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1 Ch 1 : INTRODUCTION TO 4
ACCOUNTING STANDARDS

2 Ch 2 : FRAMEWORK FOR 5
PRESENTATION OF FINANCIAL
STATEMENTS
3 Ch.3 - OVERVIEW OF ACCOUNTING 12
STANDARDS
4 Ch.4 –COMPANY FINAL ACCOUNTS 48

5 Ch.5 – CASH FLOW STATEMENT 91

6 Ch.6 - PRE INCORPORATION PROFITS 108

7 Ch.7 – ACCOUNITNG FOR BONUS ISSUE 122

& RIGHT ISSUE

8 Ch.8 – REDEMPTION OF PREFERENCE 139

SHARES
9 Ch.9 – REDEMPTION OF DEBENTURES 158

10 Ch.10 - INVESTMENT ACCOUNTS (AS- 173

13)

11 Ch.11 – INSURANCE CLAIM 198

12 Ch.12 – HIRE PURCHASE 219

TRANSACTIONS

13 Ch.13 – DEPARTMENTAL ACCOUNTS 234

14 Ch.14 – BRANCH ACCOUNTS 255

15 Ch.15 – INCOMPLETE RECORDS 276

Ch.1 – INTRODUCTION TO ACCOUNTING STANDARDS
Question 1 (JAN. 2021) [5 MARKS]
List the Criteria for classification of non-corporate entities as level I Entities for the purpose
ofapplication of Accounting Standards as per the Institute of Chartered Accountants ofIndia.
Answer
Criteria for classification of non-corporate entities as level 1 entities for purpose of application of
Accounting Standards decided by the Institute of Chartered Accountants of India is givenbelow:
Non-corporate entities which fall in any one or more of the following categories, at the end of the
relevant accounting period, are classified asLevel I entities:
(i) Entities whose equity or debt securities are listed or are in the process of listing on any stock exchange,
whether in India or outsideIndia.
(ii) Banks (including co-operative banks), financial institutions or entities carrying on insurancebusiness.

(iii) All commercial, industrial and business reporting entities, whose turnover (excluding other income)
exceeds rupees fifty crore in the immediately preceding accounting year.
(iv) All commercial, industrial and business reporting entities having borrowings (including public deposits)
in excess of rupees ten crore at any time during the immediately preceding accountingyear.
(v) Holding and subsidiary entities of any one of theabove.

Question 2 (RTP- NOV. 2020)

What are the issues, with which Accounting Standardsdeal?
Answer
Accounting Standards deal with the issues of:
(i) Recognition of events and transactions in the financial statements
(ii) Measurement of these transactions and events
(iii) Presentation of these transactions and events in the financial statements in a manner that is
meaningful and understandable to the reader
(iv) Disclosure requirements.
 Ch.2 – FRAMEWORK FOR PREPARATION AND
PRESENTATION OF FINANCIAL STATEMENTS

QUESTION 1 (MTP DEC2021) (5 MARKS)

"Accounting Standards standardize diverse accounting policies with a view to eliminate the non-
comparability of financial statements and improve the reliability of financial statements." Discuss
and explain the benefits of Accounting Standards.
ANSWER
Accounting Standards standardize diverse accounting policies with a view to eliminate the non-
comparability of financial statements and improve the reliability of financial statements.
Accounting Standards provide a set of standard accounting policies, valuation norms and
disclosure requirements. Accounting standards aim at improving the quality of financial reporting
by promoting comparability, consistency and transparency, in the interests of users of financial
statements.
The following are the benefits of Accounting Standards:
(i) Standardization of alternative accounting treatments: Accounting Standards reduce to a
reasonable extent confusing variations in the accounting treatment followed for the purpose
of preparation of financial statements.
(ii) Requirements for additional disclosures: There are certain areas where important is not
statutorily required to be disclosed. Standards may call for disclosure beyond that required by
law.
(iii) Comparability of financial statements: The application of accounting standards would
facilitate comparison of financial statements of different companies situated in India and
facilitate comparison, to a limited extent, of financial statements of companies situated in
different parts of the world. However, it should be noted in this respect that differences in
the institutions, traditions and legal systems from one country to another give rise to differences
in Accounting Standards adopted in different countries.

Question 2 (JULY 2021) (5 MARKS)

A trader commenced business on April 1, 2020 with P 120,000,
representedby6000unitsofacertainproductat120perunit.During the year 2020-21 he sold these units at
T 30/- per unit and had withdrawnT60,000.Thepriceoftheproductattheendoffinancial yearwas125/-
perunit.Computeretainedprofitofthetraderunder
theconceptofphysicalcapitalmaintenanceatcurrentcost.Alsostate,
whetheranswerwouldbedifferentifthetraderhadnotwithdrawnany amount.

Question 3 (JAN 2021) (5 MARKS)

Explain how financial capital is maintained at historicalcost?
Kishore started a business on 1stApril, 2019 with `15,00,000 represented by 75,000 units of `20 each.
During the financial year ending on 31stMarch, 2020, he sold the entire stock for ` 30 each. In order
to maintain the capital intact, calculate the maximum amount, which can be withdrawn by Kishore in
the year 2019-20 if Financial Capital is maintained at historicalcost.
Answer
Financial capital maintenance at historical cost: Under this convention, opening and closing assets are
stated at respective historical costs to ascertain opening and closing equity. If retained profit is greater
than or equals to zero, the capital is said to be maintained at historical costs. This means the business
will have enough funds to replace its assets at historical costs. This is quite right as long as prices do not
rise.

Maximum amount withdrawn by Kishore in year 2019-20 if Financial capital is maintained at historical cost
Particulars Financial Capital Maintenance at
Historical Cost(`)
Closing equity (` 30 x 75,000units) 22,50,000 represented by cash
Opening equity 75,000 units x ` 20 = 15,00,000
Permissible drawings to keep Capital 7,50,000 (22,50,000 – 15,00,000)
intact
Thus ` 7,50,000 is the maximum amount that can be withdrawn by Kishore in year 2019-20 if Financial capital is
maintained at historicalcost.

Question 4 (NOV. 2020) (4 MARKS)

What are the qualitative characteristics of the Financial Statements which improve the usefulness of
the information furnishedtherein?

Answer

The qualitative characteristics are attributes that improve the usefulness of information provided in
financial statements. Financial statements are required to show a true and fair view of the
performance, financial position and cash flows of an enterprise. The framework for Preparation and
Presentation of Financial Statements suggests that the financial statements should maintain the
following four qualitative characteristics to improve the usefulness of the information
furnishedtherein.
1. Understandability: The financial statements should present information in a manner as to be
readily understandable by the users with reasonable knowledge of business and economic
activities andaccounting.
2. Relevance: The financial statements should contain relevant information only. Information,
which is likely to influence the economic decisions by the users, is said to be relevant. Such
information may help the users to evaluate past, present or future events or may help in
confirming or correcting past evaluations. The relevance of a piece of information should be
judged by its materiality. A piece of information is said to be material if its misstatement (i.e.,
omission or erroneous statement) can influence economic decisions of auser.
3. Reliability: To be useful, the information must be reliable; that is to say, they must be free
from material error and bias. The information provided are not likely to be reliable unless
transactions and events reported are faithfully represented. The reporting of transactions and
events should be neutral, i.e. free from bias and be reported on the principle of 'substance
over form'. The information in financial statements must be complete. Prudence should be
exercised in reporting uncertain outcome of transactions orevents.
4. Comparability: Comparison of financial statements is one of the most frequently used and
most effective tools of financial analysis. The financial statements should permit both inter-firm
and intra-firm comparison. One essential requirement of comparability is disclosure of financial
effect of change in accountingpolicies.

Question 5 (NOV 2020) [4 MARKS]

Following is the Balance Sheet of M/s. S Traders as on 31stMarch,2019:

Liabilities (`) Assets (`)
Capital 1,50,000 Fixed Assets 1,05,000
11% Bank Loan 80,000 Closing stock 76,000
 Trade payables 52,000 Debtors 68,000
Profit & Loss A/c 56,000 Deferred Expenditure 24,000
Cash & Bank 65,000
3,38,000 3,38,000
Additional Information:
(i) Remaining life of Fixed Assets is 6 years with even use. The net realizable value of Fixed Assets
as on 31st March, 2020 is `90,000.
(ii) Firm's Sales & Purchases for the year ending31st March, 2020 amounted to
(iii) ` 7,80,000 and ` 6,25,000 respectively.
(iv) The cost & net realizable value of the stock as on31stMarch, 2020 was, ` 60,000 and `
66,000respectively.
(v) General expenses (including interest on Loan) for the year 2019-20 were `53,800.
(vi) Deferred expenditure is normally amortised equally over 5 years starting from the Financial
year 2018-19 i.e. ` 6,000 peryear.
(vii) Debtors on 31stMarch, 2020 is ` 65,000 of which ` 5,000 is doubtful. Collection of another `
10,000 debtors depends on successful re-installation of certain products supplied to
thecustomer.
(viii) Closing Trade payable ` 48,000, which is likely to·be settled at 5%discount.
(ix) There is a prepayment penalty of ` 4,000 for Bank loanoutstanding.
(x) Cash & Bank balances as on 31st March, 2020 is `1,65,200.
Prepare Profit & Loss Account for the year ended 31st March, 2020 and Balance Sheet as on 31st
March, 2020 assuming the firm is not a goingconcern.

Answer
Profit and Loss Account of M/s STraders for the year ended 31stMarch,2020
(business is not a going concern)

` `
To Opening Stock 76,000 By Sales 7,80,000
To Purchases 6,25,000 By Trade payables 2,400
To General expenses 53,800 By Closing Stock 66,000
To Depreciation (1,05,000 less 15,000
90,000)
To Provision for doubtful debts 15,000
To Deferred expenditure 24,000
To Loan penalty 4,000
To Net Profit (b.f.) 35,600
8,48,400 8,48,400

Balance Sheet M/s S Traders as on 31st March, 2020

Liabilities and Capital ` Assets `

Capital 1,50,000 Fixed assets 90,000
Profit & Loss A/c Debtors
opening balance 56,000 (65,000 less provision 50,000
for doubtful debts
` 15,000)
Profit earned during the 35,600 91,600 Closing stock 66,000
year
 11% Loan 84,000 Cash & Bank balance 1,65,200
Trade payables 45,600
3,71,200 3,71,200

Question 6 (RTPNOV.2021)

What is meant by ‘Measurement’? What are the bases of measurement of Elements of Financial
Statements? Explain in brief.

Answer
Measurement is the process of determining money value at which an element can be recognized in the
balance sheet or statement of profit and loss. The framework recognizes
fouralternativemeasurementbasesforthepurpose.Thesebasescanbeexplainedas:
Historical cost This is the Acquisition price. According to this, assets are recorded
at an amount of cash and cash equivalent paid or the fair value of
the assets at time of acquisition.
Current Cost Assets are carried out at the amount of cash or cash equivalent that
would have to be paid if the same or an equivalent asset was
acquired currently. Liabilities are carried at the undiscounted
amount of cash or cash equivalents that would be required to settle
the obligation currently.

Realisable (Settlement) Value For assets, amount currently realizable on sale of the asset in an
orderly disposal. For liabilities, this is the undiscounted amount
expected to be paid on settlement of liability in the normal course
of business.

Present Value Assets are carried at present value of future net cash flows
generated by the concerned assets in the normal course of business.
Liabilities are carried at present value of future net cash flows that
are expected to be required to settle the liability in the normal
course of business.
In preparation of financial statements, all or any of the measurement basis can be used in varying
combinations to assign money values to financial items.

Question 7 (RTP MAY 2021)

(i) With regard to financial statements, name any five qualitative characteristics and elements

(ii) Aman started a business on 1stApril 2020 with ` 24,00,000 represented by 1,20,000 units of `
20 each. During the financial year ending on 31stMarch, 2021, he sold the entire stock for ` 30
each. In order to maintain the capital intact, calculate the maximum amount, which can be
withdrawn by Aman in the year 2020-21 if Financial Capital is maintained at historical cost.

Answer
(a) (i) Qualitative Characteristics of FinancialStatements:
Understandability, Relevance, Comparability, Reliability & Faithful Representation
(ii) Elements of Financial Statements:
Asset, Liability, Equity, Income/Gain and Expense/Loss
(b)
Particulars Financial Capital Maintenanceat
Historical Cost(`)
 Closing equity
36,00,000 represented by cash
(` 30 x 1,20,000 units)
Opening equity 1,20,000 units x ` 20 = 24,00,000
Permissible drawings to keep Capital 12,00,000 (36,00,000 – 24,00,000)
intact

Question 8 (RTP MAY 2020)

A Ltd. has entered into a binding agreement with Gamma Ltd. to buy a custom-made
machine`1,00,000.Attheendof20X1-X2,beforedeliveryofthemachine,ALtd.hadto change its method of
production. The new method will not require the machine ordered
anditwillbescrappedafterdelivery.Theexpectedscrapvalueisnil.
You are required to advise the accounting treatment and give necessary journal entry in the year20X1-
X2.

Answer
A liability is recognised when outflow of economic resources in settlement of a present obligation can
be anticipated and the value of outflow can be reliably measured. In the given case, A Ltd. should
recognise a liability of ` 1,00,000 to GammaLtd..
When flow of economic benefit to the enterprise beyond the current accounting period is considered
improbable, the expenditure incurred is recognised as an expense rather than as an asset. In the
present case, flow of future economic benefit from the machine to the enterprise is improbable. The
entire amount of purchase price of the machine should be recognised as anexpense.
Journal entry
Loss on change in production method Dr. 1,00,000
To Gamma Ltd. 1,00,000
(Loss due to change in production method)
Profit and loss A/c Dr. 1,00,000
To Loss on change in productionmethod 1,00,000
(Loss transferred to profit and loss account)

Question 9 (RTP NOV 2020)

With regard to financial statements name anyfour.
(i) Users
(ii) Qualitativecharacteristics
(iii) Elements

Answer
(i) Users of financialstatements:
i. Investors, Employees, Lenders, Supplies/Creditors, Customers, Government & Public
(ii) Qualitative Characteristics of FinancialStatements:
i. Understandability, Relevance, Comparability, Reliability & Faithful Representation
(iii) Elements of FinancialStatements:
i. Asset, Liability, Equity, Income/Gain and Expense/Loss

Question 10 (MTP APRIL 2021)

Opening Balance Sheet of Mr. A is showing the aggregate value of assets, liabilities and equity Rs. 8
lakh, Rs. 3 lakh and Rs. 5 lakh respectively. During accounting period, Mr. A has the following
transactions:
(1) Earned 10% dividend on 2,000 equity shares held of Rs. 100 each
(2) Paid Rs. 50,000 to creditors for settlement of Rs. 70,000
(3) Rent of the premises is outstanding Rs. 10,000
(4) Mr. A withdrew Rs. 9,000 for his personal use.
You are required to show the effect of above transactions on Balance Sheet in the form of Assets
- Liabilities = Equity after each transaction.

Answer

Assets Liabilities Equity Rs. lakh

Transactions – =
Rs. lakh Rs. lakh
Opening 8.00 – 3.00 = 5.00
(1) Dividend earned 8.20 – 3.00 = 5.20
(2) Settlement of Creditors 7.70 - 2.30 = 5.40
(3) Rent Outstanding 7.70 – 2.40 = 5.30

Question 11 (MTP MARCH 2021) [4 MARKS]

Explain in brief, the alternative measurement bases, for determining the value at whichan
elementcanberecognizedintheBalanceSheetorStatementofProfitandLoss.

Answer
The Framework for Recognition and Presentation of Financial statements recognizes four alternative
measurement bases for the purpose of determining the value at which an element can be recognized
in the balance sheet or statement of profit and loss. These bases are: (i)Historical
Cost;(ii)Currentcost(iii)Realizable(Settlement)Valueand(iv)PresentValue.
A brief explanation of each measurement basis is as follows:
1. Historical Cost: Historical cost means acquisition price. According to this, assets are recorded
at an amount of cash or cash equivalent paid or the fair value of the asset at thetime of
acquisition. Liabilities are generally recorded at the amount of proceeds received in exchange
for theobligation.
2. Current Cost: Current cost gives an alternative measurement basis. Assets are carried out at
the amount of cash or cash equivalent that would have to be paid if the same or an equivalent
asset was acquired currently. Liabilities are carried at the undiscounted amount
ofcashorcashequivalentsthatwouldberequiredtosettletheobligationcurrently.
3. Realisable (Settlement) Value: As per realizable value, assets are carried at the amount of
cash or cash equivalents that could currently be obtained by selling the assets in an orderly
disposal. Liabilities are carried at their settlement values; i.e.the undiscounted amount of cash
or cash equivalents paid to satisfythe liabilities in the normal course of business.
4. Present Value: Under present value convention, assets are carried at present value of future
net cash flows generated by the concerned assets in the normal course of business. Liabilities
under this convention are carried at present value of future net cash flows that are
expectedtoberequiredtosettletheliabilityinthenormalcourseofbusiness.
 Ch.3 - OVERVIEW OF ACCOUNTING STANDARDS
AS 1 : DISCLOSURE OF ACCOUNTING POLICIES
QUESTION 1 (MTP DEC2021) (5 MARKS)
In the books of Rani Ltd., closing inventory as on 31.03.2020 amounts to ` 1,75,000 (valued on the
basis of FIFO method). The Company decides to change from FIFO method to weighted average
method for ascertaining the costs of inventory from the year 2019-20. On the basis of weighted
average method, closing inventory as on 31.03.2020 amounts to ` 1,59,000. Realizable value of
the inventory as on 31.03.2020 amounts to ` 2,07 ,000. Discuss disclosure requirements of change
in accounting policy as per AS 1.

ANSWER
As per AS 1 “Disclosure of Accounting Policies”, any change in an accounting policy which has a
material effect should be disclosed in the financial statements. The amount by which any item in
the financial statements is affected by such change should also be disclosed to the extent
ascertainable. Where such amount is not ascertainable, wholly or in part, the fact should be
indicated. Thus Rani Ltd. should disclose the change in valuation method of inventory and its effect
on financial statements. The company may disclose the change in accounting policy in the following
manner:
“The company values its inventory at lower of cost and net realizable value. Since net realizable
value of all items of inventory in the current year was greater than respective costs, the company
valued its inventory at cost. In the present year i.e. 2019-20, the company has changed to weighted
average method, which better reflects the consumption pattern of inventory, for ascertaining
inventory costs from the earlier practice of using FIFO for the purpose. The change in policy has
reduced current profit and value of inventory by ` 16,000 (1,75,000 – 1,59,000).”

Question 2 (RTP MAY 2021)

The draft results of Surya Ltd. for the year ended 31stMarch, 2020, prepared on the hitherto followed
accounting policies and presented for perusal of the board of directors showed a deficit of ` 10 crores.
The board in consultation with the managing director, decided to value year-end inventory at works
cost (` 50 crores) instead of the hitherto method of valuation of inventory at prime cost (` 30 crores).
As chief accountant of the company, you are asked by the managing director to draft the notes on
accounts for inclusion in the annual report for2019-2020.

Answer
As per AS 1, any change in the accounting policies which has a material effect in the current period or
which is reasonably expected to have a material effect in later periods should be disclosed. In the case
of a change in accounting policies which has a material effect in the current period, the amount by
which any item in the financial statements is affected by such change should also be disclosed to the
extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact should be
indicated. Accordingly, the notes on accounts should properly disclose the change and itseffect.
Notes on Accounts:
“During the year inventory has been valued at factory cost, against the practice of valuing it at prime
cost as was the practice till last year. This has been done to take cognizance of the more capital
intensive method of production on account of heavy capital expenditure during the year. As a result of
this change, the year-end inventory has been valued at ` 50 crores and the profit for the year is
increased by ` 20 crores.”

Question 3 (RTP NOV 2020)

What are the three fundamental accounting assumptions recognized by Accounting Standard (AS)
1? Briefly describe each one ofthem.
Answer
Accounting Standard (AS) 1 recognizes three fundamental accounting assumptions. These are
asfollows:
(i) Going Concern: The financial statements are normally prepared on the assumption that an
enterprise will continue its operations in the foreseeable future and neither there is intention,
nor there is need to materially curtail the scale ofoperations.
(ii) Consistency: The principle of consistency refers to the practice of using same accounting
policies for similar transactions in all accounting periods unless the change is required (i) by a
statute, (ii) by an accounting standard or (iii) for more appropriate presentation of
financialstatements.
(iii) Accrual basis of accounting: Under this basis of accounting, transactions are recognisedas
soon as they occur, whether or not cash or cash equivalent is actually received orpaid.

Question 4 (RTP MAY 2020)

(a) ABC Ltd. was making provision for non-moving inventories based on no issues for thelast 12
months up to31.3.2019.
The company wants to provide during the year ending 31.3.2020 based on technical evaluation:
Total value of inventory ` 100 lakhs
Provision required based on 12 months issue ` 3.5 lakhs
Provision required based on technical evaluation ` 2.5 lakhs
Does this amount to change in Accounting Policy? Can the company change the method of provision?
(b) State whether the following statements are 'True' or 'False'. Also give reason for your answer.
1. Certain fundamental accounting assumptions underline the preparation and presentation of financial
statements. They are usually specifically stated because their acceptance and use are notassumed.
2. If fundamental accounting assumptions are not followed in presentation and preparation of financial
statements, a specific disclosure is not required.
3. All significant accounting policies adopted in the preparation and presentation
offinancialstatementsshouldformpartofthefinancialstatements.
4. Any change in an accounting policy, which has a material effect should be disclosed. Where the amount
by which any item in the financial statements is affected by such change is not ascertainable, wholly or
in part, the fact need not to beindicated.

Answer
(a) The decision of making provision for non-moving inventories on the basis of technical
evaluation does not amount to change in accounting policy. Accounting policy of a company
may require that provision for non-moving inventories should be made. The method of
estimating the amount of provision may be changed in case a more prudent estimate can be
made. In the given case, considering the total value of inventory, the change in the amount of
required provision of non-moving inventory from ` 3.5 lakhs to ` 2.5 lakhs is also not material.
The disclosure can be made for such change in the following
linesbywayofnotestotheaccountsintheannualaccountsofABCLtd.forthe year 2019-20:
“Thecompanyhasprovidedfornon-movinginventoriesonthebasisoftechnical evaluation unlike
preceding years. Had the same method been followed asin the previous year, the profit for the
year and the corresponding effect on the year end net assets would have been lower by `
1lakh.”
(b)
1. False; As per AS 1 “Disclosure of Accounting Policies”, certain fundamental accounting
assumptions underlie the preparation and presentation of financial statements. They are
usually not specifically stated because their acceptance and use are assumed. Disclosure is
necessary if they are not followed.
 2. False; As per AS 1, if the fundamental accounting assumptions, viz. Going Concern, Consistency
and Accrual are followed in financial statements, specific disclosure is not required. If a
fundamental accounting assumption is not followed, the fact should bedisclosed.
3. True; To ensure proper understanding of financial statements, it is necessary that all significant
accounting policies adopted in the preparation and presentation of financial statements should
be disclosed. The disclosure of the significant accounting policies as such should form part
ofthefinancialstatementsandtheyshouldbedisclosedinoneplace.
4. False; Any change in the accounting policies which has a material effect in the current period
or which is reasonably expected to have a material effect in later periods should be disclosed.
Where such amount is not ascertainable,whollyorinpart,thefactshouldbeindicated.

Question 5 (MTP APRIL 2021) [5 MARKS]

State whether the following statements are 'True' or 'False' in line with the provisions of AS 1. Also
give reason for youranswer.
(i) Certain fundamental accounting assumptions underline the preparation and presentation of
financial statements. They are usually specifically stated because their acceptance and use
are notassumed.
(ii) If fundamental accounting assumptions are not followed in presentation and preparation of
financial statements, a specific disclosure is notrequired.
(iii) All significant accounting policies adopted in the preparation and presentation of financial
statements should form part of the financialstatements.
(iv) Any change in an accounting policy, which has a material effect should be disclosed. Where
the amount by which any item in the financial statements is affected by such change is not
ascertainable, wholly or in part, the fact need not to beindicated.
(v) Thereisnosinglelistofaccountingpolicieswhichareapplicabletoallcircumstances.

Answer

(i) False;AsperAS1“DisclosureofAccountingPolicies”,certainfundamentalaccounting
assumptions underlie the preparation and presentation of financial statements. They are usually not
specifically stated because their acceptanceand use are assumed. Disclosure is necessary if they are
notfollowed.
(ii) False; As per AS 1, if the fundamental accounting assumptions, viz. Going Concern, Consistency and
Accrual are followed in financial statements, specific disclosure is not required. If a fundamental
accounting assumption is not followed, the fact should bedisclosed.
(iii) True; To ensure proper understanding of financial statements, it is necessary that all significant
accounting policies adopted in the preparation and presentation of financial statements should be
disclosed. The disclosure of the significant accountingpolicies as
suchshouldformpartofthefinancialstatementsandtheyshouldbedisclosedatoneplace.
(iv) False; Any change in the accounting policies which has a material effect inthe current period or which
is reasonably expected to have a material effect in later periods should be disclosed. Where such amount
is not ascertainable, wholly or in part, the fact should be indicated.
(v) True; As per AS 1, there is no single list of accounting policies which are applicable to all circumstances.
The differing circumstances in which enterprises operate in a situation of diverse and complex economic
activity make alternative accounting principles and methodsof applying those principlesacceptable.

Question 6 (MTP MARCH 2021)

HIL Ltd. was making provision for non-moving stocks based on no issues having occurred for the
last12 months upto31.03.2019. The company now wants to change it and make provision based on
technical evaluation during the year ending 31.03.2020. Total value of stock on 31.3.20 is Rs. 120
lakhs. Provision required based on technical evaluation amounts Rs. 3.00 lakhs. However, provision
required based on 12 months (no issues) is Rs. 4.00 lakhs. You are required to discuss the following
points in the light of Accounting Standard(AS)-1:
(i) Does this amount to change in accountingpolicy?
(ii) Can the company change the method ofaccounting?
(iii) ExplainhowitwillbedisclosedintheannualaccountsofHILLtd.fortheyear2019-20.
Answer
The decision of making provision for non-moving inventories on the basis of technical evaluation does
not amount to change in accounting policy. Accounting policy of a companymay require that
provision for non-moving inventories should be made but the basis for making provision will not
constitute accounting policy. The method of estimating the amount of provision may be changed in
case a more prudent estimate can bemade.
In the given case, considering the total value of inventory, the change in the amount of required
provision of non-moving inventory from Rs. 4 lakhs to Rs. 3 lakhs is also not material. The disclosure
can be made for such change in the following lines by way of notes to the accounts in
theannualaccountsofHILLtd.fortheyear2019-20inthefollowingmanner:
“The company has provided for non-moving inventories on the basis of technical evaluation unlike
preceding years. Had the same method been followed as in the previous year, the profit for the year
and the value of net assets at the end of the year would have been lower by Rs. 1lakh.”

AS 2 : VALUATION OF INVENTORY
QUESTION 1 (RTP DEC 2021) (5 MARKS)
On 31st March 2020, a business firm finds that cost of a partly finished unit on that date is
` 430. The unit can be finished in 2020-21 by an additional expenditure of ` 310. The finished unit
can be sold for ` 750 subject to payment of 2% brokerage on selling price. The firm seeks your
advice regarding the amount at which the unfinished unit should be valued as at 31st March, 2020 for
preparation of final accounts. Assume that the partly finished unit cannot be sold in semi-finished
form and its NRV is zero without processing it further.
ANSWER
Valuation of unfinished unit
`
Net selling price 750
Less: Estimated cost of completion (310)
440
Less: Brokerage (2 % of 750) (15)
Net Realisable Value 425
Cost of inventory 430
Value of inventory (Lower of cost and net realisable value) 425

Question 2 ( MTP DEC 2021) (5 MARKS)

From the following information provided by XYZ Limited you are required to compute the closing
inventory:
Raw Material P
Closing balance 600 units
` per unit
Cost price including GST 250
Input tax credit available 20
Freight inward 30
Handling charges 15
 Replacement cost 180
Finished goods Q
Closing balance 1500 units
` per unit
Material consumed 250
Direct labour 70
Direct overhead 30
Total fixed overhead for the year was ` 3,00,000 on a normal capacity of 30,000 units while actual
production has been of 25,000 units.

ANSWER

(i) When Net Realizable Value of the Finished Good Q is ` 450 per
unit Value of Closing Stock:
Valuation Qty. Rate Amount
Base (`) (`)
Raw Material P Cost 600 275 1,65,000
Finished Good Q Cost 1,500 360 5,40,000
Total value of closing stock 7,05,000

(ii) When Net Realizable Value of the Finished Good Q is ` 340 per unit

Since NRV of finished goods Q is less than its cost i.e. ` 360 (Refer W.N.), raw material P is
to be valued at replacement cost and finished goods is to be valued at NRV.
Value of Closing Stock:
Valuation Base Qty. Rate (`) Amount (`)
Raw material P Replacement cost 600 180 1,08,000
Finished good Q Net Realisable Value 1,500 340 5,10,000
Total value of closing 6,18,000
stock

Question 3 (JULY 2021) [5 MARKS]

Joy Ltd. purchased 20,000 kilograms of Raw Material @₹ 20perkilogram during the year 2020-21. They
have furnished you with the following further information for the year ended 31" March, 2021 :
 Particulars Units Amount (T)
Opening Inventory :
Finished Goods 2,000 1,00,000

Raw Materials 2,200 44,000

Direct Labour 3,06,000

Fixed Overheads 3,00,000

Sales 20,000 11,20,000

Closing Inventory :

Finished Goods 2,400

Raw Materials 1,800

Theplanthasacapacitytoproduce30,000Unitsoffinishedproduct
perannum.However,theactualproductionoffinishedproductsduring the year 2020-21 w 20,400 Units. Due
to a fall in the market demand,thepriceofthefinishedgoodsinwhichtherawmaterialhas
[email protected] costoftherawmaterial
was119perkilogram.
You are required to ascertain the value of closing inventory as at31stMarch, 2021 as per AS 2.

Question 4 (JAN 2021) [5 MARKS]

Mr. Jatin gives the following information relating to the items forming part of the inventory as on
31.03.2019. His enterprise produces product P using Raw MaterialX.
(i) 900 units of Raw Material X (purchases @` 100 per unit). Replacement cost ofRaw Material X
as on 3103.2019 is ` 80 perunit
(ii) 400 units of partly finished goods in the process of producing P.Cost incurred till date is ` 245
per unit. These units can be finished next year by incurring additional cost of ` 50 perunit.
(iii) 800 units of Finished goods P and total cost incurred is ` 295 perunit.
Expected selling price of product P is `280 per unit, subject to a payment of 5% brokerage on
sellingprice.
Determine how each item of inventory will be valued as on 31.03.2019. Also calculate the value of total
Inventory as on 31.03.2019.

Answer
AsperAS2(Revised)“ValuationofInventories”,materialsandothersuppliesheldfor use in the production of
inventories are not written down below cost if the finishedproducts in which they will be incorporated
are expected to be sold at cost or above cost. However, when there has been a decline in the price of
materials and it is estimated that the cost of the finished products will exceed net realizable value, the
materials are written down to net realizable value. In such circumstances, the replacement cost of the
materials may be the best available measure of their net realizable value. In the given case, selling
price of product P is ` 266 and total cost per unit for productionis ` 295.
Hence the valuation will be done as under:
(i) 900 units of raw material X will be written down to replacement cost as market value
offinishedproductislessthanitscost,hencevaluedat`80perunit.
(ii) 400 units of partly finished goods will be valued at 216 per unit i.e., lower of cost (` 245) or
Net realizable value ` 216 (Estimated selling price ` 266 per unit less additional cost of `50).
(iii) 800 units of finished product P will be valued at NRV of ` 266 per unit since it is lower than
cost `295.
Valuation of Total Inventory as on31.03.2019:
Units Cost (`) NRV/Replac Value = unitsxcost or NRV whicheveris
ement cost less(`)

Raw material X 900 100 80 72,000

Partly finished goods 400 245 216 86,400
Finished goods P 800 295 266 2,12,800
Value of Inventory 3,71,200

Question 5 (NOV 2019) [5 MARKS]

Mr. Rakshit gives the following information relating to items forming part of inventory as on
31stMarch, 2019. His factory produces product X using raw materialA.
(i) 800 units of raw material A (purchased @ ` 140 per unit). Replacement cost of raw material A
as on 31stMarch, 2019 is ` 190 perunit.
(ii) 650 units of partly finished goods in the process of producing X and cost incurred till date ` 310
per unit. These units can be finished next year by incurring additional cost of ` 50 perunit.
(iii) 1,800 units of finished product X and total cost incurred ` 360 per unit. Expected selling price
of product X is ` 350 perunit.
In the context of AS-2, determine how each item of inventory will be valued as on 31stMarch,
2019. Also, calculate the value of total inventory as on 31stMarch,2019.

Answer
AsperAS2(Revised)“ValuationofInventories”,materialsandothersuppliesheldforuse in the production of
inventories are not written down below cost if the finished products in which they will be incorporated
are expected to be sold at cost or above cost. However, when there has been a decline in the price of
materials and it is estimated that the cost of the finished products will exceed net realizable value, the
materials are written down to net realizable value. In such circumstances, the replacement cost of the
materials may be the best available measure of their net realizable value. In the given case, selling
price of product X is ` 350 and total cost per unit for production is `360.
Hence the valuation will be done as under:
(i) 800 units of raw material will be valued atcost 140.
(ii) 650 units of partly finished goods will be valued at 300 per unit* i.e. lower of cost (` 310) or
Net realizable value ` 300 (Estimated selling price ` 350 per unit less additional cost of `50).
(iii) 1,800 units of finished product X will be valued at NRV of ` 350 per unit since it is lower than
cost ` 360 of productX.
Valuation of Total Inventory as on 31.03.2019:
Units Cost NRV/ Value = units x `
(`) Replacement cost or NRV
cost whichever is
` less (`)
Raw material A 800 140 190 1,12,000 (800 x 140)
Partly finished goods 650 310 300 1,95,000 (650 x 300)
Finished goods X 1,800 60 350 6,30,000 (1,800 x 350)
Value of Inventory 9,37,000
*It has been assumed that the partly finished unit cannot be sold in semi-finished form and its NRV is zero
without processing itfurther.

Question 6 (RTP NOV 2021)

On31stMarch2020,abusinessfirmfindsthatcostofapartlyfinishedunitonthatdateis ` 430. The unit can be
finished in 2020-21 by an additional expenditure of ` 310. The finished unit can be sold for ` 750
subject to payment of 2% brokerage on selling price.The firm seeks your advice regarding the amount
at which the unfinished unit should be valued as at 31stMarch, 2020 for preparation of final accounts.
Assume that the partly finished unit cannot be sold in semi-finished form and its NRV is zero without
processing itfurther.

Answer
Valuation of unfinishedunit
`
Net selling price 750
Less: Estimated cost of completion (310)
440
Less: Brokerage (2 % of 750) (15)
Net Realisable Value 425
Cost of inventory 430
Value of inventory (Lower of cost and net realisable value) 425

Question 7 (RTP MAY 2021)

The inventory of Rich Ltd. as on 31stMarch, 2020 comprises of Product – A: 200 units and Product – B:
800 units.
Details of cost for these products are:
Product – A: Material cost, wages cost and overhead cost of each unit are ` 40,
` 30 and ` 20 respectively, Each unit is sold at ` 110, selling expenses amounts to 10% of selling costs.
Product – B: Material cost and wages cost of each unit are ` 45 and ` 35 respectively and normal
selling rate is ` 150 each, however due to defect in the manufacturing process 800 units of Product-B
were expected to be sold at ` 70.
You are requested to value closing inventory according to AS 2 after considering the above.

Answer

AccordingtoAS2‘ValuationofInventories’,inventoriesshouldbevaluedatthelower of cost and net realizablevalue.

Product – A
Material cost ` 40 x 200 = 8,000
Wages cost ` 30 x 200 = 6,000
Overhead ` 20 x 200 = 4,000
Total cost ` 18,000
Realizable value [200 x (110-11)] ` 19,800
Hence inventory value of Product -A ` 18,000
Product – B
Material cost ` 45 x 800 = 36,000
Wages cost ` 35 x 800 = 28,000
Total cost ` 64,000
Realizable value (800 x 70) ` 56,000
Hence inventory value of Product-B ` 56,000
Total Value of closing inventory i.e. Product A + Product B ` 74,000
(18,000+ 56,000)

Question 8 (RTP NOV 2020)

A Limited is engaged in manufacturing of Chemical Y for which Raw Material X is required. The
company providesyou following information for the year ended 31stMarch,2020.
 ` Per unit
Raw Material X
Cost price 400
Freight Inward 40
Replacement cost 320
Chemical Y
Material consumed 440
Direct Labour 120
Variable Overheads 80
Additional Information:
(i) Total fixed overhead for the year was ` 4,00,000 on normal capacity of 25,000 units.
(ii) Closing balance of Raw Material X was 1,000 units and Chemical Y was 2,400 units.
You are required to calculate the total value of closing stock of Raw Material X and Chemical Y
according to AS 2, when Net realizable value of Chemical Y is ` 600 per unit.

Answer
Net Realizable Value of the Chemical Y (Finished Goods) is ` 600 per unit which is less than its cost `
656 per unit. Hence, Raw Material is to be valued at replacement
costandFinishedGoodsaretobevaluedatNRVsinceNRVislessthanthecost.
Value of Closing Stock:
Qty. Rate (`) Amount (`)
Raw Material X 1,000 320 3,20,000
Finished Goods Y 2,400 600 14,40,000
Total Value of Closing Stock 17,60,000
Working Note:
Statement showing cost calculation of Raw material X and Chemical Y
Raw Material X `
Cost Price 400
Add: Freight Inward 40
Cost 440
Chemical Y `
Materials consumed 440
Direct Labour 120
Variable overheads 80
Fixed overheads (`4,00,000/25,000 units) 16
Cost 656

Question 9 (RTP MAY 2020)

Particulars Kg. `
Opening Inventory: Finished Goods 1,000 25,000
Raw Materials 1,100 11,000
Purchases 10,000 1,00,000
Labour 76,500
Overheads (Fixed) 75,000
Sales 10,000 2,80,000
 Closing Inventory: Raw Materials 900
Finished Goods 1200
The expected production for the year was 15,000 kg of the finished product. Due to fall in market
demand the sales price for the finished goods was ` 20 per kg and the replacement cost for the raw
material was ` 9.50 per kg on the closing day. You are required to calculate the closing inventory as on
thatdate.

Answer
Calculation of cost for closinginventory
Particulars `
Cost of Purchase (10,200 x 10) 1,02,000
Direct Labour 76,500
Fixed Overhead 75,000 x 10,200 51,000
15,000
Cost of Production 2,29,500
Cost of closing inventory per unit (2,29,500/10,200) ` 22.50
Net Realisable Value per unit ` 20.00
Since net realisable value is less than cost, closing inventory will be valued at
` 20.
As NRV of the finished goods is less than its cost, relevant raw materials will be valued at replacement
cost i.e.` 9.50.

Therefore, value of closing inventory: Finished Goods (1,200 x 20) ` 24,000

Raw Materials (900 x 9.50) ` 8,550
` 32,550

Question 10 (MTP APRIL 2021) [5 MARKS]

(i) “In determining the cost ofinventories, it is appropriate to exclude certain costs and
recognize them as expenses in the period in which they are incurred”. Provide examples of
such costs as per AS 2 ‘Valuation of Inventories’.
(ii) X Limited purchased goods at the cost of Rs. 40 lakhs in October, 2020. Till March, 2021,
75% of the stocks were sold. The company wants to disclose closing stock at Rs. 10 lakhs. The
expected sale value is Rs. 11 lakhs and a commission at 10% on sale is payable to the
agent.Advise,whatisthecorrectvalueofclosingstocktobedisclosedasat31.3.2021.

Answer

(i)As per AS 2 ‘Valuation of Inventories’, certain costs are excluded from the cost of the inventories and
are recognized as expenses in the period in which incurred. Examples of such costs are:
(i) abnormal amount of wasted materials, labour, or other productioncosts;
(ii) storage costs, unless those costs are necessary in the production process prior to a further
productionstage;
(iii) administrative overheads that do not contribute to bringing the inventories to their
presentlocation and condition;and
(iv) selling and distributioncosts.

(ii)As per AS 2 “Valuation of Inventories”, the inventories are to be valued at lower of cost or net
realizable value. In this case, the cost of inventory is Rs. 10 lakhs. The net realizable value is 11,00,000
90% = Rs. 9,90,000. So, the stock should be valued at Rs. 9,90,000.

Question 11 (MTP MARCH 2021) [5 MARKS]

In a production process, normal waste is 5% of input. 5,000 MT of input were put in process resulting
in wastage of 300 MT. Cost per MT of input is Rs. 1,000. The entire quantity of waste and finished
output is in stock at the year end. State with reference to Accounting Standard, how will you value the
inventories in this case? What will be treatment fornormal and abnormal waste?

Answer

As per para 13 of AS 2 (Revised), abnormal amounts of wasted materials, labour and other production
costs are excluded from cost of inventories and such costs are recognized as expenses in the period
in which they areincurred.
In this case, normal waste is 250 MT and abnormal waste is 50 MT. The cost of 250 MT wil l be included
in determining the cost of inventories (finished goods) at the year end. The cost of abnormal waste (50
MT x 1,052.6315 = Rs. 52,632) will be charged to the profit and loss statement.
Cost per MT (Normal Quantity of 4,750 MT) = 50,00,000 / 4,750 = Rs. 1,052.6315 Total value of
inventory = 4,700 MT x Rs. 1,052.6315 = Rs. 49,47,368.

AS 10 : PROPERTY PLANT AND EQUIPMENT

QUESTION 1 RTP DEC 2021
A property costing ` 10,00,000 is bought on 1.4.2020. Its estimated total physical life is 50 years.
However, the company considers it likely that it will sell the property after 25 years.
The estimated residual value in 25 years' time, based on current year prices, is: Case
(a) ` 10,00,000
Case (b) ` 9,00,000
You are required to compute the amount of depreciation charged for the year ended 31.3.2021.
ANSWER
Case (a)
The company considers that the residual value, based on prices prevailing at the balance sheet
date, will equal the cost.
There is, therefore, no depreciable amount and depreciation is zero.
Case (b)
The company considers that the residual value, based on prices prevailing at the balance sheet
date, will be ` 9,00,000 and the depreciable amount is, therefore, ` 1,00,000.
Annual depreciation (on a straight line basis) will be ` 4,000 [{10,00,000 – 9,00,000} ÷ 25].

QUESTION 2 (MTP DEC2021) (5 MARKS)

Arush Ltd. is installing a new plant in its factory. It provides you the following information:
Cost of the plant (cost as per supplier's invoice) ` 31,25,000
Estimated dismantling costs to be incurred after 5 years ` 2,50,000
Initial delivery and handling costs ` 1,85,000
Cost of site preparation ` 4,50,000
Consultants used for advice on the acquisition of the plant ` 6,50,000
You are required to advise Arush Ltd. on the costs that can be capitalised for plant in accordance with AS 10
‘Property, Plant and Equipment’.

ANSWER
According to AS 10 ‘Property, Plant and Equipment’, following costs will be capitalized by Arush Ltd.:
 `
Cost of the plant 31,25,000
Initial delivery and handling costs 1,85,000
Cost of site preparation 4,50,000
Consultants’ fee 6,50,000
Estimated dismantling costs to be incurred after 5 years 2,50,000
Total cost of Plant 46,60,000

Question 3 (July 2021) [5 MARKS]

(i) ALimitedhascontractedwithasuppliertopurchasemachinery
whichistobeinstalledatitsnewplantinfourmonths’time.
Specialfoundationswererequiredforthemachinerywhichwere
tobepreparedwithinthissupplyleadtime.Thecostofthesite preparation and laying foundations
were T 2,10,000.These activities were supervised by an Architect during the entire
period,whoisemployedforthispurposeatasalaryof135,000
permonth.ThemachinerywaspurchasedforT1,27,50,000anda
sumof12,12,500wasincurredtowardstransportationchargesto
bringthemachinerytotheplantsite.AnEngineerwasappointed at a fees of 1 37,500 to supervise the
installation of the machineryattheplantsite.Youarerequiredtoascertainthe
amountatwhichthemachineryshouldbecapitalizedinthe books of ALimited.
(ii) B Limited, which operates a major chain of retail stores, has ‘acquired a new store location. The
new location requires substantial renovation expenditure. Management expects that the
renovationwilllastfor4monthsduringwhichthestorewillbe closed.Management
haspreparedthebudgetforthisperiod including expenditure related to construction and re-
modelling costs,salaryofstaffwhoshallbepreparingthestorebeforeits
openingandrelatedutilitiescost.Howwouldsuchexpenditure betreated inthebooksofBLimited?

Question 4 (NOV 2020) [5 MARKS]

A Ltd. had following assets. Calculate depreciation for the year ended 31stMarch, 2020 for each
asset as per AS 10(Revised):
(i) Machinery purchased for ` 10 lakhs on 1stApril, 2015 and residual value after useful life of
5 years, based on 2015 prices is ` 10lakhs.
(ii) Land for ` 50lakhs.
(iii) A Machinery is constructed for ` 5,00,000 for its own use (useful life is 10 years). Construction
is completed on 1stApril, 2019, but the company does not begin using the machine until 31st
March,2020.
(iv) Machinery purchased on 1stApril.2017 for ` 50,000 with useful life of 5 years and residual value
is NIL. On 1stApril, 2019, management decided to use this asset for further 2 yearsonly.

Answer
Computation of amount of depreciation as per AS10

`
(i) Machinery purchased on 1/4/15 for ` 10 lakhs (having residual value Nil
of ` 10 lakhs)
Reason: The company considers that the residual value, based on
prices
prevailing at the balance sheet date, will equal the cost. Therefore,
there is no depreciable amount and depreciation is correctlyzero.
 (ii) Land (50 lakhs) (considered freehold) Nil
Reason: Land has an unlimited useful life and therefore, it is not
depreciated.
(iii) Machinery constructed for own use (` 5,00,000/10) 50,000
Reason: The entity should begin charging depreciation from the date
the machine is ready for use i.e. 1st April,2019. The fact that the
machine was not used for a period after it was ready to be used is
not relevant in considering when to begin chargingdepreciation.
(iv) Machinery having revised useful life 15,000
Reason: The entity has charged depreciation using the straight-line
method at ` 10,000 per annum i.e (50,000/5 years). On
1stApril,2019the
asset's net book value is [50,000 – (10,000 x 2)] i.e.` 30,000. The
remaining useful life is 2 years as per revised estimate. The company
should amend the annual provision for depreciation to charge the
unamortized cost over the revised remaining life of 2 years.
Consequently, it should charge depreciation for the next 2 yearsat
` 15,000 per annum i.e. (30,000 / 2 years).

Question 5 (RTP NOV 2021)

A property costing ` 10,00,000 is bought on 1.4.2020. Its estimated total physical life is 50
years.However,thecompanyconsidersitlikelythatitwillsellthepropertyafter25years.
The estimated residual value in 25 years' time, based on current year prices, is:
Case (a) ` 10,00,000
Case (b) ` 9,00,000
You are required to compute the amount of depreciation charged for the year ended 31.3.2021.

Answer
Case(a)
The company considers that the residual value, based on prices prevailing at the balance sheet date,
will equal the cost.
There is, therefore, no depreciable amount and depreciation is zero.
Case (b)
The company considers that the residual value, based on prices prevailing at the balance sheet date,
will be ` 9,00,000 and the depreciable amount is, therefore, ` 1,00,000.
Annual depreciation (on a straight line basis) will be ` 4,000 [{10,00,000 – 9,00,000} ÷ 25].

Question 6 (RTP MAY 2021)

You are required to give the correct accounting treatment for the following in line with provisions of
AS10:
(a) Trozen Ltd. operates a major chain of supermarkets all over India. It acquires a new store in
Pune which requires significant renovation expenditure. It is expected that the renovations
will be done in 2 months during which the store will be closed. The budget for this period,
including expenditure related to construction and remodelling costs (` 18 lakhs), salaries of
staff (` 2 lakhs) who will be preparing the store before its opening and related utilities costs (`
1.5 lakhs), is prepared. The cost of salaries
ofthestaffandutilitiesareoperatingexpendituresthatwouldbeincurredevenafterthe opening of
the supermarket. What will the treatment of all these expenditures in the books ofaccounts?
 (b) ABC Ltd is setting up a new refinery outside the city limits. In order to facilitate the
construction of the refinery and its operations, ABC Ltd. is required to incur expenditure on
the construction/development of railway siding, road and bridge. Though ABC Ltd. incurs
the expenditure on the construction/development, it will not have ownership rights on
these items and they are also available for use to other entities and public at large. Can ABC
Ltd. capitalize expenditure incurred on these items as property, plant and equipment(PPE)?

Answer
(a) TrozenLtd. should capitalize the costs of construction and remodelling the supermarket,
because they are necessary to bring the store to the condition necessary for it to be capable of
operating in the manner intended. The supermarket cannot be opened without incurring the
remodellingexpenditure. Therefore, this construction and remodelling expenditure of ` 18
lakh should be considered as part ofthe cost of the asset. However, the cost of salaries of the
staff ` 2 lakh and utilities cost ` 1.5 lakh are operating expenditures that would be incurred
even after the openingof the supermarket. Therefore, these costs are not necessary to bring
the store to the condition necessary for it to be capable of operating in the manner intended
by the management and should beexpensed.
(b) AS 10 states that the cost of an item of property, plant and equipment shall be recognized as
an asset if, and onlyif:
(a) it is probable that future economic benefits associated with the item will flow to the
entity;and
(b) the cost of the item can be measuredreliably.
Further, the standard provides that the standard does not prescribe the unit of measure for
recognition, i.e., what constitutes an item of property, plant and equipment. Thus, judgement is
required in applying the recognition criteria to an
entity’sspecificcircumstances.Thecostofanitemofproperty,plantandequipment comprise any costs
directly attributable to bringing the asset to the location and condition necessary for it to be capable of
operating in the manner intended by management.
In the given case, railway siding, road and bridge are required to facilitate the construction of the
refinery and for its operations. Expenditure on these items isrequired to be incurred in order to get
future economic benefits from the project as a whole which can be considered as the unit of measure
for the purpose of capitalization of the said expenditure even though the company cannot restrict the
access of others for using the assets individually. It is apparent that the aforesaid expenditure is
directly attributable to bringing the asset to the location and condition necessary for
ittobecapableofoperatinginthemannerintendedbymanagement.
In view of this, even though ABC Ltd. may not be able to recognize expenditure incurred on these
assets as an individual item of property, plant and equipment in many cases (where it cannot restrict
others from using the asset), expenditure incurred may be capitalized as a part of overall cost of the
project. From this, it can be concluded that, in the given case the expenditure incurred on these
assets, i.e., railway siding, road and bridge, should be considered as the cost of constructing the
refinery and accordingly, expenditure incurred on these items should be allocated and
capitalizedaspartoftheitemsofproperty,plantandequipmentoftherefinery.

Question 7 (RTP NOV 2020)

Omega Ltd. contracted with a supplier to purchase machinery which is to be installed in its one
department in three months' time. Special foundations were required for the machinery which were
to be prepared within this supplylead time. The cost of the site preparationand laying foundations
were ` 1,40,000. These activities were supervised by a technician during the entire period, who is
employed for this purpose at `45,000 per month.
The machine was purchased at ` 1,58,00,000 and ` 50,000 transportation charges were incurred to
bring the machine to the factory site. An Architect was appointed at a fee of
` 30,000 to supervise machinery installation at the factory site.
You are required to ascertain the amount at which the Machinery should be capitalized under AS 10.
Answer
Calculation of Cost ofMachinery
Particulars `
Purchase Price Given 1,58,00,000
Add: Site Preparation Cost Given 1,40,000
Technician’s Salary Specific/Attributable overheads for 3 1,35,000
months (45,000 x3)
Initial Delivery Cost Transportation 50,000
Professional Fees for Architect’s Fees 30,000
Installation
Total Cost of Asset 1,61,55,000

Question 8 (RTP MAY 2020)

(a) Entity A has a policy of not providing for depreciation on PPE capitalized in the year until the
following year, but provides for a full year's depreciation in the year of disposal of an asset. Is
thisacceptable?
(b) Entity A purchased an asset on 1st January 2016 for ` 1,00,000 and the asset had an estimated
useful life of 10 years and a residual value of nil. On 1st January 2020, the directors review the
estimated life and decide that the asset will probably be useful for a further 4 years. Calculate
the amount of depreciation for each year, if company charges depreciation on Straight
Linebasis.
(c) The following items are given toyou:
ITEMS
(1) Costs of testing whether the asset is functioning properly, after deducting the net proceeds
from selling any items produced while bringing the asset to that
locationandcondition(suchassamplesproducedwhentestingequipment);
(2) Costs of conducting business in a new location or with a new class of customer (including costs
of stafftraining);
(3) Any costs directly attributable to bringing the asset to the location and condition necessary for
it to be capable of operating in the manner intended by management
(4) Costsofopeninganewfacilityorbusiness,suchas,inaugurationcosts;
(5) Purchase price, including import duties and non–refundable purchase taxes, after deducting
trade discounts andrebates.
With reference to AS 10 “Property, Plant and Equipment”, classify the above items
under the following heads:
HEADS
(i) Purchase Price ofPPE
(ii) Directly attributable cost of PPEor
(iii) CostnotincludedindeterminingthecarryingamountofanitemofPPE.

Answer
(a) The depreciable amount of a tangible fixed asset should be allocated on a systematic basis
over its useful life. The depreciation method should reflect the pattern in which the asset's
future economic benefits are expected to be consumed by the entity. Useful life means the
period over which the asset is expected to be available for use by the entity. Depreciation
should commence as soon as the asset is acquired and is available for use. Thus, the policy of
Entity A is notacceptable.
 (b) The entity has charged depreciation using the straight-line method at ` 10,000 per annum i.e
(1,00,000/10 years). On 1st January 2020, the asset's net book value is [1,00,000 – (10,000 x 4)]
= `60,000.
The remaining useful life is 4 years. The company should amend the annual provision for
depreciation to charge the unamortized cost over the revised remaining life of four years.
Consequently, it should charge depreciation for the next 4 years at ` 15,000 per annum i.e.
(60,000 / 4 years). Depreciation is recognized even if the Fair value of the Asset exceeds its
Carrying Amount. Repair and maintenance of an asset do not negate the need to depreciateit.
(c)
(1) Costs of testing whether the asset is functioning properly, after deducting the net
proceeds from selling any items produced while bringing the asset to that location and
condition (such as samples produced when testing equipment) will
beclassifiedas“DirectlyattributablecostofPPE”.
(2) Costs of conducting business in a new location or with a new class of customer (including
costs of staff training) will be classified under head (iii)as it will not be
includedindeterminingthecarryingamountofanitemofPPE.
(3) Any costs directly attributable to bringing the asset to the location and condition necessary
for it to be capable of operating in the manner intended by
managementwillbeincludedindeterminationofPurchasePriceofPPE
(4) Costs of opening a new facility or business, such as, inauguration costs will be classified
under head (iii) as it will not be included in determining the carrying amount of an item
ofPPE.
(5) Purchase price, including import duties and non–refundable purchase taxes,
afterdeductingtradediscountsandrebateswillbeincludedindeterminationof Purchase Price
of PPE.

Question 9 (MTP APRIL 2021) [5 MARKS]

Mohan Ltd. has an existing freehold factory property, which it intends to knock down andredevelop.
During the redevelopment period the company will move its production facilities to another
(temporary)site.
The details of the incremental costs which will be incurred are: Setup costs of Rs. 5,00,000 to install
machinery in the new location; Rent of Rs. 15,00,000; Removal costs of Rs. 3,00,000 to transport the
machinery from the old location to the temporarylocation.
Mohan Ltd. wants to seek your guidance as whether these costs can be capitalized into the cost of
thenewbuilding. YouarerequiredtoadviseinlinewithAS10“Property,PlantandEquipment”.

Answer
Constructing or acquiring a new asset may result in incremental costs that would have been
avoidediftheassethadnotbeenconstructedoracquired.Thesecostsarenotbeincludedinthe cost of the
asset if they are not directly attributable to bringing the asset to the location and condition necessary
for it to be capable of operating in themanner intended by management. The costs to be incurred by
the company are in the nature of costs of reducing or reorganizing the operations of the
accompany. These costs do not meet that requirement of AS 10 “Property, Plant and Equipment”
and cannot,therefore, be capitalized.

Question 10 (MTP MARCH 2021) [5 MARKS]

Neon Enterprise operates a major chain of restaurants located in different cities. Thecompany has
acquired a new restaurant located at Chandigarh. The new-restaurant requires significant renovation
expenditure. Management expects that the renovations will last for 3 months during which the
restaurant will beclosed.
Management has prepared the following budget for this period –
Salaries of the staff engaged in preparation of restaurant before its opening Rs. 7,50,000 Construction
and remodellingcostofrestaurant Rs.30,00,000
Explain the treatment of these expenditures as per the provisions of AS 10 "Property, Plant and
Equipment".

Answer

As per provisions of AS 10, any cost directly attributable to bring the assets to the location and
conditions necessary for it to be capable of operating in the manner indicated by the management
are called directly attributable costs and would be included in the costs of an item of PPE.
Management of Neon Enterprise should capitalize the costs of construction and remodelling the
restaurant, because they are necessary to bring the restaurant to the condition necessary for it to be
capable of operating in the manner intended by management. The restaurant cannot be opened
without incurring the construction and remodelling expenditure amounting Rs. 30,00,000 and thus the
expenditure should be considered part of theasset.
However, the cost of salaries of staff engaged in preparation of restaurant Rs. 7,50,000 before its
opening are in the nature of operating expenditure that would be incurred if the restaurant was open
and these costs are not necessary to bring the restaurant to the conditions necessary for it to be
capable of operating in the manner intended by management. Hence, Rs. 7,50,000 should
beexpensed.

AS 11 : THE EFFECT OF CHANGES IN FOREIGN EXCHANGE RATES

QUESTION 1 (RTP DEC 2021) (10 MARKS)
Mona Ltd. purchased a plant for US$ 1,00,000 on 01st December 2020, payable after three months.
Company entered into a forward contract for three months @ ` 49.15 per dollar. Exchange rate per
dollar on 01st December was ` 48.85. How will you recognize the profit or loss on forward contract in
the books of Mona Ltd for the year ended 31st March, 2021?
ANSWER

Forward Rate ` 49.15

Less: Spot Rate (` 48.85)
Premium on Contract ` 0.30
Contract Amount US$ 1,00,000
Total Loss (1,00,000 x 0.30) ` 30,000 to be recognized in year ended 31.3.2021.

QUESTION 2 (MTP DEC 2021) (5 MARKS)

“Explain “monetary item” as per Accounting Standard 11. How are foreign currency monetary items
to be recognized at each Balance Sheet date? Classify the following as monetary or non- monetary
item:
(i) Share Capital
(ii) Trade Receivables
(iii) Investments
(iv) Fixed Assets.
ANSWER
As per AS 11‘ The Effects of Changes in Foreign Exchange Rates’, Monetary items are money held
 and assets and liabilities to be received or paid in fixed or determinable amounts of money.

Foreign currency monetary items should be reported using the closing rate at each balance sheet
date. However, in certain circumstances, the closing rate may not reflect with reasonable accuracy
the amount in reporting currency that is likely to be realised from, or required to disburse, a foreign
currency monetary item at the balance sheet date. In such circumstances, the relevant monetary
item should be reported in the reporting currency at the amount which is likely to be realised from
or required to disburse, such item at the balance sheet date.
Share capital Non-monetary
Trade receivables Monetary
Investments Non-monetary
Fixed assets Non-monetary

Question 3 ( MTP DEC 2021) (5 MARKS)

Om Ltd. purchased an item of property, plant and equipment for US $ 50 lakh on 01.04.2020 and
the same was fully financed by the foreign currency loan [US $] repayable in five equal instalments
annually. (Exchange rate at the time of purchase was 1 US $ = ` 60]. As on 31.03.2021 the first
installment was paid when 1 US $ fetched ` 62.00. The entire loss on exchange was included in
cost of goods sold by the accountant. Om Ltd. provides depreciation on an item of property, plant
and equipment at 20% on WDV basis and wants to exercise the option to adjust the cost of asset
for exchange difference arising out of loan restatement and payment.
You are required to calculate the amount of exchange loss, its treatment and depreciation on this item
of property, plant and equipment.
ANSWER
Exchange differences arising on restatement or repayment of liabilities incurred for the purpose of
acquiring an item of property, plant and equipment should be adjusted in the carrying amount of the
respective item of property, plant and equipment as Om Ltd. has exercised the option and it is long
term foreign currency monetary item. Thus, the entire exchange loss due to variation of ` 20 lakh on
31.03.2021 on payment of US $ 10 lakh, should be added to the carrying amount of an item of
property, plant and equipment and not to the cost of goods sold. Further, depreciation on the
unamortized depreciable amount should also be provided.
Calculation of Exchange loss:
Foreign currency loan (in `) = (50 lakh $ x ` 60) = ` 3,000 lakh
Exchange loss on outstanding loan on 31.03.2021 = ` 40 lakh US $ x (62.00-60.00) = ` 80 lakh.
So, ` 80 lakh should also be added to cost of an item of property, plant and equipment with
corresponding credit to outstanding loan in addition to ` 20 lakh on account of exchange loss on
payment of instalment. The total cost of an item of property, plant and equipment to be increased by
` 100 lakh. Total depreciation to be provided for the year 2020 - 2021 = 20% of (` 3,000 Iakh
+ 100 lakh) = ` 620 lakh.

Question 4 (JAN 2021) [5 MARKS]

Explain briefly the accounting treatment needed in the following cases as per AS 11 as on31.03.2020
(i) Debtors include amount due from Mr. S ` 9,00,000 recorded at the prevailing exchange rate
on the date of sales, transaction recorded at US $1 = `72.00
US $ 1=`73.50 on 31stMarch,2020 US $ 1= ` 72.50 on 1stApril,2019.
(ii) Long term loan taken on 1stApril, 2019 from a U.S.company amounting to
` 75,00,000. `5,00,000 was repaid on 31stDecember, 2019, recorded at US $ 1 =
 ` 70.50. interest has been paid as and when debited by the US company. US $1= ` 73.50 on
31stMarch,2020
US $1=1` 72.50 on 1stApril,2019.

Answer

As perAS11“TheEffectsofChangesinForeignExchangeRates”,exchange
differencesarisingonthesettlementofmonetaryitemsoronreportinganenterprise’s monetary items at rates
different from those at which they were initially recorded during the period, or reported in previous
financial statements, should be recognized as income or as expenses in the period in which they
arise.
However, at the option of an entity, exchange differences arising on reporting of long - term foreign
currency monetary items at rates different from those at which they were initially recorded during the
period, or reported in previous financial statements, in so far as they relate to the acquisition of a
non-depreciable capital asset can be accumulated in
a“ForeignCurrencyMonetaryItemTranslationDifferenceAccount”intheenterprise’s financial
statements and amortized over the balance period of such long-term asset/ liability ,by recognition as
income or expense in each of such periods.

Foreign Currency `
Rate
Debtors
Initial recognition US $12,500 (9,00,000/72) 1 US $ = `72 9,00,000
Rate on Balance sheet date 1 US $ = ` 73.50
Exchange Difference Gain US $ 12,500 X (73.50- 72) 18,750

Treatment: Credit Profit and Loss A/c by ` 18,750

Long term Loan
Initial recognition US $ 1,03,448.28 1 US $ = ` 73.50 75,00,000
(75,00,000/72.50)
Rate on Balance sheet date 1 US $ = ` 73.50
Exchange Difference Loss after adjustment of exchange gain
on repayment of ` 5,00,000
` 67,987.48 [82,171.88 (US $96,356.08 X ` 73.5
less ` 70,00,000) less profit 14,184.40
[US $ 7,092.2 (5,00,000/70.5) X ` 2)] NET LOSS 67,987.48*
Treatment: Credit Loan A/c and
Debit FCMITD A/C or Profit and Loss A/c by
` 67,987.48

Thus, Exchange Difference on Long term loan amounting ` 67,987.48 may either be charged to Profit
and Loss A/c or to Foreign Currency Monetary Item Translation Difference Account but exchange
difference on debtors amounting ` 18,750is required to be transferred to Profit and Loss A/c.

NOTE 1: *Exchange Difference Loss (net of adjustment of exchange gain on repayment of `

5,00,000) has been calculated in the above solution. Alternative considering otherwise also possible.
NOTE 2: Date of sales transaction of ` 9 lakhs has not been given in the question and hence it has
been assumed that the transaction took place during the year ended 31 March2020.

Question 5 (RTP NOV 2021)

Mona Ltd. purchased a plant for US$ 1,00,000 on 01stDecember 2020, payable after three months.
Company entered into a forward contract for three months @ ` 49.15 per dollar. Exchange rate per
dollar on 01stDecember was ` 48.85. How will you recognize the profit or loss on forward contract in
the books of Mona Ltd for the yearended 31stMarch, 2021?

Answer
ForwardRate `49.15
Less:SpotRate (`48.85)
PremiumonContract ` 0.30
ContractAmount US$1,00,000
Total Loss (1,00,000 x 0.30) ` 30,000 to be recognized in year ended 31.3.2021.
Question 6 (RTP MAY 2021)

(a) Classify the following items into Monetary andNon-monetary:

(i)Share capital; (ii) Trade Payables; (iii) Cash balance; (iv) Property, plant and equipment

(b) Trade payables of CAT Ltd. include amount payable to JBB Ltd., `10,00,000 recorded at the
prevailing exchange rate on the date of transaction, transaction recorded at US $1 = ` 80.00.
The exchange rate on balance sheet date(31.03.2020) was US $1 = ` 85.00. You are required
to calculate the amount of exchange difference and also explain the accounting treatment
needed for this as per AS 11 in the books of CATLtd.

Answer
(a) Share capital - Non-monetary; Trade Payables -Monetary
Cash balance – Monetary; Property, plant and equipment - Non-monetary
(b) Amount of Exchange difference and its Accounting Treatment
Foreign `
Currency Rate
Trade payables
Initial recognition US $ 12,500 (`10,00,000/80) 1 US $ = ` 80 10,00,000
Rate on Balance sheet date 1 US $ = ` 85
Exchange Difference loss US $ 12,500 x ` (85-80) 62,500
Treatment:
Debit Profit and Loss A/c by ` 62,500 and Credit Trade
Payables
Thus, Exchange Difference on trade payables amounting ` 62,500 is required to be transferred to Profit
and Loss.

Question 7 (RTP MAY 2021)

Shan Builders Limited has borrowed a sum of US $ 10,00,000 at the beginning of Financial Year 2019-20
for its residential project at 4 %. The interest is payable at the end of the Financial Year. At the time of
availment, exchange rate was ` 56 per US $ and the rate as on 31stMarch, 2020 ` 62 per US $. If Shan
Builders Limited had borrowed the loan in India in Indian Rupee equivalent, the pricing of loan would
have been 10.50%. You are required to compute Borrowing Cost and exchange difference for the year
ending 31stMarch, 2020 as per applicable Accounting Standards.
Answer
(i) Interest for the period 2019-20
= US $ 10 lakhs x 4% × ` 62 per US $ = ` 24.80 lakhs
(ii) Increase in the liability towards the principalamount
= US $ 10 lakhs × ` (62 - 56) = `60 lakhs
(iii) InterestthatwouldhaveresultediftheloanwastakeninIndiancurrency
= US $ 10 lakhs × ` 56 x 10.5% = `58.80 lakhs
(iv) Difference between interest on local currency borrowing and foreign currency borrowing = `
58.80 lakhs - ` 24.80 lakhs = ` 34lakhs.
Therefore, out of ` 60 lakhs increase in the liability towards principal amount, only
` 34 lakhs will be considered as the borrowing cost. Thus, total borrowing cost would be ` 58.80
lakhs being the aggregate of interest of ` 24.80 lakhs on foreign currency borrowings plus the
exchange difference to the extent of difference between interest on local currency borrowing and
interest on foreign currency borrowing of ` 34 lakhs. Hence, ` 58.80 lakhs would be considered as
the borrowing cost to be accounted for
asperAS16“BorrowingCosts”andtheremaining`26lakhs(60-34)wouldbe
consideredastheexchangedifferencetobeaccountedforasperAS11“TheEffects of Changes in Foreign
ExchangeRates”.

Question 8 (RTP NOV 2020)

(a) Classify the following items as monetary or non-monetary item:
ShareCapital
Trade Receivables
Investment in Equity shares
Fixed Assets.
(b)
Exchange Rate per $
Goods purchased on 1.1.2019 for US $ 15,000 ` 75
Exchange rate on 31.3.2019 ` 74
Date of actual payment 7.7.2019 ` 73
You are required to ascertain the loss/gain to be recognized for financial years 2018- 19 and 2019-20 as
per AS 11.

Answer
(a)
Share capital Non-monetary
Trade receivables Monetary
Investment in equity shares Non-monetary
Fixed assets Non-monetary
(b)
AsperAS11on‘TheEffectsofChangesinForeignExchangeRates’,allforeign currency
transactions should be recorded by applying the exchange rate on the date of transactions.
Thus, goods purchased on 1.1.2019 and corresponding creditors would be recorded at `
11,25,000 (i.e.$15,000 × `75)

According to the standard, at the balance sheet date all monetary transactions should be
reported using the closing rate. Thus, creditors of US $15,000 on 31.3.201 9 will bereported
at ` 11,10,000 (i.e. $15,000 × ` 74) and exchange profit of ` 15,000 (i.e. 11,25,000 –
11,10,000) should be credited to Profit and Loss account in the year 2018-19.

On 7.7.2019, creditors of $15,000 is paid at the rate of ` 73. As per AS 11, exchange
difference on settlement of the account should also be transferred to Profit and Loss
account. Therefore, ` 15,000 (i.e. 11,10,000 – 10,95,000) will be credited to Profit and Loss
account in the year2019-20.
Question 9 (RTP MAY 2020)

(i) AXE Limited purchased fixed assets costing $ 5,00,000 on 1st Jan. 2018 from an American
company M/s M&M Limited. The amount was payable after 6 months. The company entered
into a forward contract on 1st January 2018 for
fivemonths@`62.50perdollar.Theexchangerateperdollarwasasfollows:
On 1stJanuary, 2018 ` 60.75 perdollar
On 31 March, 2018
st ` 63.00 perdollar
You are required to state how the profit or loss on forward contract would be recognized in the
books of AXE Limited for the year ending 2017-18, as per the provisions of AS 11.

(ii) Assets and liabilities and income and expenditure items in respect of integral foreign
operations are translated into Indian rupees at the prevailing rate of exchange at the end of
the year. The resultant exchange differences in the case of profit, is carried to other Liabilities
Account and the Loss, if any, is charged to revenue. You are required to comment in line with
AS 11 .

Answer
(i) As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, an enterprise may
enter into a forward exchange contract to establish the amount of the reporting currency
required, the premium or discount arising at the inception of such a forward exchange
contract should be amortized as expenses or income over the life of thecontract.
Forward Rate ` 62.50
Less:SpotRate (`60.75)

PremiumonContract ` 1.75

Contract Amount US$ 5,00,000

Total Loss (5,00,000 x 1.75) ` 8,75,000
Contract period 5 months
3 months falling in the year 2017-18; therefore loss to be recognized in 2017-18 (8,75,000/5) x
3 = ` 5,25,000. Rest ` 3,50,000 will be recognized in the following year 2018-19.

(ii) Financial statements of an integral foreign operation (for example, dependent foreign
branches) should be translated using the principles and procedures described in paragraphs 8
to 16 of AS 11 (Revised 2003). The individual items in the financial statements of a foreign
operation are translated as if all its transactions had been entered into by the reporting
enterprise itself. Individual items in the financial statements of the foreign operation are
translated at the actual rate on the date of transaction. The foreign currency monetary items
(for example cash, receivables, payables) should be reported using the closing rate at each
balance sheet date. Non-monetary items (for example, fixed assets, inventories, investments
in equity shares) which are carried in terms of historical cost denominated in a foreign
currency should be reported using the exchange date at the date of transaction. Thus the cost
and depreciation of the tangible fixed assets is translated using the exchange rate at the date
of purchase of the asset if asset is carried at cost. If the fixed asset is carried at fair value,
translation should be done using the rate existed on the date of the valuation. The cost of
inventories is translated at the exchange rates that existed when the cost of inventory was
incurred and realizable value is translated applying exchange rate when realizable value is
determined which is generally closing rate. Exchange difference arising on the translation of
the financial statements of integral foreign operation should be charged to profit and
lossaccount.
Thus, the treatment by the management of translating all assets and liabilities; income and
expenditure items in respect of foreign branches at the prevailing rate at the year end and also
the treatment of resultant exchange difference is not in consonance with AS 11 (Revised2003).
Question 10 (MTP MARCH 2021) [4 MARKS]

Omega Limited has borrowed a sum of US $ 10,00,000 at the beginning of Financial Year 2019-20
for its residential project at 4 %. The interest is payable at the end of the Financial Year. At the time of
availmentof loan exchange rate was Rs. 56 per US $ and the rate as on 31stMarch, 2020 was Rs. 62
per US $. If Omega Limited had borrowed the loan in India in Indian Rupee equivalent, thepricing of
loan would have been 10.50%.
You are required to compute Borrowing Cost and exchange difference for the year ending
31stMarch, 2020 as per applicable AccountingStandards.

Answer
(i) Interest for the period2019-20
= US $ 10 lakhs x 4% × Rs. 62 per US$ = Rs. 24.80 lakhs
(ii) Increase in the liability towards the principalamount
= US $ 10 lakhs × Rs. (62 - 56) = Rs. 60 lakhs
(iii) InterestthatwouldhaveresultediftheloanwastakeninIndiancurrency
= US $ 10 lakhs × Rs. 56 x 10.5% = Rs. 58.80 lakhs
(iv) Difference between interest on local currency borrowing and foreign currency
borrowing=Rs.58.80lakhs-Rs.24.80lakhs=Rs.34lakhs.

Therefore, out of Rs. 60 lakhs increase in the liability towards principal amount, only Rs. 34 lakhs will
be considered as the borrowing cost. Thus, total borrowing cost would be Rs. 58.80 lakhs being the
aggregate of interest of Rs. 24.80 lakhs on foreign currency borrowings plus the exchange difference
to the extent of difference between interest on local currency borrowing and interest on foreign
currency borrowing of Rs. 34lakhs.
Hence, Rs. 58.80 lakhs would be considered as the borrowing cost to be accounted for as per AS 16
and the remaining Rs. 26 lakhs (60 - 34) would be considered as the exchange difference to be
accounted for as per AS11.

AS 12 : ACCOUNTING FOR GOVERNMENT GRANTS

QUESTION 1 ( MTP DEC 2021) (5 MARKS)
Caseworker Limited received a specific grant of ` 6 crore for acquiring the plant of ` 30 crore during
financial year 2015-2016 having useful life of 10 years. During the financial year 2020- 2021, due to
non-compliance of conditions laid down for the grant of ` 6 crore, the company had to refund the
grant to the Government. What should be the treatment of the refund if grant was deducted from the
cost of the plant during financial year 2015-2016? Assume depreciation is charged on fixed assets
as per Straight Line Method.

ANSWER
As per AS 12, the amount refundable in respect of grant related to specific fixed assets should be
recorded by increasing the book value of the asset or by reducing the capital reserve or the deferred
income balance, as appropriate, by the amount refundable. Where the book value of the asset
is increased, depreciation on the revised book value should be provided prospectively over the
residual useful life of the asset.
Where grant was deducted from the cost of the asset, initial value of the plant after deduction
of grant amount of ` 6 crore would have been = ` 30 crore – ` 6 crore = ` 24 crore
. Carrying value of the plant after 5 years on 1.4.2020 = [(` 24 crore / 10 years) x 5 years] = `
12 crore.
Annual depreciation charge would be ` 2.4 crore.
On refund of grant to the Government, the book value of the plant shall be increased by ` 6 crore
i.e. ` 12 crore + ` 6 crore = ` 18 crore. The increased cost of ` 18 crore of the plant should be
amortised prospectively over remaining 5 years of useful residual life. Depreciation charge in the
 year 2020-2021 would be ` 18 crore / 5 years = ` 3.6 crore instead of earlier `
2.4 crore.

QUESTION 2 (MTP DEC 2021) (5 MARKS)

Darshan Ltd. purchased a Machinery on 1st April, 2016 for ` 130 lakhs (Useful life is 4 years).
Government grant received is ` 40 lakhs for the purchase of above Machinery.
Salvage value at the end of useful life is estimated at ` 60 lakhs.
Darshan Ltd. decides to treat the grant as deferred income.
Your are required to calculate the amount of depreciation and grant to be recognized in profit & loss
account for the year ending 31st March, 2017,31st March, 2018, 31st March, 2019 & 31st March, 2020.
Darshan Ltd. follows straight line method for charging depreciation.

ANSWER
As per 12 “Accounting for government grants”, grants related to depreciable assets, if treated as
deferred income are recognized in the profit and loss statement on a systematic and rational
basis over the useful life of the asset.

Amount of depreciation and grant to be recognized in the profit and loss account
each year
Depreciation per year:
`in lakhs
Cost of the Asset 130
Less: Salvage value (60)
70
Depreciation per year (70lakhs / 4) 17.50
` 17.50 Lakhs depreciation will be recognized for the year ending 31st March, 2017, 31st March,
2018, 31st March, 2019 and 31st March, 2020.
Amount of grant recognized in Profit and Loss account each year:
40 lakhs /4 years = ` 10 Lakhs for the year ending 31st March, 2017, 31st March, 2018, 31st March,
2019 and 31st March, 2020.

Question 3 (JULY 2021) [5 MARKS]

T25LacsreceivedfromStateGovernmentforprovidingMedicalfacilities to its workmen during thepandemic.
AdviseAlpsLimitedonthetreatmentoftheaboveGrantsinitsbooks ofAccountinaccordancewithAS-
12“GovernmentGrants”.

Question 4 (JAN 2021) [5 MARKS]

Darshan Ltd. purchased a Machinery on 1 stApril, 2016 for ` 130 lakhs (Useful life is 4Years).
Government grant received is ` 40 lakhs for the purchase of aboveMachinery.
Salvage value at the end of useful life is estimated at ` 60 lakhs. Darshan Ltd. decides to treat the grant
as deferred income.
Your are required to calculate the amount of depreciation and grant to be recognized in profit & loss
account for the year ending 31stMarch, 2017,31stMarch, 2018, 31stMarch, 2019& 31stMarch, 2020.
Darshan Ltd. follows straight line method for charging depreciation.

Answer
Asper12“Accountingforgovernmentgrants”,grantsrelatedtodepreciableassets,if treated as deferred
income are recognized in the profit and loss statement on a systematic and rational basis over the
useful life of theasset.
Amount of depreciation and grant to be recognized in the profit and loss account eachyear
Depreciation per year:
`in lakhs
Cost of the Asset 130
Less: Salvage value (60)
70
Depreciation per year(70lakhs/4) 17.50
` 17.50 Lakhs depreciation will be recognized for the year ending 31stMarch, 2017, 31st
March, 2018, 31stMarch, 2019 and 31stMarch, 2020.
Amount of grant recognized in Profit and Loss account each year :
40 lakhs /4 years = ` 10 Lakhs for the year ending 31stMarch, 2017, 31stMarch, 2018, 31stMarch, 2019
and 31stMarch,2020.

Question 5 (NOV 2020) [5 MARKS]

On 1stApril, 2016, Mac Ltd. received a Government Grant of ` 60 lakhs for acquisition of machinery
costing ` 300 lakhs. The grant was credited to the cost of the asset. The estimated useful life of the
machinery is 10 years. The machinery is depreciated @ 10% onWDV basis. The company had to
refund the grant in June 2019 due to non- compliance of certainconditions.
How the refund of the grant is dealt with in the books of Mac Ltd. assuming that the company did not
charge any depreciation for the year2019-20.
Pass necessary Journal Entries for the year 2019-20.

Answer
(` in lakhs)
1st April, 2016 Acquisition cost of machinery 300.00
Less: Government Grant 60.00
240.00
31st March, 2017 Less: Depreciation @ 10% (24.00)
1st April, 2017 Book value 216.00
31st March, 2018 Less: Depreciation @ 10% (21.60)
1st April, 2018 Book value 194.40
31st March, 2019 Less: Depreciation @ 10% (19.44)
1st April, 2019 Book value 174.96
Less: Depreciation @10% for 2 months (2.916)
1st June,2019 Book value 172.044
June 2019 Add: Refund of grant* 60.00
Revised book value 232.044
Depreciation @10% on the revised book value amounting to ` 232.044 lakhs is to be provided
prospectively over the residual useful life of themachinery.
*considered refund of grant at beginning of June month and depreciation for two months already
charged. Alternative answer considering otherwise also possible.
Journal Entries
Machinery Account Dr. 60
To Bank Account 60
 (Being government grant on asset partly
refunded which increased the cost of fixed asset)
Depreciation Account Dr. 19.337
To Machinery Account 19.337
(Being depreciation charged on revised value of
fixed asset prospectively for 10months)
Profit & Loss Account Dr. 22.253
To Depreciation Account 22.253
(Being depreciation transferred to Profit and Loss
Account amounting to ` (2.916 + 19.337= 22.253)

Question 6 (RTP NOV 2021)

D Ltd. acquired a machine on 01-04-2017 for ` 20,00,000. The useful life is 5 years. The company had
applied on 01-04-2017, for a subsidy to the tune of 80% of the cost.
ThesanctionletterforsubsidywasreceivedinNovember2020.TheCompany’sFixed
AssetsAccountforthefinancialyear2020-21showsacreditbalanceasunder:

Particulars `
Machine (Original Cost) 20,00,000
Less: Accumulated Depreciation (from 2017-18- to 2019-20 on Straight Line
Method) 12,00,000
8,00,000
Less: Grant received (16,00,000)
Balance (8,00,000)
You are required to explain how should the company deal with this asset in its accounts for 2020-21?

Answer

From the above account, it is inferred that the Company has deducted grant from the book value of
asset for accounting of Government Grants. Accordingly, out of the ` 16,00,000 that has been received,
`
8,00,000 (being the balance in Machinery A/c) should be credited to the machineryA/c.
The balance ` 8,00,000 may be credited to P&L A/c, since already the cost of the asset to the tune of `
12,00,000 had been debited to P&L A/c in the earlier years by way of depreciation charge, and `
8,00,000 transferred to P&L A/c now would be partial recovery of that cost.
There is no need to provide depreciation for 2020-21 or 2021-22 as the depreciable amount is now Nil.

Question 7 (RTP MAY 2021)

(i) Hygiene Ltd. had received a grant of ` 50 lakh in 2012 from a State Government towards
installation of pollution control machinery on fulfilment of certain conditions. The company,
however, failed to comply withthe said conditions
andconsequentlywasrequiredtorefundthesaidamountin2020.
The company debited the said amount to its machinery account in 2020 on payment of the
same. It also reworked the depreciation for the said machinery from the date of its purchase
and passed necessary adjusting entries in the year 2020 to incorporate the retrospective
impact of the same. State whether the treatment done by the company is correct or not.
 (ii) ABC Ltd. received two acres of land received for set up of plant. It also received `2 lakhs
received for purchase of machinery of ` 10 lakhs. Useful life of machinery is 5 years.
Depreciation on this machinery is to be charged on straight-line basis. How should ABC Ltd.
recognize these government grants in its books ofaccounts?

Answer

(i) As per the facts of the case, Hygiene Ltd. had received a grant of `50 lakh in 2012 from a State
Government towards installation of pollution control machinery on fulfilment of certain
conditions. However, the amount of grant has to be refunded since it failed to comply with the
prescribed conditions. In such circumstances, AS 12, “Accounting for Government Grants”, requires
that the amount refundable in respect of a government grant related to a specific fixed asset is
recorded by increasing the book value of the asset or by reducing the capital reserve or the
deferred income balance, as appropriate, by the amount refundable. The Standard
furthermakesitclearthatinthefirstalternative,i.e.,wherethebookvalueofthe

(ii) ABC Ltd. should recognize the grants inthe following manner:
• As per AS 12, government grants may take the form of non-monetary assets, such as
land or other resources, given at concessional rates. In these circumstances, it is
usual to account for such assets at their acquisition cost. Non-monetary assets given
free of cost are recorded at a nominal value. Accordingly, land should be
recognisedat nominal value in the balancesheet.
• The standard provides option to treat the grant either as a deduction from the gross
value of the asset or to treat it as deferred income as per provisions of the standard.
Under first method, the grant is shown as a deduction from the gross value of the
asset concerned in arriving at its book value. The grant is thus recognisedin the profit
and loss statement over the useful life of a depreciable asset by way of a reduced
depreciation charge. Accordingly, the grant of ` 2 lakhs is deducted from the cost of
the machinery. Machinery will be recognised in the books at ` 10 lakhs – ` 2 lakhs =
`8 lakhs and depreciation will be charged on it as follows:
` 8 lakhs/ 5 years = ` 1.60 lakhs per year.
Under the second method, grants related to depreciable assets are treated as
deferred income which is recognisedin the profit and loss statement on asystematic
and rational basis over the useful life of the asset. Such allocation to income is usually
made over the periods and in the proportions in which depreciation on related
assets is charged. ` 2 lakhs should be recognisedas deferred income and will be
transferred to profit and loss over the useful life of the asset. In this
case, ` 40,000 [` 2 lakhs / 5 years] should be credited to profit and loss each
year over the period of 5years.

Question 8 (RTP NOV 2020)

How would you treat the following in the accounts in accordance with AS 12 'GovernmentGrants'?
(i) ` 35 Lakhs received from the Local Authority for providing Medicalfacilities to theemployees.
(ii) ` 100 Lakhs received as Subsidy from the Central Government for setting up a unit in notified
backwardarea.

Answer
(i) ` 35 lakhs received from the local authority for providing medical facilities to the employees is a grant
received in the nature of revenue grant. Such grants are generally presented as a credit in the profit and
loss statement, either separately
orunderageneralheadingsuchas‘OtherIncome’.Alternatively,`35lakhs may be deducted in reporting
the related expense i.e.employee benefit expenses.

(ii) AsperAS12‘AccountingforGovernmentGrants’,wherethegovernmentgrants
areinthenatureofpromoters’contribution,i.e.theyaregivenwithreferenceto the total
 investment in an undertaking or by way of contribution towards its total capital outlay and no
repayment is ordinarily expected in respect thereof, the grants are treated as capital reserve
which can be neither distributed as dividend nor considered as deferred income. In thegiven
case, the subsidy received from the Central Government for setting up a unit in notified
backward area is neither in relation to specific fixed asset nor in relation to revenue. Thus,
amount of ` 100 lakhs should be credited to capitalreserve.

Question 9 (RTP MAY 2020)

How would you treat the following in the accounts in accordance with AS 12 'GovernmentGrants'?
(i) ` 35 Lakhs received from the Local Authority for providing Medical facilities to theemployees.
(ii) ` 100 Lakhs received as Subsidy from the Central Government for setting up a unit in a notified
backwardarea.
(iii) ` 10 Lakhs Grant received from the Central Government on installation of anti-
pollutionequipment.

Answer

(i) ` 35 lakhs received from the local authority for providing medical facilities to the employees is a
grant received in the nature of revenue grant. Such grants are generally presented as a credit
in the profit and loss statement, either separately or under a general heading such as ‘Other
Income’. Alternatively, ` 35 lakhs may be deducted in reporting the related expense i.e.
employee benefit expenses.

(ii) AsperAS12‘AccountingforGovernmentGrants’,wherethegovernmentgrants
areinthenatureofpromoters’contribution,i.e.theyaregivenwithreferenceto the total investment in
an undertaking or by way of contribution towards its total capital outlay and no repayment is
ordinarily expected in respect thereof, the grants are treated as capital reserve which can be
neither distributed as dividend nor considered as deferredincome.
In the given case, the subsidy received from the Central Government for setting up a unit in
notified backward area is neither in relation to specific fixed asset norin relation to revenue.
Thus, amount of ` 100 lakhs should be credited to capitalreserve.

(iii) ` 10 lakhs grant received for installation anti-pollution equipment is a grant related to specific
fixed asset. Two methods of presentation in financial statements of grants related to specific
fixed assets are regarded as acceptable alternatives. Under first method, the grant is shown
as a deduction from the gross value of the asset concerned in arriving at its book value. The
grant is thusrecognised in the profit and loss statement over the useful life of a depreciable
asset by way of a reduced depreciation charge. Under the second method, grants related to
depreciable assets are treated as deferred income which is recognised in the profit and loss
statement on a systematic and rational basis over the useful life of theasset.
Thus, ` 10 lakhs may either be deducted from the cost of equipment or treated as deferred
income to be recognized on a systematic basis in profit & Loss A/c over the useful life
ofequipment.

Question 10 (MTP APRIL 2021) [5 MARKS]

Ram Ltd. purchased machinery for Rs. 80 lakhs (useful life 4 years and residual value Rs. 8 lakhs).
Government grant received was Rs. 32 lakhs. The grant had to be refunded at the beginning of third
year. Show the Journal Entry to be passed at the time of refund of grant and the value of the fixed
assets in the third year and the amount of depreciation for remaining two years, if the grant had been
credited to Deferred GrantA/c.

Answer
As per AS 12 ‘Accounting for Government Grants,’ income from Deferred Grant Account is allocated to
Profit and Loss account usually over the periods and in the proportions in which depreciation on
related assetsischarged. Accordingly, in the first two years (Rs. 32lakhs
/4 years) = Rs. 8 lakhs x 2 years= Rs. 16 lakhswill be credited to Profit and Loss Account and Rs. 16
lakhs will be the balance of Deferred Grant Account after two years.Therefore, on refund ofgrant,
following entry will bepassed:
Rs. Rs.
Deferred Grant A/c Dr. 16 lakhs
Profit & Loss A/c Dr. 16 lakhs
To Bank A/c 32 lakhs
(Being Government grant refunded)
1. ValueofFixedAssetsaftertwoyearsbutbeforerefundofgrant
Fixed assets initially recorded in the books = Rs. 80 lakhs
Depreciation for each year = (Rs. 80 lakhs – Rs.8 lakhs)/4 years = Rs. 18 lakhs per year
Book value of fixed assets after two years = Rs. 80 lakhs – (Rs. 18 lakhs x 2 years) = Rs. 44 lakhs
2. Value of Fixed Assets after refund ofgrant
On refund of grant the balance of deferredgrant account will become nil. The fixed assetswill
continue to be shown in the books atRs. 44 lakhs.
3. Amount of depreciation for remaining twoyears
Depreciation will continue to be charged at Rs. 18 lakhs per annum for the remaining two
years.

Question 11 (MTP MARCH 2021) [5 MARKS]

Viva Ltd. received a specific grant of Rs. 30 lakhs for acquiring the plant of Rs. 150 lakhs during 2016-17
having useful life of 10 years. The grant received was credited to deferred income in the balance sheet
and was not deducted from the cost of plant. During 2019-20, due to non- compliance of conditions
laid down for the grant, the company had to refund the whole grant to the Government. Balance in
the deferred income on that date was Rs. 21 lakhs and written down value of plant was Rs. 105 lakhs.
What should be the treatment of the refund of the grant and the effect on cost of the fixed asset and
the amount of depreciation to be charged during the y ear 2019-20 in profit and lossaccount?

Answer

AsperAS-12,‘AccountingforGovernmentGrants’,“theamountrefundableinrespectofagrant related to
specific fixed asset should be recorded by reducing the deferredincome balance. To the extent the
amount refundable exceeds any such deferred credit, the amount should be charged to profit and
lossstatement.
In this case the grant refunded is Rs. 30 lakhs and balance in deferred income is Rs. 21 lakhs, Rs. 9
lakhs shall be charged to the profit and loss account for the year 2019-20. There will be no effect on
the cost of the fixed asset and depreciation charged will be on the same basis as charged in the
earlieryears.

AS 16 : BORROWING COSTS
QUESTION 1 (RTP DEC 2021)
In May, 2020, Omega Ltd. took a bank loan from a Bank. This loan was to be used specifically for the
construction of a new factory building. The construction was completed in January, 2021 and the
building was put to its use immediately thereafter. Interest on the actual amount used for construction
of the building till its completion was ` 18 lakhs, whereas the total interest payable to the bank on the
loan for the period till 31 st March, 2021 amounted to ` 25 lakhs.
the company wants to treat ` 25 lakhs as part of the cost of factory building and thus capitalize it on the
 plea that the loan was specifically taken for the construction of factory building? Explain the treatment
in line with the provisions of AS 16.

ANSWER
AS 16 clearly states that capitalization of borrowing costs should cease when substantially all the
activities necessary to prepare the qualifying asset for its intended use are completed. Therefore,
interest on the amount that has been used for the construction of the building up to the date of
completion (January, 2021) i.e. ` 18 lakhs alone can be capitalized. It cannot be extended to ` 25
lakhs.

QUESTION 2 (MTP DEC2021) (5 MARKS)

ABC Limited has started construction of an asset on 1st December, 2020, which continues till 31 st
March, 2021 (and is expected to go beyond a year). The entity has not taken any specific borrowings
to finance the construction of the asset but has incurred finance costs on its general borrowings
during the construction period. The directly attributable expenditure at the beginning of the month
on this asset was ` 10 lakh in December 2020 and ` 4 lakh in each of the months of January to March
2021. At the beginning of the year, the entity had taken Inter Corporate Deposits of ` 20 lakh at
9% rate of interest and had an overdraft of ` 4 lakh, which increased to
` 8 lakh on 1st March, 2021. Interest was paid on the overdraft at 10% until 1st January, 2021 and then
the rate was increased to 12%. You are required to calculate the annual capitalization rate for
computation of borrowing cost in accordance with AS 16 'Borrowing Costs'.

ANSWER
Calculation of capitalization rate on borrowings other than specific borrowings
Nature of general Period of Amount of loan Rate of Weighted average
borrowings outstanding (` ) interest p.a. amount of interest
balance (` )
a b c d = [(b x c) x (a/12)]
9% Debentures 12 months 20,00,000 9% 1,80,000
Bank overdraft 9 months 4,00,000 10% 30,000
2 months 4,00,000 12% 8,000
1 month 8,00,000 12% 8,000
36,00,000 2,26,000
Weighted average cost of borrowings
= {20,00,000 x(12/12)} + {4,00,000 x (11/12)} + {8,00,000 x (1/12)} = 24,33,334
Capitalisation rate = [(Weighted average amount of interest / Weighted average of general borrowings) x 100]
= [(2,26,000 / 24,33,334) x 100] = 9.29% p.a.

QUESTION 3 (MTP DEC 2021) (5 MARKS)

U Limited has obtained a term loan of ` 620 lacs for a complete renovation and modernization
of its Factory on 1st April, 2020. Plant and Machinery was acquired under the modernization
scheme and installation was completed on 30th April, 2021. An expenditure of ` 564 lacs was
incurred on this Plant and Machinery and the balance loan of ` 56 lacs has been used for
working capital purposes. The company has paid total interest of ` 68.20 lacs during financial
year 2020-2021 on the above loan. The accountant seeks your advice how to account for the
interest paid in the books of accounts. Will your answer be different, if the whole process of
renovation and modernization gets completed by 28th February, 2021?

ANSWER
Borrowing Cost: As per AS 16 ‘Borrowing Costs’, borrowing costs that are directly attributable to the
acquisition, construction or production of a qualifying asset should be capitalized as part of the
cost of that asset. Other borrowing costs should be recognized as an expense in the period in
 which they are incurred. Borrowing costs should be expensed except where they are directly
attributable to acquisition, construction or production of qualifying asset.
Qualifying Asset: A qualifying asset is an asset that necessarily takes a substantial period of time
(ordinarily, a period of twelve months unless a shorter or longer period can be justified on the basis
of the facts and circumstances of the case) to get ready for its intended use or sale.
(i) When construction of asset completed on 30th April, 2021
The treatment for total borrowing cost of ` 68.20 lakhs will be as follows:
Purpose Nature Interest to be Interest to be
capitalized charged to profit
and loss account
` in lakhs ` in lakhs
Plant and machinery Qualifying asset [68.20 x (564/620)]
under Modernization = 62.04
and renovation
scheme
Working Capital Not a qualifying [68.20 x (56/620)]
asset = 6.16
62.04 6.16
62.04 6.16

When construction of assets is completed by 28th February, 2019

In this scenario, when the process of renovation gets completed in less than 12 months, the
plant and machinery will not be considered as qualifying assets (until and unless the entity
specifically considers that the asset took substantial period of time for completing their
construction) and the whole of interest will be required to be charged off / expensed off to Profit
and loss account.

Question 4 (NOV 2020) [5 MARKS]

On 15th April, 2019 RBM Ltd. obtained a Term Loan from the Bank for ` 320 lakhs to be utilized
asunder:
` (in lakhs)
Construction for factory shed 240
Purchase of Machinery 30
Working capital 24
Purchase of Vehicles 12
Advance for tools/cranes etc. 8
Purchase of technical know how 6
In March, 2020 construction of shed was completed and machinery was installed. Total interest
charged by the bank for the year ending 31stMarch, 2020 was ` 40 lakhs.
In the context of provisions of AS 16 'Borrowing Costs', show the treatment of interest and also
explain thenature ofAssets.

Answer
As per AS 16 A qualifying asset is an asset that necessarily takes a substantial period of time to get
ready for its intended use or sale. Other investments and those inventories that are routinely
manufactured or otherwise produced in large quantities on a repetitive basis over a short period of
time, are not qualifying assets. Assets that are ready for their intended use or sale when acquired also
are not qualifying assets. Borrowing coststhat are directly attributable to the acquisition, construction
or production of a qualifying asset should be capitalized as part of the cost of that asset. Other
borrowing costs should be recognizedasanexpenseintheperiodinwhichtheyareincurred.

Construction of factory shed amounting ` 240 lakhs is qualifying asset in the given case. The interest
for this amount during the year will be added to the cost of factory shed. All others (purchase of
machinery, vehicles and technical know how, working capital, advance for tools/cranes) are non-
qualifying assets and related borrowing cost will be charged to Profit and Lossstatement.
Qualifying Asset as per AS 16 (construction ofashed) = ` 240 lakhs
Borrowing cost to be capitalized = ` 40 lakhs x 240/320 = ` 30 lakhs
Interest to be debited to Profit or Loss account: ` (40 – 30) = ` 10lakhs.
Note: Assumed that construction of factory shed completed on 31stMarch, 2020.

Question 5 (RTP NOV 2021)

In May, 2020, Omega Ltd. took a bank loan from a Bank. This loan was to be used specifically for the
construction of a new factory building. The construction was completed in January, 2021 and the
building was put to its use immediately thereafter. Interest on the actual amount used for construction
of the building till its completion was ` 18 lakhs, whereas the total interest payable to the bank on the
loan for the period till 31 stMarch, 2021 amounted to ` 25lakhs.
the company wants to treat ` 25 lakhs as part of the cost of factory building and thus capitalize it on the
plea that the loan was specifically taken for the construction of factory building? Explain the treatment
in line with the provisions of AS 16.

Answer
AS 16 clearly states that capitalization of borrowing costs should cease when substantially all the
activities necessary to prepare the qualifying asset for its intended use are completed. Therefore,
interest on the amount that has been used for the construction of the building up to the date of
completion (January, 2021) i.e. ` 18 lakhs alone can be capitalized. It cannot be extended to ` 25lakhs.

Question 6 (RTP MAY 2021)

When capitalisationof borrowing cost should cease as per Accounting Standard 16? Explain inbrief.

Answer
Capitalization of borrowing costs should cease when substantially all the activities necessary to
prepare the qualifying asset for its intended use or sale are complete. An asset is normally ready for
its intended use or sale when its physical construction or production is complete even though routine
administrative work might still continue.
Ifminormodificationssuchasthedecorationofapropertytotheuser’sspecification, are all that are outstanding,
this indicates that substantially all the activities are complete. When the construction of a qualifying
asset is completed in parts and a completed part is capable of being used while construction
continues for the other parts, capitalization of borrowing costs in relation to a part should cease
when substantially all the activities necessary to prepare that part for its intended use or
salearecomplete.

Question 7 (RTP NOV 2020)

(a) Vital Limited borrowed an amount of `150 crores on 1.4.2019 for construction of boiler plant
@ 10% p.a. The plant is expected to be completed in 4 years. Since the
weightedaveragecostofcapitalis13%p.a.,theaccountantofVitalLtd.capitalized
` 19.50 crores for the accounting period ending on 31.3.2020. Due to surplus fund out of
`150 crores, an income of ` 1.50 crores was earned and credited to profit and loss account.
Comment on the above treatment of accountant with reference to relevant
accountingstandard.
 (b) When capitalization of borrowing cost should cease as per Accounting Standard 16? Explain in
brief.

Answer
(a) Para10ofAS16‘BorrowingCosts’statesthattotheextentthefundsareborrowed specifically for the
purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for
capitalization on that asset should be determined as the actual borrowing costs incurred on
that borrowing during the period less any income on the temporary investment of those
borrowings. The capitalization rate should be the weighted average of the borrowing costs
applicable to the borrowings of the enterprise that are outstanding during the period, other
than borrowings made specifically for the purpose of obtaining a qualifying asset. Hence, in
the above case, treatment of accountant of Vital Ltd. is incorrect. The amount of borrowing
costs capitalizedforthefinancialyear2019-20shouldbecalculatedasfollows:
Actual interest for 2019-20 (10% of ` 150 crores) ` 15.00
crores
Less: Income on temporary investment from
specific borrowings (` 1.50
crores)
Borrowing costs to be capitalized during year 2019- ` 13.50
2020 crores

(b) Capitalization of borrowing costs should cease when substantially all the activities necessary
to prepare the qualifying asset for its intended use or sale are complete. An asset is normally
ready for its intended use or sale when its physical construction or production is complete
even though routine administrative work might still continue.
Ifminormodificationssuchasthedecorationofapropertytotheuser’sspecification, are all that are
outstanding, this indicates that substantially all the activities are complete. When the
construction of a qualifying asset is completed in parts and a completed part is capable of
being used while construction continues for the other parts, capitalization of borrowing costs
in relation to a part should cease when substantially all the activities necessary to prepare
that part for its intended use or sale arecomplete.

Question 8 (RTP MAY 2020)

Govind Ltd. issued 12% secured debentures of ` 100 Lakhs on 01.04.2018, to be utilized asunder:
Particulars Amount (` in lakhs)
Construction of factory building 40
Purchase of Machinery 35
Working Capital 25
In March 2019, construction of the factory building was completed and machinery was installed and
ready for its intended use. Total interest on debentures for the financial year ended 31.03.2019 was `
12,00,000. During the year 2018-19, the company had invested idle fund out of money raised from
debentures in banks' fixed deposit and had earned an interest of `3,00,000.
You are required to show the treatment of interest under Accounting Standard 16 and also explain
nature of assets.

Answer

AccordingtoAS16“BorrowingCosts”,borrowingcoststhataredirectlyattributable to the acquisition,

construction or production of a qualifying asset should be capitalised as part of the cost of that asset.
The amount of borrowing costs eligible for capitalisation should be determined in accordance with this
Standard. Other borrowing costs should be recognised as an expense in the period in which they are
incurred.
It also states that to the extent that funds are borrowed specifically for the purpose of obtaining a
qualifying asset, the amount of borrowing costs eligible for capitalisation on that asset should be
determined as the actual borrowing costs incurred on that borrowing during the period less any
income on the temporary investment of those borrowings.
Thus, eligible borrowing cost
= ` 12,00,000 – ` 3,00,000
= ` 9,00,000
Sr. Particulars Nature of Interest to be Interest to be
No. assets capitalized (`) charged to Profit
& Loss Account
(`)
i Construction Qualifying 9,00,000x40/100 NIL
of factory Asset = ` 3,60,000
building
ii Purchase Not a Qualifying NIL 9,00,000x35/100
of
Machinery Asset = ` 3,15,000
iii Working Not a Qualifying NIL 9,00,000x25/100
Capital Asset = ` 2,25,000
Total ` 3,60,000 ` 5,40,000

Question 9 (MTP APRIL 2021)

A company incorporated in June 2020, has setup a factory within a period of 8 monthswith borrowed
funds. The construction period of the assets had reduced drastically due to usage of technical
innovations by the company and the company is able to justify the reasons for the same. Whether
interest on borrowings for the period prior to the date of setting up the factory should be capitalized
although it has taken less than 12 months for the assets to get ready for use. You are required to
comment on the necessary treatment with reference to AS16.

Answer

As per AS 16 ‘Borrowing Costs’, a qualifying asset is an asset that necessarily takes a substantial
period of time to get ready for its intended use or sale. Further, the standard states that what
constitutes a substantial period of time primarily depends on the facts and circumstances of each
case. However, ordinarily, a period of twelve months is considered as substantial period of time unless
a shorter or longer period can be jus tified on the basis of facts and circumstances of the case. In
estimating the period, time which anasset takes,
technologicallyandcommercially,togetitreadyforitsintendeduseorsaleisconsidered.
It may be implied that there is a rebuttable presumption that a 12 months period constitutes
substantial period oftime.
Under present circumstances where construction period has reduced drastically due to technical
innovation, the 12 months period should at best be looked at as a benchmark and not as a conclusive
yardstick. It may so happen that an asset under normal circumstances may take more than 12 months
to complete. However, an enterprise that completes the asset in 8 months should not be penalized for
its efficiency by denying it interest capitalization and vice versa.
The substantial period criteria ensures that enterprises do not spend a lot of time and effort capturing
immaterial interest cost for purposes ofcapitalization.
Therefore, if the factory is constructed in 8 months then it shall be considered as a qualifyingasset.
The interest onborrowings for the same shall be capitalised although it has taken less than 12
months for the asset to get ready touse.
 Ch.4 –COMPANY FINAL ACCOUNTS
QUESTION 1 (RTP DEC 2021) (10 MARKS)
Om Ltd. has the Authorised Capital of ` 15,00,000 consisting of 6,000 6% Redeemable Preference shares
of ` 100 each and 90,000 equity Shares of `10 each. The following was the Trial Balance of the
Company as on 31st March, 2021:
Particulars Dr. Cr.
Investment in shares at cost (non-current investment) 1,50,000
Purchases 14,71,500
Selling expenses 2,37,300
Inventory as at the beginning of the year 4,35,600
Salaries and wages (included ` 30,000 being Director's
1,56,000
Remuneration)
Cash on hand 84,000
Bills receivable 1,24,500
Interest on Bank overdraft 29,400
Interest on debentures upto 30th Sep (1st half year) 11,250
Sundry Debtors and Sundry Creditors 1,50,300 2,63,550
Freehold property at cost 10,50,000
Furniture at cost less depreciation of ` 45,000 1,05,000
6% Redeemable Preference share capital 6,00,000
Equity share capital fully paid up 6,00,000
5% mortgage debentures secured on freehold properties 4,50,000
Dividends received 12,750
Profit and Loss A/c (opening balance) 85,500
Sales (Net) 20,11,050
Bank overdraft (secured by hypothecation of stocks and
receivables) 4,50,000
Technical knowhow fees (cost paid during the year) 4,50,000
Audit fees 18,000
Total 44,72,850 44,72,850

Other Information:
1. Closing Stock was valued at ` 4,27,500.
2. Purchases include ` 15,000 worth of goods and articles distributed among valued customers.
3. Salaries and Wages include ` 6,000 being Wages incurred for installation of Electrical Fittings
which were recorded under "Furniture".
4. Bills Receivable include ` 4,500 being dishonoured bills. 50% of which had been considered
irrecoverable.
5. Bills Receivable of ` 6,000 maturing after 31st March were discounted.
6. Depreciation on Furniture to be charged at 10% on Written Down Value.
7. Interest on Debentures for the half year ending on 31 st March was due on that date.
8. Technical Knowhow Fees is to be written off over a period of 10 years.
9. Trade receivables include ` 18,000 due for more than six months.
You are required to prepare the Balance Sheet as at 31st March, 2021 and Statement of Profit and Loss
 for the year ended 31st March, 2021 as per Schedule III to the Companies Act, 2013 after taking into
account the above information. Ignore taxation.
ANSWER
Balance sheet of Om Ltd. as at 31st March, 2021
Note (`)
I Equity and Liabilities
(1) Shareholders’ funds:
(a) Share capital 1 12,00,000
(b) Reserves and surplus 2 1,14,150
(2) Non-current liabilities:
Long term borrowings 3 4,50,000
(3) Current liabilities:
(a) Short term borrowings 4 4,50,000
(b) Trade payables 2,63,550
(c) Other current liabilities 5 11,250
Total 24,88,950
II ASSETS
(1) Non- Current Assets:
(a) Property, plant and equipment 6 11,49,900
(b) Intangible assets 7 4,05,000
(c) Non-current investments (Shares at cost) 1,50,000
(2) Current Assets:
(a) Inventories 4,27,500
(b) Trade receivables 8 2,72,550
(c) Cash and Cash equivalents – Cash on hand 84,000
Total 24,88,950

Note: There is a Contingent liability for Bills receivable discounted with Bank ` 6000.
Statement of Profit and Loss of Om Ltd. for the year ended 31st March, 2021
Particulars Note `
I Revenue from Operations 20,11,050
II Other income (Dividend income) 12,750
III Total Revenue (I &+ II) 20,23,800
IV Expenses:
(a) Purchases of Inventory (14,71,500 – Advertisement 14,56,500
Expenses 15,000)
(b) Changes in Inventories of finished Goods / Work in
8,100
progress & inventory (4,35,600 – 4,27,500)
(c) Employee Benefits expense 9 1,20,000
(d) Finance costs 10 51,900
(e) Depreciation & Amortization Expenses 11 56,100
(f) Other Expenses 12 3,02,550
Total Expenses 19,95,150
V Profit before exceptional, extraordinary items and tax 28,650
VI Exceptional items -
VII Profit before extra-ordinary items and tax 28,650
VIII Extraordinary items -
IX Profit before tax 28,650

Notes to accounts

(`)
1. Share Capital
Authorized capital:
90,000 Equity Shares of ` 10 each. 9,00,000
6,000 6% Preference shares of ` 100 each 6,00,000
Issued, subscribed & called up:
60,000, Equity Shares of ` 10 each 6,00,000
6,000 6% Redeemable Preference Shares of 100 each 6,00,000
12,00,000

2. Reserves and Surplus

Balance as on 1st April, 2020 85,500
Add: Surplus for current year 28,650
Balance as on 31st March, 2021 1,14,150
3. Long Term Borrowings
5% Mortgage Debentures (Secured against Freehold 4,50,000
Properties)
4. Short Term Borrowings
Secured Borrowings: Loans Repayable on Demand 4,50,000
Overdraft from Banks (Secured by Hypothecation of
Stocks & Receivables)
5. Other Current liabilities
Interest due on Borrowings (5% Debentures) 11,250
6. Property, plant and equipment
Furniture
Furniture at Cost Less depreciation ` 45,000 (as
given in Trial Balance 1,05,000
Add: Depreciation 45,000
Cost of Furniture 1,50,000
Add: Installation charge of Electrical Fittings wrongly
included under the heading Salaries and Wages 6,000
Total Gross block of Furniture A/c 1,56,000
Accumulated Depreciation Account: Opening
Balance-given in Trial Balance 45,000
Depreciation for the year:
On Opening WDV at 10% i.e.
(10% x 1,05,000) 10,500
On additional purchase during the year
at 10% i.e. (10% x 6,000) 600
Less: Accumulated Depreciation 56,100 99,900
Freehold property (at cost) 10,50,000
11,49,900
Intangible Assets
 Technical knowhow 4,50,000
Less: Written off 45,000 4,05,000
Trade Receivables
Sundry Debtors (a) Debt outstanding due more than
six months 18,000

(b) Other Debts (refer Working Note) 1,34,550

Bills Receivable (1,24,500 - 4,500) 1,20,000 2,72,550
Employee benefit expenses
Salaries & Wages 1,56,000
Less: Wages incurred for installation of electrical
fittings to be capitalised 6,000

Less: Directors’ Remuneration shown separately 30,000

Balance amount 1,20,000
Finance Costs
Interest on bank overdraft 29,400
Interest on debentures 22,500
51,900
Depreciation & Amortisation Expenses
Depreciation [10% of (1,05,000 + 6,000)] 11,100
Technical knowhow written of (4,50,000/10) 45,000 56,100
12. Other Expenses
Payment to the auditors 18,000
Director’s remuneration 30,000
Selling expenses 2,37,300
Advertisement (Goods and Articles Distributed) 15,000
3,02,550
Bad Debts (4,500 x 50%) 2,250

Working Note:

Calculation of Sundry Debtors-Other Debts

Sundry Debtors as given in Trial Balance 1,50,300
Add Back: Bills Receivables Dishonoured 4,500
1,54,800
Less: Bad Debts written off – 50% ` 4,500 (2,250)
Adjusted Sundry Debtors 1,52,550
Less: Debts due for more than 6 months (as per information given) (18,000)
Total of other Debtors i.e. Debtors outstanding for less than 6 months 1,34,550

QUESTION 2 (RTP DEC 2021) (5 MARKS)

Star Ltd. gives the following information the year ended 31st March, 2021:
`
Gross profit 60,38,048
Subsidies received from Govt. 4,10,888
Administrative, Selling and distribution expenses 12,33,813
Directors’ fees 2,02,170
Interest on debentures 46,860
 Managerial remuneration 4,28,025
Depreciation on Property, plant and equipment (PPE) 7,83,815
Provision for Taxation 18,63,750
Transfer to General Reserve 6,00,000
Transfer to Investment Revaluation Reserve 18,750
Depreciation on PPE as per Schedule II of the Companies Act, 2013 was ` 8,63,018
You are required to calculate the maximum amount of the managerial remuneration as
allowed as per Companies Act, 2013.
(b) State under which head these accounts should be classified in Balance Sheet, as per Schedule
III of the Companies Act, 2013:
(i) Share application money received in excess of issued share capital.
(ii) Share option outstanding account.
(iii) Unpaid matured debenture and interest accrued thereon.
(iv) Uncalled liability on shares and other partly paid investments.
(v) Calls unpaid.

ANSWER
1. (a) Calculation of net profit u/s 198 of the Companies Act, 2013
` `
Gross profit 60,38,048
Add: Subsidies received from Government 4,10,888
64,48,936
Less: Administrative, selling and distribution
12,33,813
expenses
Director’s fees 2,02,170
Interest on debentures 46,860
Depreciation on PPE as per Schedule II 8,63,018 (23,45,861)
Profit u/s 198 41,03,075
Maximum Managerial remuneration under Companies Act, 2013= 11% of ` 41,03,075
= ` 4,51,338
(b) (i) Current Liabilities/ Other Current Liabilities
(ii) Shareholders' Fund / Reserve & Surplus
(iii) Current liabilities/Other Current Liabilities
(iv) Contingent Liabilities and Commitments
(v) Shareholders' Fund / Share Capital

QUESTION 3 (MTP DEC 2021) (5 MARKS)

From the following information, prepare extract of Balance Sheet of A Limited along with notes making
necessary compliance of Schedule III to the Companies Act, 2013:
Amount (` )
Loan Funds
(a) Secured Loans 18,12,000
(b) Unsecured Loan - Short term from bank 2,25,000
Other information is as under:
Secured Loans
 Term Loans from:
Banks 8,95,000
Others 9,17,000
18,12,000
Current Maturities of long-term loan from Bank 1,24,000
Current Maturities of long- term loan from Others 85,000
There was no interest accrued / due as at the end of the year. Current maturities of long-term loans
amounting ` 2,09,000 is included in the value of secured loans of ` 18,12,000.
ANSWER
(b) Extract of Balance Sheet of A Ltd.
Particulars Note No Amount
Non - Current Liabilities
Long term borrowings 1 16,03,000
Current Liabilities
Short term borrowings 2 2,25,000
Other current liabilities 3 2,09,000

Notes to Accounts

1. Long-Term Borrowings
Term loans – Secured
- From banks 8,95,000
- From other parties 9,17,000
18,12,000
Less: Current maturities of long-term debt (Refer Note 3) (2,09,000)
16,03,000
2. Short-Term Borrowings
(Unsecured loan)
- from bank 2,25,000
3. Other Current Liabilities
Current maturities of long-term debt
- From banks 1,24,000
- From others 85,000
2,09,000

QUESTION 4 (MTP DEC 2021 (5 MARKS)

(b) The following information of Gaurav Ltd. was obtained on 31st March, 2021:
`
Authorized capital:
90,000, 14% preference shares of ` 100 90,00,000
9,00,000 Equity shares of `100 each 9,00,00,000
9,90,00,000
Issued and subscribed capital:
67,500, 14% preference shares of ` 100 each fully paid 67,50,000
5,40,000 Equity shares of ` 100 each, ` 80 paid-up 4,32,00,000
 Share suspense account 90,00,000
Reserves and surplus:
Capital reserves (` 6,75,000 is revaluation reserve) 8,77,500
Securities premium 2,25,000
Secured loans:
15% Debentures 2,92,50,000
Unsecured loans:
Public deposits 16,65,000
Cash credit loan from SBI (short term) 5,92,500
Current Liabilities:
Trade Payables 15,52,500
Assets:
Investment in shares, debentures, etc. 3,37,50,000
Profit and Loss account (Dr. balance) 68,62,500
Share suspense account represents application money received on shares, the allotment of which is not yet
made. You are required to compute effective capital as per the provisions of Schedule V if Gaurav Ltd.is a non-
investment company?

ANSWER
(b) Computation of effective capital:
Where Gaurav Ltd.is a non-investment company

Paid-up share capital —

67,500, 14% Preference shares 67,50,000
5,40,000 Equity shares 4,32,00,000
Capital reserves 2,02,500
Securities premium 2,25,000
15% Debentures 2,92,50,000
Public Deposits 16,65,000
(A) 8,12,92,500
Investments 3,37,50,000
Profit and Loss account (Dr.
68,62,500
balance)
(B) 4,06,12,500
Effective capital (A–B) 4,06,80,000

QUESTION 6 (MTP DEC 2021) (20 MARKS)

1. On 31st March, 2021, Morya Ltd. provides the following ledger balances:
Particulars Amount (`)
Debit Credit
Equity Share Capital, fully paid shares of ` 50 each 80,00,000
Calls in arrear 15,000
Land 25,00,000
Buildings 30,00,000
 Plant & Machinery 24,00,000
Furniture &Fixture 13,00,000
Securities Premium 15,00,000
General Reserve 9,41,000
Profit & Loss Account 5,80,000
Loan from Public Finance Corporation (Secured by
Hypothecation of Land) 26,30,000

Other Long Term Loans 22,50,000

Short Term Borrowings 4,60,000
Inventories: Finished goods 45,00,000
Raw materials 13,00,000
Trade Receivables 17,50,000
Advances: Short Term 3,75,000
Trade Payables 8,13,000
Provision for Taxation 3,80,000
Cash in Hand 70,000
Balances with Banks 3,44,000
Total 1,75,54,000 1,75,54,000
The following additional information was also provided in respect of the above balances:
(1) 50,000 fully paid equity shares were allotted as consideration for land.
(2) The cost of assets were:
Building ` 32,00,000
Plant and Machinery ` 30,00,000
Furniture and Fixture ` 16,50,000
(3) Trade Receivables for ` 4,86,000 due for more than 6 months.
(4) Balances with banks include ` 56,000, the Naya bank, which is not a scheduled bank.
(5) Loan from Public Finance Corporation repayable after 3 years.
(6) The balance of ` 26,30,000 in the loan account with Public Finance Corporation is inclusive of
` 1,34,000 for interest accrued but not due. The loan is secured by hypothecation of land.
(7) Other long-term loans (unsecured) include:
Loan taken from Nixes Bank ` 13,80,000
(Amount repayable within one year ` 4,80,000)
Loan taken from Directors ` 8,50,000
(8) Bills Receivable for ` 1,60,000 maturing on 15th June, 2021 has been discounted.
(9) Short term borrowings include:
Loan from Naya bank ` 1,16,000 (Secured)
Loan from directors ` 48,000
(10) Transfer of ` 35,000 to general reserve has been proposed by the Board of directors out of the
profits for the year.
(11) Inventory of finished goods includes loose tools costing ` 5 lakhs (which do not meet definition
of property, plant & equipment as per AS 10)
You are required to prepare the Balance Sheet of the Company as at March 31st 2021 as required
under Schedule III of the Companies Act, 2013. Ignore previous year figures.
ANSWER
Morya Ltd.

Balance Sheet as at 31st March, 2021

Particulars Notes Figures at the end of

current reporting
period (`)
Equity and Liabilities
1 Shareholders' funds
A Share capital 1 79,85,000
B Reserves and Surplus 2 30,21,000
2 Non-current liabilities
A Long-term borrowings 3 42,66,000
3 Current liabilities
A Short-term borrowings 4 4,60,000
B Trade Payables 8,13,000
C Other current liabilities 5 6,14,000
D Short-term provisions 6 3,80,000
Total 1,75,39,000
Assets
1 Non-current assets
A PPE 7 92,00,000
2 Current assets
A Inventories 8 58,00,000
B Trade receivables 9 17,50,000
C Cash and cash equivalents 10 4,14,000
D Short-term loans and advances 3,75,000
Total 1,75,39,000
Notes to accounts
`
1. Share Capital
Equity share capital
Issued, subscribed and called up
1,60,000 Equity Shares of ` 50 each (Out of the these shares
50,000 shares have been issued for consideration other than 80,00,000
cash)
Less: Calls in arrears (15,000) 79,85,000
Reserves and Surplus
2.
General Reserve 9,41,000
Add: Transferred from Profit and loss account 35,000 9,76,000
Securities premium
15,00,000
Surplus (Profit & Loss A/c) 5,80,000
Less: Appropriation to General Reserve (proposed) (35,000)
5,45,000
30,21,000
3. Long-term borrowings
Secured: Term Loans
Loan from Public Finance Corporation [repayable after 3 years 24,96,000
(` 26,30,000 - ` 1,34,000 for interest accrued but not due)]
Secured by hypothecation of land
Unsecured
Bank Loan (Nixes bank) 9,00,000
(` 13,80,000 - ` 4,80,000
repayable within 1 year)
Loan from Directors 8,50,000
Others 20,000 17,70,000
Total
42,66,000
Short-term borrowings
4. Loan from Naya bank (Secured) 1,16,000
Loan from Directors 48,000
Others 2,96,000
Other current liabilities 4,60,000
5. Loan from Nixes bank repayable within one year 4,80,000
Interest accrued but not due on borrowings Short- 1,34,000
term provisions 6,14,000
6. Provision for taxation
PPE 3,80,000
7. Land
25,00,000
Buildings 32,00,000
Less: Depreciation (2,00,000) 30,00,000
Plant & Machinery 30,00,000
Less: Depreciation (6,00,000) 24,00,000
Furniture & Fittings 16,50,000
Less: Depreciation (3,50,000) 13,00,000
Total 92,00,000
8. Inventories
Raw Material 13,00,000
Finished goods 40,00,000
Loose tools 5,00,000 58,00,000
9. Trade receivables
Outstanding for a period exceeding six months 4,86,000
Others 12,64,000
Total 17,50,000
10 Cash and cash equivalents
.
Balances with banks
with Scheduled Banks 2,88,000
with others banks 56,000 3,44,000
Cash in hand 70,000
 Total 4,14,000
Note: There is a Contingent Liability amounting ` 1,60,000
Calculation of net profit u/s 198 of the Companies Act, 2013
` `
Gross profit 42,00,000
Less: Administrative, selling and distribution expenses 8,22,540
Director’s fees 1,34,780
Interest on debentures 31,240
Depreciation on PPE as per Schedule II 5,75,345 (15,63,905)
Profit u/s 198 26,36,095
Maximum Managerial remuneration under Companies Act, 2013= 11% of ` 26,36,095= ` 2,89,970

Question 7 (JULY 2021) [20 MARKS]

The following is the Trial Balance of H Ltd., as on 3l st March, 2021.
 Dr. Cr.
Equity Capital (Shares of 100 each) 8,05,000
5,000, 6% preference shares of T 100 each 5,00,000
9% Debentures 4,00,000
General Reserve 40,00,000
Profit & Loss A/c. (of previous year) 72,000
Sales 60,00,000
Trade Payables 10,40,000
ProvisionforDepreciationonPlant&Machinery 1,72,000
Suspense Account 40,000
Land at cost 24,00,000
Plant & Machinery at cost 7,70,000
Trade Receivables 19,60,000
Inventories (31-03-/020) 9,50,000
Bank 2,30,900
Adjusted Purchases ,32,100
Factory Expenses 5,00,000
Administration Expenses 3,00,000
Selling Expenses 14,00,000
Debenture Interest 6,000
Goodwill 12,50,000

1,30,29,000 1,30,29,000
Additional Information :

(i) The authorised share capital of the company is :

a. 5000, 6% preference shares of 1 100 each 5,00,000
b. 10000, equity shares of T 100 each 10,00,000
c. Issued equity capital as on 1•' April 2020 stood at T 720,000, that is 6,000 shares fully
paid and 2,000 shares 1 60 paid. The directors made a call of 1 40 per share on 1st
October 2020. A shareholder could not pay the call on 100 shares and his shares were
then forfeited and reissued @ 1 90 per share as fully paid.
(ii) On 31st March 2021, the Directors declared a dividend of 5% on equity shares, transferring any
amount that may be required from General Reserve. Ignore Taxation.
(iii) The company on the advice of independent valuer wishes to revalue the land at 1 36,00,000.
 (iv) Suspense account of T 40,000 represents amount received for the sale of some of the
machinery on 1-4-2020. The cost of the machinery was I 100,000 and the accumulated
depreciation thereon being T 30,000.
(v) Depreciation is to be provided on plant and machinery at 10% on cost.
(vi) Amortize 1/5* of Goodwill.

You are required to prepare H Limited’s Balance Sheet as on 31-3-2021 and Statement of Profit and
Loss with notes to accounts for the year ended 31-3-2021 as per Schedule III of the Companies Act,
2013. Ignore previous years’ figures & taxation.

Question 8 (JAN 2021) [5 MARKS]

The following is the Draft Profit &Loss A/c of Brown Ltd. the year ended 31stMarch,2020:
Amount Amount
(` ) (` )
To Administrative expenses 4,99,200 By Balance b/d 6,27,550
To Advertisement 1,18,200 By Balance from
To Commission on sales 95,225 Trading A/c 38,15,890
To Director’s Fees 1,35,940 By Subsidies
To Interest on debentures 28,460 received from Govt. 2,50,000
To Managerial remuneration 2,75,550 By Profit on sale of 20,000
To Depreciation on fixed assets 4,82,565 forfeited shares

To Provision for Taxation 11,50,200

To General Reserve 4,50,000
To Investment Revaluation Reserve 52,800
To Balance c/d 14,25,300
47,13,440 47,13,440
Depreciation on fixed assets as per Schedule II of the Companies Act, 2013 was
` 5,15,675. You are required to calculate the maximum limit of managerial remuneration as per
Companies Act,2013.

Answer
Calculation of net profitu/s 198 of the Companies Act, 2013
` `
Balance from Trading A/c 38,15,890
Add: Subsidies received from Government 2,50,000

40,65,890
Less: Administrative, sellinganddistribution 7,12,625
expenses (4,99,200 + 1,18,200 +95,225)
Director’s fees Interest on debentures 1,35,940
Depreciation on fixed assets as per Schedule II 28,460
Profit u/s 198
5,15,675
(13,92,700)
26,73,190
Maximum Managerial remuneration under Companies Act, 2013= 11% of ` 26,73,190
= ` 2,94,051 (rounded off).
Note:
 1. Investment Revaluation reserve not to be deducted for calculation of profit under section198;
2. Profit on sale of forfeited shares not to added for calculation of profit under section 198.
*Alternative presentation of the above answer also possible by starting from Net profit as per
Profit and LossAccount.

Question 9 (NOV 2020) [4 MARKS]

Following is the draft Profit & Loss Account of X Ltd. for the year ended 31stMarch,2020:
Amount Amount
(`) (`)
To Administrative Expenses 5,96,400 By Balance b/d 7,25,300
To Advertisement Expenses 1,10,500 By Balance from Trading A/c 42,53,650
To Sales Commission 1,05,550 By Subsidies received from 3,50,000
Government
To Director's fees 1,48,900

To Interest on Debentures -56,000

To Managerial Remuneration 3,05,580

To Depreciation on Fixed Assets 5,78,530

To Provision for taxation 12,50,600

To General Reserve 5,50,000
To Investment Revaluation Reserve 25,800

To Balance c/d 16,01,090

53,28,950 53,28,950
Depreciation on Fixed Assets as per Schedule II of the Companies Act, 2013 was
` 6,51,750. You are required to calculate the maximum limits of the managerial remuneration as per
Companies Act,2013.

Answer
Calculation of net profit of X Ltd. as per the Companies Act,2013
` `
Balance from Trading A/c 42,53,650
Add: Subsidies received from Government 3,50,000
46,03,650
Less: Administrative expenses 5,96,400
Advertisement expenses Sales commission 1,10,500
1,05,550

Director’s fees 1,48,900

Interest on debentures 56,000

Depreciation on fixed assets as per Schedule II 6,51,750 (16,69,100)

Profit u/s 198 29,34,550

Maximum Managerial remuneration under Companies Act, 2013 = 11% of ` 29,34,550
= ` 3,22,800 (rounded off).

Question 10 (NOV 2019)

From the following particulars furnished by the Prashant Ltd., prepare the Balance Sheet
asat31stMarch,2019asrequiredbyScheduleIIIoftheCompaniesAct,2013:

Particulars Debit (`) Credit (`)

Equity share capital (face value of ` 10 each) 15,00,000
Calls-in-arrears 5,000
Land 5,50,000
Building 4,85,000
Plant & machinery 5,60,000
General reserve 2,70,000
Loan from State Financial Corporation 2,10,000
Inventories 3,15,000
Provision for taxation 72,000
Trade receivables 2,95,000
Short-term loans & advances 58,500
Profit & loss account 1,06,800
Cash in hand 37,300
Cash at bank 2,85,000
Unsecured loans 1,65,000
Trade payables 2,67,000
Total 25,90,800 25,90,800
The following additional information is also provided :
(1) 10,000 equity shares were issuedfor consideration other than cash.
(2) Trade receivables of` 55,000 are due for more than six months.
(3) The cost of building and plant &machinery is ` 5,50,000 and ` 6,25,000respectively.
(4) The loan from State Financial Corporation is secured by hypothecation of plant &machinery.
The balance of ` 2,10,000 in this account is inclusive of ` 10,000 for interest accrued but
notdue.
(5) Balance at Bank included ` 15,000 with Aakash Bank Ltd., which is not a scheduled bank.

Answer
PrashantLtd.
Balance Sheet as on 31stMarch, 2019

Particulars Notes `
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 14,95,000
b Reserves and Surplus 2 3,76,800
2 Non-current liabilities
Long-term borrowings 3 3,65,000
3 Current liabilities
a Trade Payables 2,67,000
 b Other current liabilities 4 10,000
c Short-term provisions 5 72,000
Total 25,85,800
Assets
1 Non-current assets
Property, Plant and Equipment 6 15,95,000
2 Current assets
a Inventories 3,15,000
b Trade receivables 7 2,95,000
c Cash and bank balances 8 3,22,300
d Short-term loans and advances 58,500
Total 25,85,800

Notes to accounts

`
1 Share Capital
Equity share capital
Issued & subscribed & fully paid up
1,50,000 Equity Shares of ` 10 each
(of the above 10,000 shares have been issued for
consideration other than cash) 15,00,000
14,95,000
Less: Calls in arrears (5,000)
2 Reserves and Surplus
General Reserve 2,70,000
Profit & Loss balance 1,06,800
Total 3,76,800
3 Long-term borrowings

Secured
Loan from State Financial Corporation (2,10,000-10,000)
(Secured by hypothecation of Plant and Machinery) 2,00,000
Unsecured Loan 1,65,000
Total 3,65,000
4 Other current liabilities
Interest accrued but not due on loans (SFC) 10,000
5 Short-term provisions
Provision for taxation 72,000
6 Property, Plant & Equipment
Land 5,50,000
Building 5,50,000
Less: Depreciation(b.f.) (65,000) 4,85,000
Plant & Machinery 6,25,000
Less: Depreciation (b.f.) (65,000) 5,60,000
Total 15,95,000
7 Trade receivables
 Outstanding for a period exceeding six months 55,000
Other Amounts 2,40,000
Total 2,95,000
8 Cash and bank balances
Cash and cash equivalents
Cash at bank 2,85,000
Cash in hand 37,300
Other bank balances Nil
Total 3,22,300

Question 11 (NOV 2019) [5 MARKS]

The following extract of Balance Sheet of Prabhat Ltd. (Non investment Company) was obtained:
Balance Sheet (Extract) as on 31stMarch, 2019
Liabilities `
Issued and subscribed capital:
30,000, 12% preference shares of ` 100 each (fully paid) 30,00,000
24,00,000 equity shares of `10 each, ` 8 paid up 1,92,00,000
Share suspense account 40,00,000
Reserves and Surplus:
Securities premium 1,00,000
Capital reserves (` 3,00,000 is revaluation reserve) 3,90,000
Secured loans:
12% debentures 1,30,00,000
Unsecured loans:
Public deposits 7,40,000
Current liabilities:
Trade payables 6,90,000
Cash credit from SBI (short term) 9,30,000
Assets
Investments in shares, debentures etc. 1,50,00,000
Profit & loss account (Dr. balance) 30,50,000
Share suspense account represents application money received on shares, the allotment of which is
not yetmade.
You are required to compute effective capital as per the provisions of Schedule V. Would your answer
differ if Prabhat Ltd. is an investment company?

Answer
Computation of effectivecapital
Where Prabhat Ltd. Is Where Prabhat Ltd.
a non-investment is an investment
company company
` `
Paid-up share capital —
30,000, 12% Preference shares 30,00,000 30,00,000
24,00,000 Equity shares of ` 8 paid up 1,92,00,000 1,92,00,000
 Capital reserves (3,90,000 – 3,00,000) 90,000 90,000
Securities premium 1,00,000 1,00,000
12% Debentures 1,30,00,000 1,30,00,000
Public Deposits 7,40,000 7,40,000
(A) 36,130,000 36,130,000
Investments 1,50,00,000 —

Profit and Loss account (Dr. balance) 30,50,000 30,50,000

(B) 1,80,50,000 30,50,000
Effective capital (A–B) 1,80,80,000 3,30,80,000

Question 12 (RTP NOV 2021)

Om Ltd. has the Authorised Capital of ` 15,00,000 consisting of 6,000 6% Redeemable Preference
shares of ` 100 each and 90,000 equity Shares of `10 each. The following was the Trial Balance of the
Company as on 31stMarch, 2021:
Particulars Dr. Cr.
Investment in shares at cost (non-current investment) 1,50,000
Purchases 14,71,500
Selling expenses 2,37,300
Inventory as at the beginning of the year 4,35,600
Salaries and wages (included ` 30,000 being Director's 1,56,000
Remuneration)
Cash on hand 84,000
Bills receivable 1,24,500
Interest on Bank overdraft 29,400
Interest on debentures upto 30thSep (1sthalf year) 11,250
Sundry Debtors and Sundry Creditors 1,50,300 2,63,550
Freehold property at cost 10,50,000
Furniture at cost less depreciation of ` 45,000 1,05,000
6% Redeemable Preference share capital 6,00,000
Equity share capital fully paid up 6,00,000
5% mortgage debentures secured on freehold 4,50,000
properties
Dividends received 12,750
Profit and Loss A/c (opening balance) 85,500
Sales (Net) 20,11,050
Bank overdraft (secured by hypothecation of stocks
and receivables) 4,50,000
Technical knowhow fees (cost paid during the year) 4,50,000
Audit fees 18,000
Total 44,72,850 44,72,850

Other Information:
 1. Closing Stock was valued at `4,27,500.
2. Purchases include ` 15,000 worth of goods and articles distributed among valued customers.
3. Salaries and Wages include ` 6,000 being Wages incurred for installation of Electrical Fittings
which were recorded under"Furniture".
4. Bills Receivable include ` 4,500 being dishonoured bills. 50% of which had been
consideredirrecoverable.
5. Bills Receivable of ` 6,000 maturing after 31stMarch werediscounted.
6. DepreciationonFurnituretobechargedat10%onWrittenDownValue.
7. InterestonDebenturesforthehalfyearendingon31stMarchwasdueonthatdate.
8. TechnicalKnowhowFeesistobewrittenoffoveraperiodof10years.
9. Trade receivables include` 18,000 due for more than six months.
You are required to prepare the Balance Sheet as at 31stMarch, 2021 and Statement of Profit and Loss
for the year ended 31stMarch, 2021 as per Schedule III to the Companies Act, 2013 after taking into
account the above information. Ignore taxation.

Answer

Balance sheet of Om Ltd. as at 31stMarch,2021

Note (`)
I Equity and Liabilities
(1) Shareholders’ funds:
(a) Sharecapital 1 12,00,000
(b) Reserves andsurplus 2 1,14,150

(2) Non-current liabilities:

Long term borrowings 3 4,50,000
(3) Current liabilities:
(a) Short termborrowings 4 4,50,000
(b) Tradepayables 2,63,550
(c) Other currentliabilities 5 11,250
Total 24,88,950
II ASSETS
(1) Non- Current Assets:
(a) Property, plant andequipment 6 11,49,900
(b) Intangibleassets 7 4,05,000
(c) Non-current investments (Shares atcost) 1,50,000
(2) Current Assets:
(a) Inventories 4,27,500
(b) Tradereceivables 8 2,72,550
(c) Cash and Cash equivalents – Cash onhand 84,000
Total 24,88,950

Note: There is a Contingent liability for Bills receivable discounted with Bank ` 6000.
Statement of Profit and Loss of Om Ltd. for the year ended 31stMarch, 2021
Particulars Note `
I Revenue from Operations 20,11,050
II Other income (Dividend income) 12,750
III Total Revenue (I &+ II) 20,23,800
IV Expenses:
(a) Purchases of Inventory (14,71,500 – Advertisement 14,56,500
Expenses15,000)
(b) Changes in Inventories of finished Goods / Work in
8,100
progress &inventory (4,35,600 –4,27,500)
(c) Employee Benefitsexpense 9 1,20,000
(d) Financecosts 10 51,900
(e) Depreciation &AmortizationExpenses 11 56,100
(f) OtherExpenses 12 3,02,550
Total Expenses 19,95,150

V Profit before exceptional, extraordinary items and tax 28,650

VI Exceptional items -
VII Profit before extra-ordinary items and tax 28,650
VIII Extraordinary items -
IX Profit before tax 28,650

Notes to accounts

(`)
1. Share Capital
Authorized capital:
90,000 Equity Shares of ` 10 each. 9,00,000
6,000 6% Preference shares of ` 100 each 6,00,000
Issued, subscribed & called up:
60,000, Equity Shares of ` 10 each 6,00,000
6,000 6% Redeemable Preference Shares of 100 each 6,00,000
12,00,000

2. Reserves and Surplus

Balance as on 1st April, 2020 85,500
Add: Surplus for current year 28,650
Balance as on 31st March, 2021 1,14,150
3. Long Term Borrowings
5% Mortgage Debentures (Secured against Freehold 4,50,000
Properties)
4. Short Term Borrowings
Secured Borrowings: Loans Repayable on Demand 4,50,000
Overdraft from Banks (Secured by Hypothecation of
Stocks & Receivables)
5. Other Current liabilities
Interest due on Borrowings (5% Debentures) 11,250
6. Property, plant and equipment
Furniture
Furniture at Cost Less depreciation ` 45,000 (as
given in Trial Balance 1,05,000
Add: Depreciation 45,000
 Cost of Furniture 1,50,000
12. Other Expenses
Payment to the auditors 18,000
Director’s remuneration 30,000
Selling expenses 2,37,300
Advertisement (Goods and Articles Distributed) 15,000
3,02,550
Bad Debts (4,500 x 50%) 2,250

Working Note:

Calculation of Sundry Debtors-Other Debts

Sundry Debtors as given in Trial Balance 1,50,300
Add Back: Bills Receivables Dishonoured 4,500
1,54,800
Less: Bad Debts written off – 50% ` 4,500 (2,250)
Adjusted Sundry Debtors 1,52,550
Less: Debts due for more than 6 months (as per information given) (18,000)
Total of other Debtors i.e. Debtors outstanding for less than 6 months 1,34,550

Question 13 (RTP NOV 2021)

(a) Star Ltd. gives the following information the year ended 31st March, 2021:
`
Gross profit 60,38,048
Subsidies received from Govt. 4,10,888
Administrative, Selling and distribution expenses 12,33,813
Directors’ fees 2,02,170
Interest on debentures 46,860
Managerial remuneration 4,28,025
Depreciation on Property, plant and equipment (PPE) 7,83,815
Provision for Taxation 18,63,750
Transfer to General Reserve 6,00,000
Transfer to Investment Revaluation Reserve 18,750
Depreciation on PPE as per Schedule II of the Companies Act, 2013 was ` 8,63,018
You are required to calculate the maximum amount of the managerial remuneration
asallowed as per Companies Act,2013.
(b) State under which head these accounts should be classified in Balance Sheet, as per Schedule
III of the Companies Act,2013:
(i) Share application money received in excess of issued sharecapital.
(ii) Share option outstandingaccount.
(iii) Unpaid matured debenture and interest accruedthereon.
(iv) Uncalled liability on shares and other partly paidinvestments.
(v) Callsunpaid.
Answer
(a) Calculation of net profit u/s 198 of the Companies Act,2013
 ` `
Gross profit 60,38,048
Add: Subsidies received from Government 4,10,888
64,48,936
Less: Administrative, selling and distribution
12,33,813
expenses
Director’s fees 2,02,170
Interest on debentures 46,860
Depreciation on PPE as per Schedule II 8,63,018 (23,45,861)
Profit u/s 198 41,03,075
Maximum Managerial remuneration under Companies Act, 2013= 11% of ` 41,03,075
= ` 4,51,338
(b)(i) Current Liabilities/ Other CurrentLiabilities
(ii) Shareholders' Fund / Reserve &Surplus
(iii) Current liabilities/Other CurrentLiabilities
(iv) Contingent Liabilities andCommitments
(v) Shareholders' Fund / ShareCapital

Question 14 (RTP MAY 2021)

Om Ltd. has authorized capital of ` 50 lakhs divided into 5,00,000 equity shares of ` 10 each. Their
books show the followingledger balances as on 31stMarch, 2021:
` `
Inventory 1.4.2020 6,65,000 Bank Current Account (Dr. 20,000
balance)
Discounts & Rebates allowed 30,000 Cash in hand 11,000

Carriage Inwards 57,500

Purchases 12,32,500 Calls in Arrear @ ` 2 per
share 10,000
Rate, Taxes and Insurance 55,000 Equity share capital 20,00,000
Furniture & Fixtures 1,50,000 (2,00,000 shares of ` 10
each)
Business Expenses 56,000 Trade Payables 2,40,500
Wages 14,79,000 Sales 36,17,000
Freehold Land 7,30,000 Rent (Cr.) 30,000
Plant & Machinery 7,50,000 Transfer fees received 6,500
Engineering Tools 1,50,000 Profit & Loss A/c (Cr.) 67,000
Trade Receivables 4,00,500 Repairs to Building 56,500
Advertisement Expenses 15,000 Bad debts 25,500
Commission & Brokerage 67,500
Expenses

Theinventory(valuedatcostormarketvalue,whichislower)ason 31 st March,2021was
` 7,05,000. Outstanding liabilities for wages ` 25,000 and business expenses ` 36,500. It was decided
to transfer ` 10,000 to reserves.
Charge depreciation on written down values of Plant &Machinery @ 5%, Engineering Tools@ 20%
 and Furniture &Fixtures @10%. Provide ` 25,000 as doubtful debts for trade receivables. Provide
for income tax @ 30%. It was decided to transfer ` 10,000 to reserves.
You are required to prepare Statement of Profit & Loss for the year ended 31st March, 2021 and
Balance Sheet as at thatdate.
Answer
Balance Sheet of Om Ltd. as at 31stMarch,2021
Note
Particulars (`)
No.
I Equity and Liabilities
(1) Shareholders' Funds
(a) ShareCapital 1 19,90,000
(b) Reserves andSurplus 2 3,82,000
(2) Current Liabilities
(a) TradePayables 2,40,500
(b) Other CurrentLiabilities 3 61,500
(c) Short-TermProvisions 4 1,35,000
Total 28,09,000
II ASSETS
(1) Non-Current Assets
(a) Property, Plant andEquipment 5 16,97,500
(2) Current Assets
(a) Inventories 7,05,000
(b) TradeReceivables 6 3,75,500
(c) Cash and CashEquivalents 7 31,000
Total 28,09,000
Statement of Profit and Loss of Om Ltd. for
the year ended 31stMarch, 2021

Particulars Note No. (`)

I Revenue from Operations 36,17,000
II Other Income 8 36,500
III Total Revenue [I + II] 36,53,500
IV Expenses:
Cost of purchases 12,32,500
Changes in Inventories [6,65,000-7,05,000] (40,000)
Employee Benefits Expenses 9 15,04,000
Depreciation and Amortization Expenses 82,500
Other Expenses 10 4,24,500
Total Expenses 32,03,500
V Profit before Tax (III-IV) 4,50,000
VI Tax Expenses @ 30% (1,35,000)
VII Profit for the period 3,15,000

Notes to Accounts:
1. ShareCapital
Authorized Capital
 5,00,000 Equity Shares of ` 10 each
50,00,000
Issued Capital
2,00,000 Equity Shares of ` 10 each 20,00,000
Subscribed Capital and fully paid
1,95,000 Equity Shares of `10 each 19,50,000
Subscribed Capital but not fully paid
5,000 Equity Shares of `10 each ` 8 paid 40,000
(Call unpaid `10,000) 19,90,000

2. Reserves andSurplus
General Reserve 10,000
Surplus i.e. Balance in Statement of Profit & Loss:
Opening Balance 67,000
Add: Profit for the period 3,15,000
Less: Transfer to Reserve (10,000) 3,72,000
3,82,000
3. Other CurrentLiabilities
Outstanding Expenses [25,000+36,500] 61,500
4. Short-termProvisions
Provision for Tax 1,35,000
5. Property, Plant andEquipment
Particulars Valuegiven Depreciation Depreciation Written down
(`) rate Charged value at theend
(`) (`)
Land 7,30,000 - 7,30,000
Plant & Machinery 7,50,000 5% 37,500 7,12,500
Furniture & Fixtures 1,50,000 10% 15,000 1,35,000
Engineering Tools 1,50,000 20% 30,000 1,20,000
17,80,000 82,500 16,97,500
6. TradeReceivables
Trade receivables 4,00,500
Less: Provision for doubtful debts (25,000)
3,75,500
7. Cash &CashEquivalent
Cash Balance 11,000
Bank Balance in current A/c 20,000
31,000
8. OtherIncome
Miscellaneous Income (Transfer fees) 6,500
Rental Income 30,000
36,500

9. Employee benefitsexpenses
Wages 14,79,000
 Add: Outstanding wages 25,000
15,04,000
10. OtherExpenses
Carriage Inwards 57,500
Discount & Rebates 30,000
Advertisement 15,000
Rate, Taxes and Insurance 55,000
Repairs to Buildings 56,500
Commission & Brokerage 67,500
Miscellaneous Expenses [56,000+36,500] (Business Expenses) 92,500
Bad Debts 25,500
Provision for Doubtful Debts 25,000
4,24,500

Question 15 (RTP MAY 2021)

(a) XYZ Ltd. is having inadequacy of profits in the year ending 31-03-2021 and it proposes to
declare 10% dividend out of GeneralReserves.
From the following particulars ascertain the amount that can be utilized from general reserves,
according to the Companies (Declaration of Dividend out of Reserves) Rules, 2014:
5,00,000 Equity Shares of ` 10 each fully paid 50,00,000
up
General Reserves 25,00,000
Revaluation Reserves 6,50,000
Net profit for the year 1,42,500
Average rate of dividend during the last five years has been 12%.
(b) Mohit Ltd. provides the following information as on 31st March,2021:
Liabilities `
Authorized capital:
1,00,000, 14% preference shares of `100 1,00,00,000
10,00,000 Equity shares of `100 each 10,00,00,000
11,00,00,000
Issued and subscribed capital:

77,500, 14% preference shares of ` 100 each fully paid 77,50,000

5,40,000 Equity shares of ` 100 each, ` 80 paid-up 4,32,00,000
Share suspense account 90,00,000
Reserves and surplus
Capital reserves (` 5,00,000 is revaluation reserve) 8,77,500
Securities premium 2,25,000
Secured loans:
15% Debentures 2,92,50,000
Unsecured loans:
Public deposits 16,65,000
 Cash credit loan from SBI (short term) 5,92,500
Current Liabilities:
Trade Payables 15,52,500
Assets:
Investment in shares, debentures, etc. 3,50,50,000
Profit and Loss account (Dr. balance) 68,50,000
Share suspense account represents application money received on shares, the allotment of
which is not yet made. You are required to compute effective capital as per the provisions of
Schedule V if Mohit Ltd is non-investment company. Would your answer differ if Mohit Ltd. is
an investmentcompany?

Answer
(a) Amount that can be drawn from reserves for (10% dividend on ` 50,00,000i.e.
` 5,00,000)
Profits available
Currentyearprofit `1,42,500
Amount which can be utilized from reserves (` 5,00,000 –1,42,500) ` 3,57,500
Conditions as per Companies (Declaration of dividend out of Reserves) Rules, 20X1:
ConditionI
Since 10% is lower than the average rate of dividend (12%), 10% dividend can be declared.
Condition II
Maximum amount that can be drawn from the accumulated profits and reserves should not
exceed 10% of paid upcapital plus free reserves ie. ` 7,50,000 [10% of (50,00,000 +25,00,000)]
Condition III

The balance of reserves after drawl ` 21,42,500 (` 25,00,000 - ` 3,57,500) should not fall
below 15 % of its paid upcapital ie. ` 7,50,000 (15% of `50,00,000]
Since all the three conditions are satisfied, the company can withdraw ` 3,57,500
fromaccumulated reserve (as per Declaration and Payment of Dividend Rules,2014).
(b) Computation of effectivecapital:
Where Mohit Where Mohit
Ltd.is a non- Ltd.is an
investment investment
company company
Paid-up share capital —
77,500, 14% Preference shares 77,50,000 77,50,000
5,40,000 Equity shares 4,32,00,000 4,32,00,000
Capital reserves 3,77,500 3,77,500
Securities premium 2,25,000 2,25,000
15% Debentures 2,92,50,000 2,92,50,000
Public Deposits 16,65,000 16,65,000
(A) 8,24,67,500 8,24,67,500
Investments 3,50,50,000 -
 Profit and Loss account (Dr. balance) 68,50,000 68,50,000
(B) 4,19,00,000 68,50,000
Effective capital (A–B) 4,05,67,500 7,56,17,500

Question 16 (RTP NOV 2020)

On 31stMarch, 2020, Om Ltd. provides to you the following ledger balances after preparing its Profit
and Loss Account for the year ended31st March, 2020:
Credit Balances
`
Equity shares capital (fully paid shares of ` 10 each) 1,05,00,000
General Reserve 21,84,000
Loan from State Finance Corporation 15,75,000
(Secured by hypothecation of Plant & Machinery – Repayable
within one year `3,00,000)
Loans: Unsecured (Long term) 12,70,500
Sundry Creditors for goods & expenses
(Payable within 6 months) 21,00,000
Profit & Loss Account 10,50,000
Provision for Taxation 12,25,350
199,04,850
Debit Balances
`
Calls in arrear 10,500
Land 21,00,000
Buildings 30,75,000
Plant and Machinery 55,12,500
Furniture & Fixture 5,25,000
Inventories: Finishedgoods 21,00,000
Raw Materials 5,25,000
Trade Receivables 21,00,000
Advances: Short-term 4,48,350
Cash in hand 3,15,000
Balances with banks 25,93,500
Patents & Trade marks 6,00,000
199,04,850
The following additional information is also provided in respect of the above balances:
(i) 6,30,000 fully paid equity shares were allotted as consideration for land& buildings.
(ii) CostofBuilding ` 42,00,000

Cost ofPlant&Machinery ` 73,50,000

Cost ofFurniture&Fixture `6,56,250

(iii) Trade receivables for ` 5,70,000 are due for more than 6months.
(iv) The amountof Balances with Bank includes ` 27,000 with a bank which is not a scheduled Bank
and the deposits of ` 7,50,000 are for a period of 9months.
(v) Unsecured loan includes ` 3,00,000 from a Bank and ` 1,50,000 from relatedparties.
You are not required to give previous year figures. You are required to prepare the Balance Sheet of
 the Company as on 31stMarch, 2020 as required under Schedule III of the Companies Act,2013.

Answer
OmLtd.
Balance Sheet as on 31st March, 2020

Particulars Notes Figures at theendof

current reportingperiod
(`)
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 1,04,89,500
b Reserves and Surplus 2 32,34,000
2 Non-current liabilities
a Long-term borrowings 3 25,45,500
3 Current liabilities
a Trade Payables 21,00,000
b Other current liabilities 4 3,00,000
c Short-term provisions 5 12,25,350
Total 1,98,94,350
Assets
1 Non-current assets
a Property, Plant andEquipment 6 1,12,12,500
b Intangible assets (Patents & Trade
Marks) 6,00,000
2 Current assets
a Inventories 7 26,25,000
b Trade receivables 8 21,00,000
c Cash and cash equivalents 9 29,08,500
d Short-term loans and advances 4,48,350
Total 1,98,94,350

Notes to accounts

`
1 Share Capital
Equity share capital

Issued, subscribed and called up

10,50,000 Equity Shares of ` 10 each 1,05,00,000
(Out of the above 6,30,000 shares have
been issued for consideration other than
cash) 1,04,89,500
Less: Calls in arrears (10,500)
Total 1,04,89,500
2 Reserves and Surplus
General Reserve 21,84,000
 Surplus (Profit & Loss A/c) 10,50,000
Total 32,34,000
3 Long-term borrowings
Secured
Term Loans
Loan from State Finance Corporation (`
15,75,000 less ` 3,00,000)
(Secured by hypothecation of Plant
and Machinery) 12,75,000

Unsecured
Bank Loan 3,00,000
Loan from related parties 1,50,000
Others 8,20,500 12,70,500
Total 25,45,500
4 Other current liabilities
Loan Instalment repayable within one
year 3,00,000
5 Short-term provisions
Provision for taxation 12,25,350
6 Property, Plant and Equipment
Land 21,00,000
Buildings 42,00,000
Less: Depreciation (11,25,000) 30,75,000
Plant & Machinery 73,50,000
Less: Depreciation (18,37,500) 55,12,500
Furniture & Fittings 6,56,250
5,25,000
Less: Depreciation (1,31,250)
Total 1,12,12,500
7 Inventories
Raw Material 5,25,000
Finished goods 21,00,000
26,25,000
8 Trade receivables
Debts outstanding for a period
exceeding six months 5,70,000
Other Debts 15,30,000
Total 21,00,000
9 Cash and cash equivalents
Cash at bank with Scheduled Banks including Bank 25,66,500
deposits for period of 9 months amounting ` 7,50,000
with others 27,000 25,93,500
Cash in hand 3,15,000
Total 29,08,500

Question 17 (RTP NOV 2020)

 Kartik Ltd. is a non-investment company and has been incurring losses for the past few years. The
company provides the following information for the currentyear:
(` in lakhs)
Paid up equity share capital 270
Paid up Preference share capital 45

Reserves (including Revaluation reserve ` 22.5 lakhs) 337.5

Securities premium 90
Long term loans 90
Deposits repayable after one year 45
Application money pending allotment 1620
Accumulated losses not written off 45
Investments 405
Kartik Ltd. has only one whole-time director, Mr. Kumar. You are required to calculate the amount of
maximum remuneration that can be paid to him as per provisions of the Companies Act, 2013, if no
special resolution is passed at the general meeting of the company in respect of payment of
remuneration.

Answer
Calculation of effective capital and maximum amount of monthlyremuneration
(` in lakhs)
Paid up equity share capital 270
Paid up Preference share capital 45
Reserve excluding Revaluation reserve (337.5- 22.5) 315
Securities premium 90
Long term loans 90
Deposits repayable after one year 45
855
Less: Accumulated losses not written off (45)
Investments (405)
Effective capital for the purpose of managerial remuneration 405
Kartik Ltd. is incurring losses and no special resolution has been passed by the company for
payment of remuneration. Effective capital of the company is less than 5 crores,

Question 18 (RTP MAY 2020)

On 31stMarch 2019, Gaurav Ltd. provides you the followingparticulars:
Particulars Debit ` Credit `
Equity Share Capital (Face value of ` 100 each) 12,50,000
Call in Arrears 1,250
Land & Building 6,87,500
Plant & Machinery 6,56,250
Furniture 62,500
General Reserve 2,62,500
 Loan from State Financial Corporation 1,87,500
Stock:
Raw Materials 62,500
Finished Goods 2,50,000 3,12,500
Provision for Taxation 1,60,000
Trade receivables 2,50,000
Advances 53,375
Profit & Loss Account 1,08,375

Cash in Hand 37,500

Cash at Bank 3,08,750
Unsecured Loan 1,51,250
Trade payables 2,50,000
The following additional information is also provided:
(i) 2,500 Equity shares were issued forconsideration other than cash.
(ii) Debtorsof`65,000(includedintradereceivables)aredueformorethan6months.
(iii) The cost of the Assetswere:
Building ` 7,50,000, Plant & Machinery ` 8,75,000 and Furniture ` 78,125
(iv) The balance of ` 1,87,500 in the Loan Account with State Finance Corporation is inclusive of `
9,375 for Interest accrued but not due. The loan is secured by hypothecation of Plant
&Machinery.
(v) Balance at Bank includes ` 2,500 with Global Bank Ltd., which is not a Scheduled Bank.
You are required to prepare the Balance sheet of Gaurav Ltd. as on 31 stMarch, 2019 as per Schedule
III to the Companies Act,2013.
Answer
GauravLtd.
Balance Sheet as on 31stMarch, 2019

Particulars Notes `
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 12,48,750
b Reserves and Surplus 2 3,70,875
2 Non-current liabilities
Long-term borrowings 3 3,29,375
3 Current liabilities
a Trade Payables 2,50,000
b Other current liabilities 4 9,375
c Short-term provisions 5 1,60,000
Total 23,68,375
Assets
1 Non-current assets
PPE 6 14,06,250
2 Current assets
a Inventories 7 3,12,500
 b Trade receivables 8 2,50,000
c Cash and cash equivalents 9 3,46,250
d Short-term loans and advances 53,375
Total 23,68,375

Notes toaccounts
`
1Share Capital
Equity share capital
Issued & subscribed & called up
12,500 Equity Shares of ` 100 each
(of the above 2,500 shares have been issued for
consideration other than cash) 12,50,000
12,48,750
Less: Calls in arrears (1,250)
Total 12,48,750
2Reserves and Surplus
General Reserve 2,62,500
Surplus (Profit & Loss A/c) 1,08,375
Total 3,70,875
3Long-term borrowings
Secured Term Loan
State Financial Corporation Loan (1,87,500 – 9,375)
(Secured by hypothecation of Plant andMachinery) 1,78,125
Unsecured Loan 1,51,250
Total 3,29,375
4Other current liabilities
Interest accrued but not due on loans (SFC) 9,375

5Short-term provisions
Provision for taxation 1,60,000
6PPE
Land and Building 7,50,000
Less: Depreciation (62,500) 6,87,500
Plant & Machinery 8,75,000
Less: Depreciation (2,18,750) 6,56,250
Furniture & Fittings 78,125
Less: Depreciation (15,625) 62,500
Total 14,06,250
7Inventories
Raw Materials 62,500
Finished goods 2,50,000
Total 3,12,500
8 Trade receivables
Outstanding for a period exceeding six 65,000
months
Other Amounts 1,85,000
Total 2,50,000
9 Cash and cash equivalents
 Cash at bank
with Scheduled Banks 3,06,250
with others (Global Bank Ltd.) 2,500 3,08,750
Cash in hand 37,500
Total 3,46,250
Question 19 (RTP MAY 2020)
The following is the Draft Profit &Loss A/c of Harsha Ltd., the year ended 31st March, 20X1:
` `
To Administrative, Selling and By Balance b/d 28,61,750
distribution expenses 41,12,710 “ Balance from 201,26,825
” Directorsfees 6,73,900 TradingA/c
” Interest on debentures 1,56,200 “ Subsidies received 13,69,625
” Managerialremuneration 14,26,750 fromGovt.
” Depreciation on fixed 26,12,715
assets
” Provision for Taxation 62,12,500
” General Reserve 20,00,000
” Investment Revaluation
Reserve 62,500
” Balance c/d 71,00,925
243,58,200 243,58,200

Depreciation on fixed assets as per Schedule II of the Companies Act, 2013 was
` 28,76,725. You are required to calculate the maximum limits of the managerial remuneration as per
Companies Act, 2013.

Answer
Calculation of net profit u/s 198 of the Companies Act,2013
` `
Balance from Trading A/c 201,26,825
Add: Subsidies received from Government 13,69,625
214,96,450
Less: Administrative, selling and distribution 41,12,710
expenses
Director’s fees 6,73,900
Interest on debentures 1,56,200
Depreciation on fixed assets as per Schedule II 28,76,725 (78,19,535)
Profit u/s 198 136,76,915
Maximum Managerial remuneration under Companies Act, 2013 = 11% of
` 136,76,915= ` 15,04,461.

Question 20 (MTP APRIL 2021) [14 MARKS]

You are required to prepare a Balance Sheet as at 31stMarch 2020, as per Schedule III of the
Companies Act, 2013, from the following information of Mehar Ltd.:
 Particulars Amount Particulars Amount
(Rs.) (Rs.)
Term Loans (Secured) 40,00,000 Investments (Non-current) 9,00,000
Trade payables 45,80,000 Profit for the year 32,00,000
Cash and Bank Balances 38,40,000 Trade receivables 49,00,000
Staff Advances 2,20,000 Miscellaneous Expenses 2,32,000
Other advances (given by Co.) 14,88,000 Loan from other parties 8,00,000
Provision for Taxation 10,20,000 Provision for Doubtful Debts 80,000
Securities Premium 19,00,000 Stores 16,00,000
Loose Tools 2,00,000 Finished Goods 30,00,000
General Reserve 62,00,000 Plant and Machinery (WDV) 2,14,00,000
Additional Information: -
1. Share Capital consistsof-
(a) 1,20,000 Equity Shares of Rs. 100 each fully paidup.
(b) 40,000,10%RedeemablePreferenceSharesofRs.100eachfullypaidup.
2. WriteofftheamountofMiscellaneousExpensesinfull,amountingRs.2,32,000.

Answer
Balance Sheet of Mehar Ltd. as at 31stMarch,2020
Note Rs.
I EQUITY AND LIABILITIES:
(1) (a) ShareCapital 1 1,60,00,000
(b) Reserves andSurplus 2 110,68,000
(2) Non-current Liabilities
Long term Borrowings- 40,00,000
Terms Loans(Secured)
Current Liabilities
(3)
(a) TradePayables
45,80,000
(b) Other currentliabilities
3 8,00,000
(c) Short-term Provisions (Provision fortaxation)
10,20,000
Total
3,74,68,000
ASSETS
II
Non-current Assets
(1) (a) Property, Plant andEquipment
(b) Non- currentInvestments 4 214,00,000
Current Assets: 9,00,000
(2) (a) Inventories
(b) TradeReceivables 5 48,00,000
(c) Cash and CashEquivalents 6 48,20,000
(d) Short-term Loans andAdvances 38,40,000
Total 7 17,08,000
3,74,68,000

Notes to accounts

(Rs.)
 1. Share Capital
Authorized, issued, subscribed & called up
1,20,000, Equity Shares of Rs. 100 each 1,20,00,000
40,000 10% Redeemable Preference Shares of 100 each 40,00,000 1,60,00,000
2. Reserves and Surplus
Securities Premium Account 19,00,000
General reserve
62,00,000
Profit & Loss Balance
Openingbalance -

Profit for the period 32,00,000

Less: Miscellaneous Expenditure
written off (2,32,000) 29,68,000 110,68,000
3. Other current liabilities
Loan from other parties 8,00,000
4. Property, plant and equipment
Plant and Machinery (WDV) 214,00,000
Inventories
5.
Finished Goods
30,00,000
Stores
16,00,000
Loose Tools
2,00,000 48,00,000
Trade Receivables
6.
Trade receivables
Less: Provision for Doubtful Debts 49,00,000
Short term loans & Advances (80,000) 48,20,000
7. Staff Advances*
Other Advances* 2,20,000
14,88,000 17,08,000
*Considered to be short term.

Question 21 (MTP APRIL 2021) [5 MARKS]

XYZ Ltd. proposes to declare 10% dividend out of General Reserves dueto inadequacy of profits in
the year ending31-03-2020.
From the following particulars ascertain the amount that can be utilized from general reserves,
according to the Companies Rules, 2014: (Rs.)
8,00,000 Equity Shares of Rs. 10 each fully paid up 80,00,000
General Reserves 25,00,000
Revaluation Reserves 6,50,000
Net profit for the year 1,42,500

Average rate of dividend during the last five years has been 12%.
OR
X Ltd. (a non-investment company) provides the following information as on 31st March, 2020
wasobtained:
Rs.
Issued and subscribed capital:
 15,000, 14% preference shares of Rs. 100 each fully paid 15,00,000
1,20,000 Equity shares of Rs. 100 each, Rs. 80 paid-up 96,00,000
Capital reserves (Rs. 1,50,000 is revaluation reserve) 1,95,000
Securities premium 50,000
15% Debentures 65,00,000
Investment in shares, debentures, etc. 75,00,000
Profit and Loss account (debit balance) 15,25,000

You are required to compute Effective Capital as per the provisions of Schedule V to the
Companies Act,2013.

Answer
Amountthatcanbedrawnfromreservesfor(10%dividendonRs.80,00,000i.e.Rs.8,00,000)
Profits available
Currentyearprofit Rs.1,42,500
Amount which can be utilized from reserves (Rs. 8,00,000 –1,42,500) Rs. 6,57,500
Conditions as per Companies (Declaration of dividend out of Reserves) Rules, 2014:
ConditionI
Since 10% is lower than the average rate of dividend (12%), 10% dividend can be declared.
Condition II
Maximum amount that can be drawn from the accumulated profits and reserves should not exceed
10% of paid up capital plus free reserves ie. Rs. 10,50,000 [10% of (80,00,000 + 25,00,000)]
Condition III
The balance of reserves after drawl Rs. 18,42,500 (Rs. 25,00,000 - Rs. 6,57,500) should not fall below
15 % of its paid up capital ie. Rs. 12,00,000 (15% of Rs. 80,00,000]
Since all the three conditions are satisfied, the company can withdraw Rs. 6,57,500 from accumulated
reserve (as per Declaration and Payment of Dividend Rules, 2014).
OR
Computation of Effective Capital

Rs.
Paid-up share capital-
15,000, 14% Preference shares 15,00,000
1,20,000 Equity shares 96,00,000
Capital reserves (excluding revaluation reserve) 45,000
Securities premium 50,000
15% Debentures 65,00,000
(A) 1,76,95,000
Investments 75,00,000
Profit and Loss account (Dr. balance) 15,25,000
(B) 90,25,000
Effective capital (A–B) 86,70,000

Question 22 (MTP MARCH 2021) [15 MARKS]

From the following particulars furnished by Alpha Ltd., prepare the Balance Sheet as on
31stMarch2020asrequiredbyPartI,ScheduleIIIoftheCompaniesAct,2013.
 Particulars Debit Rs. Credit Rs.
Equity Share Capital (Face value of Rs. 100 each) 50,00,000
Call in Arrears 5,000
Building 27,50,000
Plant & Machinery 26,25,000
Furniture 2,50,000
General Reserve 10,50,000
Loan from State Financial Corporation 7,50,000
Inventory:
2,50,000
Raw Materials
10,00,000
Finished Goods 12,50,000
Provision for Taxation 6,40,000
Trade receivables 10,00,000
Short term Advances 2,13,500
Profit & Loss Account 4,33,500
Cash in Hand 1,50,000
Cash at Bank 12,35,000
Unsecured Loan 6,05,000
Trade payables (for Goods and Expenses) 8,00,000
Loans & advances from related parties 2,00,000
The following additional information is also provided:
(i) 10,000 Equity shares were issued for consideration other thancash.
(ii) Trade receivables of Rs. 2,60,000 are due for more than 6months.
(iii) The cost of the Assetswere:
Building Rs. 30,00,000, Plant & Machinery Rs. 35,00,000 and Furniture Rs. 3,12,500
(iv) The balance of Rs. 7,50,000 in the Loan Account with State Finance Corporation is inclusive of
Rs. 37,500 for Interest Accrued but not Due. The loan is secured by hypothecationof Plant
&Machinery.
(v) Balance at Bank includes Rs. 10,000 with Omega Bank Ltd., whichis not a Scheduled Bank.
(vi) TransferRs.20,000togeneralreserveasproposedbyBoardofdirectors.

Answer
AlphaLtd.
Balance Sheet as at 31st March, 2020

Particulars Notes Rs.

Equity and Liabilities
1 Shareholders' funds
a Share capital 1 49,95,000
b Reserves and Surplus 2 14,83,500
2 Non-current liabilities
Long-term borrowings 3 13,17,500
3 Current liabilities
a Trade Payables 8,00,000
 b Other current liabilities 4 37,500
c Short-term provisions 5 6,40,000
d Short-term borrowings 2,00,000
Total 94,73,500
Assets
1 Non-current assets
Property, Plant & equipment 6 56,25,000
2 Current assets
a Inventories 7 12,50,000
b Trade receivables 8 10,00,000
c Cash and bank balances 9 13,85,000
d Short-term loans and advances 2,13,500
Total 94,73,500

Notes to accounts

Rs.
1 Share Capital
Equity share capital
Issued & subscribed & called up
50,000 Equity Shares of Rs. 100 each
(of the above 10,000 shares have been issued for
consideration other than cash) 50,00,000
49,95,000
Less: Calls in arrears (5,000)
Total 49,95,000
2 Reserves and Surplus
General Reserve 10,50,000
Add: current year transfer 20,000 10,70,000
Question 23 (MTP MARCH 2021) [4 MARKS]

ThefollowingextractofBalanceSheetofXLtd.(anon-investmentcompany)wasobtained:
Balance Sheet (Extract) as on 31st March, 2020
Liabilities Rs.
Issued and subscribed capital:
20,000, 14% preference shares of Rs. 100 each fully paid 20,00,000
1,20,000 Equity shares of Rs. 100 each, Rs. 80 paid-up 96,00,000
Capital reserves (Rs. 1,50,000 is revaluation reserve) 1,95,000
Securities premium 50,000
15% Debentures 65,00,000
Unsecured loans: Public deposits repayable after one year 3,70,000
Investment in shares, debentures, etc. 75,00,000
Profit and Loss account (debit balance) 15,00,000
You are required to compute Effective Capital as per the provisions of Schedule V to Companies Act, 2013.
OR
Following items appear in the Trial Balance of Hello Ltd. as on 31st March, 2020:
Particulars Amount
9,000 Equity Shares of Rs.100 each 9,00,000
Securities Premium 80,000
Capital Redemption Reserve 1,40,000
General Reserve 2,10,000
Profit and Loss Account (Cr. Balance) 90,000
The company decided to issue to equity shareholders bonus shares at the rate of 1 share for every 3
shares held. Company decided that there should be the minimum reduction in free
reserves.YouarerequiredtogivethenecessaryJournalEntriesinthebooksHelloLtd.
Answer
Computation of effectivecapital:
Rs.
Paid-up share capital-
20,000, 14% Preference shares 20,00,000
1,20,000 Equity shares 96,00,000
Capital reserves (excluding revaluation reserve) 45,000
Securities premium 50,000
15% Debentures 65,00,000
Public Deposits 3,70,000
(A) 1,85,65,000
Investments 75,00,000
Profit and Loss account (Dr. balance) 15,00,000
(B) 90,00,000
Effectivecapital (A–B) 95,65,000
OR
Capital RedemptionReserveA/c Dr.
1,40,000
SecuritiesPremiumA/c(consideredtoberealizedincash)Dr. 80,000
General Reserve A/c (balancing figure) Dr. 80,000
To Bonus to Shareholders 3,00,000
(Being issue of bonus shares by utilization of various
Reserves, as per resolution dated …….)
Bonus to Shareholders A/c Dr. 3,00,000
To Equity Share Capital 3,00,000
(Being capitalization of Profit)
 Ch.5 – CASH FLOW STATEMENT
QUESTION 1 (RTP DEC 2021) (10 MARKS)
On the basis of the following information prepare a Cash Flow Statement for the year ended 31st March,
2021 (Using direct method):
(i) Total sales for the year were ` 597 crores out of which cash sales amounted to
` 393 crores.
(ii) Receipts from credit customers during the year, totalled ` 201 crores.
(iii) Purchases for the year amounted to ` 330 crores out of which credit purchases were 80%.
Balance in creditors as on
1.4.2020 ` 126 crores
31.3.2021 ` 138 crores
(iv) Suppliers of other consumables and services were paid ` 28.5 crores in cash.
(v) Employees of the enterprises were paid 30 crores in cash.
(vi) Fully paid preference shares of the face value of ` 48 crores were redeemed. Equity shares of
the face value of ` 30 crores were allotted as fully paid up at premium of 20%.
(vii) Debentures of ` 30 crores at a premium of 10% were redeemed. Debenture holders were issued
equity shares in lieu of their debentures.
(viii) ` 39 crores were paid by way of income tax.
(ix) A new machinery costing ` 15 was purchased.
(x) Investment costing ` 27 cores were sold at a loss of ` 3 crores.
(xi) Dividends totalling ` 22.5 crores was also paid.
(xii) Debenture interest amounting ` 3 crore was paid.
(xiii) On 31st March 2020, Balance with Bank and Cash on hand totalled ` 3 crores.
ANSWER
1. Cash flow statement (using direct method) for the year ended 31st March, 2021
(` in crores) (` in crores)
Cash flow from operating activities
Cash sales 393
Cash collected from credit customers 201
Less: Cash paid to suppliers for goods & services and
to employees (Refer Working Note) (376.5)

Cash from operations 217.5

Less: Income tax paid (39)
Net cash generated from operating activities 178.5
Cash flow from investing activities
Payment for purchase of Machine (15)
Proceeds from sale of investments 24
Net cash used in investing activities 9
Cash flow from financing activities
Redemption of Preference shares (48)
Proceeds from issue of Equity shares 36
Debenture interest paid (3)
 Dividend Paid (22.5)
Net cash used in financing activities (37.5)
Net increase in cash and cash equivalents 150
Add: Cash and cash equivalents as on 1.04.2020 3
Cash and cash equivalents as on 31.3.2021 153

Working Note:

Calculation of cash paid to suppliers of goods and services and to employees

(` in crores)
Opening Balance in creditors Account 126
Add: Purchases (330x .8) 264
Total 390
Less: Closing balance in Creditors Account 138
Cash paid to suppliers of goods 252
Add: Cash purchases (330x .2) 66
Total cash paid for purchases to suppliers (a) 318
Add: Cash paid to suppliers of other consumables and services (b) 28.5
Add: Payment to employees (c) 30
Total cash paid to suppliers of goods & services and to employees [(a)+ 376.5
(b) + (c)]

QUESTION 2 (MTP DEC 2021) (10 MARKS)

The following figures have been extracted from the books of Manan Limited for the year ended on 31.3.2020. You
are required to prepare the Cash Flow statement as per AS 3 using indirect method.
(i) Net profit before taking into account income tax and income from law suits but after taking into
account the following items was ` 30 lakhs :
(a) Depreciation on Property, Plant & Equipment ` 7.50 lakhs.
(b) Discount on issue of Debentures written off ` 45,000.
(c) Interest on Debentures paid ` 5,25,000.
(d) Book value of investments ` 4.50 lakhs (Sale of Investments for ` 4,80,000).
(e) Interest received on investments ` 90,000.
(ii) Compensation received `1,35,000 by the company in a suit filed.
(iii) lncome tax paid during the year ` 15,75,000.
(iv) 22,500, 10% preference shares of ` 100 each were redeemed on 02-04-2019 at a premium of
5%.
(v) Further the company issued 75,000 equity shares of `10 each at a premium of 20% on
30.3.2020 (Out of 75,000 equity shares, 25,000 equity shares were issued to a supplier of
machinery)
(vi) Dividend for FY 2018-19 on preference shares were paid at the time of redemption.
(vii) Dividend on Equity shares paid on 31.01.2020 for the year 2018-2019 ` 7.50 lakhs and interim
dividend paid ` 2.50 lakhs for the year 2019-2020.
(viii) Land was purchased on 02.4.2019 for `3,00,000 for which the company issued 22,000 equity
shares of ` 10 each at a premium of 20% to the land owner and balance in cash as
consideration.
(ix) Current assets and current liabilities in the beginning and at the end of the years were as
detailed below:
 As on 01.04.2019 As on 31.3.2020
` `
Inventory 18,00,000 19,77,000
Trade receivables 3,87,000 3,79,650
Cash in hand 3,94,450 16,950
Trade payables 3,16,500 3,16,950
Outstanding expenses 1,12,500 1,22,700

ANSWER
1. Manan Ltd.
Cash Flow Statement

for the year ended 31st March, 2020

` `
Cash flow from Operating Activities
Net profit before income tax and extraordinary items: 30,00,000
Adjustments for:
Depreciation on Property, plant and equipment 7,50,000
Discount on issue of debentures 45,000
Interest on debentures paid 5,25,000
Interest on investments received (90,000)
Profit on sale of investments (30,000) 12,00,000
Operating profit before working capital changes 42,00,000
Adjustments for:
Increase in inventory (1,77,000)
Decrease in trade receivable 7,350
Increase in trade payables 450
Increase in outstanding expenses 10,200 (1,59,000)
Cash generated from operations 40,41,000
Income tax paid (15,75,000)
Cash flow from ordinary items 24,66,000
Cash flow from extraordinary items:
Compensation received in a suit filed 1,35,000
Net cash flow from operating activities 26,01,000
Cash flow from Investing Activities;
Sale proceeds of investments
Interest received on investments
Purchase of land (3,00,000 less 2,64,000)
Net cash flow from investing activities 5,34,000
Cash flow from Financing Activities
Proceeds of issue of equity shares at 20% premium
Redemption of preference shares at 5% premium
Preference dividend paid
 Interest on debentures paid
Dividend paid (7,50,000 + 2,50,000)
Net cash used in financing activities (35,12,500
)
Net decrease in cash and cash equivalents during the year (3,77,500)
Add: Cash and cash equivalents as on 31.3.2019 3,94,450
Cash and cash equivalents as on 31.3.2020 16,950

QUESTION 3 (MTP DEC 2021) (5 MARKS)

From the following information, prepare the Cash Flow from Financing activities as per
AS 3 ‘Cash Flow Statements’ as the accountant of XYZ Limited is not able to decide and seeks
your advice:
(i) Received ` 4,00,000 as redemption of short-term deposit
(ii) Proceeds of ` 20,00,000 from issuance of equity share capital
(iii) Received interest of ` 70,000 on Govt. bonds.
(iv) An amount of ` 13,00,000 incurred for purchase of goodwill
(v) Proceeds of ` 5,00,000 from sale of patent.
(vi) Proceeds of ` 12,00,000 from long term borrowing.
(vii) Amount paid for redemption of debentures of ` 22,00,000
(viii) Underwriting commission of ` 40,000 paid on issue of equity share capital
(ix) Interest of ` 1,44,000 paid on long-term borrowing.
ANSWER
Statement showing Cash Flow from Financing Activities
`
Cash inflow from financing activity
Proceeds from issuance of equity share capital 20,00,000
Proceeds from long term borrowings 12,00,000
Total cash inflow from financing activity 32,00,000
Less: Cash outflow from financing activity
Amount paid for redemption of debentures 22,00,000
Underwriting commission paid 40,000
Interest paid on long-term borrowings 1,44,000 (23,84,000)
Net cash inflow from financing activity 8,16,000

Question 4 (JULY 2021) [5 MARKS]

st
Prepare cash flow statement of Gama Limited for the year ended 31 March, 2021 in accordance with
AS-3(Revised) from the following cash account summary:
Cash summary Account

Inflows T (‘000) Outflows 1 (‘000)

Opening Balance 945 Payment to suppliers 54,918

 Receipts from Customers 74,682 Purchase of Investments 351

SaleofInvestments(Cost Property, plant and

T 4,05,000) 459 equipment acquired 6,210

Issue of Shares 8,100 Wages and salaries 1,863

Sale of Property,Plant Payment of Overheads 3,105

and equipment 3,456 Taxation 6,561

Dividends 2,160

Repayment of Bank

Overdraft 6,750

Interest paid on Bank

Overdraft 1,350

Closing Balance 4,374

87,642 87,642

Question 5 (JAN 2021) [12 MARKS]

Following information was extractedfrom the books of S Ltd. for the yearended 31stMarch,2020:
(1) Net profit before talking into account income tax and after talkinginto account the following items
was `30lakhs;
(i) Depreciation on Property, Plant &Equipment`7,00,000
(ii) Discount on issue of debentures written off`45,000.
(iii) Interest on debentures paid`4,35,000
(iv) Investment of Book value `3,50,000 sold for`3,75,000.
(v) Interest received on Investments`70,000
(2) Income tax paid during the year `12,80,000
(3) Company issued 60,000 Equity Shares of`10 each at a premium of 20% on 10thApril,2019.
(4) 20,000,9% Preference Shares of `100 each were redeemed on 31stMarch, 2020 at a premium
of5%

(5) Dividend paid during the year amounted to `11 Lakhs (including dividend distributiontax)
(6) A new Plant costing `7 Lakhs was purchased in part exchange of an old plant on
1stJanuary,2020. The book value of the old plant was `8 Lakhs butthe vendor took over the
old plant at a value of `6 Lakhs only. The balance amount was paid to vendor through cheque
on 30thMarch,2020.
(7) Company decided to value inventory at cost, whereas previously the practice was to value
inventory at cost less 10%. The inventory according to books on 31.03.2020 was `14,76,000.
The inventory on 31.03.2019 was correctly valued at ` 13,50,000.
(8) Current Assets and Current Liabilities in the beginning and at the end of year 2019-2020
wereas:
 As on 1stApril,2019 As on 31stMarch,2020
(`) (`)
Inventory 13,50,000 14,76,000
Trade Receivables 3,27,000 3,13,200
Cash &Bank Balances 2,40,700 3,70,500
Trade Payables 2,84,700 2,87,300
Outstanding Expenses 97,000 1,01,400
You are required to prepare a Cash Flow Statement for the year ended 31 March, 2020as per AS 3 (revised)
st

using the indirectmethod.

Answer
SLtd.
Cash Flow Statement for the year ended 31st March, 2020

` `
Cash flows from operating activities
Net profit before taxation* 30,00,000
Adjustments for:
Depreciation on PPE 7,00,000
Discount on debentures 45,000
Profit on sale of investments (25,000)
Interest income on investments (70,000)
Interest on debentures 4,35,000
Stock adjustment 1,64,000
{14,76,000 less 16,40,000(14,76,000/90X100)}
Operating profit before working capital changes 12,49,000
Changes in working capital 42,49,000
(Excluding cash and bank balance):
Less: Increase in inventory (2,90,000)
{16,40,000(14,76,000/90X100) less 13,50,000}
Add: Decrease in Trade receivables 13,800
Increase in trade payables 2,600
Increase in o/s expenses 4,400 (2,69,200)
Cash generated from operations 39,79,800
Less: Income taxes paid (12,80,000)
Net cash generated from operating activities 26,99,800
Cash flows from investing activities
Sale of investments 3,75,000
Interest received 70,000
Payments for purchase of fixed assets (1,00,000)
(7,00,000 – 6,00,000)
Net cash used in investing activities 3,45,000
Cash flows from financing activities
Redemption of Preference shares (21,00,000)
 Issue of shares 7,20,000
Interest paid (4,35,000)
Dividend paid (11,00,000)
Net cash used in financing activities (29,15,000)
Net increase in cash 1,29,800
Cash at beginning of the period 2,40,700
Cash at end of the period
3,70,500
*Net profit given in the question is after considering only the items listed as information
point(1)ofthequestion;henceamountoflossonplantnotaddedback.

Question 6 (NOV 2020) [10 MARKS]

The following figures have been extracted from the books of Manan Jo Limited for the year ended
on 31.3.2020. You are requiredto prepare the Cash Flow statement as per AS 3 using indirectmethod.
(i) Net profit before taking into account income tax and income from law suits but after taking into
account the following items was ` 30 lakhs:
(a) Depreciation on Property, Plant & Equipment ` 7.50lakhs.
(b) Discount on issue of Debentures written off `45,000.
(c) Interest on Debentures paid `5,25,000.
(d) Book value of investments ` 4.50 lakhs (Sale of Investments for `4,80,000).
(e) Interest received on investments `90,000.
(ii) Compensation received `1,35,000 by the company in a suitfiled.
(iii) lncome tax paid during the year `15,75,000.
(iv) 22,500, 10% preference shares of ` 100 each were redeemed on 02-04-2019 at a premium of5%.
(v) Further the company issued 75,000 equity shares of `10 each at a premium of 20% on 30.3.2020
(Out of 75,000 equity shares, 25,000 equity shares were issued to a supplier ofmachinery)
(vi) Dividend for FY 2018-19 on preference shares were paid at the timeof redemption.
(vii) Dividend on Equity shares paid on 31.01.2020 for the year 2018-2019 ` 7.50 lakhs (including
dividend distribution tax) and interim dividend paid `2.50 lakhs for the year2019-2020.
(viii) Land was purchased on 02.4.2019 for `3,00,000 for which the company issued 22,000 equity
shares of ` 10 each at a premium of 20% to the land owner and balance in cash asconsideration.
(ix) Current assets and current liabilities in the beginning and at the end of the years were as
detailed below:
As on 01.04.2019 As on 31.3.2020
` `
Inventory 18,00,000 19,77,000
Trade receivables 3,87,000 3,79,650
Cash in hand 3,94,450 16,950
Trade payables 3,16,500 3,16,950
Outstanding expenses 1,12,500 1,22,700

Answer
MananLtd.
 Cash Flow Statement

for the year ended 31st March, 2020

` `
Cash flow from Operating Activities
Net profit before income tax and extraordinary items: 30,00,000
Adjustments for:
Depreciation on Property, plant and equipment 7,50,000
Discount on issue of debentures
Interest on debentures paid
Interest on investments received
Profit on sale of investments
Operating profit before working capital changes
Adjustments for:
Increase in inventory
Decrease in trade receivable
Increase in trade payables
Increase in outstanding expenses
Cash generated from operations
Income tax paid
Cash flow from ordinary items
Cash flow from extraordinary items:
Compensation received in a suit filed
Net cash flow from operating activities
Cash flow from Investing Activities;
Sale proceeds of investments
Interest received on investments
Purchase of land (3,00,000 less 2,64,000)
Net cash flow from investing activities
Cash flow from Financing Activities
Proceeds of issue of equity shares at 20% premium
Redemption of preference shares at 5% premium
Preference dividend paid
Interest on debentures paid
Dividend paid (7,50,000 + 2,50,000)
Net cash used in financing activities
Net decrease in cash and cash equivalents during the year
Add: Cash and cash equivalents as on 31.3.2019
Cash and cash equivalents as on 31.3.2020

Question 7 (NOV 2019) [5 MARKS]

Prepare cash flow from investing activities as per AS 3 of M/s Subham Creative Limited for year
ended31.3.2019.
 Particulars Amount (`)
Machinery acquired by issue of shares at face value 2,00,000
Claim received for loss of machinery in earthquake 55,000
Unsecured loans given to associates 5,00,000
Interest on loan received from associate company 70,000
Pre-acquisition dividend received on investment made 52,600
Debenture interest paid 1,45,200
Term loan repaid 4,50,000
Interest received on investment (TDS of ` 8,200 was deducted on the 73,800
above interest)
Purchased debentures of X Ltd., on. 1stDecember, 2018 which are 3,00,000
redeemable within 3 months
Book value of plant & machinery sold (loss incurred ` 9,600) 90,000

Answer
Cash Flow Statement from Investing Activities of

Subham Creative Limited forthe year ended 31-03-2019

Cash generated from investing activities ` `
Interest on loan received 70,000
Pre-acquisition dividend received on investment made 52,600
Unsecured loans given to subsidiaries (5,00,000)
Interest received on investments (gross value) 82,000
TDS deducted on interest (8,200)
Sale of Plant & Machinery ` (90,000 – 9,600) 80,400
(2,23,200)
Cash used in investing activities (before extra-ordinary item)
55,000
Extraordinary claim received for loss of machinery
Net cash used in investing activities (after extra-ordinary item) (1,68,200)

Note:
1. Debenture interest paid and Term Loan repaid are financing activities and therefore not
considered for preparing cash flow from investingactivities.
2. Machinery acquired by issue of shares does not amount to cash outflow, hence also not
considered in the above cash flowstatement.
3. Theinvestmentsmadeindebenturesareforshort-term,itwillbetreatedas‘cash
equivalent’andwillnotbeconsideredasoutflowincashflowstatement.

Question 8 (RTP NOV 2021)

On the basis of the following information prepare a Cash Flow Statement for the year ended 31stMarch,
2021 (Using directmethod):
(i) Totalsalesfortheyearwere `597croresoutofwhichcashsalesamountedto
` 393crores.
(ii) Receipts from credit customers during the year, totalled` 201crores.
(iii) Purchases for the year amounted to ` 330 crores out of which credit purchases were 80%.
Balance in creditors as on
1.4.2020 ` 126crores
31.3.2021 ` 138crores
 (iv) Suppliers of other consumables and services were paid ` 28.5 crores incash.
(v) Employees of the enterprises were paid 30 crores incash.
(vi) Fully paid preference shares of the face value of ` 48 crores were redeemed. Equity shares of
the face value of ` 30 crores were allotted as fully paid up at premium of 20%.
(vii) Debentures of ` 30 crores at a premium of 10% were redeemed. Debenture holders were issued
equity shares in lieu of theirdebentures.
(viii) ` 39 crores were paid byway of income tax.
(ix) A new machinery costing ` 15 waspurchased.
(x) Investmentcosting`27coresweresoldatalossof`3crores.
(xi) Dividends totalling` 22.5 crores wasalso paid.
(xii) Debenture interest amounting ` 3 crore waspaid.
(xiii) On 31stMarch 2020, Balance with Bank and Cash on hand totalled` 3crores.

Answer
Cash flow statement (using direct method)for the year ended 31stMarch, 2021
(` in crores) (` in crores)
Cash flow from operating activities
Cash sales 393
Cash collected from credit customers 201
Less: Cash paid to suppliers for goods & services and
to employees (Refer Working Note) (376.5)

Cash from operations 217.5

Less: Income tax paid (39)
Net cash generated from operating activities 178.5
Cash flow from investing activities
Payment for purchase of Machine (15)
Proceeds from sale of investments 24
Net cash used in investing activities 9
Cash flow from financing activities
Redemption of Preference shares (48)
Proceeds from issue of Equity shares 36
Debenture interest paid (3)
Dividend Paid (22.5)
Net cash used in financing activities (37.5)
Net increase in cash and cash equivalents 150
Add: Cash and cash equivalents as on 1.04.2020 3
Cash and cash equivalents as on 31.3.2021 153

Working Note:

Calculation of cash paid to suppliers of goods and services and to employees

(` in crores)
Opening Balance in creditors Account 126
Add: Purchases (330x .8) 264
 Total 390
Less: Closing balance in Creditors Account 138
Cash paid to suppliers of goods 252
Add: Cash purchases (330x .2) 66
Total cash paid for purchases to suppliers (a) 318
Add: Cash paid to suppliers of other consumables and services (b) 28.5
Add: Payment to employees (c) 30
Total cash paid to suppliers of goods & services and to employees [(a)+ 376.5
(b) + (c)]

Question 9 (RTP MAY 2021)

The following are the extracts of Balance Sheet and Statement of Profit and Loss of SupriyaLtd.:
Extract of Balance Sheet
Particulars Notes 2021 2020
(`’000) (`’000)
Equity and Liabilities
1 Shareholder’s funds
(a) Share capital 1 500 200
2 Non- current liabilities
(a) Long term loan from bank --- 250
3 Current liabilities
(a) Trade Payables 1,000 3,047
Assets
1 Non-current assets
(a) Property, Plant and Equipment 230 128
2 Current assets
(a) Trade receivables 2,000 4,783
(b) Cash & cash equivalents (Cash balance) 212 35

Extract of Statement of Profit and Loss

Particulars Notes 2021 2020

(`’000) (`’000)
I Expenses:
Employee benefits expense 69 25
Other expenses 2 115 110
II Tax expense:
Current tax (paid during year) 243 140

Notes to accounts

2021 (`’000) 2020 (`’000)

1 Share Capital
Equity Shares of `10 each, fully paid up 500 200
2 Other expenses
Overheads 115 110

Prepare Cash Flow Statement of Supriya Ltd. for the year ended 31st March, 2021 in accordance with
AS-3 (Revised) using direct method. All transactions were done in cash only. There were no
outstanding/prepaid expenses as on 31stMarch, 2020 and on 31stMarch, 2021. Ignore deprecation.
 Dividend amounting ` 80,000 was paid during the year ended 31stMarch, 2021.

Answer
SupriyaLtd.
Cash Flow Statement for the year ended 31st March, 2021

(Using direct method)

(` ’000)
Cash flows from operating activities
Cash receipts from customers 2,783
Cash payments to suppliers (2,047)
Cash paid to employees (69)
Other cash payments (for overheads) (115)
Cash generated from operations 552
Income taxes paid (243)
Net cash from operating activities
Cash flows from investing activities
Payments for purchase of Property, Plant and Equipment (102)
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issuance of share capital 300
Bank loan repaid (250)
Dividend paid (80)
Net cash used in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period

Question 10 (RTP NOV 2020)

Prepare Cash Flow Statement of Light Ltd. for the year ended 31 stMarch, 2020,
inaccordancewithAS3(Revised)fromthefollowingSummaryCashAccount:
Summary Cash Account
` in '000 ` in '000
Balance as on 01.04.2019 315
Receipts from Customers 24,894
Sale of Investments (Cost ` 1,35,000) 153
Issue of Shares 2,700
Sale of Fixed Assets 1,152
29,214
Payment to Suppliers 18,306
Purchase of Investments 117
Purchase of Fixed Assets 2,070 ,
 Wages & Salaries 621
Selling & Administration Expenses 1,035
Payment of Income Tax 2,187
Payment of Dividends 720
Repayment of Bank Loan 2,250
Interest paid on Bank Loan 450 (27,756)
Balance as on 31.03.2020 1,458

Answer
Cash Flow Statement ofLight Ltd. for the year ended 31stMarch, 2020
Cash flows from operating activities (` ’000) (` ’000)
Cash receipts from customers 24,894
Cash payments to suppliers (18,306)
Cash paid to employees (621)
Other cash payments (for Selling & Administrative expenses) (1,035)
Cash generated from operations 4,932
Income taxes paid (2,187)
Net cash from operating activities 2,745
Cash flows from investing activities
Payments for purchase of fixed asset (2,070)
Proceeds from sale of fixed assets 1,152
Purchase of investments (117)
Sale of investments 153
Net cash used in investing activities (882)
Cash flows from financing activities
Proceeds from issuance of share capital 2,700
Bank loan repaid (2,250)
Interest paid on bank loan (450)
Dividend paid (720)
Net cash used in financing activities (720)
Net increase in cash and cash equivalents 1,143
Cash and cash equivalents at beginning of period 315
Cash and cash equivalents at end of period 1,458

Question11 (RTP MAY 2020)

The following figures have been extracted from the books of X Limited for the year ended
on31.3.2019. You are required to prepare a cash flow statement as per AS 3 using indirect method.
(i) Net profit before taking into account income tax and income from law suits but after taking into
account the following itemswas ` 20 lakhs:
(a) Depreciation on Property, Plant &Equipment ` 5lakhs.
(b) Discount on issue of Debentures written off `30,000.
(c) Interest on Debentures paid `3,50,000.
(d) Bookvalueofinvestments`3lakhs(SaleofInvestmentsfor`3,20,000).
(e) Interest received on investments `60,000.
(f) Compensationreceived`90,000bythecompanyinasuitfiled.
 (ii) Income tax paid during the year `10,50,000.
(iii) 15,000, 10% preference shares of ` 100 each were redeemed on 31.3.2019 at a premium of 5%.
Further the company issued 50,000 equity shares of ` 10 each at a premium of 20% on 2.4.2018.
Dividend on preference shares were paid at the time ofredemption.
(iv) Dividend paid for the year 2017-2018 ` 5 lakhs and interim dividend paid `3 lakhs for the
year2018-2019.
(v) Land was purchased on 2 4.2018 for ` 2,40,000 for which the company issued20,000
equity shares of ` 10 each at a premium of 20% to the land owner as consideration.
(vi) Current assets and current liabilities in the beginning and at the end of the years were as
detailedbelow:
As on 31.3.2018 As on 31.3.2019
` `
Inventory 12,00,000 13,18,000
Trade receivables 2,58,000 2,53100
Cash in hand 1,96,300 35,300
Trade payables 2,11,000 2,11,300
Outstanding expenses 75,000 81,800

Answer
XLtd.
Cash Flow Statement

for the year ended 31stMarch, 2019

` `
Cash flow from Operating Activities
Net profit before income tax and extraordinary items: 20,00,000
Adjustments for:
Depreciation on PPE 5,00,000
Discount on issue of debentures 30,000
Interest on debentures paid 3,50,000
Interest on investments received (60,000)
Profit on sale of investments (20,000) 8,00,000
Operating profit before working capital changes 28,00,000
Adjustments for:
Increase in inventory (1,18,000)
Decrease in trade receivable 4,900
Increase in trade payables 300
Increase in outstanding expenses 6,800 (1,06,000)
Cash generated from operations 26,94,000
Income tax paid (10,50,000)
16,44,000
Cash flow from extraordinary items:
Compensation received in a suit filed 90,000
Net cash flow from operating activities 17,34,000
Cash flow from Investing Activities
 Sale proceeds of investments 3,20,000
Interest received on investments 60,000
Net cash flow from investing activities 3,80,000
Cash flow from Financing Activities
Proceeds by issue of equity shares at 20% premium 6,00,000
Redemption of preference shares at 5% premium (15,75,000)
Preference dividend paid (1,50,000)
Interest on debentures paid (3,50,000)
Dividend paid (5,00,000 + 3,00,000) (8,00,000)
Net cash used in financing activities (22,75,000)
Net decrease in cash and cash equivalents during the (1,61,000)
year
Add: Cash and cash equivalents as on 31.3.2018 1,96,300
Cash and cash equivalents as on 31.3.2019 35,300
Note: Purchase of land in exchange of equity shares (issued at 20% premium) has not been
considered in the cash flow statement as it does not involve any cash transaction.

Question 12 (MTP APRIL 2021) [5 MARKS]

Following is the cash flow abstract of Alpha Ltd. for the year ended 31stMarch,2021:
Cash Flow (Abstract)
Inflows Rs. Outflows Rs.
Opening cash and bank balance 80,000 Payment for Account Payables 90,000
Share capital – shares issued 5,00,000 Salaries and wages 25,000
Collection from Trade Payment of overheads 15,000
Receivables 3,50,000 Machinery acquired 4,00,000
Debentures redeemed 50,000
Sale of Machinery 70,000 Bank loan repaid 2,50,000
Tax paid 1,55,000
Closing cash and bank balance 15,000
10,00,000 10,00,000
Prepare Cash Flow Statement for the year ended 31stMarch, 2021 in accordance with AS 3.

Answer
Cash Flow Statement for the year ended31.3.2021
Rs. Rs.
Cash flow from operating activities
Cash received on account of trade receivables 3,50,000
Cash paid on account of trade payables (90,000)
Cash paid to employees (salaries and wages) (25,000)
Other cash payments (overheads) (15,000)
Cash generated from operations 2,20,000
Income tax paid (1,55,000)
Net cash generated from operating activities 65,000
 Cash flow from investing activities
Payment for purchase of machinery (4,00,000)
Proceeds from sale of machinery 70,000
Net cash used in investment activities (3,30,000)
Cash flow from financing activities
Proceeds from issue of share capital 5,00,000
Bank loan repaid (2,50,000)
Debentures redeemed (50,000)
Net cash used in financing activities 2,00,000
Net decrease in cash and cash equivalents (65,000)
Cash and cash equivalents at the beginning of the year 80,000
Cash and cash equivalents at the end of the year 15,000

Question 13 (MTP MARCH 2021) [4 MARKS]

Prepare cash flow from investing activities as per AS 3 of M/s Subham Creative Limited for year
ended31.3.2019.
Particulars Amount (Rs.)
Machinery acquired by issue of shares at face value 2,00,000
Claim received for loss of machinery in earthquake 55,000
Unsecured loans given to associates 5,00,000
Interest on loan received from associate company 70,000
Pre-acquisition dividend received on investment made 52,600
Debenture interest paid 1,45,200
Term loan repaid 4,50,000
Interest received on investment (TDS of Rs. 8,200 was deducted on the 73,800
above interest)
Book value of plant & machinery sold (loss incurred Rs. 9,600) 90,000

Answer
Cash Flow from Investing Activities of Subham Creative Limited for year ended 31-03-2019
Cash generated from investing activities Rs. Rs.
Interest on loan received 70,000
Pre-acquisition dividend received on investment made 52,600
Unsecured loans given to subsidiaries (5,00,000)
Interest received on investments (gross value) 82,000
TDS deducted on interest (8,200)
Sale of Plant & Machinery Rs. (90,000 – 9,600) 80,400
(2,23,200)
 Ch.6 - PRE INCORPORATION PROFITS
QUESTION 1 (RTP DEC 2021) (10 MARKS)
New Limited was incorporated on 01.08.2020 to take-over the business of a partnership firm w.e.f.
01.04.2020. It provides you the following information for the year ended 31.03.2021:
`
Gross profit 9,00,000
Expenses:
Salaries 1,80,000
Rent, Rates & Taxes 1,20,000
Depreciation 37,500
Commission on Sales 31,500
Interest on Debentures 48,000
Director’s Fees 18,000
Advertisement 54,000
Net Profit for the Year 4,11,000
(i) New Limited initiated an advertising campaign which resulted increase in monthly average
sales by 25% post incorporation.
(ii) The Gross profit ratio post incorporation increased to 30% from 25%.
You are required to apportion the profit for the year between pre-incorporation and post- incorporation
periods.
ANSWER
1. Statement showing the calculation of Profits for the pre-incorporation and post- incorporation
periods
Particulars Total Basis of Pre- Post-
Amount Allocation incorporation incorporation
` ` `
Gross Profit 9,00,000 1:3 2,25,000 6,75,000
Less: Salaries 1,80,000 Time 60,000 1,20,000
Rent, rates and taxes 1,20,000 Time 40,000 80,000
Commission on sales 31,500 Sales(2:5) 9,000 22,500
Depreciation 37,500 Time 12,500 25,000
Interest on debentures 48,000 Post 48,000
Directors’ fee 18,000 Post 18,000
Advertisement 54,000 post 54,000
Net profit 4,11,000 1,03,500 3,07,500
Working Notes:
1. Sales ratio
Let the monthly sales for first 4 months (i.e. from 1.4.2020 to 31.7.2020) be = x Then,
sales for 4 months = 4x
Monthly sales for next 8 months (i.e. from 1.8.20 to 31.3.2021) = x + 25% of x= 1.25x Then,
sales for next 8 months = 1.25x X 8 = 10x
Total sales for the year = 4x + 10x = 14x Sales Ratio
= 4 x :10x i.e. 2:5
 2. Gross profit ratio
From 1.4.2020 to 31.7.2020 gross profit is 25% of sales Then, 25%
of 4x= 1x
gross profit for next 8 months (i.e. from 1.8.20 to 31.3.2021) is 30% Then, 30%
of 10x = 3x
Therefore gross profit ratio will be 1:3

QUESTION 2 (MTP DEC 2021) (5 MARKS)

The Business carried on by Kamal under the name "K" was taken over as a running business with effect
from 1st April, 2020 by Sanjana Ltd., which was incorporated on 1st July, 2020. The same set of books
was continued since there was no change in the type of business and the following particulars of profits
for the year ended 31st March, 2021 were available.
Sales: Company period 40,000
Prior period 10,000 50,000
Selling Expenses 3,500
Preliminary Expenses written off 1,200
Salaries 3,600
Directors' Fees 1,200
Interest on Capital (Up to 30.6.2020) 700
Depreciation 2,800
Rent 4,800
Purchases 25,000
Carriage Inwards 1,019 43,819
Net Profit 6,181
The purchase price (including carriage inwards) for the post-incorporation period had increased by
10 percent as compared to pre-incorporation period. No stocks were carried either at the beginning
or at the end.
You are required to prepare a statement showing the amount of pre and post incorporation period profits
stating the basis of allocation of expenses.
ANSWER
(b) Statement showing the calculation of profits/losses for pre incorporation and Post
incorporation period profits of Sanjana Ltd. for year ended 31.3.2021
Particulars Basis Pre Post
` `
Sales (given) 10,000 40,000
Less: Purchases 1:3.3 5,814 19,186
Carriage Inwards 1:3.3 237 782
Gross Profit (i) 3,949 20,032
Less: Selling Expenses 1:4 700 2,800
Preliminary Expenses 1,200
Salaries 1:3 900 2,700
Director Fees 1,200
Interest on capital 700
Depreciation 1:3 700 2,100
Rent 1:3 1,200 3,600
Total of Expenses(ii) 4,200 13,600
Capital Loss/Net Profit (i-ii) (251) 6,432
 Working Notes:
1: Sales Ratio = 10,000 : 40,000 = 1 :4
2:Time Ratio = 3:9= 1:3 3:
Purchase Price Ratio
 Ratio is 3
QUESTION 3 ( MTP DEC 2021) (4 MARKS)
Lotus Ltd. was incorporated on 1 July, 2019 to acquire a running business of Feel goods
st

with effect from 1st April, 2019. During the year 2019-20, the total sales were `
48,00,000 of which 9,60,000 were for the first six months. The Gross profit of the company `
7,81,600. The expenses debited to the Profit & Loss statement included:
(i) Director's fees ` 60,000
(ii) Bad debts ` 14,400
(iii)Advertising ` 48,000 (under a contract amounting to ` 4,000 per month)
(iv) Salaries and General Expenses ` 2,56,000
(v) Preliminary Expenses written off ` 20,000
(vi) Donation to a political party given by the company ` 20,000.
Prepare a statement showing pre-incorporation and post-incorporation profit for the year ended 31st March,
2020
ANSWER
Statement showing the calculation of Profits for the pre-incorporation and
post- incorporation periods
For the year ended 31st March, 2020

Particulars Total Basis of Pre- Post-

Amount Allocation incorporation incorporation
Gross Profit 7,81,600 Sales 78,160 7,03,440
Less: Directors’ fee 60,000 Post 60,000
Bad debts 14,400 Sales 1,440 12,960
Advertising 48,000 Time 12,000 36,000
Salaries & general expenses 2,56,000 Time 64,000 1,92,000
Preliminary expenses 20,000 Post 20,000
Donation to Political Party 20,000 Post 20,000
Net Profit 3,63,200 720 3,62,480

Working Notes:
1. Sales ratio
Particulars `
Sales for period up to 30.06.2019 (9,60,000 x 3/6) 4,80,000
Sales for period from 01.07.2019 to 31.03.2020 (48,00,000 – 4,80,000) 43,20,000
Thus, Sales Ratio = 1 : 9
2. Time ratio
1st April, 2019 to 30 June, 2019: 1st July, 2019 to 31st March, 2020
= 3 months: 9 months = 1: 3
Thus, Time Ratio is 1: 3

Question 5 (July 2021) [4 MARKS]

S. Ltd. was incorporated on 30* November 2020 to take over the running Business of proprietorship
firm of Mr. S. The various expenses debited to the profit and loss Account for the year 2020-21
included :
(i) Directors fees

(ii) Preliminary expenses written off

(iii) Salaries and general expenses

(iv) Statutory Audit fees

(v) Tax Audit fees u/s 44 AB of the Income Tax Act, 1961

(vi) Commission to travelling agents

(vii) Sale promotion expenses

(viii) Advertisement expenses

(ix) Rent expenses

(x) Bad debts

You are required to determine the basis of apportionment of above expenses between pre
incorporation and post incorporation periods.

Question 6 (NOV 2020) [4 MARKS]

Moon Ltd. was incorporated on 1stAugust, 2019 to take over the running business of a partnership firm
w.e.f. 1st April, 2019. The summarized Profit & Loss Account for the year ended 31st March, 2020
is asunder:

Amount
(`)
Gross Profit 6,30,000
Less: Salaries 1,56,000
Rent, Rates & Taxes 72,000
Commission on sales 40,600
Depreciation 60,000
Interest on Debentures 36,000
Director's fees 24,000
Advertisement 48,000 4,36,600
Net Profit for the year 1,93,400
Moon Ltd. initiated an advertising campaign which resulted in increase of monthly sales by 25%
postincorporation.
You are required to prepare a statement showing the profit for the year between pre- incorporation and post-
incorporation. Also, explain how these profits areto be treated in theaccounts?

Answer
Statement showing the calculation of Profits for the pre-incorporation and post-
incorporationperiods
 Particulars Total Basis of Pre- Post-
Amount Allocation incorporation incorporation
` ` `
Gross Profit (W.N.2) 6,30,000 2:5 (sales) 1,80,000 4,50,000
Less: Salaries 1,56,000 Time (52,000) (1,04,000)
Rent, rates and taxes 72,000 Time (24,000) (48,000)
Commission on sales 40,600 2:5 (sales) (11,600) (29,000)
Depreciation 60,000 Time (20,000) (40,000)
Interest on debentures 36,000 Post (36,000)
Directors’ fee 24,000 Post (24,000)
Advertisement 48,000 Post ( 48,000)
Net profit 72,400 1,21,000

Pre-incorporation profit will be transferred to Capital Reserve.

Post-incorporation profit will be transferred to Profit & Loss Account.

Working Notes:
1. Salesratio
Let the monthly sales for first 4 months (i.e. from 1.4.2019 to 31.7.2019) be = x
Then, sales for 4 months = 4x

Monthly sales for next 8 months (1stAugust, 2019 to 31stMarch,2020)

= x + 25% of x= 1.25xThen, sales for next 8 months = 1.25x X 8 = 10x

Total sales for the year = 4x + 10x =14x.Hence Sales Ratio = 4 x :10x i.e.2:5
2. Timeratio
1stApril, 2019 to 31stJuly, 2019 : 1stAugust, 2019 to 31stMarch, 2020

= 4 months: 8 months = 1:2. Thus, time ratio is 1:2.

Question 7 (NOV 2019)
The partners of C&G decided to convert their existing partnership business into a private limited called
CG trading Pvt. Ltd. with effect from1.7.2018.
The same books of accounts were continued by the company which closed its accounts for the first
term on31.3.2019.
The summarized profit & loss account for the year ended 31.3.2019 is below:
Particulars ` in lakhs ` in lakhs
Turnover 245.00
Interest on investments 6.00 251.00
Less: Cost of goods sold 124.32
Advertisement 3.50
Sales Commission 7.00
Salaries 18.00
Managing Director’s Remuneration 6.00
Interest on Debentures 2.00
Rent 5.50
 Bad debt 1.15
Underwriting Commission 1.00
Audit fees 3.00
Loss on sale of Investments 1.00
Depreciation 4.00 176.47
74.53
The following additional information was provided :
(i) Theaveragemonthlysalesdoubledfrom1.7.2018,GPratiowasconstant.
(ii) All investments were sold on31.5.2018.
(iii) Average monthly salaries doubled from1.10.2018.
(iv) The company occupied additional space from 1.7.2018 for which rent of ` 20,000 per month
wasincurred.
(v) Bad debts recovered amounting to ` 60,000 for a sale made in 2016-17 has been deducted from
bad debts mentionedabove.
(vi) Audit fees pertains to thecompany.
Prepare a statement apportioning the expenses between pre and post incorporation periods and
calculate the profit / loss for suchperiods.

Answer
C G Trading PrivateLimited
Statement showing calculation of Profit/Loss for Pre and Post Incorporation Periods

` Inlakhs

Ratio Total Pre Post

Incorporation Incorporation
Sales 1:6 245.00 35.00 210.00
Interest on Investments Pre 6.00 6.00 -
Bad debts recovered Pre 0.60 0.60 _
(i) 251.6 41.60 210.00
Cost of goods sold 1:6 124.32 17.76 106.56
Advertisement 1:6 3.50 0.50 3.00
Sales commission 1:6 7.00 1.00 6.00
Salary (W.N.3) 1:5 18.00 3.00 15.00
Managing director’s remuneration Post 6.00 - 6.00
Interest on Debentures Post 2.00 - 2.00
Rent (W.N.4) 5.50 0.93 4.57
Bad debts (1.15 + 0.6) 1:6 1.75 0.25 1.50
Underwriting commission Post 1.00 - 1.00
Audit fees Post 3.00 - 3.00
Loss on sale of Investment Pre 1.00 1.00 -
Depreciation 1:3 4.00 1.00 3.00

(ii) 177.07 25.44 151.63

Net Profit [(i) – (ii)] 74.53 16.16 58.37

Working Notes:
1. Calculation of SalesRatio
 Let the average sales per month be x

Total sales from 01.04.2018 to 30.06.2018 will be 3x

Average sales per month from 01.07.2018 to 31.03.2019 will be 2x

Total sales from 01.07.2018 to 31.03.2019 will be 2x X 9 =18x
RatioofSaleswillbe3x:18xi.e.3:18or1:6

2. Calculation of timeRatio
3 Months: 9 Months i.e. 1:3
3. Apportionment ofSalary
Let the salary per month from 01.04.2018 to 30.09.2018 is x Salary
per month from 01.10.2018 to 31.03.2019 will be 2x
Hence,preincorporationsalary(01.04.2018to30.06.2018)=3x

Post incorporation salary from 01.07.2018 to 31.03.2019 = (3x + 12x) i.e.15x

Ratio for division 3x: 15x or 1: 5

4. ApportionmentofRent ` In Lakhs
TotalRent 5.50
Less: additional rent from 1.7.2018 to 31.3.2019 1.80
Rent of old premises for 12 months 3.70
Pre Post
Apportionment in time ratio 0.93 2.77
Add: Rent for new space - 1.80
Total 0.93 4.57

Question 8 (RTP NOV 2021)

New Limited was incorporated on 01.08.2020 to take-over the business of a partnership firm w.e.f.
01.04.2020. It provides you the following information for the year ended 31.03.2021:
`
Gross profit 9,00,000
Expenses:
Salaries 1,80,000
Rent, Rates & Taxes 1,20,000
Depreciation 37,500
Commission on Sales 31,500
Interest on Debentures 48,000
Director’s Fees 18,000
Advertisement 54,000
Net Profit for the Year 4,11,000
(i) New Limited initiated an advertising campaign which resulted increase in monthly average
sales by 25% postincorporation.
 (ii) TheGrossprofitratiopostincorporationincreasedto30%from25%.
You are required to apportion the profit for the year between pre-incorporation and post- incorporation
periods.

Answer
Statement showing the calculation of Profits for the pre-incorporation and post-
incorporationperiods
Particulars Total Basis of Pre- Post-
Amount Allocation incorporation incorporation
` ` `
Gross Profit 9,00,000 1:3 2,25,000 6,75,000
Less: Salaries 1,80,000 Time 60,000 1,20,000
Rent, rates and taxes 1,20,000 Time 40,000 80,000
Commission on sales 31,500 Sales(2:5) 9,000 22,500
Depreciation 37,500 Time 12,500 25,000
Interest on debentures 48,000 Post 48,000
Directors’ fee 18,000 Post 18,000
Advertisement 54,000 post 54,000
Net profit 4,11,000 1,03,500 3,07,500
Working Notes:
1. Salesratio
Let the monthly sales for first 4 months (i.e. from 1.4.2020 to 31.7.2020) be = x Then,
sales for 4 months = 4x
Monthly sales for next 8 months (i.e. from 1.8.20 to 31.3.2021) = x + 25% of x= 1.25x Then,
sales for next 8 months = 1.25x X 8 = 10x
Total sales for the year = 4x + 10x = 14x Sales Ratio
= 4 x :10x i.e. 2:5
2. Gross profitratio
From 1.4.2020 to 31.7.2020 gross profit is 25% of sales Then, 25%
of 4x= 1x
gross profit for next 8 months (i.e. from 1.8.20 to 31.3.2021) is 30% Then, 30%
of 10x = 3x
Therefore gross profit ratio will be 1:3
3. Timeratio
1stApril, 2020 to 31stJuly, 2020 : 1stAugust, 2020 to 31stMarch, 2021
= 4 months: 8 months = 1:2 Thus, time
ratio is 1:2.

Question 9 (RTP MAY 2021)

(a) Megha Ltd. was incorporated on 1.7.2020 to take over the running business of M/s
Happyfrom1.4.2020.Theaccountsofthecompanywereclosedon31.3.2021.
The average monthly sales during the first three months of the year (2020-21) was twice the
average monthly sales during each of the remaining nine months.
You are required to compute time ratio and sales ratio for pre and post incorporation periods.
(b) The Business carried on by Kamal under the name "K" was taken over as a running business with
effect from 1stApril, 2020 by Sanjana Ltd., which was incorporated on 1stJuly, 2020. The same
 set of books was continued since there was nochange in the type of business and the
following particulars for the year ended 31stMarch, 2021 wereavailable:
` `
Sales: Company period (1.7.20 to 31.3.21) 40,000
Prior period (1.4.20 to 30.6.20) 10,000 50,000
Selling Expenses 3,500
Preliminary Expenses written off 1,200
Salaries paid 3,600
Directors' Fees 1,200
Interest on Capital (Upto 30.6.2020) 700
Depreciation 2,800
Rent expense 4,800
Purchases: Company period (1.7.20 to 31.3.21) 21,875
Prior period (1.4.20 to 30.6.20) 3,125
Carriage Inwards 1,000 43,800
Net Profit 6,200
You are required to prepare a statement showing the amount of pre and post incorporation period
profits stating the basis of allocation of expenses.

Answer
(a) Timeratio:
Pre-incorporation period(1.4.2020to1.7.2020) = 3months
Post incorporation period (1.7.2020 to 31.3.2021) = 9 months
Timeratio = 3 : 9 or 1 :3
Sales ratio:
Average monthly sale before incorporation was twice the average sale per month of the post
incorporation period. If weightage for each post-incorporation month is x, then
Weighted sales ratio = 3 2x : 9 1x = 6x : 9x or 2 : 3
(b) Statement showing the calculation of profits/losses for pre incorporation and Post
incorporation period profits of SanjanaLtd.
for the year ended 31stMarch, 2021

Particulars Basis Pre Post

` `
Sales (given) 10,000 40,000
Less: Purchases (given) 3,125 21,875
Carriage Inwards 1:7 125 875
Gross Profit (i) 6,750 17,250
Less: Selling Expenses 1:4 700 2,800
Preliminary Expenses 1,200
Salaries 1:3 900 2,700
Director Fees 1,200
Interest on capital 700
Depreciation 1:3 700 2,100
Rent 1:3 1,200 3,600
Total of Expenses(ii) 4,200 13,600
 Pre-incorporation/Net Profit (i-ii) 2,550 3,650

Working Notes:
1: Sales Ratio = 10,000:40,000 = 1:4
2: Time Ratio = 3:9 =1:3

Question 10 (RTP NOV 2020)

Green Ltd. took over a running business with effect from 1 st April, 2019. The company was
incorporated on 1stAugust, 2019. The following summarized Profit and Loss Account has been
prepared for the year ended31.3.2020:
` `
To Salaries 72,000 By Gross profit 4,80,000
To Stationery 7,200
To Travelling expenses 25,200
To Advertisement 24,000
To Miscellaneous trade expenses 56,700
To Rent (office buildings) 39,600
To Electricity charges 6,300
To Director’s fee 16,800
To Bad debts 4,800
To Commission to selling agents 33,000
To Debenture interest 4,500
To Interest paid to vendor 6,300
To Selling expenses 37,800
To Depreciation on fixed assets 14,400
To Net profit 1,31,400
4,80,000 4,80,000
Additional information:
(a) Salesratiobetweenpreandpostincorporationperiodswas1:3.
(b) Rent of office building was paid @ ` 3,000 per month up to September, 2019 and thereafter it
was increased by ` 600 permonth.
(c) Travelling expenses include ` 7,200 towards sales promotion. Travelling expenses
aretobeallocatedbetweenpreandpostincorporationperiodsontimebasis.
(d) Depreciation include ` 900 for assets acquired in the post incorporationperiod.
(e) Purchase consideration was discharged by the company on 30 th September, 2019 by issuing
equity shares of ` 10each.
You are required to prepare Statement showing calculation of profits and allocation of expenses
between pre and post incorporation periods.

Answer
Statementshowingcalculationofprofitsforpreandpostincorporationperiods
for the year ended 31.3.2020

Particulars Pre-incorporation Post-incorporation

period period
` `
 A. Gross profit (1:3) 1,20,000 3,60,000
Less: Salaries (1:2) 24,000 48,000
Stationery (1:2) 2,400 4,800
Advertisement (1:3) 6,000 18,000
Travelling expenses (W.N.3) 6,000 12,000
Sales promotion expenses (W.N.3) 1,800 5,400
Misc. trade expenses (1:2) 18,900 37,800
Rent (office building) (W.N.2) 12,000 27,600
Electricity charges (1:2) 2,100 4,200
Director’s fee 16,800
Bad debts (1:3) 1,200 3,600
Selling agents commission (1:3) 8,250 24,750
Debenture interest 4,500
Interest paid to vendor (2:1) (W.N.4) 4,200 2,100
Selling expenses (1:3) 9,450 28,350
Depreciation on fixed assets (W.N.5) 4,500 9,900
B. 1,00,800 2,47,800
Pre-incorporation profit (A less B) 19,200
Post-incorporation profit (A less B) 1,12,200

Working Notes:
1. TimeRatio
Pre incorporation period = 1stApril, 2019 to 31stJuly, 2019 i.e. 4 months Post
incorporation period is 8 months; Time ratio is 1: 2.
2. Rent
`
Rent for pre-incorporation period (` 3,000 x 4) 12,000 (pre)
Rent for post incorporation period
August,2019 & September, 2019 (` 3,000 x 2) 6,000
October,2019 to March,2020 (` 3,600 x 6) 21,600 27,600 (post)
3. Travelling expenses and sales promotionexpenses
Pre Post
` `
Traveling expenses` 18,000 (i.e. ` 25200-
` 7200) distributed in 1:2 ratio 6,000 12,000
Sales promotion expenses ` 7,200 distributed in
1:3ratio 1,800 5,400
4. Interest paid to vendor till 30thSeptember,2019
Pre Post
` `
Interest for pre-incorporation period ` 6,300x 4/6 4,200

Interest for post incorporation period i.e. for

2,100
August, 2019 & September, 2019 = ` 6,300x 2/6
 5. Depreciation
Pre Post
` `
Totaldepreciation 14,400
Less:Depreciationexclusivelyforpostincorporationperiod 900 900
13,500
Depreciation for pre-incorporation period (13,500x4/12) 4,500
Depreciation for post incorporation period (13,500x8/12) ____ 9,000
4,500 9,900

Question 12 (RTP MAY 2020)

The partners of Shri Enterprises decided to convert the partnership firm into a Private Limited
Company Shreya (P) Ltd. with effect from 1 st January, 2018. However, company could be incorporated
only on 1stJune, 2018. The business was continued on behalf of the company and the consideration
of ` 6,00,000 was settled on that day along with interest @ 12% per annum. The company availed
loan of` 9,00,000 @ 10% per annum on 1stJune, 2018 to pay purchase consideration and for
working capital. The company closed its accounts for the first time on 31stMarch, 2019 and presents
you the following summarized profit and lossaccount:
` `
Sales 19,80,000
Cost of goods sold 11,88,000
Discount to dealers 46,200
Directors’ remuneration 60,000
Salaries 90,000
Rent 1,35,000
Interest 1,05,000
Depreciation 30,000
Office expenses 1,05,000
Sales promotion expenses 33,000
Preliminary expenses (to be written off in first year itself) 15,000 18,07,200
Profit 1,72,800
Sales from June, 2018 to December, 2018 were 2½ times of the average sales, which further increased
to 3½ times in January to March quarter, 2019. The company recruited additional work force to expand
the business. The salaries from July, 2018 doubled. The company also acquired additional showroom
at monthly rent of ` 10,000 from July, 2018.
You are required to prepare a Profit and Loss Account showing apportionment of cost and revenue
between pre-incorporation and post-incorporation periods.

Answer
Shreya (P)Limited
Profit and Loss Account

for 15 months ended 31stMarch, 2019

Pre. inc. Post inc. Pre. inc. Post inc.

(5 months) (10 months) (5 months) (10 months)
( `) ( `) ( `) ( `)
To Cost of sales 1,80,000 10,08,000 By Sales 3,00,000 16,80,000
To Gross profit 1,20,000 6,72,000 (W.N.1)
 3,00,000 16,80,000 3,00,000 16,80,000
To Discount to 7,000 39,200 By Gross 1,20,000 6,72,000
dealers profit
To Directors’ - 60,000 By Loss 750
remuneration
To Salaries (W.N.2) 18,750 71,250
To Rent (W.N.3) 15,000 1,20,000
To Interest (W.N.4) 30,000 75,000
To Depreciation 10,000 20,000
To Office expenses 35,000 70,000
To Preliminary - 15,000
expenses
To Sales promotion 5,000 28,000
expenses
To Net profit - 1,73,550
1,20,750 6,72,000 1,20,750 6,72,000
Working Notes:
1. Calculation of salesratio:
Let the average sales per month in pre-incorporation period be x
AverageSales(Pre-incorporation) = x X 5 = 5x Sales
(Post incorporation) from June to December, 2018 = 2½ x X7 =17.5x From January
toMarch,2019 = 3½ xX3 = ........... x
TotalSales ............................................................................................................... x
Sales ratio of pre-incorporation & post incorporation is 5x : 28x
2. Calculation of ratio forsalaries
Let the average salary be x
Pre-incorporationsalary = x X 5= 5x Post
incorporationsalary
June,2018 = x
July18toMarch,2019=xX9X2= 18x
19x
Ratio is 5 : 19
3. CalculationofRent `
Totalrent 1,35,000
Less: Additional rent for 9 months @ `10,000p.m. 90,000Rent of
old premises apportioned in timeratio 45,000
Apportionment PreInc. PostInc.
Oldpremisesrent 15,000 30,000
AdditionalRent 90,000
15,000 1,20,000
Question 14 (MTP APRIL 2021) [6 MARKS]

Sneha Ltd. was incorporated on 1stJuly, 2019 to acquire a running business of Atul Sons with effect
from 1stApril,2019.
During the year 2019-20, the total sales were Rs. 24,00,000 of which Rs. 4,80,000 were for thefirst
six months. The Gross profit of the company for the year was Rs. 3,90,800. The expenses charged
to the Statement of Profit &Loss Account includedthe following:
(i) Director's fees Rs.30,000
(ii) Bad debts Rs.7,200
(iii) Advertising Rs. 24,000 (under a contract amounting to Rs. 2,000 permonth)
(iv) Salaries and General Expenses Rs.1,28,000
(v) Preliminary Expenses written off Rs.10,000
(vi) DonationtoapoliticalpartygivenbythecompanyRs.10,000.
Prepare a statement showing pre-incorporation and post-incorporation profit for the year ended 31stMarch,2020.

Answer
Statement showing the calculation of Profits for the pre-incorporation and post-
incorporation periods for the year ended 31stMarch,2020
Particulars Total Allocation Pre- Post-
basis incorporation incorporation
Rs. Rs.
Gross Profit 3,90,800 Sales 39,080 3,51,720
Less: Directors’ fee 30,000 Post 30,000
Bad debts 7,200 Sales 720 6,480
Advertising 24,000 Time 6,000 18,000
Salaries & general 1,28,000 Time 32,000 96,000
expenses
Preliminary expenses 10,000 Post 10,000
Donation to Political 10,000 Post 10,000
Party
Net Profit 1,81,600 1,81,240
Pre-incorporation profit transferred 360
to Capital Reserve
Working Notes:
1. Salesratio
Particulars Rs.
Sales for period up to 30.06.2019 (4,80,000 X 3/6) 2,40,000
 Sales for period from 01.07.2019 to 31.03.2020 (24,00,000 – 2,40,000) 21,60,000
Thus, Sales Ratio = 1 : 9
2. Timeratio
1stApril, 2019 to 30 June, 2019: 1stJuly, 2019 to 31stMarch, 2020
= 3 months: 9 months = 1: 3
Thus, Time Ratio is 1: 3
Ch.7 – ACCOUNITNG FOR BONUS ISSUE & RIGHT ISSUE
QUESTION 1 (RTP DEC 2021) (10 MARKS)
Raman Ltd. gives the following information as at 31st March, 2021:
`
Authorised capital:
45,000 12% Preference shares of ` 10 each 4,50,000
6,00,000 Equity shares of ` 10 each 60,00,000
64,50,000
Issued and Subscribed capital:
36,000 12% Preference shares of ` 10 each fully paid 3,60,000
4,05,000 Equity shares of ` 10 each, ` 8 paid up 32,40,000
Reserves and surplus:
General Reserve 5,40,000
Capital Redemption Reserve 1,80,000
Securities premium (collected in cash) 1,12,500
Profit and Loss Account 9,00,000
On 1st April, 2021, the Company has made final call @ ` 2 each on 4,05,000 equity shares. The call
money was received by 20th April, 2021. Thereafter, the company decided to capitalize its reserves by
way of bonus at the rate of one share for every four shares held.
Show necessary journal entries in the books of the company.
ANSWER
1. Journal Entries in the books of Raman Ltd.
` `
1-4-2021 Equity share final call A/c Dr. 8,10,000
To Equity share capital A/c 8,10,000
(For final calls of ` 2 per share on 4,05,000
equity shares due as per Board’s Resolution
dated….)
20-4-2021 Bank A/c Dr. 8,10,000
To Equity share final call A/c 8,10,000
(For final call money on 4,05,000 equity
shares received)
Securities Premium A/c Dr. 1,12,500
Capital Redemption Reserve A/c Dr. 1,80,000
General Reserve A/c Dr. 5,40,000
Profit and Loss A/c (b.f.) Dr. 1,80,000
To Bonus to shareholders A/c 10,12,500
(For making provision for bonus issue of
one share for every four shares held)
Bonus to shareholders A/c Dr. 10,12,500
To Equity share capital A/c 10,12,500
(For issue of bonus shares)

QUESTION 2 (MTP DEC2021) (5 MARKS)

Following is the extract of the Balance Sheet of ABC Ltd. as at 31st March, 2021:
 `
Authorised capital:
45,000 12% Preference shares of ` 10 each 4,50,000
6,00,000 Equity shares of ` 10 each 60,00,000
64,50,000
Issued and Subscribed capital:
36,000 12% Preference shares of ` 10 each fully paid 3,60,000
4,05,000 Equity shares of ` 10 each, ` 8 paid up 32,40,000
Reserves and surplus:
General Reserve 5,40,000
Capital Redemption Reserve 1,80,000
Securities premium (collected in cash) 1,12,500
Profit and Loss Account 9,00,000

On 1st April, 2021, the Company has made final call @ ` 2 each on 4,05,000 equity shares. The call
money was received by 20th April, 2021. Thereafter, the company decided to capitalize its reserves
by way of bonus at the rate of one share for every four shares held.
You are required to give necessary journal entries in the books of the ABC Ltd. and prepare the relevant
extract of the balance sheet as on 30th April, 2021 after bonus issue.

ANSWER
Journal Entries in the books of ABC Ltd.

` `
1-4-2021 Equity share final call A/c Dr. 8,10,000
To Equity share capital A/c 8,10,000
(For final calls of ` 2 per share on 4,05,000 equity
shares due as per Board’s Resolution dated….)
20-4-2021 Bank A/c Dr. 8,10,000
To Equity share final call A/c 8,10,000
(For final call money on 4,05,000 equity shares
received)
Securities Premium A/c Dr. 1,12,500
Capital redemption reserve A/c Dr. 1,80,000
General Reserve A/c Dr. 5,40,000
Profit and Loss A/c (b.f.) Dr. 1,80,000
To Bonus to shareholders A/c 10,12,500
(For making provision for bonus issue of one share
for every four shares held)
Bonus to shareholders A/c Dr. 10,12,500
To Equity share capital A/c 10,12,500
(For issue of bonus shares)

Extract of Balance Sheet as at 30th April, 2021 (after

bonus issue)
`
 Authorized Capital
45,000 12% Preference shares of ` 10 each 4,50,000
6,00,000 Equity shares of ` 10 each 60,00,000
Issued and subscribed capital
36,000 12% Preference shares of `10 each, fully paid 3,60,000
5,06,250 Equity shares of ` 10 each, fully paid 50,62,500
(Out of the above, 1,01,250 equity shares @ ` 10 each were issued by way of bonus
shares)
Reserves and surplus
Profit and Loss Account 7,20,000

Question 3 (July 2021) [5 MARKS]

Question 4 (JAN 2021) [5 MARKS]

FollowingitemsappearintheTrailBalanceofStarLtd.ason31stMarch,2019:

Particulars `
80,000 Equity shares of `10 each, ` 8 paid-up 6,40,000
Capital Reserve (including `45,000 being profit on sale of Machinery) 1,10,000
Revaluation Reserve 80,000
Capital Redemption Reserve 75,000
Securities Premium 60,000
General Reserve 2,10,000
Profit & Loss Account (Cr. Balance) 1,00,000
On 1stApril,2019, the Company has made final call on Equity shares@` 2 per share.The entire
money was received in the month of April, 2019.
On 1stJune, 2019, the Company decided to issue to Equity shareholders bonus shares at the rate of
2 shares for every 5 shares held and for this purpose, it was decided that there should be minimum
reduction in freereserves.
Pass necessary journal entries in the Books of Star Ltd.

Answer
Journal Entries in the books of StarLtd.

2019 Dr. Cr.

` `
April 1 Equity Share Final Call A/c Dr. 1,60,000
To Equity Share Capital A/c 1,60,000
(Final call of ` 2 per share on 80,000
equity shares made due)
Bank A/c Dr. 1,60,000
To Equity Share Final Call A/c 1,60,000
(Final call money on 80,000 equity
shares received)

June 1 Capital Redemption Reserve A/c Dr. 75,000

Capital Reserve Dr. 45,000*
Securities Premium A/c Dr. 60,000
General Reserve A/c (b.f.) Dr. 1,40,000**
To Bonus to Shareholders A/c 3,20,000
(Bonus issue of two shares for every five
shares held, by utilizing various reserves
as per Board’s resolution
dated…….)

Bonus to Shareholders A/c Dr. 3,20,000

 To Equity Share Capital A/c 3,20,000
(Capitalization of profit)
* consideringit as free reserve as it has been realized.

** Alternatively, different combination of profit and loss balance and general

reservemay also beused.

Question 5 (NOV 2019) [5 marks]

FollowingistheextractofBalanceSheetofPremLtd.asat31 stMarch,2018:

`
Authorized capital:
3,00,000 equity shares of `10 each 30,00,000
25,000,10% preference shares of `10 each 2,50,000
32,50,000
Issued and subscribed capital:
2,70,000 equity shares of ` 10 each fully paid up 27,00,000
24,000, 10% preference shares of ` 10 each fully paid up 2,40,000
29,40,000
Reserves and surplus:
General reserve 3,60,000
Capital redemption reserve 1,20,000
Securities premium (collected in cash) 75,000
Profit and loss account 6,00,000
11,55,000
On 1stApril, 2018, the company decided to capitalize its reserves by way of bonus at the rate of two
shares for every five shares held.
Show necessary journal entries in the books of the company and prepare the extract of the balance
sheet after bonus issue.

Answer
PremLtd.
Journal Entries
Dr. Cr.
April 1 Capital Redemption Reserve A/c Dr. 1,20,000
Securities Premium A/c Dr. 75,000
General Reserve A/c Dr. 3,60,000
Profit and Loss A/c (b.f.) Dr. 5,25,000
To Bonus to Equity Shareholders A/c 10,80,000
(Bonus issue @ two shares for every five
shares held by utilizing various reserves as
per Board’s Resolution dated...)
Bonus to Shareholders A/c Dr. 10,80,000
To Equity Share Capital A/c 10,80,000
(Issue of bonus shares)
 Balance Sheet (Extract) as on 1stApril, 2018 (after bonus issue)

Particulars Notes Amount (`)

Equity and Liabilities
1 Shareholders’ funds
a Share capital 1 40,20,000
b Reserves and Surplus 2 75,000

Notes to Accounts

1 Share Capital (`)

Authorized share capital:
3,78,000* Equity shares of ` 10 each 37,80,000*
25,000 10% Preference shares of ` 10 each 2,50,000
Total 40,30,000
Issued, subscribed and fully paid share capital:
3,78,000 Equity shares of ` 10 each, fully paid
(Out of above, 1,08,000 equity shares @ ` 10each
were issued by way of bonus) 37,80,000
24,000 10% Preference shares of ` 10 each 2,40,000
Total 40,20,000
2
Reserves and Surplus
Capital Redemption Reserve 1,20,000 Nil
Less: Utilized 1,20,000
Securities Premium 75,000
Less: Utilised for bonus issue (75,000) Nil
General reserve 3,60,000
Less: Utilised for bonus issue (3,60,000) Nil
Profit & Loss Account 6,00,000
Less: Utilised for bonus issue (5,25,000) 75,000
Total 75,000

Note: *Authorized capitalhas been increased by the minimum required amount i.e.`

7,80,000 (37,80,000 – 30,00,000) in the above solution.

Question 7 (RTP NOV 2021)

Raman Ltd. gives the following information as at 31stMarch,2021:

`
Authorised capital:
45,000 12% Preference shares of ` 10 each 4,50,000
6,00,000 Equity shares of ` 10 each 60,00,000
64,50,000
Issued and Subscribed capital:
 36,000 12% Preference shares of ` 10 each fully paid 3,60,000
4,05,000 Equity shares of ` 10 each, ` 8 paid up 32,40,000
Reserves and surplus:
General Reserve 5,40,000
Capital Redemption Reserve 1,80,000
Securities premium (collected in cash) 1,12,500
Profit and Loss Account 9,00,000
On 1stApril, 2021, the Company has made final call @ ` 2 each on 4,05,000 equity shares. The call
money was received by 20thApril, 2021. Thereafter, the company decided to capitalize its reserves by
way of bonus at the rate of one share for every four shares held.
Show necessary journal entries in the books of the company.

Answer
Journal Entries in the books of Raman Ltd.
` `
1-4-2021 Equity share final call A/c Dr. 8,10,000
To Equity share capital A/c 8,10,000
(For final calls of ` 2 per share on 4,05,000
equitysharesdueasperBoard’sResolution
dated….)
20-4-2021 Bank A/c Dr. 8,10,000
To Equity share final call A/c 8,10,000
(For final call money on 4,05,000 equity
shares received)
Securities Premium A/c Dr. 1,12,500
Capital Redemption Reserve A/c Dr. 1,80,000
General Reserve A/c Dr. 5,40,000
Profit and Loss A/c (b.f.) Dr. 1,80,000
To Bonus to shareholders A/c 10,12,500
(For making provision for bonus issue of
one share for every four sharesheld)
Bonus to shareholders A/c Dr. 10,12,500
To Equity share capital A/c 10,12,500
(For issue of bonus shares)

Question 8 (RTP NOV 2021)

Super company offers new shares of ` 100 each at 20% premium to existing shareholders
onthebasisoneforfourshares.Thecum-rightmarketpriceofashareis`190.
You are required to calculate the value of a right share.

Answer
Value of right = Cum-right value of the share – Ex-right value of the share (as computed in WorkingNote)
= ` 190 – ` 176 = ` 14 pershare.
Working Note:
Ex-right value of the shares
= (Cum-right value of the existing shares + Rights shares x Issue Price) / (Existing No. of
shares + No. of right shares) = (` 190 X 4 Shares + ` 120 X 1 Share) / (4 + 1)Shares
 = ` 880 / 5 shares = ` 176 per share.

Question 9 (RTP MAY 2021)

Following is the information of Umesh Ltd. as at31stMarch, 2021:

`
Authorized capital:
30,000 12% Preference shares of ` 10 each 3,00,000
4,00,000 Equity shares of ` 10 each 40,00,000
43,00,000
Issued and Subscribed capital:
24,000 12% Preference shares of ` 10 each fully paid 2,40,000
3,00,000 Equity shares of ` 10 each, ` 8 paid up 24,00,000
Reserves and surplus:
General Reserve 3,60,000
Capital Redemption Reserve 1,20,000
Securities premium (collected in cash) 75,000
Profit and Loss Account 6,00,000

On 1stApril, 2021, the Company has made final call @ ` 2 each on 3,00,000 equity shares. The call
money was received by 20thApril, 2021. Thereafter, the company decided to capitalize its reserves by
way of bonus at the rate of one share for every four shares held.
You are required to prepare necessary journal entries in the books of the company.

Answer
Journal Entries in the books of UmeshLtd.
` `
1-4-2021 Equity share final call A/c Dr. 6,00,000
To Equity share capital A/c 6,00,000
(For final calls of ` 2 per share on 3,00,000
equitysharesdueasperBoard’sResolution
dated….)
20-4-2021 Bank A/c Dr. 6,00,000
To Equity share final call A/c 6,00,000
(For final call money on 3,00,000 equity
sharesreceived)
Securities Premium A/c Dr. 75,000
Capital redemption reserve A/c Dr. 1,20,000
General Reserve A/c Dr. 3,60,000
Profit and Loss A/c (b.f.) Dr. 1,95,000
To Bonus to shareholders A/c 7,50,000
(For making provision for bonus issue of one
share for every four shares held)
Bonus to shareholders A/c Dr. 7,50,000
To Equity share capital A/c 7,50,000
(For issue of bonus shares)
Question 10 (RTP MAY 2021)

(a) Beta Ltd. having share capital of 20,000 equity shares of `10 each decides to issue rights share at the
ratio of 1 for every 8 shares held at par value. Assuming all the share holders accepted the rights
issue and all money was duly received, pass journal entry in the books of thecompany.
(b) Omega Ltd. offers new shares of ` 100 each at 25% premium to existing shareholders on the basis
one for five shares. The cum-right market price of a share is ` 200. You are required to calculate
the (i) Ex-right value of a share; (ii) Value of a right share?

Answer

(a)

` `
Bank A/c Dr. 25,000
To Equity share capital A/c 25,000
(For rights share issued at par value in the ratio of 1:8
equitysharesdueasperBoard’sResolutiondated….)
Working Note:
Number of Rights shares to be issued- 20,000/8x1= 2,500 shares
(b) Ex-right value of the shares
= (Cum-right value of the existing shares + Rights shares x Issue Price) / (Existing No.of shares
+ No. of right shares) = (` 200 X 5 Shares + ` 125 X 1 Share)/(5+1) Shares
= ` 1,125 / 6 shares = ` 187.50 per share.
Valueofright = Cum-right value of the share – Ex-right value of theshare
= ` 200 – ` 187.50 = ` 12.50 per share.

Question11 (RTP NOV 2020)

Following is the extract of the Balance Sheet of Madhu Ltd.as at 31stMarch,2020

`
Authorized capital:
45,000 12% Preference shares of ` 10 each 4,50,000
6,00,000 Equity shares of ` 10 each 60,00,000
64,50,000
Issued and Subscribed capital:
36,000 12% Preference shares of ` 10 each fully paid 3,60,000
4,05,000 Equity shares of ` 10 each, ` 8 paid up 32,40,000
Reserves and surplus:
General Reserve 5,40,000
Capital Redemption Reserve 1,80,000
Securities premium (collected in cash) 1,12,500
Profit and Loss Account 9,00,000
 On 1stApril, 2020, the Company has made final call @ ` 2 each on 4,05,000 equity shares. The call
money was received by 20thApril, 2020. Thereafter, the company decided to capitalize its reserves by
way of bonus at the rate of one share for every four shares held
byutilizingthebalanceofprofitandlossaccounttotheminimumextent.
You are required to prepare necessary journal entries in the books of the company and prepare the
relevant extract of the balance sheet as on 30thApril, 2020 after bonus issue.
Answer
Journal Entries in the books of MadhuLtd.
` `
1-4-2020 Equity share final call A/c Dr. 8,10,000
To Equity share capital A/c 8,10,000
(For final calls of ` 2 per share on
4,05,000 equity shares due as per
Board’s Resolution dated….)
20-4-2020 Bank A/c Dr. 8,10,000
To Equity share final call A/c 8,10,000
(For final call money on 4,05,000 equity
shares received)
Securities Premium A/c Dr. 1,12,500
Capital redemption reserve A/c Dr. 1,80,000
General Reserve A/c Dr. 5,40,000
Profit and Loss A/c (b.f.) Dr. 1,80,000
To Bonus to shareholders A/c 10,12,500
(For making provision for bonus issue of
one share for every four shares held)

Bonus to shareholders A/c Dr. 10,12,500

To Equity share capital A/c 10,12,500
(For issue of bonus shares)

ExtractofBalanceSheetasat30thApril,2020(afterbonusissue)

`
Authorized Capital
45,000 12% Preference shares of ` 10 each 4,50,000
6,00,000 Equity shares of ` 10 each 60,00,000
Issued and subscribed capital
36,000 12% Preference shares of ``10 each, fully paid 3,60,000
5,06,250 Equity shares of ` 10 each, fully paid 50,62,500
(Out of the above, 1,01,250 equity shares @ ` 10 each were issued by way
of bonus shares)
Reserves and surplus
Profit and Loss Account 7,20,000

Question 12 (RTP NOV 2020)

Omegacompanyoffersnewsharesof`100eachat25%premiumtoexistingshareholders on the basis one
for five shares. The cum-right market price of a share is `200.
 You are required to calculate the (i) Ex-right value of a share; (ii) Value of a right share?
Answer
Ex-right value of theshares
= (Cum-right value of the existing shares + Rights shares x Issue Price) / (ExistingNo. of shares
+ No. of right shares) = (` 200 X 5 Shares + ` 125 X 1 Share) / (5 + 1) Shares = ` 1,125
/ 6 shares = `187.50 per share.
Value of right = Cum-right value of the share – Ex-right value of the share
= ` 200 – ` 187.50 = ` 12.50 pershare.

Question 13 (RTP MAY 2020)

The following is the summarised Balance Sheet of Bumbum Limited as at 31 st March,2019:
`
Sources offunds
Authorizedcapital
50,000 Equity shares of ` 10 each 5,00,000
10,000 Preference shares of ` 100 each (8% redeemable) 10,00,000
15,00,000
Issued, subscribed and paid up
30,000 Equity shares of ` 10 each 3,00,000
5,000, 8%Redeemable Preference shares of ` 100 each 5,00,000
Reserves & Surplus
Securities Premium 6,00,000
General Reserve 6,50,000
Profit & Loss A/c 40,000
Trade payables 4,20,000
25,10,000
Application of funds
PPE (net) 7,80,000
Investments (market value ` 5,80,000) 4,90,000
Deferred Tax Assets 3,40,000
Trade receivables 6,20,000
Cash & Bank balance 2,80,000
25,10,000
In Annual General Meeting held on 20thJune, 2019 the company passed the following resolutions:
(vii) To split equity share of ` 10 each into 5 equity shares of ` 2 each from 1stJuly,2019.
(viii) To redeem 8% preference shares at a premium of5%.
(ix) To issue fully paid bonus shares in the ratio of one equity share for every 3 shares held on
recorddate.
On 10thJuly, 2019 investments were sold for ` 5,55,000 and preference shares were redeemed.
The bonus issue was concluded by 12thSeptember, 2019
You are required to journalize the above transactions including cash transactions and prepare Balance
Sheet as at 30thSeptember, 2019. All working notes should form part of your answer.
Answer
Bumbum Limited
 Journal Entries
2019 Dr. (`) Cr. (`)
July 1 Equity Share Capital A/c (`10each) Dr. 3,00,000
To Equity share capital A/c (` 2 each) 3,00,000
(Being equity share of ` 10 each splitted into 5 equity
shares of ` 2 each) {1,50,000 X 2}
July 10 Cash & Bank balance A/c Dr. 5,55,000
To Investment A/c 4,90,000
To Profit & Loss A/c 65,000
(Being investment sold out and profit on sale credited to
Profit & Loss A/c)
July 10 8% Redeemable preference share capital A/c Dr. 5,00,000
Premium on redemption of preference share A/c Dr. 25,000
To Preference shareholders A/c 5,25,000
(Being amount payable to preference share holders on
redemption)
July 10 Preference shareholders A/c Dr. 5,25,000
To Cash & bank A/c 5,25,000
(Being amount paid to preference shareholders)
July 10 General reserve A/c Dr. 5,00,000
To Capital redemption reserve A/c 5,00,000
(Being amount equal to nominal value of preference
shares transferred to Capital Redemption Reserve A/c
on its redemption as per the law)
Sept. 12 Capital Redemption Reserve A/c Dr. 1,00,000
To Bonus to shareholders A/c 1,00,000
(Being balance in capital redemption
reserve capitalized to issue bonus shares)
Sept. 12 Bonus to shareholders A/c Dr. 1,00,000
To Equity share capital A/c 1,00,000
(Being 50,000 fully paid equity shares of ` 2 each issued
as bonus in ratio of 1 share for every 3 shares held)
Sept. 30 Securities Premium A/c Dr. 25,000
To Premium on redemption of preference shares A/c 25,000
(Being premium on preference shares adjusted from
securities premium account)

Balance Sheet as at 30thSeptember,2019

Particulars Notes `
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 4,00,000
b Reserves and Surplus 2 12,30,000
2 Current liabilities
a Trade Payables 4,20,000
Total 20,50,000
Assets
1 Non-current assets
 a PPE 7,80,000
b Deferred tax asset 3,40,000
2 Current assets
Trade receivables 6,20,000
Cash and cash equivalents 3,10,000
Total 20,50,000
Notes to accounts
1 Share Capital ` `
Authorized share capital
2,50,000 Equity shares of ` 2 each 5,00,000
10,000 8% Preference shares of `100 each 10,00,000 15,00,000
Issued, subscribed and paid up
2,00,000 Equity shares of ` 2 each 4,00,000
2
Reserves and Surplus
Securities Premium A/c
Balance as per balance sheet 6,00,000
Less: Adjustment for premium on preference
Shares (25,000)
Balance 5,75,000
Capital Redemption Reserve (5,00,000-1,00,000) 4,00,000
General Reserve (6,50,000 – 5,00,000) 1,50,000
Profit & Loss A/c 40,000
Add: Profit on sale of investment 65,000 1,05,000
Total 12,30,000

Working Notes:

`
1. Redemption of preferenceshares
5,000 Preference shares of ` 100 each 5,00,000
Premium on redemption @ 5% 25,000
Amount Payable 5,25,000
2. Issue of BonusShares
Existing equity shares after split (30,000 x 5) 1,50,000 shares
Bonus shares (1 share for every 3 shares held) to be issued 50,000 shares
3. Cash and BankBalance
Balance as per balance sheet 2,80,000
Add: Realization on sale of investment 5,55,000
8,35,000
Less: Paid to preference share holders (5,25,000)
Balance 3,10,000

Question 14 (RTP MAY 2020)

Zeta Ltd. has decided to increase its existing share capital by making rights issue to its existing
 shareholders. Zeta Ltd. is offering one new share for every two shares held by the shareholder. The
market value of the share is ` 360 and the company is offering one share of ` 180 each. Calculate the
value of a right. What should be the ex-right market price of ashare?
Answer
Ex-right value oftheshares =
(Cum-right value of the existing shares + Rights shares x Issue Price) / (Existing No. of shares +
Rights No. of shares) = (` 360 x 2 Shares + ` 180 x 1 Share) / (2 + 1) Shares
= ` 900 / 3 shares = ` 300 pershare.
Valueofright = Cum-right value of the share – Ex-right value of theshare
= ` 360 – ` 300 = ` 60 pershare.
Hence, any one desirous of having a confirmed allotment of one share from the company at` 180 will
have to pay ` 120 (2 shares x ` 60) to an existing shareholder holding 2
sharesandwillingtorenouncehisrightofbuyingoneshareinfavourofthatperson.

Question 15 (MTP APRIL 2021) [4 MARKS]

Manu Ltd. gives the following information as at 31stMarch,2021:

Rs.
Issued and Subscribed capital:
24,000 12% Preference shares of Rs. 10 each fully paid 2,40,000
2,70,000 Equity shares of Rs. 10 each, Rs. 8 paid up 21,60,000
Reserves and surplus:
General Reserve 3,60,000
Capital Redemption Reserve 1,20,000
Securities premium (collected in cash) 75,000
Profit and Loss Account 6,00,000

On 1stApril, 2021, the Company has made final call @ Rs. 2 each on 2,70,000 equity shares. The call
money was received by 20thApril, 2021. Thereafter, the company decided tocapitalizeits reserves
by way of bonus at the rate of one share for every four shares held. You are required to prepare
necessary journal entries in the books of the company on 30th April, 2021 for these transactions.

Answer
JournalEntries
Rs. Rs.
1-4-2021 Equity share final call A/c Dr. 5,40,000
To Equity share capital A/c 5,40,000
(For final calls of Rs. 2 per share on 2,70,000 equity
shares due as per Board’s Resolution dated….)
20-4-2021 Bank A/c Dr. 5,40,000
To Equity share final call A/c 5,40,000
(For final call money on 2,70,000 equity shares
received)
Securities Premium A/c Dr. 75,000
Capital redemption reserveA/c Dr. 1,20,000
General Reserve A/c Dr. 3,60,000
Profit and Loss A/c (b.f.) Dr. 1,20,000
To Bonus to shareholders A/c
(For making provision for
bonus issue of one share for
every four shares held)
6,75,000

Bonus to shareholders A/c Dr. 6,75,000

To Equity share capital A/c
(For issue of bonus shares)
6,75,000
 Ch.8 – REDEMPTION OF PREFERENCE SHARES

QUESTION 1 (RTP DEC 2021) (10 MARKS)

Neeraj Ltd.’s capital structure consists of 45,000 Equity Shares of ` 10 each fully paid up and 3,000
9% Redeemable Preference Shares of ` 100 each fully paid up as on 31.03.2021. The other
particulars as at 31.03.2021 are as follows:
Amount (`)
General Reserve 1,80,000
Profit & Loss Account 90,000
Investment Allowance Reserve (not free for distribution as dividend) 22,500
Cash at bank 2,92,500
Preference Shares are to be redeemed at a premium of 10%. For the purpose of redemption, the
directors are empowered to make fresh issue of Equity Shares at par after utilizing the undistributed
reserve & surplus, subject to the conditions that a sum of ` 60,000 shall be retained in General
Reserve and which should not be utilized. Company also sold investment of 6,750 Equity Shares in
Kumar Ltd., costing `67,500 at ` 9 per share.
Pass Journal entries to give effect to the above arrangements and also show how the relevant items
will appear in the Balance Sheet as at 31.03.2021 of Neeraj Ltd. after the redemption is carried out.
ANSWER

1. Journal Entries

Date Particulars Dr. (`) Cr. (`)

Bank A/c Dr. 1,26,750
To Equity Share Capital A/c 1,26,750
(Being the issue of 12,675 Equity Shares of
` 10 each as per Board’s Resolution No ... dated….)
9% Redeemable Preference Share Capital A/c Dr. 3,00,000
Premium on Redemption of Preference Shares A/c Dr. 30,000
To Preference Shareholders A/c 3,30,000
(Being the amount paid on redemption transferred to
Preference Shareholders Account)
Bank A/c Dr. 60,750
Profit and Loss A/c (loss on sale) A/c Dr. 6,750
To Investment A/c 67,500
(Being investment sold at loss of ` 6,750)
Preference Shareholders A/c Dr. 3,30,000
To Bank A/c 3,30,000
(Being the amount paid on redemption of preference
shares)
Profit & Loss A/c Dr. 30,000
To Premium on Redemption of
Preference Shares A/c 30,000
(Being the premium payable on redemption is
adjusted against Profit & Loss Account)
General Reserve A/c Dr. 1,20,000
 Profit & Loss A/c Dr. 53,250
To Capital Redemption Reserve A/c 1,73,250
(Being the amount transferred to Capital Redemption
Reserve Account)
Balance Sheet as at 31.3.2021[Extracts]
Particulars Notes `
No.
EQUITY AND LIABILITIES
Shareholders’ funds
Share capital 1 5,76,750

b Reserves and Surplus 2 2,55,750

ASSETS
2. Current Assets
Cash and cash equivalents
(2,92,500 + 1,26,750+ 60,750 – 3,30,000) 1,50,000
Notes to accounts

1. Share Capital
57,675 Equity shares (45,000 + 12,675) of `10 each fully paid up 5,76,750
2. Reserves and Surplus
General Reserve 60,000
Profit and loss account NIL
Capital Redemption Reserve 1,73,250
Investment Allowance Reserve 22,500
2,55,750

Working Note:
Number of Shares to be issued for redemption of Preference Shares:
Face value of shares redeemed ` 3,00,000 Less:
Profit available for distribution as dividend:
General Reserve: ` (1,80,000-60,000) ` 1,20,000 Profit
and Loss (90,000 less 30,000 set aside for
adjusting premium payable on redemption of Pref.
shares less 6,750 loss on sale of investments) ` 53,250
` (1,73,250)
` 1,26,750
Therefore, No. of shares to be issued = ` 1,26,750/`10 = 12,675 Shares.
QUESTION 2 ( MTP DEC 2021) (10 MARKS)
The Capital structure of a company BK Ltd. consists of 30,000 Equity Shares of ` 10 each fully paid up
and 2,000 9% Redeemable Preference Shares of ` 100 each fully paid up as on 31.03.2020. the
other particulars as at 31.03.2020 are as follows:
General Reserve 1,20,000
Profit &Loss Account 60,000
 Investment Allowance Reserve (not free for distribution as 15,000
dividend)
Cash at bank 1,95,000

Preference Shares are to be redeemed at a premium of 10%. For the purpose of redemption, the
directors are empowered to make fresh issue of Equity Shares at par after utilizing the undistributed
reserve & surplus, subject to the conditions that a sum of ` 40,000 shall be retained in General
Reserve and which should not be utilized. Company also sold investment of 4500 Equity Shares in
G Ltd., costing `45,000 at ` 9 per share.
You are required to pass Journal entries to give effect to the above arrangements

ANSWER
Journal Entries
Date Particulars Dr. (`) Cr. (`)
Bank A/c Dr. 84,500
To Equity Share Capital A/c 84,500
(Being the issue of 8,450 Equity Shares of
` 10 each as per Board’s Resolution
No…..dated…….)
9% Redeemable Preference Share Capital A/c Dr. 2,00,000
Premium on Redemption of Preference Shares A/c Dr. 20,000
To Preference Shareholders A/c 2,20,000
(Being the amount paid on redemption transferred to
Preference Shareholders Account)
Bank A/c Dr. 40,500
Profit and Loss A/c (loss on sale) A/c Dr. 4,500
To Investment A/c 45,000
(Being investment sold at loss of ` 4,500)
Preference Shareholders A/c Dr. 2,20,000
To Bank A/c 2,20,000
(Being the amount paid on redemption of
preference shares)
Profit & Loss A/c Dr. 20,000
To Premium on Redemption of 20,000
Preference Shares A/c
(Being the premium payable on redemption is
adjusted against Profit & Loss Account)
General Reserve A/c Dr. 80,000
Profit & Loss A/c Dr. 35,500
To Capital Redemption Reserve A/c 1,15,500
(Being the amount transferred to Capital
Redemption Reserve Account)
Working Note:
Number of Shares to be issued for redemption of Preference Shares:
Face value of shares redeemed `2,00,000
Less: Profit available for distribution as dividend:
General Reserve: ` (1,20,000-40,000)
 `80,00
0 Profit and Loss (60,000 less 20,000 set aside for adjusting
premium payable on redemption of

Pref. shares less 4,500 loss on sale of investments) `35,500 (1,15,500)

` 84,500.
Therefore, No. of shares to be issued = 84,500/`10 = 8,450 shares.

QUESTION 3 (MTP DEC2021) (8 MARKS)

The capital structure of Beta Ltd. consists of 20,000 Equity Shares of `10 each fully paid up and 1,000
8%Redeemable Preference Shares of `100 each fully paid up (issued on 1.4.2019).
Undistributed reserve and surplus stood on 31.3.21 as: General Reserve ` 80,000; Profit and Loss
Account ` 20,000; Investment Allowance Reserve is ` 10,000 out of which ` 5,000 is not ascertained
as free reserve; Cash at bank amounted to ` 98,000.
Preference shares are redeemed at a Premium of 10% on 31.3.21 and for the purpose of redemption,
the directors make fresh issue of Equity Shares at par after utilising the undistributed reserve and
surplus, subject to the conditions that a sum of ` 20,000 shall be retained in general reserve and which
should not be utilised.
You are required to give Journal Entries to give effect to the above arrangements and show how the relevant
items will appear in the Balance Sheet of the company after the redemption is carried out.

ANSWER
In the books of Beta Ltd.
Journal Entries

Date Particulars Dr. (`) Cr. (`)

Bank A/c Dr. 25,000
To Equity Share Capital A/c 25,000
(Being the issue of 2,500 Equity Shares of ` 10 each
at par, as per Board’s Resolution No…..dated…….)
8% Redeemable Preference Share Capital A/c Dr. 1,00,000
Premium on Redemption of Preference Shares A/c Dr. 10,000
To Preference Shareholders A/c 1,10,000
(Being the amount paid on redemption transferred to
Preference Shareholders Account)
Preference Shareholders A/c Dr. 1,10,000
To Bank A/c 1,10,000
(Being the amount paid on redemption of preference
shares)
Profit & Loss A/c Dr. 10,000
To Premium on Redemption of Preference 10,000
Shares A/c
(Being the premium payable on redemption is adjusted
against Profit & Loss Account)
General Reserve A/c Dr. 60,000
Profit & Loss A/c Dr. 10,000
 Investment Allowance Reserve A/c Dr. 5,000
To Capital Redemption Reserve A/c 75,000
(Being the amount transferred to Capital Redemption
Reserve Account as per the requirement of the Act)

Balance Sheet as on ………[Extracts]

Particulars Notes No. `

EQUITY AND LIABILITIES
1. Shareholders’ funds
a Share capital 1 2,25,000
b Reserves and Surplus 2 1,00,000
Total ?
ASSETS
2. Current Assets
Cash and cash equivalents 13,000
(98,000 + 25,000 – 1,10,000)
Total ?
Notes to accounts
1. Share Capital
22,500 Equity shares (20,000 + 2,500) of `10 each fully paid up 2,25,000
2. Reserves and Surplus
General Reserve 20,000
Capital Redemption Reserve 75,000
Investment Allowance Reserve 5,000
1,00,000
Working Note:
No of Shares to be issued for redemption of Preference Shares:
Face value of shares redeemed `1,00,000
Less: Profit available for distribution as dividend:
General Reserve : `(80,000-20,000) `60,000
Profit and Loss (20,000 – 10,000 set aside for
adjusting premium payable on redemption of
preference shares) `10,000
Investment Allowance Reserve: (` 10,000-5,000) ` 5,000 (` 75,000)
` 25,000
Therefore, No. of shares to be issued = 25,000/`10 = 2,500 shares.

Question 4 (JAN 2021) [12 MARKS]

The Capital structure of a company BK Ltd., consists of 30,000 Equity Shares of` 10 each fully paid
up and 2,000 9% Redeemable Preference Shares of ` 100 each fully paid
upason31.03.2020.theotherparticularsasat31.03.2020areasfollows:

Amount (`)
 General Reserve 1,20,000
Profit &Loss Account 60,000
Investment Allowance Reserve (not free for distribution as 15,000
dividend)
Cash at bank 1,95,000

Preference Shares are to be redeemed at a premium of 10%. For the purpose of redemption, the
directors are empowered to make fresh issue of Equity Shares at per after utilizing the undistributed
reserve &surplus, subject to the conditions that a sumof
` 40,000 shall be retained in General Reserve and which should not be utilized.
Company also sold investment of 4500 Equity Shares in G Ltd., costing `45,000 at ` 9 pershare.

Pass Journal entries to give effect to the above arrangements and also show how the relevant items
will appear in the Balance Sheet as at 31.03.2020 of BK Ltd., after the redemption is carried out.

Answer
JournalEntries
Date Particulars Dr. (`) Cr. (`)
Bank A/c Dr. 84,500
To Equity Share Capital A/c 84,500
(Being the issue of 8,450 Equity Shares of
` 10 each as per Board’s Resolution
No…..dated…….)
9% Redeemable Preference Share Capital A/c Dr. 2,00,000
Premium on Redemption of Preference Shares A/c Dr. 20,000
To Preference Shareholders A/c 2,20,000
(Being the amount paid on redemption transferred to
Preference Shareholders Account)
Bank A/c Dr. 40,500
Profit and Loss A/c (loss on sale) A/c Dr. 4,500
To Investment A/c 45,000
(Being investment sold at loss of ` 4,500)
Preference Shareholders A/c Dr. 2,20,000
To Bank A/c 2,20,000
(Being the amount paid on redemption of
preferenceshares)
Profit & Loss A/c Dr. 20,000
To Premium on Redemption of 20,000
Preference SharesA/c
(Being the premium payable on redemption is
adjusted against Profit & Loss Account)
General Reserve A/c Dr. 80,000
Profit & Loss A/c Dr. 35,500
To Capital Redemption Reserve A/c 1,15,500
(Being the amount transferred to Capital
Redemption ReserveAccount)
 Balance Sheetason ........... [Extracts]

Particulars Notes `
No.
EQUITY AND LIABILITIES
1. Shareholders’funds
a Sharecapital 1 3,84,500
b Reserves and Surplus 2 1,70,500
ASSETS
2. Current Assets
Cash and cash equivalents 1,00,000
(1,95,000 + 84,500+ 40,500 – 2,20,000)

Notes to accounts

1. Share Capital
38,450 Equity shares (30,000 + 8,450) of `10 each fully paid up 3,84,500
2. Reserves and Surplus
General Reserve 40,000
Profit and loss account NIL
Capital Redemption Reserve 1,15,500
Investment Allowance Reserve 15,000
1,70,500
Working Note:

Number of Shares to be issued for redemption of Preference Shares:

Face value ofsharesredeemed `2,00,000 Less:

Profit available for distribution asdividend:

General Reserve:`(1,20,000-40,000) `80,000 Profit

and Loss (60,000 less 20,000 set asidefor

adjusting premium payable on redemption of Pref.

shares less 4,500 loss on sale ofinvestments) `35,500

`(1,15,500)

`84,500

Therefore, No. of shares to be issued = 84,500/`10 = 8,450 shares.

Question 5 (NOV 2020) [12 MARKS]

The Books of Arpit Ltd. shows the following Balances as on 31 December,2019:
st

Amount (`)
6,00,000 Equity shares of ` 10 each fully paid up 60,00,000
30,000, 10% Preference shares of ` 100 each, ` 80 paid up 24,00,000
 Securities Premium 6,00,000
Capital Redemption Reserve 18,00,000
General Reserve 35,00,000
Under the terms of issue, the Preference Shares are redeemable on 31st March, 2020 at a premium
of 10%. In order to finance the redemption, the Board of Directors decided to make a fresh issue of
1,50,000 Equity shares of `10 each at a premium of 20%, ` 2 being payable on application, ` 7
(including premium) on allotment and the balance on 1stJanuary, 2021. The issue was fully subscribed
and allotment made on 1st March, 2020. The money due on allotment was received by
20thMarch,2020.
The preference shares were redeemed after fulfilling the necessary conditions of Section 55 of the
Companies Act,2013.
You are required to pass the necessary Journal Entries and also show how the relevant items will appear in the
Balance Sheet of the company after the redemption carried out on 31stMarch,2020.

Answer
(a) JournalEntries
` `
1 10% Preference Share Final Call A/c Dr. 6,00,000
To 10% Preference Share Capital A/c 6,00,000
(For final call made on preference shares @ ` 20
each to make them fully paidup)

2 Bank A/c Dr. 6,00,000

To 10% Preference Share Final Call A/c 6,00,000
(For receipt of final call money on preference shares)
3 Bank A/c Dr. 3,00,000
To Equity Share Application A/c 3,00,000
(For receipt of application money on 1,50,000 equity
shares @ ` 2 per share)
4 Equity Share Application A/c Dr. 3,00,000
To Equity Share Capital A/c 3,00,000
(For capitalization of application money received)
5 Equity Share Allotment A/c Dr. 10,50,000
To Equity Share Capital A/c 7,50,000
To Securities Premium A/c 3,00,000
(For allotment money due on 1,50,000 equity shares @
` 7 per share including a premium of ` 2 per share)

6 Bank A/c Dr. 10,50,000

To Equity Share Allotment A/c 10,50,000
(For receipt of allotment money on equity shares)
7 10% Preference Share Capital A/c Dr. 30,00,000
Premium on Redemption of Preference Shares A/c Dr. 3,00,000
To Preference Shareholders A/c 33,00,000
(For amount payable to preference shareholders on
redemption at 10 % premium)
 8 General Reserve A/c Dr. 3,00,000
To Premium on Redemption A/c 3,00,000
(Writing off premium on redemption of preference
shares)
9 General Reserve A/c Dr. 19,50,000
To Capital Redemption Reserve A/c 19,50,000
(For transfer of CRR the amount not covered by the
proceeds of fresh issue of equity shares i.e., 30,00,000
- 3,00,000 -7,50,000)
10 Preference Shareholders A/c Dr. 33,00,000
To Bank A/c 33,00,000
(For amount paid to preference shareholders)
Balance Sheet (extracts)

Particulars Notes As at As at
No. 31.3.2020 31.12.2019
` `
EQUITY AND LIABILITIES
1. Shareholders’ funds
a) Share capital 1 70,50,000 84,00,000
b) Reserves and Surplus 2 59,00,000 59,00,000
Notes to Accounts:

As at As at
31.3.2020 31.12.2019
1. Share Capital
Issued, Subscribed and Paid up:
6,00,000 Equity shares of ` 10 each fully paid 60,00,000 60,00,000
up
1,50,000 Equity shares of `10 each ` 7 paid up 10,50,000 -
30,000, 10% Preference shares of ` 100 each, - 24,00,000
`80 paid up
70,50,000 84,00,000
2. Reserves and Surplus
Capital Redemption Reserve 37,50,000 18,00,000
Securities Premium 9,00,000 6,00,000
General Reserve 12,50,000 35,00,000
59,00,000 59,00,000
Note:
1. Securities premium has not been utilized for the purpose of premium payable on redemption of
preference shares assuming that the company referred in the question is governed by Section
133 of the Companies Act, 2013 and comply with the Accounting Standards prescribed forthem.
2. Amount received (excluding premium) on fresh issue of shares till the date of redemption should
be considered for calculation of proceeds of fresh issue of shares. Thus, proceeds of fresh
issue of shares are `10,50,000 (`3,00,000
3. application money plus ` 7,50,000 received on allotment towards share capital) and balance `
 19,50,000 to taken from general reserve account.

Question 6 (RTP NOV 2021)

Neeraj Ltd.’s capital structure consists of 45,000 Equity Shares of ` 10 each fully paid up and 3,000
9% Redeemable Preference Shares of ` 100 each fully paid up as on 31.03.2021. The other
particulars as at 31.03.2021 are asfollows:
Amount (`)
General Reserve 1,80,000
Profit & Loss Account 90,000
Investment Allowance Reserve (not free for distribution as dividend) 22,500
Cash at bank 2,92,500
Preference Shares are to be redeemed at a premium of 10%. For the purpose of redemption, the
directors are empowered to make fresh issue of Equity Shares at par after utilizing the undistributed
reserve &surplus, subject to the conditions that a sum of ` 60,000 shall be retained in General
Reserve and which should not be utilized. Company also sold investment of 6,750 Equity Shares in
Kumar Ltd., costing `67,500 at ` 9 per share.
Pass Journal entries to give effect to the above arrangements and also show how the relevant items
will appear in the Balance Sheet as at 31.03.2021 of Neeraj Ltd. after the redemption is carried out.

Answer
JournalEntries
Date Particulars Dr. (`) Cr. (`)
Bank A/c Dr. 1,26,750
To Equity Share Capital A/c 1,26,750
(Being the issue of 12,675 Equity Shares of
`10eachasperBoard’sResolutionNo ....... dated….)
9% Redeemable Preference Share Capital A/c Dr. 3,00,000
Premium on Redemption of Preference Shares A/c Dr. 30,000
To Preference Shareholders A/c 3,30,000
(Being the amount paid on redemption transferred to
Preference Shareholders Account)
Bank A/c Dr. 60,750
Profit and Loss A/c (loss on sale)A/c Dr. 6,750
To Investment A/c 67,500
(Being investment sold at loss of ` 6,750)
Preference Shareholders A/c Dr. 3,30,000
To Bank A/c 3,30,000
(Being the amount paid on redemption of preference
shares)
Profit & Loss A/c Dr. 30,000
To Premium on Redemption of
Preference SharesA/c 30,000
(Being the premium payable on redemption is
adjusted against Profit & Loss Account)
General Reserve A/c Dr. 1,20,000
Profit & Loss A/c Dr. 53,250
To Capital Redemption Reserve A/c 1,73,250
 (Being the amount transferred to Capital Redemption
Reserve Account)
Balance Sheet as at 31.3.2021[Extracts]
Particulars Notes `
No.
EQUITY AND LIABILITIES
1. Shareholders’ funds
a Share capital 1 5,76,750
b Reserves and Surplus 2 2,55,750
ASSETS
2. Current Assets
Cash and cash equivalents
(2,92,500 + 1,26,750+ 60,750 – 3,30,000) 1,50,000
Notes to accounts

1. Share Capital
57,675 Equity shares (45,000 + 12,675) of `10 each fully paid up 5,76,750
2. Reserves and Surplus
General Reserve 60,000
Profit and loss account NIL
Capital Redemption Reserve 1,73,250
Investment Allowance Reserve 22,500
2,55,750

Working Note:
Number of Shares to be issued for redemption of Preference Shares:
Face value ofsharesredeemed ` 3,00,000 Less:
Profit available for distribution asdividend:
General Reserve:`(1,80,000-60,000) ` 1,20,000 Profit
and Loss (90,000 less 30,000 set asidefor
adjusting premium payable on redemption of Pref.
shares less 6,750 loss on sale ofinvestments) ` 53,250
` (1,73,250)
` 1,26,750
Therefore, No. of shares to be issued = ` 1,26,750/`10 = 12,675 shares.

Question 7 (RTP MAY 2021)

ABC Ltd. provides you the following information as on 31st March,

2021:Sharecapital:
50,000 Equity shares of ` 10 each fully paid – `5,00,000;
1,500 10% Redeemable preference shares of `100 each fully paid – ` 1,50,000. Reserve &
Surplus:
Capital reserve – ` 1,00,000; General
 reserve –` 80,000;

Profit and Loss Account – `95,000.

On 1st April 2021, the Board of Directors decided to redeem the preference shares at premium
of 10% by utilization of reserves.
You are required to prepare necessary Journal Entries including cash transactions in the books of the
company.

Answer
In the books of ABCLimited
Journal Entries

Date Particulars Dr. (`) Cr. (`)

2021
April 1 10% Redeemable Preference Share Capital A/c Dr. 1,50,000
Premium on Redemption of Preference Shares 15,000
To Preference Shareholders A/c 1,65,000
(Being the amount payable on redemption
transferred to Preference Shareholders
Account)
Preference Shareholders A/c Dr. 1,65,000
To Bank A/c 1,65,000
(Being the amount paid on redemption of
preference shares)
General Reserve A/c Dr. 80,000
Profit & Loss A/c Dr. 70,000
To Capital Redemption Reserve A/c 1,50,000
(Being the amount transferred to Capital
Redemption Reserve Account as per the
requirement of the Act)
Profit & Loss A/c Dr. 15,000
To Premium on Redemption of 15,000
Preference SharesA/c
(Being premium on redemption charged to
Profitand LossA/c)
Note: Capital reserve cannot be utilized for transfer to Capital Redemption Reserve.

Question 8 (RTP NOV 2020)

The following are the extracts from the Balance Sheet of Hari Ltd. as on 31st March,2020:
Share capital: 75,000 Equity shares of `10 each fully paid – `7,50,000; 2,250 10% Redeemable
preference shares of `100 each fully paid – ` 2,25,000.
Reserve & Surplus: Capital reserve – `1,50,000; General reserve –` 1,50,000; Profit and Loss
Account – `1,12,500.
On 1st April 2020, the Board of Directors decided to redeem the preference shares at premium of 10%
by utilization of reserves.
You are required to prepare necessary Journal Entries including cash transactions in the books of the
company.
Answer
In the books of Hari Limited
JournalEntries
Date Particulars Dr. (`) Cr. (`)
2020
April 1 10% Redeemable Preference Share Capital Dr. 2,25,000
A/c
Premium on Redemption of Preference Dr. 22,500
Shares
To Preference Shareholders A/c 2,47,500
(Being the amount payable on redemption
transferred to Preference Shareholders
Account)
Preference Shareholders A/c Dr. 2,47,500
To Bank A/c 2,47,500
(Being the amount paid on redemption of
preference shares)
General Reserve A/c Dr. 1,50,000
Profit & Loss A/c Dr. 75,000
To Capital Redemption Reserve A/c 2,25,000
(Being the amount transferred to Capital
Redemption Reserve Account as per the
requirement of the Act)___________
Profit & Loss A/c Dr. 22,500
To Premium on Redemption of 22,500
Preference SharesA/c
(Being premium on redemption charged to
Profit and Loss A/c)

Note: Capital reserve cannot be utilized for transfer to Capital Redemption Reserve.

Question 9 (RTP MAY 2020)

The capital structure of Chand Ltd. consists of 20,000 Equity Shares of `10 each fully paid up and
1,000 8% Redeemable Preference Shares of `100 each fully paid up (issued on 1.4.20X1).
Undistributed reserve and surplus stood as: General Reserve ` 80,000; Profit and Loss Account `
20,000; Investment Allowance Reserve is ` 10,000 out of which ` 5,000 is not free for distribution as
dividend; Cash at bank amounted to ` 98,000. Preference shares areto be redeemed at a Premium of
10% and for the purpose of redemption, the directors are empowered to make fresh issue of Equity
Shares at par after utilizing the undistributed reserve and surplus, subject to the conditions that a sum
of ` 20,000 shall be retained in general reserve and which should not beutilized.
Pass Journal Entries to give effect to the above arrangements and also show how the relevant items will
appear in the Balance Sheet of the company after the redemption carried out.

Answer
JournalEntries
Date Particulars Dr. (`) Cr. (`)
 Bank A/c Dr. 25,000
To Equity Share Capital A/c 25,000
(Being the issue of 2,500 Equity Shares of ` 10
each at par as per Board’s Resolution
No…..dated…….)
8% Redeemable Preference Share Capital A/c Dr. 1,00,000
Premium on Redemption of Preference Shares A/c Dr. 10,000
To Preference Shareholders A/c 1,10,000
(Being the amount paid on redemption transferred
to Preference Shareholders Account)
Preference Shareholders A/c Dr. 1,10,000
To Bank A/c 1,10,000
(Being the amount paid on redemption of
preference shares)
Profit & Loss A/c Dr. 10,000
To Premium on Redemption of Preference 10,000
Shares A/c
(Being the premium payable on redemption is
adjusted against Profit & Loss Account)
General Reserve A/c Dr. 60,000
Profit & Loss A/c Dr. 10,000
Investment Allowance Reserve A/c Dr. 5,000
To Capital Redemption Reserve A/c 75,000
(Being the amount transferred to Capital Redemption
Reserve Account as per the requirement of the Act)

Balance Sheet as on ………[Extracts]

Particulars Notes No. `

EQUITY AND LIABILITIES
1. Shareholders’ funds
a Share capital 1 2,25,000
b Reserves and Surplus 2 1,02,000
Total ?
ASSETS
2. Current Assets
Cash and cash equivalents 13,000
(98,000 + 25,000 – 1,10,000)
Total ?

Notes to accounts

1. Share Capital
22,500 Equity shares (20,000 + 2,500) of `10 each fully paid up 2,25,000
2. Reserves and Surplus
General Reserve 20,000
Capital Redemption Reserve 75,000
 Investment Allowance Reserve 5,000
1,00,000
Working Note:
No of Shares to be issued for redemption of Preference Shares:
Face value ofsharesredeemed `1,00,000 Less:
Profit available for distribution asdividend:
GeneralReserve:`(80,000-20,000) `60,000
Profit and Loss (20,000 – 10,000 set aside for adjusting
premium payable on redemption of
preferenceshares) `10,000
Investment Allowance Reserve:(`10,000-5,000) `5,000 (`75,000)
`25,000
Therefore, No. of shares to be issued = 25,000/`10 = 2,500 shares.

Question 10 (MTP MARCH 2021) [12 MARKS]

The capital structure of AP Ltd. consists of 20,000 Equity Shares of Rs.10 each fully paid up and 1,000 8%
Redeemable Preference Shares of Rs.100 each fully paidup.
Undistributed reserve and surplus stood as: General Reserve Rs. 80,000; Profit andLoss Account Rs. 20,000;
Investment Allowance Reserve is Rs. 10,000 out of which Rs. 5,000 is not ascertained as free reserve; Cash at
bank amounted toRs. 98,000.
Preference shares are to be redeemed at a Premium of 10% and for the purpose of redemption,the directors are
empowered to make fresh issue of Equity Shares at par after utilizing the undistributed reserves and surplus,
subject to the condition that a sum of Rs. 20,000 shall be retained in general reserve which should not beutilized.
You are required to pass Journal Entries to give effect to the above arrangements and also show how the
relevant items will appear in the Balance Sheet of the company after the redemption is carriedout.

Answer
Journal Entries in the books of APLtd.

Date Particulars Dr. (Rs.) Cr. (Rs.)

Bank A/c Dr. 25,000
To Equity Share Capital A/c 25,000
(Being the issue of 2,500 Equity Shares of Rs. 10 each at par,
as per Board’s Resolution No…..dated…….)
8% Redeemable Preference Share Capital A/c Dr. 1,00,000
Premium on Redemption of Preference Shares A/c Dr. 10,000
To Preference Shareholders A/c 1,10,000
(Being the amount paid on redemption transferred to
Preference Shareholders Account)
Preference Shareholders A/c Dr. 1,10,000
To Bank A/c 1,10,000
(Being the amount paid on redemption of preference shares)
Profit & Loss A/c Dr. 10,000
 To Premium on Redemption of Preference 10,000
SharesA/c
(Being the premium payable on redemption is adjusted
against Profit & LossAccount)
General Reserve A/c Dr. 60,000
Profit & Loss A/c Dr. 10,000
Investment Allowance Reserve A/c Dr. 5,000
75,000
To Capital Redemption Reserve A/c
(Being the amount transferred to Capital Redemption Reserve
Account as per the requirement of the Act)

Balance Sheet as at ………[Extracts]

Particulars Notes No. Rs.
EQUITY AND LIABILITIES
1. Shareholders’ funds
a Share capital 1 2,25,000
b Reserves and Surplus 2 1,00,000
Total ?
ASSETS
2. Current Assets
Cash and cash equivalents 13,000
(98,000 + 25,000 – 1,10,000)
Total ?

Notes to accounts

1. Share Capital
22,500 Equity shares (20,000 + 2,500) of Rs.10 each fully paid up 2,25,000
2. Reserves and Surplus
General Reserve 20,000
Capital Redemption Reserve 75,000
Investment Allowance Reserve 5,000
1,00,000
Working Note:
No of Shares to be issued for redemption of Preference Shares:
Face value ofsharesredeemed Rs.1,00,000
Less: Profit available:
General Reserve:Rs.(80,000-20,000)
Rs.60,00
0 Profit and Loss (20,000 – 10,000 set asidefor
adjusting premium payable on redemption of
preferenceshares) Rs.10,000
Investment Allowance Reserve:(Rs.10,000-5,000) Rs. 5,000 (Rs. 75,000)
Rs.25,000
Therefore, No. of shares to be issued = 25,000/Rs.10 = 2,500 shares.
 Ch.9 – REDEMPTION OF DEBENTURES

Question 1 (RTP DEC 2021) (10 MARKS)

Jeet Limited (listed company) recently made a public issue in respect of which the following
information is available:
(a) No. of partly convertible debentures issued - 1,00,000; face value and issue price-
` 100 per debenture.
(b) Convertible portion per debenture- 60%, date of conversion- on expiry of 6 months from the
date of closing of issue i.e 31.10.2020.
(c) Date of closure of subscription lists - 1.5.2020, date of allotment- 1.6.2020, rate of interest on
debenture- 15% payable from the date of allotment, value of equity share for the purpose of
conversion- ` 60 (Face Value ` 10).
(d) Underwriting Commission- 2%.
(e) Number of debentures applied for - 75,000.
(f) Interest payable on debentures half-yearly on 30th September and 31st March.
Write relevant journal entries for all transactions arising out of the above during the year ended 31st
March, 2021 (including cash and bank entries).

ANSWER
1. Journal Entries in the books of Jeet Ltd.
Journal Entries
Date Particulars Amount Dr. Amount Cr.
` `
1.5.2020 Bank A/c Dr. 75,00,000
To Debenture Application A/c 75,00,000

(Application money received on 75,000

debentures @ ` 100 each)
1.6.2020 Debenture Application A/c Dr. 75,00,000
Underwriters A/c Dr. 25,00,000
To 15% Debentures A/c 1,00,00,000
(Allotment of 75,000 debentures to
applicants and 25,000 debentures to
underwriters)
Underwriting Commission Dr. 2,00,000
To Underwriters A/c 2,00,000
(Commission payable to underwriters @
2% on ` 1,00,00,000)
Bank A/c Dr. 23,00,000
To Underwriters A/c 23,00,000
(Amount received from underwriters in
settlement of account)
1.6.2020 Debenture Redemption Reserve 6,00,000
Investment A/c
 To Bank A/c (1,00,000x100x15%x 40%) Dr. 6,00,000
(Being Investments made for redemption
purpose)
30.9.2020 Debenture Interest A/c Dr. 5,00,000
To Bank A/c 5,00,000
(Interest paid on debentures for 4 months
@ 15% on ` 1,00,00,000)
31.10.2020 15% Debentures A/c Dr. 60,00,000
To Equity Share Capital A/c 10,00,000
To Securities Premium A/c 50,00,000
(Conversion of 60% of debentures into
shares of ` 60 each with a face value of
` 10)
31.3.2021 Debenture Interest A/c Dr. 3,75,000
To Bank A/c 3,75,000
(Interest paid on debentures for the half
year) (refer working note below)

Working Note :

Calculation of Debenture Interest for the half year ended 31st March, 2021 On `
40,00,000 for 6 months @ 15% = ` 3,00,000
On ` 60,00,000 for 1 months @ 15% = ` 75,000
` 3,75,000

QUESTION 2 (MTP DEC 2021) (5 MARKS)

Aman Ltd. has issued 2,000, 12% convertible debentures of ` 100 each redeemable after a
period of five years. According to the terms & conditions of the issue, these debentures were
redeemable at a premium of 5%. The debenture holders also had the option at the time of
redemption to convert 20% of their holdings into equity shares of ` 10 each at a price of `
20 per share and balance in cash. Debenture holders amounting ` 40,000 opted to get their
debentures converted into equity shares as per terms of the issue.

You are required to calculate the number of shares issued and cash paid for redemption of ` 40,000
debenture holders and also pass journal entry for conversion and redemption of debentures.

ANSWER
Calculation of number of shares issued
Number of
debentures
Debenture holders opted for conversion (40,000 /100) 400
Option for conversion 20%
Number of debentures to be converted (20% of 400) 80
Redemption value of 80 debentures at a premium of 5% [80 x (100+5)] ` 8,400
Equity shares of ` 10 each issued on conversion
[` 8,400/ ` 20 ] 420 shares
 Calculation of cash to be paid : `
Number of debentures 400
Less: number of debentures to be converted into equity shares (80)
320
Redemption value of 320 debentures (320 × ` 105) ` 33,600
Journal Entry
Debentures A/c Dr. 40,000
Premium on redemption A/c Dr. 2,000
To Debenture holders A/c 42,000
(Being amount due to debenture holders at redemption)
Debenture holders A/c Dr. 42,000
To Equity Share capital A/c 4,200
To Securities premium A/c Dr. 4,200
To Cash A/c 33,600
(Discharge of amount due to Debenture holders)

Question 3 (JULY 2021) [10 MARKS]

AB Limited (a listed company) recently made a public issue in respect 10 of which the following
information is available:
(i) No. of partly Convertible 80% debentures issued 3,00,000; face value and issue price 1 100 per
debenture.
(ii) Convertible portion per debenture- 60%, date of conversion- on expiry of 7 months from the
date of closing of issue.
(iii) Date of closure of subscription lists 1-5-2020, date of allotment 1-6-2020, rate of interest on
debenture 8% payable from the date of allotment, market value of equity share as on date of
conversion T 60 (Face Value T 10).
(iv) Underwriting Commission 1%

(v) No. of debentures applied for 2,50,000.

(vi) Interest payable on debentures half-yearly on 30th September and 31st March.
Write relevant journal entries for all transactions arising out of the above during the year ended 31st
March, 2021 (including cash and bank entries)

Question 4 (JAN 2021) [8 MARKS]

During the year 2019-2020, A Limited (a listed company) made a public issue in respect of which
the following information isavailable:
(i) No. of partly convertible debentures issued-1,00,000; face value and issueprice
`100 per debenture. (Whole issue was underwritten by X Ltd.)
(ii) Convertible portion per debenture -60%, date of conversion -on expiry of 6 months from the
date of closing ofissue.
(iii) Date of closure of subscription lists -1stMay,2019, date of allotment –1stJune, 2019, rate of
interest on debenture -15% p.a. payable from the date of allotment, value of equity share for
the purpose of conversion – `60 (face value`10)
(iv) Underwriting Commission–2%
(v) No. of debentures applied for by public –80,000
 (vi) Interest is payable on debentures half yearly on 30thSeptemberand 31stMarch eachyear.
Pass relevant journal entries for all transactions arising out of the above during the year ended
31stMarch,2020. (including cash andbankentries)
Answer
Journal Entries in the books of ALtd.
Date Particulars Amount Dr. Amount Cr.
` `
1.5.2019 Bank A/c Dr. 80,00,000
To Debenture Application A/c 80,00,000
(Application money received on 80,000
debentures @ `100 each)
1.6.2019 Debenture ApplicationA/c Dr. 80,00,000
UnderwritersA/c Dr. 20,00,000
To 15% Debentures A/c 1,00,00,000
(Allotment of 80,000 debentures to
applicants and 20,000 debentures to
underwriters)

UnderwritingCommission Dr. 2,00,000

To UnderwritersA/c 2,00,000
(Commission payable to underwriters
@ 2% on `1,00,00,000)
Bank A/c Dr. 18,00,000
To Underwriters A/c 18,00,000
(Amount received from underwriters in
settlement of account)
01.06.2019 Debenture Redemption Investment A/c Dr. 6,00,000
To Bank A/c
(100,000 X 100 x 15% X 40%) 6,00,000
(Being Investments made for
redemptionpurpose)
30.9.2019 Debenture Interest A/c Dr. 5,00,000
To Bank A/c 5,00,000
(Interest paid on debentures for 4
months @ 15% on ` 1,00,00,000)
31.10.2019 15% Debentures A/c Dr. 60,00,000
To Equity Share CapitalA/c 10,00,000
To Securities PremiumA/c 50,00,000
(Conversion of 60% of debentures into
shares of ` 60 each with a face value of
` 10)
31.3.2020 Debenture Interest A/c Dr. 3,75,000
To Bank A/c 3,75,000
(Interest paid on debentures for the
halfyear)
(Refer working note below)

Working Note:
 Calculation of Debenture Interest for the half year ended 31st March, 2020
On ` 40,00,000 for 6 months@15% = `3,00,000

On ` 60,00,000 for 1 months@15% = `75,000

`3,75,000

Question 5 (NOV 2020) [10 MARKS]

Sumit Ltd. (an unlisted company other than AIFI, Banking company, NBFC and HFC) had 8,000, 9%
debentures of ` 100 each outstanding as on 1stApril, 2019, redeemable on 31stMarch,2020.
On 1stApril, 2019, the following balances appeared in the books of accounts:
• Investment in 1,000, 7% secured Govt. bonds of ` 100 each, `1,00,000.
• Debenture Redemption Reserve is `50,000.
Interest on investments is received yearly at the end of financial year.
1,000 own debentures were purchased on 30thMarch, 2020 at an average price of
` 96.50 and cancelled on the same date.
On 31st March, 2020, the investments were realized at par and the debentures were redeemed. You
are required to write up the following accounts for the year ended 31st March,2020.
(1) 9% DebenturesAccount.
(2) Debenture Redemption ReserveAccount.
(3) DRR InvestmentAccount.
(4) OwnDebenturesAccount.

Answer
9% DebenturesAccount

Date Particulars ` Date Particulars `

30th March, To Own 96,500 1stApril, By Balance b/d 8,00,000
2020 Debentures A/c 2019
March, 2020 To Profit on
cancellation 3,500
31 st March, To Bank A/c 7,00,000
2020
8,00,000 8,00,000
Debenture Redemption Reserve (DRR) Account

Date Particulars ` Date Particulars `

1stApril, By Balance b/d 50,000
2019
31stMarch, To General 80,000 1stApril, By Profit and loss A/c
2020 Reserve A/c 2019 [Refer Working Note 30,000
3]
80,000 80,000
Debenture Redemption Reserve Investments (DRRI) Account
 Date Particulars Amount Date Particulars Amount
1st April To Balance b/d 1,00,000 31 March, By Bank A/c
st
15,000
2019 2020 (1,000 x 100 x 15%)
(Refer Working Note
2)
1st April To Bank A/c 20,000 31stMarch, By Bank A/c 1,05,000
2019 (Refer Working 1,20,000 2020 (Refer Working Note 1,20,000
Note 1) 2)

Own Debentures A/c

Date Particulars Amount Date Particulars Amount
30th March, To Bank 96,500 30th March, By 9% Debentures 96,500
2020 A/c* 2020
96,500 96,500
* interest not considered.
Working Notes:
1. Debenture Redemption Reserve InvestmentA/c
The company would be required to invest an amount equivalent to 15% of the value
of the debentures in specified investments which would be equivalentto:

= Total No of debentures X Face value per debenture X 15%

= 8,000 X 100 X 15% = `1,20,000/-

The company has already invested in specified investments i.e. 7% Govt bonds for an
amount of `1,00,000 as per the information given in the question. The balance amount
of `20,000 (i.e. ` 1,20,000 less ` 1,00,000) would be invested by the company on 1
April2019.
2. Redemption of Debenture Redemption Reserve Investments on31.3.2020
Since the company purchased 1,000 own debentures on 31 March 2020, the company
would also realize the investments of 15% corresponding to these debentures for
which computation is asfollows:

= No of own debentures to be bought X Face value per debenture X 15%

= 1,000 X 100 X 15% = `15,000/-

The remaining debentures i.e. total debentures less own debentures would be
redeemed on 31 March 2020 and hence the company would also realize the balance
investments of 15% corresponding to these debentures for which computation is
asfollows:

= (Total no of debentures - No of own debentures) X Face value per debenture X 15%

= (8,000 - 1,000) X 100 X 15% =`1,05,000/-
3. Debenture RedemptionReserve
The company would be required to transfer an amount equivalent to 10% of the
value of the debentures in Debentures Redemption Reserve Account. The value of
debentures is 8,00,000 thus 10% of it i.e. 80,000 should be there in DRR a/c. The
available balance in DRR a/c is only 50,000 therefore 30,000 (80,000 – 50,000)
additional amount will be transferred from General Reserve or Profit and loss A/c to
DRR A/c.
Question 6 (NOV 2019) [5 MARKS]

A company had issued 40,000, 12% debentures of ` 100 each on 1stApril, 2015. The debentures are due for
redemption on 1stMarch, 2019. The terms of issue of debentures provided that they were redeemable at a
premium of 5% and also conferred option to the debenture holders to convert 20% of their holding into equity
shares (nominal value ` 10) at a predetermined price of ` 15 per share and the payment in cash. 50 debentures
holders holding totally 5,000 debentures did not exercise the option. Calculate the number of equity shares to be
allotted to the debenture holders and the amount to be paid in cash on redemption.

Answer
Calculation of number of equity shares to beallotted
Number of debentures
Total number of debentures 40,000
Less: Debenture holders not opted for conversion (5,000)
Debenture holders opted for conversion 35,000
Option for conversion 20%
Number of debentures to be converted (20% of 35,000) 7,000

Redemption value of 7,000 debentures at a premium of 5%

[7,000 x (100+5)] ` 7,35,000
Equity shares of ` 10 each issued to debenture holders on redemption
[` 7,35,000/ ` 15] 49,000 shares
Amount of cash to be paid
Amount to be paid into cash [42,00,000 (40,000 x ` 105 )– 7,35,000] ` 34,65,000
on redemption

Question 7 (NOV 2019) [5 MARKS]

Jeet Limited (listed company) recently made a public issue in respect of which the following
information isavailable:
(a) No. of partly convertible debentures issued - 1,00,000; face value and issueprice-
` 100 per debenture.
(b) Convertible portion per debenture- 60%, date of conversion- on expiry of 6 months from the
date of closing of issue i.e31.10.2020.
(c) Date of closure of subscription lists - 1.5.2020, date of allotment- 1.6.2020, rate of interest on
debenture- 15% payable from the date of allotment, value of equity share
forthepurposeofconversion-`60(FaceValue`10).
(d) Underwriting Commission-2%.
(e) Number of debentures applied for -75,000.
(f) Interestpayableondebentureshalf-yearlyon30thSeptemberand31stMarch.
Write relevant journal entries for all transactions arising out of the above during the year ended 31st
March, 2021 (including cash and bank entries).

Answer
Journal Entries in the books of
Jeet Ltd. JournalEntries
 Date Particulars Amount Dr. Amount Cr.
` `
1.5.2020 Bank A/c Dr. 75,00,000
To Debenture Application A/c 75,00,000
(Application money received on 75,000 debentures
@ ` 100 each)
1.6.2020 Debenture Application A/c Dr. 75,00,000
Underwriters A/c Dr. 25,00,000
To 15% Debentures A/c 1,00,00,000
(Allotment of 75,000 debentures to
applicants and 25,000 debenturesto
underwriters)
Underwriting Commission Dr. 2,00,000
To Underwriters A/c 2,00,000
(Commission payable to underwriters @
2% on `1,00,00,000)
Bank A/c Dr. 23,00,000
To Underwriters A/c 23,00,000
(Amount received from underwriters in
settlement of account)
1.6.2020 Debenture Redemption Reserve 6,00,000
InvestmentA/c
To Bank A/c (1,00,000x100x15%x 40%) Dr. 6,00,000
(Being Investments made for redemption
purpose)
30.9.2020 Debenture Interest A/c Dr. 5,00,000
To Bank A/c 5,00,000
(Interest paid on debentures for 4 months
@ 15% on `1,00,00,000)
31.10.2020 15% Debentures A/c Dr. 60,00,000
To Equity Share Capital A/c 10,00,000
To Securities Premium A/c 50,00,000
(Conversion of 60% of debentures into
shares of ` 60 each with a face value of
` 10)
31.3.2021 Debenture Interest A/c Dr. 3,75,000
To Bank A/c 3,75,000
(Interest paid on debentures for the half
year) (refer working note below)

Working Note :

Calculation of Debenture Interest for the half year ended 31st March, 2021 On `
40,00,000 for 6 months@15% = `3,00,000
On ` 60,00,000 for 1 months@15% = `75,000
` 3,75,000

Question 8 (RTP MAY 2021)

The following balances appeared in the books of Omega Ltd. as on1-4-2020:
 (i) 10 % Debentures `75,00,000
(ii) Balance of DRR `2,50,000
(iii) DRR Investment ` 11,25,000 represented by 10% ` 11,250 Secured Bonds of the Government
of India of ` 100each.
Annual contribution to the DRR was made as per the requirement. On 31-3-2021, balance at bank
was ` 80,00,000 before receipt of interest. Interest on Debentures had already been paid. The
investments were realized at par for redemption of debentures at a premium of 10% on the
abovedate.
Omega Ltd. is an unlisted company (other than AIFI, Banking company, NBFC and HFC). You are
required to prepare Debenture Redemption Reserve Account, Debenture Redemption Reserve
Investment Account and Bank Account in the books of Omega Ltd. for the year ended 31st
March,2021.

Answer
Debenture Redemption ReserveAccount
Date Particulars ` Date Particulars `
31stMarch, 2021 To General 1stApril, By Balance b/d 2,50,000
reserve A/c 7,50,000 2020
(ReferNote)
1stApril, By Profit and loss A/c 5,00,000
2020 (Refer Note 1)
7,50,000 7,50,000

10% Secured Bonds of Govt. (DRR Investment) A/c

` `
1stApril, 2020 To Balance b/d 11,25,000 31stMarch, 2021 By Bank A/c 11,25,000
11,25,000 11,25,000

Bank Account

` `
31stMarch, To Balance b/d 80,00,000 31stMarch, By Debenture holders 82,50,000
2021 To Interest on 1,12,500 2021 A/c
DRR Investment (110% of 75,00,000)
(11,25,000X 10%)
To DRR By Balance c/d 9,87,500
Investment A/c 11,25,000
92,37,500 92,37,500

Working note –

Calculation of DRR before redemption = 10% of ` 75,00,000 = 7,50,000 Available

balance = ` 2,50,000
DRR required =7,50,000 – 2,50,000= ` 5,00,000.

Question 9 (RTP NOV 2020)

XYZ Ltd. has issued 1,000, 12% convertible debentures of ` 100 each redeemable after a period of
 five years. According to the terms &conditions of the issue, these debentures were redeemable at a
premium of 5%. The debenture holders also had the option at the time of redemption to convert 20%
of their holdings into equity shares of ` 10 each at a price of ` 20 per share and balance in cash.
Debenture holders amounting ` 20,000 opted to get their debentures converted into equity shares as
per terms of the issue. You are required to calculate the number of shares issued and cash paid for
redemption of ` 20,000 debentureholders.

Answer
Number of debentures
Debenture holders opted for conversion (20,000 /100) 200
Option for conversion 20%
Number of debentures to be converted (20% of 200) 40
Redemption value of 40 debentures at a premium of 5% [40
x (100+5)] ` 4,200
Equity shares of ` 10 each issued on conversion
[` 4,200/ ` 20 ] 210 shares
Calculation of cash to be paid : `
Number of debentures 200
Less: number of debentures to be converted into equity shares (40)
160

Redemption value of 160 debentures (160 × ` 105) ie. ` 16,800.

Question 10 (RTP MAY 2020)

ThefollowingbalancesappearedinthebooksofLakshyaLtd.ason1-4-20X1:
(i) 10 % Debentures ` 37,50,000
(ii) Balance of DRR `1,25,000
(iii) DRR Investment 5,62,500 represented by 10% ` 5,625 Secured Bonds of the Government of
India of ` 100each.
Annual contribution to the DRR was made on 31st March every year. On 31 -3-20X2, balance at bank
was ` 37,50,000 before receipt of interest. Interest on Debentures had already been paid. The
investment were realized at par for redemption of debentures at a premium of 10% on the above date.
Lakshya Ltd. is an unlisted company (other than AIFI, Banking company, NBFC and HFC). You are
required to prepare Debenture Redemption Reserve Account, Debenture Redemption Reserve
Investment Account and Bank Account in the books of Lakshya Ltd. for the year ended 31st March,
20X2.

Answer
Debenture Redemption ReserveAccount
Date Particulars ` Date Particulars `
31stMarch, To General reserve 1st April, By Balance b/d 1,25,000
20X2 A/c note 1 (Refer 3,75,000 20X1
Note1)
1st April, By Profit and loss A/c 2,50,000
20X1 (Refer Note 1)
3,75,000 3,75,000

10% Secured Bonds of Govt. (DRR Investment) A/c

` `
 1stApril, 20X1 To Balance b/d 5,62,500 31st March, By Bank A/c 5,62,500
20X2
5,62,500 5,62,500

Bank Account

31stMarch, To Balance b/d 37,50,000 31stMarch, By Debenture holders 41,25,000

20X2 To Interest on 56,250 20X2 A/c
DRR Investment (110% of 37,50,000)
(5,62,500X 10%)
To DRR By Balance c/d 2,43,750
Investment A/c 5,62,500
43,68,750 43,68,750

Working note –

Calculation of DRR before redemption = 10% of ` 37,50,000 = 3,75,000 Available

balance = ` 1,25,000
DRR required =3,75,000 – 1,25,000 = ` 2,50,000.

Question 11 (MTP APRIL 2021) [10 MARKS]

Surya Limited (a listed company) recently made a public issue in respect of which the following
information isavailable:
(a) No. of partly convertible debentures issued- 2,00,000; face value and issue price- Rs. 100
perdebenture.
(b) Convertible portion per debenture- 60%, date of conversion- on expiry of 6 months from the date
of closing ofissue.
(c) Date of closure of subscriptionlists- 1.5.2020, date of allotment- 1.6.2020, rate of interest on
debenture- 15% payable from the date of allotment, value of equity share for the purpose of
conversion- Rs. 60 (Face Value Rs.10).
(d) Underwriting Commission-2%.

Answer
JournalEntries
Date Particulars AmountDr. AmountCr.
Rs. Rs.
1.5.2020 Bank A/c Dr. 1,50,00,000
To Debenture Application A/c 1,50,00,000
(Application money received on 1,50,000
debentures @ Rs. 100 each)
1.6.2020 Debenture Application A/c Dr. 1,50,00,000
Underwriters A/c Dr. 50,00,000
To 15% Debentures A/c 2,00,00,000
(Allotment of 1,50,000 debentures to applicants
and 50,000 debentures to underwriters)
Underwriting Commission Dr. 4,00,000
To Underwriters A/c 4,00,000
(Commission payable to underwriters @ 2% on
Rs. 2,00,00,000)
 Bank A/c Dr. 46,00,000
To Underwriters A/c 46,00,000
(Amount received from underwriters in
settlement ofaccount)
01.06.2020 Debenture Redemption Investment A/c Dr. 12,00,000
To Bank A/c
(200,000 X 100 x 15% X 40%) 12,00,000
(Being Investments made for redemption
purpose)
30.9.2020 Debenture Interest A/c Dr. 10,00,000
To Bank A/c 10,00,000
(Interest paid on debentures for 4 months @
15% on Rs. 2,00,00,000)
31.10.2020 15% Debentures A/c Dr. 1,20,00,000
To Equity Share Capital A/c 20,00,000
To Securities Premium A/c 1,00,00,0000
(Conversion of 60% of debentures into shares
of Rs. 60 each with a face value of Rs.10)
31.3.2021 Debenture Interest A/c Dr. 7,50,000
To Bank A/c 7,50,000
(Interest paid on debentures for the half year)
(Refer working note below)

Working Note:
Calculation of Debenture Interest for the half year ended 31st March, 2021:
On Rs. 80,00,000 for 6 months @15% =Rs.6,00,000
OnRs.1,20,00,000for1months@15%=Rs.1,50,000
Rs.7,50,000

Question 12 (MTP MARCH 2021] [5 MARKS]

XYZ Ltd. has issued 1,000, 12% convertible debentures of Rs. 100 each redeemable after a period of five
years. According to the terms &conditions of the issue, these debentures were redeemable at a premium of 5%.
The debenture holders also had the option at the time of redemption to convert 20% of their holdings into equity
shares of Rs. 10 each at a price of Rs. 20 per share and balance in cash. Debenture holders amounting Rs.
20,000 opted to get their debentures converted into equity shares as per terms ofthe issue.
You are required to calculate the numberof shares issued and cash paid for redemption of Rs. 20,000
debenture holders and also pass journal entry for conversion and redemption of debentures.

Answer
Number of debentures
Debenture holders opted for conversion (20,000 /100) 200
Option for conversion 20%
Number of debentures to be converted (20% of 200) 40
Redemption value of 40 debentures at a premium of 5% [40 x (100+5)] Rs. 4,200
Equity shares of Rs. 10 each issued on conversion
[Rs. 4,200/ Rs. 20 ] 210 shares
Calculation of cash to be paid: Rs.
Numberofdebentures 200
Less:numberofdebenturestobeconvertedintoequityshares (40)
160
Redemption value of 160 debentures (160 × Rs. 105) Rs.16,800
Journal Entry
Debentures A/c Dr. 20,000
Premium on redemption A/c Dr. 1,000
To Debenture holders A/c 21,000
(Being amount due to debenture holders at redemption)
Debenture holders A/c Dr. 21,000
To Equity Share capital A/c 2,100
To Securities premium A/c Dr. 2,100
To Cash A/c 16,800
(Discharge of amount due to Debenture holders)
 Ch.10 - INVESTMENT ACCOUNTS (AS-13)

QUESTION 1 (RTP DEC 2021) (10 MARKS)

Following transactions of Meeta took place during the financial year 2020 -21:
1st April, 2020 Purchased ` 4,500 8% bonds of ` 100 each at ` 80.50 cum-
interest. Interest is payable on 1st November and 1st May.

1st May, 2020 Received half year’s interest on 8% bonds.

10 July, 2020 Purchased 6,000 equity shares of ` 10 each in Kamal Limited
for ` 44 each through a broker, who charged brokerage @
2%.
1st October 2020 Sold 1,125 8% bonds at ` 81 Ex-interest.
1st November, 2020 Received half year’s interest on 8% bonds.
15th January, 2021 Received 18% interim dividend on equity shares of Kamal
Limited.
15th March, 2021 Kamal Limited made a rights issue of one equity share for
every four Equity shares held at ` 5 per share. Meeta
exercised the option for 40% of her entitlements and sold the
balance rights in the market at ` 2.25 per share.

Prepare separate investment account for 8% bonds and equity shares of Kamal Limited in the books
of Meeta for the year ended on 31st March, 2021. Assume that the average cost method is followed.

ANSWER
1. In the books of Meeta
8% Bonds for the year ended 31st March, 2021

Date Particulars No. Income Amount Date Particulars No. Income Amount
` ` ` `
2020 1 May By Bank- - 18,000
1 April, To Bank A/c 4,500 15,000 3,47,250 2020 Interest
Oct. 1
2021 To P & L A/c - - 4,312.50 1 Oct. By Bank A/c 1,125 3,750 91,125
March 31 (W.N.1) 2020
To P & L A/c 20,250 1 Nov. By Bank- 13,500
2021 Interest
2021 By Balance 3,375 - 2,60,437.50
Mar. c/d
31 (W.N.2)
4,500 35,250 3,51,562.50 4,500 35,250 3,51,562.50

Investment in Equity shares of Kamal Ltd. for the year ended 31 st March, 2021

Date Particulars No. Income Amount Date Particulars No. Income Amount
` ` ` `
2020 To Bank 6,000 -- 2,69,280 2021 By Bank – - 10,800
July 10 A/c Jan dividend
15
2021 To Bank 600 - 3,000 March By Balance 6,600 2,72,280
March A/c 31 c/d
15 (W.N. 3) (bal. fig.)
 March To P & L
31 A/c - 10,800
6,600 10,800 2,72,280 6,600 10,800 2,72,280

Working Notes:
1. Profit on sale of 8% Bonds
Sales price ` 91,125
Less: Cost of bonds sold = 3,47,250/4,500x 1,125 (` 86,812.50) Profit on
sale ` 4,312.50

1. Closing balance as on 31.3.2021 of 8 % Bonds

3,47,250/4,500x 3,375= ` 2,60,437.50
2. Calculation of right shares subscribed by Kamal Ltd.
Right Shares = 6,000/4 x 1= 1,500 shares
Shares subscribed by Meeta = 1,500 x 40%= 600 shares
Value of right shares subscribed = 600 shares @ ` 5 per share = ` 3,000
3. Calculation of sale of right entitlement by Kamal Ltd.
No. of right shares sold = 1,500 – 600 = 900 rights for 2,025
Note: As per para 13 of AS 13, sale proceeds of rights are to be credited to P & L A/c.

QUESTION 2 (MTP DEC 2021) (10 MARKS)

Alpha Ltd. purchased 5,000, 13.5% Debentures of Face Value of ` 100 each of Pergot Ltd. on 1st May 2020 @ `
105 on cum interest basis. The interest on these instruments is payable on 31st & 30th of March & September
respectively. On August 1st 2020 the company again purchased 2,500 of such debentures @ ` 102.50 each
on cum interest basis. On October 1st, 2020 the company sold 2,000 Debentures @ ` 103 each on ex- interest
basis. The market value of the debentures as at the close of the year was ` 106. You are required to prepare the
Investment in Debentures Account in the books of Alpha Ltd. for the year ended 31st Dec. 2020 on Average
Cost Basis.
ANSWER
(b) Investment in 13.5% Debentures in Pergot Ltd. Account
(Interest payable on 31st March & 30th
September)

Date Particulars Nominal Interest Amount Date Particulars Nominal Interest Amount
2020 ` ` ` 2020 ` ` `
May 1 To Bank 5,00,000 5,625 5,19,375 Sept.30 By Bank 50,625
(6 months Int)
Aug.1 To Bank 2,50,000 11,250 2,45,000 Oct.1 By Bank 2,00,000 2,06,000
Oct.1 To P&L A/c 2,167
Dec.31 To P&L A/c 52,313
Dec.31 By Balance c/d
5,50,000 18,563 5,60,542
7,50,000 69,188 7,66,542 7,50,000 69,188 7,66,542
Note: Cost being lower than Market Value the debentures are carried forward at Cost.

Working Notes:

1. Interest paid on ` 5,00,000 purchased on May 1st, 2020 for the month of April 2020, as part
of purchase price: 5,00,000 x 13.5% x 1/12 = ` 5,625
2. Interest received on 30th Sept. 2020
 On ` 5,00,000 = 5,00,000 x 13.5% x ½ = 33,750
On ` 2,50,000 = 2,50,000 x 13.5% x ½ = 16,875
Total ` 50,625
3. Interest paid on ` 2,50,000 purchased on Aug. 1st 2020 for April 2020 to July 2020 as part
of purchase price:
` 2,50,000 x 13.5% x 4/12 = ` 11,250
4. Loss on Sale of Debentures
Cost of acquisition
(` 5,19,375 + ` 2,45,000) x ` 2,00,000/` 7,50,000 = 2,03,833
Less: Sale Price (2,000 x `103) = 2,06,000
Profit on sale = ` 2,167
5. Cost of Balance Debentures
(` 5,19,375 + ` 2,45,000) x ` 5,50,000/` 7,50,000 = ` 5,60,542
Interest on Closing Debentures for period Oct.-Dec. 2020 carried forward (accrued interest)
` 5,50,000 x 13.5% x 3/12 = ` 18,563 (rounded off)

QUESTION 3 (MTP DEC 2021) (5 MARKS)

Z Bank has classified its total investment on 31-3-2021 into three categories (a) held to maturity
(b) available for sale (c) held for trading as per the RBI Guidelines. ‘Held to maturity’ investments are
carried at acquisition cost less amortized amount. ‘Available for sale’ investments are carried at
marked to market. ‘Held for trading’ investments are valued at weekly intervals at market rates.
Net depreciation, if any, is charged to revenue and net appreciation, if any, is ignored. You are
required to comment whether the policy of the bank is in accordance with AS 13?
ANSWER
As per AS 13 ‘Accounting for Investments’, the accounting standard is not applicable to Bank, Insurance
Company, Mutual Funds. In this case Z Bank is a bank, therefore, AS 13 does not apply to it. For
banks, the RBI has issued separate guidelines for classification and valuation of its investment and Z
Bank should comply with those RBI Guidelines/Norms. Therefore, though Z Bank has not followed the
provisions of AS 13, yet it would not be said as non-compliance since, it is complying with the norms
stipulated by the RBI.

QUESTION 4 (MTP DEC2021) (10 MARKS)

On 1st April, 2019, Mr. Vijay had 30,000 Equity shares in X Ltd. (the company) at a book value
of 4,50,000 (Face Value ` 10 per share). On 22nd June, 2019, he purchased another 5000 shares
of the same company for ` 80,000. The Directors of X Ltd. announced a bonus of equity shares
in the ratio of one share for seven shares held on 10th August, 2019.
On 31st August, 2019 the Company made a right issue in the ratio of three shares for every eight
shares held, on payment of ` 15 per share. Due date for the payment was 30th September, 2019, Mr.
Vijay subscribed to 2/3rd of the right shares and sold the remaining of his entitlement to Viru for a
consideration of ` 2 per share.
On 31stOctober,2019, Vijay received dividends from X Ltd. @ 20% for the year ended 31 st March,
2019. Dividend for the shares acquired by him on 22ndJune,2019 to be adjusted against the cost of
purchase.
On 15th November, 2019 Vijay sold 20,000 Equity shares at a premium of ` 5 per share.
You are required to prepare Investment Account in the books of Mr. Vijay for the year ended 31st
March, 2020 assuming the shares are being valued at average cost.

ANSWER
Books of Vijay
 Investment Account
(Scrip: Equity Shares in X Ltd.)

No. Amount No. Amount

` `
1.4.2019 To Bal b/d 30,000 4,50,000 31.10.2019 By Bank — 10,000
22.6.2019 To Bank 5,000 80,000 (dividend
10.8.2019 To Bonus 5,000 - on shares
30.9.2019 To Bank 10,000 1,50,000 acquired on
(Rights Shares) 22/6/2019)
15.11.2019 To Profit 32,000 15.11.2019 By Bank 20,000 3,00,000
(on sale of (Sale of
shares) shares)
31.3.2020 By Bal. c/d 30,000 4,02,000
50,000 7,12,000 50,000 7,12,000

Working Notes:
(1) Bonus Shares = (30,000 + 5,000) / 7 = 5,000 shares

(2)(30, 000 + 5, 000 + 5, 000)

(2) Right Shares =  3 = 15,000
shares
(3) Rights shares sold = o
15,000×1/3 = 5,000 shares c
(4) Dividend received = e
30,000×10×20% = `60,000 will
be taken to P&L statement e
(5) Dividend on shares d
purchased on 22.6.2019= s
5,000×10×20% = ` 10,000 is =
adjusted to Investment A/c
`
(6) Profit on sale of 20,000 shares
3
=
,
0
S
0
a
,
l
0
e
0
s
0
p
r Average cost =
(4, 50, 000 + 80, 000 +
o 1, 50, 000 - 10, 000)
× 20, 000 = `
c 2,68,000
e
50, 000
e
Profit = ` 3,00,000– `2,68,000=
d
`32,000.
s
(7) Cost of shares on 31.3.2020
–
(4, 50, 000 + 80, 000 + 1, 50, 000 - 10,
A
000)
v × 30, 000 = `4,02,000
e 50, 000
r (8) Sale of rights amounting ` 10,000 (` 2
a x 5,000 shares) will not be shown in
investment A/c but will directly be
g taken to P & L statement.
e
c Question 5 (JULY 2021)
o [20 MARKS]
s
Mr. Z has made following transactions during the
t
financialyear2020-21
S Investment 1 : 8% Corporate Bonds having face
a value T 100.
l Date Particulars
e
01-06-2020 Purchased 36,000 Bonds at T 86 cum-interes
s
September and 31st March every year
p
r
 15-02-2021 Sold 24,000 Bonds at T(ii)
92 Profit and loss Account for the year
ex-interest
2020-21, based on the above
Interest on the bonds is received on 30*
September and 31" March information.
Investment 2 : Equity Shares of G Ltd (iii) Suggest values at which investment in
having face value 1 10 equity shares should be re- classified in
accordance with AS13.
Date Particulars

01-04-2020 Opening balance 8000 equity

Question shares
2 (JAN at a book value of 1 190 pershare
2021)

[10 MARKS]
01-05-2020 Purchased7,000equityshares@1230oncumrightbasis Brokerage of 1% was
paid inaddition. PLtd.had8,000equitysharesofKLtd.,atabookva
lueof`15pershare(facevalueof
15-06-2020 ` 10issue
The company announced a bonus each) on 1for
of 2 shares st April,2019. On
every 5 shares held 1 stSeptember, 2019, P Ltd.acquired
another2,000 equity shares of K Ltd. at a
01-08-2020 premium
The company made a rights issue share`for
of 1 of 4 per
everyshare. K held
7 shares Ltd.at T
announced a bonus and right issue for
230 per share. The entire money was payable by 31.08.2020
existingshareholders.
The term of bonus and right issue were:
(i) Bonus was declared at the rate for two
25-08-2020 Rightstotheextentof30%ofhisentitlemTHt8wasSold@
equity shares for every five shares
heldwere
T 75 per share. The remaining rights on 30subscribed.
thSeptember,2019.

(ii) Right shares are to be issued to the

15-09-2020 Dividend @ 1 6 per share for the existing
year ended 31.tl3.2020
shareholders on
was received on 16.09.2020. No dividend payable
1 st December, 219.on Right issue and Bonus
The Company
issue. had issued two right shares for every
seven shares held at 25% premium on
01-12-2020 face value. No dividend
Sold7,[email protected]%was was payable
incurredextra.
on these shares. The whole sum being
payable by 31stDecember,2019.
(iii) Existing shareholders were entitled to
25-01-2021 Received interim dividend @ 1 3 per share
transfer for rthe
their year
ightto 2020-21.
outsiders either
wholly or inpart.
(iv) P Ltd. exercised its option under the
31-03-2021 The shares were quoted in the stock
issueexchange
for 50% @ 1 260.
of its entitlements and
sold the remaining rights for `8
Both investments have been pershare.
classified as Current investment in
(v) Dividend for the year ended
the books of ’Mr. Z. On 15* May 31stMarch,2019 at the rate of 20% was
2021, Mr. Z decides to reclassify declared by K Ltd. and received by P
Investment in equity shares of Z Ltd. Ltd. on 20thJanuary,2020.
as Long term Investment. On 15* (vi) On 1stFebruary, 2020, P Ltd. sold half
May 2021, the shares were quoted in of its shareholdings at a premium of `
4 per share.
the stock exchange @ T180.
You are required to : (vii) The market price of share on
(i) Prepare Investment Accounts in the 31stMarch,2020 was `13 pershare.
books of Mr. Z for the year 2020- You are required to prepare the Investment
21,assumingthattheaveragecostme account of P Ltd. for theyearended
thodisfollowed. 31stMarch,2020 and determine the value
of shares held on that date, assuming the
investment as current investment.
 Consider average cost basisfor bed = 4,000 x
ascertainment for cost for
equitysharessold. 50% = 2,000
shares
Answer
Valueofrightsha
Investment
Account- resissued=2,00
Equity Shares
in KLtd. 0x`12.50=`25,0
Date No. of Dividend Amount Date 00 No. of Dividend Amount
shares shares
` ` No. of right shares sold`= 2,000 `
1.4.19 To Bal.b/d 8,000 - 1,20,000 20.1.20 By Bank
shares 16,000 4,000
(dividend)
[8,000 of
Sale x10right
shares = 2,000 x ` 8
x 20%]and
= ` 16,000 to be credited
[2,000 x 10
tostatement
x 20%] of profitandloss
1.9.19 To Bank 2,000 - 28,000 1.2.20 By Bank 8,000 1,12,000
30.9.19 To Bonus 4,000 —
2. Cost of shares sold — Amount paid for
Issue 16,000shares
31.12.19 To Bank 2,000 - 25,000 31.3.20 By Balance 8,000 84,500
(Right) c/d (W.N. 3)
(W.N.1)
20.1.20 To Profit 16,000 (`1,20,000 + ` 28,000 + ` 25,000)
&Loss A/c
(Dividend Less: Dividend on shares purchased on Sept.1 (since the di
income) pertains to the year ended 31stMarch, 2019, i.e., the pre-acq
1.2.20 To P&LA/c 27,500
(profit
period)
onsale) Cost of 16,000 shares
16,000 16,000 2,00,500 Cost of 8,000 shares
16,000 (Average
16,000 cost basis)
2,00,500
Sale proceeds (8,000 X `14)
Working Notes:
Profit on sale
1. Rightshares
3. Value of investment at the end of
No. of theyear
right Assuming investment as
shares current investment, closing
balance will bevalued based on
issued
lower of cost or net
= realizablevalue.
(8,000 Here, Net realizable value is `13 per
+ 2,000 share i.e., 8,000 shares x ` 13 =
+ ` 1,04,000 and cost = 84,500.
4,000)/ Therefore, value of investment at
the end of the year will be `
7 X 2=
84,500.
4,000
Question 6 (JAN 2021)
No. of
[5 MARKS]
right
shares Kunal Securities Ltd. wants to reclassify its
subscri investments in accordance with AS-13
(Revised). State the values, at which the
 investments have to be carried at` 9 lakhs in thebooks.
reclassified in the followingcases:
(ii) Thecarrying/bookvalueofthelong-
(i) Long term investment in terminvestmentissameascosti.e.,
Company A, costing ` 10.5 ` 14 lakhs. Hence this long-term
lakhs is to be re-classified as investment will be reclassified as
current investment. The currentinvestment at book value
company had reduced the
of ` 14 lakhs only.
value of these investmentsto
` 9 lakhs to recognize a (iii) In this case, reclassification of current
permanent decline in value. investment into long-term
The fair value on the date of investments will be
reclassification is ` 9.3 lakhs. madeat`12lakhsascostarelessthanits
(ii) Long term investment in marketvalue of`13.5lakhs.
Company B, costing ` 14 (iv) Market value of the investment is `
lakhs is to be re-classified as 16.5 lakhs, which is lower than its cost
current investment The fair
i.e., ` 18 lakhs. Therefore, the transfer
value on the date of
to long term investments should be
reclassification is ` 16 lakhs
done inthe books at the market value
and book value is ` 14lakhs. i.e., ` 16.5lakhs.
(iii) Current investment in
Company C, costing `12
lakhs is to be re-classified as Question 7 (NOV 2020)
long term investment as the
company wants to retain [5 MARKS]
them. The marketvalue
onthe date of reclassification A Limited invested in the shares of XYZ Ltd. on
is ` 13.5lakhs. 1stDecember, 2019 at a costof
(iv) Current investment in ` 50,000. Out of these shares, ` 25,000
Company D, costing ` 18 shares were purchased with an intention to
lakhs is to be re-classified as hold for 6 months and ` 25,000 shares were
long term investment. The purchased with an intention to hold as long-
market value on the date of term Investment.
reclassification is `
A Limited also earlier purchased Gold of `
16.5lakhs.
1,00,000 and Silver of ` 30,00,000 on 1st
Answer April, 2019. Market value as on 31st March,
2020 of above investments are asfollows:
AsperAS13(Revised)‘Accounti
ngforInvestments’,wherelong Shares ` 47,500
-terminvestmentsare reclassified (Decline in the
as current investments, transfers value of shares is
are made at the lower of cost and
carrying amount at the date of temporary.) Gold
transfer. And where investments `1,80,000
are reclassified fromcurrent to
longterm,transfersaremadeatlowe Silver `30,55,000
rofcostandfairvalueonthedateoftra How above investments will be shown in the
nsfer. books of accounts of M/s A Limited for the
Accordingly, the re-classification year ended 31st March, 2020 as per the
provisions of AS 13 (Revised)?
will be done on the following
basis: Answer
(i) In this case, carrying amount As per AS 13 (Revised) ‘Accounting for
of investment on the date of Investments, for investment in shares - if the
transfer is less than the cost; investment is purchased with an intention to
hence this re-classified hold for short-term period (less than one
current investment should be
 year), then it will be classified as equity shares of the ABC ltd. at ` 16 per share
current investment and to be through a broker who charged 1.5%
carried at lower of cost and brokerage.
fairvalue. The directors of ABC Ltd. announced a bonus
In the given case` 25,000 and a right issue. The terms of the issues
shares held as current were asfollows:
investment will be carried in the (i) Bonus shares were declared at the rate
books at ` 23,750 (`47,500/2). of one equity share for every four
shares held on 15th July,2019.
If equity shares are acquired (ii) Right shares were to be issued to the
with an intention to hold for existing equity shareholders on
long term period (more than 31stAugust, 2019. The company
one year), then should be decides to issue one right share for
considered as long-term every five equity shares held at 20%
investment to be shown at cost premium and the due date for payment
in the Balance Sheet of the will be 30th September, 2019.
company. However, provision Shareholders were entitled to transfer
for diminution should be made their rights in full or inpart.
to (iii) No dividend was payable on theseissues.
recognizeadecline,ifotherthant Mr. H subscribed 60% of the rights
emporary,inthevalueofthe entitlements and sold the remaining rights for
investments.Hence, consideration of ` 5 pershare.
` 25,000 shares held as long-term Dividends for the year ending 31st March,
2019 was declared by ABC Ltd. at the rate
investment will be carried in the
of 20% and received by Mr. H on 31st
books at ` 25,000. October,2019.
Gold and silver are generally On 15th January, 2020 Mr. H sold half of his
purchased with an intention shareholdings at ` 17.50 per share and
tohold them for long term brokerage was charged @1 %.
period(morethanoneyear)untila You are required to prepare Investment
ndunlessgivenotherwise. account in the books of Mr. H for the year
ending 31stMarch, 2020, assuming the
Hence, the investment in Gold shares are valued at averagecost.
and Silver (purchased on
1 st March, 2019) should Answer
continuetobeshownatcost(sincet
InthebooksofMr.H
hereisno‘otherthantemporary’di
minution)ason 31stMarch, 2020. Investment in equity shares of ABC
Thus Gold at ` 1,00,000 and Ltd. for the year ended 31stMarch,
Silver at ` 30,00,000 2020
respectively will be shown in Date Particulars No. Income Amount Date Particulars
thebooks. ` `
2019 To Balance b/d 30,000 - 5,40,000 2019 By Bank
April1 Oct. A/c
(W.N. 5)
Question 8 (NOV 2020) June To Bank A/c 10,000 -- 1,62,400 20X2 By Bank
Jan. A/c
[10 MARKS] (W.N.4)
July To Bonus Issue 10,000 - - March By Balance
(W.N. 1) 31 c/d
On 1stApril, 2019 Mr. H had 30,000 (W.N. 6)
equity shares of ABC Ltd. at book Sept. To Bank A/c 6,000 - 72,000
value of ` 18 per share (Nominal (W.N. 2)
value 10 per share). On 10thJune, 2020 To P & L A/c - - 1,07,900
2019, H purchased another 10,000 Jan. (W.N. 4)
March To P & L A/c - 60,000 -
31
56,000 60,000Question
8,82,300 9 (NOV 2019) 56,000 60,000 8,82,300

[10 MARKS]

Mr. Harsh provides the following details

relating to his holding in 10% debentures
(face value of ` 100 each) of Exe Ltd. held
as currentassets:
1.4.2018 opening balance - 12,500 debenture
1.6.2018 purchased 9,000 debentures@ ` 98
1.11.2018 purchased 12,000 debentures @ ` 1
31.1.2019 sold 13,500 debentures@ ` 110 eac
31.3.2019 Market value of debentures @ ` 115
Due dates of interest are 30thJune and
31stDecember.
Brokerage at 1% is to be paid for each
transaction. Mr. Harsh closes his books on
31.3.2019. Show investment account as it
would appear in his books assuming FIFO
method is followed.

Answer
I
n
v
e
s
t
m
e
n
t
A
c
c
o
u
n
t
o
f
M
r
.
 H 1.4.18 To Balance 12,50,000 31,250 12,25,000 30.6.18 By Bank
b/d 21,500 x 100
a
x 10% x 1/2
r 1.6.18 To Bank 9,00,000 37,500 8,90,820 31.12.19 By Bank
(ex-Interest) 33,500 x
s (W.N.1) 100x10% x
h 1/2
1.11.18 To Bank 12,00,000 40,000 13,53,800 31.1.19 By Bank
f (cum- (W.N.3)
Interest)
o (W.N.2)
r 31.1.19 To Profit & 1,34,920 31.3.19 By Balance
Loss A/c c/d (W.N.4)
t (W.N.3)
h 31.3.19 To Profit & 2,27,500
Loss A/c
e (Bal. fig.)
y 33,50,000 3,36,250 36,04,540

e Working Notes:
a
1. Purchase of debentures on1.6.18
r
Interest element = 9,000 x 100 x 10%
e x 5/12 = ` 37,500
n
Investment element = (9,000 x 98) +
d
[1%(9,000 x 98)] = ` 8,90,820
i
n 2. Purchase of debentures on1.11.2018
g Interest element = 12,000 x 100 x
o 10% x 4/12 = ` 40,000

n Investment element = 12,000 X 115

3 X 101% less 40,000 = ` 13,53,800
1 3. Profit on sale of debentures as
- on31.1.19
3
-
2 Sales price of debentures (13,500 x ` 110)
0 Less: Brokerage @ 1%
1
9 Less: Interest (1,35,000/ 12)
(Scrip: 10%
Debentures Less: Cost of Debentures [(12,25,000 + (890820 X
of Exe
1,00,000/9,00,000)]
Limited)
Profit on sale
(Interest
Payable on 4. Valuation of closing balance as
30thJune and on31.3.2019:
31stDecember) Market
value of
Date Particulars Nominal Interest Cost Date Particulars Nominal Interest Cost
Value 20,000 Value
` ` ` ` ` `
 Deb 10 July, 2020 Purchased 6,000 equity shares of ` 1
entu for ` 44 each through a broker, who
2%.
res 1stOctober 2020 Sold 1,125 8% bonds at ` 81 Ex-inte
at ` 1stNovember, 2020 Received half year’s interest on 8
115 15thJanuary, 2021 Received 18% interim dividend on e
Limited.
=`
15thMarch, 2021 Kamal Limited made a rights issue
23,0 every four Equity shares held at
0,00 exercised the option for 40% of her e
balance rights in the market at ` 2.25
0
Prepare separate investment account for 8%
Cost bonds and equity shares of Kamal Limited in
the books of Meeta for the year ended on
of 31stMarch, 2021. Assume that the average
cost method is followed.
8,000Debentures
Answer
= In the books
ofMeeta
8,90,820/ 9,000 X8,000= 8% Bonds for the year
ended 31stMarch, 2021
7,91,840
Date Particulars No. Incom Amou Date Particulars
12,000Debentures e nt
` `
= 2020 1 By
1 April, To Bank 4,500 15,000 3,47,250 May Ban
A/c 2020 k- Interest
Oct. 1
13,53,800
2021 To P & L - - 4,312.50 1 By Bank A/c
Total March A/c Oct.
31 (W.N.1) 2020
To P & L 20,250 1 By
21,45,640 A/c Nov. Ban
2021 k- Interest
Value at the end is `
2021 By Balance
21,45,640, i.e., which is less Mar c/d
than market value of ` . 31 (W.N.2)
23,00,000. 4,500 35,250 3,51,562.50

Question 10 (RTP NOV 2021) Investment in Equity shares of Kamal

Ltd. for the year ended 31 stMarch, 2021
Following transactions of Meetatook
place during the financial year2020 - Date Particulars No. Income Amount Date Particulars
21: ` `
2020 To Bank 6,000 -- 2,69,280 2021 By Bank–
1stApril, 2020 Purchased ` 4,500 July8%10
bonds of
A/c` 100 each at ` 80.50 cum- Jan dividend
interest. Interest is payable on 1stNovember and 1stMay. 15
2021 To Bank 600 - 3,000 March By Balance
1stMay, 2020 March
Received half year’s A/con 8% bonds.
interest 31 c/d
15 (W.N. 3) (bal. fig.)
March To P & L
31 A/c - 10,800
 6,600 10,800 2,72,280 carried at acquisition cost less
6,600 10,800 amortised
2,72,280
amount. ‘Available for sale’ investments
Working Notes: are carried at marked to market. ‘Held for
trading’ investments are valued at weekly
1. Profit on sale of 8%Bonds intervals at market rates. Net
Salesprice depreciation, if any, is charged to revenue
and net appreciation, if any, is ignored.
`91,125 Comment whether the policy of the bank
is in accordance with AS 13?
Less: Cost of
Answer
bonds sold =
3,47,250/4,500 AsperAS13‘AccountingforInvestments’,
theaccountingstandardisnotapplic
x1,125 able to Bank, Insurance Company,
Mutual Funds. In this case Z Bank is a
bank, therefore, AS 13 does not apply
(` to it. For banks, the RBI has issued
86,812.50)Profi guidelines for classification and
valuation of its investment and Z Bank
tonsale should comply with those RBI
Guidelines/Norms. Therefore, though
Z Bankhas not followed the
`4,312.50 provisions of AS 13, yet it would not
be said as non-compliance since, it is
2. Closing balance as on complying with the norms stipulated
31.3.2021 of 8 %Bonds by theRBI.
3,47,250/4,500x 3,375= `
2,60,437.50 Question 9 (RTP MAY 2021)
3. Calculation of right shares On1stApril,2019Mr.Shyamhadanopeningbalanc
subscribed by KamalLtd. eof1000equitysharesofXLtd
Right Shares = 6,000/4 x 1= ` 1,20,000 (face value `100 each).
1,500 shares On 5.04.2019 he further purchased 200
Shares subscribed by Meeta = cum-right shares for ` 135 each. On
1,500 x 40%= 600 shares 8.04.2019 the director of X Ltd
Value of right shares subscribed announced rightissue in the ratio of 1:6.
= 600 shares @ ` 5 per share = Mr. Shyamwaived off 100% of his
` 3,000 entitlement of right issue in the favourof
4. Calculation of sale of right Mr. Rahul at the rate of ` 20each.
entitlement by KamalLtd. All the shares held by Shyam had been
No. of right shares sold = 1,500 acquired on cum right basis and the total
– 600 = 900 rights for 2,025 market price (ex-right) of all these shares
Note: As per para 13 of AS 13, sale proceeds after the declaration of rights got reduced
of rights are to be credited to P & L A/c. by ` 3,400.
On 10.10.2019
Question 8 (RTP NOV 2021) Shyam sold 350
shares for `
Z Bank has classified its total
investment on 31-3-2021 into 140 each.
three categories (a) held to
maturity (b) available for sale (c) 31.03.2020 The
held for trading as per the RBI market price of
Guidelines.
each share is `
‘Held to maturity’ investments are
 125 0
each. (
You are required to prepare the S
Investment account in the books of
Mr. Shyam for the year ended c
31.03.2020 assuming that the shares
r
are being valued at average cost.
i
Answer
p
In the
books of :
Mr.Shya E
m
q
f
u
o
i
r
t
t
y
h
S
e
h
y
a
e
r
a
e
r
s
e
o
n
f
d
X
i
L
n
i
g
m
o
i
n
t
3
e
1
d
-
)
3
- Date Particulars Qty Amount Date Particulars
1.4.2019 To Balance 1000 1,20,000 8.04.2019 By Bank A/c (W
2 b/d
0 5.04.2019 To Bank 200 27,000 10.10.2019 By BankA/c
(200x`135) (350x`140)
2
 10.10.2019 To Profit & 7,117 31.3.2020 Electronics
By Balance Ltd.
c/d may 850
not fetch more
1,01,717
Loss A/c (W.N.3)
than 7,50,000. The reduction in value
(W.N.2)
is apparent to be non-temporary.
1200 1,54,117 1200 1,54,117
You are required to explain how you
Working Notes: will deal with the above in the financial
statementsoftheParidhiElectronicsLtd
1. SaleofRights .ason31.3.21withreferencetoAS13?
`4,000 Answer
The market price of all shares
AsperAS13,“AccountingforInvestment
of X Ltd after shares
becoming ex-rights has been s”,carryingamountforcurrentinvestmentsi
reduced by ` 3,400 s the lower of cost and fair value. But
long term investments should be
In this case out of sale carried in the
proceeds of `4,000; ` 3,400
financialstatementsatcost.However,pr
may be applied to reduce the
carrying amount to the ovisionfordiminutionshallbemadetorec
market value and ` 600 ognize a decline, other than temporary,
would be credited to the in the value of the investments, such
profit and lossaccount. reduction being determined and made
for each investment individually. The
2. Profit on sale of 350shares
standard also states that
indicatorsofthevalueofaninvestmentare
Amount
obtainedbyreferencetoitsmarketvalue,t
Sale price of 350 shares (350 shares X 140 each) ` 49,000
he investee's assets and results and
Less: Cost of 350 shares [(1,20,000+27,000-3,400)
the X350]/1200
expected cash `flows 41,883
from
Profit theinvestment. ` 7,117
3. Valuation of 850 shares as
on31.03.2020 Question 11 (RTP NOV 2020)
Particulars Amount
(a) In 2018, Royal Ltd. issued 12% fully paid
Cost price of 850 shares debentures of ` 100 each, ` 1,01,717
interest being
[(1,20,000 +27,000 -3,400) x 850 /1,200] payable half yearly on 30th September
and 31stMarch of every accounting year.
Fair Value as on 31.03.2020 [850 X ` 125 each]On 1st December, 2019, ` 1,06,250
M/s. Kumar
Cost price or fair value whichever is less purchased 10,000 of these` 1,01,717 at
debentures
` 101 (cum-interest) price. On 1st March,
2020 the firm sold all of thesedebentures
at
Question 11 (RTP MAY 2021)
` 106 (cum-interest) price.
Paridhi Electronics Ltd. You are required to prepare Investment
invested in the shares of (Debentures) Account in the books of
DhansukhLtd. on 1stMay M/s. Kumar for the period 1st
2020 at a cost of ` December, 2019 to 1st March, 2020.
10,00,000. Three fourth of
(b) Mr. X acquires 200 shares of a company
these investments were
current investmentsandthe on cum-right basis for ` 60,000. He
remaining investments were subsequently receives an offer of right
intended to be held for more to acquire fresh shares in the company
than a year. The published in the proportion of 1:1 at ` 105 each.
accounts of Dhansukh Ltd. He does not subscribe but sells all the
received in January, 2021 rights for
reveals that the company has ` 15,000. The market value of the
incurred cash losses with shares after their becoming ex-rights
decline in market share and has also gone down to ` 50,000. What
investment of Paridhi should be the accounting treatment in
 this case? becoming ex-right is lower than the cost for
which they were acquired, it may be
Answer appropriate to apply the sale proceeds of
(a) Investment rights to reducethe carrying amount of such
investments to the market value. In this
Account inthe case, the amount of the ex-right market
books of M/s value of 200 shares bought by X immediately
after the declaration of rights falls to
Kumar `50,000. In this case, out of sale proceeds
for the of ` 15,000, ` 10,000 may be applied to
reduce the carrying amount to bring it to the
period market value `50,000 and ` 5,000 would be
from credited to the profit and lossaccount.
1stDec
ember Question 12 (RTP NOV 2020)
2019
A Ltd. on 1-1-2020 had made an investment
to of ` 600 lakhs in the equity shares of B
1stMar Ltd.of which 50% is made in the long term
category and the rest as temporary
ch,202
investment. The realizable value of all such
0 investment on 31-3-2020 became ` 200
(Scrip: 12% lakhs as B Ltd. lost a case of copyright. How
Debentures will you recognize the reduction in the value
of Royal of the investment in the financial statements
for the year ended on 31-3-2020
Ltd.) asperAS13consideringthisdownfallinthevalu
eofsharesasnon-temporary?
Date Particulars Nominal Interest Cost Date Particulars Nominal Interest Cost
Value Answer Value
(`) (`)
(`) A limited invested ` 600(`)lakhs in
the equity
shares
1.12.2019 To Bank A/c 10,00,000 20,000 9,90,000 1.03.2020 By Bank A/cof B Ltd. Out of the same,
10,00,000 50,000 10,10,000the
(W.N.1) companyintendstohold50%sharesforlon
(W.N.2)
gtermperiodi.e.`300lakhsandremaining
1.3.2020 To Profit as temporary (current) investment i.e. `
& 30,000 20,000
lossA/c 300 lakhs. Irrespective of the fact that
10,00,000 50,000 10,10,000 investment has been held
10,00,000 by 10,10,000
50,000 A Limited
only for 3 months (from 1.1.2020 to
31.3.2020), AS 13 lays emphasis on
Working Notes: intention of the investor to classify the
investment as current or long term even
(i) Cost of 12% debentures purchased on1.12.2019 though the long-term investment`maybe
Cost Value (10,000 `101) readily marketable. = 10,10,000
In the given situation, the realizable value
Less: Interest (10,000 x 100 x12% x 2/12) = (20,000)
of all such investments on 31.3.2020
Total became = 9,90,000
(ii) Saleproceedsof12%debenturessoldon1stMarch,2020` 200 lakhs i.e.` 100 lakhs in respect of
`
current investment and ` 100 lakhs in
Sales Price (10,000 `106) = 10,60,000
respect of long-term investment.
Less: Interest (10,000 x 100 x12% x 5/12) AsperAS13,‘AccountingforInvestment’
= (50,000)
Total ,thecarryingamountforcurrentinvestme
= 10,10,000
nts is the lower of cost and fair value. In
(b) As per AS 13, where the investments respect of current investments for which
are acquired on cum-right basis an active market exists, market value
and the market value of generally provides the best evidence of
investments immediately after their fairvalue.
 Accordingly, the carrying value for every four shares held on 1st
of investment held as June 2019,and
temporary investment should
be shown at realizable value (ii) To give its members the right to
i.e. at ` 100 lakhs. The apply for one share for every five
reduction of ` 200 lakhs in the shares held on 1st June 2019 at
carrying value of current a price of ` 1.50 per share of which
investment will be charged in 75 paise is payable on or before
the profit and loss account. 15th July 2019 and the balance,
75 paise per share, on or before
Standard further states that 15th September,2019.
long-term investments are
usually carried at cost. The shares issued under (i) and (ii) were
However, when there is a not to rank for dividend for the year
decline, other than temporary, ending 31stDecember 2019.
in the value of long-term (a) Meera received her bonus shares
investment, the carrying and took up 4,000 shares under
amount is reduced to the right issue, paying the sum
recognize the decline. thereon when due and selling the
Here, B Limited has lost a case rights of the remaining shares at
of copyright which drastically 40 paise per share; the proceeds
reduced the realizable value of were received on 30thSeptember
its shares to one third which is 2019.
quiet a substantial figure. (b) On 15th March 2020, she
Losing the case of copyright received interim dividend from
may affect the business and Kumar Ltd. of 15 per cent in
the performance of the respect of the current
company in long run. financialyear.
Accordingly, it will be
appropriate to reduce the (c) On30thMarch2020,shereceived`28,
carrying amount of long-term 000fromthesaleof20,000shares.
investment by ` 200 lakhs and You are required to record these
show the investments at ` 100 transactions in the Investment Account in
lakhs as the downfall in the Meera’s books for the year ended 31stMarch
value of shares is not 2020 transferring any profits or losses on
temporary. The reduction of ` these transactions to Profit and Loss account.
200 lakhs in the carrying value Apply average cost basis. Expenses and tax
of long-term investment will be to be ignored.
charged to the profit and loss
account. Answer
InvestmentAccount(SharesinKu
Question 13 (RTP MAY 2020) marLimited)inthebooksofMeera
Date Particulars
No. Incom Amoun Date Particulars
Meeracarriedoutthefollowingtransact of e t
ionsinthesharesofKumarLtd.: Share
s
(1) On1stApril,2019shepurchased4 2019 ` ` 2019
0,000equitysharesof`1eachfully
April 1 To Bank 40,00 - 60,000 May By Bank (Sale
paidupfor (Purchases) 0 15
` 60,000. May To Profit & - - 3,200
(2) On 15th May 2019, Meera sold 15 Loss A/c
8,000 shares for` 15,200. (W.N.1)
(3) At a meeting on 15thJune 2019, June1 To Bonus Issue 8,000 - Nil 2020
the companydecided: 5
(i) To make a bonus issue
of one fully paid upshare
 July 15 To Bank (@ 75 4,000 - 3,000 Mar By Bank 6.5 lakhs to 4,80 recognize - a
p. paid on . 15 permanent decline in 0value. The
(Dividend
4,000 @ 15% on on date of transfer is `
fair value
shares) ` 32,000)
6.8lakhs.
Sept. To Bank (@ 75 - - 3,000 Mar By(ii) Bank 20,000
Current investment in- Company
28,00
p. paid on . 30 (Sale)
C, costing ` 10 lakhs are to be0re-
4,000 classified as long term as the
shares) company wants to retain them.
2020 To Profit & The market
3,455 Mar By Balance 24,000value on- date
29,45 of
Mar. Loss A/c . 31 c/d*
transfer is ` 12lakhs. 5
31 (W.N.2)
(iii) Certain long terminvestments no
To Profit & - 4,800 longer considered for holding
Loss A/c purposes, to be reclassified as
52,00 4,800 72,655 52,000 4,80
current investments. The 72,65
original
0 0
cost of these investmentswas 5
` 18 lakhs but had been written down
to ` 12 lakhs to recognize permanent
24,000×54,000 decline as per AS 13.
*
  Answer
44,000 
As per AS 13 ‘Accounting for
Investments’, where long-term
investments are reclassified as current
WorkingNotes: investments, transfers are made at the
lower of cost and carrying amount at
(1) Profit on Sale on 15-5-2019: the date of transfer. And where
investments are reclassified from
Cost of 8,000 shares @ `1.50 ` 12,000
current to long term, transfers are
Less: Sales price made at lower` of cost and fair value on
15,200
the date of transfer.Accordingly,there-
Profit ` 3,200
classificationwillbedoneonthefollowing
(2) Cost of 20,000 shares sold: basis:
Cost of 44,000 shares (48,000 + 6,000) (i) In this case, carrying `amount
54,000 of
investment on the date of transfer
Cost of 20,000shares  `54,000 ×20, 000shares is less than the cost; `hence
24,545this
44,000shares re-classified current investment
 should be carried at ` 6.5 lakhs in
thebooks.
Profit on sale of 20,000 shares (` 28,000 – ` 24,545) ` 3,455
(ii) In this case, reclassification of
current investment into long-term
Question 14 (RTP MAY 2020) investments will
bemadeat`10lakhsascostislessth
Omega Equity Investments anitsmarketvalueof`12lakhs.
Ltd., wants to re-classify its (iii) In this case, the book value of the
investments in accordance investment is ` 12 lakhs, which is
with AS 13. State the values, lower than its cost i.e.` 18 lakhs.
at which the investments have Here, the transfer should be at
to be reclassified in the carrying amount and hence this
followingcases: re-classified current investment
(i) Long term investments should be carried at ` 12lakhs.
in Company A, costing `
8.5 lakhs are to be re-
classified as current. Question 15 (MTP APRIL 2021)
The company had
reduced the value of [8 MARKS]
these investments to `
 A Ltd.purchased on1stApril, 2020 e
8% convertible debenture in C
Ltd. of facevalue of Rs. 2,00,000 D
@ Rs. 108. On 1st July, 2020 A e
Ltd. purchased another Rs.
1,00,000 debentures @ Rs. 112 b
cum interest. On 1stOctober, 2020 e
Rs. 80,000 debentures were sold
@ Rs. 105. On 1stDecember, 2020, n
C Ltd. give option for conversion of
8% convertible debentures into t
equity share of Rs. 10 each. A Ltd. u
received 5,000 equity shares in C
Ltd. in conversion of 25% r
debenturesheld on that date. The e
market price of debenture and
equity share in C Ltd. on s
31stDecember, 2020 is Rs. 110 and
i
Rs. 15 respectively. Interest on
debenture is payableeach year on n
31stMarch, and 30thSeptember.
Prepare investment account in the C
books of ALtd. on averagecost L
basis for the accounting year
ended 31stDecember,2020. t
d
Answer
Investment Account for the year .
ending on 31stDecember,2020 [
S I
c n
r t
i e
p r
: e
8 s
% t
C P
o a
n y
v a
e b
r l
t e
i o
b n
l 3
 1 IP:
s Equit
t y
M Share
s in C
a
LTD.
r
c Date Particulars Cost Date
(Rs.)
h
1.12.20 To 8 % debentures 59,767 31.12.20
a
Working Notes:
n
(i) Cost of Debenture purchased on 1stJuly
d = Rs.1,12,000 –Rs.2,000 (Interest) =
3 Rs.1,10,000

0 (ii) Cost of Debentures sold on 1stOct.

t
= (Rs.2,16,000 + Rs.1,10,000)x
h
80,000/3,00,000

S = Rs.86,933
e (iii) Loss on sale of Debentures
p = Rs. 86,933–Rs.84,000
t
= Rs.2,933 Nominal value
e
of debentures converted
m
into equityshares
b =Rs.55,000
e [(Rs. 3,00,000 – 80,000) x.25]
r Interest received before the conversion
of debentures
]
Interest on 25% of total debentures =
Date Particulars Nominal Interest Cost Rs. Date 55,000
Particularsx 8% x 2/12Nominal
= 733 Interest
Cost
value Rs. Rs. Value (Rs.) (Rs. (Rs.)
(iv) Cost of Debentures converted = (Rs.
1.4.20 To Bank A/c 2,00,000 - 2,16,000 30.09.20 By Bank A/c - 12,000 -
1.7.20 To Bank A/c 1,00,000 2,000 1,10,000
2,16,000 + Rs.1,10,000) x 55,000/3,00,000
[Rs.3,00,000 x 8%
(W.N.1) x(6/12] =
31.12.20 To P & L A/c - 14,033 - 1.10.20 By Bank A/c 80,000 Rs.
84,000
[Interest] 1.10.20 By P & L A/c (loss) 59,
2,933
(W.N.3) 767
1.12.20 By Bank A/c 733
(v) (Accrued
CostofclosingbalanceofDebentures=(Rs
interest)
(Rs. 55,000 x .08 x
.2,16,000+Rs.1,10,000)x1,65,000/3,00,000
2/12)
=
1.12.20 By Equity shares 55,000 59,767
in C Ltd. R
(W.N. 3 and 4) s
31.12.20 By Balance c/d .
(W.N.5) 1,65,000 3,300 1
1,79,300
3,00,000 16,033 3,26,000 3,00,000 16,033 3,26,000
,
7
S
9
C ,
R 3
 0 I
0
n
(vii) Closing balance of Debentures
has been valued atcost. v
(viii) 5,000 equity Shares in C Ltd. e
will be valued at cost of Rs.
59,767 beinglower thanthe s
market value Rs. 75,000 (Rs. t
15x5,000)
m
Note: It is assumed that interest on
debentures, which are converted e
into cash, has been received at
n
the time ofconversion.
t

Question 12 (MTP MARCH 2021) A

c
[8 MARKS]
c
On 1st April, 2019, Rajat has o
50,000 equity shares of P Ltd. at a
book value of Rs. 15 per share u
(face valueRs. 10 each). He n
provides you the further
information: t
(1) On20thJune,2019hepurchased (
another10,000sharesofPLtd.at
Rs.16pershare. E
q
(1) On 1stAugust, 2019, P Ltd.
issued one equity bonus u
share for every six shares i
held by the shareholders.
(2) On 31stOctober, 2019, the t
directors of P Ltd. announced y
a right issue which entitles the
holders to subscribe three s
shares for every seven shares h
at Rs. 15 per share.
Shareholders can transfer a
their rights in full or inpart.
r
Rajat sold 1/3rdof entitlement to
Umang for a consideration of Rs. e
2 per share and subscribed the s
rest on 5thNovember, 2019.
You are required to prepare i
Investment A/c in the books of n
Rajat for the year ending
31stMarch,2020. P
L
Answer
In t
the books ofRajat
d
 .
)
Date Particulars No. of Amount Date Particulars No. of Amount
shares (Rs.) shares (Rs.)

1.4.19 To Balance b/d 50,000 7,50,000 31.3.20 By Balance c/d 90,000 12,10,000
(Bal.fig.)
20.6.19 To Bank A/c 10,000 1,60,000
1.8.19 To Bonus 10,000 -
issue(W.N.1)
5.11.19 To Bank A/c
(rightshares)
(W.N.4) 20,000 3,00,000

90,000 12,10,000 90,000 12,10,000

 Ch.11 – INSURANCE To Gross Profit 4,50,000
(2,43,00
CLAIM 16,20,000

Memorandum Trading A/c

QUESTION 1 (RTP DEC 2021) for the period from 1 4.2021 to

02.06.2021

(10 MARKS) `
On 2.6.2021 the stock of Mr. To Opening Stock (at cost) 2,70,000 By Sales
Heera was destroyed by fire.
To Purchases 3,37,500 Less: Goods n
However, following particulars
were furnished from the records Add: Goods received but dispatch
saved: invoice not received 45,000 By Closing stock
3,82,500 figure)
`
Less: Machinery 22,500 3,60,000
Stock at cost on 1.4.2020 2,02,500
To Gross Profit (Refer W.N.) 2,02,500
Stock at 90% of cost on 31.3.2021 2,43,000
8,32,500
Purchases for the year ended 31.3.2021 9,67,500
Calculation of Insurance Claim
Sales for the year ended 31.3.2021 13,50,000

Purchases from 1.4.2021 to 2.6.2021 Claim subject to average clause =3,37,500
Sales from 1.4.2021 to 2.6.2021 7,20,000
Sales up to 2.6.2021 includes `
1,12,500 being the goods not
dispatched to the customers. The
sales (invoice) price is ` 1,12,500.
Purchases up to 2.6.2021 includes a
machinery acquired for ` 22,500.
Purchases up to 2.6.2021 does not
include goods worth ` 45,000
received from suppliers, as
invoice not received up to the date
of fire. These goods have
remained in the godown at the
time of fire. The insurance policy is
for ` 1,80,000 and it is subject to
average clause. Ascertain the
amount of claim for loss of stock.
ANSWER
1. In the books
of Mr. Heera
Trading Account for
the year ended
31.3.2021

` `
To Opening Stock 2,02,500 By Sales 13,50,000
To Purchases 9,67,500 By Closing Stock at cost 2,70,000
 Actual loss of stock 
×Amount of policy
 
Value of stock on the date of fire
 
2,25,000
= 1,80,000 x ( )= ` 1,80,000
2,25,000
Working Note:
 4,50,000
G.P. ratio = ×100 = 33 1 %
13,50,000 3
1
Amount of Gross Profit = ` 6,07,500 x 33 % = ` 2,02,500
3

QUESTION 2 (MTP DEC 2021) (10

MARKS)
A Fire occurred in the premises of M/s B & Co. on 30th September, 2019. The firm had taken
an insurance policy for ` 1,20,000 which was subject to an average clause. Following
particulars were ascertained from the available records for the period from 1st April, 2018 to
30th September, 2019:
Amount
(`)
Stock at cost on 1-04-2018 2,11,000
Stock at cost on 31-03-2019 (after adjustment of written off amount in respect 2,52,000
of slow-moving item)
Purchases during 2018-19 6,55,000
Wages during 2018-19 82,000
Sales during 2018-19 8,60,000
Purchases from 01-04-2019 to 30-09-2019 (including purchase of machinery 4,48,000
costing ` 58,000)
Wages from 01-04-2019 to 30-09-2019 (including wages for installation of 85,000
machinery costing ` 7,000)
Sales from 01-04-2019 to 30-09-2019 6,02,000
Sale value of goods drawn by partners (1-4-19 to 30-9-19) 52,000
Cost of Goods sent to consignee on 18th September, 2019 lying unsold with 44,800
them
Cost of Goods distributed as free samples(1-4-19 to 30-9-19) 8,500

While valuing the Stock at 31st March, 2019, ` 8,000 were written off in respect of a slow moving
item, cost of which was ` 12,000. A portion of these goods was sold at a loss of ` 4,000 on the
original cost of ` 9,000. The remainder of the stock is estimated to be worth the original cost.
The value of Goods salvaged was estimated at ` 35,000.
You are required to ascertain the amount of claim to be lodged with the Insurance Company
for the loss of stock.
ANSWER
1. Memorandum Trading Account
for the period 1st April, 2019 to 30th September, 2019

Normal Abnormal Total Normal Abnormal Total

Items Items Items Items
` ` ` ` ` `
To Opening 2,48,000 12,000 2,60,000 By Sales 5,97,000 5,000 6,02,000
stock
 To 3,39,900 - 3,39,900 By Goods
Purchases sent to 44,800 - 44,800
(W.N. 2) consignee

To Wages 78,000 - 78,000 By Loss - 4,000 4,000

(85,000 –
7,000)
To Gross 1,19,400 - 1,19,400 By Closing 1,43,500 3,000 1,46,500
profit stock
@20% (Bal. fig.)
7,85,300 12,000 7,97,300 7,85,300 12,000 7,97,300

Statement of Claim for Loss of Stock

`
Book value of stock as on 30.9.2019 1,46,500
Less: Stock salvaged (35,000)
Loss of stock 1,11,500
Amount of claim to be lodged with insurance company
Policy value
= Loss of stock x
Value of stock on the date of fire
= ` 1,11,500 x 1,20,000/1,46,500 = `91,331 (approx.)
Working Notes:
1. Rate of gross profit for the year ended 31st March, 2019
Trading Account for the year ended 31 st March, 2019

` `
To Opening Stock 2,11,000 By Sales 8,60,000
To Purchases 6,55,000 By Closing stock 2,52,000
Add: written off 8,000
To Wages 82,000 2,60,000
To Gross Profit (b.f.) 1,72,000
11,20,000 11,20,000

Rate of Gross Profit in 2018-19

Gross
Profit
× 100
Sales
= 1,72,000 X 100 / 8,60,000 = 20%
1. Calculation of Adjusted Purchases
`
Purchases (4,48,000 – 58,000) 3,90,000
Less: Drawings [52,000 – (20 % of 52,000)] (41,600)
Free samples (8,500)
Adjusted purchases 3,39,900
QUESTION 3 (MTP DEC 2021) (10
MARKS)
1. On 27th July, 2021, a fire occurred in the godown of M/s. Vijay Exports and most of the stocks were
destroyed. However goods costing ` 5,000 could be salvaged. Their fire fighting expenses were
amounting to ` 1,300.
From the salvaged accounting records, the following information is available relating to the
period from 1.4.2021 to 27.7.2021:
1. Stock as per balance sheet as on 31.3.2021 ` 63,000
2. Purchases (including purchase of machinery costing ` 10,000 ` 2,92,000
3. Wages (including wages paid for installation of machinery ` 3,000) ` 53,000
4. Sales (including goods sold on approval basis amounting to ` 4,12,300
` 40,000. No approval has been received in respect of 1/4th of the goods
sold on approval)
5. Cost of goods distributed as free sample ` 2,000
Other Information:
(i) While valuing the stock on 31.3.2021, ` 1,000 had been written off in respect of certain
slow moving items costing ` 4,000. A portion of these goods were sold in June, 2021
at a loss of
` 700 on original cost of ` 3,000. The remainder of these stocks is now estimated to be
worth its original cost.
(ii) Past record shows the normal gross profit rate is 20%.
(iii) The insurance company also admitted fire fighting expenses as part of insurance policy.
The Company had taken the fire insurance policy of ` 55,000 with the average clause.
Compute the amount of claim of stock destroyed by fire, to be lodged to the Insurance Company.
Also prepare Memorandum Trading Account for the period 1.4. 2021 to 27.7.2021 for normal
and abnormal items.
ANSWER
Memorandum Trading Account for the period 1 st April, 2021 to 27th
July, 2021
Normal Abnormal Total Normal Abnormal Total
Items Items Items Items
` ` ` ` ` `
To Opening 60,000 4,000 64,000 By Sales 4,00,000 2,300 4,02,300
stock (W.N. 3)
(W.N.5)
To Purchases 2,80,000 - 2,80,000 By Loss - 700 700
( W.N. 1)
To Wages 50,000 - 50,000 By Goods on 8,000 - 8,000
(W.N. 4) Approval
( W.N. 2)
To Gross 80,000 - 80,000 By Closing 62,000 1,000 63,000
profit stock (Bal. fig.)
@ 20%
4,70,000 4,000 4,74,000 4,70,000 4,000 4,74,000

Statement of Claim for Loss of Stock

`
Book value of stock as on 27th July, 2021 62,000
 Add: Abnormal Stock 1,000
Less: Stock salvaged (5,000)
Loss of stock 58,000
Add: Fire fighting expenses 1,300
Total Loss 59,300

Amount of claim to be lodged with insurance company

Policy value
= Loss x
Value of stock on the date of fire
= ` 59,300 x (55,000/ 63,000) = ` 51,770 (rounded off)
Working Notes:
1. Calculation of Adjusted Purchases
`
Purchases 2,92,000
Less: Purchase of Machinery (10,000)
Less: Free samples (2,000)
Adjusted purchases 2,80,000

2. Calculation of Goods with Customers

Approval for sale has not been received = ` 40,000 X 1/4 = ` 10,000.
Hence, these should be valued at cost i.e. (` 10,000 – 20% of ` 10,000)
= ` 8,000

3. Calculation of Actual Sales

Total Sales shown ` 4,12,300
Less: Approval for sale not received (1/4 X ` 40,000) ` 10,000 Actual
Sales `
4,02,300

4. Calculation of Wages
Total Wages ` 53,000
Less: Wages for installation of machinery ` 3,000
` 50,000

5. Value of Opening Stock

Original cost of stock as on 31st March,2021
= ` 63,000 + 1,000 (Amount written off)
= ` 64,000.

Question 4 (JULY 2021) [5 MARKS]

On 13* Jan, 2021 fire occurred in the premises of Mr. X, a cloth merchant. The Goods were
totally destroyed. From the books of account, for the period 01-04-2020 to the date of fire
thefollowing particulars wereavailable:
Particulars

Stock as on 01-04-2020 57,000

Purchases 3,05,000

Manufacturing Expenses 60,000

Selling Expenses 24,200

Sales 4,98,000

Atthetimeofvaluingstockason31stMarch,2020,asumof17,000
waswrittenoffonaparticularitem,whichwasoriginallypurchased for1
20,000andwassoldduringtheyearforT18,000.Barringthe transactinn relating to this item, the
gross proflt earned during the periodwas25%onsales.Mr.Xhasinsured hisstockfor140,000.
Compute the amount of theclaim.

Question 5 (JAN 2021) [10 MARKS]

A Fire occurred in the premises of M/S MJ &Co., on 31stDecember, 2019. From the following
particulars related to the period from 1stApril 2019 to 31stDecember 2019, you
arerequiredtoascertaintheamountofclaimtobefiledwiththeinsurancepolicyfor
` 1,00,000 which is subject to average clause. The value of goods salvaged
wasestimatedat`31,000.Theaveragerateofgrossprofitwas20%throughouttheperiod:

Particulars Amount (`)

(i) Opening stock as on 1stApril,2019 1,50,000
(ii) Purchases during the year 4,20,000
(iii) Goods withdrawn by the proprietor for his self-use at Sales 10,000
Value
(iv) Goods distributed as charity at cost 4,000
(v) Purchases include ` 5,000 of Tools purchased, these tools
should have been capitalized.
(vi) Wages (include wages paid for the installation of machinery 90,000
`6,000)
(vii) Sales during the year 6,10,000
(viii) Cost of goods sent to consignee on 1stNovember,2019, lying 25,000
unsold with the consignee.
(ix) Sales Return 10,000

Answer
Memorandum Trading Account for the period 1stApril, 2019 to 31stDec2019

` `
To Opening Stock 1,50,000 By Sales 6,00,000
(6,10,000 - 10,000)
 ToPurchases 4,20,000 By Consignment stock 25,000
Less:Tools purchased (5,000) By Closing Stock (Bal. 1,32,000
fig.)
Goods distributedas (4,000)
Charity
Cost of goods taken
byproprietor (8,000)
4,03,000
To Wages
84,000
(90,000 – 6,000)
To Gross Profit
[20% of Sales) 1,20,000

7,57,000 7,57,000
* For financial statement purposes, this would form part of closing stock (since
there is no sale). However, this has been shown separately for computation of
claim for loss of stock since the goods were physically not with the concern and,
hence, there was no loss of suchstock.

Statement of Insurance Claim

`
Value of stock destroyed by fire 1,32,000
Less: Salvaged Stock (31,000)
Loss of stock 1,01,000

Note:

Since policy amount is less than value of stock on date of fire, average clause will
apply. Therefore, claim amount will be computed by applying the formula:
Insuredvalue
Claim= ×Losssuffered
Total cost

Claim amount = ` 1,01,000/1,32,000X1,00,000 = ` 76,515 (Rounded

off)

NOTE: The average rate of 20% has been given in the question. In the above solution,
Gross Profit is calculated @ 20% on sales. Alternative answer considering Gross Profit
of 20% is also possible.

Question 6 (NOV 2020) [10 MARKS]

A Fire occurred in the premises of M/s B & Co. on 30th September, 2019. The firm had taken
an insurance policy for ` 1,20,000 which was subject to an average clause. Following
particulars were ascertained from the available records for the period from1stApril, 2018 to
30thSeptember,2019:

Amount
(`)
Stock at cost on 1-04-2018 2,11,000
 Stock at cost on 31-03-2019 2,52,000
Purchases during 2018-19 6,55,000
Wages during 2018-19 82,000
Sales during 2018-19 8,60,000
Purchases from 01-04-2019 to 30-09-2019 (including purchase of 4,48,000
machinery costing `58,000)
Wages from 01-04-2019 to 30-09-2019 (including wages for installation 85,000
of machinery costing `7,000)
Sales from 01-04-2019 to 30-09-2019 6,02,000
Sale value of goods drawn by partners (1-4-19 to 30-9-19) 52,000
Cost of Goods sent to consignee on 18thSeptember, 2019 lying unsold 44,800
withthem
Cost of Goods distributed as free samples(1-4-19 to 30-9-19) 8,500

While valuing the Stock at 31st March, 2019, ` 8,000 were written off in respect of a slow
moving item, cost of which was ` 12,000. A portion of these goods was sold at a loss of
` 4,000 on the original cost of ` 9,000. The remainder of the stock is estimated to be worth
the original cost. The value of Goods salvaged was estimated at `35,000.
You are required to ascertain the amount of claim to be lodged with the Insurance Company for the
lossofstock.

Answer
Memorandum TradingAccount
for the period 1st April, 2019 to 30th September, 2019

Normal Abnormal Total Normal Abnormal Total

Items Items Items Items
` ` ` ` ` `
To Opening 2,48,000 12,000 2,60,000 By Sales 5,97,000 5,000 6,02,000
stock
To 3,39,900 - 3,39,900 By Goods
Purchases sent to 44,800 - 44,800
(W.N. 2) consignee

To Wages 78,000 - 78,000 By Loss - 4,000 4,000

(85,000 –
7,000)
To Gross 1,19,400 - 1,19,400 By Closing 1,43,500 3,000 1,46,500
profit stock
@20% (Bal. fig.)
7,85,300 12,000 7,97,300 7,85,300 12,000 7,97,300

Statement of Claim for Loss of Stock

`
Book value of stock as on 30.9.2019 1,46,500
Less: Stock salvaged (35,000)
Loss of stock 1,11,500
 Amount of claim to be lodged with insurance company
Policyvalue
= Loss ofstockx
Valueofstockonthedateoffire
= ` 1,11,500 x 1,20,000/1,46,500 = `91,331 (approx.)

Working Notes:
1. Rate of gross profit for the year ended 31stMarch, 2019 Trading
Account for the year ended 31stMarch,2019
` `
To Opening Stock 2,11,000 By Sales 8,60,000
To Purchases 6,55,000 By Closing stock 2,52,000
Add:writtenoff 8,000
To Wages 82,000 2,60,000
To Gross Profit (b.f.) 1,72,000
11,20,000 11,20,000
Rate of Gross Profit in 2018-19
Gross Profit
×100
Sales
= 1,72,000 X 100 / 8,60,000 = 20%
2. Calculation of AdjustedPurchases

`
Purchases (4,48,000 – 58,000) 3,90,000
Less: Drawings [52,000 – (20 % of 52,000)] (41,600)
Free samples (8,500)
Adjusted purchases 3,39,900

Note: The answer has been given considering that the value of stock (at cost) on
31.3.19 amounting ` 2,52,000 is after adjustment of written off amount in respect of
slow-moving item.

Question 7 (NOV 2019) [10

MARKS]

A fire occurred in the premises of M/s Kirti & Co. on 15thDecember, 2018. The working
remained disturbed upto15thMarch, 2019 as a result of which sales got adversely affected.
The firm had taken out an insurance policy with an average clause against consequential
losses for `2,50,000.
Following details are available from the quarterly sales tax return filed/GST return filed:
Sales 2015-16 2016-17 2017-18 2018-19
(` ) (` ) (` ) (` )
From 1stApril to 30thJune 3,80,000 3,15,000 4,11,900 3,24,000
From 1stJuly to 30th September 1,86,000 3,92,000 3,86,000 4,42,000
From 1stOctober to 31stDecember 3,86,000 4,00,000 4,62,000 3,50,000
From 1stJanuary to 31stMarch 2,88,000 3,19,000 3,80,000 2,96,000
 Total 12,40,000 14,26,000 16,39,900 14,12,000
A period of 3 months (i.e. from 16-12-2018 to 15-3-2019) has been agreed upon as indemnity
period.

Sales from 16-12-2017 to 31-12-2017 68,000

Sales from 16-12-2018 to 31-12-2018 Nil
Sales from 16-03-2018 to 31-03-2018 1,20,000
Sales from 16~03-2019 to 31-03-2019 40,000
Net profit was ` 2,50,000 and standing charges (all insured) amounted to ` 77,980 for the year
ending 31stMarch, 2018.
Youarerequiredtocalculatethelossofprofitclaimamount.

Answer
Grossprofitratio `
Net profit for theyear2017-18 2,50,000

Add: Insuredstandingcharges 77,980

3,27,980
Ratio of Gross profit = =20% 3,27,980
16,39,900
Calculation of Short sales

Indemnity period: 16.12.2018 to 15.3.19

Standard sales to be calculated on basis of corresponding period of year 2017-18

`
Sales for period 16.12.2017 to 31.12.17 68,000
Sales for period 1.1.2018 to 15.3.2018 (Note 1) 2,60,000
Sales for period 16.12.2017 to 15.3.2018 3,28,000
Add: upward trend in sales (15%) (Note 2) 49,200
Standard Sales (adjusted) 3,77,200
Actual sales of disorganized period
Calculation of sales from 16.12.18 to 15.3.19
Sales for period 16.12.18 to 31.12.18 Nil
Sales for 1.1.19 to 15.3.19 (` 2,96,000 – ` 40,000) 2,56,000
Actual Sales 2,56,000
Short Sales (` 3,77,200 - ` 2,56,000) 1,21,200
Loss of gross profit

Shortsalesxgrossprofitratio=1,21,200x20% 24,240

Application of average clause

policy value
Netclaim = Grossclaimx
gross profit on annual turnover
 2,50,000
=24,240x
3,26,240 (W.N.3)
Amount of loss of profit claim = ` 18,575
Working Notes:

1. Sales for period 1.1.18 to15.3.18 `

Sales for 1 Jan. to 31 March (2017-18) (given) 3,80,000
Less: Sales for 16.3.18 to 31.3.18 (given) (1,20,000)
Sales for period 1.1.18 to 15.3.18 2,60,000
2. Calculation of upward trend insales
Total sales in year 2015-16 = ` 12,40,000
Increase in sales in year 2016-17 as compared to 2015-16 = ` 1,86,000
1,86,000 (14,26,000 - 12,40,000)
% increase = = 15%
12,40,000
Increase in sales in year 2017-18 as compared to year 2016-17
2,13,900 (16,39,900 - 14,26,000)
% increase = = 15%
14,26,000

Thus annual percentage increase trend is of 15%

3. Gross profit on annual turnover `
Sales from 16.12.17 to 30.12.17 (adjusted) (68,000 x 1.15) 78,200
1.1.18 to 31.3.18 (adjusted) (3,80,000 x1.15) 4,37,000
1.4.18 to 30.6.18 3,24,000
1.7.18 to 30.9.18 4,42,000
1.10.18 to 15.12.18 (3,50,000 – Nil) 3,50,000
Sales for 12 months just before date of fire* 16,31,200
Gross profit on adjusted annual sales @ 20% 3,26,240

NOTE*: Alternatively, the annual adjusted turnover may be computed as

`17,98,000 (` 15,64,000 X 1.15) considering the annual % increase trend for the
entire period of last 12 months preceding to the date of fire. In that case, the gross
profit on adjusted annual
sales@20%willbecomputedas`3,59,720andnetclaimwillbecomputedaccordingly.

Question 8 (RTP NOV 2021)

On 2.6.2021 the stock of Mr. Heerawas destroyed by fire. However, following particulars were
furnished from the recordssaved:
`
Stock at cost on 1.4.2020 2,02,500
 Stock at 90% of cost on 31.3.2021 2,43,000
Purchases for the year ended 31.3.2021 9,67,500
Sales for the year ended 31.3.2021 13,50,000
Purchases from 1.4.2021 to 2.6.2021 3,37,500
Sales from 1.4.2021 to 2.6.2021 7,20,000
Sales up to 2.6.2021 includes ` 1,12,500 being the goods not dispatched to the customers. The
sales (invoice) price is ` 1,12,500.
Purchases up to 2.6.2021 includes a machinery acquired for ` 22,500.
Purchases up to 2.6.2021 does not include goods worth ` 45,000 received from suppliers, as
invoice not received up to the date of fire. These goods have remained in the godownat the
time of fire. The insurance policy is for ` 1,80,000 and it is subject to average clause. Ascertain
the amount of claim for loss ofstock.

Answer
In the books of Mr.Heera
Trading Account for the year ended 31.3.2021

` `
To Opening Stock 2,02,500 By Sales 13,50,000
To Purchases 9,67,500 By Closing Stock at cost 2,70,000
To Gross Profit 4,50,000 100
(2,43,000× )
90
16,20,000 16,20,000
Memorandum Trading A/c

for the period from 1 4.2021 to 02.06.2021

` `
To Opening Stock (at cost) 2,70,000 By Sales 7,20,000
To Purchases 3,37,500 Less: Goods not
Add: Goods received but dispatched 1,12,500 6,07,500
invoice not received 45,000 By Closing stock (Balancing 2,25,000
3,82,500 figure)
Less:Machinery 22,500 3,60,000
To Gross Profit (Refer W.N.) 2,02,500
8,32,500 8,32,500
Question 9 (RTP MAY 2021)

Ram’s godown caught fire on 29th August, 2020. Large part of the stock of goods was
destroyed and goods costing ` 56,350 could be salvaged. Ram provides you the
following additionalinformation:
`
Cost of stock on 1st April, 2019 3,55,250
Cost of stock on 31st March, 2020 3,95,050
Purchases during the year ended 31st March, 2020 28,39,800
Purchases from 1st April, 2020 to the date of fire 16,55,350
Cost of goods distributed as samples for advertising from 1st April, 2020 to
20,500
the date of fire
Cost of goods withdrawn by trader for personal use from 1st April, 2020
to the date of fire 1,000
Sales for the year ended 31st March, 2020 40,00,000
Sales from 1st April, 2020 to the date of fire 22,68,000

Ram had taken the fire insurance policy for ` 4,00,000 with an average clause. You are
required to compute the amount of the claim that will be admitted by the insurance company.

Answer
7. Memorandum Trading Account for the period 1stApril, 2020 to 29thAugust2020
` `
To Opening Stock 3,95,050 By Sales 22,68,000
To Purchases 16,55,350 By Closing stock (Bal. fig.) 4,41,300
Less: Advertisement (20,500)
Drawings (1,000) 16,33,850
To Gross Profit [30% of
Sales] [W N] 6,80,400
27,09,300 27,09,300

Statement of Insurance Claim

`
Value of stock destroyed by fire 4,41,300
Less: Salvaged Stock (56,350)
3,84,950
Note: Since policy amount is less than the value of stock on date of fire, average clause
willapply.
` 4,00,000/4,41,300 X 3,84,950= ` 3,48,924 (rounded off)
Therefore, claim amount of ` 3,48,924 will be admitted by the Insurance Company.
 Working Note:
Trading Account for the year ended 31stMarch, 2020

` `
To Opening Stock 3,55,250 By Sales 40,00,000
To Purchases 28,39,800 By Closing stock 3,95,050
To Gross Profit 12,00,000
43,95,050 43,95,050
Rate of Gross Profit in 2019-20
Gross Profit
100 = 12,00,000/40,00,000 x 100 = 30%
Sales

Question 10 (RTP NOV 2020)

Shyam’sgodowncaughtfireon29thAugust,2020,andalargepartofthestockofgoods was
destroyed. However, goods costing ` 54,000 could be salvaged. The trader provides you the
following additionalinformation:
`
Cost of stock on 1st April, 2019 3,55,250
Cost of stock on 31st March, 2020 3,95,050
Purchases during the year ended 31st March, 2020 28,39,800
Purchases from 1st April, 2020 to the date of fire 16,55,350
Cost of goods distributed as samples for advertising from 1st April, 2020 to
the date of fire 20,500

Cost of goods withdrawn by trader for personal use from 1st April, 2020
to the date of fire 1,000
Sales for the year ended 31st March, 2020 40,00,000
Sales from 1st April, 2020 to the date of fire 22,68,000
Shyam had taken the fire insurance policy for ` 2,50,000 with an average clause.
Calculate the amount of the claim that will be admitted by the insurance company. Consider that
the rate of gross profit up to date of fire is same as that of previous accounting year.

Answer
Memorandum Trading Account for the period 1stApril, 2020 to 29thAugust2020
` `
To Opening Stock 3,95,050 By Sales 22,68,000
To Purchases 16,55,350 By Closing stock (Bal. fig.) 4,41,300
Less: Advertisement (20,500)
Drawings (1,000) 16,33,850
To Gross Profit [30% of
Sales] [W N] 6,80,400
27,09,300 27,09,300
 Statement of Insurance Claim

`
Value of stock on date of fire 4,41,300
Less: Salvaged Stock (54,000)
stock destroyed 3,87,300

Application of Average Clause

Amount of Insurance claim= ` 3,87,300/ 4,41,300 X 2,50,000 = ` 2,19,409 (rounded off)

Working Note:
Trading Account for the year ended 31stMarch, 2020

` `
To Opening Stock 3,55,250 By Sales 40,00,000
To Purchases 28,39,800 By Closing stock 3,95,050
To Gross Profit 12,00,000
43,95,050 43,95,050
Rate of Gross Profit in 2019-2020
Gross Profit
100 = 12,00,000/40,00,000 x 100 = 30%
Sales

Question 11 (RTP MAY 2020)

A trader intends to take a loss of profit policy with indemnity period of 6 months, however, he
could not decide the policy amount. From the following details, suggest the policy amount:
`
Turnover in lastfinancialyear 36,00,000
Standing charges in lastfinancialyear 7,20,000
Net profit earned in last year was 10% of turnover and the same trend expected in
subsequent year.
Increase in turnover expected 25%.
To achieve additional sales, trader has to incur additional expenditure of ` 50,000.

Answer
Question 12 (MTP APRIL 2021) [8
MARKS]

A fire engulfed the premises of a business of M/s Preet on the morning of 1 st July 2020. The
building, equipment and stock were destroyed and the salvage recorded thefollowing:
Building – Rs. 4,000; Equipment – Rs. 2,500; Stock –Rs. 20,000. The followingother
information was obtained from the records saved for the period from 1 stJanuary to 30thJune
2020:
Rs.
Sales 11,50,000
Sales Returns 40,000
Purchases 9,50,000
Purchases Returns 12,500
Cartage inward 17,500
Wages 7,500
Stock in hand on 31stDecember, 2019 1,50,000
Building (value on 31stDecember, 2019) 3,75,000
Equipment (value on 31stDecember, 2019) 75,000
Depreciation provided till 31stDecember, 2019 on:
Building 1,25,000
Equipment 22,500
No depreciation has been provided after December31st2019. The latestrate of depreciation
is 5% p.a. on building and 15% p.a. on equipment by straightline method.
Normally business makes a profit of 25% on net sales. You are requiredto prepare the statement of
claim for submission to the InsuranceCompany.

Answer
Memorandum Trading Account for the Period from 1.1.2020 to30.6.2020
Rs. Rs.
To Opening Stock (1.1.2020) 1,50,000 By Sales 11,50,000
To Purchases 9,50,000 Less: Sales Returns (40,000) 11,10,000
Less: Returns (12,500) 9,37,500
To Cartage Inwards 17,500 By Closing Stock 2,80,000
To Wages 7,500 (Bal. Fig.)
To Gross Profit 2,77,500
(25% of Rs. 11,10,000)

13,90,000 13,90,000

Stock Destroyed Account

 Rs. Rs.
To TradingAccount 2,80,000 By Stock Salvaged Account 20,000
By Balance c/d (For Claim) 2,60,000
2,80,000 2,80,000
Statement of Claim

Items Cost Depreciation Salvage Claim

(Rs.) (Rs.) (Rs.) (Rs.)
A B C D (E=B-C-D)
Stock 2,80,000 20,000 2,60,000
Buildings 3,75,000 1,25,000 + 9,375 4,000 2,36,625
Equipment 75,000 22,500 + 5,625 2,500 44,375
5,41,000

Question 13 (MTP MARCH 2021) [8 MARKS]

A fire engulfed the premises of a business of M/s Kite in the morning, of 1stOctober, 2019.
The entirestock was destroyed except, stock salvaged of Rs. 50,000. Insurance Policywas
for Rs. 5,00,000 with averageclause.
Stock in hand on 31st March,2019 Rs.3,50,000
The following information was obtained from the records saved for the period from
1stApril to 30th September,2019:
Rs.
Sales 27,75,000
Purchases 18,75,000
Carriage inward 35,000
Carriage outward 20,000
Wages 40,000
Salaries 50,000
Additional Information:
(1) Sales upto30th September, 2019, includes Rs. 75,000 for which goods had not been
dispatched.
(2) On 1stJune, 2019, goods worth Rs. 1,98,000 sold to Hari on approval basis which
wasincluded in sales but no approval has been received in respect of 2/3rd of the goods
sold to him till 30th September,2019.
(3) Purchases upto30th September, 2019 did not include Rs. 1,00,000 for which purchase
invoices had not been received from suppliers, though goods have beenreceived in
godown.
(4) Past records show the gross profit rate of 25% onsales.
You are required to prepare the statement of claim for loss of stock for submission to the
Insurance Company..

Answer
Computation of claim for loss ofstock
Rs.
 Stock on the date of fire (i.e. on 1.10.2019) 3,75,000
Less: Stock salvaged (50,000)
Stock destroyed by fire (Loss of stock) 3,25,000
Insuranceclaimamount= Rs.3,25,000
(Average clause is not applicable as insurance policy amount ( Rs. 5,00,000) is more than
thevalue of closing stock ie. Rs.3,75,000)
Memorandum Trading
A/c (1.4.19 to
30.9.19)
Particulars (Rs.) Particulars (Rs.)
To Opening stock 3,50,000 By Sales 25,68,000
To Purchases 19,75,000 By Goods with customers* 99,000
(Rs. 18,75,000+Rs. 1,00,000) (for approval) (W.N.1)
To Carriage inward 35,000 By Closing stock (bal.fig.) 3,75,000
To Wages 40,000
To Gross profit
(Rs. 25,68,000 x 25%) 6,42,000 _______
30,42,000 30,42,000
* For financial statement purposes, this would form part of closing stock (since there is no
sale). However, this has been shown separately for computation of claim for loss of stock
since the goodswerephysicallynotwiththeentityand,hence,therewas nolossofsuchstock.
Working Notes:
1. Calculation of goods withcustomers
Since no approval for sale has been received for the goods of Rs. 1,32,000 (i.e. 2/3
of Rs. 1,98,000) hence, these should be valued at cost i.e.Rs. 1,32,000 –25% of Rs.
1,32,000
= Rs. 99,000.
2. Calculation of actualsales
Total sales – Goods not dispatched- Sale of goods on approval (2/3rd)=
Sales (Rs. 27,75,000 –75,000– Rs.1,32,000) = Rs. 25,68,000
 Ch.12 – HIRE PURCHASE TRANSACTIONS

QUESTION (RTP DEC 2021) (10

MARKS
On January 1, 2018 M/s Hello acquired a Machine on hire purchase from M/s Pass. The
terms of the contract were as follows:
(a) The cash price of the Machine was ` 2,00,000.
(b) ` 80,000 were to be paid on signing of the contract.
(c) The balance was to be paid in annual instalments of ` 40,000 plus interest. The first
instalment was to be paid on 31st Dec. 2018.
(d) Interest chargeable on the outstanding balance was 6% p.a.
(e) Depreciation at 10% p.a. is to be written-off using the WDV method.
You are required to give Journal Entries in the books of M/s Hello from January 1, 2018 to
December 31, 2020.
ANSWER
1. In the books of M/s Hello
Journal Entries
Date Particulars Dr. Cr.
` `
2018 Machine A/c Dr. 2,00,000
Jan. 1 To M/s Pass A/c 2,00,000
(Being the purchase of a Machine on hire
purchase from M/s Pass)
“ M/s Pass A/c Dr. 80,000
To Bank A/c 80,000
(Being the amount paid on signing the H.P.
contract)
Dec. 31 Interest A/c Dr. 7,200
To M/s Pass A/c 7,200
(Being the interest payable @ 6% on
` 1,20,000
“ M/s Pass A/c (` 40,000+` 7,200) Dr. 47,200
To Bank A/c 47,200
(Being the payment of 1st instalment along
with interest)
“ Depreciation A/c Dr. 20,000
To Machine A/c 20,000
(Being the depreciation charged @ 10% p.a.
on ` 2,00,000)
Profit & Loss A/c Dr. 27,200
To Depreciation A/c 20,000
To Interest A/c 7,200
(Being the depreciation and interest
transferred to Profit and Loss Account)
 Interest A/c Dr. 4,800
To M/s Pass A/c 4,800
(Being the interest payable @ 6% on
` 80,000)
M/s Pass A/c (` 40,000 + ` 4,800) Dr. 44,800
To Bank A/c 44,800
(Being the payment of 2nd instalment along with
interest)
Depreciation A/c Dr. 18,000
To Machine A/c 18,000
(Being the depreciation charged @ 10% p.a.)
Profit & Loss A/c Dr. 22,800
To Depreciation A/c 18,000
To Interest A/c 4,800
(Being the depreciation and interest charged to
Profit and Loss Account)
Interest A/c Dr. 2,400
To M/s Pass A/c 2,400
(Being the interest payable @ 6% on
` 40,000)
M/s Pass A/c (` 40000 + ` 2,400) Dr. 42,400
To Bank A/c 42,400
(Being the payment of final instalment along
with interest)
Depreciation A/c Dr. 16,200
To Machine A/c 16,200
(Being the depreciation charged @ 10% p.a.)
Profit & Loss A/c Dr. 18,600
To Depreciation A/c 16,200
To Interest A/c 2,400
(Being the interest and depreciation charged to
Profit and Loss Account)

QUESTION 2 (MTP DEC 2021) (5

MARKS)
Jai Ltd purchased a machine on hire purchase basis from KM Ltd. on the following terms:
(a) Cash price ` 1,20,000.
(b) Down payment at the time of signing the agreement on 1-1-2016, ` 32,433.
(c) 5 annual instalments of ` 23,100, the first to commence at the end of twelve months
from the date of down payment.
(d) Rate of interest is 10% p.a.
Your are required to calculate the total interest and interest included in each instalment.

ANSWER
 Calculation of interest
Total Interest in each Cash price in
(`) instalment each instalment
(1) (2)
Cash Price 1,20,000
Less: Down Payment (32,433) Nil ` 32,433
Balance due after down payment 87,567
Interest/Cash Price of 1st instalment - ` 87,567x10/100 = ` 23,100 –
8,757 ` 8,757 =
` 14,343
Less: Cash price of 1st instalment (14,343)
Balance due after 1st instalment 73,224
Interest/cash price of 2nd instalment - ` 73,224x 10/100 = ` 23,100 -
` 7322 ` 7,322 =
` 15,778
Less: Cash price of 2nd instalment (15,778)
Balance due after 2nd instalment 57,446
Interest/Cash price of 3rd instalment - ` 57,446 x 10/100 = ` 23,100 -
` 5745 ` 5745 =
` 17,355
Less: Cash price of 3rd instalment (17,355)
Balance due after 3rd instalment 40,091
Interest/Cash price of 4th instalment - ` 40,091x10/100 = ` 23,100 -
` 4,009 ` 4,009 =
` 19,091
Less: Cash price of 4th instalment (19,091)
Balance due after 4th instalment 21,000
Interest/Cash price of 5th instalment - `21,000 x10/100 = ` 23,100 –
` 2,100 ` 2,100 = 21,000
Less: Cash price of 5th instalment (21,000)
Total Nil ` 27,933 `1,20,000
Total interest can also be calculated as follow:
(Down payment + instalments) – Cash Price = ` [32,433 +(23,100 x 5)] – `1,20,000 = ` 27,933

Question 3 (JULY 2021) [5

MARKS]

An Engineer purchased a compressing machine on hire purchase system. As per the terms he is
required to pay T 1,40,000 down, T 1,06,000 at the end of first year, T 98,000 at the end of
the second year, 87,000 at the end of the third year and 1 55,000 at the end of fourth year.
Interest charged @ 12% p.a. You are required to calculate total cash price of the machine
and the interest paid with each installment.

Question 4 (JAN 2021)

[8
MARKS]
JaiLtdpurchasedamachineonhirepurchasebasisfromKMLtd.onthefollowingterms:
 (a) Cash price `1,20,000.
(b) Down payment at the time of signing the agreement on 1-1-2016, `32,433.
(c) 5 annual instalments of `23,100, the first to commence at the end of twelve months
from the date of downpayment.
(d) Rate of interest is 10%p.a.
Your are required to calculate the total interest and interest included in each instalment. Also
prepare the Ledger Account of KM Ltd. in the books of JaiLtd.

Answer
Calculation ofinterest

Total Interest in each Cash price in

(`) instalment eachinstalment
(1) (2)
Cash Price 1,20,000
Less: Down Payment (32,433) Nil ` 32,433
Balance due after down payment 87,567
Interest/Cash Price of 1st - ` 87,567x10/100 ` 23,100 –
instalment = ` 8,757 =
8,757 ` 14,343
Less: Cash price of 1stinstalment (14,343)
Balance due after 1stinstalment 73,224
Interest/cash price of 2ndinstalment - ` 73,224x 10/100 ` 23,100 -
= ` 7,322=
` 7322 ` 15,778
Less: Cash price of 2ndinstalment (15,778)
Balance due after 2ndinstalment 57,446
Interest/Cash price of 3rdinstalment - ` 57,446 x 10/100 ` 23,100 -
= ` 5745=
` 5745 ` 17,355
Less: Cash price of 3rdinstalment (17,355)
Balance due after 3rdinstalment 40,091
Interest/Cash price of 4thinstalment - ` 40,091x10/100= ` 23,100 -
` 4,009 ` 4,009=
` 19,091
Less: Cash price of 4thinstalment (19,091)
Balance due after 4thinstalment 21,000
Interest/Cash price of 5thinstalment - `21,000 x10/100 ` 23,100 –
= ` 2,100 ` 2,100= 21,000
Less: Cash price of 5thinstalment (21,000)
Total Nil ` 27,933 `1,20,000
Total interest can also be calculated as follow:

(Down payment + instalments) – Cash Price = ` [32,433 +(23,100 x 5)] – `1,20,000 =

` 27,933

KM Ltd. Account in the books of Jai Ltd

 Date Particulars ` Date Particulars `
1.1.2016 To Bank A/c 32,433 1.1.2016 By MachineA/c 1,20,000
31.12.20 To Bank A/c 23,100 31.12.20 By Interest A/c 8,757
16 16
31.12.20 To Balance c/d 73,224
16

1,28,75 1,28,757
7
31.12.20 To Bank A/c 23,100 1.1.2017 By Balance b/d 73,224
17
31.12.20 To Balance c/d 57,446 31.12.20 By Interest A/c 7,322
17 17

80,546 80,546

31.12.20 To Bank A/c 23,100 1.1.2018 By Balance b/d 57,446

18
31.12.20 To Balance c/d 40,091 31.12.20 By Interest A/c 5,745
18 18

63,191 63,191

31.12.20 To Bank A/c 23,100 1.1.2019 By Balance b/d 40,091

19
31.12.20 To Balance c/d 21,000 31.12.20 By Interest A/c 4,009
19 19

44,100 44,100

31.12.20 To Bank A/c 23,100 1.1.2020 By Balance b/d 21,000

20

____ 31.12.20 By Interest A/c 2,100

20

23,100 23,100

Question 5 (NOV 2020) [8

MARKS]

On 1stApril, 2017, Mr. Nilesh acquired a Tractor on Hire purchase from Raj Ltd. The terms
of contract were asfollows:
(i) The Cash price of the Tractor was `11,50,000.
(ii) ` 2,50,000 were to be paid as down payment on the date ofpurchase.
(iii) The Balance was to be paid in annual instalments of ` 3,00,000 plus interest at the end
of theyear.
(iv) Interest chargeable on the outstanding balance was 8%p.a.
(v) Depreciation @ 10% p.a. is to be charged using straight linemethod.
Mr. Nilesh adopted the Interest Suspense method for recording his Hire purchase
transactions.
 You are required to :
Prepare the Tractor account, Interest Suspense account and Raj Ltd.’s account in the
books of Mr. Nilesh for the period of hirepurchase.

Answer
TractorAccount

Date Particulars ` Date Particulars `

1.4.2017 To Raj 11,50,000 31.3.2018 By Dep. 1,15,000
_______ By Balance c/d 10,35,000
11,50,000 11,50,000
1.4.2018 To Balance b/d 10,35,000 31.3.2019 By Dep. 1,15,000
________ By Balance c/d 9,20,000
10,35,000 10,35,000
1.4.2019 To balance b/d 9,20,000 31.3.2020 By Dep. 1,15,000
_______ By Balance c/d 8,05,000
9,20,000 9,20,000
H.P. Interest Suspense Account

Date Particulars ` Date Particulars `

1.4.2017 To Raj Ltd. A/c 1,44,000 31.3.2018 By Interest A/c 72,000
(W.N.)
31.3.2018 By Balance c/d 72,000
1,44,000 1,44,000
1.4.2018 To Balance b/d 72,000 31.3.2019 By Interest A/c 48,000
31.3.2019 By Balance c/d 24,000
72,000 72,000
1.4.2019 To Balance b/d 24,000 31.3.2020 By Interest A/c 24,000
Total Interest = ` 72,000 + ` 48,000 + ` 24,000 = `
1,44,000

Raj Ltd. Account

Date Particulars ` Date Particulars `

1.4.2017 To Bank A/c 2,50,000 1.4.2017 By Tractor A/c 11,50,000
31.3.2018 To Bank A/c 3,72,000 By H.P. Interest 1,44,000
SuspenseA/c
To Balance c/d 6,72,000
12,94,000 12,94,000
31.3.2019 To Bank A/c 3,48,000 1.4.2018 By Balance b/d 6,72,000
To Balance c/d 3,24,000 _______
6,72,000 6,72,000
31.3.2020 To Bank A/c 3,24,000 1.4.2019 By Balance b/d 3,24,000

Question 6 (RTP NOV 2021)

On January 1, 2018 M/s Hello acquired a Machine on hire purchase from M/s Pass. The
 terms of the contract were asfollows:
(a) The cash price of the Machine was `2,00,000.
(b) ` 80,000were to be paid on signing of the contract.
(c) The balance was to be paid in annual instalments of ` 40,000 plus interest. The first
instalment was to be paid on 31stDec.2018.
(d) Interest chargeable on the outstanding balance was 6%p.a.
(e) Depreciationat10%p.a.istobewritten-offusingtheWDVmethod.
You are required to give Journal Entries in the books of M/s Hello from January 1, 2018 to
December 31,2020.

Answer
In the books of
M/s Hello
JournalEntries
Date Particulars Dr. Cr.
` `
2018 Machine A/c Dr. 2,00,000
Jan. 1 To M/s Pass A/c 2,00,000
(Being the purchase of a Machine on hire
purchase from M/s Pass)
“ M/s Pass A/c Dr. 80,000
To Bank A/c 80,000
(Being the amount paid on signing the H.P.
contract)
Dec. 31 Interest A/c Dr. 7,200
To M/s Pass A/c 7,200
(Being the interest payable @ 6% on
` 1,20,000
“ M/s Pass A/c (` 40,000+` 7,200) Dr. 47,200
To Bank A/c 47,200
(Being the payment of 1stinstalment along
withinterest)
“ Depreciation A/c Dr. 20,000
To Machine A/c 20,000
(Being the depreciation charged @ 10% p.a.
on ` 2,00,000)
“ Profit & Loss A/c Dr. 27,200
To Depreciation A/c 20,000
To Interest A/c 7,200
(Being the depreciation and interest
transferred to Profit and LossAccount)
2019 Interest A/c Dr. 4,800
Dec. 31 To M/s Pass A/c 4,800
(Being the interest payable @ 6% on
` 80,000)
M/s Pass A/c (` 40,000 + `4,800) Dr. 44,800
 To Bank A/c 44,800
(Being the payment of 2ndinstalment along with
interest)
Depreciation A/c Dr. 18,000
To Machine A/c 18,000
(Being the depreciation charged @ 10% p.a.)
Profit & Loss A/c Dr. 22,800
To Depreciation A/c 18,000
To Interest A/c 4,800
(Being the depreciation and interest charged to
Profit and Loss Account)
2020 Interest A/c Dr. 2,400
Dec. 31 To M/s Pass A/c 2,400
(Being the interest payable @ 6% on
` 40,000)
M/s Pass A/c (` 40000 + `2,400) Dr. 42,400
To Bank A/c 42,400
(Being the payment of final instalment along
with interest)
Depreciation A/c Dr. 16,200
To Machine A/c 16,200
(Being the depreciation charged @ 10% p.a.)
Profit & Loss A/c Dr. 18,600
To Depreciation A/c 16,200
To Interest A/c 2,400
(Being the interest and depreciation charged to
Profit and Loss Account)

Question 7 (RTP MAY 2021)

(a) What is meant by repossession. What is the treatment for repossession in the books of
HirePurchaser?
(b) On 1st April 2018 M/s KMR acquired a machine on hire purchase from M/s PQR on the
followingterms:
(1) Cash price of the machine was `2,40,000.
(2) The down payment at the time of signing the contract was `96,000.
(3) The balance amount is to be paid in 3equal annual instalments plus interest.
(4) Interest is chargeable @ 8%p.a.
On this basis prepare the H.P. Interest Suspense Account and Account of M/s PQR
inthebooksofthepurchaserfortheperiodofhirepurchase.

Answer
(a) Repossession is the Right of the Seller to take back the goods sold from the Hire purchaser in
case of any default by the Hire purchaser and can sell the goods after
reconditioningtoanyotherperson.ThehirepurchaserclosestheHireVendor’s Account
 by transferring the balance of Hire Vendor Account to Hire Purchase Asset
andthenfindingtheprofitandlossonrepossessioninAssetAccount.

(b) In the books of M/s KMR(purchaser)

H.P. Interest Suspense Account

Date Particulars ` Date Particulars `

1.4.18 To M/s PQR A/c 23,040 31.3.19 By Interest A/c 11,520
(W.N.)
31.3.19 By Balance c/d 11,520
23,040 23,040
1.4.19 To Balance b/d 11,520 31.3.20 By Interest A/c 7,680
31.3.20 By Balance c/d 3,840
11,520 11,520
1.4.20 To Balance b/d 3,840 31.3.21 By Interest A/c 3,840
M/s PQR Account

Date Particulars ` Date Particulars `

1.4.18 To Bank/Cash A/c 96,000 1.4.18 By Machine A/c 2,40,000
31.3.19 To Bank/Cash A/c 59,520 1.4.18 By H.P. Interest 23,040
SuspenseA/c
31.3.18 To Balance c/d 1,07,520
2,63,040 2,63,040
31.3.20 To Bank/Cash A/c 55,680 1.4.19 By Balance b/d 1,07,520
31.3.20 To Balance c/d 51,840
1,07,520 1,07,520
31.3.21 To Bank/Cash A/c 51,840 1.4.20 By Balance b/d 51,840
Working Note:
Cash Price 2,40,000
Down Payment 96,000
1,44,000
` 1,44,000 to be paid in 3 instalments ie. ` 48,000 plus interest
Total interest = ` 11,520 + ` 7,680 + ` 3,840 = ` 23,040

Question 8 (RTP NOV 2020)

X purchased three cars from Y on hire purchase basis, the cash price of each car being `
2,00,000. The hire purchaser charged depreciation @ 20% on diminishing balance method.
Two cars were seized by on hire vendor when second installment was not paid at the end
ofthe second year. The hire vendor valued the two cars at cash price less 30%depreciation
charged under diminishing balance method. The hire vendor spent ` 10,000 on repairs of the
cars and then sold them for a total amount of `1,70,000.
You are required to compute: (i) Agreed value of two cars taken back by the hire vendor and
book value of car left with the hire purchaser and (ii) Profit or loss to hire purchaser on two
cars taken back by the hirevendor.

Answer
`
 (i) Price of two cars = ` 2,00,000 x 2 4,00,000
Less: Depreciation for the first year @ 30% 1,20,000
2,80,000
30
Less: Depreciation for the second year = ` 2, 80,000 x 84,000
100
Agreed value of two cars taken back by the hire vendor 1,96,000
Cash purchase price of one car 2,00,000
Less: Depreciation on ` 2,00,000 @20% for the first year 40,000
Written drown value at the end of first year 1,60,000
Less: Depreciation on ` 1,60,000 @ 20% for the second year 32,000
Book value of car left with the hire purchaser 1,28,000
Book value of one car as calculated above 1,28,000
Book value of Two cars = ` 1,28,000 x 2 2,56,000
Value at which the two cars were taken back, calculated in (i) above 1,96,000
Hence, loss to hire purchaser on cars taken back by hire vendor
= ` 2,56,000 – ` 1,96,000 = ` 60,000

Question 9 (RTP MAY 2020)

On January 1, 20X1 Kasturi Ltd. acquired a Pick-up Van on hire purchase from ShoryaLtd.
The terms of the contract were asfollows:
(a) The cash price of the van was `25,000.
(b) ` 10,000were to be paid on signing of the contract.
(c) The balance was to be paid inannual instalments of ` 5,000 plus interest.
(d) Interest chargeable on the outstanding balance was 6%p.a.
(e) Depreciationat10%p.a.istobewritten-offusingthestraight-linemethod.
You are required to show the Van account &Shorya Ltd. account in the books of Kasturi
Ltd. from January 1, 20X1 to December 31,20X3.

Answer
Ledger Accounts in the books of Kasturi
VanAccount
Date Particulars ` Date Particulars `
1.1.20X1 To Shorya Ltd. 25,000 31.12.20X1 By Depreciation A/c 2,500
31.12.20X1 By Balance c/d 22,500
25,000 25,000
1.1.20X2 To Balance b/d 22,500 31.12.20X2 By Depreciation A/c 2,500
31.12.20X2 By Balance c/d 20,000
22,500 22,500
1.1.20X3 To Balance b/d 20,000 31.12.20X3 By Depreciation A/c 2,500
31.12.20X3 By Balance c/d 17,500
20,000 20,000
 Shorya Ltd. Account

Date Particulars ` Date Particulars `

1.1.20X1 To Bank A/c 10,000 1.1.20X1 By Van A/c 25,000
31.12.20X1 To Bank A/c 5,900 31.12.20X1 By Interest A/c 900
31.12.20X1 To Balance c/d 10,000
25,900 25,900
31.12.20X2 To Bank A/c 5,600 1.1.20X2 By Balance b/d 10,000
31.12.20X2 To Balance c/d 5,000 31.12.20X2 By Interest A/c 600
10,600 10,600
31.12.20X3 To Bank A/c 5,300 1.1.20X3 By Balance b/d 5,000
31.12.20X3 By Interest A/c 300
5,300 5,300

Question 10 (MTP APRIL 2021) [4 MARKS]

A acquired on1st January, 2020 a machine under a Hire-Purchase agreement which provides for 5 half-
yearly instalments of Rs. 6,000 each, the first instalment being due on 1st July, 2020. Assuming that the
applicable rate of interest is 10 per cent per annum, calculate the cash value of the machine. All
working should form part of theanswer.

Answer
Statementshowingcashvalueofthemachineacquiredonhire-purchasebasis
Instalment Interest @ 5% half Principal Amount
Amount yearly (10% p.a.) = (in eachinstalment)
5/105 = 1/21)
(in each instalment)
Rs. Rs. Rs.
5th Instalment 6,000 286 5,714
Less: Interest (286)
5,714
Add: 4th Instalment 6,000
11,714 558 5,442
Less: Interest (558) (11,156–5,714)
11,156
Add: 3rd instalment 6,000
17,156 817 5,183
Less: Interest (817) (16,339–11,156)
16,339
Add: 2nd instalment 6,000
22,339 1,063 4,937
Less: Interest (1,063) (21,276–16,339)
21,276
Add: 1st instalment 6,000
27,276 1,299 4,701
Less: Interest (1,299) (25,977–21,276)
25,977 4,023 25,977
The cash purchase price of machinery is Rs. 25,977.
Question 11 (MTP MARCH 2021) [4 MARKS]

Identify four differences between HirePurchase and Installment Payment agreement.

Answer
Statement showing differences between Hire Purchase and InstallmentSystem
Basis of Distinction Hire Purchase Installment System
1. Governing Act It is governed by Hire Purchase It is governed by the Sale of
Act,1972. Goods Act, 1930.
2. Nature of Contract It is an agreement of hiring. It is an agreement of sale.
3. Passing of Title The title to goods passes on last The title to goods passes
(ownership) payment. immediately as in the case of
usual sale.
4. Right to Return The hirer may return goods without Unless seller defaults, goods
goods further payment except for accrued are not returnable.
installments.
5. Seller’s right to The seller may take possession of the The seller can sue for price if the
repossess goods if hirer is in default. buyer is in default. He cannot
take possession of the goods.

6. Right of Disposal Hirer cannot hire out, sell, pledge or The buyer may dispose offthe
assign entitling transferee to retain goods and give good title tothe
possession as against the hire vendor. bonafidepurchaser.

7. Responsibility for The hirer is not responsible for risk of The buyer is responsible for risk
Risk ofLoss loss of goods if he has taken reasonable of loss of goods because ofthe
precaution because the ownership has ownership has transferred.
not yet transferred.
8. Name of Parties The parties involved are called Hirer The parties involved are called
involved and Hire vendor. buyer and seller.
9. Component other Component other than Cash Price Component other than Cash
than cashprice. included in installment is called Hire Price included in Installment is
charges. called Interest.

Note: Any four differences may form part of the answer.

Question 12 (MTP MARCH 2021) [4 MARKS]

M/s. Kodam Enterprises purchased a generator on hire purchase from M/s. Sanctum Ltd. on
1stApril, 2019. The hire purchase price was Rs.48,000. Down payment was Rs.12,000 and
the balance is payable in 3 annual instalments of Rs.12,000 each payable at theend of each
financialyear.Interestispayable@8%p.a.andisincludedintheannualpaymentofRs.12,000.
Depreciation at 10% p.a. is to be written off using the straight line method.
You are required to calculate the cash price of the generator and the interest paid on each
instalment.

Answer
Calculation of Interest and CashPrice
Ratio of interest and amount due = 8 / (100 + rate of interest) i.e. 8/108
To ascertain cash price, interest will be calculated from last instalment to first instalmentas
follows:
No. of Amount due at the time Interest Cumulative
instalments of instalment Cash price
[1] [2] [3] (2-3) = [4]
3rd 12,000 8/108 of Rs.12,000 =Rs. 889 11,111
2nd 23,111 [W.N.1] 8/108 of Rs. 23,111 = Rs.1,712 21,399
1st 33,399 [W.N.2] 8/108 of Rs.33,399 = Rs.2,474 30,925
5,075
Total cash price = Rs. 30,925 + Rs. 12,000 (down payment) =Rs.42,925
Working Notes:
1. Rs. 11,111+ 2nd instalment of Rs. 12,000= Rs.23,111
2. Rs. 21,399+ 1stinstalment of Rs. 12,000= Rs.33,399
 Ch.13 – DEPARTMENTAL ACCOUNTS

QUESTION 1 (RTP DEC 2021)

M/s. Hero is a Departmental Store having three departments X, Y and Z. The information
regarding three departments for the year ended 31st March, 2021 are given below:
Particulars Dept. X Dept. Y Dept. Z
Opening Stock 18,000 12,000 10,000
Purchases 66,000 44,000 22,000
Debtors at end 7,500 5,000 5,000
Sales 90,000 67,500 45,000
Closing Stock 22,500 8,750 10,500
Value of furniture in each Department 10,000 10,000 5,000
Floor space occupied by each Dept. (in Sq. ft.) 1,500 1,250 1,000
Number of employees in each Department 25 20 15
Electricity consumed by each Department (in units) 300 200 100
Additional Information:
Amount (`)
Carriage inwards 1,500
Carriage outwards 2,700
Salaries 24,000
Advertisement 2,700
Discount allowed 2,250
Discount received 1,800
Rent, Rates and Taxes 7,500
Depreciation on furniture 1,000
Electricity Expenses 3,000
Labour welfare expenses 2,400
Prepare Departmental Trading and Profit & Loss Account for the year ended 31st
March, 2021 after providing provision for Bad Debts at 5%.
ANSWER
1. In the Books of M/s Hero
Departmental Trading and Profit and Loss
Account for the year ended 31st March,
2021

Particulars Deptt.X Deptt.Y Deptt.Z Total Particulars Deptt.X Deptt.Y Deptt.Z Total
` ` ` ` ` ` ` `
To Stock 18,000 12,000 10,000 40,000 By Sales 90,000 67,500 45,000 2,02,500
(opening)
To Purchases 66,000 44,000 22,000 1,32,000 By Stock 22,500 8,750 10,500 41,750
(closing)
To Carriage 750 500 250 1,500
Inwards
To Gross Profit 27,750 19,750 23,250 70,750
c/d (b.f.)
 1,12,500 76,250 55,500 2,44,250 1,12,500 76,250 55,500 2,44,250
To Carriage 1,200 900 600 2,700 By Gross 27,750 19,750 23,250 70,750
Outwards Profit b/d
To Electricity 1,500 1,000 500 3,000 By Discount 900 600 300 1,800
received
To Salaries 10,000 8,000 6,000 24,000
To Advertisement 1,200 900 600 2,700
To Discount 1,000 750 500 2,250
allowed
To Rent, Rates 3,000 2,500 2,000 7,500
and Taxes
To Depreciation 400 400 200 1,000
To Provision for 375 250 250 875
Bad Debts @ 5%
of debtors
To Labour 1,000 800 600 2,400
welfare expenses
To Net Profit (b.f.) 8,975 4,850 12,300 26,125
28,650 20,350 23,550 72,550 28,650 20,350 23,550 72,550

Working Note:

Basis of allocation of expenses

Carriage inwards Purchases (3:2:1)
Carriage outwards Turnover (4:3:2)
Salaries No. of Employees (5:4:3)
Advertisement Turnover (4:3:2)
Discount allowed Turnover (4:3:2)
Discount received Purchases (3:2:1)
Rent, Rates and Taxes Floor Space occupied (6:5:4)
Depreciation on furniture Value of furniture (2:2:1)
Labour welfare expenses No. of Employees (5:4:3)
Electricity expense Units consumed (3:2:1)
Provision for bad debts Debtors balances (3:2:2)

QUESTION 2 ( MTP DEC 2021) (10 MARKS)

Following is the Trial Balance of Mr. Mohan as on 31.03.2021:
Particulars Debit (`) Credit (`)
Capital Account 40,000
Drawing Account 1,500
Opening Stock Department A 8,500
Department B 5,700
Department C 1,200
Purchases Department A 22,000
Department B 17,000
Department C 8,000
Sales Department A 54,000
Department B 33,000
 Department C 21,000
Sales Returns Department A 4,000
Department B 3,000
Department C 1,000
Freight and Carriage Department A 1,400
Department B 800
Department C 200
Furniture and fixtures 4,600
Plant and Machinery 20,000
Motor Vehicles 40,000
Sundry Debtors 12,200
Sundry Creditors 15,000
Salaries 4,500
Power and water 1,200
Telephone charges 2,100
Bad Debts 750
Rent and taxes 6,000
Insurance 1,500
Wages Department A 800
Department B 550
Department C 150
Printing and 2,000
Stationerie
s
Advertising 3,500
Bank Overdraft 12,000
Cash in hand 850
1,75,000 1,75,000
You are required to prepare Department Trading, Profit and Loss Account and the Balance
Sheet taking into account the following adjustments:
(a) Outstanding Wages: Department B- ` 150, Department C – ` 50.
(b) Depreciate Plant and Machinery and Motor Vehicles at the rate of 10%.
(c) Each Department shall share all expenses in proportion to their sales.
(d) Closing Stock: Department A - ` 3,500, Department B - ` 2,000, Department C - `
1,500.
ANSWER
1. Trading and Profit and Loss Account for the year ended on
31st Match, 2021
Particulars A ( `) B ( `) C (`) Particulars A (`) B ( `) C (`)
To Opening Stock 8,500 5,700 1,200 By Sales less 50,000 30,000 20,000
Sales returns
To Purchases 22,000 17,000 8,000 By Closing 3,500 2,000 1,500
Stock
To Freight & carriage 1,400 800 200
To Wages 800 700 200
 To Gross profit 20,800 7,800 11,900
53,500 32,000 21,500 53,500 32,000 21,500
To Salaries 2,250 1,350 900 By Gross Profit 20,800 7,800 11,900
To Power & Water 600 360 240 By Net Loss - 465 -
To Telephone 1,050 630 420
Charges
To Bad Debts 375 225 150
To Rent & Taxes 3,000 1,800 1,200
To Insurance 750 450 300
To Printing & 1,000 600 400
Stationery
To Advertising 1,750 1,050 700
To Depreciation 3,000 1,800 1,200
(2,000 +4,000)
To Net Profit 7,025 6,390
20,800 8,265 11,900 20,800 8,265 11,900

Balance Sheet as at 31.03.2021

Liabilities ` Assets `
Capital A/c 40,000 Furniture & Fixtures 4,600
Add: Net Profit (` Plant & Machinery 20,000
7,025 + ` 13,415
6,390)
53,415 Less: Depreciation 2,000 18,000
Less: Net loss in Dept B 465 Motor Vehicles 40,000
52,950 Less: Depreciation 4,000 36,000
Less: Drawings 1,500 51,450 Sundry Debtors 12,200
Sundry Creditors 15,000 Cash in hand 850
Bank Overdraft 12,000 Closing Stock 7,000
Wages Outstanding 200
78,650 78,650

QUESTION 3 ( MTP DEC 2021) (10 MARKS)

1. Ram, Sham and Mahaan sons of Prabhu Dyal are running Punya Hotel in Chennai. Ram is heading
Room division (A), Sham is heading banquet division (B) and Mahaan is heading Restaurant
division (C). Each of the three brothers would receive 60% of the profits, if any, of the department
of which he was incharge and remaining combined profits would be shared in 2:2:1 ratio. The
following is the Trading and Profit and Loss Account of the firm for the year ended March 31,2021:
(`) (`) (`) (`)
To Opening Stock: By Sales:
Room (A) 25,650 Room (A) 2,70,000
Banquet (B) 18,000 Banquet (B) 1,65,000
Restaurant (C) 19,500 63,150 Restaurant (C) 86,700 5,21,700
To Purchases: By Discount
Room (A) 2,35,000 received 1,650
Banquet (B) 1,56,000 By Closing Stock:
Restaurant (C) 84,200 4,75,200 Room (A) 55,300
To Salaries 34,400 Banquet (B) 31,800
 To Royalties 8,000 Restaurant (C) 42,500 1,29,600
To Parking fee
& car washing 9,600
charges
To Discount 2,500
allowed
To Misc. Exp. 7,000
To Depreciation 1,160 62,660
To Net Profit 51,940
Total 6,52,950 Total 6,52,950
Prepare: (I) Departmental Trading and Profit and Loss Account alongwith combined Profit &
Loss account and (II) Profit and Loss Appropriation Account after incorporating the following
information:
(i) Closing stock of Dept. B includes goods amounting ` 3,500 being transferred from Dept.
A
(ii) Stock value ` 9,300 and other goods of the value of ` 1,500 were transferred at selling
price by Departments A and C respectively to Department B.
(iii) The details of salaries were as follows:
(1) Admin Office 60%, Pantry 40%
(2) Allocate Admin Office in the proportion of 3: 2:1 among the Departments A, B, C
(3) Distribute Pantry expenses equally among the Department A and B.
(iv) The parking fee is ` 500 per month which is to be divided equally between Departments
A, B & C.
(v) All other expenses are to be allocated in ratio of 2:2:1.
(vi) Discounts received are to be credited to the three Departments as
follows: A : ` 650; B : ` 600; C : ` 400.
(vii) The opening stock of Department B does not include any goods transferred from other
departments and closing stock of Department B does not include any stock transferred
from Department C.
ANSWER
Ram, Sham and Mahaan
Departmental Trading and Profit & Loss Account for the year ended 31-3-2021

A B C A B C
To Opening 25,650 18,000 19,500 By Sales 2,70,000 1,65,000 86,700
Stock
To Purchases 2,35,000 1,56,000 84,200 By Transfer 9,300 1,500
To Transfer 10,800 By Closing Stock 55,300 31,800 42,500
To Gross profit 73,950 12,000 27,000
c/d
3,34,600 1,96,800 1,30,700 3,34,600 1,96,800 1,30,700
To Salaries: By Gross profit b/d 73,950 12,000 27,000
Admin 10,320 6,880 3,440 By Discount 650 600 400
Received
To Royalty 3,200 3,200 1,600 By Net loss - 12,064
To Parking 2,000 2,000 2,000
To Salaries: 6,880 6,880
Pantry
 To Car wash 1,440 1,440 720
To Discount 1,000 1,000 500
Allowed
To Misc 2,800 2,800 1,400
Expenses
To Depreciation 464 464 232
To Net Profit c/d 46,496 - 17,508
74,600 24,664 27,400 74,600 24,664 27,400
Note: Gross profit of Department A is 26.48% (approx.) of Sales price (including transfer to
Department C) 73,950/(2,70,000+9,300).There is some unrealized profit only on inter
departmental stock 26.48% of ` 3,500 is as stock reserve i.e. ` 927. This will be debited to
Profit and Loss (combined) Account.
Profit and Loss Account (combined)
` `
To Stock Reserve (See Note) 927 By Net Profit transferred from 64,004
To Net loss transferred from profit & 12,064 Profit & Loss A/c
loss A/c
To Profit transfer 51,013
64,004 64,004
Profit and Loss Appropriation Account

To Ram: 60% of Profit of Deptt. A 27,898 By Profit transfer 51,013

To Mahaan: 60% of Profit of Deptt. C 10,505
To Share in Combined profits
Ram 5,044
Sham 5,044
Mahaan 2,522 12,610
51,013 51,013

Working Note:

Calculation of combined profit `

Ram 46,496
Mahaan 17,508
Sham (12,064)
Total 51,940
Less: Ram share (27,898)
Less: Mahaan share (10,505)
Less: stock reserve (927)
Remaining profit 12,610

Question 4 (JULY 2021) [10 MARKS]

The firm, Mls. K Creations has two Departments, Dyed fabric and readymade garments.
Readymade garments are made by the firm itself.
Both dyed fabric and readymade garments have independent market. Some of readymade garment
department’s requirement is suppliedby DyedFabricDepartmentatitsusualSellingPrice.
From the following figures, prepare Departmental Trading and Profit & Loss Account for the year
ended 31•t March 2021.
Particulars Dyed Fabric Readymade
Department garments
department

Opening stock as on April 1, 2020 5,40,000 15,20,000

Purchases (excluding inter department 20,12,080 1,50,00,000

transfers)

Sales (excluding inter department 31,06,000 3,12,50,000

transfers)

Transfer to Rendymede garment

Direct wages 3,00,000 67,30,000

Direct expenses 1,00,000 19,50,000

Plant and Equipments for

dyeing/stitching readymade garments

(WDV as on April 1, 2020) 5,00,000 15,00,000

Rent and warehousing 4,50,000 12,00,000

6,00,000 22,50,000
StockasonMarch31st2021

The following further information are available for necessary consideration :

(i) The Stock in Readymade garments department may be considered as consisting of d0%
of dyed fabric and 40% of Other Expenses.
(ii) The Dyed Fabric Department earned a Gross Profit @ 30% in 2019-2020.
(iii) On the plant and equipment, Depreciation @ 20% p.a. to be provided.
(iv) The following expenses incurred for both the departments were not apportioned
between the departments :

(a) Salaries 2,70,000

(b) Advertisementexpenses 90,000

(c) Generalexpenses 8,00,000

(v) Salaries in 1 : 2 ratio, Advertisement expenses in the turnover ratio and General expenses in 1 : 3
ratio are to be apportioned between the Dyed Fabric Department and Readymade Department
respectively.

Question 5 (JAN 2021) [10 MARKS]

 XYZ Garage consists of 3 departments: Spares, Service and Re pairs, each department being
managed by a departmental manager whose commission was respectively 5%, 10% and
10% of the respective departmental profit subject to a minimum of `5,000 in eachcase.
Inter departmental transfers take place at a “loaded” price as follows:
From SparestoService 5% abovecost
From SparestoRepairs 10% abovecost
From SparestoService 10% abovecost
In respect of the year ended March 31st2019 the firm had already prepared and closed the
departmental trading and profit and loss account.Subsequently it was discovered that the
closing stocks of department had included inter-departmentally transferred goods at “loaded”
price instead of the correct costprice.
From the following information, you are required to prepare a statement re-computing the
departmental profit or loss:

Spares Service Repairs

` ` `
Final Net Profit/Loss (after 38,000 50,400 72,000
chargingcommission) (Loss) (Profit) (Profit)
Inter-departmental transfers 65,000 4,202
Included at “loaded” price in (21,000 from (from Spares)
the departmental stocks Spares and 44,000
from Repairs)

Answer
Calculation of correct Departmental Profits orLosses

Department Department Department

Spares (`) Service (`) Repair (`)
Profit after charging Manager’s (38,000) 50,400 72,000
Commission
Add: Manager’s Commission (1/9) 5,000(Minimum) 5,600 8,000
(33,000) 56,000 80,000
Less: Unrealized profit on Stock (WN) (1,382) (4,000)
Profit Before Manager’s Commission (34,382) 56,000 76,000
Less: Manager’s Commission 10% (5,000) (5,600) (7,600)
Correct Profit after Manager’s (39,382) 50,400 68,400
Commission

Working Note:

Department Department DepartmentRepair Total

Spares (`) Service (`) (`) (`)
Unrealized Profit of:
Department Spares 21,000X5/105 4202X10/110 = 382 1,382
= 1,000
Department Repair 44000X10/110 4,000
= 4000
Question 6 (NOV 2020) [4 MARKS]

Department A sells goods toDepartment B at a profit of 20% on cost and to Department C at

50% on cost. Department B sells goods to Department A and Department C at a profit of
15% and 10% on sales respectively. Department C sells goods to Department A and
Department B at a profit of 10% and 5% on costrespectively.
Stock lying at different departments at the end of the year are as follows:

DepartmentA DepartmentB DepartmentC

(`) (`) (`)
Transfer from Department A 1,14,000 60,000
Transfer from Department B 55,000 15,200
Transfer from Department C 52,800 1,11,300
Calculate Department wise unrealized profit on Stock.

Answer
Calculationofunrealizedprofitofeachdepartment
Dept. A Dept. B Dept. C Total
` ` ` `
Unrealized Profit
of:
Department A 1,14,000x 60,000 x50/150 39,000
20/120 =19,000 =20,000
Department B 55,000 x.15 15,200x.10 9,770
=8,250 =1,520
Department C 52,800 x 10/110 1,11,300 x 5/105
= 4,800 5,300 10,100

Question 7 (NOV 2019) [10

MARKS]

ABC Ltd. has several departments. Goods supplied to each department are debited to a
Memorandum Departmental Stock Account at cost plus a fixed percentage (mark-up) to give
the normal selling price. The amount of mark-up is credited to a Memorandum Departmental
Markup account. If the selling price of goods is reduced below its normal selling prices, the
reduction (mark-down) will require adjustment both in the stock account and the mark-up
account. The mark-up for department X for the last three years has been 20%. Figures
relevant to department X for the year ended 31 stMarch, 2019 were as follows:
Stock as on 1stApril, 2018,atcost `1,50,000
Purchasesatcost `4,30,000
Sales `6,50,000
It is further ascertained that:
(1) Shortage of stock found in the year ending 31.3.2019, costing ` 4,000 were written off.
(2) Opening stock on 1.4.2018 including goods costing ` 12,000 had been sold during the
year and had been marked-down in the selling price by ` 1,600. The remaining stock
had been sold during theyear.
 (3) Goods purchased during the year were marked down by ` 3,600 from a costof
` 30,000. Marked-down stock costing ` 10,000 remained unsold on 31.3.2019.
(4) The departmental closing stock is to be valued at cost subject to adjustment for mark-
up andmark-down.
You are required to prepare for the year ended 31stMarch, 2019 :
(i) Departmental Trading Account for department X for the year ended 31stMarch, 2019 in
the books of headoffice.
(ii) Memorandum Stock Account for the year ended 31stMarch,2019.
(iii) Memorandum Mark-Up account for the year ended 31stMarch,2019.

Answer
(i) Department Trading Account for Department X

For the year ending on31.03.2019

In the books of Head Office

Particulars ` Particulars `
To Opening Stock 1,50,000 By Sales 6,50,000
To Purchases 4,30,000 By Shortage 4,000
To Gross Profit c/d 1,05,000 By Closing Stock 31,000
6,85,000 6,85,000

(ii) Memorandum Stock Account (for Department X) (at sellingprice)

Particulars ` Particulars `
To Balance b/d 1,80,000 By Profit & Loss A/c 4,000
(` 1,50,000+20% of (Cost of Shortage)
` 1,50,000)
To Purchases 5,16,000 By Memorandum Departmental 800
(` 4,30,000 + 20% of Mark up A/c (Load on Shortage)
` 4,30,000) (` 4,000 x20%)
By Memorandum Departmental 3,600
Mark-up A/c (Mark-down on
Current Purchases)
By Debtors A/c (Sales) 6,50,000
By Memorandum Departmental 1,600
Mark-upA/c
(Mark Down on Opening Stock)
By Balance c/d 36,000
6,96,000 6,96,000

(iii) Memorandum Departmental Mark-upAccount

Particulars ` Particulars `
To Memorandum 800 By Balance b/d 30,000
Departmental Stock A/c (` 1,80,000 x 20/120)
(` 4,000 × 20/100)
To Memorandum Departmental 3,600 By Memorandum 86,000
Stock A/c Departmental Stock A/c
 To Memorandum 1,600 (` 5,16,000 x 20/120)
Departmental Stock A/c
To Gross Profit transferred 1,05,000
to Profit & Loss A/c
To Balance c/d [(` 36,000
+ 1,200*) x 20/120 - ` 1,200] 5,000
1,16,000 1,16,000

*[` 3,600 ×10,000/30,000] = ` 1,200. Alternatively, this adjustment of ` 1,200 may be

routed through Memorandum Stock Account.
Working Notes:
(i) Calculation of Cost ofSales
`
A Sales as per Books 6,50,000
B Add: Mark-down in opening stock (given) 1,600
C Add: mark-down in sales out of current Purchases
(` 3,600 x 20,000 /30,000) 2,400

D Value of sales if there was no mark-down (A+B+C) 6,54,000

E Less: Gross Profit (20/120 of ` 6,54,000) subject to Mark Down (1,09,000)
F Cost of sales (D-E) 5,45,000

(ii) Calculation of ClosingStock

`
A Opening Stock 1,50,000
B Add: Purchases 4,30,000
C Less: Cost of Sales (5,45,000)
D Less: Shortage (4,000)
E Closing Stock (A+B-C-D) 31,000

Question 8 (RTP NOV 2021)

M/s. Hero is a Departmental Store having three departments X, Y and Z. The information
regarding three departments for the year ended 31stMarch, 2021are given below:
Particulars Dept. X Dept. Y Dept. Z
Opening Stock 18,000 12,000 10,000
Purchases 66,000 44,000 22,000
Debtors at end 7,500 5,000 5,000
Sales 90,000 67,500 45,000
Closing Stock 22,500 8,750 10,500
Value of furniture in each Department 10,000 10,000 5,000
Floor space occupied by each Dept. (in Sq. ft.) 1,500 1,250 1,000
Number of employees in each Department 25 20 15
 Electricity consumed by each Department (in units) 300 200 100
Additional Information:
Amount (`)
Carriage inwards 1,500
Carriage outwards 2,700
Salaries 24,000
Advertisement 2,700
Discount allowed 2,250
Discount received 1,800
Rent, Rates and Taxes 7,500
Depreciation on furniture 1,000
Electricity Expenses 3,000
Labour welfare expenses 2,400
Prepare Departmental Trading and Profit &Loss Account for the year ended
31stMarch, 2021 after providing provision for Bad Debts at5%.

Answer
In the Books of M/sHero
Departmental Trading and Profit and Loss
Account for the year ended 31stMarch,
2021

Particulars Deptt.X Deptt. Deptt. Total Particulars Deptt.X Deptt. Deptt. Total
Y Z Y Z
` ` ` ` ` ` ` `
To Stock 18,000 12,000 10,000 40,000 By Sales 90,000 67,500 45,000 2,02,50
(opening) 0
To Purchases 66,000 44,000 22,000 1,32,00 By 22,500 8,750 10,500 41,750
0 Stoc
k (closing)
To Carriage 750 500 250 1,500
Inwards
To Gross 27,750 19,750 23,250 70,750
Profit c/d (b.f.)
1,12,50 76,250 55,500 2,44,25 1,12,50 76,250 55,500 2,44,25
0 0 0 0
To Carriage 1,200 900 600 2,700 By 27,750 19,750 23,250 70,750
Outwards Gros
s Profitb/d
To Electricity 1,500 1,000 500 3,000 By 900 600 300 1,800
Discount
To Salaries 10,000 8,000 6,000 24,000 received
To 1,200 900 600 2,700
Advertisement
To Discount 1,000 750 500 2,250
allowed
To Rent, 3,000 2,500 2,000 7,500
Rates and
Taxes
To 400 400 200 1,000
 Depreciation
To Provision 375 250 250 875
for Bad Debts
@ 5% of
debtors
To Labour 1,000 800 600 2,400
welfareexpens
es
To Net Profit 8,975 4,850 12,300 26,125
(b.f.)
28,650 20,350 23,550 72,550 28,650 20,350 23,550 72,550
Working Note:

Basis of allocation of expenses

Carriage inwards Purchases (3:2:1)
Carriage outwards Turnover (4:3:2)
Salaries No. of Employees (5:4:3)
Advertisement Turnover (4:3:2)
Discount allowed Turnover (4:3:2)
Discount received Purchases (3:2:1)
Rent, Rates and Taxes Floor Space occupied (6:5:4)
Depreciation on furniture Value of furniture (2:2:1)
Labour welfare expenses No. of Employees (5:4:3)
Electricity expense Units consumed (3:2:1)
Provision for bad debts Debtors balances (3:2:2)

Question 9 (RTP MAY 2021)

Below balances are taken from the records of M/s Big Shopping Complex for the year ended
31stMarch,2020:
Details Department P (`) Department Q (`)
Opening Stock 1,00,000 80,000
Purchases 13,00,000 18,20,000
Sales 20,00,000 30,00,000

• Closing stock of Department P was ` 2,00,000 including goods transferred from

Department Q for `40,000.
• Closing stock of Department Q was ` 4,00,000 including goods transferred from
Department P for `60,000.
• Opening stock of Department P included goods for ` 20,000 transferred from
Department Q and Opening stock of Department Q included goods for ` 30,000
transferred from DepartmentP.
• Assume that above transfer amounts are cost to the transferee departments and the
rate of gross profit is uniform from year toyear.
• Total selling expenses incurred were ` 2,50,000 for both thedepartments.
From the above information, prepare Departmental Trading Account and Profit &Loss Account
for the year ended 31stMarch 2020, after adjusting the unrealized departmental profits, if any.
Answer
Departmental Trading and Profit & Loss A/c for M/s Big ShoppingComplex
For the year ended 31stMarch 2020

Details Deptt.P Deptt.Q Details Deptt.P Deptt.Q

(`) (`) (`) (`)
To Opening Stock 1,00,000 80,000 By Sales 20,00,000 30,00,000
To Purchases 13,00,000 18,20,000 2,00,000 4,00,000
To Gross Profit 8,00,000 15,00,000 By Closing
Stock
22,00,000 34,00,000 22,00,000 34,00,000
To Selling Exp 1,00,000 1,50,000 By Gross Profit 8,00,000 15,00,000
(in ratio of sales)
To Profit transferred 7,00,000 13,50,000
to General P&LA/c
8,00,000 15,00,000 8,00,000 15,00,000

General Profit and Loss A/c for M/s Big Shopping

Complex For the year ended 31stMarch 2020

Details Amount (`) Details Amount (`)

To Stock Reserve By Profit transferred from
Deptt. P WN 1 &2 Deptt.P 7,00,000
50% x (40,000 – 20,000) 10,000 Deptt.Q 13,50,000
Deptt. Q WN 1 & 3
40% x (60,000 – 30,000) 12,000
To Net Profit 20,28,000
20,50,000 20,50,000

Working Notes:
1. Gross Profit Ratios are: Deptt. P =8,00,000 / 20,00,000 = 40% and of Deptt.
Q = 15,00,000 / 30,00,000 =50%.
2. Stock Reserve for Deptt. P shall beadjusted as per the gross profit ratio of Deptt.
Q i.e. 50% (On Closing Stock – OpeningStock)
3. Stock Reserve for Deptt. Q shall be adjustedas per the gross profit ratio of Deptt.
P i.e.40% (On Closing Stock – OpeningStock)

Question 10 (RTP NOV 2020)

Department X sells goods to Department Y at a profit of 50% on cost and to Depart ment Z at
20% on cost. Department Y sells goods to Department X and Z at a profit of 25% and 15%
respectively on sales. Department Z charges 30% profit on cost to Department X and 40%
profit on sale toY.
Stocks lying at different departments at the end of the year are as under:
Dept. X Dept. Y Dept. Z
` ` `
Transfer from Department X 75,000 48,000
Transfer from Department Y 50,000 82,000
Transfer from Department Z 52,000 56,000
Calculate the unrealized profit of each department and also total unrealized profit.
Answer
Calculation of unrealized profit of each departmentand total unrealized profit
Dept. X Dept. Y Dept. Z Total
` ` ` `
Unrealized Profit of:
Department X 75,000 x50/150 48,000 x20/120
=25,000 =8,000 33,000
Department Y 50,000 x.25 82,000 x.15
=12,500 =12,300 24,800
Department Z 52,000 x30/130 56,000 x40/100
=12,000 =22,400 34,400
92,200

Question 11 (RTP MAY 2020)

a) Howwillyouallocatethefollowingexpensesamongdifferentdepartments:
(i) Rent, rates and taxes, repairs and maintenance, insurance of building;
(ii) Maintenance of capital assets
(iii) PF/ESI contributions
(iv) Carriage inward/ Discount received
(v) Lighting and Heating expenses
(b) There is transfer/sale among the three departments asbelow:
Department X sells goods to Department Y at a profit of 25% on cost and to Department Z
at 20% profit on cost.
Department Y sells goods to X and Z at a profit of 15% and 20% on sales respectively.
Department Z charges 20% and 25% profit on cost to Departments X and Y
respectively.
Department Managers are entitled to 10% commission on net profit subject to urealised
profit on departmental sales being eliminated.
Departmental profits after charging Managers' commission, but before adjustment of
unrealised profit are as under:
`
Department X 1,80,000
Department Y 1,35,000
Department Z 90,000
Stocks lying at different Departments at the end of the year are as under:
Dept. X Dept. Y Dept. Z
Transfer from Department X - 75,000 57,000
Transfer from Department Y 70,000 - 60,000
Transfer from Department Z 30,000 25,000 -
Find out the correct departmental profits after charging Managers' commission.

Answer
(a) (i) Floorareaoccupiedbyeachdepartment(ifgiven)otherwiseontimebasis;
 (ii) Value of assets of each department otherwise on timebasis;
(iii) Wages and salaries of eachdepartment;
(iv) Purchases of eachdepartment;
(v) Consumption of energy by eachdepartment.
(b) Calculation of Correct Profit
Department Department Department
X Y Z
` ` `
Profit after charging managers’ 1,80,000 1,35,000 90,000
commission
Addback:Managers’commission(1/9) 20,000 15,000 10,000
2,00,000 1,50,000 1,00,000
Less: Unrealized profit on stock (W.N.) (24,500) (22,500) (10,000)
Profit before Manager’s commission 1,75,500 1,27,500 90,000
Less: Commission for Department
Manager @ 10% (17,550) (12,750) (9,000)
Departmental Profits after manager’s
commission 1,57,950 1,14,750 81,000
Working Note:

Stock lying with

Dept. X Dept. Y Dept. Z Total

` ` ` `
Unrealized Profit of:
Department X 1/5×75,000 20/120×57,000 24,500
=15,000 =9,500
Department Y 0.15×70,000 0.20×60,000 22,500
=10,500 =12,000
Department Z 20/120×30,000 25/125×25,000 10,000
=5,000 =5,000

Question 12 (MTP APRIL 2021) [6 MARKS]

X Ltd has three departments A, B and C.From theparticulars given belowcompute: (i) the
values of stock as on 31st Dec. 2020 and (ii) the departmental results showing actual amount
of grossprofit.
A B C
Rs. Rs. Rs.
Stock (on 1.1. 2020) 24,000 36,000 12,000
Purchases 1,46,000 1,24,000 48,000
Actual sales 1,72,500 1,59,400 74,600
Gross Profit on normal selling price 20% 25% 33 1/3%

During the year ended 31st Dec. 2020, certain items were sold at discount and these
discounts were reflected in the value ofsales shown above. The items sold at discount were:
 A B C
Rs. Rs. Rs.
Sales at normal price 10,000 3,000 1,000
Sales at actual price 7,500 2,400 600

Answer
Calculation of Departmental Results (Actual Gross Profit)
A (Rs.) B (Rs.) C (Rs.)
Actual Sales 1,72,500 1,59,400 74,600
Add back: Discount (Refer W.N.) 2,500 600 400
Normal sales 1,75,000 1,60,000 75,000
Gross profit % on normal sales 20% 25% 33.33%
Normal gross profit 35,000 40,000 25,000
Less: Discount (2,500) (600) (400)
Actual gross profit 32,500 39,400 24,600

Computation of value of stock as on 31st Dec.2020

Departments A B C
Rs. Rs. Rs.
Stock (on 1.1. 2020) 24,000 36,000 12,000
Add: Purchases 1,46,000 1,24,000 48,000
1,70,000 1,60,000 60,000
Add: Actual gross profit 32,500 39,400 24,600
2,02,500 1,99,400 84,600
Less: Actual Sales (1,72,500) (1,59,400) (74,600)
Closing stock as on 31.12.2020 (bal.fig.) 30,000 40,000 10,000
Working Note:

Calculation of discount on sales:

Departments A B C
Rs. Rs. Rs.
Sales at normal price 10,000 3,000 1,000
Less: Sales at actual price (7,500) (2,400) (600)
2,500 600 400

Question 13 (MTP MARCH 2021) [8

MARKS]

The following balances were extracted from the books of Beta. You are required to prepare
Departmental Trading Account and General Profit &Loss Account for the year ended
31stDecember,2020:
Particulars Deptt.A Deptt.B
Rs. Rs.
 Opening Stock 3,00,000 2,40,000
Purchases 39,00,000 54,60,000
Sales 60,00,000 90,00,000
General expenses incurred for both the Departments were Rs. 7,50,000 and you are also
supplied with the followinginformation:
(i) Closing stock of Department A Rs. 6,00,000 including goods from Department B
for Rs. 1,20,000 at cost to DepartmentA.
(ii) Closing stock of DepartmentB Rs. 12,00,000 including goods from Department A
for Rs. 1,80,000 at cost to DepartmentB.
(iii) Opening stockof Department A and Department B include goods of the value
of Rs. 60,000 and Rs. 90,000 taken from Department B and DepartmentA respectively
at cost to transfereedepartments.
(iv) The gross profit is uniform from year toyear.

Answer
Departmental Trading Account for the yearended on 31stDecember, 2020
Particulars A B Particulars A B
Rs. Rs. Rs. Rs.
To Opening Stock 3,00,000 2,40,000 By Sales 60,00,000 90,00,000
To Purchases 39,00,000 54,60,000 By Closing Stock 6,00,000 12,00,000
To Gross Profit 24,00,000 45,00,000
66,00,000 1,02,00,000 66,00,000 1,02,00,000

General profit and loss account of Beta for the year ended on 31stDecember, 2020
Particulars Amount Particulars Amount
Rs. Rs.
To General expenses 7,50,000 By Stock reserve (opening stock)
To Stock reserve (Closing Dept. A 30,000
Stock)
Dept. A 60,000 Dept. B 36,000
Dept. B 72,000 By Gross Profit
To Net Profit 60,84,000 Dept. A 24,00,000
Dept. B 45,00,000
69,66,000 69,66,000

Working Notes:

Dept. A Dept. B
1. Percentage of Profit 24,00,000/60,00,000 x 100 45,00,000/90,00,000 x 100
40% 50%
2. Opening Stock reserve 60,000 x 50% = 30,000 90,000 X 40% = 36,000
3. Closing Stock reserve 1,20,000 x 50%=60,000 1,80,000 x 40% = 72,000
 Ch.14 – BRANCH ACCOUNTS

QUESTION (RTP DEC 2021)

Lal & Co. of Jaipur has a branch in Patna to which goods are sent @ 20% above cost. The
branch makes both cash & credit sales. Branch expenses are paid direct from Head office
and the branch has to remit all cash received into the bank account of Head office. Branch
doesn't maintain any books of accounts but sends monthly returns to the head office.
Following further details are given for the year ended 31st March, 2020:
Amount (`)
Goods received from Head office at Invoice Price 4,20,000
Goods returned to Head office at Invoice Price 30,000
Cash sales for the year 2019-20 92,500
Credit Sales for the year 2019-20 3,12,500
Stock at Branch as on 01-04-2019 at Invoice price 36,000
Sundry Debtors at Patna branch as on 01-04-2019 48,000
Cash received from Debtors 2,19,000
Discount allowed to Debtors 3,750
Goods returned by customer at Patna Branch 7,000
Bad debts written off 2,750
Amount recovered from Bad debts previously written off as Bad 500
Rent, Rates & taxes at Branch 12,000
Salaries & wages at Branch 36,000
Office Expenses (at Branch) 4,600
Stock at Branch as on 31-03-2020 at cost price 62,500
Prepare necessary ledger accounts in the books of Head office by following Stock and
Debtors method and ascertain Branch profit.
2. Branch Stock Account
` ` ` `
1.4.19 To Balance b/d 36,000 31.3.20 By Sales:
(opening
stock)
31.3.20 To Goods Sent 4,20,000 Cash 92,500
to Branch A/c Credit 3,12,500
To Branch P&L 47,000 Less: (7,000) 3,05,500 3,98,000
Return
By Goods 30,000
sent to
branch -
returns
By Balance 75,000
c/d
(closing
stock)
5,03,000 5,03,000
1.4.20 To Balance b/d 75,000

Branch Debtors Account

` `
1.4.19 To Balance b/d 48,000 31.3.20 By Cash 2,19,000
 31.3.20 To Sales 3,12,500 By Returns 7,000
By Discounts 3,750
By Bad debts 2,750
By Balance c/d 1,28,000
3,60,500 3,60,500
1.4.20 To Balance b/d 1,28,000

Branch Expenses Account

` `
31.3.20 To Salaries & Wages 36,000 31.3.20 By Branch P&L 59,100
A/c
To Rent, Rates &
Taxes 12,000
To Office Expenses 4,600
To Discounts 3,750
To Bad Debts 2,750
59,100 59,100

Branch Profit & Loss Account for year ended 31.3.20

` `
31.3.20 To Branch 59,100 31.3.20 By Branch stock 47,000
Expenses A/c
To Net Profit By Branch Stock
transferred to Adjustment
account 58,500
General P & L By Bad debts
A/c 46,900 recovered 500
1,06,000 106,000
Branch Stock Adjustment Account for year ended 31.3.20

` `
31.3.20 To Goods sent to 5,000 31.3.20 By Balance b/d 6,000
branch (30,000x1/6) (36,000x1/6)
-returns
To Branch P & L A/c 58,500 By Goods sent to 70,000
branch
(4,20,000x1/6)
To Balance c/d
(75,000x1/6) 12,500
76,000 76,000

QUESTION 2 ( MTP DEC 2021) (4

MARKS)
(b) Pass necessary Journal entries in the books of an independent Branch of a Company,
wherever required, to rectify or adjust the following:
(i) Branch incurred travelling expenses of ` 4,000 on behalf of other Branches, but not
recorded in the books of Branch.
 (ii) Goods dispatched by the Head office amounting to ` 8,000, but not received by the
Branch till date of reconciliation. The Goods have been received subsequently.
(iii) Provision for doubtful debts, whose accounts are kept by the Head Office, not provided
earlier for ` 2,000.
Branch paid ` 2,000 as salary to a Head Office Manager, but the amount paid has been debited by the
Branch to Salaries Account.
ANSWER
Journal Entries in Books of Branch

Amount in `
Dr. Cr.
(i) Head Office Account Dr. 4,000
To Cash Account 4,000
(Being expenditure incurred on account of other branch,
now recorded in books)
(ii) Goods –in- transit Account Dr. 8,000
To Head Office Account 8,000
(Being goods sent by Head Office still in-transit)
Provision for Doubtful Debts A/c Dr. 2,000
To Head Office Account 2,000
(Being the provision for doubtful debts not provided earlier,
now provided for)
Head Office Account Dr. 2,000
To Salaries Account 2,000

QUESTION 3 ( MTP DEC 2021) (4 MARKS)

From the following details of Western Branch Office of M/s. Alpha for the year
ending 31st March, 2020, ascertain branch stock reserve in respect of unrealized profit in
opening stock and closing stock:
(i) Goods are sent to the branch at invoice price and branch also maintains stock at the
same price.
(ii) Sale price is cost plus 40%.
(iii) Invoice price is cost plus 15%.
(iv) Other information from accounts of branch:
Opening Stock as on 01-04-2019 3,45,000
Goods sent during the year by Head Office to Branch 16,10,000
Sales during the year 21,00,000
Expenses incurred at the branch 45,000

ANSWER
Branch Stock Reserve in respect of unrealized profit
on opening stock = ` 3,45,000 x (15/115) = `
45,000

on closing stock = ` 2,30,000 x (15/115) = `

30,000
Working Note: `
 Cost Price 100
Invoice Price 115
Sale Price 140
Calculation of closing stock at invoice price `
Opening stock at invoice price 3,45,000
Goods received during the year at invoice price 16,10,000
19,55,000
Less: Cost of goods sold at invoice price [21,00,000 X (115/140)] (17,25,000)
Closing stock 2,30,000

Question 4 (JULY 2021) [10

MARKS]

ManoharofMohalihasabranchatNoidatowhichthegoodsaresupplied from Mohali but the cost

thereof is not recorded in the Head Office books. On 3l•' March, 2020 the Branch Balance Sheet
was as follows:

Liabilities Assets 7
Creditors Balance 62,000 Debtors Balance 2,24,000

Head Office 1,88,000 Building Extension A/c.

Closed by transferto
H.O. A/c.

Cash at Bank 26,000

2,50,000 2,50,000

During thesixmonths ending on30-09-2020, thefollowing transactions took place at Noida :

Sales 2,78,000 Manager’s salary 16,400

Purchases 64,500 Collectionsfromdebtors 2,57,000
Wages Paid 24,000 Discounts allowed 16,000
Salaries (inclusive of 15,600 Discount earned 4,600
advance of 5,000) Cash paid to creditors 88,500
General Expenses 7,800 Building Account 14,000
Fire Insurance (Paid 11,200 (further payment)
for one year) Cash in Hand 5,600
 Remittance to H.O. 52,900 Cash at Bank 47,000
Set out the Head Office Account in Noida Books and the Branch
BalanceSheetason30.09.2020.AlsogivejournalentriesintheNoida books.
Question 5 (JAN 2021) [5 MARKS]

Give Journal Entries in the books of Branch to rectify or adjust thefollowing:

(1) Branch paid ` 5,000 as salary to H.O supervisor, but the amount paid by branch has
been debited to salary account in thebooks of branch.
(2) Asset Purchased by branch for ` 25,000, but the Asset account was retained in H.O
Books.
(3) A remittance of `8,000 sent by the branch has not beenreceived by H.O.
(4) H.O collected ` 25,000 directly from the customer of Branch but fails to give the
intimation tobranch.
RemittanceoffundsbyH.Otobranch`5,000notenteredinbranchbooks.

Answer
Journal Entries in Books of BranchA
Particulars Dr. Cr.
Amount Amount
` `
(i) Headofficeaccount Dr. 5,000
To Salaries account 5,000
(Being the rectification of salary paid on behalf
ofH.O.)
(ii) Headofficeaccount Dr. 25,000
To Bank / Liability A/c 25,000
(Being Asset purchased by branch but Asset
account retained at head office books)
(iii) No Entry in Branch Books
(iv) Headofficeaccount Dr. 25,000
To Debtors account 25,000
(Being the amount of branch debtorscollected
byH.O.)
(v) BankA/c Dr. 5,000
To Head Office 5,000
(Remittance of Funds by H.O. to Branch)

Question 6 (NOV 2020) [4

MARKS]

Vijay & Co. of Jaipur has a branch in Patna to which goods are sent @ 20% above cost. The
branch makes both cash & credit sales. Branch expenses are paid direct from Head office and
the branch has to remit all cash received into the bank account of Head office. Branch doesn't
maintain any books of accounts, but sends monthly returns to the head office.
Following further details are given for the year ended 31st March, 2020:

Amount (`)
 Goods received from Head office at Invoice Price 8,40,000
Goods returned to Head office at Invoice Price 60,000
Cash sales for the year 2019-20 1,85,000
Credit Sales for the year 2019-20 6,25,000
Stock at Branch as on 01-04-2019 at Invoice price 72,000
Sundry Debtors at Patna branch as on 01-04-2019 96,000
Cash received from Debtors 4,38,000
Discount allowed to Debtors 7,500
Goods returned by customer at Patna Branch 14,000
Bad debts written off 5,500
Amount recovered from Bad debts previously written off as Bad 1,000
Rent, Rates & taxes at Branch 24,000
Salaries & wages at Branch 72,000
Office Expenses (at Branch) 9,200
Stock at Branch as on 31-03-2020 at cost price 1,25,000
Prepare necessary ledger accounts in the books of Head office by following Stock and Debtors
method and ascertain Branchprofit.

Answer
Branch StockAccount

` ` ` `
1.4.19 To Balance b/d 72,000 31.3.20 By Sales:
(opening
stock)
31.3.20 To Goods Sent 8,40,000 Cash 1,85,000
to Branch Credit 6,25,000
A/c
To Branch P&L 94,000 Less:
Return (14,000) 6,11,000 7,96,000
By Goods 60,000
sent to
branch -
returns
By Balance 1,50,000
c/d
(closing
stock)
10,06,000 10,06,000
1.4.20 To Balance b/d 1,50,000

Branch Debtors Account

` `
1.4.19 To Balance b/d 96,000 31.3.20 By Cash 4,38,000
31.3.20 To Sales 6,25,000 By Returns 14,000
By Discounts 7,500
By Bad debts 5,500
By Balance c/d 2,56,000
 7,21,000 7,21,000
1.4.20 To Balance b/d 2,56,000
Branch Expenses Account
` `
31.3.20 To Salaries & Wages 72,000 31.3.20 By Branch P&L 1,18,200
A/c
To Rent, Rates 24,000
&Taxes
To Office Expenses 9,200
To Discounts 7,500
To Bad Debts 5,500
1,18,200 1,18,200

Branch Profit & Loss Account for year ended 31.3.20

` `
31.3.20 To Branch 1,18,200 31.3.20 By Branch stock 94,000
Expenses A/c
To Net Profit By Branch Stock 1,17,000
transferredto Adjustment
account
General P & L 93,800 By Bad debts 1,000
A/c recovered
2,12,000 2,12,000
Branch Stock Adjustment Accountfor year ended31.3.20

` `
31.3.20 To Goods sent to 10,000 31.3.20 By Balance b/d 12,000
branch (72,000x1/6)
(60,000x1/6) -
returns
To Branch P & L 1,17,000 By Goods sent to 1,40,000
A/c branch
(8,40,000x1/6)
To Balance c/d 25,000
(1,50,000x1/6)
1,52,000 1,52,000

Question 7 (NOV 2019)

Karan Enterprises having its Head Office in Mangalore, Karnataka has a branch in Greenville,
USA. Following is the trial balance of Branch as at31 -3-2019:

Particulars Amount($) Amount($)

Dr. Cr.
Fixed assets 8,000
Opening inventory 800
 Cash 700
Goods received from Head Office 2,800
Sales 24,050
Purchases 11,800
Expenses 1,800
Remittance to head office 2,450
Head office account 4,300
28,350 28,350
(i) Fixed assets were purchased on 1stApril,2015.
(ii) Depreciationat10%p.a.istobechargedonfixedassetsonstraightlinemethod.·
(iii) Closing inventory at branch is$ 700 as on 31-3-2019.
(iv) GoodsreceivedfromHeadOffice(HO)wererecordedat`1,85,500inHObooks.
(v) Remittances to HO were recorded at` 1,62,000 in HO books.
(vi) HO account is recorded in HO books at `2,84,500.
(vii) Exchange rates of US Dollar at different dates can be taken as :1-
4-2015 `63
1-4-2018 ` 65and
31-3-2019 `67
Prepare the trial balance after been converted into Indian rupees in accordance withAS-11.

Answer
Trial Balance of Foreign Branch (converted into Indian Rupees) as on March 31,2019
Particulars $ (Dr.) $ (Cr.) Conversion Rate ` (Dr.) ` (Cr.)
Basis
Fixed Assets 8,000 Transaction Date 63 5,04,000
Rate
Opening Inventory 800 Opening Rate 65 52,000
Goods Received 2,800 Actuals 1,85,500
fromHO
Sales Average Rate 66

Purchases 11,800 Average Rate 66 7,78,80

0
Expenses 1,800 Average Rate 66 1,18,80
0
Cash 700 Closing Rate 67 46,900

Remittance to HO 2,450 Actuals 1,62,00

0
HO Account Actuals

Exchange Balancing Figure 23,800

Rate
Difference
28,350 18,71,8
00
 Closing Stock 700 Closing Rate 67 46,900

Depreciation 800 Fixed Asset Rate 63 50,400

Question 8 (RTP NOV 2021)

Lal &Co. of Jaipur has a branch in Patna to which goods are sent @ 20% above cost. The
branch makes both cash &credit sales. Branch expenses are paid direct from Head office
and the branch has to remit all cash received into the bank account of Head office. Branch
doesn'tmaintainanybooksofaccountsbutsendsmonthlyreturnstotheheadoffice.
Following further details are given for the year ended 31st March, 2020:
Amount (`)
Goods received from Head office at Invoice Price 4,20,000
Goods returned to Head office at InvoicePrice 30,000
Cash sales for the year 2019-20 92,500
Credit Sales for the year 2019-20 3,12,500
Stock at Branch as on 01-04-2019 at Invoice price 36,000
Sundry Debtors at Patna branch as on 01-04-2019 48,000
Cash received from Debtors 2,19,000
Discount allowed to Debtors 3,750
Goods returned by customer at Patna Branch 7,000
Bad debts written off 2,750
Amount recovered from Bad debts previously written off as Bad 500
Rent, Rates & taxes at Branch 12,000
Salaries & wages at Branch 36,000
Office Expenses (at Branch) 4,600
Stock at Branch as on 31-03-2020 at cost price 62,500
Prepare necessary ledger accounts in the books of Head office by following Stock and
Debtors method and ascertain Branch profit.

Answer
Branch StockAccount
` ` ` `
1.4.19 To Balance b/d 36,000 31.3.20 By Sales:
(opening
stock)
31.3.20 To Goods Sent 4,20,000 Cash 92,500
to Branch Credit 3,12,500
A/c
To Branch P&L 47,000 Less: (7,000) 3,05,500 3,98,00
Return 0
By Goods 30,000
sent to
branch -
returns
By Balance 75,000
c/d
(closing
stock)
5,03,000 5,03,00
 0
1.4.20 To Balance b/d 75,000
Branch Debtors Account

` `
1.4.19 To Balance b/d 48,000 31.3.20 By Cash 2,19,000
31.3.20 To Sales 3,12,500 By Returns 7,000
By Discounts 3,750
By Bad debts 2,750
By Balance c/d 1,28,000
3,60,500 3,60,500
1.4.20 To Balance b/d 1,28,000

Branch Expenses Account

` `
31.3.20 To Salaries & Wages 36,000 31.3.20 By Branch P&L 59,100
A/c
To Rent, Rates
&Taxes 12,000
To Office Expenses 4,600
To Discounts 3,750
To Bad Debts 2,750
59,100 59,100

Branch Profit & Loss Account for year ended 31.3.20

` `
31.3.20 To Branch 59,100 31.3.20 By Branch stock 47,000
Expenses A/c
To Net Profit By Branch Stock
transferredto Adjustment
account 58,500
General P & L By Bad debts
A/c 46,900 recovered 500
1,06,000 106,000
Branch Stock Adjustment Account for year ended 31.3.20

` `
31.3.20 To Goods sent to 5,000 31.3.20 By Balance b/d 6,000
branch(30,000x1/6) (36,000x1/6)
-returns
To Branch P & L A/c 58,500 By Goods sent to 70,000
branch
(4,20,000x1/6)
To Balance c/d
(75,000x1/6) 12,500
76,000 76,000
Question 9 (RTP MAY 2021)

Alpha Ltd. has a retail shop under the supervision of a manager. The ratio of gross
profitatsellingpriceisconstantat25percentthroughouttheyearto31stMarch,2020.
Branch manager is entitled to a commission of 10 per cent of the profit earned by his branch,
calculated before charging his commission but subject to a deduction from such commission
equal to 25 per cent of any ascertained deficiency of branch stock. All goods were supplied
to the branch from headoffice.
The following details for the year ended 31stMarch, 2020 are given as follows:
` `
Opening Stock (at cost) 74,736 Chargeable expenses 49,120
Goods sent to branch (at 2,89,680 Closing Stock (Selling 1,23,328
cost) Price)
Sales 3,61,280
Manager’s commission paid
on account 2,400

From the above details, you are required to calculate the commission due to manager for the
year ended 31stMarch,2020.

Answer
In the books of AlphaLtd.
Step 1: Calculation of Deficiency

Branch stock account (at invoice price)

Particulars ` Particulars `
To Opening Stock (` 74,736 + 1/3 By Sales 3,61,280
of ` 74,736) 99,648
To Goodssent to Branch A/c (` By Closing Stock 1,23,328
2,89,680 + 1/3 of `2,89,680) 3,86,240
By Deficiency at sale
price [Balancingfigure] 1,280
4,85,888 4,85,888

Step 2: Calculation of Net Profit before Commission

Branch account

Particulars ` Particulars `
To Opening Stock 99,648 By Sales 3,61,280
[`74,736 + 1/3 of ` 74,736]
To Grosssent to Branch A/c (` 3,86,240 By Closing Stock 1,23,328
2,89,680 + 1/3 of
` 2,89,680)
To Expenses 49,120 By Stock Reserve A/c 24,912
To Stock Reserve A/c 30,832 By Goods sent to 96,560
[` 1,23,328 x25/100] Branch
A/c
To Net Profit –subject to
manager’s commission 40,240
 6,06,080 6,06,080
Step 3: Calculation of Commission still due to manager

`
A Calculation at 10% profit before charging his commission
[` 40,240 x 10/100] 4,024
B Less: 25% of cost of deficiency in stock [25% of (75% of ` 1,280)] (240)
C Commission for the year [A-B] 3,784
D Less: Paid on account (2,400)
E Balance due (C-D) 1,384

Question 10 (RTP NOV 20200)

M & S Co. of Lucknow has an integral foreign branch in Canberra, Australia. At the end of
31stMarch 2020, the following ledger balances have been extracted from the books of the
Lucknow office and the Canberrabranch.
Lucknow office Canberra Branch
(` In thousand) (Aust. Dollars in thousand)
Dr. Cr. Dr. Cr.
Capital 1,500
Reserves & Surplus 1,500
Land 500
Buildings (Cost) 1,000
Buildings - Accumulated Dep. 200
Plant and Machinery (Cost) 2,500 200
Plant and Machinery -
Accumulated Dep. 600 130
Debtors/Creditors 280 200 60 30
Stock as on 1- 4-2019 100 20
Branch Stock Reserve 4
Cash & Bank Balances 10 10
Purchases/Sales 240 520 20 123
Goods sent to Branch 100 5
Managing Partner's Salary 30
Wages and Salaries 75 45
Rent 12
Office Expenses 25 18
Commission Receipts 256 100
Branch/HO Current Account 120 7
4,880 4,880 390 390
You are required to convert the Branch Trial Balance given above into rupees by using the
following exchange rates:
 Opening rate 1 A $ = ` 50
Closing rate 1 A $ = ` 53
Average rate 1 A $ = ` 51.00
for Fixed Assets 1 A $ = ` 46.00

Answer
M & S Co.Ltd.
Canberra, Australia Branch Trial Balance
As on 31st March 2020

($ ‘thousands) (` ‘thousands)
Dr. Cr. Conversion Dr. Cr.
rate per $
Plant & Machinery (cost) 200 ` 46 9,200
Plant & Machinery 130 ` 46 5,980
(Accumulated Dep.)
Debtors/Creditors 60 30 ` 53 3,180 1,590
Stock (1.4.2019) 20 ` 50 1,000
Cash & Bank Balances 10 ` 53 530
Purchase / Sales 20 123 ` 51 1,020 6,273
Goods received from H.O. 5 Actual 100
Wages & Salaries 45 ` 51 2,295
Rent 12 ` 51 612
Office expenses 18 ` 51 918

Commission Receipts 100 ` 51 5,100

H.O. Current A/c 7 Actual 120
18,855 19,063
Foreign Exchange Loss (bal. fig.)
208
390 390 19,063 19,063

Question 11 (RTP MAY 2020)

(i) Books ofBranch

Journal Entries
(` in lacs)
Dr. Cr.
Goods in Transit A/c Dr. 10
To Head Office A/c 10
 (Goods dispatched by head office but not received by
branch before 1stApril, 2019)
Expenses A/c Dr. 1
To Head Office A/c 1
(Amount charged by head office for centralised services)

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

for the year ended 31stMarch,2019
` in lacs ` in lacs
To Opening Stock 60 By Sales 360
To Goods received from By Closing Stock 62
HeadOffice 288
Less:Returns (5) 283
To Carriage Inwards 7
To Gross Profit c/d 72
422 422
To Salaries 25 By Gross Profit b/d 72
To Depreciation on Furniture 2
To Rent 10
To Advertising 6
To Telephone, Postage & Stationery 3
To Sundry Office Expenses 1
To Head Office Expenses 1
To Net Profit Transferred to
Head Office A/c 24
72 72

Balance Sheet as on 31stMarch, 2019

Liabilities ` in lacs Assets ` in lacs

Head Office 80 Furniture & Equipment 20
Add: Goods in transit 10 Less: Depreciation (2) 18
Head Office Expenses 1 Stock in hand 62
Net Profit 24 115 Goods in Transit 10
Outstanding Expenses 3 Debtors 20
Cash at bank and in hand 8
118 118

Answer
(i) Books ofBranch
Journal Entries
(` in lacs)
Dr. Cr.
Goods in Transit A/c Dr. 10
To Head Office A/c 10
(Goods dispatched by head office but not received by
branch before 1stApril, 2019)
Expenses A/c Dr. 1
To Head Office A/c 1
 (Amount charged by head office for centralised services)
(ii) Trading and Profit &Loss Account of the Branch
for the year ended 31stMarch,2019
` in lacs ` in lacs
To Opening Stock 60 By Sales 360
To Goods received from By Closing Stock 62
HeadOffice 288
Less:Returns (5) 283
To Carriage Inwards 7
To Gross Profit c/d 72
422 422
To Salaries 25 By Gross Profit b/d 72
To Depreciation on Furniture 2
To Rent 10
To Advertising 6
To Telephone, Postage & Stationery 3

To Sundry Office Expenses 1

To Head Office Expenses 1
To Net Profit Transferred to
Head Office A/c 24
72 72

Balance Sheet as on 31stMarch, 2019

Liabilities ` in lacs Assets ` in lacs

Head Office 80 Furniture & Equipment 20
Add: Goods in transit 10 Less: Depreciation (2) 18
Head Office Expenses 1 Stock in hand 62
Net Profit 24 115 Goods in Transit 10
Outstanding Expenses 3 Debtors 20
Cash at bank and in hand 8
118 118

Question 12 (MTP APRIL 2021) [8 MARKS]

DM Delhi has a branch in London whichis an integral foreign operation of DM. At the end of
the year31stMarch,2021,thebranchfurnishesthefollowingtrialbalanceinU.K.Pound:
Particulars £ £
Dr. Cr.
Fixed assets (Acquired on 1stApril, 2017) 24,000
Stock as on 1stApril, 2020 11,200
Goods from head Office 64,000
Expenses 4,800
Debtors 4,800
Creditors 3,200
Cash at bank 1,200
 Head Office Account 22,800
Purchases 12,000
Sales 96,000
1,22,000 1,22,000
In head office books, the branch account stood as shown below:
London Branch A/c
Particulars Amount Particulars Amount
Rs. Rs.
To Balance b/d 20,10,000 By Bank A/c 52,16,000
To Goods sent to branch 49,26,000 By Balance c/d 17,20,000
69,36,000 69,36,000
The following further information is given:
(a) Fixed assets are to bedepreciated @ 10% p.a. on WDV.
(b) On 31stMarch,2021:
Expenses outstanding - £ 400
Prepaid expenses - £ 200
Closing stock - £ 8,000
(c) Rate ofExchange:
1stApril,2017 - Rs. 70 to £1
1 April,2020
st - Rs. 76 to £1
31stMarch,2021 - Rs. 77 to £1
Average - Rs. 75 to £1
You are required to prepare: (1) Trial balance, incorporating adjustments of outstanding and
prepaid expenses, converting U.K. pound into Indian rupees; and (2) Trading and profit and
loss account for the year ended 31stMarch, 2021 of London branch as would appear in the
books of Delhi head office ofDM.

Answer
Trial Balance of London Branch as on 31stMarch,2021
Particulars U.K. RatePer Dr. (Rs.) Cr. (Rs.)
Pound U.K.Pound
Fixed Assets 24,000 70 16,80,000
Stock (as on 1stApril, 2020) 11,200 76 8,51,200
Goods from Head Office 64,000 - 49,26,000
Sales 96,000 75 72,00,000
Purchases 12,000 75 9,00,000
Expenses (4,800 + 400 – 200) 5,000 75 3,75,000
Debtors 4,800 77 3,69,600
Creditors 3,200 77 2,46,400
Outstanding Expenses 400 77 30,800
Prepaid expenses 200 77 15,400
Cash at Bank 1,200 77 92,400
Head office Account - 17,20,000
Difference in Exchange 12,400
92,09,600 92,09,600
Closing stock will be (8,000 × 77) = Rs. 6,16,000
Trading and Profit& Loss
 A/c for the year ended
31stMarch,2021
Particulars Amount Particulars Amount
(Rs.) (Rs.)
To Opening Stock 8,51,200 By Sales 72,00,000
To Purchases 9,00,000 By Closing Stock 6,16,000
To Goods from H.O. 49,26,000
To Gross Profit 11,38,800
78,16,000 78,16,000
To Expenses 3,75,000 By Gross Profit 11,38,800
By Profit due to
To Depreciation 1,68,000
Exchange
difference
To Net Profit 6,08,200 12,400
11,51,200 11,51,200

Working Note:
Since London Branch is an integral foreign operation. Hence, (1) Fixed assets (cost and
depreciation) are translated using the exchange rate at the date of purchase of the assets. (2)
Exchange difference arising on translation of the financial statement is charged to Profit and
Loss Account.

Question 13 (MTP MARCH 2021) [12

MARKS]

Moon Star has a branch at Virginia (USA). The Branch is a non-integral foreign operation of
the MoonStar.ThetrialbalanceoftheBranchasat31stMarch,2020isasfollows:
Particulars US $
Dr. Cr.
Office equipments 48,000
Furniture and Fixtures 3,200
Stock (April 1, 2019) 22,400
Purchases 96,000
Sales --- 1,66,400
Goods sent from H.O 32,000
Salaries 3,200
Carriage inward 400
Rent, Rates & Taxes 800
Insurance 400
Trade Expenses 400
Head Office Account --- 45,600
Sundry Debtors 9,600
Sundry Creditors --- 6,800
Cash at Bank 2,000
Cash in Hand 400
2,18,800 2,18,800
 The following further information is given:
(1) Salaries outstanding $400.
(2) Depreciate office equipment and furniture &fixtures @10% p.a. at written downvalue.
(3) The Head Office sent goods to Branch forRs.15,80,000.
(4) The Head Office shows an amount of Rs. 20,50,000 due from
Branch. (5) Stock on 31st March, 2020-$21,500.
(6) Therewerenotransititemseitheratthestartorattheendoftheyear.
(7) On April1, 2018 when the fixed assets were purchased the rate of exchange was
Rs. 43 to one $. On April 1, 2019, the rate was 47per $. On March 31, 2020 the rate
was Rs.50per$.AveragerateduringtheyearwasRs.45toone$.
Prepare Trial balance incorporating adjustments given converting dollars into rupees and
Trading, Profit and Loss Account for the year ended 31stMarch, 2020 of the Branch as would
appearinthebooksofMoonStarforthepurposeofincorporatinginthemainBalanceSheet.

Answer
In the books of MoonStar
Trial Balance (in Rupees) of Virginia (USA) Branch as on 31stMarch, 2020

Dr. Cr. Conversion Dr. Cr.

US $ US $ rate Rs. Rs.
Office Equipment 43,200 50 21,60,000
Depreciation on Office 4,800 50 2,40,000
Equipment
Furniture and fixtures 2,880 50 1,44,000
Depreciation on furniture and 320 50 16,000
fixtures
Stock (1stApril, 2019) 22,400 47 10,52,800
Purchases 96,000 45 43,20,000
Sales 1,66,400 45 74,88,000
Goods sent from H.O. 32,000 15,80,000
Carriage inward 400 45 18,000
Salaries (3,200+400) 3,600 45 1,62,000
Outstanding salaries 400 50 20,000
Rent, rates and taxes 800 45 36,000
Insurance 400 45 18,000
Trade expenses 400 45 18,000
Head Office A/c 45,600 20,50,000
Trade debtors 9,600 50 4,80,000
Trade creditors 6,800 50 3,40,000
Cash at bank 2,000 50 1,00,000
Cash in hand 400 50 20,000
Exchange gain (bal. fig.) 4,66,800
2,19,200 2,19,200 1,03,64,800 1,03,64,800

Trading and Profit and Loss Account of Virginia Branch

for the year ended 31stMarch,2020
 Rs. Rs.
To Opening stock 10,52,800 By Sales 74,88,000
To Purchases 43,20,000 By Closing stock 10,75,000
To Goods from Head Office 15,80,000 (21,500 US $ × 50)
To Carriage inward 18,000
To Gross profit c/d 15,92,200
85,63,000 85,63,000
To Salaries 1,62,000 By Gross profit b/d 15,92,200
To Rent, rates and taxes 36,000
To Insurance 18,000
 Ch.15 – INCOMPLETE RECORDS

QUESTION 1 (RTP DEC 2021)

4. From the following details furnished by Mittal ji, prepare Trading and Profit and Loss account
for the year ended 31.3.2021. Also draft his Balance Sheet as at 31.3.2021:
1.4.2020 31.3.2021
` `
Creditors 3,15,400 2,48,000
Expenses outstanding 12,000 6,600
Plant and Machinery 2,32,200 2,40,800
Stock in hand 1,60,800 2,22,400
Cash in hand 59,200 24,000
Cash at bank 80,000 1,37,600
Sundry debtors 3,30,600 ?
Details of the year’s transactions are as follows:
Cash and discount credited to debtors 12,80,000
Returns from debtors 29,000
Bad debts 8,400
Sales (Both cash and credit) 14,36,200
Discount allowed by creditors 14,000
Returns to creditors 8,000
Capital introduced by cheque 1,70,000
Collection from debtors (Deposited into bank after 12,50,000
receiving cash)
Cash purchases 20,600
Expenses paid by cash 1,91,400
Drawings by cheque 8,600
Machinery acquired by cheque 63,600
Cash deposited into bank 1,00,000
Cash withdrawn from bank 1,84,800
Cash sales 92,000
Payment to creditors by cheque 12,05,400
Note: Mittalji has not sold any machinery during the year.
ANSWER

Balance Sheet as at 31st March, 2021

Liabilities ` Assets `
Capital (W.N. 1) 5,35,400 Plant & Machinery 2,32,200
Add: Additional 1,70,000 Add: New
capital machinery 63,600
Net profit 30,800 2,95,800
 7,36,200 Less: Depreciation (55,000) 2,40,800
Less: Drawings (8,600) 7,27,600 Stock in trade 2,22,400
Sundry creditors 2,48,000 Sundry debtors (W.N. 2) 3,57,400
Expenses 6,600 Cash in hand 24,000
outstanding
Cash in Bank 1,37,600
9,82,200 9,82,200

Working Notes:
(1) Statement of Affairs as at 31st March, 2020
Liabilities ` Assets `
Sundry creditors 3,15,400 Plant & Machinery 2,32,200
Outstanding expenses 12,000 Stock 1,60,800
Mittal’s Capital Debtors 3,30,600
(Balancing figure) 5,35,400 Cash in hand 59,200
_______ Cash at Bank 80,000
8,62,800 8,62,800
(2) Sundry Debtors Account
` `
To Balance b/d 3,30,600 By Cash 12,50,000
To Sales 13,44,200 By Discount 30,000
(14,36,200 – 92,000)
By Returns (sales) 29,000
By Bad debts 8,400
________ By Balance c/d (Bal. fig.) 3,57,400
16,74,800 16,74,800
(3) Sundry Creditors Account
` `
To Bank – Payments 12,05,400 By Balance b/d 3,15,400
To Discount 14,000 By Purchases credit 11,60,000
To Returns 8,000 (Balancing figure)
To Balance c/d (closing
balance) 2,48,000
14,75,400 14,75,400
(4)
Depreciation on Plant & Machinery: `
Opening balance 2,32,200
Add: Additions 63,600
2,95,800
Less: Closing balance (2,40,800)
Depreciation 55,000

(1) Expenses to be shown in profit and loss account

Expenses (in cash) 1,91,400
Add: Outstanding of 2021 6,600
1,98,000
 Less: Outstanding of 2020 12,000
1,86,000
(2) Cash and Bank Account
Cash Bank Cash Bank
` ` ` `
To Balance b/d 59,200 80,000 By Purchases 20,600 −
To Capital 1,70,000 By Expenses 1,91,400
To Debtors 12,50,000 By Plant and 63,600
Machinery
To Bank 1,84,800 By Drawings 8,600
To Cash 1,00,000 By Creditors 12,05,400
To Sales 92,000 By Cash 1,84,800
By Bank 1,00,000
_______ ________ By Balance c/d 24,000 1,37,600
3,36,000 16,00,000 3,36,000 16,00,000
QUESTION 2 (MTP DEC 2021) (16 MARKS)
The following is the Balance Sheet of Manish and Suresh as on 1st April, 2020:
Equity and Liabilities ` Assets `
Capital Accounts: Building 1,00,000
Manish 1,50,000 Machinery 65,000
Suresh 75,000 Stock 40,000
Creditors for goods 30,000 Debtors 50,000
Creditors for expenses 25,000 Bank 25,000

2,80,000 2,80,000
They give you the following additional information:
(i) Creditors' Velocity 1.5 month & Debtors' Velocity 2 months. Here velocity indicates the no. of
times the creditors and debtors are turned over a year.
(ii) Stock level is maintained uniformly in value throughout all over the year.
(iii) Depreciation on machinery is charged @ 10%, Depreciation on building @ 5% in the current year.
(iv) Cost price will go up 15% as compared to last year and also sales in the current year will increase
by 25% in volume.
(v) Rate of gross profit remains the same.
(vi) Business Expenditures are ` 50,000 for the year. All expenditures are paid off in cash.
(vii) Closing stock is to be valued on LIFO Basis.
(viii) All sales and purchases are on credit basis and there are no cash purchases and sales.
You are required to prepare Trading, Profit and Loss Account, Trade Debtors Account and Trade
Creditors Account for the year ending 31.03.2021.
ANSWER
1. Trading and Profit and Loss account for the year ending 31st March, 2021
Particulars ` Particulars `
To Opening Stock 40,000 By Sales 4,31,250
To Purchases (Working Note) 3,45,000 By Closing Stock 40,000
To Gross Profit c/d (20% on
sales) 86,250
4,71,250 4,71,250
To Business Expenses 50,000 By Gross Profit b/d 86,250
To Depreciation on:
Machinery 6,500
Building 5,000 11,500
To Net profit 24,750
86,250 86,250
 Trade Debtors Account

Particulars ` Particulars `
To Balance b/d 50,000 By Bank (bal.fig.) 4,09,375
To Sales 4,31,250 By Balance c/d (1/6 of 4,31,250) 71,875
4,81,250 4,81,250
Trade Creditors Account
Particulars ` Particulars `
To Bank (Balancing figure) 3,31,875 By Balancing b/d 30,000
To Balance c/d/ (1/8 of ` 43,125 By Purchases 3,45,000
3,45,000)
3,75,000 3,75,000
Working Note:

`
(i) Calculation of Rate of Gross Profit earned during previous year
A Sales during previous year (` 50,000 x 12/2) 3,00,000
B Purchases (` 30,000 x 12/1.5) 2,40,000
C Cost of Goods Sold (` 40,000 + ` 2,40,000 – ` 40,000) 2,40,000
D Gross Profit (A-C) 60,000
E ` 60,000 20%
Rate of Gross Profit x 100
` 3,00,000
(ii) Calculation of sales and Purchases during current year `
A Cost of goods sold during previous year 2,40,000
B Add: Increases in volume @ 25 % 60,000
3,00,000
Add: Increase in cost @ 15%
C 45,000
Cost of Goods Sold during Current Year
D 3,45,000
Add: Gross profit @ 25% on cost (20% on sales)
E 86,250
Sales for current year [D+E]
F 4,31,250

QUESTION 3 ( MTP DEC2021) (16 MARKS)

M/s Shyam, a proprietorship firm runs a business of stationary items. It provides you the following
information relating to assets and liabilities:

Assets & Liabilities As on 01.04.2019 As on 31.03.2020

Creditors 20,000 15,000
Outstanding Expenses 600 800
Fixed Assets 12,000 13,000
Stock 10,000 12,000
Cash in hand 7,500 2,000
 Cash at Bank 2,500 10,000
Debtors ? 18,000
Details of the year’s transactions are as follows:
(1) Discounts allowed to Debtor 4,000
(2) Returns from debtors 1,450
(3) Bad debts 500
(4) Total sales (Cash and Credit) 72,000
(5) Discount allowed by creditors 700
(6) Returns to creditors 400
(7) Receipts from debtors paid into Bank 76,000
(8) Cash purchases 1,000
(9) Expenses paid by cash 9,000
(10) Drawings by cheque 500
(11) Purchase of Fixed Assets by cheque 4,000
(12) Cash deposited into bank 5,000
(13) Cash withdrawn from bank 9,000
(14) Payments to creditors by cheque 60,000

No fixed assets were sold during the year. Any difference in cash account to be considered as cash sales.
You aRe required to prepare Trading and Profit & Loss Account for the year ended 31.03.2020 and the Balance
Sheet as at 31.03.2020 from the given information

ANSWER
In the books of
M/s Shyam Trading and Profit and Loss Account for the year
ended 31st March, 2020
` ` ` `
To Opening stock 10,000 By Sales:
To Purchases: Cash 500

Cash 1,000 Credit 71,500

Credit (W.N. 3) 56,100 Less: Returns (1,450) 70,550
57,100 By Closing stock 12,000
Less: Returns (400) 56,700
To Gross Profit c/d 15,850
 82,550 82,550
To Discount allowed 4,000 By Gross profit b/d 15,850
To Bad debts 500 By Discount received 700
To General expenses (W.N. 5) 9,200 By Net Loss (balancing 150
fig.)
To Depreciation (W.N. 4) 3,000
16,700 16,700

Balance Sheet as at 31st March, 2020

Liabilities ` Assets `
Capital (W.N. 1) 39,850 Fixed Assets 12,000
Less: Net loss 150 Add: New asset 4,000
39,700 16,000
Less: Drawings (500) 39,200 Less: Depreciation (3,000) 13,000
Sundry creditors 15,000 Stock in trade 12,000
Expenses outstanding 800 Sundry debtors 18,000
(W.N. 2)
Cash in hand 2,000
_______ Cash in Bank 10,000
55,000 55,000

Working Notes:
(1) Ascertainment of Opening Capital - Statement of Affairs as at 1.4.19
` Assets `
Liabilities
Sundry creditors 20,000 Fixed Assets 12,000
Outstanding expenses 600 Stock 10,000
Prasad’s Capital Debtors 28,450
(Balancing figure) 39,850 Cash in hand 7,500
_______ Cash at Bank 2,500
60,450 60,450

(1) Sundry Debtors Account

` `
To Balance b/d 28,450 By Cash 76,000
(bal. fig)
To Sales 71,500 By Discount 4,000
(72,000 – 500)
By Returns (sales) 1,450
 By Bad debts 500
________ By Balance c/d (given) 18,000
99,950 99,950
(2) Sundry Creditors Account
` `
To Bank – Payments 60,000 By Balance b/d 20,000
To Discount 700 By Purchases - credit 56,100
To Returns 400 (Balancing figure)
To Balance c/d
(closing balance) 15,000 _______
76,100 76,100

(3) Depreciation on Fixed Assets

`
Opening balance of fixed assets 12,000
Add: Additions 4,000
16,000
Less: Closing balance of fixed assets (13,000)
Depreciation 3,000

(4) Expenses to be shown in profit and loss account

Expenses (in cash) 9,000
Add: Outstanding of 2020 800
9,800
Less: Outstanding of 2019 600
9,200

(5) Cash and Bank Account

Cash Bank Cash Bank
` ` ` `
To Balance b/d 7,500 2,500 By Purchases 1,000 −
To Debtors - 76,000 By Expenses 9,000
To Bank (C) 9,000 - By Fixed Asset 
To Cash (C) - 5,000 By Drawings 
To Sales (balancing 500 - By Creditors 
figure considered as
cash sales)
 By Cash (C) 
By Bank (C) 5,000
By Balance c/d 2,000 
17,000 83,500 17,000 

Question 1 (JULY 2021) [10 MARKS]

Question 4 (JAN 2021) [10 MARKS]
Mr. Prakash furnishes following information for his readymade garmentsbusiness:
(i) Receipts and Payments during2019-20:

Receipts Amount ` Payments Amount `

Bank Balance as on Payment to Sundry
1-4-2019 16,250 Creditors 3,43,000
Received from Sundry Salaries 75,000
Debtors 4,81,000
General Expenses 22,500
Cash sales 1,70,800 Rent and Taxes 11,800
Capital brought in the Drawings 96,000
Business during the year 50,000
Cash Purchases 1,22,750
Interest on Investment Balance at Bank on
Received 9,750 31-03-2020 36,600
Cash in hand on
31-03-2020 20,150
7,27,800 7,27,800
(ii) Particulars of other Assets and Liabilities are asfollows:
1stApril, 2019 31stMarch, 2020
(`) (`)
Machinery 85,000 85,000
Furniture 24,500 24,500
Trade Debtors 1,55,000 ?
Trade Creditors 60,200 ?
 Stock 38,600 55,700
12% Investment 85,000 85,000
Outstanding Salaries 12,000 14,000
(iii) Additionalinformation:
(1) 20% of Total sales and 20% of total purchases are incash.
(2) Of the Debtors, a sum of `7,200 should be written off as Bad debt and further a provision
for doubtful debts is to be provided@2%.
(3) Provide depreciation @10% p.a. on Machinery andFurniture.
You are required to prepare Trading and Profit & Loss account for the year ended 31stMarch, 2020,
and Balance Sheet as on thatdate.

Answer
Trading and Profit & Loss Account for the yearended 31-03-2020
` ` `
To Opening Inventory 38,600 By Sales 8,54,000
To Purchases 6,13,750 By Closing Inventory 55,700
To Gross profit c/d (b.f.) 2,57,350
9,09,700 9,09,700
To Salaries 77,000 By Gross Profit b/d 2,57,350
(75,000+14,000-12,000)
To Rent 11,800 By Interest on 10,200
investment
To General expenses 22,500 (9,750+450)
To Depreciation:
Machinery @ 10% 8,500
Furniture @ 10% 2,450 10,950
To Bad Debts 7,200
To Provision for doubtful 7,000 14,200
debts
To Balance being profit
carried to Capital A/c
(b.f.) 1,31,100

2,67,550 2,67,550
Balance Sheet as on 31st March, 2020

Liabilities ` ` Assets ` `
A. Adamjee’s Machinery 85,000
Capital Less: Depreciation
on 1st April, 2019 3,32,150 Furniture (8,500) 76,500
Add: Fresh Capital 50,000 24,500
 Add: Profit for the year 1,31,100 Less:Depreciation (2,450) 22,050
5,13,250
Inventory-in-
Less: Drawings (96,000) 4,17,250 55,700
trade Sundry
3,57,200
debtors Less:
Sundry creditors 2,08,200
Provisionfor
Outstanding expenses 14,000 (14,200) 3,43,000
Doubtful
85,450
debts Investment
(including
accrue 36,600
d 20,150
6,39,450 interest ` 450) 6,39,450
Cash at bank
Cash in hand

Working Notes:
1. Balance sheet as on1-4-2019
` `
Sundry creditors 60,200 Machinery 85,000
Capital 3,32,150 Furniture 24,500
(balancing figure) Inventory 38,600
Outstanding salaries 12,000 Sundry debtors 1,55,000
Investments 85,000
Bank balance (from Cash 16,250
statement)
4,04,350 4,04,350
1. Total DebtorsAccount

` `
1.4.19 To Balance b/d 1,55,000 31.3.20 By Cash 4,81,000
31.3.20 To Credit sales 6,83,200 31.3.20 By Bad debts 7,200
(1,70800/20x80) By Balance c/d 3,50,000
(Bal. Fig.)
8,38,200 8,38,200
2. Total CreditorsAccount

` `
31.3.20 To Cash 3,43,000 1.4.19 By Balance b/d 60,200
31.3.20 To Balance 2,08,200 31.3.20 By Credit Purchases 4,91,000
c/d (1,22,750/20x80)
(Bal. Fig.)
5,51,200 5,51,200
Question 5 (NOV 2020) [10 MARKS]

M/s Rohan & Sons runs a business of Electrical goods on wholesale basis. The books of accounts are
closed on 31stMarch every year. The Balance Sheet as on 31stMarch, 2019 is as follows:

Liabilities ` Assets `
Capital 12,50,000 Fixed Assets 6 50,000
Closing stock 3,75,000
Trade Debtors 3,65,000
Trade Creditors 1,90,000 Cash & Bank 1,95,000
Profit & Loss A/c 1,45,000
15,85,000 15,85,000
The management estimates the purchase & sales for the year ended 31st March,2020 as under:

Particulars Upto31.01.2020 February 2020 March2020

(`) (`) (`)
Purchases 16,20,000 1,40,000 1,25,000
Sales 20,75,000 2,10,000 1, 75,000

All Sales and Purchases are on credit basis. It was decided to invest ` 1,50,000 in purchase of Fixed
assets, which are depreciated @ 10% on book value. A Fixed Asset of book value as on 01.04.2019,
` 60,000 was sold for `56,000 on 31st March, 2020.
The time lag for payment to Trade Creditors for purchases is one month and receipt from Trade debtors
for sales, is two months. The business earns a gross profit of 25% on turnover. The expenses against
gross profit amounts to 15% of the turnover. The amount of depreciation is not included in
theseexpenses.
Prepare Trading & profit& Loss Account for the year ending 31st March, 2020 and draft a Balance
Sheet as at 31st March, 2020 assuming that creditors are all Trade creditors for purchases and
debtors are all Trade debtors for sales and there is no other current asset and liability apart from stock
and cash and bankbalances.
Also, prepare Cash & Bank account and Fixed Assets account for the year ending 31stMarch,2020.

Answer
Trading and Profit and Loss Account of M/s Rohan & Sons
for the year ended 31st March,2020
` `
To Opening stock 3,75,000 By Sales 24,60,000
To Purchases 18,85,000 By Closing stock 4,15,000
To Gross Profit c/d 6,15,000 (Balancing Figure)
(25%)
28,75,000 28,75,000
To Depreciation 80,000 By Gross profit b/d 6,15,000
To Expenses (15% of 3,69,000 By Profit on sale of Fixed 2,000
` 24,60,000) assets
 To Net Profit (b.f.) 1,68,000
6,17,000 6,17,000
Balance Sheet of M/s Rohan Sons as on 31st March, 2020
Liabilities Assets `
Capital 12,50,000 Fixed assets (less Dep.) 6,66,000
Profit & Loss A/c 3,13,000 Stock 4,15,000
(1,45,000 + 1,68,000)
Trade Creditors 1,25,000 Debtors 3,85,000
_______ Cash and bank 2,22,000
16,88,000 16,88,000
Cash and Bank Account

To Bal. b/d 1,95,000 By Creditors (1,90,000 + 19,50,000

16,20,000 + 1,40,000)
To Debtors 24,40,000 By Expenses 3,69,000
(3,65,000 + 20,75,000)
To Fixed assets 56,000 By Fixed assets 1,50,000
By Bal. c/d 2,22,000
26,91,000 26,91,000
Fixed Assets Account

To Bal. b/d 6,50,000 By Cash 56,000

To Profit on sale of Fixed asset 2,000 By Depreciation on sold 6,000
fixedasset
By Depreciation 74,000
(59,000 + 15,000)
To Bank A/c 1,50,000 By Bal. c/d 6,66,000
8,02,000 8,02,000

Question 6 (NOV 2019) [10 MARKS]

Archana Enterprises maintain their books of accounts under single entry system. The Balance-Sheet
as on 31st March, 2018 was asfollows :

Liabilities Amount (`) Assets Amount (`)

Capital A/c 6,75,000 Furniture & fixtures 1,50,000
Trade creditors 7,57,500 Stock 9,15,000
Outstanding expenses 67,500 Trade debtors 3,12,000
Prepaid insurance 3,000
Cash in hand & at bank 1,20,000
15,00,000 15,00,000
 The following was the summary of cash and bank book for the year ended 31stMarch, 2019:

Receipts Amount (`) Payments Amount (`)

Cash in hand & at Bank on 1,20,000 Payment to trade 1,24,83,000
1stApril, 2018 creditors
Cash sales 1,10,70,000 Sundry expenses paid 9,31,050
Receipts from trade debtors 27,75,000 Drawings 3,60,000
Cash in hand & at Bank
on 31stMarch, 2019 1,90,950
1,39,65,000 1,39,65,000
Additional Information:
(i) Discount allowed to trade debtors and received from trade creditors amountedto
` 54,000 and ` 42,500 respectively (for the year ended 31stMarch, 2019).
(ii) Annual fire insurance premium of ` 9,000 was paid every year on 1stAugust for the renewal of
thepolicy.
(iii) Furniture &fixtures were subject to depreciation @ 15% p.a. on diminishing balance method.
(iv) The following are the balances as on 31stMarch, 2019: Stock
`9,75,000
Tradedebtors `3,43,000
Outstandingexpenses ` 55,200
(v) Grossprofitratioof10%onsalesismaintainedthroughouttheyear.
You are required to prepare Trading and Profit & Loss account for the year ended 31stMarch, 2019,
and Balance Sheet as onthatdate.

Answer
Trading and Profit and Loss Account of ArchanaEnterprises
for the year ended 31st March, 2019

` `
To Opening Stock 9,15,000 By Sales
To Purchases (W.N. 2) 125,97,000 Cash 110,70,000
To Gross profit c/d 13,93,000 Credit (W.N. 1) 28,60,000 139,30,000
(10% of 139,30,000) By Closing stock 9,75,000
149,05,000 149,05,000
To Sundry expenses 9,18,750 By Gross profit b/d 13,93,000
(W.N. 4)
To Discount allowed 54,000 By Discount received 42,500
To Depreciation 22,500
(15% ` 1,50,000)

To Net Profit (b.f.) 4,40,250

 14,35,500 14,35,500
Balance Sheet of Archana Enterprises as at 31st March, 2019

Liabilities Amount Assets Amount

` `
Capital Furniture & Fittings 1,50,000
Opening 6,75,000 Less: Depreciation (22,500) 1,27,500
balance
Less: Drawing (3,60,000) Stock 9,75,000
3,15,000 Trade Debtors 3,43,000
Add: Net profit Unexpired insurance 3,000
for the years 4,40,250 7,55,250
Trade creditors 8,29,000 Cash in hand & at bank 1,90,950
(W.N. 3)
Outstanding 55,200
expenses

16,39,450 16,39,450

Working Notes:
1. Trade DebtorsAccount

` `
To Balance b/d 3,12,000 By Cash/Bank 27,75,000
To Credit sales 28,60,000 By Discount allowed 54,000
(Bal. fig.) By Balance c/d 3,43,000
31,72,000 31,72,000

1. Memorandum TradingAccount
` `
To Opening stock 9,15,000 By Sales 139,30,000
To Purchases (Balancing figure) 125,97,000 By Closing stock 9,75,000
To Gross Profit (10% on sales) 13,93,000
149,05,000 149,05,000

2. Trade CreditorsAccount
` `
To Cash/Bank 124,83,000 By Balance b/d 7,57,500
To Discount received 42,500 By Purchases (as calculated 125,97,000
 To Balance c/d in W.N. 2)
(balancing figure) 8,29,000
133,54,500 133,54,500

3. ComputationofsundryexpensestobechargedtoProfit&LossA/c

`
Sundry expenses paid (as per cash and Bank book) 9,31,050
Add: Prepaid expenses as on 31–3–2018 3,000
9,34,050
Less: Outstanding expenses as on 31–3–2018 (67,500)
8,66,550
Add: Outstanding expenses as on 31–3–2019 55,200
9,21,750
Less: Prepaid expenses as on 31–3–2019 (Insurance paid till July, 2019)
(9,000 x 4/12) (3,000)
9,18,750

Question 7 (RTP NOV 2021)

From the following details furnished by Mittal ji, prepare Trading and Profit and Loss
accountfortheyearended31.3.2021.AlsodrafthisBalanceSheetasat31.3.2021:
1.4.2020 31.3.2021
` `
Creditors 3,15,400 2,48,000
Expenses outstanding 12,000 6,600
Plant and Machinery 2,32,200 2,40,800
Stock in hand 1,60,800 2,22,400
Cash in hand 59,200 24,000
Cash at bank 80,000 1,37,600
Sundry debtors 3,30,600 ?
Details of the year’s transactions are as follows:
Cash and discount credited to debtors 12,80,000
Returns from debtors 29,000
Bad debts 8,400
Sales (Both cash and credit) 14,36,200
Discount allowed by creditors 14,000
Returns to creditors 8,000
 Capital introduced by cheque 1,70,000
Collection from debtors (Deposited into bank after 12,50,000
receiving cash)
Cash purchases 20,600
Expenses paid by cash 1,91,400
Drawings by cheque 8,600
Machinery acquired by cheque 63,600
Cash deposited into bank 1,00,000
Cash withdrawn from bank 1,84,800
Cash sales 92,000
Payment to creditors by cheque 12,05,400
Note: Mittalji has not sold any machinery during the year.

Answer

In the books of Mittalji

Trading and Profit and Loss Account
for the year ended 31st March, 2021
` ` ` `
To Opening stock 1,60,800 By Sales:
To Purchases: Cash 92,000
Cash 20,600 Credit 13,44,200
Credit (W.N. 3) 11,60,000 14,36,200
11,80,600 Less: Returns (29,000) 14,07,200
Less: Returns (8,000) 11,72,600
To Gross Profit c/d 2,96,200 By Closing stock 2,22,400
16,29,600 16,29,600
To Discount allowed 30,000 By Gross profit b/d 2,96,200
To Bad debts 8,400 By Discount 14,000
To General expenses 1,86,000
(W.N. 5)
To Depreciation 55,000
(W.N. 4)
To Net profit 30,800
3,10,200 3,10,200
Balance Sheet as at 31st March, 2021
Liabilities ` Assets `
Capital (W.N. 1) 5,35,400 Plant & Machinery 2,32,200
Add: Additional 1,70,000 Add: New
capital machinery 63,600
Net profit 30,800 2,95,800
7,36,200 Less: Depreciation (55,000) 2,40,800
Less: Drawings (8,600) 7,27,600 Stock in trade 2,22,400
 Sundry creditors 2,48,000 Sundry debtors (W.N. 2) 3,57,400
Expenses 6,600 Cash in hand 24,000
outstanding
Cash in Bank 1,37,600
9,82,200 9,82,200

Working Notes:
(1) Statement of Affairs as at 31st March,2020
Liabilities ` Assets `
Sundry creditors 3,15,400 Plant & Machinery 2,32,200
Outstanding expenses 12,000 Stock 1,60,800
Mittal’s Capital Debtors 3,30,600
(Balancing figure) 5,35,400 Cash in hand 59,200
_______ Cash at Bank 80,000
8,62,800 8,62,800
(2) Sundry DebtorsAccount
` `
To Balance b/d 3,30,600 By Cash 12,50,000
To Sales 13,44,200 By Discount 30,000
(14,36,200 – 92,000)
By Returns (sales) 29,000
By Bad debts 8,400
________ By Balance c/d (Bal. fig.) 3,57,400
16,74,800 16,74,800
(3) Sundry CreditorsAccount
` `
To Bank – Payments 12,05,400 By Balance b/d 3,15,400
To Discount 14,000 By Purchases credit 11,60,000
To Returns 8,000 (Balancing figure)
To Balance c/d (closing
balance) 2,48,000
14,75,400 14,75,400
(4)
Depreciation on Plant & Machinery: `
Opening balance 2,32,200
Add: Additions 63,600
2,95,800
Less: Closing balance (2,40,800)
Depreciation 55,000

(5) Expenses to be shown in profit and lossaccount

 Expenses (in cash) 1,91,400
Add: Outstanding of 2021 6,600
1,98,000
Less: Outstanding of 2020 12,000
1,86,000
(6) Cash and BankAccount
Cash Bank Cash Bank
` ` ` `
To Balance b/d 59,200 80,000 By Purchases 20,600 −
To Capital 1,70,000 By Expenses 1,91,400
To Debtors 12,50,000 By Plant and 63,600
Machinery
To Bank 1,84,800 By Drawings 8,600
To Cash 1,00,000 By Creditors 12,05,400
To Sales 92,000 By Cash 1,84,800
By Bank 1,00,000
_______ ________ By Balance c/d 24,000 1,37,600
3,36,000 16,00,000 3,36,000 16,00,000

Question 8 (RTP MAY 2021)

Ram carried on business as retail merchant. He has not maintained regular account books. However,
he always maintained ` 10,000 in cash and deposited the balance into the bank
account.Heinformsyouthathehassoldgoodsatprofitof25%onsales.
Following information is given to you:
Assets and Liabilities As on 1.4.2020 As on 31.3.2021
Cash in Hand 10,000 10,000
Sundry Creditors 40,000 90,000
Cash at Bank 50,000 (Cr.) 80,000 (Dr.)
Sundry Debtors 1,00,000 3,50,000
Stock in Trade 2,80,000 ?
Ram’s capital 3,00,000 ?

Analysis of his bank pass book reveals the following information:

(a) Payment to creditors `7,00,000
(b) Payment for business expenses `1,20,000
(c) Receipts from debtors `7,50,000
(d) Loan ` 1,00,000 taken on 1.10.2020 at 10% perannum
(e) Cash deposited in the bank `1,00,000
 He informs you that he paid creditors for goods ` 20,000 in cash and salaries ` 40,000 in cash. He
has drawn ` 80,000 in cash for personal expenses. During the year Ramhad not introduced any
additional capital. Surplus cash if any, to be taken as cash sales. All purchases are on creditbasis.
You are required to prepare: Trading and Profit and Loss Account for the year ended 31.3.2021 and
Balance Sheet as at 31stMarch, 2021.

Answer
Trading and Profit and Loss Account of Ram
for the year ended 31stMarch,2021
` `
To Opening stock 2,80,000 By Sales
To Purchases 7,70,000 Cash 2,40,000
To Gross Profit @ 25% 3,10,000 Credit 10,00,000 12,40,000
By Closing Stock (bal.fig.) 1,20,000
13,60,000 13,60,000
To Salaries 40,000 By Gross Profit 3,10,000
To Business expenses 1,20,000
To Interest on loan 5,000
(10% of 1,00,000 x
6/12)
To Net Profit 1,45,000
3,10,000 3,10,000
Balance Sheet of Ram as at 31stMarch, 2021

Liabilities ` ` Assets `
Ram’s capital: Cash in hand 10,000
Opening 3,00,000 Cash at Bank 80,000
Add: Net Profit 1,45,000 Sundry Debtors 3,50,000
4,45,000 Stock in trade 1,20,000
Less: Drawings (80,000) 3,65,000
Loan (including interest due) 1,05,000
Sundry Creditors 90,000 _______
5,60,000 5,60,000

Working Notes:
1. Sundry DebtorsAccount
` `
To Balance b/d 1,00,000 By Bank A/c 7,50,000
To Credit sales (Bal. fig) 10,00,000 By Balance c/d 3,50,000
11,00,000 11,00,000
2. Sundry CreditorsAccount
 ` `
To Bank A/c 7,00,000 By Balance b/d 40,000
To Cash A/c 20,000 By Purchases (Bal. fig.) 7,70,000
To Balance c/d 90,000
8,10,000 8,10,000
3. Cash and BankAccount
Cash Bank Cash Bank
` ` ` `
To Balance b/d 10,000 By Balance b/d 50,000
To Sales (bal. fig) 2,40,000 By Bank A/c (C) 1,00,000
To Cash (C) 1,00,000 By Salaries 40,000
To Debtors 7,50,000 By Creditors 20,000 7,00,000
To Loan 1,00,000 By Drawings 80,000
By Business 1,20,000
expenses
By Balance c/d 10,000 80,000
2,50,000 9,50,000 2,50,000 9,50,000

Question 9 (RTP NOV 2020)

The following is the Balance Sheet of Manish and Suresh as on1 stApril, 2019:
Liabilities ` Assets `
Capital Accounts: Building 1,00,000
Manish 1,50,000 Machinery 65,000
Suresh 75,000 Stock 40,000
Creditors for goods 30,000 Debtors 50,000
Creditors for expenses 25,000 Bank 25,000

2,80,000 2,80,000
They give you the following additional information:
(i) Salesandpurchasesfortheyearended31stMarch,2019were`3,00,000and`
2,40,000 respectively.
(ii) Stock level is maintained uniformly in value throughout all over theyear.
(iii) Depreciation on machinery is charged @ 10%, Depreciation on building @ 5% in the currentyear.
(iv) Salesinthecurrentyearwillincreaseby43.75%involume.
(v) Rate of gross profit remains thesame.
(vi) Business Expenditures are ` 50,000 for the year and all expenditures are paid in cash.
(vii) All sales and purchases are on credit basis and there are no cash purchases and sales.
You are required to prepare Trading and Profit and Loss Account for the year ended 31.03.2020.
Answer
TradingandProfitandLossaccountfortheyearending31stMarch,2020
Particulars ` Particulars `
To Opening Stock 40,000 By Sales 4,31,250
To Purchases 3,45,000 By Closing Stock 40,000
To Gross Profit c/d (20% on
sales) 86,250
4,71,250 4,71,250
To Business Expenses 50,000 By Gross Profit b/d 86,250
To Depreciation on:
Machinery 6,500
Building 5,000 11,500
To Net profit 24,750
86,250 86,250
Working Note:

`
(i) Calculation of Rate of Gross Profit earned during previous year
A Sales during previous year 3,00,000
B Purchases 2,40,000

Question 10 (RTP MAY 2020)

ThebooksofaccountofMr.MaanofMumbaishowedthefollowingfigures:
31.3.2018 31.3.2019
` `
Furniture & fixtures 2,60,000 2,34,000
Stock 2,45,000 3,20,000
Debtors 1,25,000 ?
 Cash in hand & bank 1,10,000 ?
Creditors 1,35,000 1,90,000
Bills payable 70,000 80,000
Outstanding salaries 19,000 20,000
An analysis of the cash book revealed the following:
`
Cash sales 16,20,000
Collection from debtors 10,58,000
Discount allowed to debtors 20,000
Cash purchases 6,15,000
Payment to creditors 9,73,000
Discount received from creditors 32,000
Payment for bills payable 4,30,000
Drawings for domestic expenses 1,20,000
Salaries paid 2,36,000
Rent paid 1,32,000
Sundry trade expenses 81,000
Depreciation is provided on furniture & fixtures @10% p.a. on diminishing balance method. Mr. Maan
maintains a steady gross profit rate of 25% on sales.
You are required to prepare Trading and Profit and Loss account for the year ended 31stMarch,
2019 and Balance Sheet as on thatdate.

Answer
In the books of Mr. Maan

Trading &Profit and Loss Account

for the year ended 31stMarch,2019

Particulars Amount Particulars Amount
` `
To Opening stock 2,45,000 By Sales:
To Purchases: Cash 16,20,000
Cash 6,15,000 Credit (W.N.3) 11,00,000
Credit (W.N. 2) 15,00,000 By Closing stock 3,20,000
To Gross profit c/d 6,80,000
30,40,000 30,40,000
To Salaries (W.N.5) 2,37,000 By Gross profit b/d 6,80,000
To Rent 1,32,000 By Discount received 32,000
To Sundry trade expenses 81,000
 To Discount allowed 20,000
To Depreciation on furniture &
fixtures 26,000
To Net profit 2,16,000
7,12,000 7,12,000
Balance Sheet
as at 31stMarch, 2019
Liabilities Amount Amount
` `
Capital Fixed assets
Opening balance (W.N.7) 5,16,000 Furniture & fixtures 2,34,000
Add: Net profit 2,16,000 Current assets:
7,32,000 Stock 3,20,000
Less: Drawings 1,20,000 6,12,000 Debtors (W.N.4) 1,47,000
Current liabilities & provisions: Cash & bank (W.N.6) 2,01,000
Creditors 1,90,000
Bills payable 80,000
Outstanding salaries 20,000
9,02,000 9,02,000

Working Notes:
1. Bills PayableAccount
` `
To Cash/Bank 4,30,000 By Balance b/d 70,000
To Balance c/d 80,000 By Trade creditors (Bal. fig.) 4,40,000
5,10,000 5,10,000
2. CreditorsAccount
` `
To Cash/Bank 9,73,000 By Balance b/d 1,35,000
To Bills payable A/c 4,40,000 By Credit purchases 15,00,000
(W.N.1) (Bal.fig.)
To Discount received 32,000
To Balance c/d 1,90,000
16,35,000 16,35,000
3. Calculation of creditsales
 `
Opening stock 2,45,000
Add: Purchases
Cashpurchases 6,15,000
Creditpurchases 15,00,000 21,15,000
23,60,000
Less: Closing Stock 3,20,000
Cost of goods sold 20,40,000
Gross profit ratio on sales 25%
 100 27,20,000
Total sales ` 20,40,000 ×
 75
Less: Cash sales 16,20,000
Credit sales 11,00,000
4. DebtorsAccount
` `
To Balance b/d 1,25,000 By Cash/Bank 10,58,000
To Credit sales 11,00,000 By Discount allowed 20,000
(W.N.3)
By Balance c/d (Bal. fig.) 1,47,000
12,25,000 12,25,000
5. Salaries
`
Salaries paid during the year 2,36,000
Add: Outstanding salaries as on 31.3.2019 20,000
2,56,000
Less: Outstanding salaries as on31.03.2018 19,000
2,37,000
6. Cash / BankAccount
` `
To Balance b/d 1,10,000 By Cash purchases 6,15,000
To Cash sales 16,20,000 By Creditors 9,73,000
To Debtors 10,58,000 By Bills payable 4,30,000
By Drawings 1,20,000
By Salaries 2,36,000
By Rent 1,32,000
By Sundry trade 81,000
expenses
By Balance c/d 2,01,000
 27,88,000 27,88,000
7. Balance Sheet as at 31stMarch,2018
` `
Creditors 1,35,000 Furniture & fixtures 2,60,000
Bills payable 70,000 Stock 2,45,000
Outstanding salaries 19,000 Debtors 1,25,000
Capital (Bal. fig.) 5,16,000 Cash & bank 1,10,000
7,40,000 7,40,000

Question 12 (MTP APRIL 2021) [12 MARKS]

The following is the Balance Sheet of Chirag as on 31stMarch,2020:

Liabilities Rs. Assets Rs.
Capital Account 48,000 Building 32,500
Loan 15,000 Furniture 5,000
Creditor 31,000 Motor car 9,000
Stock 20,000
Debtors 17,000
Cash in hand 2,000
Cash at bank 8,500
94,000 94,000
A riot occurred on the night of 31stMarch, 2021 in which all books and records were lost. The
cashierhadabscondedwiththeavailablecash.Hegivesyouthefollowinginformation:
(a) His sales for the year ended 31stMarch, 2021 were 20% higher than the previous year’s sales.
He always sells his goods at cost plus 25%; 20% of the total sales for the year ended 31stMarch,
2021 were for cash. There were no cashpurchases.
(b) On 1stApril, 2020 the stock level was raised to Rs. 30,000 and stock was maintained at this new
level all throughout theyear.
(c) Collection from debtors amounted to Rs. 1,40,000 of which Rs. 35,000 was received in cash,
Business expenses amounted to Rs. 20,000 of which Rs. 5,000 was outstandingon 31stMarch,
2021 and Rs. 6,000 was paid bycheques.
(d) Analysis of the Pass Book revealed the Payment to Creditors Rs. 1,37,500, PersonalDrawing
Rs. 7,500, Cash deposited in Bank Rs. 71,500, andCash withdrawn from Bank Rs.12,000.
(e) Gross profit as per last year’s audited accounts was Rs.30,000.
(f) ProvidedepreciationonBuildingandFurnitureat5%andMotorCarat20%.
(g) Theamountdefalcatedbythecashiermaybetreatedasrecoverablefromhim.
YouarerequiredtopreparetheTradingandProfitandLossAccountfortheyearended31 st
March, 2021 and Balance Sheet as on thatdate.

Answer
 TradingandProfitandLossAccountfortheyearendingon31stMarch,2021
Particulars Rs. Particulars Rs.
To Opening Stock 20,000 By Sales 1,80,000
To Purchases (bal.fig.) 1,54,000 By Closing Stock 30,000
To Gross Profit c/d (@20% on sales) 36,000 2,10,000
2,10,000
To Sundry Business Expenses 20,000 By Gross Profit b/d 36,000
To Depreciation:
Building 1,625
Furniture 250
Motor 1,800 3,675
To Net profit transferred to Capital A/c 12,325
36,000 36,000
Balance Sheet as at 31stMarch, 2021
Liabilities Rs. Assets Rs.
Capital Account: Building 32,500
Opening Balance 48,000 Less: Depreciation (1,625) 30,875
Add: Net profit 12,325 Furniture 5,000
60,325 Less: Depreciation (250) 4,750
Less: Drawings (7,500) 52,825 Motor Car 9,000
Loan 15,000 Less: Depreciation (1,800) 7,200
Sundry Creditors 47,500 Stock in trade 30,000
Outstanding Expenses 5,000 Sundry Debtors 21,000
Cash at Bank 22,000
Sundry Advances
(Amount recoverable
fromCashier) 4,500
1,20,325 1,20,325
Working Notes:
(i) Total DebtorsAccount
Particulars Rs. Particulars Rs.
To Balance b/d 17,000 By Bank (Rs. 1,40,000 – Rs. 35,000) 1,05,000
To Sales (80% of Rs. 1,80,000) 1,44,000 By Cash A/c 35,000
By Balance c/d 21,000
1,61,000 1,61,000
(ii) Total CreditorsAccount
Particulars Rs. Particulars Rs.
To Bank 1,37,500 By Balance b/d 31,000
To Balance c/d 47,500 By Purchases 1,54,000
1,85,000 1,85,000
 (iii) CashBook
Particulars Cash Bank Rs. Particulars Cash Bank Rs.
Rs. Rs.
To Balance b/d 2,000 8,500 By Business Expenses 9,000 6,000
To Sales 36,000 - By Drawings - 7,500
To Sundry Debtors 35,000 1,05,000 By Sundry Creditors - 1,37,500
To Cash (Contra) - 71,500 By Bank (Contra) 71,500 -
To Bank (Contra) 12,000 By Cash (Contra) - 12,000
By Defalcation (Bal fig.) 4,500 -
By Balance c/d (Bal fig.) 22,000
85,000 1,85,000 85,000 1,85,000

(iv) Lastyear’sTotalSales=GrossProfitx100/20=Rs.30,000x100/20=Rs.1,50,000 (v)

Currentyear’sTotalSales=Rs.1,50,000+20%ofRs.1,50,000=Rs.1,80,000
(vi) Current year’s Credit Sales = Rs. 1,80,000 x 80%= Rs.1,44,000
(vii) Cost of Goods Sold = Sales – G.P. = Rs.1,80,000 – Rs. 36,000 = Rs.1,44,000
(viii) Purchases = Cost of Goods Sold + Closing Stock – OpeningStock
= Rs. 1,44,000 + Rs. 30,000 – Rs. 20,000 = Rs. 1,54,000

Question 13 (MTP MARCH 2021) [12 MARKS]

Archana Enterprises maintain their books of accounts under single entry system. The Balance- Sheet
as on 31st March, 2018 was as follows:
Liabilities Amount (Rs.) Assets Amount (Rs.)
Capital A/c 6,75,000 Furniture & fixtures 1,50,000
Trade creditors 7,57,500 Stock 9,15,000
Outstanding expenses 67,500 Trade debtors 3,12,000
Prepaid insurance 3,000
Cash in hand & at bank 1,20,000
15,00,000 15,00,000
The following was the summary of cash and bank book for the year ended 31stMarch, 2019:
Receipts Amount (Rs.) Payments Amount (Rs.)
Cash in hand & at Bank 1,20,000 Payment to trade creditors 1,24,83,000
on 1stApril, 2018
Cash sales 1,10,70,000 Sundry expenses paid 9,31,050
Receipts from trade 27,75,000 Drawings 3,60,000
 debtors
Cash in hand & at Bank on
31stMarch, 2019 1,90,950
1,39,65,000 1,39,65,000
Additional Information:
(i) Discount allowedto trade debtors and received from trade creditors amounted to Rs.
54,000 and Rs. 42,500 respectively(for the year ended 31stMarch, 2019).
(ii) Annual fire insurance premium of Rs. 9,000 was paid every year on 1stAugust for the renewal of
thepolicy.
(iii) Furniture &fixtures were subject to depreciation @ 15% p.a. on diminishing balance method.
(iv) The following are the balances as on 31stMarch, 2019:
Stock Rs.9,75,000
Tradedebtors Rs. 3,43,000
Outstandingexpenses Rs. 55,200
(v) Grossprofitratioof10%onsalesismaintainedthroughouttheyear.
You are required to prepare Trading and Profit & Loss account for the year ended 31stMarch,
2019, and Balance Sheet as on thatdate.

Answer
Trading and Profit and Loss Account of ArchanaEnterprises
for the year ended 31st March, 2019

Rs. Rs.
To Opening Stock 9,15,000 By Sales
To Purchases (W.N. 2) 125,97,000 Cash 110,70,000
To Gross profit c/d 13,93,000 Credit (W.N. 1) 28,60,000 139,30,000
(10% of 139,30,000) By Closing stock 9,75,000
149,05,000 149,05,000
To Sundry expenses 9,18,750 By Gross profit b/d 13,93,000
(W.N.4)
To Discount allowed 54,000 By Discount received 42,500
To Depreciation 22,500
(15% Rs. 1,50,000)

To Net Profit (b.f.) 4,40,250

14,35,500 14,35,500

Balance Sheet of Archana Enterprises as at 31st March, 2019

Liabilities Amount Assets Amount
Rs. Rs.
Capital Furniture & Fittings 1,50,000
Opening 6,75,000 Less: Depreciation (22,500) 1,27,500
balance
Less: Drawing (3,60,000) Stock 9,75,000
3,15,000 Trade Debtors 3,43,000
Add: Net profit Unexpired insurance 3,000
for the years 4,40,250 7,55,250
Trade creditors 8,29,000 Cash in hand & at bank 1,90,950
(W.N. 3)
Outstanding 55,200
expenses

16,39,450 16,39,450
Working Notes:
1. Trade DebtorsAccount
Rs. Rs.
To Balance b/d 3,12,000 By Cash/Bank 27,75,000
To Credit sales 28,60,000 By Discount allowed 54,000
(Bal. fig.) By Balance c/d 3,43,000
31,72,000 31,72,000
2. Memorandum TradingAccount
Rs. Rs.
To Opening stock 9,15,000 By Sales 139,30,000
To Purchases (Balancing figure) 125,97,000 By Closing stock 9,75,000
To Gross Profit (10% on sales) 13,93,000
149,05,000 149,05,000
3. Trade CreditorsAccount
Rs. Rs.
To Cash/Bank 124,83,000 By Balance b/d 7,57,500
To Discount received 42,500 By Purchases (as calculated 125,97,000
To Balance c/d in W.N. 2)
(balancing figure) 8,29,000
133,54,500 133,54,500

4. ComputationofsundryexpensestobechargedtoProfit&LossA/c
 Rs.
Sundry expenses paid (as per cash and Bank book) 9,31,050
Add: Prepaid expenses as on 31–3–2018 3,000
9,34,050
Less: Outstanding expenses as on 31–3–2018 (67,500)
8,66,550
Add: Outstanding expenses as on 31–3–2019 55,200
9,21,750
Less: Prepaid expenses as on 31–3–2019 (Insurance paid till July,
2019) (9,000 x4/12) (3,000)
9,18,750
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