Revisionary Test Paper_Intermediate_Syllabus 2012_Dec2014

Paper-5 : FINANCIAL ACCOUNTING

Study Note – 1: Accounting Process

1. (a) The following errors were discovered in the books of a trader for the year ended
December 31, 2014:
(i) The total of the Purchase Day Book had been undercast by ` 100.
(ii) The discount column of the debit side of the Cash Book had been posted to the
credit of the Discount Received Account ` 20.
(iii) ` 76 paid for Repairs of Motor Van had been taken to Motor Van Account.
(iv) A cheque received from B ` 39 had been debited in Cash Book but the double
entry had not been completed.
(v) The Returns Outward Book had been overcast by ` 50.
Show the Rectification entries considering that the Final Accounts had already been
prepared and the net profit arrived at amounted ` 24,320 (before corrections). Show
the calculation of the net profit for the year

Answer:

(a)
Books of ………………..
Journal
Dr. Cr.
Date Particulars L.F. Amount Amount
(`) (`)
(i) Profit & Loss Adjustment A/c .... , .....................................Dr. 100
To Suspense A/c 100
[Purchase Day Book undercast, now rectified]
(ii) Profit & Loss Adj. A/c (Disc. Allowed and Disc Received)… Dr. 40
To Suspense A/c 40
[Discount Received credited instead of Disc, allowed debited,
now rectified]
(iii) Profit & Loss Adjustment ................................................ Dr. 76
To Motor Van A/c 76
[Repairs of Motor Van debited to Motor Van Account, now
rectified]
(iv) Suspense A/c .................................................................... Dr. 39
To B A/c 39
[Cash Received from B not credited to his account, now
rectified]
(v) Profit & Loss Adjustment A/c ........................................ Dr. 50
To Suspense A/c 50
[Overcasting of Return Outward Book, now rectified]

Profit & Loss Adjustment Account

Dr. Cr.
Particulars Amount Particulars Amount
(`) (`)
To Suspense A/c 100 By Net Profit b/d 24,320
" Suspense A/c 40
" Motor Van A/c 76
" Suspense A/c 50
" Capital A/c (Adjusted Net Profit) 24,054
24,320 24,320

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(b) Difference between Capital and Revenue Expenditure.

The following are the points of distinction between capital expenditure and revenue
expenditure:
Capital Expenditure Revenue Expenditure

1. The economic benefits of Capital 1. The economic benefits of Revenue

expenditures are enjoyed for more than expenditures are enjoyed within a
one accounting period. particular accounting period.

2. Capital expenditures are of non-recurring 2. Revenue expenditures are of recurring

in nature. in nature.

3. All capital expenditures eventually 3. Revenue expenditures are not

become revenue expenditures like generally capital expenditures.
depreciation

4. Capital expenditures are not matched 4. All revenue expenditures are matched
with capital receipts. with revenue receipts.

Study Note – 2: Accounting Standard

2. (a) An industry borrowed `40,00,000 for purchase of machinery on 1.6.2013. Interest on loan
is 9% per annum. The machinery was put to use from 1.1.2014. What is the amount to be
charged for the year ended 31.3.2014 to record the borrowing cost of loan as per AS 16.

Answer:
Particulars `
(i) Interest upto 31.3.2014 (40,00,000 x 9% x 10/12 months) 3,00,000
(ii) Less: interest relating to pre-operative period to be capitalized [3,00,000 x 7/10] 2,10,000
Amount to be charged to P & L A/c [3,00,000 x 3/10] 90,000

(b) In a production process, normal waste 5% of input , 5,000 Mt of input were put in process
resulting in a wastage of 300 MT. Costs per MT of input is ` 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?

Answer:

As per AS – 2 , abnormal amounts of waste 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.
Calculation of Value of inventories
Particulars Qty Amount
(MT) (`)
Total Cost 5,000 50,00,000
Less: Normal Waste @ 5% (250) -
Total Cost of expected Input 4,750 50,00,000
Less: Cost of Abnormal waste to be charged to profit & Loss A/c
[(50,00,000 /4,750) x 50] (50) (52,632)
Cost of Inventory left 4,700 49,47,368

(c) Sterling Ltd. purchased a plant for US $20,000 on 31st December, 2013 payable after 4 months.
The company entered into a forward contract for 4 months @` 48.85 per dollar. On 31st Decem-
ber, 2013, the exchange rate was `47.50 per dollar.

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How will you recognize the profit or loss on forward contract in the books of Sterling Limited
for the year ended 31st March, 2014

Calculation of Profit or Loss to be recognized in the books of Sterling Limited

Particulars `
Forward contract rate 48.85
Less: Spot rate 47.50
Loss 1.35
Forward Contract Amount $20,000
Total loss on entering into forward contract = ($20,000 x `1.35) `27,000
Contract period 4 months
Loss for the period 1st January, 2014 to 31st March, 2014 i.e.
3 months falling in the year 2013-2014 will be ( ` 27,000 x 3/4) 20,250

Study Note – 3: Reconciliation Statements

Question No 3.

(a) Jay Prakash Ltd. makes up its accounts up to 31st December every year. It was able to
take stock by physical inventory only on 10th January, 2014, on which date the stock at
cost was valued at ` 2,05,000.
You ascertain the following regarding the period intervening between January 1 to
January 10, 2014:

(i) Purchases totaled ` 58,000 and included (A) ` 13,000 in respect of goods received in
December, 2013, (B) ` 6,000 in respect of goods received on 15th January, 2014 and
(C) ` 2,000 in respect of goods received but returned to suppliers on January 9, 2014
for which no credit note has been received or passed through the books.

(ii) Sales totaled ` 70,000 and included (A) ` 3,550 in respect of goods which left the
warehouse on 29th December, 2013, (B) ` 3,000 in respect of goods which were not
despatched until 13th January' 2014 and (C) ` 2,000 in respect of goods in respect of
goods invoiced and 5.1.2014 but returned by customers on January 8, 2014 for which
no credit note had been passed but which were, in fact, included in stock taken on
10th January, 2014.

(iii) Other returns to suppliers totaled ` 2,700 and other returns by customers were ` 450.

(iv) The rate of gross profit was 20% on selling price with the exception of an isolated
purchase on 5th December, 2013 of 10 identical articles which had cost ` 11,000. 5
Articles out of these were sold on January 5, 2014 at a profit of ` 1,000. The remainder
had been included at Cost in Stock taken on 10.1.2014. Show the estimated value of
stock on 31st December, 2013.

Answer:

Jay Prakash Ltd. Statement Showing Value of Stock on 31st December, 2013
Particulars Amount Amount
(`) (`)
Stock on January 10, 2014 2,05,000
Add: (i) Cost of Goods Sold between 1.1.14 and 10.1.14 : 70,000
Sales Less : Goods not despatched till 13.1.2014 3,000
67,000
Less : Sales Returns 2,000

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65,000
Less : Sale of Isolated Purchase 6,500
58,500
Less : Gross Profit, @ 20% on 58,500 11,700
46,800
Add : Cost of Isolated Purchase 5,500 52,300
2,57,300
2,700
Add :(ii) Purchase Returns
2,60,000
58,000
6,000
Less :(i) Purchases between 1.1.2014 and 10.1.2014
52,000
2,000
Less : Goods received on 15.1.2014
50,000
360 50,360
Less : Goods returned on. 9.1.2014
Less :(ii) Sales Returns at Cost Price [450 - 20% of 450] 2,09,640

(b) Prepare a Bank Reconciliation Statement from the following data as on 30.11.2013:
(i) Balance as per Pass Book on 30.11.2013, overdrawn ` 9,204.
(ii) Cheques drawn on 30.11.2013 but not cleared till December 2013, `3,225; ` 745 and
`926.
(iii) Bank Overdraft interest charged on 28.11.2013, not entered in Cash Book ` 1,610.
(iv) Cheques received on 29.11.2013 entered in Cash Book but not deposited to Bank till
3rd December 2013, `11,322 and `1,730.
(v) Cheque received amounting to `35 entered in the Cash Book twice.
(vi) Bills Receivable due on 29.11.13 was sent to Bank for collection on 28.11.13, and was
entered in Cash Book forthwith but the proceeds were not credited in Bank Pass
Book till 3rd Dec. 2013, ` 2,980.
(vii) A periodic payment by Bank for ` 80 understanding instruction not entered in Cash
Book.
(viii) Cheque deposited on 30th Nov.2013 dishonoured but the entry, therefore, was not
made in the Cash Book ` 1,890.

Answer:
In the books of ………..
Bank reconciliation Statement as at 30.11. 2013.
Particulars Amount
(`)
Overdraft balance as per Pass Book 9,204
Add: Cheques drawn but not cleared (`3,225 + `745 + `926) 4,896
14,100
Less:
(i) Interest on Bank overdraft not entered in Cash Book 1,610
(ii) Cheques received and entered in the Cash Book as deposited
into Bank but actually not deposited till 3rd Dec. 2013. (` 11,322 + `
1,730) 13,052
(iii) Cheque received and entered in the Cash Book twice 35
(iv) Bills sent to Bank for collection but not credited till 3rd Dec. 2013 2,980
(v) A periodic payment made by bank not entered in Cash Book 80
(vi) Cheques deposited and dishonoured but not entered in Cash 1,890 19,647
book
Bank balance as per Cash Book (Dr.) 5,547

Study Note – 4: Accounting for Depreciation

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Question No 4.

(a) Amit Industries Ltd. is in the business of manufacturing and export. In 2011, the
Government put a restriction on export of goods exported by Amit Industries Ltd leading
to impairment of its assets. Amit Industries acquired at the end of 2007, identifiable assets
worth `800 Lakhs for `1,200 lakhs, the balance being treated as Goodwill. The useful life of
the identifiable assets is 15 years and depreciated on straight – line basis. When
Government put the restriction at the end of 2011, the Company recognized the
impairment loss by determining the recoverable amount of assets at `544 Lakhs. In 2013,
the ―restriction‖ was withdrawn by the Government and due to this favourable change,
Amit Industries Ltd estimates its recoverable amount at `684 Lakhs.
Calculate and allocate Impairment Loss in 2011.
Compute reversal of Impairment Loss and its allocation in 2013.

Answer:

(i) Computation and allocation of Impairment Loss for the year ended 31.03.2011 (` Lakhs)
End of 2011 Goodwill Identifiable Total
Assets
(a) Historical cost 400 800 1,200
(b) Accumulated/Amortization for the (320)(400 x 4/5) (214)(800 x 4/15) (534)
period 01.04.2007 to 31.03.2011
(c) Carrying Amount (a) – (b) 80 586 666
(d) Recoverable Amount as on 31.03.2013 544
(e) Impairment Loss 122
(f) Impairment Loss allocated first to (80) (42) (122)
Goodwill and balance to other assets
(g) Carrying Amount after Impairment Loss Nil 544 544
(c) – (f)

(ii) Reversal of Impairment of Loss as on 31.03.2013 (` Lakhs)

Particulars Goodwill Identifiable Total
Assets
1. Carrying Amount at the end of 2011 after recognition Nil 544 544
of Impairment Loss (as above)
2. Less: Depreciation/ Amortization for 2 years NIL (98) (98)
(544 x 2/11)
3. Carrying Amount at the end of 2013 (1) – (2) NIL 446 446
4. Carrying Amount at the end of 2013 had there been NIL 480 480
no impairment (Cost – Accumulated Depreciation)
5. Recoverable Amount at the end of 2013 (Given) 684
6. Total Impairment Loss to be reversed (5) – (3) 238
7. Impairment Loss That can be reversed (4) – (3) or (6) 34
whichever is lower
8. Revised Carrying Amount at the end of 2013 (3) + (7)
[This amount should not exceed (4)] 480

(b) Ram Ltd. which depreciates its machinery at 10% p.a. on Diminishing Balance Method,
had on 1st January 2013 ` 9,72,000 on the debt side of Machinery Account.
During the year 2013 machinery purchased on 1st January 2009 for ` 80,000 was sold for `
45,000 on 1st July 2013 and a new machinery at a cost of ` 1,50,000 was purchased and
installed on the same date, installation charges being ` 8,000.
The company wanted to change the method of depreciation from Diminishing Balance
Method, to Straight Line Method which effect from 1st January 2011. Difference of

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depreciation up to 31st December 2013 to be adjusted with Machinery Account. Show

Machinery Account.

Answer:
In the books of Ram Ltd.
Machinery Account
Dr. Cr.
Date Particulars Amount Date Particulars Amount
2013 To Balance b/d 9,72,000 2013 By Bank A/c 45,000
Jan. 1 July 30 Sale
July To Bank A/c 1,50,000 By Depreciation A/c 4,000
Purchase  10 6 
 ` 80,000 x x 
 100 12 
To Bank A/c 8,000 By Profit and Loss A/c 15,0001
-Installation changes -Loss on Sale
Dec. 31 By Depreciation A/c 1,19,9003
By Profit and Loss A/c 12,0002
Depreciation undercharged
By Balance c/d 9,34,100
11,30,000 11,30,000

Workings:
1. Loss on Sale of Plant Sold
`
Book Value 80,000
1 20,000
Less: Depreciation @ 10% for 2 years on Straight Line Method
2
W.D.V. on 01.07.2013 60,000
Less: Sold for 45,000
Loss on Sale 15,000

2. Depreciation Undercharged
`
 100 100  12,00,000
Book Value  ` 8,00,000 x x 
 90 90 
Depreciation @ 10% for 2 years (i.e., 2011 & 2012) ` 1,20,000 x 2 = 2,40,000
Less: Already charged as per Diminishing Balance Method – (`1,20,000+ ` 1,08,000) 2,28,000
Depreciation undercharged 12,000

3. Depreciation for 2011

Old Machine I New Machine II
On 1.1.2011 Book Value 12,00,000 On 01.07.2013 – B.V. 15,800
Less: Sold 80,000 Depreciation @ 10% for 6 months 7,900
11,20,000
Depreciation @ 10% 1,12,000
Total Depreciation ` 1,12,000 + ` 7,900 = ` 1,19,900

Study Note – 5: Preparation of Final Accounts

Question No 5.

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(a) A's Balance Sheet as at 30th June, 2011 included the following items in the list of current
assets:
Debtors 98,000
Less : Provision for Bad Debts 2.450
95,550
At the end of the two following financial years the gross amount of Debtors (before
deducting a provision) were
Particulars 2012 2013
(`) (`)
At 30th June 94,000 1,02,000
On each of these dates there was a Provision for Bad Debts calculated on the same
percentage basis as at 30th June, 2011.
The actual amount of bad debts written off from Debtors Accounts over these periods
were:
Particulars 2012 (`) 2013 (`)
For the year to 30th June 2,600 2,300
You are asked to show these transactions in Account Ledger for the period from 1st July,
2011 to 30th June, 2013

Answer:
Books of A
Bad Debts Account
Dr. Cr.
Date Particulars Amount (`) Date Particulars Amount (`)
2011-12 To Sundry Debtors A/c 2,600 30.6.12 By Profit & Loss A/c 2,600

2012-13 To Sundry Debtors A/c 2,300 30.6.13 By Profit & Loss A/c 2,300

Provision for Bad Debts Account

Dr. Cr.
Date Particulars Amount (`) Date Particulars Amount (`)
30.06.12 To Profit & Loss A/c 100 01.07.11 By Balance b/f 2,450
To Balance c/d 2,350
 1 
*2 2 % of `94,000
2,450 2,450
30.06.12 To Balance c/d 2,550 1.07.12 By Balance b/d 2,350
 1  30.6.13 By Profit & Loss A/c 200
*2 2 % of `1,02,000
2,550 2,550
1.07.13 By Balance b/d 2,550

Profit & Loss Account (includes) for the year ended 30.6.12
Dr. Cr.
Particulars Amount (`) Particulars Amount
(`)
To Bad Debts 2,600 By Provision for Bad Debts :
Existing Provision 2,450
Less : New Provision
required 2,350 100

Profit & Loss Account (includes) for the year ended 30.6.13
Dr. Cr.

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Particulars Amount (`) Particulars Amount (`)

To Bad Debts 2,300
`` Provision for Bad Debt :
New Provision required 2,550
Less : Existing Provision 2,350 200
Provision `2,450 1
*Percentage of Provision as at 30th June, 2011 = x100 = x=2 %
Debtors `98,000 2
** For practical reasons, the application of this method is easier.

(b) The following balances were appearing in the books of CPL Ltd. as on 31.12.2013
`
(i) Sundry Debtors (including ` 4,000 due from X) 48,000
(ii) Sundry Creditors (including ` 3,000 due to X) 36,000
(iii) Provision for Doubtful Debts 2,500
(iv) Provision for Discount on Debtors 1,200
(v) Provision for Discount on Creditors 500

No entry has been passed in the books to record the dishonor of two cheques of ` 1,000
and ` 1,500 respectively. These cheques were received from customers. First one is
expected to be 75% bad and the second one is expected to be 50% bad.
A Provision for Doubtful Debts @ 5% on Debtors and @ 2% on Debtors and Creditors are
maintained.
Prepare the Provisions Accounts.

Answer:

(b) Point to be noted:

The balances appearing in the books on 31.12.13 in the different Provision Accounts are
actually balances on 1.1.13 or old provisions. The new provisions are to be made on
31.12.13. Books of CPL Ltd.

Provision for Doubtful Debts Account

Dr. Cr.
Date Particulars Amount Date Particulars Amount
31.12.13 To Balance c/f [Note 1] 3,750 1.1.13 By Balance b/f 2,500
31.12.13 "Profit & Loss A/c (Bal. figure) 1,250
3,750 3,750

Provision for Discount on Debtors Account

Dr. Cr.
Date Particulars Amount Date Particulars Amount
31.12.13 To Profit & Loss A/c (Bal. fig.) 345 1.1.13 By Balance b/f 1,200
" Balance c/f [Note 2] 855
1,200 1,200

Provision for Discount on Creditors Account

Dr. Cr.
Date Particulars Amount Date Particulars Amount
1.1.13 To Balance b/f 500 31.12.13 By Balance c/f [Note 660
31.12.13 `` Profit & Loss A/c (Bal. fig) 160 3]
660 660

Working Notes:
1.Particulars `

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Debtors Balance as given 48,000

Less : Amount set off with creditors 3,000
Adjusted Debtors 45,000
 Closing Provision for Doubtful Debts [5% of 45,000] 2,250
Add : 75% of the first dishonoured amount or [75% of 1,000] 750
Add : 50% of the other dishonoured amount or [50% of 1,500] 750
Total Provision to be made 3,750

2. Provision for Discount on Debtors `

Debtors Balance as given 48,000
Less : Amount set off 3,000
45,000
Less: *Provision for Doubtful Debts 2,250
42,750
 Provision for Discount on Debtors = 2% of 42,750 = 855
* As the cheques have been dishonoured, the question of allowing discount for prompt
payments does not arise. So the Provision for such Doubtful Debts has not been
considered.
3. Provision for Discount on Creditors = 2% of (36,000 – 3,000) = ` 660.

(c) X –Ray Ltd gives you the following information for the year ended 31st March, 2013 :
(i) Sales for the year ` 48,50,000. The company sold goods for cash only.
(ii) Cost of goods sold was 75% of sales.
(iii) Closing inventory was higher than opening inventory by ` 50,000.
(iv) Trade creditors on 31.3.2013 exceed the outstanding on 31.3.2012 by ` 1,00,000.
(v) Tax paid during the year amounts to ` 2,00,000.
(vi) Amounts paid to trade creditors during the year ` 35,60,000.
(vii) Administrative and selling expenses paid ` 3,50,000.
(viii) One new machinery was acquired in December, 2012 for ` 6,50,000.
(ix) Dividend paid during the year ` 70,000.
(x) Cash in hand and at Bank on 31.3.2013 ` 90,000.
(xi) Cash in hand and at Bank on 1.4.2012 ` 70,000.
Prepare Cash Flow Statement for the period ended 31.3.2013 as per the prescribed
Accounting Standard.

Answer:
X -Ray Ltd.
Cash Flow Statement (Under Direct Method) for the year ended 31st March, 2013
Particulars ` `
Cash Flows from Operating Activities
Cash Sales 48,50,000
Less: Cash paid to Suppliers (35,60,00)
Less: Expenses paid (3,50,000)
Cash Generated from Operations 9,40,000
Income-tax paid 2,00,000
Net Cash from Operating Activities 7,40,000
Cash Flows from Investing Activities
Purchase of Fixed Assets (6,50,000)
Net Cash from Investing Activities (6,50,000)
Cash Flows from Financing Activities
Dividend Paid (70,000)
Net Cash from Financing Activities (70,000)
Net Increase in Cash and Cash Equivalents 20,000
Cash and Cash Equivalents at the Beginning
of the Period 70,000

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Cash and Cash Equivalents at the End of

the Period 90,000
Note: Under direct method, change in the items of working capital is not taken into
consideration, only cash paid are taken into consideration.

Question No 6.

(a) The following is the Receipts and Payments Account of Young Club in respect of the year
to 31st December, 2013:
Receipts ` Payments `
1.1.13 31.12.13
To Balance b/d 20,500 By Salaries 41,600
31.12.13 `` Stationery 8,000
" Subscriptions : 2012 800 `` Rates 12,000
2013 42,200 `` Telephone Charges 2,000
2014 1,600 `` Investment [4% Stock at par] 25,000
`` Sport Making Profit 31,000 `` Sundry Expenses 18,500
`` Dividends on Investments 20,000 `` Balance c/d 9,000
1,16,100 1,16,100
Additional Information available:
(i) There are 450 members each paying an annual subscription of ` 100. ` 900 being in
arrears for 2012 at the beginning of 2013.
(ii) Stock of stationery on 31st December, 2012 was ` 4,000 and on 31st December, 2013 `
1,800.
(iii) At 31st December, 2013 the rates were prepaid to the following 31st March, the yearly
charges being ` 12,000. A quarter's charge for telephone is outstanding to the tune of `
700. Expenses‘ accruing on 31st December, 2012, was ` 1,400.
(iv) At 31st December, 2012, the Buildings stood in the books at ` 2,00,000 on which
depreciation is to be provided at 5% per annum. Investments on 31st December, 2012
were ` 4,00,000.
Prepare an Income & Expenditure Account for the year ended 31st December, 2013 and
a Balance Sheet as on that date.

Answer:

(a) Working Notes:

1. Analysis of Subscriptions
(a) for 2012 `
Total Amount due on 31.12.2012 900
Less: Received in 2013 on account 800
Still outstanding on 31.12.13 100

(b) for 2013 `

Annual Amount [450 x ` 100] 45,000
Less: Received in 2013 on account 42,200
outstanding on 31.12.13 2,800

(c) For 2014: Received in Advance ` 1,600

2. Opening Capital on 31.12.2012 (or 1.1.2013)

Balance Sheet as on 01.01.2013

Liabilities Amount Assets Amount

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Outstanding Expenses 1,400 Cash 20,500

Capital Fund 6,24,000 Outstanding Subscription 900
(Excess of Assets over Liabilities) Stock of Stationery 4,000
Buildings 2,00,000
Investments 4,00,000
6,25,400 6,25,400

Young Club
Income and Expenditure Account for the year ended 31st December, 2013
Dr. Cr.
Particulars Amount Amount Particulars Amount Amount
` ` ` `
To Salaries 41,600 By Subscription 42,200
" Stationery Used : Add: Outstanding
Opening Stock 4,000 [Note 1 (b)] 2,800 45,000
Add: Purchases 8,000 `` Sport making Profit 31,000
12,000 ``Dividend on
Less : Closing Stock 1,800 10,800 Investment 20,000
`` Rates 12,000
Less : Prepaid Amount [¼th] 3,000 9,000
`` Telephone Charges 2,000
Add: Outstanding for ‗13 700 2,700
`` Sundry Expenses 18,500
Less: Outstanding for ‗12 1,400 17,100
`` Depreciation on building 10,000
[5% of 2,00,000] 5,400
`` Surplus
96,000 96,000

(b)The Balance Sheet of New City College as at 31st March 2013 was as follows:
Liabilities ` Assets `
Capital Fund 21,00,000 Land and Building 20,00,000
Building Construction 8,00,000 Furniture 3,00,000
Fund General Fund 6,40,000 Laboratory Equipment 2,50,000
Outstanding Salary(teachers) 1,60,000 Library Books 3,60,000
Investments 6,50,000
Accrued Tuition Fee 10,000
Cash and Bank 1,30,000
37,00,000 37,00,000

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The Receipts and Payments Account for the year ended 31st March 2014 was drawn as under:
Dr. Cr.
Receipts ` Payments `
To Opening Bal.(1/4/2013) 1,30,000 By Salaries & Allowances (teachers) 42,00,000
To Govt. Grants 50,00,000 By non- teaching staff 20,00,000
To Donation for Building 2,00,000 By Printing & Stationary 80,000
Construction By Lab. Exp 60,000
To Tuition fees & session 18,20,000 By Lab. Equipment 1,20,000
charges By Library Books 2,50,000
To Investment Income 70,000 By Office Equipment 60,000
To Rental Income(College Hall) 40,000 By Electricity & Telephone 75,000
By Audit Fees 2,000
By Municipal Taxes 1,000
By Building Repairs 40,000
By Purchase of Furniture 80,000
By Games and Sports 20,000
By Welfare Exp. 30,000
By New Investments 1,50,000
By Cl. Bal. (31/3/2014) 92,000
72,60,00 72,60,000
Other information: 0
(i) Tuition fee outstanding as on 31/3/2014 – `40,000
(ii) Salary of teaching staff outstanding for March 2014-` 2,50,000
(iii) Books received as donations from various parties- `30000 (valued)
(iv) Outstanding building repair expenses as on 31/3/2014- ` 15,000
(v) Applicable depreciation rates:
Land and Building 2%
Furniture 8%
Lab. Equipment 10%
Library Books 20%

You are required to prepare the Income and Expenditure Account for the year ended 31st
March 2014.

Answer:
New City College
Income and Expenditure Account for the year ended 31.3.2014
Dr. Cr.
Particulars ` Particulars `
To Salaries : Tuition Fees 18,20,000
Teaching staff 42,00,000 Add : Outstanding 40,000
Add: Outstanding 2,50,000 18,60,000
44,50,000 Less: Accrued last year 10,000
Less: Last year Liability 1,60,000 42,90,000 18,50,000
Non-teaching staff 20,00,000 Revenue Grant
Building Repairs 40,000 50,00,000
Investment Income
Add: Outstanding 15,000 55,000 70,000
Rental Income
Office Exp. 40,000
Value of donation of books
Printing & Stationary 60,000 30,000
Lab. Exp 80,000
Electricity & Telephone 60,000
Audit Fee 75,000
Municipal Tax 2,000
Games& Sports 1,000
Welfare Expenses 20,000
30,000

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Depreciation : Building 40,000

Furniture 30,400
2,35,400
Lab. Equip 37,000
Book 1,28,000
Excess of Income over
81,600
Expenditure transferred to
General Fund
69,90,000 69,90,000

(c) On 1.07.2013 , Nikita Mittal commenced her business with `5,00,000. On 1st Oct. she sold
her private investments (Cost `50,000, Face value `40,000) at 125% of face value and
brought the proceeds into her bussiness. Her drawings were `1,000 p.m. Goods costing
`11,000 were taken by her for personal use. On 31.03.2012, Capital before adjustments
`7,00,000, Outstanding Expenses `21,000 and Prepaid Expenses `4,000.Provide Interest on
Capital @ 12% p.a and for group incentive to staff @5% on Net Profit after charging such
incentive and interest on capital. Calculate the Profit/Loss for the year ended 31st March,
2014.

Answer:

STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDING ON 31.03.2013

Particulars `
A. Capital at the end 7,00,000
B. Add: Drawings during the year
[Cash (`1,000 × 9) + Goods of `11,000 20,000
C. Less: Additional capital introduced during the year
[`40,000 + 25% of `40,000] 50,000
D. Adjusted Capital at the end (A + B - C) 6,70,000
E. Less: Capital in the beginning 5,00,000
F. Profit subject to adjustments (D – E) 1,70,000
G. Less: Adjustments
Outstanding Expenses (21,000)
Prepaid Expenses 4,000
Interest on capital
(12% × 5,00,000 × 9/12) 45,000
(12% × 50,000 × 6/12) 3,000 (48,000) 65,000
H. Net Profit before Group Commission for the year [F – G] 1,05,000
I. Less: Group Commission [`1,05,000 ×5/105] 5,000
J. Net Profit [H – I] 1,00,000

Study Note – 6: Partnership

Question No 7.

(a) A, B and C were in partnership sharing profits and losses in the ratio of 9 : 4 : 2. B retired
from the partnership on 31st March, 2014, when the firm‘s balance sheet was as under
Particulars ` Particulars `
Sundry creditors 900 Cash and bank 426
Capital accounts : Sundry debtors 600
A 4,050 Stock 1,200
B 1,800 Furniture 399
C 900 6,750 Plant 1,275
Land and building 3,750
7,650 7,650

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B‘s share in goodwill and capital was acquired by A and C in the ratio of 1 : 3, the continuing
partners bringing in the necessary finance to pay off B. 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 ended 31st March, 2014 in thousands of
rupees were:
`
2010-11 675
2011-12 375
2012-13 900
2013-14 1,050

Answer:

(i) Statement showing the partners‘ share

Particulars A B C G
Ratio before retirement of B 9/15 4/15 2/15 -
Adjustment on retirement (+) 1/15 - (+)3/15
New ratio before admission of G 10/15 - - 5/15
On admission G Gift by A (12.5/100) (-) 1/8 1/8
Purchase from A & C* (-) 2/24 - (-)1/24 (+)3/24
New ratio 11/24 - 7/24 6/24
* Purchase from A = 2/3 × 1/8 = 2/24
Purchase from C. = 1/3 × 1/8 = 1/24

(ii)
Journal Entries
Dr. Cr.
Particulars ` `
1. A‘s capital A/c Dr. 1,50,000
C ‗s capital A/c Dr. 4,50,000
To B‘s capital A/c 6,00,000
(Being purchase by A and C of goodwill from B)
2. A‘s capital A/c Dr. 11,25,000
To G‘s capital A/c 11,25,000
(Being gift made by A to G)

3. Bank A/c Dr. 46,50,000

To A‘s capital A/c 11,62,500
To C‘s capital A/c 20,81,250
To G‘s capital A/c 14,06,250
(Being capital brought in by the partners)
4. B‘s capital A/c Dr. 24,00,000
To Bank A/c 24,00,000
(Being final payment made to B on retirement)

5. G‘s capital A/c Dr. 2,81,250

To A‘s capital A/c 1,87,500
To C‘s Capital A/c 93,750
(Being goodwill adjusted on admission)

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(iii)
Balance Sheet as on 1st April, 2014
Liabilities ` Assets `
Sundry creditors 9,00,000 Cash and bank 26,76,000
Capital accounts : 6,00,000
Sundry debtors Stock
12,00,000
A 41,25,000 Furniture 399,000
C 26,25,000 Plant 1275,000
G 22,50,000 Land and building 3750,000
99,00,000 99,00,000
Working Notes: 90,00,000
(1) Adjustment of Goodwill on Retirement
Value of Goodwill = (675 + 375 + 900 + 1050) × ¾ 2250
Share of B = 1,500 × 4/15 = 400

Adjustment through partners‘ capital accounts

A : ¼ *600=150(Dr.)
B : 4/15 *2250=600(Cr.)
C : ¾*600=450(Dr.)

(2) Closing Balances of Capital Accounts

B‘s share of capital and goodwill = 1,800 + 600 = 2400
This represents 4/15th share of capital and goodwill requirement of the firm. Thus, total
capital and goodwill requirement = 2400*15/4=9000
Hence, closing capital balances (in new profit sharing ratio of 11: 7: 6) should be
A : 11/24*9,000=4125
C : 7/24*9,000=2625
G :6/24*9,000=2250
Gift by A to G : 1/2*2,250=1125
(Debit to A‘s capital A/c and credit to G‘s
capital A/c)

(3) Adjustment of Goodwill on Admission

Goodwill of the firm = 2250
G‘s share of goodwill = ¼*2250
= 562.50
(a) Gift by A = ½*562.50
= 281.25
(Included in the gift of 1125 – see W.N. 2)
(b) Purchase from A and C = 281.25 (in 2 : 1 ratio)
Thus, adjustment of goodwill purchased through capital accounts
A : 2/3*281.25=187.50 (Cr.)
C : 1/3*281.25=93.75(Cr.)
G : 1/2*562.50=281.25(Dr.)

(4) Amount brought in by Partners

Partners‘ Capital Accounts

Dr. Cr.
Particulars A B C G Particulars A B C G
` ` ` ` ` ` ` `

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To B 150 — 450 — By Balance b/d 4050 1800 900 —

To G 1125 — — — By A and C — 600 — —
To A & C — — — 281.25 By Cash and Bank 1162.5 — 2081.25 1406.25
To Cash and Bank — 2400 — — (Bal. figure)
To Balance c/d 4125 — 2625 2250 By A — — — 1125.00
By G 187.5 — 93.75 —
5,400 2,400 3,075 2,531.25 5,400 2,400 3,075 2,531.2
5
(5) Cash and Bank
Amount given 426
Amount brought in by partners 4,650
5,076
Less: Payment to B 2,400
2,676
Net increase = ` 2676
(Equivalent to the value of goodwill)

(b) The firm of PQR was dissolved on 31.3.2014, at which date its Balance Sheet stood as follows:

Liabilities ` Assets `
Creditors 5,00,000 Fixed Assets 1,12,50,000
Bank Loan 12,50,000
Cash and Bank 5,00,000
P‘s Loan 25,00,000
Capital
P 37,50,000
Q 25,00,000
R 12,50,000
1,17,50,000 1,17,50,000
Partners share profits equally. A firm of Professional Accountants is retained to realize the
assets and distribute the cash after discharge of liabilities. Their fees which are to include all
expenses is fixed at ` 2,50,000. No loss is expected on realization since fixed assets include
valuable land and building.
Realizations are:
Sl. No. Amount in (`)
1 12,50,000
2 37,50,000
3 37,50,000
4 75,00,000
5 75,00,000

The 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.

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In the Books of M/s PQR

Statement of Piecemeal Distribution
(Under Higher Relative Capital method)

Particulars Amount Creditors Bank P‘s loan Capital A/cs

available Loan
P Q R

` ` ` ` ` ` `

Balance due 5,00,000 12,50,000 25,00,000 37,50,000 25,00,000 12,50,000

1st Instalment (including cash and bank balances) 12,50,000

Less: Liquidator‘s Expenses and fees 2,50,000

10,00,000

Less: Payment to Creditors and repayment of Bank (10,00,000) (2,85,715) (7,14,285)

Loan in the ratio of 2:5

Balance Due _ 2,14,285 5,35,715 25,00,000 37,50,000 25,00,000 12,50,000

2nd Instalment 3750,000

Less: Payment to Creditors and repayment of bank (7,50,000) 2,14,285 5,35,715 - - - -

loan in full settlement

30,00,000 - - - - - -

Less: Repayment of P‘s Loan 25,00,000 - - (25,00,000) - - -

5,00,000

Less: Payment to Mr. P towards relative higher 500000 5,00,000

capital (W.N. 1)

Balance Due - - - - 32,50,000 25,00,000 12,50,000

3rd Instalment 37,50,000

Less: Payment to Mr. P towards higher relative 7,50,000 7,50,000

capital (W.N. 2)

30,00,000 - - - 25,00,000 25,00,000 12,50,000

Less: Payment to Mr. Q & Mr. R towards excess 25,00,000 12,50,000 12,50,000
capital (W.N. 1&2)

5,00,000 - - - 12,50,000 12,50,000 12,50,000

Less: Payment to all the partners equally 5,00,000 1,66,667 1,66,667 1,66,666

Balance due 10,83,333 10,83,333 10,83,334

4th Instalment 75,00,000

Less: Payment to all the partners equally 75,00,000 25,00,000 25,00,000 25,00,000

Realisation profit credited to Partners 14,16,667 14,16,667 14,16,666

5th Instalment 75,00,000

Less: Payment to all partners equally (75,00,000) 12,50,000 12,50,000 12,50,000

Realisation profit credited to partners 26,66,667 26,66,667 26,66,666

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Working Notes :
(i) Scheme of payment of surplus amount of ` 5,00,000 out of second Installment :

Capital A/cs
Particulars P Q R
` ` `
Balance (i) 37,50,000 25,00,000 12,50,000
Profit sharing ratio (ii) 1 1 1
Capital taking P‘s Capital (iii) 12,50,000 12,50,000 12,50,000
Excess Capital (iv) = (i) –(iii) 25,00,000 12,50,000
Profit Sharing Ratio 1 1
Excess capital taking Q‘s Excess Capital as base (v) 12,50,000 12,50,000
Higher Relative Excess (iv) – (iv) 12,50,000
So Mr. P should get ` 12,50,000 first which will bring down his capital account balance from `
37,50,000 to ` 25,00,000. Accordingly, surplus amounting to ` 5,00,000 will be paid to Mr. P
towards higher relative capital.

(ii) Scheme of payment of ` 37,50,000 realized in 3rd Installment :

– Payment of ` 7,50,000 will be made to Mr. P to discharge higher relative capital. This
makes the higher capital of both Mr. P and Mr. Q ` 12,50,000 as compared to capital
of Mr. R.
– Payment of ` 12,50,000 each of Mr. P & Mr. Q to discharge the higher capital.
– Balance ` 5,00,000 equally to P, Q and R, i.e., ` 166,667 ` 1,66,667 and ` 1,66,666
respectively.

Question No 8.

(a) D, E and F were partners in business, sharing profits & losses in the ratio 2:1:1. Their Balance
Sheet as at 31.3.14 is as follows :
Balance Sheet as at 31.3.14
Liabilities ` (In thousands) Assets ` (In thousands)
Fixed Capital: Fixed Assets 900
D 600 Investments 150
E 300 Current Assets:
F 300 Stock 300
1,200
Current Accounts: Debtors 180
D 120 Cash & Bank 450 930
E 60 180
Unsecured Loans 600
1980 1980
On 1.4.14, it is agreed among the partners that AB (P) Ltd. a newly formed company with E
and F having each taken up 300 shares of ` 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:
(i) Goodwill will be valued at 3 years purchase of super profits.
(ii) The actual profit for the purpose of goodwill valuation will be ` 300,000.
(iii) Normal rate of return will be 15% on fixed capital.
(iv) All other assets and liabilities will be taken over at book values.
(v) The purchase consideration will be payable partly in shares of ` 10 each and partly in
cash. Payment in cash being to meet the requirement to discharge D, who has agreed
to retire.
(vi) E and F are to acquire equal interest in the new company.

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(vii)Expenses of liquidation ` 120,000.

You are required to prepare the necessary Ledger Accounts.

Answer:

Particulars `
Capital employed on 31.3.14 (Fixed capital) 12,00,000
Calculation of Goodwill :
Weighted average of actual profits 3,00,000
Less: Normal profits at 15% of ` 12,00,000 1,80,000
Super profits 1,20,000
Goodwill at 3 years‘ purchase, i.e. 120,000 × 3 3,60,000
Calculation of Purchase Consideration :
Total assets as per Balance Sheet 19,80,000
Less: Cash & Bank balances 4,50,000
15,30,000
Add: Goodwill 3,60,000
18,90,000
Less: Unsecured loans 6,00,000
Purchase Consideration 12,90,000

Dr. Realization Account Cr.

Particulars ` Particulars `
To Sundry Assets 15,30,000 By Unsecured loans 6,00,000
To Goodwill 3,60,000 By AB(P) Ltd. 12,90,000
To Bank : expenses 1,20,000 By Capital A/c:
D 60,000
E 30,000
F 30,000 1,20,000
20,10,000 20,10,000

Dr. Partners‘ Capital Accounts Cr.

Particulars D E F Particulars D E F
` ` ` ` ` `
To Realisation 60,000 30,000 30,000 By Bal. c/d 6,00,000 3,00,000 3,00,000
To Cash 8,40,000 – – By Cur. A/c 1,20,000 60,000
To C (Cap. adj) – 30,000 – By Goodwill By E 18,00,000 90,000 90,000
To Shares in (Cap. adj) – – 30,000
AB (P) Ltd.) – 3,90,000 3,90,000
9,00,000 4,50,000 4,20,000 9,00,000 4,50,000 420,000

Dr. Cash & Bank Account Cr.

Particulars ` Particulars `
To Balance b/d 4,50,000 By Realisation A/c – expenses 1,20,000
To AB (P) Ltd. (Balancing Figure) 5,10,000 By A‘s Capital A/c 8,40,000
9,60,000 9,60,000

Dr. AB(P) Ltd. Account Cr.

Particulars ` Particulars `
To Realisation 9,00,000 By Cash 5,10,000
By Equity Shares (Balancing Fig.) 390,000
(39,000 shares of ` 10 each)
900,000 900,000

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Proportion of equity capital E:F = 1:1

No. of shares 39,000 /2 =19,500 Shares

(b) The Capital Accounts of Adhar and Bhudhar stood at `40,000 and `30,000 respectively
after the necessary adjustments in respect of the drawings and the net profits for the year
ended 31st December, 2013. It was subsequently ascertained that 5% p.a. interest on
Capitals and drawings was not taken into account in arriving at the net profit. The
drawings of the partners had been: Adhar `1,200 at the end of each quarter and Bhudhar
`1,800 at the end of each half year.
The Profits for the year as adjusted amounted to `20,000. The partners share profits in the
3 2
proportion of Adhar and Bhudhar .
5 5
You are required to pass journal entries and show the adjusted capital accounts of the
partners.

Working notes:
1. Calculation of opening capitals (01.01.2013)
Adhar Bhudhar
` `
Capital as on 31.12.2013 40,000 30,000
Added Back: Drawings already deducted [Adhar = 1,200 × 4] 4,800
[Bhudhar = 1,800 × 2] 3,600
44,800 33,600
3 2
Deducted: Share of Profits already credited[20,000 shared as and ]
5 5 12,00 8,000
Capital as on 01.01.2013 32,800 25,600
Interest on Capital @ 5% p.a 1,640 1,280

2. Interest on Drawings
Adhar Bhudhar
` `
 5 9 45
On 1,200 drawn at the end of first quarter 1,200   
 100 12 
 5 6 30
On 1,200 drawn at the end of second quarter 1,200   
 100 12 
 5 3
On 1,200 drawn at the end of 3rd quarter 1,200    15
 100 12 
On 1,200 drawn at the end of last quarter
Nil
90
 5 6 45
On 1,800 drawn at the end of 1st half year 1,800   
 100 12 
On 1,800 drawn at the end of 2nd half year Nil
45

3. Adjustment required
Adhar Bhudhar Total
` ` `
Interest on Capitals (to be credited to capital) 1,640 1,280 45 2,920
Interest on Drawings (to be debited to capital) 90 135
Net Interest to be credited to Capital 1,550 1,235 2,785

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3 2 1,671, 1,114. 2,785

`2,785 wrongly shared as profits as and and credited
5 5
Difference 121 121
(excess cr.) (under cr.)

Answer:
Adjustment Entry:
Journal Dr. Cr.
Date Particulars L.F. Amount Amount
` `
1.1.2014 Adhar's Capital Account .................................................... Dr. 121
To Bhudhar's Capital Account 121
[Adjustment made for Interests on Capital and on
Drawings not provided and the net amount wrongly
shared as profits]

Capital Account
Dr. Cr.
Date Particulars Adhar Bhudhar Date Particulars Adhar Bhudhar
` ` ` `
1.1.14 To Bhudhar's Capital 121 1.1.14 By Balance b/f 40,000 30,000
To Balance c/f 39,879 30,121 Adhar's Capital 121
40,000 30,121 40,000 30,121

Points to be noted:
1. Here opening Capitals can be 'found out. Information regarding annual profits and
drawings are given. So interest on capitals (opening) can be calculated.
2. Interest on Drawings should also be calculated.

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Study Note — 7: Royalty and Hire purchase

Question No 9.

(a) Banerjee & Co. purchased seven trucks on hire purchase on 1st July. 2012. The cash
purchase price of each truck was ` 50,000. The company has to pay 20% of the cash
purchase price at the time of delivery and the balance in five half yearly installment
starting from 31st December, 2012 with interest at 5% per annum at half yearly rest. On the
Company's failure to pay the installment due on 30th June 2013, it was agreed that the
Company would return 3 trucks to the vendor and the remaining four would be retained.
The vendor agreed to allow him a credit for the amount paid against these 3 trucks less
25%. Vendor after spending ` 1,000 on repairs sold away all the three trucks for `40,000.
Required: Show the relevant Accounts in the books of the purchaser and vendor assuming
the books are closed in June every year and depreciation @ 20% p.a. is charged on
Trucks.

Answer:
In books of Hire-Purchaser (Banerjee & Co.)
Trucks Account
Dr. Cr.
Date Particulars ` Date Particulars `
01.07.12 To Hire Vendor's A/c 30.06.13 By Depreciation A/c 70,000
(Cost of 7 Trucks @ By Hire Vendor's A/c (Value of 40,500
`50,000 each) 3,50,000 3 Trucks returned to Vendor)
By P & L A/c (Loss on default) 79,500
By balance c/d 1,60,000
3,50,000 3,50,000

Hire Vendor's Account

Dr. Cr.
Date Particulars ` Date Particulars `
01.07.12 To Bank A/c 01.07.12 By Trucks A/c 3,50,000
(` 3,50,000 × 20/100) 70,000 31.12.12 By Interest A/c
31.12.12 To Bank A/c [` 2,80,000 × 5/100 × 6/12] 7,000
[(20% of ` 2,80,000) + `7,000] 63,000 30.06.13 By Interest A/c
30.06.13 To Trucks A/c [`2,24,000 × 5/100 × 6/12] 5,600
(Value of Trucks returned) 40,500
30.06.13 To Balance c/d 1,89,100
3,62,600 3,62,600

Working Notes:
1. Credit allowed Vendor against 3 trucks `
A. Total amount of principal paid against 7 trucks (` 70,000 + ` 56,000) 1,26,000
B. Total amount of principal paid against 3 trucks (` 1,26,000 × 3/7) 54,000
C. Credit allowed by Vendor (` 54,000 - 25% of `54,000) 40,500
2. Loss on return of 3 trucks
A. Book value of 3 trucks returned [(`50,000 × 3) less 20% of ` 1,50,000] 1,20,000
B. Less: Credit allowed by Vendor against these 3 Trucks (40,500)
C. Loss on return of 3 Trucks (A — B) 79,500

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In the books of hire vendor

Dr. Banerjee & Co‘s Account Cr.
Date Particulars ` Date Particulars `
01.07.12 To Hire Sales A/c 3,50,000 01.07.12 By Bank A/c 70,000
31.12.12 To Interest A/c 7,000 31.12.12 By Bank A/c 63,000
30.06.13 To Interest A/c 5,600 30.06.13 By Goods Repossessed A/c 40,500
30. 06.13 By Balance c/d 1,89,100
3,62,600 3,62,600

Dr. Goods Repossessed Account Cr.

Date Particulars ` Date Particulars `
30.06.13 To BANERJEE & Co. 40,500 30.06.13 By Bank A/c (Sales) 40,000
30.06.13 To Cash A/c (expenses) 1,000 30.06.13 By Profit and Loss A/c
(Loss on sale) 1,500
41,500 41,500

(b) Discuss about the Minimum Rent or Dead Rent.

Answer:

Minimum Rent / Dead Rent

A contract is entered into between the landlord and the lessee for payment of royalty, usually
calculated upon the quantum of production or sale at a certain stipulated rate.
So, if there is little or no production or sale, the landlord would receive little or no royalty at all,
thus affects the monetary interest of the landlord as well as the lessee. It is normally not
acceptable to the owner, since sale or production mostly depends on the capacity of the
person to whom the rights have been given. To avoid such a situation, the landlord and the
lessee agreed upon a minimum periodical amount that the landlord will receive from the
lessee, even if the actual royalty as calculated on the basis of actual production or sale is less
than such minimum amount.
This assured and mutually agreed periodical minimum amount is known as ―Minimum Rent‖.
Example: Suppose royalty per ton of production is ` 10 and the minimum (annual) rent is `
4,00,000. Now, the actual production is 35,000 tons, then actual royalty would become `
3,50,000. In this case the minimum rent of ` 4,00,000 will have to be paid by the lessee. On the
other hand, if the actual production is 46,000 tons, then the actual royalty would become `
4,60,000. In this case ` 4,60,000 will have to be paid by the lessee.
Thus, as there is a stipulation for minimum rent, then either the minimum rent or the actual
royalty whichever is more shall have to be paid by the lessee.
The minimum rent is also called dead rent, certain rent, fixed rent, etc.

(c) From the following information of M/s Chennai Traders, you are required to prepare Hire
Purchase Trading Account to ascertain the profit made during the financial year 2012-13.
Chennai Traders sell goods on hire purchase basis at cost plus 25%. The following details
are available:
(1) Installment not due on 31st March, 2012-2013 4,50,000
(2) Installment due and collected during the financial year 2012-13 12,00,000
(3) Installment due but not collected during the financial year 2012-2013
which includes ` 15,000 for which goods were repossessed 75,000
(4) Installment not due on 31st March, 2013 including ` 30,000 for which
goods were repossessed
(5) Installment collected on repossessed stock 5,55,000
(6) M/s Chennai Traders valued repossessed stock at 60% of original cost 22,500

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Answer:

Dr. Hire Purchase Trading Account Cr.

Particulars ` Particulars `
To Opening Balances By Stock reserve (Opening) 90,000
H.P. Stocks 4,50,000 By Hire purchase sales 12,00,000
H.P. Debtors — By Goods sold on hire 2,70,000
To Goods sold on Hire Purchase 13,80,000 purchase (loading)
To Stock Reserve (Closing) 1,05,000 By Goods Repossessed 32,400
To Profit & Loss A/c ( H.P. profit) 2,48,400 By Closing Balances:
- HP Stock 5,25,000
- HP Debtors 60,000
21,60,000 21,60,000

Working Notes:
Dr. 1. Memorandum Hire Purchase Stock Account Cr.
Particulars ` Particulars `
To Balance b/d 4,50,000 By Hire Purchase Debtors A/c 12,75,000
To Goods Sold on H.P. A/c 13,80,000 By Goods Repossessed A/c 30,000
By Balance c/d[` 5,55,000 – ` 30,000] 5,25,000
18,30,000 18,30,000

Dr. 2. Memorandum Hire Purchase Debtors Account Cr.

Particulars ` Particulars `
To Balance b/d - By Cash/Bank A/c 12,00,000
To Hire Purchase Stock A/c 12,75,000 By Goods Repossessed A/c 15,000
By Balance c/d [` 75,000-` 15,000] 60,000
12,75,000 12,75,000

3. Loss on repossessed goods

Installments collected 22,500
Installments due 15,000
Installments not due 30,000
67,500
Hire Purchase Price of Repossessed goods
Cost of Repossessed Goods (` 67,500 × 100/125) 54,000
Valuation of Repossessed Goods (` 54,000 × 60/100) 32,400
Less: Cost of installments due + Installments not yet due (` 15,000+` 30,000)×100/125 36,000
Loss on repossession 3,600

Question No 10.

(a) NN Ltd. owns certain patent rights. It has granted a license to AA Ltd. to use such rights on
royalty basis. The Royalty payable is ` 50 per unit produced. AA Ltd. Has issued sub-license to
KK Ltd. On the basis of a Royalty of ` 60 per unit sold. The minimum Royalty payable by KK Ltd
is fixed at ` 75000.
- per annum. Short Workings can be recouped within one year from the last date of the year
in which they occur.
The following particulars are available for the first three years of working:

AA Ltd.

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Year Sales (units) Closing Stock (units)

1 6,000 1,500
2 7,500 3,000
3 13,500 4,500

KK Ltd.
Year Production (units) Closing Stock (units)
1 600 300
2 3,000 600
3 4,500 1,350

You are required to:

(a) Prepare in books of AA Ltd. a statement showing analysis of Royalties Receivable and
Royalties Payable, and

(b) Show Royalty Receivable Account and Royalty Payable Account in books of AA Ltd.

Answer:
Books of AA Ltd.
Analysis of Royalty Payable
Year Production (Consolidated Units) Rate (`) Amount (`)

1 7,500 + 600 = 8,100 50 4,05,000

2 9,000 + 3,000 = 12,000 50 6,00,000
3 15,000 + 4,500 = 19,500 50 9,75,000

Analysis of Royalty Receivable

Year Sales Minimum Royalty Excess of Royalty S/W S/W S/W S/W Amount
Unit Rent @ ` 60 over Min. Rent Occurred Adjusted Lapsed c/f Receivable
(`) (`) (`) (`) (`)
1 300 75,000 18,000 - 57,000 - - 57,000
2 2,700 75,000 1,62,000 87,000 - 57,000 - - 1,05,000
3 3,750 75,000 2,25,000 1,50,000 - - - - 2,25,000

Royalty Payable Account

Dr Cr
Year End Particulars Amount (`) Year End Particulars Amount (`)
1 To NN Ltd 4,05,000 1 By Royalty Receivable A/c 30,000
By P/L A/c 3,75,000
4,05,000 4,05,000
2 To NN Ltd 6,00,000 2 By Royalty Receivable A/c 1,50,000
By P/L A/c 4,50,000
6,00,000 6,00,000
3 To NN Ltd 9,75,000 3 By Royalty Receivable A/c 2,25,000
By P/L A/c 7,50,000
9,75,000 9,75,000

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Royalty Receivable Account

Dr Cr
Year End Particulars Amount (`) Year End Particulars Amount (`)

1 To Royalty Payable A/c 600 × `50 30,000 1 By KK Ltd. 18,000

By P/L A/c 12,000
30,000 30,000
2 To Royalty Payable A/c 1,50,000 2 By KK Ltd. 1,62,000
To P/L A/c 12,000
1,62,000 1,62,000
3 To Royalty Payable A/c 2,25,000 3 By KK Ltd. 2,25,000

(b) A firm started business on 1st April, 2012. During the year ending on 31st March, 2013 its
total purchases amounted to ` 52,540 and sales excluding hire purchase transactions
amounted to ` 63,900. The following are the details of H.P. transactions:

Articles Cost Sale price Deposit Monthly installment No. of installments paid in 2011-12

Radio 400 600 100 20 of `25 8

Motor Cycle 1,500 2,400 400 10 of ` 200 4
Refrigerator 2,000 2,800 400 12 of ` 200 2
The installments on the refrigerator could not be kept up and it was returned on 26th March,
2013. Stock in hand on 31st March, 2013 excluding the returned refrigerator was valued at `
7,210.
Required: Prepare the Hire Purchase Trading Account and the General Trading Account.

Answer:

Dr. General Trading Account for the year ended on 31st March, 2013 Cr.
Particulars ` Particulars `
To Purchases 52,540 By Sales 63,900
Less: Sold on H.P. 3,900 48,640 By Closing Stock 7,210
To Gross Profit 22,470
71,110 71,110

Hire Purchase Trading Account

Dr. for the year ended on 31st March, 2013 Cr.
Particulars ` Particulars `
To Goods Sold on Hire Purchase 5,800 By Cash:
To Stock Reserve 550 Down Payment 900
To Gross Profit 778 Installments 1,400 2,300
By Hire Purchase Stock at the end 1,500
By Goods Repossessed (Cost equivalent) 1,428
By Goods Sold on Hire Purchase (Loading) 1,900
7,128 7,128

Working Notes:
Total Installments Installments Collected Installment not due or unpaid
Radio 500 200 300
Motor cycle 2,000 800 1,200
Refrigerator 2,400 400 2,000
Hirepurchase Pr ice  Cost Pr ice
Unrealised profit of installments not due = Installments not due×
Hirepurchase Pr ice
Radio = ` 300 × ` 200/600 = `100, Motor Cycle = 1,200 × ` 900/` 2,400 = ` 450,

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Cost Equivalent on Refrigerator = ` 2,000 × ` 2,000/ ` 2,800 = `1,428

Study Note — 8: Branch and Departmental Accounting

Question No 11.

(a) A Chennai Merchant opens a New Branch in Mathura, which trades independently of the
Head Office. The transactions of the Branch for the year-ended 31st March are as under -
Particulars `
Goods supplied by Head Office 2,00,000
Purchases from Outsiders:
- Credit 1,55,500
- Cash 30,000 1,85,500
Sales: '
- Credit 2,50,500
- Cash 46,000 2,96,500
Cash received from Customers 3,04,500
Trade Creditors Paid 1,42,500
Expenses Paid by Branch 89,500
Furniture purchased by Branch on credit 35,000
Cash Received from Head Office initially 40,000
Remittances to Head Office 1,10,000
Prepare the Branch Final Accounts and the Branch Account in the Head Office Books on
incorporation of the Branch Trial Balance in the Head Office Books, after taking the following
into consideration:
(i) The Accounts of the Branch Fixed Assets are maintained in the Head Office books.
(ii) Write off Depreciation on Furniture at 5 percent per annum for full year.
(iii) A Remittance of `20,000 from the Branch to the Head Office is in Transit.
(iv) The Branch values its Closing Stock at `1,20,000.

Answer:

In the books of Mathura Branch

A. Trading and Profit and Loss Account for year ending 31st March
Particulars ` ` Particulars ` `
To Goods Supplied by HO 2,00,000 By Sales:
To Purchases: - Credit 2,50,000
- Credit 1,55,500 - Cash 46,000 2,96,500
- Cash 30,000 1,85,500 By closing stock 1,20,000
To Gross Profit c/d (bal.fig.) 31,000
4,16,500 4,16,500
To Expenses (HO A/c Contra) 89,500 By Gross Profit b/d 31,000
To Depreciation on Furniture By Net Loss (transferred
(35,000 × 5%) 1,750 to HO A/c) (bal. fig.) 60,250
91,250 91,250

B. Balance Sheet as on year ended 31st March (before transfer of Branch Assets and Liabilities
to HO A/c)
Capital and Liabilities ` Properties and Assets `
Head Office Account (Stage I Bal. WN 2) 36,500 Closing Stock 1,20,000
Trade Creditors 13,000 Cash in Hand (WN 1) 18,500
Creditors for Furniture 35,000
Advances from Customers 54,000
1,38,500 1,38,500

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Working Notes:

1. Branch Cash Account (to determine the closing Balance)

Receipts ` Payments `
To Head Office (Initial Receipt) 40,000 By Cash Purchases 30,000
To Cash Sales 46,000 By Trade Creditors 1,42,500
To Trade Debtors 3,04,500 By Expenses 89,500
By Head Office A/c (Remittances made) 1,10,000
By balance c/d (balancing figure) 18,500
3,90,500 3,90,500

2. Head office Account (This is prepared to determine Closing HO Balance in Branch Books
from I Stage)
Particulars ` Particulars `
To Branch Cash A/c (Note 2) 1,10,000 By Goods received from HO A/c 2,00,000
To Branch P & L A/c (Note 3) 60,250 By Branch Cash A/c 40,000
To Creditor for Furniture 35,000 By Depreciation on Furniture A/c(Note 1) 1,750
To Stage I balance c/d (bal. fig.) 36,500
2,41,750 2,41,750
To Branch Cash A/c 18,500 By balance b/d 36,500
To Branch Stock A/c 1,20,000 By Creditors A/c 13,000
By Creditors for Furniture A/c 35,000
By Advance from Customers 54,000
1,38,500 1,38,500

3. Mathura Branch Account in the books of Head office

Particulars ` Particulars `
To Cash (Initial Investment) 40,000 By Cash (Remittance) 1,10,000
To Goods Sent to Branch A/c 2,00,00 By Branch Stock 1,20,000
To Branch Furniture 0 1,750 By Branch Cash 18,500
To Branch Trade Creditors 13,000 By General P & L A/c (Loss Transfer) 60,250
To Branch Creditors for Furniture 35,000 By Branch Furniture 35,000
To Branch Trade Debtors (Advances) 54,000
3,43,750 3,43,750
Notes:
1. Since Branch Accounts are maintained by at HO, the Entry passed in Branch and HO
Books is are under –
Branch Books Dr. Cr. Head Office Books Dr. Cr.
(`) (`) (`) (`)
(a) For Purchase of Furniture (a) For Purchase of Furniture
Head Office A/c Dr. 35,000 Branch Furniture A/c Dr. 35,000
To Creditors for Furniture 35,000 To Branch A/c 35,000
(b) For Depreciation (b) For Depreciation
Depreciation A/c Dr. 1,750 Branch A/c Dr. 1,750
To Head Office A/c 1,750 To Branch Furniture A/c 1,750

2. It is assumed that the remittances of `1,10,000 include Cash in Transit of `20,000 from
Branch to Head Office. The adjustment for this Cash in Transit is assumed to be made in
Head Office Books.

3. It is assumed that the Branch transfers all its Assets and Liabilities including Profits / Losses
after preparing Branch Trading and Profit & Loss A/c.

In the Books of Mathura Branch

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Particulars Dr. (`) Cr. (`)

(a) For transfer of Branch Losses
Head Office A/c Dr. 60,250
To Branch P & L A/c 60,250
(b) For transfer of Branch Assets
Head Office A/c Dr. 1,38,500
To Closing Stock A/c 1,20,000
To Branch Cash A/c 18,500
(c) For transfer of Branch Liabilities
Creditors A/c (1,55,500 -1,42,500) Dr. 13,000
Creditors for Furniture A/c Dr. 35,000
Advance from Customers A/c (3,04,500 - 2,50,500) Dr. 54,000
To Head Office A/c 1,02,000

(b) The following purchases were made by a business house having three departments:
Department A 1,000 units
Department B 2,000 units at a total cost of ` 1,00,000.
Department C 2,400 units
Stock on 1st January were: Department A 120 units; Department B 80 units and Department
C 152 units

The Sales were

Department A 1,020 units at ` 20 each
Department B 2,000 units at ` 22.50 each
Department C 2,400 units at ` 25 each
The Rate of Gross Profits is the same in each case. Prepare the Departmental Trading
Account.

Working Notes:
1. Calculation of Purchase Rate/Cost Price per unit
A B C
(a) Ratio of Selling Prices 20 22.50 25
8 9 10
(b) Ratio of Questions Purchased 1,000 2,000 2,400
5 10 12
(c) Composite Ratios [a x b] 40 90 120
4 9 12

4 9
 Purchases of each department are : A = x ` 1,00,000 = ` 16,000; B = x ` 1,00,000 =
25 25
12
` 36,000 C = x ` 1,00,000 = ` 48,000
25
 Purchases 
 Cost Price per unit =
 Units Purchased 
`16, 000
A= = ` 16
1, 000
` 36, 000
B= = ` 18 This could be found out in a different way as illustrated in Illustration
2, 000
7.
` 48, 000
C= = ` 20
24

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2. Valuation of Opening Stock

3. [Quantity x Cost Price Per Unit]
`
A = 120 x ` 16 1,920
B = 80 x ` 18 1,440
C = 152 x ` 20 3,040

4. Calculation of Sales
[Quantity Sold x Selling Price Per Unit]
`
A = 1,020 x ` 20 20,400
B = 1,920 x ` 22.50 43,200
C = 2,496 x ` 25 62,400

5. Valuation of Closing Stock

A B C
(a) Calculation of Units of Closing Stock
Units of Opening Stock 120 80 152
+ Units Purchase 1,000 2,000 2,400
1,120 2,080 2,552
- Units Sold 1,020 1,920 2,496
Units of Closing Stock 100 160 56
(b) Values of Closing Stock [units x Cost Price] 100 x ` 16 160 x ` 18 56 x ` 20
= ` 1,600 = ` 2,880 = ` 1,120

Answer:

Departmental Trading Account for the year ended ………………

Dr. Cr.
A B C A B C
` ` ` ` ` `
To Opening Stock 1,920 1,440 3,040 By Sales 20,400 43,200 62,400
To Purchases 16,000 36,000 48,000 By Closing Stock 1,600 2,880 1,120
To Gross Profit 4,080 8,640 12,480
22,000 46,080 63,520 22,000 46,080 63,520
Note: The correctness of the solution can be verified very easily. The Rate of G.P.
 GP 
 Sales x 100 in each department is the same [here 20%].

Question No 12.

(a) Govind Limited has a Retail Branch at Noida. Goods are sold to Customers at Cost plus
100%. The Wholesale Price is Cost Plus 80%. Goods are invoiced to Noida at Wholesale
Price. From the following particulars, find out the Profit made by the Head Office and
Noida Branch for the year ended 31st March 20X2 using Invoice Method.
(b)
Particulars Head Office (`) Noida (`)
Stock on 1st April 20X1 56,000 -
Purchases 3,00,000 -
Goods Sent to Branch (at Invoice Value) 1,08,000 -
Sales 3,06,000 1,00,000
Expenses 90,000 4,000

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Sales at Head Office are made only on Wholesale basis and Sales at Branch are made only to
Customers. Stock at Branch is valued at Invoice Price.

Answer::

1. Trading and Profit and Loss Account for the year ended on 31st March
Particulars HO Branch Particulars HO Branch
To Opening Stock 50,000 NIL By Sales 3,06,000 1,00,000
To Purchases 3,00,000 NIL By Goods Sent to Branch 1,08,000 -
To Goods received from HO - 1,08,000 By Closing Stock (WN 1,2) 1,20,000 18,000
To Gross Profit (balancing
figure) 1,84,000 10,000
5,34,000 1,18,000 5,34,000 1,18,000
To Expenses 90,000 4,000 By Gross Profit 1,84,000 10,000
To Net Profit (balancing
figure) 94,000 6,000
1,84,000 10,000 1,84,000 10,000

Note: The Closing Stock of the Branch is taken at the Invoice Price, due to the requirement of
the question.
2. General Profit and Loss Account
Particulars ` Particulars `
To Stock Reserve on Branch Closing 8,000 By Head Office Profit 94,000
80 By Branch Profit 6,000
Stk (18,000 × )
100 By Stock Reserve on Branch Opg Stk Nil
To Net Profit (balancing figure) 92,000
1,00,000 1,00,000

Working Notes:
1. Computation of Branch Closing Stock at Invoice Price
Particulars `
Invoice Value of goods sent to Branch 1,08,000
Less: Invoice Value of goods sold by Branch (` 1,00,000 ×180 ÷ 200) (90,000)
Branch closing stock (at Invoice Price) 18,000

2. Computation of Head Office closing Stock

Particulars `
Opening Stock 50,000
Add: Purchase 3,00,000
3,50,000
100
Less: Cost of Goods sold by Head Office (`3,06,000 × )
180 (1,70,000)
1,80,000
100
Less: Cost of Goods sent to Branch (`1,08,000× )
180 (60,000)
Head Office Closing stock 1,20,000

(c)
From the following data, prepare Departmental Trading and Profit and Loss Account for the
year ended December 31, 2013.
Departments
A B

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` `
Opening Stock 40,000 ----
Purchases from outside 2,00,000 20,000
Wages 10,000 1,000
Transfer of goods from Department A --- 50,000
Closing Stock at cost to the Department 30,000 10,000
Sales to outsiders 2,00,000 71,000

B‘s entire stock represents goods from Department A which transfers them at 25% above its
cost. Administrative and Selling Expenses amount to ` 15,000 which are to be allocated
between Departments A and B in the ratio of 4 : 1 respectively. Also show the amount of
provision to be made for unreaslied profit.

Answer:
……………..
Departmental Trading and Profit and Loss Account for the year ended 31.12.13
Dr. Cr.
Particulars Dept. A Dept. B Particulars Dept. A Dept. B
` ` ` `
To Opening Stock 40,000 --- By Sales 2,00,000 71,000
To Purchases 2,00,000 20,000 By Transfer 50,000 ---
To Wages 10,000 1,000 By Closing Stock 30,000 10,000
To Transfer 50,000
To Gross Profit c/d 30,000 10,000
2,80,000 81,000 2,80,000 81,000
To Administrative and 12,000 3,000 By Gross Profit b/d 30,000 10,000
Selling Expenses [4 : 1]
To General Profit & Loss A/c 18,000 7,000
[Departmental Net Profits]
30,000 10,000 30,000 10,000

(d)
General Profit and Loss Account for the year ended 31.12.13
Dr. Cr.
Particulars Amount (`) Particulars Amount (`)
To Provision on Stock [Note] 2,000 By Departmental Profit & Loss
A/c:
To Balance c/f / Capital A/c 23,000 A 18,000
B 7,000
25,000 25,000
Note:
B‘s Closing Stock = ` 10,000
25
A‘s Profit included there of ` 10,000 = ` 2,000
125
If this Provision had been shown in the Departmental Trading and Profit & Loss Account, it
would be debited to A‘s column.
As a result the Departmental Net Profit of A would be shown as ` 16,000.

Study Note — 9: Self Balancing Ledgers and Sectional Balancing Ledgers

Question No 13.

The following pieces of information are available from the books of Mr. Ajana for the period to
30.9.13:

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(i) Total sales during the period amounted to `62,200 which included sale proceeds of an
old machine ` 3,400. The book value of the machine on the date of sale was ` 3,100.
Cash sales during the period had been 80% less than credit sales.
(ii) The trader collected dues from customers by cash and cheques which actually
represented 80% of the aggregate of his opening dues and credit sales during the period.
However, this actual collection represented the amount received after allowing a
discount of 5% of dues.
(iii) Bills Receivable drawn during the period totalled `5,000 of which bills amounting to 7
2,000 were endorsed in favour of suppliers. Of these endorsed bills, one for 7 600 was
dishonoured for non-payment, the party being totally insolvent.
(iv) Purchases during this period were 66% of total sales. 25% of total purchases represented
cash purchases.
(v) Cheques received from customers but dishonoured totalled `6,000. `500 is totally
irrecoverable.
(vi) Bad Debts written off in earlier years but collected in this period amounted to ` 420.
(vii) Sundry Debtors as on 1.4.2013 were ` 22,250. Show the Debtors' Ledger Adjustment
Account in the General Ledger of Mr. Ajana.

Answer:

Working Notes:
(i) Calculation of credit sales during the period
Cash Sales were 80% less than credit sales. So if credit sale was `100, cash sale was ` 20.
100 5
So out of total sales credit sales were or ths
100 + 20 6
`
Sales including Proceeds of Sale of Asset 62,200
Less : Sale Proceeds of Old Machine (Book value requires no attention) 3,400
Total Sales of Goods 58,800
5
and credit sales = of 58,800 = ` 49,000
6

(ii) Collection from debtors and discount allowed

Actual Collection = 80% of (Opening Debtors + Credit Sales) = 80% of (22,250 + 49,000) = `
57,000
5
As discount allowed = 5%  Collection = 95%; Discount allowed = of collection =
95
1
× 57,000 = ` 3,000
19
(iii) There will be no entry here for purchases, bill endorsed to supplier and bad debts
subsequently recovered.
(iv) Total bad debts written off = ` 600 + ` 500 = `1,100

Solution:
In the General Ledger of Mr. Ajana
Debtors Ledger Adjustment Account
Dr. Cr.
Date Particulars Amount Date Particulars Amount
` `

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1.4.13 To Balance b/f 22,250 30.9.13 By General Ledger Adj. A/c :

30.9.13 `` General Ledger Adj. A/c : Cash/Bank (Received) 57,000
Sales (Credit) 49,000 Bill Receivable 5,000
Creditors 600 Discount Allowed 3,000
(Endorsed Bill Dishonoured) Bad Debts 1,100
Bank (Cheques received but Dishonoured) 6,000 `` Balance c/f 11,750

77,850 77,850

Question No 14.

J. B. Ltd, that adopted sectional balancing system, maintains two sales ledgers named as
"Bangla" and "outside Bangla". Prepare the Debtors Ledger Control Accounts in the General
Ledger from the following particulars:
Bangla Outside Bangal
` `
Opening Balances : Debit 18,000 30,000
Credit 500 200
Sales 32,000 40,000
Collections from Debtors 22,000 50,000
Returns Inward 2,000 3,000
Discounts allowed 1,500 900
Bills Received 1,800 1,000
Bills Discounted — 500
Bills Dishonoured 400 —
Bad Debts written off 1,900 2,800
Closing credit balances 300 400
Goods sold on credit for ` 2,000 to S. Mitra of "Bangla' had been correctly debited to the
individual count of the debtor but in error has been entered in "Outside Bangla" analysis
column in Sales Journal and has been posted accordingly.

Solution:
Debtors Ledger Control Account
Dr. Cr.
Date Particulars Bangla Outside Date Particulars Bangla Outside
Bangla Bangla
To Balance b/f 18,000 30,000 By Balance b/f 500 200
`` Sales 32,000 40,000 `` Returns Inward 2,000 3,000
`` Bill Receivable 400 --- `` Cash 22,000 50,000
(Dishonoured) 2,000 `` Discount Allowed 1,500 900
``Transfer Balance c/d 300 400 `` Bad Debts 1,900 2,800
`` Bills Receivable 1,800 1,000
`` Transfer Balance c/d 23,000 2,000
10,500
52,700 70,400 52,700 70,400

Question No 15.

Mr. Nimbupani, the accountant F.F.C. Ltd., committed some errors in preparing the accounts
of the concern for the year accounting year ending on 31.3.2000.
You are requested to show the necessary entries assuming
A. There is no self-balancing system and
B. There is self-balancing system.

You may use Suspense Account, if required:

(i) Mr. Sur returned goods of the value of ` 1,200 which were entered in the sales day book
and posted to the credit of his account.

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(ii) Goods sold to Mr. Bhattasali for ` 2,000 was correctly recorded in the sales day book but
wrongly posted as 20 to the debit of the account of Mr. Bhattacharjee.
(iii) Mr. Moitra returned goods of the value of ` 420 but this was posted to the debit of his
account.
(iv) Discount allowed ` 4,000 were recorded in the Sales Ledger but were not adjusted in the
Sales Ledger.

Solution :
F.F.C. Ltd.
Journal Entries
If there is no Self-Balancing System If there is Self-Balancing System
1. Sales A/c ............................. Dr. 1,200 1. (a) Same
Sales Returns A/c ............... Dr. 1,200 (b) General Ledger Adj. A/c... Dr. 2,400
To Suspense A/c ................... 2,400 (in Sales Ledger)
[Goods returned and posted to Sales A/c To Sales Ledger Adj. A/c 2,400
and Sales Returns A/c not debited, now (in General Ledger)
rectified]
2. Bhattasali A/c …………….Dr. 2,000 2. Same entry in Sales Ledger.
To Bhattacharjee/c 20
To Suspense A/c 1,980
[Sale to Bhattasali for ` 2,000 wrongly
debited to Bhattacharjee A/c as ` 20,
now rectified.]
3. Suspense A/c ................... Dr. 840 3. Same entry in Sales Ledger.
To Moitra A/c 840
[Goods returned by Moitra debited to his
A/c, now rectified.]
4, Discount Allowed A/c. …Dr. 4,000 4. Same entry in Sales Ledger.
To Suspense A/c 4,000
[Discount Allowed but not adjusted in
General Ledger, now rectified.]

Study Note — 10: Accounting For Service Sectors

Question No 16:

(a) Write short note on Effect of Uncertainties on Revenue Recognition.

Answer:
Para 9 of AS 9 on ―Revenue Recognition‖ deals with the effect of uncertainties on Revenue
Recognition. The Para states:
(i) Recognition of revenue requires that revenue is measurable and at the time of sale or the
rendering of the service it would not be unreasonable to expect ultimate collection.
(ii) Where the ability to assess the ultimate collection with reasonable certainty is lacking at
the time of raising any claim, e.g., for escalation of price, export incentives, interest etc.
revenue recognition is postponed to the extent of uncertainty involved. In such cases, it
may be appropriate to recognize, revenue only when it is reasonably certain that the
ultimate collection will be made. When there is uncertainty as to ultimate collection,
revenue is recognized at the, time of sale or rendering of service even, though payments
are made by installments.
(iii) When the uncertainty relating to collectability arises subsequent to the time of sale or
rendering of the service, it is more appropriate to make a separate provision to reflect
the uncertainty rather than to adjust the amount of revenue originally recorded.
(iv) An essential criterion for the recognition of revenue is that the consideration receivable
for the sale of goods, the rendering of services or from the use by others of enterprise

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resources is reasonably determinable. When such consideration is not determinable

within reasonable limits; the recognition of revenue is postponed.
(v) When recognition of revenue is postponed due to the effect of uncertainties, it is
considered as revenue of the period in which it is properly recognized.

(b) The company undertook a contract for building a crane for ` 15 lacs. As on 31.03.14 it
incurred a cost of ` 2.25 lacs and expects that there will be ` 13.5 lacs more for
completing the crane. It has received so far ` 1.5 lacs as progress payment.

Answer:
Para 21 of AS 7 (Revised) ‗Construction Contracts‘ provides that when the outcome of a
construction contract can be estimated reliably, contract revenue and contract costs
associated with the construction contract should be recognized as revenue and expenses
respectively with reference to the stage of completion of the contract activity at the reporting
date.
As per para 32 of the standard, during the early stages of a contact it is often the case that
the outcome of the contract cannot be estimated reliably. Nevertheless, it may be probable
that the enterprise will recover the contract costs incurred. Therefore, contract revenue is
recognized only to the extent of costs incurred that are expected to be recovered. As the
outcome of the contract cannot be estimated reliably, no profit is recognized. Para 35 of the
standard states that when it is probable that the total contacts costs will exceed total
contract revenue, the expected loss should be recognized as an expense immediately. Thus
the foreseeable loss of ` 75000 (expected cost ` 15.75 lacs less contract revenue ` 15 lacs
should be recognized as an expense in the year ended 31st March, 2014.
Also, the following disclosures should be given in the financial statements:
(i) the amount of contract revenue recognized as revenue in the period;
(ii) the aggregate amount of costs incurred and loss recognized up to the reporting date;
(iii) amount of advances received;
(iv) amount of retentions; and
(v) gross amount due from/due to customers Amount.

Question No.17

(a) P Ltd., used certain resources of Q Co. Ltd. In return Q Ltd. received ` 30 lacs and ` 45 lacs
as interest and royalties respective from Y Co. Ltd. during the year 2013-2014.

You are required to state whether and on what basis these revenues can be recognized by Q
Ltd.

Answer:

As per para 13 of AS 9 on Revenue Recognition, revenue arising from the use by others of
enterprise resources yielding interest and royalties should only be recognized when no
significant uncertainty as to measurability or collectability exists. These revenues are
recognized on the following bases:
(i) Interest: on a time proportion basis taking into account the amount outstanding and
the rate applicable.
(ii) Royalties: on an accrual basis in accordance with the terms of the relevant agreement.

(b) Briefly describe with reference to Accounting Standard 7 on Accounting for construction
contracts, the methods which may be used for recognizing revenue on construction
contracts.
Answer

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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
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.

Question No.18

Y. Ltd. undertook a contract No. 80 for ` 7,50,000. The contract account showed the following
particulars:
2012 :
Materials ` 30,000, Wages ` 25,000, Overheads ` 10,000, Plant ` 1,00,000 and Materials at site
at close ` 3,000.
2013:
Materials ` 1,00,000, Wages ` 60,000, Overheads ` 15,000, Materials returned, ` 8,000. The Plant
at its depreciated value was transferred to contract No. 88. Uncertified work ` 15,000.
2014:
Materials ` 1,60,000, Wages ` 1,00,000, Overheads ` 28,000 and Materials ` 4,000.
The amount of work certified at the end of the first year was ` 1 ,00,000. The work certified upto
the end of the second year was ` 4,00,000 and the work certified in the third year was `
3,50,000. 80 percent of the certified work was received in cash.
Profit to be taken credit for are one-third and one-half on cash basis in each of the two years1
respectively. Depreciate plant by 10 percent on balance at the beginning of each year.
Prepare accounts in respect of the contract at the end of each year.

2012 : ` 2012 : `
To Materials 30,000 By Work-n-Progress A/c :
To Wages 25,000 Materials 3,000
To Overheads 10,000 Plant 90,000
To Plant 1,00,000 Certified Work 1,00,000
To Balance c/d 28,000
1,93,000 1,93,000
To Profit & Loss Account 7,467 By Balance b/d 28,000
To Work-in-Progress Account 20,533
28000 28,000

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2013 : 2013 :
To Work-in-Progress — By Work-in-Progress— Opening
20,533
Opening balance transferred: 3,000 provision transferred
8,000
Materials 90,000 By Materials — returned
Plant 1,00,000 By Contract No. 88 —
81,000
Certified Work 1,00,000 Plant transferred
To Materials 60,000 By Work-in-Progress c/d:
To Wages 15,000 Uncertified Work 15,000
To Overheads 1,56,533 Certified Work 4,00,000
To Balance c/d
5,24,533 5,24,533
By Balance b/d
To Profit & Loss Account 62,613 1,56,533
To Work-in-Progress 93,920
1,56,533 2014 : 1,56,533
2014 : By Work-in-Progress
To Work-in-Progress : 93,920
By Bank — sale of materials
Uncertified Work 15,000 4,000
By Contractee‘s Account
Certified Work 4,00,000
(4,00,000 + 3,50,000)
To Materials 1,60,000 7,50,000
To Wages 1,00,000
To Overheads 28,000
To Profit & Loss Account 1,44,920
8,47,920 8,47,920

Notes:
Profit credited in 2012 and 2013
Particulars 2012 (`) 2013 (`)
Accounting profit 28,000 1,56,533
Cash Profit – on 80% basis 22,400 1,25,226
Proportionate profit to be credited 1/3 x 22,400 1/2 x 1,25,226
=7,467 =62,613

In absence of specific direction, on profit in 2012 would have been considered as extent of
completion was less than 1/3.
In 2014 the entire work was certified and hence no provision is necessary.

Study Note — 11: Accounting for Special Transactions

Question No 19.

(a) On 01-04-2012, Mr. T. Shakharan purchased 5,000 equity shares of `100 each in V Ltd. @ `
120 each from a broker, who charged 2% brokerage, he incurred 50 paisa per ` 100 as
cost of shares transfer stamps. On 31-01-2013 bonus was declared in the ratio of 1 : 2.
Before and after the record date of bonus shares, the shares were quoted at ` 175 per
share and ` 90 per share respectively. On 31-01-2013, Mr. T. Shekharan sold bonus shares
to a broker, who charged 2% brokerage. Show the Investment Account in the books of T.
Shekharan, who held the shares as Current Assets and closing value of investments shall
be made at cost or market value whichever is lower.

Solution:

Investment Account

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for the year ended 31st March, 2013

(Scrip: Equity Shares of V Ltd.)
Dr. Cr.
Date Particulars Nominal Value Cost (`) Date Particulars Nominal Cost
Value
(`) (`)
1.04.12 To Bank A/c 5,00,000 6,15,000 31.3.13 By Bank A/c 2,50,000 2,20,500
31.01.13 To Bonus 31.03.13 By Balance c/d 5,00,000 4,10,000
Shares 2,50,000 -
31.03.13 To P & LA/c - 15,500
7,50,000 6,30,500 7,50,000 6,30,500

Working Notes:

(i) Calculation of Cost of Equity Shares purchased

1
= (5,000 × `120) + (2% of `6,00,000) + % 0f `6,00,000) = `6,15,000
2
(ii) Calculation of Sale Proceeds of Equity Shares sold
(2,500 × `90) - (2% of `2,25,000) = `2,20,500
(iii) Calculation of Profit on Sale of Bonus Shares = Sale proceeds - Average cost
 2,50,000 
= 2,20,500 -  6,15,000   = `15,500
 7,50,000 
(iv) Valuation of equity shares at the end
5,00,000
Cost = 6,15,000  = `4,10,000
7,50,000

Market value = 5,000 shares × `90 = `4,50,000

Closing balance has been valued at `4,10,000 i.e. at cost which is lower than the market
value.

(b) On 1st April, 2013, Rajat has 50,000 equity shares of P Ltd. at a book value of `15 per share
(face value ` 10 each). He provides you the further information:
(i) On 20th June, 2013, he purchased another 10,000 shares of P Ltd. at ` 16 per share.
(ii) On 1st August 2013, P Ltd. issued one equity bonus share for every six shares held by
the shareholders.
(iii) On 31st October, 2013, the directors of P Ltd. announced a right sssue which entitle the
holders to subscribe three shares for every seven shares at `15 per share. Shareholders
can transfer their rights in full or in part.
Rajat sold 1/3rd of entitlement to Umang for a consideration of `2 per share and
subscribe the rest on 5th November, 2013.
You are required to prepare Investment A/c in the books of Rajat for the year ending
31st March, 2014.

Answer:
Investment account in the books of Rajat
Dr. (Equity Shares in P Ltd.) Cr.
Date Particulars No. of ` Date Particulars No. of `
shares shares

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01.04.13 To Balance b/d 50,000 7,50,000 05.11.13 By Bank A/c

20.06.13 To Bank A/c 10,000 1,60,000 (sale of rights) - 20,000
01.08.13 To Bonus issue 10, 000 - 31.03.14 By Balance c/d
05.11.13 To Bank A/c (Bal.flg.) 90,000 11,90,000
(right shares) 20,000 3,00,000
90,000 12,10,000 90,000 12,10,000

Working Notes:
(i) Bonus Shares = (50,000 + 10,000)/6 = 10,000 shares
(ii) Right Shares = [(50,000 + 10,000 + 10,000)/7] × 3 = 30,000 shares
(iii) Sale of Rights = (30,000 shares × 1/3)× `2 = ` 20,000
(iv) Rights subscribed = (30,000 Shares x 2/3)× `15 = `3,00,000

Question No.20

(a) From the following, prepare an account current as sent by Arun to Bhola on 30th June,
2013, charging interest on debits @ 6% p.a. and on credits @ 4% p.a.:
Year `
2013
Jan. 1 Balance due from Bhola 600
Jan. 10 Sold goods to Bhola, 520
Jan. 17 Bhola returned goods 125
Feb. 10 Bhola paid by cheque 400
Feb. 14 Bhola accepted Arun's draft for one month 300
Apr. 29 Goods sold to Bhola 615
May 15 Received cash from Bhola 700
June 5 Bhola accepted Arun's bill for 3 months 500

Answer:
Bhola in Account Current with Arun
for the year ending on 30th June 2013

Date Particulars Amount Days Product Date Particulars Amount Days Product
` `
2013 2013
Jan 1 To Balance b/d 600 181 1,08,600 Jan 17 By Sale Return 125 164 20,500
Jan 10 To Sales A/c 520 171 88,920 Feb 10 By Bank A/c 400 140 56,000
Apr 29 To Sales A/c 615 62 38,130 Feb 14 By B/R A/c (Due 31,500
Jun 30 To Interest A/c 27.21 — — date: Mar. 17) 300 105 32,200
To Balance c/d 262.79 — — May 15 By Cash A/c -35,000
— June 5 By B/R (Due 700 46
date: 8th Sept. 500 (70)
2,025 — 2,35,650 2,025 — 1,05,200
6 1

Interest on debit side Product Total = 2,35,650 × 100 365 = 38.74
4 1

Interest on Credit side Product Total = 1,05,200 × 100 365 = 11.53

Net = 27.21

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(b) Shankar owed to Ramesh the following sums of money on the due dates given below:

Due date Amount Due (`)

10 Aug.
th 500
25th Aug. 300
5th Sep. 1,000
10th Sep. 800
15th Sep. 400
Calculation the average due date on which Shankar may pay the total sum due.

Solution:

Calculation of Average Due Date [BASE DATE: 10TH AUG.]

A Date of Maturity B Amount (`) C No. of days from base date D = B × C Product
10th Aug. 500 0 0
25th Aug. 300 15 4,500
5th Sept. 1,000 26 26,000
10th Sept. 800 31 24,800
15th Sept. 400 36 14,400
3,000 69,700

Total Pr oducts
Average Due Date = Base date + Days
Total Amount
= 10th Aug. + (69,700/3,000) days
Average Due Date = 10th Aug. + 23.23 days = 2nd September

Question No.21

(a) Calculate No. days from the base date (i.e. 16th Aug) X owes Y `2,000 on 16th Aug.

Date No. of days from Base date Amount (`)

20th Oct 2months 5,000
20th Oct 60 days 6,000

Solution:

Due date of Bill (including 3 grace days) No. of days from Base date Amount (`)
16th Aug. 0 2,000
23rd Dec. 15 + 30 + 31 + 30 + 23 = 129 5,000
22nd Dec. 15 + 30 + 31 + 30 + 22 = 128 6,000

(b) Arjun of Ahmedabad consigned 40,000 lb. of linseed oil (in 10 lb. tins) to Bhimani of
Bhilwara. The cost of oil was ` 2 per lb. Arjun paid ` 6,000 for freight and insurance. During
transit 50 tins were totally destroyed for which the insurance company directly to the
consignors ` 1,900 in full settlement of the claim.
Bhimani accepted a bill drawn on him by the consignor for ` 15,000 for 3 months. Arjun
discounted the bill for `14,750 immediately.
Bhimani sold.35,000 lbs. of oil @ ` 3 per lb. and paid the following expenses :
Godown Rent 2,200 and Advertisement ` 4,200. He sold further the remaining stock of oil to
Kamlani on credit for ` 19,000 but the latter was declared insolvent and only 25 paise per
rupee was realized from him. Bhimani charged a commission of 3 per cent plus 3 per cent
del credere.
Show the Journal Entries in the books of Bhimani assuming that he paid the amount due by
a bank draft.

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Books of Bhimani
Journal
Dr. Cr.
Date Particulars L. Amount Amount
F. ` `
Arjun A/c Dr. 15,000
To Bill Payable A/c 15,000
[Acceptance given on a bill drawn by Arjun]
Bank A/c ................................................................................ Dr. 1,05,000
To Arjun A/c 1,05,000
[Consignment goods sold on Arjun's behalf for cash]
Kamlani A/c (Consignment Debtors) ............................... Dr. 19,000
To Arjun A/c 19,000
[Consignment goods sold on Arjun's behalf on credit]
Arjun A/c ................................................................................ Dr. 6,400
To Bank A/c 6,400
[Godown Rent and Advertisement expenses paid on
consignment]
Arjun A/c ................................................................................ Dr. 7,440
To Commission A/c 7,440
[Commission due from Arjun @ 3% ordinary and 3% del credere
on sales]
Arjun A/c ..................... .. ........................................................ Dr. 95,160
To Bank A/c 95,160
[Balance remitted by a draft to Arjun]
Bank A/c ................................................................................ Dr. 14,250
Bad Debts A/c ...................................................................... Dr. 4,750
To Kamlani A/c 19,000
[Final dividend realized from Debtor]
Commission A/c ................................................................... Dr. 7,440
To Bad Debts A/c 4,750
`` Profit & Loss A/c 2,690
[Bad debts written off against commission and the balance of
the latter A/c transferred]

Question No.22

(a) Mother Dairy Products Ltd. of Vadodara has given the following particulars regarding its
tinned milk sent on consignment to Baba Stores of Kolkata
Cost Price (`) Selling Price (`) Quantity Consigned
1 kg. Tin 45 each 60 each 6,000 tins
500 gms Tin 25 each 35 each 8,000 tins

The consignment was booked on freight "To Pay" basis. The freight was charged @ 2½% of
selling value.
During transit 100, 1kg tins got damaged and the transporters agreed to pay ` 4,000 as
damage charge.
Baba Stores could sell 5,000, 1kg tins and 6,000, 500 gms. tins. It paid storage ` 360 and
insurance of stores ` 240.
Show the Consignment Account in the books of Amul Products which paid to consignee a
fixed commission of 5% on sales.

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Answer:
Books of Mother Dairy Products Ltd.
Consignment to Kolkata Account
Dr. Cr.
Particulars Amount Amount Particulars Amount
` ` `
To Goods Sent on Consignment 4,70,000 By Loss in Transit A/c 4,650
A/c [Working Note 2]
[6,000 x `45 + 8,000 × ` 25] `` Baba Stores A/c 5,10,000
`` Baba Stores A/c [5,000 × ` 60 +6,000 × ` 35]
[Working Note 1] 16,000 ``Stock on Consignment A/c 93,600
Freight 360 [Working Note 3]
Storage 240 16,600
Insurance of Stores
`` Baba Stores A/c: 25,500
Commission [@ 5% on 5,10,000] 96,150
‗‘ Profit & Loss A/c (Profit) 6,08,250 6,08,250

Working Notes:

1. Calculation of Freight [To Pay" basis means the consignee is to pay freight on the sales
value of goods consigned]
`
Sales Value of Total Goods Consigned
For 1 kg tins 6,000 × `60 3,60,000
For 500 gms. tins. 8,000 × `35 2,80,000
6,40,000
Freight 2 ½% of 6,40,000 `16,000

1. Loss in Transit [100 1kg tins]

`
Cost [100 × 45] 4,500
Add: Freight [2 ½% of sales value or 2 ½ of 100 × `60] 150
4,650
Less: Damage charge accepted 4,000
Actual Loss to be charged to P/L 650

2. Stock on consignment
Qty Cost/Unit Rate Value (`) Sales Value
1kg tins [6,000 – 100 – 5,000] 900 45 40,500 900 × 60 = 54,000
500 gms. Tins [8,000 – 6,000] 2,000 25 50,000 2,000 × 35 = 70,000
90,500 1,24,000
Add: Freight @ 2 ½% of 1,24,000 3,100
93,600

(b) On 20th July, 2013 the godown and the business premises of a merchant were affected by
fire. From the accounting records salvaged, the following information is made available to
you:
`
Stock of Goods on 1st April, 2012 1,00,000
Stock of Goods at 10% lower than cost on 31st March, '13 1,08,000
Purchases of Goods for the year 1st April, 2012 to 31st March. '13 4,20,000
Sales for the same period 6.00,000
Purchases less returns from 1st April, '13 to 20th July, '13 1,40,000
Sales Returns for the above period 3,10,000

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Sales up to 20th July, 2013 included `40,000 for which goods had not been despatched.
Purchases up to 20th July, 2013 did not include ` 20,000 for which purchase invoices had
not been received from suppliers, though goods had been received at the godown.
Goods salvaged from the accident were worth `12,000 and these were handed over to
the insured. Ascertain the value of the claim for the loss of goods/stock which could be
preferred to the insurer.

Answer:
Dr. Cr.
Trading Account for the year ended 31.03.2013
Particulars Amount Particulars Amount Amount
` ` `
To Opening Stock 1,00,000 By Sales 6,00,000
`` Purchases 4,20,000 `` Closing Stock 1,08,000
`` Gross Profit 2,00,000  10 
Add: Under Valuation
 90 of 1,08,000 12,000 1,20,000

7,20,000 7,20,000
` 2,00,000
Rate of Gross Profit in 1995-96 = x 100 = 331/3% on sales.
`6,00,000
The net purchases in current year should be ` 1,40,000 + ` 20,000 = ` 1,60,000
Similarly Sales = ` 3,10,000 – ` 40,000 = ` 2,70,000

Memorandum Trading Account for the period from 1.4.13 to 20.7.13

Dr. Cr.
Particulars Amount Particulars Amount
` `
To Opening Stock 1,20,000 By Sales 2,70,000
`` Purchases 1,60,000 " Closing Stock (Balancing Figure) 1,00,000
1 
`` Gross Profit
 3 of 2,70,000 90,000
3,70,000 3,70,000

Statement of Claim for Loss of Stock

Particulars `
Estimated Value of Stock on 20.7.13 1,00,000
Less : Value of Salvaged Stock 12,000
Stock Lost by Fire 88,000

Question No.23

On 01.07.2013 Anil, for mutual accommodation of himself and Sunil, drew on the other a bill
for ` 10,000 payable at 3 months date. The bill was discounted with Punjab National Bank at
5% and half of the proceeds were remitted to Sunil on 02.07.2013. On 02.07.2013, Sunil drew a
bill on Anil for ` 4,000 payable at 3 months date. He discounted the bill with Central Bank of
India at 10% and remitted half of the proceeds to Anil. Sunil became bankrupt on 31.08.2013
and only 25% was received by Anil on 20.09.2013 as the first and final dividend from his estate.
Show the journal entries in the books of Anil.

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Answer:
In the books of Anil
Journal Entries
Date Particulars L. Dr. Cr.
F. (`) (`)
01.07.13 Bills Receivable A/c Dr. 10,000
To, Sunil A/c 10,000
(Being bill drawn for mutual accommodation for 3 months)
02.07.13 Bank A/c Dr. 9,875
Discount A/c Dr. 125
To, Bills Receivable A/c 10,000
( Being bill discounted by the bank)
02.07.13 Sunil A/c Dr. 5,000
To, Bank A/c 4,937.5
To, Discount A/c 62.5
(Being half the proceeds remitted to Sunil)
02.07.13 Sunil A/c Dr. 4,000
To, Bills Payable A/c 4,000
(Being bills accepted for 3 months)
02.07.13 Bank A/c Dr. 1,950
Discount A/c Dr. 50
To, Sunil A/c 2,000
(Being proceeds received from Sunil)
31.08.13 Sunil A/c Dr. 10,000
To, Bank A/c 10,000
(Being bill dishonoured as Sunil became insolvent)
20.09.13 Bank A/c Dr. 1,750
Bad Debts A/c Dr. 5,250
To, Sunil A/c 7,000
(Being amount realized from the official liquidator of Sunil @
25% and the balance proved bad)
05.10.13 Sunil A/c Dr. 4,000
To, Bank A/c 4,000
(Being bill honoured at maturity)

Question No. 24

Sourav and Sachin entered into a joint venture for buying and selling plastic goods and
agreed to share profits and losses in the ratio of 3 : 2.
On October 1, 2012, Sourav purchased goods at a cost of ` 60,000 and half of the goods were
handed over to Sachin. On October 15, he again purchased goods worth ` 20,000. He
incurred expenses ` 2,000.
On October 15, Sachin also made a purchase of ` 37,500 and, on the same day, he sent to
Sourav goods worth ` 15,000. He incurred expenses of ` 900. On October 20, Sourav in, order
to help Sachin, sent ` 16,000 to him. Both the parties sold goods at a profit of 25% on Sale.
On March 31, 2012; Sourav had unsold stock of goods of ` 12,500, of these, goods costing `
5,000 were taken away by him and the remainder sold for ` 8,000. Sachin was able to sell
away complete goods excepting goods costing ` 2,500 which were badly damaged and
were treated as un saleable. ` 3,000 owing to Sourav were unrecoverable and treated as joint
loss.
On March 31, 2013 both the parties decided to close the books. You are required to prepare:
(i) The Joint Venture Account as it would appear in the books of Sourav recording his own
transactions, and
(ii) A Memorandum Joint Venture Account, showing the profits of the business.

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In the books of Sourav

Joint Venture with Sachin Account
Dr. Cr.
Date Particulars
Amount Date Particulars Amount
(`) `
2012 Oct. 1 To Purchases 60,000 2013 By Sales 70,000
15 To Bank—Expenses 20,000 Mar. 31 Less : Bad Debts 3,000 67,000
15 To Bank—Advance 2,000 `` By Purchases -Stock taken over 5,000
20 To Cash A/c 16,000 `` By Sales A/c — Stock Sold 8,000
2013 Mar. 31 Share of Profit 15,760 `` By Bank-remittances received 33,760
1,13,760 `` 1,13,760

In the books of Sourav & Sachin

Memorandum Joint Venture Account
Dr. Cr.
Date Particulars Amount Date Particulars Amount
(`) (`)
2013 2013
Oct. 1 To Purchase Mar.
Sourav 60,000 31 By Sales:
Sourav 20,000 Sourav 70,000
Sachin 37,500 Sachin 66,667
Sourav 8,000
15 To Expenses: 2,000 By Stock
Sourav 900 - Taken over by Sourav 5,000
Sachin 3,000
Bad Debts incurred by Sourav
To Profit on Venture
2013 Sourav ` 15,760 26,267
Mar. 31 Sachin ` 10,507
1,49,667 1,49,667

Workings:
Computation of Sales
Particulars Sourav (`) Sachin (`)
Purchases (60,000 + 20,000) 80,000 37,500
Add: Received from other party 15,000 30,000
95,000 67,500
Less: Sent to other party 30,000 15,000
65,000 52,500
Less: Stock 12,500 2,500
Cost of Goods Sold 52,500 50,000
Add: Profit at 25% on Sales i.e., 33 1/3% on cost 17,500 16,667
Sales 70,000 66,667

Study Note — 12: Banking, Electricity and Insurance Company

Question No.25

Prudence Life Insurance Co. furnishes you the following information:

`
Life Insurance fund on 31.3.2014 1,30,00,000
Net liability on 31.3.2014 as per actuarial valuation 1,00,00,000
Interim bonus paid to policyholders during intervaluation period 7,50,000
You are required to prepare :

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(i) Valuation Balance Sheet;

(ii) Statement of Net Profit for the valuation period; and
(iii) Amount due to the policyholders.

Answer
Prudence Life Insurance Co.
Valuation Balance Sheet as at 31st March, 2014
Particulars ` Particulars `

To Net Liability as per actuarial valuation 100,00,000 By Life Assurance Fund 130,00,000
To Surplus 30,00,000
130,00,000 130,00,000

Statement showing Net profit for the valuation Period

Particulars `
Surplus as per Balance sheet (i.e. Valuation Balance sheet) 30,00,000
Add: Interim bonus paid 7,50,000
37,50,000

Amount due to policyholders

Particulars `
95% of net profit due to policyholders (95% of ` 37,50,000) 35,62,500
Less: Interim bonus already paid 7,50,000
28,12,500

Question No.26

From the following figures appearing in the books of Fire Insurance division of HBC General
Insurance Company, show the amount of claim as it would appear in the Revenue Account
for the year ended 31st March, 2014 :
Particulars Direct Business (`) Re-Insurance (`)
Claim paid during the year 70,05,000 10,50,000
Claim Payable — 1st April, 2014 11,44,500 1,30,500
31st March, 2013 12,18,000 79,500
Claims received – 3,45,000
Claims Receivable — 1st April, 2013 – 97,500
31st March, 2014 – 1,69,500
Expenses of Management 3,45,000 –
(includes ` 52500 Surveyor‘s fee and ` 67500
Legal expenses for settlement of claims)

Answer:
HBC General Insurance Company
(Abstract showing the amount of claims)

` ‗000 ` ‗000
Claims less Re-insurance:
Paid during the year 7,830.0
Add: Outstanding claims at the end of the year 1,128.0
8,958.0
Less: Outstanding claims at the beginning of the year 1,177.5 7,780.5

1. Claims paid during the year

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` ‗000 ` ‗000
Direct business 7,005
Reinsurance 1,050 8,055
Add: Surveyor‘s fee 52.5
Legal expenses 67.5 120
8,175
Less: Claims received from re-insurers 345
7,830

2. Claims outstanding on 31st March, 2014

` ‗000 ` ‗000
Direct business 1,218.0
Reinsurance 79.5 1,297.5
Less: Claims receivable from re-insurers 169.5
1,128

3. Claims outstanding on 1st April, 2013

` ‗000 ` ‗000
Direct business 1,114.0
Reinsurance 130.5 1,275.0
Less: Claims receivable from re-insurers 97.5
1,177.5

Question No.27

From the following calculate Weighted Average Rate of Depreciation considering the rates as
per Appendix-III
Assets Closing Balance
At Cost

1. Land under full ownership 13,00,000

2. Land under Lease 4,30,000

3. (a) Building & Civil Engineering Works other than Kutcha Roads 33,00,000

(b) Railways Sidings 40,00,000

(c) Temporary Erections such as Wooden Structures 10,00,000

4. IT Equipments 20,00,000

5. Self Propelled Vehicles 30,00,000

6. Portable Air Conditioning Plants 25,00,000

7. (a) Apparatus other than Motors let on hire 15,00,000

(b) Motors let on hire 2,00,000

8. Communication Equipments 5,00,000

9. Office Furniture, Furnishing, Equipments, Fittings & Apparatus 5,00,000

10. Plants & Machinery in generating stations 252,00,000

11. Cooling Towers & Circulating Water Systems 10,00,000

12. Hydraulic Works Forming part of the Hydro-dams, etc. 20,00,000

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13. Transformers & Switchgear 205,00,000

14. Lighting Arrestor, Batteries, Overhead lines including cable support 42,00,000

15. Meters 20,00,000

16. Static Air Conditioning Plants 100,00,000

17. Street Light Fittings 47,85,000

18. Vehicles other than Self Propelled Vehicles 2,15,000

Answer:
WEIGHTED AVERAGE RATE OF DEPRECIATION

Assets Rate Cost Depreciation

1. Land under full ownership 0.00% 13,00,000 0

2. Land under Lease 3.34% 4,30,000 14,362
3. (a) Building & Civil Engineering Works other than Kutcha Roads 3.34% 33,00,000 1,10,220
(b) Railways Sidings 3.34% 40,00,000 1,33,600
(c) Temporary Erections such as Wooden Structures 100.00% 10,00,000 10,00,000
4. IT Equipments 15.00% 20,00,000 3,00,000
5. Self Propelled Vehicles 9.50% 30,00,000 2,85,000
6. Portable Air Conditioning Plants 9.50% 25,00,000 2,37,500
7. (a) Apparatus other than Motors let on hire 9.50% 15,00,000 1.42,500
(b) Motors let on hire 6.33% 2,00,000 12,660
8. Communication Equipments 6.33% 5,00,000 31,650
9. Office Furniture, Furnishing, Equipments, Fittings & Apparatus 6.33% 5,00,000 31,650
10. Plants & Machinery in generating stations 5.28% 252,00,000 13,30,560
11. Cooling Towers & Circulating Water Systems 5.28% 10,00,000 52,800
12. Hydraulic Works Forming part of the Hydro-dams, etc. 5.28% 20,00,000 1,05,600
13. Transformers & Switchgear 5.28% 205,00,000 10,82,400
14. Lighting Arrestor, Batteries, Overhead lines including cable support 5.28% 42,00,000 2,21,760
15. Meters
16. Static Air Conditioning Plants 5.28% 20,00,000 1,05,600
17. Street Light Fittings 5.28% 100,00,000 5,28,000
18. Vehicles other than Self Propelled Vehicles 5.28% 47,85,000 2,52,648
5.28% 2,15,000 11,352

901,30,000 59,89,862

Question No.28

Discuss the applicability of Accounting Standard on Electricity Company.

Answer:
The objective of financial statements is to provide information about the financial position,
performance and cash flows of an enterprise that is useful to a wide range of users in making
economic decisions. Financial statements prepared for this purpose meet the common needs
of most users.
However, financial statements do not provide all the information that users may need to
make economic decisions since
(a) these largely portray the financial effects of past events, and
(b) do not necessarily provide non-financial information.

Financial statements also show the results of the stewardship of management, or the
accountability of management for the resources entrusted to it. The users may wish to assess
the stewardship or accountability of management in order to make economic decisions;

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these decisions may include, for example, whether to hold or sell their investment in the
enterprise or whether to reappoint or replace the management.
Considering the various uses and to achieve a standardised comparability of the financial
statements over a period of time or across organizations, the accounting standards have
been promulgated. The management of any company is mandated as per the Companies
Act, 2013 to declare that the company has followed the Accounting Standards prescribed
under Companies Act, 2013.

Considering these issues it is important that the requirements of these Standards are complied
with in the accounting functions to the extent applicable. Although all the accounting
standards are applicable to the electricity companies, some of the specific applications
have been discussed below:

1. (AS) 2 – Valuation of Inventories

The revised standard came into effect in respect of accounting periods commencing on
or after 1.4.1999 and is mandatory in nature.
The Standard mandates the following:
(i) Inventories should be valued at the lower of cost and net realisable value.
(ii) The cost of inventories should comprise all costs of purchase, costs of conversion and
other costs incurred in bringing the inventories to their present location and condition.
Specific issues relating to electricity companies:
(i) The unique feature of Power sector is that electricity cannot be stored and hence
there are no finished goods or work in progress in stock. The inventories would
generally comprise materials, stores and supplies and fuels. As per AS 2 these are
required to be valued at lesser of cost or Net Realisable Value (NRV). Generally, the
materials, stores and supplies and fuels are valued at cost.
(ii) The cost of purchase of materials especially coal and fuel which forms major part of
inventory should include:
- All duties and taxes (except those that are subsequently recoverable from the
taxing authorities)
- Freight inwards on an actual basis.
- All expenditure attributable to bring the inventories to the current location and
condition which includes freight cost, handling cost and other direct costs (like
coal handling costs, cost of employees involved in transportation of fuel and
converting it to the consumable stage).

2. Accounting Standard (AS) 6 – Depreciation Accounting

This Standard deals with depreciation accounting and applies to all depreciable assets,
except the following items to which special considerations apply:
(i) Forests, plantations and similar regenerative natural resources
(ii) Wasting assets including expenditure on the exploration for and extraction of minerals,
oils, natural gas and similar non-regenerative resources
(iii) Expenditure on research and development
(iv) Goodwill
(v) Livestock
This statement also does not apply to land unless it has a limited useful life for the
enterprise.
The depreciable amount of a depreciable asset should be allocated on a systematic
basis to each accounting period during the useful life of the asset.

Specific issue relating to electricity companies:

Under the provisions of the Electricity Act, depreciation has to be provided at the rates
prescribed by the Government of India / Regulatory Commission so as to ensure that 90%
of the cost of each asset is provided for during its‘ useful life. In respect of assets for which
no specific rates have been prescribed by the regulatory authorities depreciation shall be

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provided for as per the minimum rates prescribed under Schedule II to the Companies
Act, 2013.
The provisions regarding depreciation have already been discussed in detail.

3. Accounting Standard (AS) 9 – Revenue Recognition

This Accounting Standard is mandatory for all companies. In case of electricity
companies, significant revenues are from the sale of power. It should be ensured that the
revenue from units generated is recognised commencing 00.00 hours as on 1st April.
Power generation utility business is highly capital intensive. Adequate care should be
taken to ensure that the capital and revenue expenses are differentiated and accounted
for. The capitalisation principles should be applied as a test to ensure that the capital
expenses are accounted properly in accordance with the standard.

Question No.29

The following is an extract from the Trial Balance of Utsav Bank Ltd. as on 31st March 2013:
`
Rebate on Bills Discounted on 01.04.2012 68,259 (Cr.)
Discount Received 1,70,156(Cr)

Analysis of the bills discounted reveals:

Amount (`) Due Date
2,80,000 June 1,2012
8,72,000 June 8,2012
5,64,000 June 21,2012
8,12,000 July 1,2012
6,00,000 July 5,2012
You are required to find out the amount of discount to be credited to Profit and Loss Account
for the year ending 31st March 2013, and pass journal entries.
The rate of discount may be taken at 10% p.a.
Rebate on bills discounted as on 31st March 2013 (for unexpired portion) is calculated as:

Answer:

Amount (`)
62 10 4,756
On ` 2,80,000  
365 100
69 10 16,484
On ` 8,72,000  
365 100
82 10 12,671
On ` 5,64,000  
365 100
92 10 20,467
On ` 8,12,000  
365 100
96 10 15,781
On ` 6,00,000  
365 100
70,159

Thus, amount of discount to be credited to Profit and Loss Account

Particulars Amount (`)
Rebate on Bill Discounted (01.04.2009) 68,259
Add: Discount Received 1,70,156
2,38,415
Less: Rebate on Bills Discounted (31.03.2010) 70,159
1,68,256

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In the Books of Utsav bank Ltd.

Journal Entries
Date Particulars L.F. Debit (`) Credit (`)
2013 Rebate on Bills Discounted A/c Dr. 68,259
March To, Interest and Discount A/c 68,259
31 (Transfer of unexpired discount as on 31.03.2010)
Interest and Discount A/c Dr. 70,159
To, Rebate on Bills Discounted A/c 70,159
(Unexpired discount considered as on 31.03.2010)
Interest and Discount A/c Dr. 1,68,2
To, Profit and Loss A/c 56 1,68,256
(Interest and Discount transferred to P&L A/c.)

Question No. 30

Save Money Bank Ltd. had extended the following credit lines to a Small Scale Industry, which
had not paid any Interest since March, 2013:

Term Loan Export Loan

Balance Outstanding on 31.03.2012 ` 105 lakhs ` 90 lakhs
DICGC/ECGC cover 40% 50%
Securities held ` 45 lakhs ` 30 lakhs
Realisable value of Securities ` 30 lakhs ` 24 lakhs

Compute necessary provisions to be made for the year ended 31st March, 2013.

Answer:

Particulars Term Loan (` in lakhs) Export Credit (` in Lakhs)

Balance outstanding on 31.03. 105.00 90.00
Less: Realisable Value of Securities 30,00 24.00
75.00 66.00
Less: DICGC cover @40% 30.00 -
ECGC cover @50% - 33.00
Unsecured balance 45.00 33.00

Required Provision:
Particulars Term Loan (` in lakhs) Export Credit (` in lakhs)
100% for unsecured portion 45.00 33.00
100% for secured portion 30.00 24.00
Total provision required 75.00 57.00

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