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UNIT – I AMALGAMATION, ABSORBTION AND RECONSTRUCTION What Is Amalgamation? An amalgamation is a combination of two or more companies into a new entity. Amalgamation is distinct from a merger because neither company involved survives as a legal entity. Instead, a completely new entity is formed to house the combined assets and liabilities of both companies. The term amalgamation has generally fallen out of popular use in countries like the United States, being replaced with the terms merger or consolidation. But it is still commonly used in countries like India. Purchase Consideration: Purchase Consideration refers to the consideration payable by the purchasing company to the vendor company for taking over the assets and liabilities of Vendor Company. Accounting Standard – 14 defines the term purchase consideration as the “aggregate of the shares and other securities issued and the payment made in the form of ach or other assets by the transferee company to the shareholders of the transferor company”. Although, purchase consideration refers to total payment made by purchasing company to the shareholders of Vendor Company, its calculation could be in different methods, as explained below: A. Lump sum method B. Net Assets method C. Net Payment Method A. Lump sum Method: Under this method purchase consideration will be paid in lump sum as per the valuation of purchasing companies valuation. E.g., if it is stated that A Ltd. takes over the business of B Ltd. for Rs.15, 00,000 here the sum of the Rs.15, 00,000 is the Purchase Consideration. B. Net Assets Method: Under this method P.C. shall be computed as follows:
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UNIT – IAMALGAMATION, ABSORBTION AND RECONSTRUCTION
What Is Amalgamation?An amalgamation is a combination of two or more companies into a new entity. Amalgamation is distinct from a merger because neither company involved survives as a legal entity. Instead, a completely new entity is formed to house the combined assets and liabilities of both companies.
The term amalgamation has generally fallen out of popular use in countries like the United States, being replaced with the terms merger or consolidation. But it is still commonly used in countries like India.
Purchase Consideration:Purchase Consideration refers to the consideration payable by the purchasing company to the vendor company for taking over the assets and liabilities of Vendor Company.Accounting Standard – 14 defines the term purchase consideration as the “aggregate of the shares and other securities issued and the payment made in the form of ach or other assets by the transferee company to the shareholders of the transferor company”. Although, purchase consideration refers to total payment made by purchasing company to the shareholders of Vendor Company, its calculation could be in different methods, as explained below:A. Lump sum methodB. Net Assets methodC. Net Payment Method
A. Lump sum Method:Under this method purchase consideration will be paid in lump sum as per the valuation of purchasing companies valuation. E.g., if it is stated that A Ltd. takes over the business of B Ltd. for Rs.15, 00,000 here the sum of the Rs.15, 00,000 is the Purchase Consideration.B. Net Assets Method:Under this method P.C. shall be computed as follows:Particulars Rs.Agreed value of assets taken overLess: Agreed value of Liabilities taken over
XXXXXX
Purchase Consideration XXX
C. Net Payment Method:Under this method P.C. should be calculated by aggregating total payments made by the purchasing company. E.g.: A Ltd. had taken over B Ltd. and for that it agreed to pay Rs.5, 00,000 in cash 4, 00,000 Equity Shares of Rs.10 each fully paid at an agreed value of Rs.15 per share then the P.C. will be ascertained as follows:
Particulars Rs.Cash4,00,000 E. Shares of Rs.10 each fully paid, at Rs.15 per share
5,00,00060,00,000
Purchase Consideration 65,00,000
1. Calculate purchase consideration from the following given Balance Sheet:
Solution:
2. The following information has been extracted from the balance sheets of P Ltd.
and S Ltd. as on 31st March, 2012:
P Ltd. takes over S Ltd. on 1st April, 2012, and discharges consideration for the business as follows: (i) Issued 35 lakh fully paid equity shares of Rs 10 each at par to the equity shareholders of S Ltd.(ii) Issued fully paid 12% preference shares of Rs 10 each to discharge the preference shareholders of S Ltd. at a premium of 10%.It is agreed that the debentures of S Ltd. will be converted into equal number and amount of 10% debentures of P Ltd.You are required to show the balance sheet of P Ltd. assuming that:
(i) The amalgamation is in the nature of merger, and(ii) The amalgamation is in the nature of purchase.
3) On 31st March, 2012, Thin Ltd. was absorbed by Thick Ltd., the latter taking over all the assets and liabilities of the former at book values. The consideration for the business was fixed at Rs 40 crore to be discharged by the transferee company in the form of its fully paid equity shares of Rs 10 each, to be distributed among the shareholders of the transferor company, each shareholder getting two shares for every share held in the transferor company.The balance sheets of the two companies as on 31st March, 2012 stood as under:
Amalgamation expenses amounting to Rs 10 lakh were paid by Thick Ltd. You are required to:(i) Show the necessary ledger accounts in the books of Thin Ltd.,(ii) Show the necessary journal entries in the books of Thick Ltd., and(iii) Prepare the balance sheet of Thick Ltd. after the amalgamation.
4) White Ltd. agreed to acquire the business of Green Ltd. as on March 31, 2012. The summarised balance sheet of Green Ltd. at that date was as follows:
5) The following are the summarised balance sheets of V Ltd and P Ltd as at 31st March, 2012:You are required to:(a) Prepare Realisation Account and Equity Shareholders Account in the books of V Ltd.(b) Pass journal entries in the books of P Ltd. and redraft P Ltd.’s balance sheet immediately after amalgamation assuming (i) it is an amalgamation in the nature of purchase and (ii) it is an amalgamation in the nature of merger.
P Ltd. acquires the entire business of V Ltd. for Rs 14,00,000 to be satisfied by allotment of
equity shares at par. All the acceptances of P Ltd. are in the favour of V Ltd. and which are
included in the figure of Rs 40,000 in V Ltd.’s balance sheet. Trade Receivables appearing in
the balance sheet of V Ltd. include Rs, 10,000 due from P Ltd.
UNIT – IIHOLDING COMPANY ACCOUNTS
Meaning:A holding company is a type of business that deals specifically with assets, investments and management, rather than providing goods and services with a view to making a profit from production and sales. It will usually be limited by shares and its main activities will involve owning assets in another company or many companies. Assets could be in the form of shares, intellectual property and real property.
Holding companies may also be responsible for the supervision and management of other companies, in addition to or instead of holding shares and receiving dividends from their shareholdings. Aside from these functions, a holding company will normally conduct no other type of business activity.
The other companies in which assets are held are known as ‘subsidiaries’. Holding companies in the UK that own more than 50% of another company’s shares are known as ‘parent’ companies of these subsidiaries.
The legal requirements of a holding company
In order to qualify as a holding company, the Companies Act 2006 (sec. 1159) states that it will be considered the subsidiary of a holding company in the following circumstances: The parent company holds greater than 50% of the voting rights in the subsidiary. The parent company is a member of the subsidiary and has the right to appoint or remove
a majority of its board of directors. The parent company is a member of the subsidiary and, in accordance with an agreement
with other shareholders, it alone controls a majority of the voting rights in the subsidiary.
Problem 1 (Wholly Owned Subsidiary):
2. From the balance sheets and information given below, prepare a Consolidated Balance Sheet:
(a) All the profits of S Ltd. have been earned since the shares were acquired by H Ltd. but there was already the Reserve of Rs. 6, 00,000 on that date.
(b) The bills accepted by S Ltd. are all in favour of H Ltd. which has discounted Rs. 2,000 of them.
(c) Sundry assets of S Ltd. are undervalued by Rs. 2,000.
{d) The stock H Ltd. includes Rs. 5,000 bought from S Ltd. at a profit to the latter of 25% on cost.
3) From the balance sheets and information given below, prepare a Consolidated Balance Sheet:
(a) All the profits of S Ltd. have been earned since the shares were acquired by H Ltd. but there was already the Reserve of Rs. 6, 00,000 on that date.
(b) The bills accepted by S Ltd. are all in favour of H Ltd. which has discounted Rs. 2,000 of them.
(c) Sundry assets of S Ltd. are undervalued by Rs. 2,000.
{d) The stock H Ltd. includes Rs. 5,000 bought from S Ltd. at a profit to the latter of 25% on cost.
Problem 4 (Cash-in-Transit & Mutual Obligation):X Ltd. purchased 750 shares in Y Ltd. on 1.7.2006. The following were their Balance Sheets on 31.12.2006.
Further:1. Bills Receivable of X Ltd. include Rs. 10,000 accepted by Y Ltd.
2. Debtors of X Ltd. include Rs. 20,000 payable by Y Ltd.
3. A cheque of Rs. 5,000 sent by Y Ltd. on 20th December was not yet received by X Ltd. till 31st December 2006.
4. Profit and Loss Account of Y Ltd. showed a balance of Rs. 20,000 on 1st January 2006.
You are required to prepare a consolidated Balance sheet of X Ltd. and Y Ltd. as on 31st December 2006.
5. The summarised Balance Sheet of H Ltd. and its S Ltd. on 31st December 2004 are as follows:
S Ltd. had the credit balance of Rs 30,000 in the Reserves when H Ltd. acquired shares in S Ltd. decided to make a bonus issue out of post-acquisition profits of two shares of Rs 10 each fully paid for every five shares held. Calculate the cost of control before the issue of bonus shares and after the issue of bonus shares. Also make the consolidated Balance Sheet after the issue of bonus shares.
Problem 6: The Sun Co. Ltd. acquired 6,000 shares in the Moon Co. Ltd. on 31.12.2006.
The summarised Balance Sheets of the two companies on that date were:
On 31st December, 2002 the Sun Co. Ltd. remitted cash Rs. 1,000 on current account to Moon Co. Ltd. On 1st January, 2007, Moon Co. Ltd., utilised a part of its capital reserve to make a bonus issue of one share for every four shares held. There is a contingent liability for bills discounted Rs. 1,200.
7.H Ltd. acquired 12,000 shares of S Ltd. For Rs 1,70,000 on April 1, 2011 on which
date S Ltd’s Profit & Loss Account showed a credit balance of Rs 53,400. In August,
2011 S Ltd. declared a dividend of 10% for the year ended 31st March, 2011. This
dividend was credited by H Ltd. to its Profit & Loss Account. Assume dividend
distribution tax was paid @ 17%. On 31st March, 2012 the balance sheets of the two
companies appeared as follows:
UNIT – III
DOUBLE ACCOUNT SYSTEM
What is Meant by Double Account System?
The double entry system of accounting or bookkeeping means that every business transaction will involve two accounts (or more). For example, when a company borrows money from its bank, the company’s Cash account will increase and its liability account Loans Payable will increase. If a company pays $200 for an advertisement, its Cash account will decrease and its account Advertising Expense
will increase.Double entry means that every transaction will involve at least two accounts. For example, if your company borrows money from the bank, the company’s asset Cash is increased and the company’s liability Notes Payable is increased. If your company pays the six-month insurance premium, your company’s asset Cash is decreased and its asset Prepaid Insurance is increased. If an employee works for hourly wages, the company’s account Wages Expense is increased and its liability account Wages Payable is increased. When the employee is paid, the account Wages Payable is decreased and Cash is decreased.
Double entry also requires that one account be debited and the other account be credited. Accounting software might record the effect on one account automatically and only require information on the other account. For example, if you are preparing a check, the software will automatically reduce the Cash account. Therefore, the accounting software needs only to prompt you for information on the other account involved in the payment being processed.
Double entry also allows for the accounting equation (assets = liabilities + owner’s equity) to always be in balance. In our example involving Advertising Expense, the accounting equation remained in balance because expenses cause owner’s equity to decrease. In that example, the asset Cash decreased and the owner’s capital account within owner’s equity also decreased.
A third aspect of double entry is that the amounts entered into the general ledger accounts as debits must be equal to the amounts entered as credits.
SPECIAL FEATURES OF DOUBLE ACCOUNTING SYSTEM:The following are the special features of the double accounting system:
( i ) I t i s n o t a s y s t e m o f m a i n t a i n i n g a c c o u n t s , b u t o n l y a s y s t e m o f p r e s e n t i n g t h e final accounts.
( i i ) I t i s gene ra l l y adop t ed by pub l i c u t i l i t y c once rns fo rmed unde r spe c i a l a c t s o f parliament.
( i i i )As ind i c a t ed ea r l i e r , unde r t h i s s y s t em , t he ba l ance s hee t i s b i fu r ca t ed i n t o two parts viz., (i) receipts and expenditure on capital a/c and (ii) general balance sheet.
Problem 1:The following balances are extracted from the books of M/s. Flashlight Electric Company Ltd:(i) Fixed assets:Expenditure up to 1.1.2006:(a) Land and Buildings Rs 10,00,000 ;
(b) Machinery Rs 15, 00,000.
(ii) Additions during the year – Machinery Rs 3, 50,000
(iii) Depreciation Fund:(a) Machinery Rs 3, 00,000;
(b) Buildings Rs 1, 00,000.
(iv) Authorised Capital Rs 50, 00,000 divided into equity shares of Rs 100 each.
(v) Issued and fully paid-up 20,000 equity shares of Rs 100 each (including 2,500 equity shares issued during the year).
(vi) 7.5% Debentures Rs. 10, 00,000 secured by a charge on Fixed Assets.
(vii) Sundry Creditors Rs. 2,50,000; Reserve Fund Rs. 5,00,000; Reserve Fund Investments at cost Rs. 5,00,000; (Market value Rs. 5,25,000).
(viii) Stock Rs. 3, 02,500; Sundry Debtors Rs. 4, 50,000; Cash at Bank Rs. 2, 00,000; Cash in hand Rs. 50,000.
(ix) Profit and Loss Account (Cr.) Rs 2, 02,500.
Your are instructed to prepare:(i) The Balance Sheet as on December 31, 2006, according to Schedule VI to the Companies Act, 1956, under the Single Account System (previous year’s figures not required).
(ii) (a) Capital Account
(b) General Balance Sheet as on the same date under the Double Account System.
2)The Chennai Electricity Company decides to replace one of its old plants with a modern one with a larger capacity. The plant when installed ten years back cost the company Rs. 24,00,000, the components of materials, labour and overheads being in the ratio of 5:3:2.
It is ascertained that the costs of materials and labour have gone up by 40% and 80% respectively. The proportion of overheads to total costs is expected to remain the same as before. The cost of the new plant as per improved design is Rs. 60 lakhs and in addition, materials recovered from the old plant of a value of Rs. 2, 40,000 has been used in the construction of the new plant. Old plant was scrapped and sold for Rs. 7, 50,000.
The accounts of the company are maintained under the double account system. Indicate how much would be capitalized and the amount to be charged to revenue. Show journal entries and prepare ledger accounts.
3) In the year 1984 railway lines were laid between Agra and Delhi at a cost of Rs 1, 50, 00,000. This expenditure was distributed over overheads, wages and material in the ratio of 2: 4: 9. The lines were replaced in the year 2004 at a cost of Rs 3, 80, 00,000. It was estimated that the price of overheads, wages and material had gone up during this period of 20 years as follows: overheads 25%; wages 20% and materials 45%.
Ascertain the amount to be capitalized in respect of the railway lines for the purpose of preparing the final accounts for the year 2004.
Problem 4: From the following balances as on December 31, 2004, appearing in the ledger of the Electric Light and Power Co. Ltd. you are required to prepare:(a) Revenue Account,
(b) Net Revenue Account,
(c) Capital Account, and
(d) General Balance Sheet.
FINAL ACCOUNTS:
Prepare a Revenue Account, Net Revenue Account and the General Balance Sheet under the
Double Account System from the following Trial Balance as on 31.12.1993, of the Rural
Electric Supply Co. Ltd. A Call of Re. 1 per share was payable on 30.6.1993 and arrears are
subject to interest at 10% p.a.
Depreciation to be provided for on opening balance on Buildings 2½%, Machinery 7½%,
Main 5%, Transformer etc. 10%, Meters and Electrical Instruments 15%, Advertising has
been prepaid by Rs. 5,000 and provision of 5% to be made for doubtful debts.
UNIT - IVBANKING COMPANY ACCOUNTS
1. INTRODUCTIONA banking company means and includes any company which carries on business or which transacts banking business in India. A banking business generally governed by the provisions of the Companies Act 1956 andspecifically by the Banking Regulation Act. The Banking regulation Actof 1949 came into force on 16thMarch 1949 as a result of long-felt need toregulate the banking business in India and protect the interest of number of depositors.The existence of well- organized, regulated and efficient banking systemis pre-requisite for economic growth. Banks are agencies responsible for mobilizing and channeling of funds in a country. The major institutionscarrying business,in India, include:(a)Nationalized banks(b)State bank of India and Associates banks(c)Foreign banks having branches in India(d) Co-operative banks(e)Rural banks and(f)Private sector banks.
The revised formats are presented below:Format A — for Balance Sheet
Format B — for Profit and Loss Account.
1) From the following information, prepare the Profit and Loss Account of South Indian Bank as on 31st March, 2004:
2) The following Trial Balance was extracted from the books of the United Bank of India as on March 31, 2004:
You are required to prepare a Profit and Loss Account for the year ended 31st March, 2004, and Balance Sheet as at that date after considering the following:(i) Provide Rebate on bills discounted Rs. 5,000.
(ii) A scrutiny of the Current Account Ledger reveals that there are accounts overdrawn to the extent of Rs. 25,000 and the total of the credit balances is Rs. 1, 22,000.
iii) Claims by employees for Bonus Rs. 15,000 is pending award of arbitration,
(iv) Depreciation on building for the year amounts to Rs. 5,000.
(v) Out of profits for the year, 20 per cent transferred to Statutory Reserve and the Directors proposed a dividend of 8 per cent, subject to deduction of tax.
3) On 31st December, 2004, a Bank had the following unmetered Bills:
4) From the following information, find out the amount of provision to be shown in the Profit and Loss Account of a bank:
UNIT – V
INSURANCE COMPANY ACCOUNTS
1) The undermentioned balances form part of the Trial Balance of the All People’s
Assurance Co. Ltd., as on 31st March, 2012:
Amount of Life Assurance Fund at the beginning of the year, Rs 14,70,562 thousand; claims
by death Rs 76,980 thousand; claims by maturity, Rs 56,420 thousand; premiums, Rs
2,10,572 thousand; expenses or management, Rs 19,890 thousand; commission, Rs 26,541
thousand; consideration for annuities granted Rs 10,712 thousand; interests, dividends and
rents, Rs 52,461 thousand; income tax paid on profits Rs 3,060 thousand; surrenders, Rs
21,860 thousand; annuities, Rs 29,420 thousand; bonus paid in cash, Rs 9,450 thousand;
bonus paid in reduction of premiums, Rs 2,500 thousand; preliminary expenses balance, Rs
600 thousand; claims admitted but not paid at the end of year, Rs 10,034 thousand; annuities
due but not paid, Rs 2,380 thousand; capital paid up, Rs 14,00,000 thousand; Government
securities, Rs 24,90,890 thousand; Sundry Fixed Assets, Rs 4,19,110 thousand.
Prepare Revenue Account and the Balance Sheet after taking into account the
following:
2) Indian Insurance Co. Ltd. furnishes you with the following information:
(i) On 31.3.2011 it had reserve for unexpired risks to the tune of Rs 40 crore. It comprised of
Rs 15 crore in respect of marine insurance business; Rs 20 crore in respect of fire insurance
business and Rs 5 crore in respect of miscellaneous insurance 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 insurance policies.
(iii) During the year ended 31st March, 2012, the following business was conducted:
Indian Insurance Co. Ltd. asks you to:
(a) Pass journal entries relating to “unexpired risks reserve’.
(b) Show in columnar form Unexpired Risks Reserve Account for the year ended 31st March,
2012.
3) From the following particulars, prepare the Fire Revenue Account for 2011 –
2012:
4) The following balances appeared in the books of the Happy Life-Assurance
Co. Ltd., as on 31st March, 2012:
From the foregoing balances and the following information, prepare the company’s
Balance Sheet as on 31st March, 2012 and its Revenue Account for the year ended on
that date:
(a) Claims less reassurances outstanding at the end of the year: By Death Rs 600 lakh; By
Maturity, Rs 400 lakh.
(b) Expenses outstanding Rs 60 lakh and prepaid Rs 15 lakh.
(c) Provide Rs 45 lakh for depreciation of buildings, Rs 15 lakh for depreciation of furniture
and office equipment and Rs 110 lakh for taxation.
(d) Premium outstanding 12,028 lakh; commission thereon Rs 65 lakh.
(e) Interests, Dividends and Rents outstanding (net) 130 lakhs and interest and rents accrued
(net) Rs 350 lakh.
5) From the following figures taken from the books of New Asia Insurance Co.
Ltd. doing fire underwriting business, prepare the set of final accounts for
the year 2011-2012:
The following further information may also be noted:
(a) Expenses of management include survey fees and legal expenses of Rs 36,000 thousand
and Rs 20,000 thousand relating to claims,
(b) Claims intimated but not paid on 31st March 2012, Rs 1,04,000 thousand.
(c) Income-tax to be provided at 40%.
(d) Transfer of Rs 2,19,000 thousand to be made from current profit to General Reserve.
(e) The company maintains a reserve for unexpired risk @ 50% of net premium income.
(f) The directors propose a dividend @ 30 %. Dividend distribution tax is payable @ 17%.
Form B-RAName of the Insurer:
Registration No. and Date of Registration with the IRDA
Revenue Account for The Year Ended 31st March, 20…
Policyholders’ Account (Technical Account)
Note:See Notes appended at the end of Form B-PL:
Form B-PLName of the Insurer:
Registration No. and Date of Registration with the IRDA
Profit and Loss Account for The Year Ended 31st March, 20…
Shareholders’ Account (Non-technical Account)
From B BSName of the Insurer:
Registration No. and Date of Registration with the IRDA
Balance Sheet as at 31st March, 2006
GIC – FIRE INSUREANCE (Fire Insurance Revenue Account and Final Accounts):From the following figures taken from the books of New Asia Insurance Company Ltd. doing fire underwriting business.
6) Prepare the set of final accounts for the year 2006-2007:
The following further information may also be noted:(a) Expenses of management include survey fees and legal expenses of Rs. 36,000 and Rs. 20,000 relating to claims;
(b) Claims intimated but not paid on 31st March 2006—Rs. 1, 04,000;
(c) Income-tax to be provided at 40%;
(d) Transfer of Rs. 2, 25,000 to be made from Current Profits to General Reserve.
(e) The company maintains a reserve for unexpired risk @ 50% of net premium income.
(f) The directors propose a dividend @ 30%. Dividend distribution tax is payable @ 11% which includes surcharge (CA Inter)
7)A fire occurred on 15th December, 2011 in the premises of D Co. Ltd. From the
following figures, calculate the amount of claim to be lodged with the insurance
company for loss of stock:
8)The premises of X Ltd. caught fire on 22nd January, 2012 and the stock was damaged. The
firm made up accounts to 31 March each year and on 31st March, 2010 the stock at cost was
Rs 13,27,200 as against Rs 9,62,200 on 31st March. 2010.
Purchases from 1st April, 2011 to the date of fire were Rs 34,82,700 as against Rs 45,25,000
for the full year 2010-11 and the corresponding sales figure were Rs 49,17,000 and Rs
52,00,000 respectively.
You are given the following further information:
(i) In July, 2011, goods costing Rs 1,00,000 were given away for advertising purposes, no
entries being made in the books.
(ii) During 2011-2012, a clerk misappropriated unrecorded cash sales. It is estimated that the
defalcation averaged Rs 2,000 per week from 1st April, 2011 until the clerk was dismissed on
18th August, 2011.
(iii) The rate of gross profit is constant. From the above information, make an estimate of the
stock in hand on the date of fire.
9)Fire occurred in the premises of X Ltd. on 10th January, 2012. All stocks were destroyed
except to the extent of Rs 62,000.
From the following figures, ascertain the loss suffered by the company:
It was the practice of the firm to value stock at cost less 10%. Early in April, 2011, prices
were raised by 5%.
Solution:
Since the rate of gross profit is not given, it is necessary to prepare Trading Account for
2010-11. The stocks being valued at 10% below cost, the value of stocks must be increased
by 1/9 to bring them up to their full cost which is the normal practice.
10)On 30th June, 2011 accidental fire destroyed a major part of the stocks in the godown of
Jay Associates. Stocks costing Rs 30,000 could be salvaged but not their stores ledgers. A fire
insurance policy was in force under which the sum insured was Rs 3,50,000.
From available records, the following information was retrieved:
(i) Total of sales invoices during the period April-June amounted to Rs 30,20,000. An
analysis showed that goods of the value of Rs 3,00,000 had been returned by the customers
before the date of the fire.
(ii) Opening stock on 1.4.2011 was Rs 2,20,000 including stocks of the value of Rs 20,000
being lower of cost and net value subsequently realised.
(iii) Purchases between 1.4.2011 and 30.6.2011 were Rs 21,00,000.
(iv) Normal gross profit rate was 33 1/3% on sales.
(v) A sum of Rs 30,000 was incurred by way of fire-fighting expenses on the day of the fire.
Prepare a statement showing the insurance claim recoverable.
11) On 15th September, 2011 the premises of Fire and Stone were destroyed by fire but
sufficient records were saved from which the following particulars were ascertained:
In valuing stock for Balance Sheet at 31st March, 2011 Rs 2,300 had been written off certain
stock which was of a poor selling line, having cost Rs 6,900. A portion of these goods was
sold in June, 2011 at a loss of Rs 250 on the original cost of Rs 3,450. The remainder of this
stock was now estimated to be worth the original cost. Subject to the above exception, gross
profit had remained at a uniform rate throughout.
The stock salvaged was Rs 5,800.
Show the amount of the claim.
12)On 1st July, 2011, the godown of Hindustan Limited was destroyed by fire. From the
books of account, the following particulars are gathered:
Goods of which original cost was Rs 360 thousand had been valued at Rs 150 thousand on
31st March, 2011. These goods were sold in June, 2009 for Rs 270 thousand. Except this
transaction, the rate of gross profit has remained constant.
On 30th June, 2011 goods worth Rs 1,500 thousand had been received by the godown keeper;
but had not been entered in the purchases account.
Calculate the value of goods destroyed by fire.
13) A fire occurred in the premises of Atul on 25th August, 2011 when a large part of the stock was destroyed. Salvage was Rs 1,50,000. Atul gives you the following information for the period from 1st April, 2011 to 25th August, 2011:(a) Purchases, Rs 8,05,000.(b) Sales, Rs 9,00,000.(c) Goods costing Rs 5,000 were taken away by Atul for his personal use.(d) Cost price of stock on 1st April, 2011 was Rs 4,00,000.Over the past few years, Atul has been selling goods at a consistent gross profit margin of 33 1/3%.The insurance policy was for Rs 5,00,000. It included an average clause also.
Atul asks you to prepare a statement of claim to be made on the insurance company.
14) On 31st August, 2011 the premises and stock of a firm were totally destroyed by
fire; the books of accounts, however, were saved. In order to make a claim on their fire
policy, they ask you to advise on the basis of the following information. The stock in
hand has always been valued at 5% below cost:
Prepare a statement for submission to the insurance company in support of your claim for
loss of stock. The company closes its books of account every year on 31st March.
THEORY QUESTIONS
1. What is Insurance? It is an agreement between Insured and Insurer to compensate the losses suffered due to uncertainties in future, for a consideration called premium.
2. What is meant by Fire Claims? It is a kind of General insurance where an agreement is made between the industry (i.e., insured) and General Insurance Company (i.e., insurer) to indemnify the compensation for the loss of stock or profit due to fire accident, for a consideration called premium.
3. Who is an Insured? Insured is a person/industry/asset, to whom/which the insurance is made. The compensation shall be received on happening of certain event determined i.e., death of a person or destroy of asset or properties.
4. Who is Insurer? Insurer is an insurance company which pays the losses suffered by the insured on happening of certain event estimated in advance i.e., death of a person or destroy of asset or properties.
5. What is Trading Account? Trading Account is a ledger prepared to find out the Gross Profit of an accounting year. It includes the trading activities done by an industry during a financial year.
6. When do we have to prepare the previous year’s ‘trading account under insurance? The previous year’s trading account is prepared to find out the last year gross profit to help the calculation of Gross Profit during the year in which fire accident occurred, to find out the stock on the date of fire accident.
7.What is Gross Profit Ratio?
Gross Profit Ratio is a ratio which shows the relationship between the Gross Profit and Net Sales. Net Sales = Total Sales – Return inwards.
8. How do you calculate Gross Profit Ratio? Gross Profit Ratio = Gross Profit x100 Net Sales
9. What is Memorandum Trading Account? The Memorandum Trading Account is similar to usual trading account. It is prepared from the begin date of accounting year and till the date of fire accident. It is not prepared as per double entry system of booking.
10. What is meant by Salvage? The value of stock saved from the fire accident is called salvaged stock. Sometimes it is also referred as scrap value or realizable value of stock. The saved stock should be deducted from the stock of the date of fire.
