Test Series: May, 2020

MOCK TEST PAPER 1

FOUNDATION COURSE
PAPER – 1: PRINCIPLES AND PRACTICE OF ACCOUNTING
SUGGESTED ANSWERS/HINTS
1. (a) (i) False: If the effect of errors committed cancel out, the errors will be called compensating
errors and the trial balance will agree.
(ii) True: Since the temporary huts were necessary for the construction, their cost should be
added to the cost of the cinema hall and thus capitalised.
(iii) False: In Consignment sale, ownership of the goods rests with the consignor till they are sold
by the consignee. The consignee does not become the owner of the goods even though goods
are in his possession. He acts only as agent of the consignor.
(iv) True: In case the due date of a bill falls after the date of closing the account, then no interest
is allowed for that. However, interest from the date of closing to such due date is written in
“Red-Ink” in the appropriate side of the ‘Account current’. This interest is called Red-Ink
interest.
(v) True: When there is no partnership deed then the provisions of the Indian Partnership Act are
to be applied for settling the dispute. Interest on loan is payable @ 6% p.a. as per Indian
Partnership Act.
(vi) False: A forfeited share is merely a share available to the company for sale and remains
vested in the company for that purpose only. Reissue of forfeited shares is not allotment of
shares but only a sale as they have already been allotted earlier.
(b) Accounting Standards are selected set of accounting policies or broad guidelines regarding the
principles and methods to be chosen out of several alternatives. The Accounting Standards Board
of the Institute of Chartered Accountants of India (ICAI) formulates Accounting Standards to be
established by the Council of the ICAI. The main objective of Accounting Standards is to establish
standards which have to be complied with, to ensure that financial statements are prepared in
accordance with generally accepted accounting principles. Accounting Standards seek to suggest
rules and criteria of accounting measurements. These standards harmonize the diverse accounting
policies and practices at present in use in India.
(c) Purchase Returns Book
Date Debit Name of supplier L.F. Amount
Note No.
2020
Jan. 4 101 Goyal Mills, Surat 500
Jan. 16 102 Mittal Mills, Bangalore 1,300
Jan. 31 Purchases Returns Account (Cr.) 1,800
2. (a) Statement of Valuation of Stock on 31st March, 2020
Rs. Rs.
Value of stock as on 15th April, 2020 50,000

© The Institute of Chartered Accountants of India

 Add: Cost of sales during the period from 31st March, 2020 to
15th April, 2020
Sales (Rs. 41,000 – Rs. 1,000) 40,000
Less: Gross Profit (20% of Rs. 40,000) 8,000 32,000
Cost of goods sent on approval basis (80% of Rs. 6,000) 4,800
86,800
Less: Purchases during the period from 31st March, 2020 to
15th April, 2020 5,034
Unsold stock out of goods received on consignment basis
(30% of Rs. 8,000) 2,400 7,434
79,366
(b) Calculation of depreciation for 5th year
Depreciation per year charged for four years = Rs. 10,00,000 / 10 = Rs. 1,00,000
WDV of the machine at the end of fourth year = Rs. 10,00,000 – Rs. 1,00,000 × 4 = Rs. 6,00,000.
Depreciable amount after revaluation = Rs. 6,00,000 + Rs. 40,000 = Rs. 6,40,000
Remaining useful life as per previous estimate = 6 years
Remaining useful life as per revised estimate = 8 years
Depreciation for the fifth year and onwards = Rs. 6,40,000 / 8 = Rs. 80,000.
(c) Bank Reconciliation Statement as on 30th June 2020
Particulars Amount Amount
Overdraft as per Pass Book (Dr. Balance) 25,000
Add: Cheques issued but not presented Rs. (34,000-20,000) 14,000
Cheques deposited into the Bank by Customer but not 400
entered in Cash Book
Bank charges written twice in Cash Book 80 14,480
39,480
Less: Cheques received, recorded in cash Book but not sent to the 4,000
Bank
Cheques sent to the Bank but not collected 6,000
Direct payment made by the bank not recorded in the Cash 600
book
Interest on Overdraft charged by Bank 1,600
Insurance charges not entered in Cash Book 70
Credit side of bank column of Cash Book was undercast
2,000 14,270
Balance as per Cash Book 25,210
3. (a) Consignment Account
Rs. Rs.
To Goods sent on consignment A/c 4,50,000 By Consignee’s A/c-Sales 4,50,000
(15,000 kg x Rs. 30) (7,500 kg x Rs. 60)

© The Institute of Chartered Accountants of India

 To Cash A/c 75,000 By Abnormal Loss A/c
(Expenses 15,000 kg x Rs. 5) (Insurance claim - WN) 9,000
To Consignee’s A/c: Add: Abnormal Loss (WN) 5,000 14,000
Advertisement & Recurring expenses 33,000 (Profit and Loss Account)
Commission @ 5% on Rs.4,50,000 22,500 By Consignment Stock A/c 2,46,690
To Profit and loss A/c 1,30,190
(Profit on Consignment) _______ _______
7,10,690 7,10,690

Working Notes:
1. Abnormal Loss:
Cost of goods lost: 400 kg
Total cost (400 x Rs. 30) 12,000
Add: expenses incurred by the consignor @ Rs.5 per kg 2,000
Gross Amount of abnormal loss 14,000
Less: Insurance claim (9,000)
Net abnormal loss 5,000
2. Valuation of Inventories
Quantity (Kgs) Amount (Rs.)
Total Cost (15,000 kg x Rs.30) 15,000 4,50,000
Add: Expenses incurred by the consignor 75,000
Less: Value of Abnormal Loss – 400 kgs (WN 1) (400) (14,000)
14,600 5,11,000
Less: Normal Loss (100)
14,500 5,11,000
Less: Quantity of ghee sold (7,500)
Quantity of Closing Stock 7,000
Value of 7,000 kgs – (5,11,000/14,500) x 7,000 2,46,690
(b) Mr. A in Account Current with Mr. X
(Interest upto 15th March, 2020 @ 10% p.a.)
Dr. Cr.
Date Particulars Amount Days Product Date Particulars Amount Days Product
2020 2020
Jan. 01 To Balance b/d 4,000 75 3,00,000 Jan. 29 By Purchase 1,200 46 55,200
account
Jan. 15 To Sales account 2,230 60 1,33,800 Feb. 10 By Cash account 1,000 34 34,000
Mar. 13 To Red Ink product Mar. 13 By Bills Receivable
(Rs. 2,000  29) 58,000 account
2,000
Mar. 15 To Interest account Mar. 15 By Balance of
product 4,02,600
 Rs.4,02,600101  110 By Balance c/d
  (amount to be
 100 366  paid) 2,140
6,340 4,91,800 6,340 4,91,800

© The Institute of Chartered Accountants of India

 (c) In the books of Mr. Badhri
Journal Entries
Date Particulars L.F. Dr. Cr.
(in Rs.) (in Rs.)
2019
Dec. 2 Trade receivables A/c Dr. 80,000
To Sales A/c 80,000
(Being the goods sent to customers on sale or
return basis)
Dec. 10 Return Inward A/c (Note 1) Dr. 35,000
To Trade receivables A/c 35,000
(Being the goods returned by customers to
whom goods were sent on sale or return
basis)
Dec. 23 Sales A/c Dr. 15,000
To Trade receivables A/c 15,000
(Being the cancellation of original entry of sale
in respect of goods on sale or return basis)
Dec. 31 Inventories with customers on Sale or Return Dr. 12,000
A/c
To Trading A/c (Note 3) 12,000
(Being the adjustment for cost of goods lying
with customers awaiting approval)
Working Note:
1 No entry is required for receiving letter of approval from customer.
(2) Cost of goods with customers = Rs. 15,000 x 100/125 = Rs. 12,000
4 (a) Revaluation Account
Particulars Rs. Particulars Rs.
To Stock 1,500 By Land & Building 25,000
To Partners: By Provision for doubtful debt 2,000
(Revaluation Profit)
Monika 8,500
Yedhant 8,500
Zoya 8,500
27,000 27,000

Partners’ Capital Accounts

Particulars Monika Yedhant Zoya Particulars Monika Yedhant Zoya
To Zoya 4,375 4,375 - By Bal b/d. 1,00,000 75,000 75,000
To Zoya’s - - 98,125 By General reserve 4,000 4,000 4,000
Executor By Monika & Yedhant - - 8,750
To Bal. c/d 1,08,125 83,125 By Profit and Loss - - 1,875
Adjustment*
(suspense) A/c

© The Institute of Chartered Accountants of India

 By Revaluation A/c 8,500 8,500 8,500
1,12,500 87,500 98,125 1,12,500 87,500 98,125

*Profit and Loss Adjustment = [(25,000 + 20,000 + 22,500)/3] x 3/12 x 1/3 = 1,875
Working Note:
Calculation of goodwill and Zoya’s share
Average of last five year’s profits and losses for the year ended on 31 st March
31.3.2016 28,750
31.3.2017 35,000
31.3.2018 22,500
31.3.2019 20,000
31.3.2020 25,000
Total 1,31,250
Average profit 26,250
Goodwill at 1 year purchase = Rs. 26,250 x 1 = Rs. 26,250
Zoya’s Share of Goodwill = Rs. 26,250X1/3
= Rs. 8,750
Which is contributed by Monika and Yedhant in their gaining Ratio
Monika = Rs. 8,750X1/2 = Rs. 4,375
Yedhant = Rs. 8,750X1/2 = Rs. 4,375
(b) Trading & Profit and Loss Account of
Mr. Sandeep for the year ended 31st December, 2020
Particulars Rs. Rs. Particulars Rs. Rs.
To Opening Stock 1,400 By Sales 9,000
To Purchase 12,000 Less: Sales return (1,000) 8,000
Less: Purchase return (2,000) 10,000 By Closing stock 4,500
To Gross Profit 1,100
12,500 12,500
To Salary 2,500 By Gross Profit 1,100
Add: Outstanding salary 100 2,600 By Commission 500
Less: Advance (100) 400
To Tax & Insurance 500 By Accrued interest 210
Add: Outstanding 200 By Net Loss 2,500
Prepaid insurance (50) 650
To Bad debt 500
Opening provision (1,000)
Closing provision 1,000 500
To Interest on overdraft 300
To Depreciation on furniture 160
4,210 4,210

© The Institute of Chartered Accountants of India

 Balance Sheet of Mr. Sandeep as on 31.3.2020
Particulars Rs. Rs. Particulars Rs. Rs.
Capital 16,000 By Furniture 1,600
Less: drawing (2,000) Less: Depreciation (160) 1,440
Net loss (2,500) 11,500 Bill receivable 3,000
Bank overdraft 2,000 Investment 4,000
Add: interest 300 2,300 Add: accrued interest 210 4,210
Creditors 2,000 Debtors 5,000
Bills payable Outstanding 2,500 Less: Provision on bad (1,000) 4,000
expenses: debts
Salary 100 Closing stock 4,500
Tax 200 300 Cash in hand 1,500
Commission received in 100 Prepaid insurance 50
advance
18,700 18,700
5. (a) Smith Library Society
Income and Expenditure Account
for the year ended 31st March, 2020

Dr. Cr.
Expenditure Rs. Rs. Income Rs.
To Electric charges 7,200 By Entrance fee (25% of 7,500
To Postage and 5,000 Rs. 30,000)
stationary
To Telephone charges 5,000 By Membership subscription 2,00,000
To Rent 88,000 Less: Received in 10,000 1,90,000
Add: Outstanding 4,000 92,000 advance
To Salaries 66,000 By Sale proceeds of old 1,500
Add: Outstanding 3,000 69,000 papers
To Depreciation (W.N.1) By Hire of lecture hall 20,000
Electrical fittings 15,000 By Interest on securities 8,000
Furniture 5,000 (W.N.2)
Books 46,000 66,000 Add: Receivable 500 8,500
By Deficit- excess of 16,700
expenditure over income
2,44,200 2,44,200

Working Notes:
1. Depreciation Rs.
Electrical fittings 10% of Rs. 1,50,000 15,000
Furniture 10% of Rs. 50,000 5,000
Books 10% of Rs. 4,60,000 46,000

© The Institute of Chartered Accountants of India

 2. Interest on Securities
Interest @ 5% p.a. on Rs. 1,50,000 for full year 7,500
Interest @ 5% p.a. on Rs. 40,000 for half year 1,000 8,500
Less: Received (8,000)
Receivable 500
(b) Journal Proper in the Books of M/s. Kumar Traders
Date Particulars Amount Amount
2019 Rs. Rs.
Mar. 31 Returns outward A/c Dr. 72,000
To Purchases A/c 72,000
(Being the transfer of returns to purchases account)
Sales A/c Dr. 1,00,000
To Returns Inward A/c 1,00,000
(Being the transfer of returns to sales account)
. Sales A/c Dr. 10,00,000
To Trading A/c 10,00,000
(Being the transfer of balance of sales account to
trading account)
Trading A/c Dr. 7,80,000
To Opening Inventory A/c 1,00,000
To Purchases A/c 6,00,000
To Wages A/c 50,000
To Carriage Inwards A/c 30,000
(Being the transfer of balances of opening
inventory, purchases and wages accounts)
Closing Inventory A/c Dr. 2,00,000
To Trading A/c 2,00,000
(Being the incorporation of value of closing
Inventory)
Trading A/c Dr. 4,20,000
To Gross Profit 4,20,000
(Being the amount of gross profit)
Gross profit Dr. 4,20,000
To Profit and Loss A/c 4,20,000
(Being the transfer of gross profit to Profit and Loss
Account)
6. (a) (i) Journal Entries in the books of X Ltd.
Date Dr. Cr.
Rs. Rs.
(a) Equity Share Capital A/c Dr. 3,000
To Equity Share Allotment money A/c 900
(300 x Rs. 3)

© The Institute of Chartered Accountants of India

 To Equity Share Final Call A/c (300 x Rs. 4) 1,200
To Forfeited Shares A/c (300 x Rs. 3) 900
(Being the forfeiture of 300 equity shares of
Rs. 10 each for non-payment of allotment money and
final call, held by Ramesh as per Board’s resolution
No…………….dated……………..)
(b) Bank Account (300 x 8) Dr. 2,400
Forfeited Shares Account (300x 2) Dr. 600
To Equity Share Capital Account 3,000
(Being the re-issue of 300 forfeited shares @
Rs. 8 each as fully paid up to Suresh as per Board’s
resolution No……….dated……………..)
(c) Forfeited Shares Account Dr. 300
To Capital Reserve Account 300
(Being the profit on re-issue, transferred to capital
reserve)
(ii)
Dr. Cr.
Rs. Rs.
Preference Share Capital A/c (2,500 x Rs. 70) Dr. 1,75,000
To Preference Share Allotment A/c (2,500 x Rs. 20) 50,000
To Preference Share First Call A/c (2,500 x Rs. 20) 50,000
To Forfeited Share A/c 75,000
(Being the forfeiture of 2,500 preference shares Rs. 70
each being called up for non-payment of allotment and first
call money as per Board’s Resolution No.... dated.....)
Bank A/c (2,000 x Rs.60) Dr. 1,20,000
Forfeited Shares A/c (2,000 x Rs.10) Dr. 20,000
To Preference Share Capital A/c 1,40,000
(Being re-issue of 2,000 shares at Rs. 60 per share paid-
up as Rs. 70 as per Board’s Resolution No…..dated….)
Forfeited Shares A/c Dr. 40,000
To Capital Reserve A/c (Note 1) 40,000
(Being profit on re-issue transferred to
Capital/Reserve)
Working Note:
Calculation of amount to be transferred to Capital Reserve
Forfeited amount per share =Rs. 75,000/2500 = Rs. 30
Loss on re-issue =Rs. 70 – Rs. 60 = Rs. 10
Surplus per share re-issued Rs. 20
Transferred to capital Reserve Rs. 20 x 2000 = Rs. 40,000.

© The Institute of Chartered Accountants of India

 (b) Total amount of discount comes to Rs. 60,000 (Rs. 0.6 X 1, 00,000). The amount of discount to be
written-off in each year is calculated as under:
Year end Debentures Ratio in which discount Amount of discount to be
Outstanding to be written-off written-off
1st Rs. 10, 00,000 1/5 1/5th of Rs. 60,000 = Rs. 12,000
2nd Rs. 10, 00,000 1/5 1/5th of Rs. 60,000 = Rs. 12,000
3rd Rs. 10, 00,000 1/5 1/5th of Rs. 60,000 = Rs. 12,000
4th Rs. 10, 00,000 1/5 1/5th of Rs. 60,000 = Rs. 12,000
5th Rs. 10, 00,000 1/5 1/5th of Rs. 60,000 = Rs. 12,000
(c) (i) Revenue Expenditure.
(ii) Capital Expenditure.
(iii) Revenue Expenditure.
(iv) Revenue Expenditure.
(v) Capital Expenditure.

© The Institute of Chartered Accountants of India