INTERMEDIATE

GROUP-1
PAPER-1 ACCOUNTING
RTP, MTP AND PAST PAPERS

1. Accounting Standards ................................................................................... 1-25

2. Framework for prepartion and presentation of Financial Statements .......... 26-31

3. Overview of Accounting Standards ............................................................. 32-63

4. Financial Statements of Companies

Unit : I ............................................................................................................ 64-102

Unit : II .......................................................................................................... 103-116

5. Profit or Loss Pre and Post Incorporation ..................................................... 117-133

6. Accounting for Bonus Issue and Right Issue ................................................ 134-151

7. Redemption of Preference Shares ............................................................... 152-163

8. Redemption of Debentures .......................................................................... 164-173

9. Investment Accounts ................................................................................ 174-189

10. Insurance Claims .......................................................................................... 190-207

11. Hire Purchase ................................................................................................ 208-212

12. Departmental Accounts .............................................................................. 213-254

13. Accounting for Branches including Foreign Branches .................................. 255-243

14. Accounts from Incomplete Records ........................................................... 244-275

CHAPTER-1
ACCOUNTING STANDARDS

Q-1 (a) ABC Ltd. was making provision for non-moving inventories based on no issues for the last 12 months up
to 31.3.2019.
The company wants to provide during the year ending 31.3.2020 based on technical evaluation:
Total value of inventory ` 100 lakhs
Provision required based on 12 months issue ` 3.5 lakhs
Provision required based on technical evaluation ` 2.5 lakhs
Does this amount to change in Accounting Policy? Can the company change the method of provision?
(b) State whether the following statements are ‘True’ or ‘False’. Also give reason for your answer.
1. Certain fundamental accounting assumptions underline the preparation and presentation of
financial statements. They are usually specifically stated because their acceptance and use are
not assumed.
2 If fundamental accounting assumptions are not followed in presentation and preparation of
financial statements, a specific disclosure is not required.
3. All significant accounting policies adopted in the preparation and presentation of financial
statements should form part of the financial statements.
4. Any change in an accounting policy, which has a material effect should be disclosed. Where the
amount by which any item in the financial statements is affected by such change is not
ascertainable, wholly or in part, the fact need not to be indicated. [RTP-May’2020]
Ans.(a) The decision of making provision for non-moving inventories on the basis of technical evaluation does
not amount to change in accounting policy. Accounting policy of a company may require that provision
for non-moving inventories should be made. The method of estimating the amount of provision may
be changed in case a more prudent estimate can be made. In the given case, considering the total value
of inventory, the change in the amount of required provision of non-moving inventory from ` 3.5 lakhs
to ` 2.5 lakhs is also not material. The disclosure can be made for such change in the following lines by
way of notes to the accounts in the annual accounts of ABC Ltd. for the year 2019-20:
“The company has provided for non-moving inventories on the basis of technical evaluation unlike
preceding years. Had the same method been followed as in the previous year, the profit for the year
and the corresponding effect on the year end net assets would have been lower by ` 1 lakh.”
(b) 1. False; As per AS 1 “Disclosure of Accounting Policies”, certain fundamental accounting assumptions
underlie the preparation and presentation of financial statements. They are usually not specifically
stated because their acceptance and use are assumed. Disclosure is necessary if they are not
followed.

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 2. False; As per AS 1, if the fundamental accounting assumptions, viz. Going Concern, Consistency
and Accrual are followed in financial statements, specific disclosure is not required. If a
fundamental accounting assumption is not followed, the fact should be disclosed.
3. True; To ensure proper understanding of financial statements, it is necessary that all significant
accounting policies adopted in the preparation and presentation of financial statements should
be disclosed. The disclosure of the significant accounting policies as such should form part of the
financial statements and they should be disclosed in one place.
4. False; Any change in the accounting policies which has a material effect in the current period or
which is reasonably expected to have a material effect in later periods should be disclose.
Q-2
Particulars Kg. `
Opening Inventory: Finished Goods 1,000 25,000
Raw Materials 1,100 11,000
Purchases 10,000 1,00,000
Labour 76,500
Overheads (Fixed) 75,000
Sales 10,000 2,80,000
Closing Inventory: Raw Materials 900
Finished Goods 1200
The expected production for the year was 15,000 kg of the finished product. Due to fall in market
demand the sales price for the finished goods was ` 20 per kg and the replacement cost for the raw
material was ` 9.50 per kg on the closing day. You are required to calculate the closing inventory as on
that date. [RTP-May’2020]
Ans. Calculation of cost for closing inventory
Particulars `
Cost of Purchase (10,200 x 10) 1,02,000
Direct Labour 76,500

75,000 ×10,200
Fixed Overhead 51,000
15,000
Cost of Production 2,29,500
Cost of closing inventory per unit (2,29,500/10,200) ` 22.50
Net Realisable Value per unit ` 20.00
Since net realisable value is less than cost, closing inventory will be valued at ` 20.
As NRV of the finished goods is less than its cost, relevant raw materials will be
valued at replacement cost i.e. ` 9.50.
Therefore, value of closing inventory: Finished Goods (1,200 x 20) ` 24,000
Raw Materials (900 x 9.50) ` 8,550
` 32,550

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Q-3 Classify the following activities as (1) Operating Activities, (2) Investing Activities, (3) Financing Activities
(4) Cash Equivalents.
a. Proceeds from long-term borrowings.
b. Proceeds from Trade receivables.
c. Trading Commission received.
d. Redemption of Preference Shares.
e. Proceeds from sale of investment
f. Interim Dividend paid on equity shares.
g. Interest received on debentures held as investment.
h. Dividend received on shares held as investments.
i. Rent received on property held as investment.
j. Dividend paid on Preference shares.
k. Marketable Securities
Ans. Operating Activities: b, c.
Investing Activities: e, g, h, i.
Financing Activities: a, d, f, j.
Cash Equivalent: k.
Q-4
(a) Entity A has a policy of not providing for depreciation on PPE capitalized in the year until the following
year, but provides for a full year’s depreciation in the year of disposal of an asset. Is this acceptable?
(b) Entity A purchased an asset on 1st January 2016 for ` 1,00,000 and the asset had an estimated useful life
of 10 years and a residual value of nil. On 1st January 2020, the directors review the estimated life and
decide that the asset will probably be useful for a further 4 years. Calculate the amount of depreciation
for each year, if company charges depreciation on Straight Line basis
(c) The following items are given to you:
ITEMS
(1) Costs of testing whether the asset is functioning properly, after deducting the net proceeds from
selling any items produced while bringing the asset to that location and condition (such as samples
produced when testing equipment);
(2) Costs of conducting business in a new location or with a new class of customer (including costs of staff
training);
(3) Any costs directly attributable to bringing the asset to the location and condition necessary for it to be
capable of operating in the manner intended by management
(4) Costs of opening a new facility or business, such as, inauguration costs;
(5) Purchase price, including import duties and non–refundable purchase taxes, after deducting trade
discounts and rebates.
With reference to AS 10 “Property, Plant and Equipment”, classify the above items under the following heads
HEADS
(i) Purchase Price of PPE
(ii) Directly attributable cost of PPE or
(iii) Cost not included in determining the carrying amount of an item of PPE. [RTP-May’20]

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Ans. (a) The depreciable amount of a tangible fixed asset should be allocated on a systematic basis over its
useful life. The depreciation method should reflect the pattern in which the asset’s future economic
benefits are expected to be consumed by the entity. Useful life means the period over which the asset
is expected to be available for use by the entity. Depreciation should commence as soon as the asset is
acquired and is available for use. Thus, the policy of Entity A is not acceptable.
(b) The entity has charged depreciation using the straight-line method at ` 10,000 per annum i.e (1,00,000/
10 years). On 1st January 2020, the asset’s net book value is [1,00,000 – (10,000 x 4)] = ` 60,000.
The remaining useful life is 4 years. The company should amend the annual provision for depreciation
to charge the unamortized cost over the revised remaining life of four years. Consequently, it should
charge depreciation for the next 4 years at ` 15,000 per annum i.e. (60,000 / 4 years). Depreciation is
recognized even if the Fair value of the Asset exceeds its Carrying Amount. Repair and maintenance of
an asset do not negate the need to depreciate it.
(c) (1) Costs of testing whether the asset is functioning properly, after deducting the net proceeds from
selling any items produced while bringing the asset to that location and condition (such as samples
produced when testing equipment) will be classified as “Directly attributable cost of PPE”.
(2) Costs of conducting business in a new location or with a new class of customer (including costs of
staff training) will be classified under head (iii)as it will not be included in determining the
carrying amount of an item of PPE.
(3) Any costs directly attributable to bringing the asset to the location and condition necessary for it
to be capable of operating in the manner intended by management will be included in
determination of Purchase Price of PPE
(4) Costs of opening a new facility or business, such as, inauguration costs will be classified under
head (iii) as it will not be included in determining the carrying amount of an item of PPE.
(5) Purchase price, including import duties and non–refundable purchase taxes, after deducting trade
discounts and rebates will be included in determination of Purchase Price of PPE.
Q-5 (i) AXE Limited purchased fixed assets costing $ 5,00,000 on 1st Jan. 2018 from an American company M/
s M&M Limited. The amount was payable after 6 months. The company entered into a forward contract
on 1st January 2018 for five months @ ` 62.50 per dollar. The exchange rate per dollar was as follows :
On 1st January, 2018 ` 60.75 per dollar
On 31st March, 2018 ` 63.00 per dollar
You are required to state how the profit or loss on forward contract would be recognized in the books
of AXE Limited for the year ending 2017-18, as per the provisions of AS 11.
(ii) Assets and liabilities and income and expenditure items in respect of integral foreign operations are
translated into Indian rupees at the prevailing rate of exchange at the end of the year. The resultant
exchange differences in the case of profit, is carried to other Liabilities Account and the Loss, if any, is
charged to revenue. You are required to comment in line with AS 11 [RTP-May’20]
Ans. (i) As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, an enterprise may enter into a
forward exchange contract to establish the amount of the reporting currency required, the premium or
discount arising at the inception of such a forward exchange contract should be amortized as expenses
or income over the life of the contract.
Forward Rate ` 62.50
Less: Spot Rate (` 60.75)
Premium on Contract ` 1.75
Contract Amount US$ 5,00,000
Total Loss (5,00,000 x 1.75) ` 8,75,000
Contract period 5 months
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 3 months falling in the year 2017-18; therefore loss to be recognized in 2017-18 (8,75,000/5) x 3 = `
5,25,000. Rest ` 3,50,000 will be recognized in the following year 2018-19.
(ii) Financial statements of an integral foreign operation (for example, dependent foreign branches) should
be translated using the principles and procedures described in paragraphs 8 to 16 of AS 11 (Revised
2003). The individual items in the financial statements of a foreign operation are translated as if all its
transactions had been entered into by the reporting enterprise itself. Individual items in the financial
statements of the foreign operation are translated at the actual rate on the date of transaction. The
foreign currency monetary items (for example cash, receivables, payables) should be reported using
the closing rate at each balance sheet date. Non-monetary items (for example, fixed assets, inventories,
investments in equity shares) which are carried in terms of historical cost denominated in a foreign
currency should be reported using the exchange date at the date of transaction. Thus the cost and
depreciation of the tangible fixed assets is translated using the exchange rate at the date of purchase
of the asset if asset is carried at cost. If the fixed asset is carried at fair value, translation should be done
using the rate existed on the date of the valuation. The cost of inventories is translated at the exchange
rates that existed when the cost of inventory was incurred and realizable value is translated applying
exchange rate when realizable value is determined which is generally closing rate. Exchange difference
arising on the translation of the financial statements of integral foreign operation should be charged to
profit and loss account.
Thus, the treatment by the management of translating all assets and liabilities; income and expenditure
items in respect of foreign branches at the prevailing rate at the year end and also the treatment of
resultant exchange difference is not in consonance with AS 11 (Revised 2003).
Q-6 Omega Equity Investments Ltd., wants to re-classify its investments in accordance with AS 13. State the
values, at which the investments have to be reclassified in the following cases:
(i) Long term investments in Company A, costing ` 8.5 lakhs are to be re-classified as current. The
company had reduced the value of these investments to ` 6.5 lakhs to recognize a permanent
decline in value. The fair value on date of transfer is ` 6.8 lakhs.
(ii) Current investment in Company C, costing ` 10 lakhs are to be re-classified as long term as the
company wants to retain them. The market value on date of transfer is ` 12 lakhs.
(iii) Certain long term investments no longer considered for holding purposes, to be reclassified as
current investments. The original cost of these investments was ` 18 lakhs but had been written
down to ` 12 lakhs to recognize permanent decline as per AS 13. [RTP-May’2020]
Ans. As per AS 13 ‘Accounting for Investments’, where long-term investments are reclassified as current
investments, transfers are made at the lower of cost and carrying amount at the date of transfer. And
where investments are reclassified from current to long term, transfers are made at lower of cost and
fair value on the date of transfer. Accordingly, the re-classification will be done on the following basis:
(i) In this case, carrying amount of investment on the date of transfer is less than the cost; hence this
re-classified current investment should be carried at ` 6.5 lakhs in the books.
(ii) In this case, reclassification of current investment into long-term investments will be made at `
10 lakhs as cost is less than its market value of ` 12 lakhs.
(iii) In this case, the book value of the investment is ` 12 lakhs, which is lower than its cost i.e. `18
lakhs. Here, the transfer should be at carrying amount and hence this re-classified current
investment should be carried at ` 12 lakhs.

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Q-7 Govind Ltd. issued 12% secured debentures of ` 100 Lakhs on 01.04.2018, to be utilized as under:
Particulars Amount ( ` in lakhs)
Construction of factory building 40
Purchase of Machinery 35
Working Capital 25
In March 2019, construction of the factory building was completed and machinery was installed and
ready for its intended use. Total interest on debentures for the financial year ended 31.03.2019 was `
12,00,000. During the year 2018-19, the company had invested idle fund out of money raised from
debentures in banks’ fixed deposit and had earned an interest of `3,00,000.
You are required to show the treatment of interest under Accounting Standard 16 and also explain
nature of assets. [RTP-May’2020]
Ans. According to AS 16 “Borrowing Costs”, borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset should be capitalised as part of the cost of that asset.
The amount of borrowing costs eligible for capitalisation should be determined in accordance with this
Standard. Other borrowing costs should be recognised as an expense in the period in which they are
incurred.
It also states that to the extent that funds are borrowed specifically for the purpose of obtaining a
qualifying asset, the amount of borrowing costs eligible for capitalisation on that asset should be
determined as the actual borrowing costs incurred on that borrowing during the period less any income
on the temporary investment of those borrowings.
Thus, eligible borrowing cost
= ` 12,00,000 – ` 3,00,000
= ` 9,00,000
Sr. No. Particulars Nature of Interest to be Interest to be
assets capitalized (`) charged to Profit
& Loss Account (`)
i Construction of Qualifying 9,00,000x40/100
factory building Asset = ` 3,60,000 NIL
ii Purchase of Not a Qualifying NIL 9,00,000x35/100
Machinery Asset = ` 3,15,000
iii Working Capital Not a Qualifying Asset NIL 9,00,000x25/100
= ` 2,25,000
_________ = ` 2,25,000
Total ` 3,60,000 ` 5,40,000
Q-8 On 31st March 2017, a business firm finds that cost of a partly finished unit on that date is Rs.530. The
unit can be finished in 2017-18 by an additional expenditure of Rs.310. The finished unit can be sold for
Rs.750 subject to payment of 4% brokerage on selling price. The firm seeks your advice regarding the
amount at which the unfinished unit should be valued as at 31st March, 2017 for preparation of final
accounts. Assume that the partly finished unit cannot be sold in semi finished form and its NRV is zero
without processing it further. [RTP May ‘19]

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Ans. Valuation of unfinished unit
Rs.
Net selling price 750
Less : estimated cost of completion (310)
440
Less : Brokrage (4% of 750) (30)
Net Realisable Value 410
Cos of inventory 530
Value of inventory (lower of cost and ane trealisable value) 410
Q-9 The Board of Directors of New Graphics Ltd. in its Board Meeting held on 18th April, 2017, considered
and approved the Audited Financial results along with Auditors Report for the Financial Year ended 31st
March, 2017 and recommended a dividend of Rs.2 per equity share (on 2 crore fully paid up equity
shares of Rs.10 each) for the year ended31st March, 2017 and if approved by the members at the
forthcoming Annual General Meeting of the companyon 18th June, 2017, the same will be paid to all the
eligible shareholders.
Discuss on the accounting treatment and presentation of the said proposed dividend in the annual
accounts of the company for the year ended 31st March, 2017 as per the applicable Accounting Standard
and other Statutory Requirements. [RTP May ‘19]
Ans. As per the amendment in AS 4 "Contingencies and Events Occurring After the Balance Sheet Date" vide
Companies (Accounting Standards) Amendments Rules, 2016 dated 30th March, 2016, the events which
take place after the balance sheet date, are sometimes reflected in the financial statements because of
statutory requirements or because of their special nature.
However, dividends declared after the balance sheet date but before approval of financial statements
are not recognized as a liability at the balance sheet date because no statutory obligation exists at that
time. Hence such dividends are disclosed in the notes to financial statements.
No, provision for proposed dividends is not required to be made. Such proposed dividends are to be
disclosed in the notes to financial statements. Accordingly, the dividend of ? 4 crores recommended by
New Graphics Ltd. in its Board meeting on 18th April, 2017 shall not be accounted for in the books for the
year 2016-17 irrespective of the fact that it pertains to the year 2016-17 and will be paid after approval
in the Annual General Meeting of the members/shareholders.
Q-10 Goods of Rs.5,00,000 were destroyed due to flood in September, 2015. A claim was lodged with insurance
company, but no entry was passed in the books for insurance claim. [RTP May ‘19]
In March, 2018, the claim was passed and the company received a payment of Rs.3,50,000 against the
claim. Explain the treatment of such receipt in final accounts for the year ended 31st March, 2018.
Ans. As per the provisions of AS 5 "Net Profit or Loss for the Period, Prior Period Items and Changes in
Accounting Policies", prior period items are income or expenses, which arise, in the current period as a
result of error or omissions in the preparation of financial statements of one or more prior periods.
Further, the nature and amount of prior period items should be separately disclosed in the statement of
profit and loss in a manner that their impact on current profit or loss can be perceived.
In the given instance, it is clearly a case of error in preparation of financial statements for the year 2015-
16. Hence, claim received in the financial year 2017-18 is a prior period item and should be separately
disclosed in the statement of Profit and Loss.

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Q-11 Preet Ltd. is installing a new plant at its production facility. It has incurred these costs:[RTP May ‘19]
1. Cost of the plant (cost per supplier's invoice plus taxes) Rs.50,00,000
2. Initial delivery and handling costs Rs.4,00,000
3. Cost of site preparation Rs.12,00,000
4. Consultants used for advice on the acquisition of the plant Rs.14,00,000
5. Interest charges paid to supplier of plant for deferred credit Rs.4,00,000
6. Estimated dismantling costs to be incurred after 7 years Rs.6,00,000
7. Operating losses before commercial production Rs.8,00,000
Please advise Preet Ltd. on the costs that can be capitalised in accordance with AS 10 (Revised).
Ans. Accordint ot As 10 (Revised), these costs can be capitalised :
1. Cost of the plant Rs.50,00,000
2. Initial delivery and handling costs Rs.4,00,000
3. Cost of site preparation Rs.12,00,000
4. Consultants’ fees Rs.14,00,000
5. Estimated dismantling costs to be incurred after 7 years. Rs.6,00,000
Rs.86,00,000
Note: Interest charges paid on "Deferred credit terms" to the supplier of the plant (not a qualifying
asset) of Rs.4,00,000 and operating losses before commercial production amounting to Rs.8,00,000 are
not regarded as directly attributable costs and thus cannot be capitalised. They should be written off to
the Statement of Profit and Loss in the period they are incurred.
Q-12 Rau Ltd. purchased a plant for US$ 1,00,000 on 01st February 2016, payable after three months. Company
entered into a forward contract for three months @ Rs.49.15 per dollar. Exchange rate per dollar on 01st
Feb. was Rs.48.85. How will you recognise the profit or loss on forward contract in the books of Rau Ltd.?
[RTP May ‘19]
Ans. Forward Rate Rs.49.15
Less: Spot Rate (Rs.48.85)
Premium on Contract Rs.0.30
Contract Amount US$ 1,00,000
Total Loss (1,00,000 x 0.30) Rs.30,000
Contract period 3 months
Two falling the year 2016-17; therefore loss to be recognised (30,000/3) x 2 = Rs.20,000. Rest Rs.10,000
will be recognised in the following year.
Q-13 Viva Ltd. received a specific grant of Rs.30 lakhs for acquiring the plant of Rs.150 lakhs during 2014- 15
having useful life of 10 years. The grant received was credited to deferred income in the balance sheet
and was not deducted from the cost of plant. During 2017-18, due to non-compliance of conditions laid
down for the grant, the company had to refund the whole grant to the Government. Balance in the
deferred income on that date was Rs.21 lakhs and written down value of plant was Rs.105 lakhs. What
should be the treatment of the refund of the grant and the effect on cost of the fixed asset and the
amount of depreciation to be charged during the year 2017-18 in profit and loss account? AS 13 Accounting
for Investments. [RTP May ‘19]

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Ans. As per AS-12, 'Accounting for Government Grants', "the amount refundable in respect of a grant related
to specific fixed asset should be recorded by reducing the deferred income balance. To the extent the
amount refundable exceeds any such deferred credit, the amount should be charged to profit and loss
statement.
In this case the grant refunded is ? 30 lakhs and balance in deferred income is Rs.21 lakhs, Rs.9 lakhs shall
be charged to the profit and loss accountfor the year 2017-18. There will be no effect on the cost of the
fixed asset and depreciation charged will be on the same basis as charged in the earlier years.
Q-14 Paridhi Electronics Ltd. has current investment (X Ltd.'s shares) purchased for Rs.5 lakhs, which the
company want to reclassify as long term investment on 31.3.2018. The market value of these investments
as on date of Balance Sheet was ?2.5 lakhs. How will you deal with this as on 31.3.18 with reference to
AS-13? [RTP May ‘19]
Ans. As per AS 13'Accounting for Investments', where investments are reclassified from current to long-
term, transfers are made at the lower of cost or fair value at the date of transfer.
In the given case, the market value of the investment (X Ltd. shares) is Rs.2.50 lakhs, which is lower than
its cost i.e. Rs.5 lakhs. Therefore, the transfer to long term investments should be made at cost of
Rs.2.50 lakhs. The loss of Rs.2.50 lakhs should be charged to profit and loss account.
Q-15 Zen Bridge Construction Limited obtained a loan of Rs.64 crores to be utilized asunder:
(i) Construction of Hill link road in Kedarnath Rs.50 crores
(ii) Purchase of Equipment and Machineries Rs.6 crores
(ii) Working Capital Rs.4 crores
(iv) Purchase of Vehicles Rs.1 crore
(v) Advances for tools/cranes etc. Rs.1 crore
(vi) Purchase of Technical Know how Rs.2 crores
(vii)Total Interest charged by the Bank for the year ending 31st March, 2018 Rs.1.6 crores
Show the treatment of Interest according to Accounting Standard by Zen Bridge Construction Limited.
[RTP May ‘19]
Ans. According to AS 16 'Borrowing costs', qualifying asset is an asset that necessarily takes substantial
period of time to get ready for its intended use. As per the standard, borrowing costs that are directly
attributable to the acquisition, construction or production of a qualifying asset should be capitalized as
part of the cost of that asset. Other borrowing costs should be recognized as an expense in the period in
which they are incurred. Capitalization of borrowing costs is also not suspended when a temporary
delay is a necessary part of the process of getting an asset ready for its intended use or sale.
The treatment of interest by Zen Bridge Construction Ltd. can be shown as:
Qualifying Interest to be Interest to be
Assets capitalized charges to
Rs.in crores Profit & Loss
A/c Rs. in
crores
Construction of hill road* Yes 1.25 1 .6/64 x 50
Purchase of equipment
and machineries No 0.15 1.6/64x6
Working capital No 0.10 1.6/64x4
Purchase of vehicles No 0.025 1 .6/64 x 1
Advance for tools, cranes etc. No 0.025 1 .6/64 x 1
Purchase of technical know-how No 0.05 1 .6/64 x 2
Total 1.25 0.35

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 *Note: It is assumed that construction of hill road will normally take more than a year (substantial
period of time), hence considered as qualifying asset.
Q-16 PK Ltd. has identified business segment as its primary reporting format. It has identified India, USA and
UK as three geographical segments. It sells its products in the Indian market, which constitutes 70
percent of the Company's sales. 25 per cent is sold in USA and the balance is sold in UK. Is PK Ltd. as part
of its geographical secondary segment information, required to disclose segment revenue from export
sales, where such sales are not significant? [RTP May ‘19]
Ans. As per AS 17 if primary format of an enterprise for reporting segment information is business segments,
it should also report segment revenue from external customers by geographical area based on the
geographical location of its customers, for each geographical segment whose revenue from sales to
external customers is 10 per cent or more of enterprise revenue. Accordingly, for the purposes of
disclosing secondary segment information, PK Ltd. is not required to disclose segment revenue from
export sales to UK, since that segment does not meet the 10 per center more of enterprise revenue
threshold. However, other secondary segment information as per AS 17 should be disclosed in respect
of this segment if the thresholds prescribed in the AS 17 are met.
Q-17 Is it permissible not to recognize deferred tax liability on the ground that the Company expects that
there will be losses both for accounting and tax purposes in near future? You are required to give advise
to the company. [RTP May ‘19]
Ans. The Company should provide for deferred tax liability on the timing differences irrespective for the fact
that these timing differences will reverse in the period in which the Company expects to be in loss both
from the accounting as well as tax point of view. It may, however, be added that the deferred tax
liability recognized at the balance sheet date will give rise to future taxable income at the time of
reversal thereof.
Q-18 A Limited is engaged in manufacturing of Chemical Y for which Raw Material X is required. The company
provides you following information for the year ended 31st March, 2017.
Rs.Per unit
Raw Material X
Cost price 380
Unloading Charges 20
Freight Inward 40
Replacement cost 300
Chemical Y
Material consumed 440
Direct Labour 120
Variable Overheads 80
Additional Information:
(i) Total fixed overhead for the year was Rs.4,00,000 on normal capacity of 20,000 units.
(ii) Closing balance of Raw Material X was 1,000 units and Chemical Y was Rs.2,400 units.
You are required to calculate the total value of closing stock of Raw Material X and Chemical Y according
to AS 2, when
(i) Net realizable value of Chemical Y is Rs.800 per unit
(ii) Net realizable value of Chemical Y is Rs.600 per unit [RTP Nov ‘18]
Ans. (i) When Net Realizable Value of the Chemical Y is Rs.800 per unit

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 NRV is greater than the cost of Finished Goods Y i.e. Rs.660 (Refer W.N.) Hence, Raw Material and
Finished Goods are to be valued at cost.
Value of Closing Stock:
Qty. Rate (Rs.) Amount (Rs.)
Raw Material X 1,000 440 4,40,000
Finished Goods Y 2,400 660 15,84,000
Total Value of Closing Stock 20,24,000
(ii) When Net Realizable Value of the Chemical Y is Rs. 600 per unit
NRV is less than the cost of Finished Goods Y i.e. Rs. 660. Hence, Raw Material is to be valued at
replacement cost and Finished Goods are to be valued at NRV since NRV is less than the cost.
Value of Closing Stock:
Qty. Rate (Rs.) Amount (Rs.)
Raw Material X 1,000 300 3,00,000
Finished Goods Y 2,400 600 14,40,000
Total Value of Closing Stock 17,40,000
Working Note:
Statement showing cost calculation of Raw material X and Chemical Y
Raw Material X Rs.
Cost Price 380
Add: Freight Inward 40
Unloading charges 20
Cost 440
Chemical Y Rs.
Materials consumed 440
Direct Labour 120
Variable overheads 80
Fixed overheads (Rs.4,00,000/20,000 units) 20
Cost 660
Q-19 While preparing its final accounts for the year ended 31st March, 2017, a company made provision for
bad debts @ 5% of its total debtors. In the last week of February, 2017 a debtor for Rs.20 lakhs had
suffered heavy loss due to an earthquake; the loss was not covered by any insurance policy. In April,
2017 the debtor became a bankrupt. Can the company provide for the full loss arising out of insolvency
of the debtor in the final accounts for the year ended 31st March, 2017? You are required to advise the
company in line with AS 4. [RTP Nov ‘18]
Ans. As per AS 4 'Contingencies and Events Occurring After the Balance Sheet Date', adjustment to assets and
liabilities are required for events occurring after the balance sheet date that provide additional
information materially affecting the determination of the amounts relating to conditions existing at
the Balance Sheet date.
A debtor for Rs 20,00,000 suffered heavy loss due to earthquake in the last week of February, 2017 which
was not covered by insurance. This information with its implications was already known to the company.

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 The fact that he became bankrupt in April, 2017 (after the balance sheet date) is only an additional
information related to the condition existing on the balance sheet date.
Accordingly, full provision for bad debts amounting Rs. 20,00,000 should be made, to cover the loss
arising due to the insolvency of a debtor, in the final accounts for the year ended 31st March 2017. Since
the company has already made 5% provision of its total debtors, additional provision amounting Rs.
19,00,000 shall be made (20,00,000 x 95%) for the year ended 31st March, 2017.
Q-20 The Accountant of Mobile Limited has sought your opinion with relevant reasons, whether the following
transactions will be treated as change in Accounting Policy or not for the year ended 31st March, 2017.
You are required to advise him in the following situations in accordance with the provisions of AS 5
(i) Provision for doubtful debts was created @ 2% till 31st March, 2016. From the Financial year 2016-
2017, the rate of provision has been changed to 3%.
(ii) During the year ended 31st March, 2017, the management has introduced a formal gratuity scheme
in place of ad-hoc ex-gratia payments to employees on retirement.
(iii) Till the previous year the furniture was depreciated on straight line basis over a period of 5 years.
From current year, the useful life of furniture has been changed to 3 years.
(iv) Management decided to pay pension to those employees who have retired after completing 5
years of service in the organization. Such employees will get pension of Rs.20,000 per month.
Earlier there was no such scheme of pension in the organization.
(v) During the year ended 31st March, 2017, there was change in cost formula in measuring the cost of
inventories. [RTP Nov ‘18]
Ans. (i) In the given case, Mobile limited created 2% provision for doubtful debts till 31st March, 2016.
Subsequently in 2016-17, the company revised the estimates based on the changed circumstances
and wants to create 3% provision. Thus change in rate of provision of doubtful debt is change in
estimate and is not change in accounting policy. This change will affect only current year.
(ii) As per AS 5, the adoption of an accounting policy for events or transactions that differ in substance
from previously occurring events or transactions, will not be considered as a change in accounting
policy. Introduction of a formal retirement gratuity scheme by an employer in place of ad hoc ex-
gratia payments to employees on retirement is a transaction which is substantially different from
the previous policy, will not be treated as change in an accounting policy.
(iii) Change in useful life of furniture from 5 years to 3 years is a change in estimate and is not a change
in accounting policy.
(iv) Adoption of a new accounting policy for events or transactions which did not occur previously
should not be treated as a change in an accounting policy. Hence the introduction of new pension
scheme is not a change in accounting policy.
(v) Change in cost formula used in measurement of cost of inventories is a change in accounting policy.
Q-21 ABC Ltd. is installing a new plant at its production facility. It provides you the following information:
Rs.
Cost of the plant (cost as per supplier's invoice) 31,25,000
Estimated dismantling costs to be incurred after 5 years 2,50,000
Initial Operating losses before commercial production 3,75,000
Initial delivery and handling costs 1,85,000
Cost of site preparation 4,50,000
Consultants used for advice on the acquisition of the plant 6,50,000
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 You are required to compute the costs that can be capitalised for plant by ABC Ltd., in accordance with
AS 10: Property, Plant and Equipment. [RTP Nov ‘18]
Ans. According to AS 10 on Property, Plant and Equipment, the costs which will be capitalized by ABC Ltd.:
Rs.
Cost of the plant 31,25,000
Initial delivery and handling costs 1,85,000
Cost of site preparation 4,50,000
Consultants' fees 6,50,000
Estimated dismantling costs to be incurred after 5 years 2,50,000
Total cost of Plant 46,60,000
Note: Operating losses before commercial production amounting to Rs.3,75,000 will not be capitalized
as per AS 10. They should be written off to the Statement of Profit and Loss in the period they are
incurred.
Q-22 (i) Classify the following items as monetary or non-monetary item:
Share Capital
Trade Receivables
Investment in Equity shares
Fixed Assets.
(ii) Exchange Rate per $
Goods purchased on 1.1.2017 for US $ 15,000 Rs.75
Exchange rate on 31.3.2017 Rs.74
Date of actual payment 7.7.2017 Rs.73
You are required to ascertain the loss/gain for financial years 2016-17 and 2017-18, also give their
treatment as per AS 11. [RTP Nov ‘18]
Ans. (i)
Share capital Non-monetary
Trade receivables Menotary
Investment in equity shares Non-monetary
Fixed assets Non-monetary
(ii) As per AS 11 on The Effects of Changes in Foreign Exchange Rates', all foreign currency transactions
should be recorded by applying the exchange rate on the date of transactions. Thus, goods purchased
on 1.1.2017 and corresponding creditor would be recorded at Rs 11,25,000 (i.e. $15,000 x Rs. 75)
According to the standard, at the balance sheet date all monetary transactions should be reported
using the closing rate. Thus, creditors of US $15,000 on 31.3.2017 will be reported at Rs. 11,10,000
(i.e. $15,000 x Rs. 74) and exchange profit of Rs. 15,000 (i.e. 11,25,000 - 11,10,000) should be credited
to Profit and Loss account in the year 2016-17.
On 7.7.2017, creditors of $15,000 is paid at the rate of Rs.73. As per AS 11, exchange difference on
settlement of the account should also be transferred to Profit and Loss account. Therefore, Rs.15,000
(i.e. 11,10,000 - 10,95,000) will be credited to Profit and Loss account in the year 2017-18.
Q-23 A specific government grant of Rs.15 lakhs was received by USB Ltd. for acquiring the Hi-Tech Diary plant
of Rs.95 lakhs during the year 2014-15. Plant has useful life of 10 years. The grant received was credited
to deferred income in the balance sheet. During 2017-18, due to non-compliance of conditions laid

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 down for the grant, the company had to refund the whole grant to the Government. Balance in the
deferred income on that date was ? 10.50 lakhs and written down value of plant was Rs.66.50 lakhs.
(i) What should be the treatment of the refund of the grant and the effect on cost of plant and the
amount of depreciation to be charged during the year 2017-18 in profit and loss account?
(ii) What should be the treatment of the refund, if grant was deducted from the cost of the plant during
2014-15 assuming plant account showed the balance of Rs.56 lakhs as on 1.4.2017?
You are required to explain in the line with provisions of AS 12. [RTP Nov ‘18]
Ans. As per para 21 of AS 12, 'Accounting for Government Grants', "the amount refundable in respect of a
grant related to specific fixed asset should be recorded by reducing the deferred income balance. To
the extent the amount refundable exceeds any such deferred credit, the amount should be charged to
profit and loss statement.
(i) In this case the grant refunded is Rs.15 lakhs and balance in deferred income is Rs. 10.50 lakhs, Rs. 4.50
lakhs shall be charged to the profit and loss account for the year 2017-18. There will be no effect on the
cost of the fixed asset and depreciation charged will be on the same basis as charged in the earlier
years.
(ii) If the grant was deducted from the cost of the plant in the year 2014-15 then, para 21 of AS 12 states
that the amount refundable in respect of grant which relates to specific fixed assets should be
recorded by increasing the book value of the assets, by the amount refundable. Where the book
value of the asset is increased, depreciation on the revised book value should be provided
prospectively over the residual useful life of the asset. Therefore, in this case, the book value of the
plant shall be increased by Rs. 15 lakhs. The increased cost of Rs. 15 lakhs of the plant should be
amortized over 7 years (residual life). Depreciation charged during the year 2017-18 shall be (56+15)17
years = Rs.10.14 lakhs presuming the depreciation is charged on SLM.
Q-24 M/s Active Builders Ltd. invested in the shares of another company (with an intention to hold the shares
for short term period) on 31st October, 2016 at a cost of Rs.4,50,000. It also earlier purchased Gold of
Rs.5,00,000 and Silver of Rs.2,25,000 on 31st March, 2014.
Market values as on 31st March, 2017 of the above investments are as follows:
Shares Rs.3,75,000; Gold Rs.7,50,000 and Silver Rs.4,35,000
You are required explain how will the above investments be shown in the books of account of M/s
Active Builders Ltd. for the year ending 31st March, 2017 as per the provisions of AS 13? [RTP Nov ‘18]
Ans. As per AS 13 'Accounting for Investments', if the shares are purchased with an intention to hold for
short-term period then investment will be shown at the realizable value. In the given case, shares
purchased on 31st October, 2016, will be valued at Rs. 3,75,000 as on 31st March, 2017.
Gold and silver are generally purchased with an intention to hold it for long term period until and unless
given otherwise. Hence, the investment in gold and silver (purchased on 31st March, 2014) shall continue
to be shown at cost as on 31st March, 2017 i.e., Rs. 5,00,000 and Rs. 2,25,000 respectively, though their
realizable values have been increased.
Thus the shares, gold and silver will be shown at Rs.3,75,000, Rs. 5,00,000 and Rs. 2,25,000 respectively
and hence, total investment will be valued at Rs.11,00,000 in the books of account of M/s Active Builders
for the year ending 31st March, 2017 as per provisions of AS 13.
Q-25 A company incorporated in June 2017, has setup a factory within a period of 8 months with borrowed
funds. The construction period of the assets had reduced drastically due to usage of technical innovations
by the company. Whether interest on borrowings for the period prior to the date of setting up the
factory should be capitalized although it has taken less than 12 months for the assets to get ready for
use. You are required to comment on the necessary treatment with reference to AS 16. [RTP Nov ‘18]
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Ans. As per para 3.2 to AS 16 'Borrowing Costs', a qualifying asset is an asset that necessarily akes a substantial
period of time to get ready for its intended use or sale.
Further, Explanation to the above para states that what constitutes a substantial period of time primarily
depends on the facts and circumstances of each case. However, ordinarily, a period of twelve months is
considered as substantial period of time unless a shorter or longer period can be justified on the basis
of facts and circumstances of the case. In estimating the period, time which an asset takes, technologically
and commercially, to get it ready for its intended use or sale is considered.
It may be implied that there is a rebuttable presumption that a 12 months period constitutes substantial
period of time.
Under present circumstances where construction period has reduced drastically due to technical
innovation, the 12 months period should at best be looked at as a benchmark and not as a conclusive
yardstick. It may so happen that an asset under normal circumstances may take more than 12 months to
complete. However, an enterprise that completes the asset in 8 months should not be penalized for its
efficiency by denying it interest capitalization and vice versa.
The substantial period criteria ensures that enterprises do not spend a lot of time and effort capturing
immaterial interest cost for purposes of capitalization.
Therefore, if the factory is constructed in 8 months then it shall be considered as a qualifying asset. The
interest on borrowings for the same shall be capitalised although it has taken less than 12 months for
the asset to get ready to use.
Q-26 Calculate the segment results of a manufacturing organization from the following information:
Segments A B C Total
Directly attributed revenue 5,00,000 3,00,000 1,00,000 9,00,000
Enterprise revenue (allocated in 5 : 4 : 2 basis) 1,10,000
Revenue from transactions with other segments
Transaction from B 1,00,000 50,000 1,50,000
Transaction from C 10,000 50,000 60,000
Transaction from A 25,000 1,00,000 1,25,000
Operating expenses 3,00,000 1,50,000 75,000 5,25,000
Enterprise expenses (allocated in 5 : 4 : 2 basis) 77,000
Expenses on transactions with other segments
Transaction from B 75,000 30,000
Transaction from C 6,000 40,000
Transaction from A 18,000 82,000
[RTP Nov ‘18]
Ans. Calculation of segment result
Segments A B C Total
Directly attributed revenue 5,00,000 3,00,000 1,00,000 9,00,000
Enterprise revenue (allocated in 5 : 4 : 2 basis) 50,000 40,000 20,000 1,10,000
Revenue from transactions with other segments
Transaction from B 1,00,000 50,000 1,50,000
Transaction from C 10,000 50,000 60,000
Transaction from A 25,000 1,00,000 1,25,000

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 Total segment revenue as per AS 17 (A) 6,60,000 4,15,000 2,70,000 13,45,000
Operating expenses 3,00,000 1,50,000 75,000 5,25,000
Enterprise expenses (allocated in 5 : 4 : 2 basis) 35,000 28,000 14,000 77,000
Expenses on transactions with other segments
Transaction from B 75,000 30,000 1,05,000
Transaction from C 6,000 40,000 46,000
Transaction from A 18,000 82,000 1,00,000
Total segment expenses as per AS 17 (B) 4,16,000 2,36,000 2,01,000 8,53,00
Segment result (A-B) 2,44,000 1,79,000 69,000 4,92,000
Q-27 Beta Ltd. is a full tax free enterprise for the first ten years of its existence and is in the second year of its
operation. Depreciation timing difference resulting in a tax liability in year 1 and 2 is Rs.1,000 lakhs and
Rs.2,000 lakhs respectively. From the third year it is expected that the timing difference would reverse
each year by Rs.50 lakhs. Assuming tax rate of 40%, you are required to compute to the deferred tax
liability at the end of the second year and any charge to the Profit and Loss account. [RTP Nov ‘18]
Ans. As per para 13 of Accounting Standard (AS) 22, Accounting for Taxes on Income", deferred tax in respect
of timing differences which originate during the tax holiday period and reverse during the tax holiday
period, should not be recognized to the extent deduction from the total income of an enterprise is
allowed during the tax holiday period as per the provisions of sections 10A and 10B of the Income-tax
Act. Deferred tax in respect of timing differences which originate during the tax holiday period but
reverse after the tax holiday period should be recognized in the year in which the timing differences
originate. However, recognition of deferred tax assets should be subject to the consideration of
prudence. For this purpose, the timing differences which originate first should be considered to reverse
first.
Out of Rs. 1,000 lakhs depreciation, timing difference amounting Rs. 400 lakhs (Rs. 50 lakhs x 8 years) will
reverse in the tax holiday period and therefore, should not be recognized. However, for Rs. 600 lakhs
(Rs. 1,000 lakhs - Rs. 400 lakhs), deferred tax liability will be recognized for Rs. 240 lakhs (40% of Rs. 600
lakhs) in first year. In the second year, the entire amount of timing difference of Rs. 2,000 lakhs will
reverse only after tax holiday period and hence, will be recognized in full. Deferred tax liability amounting
Rs. 800 lakhs (40% of Rs.2,000 lakhs) will be created by charging it to profit and loss account and the total
balance of deferred tax liability account at the end of second year will be Rs. 1,040 lakhs (240 lakhs + 800
lakhs).
Q-28 "Accounting Standards standardize diverse accounting policies with a view to eliminate the non-
comparability of financial statements and improve the reliability of financial statements. "Discuss and
explain the benefits of Accounting Standards. [Sugg. Nov.’18, 5 Marks]
Ans. Accounting Standards standardize diverse accounting policies with a view to eliminate the non-
comparability of financial statements and improve the reliability of financial statements. Accounting
Standards provide a set of standard accounting policies, valuation norms and disclosure requirements.
Accounting standards aim at improving the quality of financial reporting by promoting comparability,
consistency and transparency, in the interests of users of financial statements.
The following are the benefits of Accounting Standards:
(i) Standardization of alternative accounting treatments: Accounting Standards reduce to a reasonable
extent confusing variations in the accounting treatment followed for the purpose of preparation of
financial statements.

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 (ii) Requirements for additional disclosures: There are certain areas where important is not statutorily
required to be disclosed. Standards may call for disclosure beyond that required by law.
(iii) Comparability of financial statements: The application of accounting standards would facilitate
comparison of financial statements of different companies situated in India and facilitate comparison,
to a limited extent, of financial statements of companies situated in different parts of the world.
However, it should be noted in this respect that differences in the institutions, traditions and legal
systems from one country to another give rise to differences in Accounting Standards adopted in different
countries.
Q-29 Hello Ltd. purchased goods at the cost of ` 20 lakhs in October. Till the end of the financial year, 75% of
the stocks were sold. The Company wants to disclose closing stock at ` 5 lakhs. The expected sale value
is ` 5.5 lakhs and a commission at 10% on sale is payable to the agent. You are required to ascertain the
value of closing stock? [RTP Nov. ‘19]
Ans. As per para 5 of AS 2 “Valuation of Inventories”, the inventories are to be valued at lower of cost or net
realizable value.
In this case, the cost of inventory is ` 5 lakhs. The net realizable value is ` 4.95 lakhs (` 5.5 lakhs less cost
to make the sale @ 10% of ` 5.5 lakhs). So, the closing stock should be valued at ` 4.95 lakhs.
Q-30 An earthquake destroyed a major warehouse of PQR Ltd. on 30.4.2019. The accounting year of the
company ended on 31.3.2019. The accounts were approved on 30.6.2019. The loss from earthquake is
estimated at ` 25 lakhs. State with reasons, whether the loss due to earthquake is an adjusting or non-
adjusting event and how the fact of loss is to be disclosed by the company. [RTP Nov. ‘19]
Ans. Para 8.3 of AS 4 “Contingencies and Events Occurring after the Balance Sheet Date”, states that
adjustments to assets and liabilities are not appropriate for events occurring after the balance sheet
date, if such events do not relate to conditions existing at the balance sheet date. The destruction of
warehouse due to earthquake did not exist on the balance sheet date i.e. 31.3.2019. Therefore, loss
occurred due to earthquake is not to be recognized in the financial year 2018-2019.
However, according to para 8.6 of the standard, unusual changes affecting the existence or substratum
of the enterprise after the balance sheet date may indicate a need to consider the use of fundamental
accounting assumption of going concern in the preparation of the financial statements. As per the
information given in the question, the earthquake has caused major destruction; therefore, fundamental
accounting assumption of going concern is called upon.
Hence, the fact of earthquake together with an estimated loss of ` 25 lakhs should be disclosed in the
Report of the Directors for the financial year 2018-2019.
Q-31 The Accountant of Mobile Limited has sought your opinion with relevant reasons, whether the following
transactions will be treated as change in Accounting Policy or not for the year ended 31st March, 2019.
Please advise him in the following situations in accordance with the provisions of relevant Accounting
Standard;
(i) Provision for doubtful debts was created @ 2% till 31st March, 2018. From the Financial year 2018-
2019, the rate of provision has been changed to 3%.
(ii) During the year ended 31st March, 2019, the management has introduced a formal gratuity scheme
in place of ad-hoc ex-gratia payments to employees on retirement.
(iii) Till the previous year the furniture was depreciated on straight line basis over a period of 5 years.
From current year, the useful life of furniture has been changed to 3 years.
(iv) Management decided to pay pension to those employees who have retired after completing 5
years of service in the organization. Such employees will get pension of ` 20,000 per month.

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 Earlier there was no such scheme of pension in the organization.
(v) During the year ended 31st March, 2019, there was change in cost formula in measuring the cost of
inventories. [RTP Nov. ‘19]
Ans.(i) In the given case, Mobile limited created 2% provision for doubtful debts till 31st March, 2018.
Subsequently in 2018-19, the company revised the estimates based on the changed circumstances and
wants to create 3% provision. Thus change in rate of provision of doubtful debt is change in estimate
and is not change in accounting policy. This change will affect only current year.
(ii) As per AS 5, the adoption of an accounting policy for events or transactions that differ in substance
from previously occurring events or transactions, will not be considered as a change in accounting
policy. Introduction of a formal retirement gratuity scheme by an employer in place of ad hoc ex-gratia
payments to employees on retirement is a transaction which is substantially different from the previous
policy, will not be treated as change in an accounting policy.
(iii) Change in useful life of furniture from 5 years to 3 years is a change in estimate and is not a change in
accounting policy.
(iv) Adoption of a new accounting policy for events or transactions which did not occur previously should
not be treated as a change in an accounting policy. Hence the introduction of new pension scheme is
not a change in accounting policy.
(v) Change in cost formula used in measurement of cost of inventories is a change in accounting policy.
Q-32 Shrishti Ltd. contracted with a supplier to purchase machinery which is to be installed in its Department
A in three months' time. Special foundations were required for the machinery which were to be
prepared within this supply lead time. The cost of the site preparation and laying foundations were `
1,41,870. These activities were supervised by a technician during the entire period, who is employed
for this purpose of ` 45,000 per month. The technician's services were given by Department B to
Department A, which billed the services at ` 49,500 per month after adding 10% profit margin.
The machine was purchased at ` 1,58,34,000 inclusive of IGST @ 12% for which input credit is available
to Shrishti Ltd. ` 55,770 transportation charges were incurred to bring the machine to the factory site.
An Architect was appointed at a fee of ` 30,000 to supervise machinery installation at the factory site.
Ascertain the amount at which the Machinery should be capitalized under AS 10 considering that IGST
credit is availed by the Shristhi Limited. Internally booked profits should be eliminated in arriving at
the cost of machine. [RTP Nov. ‘19]
Ans. Calculation of Cost of Fixed Asset (i.e. Machinery)
Particulars `
Purchase Price Given (` 158,34,000 x 100/112) 1,41,37,500
Add: Site Preparation Cost Given 1,41,870
Technician’s Salary Specific/Attributable overheads for
3 months (See Note) (45,000 x3) 1,35,000
Initial Delivery Cost Transportation 55,770
Professional Fees for Installation Architect’s Fees 30,000
Total Cost of Asset 1,45,00,140
Q-33(i) Trade receivables as on 31.3.2019 in the books of XYZ Ltd. include an amount receivable from Umesh `
5,00,000 recorded at the prevailing exchange rate on the date of sales, i.e. at US $ 1= ` 58.50. US $ 1 = `
61.20 on 31.3.2019.
Explain briefly the accounting treatment needed in this case as per AS 11 as on 31.3.2019.
[RTP Nov. ‘19]

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 (ii) Power Track Ltd. purchased a plant for US$ 50,000 on 31st October, 2018 payable after 6 months. The
company entered into a forward contract for 6 months @` 64.25 per Dollar. On 31st October, 2018, the
exchange rate was ` 61.50 per Dollar.
You are required to recognise the profit or loss on forward contract in the books of the company for the
year ended 31st March, 2019. [RTP Nov. ‘19]
Ans. (i) As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, exchange differences arising on the
settlement of monetary items or on reporting an enterprise’s monetary items at rates different from
those at which they were initially recorded during the period, or reported in previous financial
statements, should be recognized as income or as expenses in the period in which they arise.
Accordingly, exchange difference on trade receivables amounting ` 23,076 {` 5,23,076(US $ 8547* x `
61.20) less ` 5,00,000} should be charged to profit & Loss account.
(ii) Calculation of profit or loss to be recognized in the books of Power Track Limited
`
Forward contract rate 64.25
Less: Spot rate (61.50)
Loss on forward contract 2.75
Forward Contract Amount $ 50,000
Total loss on entering into forward contract = ($ 50,000 x ` 2.75) `1,37,500
Contract period 6 months
Loss for the period 1st November, 2018 to 31st March, 2019 i.e. 5 months
5 months falling in the year 2018-2019

5
Hence, Loss for 5 months will be ` 1,37,500 x = ` 1,14,583
6
Thus, the loss amounting to ` 1,14,583 for the period is to be recognized in the year ended 31st March,
2019.
Q-34 Samrat Limited has set up its business in a designated backward area which entitles the company for
subsidy of 25% of the total investment from Government of India. The company has invested ` 80
crores in the eligible investments. The company is eligible for the subsidy and has received ` 20 crores
from the government in February 2019. The company wants to recognize the said subsidy as its income
to improve the bottom line of the company.
Do you approve the action of the company in accordance with the Accounting Standard?[RTP Nov. ‘19]
Ans. As per AS 12 “Accounting for Government Grants”, where the government grants are in the nature of
promoters’ contribution, i.e., they are given with reference to the total investment in an undertaking
or by way of contribution towards its total capital outlay (for example, Central Investment Subsidy
Scheme) and no repayment is ordinarily expected in respect thereof, the grants are treated as capital
reserve which can be neither distributed as dividend nor considered as deferred income.
The subsidy received by Samrat Ltd. for setting up its business in a designated backward area will be
treated as grant by the government in the nature of promoter’s contribution as the grant is given with
reference to the total investment in an undertaking i.e. subsidy is 25% of the eligible investment and
also no repayment is apparently expected in respect thereof.
* US $ 8,547 = 5,00,000/58.50
Since the subsidy received is neither in relation to specific fixed assets nor in relation to revenue.

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 Thus, the company cannot recognize the said subsidy as income in its financial statements in the given
case. It should be recognized as capital reserve which can be neither distributed as dividend nor
considered as deferred income.
Q-35 Z Bank has classified its total investment on 31-3-2018 into three categories (a) held to maturity (b)
available for sale (c) held for trading as per the RBI Guidelines.
‘Held to maturity’ investments are carried at acquisition cost less amortized amount. ‘Available for
sale’ investments are carried at marked to market. ‘Held for trading’ investments are valued at weekly
intervals at market rates. Net depreciation, if any, is charged to revenue and net appreciation, if any, is
ignored.
You are required to comment whether the policy of the bank is in accordance with AS 13?[RTP Nov. ‘19]
Ans. As per AS 13 ‘Accounting for Investments’, the accounting standard is not applicable to Bank, Insurance
Company, Mutual Funds. In this case Z Bank is a bank, therefore, AS 13 does not apply to it. For banks,
the RBI has issued separate guidelines for classification and valuation of its investment and Z Bank
should comply with those RBI Guidelines/Norms. Therefore, though Z Bank has not followed the
provisions of AS 13, yet it would not be said as non-compliance since, it is complying with the norms
stipulated by the RBI.
Q-36 In May, 2018, Capacity Ltd. took a bank loan to be used specifically for the construction of a new factory
building. The construction was completed in January, 2019 and the building was put to its use
immediately thereafter. Interest on the actual amount used for construction of the building till its
completion was ` 18 lakhs, whereas the total interest payable to the bank on the loan for the period till
31st March, 2019 amounted to ` 25 lakhs.
Can ` 25 lakhs be treated as part of the cost of factory building and thus be capitalized on the plea that
the loan was specifically taken for the construction of factory building? Explain the treatment in line
with the provisions of AS 16. AS 17 Segment Reporting. [RTP Nov. ‘19]
Ans. AS 16 clearly states that capitalization of borrowing costs should cease when substantially all the
activities necessary to prepare the qualifying asset for its intended use are completed. Therefore,
interest on the amount that has been used for the construction of the building up to the date of
completion (January, 2019) i.e. ` 18 lakhs alone can be capitalized. It cannot be extended to ` 25 lakhs.
Q-37 A Company has an inter-segment transfer pricing policy of charging at cost less 5%. The market prices
are generally 20% above cost.
You are required to examine whether the policy adopted by the company is correct or not?
[RTP Nov. ‘19]
Ans. AS 17 ‘Segment Reporting’ requires that inter-segment transfers should be measured on the basis that
the enterprise actually used to price these transfers. The basis of pricing inter-segment transfers and
any change therein should be disclosed in the financial statements. Hence, the enterprise can have its
own policy for pricing inter-segment transfers and hence, inter-segment transfers may be based on
cost, below cost or market price. However, whichever policy is followed, the same should be disclosed
and applied consistently. Therefore, in the given case inter-segment transfer pricing policy adopted by
the company is correct if followed consistently.
Q-38 The Accountant of Sohna Ltd. provides the following information for the year ended 31-03-2019:
Particulars `
Accounting Profit 7,50,000
Book Profit as per MAT 4,37,500
Profit as per Income Tax Act 90,000
Tax rate 20%
MAT rate 7.50%
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 You are required to calculate the deferred tax asset/ liability as per AS 22 and amount of tax to be
debited to the Profit and Loss Account for the year. [RTP Nov. ‘19]
Ans. Tax as per accounting profit 7,50,000 x 20% = ` 1,50,000
Tax as per Income-tax Profit 90,000 x 20% = ` 18,000
Tax as per MAT 4,37,500 x 7.50% = ` 32,812.50
Tax expense= Current Tax + Deferred Tax
` 1,50,000 = ` 18,000 + Deferred tax
Therefore, Deferred Tax liability as on 31-03-2019
= ` 1,50,000 - ` 18,000 = ` 1,32,000
Amount of tax to be debited in Profit and Loss account for the year 31-03-2019
Current Tax + Deferred Tax liability + Excess of MAT over current tax
= ` 18,000 + ` 1,32,000 + ` 14,812.50 (32,812.50 - 18,000)
= ` 1,64,812.50
Q-39 A private limited company manufacturing fancy terry towels had valued its closing inventory of
inventories of finished goods at the realizable value, inclusive of profit and the export cash incentives.
Firm contracts had been received and goods were packed for export, but the ownership in these goods
had not been transferred to the foreign buyers.
You are required to advise the company on the valuation of the inventories in line with the provisions
of AS 2. [RTP May ‘18]
Ans. Accounting Standard 2 "Valuation of Inventories" states that inventories should be valued at lower of
historical cost and net realizable value. The standard states, "at certain stages in specific industries,
such as when agricultural crops have been harvested or mineral ores have been extracted, performance
may be substantially complete prior to the execution of the transaction generating revenue. In such
cases, when sale is assured under forward contract or a government guarantee or when market exists
and there is a negligible risk of failure to sell, the goods are often valued at net realizable value at
certain stages of production."
Terry Towels do not fall in the category of agricultural crops or mineral ores. Accordingly, taking into
account the facts stated, the closing inventory of finished goods (Fancy terry towel) should have been
valued at lower of cost and net realizable value and not at net realizable value. Further, export incentives
are recorded only in the year the export sale takes place. Therefore, the policy adopted by the company
for valuing its closing inventory of inventories of finished goods is not correct.
Q-40 With reference to AS 4 "Contingencies and events occurring after the balance sheet date", identify
whether the following events will be treated as contingencies, adjusting events or non-adjusting
events occurring after balance sheet date in case of a company which follows April to March as its
financial year.
(i) A major fire has damaged the assets in a factory on 5th April, 5 days after the year end. However, the
assets are fully insured and the books have not been approved by the Directors.
(ii) A suit against the company's advertisement was filed by a party on 10th April, 10 days after the year
end claiming damages of Rs.20 lakhs. [RTP May ‘18]
Ans. According to AS 4 on 'Contingencies and Events Occurring after the Balance Sheet Date', adjustments to
assets and liabilities are required for events occurring after the balance sheet date that provide additional
information materially affecting the determination of the amounts relating to conditions existing at
the balance sheet date. However, adjustments to assets and liabi lilies are not appropriate for events

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 occurring after the balance sheet date, if such events do not relate to conditions existing at the balance
sheet date. "Contingencies" used in the Standard is restricted to conditions or situations at the balance
sheet date, the financial effect of which is to be determined by future events which may or may not
occur.
(i) Fire has occurred after the balance sheet date and also the loss is totally insured. Therefore, the
event becomes immaterial and the event is non-adjusting in nature.
(ii) The contingency is restricted to conditions existing at the balance sheet date. However, in the given
case, suit was filed against the company's advertisement by a party on 10th April for amount of Rs.
20 lakhs. Therefore, it does not fit into the definition of a contingency and hence is a non-adjusting
event.
Q-41 Bela Ltd. has a vacant land measuring 20,000 sq. mts, which it had no intention to use in the future. The
Company decided to sell the land to tide over its liquidity problems and made a profit of Rs.10 Lakhs by
selling the said land. Moreover, there was a fire in the factory and a part of the unused factory shed
valued at Rs.8 Lakhs was destroyed. The loss from fire was set off against the profit from sale of land
and profit of Rs.2 lakhs was disclosed as net profit from sale of assets.
You are required to examine the treatment and disclosure done by the company and advise the company
in line with AS 5. [RTP May ‘18]
Ans. As per AS 5 "Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies"
Extraordinary items should be disclosed in the statement of profit and loss as a part of net profit or loss
for the period. The nature and the amount of each extraordinary item should be separately disclosed in
the statement of profit and loss in a manner that its impact on current profit or loss can be perceived.
In the given case the selling of land to tide over liquidation problems as well as fire in the Factory does
not constitute ordinary activities of the Company. These items are distinct from the ordinary activities
of the business. Both the events are material in nature and expected not to recur frequently or regularly.
Thus, these are Extraordinary Items.
Therefore, in the given case, disclosing net profits by setting off fire losses against profit from sale of
land is not correct. The profit on sale of land, and loss due to fire should be disclosed separately in the
statement of profit and loss.
Q-42 In the year 2016-17, an entity has acquired a new freehold building with a useful life of 50 years for
Rs.90,00,000. The entity desires to calculate the depreciation charge per annum using a straight-line
method. It has identified the following components (with no residual value of lifts & fixtures at the
end of their useful life) as follows:
Component Useful life (years) Cost
Land Infinite Rs.20,00,000
Roof 25 Rs.10,00,000
Lifts 20 Rs.5,00,000
Fixtures 10 Rs.5,00,000
Remainder of building 50 Rs.50,00,000
Rs.90,00,000
You are required to calculate depreciation for the year 2016-17 as per componentization method.
[RTP May ‘18]
Ans. Statement showing amount of depreciation as per Componentization Method
Component Depreciation (Per annum)
Rs.
Land Nil
Roof 40,000
Lifts 25,000
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 Fixtures 50,000
Remainder of Building 1,00,000
2,15,000
Note: When the roof requires replacement at the end of its useful life the carrying amount will be nil.
The cost of replacing the roof should be recognized as a new component.
Q-43 Power Track Ltd. purchased a plant for US$ 50,000 on 31st October, 2016 payable after 6 months. The
company entered into a forward contract for 6 months @ Rs.64.25 per Dollar. On 31st October, 2016, the
exchange rate was Rs.61.50 per Dollar.
You are required to calculate the amount of the profit or loss on forward contract to be recognized in the
books of the company for the year ended 31st March, 2017. [RTP May ‘18]
Ans. Calculation of profit or loss to be recognized in the books of Power Track Limited
Rs.
Forward contract rate 64.25
Less; Spot rate 61.50
Loss on forward contract 2.75
Forward Contract Amount $50,000
Total loss on entering into forward contract = ($ 50,000 x Rs.2.75) Rs.1,37,500
Contract period 6 months
Loss for the period 1st November, 2016 to 31st March, 2017 i.e. 5 months
5 months falling in the year 2016-2017

5
Hence, Loss for 5 months will be Rs.1,37,500 x = Rs.1,14,583
6
Thus, the loss amounting to Rs. 1,14,583 for the period is to be recognized in the year ended 31st March,
2017.
Q-44 D Ltd. acquired a machine on 01-04-2012 for Rs.20,00,000. The useful life is 5 years. The company had
applied on 01-04-2012, for a subsidy to the tune of 80% of the cost. The sanction letter for subsidy was
received in November 2015. The Company's Fixed Assets Account for the financial year 2015-16 shows
a credit balance as under:
Particular Rs.
Machine (Original Cost) 20,00,000
Less; Accumulated Depreciation (from 2012-13- to 2014-15 on Straight Line Method) 12,00,000
8,00,000
Less; Grant received 16,00,000
Balance 8,00,000
You are required to explain how should the company deal with this asset in its accounts for 2015-16?
[RTP May ‘18]
Ans. From the above account, it is inferred that the Company follows Reduction Method for accounting of
Government Grants. Accordingly, out of the Rs. 16,00,000 that has been received, Rs. 8,00,000 (being the
balance in Machinery A/c) should be credited to the machinery A/c.

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 The balance Rs. 8,00,000 may be credited to P & L A/c, since already the cost of the asset to the tune of
Rs. 12,00,000 had been debited to P&L A/c in the earlier years by way of depreciation charge, and
Rs.8,00,000 transferred to P&L A/c now would be partial recovery of that cost.
There is no need to provide depreciation for 2015-16 or 2016-17 as the depreciable amount is now Nil.
Q-45 Paridhi Electronics Ltd. invested in the shares of another unlisted company on 1st May 2012 at a cost of
Rs. 3,00,000 with the intention of holding more than a year. The published accounts of unlisted company
received in January, 2017 reveals that the company has incurred cash losses with decline in market
share and investment of Paridhi Electronics Ltd. may not fetch more than Rs.45,000.
You are required to explain how you will deal with the above in the financial statements of the Paridhi
Electronics Ltd. as on 31.3.17 with reference to AS 13? [RTP May ‘18]
Ans. As per AS 13, "Accounting for Investments" Investments classified as long term investments should be
carried in the financial statements at cost. However, provision for diminution shall be made to recognize
a decline, other than temporary, in the value of the investments, such reduction being determined and
made for each investment individually. The standard also states that indicators of the value of an
investment are obtained by reference to its market value, the investee's assets and results and the
expected cash flows from the investment.
On this basis, the facts of the case given in the question clearly suggest that the provision for diminution
should be made to reduce the carrying amount of shares to Rs. 45,000 in the financial statements for the
year ended 31st March, 2017 and charge the difference of loss of Rs. 2,55,000 to profit and loss account.
Q-46 In May, 2016, Capacity Ltd. took a bank loan to be used specifically for the construction of a new factory
building. The construction was completed in January, 2017 and the building was put to its use
immediately thereafter. Interest on the actual amount used for construction of the building till its
completion was Rs.18 lakhs, whereas the total interest payable to the bank on the loan for the period
till 31st March, 2017 amounted to Rs. 25 lakhs.
Can Rs. 25 lakhs be treated as part of the cost of factory building and thus be capitalized on the plea that
the loan was specifically taken for the construction of factory building? Explain the treatment in line
with the provisions of AS 16. [RTP May ‘18]
Ans. AS 16 clearly states that capitalization of borrowing costs should cease when substantially all the activities
necessary to prepare the qualifying asset for its intended use are completed. Therefore, interest on the
amount that has been used for the construction of the building up to the date of completion (January,
2017) i.e. Rs.18 lakhs alone can be capitalized. It cannot be extended to Rs.25 lakhs.
Q-47 A Company has an inter-segment transfer pricing policy of charging at cost less 5%. The market prices
are generally 20% above cost.
You are required to examine whether the policy adopted by the company is correct or not?[RTP May ‘18]
Ans. AS 17 'Segment Reporting' requires that inter-segment transfers should be measured on the basis that
the enterprise actually used to price these transfers. The basis of pricing inter-segment transfers and
any change therein should be disclosed in the financial statements. Hence, the enterprise can have its
own policy for pricing intersegment transfers and hence, inter-segment transfers may be based on cost,
below cost or market price. However, whichever policy is followed, the same should be disclosed and
applied consistently. Therefore, in the given case inter-segment transfer pricing policy adopted by the
company is correct if followed consistently.

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Q-48 Rama Ltd., has provided the following information:
Rs.
Depreciation as per accounting records = 2,00,000
Depreciation as per income tax records = 5,00,000
Unamortized preliminary expenses as per tax record = 30,000
There is adequate evidence of future profit sufficiency.
You are required to calculate the amount of deferred tax asset/liability to be recognized as transition
adjustment assuming Tax rate as 50%. [RTP May ‘18]

Ans. Table showing calculation of deferred tax asset / liability

Particulars Amount Timing Deferred tax Amount
Rs. differences @50%
Excess depreciation as per tax records 3,00,000 Timing Deferred tax 1,50,000
(Rs.5,00,000 - Rs.2,00,000) liability
Unamortized preliminary 30,000 Timing Deferred tax 15,000
expenses as per tax records assets
Net deferred tax liability 1,35,000

---0---0---

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CHAPTER-2
Framework for prepartion and presentation of Financial
Statements

Q-1 A Ltd. has entered into a binding agreement with Gamma Ltd. to buy a custom-made machine `1,00,000.
At the end of 20X1-X2, before delivery of the machine, A Ltd. had to change its method of production.
The new method will not require the machine ordered and it will be scrapped after delivery. The
expected scrap value is nil.
You are required to advise the accounting treatment and give necessary journal entry in the year 20X1-
X2. [RTP-May’2020]
Ans. A liability is recognised when outflow of economic resources in settlement of a present obligation can
be anticipated and the value of outflow can be reliably measured. In the given case, A Ltd. should
recognise a liability of ` 1,00,000 to Gamma Ltd..
When flow of economic benefit to the enterprise beyond the current accounting period is considered
improbable, the expenditure incurred is recognised as an expense rather than as an asset. In the
present case, flow of future economic benefit from the machine to the enterprise is improbable. The
entire amount of purchase price of the machine should be recognised as an expense.
Journal entry
Loss on change in production method Dr. 1,00,000
To Gamma Ltd. 1,00,000
(Loss due to change in production method)
Profit and loss A/c Dr. 1,00,000
To Loss on change in production method 1,00,000
transferred to profit and loss account)
Q-2 With regard to financial statements name any four.
(1) Users
(2) Qualitative characteristics
(3) Elements
(b) What are fundamental accounting assumptions? [RTP May ‘19]
Ans. (1) Users of Financial statement
Investors, employees, Lenders, Supllies/Creditors, Customers, Govt. & Public
(2) Qualitative Characteristics of Financial Statements :
Understandability, Relevance, Comparability, Reliability & Faithful Representation
(3) Elements of Financial Statement :
Asset, Liability, Equity, Income/gain and Expense/Loss
(b) Fundamental Accountig Assumptions :
Accrual, Going Concern and Consistency
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Q-3
(a) Explain in brief, the alternative measurement bases, for determining the value at which an element can
be recognized in the Balance Sheet or Statement of Profit and Loss.
(b) Mohan started a business on 1st April 2017 with Rs.12,00,000 represented by 60,000 units of Rs.20 each.
During the financial year ending on 31st March, 2018, he sold the entire stock for Rs.30 each. In order to
maintain the capital intact, calculate the maximum amount, which can be withdrawn by Mohan in the
year 2017-18 if Financial Capital is maintained at historical cost. [RTP Nov ‘18]
Ans. (a) The Framework for Recognition and Presentation of Financial statements recognizes four alternative
measurement bases for the purpose of determining the value at which an element can be recognized in
the balance sheet or statement of profit and loss. These bases are: (i)Historical Cost; (ii)Currentcost (iii)
Realizable (Settlement) Value and (iv) Present Value.
A brief explanation of each measurement basis is as follows:
1. Historical Cost: Historical cost means acquisition price. According to this, assets are recorded at an
amount of cash or cash equivalent paid or the fair value of the asset at the time of acquisition.
Liabilities are generally recorded at the amount of proceeds received in exchange for the obligation.
2. Current Cost: Current cost gives an alternative measurement basis. Assets are carried out at the
amount of cash or cash equivalent that would have to be paid if the same or an equivalent asset was
acquired currently. Liabilities are carried at the undiscounted amount of cash or cash equivalents
that would be required to settle the obligation currently.
3. Realizable (Settlement) Value: As per realizable value, assets are carried at the amount of cash or
cash equivalents that could currently be obtained by selling the assets in an orderly disposal.
Liabilities are carried at their settlement values; i.e. the undiscounted amount of cash or cash
equivalents paid to satisfy the liabilities in the normal course of business.
4. Present Value: Under present value convention, assets are carried at present value of future net
cash flows generated by the concerned assets in the normal course of business. Liabilities under
this convention are carried at present value of future net cash flows that are expected to be required
to settle the liability in the normal course of business.
(b)
Particular Financial Capital Maintenance at
Historical Cost (Rs.)
Closing equity (Rs.30 x 60,000 units) 18,00,000 represented by cash
Opening equity 60,000 units x Rs. = 12,00,000
Permissible drawings to keep Capital intact 6,00,000 (1,80,000 - 12,00,000)
Thus, in order to maintain the capital intact Mohan can withdraw Rs. 6,00,000 as the maximum amount
Q-4 Explain main elements of Financial Statements. [RTP May ‘18]
Ans. Elements of Financial Statements
The Framework for preparation and Presentation of financial statements classifies items of financial
statements can be classified in five broad groups depending on their economic characteristics: Asset, Liability,
Equity, Income/Gain and Expense/Loss.
Assets Resource controlled by the enterprise as a result of past events from which future
economic benefits are expected to flow to the enterprise
Liability Present obligation of the enterprise arising from past events, the settlement of which is
expected to result in an outflow of a resource embodying economic benefits.

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 Equity Residual interest in the assets of an enterprise after deducting all its liabilities.
Income/gain Increase in economic benefits during the accounting period in the form of inflows or
enhancement of assets or decreases in liabilities that result in increase in equity other
than those relating to contributions from equity participants
Expense/loss Decrease in economic benefits during the accounting period in the form of outflows or
depletions of assets or incurrence of liabilities that result in decrease in equity other
than those relating to distributions to equity participants.
Q-5 Summarised Balance Sheet of Cloth Trader as on 31.03.2017 is given below:
Liabilities Amount (`) Assets Amount (`)
Proprietor's Capital 3,00,000 Fixed Assets 3,60,000
Profit & Loss Account 1,25,000 Closing Stock 1,50,000
10% Loan Account 2,10,000 Sundry Debtors 1,00,000
Sundry Creditors 50,000 Deferred Expenses 50,000
_______ Cash & Bank 25,000
6,85,000 6,85,000
Additional Information is as follows :
(1) The remaining life of fixed assets is 8 years. The pattern of use of the asset is even. The net realisable
value of fixed assets on 31.03.2018 was ` 3,25,000.
(2) Purchases and Sales in 2017-18 amounted to ` 22,50,000 and ` 27,50,000 respectively.
(3) The cost and net realizable value of stock on 31.03.2018 were ` 2,00,000 and ` 2,50,000 respectively.
(4) Expenses for the year amounted to ` 78,000.
(5) Deferred Expenses are amortized equally over 5 years.
(6) Sundry Debtors on 31.03.2018 are ` 1,50,000 of which ` 5,000 is doubtful. Collection of another `
25,000 depends on successful re-installation of certain product supplied to the customer;
(7) Closing Sundry Creditors are ` 75,000, likely to be settled at 10% discount.
(8) Cash balance as on 31.03.2018 is ` 4,22,000.
(9) There is an early repayment penalty for the loan of ` 25,000.
You are required to prepare: (Not assuming going concern)
(1) Profit & Loss Account for the year 2017-18.
(2) Balance Sheet as on 31st March, 2018. [Sugg. May ‘19, 5 Marks]
Ans. Profit and Loss Account for the year ended 2017-18(not assuming going concern)
Particulars Amount Particulars Amount
` `
To Opening Stock 1,50,000 By Sales 27,50,000
To Purchases 22,50,000 By Closing Stock 2,50,000
To Expenses* 78,000 By Trade payables 7,500
To Depreciation 35,000
To Provision for doubtful debts 30,000
To Deferred cost 50,000
To Loan penalty 25,000
To Net Profit (b.f.) 3,89,500 ________
30,07,500 30,07,500

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 Balance Sheet as at 31st March, 2018 (not assuming going concern)
Liabilities Amount ` Assets Amount `
Capital 3,00,000 Fixed Assets 3,25,000
Profit & Loss A/c 5,14,500 Stock 2,50,000
10% Loan 2,35,000 Trade receivables (less provision) 1,20,000
Trade payables 67,500 Deferred costs Nil
________ Bank 4,22,000
11,17,000 11,17,000
*Assumed that ` 78,000 includes interest on 10% loan amount for the year.
Q-6 "One of the characteristic of the financial statement is neutrality."Do you agree with this statement?
Explain in brief. [Sugg. Nov.’18, 5 Marks]
Ans. Yes, one of the characteristics of financial statements is neutrality. To be reliable, the information
contained in financial statement must be neutral, that is free from bias.
Financial Statements are not neutral if by the selection or presentation of information, the focus of
analysis could shift from one area of business to another thereby arriving at a totally different conclusion
based on the business results. Information contained in the financial statements must be free from
bias. It should reflect a balanced view of the financial position of the company without attempting to
present them in biased manner. Financial statements cannot be prepared with the purpose to influence
certain division, i.e. they must be neutral.
Q-7 Briefly explain the elements of financial statements. [Sugg. May ‘18, 5 Marks]
Ans. Elements of Financial Statements
Assets Resource controlled by the enterprise as a result of past events from which future economic
benefits are expected to flow to the enterprise
Liability Present obligation of the enterprise arising from past events, the settlement of which is
expected to result in an outflow of a resource embodying economic benefits.
Equity Residual interest in the assets of an enterprise after deducting all its liabilities
Income/gain Increase in economic benefits during the accounting period in the form of inflows or
enhancement of assets or decreases in liabilities that result in increase in equity other
than those relating to contributions from equity participants
Expense/loss Decrease in economic benefits during the accounting period in the form of outflows or
depletions of assets or incurrence of liabilities that result in decrease in equity other than
those relating to distributions to equity participants.
Q-8 ABC Ltd. has entered into a binding agreement with XYZ Ltd. to buy a custom-made machine amounting
to Rs. 4,00,000. As on 31st March, 2018 before delivery of the machine, ABC Ltd. had to change its
method of production. The new method will not require the machine ordered and so it shall be scrapped
after delivery. The expected scrap value is ‘NIL’.
Show the treatment of machine in the books of ABC Ltd. [MTP Oct. ‘19, 5 Marks]
Ans. A liability is recognized when outflow of economic resources in settlement of a present obligation can
be anticipated and the value of outflow can be reliably measured. In the given case, ABC Ltd. should
recognize a liability of Rs. 4,00,000 payable to XYZ Ltd. When flow of economic benefit to the enterprise
beyond the current accounting period is considered improbable, the expenditure incurred is recognized
as an expense rather than as an asset. In the present case, flow of future economic benefit from the

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 machine to the enterprise is improbable. The entire amount of purchase price of the machine should
be recognized as an expense. Hence ABC Ltd. should charge the amount of Rs. 4,00,000 (being loss due
to change in production method) to Profit and loss statement and record the corresponding liability
(amount payable to XYZ Ltd.) for the same amount in the books for the year ended 31st March, 2018.
Q-9 Explain in brief, the alternative measurement bases, for determining the value at which an element can
be recognized in the Balance Sheet or Statement of Profit and Loss.
[MTP March ‘19, April ‘19,18, 5 Marks]
Ans. The Framework for Recognition and Presentation of Financial statements recognises four alternative
measurement bases for the purpose of determining the value at which an element can be recognized in
the balance sheet or statement of profit and loss. These bases are: (i)Historical Cost; (ii)Current cost (iii)
Realisable (Settlement) Value and (iv) Present Value.
A brief explanation of each measurement basis is as follows:
1. Historical Cost: Historical cost means acquisition price. According to this, assets are recorded at an
amount of cash or cash equivalent paid or the fair value of the asset at the time of acquisition.
Liabilities are generally recorded at the amount of proceeds received in exchange for the
obligation.
2. Current Cost: Current cost gives an alternative measurement basis. Assets are carried out at the
amount of cash or cash equivalent that would have to be paid if the same or an equivalent asset
was acquired currently. Liabilities are carried at the undiscounted amount of cash or cash
equivalents that would be required to settle the obligation currently.
3. Realisable (Settlement) Value: As per realisable value, assets are carried at the amount of cash or
cash equivalents that could currently be obtained by selling the assets in an orderly disposal.
Liabilities are carried at their settlement values; i.e. the undiscounted amount of cash or cash
equivalents paid to satisfy the liabilities in the normal course of business.
4. Present Value: Under present value convention, assets are carried at present value of future net
cash flows generated by the concerned assets in the normal course of business. Liabilities under
this convention are carried at present value of future net cash flows that are expected to be
required to settle the liability in the normal course of business.
Q-10 "One of the characteristics of financial statements is neutrality"- Do you agree with this statement?
Comment. [MTP March ‘18, 5 Marks]
Ans. Yes, one of the characteristics of financial statements is neutrality. To be reliable, the information
contained in financial statement must be neutral, that is free from bias.
Financial Statements are not neutral if by the selection or presentation of information, the focus of
analysis could shift from one area of business to another thereby arriving at a totally different conclusion
on the business results.
For example, if the assets of a company primarily consist of trade receivables and insurance claims and
the financial statements do not specify that the insurance claims have been lying unrealized for a
number of years or that a few key trade receivables have not given balance confirmation certificates, an
erroneous conclusion may be drawn on the liquidity of the company. Financial statements are said to
depict the true and fair view of the business of the organization by virtue of neutrality.
Q-11 ABC Ltd. has entered into a binding agreement with XYZ Ltd. to buy a custom -made machine amounting
to Rs. 4,00,000. As on 31st March, 2018 before delivery of the machine, ABC Ltd. had to change its
method of production. The new method will not require the machine ordered and so it shall be scrapped
after delivery. The expected scrap value is ‘NIL’.
Explain the treatment of machine in the books of ABC Ltd. [MTP Aug. ‘18, 5 Marks]

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Ans. A liability is recognized when outflow of economic resources in settlement of a present obligation can
be anticipated and the value of outflow can be reliably measured. In the given case, ABC Ltd. should
recognize a liability of Rs.4,00,000 payable to XYZ Ltd.
When flow of economic benefit to the enterprise beyond the current accounting period is considered
improbable, the expenditure incurred is recognized as an expense rather than as an asset. In the
present case, flow of future economic benefit from the machine to t he enterprise is improbable. The
entire amount of purchase price of the machine should be recognized as an expense.
Hence ABC Ltd. should charge the amount of Rs.4,00,000 (being loss due to change in production
method) to Profit and loss statement and r ecord the corresponding liability (amount payable to XYZ
Ltd.) for the same amount in the books fo r the year ended 31st March, 2018 .
Q-12 ABC Ltd. has entered into a binding agreement with XYZ Ltd. to buy a custom-made machine amounting
to Rs. 4,00,000. As on 31st March, 2018 before delivery of the machine, ABC Ltd. had to change its
method of production. The new method will not require the machine ordered and so it shall be scrapped
after delivery. The expected scrap value is ‘NIL’.
Show the treatment of machine in the books of ABC Ltd. [MTP Oct. ‘18, 5 Marks]
Ans. A liability is recognized when outflow of economic resources in settlement of a present obligation can
be anticipated and the value of outflow can be reliably measured. In the given case, ABC Ltd. should
recognize a liability of Rs.4, 00,000 payable to XYZ Ltd. When flow of economic benefit to the enterprise
beyond the current accounting period is considered improbable, the expenditure incurred is recognized
as an expense rather than as an asset. In the present case, flow of future economic benefit from the
machine to the enterprise is improbable. The entire amount of purchase price of the machine should
be recognized as an expense. Hence ABC Ltd. should charge the amount of Rs. 4,00,000 (being loss due
to change in production method) to Profit and loss statement and record the corresponding liability
(amount payable to XYZ Ltd.) for the same amount in the books for the year ended 31st March, 2018.
Q-13 Aman started a business on 1st April 20X1 with ` 24,00,000 represented by 1,20,000 units of ` 20 each.
During the financial year ending on 31st March, 20X2, he sold the entire stock for ` 30 each. In order to
maintain the capital intact, calculate the maximum amount, which can be withdrawn by Aman in the
year 20X1-X2 if Financial Capital is maintained at historical cost. [RTP Nov. ‘19]
Ans.
Particulars Financial Capital Maintenance at
Historical Cost (`)
Closing equity
(` 30 x 1,20,000 units) 36,00,000 represented by cash
Opening equity 1,20,000 units x ` 20 = 24,00,000
Permissible drawings to keep Capital intact 12,00,000 (36,00,000 – 24,00,000)

---0---0---

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CHAPTER-3
Overview of Accounting Standards

UNIT - I
Q-1 Prepare cash flow from investing activities as per AS 3 of M/s Subham Creative Limited for year ended
31.3.2019.
Particulars Amount (`)
Machinery acquired by issue of shares at face value 2,00,000
Claim received for loss of machinery in earthquake 55,000
Unsecured loans given to associates 5,00,000
Interest on loan received form associate company 70,000
Pre-acquisition dividend received on investment made 52,600
Debenture interest paid 1,45,200
Term loan repaid 4,50,000
Interest received on investment (TDS of ` 8,200 was deducted on the above interest) 73,800
st
Purchased debentures of X Ltd., on 1 December, 2018 which are redeemable
within 3 months 3,00,000
Book value of plant & machinery sold (loss incurred ` 9,600) 90,000
[Sugg.Nov.’19,5 Marks]
Ans. Cash Flow Statement from Investing Activities of
Subham Creative Limited for the year ended 31-03-2019
Cash generated from investing activities ` `
Interest on loan received 70,000
Pre-acquisition dividend received on investment made 52,600
Unsecured loans given to subsidiaries (5,00,000)
Interest received on investments (gross value) 82,000
TDS deducted on interest (8,200)
Sale of Plant & Machinery ` (90,000 – 9,600) 80,400
Cash used in investing activities (before extra-ordinary item) (2,23,200)
Extraordinary claim received for loss of machinery 55,000
Net cash used in investing activities (after extra-ordinary item) (1,68,200)

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 Note:
1. Debenture interest paid and Term Loan repaid are financing activities and therefore not considered
for preparing cash flow from investing activities.
2. Machinery acquired by issue of shares does not amount to cash outflow, hence also not considered
in the above cash flow statement.
3. The investments made in debentures are for short-term, it will be treated as ‘cash equivalent’
and will not be considered as outflow in cash flow statement.
Q-2 Karan Enterprises having is Head office in Mangalore, Karnataka has a branch in Greenville, USA.
Following is the trial balance of Branch as at 31-3-2019:
Particulars Amount ($) Dr. Amount ($) Cr.
Fixed assets 8,000
Opening inventory 800
Cash 700
Goods received form Head Office 2,800
Sales 24,050
Purchases 11,800
Expenses 1,800
Remittance to head office 2,450
Head office account 4,300
28,350 28,350
(i) Fixed assets were purchased on 1st April, 201
(ii) Depreciation at 10% p.a. is to be charged on fixed assets on straight line method,
(iii) Closing inventory at branch is $ 700 as on 31-3-2019.
(iv) Goods received form Head Office (HO) were recorded at ` 1,85,500 in HO books.
(v) Remittances to HO were recorded at ` 1,62,000 in HO books.
(vi) HO account is recorded in HO books at ` 2,84,500.
(vii) Exchange rates of US Dollar at different dates can be taken as :
1-4-2015 ` 63;
1-4-2018 ` 65 and
31-3-2019 ` 67.
Prepare the trial balance after been converted into Indian rupees in accordance with AS-11.
[Sugg.Nov.’19,5 Marks]
Ans. Trial Balance of Foreign Branch (converted into Indian Rupees) as on March 31, 2019
Particulars $ (Dr.) $ (Cr.) Conversion Basis Rate ` (Dr.) ` (Cr.)
Fixed Assets 8,000 Transaction Date
Rate 63 5,04,000
Opening Inventory 800 Opening Rate 65 52,000
Goods Received Actuals 1,85,500
from HO 2,800
Sales 24,050 Average Rate 66 15,87,300
Purchases 11,800 Average Rate 66 7,78,800

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 Expenses 1,800 Average Rate 66 1,18,800
Cash 700 Closing Rate 67 46,900
Remittance to HO 2,450 Actuals 1,62,000
HO Account 4,300 Actuals 2,84,500
Exchange Rate
Difference ______ ______ Balancing Figure 23,800 _______
28,350 28,350 18,71,800 18,71,800
Closing Stock 700 Closing Rate 67 46,900
Depreciation 800 Fixed Asset Rate 63 50,400
Q-3 Mr. Rakshit gives the following information relating to items forming part of inventory as on 31st March,
2019. His factory produces product X using raw material A.
(i) 800 units of raw material A (purchased @ ` 140 per unit).
Replacement cost of raw material A as on 31st March, 2019 is ` 190 per unit.
(ii) 650 units of partly finished goods in the process of producing X and cost incurred till date ` 310
per unit. These units can be finished next year by incurring additional cost of ` 50 per unit.
(iii) 1,800 units of finished product X and total cost incurred ` 360 per unit.
Expected selling price of product X is ` 350 per unit.
In the context of AS-2, determine how each item of inventory will be valued as on 31st March, 2019.
Also, calculate the value of total inventory as on 31st March, 2019. [Sugg.Nov.’19,5 Marks]
Ans. As per AS 2 (Revised) “Valuation of Inventories”, materials and other supplies held for use in the
production of inventories are not written down below cost if the finished products in which they will
be incorporated are expected to be sold at cost or above cost. However, when there has been a decline
in the price of materials and it is estimated that the cost of the finished products will exceed net
realizable value, the materials are written down to net realizable value. In such circumstances, the
replacement cost of the materials may be the best available measure of their net realizable value. In
the given case, selling price of product X is ` 350 and total cost per unit for production is ` 360.
Hence the valuation will be done as under:
(i) 800 units of raw material will be valued at cost 140.
(ii) 650 units of partly finished goods will be valued at 300 per unit* i.e. lower of cost (` 310) or Net
realizable value ` 300 (Estimated selling price ` 350 per unit less additional cost of ` 50).
(iii) 1,800 units of finished product X will be valued at NRV of ` 350 per unit since it is lower than cost
` 360 of product X.
Valuation of Total Inventory as on 31.03.2019:
Units Cost (` ) NRV / Value = units `
Replacement x cost or NRV
cost ` whichever is
less (`)
Raw material A 800 140 190 1,12,000 (800 x 140)
Partly finished goods 650 310 300 1,95,000 (650 x 300)
Finished goods X 1,800 60 350 6,30,000 (1,800 x 350)
Value of Inventory 9,37,000

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 *It has been assumed that the partly finished unit cannot be sold in semi-finished form and its NRV is
zero without processing it further.
Q-4 Sheetal Ltd. has provided the following information for the year ended 31st March, 2019:
Particulars Amount (` )
Accounting profit 9,00,000
Book profit as per MAT 5,25,000
Profit as per Income Tax Act 95,000
Tax rate 30%
MAT rate 7.5%
You are required to calculate the deferred tax asset/liability as per AS-22 and amount of tax to be
debited to the profit and loss account for the year. [Sugg.Nov.’19,5 Marks]
Ans.
Tax as per accounting profit 9,00,000 x 30%= ` 2,70,000
Tax as per Income-tax Profit 95,000 x 30% = ` 28,500
Tax as per MAT 5,25,000 x 7.50%= ` 39,375
Tax expense= Current Tax +Deferred Tax
` 2,70,000 = ` 28,500+ Deferred tax
Deferred Tax liability as on 31-03-2019
= ` 2,70,000 – ` 28,500 = ` 2,41,500
Amount of tax to be debited in Profit and Loss account for the year 31-03-2019
Current Tax + Deferred Tax liability + Excess of MAT over current tax
= ` 28,500 + ` 2,41,500+ ` 10,875 (39,375 – 28,500)
= ` 2,80,875
Q-5 M/s X & Co. (a partnership firm), had a turnover of Rs. 1.25 crores (excluding other income) and
borrowings of Rs. 0.95 crores in the previous year. It wants to avail the exemptions available in application
of Accounting Standards to non-corporate entities for the year ended 31.3.2018. Advise the management
of M/s X & Co in respect of the exemptions of provisions of ASs, as per the directive issued by the ICAI.
[MTP Oct. ‘18, 5 Marks]
Ans. The question deals with the issue of Applicability of Accounting Standards to a non-corporate entity.
For availment of the exemptions, first of all, it has to be seen that M/s X& Co. falls in which level of the
non-corporate entities. Its classification will be done on the basis of the classification of non-corporate
entities as prescribed by the ICAI. According to the ICAI, non-corporate entities can be classified under
3 levels viz Level I, Level II (SMEs) and Level III (SMEs).
An entity whose turnover (excluding other income) does exceed rupees fifty crore in the immediately
preceding accounting year, will fall under the category of Level I entities. Non-corporate entities which
are not Level I entities but fall in any one or more of the following categories are classified as Level II
entities:
(i) All commercial, industrial and business reporting entities, whose turnover (excluding other
income) exceeds rupees one crore but does not exceed rupees fifty crore in the immediately
preceding accounting year.

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 (ii) All commercial, industrial and business reporting entities having borrowings (including public
deposits) in excess of rupees one crore but not in excess of rupees ten crore at any time during
the immediately preceding accounting year.
(iii) Holding and subsidiary entities of any one of the above.
As the turnover of M/s X& Co. is more than Rs. 1 crore, it falls under 1st criteria of Level II non-
corporate entities as defined above. Even if its borrowings of Rs. 0.95 crores is less than Rs. 1
crores, it will be classified as Level II Entity. In this case, AS 3, AS 17, AS 21, AS 23, AS 27 will not be
applicable to M/s X & Co. Relaxations from certain requirements in respect of AS 15, AS 19, AS 20,
AS 25, AS 28 and AS 29 are also available to M/s X& Co.

UNIT - II
Q-1 Mac Ltd. gives the following data regarding to its six segments :
(` in lakhs)
Particulars A B C D E F Total
Segment assets 80 160 60 40 40 20 400
Segment results 100 (380) 20. 20 (20) 60 (200)
Segment revenue 600 1,240 160 120 160 120 2,400
The accountant contends that segments ‘A’ and ‘B’ alone are reportable segments. Is he justified in his
view ? Discuss in the context of AS-17 ‘Segment Reporting’. [Sugg.Nov.’19, 5 Marks]
Ans. As per AS 17 ‘Segment Reporting’, a business segment or geographical segment should be identified as
a reportable segment if:
- Its revenue from sales to external customers and from other transactions with other segments is
10% or more of the total revenue- external and internal of all segments; or
- Its segment result whether profit or loss is 10% or more of combined result of all segments in
profit; or combined result of all segments in loss, whichever is greater in absolute amount; or
- Its segment assets are 10% or more of the total assets of all segments.
If the total external revenue attributable to reportable segments constitutes less than 75% of total
enterprise revenue, additional segments should be identified as reportable segments even if they do
not meet the 10% thresholds until at least 75% of total enterprise revenue is included in reportable
segments.
On the basis of turnover criteria segments A and B are reportable segments.
On the basis of the result criteria, segments A, B and F are reportable segments (since their results in
absolute amount is 10% or more of ` 400 lakhs).
On the basis of asset criteria, all segments except F are reportable segments.
Since all the segments are covered in at least one of the above criteria all segments have to be reported
upon in accordance with Accounting Standard (AS) 17. Hence, the opinion of accountant is wrong.
Q-2 First Ltd. began construction of a new factory building on 1st April, 2017. It obtained ` 2,00,000 as a
special loan to finance the construction of the factory building on 1st April, 2017 at an interest rate of
8% per annum. Further, expenditure on construction of the factory building was financed through
other non-specific loans. Details of other outstanding non-specific loans were:

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 Amount (`) Rate of Interest per annum
4,00,000 9%
5,00,000 12%
3,00,000 14%
The expenditures that were made on the factory building construction were as follows:
Date Amount (`)
1st April, 2017 3,00,000
31st May, 2017 2,40,000
1st August, 2017 4,00,000
31st December, 2017 3,60,000
The construction of factory building was completed by 31st March, 2018. As per the provisions of AS 16,
you are required to:
(1) Calculate the amount of interest to be capitalized.
(2) Pass Journal entry for capitalizing the cost and borrowing cost in respect of the factory building.
[Sugg. May ‘19, 5 Marks]
Ans.
(i) Computation of average accumulated expenses
`
` 3,00,000 x 12 / 12 = 3,00,000
` 2,40,000 x 10 / 12 = 2,00,000
` 4,00,000 x 8 / 12 = 2,66,667
` 3,60,000 x 3 / 12 = 90,000
8,56,667
(ii) Calculation of average interest rate other than for specific borrowings
Amount of loan (`) Rate of interest Amount of
interest (`)
4,00,000 9% = 36,000
5,00,000 12% = 60,000
3,00,000 14% = 42,000
1,38,000
Weighted average rate of interest

 1,38,000 
 × 100  = 11.5%
 12, 00, 000 
(iii) Amount of interest to be capitalized
`
Interest on average accumulated expenses:
Specific borrowings (` 2,00,000 x 8%) = 16,000
Non-specific borrowings (` 6,56,667* x 11.5%) = 75,517
Amount of interest to be capitalised = 91,517

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 (iv) Total expenses to be capitalised for building
`
Cost of building ` (3,00,000 + 2,40,000 + 4,00,000 + 3,60,000) 13,00,000
Add: Amount of interest to be capitalized 91,517
13,91,517
(v) Journal Entry
Date Particulars Dr. (`) Cr. (`)
31.3.2018 Building A/c Dr. 13,91,517
To Building WIP* A/c 13,00,000
To Borrowing costs A/c 91,517
(Being amount of cost of building and borrowing
cost thereon capitalised)
Q-3 On 15th June, 2018, Y limited wants to re-classify its investments in accordance with AS 13 (revised).
Decide and state the amount of transfer, based on the following information:
(1) A portion of long term investments purchased on 1st March, 2017 are to be re-classified as current
investments. The original cost of these investments was ` 14 lakhs but had been written down by
` 2 lakhs (to recognise 'other than temporary' decline in value). The market value of these
investments on 15th June, 2018 was ` 11 lakhs.
(2) Another portion of long term investments purchased on 15th January, 2017 are to be re-classified
as current investments. The original cost of these investments was ` 7 lakhs but had been written
down to ` 5 lakhs (to recognize 'other than temporary' decline in value). The fair value of these
investments on 15th June, 2018 was ` 4.5 lakhs.
(3) A portion of current investments purchased on 15th March, 2018 for ` 7 lakhs are to be re-classified
as long term investments, as the company has decided to retain them. The market value of these
investments on 31st March, 2018 was ` 6 lakhs and fair value on 15th June 2018 was ` 8.5 lakhs,
(4) Another portion of current investments purchased on 7th December, 2017 for ` 4 lakhs are to be
re-classified as long term investments. The market value of these investments was :
on 31st March, 2018 ` 3.5 lakhs
on 15th June, 2018 ` 3.8 lakhs [Sugg. May ‘19, 5 Marks]
Ans. As per AS 13 (Revised) ‘Accounting for Investments’, where long-term investments are reclassified as
current investments, transfers are made at the lower of cost and carrying amount at the date of transfer;
and where investments are reclassified from current to long term, transfers are made at lower of cost
and fair value on the date of transfer.
Accordingly, the re-classification will be done on the following basis:
(i) In this case, carrying amount of investment on the date of transfer is less than the cost; hence this
re-classified current investment should be carried at ` 12 lakhs in the books.
(ii) In this case also, carrying amount of investment on the date of transfer is less than the cost; hence
this re-classified current investment should be carried at ` 5 lakhs in the books.
(iii) In this case, reclassification of current investment into long-term investments will be made at ` 7
lakhs as cost is less than its fair value of ` 8.5 lakhs on the date of transfer.
* (` 8,56,667 - ` 2,00,000)
** Considering that ` 13,00,000 was debited to Building WIP A/c earlier.
(iv) In this case, market value (considered as fair vale) is ` 3.8 lakhs on the date of transfer which is
lower than the cost of ` 4 lakhs. The reclassification of current investment into long-term
investments will be made at ` 3.8 lakhs.
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Q-4 State whether the following statements are 'True' or 'False'. Also give reason for your answer.
(1) As per the provisions of AS-5, extraordinary items should not be disclosed in the statement of
profit and loss as a part of net profit or loss for the period.
(2) As per the provisions of AS-12, government grants in the nature of promoters' contribution which
become refundable should be reduced from the capital reserve.
(3) As per the provisions of AS-2, inventories should be valued at the lower of cost and selling price.
(4) As per the provisions of AS-13, a current investment is an investment, that by its nature, is readily
realisable and is intended to be held for not more than six months from the date on which such
investment is made.
(5) As per the provisions of AS-4, a contingency is a condition or situation, the ultimate outcome of
which (gain or loss) will be known or determined only on the occurrence of one or more uncertain
future events. [Sugg. May ‘19, 5 Marks]
Ans.
(1) False : The nature and the amount of each extraordinary item should be separately disclosed in the
statement of profit and loss in a manner that its impact on current profit or loss can be perceived.
(2) True: When grants in the nature of promoters’ contribution becomes refundable, in part or in full to the
government on non-fulfillment of some specified conditions, the relevant amount refundable to the
government is reduced from the capital reserve.
(3) False: Inventories should be valued at the lower of cost and net realizable value (not selling price) as
per AS 2.
(4) False: A current investment is an investment that is by its nature readily realizable and is intended to
be held for not more than one year from the date on which such investment is made.
(5) False: A contingency is a condition or situation, the ultimate outcome of which, gain or loss, will be
known or determined only on the occurrence, or non-occurrence, of one or more uncertain future
events.
Q-5 The financial statements of PQ Ltd. for the year 2017-18 approved by the Board of Directors on 15th July,
2018. The following information was provided :
(i) A suit against the company's advertisement was filed by a party on 20th April, 2018, claiming
damages of ` 25 lakhs.
(ii) The terms and conditions for acquisition of business of another company have been decided by
March, 2018. But the financial resources were arranged in April, 2018 and amount invested was `
50 lakhs.
(iii) Theft of cash of ` 5 lakhs by the cashier on 31st March, 2018 but was detected on 16th July, 2018.
(iv) Company sent a proposal to sell an immovable property for ` 40 lakhs in March, 2018. The book
value of the property was ` 30 lakhs on 31st March, 2018. However, the deed was registered on
15th April, 2018.
(v) A, major fire has damaged the assets in a factory on 5th April, 2018. However, the assets are fully
insured.
With reference to AS-4 "Contingencies and events occurring after the balance sheet date", state whether
the above mentioned events will be treated as contingencies, adjusting events or non-adjusting events
occurring after the balance sheet date. [Sugg. May ‘19, 5 Marks]
Ans. (i) Suit filed against the company is a contingent liability but it was not existing as on balance sheet
date as the suit was filed on 20th April after the balance Sheet date. As per AS 4, 'Contingencies' used
in the Standard is restricted to conditions or situations at the balance sheet date, the financial effect of
which is to be determined by future events which may or may not occur. Hence, it will have no effect on
financial statements and will be a non-adjusting event.
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 (ii) In the given case, terms and conditions for acquisition of business were finalised and carried out
before the closure of the books of accounts but transaction for payment of financial resources was
effected in April, 2018. This is clearly an event occuring after the balance sheet date. Hence, necessary
adjustment to assets and liabilities for acquisition of business is necessary in the financial statements
for the year ended 31st March 2018.
(iii) Only those significant events which occur between the balance sheet date and the date on which the
financial statements are approved, may indicate the need for adjustment to assets and liabilities
existing on the balance sheet date or may require disclosure. In the given case, theft of cash was
detected on 16th July, 18 after approval of financial statements by the Board of Directors, hence no
treatment is required.
(iv) Adjustments to assets and liabilities are not appropriate for events occurring after the balance sheet
date, if such events do not relate to conditions existing at the balance sheet date. In the given case,
sale of immovable property was under proposal stage (negotiations also not started) on the balance
sheet date. Therefore, no adjustment to assets for sale of immovable property is required in the
financial statements for the year ended 31st March, 2018.
(v) The condition of fire occurrence was not existing on the balance sheet date. Only the disclosure
regarding event of fire and loss being completely insured may be given in the report of approving
authority.
Q-6 Write short note on Timing difference and Permanent Difference as per AS 22.
[Sugg. May ‘19, 5 Marks]
Ans. Matching of taxes against revenue for a period poses special problems arising from the fact that in
number of cases, taxable income may be different from the accounting income. The divergence between
taxable income may be different from the accounting income arises due to two main reasons: Firstly,
there are differences between items of revenue and expenses as appearing in the statement of profit
and loss and the items which are considered as revenue, expenses or deductions for tax purposes,
known as Permanent Difference. Secondly, there are differences between the amount in respect of a
particular item of revenue or expense as recognised in the statement of profit and loss and the
corresponding amount which is recognised for the computation of taxable income, known as Timing
Difference.
Permanent differences are the differences between taxable income and accounting income which
arise in one accounting period and do not reverse subsequently. For example, an income exempt from
tax or an expense that is not allowable as a deduction for tax purposes.
Timing differences are those differences between taxable income and accounting income which arise
in one accounting period and are capable of reversal in one or more subsequent periods. For e.g.,
Depreciation, Bonus, etc.
Q-7 Wooden Plywood Limited has a normal wastage of 5% in the production process. During the year 2017-
18, the Company used 16,000 MT of Raw material costing ` 190 per MT. At the end of the year, 950 MT of
wastage was in stock. The accountant wants to know how this wastage is to be treated in the books.
You are required to :
(1) Calculate the amount of abnormal loss.
(2) Explain the treatment of normal loss and abnormal loss. [In the context of AS-2 (Revised)]
[Sugg. May ‘19, 5 Marks]
Ans. (i) As per AS 2 (Revised) ‘Valuation of Inventories’, abnormal amounts of wasted materials, labour and
other production costs are excluded from cost of inventories and such costs are recognised as expenses
in the period in which they are incurred.

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 The normal loss will be included in determining the cost of inventories (finished goods) at the year
end.
Amount of Abnormal Loss:
(ii) Material used 16,000 MT @ ` 190 = ` 30,40,000
Normal Loss (5% of 16,000 MT ) 800 MT (included in calculation of cost of inventories)
Net quantity of material 15,200 MT
(iii) Abnormal Loss in quantity (950 - 800) 150 MT
Abnormal Loss ` 30,000
[150 units @ ` 200 (` 30,40,000/15,200)]
Amount of ` 30,000 (Abnormal loss) will be charged to the Profit and Loss statement.
Q-8 Neon Enterprise operates a major chain of restaurants located in different cities. The company has
acquired a new restaurant located at Chandigarh. The new-restaurant requires significant renovation
expenditure. Management expects that the renovations will last for 3 months during which the
restaurant will be closed.
Management has prepared the following budget for this period -
Salaries of the staff engaged in preparation of restaurant before its opening ` 7,50,000
Construction and remodelling cost of restaurant ` 30,00,000
Explain the treatment of these expenditures as per the provisions of AS 10 "Property, Plant and
Equipment". [Sugg. Nov.’18, 5 Marks]
Ans. As per provisions of AS 10, any cost directly attributable to bring the assets to the location and conditions
necessary for it to be capable of operating in the manner indicated by the management are called
directly attributable costs and would be included in the costs of an item of PPE.
Management of Neon Enterprise should capitalize the costs of construction and remodelling the
restaurant, because they are necessary to bring the restaurant to the condition necessary for it to be
capable of operating in the manner intended by management. The restaurant cannot be opened without
incurring the construction and remodelling expenditure amounting Rs.30,00,000 and thus the expenditure
should be considered part of the asset.
However, the cost of salaries of staff engaged in preparation of restaurant Rs.7,50,000 before its opening
are in the nature of operating expenditure that would be incurred if the restaurant was open and these
costs are not necessary to bring the restaurant to the conditions necessary for it to be capable of
operating in the manner intended by management. Hence, Rs. 7,50,000 should be expensed.
Q-9 (i) ABC Ltd. a Indian Company obtained long term loan from WWW private Ltd., a U.S. company amounting
to Rs.30,00,000. It was recorded at US $1 = Rs.60.00, taking exchange rate prevailing at the date of
transaction. The exchange rate on balance sheet date (31.03.2018) was US $1 = ` 62.00.
(II) Trade receivable includes amount receivable from Preksha Ltd., ` 10,00,000 recorded at the prevailing
exchange rate on the date of sales, transaction recorded at US $1 = ` 59.00. The exchange rate on balance
sheet date (31.03.2018) was US $1 = ` 62.00.
You are required to calculate the amount of exchange difference and also explain the accounting treatment
needed in the above two cases as per AS 11 in the books of ABC Ltd. [Sugg. Nov.’18, 5 Marks]

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Ans. Amount of Exchange difference and its Accounting Treatment
Long term Loan Foreign `
Currency Rate
(i) Intial recognitation US $50,000 1 US $ = ` 60 30,00,000
` (30,00,000/60)
Rate on Blance sheet date 1 US $ = ` 62
Exchange Difference Loss Us $ 50,000 X 1,00,000
` (62 - 60)
Treatment : Credit Loan A/c and Debit FCMITD A/c
or Profit and Loss A/c by ` 1,00,000
Trade receivables
(ii) Initial recognition US $ 16,949.152* 1 US $ = ` 59 10,00,000
(` 10,00,000/59)
Rate on Balance sheet date 1 Us $ = ` 62
Exchange Difference Gain US $ 16,949.152* x ` (62-59) 50,847.456*
Treatment : Credit Profit and Loss A/c by ` 50,847.456*
And Debit Trade Receivales
Thus, Exchange Difference on Long term loan amounting ` 1,00,000 may either be charged to Profit and Loss
A/c or to Foreign Currency Monetary Item Translation Difference Account but exchange difference on trade
receivables amounting ` 50,847.456 is required to be transferred to Profit and Loss A/c.
Q-10 HIL Ltd. was making provision for non-moving stocks based on no issues having occurred for the last 12
months upto 31.03.2017. The company now wants to make provision based on technical evaluation
during the year ending 31.03.2018.
Total value of stock ` 120 lakhs
Provision required based on technical evaluation ` 3.00 lakhs.
Provision required based on 12 months no issues ` 4.00 lakhs.
You are requested to discuss the following points in the light of Accounting Standard (AS)-1
(i) Does this amount to change in accounting policy?
(II) Can the company change the method of accounting? [Sugg. Nov.’18, 5 Marks]
Ans. The decision of making provision for non-moving inventories on the basis of technical evaluation does
not amount to change in accounting policy. Accounting policy of a company may require that provision
for non-moving inventories should be made but the basis for making provision will not constitute
accounting policy. The method of estimating the amount of provision may be changed in case a more
prudent estimate can be made.
In the given case, considering the total value of inventory, the change in the amount of required provision
of non-moving inventory from ` 4 lakhs to ? 3 lakhs is also not material. The disclosure can be made for
such change in the following lines by way of notes to the accounts in the annual accounts of MIL Ltd. for
the year 2017-18 in the following manner:
"The company has provided for non-moving inventories on the basis of technical evaluation unlike
preceding years. Had the same method been followed as in the previous year, the profit for the year
and the value of net assets at the end of the year would have been lower by ` 1 lakh."

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Q-11 The accounting year of Dee Limited ended on 31st March, 2018 but the accounts were approved on 30th
April, 2018. On 15th April, 2018 a fire occurred in the factory and office premises. The loss by fire is of
such a magnitude that it was not possible to expect the enterprise Dee Limited to start operation again.
State with reasons, whether the loss due to fire is an adjusting or non- adjusting event and how the fact
of loss is to be disclosed by the company in the context of the provisions of AS-4 (Revised).
[Sugg. Nov.’18, 5 Marks]
Ans. As per AS 4 (Revised) "Contingencies and Events occurring after the Balance Sheet Date", an event
occurring after the balance sheet date should be an adjusting event even if it does not reflect any
condition existing on the balance sheet date, if the event is such as to indicate that the fundamental
accounting assumption of going concern is no longer appropriate.
The fire occurred in the factory and office premises of an enterprise after 31 March, 2018 but before
approval of financial statement of 30.4.18. The loss by fire is of such a magnitude that it is not reasonable
to expect the Dee Ltd. to start operations again, i.e., the going concern assumption is not valid. Since the
fire occurred after 31/03/18, the loss on fire is not a result of any condition existing on 31/03/18. But the
loss due to fire is an adjusting event the entire accounts need to be prepared on a liquidation basis with
adequate disclosures by the company by way of note in its financial statements in the following manner:
"Major fire occurred in the factory and office premises on 15th April, 2018 which has made impossible
for the enterprise to start operations again. Therefore, the financial statements have been prepared on
liquidation basis."
Q-12 AXE Limited purchased fixed assets costing $ 5,00,000 on 1st Jan. 2018 from an American company M/s
M&M Limited. The amount was payable after 6 months. The company entered into a forward contract
on 1st January 2018 for five months @ f 62.50 per dollar. The exchange rate per dollar was as follows :
On 1st January, 2018 Rs. 60.75 per dollar
On 31st March, 2018 Rs. 63.00 per dollar
You are required to state how the profit or loss on forward contract would be recognized in the books of
AXE Limited for the year ending 2017-18, as per the provisions of AS 11. [Sugg. Nov.’18, 5 Marks]
Ans. As per AS 11 "The Effects of Changes in Foreign Exchange Rates", an enterprise may enter into a forward
exchange contract to establish the amount of the reporting currency required, the premium or discount
arising at the inception of such a forward exchange contract should be amortized as expenses or income
over the life of the contract.
Forward Rate Rs.62.50
Less: Spot Rate (Rs. 60.75)
Premium on Contract Rs. 1.75
Contract Amount US$5,00,000
Total Loss (5,00,000 x 1.75) ` 8,75,000
Contract period 5 months
3 months falling in the year 2017-18; therefore loss to be recognized in 2017-18 (8,75,000/5) x 3 = Rs.
5,25,000. Rest ` 3,50,000 will be recognized in the following year 2018-19.
Q-13 On 01.04.2014, XYZ Ltd. received Government grant of f 100 Lakhs for an acquisition of new machinery
costing ` 500 lakhs. The grant was received and credited to the cost of the assets. The life span of the
machinery is 5 years. The machinery is depreciated at 20% on WDV method.

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 The company had to refund the entire grant in 2nd April, 2017 due to non-fulfilment of certain conditions
which was imposed by the government at the time of approval of grant.
How do you deal with the refund of grant to the Government in the books of XYZ Ltd., as per AS 12?
[Sugg. May ‘18, 5 Marks]
Ans. According to AS 12 on Accounting for Government Grants, the amount refundable in respect of a grant
related to a specific fixed asset (if the grant had been credited to the cost of fixed asset at the time of
receipt of grant) should be recorded by increasing the book value of the asset, by the amount refundable.
Where the book value is increased, depreciation on the revised book value should be provided
prospectively over the residual useful life of the asset.
(Rs. in lakhs)
1st April, 2014 Acquisition cost of machinery (` 500 - ` 100) 400.00
31st March, 2015 Less: Depreciation @ 20% (80)
1st April, 2015 Book value 320.00
31st March, 2016 Less: Depreciation @ 20% (64)
1st April, 2016 Book value 256.00
31st March, 2017 Less: Depreciation @ 20% (51.20)
1st April, 2017 Book value 204.80
2nd April, 2017 Add: Refund of grant 100.00
Revised book value 304.80
Depreciation @20% on the revised book value amounting Rs.304.80 lakhs is to be provided prospectively
over the residual useful life of the assets.
Q-14 ABC Ltd. borrowed US $ 5,00,000 on 01/07/2017, which was repaid as on 31/07/2017. ABC Ltd. prepares
financial statement ending on 31/03/2017. Rate of Exchange between reporting currency (INR) and
foreign currency (USD) on different dates are as under:
01/01/2017 1 US$ = Rs.68.50
31/03/2017 1 US$ = Rs.69.50
31/07/2017 1 US$ = Rs70.00
You are required to pass necessary journal entries in the books of ABC Ltd. as per AS 11.
[Sugg. May ‘18, 5 Marks]
Ans. Journal Entries in the Books of ABC Ltd.
Date Particular Rs.(Dr.) Rs.(Cr)
Jan. 01,2017 Bank Account (5,00,000x68.50) Dr. 342,50,000
To Foreign Loan Account 342,50,000
Mar. 31, 2017 Foreign Exchange Difference Account Dr. 5,00,000
To Foreign Loan Account 5,00,000
[5,00,000 x (69.50-68.50)]
Jul.31,2017 Foreign Exchange Difference Account 2,50,000
[5,00,000 x (70-69.5)] Dr.
Foreign Loan Account Dr. 347,50,000
To Bank Account 350,00,000

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Q-15 Rohit Ltd. has provided the following information
Particulars Rs.
Depreciation as per accounting records 2,50,000
Depreciation as per tax records 5,50,000
Unamortised preliminary expenses as per tax record 40,000
There is adequate evidence of future profit sufficiency. How much deferred tax assets/liability should
be recognized as transition adjustment when the tax rate is 50%? [Sugg. May ‘18, 5 Marks]
Ans. Table showing calculation deferred tax asset/liability
Particulars Amount Timing Defferred tax Amount
defirrence @ 50%
Rs. Rs.
Excess depreciation as per tax records 3,00,000 Timing Deferred tax 1,50,000
(Rs.5,50,000 - Rs.2,50,000) liability
Unamortised preliminary 40,000 Timing Deferred tax
expenses as per tax records assest 20,000
Net deffered tax liablity 1,30,000
Net deferred tax liablity amounting Rs.1,30,000 should be recognized as transition adjustment.
Q-16 PQR Ltd. is in the process of finalizing its accounts for the year ended 31st March, 2018. The company
seeks your advice on the following:
(I) Goods worth f 5,00,000 were destroyed due to flood in September, 2015. A claim was lodged with
insurance company. But no entry was passed in the books for insurance claim in the financial year
2015-16. In March, 2018, the claim was passed and the company received a payment of f 3,50,000
against the claim. Explain the treatment of such receipt in final account for the year ended 31st
March, 2018.
(II) Company created a provision for bad and doubtful debts at 2.5% on debtors in preparing the
financial statements for the year 2017-18.
Subsequently, on a review of the credit period allowed and financial capacity of the customers,
the company decides to increase the provision to 8% on debtors as on 31.03.2018. The accounts
were not approved by the Board of Directors till the date of decision. While applying the relevant
accounting standard, can this revision be considered as an extra ordinary item or prior period
item? [Sugg. May ‘18, 5 Marks]
Ans.
(i) As per the provisions of AS 5 "Net Profit or Loss for the Period, Prior Period Items and Changes in
Accounting Policies", prior period items are income or expenses, which arise, in the current period as a
result of error or omissions in the preparation of financial statements of one or more prior periods.
Further, the nature and amount of prior period items should be separately disclosed in the statement of
profit and loss in a manner that their impact on current profit or loss can be perceived.
In the given instance, it is clearly a case of error/omission in preparation of financial statements for the
year 2015-16. Hence, claim received in the financial year 2017-18 is a prior period item and should be
separately disclosed in the statement of Profit and Loss.
(ii) In the given case, a limited company created 2.5% provision for doubtful debts for the year 2017-2018.
Subsequently, the company revised the estimates based on the changed circumstances and wants to
create 8% provision.

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 As per AS 5, the revision in rate of provision for doubtful debts will be considered as change in estimate
and is neither a prior period item nor an extraordinary item.
The effect of such change should be shown in the profit and loss account for the year ending 31st March,
2018.
Q-17 M/s Nathan Limited has three segments namely P, Q and R. The assets of the company are ` 15 crores.
Segment P has 4 crores, Segment Q has 6 crores and Segment R has 5 crores. Deferred tax assets
included in the assets of each segment are P - ` 1 crore, Q - Rs.0.90 crores and R - Rs.0.80 crores. The
accountant contends all these three segments are reportable segments. Comment.
Ans. According to AS 17 "Segment Reporting", segment Assets do not include income tax assets.
Therefore, the revised total assets are 12.3 crores [Rs.15 - (Rs. 1 + 0.9 + 0.8).
Details of Segment wise assets
Segment P holds total assets of Rs 3 crores (Rs 4 crores - Rs 1 crores);
Segment Q holds Rs. 5.1 crores (Rs 6 crores - 0.9 crores);
Segment R holds Rs 4.2 crores (Rs 5 crores - Rs 0.8 crores).
Thus, all the three segments hold more than 10% of the total assets, all segments are reportable
segments.
Hence, the contention of the Accountant that all three segments are reportable segments is correct.
Q-18 Classify the following activities as
(i) Operating Activities, (ii) Investing activities, (iii) Financial activities and (iv) Cash Equivalents.
(1) Cash receipts from Trade Receivables (2) Marketable Securities
(3) Purchase of investment (4) Proceeds from long term borrowings
(5) Wages and Salaries paid (6) Bank overdraft
(7) Purchase of Goodwill (8) Interim dividend paid on equity shares
(9) Short term Deposits (10) Underwriting commission paid
[MTP Oct. ‘18, Sugg. May ‘18, 5 Marks]
Ans.
(a) Operating Activities: Items 1 and 5. (b) Investing Activities: Items 3,7 and 9
(c) Financing Activities: Items 4,6,8 and 10 (d) Cash Equivalent: 2
Q-19 (i) In the year 2018-19, an entity has acquired a new freehold building with a useful life of 50 years for
Rs. 75,00,000. The entity desires to calculate the depreciation charge per annum using a straight-line
method. It has identified the following components (with no residual value of lifts & fixtures at the
end of their useful life) as follows:
Component Useful life (Years) Cost
Land Infinite Rs. 10,00,000
Roof 25 Rs. 15,00,000
Lifts 20 Rs. 7,50,000
Fixtures 10 Rs. 2,50,000
Remainder of building 50 Rs. 40,00,000
Rs. 75,00,000

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 Calculate depreciation for the year 2018-19 as per componentization method. Also state the treatment,
in case Roof requires replacement at the end of its useful life.
(ii) Entity A, a supermarket chain, is renovating one of its major stores. The store will have more
available space for store promotion outlets after the renovation and will include a restaurant.
Management is preparing the budgets for the year after the store reopens, which include the cost
of remodeling and the expectation of a 15% increase in sales resulting from the store renovations,
which will attract new customers.
Decide whether the remodeling cost will be capitalized or not as per provision of AS 10 “Property
plant & Equipment”. [MTP Oct. ‘19, 5 Marks]
Ans. (i) Statement showing amount of depreciation as per Componentization Method
Component Depreciation (Per annum)
(Rs.)
Land Nil
Roof 60,000
Lifts 37,500
Fixtures 25,000
Remainder of Building 80,000
2,02,500
Note: When the roof requires replacement at the end of its useful life the carrying amount will be nil.
The cost of replacing the roof should be recognised as a new component.
(ii) The expenditure in remodelling the store will create future economic benefits (in the form of
15% of increase in sales). Moreover, the cost of remodelling can be measured reliably, therefore,
it should be capitalized in line with AS 10 PPE.
Q-20 The Accountant of Mobile Limited has sought your opinion with relevant reasons, whether the following
transactions will be treated as change in Accounting Policy or not for the year ended 31st March, 2019.
Please advise him in the following situations in accordance with the provisions of relevant Accounting
Standard;
(i) Provision for doubtful debts was created @ 2% till 31st March, 2018. From the Financial year 2018-
2019, the rate of provision has been changed to 3%.
(ii) During the year ended 31st March, 2019, the management has introduced a formal gratuity scheme
in place of ad-hoc ex-gratia payments to employees on retirement.
(iii) Till the previous year the furniture was depreciated on straight line basis over a period of 5 years.
From current year, the useful life of furniture has been changed to 3 years.
(iv) Management decided to pay pension to those employees who have retired after completing 5
years of service in the organization. Such employees will get pension of Rs. 20,000 per month.
Earlier there was no such scheme of pension in the organization.
(v) During the year ended 31st March, 2019, there was change in cost formula in measuring the cost of
inventories. [MTP Oct. ‘18, MTP Oct. ‘19, 5 Marks]
Ans. (i) In the given case, Mobile limited created 2% provision for doubtful debts till 31st March, 2018.
Subsequently in 2018-19, the company revised the estimates based on the changed circumstances and
wants to create 3% provision. Thus change in rate of provision of doubtful debt is change in estimate
and is not change in accounting policy. This change will affect only current year.

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 (ii) As per AS 5, the adoption of an accounting policy for events or transactions that differ in substance
from previously occurring events or transactions, will not be considered as a change in accounting
policy. Introduction of a formal retirement gratuity scheme by an employer in place of ad hoc ex-
gratia payments to employees on retirement is a transaction which is substantially different from
the previous policy, will not be treated as change in an accounting policy.
(iii) Change in useful life of furniture from 5 years to 3 years is a change in estimate and is not a change
in accounting policy.
(iv) Adoption of a new accounting policy for events or transactions which did not occur previously
should not be treated as a change in an accounting policy. Hence the introduction of new pension
scheme is not a change in accounting policy.
(v) Change in cost formula used in measurement of cost of inventories is a change in accounting
policy.
Q-21 Mr. Mehul gives the following information relating to items forming part of inventory as on 31-3-2019.
His factory produces Product X using Raw material A.
(i) 600 units of Raw material A (purchased @ Rs. 120). Replacement cost of raw material A as on 31-3-
2019 is Rs. 90 per unit.
(ii) 500 units of partly finished goods in the process of producing X and cost incurred till date Rs. 260
per unit. These units can be finished next year by incurring additional cost of Rs. 60 per unit.
(iii) 1500 units of finished Product X and total cost incurred Rs. 320 per unit.
Expected selling price of Product X is Rs. 300 per unit.
Determine how each item of inventory will be valued as on 31-3-2019. Also calculate the value of total
inventory as on 31-3-2019. [MTP Oct. ‘19, 5 Marks]
Ans. As per AS 2 “Valuation of Inventories”, materials and other supplies held for use in the production of
inventories are not written down below cost if the finished products in which they will be incorporated
are expected to be sold at cost or above cost. However, when there has been a decline in the price of
materials and it is estimated that the cost of the finished products will exceed net realizable value, the
materials are written down to net realizable value. In such circumstances, the replacement cost of the
materials may be the best available measure of their net realizable value. In the given case, selling
price of product X is Rs. 300 and total cost per unit for production is Rs. 320.
Hence the valuation will be done as under:
(i) 600 units of raw material will be written down to replacement cost as market value of finished
product is less than its cost, hence valued at Rs. 90 per unit.
(ii) 500 units of partly finished goods will be valued at 240 per unit i.e. lower of cost Rs. 320 (Rs. 260 +
additional cost Rs. 60) or Net estimated selling price or NRV i.e.Rs. 240 (Estimated selling price Rs.
300 per unit less additional cost of Rs. 60).
(iii) 1,500 units of finished product X will be valued at NRV of Rs. 300 per unit since it is lower than cost
Rs. 320 of product X.
Valuation of Total Inventory as on 31.03.2019:
Units Cost (Rs.) NRV/Replacement Value = units x cost or
cost NRV whichever is less
(Rs.)
Raw material A 600 120 90 54,000
Partly finished goods 500 260 240 1,20,000
Finished goods X 1,500 320 300 4,50,000
Value of Inventory 6,24,000

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Q-22 State whether the following statements are 'True' or 'False'. Also give reason for your answer.
(i) Certain fundamental accounting assumptions underline the preparation and presentation of
financial statements. They are usually specifically stated because their acceptance and use are
not assumed.
(ii) If fundamental accounting assumptions are not followed in presentation and preparation of
financial statements, a specific disclosure is not required.
(iii) All significant accounting policies adopted in the preparation and presentation of financial
statements should form part of the financial statements.
(iv) Any change in an accounting policy, which has a material effect should be disclosed. Where the
amount by which any item in the financial statements is affected by such change is not
ascertainable, wholly or in part, the fact need not to be indicated.
(v) There is no single list of accounting policies which are applicable to all circumstances.
[MTP Oct. ‘19, 5 Marks]
Ans. (i) False; As per AS 1 “Disclosure of Accounting Policies”, certain fundamental accounting assumptions
underlie the preparation and presentation of financial statements. They are usually not specifically
stated because their acceptance and use are assumed. Disclosure is necessary if they are not followed.
(ii) False; As per AS 1, if the fundamental accounting assumptions, viz. Going Concern, Consistency
and Accrual are followed in financial statements, specific disclosure is not required. If a
fundamental accounting assumption is not followed, the fact should be disclosed.
(iii) True; To ensure proper understanding of financial statements, it is necessary that all significant
accounting policies adopted in the preparation and presentation of financial statements should
be disclosed. The disclosure of the significant accounting policies as such should form part of the
financial statements and they should be disclosed at one place.
(iv) False; Any change in the accounting policies which has a material effect in the current period or
which is reasonably expected to have a material effect in later periods should be disclosed.
Where such amount is not ascertainable, wholly or in part, the fact should be indicated.
(v) True; As per AS 1, there is no single list of accounting policies which are applicable to all
circumstances. The differing circumstances in which enterprises operate in a situation of diverse
and complex economic activity make alternative accounting principles and methods of applying
those principles acceptable.
Q-23 Suhana Ltd. issued 12% secured debentures of Rs. 100 Lakhs on 01.05.2018, to be utilized as under:
Particulars Amount (Rs. in lakhs)
Construction of factory building 40
Purchase of Machinery 35
Working Capital 25
In March 2019, construction of the factory building was completed and machinery was installed and
ready for its intended use. Total interest on debentures for the financial year ended 31.03.2019 was Rs.
11,00,000. During the year 2018-19, the company had invested idle fund out of money raised from
debentures in banks' fixed deposit and had earned an interest of Rs. 2,00,000.
Show the treatment of interest under Accounting Standard 16 and also explain nature of assets.
OR
Beta Ltd. is a full tax free enterprise for the first ten years of its existence and is in the second year of
its operation. Depreciation timing difference resulting in a tax liability in year 1 and 2 is Rs. 1,000 lakhs
and Rs. 2,000 lakhs respectively. From the third year it is expected that the timing difference would
reverse each year by Rs. 50 lakhs. Assuming tax rate of 40%, find out the deferred tax liability at the end
of the second year and any charge to the Profit and Loss account.
[MTP Oct. ‘18, MTP Aug. ‘18, MTP Oct. ‘19, 5 Marks]

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Ans. According to AS 16 “Borrowing Costs”, borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset should be capitalised as part of the cost of that asset.
The amount of borrowing costs eligible for capitalisation should be determined in accordance with this
Standard. Other borrowing costs should be recognised as an expense in the period in which they are
incurred.
It also states that to the extent that funds are borrowed specifically for the purpose of obtaining a
qualifying asset, the amount of borrowing costs eligible for capitalisation on that asset should be
determined as the actual borrowing costs incurred on that borrowing during the period less any income
on the temporary investment of those borrowings.
Thus, eligible borrowing cost
= Rs. 11,00,000 - Rs. 2,00,000
= Rs. 9,00,000
Sr. No. Particulars Nature of assets Interest to be Interest to be charged
Capitalized (Rs.) to Profit & Loss Account
(Rs.)
i Construction of Qualifying Asset* 9,00,000x40/100 NIL
factory building = Rs. 3,60,000
ii Purchase of Not a Qualifying NIL 9,00,000x35/100
Machinery Asset = Rs. 3,15,000
iii Working Capital Not a Qualifying NIL 9,00,000x25/100
Asset _________ = Rs. 2,25,000
Total Rs. 3,60,000 Rs. 5,40,000
* A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its
intended use or sale.
OR
As per para 13 of Accounting Standard (AS) 22, Accounting for Taxes on Income”, deferred tax in respect
of timing differences which originate during the tax holiday period and reverse during the tax holiday
period, should not be recognized to the extent deduction from the total income of an enterprise is
allowed during the tax holiday period as per the provisions of sections 10A and 10B of the Income-tax
Act. Deferred tax in respect of timing differences which originate during the tax holiday period but
reverse after the tax holiday period should be recognized in the year in which the timing differences
originate. However, recognition of deferred tax assets should be subject to the consideration of
prudence. For this purpose, the timing differences which originate first should be considered to reverse
first.
Out of Rs. 1,000 lakhs depreciation, timing difference amounting Rs. 400 lakhs (Rs. 50 lakhs x 8 years)
will reverse in the tax holiday period and therefore, should not be recognized. However, for Rs. 600
lakhs (Rs. 1,000 lakhs . Rs. 400 lakhs), deferred tax liability will be recognized for Rs. 240 lakhs (40% of
Rs. 600 lakhs) in first year. In the second year, the entire amount of timing difference of Rs. 2,000 lakhs
will reverse only after tax holiday period and hence, will be recognized in full. Deferred tax liability
amounting Rs. 800 lakhs (40% of Rs. 2,000 lakhs) will be created by charging it to profit and loss account
and the total balance of deferred tax liability account at the end of second year will be Rs. 1,040 lakhs
(240 lakhs + 800 lakhs).

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Q-24 Gamma Limited is working on different projects which are likely to be completed within 3 years period.
It recognizes revenue from these contracts on percentage of completion method for financial statements
during 2014-2015, 2015-2016 and 2016-2017 for Rs. 11,00,000, Rs. 16,00,000 and Rs. 21,00,000 respectively.
However, for Income-tax purpose, it has adopted the completed contract method under which it has
recognized revenue of Rs. 7,00,000, Rs. 18,00,000 and Rs. 23,00,000 for the years 2014-2015, 2015-2016
and 2016-2017 respectively. Income-tax rate is 35%.
You are required to compute the amount of deferred tax asset/liability for the years 2014-2015, 2015-
2016 and 2016-2017. Also describe how this amount of deferred tax asset/liability will be disclosed in
the balance sheet of Omega Limited as per provisions of AS 22.
[MTP March ‘18, MTP March ‘19, 5 Marks]
Ans. Gamma Limited
Calculation of Deferred Tax Asset/Liability
Year Accounting Taxable Income Timing Difference Deferred Tax
Income (Balance) Liability (Balance)
2014-2015 11,00,000 7,00,000 4,00,000 1,40,000
2015-2016 16,00,000 18,00,000 2,00,000 70,000
2016-2017 21,00,000 23,00,000 NIL NIL
48,00,000 48,00,000
As per AS 22, deferred tax assets and liabilities should be distinguished from assets and liabilities
representing current tax for the period. Deferred tax assets and liabilities should be disclosed under a
separate heading in the balance sheet of the enterprise, separately from current assets and current
liabilities. The break-up of deferred tax assets and deferred tax liabilities into major components of the
respective balances should be disclosed in the notes to accounts.
Q-25 While preparing its final accounts for the year ended 31st March, 2016, a company made provision for
bad debts @ 5% of its total debtors. In the last week of February, 2016 a debtor for Rs. 20 lakhs had
suffered heavy loss due to an earthquake; the loss was not covered by any insurance policy. In April,
2016 the debtor became a bankrupt. Can the company provide for the full loss arising out of insolvency
of the debtor in the final accounts for the year ended 31st March, 2016?
Commentwith reference to relevant Accounting Standard. [MTP March ‘19, 5 Marks]
Ans. As per AS 4 'Contingencies and Events Occurring After the Balance Sheet Date', adjustment to assets and
liabilities are required for events occurring after the balance sheet date that provide additional
information materially affecting the determination of the amounts relating to conditions existing at
the Balance Sheet date.
A debtor for Rs. 20,00,000 suffered heavy loss due to earthquake in the last week of February, 2016
which was not covered by insurance. Thisinformation with its implicationswas already known to the
company. Thefact that he became bankrupt in April, 2016 (after the balance sheet date) is only an
additional information related to the condition existing on the balance sheet date.
Accordingly, full provision for bad debts amounting Rs. 20,00,000 should be made, to cover the loss
arising due to the insolvency of a debtor, in the final accounts for the year ended 31st March 2016. Since
the company has already made 5% provision of its total debtors, additional provision amounting Rs.
19,00,000 shall be made (20,00,000 x95%).

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Q-26 Examine whether the following will constitute a change in accounting policy or not as per AS 5.
(i) Introduction of a formal retirement gratuity scheme by an employer in place of ad hoc ex-gratia
payments to employees on retirement.
(ii) Management decided to pay pension to those employees who have retired after completing 5
years of service in the organisation. Such employees will get pension of Rs. 20,000 per month.
Earlier there was no such scheme of pension in the organisation. [MTP March ‘19, 5 Marks]
Ans. As per AS 5 'Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies', the
adoption of an accounting policy for events or transactions that differ in substance from previously
occurring events or transactions, will not be considered as a change in accounting policy.
(i) Accordingly, introduction of a formal retirement gratuity scheme by an employer in place of ad hoc
ex-gratia payments to employees on retirement is not a change in an accounting policy.
(ii) Similarly, the adoption of a new accounting policy for events or transactions which did not occur
previously or that were immaterial will not be treated as a change in an accounting policy.
Q-27 On the basis of information given below, find the value of inventory (by periodic inventory method) as per
AS 2, to be considered while preparing the Balance Sheet as on 31st March, 2017 on weighted Average
Basis.
Details of Purchases:
Date of purchase Unit(Nos.) Purchase cost per unit (Rs.)
01-03-2017 20 108
08-03-2017 15 107
17-03-2017 30 109
25-03-2017 15 107
Details of issue of Inventory:
Date of Issue Unit(Nos.)
03-03-2017 10
12-03-2017 20
18-03-2017 10
24-03-2017 20
Net realizable value of inventory as on 31st March, 2017 is Rs. 107.75 per unit.
You are required to compute the value of Inventory as per AS 2. [MTP March ‘19, 5 Marks]
Ans. Net Realisable Value of Inventory as on 31st March, 2017
= Rs. 107.75 x 20 units = Rs. 2,155
Value of inventory as per Weighted Average basis
Total units purchased and total cost:
01.03.2017 Rs. 108 x 20 units = Rs. 2160
08.3.2017 Rs. 107 x 15 units = Rs. 1605
17.03.2017 Rs. 109 x 30 units = Rs. 3270
25.03.2017 Rs. 107 x 15 units = Rs. 1605
Total 80 units = Rs. 8640

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 Weighted Average Cost = Rs. 8640/80 units = Rs.108
Total cost =Rs. 108 x 20 units = Rs. 2,160
Value of inventory to be considered while preparing Balance Sheet as on 31st March, 2017 is, Cost or Net
Realisable value whichever is lower i.e. Rs. 2,155.
Q-28 Omega Limited has borrowed a sum of US $ 10,00,000 at the beginning of Financial Year 2016-17 for its
residential project at 4 %. The interest is payable at the end of the Financial Year. At the time of availment
exchange rate was Rs. 56 per US $ and the rate as on31s'March,2017 was Rs. 62 per US $. If Omega Limited
borrowed the loan in India in Indian Rupee equivalent, the pricing of loan would have been 10.50%.
You are required to compute Borrowing Cost and exchange difference for the year ending 31st March,
2017 as per applicable Accounting Standards. [MTP March ‘19, 5 Marks]
Ans. (i) Interest for the period 2016-17
= US $ 10 lakhs x4% x Rs. 62 per US$ = Rs. 24.80 lakhs
(ii) Increase in the liability towards the principal amount
= US $ 10 lakhs x Rs. (62 - 56) = Rs. 60 lakhs
(iii) Interest that would have resulted if the loan was taken in Indian currency
= US $ 10 lakhs x Rs. 56 x 10.5% = Rs. 58.80 lakhs
(iv) Difference between interest on local currency borrowing and foreign currency borrowing = Rs.
58.80 lakhs - Rs. 24.80 lakhs = Rs. 34 lakhs.
Therefore, out of Rs. 60 lakhs increase in the liability towards principal amount, only Rs. 34 lakhs will be
considered as the borrowing cost. Thus, total borrowing cost would be Rs. 58.80 lakhs being the aggregate
of interest of Rs. 24.80 lakhs on foreign currency borrowings plus the exchange difference to the extent
of difference between interest on local currency borrowing and interest on foreign currency borrowing
of Rs. 34 lakhs.
Hence, Rs. 58.80 lakhs would be considered as the borrowing cost to be accounted for as per AS 16 and
the remaining Rs. 26 lakhs (60 - 34) would be considered as the exchange difference to be accounted for
as per AS 11.
Q-29 Omega Ltd., has a normal wastage of 4% in the production process. During the year 2016-17, the Company
used 12,000 MTof raw material costing Rs. 150 per MT.At the end of the year 630 MT of wastage was
ascertained in stock. The accountant wants to know how this wastage is to be treated in the books.
You are required to compute the amount of normal and abnormal loss and treatment thereof in line
with AS 2 "Valuation of inventories". [MTP Oct. ‘18, MTP April ‘19, MTP April ‘18, 5 Marks]
Ans. As per para AS 2 'Valuation of Inventories', abnormal amounts of wasted materials, labour and other
production costs are excluded from cost of inventories and such costs are recognized as expenses in the
period in which they are incurred. The normal loss will be included in determining the cost of inventories
(finished goods) at the year end.
Amount of Normal Loss and Abnormal Loss:
Material used 12,000 MT @ Rs. 150 = Rs. 18,00,000
Normal Loss (4% of 12,000 MT) 480 MT
Net quantity of material 11,520 MT
Abnormal Loss in quantity 150 MT (630 MT less480 MT)
Abnormal Loss Rs. 23,437.50 [150 units @ Rs. 156.25
(Rs.18,00,000/11,520)]
Amount Rs. 23,437.50 will be charged to the Profit and Loss statement.

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Q-30 Ram Ltd. purchased machineryfor Rs. 80 lakhs, (useful life 4 years and residual value Rs. 8 lakhs).
Government grant received is Rs. 32 lakhs. Show the Journal Entry to be passed at the time of refund of
grant and the value of the fixed assets in the third year and the amount of depreciation for remaining
two years, if the grant is credited to Deferred Grant A/c. [MTP April ‘18, MTP April ‘19, 5 Marks]
Ans. In the books of Ram Ltd.
If the grant is credited to Deferred Grant Account:
As per AS 12 'Accounting for Government Grants,' income from Deferred Grant Account is allocated to
Profit and Loss account usually over the periods and in the proportions in which depreciation on related
assets is charged.
Accordingly, in the first two years (Rs. 32 lakhs /4 years) = Rs. 8 lakhs x 2 years = Rs. 16 lakhs will be
credited to Profit and Loss Account and Rs. 16 lakhs will be the balance of Deferred Grant Account after
two years.
Therefore, on refund of grant, following entry will be passed:
Rs. Rs.
I Deferred Grant A/c Dr. 16 lakhs
Profit & Loss A/c Dr. 16 lakhs
To Bank A/c 32 lakhs
(Being Government grant refunded)
1. Value of Fixed Assets after two years but before refund of grant
Fixed assets initially recorded in the books = Rs. 80 lakhs
Depreciation for each year= (Rs. 80 lakhs- Rs.8 lakhs)/4 years = Rs. 18 lakhs per year Book value of
fixed assets after two years = Rs. 80 lakhs - (Rs. 18 lakhs x 2 years) = Rs. 44 lakhs
2. Value of Fixed Assets after refund of grant
On refund of grant the balance of deferred grant account will becomenil. Thefixed assets will
continue to be shown in the books at Rs. 44 lakhs.
3. Amount of depreciation for remaining two years
Value of Fixed Assets before refund of grant Rs. 28 lakhs
Add Refund of grant Rs. 32 lakhs
Rs. 60 lakhs
4. Amount of depreciation for remaining two years
Value of the fixed assets after refund of grant -residual value of the assets / No. of years
= Rs. 60 lakhs - Rs. 8 lakhs/ 2
= Rs. 26 lakhs per annum will be charged for next two years.
Q-31 While preparing its final accounts for the year ended 31st March, 2019, a company made provision for bad
debts @ 5% of its total debtors. In the last week of February, 2019 a debtor for Rs. 20 lakhs had suffered
heavy loss due to an earthquake; the loss was not covered by any insurance policy. In April, 2019 the debtor
becamea bankrupt. Can the company provide for the full loss arising out of insolvency of the debtor in the
final accounts for the year ended 31st March, 2019? Comment with reference to relevant Accounting
Standard. [MTP April ‘19, 5 Marks]
Ans. As per AS 4 'Contingencies and Events Occurring After the Balance Sheet Date', adjustment to assets and
liabilities are required for events occurring after the balance sheet date that provide additional

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 information materially affecting the determination of the amounts relating to conditions existing at
the Balance Sheet date.
A debtor for Rs. 20,00,000 suffered heavy loss due to earthquake in the last week of February, 2019
which was not covered by insurance. Thisinformation with its implicationswas already known to the
company. Thefact that he became bankrupt in April, 2019 (after the balance sheet date) is only an
additional information related to the condition existing on the balance sheet date.
Accordingly, full provision for bad debts amounting Rs. 20,00,000 should be made, to cover the loss
arising due to the insolvency of a debtor, in the final accounts for the year ended 31st March 2019. Since
the company has already made5% provision of its total debtors, additional provision amounting Rs.
19,00,000 shall be made (20,00,000 x95%).
Q-32 KumarLtd. had made a rights issue of shares in 2017. In the offer documentto its members, it had
projected a surplus of Rs. 40 crores during the accounting year to end on 31st March, 2017. The draft
results for the year, prepared on the hitherto followed accounting policies and presented for perusal of
the board of directors showed a deficit of Rs. 10 crores. The board in consultation with the managing
director, decided not to provide for "after sales expenses" during the warranty period. Till the last year,
provision at 2% of sales used to be made under the conceptof "matching of costs against revenue" and
actual expenses used to be charged against the provision. The board now decided to account for expenses
as and when actually incurred. Sales during the year total to Rs. 600 crores.
As chief accountant of the company, you are asked by the managing director to draft the notes on
accounts for inclusion in the annual report for 2016-2017. [MTP April ‘18,MTP April ‘19, 5 Marks]
Ans. As per AS 1, any change in the accounting policies which has a material effect in the current period or
which is reasonably expected to have a material effect in later periods should be disclosed. In the case
of a change in accounting policies which has a material effect in the current period, the amount by
which any item in the financial statements is affected by such change should also be disclosed to the
extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact should be
indicated. Accordingly, the notes on accounts should properly disclose the change and its effect.
Notes on Accounts:
So far, the companyhas been providing 2% of sales for meeting "after sales expenses during the warranty
period. With the improved method of production, the probability of defects occurring in the products
has reduced considerably. Hence, the company has decided not to make provision for such expenses
but to account for the same as and when expenses are incurred. Due to this change, the profit for the
year is increased by Rs. 12 crores than would have been the case if the old policy were to continue.
Q-33 Mohan Ltd. purchased an asset on 1st January 2013 for Rs. 5,00,000 and the asset had an estimated useful
life of 5 years and a residual value of nil. On 1st January 2017, the directors review the estimated life and
decide that the asset will probably be useful for a further 4 years.
You are required to compute the amount of depreciation for each year, if company charges depreciation
on Straight Line basis. [MTP April ‘19, 5 Marks]
Ans. The entity has charged depreciation using the straight-line method at Rs. 1,00,000 per annum i.e
(5,00,000/5 years). On 1st January 2017, the asset's net book value is [5,00,000 - (1,00,000 x4)] Rs. 1,00,000.
The remaining useful Iife is 4years. Thecompanyshould amend the annual provision for depreciation to
charge the unamortized cost over the revised remaining life of four years. Consequently, it should
charge depreciation for the next 4 years at Rs. 25,000 per annum i.e. (1,00,000/4 years).
Q-34 Zen Bridge Construction Limited obtained a loan of Rs. 64 crores to be utilized as under:
(i) Construction of Hill link road in Kedarnath: Rs. 50 crores
(work was held up totally for a month during the year due to heavy rain

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 which are common in the geographic region involved)
(ii) Purchase of Equipment and Machineries Rs.6 crores
(iii) Working Capital Rs.4 crores
(iv) Purchase of Vehicles Rs.1 crores
(v) Advances for tools/cranes etc. Rs. 1 crores
(vi) Purchase of Technical Know how Rs.2 crores
(vii) Total Interest charged by the Bank for the year ending 31st March, 2016 Rs.1.6 crores
You are required to show the treatment of Interest according to Accounting Standard by Zen Bridge
Construction Limited. [MTP April ‘18, 5 Marks]
Ans. According to AS 16'Borrowing costs', qualifying asset is an asset that necessarily takes substantial period
of time to get ready for its intended use. As per the standard, borrowing costs that are directly attributable
to the acquisition, construction or production of a qualifying asset should be capitalized as part of the
cost of that asset. Other borrowing costs should be recognized as an expense in the period in which they
are incurred. Capitalization of borrowing costs is also not suspended when a temporary delay is a
necessary part of the process of getting an asset ready for its intended use or sale.
The treatment of interest by Zen Bridge Construction Ltd. can be shown as:
Qualifying Interest to be Interest to be
Assets capitalized charged to profit
Rs. in crores & Loss A/c Rs. in
crores
Construction of hill road* Yes 1.25 1.6/64x50
Purchase of equipment and
machineries No 0.15 1.6/64x6
Working capitalNo 0.10 1.6/64x4
Purchase of vehicles No 0.025 1.6/64x1
Advance for tools, cranes etc. No
0.025 1.6/64x1
Purchase of technical know-how No
0.05 1.6/64x2
Total 1.25 0.35
*Note: It is assumed that construction of hill road will normally take more than a year (substantial
period of time), hence considered as qualifying asset.
Q-35 Prepare Cash Flow from Investing Activities of Creative Furnishings Limited for the year ended 31-3-
2017.
Particulars Rs.
Plant acquired by the issue of 8% Debentures 1,56,000
Claim received for loss of plant in fire 49,600
Unsecured loans given to subsidiaries 4,85,000
Interest on loan received from subsidiary companies 82,500

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 Pre-acquisition dividend received on investment made 62,400
Debenture interest paid 1,16,000
Term loan repaid 4,25,000
Interest received on investment 68,000
(IDS of Rs. 8,200 was deducted on the above interest)
Book value of plant sold (loss incurred Rs. 9,600) 84,000
[MTP April ‘18, 5 Marks]
Ans. (a) Cash Flow Statement from Investing Activities of Creative Furnishings Limited for the year ended
31-03-2017
Cash generated from investing activities Rs. Rs.
Interest on loan received 82,500
Pre-acquisition dividend received on investment made 62,400
Unsecured loans given to subsidiaries 4,85,000
Interest received on investments (gross value) 76,200
IDS deducted on interest 8,200
Sale of plant 74,400
Cash used in investing activities (before extra ordinary item) 1,97,700
Extraordinary claim received for loss of plant 49,600
Net cash used in investing activities (after extra ordinary item) 1,48,100
Note :
1. Debenture interest paid and Term Loan repaid are financing activities and therefore not considered
for preparing cash flow from investing activities.
2. Plant acquired by issue of 8% debentures does not amount to cash outflow, hence also not considered
in the above cash flow statement.
Q-36 While preparing its final accounts for the year ended 31st March, 2016, a company made provision for
bad debts @ 5% of its total debtors. In the last week of February, 2016 a debtor for Rs. 20 lakhs had
suffered heavy loss due to an earthquake; the loss was not covered by any insurance policy. In April,
2016 the debtor became a bankrupt. Can the company provide for the full loss arising out of insolvency
of the debtor in the final accounts for the year ended 31st March, 2016?
You are required to examine and comment with reference to relevant Accounting Standard.
[MTP April ‘18, 5 Marks]
Ans. As per AS 4 'Contingencies and Events Occurring After the Balance Sheet Date', adjustment to assets and
liabilities are required for events occurring after the balance sheet date that provide additional
information materially affecting the determination of the amounts relating to conditions existing at
the Balance Sheet date.
A debtor for Rs. 20,00,000 suffered heavy loss due to earthquake in the last week of February, 2016
which was not covered by insurance. This information with its implications was al ready known to the
company. The fact that he became bankrupt in April, 2016 (after the balance sheet date) is only an
additional information related to the condition existing on the balance sheet date.
Accordingly, full provision for bad debts amounting Rs. 20,00,000 should be made, to cover the loss
arising due to the insolvency of a debtor, in the final accounts for the year ended 31st March 2016. Since
the company has already made 5% provision of its total debtors, additional provision amounting Rs.
19,00,000 shall be made (20,00,000 x 95%).

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Q-37 The Board of Directors of New Graphics Ltd. in its Board Meeting held on 18th April, 2017, considered
and approved the Audited Financial results along with Auditors Report for the Financial Year ended 31st
March, 2017 and recommended a dividend of Rs. 2 per equity share (on 2 crore fully paid up equity
shares of Rs. 10 each) for the year ended 31st March, 2017 and if approved by the members at the
forthcoming Annual General Meeting of the company on 18th June, 2017, the same will be paid to all the
eligible shareholders.
Discuss on the accounting treatment and presentation of the said proposed dividend in the annual
accounts of the company for the year ended 31st March, 2017 as per the applicable Accounting Standard
and other Statutory Requirements. [MTP March ‘18, 5 Marks]
Ans. As per the amendment in AS 4 "Contingencies and Events Occurring After the Balance Sheet Date" vide
Companies (Accounting Standards) Amendments Rules, 2016 dated 30th March, 2016, the events which
take place after the balance sheet date, are sometimes reflected in the financial statements because of
statutory requirements or because of their special nature.
However, dividends declared after the balance sheet date but before approval of financial statements
are not recognized as a liability at the balance sheet date because no statutory obligation exists at that
time. Hence such dividends are disclosed in the notes to financial statements.
Provision for proposed dividends is not required to be made as per the amendment in AS 4. Such
proposed dividends are to be disclosed in the notes to financial statements. Accordingly, the dividend
of Rs.4 crores recommended by New Graphics Ltd. in its Board meeting on 18th April, 2017 shall not be
accounted for in the books for the year 2016-17 irrespective of the fact that it pertains to the year 2016-
17 and will be paid after approval in the Annual General Meeting of the members/shareholders.
Q-38 On the basis of information given below, find the value of inventory (by periodic inventory method) as
per AS 2, to be considered while preparing the Balance Sheet as on 31st March, 2017 on weighted
Average Basis.
Details of Purchases:
Date of purchase Unit (Nos.) Purchase cost per unit (Rs.)
01-03-2017 20 108
08-03-2017' 15 107
17-03-2017 30 109
25-03-2017 15 107
Details of issue of Inventory:
Date of Issue Unit (Nos.)
03-03-2017 10
12-03-2017 20
18-03-2017 10
24-03-2017 20
Net realizable value of inventory as on 31st March, 2017 is Rs. 107.75 per unit. You are required to
compute the value of Inventory as per AS 2? [MTP March ‘18, 5 Marks]
Ans. Net Realisable Value of Inventory as on 31st March, 2017 = Rs.107.75 x 20 units = Rs.2,155
Value of inventory as per Weighted Average basis
Total units purchased and total cost:

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 01.03.2017 Rs.108x20 units = Rs.2160
08.3.2017 Rs.107x15 units = Rs.1605
17.03.2017 Rs.109x30 units = Rs.3270
25.03.2017 Rs.107x15 units = Rs.1605
Total 80 units = Rs.8640
Weighted Average Cost = Rs.8640/80 units = Rs.108
Total cost = Rs.108 x 20 units = Rs.2,160
Value of inventory to be considered while preparing Balance Sheet as on 31st March, 2017 is, Cost or Net
Realisable value whichever is lower i.e. Rs.2,155.
Q-39 Mohan Ltd. has an existing freehold factory property, which it intends to knock down and redevelop.
During the redevelopment period the company will move its production facilities to another (temporary)
site.
The following incremental costs will be incurred:
Setup costs of Rs.5,00,000 to install machinery in the new location.
Rent of Rs.15,00,000
Removal costs of Rs.3,00,000 to transport the machinery from the old location to the temporary location.
You are required to examine in line with AS 10 "Property, Plant and Equipment" whether these costs can
be capitalized into the cost of the new building. [MTP Oct. ‘18, MTP March ‘18, 5 Marks]
Ans. Constructing or acquiring a new asset may result in incremental costs that would have been avoided if
the asset had not been constructed or acquired. These costs are not be included in the cost of the asset
if they are not directly attributable to bringing the asset to the location and condition necessary for it to
be capable of operating in the manner intended by management.
The costs to be incurred by the company are in the nature of costs of reducing or reorganizing the
operations of the accompany. These costs do not meet that requirement of AS 10 "Property, Plant and
Equipment" and cannot, therefore, be capitalized.
Q-40 Omega Limited has borrowed a sum of US $ 10,00,000 at the beginning of Financial Year 2016-17 for its
residential project at 4 %. The interest is payable at the end of the Financial Year. At the time of availment
exchange rate was Rs.56 per US $ and the rate as on31st March, 2017 was Rs.62 per US $. If Omega Limited
borrowed the loan in India in Indian Rupee equivalent, the pricing of loan would have been 10.50%.
You are required to compute Borrowing Cost and exchange difference for the year ending 31st March,
2017 as per applicable Accounting Standards. [MTP March ‘18, 5 Marks]
Ans. (i) Interest for the period 2016-17
= US $ 10 lakhs x 4% x Rs.62 per US$ = Rs.24.80 lakhs
(ii) Increase in the liability towards the principal amount
= US $ 10 lakhs x Rs.(62 - 56) = Rs.60 lakhs
(iii) Interest that would have resulted if the loan was taken in Indian currency
= US $ 10 lakhs x Rs.56 x 10.5% = Rs.58.80 lakhs
(iv) Difference between interest on local currency borrowing and foreign currency borrowing
= Rs.58.80 lakhs - Rs.24.80 lakhs = Rs. 34 lakhs.
Therefore, out of Rs. 60 lakhs increase in the liability towards principal amount, only Rs.34 lakhs will be
considered as the borrowing cost. Thus, total borrowing cost would be Rs. 58.80 lakhs being the aggregate of

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 interest of Rs.24.80 lakhs on foreign currency borrowings plus the exchange difference to the extent of
difference between interest on local currency borrowing and interest on foreign currency borrowing
of Rs.34 lakhs.
Hence, Rs.58.80 lakhs would be considered as the borrowing cost to be accounted for as per AS 16 and
the remaining Rs.26 lakhs (60 - 34) would be considered as the exchange difference to be accounted for
as per AS 11.
Q-41 The Board of Directors of New Graphics Ltd. in its Board Meeting held on 18th April, 2017, considered
and approved the Audited Financial results along with Auditors Report for the Financial Year ended
31st March, 2017 and recommended a dividend of Rs. 2 per equity share (on 2 crore fully paid up equity
shares of Rs. 10 each) for the year ended 31st March, 2017 and if approved by the members at the
forthcoming Annual General Meeting of the company on 18th June, 2017, the same will be paid to all
the eligible shareholders.
Discuss on the accounting treatment and presentation of the said proposed dividend in the annual
accounts of the compa ny for the year ended 31st March, 2017 as per the applicable Accounting Standard
and other Statutory Requirements. [MTP Aug. ‘18, 5 Marks]
Ans. As per the amendment in AS 4 “Contingencies and Events Occurring After the Balance Sheet Date” vide
Companies (Accounting Sta ndards) Amendments Rules, 2016 dated 30th March, 2016, the events which
take place after the balance sheet date, are sometimes reflected in the financial statements because
of statutory requirements or because of their special nature.
However, dividends declared after the balance sheet date but before approval of financial statements
are not recognized as a liability at the balance sheet date because no statutory obligation exists at that
time. Hence such dividends are disclosed in the notes to financial statements.
No, provision for proposed dividends is not required to be made. Such proposed dividends are to be
disclosed in the notes to financial statements. Accordingly, the dividend of Rs.4 crores recommended
by New Graphics Ltd. in its Board meeting on 18th April, 2017 shall not be accounted for in the books for
the year 2016 -17 irrespective of the fact that it pertains to the year 2016-17 and will be paid after
approval in the Annual General Meeting of the members / shareholders.
Q-42 How you will deal with following in the financial statements of the Paridhi Electronics Ltd. as on 31.3.18
with reference to AS-13?
(i) Paridhi Electronics Ltd. invested in the shares of another unlised company on 1st May 2014 at a
cost of Rs. 3,00,000 with the intention of holding more than a year. The published accounts of
unlisted company received in January, 2018 reveals that the company has incurred cash losses
with decline in market share and investment of Paridhi Electronics L td. may not fetch more than
Rs. 45,000.
(ii) Also Paridhi Electronics Ltd. has current investment (X Ltd.’s shares) purchased for Rs. 5 lakhs,
which the company want to reclassify as long term investment. The market value of these
investments as on date o f Balance Sheet was Rs. 2.5 lakhs. [MTP Aug. ‘18, 5 Marks]
Ans. (i) As per AS 13, “Accounting for Investments” Investments classified as long term investments should
be carried in t he financial statements at cost. However, provision for diminution shall be made to
recognise a decline, other than temporary, in the value of the investments, such reduction being
determined and made for each investment individually. The standard also states that indicators of the
value of an investment are obtained by reference to its market value, the investee's assets and results
and the expected cash flows from the investment.
On this basis, the facts of the case given in the question clearly sugge st that the provision for diminution
should be made to reduce the carrying amount of shares to Rs. 45,000 in the financial statements for
the year ended 31st March, 2018 and charge the difference of loss of Rs. 2,55,000 to profit and loss
account.

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 (ii) As per AS 13 ‘Accounting for Investments’, where investments are reclassified from current to
long -term, transfers are made at the lower of cost or fair value at the date of transfer.
In the given case, the market value of the investment (X Ltd. shares) is Rs.2.50 lakhs, which is
lower than its cost i.e. Rs. 5 lakhs. Therefore, the transfer to long term investments should be
made at cost of Rs. 2.50 lakhs. The loss of Rs. 2.50 lakhs should be charged to profit and loss
account.
Q-43 Kumar Ltd. had made a rights issue of shares in 2017. In the offer document to its members, it had
projected a surplus of Rs. 40 crores during the accounting year to end on 31st March, 2017.
The draft results for the year, prepared on the hitherto followed accounting policies and presented for
perusal of the board of directors showed a deficit of Rs. 10 crores. The board in consultation with the
managing director, decided not to provide for “after sales expenses” during the warranty period. Till
the last year, provision at 2% of sales used to be made under the concept of “matching of costs against
revenue” and actual expenses used to be charged against the provision. The board now decided to
account for expenses as and when actually incurred.
Sales during the year total to Rs. 600 crores.
As chief accountant of the company, you are asked by the managing director to draft the notes on
accounts for inclusion in the annual report for 2016 -2017. [MTP Aug. ‘18, 5 Marks]
Ans. As per AS 1, any change in the accounting policies which has a material effect in the current period or
which is reasonably expected to have a mat erial effect in later periods should be disclosed. In the case
of a change in accounting policies which has a material effect in the current period, the amount by
which any item in the financial statements is affected by such change should also be disclose d to the
extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact should be
indicated. Accordingly, the notes on accounts should properly disclose the change and its effect.
Notes on Accounts:
So far, the company has been providing 2% of sales for meeting “after sales expenses during the
warranty period. With the improved method of production, the probability of defects occurring in the
products has reduced considerably. Hence, the company has decided not to make provision for such
expenses but to account for the same as and when expenses are incurred. Due to this change, the
profit for the year is increased by Rs. 12 crores than would have been the case if the old policy were to
continue.
Q-44 A Limited is engaged in manufacturing of Chemical Y for which Raw Material X is required. The company
provides you following information for the year ended 31st March, 2017.
Rs. Per unit
Raw Material X
Cost price 380
Unloading Charges 20
Freight Inward 40
Replacement cost 300
Chemical Y
Material consumed 440
Direct Labour 120
Variable Overheads 80

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 Additional Information:
(i) Total fixed overhead for the year was Rs. 4,00,000 on normal capacity of 20,000 units.
(ii) Closing balance of Raw Material X was 1,000 units and Chemical Y was Rs. 2,400 units.
You are required to calculate the total value of closing stock of Raw Material X and Chemical Y according to AS
2, when Net realizable value of Chemical Y is Rs. 800 per unit. [MTP Aug. ‘18, 5 Marks]
Ans. When Net Realizable Value of the Chemical Y is Rs. 800 per unit NRV is greater than the cost of Finished
Goods Y i.e. Rs. 660 (Refer W.N.)
Hence, Raw Material and Finished Goods are to be valued at cost.
Value of Closing Stock:
Qty. Rate (Rs.) Amount (Rs.)
Raw Material X 1,000 440 4,40,000
Finished Goods Y 2,400 660 15,84,000
Total Value of Closing Stock 20,24,000
Working Note:
Statement showing cost calculation of Raw material X and Chemical Y
Raw Material X Rs.
Cost Price 380
Add: Freight Inward 40
Unloading charges 20
Cost 440
Chemical Y Rs.
Materials consumed 440
Direct Labour 120
Variable overheads 80
Fixed overheads (Rs.4,00,000/20,000 units) 20
Cost 660
Q-45 ABC Ltd. is installing a new plant at its production facility. It has incurred these costs:
Cost of the plant (cost per supplier’s invoice plus taxes) Rs. 25,00,000
Initial delivery and handling costs Rs. 2,00,000
Cost of site preparation Rs. 6,00,000
Consultants used for advice on the acquisition of the plant Rs. 7,00,000
Interest charges paid to supplier of plant for deferred credit Rs. 2,00,000
Estimated dismantling costs to be incurred after 7 years Rs. 3,00,000
Operating losses before commercial production Rs. 4,00,000
Please advise ABC Ltd. on the costs that can be capitalised in accordance with AS 10 (Revised).
[MTP Aug. ‘18, 5 Marks]

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Ans. According to AS 10 (Revised), the following costs can be capitalized:
Cost of the plant Rs. 25,00,000
Initial delivery and handling costs Rs. 2,00,000
Cost of site preparation Rs. 6,00,000
Consultants’ fees Rs. 7,00,000
Estimated dismantling costs to be incurred after 7 years Rs. 3,00,000
Rs. 43,00,000
Note: Interest charges paid on “Deferred credit terms” to the supplier of the plant (not a qualifying
asset) of Rs. 2,00,000 and operating losses before commercial production amounting to Rs.4,00,000
are not regarded as directly attributable costs and thus cannot be capitalised. They should be written
off to the Statement of Profit and Loss in the period they are incurred.
Q-46 In the books of M/s Prashant Ltd., closing inventory as on 31.03.2015 amounts to Rs. 1,63,000 (on the
basis of FIFO method).
The company decides to change from FIFO method to weighted average method for ascertaining the
cost of inventory from the year 2014-15. On the basis of weighted average method, closing inventory as
on 31.03.2015 amounts to Rs. 1,47,000. Realisable value of the inventory as on 31.03.2015 amounts to
Rs. 1,95,000.
Discuss disclosure requirement of change in accounting policy as per AS-1. [MTP Oct. ‘18, 5 Marks]
Ans. As per AS 1 “Disclosure of Accounting Policies”, any change in an accounting policy which has a material
effect should be disclosed in the financial statements. The amount by which any item in the financial
statements is affected by such change should also be disclosed to the extent ascertainable. Where
such amount is not ascertainable, wholly or in part, the fact should be indicated. Thus Prashant Ltd.
should disclose the change in valuation method of inventory and its effect on financial statements.
The company may disclose the change in accounting policy in the following manner:
‘The company values its inventory at lower of cost and net realisable value. Since net realisable value
of all items of inventory in the current year was greater than respective costs, the company valued its
inventory at cost. In the present year i.e. 2014-15, the company has changed to weighted average
method, which better reflects the consumption pattern of inventory, for ascertaining inventory costs
from the earlier practice of using FIFO for the purpose. The change in policy has reduced current profit
and value of inventory by Rs. 16,000.

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CHAPTER-4
Financial Statements of Companies

UNIT I
PREPARATION OF FINANCIAL STATEMENTS

Q-1 You are required to prepare a Balance Sheet as at 31st March 2018, as per Schedule III of the Companies
Act, 2013, from the following information of Mehar Ltd.:
Particulars Amount (Rs.) Particulars Amount (Rs)
Term Loans (Secured) 40,00,000 Investments (Non-current) 9,00,000
Trade payables 45,80,000 Profit for the year 32,00,000
Other advances 14,88,000 Trade receivables 49,00,000
Cash and Bank Balances 38,40,000 Miscellaneous Expenses 2,32,000
Staff Advances 2,20,000 Loan from other parties 8,00,000
Provision for Taxation 10,20,000 Provision for Doubtful Debts 80,000
Securities Premium 19,00,000
Loose Tools 2,00,000 Stores 16,00,000
General Reserve 62,00,000 Fixed Assets (WDV) 2,26,00,000
Capital Work-in- progress 8,00,000 Finished Goods 30,00,000
Additional Information:-
1. Share Capital consist of-
(a)1,20,000 Equity Shares of Rs.100 each fully paid up.
(b)40,000, 10% Redeemable Preference Shares of Rs.100 each fully paid up.
2. The company declared dividend @ 5% of equity share capital. The dividend distribution tax rate is
17.304%. (15% CDT, surcharge 12%, Education Cess 2%andSHEC@1%)
3. Depreciate Assets by Rs.20,00,000. [RTP Nov ‘18]
Ans. Balance Sheet of Mehar Ltd. as at 31st March, 2018
Note Rs.
I EQUITY AND LIABILITIES:
(1) (a) Share Capital 1 1,60,00,000
(b) Reserves and Surplus 2 98,64,424

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 (2) Non-current Liabilities
Long term Borrowings- 40,00,000
Terms Loans (Secured)
(3) Current Liabilities
(a) Trade Payables - 45,80,000
(b) Other current liabilities 3 20,03,576
(c) Short-term Provisions (Provision for taxation) 10,20,000
Total 3,74,68,000
II ASSETS
(1) Non-current Assets
(a) Fixed Assets:
(i) Tangible Assets 4 2,06,00,000
(ii) Capital WIP 8,00,000
(b) Non- current Investments 9,00,000
(2) Current Assets:
(a) Inventories 5 48,00,000
(b) Trade Receivables 6 48,20,000
(c) Cash and Cash Equivalents 38,40,000
(d) Short-term Loans and Advances 7 17,08,000
Total 3,74,68,000
Notes to account
Rs.
1. Share Capital
Authorized, issued, subscribed & called up
1,20,000, Equity Shares of Rs. 100 each 1,20,00,000
40,000 10% Redeemable Preference Shares of 100 each 40,00,000 1,60,00,000
2. Reserves and Surplus
Securities Premium Account 19,00,000
General reserve 62,00,000
Profit & Loss Balance
Opening balance
Profit for the period 32,00,000
Less; Miscellaneous Expenditure written off (2,32,000)
29,68,000
Less: Appropriations
Dividend (10,00,000)
Dividend distribution tax (2,03,576) 17,64,424 98,64,424

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 3. Other current liabilities
Loan from other parties Dividend 8,00,000
Dividend 10,00,00
Distribution tax [W.N] 2,03,576 20,03,576
4. Tangible assets
Fixed Assets
Opening balance 2,26,00,000
Less; Depreciation 20,00,000
Closing balance 2,06,00,000
5. Inventories
Finished Goods 30,00,000
Stores 16,00,000
Loose Tools 2,00,000 48,00,000
6. Trade Receivables
Trade receivables 49,00,000
Less: Provision for Doubtful Debts 80,000 48,20,000
7. Short term loans & Advances
Staff Advances 2,20,000
Other Advances 14,88,000 17,08,000
Working Note:
Calculation of Dividend distribution tax
(i) Grossing-up of dividend:
Dividend distributed by Mehar Ltd.
Equity shares dividend 6,00,000
Preference share dividend 4,00,000 10,00,000
Add:Increase for the purpose of grossing up of dividend
10,00,000 x[15/(100-15)] 1,76,470
Gross dividend 11,76,470
(ii) Dividend distribution tax @ 17.304% 2,03,576
Q-2 PQ Ltd., a non-investment company has been incurring losses for the past few years. The company
provides the following information for the current year:
(Rs.In lakhs)
Paid up equity share capital 180
Paid up preference share capital 30
Reserves (including Revaluation reserve Rs.15 lakhs) 225
Securities premium 60
Long term loans 60
Deposits repayable after one year 30

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 Application money pending allotment 1080
Accumulated losses not written off 30
Investments 270
PQ Ltd. has only one whole-time director, Mr. Hello. You are required to calculate the amount of maximum
remuneration that can be paid to him as per provisions of Companies Act, 2013, if no special resolution
is passed at the general meeting of the company in respect of payment of remuneration for a period not
exceeding three years. [RTP Nov ‘18]
Ans. Calculation of effective capital and maximum amount of monthly remuneration
(Rs.In lakhs)
Paid up equity share capital 180
Paid up Preference share capital 30
Reserve excluding Revaluation reserve (225-15) 210
Securities premium 60
Long term loans 60
Deposits repayable after one year 30
570
Less; Accumulated losses not written off 30
Investments 270
Effective capital for the purpose of managerial remuneration 270
Since PQ Ltd. is incurring losses and no special resolution has been passed by the company for payment
of remuneration, managerial remuneration will be calculated on the basis of effective capital of the
company, therefore maximum remuneration payable to the Managing Director should be @ Rs.60,00,000
per annum*.
*lf the effective capital is less then 5 Crore, limit of yearly remuneration payable should not exceed
Rs.60 lakhs as per Companies Act, 2013.
Q-3 Kapil Ltd. has authorized capital of Rs. 50 lakhs divided into 5,00,000 equity shares of Rs. 10 each. Their
books show the following balances as on 31st March, 2017:
Rs. Rs.
Inventory 1.4.2016 6,65,000 Bank Current Account 20,000
Discounts & Rebates allowed 30,000 Cash in hand 8,000
Carriage Inwards 57,500 Interest (bank overdraft) 1,11,000
Patterns 3,75,000 Calls in Arrear @ Rs.2 per share 10,000
Rate, Taxes and Insurance 55,000 Equity share capital 20,00,000
Furniture & Fixtures 1,50,000 (2,00,000 shares of Rs.10 each)
Purchases 12,32,500 Bank Overdraft 12,67,000
Wages 13,68,000
Freehold Land 16,25,000 Trade Payables (for goods) 2,40,000
Plant & Machinery 7,50,000 Sales 36,17,000
Engineering Tools 1,50,000 Rent (Cr.) 30,000

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 Trade Receivables 4,00,500 Transfer fees received 6,500
Advertisement 15,000 Profit & Loss A/c (Cr.) 67,000
Commission & Brokerage 67,500 Repairs to Building 56,500
Business Expenses 56,000 Bed debts 25,500
The inventory (valued at cost or market value, which is lower) as on 31st March, 2017 was Rs. 7,08,000.
Outstanding liabilities for wages Rs.25,000 and business expenses Rs.36,000. Dividend declared @ 12% on
paid-up capital and it was decided to transfer to reserve @ 2.5% of profits.
Charge depreciation on closing written down amount of Plant & Machinery @ 5%, Engineering Tools @ 20%;
Patterns @ 10%; and Furniture & Fixtures @10%. Provide 25,000 as doubtful debts after writing off Rs.16,000 as
bad debts. Provide for income tax @ 30%. Corporate Dividend Tax Rate @ 17.304 (wherein Base Rate is 15%).
You are required to prepare Statement of Profit & Loss for the year ended 31st March, 2017 and Balance
Sheet as on that date. [RTP May ‘18]
Ans. Kapil Ltd.
Balance Sheet as at 31st March, 2017
Particulars Note No. Rs.
I Equity and Liabilities
(1) Shareholders’ Funds
(a) Share Capital 1 19,90,000
(b) Reserves and Surplus 2 59,586
(2) Current Liabilities
(a) Trade Payables 2,40,500
(b) Other Current Liabilities 3 13,28,000
(c) Short-Term Provisions 4 4,07,414
Total 40,25,500
II ASSETS
(1) Non-Current Assets
(a) Fixed Assets
(i) Tangible Assets 5 29,30,000
(2) Current Assets
(a) Inventories 7,08,000
(b) Trade Receivables 6 3,59,500
(c) Cash and Cash Equivalents 7 28,000
Total 40,25,500
Kapil Ltd.
Statement of Profit and Loss for the year ended 31st March, 2017
Particular Note No. (Rs.)
I Revenue from Operations 36,17,000
II Other Income 8 36,500
III Total Revenue [I + II] 36,53,500
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 IV Expenses:
Cost of purchases 12,32,500
Changes in Inventories [6,65,000-7,08,000] (43,000)
Employee Benefits Expenses 9 13,93,000
Finance Costs 10 1,11,000
Depreciation and Amortization Expenses 1,20,000
Other Expenses 11 4,40,000
Total Expenses 32,53,500
V Profit before Tax (III-IV) 4,00,000
VI Tax Expenses @ 30% (1,20,000)
VII Profit for the period 2,80,000
Notes Accounts :
1. Share Capital
Authorized Capital
5,00,000 Equity Shares of Rs 10 each 50,00,000
Issued Capital
2,00,000 Equity Shares of Rs. 10 each 20,00,000
Subscribed Capital and fully paid
1,95,000 Equity Shares of Rs.10 each 19,50,000
Subscribed Capital but not fully paid
5,000 Equity Shares of Rs.10 each Rs. 8 paid 40,000
(Call unpaid Rs.10,000) 19,90,000
2. Reserves and Surplus
General Reserve 7,000
Surplus i.e. Balance in Statement of Profit & Loss:
Opening Balance 67,000
Add: Profit for the period 2,80,000
Less; Transfer to Reserve @ 2.5% (7,000)
Less; Equity Dividend [12% of (20,00,000-10,000)] (2,38,800)
Less; Corporate Dividend Tax (Working note) (48,614) 52,586
59,586
3. Other Current Liabilites
Bank Orverdraft 12,67,000
Outstanding expenses (25,000 + 36,000) 61,000
13,28,000
4. Short term Provisions
Provision for Tax 1,20,000
Equity dividend payable 2,38,800
Corporate Dividend Tax 48,614
4,07,414
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5. Tangible Assets
Particulars Value given Depreciation Depreciation Writen down
(Rs.) rate Charged value
(Rs.) at the end
Land 16,25,000 - 16,25,000
Plant & Machinery 7,50,000 5% 37,500 7,12,500
Furniture & Fixtures 1,50,000 10% 15,000 1,35,000
Patterns 3,75,000 10% 37,500 3,37,500
Engineering Tools 1,50,000 20% 30,000 1,20,000
30,50,000 1,20,000 29,30,000
6. Trade Receivables
Trade receivables (4,00,500 - 16,000) 3,84,500
Less : Provision for doubtful debts 25,000
3,59,500
7. Cash & Cash equivalent
Cash Balance 8,000
Bank Balance in current A/c 20,000
28,000
8. Other Income
Miscellaneos Income (Transfer fees) 6,500
Rental Income 30,000
36,500
9. Employee benefits expenses
Wages 13,68,000
Add : Outstanding wages 25,000
13,93,000
10. Finance Cost
Interest on Bank overdraft 1,11,000
11. Other Expenses
Carriage Inward 57,500
Discount & Rebats 30,000
Advertisement 15,000
Rate, Taxes and Insurance 55,000
Repairs to Buildings 56,500
Commission & Brokerage 67,500
Miscellaneous Expenses [56,000+36,000] (Business Expenses) 92,000
Bad Debts [25,500+16,000] 41,500
Provision for Doubtful Debts 25,000
4,40,000

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 Working Note
Calculation of grossing up of dividend:
Particulars Rs.
Dividend distributed by Company 2,38,800
Add: Increase for the purpose of grossing up of dividend 42,141
2,38,800 x[15/(1 00-1 5)]
Gross dividend 2,80,941
Dividend distribution tax @ 17.304% 48,614
Q-4 Shweta Ltd. has the Authorised Capital of Rs. 15,00,000 consisting of 6,000 6% Preference shares of
Rs.100 each and 90,000 equity Shares of Rs.10 each. T he following was the Trial Balance of the Company
as on 31st March, 2018:
Particulars Dr. Cr.
Investment in Shares at cost 1,50,000
Purchases 14,71,500
Selling Expenses 2,37,300
Inventory as at the beginning of the year 4,35,600
Salaries and Wages 1,56,000
Cash on Hand 36,000
Interim Preference dividend for the half year to 30th September 18,000
Bills Receivable 1,24,500
Interest on Bank overdraft 29,400
Interest on Debentures upto 30th Sep (1st half year) 11,250
Debtors 1,50,300
Trade payables 2,63,550
Freehold property at cost 10,50,000
Furniture at cost less depreciation of Rs. 45,000 1,05,000
6% Preference share capital 6,00,000
Equity share capital fully paid up 6,00,000
5% mortgage debentures secured on Freehold properties 4,50,000
Income tax paid in advance for the current year 30,000
Dividends 12,750
Profit and Loss A/c (opening balance) 85,500
Sales (Net) 20,11,050
Bank overdraft secured by hypothecation of stocks and receivables 4,50,000
Technical knowhowfees at cost paid during the year 4,50,000
Audit fees 18,000
Total 44,72,850 44,72,850
You are required to prepare the Profit and Loss Statement for the year ended 31st March, 2018 and the
Balance Sheet as on 31st March, 2018 as per Schedule III of the Companies Act, 2013 after taking into
account the following -

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 1. Closing Stock was valued at Rs.4,27,500.
2. Purchases include Rs.15,000 worth of goods and articles distributed among valued customers.
3. Salaries and Wages include Rs.6,000 being Wages incurred for installation of Electrical Fittings which
were recorded under "Furniture".
4. Bills Receivable include Rs. 4,500 being dishonoured bills. 50% of which had been considered
irrecoverable.
5. Bills Receivable of Rs.6,000 maturing after 31st March were discounted.
6. Depreciation on Furniture to be charged at 10% on Written Down Value. Investment in shares is to be
treated as non-current investments.
7. Interest on Debentures for the half year ending on 31st March was due on that date.
8. Provide Provision for taxation Rs.12,000.
9. Technical KnowhowFees is to be written off over a period of 10 years.
10. Salaries and Wages include Rs.30,000 being Director's Remuneration.
11. Trade receivables include Rs.18,000 due for more than six months. [RTP May ‘19]
Ans. Statement of Profit and Loss of Shweta Ltd. forthe year ended 31st March, 2018
Particular Note Rs.
I Revenue from Operations 20,11,050
II Other income (Divided income) 12,750
III Total Revenue (I &+ II) 20,23,800
IV Expenses:
(a) Purchases (14,71,500 - Advertisement Expenses 15,000) 14,56,500
(b) Changes in Inventories of finished Goods / 8,100
Work in progress (4,35,600 -4,27,500)
(c) Employee Benefits expense 9 1,20,000
(d) Finance costs 10 51,900
(e) Depreciation & Amortization Expenses [10% of (1,05,000+6,000)] 11,100
(f) Other Expenses 11 3,47,550
Total Expenses 19,95,150
V Profit before exceptional, extraordinary itemsand tax (III-IV) 28,650
VI Exceptional items -
VII Profit before extra ordinary itemsand tax (V-IV) 28,650
VIII Extraordinary items -
IX Profit before tax (VII-VI II) 28,650
X Tax expense:
Current Tax 12,000
XI Profit/Loss for the period (after tax) 16,650

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 Balance sheet of Shweta Ltd. as on 31st March, 2018
Particular as on 31st March Note
I
(1) Shareholders' funds:
(a) Share capital 1 12,00,000
(b) Reserves and surplus 2 66,150
(2) Non current liabilities:
Long term borrowings 3 4,50,000
(3) Current liabilities:
(a) Short term borrowings 4 4,50,000
(b) Trade payables 2,63,550
(c) Other current liabilities 5 29,250
Total 24,58,950
II ASSETS
(1) Non-current Assets
(a) Property, Plant & Equipment
(i) Tangible assets 6 11,49,900
(ii) Intangible assets 7 4,05,000
(b) Non current investments (Shares at cost) 1,50,000
Current Assets:
(a) Inventories 4,27,500
(b) Trade receivables 8 2,72,550
(c) Cash and Cash equivalents - Cash on hand 36,000
(d) Short term loans and advances -Income tax 18,000
(paid 30,000-Provision 12,000)
Total 24,58,950
Note : There is a Contingent liability for Bills receivable discounted with Bank Rs.6,000
Notes to accounts
Rs.
1. Share Capital
Authorized
90,000 Equity Shares of Rs.10 eahc 9,00,000
6,000 6% Preference shares of Rs.100 each 6,00,000 15,00,000
Issued, subscribed & called up
60,000, Equity Shares of Rs.10 each 6,00,000
6,000 6% Redeemable Preference Shares of 100 each 6,00,000 12,00,000
2. Reserves and Surplus
Balance as on 1st April, 2017 85,500
Add: Surplus for current year 16,650 1,02,150
Less; Preference Dividend 36,000
Balance as on 31st March, 2018 66,150

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 3. Long Term Borrowings
5% Mortgage Debentures (Secured against Freehold Properties) 4,50,000
4. Short Term Borrowings
Secured Borrowings: Loans Repayable on Demand
Overdraft from Banks (Secured by Hypothecation of Stocks & Receivables) 4,50,000
5. Other Current liabilities
Interest Accrued and due on Borrowings (5% Debentures) 11,250
Unpaid Preference Dividends 18,000 29,250
6. Tangible Fixed assets
Furniture
Furniture at Cost Less depreciation Rs.45,000 (as given in Trial Balance 1,05,000
Add: Depreciation 45,000
Cost of Furniture 1,50,000
Add: Installation charge of Electrical Fittings wrongly
included under the heading Salaries and Wages 6,000
Total Gross block of Furniture A/c 1,56,000
Accumulated Depreciation Account: Opening
Balance-given in Trial Balance 45,000
Depreciation for the year:
On Opening WDV at 10% i.e. (10%x 1,05,000) 10,500
On additional purchase during the year at 10% i.e. (10%x 6,000) 600
Less; Accumulated Depreciation 56,100 99,900
Freehold property (at cost) 10,50,000
11,49,900
7. Intangible Fixed Assets
Technical knowhow 4,50,000
Less; Written off 45,000 4,05,000
8. Trade Receivables
Sundry Debtors (a) Debt outstanding for more than six months 18,000
(b) Other Debts (refer Working Note) 1,34,550
Bills Receivable (1,24,500 -4,500) 1,20,000 2,72,550
9. Employee benefit expenses
Amount as per Trial Balance 1,56,000
Less; Wages incurred for installation of electrical fittings to be capitalised 6,000
Less; Directors' Remuneration shown separately 30,000
Balance amount 1,20,000
10. Finance Costs
Interest on bank overdraft 29,400
Interest on debentures 22,500 51,900

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 11. Other Expenses
Payment to the auditors 18,000
Director's remuneration 30,000
Selling expenses 2,37,300
Technical knowhow written of (4,50,000/10) 45,000
Advertisement (Goods and Articles Distributed) 15,000
Bad Debts (4,500 x50%) 2,250 3,47,550
Working Note
Calculation of Sundrya Debtors-Other debts
Sundry Debtors as given in Trial Balance 1,50,300
Add Back : Bill receivable Dishonoured 4,500
1,54,800
Less : Bad Debts written off - 50% Rs.4,500 (2,250)
Adjusted Sundry Debtor 1,52,550
Less : Debts due for more than 6 monht (as per information given) (18,000)
Total of other Debtors i.e. Debtors outstanding for less than 6 monht 1,34,550
Q-5 From the following particulars furnished by the Prashant Ltd., prepare the Balance Sheet as at 31 st
March, 2019 as required by Schedule III of the Companies Act, 2013 :
Particulars Debit (`) Credit (`)
Equity share capital (face value of ` 10 each) 15,00,000
Calls-in-arrears 5,000
Land 5,50,000
Building 4,85,000
Plant & machinery 5,60,000
General reserve 2,70,000
Loan from State Financial Corporation 2,10,000
Inventories 3,15,000
Provision for taxation 72,000
Trade receivables 2,95,000
Short-term loans & advances 58,500
Profit & loss account 1,06,800
Cash in hand 37,300
Cash at bank 2,85,000
Unsecured loans 1,65,000
Trade payables ________ 2,67,000
Total 25,90,800 25,90,800
The following additional information is also provided :
(1) 10,000 equity shares were issued for consideration other than cash.
(2) Trade receivables of ` 55,000 are due for more than six months.

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 (3) The cost of building and plant & machinery is ` 5,50,000 and ` 6,25,000 respectively.
(4) The loan from State Financial Corporation is secured by hypothecation of plant & machinery. The
balance of ` 2,10,000 in this account is inclusive of ` 10,000 for interest accrued but not due.
(5) Balance at Bank included ` 15,000 with Aakash Bank Ltd., which is not a scheduled bank.
[Sugg.Nov.’19,10 Marks]
Ans.(a) Prashant Ltd.
Balance Sheet as on 31st March, 2019
Particulars Notes `
Equity and Liabilities
1 Shareholders’ funds
a Share capital 1 14,95,000
b Reserves and Surplus 2 3,76,800
2 Non-current liabilities
Long-term borrowings 3 3,65,000
3 Current liabilities
a Trade Payables 2,67,000
b Other current liabilities 4 10,000
c Short-term provisions 5 72,000
Total 25,85,800
Assets
1 Non-current assets
Property, Plant and Equipment 6 15,95,000
2 Current assets
a Inventories 3,15,000
b Trade receivables 7 2,95,000
c Cash and bank balances 8 3,22,300
d Short-term loans and advances 58,500
Total 25,85,800
Notes to accounts
`
1 Share Capital
Equity share capital
Issued & subscribed & fully paid up
1,50,000 Equity Shares of ` 10 each
(of the above 10,000 shares have been issued
for consideration other than cash) 15,00,000
Less: Calls in arrears (5,000) 14,95,000

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 2 Reserves and Surplus
General Reserve 2,70,000
Profit & Loss balance 1,06,800
Total 3,76,800
3 Long-term borrowings
Secured
Loan from State Financial Corporation (2,10,000-10,000)
(Secured by hypothecation of Plant and Machinery) 2,00,000
Unsecured Loan 1,65,000
Total 3,65,000
4 Other current liabilities
Interest accrued but not due on loans (SFC) 10,000
5 Short-term provisions
Provision for taxation 72,000
6 Property, Plant & Equipment
Land 5,50,000
Building 5,50,000
Less: Depreciation(b.f.) (65,000) 4,85,000
Plant & Machinery 6,25,000
Less: Depreciation (b.f.) (65,000) 5,60,000
Total 15,95,000
7 Trade receivables
Outstanding for a period exceeding six months 55,000
Other Amounts 2,40,000
Total 2,95,000
8 Cash and bank balances
Cash and cash equivalents Cash at bank 2,85,000
Cash in hand 37,300
Other bank balances Nil
Total 3,22,300
Q-6 The following extract of Balance Sheet of Prabhat Ltd. (Non-investment Company) was obtained:
Balance Sheet (Extract) as on 31st March, 2019
Liabilities
Issued and subscribed capital:
30,000,12% preference shares of ` 100 each (fully paid) 30,00,000
24,00,000 equity shares of ` 10 each, ` 8 paid up 1,92,00,000
Share suspense account 40,00,000

Reserves and Surplus:

Securities premium 1,00,000

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 Capital reserves (` 3,00,000 is revaluation reserve) 3,90,000
Secured loans:
12% debentures 1,30,00,000
Unsecured loans:
Public deposits 7,40,000
Current liabilities:
Trade payables 6,90,000
Cash credit from SBI (short term) 9,30,000
Assets
Investments in shares, debentures etc. 1,50,00,000
Profit & loss account (Dr. balance) 30,50,000
Share suspense account represents application money received on shares, the allotment of which is
not yet made.
You are required to compute effective capital as per the provisions of Schedule V. Would your answer
differ if Prabhat Ltd. is an investment company ? [Sugg.Nov.’19, 5 Marks]
Ans. Computation of effective capital
Where Prabhat Ltd. Is a Where Prabhat Ltd. is
non-investment company ` an investment company `
Paid-up share capital —
30,000, 12% Preference shares 30,00,000 30,00,000
24,00,000 Equity shares of ` 8 paid up 1,92,00,000 1,92,00,000
Capital reserves (3,90,000 – 3,00,000) 90,000 90,000
Securities premium 1,00,000 1,00,000
12% Debentures 1,30,00,000 1,30,00,000
Public Deposits 7,40,000 7,40,000
(A) 36,130,000 36,130,000
Investments 1,50,00,000 —
Profit and Loss account (Dr. balance) 30,50,000 30,50,000
(B) 1,80,50,000 30,50,000
Effective capital (A–B) 1,80,80,000 3,30,80,000
Q-7 Futura Ltd. had the following items under the head “Reserves and Surplus” in the Balance Sheet as on
31st March, 2019:
Amount Rs. in lakhs
Securities Premium Account 80
Capital Reserve 60
General Reserve 90
The company had an accumulated loss of Rs. 250 lakhs on the same date, which it has disclosed under
the head “Statement of Profit and Loss” as asset in its Balance Sheet. Comment on accuracy of this
treatment in line with Schedule III to the Companies Act, 2013. [MTP Oct. ‘19, 4 Marks]

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Ans. Note 6 (B) given under Part I of Schedule III to the Companies Act, 2013 provides that debit balance of
Statement of Profit and Loss (after all allocations and appropriations) shall be shown as a negative
figure under the head ‘Surplus’. Similarly, the balance of ‘Reserves and Surplus’, after adjusting negative
balance of surplus, shall be shown under the head ‘Reserves and Surplus’ even if the resulting figure is
in the negative. In this case, the debit balance of profit and loss i.e. Rs. 250 lakhs exceeds the total of all
the reserves i.e. Rs. 230 lakhs. Therefore, balance of ‘Reserves and Surplus’ after adjusting debit balance
of profit and loss is negative by Rs. 20 lakhs, which should be disclosed on the face of the balance sheet.
Thus the treatment done by the company is incorrect.
Q-8 PQ Ltd., a non-investment company has been incurring losses for the past few years. The company
provides the following information for the current year:
(Rs. in lakhs)
Paid up equity share capital 180
Paid up Preference share capital 30
Reserves (including Revaluation reserve Rs. 15 lakhs) 225
Securities premium 60
Long term loans 60
Deposits repayable after one year 30
Application money pending allotment 1080
Accumulated losses not written off 30
Investments 270
PQ Ltd. has only one whole-time director, Mr. Hello. You are required to calculate the amount of
maximum remuneration that can be paid to him as per provisions of Part II of Schedule XIII, if no special
resolution is passed at the general meeting of the company in respect of payment of remuneration for
a period not exceeding three years. [MTP Oct. ‘19, 4 Marks]
Ans. Calculation of effective capital and maximum amount of monthly remuneration
(Rs. in lakhs)
Paid up equity share capital 180
Paid up Preference share capital 30
Reserve excluding Revaluation reserve (225- 15) 210
Securities premium 60
Long term loans 60
Deposits repayable after one year 30
570
Less: Accumulated losses not written off (30)
Investments (270)
Effective capital for the purpose of managerial remuneration 270
Since PQ Ltd. is incurring losses and no special resolution has been passed by the company for payment
of remuneration, managerial remuneration will be calculated on the basis of effective capital of the
company, therefore maximum remuneration payable to the Managing Director should be @ Rs. 60,00,000
per annum.
Note: Revaluation reserve and application money pending allotment are not included while computing
effective capital of PQ Ltd.

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Q-9 From the following particulars furnished by Alpha Ltd., prepare the Balance Sheet as on 31st March
20X1 as required by Part I, Schedule III of the Companies Act, 2013.
Particulars Debit Rs. Credit Rs.
Equity Share Capital (Face value of Rs. 100 each) 50,00,000
Call in Arrears 5,000
Land & Building 27,50,000
Plant & Machinery 26,25,000
Furniture 2,50,000
General Reserve 10,50,000
Loan from State Financial Corporation 7,50,000
Inventory:
Raw Materials 2,50,000
Finished Goods 10,00,000 12,50,000
Provision for Taxation 6,40,000
Trade receivables 10,00,000
Short term Advances 2,13,500
Profit & Loss Account 4,33,500
Cash in Hand 1,50,000
Cash at Bank 12,35,000
Unsecured Loan 6,05,000
Trade payables (for Goods and Expenses) 8,00,000
Loans & advances from related parties 2,00,000
The following additional information is also provided:
(i) 10,000 Equity shares were issued for consideration other than cash,
(ii) Trade receivables of Rs. 2,60,000 are due for more than 6 months,
(iii) The costofthe Assets were:
Building Rs. 30,00,000, Plant & Machinery Rs. 35,00,000 and Furniture Rs. 3,12,500
(iv) The balance of Rs. 7,50,000 in the Loan Account with State Finance Corporation is inclusive of Rs.
37,500 for Interest Accrued but not Due. The loan is secured by hypothecation of Plants Machinery.
(v) Balance at Bank includes Rs. 10,000 with Omega Bank Ltd., which is not a Scheduled Bank,
(vi) Transfer Rs. 20,000 to general reserve is proposed by Board of directors
(vii) Board of directors has declared dividend of 5% on the paid up capital. The dividend distribution tax
liability is Corporate Dividend Tax Rate @ 17.304 (wherein Base Rate is 15%).
[MTP March ‘19, MTP March ‘18, 20 Marks]

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Ans. Alpha Ltd.
Balance Sheet as on 31st March, 20X1
Particular Notes Rs.
Equity and Liabilities
1 Shareholders’ funds
a Share capital 1 49,95,000
b Reserves and Surplus 2 11,82,907
2 Non-current liabilities
Long-term borrowings 3 13,17,500
3 Current liabilities
a Trade Payables 8,00,000
b Other current liabilities 4 3,38,093
c Short term provisions 5 6,40,000
d Short term borrowings 2,00,000
Total 94,73,500
Assets
1 Non-current assets
Property, Plant & equipment
Tangible assets 6 56,25,000
2 Current assets
a Inventories 7 12,50,000
b Trade receivables 8 10,00,000
c Cash and bank balances 9 13,85,000
d Short-term loans and advances 2,13,500
Total 94,73,500
Notes to accounts
Rs.
1. Share Capital
Equity share capital
Issued & subscribed & called up
50,000 Equity Shares of Rs. 100 each
(of the above 10,000 shares have been issued for
consideration other than cash) 50,00,000
Less; Calls in arrears (5,000) 49,95,000
Total 49,95,000
2 Reserves and Surplus
General Reserve 10,50,000
Add: current year transfer 20,000 10,70,000

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 Profit & Loss balance
Profit for the year 4,33,500
Less; Appropriations:
Transfer to General reserve (20,000)
Dividend Payable (Refer W N) (2,49,750)
DOT on dividend (Refer W N) (50,843) 1,12,907
Total 11,82,907
3 Long-term borrowings
Secured Term Loan
State Financial Corporation Loan (7,50,000-37,500)
(Secured by hypothecation of Plant and Machinery) 7,12,500
Unsecured Loan 6,05,000
Total 13,17,500
4 Other current liabilities
Interest accrued but not due on loans (SFC) 37,500
Dividend (Refer W N) 2,49,750
DOT on dividend (Refer W N) 50,843 3,00,593
3,38,093
5 Short-term provisions
Provision for taxation 6,40,000
6 Tangible assets
Land and Building 30,00,000
Less; Depreciation (2,50,000) (b.f.) 27,50,000
Plants Machinery 35,00,000
Less; Depreciation (8,75,000) (b.f.) 26,25,000
Furniture & Fittings 3,12,500
Less; Depreciation (62,500) (b.f.) 2,50,000
Total 56,25,000
7 Inventories
Raw Materials 2,50,000
Finished goods 10,00,000
Total 12,50,000
8 Trade receivables
Outstanding for a period exceeding six months 2,60,000
Other Amounts 7,40,000
Total 10,00,000

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 9 Cash and bank balances
Cash and cash equivalents
Cash at bank
with Scheduled Banks 12,25,000
with others (Omega Bank Ltd.) 10,000 12,35,000
Cash in hand 1,50,000
Other bank balances Nil
Total 13,85,000
Working Note :
Calculation of grossing-up of dividend
Particular Rs.
Dividend distributed Aplha Ltd. (5% of 49,95,000) 2,49,750
Add : Increases for the purpose of grossing up of dividend

 15 
 100 - 15 x 2, 49, 750  44,074
 
Gross dividend 2,93,824
Q-10 The following extract of Balance Sheet of X Ltd. (a non-investment company) was obtained:
Balance Sheet (Extract) as on 31st March, 2017
Liabilities Rs.
Issued and subscribed capital:
20,000,14% preference shares of Rs. 100 each fully paid 20,00,000
1,20,000 Equity shares of Rs. 100 each, Rs. 80 paid-up 96,00,000
Capital reserves (Rs. 1,50,000 is revaluation reserve) 1,95,000
Securities premium 50,000
15% Debentures 65,00,000
Unsecured loans: Public deposits repayable after one year 3,70,000
Investment in shares, debentures, etc. 75,00,000
Profit and Loss account (debit balance) 15,00,000
You are required to compute Effective Capital as per the provisions of Schedule V to Companies Act, 2013.
[[MTP March ‘18, MTP March ‘19, 5 Marks]
Ans. Computation of effective capital :
Rs.
Paid-up share capital
20,000, 14% Preference shares 20,00,000
1,20,000 Equity shares 96,00,000
Capital reserves (excluding revaluation reserve) 45,000
Securities premium 50,000

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 15% Debentures 65,00,000
Public Deposits 3,70,000
(A) 1,85,65,000
Investments 75,00,000
Profit and Loss account (Dr. balance) 15,00,000
(B) 90,00,000
Effective capital (A-B) 95,65,000
Q-11 State under which head the following accounts should be classified in Balance Sheet, as per Schedule III
of the Companies Act, 2013:
(i) Share application money received in excess of issued share capital.
(ii) Share option outstanding account.
(iii) Unpaid matured debenture and interest accrued thereon.
(iv) Uncalled liability on shares and other partly paid investments.
(v) Calls unpaid.
(vi) Intangible Assets under development.
(vii) Money received against share warrant.
(viii) Cash equivalents. [MTP April ‘19, 5 Marks]
Ans.
(i) Current Liabilities/Other Current Liabilities
(ii) Shareholders' Fund / Reserve & Surplus
(iii) Current liabilities/Other Current Liabilities
(iv) Contingent Liabilities and Commitments
(v) Shareholders' Fund / Share Capital
(vi) Fixed Assets
(vii) Shareholders' Fund/Money received against share warrants
(viii) Current Assets
Q-12 From the following particulars furnished by Megha Ltd., prepare the Balance Sheet as on 31st March
20X1 as required by Part I, Schedule III of the Companies Act, 2013.
Particulars Debit Rs. Credit Rs.
Equity Share Capital (Face value of Rs. 100 each) 50,00,000
Call in Arrears 5,000
Land & Building 27,50,000
Plant & Machinery 26,25,000
Furniture 2,50,000
General Reserve 10,50,000
Loan from State Financial Corporation 7,50,000
Inventory:

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 Raw Materials 2,50,000
Finished Goods 10,00,000 12,50,000
Provision for Taxation 6,40,000
Trade receivables 10,00,000
Short term Advances 2,13,500
Profit & Loss Account 4,33,500
Cash in Hand 1,50,000
Cash at Bank 12,35,000
Unsecured Loan 6,05,000
Trade payables (for Goods and Expenses) 8,00,000
Loans & advances from related parties 2,00,000
The following additional information is also provided:
(i) 10,000 Equity shares were issued for consideration other than cash.
(ii) Trade receivables of Rs. 2,60,000 are due for more than 6 months.
(iii) The cost of the Assets were: Building Rs. 30,00,000, Plant & Machinery Rs. 35,00,000 and Furniture Rs.
3,12,500
(iv) The balance of Rs. 7,50,000 in the Loan Account with State Finance Corporation is inclu sive of Rs. 37,500
for Interest Accrued but not Due. The loan is secured by hypothecation of Plant & Machinery.
(v) Balance at Bank includes Rs. 10,000 with Omega Bank Ltd., which is not a Scheduled Bank.
(vi) Transfer of Rs. 20,000 to general reserve is proposed by the Board of directors.
[MTP Aug. ‘18, 16 Marks]
Ans. Megha Ltd.
Balance Sheet as on 31st March, 20X1
Particulars Notes Rs.
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 49,95,000
b Reserves and Surplus 2 14,83,500
2 Non-current liabilities
Long-term borrowings 3 13,17,500
3 Current liabilities
a Trade Payables 8,00,000
b Other current liabilities 4 37,500
c Short-term provisions 5 6,40,000
d Short-term borrowings 2,00,000
Total 94,73,500

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 Assets
1 Non-current assets
Fixed assets
Tangible assets 6 56,25,000
2 Current assets
a Inventories 7 12,50,000
b Trade receivables 8 10,00,000
c Cash and bank balances 9 13,85,000
d Short-term loans and advances 2,13,500
Total 94,73,500
Notes to accounts
Rs.
1 Share Capital
Equity share capital
Issued & subscribed & called up
50,000 Equity Shares of Rs. 100 each
(of the above 10,000 shares have been issued for
consideration other than cash) 50,00,000
Less: Calls in arrears (5,000) 49,95,000
Total 49,95,000
2 Reserves and Surplus
General Reserve 10,50,000
Add: current year transfer 20,000 10,70,000
Profit & Loss balance
Profit for the year 4,33,500
Less: Appropriations:
Transfer to General reserve (20,000) 4,13,500
Total 14,83,500
3 Long-term borrowings
Secured Term Loan
State Financial Corporation Loan (7,50,000-37,500)
(Secured by hypothecation of Plant and Machinery) 7,12,500
Unsecured Loan 6,05,000
Total 13,17,500
4 Other current liabilities
Interest accrued but not due on loans (SFC) 37,500

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 5 Short-term provisions
Provision for taxation 6,40,000
6 Tangible assets
Land and Building 30,00,000
Less: Depreciation (2,50,000) (b.f.) 27,50,000
Plant & Machinery 35,00,000
Less: Depreciation (8,75,000) (b.f.) 26,25,000
Furniture & Fittings 3,12,500
Less: Depreciation (62,500)(b.f.) 2,50,000
Total 56,25,000
7 Inventories
Raw Materials 2,50,000
Finished goods 10,00,000
Total 12,50,000
8 Trade receivables
Outstanding for a period exceeding six months 2,60,000
Other Amounts 7,40,000
Total 10,00,000
9 Cash and bank balances
Cash at bank
with Scheduled Banks 12,25,000
with others (Omega Bank Ltd.) 10,000 12,35,000
Cash in hand 1,50,000
Other bank balances Nil
Total 13,85,000
Q-13 The following is the Draft Profit & Loss A/c of Mudra Ltd., the year ended 31st March, 20X1:
Rs. Rs.
To Administrative, Selling and By Balance b/d 5,72,350
distribution expenses 8,22,542 By Balance from Trading A/c 40,25,365
By Subsidies received from Govt. 2,73,925
To Directors fees 1,34,780
To Interest on debentures 31,240
To Managerial remuneration 2,85,350
To Depreciation on fixed assets 5,22,543
To Provision for Taxation 12,42,500
To General Reserve 4,00,000
To Investment Revaluation Reserve 12,500
To Balance c/d 14,20,185 ________
48,71,640 48,71,640
Depreciation on fixed assets as per Schedule II of the Companies Act, 2013 was Rs.5,75,345. You are
required to calculate the maximum limits of the managerial remuneration as per Companies Act, 2013.
[MTP Aug. ‘18, 5 Marks]

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Ans. Calculation of net profit u/s 198 of the Companies Act, 2013
Rs. Rs.
Balance from Trading A/c 40,25,365
Add : Subsidies received from Government 2,73,925
42,99,290
Less : Administrative, selling and distribution expenses 8,22,542
Director’s fees 1,34,780
Interest on debentures 31,240
Depreciation on fixed assets as per Schedule II 5,75,345 (15,63,907)
Profit u/s 198 27,35,383
Maximum Managerial remuneration under Companies Act, 2013= 11% of Rs.27,35,383= Rs.3,00,892.
Q-14 From the following particulars furnished by Happy Ltd., prepare the Balance Sheet as on 31st March
2018 as required by Part I, Schedule III of the Companies Act.
Particulars Debit Rs. Credit Rs.
Equity Share Capital (Face value of Rs. 100 each) 50,00,000
Call in Arrears 5,000
Land & Building 27,50,000
Plant & Machinery 26,25,000
Furniture 2,50,000
General Reserve 10,50,000
Loan from State Financial Corporation 7,50,000
Stock:
Raw Materials 2,50,000
Finished Goods 10,00,000 12,50,000
Provision for Taxation 6,40,000
Sundry Debtors 10,00,000
Advances 2,13,500
Profit & Loss Account 4,33,500
Cash in Hand 1,50,000
Cash at Bank 12,35,000
Unsecured Loan 6,05,000
Sundry Creditors (for Goods and Expenses) 10,00,000
The following additional information is also provided:
(i) 10,000 Equity shares were issued for consideration other than cash.
(ii) Debtors of Rs. 2,60,000 are due for more than 6 months.
(iii) The cost of the Assets were: Building Rs. 30,00,000, Plant & Machinery Rs. 35,00,000 and Furniture
Rs. 3,12,500

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 (iv) The balance of Rs. 7,50,000 in the Loan Account with State Finance Corporation is inclusive of Rs.
37,500 for Interest Accrued but not Due. The loan is secured by hypothecation of Plant & Machinery.
(v) Balance at Bank includes Rs. 10,000 with Global Bank Ltd., which is not a Scheduled Bank.
[MTP Oct. ‘18, 15 Marks]
Ans. Happy Ltd.
Balance Sheet as on 31st March, 2018
Particulars Notes Rs.
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 49,95,000
b Reserves and Surplus 2 14,83,500
2 Non-current liabilities
Long-term borrowings 3 13,17,500
3 Current liabilities
a Trade Payables 10,00,000
b Other current liabilities 4 37,500
c Short-term provisions 5 6,40,000
Total 94,73,500
Assets
1 Non-current assets
Fixed assets
Tangible assets 6 56,25,000
2 Current assets
a Inventories 7 12,50,000
b Trade receivables 8 10,00,000
c Cash and cash equivalents 9 13,85,000
d Short-term loans and advances 2,13,500
Total 94,73,500
Notes to accounts
Rs.
1 Share Capital
Equity share capital
Issued & subscribed & called up
50,000 Equity Shares of Rs. 100 each
(of the above 10,000 shares have been issued for
consideration other than cash) 50,00,000
Less: Calls in arrears (5,000) 49,95,000
Total 49,95,000

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 2 Reserves and Surplus
General Reserve 10,50,000
Surplus (Profit & Loss A/c) 4,33,500
Total 14,83,500
3 Long-term borrowings
Secured Term Loan
State Financial Corporation Loan (7,50,000 - 37,500)
(Secured by hypothecation of Plant and Machinery) 7,12,500
Unsecured Loan 6,05,000
Total 13,17,500
4 Other current liabilities
Interest accrued but not due on loans (SFC) 37,500
5 Short-term provisions
Provision for taxation 6,40,000
6 Tangible assets
Land and Building 30,00,000
Less: Depreciation (2,50,000) 27,50,000
Plant & Machinery 35,00,000
Less: Depreciation (8,75,000) 26,25,000
Furniture & Fittings 3,12,500
Less: Depreciation (62,500) 2,50,000
Total 56,25,000
7 Inventories
Raw Materials 2,50,000
Finished goods 10,00,000
Total 12,50,000
8 Trade receivables
Outstanding for a period exceeding six months 2,60,000
Other Amounts 7,40,000
Total 10,00,000
9 Cash and cash equivalents
Cash at bank with Scheduled Banks 12,25,000
with others (Global Bank Ltd.) 10,000 12,35,000
Cash in hand 1,50,000
Total 13,85,000

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Q-15 (a) The following balance appeared in the books of Oliva Company Ltd. as on 31-03-2019.
Particulars ` Particulars `
Inventory 01-04-2018 Sales 17,10,000
-Raw Material 30,000 Interest 3,900
-Finished goods 46,500 76,500 Profit and Loss A/c 48,000
Purchases 12,15,000 Share Capital 3,15,000
Manufacturing Expenses 2,70,000 Secured Loans:
Short–term 4,500
Long-term 21,000 25,500
Salaries and wages 40,200 Fixed Deposits (unsecured):
Short -term 1,500
General Charges 16,500 Long - term 3,300 4,800
Interim Dividend 27,000 Trade payables 3,27,000
paid (inclusive of
Dividend Distribution Tax)
Building 1,01,000
Plant and Machinery 70,400
Furniture 10,200
Motor Vehicles 40,800
Stores and Spare Parts Consumed 45,000
Investments:
Current 4,500
Non-Current 7,500 12,000
Trade receivables 2,38,500
Cash in Bank 2,71,100 ________
24,34,200 24,34,200
From the above balance and the following information, prepare the company’s Profit and Loss Account
for the year ended 31st March, 2019 and Company’s Balance Sheet as on that date:
1. Inventory on 31st March,2019 Raw material ` 25,800 & finished goods ` 60,000.
2. Outstanding Expenses: Manufacturing Expenses ` 67,500 & Salaries & Wages ` 4,500.
3. Interest accrued on Securities ` 300.
4. General Charges prepaid ` 2,490.
5. Provide depreciation: Building @ 2% p.a., Machinery @ 10% p.a., Furniture @ 10% p.a. & Motor
Vehicles @ 20% p.a.
6. Current maturity of long term loan is ` 1,000.
7. The Taxation provision of 40% on net profit is considered.

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 (b) The following extract of Balance Sheet of X Ltd. (a non-investment company) was obtained:
Balance Sheet (Extract) as on 31st March, 2019
Liabilities `
Authorized capital:
15,000, 14% preference shares of ` 100 15,00,000
1,50,000 Equity shares of ` 100 each 1,50,00,000
1,65,00,000
Issued and subscribed capital:
15,000, 14% preference shares of ` 100 each fully paid 15,00,000
1,20,000 Equity shares of ` 100 each, ` 80 paid-up 96,00,000
Capital reserves (` 1,50,000 is revaluation reserve) 1,95,000
Securities premium 50,000
15% Debentures 65,00,000
Investment in shares, debentures, etc. 75,00,000
Profit and Loss account (debit balance) 15,25,000
You are required to compute Effective Capital as per the provisions of Schedule V to the Companies
Act, 2013. [RTP Nov ‘19]
Ans. (a) Oliva Company Ltd.
Statement of Profit and loss for the year ended 31.03.2019
(` )
Particulars Note Amount
I Revenue from operations 17,10,000
II Other income (3,900 +300) 4,200
III Total Revenue (I +II) 17,14,200
IV Expenses:
Cost of materials consumed 10 12,64,200
Purchases of inventory-in-trade --
Changes in inventories of finished goods, work-in-progress
and inventory-in-Trade 11 (13,500)
Employee benefit expenses 12 44,700
Finance costs --
Depreciation and amortization expenses 18,240
Other expenses 13 3,51,510
Total Expenses 16,65,150
V Profit before exceptional and extraordinary items and tax 49,050
VI Exceptional items --
VII Profit before extraordinary items and tax 49,050
VIII Extraordinary items --

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 IX Profit before tax 49,050
X Tax expense (40% of 49,050) 19,620
XI Profit/Loss for the period from continuing operations 29,430
Oliva Company Ltd.
Balance Sheet for the year ended 31.03.2019
Particulars Note Amount
1 Equity and Liabilities
(i) Shareholders’ funds
(a) Share Capital 3,15,000
(b) Reserves and surplus 1 50,430
2) Non-current liabilities
(a) Long-term borrowings 2 23,300
(3) Current Liabilities
(a) Short -term borrowings 3 6,000
(b) Trade payables 3,27,000
(c) Other current liability 4 73,000
(d) Short term provision 5 19,620
8,14,350
II ASSETS
(1) Non current assets
(a) Property, Plant & equipment
(i) Tangible assets 6 2,04,160
(b) Non-current investments 7,500
(2) Current assets
(a) Current investments 4,500
(b) Inventories 7 85,800
(c) Trade receivables 2,38,500
(d) Cash and cash equivalents 2,71,100
(e) Short-term loans and advances 8 2,490
(f) Other current assets 9 300
8,14,350
Notes to accounts
No Particulars Amount Amount
1. Reserve & Surplus
Profit & Loss Account: Balance b/f 48,000
Net Profit for the year 29,430
Less: Interim Dividend including DDT (27,000) 50,430

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 2. Long term borrowings
Secured loans (21,000 less current maturities 1,000) 20,000
Fixed Deposits: Unsecured 3,300 23,300
3. Short term borrowings
Secured loans 4,500
Fixed Deposits -Unsecured 1,500 6,000
4. Other current liabilities
Expenses Payable (67,500 + 4,500) 72,000
Current maturities of long term borrowings 1,000 73,000
5. Short term provisions
Provision for Income tax 19,620
6. Tangible Assets
Building 1,01,000
Less: Depreciation @ 2% ( 2,020) 98,980
Plant & Machinery 70,400
Less: Depreciation @10% (7,040) 63,360
Furniture 10,200
Less: Depreciation @10% (1,020) 9,180
Motor vehicles 40,800
Less: Depreciation @20% ( 8,160) 32,640 2,04,160
7 Inventory:
Raw Material 25,800
Finished goods 60,000 85,800
8. Short term Loans & Advances
General Charges prepaid 2,490
9. Other Current Assets:
Interest accrued 300
10. Cost of material consumed
Opening inventory of raw Material & Stores 30,000
Add: Purchases 12,15,000
Stores & Spare parts consumed (45,000) 12,90,000
Less: Closing inventory (25,800) 12,64,200
11. Changes in inventory of Finished Goods & WIP
Closing Inventory of Finished Goods 60,000
Less: Opening Inventory of Finished Goods 46,500 13,500
12. Employee Benefit expenses
Salary & Wages (40,200 + 4,500) 44,700

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 13. Other Expenses:
Manufacturing Expenses 3,37,500
(2,70,000 + 67,500)
General Charges (16,500 - 2,490) 14,010 3,51,510
(b) Computation of Effective Capital
`
Paid-up share capital-
15,000, 14% Preference shares 15,00,000
1,20,000 Equity shares 96,00,000
Capital reserves (excluding revaluation reserve) 45,000
Securities premium 50,000
15% Debentures 65,00,000
(A) 1,76,95,000
Investments 75,00,000
Profit and Loss account (Dr. balance) 15,25,000
(B) 90,25,000
Effective capital (A-B) 86,70,000
Q-16 Shweta Ltd. has the Authorised Capital of Rs. 15,00,000 consisting of 6,000 6% Preference shares of
Rs.100 each and 90,000 equity Shares of Rs.10 each. T he following was the Trial Balance of the Company
as on 31st March, 2018:
Particulars Dr. Cr.
Investment in Shares at cost 1,50,000
Purchases 14,71,500
Selling Expenses 2,37,300
Inventory as at the beginning of the year 4,35,600
Salaries and Wages 1,56,000
Cash on Hand 36,000
Interim Preference dividend for the half year to 30th September 18,000
Bills Receivable 1,24,500
Interest on Bank overdraft 29,400
Interest on Debentures upto 30th Sep (1st half year) 11,250
Debtors 1,50,300
Trade payables 2,63,550
Freehold property at cost 10,50,000
Furniture at cost less depreciation of Rs. 45,000 1,05,000
6% Preference share capital 6,00,000
Equity share capital fully paid up 6,00,000
5% mortgage debentures secured on Freehold properties 4,50,000

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 Income tax paid in advance for the current year 30,000
Dividends 12,750
Profit and Loss A/c (opening balance) 85,500
Sales (Net) 20,11,050
Bank overdraft secured by hypothecation of stocks and receivables 4,50,000
Technical knowhowfees at cost paid during the year 4,50,000
Audit fees 18,000
Total 44,72,850 44,72,850
You are required to prepare the Profit and Loss Statement for the year ended 31st March, 2018 and the
Balance Sheet as on 31st March, 2018 as per Schedule III of the Companies Act, 2013 after taking into
account the following -
1. Closing Stock was valued at Rs.4,27,500.
2. Purchases include Rs.15,000 worth of goods and articles distributed among valued customers.
3. Salaries and Wages include Rs.6,000 being Wages incurred for installation of Electrical Fittings which
were recorded under "Furniture".
4. Bills Receivable include Rs. 4,500 being dishonoured bills. 50% of which had been considered
irrecoverable.
5. Bills Receivable of Rs.6,000 maturing after 31st March were discounted.
6. Depreciation on Furniture to be charged at 10% on Written Down Value. Investment in shares is to
be treated as non-current investments.
7. Interest on Debentures for the half year ending on 31st March was due on that date.
9. Provide Provision for taxation Rs.12,000.
10. Technical KnowhowFees is to be written off over a period of 10 years.
11. Salaries and Wages include Rs.30,000 being Director's Remuneration.
12. Trade receivables include Rs.18,000 due for more than six months. [RTP May ‘19]
Ans.
(a) Statement of Profit and Loss of Shweta Ltd. forthe year ended 31st March, 2018
Particular Note Rs.
I Revenue from Operations 20,11,050
II Other income (Divided income) 12,750
III Total Revenue (I &+ II) 20,23,800
IV Expenses:
(a) Purchases (14,71,500 - Advertisement Expenses 15,000) 14,56,500
(b) Changes in Inventories of finished Goods / 8,100
Work in progress (4,35,600 -4,27,500)
(c) Employee Benefits expense 9 1,20,000
(d) Finance costs 10 51,900
(e) Depreciation & Amortization Expenses [10% of (1,05,000+6,000)] 11,100
(f) Other Expenses 11 3,47,550
Total Expenses 19,95,150

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 V Profit before exceptional, extraordinary itemsand tax (III-IV) 28,650
VI Exceptional items -
VII Profit before extra ordinary itemsand tax (V-IV) 28,650
VIII Extraordinary items -
IX Profit before tax (VII-VI II) 28,650
X Tax expense:
Current Tax 12,000
XI Profit/Loss for the period (after tax) 16,650
Balance sheet of Shweta Ltd. as on 31st March, 2018
Particular as on 31st March Note
I
(1) Shareholders' funds:
(a) Share capital 1 12,00,000
(b) Reserves and surplus 2 66,150
(2) Non current liabilities:
Long term borrowings 3 4,50,000
(3) Current liabilities:
(a) Short term borrowings 4 4,50,000
(b) Trade payables 2,63,550
(c) Other current liabilities 5 29,250
Total 24,58,950
II ASSETS
(1) Non-current Assets
(a) Property, Plant & Equipment
(i) Tangible assets 6 11,49,900
(ii) Intangible assets 7 4,05,000
(b) Non current investments (Shares at cost) 1,50,000
Current Assets:
(a) Inventories 4,27,500
(b) Trade receivables 8 2,72,550
(c) Cash and Cash equivalents - Cash on hand 36,000
(d) Short term loans and advances -Income tax 18,000
(paid 30,000-Provision 12,000)
Total 24,58,950
Note : There is a Contingent liability for Bills receivable discounted with Bank Rs.6,000

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 Notes to accounts
Rs.
1. Share Capital
Authorized
90,000 Equity Shares of Rs.10 eahc 9,00,000
6,000 6% Preference shares of Rs.100 each 6,00,000 15,00,000
Issued, subscribed & called up
60,000, Equity Shares of Rs.10 each 6,00,000
6,000 6% Redeemable Preference Shares of 100 each 6,00,000 12,00,000
2. Reserves and Surplus
Balance as on 1st April, 2017 85,500
Add: Surplus for current year 16,650 1,02,150
Less; Preference Dividend 36,000
Balance as on 31st March, 2018 66,150
3. Long Term Borrowings
5% Mortgage Debentures (Secured against Freehold Properties) 4,50,000
4. Short Term Borrowings
Secured Borrowings: Loans Repayable on Demand
Overdraft from Banks (Secured by Hypothecation of Stocks & Receivables) 4,50,000
5. Other Current liabilities
Interest Accrued and due on Borrowings (5% Debentures) 11,250
Unpaid Preference Dividends 18,000 29,250
6. Tangible Fixed assets
Furniture
Furniture at Cost Less depreciation Rs.45,000 (as given in Trial Balance 1,05,000
Add: Depreciation 45,000
Cost of Furniture 1,50,000
Add: Installation charge of Electrical Fittings wrongly
included under the heading Salaries and Wages 6,000
Total Gross block of Furniture A/c 1,56,000
Accumulated Depreciation Account: Opening
Balance-given in Trial Balance 45,000
Depreciation for the year:
On Opening WDV at 10% i.e. (10%x 1,05,000) 10,500
On additional purchase during the year at 10% i.e. (10%x 6,000) 600
Less; Accumulated Depreciation 56,100 99,900
Freehold property (at cost) 10,50,000
11,49,900
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 7. Intangible Fixed Assets
Technical knowhow 4,50,000
Less; Written off 45,000 4,05,000
8. Trade Receivables
Sundry Debtors (a) Debt outstanding for more than six months 18,000
(b) Other Debts (refer Working Note) 1,34,550
Bills Receivable (1,24,500 -4,500) 1,20,000 2,72,550
9. Employee benefit expenses
Amount as per Trial Balance 1,56,000
Less; Wages incurred for installation of electrical fittings to be capitalised 6,000
Less; Directors' Remuneration shown separately 30,000
Balance amount 1,20,000
10. Finance Costs
Interest on bank overdraft 29,400
Interest on debentures 22,500 51,900
11. Other Expenses
Payment to the auditors 18,000
Director's remuneration 30,000
Selling expenses 2,37,300
Technical knowhow written of (4,50,000/10) 45,000
Advertisement (Goods and Articles Distributed) 15,000
Bad Debts (4,500 x50%) 2,250 3,47,550
Working Note
Calculation of Sundrya Debtors-Other debts
Sundry Debtors as given in Trial Balance 1,50,300
Add Back : Bill receivable Dishonoured 4,500
1,54,800
Less : Bad Debts written off - 50% Rs.4,500 (2,250)
Adjusted Sundry Debtor 1,52,550
Less : Debts due for more than 6 month (as per information given) (18,000)
Total of other Debtors i.e. Debtors outstanding for less than 6 monht 1,34,550
Q-17 The following extract of Balance Sheet of Gaurav Ltd. was obtained:
Balance Sheet (Extract) as on 31st March, 2018
Liabilities Rs.
Authorised capital:
90,000, 14% preference shares of Rs.100 90,00,000
9,00,000 Equity shares of Rs.100 each 9,00,00,000
9,90,00,000
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 Issued and subscribed capital:
67,500, 14% preference shares of Rs.100 each fully paid 67,50,000
5,40,000 Equity shares of Rs.100 each, Rs.80 paid-up 4,32,00,000
Share suspense account 90,00,000
Reserves and surplus
Capital reserves (Rs.6,75,000 is revaluation reserve) 8,87,500
Securities premium 2,25,000
Secured loans:
15% Debentures 2,92,50,000
Unsecured loans:
Public deposits 16,65,000
Cash credit loan from SBI (short term) 5,92,500
Current Liabilities:
Trade Payables 15,50,500
Assets:
Investment in shares, debentures, etc. 3,37,50,000
Profit and Loss account (Dr. balance) 68,62,500
Share suspense account represents application money received on shares, the allotment of which is
not yet made. You are required to compute effective capital as per the provisions of Schedule V. Would
your answer differ if Gaurav Ltd.is an investment company? [RTP May ‘19]
Ans. Computation of effective capital :
Where Gaurav Where Gaurav
Ltd. is a non- Lts. is an
investement investment
company company
Paid-up share capital - 67,500, 14% Preference shares 67,50,000 67,50,000
5,40,000 Equity shares 4,32,00,000 4,32,00,000
Capital reserves 2,02,500 2,02,500
Securities premium 2,25,000 2,25,000
15% Debentures 2,92,50,000 2,92,50,000
Public Deposits 16,65,000 16,65,000
(A) 8,12,92,500 8,12,92,500
Investments 3,37,50,000 -
Profit and Loss account (Dr. balance) 68,62,500 68,62,500
(B) 4,06,12,500 68,62,500
Effective capital (A-B) 4,06,80,000 7,44,30,000

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Q-18 The following is the Draft Profit & Loss A/c of Harsha Ltd., the year ended 31st March, 20X1:
` `
To Administrative, Selling and By Balance b/d 28,61,750
” distribution expenses 41,12,710 Balance from Trading A/c 201,26,825
Directors fees 6,73,900 “
”” Interest on debentures 1,56,200
Managerial remuneration 14,26,750 “ Subsidies received from Govt. 13,69,625
” Depreciation on fixed assets 26,12,715
” Provision for Taxation 62,12,500
” General Reserve 20,00,000
” Investment Revaluation
Reserve 62,500
” Balance c/d 71,00,925 _________
243,58,200 243,58,200
Depreciation on fixed assets as per Schedule II of the Companies Act, 2013 was ` 28,76,725. You are
required to calculate the maximum limits of the managerial remuneration as per Companies Act, 2013.
[RTP-May’2020]
Ans. Calculation of net profit u/s 198 of the Companies Act, 2013
` `
Balance from Trading A/c 201,26,825
Add: Subsidies received from Government 13,69,625
214,96,450
Less: Administrative, selling and distribution expenses 41,12,710
Director’s fees 6,73,900
Interest on debentures 1,56,200
Depreciation on fixed assets as per Schedule II 28,76,725 (78,19,535)
Profit u/s 198 136,76,915
Maximum Managerial remuneration under Companies Act, 2013 = 11% of ` 136,76,915= ` 15,04,461
Q-19 The following extract of Balance Sheet of Gaurav Ltd. was obtained:
Balance Sheet (Extract) as on 31st March, 2018
Liabilities Rs.
Authorised capital:
90,000, 14% preference shares of Rs.100 90,00,000
9,00,000 Equity shares of Rs.100 each 9,00,00,000
9,90,00,000
Issued and subscribed capital:
67,500, 14% preference shares of Rs.100 each fully paid 67,50,000

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 5,40,000 Equity shares of Rs.100 each, Rs.80 paid-up 4,32,00,000
Share suspense account 90,00,000
Reserves and surplus
Capital reserves (Rs.6,75,000 is revaluation reserve) 8,87,500
Securities premium 2,25,000
Secured loans:
15% Debentures 2,92,50,000
Unsecured loans:
Public deposits 16,65,000
Cash credit loan from SBI (short term) 5,92,500
Current Liabilities:
Trade Payables 15,50,500
Assets:
Investment in shares, debentures, etc. 3,37,50,000
Profit and Loss account (Dr. balance) 68,62,500
Share suspense account represents application money received on shares, the allotment of which is
not yet made. You are required to compute effective capital as per the provisions of Schedule V. Would
your answer differ if Gaurav Ltd.is an investment company? [RTP May ‘19]
Ans. Computation of effective capital :
Where Gaurav Where Gaurav
Ltd. is a non- Lts. is an
investement investment
company company
Paid-up share capital - 67,500, 14% Preference shares 67,50,000 67,50,000
5,40,000 Equity shares 4,32,00,000 4,32,00,000
Capital reserves 2,02,500 2,02,500
Securities premium 2,25,000 2,25,000
15% Debentures 2,92,50,000 2,92,50,000
Public Deposits 16,65,000 16,65,000
(A) 8,12,92,500 8,12,92,500
Investments 3,37,50,000 -
Profit and Loss account (Dr. balance) 68,62,500 68,62,500
(B) 4,06,12,500 68,62,500
Effective capital (A-B) 4,06,80,000 7,44,30,000

---0---0---

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 UNIT II
CASH FLOW STATEMENT

Q-1 The following information was provided by PQR Ltd. for the year ended 31st March, 2019 :
(1) Gross Profit Ratio was 25% for the year, which amounts to ` 3,75,000.
(2) Company sold goods for cash only.
(3) Opening inventory was lesser than closing inventory by ` 25,000.
(4) Wages paid during the year ` 5,55,000.
(5) Office expenses paid during the year ` 35,000.
(6) Selling expenses paid during the year ` 15,000.
(7) Dividend paid during the year ` 40,000 (including dividend distribution tax).
(8) Bank Loan repaid during the year ` 2,05,000 (included interest ` 5,000)
(9) Trade Payables on 31st March, 2018 were ` 50,000 and on 31st March, 2019 were ` 35,000.
(10) Amount paid to Trade payables during the year ` 6,10,000
(11) Income Tax paid during the year amounts to ` 55,000
(Provision for taxation as on 31st March, 2019 ` 30,000).
(12) Investments of ` 8,20,000 sold during the year at a profit of ` 20,000.
(13) Depreciation on furniture amounts to ` 40,000.
(14) Depreciation on other tangible assets amounts to ` 20,000.
(15) Plant and Machinery purchased on 15th November, 2018 for ` 3,50,000.
(16) On 31st March, 2019 ` 2,00,000, 7% Debentures were issued at face value in an exchange for a
plant.
(17) Cash and Cash equivalents on 31st March, 2018 ` 2,25,000.
(A) Prepare cash flow statement for the year ended 31st March, 2019, using direct method.
(B) Calculate cash flow from operating activities, using indirect method.
[Sugg. May ‘19, 10 Marks]
Ans. PQR Ltd.
Cash Flow Statement for the year ended 31st March, 2019
(Using direct method)
Particulars ` `
Cash flows from Operating Activities
Cash sales (` 3,75,000/25%) 15,00,000
Less: Cash payments for trade payables (6,10,000)
Wages Paid (5,55,000)
Office and selling expenses ` (35,000 + 15,000) (50,000) (12,15,000)
Cash generated from operations before taxes 2,85,000

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 Income tax paid (55,000)
Net cash generated from operating activities (A) 2,30,000
Cash flows from Investing activities
Sale of investments ` (8,20,000 + 20,000) 8,40,000
Payments for purchase of Plant & machinery (3,50,000)
Net cash used in investing activities (B) 4,90,000
Cash flows from financing activities
Bank loan repayment (including interest) (2,05,000)
Dividend paid (including dividend distribution tax) (40,000)
Net cash used in financing activities (C) (2,45,000)
Net increase in cash (A+B+C) 4,75,000
Cash and cash equivalents at beginning of the period 2,25,000
Cash and cash equivalents at end of the period 7,00,000
(ii) ‘Cash Flow from Operating Activities’ by indirect method
`
Net Profit for the year before tax and extraordinary items 2,80,000
Add: Non-Cash and Non-Operating Expenses:
Depreciation 60,000
Interest Paid 5,000
Less: Non-Cash and Non-Operating Incomes:
Profit on Sale of Investments (20,000)
Net Profit after Adjustment for Non-Cash Items 3,25,000
Less: Decrease in trade payables 15,000
Increase in inventory 25,000 (40,000)
Cash generated from operations before taxes 2,85,000
Working Note:
Calculation of net profit earned during the year
` `
Gross profit 3,75,000
Less: Office expenses, selling expenses 50,000
Depreciation 60,000
Interest paid 5,000 (1,15,000)
2,60,000
Add: Profit on sale of investments 20,000
Net profit before tax 2,80,000

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Q-2 J Ltd. presents you the following information for the year ended 31st March, 2019:
(Rs. in lacs)
(i) Net profit before tax provision 36,000
(ii) Dividend paid 10,202
(iii) Income-tax paid 5,100
(iv) Book value of assets sold 222
Loss on sale of asset 48
(v) Depreciation debited to P & L account 24,000
(vi) Capital grant received - amortized to P & L A/c 10
(vii) Book value of investment sold 33,318
Profit on sale of investment 120
(viii) Interest income from investment credited to P & L A/c 3,000
(ix) Interest expenditure debited to P & L A/c 12,000
(x) Interest actually paid (Financing activity) 13,042
(xi) Increase in working capital 67,290
[Excluding cash and bank balance]
(xii) Purchase of fixed assets 22,092
(xiii) Expenditure on construction work 41,688
(xiv) Grant received for capital projects 18
(xv) Long term borrowings from banks 55,866
(xvi) Provision for Income-tax debited to P & L A/c 6,000
Cash and bank balance on 1.4.2018 6,000
Cash and bank balance on 31.3.2019 8,000
You are required to prepare a cash flow statement as per AS-3 (Revised). [MTP Oct. ‘19, 12 Marks]
Ans. Cash Flow Statement as per AS 3
Rs. in lacs
Cash flows from operating activities: 36,000
Net profit before tax provision
Add: Non cash expenditures:
Depreciation 24,000
Loss on sale of assets 48
Interest expenditure (non operating activity) 12,000 36,048
72,048
Less: Non cash income
Amortisation of capital grant received (10)
Profit on sale of investments (non operating income) (120)
Interest income from investments (non operating income) (3,000) 3,130

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 Operating profit 68,918
Less: Increase in working capital (67,290)
Cash from operations 1,628
Less: Income tax paid (5,100)
Net cash generated from operating activities (3,472)
Cash flows from investing activities:
Sale of assets (222 . 48) 174
Sale of investments (33,318+120) 33,438
Interest income from investments 3,000
Purchase of fixed assets (22,092)
Expenditure on construction work (41,688)
Net cash used in investing activities (27,168)
Cash flows from financing activities:
Grants for capital projects 18
Long term borrowings 55,866
Interest paid (13,042)
Dividend paid (10,202)
Net cash from financing activities 32,640
Net increase in cash 2,000
Add: Cash and bank balance as on 1.4.2018 6,000
Cash and bank balance as on 31.3.2019 8,000
Q-3 The following figures have been extracted from the books of X Limited for the year ended on 31.3.2019.
You are required to prepare a cash flow statement as per AS 3 using indirect method.
(i) Net profit before taking into account income tax and income from law suits but after taking into
account the following items was ` 20 lakhs:
(a) Depreciation on Property, Plant & Equipment ` 5 lakhs.
(b) Discount on issue of Debentures written off ` 30,000.
(c) Interest on Debentures paid ` 3,50,000.
(d) Book value of investments ` 3 lakhs (Sale of Investments for ` 3,20,000).
(e) Interest received on investments ` 60,000.
(f) Compensation received ` 90,000 by the company in a suit filed.
(ii) Income tax paid during the year ` 10,50,000.
(iii) 15,000, 10% preference shares of ` 100 each were redeemed on 31.3.2019 at a premium of 5%.
Further the company issued 50,000 equity shares of ` 10 each at a premium of 20% on 2.4.2018.
Dividend on preference shares were paid at the time of redemption.
(iv) Dividend paid for the year 2017-2018 ` 5 lakhs and interim dividend paid ` 3 lakhs for the year
2018-2019.
(v) Land was purchased on 2.4.2018 for ` 2,40,000 for which the company issued 20,000 equity shares
of ` 10 each at a premium of 20% to the land owner as consideration.

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 (vi) Current assets and current liabilities in the beginning and at the end of the years were as detailed
below:
As on 31.3.2018 As on 31.3.2019
` `
Inventory 12,00,000 13,18,000
Trade receivables 2,58,000 2,53100
Cash in hand 1,96,300 35,300
Trade payables 2,11,000 2,11,300
Outstanding expenses 75,000 81,800
[RTP-May’20]
Ans. X Ltd.
Cash Flow Statement
for the year ended 31st March, 2019
` `
Cash flow from Operating Activities
Net profit before income tax and extraordinary items: 20,00,000
Adjustments for:
Depreciation on PPE 5,00,000
Discount on issue of debentures 30,000
Interest on debentures paid 3,50,000
Interest on investments received (60,000)
Profit on sale of investments (20,000) 8,00,000
Operating profit before working capital changes 28,00,000
Adjustments for:
Increase in inventory (1,18,000)
Decrease in trade receivable 4,900
Increase in trade payables 300
Increase in outstanding expenses 6,800 (1,06,000)
Cash generated from operations 26,94,000
Income tax paid (10,50,000)
16,44,000
Cash flow from extraordinary items:
Compensation received in a suit filed 90,000
Net cash flow from operating activities 17,34,000
Cash flow from Investing Activities
Sale proceeds of investments 3,20,000
Interest received on investments 60,000
Net cash flow from investing activities 3,80,000

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 Cash flow from Financing Activities
Proceeds by issue of equity shares at 20% premium 6,00,000
Redemption of preference shares at 5% premium (15,75,000)
Preference dividend paid (1,50,000)
Interest on debentures paid (3,50,000)
Dividend paid (5,00,000 + 3,00,000) (8,00,000)
Net cash used in financing activities (22,75,000)
Net decrease in cash and cash equivalents during the year (1,61,000)
Add: Cash and cash equivalents as on 31.3.2018 1,96,300
Cash and cash equivalents as on 31.3.2019 35,300
Note: Purchase of land in exchange of equity shares (issued at 20% premium) has not been considered
in the cash flow statement as it does not involve any cash transaction.
Q-4 From the following information, prepare a Cash Flow Statement for the year ended 31st March, 2019.
Balance Sheets
Particulars Note 31.03.2019 31.03.2018
(` ) (` )
I EQUITY AND LIABILITES
(1) Shareholder’s Funds
(a) Share Capital 1 3,50,000 3,00,000
(b) Reserves and Surplus 2 82,000 38,000
(2) Non-Current Liabilities
(3) Current Liabilities
(a) Trade Payables 65,000 44,000
(b) Other Current Liabilities 3 37,000 27,000
(c) Short term Provisions (provision for tax) 32,000 28,000
Total 5,66,000 4,37,000
II ASSETS
(1) Non-current Assets
(a) Tangible Assets 4 2,66,000 1,90,000
(b) Intangible Assets (Goodwill) 47,000 60,000
Non-Current Investments 35,000 10,000
(2) Current Assets
(a) Inventories 78,000 85,000
(b) Trade Receivables 1,08,000 75,000
(c) Cash & Cash Equivalents 32,000 17,000
Total 5,66,000 4,37,000

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 Note 1: Share Capital
Particulars 31.03.2019 (`) 31.03.2018 (`)
Equity Share Capital 2,50,000 1,50,000
8% Preference Share Capital 1,00,000 1,50,000
Total 3,50,000 3,00,000
Note 2: Reserves and Surplus
Particulars 31.03.2019 (`) 31.03.2018 (`)
General Reserve 30,000 20,000
Profit and Loss A/c 27,000 18,000
Capital Reserve 25,000 _____
Total 82,000 38,000
Note 3: Current Liabilities
Particulars 31.03.2019(`) 31.03.2018 (`)
Dividend declared 37,000 27,000
Note 4: Tangible Assets
Particulars 31.03.2019 (`) 31.03.2018 (`)
Land & Building 75,000 1,00,000
Machinery 1,91,000 90,000
Total 2,66,000 1,90,000
Additional Information:
(i) ` 18,000 depreciation for the year has been written off on plant and machinery and no depreciation
has been charged on Land and Building.
(ii) A piece of land has been sold out for ` 50,000 and the balance has been revalued, profit on such sale
and revaluation being transferred to capital reserve. There is no other entry in Capital Reserve
Account.
(iii) A plant was sold for ` 12,000 WDV being ` 15,000 on the date of sale (after charging depreciation).
(iv) Dividend received amounted to ` 2,100 which included pre-acquisition dividend of ` 600.
(v) An interim dividend of ` 10,000 including Dividend Distribution Tax has been paid.
(vi) Non-current investments given in the balance sheet represents investment in shares of other
companies.
(vii) Amount of provision for tax existing on 31.3.2018 was paid during the year 2018-19.
[RTP Nov ‘19]
Ans. Cash flow Statement for the year ending 31st March, 2019
Particulars ` `
1 Cash Flow from Operating Activities
A. Closing balance as per Profit and Loss Account 27,000
Less: Opening balance as per Profit and Loss Account (18,000)
Add: Dividend declared during the year 37,000
Add: Interim dividend paid during the year 10,000
Add: Transfer to reserve 10,000
Add: Provision for Tax 32,000

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 B. Net profit before taxation, and extra-ordinary item 98,000
C. Add: Items to be added
Depreciation 18,000
Loss on sale of Plant 3,000
Goodwill written off 13,000 34,000
D. Less: Dividend Income (1,500)
E. Operating profit before working capital changes [B + C - D] 1,30,500
F. Add: Decrease in Current Assets and Increase in Current Liabilities
Decrease in Inventories 7,000
Increase in Trade Payables 21,000 28,000
G. Less: Increase in Trade Receivables (33,000)
H Cash generated from operations (E+F-G) 1,25,500
I Less: Income taxes paid (28,000)
J Net Cash from (used in) operating activities 97,500
II. Cash Flows from investing activities:
Purchase of Plant (1,34,000)
Sale of Land 50,000
Sale of plant 12,000
Purchase of investments (25,600)
Dividend Received 2,100
Net cash used in investing activities (95,500)
III. Cash Flows from Financing Activities:
Proceeds from issue of equity share capital 1,00,000
Redemption of preference shares (50,000)
Interim Dividend (inclusive of DDT) paid (10,000)
Final dividend (inclusive of DDT) paid (27,000)
Net cash from financing activities 13,000
IV. Net increase in cash and cash equivalents (I+II+III) 15,000
V. Cash and cash equivalents at beginning of period 17,000
VI. Cash and cash equivalents at end of period (IV+V) 32,000
1. Land and Building Account
Particulars ` Particulars `
To Balance b/d 1,00,000 By Bank A/c (Sale) 50,000
To Capital Reserve A/c 25,000 By Balance c/d 75,000
(Profit on sale/revaluation) _______ _______
1,25,000 1,25,000

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 2. Plant and Machinery Account
Particulars ` Particulars `
To Balance b/d 90,000 By Depreciation A/c 18,000
To Bank A/c (Purchase) 1,34,000 By Bank A/c (sale) 12,000
By Profit and Loss A/c 3,000
(Loss on sale)
_______ By Balance c/d 1,91,000
2,24,000 2,24,000
3. Investments Account
Particulars ` Particulars `
To Balance b/d 10,000 By Bank A/c (Div. received) 600
To bank A/c (Purchase 25,600 By Balance c/d 35,000
35,600 35,600
Q-5 Preet Ltd. presents you the following information for the year ended 31st March, 2019:
(Rs. in lacs)
(i) Net profit before tax provision 72,000
(ii) Dividend paid 20,404
(iii) Income-tax paid 10,200
(iv) Book value of assets sold 444
Loss on sale of asset 96
(v) Depreciation debited to P & L account 48,000
(vi) Capital grant received - amortized to P & L A/c 20
(vii) Book value of investment sold 66,636
Profit on sale of investment 240
(viii) Interest income from investment credited to P & LA/c 6,000
(ix) Interest expenditure debited to P & L A/c 24,000
(x) Interest actually paid (Financing activity) 26,084
(xi) Increase in working capital 1,34,580
[Excluding cash and bank balance]
(xii) Purchase of fixed assets 44,184
(xiii) Expenditure on construction work 83,376
(xiv) Grant received for capital projects 36
(xv) Long term borrowings from banks 1,11,732
(xvi) Provision for Income-tax debited to P & L A/c 12,000
Cash and bank balance on 1.4.2018 12,000
Cash and bank balance on 31.3.2019 16,000
You are required to prepare a cash flow statement as per AS-3 (Revised). [RTP May ‘19]

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Ans. Cash Flow Statement as per AS 3
Rs. in lacs
Cash flows from operating activities:
Net profit before tax provision 72,000
Add: Non cash expenditures:
Depreciation 48,000
Loss on sale of assets 96
Interest expenditure (non-operating acivity) 24,000 72,096
1,44,096
Less: Non cash income
Amortisation of capital grant received (20)
Profit on sale of investments (non-operating income) (240)
Interest income from investments (non-operating income) (6,000) 6,260
Operating profit 1,37,836
Less; Increase in working capital 1,34,580
Cash from operations 3,256
Less; Income tax paid 10,200
Net cash generated from operating activities 6944
Cash flows from investing activities:
Sale of assets (444 - 96) 348
Sale of investments (66,636+240) 66,876
Interest income from investments 6,000
Purchase of fixed assets 44,184
Expenditure on construction work 83,376
Net cash used in investing activities 54,336
Cash flows from financing activities:
Grants for capital projects 36
Long term borrowings 1,11,732
Interest paid 26,084
Dividend paid 20,404
Net cash from financing activities 65,280
Net increase in cash 4,000
Add: Cash and bank balance as on 1.4.2018 12,000
Cash and bank balance as on 31.3.2019 16,000

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Q-6 The Balance Sheet of Harry Ltd. for the year ending 31st March, 2018 and 31st March, 2017 were
summarised as follows:
2018 (Rs.) 2017 (Rs.)
Equity share capital 1,20,000 1,00,000
Reserves:
Profit and Loss Account 9,000 8,000
Current Liabilities:
Trade Payables 8,000 5,000
Income tax pay able 3,000 2,000
Declared Dividends 4,000 2,000
1,44,000 1,17,000
Fixed Assets (at W.D.V) :
Building 19,000 20,000
Furniture & Fixture 34,000 22,000
Cars 25,000 16,000
Long Term Investments 32,000 28,000
Current Assets:
Inventory 14,000 8,000
Trade Receivables 8,000 6,000
Cash & Bank 12,000 17,000
1,44,000 1,17,000
The Profit and Loss account for the year ended 31st March, 2018 disclosed :
Rs.
Profit before tax 8,000
Income Tax (3,000)
Profit after tax 5,000
Declared Dividends (4,000)
Retained Profit 1,000
Further Information is available:
1. Depreciation on Building Rs.1,000.
2. Depreciation on Furniture & Fixtures for the year Rs.2,000.
3. Depreciation on Cars for the year Rs.5,000. One car was disposed during the year for Rs.3,400 whose
written down value was Rs.2,000.
4. Purchase investments for Rs.6,000.
5. Sold investments for Rs.10,000, these investments cost Rs.2,000.
You are required to prepare Cash Flow Statement as per AS-3 (revised) using indirect method.
[RTP Nov ‘18]

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Ans. Harry Ltd.
Cash Flow Statement for the year ended 31st March, 2018
Rs. Rs.
Cash flows from operating activities
Net Profit before taxation 8,000
Adjustments for:
Depreciation (1,000+2,000 +5,000) 8,000
Profit on sale of Investment (8,000)
Profit on sale of car (1,400)
Operating profit before working capital changes 6,600
Increase in Trade receivables (2,000)
Increase in inventories (6,000)
Increase in Trade payables 3,000
Cash generated from operations 1,600
Income taxes paid (2,000)
Net cash generated from operating activities (A) (400)
Cash flows from investing activities
Sale of car 3,400
Purchase of car (16,000)
Sale of Investment 10,000
Purchase of Investment (6,000)
Purchase of Furniture & fixtures (14,000)
Net cash used in investing activities (B) (22,600)
Cash flows from financing activities
Issue of shares for cash 20,000
Dividends paid* (2,000)
Net cash from financing activities(C) 18,000
Net decrease in cash and cash equivalents (A + B +C) (5,000)
Cash and cash equivalents at beginning of period 17,000
Cash and cash equivalents at end of period 12,000
* Dividend declared for the year ended 31st March, 2017 amounting Rs. 2,000 must have been paid in the
year 2017-18. Hence, it has been considered as cash outflow for preparation of cash flow statement of 2017-
18.
Working Notes:
1. Calculation of Income taxes paid
Rs.
Income tax expense for the year 3,000
Add: Income tax liability at the beginning of the year 2,000
5,000
Less: Income tax liability at the end of the year (3,000)
2,000

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 2. Calculation of Fixed assets acquisitions
Furniture & Fixtures (Rs.) Car (Rs.)
W.D.V. at 31.3.2018 34,000 25,000
Add back: Depreciation for the year 2,000 5,000
Disposals -- 2,000
36,000 32,000
Less; W.D.V. at 31. 3. 2017 (22,000) (16,000)
Acquisitions during 2016-2018 14,000 16,000
Q-7 A company provides you the following information:
(i) Total sales for the year were Rs. 398 crores out of which cash sales amounted to Rs.262 crores.
(ii) Receipts from credit customers during the year, aggregated Rs.134 crores.
(iii) Purchases for the year amounted to Rs.220 crores out of which credit purchase was 80%.
Balance in creditors as on
1.4.2016 Rs.84 crores
31.3.2017 Rs.92 crores
(iv) Suppliers of other consumables and services were paid Rs. 19 crores in cash, (v) Employees of the
enterprises were paid 20 crores in cash.
(vi) Fully paid preference shares of the face value of Rs.32 crores were redeemed. Equity shares of the
face value of Rs. 20 crores were allotted as fully paid up at premium of 20%.
(vii) Debentures of Rs.20 crores at a premium of 10% were redeemed. Debenture holders were issued
equity shares in lieu of their debentures.
(viii) Rs. 26 crores were paid by way of income tax.
(ix) A new machinery costing Rs.25 crores was purchased in part exchange of an old machinery. The
book value of the old machinery was Rs.13 crores. Through the negotiations, the vendor agreed to
take over the old machinery at a higher value of Rs.15 crores. The balance was paid in cash to the
vendor.
(x) Investment costing Rs 18 cores were sold at a loss of Rs.2 crores.
(xi) Dividends amounting Rs.15 crores (including dividend distribution tax of Rs.2.7 crores) was also
paid.
(xii) Debenture interest amounting Rs.2 crore was paid.
(xiii) On 31st March 2016, Balance with Bank and Cash on hand was Rs. 2 crores.
On the basis of the above information, you are required to prepare a Cash Flow Statement for the year
ended 31st March, 2017 (Using direct method). [RTP May ‘18]

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Ans. Cash flow statement (using direct method) for the year ended 31st March, 2017
(Rs. in crores) (Rs. In crores)
Cash flow from operating activities
Cash sales 262
Cash collected from credit customers 134
Less; Cash paid to suppliers for goods & services
and to employees (Refer Working Note) (251)
Cash from operations 145
Less; Income tax paid (26)
Net cash generated from operating activities 119
Cash flow from investing activities
Net Payment for purchase of Machine (25 - 15) (10)
Proceeds from sale of investments 16
Net cash used in investing activities 6
Cash flow from financing activities
Redemption of Preference shares (32)
Proceeds from issue of Equity shares 24
Debenture interest paid (2)
Dividend Paid (15)
Net cash used in financing activities (25)
Net increase in cash and cash equivalents 100
Add : Cash and cash equivalents as on 1-4-2016 2
Cash and cash equivalents as on 31-3-2017 102
Working Note:
Calculation of cash paid to suppliers of goods and services and to employees
(Rs. in crores)
Opening Balance in creditors Account 84
Add: Purchases (220x .8) 176
Total 220
Less; Closing balance in Creditors Account 92
Cash paid to suppliers of goods 168
Add: Cash purchases (220x .2) 44
Total cash paid for purchases to suppliers (a) 212
Add: Cash paid to suppliers of other consumables and services (b) 19
Add: Payment to employees (c) 20
Total cash paid to suppliers of goods & services and to employees [(a) + (b) + (c)] 251

---0---0---
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CHAPTER-5
Profit or Loss Pre and Post Incorporation

Q-1 The partners of C&G decided to convert their existing partnership business into a private limited called
CG trading Pvt. Ltd. with effect from 1.7.2018.
The same books of accounts were continued by the company which closed its accounts for the first
term on 31.3.2019. The summarized profit & loss account for the year ended 31.3.2019 is below:
Particulars ` in lakhs ` in lakhs
Turnover 245.00
Interest on investments 6.00 251.00
Less: Cost of goods sold 124.32
Advertisement 3.50
Sales Commission 7.00
Salaries 18.00
Managing Director’s Remuneration 6.00
Interest on Debenture 2.(XV
Rent 5.50
Bad debt 1.15
Underwriting Commission 1.00
Audit fees 3.00
Loss on sale of Investments 1.00
Depreciation 4.00 176.47
74.53
The following additional information was provided :
(i) The average monthly sales doubled from 1.7.2018, GP ratio was constant.
(ii) All investments were sold on 31.5.2018.
(iii) Average monthly salaries doubled from 1.10.2018.
(iv) The company occupied additional space from 1.7.2018 for which rent of ` 20,000 per month was
incurred.
(v) Bad debts recovered amounting to ` 60,000 for a sale madern 2016-17 has been deducted from
bad debts mentioned above.
(vi) Audit fees pertains to the company.
Prepare a statement apportioning the expenses between pre and post incorporation periods and
calculate the profit / loss for such periods. [Sugg.Nov.’19,10 Marks]

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Ans. C G Trading Private Limited
Statement showing calculation of Profit/Loss for Pre and Post Incorporation Periods
` In lakhs
Ratio Total Pre Post
Incorporation Incorporation
Sales 1:6 245.00 35.00 210.00
Interest on Investments Pre 6.00 6.00 -
Bad debts recovered Pre 0.60 0.60 -
(i) 251.6 41.60 210.00
Cost of goods sold 1:6 124.32 17.76 106.56
Advertisement 1:6 3.50 0.50 3.00
Sales commission 1:6 7.00 1.00 6.00
Salary (W.N.3) 1:5 18.00 3.00 15.00
Managing director’s remuneration Post 6.00 - 6.00
Interest on Debentures Post 2.00 - 2.00
Rent (W.N.4) 5.50 0.93 4.57
Bad debts (1.15 + 0.6) 1:6 1.75 0.25 1.50
Underwriting commission Post 1.00 - 1.00
Audit fees Post 3.00 - 3.00
Loss on sale of Investment Pre 1.00 1.00 -
Depreciation 1:3 4.00 1.00 3.00
(ii) 177.07 25.44 151.63
Net Profit [(i)-(ii) 74.53 16.16 58.37
Working Notes:
1. Calculation of Sales Ratio
Let the average sales per month be x
Total sales from 01.04.2018 to 30.06.2018 will be 3x
Average sales per month from 01.07.2018 to 31.03.2019 will be 2x
Total sales from 01.07.2018 to 31.03.2019 will be 2x X 9 =18x
Ratio of Sales will be 3x: 18x i.e. 3:18 or 1:6
2. Calculation of time Ratio
3 Months: 9 Months i.e. 1:3
3. Apportionment of Salary
Let the salary per month from 01.04.2018 to 30.09.2018 is x
Salary per month from 01.10.2018 to 31.03.2019 will be 2x
Hence, pre incorporation salary (01.04.2018 to 30.06.2018) = 3x
Post incorporation salary from 01.07.2018 to 31.03.2019 = (3x + 12x) i.e.15x
Ratio for division 3x: 15x or 1: 5

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 4. Apportionment of Rent ` In Lakhs
Total Rent 5.50
Less: additional rent from 1.7.2018 to 31.3.2019 1.80
Rent of old premises for 12 months 3.70
Pre Post
Apportionment in time ratio 0.93 2.77
Add: Rent for new space - 1.80
Total 0.93 4.57
Q-2 Tarun Ltd. was incorporated on 1st July, 2018 to acquire a running business of Vinay Sons with effect
from 1st April, 2018. During the year 2018-19, the total sales were ` 12,00,000 of which ` 2,40,000 were
for the first six months. The Gross Profit for the year is ` 4,15,000. The expenses debited to the Profit
and Loss account included:
(i) Director's fees ` 25,000
(ii) Bad Debts ` 6,500
(iii) Advertising ` 18,000 (under a contract amounting to ` 1,500 per month)
(iv) Company Audit Fees ` 15,000
(v) Tax Audit Fees ` 10,000
(1) Prepare a statement showing pre-incorporation and post incorporation profit for the year ended
31st March, 2019.
(2) Explain how profits are to be treated. [Sugg. May ‘19, 5 Marks]
Ans. Statement showing the calculation of Profits for the pre-incorporation and post-incorporation periods
For the year ended 31st March, 2019
Particulars Total Basis of Pre- Post
Amount Allocation incorporation incorporation
Gross Profit 4,15,000 Sales (1:9) 41,500 3,73,500
Less: Directors’ fee 25,000 Post 25,000
Bad debts 6,500 Sales (1:9) 650 5,850
Advertising 18,000 Time (1:3) 4,500 13,500
Company Audit Fees 15,000 Post 15,000
Tax Audit Fee 10,000 Sales (1:9) 1,000 9,000
Net Profit 3,40,500 35,350 3,05,150
Pre-incorporation profits to be transferred to capital reserve and post -incorporation profit to be
transferred to profit & Loss A/c.
Working Notes:
(i) Sales ratio
Particulars `
Sales for period up to 30.06.2018 (2,40,000 x 3/6) 1,20,000
Sales for period from 01.07.2018 to 31.03.2019 (12,00,000 –1,20,000) 10,80,000
Thus, Sales Ratio = 1 : 9 (1,20,000 : 10,80,000)

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 (ii) Time ratio
1st April, 2018 to 30 June, 2018: 1st July, 2018 to 31st March, 2019
= 3 months: 9 months = 1: 3
Thus, T ime Ratio is 1: 3
Q-3 Sun Limited took over the running business of a partnership firm M/s A & N Brothers with effect from
1st April, 2017. The company was incorporated on 1st September, 2017. The following profit and loss
account has been prepared for the year ended 31st March, 2018.
Particular ` Particular `
To salaries 1,33,000 By Gross Profit b/d 7,50,000
To rent 96,000
To carriage outward 75,000
To audit fees 12,000
To travelling expenses 66,000
To commission on sales 48,000
To printing and stationery 24,000
To electricity charges 30,000
To depreciation 80,000
To advertising expenses 24,000
To preliminary expenses 9,000
To Managing Director's remuneration 8,000
To Net Profit c/d 1,45,000 _______
7,50,000 7,50,000
Additional Information :
1. Trend of sales during April, 2017 to March, 2018 was as under:
April, May ` 85,000 per month
June, July ` 1,05,000 per month
August, September ` 1,20,000 per month
October, November ` 1,40,000 per month
December onward ` 1,50,000 per month
2. Sun Limited took over a machine worth ` 7,20,000 from A&N Brothers and purchased a new machine on
1st February, 2018 for ` 4,80,000. The company decides to provide depreciation @ 10% p.a.
3. The company occupied additional space from 1st October, 2017 @ rent of ` 6,000 per month.
4. Out of travelling expenses, ` 30,000 were incurred by office staff while remaining expenses were
incurred by salesmen.
5. Audit fees pertains to the company.
6. Salaries were doubled from the date of incorporation.
You are required to prepare a statement apportioning the expenses between pre and post in corporation
periods and calculate the profit/(loss) for such periods.
[Sugg. Nov.’18, 12 Marks]
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Ans. Statement showing calculation of profit for per and post incorporation periods For the year ended 31-
3-2018
Particulars Pre-incorporation Post- incorporation
period period
` `
Gross profit (1:2) 2,50,000 5,00,000
Less; Salaries (5:14) 35,000 98,000
Carriage outward (1:2) 25,000 50,000
Audit fee - 12,000
Travelling expenses (W.N.3) 24,500 41,500
Commission on sales (1:2) 16,000 32,000
Printing & stationary (5:7) 10,000 14,000
Rent (office building) (W.N.4) 25,000 71,000
Electricity charges (5:7) 12,500 17,500
Depreciation 30,000 50,000
Advertisement (1:2) 8,000 16,000
Preliminary expenses - 9,000
MD remuneration - 8,000
Pre-incorporation profit - ts/f to Capital reserve (Bal. Fig.) 64,000 -
Net profit (Bal. Fig.) - 81,000
Working Notes:
1. Time Ratio
Pre incorporation period = 1st April, 2017 to 31st August, 2017 i.e. 5 months
Post incorporation period is 7 months
Time ratio is 5: 7.
2. Sales ratio
April 85,000
May 85,000
June 1,05,000
July 1,05,000
August 1,20,000
5,00,000
September 1,20,000
Oct & Nov. 2,80,000
Dec. to March (1,50,000 x4) 6,00,000
10,00,000
5,00,000 : 10,00,000 = 1.2

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 3. Travelling expenses
` `
Pre-incorporation Post-incorporation
30,000 office staff (5:7) 12,500 17,500
36,000 sales (1:2) 12,000 24,000
24,500 41,500
4. Rent
`
Rent for additional space Rs.(6,000 x 6) 36,000
Remaining rent Rs. (96,000-36,000) 60,000
Pre-incorporation period (5/12 of 60,000) 25,000
Post- incorporation period Rs.35,000 + Rs.36,000 71,000
5. Salaries
Suppose x for a month in pre-incorporation period then salaries for preincorporation period = 5x salaries
for post incorporation period = 2x X 7 = 14x Ratio = 5:14
6. Depreciation
Rs. Rs Rs.
Pre- Post
incorporation incorporation
Total depreciation 80,000
Less: Dereciation exclusively for post incorporation period
(Rs.4,80,000 x 10 x 2/12) 8,000
72,000
Depreciation for pre-incorporation period Rs.72,000 x 5/12) 30,000
Depreciation for post incorporation period (Rs. 72,000 x 7/12) 42,000
30,000 50,000
Q-4 The promotors of Shiva Ltd. took over on behalf of the company a running business with effect from 1st
April 2017. The company got incorporated on 1st August 2017. The annual accounts were made up to
31st March, 2018 which revealed that the sales for the whole year totalled ` 2400 lakhs out of which
sales till 31st July, 2017 were for ` 600 lakhs. Gross profit ratio was 20%.
The expenses from 1st April 2017, till 31st March, 2018 were as follows:
Particular Rs. in lakhs
Salaries 75
Rent, rates and Insurance 30
Sundry Office expenses 72
Traveller’s Commission 20
Discount allowed 16
Bad Debts 6
Directors Fee 30
Tax Audit Fee 16
Depreciation on Tangible Assets 15
Debenture Interest 14

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 Prepare a statement showing the calculation of profits for the pre-incorporation and Post incorporation
periods. [Sugg. May ‘18, 10 Marks]
Ans. Statement Showing the calculation of Profits for the pre-incorporation and postincorporation periods
Particulars Total Basis of Pre- Post-
Amount Allocation incorporation incorporation
(Rs. in lakhs) (Rs. in lakhs) (Rs. in lakhs)
Gross Profit (20% of Rs. 2,400) 480 Sales 120 360
Less: Salaries 75 Time 25 50
Rent, rates and Insurance 30 Time 10 20
Sundry office expenses 72 Time 24 48
Travellers' commission 20 Sales 5 15
Discount allowed 16 Sales 4 12
Bad debts 8 Sales 2 6
Directors' fee 30 Post - 30
Tax Audit Fees* 16 Sales 4 12
Depreciation on tangible assets 15 Time 5 10
Debentures interest 14 Post - 14
Net Profit 184 41 143
* Tax Audit Fees allocated in the ratio of sales.
Thus, pre-incorporation profits is ` 41 lakhs and post- incorporation profit is ` 143 akhs.
Working Notes:
1. Sales ratio
(Rs. in lakh)
Sales for the whole year 2400
Sales up to 31st July, 2017 600
Therefore, sales for the period from 1st August, 2017 to 31st March 2018 1,800
Thus, saLe ration = 600:1800 = 1:3
2. Time ratio
1st April, 2017 to 31st July, 2017 : 1st August, 2017 to 31st March, 2018
= 4 monhts:8 month = 1:2, Thus, time ratio is 1:2.
Q-5 The Business carried on by Kamal under the name "K" was taken over as a running business with effect
from 1stApril, 2016 by Sanjana Ltd., which was incorporated on 1st July, 2016. The same set of books was
continued since there was no change in the type of business and the following particulars of profits for
the year ended 31st March, 2017 were available.
Rs. Rs.
Sales: Company period 40,000
Prior period 10,000 50,000
Selling Expenses 3,500
Preliminary Expenses written off 1,200

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 Salaries 3,600
Directors' Fees 1,200
Interest on Capital (Upto 30.6.2016) 700
Depreciation 2,800
Rent 4,800
Purchases 25,000
Carriage Inwards 1,019 43,819
Net Profit 6,181
The purchase price (including carriage inwards) for the post-incorporation period had increased by 10
percent as com pared to pre-incorporation period. No stocks were carried either at the beginning or at
the end.
You are required to prepare a statement showing the amount of pre and post-incorporation period
profits stating the basis of allocation of expenses.
OR
Following items appear in the Trial Balance of Beta Ltd. as on 31st March, 2017:
Particulars Amount
3,000 Equity Shares of Rs. 100 each 3,00,000
Securities Premium 40,000
Capital Redemption Reserve 30,000
General Reserve 1,00,000
Profit and Loss Account (Cr. Balance) 50,000
The company decided to issue to equity shareholders bonus shares at the rate of 1 share for every 3
shares held. Company decided that there should be the minimum reduction in free reserves. Pass
necessary Journal Entries in the books of Beta Ltd. [MTP April ‘19, 5 Marks]
Ans. Statement showing the calculation of profits/losses for pre incorporation and Post incorporation period
profits of Sanjana Ltd.
for the year ended 31st March, 2017
Particular Basis Pre Post
Rs. Rs.
Sales (given) 10,000 40,000
Less; Purchases 1:3.3 5,814 19,186
Carriage Inwards 1:3.3 237 782
Gross Profit (i) 3,949 20,032
Less; Selling Expenses 1:4 700 2,800
Preliminary Expenses 1,200
Salaries 1:3 900 2,700
Director Fees 1,200
Interest on capital 700
Depreciation 1:3 700 2,100
Rent 1:3 1,200 3,600
Total of Expenses (ii) 4,200 13,600
Capital Loss/Net Profit (i-ii) 251 6,432

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 Working Notes:
1 Sales Ratio =10,000:40,000 =1 :4
2 Time Ratio = 3:9 =1:3
3 Purchase Price Ratio
 Ratio is 3 : 9
But purchase price was 10% higher in the company period
 Ratio is3 :9 + 10% ie. 3:9.9=1:3.3.
Or
Capital Redemption Reserve A/c Dr. 30,000
Securities Premium A/c Dr. 40,000
General Reserve A/c Dr. 30,000
To Bonus to Shareholders 1,00,000
(Being issue of bonus shares by utilization of various
Reserves, as per resolution dated .......)
Bonus to Shareholders A/c Dr. 1,00,000
To Equity Share Capital 1,00,000
(Being capitalization of Profit)
Q-6 ABC Ltd. took over a running business with effect from 1st April, 2016. The company was incorporated
on 1st August, 2016. The following summarized Profit and Loss Account has been prepared for the year
ended 31.3.2017:
Rs. Rs.
To Salaries 48,000 By Gross profit 3,20,000
To Stationery 4,800
To Travelling expenses 16,800
To Advertisement 16,000
To Miscellaneous trade expenses 37,800
To Rent (office buildings) 26,400
To Electricity charges 4,200
To Director's fee 11,200
To Bad debts 3,200
To Commission to selling agents 16,000
To Tax Audit fee 6,000
To Debenture interest 3,000
To Interest paid to vendor 4,200
To Selling expenses 25,200
To Depreciation on fixed assets 9,600
To Net profit 87,600 _______
3,20,000 3,20,000

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 Additional information:
(a) Total sales for the year, which amounted to Rs. 19,20,000 arose evenly upto the date of 30.9.2016.
Thereafter they spurted to record an increase of two-third during the rest of the year.
(b) Rent of office building was paid @ Rs. 2,000 per month upto September, 2016 and thereafter it was
increased by Rs.400 per month.
(c) Travelling expenses include Rs. 4,800 towards sales promotion.
(d) Depreciation include Rs.600 for assets acquired in the post incorporation period.
(e) Purchase consideration was discharged by the company on 30th September, 2016 by issuing equity
shares of Rs.10 each.
Prepare Statement showing calculation of profits and allocation of expenses between pre and post
incorporation periods. [MTP April ‘18, 10 Marks]
Ans. Statement showing calculation of profits for pre and post incorporation periods for the year ended
31.3.2017
Particulars Pre incorporation Post incorporation
period period
Rs. Rs.
Gross profit (1:3) 80,000 2,40,000
Less; Salaries (1:2) 16,000 32,000
Stationery (1:2) 1,600 3,200
Advertisement (1:3) 4,000 12,000
Travelling expenses (W.N.3) 4,000 8,000
Sales promotion expenses (W.N.3) 1,200 3,600
Misc. trade expenses (1:2) 12,600 25,200
Rent (office building) (W.N.2) 8,000 18,400
Electricity charges (1:2) 1,400 2,800
Director's fee - 11,200
Bad debts (1:3) 800 2,400
Selling agents commission (1:3) 4,000 12,000
Audit fee (1:3) 1,500 4,500
Debenture interest - 3,000
Interest paid to vendor (2:1) (W.N.4) 2,800 1,400
Selling expenses (1:3) 6,300 18,900
Depreciation on fixed assets (W.N.5) 3,000 6,600
Capital reserve (Bal. Fig.) 12,800 -
Net profit (Bal. Fig.) - 74,800
Working Notes:
1. Time Ratio
Pre incorporation period = 1st April, 2016 to 31st July, 2016
i.e. 4 months
Post incorporation period is 8 months
Time ratio is 1: 2.
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 2. Sales ratio
Let the monthly sales for first 6 months (i.e. from 1.4.2016 to 30.09.16) be = x
Then, sales for 6 months = 6x
2 5
Monthly sales for next 6 months (i.e. from 1.10.16 to 31.3.2017) = x + x= x
3 3

5
Then, sales for next 6 months = x X 6 = 10x
3
Total sales for the year = 6x + 10x = 16x
Monthly sales in the pre incorporation period = Rs. 19,20,000/16 = Rs. 1,20,000
Total sales for pre-incorporation period = Rs. 1,20,000 x 4 = Rs.4,80,000
Total sales for post incorporation period = Rs. 19,20,000 - Rs.4,80,000=Rs. 14,40,000
Sales Ratio = 4,80,000 : 14,40,000= 1 : 3
3. Rent
Rs.
Rent for pre-incorporation period (Rs.2,000 x 4) 8,000 (pre)
Rent for post incorporation period
August,2016& September,2016 (Rs.2,000 x 2) 4,000
October,2016 to March,2017 (Rs.2,400 x 6) 14,400 18,400 (post)
4. Travelling expenses and sales promotion expenses
Pre Post
Rs. Rs.
Traveling expenses Rs.12,000 (i.e. Rs.16,800-Rs.4,800) distributed in 1:2 ratio
distributed in 1:2 ratio 40,00 8,000
Sales promotion expenses Rs. 4,800 distributed in 1:3 ratio 1,200 3,600
5. Interest paid to vendor till 30th September, 2016
Pre Post
Rs. Rs.
Rs.4,200
Interest for pre-incorporation period x4 2,800
6
Interest for post incorporation period i.e. for
Rs.4,200
August, 2016 & September, 2016 = x2 1,400
6
6. Depreciation
Pre Post
Rs. Rs.
Total depreciation 9,600
Less:Depreciation exclusinvely for post incorporation period 600 600
9,000
 4
Depreciation for pre-incorporation period 9,000 3,000
 12 

 8
Depreciation for post-incorporation period 9, 000  6,000
 12 

30,000 6,600

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Q-7 Megha Ltd. was incorporated on 1.8.2016 to take over the running business of M/s Happy with assets
from 1.4.2016. The accounts of the company were closed on 31.3.2017.
The average monthly sales during the first four months of the year (2016-17) was twice the average
monthly sales during each of the remaining eight months.
You are required to compute time ratio and sales ratio for pre and post incorporation periods.
[MTP March ‘18, 5 Marks]
Ans. Time ration :
Pre-incorporation period (1.4.2016 to 1.8.2016) = 4 months
Post incorporation period (1.8.2016 to 31.3.2017) = 8 months
Time ratio = 4:8 or 1 : 2
Sales ratio:
Average monthly sale before incorporation was twice the average sale per month of the post
incorporation period. If weightage for each post-incorporation month is x, then
Weighted sales ratio = 4 x 2x : 8 x 1x = 8x : 8x or 1 : 1
Q-8 Roshani & Reshma working in partnership, registered a joint stock company under the name of Happy
Ltd. on May 31st 2018 to take over their existing business. The summarized Profit & Loss A/c as given by
Happy Ltd. for the year ending 31st March, 2019 is as under:
Happy Ltd.
Profit & Loss A/c for the year ending March 31, 2019
Particulars Amount (`) Particulars Amount (`)
To Salary 1,44,000 By Gross Profit 4,50,000
To Interest on Debenture 36,000
To Sales Commission 18,000
To Bad Debts 49,000
To Depreciation 19,250
To Rent 38,400
To Company Audit fees 12,000
To Net Profit 1,33,350 _______
Total 4,50,000 Total 4,50,000
Prepare a Statement showing allocation of expenses & calculation of pre-incorporation & post- incorporation
profits after considering the following information:
(i) GP ratio was constant throughout the year.
(ii) Depreciation includes ` 1,250 for assets acquired in post incorporation period.
(iii) Bad debts recovered amounting to ` 14,000 for a sale made in 2015-16 has been deducted from bad
debts mentioned above.
(iv) Total sales were ` 18,00,000 of which ` 6,00,000 were for April to September.
(v) Happy Ltd. had to occupy additional space from 1st Oct. 2018 for which rent was ` 2,400 per month.
[RTP Nov ‘19]

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Ans. Pre-incorporation period is for two months, from 1st April, 2018 to 31st May, 2018. 10 months’ period
(from 1st June, 2018 to 31st March, 2019) is post-incorporation period.
Statement showing calculation of profit/losses for
pre and post incorporation periods
Pre-Inc Post Inc
` `
Gross Profit 50,000 4,00,000
Bad debts Recovery 14,000 _______
64,000 4,00,000
Less: Salaries 24,000 1,20,000
Audit fees - 12,000
Depreciation 3,000 16,250
Sales commission 2,000 16,000
Bad Debts (49,000 + 14,000) 7,000 56,000
Interest on Debentures - 36,000
Rent 4,000 34,400
Net Profit 24,000 1,09,350
* Pre-incorporation profit is a capital profit and will be transferred to Capital Reserve.
Working Notes:
(i) Calculation of ratio of Sales
Sales from April to September = 6,00,000 (1,00,000 p.m. on average basis)
October to March = ` 12,00,000 (2,00,000 p.m. on average basis)
Thus, sales for pre-incorporation period = `2,00,000
post-incorporation period = ` 16,00,000
Sales are in the ratio of 1:8
(ii) Gross profit, sales commission and bad debts written off have been allocated in pre and post
incorporation periods in the ratio of Sales.
(iii) Rent, salary are allocated on time basis.
(iv) Interest on debentures is allocated in post incorporation period.
(v) Audit fees charged to post incorporation period as relating to company audit.
(vi) Depreciation of ` 18,000 divided in the ratio of 1:5 (time basis) and ` 1,250 charged to post
incorporation period.
(vii) Bad debt recovery of ` 14,000/- is allocated in pre-incorporation period, being sale made in 2015-16.
(viii) Rent
(` 38,400 - Additional rent for 6 months) `
[38,400- 14,400 (2,400 x 6) = ` 24,000 i.e. 2,000 per month]
1/4/18 -31/5//18 (2,000 x 2) = 4,000
1/6/18-31/3/19 - [(2,000 x 10) +14,400] = 34,400
38,400

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Q-9 Lotus Ltd. was incorporated on 1st July, 2017 to acquire a running business of Feel goods with effect
from 1st April, 2017. During the year 2017-18, the total sales were Rs. 48,00,000 of which Rs. 9,60,000
were for the first six months. The Gross profit of the company Rs. 7,81,600. The expenses debited to the
Profit & Loss Account included:
(i) Director's fees Rs.60,000
(ii) Bad debts Rs.14,400
(iii) Advertising Rs. 48,000 (under a contract amounting to Rs.4,000 per month)
(iv) Salaries and General Expenses Rs.2,56,000
(v) Preliminary Expenses written off Rs.20,000
(vi) Donation to a political party given by the company Rs.20,000.
Prepare a statement showing pre-incorporation and post-incorporation profit for the year ended 31st
March, 2018. [RTP May ‘19]
Ans. Statement showing the calculation of Profits for the pre-incorporation and post-incorporation periods
For the year ended 31st March, 2018
Particulars Total Basis of Pre- Post-
Amount Allocation incorporation incorporation
Gross Profit 7,81,600 Sales 78,160 7,03,440
Less: Directors' fee 60,000 Post 60,000
Bad debts 14,400 Sales 1,440 12,960
Advertising 48,000 Time 12,000 36,000
Salaries & general expenses 2,56,000 Time 64,000 1,92,000
Preliminary expenses 20,000 Post 20,000
Donation to Political Party 20,000 Post 20,000
Not Profit 3,63,200 720 3,62,480
Working Notes :
1. Sales ratio
Particular Rs.
Sales for period up to 30.06.2017 (9,60,000 x 3/6) 4,80,000
Sales for period from 01 .07.2017 to 31 .03.2018 (48,00,000 - 4,80,000) 43,20,000
Thus, Sales Ratio = 1 : 9
2. Time ratio
1st April, 2017 to 30 June, 2017:1st July, 2017 to 31st March, 2018
= 3 months: 9 months = 1:3
Thus, Time Ratio is 1: 3
Q-10 Roshani & Reshma working in partnership, registered a joint stock company under the name of Happy
Ltd. on May 31st 2017 to take over their existing business. The summarized Profit & Loss A/c as given by
Happy Ltd. for the year ending 31st March, 2018 is as under:

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 Happy Ltd.
Profit & Loss Account for the year ending March 31, 2018
Particular Amount (Rs.) Particulars Amount(Rs.)
To Salary 1,44,000 By Gross Profit 4,50,000
To Interest on Debenture 36,000
To Sales Commission 18,000
To Bad Debts 49,000
To Depreciation 19,250
To Rent 38,400
To Audit fees (Company Audit) 12,000
To Net Profit Total 1,33,350
Total 4,50,000 Total 4,50,000
You are required to prepare a Statement showing allocation of expenses and calculation of pre-incorporation
and post- incorporation profits after considering the following information:
(i) GP ratio was constant throughout the year.
(ii) Depreciation includes Rs.1,250 for assets acquired in post incorporation period.
(iii) Bad debts recovered amounting to Rs. 14,000 for a sale made in 2014-15 has been deducted from bad
debts mentioned above.
(iv) Total sales were Rs.18,00,000 of which Rs.6,00,000 were for April to September.
(v) Happy Ltd. had to occupy additional space from 1st Oct. 2017 for which rent was Rs.2,400 per month.
[RTP Nov ‘18]
Ans. Pre-incorporation period is for two months, from 1st April, 2017 to 31st May, 2017. 10 months' period
(from 1st June, 2017 to 31st March, 2018) is post-incorporation period.
Statement showing calculation of profit/losses for pre and post incorporation periods
Pre-lnc Post-lnc
Rs. Rs.
Gross Profit 50,000 4,00,000
Bad debts Recovery 14,000
64,000 4,00,000
Less: Salaries 24,000 1,20,000
Audit fees - 12,000
Depreciation 3,000 16,250
Sales commission 2,000 16,000
Bad Debts (49,000 + 14, 000) 7,000 56,000
Interest on Debentures - 36,000
Rent 4,000 34,400
Net Profit 24,000 1,09,350

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Working Notes:
(i) Calculation of ratio of Sales
Sales from April to September = 6,00,000 (1,00,000 p.m. on average basis)
Oct. to March = Rs. 12,00,000 (2,00,000 p.m. on average basis)
Thus, sales for pre-incorporation period = Rs.2,00,000
post-incorporation period = Rs.16,00,000
Sales are in the ratio of 1:8
(ii) Gross profit, sales commission and bad debts written off have been allocated in pre and post
incorporation periods in the ratio of Sales.
(iii) Rent, salary are allocated on time basis.
(iv) Interest on debentures is allocated in post incorporation period.
(v) Audit fees charged to post incorporation period as relating to company audit.
(vi) Depreciation of Rs.18,000 divided in the ratio of 1:5 (time basis) and Rs.1,250 charged to post incorporation
period.
(vii)Bad debt recovery of Rs.14.000/- is allocated in pre-incorporation period, being sale made in 2014-15.
(viii) Rent
(Rs.38,400 - Additional rent for 6 months) Rs.
[38,400-14,400 (2,400 x 6)] = 24,000
1/4/17-31/5//17 (2,000x2) = 4,000
1/6/17-31/3/18-[(2,000x10)+14,400] = 34,400
38,400
Q-11 The Business carried on by Kamal under the name "K" was taken over as a running business with effect
from 1st April, 2016 by Sanjana Ltd., which was incorporated on 1st July, 2016. The same set of books
was continued since there was no change in the type of business and the following particulars of
profits for the year ended 31st March, 2017 were available.
Rs. Rs.
Sales: Company period 40,000
Prior period 10,000 50,000
Selling Expenses 3,500
Preliminary Expenses written off 1,200
Salaries 3,600
Directors' Fees 1,200
Interest on Capital (Upto 30.6.2016) 700
Depreciation 2,800
Rent 4,800
Purchases 25,000
Carriage Inwards 1,019 43,819
Net Profit 6,181

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 The purchase price (including carriage inwards) for the post-incorporation period had increased by 10
percent as compared to pre-incorporation period. No stocks were carried either at the beginning or at the
end.
You are required to prepare a statement showing the amount of pre and post incorporation period profits
stating the basis of allocation of expenses. [RTP May ‘18]
Ans. Statement showing the calculation of profits/losses for pre incorporation and Post incorporation period
profits of Sanjana Ltd. for the year ended 31st March, 2017
Particulars Basis Pre Post
Rs. Rs.
Sales (given) 10,000 40,000
Less; Purchases 1:3.3 5,814 19,186
Carriage Inwards 1:3.3 237 782
Gross Profit (i) 3,949 20,032
Less; Selling Expenses 1:4 700 2,800
Preliminary Expenses 1,200
Salaries 1:3 900 2,700
Director Fees 1,200
Interest on capital 700
Depreciation 1:3 700 2,100
Rent 1:3 1,200 3,600
Total of Expenses(ii) 4,200 13,600
Capital Loss/Net Profit (i-ii) (251) 6,432
Working Notes :
1. Sales Ratio = 10,000 : 40,000 =1:4
2. Time Ratio = 3 : 9 =1:3
3. Purchases Price Ratio
 Ratio is 3 : 9
But purchases price was 10% higher in the company period
 Ratio is 3 : 9 + 10%
3:9.9 = 1:3.3.

---0---0---

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CHAPTER-6
Accounting for Bonus Issue and Right Issue

Q-1 Following is the extract of the Balance Sheet of Xeta Ltd. as at 31st March, 2017
Rs.
Authorised capital:
50,000 12% Preference shares of Rs.10 each 5,00,000
4,00,000 Equity shares of Rs.10 each 40,00,000
45,00,000
Issued and Subscribed capital:
24,000 12% Preference shares of Rs.10 each fully paid 2,40,000
2,70,000 Equity shares of Rs.10 each, Rs.8 paid up 21,60,000
Reserves and surplus:
General Reserve 3,60,000
Securities premium 1,00,000
Profit and Loss Account 6,00,000
On 1st April, 2017, the Company has made final call@ ` 2 each on 2,70,000 equity shares. The call money was
received by 20th April, 2017. Thereafter, the company decided to capitalize its reserves by way of bonus at
the rate of one share for every four shares held.
Show necessary journal entries in the books of the company and prepare the extract of the balance sheet as
on 30th April, 2017 after bonus issue. [RTP May ‘19]
Ans. Journal Entries in the books of Xeta Ltd. Rs. Rs.
1-4-2017 Equity share final call A/c Dr. 5,40,000
To Equity share capital A/c 5,40,000
(For final calls of Rs.2 per share on 2,70,000 equity shares
due as per Board's Resolution dated....)
20-4-2017 Bank A/c Dr. 5,40,000
Dr. To Equity share final call A/c 5,40,000
(For final call money on 2,70,000 equity shares received)
Securities Premium A/c Dr. 1,00,000
General Reserve A/c Dr. 3,60,000
Profit and Loss A/c Dr. 2,15,000
To Bonus to shareholders A/c 6,75,000
(For making provision for bonus issue of one
share for every four shares held)
Bonus to shareholders A/c Dr. 6,75,000
To Equity share capital A/c 6,75,000
(For issue of bonus shares)

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 Extract of Balance Sheet as at 30th April, 2017 (after bous issue)
Rs.
Authorised Capital
50,000 12% Preference shares of Rs.10 each 5,00,000
4,00,000 Equity shares of Rs.10 each 40,00,000
Issued and subscribed capital
24,000 12% Preference shares of Rs.10 each, fully paid 2,40,000
3,37,500 Equity shares of Rs.10 each, fully paid 33,75,000
(Out of above, 67,500 equity shares @ ` 10 each were issued by wayof bonus)
Reserves and surplus
Profit and Loss Account 3,85,000
Q-2 Following is the extract of the Balance Sheet of Xeta Ltd. as at 31st March, 2017:
Rs.
Authorised capital:
50,000 12% Preference shares of Rs.10 each 5,00,000
4,00,000 Equity shares of Rs.10 each 40,00,000
45,00,000
Issued and Subscribed capital:
24,000 12% Preference shares of Rs.10 each fully paid 2,40,000
2,70,000 Equity shares of Rs.10 each, Rs.8 paid up 21,60,000
Reserves and surplus:
General Reserve 3,60,000
Securities premium 1,00,000
Profit and Loss Account 6,00,000
On 1st April, 2017, the Company has made final call @ Rs.2 each on 2,70,000 equity shares. The call money
was received by 20th April, 2017. Thereafter, the company decided to capitalize its reserves by way of bonus
at the rate of one share for every four shares held.
You are required to give necessary journal entries in the books of the company and prepare the extract of
the balance sheet as on 30th April, 2017 after bonus issue. [RTP Nov ‘18]
Ans. Journal Entries in the books of Xeta Ltd.
Rs. Rs.
1-4-2017 Equity share final call A/c Dr. 5,40,000
To Equity share capital A/c 5,40,000
(For final calls of Rs.2 per share on 2,70,000
equity shares due as per Board's Resolution dated....)
20-4-2017 Bank A/c Dr. 5,40,000
To Equity share final call A/c 5,40,000
(For final call money on 2,70,000 equity shares received)
Securities Premium A/c Dr. 1,00,000
General Reserve A/c Dr. 3,60,000
Profit and Loss A/c Dr. 2,15,000
To Bonus to shareholders A/c 6,75,000
(For making provision for bonus issue of one
share for every four shares held)

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 Bonus to shareholders A/c Dr. 6,75,000
To Equity share capital A/c (For issue of bonus shares) 6,75,000
Extract of Balance Sheet as at 30th April, 2017 (after bonus issue)
Rs.
Authorised Capital
50,000 12% Preference shares of Rs.10 each 5,00,000
4,00,000 Equity shares of Rs.10 each 40,00,000
Issued and subscribed capital
24,000 12% Preference shares of Rs.10 each, fully paid 2,40,000
3,37,500 Equity shares of Rs.10 each, fully paid 33,75,000
(Out of above, 67,500 equity shares @ Rs.10 each were issued by way of bonus)
Reserves and surplus
Profit and Loss Account 3,85,000
Q-3 Following is the extract of the Balance Sheet of Manoj Ltd. as at 31st March, 20X1
Rs.
Authorized capital:
30,000 12% Preference shares of Rs.10 each 3,00,000
4,00,000 Equity shares of Rs.10 each 40,00,000
43,00,000
Issued and Subscribed capital:
24,000 12% Preference shares of Rs.10 each fully paid 2,40,000
2,70,000 Equity shares of Rs.10 each, Rs.8 paid up 21,60,000
Reserves and surplus:
General Reserve 3,60,000
Capital Redemption Reserve 1,20,000
Securities premium (collected in cash) 75,000
Profit and Loss Account 6,00,000
On 1st April, 20X1, the Company has made final call @ Rs. 2 each on 2,70,000 equity shares. The call money
was received by 20th April, 20X1. Thereafter, the company decided to capitalize its reserves by way of bonus
at the rate of one share for every four shares held.
You are required to prepare necessary journal entries in the books of the company and prepare the relevant
extract of the balance sheet as on 30th April, 20X1 after bonus issue. [RTP May ‘18]
Ans. Journal Entries in the books of Manoj Ltd.
Rs. Rs.
1-4-20x1 Equity share final call A/c Dr. 5,40,000
To Equity share capital A/c 5,40,000
(For final calls of Rs. 2 per share on 2,70,000
equity shares due as per Board's Resolution dated....)

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 20-4-20x1 Bank A/c Dr. 5,40,000
To Equity share final call A/c 5,40,000
(For final call money on 2,70,000 equity shares received)
Securities Premium A/c Dr. 75,000
Capital redemption reserve A/c Dr. 1,20,000
General Reserve A/c Dr. 3,60,000
Profit and Loss A/c (b.f.) Dr. 1,20,000
To Bonus to shareholders A/c 6,75,000
(For making provision for bonus issue of one
share for every four shares held)
Bonus to shareholders A/c Dr. 6,75,000
To Equity share capital A/c 6,75,000
(For issue of bonus shares)
Extract of Balance Sheet as at 30th April, 20X1 (after bonus issue)
Rs.
Authorised Capital
30,000 12% Preference shares of Rs. 10 each 3,00,000
4,00,000 Equity shares of Rs. 10 each 40,00,000
Issued and subscribed capital
24,000 12% Preference shares of Rs.10 each, fully paid 2,40,000
3,37,500 Equity shares of Rs. 10 each, fully paid 33,75,000
(Out of the above, 67,500 equity shares @ Rs.10 each were issued by way of bonus shares)
Reserves and surplus Profit and Loss Account 4,80,000
Q-4 The following is the summarised Balance Sheet of Bumbum Limited as at 31st March, 2019:
`
Sources of funds
Authorized capital
50,000 Equity shares of ` 10 each 5,00,000
10,000 Preference shares of ‘ 100 each (8% redeemable) 10,00,000
15,00,000
Issued, subscribed and paid up
30,000 Equity shares of ` 10 each 3,00,000
5,000, 8%Redeemable Preference shares of ` 100 each 5,00,000
Reserves & Surplus x
Securities Premium 6,00,000
General Reserve 6,50,000
Profit & Loss A/c 40,000
Trade payables 4,20,000
25,10,000

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 Application of funds
PPE (net) 7,80,000
Investments (market value ` 5,80,000) 4,90,000
Deferred Tax Assets 3,40,000
Trade receivables 6,20,000
Cash & Bank balance 2,80,000
25,10,000
In Annual General Meeting held on 20th June, 2019 the company passed the following resolutions:
(i) To split equity share of ` 10 each into 5 equity shares of ` 2 each from 1st July, 2019.
(ii) To redeem 8% preference shares at a premium of 5%.
(iii) To issue fully paid bonus shares in the ratio of one equity share for every 3 shares held on record
date.
On 10th July, 2019 investments were sold for ` 5,55,000 and preference shares were redeemed.
The bonus issue was concluded by 12th September, 2019
You are required to journalize the above transactions including cash transactions and prepare Balance
Sheet as at 30th September, 2019. All working notes should form part of your answer. [RTP-May’20]
Ans. Bumbum Limited
Journal Entries
2019 Dr. (`) Cr. (`)
July 1 Equity Share Capital A/c (` 10 each) Dr. 3,00,000
To Equity share capital A/c (` 2 each) 3,00,000
(Being equity share of ` 10 each splitted into 5 equity
shares of ` 2 each) {1,50,000 x 2}
July 10 Cash & Bank balance A/c Dr. 5,55,000
To Investment A/c 4,90,000
To Profit & Loss A/c 65,000
(Being investment sold out and profit on sale credited
to Profit & Loss A/c)
July 10 8% Redeemable preference share capital A/c Dr. 5,00,000
Premium on redemption of preference share A/c Dr. 25,000
To Preference shareholders A/c 5,25,000
(Being amount payable to preference share holders
on redemption)
July 10 Preference shareholders A/c Dr. 5,25,000
To Cash & bank A/c 5,25,000
(Being amount paid to preference shareholders)
July 10 General reserve A/c Dr. 5,00,000
To Capital redemption reserve A/c 5,00,000
(Being amount equal to nominal value of preference
shares transferred to Capital Redemption Reserve A/c
on its redemption as per the law)

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 Sept. 12 Capital Redemption Reserve A/c Dr. 1,00,000
To Bonus to shareholders A/c 1,00,000
(Being balance in capital redemption reserve
capitalized to issue bonus shares)
Sept. 12 Bonus to shareholders A/c Dr. 1,00,000
To Equity share capital A/c 1,00,000
(Being 50,000 fully paid equity shares of ` 2 each
issued as bonus in ratio of 1 share for every 3 shares held)
Sept. 30 Securities Premium A/c Dr. 25,000
To Premium on redemption of preference shares A/c 25,000
(Being premium on preference shares adjusted from
securities premium account)
Balance Sheet as at 30th September, 2019
Particulars Notes `
Equity and Liabilities
1 Shareholders’ funds
a Share capital 1 4,00,000
b Reserves and Surplus 2 12,30,000
2 Current liabilities
a Trade Payables 4,20,000
Total 20,50,000
Assets
1 Non-current assets
a PPE 7,80,000
b Deferred tax asset 3,40,000
2 Current assets
Trade receivables 6,20,000
Cash and cash equivalents 3,10,000
Total 20,50,000
Notes to accounts
1 Share Capital ` `
Authorized share capital
2,50,000 Equity shares of ` 2 each 5,00,000
10,000 8% Preference shares of `100 each 10,00,000 15,00,000
Issued, subscribed and paid up
2,00,000 Equity shares of ` 2 each 4,00,000

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 2 Reserves and Surplus
Securities Premium A/c
Balance as per balance sheet 6,00,000
Less: Adjustment for premium on preference Shares (25,000)
Balance 5,75,000
Capital Redemption Reserve (5,00,000-1,00,000) 4,00,000
General Reserve (6,50,000 – 5,00,000) 1,50,000
Profit & Loss A/c 40,000
Add: Profit on sale of investment 65,000 1,05,000
Total 12,30,000
Working Notes:
`
1. Redemption of preference shares
5,000 Preference shares of ` 100 each 5,00,000
Premium on redemption @ 5% 25,000
Amount Payable 5,25,000
2. Issue of Bonus Shares
Existing equity shares after split (30,000 x 5) 1,50,000 shares
Bonus shares (1 share for every 3 shares held) to be issued 50,000 shares
3. Cash and Bank Balance
Balance as per balance sheet 2,80,000
Add: Realization on sale of investment 5,55,000
8,35,000
Less: Paid to preference share holders (5,25,000)
Balance 3,10,000
Q-5 Following is the extract of Balance Sheet of Prem Ltd. as at 31st March, 2018 :
Authorized capital `
3,00,000 equity shares of ` 10 each 30,00,000
25,000, 10% preference shares of ` 10 each 2,50,000
32,50,000

Issued and subscribed capital:

2,70,000 equity shares of ` 10 each fully paid up 27,00,000
24,000,10% preference shares of ` 10 each fully paid up 2,40,000
29,40,000
Reserves and surplus:
General reserve 3,60,000
Capital redemption reserve 1,20,000
Securities premium (in cash) 75,000
Profit and loss account 6,00,000
11,55,000

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 On 1st April, 2018, the company decided to capitalize its reserves by way of bonus at the rate of two
shares for every five shares held.. Show necessary journal entries in the books of the company and
prepare the extract of the balance sheet after bonus issue. [Sugg.Nov.’19, 5 Marks]
Ans. Prem Ltd.
Journal Entries
April 1 Capital Redemption Reserve A/c Dr. 1,20,000
Securities Premium A/c Dr. 75,000
General Reserve A/c Dr. 3,60,000
Profit and Loss A/c (b.f.) Dr. 5,25,000
To Bonus to Equity Shareholders A/c 10,80,000
(Bonus issue @ two shares for every five
shares held by utilizing various reserves as per
Board’s Resolution dated...)
Bonus to Shareholders A/c Dr. 10,80,000
To Equity Share Capital A/c 10,80,000
(Issue of bonus shares)
Balance Sheet (Extract) as on 1st April, 2018 (after bonus issue)
Particulars Notes Amount (`)
Equity and Liabilities
1 Shareholders’ funds
a Share capital 1 40,20,000
b Reserves and Surplus 2 75,000
Notes to Accounts
1 Share Capital (` )
Authorized share capital:
3,78,000* Equity shares of ` 10 each 37,80,000*
25,000 10% Preference shares of ` 10 each 2,50,000
Total 40,30,000
Issued, subscribed and fully paid share capital: 3,78,000
Equity shares of ` 10 each, fully paid
(Out of above, 1,08,000 equity shares @ ` 10 each
were issued by way of bonus) 37,80,000
24,000 10% Preference shares of ` 10 each 2,40,000
Total 40,20,000
2 Reserves and Surplus
Capital Redemption Reserve 1,20,000 Nil
Less: Utilized 1,20,000
Securities Premium 75,000
Less: Utilised for bonus issue (75,000) Nil
General reserve 3,60,000
Less: Utilised for bonus issue (3,60,000) Nil
Profit & Loss Account 6,00,000
Less: Utilised for bonus issue (5,25,000) 75,000
Total 75,000

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 Note: *Authorized capital has been increased by the minimum required amount i.e. ` 7,80,000 (37,80,000
– 30,00,000) in the above solution.
Q-6 Following are the balances appear in the trial balance of Arya Ltd. as at 31st March. 2018.
Issued and Subscribed Capital:
Rs.
10,000; 10% Preference Shares of Rs.10 each fully paid 1,00,000
1,00,00, Equity Shares of Rs.10 each Rs 8 paid up 8,00,000
Reserves and Surplus :
General Reserve 2,40,000
Security Premium (collected in cash) 25,000
Profit and Loss Account 1,20,000
On 1st April, 2018 the company has made final call @ ` 2 each on 1,00,000 Equity Shares. The call money
was received by 15th April, 2018. Thereafter the company decided to issue bonus shares to equity
shareholders at the rate of 1 share for every 5 shares held and for this purpose, it decided that there
should be minimum reduction in free reserves. Pass Journal entries. [Sugg. May ‘18, 5 Marks]

Ans. Arya Ltd.

Journal Entries
2018 Dr. Cr.
Rs. Rs.
April 1 Equity Share Final Call A/c Dr. 2,00,000
To Equity Share Capital A/c 2,00,000
(Final call of Rs.2 per share on 1,00,000 equity
shares due as per Board’s Resolution dated....)
April 15 Bank A/c Dr. 2,00,000
To Equity Share final Call A/c 2,00,000
(Final Call money on 1,00,000 eqity shares received)
Securities Premium A/c Dr. 25,000
General Reserve A/c* Dr. 1,75,000
To Bonus to Shareholder A/c 2,00,000
(Bonus issue @ one share for every 5 shares held by utilizing
various reserves as per Board’s resolution dated...)
April 15 Bonus to Shareholders A/c Dr. 2,00,000
To Equity Share Capital A/c (Capitalization of profit) 2,00,000
Note: Profit and Loss Account balance may also be utilized along with General Reserve for the purpose of
issue of Bonus shares.
Q-7 Following items appear in the Trial Balance of Beta Ltd. as on 31st March, 2017:
Particulars Amount
3,000 Equity Shares of Rs. 100 each 3,00,000
Securities Premium (collected in cash) 40,000
Capital Redemption Reserve 30,000
General Reserve 1,00,000

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 The company decided to issue to equity shareholders bonus shares at the rate of 1 share for every 3
shares held. Company decided that there should be the minimum reduction in free reserves. Pass
necessary Journal Entries in the books of Beta Ltd. [MTP Oct. ‘19, 5 Marks]
Ans. Capital Redemption Reserve A/c Dr. 30,000
Securities Premium A/c Dr. 40,000
General Reserve A/c Dr. 30,000
To Bonus to Shareholders 1,00,000
(Being issue of bonus shares by utilization of various
Reserves, as per resolution dated .....)
Bonus to Shareholders A/c Dr. 1,00,000
To Equity Share Capital 1,00,000
(Being capitalization of Profit)
Q-8 Omega company offers new shares of Rs. 100 each at 25% premium to existing shareholders on the basis
one for five shares. The cum-right market price of a share is Rs. 200.
You are required to calculate the (i) Ex-right value of a share; (ii) Value of a right share?
[MTP April ‘19, 4 Marks]
Ans. Ex-right value of the shares
= (Gum-right value of the existing shares + Rights shares x Issue Price) / (Existing No. of shares + No.
of right shares) = (Rs. 200 X 5 Shares + Rs. 125 X 1 Share) / (5 + 1) Shares
= Rs. 1,125 / 6 shares = Rs. 187.50 per share.
Value of right = Gum-right value of the share - Ex-right value of the share
= Rs. 200-Rs. 187.50 = Rs. 12.50 per share.
Q-9 The following notes pertain to Brite Ltd.'s Balance Sheet as on 31st March, 20X1:
Notes Rs. in Lakhs
(1) Share Capital
Authorised :
20 crore shares of Rs. 10 each 20,000
Issued and Subscribed :
10 crore Equity Shares of Rs. 10 each 10,000
2 crore 11% Cumulative Preference Shares of Rs. 10 each 2,000
Total 12,000
Called and paid up:
10 crore Equity Shares of Rs. 10 each, Rs. 8 per share called and paid up 2 crore 8,000
11% Cumulative Preference Shares of Rs. 10 each, fully called and paid up 2,000
Total 10,000
(2) Reserves and Surplus:
Capital Redemption Reserve 1,485
Securities Premium (collected in cash) 2,000
General Reserve 1,040
Surplus i.e. credit balance of Profit & Loss Account 273
Total 4,798
On 2nd April 20X1, the company made the final call on equity shares @ Rs. 2 per share. The entire money
was received in the month of April, 20X1.

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 On 1st June 20X1, the company decided to issue to equity shareholders bonus shares at the rate of 2
shares for every 5 shares held .
Youa re required to prepare journal entries for all the above mentioned transactions. Also prepare the
notes on Share Capital and Reserves and Surplus relevant to the Balance Sheet of the company
immediately after the issue of bonus shares. [MTP April ‘18, 10 Marks]
Ans. Journal Entries in the books of Brite Ltd.
20x1 Dr. Cr.
Rs.in lakhs Rs. in lakhs
April 2 Equity Share Final Call A/c Dr. 2,000
To Equity Share Capital A/c 2,000
(Final call of Rs. 2 per share on 10 crore equity shares made due)
Bank A/c Dr. 2,000
To Equity Share Final Call A/c 2,000
(Final call money on 10 crore equity shares received)
June 1 Capital Redemption Reserve A/c Dr. 1,485
Securities Premium A/c Dr. 2,000
General Reserve A/c (b.f.) Dr. 515
To Bonus to Shareholders A/c 4,000
(Bonus issue of two shares for every five shares held, by utilising
various reserves as per Board's resolution dated.......)
Bonus to Shareholders A/c Dr. 4,000
To Equity Share Capital A/c 4,000
(Capitalisation of profit)
Notes to Accounts
1 Share Capital
Authorised share capital
20 crores shares of Rs.10 each 20,000
Issued, subscribed and fully paid up share capital
14 crore Equity shares of Rs. 10 each, fully paid up 14,000
(Out of the above, 4 crore equity shares @ Rs.10 each
were issued by way of bonus)
2 crore, 11% Cumulative Preference share capital of Rs. 10 each, fully paid up 2,000
16,000
2. Reserves and Surplus
Capital Redemption reserve 1,485
Less: Utilised for bonus issue 1,485
Securities Premium 2,000
Less: Utilised for bonus issue (2,000)
General Reserve 1,040
Less: Utilised for bonus issue 515 515
Surplus (Profit and Loss Account) 273
Total 798

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Q-10 The following notes pertain to Brite Ltd.'s Balance Sheet as on 31st March, 20X1:
Notes Rs. in Lakhs
(1) Share Capital
Authorised :
20 crore shares of Rs. 10 each 20,000
Issued and Subscribed :
10 crore Equity Shares of Rs. 10 each 10,000
2 crore 11% Cumulative Preference Shares of Rs. 10 each 2,000
Total 12,000
Called and paid up:
10 crore Equity Shares of Rs. 10 each, Rs. 8 per share called and paid up 2 crore 8,000
11% Cumulative Preference Shares of Rs. 10 each, fully called and paid up 2,000
Total 10,000
(2) Reserves and Surplus:
Capital Redemption Reserve 1,485
Securities Premium (collected in cash) 2,000
General Reserve 1,040
Surplus i.e. credit balance of Profit & Loss Account 273
Total 4,798
On 2nd April 20X1, the company made the final call on equity shares @ Rs. 2 per share. The entire money
was received in the month of April, 20X1.
On 1st June 20X1, the company decided to issue to equity shareholders bonus shares at the rate of 2
shares for every 5 shares held .
Youa re required to prepare journal entries for all the above mentioned transactions. Also prepare the
notes on Share Capital and Reserves and Surplus relevant to the Balance Sheet of the company
immediately after the issue of bonus shares. [MTP April ‘18, 10 Marks]
Ans. Journal Entries in the books of Brite Ltd.
20x1 Dr. Cr.
Rs.in lakhs Rs. in lakhs
April 2 Equity Share Final Call A/c Dr. 2,000
To Equity Share Capital A/c 2,000
(Final call of Rs. 2 per share on 10 crore equity shares made due)
Bank A/c Dr. 2,000
To Equity Share Final Call A/c 2,000
(Final call money on 10 crore equity shares received)
June 1 Capital Redemption Reserve A/c Dr. 1,485
Securities Premium A/c Dr. 2,000
General Reserve A/c (b.f.) Dr. 515
To Bonus to Shareholders A/c 4,000

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 (Bonus issue of two shares for every five shares held, by utilising
various reserves as per Board's resolution dated.......)
Bonus to Shareholders A/c Dr. 4,000
To Equity Share Capital A/c 4,000
(Capitalisation of profit)
Notes to Accounts
1 Share Capital
Authorised share capital
20 crores shares of Rs.10 each 20,000
Issued, subscribed and fully paid up share capital
14 crore Equity shares of Rs. 10 each, fully paid up 14,000
(Out of the above, 4 crore equity shares @ Rs.10 each
were issued by way of bonus)
2 crore, 11% Cumulative Preference share capital of Rs. 10 each, fully paid up 2,000
16,000
2. Reserves and Surplus
Capital Redemption reserve 1,485
Less: Utilised for bonus issue 1,485
Securities Premium 2,000
Less: Utilised for bonus issue (2,000)
General Reserve 1,040
Less: Utilised for bonus issue 515 515
Surplus (Profit and Loss Account) 273
Total 798
Q-11 Following items appear in the Trial Balance of Hello Ltd. as on 31st March, 2017:
Particulars Amount
9,000 Equity Shares of Rs.100 each 9,00,000
Securities Premium 80,000
Capital Redemption Reserve 1,40,000
General Reserve 2,10,000
Profit and Loss Account (Cr. Balance) 90,000
The company decided to issue to equity shareholders bonus shares at the rate of 1 share for every 3
shares held. Company decided that there should be the minimum reduction in free reserves.
You are required to give the necessary Journal Entries in the books Hello Ltd.[MTP March ‘18, 5 Marks]
Ans. Journal Entries in the books of Hello Ltd.
Capital Redemption Reserve A/c Dr. 1,40,000
Securities Premium A/c Dr. 80,000
General Reserve A/c (balancing figure) Dr. 80,000
To Bonus to Shareholders 3,00,000

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 (Being issue of bonus shares by utilization of various
Reserves, as per resolution dated .......)
Bonus to Shareholders A/c Dr.3,00,000
To Equity Share Capital 3,00,000
(Being capitalization of profit)
Q-12 Omega company offers new shares of Rs. 100 each at 25% premium to existing shareholders on the
basis one for five shares. The cum -right market price of a share is Rs. 200.
You are required to calculate the (i) Ex -right value of a share; (ii) Value of a right share?
[MTP Aug. ‘18, 4 Marks]
Ans. Ex-right value of the shares
= (Cum-right value of the existing shares + Rights shares x Issue Price) / (Existing No. of shares + No.
of right shares)
= (Rs. 200 x 5 Shares + Rs. 125 x 1 Share) / (5 + 1) Shares
= Rs. 1,125 / 6 shares = Rs. 187.50 per share.
Value of right = Cum-right value of the share – Ex-right value of the share
= Rs. 200 – Rs. 187.50 = Rs. 12.50 per share.
Q-13 Following is the extract of the Balance Sheet of Manoj Ltd. as at 31st March, 20X1
Authorised capital: Rs.
30,000 12% Preference shares of Rs. 10 each 3,00,000
3,00,000 Equity shares of Rs. 10 each 30,00,000
33,00,000
Issued and Subscribed capital:
24,000 12% Preference shares of Rs. 10 each fully paid 2,40,000
2,70,000 Equity shares of Rs. 10 each, Rs. 8 paid up 21,60,000
Reserves and surplus:
General Reserve 3,60,000
Capital Redemption Reserve 1,20,000
Securities premium (collected in cash) 75,000
Profit and Loss Account 6,00,000
On 1st April, 20X1, the Company has made final call @ Rs. 2 each on 2,70,000 equity shares.
The call money was received by 20th April, 20X1. Thereafter, the company decided to capitalise its
reserves by way of bonus at the rate of one share for every four shares held.
Prepare necessary journal entries in the books of the company . [MTP Aug. ‘18, 5 Marks]
Ans. Journal Entries in the books of Manoj Ltd.
Rs. Rs.
1-4-20X1 Equity share final call A/c Dr. 5,40,000
To Equity share capital A/c 5,40,000
(For final calls of Rs. 2 per share on 2,70,000 equity
shares due as per Board’s Resolution dated….)

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 20-4- 20X1 Bank A/c Dr. 5,40,000
To Equity share final call A/c 5,40,000
(For final call money on 2,70,000 equity shares received)
Securities Premium A/c Dr. 75,000
Capital redemption Reserve A/c Dr. 1,20,000
General Reserve A/c Dr. 3,60,000
Profit and Loss A/c (b.f.) Dr. 1,20,000
To Bonus to shareholders A/c 6,75,000
(For making provision for bonus issue of one share for
every four shares held)
Bonus to shareholders A/c Dr. 6,75,000
To Equity share capital A/c 6,75,000
(For issue of bonus shares)
Q-14 Following items appear in the Trial Balance of Beta Ltd. as on 31st March, 2017:
Particulars Amount
3,000 Equity Shares of Rs. 100 each 3,00,000
Securities Premium (collected in cash) 40,000
Capital Redemption Reserve 30,000
General Reserve 1,00,000
The company decided to issue to equity shareholders bonus shares at the rate of 1 share for every 3
shares held. Company decided that there should be the minimum reduction in free reserves. Pass
necessary Journal Entries in the books of Beta Ltd. [MTP Oct. ‘18, 5 Marks]
Ans. Capital Redemption Reserve A/c Dr. 30,000
Securities Premium A/c Dr. 40,000
General Reserve A/c Dr. 30,000
To Bonus to Shareholders 1,00,000
(Being issue of bonus shares by utilization of various
Reserves, as per resolution dated …….)
Bonus to Shareholders A/c Dr. 1,00,000
To Equity Share Capital 1,00,000
(Being capitalization of Profit)
Q-15 Following is the extract of the Balance Sheet of Manoj Ltd. as at 31st March, 20X1
`
Authorised capital:
30,000 12% Preference shares of ` 10 each 3,00,000
4,00,000 Equity shares of ` 10 each 40,00,000
43,00,000

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 Issued and Subscribed capital:
24,000 12% Preference shares of ` 10 each fully paid 2,40,000
2,70,000 Equity shares of ` 10 each, ` 8 paid up 21,60,000
Reserves and surplus:
General Reserve 3,60,000
Capital Redemption Reserve 1,20,000
Securities premium (collected in cash) 75,000
Profit and Loss Account 6,00,000
On 1st April, 20X1, the Company has made final call @ ` 2 each on 2,70,000 equity shares. The call
money was received by 20th April, 20X1. Thereafter, the company decided to capitalize its reserves by
way of bonus at the rate of one share for every four shares held.
Show necessary journal entries in the books of the company and prepare the relevant extract of the
balance sheet as on 30th April, 20X1 after bonus issue. [RTP Nov ‘19]
Ans. Journal Entries in the books of Manoj Ltd.
` `
1-4-20X1 Equity share final call A/c Dr. 5,40,000
To Equity share capital A/c 5,40,000
(For final calls of ` 2 per share on 2,70,000
equity shares due as per Board’s Resolution dated....)
20-4-20X1 Bank A/c Dr. 5,40,000
To Equity share final call A/c 5,40,000
(For final call money on 2,70,000 equity shares received)
Securities Premium A/c Dr. 75,000
Capital Redemption Reserve A/c Dr. 1,20,000
General Reserve A/c Dr. 3,60,000
Profit and Loss A/c (b.f.) Dr. 1,20,000
To Bonus to shareholders A/c 6,75,000
(For making provision for bonus issue of one share for
every four shares held)
Bonus to shareholders A/c Dr. 6,75,000
To Equity share capital A/c 6,75,000
(For issue of bonus shares)
Extract of Balance Sheet as at 30th April, 20X1 (after bonus issue)
`
Authorized Capital
30,000 12% Preference shares of ` 10 each 3,00,000
4,00,000 Equity shares of ` 10 each 40,00,000
Issued and subscribed capital
24,000 12% Preference shares of `10 each, fully paid 2,40,000
3,37,500 Equity shares of ` 10 each, fully paid 33,75,000
(Out of the above, 67,500 equity shares @ ` 10 each were issued by way of bonus shares)
Reserves and surplus
Profit and Loss Account 4,80,000
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 RIGHT ISSUE
Q-1 Omega company offers new shares of ` 100 each at 20% premium to existing shareholders on the basis
of one for four shares. The cum-right market price of a share is ` 190.
You are required to calculate the Value of a right share. [RTP Nov. ‘19]
Ans. Value of right share = Cum-right value of the share - Ex-right value of the share (as computed in Working
Note)
= ` 190 - ` 176 = ` 14 per share.
Working Note:
Ex-right value of the shares
= (Cum-right value of the existing shares + Rights shares x Issue Price) / (Existing No. of shares + No. of
right shares) = (` 190 x 4 Shares + ` 120 x 1 Share) / (4 + 1) Shares
= ` 880 / 5 shares = ` 176 per share.
Q-2 State under which head these accounts should be classified in Balance Sheet, as per Schedule III of the
Companies Act, 2013:
(i) Share application money received in excess of issued share capital.
(ii) Share option outstanding account.
(iii) Unpaid matured debenture and interest accrued thereon.
(iv) Uncalled liability on shares and other partly paid investments.
(v) Calls unpaid. [RTP May ‘19]
Ans. (i) Current Liabilities/ Other Current Liabilities
(ii) Shareholders' Fund/Reserve & Surplus
(iii) Current liabilities/Other Current Liabilities
(iv) Contingent Liabilities and Commitments
(v) Shareholders' Fund / Share Capital
Q-3 A company offers new shares of Rs.100 each at 25% premium to existing shareholders on one for four
basis. Thecum-right market price of a share is ` 150. Calculate the value of a right. [RTP May ‘19]
Ans. Ex-right value of the shares = (Gum-right value of the existing shares + Rights shares Issue Price) /
(Existing Number of shares + Rights Number of shares)
= (Rs. 150 X 4 Shares + Rs.125 X 1 Share) / (4 + 1) Shares
= Rs. 725 / 5 shares = Rs.145 per share.
Value of right = Gum-right value of the share - Ex-right value of the share
= Rs.150-Rs.145 = Rs.5 per share.
Q-4 Zeta Ltd. has decided to increase its existing share capital by making rights issue to its existing
shareholders. Zeta Ltd. is offering one new share for every two shares held by the shareholder. The
market value (cum-right) of the share is Rs.360 and the company is offering one right share of Rs.180
each to its existing shareholders. You are required to calculate the value of a right. What should be the
ex-right value of a share? [RTP Nov ‘18]

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Ans. Ex-right value of the shares = (Cum-right value of the existing shares + Rights shares x
Issue Price) / (Existing Number of shares + Number of Right shares)
= (Rs. 360 x 2 Shares+ Rs.180 x 1 Share)/(2 + 1) Shares
= Rs.900/3 shares = Rs.300 per share.
Value of right = Cum-right value of the share - Ex-right value of the share
= Rs.360- Rs.300 = Rs.60 per share.
Hence, any one desirous of having a confirmed allotment of one share from the company at Rs. 180 will have
to pay Rs. 120 (2 shares x Rs. 60) to an existing shareholder holding 2 shares and willing to renounce his right
of buying one share in favour of that person.
Q-5 Omega company offers new shares of Rs. 100 each at 25% premium to existing shareholders on the
basis one for five shares. The cum-right market price of a share is Rs.200.
You are required to calculate the (I) Ex-right value of a share; (II) Value of a right share?[RTP May ‘18]
Ans. Ex-right value of the shares
= (Gum-right value of the existing shares + Rights shares x Issue Price) / (Existing No. of
shares + No. of right shares)
= (Rs.200 X 5 Shares + Rs.125 X 1 Share) / (5 + 1) Shares
= Rs.1,125 / 6 shares = Rs.187.50 per share.
Value of right = Gum-right value of the share-Ex-right value of the share
= Rs.200-Rs.187.50 =Rs.12.50 per share.

---0---0---

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CHAPTER-7
Redemption of Preference Shares

Q-1 The Summarized Balance Sheet of Clean Ltd. as on 31st March, 2019 is as follows:
Particulars (` )
EQUITY AND LIABILITIES
1. Shareholder's funds:
(a) Share Capital 5,80,000
(b) Reserves and Surplus 96,000
2. Current Liabilities:
Trade Payables 1,13,000
Total 7,89,000
ASSETS:
1. Non-Current Assets
(a) Property, Plant and Equipment
Tangible Assets 6,90,000
(b) Non-current investments 37,000
2. Current Assets
Cash and cash equivalents (Bank) 62,000
Total 7,89,000
The Share Capital of the company consists of ` 50 each Equity shares of ` 4,50,000 and ` 100 each 8%
Redeemable Preference Shares of ` 1,30,000 (issued on 1.4.2017).
Reserves and Surplus comprises statement of profit and loss only.
In order to facilitate the redemption of preference shares at a premium of 10%, the Company decided:
(a) to sell all the investments for ` 30,000.
(b) to finance part of redemption from company funds, subject to, leaving a Bank balance of ` 24,000.
(c) to issue minimum equity share of ` 50 each at a premium of ` 10 per share to raise the balance of
funds required.
You are required to :
(1) Pass Journal Entries to record the above transactions.
(2) Prepare Balance Sheet after completion of the above transactions. [Sugg. May ‘19, 10 Marks]

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Ans.
(a) Journal Entries
Particulars Dr. (`) Cr. (`)
1 Bank A/c Dr. 75,000
To Share Application A/c 75,000
(For application money received on 1,250 shares
@ ` 60 per share)
2 Share Application A/c Dr. 75,000
To Equity Share Capital A/c 62,500
To Securities Premium A/c 12,500
(For disposition of application money received)
3 Preference Share Capital A/c Dr. 1,30,000
Premium on Redemption of Preference Shares A/c Dr. 13,000
To Preference Shareholders A/c 1,43,000
(For amount payable on redemption of preference shares)
4 Profit and Loss A/c Dr. 13,000
To Premium on Redemption of Preference Shares A/c 13,000
(For writing off premium on redemption out of profits)
5 Bank A/c Dr. 30,000
Profit and Loss A/c (loss on sale) A/c Dr. 7,000
To Investment A/c 37,000
(For sale of investments at a loss of ` 3,500)
6 Preference Shareholders A/c Dr. 1,43,000
To Bank 1,43,000
(Being amount paid to Preference shareholders)
7 Profit and Loss A/c Dr. 67,500
To Capital Redemption Reserve A/c 67,500
(For transfer to CRR out of divisible profits an amount
equivalent to excess of nominal value of preference shares
over proceeds (face value of equity shares) i.e., ` 1,30,000 - ` 62,500)
Balance Sheet of Clean Ltd. (after redemption)
Particulars Notes No. `
EQUITY AND LIABILITIES
1. Shareholders’ funds
a) Share capital 1 5,12,500
b) Reserves and Surplus 2 88,500
2. Current liabilities
Trade Payables 1,13,000
Total 7,14,000

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 ASSETS
1. Non-Current Assets
Property Plant and Equipments
Tangible asset 6,90,000
2. Current Assets
Cash and cash equivalents (bank) 3 24,000
Total 7,14,000
Notes to accounts `
1. Share Capital
Equity share capital ` (4,50,000 + 62,500) 5,12,500
2. Reserves and Surplus
Capital Redemption Reserve 67,500
Profit and Loss Account ` (96,000 - 13,000 - 7,000 - 67,500) 8,500
Security Premium 12,500
88,500
3. Cash and cash equivalents
Balances with banks ` (62,000 + 75,000 +30,000 - 1,43,000) 24,000
Working Note:
Calculation of Number of Shares: `
Amount payable on redemption (1,30,000 + 10% Premium) 1,43,000
Less: Sale price of investment (30,000)
1,13,000
Less: Available bank balance (62,000 - 24,000) (38,000)
Funds required from fresh issue 75,000
No. of shares = 75,000/60 = 1,250 shares
Q-2 Explain the conditions when a company should issue new equity shares for redemption of the preference
shares. Also discuss the advantages and disadvantages of redemption of preference shares by issue of
equity shares. [Sugg. Nov.’18, 5 Marks]
Ans. A company may prefer issue of new equity shares in the following situations:
(a) When the company realizes that the capital is needed permanently and it makes more sense to issue
Equity Shares in place of Redeemable Preference Shares which carry a fixed rate of dividend.
(b) When the balance of profit, which would otherwise be available for dividend, is insufficient.
(c) When the liquidity position of the company is not good enough.
Advantages of redemption of preference shares by issue of fresh equity shares
(1) No cash outflow of money is required -now or later.
(2) New equity shares may be valued at a premium.
(3) Shareholders retain their equity interest.

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 Disadvantages of redemption of preference shares by issue of fresh equity shares
(1) Therewill be dilution of future earnings;
(2) Share-holding in the companyis changed.
Q-4 Dheeraj Limited had 5,000, 10% Redeemable Preference Shares of Rs. 100 each, fully paid up. The
company had to redeem these shares at a premium of 10%.
It was decided by the company to issue the following:
(i) 40,000 Equity Shares of Rs. 10 each at par
(ii) 2,000 12% Debentures of Rs.100 each.
The issue was fully subscribed and all accounts were received in full. The payment was duly made. The
company had sufficient profits. Show journal entries in the books of the company
[Sugg. May ‘18, 10 Marks]
Ans. In the books of Dheeraj Limited
Journal Entries
Date Particular Dr. Dr.(Rs.) Cr.(Rs.)
Bank A/c Dr. 4,00,000
To Equity Share Capital A/c 4,00,000
(Being the issue of 40,000 equity shares of Rs.10 each at par
as per Board's resolution No... ...dated.....)
Bank A/c Dr. 2,00,000
To 12% Debenture A/c 2,00,000
(Being the issue of 2,000 Debentures of Rs.100 each as per
Board's Resolution No.....dated......)
10% Redeemable Preference Share Capital A/c Dr. 5,00,000
Premium on Redemption of Preference Shares A/c Dr. 50,000
To Preference Shareholders A/c 5,50,000
(Being the amount payable on redemption
transferred to Preference Shareholders Account)
Preference Shareholders A/c Dr. 5,50,000
To Bank A/c 5,50,000
(Being the amount paid on redemption of preference shares)
Profit & Loss A/c Dr. 50,000
To Premium on Redemption of Preference Shares A/c 50,000
(Being the adjustment of premium on
redemption against Profits & Loss Account)
Profit & Loss A/c Dr. 1,00,000
To Capital Redemption Reserve A/c 1,00,000
(Working Note)
(Being the amount transferred to Capital Redemption Reserve
Account as per the requirement of the Act)

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 Working Note:
Amount to be transferred to Capital Redemption Reserve Account
Face value of shares to be redeemed Rs.5,00,000
Less: Proceeds from new issue Rs.4,00,000
Balance Rs.1,00,000
Q-5 The Board of Directors of a Company decide to issue minimum number of equity shares of Rs. 9 to
redeem Rs. 5,00,000 preference shares. The maximum amount of divisible profits available for
redemption is Rs. 3,00,000.
Calculate the number of shares to be issued by the company to ensure that provisions of Section 55 are
not violated. Also determine the number of shares if the company decides to issue shares in multiples
of Rs. 50 only. [MTP Oct. ‘19, 5 Marks]

Ans. Nominal value of preference shares Rs.5,00,000

Maximum possible redemption out of profits Rs.3,00,000
Minimum proceeds of fresh issue Rs.5,00,000 - 3,00,000 = Rs.2,00,000
Proceeds of one share = Rs.9
Minimum number of shares = 2,00,000/9 = 22,222.22 shares
As fractional shares are not permitted, the minimum number of shares to be issued is 22,223 shares.
If shares are to be issued in multiples of 50, then the next higher figure which is a multiple of 50 is
22,250. Hence, minimum number of shares to be issued in such a case is 22,250 shares.
Q-6 The Board of Directors of a Company decide to issue minimum number of equity shares of Rs. 9 to
redeem Rs. 5,00,000 preference shares. The maximum amount of divisible profits available for
redemption is Rs. 3,00,000.
You are required to compute the number of shares to be issued by the company to ensure that provisions
of Section 55 are not violated. Also determine the number of shares if the company decides to issue
shares in multiples of Rs. 50 only.
OR
Following items appear in the Trial Balance of Hello Ltd. as on 31st March, 2017:
Particulars Amount
9,000 Equity Shares of Rs.100 each 9,00,000
Securities Premium 80,000
Capital Redemption Reserve 1,40,000
General Reserve 2,10,000
Profit and Loss Account (Cr. Balance) 90,000
The company decided to issue to equity shareholders bonus shares at the rate of 1 share for every 3
shares held. Company decided that there should be the minimum reduction in free reserves.
You are required to give the necessary Journal Entries in the books Hello Ltd.
[MTP March ‘19, 5 Marks]

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Ans. Nominal value of preference shares Rs.5,00,000
Maximum possible redemption out of profit Rs.3,00,000
Minimum proceeds of fresh issue Rs.5,00,000 - 3,00,000 = Rs.2,00,000
Proceed of one shares = Rs.9

2, 00, 000
Minimum number of shares = = 22,222,22 shares
9

As fractional shares are not permitted, the minimum number of shares to be issued is 22,223 shars.
If shares are to be issued in multiples of 50, then the next higher figure which is a multiples of 50 is
22,250. Hence minimum number of shares to be issued in such a case is 22,250 shares.
OR
Journal Entries in the books of Hello Ltd.
Capital Redemption Reserve A/c Dr. 1,40,000
Securities Premium A/c Dr. 80,000
General Reserve A/c (balancing figure) Dr. 80,000
To Bonus to Shareholders (Being issue of bonus shares 3,00,000
by utilization of various Reserves, as per resolution dated .......)
Bonus to Shareholders A/c Dr. 3,00,000
To Equity Share Capital (Being capitalization of Profit) 3,00,000
Q-10 G India Ltd. had 9,000 10% redeemable Preference Shares of Rs.10 each, fully paid up. The company
decided to redeem these preference shares at par by the issue of sufficient number of equity shares of
Rs.9 each fully paid up.
You are required to prepare necessary Journal Entries including cash transactions in the books of the
company. [MTP April ‘18, 5 Marks]
Ans. In the books of G India Limited
Journal
Date Particular Dr.(Rs.) Cr.(Rs.)
Bank A/c Dr. 90,000
To Equity Share Capital A/c 90,000
(Being the issue of 10,000 Equity Shares of Rs.9 each at par,
as per Board's Resolution No......Dated.....)
10% Redeemable Preference Shares Capital A/c Dr. 90,000
To Preference Shareholders A/c 90,000
(Being the amount payable on redemption of preference
shares transferred to Preference Shareholders A/c)
Preference Shareholders A/c Dr. 90,000
To Bank A/c 90,000
(Being the amount paid on redemption of preference shares)

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Q-11 The Board of Directors of a Company decide to issue minimum number of equity shares of Rs.9 to
redeem Rs.5,00,000 preference shares. The maximum amount of divisible profits available for
redemption is Rs.3,00,000.
You are required to compute the number of shares to be issued by the company to ensure that provisions
of Section 55 are not violated. Also determine the number of shares if the company decides to issue
shares in multiples of Rs. 50 only. [MTP March ‘18, 5 Marks]
Ans. Nominal value of preference shares Rs.5,00,000
Maximum possible redemption out of profits Rs.3,00,000
Minimum proceeds of fresh issue Rs.5,00,000 - 3,00,000 = Rs.2,00,000
Proceed of one share = Rs.9
2, 00,000
Minimum number of shares = =22,222,22 share
9
As fractional shares are not permitted, the minimum number of shares to be issued is 22,223 shares.
If shares are to be issued in multiples of 50, then the next higher figure which is a multiple of 50 is
22,250. Hence, minimum number of shares to be issued in such a case is 22,250 shares.
Q-12 The following are the extracts from the Balance Sheet of ABC Ltd. as on 31st December, 20X1.
Share capital: 40,000 Equity shares of Rs.10 each fully paid – Rs.4,00,000; 1,000 10% Redeemable
preference shares of Rs.100 each fully paid – Rs.1,00,000.
Reserve & Surplus: Capital reserve – Rs.50,000; Securities premium – Rs.50,000; General reserve –
Rs.75,000; Profit and Loss Account – Rs.35,000
On 1st January 20X2, the Board of Directors decided to redeem the preference shares at par by utilisation
of reserve.
You are required to pass necessary Journal Entries including cash transactions in the books of the
company. [MTP Aug. ‘18, 5 Marks]
Ans. In the books of ABC Limited
Journal Entries
Date Particulars Dr. (Rs.) Cr. (Rs.)
20X2
Jan 1 10% Redeemable Preference Share Capital A/c Dr. 1,00,000
To Preference Shareholders A/c 1,00,000
(Being the amount payable on redemption
transferred to Preference Shareholders
Account)
Preference Shareholders A/c Dr. 1,00,000
To Bank A/c 1,00,000
(Being the amount paid on redemption of
preference shares)
General Reserve A/c Dr. 75,000
Profit & Loss A/c Dr. 25,000
To Capital Redemption Reserve A/c 1,00,000
(Being the amount transferred to Capital
Redemption Reserve Account as per the
requirement of the Act)
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 Note: Securities premium and capital reserve cannot be utilised for transfer to Capital Redemption Reserve.
Q-13 The Board of Directors of a Company decide to issue minimum number of equity shares of Rs. 9 to
redeem Rs. 5,00,000 preference shares. The maximum amount of divisible profits available for
redemption is Rs. 3,00,000.
Calculate the number of shares to be issued by the company to ensure that provisions of Section 55 are
not violated. Also determine the number of shares if the company decides to issue shares in multiples
of Rs. 50 only. [MTP Oct. ‘18, 5 Marks]

Ans. Nominal value of preference shares Rs.5,00,000

Maximum possible redemption out of profits Rs.3,00,000
Minimum proceeds of fresh issue Rs.5,00,000 - 3,00,000 = Rs.2,00,000
Proceed of one share = Rs.9

2, 00, 000
Minimum number of shares = = 22,222.22 shares
9
As fractional shares are not permitted, the minimum number of shares to be issued is 22,223 shares.
If shares are to be issued in multiples of 50, then the next higher figure which is a multiple of 50 is
22,250. Hence, minimum number of shares to be issued in such a case is 22,250 shares.
Q-14 The following are the extracts from the Balance Sheet of ABC Ltd. as on 31st December, 20X1:
Share capital: 50,000 Equity shares of `10 each fully paid – `5,00,000; 2,000 10% Redeemable preference
shares of `100 each fully paid – ` 2,00,000.
Reserve & Surplus: Capital reserve – `2,00,000; General reserve –` 2,00,000; Profit and Loss Account –
`75,000.
On 1st January 20X2, the Board of Directors decided to redeem the preference shares at premium of 5%
by utilization of reserves.
You are required to prepare necessary Journal Entries including cash transactions in the books of the
company. [RTP Nov. ‘19]
Ans. In the books of ABC Limited
Journal Entries
Date Particulars Dr. (`) Cr. (`)
20X2
Jan 1 10% Redeemable Preference Share Capital A/c Dr. 2,00,000
Premium on Redemption of Preference Shares 10,000
To Preference Shareholders A/c 2,10,000
(Being the amount payable on redemption transferred
to Preference Shareholders Account)
Preference Shareholders A/c Dr. 2,10,000
To Bank A/c 2,10,000
(Being the amount paid on redemption of preference shares)
General Reserve A/c Dr. 2,00,000

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 To Capital Redemption Reserve A/c 2,00,000
(Being the amount transferred to Capital Redemption Reserve
Account as per the requirement of the Act)
Profit & Loss A/c Dr. 10,000
To Premium on Redemption of Preference Shares A/c 10,000
(Being premium on redemption charged to Profit and Loss A/c)
Note: Capital reserve cannot be utilized for transfer to Capital Redemption Reserve.
Q-15 Thecapital structure of a AP Ltd. consists of 20,000 Equity Shares of Rs.10 each fully paid up and 1,000 8%
Redeemable Preference Shares of Rs.100 each fully paid up (issued on 1.4.20X1).
Undistributed reserve and surplus stood as: General Reserve Rs.80,000; Profit and Loss Account Rs.20,000;
Investment Allowance Reserve out of which Rs.5,000, (not free for distribution as dividend) Rs.10,000;
Cash at bank amounted to Rs.98,000. Preference shares are to be redeemed at a Premium of 10% and for
the purpose of redemption, the directors are empowered to make fresh issue of Equity Shares at par
after utilising the undistributed reserve and surplus, subject to the conditions that a sum of Rs.20,000
shall be retained in general reserve and which should not be utilised.
Pass Journal Entries to give effect to the above arrangements and also show how the relevant
itemswillappearin the Balance Sheet of the companyafterthe redemption carried out. [RTP May ‘19]
Ans. In the books of AP Ltd.
Journal Entries
Date Particulars Dr. (Rs.) Cr. (Rs.)
Bank A/c Dr. 25,000
To Equity Share Capital A/c 25,000
(Being the issue of 2,500 Equity Shares of Rs.10
each at par, as per Board's Resolution No... ..dated.......)
8% Redeemable Preference Share Capital A/c Dr. 1,00,000
Premium on Redemption of Preference Shares A/c Dr. 10,000
To Preference Shareholders A/c 1,10,000
(Being the amount paid on redemption transferred
to Preference Shareholders Account)
Preference Shareholders A/c Dr. 1,10,000
To Bank A/c 1,10,000
(Being the amount paid on redemption of preference shares)
Profit & Loss A/c Dr. 10,000
To Premium on Redemption of Preference 10,000
Shares A/c
(Being the premium payable on redemption is
adjusted against Profit & Loss Account)
General Reserve A/c Dr. 60,000
Profit & Loss A/c Dr. 10,000

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 Investment Allowance Reserve A/c Dr. 5,000
To Capital Redemption Reserve A/c 75,000
(Being the amount transferred to Capital Redemption Reserve
Account as per the requirement of the Act)
Balance Sheets as on ......... (Extracts)
Particulars Notes Rs.
EQUITY AND LIABILITIES
1. Shareholders’ funds
a Share capital 1 2,25,000
b Reserves and Surplus 2 1,00,000
Total ?
ASSETS
2. Current Assets
Cash and cach eqivalents 13,000
(98,000 + 25,000 - 1,10,000)
Total ?
Notes to accounts
1. Share capital
22,500 Equity shares (20,000 + 2,500) of Rs.10 eahc fully paid up 2,25,000
2. Reserves and Surplus
General Reserve 20,000
Capital Redemption Reserve 75,000
Investment Allowance Reserve 5,000
1,00,000
Working Note:
No of Shares to be issued for redemption of Preference Shares:
Face value of shares redeemed Rs.1,00,000
Less: Profit available for distribution as dividend:
General Reserve : Rs.(80,000-20,000) Rs.60,000
Profit and Loss (20,000 - 10,000 set aside for
adjusting premium payable on redemption of preference shares) Rs.10,000
Investment Allowance Reserve: (Rs 10,000-5,000) Rs.5,000 (Rs.75,000)
25,000
Therefore, No. of shares to be issued = 25,000/`10 = 2,500 shares.
Q-16 The following are the extracts from the Balance Sheet of Meera Ltd. as on 31st December, 2017.
Share capital: 60,000 Equity shares of Rs.10 each fully paid - Rs.6,00,000; 1,500 10% Redeemable preference
shares of Rs.100 each fully paid - Rs.1,50,000.

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 Reserve & Surplus: Capital reserve - Rs.75,000; Securities premium - Rs.75,000; General reserve -
Rs.1,12,500; Profit and Loss Account - Rs.62,500.
On 1st January 2018, the Board of Directors decided to redeem the preference shares at premium of 10%
by utilisation of reserve.
You are required to prepare necessary Journal Entries including cash transactions in the books of the
company. [RTP Nov ‘18]
Ans. In the books of Meera Limited
Journal Entries
Date Particulars Dr. Rs. Cr.Rs.
2018
Jan 1 10% Redeemable Preference Share Capital A/c Dr. 1,50,000
Premium on Redemption of Pref. shares Dr. 15,000
To Preference Shareholders A/c 1,65,000
(Being the amount payable on redemption transferred
to Preference Shareholders Account)
Preference Shareholders A/c Dr. 1,65,000
To Bank A/c 1,65,000
(Being the amount paid on redemption of preference shares)
Profit & Loss A/c Dr. 15,000
To Premium on Redemption of Pref. Shares 15,000
(Being adjustment of premium on redemption)
General Reserve A/c Dr. 1,12,500
Profit & Loss A/c Dr. 37,500
To Capital Redemption Reserve A/c 1,50,000
(Being the amount transferred to Capital Redemption
Reserve Account as per the requirement of the Act)
Note: Securities premium and capital reserve cannot be utilized for transfer to Capital Redemption Reserve.
Q-17 The following are the extracts from the Balance Sheet of ABC Ltd. as on 31st December, 20X1:
Share capital: 50,000 Equity shares of Rs.10 each fully paid - Rs.5,00,000; 1,500 10% Redeemable
preference shares of Rs.100 each fully paid - Rs. 1,50,000.
Reserve & Surplus: Capital reserve - Rs.1,00,000; General reserve -Rs.1,00,000; Profit and Loss Account -
Rs.75,000.
On 1st January 20X2, the Board of Directors decided to redeem the preference shares at premium of
10% by utilization of reserves.
You are required to prepare necessary Journal Entries including cash transactions in the books of the
company.
[RTP May ‘18]

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Ans. In the books of ABC Limited
Journal Entries
Date Particulars Dr. Rs. Cr.Rs.
20x2
Jan 1 10% Redeemable Preference Share Capital A/c Dr. 1,50,000
Premium on Redemption of Preference Shares 15,000
To Preference Shareholders A/c 1,65,000
(Being the amount payable on redemption
transferred to Preference Shareholders Account)
Preference Shareholders A/c Dr. 1,65,000
To Bank A/c 1,65,000
(Being the amount paid on redemption of preference shares)
General Reserve A/c Dr. 1,00,000
Profit & Loss A/c Dr. 50,000
To Capital Redemption Reserve A/c 1,50,000
(Being the amount transferred to Capital Redemption
Reserve Account as per the requirement of the Act)
Profit & Loss A/c Dr. 15,000
To Premium on Redemption of Preference Shares A/c 15,000
(Being premium on redemption charged to Profit and Loss A/c)
Note : Capital reserve cannot be utilized for transfer to Capital Redemption Reserve.

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CHAPTER-8
Redemption of Debentures

Q-1 A company had issued 40,000, 12% debentures of ` 100 each on 1st April, 2015. The debentures are due
for redemption on 1 st March, 2019. The terms of issue of. debentures provided that they were
redeemable at a premium of 5% and also conferred option to the debenture holders to convert 20% of
their holding into equity shares (nominal value ` 10) at a predetermined price of ` 15 per share and the
payment in cash. 50 debentures holders holding totally 5,000 debentures did not exercise the option.
Calculate the number of equity shares to be allotted to the debenture holders and the amount to be
paid in cash on redemption. [Sugg.Nov.’19, 5 Marks]
Ans. Calculation of number of equity shares to be allotted
Number of debentures
Total number of debentures 40,000
Less: Debenture holders not opted for conversion (5,000)
Debenture holders opted for conversion 35,000
Option for conversion 20%
Number of debentures to be converted (20% of 35,000) 7,000

Redemption value of 7,000 debentures at a premium of 5% [7,000 x (100+5)] ` 7,35,000

Equity shares of ` 10 each issued to debenture holders on redemption
[` 7,35,000/ ` 15] 49,000 shares
Amount of cash to be paid
Amount to be paid into cash [42,00,000 (40,000 x ` 105 ) – 7,35,000] on redemption `34,65,000
Q-2 A Company had issued 1,000 12% debentures of f fOO each redeemable at the company's option at the
end of 10 years at par or prior to that by purchase in open market or at f 102 after giving 6 months notice.
On 31st December, 2016, the accounts of the company showed the following balances:
Debenture redemption fund ` 53,500 represented by 10% Govt. Loan of a nominal value of ` 42,800
purchased at an average price of ` 101 and ` 10,272 uninvested cash in hand.
On 1st January 2017, the company purchased ` 11,000 of its own debentures at a cost of Rs.10,272.
On 30th June, 2017, the company gave a six months notice to the holders of ` 40,000 debentures and on
31st December, 2017 carried out the redemption by sale of ` 40,800 worth of Govt. Loan at par and also
cancelled the own debentures held by it.
Prepare ledger account of Debenture Redemption Fund Account and Debenture Redemption Fund
Investment Account for the year ended 31.12.2017, assuming that, interest on company debentures &
Govt. loan was payable on 31st December every year. [Sugg. Nov.’18, 8 Marks]

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Ans. Debenture Redemption Fund Account
Date Particulars Rs. Date Particulars Rs.
31-12-17 To Debenture 1-1-17 By Balance b/d 53,500
Redemption
Fund Investment A/c 408
To Premium on redemption 800 31-12-17 By interest on DRFI (10% of 4,280
of debentures Rs.42,800)
To Balance c/d 57,892 By interest on Own debentures 1,320
(ie. 12% on Rs.11,000)
59,100 59,100
1-1-18 To Balance b/d 57,892
Debenture Redemption Fund Investment Account
Rs. Rs.
1.1.17 To Balance b/d 43,228 31.12.17 By Bank A/c 40,800
(428 x Rs.101) By Debenture redemption
Fund (1% of Rs.40,800)
By 12% Debentures 11,000
1.1.17 To Bank 10,272 By Balance c/d 2,020
31.12.17 To Capital Reserve 728
(Profit on cancellation of
Debentures)
54,228 54,228
1.1.18 To Balance b/d 2,020
Q-3 Gurudev Limited purchases for immediate cancellation 6,000 of its own 12% debentures of ` 100 each
on 1st November, 2017. The dates of interest being 31st March, and 30th September. Pass necessary
journal entries relating to the cancellation if:
(i) Debentures are purchased at ` 98 ex-interest,
(ii) Debentures are purchased at ` 98 cum-interest. [Sugg. May ‘18, 5 Marks]
Ans. In the books of Gurudev Ltd.
Journal Entries
(i) In case of ex-interest
Date Particulars Rs. Rs.
1.11.2017 Own Debentures A/c Dr. 5,88,000
Debentures Interest A/c [6,000 x 100 x 12% x (1/12)] Dr 6,000
To Bank A/c (Purchase of 6,000 Debentures 5,94,000
@ 98 ex interest for immediate cancellation
1.11.17 12% Debentures A/c Dr 6,00,000
To Own Debentures A/c 5,88,000

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 To Capital reserve A/c (Profit on 12,000
cancellation of debentures)
(Being profit on cancellation of 6,000
Debentures trasferred to capital reserved account)
(ii) Incase of cum interest
1.11.17 Own Debenture A/c Dr. 5,82,000
Debenture Interest Account A/c Dr. 6,000
[6,000 x 100 x 12% x (1/12)]
To Bank A/c 5,88,000
(Being 6,000 debentures purchased @ Rs. 98
cum interest for immediate cancellation
1.11.17 12% Debenture A/c Dr. 6,00,000
To Own Debentures A/c 5,82,000
To Capital reserve A/c (Profit on cancellation of debentures) 18,000
(Being Profit on cancelation of 6,000 Debentures
transferred to capital reserve account).
Q-4 A Company had issued 20,000, 13% Convertible debentures of Rs. 100 each on 1st April, 20X1. The
debentures are due for redemption on 1st July, 20X2. The terms of issue of debentures provided that
they were redeemable at a premium of 5% and also conferred option to the debenture holders to
convert 20% of their holding into equity shares (Nominal value Rs. 10) at a price of Rs. 15 per share.
Debenture holders holding 2,500 debentures did not exercise the option.
Calculate the number of equity shares to be allotted to the Debenture holders exercising the option to
the maximum. [MTP April ‘18, 5 Marks]
Ans. Calculation of number of equity shares to be allotted
Number of
debentures
Total number of debentures 20,000
Less; Debenture holders not opted for conversion 2,500
Debenture holders opted for conversion 17,500
Option for conversion 20%
Number of debentures to be converted (20% of 17,500) 3,500
Redemption value of 3,500 debentures at a premium of 5% [3,500 x (100+5)] Rs. 3,67,500
Equity shares of Rs. 10 each issued on conversion [Rs. 3,67,500/ Rs. 15 ] 24,500 shares
Q-5 Omega Limited (a manufacturing company) 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- ` 100 per
debenture.
(b) Convertible portion per debenture- 60%, date of conversion- on expiry of 6 months from the date
of closing of issue i.e 31.10.20X1.

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 (c) Date of closure of subscription lists- 1.5.20X1, date of allotment- 1.6.20X1, rate of interest on
debenture- 15% payable from the date of allotment, value of equity share for the purpose of
conversion- ` 60 (Face Value ` 10).
(d) Underwriting Commission- 2%.
(e) Number of debentures applied for - 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, 20X2 (including cash and bank entries). [RTP Nov. ‘19]
Ans. Journal Entries in the books of Omega Ltd.
Journal Entries
Date Particulars Amount Dr. Amount Cr.
` `
1.5.20X1 Bank A/c Dr. 1,50,00,000
To Debenture Application A/c 1,50,00,000
(Application money received on 1,50,000
debentures @ ` 100 each)
1.6.20X1 Debenture Application A/c Dr. 1,50,00,000
Underwriters A/c Dr. 50,00,000
To 15% Debentures A/c 2,00,00,000
(Allotment of 1,50,000 debentures to applicants
and 50,000 debentures to underwriters)
Underwriting Commission Dr. 4,00,000
To Underwriters A/c 4,00,000
(Commission payable to underwriters @ 2% on ` 2,00,00,000)
Bank A/c Dr. 46,00,000
To Underwriters A/c 46,00,000
(Amount received from underwriters in settlement of account)
01.06.20X1 Profit & Loss A/c
To Debenture Redemption Reserve A/c Dr. 20,00,000
(200,000 x 100 x 25% x 40%) 20,00,000
(Being Debenture Redemption Reserve created
on non-convertible debentures)
Debenture Redemption Reserve Investment A/c
To Bank A/c (200,000 x 100 x 15% x 40%) Dr. 12,00,000
(Being Investments made for redemption purpose)
12,00,000
30.9.20X1 Debenture Interest A/c Dr. 10,00,000
To Bank A/c 10,00,000
(Interest paid on debentures for 4 months @
15% on ` 2,00,00,000)

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 31.10.20X1 15% Debentures A/c Dr. 1,20,00,000
To Equity Share Capital A/c 20,00,000
To Securities Premium A/c 1,00,00,0000
(Conversion of 60% of debentures into shares
of ` 60 each with a face value of ` 10)
31.3.20X2 Debenture Interest A/c Dr. 7,50,000
To Bank A/c 7,50,000
(Interest paid on debentures for the half year)
(refer working note below)
Working Note :
Calculation of Debenture Interest for the half year ended 31st March, 20X2
On ` 80,00,000 for 6 months @ 15% = ` 6,00,000
On ` 1,20,00,000 for 1 months @ 15% = ` 1,50,000
` 7,50,000
Q-6 On 1st January, 2008 Raman Ltd. allotted 20,000 9% Debentures of ?100 each at par, the total amount
having been received along with applications.
(i) On 1st January, 2010 the Company purchased in the open market 2,000 of its own debentures @
Rs.101 each and cancelled them immediately.
(ii) On 1st January, 2013 the companyredeemed at par debentures for Rs.6,00,000 by draw of a lot.
(iii) On 1st January, 2014 the company purchased debentures of the face value of Rs.4,00,000 for 3,95,600
in the open market, held them as investments for one year and then cancelled them.
(iv) Finally, as per resolution of the board of directors, the remaining debentures were redeemed at a
premium of 2% on 1st January, 2018 when Securities Premium Account in the company's ledger
showed a balanceof Rs.60,000.
Pass journal entries for the above mentioned transactions ignoring debenture redemption reserve,
debenture - interest and interest on own' debentures. [RTP May ‘19]
Ans. Journal
Date Particulars Dr. (Rs.) Cr. (Rs.)
2008 Jan 1 Bank Dr. 20,00,000 20,00,000
To 9% Debenture Applications SAIIotment Account
(Being application money on 20,000 debentures @ Rs.100
per debenture received)
9% Debentures Applications & Allotment Account Dr. 10,00,000
To 9% Debentures Account 20,00,000
(Being allotment of 20,000 9% Debentures of Rs.100each at par)
(i) 9% Debenture Account Dr. 2,00,000
2010 Jan. 1 Loss on Redemption of Debentures Account Dr. 2,000
To Bank 2,02,000
(Being redemption of 2,000 9% Debentures of Rs.100

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 each by purchase in the open market @Rs.101 each)
Profit & Loss Account/Securities Premium 2,000
Account Dr. 2,000
To Loss on Redemption of Debentures Account
(Being loss on redemption of debentures being written off
by transfer b Profit and Loss Account or Securities
Premium Account
(ii) 2013 9% Debentures Account Dr. 6,00,000
Jan. 1 To Sundry Debenture holders 6,00,000
(Being Amount payable b debenture holders on redemption
debentures for Rs.6,00,000 at par by draw of a lot)
Sundry Debenture holders Dr. 6,00,000
To Bank 6,00,000
(Being Payment made b sundry debenture holders for
redeeming debentures of Rs.6,00,000 at par)
(iii) 2014 Own Debentures Dr. 3,95,000
Jan. 1 To Bank 3,95,600
(Being purchase of own debentures of the face value of
Rs.4,00,000 for Rs.3,95,600)
2015 ” 9% Debentures Dr. 4,00,000
To Own Debentures 3,95,600
To Profit on Cancellation of Own Debentures Account 4,400
(Being Cancellation of own debentures of the face value of
Rs.4,00,000 purchased last year for Rs.3,95,600)
” ” Profit on Cancellation of Own Debentures 4,400
Account Dr. 4,400
To Capital Reserve Account
(Being transfer of profit on cancellation of own debentures
to capital reserve)
(iv) 2018 9% Debentures Account Dr. 8,00,000
Jan. Premium on Redemption of Debentures Account Dr. 16,000
To Sundry Debenture holders 8,16,000
(Being amount payable to holders of debentures of the face
value of Rs.8,00,000 on redemption at a premium of 2% as
per resolution of the board of directors)
” ” Sundry Debenture holders Dr. 8,16,000
To Bank Account

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 (Being payment to sundry debenture holders) 8,16,000
” ” Securities Premium Account Dr. 16,000
To Premium on Redemption of Debentures Account 16,000
(Being utilisation of a part of the balance in Securities
Premium Account to write off premium paid on redemption
of debentures)
Q-7 The summarized Balance Sheet of Spices Ltd. as on 31st March, 2018 read as under:
Rs.
Liabilities:
Share Capital: 9,000 equity shares of Rs.10 each, fully paid up 90,000
General Reserve 38,000
Debenture Redemption Reserve 35,000
12% Convertible Debentures : 1,200 Debentures of Rs.50 each 60,000
Unsecured Loans 28,000
Short term borrowings 19,000
2,70,000
Assets:
Fixed Assets (at cost less depreciation) 72,000
Debenture Redemption Reserve Investments 34,000
Cash and Bank Balances 86,000
Other Current Assets 78,000
2,70,000
The debentures are due for redemption on 1st April, 2018. The terms of issue of debentures provided that
they were redeemable at a premium 10% and also conferred option to the debenture holders to convert
40% of their holding into equity shares at a predetermined price of ? 11 per share and the balance payment
in cash.
Assuming that:
(i) Except for debentureholders holding 200 debentures in aggregate, rest of them exercised the option
for maximum conversion,
(ii) The investments realized Rs.56,000 on sale,
(iii) All the transactions were taken place on 1st April, 2018
(iv) Premium on redemption of debentures is to be adjusted against General Reserve.
You are required to
(a) Redraft the Balance Sheet of Spices Ltd. as on 01.04.2018 after giving effect to the redemption.
(b) Show your calculations in respect of the number of equity shares to be allotted and the cash payment
necessary. [RTP Nov ‘18]

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Ans. Spices Ltd.
Balance Sheet as on 01.04.2018
Particulars Note No. Figures as at the
end of current
reporting period
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 1,10,000
(b) Reserves and Surplus 2 91,000
(2) Non-Current Liabilities
(a) Long-term borrowings - Unsecured Loans 28,000
(3) Current Liabilities
(a) Short-term borrowings 19,000
Total 2,48,000
II. Assets
(1) Non-current assets
(a) Fixed assets
(i) Tangible assets 72,000
(2) Current assets
(a) Cash and cash equivalents 98,000
(b) Other current assets 78,000
Total 2,48,000
Notes to Accounts
Rs.
1. Share Capital
11,000 Equity Shares of Rs.10 each 1,10,000
(Out of above, 2000 shares issued to debentures
holders who opted for conversion into shares)
2. Reserve and Surplus
General Reserve 38,000
Add: Debenture Redemption Reserve transfer 35,000
73,000
22,000
Add: Profit on sale of investments 95,000
Less: Premium on redemption of debentures (1,200 xRs.5) 6,000 89,000
Securities Premium Account (2,000 x Rs.1) 2,000
91,000
Working Notes:
(i) Calculation of number of shares to be allotted Rs.
Total number of debentures 1,200
Less; Number of debentures not opting for conversion (200)
1,000

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 40% of 1,000 400
Redemption value of 400 debentures (400 x Rs.55) Rs.22,000
Number of Equity Shares to be allotted 22,000/11 = 2,000 shares of Rs.10 each.
(ii) Calculation of cash to be paid Rs.
Number of debentures 1,200
Less; Number of debentures to be converted into equity shares (400)
800
Redemption value of 800 debentures (800 x Rs.55) Rs.44,000
(ii) Cash and Bank Balance Rs.
Balance before redemption 86,000
Add: Proceeds of investments sold 56,000
1,42,000
Less: Cash paid to debenture holders 44,000
98,000
Q-8 On 1st January, 2006 Raman Ltd. allotted 20,000 9% Debentures of Rs.100 each at par, the total amount
having been received along with applications.
(i) On 1st January, 2008 the Company purchased in the open market 2,000 of its own debentures @ ?
101 each and cancelled them immediately.
(ii) On 1st January, 2011 the company redeemed at par debentures for Rs.6,00,000 by draw of a lot.
(iii) On 1st January, 2012 the company purchased debentures of the face value of Rs.4,00,000 for 3,95,600
in the open market, held them as investments for one year and then cancelled them.
(iv) Finally, as per resolution of the board of directors, the remaining debentures were redeemed at a
premium of 2% on 1st January, 2016.
You are required to prepare required journal entries for the above-mentioned transactions ignoring
debenture redemption reserve, debenture interest and interest on own debentures. [RTP May ‘18]
Ans. Journal Entries
(Rs.) Dr. (Rs.) Cr.
2006 Jan 1 Bank Dr. 20,00,000
To 9% Debenture Applications & Allotment Account 20,00,000
(Being application money on 20,000 debentures @
Rs.100 per debenture received)
9% Debentures Applications & Allotment Account Dr. 20,00,000
To 9% Debentures Account 20,00,000
(Being allotment of 20,000 9% Debentures of Rs.100 each at par)
(i) 9% Debenture Account Dr. 2,00,000
2008 Jan.1 Loss on Redemption of Debentures Account Dr. 2,000
To Bank 2,02,000
(Being redemption of 2,000 9% Debentures of Rs.100 each by
purchase in the open market @ Rs.101 each)
Profit & Loss Account Dr. 2,000
To Loss on Redemption of Debentures Account 2,000
(Being loss on redemption of debentures being
written off by transfer to Profit and Loss Account)

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 (ii) 9% Debentures Account Dr. 6,00,000
2011 Jan.1 To Sundry Debenture holders 6,00,000
(Being Amount payable to debenture holders on
redemption debentures for Rs.6,00,000 at par by draw of a lot)
Sundry Debenture holders Dr. 6,00,000
To Bank 6,00,000
(Being Payment made to sundry debenture holders
for redeeming debentures of Rs.6,00,000 at par)
(iii) Own Debentures Dr. 3,95,600
2012 Jan.1 To Bank 3,95,600
(Being purchase of own debentures of the face value
of Rs.4,00,000 for Rs.3,95,600)
2013 9% Debentures Dr. 4,00,000
To Own Debentures 3,95,600
To Profit on Cancellation of Own Debentures Account 4,400
(Being Cancellation of own debentures of the face
value of Rs.4,00,000 purchased last year for Rs.3,95,600)
Profit on Cancellation of Own Debentures 4,400
Account Dr. 4,400
To Capital Reserve Account
(Being transfer of profit on cancellation of own
debentures to capital reserve)
(iv) 9% Debentures Account Dr. 8,00,000
2016 Jan.1 Premium on Redemption of Debentures Account Dr. 16,000
To Sundry Debenture holders 8,16,000
(Being amount payable to holders of debentures of
the face value of Rs.8,00,000 on redemption at a
premium of 2% as per resolution of the board of directors)
Sundry Debenture holders Dr. 8,16,000
To Bank Account 8,16,000
(Being payment to sundry debenture holders)
Profit & Loss Account Dr. 16,000
To Premium on Redemption of Debentures Account 16,000
(Being utilization of a part of the balance in Securities Premium
Account to write off premium paid on redemption of debentures)

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CHAPTER-9
Investment Accounts

Q-1 Mr. Harsh provides the following details relating to his holding m 10% debentures (face value of ` 100
each) of Exe Ltd., held as current assets:
1.4.2018 opening balance - 12,500 debentures, cost ` 12,25,000
1.6.2018 purchased 9,000 debentures @ ` 98 each ex-interest
1.11.2018 purchased 12,000 debentures @ ` 115 each cum-in terest
31.1.2019 sold 13,500 debentures @ ` 110 each cum-interest
31.3.2019 Market value of debentures @ ` 115 each
Due dates of interest are 30th June and 31st December. Brokerage at 1% is to be paid for each transaction.
Mr, Harsh closes his books on 31.3.2019. Show investment account as it would appear in his books
assuming FIFO method is followed. [Sugg.Nov.’19,10 Marks]
Ans. Investment Account of Mr. Harsh
for the year ending on 31-3-2019
(Scrip: 10% Debentures of Exe Limited)
(Interest Payable on 30th June and 31st December)
Date Particulars Nominal Interest Cost Date Particulars Nominal Interest Cost
Value Value
` ` ` ` ` `
1.4.18 To Balance
b/d 12,50,000 31,250 12,25,000 30.6.18 By Bank 21,500 x 100 - 1,07,500 -
x 10% x 1/2
1.6.18 To Bank
(ex-Interest)
(W.N.1) 9,00,000 37,500 8,90,820 31.12.19 By Bank
33,500 x 100
x10% x 1/2 1,67,500
1.11.18 To Bank
(cum-Interest)
(W.N.2) 12,00,000 40,000 13,53,800 31.1.19 By Bank (W.N.3) 13,50,000 11,250 14,58,900
31.1.19 To Profit &
Loss A/c
(W.N.3) 1,34,920 31.3.19 By Balance c/d 20,00,000 50,000 21,45,640
(W.N.4) -
31.3.19 To Profit &
Loss A/c
(Bal. fig.) _________ 2,27,500 ________ _________ _________ _________
33,50,000 3,36,250 36,04,540 33,50,000 3,36,250 36,04,540

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 Working Notes:
1. Purchase of debentures on 1.6.18
Interest element = 9,000 x 100 x 10% x 5/12 = ` 37,500
Investment element = (9,000 x 98) + [1%(9,000 x 98)] = ` 8,90,820
2. Purchase of debentures on 1.11.2018
Interest element = 12,000 x 100 x 10% x 4/12 = ` 40,000
Investment element = 12,000 X 115 X 101% less 40,000 = ` 13,53,800
3. Profit on sale of debentures as on 31.1.19
`
Sales price of debentures (13,500 x ` 110) 14,85,000
Less: Brokerage @ 1% (14,850)
14,70,150
Less: Interest (1,35,000/ 12) (11,250)
14,58,900
Less: Cost of Debentures [(12,25,000 + (890820 X 1,00,000/9,00,000)] (13,23,980)
Profit on sale 1,34,920
4. Valuation of closing balance as on 31.3.2019:
Market value of 20,000 Debentures at ` 115 = ` 23,00,000
Cost of
8,000 Debentures = 8,90,820/ 9,000 X 8,000 = 7,91,840
12,000 Debentures = 13,53,800
Total 21,45,640
Value at the end is ` 21,45,640, i.e., which is less than market value of ` 23,00,000.
Q-2 Following transaction of Nisha took Place during the financil year 2017-18 :
1st April, 2017 Puchased ` 9,000 8% bonds of ` 100 each at ` 80.50 cuminterset. Intersest. Interest
is payable on 1st November and 1st May.
1st May, 2017 Received half year’s interset on 8% bonds.
10 July, 2017 Puchased 12,000 equilty shares of Rs.10 each in Moon Limited for ` 44 each through
a broker, who charged brokerage @2%
1st October 2017 Sold 2,250 8% bonds at ` 81 Ex-interest.
1st November, 2017 Received half year’s interest on 8% bonds.
15th January, 2018 Moon Limited made a right issue of one equity share for every four Equity shares
helf at ` 5 per share. Nisha exercised the option for 4% of her entitlements and
sold the balance right int he makret at ` 2.25 per share.
15th March, 2018 Received 18% interm dvidend on equity shares of Moon Limited.
Prepare separate investment account for 8% bonds and equity shares of Moon Limited in the books of Nisha
for the year ended on 31st March, 2018. Assume that the average cost method is followed.
[Sugg. Nov.’18, 10 Marks]

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Ans. In the books of Nisha
8% Bonds for the year ended 31st March, 2018
Date Particular No. Income Amount Date Particular No. Income Amount
` ` ` `
2017 1 May By Bank Interset - 36,000 -
1 April, To Bank A/c 9,000 30,000 6,94,500 2017
Oct. 1
2018 To P & L A/c - - 8,625 1 Oct. By Bank A/c 2,250 7,500 1,82,250
March (W.N.1) 2017
31
To P & L A/c 40,500 1 Nov. By bank Interest 27,000
2018
2018 By Balance c/d
Mar.31 (W.N.2)
6,750 - 5,20,875
9,000 70,500 7,03,125 9,000 70,500 7,03,125
Investment In Equity shares of Moon Ltd. for the year ended 31st March, 2018
Date Particular No. Income Amount Date Particular No. Income Amount
` ` ` `
2017 To Bank 12,000 -- 5,38,560 2018 By Bank- - 23,760
A/c March dividend
15 *
2018 To Bank 1,200 - 6,000 March By Balance
Jan. 15 A/c 31 c/d
(W.N.3) (bal.fig) 13,200 - 5,44,560
March To P & L
31 A/c - 23,760
13,200 23,760 5,44,560 13,200 23,760 5,44,560
* Considering that dividend was received on right share also.
Working Notes:
1. Profit on sale of 8% Bonds
Sales price ` 1,82,250
Less: Cost of bond sold = 6,94,500/9,000x 2,250 (` 1,73,625)
Profit on sale ` 8,625
2. Closing balanceas on 31.3.2018 of 8% Bonds
6,94,500/ 9,000 x 6,750= ` 5,20,875
3. Calculation of right shares subscribed by Moon Ltd.
Right Shares = 12,000/4 x 1= 3,000 shares
Shares subscribed by Nisha = 3,000 x 40%= 1,200 shares
Value of right shares subscribed = 1,200 shares @ ` 5 per share = ` 6,000
4. Calculation of sale of rightentitlement by Moon Ltd.
No. of right shares sold = 3,000 -1,200 = 1,800 rights for ` 4,050
Note: As per para 13 of AS 13, sale proceeds of rights are to be credited to P & L A/c.

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Q-3 Mr. Vijay entered into the following transactions of purchase and sale of equity shares of JP Power Ltd.
The shares have paid up value of ` 10 per share.
Date No.of Shares Terms
01.01.2016 600 Buy @ Rs.20 per share
15.03.2016 900 Buy @ Rs.25 per share
20.05.2016 1000 Buy@ Rs.23 per share
25.07.2016 2500 Bonus Shares received
20.12.2016 1500 Sale @ Rs.22 per share
01.02.2017 1000 Sale @ Rs.24 per share
Addition information:
(1) On 15.09.2016 dividend @ ` 3 per share was received for the year ended 31.03.2016.
(2) On 12.11.2016 company made a right issue of equity shares in the ratio of one share for five shares held
on payment of ` 20 per share. He subscribed to 60% of the shares and renounced the remaining shares
on receipt of the premium of ` 3 per share.
(3) Shares are to be valued on weighted average cost basis.
You are required to prepare Investment Account for the year ended 31.03.2016 and 31.03.2017.
[Sugg. May ‘18, 10 Marks]
Ans. Investment in Equity Shares of JP Power Ltd.
Date Particular No. Dividend Amount Date Particular No. Dividend Amount
01.01.16 To Bank A/c 600 12,000 31.3.16 By Balance c/d 1,500 34,500
15.3.16 To Bank A/c 900 22,500
1,500 34,500 1,500 34,500
1.4.16 To Balance b/d 1,500 34,500 15.9.16 By Bank dividend 4,500 3,000
20.5.16 To Bank A/c 1,000 23,000 20.12.16 By Bank 1,500 33,000
25.7.16 To Bonus shares 2,500 - 1.2.17 By Bank 1,000 24,000
12.11.16 To Bank A/c 600 12,000 31.3.17 By Balance c/d 3,100 36,812.50*
20.12.16 To P&L A/c
(profit on sale) 15,187,50*
1.2.17 To P&L A/c 12,125
(profit on sale)
31.3.17 To P&L A/c 4,500
(divdend)
5,600 4,500 96,812,50 5,600 4,500 96,812.50
Working Notes :
1. Calculation of Weighted average cost of equity shres
600 shares puchased at Rs.12,000
900 shares purchased at Rs.22,500
1,000 shares purchased at Rs.23,000
2,500 shares at nil cost
600 right shares purchased at Rs.12,000
Total cost of 5,600 shares is Rs.66,500 [Rs. 69,500 less Rs.3,000 (pre-acquisition dividend received on
1,000 shares purchased on 20.5.17].
Hence, weighted average cost per share will be considered as Rs.11.875 per share (66,500/5,600).

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 2. It has been considered that no dividend was received on bonus shares as the dividend pertains to the
year ended 31st March, 2016.
3. Calculation of right shares subscribed by Vijay
Right Shares (considering that right shares have been granted on Bonus shares also) = 5,000/5 x 1= 1,000
shares
Shares subscribed = 1,000 x 60%= 600 shares
Value of right shares subscribed = 600 shares @ Rs. 20 per share = Rs.12,000
Calculation of sale of right renouncement
No. of right shares sold = 1,000 x 40% = 400 shares
Sale value of right = 400 shares x Rs.3 per share = Rs.1,200
Note: As per para 13 of AS 13, sale proceeds of rights is to be credited to P & L A/c.
4. Profit on sale of equity shares
As on 20.12.16
Sales price (1,500 shares at Rs.22) 33,000.00
Less: Cost of shares sold (1,500 x Rs 11.875) (17,812.50)
Profit on sale 15,187.50
As on 1.2.17
Sales price (1,000 shares at Rs.24) 24,000
Less: Cost of shares sold (1,000 x Rs. 11.875) 11,875
Profit on sale 12,125
Balance of 3,100 shares as on 31.3.17 will be valued at ` 36,812.50 (at rate of Rs.11.875 per share).
Q-4 Akash Ltd. had 4,000 equity share of X Limited, at a book value of Rs. 15 per share (face value of Rs. 10
each) on 1st April 2018. On 1st September 2018, Akash Ltd. acquired 1,000 equity shares of X Limited at
a premium of Rs. 4 per share. X Limited announced a bonus and right issue for existing share holders.
The terms of bonus and right issue were -
(1) Bonus was declared, at the rate of two equity shares for every five equity shares held on 30th
September, 2018.
(2) Right shares are to be issued to the existing shareholders on 1st December, 2018. The company
issued two right shares for every seven shares held at 25% premium. No dividend, was payable on
these shares. The whole sum being payable by 31st December, 2018.
(3) Existing shareholders were entitled to transfer their rights to outsiders, either wholly or in part.
(4) Akash Ltd. exercised its option under the issue for 50% of its entitlements and sold the remaining
rights for Rs. 8 per share.
(5) Dividend for the year ended 31st March 2018, at the rate of 20% was declared by the company and
received by Akash Ltd., on 20th January 2019.
(6) On 1st February 2019, Akash Ltd., sold half of its share holdings at a premium of Rs. 4 per share.
(7) The market price of share on 31.03.2019 was Rs. 13 per share.
You are required to prepare the Investment Account of Akash Ltd. for the year ended 31st March, 2019
and determine the value of shares held on that date assuming the investment as current investment.
[MTP Oct. ‘19, 10 Marks]

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Ans. Investment Account-Equity Shares in X Ltd.
Date No. of Dividend Amount Date No. of Dividend Amount
shares shares
Rs. Rs. Rs. Rs.
2018 2019
April 1 To Balance 4,000 - 60,000 Jan. 20 By Bank 8,000 2,000
b/d (dividend)
Sept 1 To Bank 1,000 - 14,000 Feb. 1 By Bank 4,000 56,000
Sept.30 To Bonus Issue 2,000 - Mar. 31 By Balance c/d 4,000 42,250
Dec.1 To Bank (Right) 1,000 - 12,500
2019
Feb. 1 To Profit & 13,750
Loss A/c
Feb. 1 To Profit & Loss A/c 8,000
(Dividend income) _____ ______ ______ _____ _____ ______
8,000 8,000 1,00,250 8,000 8,000 1,00,250
April. 1 To Balance b/d 4,000 42,250
Working Notes:
1. Cost of shares sold . Amount paid for 8,000 shares
Rs.
(Rs. 60,000 + Rs. 14,000 + Rs. 12,500) 86,500
Less: Dividend on shares purchased on 1st Sept, 2018 (2,000)
Cost of 8,000 shares 84,500
Cost of 4,000 shares (Average cost basis*) 42,250
Sale proceeds (4,000 shares @ 14/-) 56,000
Profit on sale 13,750
* For ascertainment of cost for equity shares sold, average cost basis has been applied.
2. Value of investment at the end of the year
Closing balance will be valued based on lower of cost (Rs. 42,250) or net realizable value (Rs.13 x 4,000).
Thus investment will be valued at Rs. 42,250.
3. Calculation of sale of right entitlement
1,000 shares x Rs. 8 per share = Rs. 8,000
Amount received from sale of rights will be credited to P & L A/c as per AS 13
4. Dividend received on investment held as on 1st April, 2018
= 4,000 shares x Rs. 10 x 20%
= Rs. 8,000 will be transferred to Profit and Loss A/c
Dividend received on shares purchased on 1st Sep. 2018
= 1,000 shares x Rs. 10 x 20% = Rs. 2,000 will be adjusted to Investment A/c
Note: It is presumed that no dividend is received on bonus shares as bonus shares are declared on 30th
Sept., 2018 and dividend pertains to the year ended 31.3.2018.

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Q-5 In 2015, Royal Ltd. issued 12% fully paid debentures of Rs. 100 each, interest being payable half yearly
on 30th September and 31st March of every accounting year.
On 1st December, 2016, M/s. Kumar purchased 10,000 of these debentures at Rs.101 cum-interest price,
also paying brokerage @ 1% of cum-interest amount of the purchase. On 1st March, 2017 the firm sold
all of these debentures at Rs.106 cum-interest price, again paying brokerage @ 1 % of cum-interest
amount. Prepare Investment Account in the books of M/s. Kumar for the period 1st December, 2016 to
1st March, 2017. [MTP March ‘19, 6 Marks]
Ans. In the books of M/s Kumar
Investment Account for the period from 1st December 2016 to 1st March, 2017
(Scrip : 12% Debentures of Royal Ltd.)
Date Particulars Nominal Interest Cost date Particulars Nominal Interest Cost
1.12.2016 To Bank A/c 10,00,000 20,000 10,00,100 1.3.2017 By Bank A/c 10,00,000 50,000 9,99,400
(W.N.1) (W.N.2)
1.3.2017 To Profit & - 1.3.2017 By Profit &
loss A/c 30,000 loss A/c 700
10,00,000 50,000 10,00,100 10,00,000 50,000 10,00,100
Working Notes :
(i) Costof 12% debentures purchased on 1.12.2016 Rs.
Cost Value (10,000 xRs.101) = 10,10,000
Add: Brokerage (1% of Rs.10,10,000) = 10,100
Less; Cum Interest (10,000 x 100 x12% x 2/12) = (20,000)
Total = 10,00,100
(ii) Sale proceeds of 12% debentures sold on 1st March, 2017 Rs.
Sales Price (10,000 xRs.106) = 10,60,000
Less; Brokerage (1% of Rs.10,60,000) = (10,600)
Less; Cum Interest (10,000 x 100 x12% x 5/12) = (50,000)
Total = 9,99,400
Q-6 Gopal holds 2,000, 15% Debentures of Rs. 100 each in Ritu Industries Ltd. as on April 1, 2015 at a cost of
Rs. 2,10,000. Interest is payable on June, 30 and December, 31 each year. On May 1, 2015,1,000 debentures
are purchased cum-interest at Rs. 1,07,000. On November 1,2015,1,200 debentures are sold ex-interest
at Rs. 1,14,600. On November 30, 2015, 800 debentures are purchased ex-interest atRs. 76,800. On
December31,2015,800 debentures are sold cum-interest for Rs. 1,10,000. You are required to prepare
the Investment Account showing value of holdings on March31, 2016 at cost, using FIFO Method.
[MTP April ‘19, 10 Marks]
Ans. Investment Accountof Gopal
For the year ended 31.3.2016
(Script: 15% Debentures in Ritu Industries Ltd.)
(Interest payable on 30th June and 31st December)
Date Particulars Nominal Interest Cost Rs. Date Particulars Nominal Interest Cost Rs.
1.04.15 To Balance A/c 2,00,000 7,500 2,10,000 30.06.15 By Bank A/c - 22,500
1.05.15 To Bank A/c 1,00,000 5,000 1,02,000 1.11.15 By Bank A/c 1,20,000 6,000 1,14,600
30.11.15 To Bank A/c 80,000 5,000 76,800 1.11.15 By Profit - - 11,400
& Loss A/c
31.12.15 To Profit & Loss A/c 20,000 31.12.15 By Bank A/c 80,000 6,000 1,04,000
31.03.16 To Profit & 37,250 31.12.15 By Bank A/c - 13,500 -
Loss A/c (Bal. fig.) 31.12.15 By Bank A/c 6,750
31.3.16 By Bal. c/d 1,80,000 1,78,800
3,80,000 54,750 4,08,800 3,80,000 54,750 4,08,800

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 Working Notes:
15 3
(i) Accrued Interest as on 1st April, 2015 = Rs. 2,00,000 x x = Rs.7,500
100 12

15 4
(ii) Accrued Interest as on 1.5.2015 = Rs. 1,00,000 x x = Rs.5,000
100 12
(iii) Cost of Investment for purchase on 1st May = Rs. 1,07,000-Rs. 5,000= Rs. 1,02,000
15 6
(iv) Interest received as on 30.6.2015 = Rs. 3,00,000 x x =Rs. 22,500
100 12
(v) Accrued Interest on debentures sold on 1.11.2015

15 4
= Rs. 1,20,OOOx x =Rs. 6,000
100 12

15 5
(vi) Accrued Interest = Rs. 80,000 x x = Rs.5,000
100 12

15 6
(vii)Accrued Interest on sold debentures 31.12.2015 = Rs. 80,000 x x =Rs. 6,000
100 12
(viii) Sale Price of Investment on 31st Dec. = Rs. 1,10,000-Rs. 6,000 = Rs. 1,04,000
(ix) Loss on Sale of Debenture on 1.1.2015
Sales Price of debenture 1,14,6000
Less : Cost Price of debenture

2,10,000 
1, 20, 000 1,26,000
2, 00, 000
Less on sale 11,400
15 6
(x) Accrued interest as on 31.12.2015 = Rs. 1,80,000 x x = Rs.13,500
100 12

15 3
(xi) Accrued Interest =Rs. 1,80,000 x x =Rs.6,750
100 12
(xii)Cost of investment as on 31st March = Rs. 1,02,000+ Rs. 76,800 = Rs. 1,78,800
(xiii) Profit on debentures sold on 31st December
= Rs. 1,04,000-(Rs. 2,10,000x800/2,000) =Rs. 20,000.
Q-7 Meera carried out the following transactions in the shares of Kumar Ltd.:
(1) On 1st April, 2017 She purchased 40,000 equity shares of Rs.1 each fully paid up for Rs.60,000
(2) On 15th May, 2017 Meera sold 8,000 shares for Rs.15,200
(3) At a meeting on 15th June, 2017, the company decided:
(i) To make a bonus issue of one fully paid up share for every four shares held on 1st June 2017, and
(ii) To give its members the right to apply for one share for every five shares held on 1st June 2017
at a price of ` 1.50 per share of which 75 paise is payable on or before 15th July 2017 and the
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 balance, 75 paise per share, on or before 15th September, 2017.
The shares issued under (i) and (ii) were not to rank for dividend for the year ending 31st
December 2017.
(a) Meera received her bonus shares and took up 4000 shares under the right issue, paying the
sum thereon when due and selling the rights of the remaining shares at 40 paise per share;
the proceeds were received on 30th September 2017.
(b) On 15th March 2018, she received a dividend from Kumar Ltd. of 15 per cent in respect of the
year ended 31st Dec 2017.
(c) On 30th March she received Rs.28,000 from the sale of 20,000 shares.
You are required to prepare the Investment Account in Meera's books for the year ended 31st March
2018 recording the above mentioned transactions by transferring any profits or losses on these
transactions to Profit and Loss account. Apply average cost basis. Expenses and tax to be ignored.
[MTP March ‘18, 10 Marks]
Ans. Investment Account (Shares in Kumar Limited) in the books of Meera
Date Particulars No.of Income Amount Date Particular No.of Income Amount
2017 Shares Shares
April 1 To Bank (Purchases) 40,000 - 60,000 May By Bank (Sale) 8,000 - 15,200
May To Profit & Loss - - 3,200
A/c (W.N.1)
June To Bonus Issue 8,000 - Nil 2018
July To Bank @ 75 p. 4,000 - 3,000 Mar. 15 By Bank (Dividend 4,800 -
paid on 4,000 shares) @ 15% on Rs.32,000)
Sept. To Bank @ 75 p. - - 3,000 Mar. 30 By Bank (Sale) 20,000 - 28,000
paid on 4,000 shares)
2018 To Profit & Loss 3,455 Mar. 31 By Balance c/d 24,000 - 29,455

 24, 000 
Mar. A/c (W.N.2)  x 54, 000 
 44, 000 
To Profit & Loss A/c - 4,800
52,000 4,800 72,655 52,000 4,800 72,655
Working Notes:
(1) Profit on Sae on 15-5-2017
Cos of 8,000 shares @ Rs.1.50 Rs.12,000
Less: Sales price Rs.15,200
Profit Rs.3,200
(2) Cost of 20,000 shares sold :
Cost of 44,000 shares (48,000 + 6,000) Rs.54,000
 Rs.54, 000 
 Cost of 20,000  x20, 000shares  Rs.24,545
 44, 000shares 
Profit on sale of 20,000 shares (Rs.28,000 - Rs.24,545) Rs.3,455
Q-8 Smart Investments made the following investments in the year 201 7-18:
12% State Government Bonds having face value Rs. 100
Date Particulars
01.04.2017 Opening Balance (1200 bonds) book value of Rs. 1,26,000
02.05.2017 Purchased 2,000 bonds @ Rs. 100 cum interest
30.09.2017 Sold 1,500 bonds at Rs. 105 ex interest
Interest on the bonds is received on 30th June and 31st Dec. each year.
Equity Shares of X Ltd.

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 15.04.2017 Purchased 5,000 equity shares @ Rs. 200 on cum right basis
Brokerage of 1% was paid in addition (Face Value of shares Rs. 10)
03.06.2017 The company announced a bonus issue of 2 shares for every 5
shares held.
16.08.2017 The company made a rights issue of 1 share for every 7 shares held
at Rs. 250 per share.
The entire money was payable by 31.08.2017.
22.8.2017 Rights to the extent of 20% was sold @ Rs. 60. The remaining rights
were subscribed.
02.09.2017 Dividend @ 15% for the year ended 31.03.2017 was received on 16.09.2017
15.12.2017 Sold 3,000 shares @ Rs. 300. Brokerage of 1% was incurred extra.
15.01.2018 Received interim dividend @ 10% for the year 2017-18
31.03.2018 The shares were quoted in the stock exchange @ Rs. 220
Prepare Investment Accounts in the books of Smart Investments. Assume that the average cost method
is followed. [MTP Aug. ‘18, 12 Marks]
Ans. In the books of Smart Investments
12% Govt. Bonds for the year ended 31st March, 2018

Investments in Equity shares of X Ltd. for year ended 31.3.2018

Working Notes:
1. Profit on sale of bonds on 30.9.17
= Sales proceeds – Average cost

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 Sales proceeds = Rs. 1,57,500
Average cost = Rs. [(1,26,000+1,92,000) x 1,500/3,200] = 1,49,062.50
Profit = 1,57,500– Rs. 1,49,062.50=Rs. 8,437.50
2. Valuation of bonds on 31st March, 2018
Cost = Rs. 3,18,000/3,200 x1,700 = 1,68,937.50
3. Cost of equity shares purchased on 15/4/2017
= Cost + Brokerage
= (5,000 x Rs. 200) + 1% of (5,000 x Rs. 200) = Rs. 10,10,000
4. Sale proceeds of equity shares on 1 5/12/2017
= Sale price – Brokerage
= (3,000 x Rs. 300) – 1% of (3,000 x Rs. 300) = Rs. 8,91,000.
5. Profit on sale of shares on 15/12/2017
= Sales proceeds – Average cost
Sales proceeds = Rs. 8,91,000
Average cost = Rs. [(10,10,000+2,00,000 -7,500) x 3,000/7,800]
= Rs. [12,02,500 x 3,000/7,800] = 4,62,500
Profit = Rs. 8,91,000 – Rs. 4,62,500=Rs. 4,28,500.
6. Valuation of equity shares on 31st March, 2018
Cost =Rs. [12,02,500 x 4,800/7,800] = Rs. 7,40,000
Market Value = 4,800 shares ×Rs. 220 =Rs. 10,56,000
Closing stock of equity shares has been valued at Rs.7,40,000 i.e. cost being lower than the market
value.
Note: If rights are not subscribed for but are sold in the market, the sale proceeds are taken to the
profit and loss statement as per para 13 of AS 13 “Accounting for Investments”.
Q-9 A Pvt. Ltd. follows the calendar year for accounting purposes. The company purchased 5,000 (nos.)
13.5% Convertible Debentures of Face Value of ` 100 each of P Ltd. on 1st May 2018 @ ` 105 on cum
interest basis. The interest on these instruments is payable on 31st March & 30th September
respectively. On August 1st 2018 the company again purchased 2,500 of such debentures @ ` 102.50
each on cum interest basis. On 1st October, 2018 the company sold 2,000 Debentures @ ` 103 each. On
31st December, 2018 the company received 10,000 equity shares of ` 10 each in P Ltd. on conversion of
20% of its holdings. Interest for 3 months on converted debentures was also received on 31.12.2018.
The market value of the debentures and equity shares as at the close of the year were ` 106 and ` 9
respectively. Prepare the Debenture Investment Account & Equity Shares Investment Account in the
books of A Pvt. Ltd. for the year 2018 on Average Cost Basis. [RTP Nov.’19]

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Ans. Books of A Pvt. Ltd.
Investment in 13.5% Convertible Debentures in P Ltd. Account
(Interest payable 31st March & 30th September)
Date Particulars Nominal Interest Amount Date Particulars Nominal Interest Amount
` ` ` ` ` `
2018 2018
May 1 To Bank 5,00,000 5,625 5,19,375 Sept.30 By Bank 50,625
(6 months Int)
Aug.1 To Bank 2,50,000 11,250 2,45,000 Oct.1 By Bank 2,00,000 2,06,000
Oct.1 To P&L A/c 2,167
Dec. 31 To P&L A/c 52,313 Dec. 31 By Equity share 1,10,000 1,12,108
Dec. 31 By Bank 3,713
(See note1)
Dec. 31 By Balance c/d 4,40,000 14,850 4,48,434
7,50,000 69,188 7,66,542 7,50,000 69,188 7,66,542
Note 1 : ` 3,713 received on 31.12.2018 represents interest on the debentures converted till date of
conversion.
Note 2: Cost being lower than Market Value the debentures are carried forward at Cost.
Investment in Equity shares in P Ltd. Account
Date Particulars Nominal Amount Date Particulars Nominal Amount
` ` ` `
2018 2018
Dec 31 To 13.5% Deb. 1,00,000 1,12,108 Dec.31 By P&L A/c 22,108
_______ _______ Dec.31 By Bal. c/d 1,00,000 90,000
1,00,000 1,12,108 1,00,000 1,12,108
Note 1: Cost being higher than Market Value the shares are carried forward at Market Value.
Working Notes:
1. Interest paid on ` 5,00,000 purchased on May 1st, 2018 for the month of April 2018, as part of purchase
price: 5,00,000 x 13.5% x 1/12 = ` 5,625
2. Interest received on 30th Sept. 2018
On ` 5,00,000 = 5,00,000 x 13.5% x ½ = 33,750
On ` 2,50,000 = 2,50,000 x 13.5% x ½ = 16,875
Total ` 50,625
3. Interest paid on ` 2,50,000 purchased on Aug. 1st 2018 for April 2018 to July 2018 as part of purchase
price:
2,50,000 x 13.5% x 4/12 = ` 11,250
4. Loss on Sale of Debentures
Cost of acquisition
(` 5,19,375 + ` 2,45,000) x ` 2,00,000/` 7,50,000 = 2,03,833
Less: Sale Price (2,000 x 103) = 2,06,000
Profit on sale = ` 2,167
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 5. Interest on 1,100 Debentures (being those converted) for 3 months i.e. Oct-Dec. 2018
1,10,000 x 13.5% x 3/12 = ` 3,713
6. Cost of Debentures converted to Equity Shares
(` 5,19,375 + ` 2,45,000) x 1,10,000/7,50,000= ` 1,12,108
7. Cost of Balance Debentures
(` 5,19,375 + ` 2,45,000) x ` 4,40,000/` 7,50,000 = ` 4,48,434
8. Interest on Closing Debentures for period Oct.- Dec. 2018 carried forward (accrued interest)
` 4,40,000 x 13.5% x 3/12 = ` 14,850
Q-10 A Ltd. purchased on 1st April, 2018 8% convertible debenture in C Ltd. of face value of Rs.2,00,000 @
Rs.108. On 1st July, 2018 A Ltd. purchased another Rs.1,00,000 debenture @ Rs.112 cum interest.
On 1st October, 2018 Rs.80,000 debenture was sold @ Rs.108. On 1st December, 2018, C Ltd. give option
for conversion of 8% convertible debentures into equity share of Rs.10 each. A Ltd. receive 5,000 equity
share in C Ltd. in conversion of 25% debenture held on that date. The market price of debenture and
equity share in C Ltd. at the end of year 2018 is Rs.110 and Rs.15 respectively.
Interest on debenture is payable each year on 31st March, and 30th September. The accounting year of
A Ltd. is calendar year. Prepare investment account in the books of A Ltd. on average cost basis.
[RTP May ‘19]
Ans. Investment Account for the year ending on 31st December, 2018
Scrip : 8% Convertible Debentures in C Ltd.
[Interest Payable on 31st March and 30th September]
Date Particulars Nominal Interest Cost Date Particulars Nominal Interest Cost
value (Rs.) (Rs.) (Rs.) Value (Rs.) (Rs.) (Rs.)
1.4.18 To Bank A/c 2,00,000 - 2,16,000 30.09.18 By Bank A/c - 12,000 -
1.7.18 To Bank A/c 1,00,000 2,000 1,10,000 [Rs. 3,00,000 x 8% x
(W.N.1) (6/12]
31.12.18 To P & L A/c - 14,033 - 1.10.18 By Bank A/c 80,000 84,000
[Interest] 1.10.18 By P&L A/c (loss) (W.N.1) 2,933
1.12.18 By Bank A/c (Accrued interest) 733
(Rs. 55,000 x .08x 2/12)
1.12.18 By Equity shares in C Ltd. 55,000 59,767
(W.N. 3 and 4)
31.12.18 By Balance c/d (W.N.5) 1,65,000 3,300 1,79,300
3,00,000 16,033 3,26,000 3,00,000 16,033 3,26,000
SCRIP: Equity Shares in C LTD.
Date Particulars Cost (Rs.) Date Particulars Cost (Rs.)
1.12.18 To 8 % debentures 59,767 31.12.18 By balance c/d 59,767
Working Notes:
(i) Cost of Debenture purchased on 1st July = Rs.1,12,000-Rs.2,000 (Interest) = Rs.1,10,000
(ii) Cost of Debentures sold on 1st Oct.
= (Rs.2,16,000 + Rs.1,10,000) x 80,000/3,00,000 = Rs.86,933
(iii) Loss on sale of Debentures = Rs.86,933-Rs.84,000 = Rs.2,933
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 Nominal value of debentures converted into equity shares = Rs.55,000
[(Rs.3,00,000-80,000) x.25]
Interest received before the conversion of debentures
Interest on 25% of total debentures = 55,000 x 8% x 2/12 = 733
(iv) Cost of Debentures converted = (Rs.2,16,000 + Rs.1,10,000) x 55,000/3,00,000 = Rs.59,767
(v) Cost of closing balance of Debentures =
(Rs.2,16,000 + Rs.1,10,000) x 1,65,000/3,00,000 = Rs.1,79,300
(vii)Closing balance of Debentures has been valued at cost being lower than the market value i.e. Rs.1,81,500
(Rs.1,65,000 @ Rs.110)
(viii)5,000 equity Shares in C Ltd. will be valued at cost of Rs.59,767 being lower than the market value
Rs.75,000 (Rs.15 x5,000)
Note : It is assumed that interest on debentures, which are converted into cash, has been received at the
time of conversion.
Q-11 Akash Ltd. had 4,000 equity share of X Limited, at a book value of Rs.15 per share (face value of Rs.10
each) on 1st April 2017. On 1st September 2017, Akash Ltd. acquired 1,000 equity shares of X Limited at
a premium of Rs.4 per share. X Limited announced a bonus and right issue for existing shareholders.
The terms of bonus and right issue were -
(1) Bonus was declared, at the rate of two equity shares for every five equity shares held on 30th September,
2017.
(2) Right shares are to be issued to the existing shareholders on 1st December, 2017. The company issued
two right shares for every seven shares held at 25% premium. No dividend was payable on these shares.
The whole sum being payable by 31st December, 2017.
(3) Existing shareholders were entitled to transfer their rights to outsiders, either wholly or in part.
(4) Akash Ltd. exercised its option under the issue for 50% of its entitlements and sold the remaining rights
for Rs.8 per share.
(5) Dividend for the year ended 31st March 2017, at the rate of 20% was declared by the company and
received by Akash Ltd., on 20th January 2018.
(6) On 1st February 2018, Akash Ltd., sold half of its shareholdings at a premium of Rs.4 per share.
(7) The market price of share on 31.03.2018 was Rs.13 per share.
You are required to prepare the Investment Account of Akash Ltd. for the year ended 31st March, 2018 and
determine the value of share held on that date assuming the investment as current investment. Consider
average cost basis for ascertainment of cost for equity share sold. [RTP Nov ‘18]
Ans. Investment Account-Equity Shares in X Ltd.
Date No. of Dividend Amount Date No.of Dividend Amount
Share Rs. Rs. Share Rs. Rs.
2017 2018
April 1 To Balance b/d 4,000 - 60,000 Jan. 20 By Bank (divdend) 8,000 2,000
Sept 1 To Bank 1,000 - 14,000 Feb. 1 By Bank 4,000 56,000
Sept.30 To Bonus Issue 2,000 - Mar. 31 By Balance c/d 4,000 42,250
Dec.1 To Bank (Right) 1,000 - 12,500
2018
Feb.1 To Profit & Loss A/c 13,750
Mar.31 To Profit & Loss A/c
(Dividend income) 8,000
8,000 8,000 1,00,250 8,000 8,000 1,00,250
April.1 To Balance b/d 4,000 42,250

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Working Notes:
1. Cost Shares sold-Amount paid of Rs.8,000 shares
Rs.
(Rs.60,000 + Rs.14,000+Rs.12,500) 86,500
Less; Dividend on shares purchased on 1st Sept, 2017 (2,000)
Cost of 8,000 shares 84,500
Cost of 4,000 shares (Average cost basis*) 42,250
Sale proceeds (4,000 shares @ 14/-) 56,000
Profit on sale 13,750
* For ascertainment of cost for equity shares sold, average cost basis has been applied.
2. Value of investment at the end of the year
Closing balance will be valued based on lower of cost (Rs.42,250) or net realizable value (Rs.13 x 4,000).
Thus investment will be valued at Rs.42,250.
3. Calculation of sale of right entitlement
1,000 shares x Rs.8 per share = Rs.8,000
Amount received from sale of rights will be credited to P & L A/c as per AS 13 'Accounting for Investments'.
4. Dividend received on investment held as on 1st April, 2017
= 4,000 sharesx Rs10x20%
= Rs.8,000 will be transferred to Profit and Loss A/c
Dividend received on shares purchased on 1st Sep. 2017
= 1,000 shares x Rs.10 x 20% = Rs.2,000 will be adjusted to Investment A/c
Note: It is presumed that no dividend is received on bonus shares as bonus shares are declared on 30th
Sept., 2017 and dividend pertains to the year ended 31.3.2017.
Q-12 Alpha Ltd. purchased 5,000,13.5% Debentures of Face Value of Rs.100 each of Pergot Ltd. on 1st May
2017 @ Rs.105 on cum interest basis. The interest on these instruments is payable on 31st & 30th of
March & September respectively. On August 1st 2017 the company again purchased 2,500 of such
debentures @ Rs.102.50 each on cum interest basis. On October 1st, 2017 the company sold 2,000
Debentures @ Rs.103 each on ex-interest basis. The market value of the debentures as at the close of
the year was Rs.106. You are required to prepare the Investment in Debentures Account in the books of
Alpha Ltd. for the year ended 31st Dec. 2017 on Average Cost Basis. [RTP May ‘18]

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Ans. Books of Alpha Ltd.
Investment in 13.5% Debentrures in Pergot Ltd. Account
(Interest Payable on 31st March & 30th September)
Date Particular Nominal Interest Amount Date Particular Nominal Interest Amount
2017 Rs. Rs. Rs. 2017 Rs. Rs. Rs.
May 1 To Bank 5,00,000 5,625 5,19,375 Sept.30 By Bank 50,625
(6 months Int)
Aug.1 To Bank 2,50,000 11,250 2,45,000 Oct.1 By Bank 2,00,000 2,06,000
Oct.1 To P&L A/c 2,167
Dec.31 To P&L A/c 52,313 Dec.31 By Balance c/d 5,50,000 18,563 5,60,542
7,50,000 69,188 7,66,542 7,50,000 69,188 7,66,542
Note: Cost being lower than Market Value the debentures are carried forward at Cost.
Working Notes:
1. Interest paid on Rs. 5,00,000 purchased on May 1st, 2017 for the month of April 2017, as part of purchase
price: 5,00,000 x 13.5% x 1/12 = Rs.5,625
2. Interest received on 30th Sept. 2017
On Rs. 5,00,000 = 5,00,000 x 13.5% x 1/2 = 33,750
On Rs. 2,50,000 = 2,50,000 x 13.5% x 1/2 = 16,875
Total Rs. 50,625
3. Interest paid on Rs.2,50,000 purchased on Aug. 1st 2017 for April 2017 to July 2017 as part of purchase
price:
2,50,000 x13.5% x 4712 = Rs.11,250
4. Loss on Sale of Debentures Cost of acquisition
(Rs.5,19,375 + Rs.2,45,000) x Rs.2,00,000/Rs.7,50,000 = 2,03,833
Less: Sale Price (2,000 x 103) = 2,06,000
Profit on sale = Rs. 2,167
5. Cost of Balance Debentures
(Rs.5,19,375 + Rs.2,45,000) x Rs.5,50,000/Rs.7,50,000 = Rs.5,60,542
6. Interest on Closing Debentures for period Oct.-Dec. 2017 carried forward (accrued interest)
Rs.5,50,000 x 13.5% x 3/12 = Rs.18,563.

---0---0---

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CHAPTER-10
Insurance Claims

Q-1 A trader intends to take a loss of profit policy with indemnity period of 6 months, however, he could
not decide the policy amount. From the following details, suggest the policy amount:
`
Turnover in last financial year 36,00,000
Standing charges in last financial year 7,20,000
Net profit earned in last year was 10% of turnover and the same trend expected in subsequent year.
Increase in turnover expected 25%.
To achieve additional sales, trader has to incur additional expenditure of ` 50,000. [RTP-May’2020]
Ans.(a) Calculation of Gross Profit

Net Profit + Standing Charges

Gross Profit = ×100
Turn over
= (3,60,000 + 7,20,000)/36,00,000= 30%
(b) Calculation of policy amount to cover loss of profit
`
Turnover in the last financial year 36,00,000
Add: 25% increase in turnover 9,00,000
45,00,000
Gross profit on increased turnover 13,50,000
Add: Additional standing charges 50,000
Policy Amount 14,00,000
Therefore, the trader should go in for a loss of profit policy of ` 14,00,000.
Q-2 A fire occurred in the premises of M/s Kirti & Co. on 15 th December, 2018. The working remained
disturbed upto 15th March, 2019 as a result of which sales adversely affected. The firm had taken out an
insurance policy with an average clause against consequential losses for ` 2,50,000.
Following details are available form the quarterly sales tax return filed / GST return filed :
Sales 2015-16 2016-17(`) 2017-18 (`) 2018-19(`)
st th
From 1 April to 30 June 3,80,000 3,15,000 4,11,900 3,24,000
st th
From 1 July to 30 September 1,86,000 3,92,000 3,86,000 4,42,000
st st
I From 1 October to 31 December 3,86,000 4,00,000 4,62,000 3,50,000
st st
From 1 January to 31 March 2,88,000, 3,19,000 3,80,000 2,96,000
Total 12,40,000 14,26,000 16,39,900 14,12,000
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 A period of 3 months (i.e. from 16-12-2018 to 15-3-2019) has been agreed upon as indemnity period.
Sales from 16-12-2017 to 31-12-2017 68,000
Sales from 16-12-2018 to 31-12-2018 Nil
Sales from 16-03-2018 to 31-03-2018 1,20,000
Sales from 16-03-2019 to 31-03-2019 40,000
Net profit was ? 2,50,000 and standing charges (all insured) amounted to ` 77,980 for the year ending
31st March, 2018.
You are required to calculate the loss of profit claim amount. [Sugg.Nov.’19,10 Marks]
Ans. Gross profit ratio
`
Net profit for the year 2017-18 2,50,000
Add: Insured standing charges 77,980

3,27,980
Ratio of Gross profit = = 20% 3,27,980
16,39,900
Calculation of Short sales
Indemnity period: 16.12.2018 to 15.3.19
Standard sales to be calculated on basis of corresponding period of year 2017-18
`
Sales for period 16.12.2017 to 31.12.17 68,000
Sales for period 1.1.2018 to 15.3.2018 (Note 1) 2,60,000
Sales for period 16.12.2017 to 15.3.2018 3,28,000
Add: upward trend in sales (15%) (Note 2) 49,200
Standard Sales (adjusted) 3,77,200
Actual sales of disorganized period
Calculation of sales from 16.12.18 to 15.3.19
Sales for period 16.12.18 to 31.12.18 Nil
Sales for 1.1.19 to 15.3.19 (` 2,96,000 – ` 40,000) 2,56,000
Actual Sales 2,56,000
Short Sales (` 3,77,200 - ` 2,56,000) 1,21,200
Loss of gross profit
Short sales x gross profit ratio = 1,21,200 x 20% 24,240
Application of average clause

policy value
Net claim = Gross claim ×
gross profit on annual turnover

2,50,000
= 24,240 x 3,26,240  W.N.3

Amount of loss of profit claim = ` 18,575

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

1,86,000 (14,26,000 - 12,40,000)

% increase = = 15%
12,40,000
Increase in sales in year 2017-18 as compared to year 2016-17

2,13,900 (16,39,900 - 14,26,000)

% increase = = 15%
14,26,000
Thus annual percentage increase trend is of 15%
3. Gross profit on annual turnover `
Sales from 16.12.17 to 30.12.17 (adjusted) (68,000 x 1.15) 78,200
1.1.18 to 31.3.18 (adjusted) (3,80,000 x1.15) 4,37,000
1.4.18 to 30.6.18 3,24,000
1.7.18 to 30.9.18 4,42,000
1.10.18 to 15.12.18 (3,50,000 – Nil) 3,50,000
Sales for 12 months just before date of fire* 16,31,200
Gross profit on adjusted annual sales @ 20% 3,26,240
NOTE*: Alternatively, the annual adjusted turnover may be computed as ` 17,98,000 (` 15,64,000 X
1.15) considering the annual % increase trend for the entire period of last 12 months preceding to the
date of fire. In that case, the gross profit on adjusted annual sales @ 20% will be computed as ` 3,59,720
and net claim will be computed accordingly.
Q-3 A fire occurred in the premises of M/s Bright on 25th May, 2017. As a result of fire, sales were adversely
affected up to 30th September, 2017. The firm had taken Loss of profit policy (with an average clause)
for ` 3,50,000 having indemnity period of 5 months. There is an upward trend of 10% in sales.
The firm incurred an additional expenditure of ` 30,000 to maintain the sales.
There was a saving of ` 5,000 in the insured standing charges.
Actual turnover from 25th May, 2017 to 30th September, 2017 ` 1,75,000
Turnover from 25th May, 2016 to 30th September, 2016 ` 6,00,000
Net profit for last financial year ` 2,00,000
Insured standing charges for the last financial year ` 1,75,000
Total standing charges for the last financial year ` 3,00,000
Turnover for the last financial year ` 15,00,000
Turnover for one year from 25th May, 2016 to 24th May, 2017 ` 14,00,000

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 You are required to calculate the loss of profit claim amount, assuming that entire sales during the
interrupted period was due to additional expenses. [Sugg. May ‘19, 10 Marks]
Ans. Computation of the amount of claim for the loss of profit
1. Reduction in turnover `
Turnover from 25th May, 2016 to 30th September, 2016 6,00,000
Add: 10% expected increase 60,000
6,60,000
Less: Actual Turnover from 25th May, 2017 to 30th September, 2017 (1,75,000)
Short Sales 4,85,000
2. Calculation of loss of Profit
Gross Profit on reduction in turnover @ 25% on ` 4,85,000 1,21,250
(see working note 1)
Add: Additional Expenses
Lower of
(i) Actual = ` 30,000
(ii) Additional Exp. x G.P. on Adjusted Annual Turnover
G.P. as above + Uninsured Standing Charges
30,000x [3,85,000/(3,85,000+1,25,000)] = ` 22,647
(iii) G.P. on sales generated by additional expenses
175000 x 25% = ` 43,750
It is given that entire sales during the interrupted period was due to additional expenses.
Therefore, lower of above is (i, ii & iii) ` 22,647
1,43,897
Less: Saving in Insured Standing Charges (5,000)
Amount of claim before application of Average Clause 1,38,897
3. Application of Average Clause:
Amount of Policy x Amount of Claim
G.P. on Annual Turnover
(3,50,000/3,85,000) x 1,38,897= ` 1,26,270
Amount of claim under the policy = ` 1,26,270
Working Notes:
1. Rate of Gross Profit for last Financial Year: `
Net Profi t for last financial year 2,00,000
Add: Insured Standing Charges 1,75,000
Gross Profit 3,75,000
Turnover for the last financial year 15,00,000

3,75,000
Rate of Gross Profit = ×100 = 25%
15,00,000

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 2. Annual Turnover (adjusted):
Turnover from 25 May, 2016 to 24 May, 2017 14,00,000
Add: 10% expected increase 1,40,000
15,40,000
Gross Profi t on ` 15,40,000 @ 25% 3,85,000
Standing charges not Insured (3,00,000 - 1,75,000) 1,25,000
Gross profit + Uninsured standing charges 5,10,000
Q-4 A fire engulfed the premises of a business of M/S Kite Ltd. in the morning, of 1st October, 2017. The
entire stock was destroyed except, stock salvaged of ` 50,000. Insurance Policy was for ` 5,00,000 with
average clause.
The following information was obtained from the records saved for the period from 1st April to 30th
September, 2017:
`
Sales 27,75,000
Purchases 18,75,000
Carriage inward 35,000
Carriage outward 20,000
Wages 40,000
Salaries 50,000
Stock in hand on 31st March, 2017 3,50,000
Additional Information:
(1) Sales upto 30th September, 2017, includes ` 75,000 for which goods had not been dispatched.
(2) On 1st June, 2017, goods worth ` 1,98,000 sold to Hari on approval basis which was included in sales but
no approval has been received in respect of 2/3rd of the goods sold to him till 30th September, 2017.
(3) Purchases upto 30th September, 2017 did not include ` 1,00,000 for which purchase invoices had not
been received from suppliers, though goods have been received in godown.
(4) Past records show the gross profit rate of 25% on sales.
You are required to prepare the statement of claim for loss of stock for submission to the Insurance Company.
[Sugg. Nov.’18, 10 Marks]
Ans. Computation of claim for loss of stock
`
Stock on the date of fire (i.e. on 1.10.2017) 3,75,000
Less : Stock salvage 50,000
Stock destroyed by fire (Loss of stock) 3,25,000
Insurance Claim = ` 3,25,000
(Average clause is not applicable as insurance policyt amount (` 5,00,000) is more than that value of closing
stock ie. ` 3,75,000)

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 Memorandum Trading A/c
(1.4.17 to 30.9.17)
Particular ` Particular `
To Opening stock 3,50,000 By Sales 25,68,000
To Purchases 19,75,000 By Goods with customers* 99,000
(` 18,75,000 + ` 1,00,000) (for approval) (W.N.1)
To Carriage inward 35,000 By Closing stock (bal.fig) 3,75,000
To Wages 40,000
To Gross profit
(` 25,68,000 x25%) 6,42,000
30,42,000 30,42,000
* For financial statement purposes, this would form part of closing stock (since there is no sale). However,
this has been shown separately for computation of claim for loss of stock since the goods were physically
not with the entity and, hence, there was no loss of such stock.
Working Notes:
1. Calculation of goods with customers
Since no approval for sale has been received for the goods of ` 1,32,000 (i.e. 2/3 of ` 1,98,000) hence, these
should be valued at cost i.e. ` 1,32,000 - 25% of ` 1,32,000 = ` 99,000.
2. Calculation of actual sales
Total sales - Goods not dispatched - Sale of goods on approval (2/3rd) =
Sales (` 27,75,000 - 75,000 - ` 1,32,000) = ` 25,68,000
Q-5 On 30th March, 2018 fire occurred in the premises of M/s Alok & Co. The concern had taken an insurance
policy of ` 1,20,000 which was subject to the average clause. From the books of accounts the following
particulars are available relating to the period 1st January to 30th March, 2018:
(i) Stock as per Blance Sheet at 31st December, 2017 Rs.1,91,200
(ii) Purchases (including purchase of machinery costing f 60,000) Rs.3,40,000
(iii) Wages (including wages ` 6,000 for installation of machinery) Rs.1,00,000
(iv) Sales (including goods sold on approval basis amounting to Rs.99,000) Rs.5,50,000
No approval has been received in respect of 2/3rd of the goods sold on approval.
(v) The average rate of gross profit is 20% of sales.
(vi) The value of the salveged goods was Rs.24,600
You are required to compute the amount of the claim to be lodged to the Insurance Company.
[Sugg. May ‘18, 10 Marks]
Ans. Computation of claim for loss of stock
Rs.
Stock on the date of fire i.e. on 30th March, 2018 (W.N.1) 1,25,000
Less : Value of salvaged stock 24,600
Loss of stock 1,00,600

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 Insured value
Amount of Claim =
Totalcost of stock onthedateof fire X Loss of stock 96,422

 1,20,000 
= X1,00,600 = 96,422  approx  
 1,25,200 
A claim of Rs.96,422 (aprrox) should be lodged by M/s Alok & Co. to the insurance company.
Working Notes :
1. Calculation of closing stock as on 30th March, 2018
Memorandum Trading Account for (From 1st January, 2018 to 30th March, 2018)
Particulars Amount Particular Amount
Rs. Rs.
To Opening stock 1,91,200 By Sales (W.N.3) 4,84,000
To Purchases (3,40,000-60,000) By Goods with customers
2,80,000 (for approval) (W.N.2) 52,800
To Wages (1,00,000-6,000) 94,000 By Closing stock (Bal. Fig.) 1,25,200
To Gross profit (20% on sales) 96,800
6,62,000 6,62,000
* For financial statement purposes, this would form part of closing stock (since there is no sale). However,
this has been shown separately for computation of claim for loss of stock since the goods were physically
not with the concern and, hence, there was no loss of such stock.
2. Calculation of goods with customers
Since no approval for sale has been received for the goods of Rs. 66,000 (i.e. 2/3 of Rs. 99,000) hence,
these should be valued at cost i.e. Rs.66,000 - 20% of Rs.66,000 = Rs.52,800.
3 Calculation of actual sales
Total sales - Sale of goods on approval (2/3rd) = Rs.5,50,000 - 66,000 = Rs.4,84,000.
Q-6 The premises of Anmol Ltd. caught fire on 22nd January 2017, and the stock was damaged. The firm
makes account up to 31st March each year. On 31st March, 2016 the stock at cost was Rs. 6,63,600 as
against Rs. 4,81,100 on 31st March, 2015.
Purchases from 1st April, 2016 to the date of fire were Rs. 17,41,350 as against Rs. 22,62,500 for the full
year 2015-16 and the corresponding sales figures were Rs. 24,58,500 and Rs. 26,00,000 respectively. You
are given the following further information:
(i) In July, 2016, goods costing Rs. 50,000 were given away for advertising purposes, no entries being
made in the books.
(ii) During 2016-17, a clerk had misappropriated unrecorded cash sales. It is estimated that the
defalcation averaged Rs. 1,000 per week from 1st April, 2016 until the clerk was dismissed on 18th
August, 2016.
(iii) The rate of gross profit is constant.
You are required to calculate the value of stock in hand on the date of fire with the help of above
information. [MTP Oct. ‘19, 6 Marks]

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Ans. Ascertainment of rate of gross profit for the year 2015-16
Trading A/c for the year ended 31-3-2016
` `
To Opening stock 4,81,100 By Sales 26,00,000
To Purchases 22,62,500 By Closing stock 6,63,600
To Gross profit 5,20,000 ________
32,63,600 32,63,600

GP 5,20,000
Rate of gross profit = x 100 = x 100 = 20%
Sales 26,00,000
Memorandum Trading A/c for the period from 1-4-2016 to 22-01-2017
` ` ` `
To Opening stock 6,63,600 By Sales 24,58,500
To Purchases 17,41,350 Add: Unrecorded cash 20,000 24,78,500
Less: Goods used for sales (W.N.)
advertisement (50,000) 16,91,350 By Closing stock 3,72,150
To Gross profit (20% 4,95,700
of ` 24,78,500) ________ ________
28,50,650 28,50,650
Estimated stock in hand on the date of fire was ` 3,72,150.
Working Note:
Cash sales defalcated by the Accountant:
Defalcation period = 1.4.2016 to 18.8.2016= 140 days
Since, 140 days / 7 weeks = 20 weeks
Therefore, amount of defalcation = 20 weeks x ` 1,000 = ` 20,000.
Q-7 A trader's godown caught fire on 29th August, 2017, and a large part of the stock of goods was destroyed.
However, goods costing Rs. 54,000 could be salvaged incurring fire fighting expenses amounting to Rs.
2,350.
The trader provides you the following additional information:
Rs.
Cost of stock on 1st April, 2016 3,55,250
Cost of stock on 31st March,2017 3,95,050
Purchases during the year ended 31st March, 2017 28,39,800
Purchases from 1st April, 2017 to the date of fire 16,55,350
Cost of goods distributed as samples for advertising from 1st April, 2017 to the date of fire 20,500
Cost of goods withdrawn by trader for personal use from 1st April, 2017 to the date of fire 1,000
Sales for the year ended 31st March, 2017 40,00,000
Sales from 1st April, 2017 to the date of fire 22,68,000
The insurance company also admitted firefighting expenses. The trader had taken the fire insurance
policy for Rs. 4,50,000 with an average clause. [MTP March ‘19, 8 Marks]

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Ans. Memorandum Trading Accountfor the period 1st April, 2017 to 29th August 2017
Rs. Rs.
To opening Stock 3,95,050 By sales 22,68,000
To Purchases 16,55,350 By Closing stock (Bal. fig.) 4,41,300
Less : Advertisement (20,500)
Drawing (1,000) 16,33,850
To Gross Profit [30% of
Sales] [W.N] 6,80,400
27,09,300 27,09,300
Statement of Insurance Claim
Rs.
Value of stock destroyed by fire 4,41,300
Less; Salvaged Stock (54,000)
Add: Fire Fighting Expenses 2,350
Insurance Claim 3,89,650
Note : Since policy amount is more than claim amount, average clause will not apply. Therefore, claim
amount of Rs. 3,89,650 will be admitted by the Insurance Company.
Working Note:
Trading Account for the year ended 31st March, 2017
Rs. Rs.
To Opening Stock 3,55,250 By Sales 40,00,000
To Purchases 28,39,800 By Closing stock 3,95,050
To Gross Profit 12,00,000
43,95,050 43,95,050
Rate of Gross Profit in 2016-17
G
ro

ro
P
ss

x 100 = 12,00,000/40,00,000 x 100 = 30%.

t
fi
le
S
a
s

Q-8 The premises of Vani Ltd. caught fire on 22nd January 2015, and the stock was damaged. The firm makes
account up to 31st March each year. On 31st March, 2014 the stock at cost was Rs. 13,27,200 as against Rs.
9,62,200 on 31st March, 2013.
Purchases from 1st April, 2014 to the date of fire were Rs.34,82,700 as against Rs.45,25,000 for the full
year 2013-14 and the corresponding sales figures were Rs.49,17,000 and Rs. 52,00,000 respectively. You
are given the following further information:
(i) In July, 2014, goods costing Rs.1,00,000 were given away for advertising purposes, no entries being
made in the books.
(ii) During 2014-15, a clerk had misappropriated unrecorded cash sales. It is estimated that the
defalcation averaged Rs. 2,000 per week from 1st April, 2014 until the clerk was dismissed on 18th
August, 2014.
(iii) The rate of gross profit is constant.
From the above information calculate the stock in hand on the date of fire. [MTP April ‘18, 10 Marks]

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Ans. Ascertainment of rate of gross profit for the year 2013-14
Trading A/c for the year ended 31-3-2014
Rs. Rs.
To Opening stock 9,62,000 By Sales 52,00,000
To Purchased 45,25,000 By Closing stock 13,27,200
To Gross profit 10,40,00
65,27,200 65,27,200
G
P
Rate of gross profit =
1
0
0
x
le
S
a
s

10, 40, 000

= x100 = 20
%

52, 00, 000

Memorandum Trading A/c for the period from 1-4-2014 to 22-01-2015

Rs. Rs Rs. Rs.
To Opening stock 13,27,000 By sales 49,17,000
To Purchases 34,82,700 Add. Unrecorded 40,000 49,57,000
Less: Goods used cash sales
for advertisement (1,00,000) 33,82,700 By Closing stock 7,44,100
To Gross profit (20% 9,91,400
of Rs.49,57,000)
57,01,100 57,01,100
Estimated stock in hand on the date of fire= Rs.7,44,100.
Working Note:
Cash sales defalcated by the Accountant:
Defalcation period = 1.4.2014 to 18.8.2014 = 140 days
Since, 140 days / 7 weeks = 20 weeks
Therefore, amount of defalcation = 20 weeks x Rs.2,000 = Rs.40,000.
Q-9 A trader's godown caught fire on 29th August, 2017, and a large part of the stock of goods was destroyed.
However, goods costing Rs.54,000 could be salvaged incurring fire fighting expenses amounting to
Rs.2,350.
The trader provides you the following additional information:
Rs.
Cost of stock on 1st April, 2016 3,55,250
Cost of stock on 31st March, 2017 3,95,050
Purchases during the year ended 31st March, 2017 28,39,800
Purchases from 1st April, 2017 to the date of fire 16,55,350
Cost of goods distributed as samples for advertising from 1st April, 2017 to the date of fire 20,500
Cost of goods withdrawn by trader for personal use from 1st April, 2017 to the date of fire 1,000
Sales for the year ended 31st March, 2017 40,00,000
Sales from 1st April, 2017 to the date of fire 22,68,000

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 The insurance company also admitted firefighting expenses. The trader had taken the fire insurance
policy for Rs. 4,50,000 with an average clause.
You are required to calculate the amount of the claim that will be admitted by the insurance Company.
[MTP March ‘18, 10 Marks]
Ans. Memorandum Trading Account for the period 1st April, 2017 to 29th August 2017
Rs. Rs.
To Opening Stock 3,95,050 By Sales 22,68,000
To Purchases 16,55,350 By Closing stock 4,41,300
(Bal.fig.)
Less: Advertisement (20,500)
Drawings (1,000) 16,33,850
To Gross Profit [30% of Sales] [W N] 6,80,400
27,09,300 27,09,300
Statement of Insurance Claim
Rs.
Value of stock destroyed by fire 4,41,300
Less; Salvaged Stock (54,000)
Add: Fire Fighting Expenses 2,350
Insurance Claim 3,89,650
Note: Since policy amount is more than claim amount, average clause will not apply. Therefore, claim
amount of Rs.3,89,650 will be admitted by the Insurance Company.
Working Note:
Trading Account for the year ended 31st March, 2017
Rs. Rs.
To Opening Stock 3,55,250 By Sales 40,00,000
To Purchases 28,39,800 By Closing stock 3,95,050
To Gross Profit 12,00,000
43,95,050 43,95,050
Rate of Gross Profit in 2016-2017
Gross Profit
x 100 = 12,00,000/40,00,000 x 100 = 30%
Sales
Q-10 On 2.6.2018 the stock of Mr. Black was destroyed by fire. However, following particulars were furnished
from the records saved:
Rs.
Stock at cost on 1.4.2017 1,35,000
Stock at 90% of cost on 31.3.2018 1,62,000
Purchases for the year ended 31.3.2018 6,45,000
Sales for the year ended 31.3.2018 9,00,000
Purchases from 1.4.2018 to 2.6.2018 2,25,000
Sales from 1.4.2018 to 2.6.2018 4,80,000
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 Sales upto 2.6.2018 includes Rs. 75,000 being the goods not dispatched to the customers . The sales
invoice price is Rs. 75,000.
Purchases upto 2.6.2018 includes a machinery acquired for Rs. 15,000.
Purchases upto 2.6.2018 does not include goods worth Rs. 30,000 received from suppliers, as invoice
not received upto the date of fire. These goods have remained in the godown at the time of fire. The
insurance policy is for Rs. 1,20,000 and it is subject to average clause. Ascertain the amount of claim for
loss of stock. [MTP Aug. ‘18, 8 Marks]
Ans. In the books of Mr. Black
Trading Account for the year ended 31.3.2018
Rs. Rs.
To Opening Stock 1,35,000 By Sales 9,00,000
To Purchases 6,45,000 By Closing Stock at cost 1,80,000

 100 
To Gross Profit 3,00,000  1,62,000   _______
 90 
10,80,000 10,80,000
Memorandum Trading A/c
for the period from 1.4.2018 to 02.06.2018
Rs. Rs.
To Opening Stock at cost 1,80,000 By Sales 4,80,000
To Purchases 2,25,000 Less: Goods not
Add: Goods received but dispatched 75,000 4,05,000
invoice not received 30,000 By Closing stock (Balancing figure) 1,50,000
2,55,000
Less: Machinery 15,000 2,40,000
To Gross Profit (Refer W.N.) 1,35,000 ________
5,55,000 5,55,000

Calculation of Insurance Claim

 Actual loss of stock 

Claim subject to average clause =   Amount of policy 
 Value of stock on the date of fire 

 1,50,000 
1,20,000 x   = Rs. 1,20,000
 1,50,000 
Working Note:
3,00,000 1
G.P. ratio = x 100= 33 %
9,00,000 3
1
Amount of Gross Profit = Rs. 4,05,000 x 33 % = Rs. 1,35,000.
3
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Q-11 On 15th December, 2017, a fire occurred in the premises of M/s. OM Exports. Most of the stocks were
destroyed. Cost of stock salvaged being Rs. 1,40,000. Stock on 15th December, 2017 was valued at Rs.
6,40,000. Compute the amount of the claim, if the stock were insured for Rs. 4,00,000.
[MTP Oct. ‘18, 4 Marks]
Ans.
Rs.
Estimated value of Stock as at date of fire 6,40,000
Less: Value of Salvaged Stock 1,40,000
Estimated Value of Stock lost by fire 5,00,000
As the value of stock is more than insured value, amount of claim would be subject to average clause.

Amount of Policy
Amount of Claim = × Actual Loss of Stock
Value of Stock

4,00, 000
unt of Claim = × 5, 00, 000 = 3,12, 500
6, 40,000
Q-12 On 2.6.2019 the stock of Mr. Black was destroyed by fire. However, following particulars were furnished
from the records saved:
`
Stock at cost on 1.4.2018 1,35,000
Stock at 90% of cost on 31.3.2019 1,62,000
Purchases for the year ended 31.3.2019 6,45,000
Sales for the year ended 31.3.2019 9,00,000
Purchases from 1.4.2019 to 2.6.2019 2,25,000
Sales from 1.4.2019 to 2.6.2019 4,80,000
Sales up to 2.6.2019 includes ` 75,000 being the goods not dispatched to the customers. The sales
(invoice) price is ` 75,000.
Purchases up to 2.6.2019 includes a machinery acquired for ` 15,000.
Purchases up to 2.6.2019 does not include goods worth ` 30,000 received from suppliers, as invoice not
received up to the date of fire. These goods have remained in the godown at the time of fire. The
insurance policy is for ` 1,20,000 and it is subject to average clause. Ascertain the amount of claim for
loss of stock. [RTP Nov ‘19]
Ans. In the books of Mr. Black
Trading Account for the year ended 31.3.2019
` `
To Opening Stock 1,35,000 By Sales 9,00,000
To Purchases 6,45,000 By Closing Stock at cost 1,80,000

 100 
To Gross Profit 3,00,000  1,62,000 × 90  _________
 
10,80,000 10,80,000

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 Memorandum Trading A/c
for the period from 1.4.2019 to 02.06.2019
` `
To Opening Stock (at cost) 1,80,000 By Sales 4,80,000
To Purchases 2,25,000 Less: Goods not
Add: Goods received but dispatched 75,000 4,05,000
invoice not received 30,000 By Closing stock (Balancing
2,55,000 figure) 1,50,000
Less: Machinery 15,000 2,40,000
To Gross Profit (Refer W.N.) 1,35,000 _______
5,55,000 5,55,000
Calculation of Insurance Claim

 Actual loss of stock 

Claim subject to average clause =  × Amount of policy 
 Value of stock on the date of fire 

 1,50,000 
= 1,20,000 x   = ` 1,20,000
 1,50,000 

Working Note :

3,00,000 1
G.P. ratio = x 100 = 33 %
9,00,000 3

1
Amount of Gross Profit = ` 4,05,000 x 33 % = ` 1,35,000
3
Q-13 A fire engulfed the premises of a business of M/s Preet on the morning of 1st July 2018. The building,
equipment and stock were destroyed and the salvage recorded the following:
Building-Rs.4,000; Equipment-Rs.2,500; Stock-Rs.20,000. The following other information was obtained
from the records saved for the period from 1st January to 30th June 2018:
Rs.
Sales 11,50,000
Sales Returns 40,000
Purchases 9,50,000
Purchases Returns 12,500
Cartage inward 17,500
Wages 1,50,000
Stock in hand on 31st December, 2017 3,75,000
Building (value on 31st December, 2017) 75,000
Equipment (value on 31st December, 2017)

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 Depreciation provision till 31st December,2017 on:
Building 1,25,000
Equipment 22,500
No depreciation has been provided since December 31st 2017. The latest rate of depreciation is 5% p.a. on
building and 15% p.a. on equipment by straight line method.
Normally business makes a profit of 25% on net sales. You are required to prepare the statementof claim for
submission to the Insurance Company. [RTP May ‘19]
Ans. Memorandum Trading Accountforthe Period from 1.1.2018 to 30.6.2018
Rs. Rs.
To Opening Stock (1.1.2018) 1,50,000 By Sales 11,50,000
To Purchases 9,50,000 Less : Sales
Less: Returns (12,500) 93,37,500 Returns (40,000)
To cartage Inward 17,500 By Closing Stock 2,80,000
To wages 7,500 (Bal.fig)
To Gross Profit 2,77,500
(25% of Rs.11,10,000)
13,90,000 13,90,000
Stock Destroyed Account
To Trading Account 2,80,000 By Stock Salvaged Account 20,000
By Balance c/d (For Claim) 2,60,000
2,80,000 2,80,000
Statement of Claim
Items Cost Depreciation Salvage Claim
Rs. Rs. Rs. Rs.
A B C D E=B-C-D
Stock 2,80,000 20,000 2,60,000
Buildings 3,75,000 1,25,000+9,375 4,000 2,36,625
Equipment 75,000 22,500+5,625 2,500 44,375
5,41,000
Q-14 On 27th July, 2017, a fire occurred in the godown of M/s. Vijay Exports and most of the stocks were
destroyed. However goods costing Rs.5,000 could be salvaged. Their fire fighting expenses were
amounting to Rs.1,300.
From the salvaged accounting records, the following information is available relating to the period
from 1.4.2017 to 27.7.2017:
1. Stock as per balance sheet as on 31.3.2017 Rs.63,000
2. Purchases (including purchase of machinery costing Rs.10,000 Rs.2,92,000
3. Wages (including wages paid for installation of machinery Rs.3,000) Rs.53,000
4. Sales (including goods sold on approval basis amounting to Rs.40,000. Rs.4,12,000
No approval has been received in respect of 1/4th of the goods sold on approval)
5. Cost of goods distributed as free sample Rs.2,000

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 Other Information:
(i) While valuing the stock on 31.3.2017, Rs.1,000 had been written off in respect of certain slow moving
items costing Rs.4,000. A portion of these goods were sold in June, 2017 at a loss of Rs.700 on original
cost of Rs.3,000. The remainder of these stocks is now estimated to be worth its original cost.
(ii) Past record shows the normal gross profit rate is 20%.
(iii) The insurance company also admitted fire fighting expenses. The Company had taken the fire insurance
policy of Rs.55,000 with the average clause.
You are required to compute the amount of claim of stock destroyed by fire, to be lodged to the Insurance
Company. Also prepare Memorandum Trading Account for the period 1.4.2017 to 27.7.2017 for normal and
abnormal items. [RTP Nov ‘18]
Ans. Memorandum Trading Account for the period 1st April, 2017 to 27th July, 2017
Normal Abnormal Total Normal Abnormal Total
To Opening stock 60,000 4,000 64,000 By Sales 4,00,000 2,300 4,02,300
(W.N.5) (W.N.3)
To Purchases (W.N.1) 2,80,000 - 2,80,000 By Loss - 700 700
To Wages 50,000 - 50,000 By Goods on 8,000 - 8,000
(W.N.4) Approval (W.N.2)
To Gross profit 80,000 - 80,000 By Closing stock 62,000 1,000 63,000
@ 20% (Bal. fig.)
4,70,00 4,000 4,74,000 4,70,000 4,000 4,74,000
Statement of Claim for Loss of Stock
Rs.
Book value of stock as on 27th July, 2017 62,000
Add: Abnormal Stock 1,000
Less; Stock salvaged 5,000
Loss of stock 58,000
Add: Fire fighting expenses 1,300
Total Loss 59,300
Amount of claim to be lodged with insurance company

Policy value
= Loss x
Value of stock on the date of fire
= Rs.59m300 x (55,000 / 63,000) = Rs.51,770 (rounded off)
Working Notes:
1. Calculation of Adjusted Purchases
Rs.
Purchases 2,92,000
Less; Purchase of Machinery 10,000
Less: Free samples 2,000
Adjusted purchases 2,80,000

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 2. Calculation of Goods with Customers
Approval for sale has not been received = Rs.40,000 X 1/4 = Rs.10,000.
Hence, these should be valued at cost i.e. (Rs.10,000 - 20% of Rs.10,000) = Rs.8,000
3. Calculation of Actual Sales
Total Sales Rs.4,12,300
Less; Approval for sale not received (1/4 X Rs.40,000) Rs.10,000
Actual Sales Rs.4,02,300
4. Calculation of Wages
Total Wages Rs.53,000
Less; Wages for installation of machinery Rs.3,000
Rs. 50,000
5. Value of Opening Stock
Original cost of stock as on 31st March,2018
= Rs.63,000 + 1,000 (Amount written off)
= Rs.64,000.
Q-15 The premises of Anmol Ltd. caught fire on 22nd January 2017, and the stock was damaged. The firm
makes account up to 31st March each year. On 31st March, 2016 the stock at cost was Rs. 6,63,600 as
against Rs. 4,81,100 on 31st March, 2015.
Purchases from 1st April, 2016 to the date of fire were Rs.17,41,350 as against Rs.22,62,500 for the full
year 2015-16 and the corresponding sales figures were Rs.24,58,500 and Rs.26,00,000 respectively. You
are given the following further information:
(i) In July, 2016, goods costing Rs.50,000 were given away for advertising purposes, no entries being
made in the books.
(ii) During 2016-17, a clerk had misappropriated unrecorded cash sales. It is estimated that the
defalcation averaged Rs.1,000 per week from 1st April, 2016 until the clerk was dismissed on 18th
August, 2016.
(iii) The rate of gross profit is constant.
You are required to calculate the value of stock in hand on the date of fire with the help of above
information. [RTP May ‘18]
Ans. Ascertainment of rate of gross profit for the year 2015-16
Trading A/c for the year ended 31-3-2016
Rs. Rs.
To Opening stock 4,81,100 By Sales 26,00,000
To Purchases 22,62,500 By Closing stock 6,63,000
To Gross profit 5,20,000
32,63,600 32,63,600

GP
Rate of gross profit = 100
×

Sales

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 5, 20, 000
= × 100 = 20%
26, 00, 000

Memorandum Trading A/c for the period from 1-4-2016 to 22-01-2017

Rs. Rs. Rs. Rs.
To Opening stock 6,63,600 By Sales 24,58,500
To Purchases 17,41,350 Add: Unrecorded cash 20,000 24,78,500
Less: Goods used for sales (W.N.)
advertisement (50,000) 16,91,350 By Closing stock 3,72,150
To Gross profit (20% 4,95,700
of Rs. 24,78,500)
28,50,650 28,50,650
Estimated stock in hand on the date of fire was Rs.3,72,150.
Working Note:
Cash sales defalcated by the Accountant:
Defalcation period = 1.4.2016 to 18.8.2016= 140 days
Since, 140 days / 7 weeks = 20 weeks
Therefore, amount of defalcation = 20 weeks x Rs. 1,000 = Rs. 20,000.

---0---0---

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CHAPTER-11
Hire Purchase

Q-1 On January 1, 20X1 Kasturi Ltd. acquired a Pick-up Van on hire purchase from Shorya Ltd. The terms of
the contract were as follows:
(a) The cash price of the van was ` 25,000.
(b) ` 10,000 were to be paid on signing of the contract.
(c) The balance was to be paid in annual instalments of ` 5,000 plus interest.
(d) Interest chargeable on the outstanding balance was 6% p.a.
(e) Depreciation at 10% p.a. is to be written-off using the straight-line method.
You are required to show the Van account & Shorya Ltd. account in the books of Kasturi Ltd. from
January 1, 20X1 to December 31, 20X3. [RTP-May’ 20]
Ans. Ledger Accounts in the books of Kasturi
Van Account
Date Particulars ` Date Particulars `
1.1.20X1 To Shorya Ltd. 25,000 31.12.20X1 By Depreciation A/c 2,500
_____ 31.12.20X1 By Balance c/d 22,500
25,000 25,000
1.1.20X2 To Balance b/d 22,500 31.12.20X2 By Depreciation A/c 2,500
_____ 31.12.20X2 By Balance c/d 20,000
22,500 22,500
1.1.20X3 To Balance b/d 20,000 31.12.20X3 By Depreciation A/c 2,500
_____ 31.12.20X3 By Balance c/d 17,500
20,000 20,000
Shorya Ltd. Account
Date Particulars ` Date Particulars `
1.1.20X1 To Bank A/c 10,000 1.1.20X1 By Van A/c 25,000
31.12.20X1 To Bank A/c 5,900 31.12.20X1 By Interest A/c 900
31.12.20X1 To Balance c/d 10,000 ______
25,900 25,900
31.12.20X2 To Bank A/c 5,600 1.1.20X2 By Balance b/d 10,000
31.12.20X2 To Balance c/d 5,000 31.12.20X2 By Interest A/c 600
10,600 10,600
31.12.20X3 To Bank A/c 5,300 1.1.20X3 By Balance b/d 5,000
31.12.20X3 By Interest A/c 300 _____
5,300 5,300
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Q-2 M/s Amar bought six Scooters from M/s Bhanu on 1st April, 2015 on the following terms:
Down payment ` 3,00,000
1st instalment payable at the end of 1st year ` 1,59,000
2nd instalment payable at the end of 2nd year ` 1,47,000
3rd instalment payable at the end of 3rd year ` 1,65,000
Interest is charged at the rate of 10% per annum.
M/s Amar provides depreciation @ 20% per annum on the diminishing balance method.
On 31st March, 2018 M/s Amar failed to pay the 3rd instalment upon which M/s Bhanu repossessed two
Scooters. M/s Bhanu agreed to leave the other four Scooters with M/s Amar and adjusted the value of
the repossessed Scooters against the amount due. The Scooters taken over were valued on the basis of
30% depreciation per annum on written down value. The balance amount remaining in the vendor's
account after the above adjustment was paid by M/s Amar after 5 months with interest@ 15% per
annum.
M/s Bhanu incurred repairing expenses of ` 15,000 on repossessed scooters and sold scooters for `
1,05,000 on 25th April, 2018.
You are required to :
(1) Calculate the cash price of the Scooters and the interest paid with each instalment.
(2) Prepare Scooters Account and M/s Bhanu Account in the books of M/s Amar.
(3) Prepare Goods Repossessed Account in the books of M/s Bhanu. [Sugg. May ‘19, 10 Marks]
Ans.
(i) Calculation of Interest and Cash Price
No. of Outstanding Amount due Outstanding Interest Outstanding
installments balance at at the time of balance at balance at
the end installment the end the beginning
after the before the
ayment of payment of
installment installment
[1] [2] [3] [4] = 2 +3 [5] = 4 x 10/110 [6] = 4-5
3rd - 1,65,000 1,65,000 15,000 1,50,000
2nd 1,50,000 1,47,000 2,97,000 27,000 2,70,000
1st 2,70,000 1,59,000 4,29,000 39,000 3,90,000
Down 3,00,000
payment
Total of interest and Total cash price 81,000 6,90,000
(ii) In the books of M/s Amar
Scooters Account
Date Particulars ` Date Particulars `
1.4.2015 To Bhanu A/c 6,90,000 31.3.2016 By Depreciation A/c 1,38,000
By Balance c/d 5,52,000
6,90,000 6,90,000
1.4.2016 To Balance b/d 5,52,000 31.3.2017 By Depreciation A/c 1,10,400
Balance c/d 4,41,600
5,52,000 5,52,000
1.4.2017 To Balance b/d 4,41,600 31.3.2018 By Depreciation A/c 88,320
By M/s Bhanu a/c 78,890
(Value of 2 Scooters taken over)
By Profit and Loss A/c (Bal. fig.) 38,870
By Balance c/d 2,35,520
_______ 4/6 (4,41,600 - 88,320) ______
4,41,600 4,41,600

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 (iii) M/s Bhanu Account
Date Particulars ` Date Particulars `
1.4.15 To Bank (down payment) 3,00,000 1.4.15 By Scooters A/c 6,90,000
31.3.16 To Bank (1st Installment) 1,59,000 31.3.16 By Interest A/c 39,000
To Balance c/d 2,70,000 _______
7,29,000 7,29,000
31.3.17 To Bank (2nd Installment) 1,47,000 1.4.2016 By Balance b/d 2,70,000
To Balance c/d 1,50,000 31.3.2017 By Interest A/c 27,000
2,97,000 2,97,000
31.3.18 To Scooter A/c 78,890 1.4.2017 By Balance b/d 1,50,000
To Balance c/d (b.f.) 86,110 31.3.2018 By Interest A/c 15,000
1,65,000 1,65,000
31.8.18 To Bank (Amount 1.4.2018 By Balance b/d 86,110
settled after 5 months) 91,492 31.8.2018 By Interest A/c (@ 15 % 5,382
on bal.)
_____ (86,110 x 5/12 x 15/100) _____
91,492 91,492
(iv) In the Books of M/s Bhanu
Goods Repossessed A/c
Date Particulars ` Date Particulars `
31.3.18 To Amar A/c 78,890 31.3.2018 By Balance c/d 78,890
78,890 78,890
1.04.2018 To Balance b/d 78,890 25.4.2018 By Bank (Sale) 1,05,000
25.4.2018 To Repair A/c 15,000
25.4.2018 To Profit & Loss A/c 11,110 _______
1,05,000 1,05,000
Working Note:
Value of Scooters taken over `
2 Scooters (6,90,000/6 x 2) 2,30,000
Depreciation @ 30% WDV for 3 years
(69,000 + 48,300 +33,810) (1,51,110)
78,890
Q-3 Krishan bought 2 cars from 'Fair Value Motors Pvt. Ltd. on 1.4.2015 on the following terms (for both
cars):
Rs.
Down payment 6,00,000
1st Installment at the end of first year 4,20,000
2nd Installment at the end of 2nd year 4,90,000
3rd Installment at the end of 3rd year 5,50,000
Interest is charged at 10% p.a.

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 Krishan provides depreciation @ 25% on the diminishing balances.
On 31.3.2018 Krishan failed to pay the 3rd installment upon which 'Fair Value Motors Pvt. Ltd.' repossessed
1 car. Krishan agreed to leave one car with Fair Value Motors Pvt. Ltd. and adjusted the value of the car
against the amount due. The car taken over was valued on the basis of 40% depreciation annually on
written down basis. The balance amount remaining in the vendor's account after the above adjustment
was paid by Krishan after 3 months with interest@ 20% p.a.
You are required to: Calculate the cash price of the cars and the interest paid with each installment, and
prepare Car Account in the books of Krishan for the year 2017-18 assuming books are closed on March 31,
every year. Figures may be rounded off to the nearest rupee. [MTP March ‘19, 6 Marks,RTP N ‘19]
Ans.
Calculation of Interest and Cash Price
No. of Outstanding balance Amount due at the Outstanding Interest Outstanding
installment at the end after the time of installment balance at the end balance at
payment of installment before the payment the begining
of installment
(1) (2) (3) (4)= 2 + 3 (5)=4x10/110 (6)=4-5
3rs - 5,50,000 5,50,000 50,000 5,00,000
2nd 5,00,000 4,90,000 90,000 90,000 9,00,000
1st 9,00,000 4,20,000 13,20,000 1,20,000 12,00,000
Total cash price = Rs. 12,00,000+6,00,000 (down payment) = Rs.18,00,000
Cars Account in the boosk of Krishna for the year ended 31st March, 18
1.4.2017 To Balance 10,12,500 31.3.2018 By Depreciation A/c 2,53,125
b/d [18,00,000 less
depreciation
(4,50,000+
3,37,500)
By Fair value Morots A/c (value of 1
Car taken over after depreciation
for 3 years @ 40% p.a.) [9,00,000-
(3,60,000 + 2,16,000 + 1,29,600)] 1,94,400
By Loss transferred to Profit and
Loss A/c on surrender (Bal.fig.) 1,85,288
By balance c/d
1

(10,12,500-2,53,125) 3,79,687
2

10,12,500 10,12,500
Q-4 The following particulars relate to hire purchase transactions:
(a) X purchased three cars from Y on hire purchase basis, the cash price of each car being Rs. 2,00,000.
(b) The hire purchaser charged depreciation @20% on diminishing balance method.
(c) Two cars were seized by on hire vendor when second installment was not paid at the end of the
second year. The hire vendor valued the two cars at cash price less 30% depreciation charged under
it diminishing balance method.
(d) The hire vendor spent Rs.10,000 on repairs of the cars and then sold them for a total amount of
Rs.1,70,000.

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 You are required to compute:
(i) Agreed value of two cars taken back by the hire vendor
(ii) Book value of car left with the hire purchaser.
(iii) Profit or loss to hire purchaser on two cars taken back by their hire vendor,
(iv) Profit or loss of cars repossessed, when sold by the hire vendor. [RTP May ‘19, RTP Nov ‘18]
Ans.
Rs.
(i) Price of two cars = Rs.2,00,000 x 2 4,00,000
Less; Depreciation for the first year @ 30% 1,20,000
2,80,000

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

(iv) Sale proceeds of cars repossessed 1,70,000

Less: Value at which cars were taken back Rs.1,96,000
Repair Rs.10,000 2,06,000
Loss on resale 36,000

---0---0---

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CHAPTER-12
Departmental Accounts

Q-1 ABC Ltd. has several departments. Goods supplied to each department are debited to a Memorandum
Departmental Stock Account at cost plus a fixed percentage (mark-up) to give the normal selling price.
The amount of mark-up is credited to a Memorandum Departmental Markup account. If the selling
price of goods is reduced below its normal selling prices, the reduction (mark-down) will require
adjustment both in the stock account and the mark-up account. The mark-up for department X for the
last three years has been 20%. Figures relevant to department X for the year ended 31st March, 2019
were as follows;
Stock as on 1st April, 2018, at cost ` 1,50,000
Purchases at cost ` 4,30,000
Sales ` 6,50,000
It is further ascertained that:
(1) Shortage of stock found in the year ending 31.3.2019, costing ` 4,000 were written off.
(2) Opening stock on 1.4.2018 including goods costing ` 12,000 had been sold during the year and had
been marked-down in the selling price by `1,600. The remaining stock had been sold during the
year.
(3) Goods purchased during the year were marked down by ` 3,600 from a cost of ? 30,000. Marked-
down stock costing ? 10,000 remained unsold on 31.3.2019.
(4) The departmental closing stock is to be valued at cost subject to adjustment for mark-up and
mark-down.
You are required to prepare for the year ended 31st March, 2019 :
(i) Departmental Trading Account for department X for the year ended 31st March, 2019 in the books
of head office.
(ii) Memorandum Stock Account for the year ended 31st March, 2019.
(iii) Memorandum Mark-Up account for the year ended 31st March, 2019.
[Sugg.Nov.’19,10 Marks]

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Ans.(i) Department Trading Account for Department X
For the year ending on 31.03.2019
In the books of Head Office

Particulars ` Particulars `
To Opening Stock 1,50,000 By Sales 6,50,000
To Purchases 4,30,000 By Shortage 4,000
To Gross Profit c/d 1,05,000 By Closing Stock 31,000
6,85,000 6,85,000
(ii) Memorandum Stock Account (for Department X) (at selling price)
Particulars ` Particulars `
To Balance b/d
(` 1,50,000+20% of
` 1,50,000) 1,80,000 By Profit & Loss A/c (Cost of Shortage) 4,000
To Purchases
(` 4,30,000 + 20% of
` 4,30,000) 5,16,000 By Memorandum Departmental
Mark up A/c (Load on Shortage)
(` 4,000 x 20%) 800
By Memorandum Departmental
Mark-up A/c (Mark-down on
Current Purchases) 3,600
By Debtors A/c (Sales) 6,50,000
By Memorandum Departmental
Mark-up A/c (Mark Down on
Opening Stock) 1,600
_______ By Balance c/d 36,000
6,96,000 6,96,000
(iii) Memorandum Departmental Mark-up Account
Particulars ` Particulars `
To Memorandum 800 By Balance b/d 30,000
Departmental Stock A/c (` 1,80,000 x 20/120)
(` 4,000 × 20/100)
To Memorandum 3,600 By Memorandum 86,000
Departmental Stock A/c Departmental Stock A/c
To Memorandum 1,600 (` 5,16,000 x 20/120)
Departmental Stock A/c
To Gross Profit transferred
to Profit & Loss A/c 1,05,000
To Balance c/d [(` 36,000
+ 1,200*) x 20/120 - ` 1,200] 5,000 _______
1,16,000 1,16,000

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 *[` 3,600 ×10,000/30,000] = ` 1,200. Alternatively, this adjustment of ` 1,200 may be routed through
Memorandum Stock Account.
Working Notes:
(i) Calculation of Cost of Sales
`
A Sales as per Books 6,50,000
B Add: Mark-down in opening stock (given) 1,600
C Add: mark-down in sales out of current Purchases
(` 3,600 x 20,000 /30,000) 2,400
D Value of sales if there was no mark-down (A+B+C) 6,54,000
E Less: Gross Profit (20/120 of ` 6,54,000) subject to Mark Down (1,09,000)
F Cost of sales (D-E) 5,45,000
(ii) Calculation of Closing Stock
`
A Opening Stock 1,50,000
B Add: Purchases 4,30,000
C Less: Cost of Sales (5,45,000)
D Less: Shortage (4,000)
E Closing Stock (A+B-C-D) 31,000
Q-2 Axe Limited has four departments, A, B, C and D. Department A sells goods to other partments at a
profit of 25% on cost. Department B sells goods to other department at a profit of 30% on sales.
Department C sells goods to other departments at a profit of 10% on cost, Department D sells goods to
other departments at a profit of 15% on sales.
Stock lying at different departments at the year-end was as follows :
Department Department Department Department
A B C D
Transfer from Department A - 45,000 50,000 60,000
Trasfer from Department B 50,000 - - 75,000
Trasfer from Departmnet C 33,000 22,000 - -
Trasfer from Department D 40,000 10,000 65,000 -
Departmental managers are entitled to 10% commission on net profit subject to unrealized profit on
departmental sales being eliminated.
Departmental profits after charging manager's commission, but before adjustment of unrealized profit are
as under:
`
Department A 2,25,000
Department B 3,37,500
Department C 1,80,000
Department D 4,50,000
Calculate the correct departmental profit after charging Manager’s commission. [Sugg. Nov.’18, 5 Marks]

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Answer
Calculation of correct departmental profits
Department Department Department Department
A B C D
` ` ` `
Profit after charging managers’ commission 2,25,000 3,75,500 1,80,000 4,50,000
Add back: managers’ commission (1/9) 25,000 37,500 20,000 50,000
2,50,000 3,75,000 2,00,000 5,00,000
Less: Unrealized profit on stock (Working Note) 31,000 37,500 5,000 17,250
Profit before Manager’s commission 2,19,000 3,37,500 1,95,000 4,82,750
Less : Commission for Department Manager @ 10% 21,900 33,750 19,500 48,275
Correct Department Profit after manager’s commission 1,97,100 3,03,750 1,75,500 4,34,475
Working Note:
Stock lying with
Dept. A Dept.B Dept.C Dept.D Total
` ` ` ` `
Unrealized Profit of Department A 45,000 x 50,000 x 60,000 x 31,000
25/125=9,000 25/125=10,000 25/125=12,000
Department B 50,000x0.3 75,000x0.3 37,500
= 15,000 = 22,500
Department C 33,000 x 22,000 x 5,000
10/110 = 10/110 =
3,000 2,000
Department D 40,000 x .15 10,000 x 0.15 65,000 x 0.15 17,250
= 6,000 = 1,500 = 9,750

Q-3 M/s. Delta is a Department Store having three department X, Y and Z. The information regardin three
department for the year ended 31st March, 2019 are given below :
Particular Dept.X Dept.Y Dept.Z
Opening Stock 18,000 12,000 10,000
Purchases 66,000 44,000 22,000
Debtors at end 7,500 5,000 5,000
Sales 90,000 67,500 45,000
Closing Stock 22,500 8,750 10,500
Value of furniture in each Department 10,000 10,000 5,000
Floor space occupied by each Dept. (in sq. ft.) 1,500 1,250 1,000
Number of employees in each Department 25 20 15
Electricity consumed by each Department (in units) 300 200 100

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 Additinal infromation
Amount Rs.
Carriage inwards 1,500
Carriage outwards 2,700
Salaries 24,000
Advertisement 2,700
Discount allowed 2,250
Discount received 1,800
Rent, Rates and Taxes 7,500
Depreciation on furniture 1,000
Electricity Expenses 3,000
Labour welfare expenses 2,400
Prepare Departmental Trading and Profit & Loss Account for the year ended 31st March, 2018 after
providing provision for Bad Debts at 5%. [Sugg. May ‘18, 10 Marks]
Ans. In the Books of M/s Delta Departmental Trading and Profit and Loss Account for the year ended 31st March, 2018
Particulars Deptt.X Deptt.Y Deptt.Z Total Particulars Deptt.X Deptt.Y Deptt.Z Total
` ` ` ` ` ` ` `
To Stock (opening) 18,000 12,000 10,000 40,000 By Sales 90,000 67,500 45,000 2,02,500
To Purchases 66,000 44,000 22,000 1,32,000 By Stock (closing) 22,500 8,750 10,500 41,750
To Carriage Inwards 750 500 250 1,500
To Gross Profit c/d (b.f.) 27,750 19,750 23,250 70,750
1,12,500 76,250 55,500 2,44,250 1,12,500 76,250 55,500 2,44,250
To Carriage Outwards 1,200 900 600 2,700 By Gross Profit b/d 27,750 19,750 23,250 70,750
To Electricity 1,500 1,000 500 3,000 By Discount received 900 600 300 1,800
To Salaries 10,000 8,000 6,000 24,000
To Advertisement 1,200 900 600 2,700
To Discount allowed 1,000 750 500 2,250
To Rent, Rates and Taxes 3,000 2,500 2,000 7,500
To Depreciation 400 400 200 1,000
To Provision for Bad
Debts @ 5% of debtors 375 250 250 875
To Labour welfare expenses 1,000 800 600 2,400
To Net Profit (b.f.) 8,975 4,850 12,300 26,125
28,650 20,350 23,550 72,550 28,650 20,350 23,550 72,550
Working Note :
Basis of allocation of expenses
Carriage inwards Purchases (3:2:1)
Carriage outwards Turnover (4:3:2)
Salaries No.of Employees (5:4:3)
Advertisement Turnover (4:3:2)

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 Discount allowed Turnover (4:3:2)
Discount received Purchases (3:2:1)
Rent, rates and Taxes Floor Space occupied (6:5:4)
Depreciation on funiture Value of furniture (2:2:1)
Labour welfare expenses No. of Employees (5:4:3)
Electricity expense Units consumed (3:2:1)
Provision for bad debts Debtors balances(3:2:1)
Q-4 The following balances were extracted from the books of Beta. You are required to prepare
Departmental Trading Account and general Profit & Loss Account for the year ended 31st December,
2018:
Particulars Deptt. A Deptt. B
Rs. Rs.
Opening Stock 3,00,000 2,40,000
Purchases 39,00,000 54,60,000
Sales 60,00,000 90,00,000
General expenses incurred for both the Departments were Rs. 7,50,000 and you are also supplied with
the following information:
(i) Closing stock of Department A Rs. 6,00,000 including goods from Department B for Rs. 1,20,000 at
cost to Department A.
(ii) Closing stock of Department B Rs. 12,00,000 including goods from Department A for Rs. 1,80,000 at
cost to Department B.
(iii) Opening stock of Department A and Department B include goods of the value of Rs. 60,000 and Rs.
90,000 taken from Department B and Department A respectively at cost to transferee departments.
(iv) The gross profit is uniform from year to year. [MTP Oct. ‘19, 10 Marks]
Ans. Departmental Trading Account for the year ended on 31st December, 2018
Particulars A B Particulars A B
Rs. Rs. Rs. Rs.
To Opening Stock 3,00,000 2,40,000 By Sales 60,00,000 90,00,000
To Purchases 39,00,000 54,60,000 By Closing Stock 6,00,000 12,00,000
To Gross Profit 24,00,000 45,00,000 ________ __________
66,00,000 1,02,00,000 66,00,000 1,02,00,000
General profit and loss account of Beta for the year ended on 31st December, 2018
Particulars Amount Particulars Amount
Rs. Rs.
To General expenses. 7,50,000 By Stock reserve (opening stock)
To Stock reserve (Closing Stock) Dept. A 30,000
Dept. A 60,000 Dept. B 36,000
Dept. B 72,000 By Gross Profit
To Net Profit 60,84,000 Dept. A 24,00,000
________ Dept. B 45,00,000
69,66,000 69,66,000
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 Working Notes :
Dept. A Dept. B
1. Percentage of Profit 24,00,000/60,00,000 x 100 45,00,000/90,00,000 x 100
40% 50%
2. Opening Stock reserve 60,000 x 50% = 30,000 90,000 x 40% = 36,000
3. Closing Stock reserve 1,20,000 x 50%=60,000 1,80,000 x 40% = 72,000
. General expenses have not been allocated to individual department and are charged to General Profit and
Loss Account.
Q-5 The following balances were extracted from the books of M/s Division. You are required to prepare
Departmental Trading Account and Profit and Loss account for the year ended 31st December, 2017
after adjusting the unrealized department profits if any.
Deptt. A Deptt. B
Rs. Rs.
Opening Stock 50,000 40,000
Purchases 6,50,000 9,10,000
Sales 10,00,000 15,00,000
General expenses incurred for both the departments were Rs. 1,25,000 and you are also supplied with
the following information: (a) Closing stock of Department A Rs.1,00,000 including goods from
Department B for Rs. 20,000 at cost of Department A. (b) Closing stock of Department B Rs. 2,00,000
including goods from Department A for Rs. 30,000 at cost to Department B. (c) Opening stock of
Department A and Department B include goods of the value of Rs. 10,000 and Rs. 15,000 taken from
Department B and Department A respectively at cost to transferee departmen ts. (d) The rate of gross
profit is uniform from year to year. [MTP Aug. ‘18, 8 Marks]
Ans. Departmental Trading and Loss Account of M/s Division
For the year ended 31st December, 2017
Deptt. A Deptt. B Deptt. A Deptt. B
Rs. Rs. Rs. Rs.
To Opening stock 50,000 40,000 By Sales 10,00,000 15,00,000
To Purchases 6,50,000 9,10,000 By Closing stock
To Gross profit 4,00,000 7,50,000 1,00,000 2,00,000
11,00,000 17,00,000 11,00,000 17,00,000
To General By Gross profit 4,00,000 7,50,000
Expenses (in ratio of
sales) 50,000 75,000
To Profit ts/f to general
profit and loss account 3,50,000 6,75,000 _______ _______
4,00,000 7,50,000 4,00,000 7,50,000

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 General Profit and Loss Account
Rs. Rs.
To Stock reserve required (additional: By Profit from:
Stock in Deptt. A Deptt. A 3,50,000
50% of (Rs. 20,000 - Rs. 10,000) (W.N.1) 5,000 Deptt. B 6,75,000
Stock in Deptt. B
40% of (Rs. 30,000 - Rs. 15,000) (W.N.2) 6,000
To Net Profit 10,14,000 ________
10,25,000 10,25,000
Working Notes:
1. Stock of department A will be adjusted according to the rate appli cable to department B =
[(7,50,000 ÷ 15,00,000) x 100] = 50%
2. Stock of department B will be adjusted according to the rate applicable to department A =
[(4,00,000 ÷ 10,00,000) x 100] = 40%
Q-6 Following is the Trial Balance of Mr. Mohan as on 31.03.2017:
Particulars Debit (Rs.) Credit (Rs.)
Capital Account 40,000
Drawing Account 1,500
Opening Stock Department A 8,500
Department B 5,700
Department C 1,200
Purchases Department A 22,000
Department B 17,000
Department C 8,000
Sales Department A 54,000
Department B 33,000
Department C 21,000
Sales Returns Department A 4,000
Department B 3,000
Department C 1,000
Freight and Carriage Department A 1,400
Department B 800
Department C 200
Furniture and fixtures 4,600
Plant and Machinery 20,000
Motor Vehicles 40,000
Sundry Debtors 12,200
Sundry Creditors 15,000
Salaries 4,500
Power and water 1,200
Telephone charges 2,100
Bad Debts 750

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 Rent and taxes 6,000
Insurance 1,500
Wages Department A 800
Department B 550
Department C 150
Printing and Stationeries 2,000
Advertising 3,500
Bank Overdraft 12,000
Cash in hand 850 _______
1,75,000 1,75,000
You are required to prepare Department Trading, Profit and Loss Account and the Balance Sheet taking
into account the following adjustments:
(a) Outstanding Wages: Department B- Rs. 150, Department C – Rs. 50.
(b) Depreciate Plant and Machinery and Motor Vehicles at the rate of 10%.
(c) Each Department shall share all expenses in proportion to their sales.
(d) Closing Stock: Department A - Rs. 3,500, Department B - Rs. 2,000, Department C - Rs. 1,500.
[MTP Oct. ‘18, 10 Marks, RTP May ‘18]
Ans. Trading and Profit and Loss Account
for the year ended on 31st March, 2017
Particulars A (Rs.) B (Rs.) C (Rs.) Particulars A (Rs.) B (Rs.) C (Rs.)
To Opening Stock 8,500 5,700 1,200 By Sales less
Sales returns 50,000 30,000 20,000
To Purchases 22,000 17,000 8,000 By Closing Stock 3,500 2,000 1,500
To Freight & carriage 1,400 800 200
To Wages 800 700 200
To Gross profit 20,800 7,800 11,900 ______ _______ ________
53,500 32,000 21,500 53,500 32,000 21,500
To Salaries 2,250 1,350 900 By Gross Profit 20,800 7,800 11,900
To Power & Water 600 360 240 By Net Loss - 465 -
To Telephone Charges 1,050 630 420
To Bad Debts 375 225 150
To Rent & Taxes 3,000 1,800 1,200
To Insurance 750 450 300
To Printing & Stationery 1,000 600 400
To Advertising 1,750 1,050 700
To Depreciation (2,000 +4,000) 3,000 1,800 1,200
To Net Profit 7,025 6,390 ______ _______ ______ _______
20,800 8,265 11,900 20,800 8,265 11,900

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 Balance Sheet as at 31.03.2017
Liabilities Rs. Assets Rs.
Capital A/c 40,000 Furniture & Fixtures 4,600
Add: Net Profit
(Rs. 7,025 + Rs. 6,390) 13,415 Plant & Machinery 20,000
53,415
Less: Depreciation 2,000 18,000
Less: Net loss in Dept B 465 Motor Vehicles 40,000
52,950 Less: Depreciation 4,000 36,000
Less: Drawings 1,500 51,450 Sundry Debtors 12,200
Sundry Creditors 15,000 Cash in hand 850
Bank Overdraft 12,000 Closing Stock 7,000
Wages Outstanding 200 ______
78,650 78,650
Note: All expenses have been allocated among departments in proportion of their sales in the solution
as per the specific requirement of the question.
Q-7 A firm has two departments--Sawmill and Furniture. Furniture is made with wood supplied by the
Sawmill department at its usual selling price. From the following figures prepare Departmental Trading
and Profit and Loss Account for the year 2018:
Sawmill Furniture
` `
Opening Stock on 1st January, 2018 1,50,000 25,000
Sales 12,00,000 2,00,000
Purchases 10,00,000 7,500
Supply to Furniture Department 1,50,000 --
Selling expenses 10,000 3,000
Wages 30,000 10,000
Clsong Stock on 31st December, 2018 1,00,000 30,000
The value of stocks in the furniture department consist of 75% wood and 25% other expenses. The
Sawmill Department earned Gross Profit at 15 % on sales in 2017. General expenses of the business as
a whole came to ` 55,000. The firm adopts FIFO method for assigning costs to inventories.
[RTP Nov.’19]
Ans. Departmental Trading and Profit and Loss Account
Particulars Sawmill Furniture Particulars Sawmill Furniture
To Opening stock 1,50,000 25,000 By Sales 12,00,000 2,00,000
To Purchase 10,00,000 7,500 By Transfer to furniture
department 1,50,000
To Wages 30,000 10,000 By Closing stock 1,00,000 30,000

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 To Transfer from
sawmill - 1,50,000
To Gross profit 2,70,000 37,500 ________ ________
14,50,000 2,30,000 14,50,000 2,30,000
To Selling expenses 10,000 3,000 By Gross profit 2,70,000 37,500
To Net Profit 2,60,000 34,500 _______ ______
2,70,000 37,500 2,70,000 37,500

General Profit & Loss Account

Particulars Amount Particulars Amount
To General Expenses 55,000 By Net Profit from
To Stock reserve (WN-2) 4,500 Saw Mill 2,60,000
To Net Profit 2,37,813 Furniture 34,500
_______ By stock reserve (opening WN-1) 2,813
2,97,313 2,97,313
Working Notes
1. Calculation of Stock Reserve (opening)
25,000 x 75% wood x 15% = ` 2,813
2. Calculation of closing stock reserve
Gross profit Rate of Saw Mill of 2018
2,70,000 / (12,00,000 + 1,50,000) x 100 = 20%
30,000x 75% x 20% = ` 4,500.
Q-8 The following balances were extracted from the books of M/s Division. You are required to prepare
Departmental Trading Account and Profit and Loss account for the year ended 31st December, 2018
after adjusting the unrealized department profits if any.
Deptt.A Deptt.B
Rs. Rs.
Opening stock 50,000 40,000
Purchases 6,50,000 9,10,000
Sales 10,00,000 15,00,000
General expenses incurred for both the departments were Rs.1,25,000 and you are also supplied with
the following information: (a) Closing stock of Department A Rs.1,00,000 including goods from
Department B for Rs.20,000 at cost of Department A. (b) Closing stock of Department B Rs. 2,00,000
including goods from Department A for Rs.30,000 at cost to Department B. (c) Opening stock of Department
A and Department B include goods of the value of Rs.10,000 and Rs.15,000 taken from Department B and
Department A respectively at cost to transferee departments, (d) The rate of gross profit is uniform
from year to year. [RTP May ‘19, RTP Nov.’18]

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Ans. Departmental Trading and Loss account of M/s Division
For the year ended 31st December, 2018
Deptt. A. Deptt.B Deptt.A Deptt.B
Rs. Rs. Rs. Rs.
To Opening sbck 50,000 40,000 By Sales 10,00,000 15,00,000
To Purchases 6,50000 9,10,000 By Closing stock 1,00,000 2,00,000
To Gross profit 4,00,000 7,50,000 11,00,000 17,00,000
11,00,000 17,00,000
To General Expenses By Gross profit 4,00,000 7,50,000
(in ratio of sales) 50,000 75,000
To Profit it/f to general 3,50,000 6,75,000
profit and loss account ________ ________ _______ _______
4,00,000 7,50,000 4,00,000 7,50,000
General Profit and Loss Account
Rs. Rs.
To Stock reserve requeird (additional: - By Profit from -
Stock in Deptt. A - Deptt. A 3,50,000
50% of (Rs.20,000 - Rs.10,000) (W.N.1) 50,000 Deptt. A 6,75,000
Stock in Deptt. B
40% of (Rs.30,000 - Rs.15,000 (W.N.2) 6,000
To Net Profit 10,14,000
10,25,000 10,25,000
Working Notes :
1. Stock of department A will be adjusted according to the rate applicable to department B = [(7,50,000
 15,00,000) x 100] = 50%
2. Stock of department B will be adjusted according to the rate applicable to department A = [(4,00,000
 10,00,000) x 100] = 40%.

---0---0---

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CHAPTER-13
Accounting for Branches including Foreign Branches

Q-1 On 31st March, 2019 Chennai Branch submits the following Trial Balance to its Head Office at Lucknow:
Debit Balances ` in lacs
Furniture and Equipment 18
Depreciation on furniture 2
Salaries 25
Rent 10
Advertising 6
Telephone, Postage and Stationery 3
Sundry Office Expenses 1
Stock on 1st April, 2018 60
Goods Received from Head Office 288
Debtors 20
Cash at bank and in hand 8
Carriage Inwards 7
448
Credit Balances
Outstanding Expenses 3
Goods Returned to Head Office 5
Sales 360
Head Office 80
448
Additional Information:
Stock on 31st March, 2019 was valued at ` 62 lacs. On 29th March, 2019 the Head Office dispatched
goods costing ` 10 lacs to its branch. Branch did not receive these goods before 1st April, 2019. Hence,
the figure of goods received from Head Office does not include these goods. Also the head office has
charged the branch ` 1 lac for centralized 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
and (ii) prepare Final Accounts of the Branch including Balance Sheet. [RTP-May’ 20]

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Ans.(i) Books of Branch
Journal Entries
(` in lacs)
Dr. Cr.
Goods in Transit A/c Dr. 10
To Head Office A/c ` 10
(Goods dispatched by head office but not received by
branch before 1st April, 2019)
Expenses A/c Dr. 1
To Head Office A/c 1
(Amount charged by head office for centralised services)
(ii) Trading and Profit & Loss Account of the Branch
for the year ended 31st March, 2019
` in lacs ` in lacs
To Opening Stock 60 By Sales 360
To Goods received from By Closing Stock 62
Head Office 288
Less: Returns (5) 283
To Carriage Inwards 7
To Gross Profit c/d 72 ___
422 422
To Salaries 25 By Gross Profit b/d 72
To Depreciation on Furniture 2
To Rent 10
To Advertising 6
To Telephone, Postage & Stationery 3
To Sundry Office Expenses 1
To Head Office Expenses 1
To Net Profit Transferred to
Head Office A/c 24 __
72 72
Balance Sheet as on 31st March, 2019
Liabilities ` in lacs Assets ` in lacs
Head Office 80 Furniture & Equipment 20
Add: Goods in transit 10 Less: Depreciation (2) 18
Head Office Expenses 1 Stock in hand 62
Net Profit 24 115 Goods in Transit 10
Outstanding Expenses 3 Debtors 20
___ Cash at bank and in hand 8
118 118
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Q-2 M/s Rani & Co. has head office at Singapore and branch at Delhi (India). Delhi branch is an integral
foreign operation of M/s Rani & Co. Delhi branch furnishes you with its Trial Balance as on 31st March,
2019 and the additional information thereafter:
Dr. Cr.
Rupees in thousands
Stock on 1st April, 2018 600 -
Purchases and Sales 1,600 2,400
Sundry Debtors and Creditors 800 600
Bills of Exchange 240 480
Wages 1,120 -
Rent, rates and taxes 720 -
Sundry Expenses 320 -
Computers 600 -
Bank Balance 520 -
Singapore Office A/c - 3,040
Total 6,520 6,520
Additional information :
(a) Computers were acquired from a remittance of Singapore dollar 12,000 received from Singapore Head
Office and paid to the suppliers. Depreciate Computers at the rate of 40% for the year.
(b) Closing Stock of Delhi branch was ` 15,60,000 on 31st March, 2019.
(c) The Rates of Exchange may be taken as follows :
(i) on 1.4.2018 @ ` 50 per Singapore Dollar
(ii) on 31.3.2019 @ ` 52 per Singapore Dollar
(iii) Average Exchange Rate for the year @ ` 51 per Singapore Dollar.
(iv) Conversion in Singapore Dollar shall be made upto two decimal accuracy.
(d) Delhi Branch Account showed a debit balance of Singapore Dollar 59,897.43 on 31.3.2019 in the Head
office books and there were no items pending for reconciliation.
In the books of Head office you are required to prepare :
(1) Revenue statement for the year ended 31st March, 2019 (in Singapore Dollar)
(2) Balance Sheet as on that date. (in Singapore Dollar) [Sugg. May ‘19, 8 Marks]
Ans. Revenue Statement
for the year ended 31st March, 2019
Singapore dollar Singapore dollar
To Opening Stock 12,000.00 By Sales 47,058.82
To Purchases 31,372.55 By Closing stock 30,000.00
To Wages 21,960.78 (15,60,000/52)
To Gross profit b/d 11,725.49 ________
77,058.82 77,058.82

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 To Rent, rates and taxes 14,117.65 By Gross profit c/d 11,725.49
To Sundry Expenses 6,274.51 By Net loss b/d 13,466.67
To Depreciation on computers
(Singapore dollar 12,000 x 0.4) 4,800.00 ________
25,192.16 25,192.16
Balance Sheet of Delhi Branch
as on 31st March, 2019
Liabilities Singapore Assets Singapore Singapore
dollar dollar dollar
Singapore Office A/c 59,897.43 Computers 12,000.00
Less: Net Loss (13,466.67) 46,430.76 Less: Depreciation (4,800.00) 7,200.00
Sundry creditors 11,538.46 Closing stock 30,000.00
Bills payable 9,230.77 Sundry debtors 15,384.61
Bank balance 10,000.00
________ Bills receivable 4,615.38
67,199.99 67,199.99
Working Note :
M/s Rani & Co.
Delhi Branch Trial Balance in (Singapore $)
as on 31st March, 2019
Conversion Dr. Cr.
rate per Singapore Singapore
Singapore dollar dollar
dollar
(`)
Stock on 1.4.18 6,00,000.00 50 12,000.00 -
Purchases and sales 16,00,000.00 24,00,000.00 51 31,372.55 47,058.82
Sundry Debtors and
Creditors 8,00,000.00 6,00,000.00 52 15,384.61 11,538.46
Bills of exchange 2,40,000.00 4,80,000.00 52 4,615.38 9,230.77
Wages 11,20,000.00 51 21,960.78 -
Rent, rates and taxes 7,20,000.00 51 14,117.65 -
Sundry Expenses 3,20,000.00 51 6,274.51 -
Computers 6,00,000.00 - 12,000.00 -
Bank balance 5,20,000.00 52 10,000.00 -
Singapore office A/c - 59,897.43
1,27,725.48 1,27,725.48

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 1
Q-3 Ayan Ltd. invoices goods to its branch at cost plus 33 % . From the following particulars prepare
3
Branch Stock Account, Branch Stock Adjustment Account and Branch Profit and Loss Account as they
would appear in the books of head office.
Rs.
Stock at commencement at Branch at invoice Price 36,60,000
Stock at close at Branch at Invoice Price 2,88,000
Goods sent to Branch during the year at invoice price (including goods invoiced at ` 48,000 24,00,000
to Branch on 31.03.2018 but not received by Branch before close of the year).
Return of goods to head office (invoice Price) 1,20,000
Credit Sales at Branch 1,20,000
Invoice value of goods pilfered 24,000
Normal loss at Branch due to wastage and deterioration of stock (at invoice price) 36,000
Cash Sales at Branch 21,60,000
Ayan closes its books on 31st March, 2018. [Sugg. May ‘18, 10 Marks]
Ans. In the books of Head Office
Branch Stock Account
Particular Rs. Particular Rs.
To Balance b/d 3,60,000 By Bank A/c (cash Sales) 21,60,000
To Goods sent to Branch A/c 24,00,000 By Branch Debtors A/c (Credit Sales) 1,20,000
To Branch Adjustment 36,000 By Goods sent to Branch A/c 1,20,000
A/c balancing fig. (Surplus)*** (Returns to H.O.)
By Branch Adjustment A/c* 6,000
(Rs.24,000 x 25/100)
By Branch P&L A/c* 18,000
(Cost of Abnormal Loss)
By Branch Adjustment A/c** 36,000
(invoice price of normal loss
By Balance c/d:
In hand 2,88,000
In transit 48,000
27,96,000 27,96,000
*Alternative, comined postin for the amount of Rs.24,000 may be passed through Goods pifered account.
** Alternatively, it may first be transferred to normal Loss account which may ultimately be closed by
transfer to Branch Adjustment account. The final amount of net profit will however remain same.
*** It has been considered that the surplus may be due to sale of goods by branch at price higher than
invoice price.

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 Branch Stock Adjustment Account
Particulars Rs. Particulars Rs.
To Branch Stock A/c 6,000 By Stock Reserve A/c 90,000
(Loading on Abnormal Loss) (Rs. 3,60,000x25/100)
To Branch Stock A/c 36,000 By Goods Sent to Branch A/c 5,70,000
(Normal Loss) (Rs.24,00,000 - Rs.1,20,000) x 25/100
To Stock Reserve A/c 84,000 By Branch Stock A/c (Surplus) 36,000
(Rs.3,36,000x25/100)
To Gross Profit t/f to P & LA/c 5,70,000
6,96,000 6,96,000
Branch Profit and Loss Account
Particulars Rs. Particulars Rs.
To Branch Stock A/c 18,000 By Branch Adjustment A/c 5,70,000
(Cost of Abnormal Loss) (Gross Profit)
To Net Profit t/f to General P&LA/c 5,52,000
5,70,000 5,70,000
Q-4 M & S Co. of Lucknow has a branch in Canberra, Australia (as an integral foreign operation of M & S Co.).
At the end of 31st March 2019, the following ledger balances have been extracted from the books of
the Lucknow office and the Canberra.
Lucknow office Canberra Branch
(Rs. In thousand) (Aust. Dollars
in thousand)
Dr. Cr. Dr. Cr.
Capital 2,000
Reserves & Surplus 1,000
Land 500
Buildings (Cost) 1,000
Buildings Dep. Reserves 200
Plant and Machinery (Cost) 2,500 200
Plant and Machinery Dep.
Reserves 600 130
Debtors/Creditors 280 200 60 30
Stock as on 1- 4-2018 100 20
Branch Stock Reserve 4
Cash & Bank Balances 10 10
Purchases/Sales 240 520 20 123
Goods sent to Branch 100 5
Managing Partner's Salary 30
Wages and Salary 75 45
Rent 12
Office Expenses 25 18
Commission Receipts 256 100
Branch/HO Current Account 120 7
4,880 4,880 390 390

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 The following information is also available:
(i) Stock as at 31st March, 2019
Lucknow Rs. 1,50,000
Canberra A$ 3125 (all stock are out of purchases made at Abroad)
(ii) Head Office always sent goods to the Branch at cost plus 25%
(iii) Provision is to be made for doubtful debts at 5%
(iv) Depreciation is to be provided on Buildings at 10% and on Plant and Machinery at 20% on written down
value.
You are required to:
(1) Convert the Branch Trial Balance into rupees by using the following exchange rates:
Opening rate 1 A $ = Rs. 50
Closing rate 1 A $ = Rs. 53
Average rate 1 A $ = Rs. 51.00
For Fixed Assets 1 A $ = Rs. 46.00
(2) Prepare Trading and Profit and Loss Account for the year ended 31st March 2019 showing to the
extent possible H.O. results and Branch results separately. [MTP Oct. ‘19, 10 Marks]
Ans. M & S Co. Ltd.
Canberra, Australia Branch Trial Balance
As on 31st March 2019
($ ‘thousands) (Rs. ‘ thousands)
Dr. Cr. Conversion Dr. Cr.
rate per $
Plant & Machinery (cost) 200 Rs. 46 9,200
Plant & Machinery Dep. Reserve 130 Rs. 46 5,980
Trade receivable/payable 60 30 Rs. 53 3,180 1,590
Stock (1.4.2018) 20 Rs. 50 1,000
Cash & Bank Balances 10 Rs. 53 530
Purchase / Sales 20 123 Rs. 51 1,020 6,273
Goods received from H.O. 5 Actual 100
Wages & Salaries 45 Rs. 51 2,295
Rent 12 Rs. 51 612
Office expenses 18 Rs. 51 918
Commission Receipts 100 Rs. 51 5,100
H.O. Current A/c 7 Actual ______ 120
18,855 19,063
Foreign Exchange Loss (bal. fig.) ____ ____ 208
390 390 19,063 19,063
Closing stock 3.125 53 165.625

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 Trading and Profit & Loss Account for the year ended 31st March, 2019
(Rs.’000)
H.O. Branch Total H.O. Branch Total
To Opening Stock 100 1,000.000 1,100.000 By Sales 520 6,273.000 6,793.000
To Purchases 240 1,020.000 1,260.000 By Goods sent
To Goods received to Branch 100 - 100.000
from Head Office - 100.000 100.000 By Closing Stock 150 165.625 315.625
To Wages & Salaries 75 2,295.000 2,370.000
To Gross profit c/d 355 2,023.625 2,378.625
770 6,438.625 7,208.625 770 6,438.625 7,208.625
To Rent - 612.000 612.000 By Gross profit b/d 355 2,023.625 2,378.625
To Office expenses 25 918.000 943.000 By Commission
To Provision for receipts 256 5,100.000 5,356.000
doubtful debts 14 159.000 173.000
@ 5%
To Depreciation 460 644.000 1,104.000
(W. N.)
To Balance c/d 112 4,790.625 4,902.625 ____ ________ ________
611 7,123.625 7,734.625 611 7,123.625 7,734.625
To Managing Partner’s Salary 30.000 By Balance b/d 4,902.625
To Exchange Loss 208.000 By Branch stock 4,000
reserve
To Balance c/d ______ ______ 4,668.625 _____ ______ ________
______ ______ 4,906.625 _____ ______ 4,906.625
Working Note:
Calculation of Depreciation
H.O Branch
Rs. ‘000 Rs. ‘000
Building . Cost 1,000
Less: Dep. Reserve (200)
800
Depreciation @ 10% (A) 80
Plant & Machinery Cost 2,500 9,200
Less: Dep. Reserve (600) (5,980)
1,900 3,220
Depreciation @ 20% (B) 380 644
Total Depreciation (A+B) 460 644

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 Note: As the closing stock of Branch does not consist any stock transferred from M& S Co., there is no need
to create closing stock reserve. But the opening branch stock reserve has to be reversed in the P&L A/c.
Q-5 XYZ is having its Branch at Kolkata. Goods are invoiced to the branch at 20% profit on sale. Branch has
been instructed to send all cash daily to head office. All expenses are paid by head office except petty
expenses which are met by the Branch Manager. From the following particulars, you are required to
prepare branch account in the books of Head Office.
Rs. Rs.
Stockon 1st April 2017 (invoice price) 30,000 Discount allowed to debtors 160
Sundry Debtors on 1st April, 201 7 18,000 Expenses paid by head office:
Cash in hand as on 1st April, 2017 - Rent 1,800
Office furniture on 1st April, 2017 3,000 Salary 3,200
Goods invoiced from the head Stationery & Printing 800
office (invoice price) 1,60,000
Goods returned to Head Office 2,000 Petty expenses paid by the branch 600
(invoice price)
Goods returned by debtors 960 Depreciation to be provided on branch
Cash received from debtors 60,000 furniture at 10% p. a.
Cash Sales 1,00,000 Stockon 31st March, 2018
Credit sales 60,000 (at invoice price) 28,000
[MTP March ‘19, MTP March ‘18, 8 Marks]
Ans. In the books of Head Office - XYZ
Kolkata Branch Account (at invoice)
Rs. Rs.
To Balance b/d By Stock reserve (opening) 6,000
Stock 30,000 By Remittances:
Debtors 18,000 Cash Sales 1,00,000
Furniture 3,000 Cash from Debtors 60,000
To Goods sent to branch 1,60,000 Less; Petty expenses (600) 1,59,400
To Goods returned by branch (loading) 400 By Goods sent to branch (loading) 32,000
To Bank (expenses paid by H.O.) By Goods returned by
Rent 1 ,800 branch (Return to H.O.) 2,000
Salary 3,200 By Balance c/d
Stationary & printing 800 5,800 Stock 28,000
To Stock reserve (closing) 5,600 Debtors 16,880
To Profit transferred to Furniture (3,000-300) 2,700
General Profits Loss A/c 24,180
2,46,980 2,46,980

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 Working Note :
Debtors Account
Rs. Rs.
To Balance c/d 18,000 By Cash account 60,000
To Sales account (credit) 60,000 By Sales return account 960
By Discount allowed account 160
_____ By Balance c/d 16,880
78,000 78,000
Note : In the absence of opening cash balance, remittance to Head Office has been made after payment
of petty expenses.
Q-6 On 31st December, 2016 the following balances appeared in the books of Kolkata Branch of an English
firm having its HO office in New York:
Amount in Rs. Amount in Rs.
Stock on 1st Jan, 2016 2,34,000
Purchases and Sales 15,62,500 23,43,750
Debtors and Creditors 7,65,000 5,10,000
Bills Receivable and Payable 2,04,000 1,78,500
Salaries and Wages 1,00,000 -
Rent, Rates and Taxes 1,06,250 -
Furniture 91,000 -
Bank A/c 5,68,650
New York Account - 5,99,150
36,31,400 36,31,400
Stock on 31st December, 2016 was Rs. 6,37,500.
Branch account in New York books showed a debit balance of $ 13,400 on 31st December, 2016 and
Furniture appeared in the Head Office books at $ 1,750.
The rate of exchange on 31st December, 2015 was Rs. 52 and on 31st December, 2016 was Rs. 51. The
average rate for the year was Rs. 50.
Prepare in the Head Office books the Profit and Loss a/c and the Balance Sheet of the Branch.
[MTP April ‘19,MTP April ‘18, 10 Marks]
Ans. In the books of English Firm (Head Office in New York)
Kolkata Branch Profit and Loss Account for the year ended 31st December, 2016
$ $
To Opening Stock 4,500 By Sales 46,875
To Purchases 31,250 By Closing stock 12,500
To Gross profit c/d 23,625 (6,37,500 / 51)
59,375 59,375
To salaries 2,000 By Gross profit b/d 23,625
To Rent, rates and taxes 2,125
To exchange translation loss 2,000
To Net Profit c/d 17,500 ______
23,625 23,625

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 Balance Sheet of Kolkata Branch as on 31st December, 2016
Liabilities $ Assets $
Head office A/c 13,400 Furniture 1,750
Add : Net profit 17,500 30,900 Closing Stock 12,500
Trade creditors 10,000 Trade Debtors 15,000
Bills Payable 3,500 Bill Receivable 4,000
______ Cash at Bank 11,150
44,400 44,400
Working Note :
Require for calculation of Exchange Translation Loss
Kalkata Branch Trail Balance (converted in $) as on 31st December, 2016
Dr. Cr. Coversion Dr. Cr.
Rs. Rs. rate $ $
Stock on 1st Jan., 2016 2,34,000 52 4,500
Purchases & Sales 15,62,500 23,43,750 50 31,250 46,875
Debtors & creditors 7,65,000 5,10,000 51 15,000 10,000
Bills Receivable and Bills Payable 2,04,000 1,78,500 51 4,000 3,500
Salaries and wages 1,00,000 50 2,000
Rent, Rates and Taxes 1,06,250 50 2,125
Furniture 91,000 1,750
Bank A/c 5,68,650 51 11,150
New York Account 5,99,150 13,400
Exchange translation loss (bal. fig.) 2,000
36,31,400 36,31,400 73,775 73,775
Q-7 M/s Heera & Co. has head office at U.S.A. and branch in Patna(India). Patna branch is an integral
foreign operation of Heera & Co.Patna branch furnishes you with its trial balance as on 31stMarch, 2018
and the additional information given thereafter:
Dr. Cr.
(Rupees in thousands)
Stock on 1st April, 2017 300
Purchases and Sales 800 1,200
Sundry Debtors & Creditors 400 300
Bills of Exchange 120 240
Wages & Salaries 560 -
Rent, Rates & Taxes 360 -
Sundry Charges 160 -
Plant 240 -
Bank Balance 420 -
New York Office A/c - 1,620
3,360 3,360

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 Information:
(a) Plant was acquired from a remittance of US $ 6,000 received from USA head office and paid to the
suppliers. Depreciate Plant at 60% for the year.
(b) Unsold stock of Patna branch was worth Rs. 4,20,000 on 31st March, 2018.
(c) The rates of exchange may be taken as follows:
- On 01.04.2017 @ Rs. 55 per US $
- On 31.03.2018 @ Rs. 60 per US $
- Average exchange rate for the year @ Rs.58 per US $
Conversion in $ shall be made up to two decimal accuracy.
You are asked to prepare in US dollars the revenue statement for the year ended 31st March, 2018 and the
balance sheet as on that date of Patna branch as would appear in the books of USA head office of Heera & Co.
You are informed that Patna branch account showed a debit balance of US $ 29845.35 on 31.3.2018 in USA
books and there were no items pending reconciliation. [MTP Aug. ‘18, 12 Marks]
Ans. M/s Heera & Co.
Patna Branch Trial Balance in (US $)
as on 31st March, 2018
Conversion Dr. Cr.
rate per US $ US $ US $
(Rs.)
Stock on 1.4.15 55 5,454.55 –
Purchases and sales 58 13,793.10 20,689.66
Sundry debtors and creditors 60 6,666.67 5,000.00
Bills of exchange 60 2,000.00 4,000.00
Wages and salaries 58 9,655.17 -
Rent, rates and taxes 58 6,206.90 -
Sundry charges 58 2,758.62 -
Plant – 6,000.00 -
Bank balance 60 7,000.00 -
USA office A/c – - 29,845.35
59,535.01 59,535.01
Trading and Profit & Loss Account
for the year ended 31st March, 2018

US $ US $
To Opening Stock 5,454.55 By Sales 20,689.66
To Purchases 13,793.10 By Closing stock 7,000.00
To Wages and salaries 9,655.17 (Rs. 4,20,000/60)
By Gross Loss c/d 1,213.16 ________
28,902.82 28,902.82
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 To Gross Loss b/d 1,213.16 By Net Loss 13,778.68
To Rent, rates and taxes 6,206.90
To Sundry charges 2,758.62
To Depreciation on Plant 3,600.00
(US $ 6,000 × 0.6) ________ ________
13,778.68 13,778.68
Balance Sheet of Patna Branch
as on 31st March, 2018
Liabilities US $ Assets US $ US $
USA Office A/c 29,845.35 Plant 6,000.00
Less: Net Loss (13,778.68) 16,066.67 Less: Depreciation (3,600.00) 2,400.00
Sundry creditors 5,000.00 Closing stock 7,000.00
Bills payable 4,000.00 Sundry debtors 6,666.67
Bills receivable 2,000.00
________ Bank balance 7,000.00
25,066.67 25,066.67
Q-8 On 31st December, 2016 the following balances appeared in the books of Kolkata Branch of an English
firm having its Head office in New York:
Amount in Rs. Amount in Rs.
Stock on 1st Jan., 2016 2,34,000
Purchases and Sales 15,62,500 23,43,750
Debtors and Creditors 7,65,000 5,10,000
Bills Receivable and Payable 2,04,000 1,78,500
Salaries and Wages 1,00,000 -
Rent, Rates and Taxes 1,06,250 -
Furniture 91,000 -
Bank A/c 5,68,650
New York Account - 5,99,150
36,31,400 36,31,400
Stock on 31st December, 2016 was Rs.6,37,500.
Branch account in New York books showed a debit balance of $ 13,400 on 31st December, 2016 and
Furniture appeared in the Head Office books at $ 1,750.
The rate of exchange on 31st December, 2015 was Rs. 52 and on 31st December, 2016 was Rs. 51. The
average rate for the year was Rs. 50.
Prepare in the Head Office books the Profit and Loss A/c and the Balance Sheet of the Branch assuming
branch to be an integral foreign operation of H.O. [MTP Oct. ‘18, 10 Marks]

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Ans. In the books of English Firm (Head Office in New York)
Kolkata Branch Profit and Loss Account
for the year ended 31st December, 2016
$ $
To Opening stock 4,500 By Sales 46,875
To Purchases 31,250 By Closing stock 12,500
To Gross profit c/d 23,625 (6,37,500 / 51) ______
59,375 59,375
To Salaries 2,000 By Gross profit b/d 23,625
To Rent, rates and taxes 2,125
To Exchange translation loss 2,000
To Net Profit c/d 17,500 ______
23,625 23,625
Balance Sheet of Kolkata Branch
as on 31st December, 2016
Liabilities $ $ Assets $
Head Office A/c 13,400 Furniture 1,750
Add : Net profit 17,500 30,900 Closing Stock 12,500
Trade creditors 10,000 Trade Debtors 15,000
Bills Payable 3,500 Bills Receivable 4,000
_____ Cash at bank 11,150
44,400 44,400
Working Note:
Calculation of Exchange Translation Loss
Kolkata Branch Trial Balance (converted in $)
as on 31st December, 2016
Dr. Cr. Conversion Dr. Cr.
Rs. Rs. rate ($) ($)
Stock on 1st Jan., 2016 2,34,000 52 4,500
Purchases & Sales 15,62,500 23,43,750 50 31,250 46,875
Debtors & creditors 7,65,000 5,10,000 51 15,000 10,000
Bills Receivable and Bills Payable 2,04,000 1,78,500 51 4,000 3,500
Salaries and wages 1,00,000 50 2,000
Rent, Rates and Taxes 1,06,250 50 2,125
Furniture 91,000 1,750
Bank A/c 5,68,650 51 11,150
New York Account 5,99,150 13,400
Exchange translation loss (bal. fig.) _________ _________ 2,000 ______
36,31,400 36,31,400 73,775 73,775

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Q-9 From the following particulars relating to Pune branch for the year ending December 31, 2018, prepare
Branch Account in the books of Head office.
`
Stock at Branch on January 1, 2018 10,000
Branch Debtors on January 1, 2018 4,000
Branch Debtors on Dec. 31, 2018 4,900
Petty cash at branch on January 1, 2018 500
Furniture at branch on January 1, 2018 2,000
Prepaid fire insurance premium on January 1, 2018 150
Salaries outstanding at branch on January 1, 2018 100
Good sent to Branch during the year 80,000
Cash Sales during the year 1,30,000
Credit Sales during the year 40,000
Cash received from debtors 35,000
Cash paid by the branch debtors directly to the Head Office 2,000
Discount allowed to debtors 100
Cash sent to branch for Expenses:
Rent 2,000
Salaries 2,400
Petty Cash 1,000
Annual Insurance up to March 31, 2019 600 6,000
Goods returned by the Branch 1,000
Goods returned by the debtors 2,000
Stock on December 31,2018 5000
Petty Cash spent by branch 850
Provide depreciation on furniture 10% p.a.
Goods costing ` 1,200 were destroyed due to fire and a sum of ` 1,000 was received from the Insurance
Company. [RTP Nov ‘19]
Ans. Pune Branch Account
Particulars ` Particulars ` `
To Opening Balance By Opening Balance:
Stock 10,000 Salaries outstanding 100
Debtors 4,000 By Remittances:
Petty Cash 500 Cash sales 1,30,000
Furniture 2,000 Cash received from debtors 35,000
Prepaid Insurance 150 Cash paid by debtors directly
to H.O. 2,000

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 To Goods sent to Branch Account 80,000 Received from
Insurance Company 1,000 1,68,000
To Bank (expenses) By Goods sent to branch 1,000
Rent 2,000 (return of goods by
Salaries 2,400 the branch to H.O.)
Petty Cash 1,000 By Closing Balances:
Insurance 600 6,000 Stock 5,000
To Net Profit 78,950 Petty Cash 650
Debtors 4,900
Furniture (2,000 – 10% depreciation) 1,800
Prepaid insurance
______ (1/4 x ` 600) 150
1,81,600 1,81,600
Working Note:
Calculation of petty cash balance at the end: `
Opening balance 500
Add: Cash received form the Head Office 1,000
Total Cash with branch 1,500
Less: Spent by the branch 850
Closing balance 650
Q-10 M/s ABC & Co. has head office at New York (U.S.A.) and branch in Bangalore (India). Bangalore branch is
an integral foreign operation of ABC & Co.
Bangalore branch furnishes you with its trial balance as on 31st March, 2018 and the additional information
given thereafter:
Dr. Cr.
(Rupees in thousands)
Stock on 1st April, 2017 300
Purchases and Sales 800 1,200
Sundry Debtors & Creditors 400 300
Bills of Exchange 120 240
Wages & Salaries 560 -
Rent, Rates & Taxes 360 -
Sundry Charges 160 -
Computers 240 -
Bank Balance 420 -
New York Office A/c _ 1,620
3,360 3,360

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 Additional 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 Bangalore branch was worth ? 4,20,000 on 31st March, 2018.
(c) The rates of exchange may be taken as follows:
- On 01.04.2017 @Rs.55 per US $
- On 31.03.2018 @Rs.60 per US $
- Average exchange rate for the year @ Rs.58 per US $
- Conversion in $ shall be made up to two decimal accuracy.
You are asked to prepare in US dollars the revenue statement for the year ended 31st March, 2018 and the
balance sheet as on that date of Bangalore branch as would appear in the books of New York head office of
ABC & Co. You are informed that Bangalore branch accountshowed a debit balance of US $29845.35 on
31.3.2018 in New York books and there were no items pending reconciliation. [RTP May ‘19]
Ans. M/s ABC & Co.
Bangalore Branch Trial Balance in (US $)
as on 31st March, 2018
Conversion Dr. Cr.
rate per US $ US $ US $
Rs.
Stock on 1.4.17 55 5,454.55 -
Purchases and sales 58 13,793.10 20,689.66
Sundry debtors and creditors 60 6,666.67 5,000.00
Bills of exchange 60 2,000.00 4,000.00
Wages and salaries 58 9,655.17 -
Rent, rates and taxes 58 6,206.90 -
Sundry charges 58 2,758.62 -
Computers - 6,000.00 -
Bank balance 60 7,000.00 -
New York office A/c - - 29,845.35
59,535.01 59,535.01
Q-11 Pass necessary Journal entries in the books of an independent Branch of M/s TPL Sons, wherever
required, to rectify or adjust the following transactions:
(i) Branch paid Rs.5,000 as salary to a Head Office Manager, but the amount paid has been debited by
the Branch to Salaries Account.
(ii) A remittance of Rs.1,50,000 sent by the Branch has not received by Head Office on the date of
reconciliation of Accounts.
(iii) Branch assets accounts retained at head office, depreciation charged for the year Rs.15,000 not
recorded by Branch.
(iv) Head Office expenses Rs.75,000 allocated to the Branch, but not yet been recorded by the Branch.

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 (v) Head Office collected Rs.60,000 directly from a Branch Customer. The intimation of the fact has not
been received by the Branch.
(vi) Goods dispatched by the Head office amounting to Rs.50,000, but not received by the Branch till
date of reconciliation.
(vii) Branch incurred advertisement expenses of Rs.10,000 on behalf of other Branches, but not recorded
in the books of Branch.
(viii) Head office made payment of Rs.16,000 for purchase of goods by branch, but not recorded in
branch books. [RTP Nov ‘18]
Ans. Books of Branch
Journal Entries
Amount Rs.
Dr. Cr.
(i) Head Office Account Dr. 5,000
To Salaries Account 5,000
(Being rectification of salary paid on behalf of Head Office)
(ii) No entry in Branch Books is required.
(iii) Depreciation A/c Dr. 15,000
To Head Office Account 15,000
(Being depreciation of assets accounted for)
(iv) Expenses Account Dr. 75,000
To Head Office Account 75,000
(Being allocated expenses of Head Office recorded)
(v) Head Office Account Dr. 60,000
To Debtors Account 60,000
(Being adjustment entry for collection from Branch
Debtors directly by Head Office)
(vi) Goods in-transit Account Dr. 50,000
To Head Office Account 50,000
(Being goods sent by Head Office still in-transit)
(vii) Head Office Account Dr. 10,000
To expenses Account 50,000
(Being expenditure incurred, wrongly recorded in
books)
(vii) Purchases account A/c Dr. 16,000
To Head Office Account 16,000
(Being purchases booked)
Q-12 Alpha Ltd. has a retail shop under the supervision of a manager. The ratio of gross profit at selling price
is constant at 25 per cent throughout the year to 31 st March, 2017.

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 Branch manager is entitled to a commission of 10 per cent of the profit earned by his branch, calculated
before charging his commission but subject to a deduction from such commission equal in 25 per cent of
any ascertained deficiency of branch stock. All goods were supplied to the branch in head office.
The following details for the year ended 31 st March, 2017 are given as follows:
Rs. Rs.
Opening Stock (at cost) 74,736 Chargeable expenses 49,120
Goods sent to branch (at cost) 2,89,680 Closing Stock (Selling Price) 1,23,328
Sales 3,61,280
Manager's commission paid on account 2,400
From the above details, you are required to calculate the commission due to manager for the year
ended 31st March, 2017. [RTP May ‘18]
Ans. Step: Calculation of Deficiency
Branch stock account (at invoice price)
Particulars Rs. Particulars Rs.
To Opening Stock (Rs.74,736 + 1/3 By Sales 3,61,280
of Rs.74,736) 99,648
To Goods sent to Branch A/c By Closing Stock 1,23,328
(Rs.2,89,680 + 1/3 of Rs.2,89,680) 3,86,240
By Deficiency at sale
price [Balancing figure] 1,280
4,85,888 4,85,000
Step 2 : Calculation of Net Profit before Commission
Branch account
Particular Rs. Particular Rs.
To Opening [Rs.74,736 + 1/3 of Rs.74,736] 99,648 By Sales 3,61,280
To Gross sent to Branch A/c 3,86,240 By Closing Stock 1,23,328
(Rs.2,89,680 + 1/3 of Rs.2,89,680)
To Expenses 49,120 By Stock Reserve A/c 24,912
To Stock Reserve A/c 30,832 By goods sent to Branch A/c 96,560
(Rs.1,23,328x25/1 00]
To Net Profit - subject to
manager's commission 40,240 _______
6,06,080 6,06,080
Step 3 : Calculation of Commission still due to manager
Rs.
A Calculation at 10% profit before charging his commission [Rs.40,240x1 0/1 00] 4,024
B Less; 25% of cost of deficiency in stock (25% of (75% of Rs.1,280) (240)
C Commission for the year [A-B] 3,784
D Less; Paid on account (2,400)
E Balance due (C-D) 1,384
---0---0---
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CHAPTER-14
Accounts from Incomplete Records

Q-1 The books of account of Mr. Maan of Mumbai showed the following figures:
31.3.2018 ` 31.3.2019 `
Furniture & fixtures 2,60,000 2,34,000
Stock 2,45,000 3,20,000
Debtors 1,25,000 ?
Cash in hand & bank 1,10,000 ?
Creditors 1,35,000 1,90,000
Bills payable 70,000 80,000
Outstanding salaries 19,000 20,000
An analysis of the cash book revealed the following:
`
Cash sales 16,20,000
Collection from debtors 10,58,000
Discount allowed to debtors 20,000
Cash purchases 6,15,000
Payment to creditors 9,73,000
Discount received from creditors 32,000
Payment for bills payable 4,30,000
Drawings for domestic expenses 1,20,000
Salaries paid 2,36,000
Rent paid 1,32,000
Sundry trade expenses 81,000
Depreciation is provided on furniture & fixtures @10% p.a. on diminishing balance method. Mr. Maan
maintains a steady gross profit rate of 25% on sales.
You are required to prepare Trading and Profit and Loss account for the year ended 31st March, 2019 and
Balance Sheet as on that date. [RTP-May’ 20]

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Ans. Trading & Profit and Loss Account In the books of Mr. Maan
for the year ended 31st March, 2019
Particulars Amount Particulars Amount
` `
To Opening stock 2,45,000 By Sales:
To Purchases: Cash 16,20,000
Cash 6,15,000 Credit (W.N.3) 11,00,000
Credit (W.N. 2) 15,00,000 By Closing stock 3,20,000
To Gross profit c/d 6,80,000 _______
30,40,000 30,40,000
To Salaries (W.N.5) 2,37,000 By Gross profit b/d 6,80,000
To Rent 1,32,000 By Discount received 32,000
To Sundry trade expenses 81,000
To Discount allowed 20,000
To Depreciation on furniture & fixtures 26,000
To Net profit 2,16,000 ______
7,12,000 7,12,000
Balance Sheet
as at 31st March, 2019
Liabilities Amount Amount
` `
Capital Fixed assets
Opening balance (W.N.7) 5,16,000 Furniture & fixtures 2,34,000
Add: Net profit 2,16,000 Current assets:
7,32,000 Stock 3,20,000
Less: Drawings 1,20,000 6,12,000 Debtors (W.N.4) 1,47,000
Current liabilities & provisions: Cash & bank (W.N.6) 2,01,000
Creditors 1,90,000
Bills payable 80,000
Outstanding salaries 20,000 _______
9,02,000 9,02,000
Working Notes:
1. Bills Payable Account
` `
To Cash/Bank 4,30,000 By Balance b/d 70,000
To Balance c/d 80,000 By Trade creditors (Bal. fig.) 4,40,000
5,10,000 5,10,000

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 2. Creditors Account
` `
To Cash/Bank 9,73,000 By Balance b/d 1,35,000
To Bills payable A/c (W.N.1) 4,40,000 By Credit purchases (Bal. fig.) 15,00,000
To Discount received 32,000
To Balance c/d 1,90,000 _______
16,35,000 16,35,000
3. Calculation of credit sales
`
Opening stock 2,45,000
Add: Purchases
Cash purchases 6,15,000
Credit purchases 15,00,000 21,15,000
23,60,000
Less: Closing Stock 3,20,000
Cost of goods sold 20,40,000
Gross profit ratio on sales 25%
Gross profit ratio on sales

 100 
Total sales  ` 20,40,000 × 27,20,000
 75 
Less: Cash sales 16,20,000
Credit sales 11,00,000
4. Debtors Account
` `
To Balance b/d 1,25,000 By Cash/Bank 10,58,000
To Credit sales (W.N.3) 11,00,000 By Discount allowed 20,000
________ By Balance c/d (Bal. fig.) 1,47,000
12,25,000 12,25,000

5. Salaries
`
Salaries paid during the year 2,36,000
Add: Outstanding salaries as on 31.3.2019 20,000
2,56,000
Less: Outstanding salaries as on 31.03.2018 19,000
2,37,000

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 6. Cash / Bank Account
` `
To Balance b/d 1,10,000 By Cash purchases 6,15,000
To Cash sales 16,20,000 By Creditors 9,73,000
To Debtors 10,58,000 By Bills payable 4,30,000
By Drawings 1,20,000
By Salaries 2,36,000
By Rent 1,32,000
By Sundry trade expenses 81,000
_______ By Balance c/d 2,01,000
27,88,000 27,88,000
7. Balance Sheet as at 31st March, 2018
` `
Creditors 1,35,000 Furniture & fixtures 2,60,000
Bills payable 70,000 Stock 2,45,000
Outstanding salaries 19,000 Debtors 1,25,000
Capital (Bal. fig.) 5,16,000 Cash & bank 1,10,000
7,40,000 7,40,000
Q-2 Archana Enterprises maintain their books of accounts under single entry system. The Balance Sheet as
on 31st March, 2018 was as follows :

Liabilities Amount(`) Assets Amount(`)

Capital A/c 6,75,000 Furniture & fixtures 1,50,000
Trade creditors 7,57,500 Stock 9,15,000
Outstanding exp. 67,500 Trade debtors 3,12,000
Prepaid insurance 3,000
________ Cash in hand & at bank 1,20,000
15,00,000 15,00,000
The following was the summary of cash and bank book for the year ended 31st March, 2019:
Receipts Amount(`) Payments Amount (`)
Cash in hand & at Payment to trade creditors 1,24,83,000
Bank on 1st April, 2018 1,20,000 Sundry expenses paid 9,31,050
Cash sales 1,10,70,000 Drawings 3,60,000
Receipts from trade debtors 27,75,000 Cash in hand & at Bank 1,90,950
st
________ on 31 March, 2019 ________
1,39,65,000 1,39,65,000

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 Additional Information:
(i) Discount allowed to trade debtors and received from trade creditors amounted to ` 54,000 and `
42,500 respectively, (for the year ended 31st March, 2019)
(ii) Annual fire insurance premium of ` 9,000 was paid every year on 1st August for the renewal of the
policy.
(iii) Furniture & fixtures were subject to depreciation @ 15% p.a. on diminishing balance method.
(iv) The following are the balances as on 31st March, 2019 :
Stock ` 9,75,000
Trade debtors ` 3,43,000
Outstanding expenses ` 55,200
(v) Gross profit ratio of 10% on sales is maintained throughout the year.
You are required to prepare Trading and Profit & Loss account for the year ended 31st March, 2019, and
Balance Sheet as on that date. [Sugg.Nov.’19,10 Marks]

Ans. Trading and Profit and Loss Account of Archana Enterprises

for the year ended 31st March, 2019
` `
To Opening Stock 9,15,000 By Sales
To Purchases (W.N. 2) 125,97,000 Cash 110,70,000
To Gross profit c/d 13,93,000 Credit (W.N. 1) 28,60,000 139,30,000
(10% of 139,30,000) ________ By Closing stock 9,75,000
149,05,000 149,05,000
To Sundry expenses (W.N. 4) 9,18,750 By Gross profit b/d 13,93,000
To Discount allowed 54,000 By Discount received 42,500
To Depreciation 22,500
(15% `1,50,000)
To Net Profit (b.f.) 4,40,250 _______
14,35,500 14,35,500
Balance Sheet of Archana Enterprises as at 31st March, 2019
Liabilities Amount Assets Amount
` `
Capital Furniture & Fittings 1,50,000
Opening balance 6,75,000 Less: Depreciation (22,500) 1,27,500
Less: Drawing (3,60,000) Stock 9,75,000
3,15,000 Trade Debtors 3,43,000
Add: Net profit
for the years 4,40,250 7,55,250 Unexpired insurance 3,000
Trade creditors
(W.N. 3) 8,29,000 Cash in hand & at bank 1,90,950
Outstanding expenses 55,200 ________
16,39,450 16,39,450

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 Working Notes:
1. Trade Debtors Account
` `
To Balance b/d 3,12,000 By Cash/Bank 27,75,000
To Credit sales 28,60,000 By Discount allowed 54,000
(Bal. fig.) ________ By Balance c/d 3,43,000
31,72,000 31,72,000
2. Memorandum Trading Account
` `
To Opening stock 9,15,000 By Sales 139,30,000
To Purchases (Balancing figure) 125,97,000 By Closing stock 9,75,000
To Gross Profit (10% on sales) 13,93,000 ________
149,05,000 149,05,000
3. Trade Creditors Account
` `
To Cash/Bank 124,83,000 By Balance b/d 7,57,500
To Discount received 42,500 By Purchases (as calculated 125,97,000
To Balance c/d in W.N. 2)
(balancing figure) 8,29,000 ________
133,54,500 133,54,500
4. Computation of sundry expenses to be charged to Profit & Loss A/c
`
Sundry expenses paid (as per cash and Bank book) 9,31,050
Add: Prepaid expenses as on 31–3–2018 3,000
9,34,050
Less: Outstanding expenses as on 31–3–2018 (67,500)
8,66,550
Add: Outstanding expenses as on 31–3–2019 55,200
9,21,750
Less: Prepaid expenses as on 31–3–2019 (Insurance paid till July, 2019)
(9,000 x 4/12) (3,000)
9,18,750
Q-3 The following balances appeared in the books of M/s Sunshine Traders:
As on As on
31-03-2018 31-03-2019
(` ) (` )
Land and Building 2,50,000 2,50,000
Plant and Machinery 1,10,000 1,65,000
Office Equipment 52,500 42,500
Sundry Debtors 77,750 1,10,250
Creditors for Purchases 47,500 ?
Provision for office expenses 10,000 7,500

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 Stock ? 32,500
Long Term loan from ABC Bank @ 10% per annum 62,500 50,000
Bank 12,500 ?
Capital 4,65,250 ?
Other information was as follows: In (`)
- Collection from Sundry Debtors 4,62,500
- Payments to Creditors for Purchases 2,62,500
- Payment of office Expenses 21,000
- Salary paid 16,000
- Selling Expenses paid 7,500
- Total sales 6,25,000
Credit sales (80% of Total sales)
- Credit Purchases 2,70,000
Cash Purchases (40% of Total Purchases)
- Gross Profit Margin was 25% on cost
- Discount Allowed 2,750
- Discount Received 2,250
- Bad debts 2,250
- Depreciation to be provided as follows:
Land and Building - 5% per annum
Plant and Machinery - 10% per annum
Office Equipment - 15% Per annum
- On 01.10.2018 the firm sold machine having book value, ` 20,000 (as on 31.03.2018) at a loss of `
7,500. New machine was purchased on 01.01.2019.
- Office equipment was sold at its book value on 01.04.2018.
- Loan was partly repaid on 31.03.2019 together with interest for the year.
You are required to prepare:
(i) Trading and Profit & Loss account for the year ended 31st March, 2019.
(ii) Balance Sheet as on 31st March 2019. [Sugg. May ‘19, 12 Marks]
Ans. Trading and Profit and Loss A/c for the year ended 31.3.2019
` `
To Opening stock (Balancing figure) 82,500 By Sales- Cash (W.N.1) 1,25,000
To Purchases-Cash 1,80,000 Credit 5,00,000 6,25,000
Credit (W.N.1) 2,70,000 4,50,000 By Closing stock 32,500
To Gross profit c/d 1,25,000 _______
6,57,500 6,57,500

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 To Loss on sale of 7,500 By Gross profit b/d 1,25,000
Machine By Discount received 2,250
To Depreciation
Land & Building 12,500
Plant & Machinery 11,875
Office Equipment 6,375 30,750
To Expenses paid
Salary 16,000
Selling Expenses 7,500
Office Expenses 18,500 42,000
To Bed debt 2,250
To Discount allowed 2,750
To Interest on loan 6,250
To Net profit 35,750 _______
1,27,250 1,27,250
Balance Sheet as on 31-3-2019
Liabilities ` Assets `
Capital (Balancing Figure) 4,65,250 Land & Building 2,50,000
Add: Net profit 35,750 5,01,000 Less: Depreciation (12,500) 2,37,500
Sundry creditors (W.N.3) 52,750 Plant & Machinery 1,65,000
Bank loan 50,000 Less: Depreciation (10,875) 1,54,125
Provision for expenses 7,500 Office Equipment 42,500
Less: Depreciation (6,375) 36,125
Debtors 1,10,250
Stock 32,500
_______ Bank balance (W.N.4) 40,750
6,11,250 6,11,250
Working Notes :
1. Calculation of Sales and Purchases
Total sales = ` 6,25,000
Cash sales = 20% of total sales (6,25,000) = ` 1,25,000
Credit sales = 80% of total sales = (6,25,000) ` 5,00,000
Gross Profit 25% on cost = 6,25,000 x 25 / 125 = `1,25,000
Credit purchases = ` 2,70,000
Credit purchases = 60% of total purchases
Cash purchases = 40% of total purchases
Total purchases = 2,70,000 / 60 x 100 = ` 4,50,000
Cash purchases = 4,50,000 - 2,70,000 = ` 1,80,000

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 2. Plant & Machinery
` `
To Balance b/d 1,10,000 By Sale of Machinery A/c 20,000
To Cash-purchase (Bal. Fig.) 75,000 By Balance c/d 1,65,000
1,85,000 1,85,000
Depreciation on Plant & Machinery:
@ 10% p.a. on ` 20,000 for 6 months = 1,000
@ 10% p.a. on ` 90,000 (i.e. ` 1,10,000 - ` 20,000) = 9,000
@ 10% p.a. on ` 75,000 for 3 months (i.e. during the year) = 1,875
11,875
Sale of Machinery Account
To Plant and Machinery 20,000 By Depreciation (20,000 x 10% x 1/2) 1000
By Profit and Loss A/c 7,500
______ By Bank (Balancing figure) 11,500
20,000 20,000
3. Creditors Account
` `
To Cash 2,62,500 By Balance b/d 47,500
To Discount received 2,250 By Credit purchases (W.N.2) 2,70,000
To Balance c/d (Bal. Fig.) 52,750 _______
3,17,500 3,17,500
Debtors Account
` `
To Balance b/d (Given) 77,750 By Cash 4,62,500
To Sales (Credit) 5,00,000 By Discount allowed 2,750
By Bad debts 2,250
_______ By Balance c/d 1,10,250
5,77,750 5,77,750
Provision for Office Expenses Account
` `
To Bank 21,000 By balance b/d 10,000
To balance c/d 7,500 By Expenses. (Bal. fig.) 18,500
28,500 28,500
4. Bank Account
` `
To Balance b/d 12,500 By Creditors 2,62,500
To Debtors 4,62,500 By Purchases 1,80,000
To Office Equipment (sales) 10,000 By Expenses
` (16,000 + 7,500 + 21,000) 44,500
To Cash sales (W.N.1) 1,25,000 By Bank loan paid 18,750
To Machine sold 11,500 By Machine purchased (W.N.4) 75,000
_______ By Balance c/d (Bal. Fig.) 40,750
6,21,500 6,21,500

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 5. Office Equipment Account
To balance b/d 52,500 By Sales 10,000
______ By balance c/d 42,500
52,500 52,500
Q-4 Aman, a readymade garment trader, keeps his books of account under single entry system. On the
closing date, i.e. on 31st March, 2017 his statement of affairs stood as follows:
Liabilities Amount ` Assets Amount `
Aman’s Capital 4,80,000 Building 3,25,000
Loan 1,50,00 Furniture 50,000
Creditors 3,10,00 Motor car 90,000
Stock 2,00,000
Debtors 1,70,00
Cash in hand 20,000
______ Cash at bank 85,000
9,40,00 9,40,000
Riots occurred and a fire broke out on the evening of 31st March, 2018, destroying the books of accounts. On
that day, the cashier had absconded with the available cash. You are furnished with the following information:
1. Sales for the year ended 31st March, 2018 were 20% higher than the previous year's sales, out of which,
20% sales were for cash. He always sells his goods at cost plus 25%. There were no cash purchases.
2. Collection from debtors amounted to ` 14,00,000, out of which ` 3,50,000 was received in cash.
3. Business expenses amounted to ` 2,00,000, of which ` 50,000 were outstanding on 31st March, 2018 and
` 60,000 paid by cheques.
4. Gross profit as per last year's audited accounts was ` 3,00,000.
5. Provide depreciation on building and furniture at 5% each and motor car at 20%.
6. His private records and the Bank Pass Book disclosed the following transactions for the year 2017-18:
`
Payment to creditors (paid by cheques) 13,75,000
Perosnal drawings (paid by cheques) 75,000
Repairs (paid by cash) 10,000
Travelling expenses (paid by cash) 15,000
Cash deposited in bank 7,15,000
Cash withdran from bank 1,20,000
7. Stock level was maintained at ` 3,00,000 all throughout the year.
8. The amount defalcated by the cashier is to be written off to the Profit and Loss Account.
You are required to prepare Trading and Profit and Loss A/c for the year ended 31st March, 2018 and Balance
Sheet as on that date of Aman. All the workings should form part of the answer.[Sugg. Nov.’18, 15 Marks]
Ans. Trading and Profit and Loss Account of Aman for the year ended 31st March, 2018
` `
To Opening Stock 2,00,000 By Sales 18,00,000
To Purchases (Bal. fig.) 15,40,000 By Closing Stock 3,00,000
To Gross Profit c/d 3,60,000
21,00,000 21,00,000
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 To Business Expenses 2,00,000 By Gross Profit b/d 3,60,00
To Repairs 10,000
To Depreciation :
Building 16,250
Machinery 2,500
Motor Car 18,000 36,750
To Travelling Expenses 15,000
To Loss by theft (cash defalcated 20,000
To Net profit 78,250
3,60,000 3,60,000
Balance Sheet of Aman as at 31st March, 2018
Liabilites ` ` Assets ` `
Capital 4,80,000 Building 3,25,000
Add: Less : Depreciation 16,250 3,08,750
Net Profit 78,250 Furniture 50,000
Drawings 75,000 4,83,250 Less : Depreciation 2,500 47,500
Loan 1,50,000 Motor Car 90,000
Less : Depreciation 18,000 72,000
Sundry Creditors 4,75,000 Stock in Trade 3,00,000
Outstanding business Sundry Debtors 2,10,000
Expenses 50,000 Bank Balance 2,20,000
11,58,250 11,58,250
Working Notes :
1. Cash and Bank Account
Particular Cash Bank Particulars Cash Bank
To Balance b/d 20,000 85,000 By Payment to Creditors - 13,75,000
To Collection from Debtors 3,50,000 10,50,000 By Business Expenses 90,000 60,000
To Sales (18,00,000 x 20%) 3,60,000 - By Repair 10,000 -
To Cash (C) - 7,15,000 By Cash (C) (withdrawal) 1,20,000
By Bank (c) 7,15,000
To Bank (C) 1,20,000 - By Travelling Expenses 15,000 -
By Private Drawings - 75,000
By Balance c/d 2,20,000
By Cash defalcated 20,000
_______ ________ (balancing fig.) _______ ________
8,50,000 18,50,000 8,50,000 18,50,000
2. Calculation of sales during 2017-18
Gross profit (last year i.e. for year ended 31-3-2017) 3,00,000
Goods sold at cost plus 25% i.e. 20% of sales 15,00,000
Sales for 2016-17 3,00,000/0.2
Sales for 2017-18 (15,00,000 x 1.2) 18,00,000
Credit sales for 2017-18 17,40,000
(80% of 18,00,000)

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3. Debtors Acounting
To Bal. b/d 1,70,000 By Cash 3,50,000
To Sales (18,00,000 x 80%) 14,40, 000 By Bank 10,50,000
By Bal. c/d 2,10,000
16,10,000 16,10,000
4. Creditors Account
To Bank 13,75,000 By Bal. b/d 3,10,000
To Bal. c/d (bal. fig.) 4,75,000 By Purchases 15,40,000
18,50,000 18,50,000
Q-5 Mr. Aman is running a business of readymade garments. He does not maintain his books of accounts
under double entry system. While assessing the income of Mr. Aman for the financial year 2018-19,
Income Tax Officer feels that he has not disclosed the full income earned by him from his business. He
provides you the following information:
On 31st March, 2018
Sundry Assets Rs. 16,65,000
Liabilities Rs. 4,13,000
On 31st March, 2019
Sundry Assets Rs. 28,40,000
Liabilities Rs. 5,80,000
Mr. Aman’s drawings for the year 2018-19 Rs. 32,000 per month
Income declared to the Income Tax Officer Rs. 9,12,000
During the year 2018-19, one life insurance policy of Mr. Aman was matured and amount received Rs.
50,000 was retained in the business.
State whether the Income Tax Officer's contention is correct. Explain by giving your working.
[MTP Oct. ‘19, 4 Marks]
Ans. Determination of Capital balances of Mr. Aman on 31.3.2018 and 31.3.2019
31.3.2018 31.3.2019
Rs. Rs.
Assets 16,65,000 28,40,000
Less: Liabilities (4,13,000) (5,80,000)
Capital 12,52,000 22,60,000
Determination of Profit by applying the method of the capital comparison
Rs.
Capital Balance as on 31-3-2019 22,60,000
Less: Fresh capital introduced (matured life insurance policy amount) (50,000)
22,10,000
Add: Drawings (Rs. 32,000 x 12) 3,84,000
25,94,000
Less: Capital Balance as on 1.4.2018 (12,52,000)
Profit 13,42,000
Income declared 9,12,000
Suppressed Income 4,30,000
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 The Income-tax officer’s contention that Mr. Aman has not declared his true income is correct. Mr. Aman’s
true income is in excess of the disclosed income by Rs. 4,30,000.
Note:
. Closing capital is increased due to fresh capital introduction, so it is deducted.
. Closing capital was reduced due to withdrawal by proprietor; so it is added back.
Q-6 Ram carried on business as retail merchant. He has not maintained regular account books. However, he
always maintained Rs. 10,000 in cash and deposited the balance into the bank account. He informs you
that he has sold goods at profit of 25% on sales.
Following information is given to you:
Assets and Liabilities As on 1.4.2016 As on 31.3.2017
Cash in Hand 10,000 10,000
Sundry Creditors 40,000 90,000
Cash at Bank 50,000 (Cr.) 80,000(Dr.)
Sundry Debtors 1,00,000 3,50,000
Stockin Trade 2,80,000 ?
Ram's capital 3,00,000
Analysis of his bank pass book reveals the following information:
(a) Payment to creditors Rs. 7,00,000
(b) Payment for business expenses Rs. 1,20,000
(c) Receipts from debtors Rs. 7,50,000
(d) Loan from Laxman Rs. 1,00,000 taken on 1.10.2016 at 10% per annum
(e) Cash deposited in the bank Rs. 1,00,000
He informs you that he paid creditors for goods Rs. 20,000 in cash and salaries Rs. 40,000 in cash. He has
drawn Rs. 80,000 in cash for personal expenses. During the year Ram had not introduced any additional
capital. Surplus cash if any, to be taken as cash sales.
You are required to prepare:
(i) Trading and Profit and Loss Account for the year ended 31.3.2017.
(ii) Balance Sheet as at 31st March, 2017. [MTP March ‘19, 12 Marks]
Ans. Trading and Profit and Loss Account for the year ended 31st March, 2017
Rs. Rs.
To Opening stock 2,80,000 By Sales
To Purchases 7,70,000 Cash 2,40,000
To Gross Profit @ 25% 3,10,000 Creditor 10,00,000 12,40,000
By Closing Stock (bal.fig) 1,20,000
13,60,000 13,60,000
To Salaries 40,000 By Gross Profit 3,10,000
To Business expenses 1,20,000
To Interest on loan 5,000
(10% of 1,00,000*6/12)
To Net Profit 1,45,000 _______
3,10,000 3,10,000

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 Balance Sheet as at 31st March, 2017
Liabilitities Rs. Rs. Assets Rs.
Ram'scapital: Cash in hand 10,000
Opening 3,00,000 Cash at Bank 80,000
Add: Net Profit 1,45,000 Sundry Debtors 3,50,000
4,45,000 Stock in trade 1,20,000
Less; Drawings (80,000) 3,65,000
Loan from Laxman 1,05,000
(including interestdue)
Sundry Creditors 90,000 ________
5,60,000 5,60,000
Working Notes :
1. Sundry Debtors Account
Rs. Rs.
To Balance b/d 1,00,000 By Bank A/c 7,50,000
To Credit sales (Bal.fig) 10,00,000 By Balance c/d 3,50,000
11,00,000 11,00,000
2. Sundry Creditor Account
Rs. Rs.
To Bank A/c 7,00,000 By Balance b/d 7,50,000
To Cash A/c 20,000 By Purchases (Bal. Fig) 7,70,000
To Balance c/d 90,000
8,10,000 8,10,000
3. Cash and Bank Account
Cash Bank Cash Bank
Rs. Rs. Rs. Rs.
To Balance b/d 10,000 By Balance b/d 50,000
To Sales (bal. fig) 2,40,000 By Bank/Vc(C) 1,00,000
To Cash (C) 1,00,000 By Salaries 40,000
To Debtors 7,50,000 By Creditors 20,000 7,00,000
To Laxman'sloan 1,00,000 By Drawings 80,000
By Business expenses 1,20,000
_______ _______ By Balance c/d 10,000 80,000
2,50,000 9,50,000 2,50,000 9,50,000
Q-7 The following is the Balance Sheet of Chirag as on 31st March, 2015:
Liabilities Rs. Assets Rs.
Capital Account 48,000 Building 32,500
Loan 15,000 Furniture 5,000
Creditor 31,000 Motor car 9,000
Stock 20,000
Debtors 17,000
Cash in hand 2,000
______ Cash at bank 8,500
94,000 94,000
A riot occurred on the night of 31st March, 2016 in which all books and records were lost. The cashier had
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 absconded with the available cash. He gives you the following information:
(a) His sales for the year ended 31st March, 2016 were 20% higher than the previous year's. He always
sells his goods at cost plus 25%; 20% of the total sales for the year ended 31st March, 2016 were for
cash. There were no cash purchases
(b) On 1st April, 2015 the stock level was raised to Rs. 30,000 and stock was maintained at this new level
all throughout the year.
(c) Collection from debtors amounted to Rs. 1,40,000 of which Rs. 35,000 was received in cash, Business
expenses amounted to Rs. 20,000 of which Rs. 5,000 was outstanding on 31st March, 2016 and Rs.
6,000 was paid by cheques.
(d) Analysis of the Pass Book revealed the Payment to Creditors Rs. 1,37,500, Personal Drawing Rs.
7,500, Cash deposited in Bank Rs. 71,500, and Cash withdrawn from Bank Rs. 12,000.
(e) Gross profit as per last year's audited accounts was Rs. 30,000.
(f) Provide depreciation on Building and Furniture at 5% and Motor Car at 20%.
(g) The amount defalcated by the cashier may be treated as recoverable from him.
You are required to prepare the Trading and Profit and Loss Account for the year ended 31st March, 2016
and Balance Sheet as on that date. [MTP April ‘19, 10 Marks]
Ans. Trading and Profit Loss Account for the year ending on 31st March, 2016
Particular Rs. Particular Rs.
To Opening Stock 20,000 By Sales 1,80,000
To Purchases (bal .fig.); 1,54,000 By Closing Stock 30,000
To Gross Profit c/d (@20% on sales) 36,000 2,10,000
To Sundry Business Expenses 20,0000 By Gross Profit b/d 36,000
To Depreciation on Building 1,625
Funiture 250
Motor 1,800 3,675
To Net profit transferred to
Capital A/c 12,325 ______
36,000 36,000
Balance Sheet as at 31st March, 2016
Liabilities Rs. Assets Rs.
Capital Account: Building 32,500
Opening Balance 48,000 Less; Depreciation (1,625) 30,875
Add: Net profit 12,325 Furniture 5,000
60,325 Less; Depreciation (250) 4,750
Less; Drawings (7,500) 52,825 Motor Car 9,000
Loan 15,000 Less; Depreciation (1,800) 7,200
Sundry Creditors 47,500 Stock in trade 30,000
Outstanding Expenses 5,000 Sundry Debtors 21,000
Cash at Bank 22,000
Sundry Advances (Amount
recoverable from Cashier) 4,500
1,20,325 1,20,325

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 Working Notes :
(i) Total Debtors Amount
Particular Rs. Particular Rs.
To Balance b/d 17,000 By Bank (Rs.1,40,000-Rs.35,000) 1,05,000
To Sales (80% of Rs.1,80,000) 1,44,000 By Cash A/c 35,000
By Balance c/d 21,000
1,61,000 1,61,000
(ii) Total Creditor Account
Particular Rs. Particular Rs.
To Bank 1,37,500 By Balance b/d 31,000
To Balance c/d 47,500 By Pruchases 1,54,000
1,85,000 1,85,000
(iii) Cash Book
Particulars Cash Rs. Bank Rs. Particulars Cash Rs. Bank Rs.
To Balance b/d 2,000 8,500 By Business Expenses 9,000 6,000
To sales 36,000 - By drawings - 7,500
To Sundry Debtors 35,000 1,05,000 By Sundry Creditors - 1,37,500
To Cash (Contra) - 71,500 By Bank (Contra) 71,500 -
To Bank (Contra) 12,000 By Cash (Contra) - 12,000
By Defalcation (Bla.Fig) 4,500 -
By Balance c/d (Bal.Fig)
85,000 1,85,000 85,000 1,85,000
(iv) Last year’s Total Sales = Gross Profit x 100/20 = Rs.30,000 x 100/20 = Rs.1,50,000
(v) Current year’s total Sales = Rs.1,50,000 + 20% of Rs.1,50,000 = Rs.1,80,000
(vi) Current year’s Credit Sales =Rs.1,80,000 x 80% = Rs.1,44,000
(vii)Cos of Goods Sold = Sales - G.P. = Rs.1,80,000 - Rs.36,000 = Rs.1,44,000
(vii)Purchases = Cost of Goods Sold + Closing stock - Opening Stock
= Rs.1,44,000 + Rs.30,000 - Rs.20,000 = Rs.1,54,000.
Q-8 The following is the Balance Sheet of Chirag as on 31st March, 2015:
Liabilities Rs. Assets Rs.
Capital Account 48,000 Building 32,500
Loan 15,000 Furniture 5,000
Creditor 31,000 Motor car 9,000
Stock 20,000
Debtors 17,000
Cash in hand 2,000
______ Cash at bank 8,500
94,000 94,000
A riot occurred on the night of 31st March, 2016 in which all books and records were lost. The cashier had
absconded with the available cash. He gives you the following information:
(a) His sales for the year ended 31st March, 2016 were 20% higher than the previous year's. He always sells
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 his goods at cost plus 25%; 20% of the total sales for the year ended 31st March, 2016 were for cash.
There were no cash purchases
(b) On 1st April, 2015 the stock level was raised to Rs. 30,000 and stock was maintained at this new level all
throughout the year.
(c) Collection from debtors amounted to Rs. 1,40,000 of which Rs. 35,000 was received in cash, Business
expenses amounted to Rs. 20,000 of which Rs. 5,000 was outstanding on 31st March, 2016 and Rs. 6,000
was paid by cheques.
(d) Analysis of the Pass Book revealed the Payment to Creditors Rs. 1,37,500, Personal Drawing Rs. 7,500,
Cash deposited in Bank Rs. 71,500, and Cash withdrawn from Bank Rs. 12,000.
(e) Gross profit as per last year's audited accounts was Rs. 30,000.
(f) Provide depreciation on Building and Furniture at 5% and Motor Car at 20%.
(g) The amount defalcated by the cashier may be treated as recoverable from him.
You are required to prepare the Trading and Profit and Loss Account for the year ended 31st March, 2016 and
Balance Sheet as on that date. [MTP April ‘18, 10 Marks]
Ans. Trading and Profit and Loss Account
For the year ending on 31st March, 2016
Particulars Rs. Particulars Rs.
To Opening Stock 20,000 By Sales 1,80,000
To Purchases (bal.fig.); 1,54,000 By Closing Stock 30,000
To Gross Profit c/d (@20% on sales) 36,000 2,10,000
2,10,000
To Sundry Business Expenses 20,000 By Gross Profit b/d 36,000
To Depreciation on Building 1,625
Furniture 250
Motor 1,800 3,675
To Net profit transferred to Capital A/c 12,325 _____
36,000 36,000
Balance Sheet as at 31st March, 2016
Liabilities Rs. Assets Rs.
Capital Account: Building 32,500
Opening Balance 48,000 Less; Depreciation (1,625) 30,875
Add: Net profit 12,325 Furniture 5,000
60,325 Less; Depreciation (250) 4,750
Less; Drawings (7,500) 52,825 Motor Car 9,000
Loan 15,000 Less; Depreciation (1,800) 7,200
Sundry Creditors 47,500 Stock in trade 30,000
Outstanding Expenses 5,000 Sundry Debtors 21,000
Cash at Bank 22,000
Sundry Advances
(Amount recoverable
from Cashier) 4,500
1,20,325 1,20,325

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 Working Notes :
(i) Total Debtors Account
Particulars Rs. Particulars Rs.
To Balance b/d 17,000 By Bank (Rs.1,40,000 - Rs.35,000) 1,05,000
To Sales (80% of Rs. 1,80,000) 1,44,0000 By Cash A/c 35,000
By Balance c/d 21,000
1,61,000 1,61,000
(ii) Total Creditors Account
Particulars Rs. Particulars Rs.
To Bank 1,37,500 By Balalnce b/d 31,000
To Balance c/d 47,500 By Purchases 1,54,000
1,85,000 1,85,000
(iii) Cash Book
Particulars Cash Bank Particulars Cash Bank
Rs. Rs. Rs. Rs.
To Balance b/d 2,000 8,500 By Business Expenses 9,000 6,000
To Sales 36,000 - By Drawings - 7,500
To Sundry Debtors 35,000 1,05,000 By Sundry Creditors - 1,37,500
To Cash (Contra) - 71,500 By Bank (Contra) 71,500 -
To Bank (Contra) 12,000 By Cash (Contra) - 12,000
By Defalcation (Bal fig.) 4,500 -
By Balance c/d (Bal fig.)
22,000
85,000 1,85,000 85,000 1,85,000
(iv) Last year's Total Sales = Gross Profit x 100/20 = Rs. 30,000 x 100/20 = Rs. 1,50,000
(v) Current year's Total Sales = Rs. 1,50,000+20% of Rs. 1,50,000= Rs. 1,80,000
(vi) Current year's Credit Sales = Rs. 1,80,000 x 80%= Rs. 1,44,000
(vii)Cost of Goods Sold = Sales - G.P. = Rs. 1,80,000 - Rs. 36,000 = Rs. 1,44,000
(viii)Purchases = Cost of Goods Sold + Closing Stock - Opening Stock
= Rs. 1,44,000 + Rs. 30,000 - Rs. 20,000 = Rs. 1,54,000
Q-9 Ram carried on business as retail merchant. He has not maintained regular account books. However, he
always maintained Rs.10,000 in cash and deposited the balance into the bank account. He informs you
that he has sold goods at profit of 25% on sales.
Following information is given to you:
Assets and Liability As on 1.4.2016 As on 31.3.2017
Cash in Hand 10,000 10,000
Sundry Creditors 40,000 90,000
Cash at Bank 50,000 (Cr.) 80,000(Dr.)
Sundry Debtors 1,00,000 3,50,000
Stock in Trade 2,80,000 ?
Ram's capital 3,00,000
Analysis of his bank pass book reveals the following information:
(a) Payment to creditors Rs.7,00,000
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 (b) Payment for business expenses Rs.1,20,000
(c) Receipts from debtors Rs.7,50,000
(d) Loan from Laxman Rs.1,00,000 taken on 1.10.2016 at 10% per annum
(e) Cash deposited in the bank Rs.1,00,000
He informs you that he paid creditors for goods Rs.20,000 in cash and salaries Rs.40,000 in cash. He has
drawn Rs.80,000 in cash for personal expenses. During the year Ram had not introduced any additional
capital. Surplus cash if any, to be taken as cash sales.
You are required to prepare:
(i) Trading and Profit and Loss Account for the year ended 31.3.2017.
(ii) Balance Sheet as at 31st March, 2017. [MTP March ‘18, 10 Marks]
Ans. Trading and profit and loss account for the year ended 31st March, 2017
Rs. Rs.
To Opening stock 2,80,000 By Sales
To Purchases 7,70,000 Cash 2,40,000
To Gross Profit @ 25% 3,10,000 Credit 10,00,000 12,40,000
By Closing Stock (bal.fig.) 1,20,000
13,60,000 13,60,000
To Salaries 40,000 By Gross Profit 3,10,000
To Business expenses 1,20,000
To Interest on loan 5,000
(10% of 1,00,000*6/1 2)
To Net Profit 1,45,000
3,10,000 3,10,000
Balance Sheet as at 31st March, 2017
Liabilities Rs. Rs. Assets Rs.
Ram's capital: Cash in hand 10,000
Opening 3,00,000 Cash at Bank 80,000
Add: Net Profit 1,45,000 Sundry Debtors 3,50,000
4,45,000 Stock in trade 1,20,000
Less; Drawings (80,000) 3,65,000
Loan from Laxman
(including interest due) 1,05,000
Sundry Creditors 90,000 _______
5,60,000 5,60,000

Working Notes:
1. Sundry Debtors Account
Rs. Rs.
To Balance c/d 1,00,000 By Bank A/c 7,50,000
To Credit sales (Bal.fig) 10,00,000 By Balance c/d 3,50,000
11,00,000 11,00,000
2. Sundray Creditor Account
Rs. Rs.
To Bank A/c 7,00,000 By Balance b/d 40,000
To Cash A/c 20,000 By Purchased (Bal.fig) 7,70,000
To Balance c/d 90,000 _______
8,10,000 8,10,000

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 3. Cash and Bank Account
Cash Bank Cash Bank
Rs. Rs. Rs. Rs.
To Balance b/d 10,000 By Balance b/d 50,000
To Sales (bal. fig) 2,40,000 By Bank A/c (C) 1,00,000
To Cash (C) 1,00,000 By Salaries 40,000
To Debtors 7,50,000 By Creditors 20,000 7,00,000
To Laxman's loan 1,00,000 By Drawings 80,000
By Business expenses 1,20,000
_______ _______ By Balance c/d 10,000 80,000
2,50,000 9,50,000 2,50,000 9,50,000
Q-10 Following is the incomplete information of Jyotishikha Traders:
The following balances are available as on 31.03.2018 and 31.03.2019.
Balances 31.03.2018 31.03.2019
Land and Building 5,00,000 5,00,000
Plant and Machinery 2,20,000 3,30,000
Office equipment 1,05,000 85,000
Debtors (before charging for Bad debts) ? 2,25,000
Creditors for purchases 95,000 ?
Creditors for office expenses 20,000 15,000
Stock ? 65,000
Long term loan from SBI @ 12%. 1,60,000 100,000
Bank 25,000 ?
Other Information In `
Collection from debtors 9,25,000
Payment to creditors for purchases 5,25,000
Payment of office expenses (excluding interest on loan) 42,000
Salary paid 32,000
Selling expenses 15,000
Cash sales 2,50,000
Credit sales (80% of total sales)
Credit purchases 5,40,000
Cash purchases (40% of total purchases)
GP Margin at cost plus 25%
Discount Allowed 5,500
Discount Received 4,500
Bad debts (2% of closing debtors)
Depreciation to be provided as follows:
Land and Building 5%
Plant and Machinery 10%
Office Equipment 15%
Other adjustments:
(i) On 01.10.18 they sold machine having Book Value ` 40,000 (as on 31.03.2018) at a loss of ` 15,000.
New machine was purchased on 01.01.2019.

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 (ii) Office equipment was sold at its book value on 01.04.2018.
(iii) Loan was partly repaid on 31.03.19 together with interest for the year.
You are required to prepare Trading, Profit & Loss Account and Balance Sheet as on 31.03.2019.
[RTP Nov.’19]
Ans. In the Books of Jyotishikha Traders
Trading Account for the year ended 31.03.2019
Particulars ` Particulars `
To Opening Stock A/c (Bal. fig.) 1,65,000 By Sales (W.N.1) 12,50,000
To Purchases (W.N.2) 9,00,000 By Closing Stock 65,000
To Gross profit (12,50,000x25/125) 2,50,000 ________
13,15,000 13,15,000
Profit and Loss Account for the year ended 31.03.2019
Particulars ` Particulars `
To Discount 5,500 By Gross profit 2,50,000
To Salaries Expenses 32,000 By Discount 4,500
To Office expenses (W.N.3) 37,000
To Selling expenses 15,000 84,000
To Interest on loan (12% on `1,60,000) 19,200
To Bad debts (2% of `2,25,000) 4,500
To Loss on sale of Machinery 15,000
To Depreciation:
Land & Building 25,000
Plant &Machinery (W.N 4b) 23,750
Office Equipment (W.N. 5) 12,750 61,500
To Net profit after tax 64,800 _______
2,54,500 2,54,500
Balance sheet as on 31.3.2019
Liabilities ` ` Assets `
Capital (W.N. 6) 8,95,500 Land and Building 4,75,000
(5,00,000-25,000)
Add: Net Profit 64,800 9,60,300 Plant and Machinery 3,08,250
(W.N.4a)
(3,30,000-21,750)
Creditors for Purchases 1,05,500 Office Equipment 72,250
(W.N. 8) (85,000-12,750)
Outstanding expenses 15,000 Debtors less Bad debts 2,20,500
Loan from SBI 1,00,000 (W.N. 7)
Stock 65,000
________ Bank Balance (W.N. 9) 39,800
11,80,800 11,80,800
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 Working Notes:
1. Calculation of Total Sales `
Cash Sales 2,50,000
Credit Sales (80% of total sales)
Cash Sales (20% of total sales)
Thus total Sales (250000 x 100/20) 12,50,000
Credit Sales (1250000 x 80/100) 10,00,000
2. Calculation of Total Purchases `
Credit Purchases 5,40,000
Cash Purchases (40% of total purchases)
Credit Purchases (60% of total purchases)
Thus total Purchases (5,40,000 x 100/60) 9,00,000
Cash Purchases 9,00,000 x 40/100) 3,60,000
3. Office Expenses Account
` `
To Bank A/c 42,000 By Balance b/d 20,000
To Balance c/d 15,000 By Profit & loss A/c 37,000
57,000 57,000
4. (a) Plant and Machinery Account
` `
To Opening balance 2,20,000 By Sale 40,000
To Purchases 1,50,000 By Closing Balance 3,30,000
3,70,000 3,70,000
(b) Depreciation calculations on Plant & Machinery
`
Depreciation on 1,80,000 x 10% (for full year) 18,000
1,50,000 x 10% x 3/12 (for 3 months) 3,750
40,000 x 10% x 6/12 (for 6 months) 2,000
23,750
(c) Sale of Machinery Account
Amount (`) Amount (`)
To Plant & Machinery 40,000 By Depreciation 2,000
By Profit and Loss A/c 15,000 By Bank 23,000
40,000 40,000
5. Depreciation calculations on Office Equipments
`
Opening Balance 1,05,000
Less: Closing Balance 85,000
Sale of Office Equipment 20,000
Balance of Office Equipment after sale 85,000
Depreciation @15% 12,750

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 6. Opening Balance Sheet as on 31.03.2018
` `
Creditors 95,000 Land & Building 5,00,000
Creditor for Exp. 20,000 Plant & Machinery 2,20,000
Loan 1,60,000 Office Equipment 1,05,000
Capital (Bal. fig.) 8,95,500 Debtors 1,55,500
Stock 1,65,000
________ Bank 25,000
11,70,500 11,70,500
7. Sundry Debtors A/c
` `
To Balance b/d 1,55,500 By Bank 9,25,000
To Sales 10,00,000 By Discount 5,500
By Bad debts 4,500
________ By Bal. c/d 2,20,500
11,55,500 11,55,500
8. Sundry Creditors A/c
` `
To Bank 5,25,000 By Balance b/d 95,000
To Discount 4,500 By Purchases 5,40,000
To Balance c/d 1,05,500 ________
6,35,000 6,35,000
9. Bank Account
` `
To Balance b/d 25,000 By Creditors 5,25,000
To Debtors 9,25,000 By Office Expenses 42,000
To Cash Sales 2,50,000 By Salary Expense 32,000
To Sale of Machinery (W.N. 4c) 23,000 By Selling Expenses 15,000
To Sale of equipment 20,000 By Purchases (cash) 3,60,000
By Purchase of Machinery 1,50,000
By Bank Loan & Interest 79,200
________ By Balance c/d 39,800
12,43,000 12,43,000
Q-11 From the following information in respect of Mr. Preet, prepare Trading and Profit and Loss Account for
the year ended 31st March, 2018 and a Balance Sheet as at that date:
31-03-2017 31-03-2018
(1) Liabilities and Assets Rs. Rs.
Stock in trade 1,60,000 1,40,000
Debtors for sales 3,20,000 ?
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 Bills receivable - ?
Creditors for purchases 2,20,000 3,00,000
Furniture at written down value 1,20,000 1,27,000
Expenses outstanding 40,000 36,000
Prepaid expenses 12,000 14,000
Cash on hand 4,000 3,000
Bank Balance 20,000 1,500
(2) Receipts and Payments during 2017-2018:
Collections from Debtors (after allowing 2-1/2% discount) 11,70,000
Payments to Creditors (after receiving 2% discount) 7,84,000
Proceeds of Bills receivable discounted at 2%) 1,22,500
Proprietor's drawings 1,40,000
Purchase of furniture on 30.09.2017 20,000
12% Government securities purchased on 1-10-2017 2,00,000
Expenses 3,50,000
Miscellaneous Income 10,000
(3) Sales are effected so as to realize a gross profit of 50% on the cost.
(4) Capital introduced during the year by the proprietor by cheques was omitted to be recorded in the Cash
Book, though the bank balance on 31st March, 2018 (as shown above), is after taking the same into
account.
(5) Purchases and Sales are made only on credit.
(6) During the year, Bills Receivable of Rs.2,00,000 were drawn on debtors, out of these, Bills amount to
Rs.40,000 were endorsed in favour of creditors. Out of this latter amount, a Bill for Rs.8,000 was
dishonoured by the debtor. [RTP May ‘19]
Ans. Trading and Profit & Loss Account for the year ended 31st March, 2018
US $ US $
To Opening Stock 5,454.55 By Sales 20,689.66
To Purchases 13,793.10 By Closing stock (Rs.4,20,000/60) 7,000.00
To Wages and salaries 9,655.17 By Gross Loss c/d 1,213.16
28,902.82 28,902.82
To Gross Loss b/d 1,213.16 By Net Loss 13,778.68
To Rent, rates and taxes 6,206.90
To Sundry charges 2,758.62
To Depreciation on computers 3,600.00
(US $ 6,000 x 0.6)
13,778.68 13,778.68
Balance Sheet of Bangalore Branch as on 31st March, 2018
Liabilities US$ Assets US$ US$
New York Office A/c 29,845.35 Computers 6,000.00
Less; Net Loss (13,778.68) 16,066.67 Less; (3,600.00) 2,400.00

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 Depreciation
Sundry creditors 5,000.00 Closing stock 7,000.00
Bills payable 4,000.00 Sundry debtors 6,666.67
Bills receivable 2,000.00
Bank balance 7,000.00
25,066.67 25,066.67
Trading and Profit and Loss Account of Mr. Preet For the year ended 31st March, 2018
Amount Amount
Rs. Rs.
To Opening stock 1,60,000 By Sales 13,98,000
To Purchases (W.N. 5) 9,12,000 By Closing stock 1,40,000
To Gross profit c/d (Bal.fig.) 4,66,000
15,38,000 15,38,000
To Expenses (W.N. 7) 3,44,000 By Gross profit b/d 4,66,000
To Discount allowed (W.N. 9) 32,500 By Discount received (W.N.10) 16,000
To Depreciation on furniture (W.N.1) 13,000 By Interest on Govt. Securities (W.N. 8) 12,000
To Net profit 1,14,500 By Miscellaneous income 10,000
5,04,000 5,04,000
Balance Sheet of Mr. Preet as on 31st March, 2018
Liabilities Amount Assets Amount
Rs. Rs.
Capital (W.N.6) 3,76,000 Furniture 1,27,000
Add: Additional capital (W.N.2) 1,72,00 12% Government Securities 2,00,000
Accrued interest on Govt.
Add : Profit during the year 1,14,500 securities (W.N.8) 12,000
6,62,500 Debtors (W.N.3) 3,26,000
Less: Drawing 1,40,000 5,22,500 Bills Receivable (W.N.4) 35,000
Creditors 3,00,000 Stock 1,40,000
Outstanding expenses 36,000 Prepaid expenses 14,000
Cash on hand 3,000
Bank balance 1,500
8,58,500 8,58,500
Working Notes:
1. Furniture account
Rs. Rs.
To Balance b/d 1,20,000 By Depreciation (bal.Fig.) 13,000
To Bank 20,000 By Balance c/d 1,27,000
1,40,000 1,40,000
2. Cash and Bank account
Rs. Rs.
To Balance b/d By Creditors 7,84,000
Cash 4,000 By Drawing 1,40,000
Bank 20,000 By Furniture 20,000

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 To Debtors 11,70,000 By 12% Govt. secutirites 2,00,000
To Bill receivable 1,22,500 By expenses 3,50,000
To Micellaneous income 10,000 By Balance c/d
To Additinal Capital (bal.fig) 1,72,000 Cash 3,000
Bank 1,500
14,98,500 14,98,500
3. Debtors account
Rs. Rs.
To balance b/d 3,20,000 By Cash and Bank 11,70,000
To Creditors (Bills receivable dishonoured) 8,000 By Discount 30,000
To Sales (W.N.1) 13,98,000 By Bills Receivable 2,00,000
By balance c/d (bal.fig) 3,26,000
17,26,000 17,26,000
4. Bills Receivable account
Rs. Rs.
To Debtors 2,00,000 By Bank 1,22,500
By Discount 2,500
By Creditors 40,000
By Balance c/d (bal. fig.) 35,000
2,00,000 2,00,000
5. Creditors account
Rs. Rs.
To Bank 7,84,000 By Balance b/d 2,20,000
To Discount 16,000 By Debtors (Bills receivable dishonoured) 8,000
To Bills receivable 40,000 By Purchases (bal. fig.) 9,12,000
To Balance c/d 3,00,000
11,40,000 11,40,000

6. Balance Sheet as on 1st April, 2017

Liabilities Rs. Assets Rs.
Creditors 2,20,000 Furniture 1,20,000
Outstanding expenses 40,000 Debtors 3,20,000
Capital (balancing figure) 3,76,000 Stock 1,60,000
Prepaid expenses 12,000
Cash 4,000
Bank balance 20,000
6,36,000 6,36,000
7. Expenses incurred during the year
Rs.
Expenses paid during the year 3,50,000
Add: Outstanding expenses as on 31 .3.2018 36,000
Prepaid expenses as on 31.3.2017 12,000 48,000
3,98,000
Less: Outstanding expenses as on 31.3.2017 40,000
Prepaid expenses as on 31.3.2018 14,000 54,000
Expenses incurred during the year 3,44,000

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8. Interest on Government securities
2,00,000 x 12% x 6/12 = Rs.12,000
Interest on Government securities receivables for 6 monhts = Rs.12,000
9. Discount allowed
Rs.
 11,70,000 
Discount to Debtors  × 2.5%  30,000
 97.5% 
 1,22,500 
Discount on Bills Receivable  × 2%  2,500
 98% 
32,500
10. Discount received
Rs.
 7,84,000 
Discount to Creditors  × 2%  16,000
 98% 

11. Credit slaes

Cash of Goods sold = Opening stock + net purchases - Closing stock
= Rs.1,60,000 + Rs.9,12,000 - Rs.1,40,000
= Rs.9,32,000
Sale price = Rs.9,32,000 + 50% of 9,32,000 = Rs.13,98,000.
Q-12 The following information relates to the business of ABC Enterprises, who requests you to prepare a
Trading and Profit & Loss A/c for the year ended 31st March, 2017 and a Balance Sheet as on that date.
(a) Assets and Liabilities as on:
in Rs.
1-4-2016 31-3-2017
Furniture 60,000 63,500
Inventory 80,000 70,000
Sundry Debtors 1,60,000 ?
Sundry Creditors 1,10,000 1,50,000
Prepaid Expenses 6,000 7,000
Outstanding Expenses 20,000 18,000
Cash in Hand & Bank Balance 12,000 26,250
(b) Cash transaction during the year:
(i) Collection from Debtors, after allowing discount of Rs.15,000 amounted to Rs.58,85,000
(ii) Collection on discounting of Bills of Exchange, after deduction of discount of Rs.1,250 by bank,
totalled to Rs.61,250.
(iii) Creditors of Rs.4,00,000 were paid Rs.3,92,000 in full settlement of their dues.
(iv) Payment of Freight inward of Rs.30,000.

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 (v) Amount withdrawn for personal use Rs.70,000.
(vi) Payment for office furniture Rs.10,000.
(vii) Investment carrying annual interest of 6% were purchased at Rs.95 (200 shares, face value
Rs.100 each) on 1st October 2016 and payment made thereof.
(viii) Expenses including salaries paid Rs.95,000. (ix) Miscellaneous receipt of Rs.5,000.
(c) Bills of exchange drawn on and accepted by customers during the year amounted to Rs. 1,00,000. Of
these, bills of exchange of Rs.20,000 were endorsed in favour of creditors. An endorsed bill of exchange
of Rs.4,000 was dishonoured.
(d) Goods costing Rs.9,000 were used as advertising material.
(e) Goods are invariably sold to show a gross profit of 20% on sales.
(f) Difference in cash book, if any, is to be treated as further drawing or introduction of capital by proprietor
of ABC enterprises.
(g) Provide at 2% for doubtful debts on closing debtors. Partnership Accounts: Dissolution of Partnership.
[RTP Nov ‘18]
Ans. Trading and Profit and Loss Account of ABC enterprise for the year ended 31st March, 2017
Rs. Rs.
To Opening Inventor 80,000 By Sales 6,08,750
To Purchases 4,56,000 By Closing inventory 70,000
Less: For advertising (9,000) 4,47,000
To Freight inwards 30,000
To Gross profit c/d 1,21,750
6,78,750 6,78,750
To Sundry expenses 92,000 By Gross profit b/d 1,21,750
To Advertisement 9,000 By Interest on investment 600
To Discount allowed - (20,000 x 6/1 00 x1/2)
Debtors 15,000 By Discount received 8,000
Bills Receivable 1,250 16,250 By Miscellaneous income 5,000
To Depreciation on furniture 6,500
To Provision for doubtful debts 1,455
To Net profit 10,145 _______
1,35,350 135,350
Balance Sheet as on 31st March, 2017
Liabilities Amount Assets Amount
Rs. Rs. Rs. Rs.
Capital as on 1.4.2016 1,88,000 Furniture (w.d.v.) 60,000
Less; Drawings (91,000) Additions during the year 10,000
97,000 Less; Depreciation (6,500) 63,500
Add: Net Profit 10,145 1,07,145 Investment (200x95) 19,000
Sundry creditors 1,50,000 Interest accrued 600
Outstanding expenses 18,000 Closing inventory 70,000
Sundry debtors 72,750

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 Less; Provision for
doubtful debts 1,455 71,295
Bills receivable 17,500
Cash in hand and at bank 26,250
_______ Prepaid expenses 7,000
2,75,145 2,75,145
Working Notes
(1) Capital on 1st April, 2016
Balance sheet as on 1st April, 2016
Liabilities Rs. Assets Rs.
Capital (Bal.fig.) 1,88,000 Furniture (w.d.v.) 60,000
Creditors 1,10,000 Closing Inventory 80,000
Outstanding expenses 20,000 Sundry debtors 1,60,000
Cash in hand and at bank 12,000
_______ Prepaid expenses 6,000
3,18,000 3,18,000
(2) Purchses made during the year
Sundry Credotors Account
Rs. Rs.
To Cash and Bank A/c 3,92,000 Ba Balance b/d 1,10,000
To Discount received A/c 8,000 By Sundry debtors A/c 4,000
To Bills Receivable A/c 20,000 By Purchases A/c 4,56,000
To Balance c/d 1,50,000 (Balancing figure) _______
5,70,000 5,70,000
(3) Sales Made During the year
Rs.
Opening inventory 80,000
Purchases 4,56,000
Less: For advertising (9,000) 4,47,000
Freight inwards 30,000
5,57,000
Less: Closing inventory 70,000
Cost of goods sold 4,87,000
Add: Gross profit (25% on cost) 1,21,750
6,08,750
(4) Debtors on 31st March, 2017
Sundry Debtors Account
Rs. Rs.
To Balance b/d 1,60,000 By Cash and bank A/c 5,85,000
To Sales A/c 6,08,750 By Discount allowed A/c 15,000
To Sundry creditors A/c By Bills receivable A/c 1,00,000
(bill dishonoured) 4,000 By Balance c/d (Bal. fig.) 72,750
7,72,750 7,72,750

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 (5) Additional drawings by proprietors of ABC entrprises
Cash and Bank Account
Rs. Rs.
To Balance b/d 12,000 By Freight inwards A/c 30,000
To Sundry debtors A/c 5,85,000 By Furniture A/c 10,000
To Bills Receivable A/c 61,250 By Investment A/c 19,000
To Miscellaneous income A/c 5,000 By Expenses A/c 95,000
By Creditors A/c 3,92,000
By Drawings A/c
[Rs.70,000 + Rs.21, 000) 91,000
(Additional drawings)]
_______ By Balance c/d 26,250
6,63,250 6,63,250
(6) Amount of expenses debited to profit and Loss A/c
Sundry expenses Account
Rs. Rs.
To Prepaid expenses A/c 6,000 By Outstanding expenses A/c 20,000
(on 1.4.2016) (on 1.4.2016)
To Bank A/c 95,000 By Profit and Loss A/c 92,000
(Balancing figure)
To Outstanding expenses By Prepaid expenses A/c
A/c (on 31. 3.201 7) 18,000 (on 31.3.17) 7,000
1,19,000 1,19,000
(7) Bills Receivable on 31st March, 2017
Bills Receivable Account
Rs. Rs.
To Debtors A/c 1,00,000 By Creditors A/c 20,000
By Bank A/c 61,250
By Discount on bills receivable A/c 1,250
_______ By Balance c/d (Balancing figure) 17,500
1,00,000 1,00,000
Note : All sales and purchases are assumed to be on credit basis.
Q-13 The following is the Balance Sheet of Manish and Suresh as on 1st April, 2016:
Liabilities Rs. Assets Rs.
Capital Accounts Building 1,00,000
Manish 1,50,000 Machinery 65,000
Suresh 75,000 Stock 40,000
Creditors for goods 30,000 Debtors 50,000
Creditors for expenses 25,000 Bank 25,000
2,80,000 2,80,000
They give you the following additional information:
(i) Creditors' Velocity* 1.5 month & Debtors' Velocity* 2 months.
(ii) Stock level is maintained uniformly in value throughout all over the year.

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 (iii) Depreciation on machinery is charged @ 10%, Depreciation on building @ 5% in the current
year.
(iv) Cost price will go up 15% as compared to last year and also sales in the current year will increase
by 25% in volume.
(v) Rate of gross profit remains the same.
(vi) Business Expenditures are Rs.50,000 for the year. All expenditures are paid off in cash.
(vii) Closing stock is to be valued on LIFO Basis.
(viii) All sales and purchases are on credit basis and there are no cash purchases and sales.
You are required to prepare Trading, Profit and Loss Account, Trade Debtors Account and Trade Creditors
Account for the year ending 31.03.2017. [RTP May ‘18]

Ans. Trading and Profit and Loss account for the year ending 31st March, 2017
Particulars Rs. Particulars Rs.
To Opening Stock 40,000 By Sales 4,31,250
To Purchases (Working Note) 3,45,000 By Closing Stock 40,000
To Gross Profit c/d (20% on sales) 86,250 _______
4,71,250 4,71,250
To Business Expenses 50,000 By Gross Profit b/d 86,250
To Depreciation on :
Machinery 6,500
Building 5,000 11,500
To Net profit 24,750 ______
86,250 86,250
Trade Debtros Account
Particulars Rs. Particulars Rs.
To Balance b/d 50,000 By Bank (bal.fig). 4,09,375
To Sales 4,31,250 By Balance c/d (1/6 of 4,31,250) 71,875
4,81,250 4,81,250
Trade Creditors Account
Particulars Rs. Particulars Rs.
To Bank (Balancing figure) 3,31,875 By Balanceing b/d 30,000
To Balance c/d (1/8 of Rs.3,45,000) 43,125 By Purchases 3,45,000
3,75,000 3,75,000
Working Note :
Rs.
(i) Calculation of Rate of Gross Profit earned during previous year
A Sales during previous year (Rs.50,000 x 12/2) 3,00,000
B Purchases (Rs.30,000x12/1 .5) 2,40,000
C Cost of Goods Sold (Rs.40,000 + Rs.2,40,000 - Rs.40,000) 2,40,000

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 D Gross Profit (A-C) 60,000

R
6
0
,0
0
0
E Rate of Gross Profit 20%

s.

1
0
0
x
R
3
,0
0
,0
0
0
s.
(ii) Calculation of sales and Purchases during current year Rs.
A Cost of goods sold during previous year 2,40,000
B Add: Increases in volume @ 25 % 60,000
3,00,000
C Add: Increase in cost @ 15% 45,000
D Cost of Goods Sold during Current Year 3,45,000
E Add: Gross profit @ 25% on cost (20% on sales) 86,250
F Sales for current year [D+E] 4,31,250
---0---0---

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