financial accounts concept

1. BRANCH ACCOUNTING INCLUDING FOREIGN BRANCH

Debtors SystemStock and Debtors SystemFinal Accounts SystemForeign Branch

Q1: Debtors System: Widespread Ltd. invoices goods to its branch at cost plus 20%. The branch sells goods for cash as well as on credit. The branch meets its expenses out of cash collected from its debtors and cash sales and remits the balance of cash to head office after withholding Rs. 10,000 necessary for meeting immediate requirements of cash. On 31st March, 2000 the assets at the branch were as follows:

Rs. (‘000)Cash in Hand 10Trade Debtors 384Stock, at Invoice Price 1,080Furniture and Fittings 500During the accounting year ended 31st March, 2001 the invoice price of goods dispatched by the head office to the branch amounted to Rs. 1 crore 32 lakhs. Out of the goods received by it, the branch sent back to head office goods invoiced at Rs. 72,000. Other transactions at the branch during the year were as follows:

Rs. (‘000)Cash Sales 9,700Credit Sales 3,140Cash collected by Branch from Credit Customers 2,842Cash Discount allowed to Debtors 58Returns by Customers 102Bad Debts written off 37Expenses paid by Branch 842On 1st January, 2001 the branch purchased new furniture for Rs.1 lakh for which payment was made by head office through a cheque.On 31st March, 2001 branch expenses amounting to Rs. 6,000 were outstanding and cash in hand was again Rs. 10,000. Furniture is subject to depreciation @ 16% per annum on diminishing balance method. Prepare Branch Account in the books of head office for the year ended 31.3.01. A:

In the Head Office Books Branch Accountfor the year ended 31st March, 2001

Dr. Cr.Rs. ‘000 Rs.’000

To Balance b/d By Balance b/dCash in hand 10 Stock reserve Rs. 1,080 ×1/6 180Trade debtors 384 By Goods sent to branch A/c 72Stock 1,080 (Returns to H.O.)Furniture and fittings 500 By Goods sent to branch A/c 2,188

To Goods sent to branch A/c 13,200 (Loading on net goods sentTo Bank A/c (Payment for furniture) 100 to branch –(Rs. 13,128 × 1/6)To Balance c/d By Bank A/c

Stock reserve (Rs.1,470 ×1/6) 245 (Remittance (BO to HO) 11,700Outstanding expenses 6 By Balance c/d

To Profit and loss A/c 1,096 Cash in hand 10(Net Profit) Trade debtors 485

Stock 1,470Furniture and fittings 516

16,621 16,621

Singar Academy: [CA-ICWA-ACS] M: Trichy: 93451 22645/Chennai: 9841971881 1

Working notes :1. Invoice price and cost

Let cost be 100So, invoice price 120Loading 20Loading : Invoice price = 20 : 120 = 1 : 6

2. Invoice price of closing stock in branch stock accountRs. ‘000 Rs. ‘000

To Balance b/d 1,080 By Goods sent to branch 72To Goods sent to branch 13,200 By Branch Cash 9,700To Branch debtors 102 By Branch debtors 3,140

By Balance c/d 1,47014,382 14,382

3. Closing balance of branch debtorsBranch Debtors Account

Rs. ‘000 Rs. ‘000To Balance b/d 384 By Branch branch 2,842To branch stock 3,140 By Branch expenses discount 58

By Branch stock (Returns) 102By Branch expenses

(Bad debts) 37By Balance b/d 485

3,524 3,5244. Closing balance of furniture and fittings

Branch Furniture and Fittings AccountRs. ‘000 Rs. ‘000

To Balance b/d 500 By Depreciation (80+4) 84To Bank 100 By Balance c/d 516

600 6005. Remittance by branch to head office

Branch Cash AccountRs. ‘000 Rs. ‘000

To Balance b/d 10 By Branch expenses 842To Branch stock 9,700 By Remittances to H.O. 11,700To Branch debtors 2,842 By Balance b/d 10

12,552 12,552

Q2: Stock and Debtors System: Concept & Co., with its Head Office at Mumbai has a branch at Nagpur. Goods are invoiced to the Branch at cost plus 33 1/3%. The following information is given in respect of the branch for the year ended 31st March, 2006:

Rs.Goods sent to Branch (Invoice price) 4,80,000Stock at Branch on 1.4.2005 (Invoice price) 24,000Cash sales 1,80,000Return of goods by customers to the Branch 6,000Branch expenses (paid in cash) 53,500Branch debtors balance on 1.4.2005 30,000Discount allowed 1,000Bad debts 1,500Collection from Debtors 2,70,000Branch debtors cheques returned dishonoured 5,000Stock at Branch on 31.3.2006 (Invoice price) 48,000Branch debtors balance on 31.3.2006 36,500

Prepare, under the Stock and Debtors system, the following Ledger Accounts in the books of the


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

In the books of head officeNagpur Branch Stock Account

Rs. Rs.To Balance b/d 24,000 By Bank A/c 1,80,000

(Cash Sales)To Goods sent to Branch 4,80,000 By Branch Debtors (Credit Sales) 2,80,000To Branch Debtors 6,000 By Stock shortage:

Branch P&L A/c 1,500*Br. Adj. A/c (Loading) 500 2,000

By Balance c/d 48,0005,10,000 5,10,000

Nagpur Branch Debtors AccountTo Balance b/d 30,000 By Bank A/c (Collection) 2,70,000To Bank (dishonour of cheques) 5,000 By Branch Stock A/c 6,000To Branch Stock A/c 2,80,000* By Bad debts 1,500

By Discount allowed 1,000By Balance c/d 36,500

3,15,000 3,15,000Nagpur Branch Adjustment Account

To Branch Stock (loading of loss) 500* By Stock Reserve A/c 6,000To Stock Reserve 12,000 By Goods sent to Branch A/c 1,20,000To Gross Profit c/d 1,13,500

1,26,000 1,26,000To Branch Stock A/c (Cost of loss) 1,500 By Gross Profit b/d 1,13,500To Branch Expenses 56,000To Net Profit (Tr to P & L A/c)

56,0001,13,500 1,13,500

*Balancing figure. Working Notes:1. The balancing figure of Branch Debtors Account is taken as credit sales

2. Loading is 331

3 % on Cost: Loading on opening stock = 24,000 25% = 6,0003. Loading on goods sent = 4,80,000 25% = Rs.1,20,0004. Loading on Closing Stock = Rs.48,000 25% = Rs.12,0005. Total Branch Expenses = Cash expenses + Bad debt + Discount allowed

= Rs.53,500 + Rs.1,500 + Rs.1,000 = Rs.56,0006. Gross Profit: (Total sales - Returned by customers) X 33.33/133.33

{(Rs. 1,80,000+ Rs. 2,80,000)- Rs. 6,000} x

33 .33133 .33 = Rs. 1,13,500

Q3: Adjustment entry for inter-branch transferShow adjustment Journal entry in the books of Head Office at the end of April, 2003 for incorporation of inter-branch transactions assuming that only Head Office maintains different branch accounts in its books.A. Delhi Branch:(1) Received goods from Mumbai – Rs. 35,000 and Rs. 15,000 from Kolkata.(2) Sent goods to Chennai – Rs. 25,000, Kolkata – Rs. 20,000.


(3) Bill Receivable received – Rs. 20,000 from Chennai.(4) Acceptances sent to Mumbai – Rs. 25,000, Kolkata – Rs. 10,000.B. Mumbai Branch (apart from the above):(5) Received goods from Kolkata – Rs. 15,000, Delhi – Rs. 20,000.(6) Cash sent to Delhi – Rs. 15,000, Kolkata – Rs. 7,000.C. Chennai Branch (apart from the above):(7) Received goods from Kolkata – Rs. 30,000.(8) Acceptances and Cash sent to Kolkata – Rs. 20,000 and Rs. 10,000 respectively.D. Kolkata Branch (apart from the above):(9) Sent goods to Chennai – Rs. 35,000.(10) Paid cash to Chennai – Rs. 15,000.(11)Acceptances sent to Chennai – Rs. 15,000.

A: Journal entry in the books of Head OfficeDate Particulars Dr. Cr.

Rs. Rs.30.4.03 Mumbai Branch Account D

r3,000

Chennai Branch Account Dr

70,000

To Delhi Branch Account 15,000To Kolkata Branch Account 58,000

Working Note:Inter – Branch transactions

Delhi Mumbai Chennai KolkataRs. Rs. Rs. Rs.

A. Delhi Branch(1) Received goods 50,000 (Dr.) 35,000 (Cr.) 15,000 (Cr.)(2) Sent goods 45,000 (Cr.) 25,000 (Dr.) 20,000 (Dr.)(3) Received Bills receivable 20,000 (Dr.) 20,000 (Cr.)(4) Sent acceptance 35,000 (Cr.) 25,000 (Dr.) 10,000 (Dr.)B. Mumbai Branch(5) Received goods 20,000 (Cr.) 35,000 (Dr.) 15,000 (Cr.)(6) Sent cash 15,000 (Dr.) 22,000 (Cr.) 7,000 (Dr.)C. Chennai Branch(7) Received goods 30,000 (Dr.) 30,000 (Cr.)(8) Sent cash and acceptances 30,000 (Cr.) 30,000 (Dr.)D. Kolkata Branch(9) Sent goods 35,000 (Dr.) 35,000 (Cr.)(10)

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

(11)

Sent acceptances __________ _________ 15,000 (Dr.) 15,000 (Cr.)

15,000 (Cr.) 3,000 (Dr.) 70,000 (Dr.) 58,000 (Cr.)


Q4: Adjustment entries for branch a/c:Give Journal Entries in the books of Branch A to rectify or adjust the following:(i) HO expenses Rs. 3,500 allocated to the Branch, but not recorded in the Branch Books.(ii) Depreciation of branch assets, whose accounts are kept by the HO not provided earlier for Rs.

1,500.(iii) Branch paid Rs. 2,000 as salary to a H.O. Inspector, but the amount paid has been debited by

the Branch to Salaries account.(iv) H.O. collected Rs. 10,000 directly from a customer on behalf of the Branch, but no intimation

to this effect has been received by the Branch.(v) A remittance of Rs. 15,000 sent by the Branch has not yet been received by the H.O.(vi) Branch A incurred advertisement expenses of Rs. 3,000 on behalf of Branch B.

(6 marks) (PE-II–Nov. 2004)Books of Branch A

Journal EntriesParticulars Dr./Rs. Cr./Rs.

(i) Expenses account Dr. 3,500To Head office account 3,500

(ii) Depreciation account Dr. 1,500To Head office account 1,500

(iii)

Head office accountDr. 2,000

To Salaries account 2,000(iv) Head office account Dr. 10,000

To Debtors account 10,000(v) No entry in branch books(vi) Head Office account Dr. 3,000

To Cash account 3,000

Q5: Final A/c System: On 31st March, 2000 Kanpur Branch submits the following Trial Balance to its Head Office at Lucknow:Debit Balances Rs. in lacsFurniture and Equipment 18Depreciation on furniture 2Salaries 25Rent 10Advertising 6Telephone, Postage and Stationery 3Sundry Office Expenses 1Stock on 1st April, 1999 60Goods Received from Head Office 288Debtors 20Cash at bank and in hand 8Carriage Inwards 7

448Credit BalancesOutstanding Expenses 3Goods Returned to Head Office 5Sales 360Head Office 80

448Additional Information :Stock on 31st March, 2000 was valued at Rs. 62 lacs. On 29th March, 2000 the Head Office despatched goods costing Rs. 10 lacs to its branch. Branch did not receive these goods before 1st April, 2000. Hence,


the figure of goods received from Head Office does not include these goods. Also the head office has charged the branch Rs. 1 lac for centralised services for which the branch has not passed the entry.You are required to :(i) Pass Journal Entries in the books of the Branch to make the necessary adjustments(ii) Prepare Final Accounts of the Branch including Balance Sheet, and(iii) Pass Journal Entries in the books of the Head Office to incorporate the whole of the Branch Trial Balance. (16 marks) (Intermediate–May 2002)

A:(i) Books of Branch - Journal Entries

(Rs. in lacs)Dr. Cr.

Goods in Transit A/c Dr. 10To Head Office A/c 10

Expenses A/c Dr. 1To Head Office A/c 1

(ii) Trading and Profit & Loss Account of the Branchfor the year ended 31st March, 2000

Rs. in lacs Rs. in lacsTo Opening Stock 60 By Sales 360To Goods received from By Closing Stock 62

Head Office 288Less: Returns 5 283

To Carriage Inwards 7To Gross Profit c/d 72

422 422To Salaries 25 By Gross Profit b/d 72To Depreciation on Furniture 2To Rent 10To Advertising 6To Telephone, Postage & Stationery 3To Sundry Office Expenses 1To Head Office Expenses 1To Net Profit Transferred to HO 24

72 72Balance Sheet as on 31st March, 2000

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

Head Office Stock in hand 62Expenses 1 Goods in Transit 10Net Profit 24 Debtors 20

115 Cash at bank and in hand 8Outstanding Expenses 3

118 118

(iii) Books of Head Office Journal EntriesRs. Rs.Dr. Dr.

Branch Trading Account Dr. 355To Branch Account 355

(The total of the following items in branch trialbalance debited to branch trading account


Rs. in lacsOpening Stock 60Goods received from Head Ofice 288Carriage Inwards 7)Branch Account Dr. 427

To Branch Trading Account 427(Total sales, closing stock and goods returned toHO credited to branch trading account, individual amounts being as follows:

Rs. in lacsSales 360Closing Stock 62Goods returned to Head Office 5)Branch Trading Account Dr. 72

T0 Branch Profit and Loss Account 72(Gross profit earned by branch credited to Branch Profit and Loss Account)Branch Profit and Loss Account Dr. 48

To Branch Account 48(Total of the following branch expenses debitedto Branch Profit & Loss Account

Rs. in lacsSalaries 25Rent 10Advertising 6Telephone, Postage & Stationery 3Sundry Office Expenses 1Head Office Expenses 1Depreciation on furniture &Equipment 2Branch Profit & Loss Account Dr. 24

To Profit and Loss Account 24(Net profit at branch credited to (general)

Profit & Loss A/c)Branch Furniture & Equipment Dr. 18Branch Stock Dr. 62Branch Debtors Dr. 20Branch Cash at Bank and in Hand Dr. 8Goods in Transit Dr. 10

To Branch 118(Incorporation of different assets at the branch in H.O. books)Branch Dr. 3

To Branch Outstanding Expenses 3(Incorporation of Branch Outstanding

Expenses in H.O. books)

Q6: Final A/c System: M/s Shah & Co. commenced business on 1.4.2004 with Head Office at Mumbai and a Branch at Chennai. Purchases were made exclusively by the Head Office, where the goods were processed before sale. There was no loss or wastage in processing. Only the processed goods received from Head Office were handled by the Branch. The goods were sent to branch at processed cost plus 10%. All sales, whether by Head Office or by the Branch, were at uniform gross profit of 25% on their respective cost. Following is the Trial Balance as on 31.3.2005.


Head Office BranchDr. Cr. Dr. Cr.

Capital 3,10,000Drawings 55,000Purchases 19,69,500Cost of processing 50,500Sales 12,80,000 8,20,000Goods sent to Branch 9,24,000Administrative expenses 1,39,000 15,000Selling expenses 50,000 6,200Debtors 3,09,600 1,13,600Branch Current account 3,89,800Creditors 6,01,400 10,800Bank Balance 1,52,000 77,500Head Office Current account 2,61,500Goods received from H.O. ________ ________ 8,80,000 ________

31,15,400 31,15,400 10,92,300 10,92,300Following further information is provided:(i) Goods sent by Head Office to the Branch in March, 2005 of Rs. 44,000 were not received by

the Branch till 2.4.2005.(ii) A remittance of Rs. 84,300 sent by the Branch to Head Office was also similarly not received

upto 31.3.2005.(iii) Stock taking at the Branch disclosed a shortage of Rs. 20,000 (at selling price).(iv) Cost of unprocessed goods at Head Office on 31.3.2005 was Rs. 1,00,000.Prepare Trading and Profit and Loss account in columnar form and Balance Sheet of the business as a whole as at 31.3.2005. (16 Marks) (PE-II – Nov. 2006)A: In the Books of Shah & Co.

Trading and Profit and Loss Account for the year ended 31st March, 2005Particulars H.O. Branch Total H.O. Branch Total

Rs. Rs. Rs. Rs. Rs. Rs.Purchases 19,69,50

0 19,69,50

0Sales 12,80,000 8,20,000 21,00,000

Cost of processing

50,500 50,500 Goods sent to Branch

9,24,000

Goods received

Stock shortage 16,000 14,545

from H.O. 8,80,000 Goods in transit

44,000

Gross profit c/d

3,40,000 1,64,000 5,02,545 Closing stock:

Processed goods

56,000 2,08,000 2,64,000

________

_______________

_

Unprocessed goods

1,00,000 1,00,000

23,60,000

10,44,000 25,22,545

23,60,000 10,44,000

25,22,545

Admn. Expenses

1,39,000 15,000 1,54,000 Gross profit b/d

3,40,000 1,64,000 5,02,545

Selling Expenses

50,000 6,200 56,200

Stock 16,000 14,545


shortageStock reserve

22,909 22,909

Net profit 1,28,091 1,26,800 2,54,891 _______ _______ _______3,40,000 1,64,000 5,02,545 3,40,000 1,64,000 5,02,545

Balance Sheet as at 31st March, 2005Liabilities Rs. Assets Rs.Capital 3,10,000 DebtorsAdd: Net profit 2,54,891 H.O. 3,09,600

5,64,891 Branch 1,13,600Less: Drawings

55,000 5,09,891 Closing stock:

Creditors: Processed goodsH.O. 6,01,400 H.O. 56,000Branch 10,800 6,12,200 Branch 2,08,00

02,64,00

0Less: Stock reserve 18,909 2,45,091Unprocessed goods

1,00,000

Bank BalanceH.O. 1,52,000Branch 77,500

Goods in transit 44,000Less: Stock reserve 4,000 40,000

________ Cash in transit 84,30011,22,091 11,22,091

Working Notes:1. Calculation of closing stock:Stock at Head Office:

Cost of goods processed Rs. (19,69,500 + 50,500 – 1,00,000) 19,20,000Less: Cost of goods sent to Branch: 924,000X100/110

8,40,000

Cost of goods sold 12,80,000 ×100

125 10,24,000 18,64,000

Stock of processed goods with H.O. 56,000Stock at Branch:

Goods received from H.O. (at invoice price) 8,80,000

Less: Invoice value of goods sold: 8,20,000 ×100

125 6,56,000

Invoice value of stock shortage:

20,000 ×100125 16,000 6,72,000

Stock at Branch at invoice price 2,08,000Less: Stock Reserve:208,000X10/110 18,909Stock of processed goods with Branch (at cost) 1,89,091

2. Stock Reserve:

Unrealised profit on Branch stock (2,08,000 ×10

110 )

18,909


Unrealised profit on goods in transit (44,000 ×10

110 )

4,000

22,909Q7: Foreign Branch: S & M Ltd., Bombay, have a branch in Sydney, Australia. At the end of 31st March, 1995, the following ledger balances have been extracted from the books of the Bombay Office and the Sydney Office :

Bombay . Sydney .(Rs. thousands) (Austr dollars thousands)

Debit Credit Debit CreditShare Capital – 2,000 – –Reserves & Surplus – 1,000 – –Land 500 – – –Buildings (Cost) 1,000 – – –Buildings Dep. Reserve – 200 – –Plant & Machinery (Cost) 2,500 – 200 –Plant & Machinery Dep. Reserve – 600 – 130Debtors / Creditors 280 200 60 30Stock (1.4.94) 100 – 20 –Branch Stock Reserve – 4 – –Cash & Bank Balances 10 – 10 –Purchases / Sales 240 520 20 123Goods sent to Branch – 100 5 –Managing Director’s salary 30 – – –Wages & Salaries 75 – 45 –Rent – – 12 –Office Expenses 25 – 18 –Commission Receipts – 256 – 100Branch / H.O. Current A/c 120 – – 7

4,880 4,880 390 390The following information is also available :(1) Stock as at 31.3.95 :

Bombay Rs. 1,50,000Sydney A $ 3,125

(2) Head Office always sent goods to the Branch at cost plus 25%.(3) Provision is to be made for doubtful debts at 5%.(4) Depreciation is to be provided on buildings at 10% and on plant and machinery at 20% on written down values.(5) The Managing Director is entitled to 2% commission on net profits.(6) Income–tax is to be provided at 47.5%.

You are required :(a) To convert the Branch Trial Balance into rupees;

(use the following rates of exchange :Opening rate A $ = Rs. 20Closing rate A $ = Rs. 24Average rate A $ = Rs. 22For Fixed Assets A $ = Rs. 18).

(b) To prepare the Trading and Profit & Loss Account for the year ended 31st March, 1995 showing to the extent possible H.O. results and Branch results separately. (Balance Sheet not required.)

(20 marks) (Intermediate May 1995)


A: (a) S & M Ltd. Sydney Branch Trial Balance (in ‘000 Rupees)As on 31st March, 1995 Conversion Dr. Cr.

rate per A$Plant & Machinery (cost) Rs 18 36,00Plant & Machinery Dep. Reserve Rs. 18 23,40Debtors / Creditors Rs. 24 14,40 7,20Stock (1.4.94) Rs. 20 4,00Cash & Bank Balances Rs. 24 2,40Purchase / Sales Rs. 22 4,40 27,06Goods received from H.O. – 1,00Wages & Salaries Rs. 22 9,90Rent Rs. 22 2,64Office expenses Rs. 22 3,96Commission Receipts Rs. 22 22,00H.O. Current A/c 1,20

78,70 80,86Exchange loss (balancing figure) 2,16

80,86 80,86(b) (Rs.’000)

Trading and Profit & Loss Account for the year ended 31st March, 1995 (in thousands) H.O. Branch Total H.O. Branch TotalTo Opening Stock 1,00 4,00 5,00 By Sales 5,20 27,06 32,26“ Purchases 2,40 4,40 6,80 “ Goods sent to 1,00 – 1,00“ Goods received – 1,00 1,00 Branch

from Head Office

“ Closing Stock 1,50 75 2,25

“ Gross profit c/d 4,30 18,41 22,71

7,70 27,81 35,51

7,70 27,81 35,51

To Wages &

Salaries75 9,90 10,65 By Gross Profit

B/d4,30 18,41 22,71

“ Rent –

2,64 2,64 Commission receipts

2,56 22,00 24,56

“ Office expenses

25 3,96 4,21 receipts

“ Provision for RDD

14 72 86

“ Depreciation (WN1)

4,60 2,52 7,12

“ Balance c/d 1,12 20,67 21,796,86 40,41 47,27 6,86 40,41 47,27

To Exchange loss 2,16 By Balance b/d 21,79“ Branch Stock Reserve 11

(W. N. 2)“ Managing Director’s

remuneration :Salary 30Commission 41 71


(W. N. 3)Provision for Income-tax 8,93(W. N. 4)

“ Balance c/d 9,88 21,79 21,79

Working Notes :(1) Calculation of Depreciation : (Rs ‘000)

H.O. BranchA. Building – Cost 10,00 –

Less : Dep. Reserve 2,00 – 8,00

Depreciation @ 10% 80B. Plant & Machinery Cost 25,00 36,00

Less : Dep. Reserve 6,00 23,4019,00 12,60

Depreciation @ 20% 3,80 2,52Total Depreciation (A+B) 4,60 2,52

(Rs ‘000)(2) Calculation of Branch Stock Reserve :

Closing stock 75Reserve on closing stock (75 × 1/5) 15Less : Branch Stock Reserve (as on 1.4.94) 4Additional Reserve required 11

(Rs’ 000)(3) Calculation of Managing Director’s Commission :

Profit before adjustment 21,79Add: Provision for doubtful debts 86

22,65Less: Branch stock reserve 11

Exchange loss 2,16 2,27Profit u/s 349 20,38*Commission @ 2% 41 (approx.)

(4) Calculation of provision for Income tax : (Rs ‘ 000)Profit u/s 349 as computed above 20,38Less : Provision for doubtful debts 86

MD’s remuneration 71 1,57Profit before tax 18,81Provision for tax @ 47.5% 8,93** (approx.)

Note : For the purpose of translation of financial statements of foreign operations, AS 11 (revised 2003) “The Effects of Changes in Foreign Exchange Rates” classifies the foreign operations as (i) integral foreign operations and (ii) non-integral foreign operations. The above answer has been given on the basis that the Sydney branch is an integral foreign operation of S&M Ltd.*For the purpose of calculating profit u/s 349 of the Companies Act, 1956, depreciation based on the rates given in Schedule XIV to the Companies Act, 1956 should be deducted. Depreciation rates as per Schedule XIV are not given in this question. Hence the adjustment for depreciation is ignored.**Alternatively provision for tax may also be computed on Rs. (000) 19,67 ignoring provision for doubtful debts.


Q8: Foreign Branch: Carlin & Co. has head office at New York (U.S.A.) and branch at Mumbai (India). Mumbai branch furnishes you with its trial balance as on 31st March, 1999 and the additional information given thereafter :

Dr. Cr.Rupees in thousands

Stock on 1st April, 1998 300 –Purchases and sales 800 1,200Sundry Debtors and creditors 400 300Bills of exchange 120 240Wages and salaries 560 –Rent, rates and taxes 360 –Sundry charges 160 –Computers 240 –Bank balance 420 –New York office a/c – 1,620

3,360 3,360Additional information :(a) Computers were acquired from a remittance of US $ 6,000 received from New York head office and paid to the suppliers. Depreciate computers at 60% for the year.(b) Unsold stock of Mumbai branch was worth Rs. 4,20,000 on 31st March, 1999.(c) The rates of exchange may be taken as follows :

(i) on 1.4.1998 @ Rs. 40 per US $(ii) on 31.3.1999 @ Rs. 42 per US $(iii) average exchange rate for the year @ Rs. 41 per US $(iv) conversion in $ shall be made upto two decimal accuracy.

You are asked to prepare in US dollars the revenue statement for the year ended 31st March, 1999 and the balance sheet as on that date of Mumbai branch as would appear in the books of New York head office of Carlin & Co. You are informed that Mumbai branch account showed a debit balance of US $ 39609.18 on 31.3.1999 in New York books and there were no items pending reconciliation.(10 marks) (Intermediate–May 1999)A:Carlin & Co. Ltd.Mumbai Branch Trial Balance in (US $) as on 31st March, 1999

Conversion Dr. Cr.rate per US $ US $ US $

(Rs.)Stock on 1.4.98 40 7,500.00 –Purchases and sales 41 19,512.20 29,268.29Sundry debtors and creditors 42 9,523.81 7,142.86Bills of exchange 42 2,857.14 5,714.29Wages and salaries 41 13,658.54 –Rent, rates and taxes 41 8,780.49 –Sundry charges 41 3,902.44 –Computers – 6,000.00 –Bank balance 42 10,000.00 –New York office A/c – – 39,609.18

81,734.62 81,734.62


Trading and Profit & Loss Account for the year ended 31st March, 1999US $ US $

To Opening Stock 7,500.00 By Sales 29,268.29To Purchases 19,512.20 By Closing stock 10,000.00To Wages and salaries 13,658.54 By Gross Loss c/d 1,402.45

40,670.74 40,670.74To Gross Loss b/d 1,402.45 By Net Loss 17,685.38To Rent, rates and taxes 8,780.49To Sundry charges 3,902.44To Depreciation on computers 3,600.00 (US $ 6,000 × 0.6)

17,685.38 17,685.38

Balance Sheet of Mumbai Branchas on 31st March, 1999Liabilities US $ Assets US $ US $New York Office A/c 39,609.18 Computers 6,000.00

Less : Net Loss 17,685.38 21,923.80 Less :Depreciation3,600.00 2,400.00Sundry creditors 7,142.86 Closing stock 10,000.00Bills payable 5,714.29 Sundry debtors 9,523.81

Bank balance 10,000.00Bills receivable 2,857.1434,780.95 34,780.95

Note : The above answer has been given on the basis that the Mumbai branch is an integral foreign operation of carlin & Co.


2 DEPARTMENTAL ACCOUNTS

Departmental Final A/cCalculation of Unrealised Profit on Unsold StockConcept of Markup and Markdown

Q1: Departmental Final A/c: X Ltd, has two department, A and B. From the following particulars prepare the consolidated Trading Accounts and Departmental Trading Account for the year ending 31st

December 1985.A (Rs) B (Rs)

Opening Stock (at cost) 20,000 12,000Purchases 92,000 68,000Sales 1,40,000 1,12,000Wages 12,000 8,000Carriage 2,000 2,000Closing Stock:(i) Purchased goods 4,500 6,000(ii) Finished goods 24,000 14,000Purchased goods transferred:

By B to A 10,000By A to B 8,000

Finished goods transferred:By A to B 35,000By B to A 40,000

Return of finished goods:By A to B 10,000By B to A 7,000You are informed that purchased goods have been transferred mutually at their respective

departmental purchases cost and finished at departmental market price and that 20% of the finished stock (closing) at each department represented finished goods received from the other department.

A:- Departmental Trading A/c for the yr ended 31st March Dec, 1985. X Ltd

ParticularDeptt.A

Rs.Deptt. B

Rs. ParticularDeptt.A

Rs.Deptt. B

Rs.

To Stock 20,000 12,000 By Sales 1,40,000 1,12,000To Purchases 92,000 68,000 By Goods Transferred 8,000 10,000To Wages 12,000 8,000 By F.G. Transferred 35,000 40,000To Carriage 2,000 2,000 By Return of F.G. 10,000 7,000To Goods transferred 10,000 8,000 By Closing Stock:To F.G. Transferred 40,000 35,000 Purchased Goods 4,500 6,000To F.G. Transferred 40,000 35,000 Finished goods 24,000 14,000To Return of F.G. 7,000 10,000To Gross Profit c/d 38,500 46,000

2,21,500 1,89,000 2,21,500 1,89,000


Consolidated Trading A/c for the yr ended 31st Dec, 1985Particular Rs. Particular Rs.

To Opening stock 32,000 By Sales 2,52,000To Purchases 1,60,000 By Closing stock:To Wages 20,000 Purchased goods 10,500To Carriage 4,000 Finished goods 38,000To Stock Reserve 2,196To Gross Profit c/d 82,304

3,00,500 3,00,500

Working Notes: Closing stock out of transfer 4,800 2,800

-------- --------Sales 1,40,000 1,12,000 Add: Transfer 35,000 40,000

----------- ------------1,75,000 1,52,000

Less: Return 7,000 10,000----------- ------------

Net Sales plus transfer 1,68,000 1,42,000------------ ----------

Rate of gross Profit 38,500/1,68,000 x 100 46,000/1,42,000x100= 22.916% = 32.394%

Unrealized Profit 4,800x 32.394 % 2,800x22.916 %= 1,555 = 641

Q2: Calculation of Unrealised Profit on Unsold Stock:FGH Ltd. has three departments I.J.K. The following information is provided for the year ended 31.3.2004:

I J KRs. Rs. Rs.

Opening stock 5,000 8,000 19,000Opening reserve for unrealised profit ― 2,000 3,000Materials consumed 16,000 20,000 ―Direct labour 9,000 10,000 ―Closing stock 5,000 20,000 5,000Sales ― ― 80,000Area occupied (sq. mtr.) 2,500 1,500 1,000No. of employees 30 20 10

Stocks of each department are valued at costs to the department concerned. Stocks of I are transferred to J at cost plus 20% and stocks of J are transferred to K at a gross profit of 20% on sales. Other common expenses are salaries and staff welfare Rs. 18,000, rent Rs. 6,000.Prepare Departmental Trading, Profit and Loss Account for the year ending 31.3.2004.

(10 marks) (PE-II–Nov. 2004)


A: FGH Ltd. Departmental Trading and Profit and Loss Account for the year ended 31st March, 2004

I J K Total I J K TotalTo Rs. Rs. Rs. Rs. By Rs. Rs. Rs. Rs.Opening stock

5,000 8,000 19,000

32,000 Sales 80,000 80,000

Material consumedDirect labourInter-departmental

16,000

9,000

20,000

10,000

36,000

19,000

Inter-departmentaltransferClosing stock

30,0005,000

60,00020,000 5,000

90,00030,000

Transfer 30,000 60,000

90,000

Gross profit 5,000 12,000 6,000

23,000_____

_

___________

_

_______

35,000 80,000 85,000

2,00,000 35,000 80,000 85,000 2,00,000

Salaries and staff welfare 9,000 6,000 3,000 18,000

Gross profit b/dNet loss

5,0007,000

12,000 6,000 23,0007,000

RentNet profit

3,000

______

1,800 4,200

1,2001,800

6,000 6,000 _____ _____ _____ _____

12,000 12,000 6,000 30,000 12,000 12,000 6,000 30,000Net loss (I)Stock reserve (J+K)

7,000 Stock reserve b/d(J + K)

5,000

(Refer W.N.) 3,000 Net profit (J + K)

6,000

Balance transferred to Profit and loss account 1,000 _____

11,000 11,000Working Note:

Calculation of unrealized profit on closing stockRs.

Stock reserve of J departmentCost 30,000Transfer from I department 30,000

60,000Stock of J department 20,000

Proportion of stock of I department = Rs.20,000 X 30000/60000= Rs.10,000Stock reserve =Rs.10,000 X 20/120 = Rs.1667 (approx.)Stock reserve of K department Rs. Stock transferred from J department 5,000 Less: Profit (stock reserve) 5,000 20% 1,000 Cost to J department 4,000

Proportion of stock of I department =Rs.4,000 ×Rs . 30,000

Rs . 60,000= Rs .2,000


Stock reserve =Rs .2,000 ×20120

= Rs . 333(approx.)

Total stock reserve = Rs.1,000 + Rs.333 = Rs.1,333

Q3: Mark up and Mark down Concept: Southern Store Ltd, is a retail store operating two departments. The company maintains a memorandum stock account and memorandum mark up account for each of the departments. Supplies issued to the departments are debited to the memorandum stock account to the department at cost plus the mark-up, and departmental sales are credited to this account. The mark up on supplies issued to the departments is credited to the mark-up account for the department. When it is necessary to reduce the selling price below the normal selling price, i.e. cost plus mark-up, the reduction (mark down) is entered in the memorandum stock account and in the mark-up account. Department Y has a mark up of 33-1/3% on cost, and Department Z 50% on cost.

The following information has been extracted from the records of Southern Store Ltd, for the year ended 31st December, 1998: -

Deptt Y (Rs.) Deptt Z (Rs.)

Stock, 1st January, 1988 at cost 24,000 36,000 Purchases 1,62,000 1,90,000Sales 2,10,000 2,85,000

(1) The stock of Department Y at 1st January 1988 includes goods on which the selling price has been marked down by Rs.510. These goods were sold in January.1988 at the reduced price.

(2) Certain goods purchased in 1988 for Rs.2700 for department Y, were transferred during the year to Department Z, and sold for Rs.4.050. Purchase and sale are recorded in the purchases of department Y and the sales of department Z respectively, but no entries in respect of the transfer have been made.

(3) Goods purchased in 1988 were marked down as follows:-Deptt Y Deptt Z (Rs.)

Cost 8,000 21,900Mark down 800 4,100At the end of the year there were some items in the stock of department Z, which had been marked down to Rs.2,300. With this exception all goods marked down in 1988 were sold during the year at the reduced prices.(4) During stock taking at 31st December 1988 goods which had cost Rs.240 were found to be missing in the department Y. It was determined that the loss should be regarded as irrecoverable.(5) The closing stock in both departments are to be valued at cost for the purpose of the annual accounts.You are requested to prepare for each department for the year ended 31.12.88: trading Account, Memorandum Stock Account and a memorandum Mark up Account.

A: Southern Stores Ltd. Trading A/c for the year ended 31st Dec, 1998 (Rs) Particular Deptt.Y Deptt. Z Particular Deptt.Y Deptt. Z

To Opening stock at cost 24,000 36,000 By Sales 2,10,000 2,85,000

To Purchases 1,62,000 1,90,000 By Transfer to Deptt. Z 2,700 -

To Transfer from Y Dept. - 2,700 By Goods lost 240 -

To Gross Profit 51,518 92,496 By Closing stock at cost 24,578 36,196

2,37,518 3,21,196 2,37,518 3,21,196


Memorandum Stock A/c (Rs) Particular Dept.Y Dept. Z Particular Deptt.Y Deptt. Z

To balance b/d 32,000 54,000 By Balance b/d 510To Purchases 1,62,000 1,90,000 By Sales 2,10,000 2,85,000To Memorandum Mark up 54,000 95,000 By Transfer 2,700 -To Transfer 2,700 By Memorandum Mark up

A/c (On transfer)900

To Memorandum Mark up 1,350 By Memorandum up A/c (marked down)

800 4,100

To Memorandum Mark up A/c (On marked down goods still in stock)

344 By Loss of Stock 240

By Memorandum mark up A/c (or lost stock)

80

By balance c/d (cl. stock) 32,770 54,2942,48,000 3,34,394 2,48,000 3,34,394

Memorandum mark-up A/c Particular Dept.Y DeptZ Particular Dept.Y Dept.Z

To balance b/d 510 - By Balance b/d 8,000 18,000

To Memorandum stock A/c (on transfer)

900 - By Memorandum Stock A/c (Mark-up on purchased)

54,000 95,000

To Memorandum stock a/c (Mark-down)

800 4,100 By Memorandum stock A/c (Mark-up on transfer)

- 1,350

To Memorandum stock A/c (mark-down on good lost)

80 - By Memorandum stock A/c (Marked down on goods still in stock)

- 344

To Gross Profit 51,518 92,496

62,000 1,14,694 62,000 1,14,694

Working Notes: - (Rs) (Rs) Particular Dept.Y Dept.Z

1. Closing stock at cost :Closing stock at invoice price 32,770 54,294At Cost (3/4) 24,578 (2/3) 36,196

2. Mark down in unsold stock of Z Deptt.: Mark down x value of stock /value after mark-down = 4,100x2,300/27,400= Rs.344

51,518 92,496

3. Verification of Gross Profit: -Sales 2,10,000 2,85,000Add: Reduction (mark-down) 1,310 3,756

2,11,310 2,88,756Gross Profit (1/4) 52,828 (1/3)96,252Less: Mark-down 1,310 3,756Mark-up account 51,518 92,496Rs.4,100 – 344 = 3,756


3. HIRE PURCHASE AND INSTALLMENT PAYMENT SYSTEM

Calculation of Cash Price of the AssetHire Purchase Sale and RepossessionHire Purchase Sale and Partial RepossessionHP with pre closureHP Accounting for small value goods [Final Accounts Method]HP Accounting for small value goods [Stock and Debtors System]

Q1: Calculation of Cash Price of the Asset: A acquired on 1st January, 2003 a machine under a Hire-Purchase agreement which provides for 5 half yearly installments of Rs.6,000 each, the first installment being due on

1st July, 2003. Assuming that the applicable rate of interest is 10 per cent per annum, calculate the cash value of the machine. All workings should form part of the answer.

A:Statement showing cash value of the machine acquired on hire-purchase basis

Installment Interest Principal5th Installment 6,000 286 5,714Less: Interest -286

5,714Add: 4th Installment 6,000

11,714 558 5,442Less: Interest 558 (11,156-5,714)

11,156Add: 3rd Installment 6,000

17,156 817 5,183Less: Interest 817 (16,339-11,156)

16,339Add: 2nd Installments 6,000

22,339 1,063 4,937Less: Interest 1,063 (21,276-16,339)

21,276Add: 1st Installments 6,000

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

25,977 4,023 25,977The cash purchase price of machinery is Rs.25,977.

Q2: Hire Purchase Sale and Repossession: A Machinery is sold on hire purchase. The terms of payment is four annual installments of Rs.6000 at the end of each year commencing from the date of agreement. Interest is charged @ 20% and is included in the annual payment of Rs.6000.

Shows Machinery Account and Hire Vendor Account in the books of the purchaser who defaulted in the payment of the third yearly payment where upon the vendor re-possessed the machinery. The purchaser provides depreciation on the machinery @ 10% per annum. All workings should form part of your answer.


A: Machinery AccountDate Particulars Rs. Date Particulars Rs.

1 year To Hire Vendor

15,533 1 year By Depreciation 1,553

By Balance c/d 13,98015,533 15,533

2 year To balance b/d 13,980 2 Year By Depreciation * 1,398By Balance c/d 12,582

13,980 13,9803 year To Balance b/d 12,582 3 year By Depreciation * 1,258

By Hire vendor 11,000By P/Loss (Loss on Surrender) 324

12,582 12,582*It has been assumed that depreciation has been written off on w.d.v. method. Alternatively straight line method may be assumed. Depreciation has been directly credited to the machinery account, it could have been accumulated in provision for depreciation account.

Hire Vendor AccountDate Particulars Rs. Date Particulars Rs.

1 year To Bank 6,000 1 year By Machinery 15,533To Balance C/d 12,639 By Interest 3,106

18,639 18,6392 year To Bank 6000 2 Year By Balance c/d 12,639

To Balance c/d 9,167 By Interest 2,52815,167 15,167

3 year To Machinery a/c (transfer) 11,000 3 year By Balance b/d 9,167By Interest 1,833

11,000 11,000Note: Alternatively total interest could have been debited to interest Suspense and credited to Hire Vendor with consequently changes.Working Notes:

InstallmentInstallment Interest Principal

4th Installments 6,000Interest 20/120 1,000 1,000 5,000

5,000Add: 3rd Installments 6,000

11,000Interest 20/120 1,833 1,833 1,833

9,167Add: 2nd Installment 6,000

15,167Interest 20/120 2,528

12,639Add: 1st Installments 6,000

18,639Interest 20/120 3,106

15,533 8,467 15,533Q3: Hire Purchase Sale and Partial Repossession: X Transport Ltd. Purchased form Delhi Motors three Tempos costing Rs.50,000 each on the hire-purchases system on 1.1.1987. Payment was to be made


Rs.30,000 down and the remainder in three equal annual installments payable on 31.12.1987, 31.12.1989 together with interest @ 9% . X Transport Ltd. Write off depreciation @ 20% on the diminishing balance. It paid the installment due at the end of the first year i.e. 31.13.1987 but could not pay the next on 31.12.1988. Delhi Motors agreed to leave one Tempo with the purchaser on 1.1.1989 adjusting the value of the other two tempos against the amount due on 1.1.1989. The Tempos were valued on the basis of 30% depreciation annually. Show the necessary accounts in the books in the books of X Transport Ltd. for the years 1987, 1988 and 1989.A: X Transport Ltd. Tempo AccountDr. Cr.

Date By Particulars Rs. Date To Particulars Rs.

1.1.87

Delhi Motors 1,50,000

31.12.87 Depreciation 30,000

,, Balance c/d 1,20,0001,50,00

01,50,000

1.1.88

Balance b/d 1,20,000


Delhi Motors(Value of 2 Tempos taken away)

49,000

Profit and Loss A/c(Balancing figures)

15,000

Balance c/d(Value of one tempo left)

32,000

1,20,000

1,20,000

1.1.89

Balance c/d 32,000 31.12.89 By Depreciation 6,400

By Balance c/d 25,60032,000 32,000

Delhi MotorsDr. Cr.

Date To Particulars Rs. Date By Particulars Rs.

1.1.87

Bank (Down Payment) 30,000 1.1.87 Tempo 1,50,000

31.12 Bank 50,800 31.12 Interest (9% on Rs.1,20,000)

10,800

Balance c/d 80,0001,60,800 1,60,800

1.1.88

Tempos 49,000 1.1.88 Balance b/d 80,000

Balance c/d 38,200 31.12 Interest (9% on Rs.80,000) 7,20087,200 87,200

31.12 Bank 41,638 1.1.89 Balance b/d 38,20031.12 Interest (9% on Rs.38,200) 3,438

41,638 41,638


Alternative Method: Tempo AccountDr. Cr.

Date Particulars Rs. Date Particulars Rs.

1.1.87 Bank (down payment) 30,000

31.12.87 Depreciation @ 20% on Rs.1,50,000)

30,000

31.12 Bank (1st Installment) 40,000

31.12 Bal c/d 40,000

70,000

70,000

1.1.88 Balance b/d 40,000


Dec.31

Delhi Motors (Creating a liability for Rs.38,200, amount due) 38,20

0

Dec.31 Profit and Loss A/c (Balancing figure) 22,000

Balance c/d (tempo left) 32,00078,20

078,200

1.1.89 Balance b/d 32,000


balance c/d 25,60032,00

032,000

Delhi MotorsDr. Cr.

Date To Particulars Rs. Date By Particulars Rs.

31.12.88 Balance c/d 38,200 31.12.88 Tempos A/c 38,200Dec.31 Bank 41,638 Jan.1 Balance b/d 38,200

Dec.31 Interest (9% on Rs.38,200)

3,438

41,638 41,638Working Notes: -

(1) Value of a Tempo left with the buyer: - Rs.Cost 50,000Depreciation @ 20% p.a. under W.D.V. method for 2 year i.e. Rs.10,000 + 8,000 18,000

---------Value of the Tempo left with the buyer at the end of 2nd year 32,000

(2) Value of Tempos taken away by the seller: -No. of tempos TwoCost Rs.50,000 x 2 = 1,00,000Depreciation : @ 30% Under WDV method for 2 years i.e. Rs.30,000 + 21,000 51,000

----------Value of tempos taken away at the end of 2nd year 49,000

Q4: HP with pre closure: ABC Associates entered into a financial lease agreement on 1.4.1995 with Flexible Leasing Ltd. for lease of a car. The price of the car was Rs. 2,00,000 and the quarterly lease rentals were agreed at Rs. 90 per thousand payable at the beginning of every quarter. ABC Associates kept up their payments but by 25.3.1996 they approached and obtained the consent of the leasing


company for treating the arrangement as one of Hire-purchase from the beginning on the following terms: Period: 3 years, Quarterly hire : Rs. 30,000 payable at the beginning of the quarter.It was agreed that the lease rentals paid will be treated as hire monies and that the balance due upto 31.3.1996 will be settled by ABC Associates on that date with interest at 18% p.a. on various instalments due during the year. The rate of depreciation on the car is 25%.Show Flexible Leasing Ltd.’s A/c and Interest Suspense A/c.A:

Books of ABC AssociatesFlexible Leasing Limited Account

Dr.Rs.

Cr.Rs.

1996 1996March 25 To Lease rental

A/c72,000 March 25 By Car on Hire

Purchase A/c2,00,000

March 31 To Bank 53,400 March 25 By Interest Suspense A/c

1,60,000

March 31 To Balance c/d 2,40,000 By Interest A/c 5,4003,65,400 3,65,400

Interest Suspense Account for 1996Dr. Rs. Cr.Rs.

25.3 To Flexible Leasing Ltd.

1,60,000 31.3 By Interest on Hire purchase A/c

72,727

31.3 By Balance c/d 87,2731,60,000 1,60,000

Working Notes :(i) Calculation of balance payable on 31st March, 1996 and the Amount of Interest

Calculation of Difference Payable on 31.3.1996 and InterestDate Quarterly Hire

ChargesQuarterly Lease

Rentals PaidDifference

Payable(Rs.)

InterestFrom

18% To

Amount of Interest(Rs.)

1.4.95 30,000 18,000 12,000 1.4.95 31.3.96 2,1601.7.95 30,000 18,000 12,000 1.7.95 31.3.96 1,6201.10.95 30,000 18,000 12,000 1.10.95 31.3.96 1,0801.1.96 30,000 18,000 12,000 1.1.96 31.3.96 540

72,000 48,000 5,400

Amount payable on 31st March, 1996 :Balance due 48,000Interest due 5,400

53,400 (1) Ascertainment of Total Amount of Interest on Hire Purchase

Hire Purchase Price of the car(Rs. 30,000 × 12 installments) 3,60,000Less : Cash Price 2,00,000 Total Amount of Interest 1,60,000

(2) Calculation of Interest on Hire Purchase Attributable to the year 1995-1996.Date Interest Calculation Interest - Rs.1.4.95 — —1.7.95

160,000X11/6626,667


87.5

187.5

87.5

187.5

1.10.95160,000X10/66

24,242

1.1.96160,000X9/66

21,81872,727

Q5: HP Accounting for small value goods [Final Accounts Method]: Krishna Agencies started business on 1st April, 1994. During the year ended 31 st March, 1995, they sold under-mentioned durables under two schemes — Cash Price Scheme (CPS) and Hire-Purchase Scheme (HPS).Under the CPS they priced the goods at cost plus 25% and collected it on delivery.Under the HPS the buyers were required to sign a Hire-purchase Agreement undertaking to pay for the value of the goods including finance charges in 30 instalments, the value being calculated at Cash Price plus 50%.The following are the details available at the end of 31 st March, 1995 with regard to the products :Product Nos.

purchasedNos. sold

under CPS

Nos. sold under HPS

Cost per unit

Rs.

No. of instalments due during the year

No. of instalments received during

the year

TV sets 90 20 60 16,000 1,080 1,000Washing Machines

70 20 40 12,000 840 800

The following were the expenses during the year :Rs.

Rent 1,20,000Salaries 1,44,000Commission to Salesmen 12,000Office Expenses 1,20,000From the above information, you are required to prepare :(a) Hire-purchase Trading Account, and(b) Trading and Profit & Loss Account. (20 marks) (Intermediate–May 1995) A:

In the books of Krishna Agencies Hire-Purchase Trading Account for the year ended 31 st

March, 1995Rs. Rs. Rs. Rs.

To Goods sold on H.P. A/c: By Bank A/c cash received TVs (60×Rs. 30,000)

18,00,000 TVs (1,000×Rs. 1,000) 10,00,000

Washing Machines (40 × Rs. 22,500) 9,00,000 27,00,000

Washing Machines (800 ×Rs. 750) 6,00,000 16,00,000

To H.P. Stock Reserve Rs. 9,90,000×87.5/187.5

4,62,000 By Instalment Due A/c: TVs (80×Rs.1,000) 80,000

To Profit & Loss A/c (H.P. profit transferred)

7,98,000 Washing Machines (40×Rs. 750) 30,000 1,10,000

By Goods sold on HP (Cancellation of loading)

12,60,0009,90,000

39,60,000 39,60,000

Trading and Profit & Loss Account for the year ended 31 st March, 1995Rs. Rs. Rs. Rs.


To Purchases: By Sales: TVs (90×Rs. 16,000) 14,40,000

TVs (20×Rs. 20,000) 4,00,000

Washing Machines (70 × Rs. 12,000) 8,40,000 22,80,000

Washing Machines (20 ×Rs. 15,000) 3,00,000 7,00,000

To Gross profit c/d 1,40,000 By Goods sold on H.P.(27,00,000–12,60,000)Shop Stock (W. N 3)

14,40,000

2,80,00024,20,000 24,20,000

To Salaries 1,44,000 By Gross profit b/d 1,40,000To RentTo Commission

1,20,00012,000

By H.P. Trading a/c (H.P. Profit) 7,98,000

To Office expenses 1,20,000To Net Profit 5,42,000

9,38,000 9,38,000

Working Notes:(1) Calculation of per unit cash price, H.P. price and Instalment Amount :

Product CostRs.

Cash PriceRs.

(Cost × 1.25)

H.P. priceRs.

(Cash Price×1.50)

InstalmentAmount (Rs.)

(H.P. price/No.of instalments)

TV sets 16,000 20,000 30,000 1,000WashingMachines 12,000 15,000 22,500 750

(2) Calculation of H.P. Stock as on 31st March, 1995 :Product Total No. of

Instalments(Nos.)

InstalmentsDue in 1994-

95(Nos.)

Instalmentsnot due in 1994-

95(Nos.)

AmountRs.

TV sets 1800 1080 720 7,20,000Washing Machines 1,200 840 360 2,70,000

9,90,000

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

(Nos.)Sold

(Nos.)Balance (Nos.)

AmountRs.

TV sets 90 80 10 1,60,000Washing Machines

70 60 10 1,20,0002,80,000

Q6: HP Accounting for small value goods [Stock and Debtors System]: The hire purchase department of New Appliances Ltd. Sells television sets and room coolers. This department was started in 1986. The relevant information for the year ended 31st December 1986 is as follows.

Television Room Cooler Rs. Rs.

Cost 5,400 2,000Cash price 6,300 2,400Cash down payment 900 400Monthly Installments 600 200


Number of installment 10 12During the year, 200 television sets and 240 room coolers were sold on hire purchase basis. Four

television sets on which 3 installments only could be collected and 8 room coolers on which 5 installments had been collected were repossessed. These were valued at Rs.20,000; after reconditioning at a cost of still paying were respectively as follows: -Television sets 540 and 40Room coolers 800 and 60Prepare accounts on stock and debtors system to reveal the profit of the department. Shows your workings.A: New Appliances Limited Hire purchase Stock AccountDr. Cr.

Particulars Rs. Particulars Rs.

To Goods sold on Hire Purchase 20,52,000 By Hire purchase Debtors Account (Installments falling due)

8,11,200

By Goods Repossessed Account (Installment not due on repossessed goods)

28,000By Balance (Installment not set due)

12,12,80020,52,000 20,52,000

Hire purchase Debtors AccountDr. Cr.


To Hire Purchase Stock Account (Balancing figure)

8,11,200 By Bank 7,75,200

By Balance c/d 36,0008,11,200 8,11,200

Goods Repossessed AccountDr. Cr.


To Hire Purchase Stock Account (Installments to be written off)

28,000 By Hire Purchase Adjustment A/c 8,000

By Balance c/d 20,00028,000 28,000

To Balance b/d 20,000 By Bank (Sale) 28,000To Bank (expenses) 2,000To Hire purchase adjustment account (Profit)

6,000

28,000 28,000Goods sold on Hire Purchase Account

Dr. Cr.Particulars Rs. Particulars Rs.

To Hire Purchase Adjustment Account (Loading)

4,92,000 By Hire Purchase Stock Account 20,52,000

To Purchase Account-transfer 15,60,000

20,52,000

20,52,000

Hire Purchase Adjustment AccountDr. Cr.



To Goods Repossessed Account (Loss on repossession of goods) 8,000

By Goods sold on Hire Purchase A/c (loading) 4,92,000

To Stock Reserve A/c 2,89,493 By Goods repossessed A/c (profit on sale of repossessed goods) 6,000

To Profit and Loss A/c (transfer to profit) 2,00,057

4,98,000 4,98,000Working Notes:-

1. Amount of Hire Purchase Cost and Sales are worked out as follows:-Dr. Cr.

Particulars Cost Rs. Particulars H.P Price Rs.

Television 200 x Rs.5,400 10,800,000

200 x Rs.6,900 13,80,000

Room-coolers 240 x Rs.2,000 4,80,000 240 x Rs.2,800 6,72,00015,60,000 15,60,000

2. Cash collected:-Dr. Cr.

Particulars TelevisionRs.

Particulars Room coolerRs.

Down payments Rs. 900 x 200 1,80,000 Rs. 400 x 240 96,000Installments collected Rs. 600 x 540

3,24,000 Rs. 200 x 800 1,60,000

Amount collected on goods repossessed Rs.600 x 3 x 4

7,200 Rs. 200 x 5 x8 8,000

5,11,200 5,11,200

3. Installments not yet due:-TelevisionTotal installments on 196 sets 1,960Installments collected and due 580

--------Installment not yet due 1,380

------------Amount on installments not yet due: Rs.600 x 1,380 = Rs.8,28,000

------------


Room Coolers: -Total Installments on 232 coolers 2,784Installments collected and due 860

--------Installments not yet due 1,924

-------------Amount on installments not yet due Rs.200 x 1,924 = Rs.3,84,800

------------ Total Amount: -Television 8,28,000Room coolers 3,84,800

------------- Rs. 12,12,800

-------------4. Stock Reserve: - Television:-

Hire purchase Price Rs.6,900 per setCost 5,400

--------------------Profit 1,500 per set

--------------------Reserve: - 1,500/6,900 x 8,28,000 = Rs. 1,80,000

Room Coolers : -Hire Purchase Price Rs. 2,800 eachCost 2,000

------------------Profit 800

-------------------Reserve: - 800/2,800 x 3,84,800 = Rs. 1,09,942

Total Stock ReserveTelevision Rs. 1,80,000Room coolers 1,09,943

---------- 2,89,943

----------5. Hire purchase total amount receivable : - Room Coolers: -

Cash down 400 x 240 96,000Installments received and due 200 x 860 1,72,000Installments received on repossessed goods 200 x 8 x 5 8,000

--------- 2,76,000----------

8,11,2006. Installments not due on repossessed goods : - Television

Installments on 4 sets @ Rs.600 Rs. 16,800Room Coolers 7 Installments on 8 coolers @ Rs.200 Rs. 11,200

---------28,000---------

Television :-Cash Down 900 x 200 1,80,000Installments receivable and due 600 x 580 3,48,000Installments receivable on repossessed goods600 x 4 x3 7,200


----------- 5,53,2007. Installments due: -

Television 40 x 600 24,000Room coolers 60 x 200 12,000

----------36,000----------


4. ACCOUNTS FROM INCOMPLETE RECORDS

Preparation of Final A/c from Opening B/S and Cash Book:Preparation of Final A/c from Opening B/S, Cash Book and Ratios:Preparation of Complete A/c from Raw Details:Preparation of Complete A/c from Raw Details:

Q1: Preparation of Final A/c from Opening B/S and Cash Book: K. Azad, who is in business as a wholesaler in sunflower oil, is a client of your accounting firm. You are required to draw up his final accounts for the year ended 31.3.96.From the files, you pick up his Balance Sheet as at 31.3.95 reading as below:

Balance Sheet as at 31.3.95 Rs. Rs.

Liabilities:K.Azad’s Capital 1,50,000Creditors for Oil purchases 2,00,00012% Security Deposit from Customers 50,000Creditors for Expenses:

Rent 6,000Salaries 4,000Commission 20,000

-----------4,30,000-----------

Assets:Cash and Bank Balance 75,000Debtors 1,60,000Stock of Oil (125 tins) 1,25,000Furniture 30,000 Less: Depreciation 3,000

--------- 27,000Rent Advance 12,000Electricity Deposit 1,0003-Wheeler Tempo Van 40,000 Less: Depreciation 10,000

--------- 30,000-----------4,30,000-----------

A summary of the rough Cash Book of K. Azad for the year ended 31.3.96 is as below:

Cash and Bank SummaryRs.

ReceiptsCash sales 5,26,500Collection from Debtors 26,73,500Payments to Landlord 79,000Salaries 48,000Miscellaneous 12,000Commission 20,000Personal Income tax 50,000Transfer on 1.10.95 to 12% Fixed Deposit 6,00,000


To creditors for Oil Supplies 24,00,000A scrutiny of the other records gives you the following information:

i. During the year oil was purchased at 250 tins per month basis at a unit cost of Rs.1,000. 5 tins were damaged in transit in respect of which insurance claim has been preferred. The surveyors have since approved the claim at 80%. The damaged ones were sold for Rs.1,500 which is included in the cash sales. One tine has been used up for personal consumption. Total number of tins sold during the year was 3,000 at a unit price of Rs.1,750.ii. Rent until 30.9.95 was Rs.6,000 per month and was increased thereafter by Rs.1,000 per month. Additional advance rent of Rs.2,000 was paid and this is included in the figure of payments to landlord.iii. Provide depreciation at 10% and 25% of WDV on furniture and tempo van respectively.iv. It is further noticed that a customer has paid Rs.10,000 on 31.3.96 as security by cash. One of the staff has defalcated. The claim against the Insurance Company is pending.

You are requested to prepare final accounts for the year ended 31.3.96.

A: In the Books of K. Azad Trading and Profit and Loss Account For the year ended 31st

March, 1996Particulars Rs. Particulars Rs.

To Opening Stock 1,25,000 By Sales 52,50,000To Purchases 30,00,000 By Damaged Stock 5,000Less: Transferred to drawings A/c

1,000 29,99,000 By Closing stock 1,19,000

To Gross Profit c/d 22,50,00053,74,000 53,74,000

To Salaries 44,000 By Gross Profit b/d 22,50,000To Rent 78,000 By Interest accrued on fired Deposits 36,000To Miscellaneous office expenses

12,000 By Profit on Damaged stock 500

To Loss of Deposits 10,000To Interest on Security Deposits

6,000

To Depreciation: Furniture 2,700 Tempo Van 7,500 10,200To Capital A/c (Net profit transferred)

21,26,300

22,86,500 22,86,500


Balance sheet as on 31st March, 1996Particulars Rs. Particulars Rs.

K.Azad’s Capital 1,50,000 Furniture 27,000Add: Net profit 21,26,300 Less: Depreciation 2,700 24,300

22,76,300 Tempo Van 30,000Less: Drawings 51,000 22,25,30

0Less: Depreciation 7,500 22,500

12% Security Deposit from Customers

60,000 Closing stock 1,19,000

interest payable on security Deposits

6,000 Debtors 22,11,500

Creditors for Oil Purchases

8,00,000 Cash and Bank Balances 66,000

Outstanding Rent 7,000 Fixed Deposit 6,00,000Interest Account on Fixed Deposit

36,000

Rent Advances 14,000Electricity Deposits 1,000Insurance Claim receivable 4,000

30,98,300

30,98,300

Working Notes: -1. Memorandum Stock Account

Particulars Qty Cost (Rs.) Particulars Qty Cost (Rs.)To Opening Stock 125 1,25,000 By Damages 5 5,000To Profit and Loss Account

3,000 30,00,000 By Drawings 1 1,000

By Sales 3,000 30,00,000By Closing stock 119 1,19,000

3,125 21,25,000 Closing stock 3,125 21,25,0002. Damaged Stock Account

Particulars Rs. Particulars Rs.To Trading Account 5,000 By Insurance Claim Receivable A/c 4,000To Profit and Loss A/c (transfer of balance) 500 By Cash and Bank A/c (sale) 1,500

5,500 5,5003. Debtors Account

Particulars Rs. Particulars Rs.To Balance b/d 1,60,000 By Cash and Bank A/c 26,73,500To Sales A/c (Credit Sales*) 47,25,00

0By Balance c/d 22,11,500

48,85,000

48,85,000

Note:- Credit sales in respect of (normal) sales of 3,000 tinsTotal Sales (3,000 x Rs.1,750) = 52,50,000Less: Cash Sales (Rs.5,26,500-1,500) = 5,25,000

------------47,25,000=======

4. Creditors AccountParticulars Rs. Particulars Rs.

To Cash and Bank A/c 75,000 By Balance b/d 2,00,000


To Balance c/d 8,00,000 By Purchases A/c 30,00,00032,00,00

032,00,000

5. Cash and Bank AccountParticulars Rs. Particulars Rs.

To Balance b/d 75,000 By Rent A/c 79,000To Sales A/c 5,25,000 By Salaries A/ 48,000To Damaged Stock A/c 1,500 By Miscellaneous office

expenses12,000

To Debtors A/c 26,73,500

By Commission 20,000

To Securities Deposit A/c 10,000 By Drawings A/c (Personal Income-tax)

50,000

By Fixed Deposit A/c 6,00,000By Creditors A/c 24,00,000By Loss of deposit A/c (Defalcation of security)

10,000

By Balance c/d 66,00032,85,00

032,85,000

Notes: -1. 12% interest on fixed deposit is considered to be per annum. Same assumption is applies for 12% security deposit from customers.2. The treatment of claim pending against the insurance company in respect of defalcation of security deposit by the staff has been considered on the basis of conservatism concept. Accounting to conservation concepts, non-consideration of claim anticipation as an asset. When assessment of the ultimate collection with reasonable certainty is lacking at the time of raising any claim, revenue recognition is postponed to the extent of uncertainty involved (AS-9). In this question it may be assumed that collectability of claims is not certain, so recognisation is to be posponeded. Q2: Preparation of Final A/c from Opening B/S, Cash Book and Ratios:

The following is the Balance Sheet of Sanjay, a small trader as on 31.3.96:(Figures in Rs. ‘000)

Liabilities Rs. Assets Rs.Capital 200 Fixed assets 145Creditors 50 Stock 40

Debtors 50Cash on Hand 5Cash at Bank 10

250 250A fire destroyed the accounting records as well as the closing cash of the trader on 31.3.97. However, the following information was available:a. Debtors and creditors on 31.3.97 showed an increase of 20% as compared to 31.3.96.b. Credit period: Debtors _ 1 month Creditor - 2 monthc. Stock was maintained at the same level throughout the year.d. Cash sales constituted 20% of total sales.e. All purchase were for credit only.f. Current ratio as on 31.3.97 was exactly 2.g. Total expenses excluding depreciation for the year amounted to Rs.2,50,000.h. Depreciation was provided at 10% on the closing value of fixed assets.i. Bank and cash transactions:

1. Payments to creditors included Rs.50,000 by cash.


2. Receipts from debtors included Rs.5,90,000 by way of cheques.3. Cash deposited into the bank Rs.1,20,000.4. Personal drawings form bank Rs.50,000.5. Fixed assets purchased and paid by cheques Rs.2,25,000.

You are required to prepare:a. The Trading and Profit & Loss Account for the year ended 31.3.97 andb. A Balance Sheet on that date.For your exercise, assume cash destroyed by fire is written off in the Profit and Loss Account.A: Books of Sanjay Trading and Profit and Loss A/c for the year ended 31.3.97

(Rs. ‘000)Particulars Rs. Particulars Rs.

To Opening stock 40 By SalesTo Purchases 360 Cash Sales 180

To Gross Profit c/d 540 Credit Sales 720 900

By Closing stock 40

940 940

To Expenses 250 By Gross Profit b/d 540

To Depreciation 37

To Cash destroyed 10

To Net profit 243

540 540

Balance sheet A/c Particulars Rs. Particulars Rs.

Capital 200 Fixed assets ( Less: Dep. 145+225 -37)

333

Add: Net profit 243 Stock 40

443 Debtors 60

Less: Drawings 50 393 Cash at Bank 20

Creditors 60

453 453

Cash and Bank A/CParticulars J.F Cash Bank Particulars J.F Cash Bank

To Bal b/d 5 10 By creditors 50 300To Debtors 120 590 By Drawings 50To Cash Sales 180 120 By Bank (c) 120To Cash (c) By Expenses 125 125*

By Assets 225By Cash Destroyed 10*By Balance c/d 20

305 720 305 720Other Computation:

Rs.1. Debtors Opening Balance 50,000 Closing Balance =Rs.50,000/20 x100 60,000 Credit Sales = Rs.60,000x 12 7,20,000 Total Sales = Rs.7,20,000 / 80 x 100 9,00,000 Cash Sales = Rs.9,00,000 / 20 x 100 1,80,000


Receipt of cash from deb6tors Rs. (50,000 + 7,20,000 – 60,000 – 5,90,000 )

1,20,000

2. Cr editors Opening Balance 50,000Closing balance = Rs.50,000 / 20 x 100 60,000Credit purchases = Rs.60,000 x 6 3,60,000Payment by cheque Rs.50,000 + 3,60,000 – 60,000 – 50,000 3,00,0003. Closing Bank Balance:Creditors 60,000 x2 1,20,000Current assets Current assets – stock- debtors Bank Balance 1,20,000 – 40,000 -60,000 20,0004. Expenses by cheque: (Balance fig.) (Rs. In ‘000)

(10 + 590 + 120 - 300 – 50 – 225 – 20) 125

Expenses by cash 250 -125 1255. Cash destroyed (balance figure in cash a/c) (Rs. In ‘000)

Fig. (Rs.’000) (5 + 120 + 180 – 50 – 120 – 125)

10

Q3: Preparation of Complete A/c from Raw Details:From the following furnished by Shri Ramji, prepare Trading and Profit and Loss account for the year ended 31.3.2005. Also draft his Balance Sheet as at 31.3.2005:

1.4.2004 31.3.2005Rs. Rs.

Creditors 3,15,400 2,48,000Expenses outstanding 12,000 6,600Fixed assets (includes machinery) 2,32,200 2,40,800Stock in hand 1,60,800 2,22,400Cash in hand 59,200 24,000Cash at bank 80,000 1,37,600Sundry debtors 3,30,600 ?Details of the year’s transactions are as follows:Cash and discount credited to debtors 12,80,000Returns from debtors 29,000Bad debts 8,400Sales (Both cash and credit) 14,36,200Discount allowed by creditors 14,000Returns to creditors 8,000Capital introduced by cheque 1,70,000Collection from debtors (Deposited into bank after receiving cash)

12,50,000

Cash purchases 20,600Expenses paid by cash 1,91,400Drawings by cheque 8,600Machinery acquired by cheque 63,600Cash deposited into bank 1,00,000Cash withdrawn from bank 1,84,800Cash sales 92,000Payment to creditors by cheque 12,05,400

Note: Ramji has not sold any Fixed Asset during the year. (16 Marks) (PE-II - Nov. 2005)A: In the books of Shri Ramji Trading and Profit and Loss Account

for the year ended 31st March, 2005Dr. Cr.

Rs. Rs. Rs. Rs.To Opening 1,60,800 By Sales:


stockTo Purchases: Cash 92,000

Cash 20,600 Credit 13,44,200Credit (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 14,000To General expenses (W.N.

5)1,86,000

To Depreciation (W.N. 4) 55,000To Net profit 30,800 _______

3,10,200 3,10,200Balance Sheet as at 31st March, 2005

Liabilities Rs. Assets Rs.Capital (W.N. 1) 5,35,400 Sundry Assets 2,32,200Add: Additional capital

1,70,000 Add: New machinery

63,600

Net profit 30,800 2,95,8007,36,200 Less: Depreciation 55,00

02,40,800

Less: Drawings 8,600 7,27,600 Stock in trade 2,22,400Sundry creditors 2,48,000 Sundry debtors (W.N. 2) 3,57,400Expenses outstanding 6,600 Cash in hand 24,000

_______ Cash in Bank 1,37,6009,82,200 9,82,200

Working Notes:(1) Statement of Affairs as at 31st March, 2004

Liabilities Rs. Assets Rs.

Sundry creditors 3,15,400 Sundry Assets 2,32,200Outstanding expenses 12,000 Stock 1,60,800Ramji’s Capital Debtors 3,30,600(Balancing figure) 5,35,400 Cash in hand 59,200

_______ Cash at Bank 80,0008,62,800 8,62,800

(2) Sundry Debtors AccountRs. Rs.

To

Balance b/d 3,30,600 By Cash 12,50,000

To

Sales (14,36,200 – 92,000)

13,44,200 By Discount 30,000

By Returns (sales) 29,000


By Bad debts 8,400________ By Balance c/d (Balancing

figure) 3,57,400

16,74,800 16,74,800

(3) Sundry Creditors AccountRs. Rs.

To Bank – Payments 12,05,400

By


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 ________14,75,40

014,75,400

(4) Depreciation on Fixed Assets: Rs.Opening balance 2,32,200Add: Additions 63,600

2,95,800Less: Closing balance 2,40,800Depreciation 55,000

(5) Expenses to be shown in profit and loss accountExpenses (in cash) 1,91,400Add: Outstanding of 2005 6,600

1,97,800Less: Outstanding of 2004 12,000

1,86,000

(6) Cash and Bank AccountCash Bank Cash Bank

Rs. Rs. Rs. Rs.To Balance b/d 59,200 80,000 By Purchases 20,600 To Capital 1,70,000 By Expenses 1,91,400To Debtors 12,50,000 By Plant and

Machinery63,600

To Bank 1,84,800 By Drawings 8,600To Cash 1,00,000 By Creditors 12,05,400To Sales 92,000 By Cash 1,84,800

By Bank 1,00,000_______ ________ By Balance c/d 24,000 1,37,6003,36,000 16,00,000 3,36,000 16,00,000

Q4: Preparation of Complete A/c from Raw Details:Shri Rashid furnishes you with the following information relating to his business :(a) Assets and liabilities as on 1.1.1997 31.12.1997


Rs. Rs.Furniture (w.d.v) 6,000 6,350Stock at cost 8,000 7,000Sundry Debtors 16,000 ?Sundry Creditors 11,000 15,000Prepaid expenses 600 700Unpaid expenses 2,000 1,800Cash in hand and at bank 1,200 625

(b) Receipts and payments during 1997 :Collections from debtors, after allowing discount of Rs. 1,500 amounted to Rs. 58,500.Collections on discounting of bills of exchange, after deduction of discount of Rs. 125 by the bank,

totaled to Rs. 6,125.Creditors of Rs. 40,000 were paid Rs. 39,200 in full settlement of their dues.Payment for freight inwards Rs. 3,000.Amounts withdrawn for personal use Rs. 7,000.Payment for office furniture Rs. 1,000.Investment carrying annual interest of 4% were purchased at Rs. 96 on 1st July, 1997 and payment

made therefor.Expenses including salaries paid Rs. 14,500.Miscellaneous receipts Rs. 500.

(c) Bills of exchange drawn on and accepted by customers during the year amounted to Rs. 10,000. Of these, bills of exchange of Rs. 2,000 were endorsed in favour of creditors. An endorsed bill of exchange of Rs. 400 was dishonoured.(d) Goods costing Rs. 900 were used as advertising materials.

(e) Goods are invariably sold to show a gross profit of 331/3% on sales.

(f) Difference in cash book, if any, is to be treated as further drawing or introduc-tion by Shri Rashid.(g) Provide at 2.5% for doubtful debts on closing debtors.Rashid asks you to prepare trading and profit and loss a/c for the year ended 31st December, 1997 and the balance sheet as on that date.Answer

Tr and P and L A/c of Shri Rashidfor the year ended 31st December, 1997Rs. Rs.

To Opening Stock 8,000 By Sales 73,050To Purchases 45,600 By Closing stock 7,000

Less : For advertising 900 44,700To Freight inwards 3,000To Gross profit c/d 24,350

80,050 80,050To Sundry expenses 14,200 By Gross profit b/d 24,350To Advertisement 900 By Interest on investment 2

To Discount allowed – (Rs . 100× 4

100×1

2 )Debtors 1,500 By Discount received 800Bills Receivable 125 1,625 By Miscellaneous income 500

To Depreciation on furniture 650To Provision for doubtful debts 486To Net Profit 7,791

25,652 25,652Balance Sheet as on 31st December, 1997

Liabilities Amount Assets Amount


Rs. Rs.Capital as on 1st January, 199718,800 Furniture (w.d.v.) 6,000

Additions during the year 1,000Less : Drawings 7,904 7,000

10,896 Less : Depreciation 650 6,350Add : Net Profit 7,791 18,687 Investment 96Sundry creditors 15,000 Interest accrued 2Outstanding expenses 1,800 Closing Stock 7,000

Sundry debtors 19,450Less : Provision for doubtful debts 486 18,964Bills receivable 1,750Cash in hand and at bank 625Prepaid expenses 700

35,487 35,487Working Notes :

(1) Capital on 1st January, 1997 Balance Sheet as on 1st January, 1997

Liabilities Rs. Assets Rs.Capital (Balancing figure) 18,800 Furniture (w.d.v.) 6,000Creditors 11,000 Stock at cost 8,000Outstanding expenses 2,000 Sundry debtors 16,000

Cash in hand and at bank 1,200Prepaid expenses 600

31,800 31,800

(2) Purchases made during the year Sundry Creditors Account

Rs. Rs.To Cash and bank A/c 39,200 By Balance b/d 11,000To Discount received A/c 800 By Sundry debtors A/c 400To Bills Receivable A/c 2,000 By Purchases A/c 45,600To Balance c/d 15,000 (Balancing figure)

57,000 57,000(3) Sales made during the year

Rs.Opening stock 8,000Purchases 45,600Less : For advertising 900 44,700Freight inwards 3,000

55,700Less : Closing stock 7,000Cost of goods sold 48,700Add : Gross profit (@ 50% on cost) 24,350

73,050(4) Debtors on 31.12.1997

Sundry Debtors AccountRs. Rs.

To Balance b/d 16,000 By Cash and bank A/c 58,500To Sales A/c 73,050 By Discount allowed A/c 1,500To Sundry creditors A/c By Bills receivable A/c 10,000


(bill dishonoured) 400 By Balance c/d (Balancing figure) 19,45089,450 89,450

(5) Additional drawings by Mr. Rashid Cash and Bank Account

Rs. Rs.To Balance b/d 1,200 By Freight inwards A/c 3,000To Sundry debtors A/c 58,500 By Furniture A/c 1,000To Bills Receivable A/c 6,125 By Investment A/c 96To Miscellaneous income A/c 500 By Expenses A/c 14,500

By Creditors A/c 39,200By Drawings A/c 7,904 [Rs. 7,000 + Rs. 904 (Additional drawings)]By Balance c/d 625

66,325 66,325


(6) Amount of expenses debited to Profit and Loss A/c

Rs. Rs.To Prepaid expenses A/c 600 By Outstanding expenses A/c 2,000 (on 1.1.1997) (on 1.1.1997)To Bank A/c 14,500 By Profit and Loss A/cTo Outstanding expenses A/c 1,800 (Balancing figure) 14,200 (on 31.12.1997) By Prepaid expenses A/c 700

(on 31.12.1997)16,900 16,900

(7) Bills Receivable on 31.12.1997

Bills Receivable AccountRs. Rs.

To Debtors A/c 10,000 By Creditors A/c 2,000By Bank A/c 6,125By Discount on bills receivable A/c 125By Balance c/d (Balancing figure) 1,750

10,000 10,000Note : As regards investment, it has been assumed that investment purchased for Rs. 96 was of the face value Rs. 100.


5. NON PROFIT ORGANISATION

Preparation of Income and Expenditure AccountPreparation of Complete Final Accounts

Q1: Preparation of Income and Expenditure Account

A:


Q2: Preparation of Complete Final Accounts:


6. PARTNERSHIP ACCOUNTING

P/L Appropriation Accounts Past adjustmentsTreatment of Goodwill - Premium Received Treatment of Goodwill – Revaluation MethodTreatment of Goodwill – Premium Paid Partly Treatment of Goodwill – Various Methods Admission of Partner Admission of Partner with Memorandum Revaluation Method Retirement of PartnerAdmission cum Retirement of Partner Joint Life Policy Death of PartnerDissolution of FirmDissolution of Partnership Firm (One Partner Insolvent)Dissolution of Firms (Single Partner Insolvent and Profit on Realisation)Dissolution of Firms (Single Partner Insolvent and Garner Vs MurrayDissolution of firm [All partners are insolvent]Piecemeal Distribution for Dissolution of Firm (Capital Proportional Method)Dissolution of Firm (Piecemeal Distribution Maximum Loss Method)Amalgamation of sole trades Formation of New Firm to Takeover Old FirmAmalgamation of Firms Conversion of Firm into Company


Sale to a Company

Q1: P/L Appropriation Accounts: A, B and C are partners in a firm with capitals of Rs.50,000, Rs.40,000 and Rs.20,000 respectively. They share profits and losses as: (i) Up to Rs.10,000, in the ratio of 4:3:3 (ii) Above Rs.10,000 equally.The net profit of the firm for the year ended 31st December, 2002 amounted to Rs.40,200 and the drawings of the partners were: A-Rs.6,000, B-5,000, C-Rs.3,000.You are required to prepare the Profit and Loss Appropriation Account for the year ended 31.12.2002 and Capital Accounts of the partners assuming: (a)partners capitals are fixed; and (b)partners capitals are fixed’ and (b)partners’ capitals are fluctuating, after considering the following adjustments: (1)interest on partners’ capitals to be paid @ 10% p.a., ; (2)interest on drawings to be charged @ 5% p.a.; (3)A to receive salary of Rs.5,000 p.a.; and (4)B and C to get commission @ 10% each on the net profit.A:

Profit and Loss Appropriation A/c for the year ended 31-12-2002 Particulars Rs

.Rs. Particulars Rs. Rs.

To interest on capital A/c (A-Rs.5,000; B-Rs.4,000; C-Rs.2,000

11,000 By Profit and Loss A/c – Net profit

40,200

To partners’ salary A/c; A 5,000 By int. on Drawings 5% on Rs.6,000 for 6 months

150

To Commission A/c: (B-Rs.4,020; C-Rs.4,020)

8,040 B-5% on Rs.6,000 for 6 months 125

To Share of profit A/c (A-Rs.6,170; B-Rs.5,170; C-Rs.5,170)

16,510 C-5% on Rs.3,000 for 6 months 75 350

40,550 40,550

(a) Fixed capital method: Partners Capital A/cParticulars

A B C Particulars

A B C

To Bal. c/d 50,000 40,000

20,000 By Bal b/d 50,000 40,000

20,000

Partners Current A/cParticulars A B C Particulars A B C

To Drawings A/c 6,000 5,000 3,000 By int. on Capital 5,000 4,000 2,000

To int. on Drawings 150 125 75 By partners Salary 5,000 --- ----

To bal.c/d 10,020 8,065 8,115 By Commision A/c --- 4,020 4,020

By Sh.Of profit A/c 6,170 5,170 5,170

16,160 13,190 11,190 16,170 13,190 11,190

(b) Fluctuating Capital Method: Partners’ Capital A/cParticulars A B C Particulars A B CTo Drawings A/c 6,000 5,000 3,000 By Bal. b/d 50,000 40,000 20,000To Int. on Drawings 150 125 75 By int.on capital 5,000 4,000 2,000To Bal. c/d 60,020 48,065 28,115 By partners

Salary 5,000 ---- ----

By Comm. A/c ---- 4,020 4,020By Share of profit 6,170 5,170 5,170

66,170 53,190 31,190 66,170 53,190 31,190Working Note:


(1)Profit is shared as under: A B C; Up to Rs. 10,000 (4:3:3) 4,000 3,000 3,000 and above Rs.10,000 i.e.,Rs. 6,510 (1:1:1) 2,170 2,170 2,170; --- 6,170 5,170 5,170

Q2: Past adjustments: A and B started a partnership on 1.1.2001 with respective capital contributions of Rs.1,20,000 and Rs.40,000. Their Capital Account balances as on 31.12.2002 were: A-Rs.2,09,500 and B-90,500. The transactions recorded in the Capital Accounts during these two years were interest on capital @ 10% p.a. on initial investments and allocations of incomes. On 31.12.2002, it was further discovered that drawings of Rs.42,000 by A and Rs.30,000 by B had been wrongly treated as business expenses. You are required to a pass a single journal entry to adjust the partners’ Capital Accounts correctly on 31.12.2002.A: Working Notes(1)Ascertainment of Total Profit for 2 years (2) Ascertainment of Correct Profit

Particulars A B Particulars Rs.Balance of capital as on 1.1.2001 1,20,00

040,000

Profits already credited (Rs.65,500 +42,500) 1,08,000

Add: Int. on Capital for 2 Years @ 10% p.a 24,000 8,000

Add: Drawings shown as expense (Rs.42,000 +30,000) 72,000

Add: Profit credited for 2 years (Bal) 65,500 42,500Balance of capital on 31.12.2002 2,09,50

090,500

Corrected profits to be shared equally1,80,000


(4)Ascertainment of correct capital balances (3) Adjustment of sharing of profitsA B A B

Balance of capital as on 31.12.2002Less: Drawings previously not charged

2,09,500 42,000

90,50030,000

Profits that should have been credited (Note 2) 90,000 90,000

1,67,500

60,500 Less: Profits that actually have been credited

65,500 42,500

Add: Profits to be credited (Note 3)

24,500 47,500 Profit that should be credited further 24,500 47,500

Corrected capital balances as on 1.12.2002

1,92,000

1,08,000

Required journal Entry (5) Adjustment of partners’ capital A/cA Capital A/c Dr. 17,500 Capital Balances as on

31.12.2002 (given)2,09,500 90,500

To B Capital A/c 17,500 Corrected balances as on 31.12.2002

1,92,000 1,08,000

(Being the partners’ capital account adjusted)

Required adjustment: excess (+) / short (-)

(+)17,500 (-)17,500

Q3: Treatment of Goodwill - Premium Received: A & B are equal partners. C is coming as a new partner who pays Rs.8,000 as premium for goodwill. The new profit sharing ratio among A, B & C is 4:3:2. Pass necessary journal entries showing the appropriation of premium money assuming that the premium for goodwill is immediately withdrawn by the old partners.Journal Entries

Cash A/c Dr. 8,000 A Capital A/c Dr. 2,000

To Premium for Goodwill A/c 8,000

B Capital A/c Dr. 6,000

Premium for Goodwill A/c Dr.

8,000 To Cash A/c 8,000

To A Capital A/c 2,000

To B Capital A/c 6,000

Q4: Treatment of Goodwill – Revaluation Method: A & B are partners in a firm sharing profits and losses in the ratio of 3:2. C joins the firm for 1/3rd share, and is to pay Rs.20,000 as premium for goodwill but cannot pay anything. As between A and B, they decided to share profits & losses equally. Pass required journal entry.


Q5: Treatment of Goodwill – Premium Paid Partly: A& B are partners in a firm sharing profits & loss in the ratio of 3:2. C is coming for 1/3rd share, is to pay Rs.30,000 as premium for goodwill but pays only Rs.15,000. As between A&B, they decided to share profits & losses equally.

Pass necessary journal entries.Bank A/c Dr. 15,000To Premium for Goodwill a/c.

15,000

Premium for Goodwill a/c Dr. 15,000To A Capital A/c 12,000To B Capital A/c 3,000C capital A/c Dr. 15,000To A Capital A/c 12,000To B Capital A/c 3,000

Q6: Treatment of Goodwill – Various Methods: A and B are partners in a firm with capital balances of Rs.1,20,000 and Rs.1,80,000 Respectively. C is admitted to the partnership. Prepare the appropriate journal entries for each of the following:(i)C Purchases a 20% partnership interest for Rs.70,000. (ii)C Contributes Rs.1,00,000 for a 25% partnership interest for Rs.70,000.(iii)C Contributes an amount to obtain a 33 1/3 % partnership interest. In the books of the Firm

Cash A/c Dr. 70,000 A Capital (5 +24) Dr. 29,000To C Capital A/c 60,000 B Capital (5 +36) Dr. 41,000To Premium for Goodwill(Nt1) 10,000 To Cash A/c 70,000Premium for goodwill Dr. 10,000 To C Capital A/c 1,00,000To A Capital A/c 5,000 Cash A/c (Note 3) Dr. 1,50,000To B Capital A/c 5,000 To Capital A/c 1,50,000


C Capital A/c Dr. 20,000To A Capital A/c (Note 1) 16,000To B Capital A/c (Note 1) 4,000AlternativelyGoodwill A/c (Note 2) Dr. 60,000To A Capital A/c 36,000To B Capital A/c 24,000A Capital A/c (Note 3) Dr. 20,000B Capital A/c 20,000C Capital A/c 20,000To Goodwill A/c 60,000

Q7: Admission of Partner: Rain and Storm are partners in a firm sharing profits and losses as 3:2 respectively. Their Balance sheet on 31.12.2000 stands as under:

Liabilities Rs. Rs. Assets Rs. Rs.Creditors 35,000 Cash 4,000Capital Accounts:

Debtors 22,000

Rain 40,000 Less: Prov. For doubtful debts 2000 20,000Storm 20,000 60,000 Stock 18,000

Machinery 20,000Land & Building 33,000

95,000 95,000On 1.1.2001, they agreed to take Dust as a partner on the following conditions:(i) goodwill of the firm shall be valued at Rs.23,750, Dust shall pay his share of goodwill in cash.(ii)Dust shall contribute Rs.15,000 as his share of capital.(iii)Land and Building shall be valued at Rs.42,000. Machinery shall be depreciated by Rs.5,000. Provision for doubtful debts shall be raised to Rs.3,000 and another provision shall be made for a probable liability for damages amounting to Rs.1,300.(iv)Profit & loss sharing ratio shall be so adjusted that, between Rain & Storm the former ratio is maintained, while between Storm & Dust there shall be the same ratio as between Rain & Storm.(v)The capital shall be adjusted (without disturbing the ultimate total capital) so as to correspond with the new ratio, the excess or deficit being transferred to their respective current accounts.Show journal entries to give effect to the above arrangement & prepare the opening B/S of the new firm.A:

Balance Sheet of the New firm as on 1st January, 2001Liabilities Rs. Rs. Assets Rs. Rs.Capital Accounts: Land and Building 42,000


Land and Building A/c Dr. 9,000

To Revaluation A/c 9,000

Revaluation A/c Dr. 7,300

To Machinery A/c 5,000

To Prov. For Doubtful Debts A/c. 1,000

To Liability for Damages A/c 1,300

Revaluation A/c (Rs.9,000 – 7,300) Dr. 1,700

To Rain Capital A/c 1,020

To Storm Capital A/c 680

Cash A/c Dr. 20,000

To Premium for Goodwill A/c (Note 2) 5,000

To Dust Capital A/c 15,000

Premium for Goodwill A/c (Note 3) Dr. 5,000

To Rain Capital A/c 3,000

To Storm Capital A/c 2,000

Rain Capital A/c.(Note 4 and 5) Dr. 5,320

To Rain Current A/c 5,320

Strom Current A/c (Note 4 and 5) Dr. 3,120

Dust Current A/c Dr. 2,200

To Storm Capital A/c 3,120

To Dust Capital A/c 2,200

Rain 38,700 Machinery 15,000 Storm 25,800 Stock 18,000 Dust 17,200 81,700 Debtors 22,000Current A/c Rain 5,320

Less: Prov. For doubtful debtsCash (Rs.4,000 + 20,000)

3,000 19,00024,000

Creditors 35,000 Current A/cLiability for Damages

1,300 Storm 3,120

Dust 2,200 5,3201,23,32

01,23,320

Working Notes:(1) Calculation of New Profit Sharing Ratio

The profit sharing ratio between Rain and Storm is 3:2, and profit sharing ratio between storm and Dust will also be 3:2. Therefore, share of Dust =2/5/3 x 2 = 4/15

(2) Premium for goodwill brought in by Dust = Rs.23,750 / 19 x 4 = Rs.5,000.(3) The partners’ old profit sharing ratio (3:2) is their sacrificing ratio.(4) Total capital of the new firm

Opening capital + Capital and premium brought in by Dust + Revaluation profit =Rs.(60,000 + 15,000 +5,000 + 1,700)=Rs.81,700

Rain’s share = Rs.81,700 x 9/19 = Rs.38,700Storm’s share = Rs.81,700 x 6/19 = Rs.25,800Dust’s share = Rs.81,700 x 4/19 = Rs.17,200.

(5) Partners’ Capital A/cParticulars Rain Storm Dust Particulars Rain Storm Dust

To Current a/c (bal) 5,320 ---- ---- By Bal. b/d 40,000 20,000 ---By Bank A/c. ---- ---- 15,000

To Bal. (Note 4) 38,700 25,800 17,200 By Goodwill 3,000 2,000 ----By Revaluation A/c 1,020 680 ----By Current a/c (Bal) ---- 3,120 2,200

44,020 25,800 17,200 44,020 25,800 17,200

Q8: Admission of Partner: Ranu & Mili are partners in a firm sharing profits & losses in the ratio of 2:1The Balance sheet of the firm on 31.12.2002 was as follows:

Liabilities Rs. Rs. Assets Rs. Rs.Creditors 7,000 Investments 25,000Investment provision 2,000 Stock 15,000General Reserve 10,500 Debtors 20,000Workmen compensation Fund

6,000 Less.Prov. for bad debts 2,500 17,500

Capital A/cs: Ranu 30,000 Bills Receivable 12,500 Mili 24,500 54,500 Bank 10,000

80,000 80,000On the above date, Manisha is admitted for 2/5th share in the profits or losses of the firm. Following adjustments were made at the time of admission:(a)Manisha is required to bring in Rs.50,000 as capital.(b)Her goodwill was calculated at Rs.12,000.(c)Ranu and Mili purchased a Machiney on hire purchase system for Rs.15,000 of which only Rs.500 are to be paid. Both machinery and unpaid liability did not appear in the Balance sheet.


(d)There was a joint life policy on the lives of Ranu and Mili for Rs.75,000. Surrender value of the policy on the date of admission amounted to Rs.12,000.(e)Accrued incomes not appearing in the books were Rs.500.(f)Market value of investments is Rs.22,500.(g)Claim on account of compensation is estimated at Rs.750.(h)S, an old customer, whose account was written-off as bad, has promised to pay Rs.1,750 in settlement of the full claim.(i)Provision for bad debts is required at Rs.3,000.Prepare Revaluation Account, Partners’ Capital Accounts and Opening Balance Sheet after the admission of Manisha.In the books of the firm

Revaluation A/cLiabilities Rs. Assets Rs.

To Investment Provision A/c (Nt 1) 500 By Accrued income A/c 500To Prov. For bad debts A/c. 500 By Workmen Comp. Fund A/c (Note 2) 5,250To Creditors A/c (hire purchase) 500 By Joint Life Policy A/c 12,000To Partners’ Capital A/cs – Profit(Ranu- Rs.20,833; Mili – Rs.10,417

31,250 By Machinery A/c 15,000

32,750 32,750Partners’ Capital A/c

Particulars Ranu Mili Manisha Particulars Ranu Mili ManishaTo G/W 12,00

06,000 12,000 By Bal. b/d. 30,00

024,500 ----

To Bal. c/d 65,833

42,417 38,000 By Revaluation A/c 20,833

10,417 ----

By General Reserve 7,000 3,500 ----By G/W A/c (Nt 3) 20,00

010,000 ----

By Bank A/c ---- ---- 50,00077,83

348,417 50,000 77,83

348,417 50,000

Balance Sheet of the Firm (after Manisha’s admission)Liabilities Rs. Assets Rs. Rs.

Capital A/c Machinery 15,000 Ranu 65,833 Investment 25,000 Mili 42,417 Stock 15,000 Manisha 38,000 Debtors 20,000Creditors 7,500 Less: RDD 3,000 17,000Investment Prov. (Rs.2,000 + 500) 2,500 Bills Receivable 12,500Workmen Comp Fund (6,000-5,250) 750 Joint Life

PolicyAccrued Income

12,000500

Bank (10+50) 60,0001,57,000 1,57,000

Working Notes:(1)Since there is a fall in the market value of investments of Rs.2,500, investment provision is increased form Rs.2,000 to Rs.2,500.(2)Workmen compensation fund is nothing but retained profit. Therefore, it is credited to Revaluation A/c. Alternatively, it could have been credited to partners’Capital A/c in the old profit sharing ratio.(3)Since Manisha is not paying the required amount of premium for goodwill. Therefore, Rs.30,000 goodwill will be adjusted through the Capital Accounts of the partners.(4)There will be no entry for the promise made by S, Since it is an event and not a transaction.


Q9: Admission of Partner with Memorandum Revaluation Method: Following was the B/S of A&B, who were sharing profit & loss in the ratio of 2:1 on 31.12.2006:

Liabilities Rs. Assets Rs.Capital Accounts Plant and machinery 12,00,000

A 10,00,000

Building 9,00,000

B 5,00,000 Sundry debtors 3,00,000Reserve fund 9,00,000 Stock 4,00,000Sundry creditors 4,00,000 Cash 1,00,000Bills payable 1,00,000

29,00,000

29,00,000

They agreed to admit ‘C’ into the partnership on the following terms:(i) The goodwill of the firm was fixed at Rs.1,05,000.(ii) That the value of stock and plant and machinery were to be reduced by 10%.(iii) That a provision of 5% was to be created for doubtful debts.(iv) That the building account was to be appreciated by 20%.(v) There was an unrecorded liability of Rs.10,000. (vi) Investments worth Rs.20,000 (Not mentioned in the B/S) were taken into account.(vii)That the value of reserve fund, the values of liabilities & the values of assets other than cash are not to be altered.(viii) C was to be given ¼ th share in the profit& was to bring capital equal to his share of profit after all adjustments.Prepare Memorandum Revaluation Account, Capital account of the partners and the Balance Sheet of the newly reconstituted firm. (16 Marks) (PE II, Nov. 2007)

A: Memorandum Revaluation A/cParticulars Rs Particulars Rs

To Stock 40,000 By Building 1,80,000To Plant & machinery 1,20,000 By Investments 20,000To Provision for doubtful debts 15,000To Unrecorded liability 10,000To Partners’ Capital A/c (OR)

A = 10,000B = 5,000 15,000

2,00,000 2,00,000To Building 1,80,000 By Stock 40,000To Investments 20,000 By Plant & machinery 1,20,000

By Provision for doubtful debts 15,000By Unrecorded liability 10,000By Partners’ Capital A/cs (NR)

A = 7,500B = 3,750

C = 3,750 15,0002,00,000 2,00,000

Partners’ Capital AcParticulars A B C Particulars A B C

To

Rev. Loss 7,500 3,750 3,750 By Balance b/d 10,00,000

5,00,000 -

To

Reserve Fund 4,50,000 2,25,000 2,25,000

By ReservFund 6,00,000 3,00,000 -

T A (W.N.3) - - 17,500 By C (W.N.3) 17,500 8,750 -


oTo

B (W.N.3) - - 8,750 By Rev. Profit 10,000 5,000

To

Balance c/d – wn2 11,70,000 5,85,000 5,85,000

By Cash (Bal) 8,40,000

16,27,500 8,13,750 8,40,000

16,27,500

8,13,750 8,40,000

Balance Sheet of newly reconstituted firm as on 31.12.2006Liabilities Rs. Assets Rs.

Capital Accounts Plant & Machinery 12,00,000A 11,70,000 Building 9,00,000B 5,85,000 Sundry Debtors 3,00,000C 5,85,000 Stock 4,00,000

Reserve Fund 9,00,000 Cash (1,00,000 + 8,40,000) 9,40,000Sundry Creditors 4,00,000Bills Payable 1,00,000

37,40,000 37,40,000Working Notes: 1. Calculation of new profit and loss sharing ratioC will get 1/4 th share in the new profit sharing ratio.Therefore, remaining share will be 1-1/4 =3/4, Share of A will be 3/4 x 2/3 = 2/4 i.e. 1/2Share of B will be 3/4 x 1/3 = ¼, New ratio will be A : B : C - 1/2 : 1/4 : 1/4 - 2 : 1: 1

2. Calculation of closing capital of CClosing capitals of A & B after all adjustments are: A-Rs.11,70,000, B-Rs. 5,85,000Since B’s capital is less than A’s capital, therefore B’s capital is taken as base. Hence, C’s closing capital should be Rs.5,85,000 i.e. at par with B (new p&l ratio)

3. Adjustment entry for goodwillPartners Goodwill as per old

ratioGoodwill as per new ratio

Effect

A 70,000 52,500 + 17,500 -B 35,000 26,250 + 8,750 -C - 26,250 - 26,250

1,05,000 1,05,000 26,250 26,250Adjustment entry will be:

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


Q10: Retirement of Partner: On 31-3-1995, the B/S of M/s. A, B and C sharing profits and losses in proportion to their capitals, stood as follows:

(1)Land and Buildings be appreciated by 30%(2)Machinery is to be depreciated by 20%(3)Closing stock is to be valued at Rs.75,000.(4)Provision for bad debts is to be made at 5%.(5)Old credit balances of Sundry Creditors Rs.20,000 is to be written-off.(6)Joint Life Policy of the partners surrendered and cash obtained Rs.80,000.(7)Goodwill of the entire firm be valued at Rs.1,40,000 &A’s share of the Goodwill be adjusted in the accounts of B& C who share the future profits equally. No Goodwill A/c being raised.(8)The capital of the firm is to be the same as before retirement. Individual capital be in their profit sharing ratio.(9)Amount due to A is to be settled on the following basis: 50% on retirement and the balance 50% within one year. Prepare Revaluation Account, Capital Accounts of partners, Cash and Bank Account and Balance Sheet as on 1.4.1995 of M/s. B and C.

In the Books of M/s/ A,B and CRevaluation A/c

Particulars Rs. Particulars Rs.To Machinery A/c 60,000 By Land and Buildings A/c 60,000To closing stock A/c 25,000 By Sundry Crs. A/c 20,000To Prov. For bad debts A/c

5,000 By Partners’Capital (A:.2,857; B;4,286; C;2,857)

10,000

90,000 90,000

Cash and Bank A/c

Partners’ Capital A/c

Particulars A B C Particulars A B C

To Revaluation 2,857 4,286 2,857 By Bal. b/d 2,00,000

3,00,000

2,00,000

To A Capital(GW)

---- 10,000 30,000 By J.L.P A/c 22,857 34,286 22,857

To Bank (50% paid)

1,30,000

---- By B Capital GW)

10,000 ---- ----


Liabilities Rs. Assets Rs.Sundry Crs. 1,00,000 Land and Buildings 2,00,000

Capital A/cs. Machinery 3,00,000 A 2,00,000 Closing stock 1,00,000 B 3,00,000 Sundry Debtors 1,00,000

C 2,00,000 7,00,000 Cash and Bank Balances 1,00,0008,00,000 8,00,000

To Balance b/d 1,00,000 By A Capital A/c

1,30,000

To Joint Life Policy A/c

80,000 By Balance c/d 2,40,000

To B Capital A/c 30,000To C Capital A/c 1,60,000

3,70,000 3,70,000

To A Loan A/c 1,30,000

---- By C Capital GW

30,000 ---- ----

To Balance (req) ---- 3,50,000

3,50,000

By Bank (Bal) ---- 30,000 1,60,000

2,62,857

3,64,286

3,82,857

2,62,857

3,64,286

3,82,857

Balance sheet of M/s. B and C as on 1st April, 1995Liabilities Rs. Rs. Assets Rs. Rs.

Partners capital a/cs Land and Buildings 2,60,000 B 3,50,000 Machinery 2,40,000 C 3,50,000 7,00,00

0Closing Stock 75,000

A’s Loan A/c 1,30,000

Sundry Debtors 1,00,000

Sundry Creditors 80,000 Less:Prov. For Bad Debts 5,000 95,000Cash and Bank Balances 2,40,000

9,10,000

9,10,000

Calculation of Share of Goodwill Right of Goodwill before retirement (2:3:2)

40,000 60,000 40,000

Right of Goodwill after retirement (1:1) ---- 70,000 70,000Sacrifice (-)/Gain (+) (-)40,000 (+)10,000 (+)30,000

Q11: Retirement of Partner: Following is the B/S of A,B&C who were partners as on 31.3.1993.Balance Sheet as at 31.3.1993

Liabilities Rs Assets RsA’s Capitals 33,600 Plant and Machinery 49,000B’s Capitals 25,200 Furniture and fittings 4,800C’s Capitals 12,000 Stock in Trade 22,800

Sundry creditors 12,000 Sundry debtors 21,60015% Mortgage Loan 16,600 Cash on hand 1,000

Cash at bank 200______ _______

99,400 99,400They share profits and losses in the ratio of 2:2:1 on 1st April, 1993, C retired from the firm and claimed his share of secret reserve/profits arising out of the following.a. During the year ended 31.3.1993 purchase of Machinery at a cost of Rs.10,000 was charged to purchase account, the erection charges of Rs.600 being charged to machinery repairs account. (Depreciation is to be charged at 10% p.a. )b. Rs.600 received from Mr. X on 31.3.93 towards rent of the property sublet was credited to his personal accounts instead of to rent account so as to reduce his debit balance from Rs.1,000 to Rs.400 debit on 31.3.93.c. Interest on mortgage loan was paid in advance up to 31.5.93 and the whole amount was charged to interest account during the year ended 31.3.93. After rectifying the above errors, it was mutually decided as under:i. The goodwill of the firm is valued at 5 times the average profits of the last 3 years. Such profits should be correct profits & not the book profits. The book profits for the last 3 financial year were: 1990-91 Rs.18,380; 1991-92 Rs.32,000; 1992-93 Rs,7,471.


ii. Plant & Machinery to be depreciated by 10% & provision for bad doubtful debts be made at 5% on sundry debtors.iii. The goodwill should not appear in the books.iv. There is a liability for Rs.501 for bill discounted. This has to be accounted for.v. C should be paid half of his dues in cash which shall be brought in by A and B in their profit sharing proportion and the other half shall be left in the business as C’s loan fetching an interest of 18% p.a.Prepare profit and loss account, Revaluation account, Capital account of the partners and the Balance sheet of A and B after C’s retirementsA: Profit and Loss Adjustment A/c

Particulars Rs. Particulars Rs.To Depreciation (Plant and Machinery)

1,060 By Plants and Machinery A/c 10,600

To Partners Capital A/c (2:2:1) By Interest on Mortgage Loan 415 A 4,222 By Sundry Debtors A/c (Rent) 600 B 4,222C 2,111

11,615 11,615Revaluation A/c

Particulars Rs. Particulars Rs.To Prov for bad and doubtful debts 1,110 By Partners’ Capital A/c (Loss)To Depreciation (Plant&Machinery) 5,854 A 2,986 To Liabilities for bills discounted 501 B 2,986

C 1,4937,465 7,465

Capital A/cParticulars A B. C. Particulars A B. C.

To Revaluation A/c (loss) 2,986 2,986 1,493 By Balance b/d 33,600 25,200 12,000To C’s Capital A/c (Share of Good will)

11,401 11,401 - By P&L Adj. A/c 4,222 4,222 2,111

To Cash A/c - - 17,710 By A’s Capital A/c - - 11,401To C’s Loan A/c - - 17,710 By B’s Capital A/c

(GW Share)- - 11,401

To Balance c/d 32,290 23,890 - By Cash A/c 8,855 8,855 -46,677 38,277 36,913 46,677 38,277 36,913

Balance Sheet of M/s A.B as on 1.4.1993

Liabilities Rs. Assets Rs.Capital A/c : Plant and Machinery 58,540

A 32,290 Less: Depreciation 5,854 52,686B 23,890 Furniture and Fittings 4,800

C’s Loan a/c 17,710 Stock in Trade 22,80015% Mortgage Loan 16,600 Sundry Debtors 22,200Liabilities for bills discounted 501 Less: Provision 1,110 21,090Creditors 12,000 Interest on Mortgage Loan

prepaid415

Cash in hand 1,000Cash at Bank 200


1,02,991

1,02,991

Working Notes: Rs.1. Sundry Debtors:Opening Debtors as on 31.3.1993 21,600Add: Rent received from Mr. X 600

-----------22,200

2. Goodwill: Year Profit1990-91 18,3801991-92 32,0001992-93 [7,471 + 10,555] 18,026Total Profits 68,406Average Profit = 68,406/3 = 22,802Goodwill of the firm = Average profit x 5 = 22,802 x 5 = Rs. 1,14,010Cr. Share of goodwill = 1,14,010/5 = Rs.22,802

3. Calculation of balance of Plant and Machinery Accounts: -Opening Plant and Machinery 49,000Add: Machinery Purchased 10,000Add: Installation charge 600

----------10,600

Less : Depreciation @ 10% 1,060--------- 9,540

58,540


Q12: Admission cum Retirement:Ram, Rahim and Robert are partners, sharing Profits and Losses in the ratio of 5 : 3 : 2. It was decided that Robert would retire on 31.3.2005 and in his place Richard would be admitted as a partner with new profit sharing ratio between Ram, Rahim and Richard at 3 : 2 : 1.

Balance Sheet of Ram, Rahim and Robert as at 31.3.2005:Liabilities Rs. Assets Rs.Capital Accounts: Cash in hand 20,000

Ram 1,00,000 Cash in Bank 1,00,000Rahim 1,50,000 Sundry Debtors 5,00,000Robert 2,00,000 Stock in Trade 2,00,000

General Reserve 2,00,000 Plant & Machinery 3,00,000Sundry Creditors 8,00,000 Land & Building 5,30,000Loan from Richard 2,00,000 ________

16,50,000 16,50,000Retirement of Robert and admission of Richard is on the following terms:(a) Plant & Machinery to be depreciated by Rs. 30,000.(b) Land and Building to be valued at Rs. 6,00,000.(c) Stock to be valued at 95% of book value.(d) Provision for doubtful debts @ 10% to be provided on debtors.(e) General Reserve to be apportioned amongst Ram, Rahim and Robert.(f) The firm’s goodwill to be valued at 2 years purchase of the average profits of the last 3 years. The relevant figures are:

Year ended 31.3.2002 Profit Rs. 50,000Year ended 31.3.2003 Profit Rs. 60,000Year ended 31.3.2004 Profit Rs. 55,000

(g) Out of the amount due to Robert Rs. 2,00,000 would be retained as loan by the firm and the balance will be settled immediately.(h) Richard’s capital should be equal to 50% of the combined capital of Ram and Rahim.Prepare:(i) Capital accounts of the partners; and(ii) Balance Sheet of the reconstituted firm.A:

Partners’ Capital AccountsDr Cr.

Ram Rahim Robert Richard

Ram Rahim Robert Richard

To Revaluation A/c (W.N. 1)

10,000 6,000 4,000 By Balance b/d

1,00,000

1,50,000

2,00,000

Loan from Robert A/c

2,00,000

General reserve

1,00,000

60,000 40,000

Bank 58,000 Goodwill (W.N. 2)

55,000 33,000 22,000

Bal.c/d 2,45,000

2,37,000

2,55,000

2,43,000

2,62,000

2,55,000

2,43,000

2,62,000

Goodwill 55,000 36,667 18,333 Balance b/d

2,45,000

2,37,000

Loan 2,00,00


A/c transfer

0

Bal. c/d 1,90,000

2,00,333

1,95,167

Bank 13,500

2,45,000

2,37,000

2,13,500

2,45,000

2,37,000

2,13,500


Balance Sheet as at 31.3.2005 after the admission of RichardLiabilities Rs. Assets Rs.Capital Accounts: Land and Building 6,00,000

Ram 1,90,000 Plant and Machinery 2,70,000Rahim 2,00,333 Stock 1,90,000Richard 1,95,167 Debtors 4,50,000

Sundry Creditors 8,00,000 Cash at Bank (W.N. 3) 55,500Loan from Robert 2,00,000 Cash in hand 20,000

15,85,500 15,85,500Working Notes:(1) Revaluation A/c

Rs. Rs.To Plant and Machinery 30,000 By Land and Building 70,000To Stock 10,000 By Partners Capital A/cs:To Debtors 50,000 Ram 10,000

Rahim 6,000______ Robert 4,000 20,00090,000 90,000

(2) Calculation of Goodwill: Profit for the year ended 31.3.2002 50,000

Profit for the year ended 31.3.2003 60,000Profit for the year ended 31.3.2004 55,000

1,65,000Average Profit = 165,000/3 = Rs. 55,000 and Goodwill = Rs. 55,000 2 = Rs. 1,10,000.

(3) Bank A/cParticulars Rs. Particulars Rs.

To

Balance b/d 1,00,000 By

Robert’s Capital A/c 58,000

To

Richard’s Capital A/c 13,500 By

Balance c/d 55,500

1,13,500 1,13,500

Q13: Joint Life Policy: X,Y & Z are partners sharing profits and losses in the ratio of 2:2:1. On 1st January 2000, they took out a joint life policy of Rs.1,00,000. Annual premium of Rs.5,000 was payable on 1st January each year. Last premium was paid on 1st January 2003. Y died on 1st March 2003, and policy money was received on 31st March, 2003.The surrender value of policy as on 31st December each year were as follows:2000 – Nil; 2001-Rs.1,000; 2002-Rs.2,500.Show necessary accounts and Balance sheet as on 31st December, each year, assuming that:1. premium is charged to profit and loss Account every year.2. premium is debited to Joint Life Policy A/c & the balance of the Joint Life Policy A/c is adjusted every year to its surrender Value.3. premium is debited to JLP A/c & a sum equal to premium is debited to P&L Appropriation

A: Case 1 In this case, premium paid is charged to P/L A/c every year, so nothing will appear in the JLP A/c and in the B/S of 2000,2001, and 2002. However, in 2003 the JLP A/c will appear as Joint Life Policy A/c

To partners capital a/cs (x-40,000; Y-40,000; Z-20,000)

1,00,000 By Bank A/c (policy money received)

1,00,000

1,00,000 1,00,000Case 2:

Joint Life Policy A/c


To Bank –Premium 5,000 By Profit & Loss A/c 5,0005,000 5,000

To Bank –Premium 5,000 By Profit & Loss A/c 4,000By Balance c/d 1,000

5,000 5,000To Bal. b/d 1,000 By profit & Loss A/c 3,500To Bank –premium 5,000 By Bal. c/d 2,500

6,000 6,000To Bal. b/d 2,500 By Bank A/c(Policy money

received)1,00,000

To Bank –premium 5,000To partners’ capital A/cs(x-37,000; Y-37,000; Z-18,500)

92,500

1,00,000 1,00,000

Balance Sheet as at 31st December, 2000Liabilities Rs. Assets Rs.

Joint Life Policy ---- Balance Sheet as at 31st December, 2001

Liabilities Rs. Assets Rs.Joint Life Policy 1,000

Balance Sheet as at 31st December, 2002Liabilities Rs. Assets Rs.

Joint Life Policy 2,500

Case 3:Joint Life Policy Account

To Bank a/c-Premium 5,000=====

By joint life policy fund a/c 5,000=====

To Bank a/c-Premium 5,000 By joint life policy fund a/c 4,000By bal c/d 1,000

5,000 5,000To bal. b/d 1,000 By joint life policy fund a/c 3,500To Bank a/c-premium 5,000 By bal. c/d 2,500

6,000 6,000To bal. b/d 2,500 By bank a/c (policy money received) 1,00,000To Bank A/c –Premium 5,000To Joint Life policy fund a/c 92,500

1,00,000 1,00,000


Joint Life Policy Fund AccountTo joint life policy A/c 5,000

=====By profit & Loss appropriation A/c 5,000

=====To joint life policy A/c 4,000 By Profit & Loss appropriation A/c 5,000To bal c/d 1,000

5,000 5,000To joint life policy a/c 3,500 By bal. b/d 1,000To bal. c/d 2,500 By Profit & loss appropriation a/c 5,000

6,000 6,00095,000 95,000

Balance sheet as at 31st December, 2000 Liabilities Rs. Assets Rs.Joint Life Policy Fund ---- Joint Life Policy Nil

Balance sheet as at 31st December, 2001Liabilities Rs. Assets Rs.Joint Life Policy fund 1,000 Joint Life Policy 1,000

Balance Sheet as at 31st December, 2002 Joint Life Policy Fund 2,500 Joint Life Policy 2,500

Q14: Death of Partner: A, B and C were partners of a firm sharing profits and losses in the ratio of 3:4:3. The Balance Sheet of the firm. As at 31st March,1998 was as under.

Liabilities AssetsCapital Accounts: Fixed assets 1,00,000

A 48,000 Current assets: B 64,000 Stock 30,000

C 48,000 1,60,000 Debtors 60,000Reserves 20,000 Cash in hand 30,000Creditors 40,000 ______

2,20,000 2,20,000The firm had taken a joint life policy for Rs.1,00,000; the premium periodically paid was charged to Profit and Loss Account. Partner C died on 30 th September 1998. It was agreed between the surviving partners and the legal representatives of C that:i. Goodwill of the firm will be taken at Rs.60,000ii. Fixed Assets will be written down by Rs.20,000iii. In lieu of profits, C should be paid at the rate of 25% pa on his capital as on 31-3-98, Policy money was received and the legal heirs were paid off. The profits for the year ended 31-3-99, after charging depreciation of Rs.10,000 (depreciation upto 30-Sep was agreed to be Rs.6,000) were Rs.48,000.Partners’ Drawings Accounts showed balances as under: A. Rs. 18,000 (drawn evenly over the year)B. Rs. 24,000 (drawn evenly over the year)C. (up-to-date of death) Rs.20,000On the basis of the above figures, please indicate the entitlement of the legal heirs of C, assuming that they had not been paid anything other than the share in the Joint Life Policy.


A: - Determination of entitlement of legal heirs of C(1) Profits for the half year ended 31st March, 1999: Rs.

Profits for the year ended 31st March, 1999 (after depreciation) 48,000Add: Depreciation 10,000Profits before depreciation 58,000Profit for the first half (assumed: evenly spread) 29,000Less: Depreciation for the first half 6,000

Profits for the first half year (after depreciation) 23,000Profits for the second half (i.e., 1st October, 1998 to 31st March, 1999) 29,000Less: Depreciation for the second half 4,000Profits for the second half year (after depreciation) 25,000

(2) Capital Accounts of partners as on 30th September, 1998: Particulars A B C Particulars A B C

To Fixed Assets 6,000 8,000 6,000 By Balance c/d 48,000

64,000 48,000

To Drawings 9,000 12,000 20,000 By Reserve 6,000 8,000 6,000Goodwill 18000 24000 18000

To C Executor’s A/c

- - 52,000 By P&L App A/c (Int on Rs.48,000 @ 25% for 6 m)

- - 6,000

To Balance c/d 57,000

76,000 -

72,000

96,000 78,000 72,000

96,000 78,000

(3) Application of Section 37 of the partnership Act: Legal heirs of C has not been paid anything other than the share in joint life policy. Amount due to the deceased partner carriers interest at the mutually agreed rate. If there is no agreement the representatives of the deceased partner can receive at their option interest at the rate of 6% per annum or the share of profit earned for the amount due to the deceased partner.Therefore, the representatives of C can Choose: - Either,(i) Interest on Rs.52,000 for 6 months @ 6% p.a. = Rs.1,560 (Or)(ii) Profit earned out of unsettled capital (in the second half year ended 3s1t march, 1999)Rs.25,000 x 52,000/57,000 + 76,000 + 52,000 = Rs.7,027 (approx)In the above case, it would be clear that the legal heirs of C would chose option of Rs.7,027.(4) Amount due to legal heirs of C:Balance in C’s Executor’s account 52,000Amount of profit earned out of unsettled capital [calculated in (3)] 7,027

Amount due 59,027Important Note: In the question paper, there was Printing mistake whereby 31 st March 1996 was printed in place of 31st march 1998 in the statement ‘In lieu of profi8ts, So, should be paid at the rate of 25% per annum on his capital as on 31st March, 1998.

Q15: Dissolution of Firm: A, B & C are partners in a firm sharing profits & losses in the ratio of 3:2:1. They decided to dissolve the partnership business as on 31-3-02. Following is the B/S on the date of dissolution:

Liabilities Rs. Assets Rs.Capitals Machiner

y31,000

A 20,000 Furnitures 3,000 B 10,000 Stock 10,000 C 2,000 Debtors 6,000Bank overdraft 6,000


Sundry creditors 12,00050,000 50,000

Following assets were realised in cash: Machinery at Rs.22,000; 50% of the stock at Rs.3,500; & Debtors were collected at 15% less than their book values. Remaining 50% of the stock was taken over by A at Rs.3,200. Furniture was taken over by B at Rs.2,400. Realisation expenses were Rs.300. Pass necessary journal entries to close the books of the firm and also prepare Realisation A/c, Bank A/c & Partners’ Capital A/c.

Realisation A/c Dr. 50,000 A capital A/c Dr. 3,200

To Machinery A/c 31,000


To Furniture A/c 3,000 To Realisation A/c 5,600

To Stock A/c 10,000

A Capital A/c Dr. 7,050

To Debtors A/c 6,000 B Capital A/c Dr. 4,700

Sundry Creditors A/c Dr. 12,000 C Capital A/c Dr. 2,350

To Realisation A/c 12,000


Bank A/c Dr. 30,600 Bank A/c Dr. 350


To C Capital A/c 350

Realisation A/c Dr. 12,000 A Capital A/c Dr. 9,750

To Bank A/c 12,000


Realisation A/c Dr. 300 To Bank A/c 12,650

To Bank A/c 300

Realisation A/cParticulars Rs. Particulars Rs.

To Machinery A/c 31,000 By Sundry Crs. A/c 12,000

To Furniture A/c 3,000 By Bank A/c(assets realised) 30,600

To Stock A/c 10,000 By A Capital A/c(Stock taken over) 3,200

To Debtors A/c 6,000 By B Capital A/c (furniture taken over) 2,400

To Bank A/c(sundry creditors paid) 12,000 By Partners’ Capital A/cs (loss): 14,100

To Bank A/c (expenses) 300 [A-Rs.7,050; B-Rs.4,700; C-Rs.2,350]

62,300 62,300

Bank Account

To Realisation A/c 30,600 By Balance b/d (Note 1) 6,000To C Capital A/c 350 By Realisation A/c (payment to creditors) 12,000

By Realisation A/c (expenses) 300By Capital A/c (A-Rs.9,750; B-Rs.2,900) 12,650

30,950 30,950


Partners’ Capital AccountsParticulars A B C Particulars A B CTo Realisation A/c 3,200 2,400 ---- By Bal. b/d 20,000 10,000 2,000To Realisation A/c (loss)

7,050 4,700 2,350 By Bank A/c ---- ---- 350

To Bank A/c 9,750 2,900 ----20,000

10,000 2,350 20,000 10,000 2,350

Working Note: (1) Bank overdraft represents adverse balance in the Bank Account. therefore, it should not be transferred to Realisation Account.

Q16: Dissolution of Firm: X, Y and Z are partners of the firm XYZ and Co., sharing Profits and Losses in the ratio of 4:3:2. Following is the Balance sheet of the firm as at 31 st March, 2008:


Partners’ Capitals: Fixed Assets 5,00,000

X 4,00,000 Stock in trade 3,00,000

Y 3,00,000 Sundry debtors 5,00,000

Z 2,00,000 Cash in hand 10,000

General Reserve 90,000

Sundry Creditors 3,20,000 ________

13,10,000 13,10,000

Partners of the firm decided to dissolve the firm on the above said date. It was found that a credit purchase of Rs. 20,000 in January, 2008 had not been recorded in the books of the firm.Fixed assets realized Rs. 5,20,000 and book debts Rs. 4,40,000.Stocks were valued at Rs. 2,50,000 and it was taken over by partner Y.Creditors allowed discount of 5% and the expenses of realization amounted to Rs. 6,000.You are required to prepare:(i) Realisation account; (ii) Partners capital account; and(iii) Cash account. (8 Marks) (PE-II Nov. 2008)A: (i) Realisation Account

Rs. Rs.To Fixed assets 5,00,000 B

yCreditors 3,20,000

To Stock in trade 3,00,000 By

Cash (5,20,000+4,40,000) 9,60,000

To Debtors 5,00,000 By

Y (Stock taken over) 2,50,000

To Cash – Expenses 6,000 By

Loss transferred topartners’ capital accounts

To Cash –Creditors 3,23,000 X 44,000(3,40,000x 95% )

Y 33,000

Z 22,00016,29,000 16,29,000

(ii) Partners’ Capital AccountsX Y Z X Y Z

Rs. Rs. Rs. Rs. Rs. Rs.


To Realisation Account

44,000 33,000 22,000 By Balance b/d 4,00,000

3,00,000 2,00,000

To Realisation Account

- 2,50,000 - By General reserve

40,000 30,000 20,000

To Cash 3,96,000

47,000 1,98,000

4,40,000

3,30,000 2,20,000

4,40,000

3,30,000 2,20,000

(iii)


Cash AccountRs. Rs.

To Balance b/d 10,000 By Realisation A/c (Expenses) 6,000To Realisation A/c 9,60,000 By Realisation A/c (Creditors) 3,23,000

(Fixed assets and By X 3,96,000book debts realized) By Y 47,000

By Z 1,98,0009,70,000 9,70,000

Q17: Dissolution of Firms (Single Partner Insolvent and Profit on Realisation):Balance Sheet As At 31st March, 1995

Liabilities Rs. Assets Rs.Capital A/C s :

F.Kapil 2,00,000 land 50,000S.Kapil 2,00,000 Buildings 2,50,000R.Dev 1,00,000 Office equip. 1,25,000

Computers 70,000Current A/Cs: Debtors 4,00,000

F.Kapil 50,000 Stocks 3,00,000S.Kapil 1,50,000 Cash at Bank 75,000R.Dev 1,10,000 Other Current Assets 22,600

Loan from NBFC 5,00,000 Current A/c:Current Liabilities 70,000 B.Dev 87,400

----------- ------------ 13,80,000 13,80,000

The partners have been sharing profits and losses in the ratio of 4:4:1:1. It has been agreed to dissolve the firm on 1.4.1995 on the basis of the following understanding:a. The following assets are to be adjusted to the extent indicated with respect to the books vales:Land 200%Buildings 120%Computers 70%Debtors95%Stocks 90%

b. In the case of loan, the lenders are to be paid at a prepayment premium of 1%.

c. B.Dev is insolvent and no amount is recoverable from him. His father, R.Dev. however, agrees to bear 50% of his deficiency. The balance of the deficiency is agreed to be apportioned according to law.Assuming that the realization of the assets and discharged of liabilities is carried out immediately show the Cash A/c, Realization Account and the partner’s Accounts.


A:In the books of M/s Kapil and Dev Cash Account (Bank Column)

Particular Rs. Particular Rs. Rs.To Balance b/d 75,000 By Realization A/c (paid of

sundry liabilities paid)5,75,000

To Realization A/c 12,46,600 Partner’s capital A/cs:(Sundry assets Realized) F. Kapil 2,42,600

S.Kapil 3,42,600R.Dev 1,61,400

13,21,600 13,21,600

Realization AccountsParticular Rs. Rs. Particular Rs. Rs.

To Land 50,000 By Current Liabilities 70,000To Building 2,50,000 By Loan from NBFC 5,00,000To Office equipments 1,25,000 By Cash A/c:To Computers 70,000 Land 1,00,00

0To Debtors 4,00,000 Building 3,00,00

0To Stocks 3,00,000 Office Eqp. 1,25,00

0To Other Current Assets 22,600 Computers 49,000To Cash A/c: Debtors 3,80,00

0Current Liabilities 70,000 Stock 2,70,00

0Loan from NBFC 5,05,00

05,75,000 Other current assets 22,600 12,46,600

To Partner’s Current A/cs:Profit on realization:F.Kapil 9,600S.Kapil 9,600R.Dev 2,400B.Dev 2,400 24,000

18,16,600 18,16,600

Partners’ Capital AccountsParticular F.Kapi

lRs.

S.Kapil

Rs.

R.DevRs.

B.Dec

Rs.

Particular

F.Kapil

Rs.

S.Kapil

Rs.

R.DevRs.

B.Dec

Rs.To partners’ Current A/c’s Transfer

- - - 85,000

By Balance b/d

2,00,000

2,00,000

1,00,000

-

To B.Dev A/c balance of Deficiency borne by in capital ratio other partners(2:2:1)SS

17,000 17,000

42,500

8,500 -

By Partner’s current A/c Transfer

59,600 1,59,600

1,12,400


To Cash A/c final settlement

2,42,600

3,42,600

1,61,400

- R.Dev A/c 50% of Deficiency

- - - 42,500

By F. Kapil

- - - 17,000

By S. Kapil

- - - 17,000

By R.Dev A/c

- - - 8,500

2,59,600

3,59,600

2,12,400

85,000

2,59,600

3,59,600

2,12,400

85,000

Partners’ Current AccountsParticula

rF.Kapi

lRs.

S.KapilRs.

R.DevRs.

B.DecRs.

Particular F.Kapil

Rs.

S.KapilRs.

R.DevRs.

B.DecRs.

Balance b/d

- - - 87,400

Balance b/d

50,000 1,50,000

1,10,000

-

Partners’ Capital

59,600 1,59,600

1,12,400

Realization

9,600 9,600 2,400 2,400

By Partners’ Capital

- - - 85,000

59,600 1,59,600

1,12,400

87,400

59,600 1,59,600

1,12,400

87,400

Q18: Dissolution of Firm (Garner Vs Murray): Neptune, Jupiter, Venus and Pluto had been carrying on business in partnership sharing profits and losses in the ratio of 3 : 2 : 1 : 1. They decide to dissolve the partnership on the basis of the following Balance Sheet as on 30th April, 2003:

Liabilities Rs. Rs. Assets Rs. Rs.Capital Account:

NeptuneJupiter

1,00,000 60,000 1,60,00

0

PremisesFurnitureStock

1,20,00040,000

1,00,000

General Reserve 56,000 Debtors 40,000Capital Reserve 14,000 Cash 8,000Sundry Creditors 20,000 Capital Overdrawn:Mortgage Loan 80,000 Venus 10,000

_______

Pluto 12,000 22,000

3,30,000

3,30,000

(i) The assets were realised as under:Rs.

Debtors 24,000Stock 60,000Furniture 16,000Premises 90,000

(ii) Expenses of dissolution amounted to Rs. 4,000.


(iii) Further Creditors of Rs. 12,000 had to be met.(iv) General Reserve unlike Capital Reserve was built up by appropriation of profits.You are required to draw up the Realisation Account, Partners’ Capital Accounts and the Cash Account assuming that Venus became insolvent and nothing was realised from his private estate. Apply the principles laid down in Garner vs Murray.

A: Realisation AccountRs. Rs. Rs.

To

Sundry assets A/c (transfer):

By Sundry creditors A/c 20,000

Premises 1,20,000 Mortgage Loan 80,000Furniture 40,000 By Cash A/c (assets sold):Stock 1,00,000 Premises 90,000Sundry Debtors 40,000 Furniture 16,000

To

Cash A/c (creditors paid) 32,000 Stock 60,000

To

Cash A/c (Loan paid) 80,000 Debtors 24,000 1,90,000

To

Cash A/c (expenses) 4,000 By Loss transferred to

Capital Accounts:Neptune 54,000Jupiter 36,000Venus 18,000

_______ Pluto 18,000 1,26,0004,16,000 4,16,000Cash Account

Rs. Rs.To

Balance b/d 8,000 By Realisation A/c (creditors) 32,000

To

Realisation A/c By Realisation A/c (expenses)

4,000

(assets realised) 1,90,000 By Mortgage loan 80,000To

Capital A/c By Neptune's Capital A/c 1,18,857

(realisation loss By Jupiter's Capital A/c 73,143made good):Neptune 54,00

0Jupiter 36,00

0Pluto 18,00

01,08,000

To

Pluto's Capital A/c 2,000 _______

3,08,000 3,08,000

Partners’ Capital AccountsParticular

sNeptune Jupiter Venu

sPluto Particulars Neptun

eJupiter Venu

sPluto

Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.

Balance b/d

10,000

12,000


60,000


Realisastion

54,000 36,000 18,000

18,000

GR 24,000 16,000 8,000 8,000

V's Capital 11,143 6,857 CR 6,000 4,000 2,000 2,000

Cash A/c 1,18,857 73,143 Cash A/c 54,000 36,000 18,000

N's Capital 11,143

J's Capital 6,857

_______ _______

_____

_____

Cash A/c 2,000

1,84,000 1,16,000

28,000

30,000

1,84,000

1,16,000

28,000

30,000

Q19: Dissolution of firm [All are insolvent]: A,B and C are equal partners, B/S Dec 31, 2002 Liabilities Rs. Assets Rs.Sundry Creditors 5,000 Cash in hand 50A’s Loan 1,000 Stock 800

Capital A/cs: Debtors 1,000 A 800 Plant & Mach., 2,000 C 500 Furniture & Fittings 800

Land & Builidings 2,000B’s Capital (overdrawn) 650

7,300 7,300

Due to lack of liquidity and weak financial position of the partners, the firm is dissolved. A and C are not able to contribute anything and a sum of Rs.200 received from B. All of them are declared insolvent. The assets are realised: Stock Rs.500; Plant and Machinery Rs.1,000; Furniture and Fittings Rs.200; Land & Buildings Rs.800; and Debtors Rs.550 only. Realisation expenses amounted to Rs.50. You are required to close the firm’s books.


Realisation Account Particulars Rs. Particulars Rs. Rs.To Stock A/c 800 By Cash A/c:To Debtors A/c 1,000 Stock 500To Plant & Mach. A/c 2,000 Plant & Mach. 1,000To Furniture & Fittings A/c 800 Furniture & Fittings 200To Land & Buildings A/c 2,000 Land & Buildings 800To Cash A/c(realization exp.,)

50 Debtors 550 3,050

By Partners’ Capital 3,6006,650 6,650

Cash AccountParticulars Rs. Particulars Rs.To Bal. b/d 50 By Realisation A/c (expenses) 50To Realisation A/c (assets realised) 3.050 By Creditors A/c (final payment) 3,250To Partners Capital A/cs: B 200

3,300 3,300

Sundry Creditors AccountTo Cash A/c (final payment) 3,25

0By bal. b/d 5,000

To Deficiency A/c 1,7505,000

5,000

Deficiency AccountTo Partners Capital A/cs:

2,350 By Sundry Creditors A/c 1,750

(B-Rs.1,650; C-Rs.700) By Partners Capital A/cs: A 6002,350 2,350

Partners’ Capital AccountsParticulars A B C Particulars A B CTo Bal. b/d ---- 650 ---- By bal. b/d 800 ---- 500To Realisation A/c (loss) 1,200 1,200 1,200 By Cash A/c (final div.) ---- 200 ----To Deficiency A/c 600 ---- ---- By A Loan A/c 1,000 ---- ----

By Deficiency A/c ---- 1,650 7001,800 1,850 1,200 1,800 1,850 1,200

Q20: Piecemeal Distribution for Dissolution of Firm (Capital Proportional Method):Liabilities Rs. Assets Rs.Creditors 2,00,000 Fixed Assets 45,00,000Bank Loan 5,00,000 Cash and Bank 2,00,000L’s Loan 10,00,000Capital L 15,00,000 M 10,00,000 S 5,00,000 Total 47,00,000 47,00,000


Partners share profits equally. A firm of Chartered Accountants is retained to realise the assets and distribute the cash after discharge of liabilities. Their fees which are to include all expenses is fixed at Rs. 1,00,000. No loss is expected on realisation since fixed assets include valuable land and building.

Realisations are:S.No. Amount in Rs.

1 5,00,0002 15,00,0003 15,00,0004 30,00,0005 30,00,000

The Chartered Accountant firm decided to pay off the partners in ‘Higher Relative Capital Method’. You are required to prepare a statement showing distribution of cash with necessary workings.(15 Marks) (Intermediate–Nov. 1995)A: Statement of Piecemeal Distribution (Under Higher Relative Capital method)

Particulars AmountCreditors Bank L’s loan Capital A/csavailable Loan L M S

Rs. Rs. Rs. Rs. Rs. Rs. Rs.Balance due 2,00,000 5,00,00010,00,00015,00,00010,00,0005,00,0001st Instalment (includingcash and bank balances)5,00,000Less: Liquidator’s Expenses

and fees

1 ,00 ,0004 ,00 ,000

Less: Payment to Creditorsand repayment of BankLoan in the ratio of 2:5 (4,00,000)(1,14,286)(2,85,714) – – ––Balance Due – 85,714 2,14,286 10,00,00015,00,00010,00,0005,00,0002nd Instalment 15,00,000

Less: Payment to Creditorsand repayment of bank

loan in full settlement

(3 , 00 , 000)12 , 00 ,000

(85 , 714 )–

(2 ,14 , 286)– – – – –

Less: Repayment of L’s Loan

(10 , 00 , 000)2 , 00 , 000 (10,00,000) – – – –

Less: Payment to Mr. L towardsrelative higher capital

(W.N. 1)

(2 , 00 , 000) (2 , 00 , 000)13 , 00 , 000

–10 , 00 , 000

—5 ,00 , 000

Balance Due3rd Instalment 15,00,000

Less: Payment to Mr. L towards higher relative

capital (W.N. 2)

(3 ,00 ,000)12 ,00 ,000

(3 ,00 ,000)10 ,00 ,000

Less: Payment to Mr. L &Mr. M towards excess

capital (W.N. 1&2)

(10 , 00 , 000)2 , 00 , 000

(5 ,00 ,000)5 ,00 ,000

(5 ,00 ,000)5 ,00 ,000

Less: Payment to all the


partners equally

(2 , 00 , 000) (66 , 667)4 ,33 ,333

(66 , 667)4 ,33 , 333

(66 , 666 )4 ,33 ,334

Balance due4th Instalment 30,00,000Less: Payment to all

the partners equally

(30 , 00 , 000)(10 , 00 , 000)(10 , 00 , 000)(10 , 00 , 000)

Realisation profitcredited to Partners 5,66,6675,66,667 5,66,6665th Instalment 30,00,000Less: payment to all partners equally(30,00,000) 10,00,00010,00,00010,00,000

Realisation profit 15,66,66715,66,66715,66,666credited to partners

Working Notes:(i) Scheme of payment of surplus amount of Rs. 2,00,000 out of second Instalment:

Capital A/csL M S

Rs. Rs. Rs.Balance (i) 15,00,000 10,00,000 5,00,000Profit sharing ratio (ii) 1 1 1Capital taking S’s Capital (iii) 5,00,000 5,00,000 5,00,000Excess Capital (iv) = (i) – (iii) 10,00,000 5,00,000Profit Sharing Ratio 1 1Excess capital takingM’s Excess Capital as base (v) 5,00,000 5,00,000Higher Relative Excess (iv) – (iv) 5,00,000

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

Q21: Dissolution of Firm (Piecemeal Distribution: Maximum Loss Method)A, B and C are partners sharing profits and losses in the ratio of 5:3:2. Their capitals were Rs. 9,600, Rs. 6,000 and Rs. 8,400 respectively.After paying creditors, the liabilities and assets of the firm were:

Rs. Rs.Liability for interest on Investments 1,000loans from : Furniture 2,000

Spouses of partners 2,000 Machinery 1,200Partners 1,000 Stock 4,000

The assets realised in full in the order in which they are listed above. B is insolvent.You are required to prepare a statement showing the distribution of cash as and when available,

applying maximum possible loss procedure. (10 marks) (Intermediate–Nov. 1999)A:

Statement of Distribution of CashRealisationInterest onInterest on Partners’ Capitals


loans fromloans frompartners’ partners A B C Totalspouses

Rs. Rs. Rs. Rs. Rs. Rs. Rs.Balances due 2,000 1,000 9,600 6,000 8,400 24,000

(i) Sale of investments 1,000

(1, 000 )1, 000

(1, 000 )–

(ii) Sale of furniture 2,000

(1, 000 )–

(1, 000 )–

(iii) Sale of machinery 1,200Maximum possible loss Rs. 22,800(total of capitals Rs. 24,000 lesscash available Rs. 1,200) allocatedto partners in the profit sharingratio i.e. 5 : 3 : 2 (11,400)(6,840)(4,560)(22,800)Amounts at credit (1,800) (840) 3,840 1,200Deficiency of A and B written offagainst C 1,800 840 (2,640) –Amount paid – – 1,200 1,200Balances in capital acounts 9,600 6,000 7,200 22,800

(iv) Sale of stock 4,000Maximum possible loss Rs. 18,800(Rs. 22,800 – Rs. 4,000) Allocatedto partners in the ratio 5 : 3 : 2 (9,400)(5,640) (3,760) (18,800)

Amounts at credit and cash paid 200 360 3,440 (4,000)Balances in capital accounts left unpaid—Loss 9,400 5,640 3,760 18,8000

Q22: Amalgamating sole trades and formation of firm: A and B carry on independent business in provisions and their position on 31.12.2002 are reflected in the Balance Sheet given below:

Liabilities A B Assets A B

Trade creditors 1,10,000 47,000 Stock-in-trade 1,70,000 98,000

Sundry Creditors for Exp. 750 2,000 Sundry Debtors 89,000 37,000

Bills payable 12,500 ---- Cash at bank 13,000 7,500

Capital Account 1,53,000 95,500 Cash in hand 987 234

Furniture and Fixtures 2,750 1,766

Investments 513 ----

2,76,250 1,44,500 2,76,250 1,44,500

Both of them want to form a partnership firm from 1.1.2003 on the following understanding:(a)The capital of the partnership firm would be Rs.3,00,000 which would be contributed by them in the ratio of 2:1.(b)The assets of the individual business would be evaluated by C at which values, the firm will take them over and the value would be adjusted against the contribution due by A and B. (c)C gave his valuation report as follows: Assets of A: Stock-in-trade to be written down by 15% and a portion of the sundry debtors amounting to Rs.9,000 estimated unrealisable not to be assumed by the firm; furniture and fixtures to be valued at Rs.2,000 and investments to be taken at market value of Rs.1,000. Assets of B: Stocks to be written up by 10% and sundry debtors to be admitted at 85% of their value; rest of the assets to be assumed at their book values. (d)The firm is not to assume any creditors other than the dues on account of purchases made. You are required to pass necessary journal entries in the books of A and B. Also prepare the opening Balance Sheet of the firm as on 1st Jan 2003

In the books of A


Realisation A/c Dr. 2,76,250 New Firm (Note 1) Dr. 1,18,987 To Stock-in-trade A/c 1,70,000 To Realisation A/c 1,18,987 To Sundry Debtors A/c 9,000 Realisation /ac. Dr. 750 To Cash at bank A/c 13,000 To Capital A/c 750 To Cash in hand A/c 987 Capital A/c Dr. 34,763 To Furniture & Fixture 2,750 To Realisation a/c 34,763To investments A/c 513 Capital in New Firm Dr 1,18,987Crs for Purchases Dr. 1,10,000 To New Firm A/c 1,18,987Creditors for Expenses Dr. 750 Capital A/c Dr. 1,18,987Bills Payable A/c Dr. 12,500 To Capital - New Firm 1,18,987 To Realisation A/c 1,23,250

In the books of B JournalRealisation A/c Dr. 1,44.500 To Stock-in-trade A/c 98,000 To Sundry Debtors A/c 37,000 To Cash at bank a/c 7,500 To Cash in hand A/c 234 To Furniture & Fixture A/c 1,766Creditors for purchase A/c Dr. 47,000Creditors for Expenses A/c Dr.

2,000

To Realisation A/c 49,000New Firm A/c (Note 1) Dr. 1,01,750 To Realisation A/c 1,01,750Realisation A/c Dr. 4,250 To Capital A/c 4,250Capital in New Firm A/c Dr. 1,01,750 To New Firm A/c 1,01,750Capital A/c Dr. 1,01,750 To Capital in New Firm A/c 1,01,750

Balance Sheet of New Firm as on 1st January, 2003Liabilities Rs. Assets Rs.Capital Accounts: Furniture & Fittings 3,766 A 2,00,000 Investments 1,000 B 1,00,000 Stock-in-trade 2,52,300Creditors for purchases

1,57,000 Sundry Debtors 1,11,450

Bills payable 12,500 Cash at bank (Rs.13,000+7500+81,013-1,750) 99,763Cash in hand (Rs.987+234) 1,221

4,69,500 4,69,500

Working Notes: Calculation of Purchase ConsiderationParticulars A BFurniture 2,000 1,766Investments 1,000 ---Stock-in-trade 1,44,500 1,07,800Sundry Debtors 80,000 31,450Cash at bank 13,000 7,500Cash in hand 987 234

2,41,487 1,48,750


Less:Sundry Creditors for purchases 1,10,000 47,000Bills payable (Assumed arising out of credit purchases)

12,500 ----

Net assets taken over by the new firm 1,18,987 1,01,750Capital as per agreement 2,00,000 1,00,000Less:Net assets taken over 1,18,987 1,01,750Cash to be introduced (+)/withdrawn (-) (+)81,013 (-)1,750

Q23: Amalgamation of Firms:Firm X & Co. consists of partners A and B sharing Profits and Losses in the ratio of 3 : 2. The firm Y & Co. consists of partners B and C sharing Profits and Losses in the ratio of 5 : 3.On 31st March, 2006 it was decided to amalgamate both the firms and form a new firm XY & Co., wherein A, B and C would be partners sharing Profits and Losses in the ratio of 4:5:1.

Balance Sheet as at 31.3.2006Liabilities X&Co., Y&Co. Assets X&Co. Y&Co.

Rs. Rs. Rs. Rs.Capital: Cash in hand/bank 40,000 30,000

A 1,50,000 --- Debtors 60,000 80,000B 1,00,000 75,000 Stock 50,000 20,000C --- 50,000 Vehicles --- 90,000

Reserve 50,000 40,000 Machinery 1,20,000 ---Creditors 1,20,000 55,000 Building 1,50,000 ---

4,20,000 2,20,000 4,20,000 2,20,000The following were the terms of amalgamation:(i) Goodwill of X & Co., was valued at Rs.75,000. Goodwill of Y & Co. was valued at Rs.40,000. Goodwill account not to be opened in the books of the new firm but adjusted through the Capital accounts of the partners.(ii) Building, Machinery and Vehicles are to be taken over at Rs.2,00,000, Rs.1,00,000 and Rs.74,000 respectively.(iii) Provision for doubtful debts at Rs.5,000 in respect of X & Co. and Rs.4,000 in respect of Y & Co. are to be provided.You are required to:(i) Show, how the Goodwill value is adjusted amongst the partners.(ii) Prepare the Balance Sheet of XY & Co. as at 31.3.2006 by keeping partners capital in their profit sharing ratio by taking capital of ‘B’ as the basis. The excess or deficiency to be kept in the respective Partners’ Current account. (16 Marks) (PE-II – May 2006)


A: (i) Adjustment for raising and writing off of goodwill

Raised in old profit sharing ratio Total Written off in new ratio Difference

X & Co. 3:2 Y & Co.5:3A.

45,000 --- 45,000 Cr.

46,000 Dr. 1,000 Dr.

B. 30,000 25,000 55,000 Cr.

57,500 Dr. 2,500 Dr.

C 15,000 15,000 Cr.

11,500 Dr. 3,500 Cr.

75,000 40,000 1,15,000 1,15,000 Nil

(ii) Balance Sheet of X Y & Co.(New firm) as on 31.3.2006Liabilities Rs. Assets Rs.Capital Accounts: Vehicle 74,000

A 1,72,000 Machinery 1,00,000B 2,15,000 Building 2,00,000C 43,000 Stock 70,000

Current Accounts: Debtors 1,31,000A 22,000 Cash & Bank 70,000C 18,000

Creditors 1,75,0006,45,000 6,45,000

Working Notes:1. Balance of Capital Accounts at the time of amalgamation of firms

2. Balance of Capital A/cs in the balance sheet of the new firm as on 31.3.2006

A - Rs. B - Rs. C - Rs.

Balance b/d: X & Co. 1,95,000

1,30,000 --

Y & Co. -- 87,500 57,5001,95,00

02,17,500 57,500

Adjustment for goodwill (1,000) (2,500) 3,5001,94,00

02,15,000 61,000

Total capital Rs. 430,000 (B’s capital i.e. Rs. 215,000 x 2) to be


X & Co.Profit and loss sharing ratio 3:2

Balance as per Balance SheetAdd: Reserves Revaluation profit (Building)Less: Revaluation loss (Machinery) Provision for doubtful debt.

A’s Capital - Rs..

B’s Capital - Rs.

1,50,000 1,00,00030,000 20,00030,000 20,000

(12,000) (8,000) (3,000) (2,000)

Y & Co. Profit and loss sharing ratio 5:3

Balance as per Balance sheet

1,95,000 1,30,000B’s Capital - Rs. C’s Capital - Rs.

75,000 50,000Add: ReservesLess: Revaluation (vehicle)

25,000 15,000(10,000) (6,000)

Provision for doubtful debts (2,500) (1,500)87,500 57,500

contributed in 4:5:1 ratio. 1,72,000

2,15,000 43,000

Transfer to Current Account 22,000 --- 18,000

Q24: Conversion of Partnership Firm into Company:‘X’ and ‘Y’ carrying on business in partnership sharing Profit and Losses equally, wished to dissolve the firm and sell the business to ‘X’ Limited Company on 31-3-2006, when the firm’s position was as follows:

Liabilities Rs. Assets Rs.X’s Capital 1,50,000 Land and Building 1,00,000Y’s Capital 1,00,000 Furniture 40,000Sundry Creditors 60,000 Stock 1,00,000

Debtors 66,000Cash 4,000

3,10,000 3,10,000The arrangement with X Limited Company was as follows:(i) Land and Building was purchased at 20% more than the book value.(ii) Furniture and stock were purchased at book values less 15%.(iii) The goodwill of the firm was valued at Rs.40,000.(iv)The firm’s debtors, cash and creditors were not to be taken over, but the company agreed to collect the book debts of the firm and discharge the creditors of the firm as an agent, for which services, the company was to be paid 5% on all collections from the firm’s debtors and 3% on cash paid to firm’s creditors.(v)The purchase price was to be discharged by the company in fully paid equity shares of Rs.10 each at a premium of Rs.2 per share.The company collected all the amounts from debtors. The creditors were paid off less by Rs.1,000 allowed by them as discount. The company paid the balance due to the vendors in cash. Prepare the Realisation account, the Capital accounts of the partners and the Cash account in the books of partnership firm. (16 Marks) (PE-II – Nov. 2006)

A: Realisation AccountTo Rs. By Rs.Land & Building 1,00,000 Sundry Creditors 60,000Furniture 40,000 X Ltd. Co. –

Purchase consideration 2,79,000Stock 1,00,000 X Ltd. Company – Drs 66,000

Debtors 66,000 Less: Comm 5% on 66,000 3,300 62,700X Ltd. Co. – S. Creditors 59,000X Ltd. Co: Comm 3% on 59,000 1,770A’s Capital A/c17,465B’s Capital A/c17,465 34,930

4,01,700 4,01,700

Capital AccountsA – Rs. B – Rs. A – Rs. B – Rs.

To Shares in X Ltd. Co.–(W.N.2) 1,63,980 1,15,020

By Balance b/d 1,50,000 1,00,000

To Cash – Final Payment3,485 2,445

By Realisation A/c - Profit 17,465 17,465

1,67,465 1,17,465 1,67,465 1,17,465


Cash AccountRs. Rs.

To Balance b/d 4,000 By A’s Capital A/c- Final payment 3,485

To X Ltd. Co. (Amount realized from Debtors less amount paid to creditors) –(W.N.3) 1,930

By B’s Capital A/c- Final Payment

2,445

5,930 5,930Working Notes:1 Calculation of Purchase consideration:

Rs.Land & Building 1,20,000Furniture 34,000Stock 85,000Goodwill 40,000

2,79,0002. The shares received from the company have been distributed between the two partners A & B in the ratio of their final claims i.e., 1,67,465: 1,17,465.

No. of shares received from the company =

2 ,79 , 00012

= 23 ,250

A gets

23 , 250 × 1 ,67 , 4652 ,84 ,930

= 13 ,665shares valued at 13,665 x 12 = Rs.1,63,980. B gets the

remaining 9,585 shares, valued at Rs.1,15,020 (9,585 12)3. Calculation of net amount received from X Ltd on account of amount realized from debtors less amount paid to creditors.

Rs.Amount realized from Debtors 66,000

Less: Commission for realization from debtors (5% on 66,000) 3,30062,700

Less: Amount paid to creditors 59,0003,700

Less: Commission for cash paid to creditors (3% on 59,000) 1,770Net amount received 1,930

Q25: Sale to a Company:S and T were carrying on business as equal partners. Their Balance Sheet as on 31 st March, 2007 stood as follows:

Liabilities Rs. Assets Rs.Capital accounts: Stock 2,70,000S 6,40,000 Debtors 3,65,000T 6,60,000 13,00,000 Furniture 75,000Creditors 3,27,500 Joint life policy 47,500Bank overdraft 1,50,000 Plant 1,72,500Bills payable 62,500 Building 9,10,000

18,40,000 18,40,000

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


The operations of the business was carried on till 30 th September, 2007. S and T both withdrew in equal amounts, half the amount of profits made during the current period of 6 months after 10% p.a. had been written off on building and plant and 5% p.a. written off on furniture. During the current period of 6 months, creditors were reduced by Rs.50,000, Bills payables by Rs.11,500 and bank overdraft by Rs.75,000. The Joint life policy was surrendered for Rs.47,500 on 30 th September, 2007. Stock was valued at Rs.3,17,000 and debtors at Rs.3,25,000 on 30th September, 2007. The other items remained the same as they were on 31st March, 2007. On 30th September, 2007 the firm sold its business to ST Ltd. The goodwill was estimated at Rs.5,40,000 and the remaining assets were valued on the basis of the balance sheet as on 30 th

September, 2007. The ST Ltd. paid the purchase consideration in equity shares of Rs.10 each. You are required to prepare a Realisation account and Capital accounts of the partners.

A: Realisation Account

Particulars Rs. Particulars Rs.To Sundry

assets:By Creditors 2,77,500

Stock 3,17,000 By Bills payables 51,000 Debtors 3,25,000 By Bank overdraft 75,000 Plant 1,63,875 By Shares in ST Ltd. (W.N.

3)18,80,000

Building 8,64,500 Furniture 73,125

To Profit: S 2,70,00

0 T 2,70,00

05,40,000

22,83,500 22,83,500

Partners’ Capital AccountsDate S T Date S T

2008 To 2008 By

April 1 Cash –Drawings wn2

20,000 20,000 April 1 Balance b/d 6,40,000

6,60,000

Sept. 30

Shares in ST Ltd. 9,30,000 9,50,000

Sept. 30

Profit (W.N.2) 40,000 40,000

Realisation A/c (Profit) 2,70,00

02,70,000

9,50,000 9,70,000

9,50,000

9,70,000


Working Notes: (1) Ascertainment of total capitalBalance Sheet as at 30th September, 2007

Liabilities Rs. Assets Rs.Sundry creditors 2,77,500 Building 9,10,000Bills payable 51,000 Less: Depreciation 45,500 8,64,500Bank overdraft 75,000 Plant 1,72,500Total capital (bal. fig.) 13,40,000 Less: Depreciation 8,625 1,63,875

Furniture 75,000Less: Depreciation 1,875 73,125Stock 3,17,000

Debtors 3,25,00017,43,500 17,43,500

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

Total capital (of S and T) on 30th September, 2007 - WN.1 13,40,000

Capital on 1st April, 2007

S 6,40,000

T 6,60,000 13,00,000

Net increase (after drawings) 40,000

Since drawings are half of profits therefore, actual profit earned is Rs.40,000 x 2 = Rs.80,000 (shared equally by partners S and T). Half of the profits, has been withdrawn by both the partners equally i.e. drawings Rs. 40,000 (Rs.80,000 x ½) withdrawn by S and T in 1:1 (i.e. Rs.20,000 each).(3) Purchase consideration: Rs.

Total assets (W.N.1) 17,43,500

Add: Goodwill 5,40,000

22,83,500

Less: Liabilities (2,77,500 + 51,000 + 75,000) 4,03,500

Purchase consideration 18,80,000

Note: The above solution is given on the basis that reduction in bank overdraft is after surrender of Joint life policy.


7. JOINT STOCK COMPANIES

Issue of Shares at par, discount & premium, Forfeiture, Reissue of SharesUnderwriting of SharesIssue and Redemption of Preference SharesIssue, Conversion and Redemption of Debentures

Q1: Issue of Shares – Over Subscription – Issues of Assets: A prospectus issued by a company invited applications for 2,00,000 equity shares of Rs.10 each, payable Rs.2 on application, Rs.2 on application, Rs.2 on allotment and the balance in two equal instalments at intervals of three months each after allotmet which was made on June 15,2000.

The Vendor was to receive 20,000 fully paid equity shares at par as part payment of the purchase consideration of Rs.16,00,000 made up as follows: Land and Building Rs.6,00,000, Plant Rs.3,50,000, Stock in Trade Rs.4,50,000 and the balance as Goodwill.

The offer was over-subscribed by 20,000 shares and the amount due on allotment was received in full. Rs.5,25,000 and Rs.5,20,000 were received on first and second calls respectively. Show the accounts concerned after opening the books, recording the above receipts on account of capital, and paying the balance of the purchase consideration to the vendor.Journal entries are not required.

Business Purchase AccountTo Vendor 16,00,00

0By Land & Buildings a/c 6,00,000

By Plant Account 3,50,000By Stock Account 4,50,000By Goodwill Account(bal. Figure)

2,00,000

16,00,000

16,00,000

Land & Buildings AccountTo Business purchase a/c

6,00,000=======

By Balance c/d 6,00,000=======

To Balance b/d 6,00,000

Plant AccountTo Business Purchase A/c

3,50,000=======

By Bal. c/d 3,50,000========

To Balance b/d 3,50,000

Stock AccountTo Business Purchase a/c. 4,50,000

========By Bal. c/d 4,50,000

========To Balance b/d 4,50,000

Goodwill AccountTo Business Purchase a/c

2,00,000=======

By Balance c/d 2,00,000========

To bal. b/d 2,00,000


VendorTo Equity Share Capital

a/c2,00,000 By Business purchase a/c 16,00,000

To Bank 14,00,00016,00,000 16,00,000

Equity Share Capital AccountTo bal. C/d 22,00,000 By Vendor 2,00,000

By Equity Share Applications and Allotment Account

8,00,000

By Equity Share First Call Account 6,00,000By Equity Share Second & Final Call Account 6,00,000

22,00,000 22,00,000By Bal. b/d 22,00,000

Equity Share Applications and Allotment AccountTo Equity Share Capital

A/c8,00,000 By Bank-Application

Money4,40,000

To Bank-Refund 40,000 By Bank-Allotment Money 4,00,0008,40,000 8,40,000

Equity Share First Call AccountTo Equity Share Capital Account 6,00,00

0By Bank 5,25,000

By Calls in Arrear a/c 75,0006,00,000

6,00,000

Equity Share Second and Final Call AccountTo Equity Share Capital Account 6,00,00

0By Bank 5,20,000

By Calls in Arrear a/c 80,0006,00,000

6,00,000

Calls in Arrear AccountTo Equity Share First Call Account 75,000 By Balance c/d 1,55,000To Equity Share Second & Final Call a/c

80,000

1,55,000 1,55,000To Balance b/d 1,55,000

Cash Book (Bank Columns)To Equity Shares Applications and Allotment Account(Application money on 2,20,000 equity shares @

Rs. By Equity Share Application & Allotment Account (Amount refunded on

40,000

Rs.2 per share). 4,40,000 20,000 equity shares)To Equity Share Applications and Allotment account

By Vendor 14,00,000

(Allotment money on2,00,000 equity shares @ Rs.2

4,00,000 By Balance c/d 4,45,000


per Share).To Equity Share First Call Account - (First call money received).

5,25,000

To Equity Share Second and Final Call account.(Final call money received)

5,20,000

18,85,000 18,85,000To bal. b/d 4,45,000

Q2: Underwriting of Shares: Kusum Ltd. has authorised capital of Rs.25,00,000 divided into 1,00,000 equity shares of Rs.25 each. The company issued for subscription 25,000 shares at a premium of Rs.10 each. The entire issue was underwritten as follows:A-15,000 shares (firm underwriting-2,500 shares), B-7,500 shares (firm underwriting-1,000 shares), and c-2,500 shares [firm underwriting-500 shares].Out of total issue, 22,500 shares including firm underwriting were subscribed.The following were the marked forms: A-8,000 shares B-5,000 shares C-2,000 sharesCalculate the liability of each underwriter.Solution: Liability of Underwriters (Number of shares]

A B C TotalGross Liability 15,000 7,500 2,500 25,000Less:Unmarked application in the ratio of gross liability i.e. 6:3:1 4,500 2,250 750 7,500Balance 10,500 5,250 1,750 17,500Less:Marked application 8,000 5,000 2,000 15,000Balance 2,500 250 -250 2,500Less:Credit for C’s oversubscription to A and B in the ratio of their gross liability i.e.2:1

-167 -83 +250 ----

Liability in respect of shares unscribed for 2,333 167 Nil 2,500Add: Firm Underwriting 2,500 1,000 500 4,000Total Liability 4,833 1,167 500 6,500

Working Notes: Total marked applications = 8,000+5,000+2,000 = 15,000Unmarked application = 22,500 – 15,000 = 7,500Alternative solution:In case the underwriting contract provides that shares underwriters firm will be treated as marked applications, the liability of the underwriters will be calculated as follows:- Liability of Underwriters (Number of shares)

A B C TotalGross Liability 15,000 7,500 2,500 25,000Less:Unmarked application in the ratio of gross liability i.e. 6:3:1 2,100 1,050 350 3,500Balance 12,900 6,450 2,150 21,500Less: Marked application 10,500 6,000 2,500 19,000Balance 2,400 450 -350 2,500Less:Credit for C’s oversubscription to A and B in the ratio of their gross liability i.e. 2:1

-233 -117 +350 ----

Liability in respect of shares unscribed for 2,167 333 Nil 2,500Add: Firm underwriting 2,500 1,000 500 4,000Total Liability 4,667 1,333 500 6,500

Working Notes: A B C


Marked applications from public 8,000 5,000 2,000Add: Firm underwriting 2,500 1,000 500Total application being treated as -------- -------- --------Marked 10,500 6,000 2,500Unmarked applications = 22,500 – 10,500 – 6,000 – 2,500 = 3,500

Q3: Underwriting of Shares [Journal Entries + Balance Sheet]:X Ltd. issued 10,000 14% Debentures of Rs.100 each at a discount of 6%. Eighty per cent of the issue was underwritten by M/s. A.B.Co. for a commission of 1 per cent on the nominal value of the debentures.Applications were received for 7,500 Debentures. Journalise the transactions, assuming all moneys due have been received. Also show the entries in the balance sheet of the company.Solution:(Note: In order to ascertain the underwriters liability, we will have to assume that the company itself is the underwriter for the remaining 20% debentures.As details of marked applications are not given, we shall distribute the total applications in the ratio of gross liabilities. M/s.A.B.Co. X Ltd. No. of Debentures No. of DebenturesGross Liability 8,000 2,000Less:Applications received Allocated in the ratio of 8:2 6,000 1,500 ------------ -------------Net Liability 2,000 500 Journal Entries

Bank Dr. 7,05,000To 14% Debenture Applications and Allotment a/c 7,05,00014% Debenture Applications and Allotment Account Dr.

7,05,000

Discount on Issue of Debentures Account 45,000To 14% Debentures a/c 7,50,000M/s. A.B.Co. Dr. 1,88,000Disc. On issue of Debentures a/c Dr. 12,000To 14% Debentures a/c 2,00,000Underwriting Commission a/c Dr. 8,000To M/s. A.B Co. 8,000Bank Dr. 1,80,000To M/s. A.B.Co 1,80,000

Balance Sheet as at ………Liabilities Rs. Assets Rs.Secured Loans Current Assets, Loans and

Advances:14% Debentures 9,50,000 (a)Current Assets

Cash at bank 8,85,000(B)Loans and Advances ---Miscellaneous Expenditure:Underwriting Commission 8,000Discount on Issue of Debentures 57,000

9,50,000 9,50,000 X Ltd. has the following balance sheet as on 31 March, 2000

Rs. Rs.Share Capital: Fixed Assets 22,00,000Issued, Subsd and fully paid up 10,000 E Shares of Rs. 100 10,00,00 Current 8,00,000


each 0 Assets5,000 Preference shares of Rs.100 each 5,00,000Capital Reserve 1,00,000Securities Premium Account 1,00,000General Reserve 2,00,000Profit and Loss account 1,00,000Current Liabilities 10,00,00

0

30,00,000

30,00,000

Q4: Redemption of Preference Shares out of Free Reserve and Fresh Issues: The preference shares are to be redeemed at 10 per cent premium. Fresh issue of equity shares is to be made to the extent it is required under the Companies Act for the purpose of this redemption. The shortfall in funds for the purpose of the redemption after utilising the proceeds of the fresh issue is to be met by taking a bank loan. Show journal entries.

Securities Premium Account Dr. 50,000To Premium on Redemption of Preference shares a/c 50,000General Reserve Dr. 2,00,000Profit and Loss account 1,00,000To Capital Redemption Reserve 3,00,000Bank Dr. 2,00,000To Equity share applications & allotment account 2,00,000Equity Share Applications & Allotment account Dr. 2,00,000To Equity Share Capital a/c 2,00,000Preference share capital a/c Dr. 5,00,000Premium on Redemption of preference shares a/c Dr.

50,000

To Sundry preference shareholders a/c 5,50,000Bank Dr. 3,50,000To Bank Loan a/c 3,50,000Sundry Preference shareholders a/c Dr. 5,50,000To Bank 5,50,000

Q5: Issue of Bonus Shares: The Balance Sheet A Ltd. as at 31.3.1995 is as follows:Liabilities Rs. Assets Rs.

Authorized Share Capital1,50,000 Equity Shares ofRs.10 each 15,00,000 Sundry Assets 17,00,000

------------Issued, Subscribed and Paid-up 80,000 Equity shares of Rs.7.50each called-up and paid-up reserve 6,00,000Capital Redemption reserve 1,50,000Plant Revaluation Reserve 20,000Share Premium Account 1,50,000Development Rebate Reserve 2,30,000Investment Allowance Reserve 2,50,000General Reserve 3,00,000

---------- -----------------


Total 17,00,000 17,00,000The company wanted to issue bonus shares to its shareholders at the rate of one share for every two share held. Necessary resolutions was passed; requisite legal requirements were complied with:

a. You are required to give effect to the proposal by passing journal entries in the books of A Ltd.Show the amended Balance Sheet.

A:-In the books of A Ltd. Journal Entries

Share final call A/c Dr. 2,00,000 To share capital 2,00,000(Being the final call of Rs.2.50 each on 80,000 equity shares to make them fully paid up share)General Reserve A/c Dr. 2,00,000 To Bonus to shareholders A/c 2,00,000(Being the transfer of Rs.2,00,000 from general reserve to make the partly paid up share to fully paid up)Bonus to Shareholders A/c Dr. 2,00,000 To Share final call A/c 2,00,000(Being the amount due on final call adjusted against General Reserve to Bonus to shareholders a/c)General Reserve A/c Dr. 1,00,000Share premium A/c Dr. 1,50,000Capital Redemption A/C Dr. 1,50,000 To Bonus to share holders A/c 4,00,000(Being the appropriation made as above in order to facilitate issue of fully paid up bonus shares at the rate of one shares for every two shares held)Bonus to shareholders A/c Dr. 4,00,000 To Equity share Capital A/c 4,00,000(Being the issuance of 40,000 fully paid up shares of Rs.10 each by way of bonus shares)

Note: i.Reserve other than capital redemption reserve, Plant revaluation reserve and share premium account can be used for making the partly paid up shares fully paid up.ii.Except Plant Revaluation Reserve, all other Reserves and share premium account can be used for making the bonus issue.


Q6: Redemption of Preference Shares with Final A/c: Provisional Balance Sheet of P Ltd. as at 31st

march, 201 was as under:Balance Sheet as at 31st March, 2001

Liabilities Rs. Rs. Assets Rs.Share Capital: Fixed assets(at cost less50,000 equity share of Rs.10 Depreciation) 7,00,000each, Rs.7 per share called up 3,50,000 Cash & Bank Balance 2,00,000Less: Calls in arrear on Other Current Assets 6,00,000Calls in career on 10,000Shares @ Rs.2 per share 20,000

-------------3,30,000

Add: Calls in advance on 40,000 shares @

Rs.3 per share 1,20,000------------ 4,50,000

20,000 10% Redeemable preference shares of Rs.10each fully paid up 2,00,000Reserves & Surplus:General Reserve 3,00,000Profit and Loss Account 2,70,000Current Liabilities 2,80,000

------------ ------------------ 15,00,000 15,00,000

Calls in arrear are outstanding for 6 months. Calls in advance were also received 6 months back. Interest @ 10% p.a. on calls in advance and 12% p.a. on calls in arrear are allowed/charged.The Board of Director have recommended that:

i. Dividend for the year 2000-01 be allowed @ 20% on equity shares.ii. Money on calls in advance be refunded and partly paid equity shares be converted as fully

paid up by declaring bonus divided to shareholders.iii. The preference shares, which are redeemable at a premium of 10% any time after 31st March,

2001 may be redeemed by issue of 10% Debentures of Rs.100 in cash.Show journal Entries to give effect to the above proposals including payment and receipt of cash and redraft the profit and Loss Account and Balance Sheet of P Ltd.

A:Journal Entries P Ltd.

Particulars Dr. Rs. Cr. Rs.Interest on Cash in Arrear A/c Dr. 1,200 To profit and Loss Account 1,200(Being interest @ 12% p.a. on Rs.20,000 for 6 months credited to P and L A/c.)Bank A/c Dr. 21,200 To Calls in Arrear A/c 20,000 To Interest on Calles in Arrear A/c 1,200(Being interest on calls in arrear received)Profit and Loss a/c Dr. 6,000 To interest on Calls in Advance A/c 6,000(Being interest @ 10% on Rs.1.2 lacs for 6 m allowed on calls in adv)Profit and Loss A/c Dr. 90,000 To Preference Dividend 20,000 To Equity Dividend 70,000


(Being dividend @ 10% on Rs.1,20,000 for 6 months allowed on calls in advance)Profit and Loss A/c Dr. 1,50,000 To Bonus to Equity shareholders A/c 1,50,000(Being bonus dividend declared)Share Final Call A/c Dr. 1,50,000 To Equity share capital A/c 1,50,000(Being final call made @ Rs.3 on 50,000 shares)

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

To Share Final Call A/c 1,50,000

(Being adjustment of bonus dividend against final call)

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

Interest on Calls in Advance A/c Dr. 6,000

To Bank A/c 1,26,000

(Being refund of calls in advance along with interest)

Bank A/c Dr. 2,20,000

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

Profit and Loss A/c Dr. 20,000

To Premium on Redemption of Preference share A/c 20,000

(Being premium payable on redemption)

Profit and Loss A/c Dr. 5,200

General Reserve A/c Dr. 1,94,800

To Capital Redemption Reserve A/c 2,00,000

(Being transfer to capital redemption reserve)_

Preference Share Capital A/c Dr. 2,00,000

Premium on Redemption of preference share A/c Dr. 20,000

To Preference Shareholders A/c 2,20,000

Preference shareholders A/c Dr. 2,20,000

To Bank A/c 2,20,000

(Being Amount paid to preference of preference shares)


In the Books of P Ltd.Profit and Loss Account(for the year ended 31st March, 2001)Particulars Rs. Particulars Rs.

To Interest on Calls in Advance 6,000 By Balance c/d 2,70,000To Balance c/d 2,65,200 By Interest on calls in arrears 1,200

2,71,200 2,71,200To premium on redemption 20,000 By Balance c/d 2,65,200To preference Dividend 20,000 To Equity Dividend 70,000To Bonus Dividend 1,50,000To Capital Redemption Reserve 5,200

2,65,200 2,65,200

In the Books of P Ltd.Balance Sheet (as on 31st March, 2001)Particulars Rs. Particulars Rs.

Share Capital : Fixed Assets: (Cost of depreciation)

7,00,000

50,000 equity shares of Rs.10 each fully paid up (of the above equity shares Rs.3 per share has not been received in cash but has been capitalized by issuing bonus dividend)

5,00,000 Cash and Bank balance (Note.1) 95,200

Reserves and Surplus Other current assets 6,00,000Capital redemption Reserve 2,00,000General Reserve 3,00,000Less: Utilized for redemption of preference shares

1,94,800 1,05,200

Profit and Loss Account 10% Debentures 2,20,000Current liabilities 2,80,000Proposed dividend 90,000

13,95,200

13,95,200

Working Notes: (1)Computation of cash and Bank Balance as on 31st March, 2001:-

Rs.Cash and Bank balance (Given) 2,00,000

Add: Recovery of calls in arrears and interest thereon 21,200Proceeds from issue of 10% Debentures 2,20,000

--------- 4,41,200

Less: Payment of calls in advance and interest thereon 1,26,000Redemption of preference shares 2,20,000

95,200

Note: In case of non-availability of information, it has been assumed that the calls in arrear amount has been received. It has been assumed that 20% dividend on equity shares has been proposed before the equity share are made fully paid by way of bonus dividend.


Q7: Redemption of Preference Shares and Issue of Bonus Shares:Trinity Ltd.Balance Sheet as at 31st March, 1995

Liabilities Rs. Assets Rs.Share Capital Fixed AssetsAuthorised Gross Block 3,00,00010,000 10% Redeemable Preference Less : Depreciation 1,00,000Shares of Rs. 10 each 1,00,000 2,00,000

90,000 Equity Shares of Rs. 10 each9,00,000Investments 1,00,00010,00,000 Current Assets and Loans

and AdvancesIssued, Subscribed and Paid-up Capital10,000 10% Redeemable Preference Inventory 25,000Shares of Rs. 10 each 1,00,000 Debtors 25,00010,000 Equity Shares of Rs. 10 each 1,00,000 Cash and Bank Balances 50,000

(A) 2,00,000 Misc. Expenditure to the extent Reserves and Surplus not written of 20,000General Reserve 1,20,000Securities Premium 70,000Profit and Loss A/c 18,500

(B) 2,08,500Current Liabilities and Provis(C) 11,500Total (A + B + C) 4,20,000 Total 4,20,000

For the year ended 31.3.1996, the company made a net profit of Rs. 15,000 after providing Rs. 20,000 depreciation and writing off the miscellaneous expenditure of Rs. 20,000.The following additional information is available with regard to company’s operation :1. The preference dividend for the year ended 31.3.1996 was paid before 31.3.1996.2. Except cash and bank balances other current assets and current liabilities as on 31.3.1996, was the

same as on 31.3.1995.3. The company redeemed the preference shares at a premium of 10%.4. The company issued bonus shares in the ratio of one share for every equity share held as on

31.3.1996.5. To meet the cash requirements of redemption, the company sold a portion of the investments, so as to

leave a minimum balance of Rs. 30,000 after such redemption.6. Investments were sold at 90% of cost on 31.3.1996.

You are required to(a) Prepare necessary journal entries to record redemption and issue of bonus shares.(b) Prepare the cash and bank account.(c) Prepare the Balance Sheet as at 31st March, 1996 incorporating the above transactions.

(20 marks) (Intermediate–Nov. 1996)A:

Journal Entries in the Books of Trinity Ltd.Dr. Cr.

Securities Premium A/c Dr. 10,000To Premium on Redemption of Preference shares 10,000

(Being amount of premium payable on redemption ofpreference shares)

10% Redeemable Preference Capital Dr. 10,00,000Premium on redemption of Preference Shares Dr. 10,000

To Preference Shareholders 1,10,000(Being the amount payable to p. shareholders on redemption)General Reserve A/c Dr. 1,00,000

To Capital Redemption Reserve 1,00,000


(Being transfer to the latter account on redemption of shares)

Bank A/c Dr. 45,000Profit and Loss A/c Dr. 5,000

To Investments 50,000(Being amount realised on sale of Investments and loss thereon adjusted)Preference shareholders A/c Dr. 1,10,000

To Bank 1,10,000(Being payment made to preference shareholders)Capital Redemption Reserve A/c Dr. 1,00,000

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

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

(b) Cash and Bank A/cDr. Cr.

Rs. Rs.To Balance b/d 50,000 By Preference Dividend 10,000To Cash from operations: By Preference shareholders 1,10,000

Profit 15,000 By Balance c/d 30,000Add : Depreciation 20,000Add : Miscellaneous

Expenditurewritten off 20,000 55,000

To Investments 45,0001,50,000 1,50,000

(c)Balance Sheet of Trinity Limited as at 31st March, 1996 (after redemption)

Liabilities Rs. Assets Rs.Share Capital Fixed AssetsAuthorised Capital 10,00,000 Gross Block 3,00,000Issued, Subscribed and Paid-up Less : DepreciationCapital upto 31.3.951,00,00020,000 Equity Shareof Rs. 10 each fully paid 2,00,000 For the year 20,0001,20,000 1,80,000(10,000 shares have beenallotted as Bonus Shares Investmentsby capitalising capital (Market Value Rs. 45,000) 50,000Redemption Reserve) Current Assets, Loans and AdvancesReserves and SurplusGeneral Reserve 20,000 Inventory 25,000Securities Premium 60,000 Debtors 25,000Profit and Loss A/c 18,500 98,500 Cash and Bank Balance 30,000 80,000Current Liabilities and ProvisionsSundry Creditors 11,500

3,10,000 3,10,000Working Notes:(i) Profit and Loss Account for the year ending 31st March, 1996 Rs.

Balance as on 1.4.1995 18,500Add : Profit for the year 15,00033,500Less : Preference Dividend 10,000


Loss on sale of investments 5,000 15,000Balance as on 31.3.1996 18,500

(ii) General Reserve 1,20,000Less : Transfer to Capital Redemption Reserve 1,00,000Balance as on 31.3.1996 20,000

(iii) Securities Premium 70,000Less : Premium on Redemption of Preference shares 10,000Balance as on 31.3.1996 60,000

(iv) Capital Redemption Reserve 1,00,000Less : Transfer for Bonus Shares 1,00,000Balance as on 31.3.1996 NIL

(v) Sale of Investments:Cost of Investments 50,000Less :Cash Received 45,000Loss on Sale of Investments 5,000Total Investments: 1,00,000Less : Cost of Investments sold 50,000Cost of Investments on hand 50,000Market value (90% of Rs. 50,000) 45,000

Q8: Issue of Debentures:Pass journal entries in 1 in the case of the issue of debentures by ABC Co. Ltd:

Issued Rs.1,00,000 11% debentures at95% redeemable at the end of 10 years (i) at 102 percent and (ii) at 98% .A:

ABC Co. Ltd. Journal entriesDate Particulars Dr.

Amount RsCr.

Amount-Rs.Bank A/c Dr. 95,000Discount on issue of debenture a/c Dr. 5,000Loss on issue of debentures A/c Dr. 2,000 To 11% Debenture A/C 1,00,000 To Premium on redemption of deb 2,000(Being issue of Rs.1,00,000 11% debentures at a discount of 5% but redeemable at a premium of 2%)Bank A/c Dr. 95,000Discount on issue of debentures A/c Dr. 5,000 To 11% Debentures A/c 1,00,000(Being issue of Rs.1,00,000 11% debentures at a discount of 5% and redeemable at discount of 2%)

Q9: Issue and Redemption of Debentures [Sinking Fund Method]: X Ltd. issued 2000 12% Debentures of Rs.100 each at par on April, 1996. These debentures are redeemable at the end of the fifth year at 5% premium. It was resolved that Sinking Fund should be formed and invested in 10% Development Bonds of Rs.100 each. Interest of Bonds is payable on 31st March every year. Reference to Sinking Fund Table shows that Re.0.1638 invested at the end of every year at 10% compound interest will produce Re.1 at the end of the fifth year.10% Development Bonds of the required amount were purchased on different dates at the following prices:On March 31, 1999 Rs.94


On March 31,2000 Rs.96On March 31,2001 Rs.98You are required to show Debenture Redemption Fund, Debenture Redemption Fund Investments account ad interest on Debenture Redemption Find Investments Accounts for the first three years in the books of X Ltd. Accounting year of the company ends on 31st March.

To bal. c/d

34,398 By Profit and Loss(Appropriation) a/c 34,398

To bal. c/d

72,456 By bal. b/d 34,398

By int. on Deb. Redemption Fund Investments a/c 3,660By Profit & Loss (Appropriation) a/c 34,398

72,456 72,456To bal. c/d

1,14,474 By bal. b/d 72,456

By Int. on Debenture Redemption Fund Investments account

7,620

By Profit & Loss (Appropriation) Account 34,3981,14,474 1,14,474

By bal. c/d 1,14,474

Debenture Redemption Fund Investment AccountTo Bank-366 Bonds 34,404 By bal. c/d 34,404To bal. b/d 34,404 By bal. c/d 72,420To Bank-396 bonds 38,016

72,420 72,420To bal. b/d 72,420 By bal. c/d 1,14,462To Bank-429 Bonds 42,042

1,14,462 1,14,462To bal. b/d 1,14,462To Deb. Redemption Fund – Transfer

3,660=====

By Bank-10% of Rs.36,600

3,660=====

To Deb. Redemption Fund – Transfer

7,620=====

By Bank – 10% of Rs.76,200

7,620=====

Working Notes:Annual amount to be appropriated = Rs.2,10,000 x 0.1638 = Rs.34,398Bonds purchased on 31.3.1999 = 34,398/94 = 365.9 i.e 366 bondscost of bonds purchased = Rs.94 x 366 = Rs.34,404Interest received during the year ended 31.3.2000 = 10% of Rs.36,600 = Rs.3,660Amount available for investment on 31.3.2000 =Rs.34,398 + Rs.3,660 – Rs. (34,404 – 34,398) =Rs.34,3,660 – Rs.6 = Rs.38,052Bonds purchased on 31.3.2000 = 38,052 / 96 =396.3 i.e. 396 bondsCost of bonds purchased = Rs.96 x 396 = Rs.38,016Interest received during the year ended 31.3.2001 =10% of Rs. (36,600 + 39,600) =10% of Rs. 36,000 = Rs.7,620.Amount available for investment on 31.3.2001 =Rs.34,398 + Rs.7,620 + Rs. (38,052 – 38,016) =Rs.34,398 + Rs.7,620 + Rs.36 =Rs.42,054Bonds purchased on 31.3.2001 = 42,054 / 98 = 429.1 i.e 429 bondsCost of bonds purchased = Rs.98 x 429 = Rs.42,042.

Q10: Issue and Redemption of Debentures [cum-int and ex-int]: S Ltd. made an issue of 1,000 14% Debentures of Rs.500 each on 1st April, 1997 at the issue price of Rs.480. The terms of issue provided that


beginning with 1999-2000 Rs.20,000 Debentures should be redeemed either by purchase in the market or by drawings by lot at par. The expenses of issue amounted to Rs.4,000 which were written off in 1997-98. In 1998-99 and 1999-2000, Rs. 5,000 were written off the Discount on Issue of Debentures.In 1999-2000 the company purchased Rs.6,000 Debentures @ Rs.470 on 31st December cum-interest and Rs.10,000 Debentures @ Rs.475 ex-interest on 28th February, the expenses being Rs.400. On 31st March, the debentures necessarily to be redeemed were paid off at par by drawings by lot. Assuming the interest is payable on 30th September and 31st March, make Journal entries to record the above transactions including interest on debentures.

Bank Dr. 4,80,000To 14% Debenture Applications & allotment a/c

4,80,000

14% Debenture applications & allotment a/c Dr. 4,80,000Discount on Issue of Debentures account Dr. 20,000To 14% Debentures account 5,00,000Expenses on Issue of Debentures a/c Dr. 4,000To Bank 4,000Interest onDebentures a/c Dr. 35,000To Bank 35,000Interest on Debentures a/c Dr. 35,000To Bank 35,000Profit and Loss Account Dr. 1,99,000To exp. On issue of Debentures a/c 4,000To int. on Debenture a/c 70,000To Debenture Redemption Reserve 1,25,000Interest on Debentures a/c Dr. 35,000To Bank 35,000Interest on Debentures a/c Dr. 35,000To Bank 35,000Profit and Loss account Dr. 2,00,000To Discount on Issue of Debentures a/c 5,000To interest on Debentures a/c 70,000To Debenture Redemption Reserve 1,25,000Interest on Debentures a/c Dr. 35,000To Bank 35,000Own Debentures a/c Dr. 5,430Interest on Debentures a/c Dr. 210To Bank 5,640Own Debentures a/c Dr. 9,900Interest on Debentures a/c Dr. 583To Bank 10,48314%Debentures account Dr. 16,000To Own Debentures a/c 15,330To Capital Reserve a/c 67014% Debentures a/c Dr. 4,000To Bank 4,000Int. on Debentures a/c Dr. 34,207To Bank 33,880To Int. on Own Debentures a/c 327Profit and Loss account Dr. 75,000To Interest on Debentures a/c 70,000To Discount on Issue of Debentures account 5,000Interest on Own Debentures account Dr. 327


To Profit and Loss Account 327

Working Notes:

No. of Debentures purchased on 31st December, 1999 = 6,000/500 = 12Cum-interest price of 12 debentures= Rs.470 X 12 = Rs.5,640Interest paid for 3 months on Rs.6,000 @ 14% p.a = Rs.210Ex-interest price of 12 debentures = Rs.5,640 – Rs.210 = Rs.5,430Ex-interest price of 20 debentures purchased on 28th February, 2000 = Rs.475 X 20=Rs.9,500. Expenses = Rs.400Total ex-interest cost = Rs.9,500 + Rs.400 = Rs.9,900Interest paid for 5 months on Rs.10,000 @ 14% p.a = Rs.583 (to the nearest rupee).

Q11: Conversion of Debenture into Shares:

Libra Limited recently made a public issue in respect of which the following information is available:

(a) No. of partly convertible debentures issued 2,00,000; face value and issue price Rs.100 per debenture.

(b) Convertible portion per debenture 60%, date of conversion on expiry of 6 months from the date of closing of issue.

(c) Date of closure of subscription lists 1.5.1994, date of allotment 1.6.1994, rate of interest on debenture 15% payable from the date of allotment, value of equity share for the purpose of conversion Rs. 60 (Face Value Rs. 10).

(d) Underwriting Commission 2%.

(e) No. of debentures applied for 1,50,000.

(f) Interest payable on debentures half-yearly on 30th September and 31st March.

Write relevant journal entries for all transactions arising out of the above during the year ended 31st March, 1995 (including cash and bank entries).


A:In the books of Libra Ltd. Journal Entries

Date Particulars Amount Dr. Amount Cr.Rs. Rs.

1.5.94 Bank A/c Dr. 1,50,00,000To Debenture Application A/c 1,50,00,000

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

To 15% Debentures A/c 2,00,00,000

Underwriting Commission Dr. 4,00,000To Underwriters A/c 4,00,000

Bank A/c Dr. 46,00,000To Underwriters A/c 46,00,000

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

30.10.94 15% Debentures A/c Dr. 1,20,00,000To Equity Share Capital A/c 20,00,000To Securities Premium A/c 1,00,00,0000

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

Working Note :Calculation of Debenture Interest for the half year ended 31st March, 1995

On Rs. 80,00,000 for 6 months @ 15% = Rs. 6,00,000On Rs. 1,20,00,000 for 1 months @ 15% = Rs. 1,50,000

Rs. 7,50,000

Q12: Debenture Redemption [Ex-int, Cum-int and Own Debenture]:On 1st April, 2007, in MK Ltd’s ledger 9% debentures appeared with a opening balance of Rs. 50,00,000 divided into 50,000 fully paid debentures of Rs. 100 each issued at par.Interest on debentures was paid half-yearly on 30 th of September and 31st March every year.On 31.5.2007, the company purchased 8,000 debentures of its own @ Rs. 98 (ex-interest) per debenture.On 31.12.2007 it cancelled 5,000 debentures out of 8,000 debentures acquired on 31.5.2007.On 31.1.2008 it resold 2,000 of its own debentures in the market @ Rs. 101 (ex-interest) per debenture.You are required to prepare:(i) Own debentures account;(ii)Interest on debentures account; and (iii) Interest on own debentures account.


A: MK Ltd.’s Ledger (i) Own Debentures Account

Rs. Rs.31.5.07 To Bank 7,84,000 31.12.07 B

y9% Debentures 5,00,000

31.12.07

To Capital Reserve (Profit on cancellation)

10,000 31.1.08 By

Bank- Resale of 2,000 debentures

2,02,000

31.1.08 To Profit and Loss A/c 6,000 31.3.08 By

Balance c/d 98,000

(Profit on resale) 8,00,000 8,00,000

(ii) Interest on Debentures AccountRs. Rs.

31.5.07 To Bank (Interest for 2 months on 8,000 debentures)

12,000 31.3.08 By

Profit and Loss A/c

4,38,750

30.9.07 To Interest on own debentures (Interest for 4 months on 8,000 debentures) 24,000

30.9.07 To Bank (Interest for 6 months on 42,000 debentures) 1,89,000

31.12.07

To Interest on own debentures (Interest for 3 months on 5,000 debentures) 11,250

31.3.08 To Interest on own debentures (Interest for 6 months on 1,000 debentures)

4,50031.3.08 To Bank (Interest for 6 months on

44,000 debentures)1,98,000 4,38,750 4,38,750

(iii) Interest on Own Debentures AccountRs. Rs.

31.3.08

To Profit and Loss A/c

45,750 30.9.07 By Interest on Debentures A/c 24,000

31.12.07 By Interest on Debentures A/c 11,25031.01.08 By Bank (interest for 4 months on

2,000 debentures)6,000

31.03.08 By Interest on Debentures

4,50045,750 45,750

Working Note:31.5.07 Acquired 8,000 Debentures @ 98 per debenture

(ex-interest)Rs.

Purchase price of debenture 8,000 × Rs. 98 = 7,84,000

Interest for 2 months Rs. 8,00,000 × 9% × 2

12= 12,000

30.9.07 Interest on own debentures[Rs. 8,00,000 × 9% × ½ ] less Rs.12,000 = 24,000

Interest on other debenturesRs. 42,00,000 × 9% × ½ = 1,89,000


31.12.07 Cancellation of 5,000 own debenturesFace value Rs.100 less acquired at Rs.98 = 2 × 5000

= 10,000

31.1.08 Resale of 2,000 Debentures sold for 101 (ex-interest) acquired for Rs. 98 (ex-interest)

2,000 × Rs.3 per Debenture = 6,00031.12.07 Interest on cancelled 5,000 debentures

5,000 × Rs.100 × 9% × 1

4= 11,250

31.3.08 Interest on 1,000 own debenturesRs. 1,00,000 × 9% × ½ = 4,500

Q13: Redemption of Debenture [ex-int and cum-int]: Progressive Ltd. issued Rs. 10,00,000, 6% Debenture Stock at par on 21.1.1984, Interest was payable on 30th June and 31st December, in each year.

Under the terms of the Debentures Trust the owned stock is redeemable at par. The trust deed obliges the Company to pay to the trustees on 31st December, 1995 and annually thereafter the sum of Rs. 1,00,000 to be utilised for the redemption and cancellation of an equivalent amount of stock, which is to be selected by drawing lots.

Alternatively, the Company is empowered as from 1st January, 1995 to purchase its own debentures on the open market. These Debentures must be surrendered to the Trustees for cancellation and any adjustments for accrued interest recorded in the books of account. If in any year the nominal amount of the stock surrendered under this alternative does not amount to Rs. 1,00,000 then the shortfall is to be paid by the Company to the Trustees in cash on 31st December.

The following purchases of stock were made by the Company:Nominal value of Purchase price perstock purchased Rs. 100 of stock

Rs. Rs.(1) 30th September, 1995 1,20,000 98(2) 31st May, 1996 75,000 95 (Ex-interest)(3) 31st July, 1997 1,15,000 92

The Company fulfilled all its obligations under the trust deed.Prepare the following Ledger Accounts :(a) Debenture Stock A/c(b) Debenture Redemption A/c(c) Debenture Interest A/c

Note : Ignore costs and taxation


A:In the Books of Progressive Ltd.Debenture Stock Account

1995 Rs. 1995 Rs.Sept. 30 To Debenture

Redemption A/c 1,20,000 Jan. 1 By Balance b/d 10,00,000Dec. 31 To Balance c/d 8,80,000

10,00,000 10,00,000

1996 Rs. 1996 Rs.May 31 To Debenture Jan. 1 By Balance b/d 8,80,000

Redemption A/c 75,000Dec.31 To Debenture

Redemption A/c 25,000To Balance c/d 7,80,000

8,80,000 8,80,000

1997 Rs. 1997 Rs.July 31 To Debenture Jan. 1 By Balance b/d 7,80,000

Redemption A/c 1,15,000Dec.31 To Balance c/d 6,65,000

7,80,000 7,80,000Debenture Redemption Account

1995 Rs. 1995 Rs.Sept. 30 To Bank A/c 1,15,800 Sept.30 By Debenture Stock A/c 1,20,000

(Rs. 1,20,000×0.98– Rs. 1,800)

To Capital Reserve A/c 4,2001,20,000 1,20,000

1996 Rs. 1996 Rs.May 30 To Bank A/c 71,250 May 31 By Debenture Stock A/c 75,000

(Rs. 75,000 × 0.95) Dec. 31 By Debenture Stock A/c 25,000To Capital Reserve A/c 3,750

(Profit on cancellation)Dec.31 To Bank A/c 25,000

(Shortfall=Rs.1,00,000– Rs. 75,000)

1,00,000 1,00,000

1997 Rs. 1997 Rs.July 31 To Bank A/c 1,05,225 July 31 By Debenture Stock A/c 1,15,000

(Rs. 1,15,000 ×.92– Rs. 575)

To Capital Reserve A/c 9,775(Profit on cancellation)

1,15,000 1,15,000


Debenture Interest Account1995 Rs. 1995 Rs.June 30 To Bank A/c 30,000 Dec. 31 By Profit and Loss A/c 58,200Sept. 30 To Bank A/c 1,800Dec. 31 To Bank A/c 26,400

58,200 58,200

1996 Rs. 1996 Rs.May 31 To Bank A/c 1,875 Dec. 31 By Profit and Loss A/c 50,175June 31 To Bank A/c 24,150Dec. 31 To Bank A/c 24,150

50,175 50,175

1997 Rs. 1997 Rs.June 30 To Bank A/c 23,400 Dec. 31 By Profit and Loss A/c 43,925July 31 To Bank A/c 575Dec. 31 To Bank A/c 19,950

43,925 43,925

Working Notes :Interest paid on Debentures @6% per annum:Date Amount of Period Interest

DebenturesRs. Rs.

1995June 30 10,00,000 6 months 30,000Sept. 30 1,20,000 3 months 1,800Dec. 31 8,80,000 6 months 26,4001996May 31 75,000 5 months 1,875June 30 8,05,000 6 months 24,150Dec. 31 8,05,000 6 months 24,1501997June 30 7,80,000 6 months 23,400July 31 1,15,000 1 month 575Dec. 31 6,65,000 6 months 19,950

Notes : (1) It has been assumed that debentures are purchased for immediate cancellation.

(2) The purchases of 30th September, 1995 and 31st July, 1997 have been taken on cum-interest basis


8 PREPARATION OF COMPANY FINAL ACCOUNTS

Final AccountsCalculation of Managerial RemunerationProvision for Taxation

Q1: Final Accounts:The following is the Trail Balance of Subhash Limited as on 31.3.97:

(Figures in Rs.’000)Debit Rs. Credit Rs.Land at Cost 110 Equity Capital (Shares ofPlant & Machinery at cost 385 Rs.10 each) 150Debtors 48 10% Debentures 100Stock(31.3.97) 43 General Reserve 65Bank 10 Profit and Loss A/c 36Adjusted Purchases 160 Share premium 20Factory expenses 30 Sales 350Admission Expenses 15 Creditors 26Selling Expenses 15 Provision for Depreciation 86Debentures Interest 10 Suspense Account 2Interim Dividend paid 9

835 835

Additional information:

a. On 31.3.97, the company issued bonus shares to the shareholders on 1:3 basis. No entry relating to this has yet been made.b. The authorized share capital of the company is 25,000 shares of Rs.10 each.c. The Company on the advice of independent valuer wish to revalue the land at Rs.1,80,000.d. Proposed final dividend 10%.e. Suspense account of Rs.2,000 represents cash received for the sale some of the machinery on 1.4.96. The cost of the machinery was Rs.5,000 and the accumulated depreciation thereon being Rs.4,000.f. Depreciation is to be provided on plant and machinery at 10% on cost.You are required to prepare subhash Limited’s profit and loss account for the year ended 31.3.97 and a balance sheet on that date in vertical from as per the provision of Schedule VI of the Companies Act, 1956. You answer to include detailed schedules for Share Capital, Reserve & Surplus and Fixed assets. Ignore previous year’s figures & Taxation.

A:Subash Limited Balance Sheet as at 31.3.97

1. Sources of funds: Rs. in ThousandsParticulars Schedule No. Rs. Rs.

(1) Shareholders Funds(a) Capital 1 20

0(b) Reserve and surplus 2 20

0400

(2) Loan funds 10% debentures 100Total 500

2. Application of funds:Particulars Schedule No. Rs. Rs. Rs.


(1) Fixed assets 3 Land 180 Gross Block (385 – 5)

380

Less: Depreciation (86 + 38 – 4) 120

260 400

(2) Current Assets:Stock 43Debtors 48Cash 10 101Less: Current liabilitiesCreditors 26Proposed dividend 15 41 60Total 500

Subash limited - Profit and loss account for the year ended 31.3.97 (Rs.’000)

Particulars (Rs.) (Rs.)Sales 350Other income (Profit on sale of machine)

1

Total income 351Less: ExpensesPurchases 160Factory expenses 30Administration expenses 15Selling expenses 15Depreciation 38Interest on debentures 10 268Net profit before dividend 83Dividend:Interim 9Final 15 24Balance transfer to the balance sheet 59

Working Notes: -Bonus issue in the proportion of 1:3Number of share = 15,000 x 1/3 = 5,000

Debit Credit(1) General Reserve A/c Dr. 50,00

0 To Equity share capital 50,000(Being reserve capitalized)(2) Land Account Dr. 70,00

0 To Revaluation Reserve 70,000 (Being land revaluation of land)


Schedule-1Rs.

Share capitalAuthorized 25,000 shares of Rs.10 each 2,50,000

----------Issued, subscribed and fully paid – up 20,000 shares of Rs.10 each [of the above 5,000Shares are allotted as fully paid by way of Bonus shares, Bonus shares were issued by utilizing the General reserve] 2,00,000

----------Schedule -2

Reserve and surplus 20,000Share premium Account 70,000Revaluation reserve 15,000General reserve 95,000

---------Balance in profit and Loss A/c 2,00,000

---------Schedule -3

Fixed assets As on 1.4.96

Rs.

AdditionsRs.

Deletion Rs.

DepreciationRs.

Net Block Rs.

Land 1,10,000 70,000 - - 1,80,000Plant and Machinery 3,85,000 - 5,000 1,20,000 2,60,000Total 4,95,000 70,000 5,000 1,20,000 4,40,000

Land was revalued upward by Rs.70,000 during the year

Q2: Calculation of Managerial Remuneration:From the following particular of Ganga Limited, you are required to calculate the managerial remuneration in the following situation:i. There is only one whole time director.ii. There is two whole time director.iii. There are two whole time director, a part time director and a manager.Net profit before provision for income-tax and managerial remuneration, but after depreciation and provision for repairs 8,70,410Depreciation provided in the books 3,10,000Provision for repairs of machinery during the year 25,000Depreciation allowable under Schedule XIV 2,60,000Actual expenditure incurred on repairs during the year 15,000

A: (a) Section 198 and 309 of the Companies Act, 1956 prescribe the maximum percentage e of profit that can be paid as managerial remuneration. For this purpose, profit is to be calculated in the manner as specified in Section 349.

Computation of net profit u/s 349 of the Companies Act, 1956Net profit before provision for income-tax and managerial remuneration, but after depreciation and provision of repairs

8,70,410

Add black: Depreciation provided in the books 3,10,000 Provision for repairs of machinery 25,000 3,35,000

12,05,410Less: Depreciation allowable under schedule XIV 2,60,000 Actual expenditure incurred on repairs 15,000 2,75,000Profit as per section 349 9,30,410


Computation of Managerial remuneration i). If there is only one whole time director:

Managerial remuneration = 5% of Rs.9,30,410 = Rs.46,520.50ii). If there are two whole time directors:

Managerial remuneration = 10% of Rs.9,30,410 = Rs.93041iii). If there are two whole time directors, a part time director and a manager:

Managerial remuneration = 11% of Rs.9,30,410 = Rs.1,02,345.10

Q3: Provision for Taxation:The trail balance of Complex Ltd. as at 31st March, 1998, shows the following items:

Dr. Cr.Rs. Rs.

Advance payment of income-tax 2,20,000 -Provision for income-tax for the year ended 31.3.97 - 1,20,000The following further information are given:i. Advance payment of income-tax included Rs.1,40,000 for 1996-97.ii. Actual tax liability for 1996-97 amounts to Rs.1,52,000 and no effect for the same has so far been given in accounts.iii. Provision for income-tax has to be make for 1997-98 for Rs.1,60,000.You are required to prepare (a) provision for income-tax account, (b) advance payment of income-tax accounts, (c) liabilities for taxation account and also show, how the relevant items will appear in the profit and loss account and balance sheet of the company.A:

Complex Ltd. provision for income tax (1996-97) accountDate Particulars Rs. Date Particulars Rs.

31.3.98

To Advance payment of income tax a/c

1,40,000 1.4.97 By Balance b/d 1,20,000

To Liability for taxation A/c 12,000 31.3.98 By Profit and Loss 32,0001,52,000 1,52,000

Provision for Income tax (1997-98) AccountDate Particulars Rs. Date Particulars Rs.

31.3.98 To Balance c/d 1,60,000

31.3.98 By Profit and Loss A/c 1,60,000

1,60,000

1,60,000

Advance payment of income tax accountDate Particulars Rs. Date Particulars Rs.

31.3.98 To Balance b/d 2,20,000

31.3.98 By Provision for Income tax (1996-97) A/c

1,40,000

By Balance c/d 80,0002,20,00

02,20,000

Liability for taxation AccountDate Particulars Rs. Date Particulars Rs.

31.3.98 T o Balance c/d 12,000 31.3.98 By Provision for Income Tax A/c 12,00012,000 12,000

Profit and Loss Account for the year ended 31st March, 1998 (Extracts)Rs. Rs.

Profit before taxationLess: Taxation for the year 1,60,000 -Less: Taxation adjustments of previous year 32,000 1,92,000Let Profit - -


Balance sheet of complex Ltd. as at 31st March, 1998Particulars Rs. Particulars Rs.

Current liabilities and Provisions Current Assets, Loans and AdvancesA.Current Liabilities Loans and Advances Liability for taxation (1996-97) 12,000 Advance payment of income tax 80,000B.Provision for income tax 1,60,000


9 ACCOUNTING FOR BANKING COMPANIES

Calculation of Provision on AssetsCalculation of Rebate on Bills DiscountedJournal Entry and Ledger Preparation for Rebate on Bills DiscountedTreatment for Acceptances, Endorsements and ObligationsPreparation of Final Accounts

Q:1 Calculation of Provision on Assets: Rajatapeeta Bank Ltd. had extended the following credit lines to a Small Scale Industry, which had not paid any Interest since March, 1997:

Particulars Term Loan Export Loan

Balance Outstanding on 31.03.2003

Rs. 35 lacs Rs. 30 lacs

DICGC/ECGC 40% 50%

Securities held Rs. 15 lacs Rs. 10 lacs

Realisable value of Securities Rs. 10 lacs Rs. 08

Compute necessary provisions to be made for the year ended 31st March, 2003.

A: (Rs. in lakhs)

Term Loan

Export Credit

Balance outstanding on 31.3.2003 35.0 30.0Less: Realisable value of Securities

10.0 8.0

25.0 22.0Less: DICGC cover @ 40% 10.0 ECGC cover @ 50% - 11.0Unsecured balance 15.0 11.0Required Provision:100%* for unsecured portion 15.0 11.0100% for secured portion 10.0 8.00Total provision required 25.0 19.0

* The above solution has been provided based on the latest NPA provisions (as per the Master Circular issued by RBI “ DBOD No. BP. BC. 11/21.04.048/2005-06” dated November 4, 2005) though in the above question provisions for the year ended 31st march 2000 is required.

Q: 2 Calculation of Provision on Assets: From the following information find out the amount of provisions to be shown in the Profit and Loss Account of a Commercial Bank:

Assets Rs. (in lakhs)

Standard 4,000

Sub-standard 2,000

Doubtful upto one year 900

Doubtful upto three years 400

Doubtful more than three years 300


Loss Assets 500

A: Computation of provision:Assets Amount

(Rs. in lacs) %of Provision Provision

(Rs. in lacs)Standard 4,000 0.40** 16Sub-standard 2,000 10 200Doubtful upto one year* 900 20 180Doubtful upto three years* 400 30 120Doubtful more than three years*

300 100** 300

Loss 500 100 5001316

* Doubtful assets are taken as fully secured.** The above solution has been provided based on the latest NPA provisions (as per the Master Circular issued by RBI “ DBOD No. BP. BC. 11/21.04.048/2005-06” dated November 4, 2005) though in the above question provisions for the year ended 31st march 2000 is required.

Q3: Provision on assets: Books of the M/s Commercial Bank Ltd for following credit lines to a Small Scale Industry, which had not paid any Interest since March, 1997:

Term Loan Export CreditBalance Outstanding on 31.3.03 Rs.35 Lakhs Rs.30 LakhsDICGC/ ECGC Cover 40% 50%Securities held Rs.15 Lacs Rs.10 LacsRealisable value of securities Rs.10 Lacs Rs.08 Lacs

Compute the necessary provisions to be made for the year ended 31st March, 2003.

A: Computation of Provision required (Rs. In Lakhs)

Term Loan Export Credit

Balance outstanding on 31.3.2003 35.0 30.0Less: Realizable value of securities 10.0 8.0

25.0 22.0Less: DICGE cover @ 40% 10.0 ECGE cover @ 50% 11.0Unsecured balance 15.0 11.0Provision Required:100% for unsecured portion 15.0 11.0Add: 50% for secured portion 5.0 4.0Less: Covered under

DICGC (40%) 2.0 3.0 ECGC (50%) 2.0 2.0Total Provision required 18.0 13.0


Otherwise, it can also be calculated as follows: - (Rs. In Lakhs)

Term Loan Export Credit

Balance outstanding 36.5 30.0Less: Realizable value of securities 10.0 8.0Unsecured Amount 25.0 22.0Provision for unsecured portion (100%) 25.0 22.0Provision in respect at sewed portion (50%) 5.0 4.0

30.0 26.0Less: DICG cover (40%) 12.0ECGC cover (50%) 13.0Total Provision required 18.0 13.0

Q4: Provision on Assets: From the following information find-out the amount of provision to be shown in the profit and Loss Account of a Commercial Bank:

Assets: (Rs. In lakhs)Standard 4,000Sub standard 2,000Doubtful 1 yr 900Doubtful 1 yr to 3 yrs 400Doubtful more 3 yrs 300Loss Assets 500

A: Computation of Amount of Provision (Rs. In Lacks)

Assets Amt Provision % Provision

Standard 4,000 0.4 16Sub-Standard 2,000 10 200Doubtful:For upto 1 year 900 20 180For upto 3 years 400 30 120For more than 3 years

300 50 150

Loss 500 100 500Required provisions 1,166

Note: Doubtful assets are considered as fully secured.

Q 5: Calculation of Amount of Rebate on Bills on Discounted and Journal Entry:The following is an extract from the Trial Balance of Dream Bank Ltd. as at 31 March, 2006:

Rebate on bills discounted as on 1-4-2005 68,259 (Cr.)Discount received 1,70,156 (Cr.)Analysis of the bills discounted reveals as follows:

Amount (Rs.) Due date 2,80,000 June 1, 2006 8,72,000 June 8, 2006

5,64,000 June 21, 20068,12,000 July 1, 20066,00,000 July 5, 2006


You are required to find out the amount of discount to be credited to Profit & Loss A/c for the year ending 31-3-2006 & pass Journal Entries. Rate of discount may be taken at 10% pa.A:The amount of rebate on bills discounted as on 31st March, 2006 the period which has not been expired upto that day will be calculated as follows:

Discount on Rs.2,80,000 for 62 days @ 10% 4,756Discount on Rs.8,72,000 for 69 days @ 10% 16,484Discount on Rs.5,64,000 for 82 days @ 10% 12,671Discount on Rs.8,12,000 for 92 days @ 10% 20,467Discount on Rs.6,00,000 for 96 days @ 10% 15,781Total 70,159

The amount of discount to be credited to the profit and loss account will be:

Journal Entries

Rs. Rs.Rebate on bills discounted A/c Dr. 68,259

To Discount on bills A/c 68,259Discount on bills A/c Dr. 70,159

To Rebate on bills discounted 70,159Discount on Bills A/c Dr. 1,68,256

To P & L A/c 1,68,526

Q6: Journal Entry and Ledger Preparation for Rebate on Bills Discounted: The following particulars are extracted from the (Trial Balance) Books of the M/s Commercial Bank Ltd. for the year ending 31st March, 2003:

Rs.

(i) Interest and Discounts 1,96,62,400

(ii) Rebate on Bills Discounted (balance on 1.4.2002)

65,040

(iii)

Bills Discounted and purchased 67,45,400

It is ascertained that proportionate discount not yet earned on the Bills Discounted which will mature during 2003-2004 amounted to Rs. 92,760.Pass the necessary Journal entries with narration adjusting the above and show:(a) Rebate on Bill Discounted Account; and(b) Interest and Discount Account in the ledger of the Bank.A:

The Commercial Bank Ltd. - JournalDate Dr. Cr.2003 Rs. Rs.Mar 31

Rebate on Bills Discounted A/c Dr. 65,040

To Interest and Discount A/c 65,040Mar Interest and Discount A/c Dr. 92,760


Rs.Transfer from rebate on bills discounted as on 31.03.2005 68,259Add: Discount received during the year 1,70,156

2,38,415Less: Rebate on bills discounted as on 31.03.2006(as above) 70,159 Total 1,68,256

31To Rebate on Bills Discounted A/c 92,760

Mar 31

Interest and Discount A/c Dr. 1,96,34,680

To Profit & Loss A/c 1,96,34,680

(a) Rebate on Bills Discounted Account2003 Rs. 2002 Rs.31.3 To Interest & Dis A/c 65,040 1.4 By Balance b/d 65,040

31.3 To Balance c/d 92,760 31.3 By Interest & Dis a/c (rebate required)

92,760

1,57,800 1,57,800

(b) Interest and Discount Account2003

Rs. 2003 Rs.

31.3 To Rebate on Bills Discounted A/c

92,760 01.4 By Rebate on Bill Discount A/c

65, 40

31.3 To Profit & Loss A/c (transfer) 1,96,34,680

31.3 By Cash and Sundries1,96,62,400

1,97,27,440 1,97,27,440

Q 7: Treatment for Acceptances, Endorsements and Obligations: From the following details prepare “Acceptances, Endorsements & ther Obligation A/c” as would appear in the general ledger: On 1.4.98 Acceptances not yet satisfied stood at Rs.22,30,000. Out of which Rs.20 lacs were subsequently paid off by clients & bank had to honor the rest. A scrutiny of the Acceptance Register revealed the following:

Client Acceptances/Guarantees RemarksA Rs.10,00,000 Bank honored on 10.6.98B Rs.12,00,000 Party paid off on 30.9.98C Rs. 5,00,000 Party failed to pay and bank had to honor on 30.11.98D Rs. 8,00,000 Not Satisfied up to 31.3.99E Rs. 5,00,000 DoF Rs. 2,70,000 Do

Total Rs. 42,70,000

Acceptances, Endorsements and Other Obligation A/c

Date Particular Rs Rs1998-99 To Constituents’ liabilities for

acceptances/guarantees etc. (paid off by Clients)

20.00 By Balance b/d 22.30

To Constituent’s Liabilities for acceptances/guarantees etc. (Honored by bank Rs.22.30 lahks less Rs.20 lahks)

2.30 By Constituents liabilities for acceptance/guarantees etc.

10.6.98 To Constituent’s liabilities for acceptances/guarantees etc. (Honored by

10.00 A 10.00


bank)30.9.98 To Constituent’s liabilities for acceptances/

guarantees etc. (paid off by party)12.00 B 12.00

30.11.98 To Constituent’s Liabilities for acceptances etc. (Honored by bank on party’s failure to pay)

5.00 C 5.00

31.3.99 To Balance c/d (acceptances not yet satisfy) 15.70 D 8.00E 5.00F 2.70

65.00 65.00

Q 8: Preparation of Profit and Loss A/c: On 31.3.2000 the following balance stood in the books of New Bank Ltd. Prepare Profit and Loss A/c. Rs. ‘000

(net profit is after deducting provisions for bad debts Rs.2,10,000, tax provision Rs.7,00,000 and rebate on bills discounted Rs.35,000. Prepare the balance sheet of bank as on 31.3.2000.

A: New Bank Limited Balance sheet as on 31.3.00 Rs.000’s

S.No. 31.3.00 C.Y 31.3.199 P.Y

Capital and LiabilitiesShare capital 1 3,500Reserves and surplus 2 5,250Deposits 3 83,650Borrowings from other banks 4 4,400Other liabilities and provisions 5 6,965

1,03,765Assets

Cash on hand and balance with RBI 6 10,920


Share capital 3,500Reserve fund 2,450Fixed deposit accounts 6,650Savings bank accounts 21,000Current accounts 56,000Money at call and short notice 2,100Investments (at cost) 21,000Profit and Loss Account (Cr.) 1.4.1999 1,470Dividends for 1999 350Land and buildings (after depreciation up to 31.3.2000) 7,445Cash in hand 420Cash with RBI 10,500Cash with other banks 9,100Borrowings from other banks 4,400Bills discounted and purchased 4,200Sundry creditors 210Bills payable 5,600Unclaimed dividend

210

Bills for collection 980Acceptance on behalf of customers 1,400Net profit for 1999 2000

1,680

Balance with other banks and money at call and short notice

7 11,200

Investments at cost 8 21,000Advances 9 53,200Fixed assets (Land and Buildings) 7,445Other assets 10 Nil

1,03,765Contingent liabilities 1,400Bills for collection 980

Schedule 2- Reserves and surplus (Rs. ‘000)

Reserve Fund 2,786Profit and loss A/c Surplus (Tutorial note.2)

2,464

Total 5,250Schedule 3- Deposits

Fixed deposit accounts 6,650Savings bank accounts 21,000Current accounts 56,000Total 83,650

Schedule 5-Other Liabilities and Provisions

Schedule-9 Advances

Bills discounted and purchased 4,200Loans, overdrafts and cash credits

49,000

Term loans Nil Total 53,200

As details are not available the full format of the advances is not given.

Note: Schedules which are simple to prepare are omitted. The student can try the omitted schedules and verify with the amount given in the Balance Sheet.

Tutorial Notes: (Rs. ‘000)

Reserve Fund Balance as on 1.4.99 2,450Add: 20% on current profits of 16, 80,000 336

------- 2,786


Rebate on bills discounted 35Sundry creditors 210Bills payable 5,600

Provision for bad debts 210Total 6,965

Profit and Loss A/c Surplus:Net profit of the current year 1,680Add: Profit brought forward 1,470

--------3,150

Appropriation:Transfer to statutory reserve 336Transfer to other reserves NilDividends paid for 1999 350

Balance carried over to Balance Sheet 2,464

3,150

Q 9: Preparation of Profit and Loss and Balance Sheet:As on that date from following Trial Balance on 31st March 1999:

Dr CrUnissued capital 2,00,000 Authorized Capital

(Equity Shares of Rs.100 each)5,00,000

Uncalled capital 1,50,000 Commission, Exchange & Brokerage 49,400Interest paid on Deposits & Borrowings 48,500

Profit on Sale of Gold 35,900

Loss on sale of investment 12,600 Short Loans 2,20,000Provident Fund contribution 9,200 Reserve Fund (invested Kerala Govt

Bonds ) 80,000Directors’ Fees 5,500 Investment Fluctuation Reserve 20,000Stationary & Printing 5,600 Current Accounts 5,00,000Auditors’ Fees 1,200 Contingency Accounts 1,00,000General expenses 2,700 Profit and Loss A/c on 1.4.98 25,000Owing by Foreign Correspondents 20,000 Interest and Discount 1,70,000Overdrafts, Loans, Cash Creditors 3,80,000 Savings Bank Deposits 3,35,000Bank premises 60,000Kerala Government Bond 80,000Government of India Securities 4,20,000Money at call and short Notice 70,000Bills Discounted 73,000Shares of other companies 17,000Cash in hand and with RBI 1,10,000Cash in Banks 3,00,000Income Tax paid 9,000Salaries and Allowances 73,500Interim Dividend paid 7,500

20,55,300 20,55,30Additional information:

(i) Interest Accrued on Investments Rs.750.(ii) Market Value of Investment Securities was Rs.4,75,000 & increase corresponding fluctuation reserve with necessary amount.(iii) The bills discounted mature at 20-5 average date& all bills are discounted at 10% p.a.(iv) Premises added during the yr Rs.10,000 & provide 5% Depreciation on Opening Balance.(v) Provision for Taxation on 1.4.98 stood at Rs.15,000 which is to be increased to Rs.28,000.


(vi) Out of the Loans and Advances Rs.2,50,000 are secured & Rs.1,00,000 are guaranteed by Government.A: Mini Bank Limited Profit and Loss Account For the year ended 31.3.1999 (Rs.)

ScheduleNo.

Year Ending31.3.99

Year Ending31.3.98

I. Income

Interest and discount 13 1,60,000Other income 14 73,450Total 2,33,450II. Expenditure Interest expended 15 48,500Operating expenses 16 1,00,200Previous and contingencies 53,175Total 2,01,875III. Profit/(Loss)Net profit for the year (I-II) 31,575Profit brought forward from the previous year

25,000

Total 56,575IV. AppropriationsTransfer to statutory reserve 6,315*Transfer to other reserves NilInterim dividend paid 7,500Balance carried over to balance sheet 42,760Total 56,575

*Transfer to statutory reserve is made at 20%. As per recent instructions of RBI the percentage has been increased to 25%.

Schedule-13 Interest and Discount

Interest and discount 1,70,000Less: Rebate on bills discounted (Tutorial note 1) 10,000Net Shown in the profit and loss account 1,60,000

Schedule – 14 Other income

Commission, exchange and brokerage 49,400Profit on sale of gold 35,900Less: Loss on sale investments 12,600 23,300Interest accrued 750Total 73,450


Schedule 15-Interest expended

Paid on deposits and borrowings 48,500

Schedule – 16 Operating expenses

Provisions and contingencies

(No schedule is required. The details are given for the benefit of the student.)

Provision for taxation (Tutorial note 2) 22,000Provision for bad debts (Tutorial note 3) 9,175Investment fluctuation reserve (Tutorial note 4)

22,000

53,175Mini Bank Ltd Balance sheet as at 31.3.1999

Schedule No. As on 31.3.99 As on 31.3.98 Capital and liabilitiesCapital 1 1,50,000Reserve and surplus 2 1,29,075Deposits 3 8,55,000Borrowings 4 2,20,000Other liabilities and provisions 5 1,74,175Total 15,28,175AssetsCash and Balance with RBI 6 1,10,000Balance with Banks and money at call

7 3,70,000

Investments at cost 8 5,17,000Advances 9 4,73,000Fixed assets 10 57,500Other assets 11 750Total 15,28,250

Schedule 1- capital

Authorized capital 5,00,000

Issued capital 3,00,000Subscribed capital 3,00,000Called-up capital 1,50,000Paid-up capital 1,50,000


Salaries and allowances 73,500

Provident fund contribution 9,200Directors’ fees 5,500

Stationery and printing 5,600Auditors fees 1,200

General expenses 2,700Depreciation on buildings 2,500

Total 1,00,200

Schedule-2 reserve and surplus

Statutory reserve as on 1.4.98 80,000Add: Transfer from current profits 6,315 86,315Profit and loss account balance 42,760Total 1,29,075

Schedule-3 Deposits

Current accounts 5,00,000Savings Bank Deposits 3,55,000Total 8,55,000

Schedule-5 Other Liabilities and Provisions

Rebate on bills discounted (Tutorial note 1) 1,000Contingency account balances as on 1.4.98 1,00,00

0Add: Transfer to tax provision (Tutorial note 2) 22,000 1,22,000Investment fluctuation reserve (20,000+22,000) (Tutorial note 4)

42,000

Bad debts provision (Tutorial note 3) 9,175Total 1,74,175

Schedule-8 Investments

Government Securities 4,20,000Kerala Government Bonds 80,000Shares in other Companies 17,000Total 5,17,000

Schedule-9 Advances

(i) Bills purchased and discounted 73,000(ii) Cash credits, overdrafts and loans 4,00,000Term Loan Nil Total 4,73,000(i) Secured by tangible assets 2,50,000(ii) Covered by Government guarantees 1,00,000(iii)Unsecured 1,23,000Total 4,73,000(i) Advances in India 4,53,000(ii) Advances Outside India 20,000Total 4,73,000

Advances schedule has been given to the extent information is available and can be inferred.

Tutorial notes:

Rebate on bills discountedUnexpired period of the bills on the basis of the average due date 30+20=50 daysRebate on bills = (73,000X50X10) /(365X100) = Rs.1,000-Transfer to tax provision (included in contingency account) (Rs.)-Opening balance of provision 15,000-Less: tax paid 9,000-Balance Provision -6,000


-Required provision for the current year -28,000- ----------Balance required for the current year -22,000

-----------Provision for bad debtsOn Rs.3,50,000 standard assets @ 0.25% 875On Rs.83,000 Sub-standard assets@10% 8,300

9,175Fully secured and guaranteed debts by government guarantee are taken as standard assets and the rest as sub-standard assets.Investment fluctuation reserveInvestments at cost 5,17,000Less: Market value of investment 4,75,000

-----------Investment fluctuation reserve required 42,000

Less: opening balance 20,000-----------

Transfer from profit and loss A/c 22,000

Q10: Preparation of Balance Sheet: The Asoka Bank Ltd. owns premises. From the following particulars relating to its accounts, prepare the balance sheet as on 31st March, 1992: (Rs.)

Authorized capital 40,00,000 Letter of credit 5,00,000Subscribed capital: 4 lacs shares of Rs.10 each Rs.5 paid 20,00,000

Telegraphic transfers payable

3,00,000

Investment 70,00,000 Banks drafts 7,00,000Bills discounted 1,50,00,000 Short loans 40,000Profit and Loss A/c (Cr) 8,50,000 Rebate on bills

discounted 10,000

Endorsement on bills negotiated 1,00,000 Acceptance for customers

50,00,000

Liability of customers for acceptances 50,00,000 Loans 1,00,00,000

Money at call and short notice 90,00,000 Cash credit 1,00,00,000Cash in hand 20,00,000 Bank overdraft 10,00,000Cash with RBI 40,00,000 Bills purchased 10,00,000Cash with SBI 40,00,000 Current and deposit A/c 5,60,00,000Reserves 30,00,000 Investment fluctuation

A/c1,00,000

Circular notes 10,00,000 Bills negotiated 1,00,000Liability on bills of exchange rediscounted amounts Rs.3,70,000 and on account of outstanding forward exchange contracts Rs.2,00,000.


A: Ashoka Bank Ltd. Balance sheet as on 31st March, 1992

Particulars Schedule No.

As on 31.3.92

As on 31.3.91

Capital and liabilities 1 2,000Capital 2 3,950Reserve and Surplus 3 56,000Deposits 4 40Borrowings 5 2,010Total 64,000AssetsCash and balance with RBI 6 6,000Balance with banks and money at call land short notice

7 13,000

Investments 8 7,000Advances 9 37,000Fixed assets 10 1,000Other assets 11 NilTotal 64,000Contingent liabilities 12 6,170Bills for collection Nil

Schedule 1- Capital 000’s omitted

As on 31.3.92 As on 31.3.91Authorized Capital 4,00,000 shares of Rs.10 each 4,000Issued and subscribed capital4,00,000 shares of Rs.10 each 4,000Called-up capital 4,00,000 shares of Rs.5 each 2,000Less: Calls unpaid NilAdd: Forfeited Nil

2,000Schedule 2- Reserves and Surplus

As on 31.3.92 As on 31.3.91Statutory ReserveOpening balance - Additions during the year - Total 3,000Revenue and other reserves Investment fluctuation account Opening balance - Additions during the year - Total 100Balance in profit and Loss A/c 850 Total of 1+2+3 3,950

Schedule 3 - Deposits 000’somitted


As on 31.3.92

As on 31.3.91

i. Demand deposits - ii.Savings Bank Deposits -Term Deposits -

56,000i. Deposit of branches in India -ii. Deposits of branches outside India

-

56,000Schedule 4 – Borrowings 000’s omitted

As on 31.3.92

As on 31.3.91

Borrowings in IndiaRBI -Other banks 40Other institutions and agencies -Borrowing outside India -Total (A and B) 40Secured borrowings in A and B above

Schedule 5- Other Liabilities and Provisions

As on 31.3.92

As on 31.3.91

Bills Payable 2,000Inter-Office adjustment (net) -Interest accrued -Other (including provisions) 10

2,010Schedule 6- Cash and Balances with RBI 000’s omitted

As on 31.3.92

As on 31.3.91

Cash in hand 2,000Balance with RBI 4,000

6,000

Schedule 7- Balances with Banks and Money at call and short notice 000’s omitted

As on 31.3.92 As on 31.3.91In IndiaBalance with banks 4,000Money at call and short notice

9,000

Total of (i) + (ii) 13,000Outside India NilGrand total A and B 13,000


Schedule 8- Investments 000’s omitted

As on 31.3.92 As on 31.3.91Investments in India in Government securitiesOther approved securitiesSharesDebentures and loansSubsidiaries and or joint ventureOthersTotalInvestment outside India in Government securitiesOther InvestmentTotal Grand Total (A and B) 7,000

Schedule 9- Advances 000’s omitted

As on 31.3.92 As on 31.3.91i. Bills purchased and discounted 16,000 ii.Cash credits, overdrafts & loans repayable on demand

21,000

Term loan Nil Total 37,000i. Secured by tangible assets 22,000ii.Covered by bank/Govt. Guarantee 10,000 iii.Unsecured 5,000 Total 37,000a. Advances in India Priority sector 8,000 Public sector 6,500 Banks 500 Others 6,200

21,200b. Advances outside India Due from banks 8,400 Due from others Bills purchased and discounted 2,400 Syndicated loans 1,600 Others 3,400 Total 15,800Grand Total (C I + II) 37,000


Schedule 10- Fixed Assets 000’s omitted

As on 31.3.92

As on 31.3.91

Premises At cost on 31st March during the previous year

Additions/Adjustments during the year - Deduction during the year - Depreciation to date - Total 1,000Buildings under construction NilOther fixed assets NilAt cost on 31st March during their previous year -Additions/Adjustments during the previous year

-

Depreciation to date - Total Nil Total 1+2+3 1,000

*This schedule is given with imaginary figure.Schedule 11- Other Assets

As on 31.3.92

As on 31.3.91

Interest accrued NilTax paid in advance/tax deducted at source NilStationery and stamps NilNon-banking assets acquired in satisfaction of claims

Nil

Others NilTotal Nil

Schedule 12- Contingent Liabilities 000’s omitted

31.3.92 31.3.91Claims against the bank not acknowledge as debtsLiability for partly paid investments3. Liability on account of outstanding forward exchange contracts 2004. Guarantees given on behalf of constituents - (a) In India -(b)Outside India5.Acceptances, endorsements and other obligations 5,6006.Other items for which the bank is contingently liable: Liability on account of bills rediscounted 370

6,170


10 ACCOUNTS FOR INSURANCE COMPANIES

Life Insurance – Valuation Balance SheetLife Insurance – Revenue Account and Balance SheetGeneral Insurance – Unexpired Risk ReserveGeneral Insurance – Revenue Account and Balance SheetInsurance Claims

Q1: Preparation of Valuation Balance Sheet:Heaven Life Insurance Co. furnishes you the following information:

Rs.Life Insurance fund on 31.3.2008 52,00,000Net liability on 31.3.2008 as per actuarial valuation 40,00,000Interim bonus paid to policyholders during intervaluation period 3,00,000

You are required to prepare:(i) Valuation Balance Sheet;(ii) Statement of Net Profit for the valuation period; and(iii) Amount due to the policyholders. (8 Marks)(PE II- Nov. 2008) A(i) Heaven Life Insurance Co.

Valuation Balance Sheet as at 31st March, 2008Rs. Rs.

To

Net Liability as per actuarial valuation

40,00,000 By

Life Assurance Fund 52,00,000

To

Surplus 12,00,000

52,00,000 52,00,000(ii) Statement showing Net Profit for the valuation period

Rs.Surplus as per Balance Sheet (i.e., Valuation Balance Sheet) 12,00,000Add: Interim bonus paid 3,00,000

15,00,000(iii) Amount due to policyholders

.

95% of net profitdue to policyholders(95%of Rs. 15,00,000)14,25,000

Less: Interim bonus already paid 3,00,000Amount due to policyholders 11,25,000

Q2: Valuation Balance Sheet: The life insurance fund of Hindusthan Life Insurance Co. Ltd. was Rs.34,00,000 on 31st March, 1997. Its actuarial on 31st march, 1997 disclosed a net liability of Rs.28,80,000. An interim bonus of Rs.40,000 was paid to the policy holders during the previous two years. It is now proposed to carry forward Rs.1,10,000 and to divide the balance between the policy holders and the shareholders. Show (a) the valuation balance Sheet, (b) the net profit for the two years period &(c) the distribution of the profits.A:In the Books of Hindustan Life Insurance Co. Lt d.Valuation balance sheet as on 31-3-1997

Rs. Rs.To Net Liability

28,80,000 By Life Insurance Fund 34,00,000

To Profit 5,20,000 34,00,000 34,00,000


Net Profit for the two years period Rs.Profit as per Valuation balance sheet 5,20,000Add: Interim Bonus paid during the previous two year s

40,000

Net profit 5,60,000Distribution of the profitsNet Profit 5,60,000Less: Amount proposed to be carried forward 1,10,000Balance 4,50,000Share of Policyholders (95% of Rs.4,50,000) 4,27,500Less: Interim Bonus paid 40,000Amount due to policyholders 3,87,500Share of shareholders (5% of Rs.4,50,000) 22,500

Q3: Preparation of Valuation Balance Sheet with Income Statement: At the valuation on 31.3.2006 of a life office, the actuary’s certificate disclosed a net liability on policies & annuities at Rs.4,040 (000s). The following were the revenue items for the yr 2005-06: (Rs 000’s)

Bonus in cash 95 Annuities 810Bonus in reduction of premium

5 Consideration for annuities granted 1,120

Surrenders 160 Life assurance fund on 1.4.97 4,000Premium 3,000 Interim bonus paid for the valuation

period90

Interest, dividends and Rents 1,100Claims 2,200Expenses of management 220Commission 80

Prepare revenue account and ascertain the balance of life assurance fund. It was decided by the company to write down investments from Rs.4,540 Thousands to Rs.4,360 Thousands, if the valuation revealed surplus. There was an investment fluctuation reserve amounting to Rs.130 Thousands.As a result of the valuation, the company declared a reversionary bonus of Rs.45 per Rs.1,000 and gave the policy holders the option to get the bonus in cash @ Rs.19 per Rs.1,000. The total business in force was Rs.4 crores. ¼ of the policy holders in value decided to get the bonus in cash. Draft journal entries to give effect to utilization of the surplus. Show how much the policy holders can get by way of share of profit. Ignore taxation.A:

Revenue A/c for the year ended 31st March, 2006Particulars Schedule No. CY PY

Premiums earned –Net: 1 3,000Interest, dividend and rents 1,100 -Other incomes (To be specified):Consideration for annuities granted 1,120 -Total (A) 5,220Commission 2 80Operating expenses related to insurance business

3 220

Total (B) 300Benefits paid (Net) 4 3,270 -Total (C) 3,270 -Surplus (D) = (A)-(B)-(C) 1,650

Note: “Interim bonus paid for the valuation period” may be taken as payment in an earlier period.Schedule Forming Part of Revenue Account


Schedule 1 – Premium

Particulars CY PYPremium received 3,000

3,000 -

Schedule 2 - Commission ExpensesParticulars C

YPY

Commission paid 8080 -

Schedule 3 – Operating Expenses related to Insurance BusinessParticulars CY PY

Expenses of management 220220 -

Schedule 4 – Benefits paid (Net)

Particulars CY PYClaims paid 2,200Annuities 810 -Surrenders 160 -Bonus in cash 95 -Bonus in reduction of premium

5 -

Total 3,270

Valuation Balance Sheet of …… as on 31.3.2006 (Rs)To Net liability as per actuarial valuation

4,040 By Life assurance fund as per balance sheet (4,000 + 1,650)

5,650

To Surplus (Bal. Fig) 1,6105,610 5,610

Schedule 4 – Benefits paid (Net) ( Rs. 000)Surplus as revealed by valuation Balance sheet 1,610Add: Interim Bonus paid 90

1,700Less: Loss on investments to be written of (45,40,000 – 43,60,000 – 1,30,000) 50Net Profit 1,650Policy holders will get 95% (16,50,000 x95%) 1567.50Less: Interim bonus already paid 90.00Amount due to policy holders 1,477.50

Note: Loss on investments should not be shown in revenue account because the investments are to be written down only if “The valuation revealed surplus”.


Journal Entries (Rs. 000))Particulars L.F. Dr. Cr.

3-31-06 Life Assurance fund A/c Dr 1,610 To Profit and Loss A/c 1,610(Being the profit revealed by valuation balance sheet transferred to profit and Loss A/c)

3-31-06 Profit and Loss A/c Dr. 50 To Investments Fluctuation A/c 50(Being the additional provision required to make the investment fluctuation equal to Rs.1,80,000, the difference between the cost and market value of investments)Investments fluctuation A/c Dr. 180 To Investments A/c 180(Being the investments written down from Rs.45,40,000 to Rs.43,60,000 by utilizing the investment fluctuation reserve)Profit and Loss A/c Dr. 190 To Bonus in cash (payable) 190(Being the immediate bonus payable @ Rs.19 Per Rs.1,000 on Rs.1,00,00,000)Profit and Loss A/c Dr. 570 To Life assurance fund A/c 570(Being the sum transferred to the Life assurance fund due to the new liability in respect of reversionary bonus @ Rs.19 per Rs.1,000 on 3,00,00,000)

Q4: Preparation of Valuation Balance Sheet: Life fund of a life assurance company was Rs.86,48,000 as on 31.3.2006. The interim bonus paid during the undervaluation period was Rs.1,48,000. The periodical actuarial valuation determined the net liability at Rs.74,25,000. Surplus brought forward from the previous valuation was Rs.8,50,000. The directors of the company proposed to carry forward Rs.9,31,000 and to divide the balance between the shareholders and the policy holders in the ratio of 1:10.Show: a. the valuation Balance sheet, b. the net profit for the valuation period. c. the distribution of the surplus. A: -

(a) ……..Co. Ltd…Valuation Balance Sheet as at 31.3.2006 (Rs. 000)To Net liability as per actual

revaluation74,25,000 By Life assurance fund as per balance

sheet)86,48,00

To Surplus (Bal. Fig) 12,23,00086,48,000 86,48,000

(b) Calculation of net profit for the valuation period

Surplus as per valuation Balance Sheet 12,23,000Add: Interim Bonus distributed 1,48,000

13,71,000Less: Surplus at the beginning of the period 8,50,000Net Profit 5,21,000


(C) Statement showing distribution of surplus

Total surplus 13,17,000Less: Surplus to be carried forward 9,31,000

4,40,000Distribution: To Shareholders (4,40,000 x1/11) 40,000 To Policy holders (4,40,000x 10/11) 4,00,00

0Less: Interim bonus already distributed 1,48,00

0Amount payable to policy holders 2,52,000(This equals Rs.4,40,000 to be distributed less Rs.1,48,000 already paid as interim bonus)

2,92,000

Q5: Preparation of Valuation Balance Sheet: The life assurance fund of a company on 31.3.2006 was Rs.29,00,000. Its net liability on that date was estimated to be Rs.19,00,000 by the company’s actuary. The investments held by the amounted to Rs.1,60,00,000 against which the investment reserve stood at Rs.2,50,000. The investments have to be written down by Rs.3,50,000. The company declared a reversionary bonus of Rs.20 per Rs.1,000 with the option to policy holders of bonus in cash at the rate of Rs.8 per Rs.1,000. Total value of policies in force was Rs.8 crores, 1/4 th of the policy holders (in value) decided to receive the bonus in cash. The company estimated that its liability for income tax would be Rs.1,60,000. Draft Journal entries A:

Valuation Balance Sheet as at 31.3.2006To Net liability as per actual valuation

19,00,000 By Life assurance fund as per balance sheet)

29,00,000

To Surplus (Bal. Fig) 10,00,00029,00,000 29,00,000

Journal Entries31-3-06 Life Assurance fund A/c Dr 10,00,000

To Profit and Loss A/c 10,00,000(Being the profit revealed by valuation balance sheet transferred to profit and Loss A/c)

‘’ Profit and Loss A/c Dr. 1,00,000 To Investments reserve A/c 1,00,000(increase in investment reserve on revaluation of investment)Investments reserve A/c Dr. 3,50,000 To Investments A/c 3,50,000(Writing down the investments to their market value)Profit and Loss A/c Dr. 16,40,000 To Bonus in cash 1,60,000 To Life assurance fund 4,80,000(Bonus @ Rs.8 per Rs.1,000 on policies valued at 2 crores the liability in respect of remaining policies @ Rs.8 per Rs.1,000 recredited to the life assurance fund) Profit and Loss A/c Dr. 1,60,000 To Provision for income tax 1,60,000(Provision created for the tax payable)

Q6: Preparation of Valuation Balance Sheet: The following balances are extracted from the books of AB Life Insurance Corporation:


Life Insurance Fund (as on 31.3.1995) Rs.1,600 lakhsNet Liabilities as per Valuation Rs.1,200 LakhsInterim Bonus paid Rs.150 lakhsYou are required to show:

a. The valuation Balance Sheet as on 31.3.95. b.The distribution statement.In the books of AB Life Insurance Corporation Valuation Balance Sheet

Particulars Rs. In lacs Particulars Rs. In lacsT o Net liability 1,200 By Life Assurance

Fund1,600

To Profit 4001,600 1,600

Rs. In lacsProfit as per valuation account 400Add: Interim Bonus 150

550Policyholders Share (95% of thereof)

522.50

Less: Interim Bonus paid 150.00Amount due to policy holders 372.50

Q7: Valuation Balance Sheet: From the following figures of Live Well Assurance Co. Ltd. prepare a Valuation Balance Sheet and profit Distribution Statement for the year ended 31st March, 2001 also pass necessary Journal entries to record the above transactions with narration.

Rs. in lacs.Balance of Life Assurance Fund as on 1.4.2000 167.15Interim Bonus paid for the valuation period 25.00Balance of Revenue Account for the year ended 31.3.01 240.00Net liability as per Valuer’s certificate as on 31.3.2001 165.00

The company declared a reversionary bonus of Rs.185 per Rs.1,000 and gave the policy holders an option to take bonus in cash Rs.105 per Rs.1,000. Total business conducted by the company was Rs.600 lacs. The company issued with profit policy only, 3/5 of the policy holders in value opted for cash bonus.

Live well life Assurance Company Ltd.:Valuation Balance Sheet on 31-3-2001 Rs.in lakhParticular Rs. Particular Rs.

To Net Liability 165.00 By Life fund as on 31.3.2001

240.00

To Profit and Loss A/c 75.00240.00 240.00

Distribution StatementProfit as per valuation balance sheet

75.00

Add: Interim Bonus paid 25.00100.00

Policy holders share (95%) 95.00Less: Interim Bonus Paid 25.00

70.00


Journal Entries Dr CrLife Assurance Fund A/c Dr

.75.00

To Profit and Loss A/c 75.00 (Being profit transferred as per Valuation Balance Sheet)Profit and Loss A/c Dr

.37.80

To Bonus payable in Cash A/c 37.80(Being cash bonus payable @ Rs.105 per 1000 on 3/5 of 600 lacks)Profit and Loss A/c Dr

.44.40

To Life Assurance Fund A/c 44.40(Being profits @ of Rs.185 per 1000 on 2/5 of 600 lakhs transferred to life fund for reversionary bonus)

Q8: Valuation Balance Sheet with Journal Entry: The Life Insurance Fund of an Insurance Company was on 31.3.2004 Rs.60 lachs before providing for dividend of Rs.20,000 for the year 2003-2004. While ascertaining the above fund figure, the following items were omitted.

a. Interest received on investment Rs.36,000 after deduction of tax at source 10%b. Bonus utilized for reduction of premium Rs.14,000.c. Death claim intimated, but not yet admitted Rs.12,000.d. Death claim covered under re-insurance Rs.12,000.e. Consideration for annuities granted Rs.9,000.

Interim bonus for the valuation period paid was Rs.80,000.Net liabilities as per valuation was Rs.50 lakh. It is now proposed to carry forward Rs.2,70,000.

The company declared a reversionary bonus of Rs.12 per Rs.1,000 and gave the policyholders on option to get the bonus in cash for Rs.5 per Rs.1000. Total business of the company is Rs.15 crores, 40% of the policyholders decided to get bonus in cash.Prepare i. Valuation Balance Sheet as on 31.3.2004.ii. Distribution statement sharing the amount due to the policyholders.Also give Journal Entries relating to reversionary bonus.A:

Valuation Balance Sheet as on 31st March, 2004 Rs. In lacsParticular Rs. Particular Rs.

T o Net Liabilities

50,00,000 By Life Insurance fund (Note.1)

60,34,000

To Net Profit 10,34,00060,34,000 60,34,000

Distribution Statement (Rs.)Net Profit as per Valuation Balance Sheet 10,34,000Add: Interim bonus paid 80,000

-------------11,14,000

Less: Dividend provided for 2003-2004 20,00010,94,000

Less: Carried forward 2,70,000 8,24,000--------------

Policy holders will get 8,24,000x95% 7,82,800Less: Interim bonus paid 80,000

-----------Amount due to policy holders 7,02,800


Journal Entries Dr CrProfit and loss Account Dr. 3,00,000 To Bonus payable in Cash 3,00,000(Being the bonus payable in cash)Profit and Loss account Dr. 10,80,000 To Life Insurance Fund 10,80,000(Being transfer to life insurance fund for new liability)

Valuation Balance Sheet as on 31st March, 2004 Rs. In lacsParticular Rs. Particular Rs.

To Net Liabilities

50,00,000 By Life insurance fund (Note-1)

60,34,000

To Net Profit 10,34,00060,34,000 60,34,000

Working Notes: - 1.Computation of Adjusted Life Insurance Fund as on 31st March, 2004.Life Insurance fund before adjustments 60,00,000Add: Interest on investment (gross) 63,000x100/(100-10) 70,000 63,000Less: Tax deducted at source Consideration for annuities granted 7,000 9,000 72,000

60,72,000Death claim intimated 36,000Less: Death claim covered under re-insurance 12,000 24,000Bonus utilized in reduction of premium 14 ,000 38,000Adjusted life insurance Fund 60,34,000

2.Bonus:(a) Payable in cash Rs.15 crores x 4/10 x 5/1,000 = Rs.3,00,000(b) Transfer to fund Rs.15 crores x 6/10 x 12/1,000 = Rs.10,80,000

Imp. Note:In the question bonus payable is cash is Rs.3,00,000 and the bonus by transfer to life insurance fund amounting Rs.10,80,000 covers to Rs.13,80,000 which is more than the amount due to the policy holder i.e. Rs.7,02,800.

So the above question is solved on the assumption that company has sufficient balance in P&L A/c for declaration of Bonus.

Life Insurance – Revenue Account and Balance Sheet

Q9: Preparation of Final A/c for Life Insurance: From the following Trial balance of National Life Assurance Co. Ltd. prepare Revenue A/c and Balance Sheet as on 31.3.2006.

Debit balance Rs. ‘000 Credit balance Rs.’000Claims by death 76,980 Life Assurance fund (1.4.05) 14,70,562Claims by maturity 36,420 Premiums 2,10,572Expenses of management 19,890 Consideration for annuities granted 10,620Dividend paid 20,000 Interest, Dividends and Rent s 52,461Commission 26,541 Fines 92Income tax on interest etc. 3,060 Annuities due but not paid 22,380Surrenders 22,860 Share capital:40,00,000 shares of Rs.100

each4,00,000

Annuities 29,420 Claims admitted but not paid 80,034


Bonus paid in cash 9,450Bonus in reduction of premium 2,500Preliminary expenses 200Stamps on hand 400Govt. securities 8,70,890Furniture 20,000Mortgages 3,09,110Loans on Company’s Policies 2,00,000Freehold premises 3,00,000Leasehold ground rents 2,00,000House Property 1,00,000

22,46,721 22,46.721Additional information: Rs. (‘000)

1. Management expenses due 6002. Premium outstanding 7,4003. Reinsurance premium 6,0004. Interest accrued 15,4005. Surrenders adjusted against loans 5,0006. Further bonus utilized in reduction of premium 1,5007. Further claim intimated 8,0008. Claim covered under reinsurance 10,000

A:National Insurance Co., Ltd Revenue A/c for the year ended 31st March 2006

Particulars Schedule No. CY PY Premiums earned –Net:

(a) Premium 1 2,19,472

(b) Reinsurance ceded (-)6,000(c) Reinsurance accepted -

Income from Investments: Interest, dividends and Rents (gross) (52,461 + 15,400)

67,861

Other incomes (to be specified): Consideration for annuities grandted 10,260 Fines 92Total (A) 2,92,04

5Commission 2 26,541Operating expenses related to insurance business 3 20,490Total(B) 47,031Benefits paid (net) 1,81,13

0Total (C) 1,81,13

0Surplus (B)= (A)-(B)-(C) 63,884Appropriation :Transfer to shareholders Account –Dividend 20,000Transfer to other reservesBalance being funds for further appropriations 43,884Total (D) 63,884

Note: 1. Dividend is to be shown as an item of payment in profit and loss Account.


1. Income tax on interest etc., is a “TDS’ and it will appear under schedule 12 Advances and other assets, as per the IRDA form.

Balance sheet as on 31st March 2006Particulars Schedule No. CY PY

Sources of Funds:

Share capital 5 3,99,800 -Reserve and surplus 6 15,14,44

6-

Borrowings 7 - -Total 19,14,24

6Application of Funds:

Investments 8 10,70,890

Loans 9 5,04,110 Fixed assets 10 4,20,000 -Total 19,95,00

0-

Current assets: Cash and Banks Balances 11 - - Advances and other assets 12 36,260 -Sub total (A) 36,260 Current liabilities 13 1,17,014 Provisions 14 - -Sub-Total (B) 1,17,014Net current assets (A) –(B) (-)80,754Total (Total of schedules 8,9 and 10 and net current assets)

19,14,246

Schedules forming part of Financial StatementSchedule -1 premium

Particulars CY PYPremiums received 2,10,572 -Add: Outstanding premiums on 31.3.2006 7,400 -Add: Bonus in reduction of premium 1,500 -Total 2,19,472 -

Schedule 2-Commission ExpensesParticulars CY PY Commission

26,541 -

26,541

Schedule 3 –Operating expenses related to Insurance BusinessParticulars CY PY

Expenses of management 19,890 -Add: Expenses of management due 600 -Total 20,490 -

Schedule 4-Benefits paid (Net)Particulars CY PY

Claims paid:


By Death 76,980 -By maturity 36,420 -

1,13,400 -Add: Claims intimated 8,000

1,21,400Less: Claims covered under reinsurance 10,000 1,11,400Annuities 29,420Surrenders 21,860Add: surrenders adjusted against loans 5,000 26,860Bonus paid in cash 9,450Bonus in reduction of premium 2,500Add: Further Bonus in reduction of premium 1,500 4,000Total 1,81,130

Schedule-5 Share capitalParticulars CY PY

4,000 shares of Rs.100 each 4,00,000

-

B: Preliminary expenses 200 -Total 3,99,80

0Note: As per IRDA from, preliminary expenses and all losses on issue of shares should be reduced from share capital.

Schedule -6 Reserves and surplusParticulars CY PY

Reserve - -Life Assurance fund on 1.4.2005 14,70,562 -Add: Transfer to Fund of future appropriations 43,884 15,14,446 -Total 15,14,446 -

Schedule 7 – Borrowings Nil

Schedule 8 - InvestmentsParticulars CY PY

Government securities 8,70,890Leasehold ground rent s

2,00,000 -

Total 10,70,890

-

Schedule 9 - LoansParticulars CY PY

Loans on Mortgage 3,09,110Loans on Policies 2,00,000 -Less: Surrenders adjusted 5,000 1,95,000 -Total 5,04,110 -

Schedule 10 – Fixed assetsParticulars CY PY

Freehold premises

3,00,000


House property 1,00,000 -Furniture 20,000 -Total 4,20,000 -

Schedule 11 – Cash and Bank - Nil

Schedule 12 – Advances and other AssetsParticulars CY PY

Advances:Income tax on interest etc. 3,060 -Other Assets: -Outstanding premiums 7,400 -Amount due from other insurers

10,000

Accrued Interest 15,400

Stamps 400Total 36,26

0

Schedule 13 - Current liabilitiesParticulars CY PY

Claims admitted, but not paid 80,034Further claim intimated 8,000 -Annuities due but not paid 22,380 -Management Expenses due 600 -Reinsurance premium due 6,000Total 1,17,014

Schedule 14 – Provisions – NilSchedule 15 – Miscellaneous – Nil

General Insurance – Unexpired Risk ReserveQ10: Unexpired Risk Reserve: Indian Insurance Co. Ltd. Furnishes you with the following information:

i. On 31.12.1996, it had reserve for unexpired risks to the tune of Rs.40 crores. It comprised of Rs.15 crores in respect of marine insurance business; Rs.20 crores in respect of fire insurance business and Rs.5 crores in respect of miscellaneous insurances business.

ii. It is the practice of Indian Insurance Co. Ltd. to create reserve at 100% of net premium income in respect of marine insurance policies and at 50% of net premium income in respect of fire and miscellaneous income policies.iii.During 1997, the following business was conducted: Rs. in crores

Marine Fire MiscellaneousPremia collected from:a. Insured in respect of policies

Issued 18 43 12b. Other insurance companies

In respect of risks undertaken 7 5 4Premia paid/payable to other Insurance companies on businessCeded 6.7 4.3 7Indian Insurance Co. Ltd. asks you to:

a. Pass journal entries relating to “Unexpired risks reserve”b. Show in columnar form “Unexpired risks reserve” a/c for 1997.


In the books of Indian Insurance Co. Ltd. (Rs.Crores) Dr. Cr.

Marine Revenue A/c Dr. 3.30 To Unexpired Risks Reserve A/c 3.30(Being the difference between closing provision of Rs.18.30 crores (18 + 7– 6.7) &opening provision of Rs.15 Crores charged to marine revenue A/c)Fire Revenue A/c Dr. 1.85 To Unexpired Risks Reserve A/c 1.85(Being the difference between closing provision of Rs.21.85 crores (143+5–4.3)/2 & opening provision of Rs.20 crores charged to fire revenue A/c)Unexpired Risks Reserve A/c Dr. 0.50 To Miscellaneous Revenue A/c 0.50(Being the excess of opening balance of Rs.5 crores over the required closing balance of Rs.4.5 crores [ (12 + 4 – 7 )/2] Credited to miscellaneous revenue A/c)

Unexpired Risks Reserve A/c (Rs.)1997 Fire Marine Misc 1997 Fire Marine Misc

31-12 To Revenue - - 0.50 1-1 By Bal b/d 15.00 20.00 5.00To Bal c/d 18.30 21.85 4.50 31-12 By Revenue A/c 3.30 1.85 -

18.30 21.85 5.00 18.30 21.85 5.00Note: Other wise, the opening balance of unexpired risk reserves can be reversed the beginning of the year by transfer to Revenue A/c and a new reserve is open with full required amount is created at the end of the year and this will be carry forwarded as closing balance.

Q11: Preparation of final accounts of general accounts: The following are the Balances of Hercules Insurance Co. Ltd. as on 31st March, 1996:

(Rs. in ‘000)Capital 320.00Balance of Fund as on 1.4.95

Fire Insurance 800.00Marine Insurance 950.00Miscellaneous Insurance 218.65

Unclaimed Dividends 8.50Amount Due to Other Insurance Companies 34.50Sundry Creditors 72.50Deposit and Suspense Account (Cr.) 22.80Profit and Loss Account (Cr.) 80.40Agent Balances (Dr.) 135.00Interest accrued but not due (Dr.) 22.50Due from Other Insurance Companies 64.50Cash on Hand 3.50Balance in Current Account with Bank 74.80Furniture and Fixtures WDV (cost 100,00) 58.00Stationary Stock 1.40Expenses of Management:

Fire Insurance 280.00Marine Insurance 160.00Miscellaneous Insurance 40.00Others 30.00

--------- 510.00Foreign Taxes-Marine 8.00


Outstanding premium 82.00Donation paid (No 80G Benefit) 10.00Transfer Fees 1.00I.T. Refund received during the year 30.00Reserve for Bad Debts 11.70Income tax paid 120.00Mortgage Loan (Dr.) 975.00Sundry Debtors 25.00Government Securities Deposited with RBI 37.00Government Securities (1020.00) 1020.00Debentures 465.50Equity shares of Joint Stock Companies 225.00Claims Less Re-insurance:


--------- 876.90Premium Less Re-insurance:


----------- 3047.25Interest and Dividends Received on investment 58.50Tax Deducted at sources 11.70Commission:


--------- 930.00You are required to make the following provision:

Depreciation on Furniture – 10% of Original CostDepreciation on Investment of Joint stock Companies Share 10.00Transfer to General Reserve 10.00

Outstanding Claims as on 31.3.96:Fire Insurance 200.00Marine Insurance 50.00Miscellaneous Insurance 32.50Provision for tax @ 50%. Proposed for unexpired risks is to be made as follows:

a. On Marine Policies 100% premium less reinsurance.b. On Other Policies 50% Premium less reinsurance.

You are required to prepare the revenue and Profit and Loss Account for the year ended 31.3.1996 and Balance Sheet as on that date of the company.


A: - (Rs. 000)Particulars Schedule Fire Marine Misc

1 Premium earned (Net) 1 1,68,125 95,000 34,977

2. Profit and Loss on Sub redemption of - - -3. Investments - - -4. Other (to be specified) - - -

Interest Dividend + Rent (Gross)Total (A) 1,68,125 95,000 34,977

1 Claim Insured (Net) 2 65,000 40,890 100,502. Commission 3 50,000. 35,000 8,0003. Operating expenses related to insurance business 4 28,000 16,800 4,000

Total (B) 1,68,125 92,690 22,050Operating profit (Loss) from Business 25,125 2,310 12,927(C = A-B)Appropriations:Transfer to Shareholder A/c - - -

Transfer to catastrophe reserve - - -Transfer to other Reserve - - -Total 25,125 2,310 12,927

From B-PL (Rs. 000’s)Hercules Insurance Co. Ltd. Profit and Loss Account:Fourth Year ended 31st March 1996

Particulars Schedule CY PY1 Opening Profit and Loss:

(a) Fire 25,125(a) Marine 2,310

(b) Miscellaneous 12,9972.

Income from investments: interest, Dividend Rent (Gross) 7,020

3.

Other Income (to be specified)

Transfer fee 100Income tax refund 3,000Total 50,482

4.

Provision (Other than taxation)

For diminution in the value of investment of joint stock Companies shares (Depreciation on investments)

50,482

5.

Other expenses:

(a).Expenses other than those related to insurance Business Donation

1,000

Expenses of management 3,000(b).OthersDepreciation furniture 1,000Total (B) 6,000Profit before (C=A-B) 44,482Provision for taxation (D) 20,656(E=C-D) 23,262


Appropriations(a).Proposed Dividend 6,400(b).Transfer to General Reserve 1,000(F) 7,400(G=E-F) 16,426Balance of profit brought forward from last year (4) 8,040Balance carried forward to Balance sheet (I = G+H) 24,466

From B – BSHercules Insurance Co. Ltd. Balance sheet as at 31st March 1996 (Rs.000)

Particulars Schedule CY PYSources of Funds Share capital 5 32,000 - Reserve and Surplus 6 27,636 - Fair value change account - - Borrowings - -Application of Funds Investments 8 1,74,75

0 Loans 9 97,500 Fixed Assets 10 4,800Current Assets Cash and ban k Balance 11 7,830 Advances and other assets 12 34,210 Sub Total (A) 3,19,09

0Current liabilities 13 42,080 Provisions 14 2,17,37

4 Sub Total (B) 2,59,45

4 Net Current Assets (C= A –B) 59,367 Miscellaneous expenditure 15 - - Debit Balance in Profit and Loss A/c

- -

Total 59,636

Schedule -1: Premium earned (Net) (Rs.000)Net Premium Fire Marine Misc.

Adjustment for change in reserve for unexpired risks

1,76,205 1,02,250 26,225

Fire (80,000 -88,125 = (-) 8,125] (-) 8,125 (-) 7,250 (+) 8,725Marine [95,000 – 1,02,250 = (-) 7,250 ]Misc. [211,865 – 13,113 = (+) 8,752]Total Premium earned (Net) 1,68,125 95,000 34,977

Schedule -2: Claims Incurred (Net) (Rs.000)Net Premium Fire Marine Misc.

Claim paid 45,000 35,890 6,800Add: Claim outstanding at end of the year 20,000 5,000 3,250Less: Claim outstanding at the beginning - - -Total claim incurred 65,000 40,800 10,050


Schedule -3: CommissionNet Premium Fire Marine Misc.

Net Commission

50,000 35,000 8,000

Schedule -4: Operating expenses related to Insurance Business (Rs.000)Net Premium Fire Marine Misc.

(1) Expenses of management

28,000

16,000 4,000

(2)Foreign tax - 800 -Total 28,00

016,800 4,000

Schedule -5: Share capital (Rs.000)Particular CY PYTotal 32,000 -

Schedule -6: Reserve and surplus (Rs.000)Particular CY PY

1.General Reserve 1,000 -2.Investment Reserves (Repreciation Investment )

1,000

3.Reserve and Bad debts 1,1704.Profit and Loss A/c 24,46

6Total 27,63

6

Schedule -7: Borrowing NIL

Schedule-8: Investment (Rs.000)Particular CY PY

Government Securities 1,02,000 -Equity Shares 22,500 -Debenture 46,550 -Government Securities 3,700 -Deposited with RBI -Total 17,475

Schedule -9: Loans (Rs.000)Particular CY PY

Secured 97,500 -Mortgage Loan Unsecured

- -

Total 97,500

Schedule -10: Fixed Assets - Furniture and Fittings (Rs.000)Particular

Opening value 10,000Addition -Deduction -


Closing Value 10,000Depreciation Up to last year

4,200

For the year 1,000Total 4,800


Schedule -11: Cash and Bank balances (Rs.000)Particular CY PY

1.Cash in hand 350 -2.Cash at Bank 7,480 -Total 7,830 -

Other assets (Rs.000)Particular CY PY

Advances1.Advamce tax paid and taxes deducted source

1,170 -

Total 1,170

Schedule -12: Advance and other assets (Rs.000)Particular CY PY

1.Income accrued on Investment 2,250 -2.Outstanding premium 8,200 -3.Agent Balances 13,5004.Due from Other Insurance Companies

6,450

5.Others(a) Sundry Debtors 2,500(b)Stationary Stock 140Total B 33,040Total (A+B) 34,210

Schedule -13: Current Liability (Rs.000)Particular CY PY

1.Amount due to other Insurance Co. 3,450 -2.Sundry Creditors 7,2503.Claim outstanding 28,25

04.Others Accounts

- Deposit and Suspense A/c 2,280- Unclaimed Dividend 850

Total 42,080

Schedule -14: Provision (Rs.000)1.Reserve for Unexpired Risk Rs. Rs.Fire 88,125 -Marine 1,02,250Miscellaneous 13,113Tot al 2,03,488 2.Reserve for taxationProvision (related from P/L A/c)Less: Tax period 20,656Less: Tax deducted at source 1,20,00Net Provision 1,170Total 7,486

3.Provision for dividends

6,400


Total 2,17,374

Schedule -15 Miscellaneous Expenditure NilWorking Notes: 1.Calculation of Provision for taxation: (Rs.000)

Tax profitRs.(25,125 + 2,310 + 12,927 + 5,850 + 100 – 43,312 – 1,000 – 1,000) 41,312Tax Provision (50% of Rs.41,312) 20,656

Q12: Revenue A/c and P/L A/c of General Insurance:

From the following balances extracted from the books of Perfect General Insurance Company Limited as on 31.3.2000, you are required to prepare Revenue Accounts in respect of Fire and Marine Insurance business for the year ended 31st march,2000 and a Profit and Loss Account for the same period:

( Rs. )

Directors’ Fees 80,000 Interest received 19,000Dividend received 1,80,000 Fixed Assets (1.4.99) 90,000Provision for Taxation (as on 1.4.99) 85,000 Income-tax paid during the yr 60,000

Fire Marine (Rs)Outstanding claims on 1.4.1999 28,000 7,000Claims paid 1,00,000 80,000Reserve for Unexpired Risk on 1.4.1999 2,00,000 1,40,000Premiums Received 4,50,000 3,30,000Agent’s Commission 40,000 20,000Expenses of Management 60,000 45,000Re-insurance Premium (Dr.) 25,000 15,000The following additional points are also to be taken into account:

a. Depreciation on fixed assets to be provided at 10% p.a.b. Interest accrued on investments Rs.10,000.c. Closing provision for taxation on 31.3.2000 to be maintained at Rs.1,24,138.d. Claims O/s on 31.3.2000 were fire Insurance Rs.10,000; Marine insurance Rs.15,000.e. Premium O/s on 31.3.2000 were fire insurance Rs.30,000; Marine insurance Rs.20,000.f. Reserve for unexpired risk to be maintained at 50% and 100% of net premium in respect of Fire

and marine insurance respectively.g. Expenses of Management due on 31.3.2000 were Rs.10,000 for Fire Insurance &Rs.5,000 in

respect of Marine Insurance.A: - From B-RA

ABC Insurance Co. Ltd.: Revenue A/c for the year ended 31st March,2000Particulars Fire

InsuranceMarine Insurance

1.Premiums ended 4,55,000 3,35,0002.Other income (27,500) (1,95,000)3.Change in Provision for unexpired risk4.Interest, Dividend and Rent-GrossTotal (A) 4,27,500 1,40,0005.Claims incurred 82,000 88,0006.Commission 40,000 20,0007.Operating Expenses related to Insurance Business

70,000 50,000

8.Other expensesTotal 1,92,000 1,58,000Operating Profit/(Loss) fromFire/Marine/Miscellaneous Business i.e. (A+B) 2,35,500 (18,000)


From B-PLABC Insurance Co. Ltd. Profit and Loss A/c for the year ended 31st March, 2000

Particulars Amount 1.Operating Profit / (Loss) form (a)Fire Insurance 2,35,500(b)Marine Insurance (18,000)(c)Miscellaneous Insurance2.Income from Investments(a)Interest Dividend and Rent-Gross 1,19,000(b)Profit on sale of Investments 10,0003.Other IncomeTotal 3,46,5004.Provision (Other than taxation) -5.Other expenses (Director’s Fees. Depreciation on F.A.) 89,000 Total (B) 89,000Profit Before Tax (A-B) 2,57,500Less: Provision for taxation 99,138Profit after tax 1,58,362

AnnexureParticulars Fire Marine

Premiums earned (schedule-1)Premium 4,50,000 3,30,000Less: Reinsurance (25,000) (15,000)Add: Outstanding (Closing) 30,000 20,000

4,55,000 3,35,000Claims incurred (schedule -2)Claim 1,00,000 80,000Less: Outstanding (Opening) (28,000) (7,000)Add: Outstanding (Closing) 10,000 15,000

82,000 88,000Commission (Schedule-3)Agent commission 40,000 20,000Operating expenses (Schedule -4)Expenses of management 60,000 45,000Add: Outstanding 10,000 5,000Total 70,000 50,000

Working Notes: -1.Tax during the year 60,000Less: Opening provision (85,000)Add: Closing provision 1,24,138

99,1382.Unexpired Risk ReserveOpening 2,00,000 1,40,000Closing (2,27,500) (3,35,000)Total 27,500 1,95,000


Q1: Insurance Claims: CCL wants to take up a Loss of Profit Policy. Turnover during the current year is expected to increase by 20%. The company will avail overdraft facilities from its bank @ 15% interest to boost up the sales. The average daily overdraft balance will be around Rs.3 lakh. All other fixed expenses will remain same. The following further details are also available from the previous year’s account.

Total variable expenses 24,00,000Fixed expenses:

Salaries 3,30,000Rent, Rates and Taxes 30,000Traveling expenses 50,000Postage, Telegram, Telephone 60,000Directors’ fees 10,000Audit Fees 20,000Miscellaneous income 70,000Net Profit 4,20,000

Determine the amount of policy to be taken for the current year. A: (Rs.)Insurance Policy .Gross Profit on the basis of last year’s sales 8,50,000Add: 20% for increase of turnover 1,70,000

------------ 10,20,000

Add: Increased standing charges (Interest on overdraft) 45,000------------

Policy to be taken for current year 10,65,000

Working Notes:- 1. Profit and loss Account for the PY -Particular Rs. Particular Rs.

To Variable Expenses 24,00,000 By Sales 32,50,000To Fixed expenses 5,00,000 By Misc.

Income70,000

To Net Profit 4,20,00033,20,000 33,20,000

2. Gross Profit of the PY: Rs.Sales 32,50,000Less: Variable expenses 24,00,000

--------------Gross Profit 8,50,000Q13: Preparation of Final A/c for General Insurance -19 From the following trial balance of the National Insurance Co. Ltd. as at March 31, 2006, preparing the final accounts of the company for 2005-2006. (Rs. 000)

Trial Balance as on 31.3.2006 Dr. Cr.Cash at Bank 51,500Capital 1,50,000Government Securities 5,25,000Claims paid: Marine 1,00,000Fire 80,000Commission: Marine 55,000Fire 60,000Provision for unexpired risk (1.4.05) Marine - 3,00,000Fire 1,25,000Additional Reserve (Fire)


Expenses: Marine 1,05,000Fire 1,02,500Claims outstanding on 1.4.05Marine 15,000Fire 12,500General expenses 75,000Premium outstanding :Marine 10,000Fire 7,500Due to other insurance companies 17,500Interest on securities 32,500General reserve 25,000 Profit and Loss A/c 9,000Premiums received:Marine 3,75,000Fire 3,50,000Dividend paid 15,000Premises 2,50,000Furniture 25,000


i. Claims outstanding on 31.3.2006 were: Fire Rs.12,500 & Marine Rs.12,500 (Thousands)ii. A taxation reserve of Rs.15,000 thousands is required.iii. Depreciate premises by 5% furniture by 10%.iv. Additional reserve (fire) is to be increased by 5% net premiums.

National Insurance Co., Ltd. Revenue A/c for the year ended 31st March 2006Particulars Schedule No. CY PY

Premiums earned –Net: 1 2,82,500

3,00,000

Total 2,82,500

3,00,000

Claims incurred (Net) 2 80,000 97,500Commission 3 60,000 55,000Operating expenses related to Insurance business

4 1,02,500

1,05,000

Total (B) 2,42,500

2,57,500

Opening profit (A-B) 40,000 42,500

Profit and loss A/c For the year ended 31st March 2006 Rs. 0001.

Operating profit from Fire Insurance Business 40,000

2.

Income from investments

Insurance on securities (Gross) 42,5003.

Other income 32,500

Total (A) 1,15,0004.

Provision (Other than taxation) -

5.

Other Expenses:


(a) Expenses other than those related to insurance business: General Expenses 75,000

(b) Bad debts written off -(c) Other:

Depreciation : On premises 2,50,000 x 5% 12,500 On Furniture 25,000 x 10% 2,500Total (B) 90,000Profit before tax (A-B) 25,000Provision for taxation 15,000Profit after tax 10,000Appropriations:Dividend paid 15,000Dividend distribution tax 15,000x 10% 1,500 16,500

-6,500Balance of profit brought forward from last year 9,000Balance of profit credited to balance Sheet 2,500

Note: After 1998, Dividend distribution tax at 10% has to provided on dividend to shareholders. Surcharge varies from yr & may be ignored.B/ S of National Insurance Co., Ltd.31.3.2006

Particulars Schedule No. CY PYSources of Funds:Share capital 5 1,50,000 -Reserve and surplus 6 27,500 -Fair value charges account - -Borrowings 7 - -Total 1,77,500Application of Funds: Investments 8 5,25,000 Loans 9 - Fixed assets 10 2,60,000 -Current assets: Cash and Banks Balances 11 51,500 - Advances and other assets 12 17,500 -Sub total (A) 69,000 Current liabilities 13 42,500 Provisions 14 6,34,000 -Sub-Total (B) 6,76,500Net current assets (A) –(B) (6,07,500)Miscellaneous expenditure 15 -Total (B) 1,77,500


Schedule Forming Part of Financial Statements

Schdule1 – Premiums earned (Net) (Rs. 000)Particulars Fire Marine

Premium received 3,50,000 3,50,000Adjustment for change in reserve for unexpired risk:Add: Provision for unexpired risk on 1.4.2005 1,25,000 3,00,000Add: Additional reserve on 1.4.2005 50,000 -

5,25,000 6,75,000Less: Provision for unexpired risk on 31.3.2006 (3,50,000 x 50%) (3,75,000x 100%)

1,75,000 3,75,000

3,50,000 3,00,000Less: Additional reservation on 31.3.2006

Fire : 3,50,000 x 50% + 50,000 67,500Total Premiums (Net) 2,82,500 3,00,000

Schdule2 – claim incurred (Net) ( Rs. 000 )Particulars Fire Marine

Claims paid 80,000 1,00,000Add: Outstanding claims on 31.3.2006 12,500 12,500

92,500 1,12,500Less: Outstanding claims on 1.4.2005 12,500 15,000Claims incurred (Net) 80,000 97,500

Schedule-3 commissionParticulars Fire Marine

Commission on direct business

60,000 55,000

60,000 55,000

Schedule 4 – Operating expenses related to Insurance Business ( Rs. 000 )Particulars Fire Marine

Expenses of Management

1,02,500 1,05,000

1,02,500 1,05,000

Schedule 5 – Share capital ( Rs. 000 )Particulars Fire Marine

Share capital - 1,50,000- 1,50,000


Schedule 6 – Reserve and SurplusParticulars Fir

eMarine

General Reserve 25,000Balance of profit and loss account

2,500

27,500

Schedule 7 – Borrowings Nil

Schedule 8 – InvestmentsGovt. Securities

5,25,000

5,25,000

Schedule 9- Loans Nil

Schedule 10- Fixed assetsPremises 2,50,000 -Less: Depreciation 12,500 2,37,500Furniture 25,000Less: Depreciation 2,500 22,500Total 2,60,000

Schedule 11- Cash and Bank BalanceCash and Bank 51,500

51,500

Schedule 12 – Advances and Other assetsAdvances -Other assets: - Outstanding premiums

17,500

Total 17,500

Schedule 13- Current LiabilitiesClaims outstanding 25,000Due to the Insurance companies 17,500Total 42,500

Schedule 14 – ProvisionsProvisions for unexpired risk :

Fire2,42,500

Marine 3,75,000Provision for taxation 15,000

Dividend distribution tax 1,500Total 6,34,000

Schedule -15- Miscellaneous expenditure Nil


Q14: Preparation of Final A/c of General Insurance: From the following Trial balance as on 31.3.2006 drawn from the books of Calcutta General Insurance Co. Ltd.& with the help of the further information, draw up the separate revenue accounts, P/L A/c for 2005-06 & B/S as on 31.3.2006.

Debit balances Rs. ‘000 Credit balances Rs.’000Claims paid less reinsurance: Share Transfer fee 200Fire 2,00,000 Compensation from L.I.C. (transferred to

P & L A/c)2,00,000

Marine 75,000 General Reserve 50,000Miscellaneous 1,50,000 Share capital (equity shares of Rs.10

each)3,00,000

Commission paid: Balance of funds as on 1.4.05Fire 45,000 Fire 2,50,000Marine 30,000 Marine 50,000Miscellaneous 37,000 Miscellaneous 1,00,000Expenses of management: Unclaimed dividend 5,000Marine 24,000 Amount of due to other insurers 1,75,000Fire 30,000 Sundry creditors 25,000Miscellaneous 22,000 P & L A/c (1.4.05) 30,000Interest accrued but not due 5,000 Interest & Dividends (Net) (not relating

to any fund)20,000

Amount due from other insurers 85,000 Investments reserve 50,000Furniture (Cost 8,000) 7,000 Outstanding claims as on 1.4.05 Building (Cost 1,50,000) 1,40,000 Marine 10,000Cash in hand 8,200 Fire 30,000Cash at bank in current A/c 2,50,000 Miscellaneous 20,000Investments (at cost): Commission on reinsurance ceded:Deposit with R.B.I (Central Govt. Securities)

1,00,000 Fire 15,000

Central Govt. Securities 6,50,000 Marine 18,000State Govt. Securities 2,00,000 Miscellaneous 10,000Fully paid shares of joint stock companies

50,000 Premium less reinsurance:

Marine 2,00,000Fire 3,00,000Miscellaneous 2,50,000


i. O/s claims as on 31.3.06 (Less reinsurance) Fire-Rs.40,000&Marine-Rs.20,000 ThousandsMiscellaneous-Rs.25,000 Thousands

ii. Market value of investments on 31.3.06 – Rs.8,90,000 Thousands.iii. Depreciation on furniture @ 10% and on Buildings @ 2% to be charged to profit and loss A/c.iv. Transfer to general reserve Rs.2,00,000 thousandsv. Reserve for unexpired risks to be provided @ 50% of the premium income for the year.vi. Ignore taxation.


A:Schedule Forming Part of Finance Statements

Schedule 1 –Premiums earned (Net)Particulars Fire Marine Miscellaneou

s

Premiums less reinsurance 3,00,000 2,00,000 2,50,000Adjustments for change in reserve for unexpired risk:Add: Reserve for unexpired risk (1.4.2005) 2,50,000 50,000 1,00,000

5,50,000 2,50,000 3,50,000Less: Reserve for unexpired risk (31.3.2006) (3,00,000x 50%)(2,00,000x50%) (2,50,000x 50%)

1,50,000 1,00,000 1,25,000

Total Premiums earned 4,00,000 1,50,000 2,25,000

Schedule 2 – Claims incurred (Net)Particulars Fire

(Rs. ‘000)Marine

(Rs.’000)Miscellaneou

s(Rs.’000)

Claims paid less reinsurance 2,00,000 75,000 1,50,000Add: Outstanding claims on 31.3.2006 40,000 20,000 25,000

2,40,000 95,000 1,75,000Less: Outstanding claims on 1.4.2005 30,000 10,000 20,000Claims incurred (Net) 2,10,000 85,000 1,55,000

Schedule 3 - CommissionParticulars Fire Marine Miscellaneous

Commission on direct business: 45,000 30,000 37,000Less: Commission on reinsurance ceded 15,000 18,000 10,000Net commission 30,000 12,000 27,000

Schedule 4 – Operating expenses related to Insurance businessParticulars Fire Marine Miscellaneous

Management expenses

30,000 24,000 22,000

30,00 24,000 22,000

Schedule 5 – Share capital3,00,00,000 Shares of Rs.10 each 3,00,000Total 3,00,000

Schedule 6 - Reserves and SurplusGeneral Reserve 50,000Add: Current years transfer 2,00,000 2,50,000Investment Reserve 50,000Balance of Profit and Loss Account 2,26,400Total 5,26,400

Schedule 7 – Borrowings --------Nil


Schedule 8 – InvestmentsCentral Govt. Securities 6,50,000State Govt. Securities 2,00,000Deposit with RBI (Central Govt. Securities)

1,00,000

Fully paid shares of Joint stock companies 50,000Total 10,00,000

Schedule 9 – Loans Nil

Schedule 10 – Fixed assetsBuildings 1,50,000 -Less: Depreciation (10,000 + 3,000) 13,000 1,37,000

2,37,500Furniture 8,000Less: Depreciation (1,000 + 800) 1,800 6,200Total 1,43,200

Schedule 11 – Cash and Bank BalanceCash in hand 8,200Cash at Bank

2,50,000

Total 2,58,000

Schedule 12 – Advances and Other assetsAdvances -Other assets:Interest accrued but not due 5,000Amount due from other insurers

85,000

Total 90,000

Schedule 13 – Current LiabilitiesOutstanding claims:Fire 40,000Marine 20,000Miscellaneous 25,000Outstanding dividend 5,000Amount due to other insurers

1,75,000

Sundry Creditors 25,000Total 2,90,000

Schedule 14 - ProvisionsProvisions for unexpired Risk:Fire 1,50,000Marine 1,00,000Miscellaneous 1,25,000Total 3,75,000

Schedule 15 – Miscellaneous Expenditure Nil


Q15: Calculation of Claims Payable for General Insurance:From the following figures appearing in the books of Fire Insurance division of a General Insurance Company, show the amount of claim as it would appear in the Revenue Account for the year ended 31st March, 1999 :

Direct BusinessRe-Insurance (Rs.)Claim paid during the year 46,70,000 7,00,000Claim Payable— 1st April, 1998 7,63,000 87,000

31st March, 1999 8,12,000 53,000Claims received – 2,30,000Claims Receivable—1st April, 1998 – 65,000

31st March, 1999 – 1,13,000Expenses of Management 2,30,000 –(includes Rs. 35,000 Surveyor’s fee and Rs. 45,000Legal expenses for settlement of claims) (6 marks)(Intermediate–Nov. 1999)

A:General Insurance Company(Abstract showing the amount of claims)Rs ’000

Claims less Re-insurance :Paid during the year 52,20Add : Outstanding claims at the end of the year 7,52

59,72Less : Outstanding claims at the beginning of the year 7,85 51,87

Working Notes : Rs. 0001. Claims paid during the year

Direct business 46,70Reinsurance 7,00 53,70Add: Surveyor’s fee 35Legal expenses 45 80

54,50Less : Claims received from re-insurers 2,30

52,202. Claims outstanding on 31st March, 1999

Direct business 8,12Reinsurance 53 8,65Less Claims receivable from re-insurers 1,13

7,523. Claims outstanding on 1st April, 1998

Direct business 763Reinsurance 87 8,50Less : Claims receivable from re-insurers 65

7,85


Q16: Preparation of Revenue A/c of General Insurance:From the following information as on 31st March, 2002, prepare the Revenue Accounts of Sagar Bhima Co. Ltd. engaged in Marine Insurance Business:

Particulars Direct Business Re-insurance

I. Premium :

Received 24,00,000 3,60,000Receivable – 1st April, 2001 1,20,000 21,000

– 31st March, 2002 1,80,000 28,000Premium paid 2,40,000 –

Payable – 1st April, 2001 – 20,000– 31st March, 2002 – 42,000

II. Claims :Paid 16,50,000 1,25,000Payable – 1st April, 2001 95,000 13,000

– 31st March, 2002 1,75,000 22,000Received – 1,00,000

Receivable – 1st April, 2001 – 9,000– 31st March, 2002 – 12,000

III. Commission :On Insurance accepted 1,50,000 11,000On Insurance ceded – 14,000

Other expenses and income:Salaries – Rs. 2,60,000; Rent, Rates and Taxes – Rs. 18,000; Printing and Stationery – Rs. 23,000; Indian Income Tax paid – Rs. 2,40,000; Interest, Dividend and Rent received (net) – Rs. 1,15,500; Income Tax deducted at source – Rs. 24,500; Legal Expenses (Inclusive of Rs. 20,000 in connection with the settlement of claims) – Rs. 60,000; Bad Debts – Rs. 5,000; Double Income Tax refund – Rs. 12,000; Profit on Sale of Motor car Rs. 5,000.Balance of Fund on 1st April, 2001 was Rs. 26,50,000 including Additional Reserve of Rs. 3,25,000. Additional Reserve has to be maintained at 5% of the net premium of the year.

(16 marks) (PE-II–Nov. 2002) A:In exercise of the powers conferred by Section 114A of the Insurance Act, 1938 (4 of 1938), the Insurance Regulatory and Development Authority in consultation with the Insurance Advisory Committee prescribed the new formats for the financial statements of Insurance Companies i.e. preparation of Financial Statements and Auditor’s Report of Insurance Companies Regulations, 2000. Therefore, the above revenue account can be prepared as:


Form B – RA (Prescribed by IRDA)Revenue Account for the year ended 31st March, 2002Marine Insurance Business

Schedule CY PYPremiums earned (net) 1 25,65,000Change in provision (Rs. 26,93,250 – Rs. 26,50,000)

(-)43,250

Interest, Dividends and Rent – Gross 1,15,500Double Income Tax refund 12,000Profit on sale of motor car 5,000Total (A) 26,54,250Claims incurred (net) 2 17,81,000Commission 3 1,47,000Operating expenses related to Insurance business 4 3,41,000Bad debts 5,000Indian and Foreign taxes 2,40,000Total (B) 25,14,000Profit from Marine Insurance business ( A-B) 1,40,250

Schedules forming part of Revenue Account Schedule –1Premiums earned (net) CY PY

Premiums from direct business written 28,27,000Less: Premium on reinsurance ceded 2,62,000Total Premium earned (net) 25,65,000

Schedule – 2Claims incurred (net) 17,81,000

Schedule – 3Commission paidDirect 1,50,000Add: Re-insurance accepted 11,000Less: reinsurance ceded 14,000

1,47,000Schedule – 4Operating expenses related to insurance businessEmployees’ remuneration and welfare benefits

2,60,000

Rent, Rates and Taxes 18,000Printing and Stationery 23,000Legal and Professional charges 40,000

3,41,000


Working Notes: 1. Total Premium Income Direct Re-insurance

Rs. Rs.Received 24,00,000 3,60,000Add: Receivable on 31st March, 2002 1,80,000 28,000

25,80,000 3,88,000Less: Receivable on 1st April, .2001 1,20,000 21,000

24,60,000 3,67,000Total premium income 24,60,000 + 3,67,000 = 28,27,000

2.Premium Paid

Paid 2,40,000Add: Payable on 31st March, 2002 42,000

2,82,000Less: Payable on 1st April, 2001 20,000

2,62,0003. Claims Paid

Direct Business 16,50,000Re-insurance 1,25,000Legal Expenses 20,000

17,95,000Less: Re-insurance claims received 1,00,000

16,95,0004. Claims outstanding as on 31st March,

2002Direct 1,75,000Re-insurance 22,000

1,97,000Less: Recoverable from Re-insurers on 31st March, 2002 12,000

1,85,0005. Claims outstanding as on 1st April, 2001

Direct 95,000Re-insurance 13,000

1,08,000Less: Recoverable from Re-insurers on 1st April, 2001 9,000

99,0006. Expenses of Management

Salaries 2,60,000Rent, Rates and taxes 18,000Printing and Stationery 23,000Legal Expenses 40,000

3,41,000

Q17: Preparation of Revenue A/c General Insurance (Fire) X Fire Insurance Co. Ltd. commenced its business on 1.4.2005. It submits you the following information for the year ended 31.3.2006:


Rs.

Premiums received 15,00,000

Re-insurance premiums paid 1,00,000

Claims paid 7,00,000

Expenses of Management 3,00,000

Commission paid 50,000

Claims outstanding on 31.3.2006 1,00,000

Create reserve for unexpired risk @40%

Prepare Revenue account for the year ended 31.3.2006.

(4 Marks) (PE-II – May 2006)

(c) Form B – RA (Prescribed by IRDA)Name of the Insurer: X Fire Insurance Co. Ltd.Registration No. and Date of registration with the IRDA: …………………..

Revenue Account for the year ended 31st March, 2006Particulars Schedule Current year

ended on 31st

March, 2006Rs.

1.

Premiums earned (Net) 1 14,00,000

2.

Change in provision for unexpired risk (NIL–5,60,000) 2 (5,60,000)Total (A) 8,40,000

1.

Claims incurred (Net) 3 8,00,000

2.

Commission 50,000

3.

Operating Expenses 4 3,00,000

Total (B) 11,50,000Operating Profit/(Loss) from Fire Insurance Business [C =(A - B)] (3,10,000)

Schedule 1

Premiums earned (Net) Rs.Premium received 15,00,000Less: Premium on re-insurance paid 1,00,000

14,00,000Schedule 2

Reserve for unexpired risk @ 40% on net premium

Rs.14,00,000

40100

= Rs. 5 ,60 ,000

Schedule 3Claims Rs.

Claims paid 7,00,000Add: Claims outstanding on 31.3.2006 1,00,000


8,00,000Schedule 4Operating expenses Rs.

Expenses of Management 3,00,000

Q18: Preparation of Revenue A/c General Insurance (Fire)Prepare the Fire Insurance Revenue A/c as per IRDA regulations for the year ended 31st March, 2008 from the following details:

Rs.Claims paid 4,90,000Legal expenses regarding claims 10,000Premiums received 13,00,000Re-insurance premium paid 1,00,000Commission 3,00,000Expenses of management 2,00,000Provision against unexpired risk on 1st April, 2007 5,50,000Claims unpaid on 1st April, 2007 50,000Claims unpaid on 31st March, 2008 80,000

(6 Marks) (PE II- May, 2008) A

FORM B - RAName of the Insurer:Registration No. and Date of Registration with the IRDA:

Fire Insurance Revenue Accountfor the year ended 31st March, 2008

Particulars Schedule Amount (Rs.)(1) Premium earned 1 11,50,000(2) Other income -(3) Interest, dividend and rent -

Total (A) 11,50,000(4) Claims incurred 2 5,30,000(5) Commission 3 3,00,000(6) Operating expenses related to Insurance

business4 2,00,000

Total (B) 10,30,000Operating Profit (A)- (B) 1,20,000

Schedule 1 : Premium earned (net) Rs.Premium received 13,00,000Less: Re-insurance premium 1,00,000Net premium 12,00,000Adjustment for change in reserve for unexpired risks (Refer W.N.) 50,000

11,50,000

Schedule 2 : Claims Incurred Rs.Claims paid including legal expenses (4,90,000 + 10,000) 5,00,000Add : Claims outstanding at the end of the year 80,000Less : Claims outstanding at the beginning of the year (50,000)Total claims incurred 5,30,000

Schedule 3 : Commission Rs.Commission paid 3,00,000

3,00,000Schedule 4: Operating expenses Rs.


Expenses of management 2,00,0002,00,000

Working Note:Change in the provision for unexpired risk Rs.

Unexpired risk reserve on 31st March, 2008 =50% of net premiumi.e. 50% of Rs.12,00,000 (See Schedule 1) 6,00,000Less : Unexpired risk reserve as on 1st April 2007 5,50,000Change in the provision for unexpired risk 50,000


11 ACCOUNTS OF ELECTRICITY SUPPLY COMPANIES

Replacement of Assets AccountDisposal of SurplusFinal Accounts – Normal Method and Double A/c Method

Q1: Replacement of Assets: A power house originally built for Rs.4,00,000 is to be replaced by a new one. The total cost of the construction is Rs.14,00,000. But the estimated cost of construction of the original size power house is Rs.6,00,000. Find out the amount to be charged to revenue and capital.A:Estimated cost of replacement of the Original power house Rs. 6,00,000 (revenue charge)Total cost of construction Rs. 14,00,000Less: Estimated cost of replacement Rs. 6,00,000

-----------------Rs. 8,00,000 (Capital charge)----------------

Q2: Replacement of Assets: What shall be amount to be charged to revenue and capitalized if the asset of material reused is Rs.12,000 and sale proceeds of old material are Rs.8,000? Should the sale or reuse of old material make any difference in the capital charge?

A:(a) (b) Rs

Calculation of revenue charge:Estimated cost of replacement of original assets

600,000

Less: Cost of material reused 12,000Sale proceeds of material sold 8,000 20,000

Net revenue charge: 580,000

Calculation of capital charge: Total cost a construction 14,00,000Less: Estimated cost of original asset to be replaced 6,00,000

-------------Net amount to be capitalized 8,00,000

------------Cost of material reused and sale proceeds of old materials makes difference only in calculation of revenue charge. Capitalization is not at all affected by these items.

Q3: Replacement of Assets: Electricity supply ltd. Rebuilt and re-equipped on of their Mains at a cash cost of Rs.40,00,000. The old Mains thus superseded cost Rs.15,00,000. The capacity of the new Main is double that of the old Main.

Rs. 70,000 was realized from sale of old materials. Four old motors valued at Rs.2,00,000 salvaged from the old main were used in the reconstruction. The cost of Labour and Materials is respectively 30% and 25% higher now than when the old Main was built. The proportion of Labour to Materials in the Main then end now is 2:3.Show the Journal entries for recording the above transactions, if accounts are maintained under Double Account System.

A: Journal Entries

Rs. Rs.


1. New Main Account Dr.Replacement Account To Bank Account

20,95,00019,05,000

40,00,0002. New Main Account Dr.

To Replacement account2,00,000

2,00,0003. Bank Account Dr.

To Replacement account70,000

70,0004. Revenue Account Dr.

To Replacement account16,35,000

16,35,000

Tutorial Notes:1. Current cost of replacement

Rs. Rs. Rs.Material (3/5 XRs.15 Lakhs) 9,00,000 25% 2,25,000 11,25,000Labour (2/5XRs.15 lakhs) 6,00,000 30% 1,80,000 7,80,000Estimated current cost for replacement of present main(amount to be charged to replacement account) 19,05,000

2. Additional cost of reconstruction of main (to be capitalized)Cash cost of re-building new main 40,00,000Less: Estimated current cost of replacement of existing old main 19,05,000Cost of new main to be capitalized (excluding old motors used) 20,95,000

Replacement AccountDr. Cr.

Rs. Rs.To Bank 19,05,000 By New main A/c 2,00,000

By Bank A/c 70,000By Replacement A/c (Balance) 16,35,000

19,05,000 19,05,000

Q4: Replacement of Assets:X Electricity Company Limited decides to replace one of its old plants with a modern one in April, 2006. The plant when installed in the year 2000, costed the company Rs.26 lakhs, the components of materials and labour being in the ratio of 7:3. It is ascertained that the cost of labour and materials have risen by 30% and 25% respectively. The cost of new plant is Rs.66 lakhs and in addition old materials worth Rs.92,000 are reused. Old materials worth Rs.1,68,000 are sold. Under double account system compute the following:(i) The amount to be written off to Revenue A/c.(ii) The amount to be capitalized.(iii) Draw up the necessary Journal entries.(iv) Draw up the Replacement Account.


A:(i) Statement showing amount to be written off to Revenue Account

Rs.Cost of old plant 26,00,000Add: Increase in cost of material 26 lacs X 7/10X25/100 4,55,000

Increase in cost of Labour 26 lacs X 3/10X30/100 2,34,000Current cost of old plant 32,89,000

Less:

Cost of Material used 92,000

Cost of Material sold 1,68,000 (-) 2,60,000Amount to be written off to Revenue A/c 30,29,000

(ii) Statement showing amount to be capitalisedCost of new plant excluding the value of old materials used 66,00,000Less: Current cost of old plant 32,89,000Current cost to be capitalized 33,11,000Add: Value of old material used 92,000Total amount to be capitalized 34,03,000

(iii) Journal Entries in the Books of X Electricity Company Ltd.Rs. Rs.

(a) Replacement Account Dr. 32,89,000To Bank Account 32,89,000

(b) Plant Account Dr. 34,03,000To Replacement Account 92,000To Bank Account 33,11,000

(c) Bank Account Dr. 1,68,000To Replacement A/c 1,68,000

(d) Revenue A/c Dr. 30,29,000To Replacement Account 30,29,000

(iv)Replacement Account

Dr.

Cr.

Rs. Rs.To Bank A/c 32,89,00

0By New Plant A/c 92,000

By Bank A/c 1,68,000 By Revenue A/c (Balance) 30,29,00032,89,00

032,89,000

Q5: Distribution of Surplus:‘H’ Electricity Company earned a profit of Rs.60,00,000 (after tax) after paying Rs.48,000 at 12% interest on debentures for the year ended 31.3.2007. The following further information is supplied to you:


Show, how the profits of the company will be dealt with under the provisions of the Electricity Act, assuming the bank rate of the year was 8%. All working notes should form part of your answer.

(16 Marks) (PE II, Nov. 2007) A:

‘H’ Electricity CompanyStatement of Distribution of Profit for the year ended 31.3.2007

Capital BaseRs. Rs.

Fixed Assets as reduced by customers contribution (600 – 4.5 lacs) 5,95,50,000Intangible Assets 17,50,000Monthly average of C A (Excluding due from customers Rs 5 lacs)

31,00,000

Contingencies Reserve Fund Investment 25,00,000 6,69,00,000Deduct:Depreciation Reserve 60,00,000Loan from Electricity Board 50,00,00012% Debentures (48000X100/12) 4,00,000Development Reserve 16,00,000Security Deposits of Customers 80,00,000Tariffs and Dividends Control Reserve 22,00,000 2,32,00,000Capital Base 4,37,00,000

Reasonable ReturnRs.

10% (Bank Rate + 2%) on Capital Base 43,70,0008% on Reserve Fund Investment 4,80,000½% on Loan from Electricity Board 25,000½% on Debentures 2,000½% on Development Reserve 8,000Reasonable Return 48,85,000

Surplus and its DisposalRs.

Clear Profit 60,00,000Surplus (Rs.60,00,000 – Rs.48,85,000) 11,15,000Less: 20% of Reasonable Return (to be disposed off) 9,77,000Amount refundable to consumers 1,38,000


Rs.Share Capital 2,50,00,000Reserve Fund Investment (invested in 8% Government Securities at par) 60,00,000Contingencies Reserve Fund Investment (7%) 25,00,000Loan from State Electricity Board 50,00,000Development Reserve 16,00,000Fixed Assets 6,00,00,000Depreciation Reserve on Fixed Assets 60,00,000Security Deposits of customers 80,00,000Amount contributed by consumers towards cost of Fixed Assets 4,50,000Intangible Assets 17,50,000Tariffs and Dividends Control Reserve 22,00,000Monthly average of C A including amount due from customers Rs.5,00,000 36,00,000

Disposal of Surplus of Rs. 977,000Rs.

(i) 1/3rd of surplus over clear profit limited to 5% of reasonable return will beat the disposal of the company i.e. s.3,71,667 >Rs.2,44,250 2,44,250

(ii) Credit to Tariffs and Dividends Control Reserve (1/2 of remaining) 3,66,375(iii)

Credit to Consumers’ Suspense Account 3,66,375

9,77,000

Total amount at the disposal of the companyRs.

(a) Amount of reasonable return 48,85,000(b)

Share in surplus 2,44,250

51,29,250

Total amount refunded to consumersRs.

(a) Surplus in excess of 20% of reasonable return

1,38,000

(b) Share in surplus 3,66,3755,04,375

Q6: Calculation of Clear Profit, Capital Base and Distribution of Surplus: From the following details of an electricity supply company, maintaining accounts under Double Account System, calculate the following:a. Clear Profit, b. capital base, c. reasonable return, and d. amounts available for dividends and contributions to tariff and dividend control reserve and consumer’s rebate reserve.

Rs.Sale of energy 12,40,000Meters rents 90,000Transfer fees 1,000Costs of generation 605,000Distribution and selling expenses 65,000Rent, Rates and Taxes 18,000Audit fees 5,000Intangible written off 3,000Management expenses 90,000Depreciation 60,000Interest on loan from electricity board 9,000Contingency reserve investment income

5,000

Interest on security deposit 1,000Interest on provident fund 600Contribution to provident fund 32,000

Original cost of Fixed Assets is Rs.27,00,000; contributions by consumers for acquisition of such fixed assets Rs.2,00,000; cost of intangibles Rs.50,000; contingency reserve investments of Rs.50,000; stores opening and closing Rs.40,000 and Rs.60,000 respectively; cash and Bank balances-opening Rs.30,000 and Closing Rs.50,000.


Depreciation up to the beginning of the year Rs.5,00,000. Intangibles written off up to the beginning of the year Rs.40,000. Security deposit of customers held in cash Rs.20,000, Tariff and dividend control reserve-opening balance Rs.80,000. Development Reserve opening balance Rs.1,20,000.

Amount carried forward fro distribution to consumers Rs.15,000. Loan from State Electricity Board Rs.90,000. No new plant and Machinery was added in the year. Transfer in the year to Contingency Reserve was Rs.8,000. Reserve Bank rate is to be adopted at 8%.

A: Clear ProfitRs.

Revenue : State of energy 12,40,000Meters rents 90,000Transfer fees 1,000Contingency reserve investment income 5,000Interest on bank deposits 600

13,36,600Less: Opening Expenses:Cost of generation 6,05,000Distribution and selling expenses 65,000Rent, Rates and Taxes 18,000Interest on loan from Electricity board 9,000Interest on security deposit 1,000Audit fees 5,000Management expenses 90,000Depreciation 60,000Contribution to provident fund 32,000 8,85,000

4,51,600Less: Special appropriations:Intangible assets written off 3,000Transfer to Contingency Reserve 8,000 11,000Clear profit Rs.4,40,600

(a) Capital Base:Rs. Rs.

Depreciation written off 5,60,000 Original cost of fixed assets 27,00,000

Intangible assets written off 43,000 Less: Contribution from Consumers 2,00,000 25,00,000

Loan from Electricity Board 90,000 Cost of intangible assets 50,000Tariff and dividend control reserve 80,000 Contingency Reserve investments 50,000Security deposit of customers 20,000 Working capital 90,000Development reserve 1,20,000 ½ (40,000+60,000) =50,000

½ (30,000+50,000)=40,000Amount carried forward for distribution to consumers 15,000Capital base 17,62,00

026,90,00

026,90,000

(b) Reasonable return: Rs.(i) Bank rate 8% + 2% =10% on capital base of Rs.17,62,000 1,76,200


(ii) Add: Investment Income on Bank deposits 600(iii) ½ % on Bank loan from Electricity Board of Rs.90,000 450(iv) ½ % on development reserve Rs.1,20,000 600

1,77,850(c) Amount available for dividend:

Clear profit 4,40,600Less: Reasonable return 1,77,850

2,62,7501/3 rd thereof, viz., Rs.87,583 or 5% or reasonable return, viz., Rs.8,893 whichever is less. Hence, amount available for dividend out of current year’s profit is Rs.8,893.

(d) Contribution to:Tariff and Dividend Control Reserve Rs.1,26,929 (50% of Rs.2,62,750-Rs.8,893)Contribution to consumers rebate reserve-balance Rs.1,26,929

Q7: Final Account - Normal Method and Double A/c Method: The following is the Trial Balance of Electricity Light and Power Company Ltd. As at 31st March, 2002. Prepare the final accounts:i. Using the old forms, andii. Using the Statutory Forms prescribed by Electricity Rules, 1956.

Trial Balance As on 31st March, 2002

Dr. - Rs. Cr. - Rs.

Preliminary expenses 10000

Cost of licence 15000

Buildings 350000

Plant 450000

Mains 175000

Tools and instruments 20000

Transformers 100000

Meters 50000

Furniture and fixtures 60000

Share capital 400000

8% Debentures 300000

Sundry creditors 35000

Reserve fund 100000

Reserve fund investment 100000

Sales of ashes 5000

Rent and taxes 10000

Fuel, oil, waste, etc., at generation station 125000

Wages at plant 120000

Distribution wages 40000

Materials 30000

Balance of Net Revenue A/c 40000

Transfer fee 1000

Depreciation fund 150000

Bad debts 1000


Law charges 4000

Cash in hand 10000

Cash at bank 60000

Sundry debtors 27000

Fixed deposit with banks 50000

Management expenses 24000

Directors’ remuneration 6000

Auditors’ remuneration 2000

Stores in hand 20000

Repairs-Generation plant 4000

-Distribution 2000

Prepaid expenses 2000

Street lighting expenses 60000

Sale of energy for lighting 450000

Sale of energy for power 310000

Sale of energy for under special contracts 150000

Miscellaneous receipts 1000

Salaries of engineers and staff

-Generation 40000

-Distribution 15000

-Office 200001,972,00

01,972,00

0

Additional information(1) Additions to fixed assets and capital during the year: Rs.Buildings 50,000Plant 1,20,000Mains 25,000Share capital 1,00,000(2) Depreciation to be provided for the year:Buildings 30,000Plant 35,000Mains 25,000Meters 5,000Transformers 10,000Tools and instruments 2,000Furniture and fixtures 5,000(3) Interest on debentures to be provided for one year.(4) Provide for income tax Rs.30,000(5) Transfer to reserve fund Rs.15,000A: (i) Using old forms.

Revenue Account for the year ended 31st March, 2002Dr. Cr.

Rs Rs.A. Generation

To fuel, Oil and waste 1,25,000 By Sale of energy for lighting 4,50,000


To salary of engineers 40,000 BY sale of energy for power 3,10,000To wages 1,20,000 By sale of energy under special contracts 1,50,000To Repairs 40,000 By meter rent 30,000

B. DistributionTo salary of engineers 15,000 By sale of ashes 5,000To wages 40,000 By Transfer fees 1,000To Repairs 2,000 By Miscellaneous receipts 1,000

C. Public LampsTo street lighting expenses 60,000

D. Rent, Rates, and TaxesTo Rent and Taxes 10,000

E. Management ExpensesTo Directors’ remuneration 6,000To Management expenses 24,000To Salaries of office staff 20,000To Auditors’ remuneration 2,000

F. Law chargesTo law charges 4,000

G. DepreciationTo Buildings 30,000To Plant 35,000To Mains 25,000To meters 5,000To Transformers 10,000To Tools and investments 2,000To Furniture and Fixtures 5,000

H. Spl. ChargesTo Bad Debt 1,000

5,85,000To Balance carried to net revenue account 3,62,000

9,47,000 9,47,000


Net Revenue AccountDr. Cr.

Rs Rs.To Interest on debentures 24,000 By Balance from last account 40,000To Reserve fund 15,000 By Balance from revenue A/c 3,62,000To Income tax 30,000To Balance carried to general balance sheet 3,33,000

4,02,000 4,02,000Capital Account

For the year ended 31st March, 2002Dr. Cr.

Expenditure

To

Expendi -ture up to

31.3.01Rs.

Expend. during

the yearRs.

Expendi -ture up to 31.3.2002

Rs.

Receipts

By

Receipts up to

31.3.01Rs.

Receipts during the

yearRs.

Receipts up to

31.3.02Rs.

Preliminary expenses

10,000 - 10,000 Share capital

3,00,000 1,00,000 4,00,000

Cost of licence 15,000 - 15,000 Deben 3,00,000 - 3,00,000Building 3,00,000 50,000 3,50,000Plant 3,30,000 1,20,000 4,50,000Mains 1,50,000 25,000 1,75,000Tools and investments

20,000 - 20,000

Transformers 1,00,000 - 1,00,000Meters 50,000 - 50,000Furniture and fixtures

60,000 - 60,000

Total expenditure 10,35,000 1,95,000 12,30,000 Total receipts

6,00,000 1,00,000 7,00,000

Balance 5,30,00012,30,000 12,30,000

General Balance Sheet as at 31st March, 2002Liabilities Rs Assets Rs.

Capital A/c –receipts 7,00,000 Capital A/c-expenditure 12,30,000Sundry creditors 35,000 Stores in hand 20,000Net revenue account 3,33,000 Sundry debtors 27,000Reserve fund 1,15,000 Reserve fund investments 1,00,000Depreciation fund 2,162,000 Fixed deposit with banks 50,000Provision for income tax 30,000 Prepaid expenses 2,000Interest on debentures outstanding 24,000 Cash at bank 60,000

Cash in hand 10,00014,99,000 14,99,000


ii) Under the new forms prescribed by the Electricity Rules, 1956Statement No.1

Statement of Share and Loan capitalFor the year ended 31st March, 2002

Description of Capital Balanceat the

beginning of the year

Rs.

Receipts during the

yearRs.

Redeemed during the

YearRs.

Balance at the end of the

yearRs.

Re-marks

A. Share capital –Authorized, issued, subscribed ….shares of Rs. …..each, fully called 3,00,000 1,00,000 - 4,00,000

3,00,000 1,00,000 - 4,00,000B. Capital reserve - - - -C. Loan Capital 8%

Debentures3,00,000 - - 3,00,000

3,00,000 3,00,000D. Other Capital - - - -

Total capital raised and appropriated

6,00,000 1,00,000 - 7,00,000

Statement No. II Statement of Capital Expenditure for the year ended 31. Mar.02

Particulars

Balance at the

beginning of the year

Rs.

Addition during

the yearRs.

Retirement during the Year

Rs.

Balance at the end

of the yearRs.

Remarks

A. Intangible Assets Preliminary expenses 10,000 - - 10,000Cost of licence 15,000 - - 15,000

25,000 25,000B. Hydraulic power Plant - - - -C. Steam power plant - - - -D. Internal Combustion

power plant Building 3,00,000 50,000-

3,50,000Plant 3,30,000 1,20,000 - 4,50,000

6,30,000 1,70,000 - 8,00,000E. Transmission plant Transformers 1,00,000 - - 1,00,000

1,00,000 - - 1,00,000F. Distribution (H.V.)

Mains 1,50,000 25,000 - 1,75,000Meters 50,000 - 50,000

2,00,000 25,000 - 2,25,000G. Distribution (M&L.V) - - - -H. Public Lighting - - - -I. General Equipment

Tools and Instruments 20,000 - - 20,000Furniture & Fixtures 60,000 - - 60,000

80,000 80,000Total Capital Assets in use 10,35,000 1,95,000 - 12,30,000


Statement No. IIIStatement of Operating Revenue For the year ended 31st March, 2002

Particulars of revenue

Corresponding amount for the previous year

Rs.

Amount for the year

Rs.

Remarks

A. Net revenue by sale of electricity Domestic and residential industrial 4,50,000Special contract 3,10,000Total revenue by sale of electricity 1,50,000

9,10,000B. Miscellaneous Revenue from Consumers

Rent from meters 30,000Transfer fees 1,000Total miscellaneous revenue from customers 31,000

C. Other Revenue Sale of ashes 5,000Miscellaneous receipts 1,000

6,000Total operating revenue 9,47,000Less Total operating expenses as per statement No. IV 5,85,000Net Surplus carried to Net Revenue and Appropriation Account Statement X 3,62,000

Statement No. IVStatement of Operating ExpensesFor the year ended 31st March, 2002

Particulars of revenue

Corresponding amount for the previous year

Rs.

Amount for the year

Rs.

Remarks

A. Hydraulic power Generation - -B. Steam power Generation -C. Internal combustion power generation(a) Operation:

Fuel, Oil and waste 1,25,000 Salary of engineers 40,000 Wages 1,20,000Total Operation 2,85,000

(b) Maintenance: Repairs 4,000 Total maintenance 4,000

(c) Depreciation Buildings 30,000 Plant 35,000

65,000Total Generation Expenses (A+B+C) 3,54,000

D. Power purchased -Total production expenses 3,54,000

E. Transmissiona) Operation and Maintenance -b) Depreciation 10,000

Total transmission expenses 10,000F. Distribution (H.V)


a) Operation and MaintenanceSalary of engineers 15,000Wages 40,000Repairs 2,000

b) DepreciationMains and meters 30,000Total distribution expenses 87,000

G. Distribution (M. & L.V.)H. Public Lightinga) Operation and Maintenance -

Street lighting expenses 60,000Total public lighting expenses 60,000

I. Consumers’ Servicing -J. General Establishment Expenses

Salaries of staff 20,0000Management expenses 24,000Auditors 2,000Rent and taxes 10,000Law charges 4,000Depreciation-Furniture 5,000Tools and instruments 2,000Total general establishment chares 67,000

K. Other chargesBad debts 1,000Total other charges 1,000

L. Management expensesDirectors’ remuneration 6,000Total management expenses 6,000Total operating expenses transferred to Statement No.III 5,85,000

Statement No. IXNew Revenue and Appropriation AccountFor the year ended 31.Mar.02P/Y

Rs.

Particulars AmountRs.

P/YRs.


To taxes on income 30,000 By Balance of last year 40,000To Interest on debentures

24,000 By operating surplus on per statement No.III

3,62,000

To Reserve fund 15,000To Balance carried over 3,33,000

4,02,000 4,02,000


Statement No. XIIGeneral Balance Sheet For the year ended 31st March, 2002Figures of PY

Rs.


Figures of previous Year

Rs.


1. capital raised and Appropriate Statement I

7,00,000 1. Capital Expenditure Statement II

12,30,000

Reserve and surplus Less: Depreciation Fund Statement V

2,62,000

2. Reserve fund 1,15,000 Net Block 9,68,0003. Balance of net revenue

A/c –statement X 3,33,000

Current Assets

Current liabilities and Provisions

2. Stores in hand 20,000

4.Cretidors 35,000 3. Debtors reserve fund 27,000 5.Interest on debentures outstanding

24,000 4. Investment 1,00,000

6.Income tax provision 30,000 5. Fixed deposit with bank

50,000

6. Prepaid expenses 2,0007. Cash at bank 60,0008. Cash in hand 10,000

12,37,000 12,37,000


12 RATIO ANALYSES

Q: Calculation of RatiosQ: Preparation of Balance Sheet:Q: Completion of Balance Sheet:Q: Preparation of Profit and Loss A/c and Balance Sheet from Ratios:

Q1: Calculation of RatiosJKL Limited has the following Balance Sheets as on March 31of 2006 and 2005:

Particulars Rs. in lakhs31.03.06 31.03.05

Sources of Funds:Shareholders Funds 2,377 1,472Loan Funds 3,570 3,083

5,947 4,555Applications of Funds:

Fixed Assets 3,466 2,900Cash and bank 489 470Debtors 1,495 1,168Stock 2,867 2,407Other Current Assets 1,567 1,404

Less: Current Liabilities (3,937) (3,794) 5,947 4,555

The Income Statement of the JKL Ltd. for the year ended is as follows:Particulars Rs. in lakhs

31.03.06 31.0305Sales 22,165 13,882Less: Cost of Goods sold 20,860 12,544

Gross Profit 1,305 1,338Less: Selling, General & Administrative expenses 1,135 752Earnings before Interest & Tax (EBIT) 170 586Interest Expense 113 105Profits before Tax 57 481Tax 23 192Profits after Tax (PAT) 34 289

Required: (i) Calculate for the year 2005-06:

(a) Inventory turnover ratio(b) Financial Leverage(c) Return on Investment (ROI)(d) Return on Equity (ROE)(e) Average Collection period.

(ii) Give a brief comment on the Financial Position of JKL Limited.(PE-II-May 2006)(12 marks)


A:Ratios for the year 2005-2006(i) (a) Inventory turnover ratio

=COGSAverage Inventory

=20,860(2,867 + 2,407 )

2 = 7.91

(b)Financial leverage 2005-06 2004-05

=EBITEBIT − I

=17057

=586481

= 2.98 = 1.22(c) ROI

=NOPATSales

×SalesAverage Capital employed

=57 ×(1 −. 4 )22,165

×22,165(5,947 + 4,555 )

2= 34 .2

22,165×22,165

5 ,251 = 0.65%(d) ROE

=PATAverage shareholders' funds

= 34(2,377 + 1,472 )

2= 34

1,924 .5 = 1.77%(e) Average Collection Period*

Average Sales per day=22,165365

= Rs. 60 .73 lakhs

Average collection period=Average DebtorsAverage sales per day =

(1,495 + 1,168 )2

60 .73=1331 .5

60 .73 = 22 days*Note: In the above solution, 1 year = 365 days has been assumed. Alternatively, some candidates may give the solution on the basis 1 year = 360 days. (ii) Brief Comment on the financial position of JKL Ltd.The profitability of operations of the company are showing sharp decline due to increase in operating expenses. The financial and operating leverages are becoming adverse.The liquidity of the company is under great stress.

Q2: Preparation of Balance Sheet:From the following information, prepare a summarised Balance Sheet as at 31st March, 2002:

Working Capital Rs.2,40,000Bank overdraft Rs.40,000Fixed Assets to Proprietary ratio 0.75Reserves and Surplus Rs.1,60,000Current ratio 2.5Liquid ratio 1.5

(PE-II-Nov.2002) (6 marks)A Working notes:1. Current assets and Current liabilities computation:

Current assetsCurrent liabilities

=2 . 51 or

Current assets2 .5

¿ Current liabilities

1 = k (say)Or Current assets = 2.5 k and Current liabilities = kOr Working capital = ( Current assets Current liabilities)


Or Rs.2,40,000 = k (2.5 1) = 1.5 kOr k = Rs. 1,60,000 Current liabilities = Rs. 1,60,000Current assets = Rs.1,60,000 2.5 = Rs.4,00,000

2. Computation of stock

Liquid ratio =

Liquid assetsCurrent liabilities

Or 1.5 =

Current assets - StockRs .1,60,000

Or 1.5 Rs.1,60,000 = Rs.4,00,000 StockOr Stock = Rs.1,60,000

3. Computation of Proprietary fund; Fixed assets; Capital and Sundry creditors

Proprietary ratio =

Fixed assetsProprietary fund

=0 .75

Fixed assets = 0.75 Proprietary fundand Net working capital = 0.25 Proprietary fundOr Rs.2,40,000/0.25 = Proprietary fundOr Proprietary fund = Rs.9,60,000and Fixed assets = 0.75 proprietary fund

= 0.75 Rs.9,60,000 = Rs.7,20,000Capital = Proprietary fund Reserves & Surplus

= Rs.9,60,000 Rs.1,60,000 = Rs.8,00,000Sundry creditors = (Current liabilities Bank overdraft)

= (Rs.1,60,000 Rs.40,000) =Rs.1,20,000Construction of Balance sheet: (Refer to working notes 1 to 3)

Balance SheetLiabilities Rs. Assets Rs.

Capital 8,00,000 Fixed assets 7,20,000Reserves & Surplus

1,60,000 Stock 1,60,000

Bank overdraft 40,000 Current assets

2,40,000

Sundry creditors 1,20,00011,20,000 11,20,000

Q3: Completion of Balance Sheet:With the help of the following information complete the Balance Sheet of MNOP Ltd.:Equity share capital Rs. 1,00,000The relevant ratios of the company are as follows:Current debt to total debt .40Total debt to owner’s equity .60Fixed assets to owner’s equity .60Total assets turnover 2 TimesInventory turnover 8 Times

(PE-II-May 2005) (7 marks)


A: MNOP Ltd Balance SheetLiabilities Rs Assets Rs

Owner equity 1,00,000 Fixed assets 60,000Current debt 24,000 Cash 60,000Long term debt 36,000 Inventory 40,000

1,60,000 1,60,000

Working Notes1. Total debt = 0.60 ¿ Owners equity = 0.60 ¿ Rs 1,00,000 = Rs 60,000

Current debt to total debt = 0.40 , hence current debt = 0.40 ¿ 60,000 = 24,0002. Fixed assets = 0.60 ¿ Owners equity = 0.60 ¿ Rs 1,00,000 = Rs 60,0003. Total equity = Total debt + Owners equity = Rs.60,000+Rs.1,00,000 = Rs.1,60,0004. Total assets consisting of fixed assets and current assets must be equal to Rs

1,60,000 (Assets = Liabilities + Owners equity). Since Fixed assets are Rs 60,000 , hence, current assets should be Rs 1,00,0005. Total assets to turnover = 2 Times : Inventory turnover = 8 Times

Hence, Inventory /Total assets = 2/8=1/4, Total assets = 1,60,000Therefore Inventory = 1,60,000/4 = 40,000Balance on Asset side Cash = 1,00,000 – 40,000 = 60,000

Q4: Completion of Balance Sheet:Using the following data, complete the Balance Sheet given below:

Gross Profits Rs. 54,000Shareholders’ Funds RsRs.6,00,000Gross Profit margin 20%Credit sales to Total sales 80%Total Assets turnover 0.3 timesInventory turnover 4 timesAverage collection period(360 days year) 20 daysCurrent ratio 1.8Long-term Debt to Equity 40%

Balance SheetCreditors …………

…Cash ……………

Long-term debt ……………

Debtors ……………

Shareholders’ funds ……………

Inventory ……………

Fixed assets ……………

(PE-II-Nov. 2005)(12 Marks)A: Gross Profits Rs. 54,000Gross Profit Margin 20%

Sales =

Gross ProfitsGross Profit Margin = Rs. 54,000 / 0.20 = Rs. 2,70,000

Credit Sales to Total Sales = 80%, Credit Sales = Rs. 2,70,000×0.80 = Rs. 2,16,000 Total

Assets Turnover = 0.3 times, Total Assets =

SalesTotal Assets =

2 ,70 ,0000.3 = 900,000

Sales – Gross Profits = COGS


COGS = Rs. 2,70,000 – 54,000 = Rs. 2,16,000Inventory turnover = 4 times

Inventory =

COGSInventory turnover

=2 ,16 , 0004 = Rs.54,000

Average Collection Period = 20 days

Debtors turnover =

360Average Collection Period = 360/20=18

Debtors =

Credit SalesDebtors turnover =

Rs . 2,16,00018 = Rs.12,000

Current ratio = 1.8 , hence 1.8 =

Debtors + Inventory + CashCreditors

1.8 Creditors = (Rs. 12,000 + Rs. 54,000 + Cash)1.8 Creditors = Rs. 66,000 + Cash

Long-term Debt to Equity = 40%Shareholders Funds = Rs. 6,00,000Long-term Debt= Rs. 6,00,000×40% = Rs. 2,40,000Creditors (Bal .fig) = 9,00,000 – (6,00,000 + 2,40,000) = Rs. 60,000Cash = (60,000×1.8) – 66,000 = Rs. 42,000

Balance Sheet (in Rs)Creditors (Bal. Fig) 60,000 Cash 42,000

Debtors 12,000Long- term debt 2,40,000 Inventory 54,000Shareholders’ funds 6,00,000 FixedAsset(Bal.fig) 7,92,000

9,00,000 9,00,000

Q5: Completion of Balance Sheet:Using the following information, complete the Balance Sheet given below:

(i) Total debt to net worth 1 : 2(ii) Total assets turnover 2(iii)

Gross profit on sales 30%

(iv) Average collection period 40days(Assume 360 days in a year)

(v) Inventory turnover ratio (cost of goods sold/ Cl. Inventory)

3

(vi) Acid test ratio 0.75Balance Sheet as on March 31, 2007

Liabilities Rs. Assets Rs.Equity Shares Capital 4,00,000 Fixed Assets Reserves and Surplus 6,00,000 Current Assets:Total Debt: Inventory

Current Liabilities Debtors Cash

_______ _______ (PE-II-Nov. 2007) (8 marks)


A: Networth = Capital + Reserves and surplus = 4,00,000 + 6,00,000 = Rs. 10,00,000

Total DebtNetworth

=12

, Total debt = Rs. 5,00,000

Total Liability side = 4,00,000 + 6,00,000 + 5,00,000 = Rs. 15,00,000= Total Assets

Total Assets Turnover =

SalesTotal assets 2 =

Sales15,00,000 Sales = Rs. 30,00,000

Gross Profit on Sales : 30% i.e. Rs. 9,00,000,COGS = Rs. 30,00,000 – Rs. 9,00,000 = Rs. 21,00,000

Inventory turnover =

COGSInventory

, 3 =

21,00,000Inventory

, Inventory = Rs. 7,00,000

Average collection period =

Average debtorsSales / day

, 40 =

Debtors30,00,000 / 360

, Debtors = Rs. 3,33,333.

Acid test ratio =

Current Assets − StockCurrent liabilities

0.75 =

Current Assets − 7,00,0005,00,000

Current Assets = Rs. 10,75,000.Fixed Assets = Total Assets – Current Assets = 15,00,000 – 10,75,000 = Rs. 4,25,000Cash and Bank balance = Current Assets – Inventory – Debtors

= 10,75,000 – 7,00,000 – 3,33,333 = Rs. 41,667.

Balance Sheet as on March 31, 2007Liabilities Rs. Assets Rs.

Equity Share Capital

4,00,000 Fixed Assets 425,000

Reserves & Surplus 6,00,000 Current Assets:Total Debt: Inventory 7,00,000Current liabilities 5,00,000 Debtors 3,33,333

Cash 41,6675,00,000 15,00,000

Q6: Preparation of Profit and Loss A/c and Balance Sheet from Ratios:The following accounting information & financial ratios of PQR Ltd. relate to the year ended 31-12-2006:

I Accounting Information: Gross Profit 15% of SalesNet profit 8% of sales

Raw materials consumed 20% of workscostDirect wages 10% of workscost

Stock of raw materials 3 months’ usageStock of finished goods 6% of works costDebt collection period 60 daysAll sales are on credit

II Financial Ratios:Fixed assets to sales 1 : 3Fixed assets to Current assets 13 : 11Current ratio 2 : 1


Long-term loans to Current liabilities 2 : 1Capital to Reserves and Surplus 1 : 4

If value of fixed assets as on 31-12-2005 amounted to Rs. 26 lakhs, prepare a summarised P&L A/c of the company for the year ended 31-12-2006 & also the B/S. (PE-II-May 07)Answer (a) Working Notes:

(i) Sales =

Fixed AssetsSales

=13

,

26,00,000Sales

=13

⇒ Sales =Rs .78,00,000

(ii) Current Assets =

Fixed AssetsCurrent Assets

=1311

,

26,00,000Current Assets

=1311

⇒ Current Assets =Rs . 22,00,000

(iii) Calculation of Raw Material Consumption and Direct WagesSALES 78,00,000LESS: GROSS PROFIT 11,70,000WORKS COST 66,30,000

Raw Material Consumption (20% of Works Cost) Rs. 13,26,000

Direct Wages (10% of Works Cost) Rs. 6,63,000

(iv) Stock of Raw Materials (= 3 months usage) = 13,26,000

312

=Rs . 3,31,500

(v) Stock of Finished Goods (= 6% of Works Cost) = 66,30,000

6100

=Rs . 3,97,800

(vi) Current Liabilities=

Current AssetsCurrent Liabilities

=2

,

22,00,000Current Liabilities

=2 ⇒ CL = 11,00,000

(vii) Debtors = ACP =

DebtorsCredit Sales

× 365

,

Debtors78,00,000

× 365= 60 ⇒Debtors = 12,82,192

(viii) Long term Loan =

Long term LoanCurrent Liabilities

=21

,

Long term loan11,00,000

=21⇒Long term loan = 22,00,000 .

(ix) Calculation of Cash BalanceCURRENT ASSETS 22,00,000LESS: DEBTORS 12,82,192

RAW MATERIALS STOCK 3,31,500 FINISHED GOODS STOCK 3,97,800 20,11,492

CASH BALANCE 1,88,508(x) Calculation of Net worth

FIXED ASSETS 26,00,000CURRENT ASSETS 22,00,000TOTAL ASSETS 48,00,000LESS: LONG TERM LOAN 22,00,000

CURRENT LIABILITIES 11,00,000

33,00,000

NET WORTH 15,00,000


Net worth = Share capital + Reserves = 15,00,000CapitalReserves and Surplus

=14

⇒Share Capital = 15,00,000 ×15=Rs . 3,00,000

Reserves and Surplus =15,00,000 ×45=Rs. 12,00,000

PROFIT AND LOSS A/C OF PQR LTD.FOR THE YEAR ENDED 31-12-2006To

Direct materials 13,26,000 By Sales 78,00,000

To

Direct wages 6,63,000

To

Works (overhead)(bal fig)

46,41,000

To

G p c/d (15% of sales) 11,70,000

78,00,000 78,00,000

To

Selling&distribution (bal) 5,46,000 By G p b/d 11,70,000

To

Net profit (8% of sales) 6,24,000

11,70,000 11,70,000B/S OF PQR LTD.AS AT 31-12-2006


Share capital 3,00,000 Fixed assets 26,00,000

Reserves & surplus 12,00,000 Current assets:

Long term loans 22,00,000 Stock of raw material 3,31,500

Current liabilities 11,00,000 Stock of finished goods 3,97,800

Debtors 12,82,192________ Cash 1,88,508

48,00,000 48,00,000

Q7: Complete Ratio Analysis:Following incomplete information of X Ltd. are given below: Trading and Profit & Loss Account for the year ended 31st March, 2008

Rs.’000

Rs.’000

To

Opening stock 700 By Sales ?

To

Purchases ? By Closing stock ?

To

Direct expenses 175

To

Gross profit c/d ?

? ?To

Establishment expenses 740 By Gross profit b/d

?

To

Interest on loan 60 By Commission 100

T Provision for taxation ?


oTo

Net profit c/d ?

? ?To

Proposed dividends ? By Balance b/f 140

To

Transfer to general reserve ? By Net profit b/d ?

To

Balance transferred to Balance sheet ?

? ?Balance Sheet as at 31st March, 2008

Liabilities (Rs.’000)

Assets (Rs.’000)

Paid-up capital 1,000 Fixed assets:General reserve: Plant & machinery 1,400Balance at the beginning of the year ? Other fixed assets ?Proposed addition ? Current assets:Profit and loss account ? Stock ?10% Loan account ? Sundry debtors ?Current liabilities ? Cash at bank 125

? ? Other information:

(i) Current ratio is 2:1.(ii) Closing stock is 25% of sales.(iii) Proposed dividends to paid-up capital ratio is 2:3.

(iv) Gross profit ratio is 60% of turnover.(iv) Loan is half of current liabilities.(v) Transfer to general reserves to proposed dividends ratio is 1:1.(vi) Profit carried forward is 10% of proposed dividends.(vii) Provision for taxation is equal to the amount of net profit of the year.(viii) Balance to credit of general reserve at the beginning of the year is twice the amount

transferred to that account from the current year’s profits.All working notes should be part of your answer. You are required to complete:

(i) Trading and Profit and Loss A/c for the year ended 31 st March, 2008 &(ii) The Balance Sheet as on that date. (20 Marks)(May, 2008)

A: Trading and Profit & Loss A/c for the year ended 31-3-2008Particulars (Rs.‘000s) Particulars (Rs.‘000s)

To Opening stock 700.00 By Sales (W.N.10) 5366.66To Purchases (Bal. Fig.) 2613.33 By Closing stock (W.N.11) 1341.67To Direct expenses 175.00To Gross profit c/d (W.N.9) 3,220.00

6,708.33 6,708.33To Establishment expenses 740.00 By Gross profit (Bal. Fig) 3,220.00To Interest on loan 60.00 By Commission 100.00To Provision for tax (W.N.8) 1,260.00To Net profit c/d 1,260.00

3,320.00 3,320.00To Proposed dividends (W.N.1) 666.67 By Balance b/f 140.00To Transfer to general reserve 666.67 By Net profit (Bal Fig) 1,260.00


(W.N.2)To Balance transferred to

B/S(W.N.3) 66.661,400.00 1,400.00

Balance Sheet as at 31st March, 2008Liabilities (Rs.‘000s

)Assets (Rs. in ‘000s)

Paid-up capital 1,000.00 Fixed assets:General reserve: Plant & machinery 1,400.00Balance at the beginning (W.N.14)

1333.34 Other fixed assets (Bal Fig)

1066.67

Proposed addition (W.N.2) 666.67 Current Assets:Profit and loss A/c 66.66 Stock (W.N.11) 1341.6710% Loan A/c (W.N.4) 600.00 Sundry debtors (W.N.13) 933.33Current liabilities (W.N.5) 1,200.00 Cash at bank 125.00

4,866.67 4,866.67Working Notes:1. Proposed dividend to paid up capital is 2:3.

i.e. Proposed dividend =

23 of capital = Rs.1,000,000 ×

23 = Rs. 666,667

2. Transfer to General Reserve is equal to proposed dividend i.e., 1:1. Proposed dividend is Rs.666.67 thousand, therefore general reserve is also Rs. 666.67 thousand.

3. Profit carried forward to Balance Sheet = 10% of Proposed Dividendi.e., Rs. 666.67 thousand × 10% = Rs.66.66 thousand

4. 10% Loan implies interest on loan being 10%

i.e. Rs.60.00 thousand × 100

10 = Rs.600.00 thousand

5. Loan is half of current liabilities which means current liabilities are twice of loan i.e., Rs.600.00 thousand × 2 = Rs.1,200.00 thousand

6.

Current Ratio i.e.,

Current AssetsCurrent Liabilities = 2:1 or

21

i.e. Current Assets = 2 x Current Liabilities or 2 x Rs.1,200.00 thousand = Rs.2,400.00 thousand

7. Current Net Profit (Rs. in ‘000s)Proposed dividend 666.67Transfer to general reserve 666.67Profit and loss balance transferred to balance sheet 66.66

1,400.00Less: Balance b/f 140.00Net profit for the year 1,260.00

8. Provision for taxation is equal to current net profit i.e., = Rs.1,260.00 thousand9. Gross profit being balancing figure of Profit and Loss A/c = Rs.3,220.00 thousand10. Gross profit = 60% of sales i.e.

Rs.3,220.00 thousand = 60% of sales

Or, sales = Rs .3 ,220 thousand×100

60 = Rs. 5,366.67 thousand11. Closing stock is 25% of sales i.e., 25% of Rs. 5,366.67 thousand = Rs.1,341.67

thousand12. Purchases being balancing figure of Trading A/c = Rs.2,613.33 thousand


13. Debtors = Current Assets – Closing Stock – Cash at Bank = Rs.2,400.00 thousand – Rs.1,341.67 thousand – Rs.125.00 thousand = Rs.933.33 thousand

14. Balance of general reserve at the beginning of the year is twice of the amount transferred to general reserve during the year i.e. 2 x Rs.666.67 thousand = Rs.1,333.34 thousand

15. Other fixed assets = Total of balance sheet (liabilities side)- Current assets – Plant and machinery i.e., Rs.4,866.67 thousand - Rs.2,400.00 thousand – Rs.1,400.00 thousand

= Rs.1,066.67 thousand


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