Answer to PTP_Intermediate_Syllabus 2008_Jun2015_Set 1

Paper-5: FINANCIAL ACCOUNTING

Time Allowed : 3 Hours Full Marks : 100

Whenever necessary, suitable assumptions should be made and indicate in answer by the
candidates.
Working Notes should be form part of your answer

Section A is compulsory and answer any 5 questions from Section B

Section A

1 (A) Answer the following questions (give workings):

Choose the right answer of the following alternatives: [10 x 1]

(a) The solvent partners must share the deficiency of an insolvent partner:
(i) In the profit sharing ratio
(ii) In the capital ratio
(iii) In the gaining ratio
(iv) None of the above

(b) If the unrecorded liabilities are taken over by the new firm, it is transferred to :
(i) Realization accounts.
(ii) Partners’ capital accounts.
(iii) Partners’ drawings accounts.
(iv) None of the above.

(c) For Buy back of shares, a company has to open

(i) A separate bank account
(ii) An escrow account
(iii) A share capital account
(iv) None of the above

(d) Convertible debentures can be

(i) Partly convertible only
(ii) Fully convertible only
(iii) Partly or fully convertible
(iv) None of the above
(e) Under ―Double Account System‖ profit is disclosed in the
(i) Revenue Account
(ii) Net Revenue Account
(iii) Capital Account (Receipts and Expenditure on Capital Account)
(iv) None of the above.

(f) Basic earnings per share amounts uses the net profit attributable to
(i) both equity and preference shareholders
(ii) Equity shareholders only
(iii) Preference shareholders only
(iv) All the above.
(g) When Sales = ` 1,80,000, Purchase = ` 1,60,000, Opening Stock = ` 34,000 and rate
of the Gross Profit is 20% on cost, the Closing Stock would be
(i) ` 50,000
(ii) ` 44,000
(iii) ` 46,000
(iv) None of the above

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 Answer to PTP_Intermediate_Syllabus 2008_Jun2015_Set 1

(h) Goods are transferred from Department X to Department Y at a price so as to

include a profit of 33.33% on cost. If the value of closing stock of Department Y is `
18,000, then the amount

of stock reserve on closing stock will be

(i) ` 6,000
(ii) ` 4,500
(iii) ` 9,000
(iv) None of the above

(i)Profit earned before incorporation is a /an

(i) Revenue profit
(ii) Extra ordinary profit
(iii) Capital Profit
(iv) None of the above
(j) A profit on the sale of furniture of a club will be taken to:
(i) Cash account
(ii) Receipts and payments account
(iii) Income and expenditure account
(iv) None of the above

(B) Fill up the Blanks: [5 x 1]

(i) As per AS – 6 when there is a change in the method of providing depreciation, the
differential account of depreciation would have ______________________ effect.
(ii) A company cannot redeem preference shares unless they are _________________ paid up.
(iii) Profit on revaluation of assets on the admission of a new partner is to be credited to the
old partners in their ________________________ profit sharing ratio.
(iv) Amalgamation Adjustments Account is opened in the books of the transferee company
to incorporate __________________________.
(v) When a new partner enters in the partnership firm and the partners decide to maintain the
General Reserve in the books of the firm at its original value, the amount of general
reserve is Credited to the old partners and _____________________ to all partners

(C) Match the following: [5 x 1]

(i) AS 20 (A) Construction Contract
(ii) AS 13 (B) Net Profit or Loss for the period, prior period items & change in accounting policies.
(iii) AS 7 (C) Earnings Per Share (EPS)
(iv) AS 5 (D) Accounting for Intangible Assets
(v) AS 26 (E) Accounting for Investment

(D) State with reasons whether the following propositions are True or False: [5 x 1]
(i) Short workings arise when minimum rent is less than actual royalty.
(ii) Revenue recognition of Royalties receivable from foreign countries is made on
receipt basis.
(iii) The accounting principle is general rule followed in preparation of financial
Statement
(iv) The inventory under AS – 2 is valued on the basis of cost price or current
replacement cost whichever is lower.
(v) In admission of a partner new partner’s capital amount is shared by old partner in
gaining ratio.

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 Answer to PTP_Intermediate_Syllabus 2008_Jun2015_Set 1

Solution:
(A) (a) – (ii) ; (b) – (i) ; (c) – (ii) ;(d) – (iii) ; (e) (i) ; (f) – (ii) [ 1,80,000 – (34,000 + 1,60,000 +
1,80,000 x 20/120)] ; (g) – (ii) [ 33.33% on cost = 25% on sales ( 18,000 x 25% = `4,500)]; (i) –
(iii) ; (j)- (iii)
(B) (i) Retrospective; (ii) Fully Paid up ; (iii) Old ; (iv) Statutory Reserve Account ; (v) Debited

(C)
(i) AS 20 (c) Earnings per Share
(ii) AS 13 (E) Accounting for Investment
(iii) AS 7 (A) Construction Contract
(iv) AS 5 (B) Net Profit or Loss for the period, prior period items & change in
accounting policies.
(v) AS 26 (D) Accounting for Intangible Assets

(D) (i) False : Minimum rent is dead rent payable , even if there is no production or sales
giving rise to payment of Royalty. Hence, when Royalty is lower than minimum rent,
shortworkings arise, but not the other way about.
(ii) False: Revenue from foreign countries such as Royalties etc. arise on the basis of
agreement and are recognized once they become receivable ; only when there
are uncertainties of realization due to exchange control etc. such revenues are
recognized on receipt basis.
(iii) True: Accounting principle indicates those rules of action which are generally
adopted by an accountant while recording accounting Transaction.
(iv) False: As per AS – 2 inventory is valued at the lower of historical cost and net
realizable value.
(v) False: New partner’s capital amount shared by the old partner in sacrificing ratio.

Section - B

2. (a) From the following information, make out a statement of Proprietors’ Fund with as
many details as possible:
(i) Current Ratio 2.5
(ii) Liquid Ratio 1.5
3
(iii) Proprietary Ratio (Fixed Assets: Proprietors’ Fund) 0.75 or
4

(iv) Working Capital ` 6,000

(v) Reserves & Surplus ` 4,000
(vi) Bank Overdraft.
` 1,000

There are no long-term loans nor any investments in fictitious assets.

(b) Two partnership firms, carrying on business under the name of B&Co and W&Co
respectively, decided to amalgamate into G & Co. with effect from 1st January 2015.
The respective Balance Sheets are:

Balance Sheet of B & Co. as on 31st December, 2014

Liabilities ` Assets `
Mr. B's Capital Accounts 38,000 Plant and Machinery 20,000
Sundry Creditors 20,000 Stock-in-trade 40,000
Bank Overdraft 30,000 Sundry Debtors 20,000
Mr. A's Capital Account 8,000
88,000 88,000

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 Answer to PTP_Intermediate_Syllabus 2008_Jun2015_Set 1

A and B share profits and losses in the proportion of 1: 2.

Balance Sheet of W & Co. as on 31st December, 2014
Liabilities ` Assets `
Mr. X's Capital Account 20,000 Investment 10,000
Mr. Y's Capital Account 4,000 Stock-in-trade 10,000
Sundry Creditors 19,000 Sundry Debtors 20,000
Cash in hand 3,000
43,000 43,000

X and Y share profit and losses equally. The following further information is given:
(i) All fixed assets are to be devalued by 20%.
(ii) All stock in trade is to be appreciated by 50%.
(iii) B & Co. owes ` 10,000 to W & Co. as on 31st December 2014. This debit is settled at `
4,000
(iv) Investment is to be ignored for the purpose of amalgamation, being valueless.
(v) The fixed capital accounts in the new firm are to be : Mr. A ` 4,000; Mr. B` 6,000 Mr.
X ` 2,000 Mr. Y ` 8,000
(vi) Mr. B takes over bank overdraft of B & Co. and gifts to Mr. A the amount of money to
be brought in by Mr. A to make up his capital contribution.
(vii)Mr. X is paid off in cash from W & Co. and Mr. Y brings in sufficient cash to make up
his required capital contribution.
Pass necessary Journal Entries to close the books of both the firms as on 31st December
2014. [5+10]

Solution:
(a)
Workings:
(i) Current Assets and Current Liabilities:
Current Ratio = 2.5
or, Current Assets/ Current Liabilities = 2.5
or, Current Assets = 2.5 x Current liabilities

Now,
Working Capital= Current Assets – Current Liabilities
` 6,000 = 2.5 Current Liabilities – Current Liabilities
 ` 6,000 = 1.5 Current Liabilities
6,000
Current Liabilities = = ` 4,000
1.5
 Current Liabilities = ` 4,000
and Current Assets : Working Capital + Current Liabilities
= ` 6,000 + ` 4,000
= ` 10,000
Creditors = Current Liabilities – Bank Overdraft
= 4,000 – 1,000
= 3,000

(ii) Stock:
Liquid Assets
Liquid Ratio:
Liquid Liabilities
Liquid Assets
Liquid Ratio 
Current Liabilities - Bank overdraft

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 Answer to PTP_Intermediate_Syllabus 2008_Jun2015_Set 1

Liquid Assets
or, 1.5 = 
3,000(4,000 - 1,000)

or, Liquid Assets = ` 3,000 x 1.5 = ` 4,500.

Stock = Current Assets – Liquid Assets
= ` 10,000 – ` 4,500
= ` 5,500.
(iii) Proprietors’ Fund:
Proprietary Ratio i.e., Fixed Assets to Proprietors’ Fund is 0.75 : 1.
So, if Proprietors’ Fund is 1. Fixed Assets are 0.75.
Again, Proprietors’ Fund – Fixed Assets = Current Assets - Current Liabilities
3
or, 1 - = ` 10,000 – ` 4,000
4
1
or, = ` 6,000.
4
4
 = ` 6,000 x = ` 24,000.
1
Therefore, Proprietors’ Fund = ` 24,000.

Here, Proprietor’s Fund = Share Capital and Reserves & Surplus

 Share Capital = Proprietors’ Fund – Reserves & Surplus

= ` 24,000 – ` 4,000
= ` 20,000.

(iv) Fixed Assets:

Fixed Assets 0.75 of Proprietors’ Fund i.e., ` 18,000 (` 24,000 x 0.75)

Statement of Proprietor’s Fund

Proprietors’ Fund ` Investment in ` ` `

Equity Share Capital 20,000 Fixed Assets 18,000
Reserve and Surplus 4,000 Working Capital
Current Assets:
Stock 5,500
Liquid Assets 4,500
10,000
Less: Current Liabilities:
Bank Overdraft 1,000
Creditors 3,000
4,000 6,000
24,000 24,000

(b) In the books of B & Co

Journal
Date Particulars Dr. Cr.
` `
2014 Realization A/c Dr. 80,000
Dec. To Plant and Machinery A/c 20,000
31 To Stock-in-trade A/c 40,000
To Sundry Debtors A/c 20,000
(Being the different assets transferred to Realization Account)

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 Answer to PTP_Intermediate_Syllabus 2008_Jun2015_Set 1

Sundry Creditors A/c Dr. 20,000

To Realization A/c 20,000
(Being sundry creditors transferred to Realization Account)
Bank Overdraft A/c Dr. 30,000
To B Capital A/c 30,000
(Being overdraft taken over by B)
G & Co. A/c (Note I) Dr. 82,000
To Realization A/c 82,000
(Being purchase consideration due from G & Co.)
Realization A/c (Note II) Dr. 22,000
To A Capital A/c 7,334
To B Capital A/c 14,666
(Being profit on realization transferred to partners capital in the
ratio of 1 : 2)
B Capital A/c (Note V) Dr. 4,666
To A Capital A/c 4,666
(Being deficit in A's capital made good by B)
A Capital A/c Dr. 4,000
B Capital A/c (See Tutorial Note) Dr. 78,000
To G & Co. A/c 82,000
(Being the capital accounts of the partners closed by transfer to G
& Co.)

Note: It should be noted that the credit balance in B's capital account is ` 82,000. His agreed
capital in G & Co is ` 6,000 only. Since there is no liquid assets in B & Co. from which B can be
repaid, the excess amount of ` 72,000 should be taken over by G & Co. as loan from B.

In the books of W & Co

Journal
Date Particulars Dr. Cr.
` `
2014 Realization A/c Dr. 40,000
Dec. To Investment A/c 10,000
31 To Stock-in-trade A/c 10,000
To Sundry Debtors A/c 20,000
(Being the different assets transferred to Realization Account)
Sundry Creditors A/c Dr. 19,000
To Realization A/c 19,000
(Being sundry creditors transferred to Realization Account)
G & Co. A/c (Note I) Dr. 10,000
To Realization A/c 10,000
(Being purchase consideration due from G & Co.)
X Capital A/c Dr. 5,500
Y Capital A/c Dr. 5,500
To Realization A/c (Note II) 11,000
(Being loss on realization transferred to Partners’ Capital Accounts
equally)
Cash A/c Dr. 9,500
To Y Capital A/c 9,500
(Being the necessary amount brought in by Y to make up his
required capital contribution)
X Capital A/c Dr. 12,500
To Cash A/c 12,500
(Being the excess capital paid by cash)

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 Answer to PTP_Intermediate_Syllabus 2008_Jun2015_Set 1

X Capital A/c Dr. 2,000

Y Capital A/c Dr. 8,000
To G & Co. A/c 10,000
(Being the capital accounts of the partners closed by transfer to G
& Co.)
Working Notes:

(i) Calculations of Purchase Consideration

Assets taken over: B & Co. W & Co.

Plant & Machinery 16,000 15,000
Stock-in-trade 60,000 *14,000
Sundry Debtors [(*After adjustment of ` 6,000 (`10,000–`4,000)] 20,000
(A) 96,000 29,000
Liability taken over:
Sundry Creditors : *` (10,000-3,000) (B) * 14,000 19,000
Purchase Consideration (A-B) 82,000 10,000

(ii) Realization Account

Dr. Cr.
Date Particulars B &Co. W &Co. Date Particulars B &Co. W &Co.

2014 To Investment A/c --- 10,000 2014 By Sundry Creditors 20,000 19,000
Dec. To Plant & Machinery 20,000 10,000 Dec. A/c 82,000 10,000
31 A/c 40,000 20,000 31 By Grey & Co. A/c --- 5,500
To Stock-in-trade A/c 20,000 --- By X Capital A/c (loss) --- 5,500
To Sundry Debtors A/c 7,334 --- By Y Capital A/c (loss)
To A Capital A/c 14,666 ---
(profit)
To B Capital A/c
(profit)
1,02,000 40,000 1,02,000 40,000

(iii) Partners' Capital Accounts

Dr. Cr.
Date Particulars A B Date Particulars A B
2014 To Balance b/d 8,000 --- 2014 By Balance b/d --- 38,000
Dec. To A Capital A/c --- 4,666 Dec. By Realization A/c (profit) 7,334 14,666
31 To G & Co. A/c 4,000 78,000 31 By B Capital A/c 4,666 ---
By Bank Overdraft A/c --- 30,000
12,000 82,666 12,000 82,666

(iv) Partners' Capital Accounts

Dr. Cr.
Date Particulars X Y Date Particulars X Y
2014 To Realization A/c 5,500 5,500 2014 By Balance b/d 20,000 4,000
Dec. To G & Co. A/c 2,000 8,000 Dec. By Cash A/c --- 9,500
31 To Cash A/c 12,500 --- 31
20,000 13,500 20,000 13,500

(v) In the new firm, A's capital should be ` 4,000 but his Capital Account is showing a debit
balance of ` 666. Therefore, to make good the deficit, B will gift ` 4,666 to A.

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 Answer to PTP_Intermediate_Syllabus 2008_Jun2015_Set 1

3. (a) Ram, Laxman and Bharat were partners sharing Profits and Losses in the ratio of 5:3:2
respectively. On 31st March, 2014, Balance Sheet of the firm stood as follows:

Liabilities Amount Assets Amount

(`) (`)
Capital A/c’s Buildings 1,37,500
Ram 1,25,000 Furniture 62,500
Laxman 1,00,000 Stock 1,05,000
Bharat 70,000 Debtors 50,000
Creditors 83,750 Cash at Bank 28,000
Outstanding Expenses 4,250
3,83,000 3,83,000
On 31st March, 2013 Ram decided to retire and Laxman and Bharat decided to continue as
equal partners. Other terms of retirement were as follows:
(i) Building be appreciated by 20%
(ii) Furniture be depreciated by 10%
(iii) A provision of 5% be created for bad debts on debtors.
(iv) Goodwill be valued at two years purchase of profit for the latest accounting year.
The firm’s profit for the year ended 31st March 2014 was ` 62,500. No goodwill
account is to be raised in the books of accounts.
(v) Fresh capital be introduced by Laxman and Bharat to the extent of ` 25,000 ` 87,500
respectively
(vi) Out of sum payable to retiring partner Ram, a sum of ` 1,12,500 be paid
immediately and the balance be transferred to his loan account bearing interest @
12% p.a. The loan is to be paid off by 31st March 2016.

One month after Ram’s retirement Laxman and Bharat agreed to admit Ram’s son Lav
as a partner with 1/4th share in profit / losses. Ram agreed that the balance in his loan
account be converted into Lav’s capital. Ram also agreed to forgo one month’s interest
on his loan.
It was also agreed that Lav will bring in, his share of goodwill through book adjustment,
valued at the price on the date of Ram’s retirement. No goodwill account is to be raised
in the books.

You are required to pass necessary Journal Entries to give effect to the above
transactions and prepare Partner’s Capital.

(b) The financial year of Mr. C ends on 31st March, 2014 but the stock in hand was physically
verified only on 8th April, 2014. You are required to determine the value of Closing Stock
(at cost) as at 31st March, 2014 from the following information.
(i) The stock (valued at cost) as verified on 8th April, 2014 was ` 37,500.
(ii) Sales have been entered in the Sales Day Book only after the despatch of goods and
sales returns only on receipt of goods.
(iii) Purchases have been entered in the Purchase Day Book on receipt of the purchase
invoice irrespective of the date of receipt of the goods.
(iv) Sales as per the sales day book for the period 1st April, 2014 to 8th April, 2014 (before
the actual verification) amounted to ` 15,000 of which goods of a sale value of `
2,500 had not been delivered at the time of verification.
(v) Purchases as per the purchase day book for the period 1st April, 2014 to 8th April,
2014 (before the actual verification) amounted to ` 15,000 of which goods for
purchases of ` 3,750 had not been received at the date of verification and goods for
purchases of ` 5,000 had been received prior to 31st March, 2014.
(vi) In respect of goods costing ` 12,500 received prior to 31st March, 2014, invoices had
not been received up to the date of verification of stocks.

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 Answer to PTP_Intermediate_Syllabus 2008_Jun2015_Set 1

(vii)The gross profit is 20% on sales.

(c) Amit Industries Ltd. is in the business of manufacturing and export. In 2012, the
Government put a restriction on export of goods exported by Amit Industries Ltd leading
to impairment of its assets. Amit Industries acquired at the end of 2008, identifiable assets
worth `800 Lakhs for `1,200 lakhs, the balance being treated as Goodwill. The useful life of
the identifiable assets is 15 years and depreciated on straight – line basis. When
Government put the restriction at the end of 2012, the Company recognized the
impairment loss by determining the recoverable amount of assets at `544 Lakhs. In 2014,
the ―restriction‖ was withdrawn by the Government and due to this favourable change,
Amit Industries Ltd estimates its recoverable amount at `684 Lakhs.
(i) Calculate and allocate Impairment Loss in 2012.
(ii) Compute reversal of Impairment Loss and its allocation in 2014. [8+3+4]

Solution:
(a)

Journal

Date Particulars Dr. Cr.

(`) (`)
1. Building A/c Dr. 27,500
To Revaluation A/c 27,500
(Being building appreciated)
2. Revaluation A/c Dr. 8,750
To Furniture A/c 6,250
To Provision for Doubtful Debts A/c 2,500
(Being furniture depreciated by 10% and Provision for
doubtful debts created @ 5% on Debtors)
3. Revaluation A/c Dr. 18,750
To Ram's Capital A/c 9,375
To Laxman's Capital A/c 5,625
To Bharat's Capital A/c 3,750
(Being profit on revaluation transferred to capital
accounts of partners)
4. Laxman's Capital A/c Dr. 25,000
Bharat's Capital A/c Dr. 37,500
To Ram's Capital A/c 62,500
(Being adjustment for Ram’s share of goodwill)
5. Bank A/c Dr. 1,12,500
To Laxman's Capital A/c 25,000
To Bharat's Capital A/c 87,500
(Being fresh capital introduced by Laxman and Bharat)
6. Ram's Capital A/c Dr. 1,96,875
To Bank A/c 1,12,500
To Ram's Loan A/c 84,375
(Being settlement of Ram's capital on his retirement)
7. Ram's Loan A/c Dr. 84,375
To Lav's Capital A/c 84,375
(Transfer of Ram's Loan Account to Lav's Capital Account)
8. Lav's Capital A/c Dr. 31,250
To Laxman's Capital A/c 15,625
To Bharat's Capital A/c 15,625
(Being adjustment entry passed for Lav's share of goodwill)

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 Answer to PTP_Intermediate_Syllabus 2008_Jun2015_Set 1

Partner’s Capital Accounts

Dr. Cr.
Particulars Ram Laxman Bharat Lav Particulars Ram Laxman Bharat Lav
` ` ` ` ` ` ` `
To Ram --- 25,000 37,500 --- By Balan b/d 1,25,000 1,00,000 70,000 ---
(Goodwill)
To Bank 1,12,500 --- --- --- ,, Rev A/c 9,375 5,625 3,750 ---
To Ram’s Loan 84,375 --- --- --- ,, Laxman 25,000 --- --- ---
A/c (b.f) (Goodwill)
To Balan c/d --- 1,05,625 1,23,750 --- ,, Bharat 37,500 --- --- ---
(Goodwill)
,, Bank (fresh --- 25,000 87,500
capital)
1,96,875 1,30,625 1,61,250 --- 1,96,875 1,30,625 1,61,250 ---

To Laxman --- --- --- 15,625 By Balan b/d --- 1,05,625 1,23,750 ---
(Goodwill)
To Bharat --- --- --- 15,625 By Ram’s --- --- --- 84,375
(Goodwill) Loan A/c
To Balan c/d --- 48,500 55,750 21,250 By Lav --- 15,625 15,625 ---
(goodwill)
--- 1,21,250 1,39,375 84,375 --- 1,21,250 1,39,375 84,375

Working Notes:

(i) Calculation of Gaining Ratio

Partners New ratio Old ratio Gain Sacrifice

Ram 5 /10 5/10
Laxman 1/2 3 /10 1/2 - 3 /10 = 2/10
Bharat 1/2 2/10 1/2 - 2 /10 = 3/10

Hence, ratio of gain between Laxman and Bharat = 2:3

(ii) Value of Total Goodwill of the firm = ` 62,500 x 2 = ` 1,25,000
Ram's Share = ` 1,25,000 x 5/10 = ` 62,500
Laxman will bear = ` 62,500 x 2/5 = ` 25,000
Bharat will bear = ` 62,500 x 3/5 = ` 37,500
(iii) Lav's share of goodwill = ` 1,25,000 x 1/4 = ` 31,250
Laxman and Bharat share equal profits. Therefore, their sacrificing ratio will also be
equal.
Hence, each of them will be credited with ` 15,625.

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 Answer to PTP_Intermediate_Syllabus 2008_Jun2015_Set 1

(b) Mr. C
Statement showing Value of Stock on 31.3.2014
Particulars Amount Amount
(`) (`)
Stock as on 8.4.14 37,500
Add: Cost of Goods Sold and sent Out between 1.4.14 and 8.4.14
(a)
Sales in this period 15,000
Less: Goods sold but not delivered (at Selling Price) 2,500
12,500
Less : Gross Profit included [20% of 12,500] 2,500 10,000

47,500
Less: Goods purchased and received between 1.4.14 and 8.4.14
(a) Purchases in this period 15,000
Less : Goods not received till 8.4.14 3,750
11,250
(b) Goods received before 31.3.14 for which the invoice is yet to
be received 12,500
Stock on 31.3.2014 23,750

(c) (i)Computation and allocation of Impairment Loss for the year ended 31.03.2012 (` Lakhs)
End of 2012 Goodwill Identifiable Assets Total
(a) Historical cost 400 800 1,200
(b) Accumulated/Amortization for the (320) (214) (534)
period 01.04.2008 to 31.03.2012 (400 x 4/5) (800 x 4/15)
(c) Carrying Amount (a) – (b) 80 586 666
(d) Recoverable Amount as on 31.03.2014 544
(e) Impairment Loss 122
(f) Impairment Loss allocated first to (80) (42) (122)
Goodwill and balance to other assets
(g) Carrying Amount after Impairment Nil 544 544
Loss (c) – (f)

(ii) Reversal of Impairment of Loss as on 31.03.2014 (` Lakhs)

Particulars Goodwill Identifiable Total
Assets
1. Carrying Amount at the end of 2012 after Nil 544 544
recognition of Impairment Loss (as above)
2. Less: Depreciation/ Amortization for 2 years NIL (98) (98)
(544 x 2/11)
3. Carrying Amount at the end of 2014 (1) – (2) NIL 446 446
4. Carrying Amount at the end of 2014 had there NIL 480 480
been no impairment (Cost – Accumulated
Depreciation)
5. Recoverable Amount at the end of 2014 (Given) 684
6. Total Impairment Loss to be reversed (5) – (3) 238
7. Impairment Loss That can be reversed (4) – (3) or 34
(6) whichever is lower
8. Revised Carrying Amount at the end of 2014
(3) + (7) 480
[This amount should not exceed (4)]

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 Answer to PTP_Intermediate_Syllabus 2008_Jun2015_Set 1

4. (a)On 1st January, 2014, Shivaji acquired furniture on the hire-purchase system from
Barcelona Aids, agreeing to pay four semi-annual installments of ` 800 each,
commencing on 30th, June, 2014. The Cash price of the furniture was ` 3,010 and
interest of 5% per annum at half yearly rest was chargeable. On 30 th September,2014,
Shivaji expresses his inability to continue and Barcelona Aids seized the property. It
was agreed that Shivaji would pay the due proportion of the installment upto the date
of seizure and also a further sum of ` 250 towards depreciation. At the time of re-
possession, Barcelona Aids valued the furniture at `1,500. The company after incurring
` 500 towards repairs of the furniture sold the items for ` 1,800 on 15th October, 2014.
Required: Prepare the Ledger Accounts in the books of the Vendor and the Purchaser
presuming that the purchaser charges depreciation @ 10% p.a.

(b) A Ltd. was incorporated on 01.01.2014 with an authorized capital of 25 crore. The
subscribers to the memorandum and articles of association subscribed for 1,000
shares of ` 10 each. The promoters and well wishers subscribed and paid for 49,900
equity shares of ` 10 each. The company took over the running business of Magadha
Bros, and allotted 1,50,000 equity shares of ` 10 each at par. The company made a
public issue of 8,00,000 equity shares of ` 10 each at par, ` 5 being payable on
application, ` 3 on allotment and `2 on call. Application monies were receivable by
28.02.2014, allotment was made on 31.03.2014, allotment monies were due by
30.4.2014, first call was made on 31.5.2014; first call was due by 30.6.2014.
Public applied for in full. Allotment monies were received from all members except
holders of 500 shares. Call monies were received from all members except holders of
800 shares (including those who had not paid allotment money).
After due notice, the 800 shares were forfeited on 30.9.2014. They were re-issued on
31.10.2014 at ` 11 per share.
You are asked to:
Record the above transactions through the Journal of A Ltd [10+5]

Solution:
(a)
Books of Shivaji
Furniture Account
Dr. Cr.
Date Particulars ` Date Particulars `
01.01.14 To Barcelona Aids 3,010 30.09.14 By Depreciation A/c 226
(10% on ` 3,010 for 9 months)
By Barcelona Aids 1,414
By Profit & Loss A/c (Loss) 1,370
3,010 3,010

Barcelona Aid’s Account

Dr. Cr.
Date Particulars ` Date Particulars `
30.06.14 To Cash A/c 800 01.01.14 By Furniture A/c 3,010
To Cash A/c 30.06.14 By Interest A/c 75
30.09.14 (` 400 + ` 500) 900 30.09.14 By Interest 29
30.09.14 To Furniture 1,414 (on ` 2,285.25 @ 5% p.a.)
3,114 3,114

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 Answer to PTP_Intermediate_Syllabus 2008_Jun2015_Set 1

Interest Account
Dr. Cr.
Date Particulars ` Date Particulars `
30.06.14 To Barcelona Aids 75 By Profit & Loss A/c 104
30.09.14 To Barcelona Aids 29
104 104

An Extract of Profit and Loss Account of Shivaji

Dr. Cr.
Date Particulars ` Date Particulars `
To Interest 104
To Loss on Seizure of goods 1,370
To Depreciation on Furniture 226
1,700

Books of Barcelona Aid

Shivaji’s Account
Dr. Cr.
Date Particulars ` Date Particulars `
01.01.14 To Hire Purchase Sales A/c 3,010 30.06.14 By Bank A/c 800
30.06.14 To Interest A/c (on ` 3,010) 75 30.06.14 By Bank A/c 600
30.09.14 To Interest A/c (on ` 2,285.25) 29 30.09.14 By Profit & Loss A/c 214
30.09.14 Loss on valuation of goods
(repossessed)
BY H.P. Goods Repossessed A/c 1,500
3,114 3,114

Hire Purchase Goods Repossessed Account

Dr. Cr.
Date Particulars ` Date Particulars `
30.09.14 To Shivaji 1,500 15.10.14 By Cash A/c (Sales) 1,800
30.09.14 To Cash (Expenses) 250
15.10.14 To Profit and Loss A/c 50
(Profit on sale of
repossessed goods )
1,800 1,800

An Extract of Profit and Loss Account of Barcelona Aid

Dr. Cr.
Particulars ` Particulars `
To Loss on Valuation of goods 214 By Interest on H.P. Sales 104
repossessed By Hire Purchase Goods Repossessed A/c (Profit) 50

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 Answer to PTP_Intermediate_Syllabus 2008_Jun2015_Set 1

(b) Books of A Ltd.

Dr. Cash Book (Bank Column) Cr.
Date Particulars Amount Date Particulars Amount
(`) (`)
01.01. 14 To Equity Share Capital A/c 10,000 31.10.13 By Balance c/d 85,14,700
[Amount received on issue of 1,000
Equity Shares of ` 10 each]

01.01. 14 To Equity Share capital A/c 4,99,000

[Amount received on issue of
49,900 Equity Shares of ` 10 each]

28.2.14 To Equity Share Application A/c 40,00,000

[Application money
received @ ` 5 each on 8,00,000
Equity shares]
30.4.14 To Equity Share Allotment A/c 23, 98,500
[Allotment money received @ ` 3
per share except on 500 shares]

30.6.14 To Equity Share First Call A/c 15,98,400

[First Call received except on
800 shares]
31.10.14 To Re-Issue A/c 8,800
[Amount received on re-issue of
800 shares @ ` 11 each]
85,14,700 85,14,700
Journal Entries
Dr. Cr.
Date Particulars L. F. Amount Amount
` `
01.01.14 Business Purchase A/c…………………………..Dr. 15,00,000
To Equity Share Capital A/c 15,00,000
[1,50,000 Equity Shares of ` 10 each issued at
par to Magadha Bros, as purchase
consideration for their business taken over]
28.02.14 Equity Share Application A/c…………...........Dr. 40,00,000
To Equity Share Capital A/c 40,00,000
[Application money transferred on 8,00,000
shares @ ` 5 each as per Board's Resolution
No.... dated....]
31.03.14 Equity Share Allotment A/c……………………Dr. 24,00,000
To Equity Share Capital A/c 24,00,000
[Allotment money on 8,00,000 shares @ ` 3 per
share transferred as per Board's Resolution
No…..dated…..]
31.05.14 Equity Share First Call A/c……………………...Dr. 16,00,000
To Equity Share Capital A/c 16,00,000
[First Call made on 8,00,000 shares @ ` 2 per
share and the amount transferred as per Board's
Resolution No...dated....]
30.09.14 Equity share capital A/c…………………….….Dr. 8,000
To Equity Share Allotment A/c [500 x ` 3] 1,500
To Equity Share First Call A/c [800 x ` 2] 1,600
To Forfeited Share A/c 4,900
[800 shares of ` 10 each, fully called forfeited for
non payments of allotment on 500 shares and
first call on 800 shares as per....]

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 Answer to PTP_Intermediate_Syllabus 2008_Jun2015_Set 1

31.10.14 Re- Issue A/c [800 x `11]……………………...Dr. 8,800

To Equity share capital A/c [800 x `10] 8,000
To Securities Premium [800 x Re 1] 800
[800 forfeited shares re-issued at a premium as
per Board’s resolution No……dated……]
31.10.14 Forfeited shares A/c…………………………….Dr. 4,900
To capital reserve A/c 4,900
[Profit on re- issue of forfeited shares transferred
to Capital reserve]

Working Notes:
1. Amount Forfeited
`
Share applications Received [800 x `5] 4,000
Share Allotment received [300 x `3] 900
4,900

5. (a) The Promoters of proposed Air Ltd. purchased a running business on 01.01.2014 from
Pollution Ltd. Air Ltd. was incorporated on 1st May 2014. The combined Profit and Loss
Account of the company prior to and after the date of incorporation is as under:

Profit and Loss account for the year ended 31st December, 2014
Particulars Amount Particulars Amount
` `
To Rent, Rates & Salaries etc. 9,000 By Gross Profit 1,50,000
To Directors’ sitting Fees 4,900 By Discount received from
To Preliminary Expenses 3,600 Creditors 6,000
To Carriage Outwards 6,500
To Interest Paid to Vendors 12,000
To Net Profit 1,20,000
1,56,000 1,56,000
Following further information is available:
(i) Sales up to 31.04.2014 were `3,00,000 out of total sales of rs.15,00,000 for the year.
(ii) Purchase up to 31.04.2014 were `3,00,000 out of total purchase of `9,00,000 for the year.
(iii) Interest paid to vendors on 1st November, 2014 @ 12% p.a. `1,00,000 being purchase
consideration.
Prepare a profit & Loss Account for the year ended 31st December, 2014 showing the
profits earned prior to and after incorporation showing the transfer of the same to
appropriate accounts.

(b) A Head Office of Bombay has a Branch at Madras in charge of a manager. The ratio of
gross profit on turnover at the Breach was 25 per cent throughout the year. The Branch
Manager is entitled to a commission of 10% of the profit earned by the Branch calculated
before charging his commission, but subject to a deduction from such commission a sum
equal to 50% of any ascertained deficiency on Branch Stock. All goods were supplied by
the Head Office to the Branch.
From the following figures extracted from the Branch Books, calculate the commission
due to the manager for the year ended 31st December, 2014.
`
Stock on 1.1.13 at Selling Price 20,806
Goods received from Head Office at Cost 54,360
Sales 73,200
Establishment Expenses 11,250
Drawings by Manager against commission 500
Stock on 31.12.13 at selling price 19,900

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 Answer to PTP_Intermediate_Syllabus 2008_Jun2015_Set 1

(c) Best Ltd. gives you the following information to find out Total Sales and Total Purchases:

Particulars ` Particulars `
Debtors as on 01.01.2013 65,000 Discount allowed by suppliers 8,000
Creditors as on 01.04.2013 80,000 Discount allowed to customers 10,000
Bills receivable received during the 45,000 Endorsed bills receivable 5,000
year dishonoured
Bills receivable issued during the 52,000 Sales return 9,000
year
Cash received from customer 1,55,000 Bills receivable discounted 8,000
Cash paid to suppliers 1,70,000 Discounted bills receivable 3,000
dishonoured
Bad debts recovered 16,000 Cash sales 1,68,000
Bills receivables endorsed to 28,000 Cash purchase 1,95,000
creditors
Bills receivables dishonoured by 6,000 Debtors as on 31.03.2014 83,000
customers
Creditors as on 31.03.2014 95,000
[5+5+5]
Solution:
(a) Working Notes:
(i) Sales Ratio between Pre- Incorporation and Post – Incorporation periods = 3,00,000 :
12,00,000 = 1 : 4.
(ii) Purchase Ratio = 3,00,000: 6,00,000 = 1: 2.
(iii) Time Ratio = 4 months: 8 months = 1: 2.
(iv) Time ratio regarding interest on purchase consideration = 4 months: 6 months
(1.5.2014 to 31.10.2014) = 2 : 3.

Air Ltd.
Profit & Loss Account for the year ended 31.12.2014
Dr. Cr.
Particulars Pre- Post- Particulars Pre- Post-
Incorporation Incorporation Incorporation Incorporati
01.01.14 to 01.05.14 to 01.01.14 to on 01.05.14
31.04.14 31.12.14 31.04.14 to 31.12.14
` ` ` `
To Rent, Rate & By gross Profit
Salaries [9,000 in 3,000 6,000 [1,50,000 as 1 : 4] 30,000 1,20,000
time Ratio 1 : 2] By Discount
To Directors’ Sitting - 4,900 Received
Fees from Creditors
To Preliminary *3,600 - [6,000 as 1 : 2] 2,000 4,000
Expenses (Purchase Ratio)
To Carriage
Outward [6,500 in 1,300 5,200
sales Ratio 1 : 4]
To Interest on
Purchase
consideration [2 : 4,800 7,200
3]
To Capital Reserve 19,300

To Balance c/f 1,07,900

32,000 1,24,000 32,000 1,24,000

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 16
 Answer to PTP_Intermediate_Syllabus 2008_Jun2015_Set 1

* In this problem Pre- Incorporation Profits have been used to write off preliminary expenses
before any balance is transferred to capital reserve. Students can charge such expenses
against Post- Acquisition Profits also. In that case transfer to capital reserve should be `22,900.

(b) Note:
The Branch Manager’s commission depends on two aspects:
(1) The Net Profit of the Branch and (2) any ascertained deficiency on Branch Stock.
No specific method for showing these two aspects have been prescribed.
Let us prepare the Branch Stock Account (Columnar) and the Profit & Loss Account.

Books of ……………………… Head Office at Bombay

Memorandum Branch Stock Account
Dr. Cr.
Particulars I.P. C.P. Particulars I.P. C.P.
` ` ` `
To Balance b/f 20,806 15,605 By Sales A/c 73,200 73,200
[C.P. = 20,806 x ¾]
`` Goods sent to Branch A/c 72,480 54,360 `` Stock Deficiency A/c 186 140
[S.P. = 54,360 x 4/3] [S.P./I.P. = Bal. Fig. = 186
C.P. = 186 x ¾]
`` Branch Profit & Loss A/c 18,300 `` Balance c/f: 19,900 14,925
(Gross Profit) [C.P. = 19,900 x ¾]
93,286 88,265 93,286 88,265

Branch Profit & Loss Account

Dr. Cr.
Particulars ` Particulars `
To Stock Deficiency A/c 140 By Branch Stock A/c 18,300
`` Establishment Expenses 11,250 (Gross Profit)
``Balance c/d (Net Profit before Commission) 6,910
18,300 18,300
To Manager’s Commission [Note II] 621 By Balance b/d 6,910
`` General P/L A/c [Br. Net Profit] 6,289
6,910 6,910

Workings:
(i) Here Ratio of Gross Profit included in Selling Price = 25%

 Cost Price = 75% or ¾ of Selling Price (or Invoice Price) and Selling Price = 4/3 of Cost
Price.

(ii) Branch Manager’s Commission

Particulars ` `
10% of Net Profit before charging Commission [10% of 6,910] 691
Less: Deduction @ 50% of Stock Deficiency [50% of 140] 70
Net Commission Payable 621
Less: Commission already Drawn 500
Outstanding Commission 121

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 Answer to PTP_Intermediate_Syllabus 2008_Jun2015_Set 1

(c)
Dr. Total Debtors Account Cr.
Particulars ` Particulars `
To balance b/d (given) 65,000 By Cash/ Bank A/c (Cash 1,55,000
received)
To Bills Receivable A/c 6,000 By Discount Allowed A/c 10,000
(Dishonoured)
To Creditors A/c (Dishonour of 5,000 By Bills Receivable A/c (B/R 45,000
endorsed B/R) Received)
To Bank A/c (Discounted B/R 3,000 By Sales Returns A/c 9,000
dishonoured)
To Sales A/c. (Bal Fig = Credit Sales) 2,23,000 By balance c/d (given) 83,000
3,02,000 3,02,000

Dr. Total Creditors Account Cr.

Particulars ` Particulars `
To Cash/ Bank A/c (Payment) 1,70,000 By balance b/d (given) 80,000
To Discount received A/c 8,000 By Debtors A/c (dishonour of 5,000
endorsed B/R)
To Bills payable A/c (issued) 52,000 By Purchase A/c (Bal Fig = Credit 2,68,000
Purchase)
To Bills receivable (endorsement) 28,000
To balance c/d (given) 95,000
3,53,000 3,53,000

Total Sales = Credit Sales + Cash Sales = ` (2,23,000 + 1,68,000) = ` 3,91,000

Total Purchase = Credit Purchase + Cash Purchase = ` (2,68,000 + 1,95,000) = ` 4,63,000

6. (a) The following is the Receipts and Payments Account of the East Bengal Club for the
year ended December, 31, 2014:

Receipts ` Payment `
Cash in hand 2,000 Remuneration to Club Coach 4,000
Balance at Bank as per Pass Groundman’s Pay 3,000
Book: Purchase of Equipments 15,500
Savings Account 19,300 Bar Room Expenses 2,000
Current Account 6,000 Ground Rent 2,800
Club Night Expenses 4,000
Bank Interest 500 Printing & Stationery 3,000
Entrance Fees 1,800 Repairs to Equipments 5,000
Donations & Subscriptions 25,000 Honorarium to Secretary for the year 4,000
Bar Room Receipts 4,000 2014
Contribution to Club Night 1,000 Balance at Bank as per Pass Book:
Sale of Equipment 800 Savings Account 20,400
Net Proceeds of Club Night 7,800 Current Account 2,000
Cash in hand 2,500
68,200 68,200

You are given the following additional information:

1.1.14 31.12.14
(i) Subscription due from members 1,500 1,000
(ii) Sums due for Printing & Stationery 1,000 800
(iii) Unpresented cheques on Current A/c, being payments for 3,000 2,500
repairs --- 200

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 Answer to PTP_Intermediate_Syllabus 2008_Jun2015_Set 1

(iv) Interest on Savings Account not entered in Pass Book 8,000 17,500
(v) Estimated value of Equipments
(vi) For the year ended 31st December, 2014, the honorarium to
secretary are to be increased by a total of ` 2,000 and the
grounds’ man is to receive a bonus of ` 2,000.

You are required to prepare: (i) an Income & Expenditure Account for the year ended 31st
December, 2014 and (ii) a Balance Sheet on that date.

(b) Ghuri Ltd undertook a Contract to construct a building for ` 85 Lakhs. At the end of the
financial year, the Company found that it had already spent ` 65,99,000 on Construction.
Prudent estimate of the additional cost for completion was ` 33,01,000. What is the additional
provision for foreseeable loss which must be made in the final accounts for the year ended
31st March? If the progress billings received were ` 50 Lakhs on 31st March, what is the amount
due from / to customers? [8+7]

Solution:
(a)
Working Notes:
(i) Calculation of Bank Balance as per Cash Book:
Savings Current
Account Account
1.1.14 31.12.14 1.1.14 31.12.14
` ` ` `
Balance as per Pass Book 19,300 20,400 6,000 2,000
Add: Interest on Savings Account not entered in Pass Book + 200
Less: Unpresented Cheques on Current Account -3,000 -2,500
Balances as per Cash Book 19,300 20,600 3,000 500(O/D)

(ii) Annual Depreciation on Equipment

` `
Value on 1.1.2014 8,000
Add: Purchase during ‘14 15,500 23,500
Less: Sale of Equipment 800
Closing Value on 31.12.2014 17,500 18,300
5,200

(iii) Calculation of Opening Capital Fund (on 1.1.2014)

Balance Sheet as on 1.1.2014
Liabilities Amount Assets Amount
` `
Outstanding Liabilities for: Cash in hand 2,000
Printing & Stationery 1,000 Cash at Bank:
Honoraria to Secretary 4,000 Savings Account 19,300
Capital Fund 28,800 Current Account 3,000
[Excess of Assets over Liabilities] Subscriptions Due 1,500
Equipment 8,000
33,800 33,800

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 Answer to PTP_Intermediate_Syllabus 2008_Jun2015_Set 1

East Bengal Club

Income and Expenditure Account for the year ended 31.12.14
Dr. Cr.
Expenditure Amount Amount Income Amount Amount
` ` ` `
To Remuneration to Coach 4,000 By Bank Interest 500
`` Groundman’s Pay 3,000 Add: Not recorded 200 700
`` Outstanding Bonus to Ground man 2,000 `` Entrance Fees (not capitalized) 1,800
`` Ground Rent 2,800 `` Donation & Subscriptions: 25,000
`` Club Night Expenses 4,000 Add: Due for ‘14 1,000
`` Printing & Stationery 3,000 26,000
Add: Due for ‘14 800 Less: Due for ‘13 1,500 24,500
3,800 `` Income From Bar Room:
Less: Due for ‘13 1,000 2,800 Receipts 4,000
`` Repairs to Equipment 5,000 Expenses 2,000 2,000
Add: Unpresented Cheque for ‘14 2,500 `` Contribution to Club Night 1,000
7,500 `` Net Proceeds of Club Night 7,800
Less: Unpresented cheque for ‘13 3,000 4,500
`` Honoraria to Secretary 4,000
Less: Paid for 2013 4,000
Nil
Add: Outstanding for 2014
[4,000 + 2,000] 6,000
`` Depreciation on Equipment 6,000
`` Surplus (Excess of Income over 5,200
expenditure) 3,500
37,800 37,800

Balance Sheet as on 31.12.2014

Liabilities Amount Amount Assets Amount Amount
` ` ` `
Outstanding Liabilities for: Cash in hand 2,500
Printing & Stationery 800
Honoraria to Secretary 6,000 Cash at Bank:
Groundman’s Bonus 2,000 8,800 Savings Account 20,600

Bank Overdraft as per Current A/c 500 Subscriptions due 1,000

Capital Fund : Opening Balance 28,800 Equipments 17,500

Add: Surplus 3,500 32,300
41,600 41,600

(b) Estimated Total Contract Costs = Cost till date + Further Costs= ` 65,99,000+` 33,01,000= ` 98,00,000
Percentage of Completion = Cost incurred till date + Estimated Total Costs = 65.99 
98.00 = 67%
Total Expected Loss to be provided for = Contract Price - Total Costs = ` 85 – ` 98 =
`13,00,000.

Contract Revenue [67% of ` 85 Lakhs] = ` 56,95,000

Less: Contract Costs = ` 65,99,000
Loss on Contract = ` 9,04,000
Less: Further provision required in respect of expected loss = ` 3,96,000 (Bal. Figure)
Expected Loss recognized = ` 13,00,000

Amount due from / to customers = Contract Costs + Recognized Profits - Recognized Losses -
Progress Billings = 65,99,000 + Nil – ` 13,00,000 – ` 50,00,000 = ` 2,99,000 Amount Due From
Customers.

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 Answer to PTP_Intermediate_Syllabus 2008_Jun2015_Set 1

This amount of ` 2,99,000 will be shown in the Balance Sheet as a Asset.

The relevant disclosures under AS - 7 are as follows -

Particulars Computation Amount
(`)
(a) Contract Revenue 56,95,000
(b) Contract Expenses 65,99,000
(c) Loss on Contract (9,04,000)
(d) Expected Losses (as provided for above) 3,96,000
(e) Recognized Profits less Recognized Losses 13,00,000
(f) Progress Billings (presumed fully billed & received) 50,00,000
(g) Retentions (billed but not received from Nil
Contractee)
(h) Gross Amount due to Customers (as calculated above) 2,99,000

7. (a) ICICI Lombard, a Insurance Company commenced its business on 1.4.2013. It submits
you the following information for the year ended 31.3.2014:
`
Premium received 15,00,000
Re-insurance premium paid 1,00,000
Claim paid 7,00,000
Expenses of Management 2,50,000
Commission paid 1,00,000
Claims outstanding on 31.3.2013 1,00,000
Create reasons for unexpired risk @ 40%.
Prepare Revenue Account for the year ended 31st March, 2014.

(b) The Trial Balance of S. Auddy as on 31.12.2014 did not agree and the difference was
transferred to a Suspense Account.
Subsequently the following errors were detected:
(i) The total of one page of the Sales Day Book was carried forward to the next page
as `4,513 instead of ` 4,531.
(ii) The total of the Purchase Day Book was undercast by `400.
(iii) A Cash discount of ` 150 received from a creditor was debited to Discount
account.
(iv) `1,450 spent on repairs of Delivery Van was debited to Motor Vehicles Account.
(v) `300 received from M. Ghosh was debited to the Account of N. Ghosh in the
Sales Ledger.
(vi) Goods worth `700 returned by Islam were not entered in the books at all.

(c) Mention three names of Intangible Assets other than goodwill, patents and copy right.
[6+6+3]

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 21
 Answer to PTP_Intermediate_Syllabus 2008_Jun2015_Set 1

Solution: (a)
Form B - RA (Prescribed by IRDA)
Name of the Insurer: ICICI Lombard Ltd.
Registration No. and Date of Registration with IRDA...
Revenue Account for the year ended 31st March, 2014

Particulars Schedule `
Premiums earned – net 1 8,40,000
Total (A) 8,40,000
1. Claims Incurred (Net) 2 8,00,000
2. Commission 3 1,00,000
3. Operating Expenses 4 2,50,000
Total (B) 11,50,000
Operating Profit / (Loss) from Insurance Business C = (A - B) (3,10,000)

Schedule 1 — Premium Earned (Net)

Particulars `
Premiums Received 15,00,000
Less: Re – Insurance premium paid 1,00,000
Net Premium 14,00,000
Adjustment for changes in Reserved for unexpired risk (Nil - *`
5,60,000) (5,60,000)
(3,10,000)

Schedule 2 — Claims Incurred (Net)

Particulars `
Claims Paid 7,00,000
Add: Claim outstanding at the end of the year 1,00,000
Total 8,00,000

Schedule 3 — Commission
Particulars `
Commission Paid 1,00,000

Schedule 4 — Operating Expenses

Particulars `
Expenses of Management 2,50,000
*40% of ` 14,00,000 = ` 5,60,000.

(b) Books of S. Auddy

Journal
Dr. Cr.
Date Particulars L. F. Amount Amount
` `
31.12.14 (i) SuspenseA/c……………………………………..Dr. 18
To Sales A/c 18
[Sales Account under credited, now rectified]
(ii) PurchaseA/c……………………………………Dr. 400
To Suspense A/c 400
[Total of Purchase day Book undercast by `400,
now rectified]
(iii) Suspense A/c…………………………………..Dr. 300
To discount (Allowed) A/c 150
To discount received A/c 150

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 Answer to PTP_Intermediate_Syllabus 2008_Jun2015_Set 1

[Cash discount of `150 received from a creditor

wrongly debited to discount Account, now
rectified]
(iv) RepairsA/c………………………………………Dr. 1,450
To Motor vehicles A/c 1,450
[Amount spent on repair of Delivery Van wrongly
debited to Motor Vehicles Account, now
rectified]
(v) Suspense A/c…………………………………. Dr. 600
To M. Ghosh A/c (Debtors) 300
To N. Ghosh A/c (Debtors) 300
[`300 received from M. Ghosh debited to N.
Ghosh Account, now rectified]
(vi) Return Inward A/c…………………………… Dr. 700
To Islam A/c 700
[Return Inward from Islam omitted to be
recorded, now entered]

(c) Name the three Intangible Assets other than goodwill patents and copyright:-
(i) Costs of research and development.
(ii) Payments on Accounts
(iii)Concessions, Licenses, Trade Marks and similar rights and assets.

8. Write on short notes (any 3) [ 3 x 5 = 15]

(a) Features of Income and Expenditure.
(b) Profit prior to Incorporation.
(c) Cum-interest and ex-interest price.
(d) Surrender value of Policy.

Solution:
(a) Features of Income and Expenditure Account
(i) It follows Nominal Account.
(ii) All expenses of revenue nature for the particular period are debited to this Account on
accrual basis.
(iii) Similarly all revenue incomes related to the particular period are credited to this
account on accrual basis.
(iv) All Capital incomes and Expenditures are excluded.
(v) Only current year’s incomes and expenses are recorded. Amounts related to other
periods are deducted. Amounts outstanding for the current year are added.
(vi) Profit on Sale of Asset is credited. Loss on Sale of Asset is debited. Annual
Depreciation on Assets is also debited.
(vii) If income is more than expenditure, it is called a Surplus, and is added with Capital or
General Fund etc. in the Balance Sheet.
(viii) If expenditure is more than income, it is a deficit, and is deducted from Capital or
General Fund etc. in the Balance Sheet.

(b) Profit prior to incorporation.

Sometimes a new Company is formed to take over an existing business as a going
concern from a date prior to its date of incorporation. The profit so earned by the newly
formed Company will be Profit prior to incorporation. The date of incorporation is taken
as the basis for calculation of pre-acquisition profit.
Profit earned prior to incorporation is a Capital Profit. Any profit prior to incorporation may
be
(a) Credited to capital reserve account

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 Answer to PTP_Intermediate_Syllabus 2008_Jun2015_Set 1

(b) Credited to goodwill account to reduce the amount of goodwill arising from
acquisition of business
(c) Utilized to write down the value of fixed assets acquired.

(c) Cum-Interest and Ex-Interest Price

When debentures are purchased in the open market, a distinction has to be made
between the capital portion and the revenue portion of the total amount paid for
acquiring the debentures. The phrase ‘cum interest price’ is used to denote the total
amount paid to the seller to acquire the debentures. If the interest accrued on
purchased debentures from the previous date of payment of debenture-interest to the
date of the transaction is deducted from the cum-interst price, we will get ex-interest
price which is the capital portion of the total amount paid, the accrued interest being
the revenue portion. Cum interest price is the total amount realized. Interest accrued is
credited to interest on Own Debenture Account and the balance which is the ex-interest
price is credited to Own Debentures Account. Ex-interest sale price is compared with the
ex-interest purchase price to ascertain the profit or loss on resale of own debentures. On
cancellation of own debentures ex-interest purchase price is compared with the face
value of own debentures cancelled to ascertain the profit or loss on cancellation.

(d) Surrender value of policy

In the case of life policy, the policy normally has value only when it matures. But to
facilitate the promotion of business insurance companies assign value to the policy on
the basis of the premium paid. Insurance companies will be prepared to pay such value
on the surrender of the policy by a needy policy holder desiring to realize the policy.
Therefore the value is referred to as ‘surrender value’. Surrender value is usually nil until at
least two premiums are paid. Amount paid as surrender value is expenditure and is similar
to claims paid. Thus surrender value is the amount the policy holder will get from the life
insurance company if he decides to exit the policy before maturity.

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 24