SUGGESTED ANSWERS

TO

QUESTIONS
SET AT THE
INSTITUTE’S EXAMINATIONS

NOVEMBER, 1994 – NOVEMBER, 2008

A COMPILATION
PROFESSIONAL EDUCATION
(COURSE – II)

PAPER – 1 : ACCOUNTING

BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
NOIDA
 CONTENTS
Page nos.

CHAPTER - 1 Fundamentals of Accounting 1 -1.6

CHAPTER - 2 Accounting Theory 2 - 2.3
CHAPTER - 3 Departmental and Branch Accounts 3 - 3.39
CHAPTER - 4 Accounting for Some Special Transactions 4 - 4.25
CHAPTER - 5 Introduction to Government Accounts and 5 - 5.11
Accounting for Agricultural Farms
CHAPTER - 6 Advanced Partnership Accounts 6 - 6.73
CHAPTER - 7 Insolvency Accounts of Non-Corporate 7 - 7.10
Entities
CHAPTER - 8 Company Accounts – I 8 - 8.83
CHAPTER – 9 Company Accounts – II 9 - 9.90
CHAPTER – 10 Accounts of Banking Companies 10 - 10.30
CHAPTER – 11 Accounts of Insurance Companies 11 - 11.23
CHAPTER – 12 Accounts of Electricity Supply Companies 12 - 12.10
CHAPTER – 13 Financial Analysis 13 - 13.39
CHAPTER – 14 Accounts from Incomplete Records 14 - 14.54
 1
FUNDAMENTALS OF ACCOUNTING

(A) Write short notes on:

Question 1
What are the main characteristics of a bank’s book-keeping system?
(5 marks) (Intermediate–Nov. 1997)
Answer
Main characteristics of a bank’s book-keeping system are:
(i) Voucher posting: Entries in the personal ledgers are made directly from vouchers
instead of being posted from the books of prime entry.
(ii) Voucher summary sheets: The vouchers entered into different personal ledgers each
day are summarised on summary sheets. The totals of these summary sheets are posted
to the control accounts in the general ledger.
(iii) Daily trial balance: The general ledger trial balance is extracted and agreed every day.
(iv) Continuous checks: All entries in the detailed personal ledgers and summary sheets
are checked by persons other than those who have made the entries. This checking is
done every day. As a result most clerical mistakes are detected before another day
begins.
(v) Control accounts: A trial balance of the detailed personal ledgers is prepared
periodically, usually every two weeks. It is agreed with general ledger control accounts.
(vi) Double voucher system: Two vouchers are prepared for every transaction not involving
cash - one debit voucher and another credit voucher.
Question 2
What are the advantages of maintaining subsidiary books by a trading—manufacturing
organisation? (5 marks) (Intermediate–Nov. 1997)
Answer
Advantages of maintaining subsidiary books by a trading/manufacturing organization are:
(i) Division of work: In place of one journal, there are many subsidiary books. The
accounting work can be divided amongst a number of people.
1.2 Accounting

(ii) Specialisation and efficiency: As a person is handling only one type of work, he
acquires full knowledge and becomes efficient in handling the work. Accounting work is
done efficiently.
(iii) Saving of time: Various accounting processes can be undertaken simultaneously
because of the use of a number of books. This results in quicker completion of work.
(iv) Availability of information: Since a separate register is kept for each class of
transactions, the information relating to each class of transaction is available at one
place.
Additional information for sales tax, excise, octroi etc., can also be compiled from the
appropriate columns in the purchases and sales registers.
(v) Facility in checking: When the trial balance does not agree, the location of errors is
facilitated by the existence of separate books. Similarly audit of the various books of
prime entry can be conducted simultaneously by a team of audit staff.
Question 3
Define in one sentence each :
(i) Expense, (ii) Equity, (iii) Liability, (iv) Asset and (v) Income
(5 Marks) (Intermediate–Nov. 1997)
Answer
(i) Expense: It is a cost incurred during an accounting period in order to earn revenue.
(ii) Equity: It is the “residual interest” of the owners of an enterprise in the assets of the
enterprise which remain after providing for the liabilities of the enterprise.
(iii) Liability: It is a present obligation of the factors arising from past events the settlement
of which is expected to result in an outflow from the enterprise of resources embodying
economic benefits.
(iv) Asset: An asset is a resource controlled by the enterprise as a result of past events and
from which future economic benefits are expected to flow to the enterprise.
(v) Income: Income is increase in economic benefits during the accounting period in the
form of inflows of assets or decrease of liabilities that result in increase in equity other
than those relating to fresh contribution from equity participants.
(B) Practical Questions:
Question 1
A business maintains accounts on self-balancing system for customers and suppliers. You are
required to pass journal entries for “Control Account” purposes in respect of the following
transactions for September, 1997 : (10 marks) (Intermediate–Nov. 1997)
 Fundamentals of Accounting 1.3

Answer
(a) Bills of exchange for Rs. 3,00,000 drawn on customers against credit sales;
(b) Bills of exchange for Rs. 2,50,000 accepted by customers earlier now endorsed to
suppliers;
(c) An endorsed bill of exchange for Rs. 13,000 dishonoured; noting charges Rs. 150
incurred by holder in due course; endorsement was not “sans recourse”;
(d) An acceptor of a bill of exchange of Rs. 12,000 retires the bill by paying Rs. 11,800. This
bill was already endorsed to the supplier. The business contacts and pays the supplier
by cheque on the due date.

Answer
Journal for September, 1997
Debit (Rs.) Credit (Rs.)
1. General ledger control a/c (in customers ledger) Dr. 3,00,000
To Customers’ ledger control a/c (in general ledger) 3,00,000
(Being self-balancing control A/c entry for bills
of exchange drawn on and accepted by customers)
2. Suppliers ledger control a/c (in general ledger) Dr. 2,50,000
To General ledger control a/c (in suppliers’ ledger) 2,50,000
(Being self-balancing control entry for bills of exchange
accepted by customers now endorsed to suppliers)
3. Customers ledger control a/c (in general ledger) Dr. 13,150
General ledger control a/c (in supplier’s ledger) Dr. 13,150
To General ledger control a/c (in customers’ ledger) 13,150
To Suppliers’ ledger control a/c (in general ledger) 13,150
(Being entry to record dishonour of an endorsed bill of
exchange, along with noting charges of Rs. 150)
4.(i) General ledger control a/c (in customer’s ledger) Dr. 12,000
To Customers’ ledger control a/c (in general ledger) 12,000
(Being retirement by a customer of an endorsed bill
of exchange)
1.4 Accounting

(ii) Supplier’s ledger control a/c (in general edger) Dr. 12,000
To General ledger control a/c (in suppliers ledger) 12,000
(Being payment made to supplier on due date)
(iii) Customers’ ledger control a/c (in general edger) Dr. 12,000
General ledger control a/c (in suppliers’ ledger) Dr. 12,000
To Suppliers’ ledger control a/c (in general ledger) 12,000
To General ledger control a/c (in customers’ ledger) 12,000
(Being transfer of balance from customers’ account
to suppliers’ account)

Question 2
On 31st March, 1998 Ramji Dayalji P. Ltd., a trading organisation owned inventory costing Rs.
3 lakhs of which inventory valued Rs. 1 lakh was with consignees. It also has in its possession
inventory valued at Rs. 10 lakhs belonging to its own principals.
During the year ended 31st March, 1999 Ramji Dayalji P. Ltd. :
(a) purchased inventory worth Rs. 50 lakhs of which 80% was despatched to its consignees,
the transportation cost being 5% of the value of goods sent;
(b) received from its principals inventory of Rs. 150 lakhs;
(c) sold 90% of own goods received and lying with itself at 20% margin on sales;
(d) sold on behalf of principals 95% of goods available at 120% of the value thereof. Ramji
Dayalji P. Ltd is entitled to commission at 10% of such sales.
The consignees sold at 125% of their per unit landed cost (consignees spending nil) 95% of
goods available with them and were entitled to commission at 10% of sales.
You are asked to work out the various figures for recording in the revenue statement of Ramji
Dayalji P. Ltd. for the year ended 31st March, 1999. Prepare the revenue statement.
(10 marks) (Intermediate May 1999)
Answer
Revenue Statement of Ramji Dayalji P. Ltd.
for the year ended 31st March, 1999
Rs.
Sales 64,56,250
Excess of closing inventory 3,35,000
over opening inventory 3,00,000 35,000
 Fundamentals of Accounting 1.5

Commission income (from consignors) 18,24,000

Gross revenues 83,15,250
Less : Purchases 50,00,000
Transportation cost 2,00,000
Commission to consignees 5,10,625 57,10,625
Net Profit 26,04,625
Working Notes :
(i) Valuation of inventory as on 31.3.99
Ramji Dayalji Consignees Total
P.Ltd.
Rs. Rs. Rs.
Opening stock 2,00,000 1,00,000 3,00,000
Purchses 10,00,000 40,00,000 50,00,000
Transportation cost - 2,00,000 2,00,000
12,00,000 43,00,000 55,00,000
Cost of goods sold 10,80,000 40,85,000 51,65,000
Closing stock 1,20,000 2,15,000 3,35,000

(ii) Sales of goods

Ramji Dayalji Consignees Total
P. Ltd.
Rs. Rs. Rs.
Cost of goods sold 10,80,000 40,85,000 51,65,000
Add : Profit margin (25% on cost) 2,70,000 10,21,250 12,91,250
13,50,000 51,06,250 64,56,250
(iii) Commission payable to consignees
Rs.
Sales made by consignees 51,06,250
Commission (10% on sales) 5,10,625
(iv) Sales for principals
Rs.
Opening stock belonging to principals 10,00,000
Add : Goods received during the year 1,50,00,000
Total goods available 1,60,00,000
Cost of goods sold (95%) 1,52,00,000
1.6 Accounting

Add : Profit margin (20% on Rs. 1,52,00,000) 30,40,000

Sales 1,82,40,000
Commission (10% on sales) 18,24,000
 2
ACCOUNTING THEORY

(A) Write short notes on:

Question 1
Materiality (3 Marks) (Intermediate–Nov. 1994)
Answer
Materiality is primarily related to the qualitative characteristic ‘relevance’. If an item is not
material, then it is not relevant. Para 17 of AS 1 states that financial statements should
disclose all material items. Material items are those the knowledge of which might influence
the decisions of the user of the financial statements. Materiality depends on the size of item or
error judged in the particular circumstances of its omission or misstatement. From a positive
perspective, materiality has to do with the significance of an the item or event to warrant
attention in the accounting process. From a negative view point, materiality is critical because
otherwise a great deal of time might be spent on trivial matters in the accounting process.
Materiality provides a threshold or cut-off point rather than being a primary qualitative
characteristic which information must have if it is to be useful. The Financial Accounting
Standards Board, USA expresses the opinion that “no general standards of materiality can be
formulated to take into account all the considerations that enter into an experienced human
judgement”. Individual judgements are required to assess materiality, or to decide what the
appropriate minimum quantitative criteria are to be set for given situations. The Companies
Act, 1956 also recognises the need for separate disclosure of material items. Part II of
Schedule VI states that any item of expense which exceeds 1% of the total revenue of the
company or Rs. 5,000, whichever is higher, should be shown as a separate and distinct item
against an appropriate head in the profit and loss account.
Questions 2
Indicate any three areas in respect of which different accounting policies may adopted by
different enterprises. Also indicate the requirements with regard to disclosure of accounting
policies. (7 Marks) (Intermediate—May 1995)
2.2 Accounting

Answer
Areas in which different accounting policies may be adopted : The following are three
areas in which different accounting policies may be adopted by different enterprises:
(i) Methods of depreciation, depletion and amortisation.
(ii) Valuation of inventories.
(iii) Valuation of Fixed Assets.
(The above three areas are not exhaustive. There are other areas also)
Disclosure requirements of accounting policies :The disclosure requirements as
prescribed in Accounting Standard 1 (AS 1) ‘Disclosure of Accounting Policies’ are as follows :
(i) All significant accounting policies adopted in the preparation and presentation of financial
statements should be disclosed at one place and they should form part of the financial
statements.
(ii) Any change in the accounting policies which has a material effect in the current period
should be disclosed alongwith the amount, to the extent ascertainable, by which any item
in the financial statement is affected. Where such amount is not ascertainable, wholly or
in part, the fact should be indicated. However, if a change in accounting policies is
reasonably expected to have a material effect in later periods, the fact of such change
should be appropriately disclosed in the period in which the change is made.
(iii) If the fundamental accounting assumptions viz. Going concern, Consistency and Accrual
are followed in the preparation of financial statements, specific disclosure is not required.
If a fundamental accounting assumption is not followed, the fact should be disclosed.
Question 3
Entity concept. (5 Marks) (Intermediate–Nov. 1995)
Answer
The American Accounting Association defines the accounting entity as “an area of economic
interest of a particular individual or group”. The accounting entity may be the business unit
itself (i.e. sole proprietorship firm, partnership firm, company or government business
undertaking), or defined part of a business (i.e. a department) or an amalgamation of related
businesses (i.e. a holding company) depending on the users needs. It can also be a non-
business group, i.e. person, club, religious bodies or government, which engages in economic
activities.
 Accounting Theory 2.3

The entity concept has three major implications for accounting:

1. It limits the area to be covered by accounting records and reports. For example, personal
transactions of the sole proprietor is not to be recorded in his business accounts as
business expenses, they are simply treated as drawings.
2. All transactions are recorded from the point of the entity itself and not from the point of
other parties such as owners, managers or customers. For example, when a firm sells
goods to customers, this is recorded as sales by the firm and not as purchases by the
customers.
3. The entity concept underlines the accounting concept of profits in which a sharp
distinction is made between the expenses of operating the business and payment to the
owners. All payments to the owners take the form of repayment of capital or loan, or a
distribution of profits. They are not treated as business expenses.
Question 4
Elucidate “accounting convention of conservatism.” (5 Marks) (Intermediate–of Nov. 1999)
Answer
‘Conservatism convention’ states that the accountants should not anticipate income and
should provide for all possible losses. The underlying principle is that revenues should only be
recognised when there is reasonable certainty about their realisation. At the same time
provision must be made for all possible liabilities, whether the amount is known with certainty
or is based on estimates. Faced with the choice between two methods of valuing an asset, the
method which leads to lesser value must be selected. To illustrate, inventories are recorded at
the cost or market value, whichever is less or if there is a possibility that a debt may not be
realised, a specific amount is set aside from profits as a provision for doubtful debts.
Question 5
Under what circumstances can an enterprise change its accounting policy?
(4 Marks) (PE-II – Nov. 2005)
Answer
A change in accounting policy is made only if the adoption of a different accounting policy is
required by statute or for compliance with an accounting standard or if it is considered that the
change would result in a more appropriate preparation or presentation of the financial
statements of the enterprise. A more appropriate presentation of events or transactions in the
financial statements occurs when the new accounting policy results in more relevant or
reliable information about the financial position, performance or cash flows of the enterprise.
 3
DEPARTMENTAL AND BRANCH ACCOUNTS

UNIT 1 : DEPARTMENTAL ACCOUNTS

(A) Write short notes on:
Question 1
Basis of allocation of common expenditure among different departments.
(4 marks) (Intermediate–Nov. 1998)
Answer
While preparing department accounts, expenses should be allocated among the different
departments on the basis of the following principles :
1. Expenses incurred specially for each department are charged directly thereto e.g., insurance
charges of stock held by a department.
2. Common expenses, the benefit of which is shared by all the dpeartments and which are
capable of precise allocation, (e.g., rent, lighting expenses etc.) are distributed among the
departments concerned on some equitable basis considered suitable in the circumstances of
the case. Rent is charged to different departments according to the floor area occupied by
each department, having regard to any favourable location specially allocated to a
department. Lighting and heating expenses are distributed on the basis of consumption of
energy by each department and so on.
3. Common expenses which are not capable of accurate measurement are dealt with as
follows:
(i) Selling expenses, e.g., discount, bad debts, selling commission, etc. are charged on the
basis of sales.
(ii) Administrative and other expenses, e.g., salaries of managers, directors, common
advertisement expenses, depreciation on assets, etc., are allocated equally among all
the departments that have benefited thereby. Alternatively, no allocation may be made
and such expenses may be charged to the combined profit and loss account.
(B) Practical Questions:
Question 1
Department X sells goods to Department Y at a profit of 25% on cost and to Department Z at 10%
profit on cost. Department Y sells goods to X and Z at a profit of 15% and 20% on sales,
3.2 Accounting

respectively. Department Z charges 20% and 25% profit on cost to Department X and Y,
respectively.
Department Managers are entitled to 10% commission on net profit subject to unrealised profit on
departmental sales being eliminated. Departmental profits after charging Managers’ commission,
but before adjustment of unrealised profit are as under :
Rs.
Department X 36,000
Department Y 27,000
Department Z 18,000
Stock lying at different departments at the end of the year are as under :
Dept. X Dept. Y Dept. Z
Rs. Rs. Rs.
Transfer from Department X — 15,000 11,000
Transfer from Department Y 14,000 — 12,000
Transfer from Department Z 6,000 5,000 —
Find out the correct departmental Profits after charging Managers’ commission
(8 marks)(Intermediate–Nov. 2001)
Answer
Calculation of correct Profit
Depart– Depart– Depart–
ment X ment Y ment Z
Rs. Rs. Rs.
Profit after charging managers’ commission 36,000 27,000 18,000
Add back : Managers’ commission (1/9) 4,000 3,000 2,000
40,000 30,000 20,000
Less : Unrealised profit on stock
(Working Note) 4,000 4,500 2,000
Profit before Manager’s commission 36,000 25,500 18,000
Less : Commission for Department
Manager @10% 3,600 2,550 1,800
32,400 22,950 16,200
Working Note :
Stock lying with
Dept. X Dept. Y Dept. Z Total
Rs. Rs. Rs. Rs.
Unrealised Profit of :
Department X 1/5×15,000 =3,000 1/11×11,000 =1,000 4,000
Department Y 0.15×14,000 =2,100 0.20×12,000 =2,400 4,500
Department Z 1/6×6,000 =1,000 1/5×5,000 =1,000 2,000
 Departmental and Branch Accounts 3.3

Question 2
FGH Ltd. has three departments I.J.K. The following information is provided for the year
ended 31.3.2004:
I J K
Rs. Rs. Rs.
Opening stock 5,000 8,000 19,000
Opening reserve for unrealised profit ― 2,000 3,000
Materials consumed 16,000 20,000 ―
Direct labour 9,000 10,000 ―
Closing stock 5,000 20,000 5,000
Sales ― ― 80,000
Area occupied (sq. mtr.) 2,500 1,500 1,000
No. of employees 30 20 10

Stocks of each department are valued at costs to the department concerned. Stocks of I
are transferred to J at cost plus 20% and stocks of J are transferred to K at a gross profit
of 20% on sales. Other common expenses are salaries and staff welfare Rs. 18,000,
rent Rs. 6,000.
Prepare Departmental Trading, Profit and Loss Account for the year ending 31.3.2004.
(10 marks) (PE-II–Nov. 2004)
Answer
FGH Ltd.
Departmental Trading and Profit and Loss Account
for the year ended 31st March, 2004
I J K Total I J K Total
Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.
To Opening stock 5,000 8,000 19,000 32,000 By Sales 80,000 80,000
To Material 16,000 20,000 36,000 By Inter-
consumed departmental
To Direct labour 9,000 10,000 19,000 transfer 30,000 60,000 90,000
To Inter-departmental By Closing stock 5,000 20,000 5,000 30,000
transfer 30,000 60,000 90,000
To Gross profit 5,000 12,000 6,000 23,000 ______ ______ ______ _______
35,000 80,000 85,000 2,00,000 35,000 80,000 85,000 2,00,000
To Salaries and staff By Gross profit b/d 5,000 12,000 6,000 23,000
welfare 9,000 6,000 3,000 18,000 By Net loss 7,000 7,000
To Rent 3,000 1,800 1,200 6,000
To Net profit ______ 4,200 1,800 6,000 _____ _____ _____ _____
12,000 12,000 6,000 30,000 12,000 12,000 6,000 30,000
To Net loss (I) 7,000 By Stock reserve b/d 5,000
To Stock reserve (J + K)
(J+K)
(Refer W.N.) 3,000 By Net profit (J + K) 6,000
To Balance
transferred to
Profit and loss
account 1,000 _____
11,000 11,000
3.4 Accounting

Working Note:
Calculation of unrealized profit on closing stock
Rs.
Stock reserve of J department
Cost 30,000
Transfer from I department 30,000
60,000
Stock of J department 20,000
Rs.30,000
Proportion of stock of I department = Rs. 20,000 = Rs.10,000
Rs.60,000
20
Stock reserve =Rs.10,000  = Rs.1667 (approx.)
120
Stock reserve of K department Rs.
Stock transferred from J department 5,000
Less: Profit (stock reserve) 5,000  20% 1,000
Cost to J department 4,000
Rs.30,000
Proportion of stock of I department =Rs. 4,000   Rs.2,000
Rs.60,000
20
Stock reserve  Rs.2,000   Rs.333 (approx.)
120
Total stock reserve = Rs.1,000 + Rs.333 = Rs.1,333
 Departmental and Branch Accounts 3.5

UNIT– 2 : BRANCH ACCOUNTS

(INCLUDING INDEPENDENT BRANCHES AND FOREIGN BRANCHES)
Question 1
S & M Ltd., Bombay, have a branch in Sydney, Australia. At the end of 31st March, 1995,
the following ledger balances have been extracted from the books of the Bombay Office and the
Sydney Office :
Bombay . Sydney .
(Rs. thousands) (Austr dollars thousands)
Debit Credit Debit Credit
Share Capital – 2,000 – –
Reserves & Surplus – 1,000 – –
Land 500 – – –
Buildings (Cost) 1,000 – – –
Buildings Dep. Reserve – 200 – –
Plant & Machinery (Cost) 2,500 – 200 –
Plant & Machinery Dep. Reserve – 600 – 130
Debtors / Creditors 280 200 60 30
Stock (1.4.94) 100 – 20 –
Branch Stock Reserve – 4 – –
Cash & Bank Balances 10 – 10 –
Purchases / Sales 240 520 20 123
Goods sent to Branch – 100 5 –
Managing Director’s salary 30 – – –
Wages & Salaries 75 – 45 –
Rent – – 12 –
Office Expenses 25 – 18 –
Commission Receipts – 256 – 100
Branch / H.O. Current A/c 120 – – 7
4,880 4,880 390 390
The following information is also available :
(1) Stock as at 31.3.95 :
Bombay Rs. 1,50,000
Sydney A $ 3,125
(2) Head Office always sent goods to the Branch at cost plus 25%.
(3) Provision is to be made for doubtful debts at 5%.
(4) Depreciation is to be provided on buildings at 10% and on plant and machinery at
20% on written down values.
3.6 Accounting

(5) The Managing Director is entitled to 2% commission on net profits.

(6) Income–tax is to be provided at 47.5%.
You are required :
(a) To convert the Branch Trial Balance into rupees;
(use the following rates of exchange :
Opening rate A $ = Rs. 20
Closing rate A $ = Rs. 24
Average rate A $ = Rs. 22
For Fixed Assets A $ = Rs. 18).
(b) To prepare the Trading and Profit & Loss Account for the year ended 31st March,
1995 showing to the extent possible H.O. results and Branch results separately.
(Balance Sheet not required.)
(20 marks) (Intermediate May 1995)
Answer
(a) S & M Ltd.
Sydney Branch Trial Balance (in Rupees)
As on 31 st March, 1995
(Rs. ‘000)
Conversion Dr. Cr.
rate per A$
Plant & Machinery (cost) Rs 18 36,00
Plant & Machinery Dep. Reserve Rs. 18 23,40
Debtors / Creditors Rs. 24 14,40 7,20
Stock (1.4.94) Rs. 20 4,00
Cash & Bank Balances Rs. 24 2,40
Purchase / Sales Rs. 22 4,40 27,06
Goods received from H.O. – 1,00
Wages & Salaries Rs. 22 9,90
Rent Rs. 22 2,64
Office expenses Rs. 22 3,96
Commission Receipts Rs. 22 22,00
H.O. Current A/c 1,20
78,70 80,86
Exchange loss (balancing figure) 2,16
80,86 80,86
 Departmental and Branch Accounts 3.7

(b) Trading and Profit & Loss Account

for the year ended 31st March, 1995
(Rs.’000)
H.O. Branch Total H.O. Branch Total
To Opening Stock 1,00 4,00 5,00 By Sales 5,20 27,06 32,26
“ Purchases 2,40 4,40 6,80 “ Goods sent to 1,00 – 1,00
“ Goods received – 1,00 1,00 Branch
from Head Office “ Closing Stock 1,50 75 2,25
“ Gross profit c/d 4,30 18,41 22,71
7,70 27,81 35,51 7,70 27,81 35,51
By Gross profit b/d 4,30 18,41 22,71
To Wages & Salaries 75 9,90 10,65 By Commission
receipts 2,56 22,00 24,56
“ Rent – 2,64 2,64
“ Office expenses 25 3,96 4,21
“ Provision for doubtful
debts @ 5% 14 72 86
“ Depreciation 4,60 2,52 7,12
(W. N. 1)
“ Balance c/d 1,12 20,67 21,79
6,86 40,41 47,27 6,86 40,41 47,27
To Exchange loss 2,16 By Balance b/d 21,79
“ Branch Stock Reserve 11
(W. N. 2)
“ Managing Director’s
remuneration :
Salary 30
Commission 41 71
(W. N. 3)
Provision for Income-tax 8,93
(W. N. 4)
“ Balance c/d 9,88
21,79 21,79
Working Notes :
(1) Calculation of Depreciation : (Rs ‘000)
H.O. Branch
A. Building – Cost 10,00 –
Less : Dep. Reserve 2,00 –
8,00
3.8 Accounting

Depreciation @ 10% 80
B. Plant & Machinery Cost 25,00 36,00
Less : Dep. Reserve 6,00 23,40
19,00 12,60
Depreciation @ 20% 3,80 2,52
Total Depreciation (A+B) 4,60 2,52
(Rs ‘000)
(2) Calculation of Branch Stock Reserve :
Closing stock 75
Reserve on closing stock (75 × 1/5) 15
Less : Branch Stock Reserve (as on 1.4.94) 4
Additional Reserve required 11

(Rs’ 000)
(3) Calculation of Managing Director’s Commission :
Profit before adjustment 21,79
Add: Provision for doubtful debts 86
22,65
Less: Branch stock reserve 11
Exchange loss 2,16 2,27
Profit u/s 349 20,38*
Commission @ 2% 41 (approx.)
(4) Calculation of provision for Income tax : (Rs ‘ 000)
Profit u/s 349 as computed above 20,38
Less : Provision for doubtful debts 86
MD’s remuneration 71 1,57
Profit before tax 18,81
Provision for tax @ 47.5% 8,93** (approx.)
Note : For the purpose of translation of financial statements of foreign operations, AS 11
(revised 2003) “The Effects of Changes in Foreign Exchange Rates” classifies the foreign
operations as (i) integral foreign operations and (ii) non-integral foreign operations. The
above answer has been given on the basis that the Sydney branch is an integral foreign
operation of S&M Ltd.
*For the purpose of calculating profit u/s 349 of the Companies Act, 1956, depreciation based on the rates
given in Schedule XIV to the Companies Act, 1956 should be deducted. Depreciation rates as per Schedule
XIV are not given in this question. Hence the adjustment for depreciation is ignored.
**Alternatively provision for tax may also be computed on Rs. (000) 19,67 ignoring provision for doubtful
debts.
 Departmental and Branch Accounts 3.9

Question 2
Head Office passes adjustment entry at the end of each month to adjust the position arising out of
inter–branch transactions during the month. From the following inter–branch transactions in
January, 1996, make the entry in the books of Head Office :
(a) Bombay Branch
(1) Received Goods : Rs. 6,000 from Calcutta Branch, Rs, 4,000 from Patna Branch.
(2) Sent Goods to Rs. 10,000 to Patna, Rs, 8,000 to Calcutta.
(3) Received B/R : Rs. 6,000 from Patna.
(4) Sent Acceptance : Rs. 4,000 to Calcutta, Rs. 2,000 to Patna.
(b) Madras Branch (Apart from the above)
(5) Received Goods : Rs. 10,000 from Calcutta, Rs. 4,000 from Bombay.
(6) Cash Sent : Rs. 2,000 to Calcutta, Rs. 6,000 to Bombay.
(c) Calcutta Branch (Apart from the above)
(7) Sent Goods to Patna : Rs. 6,000.
(8) Paid B/P : Rs. 4,000 to Patna, Rs. 4,000 cash to Patna.
(15 marks) (Intermediate–May 1996)
Answer
In the Books of Head Office
Journal
Date Particulars Dr. Cr.
Rs. Rs.
1996
Jan 31 Madras Branch A/c Dr. 6,000
Patna Branch A/c Dr. 16,000
To Bombay Branch A/c 6,000
To Calcutta Branch A/c 16,000
(Being adjustment entry passed by head
office in respect of inter–branch transactions
during the month.)
Working Note :
Inter – branch transactions
Bombay Madras Calcutta Patna
Rs. Rs. Rs. Rs.
(a) Bombay Branch
(1) Received Goods 10,000 (Dr.) 6,000 (Cr.) 4,000 (Cr.)
(2) Sent Goods 18,000 (Cr.) 8,000 (Dr.) 10,000 (Dr.)
(3) Received B/R 6,000 (Dr.) 6,000 (Cr.)
3.10 Accounting

(4) Sent Acceptance 6,000 (Cr.) 4,000 (Dr.) 2,000 (Dr.)

(b) Madras Branch
(5) Received Goods 4,000 (Cr.) 14,000 (Dr.) 10,000 (Cr.)
(6) Cash Sent 6,000 (Dr.) 8,000 (Cr.) 2,000 (Dr.)
(c) Calcutta Branch
(7) Sent Goods 6,000 (Cr.) 6,000 (Dr.)
(8) Paid B/P and Cash 8,000 (Cr.) 8,000 (Dr.)
6,000 (Cr.) 6,000 (Dr.) 16,000 (Cr.) 16,000 (Dr.)

Question 3
Rahul Limited operates a number of retail outlets to which goods are invoiced at
wholesale price which is cost plus 25%. These outlets sell the goods at the retail price
which is wholesale price plus 20%.
Following is the information regarding one of the outlets for the year ended 31.3.97 :
Rs.
Stock at the outlet 1.4.96 30,000
Goods invoiced to the outlet during the year 3,24,000
Gross profit made by the outlet 60,000
Goods lost by fire ?
Expenses of the outlet for the year 20,000
Stock at the outlet 31.3.97 36,000
You are required to prepare the following accounts in the books of Rahul Limited for the
year ended 31.3.97 :
(a) Outlet Stock Account.
(b) Outlet Profit & Loss Account.
(c) Stock Reserve Account. (10 marks) (Intermediate–May 1997)
Answer
Outlet Stock Account
1.4.96 Rs. Rs.
To Balance b/d 30,000 By Sales (Working Note 1) 3,60,000
To Goods sent to outlet 3,24,000 By Goods lost by fire 18,000
To Gross Profit c/d 60,000 By Balance c/d 36,000
4,14,000 4,14,000
Outlet Profit & Loss Account
To Expenses 20,000 By Gross Profit b/d 60,000
To Goods lost by fire 18,000
(W.N. 2)
 Departmental and Branch Accounts 3.11

To Profit transferred 22,000

60,000 60,000
Stock Reserve Account
To HO P & L A/c – Transfer 6,000 By Balance b/d 6,000
To Balance c/d 7,200 By HO P&L A/c (W.N. 3)
(Stock Res. required) 7,200
13,200 13,200
Working Notes :
Rs.
(1) Wholesale Price 100+25 = 125
Retail Price 125 + 20% = 150
Gross Profit at the outlet
Wholesale Price – Retail Price (150 – 125) 25
150
Retail sales value = 60,000 × = Rs. 3,60,000
25
(2) Goods lost by fire
Op. Stock + Goods Sent + Gross Profit – Sales – Closing Stock
30,000 + 3,24,000 + 60,000 – 3,60,000 – 36,000 = Rs. 18,000
(3) Stock Reserve
25
Opening Stock = 30,000 × = Rs. 6,000
125
25
Closing Stock = 36,000 × = Rs. 7,200
125
Question 4
T of Calcutta has a branch at Dibrugarh. The branch does not maintain separate books of
accounts. The branch has the following assets and liabilities on 31st August, 1997 and 30th
September, 1997 :
31st August, 1997 30th September, 1997
Rs. Rs.
Stock of tea 1,80,000 1,50,000
Advance to suppliers 5,00,000 4,50,000
Bank Balance 75,000 1,00,000
Prepaid expenses 10,000 12,000
Outstanding expenses 13,000 11,000
Creditors for purchases 3,00,000 to be ascertained
During the month, Dibrugarh branch :
3.12 Accounting

(a) received by electronic mail transfer Rs. 10,00,000 from Calcutta head office;
(b) purchased tea worth Rs. 12,00,000;
(c) sent tea costing Rs. 12,30,000 to Calcutta, freight of Rs. 80,000 being payable at the
destination by the receiver;
(d) spent Rs. 25,000 on office expenses;
(e) paid Rs. 3,00,000 as advance to suppliers;
(f) paid Rs. 6,50,000 to suppliers in settlement of outstanding dues.
In addition, T informs you that the Calcutta office had directly paid Rs. 3,50,000 to Dibrugarh
suppliers by cheques drawn on bank accounts in Calcutta during the month.
T informs you that for the purpose of accounting, Dibrugarh branch is not treated as an
outsider. He wants you to write the detailed accounts relating to the transactions of the Dibrugarh
branch as would appear in the books of Calcutta Head Office. (10 marks) (Intermediate–Nov. 1997)
Answer
Dibrugarh Tea Stock Account
Dr. Cr.
1997 Rs. 1997 Rs.
Sept. Sept.
1 To Opening balance1,80,000 30 By Tea in transit to
Calcutta 12,30,000
30 To Purchases 12,00,000 30 By Closing stock 1,50,000
13,80,000 13,80,000

Advance to Dibrugarh Supplier’s Account

Dr. Cr.
1997 Rs. 1997 Rs.
Sept. Sept.
1 To Opening balance 5,00,000 30 By Suppliers –
adjustment 3,50,000
30 To Dibrugarh bank 3,00,000 30 By Closing balance 4,50,000
8,00,000 8,00,000
 Departmental and Branch Accounts 3.13

Dibrugarh Supplier’s Account

Dr. Cr.
1997 Rs. 1997 Rs.
Sept. Sept.
30 To Advance to Suppliers 1 By Opening balance 3,00,000
– Dibrugarh 3,50,000 30 By Tea stock 12,00,000
30 To Dibrugarh bank 6,50,000 (Purchases)
30 To Calcutta Bank 3,50,000
30 To Balance c/d 1,50,000
15,00,000 15,00,000

Dibrugarh Bank Account

Dr. Cr.
1997 Rs. 1997 Rs.
Sept . Sept.
1 To Balance b/d 75,000 30 By Advance to
To Calcutta Bank A/c 10,00,000 Suppliers 3,00,000
30 By Suppliers 6,50,000
30 By Expenses 25,000
30 By Balance c/d 1,00,000
10,75,000 10,75,000

Dibrugarh Branch Expenses Account

Dr. Cr.
1997 Rs. 1997 Rs.
Sept Sept.
1 To Prepaid expenses 10,000 1 By Outstanding expenses 13,000
30 To Dibrugarh Bank 25,000 30 By Prepaid expenses 12,000
30 To Oustanding expenses 11,000 30 By Branch Profit and loss 21,000
46,000 46,000
3.14 Accounting

Question 5
Carlin & Co. has head office at New York (U.S.A.) and branch at Mumbai (India). Mumbai branch
furnishes you with its trial balance as on 31st March, 1999 and the additional information given
thereafter :
Dr. Cr.
Rupees in thousands
Stock on 1st April, 1998 300 –
Purchases and sales 800 1,200
Sundry Debtors and creditors 400 300
Bills of exchange 120 240
Wages and salaries 560 –
Rent, rates and taxes 360 –
Sundry charges 160 –
Computers 240 –
Bank balance 420 –
New York office a/c – 1,620
3,360 3,360
Additional information :
(a) Computers were acquired from a remittance of US $ 6,000 received from New York
head office and paid to the suppliers. Depreciate computers at 60% for the year.
(b) Unsold stock of Mumbai branch was worth Rs. 4,20,000 on 31st March, 1999.
(c) The rates of exchange may be taken as follows :
(i) on 1.4.1998 @ Rs. 40 per US $
(ii) on 31.3.1999 @ Rs. 42 per US $
(iii) average exchange rate for the year @ Rs. 41 per US $
(iv) conversion in $ shall be made upto two decimal accuracy.
You are asked to prepare in US dollars the revenue statement for the year ended 31st
March, 1999 and the balance sheet as on that date of Mumbai branch as would appear in
the books of New York head office of Carlin & Co. You are informed that Mumbai branch
account showed a debit balance of US $ 39609.18 on 31.3.1999 in New York books and
there were no items pending reconciliation. (10 marks) (Intermediate–May 1999)
 Departmental and Branch Accounts 3.15

Answer
Carlin & Co. Ltd.
Mumbai Branch Trial Balance in (US $)
as on 31st March, 1999
Conversion Dr. Cr.
rate per US $ US $ US $
(Rs.)
Stock on 1.4.98 40 7,500.00 –
Purchases and sales 41 19,512.20 29,268.29
Sundry debtors and creditors 42 9,523.81 7,142.86
Bills of exchange 42 2,857.14 5,714.29
Wages and salaries 41 13,658.54 –
Rent, rates and taxes 41 8,780.49 –
Sundry charges 41 3,902.44 –
Computers – 6,000.00 –
Bank balance 42 10,000.00 –
New York office A/c – – 39,609.18
81,734.62 81,734.62

Trading and Profit & Loss Account

for the year ended 31st March, 1999
US $ US $
To Opening Stock 7,500.00 By Sales 29,268.29
To Purchases 19,512.20 By Closing stock 10,000.00
To Wages and salaries 13,658.54 By Gross Loss c/d 1,402.45
40,670.74 40,670.74
To Gross Loss b/d 1,402.45 By Net Loss 17,685.38
To Rent, rates and taxes 8,780.49
To Sundry charges 3,902.44
To Depreciation on computers 3,600.00
(US $ 6,000 × 0.6)
17,685.38 17,685.38
3.16 Accounting

Balance Sheet of Mumbai Branch

as on 31st March, 1999
Liabilities US $ Assets US $ US $
New York Office A/c 39,609.18 Computers 6,000.00
Less : Net Loss 17,685.38 21,923.80 Less :Depreciation 3,600.00 2,400.00
Sundry creditors 7,142.86 Closing stock 10,000.00
Bills payable 5,714.29 Sundry debtors 9,523.81
Bank balance 10,000.00
Bills receivable 2,857.14
34,780.95 34,780.95
Note : The above answer has been given on the basis that the Mumbai branch is an
integral foreign operation of carlin & Co.
Question 6
An Indian company has a branch at Washington. Its Trial Balance as at 30th September,
1998 is as follows:
Dr. Cr.
US $ US $
Plant and machinery 1,20,000 –
Furniture and fixtures 8,000 –
Stock, Oct. 1, 1997 56,000 –
Purchases 2,40,000 –
Sales – . 4,16,000
Goods from Indian Co. (H.O.) 80,000 –
Wages 2,000 –
Carriage inward 1,000 –
Salaries 6,000 –
Rent, rates and taxes 2,000 –
Insurance 1,000 –
Trade expenses 1,000 –
Head Office A/c –. 1,14,000
Trade debtors 24,000 –
Trade creditors –. 17,000
Cash at bank 5,000 –
Cash in hand 1,000 –
5,47,000 5,47,000
 Departmental and Branch Accounts 3.17

The following further information is given :

(1) Wages outstanding – $ 1,000.
(2) Depreciate Plant and Machinery and Furniture and Fixtures @ 10 % p.a.
(3) The Head Office sent goods to Branch for Rs. 39,40,000.
(4) The Head Office shows an amount of Rs. 43,00,000 due from Branch.
(5) Stock on 30th September, 1998 – $ 52,000.
(6) There were no in transit items either at the start or at the end of the year.
(7) On September 1, 1996, when the fixed assets were purchased, the rate of exchange
was Rs. 38 to one $.
On October 1, 1997, the rate was Rs. 39 to one $.
On September 30, 1998, the rate was Rs. 41 to one $.
Average rate during the year was Rs. 40 to one $.
You are asked to prepare :
(a) Trial balance incorporating adjustments given under 1 to 4 above, coverting dollars
into rupees.
(b) Trading and Profit and Loss Account for the year ended 30th September, 1998 and
Balance Sheet as on that date depicting the profitability and net position of the
Branch as would appear in India for the purpose of incorporating in the main
Balance Sheet. (16 marks) (Intermediate–Nov. 1999)
Answer
(a) In the books of Indian Company
Washington Branch Trial Balnce (in Rupees)
as on 30th September, 1998
(Rs. ‘000)
Dr. Cr. . Conversion Dr. Cr.
US $ US $ rate Rs. Rs.
Plant and Machinery 1,08,000 41 44,28,000
Depreciation on plant
and machinery 12,000 41 4,92,000
Furniture and fixtures 7,200 41 2,95,200
Depreciation on furniture
and fixtures 800 41 32,800
Stock, Oct. 1, 1997 56,000 39 21,84,000
Purchases 2,40,000 40 96,00,000
Sales 4,16,000 40 1,66,40,000
Goods from Indian
Co. (H.O.) 80,000 39,40,000
Wages 3,000 40 1,20,000
Outstanding wages 1,000 41 41,000
3.18 Accounting

Carriage inward 1,000 40 40,000

Salaries 6,000 40 2,40,000
Rent, rates and taxes 2,000 40 80,000
Insurance 1,000 40 40,000
Trade expenses 1,000 40 40,000
Head Office A/c 1,14,000 43,00,000
Trade debtors 24,000 41 9,84,000
Trade creditors 17,000 41 6,97,000
Cash at bank 5,000 41 2,05,000
Cash in hand 1,000 41 41,000
Exchange gain 10,84,000
(balancing figure) 2,27,62,000 2,27,62,000

(b) Washington Branch Trading and Profit and Loss Account

for the year ended 30th September, 1998
Dr. Cr.
Rs. Rs.
To Opening stock 21,84,000 By Sales 1,66,40,000
To Purchases 96,00,000 By Closing stock 21,32,000
To Goods from Head Office 39,40,000 (52,000 US $ × 41)
To Wages 1,20,000
To Carriage inward 40,000
To Gross profit c/d 28,88,000
1,87,72,000 1,87,72,000
To Salaries 2,40,000 By Gross profit b/d 28,88,000
To Rent, rates and taxes 80,000
To Insurance 40,000
To Trade expenses 40,000
To Depreciation on plant
and machinery 4,92,000
To Depreciation on furniture
and fixtures 32,800
To Net Profit c/d 19,63,200
28,88,000 28,88,000
 Departmental and Branch Accounts 3.19

Balance Sheet of Washington Branch

as on 30th September, 1998
Liabilities Rs. Rs. Assets Rs. Rs.
Head Office A/c 43,00,000 Plant and machinery 49,20,000
Add : Net profit 19,63,200 62,63,200 Less : Depreciation 4,92,000 44,28,000
Foreign currency Furniture and fixtures 3,28,000
Translation reserve 10,84,000 Less : Depreciation 32,800 2,95,200
Trade creditors 6,97,000 Closing stock 21,32,000
Outstanding wages 41,000 Trade debtors 9,84,000
Cash in hand 41,000
Cash at bank 2,05,000
80,85,200 80,85,200
Note : (1) Depreciation has been calculated at the given depreciation rate of 10% on WDV basis.
(2) The above solution has been given assuming that the Washington branch is a non-
integral foreign operation of the Indian Company.
Question 7
Widespread Ltd. invoices goods to its branch at cost plus 20%. The branch sells goods for cash as
well as on credit. The branch meets its expenses out of cash collected from its debtors and cash
sales and remits the balance of cash to head office after withholding Rs. 10,000 necessary for
meeting immediate requirements of cash. On 31st March, 2000 the assets at the branch were as
follows :
Rs. (‘000)
Cash in Hand 10
Trade Debtors 384
Stock, at Invoice Price 1,080
Furniture and Fittings 500
During the accounting year ended 31st March, 2001 the invoice price of goods dispatched by the
head office to the branch amounted to Rs. 1 crore 32 lakhs. Out of the goods received by it, the
branch sent back to head office goods invoiced at Rs. 72,000. Other transactions at the branch
during the year were as follows :
Rs. (‘000)
Cash Sales 9,700
Credit Sales 3,140
Cash collected by Branch from Credit Customers 2,842
Cash Discount allowed to Debtors 58
Returns by Customers 102
Bad Debts written off 37
Expenses paid by Branch 842
3.20 Accounting

On 1st January, 2001 the branch purchased new furniture for Rs.1 lakh for which payment was
made by head office through a cheque.
On 31st March, 2001 branch expenses amounting to Rs. 6,000 were outstanding and cash in hand
was again Rs. 10,000. Furniture is subject to depreciation @ 16% per annum on diminishing
balance method.
Prepare Branch Account in the books of head office for the year ended 31st March, 2001.
(16 marks) (Intermediate–May 2001)
Answer
In the Head Office Books
Branch Account
for the year ended 31st March, 2001
Dr. Cr.
Rs. ‘000 Rs.’000
To Balance b/d By Balance b/d
1
Cash in hand 10 Stock reserve Rs. 1,080 × 180
6
Trade debtors 384 By Goods sent to branch A/c 72
Stock 1,080 (Returns to H.O.)
Furniture and fittings 500 By Goods sent to branch A/c 2,188
To Goods sent to branch A/c 13,200 (Loading on net goods sent
1
To Bank A/c (Payment for furniture) 100 to branch –(Rs. 13,128 × )
6
To Balance c/d By Bank A/c
1
Stock reserve (Rs.1,470 × ) 245 (Remittance from
6
branch to H.O.) 11,700
Outstanding expenses 6 By Balance c/d
To Profit and loss A/c 1,096 Cash in hand 10
(Net Profit) Trade debtors 485
Stock 1,470
Furniture and fittings 516
16,621 16,621
Working notes :
1. Invoice price and cost
Let cost be 100
So, invoice price 120
Loading 20
Loading : Invoice price = 20 : 120 = 1 : 6
 Departmental and Branch Accounts 3.21

2. Invoice price of closing stock in branch

Branch Stock Account
Rs. ‘000 Rs. ‘000
To Balance b/d 1,080 By Goods sent to branch 72
To Goods sent to branch 13,200 By Branch Cash 9,700
To Branch debtors 102 By Branch debtors 3,140
By Balance c/d 1,470
14,382 14,382
3. Closing balance of branch debtors
Branch Debtors Account
Rs. ‘000 Rs. ‘000
To Balance b/d 384 By Branch branch 2,842
To branch stock 3,140 By Branch expenses discount 58
By Branch stock (Returns) 102
By Branch expenses
(Bad debts) 37
By Balance b/d 485
3,524 3,524
4. Closing balance of furniture and fittings
Branch Furniture and Fittings Account
Rs. ‘000 Rs. ‘000
To Balance b/d 500 By Depreciation (80+4) 84
To Bank 100 By Balance c/d 516
600 600

5. Remittance by branch to head office

Branch Cash Account
Rs. ‘000 Rs. ‘000
To Balance b/d 10 By Branch expenses 842
To Branch stock 9,700 By Remittances to H.O. 11,700
To Branch debtors 2,842 By Balance b/d 10
12,552 12,552
3.22 Accounting

Question 8
On 31st March, 2000 Kanpur Branch submits the following Trial Balance to its Head Office at
Lucknow :
Debit Balances Rs. in lacs
Furniture and Equipment 18
Depreciation on furniture 2
Salaries 25
Rent 10
Advertising 6
Telephone, Postage and Stationery 3
Sundry Office Expenses 1
Stock on 1st April, 1999 60
Goods Received from Head Office 288
Debtors 20
Cash at bank and in hand 8
Carriage Inwards 7
448
Credit Balances
Outstanding Expenses 3
Goods Returned to Head Office 5
Sales 360
Head Office 80
448
Additional Information :
Stock on 31st March, 2000 was valued at Rs. 62 lacs. On 29th March, 2000 the Head Office
despatched goods costing Rs. 10 lacs to its branch. Branch did not receive these goods before 1st
April, 2000. Hence, the figure of goods received from Head Office does not include these goods.
Also the head office has charged the branch Rs. 1 lac for centralised services for which the branch
has not passed the entry.
You are required to :
(i) Pass Journal Entries in the books of the Branch to make the necessary adjustments
(ii) Prepare Final Accounts of the Branch including Balance Sheet, and
(iii) Pass Journal Entries in the books of the Head Office to incorporate the whole of the Branch
Trial Balance. (16 marks) (Intermediate–May 2002)
 Departmental and Branch Accounts 3.23

Answer
(i) Books of Branch
Journal Entries
(Rs. in lacs)
Dr. Cr.
Goods in Transit A/c Dr. 10
To Head Office A/c 10
(Goods dispatched by head office but not
received by branch before 1st April, 2000)
Expenses A/c Dr. 1
To Head Office A/c 1
(Amount charged by head office for centralised services)

(ii) Trading and Profit & Loss Account of the Branch

for the year ended 31st March, 2000
Rs. in lacs Rs. in lacs
To Opening Stock 60 By Sales 360
To Goods received from By Closing Stock 62
Head Office 288
Less : Returns 5 283
To Carriage Inwards 7
To Gross Profit c/d 72
422 422
To Salaries 25 By Gross Profit b/d 72
To Depreciation on Furniture 2
To Rent 10
To Advertising 6
To Telephone, Postage & Stationery 3
To Sundry Office Expenses 1
To Head Office Expenses 1
To Net Profit Transferred to
Head Office A/c 24
72 72

Balance Sheet as on 31st March, 2000

Liabilities Rs. in lacs Assets Rs. in lacs
Head Office 80 Furniture & Equipment 20
Add : Goods in transit 10 Less : Depreciation 2 18
3.24 Accounting

Head Office Stock in hand 62

Expenses 1 Goods in Transit 10
Net Profit 24 Debtors 20
115 Cash at bank and in hand 8
Outstanding Expenses 3
118 118
(iii) Books of Head Office
Journal Entries
Rs. Rs.
Dr. Dr.
Branch Trading Account Dr. 355
To Branch Account 355
(The total of the following items in branch trial
balance debited to branch trading account
Rs. in lacs
Opening Stock 60
Goods received from Head Ofice 288
Carriage Inwards 7)
Branch Account Dr. 427
To Branch Trading Account 427
(Total sales, closing stock and goods returned to
Head Office credited to branch trading account, individual
amounts being as follows:
Rs. in lacs
Sales 360
Closing Stock 62
Goods returned to Head Office 5)

Branch Trading Account Dr. 72

T0 Branch Profit and Loss Account 72
(Gross profit earned by branch credited to
Branch Profit and Loss Account)

Branch Profit and Loss Account Dr. 48

To Branch Account 48
(Total of the following branch expenses debited
to Branch Profit & Loss Account
Rs. in lacs
Salaries 25
 Departmental and Branch Accounts 3.25

Rent 10
Advertising 6
Telephone, Postage & Stationery 3
Sundry Office Expenses 1
Head Office Expenses 1
Depreciation on furniture &
Equipment 2

Branch Profit & Loss Account Dr. 24

To Profit and Loss Account 24
(Net profit at branch credited to (general)
Profit & Loss A/c)
Branch Furniture & Equipment Dr. 18
Branch Stock Dr. 62
Branch Debtors Dr. 20
Branch Cash at Bank and in Hand Dr. 8
Goods in Transit Dr. 10
To Branch 118
(Incorporation of different assets at the branch
in H.O. books)
Branch Dr. 3
To Branch Outstanding Expenses 3
(Incorporation of Branch Outstanding
Expenses in H.O. books)
Question 9
Show adjustment Journal entry in the books of Head Office at the end of April, 2003 for
incorporation of inter-branch transactions assuming that only Head Office maintains
different branch accounts in its books.
A. Delhi Branch:
(1) Received goods from Mumbai – Rs. 35,000 and Rs. 15,000 from Kolkata.
(2) Sent goods to Chennai – Rs. 25,000, Kolkata – Rs. 20,000.
(3) Bill Receivable received – Rs. 20,000 from Chennai.
(4) Acceptances sent to Mumbai – Rs. 25,000, Kolkata – Rs. 10,000.
B. Mumbai Branch (apart from the above) :
(5) Received goods from Kolkata – Rs. 15,000, Delhi – Rs. 20,000.
(6) Cash sent to Delhi – Rs. 15,000, Kolkata – Rs. 7,000.
3.26 Accounting

C. Chennai Branch (apart from the above) :

(7) Received goods from Kolkata – Rs. 30,000.
(8) Acceptances and Cash sent to Kolkata – Rs. 20,000 and Rs. 10,000
respectively.
D. Kolkata Branch (apart from the above) :
(9) Sent goods to Chennai – Rs. 35,000.
(10) Paid cash to Chennai – Rs. 15,000.
(11) Acceptances sent to Chennai – Rs. 15,000. (8 marks) (PE-II–May 2003)
Answer
(a) Journal entry in the books of Head Office
Date Particulars Dr. Cr.
Rs. Rs.
30th April, 2003 Mumbai Branch Account Dr. 3,000
Chennai Branch Account Dr. 70,000
To Delhi Branch Account 15,000
To Kolkata Branch Account 58,000
(Being adjustment entry passed by head
office in respect of inter-branch transactions
for the month of April, 2003.
Working Note:
Inter – Branch transactions
Delhi Mumbai Chennai Kolkata
Rs. Rs. Rs. Rs.
A. Delhi Branch
(1) Received goods 50,000 (Dr.) 35,000 (Cr.) 15,000 (Cr.)
(2) Sent goods 45,000 (Cr.) 25,000 (Dr.) 20,000 (Dr.)
(3) Received Bills receivable 20,000 (Dr.) 20,000 (Cr.)
(4) Sent acceptance 35,000 (Cr.) 25,000 (Dr.) 10,000 (Dr.)

B. Mumbai Branch
(5) Received goods 20,000 (Cr.) 35,000 (Dr.) 15,000 (Cr.)
(6) Sent cash 15,000 (Dr.) 22,000 (Cr.) 7,000 (Dr.)

C. Chennai Branch
(7) Received goods 30,000 (Dr.) 30,000 (Cr.)
(8) Sent cash and 30,000 (Cr.) 30,000 (Dr.)
acceptances
D. Kolkata Branch
(9) Sent goods 35,000 (Dr.) 35,000 (Cr.)
 Departmental and Branch Accounts 3.27

(10) Sent cash 15,000 (Dr.) 15,000 (Cr.)

(11) Sent acceptances __________ _________ 15,000 (Dr.) 15,000 (Cr.)
15,000 (Cr.) 3,000 (Dr.) 70,000 (Dr.) 58,000 (Cr.)
Question 10
Give Journal Entries in the books of Branch A to rectify or adjust the following:
(i) Head Office expenses Rs. 3,500 allocated to the Branch, but not recorded in the Branch
Books.
(ii) Depreciation of branch assets, whose accounts are kept by the Head Office not provided
earlier for Rs. 1,500.
(iii) Branch paid Rs. 2,000 as salary to a H.O. Inspector, but the amount paid has been
debited by the Branch to Salaries account.
(iv) H.O. collected Rs. 10,000 directly from a customer on behalf of the Branch, but no
intimation to this effect has been received by the Branch.
(v) A remittance of Rs. 15,000 sent by the Branch has not yet been received by the Head
Office.
(vi) Branch A incurred advertisement expenses of Rs. 3,000 on behalf of Branch B.
(6 marks) (PE-II–Nov. 2004)
Books of Branch A
Journal Entries
Particulars Dr. Cr.
Amount Amount
Rs. Rs.
(i) Expenses account Dr. 3,500
To Head office account 3,500
(Being the allocated expenditure by the
head office recorded in branch books)
(ii) Depreciation account Dr. 1,500
To Head office account 1,500
(Being the depreciation provided)
(iii) Head office account Dr. 2,000
To Salaries account 2,000
(Being the rectification of salary paid on
behalf of H.O.)
(iv) Head office account Dr. 10,000
To Debtors account 10,000
(Being the adjustment of collection from
branch debtors)
(v) No entry in branch books
(vi) Head Office account Dr. 3,000
To Cash account 3,000
(Being the expenditure on account of
Branch B, recorded in books)
3.28 Accounting

Question 11
M/s Shah & Co. commenced business on 1.4.2004 with Head Office at Mumbai and a Branch
at Chennai. Purchases were made exclusively by the Head Office, where the goods were
processed before sale. There was no loss or wastage in processing.
Only the processed goods received from Head Office were handled by the Branch. The goods
were sent to branch at processed cost plus 10%.
All sales, whether by Head Office or by the Branch, were at uniform gross profit of 25% on
their respective cost.
Following is the Trial Balance as on 31.3.2005.
Head Office Branch
Dr. Cr. Dr. Cr.
Rs. Rs. Rs. Rs.
Capital 3,10,000
Drawings 55,000
Purchases 19,69,500
Cost of processing 50,500
Sales 12,80,000 8,20,000
Goods sent to Branch 9,24,000
Administrative expenses 1,39,000 15,000
Selling expenses 50,000 6,200
Debtors 3,09,600 1,13,600
Branch Current account 3,89,800
Creditors 6,01,400 10,800
Bank Balance 1,52,000 77,500
Head Office Current account 2,61,500
Goods received from H.O. ________ ________ 8,80,000 ________
31,15,400 31,15,400 10,92,300 10,92,300
Following further information is provided:
(i) Goods sent by Head Office to the Branch in March, 2005 of Rs. 44,000 were not received
by the Branch till 2.4.2005.
(ii) A remittance of Rs. 84,300 sent by the Branch to Head Office was also similarly not
received upto 31.3.2005.
(iii) Stock taking at the Branch disclosed a shortage of Rs. 20,000 (at selling price to the
branch).
(iv) Cost of unprocessed goods at Head Office on 31.3.2005 was Rs. 1,00,000.
Prepare Trading and Profit and Loss account in columnar form and Balance Sheet of the
business as a whole as at 31.3.2005. (16 Marks) (PE-II – Nov. 2006)
 Departmental and Branch Accounts 3.29

Answer
In the Books of Shah & Co.
Trading and Profit and Loss Account for the year ended 31st March, 2005
Particulars H.O. Branch Total H.O. Branch Total
Rs. Rs. Rs. Rs. Rs. Rs.
To Purchases 19,69,500  19,69,500 By Sales 12,80,000 8,20,000 21,00,000
To Cost of processing 50,500  50,500 By Goods sent to Branch 9,24,000  
To Goods received By Stock shortage  16,000 14,545
from H.O.  8,80,000  By Goods in transit 44,000
To Gross profit c/d 3,40,000 1,64,000 5,02,545 By Closing stock:
Processed goods 56,000 2,08,000 2,64,000
________ ________ ________ Unprocessed goods 1,00,000  1,00,000
23,60,000 10,44,000 25,22,545 23,60,000 10,44,000 25,22,545

To Admn. Expenses 1,39,000 15,000 1,54,000 By Gross profit b/d 3,40,000 1,64,000 5,02,545
To Selling Expenses 50,000 6,200 56,200
To Stock shortage  16,000 14,545
To Stock reserve 22,909  22,909
To Net profit 1,28,091 1,26,800 2,54,891 _______ _______ _______
3,40,000 1,64,000 5,02,545 3,40,000 1,64,000 5,02,545
3.30 Accounting

Balance Sheet as at 31st March, 2005

Liabilities Rs. Assets Rs.
Capital 3,10,000 Debtors
Add: Net profit 2,54,891 H.O. 3,09,600
5,64,891 Branch 1,13,600
Less: Drawings 55,000 5,09,891 Closing stock:
Creditors: Processed goods
H.O. 6,01,400 H.O. 56,000
Branch 10,800 6,12,200 Branch 2,08,000
2,64,000
Less: Stock 18,909 2,45,091
reserve
Unprocessed 1,00,000
goods
Bank Balance
H.O. 1,52,000
Branch 77,500
Goods in transit 44,000
Less: Stock 4,000 40,000
reserve
________ Cash in transit 84,300
11,22,091 11,22,091
Working Notes:
1. Calculation of closing stock:
Stock at Head Office:
Cost of goods processed Rs. (19,69,500 + 50,500 – 1,00,000) 19,20,000
Less: Cost of goods sent to Branch
100
9,24,000
110 8,40,000
100
Cost of goods sold 12,80,000
125 10,24,000 18,64,000
Stock of processed goods with H.O. 56,000
 Departmental and Branch Accounts 3.31

Stock at Branch:
Goods received from H.O. (at invoice price) 8,80,000
Less: Invoice value of goods sold
100
8,20,000
125 6,56,000
100
Invoice value of stock shortage 20,000
125 16,000 6,72,000
Stock at Branch at invoice price 2,08,000
10
Less: Stock Reserve 2,08,000
110 18,909
Stock of processed goods with Branch (at cost) 1,89,091
2. Stock Reserve:

 10 
Unrealised profit on Branch stock  2,08,000  
 110  18,909

 10 
Unrealised profit on goods in transit  44,000  
 110  4,000
22,909
Question 12
Concept & Co., with its Head Office at Mumbai has a branch at Nagpur. Goods are invoiced
to the Branch at cost plus 33 1/3%. The following information is given in respect of the branch
for the year ended 31st March, 2006:
Rs.
Goods sent to Branch (Invoice price) 4,80,000
Stock at Branch on 1.4.2005 (Invoice price) 24,000
Cash sales 1,80,000
Return of goods by customers to the Branch 6,000
Branch expenses (paid in cash) 53,500
Branch debtors balance on 1.4.2005 30,000
Discount allowed 1,000
Bad debts 1,500
Collection from Debtors 2,70,000
Branch debtors cheques returned dishonoured 5,000
Stock at Branch on 31.3.2006 (Invoice price) 48,000
Branch debtors balance on 31.3.2006 36,500
Prepare, under the Stock and Debtors system, the following Ledger Accounts in the books of
3.32 Accounting

the Head Office:

(i) Nagpur Branch Stock Account
(ii) Nagpur Branch Debtors Account
(iii) Nagpur Branch Adjustment Account.
Also compute shortage of Stock at Branch, if any.
(16 Marks) (PE-II – May 2006)
Answer

In the books of head office

Nagpur Branch Stock Account
Rs. Rs.
1.4.2005 To Balance b/d 24,000 31.3.06 By Bank A/c 1,80,000
(Cash Sales)
31.3.2006 To Goods sent to By Branch Debtors
Branch A/c 4,80,000 (Credit Sales) 2,80,000
To Branch Debtors 6,000 By Stock shortage:
Branch P&L A/c 1,500*
Branch Adjustment
A/c (Loading) 500 2,000
By Balance c/d 48,000
5,10,000 5,10,000
Nagpur Branch Debtors Account
1.4.2005 To Balance b/d 30,000 31.3.2006 By Bank A/c
(Collection) 2,70,000
31.3.2006 To Bank A/c By Branch Stock A/c 6,000
(dishonour of cheques) 5,000
To Branch Stock A/c 2,80,000* By Bad debts 1,500
By Discount allowed 1,000
By Balance c/d 36,500
3,15,000 3,15,000
Nagpur Branch Adjustment Account
To Branch Stock A/c 500* By Stock Reserve A/c 6,000
(loading of loss)
To Stock Reserve 12,000 By Goods sent to Branch A/c 1,20,000
To Gross Profit c/d 1,13,500
1,26,000 1,26,000
 Departmental and Branch Accounts 3.33

To Branch Stock A/c By Gross Profit b/d 1,13,500

(Cost of loss) 1,500
To Branch Expenses 56,000
To Net Profit
(Transferred to General P & L A/c) 56,000
1,13,500 1,13,500
*Balancing figure.
Working Notes:
1. Credit Sales have not been given in the problem. So, the balancing figure of Branch Debtors
Account is taken as credit sales
2. Loading is 33 1 3 % or Cost; i.e. 25% of invoice value
Loading on opening stock = 24,000  25% = 6,000
3. Loading on goods sent = 4,80,000  25% = Rs.1,20,000
4. Loading on Closing Stock = Rs.48,000  25% = Rs.12,000
5. Total Branch Expenses = Cash expenses + Bad debt + Discount allowed
= Rs.53,500 + Rs.1,500 + Rs.1,000 = Rs.56,000
6. Gross Profit
33.33
Total sales (at invoice price) - Goods returned by customers (at invoice price) x
100  33.33
33.33
{(Rs. 1,80,000+ Rs. 2,80,000)- Rs. 6,000} x = Rs. 1,13,500
133.33
Question 13
Red and Co. of Mumbai started a branch at Bangalore on 1.4.2006 to which goods were sent at
20% above cost. The branch makes both cash sales and credit sales. Branch expenses are met
from branch cash and balance money remitted to H.O. The branch does not maintain double entry
books of account and necessary accounts relating to branch are maintained in H.O. Following
further details are given for the year ending on 31.3.2007:
Rs.
Cost of goods sent to branch 1,00,000
Goods received by branch till 31.3.2007 at Invoice price 1,08,000
Credit sales for the year 1,16,000
Closing debtors on 31.3.2007 41,600
Bad debts written off during the year 400
Cash remitted to H.O. 86,000
Closing cash on hand at branch on 31.3.2007 4,000
Cash remitted by H.O. to branch during the year 6,000
3.34 Accounting

Closing stock in hand at branch at invoice price 12,000

Expenses incurred at branch 24,000
Draw up the necessary Ledger Accounts like Branch Debtors Account, Branch Stock Account,
Goods sent to Branch Account, Branch Cash Account, Branch Expenses Account and Branch
Adjustment A/c for ascertaining gross profit and Branch Profit and Loss A/c for ascertaining Branch
profit. (16 Marks) (PE II- May, 2007)
Answer
Branch Debtors A/c
Dr. Cr.
Rs. Rs.
To Branch Stock A/c 1,16,000 By Branch Cash A/c 74,000
(balancing figure)
By Bad Debts (written 400
off)
By Balance c/d 41,600
1,16,000 1,16,000

Goods Sent to Branch A/c

To Branch Adjustment 20,000 By Branch Stock A/c 1,20,000
A/c
20
1,00,000x
100
To Purchases/ Trading 1,00,000
A/c
1,20,000 1,20,000

Branch Cash A/c

To Branch Debtors A/c 74,000 By Branch Expenses A/c 24,000
To H.O. A/c (cash 6,000 By H.O. (cash 86,000
remittance) remittance)
To Branch Stock A/c By Balance c/d 4,000
- Cash Sales
(balancing figure) 34,000
1,14,000 1,14,000
 Departmental and Branch Accounts 3.35

Branch Stock A/c

To Goods sent to 1,20,000 By Branch Debtors A/c 1,16,000
Branch A/c
To Branch Adjustment 54,000 By Branch Cash A/c 34,000
A/c (Sales)
(Excess profit over By Goods in Transit 12,000
normal loading - (1,20,000-1,08,000)
balancing figure)
By Balance c/d 12,000
1,74,000 1,74,000

Branch Expenses A/c

To Branch Cash A/c 24,000 By Branch P&L A/c 24,000

Branch Adjustment A/c

To Stock Reserve A/c 2,000 By Goods sent to Branch A/c 20,000
To Goods in transit Reserve A/c 2,000 By Branch Stock A/c 54,000
To Branch P&L A/c (Balancing figure) 70,000
74,000 74,000

Branch P & L A/c

To Branch Expenses A/c 24,000 By Branch Adjustment A/c 70,000
To Bad Debts 400
To Net Profit (transferred to General 45,600
P&L A/c)
70,000 70,000

Working Notes:
1. Loading is 20% of cost i.e. 16.67% (1/6th) of invoice value.
Loading on closing stock = Rs. 1/6 th of Rs.12,000 =Rs. 2,000.
2. Loading on goods sent to branch = 1/6 th of Rs.1,20,000 = Rs. 20,000.
3. Loading on goods in transit = 1/6 th of Rs. 12,000 = Rs. 2,000.
3.36 Accounting

Question 14
The Washington branch of XYZ Limited, Mumbai sent the following trial balance as on 31st
December, 2007:
$ $
Head office A/c _ 22,800
Sales _ 84,000
Debtors and creditors 4,800 3,400
Machinery 24,000 _
Cash at bank 1,200 _
Stock, 1 January, 2007 11,200 _
Goods from H.O. 64,000 _
Expenses 5,000 _
1,10,200 1,10,200
In the books of head office, the Branch A/c stood as follows:
Washington Branch A/c
Rs. Rs.
To Balance b/d 8,10,000 By Cash 28,76,000
To Goods sent to branch 29,26,000 By Balance c/d 8,60,000
37,36,000 37,36,000
Goods are sent to the branch at cost plus 10% and the branch sells goods at invoice price plus
25%. Machinery was acquired on 31st January, 2002, when $ 1.00 = Rs.40.
Rates of exchange were:
1st January, 2007 $ 1.00 = Rs.46
31st December, 2007 $ 1.00 = Rs.48
Average $ 1.00 = Rs.47
Machinery is depreciated @ 10% and the branch manager is entitled to a commission of 5% on the
profits of the branch.
You are required to:
(i) Prepare the Branch Trading & Profit & Loss A/c in dollars.
(ii) Convert the Trial Balance of branch into Indian currency and prepare Branch Trading &
Profit and Loss A/c and the Branch A/c in the books of head office.
(16 Marks) (PE II- May, 2008)
 Departmental and Branch Accounts 3.37

Answer
(i) In the Books of Head Office
Branch Trading and Profit & Loss A/c (in Dollars)
for the year ended 31st December, 2007
Particulars $ Particulars $
To Opening stock 11,200 By Sales 84,000
To Goods from H.O. 64,000 By Closing stock (W.N.2) 8,000
To Gross profit c/d 16,800
92,000 92,000
To Expenses 5,000 By Gross profit b/d 16,800
To Depreciation 2,400
To Manager’s commission
(W.N.1) 470
To Net profit c/d 8,930
16,800 16,800

(ii) (a) Converted Branch Trial Balance (into Indian Currency)

Particulars Rate per $ Dr. (Rs.) Cr. (Rs.)
Machinery 40 9,60,000 _
Stock January 1, 2007 46 5,15,200 _
Goods from head office Actual 29,26,000 _
Sales 47 _ 39,48,000
Expenses 47 2,35,000 _
Debtors & creditors 48 2,30,400 1,63,200
Cash at bank 48 57,600 _
Head office A/c Actual _ 8,60,000
Difference in exchange rate 47,000 _
49,71,200 49,71,200
Closing stock $ 8,000 (W.N. 2) 48 Rs.3,84,000
3.38 Accounting

(b) Branch Trading and Profit & Loss A/c

for the year ended 31st December, 2007
Rs. Rs.
To Opening stock 5,15,200 By Sales 39,48,000
To Goods from head By Closing stock
office 29,26,000 (W.N.2) 3,84,000
To Gross profit c/d 8,90,800
43,32,000 43,32,000
To Expenses 2,35,000 By Gross profit b/d 8,90,800
To Depreciation @ 10%
on Rs.9,60,000 96,000
To Exchange difference 47,000
To Manager’s
commission (W.N.1) 22,560
To Net Profit c/d 4,90,240
8,90,800 8,90,800
(c) Branch Account
Rs. Rs.
To Balance b/d 8,60,000 By Machinery 9,60,000
To Net profit 4,90,240 Less:
Depreciation 96,000 8,64,000
To Creditors 1,63,200 By Closing stock 3,84,000
To Outstanding By Debtors 2,30,400
commission 22,560
By Cash at bank 57,600
15,36,000 15,36,000

Working Notes:
1. Calculation of manager’s commission @ 5% on profit
i.e. 5% of $[16,800 – (5,000 + 2,400)]
Or 5% × $9,400 = $ 470
Manager’s commission in Rupees = $ 470  Rs.48 = Rs. 22,560
 Departmental and Branch Accounts 3.39

2. Calculation of closing stock $

Opening stock 11,200
Add: Goods from head office 64,000
75,200
Less: Cost of goods sold (at invoice price)
100
i.e.  84,000 67,200
125
Closing stock 8,000
Closing stock in Rupees = $8,000 x Rs.48 = Rs.3,84,000.
 4
ACCOUNTING FOR SOME SPECIAL TRANSACTIONS

UNIT 1 & 2 : HIRE PURCHASE AND INSTALMENT PAYMENT SYSTEM

AND ACCOUNTING FOR LEASES
Question 1
Krishna Agencies started business on 1st April, 1994. During the year ended 31 st March, 1995,
they sold under-mentioned durables under two schemes — Cash Price Scheme (CPS) and
Hire-Purchase Scheme (HPS).
Under the CPS they priced the goods at cost plus 25% and collected it on delivery.
Under the HPS the buyers were required to sign a Hire-purchase Agreement undertaking to
pay for the value of the goods including finance charges in 30 instalments, the value being
calculated at Cash Price plus 50%.
The following are the details available at the end of 31 st March, 1995 with regard to the
products :
Product Nos. Nos. sold Nos. sold Cost per No. of No. of
purchased under CPS under HPS unit instalments instalments
Rs. due during received
the year during the
year
TV sets 90 20 60 16,000 1,080 1,000
Washing 70 20 40 12,000 840 800
Machines

The following were the expenses during the year :

Rs.
Rent 1,20,000
Salaries 1,44,000
Commission to Salesmen 12,000
Office Expenses 1,20,000
From the above information, you are required to prepare :
4.2 Accounting

(a) Hire-purchase Trading Account, and

(b) Trading and Profit & Loss Account. (20 marks) (Intermediate–May 1995)
Answer
In the books of Krishna Agencies
Hire-Purchase Trading Account
for the year ended 31st March, 1995
Rs. Rs. Rs. Rs.
To Goods sold on H.P. A/c: By Bank A/c cash received
TVs TVs
(60×Rs. 30,000) 18,00,000 (1,000×Rs. 1,000) 10,00,000
Washing Machines Washing Machines
(40 × Rs. 22,500) 9,00,000 27,00,000 (800 ×Rs. 750) 6,00,000 16,00,000
To H.P. Stock Reserve By Instalment Due A/c:
87.5
Rs. 9,90,000× 4,62,000 TVs
187.5
(80×Rs.1,000) 80,000
To Profit & Loss A/c 7,98,000 Washing Machines
(H.P. profit transferred) (40×Rs. 750) 30,000 1,10,000
By Goods sold on HP
A/c: (Cancellation of
loading)
87.5
Rs. 27,00,000 ×187.5 12,60,000
By H.P. Stock (W.N 2) 9,90,000

39,60,000 39,60,000

Trading and Profit & Loss Account

for the year ended 31st March, 1995
Rs. Rs. Rs. Rs.
To Purchases: By Sales:
TVs TVs
(90×Rs. 16,000) 14,40,000 (20×Rs. 20,000) 4,00,000
Washing Machines Washing Machines
(70 × Rs. 12,000) 8,40,000 22,80,000 (20 ×Rs. 15,000) 3,00,000 7,00,000
To Gross profit c/d 1,40,000 By Goods sold on H.P.
A/c 14,40,000
(27,00,000–12,60,000)
By Shop Stock (W. N 3) 2,80,000
24,20,000 24,20,000
To Salaries 1,44,000 By Gross profit b/d 1,40,000
 Accounting for Some Special Transactions 4.3

To Rent 1,20,000 By H.P. Trading a/c

To Commission 12,000 (H.P. Profit) 7,98,000
To Office expenses 1,20,000
To Net Profit 5,42,000
9,38,000 9,38,000

Working Notes:
(1) Calculation of per unit cash price, H.P. price and Instalment Amount :
Product Cost Cash Price H.P. price Instalment
Rs. Rs. Rs. Amount (Rs.)
(Cost × 1.25) (Cash (H.P. price/No.
Price×1.50) of instalments)
TV sets 16,000 20,000 30,000 1,000
Washing
Machines 12,000 15,000 22,500 750

(2) Calculation of H.P. Stock as on 31 st March, 1995 :

Product Total No. of Instalments Instalments Amount
Instalments Due in 1994-95 not due in 1994-95 Rs.
(Nos.) (Nos.) (Nos.)
TV sets 1800 1080 720 7,20,000
Washing Machines 1,200 840 360 2,70,000
9,90,000

(3) Calculation of Shop Stock as on 31st March, 1995 :

Product Purchased Sold Balance Amount
(Nos.) (Nos.) (Nos.) Rs.
TV sets 90 80 10 1,60,000
Washing 70 60 10 1,20,000
Machines 2,80,000
Question 2
ABC Associates entered into a financial lease agreement on 1.4.1995 with Flexible Leasing
Ltd. for lease of a car. The price of the car was Rs. 2,00,000 and the quarterly lease rentals
were agreed at Rs. 90 per thousand payable at the beginning of every quarter. ABC
Associates kept up their payments but by 25.3.1996 they approached and obtained the
4.4 Accounting

consent of the leasing company for treating the arrangement as one of Hire-purchase from the
beginning on the following terms :
Period: 3 years
Quarterly hire : Rs. 30,000 payable at the beginning of the quarter.
It was agreed that the lease rentals paid will be treated as hire monies and that the balance
due upto 31.3.1996 will be settled by ABC Associates on that date with interest at 18% p.a. on
various instalments due during the year. The rate of depreciation on the car is 25%.
Show the following accounts in the books of ABC Associates for the year 1995-96:
Flexible Leasing Ltd.’s A/c and Interest Suspense A/c.
Calculations are to be rounded off to the nearest rupee (15 Marks)(Intermediate–May 1996)
Answer
Books of ABC Associates
Flexible Leasing Limited Account
Dr. Cr.
Rs. Rs.
1996 1996
March 25 To Lease rental 72,000 March 25 By Car on Hire 2,00,000
A/c Purchase A/c
March 31 To Bank 53,400 March 25 By Interest 1,60,000
Suspense A/c
March 31 To Balance c/d 2,40,000 By Interest A/c 5,400
3,65,400 3,65,400

Interest Suspense Account

Dr. Cr.
Rs. Rs.
1996 1996
March 25 To Flexible 1,60,000 March, 31 By Interest on Hire 72,727
Leasing Ltd. A/c purchase A/c
March, 31 By Balance c/d 87,273
1,60,000 1,60,000
 Accounting for Some Special Transactions 4.5

Working Notes :
(i) Calculation of balance payable on 31 st March, 1996 and the Amount of Interest
Calculation of Difference Payable on 31.3.1996 and Interest
Date Quarterly Hire Quarterly Lease Difference Interest (18% p.a.) Amount of
Charges Rentals Paid Payable From To Interest
(Rs.) (Rs.) (Rs.) (Rs.)

1.4.95 30,000 18,000 12,000 1.4.95 31.3.96 2,160

1.7.95 30,000 18,000 12,000 1.7.95 31.3.96 1,620
1.10.95 30,000 18,000 12,000 1.10.95 31.3.96 1,080
1.1.96 30,000 18,000 12,000 1.1.96 31.3.96 540
72,000 48,000 5,400

Amount payable on 31st March, 1996 :

Rs.
Balance due 48,000
Interest due 5,400
53,400
(1) Ascertainment of Total Amount of Interest on Hire Purchase
Rs.
Hire Purchase Price of the car
(Rs. 30,000 × 12 installments) 3,60,000
Less : Cash Price 2,00,000
Total Amount of Interest 1,60,000

(2) Calculation of Interest on Hire Purchase Attributable to the year 1995-1996.

Date Interest Calculation Interest
Rs.
1.4.95 — —
1.7.95 11 26,667
1,60,000 
66
1.10.95 10 24,242
1,60,000 
66
4.6 Accounting

1.1.96 9 21,818
1,60,000 
66
72,727

Question 3
Omega Corporation sells computers on hire purchase basis at cost plus 25%. Terms of sales
are Rs. 10,000 as down payment and 8 monthly instalments of Rs. 5,000 for each computer.
From the following particulars prepare Hire Purchase Trading Account for the year 1999.
As on 1st January, 1999 last instalment on 30 computers was outstanding as these were not
due up to the end of the previous year.
During 1999 the firm sold 240 computers. As on 31 st December, 1999 the position of
instalments outstanding were as under :
Instalments due but not collected :
2 instalments on 2 computers and last instalment on 6 computers.
Instalments not yet due :
8 instalments on 50 computers, 6 instalments on 30 and last instalment on 20 computers.
Two computers on which 6 instalments were due and one instalment not yet due on 31.12.99
had to be repossessed. Repossessed stock is valued at 50% of cost. All other instalments
have been received. (10 marks) (Intermediate–May 2000)
Answer
In the books of Omega Corporation
Hire Purchase Trading Account
for the year ended on 31st Dec., 1999
Dr. Cr
Rs. Rs. Rs.
To Hire Purchase Stock By Hire Purchase
(30×Rs. 5,000) 1,50,000 Sales (W.N. 2) 91,40,000
To Goods Sold on By Stock Reserve
Hire Purchase (Rs. 1,50,000×20%) 30,000
(240×Rs. 50,000) 1,20,00,000
To Bad Debts 12,000 By Goods sold on
Hire Purchase
To Loss on Re- (Rs. 1,20,00,000× 20%) 24,00,000
possession 16,000 By Hire Purchase Stock
Less : Instalments [(8×50+6×30+1×20)× 30,00,000
not yet due 8,000 8,000 Rs. 5,000]
To Stock Reserve 6,00,000
(30,00,000 ×20%)
 Accounting for Some Special Transactions 4.7

To Profit & Loss A/c

(Transfer of Profit) 18,00,000

1,45,70,000 1,45,70,000

Alternatively, hire purchase trading account can be prepared in the following manner :
Hire Purchase Trading Account
for the year ended on 31 st Dec., 1999
Rs. Rs.
To Hire Purchase Stock By Cash (W.N.1) 90,30,000
(30×Rs. 5,000) 1,50,000 By Stock Reserve
To Goods Sold on Hire (Rs. 1,50,000×20%) 30,000
Purchase By Goods Sold on Hire
(240×Rs. 50,000) 1,20,00,000 Purchase
To Stock Reserve (Rs. 1,20,00,000×20%) 24,00,000
(Rs. 30,00,000 × 20%) 6,00,000 By Goods Repossessed

To Profit & Loss A/c (2×Rs. 40,000×50%) 40,000

(Transfer of Profit) 18,00,000 By Instalments Due
[(2×2+1×6)×Rs. 5,000] 50,000
By Hire Purchase Stock
[8×50+6×30+1×20)×Rs.
5,000] 30,00,000

1,45,50,000 1,45,50,000

Working Notes :
Rs.
(1) Cash collected:
Cash down payment (240 × Rs. 10,000) 24,00,000
Add : Instalments collected :
Last instalments on 30 computers outstanding on 1.4.99 1,50,000
Instalments due and collected on 240 computers sold
during the year :
Total instalments on 240 computers
(8 × 240 × Rs. 5,000) 96,00,000
Less : Instalments due but not collected
[(2 × 2 + 1 × 6 + 6 × 2) × Rs. 5,000] 1,10,000
4.8 Accounting

Instalments not due on 31.12.99

[(8 × 50 + 6 × 30 + 1 × 20 +
1 × 2) × Rs. 5,000] 30,10,000 31,20,000 64,80,000
90,30,000
(2) Hire purchase sales:
Cash collected 90,30,000
Add : Instalments due but not collected
[(2 × 2 + 1 × 6 + 6 × 2) × Rs. 5,000] 1,10,000
91,40,000
(3) Loss on repossessed computers:
Cost of instalments due but not collected
(6 × 2 × Rs. 4,000) 48,000
Cost of Instalments not yet due
(1 × 2 × Rs. 4,000) 8,000
56,000
Less : Estimated value of repossessed computers
(2 × Rs. 40,000 × 50%) 40,000
Loss 16,000
(4) Bad debts (in respect of repossessed computers):
Instalments due but not collected
(6 × 2 × Rs. 5,000) 60,000
Cost of installments not due on 31.12.99
(1 × 2 × Rs. 5,000 × 80%) 8,000
68,000
Less : Cost of instalments due but not collected
(6 × 2 × Rs. 4,000) 48,000
Cost of instalments not yet due
(1 × 2 × Rs. 4,000) 8,000 56,000
Bad debts 12,000
Question 4
Welwash (Pvt.) Ltd. sells washing machines for outright cash as well as on hire-purchase
basis. The cost of a washing machine to the company is Rs. 10,500. The company has fixed
 Accounting for Some Special Transactions 4.9

cash price of the machine at Rs. 12,300 and hire-purchase price, at Rs. 13,500 payable as to
Rs. 1,500 down and the balance in 24 equal monthly instalments of Rs. 500 each.
On Ist April, 2000 the company had 26 washing machines lying in its showroom. On that date
3 instalments had fallen due, but not yet received and 675 instalments were yet ot fall due in
respect of machines lying with the hire purchase customers.
During the year ended 31st March, 2001 the company sold 130 machines on cash basis and
80 machines on hire-purchase basis. After paying five monthly instalments, one customer
failed to pay subsequent instalments and the company had to repossess the washing
machine. After spending Rs. 1,000 on it, the company resold it for Rs. 11,500.
On 31 st March, 2001 there were 21 washing machines in stock, 810 instalments were yet to
fall due and 5 instalments had fallen due, but not yet received in respect of washing machines
lying with the hire-purchase customers. Total selling expenses and office expenses including
depreciation on fixed assets totalled Rs. 1,60,000 for the year.
You are required to prepare for the Accounting Year ended 31 st March, 2001:
(1) Hire purchase Trading Account, and
(2) Trading and Profit and Loss Account showing net profit earned by the company after
making provision for income-tax @ 35%. (16 marks)(Intermediate–Nov. 2001)
Answe
In the books of Welwash (Pvt.) Ltd.
Hire Purchase Trading Account
for the year ended on 31st March, 2001
Dr. Cr
Rs. Rs.
To Hire Purchase Stock By Cash (W.N. 1) 10,02,000
(Rs. 500 × 675) 3,37,500
To Instalments due By Stock Reserve 75,000
Rs. (500 × 3) 1,500  3 ,000 
 Rs . 3 ,37 ,500  
 13 ,500 
To Goods sold on Hire Purchase By Goods Repossessed
(Rs. 13,500×80) 10,80,000 (Rs. 13,500–Rs. 1,500–Rs. 2,500) 9,500
To Stock Reserve By Goods sold on Hire Purchase
 3,000  90,000  3,000  2,40,000
 Rs.4,05,000  13,500   Rs.10,80,000  
   13,500 

To Profit and Loss A/c By Hire Purchase Stock

(Transfer of profit) 2,25,000 (Rs. 500 × 810) 4,05,000
By Instalments due
(Rs. 500 × 5) 2,500
17,34,000 17,34,000
4.10 Accounting

Trading and Profit and Loss Account

for the year ended on 31st March, 2001
Rs. Rs.

To Opening Stock 2,73,000 By Sales (Rs. 12,300×130) 15,99,000

(Rs.10,500×26)

To Purchases By Goods sold on Hire Purchase

Rs. 10,500×(130+80+21–26) 21,52,500 (Rs. 10,80,000–Rs. 2,40,000) 8,40,000

To Gross Profit 2,34,000 By Closing Stock (Rs. 10,500×21) 2,20,500

26,59,500 26,59,500

To Sundry Expenses 1,60,000 By Gross Profit 2,34,000

To Provision for Income Tax By Hire Purchase Trading A/c 2,25,000

(35% of Rs. 3,00,000) 1,05,000 By Goods Repossessed

To Net Profit for the year 1,95,000 (Rs. 11,500–Rs.1,000–Rs. 9,500) 1,000

4,60,000 4,60,000

Working Notes :
Rs.
(1) Cash collected during the year
Hire purchase stock on 1.4.2000 3,37,500
Instalments due on 1.4.2000 1,500
Hire purchase price of goods sold during the year 10,80,000
14,19,000
Rs.
Less : Repossessed goods 9,500
Hire purchase stock on 31.3.2001 4,05,000
Instalments due on 31.3.2001 2,500 4,17,000
Cash collected during the year 10,02,000
(2) Washing machines purchased during the year
No. No.
Closing balance 21
Add : Cash Sales 130
 Accounting for Some Special Transactions 4.11

Sales on hire purchase basis 80 231

Less : Opening stock 26
Purchase during the year 205
Purchases 205 × Rs. 10,500 = Rs. 21,52,500
Question 5
A acquired on 1st January, 2003 a machine under a Hire-Purchase agreement which provides
for 5 half-yearly instalments of Rs. 6,000 each, the first instalment being due on 1st July,
2003. Assuming that the applicable rate of interest is 10 per cent per annum, calculate the
cash value of the machine. All working should form part of the answer.
(8 marks) (PE-II – May 2003)
Answer
Statement showing cash value of the machine acquired on hire-purchase basis
Instalment Interest @ 5% half Principal Amount
Amount yearly (10% p.a.) = (in each
5/105 = 1/21) instalment)
(in each instalment)
Rs. Rs. Rs.
5th Instalment 6,000 286 5,714
Less: Interest – 286
5,714
Add: 4th Instalment 6,000
11,714 558 5,442
Less: Interest 558 (11,156–5,714)
11,156
Add: 3rd instalment 6,000
17,156 817 5,183
Less: Interest 817 (16,339–11,156)
16,339
Add: 2nd instalment 6,000
22,339 1,063 4,937
Less: Interest 1,063 (21,276–16,339)
21,276
4.12 Accounting

Add: 1st instalment 6,000

27,276 1,299 4,701
Less: Interest 1,299 (25,977–21,276)
25,977 4,023 25,977

The cash purchase price of machinery is Rs. 25,977.

Question 6
Sameera Corporation sells Computers on Hire-purchase basis at cost plus 25%. Terms of
sales are 5,000/- as Down payment and 10 monthly instalments of Rs. 2,500/- for each
Computer. From the following particulars, prepare Hire-purchase Trading A/c for the year
2002-2003:
As on 1st April, 2002, last instalment on 20 Computers were outstanding as these were not
due upto the end of the previous year. During 2002―03, the firm sold 120 Computers. As on
31st March, 2003 the position of instalments outstanding were as under:
Instalments due but not collected 4 Instalments on 4 Computers and Last
instalment on 9 Computers
Instalments not yet due 6 Instalments on 50 Computers, 4 Instalments on
20 and Last Instalment on 40 Computers
Two Computers on which 8 Instalments were due and one Instalment not yet due on
31.03.2003, had to be repossessed. Repossessed stock is valued at 50% of cost. All other
Instalments have been received. (14 marks) (PE-II – May 2004)
Answer
In the books of Sameera Corporation
Hire Purchase Trading Account
for the year ended 31st March, 2003
Dr. Cr.
Amount Amount
Rs. Rs.
To Hire Purchase Stock 50,000 By Hire Purchase Sales 25,95,000
(20  Rs. 2,500) (W.N. 2)
To Goods sold on Hire 36,00,000 By Stock Reserve 10,000
Purchase (Rs. 50,000  20%)
(120Rs.30,000)
To Bad Debts 8,000 By Goods sold on Hire Purchase
(W.N. 4) 7,20,000
To Loss on Repossession 12,000 (Rs. 36,00,000  20%)
Less: Instalments not By Hire Purchase Stock 10,50,000
yet due 4,000 8,000 [(650+420+ 140)  Rs.
2,500]
To Stock Reserve 2,10,000
(Rs.10,50,000  20%)
 Accounting for Some Special Transactions 4.13

To Profit and Loss Account 4,99,000

(Transfer of Profit) ________
43,75,000 43,75,000
Alternatively the Hire Purchase Trading A/c can be prepared in the following manner:
Hire Purchase Trading Account
for the year ended 31st March, 2003
Amount Amount
Rs. Rs.
To Hire Purchase Stock 50,000 By Cash Account 24,92,500
(20  Rs. 2,500) (W.N. 1)
To Goods sold on Hire 36,00,000 By Stock Reserve 10,000
Purchase (120Rs.30,000) (Rs. 50,000  20%)
To Stock Reserve 2,10,000 By Goods sold on Hire 7,20,000
(Rs.10,50,000  20%) Purchase
(Rs. 36,00,000  20%)
To Profit and Loss Account 4,99,000 By Goods Repossessed 24,000
(Transfer of Profit) (2  Rs. 24,000  50%)
By Instalments due 62,500
[(4  4 + 1  9)  Rs. 2,500]
By Hire Purchase Stock 10,50,000
[(6  50 + 4  20 + 1  40) 
________ Rs. 2,500]
43,59,000 43,59,000
Question 7
ABC Ltd. sells goods on Hire-purchase by adding 50% above cost. From the following
particulars, prepare Hire-purchase Trading account to reveal the profit for the year ended
31.3.2005:
Rs.
1.4.2004 Instalments due but not collected 10,000
1.4.2004 Stock at shop (at cost) 36,000
1.4.2004 Instalment not yet due 18,000
31.3.2005 Stock at shop 40,000
31.3.2005 Instalments due but not collected 18,000
Other details:
Total instalments became due 1,32,000
Goods purchased 1,20,000
Cash received from customers 1,21,000
Goods on which due instalments could not be collected were repossessed and valued at 30%
below original cost. The vendor spent Rs. 500 on getting goods overhauled and then sold for
Rs. 2,800. (16 marks) (PE-II – May 2005)
4.14 Accounting

Answer
In the Books of ABC Ltd.
Hire Purchase Trading Account
for the year ended 31st March, 2005
Dr. Cr.
Rs. Rs.
1.1.2004 To Hire purchase 18,000 1.1.2004 By Stock reserve
stock
1.1.2004 To Goods sold on (1/3 of Rs. 18,000) 6,000
hire
to Purchase 1,74,0001.1.2004 By Hire purchase 1,32,000
31.3.2005 To Loss on to By sales
repossession of 31.3.2005 Goods sold on hire
goods (W.N. 5) 1,600 purchase (1/3 of 58,000
Rs. 1,74,000)
31.3.2005 To Stock reserve 20,000 By Profit on sale of
To Profit and loss repossessed goods
account (W.N. 4) 900
(Transfer of
profit) 43,300 31.3.2005 By Hire purchase
stock (W.N. 3) 60,000
2,56,900 2,56,900

Alternatively, Hire Purchase Trading Account can be prepared in the following manner:

Hire Purchase Trading Account

for the year ended 31st March, 2005
Dr. Cr.
Rs. Rs.
1.1.2004 To Hire purchase stock 18,000 1.1.2004 By Stock reserve (1/3 of Rs. 6,000
1.1.2004 To Hire purchase debtors 10,000 18,000)
to To Goods sold on hire 1,74,000 1.1.2004 By Cash (Rs. 1,21,000 + Rs.
31.3.2005 purchase to 2,800) 1,23,800
To Cash (Overhauling 500 31.3.2005 By Goods sold on hire
charges) purchase 58,000
31.3.2005 To Stock reserve 20,000 (1/3 of Rs. 1,74,000)
To Profit and loss 31.3.2005 By Hire purchase stock 60,000
account By Hire purchase debtors 18,000
(Transfer of profit) 43,300 _______
2,65,800 2,65,800
 Accounting for Some Special Transactions 4.15

Working Notes:
1. Memorandum Instalment due but not collected (hire purchase debtors) account
Dr. Cr.
Rs. Rs.
To Balance b/d 10,000 By Cash 1,21,000
To Hire purchase By Repossessed stock
sales 1,32,000 (Balancing figure) 3,000
_______ By Balance c/d 18,000
1,42,000 1,42,000
2. Memorandum shop stock account
Dr. Cr.
Rs. Rs.
To Balance b/d 36,000 By Goods sold on hire purchase 1,16,000
To Purchases 1,20,000 (Balancing figure)
_______ By Balance c/d 40,000
1,56,000 1,56,000

3. Memorandum Instalment not yet due (hire purchase stock) account

Dr. Cr.
Rs. Rs.
To Balance b/d 18,000 By Hire purchase Sales 1,32,000
To Goods sold on hire By Balance c/d (Balancing
purchase [1,16,000 + figure) 60,000
(1,16,000  50%)] 1,74,000 _______
1,92,000 1,92,000

4. Goods Repossessed account

Dr. Cr.
Rs. Rs.
To Hire purchase debtors 3,000 By Hire purchase trading
account (W.N. 5) 1,600
_____ By Balance c/d (W.N. 5) 1,400
3,000 3,000
To Balance b/d 1,400 By Cash account 2,800
To Cash account 500
(expenses)
To Profit on sale 900 _____
2,800 2,800
4.16 Accounting

5. Rs.
 100 
Original cost of goods repossessed  Rs. 3,000   2,000
 150 
Instalments due but not received 3,000
Valuation of repossessed goods (70% of Rs. 2,000) 1,400
Loss on repossession 1,600
Question 8
Computer point sells computers on Hire-purchase basis at cost plus 25%. Terms of sale are
Rs.5,000 down payment and eight monthly instalments of Rs.2,500 for each computer.
The following transactions took place during the financial year 2006-07:
Number of instalments not yet due as on 1.4.2006 = 25
Number of instalments due but not collected as on 1.4.2006 = 5
During the financial year 240 computers were sold. Out of the above sold computers during the
year the outstanding position were as follows as on 31.3.2007:
Instalments not yet due:
(i) Eight instalments on 50 computers.
(ii) Six instalments on 30 computers.
(iii) Two instalments on 10 computers.
Instalments due but not collected:
Two instalments on 5 computers during the year. Two computers on which five instalments were
due and two instalments not yet due were repossessed out of sales effected during current year.
Repossessed stock is valued at 50% of cost. All instalments have been received. You are asked
to prepare Hire-Purchase Trading Account for the year ending on 31.3.2007.
(PE II- Nov. 2007)(16 Marks)
Answer
Dr. Hire Purchase Trading Account for the year ended 31.3.2007 Cr.
Rs. Rs.
To Hire purchase stock 62,500 25
(25 x Rs. 2,500) By Stock reserve ( 62,500  ) 12,500
125
To Hire purchase debtors 12,500 By Goods sold on hire purchase A/c –
(5 x Rs. 2,500) 25
Loading ( 60,00,000  ) 12,00,000
125
To Goods sold on hire purchase 60,00,000 By Cash A/c (W.N.1) 45,15,000
(240 computers x Rs.25,000)


Hire purchase price of a computer = Rs. 5,000 + (Rs. 2,500 x 8) = Rs. 25,000.
 Accounting for Some Special Transactions 4.17

To Stock reserve 3,00,000 By Repossessed goods (W.N.2) 20,000

25
( Rs.15,00,000  )
125
To Profit transferred to P & L A/c 8,97,500 By Hire purchase debtors 25,000
(2 x 5 x Rs.2,500)
By Hire purchase stock
[(8x50)+(6x30)+(2x10) x Rs.2,500] 15,00,000
72,72,500 72,72,500

Working Notes:
1. Calculation of cash collected during the year
Rs.
Down payment received on 240 computers sold during the year 12,00,000
(240 x Rs.5,000)
Number of Instalments due and collected: No. of instalments
Total Instalments (8 instalments x 240 computers) 1,920
Add: Opening hire purchase debtors 25
Add: Opening hire purchase stock 5
1950
Less: Closing hire purchase debtors (2 x 5 ) 10
1,940
Less:Closing hire purchase stock
8 x 50 = 400
6 x 30 = 180
2 x 10 = 20 600
1,340
Less:Repossessed computer ( 5 x 2 + 2 x 2) 14
Total number of instalments received during the year 1,326
Total amount of instalments received (1,326 instalments x Rs.2,500) 33,15,000
Instalments collected during the year 45,15,000
2. Value of repossessed computers
Hire purchase price of two repossessed computers = [Rs.5,000 + (8 x Rs. 2,500)] x 2
computers
= Rs.50,000
4.18 Accounting

Rs.50,000
Cost price of the repossessed computers =  100 = Rs. 40,000
125
Value of repossessed computers = Rs.40,000 x 50% = Rs.20,000

Alternatively Hire Purchase Trading Account can also be prepared in the following
manner:

Dr. Hire Purchase Trading Account for the year ended 31.3.2007 Cr.
Rs. Rs.
To Hire purchase stock 62,500
By Stock reserve ( 62,500  25 ) 12,500
(25 x Rs. 2,500) 125
To Hire purchase debtors 12,500 By Hire purchase sales A/c (W.N.1) 45,65,000
(5 x Rs. 2,500)
To Goods sold on hire purchase 60,00,000 By Goods sold on hire purchase A/c –
(240 computers x Rs.25,000) 25 12,00,000
Loading ( 60,00,000  )
125

To Bad debts (W.N.3) 5,000 By Hire purchase stock 15,00,000

[(8x50)+(6x30)+(2x10) x Rs.2,500]
To Loss on goods repossessed
(W.N.2) 8,000
Less : Cost of instalments
not due 8,000 Nil
To Stock reserve 3,00,000
25
15,00,000 
125
To Profit transferred to P & L A/c 8,97,500
72,77,500 72,77,500
Working Notes:
1. Calculation of hire purchase sales Rs.
Cash collected (As per the working note 1 of the Alternate solution given above) 45,15,000
Add: Instalments due but not collected (including repossessed computers) 5,00,000
(2 x Rs.2,500 x 5) + (5 x Rs.2,500 x 2)
45,65,000
 Accounting for Some Special Transactions 4.19

2. Calculation of loss on repossessed computers

(2 x 2,500 x 5)
Cost of instalments due but not collected  100 20,000
125
(2 x 2,500 x 2)
Add: Cost of instalments not yet due  100 8,000
125
28,000
Less : Value of repossessed computers
 (2 x 25,000) 
  100  50%
 125  20,000
Loss on repossessed computers 8,000
3. Bad debts (in respect of repossessed computers)
Instalments due but not collected (5 x Rs.2,500 x 2) 25,000
(2  Rs. 2,500 x 2)
Add: Cost of installments not due  100 8,000
125
33,000
Less : Cost of instalments due but not collected
(5 x Rs.2,500 x 2)
 100 20,000
125
Cost of instalments not yet due
(2  Rs. 2,500 x 2)
 100 8,000 28,000
125
Bad debts on repossessed computers 5,000
Question 9
Easy buy Corporation sells goods on hire-purchase basis. The hire-purchase price is cost
plus 60%.
It furnishes you the following information:
Rs.
Hire Purchase stock on 1.4.2007 2,40,000
Installments due on 1.4.2007 45,000
Goods sold on hire purchase from 1.4.2007 to 31.3.2008 9,60,000
Cash collected from HP debtors during 1.4.2007 to 31.3.2008 3,00,000
Stock with customers at hire-purchase price on 31.3.2008 6,40,000
4.20 Accounting

You are required to prepare Hire Purchase Trading Account for the year ended 31 st March,
2008 (8 Marks) (PE II- Nov. 2008)
Answer
Hire Purchase Trading Account
For the year ended 31.3.2008
Rs. Rs.
To Hire purchase stock 2,40,000 By Hire purchase stock reserve 90,000
(Opening) (Opening)
To Instalments due 45,000 By Bank (Collections) 3,00,000
(Opening)
To Goods sold on hire 9,60,000 By Goods sold on hire purchase 3,60,000
purchase (Loading)
To Hire purchase stock 2,40,000 By Hire purchase stock 6,40,000
reserve (Closing) (Closing)
To Profit and loss A/c 2,10,000 By Instalments due (Closing) 3,05,000
16,95,000 16,95,000

Working Notes:
Memorandum Hire Purchase Stock A/c
Rs. Rs.
To Balance b/d 2,40,000 By Hire Purchase debtors A/c 5,60,000
(Balancing Figure)
To Goods sold on hire
purchase 9,60,000 By balance c/d 6,40,000
12,00,000 12,00,000

Memorandum Hire Purchase Debtors A/c

Rs. Rs.
To Balance b/d 45,000 By Cash/Bank A/c 3,00,000
By balance c/d (Balancing Figure)
To Hire purchase stock A/c 5,60,000 3,05,000
6,05,000 6,05,000
 Accounting for Some Special Transactions 4.21

UNIT 3 : INVESTMENT ACCOUNTS

Question 1
On 1.4.96, Sundar had 25,000 equity shares of ‘X’ Ltd.at a book value of Rs. 15 per share
(Face value Rs.10). On 20.6.96, he purchased another 5,000 shares of the company at Rs.
16 per share. The directors of ‘X’Ltd. announced a bonus and rights issue. No dividend was
payable on these issues. The tems of the issue are as follows:
Bonus basis 1:6 (Date 16.8.96).
Rights basis 3:7 (Date 31.8.96) Price Rs. 15 per share.
Due date for payment 30.9.96.
Shareholders can transfer their rights in full or in part. Accordingly Sundar sold 33.33% of
his entitlement to Sekhar for a consideration of Rs. 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 Sundar on 31.10.96. Dividends for shares acquired by him on 20.6.96 are to
be adjusted against the cost of purchase.
On 15.11.96, Sundar sold 25,000 equity shares at a premium of Rs. 5 per share.
You are required to prepare in the books of Sundar.
(1) Investment Account
(2) Profit & Loss Account.
For your exercise, assume that the books are closed on 31.12.96 and shares are valued at
average cost. (15 Marks), (Intermediate–May 1997)

Answer
Books of Sundar
Investment Account
Equity Shares in X Ltd.
No. Amount No. Amount
Rs. Rs.
1.4.96 To Bal b/d 25,000 3,75,000 30.9.96 By Bank (Sale
20.6.96 To Bank 5,000 80,000 of Rights) 10,000
16.8.96 To Bonus 5,000 — 31.10.96 By Bank 10,000
(dividend on
30.9.96 To Bank 10,000 1,50,000 shares acquired
(Rights Shares) on 20/6/96)
4.22 Accounting

15.11.96 By Bank
(Sale of shares) 25,000 3,75,000
15.11.96 To Profit 50,000 31.12.96 By Bal. c/d 20,000 2,60,000
transferred 45,000 6,55,000 45,000 6,55,000
Profit & Loss A/c
To Balance c/d 1,00,000 By Profit transferred 50,000
By Dividend 50,000
1,00,000 1,00,000
Working Notes:

(1) Bonus Shares =

25,000  5,000   5,000 shares
6

(2) Right Shares = 25,000  5,000  5,000  3 = 15,000 shares

7
(3) Rights shares renounced = 15,000×1/3 = 5,000 shares
(4) Dividend received = 25,000×10×20% = Rs. 50,000
Dividend on shares purchased on 20.6.96 = 5,000×10×20% = Rs.10,000
is adjusted to Investment A/c
(5) Cost of shares on 31.12.96
3,75,000  80,000  1,50,000  10,000  10,000  20,000  Rs. 2,60,000
45,000
Question 2
On 1.4.2002, Mr. Krishna Murty purchased 1,000 equity shares of Rs. 100 each in TELCO Ltd.
@ Rs. 120 each from a Broker, who charged 2% brokerage. He incurred 50 paise per Rs. 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 Rs. 175 per
share and Rs. 90 per share respectively. On 31.3.2003 Mr. Krishna Murty sold bonus shares
to a Broker, who charged 2% brokerage.
Show the Investment Account in the books of Mr. Krishna Murty, who held the shares as
Current assets and closing value of investments shall be made at Cost or Market value
whichever is lower. (10 marks) (PE-II – Nov. 2003)
 Accounting for Some Special Transactions 4.23

Answer
In the books of Mr. Krishna Investment Account
for the year ended 31st March, 2003
(Scrip: Equity Shares of TELCO Ltd.)
Dr. Cr.
Date Particulars Nominal Cost Date Particulars Nominal Cost
Value Value
(Rs.) (Rs.) (Rs.) (Rs.)
1.4.2002 To Bank A/c 1,00,000 1,23,000 31.3.2003 By Bank A/c 50,000 44,100
31.1.2003 To Bonus shares 50,000  31.3.2003 By Balance c/d 1,00,000 82,000
31.3.2003 To Profit & loss A/c  3,100
1,50,000 1,26,100 1,50,000 1,26,100

Working Notes:
(i) Cost of equity shares purchased on 1.4.2002 = 1,000  Rs. 120 + 2% of Rs. 1,20,000 +
½% of Rs. 1,20,000 = Rs. 1,23,000
(ii) Sale proceeds of equity shares sold on 31st March, 2003 = 500  Rs. 90 – 2% of Rs.
45,000 = Rs. 44,100.
(iii) Profit on sale of bonus shares on 31st March, 2003
= Sales proceeds – Average cost
Sales proceeds = Rs. 44,100
Average cost = Rs. (1,23,000  50,000)/1,50,000
= Rs. 41,000
Profit = Rs. 44,100 – Rs. 41,000 = Rs. 3,100.
(iv) Valuation of equity shares on 31st March, 2003
Cost = (Rs. 1,23,000 × 1,00,000)/1,50,000 = Rs. 82,000)
Market Value = 1,000 shares × Rs. 90 = Rs. 90,000
Closing balance has been valued at Rs. 82,000 being lower than the market value.
4.24 Accounting

UNIT 4 : CONTRACT ACCOUNTS

Question 1
Completed Contract Method.
(5 marks) (Intermediate–Nov. 1995)
Answer
It is a revenue recognition method for long term construction contracts under which revenue is
recognized only when the contract is completed or substantially completed; i.e., when only
minor work is expected to complete the contract other than warranty obligations. Costs and
progress payments received are accumulated during the course of contract but revenue is not
recognized until the contract activity is substantially completed.
However, it is necessary to create provision for anticipated losses for the unfinished contract
work although revenue is recognized only when the contract is substantially completed.
The principal advantage of this method is that it is based on results as determined when the
contract is completed or substantially completed rather than on estimates which may require
subsequent adjustments as a result of unforeseen cost and possible losses. If this method is
followed, the risk of recognizing profit which is not really earned is greatly minimised.
The disadvantage is that periodic reported income does not reflect the level of activity on
contracts during the period.
Question 2
Describe with reference to Accounting Standard 7 on Accounting for construction contracts,
the methods which may be used for recognizing revenue on construction contracts.
(4 marks) (Intermediate–Nov. 2001)
Answer
As per Accounting Standard 7 on Accounting for Construction Contracts, two methods of
accounting commonly followed by contractors for recognizing revenue on construction
contracts are the percentage of completion method and the completed contract method.
Under the percentage of completion method, revenue is recognized as the contract activity
progresses based on the stage of completion reached. The costs incurred in reaching the
stage of completion are matched with this revenue, resulting in the reporting of results which
can be attributed to the proportion of work completed. Although (as per the principle of
‘prudence’) revenue is recognized only when realized, under this method, the revenue is
recognized as the activity progresses even though in certain circumstances it may not be
realized.
Under the completed contract method, revenue is recognized only when the contract is
completed or substantially completed; that is, when only minor work is expected other than
warranty obligation. Costs and progress payments received are accumulated during the
 Accounting for Some Special Transactions 4.25

course of the contract but revenue is not recognized until the contract activity is substantially
completed.
Under both methods, provision is made for losses for the stage of completion reached on the
contract. In addition, provision is usually made for losses on the remainder of the contract.
It may be necessary for accounting purposes to combine contracts made with a single
customer or to combine contracts made with several customers if the contracts are negotiated
as a package or if the contracts are for a single project. Conversely, if a contract covers
number of projects and if the costs and revenues of such individual projects can be identified
within the terms of the overall contract, each such project may be treated as equivalent to a
separate contract.
 5
INTRODUCTION TO GOVERNMENT ACCOUNTS AND
ACCOUNTING FOR AGRICULTURAL FARMS

UNIT 1 : INTRODUCTION TO GOVERNMENT ACCOUNTS

(A) Write short notes on:
Question 1
Principles of Government Accounting (5 marks) [Intermediate–Nov. 1995]
Answer
Government expenditure in India is classified into a five Tier-system:
(i) Sectors (ii) Major heads (iii) Minor heads (iv) Sub-heads (v) Detailed heads of accounts.
The Government’s main interest is to forecast with possible accuracy what is expected to be
received or paid during the year and whether the former together with the balance of the past
year is sufficient to cover the latter. Similarly in the complete accounts of the year, it is
concerned to see to what extent its forecast was justified by facts and whether it has surplus
or deficit balance as a result of year’s transactions.
Government accounts are designed to determine how much money it has to mobilise in order
to maintain its necessary activities at the proper standard of efficiency. On the basis of
budgets and accounts, government determines (a) whether to curtail or expand its activities
and (b) whether it can and should increase or decrease taxation accordingly.
The accounts are kept on single entry. However, a portion of the accounts are kept on double
entry system. A statement of its estimated annual receipts and expenditure is prepared by
each government and presented to its legislature. A Union Territory presents statement to
their legislature with the previous approval of the President. This annual statement is
commonly known as Budget. In the statement, the sums required to meet expenditure charged
upon the Consolidated Fund of India or the Consolidated Fund of State, or the Consolidated
Fund of Union Territory and the sums required to meet other expenditure are shown
separately. The budget shows receipts and payments of the government under three heads :
1. Consolidated Fund
2. Contingency Fund
3. Public Account
The budget comprises of (i) Revenue Budget and (ii) Capital budget.
5.2 Accounting

Question 2
Consolidated Fund (5 marks) [Intermediate Nov. 1996]
Answer
In India Government accounts are kept in three main parts, i.e., consolidated fund,
contingency fund and public account.
Revenue of the Government arising out of taxation, other receipts classified as revenue,
certain capital receipts by way of deposits, advances and expenditure therefrom are classified
and accounted under “Consolidated fund”.
Accounting for the Central Government and State Government is done separately i.e.,
consolidated fund of India for the Central Government and a separate consolidated fund for
each state and Union Territory. The two main sub-divisions under the consolidated fund are
Revenue A/c and Capital A/c.
Question 3
Proprietary ratio. (5 marks) [Intermediate –May 1997]
Answer
Proprietary ratio is calculated to judge the owner’s contribution to total fund application/assets.

Proprietary Fund
Proprietary ratio = Total Assets

Proprietary Fund includes both share capital equity, preference capital and reserves and
surplus minus losses. However, for this purpose only free reserves should be counted. The
ratio indicates the share of proprietary fund against each rupee of investment. This ratio also
helps to analyse the strength of the company.
A high proprietary ratio will indicate less utilization of external funds. It will also indicate the
high internal funds utilization of the company. The optimum proprietary ratio to be maintained
by a company will depend on the industry to which it belongs.
Question 4
Peculiarity of Government Accounting. (5 marks) [Intermediate–May 1999]
Answer
The main objective of government accounting is to forecast with possible accuracy what is
expected to be received or paid during the year and whether the former together with the
balance of past year is sufficient to cover the latter. Similarly in the complete accounts of the
year, Government is concerned to see to what extent the forecast was justified by facts and
whether it has surplus or deficit balance as a result of year’s transactions.
Accordingly, government accounts are designed to determine how much money it has to
mobilize in order to maintain its necessary activities at the proper standard of efficiency. On
the basis of budgets and accounts, government determines (a) whether to curtail or expand its
 Introduction to Government Accounts and Accounting for Agricultural Farms 5.3

activities and, (b) whether it can and should increase or decrease taxation accordingly.
Government expenditure in India is classified into a five tier-system : (i) Sectors (ii) Major
heads (iii) Minor heads, (iv) Sub-heads, (v) Detailed heads of accounts.
The mass of government accounts is kept on single entry. There is, however, a portion of the
accounts which is kept on double entry system. A statement of its estimated annual receipts
and expenditures is prepared by each government and presented to its legislature. A Union
Territory presents statement to its legislature with the previous approval of the President. This
annual statement is commonly known as budget. In this statement, the sums required to meet
the expenditure charged upon the Consolidated Fund of India or of State or of Union Territory
and the sums required to meet other expenditure are shown separately. The budget shows
receipts and payments of the government under three heads :
1. Consolidated Fund
2. Contingency Fund
3. Public Account.
The budget comprises of revenue budget and capital budget. Thus one of the most distinctive
features of the system of government accounts in India is the minute elaboration with which
the financial transactions of government under both receipts and payments, are differentiated
and classified.
Question 5
Whether government accounting is totally different from commercial accounting ? State your
opinion with reasons. (5 marks) [Intermediate –Nov. 1999]
Answer
The primary objective of commercial accounting is to ascertain the gain or loss of an
enterprise for a given period and to find out the position of assets and liabilities at the end of
the accounting period. Against this, government accounts are designed to enable government
to determine how much money it needs to mobilize in order to maintain its necessary activities
at the proper standard of efficiency. It is thus clear that the purpose of government accounting
is totally different from that of commercial accounting. The other broad differences between
government accounting and commercial accounting can be enumerated as follows :
1. Financial Statements : Every commercial enterprise prepares a profit and loss account
and a Balance Sheet. But in case of government accounting, following two statements are
generally prepared:
(i) Government account — to show the net result of all incomes and expenditure
including expenditure on capital account ;
(ii) Statement of balancing accounts — to show whether the government owes or has to
receive money.
2. Method of accounting : Government accounts are maintained on cash basis as against
commercial accounting in which accounts are normally maintained on mercantile basis.
5.4 Accounting

3. System of accounting : In commercial accounting, double entry system of book keeping is

followed. On the other hand, mass of the government accounts are kept on single entry.
There is, however, a portion of accounts which is maintained on double entry basis.
4. Classification of accounts : In commercial accounting, accounts are broadly classified
into (i) personal (ii) real, and (iii) nominal accounts. Government accounts are kept in
three parts : Part 1 – Consolidated fund ; Part II – Contingency fund ; and Part III – Public
account.
5. Classification of financial transactions : One of the most distinctive features of the system
of government accounts in India is the minute elaboration with which the financial
transactions of government under both receipts and payments, are differentiated and
classified. Government expenditure in India is classified into a five tier system : Sectors,
Major heads, Minor heads, Sub-heads and Detailed heads of accounts. In case of
commercial accounting, no such elaborate details are provided.
Question 6
Briefly explain “Treasury system” and the functions entrusted to Treasury in Government
Accounting. (4 marks) (Intermediate–May 2000 & Nov. 2000, PE-II–Nov. 2003, Nov. 2007)
Answer
Under the treasury system, district treasury is the basic unit and the focal point for the primary
record of financial transactions of government in the district with sub-treasuries under it at the
Taluks and Tehsils level.
The Treasuries are of two kinds - (1) Banking (ii) Non-banking. A bank treasury means a
treasury, the cash business of which is conducted by the Reserve Bank of India or its
branches or agencies authorised to conduct Government business and non-banking treasury
means a treasury, the cash business of which is conducted by itself.
The functions entrusted to the treasury are as follows:
(i) Receipt of money from the public and departmental officers for credit to government.
(ii) Payment of claims against Government on bills or cheques or other instruments
presented by departmental drawing and disbursing officers or pensioners or others
authorised to do so.
(iii) Keeping initial and subsidiary accounts of the receipts and payments occurring at them
and rendering statements of such transactions to the Accountant General for detailed
compilation and consolidation.
(iv) Acting as a banker in respect of funds of local bodies, Zilla Parishads, Panchayat
Institutions etc. who keep their funds with the treasuries.
(v) Custody of opium and other valuables because of the strong room facility provided at the
treasury.
(vi) Custody of cash balances of the State Government and conducting cash business of
Government at non-banking treasuries.
 Introduction to Government Accounts and Accounting for Agricultural Farms 5.5

Question 7
Treasury System used for the primary record of Financial Transactions of the Government.
(4 marks) [Intermediate –May 2001]
Answer
In the treasury system, there are treasuries which receive and pay money on behalf of the
government. Under this system, district treasury is the basic unit and the local point for the
primary record of financial transactions of government in the district with sub-treasuries under
it at the taluks/tahsils in the district. The system was evolved more than a century ago
Treasuries are of two kinds – (i) banking and (ii) non-banking. The cash business of a bank
treasury is conducted by the Reserve Bank of India or its branches or authorized agencies. A
non-banking treasury conducts the cash business itself.
Apart from receiving and paying cash on behalf of government, treasury keeps initials and
subsidiary accounts of receipts and payments occurring at it and renders statements of
transactions to the Accountants General for detailed compilation and consolidation. It acts as
a banker in respect of funds of local bodies, zila parishads etc. Treasury also keeps custody of
opium and other valuables belonging to the government in its strong room.
Question 8
What are the main principles of allocation between Capital and Revenue accounts on a Capital
scheme? (4 Marks) (PE-II – May 2005)
Answer
The following are the main principles governing the allocation of expenditure on a capital
scheme between capital and revenue accounts:
(i) Capital account should bear all charges for the first construction and equipment of a
project as well as charges for intermediate maintenance of the work while not yet opened
for service. It would also bear charges for such further additions and improvements as
may be sanctioned under rules made by competent authority.
(ii) Subject to (iii) below, revenue account should bear all subsequent changes for
maintenance and all working expenses. These embrace all expenditure on the working
and upkeep of the project and also on such renewals and replacements and such
additions, improvements or extensions as prescribed by Government.
(iii) In the case of works of renewal and replacement which partake both of a capital and
revenue nature, the allocation of expenditure should be regulated by the broad principle
that revenue should pay or provide a fund for the adequate replacement of all wastage or
depreciation of property originally provided out of capital grants and that only the cost of
genuine improvements, whether determined by prescribed rules or formulae or under
special orders of Government, should be debited to capital account. Where under
special orders of Government, a Depreciation or Renewals Reserve Fund is established
for renewing assets of any commercial department or undertaking, the distribution of
expenditure on renewals, and replacements between capital account and the fund should
5.6 Accounting

be so regulated as to guard against over-capitalisation on the one hand and excessive

withdrawals from the fund on the other.
(iv) Expenditure on account of reparation of damage caused by extraordinary calamities such
as flood, fire, earthquake, enemy action, should be charged to capital account or to
revenue account or divided between them in such a way as may be determined by
Government according to the circumstance of each case.
(v) Capital receipts in so far as they relate to expenditure previously debited to capital
heads, accruing during the process of construction of a project, should be utilised in
reduction of capital expenditure. Thereafter, their treatment in the accounts will depend
on circumstances, but except under a special rule or order of Government, they should
not be credited to the revenue account of the department or undertaking.
Question 9
Write short note on “Appropriation Act” with reference to Government Accounts.
(4 Marks) (PE-II – Nov. 2006)
Answer
After the demand is passed by the legislature, appropriation bill is introduced to provide for the
appropriation out of the Consolidated Fund of India or the State or the Union Territory having
separate legislature for all moneys required to meet (a) the grants made by the legislature; (b)
the expenditure charged on consolidated fund but not exceeding in any case the amount
shown in the statement previously laid before the legislature. No money can be withdrawn
from the consolidated fund until the appropriation bill is passed. The sum is authorized in the
Appropriation Act or intended to cover all the changes including the liability of past years to be
paid during a financial year or to be adjusted in accounts of the year. Any unspent balance
lapses and is not available for utilisation in the following year.
Question 10
How the Government expenditure in India is classified? (2 Marks) (PE II-May, 2008)
Answer
Government expenditure in India is classified into a five tier system:
(i) Sectors
(ii) Major Heads
(iii) Minor Heads
(iv) Sub-Heads
(v) Detailed Heads of Accounts
 Introduction to Government Accounts and Accounting for Agricultural Farms 5.7

UNIT 2 : ACCOUNTING FOR AGRICULTURAL FARMS

(A) Write short notes on:
Question 1
Use of Accounting information in agricultural farms.
(5 marks) [Intermediate–May 1996 and PE-II May 2006]
Answer
A properly designed accounting system can be used for extracting the following information:
1. Crop-wise performance and overall performance of the agricultural enterprise.
2. Comprehensive information regarding yield, revenue, input and cost of the enterprise.
3. Financial state of affairs i.e. assets and liabilities of the farm at a particular point of time.
4. Profit/Loss of the farm during a year.
5. Data base for other decisions, namely (a) acquire assets or hire services for ploughing,
irrigation, weeding, threshing etc.; (b) replacement of draught animal, machinery and
farming technique; (c) selection of crop-mix; (d) choosing farm size; (e) farm
diversification, for example adding crop and non-farming activities like processing of
agricultural products; (f) divestment decisions whether to discontinue agricultural
operations.
6. Supporting data to the lenders including banks and co-operative societies to assess
farm’s financial requirements as well as debt servicing ability.
7. Reliable data for farm management survey.
8. Reliable data for assessment of agricultural income tax.
Question 2
Explain, why Accounting in Agricultural operation is not popular. Mention a few peculiar
features of Farm Accounting. (7 marks) (Intermediate–Nov. 1996 & PE-II–Nov. 2004)
Answer
The features of farm accounting are as follows:
(i) Agricultural sector in India is unorganized and dominated by small farmers. Most
agricultural farms are family oriented and part of the farms produce is consumed by the
family members. Level of the education of the average farmers appears to be the
principal barrier for adaptation of agricultural accounting system. Farmers are not aware
of the technique of using accounting data for the purpose of management decision and
usefulness of data base management.
(ii) The family takes part in management and provides labour for the farm. Farmers cannot
afford the additional expenses involved in hiring a person to maintain accounts.
5.8 Accounting

(iii) Agriculture is in some cases a seasonal occupation and many farmers have other
occupations also. Farming operations are uncertain due to natural calamities.
(iv) There are many divisions in farm accounting. Finished product of one division can
become the raw material for another.
(v) Tax authorities do not rigorously insist on maintenance of books of account. Collection of
statistics by the government is also not adequate.
Question 3
Compilation of accounting information for agricultural farm. (5 marks) (Q. 1 (i) (b) of May 1999)
Answer
Agricultural activities are carried on mostly in an unorganized manner. The farmer has no
office and also does not find time for day by day record keeping. The transactions and events
are also not supported by vouchers or other documents in most of the cases. So it is desirable
to maintain a Diary to record happenings of the day. This Diary becomes the source document
for record keeping.
Seven registers are required for running the accounting system.
1. Cash Book: to record cash transactions.
2. Fixed Assets Register: to record details of fixed assets – description of assets, cost of
purchases/construction/generation, disposal, depreciation and balance.
3. Loan Register: to record borrowings from bank, cooperatives and other agencies trade
creditors along with interest paid or payable.
4. Stock Register: to record details of input, output and by product – receipts, utilization,
wastage and balance.
5. Debtors and Creditors Register: to record credit transactions classified by parties
involved.
6. Register for National Transactions: to record transactions between farm and farm
household.
7. Cost Analysis Register: to record cropwise input and output inclusive of apportionment of
common costs and finding out crop profit.
Question 4
Common costs incurred in agricultural farm and the basis of their apportionment.
(5 marks (6 (b) of Nov. 2000)
Answer
Seed, fertilizer, manure, pesticides, direct wages—notional and actual, land rental—notional
and actual can be identified crop-wise. But other costs like irrigation, services of agricultural
machinery, implements or animal power, depreciation, interest etc. cannot be classified simply
by nomenclature. These costs which can’t be identified cropwise are common costs of the
agricultural farms. Common costs should be apportioned among the crop enterprises on the
 Introduction to Government Accounts and Accounting for Agricultural Farms 5.9

basis of usage, wherever use of assets can be quantified. In other cases length of crop
season can be used. An illustrative list of the common costs and apportionment bases is given
below:
Apportionment bases of common costs in agriculture
Cost element Apportionment basis
Maintenance of Draught Animal and Depreciation Animal Base
Maintenance of Agricultural Machinery, Implements
and Depreciation Machine Hours
Maintenance of Farm Shed and Depreciation Length of crop season
Interest on Fixed Capital Length of crop season
Interest on Working Capital Working Capital Investment
for various crops
Question 5
What are the information that are extracted from the well designed accounting system in
Agricultural Farm? (4 Marks) (PE II- May, 2007)
Answer
A well designed accounting system can be used for extracting the following information:
1. Crop-wise performance and overall performance of the agricultural enterprise.
2. Comprehensive information regarding yield, revenue, input and cost of the enterprise.
3. Financial state of affairs i.e. assets and liabilities of the farm at a particular point of time.
4. Profit/Loss of the farm during a year.
5. Data base for other decisions, namely (a) acquire assets or hire services for ploughing,
irrigation, weeding, threshing etc.; (b) replacement of draught animal, machinery and
farming technique; (c) selection of crop-mix; (d) choosing farm size; (e) farm
diversification, for example adding crop and non-farming activities like processing of
agricultural products; (f) divestment decisions whether to discontinue agricultural
operations.
6. Supporting data to the lenders including banks and co-operative societies to assess
farm’s financial requirements as well as debt servicing ability.
7. Reliable data for farm management survey.
8. Reliable data for assessment of agricultural income tax.
5.10 Accounting

Question 6
List out major cost elements and revenue elements of an Agricultural farm.
(4 marks)(PE II, Nov. 2007)
Answer
In an agricultural farm, major cost elements are:
Seed, Fertilizer, Pesticides, Irrigation, Wages, Running and Maintenance cost of Agricultural
Machinery and Implements, Maintenance cost of drought animals, depreciation of fixed
assets, Interest on borrowed capital, Notional Rental on owned Land, Notional interest on
owner’s capital, Notional Wages of Family Workers.
In an agricultural farm, revenue consists of sale of main products and by-products, value of
family consumption of crops and by-products, value of crops and by-products transferred to
allied enterprise run by the family (example, use of paddy straw as food of milch animal),
value of output exchanged for input.
Question 7
Give names of books required to be maintained in agriculture farm accounting.
(4 Marks) (PE II-May, 2008)
Answer
The following seven books/registers are required in agriculture farm accounting:
i. Cash book
ii. Fixed assets register
iii. Loan register
iv. Stock register
v. Debtors and creditors register
vi. Register for notional transactions
vii. Cost analysis register

Question 8
Draw a list of direct crop costs and another of common costs in agricultural farming.
(4 Marks) (PE II- Nov. 2008)
Answer
Direct crop costs in agricultural farming are as follows:
 Seeds
 Fertilizer and manure
 Introduction to Government Accounts and Accounting for Agricultural Farms 5.11

 Pesticides and insecticides

 Wages – notional and actual
 Hire charges of animal power
 Machinery and implements
 Running cost of owned machinery and implements.
 Land Rental – notional and actual.
Common costs in agricultural farming are as follows:
 Maintenance of draught.
 Animal, machinery and implements.
 Maintenance of farm shed
 Depreciation
 Interest on borrowed capital
 Notional interest on own capital.
 6
ADVANCED PARTNERSHIP ACCOUNTS

UNIT 1 : INTRODUCTION TO PARTNERSHIP ACCOUNTS

Question 1
X, Y Ltd. and Z Ltd. are partners of X & Co. The partnership deed provided that :
(a) The working partner Mr. X is to be remunerated at 15% of the net profits after charging his
remuneration, but before charging interest on capital and provision for taxation;
(b) Interest is to be provided on capital at 15% per annum;
(c) Balance profits after making provision for taxation, is to be shared in the ratio of 1 : 2 : 2
by the three partners.
During the year ended 31 st March, 1997 :
(i) the net profit before tax and before making any payment to partners amounted to Rs.
6,90,000;
(ii) interest on capitals at 15% per annum amounted to :
Rs. 60,000 for X; Rs. 1,50,000 for Y Ltd. and Rs. 1,80,000 for Z Ltd. The capitals
have remained unchanged during the year;
(iii) provision for tax is to be at 40% of “total income” of the firm. The toal income has
been computed at Rs. 1,95,000.
You are asked by :
(a) the firm to pass closing entries in relation to the above;
(b) Y Ltd. to pass journal entries in its books pertaining to its income from the firm and show
the investment in partnership account as it would appear in its ledger;
(c) Z Ltd. to show, how the above information will appear in its financial statements for the
year;
(d) Shri X to show the working, if any, in relation to the above.
(20 marks) (Intermediate–Nov. 1997)
6.2 Accounting

Answer
Journal of partnership firm of Shri X, Y Ltd. and Z Ltd.
Closing entries on 31st March, 1997
Dr. Cr.
Rs. Rs.
Profit and loss account Dr. 78,000
To Provision for taxation for A.Y.1997-98 78,000
(Being provision made for taxation at 40% on total
income of Rs. 1,95,000)
Profit and loss appropriation account Dr. 4,80,000
To Remuneration to X, the working partner 90,000
To Interest on capitals :
X 60,000
Y Ltd. 1,50,000
Z Ltd. 1,80,000
(Being interest on capitals provided at 15% per annum
and remuneration to working partner X at 15% of net
profit after charging his remuneration but before
providing for tax and interest on capitals – now
recorded)
Profit and loss appropriation account Dr. 1,32,000
(Rs. 6,90,000 - Rs.78,000 - Rs.4,80,000)
To Capital Accounts :
X 26,400
Y Ltd. 52,800
Z Ltd. 52,800
(Being balance profits credited to partners’ capital
accounts in the ratio of 1 : 2 : 2)

(b) Journal entries in the books of Y Ltd.

1997 Dr. Cr.
March 31 Rs. Rs.
Investment in partnership with Shri X and Z
Ltd. Dr. 2,02,800
To Interest on capital (taxable) 1,50,000
To Share to profits (non-taxable) 52,800
(Being entry to record interest income at 15%
p.a. on capital of Rs. 10,00,000 and 2/5 th
share of profit in the firm)
 Advanced Partnership Accounts 6.3

Interest on capital Dr. 1,50,000

Share of profits Dr. 52,800
To Profit and Loss A/c 2,02,800
(Being incomes transferred to profit and loss
account)

Ledger
Investment in partnership with Shri X and Z Ltd.

1996 Dr. Cr. Balance

Rs. Rs. Rs.
April 1 To Balance b/d 10,00,000 Dr.10,00,000
1997
March 31 To Interest income from the firm 1,50,000 Dr. 11,50,000
To Share of profits in the firm 52,800 Dr. 12,02,800
By Balance c/d 12,02,800
12,02,800 12,02,800

(c) Extracts from the financial statements of Z Ltd.

Revenue statement for the year ended 31 st March, 1997
1996-97 1995-96
Rs. Rs.
Operating income:
Income from partnership :
Interest on capital invested 1,80,000
Share of profit 52,800
2,32,800

Extracts from schedule of investments attached to and forming part of the balance sheet as at
31 st March, 1997.
31.3.1997 31.3.1996
Rs. Rs.
Investment in partnership with Shri X and Y Ltd. 14,32,800 12,00,000
Partners Capitals as on 31 st March Share of profit
1997 1996 1996-97 1995-96
Rs. Rs.
X 5,76,400 4,00,000 1/5 1/5
Y Ltd. 12,02,800 10,00,000 2/5 2/5
Z Ltd. 14,32,800 12,00,000 2/5 2/5
6.4 Accounting

Working for capitals : X Y Ltd. Z Ltd.

Rs. Rs. Rs.
Opening capital 4,00,000 10,00,000 12,00,000
Remuneration credited 90,000 — —
Interest on capital 60,000 1,50,000 1,80,000
Share in profits 26,400 52,800 52,800
5,76,400 12,02,800 14,32,800
(d) Working for remuneration to X, the working partner
Rs.6,90,000  15
 Rs.90,000
115
Working for capitals of partners (opening of current year and closing of last year)
100
X = Rs.60,000  = Rs. 4,00,000
15
100
Y Ltd. = Rs.1,50,000  = Rs. 10,00,000
15
100
Z Ltd. = Rs.1,80,000  = Rs. 12,00,000
15

Question 2
Avinash, Basuda Ltd. and Chinmoy Ltd. were in partnership sharing profits and losses in the
ratio of 9 : 4 : 2. Basuda Ltd. retired from the partnership on 31 st March, 1998, when the firm’s
balance sheet was as under :
Rs. in thousand
Rs. Rs.
Sundry creditors 600 Cash and bank 284
Capital accounts : Sundry debtors 400
Avinash 2,700 Stock 800
Basuda Ltd. 1,200 Furniture 266
Chinmoy Ltd. 600 4,500 Plant 850
Land and building 2,500
5,100 5,100
Basuda Ltd.’s share in goodwill and capital was acquired by Avinash and Chinmoy Ltd. in the
ratio of 1 : 3, the continuing partners bringing in the necessary finance to pay off Basuda Ltd.
The partnership deed provides that on retirement or admission of a partner, the goodwill of the
firm is to be valued at three times the average annual profits of the firm for the four years
ended on the date of retirement or admission. The profits of the firm during the four years
 Advanced Partnership Accounts 6.5

ended 31st March, 1998 in thousands of rupees were :

Rs.
1994-95 450
1995-96 250
1996-97 600
1997-98 700
The deed further provided that goodwill account is not to appear in the books of accounts at
all. The continuing partners agreed that with effect from 1 st April, 1998, Ghanashyam, son of
Avinash is to be admitted as a partner with 25% share of profit.
Avinash gifts to Ghanashyam, by transfer from his capital account, an amount sufficient to
cover up 12.5% of capital and goodwill requirement. The balance 12.5% of capital and
goodwill requirement is purchased by Ghanashyam from Avinash and Chinmoy Ltd. in the
ratio of 2 : 1.
The firm asks to you :
(i) Prepare a statement showing the continuing partners’ shares;
(ii) Pass journal entries including for bank transactions; and
(iii) Prepare the balance sheet of the firm after Ghanashyam’s admission
(20 marks) (Intermediate–May 1998)

Answer

(i) Statement showing the partners’ shares

Avinash Basuda Ltd. Chinmoy Ltd. Ghanashyam
Ratio before retirement of Basuda 9 4 2
Ltd. 15 15 15
Adjustment on retirement 1 3
() ()
15 — 15
New ratio before admission of 10 5
Ghanashyam 15 15
On admission of Ghanashyam :
Gift by Avinash (12.5/100) 1 1
(–)
8 8
Purchase from Avinash & Chinmoy 2 1 3
() () ()
Ltd.* 24 24 24
New ratio 11 7 6
24 24 24
* Purchase from Avinash = 2/3 × 1/8 = 2/24
Purchase from Chinmoy Ltd. = 1/3 × 1/8 = 1/24
6.6 Accounting

(ii) Journal Entries

Dr. Cr.
Rs. Rs.
1. Avinash’s capital A/c Dr. 1,00,000
Chinmoy Ltd’s capital A/c Dr. 3,00,000
To Basuda Ltd.’s capital A/c 4,00,000
(Being purchase by Avinash and Chinmoy Ltd.
of goodwill from Basuda Ltd.)

2. Avinash’s capital A/c Dr. 7,50,000

To Ghansahyam’s capital A/c 7,50,000
(Being gift made by Avinash to Ghansahyam)

3. Bank A/c Dr. 31,00,000

To Avinash’s capital A/c 7,75,000
To Chinmoy Ltd’s capital A/c 13,87,500
To Ghanasahyam’s capital A/c 9,37,500
(Being capital brought in by the partners)

4. Basuda Ltd’s capital A/c Dr. 16,00,000

To Bank A/c 16,00,000
(Being final payment made to Basuda Ltd. on
retirement)

5. Ghanashyam’s capital A/c Dr. 1,87,500

To Avinash’s capital A/c 1,25,000
To Chinmoy Ltd’s Capital A/c 62,500
(Being goodwill adjusted on admission)

(iii) Balance Sheet as on 1st April, 1998

Liabilities Amount Assets Amount
Rs. Rs.
Sundry creditors 6,00,000 Cash and bank 17,84,000
Capital accounts : Sundry debtors 4,00,000
Avinash 27,50,000 Stock 8,00,000
Chinmoy Ltd. 17,50,000 Furniture 2,66,000
Ghanashyam 15,00,000 Plant 8,50,000
60,00,000 Land and building 25,00,000
66,00,000 66,00,000
 Advanced Partnership Accounts 6.7

Working Notes :
(Rs. in thousand)
(1) Adjustment of Goodwill on Retirement
Value of Goodwill = (450 + 250 + 600 + 700) × ¾ = 1,500
Share of Basuda Ltd. = 1,500 × 4/15 = 400
Adjustment through partners’ capital accounts
1
Avinash :  400  100 (Dr.)
4
4
Basuda Ltd. :  1,500  400 (Cr.)
15
3
Chinmoy Ltd. :  400  300 (Dr.)
4
(2) Closing Balances of Capital Accounts
Basuda Ltd.’s share of capital and goodwill = 1,200 + 400 = 1,600
This represents 4/15th share of capital and goodwill requirement of the firm.
15
Thus, total capital and goodwill requirement = 1,600   6,000
4
Hence, closing capital balances (in new profit sharing ratio of 11 : 7 : 6) should be
11
Avinash :  6,000  2,750
24
7
Chinmoy Ltd. :  6,000  1,750
24
6
Ghanashyam :  6,000  1,500
24
1
Gift by Avinash to Ghanashyam :  1,500  750
2
(Debit to Avinash’s capital A/c and credit to Ghanashyam’s capital A/c)
(2) Adjustment of Goodwill on Admission
Goodwill of the firm = 1,500
1
Ghanashyam’s share of goodwill=  1,500
4
= 375
6.8 Accounting

1
(a) Gift by Avinash =  375
2
= 187.5
(Included in the gift of 750 – see W.N. 2)
(b) Purchase from Avinash and Chinmoy Ltd. = 187.5
(in 2 : 1 ratio)
Thus, adjustment of goodwill purchased through capital accounts
2
Avinash :  187.5  125 (Cr.)
3
1
Chinmoy Ltd. :  187.5  62.5 (Cr.)
3
1
Ghanashyam :  375  187.5 (Dr.)
2
(3) Amount brought in by Partners
Partners’ Capital Accounts
Avinash Basuda Chinmoy Ghana- Avinash Basuda Chinmoy Ghana-
Ltd. Ltd. shyam Ltd. Ltd. shyam
Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.
To Basuda Ltd. 100 — 300 — By Balance b/d 2,700 1,200 600 —

To Ghanashyam 750 — — — By Avinash and

To Avinash and Chinmoy Ltd. — 400 — —
Chinmoy Ld. — — — 187.5 By Cash and
To Cash and Bank — 1,600 — — Bank (Bal.
To Balancd c/d 2,750 — 1,750 1,500 figure) 775 — 1,387.5 937.5
By Avinash — — — 750
By Ghanashyam 125 — 62.5 —
3,600 1,600 2,050 1,687.5 3,600 1,600 2,050 1,687.5

(4) Cash and Bank

Amount given 284
Amount brought in by partners 3,100
3,384
Less : Payment to Basuda Ltd. 1,600
1,784
Net increase = Rs. 1,500
(Equivalent to the value of goodwill)
 Advanced Partnership Accounts 6.9

Question 3
A, B and C were partners of a firm sharing profits and losses in the ratio of 3 : 4 : 3. The
Balance Sheet of the firm, as at 31 st March, 1998 was as under :
Liabilities Rs. Assets Rs.
Capital Accounts : Fixed Assets 1,00,000
A 48,000 Current Assets :
B 64,000 Stock 30,000
C 48,000 1,60,000 Debtors 60,000
Reserve 20,000 Cash and Bank 30,000 1,20,000
Creditors 40,000
2,20,000 2,20,000
The firm had taken a Joint Life Policy for Rs. 1,00,000; the premium periodically paid was
charged to Profit and Loss Account. Partner C died on 30th September, 1998. It was agreed
between the surviving partners and the legal representatives of C that :
(i) Goodwill of the firm will be taken at Rs. 60,000.
(ii) Fixed Assets will be written down by Rs. 20,000.
(iii) In lieu of profits, C should be paid at the rate of 25% per annum on his capital as on
31 st March, 1998.
Policy money was received and the legal heirs were paid off. The profits for the year ended
31 st March, 1999, after charging depreciation of Rs. 10,000 (depreciation upto 30th September
was agreed to be Rs. 6,000) were Rs. 48,000.
Partners’ Drawings Accounts showed balances as under :
A Rs. 18,000 (drawn evenly over the year)
B Rs. 24,000 (drawn evenly over the year)
C (up-to-date of death) Rs. 20,000
On the basis of the above figures, please indicate the entitlement of the legal heirs of C,
assuming that they had not been paid anything other then the share in the Joint Life Policy.
(13 marks) (Intermediate–Nov. 2000)
Answer
Computation of entitlement of legal heirs of C
(1) Profits for the half year ended 31 st March, 1999
Rs.
Profits for the year ended 31 st March, 1999 (after depreciation) 48,000
Add : Depreciation 10,000
Profits before depreciation 58,000
6.10 Accounting

Profits for the first half (assumed : evenly spread) 29,000

Less : Depreciation for the first half 6,000
Profits for the first half year (after depreciation) 23,000

Profits for the second half (i.e., 1st October, 1998 to 31 st March, 1999) 29,000
Less : Depreciation for the second half 4,000
Profits for the second half year (after depreciation) 25,000
(2) Capital Accounts of Partners as on 30 th September, 1998
Dr. Cr.
A B C A B C
Rs. Rs. Rs. Rs. Rs. Rs.
To Fixed Assets By Balance b/d 48,000 64,000 48,000
(loss on By Reserve 6,000 8,000 6,000
revaluation) 6,000 8,000 6,000 By Goodwill 18,000 24,000 18,000
To Drawings 9,000 12,000 20,000 By P & L Appro-
To C Executor’s A/c 52,000 priation A/c
To Balance c/d 57,000 76,000 – (Interest on
Rs. 48,000 @ 25%
for 6 months) — — 6,000
72,000 96,000 78,000 72,000 96,000 78,000

(3) Application of Section 37 of the Partnership Act

Legal heirs of C have not been paid anything other than the share in joint life policy. The
amount due to the deceased partner carries interest at the mutually agreed upon rate. In the
absence of any agreement, the representatives of the deceased partner can receive at their
option interest at the rate of 6% per annum or the share of profit earned for the amount due to
the deceased partner.
Thus, the representatives of C can opt for
Either,
(i) Interest on Rs. 52,000 for 6 months @ 6% p.a. = Rs. 1,560
Or
(ii) Profit earned out of unsettled capital (in the second half year ended 31 st March, 1999)
52,000
Rs. 25,000   Rs. 7,027 (approx.)
57,000  76,000  52,000
In the above case, it would be rational to assume that the legal heirs would opt for
Rs. 7,027.
 Advanced Partnership Accounts 6.11

(4) Amount due to legal heirs of C Rs.

Balance in C’s Executor’s account 52,000

Amount of profit earned out of unsettled capital [calculated in (3)] 7,027
Amount due 59,027
Question 4
A, B and C were partners, sharing Profits and Losses in the ratio of 5 : 3 : 2 respectively. On
31 st March, 2000 their Balance Sheet stood as follows :
Liabilities Rs. Assets Rs.
A’s capital 7,79,000 Plant and Machinery 13,62,000
B’s capital 7,07,800 Furniture and Fittings 2,36,000
C’s capital 6,86,200 Stock 7,02,000
Creditors 4,91,000 Debtors 1,91,000
Cash at Bank 1,73,000
26,64,000 26,64,000
On 31st July, 2000 A died. According to partnership deed, on the death of a partner, the capital
account of the deceased partner was to be credited with :
(i) his share of profit for the relevant part of the year of death calculated on the basis of
profit earned during the immediately preceding accounting year, and
(ii) his share of goodwill
Goodwill was to be valued at two years’ purchase of the average profits of immediately
preceding three accounting years. The profits, as per books of account were as follows :
Rs.
For accounting year ended 31 st March, 1998 3,29,000
For accounting year ended 31 st March, 1999 3,46,000
For accounting year ended 31 st March, 2000 3,78,000
However, while going through the books of account on A’s death, it came to light that Rs.
30,000 worth of wages were spent on installation of a new machinery, but the same was not
capitalized; the machinery was put into operation on 1 st October, 1999. Depreciation was
provided on the machinery @ 20% per annum.
On 1st October, 2000 A’s son D was admitted into partnership with immediate effect on the
following terms :
(a) D would get one-fourth share in the profit of the firm, while the relative profit sharing ratio
between B and C would remain unchanged.
(b) The final balance of A’s capital account would be credited to D’s capital account
6.12 Accounting

(c) An adjustment would be made in the Capital Accounts for D’s share of goodwill. The
basis of valuation of firm’s goodwill would be the same as was adopted at the time of the
death of his father.
On 31st March, 2001 the Profit and Loss Account of the firm showed that the firm had earned a
profit of Rs. 4,16,000 for the year. The respective drawings accounts showed that while B and
C had withdrawn Rs. 60,000 each during the year, D’s drawings totalled Rs. 30,000. The
Drawings Accounts are closed at the end of the year by transfer to respective capital
accounts.
You are required to :
(i) Prepare a statement showing distribution of profits for the accounting year ended 31 st
March, 2001; and
(ii) Pass journal entries for all the transactions relating to death of the partner. D’s admission
into partnership, and at the end of the year relating to transfer of Drawings Accounts and
distribution of profit for the year. (20 marks) (Intermediate–May 2001)

Answer
(i) Statement Showing distribution of profits for the accounting year ended 31 st
March, 2001
Rs. Rs.
Net profit for the year ended 31.03.2001 4,16,000
A’s share
(Profit distributed to deceased partner A & his executor)
(a) Profit for 4 months (1.4.2000 – 31.7.2000) (W.N.1 ) 67,500
(b) Application of Sec. 37 (1.8.2000 – 30.9.2000) (W. N. 5) 28,021 95,521
B’s share
(a) Profit for 4 months (1.4.2000 – 31.7.2000) (W. N. 3) 42,700
(b) Profit for 2 months (1.8.2000 – 30.9.2000) (W. N. 6) 24,787
(c) Profit for 6 months (1.10.2000 – 31.3.2001) (W. N. 10) 93,600 1,61,087
C’s share
(a) Profit for 4 months (1.4.2000 – 31.7.2000) (W. N. 3) 28,467
(b) Profit for 2 months (1.8.2000 – 30.9.2000) (W. N. 6) 16,525
(c) Profit for 6 months (1.10.2000 – 31.3.2001) (W. N. 10) 62,400 1,07,392
D’s share
(a) Profit for 6 months (1.10.2000 – 31.3.2001) (W. N. 10) 52,000 52,000
4,16,000
 Advanced Partnership Accounts 6.13

(ii) Journal Entries

Year Dr. Cr.
2000 Rs. Rs.
July 31 Machinery A/c Dr 27,000
To A’s Capital A/c 13,500
To B’s Capital A/c 8,100
To C’s Capital A/c 5,400
(Wages spent on installation of new
machinery capitalised and credited to
partners’ capital accounts after providing
depreciation for six months ended 31 st
March, 2000)
Profit and Loss Suspense A/c Dr. 67,500
To A’s Capital A/c 67,500
(A’s share of profit for four months as
calculated in W. N. 1 credited to his capital
account)
Goodwill A/c Dr. 7,20,000
To A’s Capital A/c 3,60,000
To B’s Capital A/c 2,16,000
To C’s Capital A/c 1,44,000
(Goodwill raised in the books and credited to
partners in the old profit sharing ratio 5 : 3 :
2)
A’s Capital A/c Dr. 12,20,000
To A’s Executor’s A/c 12,20,000
(Balance due to A transferred to his
executor’s account)
Profit & Loss Suspense A/c Dr. 28,021
To A’s Executor’s A/c 28,021
(Profit earned out of the unsettled capital
credited to A’s executor’s account as per W.
N. 5)
Oct. 1 A’s Executor’s A/c Dr. 12,48,021
To D’s Capital A/c 12,48,021
(Final balance of A’s executor’s account
transferred to D’s capital account)
6.14 Accounting

B’s Capital A/c Dr. 3,24,000

C’s Capital A/c Dr. 2,16,000
D’s Capital A/c Dr. 1,80,000
To Goodwill 7,20,000
(Goodwill written off and debited to partners
in the new profit sharing ratio 9 : 6 : 5)
March 31 B’s Capital A/c Dr. 60,000
C’s Capital A/c Dr. 60,000
D’s Capital A/c Dr. 30,000
To B’s Drawings A/c 60,000
To C’s Drawings A/c 60,000
To D’s Drawings A/c 30,000
(Drawings debited to partners’ capital
accounts)
March 31 Profit and Loss Appropriation A/c Dr. 4,16,000
To Profit and loss suspense A/c
(Rs. 67,500 + 28,021) 95,521
To B’s Capital A/c 1,61,087
To C’s Capital A/c 1,07,392
To D’s Capital A/c 52,000
(Division of profits as shown in statement of
distribution of profits and balance of profit &
loss suspense account transferred to profit
and loss appropriation account)
Working Notes :
(1) Computation of A’s share in profit for the period 1.4.2000 – 31.7.2000
A’s share in profit for the period of 1st April, 2000 to
31 st July, 2000 is to be calculated on the basis of profit
earned during the immediately previous accounting
year i.e. year ended on 31st March, 2000
Rs.
Profit for the year ended 31st March, 2000 3,78,000
Add : Capital expenditure of wages spent on installation
of new machinery, treated as revenue expenditure 30,000
4,08,000
 Advanced Partnership Accounts 6.15

Less : Depreciation on Rs. 30,000 (being the value of machinery @ 20%

p.a. for 6 months) 3,000
Correct profit for the year ended 31 March, 2000
st 4,05,000
4
Profit for 4 months on the basis of last year’s profit = Rs. 4,05,000×  1,35,000
12
5
A’s share in profit = 1,35,000 ×  67,500
10
(2) Valuation of Goodwill Rs.
Profit for the year ended 31st March, 1998 3,29,000
Profit for the year ended 31st March, 1999 3,46,000
Profit for the year ended 31st March, 2000 4,05,000
Total Profit 10,80,000
10,80,000
Average Profit = Rs.  Rs. 3,60,000
3
Goodwill (two years’ purchase) = Rs. 3,60,000 × 2 = Rs. 7,20,000
(3) Distribution of profit for 4 months ended 31 st July, 2000
Rs.
4
Net Profit (Rs. 4,16,000 × ) 1,38,667
12
A’s share (W. N. 1) 67,500
3
B’s share (Rs. 71,167 × ) 42,700
5
2
C’s share (Rs. 71,167 × ) 28,467
5
(4) Partners’ Capital Accounts as on 31 st July, 2000
A B C A B C
Rs. Rs. Rs. Rs. Rs. Rs.
To Drawings 20,000 20,000 By Balance b/d 7,79,000 7,07,800 6,86,200
To A’s Executor’s A/c 12,20,000 9,54,600 8,44,067 By Plant & Machinery 13,500 8,100 5,400
To Balance c/d – – By Goodwill 3,60,000 2,16,000 1,44,000
By Share in
Profit (W. N. 3) 67,500 42,700 28,467
12,20,000 9,74,600 8,64,067 12,20,000 9,74,600 8,64,067
6.16 Accounting

(5) Application of section 37 of the Partnership Act

Either
6 2
(i) Interest of Rs. 12,20,000 ×  = Rs. 12,200
100 12
Or
(ii) Profit earned out of unsettled capital
Rs. 4,16,000 × 2  Rs. 12,20,000
 Rs. 28,021 (approx.)
12 Rs. (12,20,000  9,54,600  8,44,067)
In the absence of specific agreement amongst partners on the above subject matter, the
representatives of the deceased partner can receive at their option, interest at the rate of
6% p.a. or share of profit earned for the amount due to the deceased partner.
In the above case, it would be rational to assume that A’s representatives would opt for
Rs. 28,021.
(6) Distribution of profit for 2 months ended 31 st Oct, 2000
Rs.
2
Net profit (Rs. 4,16,000 × ) 69,333
12
A’s executor’s share (W. N. 5) 28,021
3
B’s share (Rs. 41,312 × ) 24,787
5
2
C’s share (Rs. 41,312 × ) 16,525
5
(7) A’s Executor’s Account
Rs. Rs.
To D’s Capital A/c 12,48,021 By A’s capital A/c 12,20,000
By Share in profit (W. N. 6) 28,021
12,48,021 12,48,021
(8) Partner’s Capital Accounts (1st August, 2000 to 30 th Sept., 2000)
Dr. B C B C
Rs. Rs. Rs. Rs.
To Drawings 10,000 10,000 By Balancd b/d 9,54,600 8,44,067
To Balance c/d 9,69,387 8,50,592 By P & L A/c 24,787 16,525
9,79,387 8,60,592 9,79,387 8,60,592
 Advanced Partnership Accounts 6.17

(9) Computation of new profit sharing ratio between B, C & D

D is admitted for ¼ share
B’s new ratio = 3/4 × 3/5 = 9/20
C’s new ratio = 3/4 × 2/5 = 6/20
D’s new ratio = 5/20
New profit sharing ratio =9:6:5
(10) Distribution of profit for 6 months ended 31st March, 2001
Rs.
6
Net profit (Rs. 4,16,000 × ) 2,08,000
12
9
B’s share (Rs. 2,08,000 × ) 93,600
20
6
C’s share (Rs. 2,08,000 × ) 62,400
20
5
D’s share (Rs. 2,08,000 × ) 52,000
20
(11) Partner’s Capital Accounts as on 31 st March, 2001
B C D B C D
Rs. Rs. Rs. Rs. Rs. Rs.
To Goodwill 3,24,000 2,16,000 1,80,000 By Balance b/d 9,69,387 8,50,592
To Drawings 30,000 30,000 30,000 By A’s Executor’s A/c 12,48,021
To Balance c/d 7,08,987 6,66,992 10,90,021 By Share of profit
(W. N. 10) 93,600 62,400 52,000
10,62,987 9,12,992 13,00,021 10,62,987 9,12,992 13,00,021

Notes:
1. It is assumed that profit was earned uniformly throughout the year. Although notional
profit was calculated for the first four months, it is to be transferred from the current
year’s profit (as calculated in working note 3). The question requires that A’s share of
profit for this period is to be calculated on the basis of profit earned during year ended
31 st March. 2000. The balance amount after calculating his share has been credited
to B and C in ratio 3 : 2.
2. It is assumed that drawings were made evenly throughout the year. However, single
entry has been given at year end in the main solution relating to transfer of drawings
and distribution of profit but the Partners’ capital accounts shown in the working notes
include the entries of drawings and distribution of profit of respective dates within the
year.
6.18 Accounting

Question 5
M/s Neptune & Co.’s Balance Sheet as at 31 st March, 2001:
Liabilities Rs. Assets Rs.
Bank overdraft (State Bank) 54,000 Cash at Bank of India 800
Sundry Creditors 1,56,000 Sundry Debtors 2,80,000
Capital Accounts : Stock 1,00,000
Mr. A Motor Cars cost as per last B/S 1,60,000
Balance as per last B/S 4,02,000 Less : Depreciation till date 54,000 1,06,000
Add : Profits for the year 95,400 Machinery :
4,97,400 Cost as per last B/S 3,00,000
Less : Drawings 40,000 4,57,400 Less : Depreciation till date 1,40,000 1,60,000
Mr. B Land and Building 2,40,000
Balance as per last B/s 2,00,000
Add : Profit for the year 95,400
2,95,400
Less : Drawings 76,000 2,19,400
8,86,800 8,86,800
You have examined the foregoing Draft of the Balance Sheet and have ascertained that the
following adjustments are required to be carried out :
(i) Land and Buildings are shown at cost less Rs. 60,000 being the proceeds of the sale
during the year of premises costing Rs. 70,000.
(ii) Machinery having a net book value of Rs. 4,300 had been scrapped during the year. The
original cost was Rs. 12,300.
(iii) Rs. 2,000 paid for the Licence fees for the year ending 30 th September, 2001 had been
written off.
(iv) Debts amounting to Rs. 10,420 were considered to be bad and further debts amounting
to Rs. 5,400 were considered doubtful and required 100% provision. Provision for
doubtful debts had previously been made for Rs. 10,000.
(v) An item in the Inventory was valued at Rs. 37,400, but had a realisable value of Rs.
26,000 only. Scrap Material having a value of Rs. 6,600 had been omitted from the stock
valuation.
(vi) The cashier had misappropriated Rs. 700.
(vii) The cash-book for the year ending 31 st March, 2001 included payments amounting to Rs.
6,924, the cheques having been made out, but not despatched to suppliers until April
2001.
(viii) Interest is to be allowed on the Partners’ opening Capital Account balances less
drawings during the year at 9%.
You are required to prepare :
(a) Profit & Loss Adjustment Account for the year.
(b) Capital Accounts of the Partners. (16 marks) (Intermediate–Nov. 2001)
 Advanced Partnership Accounts 6.19

Answer
(a) M/s Neptune & Co.
Profit and Loss Adjustment Account
for the year ended 31st March, 2001
Rs. Rs.
To Land & Building (Loss on sale 10,000 By Partner’s Capital Accounts :
To Machinery (Loss on scrapping)4,300 Mr. A 95,400
To Provision for Doubtful Debts 5,820 Mr. B 95,400 1,90,800
(Working note)
To Stock Adjustment (Fall in the 11,400 By Prepaid expenses (Licence 1,000
Market value) fee)

To Cas (Misappropriated) 700 By Stock Adjustment (items 6,600

To Interest on Capital omitted)
Mr. A 32,580
Mr. B 11,160 43,740
To Profit transferred to Capital
Accounts:
Mr. A 61,220
Mr. B 61,220 1,22,440
1,98,400 1,98,400

(b) Partners’ Capital Accounts

As on 31 st March, 2001
Mr. A Mr. B Mr. A Mr. B
31.3.2001 Rs. Rs. 31.3.2000 Rs. Rs.
To Drawings 40,000 76,000 By Balance b/d 4,02,000 2,00,000
To Profit & Loss 31.3.2001
Adjustment Account 95,400 95,400 By Profit & Loss A/c 95,400 95,400

To Balance c/d 4,55,800 1,96,380 By Profit & Loss

Adjustment A/c:
Interest on capital 32,580 11,160
Profit for the year 61,220 61,220

5,91,200 3,67,780 5,91,200 3,67,780

6.20 Accounting

Working Notes :
(1) Provision for doubtful debts charged to profit and loss adjustment account
Provision for Doubtful Debts Accounts
Rs. Rs.
To Bad Debts 10,420 By Balance b/d 10,000
To Balance c/d (required) 5,400 By Profit & Loss Adjustment A/c
(balancing figure) 5,820

15,820 15,820
(2) Interest on Capitals
Mr. A Rs. 3,62,000 × 9% p.a. = Rs. 32,580
Mr. B Rs. 1,24,000 × 9% p.a. = Rs. 11,160
Note : Misappropriation by cashier may be debited to cashier also. In that case, Rs. 700
will not be debited to Profit and Loss Adjustment Account and profit transferred to
partners will be Rs. 1,23,140.

Question 6
Manish, Jatin and Paresh were partners sharing Profits/ Losses in the ratio of Manish 40
percent, Jatin 35 percent, and Paresh 25 percent. The draft Balance Sheet of the partnership
as on 31 st December, 2001 was as follows :
Rs. Rs.
Sundry Creditors 30,000 Cash on hand and at Bank 67,000
Bills payable 8,000 Stock 42,000
Loan from Jatin 30,000 Sundry Debtors 34,000
Current Accounts : Less : Provision for
Manish 12,000 Doubtful Debts 6,000 28,000
Jatin 8,000 Plant and Machinery
Paresh 6,000 26,000 (at cost) 80,000
Capital Accounts : Less : Depreciation 28,000 52,000
Manish 90,000 Premises (at cost) 75,000
Jatin 50,000
Paresh 30,000 1,70,000
2,64,000 2,64,000
Jatin retired on 31st
December, 2001. Manish and Paresh continued in partnership sharing
Profits/ Losses in the ratio of Manish 60 percent and Paresh 40 percent. 50 percent of Jatin’s
Loan was repaid on 1.1.2002 and it was agreed that of the amount then remaining due to him
a sum of Rs. 80,000 should remain as loan to partnership and the balance to be carried
 Advanced Partnership Accounts 6.21

forward as ordinary trading liability. The following adjustments were agreed to be made to the
above mentioned Balance Sheet:
(i) Rs. 10,000 should be written off from the premises.
(ii) Plant and Machinery was revalued at Rs. 58,000.
(iii) Provision for doubtful debts to be increased by Rs. 1,200
(iv) Rs. 5,000 due to creditors for expenses had been omitted from the books of account.
(v) Rs. 4,000 to be written off on stocks.
(vi) Provide Rs. 1,200 for professional charges in connection with revaluation.
As per the deed of partnership, in the event of the retirement of a partner, goodwill was to be
valued at an amount equal to one year’s purchase of the average profits of the preceding
three years on the date of retirement. Before determining the said average profits a notional
amount of Rs. 80,000 should be charged for remuneration to partners. The necessary profits
before charging such remuneration were:
Year ending 30.12.1999 Rs. 1,44,000
Year ending 31.12.2000 Rs. 1,68,000
Year ending 31.12.2001 Rs. 1,88,200 (As per draft accounts)
It was agreed that, for the purpose of valuing goodwill, the amount of profit for the year 2001
be recomputed after charging the loss on revaluation in respect of premises and stock, the
unprovided expenses (except professional expenses) and increase in the provision for
doubtful debts. The continuing partners decided to eliminate goodwill account from their
books.
You are required to prepare:
(i) Revaluation Account:
(ii) Capital Accounts (merging current accounts therein):
(iii) Jatin’s Accounts showing balance due to him; and
(iv) Balance Sheet of Manish and Paresh as at 1 st January, 2002.
(16 marks) (Intermediate–May 2002)
Answer
(i) Revaluation Account
Rs Rs.
To Premises 10,000 By Plant and Machinery 6,000
To Provision for Doubtful Debts 1,200 By Loss on revaluation transferred
To Outstanding Expenses 5,000 to Capital Accounts:
To Stocks 4,000 Manish (40%) 6,160
To Provision for Professional Charges1,200 Jatin (35%) 5,390
Paresh (25%) 3,850 15,400
21,400 21,400
6.22 Accounting

(ii) Capital Accounts of Partners

Manish Jatin Paresh Manish Jatin Paresh
Rs. Rs. Rs. Rs. Rs. Rs.
To Revalutation A/c (loss) 6,160 5,390 3,850 By Balance b/d 90,000 50,000 30,000
To Goodwill (written off in 48,000 – 32,000 By Current A/c 12,000 8,000 6,000
new Profit sharing ratio)
To Personal A/c (Balance 80,610 By Goodwill 32,000 28,000 20,000
transferred) – (old profit sharing)
To Balance c/d 79,840 20,150
1,34,000 86,000 56,000 1,34,000 86,000 56,000

(iii) Jatin’s Personal Account

Rs. Rs.
To Bank Account 15,000 By Capital Accounts 80,610
(50% of old loan) (Balance transferred)
To Loan Account 80,000 By Loan Account 30,000
(transferred) (old loan)
To Balance c/d 15,610
1,10,610 1,10,610

(iv) Balance Sheet of Manish and Paresh

as on 1st January, 2002
Liabilities Rs. Assets Rs.
Capital Accounts Fixed Assets
Manish 79,840 Plant and Machinery 86,000
Paresh 20,150 99,990 Less: Depreciation 28,000 58,000
Jatin’s Loan A/c 80,000 Premises 75,000
Current Liabilities Less: Written off 10,000 65,000
and Provisions Current Assets
Bills Payable 8,000 Cash in hand & at Bank
Sundry Creditors 35,000 (67,000–15,000) 52,000
(30,000+5,000) Sundry Debtors 34,000
Jatin’s dues 15,610 Less: Provision for
Provision for doubtful debts 7,200 26,800
Professional charges 1,200 59,810 Stock in trade 38,000

2,39,800 2,39,800
 Advanced Partnership Accounts 6.23

Working Notes :
(1) Profit for the Year ending 31st December, 2001 Rs.
As per draft accounts 1,88,200
Less: Premises written off 10,000
Provision for Doubtful debts 1,200
Outstanding Expenses 5,000
Stock 4,000 20,200
1,68,000
(2) Valuation of Goodwill
Profit for the year ending 31 st Dec.2001 (adjusted) 1,68,000
Profit for the year ending 31 st Dec. 2000 1,68,000
Profit for the year ending 31 st Dec. 1999 1,44,000
4,80,000
Average Profits before partners’ salaries 1,60,000
Less: Partners’s Salaries (notional) 80,000
Super Profit and Goodwill (one year’s purchase) 80,000

Question 7
Ram, Rahim and Robert are partners, sharing Profits and Losses in the ratio of 5 : 3 : 2. It was
decided that Robert would retire on 31.3.2005 and in his place Richard would be admitted as a
partner with new profit sharing ratio between Ram, Rahim and Richard at 3 : 2 : 1.
Balance Sheet of Ram, Rahim and Robert as at 31.3.2005:
Liabilities Rs. Assets Rs.
Capital Accounts: Cash in hand 20,000
Ram 1,00,000 Cash in Bank 1,00,000
Rahim 1,50,000 Sundry Debtors 5,00,000
Robert 2,00,000 Stock in Trade 2,00,000
General Reserve 2,00,000 Plant & Machinery 3,00,000
Sundry Creditors 8,00,000 Land & Building 5,30,000
Loan from Richard 2,00,000 ________
16,50,000 16,50,000
Retirement of Robert and admission of Richard is on the following terms:
(a) Plant & Machinery to be depreciated by Rs. 30,000.
(b) Land and Building to be valued at Rs. 6,00,000.
(c) Stock to be valued at 95% of book value.
(d) Provision for doubtful debts @ 10% to be provided on debtors.
(e) General Reserve to be apportioned amongst Ram, Rahim and Robert.
6.24 Accounting

(f) The firm’s goodwill to be valued at 2 years purchase of the average profits of the last 3
years. The relevant figures are:
Year ended 31.3.2002  Profit Rs. 50,000
Year ended 31.3.2003  Profit Rs. 60,000
Year ended 31.3.2004  Profit Rs. 55,000
(g) Out of the amount due to Robert Rs. 2,00,000 would be retained as loan by the firm and
the balance will be settled immediately.
(h) Richard’s capital should be equal to 50% of the combined capital of Ram and Rahim.
Prepare:
(i) Capital accounts of the partners; and
(ii) Balance Sheet of the reconstituted firm. (16 Marks) (PE-II – Nov. 2005)
Answer
Partners’ Capital Accounts
Dr. Cr.
Ram Rahim Robert Richard Ram Rahim Robert Richard
Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.
To Revaluation 10,000 6,000 4,000  By Balance 1,00,000 1,50,000 2,00,000 
A/c (W.N. b/d
1)
To Loan from 2,00,000 By General 1,00,000 60,000 40,000 
Robert A/c reserve
To Bank 58,000 By Goodwill 55,000 33,000 22,000 
(W.N. 2)
To Balance c/d 2,45,000 2,37,000   _______ _______ _______ _______
2,55,000 2,43,000 2,62,000  2,55,000 2,43,000 2,62,000 

To Goodwill 55,000 36,667  18,333 By Balance 2,45,000 2,37,000  

b/d
By Loan    2,00,000
A/c 
transfer
To Balance c/d 1,90,000 2,00,333  1,95,167 By Bank    13,500
2,45,000 2,37,000  2,13,500 2,45,000 2,37,000  2,13,500


As per para 36 of AS 10, ‘Accounting for Fixed Assets’, goodwill should be recorded in the
books only when some consideration in money or money’s worth has been paid for it. Therefore,
the goodwill raised at the time of retirement of Robert is to be written off in new ratio among
remaining partners including new partner – Richard.
 Advanced Partnership Accounts 6.25

Balance Sheet as at 31.3.2005

after the admission of Richard
Liabilities Rs. Assets Rs.
Capital Accounts: Land and Building 6,00,000
Ram 1,90,000 Plant and Machinery 2,70,000
Rahim 2,00,333 Stock 1,90,000
Richard 1,95,167 Debtors 4,50,000
Sundry Creditors 8,00,000 Cash at Bank (W.N. 3) 55,500
Loan from Robert 2,00,000 Cash in hand 20,000
15,85,500 15,85,500
Working Notes:
(1) Revaluation Account
Rs. Rs.
To Plant and Machinery 30,000 By Land and Building 70,000
To Stock 10,000 By Partners Capital A/cs:
To Debtors 50,000 Ram 10,000
Rahim 6,000
______ Robert 4,000 20,000
90,000 90,000
(2) Calculation of Goodwill:
Profit for the year ended 31.3.2002 50,000
Profit for the year ended 31.3.2003 60,000
Profit for the year ended 31.3.2004 55,000
1,65,000
1,65,000
Average profit   Rs. 55,000
3
Goodwill = Rs. 55,000  2 years = Rs. 1,10,000.
(3) Bank Account
Rs. Rs.
To Balance b/d 1,00,000 By Robert’s Capital A/c 58,000
To Richard’s Capital A/c 13,500 By Balance c/d 55,500
1,13,500 1,13,500
6.26 Accounting

Question 8
The following was the Balance Sheet of ‘A’ and ‘B’, who were sharing profits and losses in the
ratio of 2:1 on 31.12.2006:
Liabilities Rs. Assets Rs.
Capital Accounts Plant and machinery 12,00,000
A 10,00,000 Building 9,00,000
B 5,00,000 Sundry debtors 3,00,000
Reserve fund 9,00,000 Stock 4,00,000
4,00,000 Cash 1,00,000
Sundry creditors
Bills payable 1,00,000
29,00,000 29,00,000
They agreed to admit ‘C’ into the partnership on the following terms:
(i) The goodwill of the firm was fixed at Rs.1,05,000.
(ii) That the value of stock and plant and machinery were to be reduced by 10%.
(iii) That a provision of 5% was to be created for doubtful debts.
(iv) That the building account was to be appreciated by 20%.
(v) There was an unrecorded liability of Rs.10,000.
(vi) Investments worth Rs.20,000 (Not mentioned in the Balance Sheet) were taken into
account.
(vii) That the value of reserve fund, the values of liabilities and the values of assets other than
cash are not to be altered.
(viii) ‘C’ was to be given one-fourth share in the profit and was to bring capital equal to his
share of profit after all adjustments.
Prepare Memorandum Revaluation Account, Capital account of the partners and the Balance
Sheet of the newly reconstituted firm. (16 Marks) (PE II, Nov. 2007)
Answer
Memorandum Revaluation Account
Rs. Rs.
To Stock 40,000 By Building 1,80,000
To Plant & machinery 1,20,000 By Investments 20,000
To Provision for doubtful debts 15,000
To Unrecorded liability 10,000
To Profit transferred to Partners’
Capital A/cs (in old ratio)
 Advanced Partnership Accounts 6.27

A = 10,000
B = 5,000 15,000
2,00,000 2,00,000
To Building 1,80,000 By Stock 40,000
To Investments 20,000 By Plant & machinery 1,20,000
By Provision for doubtful debts 15,000
By Unrecorded liability 10,000
By Loss transferred to Partners’
Capital A/cs (in new ratio)
A = 7,500
B = 3,750
C = 3,750 15,000
2,00,000 2,00,000
Partners’ Capital Accounts
A B C A B C
To Loss on 7,500 3,750 3,750 By Balance b/d 10,00,000 5,00,000 -
Revaluation
To Reserve Fund 4,50,000 2,25,000 2,25,000 By Reserve Fund 6,00,000 3,00,000 -
To A (W.N.3) - - 17,500 By C (W.N.3) 17,500 8,750 -
To B (W.N.3) - - 8,750 By Profit on 10,000 5,000
Revaluation
To Balance c/d By Cash (Bal. Fig.) 8,40,000
(Refer W.N.2) 11,70,000 5,85,000 5,85,000
16,27,500 8,13,750 8,40,000 16,27,500 8,13,750 8,40,000

Balance Sheet of newly reconstituted firm as on 31.12.2006

Liabilities Rs. Assets Rs.
Capital Accounts Plant & Machinery 12,00,000
A 11,70,000 Building 9,00,000
B 5,85,000 Sundry Debtors 3,00,000
C 5,85,000 Stock 4,00,000
Reserve Fund 9,00,000 Cash (1,00,000 + 8,40,000) 9,40,000
Sundry Creditors 4,00,000
Bills Payable 1,00,000
37,40,000 37,40,000
Working Notes:
1. Calculation of new profit and loss sharing ratio
C will get 1/4 th share in the new profit sharing ratio.
Therefore, remaining share will be 1-1/4 =3/4
6.28 Accounting

Share of A will be 3/4 x 2/3 = 2/4 i.e. 1/2

Share of B will be 3/4 x 1/3 = 1/4
New ratio will be
A:B:C
1/2 : 1/4 : 1/4
2 : 1: 1
2. Calculation of closing capital of C
Closing capitals of A & B after all adjustments are:
A = Rs.11,70,000
B = Rs. 5,85,000
Since B’s capital is less than A’s capital, therefore B’s capital is taken as base.
Hence, C’s closing capital should be Rs.5,85,000 i.e. at par with B (as per new profit and
loss sharing ratio)
3. Adjustment entry for goodwill 
Partners Goodwill as per old ratio Goodwill as per new ratio Effect
A 70,000 52,500 + 17,500 -
B 35,000 26,250 + 8,750 -
C - 26,250 - -26,250
1,05,000 1,05,000 26,250 26,250

Adjustment entry will be:

C’s Capital A/c Dr. 26,250
To A’s Capital A/c 17,500
To B’s Capital A/c 8,750


As per para 36 of AS 10, ‘Accounting for fixed Assets,’ goodwill should be recorded in the
books only when some consideration in money or money’s worth has been paid for it. Therefore,
the goodwill raised at the time of admission of C is to be written off in new ratio among all
partners including new partner, C.
 Advanced Partnership Accounts 6.29

UNIT 2 : DISSOLUTION OF FIRMS

(A) Practical Questions:
Question 1
The firm of Kapil and Dev has four partners and as of 31st March, 1995, its Balance Sheet stood
as follows:
Balance Sheet as on 31st March, 1995
Liabilities Rs. Assets Rs.
Capital A/cs: Land 50,000
F. Kapil 2,00,000 Building 2,50,000
S. Kapil 2,00,000 Office equipment 1,25,000
R. Dev 1,00,000 Computers 70,000
Current A/cs Debtors 4,00,000
F. Kapil 50,000 Stocks 3,00,000
S. Kapil 1,50,000 Cash at Bank 75,000
R. Dev 1,10,000 Other Current Assets 22,600
Loan from NBFC 5,00,000 Current A/c :
Current Liabilities 70,000 B. Dev 87,400
13,80,000 13,80,000

The partners have been sharing profits and losses in the ratio of 4:4:1:1. It has been agreed to
dissolve the firm on 1.4.1995 on the basis of the following understanding :
(a) The following assets are to be adjusted to the extent indicated with respect to the book values
:
Land 200%
Building 120%
Computers 70%
Debtors 95%
Stocks 90%
(b) In the case of the loan, the lender’s are to be paid at their insistence a prepayment premium
of 1%.
(c) B. Dev is insolvent and no amount is recoverable from him. His father, R.Dev, however,
agrees to bear 50% of his deficiency. The balance of the deficiency is agreed to be
apportioned according to law.
Assuming that the realisation of the assets and discharge of liabilities is carried out immediately,
show the Cash A/c, Realisation Account and the Partners’ Accounts.
(20 marks) (Intermediate – May 1995)
6.30 Accounting

Answer
In the books of M/s. Kapil and Dev
Cash Account (Bank Column)
Rs. Rs.
To Balance b/d 75,000 By Realisation A/c-
To Realisation A/c (Payment of sundry liabilities) 5,75,000
(Realisation of Sundry assets) 12,46,600 By Partners’ Capital A/cs:
F. Kapil 2,42,600
S. Kapil 3,42,600
R. Dev 1,61,400 7,46,600
13,21,600 13,21,600

Realisation Account
Rs. Rs.
To Land 50,000 By Current Liabilities 70,000
To Building 2,50,000 By Loan from NBFC 5,00,000
To Office equipments 1,25,000 By Cash A/c:
To Computers 70,000 Land 1,00,000
To Debtors 4,00,000 Building 3,00,000
To Stocks 3,00,000 Office Equip. 1,25,000
To Other Current Assets 22,600 Computers 49,000
To Cash A/c: Debtors 3,80,000
Current liabilities 70,000 Stocks 2,70,000
Loan from NBFC 5,05,000 5,75,000 Other Current Assets 22,600 12,46,600
To Partners’ Current A/cs:
Profit on realisation:
F. Kapil 9,600
S. Kapil 9,600
R. Dev 2,400
B. Dev 2,400 24,000
18,16,600 18,16,600
 Advanced Partnership Accounts 6.31

Partners’ Capital Accounts

F. Kapil S. Kapil R. Dev. B. Dev. F. Kapil S. Kapil R. Dev. B. Dev.
Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.
To Partners’ – – 85,000 By Balance b/d 2,00,000 2,00,000 1,00,000 –
Current A/cs
Transfer
To B.Dev A/c – – 42,500 – By Partners’
50% of Current A/c
deficiency transfer 59,600 1,59,600 1,12,400 –
To B.Dev A/c17,000 17,000 8,500 – By R.Dev A/c
balance of –50% of
deficiency deficiency – – – 42,500
borne by
in capital ratio By F.Kapil A/c – – – 17,000
other partners By S.Kapil A/c – – – 17,000
(2:2:1) By S. Kapil A/c – – – 17,000
By R. Dev A/c – – – 8,500
To Cash 2,42,600 3,42,600 1,61,400 – (as per contra)
A/c-
final
Settlement
2,59,600 3,59,600 2,12,400 85,000 2,59,600 3,59,600 2,12,400 85,000

Partners’ Current Accounts

F. Kapil S. Kapil R. Dev. B. Dev. F. Kapil S. Kapil R. Dev. B. Dev.
Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.
To Balance b/d – – – 87,400 By Balance b/d 50,000 1,50,000 1,10,000 –
To Partners’ 59,600 1,59,600 1,12,400 – By Realisation A/c 9,600 9,600 2,400 2,400
Capital A/c By Partners’
(transfer) Capital A/c
(transfer) – – – 85,000
59,600 1,59,600 1,12,400 87,400 59,600 1,59,600 1,12,600 87,400
Note: In the absence of specific information, it is assumed that the assets are realised at the
agreed values.
6.32 Accounting

Question 2
The firm of LMS was dissolved on 31.3.95, at which date its Balance Sheet stood as follows:
Liabilities Rs. Assets Rs.
Creditors 2,00,000 Fixed Assets 45,00,000
Bank Loan 5,00,000 Cash and Bank 2,00,000
L’s Loan 10,00,000
Capital
L 15,00,000
M 10,00,000
S 5,00,000
Total 47,00,000 47,00,000
Partners share profits equally. A firm of Chartered Accountants is retained to realise the assets and
distribute the cash after discharge of liabilities. Their fees which are to include all expenses is fixed
at Rs. 1,00,000. No loss is expected on realisation since fixed assets include valuable land and
building.
Realisations are:
S.No. Amount in Rs.
1 5,00,000
2 15,00,000
3 15,00,000
4 30,00,000
5 30,00,000
The Chartered Accountant firm decided to pay off the partners in ‘Higher Relative Capital
Method’. You are required to prepare a statement showing distribution of cash with necessary
workings. (15 Marks) (Intermediate–Nov. 1995)
Answer
In the Books of M/s LMS
Statement of Piecemeal Distribution (Under
Higher Relative Capital method)
Particulars Amount Creditors Bank L’s loan Capital A/cs
available Loan L M S
Rs. Rs. Rs. Rs. Rs. Rs. Rs.
Balance due 2,00,000 5,00,000 10,00,000 15,00,000 10,00,000 5,00,000
1st Instalment (including
cash and bank balances) 5,00,000
 Advanced Partnership Accounts 6.33

Less: Liquidator’s Expenses

and fees 1,00,000
4,00,000
Less: Payment to Creditors
and repayment of Bank
Loan in the ratio of
2:5 (4,00,000) (1,14,286) (2,85,714) – – – –
Balance Due – 85,714 2,14,286 10,00,000 15,00,000 10,00,000 5,00,000
2nd Instalment 15,00,000
Less: Payment to Creditors
and repayment of bank

loan in full settlement (3,00,000) (85,714) (2,14,286) – – – –

12,00,000 – –

Less: Repayment of L’s Loan (10,00,000) (10,00,000) – – – –

2,00,000
Less: Payment to Mr. L towards
relative higher capital

(W.N. 1) (2,00,000) ( 2,00,000) – —

13,00,000 10,00,000 5,00,000
Balance Due
3rd Instalment 15,00,000
Less: Payment to Mr. L
towards higher relative

capital (W.N. 2) (3,00,000) (3,00,000)

12,00,000 10,00,000
Less: Payment to Mr. L &
Mr. M towards excess

capital (W.N. 1&2) (10,00,000) (5,00,000) (5,00,000)

2,00,000 5,00,000 5,00,000
Less: Payment to all the

partners equally (2,00,000) (66,667) (66,667) (66,666)

4,33,333 4,33,333 4,33,334
Balance due
4th Instalment 30,00,000
Less: Payment to all

the partners equally (30,00,000) (10,00,000) (10,00,000) (10,00,000)

6.34 Accounting

Realisation profit
credited to Partners 5,66,667 5,66,667 5,66,666
5th Instalment 30,00,000
Less: payment to all
partners equally (30,00,000) 10,00,000 10,00,000 10,00,000
Realisation profit 15,66,667 15,66,667 15,66,666
credited to partners

Working Notes:
(i) Scheme of payment of surplus amount of Rs. 2,00,000 out of second Instalment:
Capital A/cs
L M S
Rs. Rs. Rs.
Balance (i) 15,00,000 10,00,000 5,00,000
Profit sharing ratio (ii) 1 1 1
Capital taking S’s Capital (iii) 5,00,000 5,00,000 5,00,000
Excess Capital (iv) = (i) – (iii) 10,00,000 5,00,000
Profit Sharing Ratio 1 1
Excess capital taking
M’s Excess Capital as base (v) 5,00,000 5,00,000
Higher Relative Excess (iv) – (iv) 5,00,000

So Mr. L should get Rs. 5,00,000 first which will bring down his capital account balance
from Rs. 15,00,000 to Rs. 10,00,000. Accordingly, surplus amounting to Rs. 2,00,000 will
be paid to Mr. L towards higher relative capital.
(ii) Scheme of payment of Rs. 15,00,000 realised in 3rd Instalment:
– Payment of Rs. 3,00,000 will be made to Mr. L to discharge higher relative capital. This
makes the higher capital of both Mr. L and Mr. M Rs. 5,00,000 as compared to capital
of Mr. S.
– Payment of Rs. 5,00,000 each of Mr. L & Mr. M to discharge the higher capital.
– Balance Rs. 2,00,000 equally to L, M and S, i.e., Rs. 66,667 Rs. 66,667 and Rs.
66,666 respectively.
 Advanced Partnership Accounts 6.35

Question 3

Ajay, Vijaya, Ram and Shyam are partners in a firm sharing profits and losses in the ratio of
4 : 1 : 2 : 3. The following is their Balance Sheet as at 31st March, 1996 :
Liabilities Rs. Assets Rs.
Sundry Creditors 3,00,000 Sundry Debtors 3,50,000
Capital A/cs : Less: Doubtful Debts 50,000
Ajay 7,00,000 3,00,000
Shyam 3,00,000 Cash in hand 1,40,000
10,00,000 Stocks 2,00,000
Other Assets 3,10,000
Capital A/cs:
Vijay 2,00,000
Ram 1,50,000
13,00,000 13,00,000

On 31st March, 1996, the firm is dissolved and the following points are agreed upon:
Ajay is to takeover sundry debtors at 80% of book value
Shyam is to takeover the stocks at 95% of the value and
Ram is to discharge sundry creditors.
Other assets realise Rs. 3,00,000 and the expenses of realisation come to Rs. 30,000.
Vijay is found insolvent and Rs. 21,900 is realised from his estate.
Prepare Realisation Account and Capital Accounts of the partners. Show also the Cash A/c.
The loss arising out of capital deficiency may be distributed following the decision in Garner vs
Murray. (15 marks) (Intermediate–Nov. 1996)
Answer
Realisation A/c
Dr. Cr.
Rs. Rs.
To Sundry Debtors 3,50,000 By Sundry Creditors 3,00,000
To Stock 2,00,000 By Provision for Doubtful
To Other assets 3,10,000 Debts 50,000
To Ram’s Capital A/c: By Ajay’s Capital A/c
(Creditors) 3,00,000 (Debtors) 2,80,000
6.36 Accounting

To Cash By Shyam’s Capital A/c

(Expenses on realization) 30,000 (stock) 1,90,000
By Cash (Other assets) 3,00,000
By Ajay’s Capital A/c 28,000
By Vijay’s Capital A/c 7,000
By Ram’s Capital A/c 14,000
By Shyam’s Capital A/c 21,000
(Loss on realisation)
11,90,000 11,90,000
Capital A/cs
Dr. Cr.
Ajay Vijay Ram Shyam Ajay Vijay Ram Shyam
Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.
To Balance b/f – 2,00,000 1,50,000 – By Balance b/f 7,00,000 – – 3,00,000
To Realisation 2,80,000 – – – By Realisation – – 3,00,000 –
(Debtors) (Creditors)
To Realisation – – – 1,90,000 By Balance c/d – 2,07,000 – –
(Stock)
To Realisation 28,000 7,000 14,000 21,000
(loss)
To Balance c/d 3,92,000 – 1,36,000 89,000
7,00,000 2,07,000 3,00,000 3,00,000 7,00,000 2,07,000 3,00,000 3,00,000
To Balance b/d – 2,07,000 – – By Balance b/d 3,92,000 – 1,36,000 89,000
To Vijay’s A/c 1,29,570 – – 55,530 By Cash – 21,900
To Cash 2,62,430 – 1,36,000 33,470 By Ajay – 1,29,570
By Shyam – 55,530 – –
3,92,000 2,07,000 1,36,000 89,000 3,92,000 2,07,000 1,36,000 89,000
Cash A/c
Dr. Cr.
Rs. Rs.
To Balance b/d 1,40,000 By Realisation A/c (expenses) 30,000
To Realisation A/c 3,00,000 By Capital A/c
To Vijay’s Capital A/c 21,900 Ajay 2,62,430
Ram 1,36,000
Shyam 33,470
4,31,900
4,61,900 4,61,900
 Advanced Partnership Accounts 6.37

Note:
1. Since creditors are taken over by Ram as per Balance Sheet figures, a direct entry for the
same in Ram’s Capital A/c is also correct.
2. Ajay takes over Debtors at 80% of Rs. 3,50,000 i.e. Rs. 2,80,000.
3. Vijay’s deficiency will be borne by Ajay and Shyam in the ratio of 7 : 3 i.e. on opening
capitals of Rs. 7,00,000 and Rs. 3,00,000. Ram will not bear any portion of the loss since at
the time of dissolution he had a debit balance in his capital account.
Question 4
Ram, Rahim and Auntony were in partnership sharing profits and losses in the ratio of 1/2, 1/3 and
1/6 respectively. They decided to dissolve the partnership firm on 31.3.1998, when the Balance
Sheet of the firm appeared as under :
Balance Sheet of the firm as on 31.3.1998
Liabilities Rs. Assets Rs.
Sundry Creditors 5,67,000 Goodwill A/c 4,56,300
Bank Overdraft 6,06,450 Plant and Machinery 6,07,500
Joint Life Policy Reserve 2,65,500 Furniture 64,650
Loan from Mrs. Ram 1,50,000 Stock 2,36,700
Capital Accounts: Sundry Debtors 5,34,000
Ram 4,20,000 Joint Life Policy 2,65,500
Rahim 2,25,000 Commission Receivable 1,40,550
Auntony 1,20,000 7,65,000 Cash in Hand 48,750
23,53,950 23,53,950
The following details are relevant for dissolution :
(i) The joint life policy was surrendered for Rs. 2,32,500.
(ii) Ram took over goodwill and plant and machinery for Rs. 9,00,000.
(iii) Ram also agreed to discharge bank overdraft and loan from Mrs. Ram.
(iv) Furniture and stocks were divided equally between Ram and Rahim at an agreed
valuation of Rs. 3,60,000.
(vi) Sundry debtors were assigned to firm’s creditors in full satisfaction of their claims.
(vi) Commission receivable was received in toto in time.
(vii) A bill discounted was subsequently returned dishonoured and proved valueless
Rs. 30,750 (including Rs. 500 noting charges).
(viii) Ram paid the expenses of dissolution amounting to Rs. 18,000.
6.38 Accounting

(ix) Auntony agreed to receive Rs. 1,50,000 in full satisfaction of his rights, title and interest
in the firm.
You are required to show accounts relating to closing of books on dissolution of the firm.
(15 Marks) (Intermediate–Nov. 1998)
Answer
Realisation Account
Rs. Rs.
To Goodwill A/c 4,56,300 By Sundry Creditors A/c 5,67,000
To Plant & Machinery A/c 6,07,500 By Joint Life Policy Reserve A/c 2,65,500
To Furniture A/c 64,650 By Cash A/c :
To Stock A/c 2,36,700 Joint Life Policy 2,32,500
To Sundry Debtors A/c 5,34,000 By Ram’s Capital A/c:
To Joint Life Policy A/c 2,65,500 Goodwill, Plant and
To Ram’s Capital A/c: Machinery 9,00,000
Dissolution Expenses 18,000 Furniture, Stocks 1,80,000 10,80,000
To Cash A/c :
Bill dishonoured 30,750 By Rahim’s Capital A/c:
To Partner’s Capital Accounts: Furnitures stocks
(Profit on realisation) 1,80,000
Ram 55,800
Rahim 37,200
Auntony 18,600 1,11,600
23,25,000 23,25,000
Capital Accounts
Ram Rahim Auntony Ram Rahim Auntony
Rs. Rs. Rs . Rs. Rs. Rs.
To Realisation A/c: By Balance b/d 4,20,000 2,25,000 1,20,000
Goodwill, Plant By Bank Overdraft A/c 6,06,450 – –
and Machinery 9,00,000 – – By Loan from
Furniture, Stocks 1,80,000 1,80,000 Mrs. Ram A/c 1,50,000 – –
To Auntony’s Capital A/c 6,840 4,560 – By Realisation A/c:
To Cash A/c 1,50,000 Dissolutin Expenses 18,000 – –
 Advanced Partnership Accounts 6.39

To Cash A/c 1,63,410 77,640 – By Realisation A/c:

(Balancing figure) Profit on realisation 55,800 37,200 18,600
By Partners’ Capital A/cs: – – –
Ram – – 6,840
Rahim – – 4,560
(Note 2)
12,50,250 2,62,200 1,50,000 12,50,250 2,62,200 1,50,000
Cash Account
Rs. Rs.
To Balance b/d 48,750 By Realisation A/c:
To Realisation A/c: Bill dishonoured 30,750
Joint Life Policy 2,32,500 By Partners’ Capital Accounts:
To Commission Receivable A/c 1,40,550 Ram 1,63,410
Rahim 77,640
Auntony 1,50,000
4,21,800 4,21,800
Notes:
(1) No entry is required regarding assignment of sundry debtors to sundry creditors in full
satisfaction of their claims.
(2) The amount of excess payments to Auntony (Rs. 1,50,000 less Rs. 1,38,600 i.e., Rs.
11,400) has been debited to Ram and Rahim in the ratio of 3:2.
Question 5
A, B and C are partners sharing profits and losses in the ratio of 5:3:2. Their capitals were Rs.
9,600, Rs. 6,000 and Rs. 8,400 respectively.
After paying creditors, the liabilities and assets of the firm were:

Rs. Rs.
Liability for interest on Investments 1,000
loans from : Furniture 2,000
Spouses of partners 2,000 Machinery 1,200
Partners 1,000 Stock 4,000
The assets realised in full in the order in which they are listed above. B is insolvent.
You are required to prepare a statement showing the distribution of cash as and when available,
applying maximum possible loss procedure. (10 marks) (Intermediate–Nov. 1999)
6.40 Accounting

Answer
Statement of Distribution of Cash
Realisation Interest on Interest on Partners’ Capitals
loans from loans from
partners’ partners A B C Total
spouses
Rs. Rs. Rs. Rs. Rs. Rs. Rs.
Balances due 2,000 1,000 9,600 6,000 8,400 24,000

(i) Sale of investments 1,000 1,000 1,000 

1,000 –

(ii) Sale of furniture 2,000

1,000 1,000 
– –
(iii) Sale of machinery 1,200
Maximum possible loss Rs. 22,800
(total of capitals Rs. 24,000 less
cash available Rs. 1,200) allocated
to partners in the profit sharing
ratio i.e. 5 : 3 : 2 (11,400) (6,840) (4,560) (22,800)
Amounts at credit (1,800) (840) 3,840 1,200
Deficiency of A and B written off
against C 1,800 840 (2,640) –
Amount paid – – 1,200 1,200
Balances in capital acounts 9,600 6,000 7,200 22,800
(iv) Sale of stock 4,000
Maximum possible loss Rs. 18,800
(Rs. 22,800 – Rs. 4,000) Allocated
to partners in the ratio 5 : 3 : 2 (9,400) (5,640) (3,760) (18,800)
Amounts at credit and cash paid 200 360 3,440 (4,000)
Balances in capital accounts left unpaid—Loss 9,400 5,640 3,760 18,8000

Question 6
Neptune, Jupiter, Venus and Pluto had been carrying on business in partnership sharing
profits and losses in the ratio of 3 : 2 : 1 : 1. They decide to dissolve the partnership on the
basis of the following Balance Sheet as on 30th April, 2003:
Liabilities Rs. Rs. Assets Rs. Rs.
Capital Account: Premises 1,20,000
Neptune 1,00,000 Furniture 40,000
Jupiter 60,000 1,60,000 Stock 1,00,000
General Reserve 56,000 Debtors 40,000
 Advanced Partnership Accounts 6.41

Capital Reserve 14,000 Cash 8,000

Sundry Creditors 20,000 Capital Overdrawn:
Mortgage Loan 80,000 Venus 10,000
_______ Pluto 12,000 22,000
3,30,000 3,30,000
(i) The assets were realised as under:
Rs.
Debtors 24,000
Stock 60,000
Furniture 16,000
Premises 90,000
(ii) Expenses of dissolution amounted to Rs. 4,000.
(iii) Further Creditors of Rs. 12,000 had to be met.
(iv) General Reserve unlike Capital Reserve was built up by appropriation of profits.
You are required to draw up the Realisation Account, Partners’ Capital Accounts and the Cash
Account assuming that Venus became insolvent and nothing was realised from his private
estate. Apply the principles laid down in Garner vs Murray. (16 marks) (PE – II – Nov. 2003)
Answer
Realisation Account
Rs. Rs. Rs.
To Sundry assets A/c By Sundry creditors A/c 20,000
(transfer):
Premises 1,20,000 By Cash A/c (assets
Furniture 40,000 realised): 90,000
Premises
Stock 1,00,000 Furniture 16,000
Sundry Debtors 40,000 Stock 60,000
To Cash A/c (creditors 32,000 Debtors 24,000 1,90,000
paid)
To Cash A/c (expenses) 4,000 By Loss transferred to
Capital Accounts:
6.42 Accounting

Neptune 54,000
Jupiter 36,000
Venus 18,000
_______ Pluto 18,000 1,26,000
3,36,000 3,36,000

Cash Account
Rs. Rs.
To Balance b/d 8,000 By Realisation A/c 32,000
(creditors)
To Realisation A/c By Realisation A/c 4,000
(expenses)
(assets realised) 1,90,000 By Mortgage loan 80,000
To Capital A/c By Neptune's Capital A/c 1,18,857
(realisation loss By Jupiter's Capital A/c 73,143
made good):
Neptune 54,000
Jupiter 36,000
Pluto 18,000 1,08,000
To Pluto's Capital A/c 2,000 _______
3,08,000 3,08,000
 Advanced Partnership Accounts 6.43

Partners’ Capital Accounts

Particulars Neptune Jupiter Venus Pluto Particulars Neptune Jupiter Venus Pluto
Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.
To Balance b/d   10,000 12,000 By Balance b/d 1,00,000 60,000  
To Realisastion By General reserve A/c 24,000 16,000 8,000 8,000
A/c (loss) 54,000 36,000 18,000 18,000 (3 : 2 : 1 :1)
To Venus's Capital   By Capital reserve A/c 6,000 4,000 2,000 2,000
A/c (loss) 11,143 6,857 (3 : 2 : 1 :1)
To Cash A/c 1,18,857 73,143   By Cash A/c (loss on 54,000 36,000  18,000
realization)
By Neptune's Capital A/c   11,143 
By Jupiter's Capital A/c   6,857 
_______ _______ _____ _____ By Cash A/c    2,000
1,84,000 1,16,000 28,000 30,000 1,84,000 1,16,000 28,000 30,000
6.44 Accounting

Question 7
X, Y and Z are partners of the firm XYZ and Co., sharing Profits and Losses in the ratio of 4 : 3 : 2.
Following is the Balance sheet of the firm as at 31 st March, 2008:
Balance Sheet as at 31st March, 2008
Liabilities Rs. Assets Rs.
Partners’ Capitals: Fixed Assets 5,00,000
X 4,00,000 Stock in trade 3,00,000
Y 3,00,000 Sundry debtors 5,00,000
Z 2,00,000 Cash in hand 10,000
General Reserve 90,000
Sundry Creditors 3,20,000 ________
13,10,000 13,10,000
Partners of the firm decided to dissolve the firm on the above said date. It was found that a
credit purchase of Rs. 20,000 in January, 2008 had not been recorded in the books of the firm.
Fixed assets realized Rs. 5,20,000 and book debts Rs. 4,40,000.
Stocks were valued at Rs. 2,50,000 and it was taken over by partner Y.
Creditors allowed discount of 5% and the expenses of realization amounted to Rs. 6,000.
You are required to prepare:
(i) Realisation account;
(ii) Partners capital account; and
(iii) Cash account. (8 Marks) (PE-II Nov. 2008)
Answer
(i) Realisation Account
Rs. Rs.
To Fixed assets 5,00,000 By Creditors 3,20,000
To Stock in trade 3,00,000 By Cash (5,20,000+4,40,000) 9,60,000
To Debtors 5,00,000 By Y (Stock taken over) 2,50,000
To Cash - Expenses 6,000 By Loss transferred to partners’
capital accounts
To Cash -Creditors 3,23,000 X 44,000
(3,40,000x 95% ) Y 33,000
Z 22,000
16,29,000 16,29,000
 Advanced Partnership Accounts 6.45

(ii) Partners’ Capital Accounts

X Y Z X Y Z
Rs. Rs. Rs. Rs. Rs. Rs.
To Realisation 44,000 33,000 22,000 By Balance b/d 4,00,000 3,00,000 2,00,000
Account
To Realisation - 2,50,000 - By General 40,000 30,000 20,000
Account reserve
To Cash 3,96,000 47,000 1,98,000
4,40,000 3,30,000 2,20,000 4,40,000 3,30,000 2,20,000

(iii) Cash Account

Rs. Rs.
To Balance b/d 10,000 By Realisation A/c (Expenses) 6,000
To Realisation A/c 9,60,000 By Realisation A/c (Creditors) 3,23,000
(Fixed assets and
book debts realized) By X 3,96,000
By Y 47,000
By Z 1,98,000
9,70,000 9,70,000
6.46 Accounting

Unit 3 : AMALGAMATION, CONVERSION AND SALE OF PARTNERSHIP

FIRMS
(A) Practical Questions:
Question 1
Mr. B and Mr. E are partners sharing Profits and Losses in the ratio of 3:2. On 30th September,
1993 they admit Mr. C as a partner, and the new profit ratio is 2:2:1. C brought in Fixtures Rs.
3,000 and cash Rs. 10,000, the goodwill being (i) B and E Rs. 20,000 and (ii) C Rs. 10,000 but
neither figure is to be brought into the books.
On 31st March, 1994, the partnership is dissolved, B retiring and the other two partners
forming a company called BC Limited with equal capitals, taking over all remaining assets and
liabilities, goodwill being agreed at Rs. 40,000 and brought into books of the company. B agrees to
take over the business car at Rs. 3,700: Plant was sold for Rs. 3,000 being in excess of
requirements. The profit of the two preceding years were Rs. 17,200 and Rs. 19,000 respectively
and it was agreed that for the half year ended 30th September, 1993 the net profit was to be taken
as equal to the average of the two preceding years and the current year.
No entries has been made when C entered, except cash. No new book being opened by BC
Company Ltd., B agreed to have Rs. 50,000 as loan to the company, secured by 12% Debentures.
The following is the Trial Balance as on 31st March, 1994.

Debit Credit
Rs. Rs.
Capital Accounts:
B 35,000
E 20,000
C 10,000
Drawing Accounts:
B 6,000
E 5,000
C 2,800
Debtors & Creditors 31,000 12,000
Plant (Book value of plant sold Rs. 4,000) 23,000
Fixtures 7,000
Motor Car 2,700
Stock on 31st March, 94 13,000
Bank 16,300
P & L A/c for the year 29,800
1,06,800 1,06,800
Prepare :
(1) Goodwill Adjustment Account
(2) Capital Accounts of Partner
(3) Profit and Loss Appropriation Account
(4) Balance Sheet of BC Ltd. as on 31st March,1994 (20 Marks) (Intermediate–Nov. 1994)
 Advanced Partnership Accounts 6.47

Answer
Goodwill Adjustment Account
Rs. Rs.
1993 1993
30th Sept. To Partners’ Capital A/c 30th Sept. By Partners’ Capital A/c
(Goodwill raised) (Goodwill written off)
(W.N.1)
B 12,000 B 12,000
E 8,000 E 12,000
C 10,000 C 6,000
1994 1994
31st March To Partners’ Capital A/cs 31st March By Goodwill A/c
(goodwill raised) (Goodwill raised in the
B 16,000 books transferred) 40,000
E 16,000
C 8,000
70,000 70,000

(2) Partners’ Capital Accounts

1994 B E C 1994 B E C
31st March 31st March
To Drawings 6,000 5,000 2,800 By Balance b/d 35,000 20,000 10,000
To Motor Car 3,700 – – By Fixtures
(not recorded earlier) – – 3,000
To 12% Debentures 50,000 – – By Profit upto
To Goodwill Adjust 30th Sept 93 (W.N.2) 13,200 8,800
ment Account 12,000 12,000 6,000 By Profit for 6 months
To Bank Account 7,620 ended 31st March 1994 3,120 3,120 1,560
To Bank Account(WN 3) – 7,580 – By Goodwill
To Share Capital – 31,340 31,340 Adjustment A/c 12,000 8,000 10,000
By Goodwill
Adjustment A/c 16,000 16,000 8,000
By Bank A/c (W.N. 3) – – 7,580

79,320 55,920 40,140 79,320 55,920 40,140

(3) Profit & Loss Appropriation Account

For the year ended 31st March, 1994
Rs. Rs.
To Partners’ Capital Account By Profit & Loss A/c
(Distribution of Profit) (Net profit transferred) 29,800
B 16,320
E 11,920
C 1,560
29,800 29,800
6.48 Accounting

(4) Balance Sheet of BC Ltd.

As on 31st March, 1994
Liabilities Rs. Assets Rs.
Share Capital 62,680 Fixed Assets :
Secured Loan : Goodwill 40,000
12% Debentures 50,000 Plant 19,000
Current Liabilities & Provisions: Fixtures 10,000
Creditors 12,000 Current Assets, Loans &
Advances :
Stock 13,000
Debtors 31,000
Cash at bank (W.N.4) 11,680
1,24,680 1,24,680
Working Notes :
(1) Goodwill Adjustment as on 30th September, 1993
Total B E C
Rs. Rs. Rs. Rs.
Goodwill raised -
B and E (3:2) 20,000 12,000 8,000 –
C 10,000 10,000
30,000
Goodwill written off in the new
profit sharing ratio (2:2:1) 30,000 12,000 12,000 6,000
(2) Calculation of half yearly profit: Rs. Rs.
Profit of the preceding two years
(Rs. 17,200 + Rs. 19,000) 36,200
Current year’s profit 29,800
66,000
Profit for six months ended
30th September, 1993 ( × 66,000) 22,000
Profit for next six months ended
31st March, 1994 (Rs. 29,800 – Rs. 22,000) 7,800

(3) Share Capital of BC Ltd:

Total Capital of the firm before conversion -
E 38,920
C 23,760 62,680
E and C should have have equal share in BC Ltd.

C should bring in cash ( 1 × 62,680 – 23,760) 7,580

2

E should withdraw cash (38,920 – 1 × 62,680) 7,580

2
 Advanced Partnership Accounts 6.49

Bank Account
(4) Rs. Rs.
To Balance b/d 16,300 By B’s Capital Account 7,620
To Plant Account By E’s Capital
(Sale of Plant) 3,000 (Amount withdrawn) 7,580
To Cs capital A/c By Balance c/d 11,680
(Amount brought in) 7,580
26,880 26,880
(5) Profit and loss on sale and takeover of assets: Rs.
Profit on Motor car taken over (Rs. 3,700 – Rs. 2,700) 1,000
Loss on sale of plant (Rs. 4,000 – Rs. 3,000) 1,000
Not effect Nil

Question 2
A, B and C were partners in business, sharing profits & losses in the ratio 2:1:1. Their Balance
Sheet as at 31.3.97 is as follows:
Balance Sheet as at 31.3.97
(Figures in Rs.’000)
Liabilities Rs. Assets Rs.
Fixed Capital: Fixed Assets 300
A 200 Investments 50
B 100 Current Assets:
C 100 400 Stock 100
Current Accounts: Debtors 60
A 40 Cash & Bank 150 310
B 20 60
Unsecured Loans 200
660 660
On 1.4.97, it is agreed among the partners that BC (P) Ltd. a newly formed company with B and C
having each taken up 100 shares of Rs. 10 each will take over the firm as a going concern
including goodwill but excluding cash & bank balances. The following points are also agreed upon:
(a) Goodwill will be valued at 3 years purchase of super profits.
(b) The actual profit for the purpose of goodwill valuation will be Rs. 1,00,000.
(c) Normal rate of return will be 15% on fixed capital.
(d) All other assets and liabilities will be taken over at book values.
(e) The purchase consideration will be payable partly in shares of Rs. 10 each and partly in
cash. Payment in cash being to meet the requirement to discharge A, who has agreed to
retire.
(f) B and C are to acquire equal interest in the new company.
(g) Expenses of liquidation Rs. 40,000.
You are required to prepare the necessary Ledger Accounts.
(15 marks) (Intermediate–May 1997)
6.50 Accounting

Answer

Rs.
Capital employed on 31.3.97 (Fixed capital) 4,00,000
Calculation of Goodwill :
Weighted average of actual profits 1,00,000
Less: Normal profits at 15% of Rs. 4,00,000 60,000
Super profits 40,000
Goodwill at 3 years’ purchase, i.e. 40,000 × 3 1,20,000
Calculation of Purchase Consideration :
Total assets as per Balance Sheet 6,60,000
Less: Cash & Bank balances 1,50,000
5,10,000
Add: Goodwill 1,20,000
6,30,000
Less: Unsecured loans 2,00,000
Purchase Consideration 4,30,000

Realisation Account
Rs. Rs.
To Sundry Assets 5,10,000 By Unsecured loans 2,00,000
To Goodwill 1,20,000 By BC (P) Ltd. 4,30,000
To Bank : expenses 40,000 By Capital A/c:
A 20,000
B 10,000
C 10,000 40,000
6,70,000 6,70,000

Partners’ Capital Accounts

A B C A B C
Rs. Rs. Rs. Rs. Rs. Rs.
To Realisation 20,000 10,000 10,000 By Bal. c/d 2,00,000 1,00,000 1,00,000
To Cash 2,80,000 – – By Cur. A/c 40,000 20,000
To C (Cap. adj) – 10,000 – By Goodwill 60,000 30,000 30,000
To Shares in By B
BC (P) Ltd.) – 1,30,000 1,30,000 (Cap. adj) – – 10,000
3,00,000 1,50,000 1,40,000 3,00,000 1,50,000 1,40,000
 Advanced Partnership Accounts 6.51

Cash & Bank A/c

Rs. Rs.
To Balance b/d 1,50,000 By Realisation A/c – expenses 40,000
To BC (P) Ltd. (Balancing Figure) 1,70,000 By A’s Capital A/c 2,80,000
3,20,000 3,20,000

BC (P) Ltd.
To Realisation 4,30,000 By Cash 1,70,000
By Equity Shares (Balancing Figure) 2,60,000
(26,000 shares of Rs. 10 each)
4,30,000 4,30,000

Proportion of equity capital B:C = 1:1

No. of shares = 26,000 = 13,000 shares each.
2

Question 3
Alpha Manufacturing P. Ltd. is a company manufacturing articles. Beeta marketing P. Ltd. is a
company engaged in markting activities. The two companies enter into a partnership on the
following terms:
(a) Alpha Manufacturing P. Ltd. is to supply goods on credit of two months to the partnership
firm. The partnership is to discharge the due to Alpha Manufacturing P. Ltd. along with
interest at 12% per annum regularly on due dates.
(b) Beeta Marketing P. Ltd. is to sell the goods.
(c) Expenses of sales are to be met out of the partnership funds. Alpha Manufacturing P. Ltd.
and Beeta Marketing P. Ltd. are to introduce capital of Rs. five lakhs each for meeting the
above expenses and as working capital. Interest at 15% per annum is payable on partners’
capital—payment being made every month. Accordingly the capitals are introduced on 1st
April, 1999.
(d) Profits and losses are to be dealt with as follows:
(i) 10% of the profits, if any, are to be credited to reserves for strengthening the working
capital base;
(ii) balance profits are to be shared equally by credit to current accounts;
(iii) losses, if any, are to be borne equally by debit to capital accounts.
(e) The firm name is to be AB Traders.
During the year ended 31st March, 2000 the following were the transactions:
(a) Purchases Rs. 150 lakhs of which Rs. 30 lakhs were in the first quarter; Rs. 90 lakhs were
in the next six months; the balance Rs. 30 lakhs were in the last quarter. The purchases
are evenly spread through the respective periods.
6.52 Accounting

(b) Sales were Rs. 200 lakhs.

(c) Sales expenses were Rs. 10 lakhs and were paid in full.
(d) Discount allowed to customers amounted to Rs. 4 lakhs. On 31st March, 2000, amounts
due from customers were Rs. 45 lakhs and unsold inventory was worth Rs. 15 lakhs.
You are required to prepare final accounts of the firm.
(15 marks) (Intermediate–May 2000)
Answer
AB Traders
Trading and Profit and Loss Account
for the year ended on 31st March, 2000
(Rs. in Lakhs)
Rs. Rs.
To Purchases 150.00 By Sales 200.00
To Gross profit c/d 65.00 By Closing stock 15.00
215.00 215.00
To Interest to supplier (W.N.1) 2.80 By Gross profit b/d 65.00
To Sales expenses 10.00
To Discount 4.00
To Net profit 48.20
65.00 65.00

Profit and Loss Appropriation Account

To Reserves 4.82 By Net profit 48.20
To Interest on capitals
(15% on Rs. 10 lakhs) 1.50
To Net profit transferred to
capital accounts:
Alpha Manufacturing P. Ltd. 20.94
Beeta Marketing P. Ltd. 20.94
48.20 48.20

Balance Sheet of AB Traders

as at 31st March, 2000
(Rs. in lakhs)
Rs. Rs.
Capital accounts: Closing inventory 15.00
Alpha Manufacturing P. Ltd. 5.00 Customers’ dues 45.00
Beeta Marketing P. Ltd. 5.00 Bank balance 16.90
Current accounts:
Alpha Manufacturing P. Ltd. 20.94
Beeta Marketing P. Ltd. 20.94
 Advanced Partnership Accounts 6.53

Reserves 4.82
Liability for goods
(Alpha Manufacturing P. Ltd.) 20.00
Interest Accrued 0.20
76.90 76.90

Working Notes: (Rs. in lakhs)

1. Interest to supplier (Alpha Manufacturing P. Ltd.)
Assuming that purchases are made evenly in the middle of each month of the quarter, the
schedule of payment of dues for the purchases of last quarter is given below:
Year Purchases Due date of Period of interest accrual
2000 Rs. payment (upto financial year’ end)
Jan. 15 10 15th March 2 months
Feb. 15 10 15th April 1 months
1
2
March 15 10 15th May 15 days
Rs.
Interest on Rs. 130 lakhs (30 + 90 + 10) for two months 2.60
Interest on Rs. 10 lakhs for one and half months 0.15
Interest on Rs. 10 lakhs for 15 days 0.05
2.80
Interest accrued on 31st March, 2000 = 0.15 + 0.05 = 0.20
Customers’ Account
Rs. Rs.
To Sales A/c 200.00 By Discount A/c 4.00
By Bank A/c (balancing figure) 151.00
By Balance c/d 45.00
200.00 200.00

Bank Accounts
Rs. Rs.
To Capital A/cs : By Sales expenses A/c 10.00
Alpha Manufacturing P. Ltd. 5.00 By Alpha Manufacturing P. Ltd.
Beeta Marketing P. Ltd. 5.00 (payment for purchases) 130.00
6.54 Accounting

To Customers A/c 151.00 By Interest A/c 2.60

By Interest on partners’ capitals:
Alpha Manufacturing P. Ltd. 0.75
Beeta Marketing P. Ltd. 0.75
By Balance c/d 16.90
161.00 161.00

Partners’ Current Accounts

Alpha Beeta Alpha Beeta
Pvt. Ltd. Pvt. Ltd. Pvt. Ltd. Pvt. Ltd.
Rs. Rs. Rs. Rs.
To Bank A/c 0.75 0.75 By P & L Appro-
To Balance c/d 20.94 20.94 priation A/c 0.75 0.75
(Interest on capital)
By P & L Appro-
priation A/c 20.94 20.94
(Share of profit)
21.69 21.69 21.69 21.69
Question 4
Avinash, Rohit and Madwesh were carrying on business in partnership sharing Profits and Losses
in the ratio of 5 : 4 : 3 respectively. The Trial Balance of the firm as on 31st March, 2002 was the
following:
Particulars Dr. (Rs.) Cr. (Rs.)
Plant and Machinery @ cost 1,05,000 –
Stock 60,200 –
Sundry Debtors 85,000 –
Sundry Creditors – 1,05,200
Capital A/cs:
Avinash – 70,000
Rohit – 50,000
Madwesh – 30,000
Drawings A/cs:
Avinash 30,000 –
 Advanced Partnership Accounts 6.55

Rohit 25,000 –
Madwesh 20,000 –
Depreciation on Plant and Machinery – 35,000
Trading Profit for the year – 1,29,800
Cash at Bank 94,800 –
4,20,000 4,20,000
Additional Information:
(a) Interest on Capital Accounts at 10% on the amount standing to the credit of partners' capital
accounts at the beginning of the year was not provided before preparing the above Trial
Balance.
(b) On 31st March, 2002 they formed a Private Ltd. Company Anagha (P) Ltd. to take over the
partnership business.
(c) You are further informed as under:
(i) Plant and Machinery is to be transferred at Rs. 80,000.
(ii) Equity Shares of Rs. 10 each of the company are to be issued to the partners at par in
such numbers to ensure that by reason of their share holdings alone, they will have the
same rights of sharing Profits and Losses as they had in the partnership. Balance, if
any in their Capital Accounts, will be settled by giving 7½% Preference Shares at par.
(iii) Before transferring the business, the partners withdrew by cash from partnership the
following amounts over and above the drawings as shown in the Trial Balance:
(a) Avinash Rs. 20,000
(b) Rohit Rs. 10,600
(c) Madwesh Rs. 14,200
(iv) All Assets and Liabilities except Plant and Machinery and the Bank Balance are to be
transferred at their value in the books of the partnership as at 31st March, 2002.
(v) You are required to prepare:
(a) Profit and Loss Adjustment Account for the year ending 31st March, 2002.
(b) Capital Accounts showing all the adjustments required to dissolve the partnership
(c) A statement showing the number of shares of each class to be issued by the
company to each of the partners to settle their accounts.
(d) Prepare Balance Sheet of the company Anagha (P) Ltd. as on 31.03.2002 after
take over of the business. (16 marks) (PE-II – Nov. 2002)
6.56 Accounting

Answer
(a) In the Books of Avinash, Rohit & Madwesh
Profit and Loss Adjustment Account for the year ending 31st March, 2002
Rs. Rs. Rs.
To Interest on Avinash 7,000 By Balance b/d 1,29,800
Capital
Rohit 5,000
Madwesh 3,000 15,000 By Plant and 10,000
Machinery
To Capital Avinash 52,000
Accounts
Rohit 41,600
Madwesh 31,200 1,24,800 _______
1,39,800 1,39,800
(b) Partners’ Capital Accounts
Avinash Rohit Madwesh Avinash Rohit Madwesh

To Drawings as 30,000 25,000 20,000 By Balance b/d 70,000 50,000 30,000

per Trial By Profit and Loss
Balance
To Additional 20,000 10,600 14,200 Adjustment A/c 52,000 41,600 31,200
Drawings
To Balance c/d 79,000 61,000 30,000 By Interest on Capital 7,000 5,000 3,000
1,29,000 96,600 64,200 1,29,000 96,600 64,200
To Equity Shares 50,000 40,000 30,000 By Balance b/d 79,000 61,000 30,000
To Preference 29,000 21,000 
Shares
79,000 61,000 30,000 79,000 61,000 30,000

(c) Statement showing the number and classes of shares issued to the partners
Particulars Avinash Rohit Madwesh
Closing Capital Balance 79,000 61,000 30,000
(After Adjustments)
Taking Madwesh’s Capital as
base for ensuring same rights
50,000 40,000 30,000
of share holding-Equity Shares
 Advanced Partnership Accounts 6.57

of Rs. 10 each to be issued

Balance to be settled by issue
of 7½% Preference Shares
29,000 21,000 –

(d) Balance Sheet of Anagha (P) Ltd. as on 31st March, 2002

(after takeover of the business)
Shares Capital: Rs. Fixed Assets: Rs.
12,000 Equity Shares of 10 each at Plant and Machinery 80,000
par (Issued for consideration other Current Assets:
than cash) 1,20,000 Stock 60,200
7½% Preference Shares Debtors 85,000
(Issued for consideration other than 50,000 Cash at Bank 50,000
cash)
Current Liabilities and Provisions:
Sundry Creditors 1,05,200 _______
2,75,200 2,75,200
Working Note:
Purchase Consideration
Plant and Machinery 80,000
Stock: 60,200
Debtors 85,000
Cash at Bank (94,800 – 44,800) 50,000
2,75,200
Less: Sundry Creditors 1,05,200
1,70,000
Question 5
Ram, Rahim and Robert are partners of the firm ‘RR Traders’ for the past 5 years. The
partners decided to dissolve the firm consequent to insolvency of partner Robert in
October, 2002. The Balance Sheet of the firm as on 31.10.2002 is furnished below. They
share profits and losses equally:
Liabilities Rs. Assets Rs.
Capital Accounts: Land and Building 5,00,000
Ram 4,50,000 Plant and Machinery 2,00,000
Rahim 4,50,000 Furniture and Fittings 50,000
6.58 Accounting

Robert 2,00,000 Stock in Trade 3,00,000

General Reserve 2,10,000 Debtors 5,00,000
Creditors 2,90,000 Cash at Hand/Bank 50,000
16,00,000 16,00,000
The partners Ram and Rahim decided to form a new firm ‘RR Enterprises’ and takeover
all the assets and liabilities of the firm at values given below:
Land and Building Rs. 3,50,000
Plant and Machinery Rs. 1,50,000
Furniture and Fittings Rs. 20,000
Stock in trade Rs. 2,00,000
Debtors include Rs. 3,00,000 due from SK & Co. owned by Robert. (Nothing is
recoverable from the said concern).
Other debtors can be recovered fully.
Prepare:
(i) Realisation account, Partners’ capital accounts in the books of RR Traders; and
(ii) The Balance Sheet of RR Enterprises (immediately after commencement).
(16 marks) (PE-II – May 2003)
Answer
(i) In the Books of RR Traders
Realisation Account
Rs. Rs.
To Sundry assets: By Creditors 2,90,000
Land and building 5,00,000 By RR Enterprises 9,70,000
Plant and machinery 2,00,000 (W.N. 1)
Furniture and fittings 50,000 By Loss transferred to
Stock 3,00,000 partners’ capital accounts

Debtors 2,00,000 Ram 1,10,000

Cash at hand/bank 50,000 Rahim 1,10,000
To RR Enterprises 2,90,000 Robert 1,10,000 3,30,000
(liability taken over) ________ ________
15,90,000 15,90,000
 Advanced Partnership Accounts 6.59

Partners’ Capital Accounts

Ram Rahim Robert Ram Rahim Robert
Rs. Rs. Rs. Rs. Rs. Rs.
To Sundry 3,00,000 By Balance b/d 4,50,000 4,50,000 2,00,000
debtors
To Realisation 1,10,000 1,10,000 1,10,000 By General 70,000 70,000 70,000
account reserve
To Robert’s 70,000 70,000 By Cash 1,10,000* 1,10,000*
account
(deficiency By Ram and Rahim
borne by
solvent (deficiency
partners) borne by
solvent
partners)
To Balance c/d 4,50,000 4,50,000 _______ ______ _____ 1,40,000
6,30,000 6,30,000 4,10,000 6,30,000 6,30,000 4,10,000

* Solvent partners bring cash to the extent of loss arising upon realisation of assets of the firm
as per Garner vs Murray Rule.
(ii) Balance Sheet of RR Enterprises
as on 31.10.2002
(immediately after commencement)
Liabilities Rs. Assets Rs.
Capital Accounts: Land and building 3,50,000
Ram 4,50,000 Plant and machinery 1,50,000
Rahim 4,50,000 Furniture and fittings 20,000
Creditors 2,90,000 Stock in trade 2,00,000
Debtors 2,00,000
Cash at hand/bank 2,70,000
________ (W.N. 2) ________
11,90,000 11,90,000

Working Notes:
1. Agreed value of assets taken over by RR Enterprises
Rs.
Land and building 3,50,000
Plant and machinery 1,50,000
6.60 Accounting

Furniture and fittings 20,000

Stock in trade 2,00,000
Debtors (5,00,000 – 3,00,000) 2,00,000
Cash at hand/bank 50,000
9,70,000
2. Cash in hand/bank balance of RR Enterprises as on 31.10.2002.
Rs.
Opening Balance 50,000
Add: Ram’s and Rahim’s contribution 2,20,000
(Rs.1,10,000 + Rs.1,10,000) _______
2,70,000

Question 6
Riu, Inu and Sinu were running Partnership business sharing Profits and Losses in 2 :2 : 1
ratio. Their Balance Sheet as on 31st March, 2003 stood as follows:
Balance Sheet as on 31st March, 2003
(Figures in Rs.’000)
Liabilities Amount Amount Assets Amount Amount
Rs. Rs. Rs. Rs.
Fixed Capital: Fixed Assets 400.00
Riu 300.00 Investments 50.00
Inu 200.00 Current Assets:
Sinu 100.00 600.00 Stock 100.00
Current Accounts: Debtors 275.00
Riu 60.00 Cash & Bank 125.00 500.00
Sinu 40.00 100.00
Unsecured Loans 100.00
Current Liabilities 150.00 ______
950.00 950.00
On 01.04.2003, they agreed to form a new company RIS (P) Ltd. with Inu and Sinu each taking up
200 shares of Rs. 10 each, which shall take over the firm as a going concern including Goodwill,
but excluding Cash and Bank Balances. The following are also agreed upon:
(a) Goodwill will be valued at 3 year’s purchase of superprofits.
 Advanced Partnership Accounts 6.61

(b) The actual profit for the purpose of Goodwill valuation will be Rs. 2,00,000.
(c) The normal rate of return will be 18% per annum on Fixed Capital.
(d) All other Assets and Liabilities will be taken over at Book values.
(e) The Purchase Consideration will be payable partly in Shares of Rs. 10 each and partly in
cash. Payment in cash being to meet the requirement to discharge Riu, who has agreed
to retire.
(f) Inu and Sinu are to acquire interest in the new company at the ratio 3 : 2.
(g) Realisation expenses amounted to Rs. 51,000.
You are required to prepare Realisation Account, Cash and Bank Account, RIS (P)
Limited Account and Capital Account of Partners. (16 marks) (PE – II – May 2004)
Answer
Realisation Account
Rs. Rs.
To Sundry Assets By Unsecured Loans 1,00,000
Fixed Assets 4,00,000 By Current Liabilities 1,50,000
Investments 50,000 By RIS(P) Ltd. (WN – 2) 8,51,000
Stock 1,00,000 By Capital Accounts:
Debtors 2,75,000 8,25,000 Riu 20,400
To Goodwill (WN –1) 2,76,000 Inu 20,400
To Bank A/c 51,000 Sinu 10,200
(Realisation Expenses) ________ ________
11,52,000 11,52,000
Cash and Bank Account
Rs. Rs.
To Balance b/d 1,25,000 By Realisation A/c – Expenses 51,000
To R.I.S (P) Ltd. 3,76,000 By Riu’s Capital A/c 4,50,000
(Balancing figure) _______
5,01,000 5,01,000

RIS (P) Ltd.

Rs. Rs.
To Realisation A/c 8,51,000 By Cash A/c 3,76,000
By Equity Shares in RIS (P) Ltd. A/c 4,75,000
_______ (Balancing figure) _______
8,51,000 8,51,000
6.62 Accounting

Partners’ Capital Accounts

Riu Inu Sinu Riu Inu Sinu
Rs. Rs. Rs. Rs. Rs. Rs.
To Realisation A/c 20,400 20,400 10,200 By Balance b/d 3,00,000 2,00,000 1,00,000
To Cash A/c 4,50,000   By Current A/c 60,000  40,000
To Sinu’s A/c  5,000  By Goodwill A/c 1,10,400 1,10,400 55,200
(Capital Adjustment) By Inu’s A/c   5,000
To Equity Shares in  2,85,000 1,90,000 (Capital Adjustment)
RIS(P) Ltd.
_______ _______ _______ _______ _______ _______
4,70,400 3,10,400 2,00,200 4,70,400 3,10,400 2,00,200
Working Notes:
(1) Calculation of Goodwill
Rs.
Actual profits 2,00,000
Less: Normal Rate of Return @ 18%
of fixed capital worth Rs. 6,00,000 1,08,000
Super Profits 92,000
Goodwill valued at 3 years’ purchase 2,76,000
(2) Calculation of Purchase Consideration
Rs.
Total value of assets as per Balance Sheet 9,50,000
Less: Cash and Bank Balances 1,25,000
8,25,000
Add: Goodwill 2,76,000
11,01,000
Less: Liabilities taken over
Unsecured Loan 1,00,000
Current Liabilities 1,50,000
Purchase Consideration 8,51,000
(3) Sharing of Shares in New Company received as Purchase Consideration
Equity shares of RIS (P) Ltd. have been given to Inu and Sinu in the ratio 3 : 2.
Question 7
Firm X & Co. consists of partners A and B sharing Profits and Losses in the ratio of 3 : 2. The firm
Y & Co. consists of partners B and C sharing Profits and Losses in the ratio of 5 : 3.
On 31st March, 2006 it was decided to amalgamate both the firms and form a new firm XY & Co.,
wherein A, B and C would be partners sharing Profits and Losses in the ratio of 4:5:1.
 Advanced Partnership Accounts 6.63

Balance Sheet as at 31.3.2006

Liabilities X & Co., Y & Co. Assets X & Co. Y & Co.
Rs. Rs. Rs. Rs.
Capital: Cash in hand/bank 40,000 30,000
A 1,50,000 --- Debtors 60,000 80,000
B 1,00,000 75,000 Stock 50,000 20,000
C --- 50,000 Vehicles --- 90,000
Reserve 50,000 40,000 Machinery 1,20,000 ---
Creditors 1,20,000 55,000 Building 1,50,000 ---
4,20,000 2,20,000 4,20,000 2,20,000
The following were the terms of amalgamation:
(i) Goodwill of X & Co., was valued at Rs.75,000. Goodwill of Y & Co. was valued at Rs.40,000.
Goodwill account not to be opened in the books of the new firm but adjusted through the
Capital accounts of the partners.
(ii) Building, Machinery and Vehicles are to be taken over at Rs.2,00,000, Rs.1,00,000 and
Rs.74,000 respectively.
(iii) Provision for doubtful debts at Rs.5,000 in respect of X & Co. and Rs.4,000 in respect of Y &
Co. are to be provided.
You are required to:
(i) Show, how the Goodwill value is adjusted amongst the partners.
(ii) Prepare the Balance Sheet of XY & Co. as at 31.3.2006 by keeping partners capital in their
profit sharing ratio by taking capital of ‘B’ as the basis. The excess or deficiency to be kept in
the respective Partners’ Current account. (16 Marks) (PE-II – May 2006)
Answer
(i) Adjustment for raising and writing off of goodwill
Raised in old profit sharing ratio Total Written off in new ratio Difference
X & Co. Y & Co.
3:2 5:3
Rs. Rs. Rs. Rs. Rs.
A. 45,000 --- 45,000 Cr. 46,000 Dr. 1,000 Dr.
B. 30,000 25,000 55,000 Cr. 57,500 Dr. 2,500 Dr.
C --- 15,000 15,000 Cr. 11,500 Dr. 3,500 Cr.
75,000 40,000 1,15,000 1,15,000 Nil
6.64 Accounting

(ii) Balance Sheet of X Y & Co.(New firm) as on 31.3.2006

Liabilities Rs. Assets Rs.
Capital Accounts: Vehicle 74,000
A 1,72,000 Machinery 1,00,000
B 2,15,000 Building 2,00,000
C 43,000 Stock 70,000
Current Accounts: Debtors 1,31,000
A 22,000 Cash & Bank 70,000
C 18,000
Creditors 1,75,000
6,45,000 6,45,000
Working Notes:
1. Balance of Capital Accounts at the time of amalgamation of firms
X & Co. Profit and loss sharing ratio 3:2 A’s Capital B’s Capital
Rs.. Rs.
Balance as per Balance Sheet 1,50,000 1,00,000
Add: Reserves 30,000 20,000
Revaluation profit (Building)
30,000 20,000
Less: Revaluation loss (Machinery)
(12,000) (8,000)
Provision for doubtful debt.
(3,000) (2,000)
1,95,000 1,30,000
Y & Co. Profit and loss sharing ratio 5:3 B’s Capital C’s Capital
Rs. Rs.
Balance as per Balance sheet 75,000 50,000
Add: Reserves 25,000 15,000
Less: Revaluation (vehicle) (10,000) (6,000)
Provision for doubtful debts (2,500) (1,500)
87,500 57,500

2. Balance of Capital Accounts in the balance sheet of the new firm as on 31.3.2006
A B C
Rs. Rs. Rs.
Balance b/d: X & Co. 1,95,000 1,30,000 --
Y & Co. -- 87,500 57,500
1,95,000 2,17,500 57,500
 Advanced Partnership Accounts 6.65

Adjustment for goodwill (1,000) (2,500) 3,500

1,94,000 2,15,000 61,000
Total capital Rs. 4,30,000 (B’s capital i.e.
Rs.2,15,000 x 2) to be contributed in 4:5:1 ratio. 1,72,000 2,15,000 43,000
Transfer to Current Account 22,000 --- 18,000
Question 8
‘X’ and ‘Y’ carrying on business in partnership sharing Profit and Losses equally, wished to
dissolve the firm and sell the business to ‘X’ Limited Company on 31-3-2006, when the firm’s
position was as follows:
Liabilities Rs. Assets Rs.
X’s Capital 1,50,000 Land and Building 1,00,000
Y’s Capital 1,00,000 Furniture 40,000
Sundry Creditors 60,000 Stock 1,00,000
Debtors 66,000
Cash 4,000
3,10,000 3,10,000
The arrangement with X Limited Company was as follows:
(i) Land and Building was purchased at 20% more than the book value.
(ii) Furniture and stock were purchased at book values less 15%.
(iii) The goodwill of the firm was valued at Rs.40,000.
(iv) The firm’s debtors, cash and creditors were not to be taken over, but the company
agreed to collect the book debts of the firm and discharge the creditors of the firm as an
agent, for which services, the company was to be paid 5% on all collections from the
firm’s debtors and 3% on cash paid to firm’s creditors.
(v) The purchase price was to be discharged by the company in fully paid equity shares of
Rs.10 each at a premium of Rs.2 per share.
The company collected all the amounts from debtors. The creditors were paid off less by
Rs.1,000 allowed by them as discount. The company paid the balance due to the vendors in
cash.
Prepare the Realisation account, the Capital accounts of the partners and the Cash account in
the books of partnership firm. (16 Marks) (PE-II – Nov. 2006)


B’s Capital Rs.21,500 being one-half of the total capital of the firm.
6.66 Accounting

Answer
Realisation Account
Rs. Rs.
To Land & Building 1,00,000 By Sundry Creditors 60,000
To Furniture 40,000 By X Ltd. Co. - Purchase
consideration – (W.N.1) 2,79,000
To Stock 1,00,000 By X Ltd. Company –
Sundry Debtors 66,000
To Debtors 66,000 Less: Commission
5% on 66,000 3,300 62,700
To X Ltd. Co. - Sundry
Creditors 59,000
To X Ltd. Co. –
Commission 3% on
59,000 1,770
To Profits transferred to
A’s Capital A/c17,465
B’s Capital A/c17,465 34,930
4,01,700 4,01,700

Capital Accounts
A B A B
Rs. Rs. Rs. Rs.
To Shares in X Ltd. By Balance b/d 1,50,000 1,00,000
Co.–(W.N.2) 1,63,980 1,15,020
To Cash – Final By Realisation A/c -
Payment 3,485 2,445 Profit 17,465 17,465
1,67,465 1,17,465 1,67,465 1,17,465

Cash Account
Rs. Rs.
To Balance b/d 4,000 By A’s Capital A/c- Final
payment 3,485
To X Ltd. Co. (Amount realized By B’s Capital A/c- Final
from Debtors less amount paid Payment
to creditors) –(W.N.3) 1,930 2,445
5,930 5,930
 Advanced Partnership Accounts 6.67

Working Notes:
1 Calculation of Purchase consideration:
Rs.
Land & Building 1,20,000
Furniture 34,000
Stock 85,000
Goodwill 40,000
2,79,000
2. The shares received from the company have been distributed between the two partners
A & B in the ratio of their final claims i.e., 1,67,465: 1,17,465 .
2,79,000
No. of shares received from the company =  23,250
12
23,250 1,67,465
A gets  13,665 shares valued at 13,665 x 12 = Rs.1,63,980. B gets the
2,84,930
remaining 9,585 shares, valued at Rs.1,15,020 (9,585  12)
3. Calculation of net amount received from X Ltd on account of amount realized from
debtors less amount paid to creditors.
Rs.
Amount realized from Debtors 66,000
Less: Commission for realization from debtors (5% on 66,000) 3,300
62,700
Less: Amount paid to creditors 59,000
3,700
Less: Commission for cash paid to creditors (3% on 59,000) 1,770
Net amount received 1,930


In the above situation, shares received from X Ltd. Company have been distributed
between two partners A and B in the ratio of their final claims. Alternatively, shares
received from X Ltd. can be distributed among the partners in their profit sharing ratio i.e.
Rs. 2,79,000 x ½ =Rs. 1,39,500 each. In that case, firm will pay cash amounting
Rs. 27,965 to A and will receive cash Rs.22,035 from B.
6.68 Accounting

Question 9
A, B and C carried on business in partnership, sharing Profits and Losses in the ratio of 1:2:3.
They decided to form a private limited company, AB (P) Ltd. and C is not interested to take over
the shares in AB (P) Ltd. The authorized share capital of the company is Rs.12,00,000 divided into
12,000 ordinary shares of Rs.100 each.
The company was incorporated and took over goodwill as valued and certain assets of the
partnership firm on 31.3.2006. The Balance Sheet of the partnership firm on that date was as
follows:
Liabilities Rs. Assets Rs.
Capital Accounts: Fixed Assets:
A 1,00,000 Machinery 1,20,000
B 2,00,000 Land 1,74,000
C 3,00,000 Motorcycles 30,000
Current Accounts: Furniture & fittings 11,000
A 39,420 Current Assets:
B 60,580 Stock 2,35,000
A’s Loan A/c 28,000 Debtors 43,000
(+) Interest accrued 2,000 30,000 Cash in hand 87,000
Current Liability: C’s overdrawn 1,00,000
Creditors 70,000
8,00,000 8,00,000

C, who retired was presented by the other partners (A and B) with one motorcycle valued in the
books of the firm Rs.9,000. The remaining motorcycles were sold in the open market for
Rs.13,000. C also received certain furniture for which he was charged Rs.2,000. The debtors
which were all considered good, were taken over by C for Rs.40,000. A and B were charged in
their profit sharing ratio for the book value of Motorcycle presented by them to C.
It was agreed that C who is not willing to take the shares in AB (P) Ltd. was discharged first by
providing necessary cash. A and B should bring cash, if necessary.
AB (P) Ltd. took over the remaining furniture and fittings at a price of Rs.13,000, the machinery for
Rs.1,25,000, the stock at an agreed value of Rs.2,00,000 and the land at its book value. The
value of the goodwill of the partnership firm was agreed at Rs.88,000. The creditors of the firm
were settled by the firm for Rs.70,000. A’s loan account together with interest accrued was
transferred to his capital account.
The purchase consideration was discharged by the company by the issue of equal number of fully
paid up equity shares at par to A and B.
 Advanced Partnership Accounts 6.69

Prepare Realisation A/c, Capital A/cs of the partners and Cash A/c. Also draw the Balance Sheet
of AB (P) Ltd. (20 Marks) (PE-II – May, 2007))
Answer

Realization Account
Dr. Cr.
Rs. Rs.
To Machinery 1,20,000 By Creditors 70,000
To Land 1,74,000 By AB (P) Ltd. – Purchase 6,00,000
consideration
(Refer Working Note )
To Motor Cycles 30,000 By A’s Capital A/c 3,000
To Furniture & Fittings 11,000 By B’s Capital A/c 6,000
To Stock 2,35,000 By C’s Capital A/c (2,000 + 40,000) 42,000
To Debtors 43,000 By Cash A/c (Sale of Motor Cycle) 13,000
To Cash (payment to
creditors) 70,000
To Profit transferred to
A’s Capital A/c 8,500
B’s Capital A/c 17,000
C’s Capital A/c 25,500
7,34,000 7,34,000

Partners’ Capital Accounts

Dr Cr.
A B C A B C
Rs. Rs. Rs. Rs. Rs. Rs.
To Current - - 1,00,000 By Balance 1,00,000 2,00,000 3,00,000
A/c b/d
To Realisation 3,000 6,000 42,000 By Current 39,420 60,580 -
A/c A/c
(Assets
taken
over)
To Equity 3,00,000 3,00,000 - By A’s Loan 30,000 - -
shares in A/c
AB (P) Ltd.
To Cash A/c - - 1,83,500 By Realization 8,500 17,000 25,500
6.70 Accounting

A/c (Profit)
By Cash A/c 1,25,080 28,420
3,03,000 3,06,000 3,25,500 3,03,000 3,06,000 3,25,500

Cash Account
Dr. Cr.
Rs. Rs.
To Balance b/d 87,000 By Realisation A/c 70,000
To Realisation A/c 13,000 By C’s Capital A/c 1,83,500
To A’s Capital A/c 1,25,080
To B’s Capital A/c 28,420
2,53,500 2,53,500
Balance Sheet of AB (P) Ltd.
Liabilities Rs. Assets Rs.
Authorised Share Capital: Fixed Assets:
12,000 Equity Shares of Goodwill 88,000
Rs.100 each 12,00,000 Land 1,74,000
Issued, Subscribed & Paid up: Machinery 1,25,000
6,000 equity shares of Rs.100 Furniture & Fittings 13,000
each fully paid up (shares were Current Assets:
issued for consideration Stock 2,00,000
otherwise than for cash) 6,00,000
6,00,000 6,00,000
Working Note:
Calculation of Purchase Consideration
Assets taken over by AB (P) Ltd. Rs.
Machinery 1,25,000
Furniture & Fittings 13,000
Land 1,74,000
Stock 2,00,000
Goodwill 88,000
Purchase Consideration 6,00,000

Purchase consideration is discharged by the issue of equal number of equity shares of Rs.100
each (3,000 shares) at par to A & B.
 Advanced Partnership Accounts 6.71

Question 10
S and T were carrying on business as equal partners. Their Balance Sheet as on 31 st March,
2007 stood as follows:
Liabilities Rs. Assets Rs.
Capital accounts: Stock 2,70,000
S 6,40,000 Debtors 3,65,000
T 6,60,000 13,00,000 Furniture 75,000
Creditors 3,27,500 Joint life policy 47,500
Bank overdraft 1,50,000 Plant 1,72,500
Bills payable 62,500 Building 9,10,000
18,40,000 18,40,000
The operations of the business was carried on till 30th September, 2007. S and T both
withdrew in equal amounts, half the amount of profits made during the current period of 6
months after 10% p.a. had been written off on building and plant and 5% p.a. written off on
furniture. During the current period of 6 months, creditors were reduced by Rs.50,000,
Bills payables by Rs.11,500 and bank overdraft by Rs.75,000. The Joint life policy was
surrendered for Rs.47,500 on 30th September, 2007. Stock was valued at Rs.3,17,000
and debtors at Rs.3,25,000 on 30th September, 2007. The other items remained the same
as they were on 31st March, 2007.
On 30 th September, 2007 the firm sold its business to ST Ltd. The goodwill was estimated at
Rs.5,40,000 and the remaining assets were valued on the basis of the balance sheet as on
30th September, 2007. The ST Ltd. paid the purchase consideration in equity shares of Rs.10
each. You are required to prepare a Realisation account and Capital accounts of the partners.
(16 Marks) (PE II- May, 2008 )
Answer
Realisation Account
Particulars Rs. Particulars Rs.
To Sundry assets: By Creditors 2,77,500
Stock 3,17,000 By Bills payables 51,000
Debtors 3,25,000 By Bank overdraft 75,000
Plant 1,63,875 By Shares in ST Ltd. (W.N. 3) 18,80,000
Building 8,64,500
Furniture 73,125
To Profit:
S 2,70,000
6.72 Accounting

T 2,70,000 5,40,000
22,83,500 22,83,500

Partners’ Capital Accounts

Date Particulars S T Date Particulars S T
2008 2008
April To Cash – 20,000 20,000 April 1 By Balance 6,40,000 6,60,000
1 Drawings b/d
(W.N. 2)
Sept. To Shares in 9,30,000 9,50,000 Sept. By Profit 40,000 40,000
30 ST Ltd. 30 (W.N.2)
By Realisation
A/c (Profit) 2,70,000 2,70,000
9,50,000 9,70,000
9,50,000 9,70,000

Working Notes:
(1) Ascertainment of total capital
Balance Sheet
as at 30th September, 2007
Liabilities Rs. Assets Rs.
Sundry creditors 2,77,500 Building 9,10,000
Bills payable 51,000 Less: Depreciation 45,500 8,64,500
Bank overdraft 75,000 Plant 1,72,500
Total capital (bal. fig.) 13,40,000 Less: Depreciation 8,625 1,63,875
Furniture 75,000
Less: Depreciation 1,875 73,125
Stock 3,17,000
Debtors 3,25,000
17,43,500 17,43,500
 Advanced Partnership Accounts 6.73

(2) Profit earned during six months to 30 September, 2007 Rs.

Total capital (of S and T) on 30th September, 2007 (W.N.1) 13,40,000
Capital on 1st April, 2007
S 6,40,000
T 6,60,000 13,00,000
Net increase (after drawings) 40,000
Since drawings are half of profits therefore, actual profit earned is Rs.40,000 x 2 =
Rs.80,000 (shared equally by partners S and T).
Half of the profits, has been withdrawn by both the partners equally i.e. drawings
Rs. 40,000 (Rs.80,000 x ½) withdrawn by S and T in 1:1 (i.e. Rs.20,000 each).
(3) Purchase consideration: Rs.
Total assets (W.N.1) 17,43,500
Add: Goodwill 5,40,000
22,83,500
Less: Liabilities (2,77,500 + 51,000 + 75,000) 4,03,500
Purchase consideration 18,80,000
Note: The above solution is given on the basis that reduction in bank overdraft is after
surrender of Joint life policy.
 7
INSOLVENCY ACCOUNTS OF NON-CORPORATE ENTITIES

(A) Write short notes on:

Question 1
List the preferential creditors, who are eligible for preferential payment upon insolvency of an
individual (4x4=16 Marks) (PE-II – May 2006)
Answer
Preferential creditors get preference over other unsecured creditors. Hence, they are known
as preferential creditors. By law, the following are the preferential creditors:
(i) all debts due to Government or any local authority.
(ii) Salary and wages to staff in respect of the services rendered to the insolvent during 4
months preceding the date of presentation of insolvency petition, subject to the following
limits:
(a) Under the Presidency Towns Insolvency Act – Rs.300 for such clerk and Rs.100
each for each such servant or labourer.
(b) Under the Provincial Insolvency Act Rs.20 for each such clerk, servant or labourer.
(iii) One month’s rent due to the landlord is preferential under the Presidency Towns
Insolvency Act. Rent is not at all preferential as per the provincial Insolvency Act .

(B) Practical Questions:

Question 1
Ram commenced business on 1.7.1997 with a capital of Rs. 2,00,000. On 31st March, 2003
an adjudication order for insolvency was made against him. Following are the other details
available relating to his business as on 31.3.2003:
Rs.
Sundry Creditors 1,50,000
Mortgage Loan (of building) 1,00,000
Godown Rent (2 months) 5,000
Wages due 8,000
Mrs. Ram loan (given out of her own source) 25,000
7.2 Accounting

Cost of Building (estimated to realise Rs. 1,00,000) 1,60,000

Debtors (includes bad of Rs. 10,000) 90,000
Stock in trade (Realisation value 10,000) 15,000
Cash in Hand/Bank 10,000

He maintained books upto 31.3.2000 and profit upto 31.3.2000 was Rs. 1,40,000. He did not
maintain books from 1.4.2000 onwards. He has been drawing Rs. 4,000 per month and goods
worth Rs. 1,500 per month uniformly from April, 2000 onwards.
Prepare statement of affairs and deficiency account. (16 marks) (PE-II–May 2003)
Answer
Statement of Affairs as on 31.3.2003
Rs. Rs. Rs. Rs. Rs.
1,80,000 Unsecured creditors Property as per list E
As per list A 1,80,000 Cash in hand 10,000 10,000
1,00,000 Creditors fully Stock in hand 15,000 10,000
secured as per list B
1,00,000 Books debts as per
list F
Estimated value of Good 80,000 80,000
Security 1,00,000 Nil Bad 10,000 Nil
Nil Creditors partly 1,00,000
secured as per list C Nil
Deduct creditors for
8,000 Creditors for taxes, wages as per list D 8,000
wages etc. being 92,000
payable in full as per
list D 8,000 Deficiency as
explained in
_______ Deducted as per contra 8,000 _______ list H 88,000
2,88,000 1,80,000 1,80,000

Deficiency Account (List H)

Rs. Rs.
Excess of assets over Net loss arising from carrying on of
liabilities on 1.7.1997 2,00,000 business from 1.4.2000 to the date of
Net profit upto 31.3.2000 1,40,000 adjudication (W.N. 2) 1,55,000

Deficiency 88,000 Loss on realisation of

 Insolvency Accounts of Non-Corporate Entities 7.3

Building 60,000
Stock in trade 5,000
Debtors 10,000
Drawings for household expenses since
_______ 1.4.2000 1,98,000
4,28,000 4,28,000
Working Notes:
(1) The unsecured creditors in this case will be as follows:
Rs.
Sundry Creditors 1,50,000
Godown Rent 5,000
Mrs. Ram loan 25,000
(Since loan was given out of her own sources)
1,80,000
(2) Since accounts were not prepared for the period of 1.4.2000 to 31.3.2003 it is necessary
to ascertain the profit or loss incurred in these three years. Hence, the following trial
balance has been prepared with the given book figures.
Trial Balance
Dr. Cr.
Rs. Rs.
Building 1,60,000 Capital introduced 2,00,000
Book debt Add: Profit upto
Good 80,000 30.3.2000 1,40,000

Bad 10,000 90,000 3,40,000

Stock in trade 15,000 Less: Drawings for

Cash in hand/bank 10,000 (Rs. 5,500 × 36
Loss (balancing figure) 1,55,000 months) 1,98,000 1,42,000
Creditors 1,50,000
Mortgage on building 1,00,000
Godown rent 5,000
Wages due 8,000
_______ Mrs. Ram’s loan 25,000
4,30,000 4,30,000
7.4 Accounting

Question 2
Mr. Shankar of Mumbai finding himself unable to meet his creditors, has to prepare a
Statement of Affairs, for which the following particulars are available on the date of his
adjudication as Insolvent as on 31.03.2003:
Leasehold property Rs. 2,00,000, estimated to realise, Rs. 1,90,000.
Plant & Machinery Rs. 80,000, estimated to realise Rs. 60,000.
Stock in Trade Rs. 40,000, estimated to realise Rs. 28,000.
Bookdebts: Good Rs. 1,20,000, Doubtful Rs. 10,000, estimated to realise 50%, Bad Rs.
28,000, Bills in Hand Rs. 7,500.
Life Policy for Rs. 50,000, whose Surrender value is Rs. 10,000 held by the insurance
company against a loan of Rs. 4,000.
Household Furniture Rs. 7,200, Household Debts Rs. 5,800.
Bills Discounted Rs. 12,000, Rs. 4,000 likely to be dishonoured.
Loan on Mortgage of Leasehold Rs. 1,00,000, Cash in Hand Rs. 200.
Bank Overdraft secured by Personal Guarantee of Shankar’s Brother, and Second Mortgage
on Leasehold Rs. 1,00,000.
Unsecured Creditors Rs. 3,00,000. Loan from Naresh Rs. 5,000 secured by a Second charge
on Life Policy. Ground Rent on Household for three months accrued Rs. 750.
He could not pay his office clerks (two persons) salaries for six months Rs. 3,000 and also
Rates & Taxes amounting to Rs. 3,000 due to Government.
Prepare Statement of Affairs of Mr. Shankar as on 31.03.2003. (16 marks) (PE-II–May 2004)

Answer
Statement of Affairs of Mr. Shankar as on 31.3.2003
Gross Liabilities (as stated Expected Assets (as stated and Book Value Estimated
Liabilities and estimated by to Rank estimated by Debtor) to Produce
Debtor)
Rs. Rs. Rs. Rs. Rs.
Unsecured Creditors Properties as per List E

3,20,700 as per List A 3,12,700 viz.,

Creditors fully (a) Cash 200 200

1,09,000 secured as per list B 1,09,000 (b) Stock in trade 40,000 28,000
Estimated value of (c) Plant & Machinery 80,000 60,000
Securities 2,00,000 (d) Furniture 7,200 7,200

Surplus 91,000 Book Debts as per List F

 Insolvency Accounts of Non-Corporate Entities 7.5

Less: Amount thereof Good 1,20,000 1,20,000

carried to List C 90,000 Doubtful 10,000 5,000

Balance thereof to Bad 28,000 

contra 1,000 Bills of Exchange as per

Creditors partly List G 7,500

1,00,000 secured as per List C 1,00,000 Estimated to realize 7,500

Less: Estimated Surplus from Securities in
value of Securities 90,000 10,000 the hands of creditors

Preferential Creditors fully secured (as per

(Creditors for contra) _______ 1,000

Salaries and Wages, 2,92,900 2,28,900

Rent etc.) payable in Deduct Preferential

3,850 full as per List D 3,850 Creditors (as

Deducted as per per Contra) 3,850

contra 3,850 2,25,050

Deficiency as explained

in List H 97,650

5,33,550 3,22,700 3,22,700

Working Notes:
1. Unsecured Creditors as per List A
Rs.
Household Debts 5,800
Bills Discounted likely to be dishonoured 4,000
Unsecured Creditors 3,00,000
Two months rent (one month rent is preferential) 500
Clerk’s Salary (in excess of 300/- per clerk) (3,000 – 600) 2,400
Unsecured Creditors 3,12,700

The gross liabilities of unsecured creditors includes full amount of discounted bills.
7.6 Accounting

2. Fully Secured Creditors as per List B

Amount Security
Rs. Rs.
Loan from Insurance Company 4,000 10,000
Naresh 5,000
Loan on Mortgage of Leasehold 1,00,000 1,90,000
1,09,000 2,00,000

Note: Since the Surrender Value is Rs. 10,000, both the Insurance Company and Naresh
can be fully covered leaving a surplus of Rs. 1,000.
3. Partly Secured Creditors as per List C
The bank will be partly secured because after meeting the first charge on Leasehold, Rs.
90,000 will be left which is insufficient to meet Bank overdraft fully. The personal
Guarantee of Shankar’s brother cannot be considered for preparing Shankar’s statement
of affairs.
4. Preferential Creditors as per List D
Rs.
One month’s rent 250
Salaries of two clerks (Rs. 300  2) 600
Rates and Taxes 3,000
Preferential Creditors 3,850
Note: As shankar is a resident of Mumbai, the Presidency Towns Insolvency Act, 1909
will apply to him, and accordingly Preferential Creditors shall be calculated.

Question 3
Following is the Balance Sheet of Mr. Brown as at 31st March, 2005. He has filed a petition in
the court for being declared as insolvent:
Liabilities Rs. Assets Rs.
Capital 18,000 Goodwill 5,000
Bank loan (secured by first Machinery 20,000
charge on building) 80,000 Building 1,15,000
Loan from Finance Co., 30,000 Investment in shares 5,000
(secured by second charge Furniture 7,000
on building) Stock 9,000
Sundry creditors 59,000 Debtors:
Sales tax payable 8,000 Good 14,000
 Insolvency Accounts of Non-Corporate Entities 7.7

Loan from wife 5,000 Doubtful 8,000

Bad 2,000 24,000
_______ Cash and bank 15,000
2,00,000 2,00,000

Mr. Brown estimated that except the following, all tangible assets are realisable:
(i) A machinery Rs. 5,000 included in the Balance Sheet has no value.
(ii) Debtors (unrealisable) Rs. 7,600.
(iii) Non-moving stock Rs. 3,000.
(iv) Useless furniture Rs. 4,000.
(v) Investment has no value.
Further Information:
(i) Building expected to realise Rs. 1,20,000.
(ii) Loan was given by his wife from her personal sources.
(iii) A bill discounted for Rs. 10,000 is likely to be dishonoured.
(iv) One creditor forgoes his claim for Rs. 4,000.
(v) Mr. Brown started his business on 1.4.2001. His household expenses upto 31.3.2005 is
Rs. 48,000. His private Life Insurance Policy matured for Rs. 30,000 on 31.3.2005.
He made profit of Rs. 40,000 upto 31.3.2003.
He incurred loss of Rs. 50,000 from 1.4.2003 to 31.3.2005.
Also, he suffered speculation loss of Rs. 10,000 in the year ended 31.3.2005.
Based on the above information, prepare Statement of Affairs of Mr. Brown as on 31.3.2005
and Deficiency Account. (16 marks) (PE-II – May 2005)

Answer
Statement of Affairs of Mr. Brown as on 31st March, 2005
Dr. Cr.
Gross Liabilities Expected Assets Book Estimated
Liabilities (as stated and estimated to Rank (as stated and estimated Value to
by debtor) by debtor) produce

Rs. Rs. Rs. Rs. Rs.

74,000 Unsecured creditors as Properties as per List E
per List A 70,000
80,000 Creditors fully secured as Cash and Bank 15,000 15,000
per List B 80,000 Stock 9,000 6,000
Less: Estimated value of Machinery 20,000 15,000
7.8 Accounting

securities 1,20,000 Furniture 7,000 3,000

Surplus 40,000 Goodwill 5,000 
Less: Amount carried to Investment in shares 5,000 
List C 30,000 Book debts as per List F
Balance thereof to contra 10,000  Good 14,000 14,000
30,000 Creditors partly secured as Doubtful 8,000 2,400
per List C 30,000 Bad 2,000 
Less: Surplus carried from
85,000 55,400
List B 30,000 Surplus from securities in
Balance   the hands of fully
8,000 Preferential creditors secured creditors
payable in full as per List D (as per contra) 10,000
65,400
Sales tax payable 8,000 Less: Preferential
Less: Deducted as per creditors as per contra 8,000
contra 8,000 
57,400
Add: Deficiency as
explained in List H 12,600
1,92,000 70,000 70,000

Deficiency Account (List H)

Rs. Rs. Rs.
Excess of assets over Net loss arising from business
liabilities as on 01.04.2001 56,000 since 01.04.2003 50,000
(Balancing figure) Bad debts as per list F 7,600
Net profit arising from Drawings for household expenses 48,000
business upto 31.03.2003 40,000 Loss on realisation of :
Profit on realisation of: Furniture 4,000
Building 5,000 Machinery 5,000
Life policy matured 30,000 Stock 3,000
Creditors forgone claims 4,000 Goodwill 5,000
Deficiency as per Investment 5,000 22,000
Statement of Affairs 12,600 Loss on dishonour of bill 10,000
_______ Speculation losses 10,000
1,47,600 1,47,600
 Insolvency Accounts of Non-Corporate Entities 7.9

Question 4
Mr. A is insolvent. He supplies to you the following information as on 31.3.2006:
Rs.
Cash in hand 10,000
Creditors for goods 10,00,000
Taxes due to Government 35,000
Bank loan secured by lien on stock 1,50,000
Furniture (expected to realize Rs 50,000) 75,000
Stock (expected to realize 50%) 6,00,000
Book debts (good) 4,50,000
Book debts (doubtful) expected to realize 40% 5,50,000
Bills discounted (Rs.40,000 bad) 1,40,000
Loan from Nathan secured by second charge on stock 2,00,000
Bills receivable (Rs.40,000 bad) 1,00,000
Mr. A started business four years ago with a capital of Rs.4,50,000. He drew Rs.75,000 each year
for private purposes, but did not maintain proper books of accounts. Mrs. A gave up her jewellery
valued Rs.1,00,000 to the receiver.
Prepare Statement of Affairs of Mr. A as on 31.3.2006 and Deficiency Account as on that date.
(16 Marks) (PE II- May, 2007)
Answer
Statement of Affairs of Mr. ‘A’ as on 31.3.2006
Gross Liabilities Expected Property & Assets Book Expected
Liabilities to Rank Value to produce
Rs. Rs. Rs. Rs.
11,40,000 Unsecured creditors as Properties as per
per list A 10,40,000 list E :
1,50,000 Fully Secured Creditors Cash in Hand 10,000 10,000
as per List B (Bank Loan) 1,50,000 Furniture 75,000 50,000
Less: Estimated value of Jewellery from - 1,00,000
stock 3,00,000 wife
1,50,000 Book debts as per
Surplus transferred to - List F:
List C 1,50,000
2,00,000 Partly secured creditors Good 4,50,000 4,50,000
as per List C (Loan from
Nathan) 2,00,000
Surplus transferred from Doubtful 5,50,000 2,20,000
List B 1,50,000 50,000
35,000 Preferential creditors as Bills Receivable
per list D (Taxes due to as per List G 1,00,000 60,000
Government) 35,000
Deducted as per contra 35,000 - 11,85,000 8,90,000
Less: Preferential
7.10 Accounting

creditors as per
contra 35,000
8,55,000
Deficiency as
explained in List H 2,35,000
15,25,000 10,90,000 10,90,000
Deficiency Account (List H)
Rs. Rs. Rs.
Excess of Assets over Liabilities 4,50,000 Bad debts as per List 3,30,000
F
Accumulated Profit up to 31st March, 2,50,000 Drawings (75,000x4) 3,00,000
2006 (Refer Working Note 2) Other Losses:
Profit from other sources: Jewellery from Loss on realization of
wife 1,00,000 Furniture 25,000
Deficiency as per Statement of Affairs 2,35,000 Stock 3,00,000
Bills receivable 40,000 3,65,000
Loss on Bills Discounted 40,000
10,35,000 10,35,000
Working Notes:
1. Calculation of unsecured creditors as per List A
Gross Expected to Rank
Rs. Rs.
Creditors for Goods 10,00,000 10,00,000
Liabilities for Bills Discounted 1,40,000 40,000
11,40,000 10,40,000
2. Calculation of Accumulated Profit/Loss
Trial Balance
Debit Rs. Credit Rs.
Cash 10,000 Creditors 10,00,000
Furniture 75,000 Taxes due to Government 35,000
Stock 6,00,000 Bank Loan 1,50,000
Debtors (4,50,000 + 5,50,000) 10,00,000 Loan from Nathan 2,00,000
Bills Receivable 1,00,000 Capital 4,50,000
Drawings (75,000 x 4) 3,00,000 Accumulated Profit (b/f) 2,50,000
20,85,000 20,85,000
 8
COMPANY ACCOUNTS - I

UNITS 1 – 4 : ISSUE, REDEMPTION AND CONVERSION OF SHARES

AND DEBENTURES
(A) Write short notes on :
Question 1
Conditions to be fulfilled by a Joint Stock Company to buy-back its equity shares.
(4 marks) (Intermediate–Nov. 2001)
Answer
As per section 77A of the Companies Act, 1956 a joint stock company has to fulfill the following
conditions to buy-back its own equity shares:
(a) The buy-back is authorised by its articles.
(b) A special resolution has been passed in general meeting of the company authorising the
buy-back.
(c) The buy-back does not exceed 25% of the total paid up capital and free reserves of the
company. Provided the buy–back must not exceed 25% of its total paid up equity capital in
that financial year.
(d) The ratio of the debt owed by the company is not more than twice the capital and its free
reserves after such buy-back.
(e) All the shares for buy-back are fully paid up.
(f) The buy-back is made out of the free reserves (which include securities premium) or out of
the proceeds of a fresh issue of any shares or other specified securities.
(g) The buy-back is completed within 12 months of the passing of the special resolution or a
resolution passed by the Board.
(h) The buy-back of the shares listed on any recognised stock exchange is in accordance with
the regulations made by the SEBI in this behalf.
(i) Before making such buy-back, a listed company has to file with the Registrar and the SEBI a
declaration of solvency in the prescribed form.


If the buy-back by the company is or less than 10% of the total paid-up equity capital and free reserves of
the company then it can be authorised by the Board by means of resolution passed at its meeting and no
special resolution will be required.
8.2 Accounting

Questions 2
Sweat equity shares and conditions, which must be fulfilled by a Joint Stock Company to issue
these shares. (4 marks)(Intermediate–Nov. 2001)
Answer
The Companies (Amendment) Act, 1999 introduced through section 79A a new type of equity
shares called ‘Sweat Equity Shares. The expression ‘sweat equity shares’ means equity shares
issued by a company to its employees or directors at a discount or for consideration other than
cash for providing know-how or making available rights in the nature of intellectual property rights
or value additions by whatever name called.
Notwithstanding anything contained in section 79, which deals with the power of a company to
issue shares at a discount, a company may issue sweat equity shares of a class of shares already
issued, if the following conditions are fulfilled, namely:-
(i) the issue of sweat equity shares is authorised by a special resolution passed by the company
in the general meeting.
(ii) the resolution specifies the number of shares, current market price, the consideration if any,
and the class or classes of directors or employees to whom such equity shares are to be
issued.
(iii) not less than one year has, at the time of the issue, elapsed since the date on which the
company was entitled to commence business.
(iv) the sweat equity shares of company, whose equity shares are listed on a recognised stock
exchange, are issued in accordance with the regulations made by the Securities and
Exchange Board of India in this behalf. But in the case of company whose equity shares are
not listed on any recognised stock exchange, the sweat equity shares are issued in
accordance with the guidelines as may be prescribed.
All the limitations, restrictions and provisions relating to equity shares are applicable to sweat
equity shares also.
Question 3
Dividend on partly paid shares. (4 marks) (Intermediate May 2002)
Answer
In the case of partly paid-up shares, the dividend is payable either on the nominal, called-up or the
paid-up amount of shares, depending on the provisions in this regard that there may be in the
articles of the company. In the absence of any such provisions, Table A should be applicable. In
such a case the amount of dividend payable will be calculated on the amount paid-up on the
shares, and while doing so, the dates on which the amounts were paid must be taken into account.
Calls paid in advance do not rank for payment of dividend. A company may if so authorised by its
articles, pay a dividend in proportion to the amount paid on each share, where a larger amount is
paid on some shares than on others (Section 93 of the Companies Act, 1956). But where the
articles are silent and Table A has been excluded, the amount of dividend payable will have to be
calculated on the nominal amount of shares. It should, however, be noted that according to Clause
88 of Table A dividends are to be declared and paid according to the amounts paid or credited as
 Company Accounts - I 8.3

paid on the shares in respect whereof the dividend is paid, but if and so long as nothing is paid
upon any of the shares of the company, dividends may be declared and paid according to the
nominal amount of the shares.
Question 4
State the guidelines of SEBI regarding issue of convertible debentures for disclosure and investor
protection. (8 marks) (Intermediate–Nov. 1998)
Answer
SEBI guidelines regarding issue of convertible debentures for disclosure and investor protection
are as follows :
(i) Issue of Fully Convertible Debentures (FCDs) having a conversion period of more than 36
months will not be permissible, unless conversion is made optional with “put” and “call”
option.
(ii) No company shall make a public issue or rights issue of debts instruments (whether
convertible or not), unless credit rating of not less than investment grade is obtained from not
less than two registered credit rating agencies and disclosed in the offer document. All the
credit ratings including the unaccepted credit ratings shall be disclosed.
(iii) All the credit ratings obtained during the 3 years preceding the public or rights issue of
convertible debentures for any listed security of the issuer company shall be disclosed in the
offer document.
(iv) No company shall issue a prospectus or a letter of offer to the public for subscription of its
debentures without the appointment of a debenture trustees or creation of Debenture
Redemption Reserve, in accordance with the provisions of the Companies Act, 1956. The
names of the debenture trustees shall be stated in the Offer Document and also in all the
subsequent periodical communication. Also a trust deed shall be executed within 3 months of
the closure of the issue.
(v) The merchant banker shall ensure that the security created is adequate to ensure 100%
asset cover for the debentures and is free from any encumbrances and also the necessary
permissions to mortgage the assets or No objection certificate for a second or pari passu
charged in cases where assets are encumbered have been obtained.
(vi) Premium amount on conversion and time of conversion, shall be predetermined by the issuer
company and stated in the prospectus. Interest rates for the above debentures will also be
freely determined by the issuer company.
(vii) Any conversion in part or whole of the debentures will be optional in the hands of the
debentureholders, if the conversion takes place at or after 18 months from the date of
allotment, but before 36 months.
(viii) Premium amount at the time of conversion for the Partly Convertible Debentures (PCD) shall
be predetermined and stated in the prospectus. Redemption amount, period of maturity, yield
on redemption for the PCDs or NCDs shall also be indicated in the prospectus.
(ix) In case, the non-convertible portions of PCDs or NCDs are to be rolled over with or without
change in the interest rate, a compulsory option should be given to those debentureholders
who want to withdraw and encash from the debenture programme. Roll over shall be done
8.4 Accounting

only in cases where debentureholders have sent their positive consent and not on the basis
of the non-receipt of their negative reply.
(x) Before roll over of any NCDs or non-convertible portion of the PCDs, at least two credit
ratings of not less than investment grade shall be obtained within a period of six months prior
to the due date of redemption and communicated to debentureholders before roll over and
fresh trust deed shall be made.
(xi) Letter of information regarding roll over shall be vetted by SEBI with regard to the credit
ratings, debentureholder’s resolution, option for conversion and such other items which SEBI
may prescribe from time to time.
(xii) The disclosures relating to raising of debentures will contain, amongst other things, the
existing and future equity and long term debt ratio, servicing behaviour on existing
debentures, payment of due interest on due dates on long term loans and debentures,
certificate from a financial institution or bankers about their no objection for a second or pari
passu charge created in favour of the trustees to the proposed debenture issues.
(xiii) SEBI may prescribe additional disclosure requirement from time to time, after due notice.
(B) Practical Questions:
Question 1
The following is the Balance Sheet of Trinity Ltd. as at 31.3.1995 :
Trinity Ltd.
Balance Sheet as at 31st March, 1995
Liabilities Rs. Assets Rs.
Share Capital Fixed Assets
Authorised Gross Block 3,00,000
10,000 10% Redeemable Preference Less : Depreciation 1,00,000
Shares of Rs. 10 each 1,00,000 2,00,000
90,000 Equity Shares of Rs. 10 each 9,00,000 Investments 1,00,000
10,00,000 Current Assets and Loans
and Advances
Issued, Subscribed and Paid-up Capital
10,000 10% Redeemable Preference Inventory 25,000
Shares of Rs. 10 each 1,00,000 Debtors 25,000
10,000 Equity Shares of Rs. 10 each 1,00,000 Cash and Bank Balances 50,000
(A) 2,00,000 Misc. Expenditure to the extent
Reserves and Surplus not written of 20,000
General Reserve 1,20,000
Securities Premium 70,000
 Company Accounts - I 8.5

Profit and Loss A/c 18,500

(B) 2,08,500
Current Liabilities and Provisions (C) 11,500
Total (A + B + C) 4,20,000 Total 4,20,000
For the year ended 31.3.1996, the company made a net profit of Rs. 15,000 after providing Rs.
20,000 depreciation and writing off the miscellaneous expenditure of Rs. 20,000.
The following additional information is available with regard to company’s operation :
1. The preference dividend for the year ended 31.3.1996 was paid before 31.3.1996.
2. Except cash and bank balances other current assets and current liabilities as on 31.3.1996,
was the same as on 31.3.1995.
3. The company redeemed the preference shares at a premium of 10%.
4. The company issued bonus shares in the ratio of one share for every equity share held as on
31.3.1996.
5. To meet the cash requirements of redemption, the company sold a portion of the investments,
so as to leave a minimum balance of Rs. 30,000 after such redemption.
6. Investments were sold at 90% of cost on 31.3.1996.
You are required to
(a) Prepare necessary journal entries to record redemption and issue of bonus shares.
(b) Prepare the cash and bank account.
(c) Prepare the Balance Sheet as at 31st March, 1996 incorporating the above transactions.
(20 marks) (Intermediate–Nov. 1996)
Answer
Journal Entries in the Books of Trinity Ltd.
Dr. Cr.
Rs. Rs.
Securities Premium A/c Dr. 10,000
To Premium on Redemption of Preference shares 10,000
(Being amount of premium payable on redemption of
preference shares)

10% Redeemable Preference Capital Dr. 10,00,000

Premium on redemption of Preference Shares Dr. 10,000
To Preference Shareholders 1,10,000
(Being the amount payable to preference shareholders
on redemption)
8.6 Accounting

General Reserve A/c Dr. 1,00,000

To Capital Redemption Reserve 1,00,000
(Being transfer to the latter account on redemption
of shares)

Bank A/c Dr. 45,000

Profit and Loss A/c Dr. 5,000
To Investments 50,000
(Being amount realised on sale of Investments and loss
thereon adjusted)

Preference shareholders A/c Dr. 1,10,000

To Bank 1,10,000
(Being payment made to preference shareholders)

Capital Redemption Reserve A/c Dr. 1,00,000

To Bonus to Shareholders 1,00,000
(Amount adjusted for issuing bonus share in the ratio of 1 : 1.)

Bonus to Shareholders A/c Dr. 1,00,000

To Equity Share Capital 1,00,000
(Balance on former account transferred to latter)

(b) Cash and Bank A/c

Dr. Cr.
Rs. Rs.
To Balance b/d 50,000 By Preference Dividend 10,000
To Cash from operations: By Preference shareholders 1,10,000
Profit 15,000 By Balance c/d 30,000
Add : Depreciation 20,000
Add : Miscellaneous
Expenditure
written off 20,000 55,000
To Investments 45,000
1,50,000 1,50,000
 Company Accounts - I 8.7

(c) Balance Sheet of Trinity Limited

as at 31st March, 1996 (after redemption)
Liabilities Rs. Assets Rs.
Share Capital Fixed Assets
Authorised Capital 10,00,000 Gross Block 3,00,000
Issued, Subscribed and Paid-up Less : Depreciation
Capital upto 31.3.95 1,00,000
20,000 Equity Share
of Rs. 10 each fully paid 2,00,000 For the year 20,000 1,20,000 1,80,000
(10,000 shares have been
allotted as Bonus Shares Investments
by capitalising capital (Market Value Rs. 45,000) 50,000
Redemption Reserve) Current Assets, Loans and Advances
Reserves and Surplus
General Reserve 20,000 Inventory 25,000
Securities Premium 60,000 Debtors 25,000
Profit and Loss A/c 18,500 98,500 Cash and Bank Balance 30,000 80,000
Current Liabilities and Provisions
Sundry Creditors 11,500
3,10,000 3,10,000
Working Notes:
(i) Profit and Loss Account for the year ending 31st March, 1996 Rs.
Balance as on 1.4.1995 18,500
Add : Profit for the year 15,000
33,500
Less : Preference Dividend 10,000
Loss on sale of investments 5,000 15,000
Balance as on 31.3.1996 18,500

(ii) General Reserve 1,20,000

Less : Transfer to Capital Redemption Reserve 1,00,000
Balance as on 31.3.1996 20,000
8.8 Accounting

(iii) Securities Premium 70,000

Less : Premium on Redemption of Preference shares 10,000
Balance as on 31.3.1996 60,000

(iv) Capital Redemption Reserve 1,00,000

Less : Transfer for Bonus Shares 1,00,000
Balance as on 31.3.1996 NIL

(v) Sale of Investments:

Cost of Investments 50,000
Less : Cash Received 45,000
Loss on Sale of Investments 5,000
Total Investments: 1,00,000
Less : Cost of Investments sold 50,000
Cost of Investments on hand 50,000
Market value (90% of Rs. 50,000) 45,000
Question 2
The balance sheet of XYZ Ltd. as at 31st December, 1998 inter alia includes the following :
Rs.
50,000 8% Preference shares of Rs. 100 each Rs. 70 paid up 35,00,000
1,00,00 Equity shares of Rs. 100 each fully paid up 1,00,00,000
Securities premium 5,00,000
Capital redemption reserve 20,00,000
General reserve 50,00,000
Under the terms of their issue, the preference shares are redeemable on March 31, 1999 at a
premium of 5%. In order to finance the redemption, the company makes a right issue of 50,000
equity shares of Rs. 100 each at Rs. 20 being payable on application, Rs. 35 (including premium)
on allotment and the balance on January 1, 2000. The issue was fully subscribed and allotment
made on March 1, 1999. The monies due on allotment were received by March 30, 1999.
The preference shares were redeemed after fulfilling the necessary conditions of Section 80 of the
Companies Act, 1956. The company decided to make the minimum utilisation of general reserve.
You are asked to pass the necessary jounal entries and show the relevant extracts from the
Balance Sheet as on March 31, 1999 with the corresponding figures as on 31st December, 1998.
(14 marks) (Intermediate–Nov. 1999)
 Company Accounts - I 8.9

Answer
XYZ Ltd.
Journal Entries
Dr. Cr.
Rs. ‘000 Rs. ‘000
8% Preference Share Final Call Account Dr. 15,00
To 8% Preference Share Capital Account 15,00
(Being the final call made on 50,000 preference shares
@ Rs. 30 each to make them fully paid up)

Bank Account Dr. 15,00

To 8% Preference Share Final Call Account 15,00
(Being the final call amount received on 50,000
preference shares @ Rs. 30 each)

Bank Account Dr. 10,00

To Equity Share Application Account 10,00
(Being the application money received on 50,000
equity shares @ Rs. 20 per share)

Equity Share Application Account Dr. 10,00

To Equity Share Capital Account 10,00
(Being the application money on 50,000 equity shares
transferred to equity share capital account vide Board’s
resolution dated...)
Equity Share Allotment Account Dr. 17,50
To Equity Share Capital Account 12,50
To Securities Premium Account 5,00
(Being the amount due on 50,000 equity shares @ Rs. 35
per share [including premium Rs.] 10 vide Board’s
resolution dated...)

Bank Account Dr. 17,50

To Equity Share Allotment Account 17,50
(Being the allotment money received on 50,000 equity
shares @ Rs. 35 per share)
8.10 Accounting

8% Preference Share Capital Account Dr. 50,00

Premium on Redemption of Preference Shares Account Dr. 2,50
To Preference Shareholders Account 52,50
(Being the amount payable to preference share holders
on redemption)

Preference Shareholders Account Dr. 52,50

To Bank Account 52,50
(Being the payment made to preference shareholders)

Securities Premium Account Dr. 2,50

To Premium on Redemption of Preference Shares
Account 2,50
(Being the premium payable on redemption of preference
shares charged to share premium account)

General Reserve Dr. 27,50

To Capital Redemption Reserve 27,50
(Being the amount transferred to capital redemption
reserve on redemption of preference shares for the
balance not covered by proceeds of fresh issue of shares)

Balance Sheet of XYZ Limited

As at 31st March, 1999 (after redemption of preference shares)
(Relevant extracts)
Amount Amount
Rs. (‘000) Rs. (‘000)
As on As on
31.3.99 31.12.98
1. Sources of funds
Shareholders’ funds :
(a) Share Capital
Issued, subscribed and paid-up
1,00,000 equity shares of Rs. 100 each, fully paid up 1,00,00 1,00,00
50,000 equity shares of Rs. 100 each,
Rs. 45 called up and paid up 22,50 —
50,000, 8% Redeemable preference shares of
 Company Accounts - I 8.11

Rs. 100 each, Rs. 70 called-up and paid-up

(redeemed on 31st March, 1999) — 35,00
1,22,50 1,35,00
(b) Reserves and Surplus :
Capital redemption reserve 47,50 20,00
Securities premium account 7,50 5,00
General reserve 22,50 50,00
77,50 75,00
The cash and bank balance will be decreased by Rs. 10,00,000 on 31.3.99 as compared to the
balance on 31.12.98.
Working Notes :
Rs. ‘000
(i) Transfer to capital redemption reserve
Nominal value of preference shares redeemed (Rs. 100 × 50,000) 50,00
Less : Proceeds of fresh equity issue [(Rs. 20 + 25) × 50,000)] 22,50
Transfer to capital redemption reserve 27,50
(ii) Capital redemption reserve as on 31.3.99
Balance as on 31.12.98 20,00
Add : Transfer from general reserve 27,50
Balance as on 31.3.99 47,50
(iii) General reserve as on 31.3.99
Balance as on 31.12.98 50,00
Less : Transfer to capital redemption reserve 27,50
Balance as on 31.3.99 22,50
(iv) Securities premium as on 31.3.99
Balance as on 31.12.98 5,00
Add : Amount received @ Rs. 10 per share on fresh issue of 50,000 equity shares 5,00
10,00
Less : Premium on redemption of preference shares 2,50
Balance as on 31.3.99 7,50
(v) Change in cash and bank balance
Receipts : (31.12.98 - 31.3.99)
8.12 Accounting

Application money on 50,000 equity shares @ Rs. 20 per share 10,00

Allotment money on 50,000 equity shares @ Rs. 35 per share 17,50
Final call on 50,000, 8% Preference shares @ Rs. 30 per share 15,00
42,50
Payments :
Amount paid to preference shareholders on redemption 52,50
Reduction in cash and bank balance 10,00
Question 3
Provisional Balance Sheet of P Ltd. as at 31st March, 2001 was as under:
Balance Sheet as at 31st March, 2001
Liabilities Rs. Rs. Assets Rs.
Share Capital Fixed Assets (at cost less
50,000 equity shares of Rs. 10 depreciation) 7,00,000
each, Rs. 7 per share called up 3,50,000 Cash & Bank balances 2,00,000
Less : Calls in arrear on 10,000 Other Current assets 6,00,000
shares @ Rs. 2 per share 20,000
3,30,000
Add : Calls in advance on
40,000 shares @
Rs. 3 per share 1,20,000 4,50,000
20,000, 10% Redeemable preference
shares of Rs. 10 each, fully paid up 2,00,000
Reserves & Surplus :
General Reserve 3,00,000
Profit & Loss Account 2,70,000
Current Liabilities 2,80,000
15,00,000 15,00,000

Calls in arrear are outstanding for 6 months. Calls in advance were also received 6 months back.
Interest @ 10% p.a. on calls in advance and 12% p.a. on calls in arrear are allowed/charged.
The Board of Directors have recommended that:
(i) Dividend for the year 2000-01 be allowed @ 20% on equity shares.
(ii) Money on calls in advance be refunded and partly paid equity shares be converted as fully
paid up by declaring bonus dividend to shareholders.
(iii) The preference shares, which are redeemable at a premium of 10% any time after 31st
March, 2001 may be redeemed by issue of 10% Debentures of Rs. 100 in cash.
 Company Accounts - I 8.13

Show Journal Entries to give effect to the above proposals including payment and receipt of cash
and redraft the Profit and Loss Account and Balance Sheet of P Ltd.
(20 marks) (Intermediate–Nov. 2001)
Answer
Journal Entries
P Ltd.
Dr. Cr.
Rs. Rs.
Interest on Calls in Arrear A/c Dr. 1,200
To Profit & Loss A/c 1,200
(Being interest @ 12 % p.a. on Rs. 20,000 for 6 months
credited to Profit and Loss Account)

Bank A/c Dr. 21,200

To Calls in Arrear A/c 20,000
To Interest on Calls in Arrear A/c 1,200
(Being interest on calls in arrear received)

Profit & Loss A/c Dr. 6,000

To Interest on Calls in Advance A/c 6,000
(Being interest @ 10% on Rs. 1,20,000 for 6 months
allowed on calls in advance)

Profit & Loss A/c Dr. 90,000

To Preference Dividend 20,000
To Equity Dividend 70,000
(Being dividend @ 10% on Preference share capital &
20% on Equity share capital proposed)

Profit & Loss A/c Dr. 1,50,000

To Bonus to Equity Shareholders A/c 1,50,000
(Being bonus dividend declared)

Share Final Call A/c Dr. 1,50,000

To Equity Share Capital A/c 1,50,000
(Being final call made @ Rs. 3 on 50,000 shares)
8.14 Accounting

Bonus to Equity shareholders A/c Dr. 1,50,000

To Share Final Call A/c 1,50,000
(Being adjustment of bonus dividend against final call)

Calls in Advance A/c Dr. 1,20,000

Interest on Calls in Advance A/c Dr. 6,000
To Bank A/c 1,26,000
(Being amount of calls in advance along with interest
refuned)

Bank A/c Dr. 2,20,000

To 10% Debentures A/c 2,20,000
(Being 2,200 Debentures of Rs.100 each issued in cash)

Profit & Loss A/c Dr. 20,000

To Premium on Redemption of Preference shares A/c 20,000
(Being premium payable on redemption)

Profit & Loss A/c Dr. 5,200

General Reserve A/c Dr. 1,94,800
To Capital Redemption Reserve A/c 2,00,000
(Transfer to capital redemption reserve)
Preference Share Capital A/c Dr. 2,00,000
Premium on Redemption of Preference Shares A/c Dr. 20,000
To Preference Shareholders A/c 2,20,000
(Amount due on redemption of preference shares)
Preference Shareholders A/c Dr. 2,20,000
To Bank A/c 2,20,000
(Amount paid to preference shareholders)

Profit & Loss Account of P Ltd.

for the year ended 31st March, 2001
Rs. Rs.
To Interest on calls in advance 6,000 By Balance b/d 2,70,000
To Balance c/d 2,65,200 By Interest on calls in arrear 1,200
2,71,200 2,71,200
To Premium on redemption 20,000 By Balance b/d 2,65,200
 Company Accounts - I 8.15

To Preference Dividend 20,000

To Equity Dividend 70,000
To Bonus Dividend 1,50,000
To Capital Redemption Reserve 5,200
2,65,200 2,65,200
Balance Sheet of P Ltd.
as on 31st March 2001
Liabilities Rs. Assets Rs.
Share Capital: Fixed Assets 7,00,000
50,000 equity shares of Rs. 10 each (Cost less depreciation)
fully paid up 5,00,000
(Of the above equity shares Cash & Bank balance (W.N.) 95,200
Rs. 3 per share has not been
received in cash but has been capitalised Other Current Assets 6,00,000
by issuing
bonus dividend)
Reserves & Surplus:
Capital Redemption Reserve 2,00,000
General Reserve 3,00,000
Less: utilised for redemption
of preference share 1,94,800 1,05,200
Profit & Loss Account —
10% Debentures 2,20,000
Current liabilities 2,80,000
Proposed dividend 90,000
13,95,200 13,95,200
Working Note :
Cash and Bank balance as on 31st March, 2001
Rs.
Cash and bank balance (given) 2,00,000
Add: Recovery of calls in arrear and interest thereon 21,200
Proceeds from issue of 10% Debentures 2,20,000
4,41,200
Less: Payment of calls in advance and interest thereon 1,26,000
Redemption of preference shares 2,20,000
95,200
8.16 Accounting

Note : In the absence of information, it has been assumed that the amount of calls in arrear has
been received in the given solution. It has been assumed that 20% dividend on equity
shares has been proposed before the equity shares are made fully paid by way of bonus
dividend.
Question 4
The financial position of P Limited at 31st December, 2001 was as follows:
Liabilities Rs. Assets Rs.
Authorised, Issued and Subscribed Capital Assets 8,40,000
Cash and Bank 3,00,000
40,000, 5 % Redeemable Preference shares of
Rs. 10 each, fully paid 4,00,000
20,000 Equity shares of Rs. 10 each, fully paid 2,00,000
Securities Premium Account 50,000
Profit and Loss Account 2,80,000
Sundry Liabilities 2,10,000
11,40,000 11,40,000
As per the terms of issue of the Preference Shares these were redeemable at a premium of 5 % on
1st February, 2002 and it was decided to arrange this as far as possible out of the company’s
resources subject to leaving a balance of Rs. 50,000 in the credit of the Profit and Loss Account. It
was also decided to raise the balance amount by issue of 17,000 Equity Shares of Rs. 10 each at a
premium of Rs. 2.50 per share.
You are required to prepare the necessary Ledger Accounts giving effect to the above arrangments
in the company’s books. Journal Entries are not required. (6 marks) (Intermediate–May 2002)
Answer
5% Redeemable Preference Share Capital Account
2002 Rs. 2000 Rs.
Feb. 1 To Preference Share holders A/c 4,00,000 Jan. 1 By Balance b/d 4,00,000
4,00,000 4,00,000
Preference Shareholders Account
2002 Rs. 2002 Rs.
Feb. 1 To Bank A/c 4,20,000 Feb. 1 By 5% Redeemable
Preference Share
Capital A/c 4,00,000
By Premium on
Redemption A/c 20,000
4,20,000 4,20,000
 Company Accounts - I 8.17

Premium on Redemption Account

2002 Rs 2002 Rs.
Feb. 1 To Preference Share-holders A/c 20,000 Feb. 1 By Securities Premium A/c 20,000
Equity Shares Application and Allotment Account
2002 Rs. 2002 Rs.
Feb. 1 To Equity Share Feb. 1 By Bank A/c 2,12,500
Capital A/c 1,70,000
To Securities
Premium A/c 42,500
2,12,500 2,12,500
Capital Redemption Reserve Account
2002 Rs. 2002 Rs.
Feb. 1 To Balance c/d 2,30,000 Feb. 1 By Profit and Loss A/c 2,30,000
2,30,000 2,30,000
Equity Share Capital Account
2002 Rs. 2002 Rs.
Feb. 1 To Balance 3,70,000 Jan. 1 By Balance b/d 2,00,000
Feb. 1 By Equity shares
application and
allotment A/c 1,70,000
3,70,000 3,70,000
Securities Premium Account
2002 Rs. 2002 Rs.
Feb. 1 To Premium on Jan. 1 By Balance b/d 50,000
Redemption A/c 20,000 Feb. 1 By Equity Shares Application
To Balance c/d 72,500 and Allotment A/c 42,500
92,500 92,500
Profit and Loss Account
2002 Rs. 2002 Rs.
Feb. 1 To Capital Redemption Jan. 1 By Balance b/d 2,80,000
Reserve A/c 2,30,000
To Balance c/d 50,000
2,80,000 2,80,000
8.18 Accounting

Cash and Bank Account

2002 Rs. 2002 Rs.
Jan. 1 To Balance b/d 3,00,000 Feb. 1 By Preference Share 4,20,000
Feb. 1 To Equity Share Holders A/c
By Balance c/d 92,500
Application and
Allotment A/c 2,12,500
5,12,500 5,12,500
Note: No dividend has been paid on preference shares in the above solution. Alternatively,
dividend may be paid at the rate of 5% for one month because the redemption takes place
on 1st February, 2002 assuming that the articles of the company and terms of contract of
company with the preference shareholders provide for such dividend.
Question 5
Libra Limited recently made a public issue in respect of which the following information is available:
(a) No. of partly convertible debentures issued 2,00,000; face value and issue price Rs.100 per
debenture.
(b) Convertible portion per debenture 60%, date of conversion on expiry of 6 months from the
date of closing of issue.
(c) Date of closure of subscription lists 1.5.1994, date of allotment 1.6.1994, rate of interest on
debenture 15% payable from the date of allotment, value of equity share for the purpose of
conversion Rs. 60 (Face Value Rs. 10).
(d) Underwriting Commission 2%.
(e) No. of debentures applied for 1,50,000.
(f) Interest payable on debentures half-yearly on 30th September and 31st March.
Write relevant journal entries for all transactions arising out of the above during the year
ended 31st March, 1995 (including cash and bank entries).
(15 marks) (Intermediate–May 1995)
Answer
In the books of Libra Ltd.
Journal Entries
Date Particulars Amount Dr. Amount Cr.
Rs. Rs.
1.5.94 Bank A/c Dr. 1,50,00,000
To Debenture Application A/c 1,50,00,000
(Application money received on 1,50,000
debentures @ Rs. 100 each)
 Company Accounts - I 8.19

1.6.94 Debenture Application A/c Dr. 1,50,00,000

Underwriters A/c Dr. 50,00,000
To 15% Debentures A/c 2,00,00,000
(Allotment of 1,50,000 debentures to applicants
and 50,000 debentures to underwriters)

Underwriting Commission Dr. 4,00,000

To Underwriters A/c 4,00,000
(Commission payable to underwriters @ 2% on
Rs. 2,00,00,000)

Bank A/c Dr. 46,00,000

To Underwriters A/c 46,00,000
(Amount received from underwriters
in settlement of account)

30.9.94 Debenture Interest A/c Dr. 10,00,000

To Bank A/c 10,00,000
(Interest paid on debentures for
4 months @ 15% on Rs. 2,00,00,000)

30.10.94 15% Debentures A/c Dr. 1,20,00,000

To Equity Share Capital A/c 20,00,000
To Securities Premium A/c 1,00,00,0000
(Conversion of 60% of debentures into shares
of Rs. 60 each with a face value of Rs. 10)

31.3.95 Debenture Interest A/c Dr. 7,50,000

To Bank A/c 7,50,000
(Interest paid on debentures for the half year)
Working Note :
Calculation of Debenture Interest for the half year ended 31st March, 1995
On Rs. 80,00,000 for 6 months @ 15% = Rs. 6,00,000
On Rs. 1,20,00,000 for 1 months @ 15% = Rs. 1,50,000
Rs. 7,50,000
8.20 Accounting

Question 6
Progressive Ltd. issued Rs. 10,00,000, 6% Debenture Stock at par on 21.1.1984, Interest was
payable on 30th June and 31st December, in each year.
Under the terms of the Debentures Trust the owned stock is redeemable at par. The trust deed
obliges the Company to pay to the trustees on 31st December, 1995 and annually thereafter the
sum of Rs. 1,00,000 to be utilised for the redemption and cancellation of an equivalent amount of
stock, which is to be selected by drawing lots.
Alternatively, the Company is empowered as from 1st January, 1995 to purchase its own
debentures on the open market. These Debentures must be surrendered to the Trustees for
cancellation and any adjustments for accrued interest recorded in the books of account. If in any
year the nominal amount of the stock surrendered under this alternative does not amount to Rs.
1,00,000 then the shortfall is to be paid by the Company to the Trustees in cash on 31st
December.
The following purchases of stock were made by the Company:
Nominal value of Purchase price per
stock purchased Rs. 100 of stock
Rs. Rs.
(1) 30th September, 1995 1,20,000 98
(2) 31st May, 1996 75,000 95 (Ex-interest)
(3) 31st July, 1997 1,15,000 92
The Company fulfilled all its obligations under the trust deed.
Prepare the following Ledger Accounts :
(a) Debenture Stock A/c
(b) Debenture Redemption A/c
(c) Debenture Interest A/c
Note : Ignore costs and taxation (15 Marks) (Intermediate–Nov. 1998)
Answer
In the Books of Progressive Ltd.
Debenture Stock Account
1995 Rs. 1995 Rs.
Sept. 30 To Debenture
Redemption A/c 1,20,000 Jan. 1 By Balance b/d 10,00,000
Dec. 31 To Balance c/d 8,80,000
10,00,000 10,00,000
1996 Rs. 1996 Rs.
May 31 To Debenture Jan. 1 By Balance b/d 8,80,000
Redemption A/c 75,000
Dec.31 To Debenture
 Company Accounts - I 8.21

Redemption A/c 25,000

To Balance c/d 7,80,000
8,80,000 8,80,000
1997 Rs. 1997 Rs.
July 31 To Debenture Jan. 1 By Balance b/d 7,80,000
Redemption A/c 1,15,000
Dec.31 To Balance c/d 6,65,000
7,80,000 7,80,000

Debenture Redemption Account

1995 Rs. 1995 Rs.
Sept. 30 To Bank A/c 1,15,800 Sept.30 By Debenture Stock A/c 1,20,000
(Rs. 1,20,000×0.98
– Rs. 1,800)
To Capital Reserve A/c 4,200
1,20,000 1,20,000
1996 Rs. 1996 Rs.
May 30 To Bank A/c 71,250 May 31 By Debenture Stock A/c 75,000
(Rs. 75,000 × 0.95) Dec. 31 By Debenture Stock A/c 25,000
To Capital Reserve A/c 3,750
(Profit on cancellation)
Dec.31 To Bank A/c 25,000
(Shortfall=Rs.1,00,000
– Rs. 75,000)
1,00,000 1,00,000
1997 Rs. 1997 Rs.
July 31 To Bank A/c 1,05,225 July 31 By Debenture Stock A/c 1,15,000
(Rs. 1,15,000 ×.92
– Rs. 575)
To Capital Reserve A/c 9,775
(Profit on cancellation)
1,15,000 1,15,000
8.22 Accounting

Debenture Interest Account

1995 Rs. 1995 Rs.
June 30 To Bank A/c 30,000 Dec. 31 By Profit and Loss A/c 58,200
Sept. 30 To Bank A/c 1,800
Dec. 31 To Bank A/c 26,400
58,200 58,200
1996 Rs. 1996 Rs.
May 31 To Bank A/c 1,875 Dec. 31 By Profit and Loss A/c 50,175
June 31 To Bank A/c 24,150
Dec. 31 To Bank A/c 24,150
50,175 50,175
1997 Rs. 1997 Rs.
June 30 To Bank A/c 23,400 Dec. 31 By Profit and Loss A/c 43,925
July 31 To Bank A/c 575
Dec. 31 To Bank A/c 19,950
43,925 43,925
Working Notes :
Interest paid on Debentures @6% per annum:
Date Amount of Period Interest
Debentures
Rs. Rs.
1995
June 30 10,00,000 6 months 30,000
Sept. 30 1,20,000 3 months 1,800
Dec. 31 8,80,000 6 months 26,400
1996
May 31 75,000 5 months 1,875
June 30 8,05,000 6 months 24,150
Dec. 31 8,05,000 6 months 24,150

1997
June 30 7,80,000 6 months 23,400
July 31 1,15,000 1 month 575
Dec. 31 6,65,000 6 months 19,950
 Company Accounts - I 8.23

Notes : (1) It has been assumed that debentures are purchased for immediate cancellation.
(2) The purchases of 30th September, 1995 and 31st July, 1997 have been taken on
cum-interest basis
Question 7
Pass journal entries in year 1 in the case of the issue of debentures by ABC Co. Ltd.:
Issued Rs. 1,00,000, 11% debentures at 95% redeemable at the end of 10 years.
(i) at 102%, and (ii) at 98% (5 marks) (Intermediate–May 2000)

Answer
ABC Co. Ltd.
Journal Entries
Dr. Cr.
Rs. Rs.
(i) Bank A/c Dr. 95,000
Discount on issue of debentures A/c Dr. 5,000
Loss on issue of debentures A/c Dr. 2,000
To 11% Debentures A/c 1,00,000
To Premium on Redemption of debentures A/c 2,000
(Issue of Rs. 1,00,000 11% debentures at a discount
of 5% but redeemable at a premium of 2%)
(ii) Bank A/c Dr. 95,000
Discount on issue of debentures A/c Dr. 5,000
To 11% Debentures A/c 1,00,000
(Issue of Rs. 1,00,000, 11% debentures at a discount
of 5% and redeemable at discount of 2%)

Question 8
On 1st April, 2007, in MK Ltd’s ledger 9% debentures appeared with a opening balance of Rs.
50,00,000 divided into 50,000 fully paid debentures of Rs. 100 each issued at par.
Interest on debentures was paid half-yearly on 30 th of September and 31 st March every year.
On 31.5.2007, the company purchased 8,000 debentures of its own @ Rs. 98 (ex-interest) per
debenture.
On 31.12.2007 it cancelled 5,000 debentures out of 8,000 debentures acquired on 31.5.2007.
On 31.1.2008 it resold 2,000 of its own debentures in the market @ Rs. 101 (ex-interest) per
debenture.
You are required to prepare:
8.24 Accounting

(i) Own debentures account;

(ii) Interest on debentures account; and
(iii) Interest on own debentures account. (8 Marks) (PE II-Nov. 2008)
Answer
MK Ltd.’s Ledger
(i) Own Debentures Account
Rs. Rs.
31.5.07 To Bank 7,84,000 31.12.07 By 9% Debentures A/c 5,00,000
31.12.07 To Capital Reserve 10,000 31.1.08 By Bank- Resale of 2,02,000
(Profit on 2,000 debentures
cancellation)
31.1.08 To Profit and Loss A/c 6,000 31.3.08 By Balance c/d 98,000
(Profit on resale)
8,00,000 8,00,000

(ii) Interest on Debentures Account

Rs. Rs.
31.5.07 To Bank (Interest for 2 12,000 31.3.08 By Profit and 4,38,750
months on 8,000 Loss A/c
debentures)
30.9.07 To Interest on own
debentures (Interest 24,000
for 4 months on 8,000
debentures)
30.9.07 To Bank (Interest for 6
months on 42,000 1,89,000
debentures)
31.12.07 To Interest on own
debentures (Interest 11,250
for 3 months on 5,000
debentures)
31.3.08 To Interest on own
debentures (Interest
for 6 months on 1,000 4,500
debentures)
31.3.08 To Bank (Interest for 6
months on 44,000
debentures) 1,98,000
4,38,750 4,38,750
 Company Accounts - I 8.25

(iii) Interest on Own Debentures Account

Rs. Rs.
31.3.08 To Profit and 45,750 30.9.07 By Interest on 24,000
Loss A/c Debentures A/c
31.12.07 By Interest on 11,250
Debentures A/c
31.01.08 By Bank (interest for 6,000
4 months on
2,000
debentures)
31.03.08 By Interest on
Debentures 4,500
45,750 45,750

Working Note:
31.5.07 Acquired 8,000 Debentures @ 98 per debenture (ex- Rs.
interest)
Purchase price of debenture 8,000 × Rs. 98 = 7,84,000
Interest for 2 months Rs. 8,00,000 × 9% × 2
12 = 12,000

30.9.07 Interest on own debentures

[Rs. 8,00,000 × 9% × ½ ] less Rs.12,000 = 24,000
Interest on other debentures
Rs. 42,00,000 × 9% × ½ = 1,89,000
31.12.07 Cancellation of 5,000 own debentures
Face value Rs.100 less acquired at Rs.98 = 2 × 5000 = 10,000

31.1.08 Resale of 2,000 Debentures sold for 101 (ex-interest)

acquired for Rs. 98 (ex-interest)
2,000 × Rs.3 per Debenture = 6,000
31.12.07 Interest on cancelled 5,000 debentures
5,000 × Rs.100 × 9% × 1
4 = 11,250
31.3.08 Interest on 1,000 own debentures
Rs. 1,00,000 × 9% × ½ = 4,500
8.26 Accounting

UNIT 5 : FINAL ACCOUNTS OF COMPANIES

Question 1
The Balance Sheet of A Ltd. as at 31.3.1995 is as follows:
Balance Sheet as at 31.3.1995
Liabilities Rs. Assets Rs.
Authorised Share Capital Sundry Assets 17,00,000
1,50,000 Equity Shares of Rs. 10 each 15,00,000
Issued, Subscribed and Paid-up
80,000 Equity Shares of
Rs. 7.50 each called-up and paid-up 6,00,000
Reserves and surplus
Capital Redemption Reserve 1,50,000
Plant Revaluation Reserve 20,000
Securities Premium Account 1,50,000
Development Rebate Reserve 2,30,000
Investment Allowance Reserve 2,50,000
General Reserve 3,00,000
17,00,000 17,00,000
The company wanted to issue bonus shares to its share holders at the rate of one share for every
two shares held. Necessary resolutions were passed; requisite legal requirements were complied
with:
(a) You are required to give effect to the proposal by passing journal entries in the books of A
Ltd.
(b) Show the amended Balance Sheet. (20 marks) (Intermediate–Nov. 1995)
Answer
In the Books of A Ltd.
Journal Entries
Rs. Rs.
(i) Share Final Call A/c Dr. 2,00,000
To Share Capital A/c 2,00,000
(Being the final call of Rs. 2.50 each on 80,000
equity shares made)

(ii) Bank A/c Dr. 2,00,000

To Share Final Call A/c 2,00,000
(Being the amount due on final call received)
 Company Accounts - I 8.27

(iii) General Reserves Dr. 3,00,000

Securities Premium A.c Dr. 1,00,000
To Bonus to Share holders A/c 4,00,000
(Being the appropriation made as above to facilitate
issue of fully paid up bonus shares at the rate of one
share for every two shares held)

(iv) Bonus to Shareholders A/c Dr. 4,00,000

To Equity Share Capital A/c 4,00,000
(Being the issuance of 40,000 fully paid up shares of
Rs. 10 each by way of bonus)

(b) Balance Sheet (after bonus issue)

Liabilities Amount Assets Amount
Authorised Share Capital Bank 2,00,000
1,50,000 equity shares of Rs. 10 each 15,00,000 Sundry Assets 17,00,000
Issued and Subscribed
1,20,000 Equity Shares of Rs. 10 each
fully paid 12,00,000
Of the above, 40,000 equity shares are
allotted as fully paid up by way of bonus
shares
Reserves and Surplus
Capital Redemption Reserve 1,50,000
Securities Premium 50,000
Development Rebate Reserve 2,30,000
Investment Allowance Reserve 2,50,000
Plant Revaluation Reserve 20,000
19,00,000 19,00,000
Question 2
The following is the Trial Balance of Subhash Limited as on 31.3.97 :
(Figures in Rs. ‘000)
Debit Rs. Credit Rs.
Land at cost 110 Equity Capital (Shares of Rs. 10 each) 150
Plant & Machinery at cost 385 10% Debentures 100
8.28 Accounting

Debtors 48 General Reserve 65

Stock (31.3.97) 43 Profit & Loss A/c 36
Bank 10 Securities Premium 20
Adjusted Purchases 160 Sales 350
Factory Expenses 30 Creditors 26
Administration Expenses 15 Provision for Depreciation 86
Selling Expenses 15 Suspense Account 2
Debenture Interest 10
Interim Dividend Paid 9
835 835
Additional Information :
(a) On 31.3.97, the company issued bonus shares to the shareholders on 1 : 3 basis. No
entry relating to this has yet been made.
(b) The authorised share capital of the company is 25,000 shares of Rs. 10 each.
(c) The company on the advice of independent valuer wish to revalue the land at Rs.
1,80,000.
(d) Proposed final dividend 10%.
(e) Suspense account of Rs. 2,000 represents cash received for the sale of some of the
machinery on 1.4.96. The cost of the machinery was Rs. 5,000 and the accumulated
depreciation thereon being Rs. 4,000.
(f) Depreciation is to be provided on plant and machinery at 10% on cost.
You are required to prepare Subhash Limited’s Profit & Loss account for the year ended
31.3.97 and a balance sheet on that date in vertical form as per the provisions of
Schedule VI of the Companies Act, 1956.
Your answer to include detailed schedules only for the following :
(1) Share Capital
(2) Reserves & Surplus
(3) Fixed Assets
Ignore previous years’ figures & taxation. (20 marks) (Intermediate–May 1997)
Answer
Subash Limited
Balance Sheet as at 31.3.97
1 Sources of funds
Schedule
No. (Rs. ‘000)
(1) Shareholders funds
(a) Capital 1 200
(b) Reserves & Surplus 2 200 400
(2) Loan funds
 Company Accounts - I 8.29

10% Debentures 100

Total 500
II Application of funds
(1) Fixed Assets: 3
Land 180
Gross Block (385 - 5) 380
Less: Depreciation
(86 + 38 - 4) 120 260 440
(2) Current assets:
Stock 43
Debtors 48
Cash 10 101
Less: Current Liabilities:
Creditors 26
Proposed dividend 15 41 60
Total 500

Subash Limited
Profit & Loss Account for the year ended 31.3.97
(Rs. ‘000)
Sales 350
Other income (profit on sale of machinery) 1
Total income 351
Less : Expenses:
Purchases 160
Factory expenses 30
Administration expenses 15
Selling expenses 15
Depreciation 38
Interest on Debentures 10 268
83
Net Profit before dividend
Dividend : Interim 9
Final 15 24
Balance carried to balance sheet 59
8.30 Accounting

Working Notes :
Bonus issue proportion = 1:3
No. of shares = 15,000 × 1/3 = 5,000 shares
Debit (Rs.) Credit (Rs.)
(1) General Reserve Account Dr. Rs. 50,000
To Equity Share Capital Account Rs. 50,000
(Being reserves capitalised)

(2) Land Account Dr. Rs. 70,000

To Revaluation Reserve Account Rs. 70,000
(Being land revalued)

Schedules
SCHEDULE 1 Rs.
Share Capital
Authorised
25,000 Shares of Rs. 10 each 2,50,000
Issued, subscribed & fully paid-up
20,000 shares of Rs. 10 each 2,00,000
[of the above, 5,000 shares are alloted as fully paid by
way of Bonus Shares. Bonus Shares were issued by
utilising the general reserve]

SCHEDULE 2
Reserves and Surplus
Rs.
Share Premium Account 20,000
Revaluation reserve 70,000
General reserve (65,000 – 50,000) 15,000
Balance in profit & loss A/c (36,000 + 59,000) 95,000
2,00,000
 Company Accounts - I 8.31

SCHEDULE 3
Fixed Assets As on 1/4/1996 Additions Deductions Depreciation Net Block
Rs. Rs. Rs. Rs. Rs.
Land 1,10,000 70,000 - - 1,80,000
Plant & Machinery 3,85,000 - 5,000 1,20,000 2,60,000
Total 4,95,000 70,000 5,000 1,20,000 4,40,000
Land was revalued upward by Rs. 70,000 during the year.

Question 3
From the following particulars of Ganga Limited, you are required to calculate the managerial
remuneration in the following situation
(i) There is only one whole time director.
(ii) There ar two whole time directors.
(iii) There are two whole time directors, a part time director and a Manager.
Rs.
Net profit before provision for income-tax and managerial
remuneration, but after depreciation and provision for repairs 8,70,410
Depreciation provided in the books 3,10,000
Provision for repairs of machinery during the year 25,000
Depreciation allowable under Schedule XIV 2,60,000
Actual expenditure incurred on repairs during the year 15,000
(6 marks) (Intermediate–Nov. 1998)
Answer
Sections 198 and 309 of the Comapnies Act, 1956 prescribe the maximum percentage of profit that
can be paid as managerial remuneration. For this purpose, profit is to be calculated in the manner
as specified in Section 349.
Calculation of net profit u/s 349 of the Companies Act, 1956
Rs. Rs.
Net profit before provision for income-tax and managerial
remuneration, but after depreciation and provision for repairs 8,70,410
Add back : Depreciation provided in the books 3,10,000
Provision for repairs of machinery 25,000 3,35,000
12,05,410
Less : Depreciation allowable under Schedule XIV 2,60,000
Actual expenditure incurred on repairs 15,000 2,75,000
Profit under section 349 9,30,410
8.32 Accounting

Calculation of managerial remuneration

(i) There is only one whole time director
Managerial remuneration = 5% of Rs. 9,30,410
= Rs. 46,520.50
(ii) There are two whole time directors
Managerial remuneration = 10% of Rs. 9,30,410
= Rs. 93,041
(iii) There are two whole time directors, a part time director and a manager
Managerial remuneration = 11% of Rs. 9,30,410
= Rs. 1,02,345.10
Question 4
The trial balance of Complex Ltd. as at 31st March, 1998 shows the following items :
Dr. Cr.
Rs. Rs.
Advance payment of income-tax 2,20,000 -
Provision for income-tax for the year ended 31.3.97 - 1,20,000
The following further informations are given :
(i) Advance payment of income-tax includes Rs. 1,40,000 for 1996-97.
(ii) Actual tax liability for 1996-97 amounts to Rs. 1,52,000 and no effect for the same has so far
been given in accounts.
(iii) Provision for income-tax has to be made for 1997-98 for Rs. 1,60,000.
You are required to prepare (a) provision for income-tax account, (b) advance payment of income-
tax account, (c) liabilities for taxation account and also show, how the relevant items will appear in
the profit and loss account and balance sheet of the Company.
(10 marks) (Intermediate–Nov. 1998)
Answer
Complex Ltd.
(a) Provision for Income Tax (1996-97) Account
Dr. Cr.
Rs. Rs.
31.3.98 To Advance Payment of 1.4.97 By Balance b/d 1,20,000
Income-tax A/c 1,40,000 31.3.98 By Profit and Loss A/c 32,000
To Liability for
Taxation A/c 12,000
1,52,000 1,52,000
 Company Accounts - I 8.33

Provision for Income-tax (1997-98) Account

Rs. Rs.
31.3.98 To Balance c/d 1,60,000 31.3.98 By Profit and Loss A/c 1,60,000
1,60,000 1,60,000

(b) Advance Payment of Income Tax Account

Rs. Rs.
31.3.98 To Balance b/d 2,20,000 31.3.98 By Provision for Income-
tax (1996-97) A/c 1,40,000
By Balance c/d 80,000
2,20,000 2,20,000

(c) Liability for Taxation Account

Rs. Rs.
31.3.98 To Balance c/d 12,000 31.3.98 By Provision for Income-
tax A/c 12,000
12,000 12,000

Profit and Loss Account

for the year ended 31st March, 1998 (Extracts)
Rs. Rs.
Profit before Taxation ....
Less :Taxation for the year 1,60,000
Taxation adjustment of previous year 32,000 1,92,000
Net Profit ....

Balance Sheet of Complex Ltd.

As at 31st March, 1998 (Extracts)
Liabilities Rs. Assets Rs.
Current Liabilities and Provisions Current Assets, Loans and Advances
A. Current Liabilities B. Loans and Advances
Liability for Taxation (1996-97) 12,000 Advance payment of
B. Provisions Income-tax 80,000
Provision for Income-tax 1,60,000
8.34 Accounting

Question 5
Fruit Juice Ltd., Mumbai has factories at Ratnagiri (alphonso mango pulp) and Nagpur (Orange
juice).
During the year ended 31st March, 1999, the following locationwise revenue statements were
furnished by the two factories (from which the total column has been compiled) :
Ratnagiri Nagpur Total
Rs. Rs. Rs.
Opening stock :
Work in process 24,000 12,000 36,000
Finished goods 8,000 2,000 10,000
32,000 14,000 46,000
Raw material consumption 25,00,000 10,00,000 35,00,000
Employee cost 5,00,000 6,00,000 11,00,000
Power and Fuel 1,00,000 50,000 1,50,000
Consumable stores 15,000 7,000 22,000
Rates and taxes 14,000 9,000 23,000
Repairs to factory :
Building 4,000 5,000 9,000
Machinery 80,000 50,000 1,30,000
Other assets 3,000 1,000 4,000
Other expenses 65,000 55,000 1,20,000
Depreciation 1,00,000 90,000 1,90,000
34,13,000 18,81,000 52,94,000
Less : Closing stock
Work in process 28,000 13,000 41,000
Finished goods 5,000 8,000 13,000
33,000 21,000 54,000
Cost of goods transferred to marketing division 33,80,000 18,60,000 52,40,000
The marketing division furnishes you with the following information of its productwise revenue
statement for the year ended 31st March, 1999 (from which the total column has been compiled) :
Mango pulp Orange juice Total
Opening stock : 12,000 5,000 17,000
 Company Accounts - I 8.35

Receipt during the year out of :

Last year’s despatch from factory 10,000 5,000 15,000
Current year’s despatch from factory 33,65,000 18,50,000 52,30,000
33,75,000 18,55,000 52,30,000
Transport “in” cost from factory 50,000 60,000 1,10,000
34,37,000 19,20,000 53,57,000
Less : Closing stock 7,000 10,000 17,000
34,30,000 19,10,000 53,40,000
Sales commission 5,00,000 2,50,000 7,50,000
Sales tax 4,00,000 1,25,000 5,25,000
Profit 6,70,000 2,15,000 8,85,000
Sales 50,00,000 25,00,000 75,00,000
You are asked to prepare sectional and consolidated revenue statement for the year ended
31st March, 1999 for consideration of the board of directors and presentation to the members of
Fruit Juice Ltd. Also work out the percentage of net profit to sales.
Show your working, if any. (16 marks) (Intermediate May 1999)
Answer
Revenue Statement of Fruit Juice Ltd. (Sectional and Consolidated)
for the year ended 31st March, 1999
Mango Pulp Orange Juice Total
Rs. ‘000 Rs. ‘000 Rs. ‘000
Sales 5,000 2,500 7,500
Add : Excess of closing inventory over
opening inventory (Working note 1) 1 17 18
Gross revenue 5,001 2,517 7,518
Less : Manufacturing and other expenses 4,231 2,212 6,443
(Working note 2)
Profit before depreciation 770 305 1,075
Less : Depreciation 100 90 190
Net Profit 670 215 885
Mango Pulp Orange Juice Total
Percentage of net profit to sales 13.4% 8.6% 11.8%
8.36 Accounting

Working Notes :
(1) Excess of closing inventory over opening inventory
(a) Mango Pulp Orange Juice Total
Rs. ‘000 Rs. ‘000 Rs. ‘000
Opening Stock
Finished goods :
At factory 8 2 10
In transit (received during the year by
marketing division) 10 5 15
With marketing division 12 5 17
30 12 42
Work in process 24 12 36
Total 54 24 78
(b) Mango Pulp Orange Juice Total
Rs. ‘000 Rs. ‘000 Rs. ‘000
Closing Stock
Finished goods :
At factory 5 8 13
In transit* 15 10 25
With marketing division 7 10 17
27 28 55
Work in process 28 13 41
55 41 96
(c) Closing Stock 55 41 96
Less : Opening stock 54 24 78
Excess of closing stock over opening stock 1 17 18
*Goods sent by factory 3,380 1,860 5,240
Less : Received by marketing division 3,365 1,850 5,215
Finished goods in transit 15 10 25
 Company Accounts - I 8.37

(2) Manufacturing and other costs

Mango Pulp Orange Juice Total
Rs. ‘000 Rs. ‘000 Rs. ‘000
Manufacturing costs:
Raw Material consumption 2,500 1,000 3,500
Employee cost 500 600 1,100
Power and fuel 100 50 150
Consumable stores 15 7 22
Rates and taxes 14 9 23
Repairs : Building 4 5 9
Machinery 80 50 130
Other assets 3 1 4
Other costs :
Transport 50 60 110
Sales commission 500 250 750
Sales tax 400 125 525
Other expenses 65 55 120
4,231 2,212 6,443
8.38 Accounting

UNIT 6 : PROBLEMS BASED ON ACCOUNTING STANDARDS AND

GUIDANCE NOTES
Question 1
Events Occurring after the Balance Sheet Date and their disclosure requirements.
(5 marks) (Intermediate–Nov. 1994, May 97 and May 1998)
Answer
Events occurring after the balance sheet date are those significant events, both favourable
and unfavourable, that occur between the balance sheet date and the date on which the
financial statements are approved by the Board of Directors in the case of a company and in
the case of any other entity by the corresponding approving authority.
Assets and liabilities should be adjusted for events occurring after the balance sheet
date that provide additional evidence to assist the estimation of amounts relating to conditions
existing at the balance sheet date or that indicate that the fundamental accounting assumption
of going concern (i.e., the continuance of existence or substratum of the enterprise) is not
appropriate. However, assets and liabilities should not be adjusted for but disclosure should
be made in the report of the approving authority of events occurring after the balance sheet
date that represent material changes and commitments affecting the financial position of the
enterprise.
(ii) Disclosure regarding events occurring after the balance sheet date :
(a) The nature of the event;
(b) An estimate of the financial effect, or a statement that such an estimate cannot be
made.
Question 2
Prior-Period items. (2 marks) (Intermediate–Nov. 1994, May 1996 and May 1998)
Answer
When income or expenses arise in the current period as a result of errors or omissions in the
preparation of the financial statements of one or more prior periods, the said incomes or
expenses have to be classified as prior period items. The errors may occur as a result of
mathematical mistakes, mistakes in applying accounting policies, misinterpretation of facts or
oversight.
Question 3
Pre–incorporation expenses. (5 marks) (Intermediate–May 1996)
Answer
Pre–incorporation expenses denote expenses incurred by the promoters for the purposes of
the company before its incorporation.
 Company Accounts - I 8.39

Broadly, these include expenses in connection with:

(a) preliminary analysis of the conceived idea,
(b) detailed investigation in terms of technical feasibility and commercial viability to
establish the soundness of the proposition,
(c) preparation of ‘project report’ or ‘feasibility report’ and its verification through
independent appraisal authority (before giving final approval to the proposition) and
(d) organisation of funds, property and managerial ability and assembling of other
business elements.
These expenses should be properly capitalised and shown in the balance sheet under
the heading “Miscellaneous Expenditure”. There is no legal requirement to write–off these
expenses to profit and loss account within any specified period of time nor is there any rigid
accounting convention in regard to this matter. However, good corporate practice recognises
the need to write off these expenses to profit and loss account whtin a period of 3 to 5 years.
Question 4
Provisions contained in the Accounting Standard in respect of Revaluation of fixed assets.
(10 marks) (Intermediate–Nov. 1996)
Answer
(i) Revaluation of fixed Assts
According to Accounting Standard 10 on “Accounting for Fixed Assets”
(a) When fixed assets are revalued in financial statements, the basis of selection
should be an entire class of assets or the selection should be done on a systematic
basis. The basis of selection should be disclosed.
(b) The revaluation of any class of assets should not result in the net book value of that
class being greater than the recoverable amount of that class of assets.
(c) The accumulated depreciation should not be credited to profit and loss account.
(d) The net increase in book value should be credited to a revaluation reserve account.
(e) On disposal of a previously revalued item of fixed asset, the difference between net
disposal proceeds and the net book value should be charged or credited to the
profit and loss account except that to the extent to which such a loss is related to
an increase and which has not been subsequently reversed or utilised may be
charged directly to that account.
Questiion 5
The difference between actual expense or income and the estimated expense or income as
accounted for in earlier years’ accounts, does not necessarily constitue the item to be a prior
period item comment. (2 marks) (Intermediate–May 1998)
8.40 Accounting

Answer
The statement given in the question is correct and is in accordance with the Accounting
Standard (AS) 5 (Revised) “Net Profit or Loss for the Period. Prior Period Items and Changes
in Accounting Policies’’.
The use of reasonable estimates is an essential part of the preparation of financial statements
and does not undermine their reliability. An estimate may have to be revised if changes occur
regarding the circumstances on which the estimate was based, or as a result of new
information or subsequent developments. The revision of the estimate, by its nature, does not
bring the adjustments within the definition of an extraordinary item or a prior period item.
Question 6
When can revenue be recognised in the case of transaction of sale of goods?
(2 marks) (Intermediate–May 1998)
Answer
As per AS 9 Revenue Recognition, revenue from sales transactions should be recognised
when the following requirements as to performance are satisfied, provided that at the time of
performance it is not unreasonable to expect ultimate collection :
(i) The seller of goods has transferred to the buyer the property in the goods for a
price or all significant risks and rewards of ownership have been transferred to the
buyer and the seller retains no effective control of the goods transferred to a degree
usually associated with ownership; and
(ii) No significant uncertainty exists regarding the amount of the consideration that will
be derived from the sale of goods.
Question 7
Valuation of fixed assets in special cases. (3 marks) (Intermediate–Nov. 1998)
Answer
Para 15 of Accounting Standard 10 on “Accounting for Fixed Assets” states the following
provisions regarding valuation of fixed assets in special cases :
1. In the case of fixed assets acquired on hire purchase terms, although legal
ownership does not vest in the enterprise, such assets are recorded at their cash
value, which if not readily available, is calculated by assuming an appropriate rate
of interest. They are shown in the balance sheet with an appropriate arration to
indicate that the enterprise does not have full ownership thereof.
2. Where an enterprise owns fixed assets jointly with others (otherwise than as a
partner in a firm), the extent of its share in such assets, and the proportion in the
original cost, accumulated depreciaiton and written down value are stated in the
balance sheet. Alternatively, the pro rata cost of such jointly owned assets is
grouped together with similar fully owned assets. Details of such jointly owned
assets are indicated separately in the fixed assets register.
 Company Accounts - I 8.41

3. Where several assets are purchased for a consolidated price, the consideration is
apportioned to the various assets on a fair basis as determined by competent
valuers.
Question 8
What are the main features of the Cash Flow Statement? Explain with special reference to AS
3? (5 marks) (Intermediate–Nov. 1999)
Answer
According to AS 3 (Revised) on “Cash Flow Statements”, cash flow statement deals with the
provision of information about the historical changes in cash and cash equivalents of an
enterprise during the given period from operating, investing and financing activities. Cash
flows from operating activities can be reported using either
(a) the direct method, whereby major classes of gross cash receipts and gross cash
payments are disclosed; or
(b) the indirect method, whereby net profit or loss is adjusted for the effects of
transactions of non–cash nature, any deferrals or accruals of past or future
operating cash receipts or payments, and items of income or expense associated
with investing or financing cash flows.
As per para 42 of AS 3 (Revised), an enterprise should disclose the components of cash
and cash equivalents and should present a reconciliation of the amounts in its cash flow
statement with the equivalent items reported in the balance sheet.
A cash flow statement when used in conjunction with the other financial statements,
provides information that enables users to evaluate the changes in net assets of an enterprise,
its financial structure (including its liquidity and solvency), and its ability to affect the amount
and timing of cash flows in order to adapt to changing circumstances and opportunities. This
statement also enhances the comparability of the reporting of operating performance by
different enterprises because it eliminates the effects of using different accounting treatments
for the same transactions and events.
AS 3 (revised) is recommendatory at present but for companies listed on stock
exchanges, its compliance is mandatory due to the listing agreement which provides for the
listed companies to furnish cash flow statement in their Annual Reports.
Question 9
Extraordinary Items to be disclosed as per the Accounting Standard.
(3 marks) (Intermediate–Nov. 1994)
Answer
Extraordinary items are gains or losses which arise from events or transactions that are
distinct from the ordinary activities of the business and which are both material and expected
not to recur in future frequently. These would also include material adjustments necessitated
by circumstances, which though related to previous periods are determined in the current
8.42 Accounting

period. Some examples of extraordinary items may be the sale of a signficant part of the
business, the sale of an investment not acquired with the intention of resale etc. The nature
and amount of each extraordinary item are separately disclosed so that users of financial
statements can evaluate the relative significance of such items and their effect on the current
operating results. It may be noted that income or expenses arising from the ordinary activities
of the enterprise, though abnormal in amount or infrequent in occurrence, do not qualify as
extraordinary.
Question 10
(i) A major fire has damaged the assets in a factory of a limited company on 2nd April-two
days after the year end closure of account. The loss is estimated at Rs. 20 crores out of
which Rs. 12 crores will be recoverable from the insurers. Explain briefly how the loss
should be treated in the final accounts for the previous year.
(ii) There is a sales tax demand of Rs. 2.50 crores against a company relating to prior years
against which the company has gone on appeal to the appellate authority in the
department. The grounds of appeal deal with points covering Rs. 2 crores of the demand.
State how the matter will have to be dealt with in the final accounts for the year.
(8 marks) (Intermediate–May 1995)
Answer
(i) The loss due to break out of fire is an example of event occurring after the balance sheet
date that does not relate to conditiont existing at the balance sheet date. It has not
affected the financial position as on the date of the balance sheet and therefore requires
no specific adjustments in the financial statements. However, paragraph 8.6 of AS-4
states that disclosure is generally made of events in subsequent periods that represent
unusual changes affecting the existence or substratum of the enterprise at the balance
sheet date. In the given case, the loss of assets in a factory is considered to be an event
affecting the substratum of the enterprise after the balance sheet date. Hence, as
recommended in paragraph 15 of AS-4, disclosure of the event should be made in the
report of the approving authority that represent material changes and commitments
affecting the financial position of the enterprise.
(ii) The undisputed part of sales tax liability of Rs. 0.50 crore should be considered as actual
liability and adequately provided for. The Institute of Chartered Accountants of India has
issued Accounting standard 29 on “Provisions Contingent Liabilities and Contingent
Assets’’ (comes into effect in respect of accounting periods commencing on or after
1.4.2004). According to the standard, an enterprise should not recognise a contingent
liability but should disclose it, as required by paragraph 68, unless the possibility of an
outflow of resources embodying economic benefits is remote. Accordingly the company
should disclose the disputed part of sales tax liability of Rs. 2 crore as contingent liability
in their financial statements of the year. However, the above disclosed contingent liability
should be reviewed continuosly and if it becomes probable that an outflow of future
economic benefit will be required , then recognise the contingent liability as a provision.
 Company Accounts - I 8.43

Question 11
Jagannath Ltd. had made a rights issue of shares in 1996. In the offer document to its
members, it had projected a surplus of Rs. 40 crores during the accounting year to end on
31st March, 1998. The draft results for the year, prepared on the hitherto followed accounting
policies and presented for perusal of the board of directors showed a deficit of Rs. 10 crores.
The board in consultation with the managing director, decided on the following :
(i) Value year-end inventory at works cost (Rs. 50 crores) instead of the hitherto method of
valuation of inventory at prime cost (Rs. 30 crores).
(ii) Provide depreciation for the year on straight line basis on account of substantial
additions in gross block during the year, instead of on the reducing balance method,
which was hitherto adopted. As a consequence, the charge for depreciation at Rs. 27
crores is lower than the amount of Rs. 45 crores which would have been provided had
the old method been followed, by Rs. 18 cores.
(iii) Not to provide for “after sales expenses” during the warranty period. Till the last year,
provision at 2% of sales used to be made under the concept of “matching of costs
against revenue” and actual expenses used to be charged against the provision. The
board now decided to account for expenses as and when actually incurred. Sales during
the year total to Rs. 600 crores.
(iv) Provide for permanent fall in the value of investments - which fall had taken place over
the past five years - the provision being Rs. 10 crores.
As chief accountant of the company, you are asked by the managing director to draft the notes
on accounts for inclusion in the annual report for 1997-1998 (6 Marks) (Intermediate–May 1998)
Answer
As per AS 1 “Any change in the accounting policies which has a material effect in the current
period or which is reasonably expected to have a material effect in later periods should be
disclosed. In the case of a change in accounting policies which has a material effect in the
current period, the amount by which any item in the financial statements is affected by such
change should also be disclosed to the extent ascertainable. Where such amount is not
ascertainable, wholly or in part, the fact should be indicated. Accordingly, the notes on
accounts should properly disclose the change and its effect.
Notes on Accounts :
(i) During the year inventory has been valued at factory cost, against the practice of valuing
it at prime cost as was the practice till last year. This has been done to take cognisance
of the more capital intensive method of production on account of heavy capital
expenditure during the year. As a result of this change, the year-end inventory has been
valued at Rs. 50 crores and the profit for the year is increased by Rs. 20 crores.
(ii) In view of the heavy capital intensive method of production introduced during the year,
the company has decided to change the method of providing depreciation from reducing
balance method to straight line method. As a result of this change, depreciation has been
provided at Rs. 27 crores which is lower than the charge which would have been made
8.44 Accounting

had the old method and the old rates been applied, by Rs. 18 crores. To that extent, the
profit for the year is increased.
(iii) So far, the company has been providing 2% of sales for meeting “after sales expenses
during the warranty period. With the improved method of production, the probability of
defects occurring in the products has reduced considerably. Hence, the company has
decided not to make provision for such expenses but to account for the same as and
when expenses are incurred. Due to this change, the profit for the year is increased by
Rs. 12 crores than would have been the case if the old policy were to continue.
(iv) The company has decided to provide Rs. 10 crores for the permanent fall in the value of
investments which has taken place over the period of past five years. the provision so
made has reduced the profit disclosed in the accounts by Rs. 10 crores.
Question 12
Media Advertisers obtained advertisement rights for One Day World Cup Cricket Tournament
to be held in May/June, 1999 for Rs. 250 lakhs.
By 31st March, 1999 they have paid Rs. 150 lakhs to secure these advertisement rights. The
balance Rs. 100 lakhs was paid in April, 1999.
By 31st March, 1999 they procured advertisement for 70% of the available time for Rs. 350
lakhs. The advertisers paid 60% of the amount by that date. The balance 40% was received in
April, 1999.
Advertisements for the balance 30% time were procured in April, 1999 for Rs. 150 lakhs. The
advertisers paid the full amount while booking the advertisement.
25% of the advertisement time is expected to be available in May, 1999 and the balance 75%
in June, 1999.
You are asked to :
(i) Pass journal entries in relation to the above.
(ii) Show in columnar form as to how the items will appear in the monthly financial
statements for March, April, May and June 1999.
Give reasons for your treatment. (12 marks) (Intermediate–May 1999)
 Company Accounts - I 8.45

Answer
In the books of Media Advertisers
Journal Entries
Dr. Cr.
Rs. in lakhs Rs. in lakhs
1999
March Advance for advertisement rights (purchase) A/c Dr. 150.00
To Bank A/c 150.00
(Being advance paid for obtaining advertisement
rights)
Bank A/c Dr. 210.00
To Advance for advertisement time (sale) A/c 210.00
(Being advance received from advertisers
amounting to 60% of Rs. 350 lakhs for booking
70% advertisement time)
April Advance for advertisement rights (purchase) A/c Dr. 100.00
To Bank A/c 100.00
(Being balance advance i.e., Rs. 250 lakhs less
Rs. 150 lakhs paid)
Bank A/c Dr. 140.00
To Advance for advertisement time (sale) A/c 140.00
(Being balance advance i.e., Rs. 350 lakhs less
Rs. 210 lakhs received from advertisers)
Bank A/c Dr. 150.00
To Advance for advertisement time (sale) A/c 150.00
(Being advance received from advertisers
in respect of booking of balance 30% time)
May Advertisement rights (purchase) A/c Dr. 62.50
To Advance for advertisement rights (purchase) A/c 62.50
(Being cost of advertisement rights used in May
i.e., 25% of Rs. 250 lakhs, adjusted against advance
paid)
8.46 Accounting

Advance for advertisement time (sale) A/c Dr. 125.00

To Advertisement time (sale) A/c 125.00
(Being sale price of advertisement time in May i.e.,
25% of Rs. 500 lakhs adjusted, against advance
received from advertisers)
Profit and Loss A/c Dr. 62.50
To Advertisement rights (purchase) A/c 62.50
(Being cost of advertisement rights debited to Profit
and Loss Account in May)
Advertisement time (sale) A/c Dr. 125.00
To Profit and Loss A/c 125.00
(Being revenue recognised in Profit and Loss
Account in May)
June Advertisement rights (purchase) A/c Dr. 187.50
To Advance for advertisement rights (purchase) 187.50
A/c
(Being cost of advertisement rights used in June, i.e.,
75% of Rs. 250 lakhs, adjusted against
advance paid)
Advance for advertisement time (sale) A/c Dr. 375.00
To Advertisement time (sale) A/c 375.00
(Being sale price of advertisement time availed in
June i.e., 75% of Rs. 500 lakhs, adjusted against
advance received from advertisers)
June Profit and Loss A/c Dr. 187.50
To Advertisement rights (purchase) A/c 187.50
(Being cost of advertisement rights used in June,
debited to Profit and Loss Account in June)
Advertisement time (sale) A/c Dr. 375.00
To Profit and Loss Account 375.00
(Being revenue recognised in June)
 Company Accounts - I 8.47

(ii) Monthly financial statements

(1) Revenue statement (Rs. in lakhs)
March April May June
Rs. Rs. Rs. Rs.
Sale of advertisement time – – 125.00 375.00
Less: Purchase of advertisement rights – – 62.50 187.50
Netprofit – – 62.50 187.50

(2) Balance sheet as at 31.3.99 30.4.99 31.5.99 30.6.99

Sources of funds:
Net profit – – 62.50 250.00
Application of funds:
Current assets, loans and advances:
Advance for advertisement rights 150.00 250.00 187.50 –
Bank Balance 60.00 250.00 250.00 250.00
210.00 500.00 437.50 250.00
Less: Current liabilities
Advance for advertisement time
(received from advertisers) 210.00 500.00 375.00 –
Net current assets – – 62.50 250.00
As per para 7.1 of AS 9 on Revenue Recognition, under proportionate completion
method, revenue from service transactions is recognised proportionately by reference to the
performance of each act where performance consists of the execution of more than one act.
Therefore, income from advertisement is recognised in May, 1999 (25%) and June, 1999
(75%) in the proportion of availability of the advertisement time.
Question 13
(a) Describe the factors for determination of “Reportable Segments” as per AS-17.
(b) Briefly describe the disclosure requirements for related party transactions as per
Accounting Standard 18.
(c) State the different types of Leases contemplated in Accounting Standard 19 and discuss
briefly. (12 marks) (Intermediate–May 2002)
Answer
(a) Paragraphs 27 to 29 of AS 17 on Segment Reporting deals with reportable segments.
Paragraph 27 requires that a business segment or geographical segment should be
identified as a reportable segment if :
8.48 Accounting

(i) its revenue from sales to external customers and from transactions with other
segments is 10 percent or more of the total revenue, external and internal, of all
segments; or
(ii) its segment result, whether profit or loss, is 10 percent or more of-
(a) the combined result of all segments in profit, or
(b) the combined result of all segments in loss, whichever is greater in absolute
amount; or
(iii) its segment assets are 10 percent or more of the total assets of all segments.
A business segment or a geographical segment which is not a reportable segment as per
paragraph 27, may be designated as a reportable segment despite its size at the
discretion of the management of the enterprise. If that segment is not designated as a
reportable segment, it should be included as an unallocated reconciling item.
If total external revenue attributable to reportable segments constitutes less than 75% of
the total enterprise revenue, additional segments should be identified as reportable
segments, even if they do not meet the 10 percent thresholds specified in paragraph 27
of the standard, until at least 75 percent of the total enterprise revenue is included in
reportable segments.
(b) Paragraph 23 of AS 18 on Related Party Disclosures requires that if there have been
transactions between related parties, during the existence of the a related party
relationship, the reporting enterprise should disclose the following :
(i) the name of the transacting related party;
(ii) a description of the relationship between the parties;
(iii) a description of the nature of transactions;
(iv) volume of the transactions either as an amount or as an appropriate proportion;
(v) any other elements of the related party transactions necessary for an
understanding of the financial statements;
(vi) the amounts or appropriate proportions of outstanding items pertaining to related
parties at the balance sheet date and provisions for doubtful debts due from such
parties at that date;
(vii) amounts written off or written back in the period in respect of debts due from or to
related parties.
Point (v) requires disclosure of ‘any other elements of the related party transactions
necessary for an understanding of the financial statements. An example of such a
disclosure would be an indication that the transfer of a major asset had taken place at an
amount materially different from that obtainable on normal commercial terms.
(c) Accounting Standard 19 has divided the lease into two types viz. (i) Finance Lease and
(ii) Operating Lease.
 Company Accounts - I 8.49

Finance Lease : A lease is classified as a finance lease if it transfers substantially all the
risks and rewards incident to ownership. title may or may not eventually be transferred.
At the inception of a finance lease, the lessee should recognise the lease as an asset
and a liability. Such recognition should be at an amount equal to the fair value of the
leased asset at the inception of the lease. However, if the fair value of the leased asset
exceeds the present value of the minimum lease payments from the standpoint of the
lessee, the amount recorded as an asset and liability should be the present value of the
minimum lease payments from the standpoint of the lessee.
Operating Lease : A lease is classified as an operating lease if it does not transfer
substantially all the risks and rewards incident to ownership. Lease payments under an
operating lease should be recognised as an expense in the statement of profit and loss
on a straight line basis over the lease term unless another systematic basis is more
representative of the time pattern of the user’s benefit.
Question 14
(a) When Capitalisation of borrowing cost should cease as per Accounting Standard 16?
(b) Define a "Business Segment" and a "Geographical Segment" as per Accounting
Standard 17.
(c) Briefly describe, how do you calculate "Diluted Earnings per Share" as per Accounting
Standard 20.
(d) Briefly describe the disclosure requirements for "Deferred Tax Assets" and "Deferred Tax
Liabilities" as per Accounting Standard 22.
(e) Write short note on Sale and Lease Back Transactions as per Accounting Standard 19.
( 20 marks) (PE-II – Nov. 2002)
Answer
(a) Capitalisation of borrowing costs should cease when substantially all the activities
necessary to prepare the qualifying asset for its intended use or sale are complete.
An asset is normally ready for its intended use or sale when its physical construction or
production is complete even though routine administrative work might still continue. If
minor modifications such as the decoration of a property to the user’s specification, are
all that are outstanding, this indicates that substantially all the activities are complete.
When the construction of a qualifying asset is completed in parts and a completed part is
capable of being used while construction continues for the other parts, capitalisation of
borrowing costs in relation to a part should cease when substantially all the activities
necessary to prepare that part for its intended use or sale are complete.
(b) A Business Segment: A business segment is a distinguishable component of an
enterprise that is engaged in providing an individual product or service or a group of
related products or services and that is subject to risks and returns that are different from
those of other business segments. Factors that should be considered in determining
whether products or services are related include:
8.50 Accounting

(a) the nature of the products or services;

(b) the nature of the production processes;
(c) the type or class of customers for the products or services;
(d) the methods used to distribute the products or provide the services and
(e) if applicable, the nature of the regulatory environment, for example, banking,
insurance or public utilities.
A geographical segment: A geographical segment is a distinguishable component of an
enterprise that is engaged in providing product or services within a particular economic
environment and that is subject to risks and returns that are different from those of
components operating in other economic environments. Factors that should be
considered in identifying geographical segments include:
(a) similarity of economic and political conditions;
(b) relationships between operations in different geographical areas;
(c) proximity of operations;
(d) special risks associated with operations in a particular area;
(e) exchange control regulations; and
(f) the underlying currency risks.
(c) For the purpose of calculating diluted earnings per share, the net profit or loss for the
period attributable to equity shareholders and the weighted average number of shares
outstanding during the period should be adjusted for the effects of all dilutive potential
equity shares.
The amount of net profit or loss for the period attributable to equity shareholders should
be adjusted, after taking into account any attributable change in tax expense for the
period.
The number of equity shares should be the aggregate of the weighted average number of
equity shares (as per paragraphs 15 and 22 of AS 20) and the weighted average number
of equity shares which would be issued on the conversion of all the dilutive potential
equity shares into equity shares. Dilutive potential equity shares should be deemed to
have been converted into equity shares at the beginning of the period or, if issued later,
the date of the issue of the potential equity shares.
An enterprise should assume the exercise of dilutive options and other dilutive potential
equity shares of the enterprise. The assumed proceeds from these issues should be
considered to have been received from the issue of shares at fair value. The difference
between the number of shares issuable and the number of shares that would have been
issued at fair value should be treated as an issue of equity shares for no consideration.
 Company Accounts - I 8.51

(d) (i) An enterprise should offset deferred tax assets and deferred tax liabilities if:
(a) the enterprise has a legally enforceable right to set off assets against liabilities
representing current tax, and
(b) the deferred tax assets and the deferred tax liabilities relate to taxes on
income levied by the same governing taxation laws.
(ii) Deferred tax assets and liabilities should be distinguished from assets and liabilities
representing current tax for the period. Deferred tax assets and liabilities should be
disclosed under a separate heading in the balance sheet of the enterprise,
separately from current assets and current liabilities.
(iii) The break-up of deferred tax assets and deferred tax liabilities into major
components of the respective balances should be disclosed in the notes to
accounts.
(iv) The nature of the evidence supporting the recognition of deferred tax assets should
be disclosed, if an enterprise has unabsorbed depreciation or carry forward of
losses under tax laws.
(e) Sale and leaseback transactions: As per AS 19 on ‘Leases’, a sale and leaseback
transaction involves the sale of an asset by the vendor and the leasing of the asset back
to the vendor. The lease payments and the sale price are usually interdependent, as
they are negotiated as a package. The accounting treatment of a sale and lease back
transaction depends upon the type of lease involved.
If a sale and leaseback transaction results in a finance lease, any excess or deficiency of
sale proceeds over the carrying amount should be deferred and amortised over the lease
term in proportion to the depreciation of the leased asset.
If sale and leaseback transaction results in a operating lease, and it is clear that the
transaction is established at fair value, any profit or loss should be recognised
immediately. If the sale price is below fair value any profit or loss should be recognised
immediately except that, if the loss is compensated by future lease payments at below
market price, it should be deferred and amortised in proportion to the lease payments
over the period for which the asset is expected to be used. If the sale price is above fair
value, the excess over fair value should be deferred and amortised over the period for
which the asset is expected to be used.
Question 15
(a) X Co. Ltd. charged depreciation on its asset on SLM basis. For the year ended
31.3.2003 it changed to WDV basis. The impact of the change when computed from the
date of the asset coming to use amounts to Rs. 20 lakhs being additional charge.
Decide how it must be disclosed in Profit and loss account. Also, discuss, when such
changes in method of depreciation can be adopted by an enterprise as per AS–6.
(b) Decide when research and development cost of a project can be deferred to future
periods as per AS 26.
8.52 Accounting

(c) You are an accountant preparing accounts of A Ltd. as on 31.3.2003. After year end the
following events have taken place in April, 2003:
(i) A fire broke out in the premises damaging, uninsured stock worth Rs. 10 lakhs
(Salvage value Rs. 2 lakhs).
(ii) A suit against the company’s advertisement was filed by a party claiming damage of
Rs. 20 lakhs.
(iii) Dividend proposed @ 20% on share capital of Rs. 100 lakhs.
Describe, how above will be dealt with in the account of the company for the year
ended on 31.3.2003.
(d) How the government grants related to specific fixed assets should be presented in the
Balance Sheet as per AS–12?
(e) Briefly describe the disclosure requirements for amalgamation including additional
disclosure, if any, for different methods of amalgamation as per AS–14.
(f) Mention the prescribed accounting treatment in respect of gratuity benefits payable to
employees as per AS–15. (24 marks) (PE-II – May 2003)
Answer
(a) The company should disclose the change in method of depreciation adopted for the
accounting year. The impact on depreciation charge due to change in method must be
quantified and reported by the enterprise.
Following aspects may be noted in this regard as per AS 6 on Depreciation Accounting.
(a) The depreciation method selected should be applied consistently from period to
period.
(b) A change from one method of providing depreciation to another should be made
only if the adoption of the new method is required by statute or for compliance with
an accounting standard if it is considered that the change would result in a more
appropriate preparation or presentation of the financial statements of the enterprise.
(c) When such a change in the method of depreciation is made, depreciation should be
recalculated in accordance with the new method from the date of the asset coming
into use. The deficiency or surplus arising from retrospective recomputation of
depreciation in accordance with the new method should be adjusted in the accounts
in the year in which the method of depreciation is changed.
(d) In case the change in the method results in deficiency in depreciation in respect of
past years, the deficiency should be charged in the statement of profit and loss.
(e) In case the change in the method results in surplus, the surplus should be credited to
the statement of profit and loss. Such a change should be treated as a change in
accounting policy and its effect should be quantified and disclosed.
(b) As per para 41 of AS 26 ‘Intangible Assets’, no intangible asset arising from research
should be recognized. The expenditure incurred on development phase can be deferred
 Company Accounts - I 8.53

to the subsequent years if the company can demonstrate all of the following conditions
(as specified in para 44 of AS 26 ‘Intangible Assets’):
(a) the technical feasibility of completing the intangible asset so that it will be available
for use or sale;
(b) its intention to complete the intangible asset and use or sell it;
(c) its ability to use or sell the intangible asset;
(d) how the intangible asset will generate probable future economic benefits. Among
other things, the enterprise should demonstrate the existence of a market for the
output of the intangible asset or the intangible asset itself or, if it is to be used
internally, the usefulness of the intangible asset;
(e) the availability of adequate technical, financial and other resources to complete the
development and to use or sell the intangible asset; and
(f) its ability to measure the expenditure attributable to the intangible asset during its
development reliably.
(c) Events occurring after the Balance Sheet date that represent material changes and
commitments affecting the financial position of the enterprise must be disclosed
according to para 15 of AS 4 on Contingencies and Events occurring after the Balance
Sheet date. Hence, fire accident and loss thereof must be disclosed.
Suit filed against the company being a contingent liability must be disclosed with the
nature of contingency, an estimate of the financial effect and uncertainties which may
affect the future outcome must be disclosed as per para 16 of AS 4.
There are events which, although take place after the balance sheet date, are sometimes
reflected in the financial statements because of statutory requirements or because of
their special nature. Such items include the amount of dividend proposed or declared by
the enterprise after the balance sheet date in respect of the period covered by the
financial statements. Thus, dividends which are proposed or declared by the enterprise
after the balance sheet date but before approval of the financial statements, should be
adjusted as per para 14 of AS 4.
(d) Paragraphs 8 and 14 of AS 12 on Accounting for Government Grants deal with
presentation of government grants related to specific fixed assets.
Government grants related to specific fixed assets should be presented in the balance
sheet by showing the grant as a deduction from the gross value of the assets concerned
in arriving at their book value. Where the grant related to a specific fixed asset equals
the whole, or virtually the whole, of the cost of the asset, the asset should be shown in
the balance sheet at a nominal value. Alternatively, government grants related to
depreciable fixed assets may be treated as deferred income which should be recognised
in the profit and loss statement on a systematic and rational basis over the useful life of
the asset, i.e., such grants should be allocated to income over the periods and in
8.54 Accounting

proportion in which depreciation on those assets is charged. Grants related to non-

depreciable assets should be credited to capital reserve under this method. However, if
a grant related to a non-depreciable asset requires the fulfillment of certain obligations,
the grant should be credited to income over the same period over which the cost of
meeting such obligations is charged to income. The deferred income balance should be
separately disclosed in the financial statements.
(e) The disclosure requirements for amalgamations have been prescribed in paragraphs 43
to 46 of AS 14 on Accounting for Amalgamation.
For all amalgamations, the following disclosures should be made in the first financial
statements following the amalgamation:
(a) names and general nature of business of the amalgamating companies;
(b) the effective date of amalgamation for accounting purpose;
(c) the method of accounting used to reflect the amalgamation; and
(d) particulars of the scheme sanctioned under a statute.
For amalgamations accounted under the pooling of interests method, the following
additional disclosures should be made in the first financial statements following the
amalgamation:
(a) description and number of shares issued, together with the percentage of each
company’s equity shares exchanged to effect the amalgamation; and
(b) the amount of any difference between the consideration and the value of net
identifiable assets acquired, and the treatment thereof.
For amalgamations, accounted under the purchase method, the following additional
disclosures should be made in the first financial statements following the amalgamation;
(a) consideration for the amalgamation and a description of the consideration paid or
contingently payable; and
(b) the amount of any difference between the consideration and the value of net
identifiable assets acquired, and the treatment thereof including the period of
amortisation of any goodwill arising on amalgamation.
(f) Accounting treatment in respect of gratuity benefits payable to employees has been
prescribed under paragraph 28 of AS 15 on Accounting for Retirement Benefits in the
Financial Statements of Employers.
Accounting treatment in respect of gratuity benefit and other defined benefit schemes will
depend on the type of arrangement, which the employer has chosen to make.
(i) If the employer has chosen to make payment for retirement benefits out of his own
funds, an appropriate charge to the statement of profit and loss for the year should
be made through a provision for the accruing liability. The accruing liability should
be calculated according to actuarial valuation. However, those enterprises which
employ only a few persons may calculate the accrued liability by reference to any
 Company Accounts - I 8.55

other rational method e.g., a method based on the assumption that such benefits
are payable to all employees at the end of the accounting year.
(ii) In case the liability for retirement benefits is funded through creation of a trust, the
cost incurred for the year should be determined actuarially. Such actuarial valuation
should normally be conducted at least once in every three years. However, where
actuarial valuation are not conducted annually, the actuary’s report should specify
the contributions to be made by the employer on annual basis during the inter-
valuation period. This annual contribution (which is in addition to the contribution
that may be required to finance unfunded past service cost) reflects proper accrual
of retirement benefit cost for each of the years during the inter-valuation period and
should be charged to the statement of profit or loss each year. Where the
contribution paid during a year is lower than the amount required to be contributed
during the year to meet the accrued liability as certified by the actuary, the shortfall
should be charged to the statement of profit or loss for the year. Where the
contribution paid during a year is in excess of the amount required to be contributed
during the year to meet the accrued liability as certified by the actuary, the excess
should be treated as a pre-payment.
(ii) In case the liability for retirement benefits is funded through a scheme administered
by an insurer, an actuarial certificate or a confirmation from the insurer should be
obtained that the contribution payable to the insurer is the appropriate accrual of the
liability for the year. Where the contribution paid during a year is lower than the
amount required to be contributed during the year to meet the accrued liability as
certified by the actuary or confirmed by the insurer, as the case may be, the
shortfall should be charged to the statement of profit or loss for the year. Where the
contribution paid during a year is in excess of the amount required to be contributed
during the year to meet the accrued liability as certified by the actuary or confirmed
by the insurer, as the case may be, the excess should be treated as a pre-payment.
Question 16
(a) How is software acquired for internal use accounted for under AS-26?
(b) What are the principles for recognition of deferred taxes under AS-22?
(c) Define related party transaction under AS-18.
(d) A Limited company charged depreciation on its assets on the basis of W.D.V. method
from the date of assets coming to use till date amounts to Rs. 32.23 lakhs. Now the
company decides to switch over to Straight Line method of providing for depreciation.
The amount of depreciation computed on the basis of S.L.M. from the date of assets
coming to use till the date of change of method amounts to Rs. 20 lakhs.
Discuss as per AS-6, when such changes in method of can be adopted by the company
and what would be the accounting treatment and disclosure requirement.
(e) X Limited has recognized Rs. 10 lakhs on accrual basis income from dividend on units of
mutual funds of the face value of Rs. 50 lakhs held by it as at the end of the financial
8.56 Accounting

year 31st March, 2003. The dividends on mutual funds were declared at the rate of 20%
on 15th June, 2003. The dividend was proposed on 10th April, 2003 by the declaring
company. Whether the treatment is as per the relevant Accounting Standard? You are
asked to answer with reference to provisions of Accounting Standard.
(20 marks) (PE-II – Nov. 2003)
Answer
(a) Paragraphs 10 and 11 of Appendix A to the Accounting Standard 26 on Intangible
Assets, lays down the following procedure for accounting of software acquired for internal
use:-
 The cost of a software acquired for internal use should be recognised as an asset if
it meets the recognition criteria prescribed in paragraphs 20 and 21 of this
statement.
 The cost of a software purchased for internal use comprises its purchase price,
including any import duties and other taxes (other than those subsequently
recoverable by the enterprise from the taxing authorities) and any directly
attributable expenditure on making the software ready for its use.
Any trade discounts and rebates are deducted in arriving at the cost. In the
determination of cost, matters stated in paragraphs 24 to 34 of the Statement which deal
with the method of accounting for ‘Separate Acquisitions’, ‘Acquisitions as a part of
Amalgamations’, Acquisitions by way of Government Grant’, and ‘Exchanges of Assets’,
need to be considered, as appropriate.
Recognition criteria as per paragraphs 20 and 21 of the standard are stated below:-
 An intangible asset should be recognised if, and only if:
(a) it is probable that the future economic benefits that are attributable to the asset
will flow to the enterprise; and
(b) the cost of the asset can be measured reliably.
 An enterprise should assess the probability of future economic benefits using
reasonable and supportable assumptions that represent best estimate of the set of
economic conditions that will exist over the useful life of the asset.
(b) Taxable income is calculated in accordance with tax laws. In some circumstances the
requirements of these laws to compute taxable income differ from the accounting policies
applied to determine accounting income. This results in a difference between the taxable
and the accounting income. Such differences are classified into Permanent and Timing
differences. The tax effect of the timing differences is known as Deferred Tax and is
included as tax expense in the statement of profit and loss and as deferred tax assets or
as deferred tax liabilities, in the balance sheet.
Prudence would dictate that deferred tax liabilities are provided for without exception,
even in situations where an enterprise is incurring losses. Deferred tax assets should be
recognized and carried forward only to the extent that there is reasonable certainty that
 Company Accounts - I 8.57

sufficient future taxable income will be available against which such deferred tax asset
can be realized. Reasonable certainty can be demonstrated by providing robust and
realistic estimates of profits for the future. A company with a track record of losses with
no immediate visibility of a turnaround should not recognise a deferred tax asset as a
matter of prudence. In the case of an unabsorbed depreciation and carry forward losses
under the tax laws, the recognition principles are more stricter, i.e. deferred tax asset
should be recognized only to the extent that there is virtual certainty supported by
convincing evidence that sufficient future taxable income will be available against which
such deferred tax asset can be realized. The existence of unabsorbed depreciation or
carry forward of losses under tax laws is strong evidence that future taxable income may
not be available.
In that situation there has to be convincing evidence that sufficient future taxable income
will be available against which such deferred tax asset can be realized. This is a matter
of judgement and the conclusion would depend on facts and circumstances of each case.
(c) Accounting Standard 18 on Related Party Disclosures defines a related party transaction
as transfer of resources or obligations between related parties, regardless of whether or
not a price is charged.
Related parties have been defined by the standard in the following words. “Parties are
considered to be related if at any time during the reporting period one party has the
ability to control the other party or exercise significant influence over the other party in
making financial and/or operating decisions.”
Further, paragraph 24 of the Standard gives certain examples of related party
transactions in respect of which disclosures may be made by a reporting enterprise.
Those examples are listed below:-
(a) purchases or sales of goods (finished or unfinished);
(b) purchases or sales of fixed assets;
(c) rendering or receiving of services;
(d) agency arrangements;
(e) leasing or hire purchase arrangements;
(f) transfer of research and development;
(g) license agreements;
(h) finance (including loans and equity contributions in cash or in kind);
(i) guarantees and collaterals; and
(j) management contracts including for deputation of employees.
(d) Paragraph 21 of Accounting Standard 6 on Depreciation Accounting says, "The
depreciation method selected should be applied consistently from period to period. A
change from one method of providing depreciation to another should be made only if the
adoption of the new method is required by statute or for compliance with an accounting
8.58 Accounting

standard or if it is considered that the change would result in a more appropriate

preparation or presentation of the financial statements of the enterprise."
The paragraph also mentions the procedure to be followed when such a change in the
method of depreciation is made by an enterprise. As per the said paragraph,
depreciation should be recalculated in accordance with the new method from the date of
the asset coming to use. The difference in the amount, being deficiency or surplus from
retrospective recomputation should be adjusted in the profit and loss account in the year
such change is effected. Since such a change amounts to a change in the accounting
policy, it should be properly quantified and disclosed. In the question given, the surplus
arising out of retrospective recomputation of depreciation as per the straight line method
is Rs. 12.23 lakhs (Rs. 32.23 lakhs – Rs. 20 lakhs). This should be written back to Profit
and Loss Account and should be disclosed accordingly.
(e) Paragraph 8.4 and 13 of Accounting Standard 9 on Revenue Recognition states that
dividends from investments in shares are not recognised in the statement of profit and
loss until a right to receive payment is established.
In the given case, the dividend is proposed on 10th April, 2003, while it is declared on
15th June, 2003. Hence, the right to receive payment is established on 15th June, 2003.
As per the above mentioned paragraphs, income from dividend on units of mutual funds
should be recognised by X Ltd. in the financial year ended 31st March, 2004.
The recognition of Rs. 10 lakhs on accrual basis in the financial year 2002-2003 is not as
per AS 9 'Revenue Recognition'.
(i) Acting as a banker in respect of funds of local bodies, Zilla Parishads, Panchayat
Institutions etc. who keep their funds with the treasuries.
(ii) Custody of opium and other valuables because of the strong room facility provided
at the treasury.
(iii) Custody of cash balances of the State Government and conducting cash business
of Government at non-banking treasuries.
Question 17
(a) X Ltd. received a grant of Rs. 2 crores from the Central Government for the purpose of a
special Machinery during 1998-99. The cost of Machinery was Rs. 20 crores and had a
useful life of 9 years. During 2002-03, the grant has become refundable due to non-
fulfillment of certain conditions attached to it. Assuming the entire grant was deducted
from the cost of Machinery in the year of acquisition. State with reasons, the accounting
treatment to be followed in the year 2002-03.
(b) The company deals in three products, A, B and C, which are neither similar nor
interchangeable. At the time of closing of its account for the year 2002-03. The
Historical Cost and Net Realizable Value of the items of closing stock are determined as
follows:
 Company Accounts - I 8.59

Items Historical Cost Net Realisable

(Rs. in lakhs) Value (Rs. in lakhs)
A 40 28
B 32 32
C 16 24
What will be the value of Closing Stock?
(c) During the current year 2002 2003, X Limited made the following expenditure relating to
its plant building:
Rs. in lakhs
Routine Repairs 4
Repairing 1
Partial replacement of roof tiles 0.5
Substantial improvements to the electrical wiring
system which will increase efficiency 10
What amount should be capitalized?
(d) A plant was depreciated under two different methods as under:
Year SLM W.D.V.
(Rs. in lakhs) (Rs. in lakhs)
1 7.80 21.38
2 7.80 15.80
3 7.80 11.68
4 7.80 8.64
31.20 57.50
5 7.80 6.38
What should be the amount of resultant surplus/deficiency, if the company decides to
switch over from W.D.V. method to SLM method for first four years? Also state, how will
you treat the same in Accounts.
(e) Briefly explain the methods of accounting for amalgamation as per Accounting Standard-
14. (20 marks) (PE-II – May 2004)
Answer
(a) As per para 11.3 of AS 12 on Accounting for Government Grants, the amount refundable
in respect of a government grant related to a specific fixed asset is recorded by
increasing the book value of the asset. Depreciation on the revised book value is
provided prospectively over the residual useful life of the asset. In the given case, book
8.60 Accounting

value of machinery will be increased by Rs. 2 crores in the year 2002-2003. The
computations for the depreciation on machinery can be given as:
Cost of machinery Rs. 20 crores
Less: Grant received Rs. 2 crores
Cost of machinery Rs. 18 crores
Useful life of machinery 9 years
Depreciation per year as per straight line method Rs. 18 crores/9
(assuming residual value to be zero) = Rs. 2 crores
Total depreciation for 4 years (1998-99 to 2001-2002) Rs. 8 crores
Book value (in year 2002-2003) Rs. 10 crores
Add: Grant refunded Rs. 2 crores
Revised book value Rs. 12 crores
Remaining useful life 5 years
Revised annual depreciation Rs. 12 crores/5
= 2.4 crores
Thus, book value of machinery will be Rs. 12 crores in the year 2002-2003 and the
depreciation amounting Rs. 2.4 crores will be charged on machinery. Annual
depreciation of Rs. 2.4 crores will be charged in the next four years.
(b) As per para 5 of AS 2 on Valuation of Inventories, inventories should be valued at the
lower of cost and net realizable value. Inventories should be written down to net
realizable value on an item-by-item basis in the given case.
Items Historical Cost Net Realisable Value Valuation of closing
(Rs. in lakhs) stock (Rs. in lakhs)
(Rs. in lakhs)
A 40 28 28
B 32 32 32
C 16 24 16
88 84 76
Hence, closing stock will be valued at Rs. 76 lakhs.
(c) As per para 12.1 of AS 10 on Accounting for Fixed Assets, expenditure that increases the
future benefits from the existing asset beyond its previously assessed standard of
performance is included in the gross book value, e.g., an increase in capacity. Hence, in
the given case, Repairs amounting Rs. 5 lakhs and Partial replacement of roof tiles
should be charged to profit and loss statement. Rs. 10 lakhs incurred for substantial
improvement to the electrical writing system which will increase efficiency should be
capitalized.
 Company Accounts - I 8.61

(d) As per para 21 of AS 6 on Depreciation Accounting, when a change in the method of

depreciation is made, depreciation should be recalculated in accordance with the new
method from the date of the asset coming into use. The deficiency or surplus arising
from retrospective recomputation of depreciation in accordance with the new method
should be adjusted in the accounts in the year in which the method of depreciation is
changed. In the given case, there is a surplus of Rs. 26.30 lakhs on account of change
in method of depreciation, which will be credited to Profit and Loss Account. Such a
change should be treated as a change in accounting policy and its effect should be
quantified and disclosed.
(e) As per AS 14 on ‘Accounting for Amalgamations’, there are two main methods of
accounting for amalgamations:
(i) The Pooling of Interest Method
Under this method, the assets, liabilities and reserves of the transferor company are
recorded by the transferee company at their existing carrying amounts (after making the
necessary adjustments).
If at the time of amalgamation, the transferor and the transferee companies have
conflicting accounting policies, a uniform set of accounting policies is adopted following
the amalgamation. The effects on the financial statements of any changes in accounting
policies are reported in accordance with AS 5 on ‘Net Profit or Loss for the Period, Prior
Period Items and Changes in Accounting Policies’.
(ii) The Purchase Method
Under the purchase method, the transferee company accounts for the amalgamation
either by incorporating the assets and liabilities at their existing carrying amounts or by
allocating the consideration to individual identifiable assets and liabilities of the transferor
company on the basis of their fair values at the date of amalgamation. The identifiable
assets and liabilities may include assets and liabilities not recorded in the financial
statements of the transferor company.
Where assets and liabilities are restated on the basis of their fair values, the
determination of fair values may be influenced by the intentions of the transferee
company.
Question 18
(a) On 20.4.2003 JLC Ltd. obtained a loan from the Bank for Rs. 50 lakhs to be utilised as
under:
Rs.
Construction of a shed 20 lakhs
Purchase of machinery 15 lakhs
Working capital 10 lakhs
Advance for purchase of truck 5 lakhs
8.62 Accounting

In March, 2004 construction of shed was completed and machinery installed. Delivery of
truck was not received. Total interest charged by the bank for the year ending 31.3.2004
was Rs. 9 lakhs. Show the treatment of interest under AS 16.
(b) A limited company created a provision for bad and doubtful debts at 2.5% on debtors in
preparing the financial statements for the year 2003-2004.
Subsequently on a review of the credit period allowed and financial capacity of the
customers, the company decided to increase the provision to 8% on debtors as on
31.3.2004. The accounts were not approved by the Board of Directors till the date of
decision. While applying the relevant accounting standard can this revision be considered
as an extraordinary item or prior period item?
(c) Explain the treatment of cost arising from alteration in retirement benefit cost as per
AS 15. (12 marks) (PE-II – Nov. 2004)
Answer
(a) As per AS 16, borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset should be capitalized. A qualifying asset
is an asset that necessarily takes a substantial period of time (usually 12 months or
more) to get ready for its intended use or sale. If an asset is ready for its intended use or
sale at the time of its acquisition then it is not treated as a qualifying asst for the
purposes of AS 16.
Treatment of interest as per AS 16
Particulars Nature Interest to be capitalized Interest to be charged to
profit and loss account
(1) Constructio Qualifying  Rs. 20 lakhs 
 Rs. 9 lakhs  
n of a shed asset  Rs. 50 lakhs 
= Rs. 3.60 lakhs
(2) Purchase of Not a  Rs. 15 lakhs 
 Rs. 9 lakhs  
machinery qualifying  Rs. 50 lakhs 
asset
= Rs. 2.70 lakhs.
(3) Working Not  Rs. 10 lakhs 
 Rs. 9 lakhs  
capital qualifying  Rs. 50 lakhs 
asset
= Rs. 1.80 lakhs
(4) Advance for Not a  Rs. 5 lakhs 
purchase of qualifying  Rs. 9 lakhs  
 Rs. 50 lakhs 
truck asset
= Rs. 0.90 lakhs
Total Rs.3.60 lakhs Rs.5.40 lakhs


On the basis that machinery is ready for its intended use at the time of its acquisition/purchase.
 Company Accounts - I 8.63

(b) The preparation of financial statements involve making estimates which are based on the
circumstances existing at the time when the financial statements are prepared. It may be
necessary to revise an estimate in a subsequent period if there is a change in the
circumstances on which the estimate was based. Revision of an estimate, by its nature,
does not bring the adjustment within the definitions of a prior period item or an
extraordinary item [para 21 of AS 5 (Revised) on Net Profit or Loss for the Period, Prior
Period Items and Changes in Accounting Policies].
In the given case, a limited company created 2.5% provision for doubtful debts for the
year 2003-2004. Subsequently in 2004 they revised the estimates based on the changed
circumstances and wants to create 8% provision. As per AS-5 (Revised), this change in
estimate is neither a prior period item nor an extraordinary item.
However, as per para 27 of AS 5 (Revised), a change in accounting estimate which has
material effect in the current period, should be disclosed and quantified. Any change in
the accounting estimate which is expected to have a material effect in later periods
should also be disclosed.
(c) Alteration in the retirement benefit cost may arise from introduction of a retirement
benefit scheme for existing employees or because of making of improvements to an
existing scheme. As per AS 15 any alternation in retirement benefit cost arising from
changes in the actuarial method used or assumptions adopted should be charged or
credited to the statement of profit or loss as they arise in accordance with AS 5 “Net
Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies”.
Additionally, a change in the actuarial method should be treated as a change in
accounting policy and disclosed in accordance with AS 5. The cost of additional benefits
provided to retired employees due to amendments in the retirement benefit scheme
should also be treated in the same manner (i.e. charged to profit and loss statement of
the year).
Question 19
(a) A major fire has damaged assets in a factory of X Co. Ltd. on 8.4.2004, 8 days after the
year end closing of accounts. The loss is estimated to be Rs. 16 crores (after estimating
the recoverable amount of Rs. 24 crores from the Insurance Company).
If the company had no insurance cover, the loss due to fire would be Rs. 40 crores.
Explain, how the loss should be treated in the Final accounts of the year ended
31.3.2004.
(b) A Company had deferred research and development cost of Rs. 150 lakhs. Sales
expected in the subsequent years are as under:
Years Sales (Rs. in lakhs)
I 400
II 300
8.64 Accounting

III 200
IV 100
You are asked to suggest how should Research and Development cost be charged to
Profit and Loss account.
If at the end of the III year, it is felt that no further benefit will accrue in the IV year, how
the unamortised expenditure would be dealt with in the accounts of the Company?
(c) In April, 2004 a Limited Company issued 1,20,000 equity shares of Rs. 100 each. Rs. 50
per share was called up on that date which was paid by all shareholders. The remaining
Rs. 50 was called up on 1.9.2004. All shareholders paid the sum in September, 2004,
except one shareholder having 24,000 shares. The net profit for the year ended
31.3.2005 is Rs. 2,64,000 after dividend on preference shares and dividend distribution
tax of Rs. 64,000.
Compute basic EPS for the year ended 31.3.2005 as per Accounting Standard 20.
(d) (i) Mr. Raj a relative of key Management personnel received remuneration of Rs.
2,50,000 for his services in the company for the period from 1.4.2004 to 30.6.2004.
On 1.7.2004 he left the service.
Should the relative be identified as at the closing date i.e. on 31.3.2005 for the
purposes of AS 18?
(ii) X Ltd. sold goods to its associate Company for the 1st quarter ending 30.6.2004.
After that, the related party relationship ceased to exist. However, goods were
supplied as was supplied to any other ordinary customer. Decide whether
transactions of the entire year has to be disclosed as related party transaction.
(e) On 1.4.2001 ABC Ltd. received Government grant of Rs. 300 lakhs for acquisition of a
machinery costing Rs. 1,500 lakhs. The grant was credited to the cost of the asset. The
life of the machinery is 5 years. The machinery is depreciated at 20% on WDV basis.
The Company had to refund the grant in May 2004 due to non-fulfillment of certain
conditions.
How you would deal with the refund of grant in the books of ABC Ltd.?
(4 marks each) (PE-II – May 2005
Answer
(a) The present event does not relate to conditions existing at the balance sheet date.
Hence, no specific adjustment is required in the financial statements for the year ending
on 31.3.2004. But if the event occurring after balance sheet date gives an indication that
the enterprise may cease to be a going concern, then the assets and liabilities are
required to be adjusted for the financial year ended 31st March, 2004. AS 4 (Revised)
requires disclosure in respect of events occurring after the balance sheet date
representing unusual changes affecting the existence or substratum of the enterprise
 Company Accounts - I 8.65

after the date of the Balance Sheet. In the present event, the loss of assets in a factory
can be considered to be an event affecting the substratum of the enterprise. Hence, an
appropriate disclosure should be made in the report of the approving authority.
(b) (i) Based on sales, research and development cost to be allocated as follows:
Year Research and Development cost allocation
(Rs. in lakhs)
I 400
 150  60
1,000
II 300
 150  45
1,000
III 200
 150  30
1,000
IV 100
 150  15
1,000
(ii) If at the end of the III year, the circumstances do not justify that further benefit will
accrue in IV year, then the company has to charge the unamortised amount i.e.
remaining Rs. 45 lakhs [150 – (60 + 45)] as an expense immediately.
Note: As per para 41 of AS 26 on Intangible Assets, expenditure on research (or on the
research phase of an internal project) should be recognized as an expense when it is
incurred. It has been assumed in the above solution that the entire cost of Rs. 150 lakhs
is development cost. Therefore, the expenditure has been deferred to the subsequent
years on the basis of presumption that the company can demonstrate all the conditions
specified in para 44 of AS 26. An intangible asset should be derecognised when no
future economic benefits are expected from its use according to para 87 of the standard.
Hence the remaining unamortised amount of Rs. 45,00,000 has been written off as an
expense at the end of third year.
Net profit attributable to equity shareholders
(c) Basic earnings per share (EPS) =
Weighted average number of equity shares outstanding during the year

Rs. 2,64,000
=  Rs. 3
88,000 shares (as calculated in working note)

Working Note:
Calculation of weighted average number of equity shares
Number of shares Nominal value of shares Amount paid
1st April, 2004 1,20,000 100 50
1st September, 2004 96,000 100 100
24,000 100 50
8.66 Accounting

As per para 19 of AS 20 on Earnings per share, Partly paid equity shares are treated as
a fraction of equity share to the extent that they were entitled to participate in dividends
relative to a fully paid equity share during the reporting period. Assuming that the partly
paid shares are entitled to participate in the dividends to the extent of amount paid,
weighted average number of shares will be calculated as:
Shares
1 5
1,20,000   = 25,000
2 12
7
96,000 = 56,000
12
1 7
24,000   = 7,000
2 12
88,000 shares
(d) (i) According to para 10 of AS 18 on Related Party Disclosures, parties are considered
to be related if at any time during the reporting period one party has the ability to
control the other party or exercise significant influence over the other party in
making financial and/or operating decisions. Hence, Mr. Raj, a relative of key
management personnel should be identified as relative as at the closing date i.e. on
31.3.2005.
(ii) As per para 23 of AS 18, transactions of X Ltd. with its associate company for the
first quarter ending 30.06.2004 only are required to be disclosed as related party
transactions. The transactions for the period in which related party relationship did
not exist need not be reported.
(e) According to para 21 of AS 12 on Accounting for Government Grants, the amount
refundable in respect of a grant related to a specific fixed asset should be recorded by
increasing the book value of the asset or by reducing the capital reserve or deferred
income balance, as appropriate, by the amount refundable. In the first alternative, i.e.,
where the book value is increased, depreciation on the revised book value should be
provided prospectively over the residual useful life of the asset. The accounting treatment
in both the alternatives can be given as follows:
Alternative 1:
Rs. (in lakhs)
1st April, 2001 Acquisition cost of machinery (Rs. 1,500 – 300) 1,200.00
31st March, 2002 Less: Depreciation @ 20% 240.00
Book value 960.00
31st March, 2003 Less: Depreciation @ 20% 192.00
Book value 768.00
31st March, 2004 Less: Depreciation @ 20% 153.60
 Company Accounts - I 8.67

1st April, 2004 Book value 614.40

May, 2004 Add: Refund of grant 300.00
Revised book value 914.40
Depreciation @ 20% on the revised book value amounting Rs. 914.40 lakhs is to be
provided prospectively over the residual useful life of the asset i.e. years ended 31st
March, 2005 and 31st March, 2006.
Alternative 2:
ABC Ltd. can also debit the refund amount of Rs. 300 lakhs in capital reserve of the
company.
Question 20
(a) ABC Ltd. could not recover Rs. 10 lakhs from a debtor. The company is aware that the
debtor is in great financial difficulty. The accounts of the company were finalized for the
year ended 31.3.2005 by making a provision @ 20% of the amount due from the said
debtor.
The debtor became bankrupt in April, 2005 and nothing is recoverable from him.
Do you advise the company to provide for the entire loss of Rs. 10 lakhs in the books of
account for the year ended 31st March, 2005?
(b) X Co. Ltd. signed an agreement with its employees union for revision of wages in June,
2004. The wage revision is with retrospective effect from 1.4.2000. The arrear wages
upto 31.3.2004 amounts to Rs. 80 lakhs. Arrear wages for the period from 1.4.2004 to
30.06.2004 (being the date of agreement) amounts to Rs. 7 lakhs.
Decide whether a separate disclosure of arrear wages is required.
(c) An intangible asset appears in Balance Sheet of A Co. Ltd. at Rs. 16 lakhs as on
31.3.2004. The asset was acquired for Rs. 40 lakhs in April, 1991. The Company has
been amortising the asset value on straight line basis. The policy is to amortise for 20
years.
Do you advise the Company to amortise the entire asset value in the books of the
company as on 31.3.2004?
(d) Ram Co. (P) Ltd. furnishes you the following information for the year ended 31.3.2005:
Depreciation for the year ended 31.3.2005 Rs. 100 lakhs
(under straight line method)
Depreciation for the year ended 31.3.2005 Rs. 200 lakhs
(under written down value method)
Excess of depreciation for the earlier years calculated under Rs. 500 lakhs
written down value method over straight line method
8.68 Accounting

The Company wants to change its method of claiming depreciation from straight line
method to written down value method.
Decide, how the depreciation should be disclosed in the Financial Statement for the year
ended 31.3.2005.
(e) How refund of revenue grant received from the Government is disclosed in the Financial
Statements? (4 Marks each) (PE-II – Nov. 2005)
Answer
(a) As per AS 4 ‘Contingencies and Events occurring after the Balance Sheet Date’,
adjustments to assets and liabilities are required for events occurring after the balance
sheet date that provide additional information materially affecting the determination of the
amounts relating to conditions existing at the Balance Sheet date.
In the given case, bankruptcy of the debtor in April, 2005 and consequent non-recovery
of debt is an event occurring after the balance sheet date which materially affects the
determination of profits for the year ended 31.3.2005. Therefore, the company should be
advised to provide for the entire amount of Rs. 10 lakhs according to para 8 of AS 4.
(b) It is given that revision of wages took place in June, 2004 with retrospective effect from
1.4.2000. The arrear wages payable for the period from 1.4.2000 to 30.6.2004 cannot be
taken as an error or omission in the preparation of financial statements and hence this
expenditure cannot be taken as a prior period item.
Additional wages liability of Rs. 87 lakhs (from 1.4.2000 to 30.6.2004) should be included
in current year’s wages.
It may be mentioned that additional wages is an expense arising from the ordinary
activities of the company. Although abnormal in amount, such an expense does not
qualify as an extraordinary item. However, as per Para 12 of AS 5 (Revised),’ Net Profit
or loss for the Period, Prior Period Items and Changes in the Accounting Policies’, when
items of income and expense within profit or loss from ordinary activities are of such size,
nature or incidence that their disclosure is relevant to explain the performance of the
enterprise for the period, the nature and amount of such items should be disclosed
separately.
However, wages payable for the current year (from 1.4.2004 to 30.6.2004) amounting Rs.
7 lakhs is not a prior period item, hence need not be disclosed separately. This may be
shown as current year wages.
(c) AS 26 ‘Intangible Assets’, came into effect for accounting periods commencing on or
after 1.4.2003 and is mandatory in nature. Para 67 of the standard provides that if there
is persuasive evidence that the life of the intangible asset is 20 years, then no
adjustment is required at 1.4.2003. However, para 63 of the standard states that if it
cannot be demonstrated that the life of the intangible asset is greater than 10 years, then
 Company Accounts - I 8.69

AS 26 would require the asset to be amortised over not more than 10 years. Since, in
the given case, the amortisation period determined by applying para 63 has already
expired as on 1.4.2003, the carrying amount of Rs. 16 lakhs would be required to be
eliminated with a corresponding adjustment to the opening balance of revenue reserves
as on 1.4.2003.
(d) As per para 21 of AS 26 ‘Intangible Assets’, when a change in the method of depreciation
is made, depreciation should be calculated in accordance with the new method from the
date of the asset coming into use. The deficiency or surplus arising from retrospective
recomputation should be adjusted in the accounts in the year in which the method of
depreciation is changed. The deficiency should be charged to profit and loss account.
Similarly, any surplus should be credited in the statement of profit and loss. Such
change is a change in the accounting policy, and its effect should be quantified and
disclosed.
In the given case, the deficiency of Rs. 500 lakhs would be charged to the profit and loss
account of 31.3.2005. In the notes to account, the fact of change in method of
depreciation should be elaborated along with the effect of Rs. 500 lakhs. The current
depreciation charge of 200 lakhs determined in accordance with the written down value
method should be debited to the profit and loss account.
(e) The amount refundable in respect of a grant related to revenue should be applied first
against any unamortised deferred credit remaining in respect of the grant. To the extent
that the amount refundable exceeds any such deferred credit, or where no deferred credit
exists, the amount should be charged to profit and loss statement. The amount
refundable in respect of a grant related to a specific fixed asset should be recorded by
increasing the book value of the asset or by reducing the capital reserve or the deferred
income balance, as appropriate, by the amount refundable. In the first alternative, i.e.,
where the book value of the asset is increased, depreciation on the revised book value
should be provided prospectively over the residual useful life of the asset.
Question 21
(a) X Co. Limited purchased goods at the cost of Rs.40 lakhs in October, 2005. Till March, 2006,
75% of the stocks were sold. The company wants to disclose closing stock at Rs.10 lakhs.
The expected sale value is Rs.11 lakhs and a commission at 10% on sale is payable to the
agent. Advise, what is the correct closing stock to be disclosed as at 31.3.2006.
(b) Explain the ‘Accounting of Revaluation of Assets’ with reference to AS 10.
(c) Arjun Ltd. sold farm equipments through its dealers. One of the conditions at the time of sale
is, payment of consideration in 14 days and in the event of delay interest is chargeable @
15% per annum. The Company has not realized interest from the dealers in the past.
However, for the year ended 31.3.2006, it wants to recognise interest due on the balances
due from dealers. The amount is ascertained at Rs.9 lakhs. Decide whether the income by
way of interest from dealers is eligible for recognition as per AS 9.
8.70 Accounting

(d) AB Ltd. launched a project for producing product X in October, 2004. The Company incurred
Rs.20 lakhs towards Research and Development expenses upto 31st March, 2006. Due to
prevailing market conditions, the Management came to conclusion that the product cannot be
manufactured and sold in the market for the next 10 years. The Management hence wants to
defer the expenditure write off to future years.
Advise the Company as per the applicable Accounting Standard.
(4 Marks each) (PE-II May 2006)
Answer
(a) As per Para 5 of AS 2 “Valuation of Inventories”, the inventories are to be valued at lower of
cost and net realizable value.
In this case, the cost of inventory is Rs.10 lakhs. The net realizable value is 11,00,000  90%
= Rs.9,90,000. So, the stock should be valued at Rs.9,90,000.
(b) As per Para 30 of AS 10 “Accounting for Fixed Assets”, an increase in net book value arising
on revaluation of fixed assets should be credited to owner’s interests under the head of
‘revaluation reserve, except that, to the extent that such increase is related to and not greater
than a decrease arising on revaluation previously recorded as a charge to the profit and loss
statement, it may be credited to the profit and loss statement. A decrease in net book value
arising on revaluation of fixed assets is charged directly to profit and loss statement except
that to the extent such a decrease is related to an increase which was previously recorded as
a credit to revaluation reserve and which has not been subsequently reversed or utilized , it
may be charged directly to that account.
(c) As per AS 9 “Revenue Recognition”, where the ability to assess the ultimate collection with
reasonable certainty is lacking at the time of raising any claim, the revenue recognition is
postponed to the extent of uncertainty inverted. In such cases, the revenue is recognized
only when it is reasonably certain that the ultimate collection will be made.
In this case, the company never realized interest for the delayed payments make by the
dealers. Hence, it has to recognize the interest only if the ultimate collection is certain. The
interest income hence is not to be recognized.
(d) As per Para 41 of AS 26 “Intangible Assets”, expenditure on research should be recognized
as an expense when it is incurred. An intangible asset arising from development (or from the
development phase of an internal project) should be recognized if, and only if, an enterprise
can demonstrate all of the conditions specified in para 44 of the standard. An intangible asset
(arising from development) should be derecognised when no future economic benefits are
expected from its use according to para 87 of the standard. Therefore, the manager cannot
defer the expenditure write off to future years.
Hence, the expenses amounting Rs. 20 lakhs incurred on the research and development
project has to be written off in the current year ending 31st March, 2006.
 Company Accounts - I 8.71

Question 22
(a) What are the costs that are to be included in Research and Development costs as per
AS 8.
(b) The Company reviewed an actuarial valuation for the first time for its Pension Scheme,
which revalued a surplus of Rs.12 lacs. It wants to spread the same over the next 2
years by reducing the annual contribution to Rs.4 lacs instead of Rs.10 lacs. The
average remaining life of the employees, if estimated to be 6 years, you are required to
advise the Company considering the accounting standards 5 and 15.
(c) X Ltd. entered into an agreement to sell its immovable property included in the Balance
Sheet at Rs.10 lacs to another company for Rs.15 lacs. The agreement to sell was
concluded on 28th February, 2006 and the sale deed was registered on 1 st May, 2006.
Comment with reference to AS 4.
(d) Define related party transaction under AS 18. (4 Marks each) (PE-II- Nov. 2006)
Answer
(a) According to paras 41 and 43 of AS 26 , “No intangible asset arising from research
(or from the research phase of an internal project) should be recognized in the research
phase. Expenditure on research (or on the research phase of an internal project) should
be recognized as an expense when it is incurred.
Examples of research costs are:
 Costs of activities aimed at obtaining new knowledge;
 Costs of the search for, evaluation and final selection of, applications of research
findings or other knowledge;
 Costs of the search for alternatives for materials, devices, products, processes,
systems or services; and
 Costs of the activities involved in formulation, design, evaluation and final selection
of possible alternatives for new or improved materials, devices, products, processes
systems or services.”
According to paras 45 and 46 of AS 26, “In the development phase of a project, an
enterprise can, in some instances, identify an intangible asset and demonstrate that
future economic benefits from the asset are probable. This is because the development
phase of a project is further advanced than the research phase.


AS 8 stands withdrawn w.e.f. 1st April, 2003 i.e. the date from which AS 26 ‘Intangible Assets’
becomes mandatory. Therefore the above answer has been given as per AS 26.
8.72 Accounting

Examples of development activities/costs are:

 Costs of the design, construction and testing of pre-production or pre-use
prototypes and models;
 Costs of the design of tools, jigs, moulds and dies involving new technology;
 Costs of the design, construction ad operation of a pilot plant that is not of a scale
economically feasible for commercial production; and
 Costs of the design, construction and testing of a chosen alternative for new or
improved materials, devices, products, processes, systems or services.”
(b) According to para 92 of AS 15 (Revised 2005) on “Employee Benefits”, any actuarial
gains and losses should be recognized immediately in the statement of profit and loss
account as income or expense.
In the given case, the amount of surplus from pension scheme of Rs. 12 lacs is an
actuarial gain, which should be recognized as income in the profit and loss account of the
current year and not to be adjusted from the amount of annual contribution.
The surplus arising due to review of actuarial valuation of pension scheme by a company
should be treated as a change in accounting policy and disclosed in accordance with
AS 5(Revised).
(c) According to para 13 of AS 4 “Contingences and Events occurring after the Balance
Sheet Date”, assets and liabilities should be adjusted for events occurring after the
balance sheet date that provide additional evidence to assist the estimation of amounts
relating to conditions existing at the balance sheet date.
In this case the sale of immovable property was carried out before the closure of the
books of Accounts. This is clearly an event occurring after the balance sheet date.
Agreement to sell was effected before the balance sheet date and the registration was
done after the balance sheet date. So the adjustment for the sale of immovable property
is necessary in the books of account for the year ended 31 st March, 2006.
(d) According to AS 18, “Parties are considered to be related if at any time during the
reporting period one party has the ability to control the other party or exercise significant
influence over the other party in making financial and/or operating decisions.”
A related party transaction involves a transfer of resources or obligations between related
parties, regardless of whether or not a price is charged.
Following are the examples of the related party transactions in respect of which
disclosures may be made by a reporting enterprise:
 Purchases or sales of goods (finished or unfinished);
 Purchases or sales of fixed assets;
 Rendering or receiving of services;
 Company Accounts - I 8.73

 Agency arrangements;
 Leasing or hire purchase arrangements;
 Transfer of research and development;
 Licence agreements;
 Finance (including loans and equity contributions in cash or in kind);
 Guarantees and collateral etc.
 Management contracts including for deputation of employees.
Question 23
(a) What are the disclosure requirements of AS-7 (Revised)?
(b) How would you treat the Government grant received relating to a depreciable asset
under the following cases as per AS-12?
Case i: Gross value of asset Rs.2 crores and Grant received Rs.20 lakhs only.
Case ii: Gross value of asset Rs.2 crores and Grant received Rs.2 crores.
(c) Explain the concept of actuarial valuation.
(d) What are the information that are to be disclosed in the financial statements as per
AS-10? (4x4= 16 Marks) (PE II- May, 2007)
Answer
(a) According to paragraphs 38, 39 and 41 of AS 7, an enterprise should disclose:
(a) the amount of contract revenue recognized as revenue in the period;
(b) the methods used to determine the contract revenue recognized in the period; and
(c) the methods used to determine the stage of completion of contracts in progress.
In case of contract still in progress the following disclosures are required at the reporting
date:
(a) the aggregate amount of costs incurred and recognised profits (less recognised
losses) upto the reporting date;
(b) the amount of advances received; and
(c) the amount of retentions.
An enterprise should also present:
(a) the gross amount due from customers for contract work as an asset; and
(b) the gross amount due to customers for contract work as a liability.
8.74 Accounting

(b) In accordance with AS 12, government grants related to specific fixed assets should be
presented in the balance sheet by showing the grant as a deduction from the gross value
of the assets concerned in arriving at their book value. Where the grant related to a
specific fixed asset equals the whole, or virtually the whole, of the cost of the asset, the
asset should be shown in the balance sheet at a nominal value.
Alternatively, government grants related to depreciable fixed assets may be treated as
deferred income which should be recognized in the profit and loss statement on a
systematic and rational basis over the useful life of the asset, i.e., such grants should be
allocated to income over the periods and in the proportions in which depreciation on
those assets is charged.
Case i
Grant received amounting Rs.20 lakhs is required to be deducted from Rs.2 crores. The
balance of Rs.1.80 crores to be shown as an assest in the Balance Sheet and
depreciation should also be charged on Rs.1.80 crores.
Case ii
As the grant is received for the entire cost of the asset, the asset shall be recorded at a
nominal value of Rs.100 in the Balance sheet so that the existence of the amount is
reflected. No depreciation is to be charged in this case.
Note: Alternatively, in both the cases government grant may be treated as deferred
income which should be recognized in the profit and loss statement on a systematic and
rational basis over the useful life of the asset.
(c) Actuarial valuation is the process used by an actuary  to estimate the present value of
benefits to be paid under a retirement scheme and the present values of the scheme
assets and, sometimes, of future contributions. In the case of defined benefit scheme the
cost of retirement benefits, to be charged to Profit and Loss Account on year to year
basis, is determined on actuarial basis. According to paragraph 65 of AS 15 (revised
2005), an enterprise should use the Projected Unit Credit method to determine the
present value of its defined benefit obligations and the related current service cost and,
wherever applicable, past service cost.


Actuary is an expert person who can calculate the liability where the factors affecting the
calculation of liability are uncertain and cannot be determined in ordinary course.

Projected Unit Credit method (sometimes known as the accrued benefit method pro-rated on service or as
the benefit/years of service method) considers each period of service as giving rise to an additional unit of
benefit entitlement and measures each unit separately to build the final obligation.
 Company Accounts - I 8.75

(d) As per AS 10, the following information should be disclosed in the financial statements :
(i) gross and net book values of fixed assets at the beginning and end of an accounting
period showing additions, disposals, acquisitions and other movements ;
(ii) expenditure incurred on account of fixed assets in the course of construction or
acquisition ; and
(iii) revalued amount substituted for historical costs of fixed assets, the method adopted
to compute the revalued amounts, the nature of indices used, the year of any
appraisal made, and whether an external valuer was involved, in case where fixed
assets are stated at revalued amounts.
Question 24
(a) Explain the treatment of Refund of Government Grants as per AS-12.
(b) The Company X Ltd., has to pay for delay in cotton clearing charges. The company up to
31.3.2006 has included such charges in the valuation of closing stock. This being in the
nature of interest, X Ltd. decided to exclude such charges from closing stock for the year
2006-07. This would result in decrease in profit by Rs.5 lakhs. Comment.
(c) The Board of Directors of X Ltd. decided on 31.3.2007 to increase sale price of certain
items of goods sold retrospectively from 1st January, 2007. As a result of this decision
the company has to receive Rs.5 lakhs from its customers in respect of sales made from
1.1.2007 to 31.3.2007. But the Company’s Accountant was reluctant to make-up his
mind. You are asked to offer your suggestion.
(d) Briefly explain disclosure requirements for Investments as per AS-13.
(4x4 = 16 Marks)(PE II-Nov. 2007)
Answer
(a) As per para 11 of AS 12 ‘Accounting for Government Grants’, government grant that
becomes refundable is treated as an extraordinary item.
The amount refundable in respect of a government grant related to revenue is first
applied against any unamortised deferred credit remaining in respect of the grant.
The amount refundable in respect of a government grant related to a specific fixed asset
is recorded by increasing the book value of the asset or by reducing the capital reserve
or the deferred income balance, as appropriate, by the amount refundable.
Where a grant which is in the nature of promoters’ contribution becomes refundable, in
part or in full, to the government on non-fulfillment of some specified conditions, the
relevant amount recoverable by the government is reduced from the capital reserve.
8.76 Accounting

(b) As per para 12 of AS 2 (revised), interest and other borrowing costs are usually
considered as not relating to bringing the inventories to their present location and
condition and are therefore, usually not included in the cost of inventories. However, X
Ltd. was in practice to charge the cost for delay in cotton clearing in the closing stock. As
X Ltd. decided to change this valuation procedure of closing stock, this treatment will be
considered as a change in accounting policy and such fact to be disclosed as per AS 1.
Therefore, any change in amount mentioned in financial statement, which will affect the
financial position of the company should be disclosed properly as per AS 1, AS 2 and AS
5.
Also a note should be given in the annual accounts that, had the company followed
earlier system of valuation of closing stock, the profit before tax would have been higher
by Rs. 5 lakhs.
(c) As per para 10 of AS 9 ‘Revenue Recognition’, the additional revenue on account of
increase in sales price with retrospective effect, as decided by Board of Directors of X
Ltd., of Rs.5 lakhs to be recognised as income for financial year 2006-07, only if the
company is able to assess the ultimate collection with reasonable certainty. If at the time
of raising of any claim it is unreasonable to expect ultimate collection, revenue
recognition should be postponed.
(d) The disclosure requirements as per para 35 of AS 13 are as follows:
(i) Accounting policies followed for valuation of investments.
(ii) Classification of investment into current and long term in addition to classification as
per Schedule VI of Companies Act in case of company.
(iii) The amount included in profit and loss statements for
(a) Interest, dividends and rentals for long term and current investments,
disclosing therein gross income and tax deducted at source thereon;
(b) Profits and losses on disposal of current investment and changes in carrying
amount of such investments;
(c) Profits and losses and disposal of long term investments and changes in
carrying amount of investments.
(iv) Aggregate amount of quoted and unquoted investments, giving the aggregate
market value of quoted investments;
(v) Any significant restrictions on investments like minimum holding period for
sale/disposal, utilisation of sale proceeds or non-remittance of sale proceeds of
investment held outside India.
(vi) Other disclosures required by the relevant statute governing the enterprises.
 Company Accounts - I 8.77

Question 25
Answer any four of the following:
(i) (a) X Ltd. purchased debentures of Rs.10 lacs of Y Ltd., which are traded in stock
exchange. How will you show this item as per AS 3 while preparing cash flow
statement for the year ended on 31 st March, 2008?
(b) Mr. Raj a relative of key management personnel received remuneration of
Rs.2,50,000 for his services in the company for the period from 1.4.2007 to
30.6.2007. On 1.7.2007, he left the service.
Should the relative be identified as a related party at the closing date i.e., on
31.3.2008 for the purpose of AS 18?
(ii) A manufacturing company purchased shares of another company from stock exchange
on 1st May, 2007 at a cost of Rs.5,00,000. It also purchased Gold of Rs.2,00,000 and
Silver of Rs.1,50,000 on 1st April, 2005. How will you treat these investments as per the
applicable AS in the books of the company for the year ended on 31st March, 2008, if the
values of these investments are as follows:
Rs.
Shares 2,00,000
Gold 4,00,000
Silver 2,50,000
(iii) (a) Wye Ltd. received Rs.50 lacs from the Central Government as subsidy for setting up
an industry in backward area. How will you treat it in accounts?
(b) How Government grant relating to Specific Fixed Assets is treated in the books as
per AS 12?
(iv) A Ltd. had 6,00,000 equity shares on April 1, 2007. The company earned a profit of
Rs.15,00,000 during the year 2007-08. The average fair value per share during 2007-08
was Rs.25. The company has given share option to its employees of 1,00,000 equity
shares at option price of Rs.15. Calculate basic EPS and diluted EPS.
(v) In a production process, normal waste is 5% of input. 5,000 MT of input were put in
process resulting in wastage of 300 MT. Cost per MT of input is Rs.1,000. The
entire quantity of waste is on stock at the year end. State with reference to
Accounting Standard, how will you value the inventories in this case?
(4 x 4= 16 Marks)(PEII-May, 2008)
8.78 Accounting

Answer
(i) (a) As per AS 3 on ‘Cash flow Statement’, cash and cash equivalents consists of cash
in hand, balance with banks and short-term, highly liquid investments 1. If
investment, of Rs.10 lacs, made in debentures is for short-term period then it is an
item of ‘cash equivalents’.
However, if investment of Rs.10 lacs made in debentures is for long-term period
then as per AS 3, it should be shown as cash flow from investing activities.
(b) According to para 10 of AS 18 on ‘Related Party Disclosures’, parties are
considered to be related if at any time during the reporting period one party has the
ability to control the other party or exercise significant influence over the other party
in making financial and/or operating decisions.
Here, Mr. Raj, who received remuneration of Rs.2,50,000 from the company, is the
relative of the key management personnel of that company. And as per para 3
clause (d) of the Standard, ‘key management personnel and relatives of such
personnel’ are said to be in related party relationships. Hence, Mr. Raj, a relative of
key management personnel ,should be identified as related party at the closing date
i.e. on 31.3.2008.
(ii) As per para 32 of AS 13 on ‘Accounting for Investments’, any investment of long term
period is shown at cost. Hence, the investment in Gold and Silver (purchased on 1 st April
2005) shall continue to be shown at cost i.e., Rs.2,00,000 and Rs.1,50,000 respectively
as their value have increased.
Also as per AS 13, for investment in shares - if the investment is for short-term period
then the loss of Rs.3,00,000 is to be charged to profit & loss account for the year ended
31 st March, 2008. If investment is of long term period then it will continue to be shown at
cost in the Balance Sheet of the company. However, provision for diminution shall be
made to recognize a decline, other than temporary, in the value of the investments, such
reduction being determined and made for each investment individually.
(iii) (a) As per para 10 of AS 12 on ‘Accounting for Government Grants’, subsidy of Rs.50
lacs from the Central government, for setting up an industry in backward area is a
government grant in the nature of promoter’s contribution. Such grants are treated
as capital reserve which can be neither distributed as dividend nor considered as
deferred income.

1
As per para 6 of AS 3, an investment normally qualifies as a cash equivalent only when it has a
short maturity of, say three months or less from the date of acquisition.
 Company Accounts - I 8.79

(b) According to para 8 of AS 12 on ‘Accounting for Government Grants’, two methods

of presentation, in financial statements, of grants related to specific fixed assets are
regarded as acceptable alternatives.
 Under one method, the grant is shown as a deduction from the gross value of
the asset concerned in arriving at its book value.
 Under the other method, grant related to depreciable asset is treated as
deferred income which is recognized in the profit and loss statement on a
systematic and rational basis over the useful life of the assets. Grants related
to non-depreciable assets are credited to capital reserve under this method, as
there is usually no charge to income in respect of such assets. However, if a
grant related to a non-depreciable asset requires the fulfillment of certain
obligations, the grant is credited to income over the same period over which
the cost of meeting such obligations is charged to income. The deferred
income is suitably disclosed in the balance sheet pending its apportionment to
profit and loss account.
(iv) Computation of earnings per share
Earnings Shares Earnings per
share
Net profit for the year 2007-08 Rs.15,00,000
Weighted average number of shares 6,00,000
outstanding during year 2007-08
Basic earnings per share Rs. 2.50
Number of shares under option 1,00,000
Number of shares that would have
been issued at fair value: * (60,000)
(100,000 x 15.00)/25.00
Diluted earnings per share Rs. 15,00,000 6,40,000 Rs. 2.34
(approx.)
*The earnings have not been increased as the total number of shares has been increased
only by the number of shares (40,000) deemed for the purpose of the computation to have
been issued for no consideration.
(v) As per para 13 of AS 2 (Revised), abnormal amounts of wasted materials, labour
and other production costs are excluded from cost of inventories and such costs are
recognized as expenses in the period in which they are incurred.
In this case, normal waste is 250 MT and abnormal waste is 50 MT.
The cost of 250 MT will be included in determining the cost of inventories (finished
goods) at the year end. The cost of abnormal waste amounting to Rs.50,000
(50 MT × Rs.1,000) will be charged to the profit and loss statement.
8.80 Accounting

Question 26
Following is the cash flow abstract of Alpha Ltd. for the year ended 31 st March, 2008:
Cash Flow Abstract
Inflows Rs. Outflows Rs.
Opening balance: Payment to creditors 90,000
Cash 10,000 Salaries and wages 25,000
Bank 70,000 Payment of overheads 15,000
Share capital – shares issued 5,00,000 Fixed assets acquired 4,00,000
Collection from Debtors 3,50,000 Debentures redeemed 50,000
Sale of fixed assets 70,000 Bank loan repaid 2,50,000
Taxation 55,000
Dividends 1,00,000
Closing balance:
Cash 5,000
bank 10,000
10,00,000 10,00,000
Prepare Cash Flow Statement for the year ended 31 st March, 2008 in accordance with
Accounting standard – 3.
(8 Marks) (PE II- Nov. 2008)
Answer
Cash Flow Statement
for the year ended 31.3.2008
Rs. Rs.
Cash flow from operating activities
Cash received from customers 3,50,000
Cash paid to suppliers (90,000)
Cash paid to employees (salaries and wages) (25,000)
Other cash payments (overheads) (15,000)
Cash generated from operations 2,20,000
Income tax paid (55,000)
Net cash from operating activities 1,65,000
 Company Accounts - I 8.81

Cash flow from investing activities

Payment for purchase of fixed assets (4,00,000)
Proceeds from sale of fixed assets 70,000
Net cash used in investment activities (3,30,000)
Cash flow from financing activities
Proceeds from issue of share capital 5,00,000
Bank loan repaid (2,50,000)
Debentures redeemed (50,000)
Dividends paid (1,00,000)
Net cash from financing activities 1,00,000
Net decrease in cash and cash equivalents (65,000)
Cash and cash equivalents at the beginning of the year 80,000
Cash and cash equivalents at the end of the year 15,000

Question 27
(a) B Ltd. undertook a construction contract for Rs. 50 crores in April, 2007. the cost of
construction was initially estimated at Rs. 35 crores. The contract is to be completed in 3
years. While executing the contract, the company estimated the cost of completion of the
contract at Rs. 53 crores.
Can the company provide for the expected loss in the book of account for the year ended
31 st March, 2008?
(b) List any five related party transactions, which require disclosure as per AS 18.
(c) A Government grant of Rs. 25 lakhs received 3 years ago in respect of a machinery
which costs Rs. 200 lakhs, became refundable in March, 2008.
(i) How the receipt of grant would have been recorded in the books of the recipient?
(ii) How the refund of grant would be reflected in the books, at the time of its refund?
(d) List the conditions to be fulfilled as per Accounting Standard 14 (AS 14) for an
amalgamation to be in the nature of merger, in the case of companies.
(e) Discuss the treatment of exchange loss relating to fixed assets as per AS 11 vis – a – vis
the Schedule VI disclosure under the Companies Act, 1956.
(4 x 5 = 20 Marks) (PE II- Nov. 2008)
8.82 Accounting

Answer
(a) As per para 35 of AS 7 “Construction Contracts”, when it is probable that total contract
costs will exceed total contract revenue, the expected loss should be recognised as an
expense immediately. Therefore, The foreseeable loss of Rs.3 crores (Rs. 53 crores less
Rs. 50 crores) should be recognised as an expense immediately in the year ended 31 st
march, 2008. The amount of loss is determined irrespective of
(i) Whether or not work has commenced on the contract;
(ii) Stage of completion of contract activity; or
(iii) The amount of profits expected to arise on other contracts which are not treated as
a single construction contract in accordance with para 8 of AS 7.
(b) Five examples of related party transactions for which disclosure is required according to
AS 18 are:
(i) Purchase and/or sales of goods (finished or unfinished)
(ii) Purchase or sale of fixed assets.
(iii) Rendering or receiving of services.
(iv) Agency arrangements.
(v) Leasing or hire purchase arrangements.
(c) The grant is shown as a deduction from the gross value of the asset. Depreciation on
machinery would be charged on the reduced value of Rs.175 lakhs. Alternatively, the
grant may be treated as deferred income which should be credited to profit and loss
statement on a systematic and rational basis over the useful life of the asset.
As per para 21 of AS 12, the amount refundable in respect of a grant related to a specific
fixed asset should be recorded by increasing the book value of the asset or by reducing
the capital reserve or the deferred income balance, as appropriate, by the amount
refundable. In the first alternative, i.e., where the book value of the asset is increased,
depreciation on the revised book value should be provided prospectively over the
residual useful life of the asset.
(d) An amalgamation should be considered to be an amalgamation in the nature of merger if
the following conditions are satisfied:
(i) All the assets and liabilities of the transferor company become, after amalgamation,
the assets and liabilities of the transferee company.
 Company Accounts - I 8.83

(ii) Shareholders holding not less than 90% of the face value of the equity shares of the
transferor company (other than the equity shares already held therein, immediately
before the amalgamation, by the transferee company or its subsidiaries or their
nominees) become equity shareholders of the transferee company by virtue of the
amalgamation.
(iii) The consideration for the amalgamation receivable by those equity shareholders of
the transferor company who agree to become equity shareholders of the transferee
company is discharged by the transferee company wholly by the issue of equity
shares in the transferee company, except that cash may be paid in respect of any
fractional shares.
(iv) The business of the transferor company is intended to be carried on, after the
amalgamation, by the transferee company.
(v) No adjustment is intended to be made to the book values of the assets and liabilities
of the transferor company when they are incorporated in the financial statements of
the transferee company except to ensure uniformity of accounting policies.
(e) Schedule VI to The Companies Act, 1956 provides that any increase or decrease in
liability due to change in the rate of exchange relating to any fixed asset should be added
to or deducted from the cost of the asset. The amount arrived at should be taken to be
the cost of the fixed asset.
AS 11 (revised), however, does not require adjustment of exchange difference in the
carrying amount of fixed assets. The exchange difference is required to be recognised in
the statement of profit or loss since it is felt that this treatment is conceptually preferable
to that required in Schedule VI and is in consonance with the international position in this
regard.
The provisions of AS 11 will prevail over Schedule VI of the Companies Act. National
Advisory Committee on Accounting Standards (NACAS) has notified AS 11 for
preparation of financial statements of companies. ICAI has come up with the
announcement in this regard, stating that after the notification of AS 11 by NACAS, AS
11 will overrule Schedule VI of the Companies Act.
 9
COMPANY ACCOUNTS - II

UNIT 1 : UNDERWRITING OF SHARES AND DEBENTURES

(A) Write short notes on:
Question 1
“Firm” underwriting. Also give the accounting entries relating to firm underwriting in the books of: (i)
the company, (ii) the underwriter (5 Marks) (Intermediate–Nov. 1999)
Answer
‘Firm’ underwriting signifies a definite commitment to take up a specified number of shares
irrespective of the number of shares subscribed for by the public. In such a case, unless it has
been otherwise agreed, the underwriter’s liability is determined without taking into account the
number of shares taken up ‘firm’ by him, i.e. the underwriter is obliged to take up :
1. the number of shares he has applied for ‘firm’; and
2. the number of shares he is obliged to take up on the basis of the underwriting
agreement.
For example, A underwrites 60% of an issue of 10,000 shares of Rs. 10 each of XY Co. Ltd.
and also applies for 1,000 shares, ‘firm’. The underwriting commission is agreed to at the rate of
2.5 percent. In case there are marked applications for 4,800 shares, he will have to take up 2,200
shares, i.e. 1,000 shares for which he applied ‘firm’ and 1,200 shares to meet his liability of
underwriting contract. If, on the other hand, the underwriting contract has provided that an
abatement would be allowed in respect of shares taken up ‘firm’, the liability of A in the above-
mentioned case would only be for 1,200 shares in total. The accounting entries in relation to firm
underwriting of 1,000 shares in the above example are given below :

Entries in the books of XY Co. Ltd. (Company)

Dr. Cr.
Rs. Rs.
1. A’s Account Dr. 10,000
To Equity Share Capital Account 10,000
(Being allotment of underwritten equity shares in pur-
suance of firm underwriting contract, vide Board’s resolution)
9.2 Accounting

2. Underwriting Commission on Issue of

Shares Account Dr. 250
To A’s Account 250
(Being underwriting commission due to the underwriter
under the firm underwriting contract...)

3. Bank Account Dr. 9,750

To A’s Account 9,750
(Being money received in full settlement of account
from underwriter)
Entries in the books of A (Underwriter)
Dr. Cr.
Rs. Rs.
1. Underwriting Account Dr. 10,000
To XY Co. Ltd. Account 10,000
(Being the liability to take up necessary number of shares
of the company in pursuance of firm underwriting contract
recorded)

2. XY Co. Ltd. Account Dr. 250

To Underwriting Account 250
(Being underwriting commission income credited to
underwriting account)

3. XY Co. Ltd. Account Dr. 9,750

To Bank Account 9,750
(Being balance money paid to the company in full settlement
of account)
Question 2
Write a short note on Firm underwriting and Partial underwriting along with firm underwriting.
(4 marks) (PE – II–May 2004)
Answer
In firm underwriting the underwriter agrees to subscribe upto a certain number of
shares/debentures irrespective of the nature of public response to issue of securities. He gets
these securities even if the issue is fully subscribed or over-subscribed. These securities are taken
by the underwriter in addition to his liability for securities not subscribed by the public. Under
partial underwriting along with firm underwriting, unless otherwise agreed, individual underwriter
 Company Accounts - II 9.3

does not get the benefit of firm underwriting in determination of number of shares/debentures to be
taken up by him.
(B) Practical Questions:
Question 1
Noman Ltd. issued 80,000 Equity Shares which were underwritten as follows:
Mr. A 48,000 Equity Shares
Messrs B & Co. 20,000 Equity Shares
Messrs C Corp. 12,000 Eqiuty Shares
The above mentioned underwriters made applications for ‘firm’ underwritings as follows:
Mr. A 6,400 Equity Shares
Messrs B & Co. 8,000 Equity Shares
Messrs C Corp. 2,400 Equity Shares
The total applications excluding ‘firm’ underwriting, but including marked applications were for
40,000 Equity Shares.
The marked Applications were as under:
Mr. A 8,000 Equity Shares
Messrs B & Co. 10,000 Equity Shares
Messrs C Corp. 4,000 Equity Shares
(The underwriting contracts provide that underwriters be given credit for ‘firm’ applications and
that credit for unmarked applications be given in proportion to the shares underwritten)
You are required to show the allocation of liability. Workings will be considered as a part of your
answer. (12 Marks) (Intermediate–Nov. 1997)
Answer
Noman Ltd.
Statement showing Liability of Underwriters
Mr. A M/s. B & Co. C Corpn. Total
Gross Liability
(No. of shares) 48,000 20,000 12,000 80,000
Unmarked Applications*
(Ratio 48:20:12) 10,800 4,500 2,700 18,000
37,200 15,500 9,300 62,000
Marked Applications 8,000 10,000 4,000 22,000
29,200 5,500 5,300 40,000
Firm underwriting 6,400 8,000 2,400 16,800
Balance to be taken under 22,800 -2,500 2,900 23,200
the contract
9.4 Accounting

Credit for excess of

B & Co. (ratio 48 : 12) 2,000 2,500 500
Net Liability 20,800 2,400
Add: Firm Underwriting 6,400 8,000 2,400 16,800
Total Liability 27,200 8,000 4,800 40,000

Working Note :
* Total Applications 40,000 Shares
Marked Applications 22,000 Shares
Unmarked applications 18,000 Shares
Question 2
A joint stock company resolved to issue 10 lakh equity shares of Rs. 10 each at a premium of Re. 1
per share. One lakh of these shares were taken up by the directors of the company, their relatives,
associates and friends, the entire amount being received forthwith. The remaining shares were
offered to the public, the entire amount being asked for with applications.
The issue was underwritten by X, Y and Z for a commission @2% of the issue price, 65% of
the issue was underwritten by X, while Y’s and Z’s shares were 25% and 10% respectively. Their
firm underwriting was as follows :
X 30,000 shares, Y 20,000 shares and Z 10,000 shares. The underwriters were to submit
unmarked applications for shares underwritten firm with full application money along with members
of the general public.
Marked applications were as follows:
X 1,19,500 shares, Y 57,500 shares and Z 10,500 shares.
Unmarked applications totalled 7,00,000 shares.
Accounts with the underwriters were promptly settled.
You are required to :
(i) Prepare a statements calculating underwriters’ liability for shares other than shares
underwritten firm.
(ii) Pass journal entries for all the transactions including cash transactions.
(16 marks) (Intermediate–May 2001)
Answer
(i) Statement showing underwriters’ liability for shares other
than shares underwritten firm
X Y Z Total
Gross liability 5,85,000 2,25,000 90,000 9,00,000
(9,00,000 shares in the ratio of 65 : 25 : 10)
Less : Marked applications 1,19,500 57,500 10,500 1,87,500
4,65,500 1,67,500 79,500 7,12,000
 Company Accounts - II 9.5

Less : Allocation of unmarked

applications (including firm
underwriting i.e. 7,00,000) in the
ratio 65 : 25 : 10 4,55,000 1,75,000 70,000 7,00,000
10,500 (7,500) 9,500 12,500
Surplus of Y allocated to X and
Z in the ratio 65 : 10 (6,500) 7,500 (1,000) –
4,000 – 8,500 12,500
Rs. Rs. Rs.
Liability amount @ Rs. 11 44,000 – 93,500
Underwriting commission payable
(Gross liability × Rs. 11 × 2%) 1,28,700 49,500 19,800
Net Amount payable 84,700 49,500
Net Amount receivable 73,700

(ii) Journal Entries

Dr. Cr.
Bank A/c Dr. 11,00,000
To Equity Shares Application A/c 11,00,000
(Being application money received on 1 lakh equity
shares @ Rs. 11 per share)
Bank A/c Dr. 97,62,500
To Equity Share Application A/c 97,62,500
(Application money received on 8,87,500 equity shares
@ Rs. 11 per share from general public and underwriters
for shares underwritten firm)
Equity Share Application A/c Dr. 1,08,62,500
X’ s A/c Dr. 44,000
Z’ s A/c Dr. 93,500
To Equity Share Capital A/c 1,00,00,000
To Securities Premium A/c 10,00,000
(Allotment of 10 lakh equity shares of Rs. 10 each at a
premium of Re. 1 per share)
9.6 Accounting

Underwriting commission A/c Dr. 1,98,000

To X’s A/c 1,28,700
To Y’s A/c 49,500
To Z’s A/c 19,800
(Amount of underwriting commission payable to X,
Y and Z @2% on the amount of shares underwritten)

Bank A/c Dr. 73,700

To Z’s A/c 73,700
(Amount received from Z in final settlement)

X’s A/c Dr. 84,700

Y’s A/c Dr. 49,500
To Bank A/c 1,34,200
(Amount paid to X and Y in final settlement)
Question 3
Scorpio Ltd. came out with an issue of 45,00,000 equity shares of Rs. 10 each at a premium of
Rs. 2 per share. The promoters took 20% of the issue and the balance was offered to the
public. The issue was equally underwritten by A & Co; B & Co. and C & Co.
Each underwriter took firm underwriting of 1,00,000 shares each. Subscriptions for 31,00,000
equity shares were received with marked forms for the underwriters as given below:
A & Co. 7,25,000 shares
B & Co. 8,40,000 shares
C & Co. 13,10,000 shares
Total 28,75,000 shares
The underwriters are eligible for a commission of 5% on face value of shares. The entire
amount towards shares subscription has to be paid alongwith application. You are required to:
(a) Compute the underwriters liability (number of shares)
(b) Compute the amounts payable or due to underwriters; and
(c) Pass necessary journal entries in the books of Scorpio Ltd. relating to underwriting.
(16 Marks) (PE-II – Nov. 2005)
 Company Accounts - II 9.7

Answer
(a) Computation of liabilities of underwriters (No. of shares):
A & Co. B & Co. C & Co.
Gross liability 12,00,000 12,00,000 12,00,000
Less: Firm underwriting 1,00,000 1,00,000 1,00,000
11,00,000 11,00,000 11,00,000
Less: Marked applications 7,25,000 8,40,000 13,10,000
3,75,000 2,60,000 (2,10,000)
Less: Unmarked applications distributed
to A & Co. and B & Co. in equal ratio 1,12,500 1,12,500 Nil
2,62,500 1,47,500 (2,10,000)
Less: Surplus of C & Co. distributed to
A & Co. and B & Co. in equal ratio 1,05,000 1,05,000 2,10,000
Net liability (excluding firm underwriting) 1,57,500 42,500 Nil
Add: Firm underwriting 1,00,000 1,00,000 1,00,000
Total liability (No. of shares) 2,57,500 1,42,500 1,00,000
(b) Computation of amounts payable by underwriters:

Liability towards shares to be subscribed

@ 12 per share 30,90,000 17,10,000 12,00,000
Less: Commission
(5% on 12 lakhs shares @ 10 each) 6,00,000 6,00,000 6,00,000
Net amount to be paid by underwriters 24,90,000 11,10,000 6,00,000
(c) In the Books of Scorpio Ltd.
Journal Entries
Particulars Dr. Cr.
Rs. Rs.
Underwriting commission A/c Dr. 18,00,000
To A & Co. A/c 6,00,000
To B & Co. A/c 6,00,000
To C & Co. A/c 6,00,000
(Being underwriting commission on the
shares underwritten)
9.8 Accounting

A & Co. A/c Dr. 30,90,000

B & Co. A/c Dr. 17,10,000
C & Co. A/c Dr. 12,00,000
To Equity share capital A/c 50,00,000
To Share premium A/c 10,00,000
(Being shares including firm underwritten
shares allotted to underwriters)
Bank A/c Dr. 42,00,000
To A & Co. A/c 24,90,000
To B & Co. A/c 11,10,000
To C & Co. A/c 6,00,000
(Being the amount received towards shares
allotted to underwriters less underwriting
commission due to them)

Question 4
Gemini Ltd. came up with public issue of 30,00,000 Equity shares of Rs. 10 each at Rs. 15 per
share. A, B and C took underwriting of the issue in 3 : 2 : 1 ratio.
Applications were received for 27,00,000 shares.
The marked applications were received as under:
A 8,00,000 shares
B 7,00,000 shares
C 6,00,000 shares
Commission payable to underwriters is at 5% on the face value of shares.
(i) Compute the liability of each underwriter as regards the number of shares to be taken up.
(ii) Pass journal entries in the books of Gemini Ltd. to record the transactions relating to
underwriters. (8 Marks )(PE II- Nov. 2008)
Answer
(i) Computation of liability of underwriters in respect of shares
(In shares)
A B C
Gross liability 15,00,000 10,00,000 5,00,000
Less: Unmarked applications 3,00,000 2,00,000 1,00,000
12,00,000 8,00,000 4,00,000
 Company Accounts - II 9.9

Less: Marked applications 8,00,000 7,00,000 6,00,000

4,00,000 1,00,000 (2,00,000)
Surplus of C distributed to A & B in 3:2 ratio 1,20,000 80,000 2,00,000
Net liability 2,80,000 20,000 Nil
(ii) Journal Entries in the books of Gemini Ltd.
Rs. Rs.
A’s Account Dr. 42,00,000
B’s Account Dr. 3,00,000
To Share Capital Account 30,00,000
To Securities Premium Account 15,00,000
(Being the shares to be taken up by the underwriters)
Underwriting Commission Account Dr. 15,00,000
To A’s Account 7,50,000
To B’s Account 5,00,000
To C’s Account 2,50,000
(Being the underwriting commission due to the
underwriters)
Bank Account Dr. 34,50,000
To A’s Account 34,50,000
(Being the amount received from underwriter A for the
shares taken up by him after adjustment of his
commission)
B’s Account Dr. 2,00,000
To Bank Account 2,00,000
(Being the amount paid to underwriter B after
adjustment of the shares taken by him against
underwriting commission due to him)
C’s Account Dr. 2,50,000
To Bank Account 2,50,000
(Being the underwriting commission paid to C)
9.10 Accounting

UNIT 2 AND 3 : ACCOUNTING FOR BUSINESS ACQUISITIONS AND

ACCOUNTING REPORTS
(A) Practical Questions:
Question 1
P Ltd. was incorporated on 1.4.99 with an authorised capital of Rs. 5,00,000 divided into equity
shares of Rs. 10 each. It tookover the business of P on the basis of following valuation :
Rs.
Goodwill 20,000
Plant 80,000
Stock 15,000
Debtors 30,000
Cash 5,000
Creditors 8,000
(a) Purchase consideration was satisfied by issue of equity shares of Rs. 10 at par.
(b) Preliminary expenses paid by the company Rs. 8,000.
(c) 20,000 shares were issued to Public at Rs. 12 each. The shares were fully subscribed and
paid up. In addition to the above, the following further balances arise in the books as on
31.3.2000:
Rs. Rs.
Purchases 3,00,000 Branch Suspense (Cr.) 14,000
Sales 5,20,000 Bank 1,30,000
Salaries 60,000 Ramprakash (Suspense) (Dr.) 30,000
Other Expenses 20,000 Gulati (Suspense) (Cr.) 25,000
Debtors 92,000 Closing stock 20,000
Building 1,75,000 Creditors 18,000
The following information is also to be considered :
(1) Ramprakash Suspense A/c represents Rs. 30,000 paid to him for a joint venture business.
In addition to the above, Ramprakash spent personally Rs. 20,000 for purchase of goods
and Rs. 2,500 for expenses. Sales made by him were Rs. 70,000 and the balance stock
was taken over by him at an agreed valuation of Rs. 2,500. Ramprakash is to get 2/5 of the
profit.
(2) Gulati’s Suspense represents advance made by him against a consignment of 10 TV sets,
costing Rs. 10,000 each to be priced 35% over cost. Gulati is to get 15% commission on
sales. Gulati has incurred Rs. 5,000 as transportation charges and has sold 8 TV sets. No
entry was passed on sending the goods.
 Company Accounts - II 9.11

(3) Sales include the following :

(a) Goods sold on “Sale or Return” basis—Cost Rs. 30,000 on which 25% profit was
charged. The goods have not yet been accepted by the customer.
1
(b) Hire-purchase sales Rs. 50,000; prices being determined by adding 33 % on cost
3
price. 30% of instalments have not yet fallen due.
(c) Goods sent to branch Rs. 30,000 (Invoice Price) at 25% profit on Cost price.
Remittance received from branch has been credited to Branch Suspense Account.
Branch returns disclose that branch had Rs. 10,000 closing stock (invoice price), Rs.
500 in cash and Rs. 7,500 in debtors.
(4) Bank balance given above is not in agreement with the balance as per bank statement.
Cheques deposited Rs. 10,000 and cheques issued for Rs. 8,000 have not been recorded
in the bank statement; Rs. 15,000 cheque dishonoured by a party and bank charges of Rs.
700 have not yet been entered in cash-book.
(5) Provide 5% depreciation on building, 40% for taxation and 15% dividend. Transfer Rs.
20,000 to General Reserve.
(6) All purchases and sales transactions were on credit.
Prepare Balance Sheet as at 31st March, 2000 and Profit & Loss Account for the year ended 31st
March, 2000. (20 marks) (Intermediate–Nov. 2000)
Answer
Profit and Loss Account of P Ltd.
for the year ended as at 31st March, 2000
Rs. Rs.
To Stock (taken over) 15,000 By Sales 4,37,500
To Purchases 3,00,000 By Goods sent to branch 24,000
To Gross profit c/d 3,34,000 By Goods sent on hire purchase 37,500
By Goods sent on consignment 1,00,000
By Closing stock 20,000
Add : Goods sent on
sale or return basis 30,000 50,000
6,49,000 6,49,000
To Salaries 60,000 By Gross profit b/d 3,34,000
To Expenses 20,000 By Profit on:
To Bank charges 700 Joint venture 12,000
To Depreciation on building Hire purchase 8,750
9.12 Accounting

(5% on Rs. 1,75,000) 8,750 Consignment 7,800

To Provision for taxation 1,11,640 Branch 6,000
(40% of Rs. 2,79,100)
To Net profit c/d 1,67,460
3,68,550 3,68,550

To Proposed dividend 51,300 By Net profit b/d 1,67,460

To General Reserve 20,000
To Net profit c/d 96,160
1,67,460 1,67,460
Balance Sheet of P Ltd.
as at 31st March, 2000
Rs. Rs.
Share capital Fixed Assets
Authorised Goodwill 20,000
50,000 Equity shares of Building 1,75,000
Rs. 10 each, fully paid up 5,00,000 Less: Depreciation 8,750 1,66,250
Issued & subscribed: Plant 80,000
34,200 Equity shares of Current assets loans and advances
Rs. 10 each, fully paid up 3,42,000 Current assets :
(Out of these shares, 14,200 Closing stock
shares have been allotted as Stock in hand 20,000
fully paid up for consideration Goods sent on
other than cash) approval basis 30,000
Reserves and surplus: Hire purchase stock 11,250
Securities premium 40,000 Consignment stock 21,000
General reserve 20,000 Branch stock 8,000 90,250
Profit and loss account 96,160 Sundry debtors 24,500
Current liabilities and Provisions Add : Branch debtors 7,500 32,000
Current liabilities : Bank 1,14,300
Sundry creditors 18,000 Cash in hand 64,000
Provisions : Cash at branch 500 64,500
 Company Accounts - II 9.13

Provision for taxation 1,11,640 Gulati’s account 61,800

Proposed dividend 51,300 Ramprakash’s account 42,000
Miscellaneous expenditure
Preliminary expenses 8,000
6,79,100 6,79,100
Working Notes :
(1) Sales Account
Rs. Rs.
To Sundry Debtors A/c- By Balance b/d (given) 5,20,000
Goods sold on sale or return basis 37,500
 125 
30,000 100 
 
To Sundry Debtors A/c
Hire purchase sales 15,000
To Sundry Debtors A/c-
Goods sent to branch, 30,000
To Profit & Loss A/c 4,37,500
5,20,000 5,20,000

(2) Memorandum Debtors Account

Rs. Rs.
To P (Debtors taken over) 30,000 By Cash 4,78,000
To Sales 4,37,500 By Balance c/d 24,500
To Hire purchase sales 35,000
5,02,500 5,02,500

(3) Sundry Debtors Account

Rs. Rs.
To Balance b/d 92,000 By Sales A/c
To Bank A/c (cheque dishonoured) 15,000 (Goods sold on sale or
return basis) 37,500
By Sales A/c-
H.P. Sales 15,000
Goods sent to branch 30,000
By Balance c/d 24,500
1,07,000 1,07,000
9.14 Accounting

(4) Branch Account

Rs. Rs.
To Goods sent to Branch A/c 24,000 By Branch Suspense A/c 14,000
To Profit & Loss A/c 6,000 By Balance c/d-

Stock 10,000 
100 
8,000
 125 
Cash 500
Debtors 7,500
30,000 30,000
(5) H.P. Trading Account
Rs. Rs.
To Goods sent on H.P. By H.P. Sales 35,000
 3
50,000  4  37, 500 By H.P. Stock 11,250

To Profit on H.P.
 1
35,000  4  8,750

46,250 46,250

(6) Memorandum Joint Venture Account

Rs. Rs.
To Ram Prakash Suspense A/c 30,000 By Ram Prakash A/c-
To Ram Prakash A/c (Purchases) 20,000 Sales 70,000
To Ram Prakash A/c (Expenses) 2,500 Stock taken over 2,500
To Share of Profits-
P & L A/c (3/5) 12,000
Ram Prakash (2/5) 8,000
72,500 72,500

(7) Ram Prakash’s Account

Rs. Rs.
To Mem. Joint Venture A/c- By Mem. Joint Venture A/c-
Sales 70,000 Purchases 20,000
Stock taken over 2,500 Expenses 2,500
Profits share 8,000
By Balance c/d 42,000
72,500 72,500
 Company Accounts - II 9.15

(8) Consignment Account

Rs. Rs.
To Goods sent on
consignment A/c 1,00,000 By Gulati A/c (Sales) 1,08,000
(10 × 10,000) By Consignment Stock
To Gulati A/c (Expenses) 5,000 (2 × 10,000) = 20,000
To Gulati A/c (Commission) 16,200 Add : Expenses

(1,08,000 × 15%) [5,000 × 102,000

,000
]=1,000 21,000

To Profit & Loss A/c 7,800

1,29,000 1,29,000

(9) Gulati’s Account

Rs. Rs.
To Consignment A/c 1,08,000 By Gulati Suspense A/c 25,000
 135  By Consignment A/c-
8  10,000  100 
 
Expenses 5,000
Commission 16,200
By Balance c/d 61,800
1,08,000 1,08,000
(10) Sundry Creditors Account
Rs. Rs.
To Cash A/c 2,90,000 By P (Creditors taken over) 8,000
To Balance c/d 18,000 By Purchases A/c 3,00,000
3,08,000 3,08,000
(11) Cash and Bank Account
Rs. Rs.
To P A/c (Cash taken over) 5,000 By Creditors A/c 2,90,000
To Memorandum Debtors A/c 4,78,000 By Salaries A/c 60,000
To Sundry Debtors A/c 15,000 By Other Expenses A/c 20,000
To Share Capital A/c 2,00,000 By Ram Prakash Suspense A/c 30,000
To Securities Premium A/c 40,000 By Building A/c 1,75,000
To Gulati Suspense A/c 25,000 By Preliminary Expenses A/c 8,000
To Branch Suspense A/c 14,000 By Balance c/d-
9.16 Accounting

Bank (given) 1,30,000

Cash (balance) 64,000
7,77,000 7,77,000
(12) Bank Account
Rs. Rs.
To Balance b/d 1,30,000 By Bank ChargesA/c 700
By Sundry Debtors A/c
(Cheque dishonoured) 15,000
By Balance c/d 1,14,300
1,30,000 1,30,000
(13) Calculation of purchase consideration
Rs. Rs.
Assets taken over :
Goodwill 20,000
Plant 80,000
Stock 15,000
Debtors 30,000
Cash 5,000 1,50,000
Less : Creditors 8,000
Net assets taken over 1,42,000
Purchase consideration will be discharged by issue of 14,200 equity shares of Rs. 10 each.
Notes :
1. The rate of depreciation for Plant has not been given in the question, therefore, no
depreciation has been provided on Plant. Students may assume any suitable rate of
depreciation and provide for accordingly.
2. Sundry Debtors Account and Memorandum Debtors Account can be combined also.
3. The provision for corporate dividend tax has been ignored.
Question 2
Megabyte Ltd. was incorporated on 1st April, 1999 to take over the running business of Mr. X.
The purchase consideration was satisfied by allotment of:
(i) 20,000 equity shares of Rs. 10 each at par.
(ii) 10,000 10% Redeemable Preference shares of Rs. 10 each at par, redeemable on
31.3.2006.
(iii) Rs. 50,000 paid in cash.
The company issued a prospectus for raising capital by issue of 30,000 equity shares of Rs. 10
each, at par and 15,000, 10% Redeemable preference shares of Rs. 10 each, at par. The entire
amount in respect of the issue was received by 30th June, 1999 except final call of Rs. 2.50 per
share on 1,000 shares issued to Mr. Y, a director. Underwriting Commission @ 2% on equity
shares and @ 3% on preference shares were paid to a merchant banker.
 Company Accounts - II 9.17

The preliminary expenses were estimated at Rs. 50,000 in the prospectus but the actual
expenses incurred were as under :
Rs.
Solicitor’s fee 10,000
Printing of memorandum 15,000 (of which Rs. 5,000 remained unpaid)
Stamping and registration 20,000
Advertisement expenses 30,000
The company purchased a plot of land for Rs. 75,000. Further, it advanced Rs. 1,00,000 for
construction of office building and Rs. 1,50,000 to a supplier, being 40% of contract price for supply
of machinery. A part of the investments taken over from Mr. X was sold for Rs. 50,000 (Rs. 5,000
in excess of their book value).
Prepare a Receipts and Payments Account and other relevant financial information to be included
in the Statutory Report pursuant to Section 165 of the Companies Act, 1956 in respect of Megabyte
Ltd. made upto 30th June, 1999. (15 marks) (Intermediate–May 2000)
Answer
Extracts from the Statuory Report of Megabyte Ltd.
(Pursuant to Section 165)
Receipts and Payments Account upto 30th June, 1999

Receipts Rs.Payments Rs.

Shares: Vendor (Mr. X) 50,000
Equity shares Preliminary expenses:
(Rs. 3,00,000 – Rs. 2,500) 2,97,500 Underwriting commission
10% Redeemable preference Equity shares 6,000
shares 1,50,000 Preference shares 4,500 10,500
Investments 50,000 Solicitor’s fees 10,000
Printing of memorandum 10,000
Stamping and registration 20,000
Advertisement 30,000 80,500
Capital expenditure:
Land 75,000
Building (advance) 1,00,000
Machinery (advance) 1,50,000
Balance 42,000
4,97,500 4,97,500
9.18 Accounting

Financial information for inclusion in the Statutory Report

1. Shares allotted
(a) Allotted subject to payment thereof in cash
No. of Nominal Amount
shares value of received
each share upto 30.6.1999
Rs. Rs.
Equity shares 30,000 10 2,97,500
10% Redeemable preference shares 15,000 10 1,50,000
(b) Allotted as fully paid-up otherwise than in cash (to vendor, Mr. X for purchase of his
running business)
Equity shares 20,000 10 2,00,000
10% Redeemable preference shares 10,000 10 1,00,000

2. Preliminary expenses
Preliminary expenses
actually incurred
up to 30.6.1999
Rs.
Solicitor’s fee 10,000
Printing of memorandum 15,000
Stamping and registration 20,000
Advertisement expenses 30,000
75,000
Preliminary expenses as estimated in the prospectus was Rs. 50,000.

3. Particulars of contracts
The company has advanced Rs. 1,00,000 for construction of office building.
The company has entered into a contract for supply of machinery costing Rs. 3,75,000
against which a sum of Rs. 1,50,000 has been advanced, being 40% of contract price.

4. The arrears due on calls from directors

Name of director Amount due
Rs.
Mr. Y 2,500
 Company Accounts - II 9.19

Question 3
Emergent Ltd. was incorporated on 1st April, 2002 to take over the running business of
Mr. A.
The purchase consideration was satisfied by allotment of:
(i) 15,000 equity shares of Rs. 10 each issued at a premium of Rs. 2 per share.
(ii) 12,000 10% Redeemable preference shares of Rs. 10 each at par, redeemable
on 31.3.2007.
(iii) Rs. 70,000 paid in cash.
The company issued a Prospectus for issuing 50,000 equity shares of Rs. 10 each, at a
premium of Rs. 2 per share and 20,000 10% Redeemable Preference shares of Rs. 10
each, at par. The entire amount in respect of the issue was received by 30th June, 2002
except final call of Rs. 3 per share on 2,500 shares issued to Mr. X, a director.
Underwriting commission @ 2.5% on nominal value of equity shares and @ 3% on
preference shares were paid to a merchant banker.
The preliminary expenses were estimated at Rs. 75,000 in the prospectus but the actual
expenses incurred was as under:
Rs.
Solicitor’s fee – 15,000
Printing of memorandum – 20,000 (Rs. 10,000 remaining unpaid)
Stamping and registration – 25,000
Advertisement expenses – 30,000
The company purchased a plot of land for Rs. 1,00,000. Further, it advanced Rs.
2,50,000 for construction of office building and Rs. 3,50,000 to a supplier, being 35% of
contract price for supply of machinery. A part of the investments taken over from Mr. A
was sold for Rs. 80,000 (Rs. 5,000 in excess of their book value).
Prepare a Receipts and Payments Account and other relevant financial information to be
included in the Statutory Report pursuant to Section 165 of the Companies Act, 1956 in
respect of Emergent Ltd. made up to 30th June, 2002. (16 marks) (PE-II–May 2003)
Answer
Extracts from the Statutory Report of Emergent Ltd.
(Pursuant to Section 165 of the Companies Act)
Receipts and Payments Account up to 30th June, 2002

Receipts Rs. Payments Rs. Rs. Rs.

Shares: Vendor (Mr. A) 70,000
Equity Shares 5,92,500 Preliminary expenses:
(Rs. 6,00,000 – Rs. 7,500) Underwriting commission –
9.20 Accounting

10% Redeemable Equity Shares 12,500

preference shares 2,00,000 Preference Shares 6,000 18,500
Investments 80,000 Solicitor’s fee 15,000
Printing of memorandum 10,000
Stamping and registration 25,000
Advertisement expenses 30,000 98,500
Capital Expenditure:
Land 1,00,000
Building (advance) 2,50,000
Machinery (advance) 3,50,000
_______ Cash and bank balance 4,000
8,72,500 8,72,500

Financial information for inclusion in the Statutory Report

1. Shares allotted
(a) Allotted subject to payment thereof in cash.
No. of Nominal Premium Amount received
shares value of upto 30.06.2002
each share Rs.
Rs. Rs.
Equity shares 50,000 10 2 5,92,500
10% Redeemable
preference shares 20,000 10 2,00,000

(b) Allotted as fully paid-up otherwise than in cash (to vendor Mr. A for purchase of
running business)
Equity shares 15,000 10 2 1,80,000
10% Redeemable
preference shares 12,000 10 1,20,000
2. Preliminary expenses actually incurred upto 30.06.2002
Rs.
Solicitor’s fee 15,000
Printing of Memorandum 20,000
Stamping and Registration 25,000
Advertisement expenses 30,000
90,000
Preliminary expenses as estimated in the Prospectus – Rs. 75,000.
 Company Accounts - II 9.21

3. Particulars of contracts
The company has advanced Rs. 2,50,000 for construction of office building.
The company has entered into a contract for supply of machinery costing Rs. 10,00,000
against which a sum of Rs. 3,50,000 has been advanced, being 35% of contract price.
4. The arrears due on calls from directors
Name of director Amount due (Rs.)
Mr. X 7,500
9.22 Accounting

UNIT 4 : AMALGAMATION AND RECONSTRUCTION

(A) Write short notes on :
Question 1
Amalgamation and Absorption of companies—a comparison.(3 marks)(Intermediate–Nov. 1994)
Answer
In accounting parlance, amalgamation means merger of two or more companies into one new or
existing company. Absorption, on the other hand, refers to acqusition of business of one company
by another company. But it may be noted that the Companies Act, 1956 does not make any
distinction between amalgamation and absorption. Infact, the Companies Act, 1956 does not
properly define the terms amalgamation and absorption. But Sections 394 and 396 of the Act
prescribe the procedure for amalgamation. The Income-tax Act, 1961, however, defines the term
amalgamation to mean “the merger of one or more companies with another company or the merger
of two or more companies to form one company”. Therefore, it seems that legally there is no
difference between amalgamation and absorption of companies. According to the Accounting
Standard 14, “Accounting for Amalgamations”, amalgamations fall into two broad categories. In the
first category are those amalgamations where there is a genuine pooling not merely of the assets
and liabilities of the two companies but also of the shareholders’ interests and of the businesses of
these companies. Such amalgamations are kn54own as “amalgamation in the nature of merger”.
The second type of amalgamations are those which are in effect a mode by which one company
acquires another company and as a consequence the shareholders of the company which is
acquired normally do not continue to have a proportionate share in the equity of the combined
company or the business of the company which is acquired is not intended to be continued. Such
amalgamations are known as “amalgamation in the nature of purchase.” Therefore, it can be said
that amalgamations include absorption.
Question 2
Pooling of interests method of amalgamation. (5 marks)(Intermediate–May 1997
Answer
Pooling of interests method of accounting for amalgamation records amalgamation transactions as
if the separate businesses of the amalgamating companies were intended to be continued by the
transferee company. Accordingly, only the minimal changes are made in aggregating the individual
financial statements of the amalgamating companies.
Under the pooling of interests methods the assets, liabilities and reserves of the transferor
company will be taken over by the transferee company at existing carrying amounts unless any
adjustment is required due to difference in accounting policies. As a result, the difference between
the amount recorded as share capital issued (plus any additional consideration in the form of cash
or other assets) by the transferee company and the amount of share capital of transferor company
should be adjusted in reserves. At the time of amalgamation, if the transferor and the transferee
companies have conflicting accounting policies, a uniform set of accounting policies is adopted
following the amalgamation.
 Company Accounts - II 9.23

Question 3
What are the conditions, which, according to AS 14 on Accounting for Amalgamations, must be
satisfied for an amalgamation in the nature of merger?
(4 Marks) (Intermediate–May 2001 and PE-II – Nov. 2006)
Answer
According to AS 14 on Accounting for Amalgamations; the following conditions must be satisfied
for an amalgamation in the nature of merger :
(i) All the assets and liabilties of the transferor company become, after amalgamation, the
assets and liabilities of the transferee company.
(ii) Shareholders holding not less than 90% of the face value of the equity shares of the
transferor company (other than the equity shares already held therein, immediately before
the amalgamation, by the transferee company or its subsidiaries or their nominees) become
equity shareholders of the transferee by virtue of the amalgamation.
(iii) The consideration for the amalgamation receivable by those equity shareholders of the
transferor company who agree to become equity shareholders of the transferee company is
discharged by the transferee company wholly by the issue of equity shares in the transferee
company, except that cash may be paid in respect of any fractional shares.
(iv) The business of the transferor company is intended to be carried on, after the
amalgamation, by the transferee company.
(v) No adjustment is intended to be made to the book values of the assets and liabilities of the
transferor company when they are incorporated in the financial statements of the transferee
company except to ensure uniformity of accounting policies.
(vi) All reserves & surplus of the transferor company shall be preserved by the transferee
company.
If any one of the condition is not satisfied in a process of amalgamation, it cannot be treated
as amalgamation in the nature of merger.
Question 4
Distinguish between (i) the pooling of interests method and (ii) the purchase method of recording
transactions relating to amalgamation. (4 marks) (Intermediate–May 2002)
Answer
The following are the points of distinction between (i) the pooling of interests method and (ii) the
purchase method of recording transactions relating to amalgamation :
(i) The pooling of interests method is applied in case of an amalgamation in the nature of
merger whereas purchase method is applied in the case of an amalgamation in the nature
of purchase.
(ii) In the pooling of interests method all the reserves of the transferor company are also
recorded by the transferee company in its books of account while in the purchase method
the transferee company records in its books of account only the assets and liabilities taken
over, the reserves, except the statutory reserves, of the transferor company are not
aggregated with those of the transferee company.
9.24 Accounting

(iii) Under the pooling of interests method, the difference between the consideration paid and
the share capital of the transferor company is adjusted in the general reserve or other
reserves of the transferee company. Under the purchase method, the difference between
the consideration and net assets taken over is treated by the transferee company as
goodwill or capital reserve.
(iv) Under the pooling of interests method, the statutory reserves are recorded by the
transferee company like all other reserves without opening amalgamation adjustment
account. In the purchase method, while incorporating statutory reserves the transferee
company has to open amalgamation adjustment account debiting it with the amount of the
statutory reserves being incorporated.
(B) Practical Questions:
Question 1
The paid-up capital of Toy Ltd. amounted to Rs. 2,50,000 consisting of 25,000 equity shares of Rs.
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:
(i) In lieu of their present holdings, the shareholders are to receive:
(a) Fully paid equity shares equal to 2/5th of their holding.
(b) 5% preference shares fully paid-up to the extent of 20% of the above new equity
shares.
(c) 3,000 6% second debentures of Rs. 10 each.
(ii) An issue of 2,500 5% first debentures of Rs. 10 each was made and fully subscribed in
cash.
(iii) The assets were reduced as follows:
(a) Goodwill from Rs. 1,50,000 to Rs. 75,000.
(b) Machinery from Rs. 50,000 to Rs. 37,500.
(c) Leasehold premises from Rs. 75,000 to Rs. 62,500.
Show the journal entries to give effect to the above scheme of recontrsuction.
(10 marks) (Intermediate–Nov. 1995)
Answer
Journal Entires
Rs. Rs.
Share Capital A/c (old) Dr. 2,50,000
To Equity Share Capital A/c
2
( of Rs. 2,50,000) 1,00,000
5
To 5% Preference Share Capital A/c
 Company Accounts - II 9.25

20
( × Rs. 1,00,000) 20,000
100
To 6% Second Debntures A/c 30,000
To Capital Reduction A/c 1,00,000
(Conversion of 25,000 Equity Shares and balance being transferred
to Capital Reduction A/c in accordance with the Scheme of internal
reconstruction as per Special Resolution dated..........as confirmed
by the Court Order dated........)
Bank A/c Dr. 25,000
To 5% First Debenture A/c 25,000
(Issue of Rs. 25,000 5% First Debentures for cash as per scheme
of internal reconstruction)
Capital Reduction A/c Dr. 1,00,000
To Goodwill A/c 75,000
To Plant & Machinery A/c 12,500
To Leasehold premises A/c 12,500
(Sundry Assets written down as per scheme of internal
reconstruction

Question 2
Star and Moon had been carrying on business independently. They agreed to amalgamate and
form a new company Neptune Ltd. with an authorised share capital of Rs. 2,00,000 divided into
40,000 equity shares of Rs. 5 each.
On 31st December, 1995, the respective Balance Sheets of Star and Moon were as follows :
Star Moon
Rs. Rs.
Fixed Assets 3,17,500 1,82,500
Current Assets 1,63,500 83,875
4,81,000 2,66,375
Less: Current Liabilities 2,98,500 90,125
Representing Capital 1,82,500 1,76,250
Additional Information :
(a) Revalued figures of Fixed and Current Assets were as follows :
Star Moon
Rs. Rs.
Fixed Assets 3,55,000 1,95,000
Current Assets 1,49,750 78,875
9.26 Accounting

(b) The debtors and creditors—include Rs. 21,675 owed by Star to Moon.
The purchase consideration is satisfied by issue of the following shares and debentures :
(i) 30,000 equity shares of Neptune Ltd., to Star and Moon in the porportion to the
profitability of their respective business based on the average net profit during the last
three years which were as follows :
Star Moon
1993 Profit 2,24,788 1,36,950
1994 (Loss)/Profit (1,250) 1,71,050
1995 Profit 1,88,962 1,79,500
(ii) 15% debentures in Neptune Ltd., at par to provide an income equivalent to 8% return
on capital employed in their respective business as on 31st December, 1995 after
revaluation of assets.
You are requested to :
(1) Compute the amount of debentures and shares to be issued to Star and Moon.
(2) A Balance Sheet of Neptune Ltd., showing the position immediately after amalgamation.
(20 marks) (Intermediate–May 1996)
Answer
(1) Computation of Amount of Debentures and Shares to be issued:
Star Moon
Rs. Rs.
(i) Average Net Profit
2,24,788 – 1,250  1,88,962
= 1,37,500
3
1,36,950 – 1,71,050  1,79,500 = 1,62,500
3
(ii) Equity Shares Issued
(a) Ratio of distribution
Star : Moon
1,375 1,625
(b) Number
Star : 13,750
Moon : 16,250
30,000
(c) Amount
13,750 shares of Rs. 5 each = 68,750
16,250 shares of Rs. 5 each = 81,250
(iii) Capital Employed (after revaluation of assets)
Fixed Assets 3,55,000 1,95,000
Current Assets 1,49,750 78,875
 Company Accounts - II 9.27

5,04,750 2,73,875
Less: Current Liabilities 2,98,500 90,125
2,06,250 1,83,750
(iv) Debentures Issued
8% Return on capital employed 16,500 14,700
15% Debentures to be issued to provide
equivalent income :
Star : 16,500 × 100 = 1,10,000
15
Moon : 14,700 × 100 = 98,000
15
(2) Balance Sheet of Neptune Ltd.
As at 31st December, 1995
Liabilities Amount Assets Amount
Rs. Rs.
Share Capital: Fixed Assets 5,50,000
Authorised Current Assets 2,06,950
40,000 Equity Shares of Rs. 5 each 2,00,000
Issued and Subscribed
30,000 Equity Shares of Rs. 5 each 1,50,000
(all the above shares are allotted
as fully paid-up pursuant to a
contract without payments being
received in cash)
Reserves and Surplus
Capital Reserve 32,000
Secured Loans
15% Debentures 2,08,000
Unsecured Loans –
Current Liabilities and Provisisons
Current Liabilties 3,66,950
Provisions –
7,56,950 7,56,950
9.28 Accounting

Working Notes :
Star Moon Total
Rs. Rs. Rs.
(1) Purchase Consideration
Equity Shares Issued 68,750 81,250 1,50,000
15% Debentures Issued 1,10,000 98,000 2,08,000
1,78,750 1,79,250 3,58,000
(2) Capital Reserve
(a) Net Assets Taken Over
Fixed Assets 3,55,000 1,95,000 5,50,000
Current Assets 1,49,750 57,200* 2,06,950
5,04,750 2,52,200 7,56,950
Less : Current Liabilities 2,76,825** 90,125 3,66,950
2,27,925 1,62,075 3,90,000
(b) Purchase Consideration 1,78,750 1,79,250 3,58,000
(c) Capital Reserve [(a) - (b)] 49,175
(d) Goodwill [(b) - (a)] 17,175
(e) Capital Reserve [Final Figure(c) - (d)] 32,000

* 78, 875 - 21,675

** 2,98,500 - 21,675
Question 3
The following are the Balance Sheets of Yes Ltd. and No Ltd. as on 31st October, 1999 :
Yes Ltd. No Ltd.
Rs. Rs.
(in crores) (in crores)
Sources of funds:
Share capital:
Authorised 25 5
Issued and Subscribed :
Equity Shares of Rs. 10 each fully paid 12 5
Reserves and surplus 88 10
Shareholders funds 100 15
 Company Accounts - II 9.29

Unsecured loan from Yes Ltd. — 10

100 25
Funds employed in :
Fixed assets: Cost 70 30
Less: Depreciation 50 24
20 6
Written down value
Investments at cost:
30 lakhs equity shares of Rs. 10 each of No Ltd. 3
Long-term loan to No. Ltd. 10
Current assets 100 34
Less : Current liabilities 33 67 15 19
100 25
On that day Yes Ltd. absorbed No Ltd. The members of No Ltd. are to get one equity share of
Yes Ltd. issued at a premium of Rs. 2 per share for every five equity shares held by them in
No Ltd. The necessary approvals are obtained.
You are asked to pass journal entires in the books of the two companies to give effect to the
above. (16 marks) (Intermediate–Nov. 1999)
Answer
Journal entries in the books of No Ltd.
(Rupees in crores)
Dr. Cr.
Rs. Rs.
Realisation Account Dr. 64.00
To Fixed Assets Account 30.00
To Current Assets Account 34.00
(Being the assets taken over by Yes Ltd. transferred to
Realisation Account)
Provision for depreciation Account Dr. 24.00
Current Liabilities Account Dr. 15.00
Unsecured Loan from Yes Ltd. Account Dr. 10.00
To Realisation Account 49.00
(Being the transfer of liabilities and provision to
Realisation Account)
9.30 Accounting

Yes Ltd. Dr. 1.2

To Realisation Account 1.2
(Being the amount of consideration due from Yes Ltd. credited
to Realisation Account)

Equity Shareholders Account Dr. 13.80

To Realisation Account 13.80
(Being the the loss on realisation transferred to equity share-
holders account)

Equity Share Capital Account Dr. 5.00

Reserves and Surplus Account Dr. 10.00
To Equity Shareholders Account 15.00
(Being the amount of share capital, reserves and surplus
credited to equity shareholders account)

Equity Shareholders (Yes Ltd.) Account Dr. 0.72

To Yes Ltd. 0.72
(Being the 3/5th of the consideration due from Yes
Ltd. adjusted against the amount due to Yes Ltd. for shares
held by it)

Equity shares of Yes Ltd. Dr. 0.48

To Yes Ltd. 0.48
(Being the receipt of 4 lakhs equity shares of
Rs. 10 each at Rs. 12 per share for allotment to
outside shareholders

Equity Shareholders Account Dr. 0.48

To Equity Shares of Yes Ltd. 0.48
(Being the distribution of equity shares received from Yes
Ltd. to shareholders)
 Company Accounts - II 9.31

Journal Entries in the Books of Yes Ltd.

(Rupees in crores)
Dr. Cr.
Rs. Rs.
Business Purchase Account Dr. 1.2
To Liquidator of No Ltd. Account 1.2
(Being the amount of purchase consideration agreed under
approved scheme of amalgamation- W.N. 1)

Fixed Assets Dr. 6.00

Current Assets Dr. 34.00
To Current Liabilities 15.00
To Unsecured Loan (from Yes Ltd.) 10.00
To Business Purchase Account 1.20
To Capital Reserve 13.80
(Being the assets and liabilities taken over and the surplus
transferred to capital reserve)

Liquidator of No Ltd. Dr. 0.72

Capital Reserve Dr. 2.28
To Investments in Equity Shares of No Ltd. 3.00
(Being the investments in the equity shares of No Ltd.
cancelled and the resultant loss recorded)

Liquidator of No Ltd. Dr. 0.48

To Equity Share Capital Account 0.40
To Securities Premium Account 0.08
(Being the allotment to outside shareholders of No Ltd.
4 lakhs equity shares of Rs. 10 each at a premium of
Rs. 2 per share)
9.32 Accounting

Unsecured Loan (from Yes Ltd.) Dr. 10.00

To Loan to No. Ltd. 10.00
(Being the cancellation of unsecured loan given to No Ltd.)

Working Note:
Purchase Consideration Rs. in crores
50lakhs
× Rs. 12
5
i.e., 10 lakhs equity shares at Rs. 12 per share 1.20

Less: Belonging to Yes Ltd.  3  1.20 0.72

5 
Payable to other equity shareholders 0.48

Number of equity shars of Rs. 10 each to be issued  48lakhs  = 4 lakhs

 12 
 
Question 4
Super Express Ltd. and Fast Express Ltd. were in competing business. They decided to form a
new company named Super Fast Express Ltd. The balance sheets of both the companies were as
under :
Super Express Ltd.
Balance Sheet as at 31st December, 1999
Rs. Rs.
20,000 Equity shares of Buildings 10,00,000
Rs. 100 each 20,00,000 Machinery 4,00,000
Provident fund 1,00,000 Stock 3,00,000
Sundry creditors 60,000 Sundry debtors 2,40,000
Insurance reserve 1,00,000 Cash at bank 2,20,000
Cash in hand 1,00,000
22,60,000 22,60,000
Fast Express Ltd.
Balance Sheet as at 31st December, 1999
Rs. Rs.
10,000 Equity shares of Goodwill 1,00,000
Rs. 100 each 10,00,000 Buildings 6,00,000
Employees profit sharing Machinery 5,00,000
account 60,000 Stock 40,000
Sundry creditors 40,000 Sundry debtors 40,000
 Company Accounts - II 9.33

Reserve account 1,00,000 Cash at bank 10,000

Surplus 1,00,000 Cash in hand 10,000
13,00,000 13,00,000
The assets and liabilities of both the companies were taken over by the new company at their
book values. The companies were allotted equity shares of Rs. 100 each in lieu of purchase
consideration.
Prepare opening balance sheet of Super Fast Express Ltd. (8 marks) (Intermediate–May 2000)
Answer
Balance Sheet of Super Fast Express Ltd
as at 1st Jan., 2000
Liabilities Rs. Assets Rs.
Share capital: Goodwill 1,00,000
30,000 Equity shares of Rs. 100 each 30,00,000 Buildings 16,00,000
Reserve account 1,00,000 Machinery 9,00,000
Surplus 1,00,000 Stock 3,40,000
Insurance reserve 1,00,000 Sundry debtors 2,80,000
Employees profit sharing account 60,000 Cash at bank 2,30,000
Provident fund 1,00,000 Cash in hand 1,10,000
Sundry creditors 1,00,000
35,60,000 35,60,000
The above solution is based on pooling of interests method.
Alternative solution under the purchase method is given below :
Balance Sheet of Super Fast Express Ltd.
as at 1st Jan., 2000
Liabilities Rs. Assets Rs.
Share capital: Buildings 16,00,000
32,000 Equity shares of Machinery 9,00,000
Rs. 100 each 32,00,000 Stock 3,40,000
Provident fund 1,00,000 Sundry debtors 2,80,000
Employees profit sharing account 60,000 Cash at bank 2,30,000
Sundry creditors 1,00,000 Cash in hand 1,10,000
34,60,000 34,60,000
9.34 Accounting

Working Notes :
Calculation of Purchase Consideration
Super Express Ltd. Fast Express Ltd.
Total assets on 31.12.99 (excluding goodwill) 22,60,000 12,00,000
Less: Provident fund 1,00,000 –
Employees profit sharing account – 60,000
Sundry creditors 60,000 40,000
Net assets taken over 21,00,000 11,00,000
Question 5
Green Limited had decided to reconstruct the Balance Sheet since it has 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 Rs. Assets Rs.
Share Capital: Fixed Assets:
Authorised: Goodwill 20,00,000
1,50,000 Equity Shares of Rs. 50 each 75,00,000 Building 10,00,000
Subscribed and Paid up Capital: Plant 10,00,000
50,000 Equity Shares of Rs. 50 each 25,00,000 Computers 25,00,000
1,00,000 Equity Shares of Rs. 50 each, Investments Nil
Rs. 40 per share paid up 40,00,000 Current Assets Nil
Secured Loans: Profit and Loss A/c—Loss 20,00,000
12% First Debentures 5,00,000
12% Second Debentures 10,00,000
Current Liabilities:
Sundry Creditors 5,00,000
85,00,000 85,00,000
The following is the interest of Mr. X and Mr. Y in Green Limited:
Mr. X Mr. Y
Rs. Rs.
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
 Company Accounts - II 9.35

Fully paid up Rs. 50 shares 3,00,000 2,00,000

Parly paid up shares (Rs. 40 paid up) 5,00,000 5,00,000
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 Rs. 20 each.
(b) Mr. X is to cancel Rs. 7,00,000 of his total debt (other than share amount) and to pay Rs. 2
lakhs to the company and to receive new 14% First Debentures for the balance amount.
(c) Mr. Y is to cancel Rs. 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 utilised in writing off of
Goodwill, Profit and Loss A/c Loss and the balance to write off the value of computers.
You are required to draw the Journal Entires to record the same and also show the Balance Sheet
of the reconstructed company. (10 marks) (Intermediate–Nov. 2000)
Answer
Green Limited
Journal Entries
Dr. Cr.
Rs. Rs.
Bank Account Dr. 10,00,000
To Equity Share Capital Account 10,00,000
(Balance of Rs. 10 per share on 1,00,000 equity shares
called up as per reconstruction scheme)

Equity Share Capital Account (Rs. 50) Dr. 75,00,000

To Equity Share Capital Account (Rs. 20) 30,00,000
To Capital Reduction Account 45,00,000
(Reduction of equity shares of Rs. 50 each to shares of Rs. 20
each as per reconstruction scheme)
12% First Debentures Account Dr. 3,00,000
12% Second Debentures Account Dr. 7,00,000
Sundry Creditors Account Dr. 2,00,000
To X 12,00,000
(The total amount due to X, transferred to his account)
9.36 Accounting

Bank Account Dr. 2,00,000

To X 2,00,000
(The amount paid by X under the reconstruction scheme)

12% First Debentures Account Dr. 2,00,000

12% Second Debentures Account Dr. 3,00,000
Sundry Creditors Account Dr. 1,00,000
To Y 6,00,000
(The total amount due to Y, transferred to his account)

X Dr. 14,00,000
To 14% First Debentures Account 7,00,000
To Capital Reduction Account 7,00,000
(The cancellation of Rs. 7,00,000 out of total debt of
Mr. X and issue of 14% first debentures for the balance
amount as per reconstruction scheme)

Capital Reduction Account Dr. 55,00,000

To Goodwill Account 20,00,000
To Profit and Loss Account 20,00,000
To Computers Account 15,00,000
(The balance amount of capital reduction account utilised in
writing off goodwill, profit and loss accout, and computers—
Working Note)

Balance Sheet of Green Limited (and reduced)

as on 31st March, 2000
Liabilities Rs. Assets Rs.
Share Capital: Fixed Assets:
Subscribed and Paid up Capital Building 10,00,000
1,50,000 Equity shares of Plant 10,00,000
Rs. 20 each 30,00,000 Computers 10,00,000
 Company Accounts - II 9.37

Secured Loans: Current Assets:

14% First Debentures 10,00,000 Cash and Bank Balance 12,00,000
Current Liabilities:
Sundry Creditors 2,00,000
42,00,000 42,00,000
Working Note:
Capital Reduction Account
Rs. Rs.
To Goodwill A/c 20,00,000 By Equity Share Capital A/c 45,00,000
To P & L A/c 20,00,000 By X 7,00,000
To Computers (Bal. Fig.) 15,00,000 By Y 3,00,000
55,00,000 55,00,000
Question 6
The following were the Balance Sheets of P Ltd. and V Ltd. as at 31st March, 2001 :
Liabilities P Ltd. V Ltd.
(Rs. in lakhs) (Rs. in lakhs)
Equity Share Capital (Fully paid shares of Rs. 10 each) 15,000 6,000
Securities Premium 3,000 –
Foreign Project Reserve – 310
General Reserve 9,500 3,200
Profit and Loss Account 2,870 825
12% Debentures – 1,000
Bills Payable 120
Sundry Creditors 1,080 463
Sundry Provisions 1,830 702
33,400 12,500
Assets P Ltd. V Ltd.
(Rs. in lakhs) (Rs. in lakhs)
Land and Buildings 6,000 –
Plant and Machinery 14,000 5,000
Furniture, Fixtures and Fittings 2,304 1,700
Stock 7,862 4,041
Debtors 2,120 1,020
Cash at Bank 1,114 609
Bills Receivable — 80
Cost of Issue of Debentures — 50
33,400 12,500
9.38 Accounting

All the bills receivable held by V Ltd. were P Ltd.’s acceptances.

On 1st April 2001, P Ltd. took over V Ltd in an amalgamation in the nature of merger. It was agreed
that in discharge of consideration for the business P Ltd. would allot three fully paid equity shares
of Rs. 10 each at par for every two shares held in V Ltd. It was also agreed that 12% debentures in
V Ltd. would be converted into 13% debentures in P Ltd. of the same amount and denomination.
Expenses of amalgamation amounting to Rs. 1 lakh were borne by P Ltd.
You are required to :
(i) Pass journal entries in the books of P Ltd. and
(ii) Prepare P Ltd.’s Balance Sheet immediately after the merger.
(16 marks) (Intermediate–May 2001)
Answer
Books of P Ltd.
Journal Entries
Dr. Cr.
(Rs. in Lacs) (Rs. in Lacs)
Business Purchase A/c Dr. 9,000
To Liquidator of V Ltd. 9,000
(Being business of V Ltd. taken over for consideration
settled as per agreement)

Plant and Machinery Dr. 5,000

Furniture & Fittings Dr. 1,700
Stock Dr. 4,041
Debtors Dr. 1,020
Cash at Bank Dr. 609
Bills Receivable Dr. 80
To Foreign Project Reserve 310
To General Reserve (3,200 - 3,000) 200
To Profit and Loss A/c (825 - 50) 775
To 12% Debentures 1,000
To Sundry Creditors 463
To Sundry Provisions 702
To Business Purchase 9,000
(Being assets & liabilities taken over from V Ltd.)
 Company Accounts - II 9.39

Liquidator of V Ltd. A/c Dr. 9,000

To Equity Share Capital A/c 9,000
(Purchase consideration discharged in the form of equity
shares)
General Reserve A/c Dr. 1
To Bank A/c 1
(Liquidation expenses paid by P Ltd.)
12% Debentures A/c Dr. 1,000
To 13% Debentures A/c 1,000
(12% debentures discharged by issue of 13% debentures)
Bills Payable A/c Dr. 80
To Bills Receivable A/c 80
(Cancellation of mutual owing on account of bills)

Balance Sheet of P Ltd. as at 1st April, 2001 (after merger)

Liabilities Rs. Assets Rs.
(in lakhs) (in lakhs)
Share Capital Fixed Assets
Authorised, issued and subscribed : Land and buildings 6,000
24 crore equity shares of Rs. 10 Plant and Machinery 19,000
each, fully called and paid-up 24,000 Furniture, fixtures and fittings 4,004
(Of the above shares, 9 crore shares Current Assets, Loans and Advances
have been issued for consideration (a) Current Assets
other than cash) Stock 11,903
Reserves and Surplus Debtors 3,140
Securities Premium 3,000 Cash at Bank 1,722
Foreign Project Reserve 310 (b) Loan and advances Nil
General Reserve 9,699
Profit and Loss Account 3,645
Secured Loan
13% Debentures 1,000
9.40 Accounting

Current Liabilities and provisions

(a) Current Liabilities
Bills Payable 40
Sundry Creditors 1,543
(b) Provisions
Sundry Provisions 2,532
45,769 45,769
Working Notes :
1. Computation of purchase consideration
The purchase consideration was discharged in the form of three equity shares of P Ltd. for
every two equity shares held in V Ltd.
3
Purchase consideration = Rs. 6,000 lacs × = Rs. 9,000 lacs.
2
Note : The question is silent regarding the treatment of fictitious assets and therefore they are not
transferred to the amalgamated company. Thus the cost of issue of debentures shown in
the balance sheet of the V Ltd. company is not transferred to the P Ltd. company.
Question 7
The following are the summarised Balance Sheets of X Ltd. and Y Ltd :
X Ltd. Y Ltd.
Rs. Rs.
Liabilities :
Share Capital 1,00,000 50,000
Profit & Loss A/c 10,000 –
Creditors 25,000 5,000
Loan X Ltd. — 15,000
1,35,000 70,000
Assets :
Sundry Assets 1,20,000 60,000
Loan Y Ltd. 15,000 –
Profit & Loss A/c — 10,000
1,35,000 70,000

A new company XY Ltd. is formed to acquire the sundry assets and creditors of X Ltd. and Y Ltd.
and for this purpose, the sundry assets of X Ltd. are revalued at Rs. 1,00,000. The debt due to X
Ltd. is also to be discharged in shares of XY Ltd.
Show the Ledger Accounts to close the books of X Ltd. (8 marks) (Intermediate–Nov. 2001)
 Company Accounts - II 9.41

Answer
Books of X Ltd.
Realisation Account
Rs. Rs.
To Sundry Assets 1,20,000 By Creditors 25,000
By XY Ltd. (Purchase consideration) 75,000
By Shareholders (Loss on realisation) 20,000
1,20,000 1,20,000

Shareholders Account
Rs. Rs.
To Realisation Account (Loss) 20,000 By Share Capital 1,00,000
To Shares in XY Ltd. 90,000 By Profit and Loss Account 10,000
1,10,000 1,10,000

Loan Y Ltd.
Rs. Rs.
To Balance b/d 15,000 By Shares in XY Ltd. 15,000
Shares in XY Ltd.
Rs. Rs.
To XY Ltd. 75,000 By Shareholders 90,000
To Loan Y Ltd. 15,000
90,000 90,000
XY Ltd.
Rs. Rs.
To Realisation Account 75,000 By Shares in XY Ltd. 75,000
Question 8
The following is the Balance Sheet of Rocky Ltd. as at March 31, 2002:
Liabilities Rs. in lacs
Fully paid equity shares of Rs. 10 each 500
Capital Reserve 6
12% Debentures 400
Debenture Interest Outstanding 48
Trade Creditors 165
Directors’ Remuneration Outstanding 10
9.42 Accounting

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 at Bank 27
Discount on Issue of Debentures 8
Profits and Loss Account 390
1,173
The following scheme of internal reconstruction was framed, approved by the Court, all the
concerned parties and implemented:
(i) All the equity shares be converted into the same number of fully-paid equity shares of Rs.
2.50 each.
(ii) Directors agree to forego their outstanding remuneration.
(iii) The debentureholders also agree to forego outstanding interest in return of their 12%
debentures being converted into 13% debentures.
(iv) The existing shareholders agree to subscribe for cash, fully paid equity shares of Rs. 2.50
each for Rs. 125 lacs.
(v) Trade creditors are given the option of either to accept fully-paid equity shares of Rs. 2.50
each for the amount due to them or to accept 80% of the amount due in cash. Creditors for
Rs. 65 lacs accept equity shares whereas those for Rs. 100 lacs accept Rs. 80 lacs in cash
in full settlement.
(vi) The Assets are revalued as under :
Rs. in lacs
Land and building 230
Plant and Machinery 220
Stock 120
Debtors 76
Pass Journal Entries for all the above mentioned transactions and draft the company’s Balance
Sheet immediately after the reconstruction. (20 marks) (Intermediate–May 2002)
 Company Accounts - II 9.43

Answer
Journal Entries
Rs. in lacs
Dr. Cr.
Equity Share Capital (Rs. 10 each) A/c Dr. 500
To Equity Share Capital (Rs. 2.50 each) A/c 125
To Reconstruction A/c 375
(Conversion of all the equity shares into the same number
of fully paid equity shares of Rs. 2.50 each as per scheme
of reconstruction)
Director’s Remuneration Outstanding A/c Dr. 10
To Reconstruction A/c 10
(Outstanding remuneration foregone by the directors as per
scheme of reconstruction)
12% Debentures A/c Dr. 400
Debenture Interest Outstanding A/c Dr. 48
To 13% Debentures A/c 400
To Reconstruction A/c 48
(Conversion of 12% debentures into 13% debentures,
Debentureholders forgoing outstanding debenture interest)
Bank Dr. 125
To Equity Share Application A/c 125
(Application money received for equity shares)
Equity Share Application A/c Dr. 125
To Equity Share Capital (Rs. 2.50 each) A/c 125
(Application money transferred to share cpital)
Trade Creditors Dr. 165
To Equity Share Capital (Rs. 2.50 each) A/c 65
To Bank A/c 80
To Reconstruction A/c 20
(Trade creditors for Rs. 64 lakhs accepting shares for full
amount and those for Rs. 100 lakhs accepting cash equal to
80% of claim in full settlement)
Capital Reserve Dr. 6
To Reconstruction A/c 6
(Capital Reserve being used for purpose of reconstruction)
9.44 Accounting

Land and Building Dr. 46

To Reconstruction A/c 46
(Appreciation made in the value of land and building as per
scheme of reconstruction)
Reconstruction A/c Dr. 505
To Goodwill 15
To Plant and Machinery 66
To Stock 22
To Debtors 4
To Discount on issue of Debentures 8
To Profit and Loss Account 390
(Writing off losses and reduction in the values of
assets as per scheme of reconstruction—W.N. 1)
Balance Sheet of Rocky Ltd. (and Reduced) as on 31st March, 2002
Liabilities Rs. in lacs
1,26,000 Fully paid equity shares of Rs. 2.50 each (W.N. 2) 315
(26,000 shares have been issued for consideration other than cash)
13% Debentures 400
Outstanding Expenses 11
Provisions 33
759
Assets Rs. in lack Rs. in lacs
Goodwill 15
Less : Amount written off under scheme of
reconstruction dated........... 15 Nil
Land and Building 184
Add : Amount of appreciation made under
scheme of reconstruction dated.......... 46 230
Plant and Machinery 286
Less: Amount written off under scheme of
reconstruction dated......... 66 220
Furniture and Fixtures 41
Stock 120
Debtors 80
 Company Accounts - II 9.45

Less: Provision for Bad Debts 4 76

Cash at bank 72
759
Note : Goodwill has been written off under reconstruction scheme in the solution given above.
Working Notes:
1.
(Rs. in lacs)
Reconstruction Account
Rs. Rs.
To Goodwill 15 By Equity Share Capital A/c 375
To Plant and Machinery 66 By Director’s Remuneration Outstanding A/c 10
To Stock 22 By Debenture Interest Outstanding A/c 48
To Debtors 4 By Trade Creditors 20
To Discount on issue of By Capital Reserve 6
Debentures 8 By Land and Building 46
To Profit and Loss A/c 390
505 505
2. Equity share capital as on 31st March, 2002 (after reconstruction)
Rs.
Equity Share Capital (Rs. 2.50 each) 125
Add: Fresh issue 125
Add: Equity shares issued to creditors 65
315
3. Cash at bank as on 31st March, 2002 (after reconstruction)
Cash at bank (before reconstruction) 27
Add: Proceeds from issue of equity shares 125
152
Less: Payment made to creditors 80
72
9.46 Accounting

Question 9

The financial position of two companies Hari Ltd. and Vayu Ltd. as on 31st March, 2002 was as
under:
Assets Hari Ltd. (Rs.) Vayu Ltd. (Rs.)
Goodwill 50,000 25,000
Building 3,00,000 1,00,000
Machinery 5,00,000 1,50,000
Stock 2,50,000 1,75,000
Debtors 2,00,000 1,00,000
Cash at Bank 50,000 20,000
Preliminary Expenses 30,000 10,000
13,80,000 5,80,000
Liabilities
Share Capital: Hari Ltd. (Rs.) Vayu Ltd. (Rs.)
Equity Shares of Rs. 10 each 10,00,000 3,00,000
9% Preference Shares of Rs. 100 each 1,00,000 –
10% Preference Shares of Rs. 100 – 1,00,000
each
General Reserve 1,00,000 80,000
Retirement Gratuity fund 50,000 20,000
Sundry Creditors 1,30,000 80,000
13,80,000 5,80,000
Hari Ltd. absorbs Vayu Ltd. on the following terms:
(a) 10% Preference Shareholders are to be paid at 10% premium by issue of 9% Preference
Shares of Hari Ltd.
(b) Goodwill of Vayu Ltd. is valued at Rs. 50,000, Buildings are valued at Rs. 1,50,000 and the
Machinery at Rs. 1,60,000.
(c) Stock to be taken over at 10% less value and Reserve for Bad and Doubtful Debts to be
created @ 7.5%.
(d) Equity Shareholders of Vayu Ltd. will be issued Equity Shares @ 5% premium.
 Company Accounts - II 9.47

Prepare necessary Ledger Accounts to close the books of Vayu Ltd. and show the acquisition
entries in the books of Hari Ltd. Also draft the Balance Sheet after absorption as at 31st March,
2002. (16 marks) (PE-II–Nov. 2002)
Answer
In the Books of Vayu Ltd.
Realisation Account
Rs. Rs.
To Sundry Assets (5,80,000 – 5,70,000 By Gratuity Fund 20,000
10,000)
To Preference Shareholders By Sundry Creditors 80,000
(Premium on Redemption) 10,000 By Hari Ltd.
To Equity Shareholders (Purchase Consideration) 5,30,000
(Profit on Realisation) 50,000 _______
6,30,000 6,30,000
Equity Shareholders Account
Rs. Rs.
To Preliminary Expenses 10,000 By Share Capital 3,00,000
To Equity Shares of Hari Ltd. 4,20,000 By General Reserve 80,000
By Realisation Account
_______ (Profit on Realisation) 50,000
4,30,000 4,30,000
Preference Shareholders Account
Rs. Rs.
To 9% Preference Shares of Hari Ltd. 1,10,000 By Preference Share Capital 1,00,000
By Realisation Account
(Premium on Redemption 10,000
of Preference Shares)
1,10,000 1,10,000
9.48 Accounting

Hari Ltd. Account

Rs. Rs.
To Realisation Account 5,30,000 By 9% Preference Shares 1,10,000
_______ By Equity Shares 4,20,000
5,30,000 5,30,000

In the Books of Hari Ltd.

Journal Entries
Dr. Cr.
Rs. Rs.
Goodwill Account Dr. 50,000
Building Account Dr. 1,50,000
Machinery Account Dr. 1,60,000
Stock Account Dr. 1,57,500
Debtors Account Dr. 1,00,000
Bank Account Dr. 20,000
To Gratuity Fund Account 20,000
To Sundry Creditors Account 80,000
To Provision for Doubtful Debts Account 7,500
To Liquidators of Vayu Ltd. Account 5,30,000
(Being Assets and Liabilities takenover as per
agreed valuation).

Liquidators of Vayu Ltd. A/c Dr. 5,30,000

To 9% Preference Share Capital A/c 1,10,000
To Equity Share Capital A/c 4,00,000
To Securities Premium A/c 20,000
(Being Purchase Consideration satisfied as above).
 Company Accounts - II 9.49

Balance Sheet of Hari Ltd. (after absorption)

as at 31st March, 2002
Liabilities Rs. Assets Rs.
Share Capital : Fixed Assets:
2,100 9% Preference Shares of Rs.100 2,10,000 Goodwill 1,00,000
each
1,40,000 Equity Shares of Rs. 10 each fully Building 4,50,000
paid 14,00,000 Machinery 6,60,000
(1,100 Preference Shares and 40,000
Equity Shares were issued in consideration Current Assets:
other than for cash)
Stock 4,07,500
Reserve and Surplus: Debtors 3,00,000
Securities Premium 20,000 Less: Provision for bad debts 7,500 2,92,500
General Reserve 1,00,000 Cash and Bank 70,000

Current Liabilities: Miscellaneous Expenses to

Gratuity Fund 70,000 the extent not written off

Sundry Creditors 2,10,000 Preliminary expenses 30,000

20,10,000 20,10,000
Working Notes:
Purchase Consideration:
Goodwill 50,000
Building 1,50,000
Machinery 1,60,000
Stock 1,57,500
Debtors 92,500
Cash at Bank 20,000
6,30,000
Less: Liabilities
Gratuity 20,000
Sundry Creditors 80,000
Net Assets 5,30,000
To be satisfied as under:
9.50 Accounting

10% Preference Shareholders of Vayu Ltd. 1,00,000

Add: 10% Premium 10,000
1,100 9% Preference Shares of Hari Ltd. 1,10,000
Equity Shareholders of Vayu Ltd.
to be satisfied by issue of 40,000
Equity Shares of Hari Ltd. at 5% Premium 4,20,000
Total 5,30,000

Question 10

The Balance Sheet of Y Limited as on 31st March, 2003 was as follows:

Liabilities Amount Assets Amount
(Rs.) (Rs.)
5,00,000 Equity Shares of Rs. Goodwill 10,00,000
10 each fully paid 50,00,000 Patent 5,00,000
9% 20,000 Preference shares Land and Building 30,00,000
of Rs. 100 each fully paid 20,00,000 Plant and Machinery 10,00,000
10% First debentures 6,00,000 Furniture and Fixtures 2,00,000
10% Second debentures 10,00,000 Computers 3,00,000
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 10,00,000
Bank O/D 1,00,000 Discount on issue of
Outstanding liabilities 40,000 debentures 1,00,000
Provision for Tax 1,00,000 Profit and Loss Account
________ (Loss) 15,00,000
96,00,000 96,00,000

Note: Preference dividend is in arrears for last three years.

A holds 10% first debentures for Rs. 4,00,000 and 10% second debentures for Rs.
6,00,000. He is also creditors for Rs. 1,00,000. B holds 10% first debentures for Rs.
2,00,000 and 10% second debentures for Rs. 4,00,000 and is also creditors for Rs.
50,000.
The following scheme of reconstruction has been agreed upon and duly approved by the
court.
(i) All the equity shares be converted into fully paid equity shares of Rs. 5 each.
 Company Accounts - II 9.51

(ii) The preference shares be reduced to Rs. 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.
(iii) Mr. ‘A’ is to cancel Rs. 6,00,000 of his total debt including interest on debentures
and to pay Rs. 1 lakh to the company and to receive new 12% debentures for the
Balance amount.
(iv) Mr. ‘B’ is to cancel Rs. 3,00,000 of his total debt including interest on debentures
and to accept new 12% debentures for the balance amount.
(v) Trade creditors (other than A and B) agreed to forego 50% of their claim.
(vi) Directors to accept settlement of their loans as to 60% thereof by allotment of equity
shares and balance being waived.
(vii) There were capital commitments totalling Rs. 3,00,000. These contracts are to be
cancelled on payment of 5% of the contract price as a penalty.
(viii) The Directors refund Rs. 1,10,000 of the fees previously received by them.
(ix) Reconstruction expenses paid Rs. 10,000.
(x) The taxation liability of the company is settled at Rs. 80,000 and the same is paid
immediately.
(xi) The assets are revalued as under:
Rs.
Land and Building 28,00,000
Plant and Machinery 4,00,000
Stock 7,00,000
Debtors 3,00,000
Computers 1,80,000
Furniture and Fixtures 1,00,000
Trade Investment 4,00,000

Pass Journal entries for all the above mentioned transactions including amounts to be written
off of Goodwill, Patents, Loss in Profit & Loss Account and Discount on issue of debentures.
Prepare Bank Account and working of allocation of Interest on Debentures between A and B.
(16 marks) (PE-II–Nov. 2003)
9.52 Accounting

Answer
Journal Entries in the Books of Y Ltd.
Dr. Cr.
Rs. Rs.
(i) Equity Share Capital (Rs. 10 each) A/c Dr. 50,00,000
To Equity Share Capital (Rs. 5 each) A/c 25,00,000
To Reconstruction A/c 25,00,000
(Being conversion of 5,00,000 equity shares of Rs.
10 each fully paid into same number of fully paid
equity shares of Rs. 5 each as per scheme of
reconstruction.)
(ii) 9% Preference Share Capital (Rs.100 each) A/c Dr. 20,00,000
To 10% Preference Share Capital (Rs.50
each) A/c 10,00,000
To Reconstruction A/c 10,00,000
(Being conversion of 9% preference share of Rs.
100 each into same number of 10% preference
share of Rs. 50 each and claims of preference
dividends settled as per scheme of reconstruction.)
(iii) 10% First Debentures A/c Dr. 4,00,000
10% Second Debentures A/c Dr. 6,00,000
Trade Creditors A/c Dr. 1,00,000
Interest on Debentures Outstanding A/c Dr. 1,00,000
Bank A/c Dr. 1,00,000
To 12% New Debentures A/c 7,00,000
To Reconstruction A/c 6,00,000
(Being Rs. 6,00,000 due to A (including creditors)
cancelled and 12% new debentures allotted for
balance amount as per scheme of reconstruction.)
(iv) 10% First Debentures A/c Dr. 2,00,000
10% Second Debentures A/c Dr. 4,00,000
Trade Creditors A/c Dr. 50,000
Interest on Debentures Outstanding A/c Dr. 60,000
To 12% New Debentures A/c 4,10,000
To Reconstruction A/c 3,00,000
(Being Rs. 3,00,000 due to B (including creditors)
cancelled and 12% new debentures allotted for
balance amount as per scheme of reconstruction.)
 Company Accounts - II 9.53

(v) Trade Creditors A/c Dr. 1,75,000

To Reconstruction A/c 1,75,000
(Being remaining creditors sacrificed 50% of their
claim.)
(vi) Directors' Loan A/c Dr. 1,00,000
To Equity Share Capital (Rs. 5) A/c 60,000
To Reconstruction A/c 40,000
(Being Directors' loan claim settled by issuing
12,000 equity shares of Rs. 5 each as per scheme
of reconstruction.)
(vii) Reconstruction A/c Dr. 15,000
To Bank A/c 15,000
(Being payment made for cancellation of capital
commitments.)
(viii) Bank A/c Dr. 1,10,000
To Reconstruction A/c 1,10,000
(Being refund of fees by directors credited to
reconstruction A/c.)
(ix) Reconstruction A/c Dr. 10,000
To Bank A/c 10,000
(Being payment of reconstruction expenses.)
(x) Provision for Tax A/c Dr. 1,00,000
To Bank A/c 80,000
To Reconstruction A/c 20,000
(Being payment of tax for 80% of liability in full
settlement.)
(xi) Reconstruction A/c Dr. 47,20,000
To Goodwill A/c 10,00,000
To Patent A/c 5,00,000
To Profit and Loss A/c 15,00,000
To Discount on issue of Debentures A/c 1,00,000
To Land and Building A/c 2,00,000
To Plant and Machinery A/c 6,00,000
To Furniture & Fixture A/c 1,00,000
To Computers A/c 1,20,000
To Trade Investment A/c 1,00,000
To Stock A/c 3,00,000
To Debtors A/c 2,00,000
(Being writing off of losses and reduction in the
value of assets as per scheme of reconstruction.)
9.54 Accounting

Working Notes:
(1) Outstanding interest on debentures have been allocated between A and B as follows:
A's Share Rs.
10% First Debentures 4,00,000

10% Second Debentures 6,00,000 10,00,000

10% on Rs. 10,00,000 i.e. 1,00,000

B's Share
10% First Debentures 2,00,000

10% Second Debentures 4,00,000 6,00,000

10% on Rs. 6,00,000 i.e. 60,000
Total 1,60,000

(2) Bank Account

Rs. Rs.
To A (reconstruction) 1,00,000 By Balance b/d 1,00,000
To Reconstruction A/c By Reconstruction A/c 15,000
(paid by directors) 1,10,000 (capital commitment penalty paid)
By Reconstruction A/c (reconstruction
expenses paid) 10,000
By Provision for tax A/c(tax paid) 80,000
_______ By Balance c/d 5,000
2,10,000 2,10,000
Question 11
Following are the Balance Sheet of companies as at 31.12.2003:
Liabilities D Ltd. V Ltd. Assets D Ltd. V Ltd.
Rs. Rs. Rs. Rs.
Equity share capital Goodwill 6,00,000 ―
(Rs. 100) 8,00,000 6,00,000 Fixed Assets 5,00,000 8,00,000
General Reserve 4,00,000 3,00,000 Investments 2,00,000 4,00,000
Investment Allowance Current Assets 4,00,000 3,00,000
Reserve ― 4,00,000
Sundry Creditors 5,00,000 2,00,000 ________ ________
17,00,000 15,00,000 17,00,000 15,00,000
 Company Accounts - II 9.55

D Ltd. took over V Ltd. on the basis of the respective shares value, adjusting wherever
necessary, the book values of assets and liabilities on the basis of the following information:
(i) Investment Allowance Reserve was in respect of addition made to fixed assets by V Ltd.
in the year 1997-2002 on which income tax relief has been obtained. In terms of the
Income Tax Act, 1961, the company has to carry forward till 2006 reserve of Rs. 2,00,000
for utilization.
(ii) Investments of V Ltd. included 1,000 shares in D Ltd. acquired at cost of Rs. 150 per
share. The other investments of V Ltd. have a market value of Rs. 1,92,500.
(iii) The market value of investments of D Ltd. are to be taken at Rs. 1,00,000.
(iv) Goodwill of D Ltd. and V Ltd. are to be taken at Rs. 5,00,000 and Rs. 1,00,000
respectively.
(v) Fixed assets of D Ltd. and V Ltd. are valued at Rs. 6,00,000 and Rs. 8,50,000
respectively.
(vi) Current assets of D Ltd. included Rs. 80,000 of stock in trade received from V Ltd. at cost
plus 25%.
The above scheme has been duly adopted. Pass necessary Journal Entries in the books of D
Ltd. and prepare Balance Sheet of D Ltd. after taking over the business of V Ltd. Fractional
share to be settled in cash, rest in shares of D Ltd. Calculation shall be made to the nearest
multiple of a rupee. (16 marks) (PE-II May 2004)
Answer
Journal Entries in the Books of D Ltd.
Dr. Cr.
Amount Amount
Rs. Rs.
Business Purchase Account Dr. 12,42,500
To Liquidator of V Ltd. 12,42,500
(For purchase consideration due)
Investments Account Dr. 1,92,500
Goodwill Account (Balancing figure) Dr. 1,00,000
Fixed Assets Account Dr. 8,50,000
Current Assets Account Dr. 3,00,000
To Sundry Creditors Account 2,00,000
To Business Purchase Account 12,42,500
(For assets and liabilities taken over at agreed value)
9.56 Accounting

Liquidator of V Ltd. Dr. 12,42,500

To Equity Share Capital Account (Rs. 100) 9,03,600
To Securities Premium Account (Rs. 37.50) 3,38,850
To Cash Account 50
(For purchase consideration discharged)
Goodwill Account Dr. 16,000
To Current Assets (Stock) Account 16,000
(For elimination of unrealized profit on unsold stock)
Amalgamation Adjustment Account Dr. 2,00,000
To Investment Allowance Reserve Account 2,00,000
(For incorporation of statutory reserve)

Balance Sheet of D Ltd.

as on 31st December, 2003
Liabilities Amount Assets Amount
Rs. Rs.
Equity Share Capital: Fixed Assets
17,036 shares of Rs. 100 each (out (5,00,000 + 8,50,000) 13,50,000
of which 9036 shares are issued in Goodwill
favour of vendor for consideration (6,00,000 + 1,00,000 + 16,000) 7,16,000
other than cash) 17,03,600 Investments
General Reserve 4,00,000 (2,00,000 + 1,92,500) 3,92,500
Securities Premium 3,38,850 Current Assets
Investment Allowance Reserve 2,00,000 (7,00,000 – 50 – 16,000) 6,83,950
Sundry Creditors 7,00,000 Amalgamation Adjustment
Account 2,00,000
33,42,450 33,42,450

Working Notes:
1. Calculation of net asset value of shares
D Ltd. V Ltd.
Rs. Rs.
Goodwill 5,00,000 1,00,000
Fixed Assets 6,00,000 8,50,000
Investments 1,00,000 3,30,000*
 Company Accounts - II 9.57

Current Assets 4,00,000 3,00,000

16,00,000 15,80,000

Less: Sundry Creditors 5,00,000 2,00,000

Net assets 11,00,000 13,80,000
Number of shares 8,000 6,000
Value per equity share 137.50 230

*Investments of V Ltd. are calculated as follows: Rs.

Shares in D Ltd. (1,000  137.50) 1,37,500
Market value of remaining investments (given) 1,92,500
3,30,000
2. Calculation of Purchase Consideration
Rs.
Net assets of V Ltd. 13,80,000
Value of Shares of D Ltd. 137.50
Number of shares to be issued in D Ltd. to V Ltd. (13,80,000  137.50) 10,036.36
Less: Shares already held by V Ltd. 1,000
Additional shares to be issued 9,036.36

Total value of shares to be issued (9036  137.50) 12,42,450

Cash payment for fractional share (.36  137.50) 50
12,42,500
Question 12
Exe Limited was wound up on 31.3.2004 and its Balance Sheet as on that date was given
below:
Balance Sheet of Exe Limited as on 31.3.2004
Liabilities Rs. Assets Rs.
Share capital: Fixed assets 9,64,000
1,20,000 Equity shares Current assets:
of Rs. 10 each 12,00,000 Stock 7,75,000
Reserves and surplus: Sundry debtors 1,60,000
Profit prior to Less:
incorporation 42,000 Provision for
bad and 8,000 1,52,000
doubtful debts
9.58 Accounting

Contingency reserve 2,70,000 Bills receivable 30,000

Profit and loss A/c 2,52,000 Cash at bank 3,29,000 12,86,000
Current liabilities:
Bills payable 40,000
Sundry creditors 2,26,000
Provisions:
Provision for income tax 2,20,000 ________
22,50,000 22,50,000

Wye Limited took over the following assets at values shown as under:
Fixed assets Rs. 12,80,000, Stock Rs. 7,70,000 and Bills Receivable Rs. 30,000.
Purchase consideration was settled by Wye Limited as under:
Rs. 5,10,000 of the consideration was satisfied by the allotment of fully paid 10% Preference
shares of Rs. 100 each. The balance was settled by issuing equity shares of Rs. 10 each at
Rs. 8 per share paid up.
Sundry debtors realised Rs. 1,50,000. Bills payable was settled for Rs. 38,000. Income tax
authorities fixed the taxation liability at Rs. 2,22,000.
Creditors were finally settled with the cash remaining after meeting liquidation expenses
amounting to Rs. 8,000.
You are required to:
(i) Calculate the number of equity shares and preference shares to be allotted by Wye
Limited in discharge of purchase consideration.
(ii) Prepare the Realisation account, Cash/Bank account, Equity shareholders account and
Wye Limited account in the books of Exe Limited.
(iii) Pass journal entries in the books of Wye Limited. (16 marks) (PE-II May 2005)
Answer
(i) Purchase consideration
Rs.
Fixed assets 12,80,000
Stock 7,70,000
Bills receivable 30,000
Purchase consideration 20,80,000
 Company Accounts - II 9.59

Amount discharged by issue of preference shares = Rs. 5,10,000

Rs. 5,10,000
No. of preference shares to be allotted =  5,100 shares
100
Amount discharged by allotment of equity shares = Rs. 20,80,000 – Rs. 5,10,000
= Rs. 15,70,000
Paid up value of equity share = Rs. 8
Rs. 15,70,000
Hence, number of equity shares to be issued =
8
= 1,96,250 shares
(ii) Realisation Account
In the books of Exe Ltd.
Dr. Cr.
Rs. Rs.
To Fixed assets 9,64,000 By Provision for bad and doubtful 8,000
debts
To Stock 7,75,000 By Bills payable 40,000
To Sundry debtors 1,60,000 By Sundry creditors 2,26,000
To Bills receivable 30,000 By Provision for taxation 2,20,000
To Bank account: By Wye Ltd. account
Liquidation expenses 8,000 (Purchase consideration) 20,80,000
Bills payable 38,000 By Bank account: Sundry debtors 1,50,000
Tax liability 2,22,000
Sundry creditors 2,11,000
To Equity shareholders
(profit transferred) 3,16,000 ________
27,24,000 27,24,000

Cash/Bank Account
Dr. Cr.
Rs. Rs.
To Balance b/d 3,29,000 By Realisation account:
To Realisation account: Liquidation expenses 8,000
Sundry debtors 1,50,000 Bills payable 38,000
Tax liability 2,22,000
Sundry creditors (Balancing
_______ figure) 2,11,000
4,79,000 4,79,000
9.60 Accounting

Equity Shareholders Account

Dr. Cr.
Rs. Rs.
To 10% Preference shares By Equity share capital account 12,00,000
in Wye Ltd. 5,10,000 By Profit prior to incorporation 42,000
To Equity shares in Wye Ltd. 15,70,000 By Contingency reserve 2,70,000
By Profit and loss account 2,52,000
By Realisation account (Profit) 3,16,000
20,80,000 20,80,000

Wye Limited Account

Dr. Cr.
Rs. Rs.
To Realisation account 20,80,000 By 10% Preference shares in Wye Ltd. 5,10,000
________ By Equity shares in Wye Ltd. 15,70,000
20,80,000 20,80,000
(iii) Journal Entries
in the books of Wye Ltd.
Particulars Dr. Cr.
Amount Amount
Rs. Rs.
Business purchase account Dr. 20,80,000
To Liquidator of Exe Ltd. account 20,80,000
(Being the amount of purchase consideration payable
to liquidator of Exe Ltd. for assets taken over)
Fixed assets account Dr. 12,80,000
Stock account Dr. 7,70,000
Bills receivable account Dr. 30,000
To Business purchase account 20,80,000
(Being assets taken over)
Liquidator of the Exe Ltd. account Dr. 20,80,000
To 10% Preference share capital account 5,10,000
To Equity share capital account 15,70,000
(Being the allotment of 10% fully paid up preference
shares and equity shares of Rs 10 each, Rs. 8 each
paid up as per agreement for discharge of purchase
consideration)
 Company Accounts - II 9.61

Question 13
Following is the Balance Sheet as at March 31, 2005:
(Rs. ‘000)
Liabilities Max Ltd. Mini Assets Max Mini Ltd.
Ltd. Ltd.
Share capital: Goodwill 20 
Equity shares of Rs. 100 each 1,500 1,000 Other fixed assets 1,500 760
9% Preference shares of Rs. Debtors 651 440
100 each 500 400 Stock 393 680
General reserve 180 170 Cash at bank 26 130
Profit and loss account  15 Own debenture
12% Debentures of Rs. 100 (Nominal value Rs. 192
each 600 200 2,00,000)
Sundry creditors 415 225 Discount on issue of
debentures 2
_____ _____ Profit and loss account 411 _____
3,195 2,010 3,195 2,010
On 1.4.2005, Max Ltd. adopted the following scheme of reconstruction:
(i) Each equity share shall be sub-divided into 10 equity shares of Rs. 10 each fully paid up.
50% of the equity share capital would be surrendered to the Company.
(ii) Preference dividends are in arrear for 3 years. Preference shareholders agreed to waive
90% of the dividend claim and accept payment for the balance.
(iii) Own debentures of Rs. 80,000 were sold at Rs. 98 cum-interest and remaining own
debentures were cancelled.
(iv) Debentureholders of Rs. 2,80,000 agreed to accept one machinery of book value of Rs.
3,00,000 in full settlement.
(v) Creditors, debtors and stocks were valued at Rs. 3,50,000, Rs. 5,90,000 and Rs.
3,60,000 respectively. The goodwill, discount on issue of debentures and Profit and Loss
(Dr.) are to be written off.
(vi) The Company paid Rs. 15,000 as penalty to avoid capital commitments of Rs. 3,00,000.
On 2.4.2005 a scheme of absorption was adopted. Max Ltd. would take over Mini Ltd. The
purchase consideration was fixed as below:
(a) Equity shareholders of Mini Ltd. will be given 50 equity shares of Rs. 10 each fully paid
up, in exchange for every 5 shares held in Mini Ltd.
9.62 Accounting

(b) Issue of 9% preference shares of Rs. 100 each in the ratio of 4 preference shares of Max
Ltd. for every 5 preference shares held in Mini Ltd.
(c) Issue of one 12% debenture of Rs. 100 each of Max Ltd. for every 12% debentures in
Mini Ltd.
You are required to give Journal entries in the books of Max Ltd. and draw the resultant Balance
Sheet as at 2nd April, 2005. (20 Marks) (PE-II – Nov. 2005)
Answer
In the Books of Max Ltd.
Particulars Dr. Cr.
01.04.2005 Amount Amount
Rs. Rs.
Equity share capital A/c Dr. 15,00,000
To Equity share capital A/c 15,00,000
(Being sub-division of one share of Rs. 100
each into 10 shares of Rs. 10 each)

Equity share capital A/c Dr. 7,50,000

To Capital reduction A/c 7,50,000
(Being reduction of capital by 50%)
Capital reduction A/c Dr. 13,500
To Bank A/c 13,500
(Being payment in cash of 10% of arrear of
preference dividend)
Bank A/c Dr. 78,400
To Own debentures A/c 76,800
To Capital reduction A/c 1,600
(Being profit on sale of own debentures
transferred to capital reduction A/c)
12% Debentures A/c Dr. 1,20,000
To Own debentures A/c 1,15,200
To Capital reduction A/c 4,800
(Being profit on cancellation of own
debentures transferred to capital reduction
A/c)
 Company Accounts - II 9.63

12% Debentures A/c Dr. 2,80,000

Capital reduction A/c Dr. 20,000
To Machinery A/c 3,00,000
(Being machinery taken up by
debentureholders for Rs. 2,80,000)
Creditors A/c Dr. 65,000
Capital reduction A/c Dr. 29,000
To Debtors A/c 61,000
To Stock A/c 33,000
(Being assets and liabilities revalued)
Capital reduction A/c Dr. 4,33,000
To Goodwill A/c 20,000
To Discount on debentures A/c 2,000
To Profit and Loss A/c 4,11,000
(Being the balance of capital reduction
transferred to capital reserve account)
Capital reduction A/c Dr. 15,000
To Bank A/c 15,000
(Being penalty paid for avoidance of capital
commitments)
Capital reduction A/c Dr. 2,45,900
To Capital reserve A/c 2,45,900
(Being penalty paid for avoidance of capital
commitments)

02.04.2005 Business Purchase A/c Dr. 13,20,000

To Liquidators of Mini Ltd. 13,20,000
(Being the purchase consideration payable to
Mini Ltd.)
Fixed Assets A/c Dr. 7,60,000
Stock A/c Dr. 6,80,000
Debtors A/c Dr. 4,40,000
Cash at Bank A/c Dr. 1,30,000
To Sundry Creditors A/c 2,25,000
To 12% Debentures A/c of Mini Ltd. 2,00,000
9.64 Accounting

To Profit and Loss A/c 15,000


To General reserve A/c Rs. (1,70,000 + 80,000 ) 2,50,000
To Business purchase A/c 13,20,000
(Being the take over of all assets and liabilities
of Mini Ltd. by Max Ltd.)
Liquidators of Mini Ltd. A/c Dr. 13,20,000
To Equity Share Capital 10,00,000
To 9% Preference share capital 3,20,000
(Being the purchase consideration discharged)
12% Debentures of Mini Ltd. A/c Dr. 2,00,000
To 12% Debentures A/c 2,00,000
(Being Max Ltd. issued their 12% Debentures
in against of every Debentures of Mini Ltd.)

Balance Sheet of Max Ltd. as at 2.4.2005

Liabilities Rs. Assets Rs.
Share Capital: Fixed Assets 19,60,000
Equity Share Capital 17,50,000 Stock 10,40,000
9% Preference share capital 8,20,000 Debtors 10,30,000
Profit and Loss A/c 15,000 Cash in hand/Bank 2,05,900
General Reserve 4,30,000
Capital Reserve 2,45,900
12% Debentures 4,00,000
Sundry Creditors 5,75,000 ________
42,35,900 42,35,900
Working Notes:
1. Purchase Consideration
50
Equity share capital 10,000   Rs. 10 = 10,00,000
5
4
9% Preference share capital 4,000   Rs. 100 = 3,20,000
5
Rs. 13,20,000


Rs. 80,000 is the balancing figure adjusted to general reserve A/c as per AS 14 “Accounting for
Amalgamation”.
 Company Accounts - II 9.65

2. General Reserve
Rs.
Share Capital of Mini Ltd. (Equity + Preference) 14,00,000
Less: Share Capital issued by Max Ltd. 13,20,000
General reserve (resulted due to absorption) 80,000
Add: General reserve of Mini Ltd. 1,70,000
General reserve of Max Ltd. 1,80,000
4,30,000
Question 14
The following is the Balance Sheet of A Ltd. as at 31 st March, 2006:
Liabilities Rs. Assets Rs.
8,000 equity shares of Rs.100 each 8,00,000 Building 3,40,000
10% debentures 4,00,000 Machinery 6,40,000
Loan from A 1,60,000 Stock 2,20,000
Creditors 3,20,000 Debtors 2,60,000
General Reserve 80,000 Bank 1,36,000
Goodwill 1,30,000
Misc. Expenses 34,000
17,60,000 17,60,000
B Ltd. agreed to absorb A Ltd. on the following terms and conditions:
(1) B Ltd. would take over all Assets, except bank balance at their book values less 10%.
Goodwill is to be valued at 4 year’s purchase of superprofits, assuming that the normal
rate of return be 8% on the combined amount of share capital and general reserve.
(2) B Ltd. is to take over creditors at book value.
(3) The purchase consideration is to be paid in cash to the extent of Rs.6,00,000 and the
balance in fully paid equity shares of Rs.100 each at Rs.125 per share.
The average profit is Rs.1,24,400. The liquidation expenses amounted to Rs.16,000. B
Ltd. sold prior to 31 st March, 2006 goods costing Rs.1,20,000 to A Ltd. for Rs.1,60,000.
Rs.1,00,000 worth of goods are still in stock of A Ltd. on 31 st March, 2006. Creditors of A
Ltd. include Rs.40,000 still due to B Ltd.
Show the necessary Ledger Accounts to close the books of A Ltd. and prepare the
Balance Sheet of B Ltd. as at 1 st April, 2006 after the takeover.
(20 Marks) (PE-II – Nov. 2006)
9.66 Accounting

Answer
Books of A Limited
Realisation Account
Rs. Rs.
To Building 3,40,000 By Creditors 3,20,000
To Machinery 6,40,000 By B Ltd. 12,10,000
To Stock 2,20,000 By Equity Shareholders 76,000
(Loss)
To Debtors 2,60,000
To Goodwill 1,30,000
To Bank (Exp.) 16,000
16,06,000 16,06,000

Bank Account
To Balance b/d 1,36,000 By Realisation (Exp.) 16,000
To B Ltd. 6,00,000 By 10% debentures 4,00,000
By Loan from A 1,60,000
By Equity shareholders 1,60,000
7,36,000 7,36,000

10% Debentures Account

To Bank 4,00,000 By Balance b/d 4,00,000
4,00,000 4,00,000

Loan from A Account

To Bank 1,60,000 By Balance b/d 1,60,000
1,60,000 1,60,000

Misc. Expenses Account

To Balance b/d 34,000 By Equity shareholders 34,000
34,000 34,000
 Company Accounts - II 9.67

General Reserve Account

To Equity shareholders 80,000 By Balance b/d 80,000
80,000 80,000
B Ltd. Account
To Realisation A/c 12,10,000 By Bank 6,00,000
By Equity share in B Ltd.(4,880
shares at Rs.125 each) 6,10,000
12,10,000 12,10,000
Equity Shares in B Ltd. Account
To B Ltd. 6,10,000 By Equity shareholders 6,10,000
6,10,000 6,10,000
Equity Share Holders Account
To Realisation 76,000 By Equity share capital 8,00,000
To Misc. Expenses 34,000 By General reserve 80,000
To Equity shares in B Ltd. 6,10,000
To Bank 1,60,000
8,80,000 8,80,000
B Ltd
Balance Sheet as on 1st April, 2006 (An extract)
Liabilities Rs. Assets Rs.
4880 Equity shares of Rs.100 4,88,000 Goodwill 2,16,000
each
(Shares have been issued for Building 3,06,000
consideration other than cash)
Securities Premium 1,22,000 Machine 5,76,000
Profit and Loss A/c
…. …..
Less: unrealized profit 15,000
Creditors (3,20,000 - 40,000) 2,80,000 Stock (1,98,000 -15,000) 1,83,000
Bank Overdraft 6,00,000 Debtors (2,60,000 – 40,000) 2,20,000
Less: Provision for bad debts 26,000 1,94,000


In the absence of the particulars of assets and liabilities (other than those of A Ltd.), the complete Balance
Sheet of B Ltd. after takeover cannot be prepared.
9.68 Accounting

Working Notes:
1. Valuation of Goodwill Rs.
Average profit 1,24,400
Less: 8% of Rs.8,80,000 70,400
Super profit 54,000
Value of Goodwill = 54000 x 4 2,16,000
2. Net Assets for purchase consideration
Goodwill as valued in W.N.1 2,16,000
Building 3,06,000
Machinery 5,76,000
Stock 1,98,000
Debtors 2,60,000
Total Assets 15,56,000
Less: Creditors 3,20,000
Provision for bad debts 26,000 3,46,000
Net Assets 12,10,000
Out of this Rs.6,00,000 is to be paid in cash and remaining i.e., (12,10,000 – 6,00,000)
Rs. 6,10,000 in shares of Rs.125/-. Thus, the number of shares to be allotted 6,10,000/125 =
4,880 shares.
3. Unrealised Profit on Stock Rs.
The stock of A Ltd. includes goods worth Rs.1,00,000 which was sold by
B Ltd. on profit. Unrealized profit on this stock will be
40,000 25,000
1,00,000
1,60,000
As B Ltd purchased assets of A Ltd. at a price 10% less than the book
value, 10% need to be adjusted from the stock i.e., 10% of Rs.1,00,000. (-10,000)
Amount of unrealized profit 15,000

Question 15
The following is the Balance sheet of Weak Ltd. as on 31.3.2006:
Liabilities Rs. Assets Rs.
Equity shares of Rs.100 each 1,00,00,000 Fixed assets 1,25,00,000
12% cumulative preference 50,00,000 Investments (Market value 10,00,000
shares of Rs.100 each Rs.9,50,000)
10% debentures of Rs.100 each 40,00,000 Current assets 1,00,00,000
 Company Accounts - II 9.69

Sundry creditors 50,00,000 P & L A/c 4,00,000

Provision for taxation 1,00,000 Preliminary expenses 2,00,000
2,41,00,000 2,41,00,000

The following scheme of reorganization is sanctioned:

(i) All the existing equity shares are reduced to Rs.40 each.
(ii) All preference shares are reduced to Rs.60 each.
(iii) The rate of interest on debentures is increased to 12%. The debentureholders surrender
their existing debentures of Rs.100 each and exchange the same for fresh debentures of
Rs.70 each for every debenture held by them.
(iv) One of the creditors of the company to whom the company owes Rs.20,00,000 decides to
forgo 40% of his claim. He is allotted 30,000 equity shares of Rs.40 each in full
satisfaction of his claim.
(v) Fixed assets are to be written down by 30%.
(vi) Current assets are to be revalued at Rs.45,00,000.
(vii) The taxation liability of the company is settled at Rs.1,50,000.
(viiii) Investments to be brought to their market value.
(ix) It is decided to write off the fictitious assets.
Pass Journal entries and show the Balance sheet of the company after giving effect to the above.
(16 Marks) (PE-II – May, 2007)
Answer
Journal Entries in the books of Weak Ltd.
Rs. Rs.
(i) Equity share capital (Rs.100) A/c 1,00,00,000
Dr.
To Equity Share Capital (Rs.40) A/c 40,00,000
To Capital Reduction A/c 60,00,000
(Being conversion of equity share capital of Rs.100 each into
Rs.40 each as per reconstruction scheme)

(ii) 12% Cumulative Preference Share capital (Rs.100) A/c Dr. 50,00,000
To 12% Cumulative Preference Share Capital (Rs.60) A/c 30,00,000
To Capital Reduction A/c 20,00,000
(Being conversion of 12% cumulative preference share
9.70 Accounting

capital of Rs.100 each into Rs.60 each as per reconstruction

scheme)
(iii) 10% Debentures A/c Dr. 40,00,000
To 12% Debentures A/c 28,00,000
To Capital Reduction A/c 12,00,000
(Being 12% debentures issued to 10% debenture-holders for
70% of their claims. The balance transferred to capital
reduction account as per reconstruction scheme)
(iv) Sundry Creditors A/c Dr. 20,00,000
To Equity Share Capital A/c 12,00,000
To Capital Reduction A/c 8,00,000
(Being a creditor of Rs.20,00,000 agreed to surrender his
claim by 40% and was allotted 30,000 equity shares of Rs.40
each in full settlement of his dues as per reconstruction
scheme)
(v) Provision for Taxation A/c Dr. 1,00,000
Capital Reduction A/c Dr. 50,000
To Liability for Taxation A/c 1,50,000
(Being conversion of the provision for taxation into liability for
taxation for settlement of the amount due)
(vi) Capital Reduction A/c Dr. 99,50,000
To P & L A/c 4,00,000
To Preliminary Expenses A/c 2,00,000
To Fixed Assets A/c 37,50,000
To Current Assets A/c 55,00,000
To Investments A/c 50,000
To Capital Reserve A/c 50,000
(Being amount of Capital Reduction utilized in writing off P &
L A/c (Dr.) Balance, Preliminary Expenses, Fixed Assets,
Current Assets, Investments and the Balance transferred to
Capital Reserve)

(vii) Liability for Taxation A/c Dr. 1,50,000

To Current Assets (Bank A/c) 1,50,000
(Being the payment of tax liability)
 Company Accounts - II 9.71

Balance Sheet of Weak Ltd. (and reduced) as on 31.3.2006

Liabilities Rs. Assets Rs.

Issued, subscribed and paid Fixed Assets 87,50,000
up capital: 52,00,000 (1,25,00,000 –
1,30,000 equity shares of 37,50,000)
Rs.40 each
12% Cumulative Preference Investments 9,50,000
Shares of Rs. 60 each 30,00,000 (10,00,000 – 50,000)
Reserves & Surplus: Current Assets 43,50,000
Capital Reserve 50,000 (45,00,000 – 1,50,000)
Secured Loan:
12% Debentures 28,00,000
Current Liabilities and
Provisions:
Sundry Creditors: 30,00,000
(50,00,000 – 20,00,000)
1,40,50,000 1,40,50,000
Working Note:
Capital Reduction Account
Rs. Rs.
To Liability for taxation A/c 50,000 By Equity share capital 60,00,000
To P & L A/c 4,00,000 By 12% Cumulative preference 20,00,000
share capital
To Preliminary expenses 2,00,000 By 10% Debentures 12,00,000
To Fixed assets 37,50,000 By Sundry creditors 8,00,000
To Current assets 55,00,000
To Investment 50,000
To Capital Reserve 50,000
(balancing figure) _________ _________
1,00,00,000 1,00,00,000
Question 16
The following is the Balance Sheet of ‘A’ Ltd. as on 31.3.2007:
Liabilities Rs. Assets Rs.
14,000 Equity shares of Sundry assets 18,00,000
Rs.100 each fully paid 14,00,000 Discount on issue of
9.72 Accounting

General reserve 10,000 debentures 10,000

10% Debentures 2,00,000 Preliminary expenses 30,000
Sundry creditors 2,00,000 P & L A/c 60,000
Bank overdraft 50,000
Bills payable 40,000
19,00,000 19,00,000
‘R’ Ltd. agreed to take over the business of ‘A’ Ltd. Calculate purchase consideration under
Net Assets method on the basis of the following:
The market value of 75% of the sundry assets is estimated to be 12% more than the book
value and that of the remaining 25% at 8% less than the book value. The liabilities are taken
over at book values. There is an unrecorded liability of Rs.25,000.
( 6 Marks) (PE II, Nov. 2007 )
Answer
Calculation of Purchase Consideration under Net Assets Method
Sundry assets Rs.
75 112
18,00,000    15,12,000
100 100
25 92
18,00,000    4,14,000 19,26,000
100 100
Less: Liabilities:
10% Debentures 2,00,000
Sundry creditors 2,00,000
Bank overdraft 50,000
Bills payable 40,000
Unrecorded liability 25,000 5,15,000
Purchase consideration 14,11,000
Question 17
The Balance Sheet of A Limited and B Limited as at 31 st March, 2008 are as follows:
Liabilities A Ltd. B Ltd. Assets A Ltd. B Ltd.
Equity share of 20,00,000 12,00,000 Sundry assets 30,00,000 14,00,000
Rs.10 each
General reserve 4,00,000 2,20,000 40,000 Equity
shares in A Ltd. - 4,00,000
Creditors 6,00,000 3,80,000
30,00,000 18,00,000 30,00,000 18,00,000
 Company Accounts - II 9.73

A Ltd. absorbed B Ltd. on the basis of intrinsic value of the shares. The purchase
consideration is to be discharged in fully paid-up equity shares. A sum of Rs.1,00,000 is owed
by A Ltd. to B Ltd., also included in the stock of A Ltd. is Rs.1,20,000 goods supplied by B Ltd.
at cost plus 20%.
Give Journal entries in the books of both the companies, if entries are made at intrinsic value.
Also prepare Balance Sheet of A Ltd. after absorption. (16 Marks) (PE II- May, 2008)
Answer
In the Books of B Ltd.
Journal Entries
Dr. (Rs.) Cr. (Rs.)
(i) Realisation A/c Dr. 14,00,000
To Sundry assets A/c 14,00,000
(Being assets transferred to realization account on sale
of business to A Ltd.)

(ii) Creditors A/c Dr. 3,80,000

To Realisation A/c 3,80,000
(Being creditors transferred to realization account on
sale of business to A Ltd.)

(iii) Equity share capital A/c Dr. 12,00,000

General reserve A/c Dr. 2,20,000
To Equity shareholders A/c 14,20,000
(Being transfer of share capital and general reserve to
shareholders account)

(iv) A Ltd. Dr. 10,20,000

To Realisation A/c 10,20,000
(Being purchase consideration due – W.N. 2)

(v) Equity shares in A Ltd. Dr. 10,20,000

To A Ltd. 10,20,000
(Being purchase consideration received by A Ltd.)
9.74 Accounting

(vi) Equity shares in A Ltd. A/c Dr. 80,000

To Realisation A/c 80,000
(Being appreciation in the value of shares of A Ltd.
brought into books as entries are to be made at intrinsic
value)

(vii) Realisation A/c Dr. 80,000

To Equity shareholders A/c 80,000
(Being profit on realization transferred to shareholders
account)

(viii) Equity shareholders A/c Dr. 15,00,000

To Equity shares in A Ltd. A/c 15,00,000
(Being 85,000+ 40,000 = 1,25,000 shares distributed to
equity shareholders of B Ltd.)

In the Books of A Ltd.

Journal Entries
Dr. (Rs.) Cr. (Rs.)
(i) Business purchase A/c Dr. 10,20,000
To Liquidators of B Ltd. A/c 10,20,000
(Being amount payable to B Ltd. – W.N. 2)

(ii) Sundry assets A/c Dr. 14,00,000

To Creditors A/c 3,80,000
To Business purchase A/c 10,20,000
(Being assets & liabilities taken over and purchase
consideration due)

(iii) Liquidators of B Ltd. A/c Dr. 10,20,000

To Equity share capital A/c 8,50,000
To Securities premium A/c 1,70,000
(Being shares allotted in full payment of purchase
consideration)

(iv) Creditors A/c Dr. 1,00,000

 Company Accounts - II 9.75

To Debtors (of B Ltd.) A/c 1,00,000

(Being cancellation of mutual liability of debtors &
creditors of Rs.1,00,000)

(v) General reserve A/c Dr. 20,000*

To Stock A/c 20,000
(Being elimination of unrealized profit on unsold stock of
Rs.1,20,000, bought from B Ltd.)
*Unrealized profit = Rs.1,20,000 × 20/120 = Rs.20,000.
Balance Sheet of A Ltd.
as at 31st March, 2008
Liabilities Rs. Assets Rs.
Share capital: Sundry assets 42,80,000
2,85,000 Equity shares of Rs.10 (30,00,000 + 14,00,000 –
each 28,50,000 1,00,000 – 20,000)
(of the above, 85,000 equity
shares of Rs.10 each are issued
for consideration other than cash)
Securities premium 1,70,000
General reserve 3,80,000
Creditors 8,80,000
(6,00,000 + 3,80,000- 1,00,000)
42,80,000 42,80,000
Working Notes:
1. Calculation of Intrinsic Value of shares of ‘A’ Ltd.
Rs.
Sundry assets of A Ltd. 30,00,000
Less: Creditors 6,00,000
Net assets 24,00,000
Number of equity shares 2,00,000 shares
Rs.24,00,000
Intrinsic value per equity share = Rs. 12 per share
2,00,000 shares
9.76 Accounting

2. Calculation of Purchase Consideration Rs.

Sundry assets of B Ltd. 14,00,000
Add: Investments in shares of A Ltd. (40,000 shares × Rs.12) 4,80,000
18,80,000
Less: Creditors 3,80,000
Net assets 15,00,000
Shares
Total number of equity shares to be issued by A Ltd. @Rs.12 per
share (Rs.15,00,000 / Rs.12) 1,25,000
Less: Number of equity shares of A Ltd. which are already with B Ltd. 40,000
Number of shares to be issued to outsiders 85,000
Rs.
Equity share capital (85,000 shares  Rs.10) 8,50,000
Securities premium (85,000 shares  Rs.2) 1,70,000
Purchase consideration 10,20,000
Question 18
Following is the Balance Sheet of X Co. Ltd. as at 31 st March, 2008:
Balance Sheet as at 31st March, 2008
Liabilities Rs. Assets Rs.
Equity share capital 15,00,000 Land and building 10,00,000
(Rs. 100 each)
11% Pref. share capital 5,00,000 Plant and machinery 7,00,000
General reserve 3,00,000 Furniture and fittings 2,00,000
Sundry creditors 2,00,000 Stock in trade 3,00,000
Sundry debtors 2,00,000
Cash in hand and at bank 1,00,000
25,00,000 25,00,000
Y Co. Ltd. agreed to take over X Co. Ltd. on the following terms:
(i) Each equity share in X Co. Ltd. for the purpose of absorption is to be valued at Rs. 80.
(ii) Equity shares will be issued by Y Co. Ltd. by valuing its each equity share of Rs. 100
each at Rs. 120 per share.
(iii) 11% Preference shareholders of X Co. Ltd. will be given 11% redeemable debentures of
Y Co. Ltd. at equivalent value.
(iv) All the Assets and Liabilities of X Co. Ltd. will be recorded at the same value in the books
of Y Co. Ltd.
 Company Accounts - II 9.77

(a) Calculate Purchase consideration.

(b) Pass Journal entries in the books of Y Co. Ltd. for absorbing X Co. Ltd.
(8 Marks)(PE II- Nov. 2008)
Answer
Computation of Purchase Consideration
Rs.
Value of 15,000 equity shares @ Rs.80 per share = Rs.12,00,000
Shares to be issued by Y Co. Ltd. (Rs,12,00,000/120 per share = 10,000 shares @ 12,00,000
Rs.120 each)
11% Preference shareholders to be issued equivalent 11% Redeemable
Debentures by Y Co. Ltd. 5,00,000
Total Purchase consideration 17,00,000
Journal Entries in the books of Y Co. Ltd.
Rs. Rs.
Business Purchase A/c Dr. 17,00,000
To Liquidator of X Co. Ltd. 17,00,000
(Being the amount payable to X Co. Ltd’s liquidator)
Land & Building A/c Dr. 10,00,000
Plant & Machinery A/c Dr. 7,00,000
Furniture & Fittings A/c Dr. 2,00,000
Stock in Trade A/c Dr. 3,00,000
Sundry Debtors A/c Dr. 2,00,000
Cash & Bank A/c Dr. 1,00,000
To Sundry Creditors 2,00,000
To Capital Reserve (Balancing figure) 6,00,000
To Business Purchase 17,00,000
(Being the value of assets and liabilities taken over from X
Co. Ltd.)
Liquidators of X Co. Ltd. Account Dr. 17,00,000
To Equity Share Capital 10,00,000
To Securities Premium Account 2,00,000
To 11% Debentures 5,00,000
(Being purchase consideration discharged)
9.78 Accounting

UNIT 5 : LIQUIDATION OF COMPANIES

(A) Write short notes on :
Question 1
What are the contents of “Liquidators’ statement of account”? How frequently does a liquidator has
to submit such statement? (5 marks) (Intermediate Nov. 1999)
Answer
The statement prepared by the liquidator showing receipts and payments of cash in case of
voluntary winding up is called “Liquidators’ statement of account” (Form No. 156 Rule 329 of the
Companies Act, 1956). There is no double entry involved in the preparation of liquidator’s
statement of account. It is only a statement though presented in the form of an account.
While preparing the liquidator’s statement of account, receipts are shown in the following order :
(a) Amount realised from assets are included in the prescribed order.
(b) In case of assets specifically pledged in favour of creditors, only the surplus from it, if any,
is entered as ‘surplus from securities’.
(c) In case of partly paid up shares, the equity shareholders should be called up to pay
necessary amount (not exceeding the amount of uncalled capital) if creditors’ claims/claims
of preference shareholders can’t be satisfied with the available amount. Preference
shareholders would be called upon to contribute (not exceeding the amount as yet uncalled
on the shares) for paying of creditors.
(d) Amounts received from calls to contributories made at the time of winding up are shown on
the Receipts side.
(e) Receipts per Trading Account are also included on the Receipts side.
Payments made to redeem securities and cost of execution and payments per Trading
Account are deducted from total receipts.
Payments are made and shown in the following order :
(a) Legal charges;
(b) Liquidator’s expenses;
(d) Debentureholders (including interest up to the date of winding up if the company is
insolvent and to the date of payment if it is solvent);
(e) Creditors :
(i) Preferential (in actual practice, preferential creditors are paid before debenture holders
having a floating charge);
(ii) Unsecured creditors;
(f) Preferential shareholders (Arrears of dividends on cumulative preference shares should be
paid up to the date of commencement of winding up); and
(g) Equity shareholders.
 Company Accounts - II 9.79

Liquidator’s statement of account of the winding up is prepared for the period starting from the
commencement of winding up to the close of winding up. If winding up of company is not
concluded within one year after its commencement, Liquidator’s statement of account pursuant to
section 551 of the Companies Act, 1956 (Form No. 153) is to be filed by a Liquidator within a
period of two months of the conclusion of one year and thereafter until the winding up is concluded
at intervals of not more than one year or at such shorter intervals, if any, as may be prescribed.
Question 2
Overriding preferential payments under section 529A of the Companies Act, 1956.
(5 marks) (Intermediate May 2000)
Answer
The Companies (Amendment) Act, 1985 introduced Section 529A which states that certain dues
are to be settle in the case of winding up of a company even before the payments to preferential
creditors under Section 530. Section 529A states that in the event of winding up of a company,
workmen’s dues and debts due to secured creditors, to the extent such debts rank under Section
529(1)(c), shall be paid in priority to all other debts. The debts provable [Section 529(i)(a)] and the
valuation of annuities and future and contingent liabilities [Section 529(1)(b)] shall be paid in full,
unless the assets are insufficient to meet them, in which case they shall abate in equal proportions.
Workmen’s dues, in relation to a company, means the aggregate of the following sums:
1. all wages or salary including wages payable for time or piece work and salary earned
wholly or in part by way of commission of any workman, in respect of services rendered to
the company and any compensation payable to any workman under any of the provisions
of the Industrial Disputes Act, 1947;
2. all accrued holiday remuneration becoming payable to any workman, or in the case of his
death to any other person in his right, on the termination of his employment before, or by
the effect of, the winding up order or resolution;
3. all amounts due in respect of any compensation or liability for compensation under
Workmen’s Compensation Act, 1923 in respect of death or disablement of any workman of
the company;
4. all sum due to any workman from a provident fund, a pension fund, a gratuity fund or any
other fund for the welfare of the workmen, maintained by the company.
Question 3
B List of Contributories and the liability of contributories included in the list.
(4 marks) (Intermediate–May 2001), (PE II –May, 2007)
Answer
The shareholders who transferred partly paid shares (otherwise than by operation of law or by
death) within one year, prior to the date of winding up may be called upon to pay an amount (not
exceeding the amount not called up when the shares were transferred) to pay off such creditors as
existed on the date of transfer of shares.
9.80 Accounting

Their liability will crystallize only (i) when the existing assets available with the liquidator are not
sufficient to cover the liabilties; (ii) when the existing shareholders fail to pay the amount due on the
shares to the liquidator.
(B) Practical Questions :
Question 1
The following is the Balance Sheet of Y Limited as at 31st March, 1994:
Liabilities Rs. Assets Rs.
Share Capital: Fixed Assets :
2,000 Equity Shares of Rs. 100 Land & Buildings 4,00,000
each Rs. 75 per share paid up 1,50,000 Plant and Machineries 3,80,000
6,000 equity shares of Rs. 100 Current Assets :
each Rs. 60 per share paid up 3,60,000 Stock at cost 1,10,000
Sundry Debtors 2,20,000
2,000 10% Preference Share of Cash at Bank 60,000
Rs. 100 each fully paid up 2,00,000 Profit and Loss A/c 2,40,000
10% Debentures (having a floating
charge on all assets) 2,00,000
Interest accrued on Debentures
(also secured as above) 10,000
Sundry Creditors 4,90,000
14,10,000 14,10,000
On that date, the company went into Voluntary Liquidation. The dividends on preference shares
were in arrear for the last two years. Sundry Creditors include a loan of Rs. 90,000 on mortgage of
Land and Buildings. The assets realised were as under :-
Rs.
Land and Buildings 3,40,000
Plant & Machineries 3,60,000
Stock 1,20,000
Sundry Debtors 1,60,000
Interest accrued on loan on mortgage of buildings upto the date of payment amounted to Rs.
10,000. The expenses of Liquidation amounted to Rs. 4,600. The Liquidator is entitled to a
remuneration of 3% on all the assets realised (except cash at bank) and 2% on the amounts
distributed among equity shareholders. Preferential creditors included in sundry creditors
amount to Rs. 30,000. All payments were made on 30th June, 1994. Prepare the liquidator’s
final statement of account. (15 marks)(Intermediate Nov. 1994)
 Company Accounts - II 9.81

Answer
Liquidator’s Final Statement of Account
Receipts Rs. Rs. Payments Rs. Rs.
Cash at Bank 60,000 Liquidation expenses 4,600
Assets realised :
Sundry Debtors 1,60,000 Liquidator’s remuneration (W.N. 1) 30,400
Stock 1,20,000 Debentureholders :
Plant & Machinery 3,60,000 6,40,000 10% debentures 2,00,000
Surplus from Land & Interest accured (W.N. 2) 15,000 2,15,000
Buildings: Preferential creditors 30.000
Amount realised 3,40,000 Unsecured creditors 3,70,000
Less : Secured Preference shareholders:
Creditors 1,00,000 2,40,000 10% Preference Share
Capital 2,00,000
Arrear dividend 40,000 2,40,000
Equity Shareholders
(W.N. 3) :
Rs. 17.50 per share
on 2,000 shares 35,000
Rs. 2.50 per share
on 6,000 shares 15,000 50,000
9,40,000 9,40,000
Working Notes :
(1) Liquidator’s remuneration : Rs.
3% on Assets realised (3% of Rs. 9,80,000) 29,400
2% of the amounts distributed among Equity Shareholders
(2/102 × Rs. 51,000) 1,000
30,400
(2) Interest accrued on 10% debentures
Interest accrued as on 31.3.1994 10,000
Interest accrued upto the date of payment
(upto 30th June, 1994) 5,000
15,000
(3) Amount payable to Equity Shareholders
Equity Share Capital 5,10,000
Less: Surplus available for Equity Shareholders 50,000
Loss to be borne by them 4,60,000
Loss per Equity share (Rs. 4,60,000/8,000) 57.50
Amount payable to Equity shareholders :
Each Equity share of Rs. 75 paid up 17.50
Each Equity share of Rs. 60 paid up 2.50
9.82 Accounting

Question 2
In a winding up of a company, certain creditors remained unpaid. The following persons had
transferred their holding sometime before winding up :
Name Date of Transfer No. of Shares Amount due to creditors on
transferred the date of transfer
1996 Rs.
P January 1 1,000 7,500
Q February 15 400 12,500
S March 15 700 18,000
T March 31 900 21,000
U April 5 1,000 30,000
The shares were of Rs. 100 each, Rs. 80 being called up and paid up on the date of transfers.
A member, R, who held 200 shares died on 28th February, 1996 when the amount due to creditors
was Rs. 15,000. His shares were transmitted to his son X.
Z was the transferee of shares held by T. Z paid Rs. 20 per share as calls in advance immediately
on becoming a member.
The liquidation of the company commenced on 1st February, 1997 when the liquidator made a call
on the present and the past contributories to pay the amount.
You are asked to quantify the maximum liability of the transferors of shares mentioned in the above
table, when the transferees :
(i) pay the amount due as “present” member contributories;
(ii) do not pay the amount due as “present” member contributories.
Also quantity the liability of X to whom shares were transmitted on the demise of his father
R. (12 marks)(Intermediate Nov. 1997)
Answer
Statement of liability as contributories of former members
Creditors outstanding Q R/X S U Amount to be
on the date of transfer paid to creditor
(ceasing to be member)
No. of Shares 400 200 700 1,000
1996 Rs. Rs. Rs. Rs. Rs. Rs.
Feb. 15 12,500 2,174 1,087 3,804 5,435 12,500
Feb. 28 15,000
–12,500 2,500 – 263 921 1,316 2,500
March 15 18,000
–15,000 3,000 – 316 1,105 1,579 3,000
April 5 30,000
18,000 12,000 2,000 10,000 12,000
Total (a) 30,000 2,174 3,666 5,830 18,330 30,000
Maximum Liablity at Rs. 20
per share on shares held (b) 8,000 4,000 14,000 20,000
Lower of (a) and (b) 2,174 3,666 5,830 18,330
 Company Accounts - II 9.83

Working Note :
The transferors are P, Q, S, T and U. When the transferees pay the amount due as “present”
member contributories, there will not be any liability on the transferors. It is only when the
transferees do not pay as “present” member contributories then the liability would arise in the case
of “past” members as contributories.
X to whom shares were transmitted on demise of his father R would be liable as an existing
member contributory. He steps into the shoes of his deceased father under section 430. His
maximum liability would be at Rs. 20 per share on 200 shares received on transmission i.e. for Rs.
4,000.
P will not be liable to pay any amount as the winding up proceedings commenced after one year
from the date of the transfer. T also will not be liable as the transferee Z has paid the balance Rs.
20 per share as call in advance. Q, R/X, S and U will be liable, as former members, to the
maximum extent as indicated, provided the transferees do not pay the calls.
Question 3
The following was the Balance Sheet of X Limited as on 31.3.1998 :
Balance Sheet of X Limited as at 313.1998
Liabilities Rs. Assets Rs.
Share Capital Fixed Assets
14%, 40,000 preference shares of Land 40,000
Rs. 100 each fully paid up 4,00,000 Buildings 1,60,000
8,000 equity shares of Rs. 100 each, Plant and Machinery 5,40,000
Rs. 60 per share paid up 4,80,000 Patents 40,000
Reserves and Surplus NIL Investments NIL
Secured Loans Current assets, loans and advances
1. 14% debentures 2,30,000 A. Current Assets
(Having a floating charge Stock at cost 1,00,000
on all assets) Sundry debtors 2,30,000
Interest accrued on above Cash at bank 60,000
debentures 32,200 B. Loans and Advances NIL
(Also having a floating Miscellaneous expenses
charge as above) Profit and Loss A/c 2,40,000
2. Loan on mortgage of land
and building 1,50,000
Unsecured Loan NIL
Current Liabilities and provisions
A. Current liabilities
Sundry creditors 1,17,800
14,10,000 14,10,000
9.84 Accounting

On 31.3.1998 the company went into voluntary liquidation. The dividend on 14% preference
shares was in arrears for one year. Sundry creditors include preferential creditors amounting to Rs.
30,000.
The assets realised the following sums
Land Rs. 80,000; Buildings Rs. 2,00,000; Plant and machinery Rs. 5,00,000; Patent Rs. 50,000;
Stock Rs. 1,60,000; Sundry debtors Rs. 2,00,000.
The expenses of liquidation amounted to Rs. 29,434. The liquidator is entitled to a commission of
2% on all assets realised (except cash at bank) and 2% on amounts among unsecured creditors
other than preferential creditors. All paymnts the on 30th June, 1998. Interest on mortgage loan
shall be ignored at the time of payment.
Prepare the liquidator’s final statement of account. (10 marks)(Intermediate Nov. 1998)
Answer
X Ltd.
Liquidator’s Final Statement of Account
Receipts Value Payments Payment
Realised Rs. Rs.
Assets Realised :
Cash at Bank 60,000 Liquidator’s Remuneration (W.N. 1) 25,556
Sundry Debtors 2,00,000 Liquidation Expenses 29,434
Stock 1,60,000 Debentureholders :
Plant and Machinery 5,00,000 14% Debentures 2,30,000
Patents 50,000 Interest Accrued (W.N. 2) 40,250 2,70,250
Surplus from Securities Creditors :
(W.N. 3) 1,30,000 Preferential 30,000
Unsecured 87,800 1,17,800
Preference Shareholders :
Preference Share Capital 4,00,000
Arrears of Dividend 56,000 4,56,000
Equity Shareholders (W.N.4) :
Rs. 25.12 per share on 8,000 shares 2,00,960
11,00,000 11,00,000

Working Notes :
Rs.
1. Liquidator’s remuneration :
2% on assets realised (2% of Rs. 11,90,000) 23,800
2% on payments to unsecured creditors (2% on Rs. 87,800) 1,756
25,556
2. Interest accrued on 14% Debentures :
Interest accrued as on 31.3.1998 32,200
Interest accrued upto the date of payment i.e. 30.6.1998 8,050
40,250
 Company Accounts - II 9.85

3. Surplus from Securities :

Amount realised from Land and Buildings (Rs. 80,000 + Rs. 2,00,000) 2,80,000
Less : Mortgage Loan 1,50,000
1,30,000
4. Amount payable to Equity Shareholders :
Equity share capital (paid up) 4,80,000
Less : Amount available for equity shareholders 2,00,960
Loss to be born by equity shareholders 2,79,040
Loss per equity share (Rs. 2,79,040/8,000) 34.88
Amount payable to equity shareholders for each equity share (60-34.88) 25.12
Notes : (1) Commission due to the liquidator has been calculated on the total realisation on the
supposition that the securities (land and buildings) are realised by the liquidator on
behalf of the lender.
(2) Preference shares have been taken as cumulative.
Question 4
Pessimist Ltd. has gone into liquidation on 10th May, 2000. The details of members, who have
ceased to be members, within the year ended 31st March, 2000 are given below. The debts that
could not be paid out of realisation of assets and contribution from present membrs (‘A’
contributories) are also given with their date-wise break up. Shares are of Rs. 10 each, Rs. 6 per
share paid up.
You are to determine the amount realisable from each person.
Shareholders No. of shares Date of transfer Proportionate
transferred unpaid debts
P 1,000 20.04.1999 3,000
Q 1,200 15.05.1999 5,000
R 1,500 18.09.1999 9,200
S 800 24.12.1999 10,500
T 500 12.03.2000 11,000
(7 marks)(Intermediate Nov. 2000)
Answer
Statement of liabilities of B List Contributories
Q R S T Amount
Creditors outstanding to be
on the date of transfer paid to
(ceasing to be member) creditors
No. of shares 1,200 1,500 800 500
Date Rs. Rs. Rs. Rs. Rs. Rs.
15.5.99 5,000 1,500 1,875 1,000 625 5,000
9.86 Accounting

18.9.99 9,200
–5,000 4,200 – 2,250 1,200 750 4,200
10,500
24.12.99 -9,200 1,300 – – 800 500 1,300
11,000
12.3.2000 10,500 500 – – – 500 125
Total (a) 11,000 1,500 4,125 3,000 2,375 10,625
Maximum liability
on shares held (b) 4,800 6,000 3,200 2,000
Amount paid (a) and (b)
whichever is lower 1,500 4,125 3,000 2,000

Working Note :
P Will not be liable since he transferred his shares prior to one year preceding the date of winding
up. The amount of Rs. 5,000 outstanding on 15th May, 1999 will have to contributed by Q, R, S
and T in the ratio of number of shares held by them, i.e. in the ratio of 12:15:8:5; thus Q will have to
contribute Rs. 1,500; R Rs. 1,875; S Rs. 1,000; T Rs. 625. Similarly, the further debts incurred
between 15th May, 1999 to 18th September, 1999, viz. Rs. 4,200 for which Q is not liable will be
contributed by R, S and T in the ratio of 15:8:5. R will have to contribute Rs. 2,250. S and T will
contribute Rs. 1,200 and Rs. 750 respectively. The further increase from Rs. 9,200 to Rs. 10,500
viz. Rs. 1,300 occurring between 18th September and 24th December will be shared by S and T
who will be liable for Rs. 800 and Rs. 500 respectively. The increase between 24th December and
12th March, is solely the responsibility of T.
Question 5
Liquidation of YZ Ltd. commenced on 2nd April, 2004. Certain creditors could not receive
payments out of the realisation of assets and out of the contributions from A list contributories.
The following are the details of certain transfers which took place in 2003 and 2004:
Shareholders No. of Shares Date of Ceasing to Creditors remaining
transferred be a member unpaid and outstanding
on the date of such
transfer
A 2,000 1st March, 2003 Rs. 5,000
P 1,500 1st May, 2003 Rs. 3,300
Q 1,000 1st October, 2003 Rs. 4,300
R 500 1st November, 2003 Rs. 4,600
S 300 1st February, 2004 Rs. 6,000
All the shares were of Rs. 10 each, Rs. 8 per share paid up. Show the amount to be realised
from the various persons listed above ignoring expenses and remuneration to liquidator etc.
(8 marks) (PE-II–Nov. 2004)


Against T’s liability of Rs. 2,375, he can be called upon to pay Rs. 2,000, the loss of Rs. 375 will have to
be suffered by the creditors.
 Company Accounts - II 9.87

Answer
Statement of liabilities of B list contributories
Share- No. of Maximum Division of Liability as on
holders shares liability 1.5.2003 1.10.2003 1.11.2003 1.2.2004 Total
transferred (upto Rs. 2
per share)
Rs. Rs. Rs. Rs. Rs. Rs.
P 1,500 3,000 1,500    1,500
Q 1,000 2,000 1,000 555   1,555
R 500 1,000 500 278 188  966
S 300 600 300 167 112 21 600
3,300 6,600 3,300 1,000 300 21 4,621

Working Note:
Date Cumulative liability Increase in liability Ratio of no. of shares
held by the members
1.5.2003 3,300  30 : 20 : 10 : 6
1.10.2003 4,300 1,000 20 : 10 : 6
1.11.2003 4,600 300 10 : 6
1.2.2004 6,000 1,400 Only S

Liability of S has been restricted to the maximum allowable limit of Rs. 600, therefore amount
payable by S is restricted to Rs. 21 only, on 1.2.2004.
Notes:
1. A will not be liable to pay to the outstanding creditors since he transferred his
shares prior to one year preceding the date of winding up.
2. P will not be responsible for further debts incurred after 1st May, 2003 (from the
date when he ceases to be member). Similarly, Q and R will not be responsible for
the debts incurred after the date of their transfer of shares.
Question 6
The position of Valueless Ltd. on its liquidation is as under:
Issued and paid up Capital:
3,000 11% preference shares of Rs. 100 each fully paid.
3,000 Equity shares of Rs. 100 each fully paid.
1,000 Equity shares of Rs. 50 each Rs. 30 per share paid.
9.88 Accounting

Calls in Arrears are Rs. 10,000 and Calls received in Advance Rs. 5,000. Preference
Dividends are in arrears for one year. Amount left with the liquidator after discharging all
liabilities is Rs. 4,13,000. Articles of Association of the company provide for payment of
preference dividend arrears in priority to return of equity capital. You are required to
prepare the Liquidators final statement of account. (8 marks) (PE-II–Nov. 2004)
Answer
Liquidators’ Final Statement of Account
Receipts Rs. Payments Rs.
Cash 4,13,000 Return to contributors:
Realisation from: Preference dividend 33,000
Calls in arrears 10,000 Preference shareholders 3,00,000
Final call of Rs. 5 per Calls in advance 5,000
equity share of Rs. 50 each Equity shareholders of
(Rs. 5  1,000) 5,000 Rs. 100 each (3,000  Rs. 30) 90,000
4,28,000 4,28,000

Working Note:
Rs.
Cash account balance 4,13,000
Less: Payment for dividend 33,000
Preference shareholders 3,00,000
Calls in advance 5,000 3,38,000
75,000
Add: Calls in arrears 10,000
85,000
Add: Amount to be received from equity shareholders of Rs. 50 each
(1,000  20) 20,000
Amount disposable 1,05,000

Number of equivalent equity shares:

3,000 shares of Rs. 100 each = 6,000 shares of Rs. 50 each
1,000 shares of Rs. 50 each = 1,000 shares of Rs. 50 each
= 7,000 shares of Rs. 50 each
 Company Accounts - II 9.89

Amount left for distribution

Final payment to equity shareholders =
Total number of equivalent equity shares
= Rs. 1,05,000 / 7,000 shares = Rs. 15 per share to equity shareholders of Rs. 50 each.
 100 
Therefore for equity shareholders of Rs. 100 each  Rs. 15  
 50 
= Rs. 30 per share to equity shareholders of Rs. 100 each.
Calls in advance must be paid first, so as to pay the shareholders on prorata basis. Equity
shareholders of Rs. 50 each have to pay Rs. 20 and receive Rs. 15 each. As a result, they
are required to pay net Rs. 5 per share.
Question 7
The following particulars relate to a Limited Company which has gone into voluntary
liquidation. You are required to prepare the Liquidator’s Statement of Account allowing for his
remuneration @ 2½% on all assets realized excluding call money received and 2% on the
amount paid to unsecured creditors including preferential creditors.
Share capital issued:
10,000 Preference shares of Rs.100 each fully paid up.
50,000 Equity shares of Rs.10 each fully paid up.
30,000 Equity shares of Rs.10 each, Rs.8 paid up.
Assets realized Rs.20,00,000 excluding the amount realized by sale of securities held by
partly secured creditors.
Rs.
Preferential creditors 50,000
Unsecured creditors 18,00,000
Partly secured creditors (Assets realized Rs.3,20,000) 3,50,000
Debentureholders having floating charge on all assets of the company 6,00,000
Expenses of liquidation 10,000
A call of Rs.2 per share on the partly paid equity shares was duly received except in case of
one shareholder owning 1,000 shares.
Also calculate the percentage of amount paid to the unsecured creditors to the total unsecured
creditors. (10 Marks) (PE II - Nov. 2007)
Answer
(a) (i) Liquidator’s Final Statement of Account
Rs. Rs.
To Assets Realised 20,00,000 By Liquidator’s remuneration
9.90 Accounting

To Receipt of call money 2.5% on 23,20,000 58,000

on 29,000 equity 2% on 50,000 1,000
shares @ 2 per share 58,000 2% on 13,12,745 (W.N.3) 26,255 85,255

By Liquidation Expenses 10,000

By Debenture holders having a
floating charge on all assets 6,00,000
By Preferential creditors 50,000
By Unsecured creditors 13,12,745
20,58,000 20,58,000

(ii) Percentage of amount paid to unsecured creditors to total unsecured

creditors
13,12,745
= 100  71.73%
18,30,000
Working Notes:
1. Unsecured portion in partly secured creditors=Rs.3,50,000-Rs.3,20,000
= Rs.30,000
2. Total unsecured creditors = 18,00,000 + 30,000 (W.N.1)
= Rs.18,30,000
3. Liquidator’s remuneration on payment to unsecured creditors
Cash available for unsecured creditors after all payments including payment to
preferential creditors & liquidator’s remuneration on it = Rs.13,39,000
2
Liquidator’s remuneration on unsecured creditors = 13,39,000  Rs.26,255
102
or on Rs. 13,12,754 x 2/100 = Rs. 26,255


Total assets realised = Rs.20,00,000 + Rs.3,20,000 = Rs.23,20,000
 10
ACCOUNTS OF BANKING COMPANIES

(A) Write short notes on :

Question 1
Non-Performing Assets. (5 marks) (Intermediate–May 1995 and May 2001)
Answer
An asset is classified as non-performing asset (NPA) if dues in the form of principal and
interest are not paid by the borrower for a period of 90 days. If any advance or credit facilities
granted by a bank to a borrower becomes non-performing, then the bank will have to treat all
the advances/credit facilities granted to that borrower as non-performing without having any
regard to the fact that there may still exist certain advances/credit facilities having performing
status.
Income from the non-performing assets can only be accounted for as and when it is
actually received. In concept, any credit facility (assets) becomes non-performing when it
eases to generate income. The RBI has issued guidelines to commercial banks regarding the
classification of advances between performing and non-performing assets.
A term loan is treated as a non-performing assets (NPA) if interest and/or instalments of
principal remains over due for a period of more than 90 days. A cash credit/overdraft account
is treated as NPA if it remains out of order for a period of more than 90 days. An account is
treated an ‘out of order’ if any of the following conditions is satisfied :
(a) the outstanding balance remains continuously in excess of the sanctional limit/drawing
power.
(b) though the outstanding balance is less than the sanctioned limit/drawing power—
(i) there are credits continuously for more than 90 days as on the date of balance
sheet or
(ii) credits during the aforesaid periods are not enough to cover the interest debited
during the same period.
Bills purchased and discounted are treated as NPA if they remain overdue and unpaid
for a period of more than 90 days. Necessary provision should be made for non-performing
assets after classifying them as sub-standard, doubtful or loss asset as the case may be.
10.2 Accounting

Question 2
Classification of advances in the case of a Banking Company.
(5 Marks) (Intermediate–Nov. 1996 and Nov. 2000)
Answer
Banks have to classify their advances into four broad groups:
(i) Standard Assets—Standard assets is one which does not disclose any problems and
which does not carry more than normal risk attached to the business. Such an asset is not a
NPA as discussed earlier.
(ii) Sub-standard Assets—Sub-standard asset is one which has been classified as NPA for a
period not exceeding 12 months. In the case of term loans, those where instalments of
principal are overdue for period exceeding one year should be treated as sub-standard. In
other words, such an asset will have well-defined credit weaknesses that jeopardise the
liquidation of the debt and are characterised by the distinct possibility that the bank will
sustain some loss, if deficiencies are not corrected.
(iii) Doubtful Assets—A doubtful asset is one which has remained NPA for a period exceeding
18 months. In the case of term loans, those where instalments of principal have remained
overdue for a period exceeding 18 months should be treated as doubtful. A loan classified
as doubtful has all the weaknesses inherent in that classified as sub-standard with added
characteristic that the weaknesses make collection or liquidation in full, on the basis of
currently known facts, conditions and values, highly questionable and improbable.
(iv) Loss Assets—A loss asset is one where loss has been identified by the bank or internal or
external auditors or the RBI inspectors but the amount has not been written off, wholly or
partly.
The classification of advances should be done taking into account (i) Degree of well defined credit
worthiness and (ii) Extent of dependence on collateral security.
The above classification is meant for the purpose of computing the amount of provision to be
made in respect of advances and not for the purpose of presentation of advances in the balance
sheet.
Question 3
Draft a specimen accounting policy concerning advances of a bank.
(5 marks) (Intermediate—May 1997)
Answer
(1) Provisions for doubtful advances have been made to the satisfaction of auditors :
 In respect of identified advances based on a periodical review and after taking into
account the portion of advances guaranteed by DICGC & ECGC and similar statutory
bodies.
 Accounts of Banking Companies 10.3

 In respect of general advances as a percentage of total advances taking into account

guidelines issued by the Government of India and RBI.
(2) Provisions in respect of doubtful advances have been deducted from advances to the extent
necessary and the excess has been included under “other liabilities and provisions”.
(3) Provisions have been made on a gross basis. Tax relief which will be available when the
advance is written off will be accounted for in the year of write off.
Question 4
Slip system of posting and double voucher system. (5 marks) (Intermediate–May 2000)
Answer
Slip system of posting : Under this system used in the case of banking companies, entries in the
personal ledgers are made directly from vouchers instead of being posted from the day book. Pay-
in-slips (used by the customers at the time of making deposits) and the cheques are used as slips
which form the basis of most of the transactions directly recorded in the accounts of customers. As
the slips are mostly filled by the customers themselves, this system saves a lot of time and labour
of the bank staff. The vouchers entered into different personal ledgers are summarised on
summary sheets every day, totals of which are posted to the different control accounts which are
maintained in the general ledger.
Double voucher system : In a bank, two vouchers are prepared for every transaction not
involving cash—one debit voucher and another credit voucher. This system is called double
voucher system. The vouchers are sent to different clerks who make entries in books under their
charge.
Question 5
Acceptances and endorsements (5 marks) (Intermediate–Nov. 2000)
Answer
A bank has a more acceptable credit as compared to that of its customers. On this account, it is
often called upon to accept or endorse bills on behalf of its customers. In such a case, the bank
undertakes a liability towards the party which agrees to receive such a bill in payment of a debt or
agreed to discount the bill after the same has been accepted by the bank. As against this liability,
the bank has a corresponding claim against the customer on whose behalf it has undertaken to be
a party to the bill, either as an acceptor or as an endorser. Such liabilities which are outstanding at
the close of the year and the corresponding assets are disclosed as contingent liability in the
financial statements. As a safeguard against the customer not being able to meet the demand of
the bank in this respect, usually the bank requires the customer to deposit a security equivalent to
the amount of the bill accepted on his behalf. A record of the particulars of the bills accepted as
well as of the securities collected from the customers is kept in the Bills Accepted Register. A bank
may not treat this book as part of the system of its account. In such a case no further record of the
transactions is kept until the bill matures for payment. If the bill, at the end of its term, has to be
retired by the bank and the amount cannot be collected from the customer on demand, the bank
reimburses itself by disposing of the security deposited by the customer.
10.4 Accounting

Question 6
Classification of investments by a banking company. (4 marks) (Intermediate–Nov. 2001)
Answer
The investment portfolio of a bank would normally consist of both approved securities
(predominantly government securities) and other securities (shares, debentures, bonds etc.).
Banks are required to classify their entire investment portfolio into three catogories : held-to-
maturity, available-for-sale and held-for-maturity. Securities acquired by banks with the intention to
hold them upto maturity should be classified as ‘held-to-maturity’. Securities acquired by banks with
the intention to trade by taking advantage of short–term price interest rate movements should be
classifed as held-for trading/maturity. Securities which do not fall within the above two categories
should be classified as available-for-sale’.
(B) Practical Questions :
Question 1
From the following information, prepare a Balance Sheet of International Bank Ltd. as on 31st
March, 1994 giving the relevant schedules and also specify at least four important Principal
Accounting Polcies :
Rs. in lakhs
Dr. Cr.
Share Capital 198.00
19,80,000 Shares of Rs. 10 each
Statutory Reserve 231.00
Net Profit Before Appropriation 150.00
Profit and Loss Account 412.00
Fixed Deposit Account 517.00
Savings Deposit Account 450.00
Current Accounts 28.00 520.12
Bills Payable 0.10
Cash credits 812.10
Borrowings from other Banks 110.00
Cash in Hand 160.15
Cash with RBI 37.88
Cash with other Banks 155.87
Money at Call 210.12
Gold 55.23
 Accounts of Banking Companies 10.5

Government Securities 110.17

Premises 155.70
Furniture 70.12
Term Loan 792.88
2,588.22 2,588.22
Additional Information :
Bills for collection 18,10,000
Acceptances and endorsements 14,12,000
Claims against the Bank not acknowledged as debt 55,000
Depreciation charges—Premises 1,10,000
Furniture 78,000
50% of the Term Loans are secured by Government guarantees. 10% of cash credit is unsecured.
Also calculate cash reserves required and statutory liquid reserves required.
Note : Cash reserves required 3% of demand and time liabilities; liquid reserves required 30% of
demand and time liabilities. (20 marks) (Intermediate–Nov. 1994)
Answer
Balance Sheet of International Bank Ltd.
As on 31st March, 1994
(Rs. in lacs)
Capital and Liabilities Schedule As on 31.3.94 As on 31.3.93
Share Capital 1 1,98.00
Reserves and Surplus 2 7,93.00
Deposits 3 14,87.12
Borrowings 4 1,10.00
Other liabilities and provisions 5 0.10
25,88.12
Assets
Cash and balances with RBI 6 2,04.76
Balances with banks and money
at call and short notice 7 3,59.26
Investments 8 1,65.40
Advances 9 16,32.98
Fixed Assets 10 2,25.82
Other Assets 11 –
25,88.22
Contingent liabilities 12 14.67
Bills for collection 18.10
10.6 Accounting

Schedule 1— Capital
Authorised Capital –
Issued, Subscribed and
Paid up Capital
19,80,000 Shares of Rs. 10 each 1,98.00
Schedule 2— Reserves and Surplus
(1) Statutory Reserve-
Opening balance 2,31.00
Additions during the year 30.00
2,61.00
(2) Balance in Profit & Loss
Account (W.N. 1) 5,32.00
7,93.00
Schedule 3— Deposits
(i) Demand deposits from others 5,20.12
(ii) Saving bank deposits 4,50.00
(iii) Fixed Deposits 5,17.00
14,87.12
Schedule 4— Borrowings
Borrowing in India-
Other banks 1,10.00
Schedule 5— Other Liabilities and Provisions
Other liabilities and provisions 0.10
Schedule 6— Cash and balances with RBI
(i) Cash in hand 1,60.15
(ii) Balances with RBI
In current account (W.N. 2) 44.61
2,04.76
Schedule 7—Balances with banks and money at call and short notice
1. In India
(i) Balances with banks
(a) in current accounts (W.N. 3) 1,49.14
 Accounts of Banking Companies 10.7

(ii) Money at call and short notice 2,10.12

3,59.26
Schedule 8— Investments
(1) Investment in India in
(i) Government securities 1,10.17
(ii) Others—Gold 55.23
1,65.40
Schedule 9— Advances
A. (i) Cash credits, overdrafts 8,40.10
(ii) Term Loans 7,92.88
16,32.98
B (i) Secured by tangible assets 11,52.53
(ii) Secured by bank/government guarantees 3,96.44
(iii) Unsecured 84.01
16,32.98
Schedule 10— Fixed Assets
1. Premises
At cost on 31st March, 1994 156.80
Depreciation to date 1.10
155.70
2. Other Fixed Assets
Furniture at cost on 31st March, 1994 70.90
Depreciation to date 0.78
70.12
Total (1 + 2) 2,25.82
Schedule 11— Other Assets
Nil

Schedule 12— Contingent Liabilities

(i) Claims against bank not acknowledged as debts 0.55
(ii) Acceptances, endorsements 14.12
14.67
10.8 Accounting

Calculation of cash reserves and statutory liquid reserves

Total of demand and time liabilities
(Rs. 5,17.00 + Rs. 4,50.00 + Rs. 5,20.12) 14,87.12
Cash reserves (3% of above) 44.61
Statutory liquid reserves
(30% of demand and time liabilities) 4,46.14
Working Note :
(1) Balance in Profit & Loss Account :
Net Profit before appropriation 1,50.00
Add : Profit for the year 4,12.00
5,62.00
Less : Transfer to statutory reserve
(20% of 1,50.000) 30.00
532.00
(2) Transfer from Cash with other banks to Cash with RBI
Cash reserve required 44.61
Cash with RBI 37.88
Transfer needed to maintain cash reserve 6.73
(3) Liquid Assets :
Cash on hand 1,60.15
Cash with other Banks 1,55.87
Money at call and short notice 2,10.12
Gold 55.23
Government securities 1,10.17
6,91.54
Excess liquidity (6,91.54 – 4,46.14) 2,45.40
The excess liquidity enables the transfer as per(2) above.
After the transfer, cash with other Banks = Rs. (in lacs) (1,55.87 - 6.73) = Rs (in lacs) 1,49.14
Principal Accounting Policies :
(a) Foreign Exchange Transactions
(i) Monetary assets and liabilities have been translated at the exchange rate prevailing at
the close of year. Non-monetary assets have been carried in the books at the historical
cost.
 Accounts of Banking Companies 10.9

(ii) Income and Expenditure items in respect of Indian branches have been translated at
the exchange rates on the date of transactions and in respect of foreign branches at
the exchange rates prevailing at the close of the year.
(iii) Profit or Loss on foreign currency position including pending forward exchange
contracts have been accounted for at the exchange rates prevailing at the close of the
year.
(b) Investment
Permanent category investments are valued at cost. Valuation of investment in current category
depends on the nature of securities. While valuation of government securities held as current
investments have been made on yield to maturity basis, the investments in shares of companies
are valued on the basis of book value.
(c) Advances
Advances due from sick nationalised units under nursing programmes and in respect of various
sticky, suit filed and decreed accounts have been considered good on the basis of–
(i) Available estimate value of existing and prospective primary and collateral securities
including personal worth of the borrowers and guarantors.
(ii)The claim lodged/to be lodged under various credit guarantee schemes.
(iii) The claim lodged/to be lodged under various credit guarantee schemes.
(iii) Pending settlement of claims by Govt.
Provisions to the satisfaction of auditors have been made and deducted from advances. Tax
relief available when the advance is written off will be accounted for in the year of write-off.
(d) Fixed Assets
The premises and other fixed assets except for foreign branches are accounted for at their
historical cost. Depreciation has been provided on written down value method at the rates specified
in the Income Tax Rules, 1962. Depreciation in respect of assets of foreign branches has been
provided as per the local laws.
Question 2
On 31st March, 1997, Uncertain Bank Ltd. had a balance of Rs. 9 crores in “rebate on bills
discounted” account. During the year ended 31st March, 1998, Uncertain Bank Ltd. discounted bills
of exchange of Rs. 4,000 crores charging interest at 18% per annum the average period of
discount being for 73 days. Of these, bills of exchange of Rs. 600 crores were due for realisation
from the acceptors/customers after 31st March, 1998, the average period outstanding after 31st
March, 1998 being 36.5 days.
Uncertain Bank Ltd. asks you to pass journal entries and show the ledger accounts pertaining to :
(i) discounting of bills of exchange and
(ii) rebate on bills discounted. (10 marks) (Intermediate–May 1998)
10.10 Accounting

Answer
Uncertain Bank Ltd.
Journal Entries
(Rupees in crores)
Dr. Cr.
Rs. Rs.
Rebate on bills discounted A/c Dr. 9.00
To Discount on bills A/c 9.00
(Being the transfer of opening balance in rebate
on bills discounted account to discount on bills
account)

Bills purchased and discounted A/c Dr. 4000.00

To Discount on bills A/c 144.00
 18 73 
Rs. 4,000 crores  100  365 

To Clients A/c 3,856.00

(Being the discounting of bills of exchange
during the year)

Discount on bills A/c Dr. 10.80

To Rebate on bills discounted A/c 10.80

(Being the unexpired portion of discount in respect
of the discounted bills of exchange carried forward)

Discount on bills A/c Dr. 142.20

To Profit and loss A/c 142.20
(Being the amount of income for the year from
discounting of bills of exchange transferred to
Profit and Loss A/c)
 Accounts of Banking Companies 10.11

Ledger Accounts
(i) Discount on bills A/c
1998 Rs. 1997 Rs.
March 31 To Rebate on bills April 1 By Rebate on bills 9.00
discounted A/c 10.80 discounted A/c
To Profit and loss A/c 142.20 1997-98 By Bills purchased and
discounted A/c 144.00
153.00 153.00

(ii) Rebate on bills discounted A/c

1997 Rs. 1997 Rs.
April 1 To Discount on bills A/c 9.00 April 1 By Balance b/d 9.00
1998 1998
March 31 To Balance c/d 10.80 March 31 By Discount on bills A/c 10.80
19.80 19.80
Question 3
Following are the statements of interest on advances in respect of performing and non-performing
assets of Madura Bank Ltd. Find out the income to be recognised for the year ended 31st March.
1998.
(Rs. in lakhs)
Performing Assets Interest Interest
earned received
Cash credit and overdrafts 1,800 1,060
Term loans 480 320
Bills purchased and discounted 700 550
Non-performing Assets
Cash credit and overdrafts 450 70
Term loan 300 40
Bills purchased and discounted 350 36
(4 Marks) (Intermediate–Nov. 1998)
Answer
Interest on Performing Assets should be recognised on accrual basis, but interest on Non-
performing Assets should be recognised on cash/realisation basis.
Rs. in lakhs
Interest on cash credit and overdrafts (1,800 + 70) = 1,870
Interest on term loan (480 + 40) = 520
Interest on bills purchased and discounted (700 + 36) = 736
Total income to be recognised 3,126
10.12 Accounting

Question 4
From the following details prepare “Acceptances, Endorsements and other Obligation A/c” as
would appear in the general ledger.
On 1.4.98 Acceptances not yet satisfied stood at Rs. 22,30,000. Out of which Rs. 20 lacs were
subsequently paid off by clients and bank had to honour the rest. A scrutiny of the Acceptance
Register revealed the following :
Client Acceptances/Guarantees Remarks
Rs.
A 10,00,000 Bank honoured on 10.6.98
B 12,00,000 Party paid off on 30.9.98
C 5,00,000 Party failed to pay and bank had
to honour on 30.11.98
D 8,00,000 Not satisfied upto 31.3.99
E 5,00,000 -do-
F 2,70,000 -do-
Total 42,70,000
(4 marks) (Intermediate–Nov. 1999)
Answer
Acceptances, Endorsements and other Obligation Account
(in general ledger)
Dr. Cr.
Rs. ’000 Rs. ’000
1998-99 To Constituents’ liabilities for 1.4.98 By Balance b/d 22,30
acceptances/guarantees etc.
(Paid off by clients) 20,00 1998-99 By Constituents’ liabilities for
To Constituent’s liabilities for acceptances/guarantees etc.
acceptances/guarantees etc. 2,30 A 10,00
(Honoured by bank B 12,00
Rs. 22.30 lakhs less C 5,00
Rs. 20 lakhs)
10.6.98 To Constituents’ liabilities for D 8,00
acceptances/guarantees etc. E 5,00
(Honoured by bank) 10,00 F 2,70 42,70
30.9.98 To Constituents’ liabilities for
 Accounts of Banking Companies 10.13

acceptances/guarantees etc.
(Paid off by party) 12,00
30.11.98 To Constituent’s liabilities for
acceptances/guarantees etc.
(Honoured by bank on
party’s failure to pay) 5,00
31.3.99 To Balance c/d
(Acceptances not yet satisfied) 15,70
65,00 65,00
Question 5
From the following information find out the amount of provisions required to be made in the Profit &
Loss Account of a commercial bank for the year ended 31st March, 2000 :
(i) Packing credit outstanding from Food Processors Rs. 60 lakhs against which the bank
holds securities worth Rs. 15 lakhs. 40% of the above advance is covered by ECGC. The
above advance has remained doubtful for more than 3 years.
(ii) Other advances :
Assets classification Rs. in lakhs
Standard 3,000
Sub-standard 2,200
Doubtful :
For one year 900
For two years 600
For three years 400
For more than 3 years 300
Loss assets 600
(5 marks) (Intermediate–May 2000)
Answer
(i) (Rs. in lakhs)
Rs. Rs.
Amount outstanding (packing credit) 60
Less : Realisable value of securities 15
45
Less : ECGC cover (40%) 18
Balance 27
10.14 Accounting

Required provision :
Provision for unsecured portion (100%) 27.0
Provision for secured portion (100%)* 15.0
42.0
(ii) Other advances :
(Rs. in lakhs)
Assets Amount % of Provision
Rs. provision Rs.
Standard 3,000 0.40* 12
Sub-standard 2,200 10 220
Doubtful :
For one year 900 20 180
For two years 600 30 180
For three years 400 30 120
For more than three years 300 100* 300
Loss 600 100 600
Required provision 1612
Note : Doubtful advances have been taken as fully secured. However, in case, the students
assume that no security cover is available for these advances, provision will be made for 100%.
* The above solution has been provided based on the latest NPA provisions (as per the Master
Circular issued by RBI “ DBOD No. BP. BC. 11/21.04.048/2005-06” dated November 4, 2005)
though in the above question provisions for the year ended 31st march 2000 is required.
Question 6
Bidisha Bank Ltd. had extended the following credit lines to a Small Scale Industry which had not
paid any interest since March, 1995.
Term Loan Export Credit
Balance outstanding on 31.3.2001 Rs. 70 Lacs Rs. 60. Lacs
DICGC/ECGC Cover 50% 40%
Securities held Rs. 30 Lacs Rs. 25 Lacs
Realisable value of securities Rs. 20 Lacs Rs. 15 Lacs
Compute the necessary provisions to be made for the year ended 31st March, 2001
(6 marks) (Intermediate–May 2002)
 Accounts of Banking Companies 10.15

Answer
Term Loan Export Credit
Rs. in Lacs Rs. in Lacs
Balance outstanding 70.00 60.00
Less : Realisable value of securities 20.00 15.00
50.00 45.00
Less : DICGC/ECGC Cover 25.00 18.00
Net unsecured balance 25.00 27.00

Provision in respect of secured portion (100%)* 20.00 15.00

Provision for unsecured portion (100%) 25.00 27.00
Provision required 45.00 42.00
* The above solution has been provided based on the latest NPA provisions (as per the Master
Circular issued by RBI “ DBOD No. BP. BC. 11/21.04.048/2005-06” dated November 4, 2005)
though in the above question provisions for the year ended 31st march 2000 is required.
Question 7
The following particulars are extracted from the (Trial Balance) Books of the M/s Commercial
Bank Ltd. for the year ending 31st March, 2003:
Rs.
(i) Interest and Discounts 1,96,62,400
(ii) Rebate on Bills Discounted (balance on 1.4.2002) 65,040
(iii) Bills Discounted and purchased 67,45,400
It is ascertained that proportionate discount not yet earned on the Bills Discounted which will
mature during 2003-2004 amounted to Rs. 92,760.
Pass the necessary Journal entries with narration adjusting the above and show:
(a) Rebate on Bill Discounted Account; and
(b) Interest and Discount Account in the ledger of the Bank. (6 marks) (PE-II–Nov. 2003)
Answer
The Commercial Bank Ltd.
Journal
Date Dr. Cr.
2003 Rs. Rs.
March 31 Rebate on Bills Discounted A/c Dr. 65,040
To Interest and Discount A/c 65,040
10.16 Accounting

(Being the amount of provision for unexpired

discount brought forward from the previous year
credited to Interest and Discount A/c).
March 31 Interest and Discount A/c Dr. 92,760
To Rebate on Bills Discounted A/c 92,760
(Being provision for unexpired discount required
at the end of the current year.)
March 31 Interest and Discount A/c Dr. 1,96,34,680
To Profit & Loss A/c 1,96,34,680
(Being transfer of balance to Profit and Loss
A/c).
(a) Rebate on Bills Discounted Account
2003 Rs. 2002 Rs.
March 31 To Interest and April 1 By Balance b/d 65,040
Discount A/c 65,040 2003
2003 March 31 By Interest and Discount
March 31 To Balance c/d 92,760 A/c (rebate required) 92,760

1,57,800 1,57,800
(b) Interest and Discount Account
2003 Rs. 2002 Rs.
March 31 To Rebate on Bills April 1 By Rebate on Bills
Discounted A/c 92,760 2003 Discounted A/c
(opening balance) 65,040
March 31 To Profit & Loss March 31 By Cash and
A/c (transfer) 1,96,34,680 Sundries 1,96,62,400
1,97,27,440 1,97,27,440
Question 8
Rajatapeeta Bank Ltd. had extended the following credit lines to a Small Scale Industry, which
had not paid any Interest since March, 1997:
Term Loan Export Loan
Balance Outstanding on 31.03.2003 Rs. 35 lakhs Rs. 30 lakhs
DICGC/ECGC cover 40% 50%
Securities held Rs. 15 lakhs Rs. 10 lakhs
Realisable value of Securities Rs. 10 lakhs Rs. 08 lakhs
Compute necessary provisions to be made for the year ended 31st March, 2003.
(6 marks) (PE-II–May 2004)
 Accounts of Banking Companies 10.17

Answer
Term loan Export credit
Rs. in lakhs Rs. in lakhs
Balance outstanding on 31.3.2003 35.0 30.0
Less: Realisable value of Securities 10.0 8.0
25.0 22.0
Less: DICGC cover @ 40% 10.0
ECGC cover @ 50% ___ 11.0
Unsecured balance 15.0 11.0
Required Provision:
100%* for unsecured portion 15.0 11.0
100% for secured portion 10.0 8.00
Total provision required 25.0 19.0
* The above solution has been provided based on the latest NPA provisions (as per the Master
Circular issued by RBI “ DBOD No. BP. BC. 11/21.04.048/2005-06” dated November 4, 2005)
though in the above question provisions for the year ended 31st march 2000 is required.
Question 9
From the following information find out the amount of provisions to be shown in the Profit and
Loss Account of a Commercial Bank:
Assets Rs. (in lakhs)
Standard 4,000
Sub-standard 2,000
Doubtful upto one year 900
Doubtful upto three years 400
Doubtful more than three years 300
Loss Assets 500
(4 marks) (PE-II–Nov. 2004)
Answer
Computation of provision:
Assets Amount % of Provision Provision
(Rs. in lakhs) (Rs. in lakhs)
Standard 4,000 0.40** 16
Sub-standard 2,000 10 200
10.18 Accounting

Doubtful upto one year* 900 20 180

Doubtful upto three years* 400 30 120
Doubtful more than three years* 300 100** 300
Loss 500 100 500
1316
* Doubtful assets are taken as fully secured.
** The above solution has been provided based on the latest NPA provisions (as per the Master
Circular issued by RBI “ DBOD No. BP. BC. 11/21.04.048/2005-06” dated November 4, 2005)
though in the above question provisions for the year ended 31st march 2000 is required.
Question 10
From the following information calculate the amount of Provisions and Contingencies and
prepare Profit and Loss Account of Zed Bank Ltd. for the year ended 31.3.2004:
(Rs. in ’000)
Interest and Discount 8,860
(Includes interest accrued on investments)
Other Income 220
Interest expended 2,720
Operating expenses 2,830
Interest accrued on Investments 10
Additional Information:
(a) Rebate on bills discounted to be provided for 30
(b) Classification of Advances:
(i) Standard assets 4,000
(ii) Sub-standard assets 2,240
(iii) Doubtful assets(fully unsecured) 390
(iv) Doubtful assets – covered fully by security
Less than 1 year 100
More than 1 year, but less than 3 years 600
More than 3 years 600
(v) Loss assets 376
(c) Provide 35% of the profit towards provision for taxation.
(d) Transfer 20% of the profit to Statutory Reserve.
(16 marks) (PE-II – May 2005)
 Accounts of Banking Companies 10.19

Answer
ZED Bank Ltd.
Profit and Loss Account
for the year ended 31st March, 2004
(Rs. in ’000)
Particulars Schedule Year ended on 31st March,
No. 2004
I. Income
Interest earned (W.N. 1) 13 8,830
Other income 14 220
Total 9,050
II. Expenditure
Interest expended 15 2,720
Operating expenses 16 2,830
Provisions and contingencies (W.N. 4) 2,399
Total 7,949
III. Profit/Loss
Net profit/(loss) for the year 1,101
Profit/(loss) brought forward Nil
Total 1,101
IV. Appropriations
Transfer to statutory reserve @ 20% 220
Balance carried to balance sheet 881
Total 1,101

Working notes:
1. Schedule 13 – Interest earned (Rs.’000s)
(i) Interest and discount 8,860
Less: Rebate on bills discounted (30)
Interest accrued on investments (10) 8,820
(ii) Interest accrued on investments 10
8,830
10.20 Accounting

2. Calculation of Provisions and Contingencies

Assets Amount % of Provision Provision
(Rs. in ’000) (Rs. in ’000)
Standard assets 4,000 0.40* 16
Sub-standard assets 2,240 10 224
Doubtful assets (unsecured) 390 100 390
Doubtful assets – covered by
security
Less than 1 year 100 20 20
More than 1 year but less than 600 30 180
3 years
More than 3 years 600 100* 600
Loss assets 376 100 376
Total provision 8,306 1,806
3. Calculation of provision on tax = 35% (Total income – Total expenditure)
= 35% of Rs. [(9,050 – (2,720 + 2,830 + 1,806)]
= 35% of Rs. 1,694
= Rs. 593
4. Total provisions and contingencies = Rs. 1,806 + Rs. 593 = Rs. 2,399.
* The above solution has been provided based on the latest NPA provisions (as per the Master
Circular issued by RBI “ DBOD No. BP. BC. 11/21.04.048/2005-06” dated November 4, 2005)
though in the above question provisions for the year ended 31st march 2000 is required.
Question 11
(a) From the following information, compute the amount of provisions to be made in the
Profit and Loss Account of a Commercial bank:
Assets Rs. in lakhs
(i) Standard (Value of security Rs.6,000 lakhs) 7,000
(ii) Sub-standard 3,000
(iii) Doubtful
(a)Doubtful for less than one year 1,000
(Realisable value of security Rs.500 lakhs)
(b)Doubtful for more than one year, but less than 3 years 500
(Realisable value of security Rs.300 lakhs)
(c)Doubtful for more than 3 years (No security) 300
 Accounts of Banking Companies 10.21

(b) From the following details, prepare bills for collection (Asset) Account and Bills for
collection (Liability) Account:
Rs.
On 1.4.2005, Bills for Collection were 51,00,000
During the year 2005-06 Bills received for Collection amounted to 75,00,000
Bill collected during the year 2005-06 98,47,000
Bill dishonoured and returned during the year 27,10,000
(8+4= 12 Marks) (PE-II – May 2006)
Answer
(a) Asset Amount % of provision Provision
Rs. in lakhs Rs. in lakhs
Standard 7,000 0.40* 28
Sub-standard 3,000 10 300
Doubtful (less than one year)
On secured portion 500 20 100
On unsecured portion 500 100 500
Doubtful (more than one year but less than
three years)
On secured portion 300 30 90
On unsecured portion 200 100 200
Doubtful Unsecured (more than three years) 300 100 300
Total provision 1,518
* The above solution has been provided based on the latest NPA provisions (as per the Master
Circular issued by RBI “ DBOD No. BP. BC. 11/21.04.048/2005-06” dated November 4, 2005)
though in the above question provisions for the year ended 31st march 2000 is required.
(b) Bills for collection (Asset) Account
Rs. Rs.
1.4.2005 To Balance b/d 51,00,000 2005-06 By Bills for
collection 98,47,000
(Liability) A/c
2005-06 To Bills for 75,00,000 By Bills for
collection collection 27,10,000
(Liability) A/c
31.3.2006 By Balance c/d 43,000
1,26,00,000 1,26,00,000
1.4.2006 To Balance b/d 43,000
10.22 Accounting

Bills for collection (Liability) Account

2005- 06 To Bills for collection 1.4.2005 By Balance b/d 51,00,000
(Asset) A/c 98,47,000 By Bills for
2005-06 collection
To Bills for collection (Asset) A/c 75,00,000
(Asset) A/c 27,10,000
31.3.2006 To Balance c/d 43,000
1,26,00,000 1,26,00,000
1.4.2006 By Balance b/d 43,000
Question 12
The following is an extract from the Trial Balance of Dream Bank Ltd. as at 31 st March, 2006:
Rebate on bills discounted as on 1-4-2005 68,259 (Cr.)
Discount received 1,70,156 (Cr.)
Analysis of the bills discounted reveals as follows:
Amount (Rs.) Due date
2,80,000 June 1, 2006
8,72,000 June 8, 2006
5,64,000 June 21, 2006
8,12,000 July 1, 2006
6,00,000 July 5, 2006
You are required to find out the amount of discount to be credited to Profit and Loss account
for the year ending 31 st March, 2006 and pass Journal Entries. The rate of discount may be
taken at 10% per annum. (8+8= 16 Marks) (PE-II – Nov. 2006)
Answer
The amount of rebate on bills discounted as on 31 st March, 2006 the period which has not
been expired upto that day will be calculated as follows:
Discount on Rs.2,80,000 for 62 days @ 10% 4,756
Discount on Rs.8,72,000 for 69 days @ 10% 16,484
Discount on Rs.5,64,000 for 82 days @ 10% 12,671
Discount on Rs.8,12,000 for 92 days @ 10% 20,467
Discount on Rs.6,00,000 for 96 days @ 10% 15,781
Total 70,159
 Accounts of Banking Companies 10.23

The amount of discount to be credited to the profit and loss account will be:
Rs.
Transfer from rebate on bills discounted as on 31.03.2005 68,259
Add: Discount received during the year 1,70,156
2,38,415
Less: Rebate on bills discounted as on 31.03.2006 (as above) 70,159
1,68,256
Journal Entries
Rs. Rs.
Rebate on bills discounted A/c Dr. 68,259
To Discount on bills A/c 68,259
(Transfer of unexpired discount on 31.03.2005)
Discount on bills A/c Dr. 70,159
To Rebate on bills discounted 70,159
(Unexpired discount on 31.03.2006 taken into account)
Discount on Bills A/c Dr. 1,68,256
To P & L A/c 1,68,526
(Discount earned in the year, transferred to P&L A/c)

Question 13
From the following information of details of advances of X Bank Limited calculate the amount
of provisions to be made in profit and loss account for the year ended 31.3.2007:
Asset classification Rs. in lakhs
Standard 6,000
Sub-standard 4,400
Doubtful:
For one year 1,800
For two years 1,200
For three years 800
For more than three years 600
Loss assets 1,600
(6 Marks) (PE II- May, 2007)
10.24 Accounting

Answer
Statement showing provisions on various performing and non-performing assets
Asset Classification Amount Provision Amount of Provision
Rs. in Lakhs % Rs. in lakhs
Standard 6,000 0.40 24

Sub-standard 4,400 10 440
Doubtful**
One year 1,800 20 360
2 years 1,200 30 360
3 years 800 30 240

More than 3 years 600 100 600
Loss assets 1,600 100 1,600
3,624

Question 14
The following are the figures extracted from the books of New Generation Bank Limited as on
31.3.2008:
Rs.
Interest and discount received 37,05,738
Interest paid on deposits 20,37,452
Issued and subscribed capital 10,00,000
Salaries and allowances 2,00,000
Directors fee and allowances 30,000
Rent and taxes paid 90,000
Postage and telegrams 60,286
Statutory reserve fund 8,00,000
Commission, exchange and brokerage 1,90,000
Rent received 65,000
Profit on sale of investments 2,00,000


Sub standard and doubtful assets have been treated as fully secured.

w.e.f. 31st March 2007
 Accounts of Banking Companies 10.25

Depreciation on bank’s properties 30,000

Statutory expenses 40,000
Preliminary expenses 25,000
Auditor’s fee 5,000
The following further information is given:
(i) A customer to whom a sum of Rs.10 lakhs has been advanced has become insolvent and
it is expected only 50% can be recovered from his estate.
(ii) There were also other debts for which a provision of Rs.1,50,000 was found necessary
by the auditors.
(iii) Rebate on bills discounted on 31.3.2007 was Rs.12,000 and on 31.3.2008 was
Rs.16,000.
(iv) Provide Rs.6,50,000 for Income-tax.
(v) The directors desire to declare 10% dividend.
Prepare the Profit and Loss account of New Generation Bank Limited for the year ended
31.3.2008 and also show, how the Profit and Loss account will appear in the Balance Sheet, if
the Profit and Loss account opening balance was Nil as on 31.3.2007.
(10 Marks) (PE II- May, 2008)
Answer
New Generation Bank Limited
Profit and Loss Account for the year ended 31st March, 2008
Schedule Year ended
31.03.2008
(Rs. in ‘000s)
I. Income:
Interest earned 13 3,701.74
Other income 14 455.00
Total 4,156.74
II. Expenditure
Interest expended 15 2,037.45
Operating expenses 16 480.29
Provisions and contingencies (500 + 150 + 650) 1,300.00
Total 3,817.74
10.26 Accounting

IIII. Profits/Losses
Net profit for the year 339.00
Profit brought forward Nil
339.00
IV. Appropriations
Transfer to statutory reserve (25%) 84.75
Proposed dividend 100.00
Balance carried over to balance sheet 154.25
339.00
The Profit & Loss Account balance of Rs.154.25 thousand will appear in the Balance Sheet
under the head ‘Reserves and Surplus’ in Schedule 2.
Year ended
31.3.2008
(Rs. in ‘000s)
Schedule 13 – Interest Earned
I. Interest/discount on advances/bills (Refer W.N.) 3,701.74
3,701.74

Schedule 14 – Other Income

I. Commission, exchange and brokerage 190.00
II. Profit on sale of investments 200.00
III. Rent received 65.00
455.00

Schedule 15 – Interest Expended

I. Interests paid on deposits 2,037.45
2,037.45

Schedule 16 – Operating Expenses

I. Payment to and provisions for employees 200.00
II. Rent, taxes and lighting 90.00
III. Depreciation on bank’s properties 30.00
 Accounts of Banking Companies 10.27

IV. Director’s fee, allowances and expenses 30.00

V. Auditors’ fee 5.00
VI. Law (statutory) charges 40.00
VII. Postage and telegrams 60.29
VIII. Preliminary expenses 25.00*
480.29
*It is assumed that preliminary expenses have been fully written off during the year.
Working Note:
Interest/discount (net of rebate on bills discounted) 3,705.74
Add: Rebate on bills discounted on 31.3.2007 12.00
Less: Rebate on bills discounted on 31.3.2008 (16.00)
3701.74
Question 15
Following information is furnished to you by Sound Bank Ltd. for the year ended 31 st March,
2008:
(Rs. in thousands)
Interest and discount - (Income) 8,860
Interest on public deposits – (Expenditure) 2,720
Operating expenses 2,662
Other incomes 250
Provisions and contingencies (it includes provision in respect of 2,004
Non-performing Assets (NPAs) and tax provisions)
Rebate on bills discounted to be provided for as on 31.3.2008 30

Classification of Advances:
Standard Assets 5,000
Sub-standard Assets 1,120
Doubtful Assets – fully unsecured 200
Doubtful assets – fully secured
10.28 Accounting

Less than 1 year 50

More than 1 year but less than 3 years 300
More than 3 years 300
Loss assets 200
You are required to prepare:
(i) Profit and Loss Account of the Bank for the year ended 31 st March, 2008.
(ii) Provision in respect of advances. (8 Marks) (PE II- Nov. 2008)
Answer
Sound Bank Ltd.
Profit and Loss Account
for the year ended 31st March, 2008
Schedule No. (Rs. in
thousands)
Income: Interest and Discount (8,860 – 30) 13 8,830
Other income 14 250
9,080
Expenditure: Interest expenses 15 2,720
Operating expenses 16 2,662
Provision and Contingencies 2,004
7,386
Net Profit/Loss for the year 1,694

Assets Value % of Provision

provision
Standard Assets 5,000 0.40 20.00
Sub-standard Assets 1,120 10 112.00
Doubtful Assets
100% unsecured 200 100 200.00
Secured:
Less than 1 year 50 20 10.00
More than 1 year but less than 3 years 300 30 90.00
More than 3 years 300 100 300.00
Loss Assets 200 100 200.00
Total Provision 932.00


Sub-standards assets are assumed to be fully secured.
 Accounts of Banking Companies 10.29

Appendix: Latest Provisioning Norms

Students are advised to refer the following rates of Non-Performing Assets in case of
Banking Companies
Provisions
Taking into account the time lag between an account becoming doubtful of recovery, its
recognition as such, the realisation of the security and the erosion over time in the value of
security charged to the banks, it has been decided that banks should make provision against
sub-standard assets, doubtful assets and loss assets on the following basis:
(a) Loss assets : The entire amount should be written off or full provision should be made for
the amount outstanding.
(b) Doubtful assets : (i) Full provision to the extent of the unsecured portion should be
made. In doing so, the realisable value of the security available to the bank should be
determined on a realistic basis. DICGC/ECGC cover is also taken into account (this aspect is
discussed later in this chapter). In case the advance covered by CGTSI guarantee becomes
non-performing, no provision need be made towards the guaranteed portion. The amount
outstanding in excess of the guaranteed portion should be provided for as per the extant
guidelines on provisioning for non-performing advances.
(ii) Additionally, 20% - 100% of the secured portion should be provided for, depending upon
the period for which the advance has been considered as a doubtful asset, as follows:
Period for which the advance has been considered as doubtful % of provision on secured
portion
Upto 1 year 20%
More than 1 year and upto 3 years 30%
More than three years
i. Outstanding stock of NPA’s as on 31.03.2004 60% w.e.f. 31.03.2005
75% w.e.f. 31.03.2006
100% w.e.f. 31.03.2007
ii. Advances classified as doubtful for more than three years on or 100% w.e.f. 31.03.2005
after 01.04.2004
(iii) Banks are permitted to phase the additional provisioning consequent upon the reduction
in the transition period from substandard to doubtful asset from 18 to 12 months over a four
year period commencing from the year ending March 31, 2005, with a minimum of 20% each
year.
(c) Sub-standard assets : A general provision of 10% on total outstanding should be made
without making any allowance for DICGC/ECGC cover and securities available. An additional
provision of 10% (i.e., total 20% of total outstanding) is required to be made on ‘unsecured
exposure’ ab initio sanction of loan. Generally such a situation may arise in case of personal
10.30 Accounting

and education loans etc. Unsecured exposure is defined as ‘an exposure where the realizable
value of security is not more than 10% of the outstanding exposure (fund based and non-fund
based). Security should not include guarantees, comfort letters etc
(d) Standard assets : A general provision of a minimum of 0.40% of total standard assets
should be made. It has been clarified that the provision should be made on global loan
portfolio basis and not on domestic advances alone.
 11
ACCOUNTS OF INSURANCE COMPANIES

(A) Write short notes on:

Question 1
Unexpired Risks Reserve (5 marks) (Intermediate–May 1995 and PE-II–Nov. 2004)
Answer
In most cases policies are renewed annually except in some cases where policies are issued
for a shorter period. Since insurers close their accounts on a particular date, not all risks
under policies expire on that date. Many policies extend into the following year during which
the risk continues. Therefore on the closing date, there is unexpired liability under various
policies which may occur during the remaining term of the policy beyond the year and
therefore, a provision for unexpired risks is made at normally 50% in case of Fire Insurance
and 100% of in case of Marine Insurance. This reserve is based on the net premium income
earned by the insurance company during the year
Question 2
Re-insurance. (5 marks) (Intermediate–Nov. 1995 and Nov. 2000)
Answer
If an insurer does not wish to bear the whole risk of policy written by him, he may reinsure a
part of the risk with some other insurer. In such a case the insurer is said to have ceded a part
of his business to other insurer. The reinsurance transaction may thus be defined as an
agreement between a ‘ceding company’ and ‘reinsurer’ whereby the former agreed to ‘cede’
and the latter agrees to accept a certain specified share of risk or liability upon terms as set
out in the agreement.
A ‘ceding company’ is the original insurance company which has accepted the risk and has
agreed to ‘cede’ or pass on that risk to another insurance company or a reinsurance company.
It may however be emphasised that the original insured does not acquire any right under a
reinsurance contract against the reinsurer. In the event of loss, therefore, the insured’s claim
for full amount is against the original insurer. The original insurer has to claim the
proportionate amount from the reinsurer.
There are two types of reinsurance contracts, namely, facultative reinsurance and treaty
reinsurance. Under facultative reinsurance each transaction has to be negotiated invididually
and each party to the transaction has a free choice, i.e., for the ceding company to offer and
the reinsurer to accept. Under treaty reinsurance a treaty agreement is entered into between
11.2 Accounting

ceding company and the reinsurer whereby the volume of the reinsurance transactions remain
within the limits of the treaty.
Question 3
Give accounting entries pertaining to re-insurance business ceded to and by an insurance
company and also corresponding commission entries? (5 marks)(Intermediate Nov. 1999)
Answer
A re-insurance business transaction may be defined as an agreement between a ceding company
and re-insurer, whereby the former agrees to cede and the latter agrees to accept a certain
specified share of risk or liability upon terms as set out in the agreement. The accounting entries
pertaining to re-insurance business ceded to and by an insurance company may be explained with
the help of an example given below:
(X insurance company cedes re-insurance business to Y insurance company and Z
insurance company cedes re-insurance business to X insurance company.) Accounting entries
pertaining to re-insurance business ceded to and by X insurance company in the above example
may be given as follows :
1. Re-insurance Premium (on re-insurance ceded) Account Dr.
To Y Insurance Company
(Being premium on re-insurance business ceded to Y
insurance company recorded)

2. Z Insurance Company Dr.

To Re-insurance Premium (on re-insurance accepted)
Account
(Being premium on business ceded by Z insurance
company recorded)

3. Y Insurance Company Dr.

To Claims (on re-insurance ceded) Account
(Being claims receivable from Y Co. for part of insurance
business ceded)

4. Claims (on re-insurance accepted) Account Dr.

To Z Insurance Company
(Being claims on re-insurance business accepted from Z
Company recorded
 Accounts of Insurance Companies 11.3

5. Y Insurance Company Dr.

To Commission (on re-insurance ceded) Account
(Being commission due on re-insurance business ceded
to Y insurance company recorded)

6. Commission (on re-insurance accepted) Account Dr.

To Z Insurance Company
(Being commission due on re-insurance business ceded
to Z Company debited)
Question 4
Give computation of “premium income,” “claims expense” and “commission expense” in the case of
an insurance company. (5 marks)(Intermediate–May 2000)
Answer
Premium income : The payment made by the insured as consideration for the grant of insurance is
known as premium. The amount of premium income to be credited to revenue account for a year
may be computed as :
Rs.
Premium received on risks undertaken during the year
(direct & re-insurance accepted) –
Add : Receivable at the end of year (direct & re-insurance accepted) –
Less : Receivable at the beginning of year (direct & re-insurance accepted) –
Less : Premium on re-insurance ceded: –
Paid during the year –
Add : Payable at the end of year –
Less : Payable at the beginning of year –
Premium income –
Claims expenses : A claim occurs when a policy falls due for payment. In the case of alife
insurance business, it will arise either on death or maturity of policy that is, on the expiry of the
specified term of years. In the case of general insurance business, a claim arises only when the
loss occurs or the liability arises.
11.4 Accounting

The amount of claim to be charged to revenue account may be worked out as under :
Rs.
Claims settled during the year—direct & re-insurance accepted –
(including legal fees, survey charges etc.)
Add : Payments to co-insurers –
Less : Received from co-insurers and re-insurers –
Net payment –
Add : Estimated liability at the end of the year –
(After deducting recoverable from co-insurers and re-insurers)
Less : Estimated liability at the beginning of the year –
(after deducting recoverable from co-insurers and re-insurers)
Claims expense –
Commission expenses : Insurance Regulatory and Development Authority Act, 1999 regulates
the commission payable on policies to agents. Commission expense to be charged to revenue
account is computed as follows :
Rs.
Commission paid (direct & re-insurance accepted) –
Add : Commission payable at the end of the year –
(direct & re-insurance accepted)
Less : Commission payable at the beginning of the year –
(direct & re-insurance accepted)
Commission expense –
(B) Practical Questions:
Question 1
The following are the Balances of Hercules Insurance Co. Ltd. as on 31st March, 1996 :
(Rs. in ’000)
Capital 320,00
Balances of Funds as on 1.4.95
Fire Insurance 800,00
Marine Insurance 950,00
Miscellaneous Insurance 218,65
Unclaimed Dividends 8,50
Amount Due to Other Insurance Companies 34,50
 Accounts of Insurance Companies 11.5

Sundry Creditors 72,50

Deposit and Suspense Account (Cr.) 22,80
Profit and Loss Account (Cr.) 80,40
Agents Balances (Dr.) 135,00
Interest accrued but not due (Dr.) 22,50
Due from other Insurance Companies 64,50
Cash in Hand 3,50
Balance in Current Account with Bank 74,80
Furniture and Fixtures WDV (cost 100,00) 58,00
Stationery Stock 1,40
Expenses of Management
Fire Insurance 280,00
Marine Insurance 160,00
Miscellaneous Insurance 40,00
Others 30,00 510,00
Foreign Taxes—Marine 8,00
Outstanding premium 82,00
Donation Paid (No 80G Benefit) 10,00
Transfer Fees 1,00
Reserve for Bad Debts 11,70
Income Tax Paid 120,00
Mortgage Loan (Dr.) 975,00
Sundry Debtors 25,00
Government Securities Deposited with RBI 37,00
Government Securities (1020,00) 1020,00
Debentures 465,50
Equity Shares of Joint Stock Companies 225,00
Claims Less Re-insurance
Fire 450,00
Marine 358,90
Miscellaneous 68,00 876,90
Premium Less Re-insurance
11.6 Accounting

Fire 1762,50
Marine 1022,50
Miscellaneous 262,25 3047,25
Interest and Dividends Received on Investments 58,50
Tax Deducted at Source 11,70
Commission
Fire 500,00
Marine 350,00
Miscellaneous 80,00 930,00
You are required to make the following provisions :
Depreciation on Furniture—10% of Original Cost
Depreciation on investments of Joint Stock Companies Shares 10,00
Transfer to General Reserve 10,00
Outstanding claims as on 31.3.96
Fire 200,00
Marine 50,00
Miscellaneous 32,50
Provision for tax @50%. Proposed dividends @20%. Provision for the unexpired risks is to
be made as follows:
(a) On Marine Policies 100% Premium less reinsurance.
(b) On Other Policies 50% Premium less reinsurance.
You are required to prepare the revenue and profit and loss account for the year ended 31.3.1996
of the company. (20 marks) (Intermediate–Nov. 1996)
Answer
Form B – RA (Prescribed by IRDA)
Hercules Insurance Co. Ltd.
Revenue Account for the year ended 31st March, 1996
Fire and Marine and Misc Insurance Businesses
Sched Fire Marine Misc.
ule Current Current Current
Year Year Year
Rs. ‘000 Rs. ‘000 Rs. ‘000
Premiums earned (net) 1 1762,50 1022,50 262,25
Change in provision for unexpired risk (-)81,25 (-) 72,50 87,52
Interest, Dividends and Rent – Gross — — —
 Accounts of Insurance Companies 11.7

Double Income Tax refund — — —

Profit on sale of motor car — — —
Total (A) 1681,25 950,00 349,77

Claims incurred (net) 2 650,00 408,90 100,50

Commission 3 500,00 350,00 80,00
Operating expenses related to Insurance 4 280,00 160,00 40,00
business
Bad debts — — —
Indian and Foreign taxes — 8,00 —
Total (B) 1430,00 926,90 220,50
Profit from Marine Insurance business ( A- 251,25 23,10 129,27
B)

Schedules forming part of Revenue Account

Schedule –1
Premiums earned (net) Fire Marine Misc.
Current Current Current
Year Year Year
Rs. ‘000 Rs‘000. Rs. ‘000
Premiums Less reinsurance (net) 1762,50 1022,50 262,25

Schedule – 2
Claims incurred (net) 650,00 408,90 100,50

Schedule – 3
Commission paid 500,00 350,00 80,00
Schedule – 4
Operating expenses related to insurance
business
Expenses of Management 280,00 160,00 40,00
Form B-PL
Hercules Insurance Co. Ltd.
Profit and Loss Account for the year 31st March, 1996
Particulars Sche Current Previous
dule Year Year
Rs. ’ (000) Rs. ’ (000)
Operating Profit/(Loss)
(a) Fire Insurance 251,25
11.8 Accounting

(b) Marine Insurance 23,10

(c) Miscellaneous 129,27
Income From Investments
(a) Interest, Dividend & Rent–Gross 58,50

Other Income
Transfer Fees 1,00
Total (A) 463,12
Provisions (Other than taxation)
Depreciation of Furniture 10,00
Depreciation of Investments 10,00
Other Expenses –
Expenses of Management 30,00
Donation 10,00
Total (B) 60,00
Profit Before Tax 403,12
Provision for Taxation 206,56
Profit After Tax 196,56
Profit
(a) Interim dividends paid during the year —
(b) Proposed final dividend 64,00
(c) Dividend distribution tax —
(d) Transfer to General Reserves or Other 10,00
Accounts (to be specified)
Balance of profit/loss brought forward from last 80,40
year
Balance carried forward to Balance Sheet 202,96
Working Notes :
1. Reserve for unexpired risk 50% of net premium for fire and miscellaneous and 100% of net
premium for marine.
2. Provision for Taxation Rs.
Net Profit before tax 403,12
Add : Donation 10,00
Taxable Profit 413,12
Tax 50% 206,56
 Accounts of Insurance Companies 11.9

Question 2
Indian Insurance Co. Ltd. furnishes you with the following information :
(i) On 31.12.1996 it had reserve for unexpired risk to the tune of Rs. 40 crores. It comprised of
Rs. 15 crores in respect of marine insurance business : Rs. 20 crores in respect of fire
insurance business and Rs. 5 crores in respect of miscellaneous insurance business.
(ii) It is the practice of Indian Insurance Co. Ltd. to create reserves at 100% of net premium
income in respect of marine insurance policies and at 50% of net premium income in
respect of fire and miscellaneous income policies.
(iii) During 1997, the following business was conducted :
Marine Fire Miscellaneous
(Rs. in crores)
Rs. Rs. Rs.
Premia collected from :
(a) Insureds in respect of
policies issued 18 43 12
(b) Other insurance companies
in respect of risks undertaken 7 5 4
Premia paid/payable to other insurance
companies on business ceded 6.7 4.3 7
Indian Insurance Co. Ltd. asks you to :
(a) Pass journal entries relating to “Unexpired risks reserve”.
(b) Show in columnar form “Unexpired risks reserve” a/c for 1997.
(6 marks)(Intermediate–May 1998)
Answer
(a) Journal of Indian Insurance Co. Ltd.
(Rupees in crores)
1997 Dr. Cr.
Rs Rs.
Dec. 31 Marine Revenue A/c Dr. 3.30
To Unexpired Risks Reserve A/c 3.30
(Being the difference between closing provision of
Rs. 18.30 crores (18 + 7 – 6.7) and opening provision
of Rs. 15 crores charged to marine revenue account)
11.10 Accounting

Fire Revenue A/c Dr. 1.85

To Unexpired Risks Reserve A/c 1.85
(Being the difference between closing provision of
Rs. 21.85 crores [(43 + 5 – 4.3)/2] and opening
provision of Rs. 20 crores charged to fire revenue
account)

Unexpired Risks Reserve A/c Dr. 0.50

To Miscellaneous Revenue A/c 0.50
(Being the excess of opening balance of Rs. 5 crores
over the required closing balance of Rs. 4.5 crores
[(12 + 4 – 7)/2] credited to miscellaneous revenue account).

(b) Unexpired Risks Reserve A/c

(Rs in crores)
Marine Fire Miscel- Marine Fire Miscel-
laneous laneous
1997 Rs. Rs. Rs. 1997 Rs. Rs. Rs.
Dec. 31 To Revenue A/c – – 0.50 Jan 1 By Balance b/d 15.00 20.00 5.00
To Balance c/d 18.30 21.85 4.50 Dec. 31 By Revenue A/c 3.30 1.85 –
18.30 21.85 5.00 18.30 21.85 5.00
Note : Alternatively, the opening balances of unexpired risk reserves may be reversed in the
beginning of year by transfer to Revenue account and fresh reserve of full required amount
may be created at the end of the year which will be carried forward as closing balances.
Question 3
From the following figures appearing in the books of Fire Insurance division of a General Insurance
Company, show the amount of claim as it would appear in the Revenue Account for the year ended
31st March, 1999 :
Direct Business Re-Insurance
Rs. Rs.
Claim paid during the year 46,70,000 7,00,000
Claim Payable— 1st April, 1998 7,63,000 87,000
31st March, 1999 8,12,000 53,000
Claims received – 2,30,000
Claims Receivable— 1st April, 1998 – 65,000
 Accounts of Insurance Companies 11.11

31st March, 1999 – 1,13,000

Expenses of Management 2,30,000 –
(includes Rs. 35,000 Surveyor’s fee and Rs. 45,000
Legal expenses for settlement of claims) (6 marks)(Intermediate–Nov. 1999)
Answer
General Insurance Company
(Abstract showing the amount of claims)
Rs. ’000 Rs. ’000
Claims less Re-insurance :
Paid during the year 52,20
Add : Outstanding claims at the end of the year 7,52
59,72
Less : Outstanding claims at the beginning of the year 7,85 51,87
Working Notes :
Rs. ’000 Rs. ’000
1. Claims paid during the year
Direct business 46,70
Reinsurance 7,00 53,70
Add : Surveyor’s fee 35
Legal expenses 45 80
54,50
Less : Claims received from re-insurers 2,30
52,20
2. Claims outstanding on 31st March, 1999
Direct business 8,12
Reinsurance 53 8,65
Less : Claims receivable from re-insurers 1,13
7,52
3. Claims outstanding on 1st April, 1998
Direct business 763
Reinsurance 87 8,50
Less : Claims receivable from re-insurers 65
7,85
11.12 Accounting

Question 4
From the following balances extracted from the books of Perfect General Insurance Company
Limited as on 31.3.2000, you are required to prepare Revenue Accounts in respect of Fire and
marine Insurance business for the year ended 31.3.2000 to and a Profit and Loss Account for the
same period :
Rs. Rs.
Directors’ Fees 80,000 Interest received 19,000
Dividend received 1,00,000 Fixed Assets (1.4.1999) 90,000
Provision for Taxation Income-tax paid during
(as on 1.4. 1999) 85,000 the year 60,000

Fire Marine
Outstanding Claims on 1.4.1999 28,000 7,000
Claims paid 1,00,000 80,000
Reserve for Unexpired Risk on 1.4.1999 2,00,000 1,40,000
Premiums Received 4,50,000 3,30,000
Agent’s Commission 40,000 20,000
Expenses of Management 60,000 45,000
Re-insurance Premium (Dr.) 25,000 15,000
The following additional points are also to be taken into account :
(a) Depreciation on Fixed Assets to be provided at 10% p.a.
(b) Interest accrued on investments Rs. 10,000.
(c) Closing provision for taxation on 31.3.2000 to be maintained at Rs. 1,24,138
(d) Claims outstanding on 31.3.2000 were Fire Insurance Rs. 10,000; Marine Insurance
Rs. 15,000.
(e) Premium outstanding on 31.3.2000 were Fire Insurance Rs. 30,000; Marine Insurance Rs.
20,000.
(f) Reserve for unexpired risk to be maintained at 50% and 100% of net premiums in respect
of Fire and Marine Insurance respectively.
(g) Expenses of management due on 31.3.2000 were Rs. 10,000 for Fire Insurance and Rs.
5,000 in respect of marine Insurance.
(12 marks)(Intermediate–Nov. 2000)
 Accounts of Insurance Companies 11.13

Answer

Form B – RA (Prescribed by IRDA)

Perfect General Insurance Co. Ltd
Revenue Account for the year ended 31st March, 2000
Fire and Marine Insurance Businesses
Sche Fire Marine
dule Current Year Current Year
Rs. Rs.
Premiums earned (net) 1 4,55,000 3,35,000
Change in provision for unexpired risk (-)27,500 (-) 1,95,000
Interest, Dividends and Rent – Gross — —
Double Income Tax refund — —
Profit on sale of motor car — —
Total (A) 4,27,500 1,40,000

Claims incurred (net) 2 82,000 88,000

Commission 3 40,000 20,000
Operating expenses related to Insurance 4 70,000 50,000
business
Bad debts — —
Indian and Foreign taxes — —
Total (B) 1,92,000 1,58,000
Profit from Marine Insurance business ( A-B) 2,35,500 (18000)

Schedules forming part of Revenue Account

Schedule –1
Premiums earned (net) Fire Marine
Current Current
Year Year
Rs. Rs.
Premiums from direct business written 4,80,000 3,50,000
Less: Premium on reinsurance ceded 25,000 15,000
Total Premium earned (net) 4,55,000 33,5000
Schedule – 2
Claims incurred (net) 82,000 88,000
Schedule – 4
Operating expenses related to insurance
business
Expenses of Management 70,000 50,000
11.14 Accounting

Form B-PL
Perfect General Insurance Co. Ltd.
Profit and Loss Account for the year 31st March, 2000
Particulars Sche Current Previous
dule Year Year
Rs. Rs.
Operating Profit/(Loss)
(a) Fire Insurance 2,35,500
(b) Marine Insurance (18,000)
(c) Miscellaneous Insurance —

Income From Investments

(b) Interest, Dividend & Rent–Gross 1,29,000
(c) Profit on sale of investments
Less : Loss on sale of investments
Other Income (To be specified)
Total (A) 3,46,500
Provisions (Other than taxation) —
Depreciation 9,000
Other Expenses –Director’s Fee 80,000
Total (B) 89,000
Profit Before Tax 2,57,500
Provision for Taxation 99,138
Profit After Tax 1,58,362

Working Notes :
Fire Marine
Rs. Rs.
1. Claims under policies less reinsurance
Claims paid during the year 1,00,000 80,000
Add: Outstanding on 31st March, 2000 10,000 15,000
1,10,000 95,000
Less : Outstanding on 1st April, 1999 28,000 7,000
82,000 88,000

2. Expenses of management
Expenses paid during the year 60,000 45,000
Add: Outstanding on 31st March, 2000 10,000 5,000
70,000 50,000
 Accounts of Insurance Companies 11.15

3. Premiums less reinsurance

Premiums received during the year 4,50,000 3,30,000
Add: Outstanding on 31st March, 2000 30,000 20,000
4,80,000 3,50,000
Less : Reinsurance premiums 25,000 15,000
4,55,000 3,35,000
4. Reserve for unexpired risks is 50% of net premium for fire insurance and 100% of net
premium for marine insurance.
5. Provision for taxation account
Rs. Rs.
31.3.2000 To Bank A/c 1.4.1999 By Balance b/d 85,000
(taxes paid) 60,000 31.3.2000 By P & L A/c 99,138
31.3.2000 To Balance c/d 1,24,138
1,84,138 1,84,138
Question 5
From the following information as on 31st March, 2002, prepare the Revenue Accounts of Sagar
Bhima Co. Ltd. engaged in Marine Insurance Business:
Particulars Direct Business Re-insurance
(Rs.) (Rs.)
I. Premium :
Received 24,00,000 3,60,000
Receivable – 1st April, 2001 1,20,000 21,000
– 31st March, 2002 1,80,000 28,000
Premium paid 2,40,000 –
Payable – 1st April, 2001 – 20,000
– 31st March, 2002 – 42,000
II. Claims :
Paid 16,50,000 1,25,000
Payable – 1st April, 2001 95,000 13,000
– 31st March, 2002 1,75,000 22,000
Received – 1,00,000
Receivable – 1st April, 2001 – 9,000
– 31st March, 2002 – 12,000
III. Commission :
On Insurance accepted 1,50,000 11,000
On Insurance ceded – 14,000
11.16 Accounting

Other expenses and income:

Salaries – Rs. 2,60,000; Rent, Rates and Taxes – Rs. 18,000; Printing and Stationery – Rs.
23,000; Indian Income Tax paid – Rs. 2,40,000; Interest, Dividend and Rent received (net) – Rs.
1,15,500; Income Tax deducted at source – Rs. 24,500; Legal Expenses (Inclusive of Rs. 20,000 in
connection with the settlement of claims) – Rs. 60,000; Bad Debts – Rs. 5,000; Double Income Tax
refund – Rs. 12,000; Profit on Sale of Motor car Rs. 5,000.
Balance of Fund on 1st April, 2001 was Rs. 26,50,000 including Additional Reserve of Rs.
3,25,000. Additional Reserve has to be maintained at 5% of the net premium of the year.
(16 marks) (PE-II–Nov. 2002)
Answer
In exercise of the powers conferred by Section 114A of the Insurance Act, 1938 (4 of 1938), the
Insurance Regulatory and Development Authority in consultation with the Insurance Advisory
Committee prescribed the new formats for the financial statements of Insurance Companies i.e.
preparation of Financial Statements and Auditor’s Report of Insurance Companies Regulations,
2000. Therefore, the above revenue account can be prepared as:
Form B – RA (Prescribed by IRDA)
Revenue Account for the year ended 31st March, 2002
Marine Insurance Business
Sche Current Year Previous Year
dule
Rs. Rs.
Premiums earned (net) 1 25,65,000
Change in provision for unexpired risk (-)43,250
(Rs. 26,93,250 – Rs. 26,50,000)
Interest, Dividends and Rent – Gross 1,15,500
Double Income Tax refund 12,000
Profit on sale of motor car 5,000
Total (A) 26,54,250

Claims incurred (net) 2 17,81,000

Commission 3 1,47,000
Operating expenses related to Insurance 4 3,41,000
business
Bad debts 5,000
Indian and Foreign taxes 2,40,000
Total (B) 25,14,000
Profit from Marine Insurance business ( A-B) 1,40,250
 Accounts of Insurance Companies 11.17

Schedules forming part of Revenue Account

Schedule –1
Premiums earned (net) Current Previous Year
Year
Rs. Rs.
Premiums from direct business written 28,27,000
Less: Premium on reinsurance ceded 2,62,000
Total Premium earned (net) 25,65,000

Schedule – 2
Claims incurred (net) 17,81,000

Schedule – 3
Commission paid
Direct 1,50,000
Add: Re-insurance accepted 11,000
Less: reinsurance ceded 14,000
1,47,000
Schedule – 4
Operating expenses related to insurance
business
Employees’ remuneration and welfare benefits 2,60,000
Rent, Rates and Taxes 18,000
Printing and Stationery 23,000
Legal and Professional charges 40,000
3,41,000

Working Notes:
1. Total Premium Income Direct Re-insurance
Rs. Rs.
Received 24,00,000 3,60,000
Add: Receivable on 31st March, 2002 1,80,000 28,000
25,80,000 3,88,000
11.18 Accounting

Less: Receivable on 1st April, .2001 1,20,000 21,000

24,60,000 3,67,000
Total premium income 24,60,000 + 3,67,000 = 28,27,000
2. Premium Paid
Paid 2,40,000
Add: Payable on 31st March, 2002 42,000
2,82,000
Less: Payable on 1st April, 2001 20,000
2,62,000
3. Claims Paid
Direct Business 16,50,000
Re-insurance 1,25,000
Legal Expenses 20,000
17,95,000
Less: Re-insurance claims received 1,00,000
16,95,000
4. Claims outstanding as on 31st March, 2002
Direct 1,75,000
Re-insurance 22,000
1,97,000
Less: Recoverable from Re-insurers on 31st
March, 2002 12,000
1,85,000
5. Claims outstanding as on 1st April, 2001
Direct 95,000
Re-insurance 13,000
1,08,000
Less: Recoverable from Re-insurers on 1st
April, 2001 9,000
99,000
6. Expenses of Management
Salaries 2,60,000
Rent, Rates and taxes 18,000
Printing and Stationery 23,000
Legal Expenses 40,000
3,41,000
 Accounts of Insurance Companies 11.19

Question 6
X Fire Insurance Co. Ltd. commenced its business on 1.4.2005. It submits you the following
information for the year ended 31.3.2006:
Rs.
Premiums received 15,00,000
Re-insurance premiums paid 1,00,000
Claims paid 7,00,000
Expenses of Management 3,00,000
Commission paid 50,000
Claims outstanding on 31.3.2006 1,00,000
Create reserve for unexpired risk @40%
Prepare Revenue account for the year ended 31.3.2006.
(4 Marks) (PE-II – May 2006)
(c) Form B – RA (Prescribed by IRDA)
Name of the Insurer: X Fire Insurance Co. Ltd.
Registration No. and Date of registration with the IRDA: …………………..
Revenue Account for the year ended 31st March, 2006
Particulars Schedule Current year
ended on 31st
March, 2006
Rs.
1. Premiums earned (Net) 1 14,00,000
2. Change in provision for unexpired risk
(NIL–5,60,000) 2 (5,60,000)
Total (A) 8,40,000
1. Claims incurred (Net) 3 8,00,000
2. Commission 50,000
3. Operating Expenses 4 3,00,000
Total (B) 11,50,000
Operating Profit/(Loss) from Fire Insurance
Business [C =(A - B)] (3,10,000)
11.20 Accounting

Schedule 1
Premiums earned (Net) Rs.
Premium received 15,00,000
Less: Premium on re-insurance paid 1,00,000
14,00,000
Schedule 2
Reserve for unexpired risk @ 40% on net premium
40
Rs.14,00,000   Rs. 5,60,000
100
Schedule 3
Claims Rs.
Claims paid 7,00,000
Add: Claims outstanding on 31.3.2006 1,00,000
8,00,000
Schedule 4
Operating expenses Rs.
Expenses of Management 3,00,000
Question 7
Prepare the Fire Insurance Revenue A/c as per IRDA regulations for the year ended 31st March,
2008 from the following details:
Rs.
Claims paid 4,90,000
Legal expenses regarding claims 10,000
Premiums received 13,00,000
Re-insurance premium paid 1,00,000
Commission 3,00,000
Expenses of management 2,00,000
Provision against unexpired risk on 1st April, 2007 5,50,000
Claims unpaid on 1st April, 2007 50,000
Claims unpaid on 31st March, 2008 80,000
(6 Marks) (PE II- May, 2008)
 Accounts of Insurance Companies 11.21

Answer
FORM B - RA
Name of the Insurer:
Registration No. and Date of Registration with the IRDA:
Fire Insurance Revenue Account
for the year ended 31st March, 2008
Particulars Schedule Amount (Rs.)
(1) Premium earned 1 11,50,000
(2) Other income -
(3) Interest, dividend and rent -
Total (A) 11,50,000
(4) Claims incurred 2 5,30,000
(5) Commission 3 3,00,000
(6) Operating expenses related to Insurance business 4 2,00,000
Total (B) 10,30,000
Operating Profit (A)- (B) 1,20,000

Schedule 1 : Premium earned (net) Rs.

Premium received 13,00,000
Less: Re-insurance premium 1,00,000
Net premium 12,00,000
Adjustment for change in reserve for unexpired risks (Refer W.N.) 50,000
11,50,000

Schedule 2 : Claims Incurred Rs.

Claims paid including legal expenses (4,90,000 + 10,000) 5,00,000
Add : Claims outstanding at the end of the year 80,000
Less : Claims outstanding at the beginning of the year (50,000)
Total claims incurred 5,30,000

Schedule 3 : Commission Rs.

Commission paid 3,00,000
11.22 Accounting

3,00,000
Schedule 4: Operating expenses Rs.
Expenses of management 2,00,000
2,00,000
Working Note:
Change in the provision for unexpired risk Rs.
Unexpired risk reserve on 31st March, 2008 =50% of net premium
i.e. 50% of Rs.12,00,000 (See Schedule 1) 6,00,000
Less : Unexpired risk reserve as on 1st April 2007 5,50,000
Change in the provision for unexpired risk 50,000

Question 8
Heaven Life Insurance Co. furnishes you the following information:
Rs.
Life Insurance fund on 31.3.2008 52,00,000
Net liability on 31.3.2008 as per actuarial valuation 40,00,000
Interim bonus paid to policyholders during intervaluation period 3,00,000
You are required to prepare:
(i) Valuation Balance Sheet;
(ii) Statement of Net Profit for the valuation period; and
(iii) Amount due to the policyholders. (8 Marks)(PE II- Nov. 2008)
Answer
(i) Heaven Life Insurance Co.
Valuation Balance Sheet as at 31 st March, 2008
Rs. Rs.
To Net Liability as per actuarial 40,00,000 By Life Assurance Fund 52,00,000
valuation
To Surplus 12,00,000
52,00,000 52,00,000
(ii) Statement showing Net Profit for the valuation period
Rs.
Surplus as per Balance Sheet (i.e., Valuation Balance Sheet) 12,00,000
Add: Interim bonus paid 3,00,000
15,00,000
 Accounts of Insurance Companies 11.23

(iii) Amount due to policyholders

Rs.
95% of net profit due to policyholders (95% of Rs. 15,00,000) 14,25,000
Less: Interim bonus already paid 3,00,000
Amount due to policyholders 11,25,000
 12
ACCOUNTS OF ELECTRICITY SUPPLY COMPANIES

(A) Write short notes on:

Question 1
Main features of “Double Accounts” system of presentation of financial information in the case
of public utility concern. (5 marks) (Intermediate–May 1995, Nov. 1997 and May 1999)
Answer
Double accounts system is the name given to the system of preparing the final accounts of
certain statutory companies formed by special Acts of parliament, usually public utility
undertakings (for example Electricity Companies). The double accounts system is not a
special method of keeping accounts, rather a special method of presenting accounts which are
kept under the normal double entry system. Under this system, separate accounts in respect
of capital and revenue are prepared in order to show clearly the capital receipts and the
manner in which the amounts thereof have been invested. The final accounts prepared under
the double accounts system normally consist of :
(i) Revenue Account
(ii) Net Revenue Account
(iii) Capital Account (Receipts and Expenditure on capital account)
(iv) General Balance Sheet.
The Revenue account is analogous to the Profit & Loss Account of a company with some
exceptions. The Net Revenue Account resembles with appropriation portion of the Profit &
Loss Account of a company. The Balance Sheet is presented in two parts namely Capital
Account and General Balance Sheet. The Capital Account shows the total amount of capital
raised and its sources and also the manner and extent to which this capital has been applied
in the acquisition of fixed assets for the purpose of carrying on the business. The General
balance sheet includes the other items.
The Double accounts system in its pure form does no longer exist but the statements
submitted to State Governments by electricity companies generally follow the principle of
double accounts system. It may be noted that for presenting accounts to the shareholders,
electricity companies normally follow Schedule VI of the Companies Act, 1956.
12.2 Accounting

Question 2
“Receipt and payment on capital account” and “General Balance Sheet” of a public utility.
(5 marks) (Intermediate–May 2000)
Answer
Under the double accounts system, which is followed by a public utility concern, the balance
sheet is split into two parts : (a) Receipt and payment on capital account and (b) General
Balance Sheet.
The main purpose of the former is to show (i) the total amount of capial raised its
sources and (ii) the manner and the extent to which this capital has been applied in the
acquisition of fixed assets for the purpose of carrying on the business of the undertaking. It
thus discloses the receipt and expenditure on capital account, that is, the receipts from issue
of shares, debentures and loans and the expenditure, out of such receipts, on acquisition of
and addition to fixed assets. The receipt and expenditure on capital account is shown in a
columnar form. There are three money columns : (a) one showing the amount at the
commencement of the period; (b) another disclosing the amount received or spent during the
period; and (c) the third showing the balance left at the end of the period.
The other part (called general balance sheet) contains other assets and liabilities and
the balance of the receipt and expenditure on capital account. It is drawn up in the usual way,
showing on the liabilities side–reserves, depreciation fund, current liabilities and other credit
balances and total receipts as per capital account, on the assets side–total of expenditure as
per capital account, floating assets and other debit balances.
Question 3
Reasonable returns in electricity supply companies. (5 marks)(Intermediate–Nov. 2000)
Answer
The law seeks to prevent an electricity undertaking from earning too high a profit. For this
purpose, “reasonable return” has been defined as consisting of :
(a) An yield at the standard rate which is Reserve Bank rate plus two percent on the capital
base as defined below;
(b) Income derived from investment except investment made against Contingencies
Reserve;
(c) An amount equal to 1/2% on loans advanced by the Electricity Board;
(d) An amount equal to 1/2% on the amounts borrowed from organisations or institutions
approved by the State Government;
(e) An amount equal to 1/2% on the amount raised by the issue of debentures;
(f) An amount equal to 1/2% on balance of Development Reserve; and
(g) Such other amounts as may be allowed by the Central Government having regard to the
prevailing tax structure in the country.
 Accounts of Electricity Supply Companies 12.3

The term “Capital Base” used above, can be defined as:

(a) the original cost of fixed assets available for use and necessary for the purpose of the
undertaking less contributions, if any made by the consumers for construction of service
lines and also amounts written off;
(b) the cost of intangible assets;
(c) the original cost of work in progress;
(d) the amount of investments compulsorily made agaisnt contingencies reserve; and
(e) the monthly average of the stores, materials, supplies and cash and bank balances held
at the end of each month of the year of account not exceeding in the aggregate an
amount equal to one quarter of the expenditure.
Less:
(i) the amount written off or set aside on account of depreciation of fixed assets and
amounts written off in respect of intangible assets in the books of the undertaking;
(ii) the amount of any loans advanced by the Board;
(iii) the amount of any loans borrowed from organisations or institutions approved by the
State Government;
(iv) the amount of any debentures issued by the licensee;
(v) the amount of security deposits held in cash;
(vi) the amount standing to the credit of the Tariffs and Dividends Control Reserve;
(vii) the amount set apart for the development reserve; and
(viii) the amount carried forward in the accounts of the licensee for distribution to the
consumers.
(B) Pratical Questions:
Question 1
Electric Supply Ltd. rebuilt and re-equipped one of their Mains at a Cash Cost of Rs.
40,00,000. The old Mains thus superseded cost Rs. 15,00,000. The capacity of the new Main
is double that of the old Main.
Rs. 70,000 was realised from sale of old materials. Four old motors valued at Rs. 2,00,000
salvaged from the old Main were used in the reconstruction. The cost of Labour and Materials
is respectively 30% and 25% higher now than when the old Main was built. The proportion of
Labour to Materials in the Main then and now is 2 : 3.
Show the Journal entries for recording the above transactions, if accounts are maintained
under Double Account System. (8 marks) (Intermediate–Nov. 1999)
12.4 Accounting

Answer
Electric Supply Ltd.
Journal Entries
Dr. Cr.
Rs. Rs.
New Main Account Dr. 20,95,000
Replacement Account Dr. 19,05,000
To Bank Account 40,00,000
(Being current cost of replacement charged to re-
placement account and the balance amount capi-
talised)
New Main Account Dr. 2,00,000
To Replacement Account 2,00,000
(Being the value of motors salvaged from old main
used in the reconstruction of main)
Bank Account Dr. 70,000
To Replacement Account 70,000
(Being the amount realised from sale of old materials
credited to replacement account)
Revenue Account Dr. 16,35,000
To Replacement Account 16,35,000
(Being the net current cost of replacement
transferred to revenue account)
Working Notes:
1. Current cost of replacement:
Cost of Increase in cost Current
existing main Rate Amount cost
Rs. Rs. Rs.
Materials (3/5 × Rs. 15 lacs) 9,00,000 25% 2,25,000 11,25,000
Labour (2/5 × Rs. 15 lacs) 6,00,000 30% 1,80,000 7,80,000
Estimated current cost for replacement
of present main (amount to be charged
to replacement account) 19,05,000
 Accounts of Electricity Supply Companies 12.5

2. Additional cost of reconstruction of main (to be capitalised)

Cash cost of re-building new main 40,00,000
Less: Estimated current cost for replacement of existing old main 19,05,000
Additional cost in new main to be capitalised (excluding old motors used 20,95,000
3. Replacement Account
Dr. Cr.
To Bank A/c 19,05,000 By New Main A/c 2,00,000
By Bank A/c 70,000
By Replacement A/c
Balancing figure 16,35,000
19,05,000 19,05,000
Question 2
Power Electric Company decides to replace one of its old plant by an improved plant with
larger capacity. The cost of the new plant is Rs. 16,00,000.
Materials and Labour earlier and now are in the ratio of 4 : 6.
Original cost of the old plant is Rs. 3,00,000. Materials cost has gone up by 2½ times and
Labour cost by 3 times since then. Old materials worth Rs. 10,000 were used in the
construction of the new plant and Rs. 20,000 were realised from the sale of old materials.
Give the necessary Journal Entries for recording the above transactions.
(6 marks) (PE-II–Nov. 2004)
Journal Entries
Particulars Dr. Cr.
Amount Amount
Rs. Rs.
Plant account Dr. 7,70,000
To Bank account 7,60,000
To Replacement account 10,000
(Being the additional cost incurred and old
materials utilized in new plant)
Replacement account Dr. 8,40,000
To Bank account 8,40,000
(Being the current cost of replacement)
Bank account Dr. 20,000
To Replacement account 20,000
(Being the old materials sold)
Revenue account Dr. 8,10,000
To Replacement account 8,10,000
(Being the balance of replacement account
transferred to revenue account)
12.6 Accounting

Working Note:
Old cost of the plant Rs. 3,00,000:
4
Material = 3,00,000  = 1,20,000
10
6
Labour = 3,00,000  = 1,80,000
10
Rs.
Cost of materials increased by 250% = 1,20,000  250% 3,00,000
Cost of labour increased by 300% = 1,80,000  300% 5,40,000
Current cost of replacing old plant 8,40,000
Less: Sale of old materials 20,000
Old materials utilized in new plant 10,000 30,000
Amount to be transferred to Revenue account 8,10,000

Cash cost of the new plant 16,00,000*

Add: Old materials utilized 10,000
16,10,000
Less: Current cost of replacing old plant 8,40,000
Amount to be capitalized 7,70,000

* The cost of new plant has been given as Rs. 16,00,000 in the question. It has been
assumed in the above solution that this cost does not include the cost of old
materials used in the construction of new plant worth Rs. 10,000.
Question 3
X Electricity Company Limited decides to replace one of its old plants with a modern one in
April, 2006. The plant when installed in the year 2000, costed the company Rs.26 lakhs, the
components of materials and labour being in the ratio of 7:3. It is ascertained that the cost of
labour and materials have risen by 30% and 25% respectively. The cost of new plant is Rs.66
lakhs and in addition old materials worth Rs.92,000 are reused. Old materials worth
Rs.1,68,000 are sold. Under double account system compute the following:
(i) The amount to be written off to Revenue A/c.
(ii) The amount to be capitalized.
 Accounts of Electricity Supply Companies 12.7

(iii) Draw up the necessary Journal entries.

(iv) Draw up the Replacement Account. ( 10 Marks)(PE II – May, 2007)
Answer
(i) Statement showing amount to be written off to Revenue Account
Rs.
Cost of old plant 26,00,000
7 25
Add:. Increase in cost of material 26,00,000x  4,55,000
10 100

3 30
Increase in cost of Labour 26,00,000 x  2,34,000
10 100
Current cost of old plant 32,89,000
Less: Cost of Material used 92,000
Cost of Material sold 1,68,000 (-) 2,60,000
Amount to be written off to Revenue A/c 30,29,000

(ii) Statement showing amount to be capitalised

Cost of new plant excluding the value of old materials used 66,00,000
Less: Current cost of old plant 32,89,000
Current cost to be capitalized 33,11,000
Add: Value of old material used 92,000
Total amount to be capitalized 34,03,000
(iii) Journal Entries in the Books of X Electricity Company Ltd.
Rs. Rs.
(a) Replacement Account Dr. 32,89,000
To Bank Account 32,89,000
(Being the replacement of old plant by a new plant; the
current cost of replacement Rs.32,89,000)
(b) Plant Account Dr. 34,03,000
To Replacement Account 92,000
To Bank Account 33,11,000
(Being additional cost of new plant capitalized and also
old materials used in construction of new plant)
12.8 Accounting

(c) Bank Account Dr. 1,68,000

To Replacement A/c 1,68,000
(Being the sale of old materials for Rs.1,68,000)

(d) Revenue A/c Dr. 30,29,000

To Replacement Account 30,29,000
(Being the balance of replacement account transferred
to revenue account)
(iv)
Replacement Account
Dr. Cr.
Rs. Rs.
To Bank A/c 32,89,000 By New Plant A/c 92,000
By Bank A/c 1,68,000
By Revenue A/c (Balancing figure) 30,29,000
32,89,000 32,89,000

Question 4
‘H’ Electricity Company earned a profit of Rs.60,00,000 (after tax) after paying Rs.48,000 at
12% interest on debentures for the year ended 31.3.2007. The following further information is
supplied to you:
Rs.
Share Capital 2,50,00,000
Reserve Fund Investment (invested in 8% Government Securities at par) 60,00,000
Contingencies Reserve Fund Investment (7%) 25,00,000
Loan from State Electricity Board 50,00,000
Development Reserve 16,00,000
Fixed Assets 6,00,00,000
Depreciation Reserve on Fixed Assets 60,00,000
Security Deposits of customers 80,00,000
Amount contributed by consumers towards cost of Fixed Assets 4,50,000
Intangible Assets 17,50,000
 Accounts of Electricity Supply Companies 12.9

Tariffs and Dividends Control Reserve 22,00,000

Monthly average of Current Assets including amount due from customers 36,00,000
Rs.5,00,000
Show, how the profits of the company will be dealt with under the provisions of the Electricity
Act, assuming the bank rate of the year was 8%. All working notes should form part of your
answer. (16 Marks) (PE II, Nov. 2007)
Answer
‘H’ Electricity Company
Statement of Distribution of Profit for the year ended 31.3.2007
Capital Base
Rs. Rs.
Fixed Assets as reduced by customers contribution
(6,00,00,000 – 4,50,000) 5,95,50,000
Intangible Assets 17,50,000
Monthly average of Current Assets (Excluding amount due
from customers i.e. 36,00,000 – 5,00,000) 31,00,000
Contingencies Reserve Fund Investment 25,00,000 6,69,00,000
Deduct:
Depreciation Reserve 60,00,000
Loan from Electricity Board 50,00,000
100
12% Debentures ( 48,000  ) 4,00,000
12
Development Reserve 16,00,000
Security Deposits of Customers 80,00,000
Tariffs and Dividends Control Reserve 22,00,000 2,32,00,000
Capital Base 4,37,00,000
Reasonable Return
Rs.
10% (Bank Rate + 2%) on Capital Base 43,70,000
8% on Reserve Fund Investment 4,80,000
12.10 Accounting

½% on Loan from Electricity Board 25,000

½% on Debentures 2,000
½% on Development Reserve 8,000
Reasonable Return 48,85,000
Surplus and its Disposal
Rs.
Clear Profit 60,00,000
Surplus (Rs.60,00,000 – Rs.48,85,000) 11,15,000
Less: 20% of Reasonable Return (to be disposed off) 9,77,000
Amount refundable to consumers 1,38,000
Disposal of Surplus of Rs.9,77,000
Rs.

(i) 1
of surplus over clear profit limited to 5% of reasonable return will be
3
at the disposal of the company i.e. Rs.3,71,667 >Rs.2,44,250 2,44,250
(ii) Credit to Tariffs and Dividends Control Reserve (1/2 of remaining
balance of 20% of Reasonable Return) 3,66,375
(iii) Credit to Consumers’ Suspense Account 3,66,375
9,77,000
Total amount at the disposal of the company
Rs.
(a) Amount of reasonable return 48,85,000
(b) Share in surplus 2,44,250
51,29,250
Total amount refunded to consumers
Rs.
(a) Surplus in excess of 20% of reasonable return 1,38,000
(b) Share in surplus 3,66,375
5,04,375
 13
FINANCIAL ANALYSIS

UNITS 1 & 2 : FUND FLOW STATEMENT AND CASH FLOW STATEMENT

(A) Write short notes on:
Question 1
Cash Flow Statement. (5 marks) (Intermediate–Nov. 1997)
Answer
Cash flow statement is a statement of inflows and outflows of cash and cash equivalents. It
starts with the opening balance of cash and cash equivalents at the start of the accounting
period. It then gives in a summary form, the inflows and outflows relating to the following three
classifications of activities :
(i) Operating activities : They are the principal revenue producing activities of the
enterprise.
(ii) Investing activities : They deal with the acquisition and disposal of long-term assets
and long term investments.
(iii) Financing activities : They reflect changes in the size and composition of capital in the
case of a company this would preference capital and borrowings of the enterprise.
The cash flows arising from extraordinary items are disclosed separately under each of the
above three classifications.
Likewise where the amount of significant cash and cash equivalent balances held by an
enterprise are not available for use by the enterprise, the same should be disclosed separately
together with a commentary by the management.
Question 2
In the case of manufacturing company :
(i) List the items of ‘inflows’ of cash receipts from operating activities;
(ii) List the items of “outlflows” of investing activities. (4 marks) [Intermediate May 1998]
13.2 Accounting

Answer
(i) Inflows of cash receipts from operating activities :
(a) Cash receipts from the sales of goods;
(b) Royalties, fees, commission and other revenue;
(c) Refunds of income-tax.
(ii) Outflows of investing activities :
(a) Cash payments for acquisition of fixed assets;
(b) Cash payments for acquisition of shares, warrants or debts instruments of other
enterprises and interests in joint ventures (other than payments for instruments
considered to cash equivalents and those for dealing or trading purposes);
(c) Cash advances and loans to third parties.
Question 3
Classification of activities (with two examples) as suggested in AS 3, to be used for preparing a
cash flow statements. (5 marks) (Intermediate–May 2001)
Answer
AS 3 (Revised) on Cash Flow Statements requires that the cash flow statement should report cash
flows by operating, investing and financing activities.
(i) Operating activities are the principal revenue-producing activities of the enterprise and
other activities that are not investing or financing activities. Cash receipts from sale of
goods and cash payments to suppliers of goods are two examples of operating activities.
(ii) Investing activities are acquisition and disposal of long-term assets and other
investments not included in cash equivalents. Payment made to acquire machinery and
cash received for sale of furniture are examples of investing activities.
(iii) Financial activities are those activities that result in changes in the size and
composition of the owner’s capital (including preference share capital in the case of a
company) and borrowings of the enterprise. Cash proceeds from issue of shares and
cash paid to redeem debentures are two examples of financing activities.
Question 4
Explain the difference between direct and indirect methods of reporting cash flows from
operating activities with reference to Accounting Standard 3, (AS 3) revised.
(8 marks) (Final Nov. 2001)
Answer
As per para 18 of AS 3 (Revised) on Cash Flow Statements, an enterprise should report cash flows
from operating activities using either :
 Financial Analysis 13.3

(a) the direct method, whereby major classes of gross cash receipts and gross cash
payments are disclosed; or
(b) the indirect method, whereby net profit or loss in adjusted for the effects of transactions
of a non-cash nature, any deferrals or accruals of past or future operating cash receipts
or payments, and items of income or expense associated with investing or financing cash
flows.
The direct method provides information which may be useful in estimating future cash flows
and which is not available under the indirect method and is, therefore, considered more
appropriate than the indirect method. Under the direct method, information about major
classes of gross cash receipts and gross cash payments may be obtained either :
(a) from the accounting records of the enterprise; or
(b) by adjusting sales, cost of sales (interest and similar income and interest expense and
similar charges for a financial enterprise) and other items in the statment of profit and
loss for :
(i) changes during the period in inventories and operating receivables and payables;
(ii) other non-cash items; and
(iii) other items for which the cash effects are investing or financing cash flows.
Under the indirect method, the net cash flow from operating activies is determined by adjusting net
profit or loss for the effects of :
(a) changes during the period in inventories and operating receivables and payables;
(b non-cash items such as depreciation, provisions, deferred taxes and unrealised foreign
exchange gains and losses; and
(c) all other items for which the cash effects are investing or financing cash flows.
Alternatively, the net cash flow from operating activities may be presented under the indirect
method by showing the operating revenues and expenses, excluding non-cash items disclosed in
the statement of profit and loss and the changes during the period in inventories and operating
receivables and payables.
Question 5
What all are the differences between Cash Flow statement and Fund Flow statement?
(4 Marks) (PE-II – May 2006)
Answer
Differences between cash flow statement and fund flow statement
(i) Cash flow statement deals with the change in cash position between two points of time.
Fund flow statement deals with the changes in working capital position.
(ii) Cash flow statement contains opening as well as closing balances of cash and cash
equivalents. The fund flow statement does not contain any such opening and closing
balance.
13.4 Accounting

(iii) Cash flow statement records only inflow and outflow of cash. Fund flow statement
records sources and application of funds.
(iv) Fund flow statement can be prepared from the cash flow statement under indirect
method. However, a cash flow statement cannot be prepared from fund flow statement.
(v) A statement of changes in working capital is usually prepared alongwith fund flow
statement. No such statement is prepared along with the cash flow statement.
(B) Practical Questions:
Question 1
Given below are the condensed Balance Sheets of Lambakadi Ltd. for two years and the statement
of Profit and Loss for one year :
(Figures Rs. in lakhs)
As at 31st March 1998 1997
Share Capital
In equity shares of Rs. 100 each 150 110
10% redeemable preference shares of Rs. 100 each 10 40
Capital redemption reserve 10 —
General reserve 15 10
Profit and loss account balance 30 20
8% debentures with convertible option 20 40
Other term loans 15 30
250 250
Fixed assets less depreciation 130 100
Long term investments 40 50
Working capital 80 100
250 250
Statement of Profit and Loss for the year ended 31st March, 1998
(Figures Rs. in lakhs)
Sales 600
Less : Cost of sales 400
200
Establishment charges 30
Selling and distribution expenses 60
Interest expenses 5
Loss on sale of equipment (Book value Rs. 40 lakhs) 15 110
90
Interest income 4
Dividend income 2
Foreign exchange gain 10
Damages received for loss of reputation 14 30
120
 Financial Analysis 13.5

Depreciation 50
70
Taxes 30
40
Dividends 15
Net profit carried to Balance Sheet 25
Your are informed by the accountant that ledgers relating to debtors, creditors and stock for both
the years were seized by the income-tax authorities and it would take atleast two months to obtain
copies of the same. However, he is able to furnish the following data :
(Figures Rs. in lakhs)
1998 1997
Dividend receivable 2 4
Interest receivable 3 2
Cash on hand and with bank 7 10
Investments maturing within two months 3 2
15 18
Interest payable 4 5
Taxes payable 6 3
10 8
Current ratio 1.5 1.4
Acid test ratio 1.1 0.8
It is also gathered that debentureholders owning 50% of the debentures outstanding as on 31.3.97
exercised the option for conversion into equity shares during the financial year and the same was
put through.
You are required to prepare a direct method cash flow statement for the financial year, 1998 in
accordance with para 18(a) of Accounting Standard (AS) 3 revised. (20 marks) (Final May 1998)
Answer
Lambakadi Ltd.
Direct Method Cash Flow Statement
for the year ended 31st March, 1998
(Rs. in lakhs)
Cash flows from operating activities
Cash receipts from customers 621
Cash paid to suppliers and employees (496)
Cash generated from operations 125
Taxes paid (27)
Cash flows before extraordinary item 98
Damages received for loss of reputation 14
Net cash from operating activities 112
13.6 Accounting

Cash flows from investing activities

Purchase of fixed assets (120)
Proceeds from sale of equipment 25
Proceeds from sale of long term investments 10
Interest received 3
Dividend received 4
Net cash used in investing activities (78)
Cash flows from financing activities
Proceeds from issuance of share capital 20
Redemption of preference share capital (30)
Repayments of term loans (15)
Interest paid (6)
Dividend paid (15)
Net cash used in financing activities (46)
Net increase in cash and cash equivalents (12)
Cash and cash equivalents at beginning of period 12
(See Note 1 to the Cash Flow Statement)
Cash and cash equivalents at end of the period
(See Note 1 to the Cash Flow Statement) NIL
Notes to the Cash Flow Statement
(Rs. in lakhs)
1. Cash and Cash Equivalents 31.3.1998 31.3.1997
Cash on hand and with bank 7 10
Short-term investments 3 2
10 12
Effect of exchange rate changes (10) –
Cash and cash equivalents Nil 12
2. Conversion of debentures into equity shares, a non-cash transaction, amounted to
Rs.20 lakhs.
Working Notes :
(Rs. in lakhs)
1. Calculation of debtors, creditors and stock 31.3.98 31.3.97
(a) Current Ratio 1.5:1 1.4:1
 Financial Analysis 13.7

Working Capital to Current Liabilities Ratio 0.5:1 0.4:1

Working Capital (Rs.in lakhs) 80 100
80  1.5 10  1.4
Current Assets (Rs.in lakhs)  240  350
0.5 0.4
Current Liabilities (Rs.in lakhs) 240 – 80 = 160 350 – 100 = 250
(b) Current Ratio 1.5 1.4
Less : Acid Test Ratio 1.1 0.8
0.4 0.6
Stock : Current Liabilities 0.4:1 0.6:1
Stock (Rs.in lakhs) 160 × 0.4 = 64 250 × 0.6 = 150
(Rs. in lakhs)
(c) Break-up of Current Assets
Stock 64 150
Debtors (Balancing figures) 161 182
Other Current Assets 15 18
240 350
(d) Break-up of Current Liabilities
Creditors (Balancing figures) 150 242
Others 10 8
160 250
2. Cash receipts from customers
Sales 600
Add: Debtors at the beginning of the year 182
782
Less : Debtors at the end of the year 161
621
3. Cash paid to suppliers and employees
Cost of sales 400
Establishment charges 30
Selling and distribution expenses 60
490
Add: Creditors at the beginning of the year 242
Stock at the end of the year 64 306
796
Less : Creditors at the end of year 150
Stock at the beginning of the year 150 300
496
13.8 Accounting

4. Taxes paid
Tax expense for the year 30
Add : Tax liability at the beginning of the year 3
33
Less : Tax liability at the end of year 6
27

5. Fixed assets acquisitions

W.D.V. at 31.3.1998 130
Add back : Depreciation for the year 50
Disposals 40
220
Less : W.D.V. at 31.3.1997 100
Purchase of fixed assets 120

6. Interest received
Interest income for the year 4
Add : Amount receivable at the beginning of the year 2
6
Less : Amount receivable at the end of the year 3
3

7. Dividend received
Dividend income for the year 2
Add : Amount receivable at the beginning of the year 4
6
Less : Amount receivable at the end of the year 2
4

8. Issue of shares
Equity share capital at the end of the year 150
Less : Equity share capital at the beginning of the year 110
40
Less : Conversion of debentures into equity shares
during the year (non-cash transaction) 20
Cash flow from issue of equity shares 20

9. Interest paid
Interest expense for the year 5
Add : Interest payable at the beginning of the year 5
 Financial Analysis 13.9

10
Less : Interest payable at the end of the year 4
6
Notes :
1. It has been assumed that dividends for the year, Rs. 15 lakhs have been paid off.
2. It has been assumed that foreign exchange gain represents the effect of changes in
exchange rates on cash and cash equivalents held in a foreign currency.
Question 2
The following are the changes in the account balances taken from the Balance Sheets of PQ Ltd.
as at the beginning and end of the year. :
Changes in Rupees in
debt or [credit]
Equity share capital 30,000 shares of Rs. 10 each issued and fully paid 0
Capital reserve ]49,200]
8% debentures [50,000]
Debenture discount 1,000
Freehold property at cost/revaluation 43,000
Plant and machinery at cost 60,000
Depreciation on plant and machinery [14,400]
Debtors 50,000
Stock and work-in-progress 38,500
Creditors [11,800]
Net profit for the year [76,500]
Dividend paid in respect of earlier year 30,000
Provision for doubtful debts [3,300]
Trade investments at cost 47,000
Bank [64,300]
0
You are informed that.
(a) Capital reserve as at the end of the year represented realised profits on sale of one
freehold property together with surplus arising on the revaluation of balance of freehold
properties.
(b) During the year plant costing Rs. 18,000 against which depreciation provision of Rs. 13,500
was lying, was sold for Rs. 7,000.
13.10 Accounting

(c) During the middle of the year Rs. 50,000 debentures were issued for cash at a discount of
Rs. 1,000.
(d) The net profit for the year was after crediting the profit on sale of plant and charging
debenture interest.
You are required to prepare a statement which will explain, why bank borrowing has increased by
Rs. 64,300 during the year end. Ignore taxation. (15 marks)(Final Nov. 1998)
Answer
PQ Ltd.
Cash Flow Statement for the year ended...
Rs.
Cash flows from operating activities
Net profit 76,500
Adjustments for :
Depreciation 27,900
Profit on sale of plant (2,500)
Interest expense 2,000
Operating profit before working capital changes 1,03,900
Increase in debtors (less provision) (46,700)
Increase in stock and work-in-progress (38,500)
Increase in creditors 11,800
Net cash operating activities 30,500
Cash flows from investing activities
Purchase of plant and machinery (78,000)
Proceeds from sale of plant 7,000
Proceeds from sale of freehold property 6,200
Increase in trade investments (47,000)
Net cash used in investing activities (1,11,800)
Cash flows from financing activities
Proceeds from issuance od debentures at discount 49,000
Debenture interest paid (2,000)
Dividend paid in financing activities (30,000)
Net cash from financing activities 17,000
Excess of outflows over inflows 64,300
Thus the shortfall of Rs. 64,300 was made up through borrowing from bank.
Working Notes :
(1) Plant and Machinery Rs
Amount of increase (at cost) 60,000
Add : Disposal (at cost) 18,000
Acquisition during the year 78,000
 Financial Analysis 13.11

Disposal of plant :
proceeds from sale 7,000
Net book value (18,000 – 13,500) 4,500
Profit on sale 2,500
(2) Freehold property
Capital Reserve 49,200
Less : Increase in freehold property (closing balance minus opening balance) 43,000
Proceeds from sale of freehold property 6,200

Memorandum Accounts
(a) Plant and Machinery Account
Rs. Rs.
To Balance b/d By Bank (Sale proceeds) 7,000
To Profit and Loss A/c 2,500 By Provision for Depreciation 13,500
(Profit on sale) By Balance c/d 60,000
To Bank (Balancing figure) 78,000
80,500 80,500

(b) Provision for Depreciation (Plant and Machinery) Account

To Plant and Machinery A/c 13,500 By Balance b/d
To Balance c/d 14,400 By Profit and Loss A/c 27,900
(Balancing figure)
27,900 27,900

(c) Freehold Property Account

To Balance b/d — By Bank A/c 6,200
To Capital reserve 49,200 (Balancing figure)
By Balance c/d 43,000
49,200 49,200
In the absence of information about the opening balances, the entire amount of change has been
considered under the closing balances for the purpose of calculation of missing figures.
Notes :
(1) Investment income and dividend pertaining to the current year have not been considered in
the absence of any related information.
(2) Debenture interest has been calculated for 6 months @ 8% on Rs. 50,000.
13.12 Accounting

Question 3
Examine the following schedule prepared by K Ltd.
K Ltd.
Schedule of funds provided by operations for the year ended 31st July, 1999
(Rs.’000) (Rs.’000)
Sales 32,760
Add : Decrease in bills receivable. 1,000
Less : Increase in accounts receivable (626)
Inflow from operating revenues 33,134
Cost of goods sold 18,588
Less : Decrease in inventories (212)
Add : Decrease in trades payable 81 18,457
Wages and Salaries 5,284
Less : Increase in wages payable (12) 5,272
Administrative Expenses 3,066
Add : Increase in prepaid expenses 11 3,077
Property taxes 428
Interest expenses 532
Add : Amortisation of premium on bonds payable 20 552
Outflow from operating expenses 27,786
From operations 5,348
Rent Income 207
Add : Increase in unearned rent 3 210
5,558
Income tax 1,330
Less : Increase in deferred tax 50 1,280
Funds from operations 4,278
Required :
(i) What is the definition of funds shown in the schedule?
(ii) What amount was reported as gross margin in the income statement?
(iii) How much cash was collected from the customers?
(iv) How much cash was paid for the purchases made?
 Financial Analysis 13.13

(v) As a result of change in inventories, did the working capital increase or decrease and by
what amount?
(vi) How much rent was actually earned during the year?
(vii) What was the amount of tax expenses reported on the income statement?
Can you reconcile the profit after tax-with the funds provided by the operations?
(16 marks)(Final May 2000)
Answer
(i) ‘Funds’ shown in the schedule refer to the cash and cash equivalents [as defined in AS 3
(Revised) on Cash Flow Statements].
(ii) Gross margin in the income statement :
Rs. (’000)
Sales 32,760
Cost of goods sold 18,588
14,172
(iii) Cash collected from the customers 33,134
(iv) Cash paid for purchases made 18,457
(v) Change in inventories would reduce the working capital by 212
(vi) Rental income earned during the year 207
(vii) Tax expenses reported in the income statement 1330

(Viii) Reconciliation Statement Rs.(’000)

Profit after tax (See W.N.) 3,719
Decrease in bills receivable 1,000
Increase in accounts receivable (626)
Decrease in inventories 212
Decrease in trades payable (81)
Increase in wages payable 12
Increase in prepaid expenses (11)
Increase in unearned rent 3
Increase in deferred tax 50
Funds from operations as shown in the schedule 4,278
(i.e. cash and cash equivalents)
13.14 Accounting

Working Note :
Calculation of Profit after Tax Rs. (’000)
Sales 32,760
Less : Cost of goods sold 18,588
Gross margin 14,172
Add : Rental income 207
14,379
Less : Wages and salaries 5,284
Administrative expenses 3,066
Property taxes 428
Interest expenses 532
Amortisation of premium on bonds payable 20
9,330
Profit before tax 5,049
Less : Income tax 1,330
Profit after tax 3,719
Question 4
Ms. Joyti of Star Oils Limited has collected the following information for the preparation of cash flow
statement for the year 2000 :
(Rs. in Lakhs)
Net Profit 25,000
Dividend (including dividend tax) paid 8,535
Provision for Income tax 5,000
Income tax paid during the year 4,248
Loss on sale of assets (net) 40
Book value of the assets sold 185
Depreciation charged to Profit & Loss Account 20,000
Amortisation of Capital grant 6
Profit on sale of Investments 100
Carrying amount of Investment sold 27,765
Interest income on investments 2,506
Increase expenses 10,000
Interest paid during the year 10,520
 Financial Analysis 13.15

Increase in Working Capital (excluding Cash & Bank Balance) 56,075

Purchase of fixed assets 14,560
Investment in joint venture 3,850
Expenditure on construction work in progress 34,740
Proceeds from calls in arrear 2
Receipt of grant for capital projects 12
Proceeds from long-term borrowings 25,980
Proceeds from short-term borrowings 20,575
Opening cash and Bank balance 5,003
Closing cash and Bank balance 6,988
Required :
Prepare the Cash Flow Statement for the year 2000 in accordance with AS 3, Cash Flow
Statements issued by the Institute of Chartered Accounants of India. (make necessary
assumptions). (16 marks)(Final May 2001)
Answer
Star Oils Limited
Cash Flow Statement
for the year ended 31st December, 2000
(Rs. in lakhs)
Cash flows from operating activities
Net profit before taxation (25,000 + 5,000) 30,000
Adjustments for :
Depreciation 20,000
Loss on sale of assets (Net) 40
Amortisation of capital grant (6)
Profit on sale of investments (100)
Interest income on investments (2,506)
Interest expenses 10,000
Operating profit before working capital changes 57,428
Changes in working capital (Excluding cash and bank balance) (56,075)
Cash generated from operations 1,353
Income taxes paid (4,248)
Net cash used in operating activities (2,895)
Cash flows from investing activities
Sale of assets 145
Sale of investments (27,765 + 100) (27,865)
13.16 Accounting

Interest income on investments 2,506

Purchase of fixed assets (14,560)
Investment in joint venture (3,850)
Expenditure on construction work-in progress (34,740)
Net cash used in investing activities (22,634)
Cash flows from financing activities
Proceeds from calls in arrear 2
Receipts of grant for capital projects 12
Proceeds from long-term borrowings 25,980
Proceed from short-term borrowings 20,575
Interest paid (10,520)
Dividend (including dividend tax) paid (8,535)
27,514
Net increase in cash and cash equivalents 1,985
Cash and cash equivalents at the beginning of the period 5,003
Cash and cash equivalents at the end of the period 6,988
Working note :
Book value of the assets sold 185
Less : Loss on sale of assets 40
Proceeds on sale 145
Assumption :
Interest income on investments Rs. 2,506 has been received during the year.
Question 5
From the following Summary Cash Account of X Ltd. prepare Cash Flow Statement for the year
ended 31st March, 2001 in accordance with AS 3 (Revised) using the direct method. The company
does not have any cash equivalents.
Summary Cash Account for the year ended 31.3.2001
Rs. ’000 Rs. ’000
Balance on 1.4.2000 50 Payment to Suppliers 2,000
Issue of Equity Shares 300 Purchase of Fixed Assets 200
Receipts from Customers 2,800 Overhead expense 200
Sale of Fixed Assets 100 Wages and Salaries 100
Taxation 250
 Financial Analysis 13.17

Dividend 50
Repayment of Bank Loan 300
Balance on 31.3.2001 150
3,250 3,250
(8 marks)(Final Nov. 2001)
Answer
X Ltd.
Cash Flow Statement for the year ended 31st March, 2001
(Using the direct method)
Rs. ’000 Rs.’000
Cash flows from operating activities
Cash receipts from customers 2,800
Cash payments to suppliers (2,000)
Cash paid to employees (100)
Cash payments for overheads (200)
Cash generated from operations 500
Income tax paid (250)
Net cash from operating activities 250
Cash flows from investing activities
Payments for purchase of fixed assets (200)
Proceeds from sale of fixed assets 100
Net cash used in investing activities (100)
Cash flows from financing activities
Proceeds from issuance of equity shares 300
Bank loan repaid (300)
Dividend paid (50)
Net cash used in financing activities (50)
Net increase in cash 100
Cash at beginning of the period 50
Cash at end of the period 150
13.18 Accounting

Question 6
From the following details relating to the Accounts of Grow More Ltd. prepare Cash Flow
Statement:
Liabilities 31.03.2002 (Rs.) 31.03.2001 (Rs.)
Share Capital 10,00,000 8,00,000
Reserve 2,00,000 1,50,000
Profit and Loss Account 1,00,000 60,000
Debentures 2,00,000 –
Provision for taxation 1,00,000 70,000
Proposed dividend 2,00,000 1,00,000
Sundry Creditors 7,00,000 8,20,000
25,00,000 20,00,000
Assets
Plant and Machinery 7,00,000 5,00,000
Land and Building 6,00,000 4,00,000
Investments 1,00,000 –
Sundry Debtors 5,00,000 7,00,000
Stock 4,00,000 2,00,000
Cash on hand/Bank 2,00,000 2,00,000
25,00,000 20,00,000
(i) Depreciation @ 25% was charged on the opening value of Plant and Machinery.
(ii) During the year one old machine costing 50,000 (WDV 20,000) was sold for Rs. 35,000.
(iii) Rs. 50,000 was paid towards Income tax during the year.
(iv) Building under construction was not subject to any depreciation.
Prepare Cash flow Statement. (16 marks) (PE-II–Nov. 2002)
Answer
Grow More Ltd
Cash Flow Statement
for the year ended 31st March, 2002
Cash Flow from Operating Activities
Net Profit 40,000
Proposed Dividend 2,00,000
 Financial Analysis 13.19

Provision for taxation 80,000

Transfer to General Reserve 50,000
Depreciation 1,25,000
Profit on sale of Plant and Machinery (15,000)
Operating Profit before Working Capital changes 4,80,000
Increase in Stock (2,00,000)
Decrease in debtors 2,00,000
Decrease in creditors (1,20,000)
Cash generated from operations 3,60,000
Income tax paid (50,000)
Net Cash from operating activities 3,10,000
Cash Flow from Inventing Activities
Purchase of fixed assets (3,45,000)
Expenses on building (2,00,000)
Increase in investments (1,00,000)
Sale of old machine 35,000
Net Cash used ininvesting activities (6,10,000)
Cash Flow from financing activities:
Proceeds from issue of shares 2,00,000
Proceeds from issue of debentures 2,00,000
Dividend paid (1,00,000)
Net cash used in financing activities 3,00,000
Net increase in cash or cash equivalents NIL
Cash and Cash equivalents at the beginning of the year 2,00,000
Cash and Cash equivalents at the end of the year 2,00,000
Working Notes:
Provision for taxation account
Rs. Rs.
To Cash (Paid) 50,000 By Balance b/d 70,000
To Balance c/d 1,00,000 By Profit and Loss A/c 80,000
(Balancing figure)
1,50,000 1,50,000
13.20 Accounting

Plant and Machinery account

Rs. Rs.
To Balance b/d 5,00,000 By Depreciation 1,25,000
To Cash (Balancing figure) 3,45,000 By Cash (sale of machine) 20,000
_______ By Balance c/d 7,00,000
8,45,000 8,45,000
Question 7
From the following Balance Sheet and information, prepare Cash Flow Statement of Ryan
Ltd. for the year ended 31st March, 2003:
Balance Sheet
31st March, 31st March,
2003 2002
Rs. Rs.
Liabilities
Equity Share Capital 6,00,000 5,00,000
10% Redeemable Preference
Capital – 2,00,000
Capital Redemption Reserve 1,00,000 –
Capital Reserve 1,00,000 –
General Reserve 1,00,000 2,50,000
Profit and Loss Account 70,000 50,000
9% Debentures 2,00,000 –
Sundry Creditors 95,000 80,000
Bills Payable 20,000 30,000
Liabilities for Expenses 30,000 20,000
Provision for Taxation 95,000 60,000
Proposed Dividend 90,000 60,000
15,00,000 12,50,000

31st March, 31st March,

2003 2002
Rs. Rs.
Assets
Land and Building 1,50,000 2,00,000
Plant and Machinery 7,65,000 5,00,000
 Financial Analysis 13.21

Investments 50,000 80,000

Inventory 95,000 90,000
Bills Receivable 65,000 70,000
Sundry Debtors 1,75,000 1,30,000
Cash and Bank 65,000 90,000
Preliminary Expenses 10,000 25,000
Voluntary Separation Payments 1,25,000 65,000
15,00,000 12,50,000
Additional Information:
(i) A piece of land has been sold out for Rs. 1,50,000 (Cost – Rs. 1,20,000) and the balance
land was revalued. Capital Reserve consisted of profit on sale and profit on revaluation.
(ii) On 1st April, 2002 a plant was sold for Rs. 90,000 (Original Cost – Rs. 70,000 and
W.D.V. – Rs. 50,000) and Debentures worth Rs. 1 lakh was issued at par as part
consideration for plant of Rs. 4.5 lakhs acquired.
(iii) Part of the investments (Cost – Rs. 50,000) was sold for Rs. 70,000.
(iv) Pre-acquisition dividend received Rs. 5,000 was adjusted against cost of investment.
(v) Directors have proposed 15% dividend for the current year.
(vi) Voluntary separation cost of Rs. 50,000 was adjusted against General Reserve.
(vii) Income-tax liability for the current year was estimated at Rs. 1,35,000.
(viii) Depreciation @ 15% has been written off from Plant account but no depreciation has
been charged on Land and Building. (20 marks) (PE-II–May 2003)
Answer
Cash Flow Statement of Ryan Limited
For the year ended 31st March, 2003
Cash flow from operating activities Rs. Rs.
Net Profit before taxation 2,45,000
Adjustment for
Depreciation 1,35,000
Preliminary expenses 15,000
Profit on sale of plant (40,000)
Profit on sale of investments (20,000)
Interest on debentures 18,000
Operating profit before working capital changes 3,53,000
Increase in inventory (5,000)
13.22 Accounting

Decrease in bills receivable 5,000

Increase in debtors (45,000)
Increase in creditors 15,000
Decrease in bills payable (10,000)
Increase in accrued liabilities 10,000
Cash generated from operations 3,23,000
Income taxes paid (1,00,000)
2,23,000
Voluntary separation payments (1,10,000)
Net cash from operating activities 1,13,000
Cash flow from investing activities
Proceeds from sale of land 1,50,000
Proceeds from sale of plant 90,000
Proceeds from sale of investments 70,000
Purchase of plant (3,50,000)
Purchase of investments (25,000)
Pre-acquisition dividend received 5,000
Net cash used in investing activities (60,000)
Cash flow from financing activities
Proceeds from issue of equity shares 1,00,000
Proceeds from issue of debentures 1,00,000
Redemption of preference shares (2,00,000)
Dividends paid (60,000)
Interest paid on debentures (18,000)
Net cash used in financing activities (78,000)
Net decrease in cash and cash equivalents (25,000)
Cash and cash equivalents at the beginning of the year 90,000
Cash and Cash equivalents at the end of the year 65,000
Working Notes:
1. Rs.
Net profit before taxation
Retained profit 70,000
Less: Balance as on 31.3.2002 (50,000)
 Financial Analysis 13.23

20,000
Provision for taxation 1,35,000
Proposed dividend 90,000
2,45,000

2. Land and Building Account

Rs. Rs.
To Balance b/d 2,00,000 By Cash (Sale) 1,50,000
To Capital reserve (Profit on sale) 30,000 By Balance c/d 1,50,000
To Capital reserve
(Revaluation profit) 70,000 _______
3,00,000 3,00,000

3. Plant and Machinery Account

Rs. Rs.
To Balance b/d 5,00,000 By Cash (Sale) 90,000
To Profit and loss account 40,000 By Depreciation 1,35,000
To Debentures 1,00,000 By Balance c/d 7,65,000
To Bank 3,50,000
9,90,000 9,90,000

4. Investments Account
Rs. Rs.
To Balance b/d 80,000 By Cash (Sale) 70,000
To Profit and loss account 20,000 By Dividend
To Bank (Balancing figure) 25,000 (Pre-acquisition) 5,000
_______ By Balance c/d 50,000
1,25,000 1,25,000

5. Capital Reserve Account

Rs. Rs.
To Balance c/d 1,00,000 By Profit on sale of land 30,000
By Profit on revaluation
_______ of land 70,000
1,00,000 1,00,000
13.24 Accounting

6. General Reserve Account

Rs. Rs.
To Voluntary separation cost 50,000 By Balance b/d 2,50,000
To Capital redemption reserve 1,00,000
To Balance c/d 1,00,000 _______
2,50,000 2,50,000

7. Proposed Dividend Account

Rs. Rs.
To Bank (Balancing figure) 60,000 By Balance b/d 60,000
To Balance c/d 90,000 By Profit and loss account 90,000
1,50,000 1,50,000

8. Provision for Taxation Account

Rs. Rs.
To Bank (Balancing figure) 1,00,000 By Balance b/d 60,000
To Balance c/d 95,000 By Profit and loss account 1,35,000
1,95,000 1,95,000

9. Voluntary Separation Payments Account

Rs. Rs.
To Balance b/d 65,000 By General reserve 50,000
To Bank (Balancing figure) 1,10,000 By Balance c/d 1,25,000
1,75,000 1,75,000
Note: Cash Flow statement has been prepared using ‘indirect method’.
Question 8
The Balance Sheet of New Light Ltd. for the years ended 31st March, 2001 and 2002 are as
follows:
Liabilities 31st 31st Assets 31st 31st
March March March March
2001 2002 2001 2002
(Rs.) (Rs.) (Rs.) (Rs.)
Equity share capital 12,00,000 16,00,000 Fixed Assets 32,00,000 38,00,000
10% Preference Less: Depreciation 9,20,000 11,60,000
share capital 4,00,000 2,80,000 22,80,000 26,40,000
Capital Reserve – 40,000 Investment 4,00,000 3,20,000
 Financial Analysis 13.25

General Reserve 6,80,000 8,00,000 Cash 10,000 10,000

Profit and Loss A/c 2,40,000 3,00,000 Other current assets 11,10,000 13,10,000
9% Debentures 4,00,000 2,80,000 Preliminary expenses 80,000 40,000
Current liabilities 4,80,000 5,20,000
Proposed dividend 1,20,000 1,44,000
Provision for Tax 3,60,000 3,40,000
Unpaid dividend – 16,000 ________ ________
38,80,000 43,20,000 38,80,000 43,20,000

Additional information:
(i) The company sold one fixed asset for Rs. 1,00,000, the cost of which was Rs. 2,00,000
and the depreciation provided on it was Rs. 80,000.
(ii) The company also decided to write off another fixed asset costing Rs. 56,000 on which
depreciation amounting to Rs. 40,000 has been provided.
(iii) Depreciation on fixed assets provided Rs. 3,60,000.
(iv) Company sold some investment at a profit of Rs. 40,000, which was credited to capital
reserve.
(v) Debentures and preference share capital redeemed at 5% premium.
(vi) Company decided to value stock at cost, whereas previously the practice was to value
stock at cost less 10%. The stock according to books on 31.3.2001 was Rs. 2,16,000.
The stock on 31.3.2002 was correctly valued at Rs. 3,00,000.
Prepare Cash Flow Statement as per revised Accounting Standard 3 by indirect method.
(16 marks) (PE-II–Nov. 2003)
Answer
New Light Ltd.
Cash Flow Statement for the year ended 31st March, 2002

A. Cash Flow from operating activities Rs. Rs.

Profit after appropriation
Increase in profit and loss A/c after inventory
adjustment [Rs.3,00,000 – (Rs.2,40,000 + Rs.24,000)] 36,000
Transfer to general reserve 1,20,000
Proposed dividend 1,44,000
Provision for tax 3,40,000
Net profit before taxation and extraordinary item 6,40,000
Adjustments for:
13.26 Accounting

Preliminary expenses written off 40,000

Depreciation 3,60,000
Loss on sale of fixed assets 20,000
Decrease in value of fixed assets 16,000
Premium on redemption of preference share capital 6,000
Premium on redemption of debentures 6,000
Operating profit before working capital changes 10,88,000
Increase in current liabilities
(Rs.5,20,000 –Rs.4,80,000) 40,000
Increase in other current assets
[Rs.13,10,000 – (Rs.11,10,000 + Rs.24,000)] (1,76,000)
Cash generated from operations 9,52,000
Income taxes paid (3,60,000)
Net Cash from operating activities 5,92,000

B. Cash Flow from investing activities

Purchase of fixed assets (8,56,000)
Proceeds from sale of fixed assets 1,00,000
Proceeds from sale of investments 1,20,000
Net Cash from investing activities (6,36,000)
C. Cash Flow from financing activities
Proceeds from issuance of share capital 4,00,000
Redemption of preference share capital (1,26,000)
(Rs.1,20,000 + Rs.6,000)
Redemption of debentures (Rs. 1,20,000 + Rs. 6,000) (1,26,000)
Dividend paid (1,04,000)
Net Cash from financing activities 44,000
Net increase/decrease in cash and cash equivalent
during the year Nil
Cash and cash equivalent at the beginning of the year 10,000
Cash and cash equivalent at the end of the year 10,000
Working Notes:
1. Revaluation of stock will increase opening stock by Rs. 24,000.
2,16,000
 10  Rs. 24,000
90
Therefore, opening balance of other current assets would be as follows:
 Financial Analysis 13.27

Rs. 11,10,000 + Rs. 24,000 = Rs. 11,34,000

Due to under valuation of stock, the opening balance of profit and loss account be
increased by Rs. 24,000.
The opening balance of profit and loss account after revaluation of stock will be
Rs. 2,40,000 + Rs. 24,000 = Rs. 2,64,000
2. Investment Account
Rs. Rs.
To Balance b/d 4,00,000 By Bank A/c 1,20,000
To Capital reserve A/c (balancing figure being investment
(Profit on sale of sold)
investment) 40,000 By Balance c/d 3,20,000
4,40,000 4,40,000
3. Fixed Assets Account
Rs. Rs. Rs.
To Balance b/d 32,00,000 By Bank A/c (sale of assets) 1,00,000
To Bank A/c 8,56,000 By Accumulated
(balancing figure depreciation A/c 80,000
being assets By Profit and loss A/c(loss
purchased) on sale of assets) 20,000 2,00,000
By Accumulated
depreciation A/c 40,000
By Profit and loss A/c
(assets written off) 16,000 56,000
By Balance c/d 38,00,000
40,56,000 40,56,000
4. Accumulated Depreciation Account
Rs. Rs.
To Fixed assets A/c 80,000 By Balance b/d 9,20,000
To Fixed assets A/c 40,000 By Profit and loss A/c
To Balance c/d 11,60,000 (depreciation for the period) 3,60,000
12,80,000 12,80,000

5. Unpaid dividend is taken as non-current item and dividend paid is shown at Rs. 1,04,000
(Rs.1,20,000 – Rs.16,000).
Note: Alternatively, unpaid dividend can be assumed as current liability and hence, dividend paid
can be shown at Rs. 1,20,000. Due to this assumption cash flow from operating activities would be
affected. The cash flow from operating activities will increase by Rs. 16,000 to Rs. 6,08,000 and
cash flow from financing activities will get reduced by Rs. 16,000 to Rs. 28,000.
13.28 Accounting

Question 9
ABC Ltd. gives you the following informations. You are required to prepare Cash Flow
Statement by using indirect methods as per AS 3 for the year ended 31.03.2004:
Balance Sheet as on
Liabilities 31st 31st March Assets 31st 31st March
March 2004 March 2004
2003 2003
Rs. Rs. Rs. Rs.
Capital 50,00,000 50,00,000 Plant & Machinery 27,30,000 40,70,000
Retained Earnings 26,50,000 36,90,000 Less: Depreciation 6,10,000 7,90,000
Debentures ― 9,00,000 21,20,000 32,80,000
Current Liabilities Current Assets
Creditors 8,80,000 8,20,000 Debtors 23,90,000 28,30,000
Bank Loan 1,50,000 3,00,000 Less: Provision 1,50,000 1,90,000
Liability for expenses 3,30,000 2,70,000 22,40,000 26,40,000
Dividend payable 1,50,000 3,00,000 Cash 15,20,000 18,20,000
Marketable 11,80,000 15,00,000
securities
Inventories 20,10,000 19,20,000
Prepaid Expenses 90,000 1,20,000
91,60,000 1,12,80,000 91,60,000 1,12,80,000
Additional Information:
(i) Net profit for the year ended 31st March, 2004, after charging depreciation Rs.
1,80,000 is Rs. 22,40,000.
(ii) Debtors of Rs. 2,30,000 were determined to be worthless and were written off against
the provisions for doubtful debts account during the year.
(ii) ABC Ltd. declared dividend of Rs. 12,00,000 for the year 2003-2004.
(16 marks) (PE-II–May 2004)
Answer
Cash flow Statement of ABC Ltd. for the year ended 31.3.2004
Cash flows from Operating activities Rs. Rs.
Net Profit 22,40,000
Add: Adjustment for Depreciation
(Rs.7,90,000 – Rs.6,10,000) 1,80,000
Operating profit before working capital changes 24,20,000
 Financial Analysis 13.29

Add: Decrease in Inventories

(Rs.20,10,000 – Rs.19,20,000) 90,000
Increase in provision for doubtful debts
(Rs. 4,20,000 – Rs.1,50,000) 2,70,000
27,80,000
Less: Increase in Current Assets:
Debtors (Rs. 30,60,000 – Rs.23,90,000) 6,70,000
Prepaid expenses (Rs. 1,20,000 – Rs.90,000) 30,000

Decrease in current liabilities:

Creditors (Rs. 8,80,000 – Rs. 8,20,000) 60,000
Expenses outstanding
(Rs. 3,30,000 – Rs.2,70,000) 60,000 8,20,000
Net cash from operating activities 19,60,000

Cash flows from Investing activities

Purchase of Plant & Equipment
(Rs. 40,70,000 – Rs.27,30,000) 13,40,000
Net cash used in investing activities (13,40,000)
Cash flows from Financing Activities
Bank loan raised (Rs. 3,00,000 – Rs. 1,50,000) 1,50,000
Issue of debentures 9,00,000
Payment of Dividend (Rs. 12,00,000 – Rs. 1,50,000) (10,50,000)
Net cash used in financing activities NIL
Net increase in cash during the year 6,20,000
Add: Cash and cash equivalents as on 1.4.2003
(Rs. 15,20,000 + Rs.11,80,000) 27,00,000
Cash and cash equivalents as on 31.3.2004
(Rs. 18,20,000 + Rs.15,00,000) 33,20,000

Note: Bad debts amounting Rs. 2,30,000 were written off against provision for doubtful debts
account during the year. In the above solution, Bad debts have been added back in the balances
of provision for doubtful debts and debtors as on 31.3.2004. Alternatively, the adjustment of writing
off bad debts may be ignored and the solution can be given on the basis of figures of debtors and
provision for doubtful debts as appearing in the balance sheet on 31.3.2004.
13.30 Accounting

Question 10
From the following balance sheets of Sneha Ltd. as on 31.3.2003 and 31.3.2004 prepare a
statement of sources and applications of fund and a schedule of changes in working capital for
the year ending 31.3.2004:
Balance Sheets
Liabilities 31.3.2003 31.3.2004 Assets 31.3.2003 31.3.2004
Rs. Rs. Rs. Rs.
Equity share capital 13,00,000 16,90,000 Goodwill 65,000 42,500
Profit and loss account 4,90,100 8,77,500 Building 11,70,000 11,37,500
10% Debentures 16,25,000 13,00,000 Machinery 16,18,500 21,38,500
Creditors 9,00,000 10,00,000 Non-trade investments 5,07,000 3,93,250
Bills payable 42,500 1,70,000 Debtors 4,16,000 11,70,000
Provision for tax 2,60,000 9,75,000 Stock 5,07,000 7,99,500
Dividend payable  42,250 Cash 2,60,000 2,92,500
Prepaid expenses 42,250 52,000
Debenture discount 31,850 29,000
46,17,600 60,54,750 46,17,600 60,54,750

The following additional information is given:

(i) Building Machinery
Rs. Rs.
Accumulated depreciation 31.3.2003 4,87,500 15,92,500
Accumulated depreciation 31.3.2004 5,20,000 15,66,500
Depreciation for 2003-2004 32,500 1,36,500

(ii) Profit and loss account for 2003-2004 is as follows:

Rs.
Balance as on 31.3.2003 4,90,100
Add: Profit for 2003-2004 4,71,900
9,62,000
Less: Dividend 84,500
8,77,500

(iii) During 2003-2004 machinery costing Rs. 2,92,500 was sold for Rs. 97,500.
(iv) Investments which were sold for Rs. 1,17,000 had cost Rs. 97,500.
(v) Provision for Taxation and Dividend are to be taken as Non-current liabilities.
(20 marks) (PE-II–Nov. 2004)
 Financial Analysis 13.31

Answer
(a) Sneha Ltd.
Fund Flow Statement
for the year ended 31st March, 2004
Amount (Rs.)
Sources of funds
Share capital 3,90,000
(Rs. 16,90,000  Rs. 13,00,000)
Sale of machinery 97,500
Sale of investments 1,17,000
Funds from operation (W.N. 1) 16,70,500
22,75,000
Applications of funds
Debentures redeemed 3,25,000
(Rs. 16,25,000  Rs. 13,00,000)
Machinery purchased (W.N. 4) 7,86,500

Tax paid 2,60,000
Dividend (Rs. 84,500  Rs. 42,250) 42,250
Increase in working capital 8,61,250
22,75,000
Schedule of Changes in Working Capital
for the year ended 31st March, 2004
Balance as on Changes in working capital
1.4.2003 31.3.2004 Increase Decrease
Rs. Rs. Rs. Rs.
Current Assets:
Debtors 4,16,000 11,70,000 7,54,000 
Stock 5,07,000 7,99,500 2,92,500 
Cash 2,60,000 2,92,500 32,500 
Prepaid expenses 42,250 52,000 9,750 
A 12,25,250 23,14,000
Current Liabilities:
Creditors 9,00,000 10,00,000 1,00,000


The provision for taxation has been treated as a non-current liability as per the requirement of the
question. Last year’s provision for taxation amounting Rs. 2,60,000 has been assumed to be paid in
the current year ended 31st March, 2004.
13.32 Accounting

Bills payable 42,500 1,70,000 1,27,500

B 9,42,500 11,70,000 10,88,750 2,27,500
Working capital (A – B) 2,82,750 11,44,000
Increase in working
capital ________ 8,61,250
10,88,750 10,88,750
Working Notes:
1. Statement showing funds generated from operations
(Rs.)
Increase in profit and loss account during the year 3,87,400
(Rs. 8,77,500 – Rs. 4,90,100)
Add: Non-cash expenditures
(1) Loss on sale of machinery (W.N. 4) 32,500
(2) Investments written off (W.N. 2) 16,250
(3) Provision for tax 9,75,000
(4) Depreciation
on building (Rs. 11,70,000 – Rs. 11,37,500) 32,500
on machinery (W.N. 3) 1,36,500 1,69,000
(5) Goodwill written off (Rs. 65,000 – Rs. 42,500) 22,500
(6) Debenture discount written off (Rs. 31,850 – Rs. 29,000) 2,850
(7) Dividend 84,500 13,02,600
16,90,000
Less: Non-cash incomes
(1) Profit on sale of investments (Rs. 1,17,000 – Rs. 97,500) 19,500
Funds from operations 16,70,500

2. Non Trade Investment Account

Dr. Cr.
Rs. Rs.
To Balance b/d 5,07,000 By Bank -Sale 1,17,000
To Profit on sale 19,500 By Profit and loss account –
(Rs. 1,17,000  Rs. 97,500) written off (balancing figure) 16,250
_______ By Balance c/d 3,93,250
5,26,500 5,26,500
 Financial Analysis 13.33

3. Provision for Depreciation on Machinery Account

Dr. Cr.
Rs. Rs.
To Machinery -sale 1,62,500 By Balance b/d 15,92,500
(balancing figure) By Depreciation 1,36,500
To Balance c/d 15,66,500
17,29,000 17,29,000

4. Machinery Account
Dr. Cr.
Rs. Rs.
To Balance b/d 16,18,500 By Bank (sale) 97,500
Add: Provision By Depreciation 1,62,500
for depreciation 15,92,500 32,11,000 By Loss on sale 32,500
To Bank -purchase By Balance c/d
(balancing figure) 7,86,500 W.D.V. 21,38,500
________ Add: Provision
for depreciation 15,66,500 37,05,000
39,97,500 39,97,500
Question 11
The following figures have been extracted from the Books of X Limited for the year ended on
31.3.2004. You are required to prepare a cash flow statement.
(i) Net profit before taking into account income tax and income from law suits but after
taking into account the following items was Rs. 20 lakhs:
(a) Depreciation on Fixed Assets Rs. 5 lakhs.
(b) Discount on issue of Debentures written off Rs. 30,000.
(c) Interest on Debentures paid Rs. 3,50,000.
(d) Book value of investments Rs. 3 lakhs (Sale of Investments for Rs. 3,20,000).
(e) Interest received on investments Rs. 60,000.
(f) Compensation received Rs. 90,000 by the company in a suit filed.
(ii) Income tax paid during the year Rs. 10,50,000.
(iii) 15,000, 10% preference shares of Rs. 100 each were redeemed on 31.3.2004 at a
premium of 5%. Further the company issued 50,000 equity shares of Rs. 10 each at a
premium of 20% on 2.4.2003. Dividend on preference shares were paid at the time of
redemption.
13.34 Accounting

(iv) Dividends paid for the year 2002-2003 Rs. 5 lakhs and interim dividend paid Rs. 3 lakhs
for the year 2003-2004.
(v) Land was purchased on 2.4.2003 for Rs. 2,40,000 for which the company issued 20,000
equity shares of Rs. 10 each at a premium of 20% to the land owner as consideration.
(vi) Current assets and current liabilities in the beginning and at the end of the years were as
detailed below:
As on 31.3.2003 As on 31.3.2004
Rs. Rs.
Stock 12,00,000 13,18,000
Sundry Debtors 2,08,000 2,13,100
Cash in hand 1,96,300 35,300
Bills receivable 50,000 40,000
Bills payable 45,000 40,000
Sundry Creditors 1,66,000 1,71,300
Outstanding expenses 75,000 81,800
(20 marks) (PE-II – May 2005)
Answer
X Ltd.
Cash Flow Statement
for the year ended 31st March, 2004
Rs. Rs.
Cash flow from Operating Activities
Net profit before income tax and extraordinary items: 20,00,000
Adjustments for:
Depreciation on fixed assets 5,00,000
Discount on issue of debentures 30,000
Interest on debentures paid 3,50,000
Interest on investments received (60,000)
Profit on sale of investments (20,000) 8,00,000
Operating profit before working capital changes 28,00,000
Adjustments for:
Increase in stock (1,18,000)
Increase in sundry debtors (5,100)
Decrease in bills receivable 10,000
Decrease in bills payable (5,000)
Increase in sundry creditors 5,300
 Financial Analysis 13.35

Increase in outstanding expenses 6,800

(1,06,000)
Cash generated from operations 26,94,000
Income tax paid (10,50,000)
16,44,000
Cash flow from extraordinary items:
Compensation received in a suit filed 90,000
Net cash flow from operating activities 17,34,000

Cash flow from Investing Activities

Sale proceeds of investments 3,20,000
Interest received on investments 60,000
Net cash flow from investing activities 3,80,000
Cash flow from Financing Activities
Proceeds by issue of equity shares at 20% premium 6,00,000
Redemption of preference shares at 5% premium (15,75,000)
Preference dividend paid (1,50,000)
Interest on debentures paid (3,50,000)
Dividend paid (5,00,000 + 3,00,000) (8,00,000)
Net cash used in financing activities (22,75,000)
Net decrease in cash and cash equivalents during the year (1,61,000)
Add: Cash and cash equivalents as on 31.3.2003 1,96,300
Cash and cash equivalents as on 31.3.2004 35,300
Note: Purchase of land in exchange of equity shares (issued at 20% premium) has not been
considered in the cash flow statement as it does not involve any cash transaction.
Question 12
Raj Ltd. gives you the following information for the year ended 31st March, 2006:
(i) Sales for the year Rs.48,00,000. The Company sold goods for cash only.
(ii) Cost of goods sold was 75% of sales.
(iii) Closing inventory was higher than opening inventory by Rs.50,000.
(iv) Trade creditors on 31.3.2006 exceed the outstanding on 31.3.2005 by Rs.1,00,000.
13.36 Accounting

(v) Tax paid during the year amounts to Rs.1,50,000.

(vi) Amounts paid to Trade creditors during the year Rs.35,50,000.
(vii) Administrative and Selling expenses paid Rs.3,60,000.
(viii) One new machinery was acquired in December, 2005 for Rs.6,00,000.
(ix) Dividend paid during the year Rs.1,20,000.
(x) Cash in hand and at Bank on 31.3.2006 Rs.70,000.
(xi) Cash in hand and at Bank on 1.4.2005 Rs.50,000.
Prepare Cash Flow Statement for the year ended 31.3.2006 as per the prescribed Accounting
standard. (12 Marks) (PE-II – May 2006)
Answer
Cash flow statement of Raj Limited
for the year ended 31.3.2006
Direct Method
Rs. Rs.
Cash flow from operating activities:
Cash receipt from customers (sales) 48,00,000
Cash paid to suppliers and expenses
(Rs.35,50,000 + Rs.3,60,000) 39,10,000
Cash flow from operation 8,90,000
Less: Tax paid 1,50,000
Net cash from operating activities 7,40,000
Cash flow from investing activities:
Purchase of fixed assets (6,00,000)
Net cash used in investing activities (6,00,000)
Cash flow from financing activities:
Dividend Paid (1,20,000)
Net cash from financing activities (1,20,000)
20,000
Add: Opening balance of Cash in Hand and at Bank 50,000
Cash in Hand and at Bank on 31.3.2006 70,000
 Financial Analysis 13.37

Question 13
The following are the summarized Balance Sheets of ‘X’ Ltd. as on March 31, 2005 and 2006:
Liabilities As on 31.3.2005 As on 31.3.2006
(Rs.) (Rs,.)
Equity share capital 10,00,000 12,50,000
Capital Reserve --- 10,000
General Reserve 2,50,000 3,00,000
Profit and Loss A/c 1,50,000 1,80,000
Long-term loan from the Bank 5,00,000 4,00,000
Sundry Creditors 5,00,000 4,00,000
Provision for Taxation 50,000 60,000
Proposed Dividends 1,00,000 1,25,000
25,50,000 27,25,000

Assets Year Year

2005 2006
(Rs.) (Rs.)
Land and Building 5,00,000 4,80,000
Machinery 7,50,000 9,20,000
Investment 1,00,000 50,000
Stock 3,00,000 2,80,000
Sundry Debtors 4,00,000 4,20,000
Cash in Hand 2,00,000 1,65,000
Cash at Bank 3,00,000 4,10,000
25,50,000 27,25,000
Additional Information:
(i) Dividend of Rs.1,00,000 was paid during the year ended March 31, 2006.
(ii) Machinery during the year purchased for Rs.1,25,000.
(iii) Machinery of another company was purchased for a consideration of Rs.1,00,000
payable in equity shares.
(iv) Income-tax provided during the year Rs.55,000.
13.38 Accounting

(v) Company sold some investment at a profit of Rs.10,000, which was credited to Capital
reserve.
(vi) There was no sale of machinery during the year.
(vii) Depreciation written off on Land and Building Rs.20,000.
From the above particulars, prepare a cash flow statement for the year ended March, 2006 as
per AS 3 (Indirect method). (16 Marks) (PE-II - Nov. 2006)
Answer
Cash Flow Statement for the year ending on March 31, 2006
Rs. Rs.
I. Cash flows from Operating Activities
Net profit made during the year (W.N.1) 2,60,000
Adjustment for depreciation on Machinery (W.N.2) 55,000
Adjustment for depreciation on Land & Building 20,000
Operating profit before change in Working Capital 3,35,000
Decrease in Stock 20,000
Increase in Sundry Debtors (20,000)
Decrease in Sundry Creditors (1,00,000)
Income-tax paid (45,000)
Net cash from operating activities 1,90,000
II. Cash flows from Investing Activities
Purchase on Machinery (1,25,000)
Sale of Investments 60,000 (65,000)
III. Cash flows from Financing Activities
Issue of equity shares (2,50,000-1,00,000) 1,50,000
Repayment of Long term loan (1,00,000)
Dividend paid (1,00,000) (50,000)
Net increase in cash and cash equivalent 75,000
Cash and cash equivalents at the beginning of the period 5,00,000
Cash and cash equivalents at the end of the period 5,75,000
 Financial Analysis 13.39

Working Notes:
(i) Net Profit made during the year ended 31.3.2006
Increase in P & L (Cr.) Balance 30,000
Add: Transfer to general reserve 50,000
Add: Provision for taxation made during the year 55,000
Add: Provided for proposed dividend during the year 1,25,000
2,60,000
(ii) Machinery Account
Rs. Rs.
To Balance b/d 7,50,000 By Depreciation 55,000
(Bal. Fig.)
To Bank 1,25,000 By Balance c/d 9,20,000
To Equity share capital 1,00,000
9,75,000 9,75,000
(iii) Provision for Taxation Account
Rs. Rs.
To Cash (Bal. Fig.) 45,000 By Balance b/d 50,000
To Balance c/d 60,000 By P & L A/c 55,000
1,05,000 1,05,000
(iv) Proposed Dividend Account
Rs. Rs.
To Bank 1,00,000 By Balance b/d 1,00,000
To Balance c/d 1,25,000 By P & L A/c (Bal. Fig.) 1,25,000
2,25,000 2,25,000
(v) Investment Account
Rs. Rs.
To Balance b/d 1,00,000 By Bank A/c 60,000
To Capital Reserve A/c (Profit (Balancing figure for
on sale of investment) 10,000 investment sold)
By Balance c/d 50,000
1,10,000 1,10,000
 14
ACCOUNTS FROM INCOMPLETE RECORDS

Question 1
K. Azad, who is in business as a wholesaler in sunflower oil, is a client of your accounting firm. You
are required to draw up his final accounts for the year ended 31.3.1996.
From the files, you pick up his Balance Sheet as at 31.3.1995 reading as below:
Balance Sheet as at 31.3.1995
Liabilities Rs. Rs.
K. Azad’s Capital 1,50,000
Creditors for Oil Purchases 2,00,000
12% Security Deposit from Customers 50,000
Creditors for Expenses :
Rent 6,000
Salaries 4,000
Commission 20,000
4,30,000
Assets
Cash and Bank Balances 75,000
Debtors 1,60,000
Stock of Oil (125 tins) 1,25,000
Furniture 30,000
Less : Depreciation 3,000 27,000
Rent Advance 12,000
Electiricity Deposit 1,000
3–Wheeler Tempo Van 40,000
Less : Depreciation 10,000 30,000
4,30,000
14.2 Accounting

A Summary of the rough Cash Book of K. Azad for the year ended 31.3.1996 is as below :
Cash and Bank Summary
Receipts Rs.
Cash Sales 5,26,500
Collections from Debtors 26,73,500
Payments
To Landlord 79,000
Salaries 48,000
Miscellaneous Office Expenses 12,000
Commission 20,000
Personal Income–tax 50,000
Transfer on 1.10.95 to 12% Fixed Deposit 6,00,000
To Creditors for Oil Supplies 24,00,000
A scrutiny of the other records gives you the following information :
(i) During the year oil was purchased at 250 tins per month basis at a unit cost of Rs. 1,000. 5
tins were damaged in transit in respect of which insurance claim has been preferred. The
surveyors have since approved the claim at 80%. The damaged ones were sold for Rs. 1,500
which is included in the cash sales. One tin has been used up for personal consumption. Total
number of tins sold during the year was 3,000 at a unit price of Rs. 1,750.
(ii) Rent until 30.9.95 was Rs. 6,000 per month and was increased thereafter by Rs. 1,000 per
month. Additional advance rent of Rs. 2,000 was paid and this is included in the figure of
payments to landlord.
(iii) Provide depreciation at 10% and 25% of WDV on furniture and tempo van respectively.
(iv) It is further noticed that a customer has paid Rs. 10,000 on 31.3.96 as security deposit by
cash. One of the staff has defalcated. The claim against the Insurance Company is pending.
You are requested to prepare final accounts for the year ended 31.3.96
(20 marks) (Intermediate–May 1996)
Answer
In the books of K. Azad
Trading and Profit and Loss Account
for the year ended 31st March, 1996
Rs. Rs.
To Opening Stock 1,25,000 By Sales 52,50,000
To Purchases 30,00,000 By Damaged Stock A/c 5,000
Less : Transferred to By Closing Stock 1,19,000
drawings A/c 1,000 29,99,000
To Gross Profit c/d 22,50,000
53,74,000 53,74,000
To Salaries 44,000 By Gross Profit b/d 22,50,000
 Accounts from Incomplete Records 14.3

To Rent 78,000 By Interest accrued

To Miscellaneous Office Expenses 12,000 on fixed deposit 36,000
To Loss of Deposit 10,000 By Profit on Damaged Stock 500
To Interest on Security Deposits 6,000
To Depreciation :
Furniture 2,700
Tempo Van 7,500 10,200
To Capital A/c 21,26,300
(Net Profit Transferred)
22,86,500 22,86,500

Balance Sheet as on 31st March, 1996

Liabilities Amount Assets Amount
Rs. Rs. Rs. Rs.
K.Azad’s Capital Furniture 27,000
Balance 1,50,000 Less : Depreciation 2,700 24,300
Add : Net Profit 21,26,300
22,76,300 3–Wheeler Tempo Van 30,000
Less : Drawings 51,000 22,25,300 Less : Depreciation 7,500 22,500
12% Security Deposit from Customers 60,000 Closing Stock 1,19,000
Interest Payable on Security Deposit 6,000 Debtors 22,11,500
Creditors for Oil Purchases 8,00,000 Cash and Bank Balances 66,000
Outstanding Rent 7,000 Fixed Deposit 6,00,000
Interest Accrued on Fixed
Deposit 36,000
Rent Advance 14,000
Electricity Deposit 1,000
Insurance Claim Receivable 4,000
30,98,300 30,98,300
Working Notes :
(1) Memorandum Stock Account
No. Cost (Rs.) No. Cost (Rs.)
To Opening Stock 125 1,25,000 By Damages 5 5,000
To Purchases 3,000 30,00,000 By Drawings 1 1,000
By Sales 3,000 30,00,000
By Closing Stock 119 1,19,000
3,125 31,25,000 3,125 31,25,000
14.4 Accounting

(2) Damaged Stock Account

Rs. Rs.
To Trading Account 5,000 By Insurance Claim Receivable A/c 4,000
To Profit and Loss Account By Cash and Bank A/c (Sale) 1,500
(Balance Transferred) 500
5,500 5,500

(3) Debtors Account

Rs. Rs.
To Balance b/d 1,60,000 By Cash and Bank A/c 26,73,500
To Sales A/c 47,25,000 By Balance c/d 22,11,500
(Credit Sales*)
48,85,000 48,85,000
*Credit Sales in respect of (normal) sales of 3,000 tins
Total Sales (3000 × Rs. 1,750) = 52,50,000
Less : Cash Sales (5,26,500 – 1,500) = 5,25,000
47,25,000

(4) Creditors Account

Rs. Rs.
To Cash and Bank A/c 24,00,000 By Balance b/d 2,00,000
To Balance c/d 8,00,000 By Purchases A/c 30,00,000
32,00,000 32,00,000

(5) Cash and Bank Account

Rs. Rs.
To Balance b/d 75,000 By Rent A/c 79,000
To Sales A/c 5,25,000 By Salaries A/c 48,000
To Damaged Stock A/c 1,500 By Miscellaneous Office Expenses 12,000
To Debtors A/c 26,73,500 By Commission 20,000
To Security Deposit A/c 10,000 By Drawings A/c 50,000
(Personal Income–tax)
By Fixed Deposit A/c 6,00,000
By Creditors A/c 24,00,000
By Loss of deposit A/c 10,000
(Defalcation of security deposit)
By Balance c/d 66,000
32,85,000 32,85,000
 Accounts from Incomplete Records 14.5

Notes :
(1) 12% interest on Fixed Deposit is assumed to be per annum. Similar assumption applies to
12% Security Deposit from customers.
(2) The treatment of claim pending against the Insurance Company in respect of defalcation of
security deposit by one of the staff has been considered on the basis of Conservatism
Concept. Conservatism suggests non–consideration of claim as an asset in anticipation.
Where the ability to assess the ultimate collection with reasonable certainly is lacking at the
time of raising any claim, revenue recognition is postponed to the extent of uncertainty
involved (AS 9). In this case, it may reasonably assumed that collectability of claim is not
certain.
Question 2
The following is the Balance Sheet of Sanjay, a small trader as on 31.3.96 :
(Figures in Rs. ‘000)
Liabilities Rs. Assets Rs.
Capital 200 Fixed Assets 145
Creditors 50 Stock 40
Debtors 50
Cash in Hand 5
Cash at Bank 10
250 250
A fire destroyed the accounting records as well as the closing cash of the trader on 31.3.97.
However, the following information was available :
(a) Debtors and creditors on 31.3.97 showed an increase of 20% as compared to 31.3.96.
(b) Credit Period :
Debtors – 1 month Creditors – 2 months
(c) Stock was maintained at the same level throughout the year.
(d) Cash sales constituted 20% of total sales.
(e) All purchases were for credit only.
(f) Current ratio as on 31.3.97 was exactly 2.
(g) Total expenses excluding depreciation for the year amounted to Rs. 2,50,000.
(h) Depreciation was provided at 10% on the closing value of fixed assets.
(i) Bank and cash transactions :
(1) Payments to creditors included Rs. 50,000 by cash.
(2) Receipts from debtors included Rs. 5,90,000 by way of cheques.
(3) Cash deposited into the bank Rs. 1,20,000.
14.6 Accounting

(4) Personal drawings from bank Rs. 50,000.

(5) Fixed assets purchased and paid by cheques Rs. 2,25,000.
You are required to prepare :
(a) The Trading and Profit & Loss Account of Sanjay for the year ended 31.3.97 and
(b) A Balance Sheet on that date.
For your exercise, assume cash destroyed by fire is written off in the Profit and Loss Account
(20 marks) (Intermediate–May 1997)
Answer
Books of Sanjay
Trading and Profit & Loss A/c
for the year ended 31.3.97
(Rs. ‘000) (Rs. ‘000)
To Opening Stock 40 By Sales
To Purchases 360 Cash 180
To Gross Profit 540 Credit 720 900
By Closing Stock 40
940 940
To Expenses 250 By Gross Profit 540
To Depreciation 37
To Cash destroyed 10
To Net Profit 243
540 540
Balance Sheet as on 31.3.97
Liabilities (Rs ‘000) Assets (Rs ‘000)
Capital 200 Fixed Assets
Add : Net Profit 243 Less : Depreciation (145 + 225 – 37) 333
443 Stock 40
Less : Drawings 50 393 Debtors 60
Creditors 60 Cash at Bank 20
453 453
Working Notes : Cash & Bank A/c
(Rs. ‘000)
Cash Bank Cash Bank
 Accounts from Incomplete Records 14.7

To Balance b/d 5 10 By Creditors 50 300

To Debtors 120 590 By Drawings – 50
To Cash Sales 180 – By Bank (c) 120
To Cash (c) – 120 By Expenses 125 125*
By Assets – 225
By Cash Destroyed 10*
By Balance c/d – 20
305 720 305 720
* balancing figures
Other computations
(1) Debtors Opening balance = Rs. 50,000
Closing balance = Rs. 50,000 + 20% = Rs. 60,000
Credit Sales = Rs. 60,000 × 12 = Rs. 7,20,000
Total Sales = 7,20,000/80% = Rs. 9,00,000
Cash Sales = Rs. 9,00,000 × 20% = Rs. 1,80,000
Receipt of cash from debtors
(50,000 + 7,20,000 – 60,000 – 5,90,000) = Rs. 1,20,000
(2) Creditors Opening balance = Rs. 50,000
Closing balance = Rs. 50,000 + 20% = Rs. 60,000
Credit Purchase = Rs. 60,000 × 6 = Rs. 3,60,000
Payment by cheque
(50,000 + 3,60,000 – 60,000 – 50,000) = Rs. 3,00,000
(3) Closing Bank Balance :
Creditors i.e. current liability = Rs. 60,000
Current assets = Rs. 60,000 × 2 = Rs. 1,20,000
Bank Balance = Current assets – Stock – Debtors
= 1,20,000 – 40,000 – 60,000 = Rs. 20,000
(4) Expenses by cheque : (Balancing figure in Bank A/c)
(Figure Rs. ‘000) (10 + 590 + 120 – 300 – 50 – 225 – 20) = 125
Expenses by cash = 250–125 = 125
(5) Cash destroyed = (balancing figure in Cash A/c)
(Figure Rs. ‘000) (5 + 120 + 180 – 50 – 120 – 125) = 10
14.8 Accounting

Question 3
Shri Rashid furnishes you with the following information relating to his business :
(a) Assets and liabilities as on 1.1.1997 31.12.1997
Rs. Rs.
Furniture (w.d.v) 6,000 6,350
Stock at cost 8,000 7,000
Sundry Debtors 16,000 ?
Sundry Creditors 11,000 15,000
Prepaid expenses 600 700
Unpaid expenses 2,000 1,800
Cash in hand and at bank 1,200 625
(b) Receipts and payments during 1997 :
Collections from debtors, after allowing discount of Rs. 1,500 amounted to Rs. 58,500.
Collections on discounting of bills of exchange, after deduction of discount of Rs. 125 by the
bank, totalled to Rs. 6,125.
Creditors of Rs. 40,000 were paid Rs. 39,200 in full settlement of their dues.
Payment for freight inwards Rs. 3,000.
Amounts withdrawn for personal use Rs. 7,000.
Payment for office furniture Rs. 1,000.
Investment carrying annual interest of 4% were purchased at Rs. 96 on 1st July, 1997 and
payment made therefor.
Expenses including salaries paid Rs. 14,500.
Miscellaneous receipts Rs. 500.
(c) Bills of exchange drawn on and accepted by customers during the year amounted to Rs.
10,000. Of these, bills of exchange of Rs. 2,000 were endorsed in favour of creditors. An
endorsed bill of exchange of Rs. 400 was dishonoured.
(d) Goods costing Rs. 900 were used as advertising materials.
(e) Goods are invariably sold to show a gross profit of 331/3% on sales.
(f) Difference in cash book, if any, is to be treated as further drawing or introduc-
tion by Shri Rashid.
(g) Provide at 2.5% for doubtful debts on closing debtors.
Rashid asks you to prepare trading and profit and loss a/c for the year ended 31st December, 1997
and the balance sheet as on that date.
(20 marks) (Intermediate May 1998)
 Accounts from Incomplete Records 14.9

Answer
Trading and Profit and Loss Account of Shri Rashid
for the year ended 31st December, 1997
Rs. Rs.
To Opening Stock 8,000 By Sales 73,050
To Purchases 45,600 By Closing stock 7,000
Less : For advertising 900 44,700
To Freight inwards 3,000
To Gross profit c/d 24,350
80,050 80,050
To Sundry expenses 14,200 By Gross profit b/d 24,350
To Advertisement 900 By Interest on investment 2

To Discount allowed –  4 1
 Rs.100   
 100 2 
Debtors 1,500 By Discount received 800
Bills Receivable 125 1,625 By Miscellaneous income 500
To Depreciation on furniture 650
To Provision for doubtful debts 486
To Net Profit 7,791
25,652 25,652
Balance Sheet as on 31st December, 1997
Liabilities Amount Assets Amount
Rs. Rs.
Capital as on 1st January, 1997 18,800 Furniture (w.d.v.) 6,000
Additions during the year 1,000
Less : Drawings 7,904 7,000
10,896 Less : Depreciation 650 6,350
Add : Net Profit 7,791 18,687 Investment 96
Sundry creditors 15,000 Interest accrued 2
Outstanding expenses 1,800 Closing Stock 7,000
Sundry debtors 19,450
Less : Provision for
doubtful debts 486 18,964
14.10 Accounting

Bills receivable 1,750

Cash in hand and at bank 625
Prepaid expenses 700
35,487 35,487
Working Notes :
(1) Capital on 1st January, 1997

Balance Sheet as on 1st January, 1997

Liabilities Rs. Assets Rs.
Capital (Balancing figure) 18,800 Furniture (w.d.v.) 6,000
Creditors 11,000 Stock at cost 8,000
Outstanding expenses 2,000 Sundry debtors 16,000
Cash in hand and at bank 1,200
Prepaid expenses 600
31,800 31,800
(2) Purchases made during the year

Sundry Creditors Account

Rs. Rs.
To Cash and bank A/c 39,200 By Balance b/d 11,000
To Discount received A/c 800 By Sundry debtors A/c 400
To Bills Receivable A/c 2,000 By Purchases A/c 45,600
To Balance c/d 15,000 (Balancing figure)
57,000 57,000
(3) Sales made during the year
Rs.
Opening stock 8,000
Purchases 45,600
Less : For advertising 900 44,700
Freight inwards 3,000
55,700
Less : Closing stock 7,000
Cost of goods sold 48,700
Add : Gross profit (@ 50% on cost) 24,350
73,050
 Accounts from Incomplete Records 14.11

(4) Debtors on 31.12.1997

Sundry Debtors Account
Rs. Rs.
To Balance b/d 16,000 By Cash and bank A/c 58,500
To Sales A/c 73,050 By Discount allowed A/c 1,500
To Sundry creditors A/c By Bills receivable A/c 10,000
(bill dishonoured) 400 By Balance c/d (Balancing figure) 19,450
89,450 89,450

(5) Additional drawings by Mr. Rashid

Cash and Bank Account

Rs. Rs.
To Balance b/d 1,200 By Freight inwards A/c 3,000
To Sundry debtors A/c 58,500 By Furniture A/c 1,000
To Bills Receivable A/c 6,125 By Investment A/c 96
To Miscellaneous income A/c 500 By Expenses A/c 14,500
By Creditors A/c 39,200
By Drawings A/c 7,904
[Rs. 7,000 + Rs. 904
(Additional drawings)]
By Balance c/d 625
66,325 66,325

(6) Amount of expenses debited to Profit and Loss A/c

Expenses Account
Rs. Rs.
To Prepaid expenses A/c 600 By Outstanding expenses A/c 2,000
(on 1.1.1997) (on 1.1.1997)
To Bank A/c 14,500 By Profit and Loss A/c
To Outstanding expenses A/c 1,800 (Balancing figure) 14,200
(on 31.12.1997) By Prepaid expenses A/c 700
(on 31.12.1997)
16,900 16,900
14.12 Accounting

(7) Bills Receivable on 31.12.1997

Bills Receivable Account

Rs. Rs.
To Debtors A/c 10,000 By Creditors A/c 2,000
By Bank A/c 6,125
By Discount on bills receivable A/c 125
By Balance c/d (Balancing figure) 1,750
10,000 10,000
Note : As regards investment, it has been assumed that investment purchased for Rs. 96 was of
the face value Rs. 100.
Question 4
The following is the Balance Sheet of the retail business of Sri Srinivas as at 31st December, 1998:
Liabilities Rs. Assets Rs.
Sri Srinivas’s capital 1,00,000 Furniture 10,000
Liabilities for goods 20,500 Stock 70,000
Rent 1,000 Debtors 25,000
Cash at bank 14,500
Cash in hand 2,000
1,21,500 1,21,500
You are furnished with the following information :
(1) Sri Srinivas sells his goods at a profit of 20% on sales.
(2) Goods are sold for cash and credit. Credit customers pay by cheques only.
(3) Payments for purchases are always made by cheques.
(4) It is the practice of Sri Srinivas to send to the bank every weekend the collections of the week
after paying every week, salary of Rs. 300 to the clerk, Sundry expenses of Rs. 50 and
personal expenses Rs. 100.
Analysis of the Bank Pass–Book for the 13 weeks period ending 31st March, 1999 disclosed the
following :
Rs.
Payments to creditors 75,000
Payments of rent upto 31.3.99 4,000
Amounts deposited into the bank 1,25,000
(include Rs. 30,000 received from debtors by cheques)
The following are the balances on 31st March, 1999 :
 Accounts from Incomplete Records 14.13

Rs.
Stock 40,000
Debtors 30,000
Creditors for goods 36,500
On the evening of 31st March, 1999 the Cashier absconded with the available cash in the cash
box. There was no cash deposit in the week ended on that date.
You are required to prepare a statement showing the amount of cash defalcated by the Cashier
and also a Profit and Loss Account for the period ended 31st March, 1999 and a Balance Sheet as
on that date.
(12 marks)(Intermediate–May 1999)
Answer
Statement showing the amount of cash defalcated by the Cashier
Rs. Rs.
Cash balance as on 1.1.99 2,000
Add : Cash sales 1,16,250
1,18,250
Less : Salary to clerk (Rs. 300 × 13) 3,900
Sundry expenses (Rs. 50 × 13) 650
Drawings of Sri Srinivas (Rs. 100 × 13) 1,300
Deposit into bank (Rs. 1,25,000 – Rs. 30,000) 95,000 1,00,850
Cash balance as on 31.3.99 (defalcated by cashier) 17,400
Trading and Profit and Loss Account of Sri Srinivas
for the 13 week period ended 31st March, 1999
Rs. Rs. Rs.
To Opening stock 70,000 By Sales :
To Purchases 91,000 Cash 1,16,250
To Gross Profit c/d 30,250 Credit 35,000 1,51,250
By Closing stock 40,000
191,250 1,91,250
To Salaries 3,900 By Gross profit b/d 30,250
To Rent (Rs. 4,000 – Rs. 1,000) 3,000
To Sundry Expenses 650
To Loss of cash by theft 17,400
To Net Profit 5,300
30,250 30,250
14.14 Accounting

Balance Sheet of Sri Srinivas

as on 31st March, 1999
Liabilities Rs. Assets Rs.
Capital as on 1.1.99 1,00,000 Furniture 10,000
Add : Profit 5,300 Stock 40,000
1,05,300 Debtors 30,000
Less : Drawings 1,300 1,04,000 Cash at bank 60,500
Liabilities for goods 36,500
1,40,500 1,40,500
Working Notes :
(1) Purchases
Creditors Account
Rs. Rs.
To Bank A/c 75,000 By Balance b/d 20,500
To Balance c/d 36,500 By Purchases A/c(Balancing figure) 91,000
1,11,500 1,11,500

(2) Total sales

Rs.
Opening stock 70,000
Add : Purchases 91,000
1,61,000
Less : Closing stock 40,000
Cost of goods sold 1,21,000
Add : Gross profit (@25% on cost) 30,250
Total Sales 1,51,250

(3) Credit Sales

Debtors Account
Rs. Rs.
To Balance b/d 25,000 By Bank A/c 30,000
To Sales A/c (Balancing figure) 35,000 By Balance c/d 30,000
60,000 60,000
 Accounts from Incomplete Records 14.15

(4) Cash Sales

Rs.
Total sales 1,51,250
Less : Credit Sales 35,000
Cash sales 1,16,250

(5) Bank balance as on 31.3.99

Rs. Rs.
To Balance b/d 14,500 By Creditors A/c 75,000
To Debtors A/c 30,000 By Rent A/c 4,000
To Cash A/c 95,000 By Balance c/d 60,500
1,39,500 1,39,500
Notes :
1. All purchases are taken on credit basis.
2. In the absence of information about the rate of depreciation, no depreciation has been charged
on furniture. Alternatively, students may assume any appropriate rate of depreciation and
account for the charge.
3. The amount defalcated by the cashier may be treated as recoverable from him. In that case,
Rs. 17,400 may be shown as sundry advances on assets side in the Balance Sheet and net
profit for the 13 week period ending 31st March, 1999 would amount Rs. 22,700.
Question 5
Shri Kisan, a farmer, maintains a cash book, through which he records all receipts and payments
and a diary in which he records other relevant information. On 31st March, 1999 he had cash in
hand Rs. 1,000 and balance of Rs. 500 with local Grameen Bank. He also owed Rs. 600 to Beej
Bhandar for seeds purchased by that date.
During the year ended 31st March, 2000, he realised :
Rs.
Sale proceeds of crops 59,100
Sale proceeds of cattle and cattle products 12,500
Sale proceeds of wood and grass 3,000
Sale of cowdung 5,000
Receipt on account from Babu (a credit customer) 12,000
Grant from Zila Parishad for installing tubewell–cheque 10,000
During the year ended 31st March, 2000 he paid :
Wages 65,000
Beej Bhandar 600
Seeds, feeds and fertiliser 3,000
Power 5,000
14.16 Accounting

Land revenue 2,000

Tools purchased 2,500
Household expenses 10,000
During the year ended 31st March, 2000 his other transactions were :
Rs.
(i) Sale of crop to Babu on credit 20,000
(ii) Purchased on 25th March, 2000 from Beej Bhandar on credit of one
month seeds of 2,000
(iii) Efforts put in by self and family members on the farm were conser–
vatively valued at 60,000
(iv) Value of crop used for comsumption by :
Self and family 30,000
Agricultural labourers 40,000
On 31st March, 2000, his cash in hand was only Rs. 2,500
The rest was banked. He did not have any stock of seeds.
The tubewell for which the grant cheque was realised in the last week of March, 2000 is to be
installed in April, 2000.
Shri Kisan asks you to prepare his cash and income summaries for the year ended 31st March,
2000 and his statement of financial position as on that date.
(12 marks) (Intermediate–May 2000)
Answer
In the Books of Shri Kisan
Cash summary for the year ended on 31st March, 2000
Rs. Rs.
Opening balances (on 1st April, 1999) :
Cash in hand 1,000
Grameen Bank balance 500 1,500
Receipts :
Sale proceeds – Crops 59,100
Cattle and cattle products 12,500
Wood and grass 3,000
Cowdung 5,000
Collection from babu 12,000
Grant from Zila Parishad 10,000 1,01,600
1,03,100
Payments :
Farm expenses – Wages 65,000
Seeds, feeds and fertilizers 3,000
Power 5,000
 Accounts from Incomplete Records 14.17

Land revenue 2,000

Payment of Beej Bhandar 600
Tools purchased 2,500
Household expenses 10,000 88,100
Closing balances (on 31st March, 2000) :
Cash in hand 2,500
Grameen Bank balance (Balancing figure) 12,500 15,000
1,03,100
Income summary for the year ended on 31st March, 2000
Rs. Rs.
Revenues:
Sales – Crops (Cash sales : 59,100 + Credit sales : 20,000) 79,100
Cattle and cattle products 12,500
Wood and grass 3,000
Cowdung 5,000
Crop used for consumption –
Self and family 30,000
Agricultural labourers 40,000 1,69,600
Less : Expenses :
Wages 65,000
Consumption of crop by labourers 40,000
Seeds, feeds and fertiliser (Cash purchases : 3,000 + Credit
purchases : 2,000) 5,000
Power 5,000
Land revenue 2,000
Efforts of self and family members 60,000 1,77,000
Loss 7,400
Statement of financial position as on 31st March, 2000
Liabilities Rs. Assets Rs.
Farm household capital : Tools 2,500
Balance on 1.4.99 900 Debtors (Babu) 8,000
Add : Notional wages of self Cash in hand 2,500
and family members 60,000 Grameen bank balance 12,500
60,900
Less : Drawings :
Cash 10,000
Crop 30,000
14.18 Accounting

Loss as per
Income
summary 7,400 47,400 13,500
Grant (for tubewell) 10,000
Creditors (Beej Bhandar) 2,000
25,500 25,500
Working note :
Computation of Farm household capital on 1.4.99
Statement of financial position on 31.3.99
Rs. Rs.
Liability to Beej Bhandar 600 Cash in hand 1,000
Farm household capital Grameen bank balance 500
(Balancing figure) 900
1,500 1,500
Question 6
A trader keeps his books of account under single entry system. On 31st March, 2000 his statement
of affairs stood as follows :
Liabilities Rs. Assets Rs.
Trade Creditors 5,80,000 Furniture, Fixtures and Fittings 1,00,000
Bills Payable 1,25,000 Stock 6,10,000
Outstanding Expenses 45,000 Trade Debtors 1,48,000
Capital Account 2,50,000 Bills Receivable 60,000
Unexpired Insurance 2,000
Cash in Hand and at Bank 80,000
10,00,000 10,00,000
The following was the summary of Cash–book for the year ended 31st March, 2001 :
Receipts Rs. Payments Rs.
Cash in Hand and at Bank on Payments to Trade Creditors 75,07,000
1st April, 2001 80,000 Payments for Bills payable 8,15,000
Cash Sales 73,80,000 Sundry Expenses paid 6,20,700
Receipts from Trade Debtors 15,10,000 Drawings 2,40,000
Receipts for Bills Receivable 3,40,000 Cash in Hand and at Bank
on 31st March, 2001 1,27,300
93,10,000 93,10,000
Discount allowed to trade debtors and received from trade creditors amounted to Rs. 36,000 and
Rs. 28,000 respectively. Bills endorsed amounted to Rs. 15,000. Annual Fire Insurance premium of
Rs. 6,000 was paid every year on 1st August for the renewal of the policy. Furniture, fixtures and
fittings were subject to depreciation @ 15% per annum on diminishing balances method.
 Accounts from Incomplete Records 14.19

You are also informed about the following balances as on 31st March, 2001 :
Rs.
Stock 6,50,000
Trade Debtors 1,52,000
Bills Receivable 75,000
Bills Payable 1,40,000
Outstanding Expenses 5,000
The trader maintains a steady gross profit ratio of 10% on sales.
Prepare Trading and Profit and Loss Account for the year ended 31st March, 2001 and Balance
Sheet as at that date. (16 marks) (Intermediate–May 2001)
Answer
Trading and Profit and Loss Account
for the year ended 31st March, 2001
Rs. Rs.
To Opening Stock 6,10,000 By Sales
To Purchases (W.N. 3) 84,10,000 Cash 73,80,000
To Gross profit c/d 9,30,000 Credit (W.N. 2) 19,20,000 93,00,000
(10% of 93,00,000) By Closing stock 6,50,000
99,50,000 99,50,000
To Sundry expenses (W.N. 6) 5,80,700 By Gross profit b/d 9,30,000
To Discount allowed 36,000 By Discount received 28,000
To Depreciation 15,000
(15% Rs. 1,00,000)
To Net Profit 3,26,300
9,58,000 9,58,000
Balance Sheet as at 31st March, 2001
Liabilities Amount Assets Amount
Rs. Rs.
Capital Furniture & Fittings 1,00,000
Opening balance 2,50,000 Less : Depreciation 15,000 85,000
Less : Drawing 2,40,000 Stock 6,50,000
10,000 Trade Debtors 1,52,000
Add : Net profit for the years 3,26,300 3,36,300 Bills receivable 75,000
Bills payable 1,40,000 Unexpired insurance 2,000
Trade creditors 6,10,000 Cash in hand & at bank 1,27,300
Outstanding expenses 5,000
10,91,300 10,91,300
14.20 Accounting

Working Notes :
1. Bills Receivable Account
Rs. Rs.
To Balance b/d 60,000 By Cash 3,40,000
To Trade debtors 3,70,000 By Trade creditors 15,000
(Bills endorsed)
By Balance c/d 75,000
4,30,000 4,30,000
2. Trade Debtors Account
Rs. Rs.
To Balance b/d 1,48,000 By Cash/Bank 15,10,000
To Credit sales 19,20,000 By Discount allowed 36,000
(Balancing figure) By Bills receivable 3,70,000
By Balance c/d 1,52,000
20,68,000 20,68,000
3. Memorandum Trading Account
Rs. Rs.
To Opening stock 6,10,000 By Sales 93,00,000
To Purchases (Balancing figure) 84,10,000 By Closing stock 6,50,000
To Gross Profit (10% on sales) 9,30,000
99,50,000 99,50,000
4. Bills Payable Account
Rs. Rs.
To Cash/Bank 8,15,000 By Balance b/d 1,25,000
To Balance c/d 1,40,000 By Creditors (balancing figure) 8,30,000
9,55,000 9,55,000
5. Trade Creditors Account
Rs. Rs.
To Cash/Bank 75,07,000 By Balance b/d 5,80,000
To Discount received 28,000 By Purchases (as calculated 84,10,000
To Bills receivable 15,000 in W.N. 3)
To Bills payable 8,30,000
To Balance c/d (balancing figure) 6,10,000
89,90,000 89,90,000
 Accounts from Incomplete Records 14.21

6. Computation of sundry expenses to be charged to Profit & Loss A/c

Rs.
Sundry expenses paid (as per cash book) 6,20,700
Add : Prepaid expenses as on 31–3–2000 2,000
6,22,700
Less : Outstanding expenses as on 31–3–2000 45,000
5,77,700
Add : Outstanding expenses as on 31–3–2001 5,000
5,82,700
Less : Prepaid expenses as on 31–3–2001 (Insurance paid till July, 2001) 2,000
5,80,700
Question 7
The following is the Balance Sheet of a concern on 31st March, 2000 :
Rs. Rs.
Capital 10,00,000 Fixed Assets 4,00,000
Creditors (Trade) 1,40,000 Stock 3,00,000
Profit & Loss A/c 60,000 Debtors 1,50,000
Cash & Bank 3,50,000
12,00,000 12,00,000
The management estimates the purchases and sales for the year ended 31st March, 2001 as
under :
upto 28.2.2001 March 2001
Rs. Rs.
Purchases 14,10,000 1,10,000
Sales 19,20,000 2,00,000
It was decided to invest Rs. 1,00,000 in purchases of fixed assets, which are depreciated @ 10%
on cost.
The time lag for payment to Trade Creditors for purchase and receipt from Sales is one month. The
business earns a gross profit of 30% on turnover. The expenses against gross profit amount to
10% of the turnover. The amount of depreciation is not included in these expenses.
Draft a Balance Sheet as at 31st March, 2001 assuming that creditors are all Trade Creditors for
purchases and debtors for sales and there is no other item of current assets and liabilities apart
from stock and cash and bank balances. (8 marks)(Intermediate – Nov. 2001)
Answer
Projected Balance Sheet of ......
as on 31st March, 2001
Liabilities Rs. Assets Rs.
Capital 10,00,000 Fixed Assets 4,00,000
Profit & Loss Account as on Additions 1,00,000
1st April, 2000 60,000 5,00,000
14.22 Accounting

Add : Profit for the year 3,74,000 4,34,000 Less : Depreciation 50,000 4,50,000
Creditors (Trade) 1,10,000 Stock in trade 3,36,000
Sundry Debtors 2,00,000
Cash & Bank Balances 5,58,000
15,44,000 15,44,000
Working Notes:
1. Projected Trading and Profit and Loss Account
for the year ended 31st March, 2001
Rs. Rs.
To Opening Stock 3,00,000 By Sales 21,20,000
To Purchases 15,20,000 By Closing Stock (balancing figure) 3,36,000
To Gross Profit c/d (30% on 6,36,000
sales)
24,56,000 24,56,000
To Sundry Expenses (10% 2,12,000 By Gross Profit b/d 6,36,000
on sales)
To Depreciation 50,000
To Net Profit 3,74,000
6,36,000 6,36,000

2. Cash and Bank Account for the period

1st April, 2000 to 31st March, 2001
Rs. Rs.
To Balance b/d 3,50,000 By Sundry Creditors 15,50,000
To Sundry Debtors 20,70,000 (Rs. 1,40,000 + Rs. 14,10,000)
(Rs. 1,50,000 + Rs. 19,20,000) By Expenses 2,12,000
By Fixed Assets 1,00,000
By Balance c/d 5,58,000
24,20,000 24,20,000

Note : The entire sales and purchases are taken on credit basis.
Question 8
The following is the Balance Sheet of Sri Agni Dev as on 31st March, 2001:
Liabilities Rs. Assets Rs.
Capital Account 2,52,500 Machinery 1,20,000
Sundry Creditors for purchases 45,000 Furniture 20,000
Stock 33,000
 Accounts from Incomplete Records 14.23

Debtors 1,00,000
Cash in hand 8,000
_______ Cash at Bank 16,500
2,97,500 2,97,500
Riots occurred and fire broke out on the evening of 31st March, 2002, destroying the books of
account and Furniture. The cashier was grievously hurt and the cash available in the cash box
was stolen.
The trader gives you the following information:
(i) Sales are effected as 25% for cash and the balance on credit. His total sales for the year
ended 31st March, 2002 were 20% higher than the previous year. All the sales and
purchases of goods were evenly spread throughout the year (as also in the last year).
(ii) Terms of credit
Debtors 2 Months
Creditors 1 Month
(iii) Stock level was maintained at Rs. 33,000 all throughout the year.
(iv) A steady Gross Profit rate of 25% on the turnover was maintained throughout. Creditors are
paid by cheque only, except for cash purchase of Rs. 50,000.
(v) His private records and the Bank Pass-book disclosed the following transactions for the
year.
(i) Miscellaneous Business expenses Rs. 1,57,500 (including Rs. 5,000 paid
by cheque and Rs. 7,500 was
outstanding as on 31st March, 2002)
(ii) Repairs Rs. 3,500 (paid by cash)
(iii) Addition to Machinery Rs. 60,000 (paid by cheque)
(iv) Private drawings Rs. 30,000 (paid by cash)
(v) Travelling expenses Rs. 18,000 (paid by cash)
(vi) Introduction of additional capital by Rs. 5,000
depositing in to the Bank
(vi) Collection from debtors were all through cheques.
(vii) Depreciation on Machinery is to be provided @ 15% on the Closing Book Value.
(viii) The Cash stolen is to be charged to the Profit and Loss Account.
(ix) Loss of furniture is to be adjusted from the Capital Account.
14.24 Accounting

Prepare Trading, Profit and Loss Account for the year ended 31st March, 2002 and a Balance
Sheet as on that date. Make appropriate assumptions whenever necessary. All workings should
form part of your answer. (20 marks) (PE-II – Nov. 2002)
Answer
Trading and Profit and Loss Account of Sri. Agni Dev
for the year ended 31st March, 2002
Rs. Rs.
To Opening Stock 33,000 By Sales 9,60,000
To Purchases 7,20,000 By Closing Stock 33,000
To Gross Profit c/d 2,40,000 _______
9,93,000 9,93,000
To Business Expenses 1,57,500 By Gross Profit b/d 2,40,000
To Repairs 3,500
To Depreciation 27,000
To Travelling Expenses 18,000
To Loss by theft 1,500
To Net Profit 32,500 _______
2,40,000 2,40,000

Balance Sheet of Sri Agni Dev as at 31st March, 2002

Liabilities Rs. Rs. Assets Rs. Rs.
Capital 2,52,500 Machinery 1,80,000
Add: Additional Capital 5,000 Less: Depreciation 27,000 1,53,000
Net Profit 32,500
2,90,000 Stock in Trade 33,000
Less: Loss of Furniture 20,000 Sundry Debtors 1,20,000
Drawings 30,000 2,40,000
Bank Overdraft 2,667
Sundry Creditors 55,833
Outstanding Expenses 7,500 _______
3,06,000 3,06,000
 Accounts from Incomplete Records 14.25

Working Notes: Rs.

1. Sales during 2001-2002
Debtors as on 31st March, 2001 1,00,000
(Being equal to 2 months' sales)
Total credit sales in 2000- 2001, Rs. 1,00,000 × 6 6,00,000
Cash Sales, being equal to 1/3rd of credit sales or
1/4th of the total 2,00,000
Sales in 2000- 2001 8,00,000
Increase, 20% as stated in the problem 1,60,000
Total sales during 2001-2002 9,60,000
Cash sales : 1/4th 2,40,000
Credit sales : 3/4th 7,20,000
2. Debtors equal to two months credit sales 1,20,000
3. Purchases
Sales in 2001-2002 9,60,000
Gross Profit @ 25% 2,40,000
Cost of goods sold being purchases 7,20,000
(Since there is no change in stock level)

4. Sundry Creditors for goods

(Rs. 7,20,000 – Rs. 50,000) /12 = Rs. 6,70,000/12 55,833
5. Collections from Debtors
Opening Balance 1,00,000
Add: Credit Sales 7,20,000
8,20,000
Less: Closing Balance 1,20,000
7,00,000
6. Payment to Creditors
Opening Balance 45,000
Add: Credit Purchases (Rs. 7,20,000 – Rs. 50,000) 6,70,000
7,15,000
Less: Closing Balance 55,833
Payment by cheque 6,59,167
14.26 Accounting

7. Cash and Bank Account

Particulars Cash Bank Particulars Cash Bank
To Balance b/d 8,000 16,500 By Payment to Creditors 50,000 6,59,167

To Collection from – 7,00,000 By Misc. Expenses 1,45,000 5,000

Debtors

To Sales 2,40,000 – By Repairs 3,500 –

To Additional Capital – 5,000 By Addition to Machinery – 60,000

To Balance c/d – 2,667 By Travelling Expenses 18,000 –

(Bank overdraft) By Private Drawings 30,000 –

_______ _______ By Balance c/d (lost by theft) 1,500 _______

2,48,000 7,24,167 2,48,000 7,24,167

Question 9
Lucky does not maintain proper books of accounts. However, he maintains a record of his
bank transactions and also is able to give the following information from which you are
requested to prepare his final accounts for the year 2003:
1.1.2003 31.12.2003
Rs. Rs.
Debtors 1,02,500 
Creditors  46,000
Stock 50,000 62,500
Bank Balance  50,000
Fixed Assets 7,500 9,000

Details of his bank transactions were as follows:

Rs.
Received from debtors 3,40,000
Additional capital brought in 5,000
Sale of fixed assets (book value Rs. 2,500) 1,750
Paid to creditors 2,80,000
Expenses paid 49,250
Personal drawings 25,000
Purchase of fixed assets 5,000
No cash transactions took place during the year. Goods are sold at cost plus 25%. Cost of
goods sold was Rs. 2,60,000. (16 marks) (PE-II – Nov. 2004)
 Accounts from Incomplete Records 14.27

Answer
Trading and Profit and Loss Account
for the year ended 31st December, 2003
Amount Amount
Rs. Rs.
To Opening stock 50,000 By Sales (Rs. 2,60,000  125/100) 3,25,000
To Purchases (balancing By Closing stock 62,500
figure) 2,72,500
To Gross profit c/d
(Rs. 2,60,000  25/100) 65,000
_______ _______
3,87,500 3,87,500
To Expenses 49,250 By Gross profit b/d 65,000
To Loss on sale of fixed
assets 750
To Depreciation on fixed
assets (W.N.1) 1,000
To Net profit 14,000 ______
65,000 65,000

Balance Sheet as on 31st December, 2003

Amount Amount
Liabilities Rs. Assets Rs.
Capital (W.N. 5) 1,69,000 Fixed assets 9,000
Add: Additional capital 5,000 Debtors (W.N. 3) 87,500
Net profit 14,000 Stock 62,500
1,88,000 Bank balance 50,000
Less: Drawings 25,000 1,63,000
Creditors 46,000 _______
2,09,000 2,09,000

Working Notes:
1. Fixed assets account
Dr. Cr.
Rs. Rs.
To Balance b/d 7,500 By Bank (sale) 1,750
To Bank 5,000 By Loss on sale of fixed asset 750
By Depreciation (balancing figure) 1,000
14.28 Accounting

_____ By Balance c/d 9,000

12,500 12,500

2. Bank account
Dr. Cr.
Rs. Rs.
To Balance b/d (balancing figure) 62,500 By Creditors 2,80,000
To Debtors 3,40,000 By Expenses 49,250
To Capital 5,000 By Drawings 25,000
To Sale of fixed assets 1,750 By Fixed assets 5,000
_______ By Balance c/d 50,000
4,09,250 4,09,250
3. Debtors account
Dr. Cr.
Rs. Rs.
To Balance b/d 1,02,500 By Bank 3,40,000
To Sales 3,25,000 By Balance c/d 87,500
125 (balancing figure)
(Rs. 2,60,000  ) _______ _______
100
4,27,500 4,27,500

4. Creditors account
Dr. Cr.
Rs. Rs.
To Bank 2,80,000 By Balance b/d (balancing figure) 53,500
To Balance c/d 46,000 By Purchases (from trading account) 2,72,500
3,26,000 3,26,000

5. Balance Sheet as on 1st January, 2003

Liabilities Rs. Assets Rs.
Creditors (W.N. 4) 53,500 Fixed assets 7,500
Capital (balancing figure) 1,69,000 Debtors 1,02,500
Stock 50,000
_______ Bank balance (W.N. 2) 62,500
2,22,500 2,22,500
 Accounts from Incomplete Records 14.29

Question 10
The following information relates to the business of Mr. Shiv Kumar, who requests you to
prepare a Trading and Profit & Loss Account for the year ended 31st March, 2003 and a
Balance Sheet as on that date:
(a) Balance as on 31st Balance as on 31st
March, 2002 March, 2003
Rs. Rs.
Building 3,20,000 3,60,000
Furniture 60,000 68,000
Motorcar 80,000 80,000
Stocks – 40,000
Bills payable 28,000 16,000
Cash and Bank balances 1,80,000 1,04,000
Sundry Debtors 1,60,000 –
Bills receivable 32,000 28,000
Sundry Creditors 1,20,000 –

(b) Cash transactions during the year included the following besides certain other items:
Rs. Rs.
Sale of old papers and Cash purchases 48,000
miscellaneous income 20,000 Payment to creditors 1,84,000
Miscellaneous Trade Cash Sales 80,000
expenses (including salaries 80,000
etc.)
Collection from debtors 2,00,000

(c) Other information:

(i) Bills receivable drawn during the year amount to Rs. 20,000 and Bills payable accepted
Rs. 16,000.
(ii) Some items of old furniture, whose written down value on 31st March, 2002 was Rs.
20,000 was sold on 30th September, 2002 for Rs. 8,000. Depreciation is to be provided
on Building and Furniture @ 10% p.a. and on Motorcar @ 20% p.a. Depreciation on sale
of furniture to be provided for 6 months and for additions to Building for whole year.
14.30 Accounting

(iii) Of the Debtors, a sum of Rs. 8,000 should be written off as Bad Debt and a reserve for
doubtful debts is to be provided @ 2%.
(iv) Mr. Shivkumar has been maintaining a steady gross profit rate of 30% on turnover.
(v) Outstanding salary on 31st March, 2002 was Rs. 8,000 and on 31st March, 2003 was Rs.
10,000 on 31st March, 2002. Profit and Loss Account had a credit balance of Rs.
40,000.
(vi) 20% of total sales and total purchases are to be treated as for cash.
(vii) Additions in Furniture Account took place in the beginning of the year and there was no
opening provision for doubtful debts. (20 marks) (PE-II–Nov. 2003)
Answer
Trading and Profit and Loss Account of Mr. Shiv Kumar
for the year ended 31st March, 2003
Rs. Rs.
To Opening stock By Sales 4,00,000
(balancing figure) 80,000 By Closing stock 40,000
To Purchases 2,40,000
To Gross profit c/d
@ 30% on sales 1,20,000 _______
4,40,000 4,40,000
To Miscellaneous By Gross profit b/d 1,20,000
expenses (Rs.80,000 By Miscellaneous receipts 20,000
– Rs.8,000 + By Net loss transferred to
Rs.10,000) 82,000 Capital A/c 25,840
To Depreciation:
Building Rs. 36,000
Furniture Rs. 7,800
(Rs.6,800 + Rs.1,000)
Motor Car Rs. 16,000 59,800
To Loss on sale of
furniture 11,000
To Bad debts 8,000
To Provision for doubtful
debts 5,040
1,65,840 1,65,840
 Accounts from Incomplete Records 14.31

Balance Sheet of Mr. Shivkumar

as on 31st March, 2003
Liabilities Rs. Rs. Assets Rs. Rs.
Capital as on 1st April, Building 3,20,000
2002
7,16,000 Add: Addition during the
Profit and Loss A/c year 40,000
Opening balance 40,000 Less: Provision for 3,60,000
Less: Loss for the depreciation 36,000 3,24,000
year
25,840 14,160 Furniture 60,000
Sundry creditors 1,12,000 Less: Sold during the year 20,000
Bills payable 16,000 40,000
Outstanding salary 10,000 Add: Addition during the
year 28,000
68,000
Less: Depreciation 6,800 61,200
Motor car (at cost) 80,000
Less: Depreciation 16,000 64,000
Stock in trade 40,000
Sundry debtors 2,52,000
Less: Provision for
doubtful debts @ 2% 5,040 2,46,960
Bills receivable 28,000
_______ Cash in hand and at bank 1,04,000
8,68,160 8,68,160
Working Notes:
Sundry Debtors Account
Rs. Rs.
To Balance b/d 1,60,000 By Cash/Bank A/c 2,00,000
To Sales A/c 3,20,000 By Bills receivable A/c 20,000
By Bad debts A/c 8,000
By Balance c/d (balancing fig.) 2,52,000
4,80,000 4,80,000
14.32 Accounting

Sundry Creditors Account

Rs. Rs.
To Cash/Bank A/c 1,84,000 By Balance b/d 1,20,000
To Bills payable A/c 16,000 By Purchases A/c 1,92,000
To Balance c/d
(balancing figure) 1,12,000
3,12,000 3,12,000

Bills Receivable Account

Rs. Rs.
To Balance b/d 32,000 By Cash/ Bank A/c 24,000
To Sundry debtors 20,000 (balancing figure)
A/c
By Balance c/d 28,000
52,000 52,000

Bills Payable Account

Rs. Rs.
To Cash/Bank A/c 28,000 By Balance b/d 28,000
(balancing figure) By Sundry creditors A/c 16,000
To Balance c/d 16,000
44,000 44,000

Furniture Account
Rs. Rs.
To Balance b/d 60,000 By Bank/Cash A/c 8,000
To Bank A/c 28,000 By Depreciation A/c 1,000
By Profit and loss A/c (loss on sale) 11,000
By Depreciation A/c 6,800
By Balance c/d 61,200
88,000 88,000
 Accounts from Incomplete Records 14.33

Cash/Bank Account
Rs. Rs.
To Balance b/d 1,80,000 By Misc. trade expenses A/c 80,000
To Miscellaneous By Purchases A/c 48,000
receipts A/c 20,000 By Furniture A/c (balancing
To Sundry debtors A/c 2,00,000 figure) 28,000
To Sales A/c 80,000 By Sundry creditors A/c 1,84,000
To Furniture A/c (sale) 8,000 By Bills payable A/c 28,000
To Bills receivable A/c 24,000 By Building A/c 40,000
By Balance c/d 1,04,000
5,12,000 5,12,000

Opening Balance Sheet of Mr. Shivkumar

as on 31st March, 2002
Liabilities Rs. Assets Rs.
Capital (balancing figure) 7,16,000 Building 3,20,000
Profit and loss A/c 40,000 Furniture 60,000
Sundry creditors 1,20,000 Motor car 80,000
Bills payable 28,000 Stock in trade 80,000
Outstanding salary 8,000 Sundry debtors 1,60,000
Bills receivable 32,000
Cash in hand and at bank 1,80,000
9,12,000 9,12,000

Question 11
From the following furnished by Shri Ramji, prepare Trading and Profit and Loss account for the
year ended 31.3.2005. Also draft his Balance Sheet as at 31.3.2005:
1.4.2004 31.3.2005
Rs. Rs.
Creditors 3,15,400 2,48,000
Expenses outstanding 12,000 6,600
Fixed assets (includes machinery) 2,32,200 2,40,800
14.34 Accounting

Stock in hand 1,60,800 2,22,400

Cash in hand 59,200 24,000
Cash at bank 80,000 1,37,600
Sundry debtors 3,30,600 ?
Details of the year’s transactions are as follows:
Cash and discount credited to debtors 12,80,000
Returns from debtors 29,000
Bad debts 8,400
Sales (Both cash and credit) 14,36,200
Discount allowed by creditors 14,000
Returns to creditors 8,000
Capital introduced by cheque 1,70,000
Collection from debtors (Deposited into bank after receiving cash) 12,50,000
Cash purchases 20,600
Expenses paid by cash 1,91,400
Drawings by cheque 8,600
Machinery acquired by cheque 63,600
Cash deposited into bank 1,00,000
Cash withdrawn from bank 1,84,800
Cash sales 92,000
Payment to creditors by cheque 12,05,400
Note: Ramji has not sold any Fixed Asset during the year. (16 Marks) (PE-II - Nov. 2005)
Answer
In the books of Shri Ramji
Trading and Profit and Loss Account
for the year ended 31st March, 2005
Dr. Cr.
Rs. Rs. Rs. Rs.
To Opening 1,60,800 By Sales:
stock
To Purchases: Cash 92,000
Cash 20,600 Credit 13,44,200
Credit (W.N. 11,60,000 14,36,200
 Accounts from Incomplete Records 14.35

3)
11,80,600 Less: 29,000 14,07,200
Returns
Less: 8,000 11,72,600
Returns
To Gross Profit By Closing 2,22,400
c/d 2,96,200 stock
16,29,600 16,29,600

To Discount 30,000 By Gross profit 2,96,200

allowed b/d
To Bad debts 8,400 By Discount 14,000
To General expenses (W.N. 1,86,000
5)
To Depreciation (W.N. 4) 55,000
To Net profit 30,800 _______
3,10,200 3,10,200

Balance Sheet as at 31st March, 2005

Liabilities Rs. Assets Rs.
Capital (W.N. 1) 5,35,400 Sundry Assets 2,32,200
Add: Additional 1,70,000 Add: New
capital machinery 63,600
Net profit 30,800 2,95,800
7,36,200 Less: Depreciation 2,40,800
55,000
Less: Drawings 8,600 7,27,600 Stock in trade 2,22,400
Sundry creditors 2,48,000 Sundry debtors (W.N. 2) 3,57,400
Expenses outstanding 6,600 Cash in hand 24,000
_______ Cash in Bank 1,37,600
9,82,200 9,82,200
14.36 Accounting

Working Notes:
(1) Statement of Affairs as at 31st March, 2004
Liabilities Rs. Assets Rs.
Sundry creditors 3,15,400 Sundry Assets 2,32,200
Outstanding expenses 12,000 Stock 1,60,800
Ramji’s Capital Debtors 3,30,600
(Balancing figure) 5,35,400 Cash in hand 59,200
_______ Cash at Bank 80,000
8,62,800 8,62,800

(2) Sundry Debtors Account

Rs. Rs.
To Balance b/d 3,30,600 By Cash 12,50,000
To Sales (14,36,200 – 13,44,200 By Discount 30,000
92,000)
By Returns (sales) 29,000
By Bad debts 8,400
________ By Balance c/d (Balancing 3,57,400
figure)
16,74,800 16,74,800

(3) Sundry Creditors Account

Rs. Rs.
To Bank – Payments 12,05,400 By Balance b/d 3,15,400
To Discount 14,000 By Purchases credit 11,60,000
To Returns 8,000 (Balancing figure)
To Balance c/d (closing
balance) 2,48,000 ________
14,75,400 14,75,400

(4) Depreciation on Fixed Assets: Rs.

Opening balance 2,32,200
Add: Additions 63,600
 Accounts from Incomplete Records 14.37

2,95,800
Less: Closing balance 2,40,800
Depreciation 55,000

(5) Expenses to be shown in profit and loss account

Expenses (in cash) 1,91,400
Add: Outstanding of 2005 6,600
1,97,800
Less: Outstanding of 2004 12,000
1,86,000
(6) Cash and Bank Account
Cash Bank Cash Bank
Rs. Rs. Rs. Rs.
To Balance b/d 59,200 80,000 By Purchases 20,600 
To Capital 1,70,000 By Expenses 1,91,400
To Debtors 12,50,000 By Plant and 63,600
Machinery
To Bank 1,84,800 By Drawings 8,600
To Cash 1,00,000 By Creditors 12,05,400
To Sales By Cash 1,84,800
92,000
By Bank 1,00,000
_______ ________ By Balance c/d 24,000 1,37,600
3,36,000 16,00,000 3,36,000 16,00,000
Question 12
Mr. X runs a retail business. Suddenly he finds on 31.3.2006 that his Cash and Bank balances
have reduced considerably. He provides you the following information:
(i) Balances 31.3.2005 31.3.2006
Rs. Rs.
Sundry Debtors 35,400 58,800
Sundry Creditors 84,400 22,400
Cash at Bank 1,08,400 2,500
Cash in Hand 10,400 500
Rent (Outstanding for one month) 2,400 3,000
14.38 Accounting

Stock 11,400 20,000

Electricity and Telephone bills-outstanding -- 6,400

(ii) Bank Pass-book reveals the following Rs.

Total Deposits 10,34,000
Withdrawals:
Creditors 8,90,000
Professional charges 34,000
Furnitures and Fixtures (acquired on 1.10.05) 54,000
Proprietor’s drawings 1,61,900
(iii) Rent has been increased from January, 2006.
(iv) Mr. X deposited all cash sales and collections from debtors after meeting wages, shop
expenses, rent, electricity and telephone charges.
(v) Mr. X made all purchases on credit.
(vi) His credit sales during the year amounts to Rs.9,00,000.
(vii) He incurred Rs.6,500 per month towards wages.
(viii) He incurred following expenses:
(a) Electricity and telephone charges Rs.24,000 (paid)
(b) Shop expenses Rs.18,000 (paid).
(ix) Charge depreciation on furniture and fixtures @10% p.a.
Finalise the accounts of Mr. X and compute his profit for the year ended 31.3.2006. Prepare
his statement of affairs and reconcile the profit and capital balance.
(20 Marks) (PE-Ii – May 2006)
Answer
Trading and profit and Loss Account of Mr. X
For the year ended 31st March, 2006
Rs. Rs. Rs.
To Opening Stock 11,400 By Sales:
To Purchases 8,28,000 Cash 2,97,500
To Gross Profit 3,78,100 Credit 9,00,000 11,97,500
By Closing Stock 20,000
12,17,500 12,17,500
To Wages 78,000 By Gross Profit 3,78,100
To Rent* 30,600
 Accounts from Incomplete Records 14.39

To Electricity & Telephone** 30,400

To Professional charges 34,000
To Shop Expenses 18,000
To Depreciation 2,700
10 1
(Rs.54,000  )
100 2
To Net Profit 1,84,400
3,78,100 3,78,100

Rs.
*Rent Paid 30,000
Less: Outstanding on 1.4.2005 (2,400)
27,600
Add: Outstanding on 31.3.2006 3,000
30,600

Rs.
**Electricity & Telephone charges paid 24,000
Add: Outstanding on 31.3.2006 6,400
30,400

Statement of Affairs of Mr. X as on 31-03-2005 & 31-03-2006

Liabilities 31-3-2005 31-3-2006 Assets 31-3-2005 31-3-2006
Rs. Rs. Rs. Rs.
Capital Account Furniture - 51,300
(Balancing Figure) 78,800 1,01,300
Sundry Creditors 84,400 22,400 Stock 11,400 20,000
Outstanding Expenses: Sundry Debtors 35,400 58,800
Rent 2,400 3,000 Bank 1,08,400 2,500
Electricity & Telephone 6,400 Cash 10,400 500
1,65,600 1,33,100 1,65,600 1,33,100
14.40 Accounting

Reconciliation of Profit
Rs.
Capital on 31.03.2006 1,01,300
Add: Drawings 1,61,900
2,63,200
Less: Opening Capital on 1.4.2005 (78,800)
Profit for the year 1,84,400
Working Notes
1. Total Debtors Account
Rs. Rs.
To Balance b/d 35,400 By Cash (Balancing Figure) 8,76,600
To Credit Sales 9,00,000 By Balance c/d 58,800
9,35,400 9,35,400
2. Total Creditors Account
Rs. Rs.
To Bank 8,90,000 By Balance b/d 84,400
To Balance c/d 22,400 By Credit Purchases 8,28,000
9,12,400 9,12,400

3. Cash Account
Cash (Rs.) Bank (Rs.) Cash (Rs.) Bank (Rs.)
To Balance b/d 10,400 1,08,400 By Bank 10,34,000 -
To Sundry Debtors 8,76,600 - By Wages 78,000 -
To Cash Sales 2,97,500 - By Rent 30,000 -
(Balancing figure)
To Cash A/c (Contra) - 10,34,000 By Electricity & Telephone 24,000 -
By Shop Expenses 18,000 -
By Professional charges - 34,000
By Sundry Creditors A/c - 8,90,000
By Furniture - 54,000
By Drawings A/c - 1,61,900
By Balance c/d 500 2,500
11,84,500 11,42,400 11,84,500 11,42,400

Question 13
Mr. Ashok keeps his books in Single Entry system. From the following information, prepare
Trading and Profit & Loss Account for the year ended 31 st March, 2006 and the Balance Sheet
as on that date:
 Accounts from Incomplete Records 14.41

Assets and Liabilities 31.3.2005 31.3.2006

(Rs.) (Rs.)
Sundry Creditors 30,000 25,000
Outstanding expenses 1,000 500
Fixed Assets 23,000 22,000
Stock 16,000 22,500
Cash in Hand and at Bank 14,000 16,000
Sundry Debtors ? 36,000
Following further details are available for the Current year:
Rs. Rs.

Total receipts from debtors 1,30,000 Cash purchases 2,000
Returns inward 3,000 Fixed Assets purchased and
paid by cheque 1,000
Bad Debts 1,000 Drawings by cheques 6,500
Total Sales 1,50,000 Deposited into the bank 10,000
Discount received 1,500 Withdrawn from bank 18,500
Return outwards 1,000 Cash in hand at the end 2,500
Capital introduced Paid to creditors by cheques 1,20,000
(paid into Bank) 15,000 Expenses paid 20,000
Cheques received from Debtors 1,25,000
(16 Marks) (PE-II – Nov. 2006)
Answer
Trading and Profit and Loss Account
for the year ended on 31st March, 2006
Particulars Amount Particulars Amount
Rs. Rs.
To Opening Stock 16,000 By Sales:
To Purchases: Cash
(W.N.1) 6,500
Cash 2,000 Credit 1,43,500
Credit (W.N.3) 1,17,500 1,50,000
1,19,500 Less:Returns 3,000 1,47,000
Less: Returns 1,000 1,18,500 By Stock 22,500


The words given as “Cash receivable from debtors” in the question paper have been replaced by Total
receipts from debtors” to draw the final accounts.
14.42 Accounting

To Gross Profit c/d 35,000

1,69,500 1,69,500
To Expenses 20,000
Add: O/s at the end 500 By Gross profit b/d 35,000
20,500 By Discount received 1,500
Less: O/s at the beginning 1,000 19,500
To Bad debts 1,000
To Depreciation 2,000
To Net Profit 14,000
36,500 36,500

Balance Sheet
as on 31st March, 2006
Liabilities Amount Assets Amount
Rs. Rs.
Capital (W.N.5) 48,500 Fixed Assets 23,000
Add:Additional Add: Purchased during the 1,000
Capital 15,000 year
Add: Net Profit 14,000 Less: Depreciation 2,000 22,000
Less: Drawings 6,500 71,000 Stock 22,500
Creditors 25,000 Cash 2,500
Outstanding Exp. 500 Bank 13,500
_____ Debtors 36,000
96,500 96,500
Working Notes:
1. Cash Account
Particulars Amount Particulars Amount
Rs. Rs.
To Balance b/d 4,500 By Purchases 2,000
To Sales (Bal. Fig.) 6,500 By Bank (contra) 10,000
To Debtors 5,000 By Expenses 20,000
To Bank (contra) 18,500 By Balance c/d 2,500
34,500 34,500
 Accounts from Incomplete Records 14.43

2. Bank Account
Particulars Amount Particulars Amount
Rs. Rs.
To Balance b/d (Bal. Fig.) 9,500 By Fixed Assets 1,000
To Capital 15,000 By Drawings 6,500
To Cash (contra) 10,000 By Cash (contra) 18,500
To Debtors 1,25,000 By Creditors 1,20,000
By Balance c/d 13,500
1,59,500 1,59,500
3. Creditors Account
Particulars Amount Particulars Amount
Rs. Rs.
To Bank 1,20,000 By Balance b/d 30,000
To Returns 1,000 By Purchase (Bal. Fig.) 1,17,500
To Discount received 1,500
To Balance c/d 25,000
1,47,500 1,47,500
4. Debtors Account
Particulars Amount Particulars Amount
Rs. Rs.
To Balance b/d (Bal. Fig.) 26,500 By Cash 5,000
To Sales 1,43,500 By Bank 1,25,000
By Bad Debts 1,000
By Returns 3,000
By Balance c/d 36,000
1,70,000 1,70,000
5. Opening Balance Sheet as on 31.3.2005
Liabilities Amount Assets Amount
Rs. Rs.
Creditors 30,000 Fixed Assets 23,000
O/s Expenses 1,000 Stock 16,000
Capital (Bal. Fig.) 48,500 Cash 4,500
Bank (W.N.2) 9,500
Debtors (W.N.4) 26,500
79,500 79,500
14.44 Accounting

Question 14
‘A’ and ‘B’ are in partnership sharing profits and losses equally. They keep their books by
single entry system. The following balances are available from their books as on 31.3.2006
and 31.3.2007
31.3.2006 31.3.2007
Rs. Rs.
Building 1,50,000 1,50,000
Equipments 2,40,000 2,72,000
Furniture 25,000 25,000
Debtors ? 1,00,000
Creditors 65,000 ?
Stock ? 70,000
Bank loan 45,000 35,000
Cash 60,000 ?
The transactions during the year ended 31.3.2007 were the following:
Rs.
Collection from debtors 3,80,000
Payment to creditors 2,50,000
Cash purchases 65,000
Expenses paid 40,000
Drawings by ‘A’ 30,000

On 1.4.2006 an equipment of book value Rs.20,000 was sold for Rs.15,000. On 1.10.2006, some
equipments were purchased.
Cash sales amounted to 10% of sales.
Credit sales amounted to Rs.4,50,000.
Credit purchases were 80% of total purchases.
The firm sells goods at cost plus 25%.
Discount allowed Rs.5,500 during the year.
Discount earned Rs.4,800 during the year.
Outstanding expenses Rs.3,000 as on 31.3.2007.
Capital of ‘A’ as on 31.3.2006 was Rs.15,000 more than the capital of ‘B’, equipments and furniture
to be depreciated at 10% p.a. and building @ 2% p.a.
 Accounts from Incomplete Records 14.45

You are required to prepare:

(I) Trading and Profit and Loss account for the year ended 31.3.2007 and
(ii) The Balance Sheet as on that date. (PE II- Nov. 2007)(20 Marks)

Answer
Trading and Profit and Loss A/c for the year ended 31.3.2007
Rs. Rs.
To Opening stock 1,45,000 By Sales- Cash 50,000
(W.N.3) (W.N.1)
To Purchases-Cash 65,000 Credit 4,50,000 5,00,000
Credit (W.N.2) 2,60,000 3,25,000 By Closing stock 70,000
To Gross profit c/d 1,00,000
5,70,000 5,70,000
To Loss on sale of By Gross profit b/d 1,00,000
equipment 5,000
(20,000-15,000)
To Depreciation By Discount received 4,800
Building 3,000
Furniture 2,500
Equipment (W.N.4) 24,600 30,100
To Expenses paid 40,000
Add : Outstanding
expenses 3,000 43,000
To Discount allowed 5,500
To Net profit transferred
to: 10,600
A’s capital A/c
B’s capital A/c 10,600 21,200
1,04,800 1,04,800

Balance Sheet as on 31-3-2007

Liabilities Rs. Assets Rs.
A’s capital (W.N.7) 2,80,250 Building 1,50,000
Less: Drawings 30,000 Less: Depreciation 3,000 1,47,000
2,50,250 Equipments 2,72,000
14.46 Accounting

Add: Net profit 10,600 2,60,850 Less: Depreciation 24,600 2,47,400

B’s capital (W.N.7) 2,65,250 Furniture 25,000
Add: Net profit 10,600 2,75,850 Less: Depreciation 2,500 22,500
Sundry creditors (W.N.5) 70,200 Debtors 1,00,000
Bank loan 35,000 Stock 70,000
Outstanding expenses 3,000 Cash balance (W.N.8) 58,000
6,44,900 6,44,900
Working Notes:
1. Calculation of total sales and cost of goods sold
Cash sales = 10% of total sales
Credit sales = 90% of total sales = Rs.4,50,000
4,50,000
Total sales = 100  5,00,000
90
Cash sales = 10% of 5,00,000 = Rs.50,000
2. Calculation of total purchases and credit purchases
Cash purchases = Rs.65,000
Credit purchases = 80% of total purchases
Cash purchases = 20% of total purchases
65,000
Total purchases =  100  Rs.3,25,000
20
Credit purchases = 3,25,000 – 65,000 = Rs.2,60,000
3. Calculation of opening stock
Stock Account
Rs. Rs.
To Balance b/d (Bal. Fig.) 1,45,000 By Cost of goods sold
5,00,000
 100 4,00,000
125
To Total purchases (W.N.2) 3,25,000 By Balance c/d 70,000
4,70,000 4,70,000
 Accounts from Incomplete Records 14.47

4. Purchase of equipment & depreciation on equipments

Equipment Account
Rs. Rs.
To Balance b/d 2,40,000 By Cash -equipment sold 15,000
To Cash-purchase (Bal. Fig.) 52,000 By Profit and Loss Accounts
( Loss on sale) 5,000
By Balance c/d 2,72,000
2,92,000 2,92,000
Depreciation on equipment:
@ 10% p.a. on Rs.2,20,000 (i.e Rs.2,40,000 – Rs.20,000) = 22,000
@ 10% p.a. on Rs.52,000 for 6 months (i.e. during the year) = 2,600
24,600
5. Calculation of closing balance of creditors
Creditors Account
Rs. Rs.
To Cash 2,50,000 By Balance b/d 65,000
To Discount received 4,800 By Credit purchases (W.N.2) 2,60,000
To Balance c/d (Bal. Fig.) 70,200
3,25,000 3,25,000
6. Calculation of opening balance of debtors
Debtors Account
Rs. Rs.
To Balance b/d (Bal. Fig.) 35,500 By Cash 3,80,000
To Sales (Credit) 4,50,000 By Discount allowed 5,500
By Balance c/d 1,00,000
4,85,500 4,85,500
7. Calculation of capital accounts of A & B as on 31.3.2006
Balance Sheet as on 31.3.2006
Liabilities Rs. Assets Rs.
Combined Capital Accounts of Building 1,50,000
A & B (Bal. Fig.) 5,45,500
Creditors 65,000 Equipments 2,40,000
14.48 Accounting

Bank Loan 45,000 Furniture 25,000

Debtors (W.N.6) 35,500
Stock (W.N.3) 1,45,000
Cash balance 60,000
6,55,500 6,55,500
Rs.
Combined Capitals of A & B 5,45,500
Less: Difference in capitals of A and B 15,000
5,30,500
5,30,500
A’s Capital as on 31.3.2006 =  2,65,250  15,000  Rs.2,80,250
2
5,30,500
B’s Capital as on 31.3.2006 =  Rs.2,65,250
2
8. Cash Account
Rs. Rs.
To Balance b/d 60,000 By Creditors 2,50,000
To Debtors 3,80,000 By Purchases 65,000
To Equipment (sales) 15,000 By Expenses 40,000
To Cash sales (W.N.1) 50,000 By A’s drawings 30,000
By Bank loan paid 10,000
(45,000-35,000)
By Equipment purchased 52,000
(W.N.4)
By Balance c/d (Bal. Fig.) 58,000
5,05,000 5,05,000
Question 15
Following incomplete information of X Ltd. are given below:
Trading and Profit & Loss Account for the year ended 31st March, 2008
Rs.’000 Rs.’000
To Opening stock 700 By Sales ?
To Purchases ? By Closing stock ?
To Direct expenses 175
To Gross profit c/d ?
? ?
 Accounts from Incomplete Records 14.49

To Establishment expenses 740 By Gross profit b/d ?

To Interest on loan 60 By Commission 100
To Provision for taxation ?
To Net profit c/d ?
? ?
To Proposed dividends ? By Balance b/f 140
To Transfer to general reserve ? By Net profit b/d ?
To Balance transferred to Balance sheet ?
? ?
Balance Sheet as at 31 st March, 2008
Liabilities Amount Assets Amount
(Rs.’000) (Rs.’000)
Paid-up capital 1,000 Fixed assets:
General reserve: Plant & machinery 1,400
Balance at the beginning of ? Other fixed assets ?
the year
Proposed addition ? Current assets:
Profit and loss account ? Stock ?
10% Loan account ? Sundry debtors ?
Current liabilities ? Cash at bank 125
? ?
Other information:
(i) Current ratio is 2:1.
(ii) Closing stock is 25% of sales.
(iii) Proposed dividends to paid-up capital ratio is 2:3.
(iv) Gross profit ratio is 60% of turnover.
(v) Loan is half of current liabilities.
(vi) Transfer to general reserves to proposed dividends ratio is 1:1.
(vii) Profit carried forward is 10% of proposed dividends.
(viii) Provision for taxation is equal to the amount of net profit of the year.
(ix) Balance to credit of general reserve at the beginning of the year is twice the amount
transferred to that account from the current year’s profits.
14.50 Accounting

All working notes should be part of your answer. You are required to complete:
(i) Trading and Profit and Loss account for the year ended 31 st March, 2008 and
(ii) The Balance Sheet as on that date. (20 Marks)(May, 2008)
Answer
Trading and Profit & Loss A/c
for the year ended 31st March, 2008
(Rs. in (Rs. in
‘000s) ‘000s)
To Opening stock 700.00 By Sales (W.N.10) 5366.66
To Purchases (Bal. Fig.) 2613.33 By Closing stock (W.N.11) 1341.67
To Direct expenses 175.00
To Gross profit c/d (W.N.9) 3,220.00
6,708.33 6,708.33
To Establishment expenses 740.00 By Gross profit b/d (Bal. Fig.) 3,220.00
To Interest on loan 60.00 By Commission 100.00
To Provision for tax (W.N.8) 1,260.00
To Net profit c/d 1,260.00
3,320.00 3,320.00
To Proposed dividends (W.N.1) 666.67 By Balance b/f 140.00
To Transfer to general reserve 666.67 By Net profit b/d (Bal. Fig.) 1,260.00
(W.N.2)
To Balance transferred to
Balance sheet (W.N.3) 66.66
1,400.00 1,400.00

Balance Sheet as at 31st March, 2008

Liabilities (Rs. in Assets (Rs. in
‘000s) ‘000s)
Paid-up capital 1,000.00 Fixed assets:
General reserve: Plant & machinery 1,400.00
 Accounts from Incomplete Records 14.51

Balance at the beginning (W.N.14) 1333.34 Other fixed assets (Bal. Fig.) 1066.67
Proposed addition (W.N.2) 666.67 Current Assets:
Profit and loss A/c 66.66 Stock (W.N.11) 1341.67
10% Loan A/c (W.N.4) 600.00 Sundry debtors (W.N.13) 933.33
Current liabilities (W.N.5) 1,200.00 Cash at bank 125.00
4,866.67 4,866.67
Working Notes:
1. Proposed dividend to paid up capital is 2:3.
2
i.e. Proposed dividend = of paid up capital
3
2
= Rs.1,000.00 thousand × = Rs. 666.67 thousand
3
2. Transfer to General Reserve is equal to proposed dividend i.e., 1:1.
Proposed dividend is Rs.666.67 thousand,
therefore general reserve is also Rs. 666.67 thousand.
3. Profit carried forward to Balance Sheet = 10% of Proposed Dividend
i.e., Rs. 666.67 thousand × 10% = Rs.66.66 thousand
4. 10% Loan implies interest on loan being 10%
i.e. Rs.60.00 thousand × 100 = Rs.600.00 thousand
10
5. Loan is half of current liabilities which means current liabilities are twice of loan
i.e., Rs.600.00 thousand × 2 = Rs.1,200.00 thousand
6. Current Assets 2
Current Ratio i.e., = 2:1 or
Current Liabilities 1
i.e. Current Assets = 2 x Current Liabilities
or 2 x Rs.1,200.00 thousand = Rs.2,400.00 thousand
7. Current Net Profit (Rs. in ‘000s)
Proposed dividend 666.67
Transfer to general reserve 666.67
Profit and loss balance transferred to balance sheet 66.66
1,400.00
Less: Balance b/f 140.00
Net profit for the year 1,260.00
14.52 Accounting

8. Provision for taxation is equal to current net profit i.e., = Rs.1,260.00 thousand
9. Gross profit being balancing figure of Profit and Loss A/c = Rs.3,220.00 thousand
10. Gross profit = 60% of sales i.e.
Rs.3,220.00 thousand = 60% of sales
100
Or, sales = Rs.3,220 thousand  = Rs. 5,366.67 thousand
60
11. Closing stock is 25% of sales i.e., 25% of Rs. 5,366.67 thousand = Rs.1,341.67 thousand
12. Purchases being balancing figure of Trading A/c = Rs.2,613.33 thousand
13. Debtors = Current Assets – Closing Stock – Cash at Bank
= Rs.2,400.00 thousand – Rs.1,341.67 thousand – Rs.125.00 thousand
= Rs.933.33 thousand
14. Balance of general reserve at the beginning of the year is twice of the amount transferred to
general reserve during the year i.e. 2 x Rs.666.67 thousand = Rs.1,333.34 thousand
15. Other fixed assets = Total of balance sheet (liabilities side)- Current assets – Plant and
machinery
i.e., Rs.4,866.67 thousand - Rs.2,400.00 thousand – Rs.1,400.00 thousand
= Rs.1,066.67 thousand

Question 16
Ram carried on business as retail merchant. He has not maintained regular account books.
However, he always maintained Rs. 10,000 in cash and deposited the balance into the bank
account. He informs you that he has sold goods at profit of 25% on sales.
Following information is given to you:
Assets and Liabilities As on 1.4.2007 As on 31.3.2008
Cash in Hand 10,000 10,000
Sundry Creditors 40,000 90,000
Cash at Bank 50,000 (Cr.) 80,000 (Dr.)
Sundry Debtors 1,00,000 3,50,000
Stock in Trade 2,80,000 ?
Analysis of his bank pass book reveals the following information:
(a) Payment to creditors Rs. 7,00,000
(b) Payment for business expenses Rs. 1,20,000
(c) Receipts from debtors Rs. 7,50,000
(d) Loan from Laxman Rs. 1,00,000 taken on 1.10.2007 at 10% per annum
 Accounts from Incomplete Records 14.53

(e) Cash deposited in the bank Rs. 1,00,000

He informs you that he paid creditors for goods Rs. 20,000 in cash and salaries Rs. 40,000 in cash.
He has drawn Rs. 80,000 in cash for personal expenses. During the year Ram had not introduced
any additional capital. Surplus cash if any, to be taken as cash sales.
Prepare:
(i) Trading and Profit and Loss Account for the year ended 31.3.2008.
(ii) Balance Sheet as at 31 st March, 2008 (16 Marks) (PE I- Nov. 2008)
Answer
Trading and Profit and Loss Account
for the year ended 31st March, 2008
Rs. Rs.
To Opening stock 2,80,000 By Sales
To Purchases 7,70,000 Cash
2,40,000
To Gross Profit @ 25% 3,10,000 Credit 10,00,000 12,40,000
By Closing Stock 1,20,000
13,60,000 13,60,000

To Salaries 40,000 By Gross Profit 3,10,000

To Business expenses 1,20,000
To Interest on loan 5,000
To Net Profit 1,45,000
3,10,000 3,10,000
Balance Sheet as at 31st March, 2008
Liabilities Rs. Rs. Assets Rs.
Ram’s capital: Cash in hand 10,000
Opening 3,00,000 Cash at Bank 80,000
Add: Net Profit 1,45,000 Sundry Debtors 3,50,000
4,45,000 Stock in trade 1,20,000
Less: Drawings 80,000 3,65,000
Loan from Laxman
(including interest due) 1,05,000
Sundry Creditors 90,000 _______
5,60,000 5,60,000
14.54 Accounting

Working Notes:
1. Sundry Debtors Account
Rs. Rs.
To Balance b/d 1,00,000 By Bank A/c 7,50,000
To Credit sales (Bal. fig) 10,00,000 By Balance c/d 3,50,000
11,00,000 11,00,000
2. Sundry Creditors Account
Rs. Rs.
To Bank A/c 7,00,000 By Balance b/d 40,000
To Cash A/c 20,000 By Purchases (Bal. fig.) 7,70,000
To Balance c/d 90,000
8,10,000 8,10,000
3. Cash and Bank Account
Cash Bank Cash Bank
Rs. Rs. Rs. Rs.
To Balance b/d 10,000 By Balance b/d 50,000
To Sales (bal. fig) 2,40,000 By Bank A/c (C) 1,00,000
To Cash (C) 1,00,000 By Salaries 40,000
To Debtors 7,50,000 By Creditors 20,000 7,00,000
To Laxman’s By Drawings 80,000
loan 1,00,000 By Business
expenses 1,20,000
By Balance c/d 10,000 80,000
2,50,000 9,50,000 2,50,000 9,50,000
4. Calculation of Ram’s Capital on 1st April, 2007
Balance Sheet as at 01.04.2007
Liabilities Rs. Assets Rs.
Ram’s Capital (bal. fig) 3,00,000 Cash in hand 10,000
Bank Overdraft 50,000 Sundry Debtors 1,00,000
Sundry Creditors 40,000 Stock in trade 2,80,000
3,90,000 3,90,000