BCCA

Paper 12
Company Accounts

CA CMA Ananth Sharma

 INDEX
S.No Chapter names Page no

1 Issue, forfeiture and reissue 1

2 Bonus issue 13

3 Right issue 17

4 Buy back 19

5 Redemption of preference shares 24

6 Issue and redemption of debentures 26

7 Underwriting 30

8 Company financial statement 36

9 Cash flow statements 59

10 Insurance financial statements 75

11 Banking financial statement 95

12 AS 17 110

13 AS 18 113

14 AS 19 114
ISSUES FORFEITURE & REISSUE OF SHARES
A company is described as a voluntary association of persons who have come together for
carrying on some business and sharing the profits with capital divided into numerous
transferable shares. It is an artificial person created by law to achieve the object for which it
is formed

Section 2(20) of the Companies Act, 2013 [hereinafter referred to as Act] defines a company as
“Company formed and registered under this Act or an existing company.”

Share Capital of a Company

Share capital means the capital raised by a company through issue of shares. It is the amount
invested by the shareholders against the face value of shares. It is basically a part of a
company’s ‘net worth’ or ‘equity’

➢ Types of Share Capital

Based on the type of shares used to raise the capital, share capital can be either Preference Share
Capital or Equity Share Capital.

Again, on the basis of disclosure in the Balance Sheet, Share Capital is categorized as follows:

a. Authorized Share Capital: It is the amount of share capital that a company is permitted to
issue. It is mentioned in the Capital Clause of the Memorandum of Association of the company.
Authorized Share Capital is also known as Nominal Capital.

b. Issued Share Capital: It represents the portion of the Authorized Capital that has been
offered by a company for subscription.

c. Subscribed Capital: It is that part of the issued capital for which applications are received
from the public.

d. Called up Capital: It is that part of the subscribed capital that has been called up by the company
for payment.

e. Paid up Capital: The part of the called-up capital which is offered and is actually paid by the members.

f. Reserved Capital: It is the portion of the uncalled capital of a company that is called-up for
payment only in the event of liquidation of the company.
Accounting for Issue of Shares
Accounting entries for issue of equity shares and that of preference shares are similar. Therefore, in the
following discussion on accounting entries for issue of shares, the term ‘share’ shall mean equity as well as
preference shares.

➢ Issue of Shares at Par

When shares are issued at par i.e., issue price equals to the face value per share, the journal entries for
transactions relating to share issue will be as follows:

a. Shares issued in lump sum

(i) On receipt of application money

Bank A/c ............................................................................ Dr.

To Share Application A/c

(ii) For excess share application money refunded

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 Share Application A/c ................................................... Dr.

To Bank A/c

(iii) On allotment of shares

Share Application A/c ........................................................ Dr.

To Share Capital A/c

Consider the following illustration.

b. Shares Issued in Installments

(i) On receipt of application money
Bank A/c ............................................................................ Dr.
To Share Application A/c
(ii) For excess share application money refunded
Share Application A/c ...................................................... Dr.
To Bank A/c
(iii) For share application money transferred to share capital
Share Application A/c ........................................................... Dr.
To Share Capital A/c
(iv) For share allotment money due
Share Allotment A/c .............................................................. Dr.
To Share Capital A/c
(v) For share allotment money received
Bank A/c ............................................................................ Dr.
To Share Allotment A/c
(vi) For share call money due
Share Call A/c ................................................................ Dr.
To Share Capital A/c
(vii) For share call money received
Bank A/c ............................................................................ Dr.
To Share Call A/c

Issue of Shares at Premium

A company may issue shares at a premium, i.e., at a value greater than its face value. The power to issue
shares at a premium need not be given in the Articles of Association. Premium so received shall be credited
to a separate account called Securities Premium Account.

Section 52 of the Companies Act, 2013 gives the purposes for which share premium account may be
applied by the company. These are:

1. For the issue of fully paid bonus shares to the members of the company;

2. For writing off preliminary expenses of the company;

3. For writing off the expenses of the commission paid or discount allowed on any issue of shares or
debentures of the company; and
4. For providing premium payable on the redemption of any redeemable preference shares

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 or debentures of the company.
5. For the purchase of its own shares or other securities u/s 68.
When shares are issued at premium, the journal entries for transactions relating to share issue will
be as follows:
a. Shares issued in lump sum
(i) On receipt of application money (entire amount is received on application)
Bank A/c ...................................................................... Dr.
To Share Application A/c
(ii) For excess share application money refunded
Share Application A/c................................................. Dr.
To Bank A/c
(iii) On allotment of shares
Share Application A/c................................................... Dr.
To Share Capital A/c (Face Value x no. of shares allotted)
To Securities Premium A/c (Premium x no. of shares allotted)

b. Shares Issued in Installments

Note: Unless otherwise stated premium is considered to be a part of allotment money.
(i) On receipt of application money
Bank A/c ........................................................... Dr.
To Share Application A/c
(ii) For excess share application money refunded
Share Application A/c ..................................... Dr.
To Bank A/c
(iii) For share application money transferred to share capital
Share Application A/c ....................................... Dr.
To Share Capital A/c
(iv) For share allotment money due
Share Allotment A/c........................................... Dr.
To Share Capital A/c
To Securities Premium A/c
(vi) For share allotment money received
Bank A/c ........................................................... Dr.
To Share Allotment A/c
(vii) For share call money due
Share Call A/c ............................................... Dr.
To Share Capital A/c
(viii) For share call money received
Bank A/c ........................................................... Dr.
To Share Call A/c
➢ Calls-in-Arrear

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When the shareholders fail to pay any instalment (Allotment or call) that has been called up, the amount
so unpaid is treated as calls-in-arrear and is accounted as such. If not ultimately received, the balance of
Calls- in-arrear is deducted from Called-up Capital in the Notes to Balance Sheet (See Reporting of
Share Capital in the Balance Sheet)

The accounting entry for calls-in-arrear is as follows

Bank A/c ........................ Dr. (Amount received)

Calls-in-arrear A/c… ................................. Dr. (instalment amount not received)

To Share Allotment/Share Call A/c

If received subsequently, the entry will be –

Bank A/c.................................................. Dr.

To Calls-in-arrear A/c

➢ Calls-in-Advance

Section 50 of the Companies Act, 2013, states that –

(1) A company may, if so authorised by its articles, accept from any member, the whole or a part of the
amount remaining unpaid on any shares held by him, even if no part of that amount has been called
up.

(2) A member of the company limited by shares shall not be entitled to any voting rights in respect
of the amount paid by him under sub-section (1) until that amount has been called up.

Calls-in-advance generally arises when there is an over-subscription of shares. Here, the excess
application money is adjusted against the amount due on allotment or calls. The excess application money, after
adjustment against the allotment money due, is transferred to a separate account called ‘Calls-in-Advance A/c’.
Sometimes, shareholders may also prefer to pay the entire amount of issue price at the time of allotment.
In such a situation also calls-in-advance arises and the same is adjusted against call money due subsequently.
Balance of Calls-in- Advance on the reporting date is shown under Other Current Liabilities.
The accounting entry for calls-in-advance are as follows:
(i) For transferring excess application money
Share Application A/c .................... Dr.
To Calls-in-Advance A/c
(ii) For money received in advance against call
Bank A/c ....................... Dr.
To Calls-in-Advance A/c
(iii) For adjustment of calls-in-advance
Calls-in-Advance A/c .............. Dr.
To Share Call A/c

➢ Interest on Calls-in-Arrear

Interest on calls-in-arrear may be collected by the directors from the shareholders, if the Articles of
Association so permit. In the absence of any specification, the company needs to follow ‘Table F’ according
to which interest @ 10% p.a. from the due date to the date of actual payment is payable by the
shareholders unless the same is waived by the Board.

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 The accounting entries for the same are as follows:
(i) For interest due
Shareholders A/c ................... Dr.
To Interest on Calls-in-Arrear A/c
(ii) On realization of interest
Bank A/c .............................. Dr.
To Shareholders A/c
(iii) For transferring interest to Profit and Loss Account
Interest on Calls-in-
Arrear A/c ................................................. Dr. To Profit and Loss A/c

➢ Interest on Calls-in-Advance
Interest may be paid by a company on calls-in-advance is the Articles of Association so provide. In the
absence of any specification, the company needs to follow ‘Table F’ according to which interest @ 12%
p.a. from the date of receipt to the due date of the concerned installment is payable.
The accounting entries for the same are as follows:
(i) For interest due on calls-in-advance
Interest on Calls-in-Arrear A/c .............. Dr.
To Shareholders A/c
(ii) On payment of interest
Shareholders A/c ...........................Dr.
To Bank A/c
(iii) For transferring interest to Profit and Loss Account
Profit and Loss A/c .................. Dr.
To Interest on Calls-in-Arrear A/c
Consider the following illustrations.

➢ Issue of Shares for Consideration other than Cash

If the shares have been allotted to any person or firm from whom the company has purchased
any asset, the
following entry will be passed:
Asset A/c .................................................................... Dr.
To Share Capital A/c
(Being ... shares allotted……in consideration of purchase of an asset for the company) If shares
are issued to Promoters for their services, the following entry will be passed:
Goodwill A/c ....................................................................... Dr.
To Share Capital A/c
Similarly, if shares are issued to Underwriters for underwriting commission, the following entry will
be passed:
Underwriters A/c ....................................................................Dr.
To Share Capital A/c

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Note: The fact should also be disclosed in the Balance Sheet while showing the issued, subscribed and
paid-up capital.

➢ Prohibition on Issue of Shares at Discount [Section 53]

a. Except as provided in section 54, a company shall not issue shares at a discount.
b. Any share issued by a company at a discounted price shall be void.
c. Where a company contravenes the provisions of this section, the company shall be punishable
with fine which shall not be less than one lakh rupees but which may extend to five lakh
rupees and every officer who is in default shall be punishable with imprisonment for a term
which may extend to six months or with fine which shall not be less than one lakh rupees but
which may extend to five lakh rupees, or with both.

➢ Expense on Issue of Shares

The common expenses associated with share issue are printing charges of prospectus and
application forms, brokerage and commission, underwriting expenses, legal charges etc. These are
written off against the profits of the company in the same year or over the years depending on
the availability of profits and based on the pattern of benefit derivable from the same.
The accounting entries are:
(i) Upon expenditure incurred
Share Issue Expenses A/c ......... Dr.
To Bank A/c
(ii) When the expenses are written off
Profit and Loss A/c ........................... Dr.
To Share Issue Expenses A/c

Note: Accordingly, in the Statement of Profit and Loss, the same is included under the head
Other Expense.

➢ Over Subscription, Pro-rata Allotment and Adjustment of Excess Application Money towards the
Amount due on the Allotment
Sometimes a company may receive more number of applications than the shares actually offered for
subscription. This is called Over Subscription. In such a situation, the company may choose a few
applicants while rejecting the others fully. However, this selection is not justifiable. In such a case, the
company may issue shares on a pro- rata basis where the all the investors applying for shares get a
certain percentage of their applications actually accepted. For example, if the company offered
100,00,000 shares of `10 each but applications for 2,00,00,000 shares were received by company, the
directors might send letters of regret to applicants of 50,00,000 shares and applicants of 150,00,000
shares were allotted the 100,00,000 shares on pro-rata basis. In such a case, application money of
50,00,000 shares will be adjusted either on allotment and on calls, if there is still surplus money after
adjusting the allotment and call money due from shareholders, it will be refunded in cash.
1.1.2 Forfeiture and Re-issue of Shares
Where issue proceeds on shares are collected in instalments, the shareholders are expected to pay the
amount of allotment and subsequent call money as and when they become due. However, if the shareholder
fails to pay the same, it results in calls-in-arrear. If the Articles of the company so permit, the company
may confiscate the shares on the ground of non-payment of instalments. This is known as Forfeiture of
Shares. On forfeiture, however, the amount received on shares till such date is not returnable and the
same becomes a capital receipt for the company
and transferred to Forfeited Shares A/c.

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The shares so forfeited may again be re-issued by the company afresh to new shareholders. This process is
called Re-issue of Forfeited Shares. These shares are generally re-issued at a price lower than the face
value of shares. However, the minimum re-issue price must be equal to called up value less amount
collected (capital portion) on each share before forfeiture. The resulting loss is adjusted against Forfeited
Shares A/c. the balance of the Forfeited Shares A/c, representing the net profit on forfeiture and re-
issue of shares, is transferred to Capital Reserve A/c.

In case the shares are re-issued at a price higher than the face value, the excess amount is not payable
to the original shareholders. It is to be transferred to ‘Securities Premium A/c’. For shares forfeited but
not yet re-issued, the balance of Forfeited Shares A/c should be shown under the head Share Capital in
the Balance Sheet.

The accounting entries for forfeiture and re-issue are as follows:

(i) On forfeiture of shares

Share Capital A/c ............................... Dr. (Called-up value)

Securities Premium A/c ...................... Dr. (Premium due but not collected)

To Calls-in-Arrear A/c (Amount unpaid)

To Forfeited Shares A/c (Capital portion received on shares forfeited)

(ii) On re-issue of shares

Bank A/c .................................... Dr. (Proceeds from re-issue)

Forfeited Shares A/c ................... Dr. (Discount on re-issue)

To Share Capital A/c (Paid-up value of shares re-issued)

To Securities Premium A/c (Premium on shares re-issued, if any)

(iii) On transfer of profit

Forfeited Shares A/c (Net profit on forfeiture and re-issue)

To Capital Reserve A/c

The net profit on forfeiture and re-issue of shares can be calculated as shown in
Total Profit on Forfeiture of Shares ***
Profit on forfeiture ( )× No. of Shares reissued
No. of Shares Forfeited
Less: Discount on re-issue ***
Net profit to be transferred to Capital Reserve ***
the following

Issue of Sweat Equity Shares

When a company issues shares to its employees or directors for providing knowhow, intellectual properties
etc., such an issue of shares is termed as issue of sweat equity shares.
As per Section 2(88) of the Companies Cat, 2013, “sweat equity shares” means such equity shares as are
issued by a company to its Directors or employees at a discount or for consideration, other than cash, for
providing their know-how or making available rights in the nature of intellectual property rights or value
additions, by whatever name called.
➢ Accounting for Issue of Sweat Equity Shares

I. Issue of sweat equity shares for cash consideration at a discount

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 When sweat equity shares are issued for cash consideration at a discount, the difference between
cash consideration and nominal value of sweat equity shares shall be considered as the value of
intellectual property provided by the employee or director. The accounting entry shall be as follows:

Bank A/c .......................... Dr.

Intellectual Property A/c ……Dr.

To Equity Share Capital A/c

Note: The details of issue of sweat equity shares shall be disclosed in the Notes to Balance Sheet on
Equity Share Capital.

II. Issue of sweat equity shares for consideration other than cash

According to Rule 8(9) of Companies (Share Capital and Debentures) rules, 2014 –

Where sweat equity shares are issued for a non-cash consideration, such non-cash consideration
shall be treated in the following manner in the books of account of the company-

(a) where the non-cash consideration takes the form of a depreciable or amortizable asset, it shall be
carried to the balance sheet of the company in accordance with the accounting standards; or

(b) where clause (a) is not applicable, it shall be expensed as provided in the accounting standards.

Accordingly, the accounting entries for issue of sweat equity shares for consideration other than
cash will be as follows:

(i) Sweat equity shares issued in pursuant to acquisition of an asset

Intellectual Property A/c .................................................. Dr. (Value of asset)

Employee/Director’s Compensation Expenses A/c ..... Dr. (Difference)

To Equity Share Capital A/c

(ii) Sweat equity shares issued not in pursuant to acquisition of an asset

Employee/Director’s Compensation Expenses A/c ..... Dr.

To Equity Share Capital A/c

Note: Employee/Director’s Compensation Expenses will be included in Employee Benefit Expenses in

the Statement of Profit and Loss. The details of issue of sweat equity shares shall be disclosed in the
Notes to Balance Sheet on Equity Share Capital.

QUESTIONS
1. State whether the following statements are True or False:
The profit on forfeiture and re-issue of equity shares are credited to Capital Redemption
Reserve.

Answer: False

2. In case of Forfeiture of Shares, a shareholder is not able to pay the further calls and returns
his shares to the company for cancellation voluntarily.
Answer: False

3. Moti Ltd. invited applications for issuing 10,00,000 Equity Shares of ₹10

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 each at a premium of ₹2 per share. The amount was payable as follows:
On Application — ₹5 (including Premium) One
Allotment — ₹4

On First and Final call — ₹3

Applications for 15,00,000 shares were, received. Applications for 3,00,000 shares were
rejected and pro rata allotment was made to remaining applicants. Excess application
money was utilized towards sum due on allotment. Giri who has applied for 24,000 shares
failed to pay the allotment and call money. His shares was forfeited.

forfeited shares, 10,000 shares were reissued for ₹8 per share fully paid up. Pass necessary
Journal entries in the books of Moti Ltd.

Answer:

Date Particulars L.F. Dr. (₹) Cr. (₹)

Bank A/c Dr. 75,00,000
To Equity Shares Application A/c 75,00,000
(Being the application money received on 15,00,000 shares)
Equity Shares Application A/c Dr. 75,00,000
To Equity Share Capital A/c (10,00,000 X 30,00,000
₹3)
20,00,000
To Securities Premium Reserve A/c (10,00,000 X
₹2)To Bank A/c (3,00,000 X ₹5) 15,00,000
To Equity Share Allotment A/c (2,00,000 X ₹5) 10,00,000
(Being the application money adjusted)
Equity Shares Allotment A/c Dr. 40,00,000
To Equity Share Capital A/c 40,00,000
(Being the allotment money due)
Bank A/c Dr. 29,40,000
To Equity Shares Allotment A/c 29,40,000
Or
Bank A/c Dr.
29,40,000
Calls-in-Arrear A/c Dr. 60,000
To Equity Shares Allotment A/c
30,00,000
(Being the allotment money received except on 20,000
shares) (WN 1)
Equity Shares First and Final Call A/c Dr. 30,00,000
To Equity Share Capital A/c 30,00,000
(Being the First and Final Call money due)
Bank A/c Dr. 29,40,000
To Equity Shares Allotment A/c 29,40,000
Or
29,40,000
Bank A/c Dr. 60,000
Calls-in-Arrear A/c Dr.
30,00,000
To Equity Shares First and Final Call A/c

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 (Being the call money received except on 20,000 shares)

Equity Share Capital A/c Dr. 2,00,000

To Forfeited Shares A/c 80,000
To Equity Shares Allotment A/c 60,000
To Equity Shares First and Final call A/c 60,000
Or,

Equity Shares Capital A/c Dr. 2,00,000

To Calls-in-Arrear A/c (₹60,000 + ₹60,000) 1,20,000
To Forfeited Shares A/c 80,000
(Being 20,000 shares forfeited due to nonpayment of
allotment and call money )
Bank A/c (10,000 X ₹8) Dr. 80,000
Forfeited Shares A/c (10,000 X ₹2) Dr. 20,000
To Equity Shares Allotment A/c 1,00,000
(Being 10,000 forfeited shares reissued for ₹8 per share
fullypaid -up)
Forfeited Shares A/c Dr. 20,000
To Capital Reserve A/c 20,000
(Being the gain on re-issue transferred to Capital Reserve
account)(WN 2)
Working Note-1

Calculation of Money Received on Allotment:

(i) Pro rata allotment = 12,00,000:10,00,000 = 12:10

(ii) No. of shares allotted to Giri = 24,000 X 10/12 = 20,000 shares

(iii) Money received on application from Giri (24,000 shares X ₹5) =₹1,20,000

(iv) Less: Amount adjusted on application (20,000 shares X ₹5) = ₹1,00,000

Excess application money adjusted on allotment = ₹ 20,000

(v) Money due from Giri on allotment:

Money due from on allotment (20,000 X ₹4) = ₹80,000

Less: Excess application money adjusted [as per (iii)] = ₹20,000

Money not paid by Giri = ₹60,000

(vi) Money received on allotment:

Total amount due on allotment (10,00,000 X ₹4) = ₹40,00,000

Less: Excess application money adjusted = ₹10,00,000

= ₹30,00,000

Less: Money not paid by Giri [as per (iv)] = ₹ 60,000

= ₹29,40,000
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Working Note-2

Calculation of amount transferred to Capital Reserve:

Amount forfeited on 10,000 shares [₹80,000 X 10/20] = ₹40,000

Less: Discount on re-issue = ₹20,000

Gain on re-issue transferred to Capital Reserve =₹20,000

Write short notes

4. Issue of shares at a premium

Answer:

Issue of Shares at a Premium [Section 52]

A company may issue shares at a premium, i.e., at a value greater than its face value. The power to
issue shares at a premium need not be given in the Articles of Association. Premium so received shall
be credited to a separate account called Securities PremiumAccount.

Section 52 of the Companies Act, 2013 gives the purposes for which share premium account may be
applied by the company.

These are:
1. For the issue of fully paid bonus shares to the members of the company;
2. For writing off preliminary expenses of the company;
3. For writing off the expenses of the commission paid or discount allowed on any issue of
shares or debentures of the company; and
4. For providing premium payable on the redemption of any redeemable preference
shares or debentures of the company.
5. For the purchase of its own shares or other securities u/s 68.

State whether the following statements are True or False:

5. Capital Reserve is a Reserve which is available for distribution as Dividend.

Answer: F

6. The profit on forfeiture and re-issue of equity shares are credited to Capital Redemption
Reserve.

Answer: False

5. Write short note on

Differences between Shares & Debentures

Answer:
Difference between Shares & Debentures:

SHARES DEBENTURES
Definition An instrument to acknowledge An instrument to acknowledge
the ownership of the company. the creditors of the company.
Status A shareholder is the owner and a A debenture holder is not a
member of the company. member but a
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 creditor.

Return A shareholder may receive A debenture holder has a

dividend only when a company rightto interest even if the
makes a profit. company
does not make profit.
Rate Oof Dividend rate can vary depending Debenture carries a fixed rate
return on the profit position. of
interest.
Accounting Dividend is given out of appropriate Debenture interest is
Treatment profit and not chargeable to chargeableto Profit and Loss
Profit Account.
& Loss Account.
Redemption In case of shares, the concept of Debentures are normally
redemption does not apply. redeemable although a company
However, as per the recent can issue perpetual debentures.
changes in the Companies Act, a
company can buy back shares in
accordance with the provisions in
the Act.
Voting A shareholder has voting rights. A debenture holder can't have
rights voting rights.
Status at At the time of winding up, At the time of winding up,
the time of shareholders have the least debenture holders have a
winding up priority regarding the return of priority over the shareholders
amount due to them. regarding the return of amount
due to them.
6. Write short notes on
Forfeiture of Shares vis-à-vis reissue of Forfeited Shares
Answer:
When a shareholder fails to pay calls, the company, if empowered by its articles, may forfeit the
shares. If a shareholder has not paid any call on the day fixed for payment thereof andfails to pay
it even after his attention is drawn to it by the secretary by registered notice, the Board of
Directors pass a resolution to the effect that such shares be forfeited. Shares once forfeited
become the property of the company and may be sold on such terms as directors think fit. Upon
forfeiture, the original shareholder ceases to be a member and his name must be removed from the
register of members.
Forfeited shares may be reissued by the company directors for any amount but if such shares are
issued at a discount then the amount of discount should not exceed the actual amount received on
forfeited shares. The purchaser of forfeited reissued shares is liable for payment of all future calls
duly made by the Company.

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Write short note

7. Sweat Equity Shares

Answer:

Notwithstanding anything contained in section 53, a company may issue sweat equity shares
of a class of shares already issued, if the following conditions are fulfilled, namely: —
(a) the issue is authorised by a special resolution passed by the company;
(b) the resolution specifies the number of shares, the current market price, consideration, if
any, and the class or classes of directors or employees to whom such equity shares are to be
issued;
(c) not less than one year has, at the date of such issue, elapsed since the date on which the
company had commenced business; and
(d) where the equity shares of the company are listed on a recognised stock exchange, the sweat
equity shares are issued in accordance with the regulations made by the Securities and
Exchange Board in this behalf and if they are not solisted, the sweat equity shares are issued
in accordance with such rules as maybe prescribed.
The rights, limitations, restrictions and provisions as are for the time being applicable to
equity shares shall be applicable to the sweat equity shares issued under this section and the
holders of such shares shall rank pari passu with other equity shareholders.
Where the sweat equity shares are issued for a non-cash consideration, such non- cash
consideration shall be treated in the following manner in the books of account of the
company: -
(a) where the non-cash consideration takes the form of a depreciable or amortizable asset, it
shall be carried to the balance sheet of the company in accordance with the relevant
accounting standards; or
(b) where clause (a) is not applicable, it shall be expensed as provided in the relevant accounting
standards.

Bonus Issue of Shares

Bonus shares are shares which are issued by a company free of cost to its existing members on a pro-
rata basis. Established companies that have already built-up reserves sometimes decides to capitalize a
part of these reserves by issuing bonus shares to existing shareholders, without requiring the
shareholders to pay any consideration.
Since bonus shares requires capitalization of reserves, it leads to decrease in Reserve & Surplus and
increase in the issued capital but does not bring any change in cash flow and net worth.
➢ Ways to capitalize profits or reserves
a. by paying up amounts unpaid on existing partly paid shares so as to make them fully paid-up
shares, or
b. by issuing fully paid bonus shares to the existing members.
➢ Companies Act, 2013 on Issue of Bonus Shares
As per Section 63 of the Companies Act, 2013, provisions relating to bonus issue are as follows:
(1) A company may issue fully paid-up bonus shares to its members, in any manner whatsoever, out
of —
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 (i) its free reserves;
(ii) the securities premium account; or
(iii) the capital redemption reserve account:
Provided that no issue of bonus shares shall be made by capitalising reserves created by the revaluation
of assets.
(2) No company shall capitalise its profits or reserves for the purpose of issuing fully paid-up
bonus shares under sub-section (1), unless—
(a) it is authorised by its articles;
(b) it has, on the recommendation of the Board, been authorised in the general meeting of the
company;
(c) it has not defaulted in payment of interest or principal in respect of fixed deposits or
debt securities issued by it;
(d) it has not defaulted in respect of the payment of statutory dues of the employees, such as,
contribution to provident fund, gratuity and bonus;
(e) the partly paid-up shares, if any outstanding on the date of allotment, are made fully paid-
up;
(f) it complies with such conditions as may be prescribed.
(3) The bonus shares shall not be issued in lieu of dividend.

➢ SEBI guidelines on issue of bonus issues

A listed company proposing to issue bonus shares shall comply with the following requirements:
1. The articles of association of the company must contain a provision for capitalisation of reserves,
etc. If there is no such provision in the articles the company must pass a resolution at its general
meeting making provision in the articles of association for capitalization;
2. The company has not defaulted in payment of interest or principal in respect of fixed deposits and
interest on existing debentures or principal on redemption;
3. The company has not defaulted in payment of statutory dues of the employees such as contribution
to provident fund, gratuity etc.
4. The partly-paid shares, if any, outstanding on the date of allotment are required to be made fully
paid-up.

5. (a) No company shall, pending conversion of FCDs/PCDs, issue any by way of bonus unless similar benefit
is extended to the holders of such FCDs/though reservation of shares in proportion to such
convertible part of FCDs or PCDs.

(b) The shares so reserved may be issued at the time of conversion(s) of such debentures on the same
terms on which the bonus issues were made.

6. The bonus issue shall be made out of free reserves built out of the genuine profits or securities
premium collected in cash.

7. Reserves created by revaluation of fixed assets shall not be capitalised.

8. The declaration of bonus issue, in lieu of dividend, shall not be made.

9. A company which announces its bonus issue after the approval of the Board of directors must
implement the proposal within a period of 15 days from the date of such approval (if
14
 Shareholders’ approval is not required) or 2 months (if Shareholders’ approval is required).

10. Once the decision to make a bonus issue is announced, the same cannot be withdrawn.

➢ Meaning of Free Reserves

As per Sec 2(43) of the Companies Act, 2013, “Free Reserves” mean such reserves which, as per the
latest audited balance sheet of a company, are available for distribution as dividend.

Thus, the following are excluded from free reserves:

a. Any amount representing unrealised gains, notional gains or revaluation of assets, where shown as
a reserve or otherwise, or

b. Any change in carrying amount of an asset or of a liability recognised in equity, including

surplus in Profit and Loss Account on measurement of the Asset or the Liability at Fair Value.

➢ Conversion of partly paid-up share to fully paid-up shares

A company may utilize its reserves to convert its partly paid shares into fully paid without asking the
shareholders to contribute further against the call money due. This may be termed as bonus dividend.

Unlike issue of fully paid bonus shares, the sources for bonus dividend shall be, however, free reserves
only as Section 52 of Companies Act, 2013 allows utilization of ‘Securities Premium’ for issuing fully
paid bonus shares only. Similarly, Section 55(4) of the Act prohibits the use of ‘Capital Redemption
Reserve’ for purposes other than issue of fully paid-up bonus shares.

Note: Capital Reserve realized in cash can be a source of bonus dividend as well as issue of fully paid-
up bonus shares.

➢ Accounting for Bonus Issue

The accounting entries for issue of rights shares will be as follows

a. Conversion of partly paid-up share to fully paid-up shares by bonus dividend

(i) On declaration of bonus
Free Reserves A/c ............................................ Dr.
To Bonus to Shareholders A/c

(II) On making final call

Share Final Call A/c .....................................Dr.

To Share Capital A/c

(III) On adjustment of final call

Bonus to Shareholders A/c .......................... Dr.

To Share Final Call A/c

b. Issue of fully paid-up bonus shares

(i) On declaration of bonus

Capital Redemption Reserves A/c .......................................... Dr.

Securities Premium A/c.............................................................. Dr.

15
 Free Reserves A/c ...................................................................... Dr.

To Bonus to Shareholders A/c

(ii) On issue of fully paid-up bonus shares

Bonus to Shareholders A/c ............................ Dr.

To Share Capital A/c

To Securities Premium A/c (if any)

QUESTIONS

State whether the following statements are True or False:

1. Issue of fully paid up bonus shares increases the total shareholders fund.
Answer: F

2. Following is the extract of the Balance Sheet of Xeta Ltd. As at 31st March, 2017:

Authorized 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.

Answer:

Journal Entries in the books of Xeta Ltd.

Rs. Rs.
1-04-17 Equity share final call A/c Dr. 5,40,000
To Equity share capital A/c 5,40,000
(For final calls of Rs.2per share on 2,70,000 equity
shares due as per Board’s Resolution dated…)
20-04-17 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

16
 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)

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.10each were issued by way of
bonus)
Reserves and surplus
Profit and Loss Account 3,85,000
State whether the following statements are True or False:

3. Transfer to Capital redemption reserve account is not allowed from Dividend

Equalization Fund.
Answer: False

Rights Issue of Shares

The term ‘rights issue’ has not been defined in the Companies Act, 2013. As per Regulation 2(1) (zg) of SEBI
(Issue of Capital and Disclosure Requirements), 2009, “rights issue” means an offer of specified
securities by a listed issuer to the shareholders of the issuer as on the record date fixed for the said
purpose. The provisions relating to issue of rights shares are, however, covered in Section 62(1)(a) of the
Companies Act, 2013.

Accordingly, where at any time, a company having a share capital proposes to increase its subscribed
capital by the issue of further shares, such shares shall be offered to persons who, at the date of the
offer, are holders of equity shares of the company in proportion, as nearly as circumstances admit, to
the paid-up share capital on those shares by sending a letter of offer.

Such issue of shares shall be done subject to the following conditions:

a. the offer shall be made by notice specifying the number of shares offered;

b. The time limit shall be not less than 15 days and shall be not exceeding thirty days from the date
of the offer within which the offer;

c. unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to

17
 include a right exercisable by the person concerned to renounce the shares offered to him or any
of them in favor of any other person;

d. after the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation
from the person to whom such notice is given that he declines to accept the shares offered, the
Board of Directors may dispose of them in such manner which is not dis-advantageous to the
shareholders and the company.

➢ Valuation of Rights

Usually, a company offers rights issue at a price which is lower than the market price of the shares so
that existing (i.e., old) shareholders may get the monetary benefit of being associated with the
company for a long time. Existing shareholders who have been offered right shares and do not want to
purchase these offered shares may renounce their right shares in favour of some other persons within
the specified period as mentioned earlier. In such a case, the existing shareholders can make a profit by
selling his right to such other person. This right can be valued in terms of money as below:

(a) Calculate the market value of shares which an existing shareholder is required to have in
order to get fresh shares.

(b) Add to the above price paid for the fresh shares.

(c) Find out the average price of existing shares and fresh shares.

(d) The average price of the share should be deducted from the market price and the difference
thus ascertained is value of right.

➢ Accounting for Rights Issue

The accounting entries for issue of rights shares will be as follows:

(i) On receipt of application money

Bank A/c............................................ Dr.

To Share Application A/c

(ii) On allotment of shares

Share Application A/c.............................. Dr.

To Share Capital A/c (Face Value x no. of shares allotted)

To Securities Premium A/c (Premium x no. of shares allotted)

QUESTIONS

1. Write short note

Right Issue of Shares
Answer:
Right Issue of Shares
Where at any time, a company having a share capital proposes to increase its subscribed capital
by the issue of further shares, such shares shall be offered to persons who, at the date of the
offer, are holders of equity shares of the company in proportion, as nearly as circumstances
admit, to the paid-up share capital on those shares by sending a letter of offer subject to the
following conditions, namely: —
(i) the offer shall be made by notice specifying the number of shares offered and limiting a
time not being less than fifteen days and not exceeding thirty days from the date of the
offer within which the offer, if not accepted, shall be deemed tohave been declined;

18
 (ii) unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to
include a right exercisable by the person concerned to renounce theshares offered to him
or any of them in favor of any other person; and the notice referred to in clause (i) shall
contain a statement of this right;
(iii) after the expiry of the time specified in the notice aforesaid, or on receipt of earlier
intimation from the person to whom such notice is given that he declines to accept the
shares offered, the Board of Directors may dispose of them in such manner which is not
disadvantageous to the shareholders and the company.

Buy-back of securities
In case of companies, equity shares represent the share of ownership of net worth and hence are
supposed to be perpetual. However, over time this basic feature of equity shares has also been changed.
Companies, across the globe are now allowed to return back the equity shares subject to certain conditions
specified in the relevant statutes. This process is known as buy-back of equity shares. Technically, it is a
means of capital restructuring.

A company may buy-back its equity shares at par or at a premium or even at a discount. However, in most
of the cases, buy-backs are found to be made at premium. Hence, in such cases, buy-back involves
‘payment of capital’ as well as ‘payment of premium’.

➢ Accounting for Buy-back

I. Important Issues relating to accounting of buy-back

a. Sources for payment on buy-back

The sources for payment of capital on buy-back are –

a. Its free reserves, or

b. The securities premium account, or

c. The proceeds of any shares or other specified securities like employees’ stock option

The sources for payment of premium on buy-back are –

a. Securities Premium Account; or

b. Other Free Reserves

Note: ‘Free Reserves’ include Surplus of Statement of Profit and Loss, General Reserve, Reserve Fund,
Dividend Equalization Reserve, Capital reserve (if realized) and free portion of Workmen Compensation fund
etc. Hence, it does not include Securities Premium, Capital reserve (unrealized), Reevaluation reserve,
Capital redemption Reserve and any other statutory reserve.

Note: Companies that do not have adequate reserves may buy-back shares or other specified securities
by making fresh issue of shares for this purpose. The fresh issue may be of equity shares or of preference
shares. However, buy-back of any kind of shares or other specified securities shall not be made out of
the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.

b. Determination of quantum for buy-back. Sec. 68 of Company Act, 2013

The maximum number of shares to be bought back is determined as the least number of shares arrived
by performing the following tests:

(1) Share outstanding test

19
 (2) Resource test
(3) Debt-Equity Ratio test.
The tests are discussed below:
(1) Share Outstanding test:
(a) Ascertain the number of shares
(b) 25% of the number of shares is eligible for buy back with the approval of shareholders.
(2) Resource test:
(a) Ascertain shareholders’ fund (Aggregate Paid-up Capital + Free Reserves)
(b) No. of shares held for buyback = Shareholders funds/ Buy-back price
The number of shares to be bought back should be such that the debt-equity ratio does
not exceed 2:1.
The number of shares to be bought-back will be the least of the above three.
II. Accounting Entries for Buy-back
(i) Due entry for buy-back
Share Capital A/c ....................................... Dr.
Premium on Buy-back A/c .......................... Dr. (if at premium)
To Shareholders A/c
To Gain on Buy-back A/c (if at discount)
(ii) Payment made for buy-back
Shareholders A/c ............................................ Dr.
To Bank A/c
(iii) Provision for premium on buy-back
Securities Premium A/c ............................... ... Dr. Free Reserves A/c Dr.
To Premium on Buy-back A/c
(iv) Transfer of gain on buy-back (if any)
Gain on Buy-back A/c................................. Dr.
To Capital Reserve A/c
(v) Transfer to Capital Redemption Reserve
Securities Premium A/c ............................... ... Dr. Free Reserves A/c Dr.
To Capital Redemption Reserve A/c
(vi) Expenses on Buy-back
Expenses on Buy-back A/c ........................ Dr.
To Bank A/c
(vii) Transfer of expense on buy-back
Profit and Loss A/c .............................. Dr.
To Expenses on Buy-back A/c

QUESTIONS

1. State whether the following statements are True or False:

As per Companies Act 2013, companies are not permitted to buy back their own shares out of
securities premium.

20
Answer: False

2. R Ltd. wants to buy-back 100000 equity shares of ₹ 10 each at a price of ₹ 20 each on

01.04.2017. The buy-back is allowed in its articles of association and the company has
obtained necessary approval from the shareholders. The company has sufficient bank
balance to make the payment for buy-back of shares.

The following information is available as on 31.03.2017:

Equity Share Capital (₹ 10 each fully paid) 50,00,000

General Reserve 60,00,000
Dividend Equalization 10,00,000
Reserve Balance of Profit 5,00,000
and Loss (Cr.) 10% 75,00,000
Debentures (₹ 100 each) 40,00,000
Bank Loan 66,00,000
Current Liabilities

Verify whether the buy-back plan of the company meets the conditions specified by the
Companies Act 2013 as regards to the maximum amount of buy-back. Also pass necessary journal
entries in the books of the company to give effect of the process, if the plan is found to be in
place.

Answer:

3. Determination of maximum buyback permissible as per Companies Act 2013:

Shares Outstanding Test: Max. Permissible Limit = 25% of Outstanding Shares

Particulars
Total number of shares outstanding 500000
25% of the shares outstanding 125000
Resource Test: Max. Permissible Limit = 25% of Paid up Capital plus Free Reserves

Particulars
Equity share capital (₹) 50,00,000
Free Reserve (₹) (General Reserve + DER +P/L) 75,00,000
Paid up Capital plus Free Reserves (₹) 125,00,000
25% of Paid up Capital plus Free Reserves (₹) 31,25,000
Buy back price per share (₹) 20
No. of shares that can be bought back (31,25,000/20) 1,56,250
Debt Equity Ratio Test: Debt after buyback cannot exceed twice the paid-up capital plus
free reserves.
Particulars
Total Debt (₹) (7500000+4000000+6600000) 181,00,000
Minimum Equity to be maintained after buyback in the ratio 2:1 (₹) 90,50,000
Paid up capital plus free reserves before buyback (₹) 125,00,000
Future Paid up capital plus free reserves (₹) (see working note: 1) 113,50,000
(125,00,000 - 11,50,000)

21
 Maximum permissible buyback (₹) (113,50,000-90,50,000) 23,00,000
Buy back price per share (₹) 20
No. of shares that can be bought back 1,15,000
Summary of three test results:
No. of Shares
Permissible Buyback as per -
Share Outstanding Test 125000
Resource Test 156250
Debt-Equity Ratio Test 115000
Maximum permissible buyback (least of the three) 115000
Actual buyback plan 100000

Since actual buyback proposed is below the permissible limit, the company can buy back
100000 shares at ₹ 20 each.

Working Note 1:

In case buyback of shares is done out of free reserves and securities premium, a company is
required transfer a sum equal to the nominal value of the share’s buyback to Capital Redemption
Reserve A/C. Thus shareholders' fund after buyback includes CRR. Now CRR is not a free reserve.
Hence it cannot form part of paid up capital plus free reserve after buyback.

Let nominal value of shares bought back is x. Then CRR after buyback is x. Moreover, total premium
on buyback = x (₹ 10 face value and ₹20 buyback price, so premium on buyback ₹ 10). So total
amount to be deducted from shareholders' fund for buyback = x (capital) +x (premium) = 2x.
Moreover, free reserves to be reduced by x.

Total paid up capital plus free reserves after buyback = 125,00,000 – x (i.e. CRR) – 2x (i.e. buyback
proceeds)

Conditionally, 125,00,000 - x - 2x = 90,50,000, or, x = 11,50,000Nominal value of buyback = 11,50,000 (i.e.

CRR)

Journal
Date Particular Dr. (₹) Cr. (₹)
1.4.2017 Equity Share Buyback A/c Dr. 20,00,000
To Bank A/c 20,00,000
(Being buyback of 100000 shares of ₹ 10 each
at
₹20 per share.)
1.4.2017 Equity Share Capital A/c Dr. 10,00,000
General Reserve A/c 10,00,000
To Equity Share Buyback A/c 20,00,000
(Being cancellation of shares bought back and
premium on buyback provided out of General
Reserve)

22
 1.4.2017 General Reserve A/c Dr. 10,00,000
To Capital redemption Reserve A/c 10,00,000
(Being nominal value of shares bought back
transferred to CRR)

4. State whether the following statements are True or False:

As per Companies Act 2013, companies are not permitted to buy back their own shares out of
securities premium.

Answer: False

5. Any surplus cash may be utilized by the company for buy-back and avoid the payment of
dividend tax.
Answer: True

6. On 01.01.2017 Jay Ltd. had 2,000, 12% Debentures of ₹ 100 each. On 01.05.2017 the
company purchased 400 own Debentures at ₹ 97 cum-interest in the open market.
Interest on debentures is payable on 30th June and 31st December each year.

Required: Give the necessary journal entries assuming that the own Debentures purchased were
retained as investments till 31.12.2017, on which date they were cancelled.

Assume that the company follows English Calendar Year

Journal of Jay Ltd.
Date Particulars L.F. Dr. (₹) Cr. (₹)
May01 Own Debentures A/c Dr. 37,200
Interest on Own Dr. 1,600
Debenture A/cTo 38,800
Bank A/c
(Being the purchase of 400 debentures @
₹97 cum- interest)
June Debentures Interest A/c Dr. 12,000
30 To Interest on Own 2,400
Debentures A/cTo Bank A/c 9,600
(Being the interest paid/credited on
₹2,00,000
debentures held by outsiders and by the
companyown debentures for 2 months)
Dec.31 Debentures Dr. 12,000
Interest A/c 9,600
To Bank A/c 2,400
To Interest on Own Debentures A/c
(Being the interest paid / credited on
₹1,60,000debentures held by outsiders and
₹40,000 own
debentures for six months)
23
 Dec.31 Profit and Loss A/c Dr. 24,000
To Debenture Interest A/c 24,000
(Being the transfer of debenture interest to
P&L A/c)
Dec.31 Interest on Own Dr. 3,200
Debentures A/cTo 3,200
Profit & Loss A/c
(Being the transfer of interest on own
debentures toP&L A/c)
Dec.31 12% Debentures A/c Dr. 40,000
To Own 37,200
Debentures A/c 2,800
To Capital
Reserve A/c
(Being the cancellation of 400 own
debentures)
Dec.31 Profit & Loss Appropriation A/c Dr. 37,200
To Debenture Redemption Reserve A/c 37,200
(Being the transfer of an amount equivalent
to thecash sum applied in redeeming the
debentures)

7. Write short note on

Advantages of buy-back of shares
Answer:

Buy-back of shares have the following advantages:

(i) A company with capital, which cannot be profitably employed, may get rid of it by
resorting to buy-back, and re-structure its capital.
(ii) Free reserves which are utilized for buy-back instead of dividend enhance the value
of the company's shares and improve earnings per share.
(iii) Surplus cash may be utilized by the company for buy-back and avoid the
payment of dividend tax.
(iv) Buy-back may be used as a weapon to frustrate any hostile take-over of the
company by undesirable persons.

State whether the following statements are True or False:

8. Buy-back of shares can also be made out of the proceeds of the earlier issues of the
same kind of shares.
Answer: False

Redemption of PreferenCe Shares

Introduction
Redeemable preference shares have a fixed term and hence are redeem at the end of such period. On
redemption the shareholders are repaid the capital that they had invested in those shares.
The redemption may occur either ‘at par’ or ‘at premium’. When the company repays an amount equal to

24
the face value or nominal value of the preference shares, it is called ‘redemption at par’. On the other
hand, when a company repays more than the face value or nominal value of the preference shares, it is
known as ‘redemption at premium’. Thus, under redemption at premium, the company makes payment for
(a) preference share capital as well as for (b) premium.

Important Points on Redemption of Preference Shares (Other than Deemed Redemption)

Based on the above provisions, the following important points can be noted:
a. Only fully paid-up preference shares can be redeemed. Partly paid-up preference shares
must be converted into fully paid-up by calling up the remaining instalment(s) before they can
be eligible for redemption.
b. The repayment of capital portion can be done out of two sources –
(i) Profits of the company (which would otherwise be available for dividend payment)
(ii) Proceeds of fresh issue of shares.
c. The premium on redemption, if any, shall be provided as follows:
(i) In case of the prescribed class of companies and whose financial statements comply with
the accounting standards prescribed u/s 133 of the Companies Act, 2013 –
- If the preference shares were issued on or before 01.04.2014 (date of commencement of
the Companies Act, 2013), premium can be provided out of Securities Premium as well as out
of Profits of the Company.
- If the preference shares were issued after 01.04.2014, premium can be provided only out of
Profits of the Company.
(ii) For other companies, there can be two sources of premium i.e., Securities Premium and Profits
of the Company.

Note: For the purpose of payment of capital, the term ‘Profits of the Company which would otherwise
be available for dividend’ shall mean ‘free reserves’. Hence, Securities Premium, Revaluation Reserve,
Capital Reserve (unrealized) or any Statutory Reserve will not be eligible for this purpose. But free
portion of Investment Allowance Reserve, Development Rebate Reserve, Workmen Compensation Fund will
be allowed.
d. Companies may also issue fresh equity or preference shares for redemption of existing
preference shares. In such a case –
(i) If the shares are issued at par, proceeds from fresh issue = Nominal Value of shares;
(ii) If the shares are issued at premium, proceeds from fresh issue = Nominal Value of shares
(i.e., excluding premium on issue)
e. A sum equal to the nominal amount of the shares to be redeemed out of profits should be
transferred tom Capital Redemption Reserve (CRR). The balance of CRR so created shall only be
utilized for issue of fully paid-up bonus shares.

➢ Accounting for Redemption of Preference Shares

(i) On issue of new shares for the purpose of redemption
Bank A/c....................................... Dr.
To Equity Share Application A/c
(Being application money received on ... shares @ ` .. each)

------------------------------
Equity Share Application A/c ……Dr.
To Share Capital A/c
To Securities Premium A/c (if new shares are issued at premium)

25
 (Being the issue of... shares of ` ...each at a premium of ` ...each for the purpose of
redemption of preference shares as per Board’s Resolution No ... dated ...)
(ii) Redemption due entry
Redeemable Preference Share Capital A/c ............... Dr.
Premium on Redemption of Preference Shares A/c …Dr. (if redeemable at premium)
To Preference Shareholders A/c
(iii) When payment is made to preference shareholders
Redeemable Preference Shareholders A/c.......... Dr.
To Bank A/c

(iv) Adjustment of premium on redemption

Profit and Loss A/c ......................... Dr.
To Premium on Redemption of Preference Shares A/c
(Being the premium on redemption adjusted against profit and loss balance)
Note: In addition, the company may need to undertake transactions such as ‘sale of investment’ ‘sale of idle
assets’ etc. at profit or at loss. The effect of such transaction shall also be taken into consideration
while determining the required amount of fresh issue or profits to be transferred to CRR.

Issue and Redemption of Debentures

Share capital is the primary source of finance for every company. However, companies are often found
to raise debt capital for additional financing requirement. A company raises the debt capital either
through institutional financing i.e., loans from banks and other financial institutions or may issue
structured debt instruments (such as debentures and bonds). Debentures happens to be the most
popular debt instruments issued by a company to raise borrowed capital.

As per Section 2(30) of the Companies Act, 2013, “debenture” includes debenture stock, bonds or any
other instrument of a company evidencing a debt, whether constituting a charge on the assets of the
company or not.

Following are the features of debentures as a debt instrument.

a. Debenture is a financial instrument used to raise debt capital.

b. It is written document issued under the seal of the company.

c. It normally carries a rate of interest payable at regular interval. Such rate is

termed as coupon rate.

d. Debenture may be redeemable or irredeemable.

➢ Types of Debentures

The various types of debentures are shown in the following

a. Redeemable vs. Irredeemable Debentures

Redeemable Debentures are debentures that are repayable by a company at the end of
the pre-specified time period. Irredeemable debentures are not repayable during the
life-time of the company.

b. Secured vs. Unsecured Debentures

Secured Debentures are those debentures which create a charge on the assets of the company. These are
26
also called Mortgage Debentures. Unsecured debentures are issued without the support of a collateral
security. These are also called Naked Debentures.

c. Convertible vs. Non-convertible Debentures

Debentures which are convertible into other securities viz. equity shares, preference shares or new
debentures after a specified period are referred to as Convertible Debentures. They may fully
convertible or partly convertible. On the other hand, Debentures which are not convertible into any
other security are referred to as Non-convertible Debentures.

Note: In all the above cases, the debentures may be issued at par or at premium or at discount to the
issue price.

Accounting for Issue of Debentures – General Cases

Debentures can be issued at par or at premium or at discount. Moreover, the money can be
collected in lump- sum or in instalments. The accounting entries for issue of debentures are as
follows:

a. Debentures issued in lump sum

(i) On receipt of application money

Bank A/c ............................................................................ Dr.

To Debenture Application A/c

(ii) For excess debenture application money refunded

Debenture Application A/c ................................................... Dr.

To Bank A/c

(iii) On allotment of debentures

Debenture Application A/c ........................................................ Dr.

Discount on Issue of Debentures A/c .....................................Dr. (if issued at discount)

To Debentures A/c

To Securities Premium A/c (if issued at premium)

b. Debentures issued in instalments

(i) On receipt of application money

Bank A/c ............................................................................ Dr.

To Debenture Application A/c

(ii) For excess debenture application money refunded

Debenture Application A/c ................................................... Dr.

To Bank A/c

(iii) For debenture application money transferred to share capital

Debenture Application A/c ........................................................ Dr.

To Share Capital A/c

(iv) For debenture allotment money due

27
 Debenture Allotment A/c ........................................................... Dr.

Discount on Issue of Debentures A/c .....................................Dr. (if issued at discount)

To Debenture Capital A/c

To Securities Premium A/c (if issued at premium)

(v) For debenture allotment money received

Bank A/c ............................................................................ Dr.

To Debenture Allotment A/c

(vi) For debenture call money due

Debenture Call A/c............................................................. Dr.

To Share Capital A/c

(vii) For debenture call money received

Bank A/c ......................................................................... Dr.

To Debenture Call A/c

Note: In case of issue of debentures at discount, the Discount will always be accounted in allotment.
However, premium will be accounted with the instalment in which it is included. If nothing is mentioned
specifically, it is accounted with allotment money.
Note: The premium on issue of debenture is included in Securities Premium A/c and the same
is reflected under Reserve and Surplus in the Balance Sheet. The discount on issue of
debentures is amortized over the life of the debentures on a proportionate basis.
Accordingly, the amount amortized during the year is shown under Depreciation and
Amortization in the Statement of Profit and Loss. The remaining amount is shown in the
assets section of the Balance Sheet. The portion to be amortized over next 12 months is
included in Other Current Assets while the portion that will not be amortized over next 12
months is shown in Other Non-current Assets.

Accounting for Issue of Debentures – Special Cases

I. When terms of redemption are known and debentures are redeemable at premium

In this case the premium payable on redemption may be provided at the time of issue itself, by passing
the following additional entry –

Loss on Issue of debentures A/c… .............................................. Dr.

To Premium on Redemption of Debentures A/c

Students may pass a combined entry at the time of allotment to record the above. Consider the
following alternative situations (other entries remain the same).
Situation Combined entry on
allotment
Issue at par, Debenture Application A/c.......... Dr.
redemption at Loss on Issue of debentures A/c… ... Dr.
premium
To Debentures A/c
To Premium on Redemption of Debentures A/c
28
 Issue at premium, Debenture Application A/c.......... Dr.
redemption at Loss on Issue of debentures A/c… ... Dr.
premium
To Debentures A/c
To Securities Premium A/c
To Premium on Redemption of Debentures A/c
Issue at discount, Debenture Application A/c.............................. Dr.
redemption at Loss on Issue of Debentures A/c ........... Dr.
premium
To Debentures A/c
To Premium on Redemption of Debentures A/c
Note: Here, Loss on Issue of Debentures A/c includes both
discount on issue
of debentures and premium on redemption of debentures

II. Issue of Debenture for Consideration other than Cash

Debentures may also be issued for consideration other than cash. Examples include allotment of
debentures for purchase of asset or for technical services received. The accounting entries in
such a case will be as follows:

(i) On purchase of assets

Sundry Assets A/c ..................................Dr.

To Vendor A/c

(ii) On issue of debentures

Vendor A/c ................................................... Dr.

Discount on Issue of Debentures A/c ...................... Dr. (if issued at discount)

To Debenture Capital A/c

To Securities Premium A/c (if issued at premium)

III. Debentures Issued as Collateral Security

The term ‘collateral’ means additional or secondary. When debentures are issued as additional
security against a loan (for which there exists a primary security) it is called issue of debentures as
collateral security. This type of issue is generally made when the lender feels that the primary security
is inadequate. The borrower company, however, is not required to pay any interest on the debenture
which are issued as collateral security. On full repayment of the loan, the debentures issued as
collateral security are returned by the lender. However, if the company fails to repay the loan, the
lender exercises its right on the debentures issued as collateral security.

Debentures issued as a collateral security can be dealt with in two ways in the books:

a. First Method

No entry is made in the books. On the liability side of the balance sheet below the item of loan a note
that it has been secured by the issue of debentures is to be given.

b. Second method

Sometimes issue of debentures as collateral security is recorded by making a journal entry as

29
 follows:

Debenture Suspense A/c..................................... Dr.

To Debenture A/c

Note: Debenture Suspense A/c is shown as a deduction from Debenture A/c in the balance sheet. When
the loan is paid the above entry is cancelled by means of a reverse entry.

IV. Interest on Debentures

The periodical interest paid on debentures is included in the Finance Cost in the Statement of Profit
and Loss as it is a charge against profit. The accounting entries are:

(i) On payment of interest

Interest A/c ................................................. Dr.

To Bank A/c

(ii) On issue of debentures

Profit and Loss A/c ................................................................ Dr.

To Interest A/c

Note: When the due dates for payment of debenture interest does not match with the accounting period,
the following two concepts emerge:

(1) Debenture interest accrued and due: The portion of the total amount of debenture interest for
which due date(s) has/have fallen within the accounting period is referred to as ‘Debenture interest
accrued and due; and

(2) Debenture interest accrued but not due: The portion of the total amount of debenture interest
that has arisen but for which due date(s) has/have not fallen within the accounting period is
referred to as ‘Debenture interest accrued but not due’.

In the Balance Sheet, both ‘Debenture interest accrued and due’ as well as ‘Debenture interest accrued
but not due’ are shown under ‘Other current liabilities’.
QUESTIONS

8. When debentures are issued at discount, it is prudent to write off the loss during the
life of debentures.

Answer: True

9. Rollover must be with the written consent of the debenture holders.

Answer: False

Underwriting of Securities
Underwriting of securities is an agreement, entered into by a company (issuing the security) with a
financial agency to ensure that the entire issue of securities (shares, debentures etc.) gets fully
subscribed. The concerned financial agency is known as ‘underwriter’. The underwriters provide their
services against certain fees known as ‘underwriting commission’.

➢ Types of Underwriting

Underwriting agreements can be classified into various types on different basis. These are:

I. Based on the extent of underwriting

30
Based on the extent, underwriting can be of two types – full underwriting and partial underwriting.
II. Based on the number of underwriters

Based on the number of underwriters involved, underwriting can be of two types – single underwriting and
multiple underwriting.
III.Based on the Degree of Commitment

Based on the commitment of underwriters, underwriting can be of two types – firm underwriting and
regular underwriting.

➢ Marked vs. Unmarked Applications

‘Marked’ applications are those applications which bear the stamp of an underwriter. If the issue is not
fully subscribed, ‘marked’ applications shall be applied in reduction of underwriter’s liability.

The ‘unmarked’ applications are those applications which bear no stamp of an underwriter. These applications
are received by the company directly from the public. The distinction between marked and unmarked
applications becomes immaterial when the whole issue is subscribed by only one underwriter. When there
is more than one underwriter, the unmarked applications are divided amongst underwriters. Again, when
the issue is fully subscribed, the distinction between marked and unmarked applications becomes
immaterial.

➢ Underwriter’s Liability

The liability of an underwriter is the number of securities that has to be taken up by him. This liability
may be of two types - Gross Liability and Net Liability.
Gross Liability refers to the total commitment of the underwriter as per the underwriting agreement.

Net Liability = Gross Liability - (Marked applications + Proportion of Unmarked applications for which the
underwriter has been given credit).

Underwriting commission is calculated on their total commitment, also known as gross liability, based on
the issue price of the securities to the public. Accordingly,

Underwriting Commission = [Gross Liability (in no.) x Issue Price per security] x Rate of Commission.

the rate of commission paid or agreed to be paid shall not exceed, in case of shares, five percent of the
price at which the shares are issued or a rate authorised by the articles, whichever is less, and in case of
debentures, shall not exceed two and a half per cent of the price at which the debentures are issued, or
as specified in the company’s articles, whichever is less;

➢ Determination of Underwriter’s Liability

The determination of liability of an underwriter in an issue of securities depend on the extent of

underwriting arrangement i.e., whether the issue is underwritten in full or in part and the number of
underwriters involved – single or multiple.

I. When the Issue is Fully Underwritten by a Single Underwriter

Here, the underwriter is responsible for 100% of the unsubscribed issue. Since, the entire issue is
underwritten by him, the distinction between marked and unmarked applications is irrelevant here.
Further, the concept of firm underwriting is also not relevant in this case.
Underwriter’s liability is simply calculated as follows:

Underwriter’s liability = No. of Shares Issued (-) No. of shares subscribed by the public.

31
II. When the Issue is Fully Underwritten by Multiple Underwriters

Under this situation, the underwriters are jointly responsible for subscription of 100% of the issue size.
Thus, individual uunderwriters are given credits for respective marked applications. The unmarked
applications are shared between all the underwriters. The sharing is normally done in proportion of their
‘Gross Liability’. However, if the underwriting arrangement so provides, the same can be shared based on
‘Gross Liability (-) Marked Application’ also.

Thus, the distinction between marked applications and unmarked applications becomes relevant here.

Treatment of Firm Underwriting: The treatment of Firm Underwriting becomes significant as the
underwriter must take up the number of securities underwritten ‘firm’ irrespective of its liability under the
regular underwriting agreement.

For determining the liability of the underwriters, the shares underwritten firm may be treated in either
of the
following two ways:

(a) Firm underwriting treated as Marked applications: Here, the benefit of firm underwriting is
given to each individual underwriter i.e., number of shares underwritten firm is deducted from
each underwriter’s respective liability; or

(b) Firm underwriting is treated as Unmarked applications: Here, the benefit is given to all
underwriters in the ratio of Gross Liability.

Note: Students should note that unless otherwise stated, firm underwriting should preferably be
treated as either ‘Marked applications’ or ‘Unmarked applications’ by stating the assumption clearly.

Thus, Underwriter’s Liability is finally calculated as –

Underwriter’s liability = Gross Liability (-) No. of Marked applications (-) Shares of Unmarked
applications (+) Firm Underwriting.

III. When the Issue is Partially Underwritten by a Single Underwriter

In this situation, the concerned underwriter shall be responsible only for the agreed portion of the
total issue. For the balance portion of the issue, the company itself shall be responsible.
The liability of the underwriter will be determined in the following manner:
Step 1: Gross Liability = Total Issue Size x % of underwriting
Step 2: No. of shares unsubscribed = Total no. of shares offered (–) No. of shares subscribed (including
marked applications)
Step 3: Deficit of the underwriter = Gross Liability (-) Marked Applications Note: the deficit can never
be negative
Step 4: Net Liability = Step 2 or Step 3 – whichever is lower.
Treatment of Firm Underwriting: In case the underwriter has underwritten ‘firm’, the liability of the
underwriter should be determined by adding the number of shares underwritten ‘firm’ to the ‘Net
Liability under the underwriting contract’ mentioned above.
In this context, there can be two possibilities as follows:
(i) No abatement is allowed for the shares taken up ‘firm’: This means that the shares underwritten
‘firm’ will not be adjusted against ‘Net Liability under the underwriting contract’ and the underwriter
will have to subscribe them additionally. Therefore, here, number of shares to be taken up by the
underwriter = ‘Net Liability under the underwriting contract’ + Firm Underwriting.
(ii) Abatement is allowed for the shares taken up ‘firm’: This means that the shares underwritten ‘firm’
32
 will be adjusted against ‘Net Liability under the underwriting contract’. Hence, in this case, number of
shares to be taken up by the underwriter = ‘Net Liability under the underwriting contract’ or Firm
Underwriting – whichever is higher.

➢ Accounting for Underwriting

Following are the accounting entries required for underwriting transactions.

Particulars Journal Remarks

Entries
For shares Underwriters A/c .....Dr. Issue Price
taken up by To Share Capital A/c Face Value
the To Securities Premium A/c Premium on issue
underwriters
Underwriti Underwriting Commission A/c …..Dr. Commission payable
ng To Underwriters A/c
commission
Final Bank A/c .................................... Dr. Difference between Net liability
Settlement Underwriters under underwriting contract and
A/c Or commission payable.
Underwriters A/c… .................. Dr.
To Bank A/c
Note: Underwriting commission written off during the year will be included in Finance Cost in the
Statement of Profit and Loss. The portion of underwriting commission yet to be written off will appear
in the balance sheet as follows –
(i) The portion to be written off within 12 months will be shown in Other Current Assets;
(ii) The portion to be written off after 12 months will be shown in Other Non-Current Assets. The
details of each underwriting contract should be disclosed in the Notes to Accounts.

PROBLEMS

1. In case of an underwriting arrangement, marked applications are those applications that

bear the stamp of the issuing company.
Answer: False

2. A joint stock company resolved to issue 5 lakh equity shares of `10 each at a premium of ₹1
per share. 50000 of these shares were taken up by the directors and their relatives, the entire
amount being received forthwith. The remaining shares were offered to the public, the entire
amount being asked for with applications.
The issue was underwritten by P, Q and R for a commission of 2% of the issue price. 65% of the
issue was underwritten by P, while Q and R's share were 25% and 10% respectively.

Their firm underwriting was as follows:

33
P 15000 shares, Q 10000 shares and R 5000 shares. The underwriters were to submit unmarked
applications for shares underwritten firm with full application money along with the members of
the general public.

Marked applications were as follows:

P 59750 shares, Q 28750 shares and R 5250 shares. Unmarked applications totaled 350000
shares.

Accounts with the underwriters were promptly settled.

You are required to prepare a statement calculating liability of the Underwriters for shares
other than shares underwritten Firm and also calculate the amount due from/to the Underwriters.

Answer:

Total number of shares issued = 5,00,000

Less: Shares taken by the directors etc. 50,000
Shares offered to public 4,50,000

Calculation of underwriters' liability

Particulars P Q R
Gross liability (65:25:10) 2,92,500 1,12,500 45,000
(-) Marked application 59,750 28,750 5,250
2,32,750 83,750 39,750
(-) Unmarked application in the ratio of gross liability 2,27,500 87,500 35,000
Resultant liability (or surplus) 5,250 (3,750) 4,750
(-)Surplus of Q allocated to P and R in the ratio of 3,250 3,750 500
65:10
Net liability 2,000 Nil 4,250

Workings: Calculation of amount due from/to underwriters

Particulars P Q R
No. of shares to be subscribed as per agreement (exc. 2,000 Nil 4,250
Firm)
Amount payable @ ₹ 11 22,000 Nil 46,750
Underwriting commission @2 %
P: (292500×11×2%) 64,350
Q: (112500×11×2%) 24,750
R: (45000×11×2%) 9,900
Amount (paid) / received (42,350) (24,750) 36,850
State whether the following statements are True or False:
Marked applications are those applications which bear the stamp of an underwriter.
34
 Answer: True

In order to spread the risk of under-subscription, the principal underwriters may enter into
subsidiary agreements with sub-leases.

Answer: False

3. A company issued 1,50,000 shares of ₹10 each at a premium of ₹10. The entire
issue was underwritten as follows:
(Underwriting of shares and debentures)
A - 90000 shares (Firm underwriting 12000 shares)
B - 37500 shares (Firm underwriting 4500 shares)

C - 22500 shares (Firm underwriting 15000 shares)

Total applications received by the company (excluding firm underwriting and marked
applications) were 22500 shares.

The marked applications (excluding firm underwriting) were as follows: A - 15000 shares;
B - 30000 shares; C - 7500 shares

Commission payable to underwriters is at 5% of the issue price. The underwriting contract

provides that credit for unmarked applications be given to the underwriters in proportion to the
shares underwritten and benefit of firm underwriting is to be given to individual underwriters.

a. Determine the liability of each underwriter (number of shares)

b. Compute the amount payable or due to underwriters.
Answer:

Computation of Underwriters' Liability (Number of Shares)

Particulars A B C
Gross Liability 90,000 37,500 22,500
Less: Marked applications (15,000) (30,000) (7,500)
Less: Unmarked applications in the ratio (13,500) (5,625) (3,375)
of
(90:37.5:22.5)
Less: Firm Underwriting (12,000) (4,500) (15,000)
Balance 49,500 (2,625) (3,375)
Less: Surplus of B & C distributed to A (6,000) 2,625 3,375
Net Liability (excluding firm underwriting) 43,500 Nil Nil
Add: Firm Underwriting 12,000 4,500 15,000
Total Liability (number of shares) 55,500 4,500 15,000

35
 (ii) Computation of Amounts payable to Underwriters

Particulars ₹ ₹ ₹
Liability towards shares to be subscribed @ ₹ 20 11,10,000 90,000 3,00,000
per
share
Less: Commission @ 5% on 1,50,000 shares @ ₹ 20 (90,000) (37,500) (22,500)
Net Amount to be paid by Underwriters 10,20,000 52,500 2,77,500

COMPANY FINANCIAL STATEMENTS

Statement of Profit and Loss (as per Division I of Schedule III)

The Statement of Profit and Loss of a company is the statement of financial performance of the
entity and is also known as the Income Statement. The objective of preparing this statement is to
determine the profit (or loss) of a company for a particular reporting period.

Following is the pro-forma of the Statement of Profit and Loss suggested in Part II of Division I of

Schedule III.

Name of the Company: …………………………………………………

Statement of Profit and Loss for the year ended…………………………..(Amount in `)

Note Figures for Figures for

Particulars No. the Current the Previous
Reporting Period Reporting Period
1 2 3 4
I Revenue from Operations XXX XXX
II Other Income XXX XXX
III Total Income (I+II) XXX XXX
IV Expenses:
Cost of Materials XXX XXX
Consumed Purchases of XXX XXX
Stock-In-Trade XXX XXX
Changes in Inventories of Finished Goods / Work- in-
progress and Stock-In-Trade XXX XXX
Employee Benefits Expense XXX XXX
Finance Costs XXX XXX
Depreciation and Amortization XXX XXX
Expense Other Expenses
Total Expenses XXX XXX
V Profit before Exceptional & Extraordinary Items XXX XXX
and Tax (III – IV)
VI Exceptional Items XXX XXX
VII Profit before Extraordinary Items and TAX (V-VI) XXX XXX
36
 VII Extraordinary Items XXX XXX
I
IX Profit before Tax (VII-VIII) XXX XXX
X Tax Expenses: XXX XXX
XI Profit /(Loss) for the period from Continuing XXX XXX
Operations (IX – X)
XII Profit /(Loss) from Discontinuing Operations XXX XXX
XII Tax Expense of Discontinuing Operations XXX XXX
I
XIV Profit /(Loss) from Discontinuing Operations XXX XXX
(After Tax) (XII-XIII)
XV Profit / (Loss) for the period (XI + XIV) XXX XXX
XVI Earnings per Equity Share:
(1) Basic XXX XXX
(2) Diluted

Balance sheet
The Balance Sheet of a company is the statement of financial affairs of the entity. The objective of
preparing this statement is to determine the financial position of a company for a particular reporting
period.

Following is the pro-forma of the Balance Sheet suggested in Part I of Division I of Schedule

III.

Name of the Company: ……………………………………………….

Balance Sheet as at: …………………………………………………… (` in……)
Particulars Not Figures as at the Figures as at the
e end of Current end of the
No. Reporting Previous
Period Reporting Period
1 2 3 4
I. EQUITY AND LIABILITIES
(1) Shareholders’ Funds
(a) Share Capital
(b) Reserves & Surplus
(c) Money Received against Share Warrants
(2) Share Application money pending allotment
(3) Non-Current Liabilities
(a) Long Term Borrowings
(b) Deferred Tax Liabilities (Net)
(c) Other Long-Term Liabilities
(d) Long Term Provisions
(4) Current Liabilities

37
 (a) Short Term Borrowings
(b) Trade Payables
(c) Other Current Liabilities
(d) Short Term Provisions
Total
II ASSETS
(1) Non-Current Assets
(a) PPE and Intangible Assets
(i) Property, Plant and Equipment
(ii) Intangible Assets
(iii) Capital WIP
(iv) Intangible Assets under Development
(b) Non-Current Investment
(c) Deferred Tax Assets (Net)
(d) Long Term Loans & Advances
(e) Other Non-Current Assets
(2) Current Assets
(a) Current Investments
(b) Inventories
(c) Trade Receivables
(d) Cash & Cash Equivalents
(e) Short Term Loans & Advances
Total

QUESTIONS

1. ABC Ltd. provides the following Trial Balance as on 31st March 2017:
Particulars Dr. Balances Cr. Balances
(₹) (₹)
Equity Share Capital: 350000 shares of ₹ 10 each fully 35,00,000
paid
10% Debentures 3,00,000
Motor Van 4,00,000
Machinery 20,00,000
Land and Building 12,00,000
12% Long Term Govt. Securities 2,00,000
Sales 60,00,000
Sales Return 3,00,000
Interest on Debenture 22,500
Purchase 36,00,000
Purchase Returns 4,00,000
Opening Stock 3,00,000
Discount 7,500
Carriage Outward 1,50,000

38
 Rent and Rates 50,000
Income from Govt. Securities 24,000
Trade Receivables 10,00,000
Trade Payables 2,00,000
Advertisement 1,50,000
Bad Debt 20,000
Salaries 6,72,000
Misc. Expenditure 30,000
Contribution to P.F. and Gratuity Funds 1,00,000
Cash at Bank and in hand 2,22,000
Total 1,04,24,000 1,04,24,000

Additional Information:

(i) Closing Stock as on 31st March 2017 was ₹ 3,50,000.

(ii) Depreciation Rates: Motor Vehicle 10%, Machinery 20% and Land & Building 5%.
(iii) Misc. expenditure includes ₹ 20,000 as audit fees.
(iv) Interest on debenture is payable quarterly and the last quarter's interest is yet to be
paid.
(v) Trade receivables include a sum of ₹ 25,000 due from Mr. X who has become
insolvent and only 25 paisa in a rupee is expected to be recoverable from him.
(vi) Create a provision for doubtful debt @ 2% on trade receivables.
(vii) Provide for income tax ₹ 1,50,000.
Prepare a Statement of Profit and Loss for the year ended on 31st March 2017 and a Balance
Sheet as on that date.

Answer:

Notes to Accounts:
1. Employee Benefit Expenditure ₹
Salaries 6,72,000
Contribution to P.F. 1,00,000
7,72,000

2. Finance Cost ₹
Interest on loan 22,500
Outstanding Interest 7,500
30,000

3. Other Expenditure ₹
Discount 7,500
Carriage 1,50,000
Rent 50,000

39
 Advertisement 1,50,000
Bad Debt 20,000
Audit fees 20,000
Misc. Exp. 10,000
Provision for B/D 38,250
4,45,750

4. Trade Receivable ₹
Total Receivable 10,00,000
(-) Provision @ 2% 38,250
9,61,750
Provision = 25000 × 0.75 + (1000000 – 25000) × 0.02 38,250

5. Fixed Assets Motor Van Machine L&B

Balance 4,00,000 20,00,000 12,00,000
(-) Depreciation 40,000 4,00,000 60,000
3,60,000 16,00,000 11,40,000
Total Fixed Assets 31,00,000
Depreciation 5,00,000

Statement of Profit and Loss for the year ended on 31.03.2017

Particulars Not ₹
e
I. Revenue from operation (sales less returns) 57,00,000
II. Other Income (Income from investment) 24,000
III. Total revenue 57,24,000
IV. Expenses:
Purchase 32,00,000
Changes in inventory i.e. opening less. Closing (50,000)
Employee Benefit expenses 1 7,72,000
Finance cost 2 30,000
Depreciation 5 5,00,000
Other expenses 3 4,45,750
48,97,750
V. Profit before exceptional and extraordinary items and tax 8,26,250
VI. Exceptional items Nil
VI Profit before extraordinary items and tax 8,26,250
VII. Extraordinary items Nil
VIII. Profit before tax 8,26,250
IX. Tax (provision for tax) 1,50,000
X. Profit after tax 6,76,250

Balance Sheet as on 31.03.2017

I. Equity and Liabilities Note ₹
40
 1. Shareholders' Funds
(a) Share Capital 35,00,000
(b) Reserve and Surplus (Balance of Profit) 6,76,250
2. Share Application money pending allotment Nil
3. Non-current liabilities (10% Debentures) 3,00,000
4. Current Liabilities
Trade Payable 2,00,000
Outstanding interest 7,500
Provision for Tax 1,50,000
Total 48,33,750
II. Assets
1. Non-current Assets
(a) Fixed Assets (Tangible) 5 31,00,000
(b)Non-current Investment (12% L.T. Govt. Securities) 2,00,000
2. Current Assets
Inventories 3,50,000
Trade Receivable 4 9,61,750
Cash and cash equivalent 2,22,000
Total 48,33,750

2. Write short note

Money Received against Share Warrants

Answer:

(c) Money received against Share Warrants

• As per Sch. Ill Disclosure Requirements, it is to be shown as a separate line item on the
face of Balance Sheet.
• In case of Listed Companies, share warrants are issued to Promoters & others in terms
of the Guidelines for Preferential Issues viz. SEBI (Issue of Capital and Disclosure
Requirements), Guidelines, 2009.
• Effectively, Share Warrants are amounts which would ultimately form part of the
Shareholder's Funds. Since Shares are yet to be allotted against the same, these are not
reflected as part of Share Capital, but as a separate line - item.

3. State whether the following statements are True or False:

Interest on loan is included in ‘other operating expenses’ under the Statement ofProfit and Loss.

Answer: False

4. The following is the Trial Balance of Omega Limited as on 31.03.2018:

(Figures in Rs.’000)

Debit Credit

41
 Equity Capital (Shares of
Land at cost 220 300
Rs.10each)
Plant and Machinery at cost 770 10% Debentures 200
Trade Receivables 96 General Reserve 130
Inventories (31.03.2018) 86 Profit & Loss A/c 72
Bank 20 Securities Premium 40
Adjusted Purchases 320 Sales 700
Factory Expenses 60 Trade Payables 52
Administration Expenses 30 Provision for Depreciation 172
Selling Expenses 30 Suspense Account 4
Debenture Interest 20
Interim Dividend Paid 18
1,670 1,670

Additional Information:

a. The Authorized Share Capital of the Company is 40,000 shares of Rs.10 each
b. The Company on the advice of independent valuer wish to revalue the land Rs.3,60,000
c. Declared final dividend @10% (over Interim Dividend of Rs.18,000)
(i) Suspense account of Rs.4,000represents cash received for the sale of some of the
machinery on 01.04.2017. The cost of the machinery was Rs.10,000 and the
accumulated depreciation thereon being Rs.8,000
(ii) Depreciation is to be provided on plane and machinery at 10% on cost

You are required to prepare Omega Limited’s Profit and Loss Statement for the year ended 31.03.2018
and the Balance Sheet as on that date in accordance with the Companies Act, 2013 in the Vertical
Form along with the Notes on Accounts. Ignore previous years’ figures and taxation.

Answer:

Balance sheet Omega Limited as on 31st March, 2018

Particulars Note Amount (Rs.000)
No.
I. Equity & Liabilities
(1) Shareholders‟ Funds:
(a) Share Capital 1 300
(b) Reserves & Surplus 2 500
(2) Non-Current Liabilities
(a) Long Term Borrowing 3 200
(3) Current Liabilities
(a) Trade Payable 52
(b) Other Current Liabilities 4 30
Total 1,082
II. Assets
(1) Non-Current Assets
Fixed Assets
Tangible Assets 5 880
(2) Current Assets:

42
 (a) Inventories 86
(b) Trade Receivables 96
(c) Cash & bank balances 20
Total 1,082

Profit and Loss Statement for the year ended 31st March, 2018
Particulars Note Amount (Rs. 000)
No.
I. Revenue from Operation 700
II. Other Income 6 2
III. Total Revenue (I+II) 702
IV. Expenses:
(a) Purchases 320
(b) Finance Costs 7 20
(c) Depreciation (10% of 760*) 76
(d) Other expenses (60+30+88) 8 120
Total Expenses 536
V. Profit for the year (III-IV) 166
*770 (Plant and machinery at cost)- 10 (Cost of plant and machinery sold)Notes to accounts:
1. Share Capital (Rs. In 000)
Equity share capital
Authorised
40,000 shares of Rs.10 each 400
Issued, Subscribed & called up
30,000 shares of Rs.10 each 300
Total 300
2. Reserves & Surplus
Securities Premium Account 40
Revaluation Reserve (360-220) 140
General Reserve 130
Profit & Loss balance
Opening balance 72
Profit for the period 166 238
Less: Appropriations
Interim Dividend (18)
Final Dividend (300 10%) (30) 190
500
3. Long Term Borrowings:
10% debentures 200
4. Other Current Liability:
Dividend 30
5. Tangible assets:
Land

43
 Opening balance 220
Add: Revaluation adjustment 140
Closing balance 360
Plant and machinery
Opening balance 770
Less: Disposed off (10)
760
Less: Depreciation (172-8+76) (240)
Closing balance 520
Total 880
6. Other Income:
Profit on sale of machinery:
Sale Value of machinery 4
Less: Book value of machinery (10-8) (2) 2
7. Finance costs:
Debenture interest 20
8. Other expenses:
Factory expenses 60
Selling expenses 30
Administrative expenses 30 120

5. Write short notes on

Schedule III disclosure requirement in respect of cash and cash equivalents

Answer:

As per Schedule III of Companies Act 2013, Cash and Cash Equivalents shall be reported
under the heading Current Assets. For the purpose of reporting Cash and Cash Equivalents
shall be further classified as-
(a) Balances with Banks,

(b) Cheques, Drafts on Hand,

(c) Cash on Hand,

(d) Other (Specify
nature).Notes:
• Earmarked Balances with Banks (e.g. for Unpaid Dividend) shall be separately stated.
• Balances with Banks to the extent held as margin Money or Security against the
Borrowings, Guarantees, and Other Commitments shall be disclosed separately.
• Repatriation restrictions, if any, in respect of Cash and Bank Balances shall be separately
stated.
Bank Deposits with more than 12 months Maturity shall be disclosed separately.

44
6. State whether the following statements are True or False:
Cash comprises cash in hand and foreign currency balances.

Answer: TRUE

7. The following is the trial balance of Beta Ltd. as on 31.03.2019:

Dr. Cr.
Particulars (₹) Particulars (₹)
Stock in trade on 01.04.18 1,50,000 Purchase returns 20,000
Purchases 4,90,000 Sales 6,80,000
Salaries 60,000 Discount received 6,000
Freight, Carriage etc. 1,900 Balance of Profit and Loss (Cr.) 12,000
Furniture 34,000 Share capital (₹ 10) 2,00,000
Contribution to P.F. 10,000 Trade payables 49,000
Rent and Rates 8,000 General reserve 31,000
Stationary 3,800
Repairs 4,000
Insurance 6,000
Misc. expenses 300
Staff welfare expenses 5,000
Plant and machinery 58,000
Cash at bank 92,400
Patents 9,600
Trade receivables 65,000
9,98,000 9,98,000

You are required to prepare Statement of Profit and Loss for the year ending 31st March,
2019 and Balance Sheet as at that date after taking into consideration the following
information:
a. Closing stock as at 31.03.2019 is ₹1,76,000.
b. Make a provision for income tax @ 40%.
c. Depreciate plant and machinery @ 15%, furniture @ 10% and patents @ 5%.
d. Outstanding rent ₹1,600 and outstanding salaries ₹1,800.
e. The directors recommended a dividend @ 15% after transfer to General Reserve
₹4,000.

f. Dividend Distribution Tax payable at an effective rate of 20.36%.

g. Trade receivables of ₹5,000 are due for more than 6 months. Provide ₹1020 for
doubtful debts.
(i) The authorized capital of the company is ₹4,00,000 divided 40,000 equity shares of
₹10 each of which 20,000 shares have been issued and fully paid up. 2,000 shares were,
however, issued for consideration other than Cash.

Answer:

45
 Beta Ltd.

Balance Sheet as on 31st March, 2019

Particulars Note As on
No. 31.03.2019(₹)
EQUITY AND LIABILITIES
Shareholder’s Fund :
(a) Share Capital 1 2,00,000
(b) Reserve & Surplus 2 1,18,600
Non-Current Liabilities Nil
Current Liabilities :
(a) Trade Payables 49,000
(b) Other current Liabilities 3 3,400
(c) Short-Term Provisions 4 50,400
Total 4,21,400

ASSETS
Non-Current Assets :
Fixed Assets :
(a) Tangible Assets 5 79,900
(b) Intangible Assets 9,120
Current Assets :
(a) Inventories 1,76,000
(b) Trade Receivables 6 63,980
(c) Cash & Cash equivalents 7 92,400
Total 4,21,400

Foot Note: Contingent Liability for Proposed Dividend and DDT = ₹36,108.

Statement of Profit and Loss for

the Year end 31st March, 2019

Particulars Note 31.03.201

No. 9
(₹)
Revenue from Operations 8 6,80,000
Other Income 9 6,000
Total Revenue (A) 6,86,000
Expenses:

46
Purchase of Stock-in Trade 10 4,70,000
Changes in Inventories of Stock-in-Trade 11 (26,000)
Employee Benefits Expense 12 76,800
Depreciation & Amortization expenses 13 12,580
Other Expenses 14 26,620
Total Expenses (B) 5,60,000

Profit Before Tax (A-B) 1,26,000

Less: Provision for taxation @ 40% 50,400
Profit after tax 75,600

Notes to Accounts:
Particulars Amount (₹) Amount (₹)
1. Share Capital
Amortized: 40000 shares of ₹10 each 4,00,000
Issued, Subscribed and Paid up: 20000 shares 2,00,000
of₹10 each
Shares issued for consideration other 20,000
than cash: 2000 shares of ₹10 each

2. General Reserves
As on 1.04.2018 31,000
Add: Transfer during the year 4,000 35,000
Profit and Loss: As on 1.04.2018 12,000
Add: Profit during the year 75,600
87,600
Less: Transfer to General Reserve 4,000 83,600
1,18,600

3. Other Current Liabilities

Outstanding Rent 1,800
Outstanding Salaries 1,600
3,400

4. Short Term Provisions

Provision for Taxation 50,400

5. Fixed Assets

47
 Tangible Assets
Plant and Machinery 58,000
Less: Depreciation 8,700 49,300
Furniture 34,000
Less: Depreciation 3,400 30,600
79,900
Patent 9,600
Less: Amortization 480 9,120

6. Trade Receivables:
Trade receivable due for more than 6 5,000
months
Trade receivable (Others) 60,000
65,000
Less: Provision for doubtful debs 1,020
63,980

7. Cash and Cash Equivalent: Cash at Bank 92,400

8. Revenue from Operations: Sales 6,80,000

9. Other Income: Discount received 6,000
10. Purchase of Stock-in trade: Gross 4,70,000
Purchase
Less: Returns (4,90,000 – 20,000)
11. Changes in inventories of Stock-in- (26,000)
trade:
Opening – Closing (1,50,000 – 1,76,000)
12. Employee benefit expense:
Salary Add: Outstanding (60,000 + 61,800
1,800)
Contribution to PF 10,000
Staff welfare exp. 5,000 76,800

13. Depreciation and Amortization

Expenses:
On Plant and Machinery @ 15% 8,700
On Furniture @ 10% 3,400

48
 Amortization: on Patent @ 5% 480 12,580

14. Other Expenses:

Rent and rates including outstanding: 9,600
(8,000+1,600)
Freight and Carriage 1,900
Stationary 3,800
Repairs 4,000
Insurance 6,000
Miscellaneous Expenses 300
Provision for Doubtful Debts 1,020
26,620

Working Notes:

1) Dividend for the year proposed :15% on 30,000

2,00,000
2) Dividend distribution tax: 20.36% x 30,000 6,108
36,108

Write short notes

8. Disclosure requirement under Schedule III with respect to Trade Receivables

(c) Disclosure requirement under Schedule III with respect to Trade Receivables

Schedule III Disclosure Requirement Points

1. Aggregate amount of Trade Receivables • Sch III requires separate disclosure
outstanding for a period exceeding 6 of
months from the date they are due for ―Trade Receivables O/s for a period
payment should be separately stated. exceeding 6 months from the date they
become due for payment‖, only for the
current portion of Trade Receivables.

2. Security-wise Details: Trade • Where no due date is specifically

Receivablesshall be separately sub- agreed upon, normal credit period allows
classified as – by the Company should be taken into
consideration for computing the due date,
(a) Secured, considered Good
(b) Unsecured, considered Good which may vary depending upon the
(c) Doubtful. Nature of Goods
or Services sold and the Type of
Customers, etc.

49
 3. Bad/Doubtful: Allowance for Bad and
• Amounts due under contractual
Doubtful Loans and Advances shall be
obligations, e.g. dues in respect of
disclosed under the relevant heads
separately. Insurance Claims, Sale of Fixed
Assets, Contractually Reimbursable
Expenses, interest Accrued on Trade
Receivables, etc, cannot be included
within Trade Receivables, such
Receivables should be classified as
“Other Current Assets” and each
such item should be
disclosed nature-wise.
4. Directors, etc.: Debts due by
Directors or Other Officers of the • Lean Period Activities:
Company or any of them either Receivables arising out of sale of
severally or jointly with any other materials/ rendering of services
person or debts due by Firms or Private during a Company’s lean period should
Companies respectively in which any be included under “Trade
Director is a Partner or a Director or a Receivables”, if such activity is in the
Member should be separately stated normal course of business. If they are
not part of “normal
course of business”, they are to be
classified under “Other Assets”.

State whether the following statements are True or False:

Interest accrued and due should be shown under the head Other Current Liabilities in a
Balance Sheet of a Company.
Answer: True

9. Elixir Ltd. provides the following Trial Balance as on 31st March 2016:
Particulars Dr. Balance Cr. Balance
(₹) (₹)
Equity Share Capital 300000 shares of ` 10 each fully paid 30,00,000
12% Bank Loan 2,00,000
Furniture 2,25,000
Machinery 7,50,000
Building 12,50,000
Non-current Investment 2,00,000
Sales 48,00,000
Sales Return 4,00,000
Interest Received on Investment 20,000
Interest on Bank Loan 20,000
Purchase 33,20,000

50
Purchase Returns 420,000
Opening Stock 2,00,000
Discount 6,250
Carriage on Goods Sold 1,39,000
Rent and Taxes 60,000
Trade Receivables 12,00,000
Trade Payables 80,000
Advertisement 1,20,000
Bad Debt 10,000
Salaries 4,00,750
Audit Fees 27,000
Contribution of P.F. 60,000
Cash at Bank and in hand 1,32,000
Total 85,20,000 85,20,000
Additional Information:
(i) Closing Stock as on 31st March 2016 was ₹2,12,500
(ii) Depreciation Rates: Furniture 10%; Machinery 20% and Building 10%
(iii)Outstanding salaries as on 31st March 2016 was ₹62,250
(iv) Trade receivables include a sum of ₹ 25,000 due from Mr. B. Reddy and trade
payables include ₹ 15,000 due to him.
(v) Create a provision for doubtful debt @ 5% on trade receivables.
(vi) Provide for income tax ₹80,000.
Prepare a Statement of Profit and Loss for the year ended on 31st March 2016 and a
Balance Sheet as on that date.

Notes to Accounts (Schedules):

Schedule - 1. Employee Benefit Expenditure ₹
Salaries 4,00,750
Outstanding Salaries 62,250
Contribution to P.F. 60,000
5,23,000

Schedule - 2. Finance Cost ₹

Interest on loan 20,000
Outstanding Interest 4,000
24,000

Schedule - 3. Other Expenditure ₹

Discount 6,250
Carriage 1,39,000
Rent 60,000
Advertisement 1,20,000
Bad Debt 10,000
Audit fees 27,000
Provision for Bad debt 59,250
4,21,500

Schedule - 4. Trade Receivable ₹

51
Total Receivable 12,00,000
(-) Set off 15,000
11,85,000
(-) Provision @ 5% 59,250
11,25,750

Schedule - 5. Fixed Assets Furniture (₹) Machine (₹) Building (₹)

Balance 2,25,000 7,50,000 12,50,000
(-) Depreciation 22,500 1,50,000 1,25,000
2,02,500 6,00,000 11,25,000
Total Fixed Assets 19,27,500
Depreciation 2,97,500

Statement of Profit and Loss for the year ended on 31.03.2016

Particula Note ₹
rs
1. Revenue from operation (sales less returns) 44,00,000
II. Other Income (Income from investment) 20,000
III. Total revenue 44,20,000
IV. Expenses:
Purchase 29,00,000
Changes in inventory i.e. opening less. Closing (12,500)
Employee Benefit expenses 1 5,23,000
Finance cost 2 24,000
Depreciation 5 2,97,500
Other expenses 3 4,21,500
41,53,500
V. Profit before exceptional and extraordinary items and tax 2,66,500
VI. Exceptional items Nil
VI Profit before extraordinary items and tax 2,66,500
VII. Extraordinary items Nil
VIII. Profit before tax 2,66,500
IX. Tax (provision for tax) 80,000
X. Profit after tax 1,86,500
Balance Sheet as on 31.03.2016
I. Equity and Liabilities Note ₹
1. Shareholders' Funds
(a) Share Capital 30,00,000
(b) Reserve and Surplus (Balance of Profit) 1,86,500
2. Share Application money pending allotment Nil
3. Non-current liabilities (12% Bank loan) 2,00,000
4. Current Liabilities
Trade Payable (after set off of ` 15,000) 65,000
Outstanding interest 4,000
Outstanding salary 62,250

52
 Provision for Tax 80,000
Total 35,97,750
II. Assets
1. Non-current Assets
(a) Fixed Assets (Tangible) 5 19,27,500
(b)Non-current Investment 2,00,000
2. Current Assets
Inventories 2,12,500
Trade Receivable 4 11,25,750
Cash and cash equivalent 1,32,000
Total 35,97,750

Write short note on

Share Application money pending allotment

Answer:

Share application money pending allotment

As per Schedule III it is to be shown as a separate line item on the face of Balance
Sheet. Other provisions in this respect are as follows:
(i) Share Application Money not exceeding the Issued Capital and to the extent not refundable, is
to be disclosed as a separate line item after - Share Holders Funds and before - Non-Current
Liabilities.
(ii) If the Company’s Issued Capital is more than the Authorized Capital, and approval of increase in
Authorized Capital is pending, the amount of Share Application Money received over and
above the Authorized Capital should be shown under the head - Other Current Liabilities.
(iii) The amount shown as Share Application Money Pending Allotment will not include Share
Application Money to the extent refundable. For example, the amount, in excess of Issued
Capita], or where Minimum Subscription requirement is not met. Such amount will have to be
shown separately under 'Other CurrentLiabilities'.
(v) Calls Paid in Advance are to be shown under - Other Current Liabilities. The amount of
interest which may accrue on such advance should also is to be reflected as a Liability.

10. ABC Limited has an authorized capital of ₹ 5,00,000 divided into 5000 equity shares of
₹ 100 each. On 31.03.2018, 2500 shares were fully called up.
The following are the balance extracted from the ledger of the company as on 31.03.2018:

₹ ₹
Inventory 50,000 Advertisement 3,800
Sales 4,25,000 Bonus 10,500
Purchases 3,00,000 Accounts receivable 38,700
Productive wages 70,000 Accounts payable 35,200
Discount allowed 4,200 Plant and Machinery 80,500
Discount received 3,150 Furniture 17,100

53
 Insurance (year up to 30.06.2018) 6,720 Cash at bank 1,30,000
Salaries 18,500 Cash in hand 4,700
Rent 6,000 Reserves 25,000
General expenses 8,950 Loan from Managing Director 15,700
Profit and Loss a/c (cr.) 6,220 Bad debts 3,200
Printing and Stationary 2,400 Calls in arrears 5,000
Share capital 2,50,000
Also, the following information are given:

(a) Closing inventory is ₹ 91,500

(b) Depreciation to be charged on plant and furniture at 15% and 10% respectively
(c) Outstanding liabilities—wages at ₹ 5,200, salaries at ₹1,200 and rent at ₹ 600
(d) Salesman are entitled to a commission of 1% on sales
(e) ₹ 4,000 are to be transferred to General reserves
(f) Dividend on paid up share capital is to be provided @ 5%
You are required to prepare Profit and Loss Statement for the year ended 31.03.2018 and the
Balance Sheet as on that date in accordance with the Companies Act, 2013 in the Vertical
Form along with the Notes on Accounts.

Answer:

Balance Sheet of ABC Limited as on 31st March, 2018

Particulars Note Amount (₹)

No.
I. Equity & Liabilities
(1) Shareholders' Funds:
(a) Share Capital 1 2,45,000
(b) Reserves & Surplus 2 30,995
(2) Non-Current Liabilities
(a) Long Term Borrowing 3 15,700
(3) Current Liabilities:
(a) Trade Payable 35,200
(b) Other Current Liabilities 4 11,250
(c) Short Term Provision 5 12,250
3,50,395
II. Assets
(1) Non-Current Assets
Fixed Assets
Tangible Assets 6 83,815
(2) Current Assets:
(a) Inventories 91,500
(b) Trade Receivables 38,700
(c) Cash & Cash Equivalents 1,34,700
(d) Short Term Loans & Advances (Prepaid Insurance) 1,680
3,50,395

Profit and Loss Statement for the year ended 31st March, 2018

Particulars Note Amount (₹) Amount (₹)

54
 No.
I. Revenue From Operation 4,25,000
II. Other Income 3,150
III. Total Revenue (I+II) 4,28,150
IV. Expenses:
(a) Cost of material consumed 7 3,33,700
(b) Employees cost/ benefits expenses 8 30,200
(c) Depreciation & amortization expenses 13,785
(d) Other expenses 9 38.440
Total Expenses 4,16,125
V. Profit for the year (III-IV) 12,025
Balance brought forward from previous year 6,220
Profit available for appropriation 18,245
Appropriation:
Proposed dividend 12,250
Transfer to General Reserve 4,000
16,250
Balance carried forward 1,995

Notes:

1. Share Capital: ₹
Issued, Subscribed & Paid up 2,50,000
Less: Calls in arrears 5,000
2,45,000
2.Reserves & Surplus:
General Reserve 29,000
Surplus (P & L A/c) 1,995
30,995
3. Long Term Borrowings:
Unsecured:
Loan from Managing Director 15.700
15,700
4. Other Current Liabilities:
Outstanding Expenses 7,000
Salesmen Commission 4,250
11,250
5. Short Term Provisions:
Proposed Dividend 12,250
12,250

6. Tangible Fixed Assets:

Item Closing Balance Depreciation (₹) Net (₹)

(₹)
Plant & Machinery 80,500 12,075 68,425
55
 Furniture 17,100 1,710 15,390
Total 97,600 13,785 83,815

7. Cost of materials consumed: ₹

Opening stock 50,000
Purchases 3,00,000
Less: Closing Stock (91,500)
Wages 75.200
3,33,700
8. Employees Benefit Expenses:
Salary 19,700
Bonus 10,500
30,200
9. Other Expenses:
Administrative Expenses (5,040+6,600+8,950+2,400) 22,990
Provision for bad debts 3,200
Marketing Expenses (4,200+3,800+4,250) 12,250
38,440

11. The following is the Trial Balance of Pioneer Limited as on 31.03.2019:

Particulars Debit (₹) Credit (₹)

Equity Capital (Face value of ₹100) — 10,00,000
Calls in Arrears 1,000 —
Land 2,00,000 —
Building 3,50,000 —
Plant & Machinery 5,25,000 —
Furniture & Fittings 50,000 —
General Reserve — 2,10,000
Loan from State Financial Corporation — 1,50,000
Inventory:
Finished Goods 2,00,000
Raw Materials 50,000 2,50,000 —
Provision for taxation — 68,000
Trade Receivables 2,00,000 —
Advances 42,700 —
Dividends Payable — 60,000
Profit & Loss A/c — 86,700
Cash Balance 30,000 —
Cash at Bank 2,47,000 —
Loans (unsecured) — 1,21,000
Trade Payables (For Goods and Expenses) — 2,00,000
Total 18,95,700 18,95,700
Additional information:
56
 a. 2000 equity shares were issued for consideration other than cash.
b. Trade Receivables of ₹ 52,000 are due for more than six months.
c. (a) The cost of assets: 31.03.2019 (b) Depreciation till 31.03.2019

Building — ₹ 4,00,000 Building — ₹ 50,000

Plant & Machinery — ₹ 7,00,000 Plant & Machinery — ₹1,75,000
Furniture — ₹62,500 Furniture & Fittings — ₹ 50,000

d. The balance of ₹1,50,000 in the loan account with State Financial Corporation is
inclusive of ₹7,500 for interest accrued but not due. The loan is secured by
hypothecation of the Plant & Machinery.
e. Balance at bank includes ₹2,000 with Perfect Bank Ltd., which is not a Scheduled
Bank.
f. The company had contract for the erection of machinery at ₹ 1,50,000 which is
still incomplete.
You are required to prepare Pioneer Limited's Balance Sheet as at 31.03.2019 as per
Schedule III in accordance with the Companies Act, 2013 in the Vertical Form along with the
Notes to Accounts. Ignore previous years' figures.

Answer:

If Depreciation on Furniture is considered as ₹50,000, the solution will be as follows:

Balance Sheet of Pioneer Limited as on 31st March, 2019

Particulars Note Amount (₹ 000)

No.
I. Equity & Liabilities
(1) Shareholders' Funds:
(a) Share Capital 1 9,99,000
(b) Reserves & Surplus 2 2,59,200
(2) Non-Current Liabilities
(a) Long Term Borrowing 3 2,63,500
(3) Current Liabilities:
(a) Trade Payable 2,00,000
(b) Other Current Liabilities 4 67,500
(c) Short-term provisions 5 68,000
Total 18,57,200
II. Assets
(1) Non-Current Assets
Fixed Assets
Tangible Assets 6 10,87,500
(2) Current Assets:
(a) Inventories 7 2,50,000
(b) Trade Receivables 8 2,00,000

57
 (c) Cash & bank balances 9 2,77,000
(d) Short-term loans and advances 42,700
Total 18,57,200

Notes to Accounts:

1. Share Capital ₹ ₹
Equity Share Capital
Issued, Subscribed & called up
10,000 equity shares of ₹ 100 each (Of the above 2,000 10,00,000
shares
have been issued for consideration other than cash)
Less: Calls in arrears (1,000) 9,99,000
Total 9,99,000
2. Reserves & Surplus
General Reserve 2,10,000
Surplus (Profit & Loss A/c) 49,200
Total 2,59,200
3. Long Term Borrowings:
Secured
Term loans
Loan from State Financial Corporation (1,50,000 - 7,500) 1,42,500
(Secured by hypothecation of Plant & Machinery)
Unsecured Loan 1,21,000
Total 2,63,500
4. Other Current Liabilities:
Interest accrued but not due on loans (SFC) 7,500
Dividend Payable 60,000
Total 67,500
5. Short-term provisions:
Provision for taxation 68,000
Total 68,000
6. Tangible assets:
Land 2,00,000
Buildings 4,00,000
Less: Depreciation (50,000) 3,50,000
Plant and Machinery 7,00,000
Less: Depreciation (1,75,000 ) 5,25,000
Furniture & Fittings 62,500
Less: Depreciation (50,000) 12,500
Total 10,87,500
7. Inventories:
Raw Materials 50,000

58
 Finished Goods 2,00,000
Total 2,50,000
8. Trade Receivables:
Debt outstanding for a period exceeding six months 52,000
Other Debts 1,48,000
Total 2,00,000
9. Cash and Bank balances:
Cash and cash equivalents
Cash at bank
With scheduled banks 2,45,000
With others (Perfect Bank Ltd.) 2,000 2,47,000
Cash in hand 30,000
Other bank balances Nil
Total 2,77,000
Note: Estimated amount of contract remaining to be executed on capital account and
not provided for ₹ 1,50,000. It has been assumed that the company had given contract
for purchase of machinery.

AS 3: Cash Flow Statement

Key terminologies
1. Cash: Cash comprises cash in hand as well as cash at bank
2. Cash equivalent: marketable securities, which can be converted into cash within a short
period of time.
3. Cash flow: Cash flows are either inflows or outflows of cash and cash equivalent
4. Cash flow statement: it is a financial statement that provides the aggregate data regarding all
cash inflows that a company receives from its ongoing operation and external investment sources.
It also includes all cash outflows that pay for business activities and investments during a given
period.

Classification of cash flows

59
Operating activities Financing activities
Investing activities

Operating Investing activities Financial activities

activities are are the activities that
are acquisition and
a. principal revenue result in ch anges in
disposal of long-
producing activities the size and
term assets and
of the enterprises composition of owner’s
other investments
b. Cash flows arising equity and borrowings
Example:-
from day to day Purchase of plant of the entity
operations. and machinery Example:-
c. Other activities Sale of loan taken from
that are not investing Furniture banking company or NBFC
or financing Acquisition of
activities. Example: shares or
cash sales debentures
royalty or
commission received

60
Treatment of some selective items in Cash flow statement
a. Foreign currency cash flows: If any foreign currency transaction performed by the entity
should be recorded in an Enterprises reporting currency by applying foreign currency amount and the
exchange rate between the foreign currency and reporting currency as on the date of cash flows.
If any profits or losses arising from changes in foreign currency exchange rates are not treated as
cash flows and it should be shown as separate part of the reconciliation of changes in cash and cash
equivalents during the period

b. Taxes on income: All the cash flows arising out of taxes on income should be disclosed separately
and classified under operating activities unless they can be specifically identified with financing and
investing activities.

c. Interest and dividend: The nature of entity is mainly related to financial activities such as
accepting deposits and granting loans then interest and dividend received is treated as operating
activities where as dividend paid is treated as financial activities
The nature of entity is not related to financial activities such as accepting deposits and
granting loans then interest and dividend received is treated as investing activities whereas
dividend and interest paid is treated as financing activities

Methods of preparation of Cash Flow Statement

Operating activities Investing activities Financial activities

Direct method Indirect method

61
 Cash Flow Statement under direct method
Name of the organisation:
Cash flow statement as on

Particulars Amount Amou

nt
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers for sale of goods and services xxx
Cash paid to suppliers (xxx)
Cash paid to employees (xxx)
Cash paid for income (xxx)
taxes xxx
NET CASH GENERATED/USED FROM
OPERATING ACTIVITIES(A)

CASH FLOWS FROM INVESTING ACTIVITIES

Proceeds on sale of PPE/intangible assets/investments. xxx
Interest and dividend received xxx
Cash paid for acquisition of PPE/intangible (xxx)
assets/investments NET CASH GENERATED/USED xxx
FROM INVESTING ACTIVITIES(B)

CASH FLOWS FROM FINANCING ACTIVITIES

Issue of shares / debentures/any other securities xxx
Loan taken from bank /non-banking financial
company/ other than Bank and non-banking financial xxx
companies Repayment of loan (xxx)
Dividend or interest paid (xxx)
NET CASH GENERATED/USED FROM xxx
FINANCING ACTIVITIES(C)

Net increase or decrease in cash (A+B+C). x

x
Add: opening cash and cash equivalent
x
Closing cash and cash equivalent
x
x
x
xxx

62
 Cash flow statement under indirect method

Name of the organisation:

Cash flow statement as on

Particulars Amount Amount

CASH FLOWS FROM OPERATING ACTIVITIES
Net profit after taxation during the year xxx
(If current net profit not available, then difference in
reserves to be consider)
Add: Tax expenses xxx
Profit before tax xxx
Add: Non-cash adjustments
Depreciation and amortisation xxx
Add/Less: Non-operating adjustments
Add: Interest expenses xxx
Less: Interest or Dividend income (xxx)
Add: Loss on sale of PPE/intangible assets/investments. xxx
Less: Profit on sale of PPE/intangible (xxx)
assets/investments. Operating profit before working capital xxx
changes
xxx
Add/Less: Changes in working capital
(xxx)
Less: Increase in current assets xxx
Add: Decrease in current assets (xxx)
Add: Increase in current liabilities xxx
(xxx)
Less: Decrease in current liabilities
Cash flows before income tax
Less: Income tax paid
NET CASH GENERATED OR USED FROM xxx
OPERATING ACTIVITIES(A)

63
 CASH FLOWS FROM INVESTING ACTIVITIES
xxx
Proceeds on sale of PPE/intangible assets/investments.
xxx
Interest and dividend received
(xxx)
Cash paid for acquisition of PPE/intangible assets/investments
NET CASH GENERATED/USED FROM INVESTING
ACTIVITIES(B) xxx

CASH FLOWS FROM FINANCING ACTIVITIES

Issue of shares / debentures/any other securities xxx
Loan taken from bank /non-banking financial company/
other than Bank and non-banking financial companies Repayment xxx
of loan (xxx)
Dividend or interest paid (xxx)
NET CASH GENERATED/USED FROM
FINANCINGACTIVITIES(C)
xxx

xxx
Net increase or decrease in cash (A+B+C).
xxx
Add: opening cash and cash equivalent xxx
Closing cash and cash equivalent

QUESTIONS

State whether the following statements are True or False:

1. Interest and dividend received form a part of financing cash flow.
Answer: False

2. On the basis of the following information provided by X Ltd. prepare a Cash Flow
Statement for the year ended on 31st March 2017.
(i) X Ltd. sold all the goods for cash only and purchased the goods in credit only.
(ii) The company earned a Gross Profit of ₹ 4,00,000 with a Gross Profit Ratio of 25%.
(iii) The closing inventory was higher than the opening inventory by ₹ 20,000.
(iv) The company paid ₹ 4,50,000 as wages and ₹ 90,000 as office expenses during
the year.
(v) Balance of Suppliers accounts on 31.03.2016 were higher than the balance on
31.03.2017 by ₹ 30,000.
(vi) Tax paid by the company amounts to ₹80,000 while provision for taxation was ₹
70,000.
(vii) The company repaid bank loan of ₹ 1,75,000 which included interest of ₹15,000.
(viii) Dividend paid during the year ₹ 50,000 (including dividend distribution tax).
(ix) X Ltd. sold investments of ₹ 6,00,000 at a profit of ₹ 40,000.
(x) Depreciation charged on fixed assets ₹ 1,20,000.
64
 (xi) Furniture purchased during the year ₹ 2,00,000.
(xii)Cash and Cash Equivalents as on 31.03.2016 was ₹ 1,00,000.
(xiii) Cash and Cash Equivalents as on 31.03.2017 was ₹ 4,95,000.
Answer:
Workings Note 1:
Gross Profit @ 25% on Sales = ₹ 4,00,000, So Total Sales = ₹ 16,00,000 (all for cash)COGS = Sales
-G.P = ₹ 12,00,000
Let closing inventory is x and hence opening inventory is (x – 20,000)Now, COGS = Op.
Inventory + Purchase + Wages - CI. Inventory
Or. 12,00,000 = (x-20,000) + Purchase – 4,50,000 - x
Or. Purchase = 7,70,000.
Working Note 2:
Let closing balance of suppliers = y, hence opening balance = (y +30,000)

3. Following are the summarized Balance Sheets of Beta Ltd

Liabilities 31.03.17 31.03.18 As 31.03.17 31.03.18
Rs. Rs. Rs. Rs.
set
s
Equity Share
Capital (Rs.10) 4,00,000 5,00,000 Land & Building 4,00,000 3,80,000
General Reserve 1,00,000 1,20,000 Plant & 3,00,000 3,38,000
Machinery
Profit & Loss (Cr.) 61,000 61,200 Inventory 2,00,000 1,48,000
Bank Loan 1,40,000 -- Trade 1,60,000 1,28,400
Receivable
Trade Payable 3,00,000 2,70,400 Cash in hand 1,000 1,200
Provision 70,000 -- 16,000
60,000 Cash at Bank
for
Taxation
Goodwill -- 10,000
10,61,000 10,21,600 10,61,000 10,21,600

Additional Information:
(i) Dividend paid during the year Rs.46,000
(ii) Net profit for the year Rs.1,32,200
(iii) Depreciation written-off on building Rs.20,000 and on machinery Rs.28,000
(iv) Income tax paid during the year Rs.56,000
(v) The following assets of another company were purchased for a consideration of
Rs.1,00,000 and paid in shares
Assets were: Inventory Rs.40,000 and Machinery Rs.50,000
(vi) Further machinery was purchased for Rs.50,000 during the year. There was a sale of
Machinery
You are required to prepare a Cash Flow Statement as per AS 3
Answer:

Cash Flow Statement For year ended 31.03.2018

65
 Particulars Rs. Rs. Rs.
1. Cash flow from operating activities
Net profit 132200
Add: Adjustment for non-cash expenses
Depreciation on land and buildings 20000
Depreciation on plant and machinery 28000 48000
Operating profit before adjustment for w.c changes 180200
Add: Decrease in inventory [200000-(148000-40000)] 92000
Decrease in trade receivable (160000-128400) 31600 123600
303800
Less: Decrease in trade payable (300000-270400) tax paid 29600
274200
Less: tax paid 56000
Net cash from operating activities 218200
2. Cash flow from investing activities
Sale of machinery 34000
Less: purchase of machinery 50000
(16000)
3. Cash flow from financing activities
Repayment of bank loan (140000)
Payment of dividend (46000) (186000)
1+2+3 16200
Add: Opening cash and cash equivalent 1000
Closing cash and cash equivalent 17200

Workings:
Plant and Machinery A/c
Particulars Rs. Particulars Rs
.
To balance b/d 300000 By Depreciation 28000
To vendor A/c 50000 By bank-sale 34000
To Bank A/c 50000 By balance c/d 338000
400000 400000

Land and Building A/c

Particulars Rs. Particulars Rs
.
To balance b/d 400000 By Depreciation 20000
By balance c/d 380000

400000 400000

4. (a) The following figures have been extracted from the books of M Limited for the year

66
ended on 31.03.2019. You are required to prepare a Cash Flow Statement.
(i) Net profit, before adjusting income tax but after considering the following items,
was ₹10 lakhs.
• Depreciation on Assets ₹2,50,000.
• Discount on issue of Debentures written off ₹15,000.
• Interest on Debentures paid ₹1,75,000.
• Book value of investment ₹1,50,000 (Sold for ₹1,60,000).
• Interest received on investments ₹30,000.
(ii) Income tax paid during the year ₹4,80,000.
(iii) 7,500 10% preference shares of ₹100 each were redeemed on 31.03.2019 at a premium
of 5%. Further the company issued 25,000 equity shares of ₹10 each at a premium of
20% on 02.04.2018. Dividend on preference shares were paid at the time of
redemption.
(iv) Dividends paid for the year 2017-18 ₹2,50,000 and interim dividend paid
₹1,50,000 for the year 2018-19.
(v) Land was purchased on 02.04.2018 for ₹1,20,000 for which the company issued 10,000
equity shares of ₹10 each at a premium of 20% to the land owner as consideration.
(vi) Current assets and liabilities were as follows:
Particulars 31.03.2018 (₹) 31.03.2019 (₹)
Stock 6,00,000 6,59,000
Sundry Debtors 1,04,000 1,06,550
Cash in hand 98,150 17,650
Bills Receivable 25,000 20,000
Bills Payable 22,500 20,000
Sundry. Creditors 83,000 85,650
Outstanding expenses 37,500 40,900
Cash Flow Statement For the year
ended 31.03.2019
Amount Amount Amount
Particulars (₹) (₹) (₹)

1. Cash Flow from Operating Activities:

Net Profit 10,00,000
Add: Adjustment for non-cash expenses 2,50,000
Depreciation on assets 15,000
Discount on issue of 1,75,000
debenturesInterest on 4,40,000
debentures 10,000 14,40,000
30,000
Less: Profit on sale of investment (1,60,000 -1,50,000) (40,000)
Interest received on investment
5,000 14,00,000
Operating profit before adjustment for changes in W.C. 2,650
3,400
Add: Decrease in Bills Receivable (25,000 - 20,000)
Increase in Sundry Creditors (85,650 - 83,000) 59,000 11,050
Increase in Outstanding Expenses (40,900 - 37,500) 2,550 14,11,050
2,500
Less: Increase in Stock (6,59,000 - 6,00,000) (64,050)
Increase in Sundry Debtors (1,06,550 - 1,04,000) 13,47,000
Increase in Bills Payable (22,500 - 20,000) 4,80,000 8,67,000

67
 Less: Income Tax paid
Net Cash Flow from Operating Activities

2. Cash Flow from Investing Activities:

Sale of investment 1,60,000
Interest received on investment 30,000
1,90,000
3. Cash Flow from Financing Activities:
Issue of shares at premium 3,00,000
Redemption of preference shares at 5% (7,87,500)
(75,000)
premiumPreference dividend paid (1,75,000)
Interest on debenture paid (4,00,000)
Equity dividend paid (2,50,000+1,50,000) (11,37,500)
Total Cash Flow (1+2+3) (80,500
Add: Opening cash & cash equivalent )
98,150
Closing cash & cash equivalent 17,650

Classification: Secured Loan ₹ 5,95,000

Unsecured Loan ₹13,326
Workings:
Calculation of Outstanding Interest:
Closing Balance
Quarters Interest (₹) Workings with Principal
ending (₹)
31.12.2017 20,000 ( ₹ 5,00,000 X 16% X 3/12 ) 5,20,000
31.03.2018 20,800 (₹ 5,20,000 X 16% X 3/12) 5,40,800
30.06.2018 21,632 (₹ 5,40,800 X 16% X 3/12) 5,62,432
30.09.2018 22,497 (₹ 5,62,432 X 16% X 3/12) 5,84,929
31.12.2018 23,397 (₹ 5,84,929 X 16% X 3/12) 6,08,326
1,08,326
State whether the following statements are True or False:
5. Interest received by a finance company is a part of cash flow from investing
activities.

68
Answer: T

Write short note

Objective of preparing Cash Flow
Answer:

Objective of preparing Cash Flow Statement:

The objectives are as follows:

(i) To provide information about firm's liquidity, flexibility and ability to generate
future cash flow.
(ii) To provide information about firm's ability to meet future obligations.
(iii) To enhance comparability among firms.
(iv) To assess reliability of net profit and quality of earnings.
(v) To enable the users to assess how assets and liabilities have increased or
decreased.
(vi) To project future cash flow streams.
(vii) To provide information on different types of cash flow.
6. State whether the following statements are True or False:

Machinery purchased by issuing shares is shown under Cash Flow from Investments Activities
in Cash Flow Statement.
Answer: FALSE
7. Interest received by a finance company is a part of cash flow from investing activities.
Answer: False

8. From the following information provided, prepare a Cash Flow Statement as per AS-3.
Balance Sheet of PQR Ltd.
Particulars Note As on As on
No. 31.03.16 31.03.15
` `
I Equity and Liabilities
1. Shareholders' fund
(a) Share Capital 1 20,00,000 20,00,000
(b) Reserves and Surplus 2 10,00,000 8,70,000
2. Share application money pending Nil Nil
allotment
3. Non-Current Liability Nil Nil
4. Current Liabilities 6,50,000 8,00,000
Total 36,50,000 36,70,000
II Assets
1. Non-current Assets
(a) Fixed Assets (Tangible) 16,50,000 15,00,000
(b) Non-current Investment 7,00,000 8,00,000
69
 2 Current Assets
(a) Inventories 7,60,000 7,00,000
(b) Trade Receivables 4,50,000 5,00,000
(c) Cash and Cash Equivalent 6,000 74,000
(d) Short term loan and advances 84,000 96,000
(Prepaid Expenses)
36,50,000 36,70,000

Notes to Accounts:
1. Share Capital
Equity Share Capital 20,00,000 15,00,000
Redeemable Preference Share Capital of `100, `50 Nil 5,00,000
paid
20,00,000 20,00,000
2. Reserve and Surplus
Balance of Profit 3,00,000 4,50,000
General Reserve 2,00,000 4,00,000
Capital redemption reserve 5,00,000 Nil
Securities Premium Nil 20,000
10,00,000 8,70,000
Additional information:
1. During the year the company got income from investment ₹ 80,000.
2. Company paid ₹1,50,000 as equity dividend and ₹ 76,000 as preference dividend.
3. The company redeemed the preference shares at a premium of 5% after making a
successful call of ₹ 50 per share to make the shares fully paid.
4. During the year one machine was sold for ₹ 50,000 and the profit on sale of ₹ 6,000 was
taken to Profit and Loss A/c. Depreciation for the year on fixed assets was ₹1,80,000.

Answer: Particulars ₹ ₹
1. Cash Flow from Operating Activities:
Fund from Operation 5,00,000
(-) increase in Inventory 60,000
(+) Decrease in Trade Receivables 50,000
(+) Decrease in Prepaid Expenses 12,000
(-) Decrease in Current Liability 1,50,000
Cash Flow from operating activities 3,52,000

II. Cash Flow from Investing Activities:

Income received from investment 80,000
Machinery sold 50,000
Sale of investment 1,00,000
Purchase of machinery (3,74,000) (1,44,000)

III. Cash Flow from Financing Activities

Dividend Paid (1,50,000+76,000) (2,26,000)
Call received on Preference shares 5,00,000
Preference shares redeemed at premium (10,50,000)
Equity share issued 5,00,000 (2,76,000)
(68,000)

70
 (+)Opening cash and cash equivalent 74,000
Closing cash and cash equivalent 6,000

Workings:
Profit & Loss Account
Dr. Cr
To Dividend 2,26,000 By Balance b/f 4,50,000
To Prem. on redemption 30,000 By Profit on Sale of Machine 6,000
To Cap. Red. Reserve 3,00,000 By Income from Investment 80,000
To Depreciation 1,80,000 By Fund from Operation (bal.fig) 5,00,000
To Balance c/f 3,00,000
10,36,000 10,36,000

Fixed Assets Account

Dr. Cr.
To Balance b/f 15,00,000 By Bank 50,000
To Profit and Loss 6,000 By Depreciation 1,80,000
To Bank (bal.fig.) 3,74,000 By Balance c/f 16,50,000
18,80,000 18,80,000

Equity Share Capital Account

Dr. Cr.
By Balance c/f 15,00,000
By Bank 5,00,000
To Balance c/f 20,00,000
20,00,000 20,00,000

Preference Share Capital Account

Dr. Cr.
To PSH 10,00,000 By Balance c/f 5,00,000
By Bank 5,00,000
10,00,000 10,00,000
Preference Share Holders (PSH) Account
Dr. Cr.
71
 To Bank 10,50,000 By Pref. Sh. Capital 10,00,000
By Premium on Redemption 50,000
10,50,000 10,50,000

General Reserve Account

Dr. Cr.
To CRR 2,00,000 By Balance b/f 4,00,000
To Balance c/f 2,00,000
4,00,000 4,00,000
Capital Redemption Reserve Account
Dr. Cr.
To Balance c/f 5,00,000 By Balance b/f Nil
By General Reserve 2,00,000
By Profit & Loss 3,00,000
5,00,000 5,00,000
Securities Premium Account
Dr. Cr.
To Premium on Redemption 20,000 By Balance b/f 20,000
To Balance c/f Nil
20,000 20,000
Premium on Redemption Account
Dr. Cr.
To Securities Premium 20,000 By PSH 50,000
To Profit and Loss 30,000
50,000 50,000
Investment Account
Dr. Cr.
To Balance b/f 8,00,000 By Bank 1,00,000
By Balance c/f 7,00,000
8,00,000 8,00,000

Write short note

Objective of preparing Cash Flow
Answer:

Objective of preparing Cash Flow Statement:

The objectives are as follows:
(i) To provide information about firm's liquidity, flexibility and ability to generate future
cash flow.
(ii) To provide information about firm's ability to meet future obligations.
(iii)To enhance comparability among firms.
(iv) To assess reliability of net profit and quality of earnings.
(v) To enable the users to assess how assets and liabilities have increased or
decreased.
(vi) To project future cash flow streams.
(vii) To provide information on different types of cash flow.

72
9. The following are the summarized Balance Sheets of ABC Limited as on 31st
March, 2016 and 2017:
Liabilities 31.03.16 31.03.17 Assets 31.03.16 31.03.17
Share Capital 4,60,000 4,60,000 Land & Building 3,00,000 3,00,000
Profit & Loss Balance 32,000 46,000 Machinery 1,04,000 1,40,000
Reserve 1,20,000 1,20,000 Investments 2,20,000 1,48,000
8% Debentures 1,80,000 1,40,000 Stock 1,64,000 2,12,000
Depreciation Fund 80,000 88,000 Debtors 1,34,000 86,000
Creditors 2,06,000 1,92,000 Cash 1,80,000 1,80,000
Outstanding expenses 26,000 24,000 Prepaid expenses 2,000 4,000
11,04,000 10,70,000 11,04,000 10,70,000

Additional Information:
1. 10% Dividend was paid during 2016-17.
2. Old Machinery costing ₹ 24,000 (accumulated depreciation ₹ 12,000) was sold for
₹ 8,000.
3. 40,000 8% Debenture were redeemed by purchase from open market at ₹ 96 for a
debenture of ₹ 100 on 31.03.2017.
4. Investments worth ₹ 72,000 were sold at book value.
5. Bad debt written off during the year ₹ 10,000.
Prepare a Statement of Cash Flow for the year ended 31.03.2017.

Answer:
ABC Ltd.
Cash Flow Statement for the year ended 31.03.2017
Particulars ₹ ₹ ₹
1. Cash Flows under Operating Activities
Operating Profit (As per adjusted P/L A/c) 96,800
Add: Decrease in Debtors 48,000
1,44,800
Less: Increase in stock 48,000
Increase in prepaid expenses 2,000
Decrease in creditors 14,000
Decrease in outstanding expenses 2,000 66,000
Net cash from Operating Activities 78,800
2. Cash Flows from Investing Activities :
Sale of machinery 8,000
Sale of investment 72,000
Less: Purchase of machinery 80,000
Net cash from Investing 60,000 20,000
3. Cash Flows from Financing Activities :
Redemption of Debenture (96/100 × 40,000) (38,400)
Payment of interest (14,400)
Payment of dividend (46,000)
Net cash from Financing activities (98,800)
Net change in cash and cash equivalent for the year Nil
Add : Cash at the beginning of the year 1,80,000
Cash at the end of the year 1,80,000

(1) Machinery Account

73
 Dr. Cr
Particulars ₹ Particular ₹
s
To Balance b/d 1,04,000 By Bank - Sale proceeds 8,000
" Bank - Purchase (Bat. Fig.) 60,000 " Depreciation fund 12,000
" Adj. P/L A/c - loss on sale 4,000
By Balance c/d 1,40,000
1,64,000 1,64,000

(2) Depreciation Fund Account

Dr. Cr
Particulars ₹ Particular ₹
s
To Machinery A/c 12,000 By Balance b/d 80,000
To Balance c/d 88,000 " Adj. P/L A/c— Depreciation 20,000
1,00,000 1,00,000
(3) Investment Account
Dr. Cr
Particulars ₹ Particular ₹
s
To Balance b/d 2,20,000 By Bank 72,000
By Balance c/d 1,48,000
2,20,000 2,20,000

(4) Adjusted Profit & Loss Account

Dr Cr.
Particular ₹ Particular ₹
s s
To Machinery A/c - loss on 4,000 By Balance b/d 32,000
sale
" Depreciation Fund 20,000 " 8% Debenture-Profit on 1,600
-Depreciation cancellation
" Dividend 46,000 By Operating profit (Bal. figure) 96,800
" Interest (1,80,000 x 8/100); 14,400
To Balance c/d 46,000
1,30,400 1,30,400
Note: There is no need to make any adjustment entry for bad debt as it has alreadybeen
written off.
Write short note on
10. Share Application money pending allotment
Share application money pending allotment
As per Schedule III it is to be shown as a separate line item on the face of Balance Sheet.
Other provisions in this respect are as follows:
(iv) Share Application Money not exceeding the Issued Capital and to the extent not refundable, is
to be disclosed as a separate line item after - Share Holders Funds and before - Non-Current
Liabilities.
(v) If the Company’s Issued Capital is more than the Authorized Capital, and approval of increase in
Authorized Capital is pending, the amount of Share Application Money received over and above
the Authorized Capital should be shown under the head - Other Current Liabilities.
74
 (vi) The amount shown as Share Application Money Pending Allotment will not include Share
Application Money to the extent refundable. For example, the amount, in excess of Issued
Capita], or where Minimum Subscription requirement is not met. Such amount will have to be shown
separately under 'Other CurrentLiabilities'.
(vi) Calls Paid in Advance are to be shown under - Other Current Liabilities. The amount of interest
which may accrue on such advance should also is to be reflected as a Liability.

11. Reasons for preparation of Cash Flows

Answer:
Reasons for preparation of Cash Flows:
Cash Flow statement is considered to be a summarized statement showing sources of Cash Inflows
and application of cash outflows of an enterprise during a particular period of time. It is
prepared on the basis of the published data as disclosed by the Financial Statement of two
different financial periods. It is an essential tool for managerial decision-making. Cash Flow
Statement reports the management net Cash Flow (i.e. cash inflow less cash outflow or vice
versa) from each activity of the enterprise as well as of the overall business of the enterprise. The
management of the enterprise gets a picture of movement of cash resources from the Cash Flow
Statement and can assess the stronger and weaker area of movement of cash for different
activities of the business for drawing up the future planning.

State whether the following statements are True or False:

12. Machinery purchased by issuing shares is shown under Cash Flow from Investments Activities
in Cash Flow Statement.
Answer: False

10. INSURANCE COMPANY FINANCIAL

STATEMENTS
Various Types of Insurance: Insurance is basically of two types-life insurance and general insurance. Life
insurance policy covers the life risk of the insured (or assured) up to the policy amount General insurance
means insurance other than insurance and various types of it are fire, marine or miscellaneous insurance
business be common types of miscellaneous insurance in India are: exchange risk insurance motor vehicle
insurance, credit insurance, workmen's compensation insurance, professional by insurance, cash in transit
insurance etc.

Distinction between Life Insurance and Forms of Insurance:

1. Life insurance is a contract under which, in consideration of premiums paid by the insured, the insurer
agrees to pay ked sum of money either on the death of insured or on the lapse of a specified number of
years. Example of LIC Companies are LIC, Prudential ICICI, Max New York Life Insurance etc.

Fire, marine and miscellaneous insurance business represents the type of contract under which, in return
for premiums paid by the insured, the insurer undertakes to reimburse the insured for any loss or liability he

75
may incur on the happening of an uncertain event. There are several types of policies issued for each class of
business.

2. Maturity: Since, in life insurance, the amount insured is payable on the happening of an event which is
bound to occur, namely, the lapse of the period of time or the death of the insured, this form of insurance is
frequently described as "assurance" business. Other forms of insurance provide only for the reimbursement
of loss or liability incurred and, therefore, they are known as 'insurance' business.

3. Insurance value: Human life, being invaluable, may be insured for any amount depending upon the
premiums the insured is willing to pay. Other forms of insurance are Contracts of indemnity and, therefore,
notwithstanding the amount of policy, the sum payable under it is limited to the amount of loss actually
suffered or the liability incurred.

4. Period of contract: Life insurance contracts are long term contracts running over the number of years
but general insurance contracts are only for one year though renewable year after year.

Terms used in Insurance Business:

Bonus: Policy holders of with profit policies are entitled to receive the bonus at the declared rate. Bonus is
usually declared on sum assured and not on already accumulated bonus. For example, in case of LIC of India
with profit policy holders are entitled to participate in 95% of profit (ie, excess of Balance of Life
Assurance Fund over Net Liability as per actuarial valuation). Such bonus may be paid.

1. In cash (i.e. Bonus in ash)

2. by reduction of future premiums (ie., Bonus in reduction of premium).

3. on maturity of the policy. (ie., Reversionary Bonus)

Interim Bonus: It is a bonus declared between dates of two valuation Balance Sheets. It is for a period for
which valuation is not complete.

Surrender Value: In the case of a life insurance, the insured usually undertakes to pay premium for a very
long time; and circumstances might arise when an insured ceases to pay further premium, then he has to
surrender his policy and the value then paid by the insurer is called surrender value.

Re-Insurance: If an insurer does not wish to bear the whole of risk of a policy, he may reinsure a part of
risk with other insurer. In such a case the insurer is said to have ceded a part of his business to other
insurer. If, on the other hand, he insures the risk underwritten by another assurance company, he is said to
have accepted reinsurance business. In such a case, on a claim arising, the claim will be shared between the
two companies in the proportion they had agreed to underwrite the risk.

Consideration for Annuities Granted: It refers to the lump sum amount paid to the insurer as consideration
for the payment of annuities. Consideration for annuities granted is a source of income of the life insurance
business and as such it is shown on the credit side of its Revenue Account

Co-Insurance: In cases of large risks the business is shared between more than one insurer under
coinsurance arrangements at agreed percentages. The leading insurer issues the documents, collects
premium and settles claims. Statements of accounts are rendered by the leading insurer to the other co-
insurers.

Life Assurance Fund: It refers to the fund which is reed to meet the aggregate liability on all Oolicies
outstanding. Until the liability on all outstang policies is computed, the amount of profe of the life business
76
cannot be ascertained business is said to have earned profit only fits Life Assurance Fund exceeds its net
liabi all outstanding policies. XSTER MINDS

The computation of the net liability on nostanding policies is a complicated mathematical process which can
be done only expede in the field called 'Actuaries'. This Computation is carried out by LIC, every two years.
As such, the Life Insurance business cannot ascertain its profits every year.

Types of Life Insurance Policies:

There are various life insurance policies. The popular life insurance policies are discussed below

1. With Profit Policies Holder is entitled to receive the bonus at the declared rate Traditionally. bonus rate
is expressed per thousand rupee of the sum assured. Bonus gets accumulated year after year but is paid at
the time of maturity of the policy. Bonus is declared on sum assured and not on already accumulated bonus.
For

2. Without Profit Policies Holder of Policy is not entitled receive the bonus declared from time to time.

3. With Accident Benefit Policies On payment of some extra premium, the holder is entitled to claim the
accidental benefit. Under life insurance policies with accidental benefit, on death of the insured due to
accident either double or triple the sum assured is paid according to the type of policy taken.

4. Without Accident Policy Neither extra premium is charged not extra sum assured is paid.

Some of the popular life insurance policies are discussed below.

a) Whole Life Policy Under this policy, the sum assured along with the bonuses (in case of with profit
policies) is payable on death of insured.

b) Endowment Policy Under this policy, the sum assured along with the bonuses (in case of with profit
policies) is payable on the expiry of specified term of policy or death of insured whichever is earlier.

Unexpired Risks Reserve:

Meaning of Provision for Unexpired Risks Provision for Unexpired Risks is a provision created to meet the
claims which may arise in respect of the policies which remain unexpired at the end of the year.

The minimum amount of such reserve to be kept according to the Executive Committee of the General
Insurance Council is as under.

Types of General insurance business % of Premium

I. Marine insurance 100%
II. Other Insurance 50%
However, the income tax authorities 100% of the net premium in case of marine insurance and 50% of the
net premiums of other insurance.

Since there is no bar on creating such reserve at a percentage higher than those laid down by the Executive
Committee, the Company may maintain such reserve at a higher percentage.

The excess reserve over the minimum reserve is termed as 'Additional Reserve'

Accounting Treatment of Provision for Unexpired Risks:

77
1. The difference between the aggregate amount of minimum provision and additional provision in the
beginning and aggregate amount there of at the end is disclosed as Changes in Provision for Unexpired
Risks' in Revenue Account.

2. Balance of Minimum provision and additional provision of unexpired risks is shown on the liabilities side of
Balance Sheet.

LIFE INSURANCE BUSINESS

Name of the Insurer:

FORM A-RA

Registration No. and date of Registration with the IRDA

REVENUE ACCOUNT for the year ended 31st March, 20...

Policy holders’ Account (Technical Account)

Current Previous
Particulars Schedule
Year Year
(` ‘000) (` ‘000)
Premiums Earned-Net
(a) Premium 1
(b) Re-insurance ceded
(c) Re-insurance accepted
Income from Investments
(a) Interest, Dividends & Rent-Gross
(b) Profit on sale/Redemption of Investments
(c) Loss on sale/Redemption of Investments
(d) Transfer/Gain on revaluation/ change in
Fair Value* Other Income (to be specified)
Total (A)
Commission
2
Operating Expenses related to Insurance
3
Business Other Expenses (to be
specified)
Provisions (other than taxation)
(a) For diminution in the value of investments (Net)
(b) Others (to be specified)
Total (B)
Benefits Paid 4
(Net) Interim
Bonuses Paid
Change in valuation of liability against life policies in
force
(a) Gross**
(b) Amount ceded in Re-insurance
(c) Amount accepted in Re-insurance
Total (C)

78
Surplus/(Deficit) (D) = (A) - (B) - (C)
Appropriations
Transfer to Shareholders’ Account
Transfer to Other Reserves (to be specified)
Transfer to Funds for Future Appropriations
Total (D)
Notes:

* Represents the deemed realised gain as per norms specified by IRDA.

** Represents Mathematical Reserves after Allocation of Bonus.

The Total Surplus shall be disclosed separately with the following details:

(a) Interim Bonus Paid:

(b) Allocation of Bonus to Policyholders:

(c) Surplus shown in the Revenue Account

(d) Total Surplus: [(a) + (b) + (c)):

Name of the Insurer:

FORM A-PL

Registration No. and Date of Registration with the IRDA

PROFIT & LOSS ACCOUNT for the year ended 31st March, 20…..

Shareholders’ Account (Non-technical Account)

Current Previous
Particulars Schedule
Year Year
(` ‘000) (` ‘000)
Balance brought forward from/transferred to the
PolicyholdersAccount (TechnicalAccount)
Income from Investments:
(a) Interest, Dividends & Rent-Gross
(b) Profit on sale/Redemption of Investments
(c) Loss on sale/Redemption of
Investments Other Income (To be
specified)
Total (A)
Expenses other than those directly related to the

79
 insurance
business
Provisions (Other than taxation)
(a) For diminution in the value of investments (Net)
(b) Others (to be specified)
Total (B)
Profit/ (Loss)
before tax Provision
for Taxation Profit/
(Loss) after tax
Appropriations
(a) Brought forward Reserve/Surplus from the Balance
Sheet
(b) Interim dividends paid during the year
(c) Proposed Final Dividend
(d) Dividend Distribution on Tax
(e) Transfer to reserves/other accounts (to be specified)
Profit carried forward to the Balance Sheet

Notes:

(a) In case of premiums, less re-insurance in respect of any segment of insurance business of total
premium earned, the same shall be disclosed separately.
(b) Premium income received from business concluded in and outside India shall be separately disclosed.
(c) Re-insurance premiums whether on business ceded or accepted are to be brought into account
gross (i.e., before deducting commissions) under the head Re-insurance premiums.
(d) Claims incurred shall comprise claims paid, settlement costs wherever applicable and change in the
outstanding provision for claims at the year-end.
(e) Items of expenses and income in excess of one per cent of the total premiums (less re-insurance) or `
5,00,000 whichever is higher, shall be shown as a separate line item.
(f) Fees and expenses connected with claims shall be included in claims.
(g) Under the sub-head “Others” shall be included items like foreign exchange gains or losses and other
items.
(h) Interest, dividends and rentals receivable in connection with an investment should be stated as gross
amount, the amount of income tax deducted at source being included under ‘Advance Taxes paid and
Taxes Deducted at Source’.
(i) Income from rent shall include only the Realised Rent. It shall not include any Notional Rent.

Name of the Insurer:

FORM A-BS

Registration No. and date of Registration with the IRDA

BALANCE SHEET As At 31st March, 20.......

80
 Current Previous
Particular Schedule
Year Year
(` ‘000) (` ‘000)
Sources of funds
Shareholders’ funds:
Share Capital 5
Reserves and Surplus 6
Credit/[Debit] Fair value change account
Sub-total
Borrowings 7
Policyholders’Funds:
Credit/ [Debit] Fair value change account
Policy Liabilities
Insurance Reserves
Provision for Linked Liabilities
Sub-total
Funds for Future Appropriations
Total
Application of Funds:
Investments 8
Shareholders’ 8A
Policyholders’
Assets held to cover linked liabilities
Loans 9
Fixed Assets 10
Current Assets:
Cash and Bank Balances 11
Advances and Other Assets 12
Sub-Total (A)
Current Liabilities Provisions 13
Sub-Total (B) 14

Net current assets (C) = (A – B)

Miscellaneous Expenditure
(to the extent not written off or adjusted) 15
Debit Balance in Profit & Loss Account (Shareholders’
Account)
Total

Contingent Liabilities

Current Previous
Particulars
Year Year
(` ‘000) (` ‘000)

81
 1. Partly paid-up investments
2. Claims, other than against policies, not acknowledged as debts by the
Company
3. Underwriting Commitments outstanding

4. Guarantees given by or on behalf of the Company

5. Statutory Demands/Liabilities in dispute, not provided for

6. Re-insurance obligations

7. Others (to be specified)

Total
Schedules Forming Part of Financial Statements

Schedule 1- Premium

Current Year Previous

Particulars
(` ‘000) Year
(` ‘000)
1. First year premiums
2. Renewal Premiums
3. Single Premiums
Total Premiums
Premium Income from business written:
1. In India
2. Outside India
Total premium (Net)
Notes. Re-insurance premiums whether on business ceded or accepted are to be brought into
account, before deducting commission, under the head of Re-insurance premiums.

Schedule 2 - Commission Expenses

Particulars Current Previous
Year Year
(` ‘000) (` ‘000)
Commission Paid
Direct-First year Premiums
- Renewal Premiums
- Single Premiums
Add: Commission on Re-insurance Accepted
Less: Commission on Re-insurance Ceded
Net Commission
Note. The profits/commissions if any, are to be combined with the Re-insurance accepted or Re-
insurance ceded figures.
Schedule 3 - Operating Expenses Related to Insurance Business

82
 Current Previous
Particulars Year (` Year (`
‘000) ‘000)
1. Employees’ Remuneration & Welfare Benefits
2. Travel, Conveyance and Vehicle Running Expenses
3. Rents, Rates & Taxes
4. Repairs
5. Printing & Stationery
6. Communication Expenses
7. Legal & Professional Charges
8. Medical Fees
9. Auditors’ Fees, Expenses, etc
(a) as auditor
(b) as adviser or in any other capacity, in respect of
(i) Taxation Matters
(ii) Insurance Matters
(iii) Management Services; and
(c) in any other capacity
10. Advertisement and Publicity
11. Interest & Bank Charges
12. Others (to be specified)
13. Depreciation
14. Total
Notes:

(a) Items of expenses in excess of one per cent of the net premium or `5,00,000 which-ever is
higher, shall be shown as a separate line item.
(b) Under the sub-head “Others”, ‘Operating Expenses (Insurance Business)’ shall include items like
foreign exchange gains or losses and other items.

Schedule 4 - Benefits Paid [Net]

Current Year Previous Year (`

Particulars
(` ‘000) ‘000)
1. Insurance Claims:
(a) Claims by Death,
(b) Claims by Maturity,
(c) Annuities/Pensions in payment,
(d) Other benefits, specify
83
2. (Amount ceded in Re-insurance):
(a) Claims by Death,
(b) Claims by Maturity,
(c) Annuities/Pensions in payment,
(d) Other benefits, specify
3. Amount accepted in Re-insurance:
(a) Claims by Death,
(b) Claims by Maturity,
(c) Annuities/Pensions in payment,
(d) Other benefits, specify
Total
Benefits paid to claimants:
1. In India
2. Outside India
Total Benefits paid (Net)
Notes:

(a) Claims include claims settlement costs, wherever applicable.

(b) The legal and other fees and expenses shall also form part of the claims cost, wherever
applicable.

Schedule 5 - Share Capital

Current Previous
Particulars
Year Year
(` ‘000) (` ‘000)
1. Authorized Capital
Equity Shares of ` .. each
2. Issued Capital
Equity Shares of ` . each
3. Subscribed Capital
…….. Equity Shares of .....`
4. Called-up Capital
Equity Shares of.. `
5. Less: Calls unpaid
Add: Shares forfeited (Amount originally
paid up) Less: Par value of Equity Shares
bought back Less: Preliminary Expenses
[Expenses including commission or brokerage on Underwriting or
sub- scription of shares]
Total

Notes:
(a) Particulars of the different classes of Capital should be separately stated.
(b) The amount capitalized on account of issue of Bonus Shares should be disclosed.
(c) In case any part of the Capital is held by a holding company, the same should be separately
disclosed.

Schedule 5A – Pattern of Shareholding

84
 [As certified by the Management]

Current Year Previous Year

Shareholders Number of % of Number of % of Holding
Shares Holding Shares
Shares Promoters
● Indian
● Foreign
Others
Total
Schedule 6 – Reserves and Surplus (Shareholders)

Current Previous
Particulars
Year Year
(` ‘000) (` ‘000)
1. Capital Reserve
2. Capital Redemption Reserve
3. Share Premium
4. Revaluation Reserve
5. General Reserves
Less: Debit balance in Profit and Loss Account, if any
Less: Amount utilised for buy-back
6. Catastrophe Reserve
7. Other Reserves (to be specified)
8. Balance of Profit in Profit and Loss Account
Total
Note. Additions to and deductions from the Reserves should be disclosed under each of the specified
heads.
The Reserves and Surplus (Shareholders) as above shall be further segregated and disclosed as
Reserves and Surplus — (1) In India, and (2) Outside India
Schedule 6A may be prepared for Insurance Reserves of Policyholders.
Schedule 7 – Borrowings
Current Previous
Particulars
Year Year
(` ‘000) (` ‘000)
1. Debentures/ Bonds
2. Fixed Deposits
3. Banks
4. Financial Institutions
5. Other entities carrying on insurance business
6. Other (to be specified)
Total

Notes:

(a) The extent to which the borrowings are secured shall be separately disclosed stating the nature
of the Security under each sub-head.
85
 (b) Amounts due within 12 months from the date of Balance Sheet should be shown separately.

Schedule 8 – Investments-Shareholders

Current Previous
Particulars
Year Year
(` ‘000) (` ‘000)
Long-term investments
1. Government Securities and Government Guaranteed Bonds
including
Treasury Bills
2. Other Approved Securities
3. Other Investments
(a) Shares
– Equity
– Preference
(b) Mutual Funds
(c) Derivative Instruments
(d) Debentures/Bonds
(e) Other Securities (to be specified)
(f) Subsidiaries
(g) Investment Properties-Real Estate
Short-term Investments
1. Government Securities and Government Guaranteed Bonds
including
Treasury Bills
2. Other Approved Securities
3. Other Investments
(a) Shares
– Equity
– Preference
(b) Mutual Funds
(c) Derivative Instruments
(d) Debentures/Bonds
(e) Other Securities (to be specified)
(f) Subsidiaries
(g) Investment Properties-Real Estate

Total
Investments
1. In India
2. Outside India
Total

86
 Schedule 8A Investments-Policyholders

Current Previous
Particulars
Year Year
(` ‘000) (` ‘000)
Long-term Investments
1. Government Securities and Government Guaranteed Bonds
including
Treasury Bills
2. Other Approved Securities
3. Other Investments
(a) Shares
– Equity
– Preference
(b) Mutual Funds
(c) Derivative Instruments
(d) Debentures/Bonds
(e) Other Securities (to be specified)
(f) Subsidiaries
(g) Investment Properties-Real Estate
4. Investments in Infrastructure and Social sector
5. Other than Approved
Investments Short-term
Investments
1. Government securities and Government Guaranteed Bonds
including
Treasury Bills
2. Other Approved Securities
3. Other Investments
(a) Shares
– Equity
– Preference
(b) Mutual Funds
(c) Derivative Instruments
(d) Debentures/Bonds
(e) Other Securities (to be specified)
(f) Subsidiaries
(g) Investment Properties-Real Estate
4. Investments in Infrastructure and Social Sector
5. Other than Approved
Investments Total
Investments
1 . In India
2 . Outside India
Total
Notes: (applicable to Schedules-8 and 8A):
87
(a) Investments in subsidiary/holding companies, joint ventures and associates shall be separately
disclosed, at cost.
(i) Holding company and subsidiary shall be construed as defined in the Companies Act, 1956.

(ii) Joint Venture is a contractual arrangement whereby two or more parties undertake an economic activity,
which is subject to joint contro1.

(iii) Joint control is the contractually agreed sharing of power to govern the financial and operating policies
of an economic activity to obtain benefits from it.

(iv) Associate is an enterprise in which the company has significant influence and which is neither a
subsidiary nor a joint venture of the company.

(v) Significant influence (for the purpose of this Schedule) means participation in the financial and
operating policy decisions of a company, but not control of those policies. Significant influence may be
exercised in several ways, for examples, by representation on the board of directors, participation in
the policy-making process, material inter-company transactions, interchange of managerial personnel or
dependence on technical information. Significant influence may be gained by share ownership, statute or
agreement. As regards share ownership, if an investor holds, directly or indirectly through subsidiaries,
20 per cent or more of the voting power of the investee, it is presumed that the investor does have
significant influence, unless it can be clearly demon started that this is not the case. Conversely, if the
investor holds, directly or indirectly through subsidiaries, less than 20 per cent of the voting power of
the investee, it is presumed that the investor does not have significant influence, unless such influence
is clearly demonstrated. A substantial or majority ownership by another investor does not necessarily
preclude an investor from having significant influence.

(b) Aggregate amount of company’s investments other than listed equity securities and derivative
instruments and also the market value thereof shall be disclosed.

(c) Investments made out of catastrophe reserve should be shown separately.

(d) Debt securities will be considered as “held to maturity” securities and will be measured at historical
costs subject to amortization

(e) Investment property means a property [land or building or part of a building or both) held to earn
rental income or for capital appreciation or for both, rather than for use in services or for
administrative purposes.
Schedule 9 – Loans

Particulars Current Previous

Year Year
(` ‘000) (` ‘000)

88
1. Security-wise Classification Secured []

(a) On mortgage of property

– In India
– Outside India
(b) On shares, Bonds, Govt. Securities, etc.
(c) Others (to be specified)
Unsecured
(a) Loans against policies
(b) Others (to be specified)
Total

2. Borrower-wise classification
(a) Central and State Governments
(b) Banks and Financial Institutions
(c) Subsidiaries
(d) Companies
(e) Loans against policies
(f) Others (to be specified)
Total
3. Performance-wise
classification
(a) Loans classified as standard
– In India
– Outside India
(b) Non-standard loans less provisions
– In India
– Outside India
Total
4. Maturity-wise classification
(a) Short-term
(b) Long-
term Total

Notes:
(a) Short-term loans shall include those, which are repayable within 12 months from the date of
Balance Sheet. Long-term loans shall be the loans other than short-term loans.
(b) Provisions against Non-Performing loans shall be shown separately.
(c) The nature of the Security in case of all Long-Term Secured Loans shall be specified in each
case. Secured Loans for the purposes of this schedule, means Loans Secured wholly or partly
against an asset of the Company.
(d) Loans considered doubtful and the amount of provision created against such Loans shall be is
closed.
SCHEDULE 10 – Fixed Assets (`‘000)

89
 Particulars Cost/ Gross Block Depreciati Net Block
on
Openin Addition Deductio Closin Up to For On Sales/ To As at Previou
g s ns g Last the Adjustmen Dat year s
Year Year ts e end year
Goodwill
Intangibles
(specify) Land
Freehold
Leasehold
Property
Buildings
Furniture and
Fittings Information
Technology
Equipment
Vehicles
Office Equipment
Others (Specify
nature)
TOTAL
PREVIOUS YEAR

Note:
Assets included in land, property and building above exclude Investment Properties as defined
in Note
(d) to Schedule 8.

Schedule 11– Cash and Bank Balances

Particulars Current Previous Year
Year (` ‘000)
(` ‘000)
1. Cash (including Cheques, Drafts and Stamps)
2. Bank Balances
(a) Deposit Accounts
• Short-term (due within 12 months of the date of Balance
Sheet)
• Others
(b) Current Accounts
(c) Others (to be specified)
3. Money at Call and Short Notice
(a) With Banks
(b) With other Institutions
4. Others (to be specified)
Total
Balances with non-scheduled banks included in 2 and 3 above

90
Cash & Bank Balances
1. In India
2. Outside India
Total
Note: Bank balance may include Remittances-in-transit. If so, the nature and
amount should be separately stated.

Schedule 12 – Advances and other assets

Current Previous Year

Particulars
Year (` ‘000)
(` ‘000)
Advances
1. Reserve Deposits with Ceding Companies
2. Advances to ceding companies
3. Application money for investments
4. Pre-Payments
5. Advances to Officers/Directors
6. Advance Tax paid and Taxes Deducted at Source
7. Others (to be specified)
Total (A)
Other Assets
1. Income accrued on investments
2. Outstanding premiums
3. Agents’ Balances

4. Foreign agencies’ Balances

5. Due from other entities carrying on Insurance business
6. Due from Subsidiaries/Holding Company
7. Re-insurance claims/balances receivable
8. Deposit with Reserve Bank of India
[Pursuant to Section 7 of Insurance
Act, 1938]
9. Others (to be specified)
Total (B)
Total (A + B)
Notes:
(a) The items under the above heads shall not be shown net of provisions for doubtful amounts.
The amount of provision against each head should be shown separately.
(b) The term ‘officer’ should conform to the definition of the word ‘officer’ under the Companies
Act, 1956.

Schedule 13 – Current Liabilities

91
 Current Previous
Particulars
Year Year
(` ‘000) (` ‘000)
1. Agents’ Balances

2. Balances due to other insurance companies

3. Advances from Treaty Companies

4. Deposits held on re-insurance ceded

5. Premiums received in advance

6. Sundry creditors

7. Due to subsidiaries/holding company

8. Claims outstanding

9. Annuities due

10. Due to Officers/Directors

11. Others (to be specified)

Total

Schedule 14 – Provisions

Current Previous
Particulars
Year Year
(` ‘000) (` ‘000)
1. For taxation (less payments and taxes deducted at
source)
2. For proposed Dividends
3. For Dividend Distribution Tax
4. Bonus Payable to the Policyholders
5. Others (to be specified)
Total

Schedule 15 – Miscellaneous Expenditure

(To the extent not written off or adjusted)

Particulars Current Year (` Previous Year (`

‘000) ‘000)
1. Discount allowed in issue of shares/debentures
2. Others (to be specified)
Total
Notes:

(a) No item shall be included under the head “Miscellaneous Expenditure” and carried
forward unless:

1. Some benefit from the expenditure can reasonably be expected to be received in

92
 future, and

2. the amount of such benefit is reasonably determinable.

The amount to be carried forward in respect of any item included under the head “Miscellaneous
Expenditure” shall not exceed the expected future revenue/other benefits related to the
expenditure

QUESTIONS

1. State whether the following statements are True or False:

Bonus is the share of profit which is payable by the insurance company to the policyholders.

Answer: True

2. Write short notes on

Re-insurance

Answer:

Write short note on

Distinguish between Life and Non-Life Insurance

(c) There are certain basic differences between life policies and other types of policies.
These are listed below:
(i) Human life cannot be valued exactly. Therefore, each insured is permitted to insure his
life for a specified sum, depending on his capacity to pay premiums. This is also one form of
investment and the policy amount depends on his investment decision. In the event of the
policy maturing, the insurer must pay the policy amount, as actual loss cannot be
determined. This is not the case with other policies. Other policies are contracts of indemnity.
Therefore, notwithstanding the amount for which the policy is taken, the insurer would pay
(reimburse) only the actual loss suffered or the liability incurred.
(ii) Life insurance contracts are long-term contracts. Once a policy is taken, premiums have to
be paid for number of years till maturity and the policy amount is paid on maturity. Of course,
a life policy can be surrendered after certain number of years and the insured is paid a
proportion of the premiums paid known as surrender value. In the case of other policies, they are
for a short period of one year although the policy can be renewed year after year.
(iii) Life insurance is known also by another term 'assurance' since the insured gets an assured
sum. Other policies are known as insurance.
(iv) The determination of profit is by different methods for life and general insurance business.
In the case of life business, periodically actuaries estimate the liability
under existing policies. On that basis, a valuation Balance Sheet is prepared todetermine the
profit. In the case of general insurance business, a portion of thepremium is carried forward
as a provision for unexpired liability and the balance net of claims and expenses is taken as profit
(or loss).

2. Prepare the fire Insurance Revenue Account of Agni Fire Insurance Ltd. as per IRDA

93
regulations for the year ended 31st March, 2019 from the following details:

Particulars Amount (₹)

Claims paid 6,00,000
Legal Expenses regarding claims 10,000
Premiums received 12,50,000
Re-insurance premium paid 50,000
Commission 3,00,000
Expenses of Management 2,00,000
Provision against unexpired risk as on 1st April 2018 5,75,000
Claims unpaid on 1st April, 2018 50,000
Claims unpaid on 31st March, 2019 80,000

Provide for unexpired risk @ 50% less reinsurance.

Answer:

Sr. Particulars Schedule Amount

No (₹)
1 Premium earned 1 11,75,000
2 Other income ----

3 Interest, dividend and rent ----

Total (A) 11,75,000

4 Claims incurred 2 6,40,000
5 Commission 3 3,00,000
6 Operating expenses related to insurance business 4 2,00,000
Total (B) 11,40,000
Operating Profit (A - B) 35,000

Schedule 1: Premium Earned (Net) (₹)

Premium received 12,50,000
Less: Re-insurance premium (50,000)
Net Premium 12,00,000
Adjustment for change in reserve for unexpired risks (25,000)
11,75,000

Schedule 2: Claims incurred (₹)

Claims paid including legal expenses (6,00,000 + 10,000) 6,10,000
94
 Add: Claims outstanding at the end of the year 80,000
Less: Claims outstanding at the beginning of the year (50,000)
Total Claims Incurred 6,40,000

Schedule 3: Commission (₹)

Commission paid 3,00,000

Schedule 4: Operating Expenses (₹)

Expenses of Management 2,00,000

Working Note:

Change in the Provision for Unexpired Risk (₹)

Unexpired risk reserve on 31st March, 2018 = 50% of 6,00,000
net
premium (i.e., 50% of ₹ 12,00,000)
Less: Unexpired risk reserve as on 1st April, 2018 (5,75,000)
25,000
Write short note on

Surrender Value of a Life Insurance Policy

Answer:
Surrender Value of a Life Insurance Policy
In the case of life policy, the policy normally has value only when it matures. But tofacilitate the
promotion of business, insurance companies assign value to the policy on the basis of the
premiums 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 annual premiums are paid.
Amount paid as surrendervalue is an expenditure and is similar to claims paid.

11. BANKING COMPANY FINANCIAL STATEMENTS

Topics to be covered:

Prudential Norms

Bank Final Accounts

PRUDENTIAL NORMS

95
Deals with 4 main aspects:

1. Classification of Advances.
2. Income Recognition.
3. Provision creation.
4. Capital adequacy norms.

1. Classification of Asset/Advances:

1. Primary Classification

Types of classification

2. secondary Clasification

Primary Classification:

What is primary classification?

A Classification made for enabling the Secondary Classification. Income Recognition (Therefore
it can be concluded that for income Recognition primary classification is sufficient)

Types of Assets under this classification:

1. Performing Asset: A banking Asset which is not a Non-performing Asset i.e. An asset which
generates the income properly for the bank.

2. Non-Performing Asset: A banking Asset becomes a NPA when the interest/principal from it
is not received for a certain period.

3. What is a certain Period?

This period varies from one type of advance to another type. This will be discussed below.
Term Loans: A term loan is treated as a non-performing asset (NPA) if interest and/or
installment of principal remain overdue for a period of more than 90 days. For Eg. Any amount
which had become payable before 31" of December, 2005 will be NPA as at 31" of March,
2006 if it remains unpaid.
Cash Credits and overdrafts: A cash credit overdraft account is treated as NPA if it remains
out of order. An account is treated as 'out of order' if any of the following conditions is
satisfied:
1. The outstanding balance remains continuously in excess of the sanctioned limit / drawing
power for a continuous period of 90 days prior to the balance sheet date.
2. Though the outstanding balance is less than the sanctioned limit/drawing power-
a) There are no credits continuously for mere aan 90 days as on the date of balance sheet:

96
 b) Credits during the aforesaid period are not enough to cover the interest debited during the
same period.
Further any amount due to the bank under any credit facility is 'overdue' if it is not paid on the
due date fixed by the bank.
Category Sub-standard: Since the credit in the account is not sufficient to cover the interest
debited during the period account will be said as NPA.
Bills Purchased & Discounted: Such credit facilities are treated as NPA if they remain overdue
and unpaid for a period of more than 90 days. For Eg. If the bills purchased and discounted
before 31st December, 2004, if unpaid as at 31st March, 2005 will be treated as NPA
Other Credit Facilities: Such credit facilities are treated as NPA if any amount to be received
in respect of ach a facility remains overdue for a period of more than 90 days.
Agricultural Advances: Advances granted for agricultural purposes become NPA if interest
and/or installment of principal remains overdue for two crop seasons in case of loan granted for
short duration crops and one crop season in case of long duration crops.
For this purpose "long duration crops would be crops with crop season longer than one year".

Appropriations of money paid to the bank by the customer. Arrears of interest, current period
interest, Arrears of Principle, Current period principle.

Regularization of Account by Year-end: The identification of NPA is to be done on the basis

of the position as on the balance sheet date. If an account has been regularized before the
balance sheet date by payment of overdue amount through genuine sources (and not by sanction
of additional facilities or transfer of funds between accounts), the account need not be treated
as NPA.

Net worth of Borrower/Guarantor or Availability of Security: Since income recognition is

based on recoveries from an advance account, net worth of borrower/guarantor should not be
taken into account for the purpose of treating an advance as NPA or otherwise. Likewise, the
availability of security is not relevant for determining whether an account is NPA or not (this.
however, subject to certain exceptions discussed later in this chapter.)

Consortium Advances: Each bank may classify the borrowal accounts according to its own
record of recovery and other aspects having a bearing on the recoverability of the advances.

Advances Secured Against Certain Instruments: Advances secured against term deposits,
national savings certificates, Indira Vikas Patras, Kisan Vikas Patras and life insurance policies
have been exempted from the above guidelines. Thus, interest on such advances may be taken to
income account on due dates provided adequate margin is available in the respective accounts.

Secondary Classification:

97
 Secondary
classification

Standard Sub-Standard Doubtful Loss Asset

1. Standard Asset: A performing Asset

2. Sub-standard assets; A sub-standard asset is one which has remained as NPA for a period of
less than or equal to 12 months.

3. Doubtful assets: w.e.f. 31 March, 2006 an asset would be classified as doubtful if it remained
in the substandard category for 12 months.

BILLS FOR COLLECTION

Bills for collection refer to the bills received by bank from customers for the purpose of collection.

Accounting treatment of Bills for collection:

1. On receipt of bills for collection, the particulars of such bills are recorded in bills for
collection register.
2. On collection, the following entry is passed:
Cash A/c Dr. ( With Bill Amount)
To Commission A/c (With Commission)
To Customers A/c (With Balance)
Disclosure of Bills for collection:
Bills held for collection are to be shown by) note to the balance sheet
Rebate on Bills Discounted (Or) Unexpired Discount (Purchase Or Discounting Of Bills)

An act of purchasing of a bill and making payment for it before its maturity is called discounting
of bill. When the customers discounts the bill with the bank, the bank earn discount which is
named as Discount on Bills discounted. But some of the bills may mature after the year ending &
in which case a part of the discount should be shown as income of the next accounting year.

Accounting Entries will be as follows:

1. On Discounting of the bills:

Bills Discounted A/c Dr xxx
To Customer A/c XXX
To Discount on bills Discounted A/c xxx
2. At the end of the year:
Discount on bills discounted A/c Dr xxx
To Rebate on Bills discounted A/c xxx
98
 3. In the beginning of the next year the entry to be passed is:
Rebate on Bills Discounted A/c Dr xxx
To discount on bills discounted A/c xxx
4. At the end of the year the balance in discount A/c will be
transferred to P&L A/C:
Discount on Bills Discounted A/c Dr xxx
To Profit & Loss A/C xxx

Discount to be shown in the P&L A/c next year:

Particulars Rs.
Discount XXX
Add: Rebate on Bills discounted ( b/f from last year) XXX
XXX
Less: Rebate on bills Discounted (c/f to next year) XXX
Total: (to be shown in Profit & Loss A/c) XXX

Forms of Balance Sheet and Profit and Loss Account (Third Schedule of the Banking Regulation Act, 1949)
Form ‘A’
Form of Balance Sheet

Balance Sheet of ................. (here enter name of the Banking Company)

Balance Sheet as on 31st March (Year)

(` in 000’)
Schedul As on 31.3. As on 31.3.
e (Current (Previous Year)
No. Year)
Capital and Liabilities
Capital 1
Reserves & Surplus 2
Deposits 3
Borrowings 4
Other Liabilities and Provisions 5
Total
Assets
Cash and balances with RBI 6
Balances with banks and money at call and short 7
notice
Investments 8
Advances 9
Fixed Assets 10
Other Assets
Total 11

99
Contingent liabilities Bills for collection 12

Form ‘B’

From of Profit & Loss Account

For the year ended 31st March
Schedul As on 31.3. As on 31.3.
e (Current (Previous
No. Year) Year)
I. Income
Interest 13
earned 14
Other
Income
Total
II. Expenditure
Interest
Expended 15
Operating Expenses 16
Provision and contingencies
Total
III. Profit /Loss
Net Profit/(Loss) (–) for the year
Profit/(Loss) (–) brought forward
Total
Transfer to statutory
reserve Transfer to
other reserve Proposed
Dividend
Balance carried forward to Balance sheet
Total
🖸 Forms of Various Schedules
Schedule 1 – Capital

Particulars As on 31.3. As on 31.3.

(Current (Previous
Year) Year)
I. For Nationalized Banks
Capital (Fully owned by Central Government)
II. For Banks Incorporated Outside India
Capital
(i) (The amount brought in by banks by way of start-up
capital as prescribed by RBI should be shown under
this head)

100
 (ii) Amount of deposit kept with the RBI under Section
11(2) of Banking Regulation Act, 1949
Total
III. For Other Banks
Authorized Capital
........... shares of ` each
Issued Capital
........... shares of ` each
Subscribed Capital
.......... shares of ` each
Called-up Capital
........... shares of ` each
Less: Calls unpaid
Add: Forfeited shares
Schedule 2 – Reserve and Surplus

Particulars As on 31.3. As on 31.3.

(Current (Previous
Year) Year)
I. Statutory Reserves
Opening Balance
Additions during the year
Deductions during the year
II. Capital Reserves
Opening Balance
Additions during the year
Deductions during the year
III. Securities Premium
Opening Balance
Additions during the year
Deductions during the year
IV. Revenue and other Reserves
Opening Balance
Additions during the year
Deductions during the year
V. Balance in Profit and Loss Account
Total (I + II + III + IV + V)

Schedule 3 - Deposits

Particulars As on 31.3. As on 31.3.

(Current (Previous
Year) Year)

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A. I. Demand Deposits
(i) From banks
(ii) From others
II. Savings Bank Deposits
III. Term Deposits
(i) From banks
(ii) From others
Total (I + II + III)
B. (i) Deposits of branches in India
(ii) Deposits of branches outside India
Total

Schedule 4 - Borrowings

Particulars As on 31.3. As on 31.3.

(Current (Previous
Year) Year)
I. Borrowings in India
(i) Reserve Bank of India
(ii) Other Banks
(iii) Other Institution and agencies
II. Borrowings Outside India
1. Total (I + II)
Secured borrowings in I and II above.

Schedule 5 - Other Liabilities and Provisions

Particulars As on 31.3. As on 31.3.

(Current (Previous
Year) Year)
I. Bills Payable
II. Inter-Office adjustments (net)
III. Interest accrued
IV. Others (Including Provisions)
Total
Schedule 6 - Cash and Balances with Reserve Bank of India

Particulars As on 31.3. As on 31.3.

(Current (Previous
Year) Year)
I. Cash in hand (including foreign currency notes)
II. Balances with RBI
(i) in Current Account

102
 (ii) in Other Accounts
Total (I + II)
Schedule 7 - Balances with Banks and Money at Call & Short Notice

Particulars As on 31.3. As on 31.3.

(Current (Previous
Year) Year)
I. In India
(i) Balances with Banks
(a) In Current Accounts
(b) In Other Deposit Accounts
(ii) Money at Call and Short Notice
(a) With Banks
(b) With other institutions
Total (i + ii)
II. Outside India
(i) in Current Accounts
(ii) in Other Deposit Accounts
(iii) Money at Call and Short Notice
Total (i, ii, iii)
Grand Total (I + II)

Schedule 8 - Investments
Particulars As on 31.3. As on 31.3.
(Current (Previous
Year) Year)
I. Investments in India
(i) Government Securities
(ii) Other Approved Securities
(iii) Shares
(iv) Debentures and Bonds
(v) Subsidiaries and/or Joint Ventures
(vi) Others (to be specified)
Total
II. Investments Outside India
(i) Government securities (including loc al authorities)
(ii) Subsidiaries and/or Joint Ventures abroad
(iii) Other investments (to be specified)
Total
Grand Total (I + II)
Schedule 9 – Advances

Particulars As on 31.3. As on 31.3.

(Current (Previous
Year) Year)
103
A. (i) Bills Purchased and Discounted
(ii) Cash Credits, Overdrafts and Loans Payable on
Demand
(iii) Term Loans
Total
B. (i) Secured by Tangible Assets
(i) Covered by Bank/Government Guarantees
(iii) Unsecured
Total
C. I. Advances in India
(i) Priority Sectors
(ii) Public Sector
(iii) Banks
(iv) Others
Total
II. Advances Outside India
(i) Due from Banks
(ii) Due from others
(a) Bills Purchased and Discounted
(b) Syndicated Loans
(c) Others
Total
Grand Total ( I +
II) Schedule 10 - Fixed Assets
Particulars As on 31.3. As on 31.3.
(Current (Previous
Year) Year)
I. Premises
At cost as on 31st March of the preceding year
Additions during the year
Deductions during the year
Depreciation to date
II. Other Fixed Assets (including Furniture and Fixtures)
At cost as on 31st March of the preceding year
Additions during the year
Deductions during the year
Depreciation to date
Total (I + II)
Schedule 11 - Other Assets

Particulars As on 31.3. As on 31.3.

(Current (Previous
Year) Year)
I. Inter-Office Adjustments (net)

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 II. Interest Accrued
III. Tax paid in Advance / Tax deducted at source
IV. Stationery and Stamps
V. Non-banking assets a c quired in satisfaction of claims
VI. Others
Total

Schedule 12 - Contingent Liabilities

Particulars As on 31.3. As on 31.3.

(Current (Previous
Year) Year)
I. Claims against the bank not acknowledged as debts
II. Liability for partially paid investments
III. Liability on account of outstanding forward exchange
contracts
IV. Guarantees given on behalf of constituents
a. In India
b. Outside India
V. Acceptances, endorsements and, other obligations
VI. Other items for which the bank is contingently liable
Total
Schedule 13 -Interest Earned

Particulars As on 31.3. As on 31.3.

(Current (Previous
Year) Year)
I. Interest /discount on advances /bills
II. Income on investments
III. Interest on balances with Reserve Bank of India and
other inter-bank
funds
IV. Others
Total
Schedule 14 - Other Income

Particulars As on 31.3. As on 31.3.

(Current (Previous
Year) Year)
I. Commission, exchange and brokerage
II. Profit on sale of investments
Less: Loss on sale of investments
III. Profit on revaluation of investments
Less: Loss on revaluation of investments

105
 IV. Profit on sale of land, buildings and other assets
Less: Loss on sale of land, buildings and other assets
V. Profit on exchange transactions
Less: Loss on exchange transactions
VI. Income earned by way of dividends etc., from subsidiaries/
companies and/or joint ventures abroad / in India
VII. Miscellaneous Income
Total
Schedule 15 - Interest Expended

Particulars As on 31.3. As on 31.3.

(Current (Previous
Year) Year)
I. Interest on deposits
II. Interest on Reserve Bank of India / inter-bank
borrowings
III. Others
Total
Schedule 16 - Operating Expenses

Particulars As on 31.3. As on 31.3.

(Current (Previous
Year) Year)
I. Payments to and provisions for employees
II. Rent, taxes and lighting
III. Printing and stationery
IV. Advertisement and publicity
V. Depreciation on Bank’s property
VI. Directors’ fees, allowances and expenses
VII.Auditors’ fees and expenses (including branch auditors
fees and expenses)
VIII.Law Charges
IX. Postages, Telegrams, Telephones, etc.
X. Repairs and maintenance
XI. Insurance
XII.Other expenditure
Total
@ In case there is any unadjusted balance of loss, the same may be shown under this item with
appropriate foot note.

PROBLEMS

1. From the following information for a Bank calculate the amount of discount to be
transferred to the Statement of Profit and Loss.

106
 (i) Rebate on Bills Discounted (as on 01.04.2016) ₹ 28,000. Discount Received ₹
1,02,000.
(ii) The following bills have been discounted during the year:
Amount of Bill Rate of Due Date (including grace days)
(₹) Discount
65,000 13%p.a. June 14,2017
1,50,000 15% p.a. July 19,2017
4,30,000 12% p.a. August 30,2017
Also pass the necessary journal entry for the unexpired discount as on31.03.2017.

Answer:

Calculation for rebate on bill discounted

Bill Due Date Days after due Amount (₹) Rate Discount
date
14.06.17 75 65,000 13% 1,736
19.07.17 110 1,50,000 15% 6,781
10.08.17 132 4,30,000 12% 18,661
Total 27,178

Amount to be credited to P/L = 28000 + 102000 - 27178 = ₹ 102822.Journal

Entry:
Interest and Discount A/C ............…………...Dr 27,178
To Rebate on Bill Discounted A/C 27,178

2. Write short note

Provisioning Arrangements for Non-Performing Assets
Answer:

Rates of Provisioning for Non-Performing Assets and Restructured Advances

Category of Advances Rate (%)
Standard Advances
(a) Direct advances to agricultural and SME 0.25
(b) Advances to Commercial Real Estate (CRE) Sector 1.00
(c) All other loans 0.40
Sub-standard Advances
Secured Exposures 15
Unsecured Exposures in respect of Infrastructure loan accounts 20
where certain safeguards such as escrow accounts are available.
Unsecured other loans 25
Doubtful Advances - Unsecured Portion 100
Doubtful Advances - Secured Portion
For Doubtful upto 1 year 25
For Doubtful > 1 year and upto 3 years 40
For Doubtful > 3 years 100

107
 3. State whether the following statements are True or False:
Minimum aggregate value of Paid-up Capital and Reserve in case of a Banking Company
incorporated outside India not having place(s) of business in the city of Mumbai or Kolkata
or both should be ₹15 lakhs.

Answer: TRUE

4. Given below are details of interest on advance of a Commercial Bank as on

31.03.2017:
Particulars Interest Interest Received
Earned (₹ in (₹ in Crore)
Crore)
Performing Assets
Term Loan 120 80
Cash Credit and Overdraft 750 620
Bills Purchased and Discounted 150 150
Non-Performing Assets
Term Loan 75 5
Cash Credit and Overdraft 150 12
Bills Purchased and Discounted 100 20
Find out the income to be recognized for the year ended 31st March, 2017.

Answer:

As per RBI Circular, Interest on non-performing assets are considered on Cash Basiswhereas
interest on performing assets are considered on Accrual Basis.
Statement Showing the Recognition of Income
(₹ in Crore)
Particulars Amount (₹) Amount (₹)
1. Interest on Term Loans
(i) Performing Assets 120
(ii) Non-performing Assets 5
125
2. Interest on Cash Credit and Overdraft
(i) Performing Assets 750
(ii) Non-performing Assets 12
762
3. Interest on Bills Purchased and Discounted
(i) Performing Assets 150
(ii) Non-performing Assets 20
- 170
Income to be recognized 1057

108
 5. From the following information find out the amount of provisions required to be made in the
Profit & Loss Account of a Commercial Bank for the year ended 31st March, 2019:
(i) Credit outstanding for ₹ 80 lakhs against which the Bank holds securities worth ₹ 20
lakhs. 50% of the above advance is covered by ECGC. The above advance has
remained doubtful for more than 3 years.
(ii) Other advances:
Assets classification ₹ in lakhs
Standard 2,500
Sub-standard 1,800
Doubtful:
For one year 750
For two years 600
For three years 500
For more than 3 350
years
Loss assets 600
Answer:

Calculation of provision on credit partly secured by ECGC

Particulars ₹ in lakh
Credit outstanding 80.00
Less: Realisable value of securities 20.00
60.00
Less. ECGC cover (50%) 30.00
Net Unsecured balance 30.00

Provision on unsecured portion (100%) 30.00

Provision on secured portion (100% of 20.00) 20.00
Total provision 50.00

Calculation of provision on other advances

Assets Amount (₹ in Lakh) % of Provision Provision (₹ in Lakh)

Standard 2500 0.40 10
Sub-standard 1800 15 270
Doubtful:
For 1 year 750 25 187.50
For 2 years 600 40 240
For 3 years 500 40 200
For More than 3 years 350 100 350
Loss Assets 600 100 600
1857.50

109
 Total provision to be made = 50.00 + 1857.50 = ₹ 1907.50 lakhs.

AS 17: Segment Reporting

INRODUCTION:
This standard establishes principles for reporting financial information about different types of
products and services an enterprise produces and different geographical areas in which it
operates. The standard is more relevant for assessing risks and returns of a diversified or multi-
locational enterprise which may not be determinable from the aggregated data.

OBJECTIVE:
Many enterprises provide groups of products and services or operate in geographical areas that
are subject to differing rates of profitability, opportunities for growth, future prospects, and
risks. The objective of this Standard is to establish principles for reporting financial
information, about the different types of products and services an enterprise produces and the
different geographical areas in which it operates. Such information helps users of financial
statements:
(a) Better understand the performance of the enterprise;
(b) Better assess the risks and returns of the enterprise; and
(c) Make more informed judgements about the enterprise as a whole.
SCOPE:
AS 17 should be applied in presenting general purpose financial statements.
An enterprise should comply with the requirements of this Standard fully and not selectively. If a
single financial report contains both consolidated financial statements and the separate financial
statements of the parent, segment information need be presented only on the basis of the
consolidated financial statements.

BUSINESS SEGMENT:
A business segment is a distinguishable component of an enterprise that is engaged in providing
an individual product or service or a group of related products or services and that is subject to
risksand returns that are different from those of other business segments.

GEOGRAPHICAL SEGMENT:
A geographical segment is a distinguishable component of an enterprise that is engaged in
providing products or services within a particular economic environment and that is subject to
risks and returns that are different from those of components operating in other economic
environments.

REPOTABLE SEGMENTS:
A business segment or geographical segment should be identified as a reportable segment if:
a. Its revenue from sales to external customers and from transactions with other
110
 segments is10% or more of the total revenue, external and internal, of all
segments; or
b. Its segment result, whether profit or loss, is 10% or more of –
(i) The combined result of all segments in profit, or
(ii) The combined result of all segments in loss,
(iii) Whichever is greater in absolute amount; or
c. Its segment assets are 10% or more of the total assets of all segments.

QUESTIONS

1. An enterprise operates through six segments, namely, A, B, C, D, E and F. The

relevant information about these segments are given in the following table
(amounts in Rs.’000):

Total
A B C D E F
(segment)
1. Segment Revenue
(a) External Sales -- 550 250 150 50 50 1050
(b) Inter Segment Sales 100 100 50 200 -- 50 500
2. Segment Results-Profit/(Loss) (90) 25 (5) (15) 5 10 --
3. Segment Assets 30 50 10 20 10 5
Identify the reportable segments under

(i) segment revenue criterion,

(ii) segment result criterion and
(iii) segment asset criterion as per AS17
Answer:

Calculation of reportable segments

(Rs.000)
A B C D E F Total (segment)
1. Segment Revenue
(a) External Sales -- -- 550 250 150 50 50 1050
(b) Inter Segment Sales 100 100 50 200 -- 50 500
Total 100 650 300 350 50 100 1550
2. Segment Results
(90) 25 (5) (15) 5 10 (110)/40
Profit/(Loss)
3. Segment Assets 30 50 10 20 10 5 125
10% of total revenue of all segments=155
Reportable segments under revenue criterion=B, C and D
10% of segment result (higher of total profit or loss in absolute figure) =11

Reportable segments under result criterion = A, B, and D

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 10% of total segment assets = 12.5
Reportable segments under asset criterion = A, B and D

Write short notes

2. Rules for identification of Reportable Segments
Answer:

Rules for identification of Reportable Segments

A business segment or geographical segment should be identified as a reportable segment if:

(a) its revenue from sales to external customers and from transactions with other segments is 10
per cent or more of the total revenue, external and internal, of all segments; or
(b) its segment result, whether profit or loss, is 10 per cent or more of -
(i) the combined result of all segments in profit, or
(ii)the combined result of all segments in loss, whichever is greater in absoluteamount; or
(c) its segment assets are 10 per cent or more of the total assets of all segments.

A business segment or a geographical segment which is not a reportable segment as per the
conditions mentioned above, may be designated as a reportable segment despite its size at the
discretion of the management of the enterprise. If that segment is not designated as a reportable
segment, it should be included as an unallocated reconciling item.

If total external revenue attributable to reportable segments constitutes less than 75 per cent of the
total enterprise revenue, additional segments should be identified as reportable segments, even if
they do not meet the 10 per cent thresholds as mentioned above, until at least 75 per cent of total
enterprise revenue is included in reportable segments.

Write short note on

3. Geographical Segment as per AS-17
Answer:
A geographical segment is a distinguishable component of an enterprise that is engaged in
providing products or services within a particular economic environment and that is subject to risk
and returns that are different from those of components operating in other economic
environments. Factors that should be considered in identifying geographical segments include:
(i) Similarity of economic and political conditions;
(ii) Relationships between operations in different geographical areas;
(iii) Proximity of operations;
(iv) Special risks associated with operations in a particular area;
(v) Exchange control regulations; and
(vi) The underlying currency risks.

112
 AS 18: Related Party Disclosure
INRODUCTION:
AS 18 prescribes the requirements for disclosure of related party relationship and transactions
between the reporting enterprise and its related parties. The requirements of the standard apply
to the financial statements of each reporting enterprise as also to consolidated financial
statementspresented by a holding company.

DEFINITIONS:
1. Related party transaction : A transfer of resources or obligations between related
parties, regardless of whether or not a price is charged.

2. Control:
(a) ownership, directly or indirectly, of more than one half of the voting power of an enterprise,
or
(b) control of the composition of the board of directors in the case of a company or of the
composition of the corresponding governing body in case of any other enterprise,or
(c) a substantial interest in voting power and the power to direct, by statute or agreement, the
financial and/or operating policies of the enterprise.

3. An Associate: An enterprise in which an investing reporting party has significant influence

and which is neither a subsidiary nor a joint venture of that party.

4. Significant influence: Participation in the financial and/or operating policy decisions of an

enterprise, but not control of those policies.

5. Key Management Personnel: Those persons who have the authority and responsibility for
planning, directing and controlling the activities of the reporting enterprise.

RELATED PARTY:
Related party - parties are considered to be related if at any time during the reporting period
one party has the ability to control the other party or exercise significant influence over the
other party in making financial and/or operating decisions.
AS 18 deals only with related party relationships described in (a) to (e) below:
a. Enterprises that directly, or indirectly through one or more intermediaries, control, or are
controlled by, or are under common control with, the reporting enterprise (this includes
holding companies, subsidiaries and fellow subsidiaries).
b. Associates and joint ventures of the reporting enterprise and the investing party or venturer in
respect of which the reporting enterprise is an associate or a joint venture.
c. Individuals owning, directly or indirectly, an interest in the voting power of the reporting
enterprise that gives them control or significant influence over the enterprise, and relatives

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 of any such individual.
d. Key management personnel and relatives of such personnel and
Enterprises over which any person described in (c) or (d) is able to exercise significant influence.
This includes enterprises owned by directors or major shareholders of thereporting enterprise
and enterprises that have a member of key management in common withthe reporting enterprise.

QUESTIONS

1. Write short notes on

Related Party as per AS 18

Answer:

A related party is essentially any party that controls or can significantly influence the management
or operating policies of the company during the reporting period.

AS 18, deals only with the following relationships:

Enterprises that directly, or indirectly through one or more intermediaries, control, or are
controlled by, or are under common control with the reporting enterprise;

Associates and joint ventures of the reporting enterprise and the investing party or venture in respect
of which the reporting enterprise is an associate or a joint venture;

Individuals owing, directly or indirectly, an interest in the voting power of the reporting enterprise that gives them
control or significant influence over the enterprise and relatives of any such individual. Here “relative”
means the spouse, son, daughter, brother, sister, father and mother who may be expected to
influence, or be influenced by that individual in his/her dealings with the reporting enterprise.

Key management personnel and relatives of such personnel are those persons who have authority
and responsibility for planning, directing and controlling the activities of the reporting enterprise;
and enterprise over which individual or key management personnel described as above is able to
exercise significant influence.

AS 19: Leases
INTRODUCTION:
The objective of this Standard is to prescribe for lessees and lessors :
(i) the appropriate accounting policies to be used and
(ii) disclosures applicable to leases

Leases are required to be classified as

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 Finance Operating
Lease Lease

does not transfers

transfers substantially all substantially all the risks
the risks and reward and rewards incidentak to
incident to ownership ownership

give rise to asset and result in expense

liability recogntion bythe recognition by the
lessee and a receivable lessee with the asset
by the lessor remaining recognisedby
the lessor

APPLICABILTY:
The standard applies to all leases other than:
(a) lease agreements to explore for or use of natural resources, such as oil, gas, timber
metalsand other mineral rights; and
(b) licensing agreements for items such as motion picture films, video recordings, plays,
manuscripts, patents and copyrights; and
lease agreements to use lands

DEFINITIONS:
LEASE:

A Lease is an agreement whereby the Lessor (legal owner of an asset) conveys to the Lessee (another
party) in return for a payment or series of periodic payments (Lease rents), the right to use an asset
for an agreed period of time.

LESSOR:
Lessor is a party who gives the asset on lease and gets lease rent

LESSEE:
Lessee is one who takes the asset on lease and pays rent periodically or as per agreed
terms

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NON-CANCELLABLE LEASE:
A non-cancellable lease is a lease that is cancellable only:

(a) upon the occurrence of some remote contingency; or

(b) with the permission of the lessor; or
(c) if the lessee enters into a new lease for the same or an equivalent asset with
the samelessor; or
(d) upon payment by the lessee of an additional amount such that, at inception,
continuation of the lease is reasonably certain.

LEASE TERM:
The lease term is the non-cancellable period for which the lessee has agreed to take on
lease the asset together with any further periods for which the lessee has the option to
continue the lease of the asset, with or without further payment, which option at the
inception of thelease it is reasonably certain that the lessee will exercise.

INCEPTION OF LEASE:
The inception of the lease is the earlier of the date of the lease agreement and the date
ofcommitment by the parties to the principal provisions of the lease. As at this date:
a) a lease is classified as either an operating or a finance lease; and
b) in the case of a finance lease, the amounts to be recognised at the commencement ofthe
lease term are determined.

COMMENCEMENT OF LEASE:
The commencement of the lease term is the date from which the lessee is entitled to
exercise its right to use the leased asset. It is the date of initial recognition of the lease
(iethe recognition of the assets, liabilities, income or expenses resulting from the lease, as
appropriate)

MINIMUM LEASE RENTALS:

Minimum lease payments are the payments over the lease term that the lessee is or can be
required to make, excluding contingent rent, costs for services and taxes to be paid by
and reimbursed to the lessor, together with:
a) for a lessee, any amounts guaranteed by
(i) the lessee or
(ii) by a party related to the lessee;
b) for a lessor, any residual value guaranteed to the lessor by:
(i) the lessee;
(ii) a party related to the lessee; or
(iii) a third party unrelated to the lessor that is financially capable of
dischargingthe obligations under the guarantee

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 RESIDUAL VALUE:
Residual value of a leased asset is the estimated fair value of the asset at the
end of the lease term.

ECONOMIC LIFE:
Economic life is either:
(a) the period over which an asset is expected to be economically usable by one or more
users; or
(b) the number of production or similar units expected to be obtained from the asset by
one or more users.

GUARANTEED RESIDUAL VALUE:

(c) in the case of the lessee, that part of the residual value which is guaranteed by the
lessee or by a party on behalf of the lessee (the amount of the guarantee being the
maximum amount that could, in any event, become payable); and
(d) in the case of the lessor, that part of the residual value which is guaranteed by or on
behalf of the lessee, or by an independent third party who is financially capable of
discharging the obligations under the guarantee

UNGUARANTEED RESIDUAL VALUE:

Unguaranteed residual value of a leased asset is the amount by which the residual value
ofthe asset exceeds its guaranteed residual value.

FAIR VALUE:
Fair value is the amount for which an asset could be exchanged or a liability settled between
knowledgeable, willing parties in an arm’s length transaction
NET INVESTMENT IN LEASE:
Net investment in the lease is the gross investment in the lease discounted at the
interestrate implicit in the lease.

UNEARNED FINANCE LEASE:

Unearned finance income is the difference between:
(a) the gross investment in the lease, and
(b) the net investment in the lease.

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LEASE CLASSIFICATION :
A lease is classified as a finance lease if it transfers substantially all the risks and rewards
incidental to ownership. A lease is classified as an operating lease if it does not transfer
substantially all the risks and rewards incidental to ownership.
The classification of leases adopted in this Standard is based on the extent to which risks and
rewards incidental to ownership of a leased asset lie with the lessor or the lessee.

CHARACTERISTICS OF FINANCE LEASE :

Whether a lease is a finance lease or an operating lease depends on the substance of the
transactionrather than the form of the contract.
(a) The lease transfers ownership of the asset to the lessee by the end of the lease
term;
(b) The lessee has the option to purchase the asset at a price which is expected to be
sufficiently lower than the fair value at the date the option becomes exercisable
such that, at the inception of the lease, it is reasonably certain that the option will
be exercised;
(c) The lease term is for the major part of the economic life of the asset even if title
is not transferred;
(d) At the inception of the lease, present value of the minimum lease payments amounts
to at least substantially all of the fair value of the leased asset; and
(e) The leased asset is of a specialized nature such that only the lessee can use it
without majormodifications being made.

ACCOUNTING IN THE BOOKS OF LESSEE :

FINANCE LEASE:
1. Recognise finance lease as Asset and liabilities
▪ leased asset as an asset and
▪ obligation to pay future rentals as a liability.
2. At amount equal to lower of
▪ fair value of the leased asset
▪ the present value of the MLP.
3. The discount rate to be used in calculating the present value of the minimum lease
payments is the interest rate implicit in the lease, if this is practicable to determine; if
not, the lessee’s incremental borrowing rate shall be used.
4. Any initial direct costs of the lessee are added to the amount recognised as an asset.
The costs identified as directly attributable to activities performed by the lessee fora
finance lease are added to the amount recognised as an asset.
5. It is not appropriate for the liabilities for leased assets to be presented in the
financial statements as a deduction from the leased assets. If for the presentation of

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 liabilities in the balance sheet a distinction is made between current and noncurrent
liabilities, the same distinction is made for lease liabilities.
6. Any contingent Rent should be charged to Profit and Loss A/c.
7. Minimum lease payments are apportioned between the finance charge and the
reduction of the outstanding liability.

8. The finance charge is allocated to each period during the lease term so as to producea
constant periodic rate of interest on the remaining balance of the liability. Contingent
rents are recognised as expenses in the periods in which they are incurred.
9. Depreciation should be charged as per the Accounting Policy of the company
10. A lessee is also required to recognise any impairment of a leased asset. To determine
whether a leased asset has become impaired, an entity applies Ind AS 36, Impairment
of Assets.

ACCOUNTING IN THE BOOKS OF LESSOR :

FINANCE LEASE:
1. Lessors are present Lease as a receivable at an amount equal to the net investment in
the lease. (PV of Gross Investment in Lease).
2. Net Investment in Lease is Gross Investment in lease Less Unearned Finance Income.
3. For finance leases other than those involving manufacturer or dealer lessors, initial
direct costs are included in the initial measurement of the finance lease receivable
and reduce the amount of income recognised over the lease term.
4. No Depreciation is charged / No impairment of Asset / The receivables are subject
to review for impairment

OPERATING LEASE:
1. Lessors are required to present assets subject to operating leases in their balance sheet
according to the nature of the asset.
2. Lease income from operating leases (excluding amounts for services such as insurance and
maintenance) shall be recognised in income on a straight-line basis (even if the receipts
are not on such a basis) over the lease term, unless either:
a) another systematic basis is more representative of the time pattern in which use
benefit derived from the leased asset is diminished, even if the payments to the lessors
are not on that basis; or
b) the payments to the lessor are structured to increase in line with expected general
inflation to compensate for the lessor’s expected inflationary cost increases. If
payments to the lessor vary according to factors other than inflation, then this
condition is not met.

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1. The depreciation policy for depreciable leased assets shall be consistent with the lessor’s
normal depreciation policy for similar assets, and depreciation shall becalculated in accordance
with Ind AS 16 and Ind AS 38.
2. To determine whether a leased asset has become impaired, an entity applies Ind AS 36.
3. Costs, including depreciation, incurred in earning the lease income are recognised as an
expense.
4. Initial direct costs incurred by lessors in negotiating and arranging an operating lease shall be
added to the carrying amount of the leased asset and recognised as an expense over the lease
term on the same basis as the lease income.

SALE AND LEASE BACK :

A sale and leaseback transaction involves the sale of an asset and the leasing back of the
same asset. The lease payment and the sale price are usually interdependent because
they are negotiated as a package. The accounting treatment of a sale and leaseback
transaction depends upon the type of lease involved.

The point to be discussed is about the sale, i.e how should the profit be recognised. The lease
should be accounted as per rules we have discussed above. Yes but the recognition of the
profitdepends of the nature of Lease back i.e if it is Finance Lease or Its an Operating Lease.
FINANCE LEASEBACK:
The excess or deficiency of sales proceeds over the carrying amount should be deferred and
amortised over the lease term in proportion to the depreciation of the leased asset

OPERATING LEASEBACK:
If a sale and leaseback transaction results in an operating lease, it is necessary to determine
the fair value of the asset and compare this with the contract sale price. Because the sale and
lease transactions are connected, the sale may have been arranged at other than fair value,
with the impact of any difference being recognized in the rentals payable.
Case 1: Sale price = Fair Value

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 Profit or loss should be recognised immediately.

Case 2: Sale Price < Fair Value

Profit and loss should be recognised immediately. However if the loss is compensated by future
leasepayments at below market price, it should be deferred and amortised in proportion to the
lease payments over the period for which the asset is expected to be used.

Case 3: Sale Price > Fair Value

The excess over fair value should be deferred and amortised over the period for which the
asset isexpected to be used.

QUESTIONS

1. In case the leaseback is a finance lease, the sale proceeds in excess of the carrying
amount should be immediately recognized in the Income Statement.
Answer: F

2. Write short note

Operating Lease and Finance Lease
Answer:
Operating Lease and Finance Lease
A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or
series of payments the right to use an asset for an agreed period of time.

A finance lease is a lease that transfers substantially all the risks and rewards incidental to
ownership of an asset. Title may or may not eventually be transferred.
An operating lease is a lease other than a finance lease.

As per AS 19, a lease is classified as a finance lease if it transfers substantially all the risks and
rewards incidental to ownership. A lease is classified as an operating lease if it does not transfer
substantially all the risks and rewards incidental to ownership.

3. M Ltd. sold machinery having WDV of ₹ 200 Lakhs to N Ltd. for ₹ 250 Lakhs and the same
machinery was leased back by N Ltd. to M Ltd. The lease back is an operating lease.
Comment on the accounting treatment as per in the following circumstances:
(i) Fair value is ₹ 230 Lakhs and sale price is ₹ 250 Lakhs
(ii) Fair value is ₹ 175 Lakhs and sale price is ₹ 195 Lakhs
Answer:
Here the leaseback is an operating lease.
So, the treatment of the given circumstances will be as follows:
(i) Here, sale price > Fair value, so, profit of ₹(230-200) = ₹30 Lakhs is to be
immediately recognized by M Ltd in its books and balance profit of ₹(250-230) i.e. ₹20
Lakhs is to be amortized over the lease period.

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 (ii) Here, sale price > Fair value, so, loss of ₹(200-175) = ₹25 Lakhs is to be immediately
recognized by M Ltd in its books and balance profit of ₹ (195-175) i.e. ₹20 Lakhs is to be
amortized over the lease period.
State whether the following statements are True or False:

4. Operating Lease is a lease which transfers substantially all the risks and rewards
incidental to ownership.
Answer: False

5. A Ltd. has taken the assets on lease from X Ltd. The following information is given
below:
Lease Term = 3 years

Fair value at inception of lease = ₹14,00,000

Lease Rent = ₹6,00,000 p.a. at the end of each year
Guaranteed Residual Value = ₹44,000
Implicit Interest Rate = 15% p.a.

Calculate the value of the asset to be considered by A Ltd. and the interest (finance
charges) in each year.
Present value of ₹1.00 at 15% is given below:

Year 1 2 3
PVIF (15%) 0.869 0.756 0.657
Calculation of Present value of Minimum Lease Payments

Year (end) MLP (₹) PVIF at 15% Present Value (₹)

1 6,00,000 0.869 5,21,400
2 6,00,000 0.756 4,53,600
3 6,44,000(6,00,000+44,000) 0.657 4,23,108
13,98,108

Value of the asset will be the lower of fair value at the inception of lease and presentvalue of MLP
plus residual value. Therefore, the value of the asset will be ₹ 13,98,108.
Calculation for Interest (Finance Charge)

Year Balance Interest @ 15% Repayment of Capital Closing Balance

Due of (₹ 6,00,000 - Interest)
Balance Due
(1) (2) ₹ (3) ₹ (4) ₹ (5) = (2)-(4) ₹

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 1 13,98,108 2,09,716 3,90,284 10,07,824
2 10,07,824 1,51,174 4,48,826 5,58,998
3 5,58,998 83,850 5,16,150 42,848* (Residual Value)
(Alternative Calculation)

Year Liability (₹) MLP (₹) Finance Charge

Principle Amt.
(₹)of reduction
(₹)
1 13,98,108 — — —
2 10,07,824 6,00,000 2,09,716 3,90,284
3 5,58,998 6,00,000 1,51,174 4,48,826
4 — 6,44,000 83,850 5,60,150
Note: The difference between this figure and the guaranteed residual value (as perthe
problem) is due to approximation.

6. Write short note on

Finance Lease

Answer:

Finance Lease
It is a lease, which transfers substantially all the risks and rewards incidental to ownership
of an asset to the Lessee by the Lessor but not the legal ownership. Infollowing situations,
the lease transactions are called Finance Lease.
(i) The lessee will get the ownership of leased asset at the end of the lease term.
(ii) The lessee has an option to buy the leased asset at the end of term at price, which is
lower than its expected fair value at the date on which option will beexercised.
(iii) The lease term covers the major part of the life of asset.
(iv) At the beginning of lease term, present value of minimum lease rental covers
substantially the initial fair value of the leased asset.
(v) The asset given on lease to lessee is of specialized nature and can only be used by the
lessee without major modification.

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