CA INTERMEDIATE

BY : VINIT MISHRA SIR

 ALL INDIA RANK - 04 4

ARUL KUMAR
(STUDENT OF TOP-20)

10 ALL INDIA RANK -10

MEGHANA SAWAKAR
(STUDENT OF TOP-20)
 INDEX

S.No. Chapter Name Page No.

1. COMPANY FINAL ACCOUNTS 1 – 19

2. CASH FLOW STATEMENTS 20 – 27

3. PROFIT OR LOSS PRE AND POST INCORPORATION 28 – 32

4. ACCOUNTING FOR BONUS ISSUE AND RIGHT ISSUE 33 – 37

5. REDEMPTION OF PREFERENCE SHARES 38 – 45

6. REDEMPTION OF DEBENTURES 46 – 53

7. INVESTMENT ACCOUNTS (AS-13) 54 – 64

8. INSURANCE CLAIM 65 – 73

9. HIRE PURCHASE SYSTEM 74 – 81

10. DEPARTMENT ACCOUNT 82 – 88

11. BRANCH ACCOUNT 89 – 97

12. ACCOUNTS FROM INCOMPLETE RECORDS 98 – 112

Accounting Standards
ACCOUNTING STANDARDS: 1 113 – 115

ACCOUNTING STANDARDS: 2 116 – 118

ACCOUNTING STANDARDS: 10 119 – 123

ACCOUNTING STANDARDS: 11 124 – 127

ACCOUNTING STANDARDS: 12 128 – 132

ACCOUNTING STANDARDS: 16 133 – 134

 COMPANY FINAL ACCOUNTS

QUESTIONS AND ANSWERS

Q.1: What are the qualitative characteristics of the Financial Statements which improve the
usefulness of the information furnished therein? [Nov 2020 (4 Marks)]

ANSWER:
The qualitative characteristics are attributes that improve the usefulness of information provided in
financial statements. Financial statements are required to show a true and fair view of the
performance, financial position and cash flows of an enterprise. The framework for Preparation and
Presentation of Financial Statements suggests that the financial statements should maintain the
following four qualitative characteristics to improve the usefulness of the information furnished
therein.
1. Understandability: The financial statements should present information in a manner as to be
readily understandable by the users with reasonable knowledge of business and economic
activities and accounting.
2. Relevance: The financial statements should contain relevant information only. Information,
which is likely to influence the economic decisions by the users, is said to be relevant. Such
information may help the users to evaluate past, present or future events or may help in
confirming or correcting past evaluations. The relevance of a piece of information should be
judged by its materiality. A piece of information is said to be material if its misstatement (i.e.,
omission or erroneous statement) can influence economic decisions of a user.
3. Reliability: To be useful, the information must be reliable; that is to say, they must be free from
material error and bias. The information provided are not likely to be reliable unless transactions
and events reported are faithfully represented. The reporting of transactions and events should
be neutral, i.e. free from bias and be reported on the principle of 'substance over form'. The
information in financial statements must be complete. Prudence should be exercised in reporting
uncertain outcome of transactions or events.
Comparability: Comparison of financial statements is one of the most frequently used and most
effective tools of financial analysis. The financial statements should permit both inter-firm and intra-
firm comparison. One essential requirement of comparability is disclosure of financial effect of change
in accounting policies.

Q.2: Following is the draft Profit & Loss Account of X Ltd. for the year ended 31st March,
2020:

Amount (₹) Amount (₹)

To Administrative Expenses 5,96,400 By Balance b/d 7,25,300
To Advertisement Expenses 1,10,500 By Balance from Trading A/c 42,53,650

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 To Sales Commission 1,05,550 By Subsidies received from 3,50,000
Government
To Director's fees 1,48,900
To Interest on Debentures 56,000
To Managerial Remuneration 3,05,580
To Depreciation on Fixed 5,78,530
Assets
To Provision for taxation 12,50,600
To General Reserve 5,50,000
To Investment Revaluation 25,800
Reserve
To Balance c/d 16,01,090
53,28,950 53,28,950

Depreciation on Fixed Assets as per Schedule II of the Companies Act, 2013 was ₹ 6,51,750.
You are required to calculate the maximum limits of the managerial remuneration as per
Companies Act, 2013. [Nov 2020 (4 Marks)]

ANSWER:
Calculation of net profit of X Ltd. as per the Companies Act, 2013

₹ ₹
Balance from Trading A/c 42,53,650
Add: Subsidies received from Government 3,50,000
46,03,650
Less: Administrative expenses 5,96,400
Advertisement expenses 1,10,500
Sales commission 1,05,550
Director’s fees 1,48,900
Interest on debentures 56,000
Depreciation on fixed assets as per Schedule II 6,51,750 (16,69,100)
Profit u/s 198 29,34,550

Maximum Managerial remuneration under Companies Act, 2013 = 11% of ₹ 29,34,550 = ₹ 3,22,800
(rounded off).

Q.3: Om Ltd. has authorized capital of ₹ 50 lakhs divided into 5,00,000 equity shares of ₹ 10
each. Their books show the following ledger balances as on 31st March, 2021:

₹ ₹

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 Inventory 1.4.2020 6,65,000 Bank Current Account (Dr. 20,000
balance)
Discounts & Rebates allowed 30,000 Cash in hand 11,000
Carriage Inward 57,500
Purchases 12,32,500 Calls in Arrear @ ₹ 2 per 10,000
share
Rate, Taxes and Insurance 55,000 Equity share capital 20,00,000
Furniture & Fixtures 1,50,000 (2,00,000 shares of ₹ 10
each)
Business Expenses 56,000 Trade Payables 2,40,500
Wages 14,79,000 Sales 36,17,000
Freehold Land 7,30,000 Rent (Cr.) 30,000
Plant & Machinery 7,50,000 Transfer fees received 6,500
Engineering Tools 1,50,000 Profit & Loss A/c (Cr.) 67,000
Trade Receivables 4,00,500 Repairs to Building 56,500
Advertisement Expenses 15,000 Bad debts 25,500
Commission & Brokerage 67,500
Expenses

The inventory (valued at cost or market value, which is lower) as on 31st March, 2021 was ₹
7,05,000. Outstanding liabilities for wages ₹ 25,000 and business expenses ₹ 36,500. It was
decided to transfer ₹ 10,000 to reserves.
Charge depreciation on written down values of Plant & Machinery @ 5%, Engineering Tools
@ 20% and Furniture & Fixtures @10%. Provide ₹ 25,000 as doubtful debts for trade
receivables. Provide for income tax @ 30%. It was decided to transfer ₹ 10,000 to reserves.
You are required to prepare Statement of Profit & Loss for the year ended 31st March, 2021
and Balance Sheet as at that date. [RTP May 2021]

ANSWER:
Balance Sheet of Om Ltd. as at 31st March, 2021

Particulars Note No. (₹)

I EQUITY AND LIABILITIES
(1) Shareholders' Funds
(a) Share Capital 1 19,90,000
(b) Reserves and Surplus 2 3,82,000
(2) Current Liabilities
(a) Trade Payables 2,40,500
(b) Other Current Liabilities 3 61,500
(c) Short-Term Provisions 4 1,35,000
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 Total 28,09,000
II ASSETS
(1) Non-Current Assets
(a) Property, Plant and Equipment 5 16,97,500
(2) Current Assets
(a) Inventories 7,05,000
(b) Trade Receivables 6 3,75,500
(c) Cash and Cash Equivalents 7 31,000
Total 28,09,000

Statement of Profit and Loss of Om Ltd.

for the year ended 31st March, 2021

Particulars Note No. (₹)

I Revenue from Operations 36,17,000
II Other Income 8 36,500
III Total Revenue [I + II] 36,53,500
IV Expenses:
Cost of purchases 12,32,500
Changes in Inventories [6,65,000-7,05,000] (40,000)
Employee Benefits Expenses 9 15,04,000
Depreciation and Amortization Expenses 82,500
Other Expenses 10 4,24,500
Total Expenses 32,03,500
V Profit before Tax (III-IV) 4,50,000
VI Tax Expenses @ 30% (1,35,000)
VII Profit for the period 3,15,000

Notes to Accounts:
1. Share Capital

Authorized Capital
5,00,000 Equity Shares of ₹ 10 each 50,00,000
Issued Capital
2,00,000 Equity Shares of ₹ 10 each 20,00,000
Subscribed Capital and fully paid
1,95,000 Equity Shares of ₹10 each 19,50,000

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 Subscribed Capital but not fully paid
5,000 Equity Shares of ₹10 each ₹ 8 paid 40,000
(Call unpaid ₹10,000) 19,90,000

2. Reserves and Surplus

General Reserve 10,000

Surplus i.e. Balance in Statement of Profit & Loss:
Opening Balance 67,000
Add: Profit for the period 3,15,000
Less: Transfer to Reserve (10,000) 3,72,000
3,82,000

3. Other Current Liabilities

Outstanding Expenses [25,000 + 36,500] 61,500

4. Short-term Provisions

Provision for Tax 1,35,000

5. Property, Plant and Equipment

Particulars Value Depreciation Depreciation Written down value

given (₹) rate Charged (₹) at the end (₹)
Land 7,30,000 - 7,30,000
Plant & Machinery 7,50,000 5% 37,500 7,12,500
Furniture & Fixtures 1,50,000 10% 15,000 1,35,000
Engineering Tools 1,50,000 20% 30,000 1,20,000
17,80,000 82,500 16,97,500

6. Trade Receivables

Trade receivables 4,00,500

Less: Provisions for doubtful debts (25,000)
3,75,500

7. Cash & Cash Equivalent

Cash Balance 11,000

Bank Balance in current A/c 20,000
31,000

8. Other Income

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 Miscellaneous Income (Transfer fees) 6,500
Rental Income 30,000
36,500

9. Employee benefits expenses

Wages 14,79,000
Add: Outstanding wages 25,000
15,04,000

10. Other Expenses

Carriage Inwards 57,500

Discount & Rebates 30,000
Advertisement 15,000
Rate, Taxes and Insurance 55,000
Repairs to Buildings 56,500
Commission & Brokerage 67,500
Miscellaneous Expenses [56,000+36,500] (Business Expenses) 92,500
Bad Debts 25,500
Provision for Doubtful Debts 25,000
4,24,500

Q.4:
(a) XYZ Ltd. is having inadequacy of profits in the year ending 31-03-2021 and it proposes
to declare 10% dividend out of General Reserves.
From the following particulars ascertain the amount that can be utilized from general
reserves, according to the Companies (Declaration of Dividend out of Reserves) Rules,
2014:
5,00,000 Equity Shares of ₹ 10 each fully paid up 50,00,000
General Reserves 25,00,000
Revaluation Reserves 6,50,000
Net profit for the year 1,42,500
Average rate of dividend during the last five years has been 12%.
(b) Mohit Ltd. provides the following information as on 31st March, 2021:

Liabilities ₹
Authorized capital:
1,00,000, 14% preference shares of ₹100 1,00,00,000

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 10,00,000 Equity shares of ₹100 each 10,00,00,000
11,00,00,000
Issued and subscribed capital:
77,500, 14% preference shares of ₹ 100 each fully paid 77,50,000
5,40,000 Equity shares of ₹ 100 each, ₹ 80 paid-up 4,32,00,000
Share suspense account 90,00,000
Reserves and surplus
Capital reserves (₹ 5,00,000 is revaluation reserve) 8,77,500
Securities premium Secured loans: 2,25,000
15% Debentures 2,92,50,000
Unsecured loans:
Public deposits 16,65,000
Cash credit loan from SBI (short term) 5,92,500
Current Liabilities:
Trade Payables 15,52,500
Assets:
Investment in shares, debentures, etc. 3,50,50,000
Profit and Loss account (Dr. balance) 68,50,000

Share suspense account represents application money received on shares, the

allotment of which is not yet made. You are required to compute effective capital as per
the provisions of Schedule V if Mohit Ltd is Non-investment Company. Would your
answer differ if Mohit Ltd. is an investment company? [RTP May 2021]

ANSWER:
(a) Amount that can be drawn from reserves for (10% dividend on ₹ 50,00,000 i.e. ₹ 5,00,000)
Profits available
Current year profit ₹ 1,42,500
Amount which can be utilized from reserves (₹ 5,00,000 – 1,42,500) ₹ 3,57,500
Conditions as per Companies (Declaration of dividend out of Reserves) Rules, 20X1:
Condition I
Since 10% is lower than the average rate of dividend (12%), 10% dividend can be declared.
Condition II
Maximum amount that can be drawn from the accumulated profits and reserves should not
exceed 10% of paid up capital plus free reserves ie. ₹ 7,50,000 [10% of (50,00,000 +
25,00,000)]
Condition III

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 The balance of reserves after drawl ₹ 21,42,500 (₹ 25,00,000 - ₹ 3,57,500) should not fall below
15 % of its paid up capital i.e. ₹ 7,50,000 (15% of ₹ 50,00,000]
Since all the three conditions are satisfied, the company can withdraw ₹ 3,57,500 from
accumulated reserve (as per Declaration and Payment of Dividend Rules, 2014).
(b) Computation of effective capital:

Where Mohit Ltd. Where Mohit Ltd.

is a non- is an investment
investment company
company
Paid-up share capital —
77,500, 14% Preference shares 77,50,000 77,50,000
5,40,000 Equity shares 4,32,00,000 4,32,00,000
Capital reserves 3,77,500 3,77,500
Securities premium 2,25,000 2,25,000
15% Debentures 2,92,50,000 2,92,50,000
Public Deposits 16,65,000 16,65,000
(A) 8,24,67,500 8,24,67,500
Investments 3,50,50,000 -
Profit and Loss account (Dr. balance) 68,50,000 68,50,000
(B) 4,19,00,000 68,50,000
Effective capital (A–B) 4,05,67,500 7,56,17,500

Q.5:
(a) With regard to financial statements, name any five qualitative characteristics and
elements.
(b) Aman started a business on 1st April 2020 with ₹ 24,00,000 represented by 1,20,000
units of ₹ 20 each. During the financial year ending on 31st March, 2021, he sold the
entire stock for ₹ 30 each. In order to maintain the capital intact, calculate the
maximum amount, which can be withdrawn by Aman in the year 2020-21 if Financial
Capital is maintained at historical cost.
[RTP May 2021]

ANSWER:
(a) (i) Qualitative Characteristics of Financial Statements:
Understandability, Relevance, Comparability, Reliability & Faithful Representation
(ii) Elements of Financial Statements:
Asset, Liability, Equity, Income/Gain and Expense/Loss

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(b)

Particulars Financial Capital Maintenance at

Historical Cost (₹)
Closing equity
36,00,000 represented by cash
(₹ 30 x 1,20,000 units)
Opening equity 1,20,000 units x ₹ 20 = 24,00,000
Permissible drawings to keep Capital intact 12,00,000 (36,00,000 – 24,00,000)

Q.6: The following is the Draft Profit & Loss A/c of Brown Ltd. the year ended 31st March,
2020:

Amount (₹) Amount (₹)

To Administrative expenses 4,99,200 By Balance b/d 6,27,550
To Advertisement 1,18,200 By Balance from Trading A/c 38,15,890
To Commission on sales 95,225 By Subsidies received from
To Director’s Fees 1,35,940 Govt. 2,50,000
To Interest on debentures 28,460 By Profit on sale of forfeited
To Managerial remuneration 2,75,550 shares 20,000
To Depreciation on fixed assets 4,82,565
To Provision for Taxation 11,50,200
To General Reserve 4,50,000
To Investment Revaluation
Reserve 52,800
To Balance c/d 14,25,300
47,13,440 47,13,440

Depreciation on fixed assets as per Schedule II of the Companies Act, 2013 was ₹ 5,15,675.
You are required to calculate the maximum limit of managerial remuneration as per
Companies Act, 2013. [Jan 21 (4 Marks)]

ANSWER:
Calculation of net profit u/s 198 of the Companies Act, 2013

₹ ₹
Balance from Trading A/c 38,15,890
Add: Subsidies received from Government 2,50,000
40,65,890
Less: Administrative, selling and distribution expenses (4,99,200 7,12,625
+ 1,18,200 + 95,225)
Director’s fees 1,35,940

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 Interest on debentures 28,460
Depreciation on fixed assets as per Schedule II 5,15,675 (13,92,700)
Profit u/s 198 26,73,190

Maximum Managerial remuneration under Companies Act, 2013 = 11% of ₹ 26,73,190 = ₹ 2,94,051
(rounded off).
Note:
1. Investment Revaluation reserve not to be deducted for calculation of profit under section 198;
2. Profit on sale of forfeited shares not to added for calculation of profit under section 198.
*Alternative presentation of the above answer also possible by starting from Net profit as per Profit
and Loss Account.

Q.7: List the Criteria for classification of non-corporate entities as level I Entities for the
purpose of application of Accounting Standards as per the Institute of Chartered
Accountants of India. [Jan 21 (4 Marks)]

ANSWER:
Criteria for classification of non-corporate entities as level 1 entities for purpose of application of
Accounting Standards decided by the Institute of Chartered Accountants of India is given below:
Non-corporate entities which fall in any one or more of the following categories, at the end of the
relevant accounting period, are classified as Level I entities:
(i) Entities whose equity or debt securities are listed or are in the process of listing on any stock
exchange, whether in India or outside India.
(ii) Banks (including co-operative banks), financial institutions or entities carrying on insurance
business.
(iii) All commercial, industrial and business reporting entities, whose turnover (excluding other
income) exceeds rupees fifty crore in the immediately preceding accounting year.
(iv) All commercial, industrial and business reporting entities having borrowings (including public
deposits) in excess of rupees ten crore at any time during the immediately preceding accounting
year.
(v) Holding and subsidiary entities of any one of the above.

Q.8: From the following particulars furnished by Alpha Ltd., prepare the Balance Sheet as
on 31st March, 2020 as required by Part I, Schedule III of the Companies Act, 2013.

Particulars Debit Rs. Credit Rs.

Equity Share Capital (Face value of Rs. 100 50,00,000
each)
Call in Arrears 5,000
Building 27,50,000

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 Plant & Machinery 26,25,000
Furniture 2,50,000
General Reserve 10,50,000
Loan from State Financial Corporation 7,50,000
Inventory:
Raw Materials 2,50,000
Finished Goods 10,00,000 12,50,000
Provision for Taxation 6,40,000
Trade receivables 10,00,000
Short term Advances 2,13,500
Profit & Loss Account 4,33,500
Cash in Hand 1,50,000
Cash at Bank 12,35,000
Unsecured Loan 6,05,000
Trade payables (for Goods and Expenses) 8,00,000
Loans & advances from related parties 2,00,000

The following additional information is also provided:

(i) 10,000 Equity shares were issued for consideration other than cash.
(ii) Trade receivables of Rs. 2,60,000 are due for more than 6 months.
(iii) The cost of the Assets were:
Building Rs. 30,00,000, Plant & Machinery Rs. 35,00,000 and Furniture Rs. 3,12,500
(iv) The balance of Rs. 7,50,000 in the Loan Account with State Finance Corporation is
inclusive of Rs. 37,500 for Interest Accrued but not Due. The loan is secured by
hypothecation of Plant & Machinery.
(v) Balance at Bank includes ₹ 10,000 with Omega Bank Ltd., which is not a Scheduled
Bank.
(vi) Transfer Rs. 20,000 to general reserve as proposed by Board of directors.
[MTP March 21 (15 Marks)]

ANSWER:
Alpha Ltd.
Balance sheet as at 31st March, 2020

Particulars Notes Rs.

Equity and Liabilities
1 Shareholders' funds

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 a Share capital 1 49,95,000
b Reserves and Surplus 2 14,83,500
2 Non-current liabilities
Long-term borrowings 3 13,17,500
3 Current liabilities
a Trade Payables 8,00,000
b Other current liabilities 4 37,500
c Short-term provisions 5 6,40,000
d Short-term borrowings 2,00,000
Total 94,73,500
Assets
1 Non-current assets
Property, Plant & equipment 6 56,25,000
2 Current assets
a Inventories 7 12,50,000
b Trade receivables 8 10,00,000
c Cash and bank balances 9 13,85,000
d Short-term loans and advances 2,13,500
Total 94,73,500

Notes to Accounts

Rs.
1. Share Capital
Equity share capital
Issued & subscribed & called up
50,000 Equity Shares of Rs. 100 each
(of the above 10,000 shares have been issued for
consideration other than cash) 50,00,000
Less: Calls in arrears (5,000) 49,95,000
Total 49,95,000
2. Reserves and Surplus
General Reserve 10,50,000
Add: current year transfer 20,000 10,70,000
Profit & Loss balance

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 Profit for the year 4,33,500
Less: Appropriations:
Transfer to General reserve (20,000)
4,13,500
14,83,500
3. Long-term borrowing
Secured Term Loan
State Financial Corporation Loan (7,50,000-37,500)
(Secured by hypothecation of Plant and Machinery) 7,12,500
Unsecured Loan 6,05,000
Total 13,17,500
4. Other current liabilities
Interest accrued but not due on loans (SFC) 37,500
5. Short-term provisions
Provision for taxation 6,40,000
6. Property, plant and Equipment
Land and Building 30,00,000
(2,50,000) 27,50,000
Less: Depreciation (b.f.)
Plant & Machinery 35,00,000
(8,75,000) 26,25,000
Less: Depreciation (b.f.)
Furniture & Fittings 3,12,500
Less: Depreciation (62,500) (b.f.) 2,50,000
Total 56,25,000
7. Inventories
Raw Materials 2,50,000
Finished goods 10,00,000
Total 12,50,000
8. Trade receivables
Outstanding for a period exceeding six months 2,60,000
Other Amounts 7,40,000
Total 10,00,000

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 9. Cash and bank balances
Cash and cash equivalents
Cash at bank
With Scheduled Bank 12,25,000
With other (Omega Bank Ltd.) 10,000 12,35,000
Cash in hand 1,50,000
Other bank balances Nil
Total 13,85,000

Q.9: The following extract of Balance Sheet (Extract) as on 31st March, 2020

Liabilities Rs.
Issued and subscribed capital:
20,000, 14% preference shares of Rs. 100 each fully paid 20,00,000
1,20,000 Equity shares of Rs. 100 each, Rs. 80 paid-up 96,00,000
Capital reserves (Rs. 1,50,000 is revaluation reserve) 1,95,000
Securities premium 50,000
15% Debentures 65,00,000
Unsecured loans: Public deposits repayable after one year 3,70,000
Investment in shares, debentures, etc. 75,00,000
Profit and Loss account (debit balance) 15,00,000

You are required to compute Effective Capital as per the provisions of Schedule V to
Companies Act, 2013.
OR
Following items appear in the Trial Balance of Hello Ltd. as on 31st March, 2020:

Particulars Amount
9,000 Equity Shares of Rs.100 each 9,00,000
Securities Premium 80,000
Capital Redemption Reserve 1,40,000
General Reserve 2,10,000
Profit and Loss Account (Cr. Balance) 90,000

The company decided to issue to equity shareholders bonus shares at the rate of 1 share
for every 3 shares held. Company decided that there should be the minimum reduction in
free reserves. You are required to given the necessary journal Entries in the books Hello
Ltd. [MTP March 21 (4 Marks)]

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ANSWER:
Computation of effective capital:

Rs.
Paid-up share capital-
20,000, 14% Preference shares 20,00,000
1,20,000 Equity shares 96,00,000
Capital reserves (excluding revaluation reserve) 45,000
Securities premium 50,000
15% Debentures 65,00,000
Public Deposits 3,70,000
(A) 1,85,65,000
Investments 75,00,000
Profit and Loss account (Dr. balance) 15,00,000
(B) 90,00,000
Effective capital (A–B) 95,65,000

OR

Capital Redemption Reserve A/c Dr. 1,40,000

Securities Premium A/c (considered to be realized in cash) Dr. 80,000
General Reserve A/c (balancing figure) Dr. 80,000
To Bonus to Shareholders 3,00,000
(Being issue of bonus shares by utilization of various
Reserves, as per resolution dated …………….)
Bonus to Shareholders A/c Dr. 3,00,000
To Equity Share Capital 3,00,000
(Being capitalization of profit)

Q.10: You are required to prepare a Balance Sheet as at 31st March 2020, as per Schedule
III of the Companies Act, 2013, from the following information of Mehar Ltd.:

Particulars Amount Particulars Amount (Rs.)

(Rs.)
Term Loans (Secured) 40,00,000 Investments (Non-current) 9,00,000
Trade payables 45,80,000 Profit for the year 32,00,000
Cash and Bank Balances 38,40,000 Trade receivables 49,00,000
Staff Advances 2,20,000 Miscellaneous Expenses 2,32,000

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 Other advances (given by Co.) 14,88,000 Loan from other parties 8,00,000
Provision for Taxation 10,20,000 Provision for Doubtful 80,000
Debts
Securities Premium 19,00,000 Stores 16,00,000
Loose Tools 2,00,000 Finished Goods 30,00,000
General Reserve 62,00,000 Plant and Machinery (WDV) 2,14,00,000

Additional Information: -
1. Share Capital consists of-
(a) 1,20,000 Equity Shares of Rs. 100 each fully paid up.
(b) 40,000, 10% Redeemable Preference Shares of Rs. 100 each fully paid up.
2. Write off the amount of Miscellaneous Expenses in full, amounting Rs. 2,32,000.
[MTP April 21 (14 Marks)]

ANSWER:
Balance Sheet of Mehar Ltd. as at 31st March, 2020

Note Rs.
I EQUITY AND LIABILITIES:
(1) (a) Share Capital 1 1,60,00,000
(b) Reserves and Surplus 2 110,68,000
(2) Non-current Liabilities
Long term Borrowings- 40,00,000
Terms Loans (Secured)
(3) Current Liabilities
(a) Trade Payables 45,80,000
(b) Other current liabilities 3 8,00,000
(c) Short-term Provisions (Provision for taxation) 10,20,000
Total 3,74,68,000
II ASSETS
(1) Non-current Assets
(a) Property, Plant and Equipment 4 214,00,000
(b) Non- current Investments 9,00,000
(2) Current Assets:
(a) Inventories 5 48,00,000
(b) Trade Receivables 6 48,20,000
(c) Cash and Cash Equivalents 38,40,000
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 (d) Short-term Loans and Advances 7 17,08,000
Total 3,74,68,000

Notes to accounts

(Rs.)
1. Share Capital
Authorized, issued, subscribed & called up
1,20,000, Equity Shares of Rs. 100 each 1,20,00,000
40,000 10% Redeemable Preference Shares of 100 each 40,00,000 1,60,00,000
2. Reserves and Surplus
Securities Premium Account 19,00,000
General reserve 62,00,000
Profit & Loss Balance
Opening balance -
Profit for the period 32,00,000
Less: Miscellaneous Expenditure written off (2,32,000) 29,68,000 110,68,000
3. Other current liabilities
Loan from other parties 8,00,000
4. Property, plant and equipment
Plant and Machinery (WDV) 214,00,000
5. Inventories
Finished Goods 30,00,000
Stores 16,00,000
Loose Tools 2,00,000 48,00,000
6. Trade Receivables
Trade receivables 49,00,000
Less: Provision for Doubtful Debts (80,000) 48,20,000
7. Short term loans & Advances
Staff Advances* 2,20,000
Other Advances* 14,88,000 17,08,000

*Considered to be short term.

Q.11: XYZ Ltd. proposes to declare 10% dividend out of General Reserves due to inadequacy
of profits in the year ending 31-03-2020.

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From the following particulars ascertain the amount that can be utilized from general
reserves, according to the Companies Rules, 2014: (Rs.)
8,00,000 Equity Shares of Rs. 10 each fully paid up 80,00,000
General Reserves 25,00,000
Revaluation Reserves 6,50,000
Net profit for the year 1,42,500
Average rate of dividend during the last five years has been 12%. [MTP April 21 (5 Marks)]

OR
X Ltd. (a non-investment company) provides the following information as on 31st March,
2020 was obtained:

Rs.
Issued and subscribed capital:
15,000, 14% preference shares of Rs. 100 each fully paid 15,00,000
1,20,000 Equity shares of Rs. 100 each, Rs. 80 paid-up 96,00,000
Capital reserves (Rs. 1,50,000 is revaluation reserve) 1,95,000
Securities premium 50,000
15% Debentures 65,00,000
Investment in shares, debentures, etc. 75,00,000
Profit and Loss account (debit balance) 15,25,000

You are required to compute Effective Capital as per the provisions of Schedule V to the
Companies Act, 2013.

ANSWER:
Amount that can be drawn from reserves for (10% dividend on Rs. 80,00,000 i.e. Rs. 8,00,000)
Profits available
Current year profit Rs. 1,42,500
Amount which can be utilized from reserves (Rs. 8,00,000 – 1,42,500) Rs. 6,57,500
Conditions as per Companies (Declaration of dividend out of Reserves) Rules, 2014:
Condition I
Since 10% is lower than the average rate of dividend (12%), 10% dividend can be declared.
Condition II
Maximum amount that can be drawn from the accumulated profits and reserves should not exceed
10% of paid up capital plus free reserves ie. Rs. 10,50,000 [10% of (80,00,000 + 25,00,000)]
Condition III
The balance of reserves after drawl Rs. 18,42,500 (Rs. 25,00,000 - Rs. 6,57,500) should not fall below
15 % of its paid up capital ie. Rs. 12,00,000 (15% of Rs. 80,00,000]

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Since all the three conditions are satisfied, the company can withdraw Rs. 6,57,500 from accumulated
reserve (as per Declaration and Payment of Dividend Rules, 2014).
OR
Computation of Effective capital

Rs.
Paid-up share capital –
15,000, 14% Preference shares 15,00,000
1,20,000 Equity shares 96,00,000
Capital reserves (excluding revaluation reserve) 45,000
Securities premium 50,000
15% Debentures 65,00,000
(A) 1,76,95,000
Investments 75,00,000
Profit and Loss account (Dr. Balance) 15,25,000
(B) 90,25,000
Effective capital (A – B) 86,70,000

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 CASH FLOW STATEMENTS

QUESTIONS AND ANSWERS

Q.1: The following figures have been extracted from the books of Manan Jo Limited for the
year ended on 31.3.2020. You are required to prepare the Cash Flow statement as per AS 3
using indirect method.
(i) Net profit before taking into account income tax and income from law suits but after
taking into account the following items was ₹ 30 lakhs :
(a) Depreciation on Property, Plant & Equipment ₹ 7.50 lakhs.
(b) Discount on issue of Debentures written off ₹ 45,000.
(c) Interest on Debentures paid ₹ 5,25,000.
(d) Book value of investments ₹ 4.50 lakhs (Sale of Investments for ₹ 4,80,000).
(e) Interest received on investments ₹ 90,000.
(ii) Compensation received ₹1,35,000 by the company in a suit filed.
(iii) lncome tax paid during the year ₹ 15,75,000.
(iv) 22,500, 10% preference shares of ₹ 100 each were redeemed on 02-04-2019 at a
premium of 5%.
(v) Further the company issued 75,000 equity shares of ₹10 each at a premium of 20% on
30.3.2020 (Out of 75,000 equity shares, 25,000 equity shares were issued to a supplier
of machinery)
(vi) Dividend for FY 2018-19 on preference shares were paid at the time of redemption.
(vii) Dividend on Equity shares paid on 31.01.2020 for the year 2018-2019 ₹ 7.50 lakhs
(including dividend distribution tax) and interim dividend paid ₹ 2.50 lakhs for the year
2019-2020.
(viii) Land was purchased on 02.4.2019 for ₹3,00,000 for which the company issued 22,000
equity shares of ₹ 10 each at a premium of 20% to the land owner and balance in cash
as consideration.
(ix) Current assets and current liabilities in the beginning and at the end of the years were
as detailed below :

As on 01.04.2019 As on 31.3.2020
₹ ₹
Inventory 18,00,000 19,77,000
Trade receivables 3,87,000 3,79,650
Cash in hand 3,94,450 16,950
Trade payables 3,16,500 3,16,950
Outstanding expenses 1,12,500 1,22,700
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 [Nov 2020 (10 Marks)]

ANSWER:
Manan Ltd.
Cash Flow Statement
For the year ended 31st March, 2020

₹ ₹
Cash flow from Operating activities
Net profit before income tax and extraordinary items: 30,00,000
Adjustments for:
Depreciation on Property, plant and equipment 7,50,000
Discount on issue of debentures 45,000
Interest on debentures paid 5,25,000
Interest on investments received (90,000)
Profit on sale of investments (30,000) 12,00,000
Operating profit before working capital changes 42,00,000
Adjustment for:
increase in inventory (1,77,000)
Decrease in trade receivable 7,350
Increase in trade payables 450
Increase in outstanding expenses 10,200 (1,59,000)
Cash generated from operations 40,41,000
Income tax paid (15,75,000)
Cash flow from ordinary items 24,66,000
Cash flow from extraordinary items:
Compensation received in a suit filed 1,35,000
Net cash flow from operating activities 26,01,000
Cash flow from Investing Activities;
Sale proceeds of investments 4,80,000
Interest received on investments 90,000
Purchase of land (3,00,000 less 2,64,000) (36,000)
Net cash flow from investing activities 5,34,000
Cash flow from Financing Activities
Proceeds of issue of equity shares of 20% premium 6,00,000

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 Redemption of preference shares at 5% premium (23,62,500)
Preference dividend paid (2,25,000)
Interest on debentures paid (5,25,000)
Dividend paid (7,50,000 + 2,50,000) (10,00,000)
Net cash used in financing activities (35,12,500)
Net decrease in cash and cash equivalents during the year (3,77,500)
Add: Cash and cash equivalents as on 31.3.2019 3,94,450
Cash and cash equivalents as on 31.3.2020 16,950

Q.2: The following are the extracts of Balance Sheet and Statement of Profit and Loss of
Supriya Ltd.:
Extract of Balance Sheet

Particulars Notes 2021 2020

(₹’000) (₹’000)
Equity and Liabilities
1 Shareholder’s funds
(a) Share capital 1 500 200
2 Non- current liabilities
(a) Long term loan from bank --- 250
3 Current liabilities
(a) Trade Payables 1,000 3,047
Assets
1 Non-current assets
(a) Property, Plant and Equipment 230 128
2 Current assets
(a) Trade receivables 2,000 4,783
(b) Cash & cash equivalents (Cash balance) 212 35

Extract of Statement of Profit and Loss

Particulars Notes 2021 2020

(₹’000) (₹’000)
I Expenses:
Employee benefits expense 69 25
Other expenses 2 115 110
II Tax expense:
Current tax (paid during year) 243 140

Notes to accounts

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 Particulars 2021 (₹’000) 2020 (₹’000)
1 Share Capital
Equity Shares of ₹10 each, fully paid up 500 200
2 Other expenses
Overheads 115 110

Q.3: Prepare Cash Flow Statement of Supriya Ltd. for the year ended 31st March, 2021 in
accordance with AS-3 (Revised) using direct method. All transactions were done in cash
only. There were no outstanding/prepaid expenses as on 31st March, 2020 and on 31st
March, 2021. Ignore deprecation. Dividend amounting ₹ 80,000 was paid during the year
ended 31st March, 2021. [RTP May 2021]

ANSWER:
Supriya Ltd.
Cash Flow Statement for the year ended 31st March, 2021 (Using direct method)

(₹ ‘000)
Cash flows from operating activities
Cash receipts from customers 2,783
Cash payments to suppliers (2,047)
Cash paid to employees (69)
Other cash payments (for overheads) (115)
Cash generated from operations 552
Income taxes paid (243)
Net cash from operating activities 309
Cash flows from investing activities
Payment for purchase of Property, Plant and Equipment (102)
Net cash used in investing activities (102)
Cash flows from financing activities
Proceeds from issuance of share capital 300
Bank loan repaid (250)
Dividend paid (80)
Net cash used in financing activities (30)
Net increase in cash and cash equivalents 177
Cash and cash equivalents at beginning of period 35
Cash and cash equivalents at end of period 212

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Q.4: Following information was extracted from the books of S Ltd. for the year ended 31st
March, 2020 :
(1) Net profit before talking into account income tax and after talking into account the
following items was ₹30 lakhs;
(i) Depreciation on Property, Plant & Equipment ₹7,00,000
(ii) Discount on issue of debentures written off ₹45,000.
(iii) Interest on debentures paid ₹4,35,000
(iv) Investment of Book value ₹3,50,000 sold for ₹3,75,000.
(v) Interest received on Investments ₹70,000
(2) Income tax paid during the year ₹ 12,80,000
(3) Company issued 60,000 Equity Shares of ₹10 each at a premium of 20% on 10th
April,2019.
(4) 20,000,9% Preference Shares of ₹100 each were redeemed on 31st March, 2020 at a
premium of 5%
(5) Dividend paid during the year amounted to ₹11 Lakhs (including dividend distribution
tax)
(6) A new Plant costing ₹7 Lakhs was purchased in part exchange of an old plant on 1st
January, 2020. The book value of the old plant was ₹8 Lakhs but the vendor took over
the old plant at a value of ₹6 Lakhs only. The balance amount was paid to vendor
through cheque on 30th March, 2020.
(7) Company decided to value inventory at cost, whereas previously the practice was to
value inventory at cost less 10%. The inventory according to books on 31.03.2020 was
₹ 14,76,000.
The inventory on 31.03.2019 was correctly valued at ₹ 13,50,000.
(8) Current Assets and Current Liabilities in the beginning and at the end of year 2019-
2020 were as:

As on 1st April,2019 (₹) As on 31st March,2020 (₹)

Inventory 13,50,000 14,76,000
Trade Receivables 3,27,000 3,13,200
Cash & Bank Balances 2,40,700 3,70,500
Trade Payables 2,84,700 2,87,300
Outstanding Expenses 97,000 1,01,400

You are require to prepare a Cash Flow Statement for the year ended 31st March, 2020 as
per AS 3 (revised) using the indirect method. [Jan 21 (12 Marks)]

ANSWER:
S Ltd.
Cash Flow Statement for the year ended 31st March, 2020
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 ₹ ₹
Cash flows from operating activities
Net profit before taxation* 30,00,000
Adjustments for:
Depreciation on PPE 7,00,000
Discount on debentures 45,000
Profit on sale of investments (25,000)
Interest income on investments (70,000)
Interest on debentures 4,35,000
Stock adjustment 1,64,000
{14,76,000 less 16,40,000 (14,76,000/90 X 100)}
Operating profit before working capital changes 12,49,000
Changes in working capital 42,49,000
(Excluding cash and bank balance):
Less: Increase in inventory (2,90,000)
{16,40,000 (14,76,000/90 X 100) less 13,50,000}
Add: Decrease in Trade receivables 13,800
Increase in trade payables 2,600
Increase in o/s expenses 4,400 (2,69,200)
Cash generated from operations 39,79,800
Less: Income taxes paid (12,80,000)
Net cash generated from operating activities 26,99,800
Cash flows from investing activities
Sale of investments 3,75,000
Interest received 70,000
Payments for purchase of fixed assets (1,00,000)
(7,00,000 – 6,00,000)
Net cash used in investing activities 3,45,000
Cash flows from financing activities
Redemption of Preference shares (21,00,000)
Issue of shares 7,20,000
Interest paid (4,35,000)
Dividend paid (11,00,000)
Net cash used in financing activities (29,15,000)

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 Net increase in cash 1,29,800
Cash at beginning of the period 2,40,700
Cash at end of the period 3,70,500

*Net profit given in the question is after considering only the items listed as information point (1) of
the question; hence amount of loss on plant not added back.

Q.5: Following is the cash flow abstract of Alpha Ltd. for the year ended 31st March, 2021:
Cash Flow (Abstract)

Inflows Rs. Outflows Rs.

Opening cash and bank 80,000 Payment for Account 90,000
balance Payables
Share capital – shares issued 5,00,000 Salaries and wages 25,000
Collection from Trade Payment of overheads 15,000
Receivables 3,50,000 Machinery acquired 4,00,000
Debentures redeemed 50,000
Sale of Machinery 70,000 Bank loan repaid 2,50,000
Tax paid 1,55,000
Closing cash and bank 15,000
balance
10,00,000 10,00,000

Prepare Cash Flow Statement for the year ended 31st March, 2021 in accordance with AS
3. [MTP April 21 (5 Marks)]

ANSWER:
Cash Flow Statement for the year ended 31.3.2021

Rs. Rs.
Cash flow from operating activities
Cash received on account of trade receivables 3,50,000
Cash paid on account of trade payables (90,000)
Cash paid to employees (salaries and wages) (25,000)
Other cash payments (overheads) (15,000)
Cash generated from operations 2,20,000
Income tax paid (1,55,000)
Net cash generated from operating activities 65,000
Cash flow from investing activities

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Payment for purchase of machinery (4,00,000)
Proceeds from sale of machinery 70,000
Net cash used in investment activities (3,30,000)
Cash flow from financing activities
Proceeds from issue of share capital 5,00,000
Bank loan repaid (2,50,000)
Debentures redeemed (50,000)
Net cash used in financing activities 2,00,000
Net decrease in cash and cash equivalents (65,000)
Cash and cash equivalents at the beginning of the year 80,000
Cash and cash equivalents at the end of the year 15,000

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 PROFIT OR LOSS PRE AND
POST INCORPORATION

QUESTIONS AND ANSWERS

Q.1: Moon Ltd. was incorporated on 1st August, 2019 to take over the running business of a
partnership firm w.e.f. 1st April, 2019. The summarized Profit & Loss Account for the year
ended 31st March, 2020 is as under:

Amount (₹)
Gross Profit 6,30,000
Less: Salaries 1,56,000
Rent, Rates & Taxes 72,000
Commission on sales 40,600
Depreciation 60,000
Interest on Debentures 36,000
Director's fees 24,000
Advertisement 48,000 4,36,600
Net Profit for the year 1,93,400

Moon Ltd. initiated an advertising campaign which resulted in increase of monthly sales by
25% post incorporation.
You are required to prepare a statement showing the profit for the year between pre-
incorporation and post-incorporation. Also, explain how these profits are to be treated in
the accounts? [Nov 2020 (4 Marks)]

ANSWER:
Statement showing the calculation of Profits for the pre-incorporation and post-
incorporation periods

Particulars Total Basis of Pre- Post-

Amount Allocation incorporation incorporation
₹ ₹ ₹
Gross Profit (W.N.2) 6,30,000 2:5 (sales) 1,80,000 4,50,000
Less: Salaries 1,56,000 Time (52,000) (1,04,000)
Rent, rates and taxes 72,000 Time (24,000) (48,000)
Commission on sales 40,600 2:5 (sales) (11,600) (29,000)
Depreciation 60,000 Time (20,000) (40,000)

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 Interest on debentures 36,000 Post (36,000)
Directors’ fee 24,000 Post (24,000)
Advertisement 48,000 Post ( 48,000)
Net profit 72,400 1,21,000

Pre-incorporation profit will be transferred to Capital Reserve.

Post-incorporation profit will be transferred to Profit & Loss Account.
Working Notes:
1. Sales ratio
Let the monthly sales for first 4 months (i.e. from 1.4.2019 to 31.7.2019) be = x
Then, sales for 4 months = 4x
Monthly sales for next 8 months (1st August, 2019 to 31st March, 2020)
= x + 25% of x= 1.25x Then, sales for next 8 months = 1.25x X 8 = 10x
Total sales for the year = 4x + 10x = 14x. Hence Sales Ratio = 4x : 10x i.e. 2:5
2. Time ratio
1st April, 2019 to 31st July, 2019 : 1st August, 2019 to 31st March, 2020
= 4 months: 8 months = 1:2. Thus, time ratio is 1:2.

Q.2:
(a) Megha Ltd. was incorporated on 1.7.2020 to take over the running business of M/s
Happy from 1.4.2020. The accounts of the company were closed on 31.3.2021.
The average monthly sales during the first three months of the year (2020-21) was twice
the average monthly sales during each of the remaining nine months.
You are required to compute time ratio and sales ratio for pre and post incorporation
periods.
(b) The Business carried on by Kamal under the name "K" was taken over as a running
business with effect from 1st April, 2020 by Sanjana Ltd., which was incorporated on
1st July, 2020. The same set of books was continued since there was no change in the
type of business and the following particulars for the year ended 31st March, 2021 were
available:

₹ ₹
Sales: Company period (1.7.20 to 31.3.21) 40,000
Prior period (1.4.20 to 30.6.20) 10,000 50,000
Selling Expenses 3,500
Preliminary Expenses written off 1,200
Salaries paid 3,600
Directors' Fees 1,200
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 Interest on Capital (Upto 30.6.2020) 700
Depreciation 2,800
Rent expense 4,800
Purchases: Company period (1.7.20 to 31.3.21) 21,875
Prior period (1.4.20 to 30.6.20) 3,125
Carriage Inwards 1,000 43,800
Net Profit 6,200

You are required to prepare a statement showing the amount of pre and post
incorporation period profits stating the basis of allocation of expenses.
[RTP May 2021]

ANSWER:
(a) Time ratio:
Pre-incorporation period (1.4.2020 to 1.7.2020) = 3 months
Post incorporation period (1.7.2020 to 31.3.2021) = 9 months
Time ratio = 3 : 9 or 1 : 3
Sales ratio:
Average monthly sale before incorporation was twice the average sale per month of the post
incorporation period. If weightage for each post -incorporation month is x, then
Weighted sales ratio = 3 × 2x : 9 × 1x = 6x : 9x or 2 : 3
(b) Statement showing the calculation of profits/losses for pre incorporation and Post
incorporation period profits of Sanjana Ltd.
for the year ended 31st March, 2021

Particulars Basis Pre Post

₹ ₹
Sales (given) 10,000 40,000
Less: Purchase (given) 3,125 21,875
Carriage Inwards 1:7 125 875
Gross Profit (i) 6,750 17,250
Less: Selling Expenses 1:4 700 2,800
Preliminary Expenses 1,200
Salaries 1:3 900 2,700
Director Fees 1,200
Interest on capital 700
Depreciation 1:3 700 2,100

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 Rent 1:3 1,200 3,600
Total of Expenses (ii) 4,200 13,600
Pre-incorporation/Net Profit (i – ii) 2,550 3,650

Working Note:
1: Sales Ratio = 10,000 : 40,000 = 1 : 4
2: Time Ratio = 3:9 =1:3

Q.3: Sneha Ltd. was incorporated on 1st July, 2019 to acquire a running business of Atul
Sons with effect from 1st April, 2019.
During the year 2019-20, the total sales were Rs. 24,00,000 of which Rs. 4,80,000 were for
the first six months. The Gross profit of the company for the year was Rs. 3,90,800. The
expenses charged to the Statement of Profit & Loss Account included the following:
(i) Director's fees Rs. 30,000
(ii) Bad debts Rs. 7,200
(iii) Advertising Rs. 24,000 (under a contract amounting to Rs. 2,000 per month)
(iv) Salaries and General Expenses Rs. 1,28,000
(v) Preliminary Expenses written off Rs. 10,000
(vi) Donation to a political party given by the company Rs. 10,000.
Prepare a statement showing pre-incorporation and post-incorporation profit for the year
ended 31st March, 2020. [MTP April 21 (6 Marks)]

ANSWER:
Statement showing the calculation of Profits for the pre-incorporation and post-
incorporation periods for the year ended 31st March, 2020

Particulars Total Allocation Pre- Post-

basis incorporation incorporation
Rs. Rs.
Gross Profit 3,90,800 Sales 39,080 3,51,720
Less: Directors’ fee 30,000 Post 30,000
Bad debts 7,200 Sales 720 6,480
Advertising 24,000 Time 6,000 18,000
Salaries & general 1,28,000 Time 32,000 96,000
expenses
Preliminary expenses 10,000 Post 10,000
Donation to Political Party 10,000 Post 10,000

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Net Profit 1,81,600 1,81,240
Pre-incorporation profit transferred 360
to Capital Reserve

Working Notes:
1. Sales ratio

Particulars Rs.
Sales for period up to 30.06.2019 (4,80,000 X 3/6) 2,40,000
Sales for period from 01.07.2019 to 31.03.2020 (24,00,000 – 2,40,000) 21,60,000

Thus, Sales Ratio = 1 : 9

2. Time Ratio
1st April, 2019 to 30 June, 2019: 1st July, 2019 to 31st March, 2020
= 3 months: 9 months = 1: 3
Thus, Time Ratio is 1: 3

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 ACCOUNTING FOR BONUS ISSUE AND RIGHT
ISSUE

QUESTIONS AND ANSWERS

Q.1: Following is the information of Umesh Ltd. as at 31st March, 2021:

₹
Authorized capital:
30,000 12% Preference shares of ₹ 10 each 3,00,000
4,00,000 Equity shares of ₹ 10 each 40,00,000
43,00,000
Issued and Subscribed capital:
24,000 12% Preference shares of ₹ 10 each fully paid 2,40,000
3,00,000 Equity shares of ₹ 10 each, ₹ 8 paid up 24,00,000
Reserves and surplus:
General Reserve 3,60,000
Capital Redemption Reserve 1,20,000
Securities premium (collected in cash) 75,000
Profit and Loss Account 6,00,000

On 1st April, 2021, the Company has made final call @ ₹ 2 each on 3,00,000 equity shares.
The call money was received by 20th April, 2021. Thereafter, the company decided to
capitalize its reserves by way of bonus at the rate of one share for every four shares held.
You are required to prepare necessary journal entries in the books of the company.
[RTP May 2021]

ANSWER:
Journal Entries in the books of Umesh Ltd.

₹ ₹
1-4-2021 Equity share final call A/c Dr. 6,00,000
To Equity share capital A/c 6,00,000
(For final calls of ₹ 2 per share on 3,00,000
equity shares due as per Board’s Resolution
dated….)
20-4-2021 Bank A/c Dr. 6,00,000
To Equity share final call A/c 6,00,000

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 (For final call money on 3,00,000 equity shares
received)
Securities Premium A/c Dr. 75,000
Capital redemption reserve A/c Dr. 1,20,000
General Reserve A/c Dr. 3,60,000
Profit and Loss A/c (b.f.) Dr. 1,95,000
To Bonus to shareholders A/c 7,50,000
(For making provision for bonus issue of one
share for every four shares held)
Bonus to shareholders A/c Dr. 7,50,000
To Equity share capital A/c 7,50,000
(For issue of bonus shares)

Q.2:
(a) Beta Ltd. having share capital of 20,000 equity shares of ₹10 each decides to issue
rights share at the ratio of 1 for every 8 shares held at par value. Assuming all the share
holders accepted the rights issue and all money was duly received, pass journal entry
in the books of the company.
(b) Omega Ltd. offers new shares of ₹ 100 each at 25% premium to existing shareholders
on the basis one for five shares. The cum-right market price of a share is ₹ 200. You are
required to calculate the (i) Ex-right value of a share; (ii) Value of a right share?
[RTP May 2021]

ANSWER:
(a)

₹ ₹
Bank A/c Dr. 25,000
To Equity share capital A/c 25,000
(For rights share issued at par value in the ratio of 1:8
equity shares due as per Board’s Resolution
dated……..)

Working Note:
Number of Rights shares to be issued- 20,000/8x1= 2,500 shares
(b) Ex-right value of the shares
= (Cum-right value of the existing shares + Rights shares x Issue Price) / (Existing No. of shares +
No. of right shares) = (₹ 200 X 5 Shares + ₹ 125 X 1 Share)/(5+1) Shares
= ₹ 1,125 / 6 shares = ₹ 187.50 per share.
Value of right = Cum-right value of the share – Ex-right value of the share

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 = ₹ 200 – ₹ 187.50 = ₹ 12.50 per share.

Q.3: Following items appear in the Trail Balance of Star Ltd. as on 31st March, 2019:

Particulars ₹
80,000 Equity shares of ₹10 each, ₹ 8 paid-up 6,40,000
Capital Reserve (including ₹45,000 being profit on sale of Machinery) 1,10,000
Revaluation Reserve 80,000
Capital Redemption Reserve 75,000
Securities Premium 60,000
General Reserve 2,10,000
Profit & Loss Account (Cr. Balance) 1,00,000

On 1st April, 2019, the Company has made final call on Equity shares @ ₹ 2 per share. The
entire money was received in the month of April, 2019.
On 1st June, 2019, the Company decided to issue to Equity shareholders bonus shares at
the rate of 2 shares for every 5 shares held and for this purpose, it was decided that there
should be minimum reduction in free reserves.
Pass necessary journal entries in the Books of Star Ltd. [Jan 21 (4 Marks)]

ANSWER:
Journal Entries in the books of Star Ltd.

2019 Dr. (₹) Cr. (₹)

April 1 Equity Share Final Call A/c Dr. 1,60,000
To Equity Share Capital A/c 1,60,000
(Final call of ₹ 2 per share on 80,000 equity shares
made due)
Bank A/c Dr. 1,60,000
To Equity Share Final Call A/c 1,60,000
(Final call money on 80,000 equity shares received)
June 1 Capital Redemption Reserve A/c Dr. 75,000
Capital Reserve Dr. 45,000*
Securities Premium A/c Dr. 60,000
General Reserve A/c (b.f.) Dr. 1,40,000**
To Bonus to Shareholders A/c 3,20,000
(Bonus issue of two shares for every five shares held,
by utilizing various reserves as per Board’s resolution
dated…….)
Bonus to Shareholders A/c Dr. 3,20,000
To Equity Share Capital A/c 3,20,000

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 (Capitalization of profit)

* considering it as free reserve as it has been realized.

** Alternatively, different combination of profit and loss balance and general reserve may also be
used.

Q.4: Manu Ltd. gives the following information as at 31st March, 2021:

Rs.
Issued and Subscribed capital:
24,000 12% Preference shares of Rs. 10 each fully paid 2,40,000
2,70,000 Equity shares of Rs. 10 each, Rs. 8 paid up 21,60,000
Reserves and surplus:
General Reserve 3,60,000
Capital Redemption Reserve 1,20,000
Securities premium (collected in cash) 75,000
Profit and Loss Account 6,00,000

On 1st April, 2021, the Company has made final call @ Rs. 2 each on 2,70,000 equity shares.
The call money was received by 20th April, 2021. Thereafter, the company decided to
capitalize its reserves by way of bonus at the rate of one share for every four shares held.
You are required to prepare necessary journal entries in the books of the company on 30th
April, 2021 for these transactions. [MTP April 21 (4 Marks)]

ANSWER:
Journal Entries

Rs. Rs.
1-4-2021 Equity share final call A/c Dr. 5,40,000
To Equity share capital A/c 5,40,000
(For final calls of Rs. 2 per share on 2,70,000
equity shares due as per Board’s Resolution
dated….)
20-4-2021 Bank A/c Dr. 5,40,000
To Equity share final call A/c 5,40,000
(For final call money on 2,70,000 equity shares
received)
Securities Premium A/c Dr. 75,000
Capital redemption reserve A/c Dr. 1,20,000
General Reserve A/c Dr. 3,60,000
Profit and Loss A/c (b.f.) Dr. 1,20,000

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 To Bonus to shareholders A/c 6,75,000
(For making provision for bonus issue of one
share for every four shares held)
Bonus to shareholders A/c Dr. 6,75,000
To Equity share capital A/c 6,75,000
(For issue of bonus shares)

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 REDEMPTION OF PREFERENCE SHARES

QUESTIONS AND ANSWERS

Q.1: The Books of Arpit Ltd. shows the following Balances as on 31st December, 2019:

Amount (₹)
6,00,000 Equity shares of ₹ 10 each fully paid up 60,00,000
30,000, 10% Preference shares of ₹ 100 each, ₹ 80 paid up 24,00,000
Securities Premium 6,00,000
Capital Redemption Reserve 18,00,000
General Reserve 35,00,000

Under the terms of issue, the Preference Shares are redeemable on 31st March, 2020 at a
premium of 10%. In order to finance the redemption, the Board of Directors decided to make
a fresh issue of 1,50,000 Equity shares of ₹10 each at a premium of 20%, ₹ 2 being payable
on application, ₹ 7 (including premium) on allotment and the balance on 1st January, 2021.
The issue was fully subscribed and allotment made on 1st March, 2020. The money due on
allotment was received by 20th March, 2020.
The preference shares were redeemed after fulfilling the necessary conditions of Section
55 of the Companies Act, 2013.
You are required to pass the necessary Journal Entries and also show how the relevant
items will appear in the Balance Sheet of the company after the redemption carried out on
31st March, 2020. [Nov 2020 (12 Marks)]

ANSWER:
Journal Entries

₹ ₹
1 10% Preference Share Final Call A/c Dr. 6,00,000
To 10% Preference Share Capital A/c 6,00,000
(For final call made on preference shares @ ₹ 20
each to make them fully paid up)
2 Bank A/c Dr. 6,00,000
To 10% Preference Share Final Call A/c 6,00,000
(For receipt of final call money on preference
shares)
3 Bank A/c Dr. 3,00,000
To Equity Share Application A/c 3,00,000

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 (For receipt of application money on 1,50,000
equity shares @ ₹ 2 per share)
4 Equity Share Application A/c Dr. 3,00,000
To Equity Share Capital A/c 3,00,000
(For capitalization of application money received)
5 Equity Share Allotment A/c Dr. 10,50,000
To Equity Share Capital A/c 7,50,000
To Securities Premium A/c 3,00,000
(For allotment money due on 1,50,000 equity
shares
@ ₹ 7 per share including a premium of ₹ 2 per
share)
6 Bank A/c Dr. 10,50,000
To Equity Share Allotment A/c 10,50,000
(For receipt of allotment money on equity shares)
7 10% Preference Share Capital A/c Dr. 30,00,000
Premium on Redemption of Preference Shares A/c Dr. 3,00,000
To Preference Shareholders A/c 33,00,000
(For amount payable to preference shareholders on
redemption at 10 % premium)
8 General Reserve A/c Dr. 3,00,000
To Premium on Redemption A/c 3,00,000
(Writing off premium on redemption of preference
shares)
9 General Reserve A/c Dr. 19,50,000
To Capital Redemption Reserve A/c 19,50,000
(For transfer of CRR the amount not covered by the
proceeds of fresh issue of equity shares i.e.,
30,00,000 - 3,00,000 - 7,50,000)
10 Preference Shareholders A/c Dr. 33,00,000
To Bank A/c 33,00,000
(For amount paid to preference shareholders)

Balance Sheet (extracts)

Particulars Notes As at As at
No. 31.3.2020 31.12.2019
₹ ₹

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 EQUITY AND LIABILITIES
1. Shareholders’ funds
(a) Share capital 1 70,50,000 84,00,000
(b) Reserves and Surplus 2 59,00,000 59,00,000

Notes to Accounts:

As at As at
31.3.2020 31.12.2019
1. Share Capital
Issued, Subscribed and Paid up:
6,00,000 Equity shares of ₹ 10 each fully paid up 60,00,000 60,00,000
1,50,000 Equity shares of ₹10 each ₹ 7 paid up 10,50,000 -
30,000, 10% Preference shares of ₹ 100 each, ₹80 - 24,00,000
paid up
70,50,000 84,00,000
2.
Reserves and Surplus
Capital Redemption Reserve 37,50,000 18,00,000
Securities Premium 9,00,000 6,00,000
General Reserve 12,50,000 35,00,000
59,00,000 59,00,000

Note:
1. Securities premium has not been utilized for the purpose of premium payable on redemption of
preference shares assuming that the company referred in the question is governed by Section 133
of the Companies Act, 2013 and comply with the Accounting Standards prescribed for them.
2. Amount received (excluding premium) on fresh issue of shares till the date of redemption should
be considered for calculation of proceeds of fresh issue of shares. Thus, proceeds of fresh issue of
shares are ₹10,50,000 (₹3,00,000 application money plus ₹ 7,50,000 received on allotment
towards share capital) and balance ₹ 19,50,000 to taken from general reserve account.

Q.3: ABC Ltd. provides you the following information as on 31st March, 2021:
Share capital:
50,000 Equity shares of ₹ 10 each fully paid – ₹ 5,00,000;
1,500 10% Redeemable preference shares of ₹100 each fully paid – ₹ 1,50,000.
Reserve & Surplus:
Capital reserve – ₹ 1,00,000;
General reserve –₹ 80,000;

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Profit and Loss Account – ₹95,000.
On 1st April 2021, the Board of Directors decided to redeem the preference shares at
premium of 10% by utilization of reserves.
You are required to prepare necessary Journal Entries including cash transactions in the
books of the company. [RTP May 2021]

ANSWER:
In the books of ABC Limited
Journal Entries

Date Particulars Dr. (₹) Cr. (₹)

2021
April 1 10% Redeemable Preference Share Capital A/c Dr. 1,50,000
Premium on Redemption of Preference Shares 15,000
To Preference Shareholders A/c 1,65,000
(Being the amount payable on redemption
transferred to Preference Shareholders Account)
Preference Shareholders A/c Dr. 1,65,000
To Bank A/c 1,65,000
(Being the amount paid on redemption of
preference shares)
General Reserve A/c Dr. 80,000
Profit & Loss A/c Dr. 70,000
To Capital Redemption Reserve A/c 1,50,000
(Being the amount transferred to Capital
Redemption Reserve Account as per the
requirement of the Act)
Profit & Loss A/c Dr. 15,000
To Premium on Redemption of 15,000
Preference Shares A/c
(Being premium on redemption charged to
Profit and Loss A/c)

Note: Capital reserve cannot be utilized for transfer to Capital Redemption Reserve.

Q.4: The Capital structure of a company BK Ltd., consists of 30,000 Equity Shares of ₹ 10
each fully paid up and 2,000 9% Redeemable Preference Shares of ₹ 100 each fully paid up
as on 31.03.2020. The other particulars as at 31.03.2020 are as follows:

Amount (₹)
General Reserve 1,20,000

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 Profit &Loss Account 60,000
Investment Allowance Reserve (not free for distribution as dividend) 15,000
Cash at bank 1,95,000

Preference Shares are to be redeemed at a premium of 10%. For the purpose of redemption,
the directors are empowered to make fresh issue of Equity Shares at per after utilizing the
undistributed reserve &surplus, subject to the conditions that a sum of ₹ 40,000 shall be
retained in General Reserve and which should not be utilized.
Company also sold investment of 4500 Equity Shares in G Ltd., costing ₹45,000 at ₹ 9 per
share.
Pass Journal entries to give effect to the above arrangements and also show how the
relevant items will appear in the Balance Sheet as at 31.03.2020 of BK Ltd., after the
redemption is carried out. [Jan 21 (12 Marks)]

ANSWER:
Journal Entries

Date Particulars Dr. (₹) Cr. (₹)

Bank A/c Dr. 84,500
To Equity Share Capital A/c 84,500
(Being the issue of 8,450 Equity Shares of ₹ 10 each as
per Board’s Resolution No…..dated…….)
9% Redeemable Preference Share Capital A/c Dr. 2,00,000
Premium on Redemption of Preference Shares A/c Dr. 20,000
To Preference Shareholders A/c 2,20,000
(Being the amount paid on redemption transferred to
Preference Shareholders Account)
Bank A/c Dr. 40,500
Profit and Loss A/c (loss on sale) A/c Dr. 4,500
To Investment A/c 45,000
(Being investment sold at loss of ₹ 4,500)
Preference Shareholders A/c Dr. 2,20,000
To Bank A/c 2,20,000
(Being the amount paid on redemption of preference
shares)
Profit & Loss A/c Dr. 20,000
To Premium on Redemption of Preference 20,000
Shares A/c
(Being the premium payable on redemption is
adjusted against Profit & Loss Account)

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 General Reserve A/c Dr. 80,000
Profit & Loss A/c Dr. 35,500
To Capital Redemption Reserve A/c 1,15,500
(Being the amount transferred to Capital Redemption
Reserve Account)

Balance Sheet as on …………… [Extracts]

Particulars Notes No. ₹

EQUITY AND LIABILITIES
1. Shareholders’ funds
(a) Share capital 1 3,84,500
(b) Reserves and Surplus 2 1,70,500
ASSETS
2. Current Assets
Cash and cash equivalents 1,00,000
(1,95,000 + 84,500 + 40,500 – 2,20,000)

Notes to accounts

1. Share Capital
38,450 Equity shares (30,000 + 8,450) of ₹10 each fully paid up 3,84,500
2. Reserves and Surplus
General Reserve 40,000
Profit and loss account NIL
Capital Redemption Reserve 1,15,500
Investment Allowance Reserve 15,000
1,70,500

Working Note:

Number of Shares to be issued for redemption of Preference Shares:

Face value of shares redeemed ₹2,00,000
Less: Profit available for distribution as dividend:
General Reserve: ₹ (1,20,000 - 40,000) ₹80,000
Profit and Loss (60,000 less 20,000 set aside for adjusting
premium payable on redemption of Pref. shares less 4,500 loss
on sale of investments) ₹35,500
₹(1,15,500)
₹ 84,500

Therefore, No. of shares to be issued 84,500/ ₹ 10 = 8,450 shares.

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Q.5: The capital structure of AP Ltd. consists of 20,000 Equity Shares of Rs.10 each fully
paid up and 1,000 8% Redeemable Preference Shares of Rs.100 each fully paid up.
Undistributed reserve and surplus stood as: General Reserve Rs. 80,000; Profit and Loss
Account Rs. 20,000; Investment Allowance Reserve is Rs. 10,000 out of which Rs. 5,000 is
not ascertained as free reserve; Cash at bank amounted to Rs. 98,000.
Preference shares are to be redeemed at a Premium of 10% and for the purpose of
redemption, the directors are empowered to make fresh issue of Equity Shares at par after
utilizing the undistributed reserves and surplus, subject to the condition that a sum of Rs.
20,000 shall be retained in general reserve which should not be utilized.
You are required to pass Journal Entries to give effect to the above arrangements and also
show how the relevant items will appear in the Balance Sheet of the company after the
redemption is carried out. [MTP March 21 (12 Marks)]

ANSWER:
Journal Entries in the books of AP Ltd.

Date Particulars Dr. (Rs.) Cr. (Rs.)

Bank A/c Dr. 25,000
To Equity Share Capital A/c 25,000
(Being the issue of 2,500 Equity Shares of Rs. 10 each
at par, as per Board’s Resolution No…..dated…….)
8% Redeemable Preference Share Capital A/c Dr. 1,00,000
Premium on Redemption of Preference Shares A/c Dr. 10,000
To Preference Shareholders A/c 1,10,000
(Being the amount paid on redemption transferred to
Preference Shareholder Account)
Preference Shareholders A/c Dr. 1,10,000
To Bank A/c 1,10,000
(Being the amount paid on redemption of preference
shares)
Profit & Loss A/c Dr. 10,000
To Premium on Redemption of Preference 10,000
Shares A/c
(Being the premium payable on redemption is
adjusted against Profit & Loss Account)
General Reserve A/c Dr. 60,000
Profit & Loss A/c Dr. 10,000
Investment Allowance Reserve A/c Dr. 5,000
To Capital Redemption Reserve A/c 75,000

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 (Being the amount transferred to Capital Redemption
Reserve Account as per the requirement of the Act)

Balance Sheet as at …………… [Extracts]

Particulars Notes No. Rs.

EQUITY AND LIABILITIES
1. Shareholders’ funds
a Share capital 1 2,25,000
b Reserves and Surplus 2 1,00,000
Total ?
ASSETS
2. Current Assets
Cash and cash equivalents 13,000
(98,000 + 25,000 – 1,10,000)
Total ?

Notes to accounts
1. Share Capital
22,500 Equity shares (20,000 + 2,500) of Rs.10 each fully paid up 2,25,000
2. Reserves and Surplus
General Reserve 20,000
Capital Redemption Reserve 75,000
Investment Allowance Reserve 5,000
1,00,000

Working Note:

No of Shares to be issued for redemption of Preference Shares:

Face value of shares redeemed Rs. 1,00,000
Less: Profit available:
General Reserve : Rs. (80,000 – 20,000) Rs. 60,000
Profit and Loss (20,000 – 10,000 set aside for adjusting
premium payable on redemption of preference shares) Rs. 10,000
Investment Allowance Reserve: (Rs. 10,000 – 5,000) Rs. 5,000 (Rs. 75,000)
Rs. 25,000

Therefore, No. of shares to be issued = 25,000/Rs.10 = 2,500 shares.

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 REDEMPTION OF DEBENTURES

QUESTIONS AND ANSWERS

Q.1: Sumit Ltd. (an unlisted company other than AIFI, Banking company, NBFC and HFC)
had 8,000, 9% debentures of ₹ 100 each outstanding as on 1st April, 2019, redeemable on
31st March, 2020.
On 1st April, 2019, the following balances appeared in the books of accounts:
 Investment in 1,000, 7% secured Govt. bonds of ₹ 100 each, ₹ 1,00,000.
 Debenture Redemption Reserve is ₹ 50,000.
Interest on investments is received yearly at the end of financial year.
1,000 own debentures were purchased on 30th March, 2020 at an average price of ₹ 96.50
and cancelled on the same date.
On 31st March, 2020, the investments were realized at par and the debentures were
redeemed. You are required to write up the following accounts for the year ended 31st
March, 2020.
(1) 9% Debentures Account.
(2) Debenture Redemption Reserve Account.
(3) DRR Investment Account.
(4) Own Debentures Account. [Nov 2020 (10 Marks)]

ANSWER:
9% Debentures Account

Date Particulars ₹ Date Particulars ₹

30th March, To Own 95,500 1st April, By Balance b/d 8,00,000
2020 Debentures A/c 2019
March, To Profit on 3,500
2020 cancellation
31st March, To Bank A/c 7,20,000
2020
8,00,000 8,00,000

Debentures Redemption Reserve (DRR) Account

Date Particulars ₹ Date Particulars ₹

1st April, By Balance b/d 50,000
2019

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 31st March, To General 80,000 1st April, By Profit and loss A/c
2020 Reserve A/c 2019 [Refer Working Note 30,000
3]
80,000 80,00

Debentures Redemption Reserve Investment (DRRI) Account

Date Particulars Amount Date Particulars Amount

1st April To Balance b/d 1,00,000 31st March, By Bank A/c 15,000
2019 2020 (1,000 x 100 x 15%)
(Refer working note
2)
1st April To Bank A/c 20,000 31st March, By Bank A/c 1,05,000
2019 (Refer Working 2020 (Refer Working
Note 1) Note 2)
1,20,000 1,20,000

Own Debentures A/c

Date Particulars Amount Date Particulars Amount

30th March, To Bank A/c* 96,500 30th March, By 9% Debentures 96,500
2020 2020
96,500 96,500

* Interest not considered.

Working Notes:
1. Debenture Redemption Reserve Investment A/c
The company would be required to invest an amount equivalent to 15% of the value of the
debentures in specified investments which would be equivalent to:
= Total No of debentures X Face value per debenture X 15%
= 8,000 X 100 X 15% = ₹1,20,000/-
The company has already invested in specified investments i.e. 7% Govt bonds for an amount
of ₹1,00,000 as per the information given in the question. The balance amount of ₹20,000 (i.e.
₹ 1,20,000 less ₹ 1,00,000) would be invested by the company on 1 April 2019.
2. Redemption of Debenture Redemption Reserve Investments on 31.3.2020
Since the company purchased 1,000 own debentures on 31 March 2020, the company would
also realize the investments of 15% corresponding to these debentures for which computation is
as follows:
= No. of own debentures to be bought X Face value per debenture X 15%
= 1,000 X 100 X 15% = ₹ 15,000/-

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 The remaining debentures i.e. total debentures less own debentures would be redeemed on 31
March 2020 and hence the company would also realize the balance investments of 15%
corresponding to these debentures for which computation is as follows:
= (Total no of debentures – No. of own debentures) X Face value per debenture X 15% =
(8,000 - 1,000) X 100 X 15% = ₹1,05,000/-
3. Debenture Redemption Reserve
The company would be required to transfer an amount equivalent to 10% of the value of the
debentures in Debentures Redemption Reserve Account. The value of debentures is 8,00,000
thus 10% of it i.e. 80,000 should be there in DRR a/c. The available balance in DRR a/c is only
50,000 therefore 30,000 (80,000 – 50,000) additional amount will be transferred from General
Reserve or Profit and loss A/c to DRR A/c.

Q.2: The following balances appeared in the books of Omega Ltd. as on 1-4-2020:
(i) 10 % Debentures ₹ 75,00,000
(ii) Balance of DRR ₹ 2,50,000
(iii) DRR Investment ₹ 11,25,000 represented by 10% ₹ 11,250 Secured Bonds of the
Government of India of ₹ 100 each.
Annual contribution to the DRR was made as per the requirement. On 31-3-2021, balance at
bank was ₹ 80,00,000 before receipt of interest. Interest on Debentures had already been
paid. The investments were realized at par for redemption of debentures at a premium of
10% on the above date.
Omega Ltd. is an unlisted company (other than AIFI, Banking Company, NBFC and HFC).
You are required to prepare Debenture Redemption Reserve Account, Debenture
Redemption Reserve Investment Account and Bank Account in the books of Omega Ltd. for
the year ended 31st March, 2021. [RTP May 2021]

ANSWER:
Debentures Redemption Reserve Account

Date Particulars ₹ Date Particulars ₹

31st March, 2021 To General reserve A/c 1st April, By Balance b/d 2,50,000
(Refer Note) 7,50,000 2020
1st April, By Profit and loss 5,00,000
2020 A/c (Refer Note 1)

7,50,000 7,50,000

10% Secured Bonds of Govt. (DRR Investment) A/c

₹ ₹
1st April, 2020 To Balance b/d 11,25,000 31st March, 2021 By Bank A/c 11,25,000
11,25,000 11,25,000

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 Bank Account

₹ ₹
31st March, To Balance b/d 80,00,000 31st March, By Debenture 82,50,000
2021 To Interest on DRR 1,12,500 2021 holders A/c
Investment (11,25,000 (110% of
x 10%) 75,00,000)
To DRR Investment By Balance c/d
11,25,000 9,87,500
A/c
92,37,500 92,37,500

Working note –
Calculation of DRR before redemption = 10% of ₹ 75,00,000 = 7,50,000
Available balance = ₹ 2,50,000
DRR required =7,50,000 – 2,50,000= ₹ 5,00,000.

Q.3: During the year 2019-2020, A Limited (a listed company) made a public issue in respect
of which the following information is available:
(i) No. of partly convertible debentures issued-1,00,000; face value and issue price ₹100
per debenture. (Whole issue was underwritten by X Ltd.)
(ii) Convertible portion per debenture -60%, date of conversion -on expiry of 6 months
from the date of closing of issue.
(iii) Date of closure of subscription lists -1st May,2019, date of allotment – 1st June, 2019,
rate of interest on debenture -15% p.a. payable from the date of allotment, value of
equity share for the purpose of conversion – ₹60 (face value ₹10)
(iv) Underwriting Commission –2%
(v) No. of debentures applied for by public –80,000
(vi) Interest is payable on debentures half yearly on 30th September and 31st March each
year.
Pass relevant journal entries for all transactions arising out of the above during the year
ended 31st March, 2020. (including cash and bank entries) [Jan 21 (8 Marks)]

ANSWER:
Journal Entries in the Books of A Ltd.

Date Particulars Amount Dr. Amount Cr.

₹ ₹
1.5.2019 Bank A/c Dr. 80,00,000
To Debenture Application A/c 80,00,000

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 (Application money received on 80,000
debentures @ ₹ 100 each)
1.6.2019 Debenture Application A/c Dr. 80,00,000
Underwriters A/c Dr. 20,00,000
To 15% Debentures A/c 1,00,00,000
(Allotment of 80,000 debentures to
applicants and 20,000 debentures to
underwriters)
Underwriting Commission Dr. 2,00,000
To Underwriters A/c 2,00,000
(Commission payable to underwriters @
2% on ₹ 1,00,00,000)
Bank A/c Dr. 18,00,000
To Underwriters A/c 18,00,000
(Amount received from underwriters in
settlement of account)
01.06.2019 Debenture Redemption Investment A/c Dr. 6,00,000
To Bank A/c 6,00,000
(100,000 x 100 x 15% x 40%)
(Being Investment made for redemption
purpose)
30.9.2019 Debenture Interest A/c Dr. 5,00,000
To Bank A/c 5,00,000
(Interest paid on debentures for 4 months
@ 15% on ₹ 1,00,00,000)
31.10.2019 15% Debentures A/c Dr. 60,00,000
To Equity Shares capital A/c 10,00,000
To Securities Premium A/c 50,00,000
(Conversion of 60% of debentures into
shares of ₹ 60 each with a face value of ₹
10)
31.3.2020 Debenture Interest A/c Dr. 3,75,000
To Bank A/c 3,75,000
(Interest paid on debentures for the half
year)
(Refer working not below)

Working Note:
Calculation of Debenture Interest for the half year ended 31st March, 2020

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On ₹ 40,00,000 for 6 months @ 15% = ₹3,00,000
On ₹ 60,00,000 for 1 months @ 15% = ₹ 75,000
₹3,75,000

Q.4: XYZ Ltd. has issued 1,000, 12% convertible debentures of Rs. 100 each redeemable
after a period of five years. According to the terms & conditions of the issue, these
debentures were redeemable at a premium of 5%. The debenture holders also had the
option at the time of redemption to convert 20% of their holdings into equity shares of Rs. 10
each at a price of Rs. 20 per share and balance in cash. Debenture holders amounting Rs.
20,000 opted to get their debentures converted into equity shares as per terms of the issue.
You are required to calculate the number of shares issued and cash paid for redemption of
Rs. 20,000 debenture holders and also pass journal entry for conversion and redemption of
debentures. [MTP March 21 (5 Marks)]

ANSWER:

Number of debentures
Debentures holders opted for conversion (20,000/100) 200
Option for conversion 20%
Number of debentures to be converted (20% of 200) 40
Redemption value of 40 debentures at a premium of 5% [40 x (100 + Rs. 4,200
5)]
Equity shares of Rs. 10 each issued on conversion [Rs. 4,200 / Rs. 20] 210 shares
Calculation of cash to be paid: Rs.
Number of debentures 200
Less: number of debentures to be converted into equity shares (40)
160
Redemption value of 160 debentures (160 × Rs. 105) Rs. 16,800

Journal Entry

Debentures A/c Dr. 20,000

Premium on redemption A/c Dr. 1,000
To Debentures holder A/c 21,000
(Being amount due to debenture holder at redemption)
Debenture holder A/c Dr. 21,000
To Equity Share capital A/c 2,100
To Securities premium A/c 2,100
To Cash A/c Dr. 16,800
(Discharge of amount due to Debentures holders)

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Q.5: Surya Limited (a listed company) recently made a public issue in respect of which the
following information is available:
(a) No. of partly convertible debentures issued- 2,00,000; face value and issue price- Rs.
100 per debenture.
(b) Convertible portion per debenture- 60%, date of conversion- on expiry of 6 months from
the date of closing of issue.
(c) Date of closure of subscription lists- 1.5.2020, date of allotment- 1.6.2020, rate of
interest on debenture- 15% payable from the date of allotment, value of equity share
for the purpose of conversion- Rs. 60 (Face Value Rs. 10).
(d) Underwriting Commission- 2%.
(e) No. of debentures applied for- 1,50,000.
(f) Interest payable on debentures half-yearly on 30th September and 31st March.
Write relevant journal entries for all transactions arising out of the above during the year
ended 31st March, 2021 (including cash and bank entries).
[MTP April 21 (10 Marks)]

ANSWER:
Journal Entries

Date Particulars Amount Dr. Amount Cr.

(₹) (₹)

1.5.2020 Bank A/c Dr. 1,50,00,000

To Debentures Application A/c 1,50,00,000
(Application money received on 1,50,000
debentures @ Rs. 100 each)
1.6.2020 Debenture Application A/c Dr. 1,50,00,000
Underwriters A/c Dr. 50,00,000
To 15% Debentures A/c 2,00,00,000
(Allotment of 1,50,000 debentures to applicants
and 50,000 debentures to underwriters)
Underwriting Commission Dr. 4,00,000
To Underwriters A/c 4,00,000
(Commission payable to underwriters @ 2% on
Rs. 2,00,00,000)
Bank A/c Dr. 46,00,000
To Underwriters A/c 46,00,000
(Amount received from underwriters in
settlement of account)
01.06.2020 Debenture Redemption Investment A/c Dr. 12,00,000

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 To Bank A/c 12,00,000
(200,000 x 100 x 15% x 40%)
(Being Investments made for redemption
purpose)
30.09.2020 Debenture Interest A/c Dr. 10,00,000
To Bank A/c 10,00,000
(Interest paid on debentures for 4 months @ 15%
on Rs. 2,00,00,000)
31.10.2020 15% Debentures A/c Dr. 1,20,00,000
To Equity Share Capital A/c 20,00,000
To Securities Premium A/c 1,00,00,0000
(Conversion of 60% of debentures into shares of
Rs. 60 each with a face value of Rs. 10)
31.03.2021 Debenture Interest A/c Dr. 7,50,000
To Bank A/c 7,50,000
(Interest paid on debentures for the half year)
(Refer working note below)

Working Note:
Calculation of Debenture Interest for the half year ended 31st March, 2021:
On Rs. 80,00,000 for 6 months @ 15% = Rs.6,00,000
On Rs. 1,20,00,000 for 1 months @ 15% = Rs. 1,50,000
Rs.7,50,000

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 INVESTMENT ACCOUNTS (AS-13)

QUESTIONS AND ANSWERS

Q.1: A Limited invested in the shares of XYZ Ltd. on 1st December, 2019 at a cost of ₹ 50,000.
Out of these shares, ₹ 25,000 shares were purchased with an intention to hold for 6 months
and ₹ 25,000 shares were purchased with an intention to hold as long-term Investment.
A Limited also earlier purchased Gold of ₹ 1,00,000 and Silver of ₹ 30,00,000 on 1st April,
2019. Market value as on 31st March, 2020 of above investments are as follows:
Shares ₹ 47,500 (Decline in the value of shares is temporary.)
Gold ₹ 1,80,000
Silver ₹ 30,55,000
How above investments will be shown in the books of accounts of M/s A Limited for the year
ended 31st March, 2020 as per the provisions of AS 13 (Revised)? [Nov 2020 (5 Marks)]

ANSWER:
As per AS 13 (Revised) ‘Accounting for Investments, for investment in shares - if the investment is
purchased with an intention to hold for short-term period (less than one year), then it will be classified
as current investment and to be carried at lower of cost and fair value.
In the given case ₹ 25,000 shares held as current investment will be carried in the books at ₹ 23,750
(₹ 47,500/2).
If equity shares are acquired with an intention to hold for long term period (more than one year),
then should be considered as long-term investment to be shown at cost in the Balance Sheet of the
company. However, provision for diminution should be made to recognize a decline, if other than
temporary, in the value of the investments. Hence, ₹ 25,000 shares held as long-term investment will
be carried in the books at ₹ 25,000.
Gold and silver are generally purchased with an intention to hold them for long term period (more
than one year) until and unless given otherwise.
Hence, the investment in Gold and Silver (purchased on 1st March, 2019) should continue to be shown
at cost (since there is no ‘other than temporary’ diminution) as on 31st March, 2020. Thus Gold at ₹
1,00,000 and Silver at ₹ 30,00,000 respectively will be shown in the books.

Q.2: On 1st April, 2019 Mr. H had 30,000 equity shares of ABC Ltd. at book value of ₹ 18 per
share (Nominal value 10 per share). On 10th June, 2019, H purchased another 10,000 equity
shares of the ABC ltd. at ₹ 16 per share through a broker who charged 1.5% brokerage.
The directors of ABC Ltd. announced a bonus and a right issue. The terms of the issues were
as follows:
(i) Bonus shares were declared at the rate of one equity share for every four shares held
on 15th July, 2019.

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(ii) Right shares were to be issued to the existing equity shareholders on 31st August,
2019. The company decides to issue one right share for every five equity shares held
at 20% premium and the due date for payment will be 30th September, 2019.
Shareholders were entitled to transfer their rights in full or in part.
(iii) No dividend was payable on these issues.
Mr. H subscribed 60% of the rights entitlements and sold the remaining rights for
consideration of ₹ 5 per share.
Dividends for the year ending 31st March, 2019 was declared by ABC Ltd. at the rate of 20%
and received by Mr. H on 31st October, 2019.
On 15th January, 2020 Mr. H sold half of his shareholdings at ₹ 17.50 per share and
brokerage was charged @1 %.
You are required to prepare Investment account in the books of Mr. H for the year ending
31st March, 2020, assuming the shares are valued at average cost. [Nov 2020 (10 Marks)]

ANSWER:
In the books of Mr. H
Investment in equity shares of ABC Ltd. for the year ended 31st March, 2020
Date Particulars No. Income Amount Date Particulars No. Income Amount
₹ ₹ ₹ ₹

2019 To 30,000 - 5,40,000 2019 By Bank - 60,000 20,000

April 1 Balance Oct. A/c
b/d (W.N. 5)
June To Bank 10,000 -- 1,62,400 20X2 By Bank 28,000 - 4,85,100
A/c Jan. A/c
(W.N.4)
July To Bonus 10,000 - - March By Balance 28,000 - 3,77,200
Issue 31 c/d
(W.N. 1) (W.N. 6)
Sept. To Bank 6,000 - 72,000
A/c
(W.N. 2)
2020 To P & L - - 1,07,900
Jan. A/c
(W.N. 4)
March To P & L - 60,000 -
31 A/c

56,000 60,000 8,82,300 56,000 60,000 8,82,300

Working Notes:

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1. Calculation of no. of bonus shares issued
Bonus Shares = (30,000 + 10,000) divided by 4= 10,000 shares
2. Calculation of right shares subscribed
, , ,
Right Shares =

=10,000 Shares
Shares subscribed 10,000 x 60% = 6,000 shares
Value of right shares subscribed = 6,000 shares @ 12 per shares = ₹ 72,000
3. Calculation of sale of right entitlement
Amount received from sale of rights will be 4,000 shares x ₹ 5 per share
= ₹ 20,000 and it will be credited to statement of profit and loss.
4. Calculation of profit/loss on sale of shares-
Total holding = 30,000 shares original

10,000 shares purchased

10,000 shares bonus
6,000 shares right shares
56,000
50% of the holdings were sold i.e. 28,000 shares (56,000 x1/2) were sold.
Cost of total holdings of 56,000 shares
= ₹ 5,40,000 + ₹ 1,62,400 + ₹ 72,000 – ₹ 20,000 = ₹ 7,54,400
Average cost of shares sold would be:
, ,
= x 28,000 = ₹ 3,77,200
,
₹
Sale proceeds of 28,000 shares (28,000 x ₹17.50) 4,90,000
Less: 1% Brokerage (4,900)
4,85,100
Less: Cost of 28,000 shares sold (3,77,200)
Profit on sale 1,07,900
5. Dividend received on investment held as on 1st April, 2019
= 30,000 shares x ₹ 10 x 20%

= ₹ 60,000 will be transferred to Profit and Loss A/c and

Dividend received on shares purchased on 10th June, 2019
= 10,000 shares x ₹ 10 x 20% = ₹20,000 will be adjusted to Investment A/c
6. Calculation of closing value of shares (on average basis) as on 31st March, 2020
, ,
= x 28,000 = ₹ 3,77,200
,

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Q.3: On 1st April, 2019 Mr. Shyam had an opening balance of 1000 equity shares of X Ltd ₹
1,20,000 (face value ₹100 each).
On 5.04.2019 he further purchased 200 cum-right shares for ₹ 135 each. On 8.04.2019 the
director of X Ltd announced right issue in the ratio of 1:6.
Mr. Shyam waived off 100% of his entitlement of right issue in the favour of Mr. Rahul at the
rate of ₹ 20 each.
All the shares held by Shyam had been acquired on cum right basis and the total market
price (ex-right) of all these shares after the declaration of rights got reduced by ₹ 3,400.
On 10.10.2019 Shyam sold 350 shares for ₹ 140 each.
31.03.2020 The market price of each share is ₹ 125 each.
You are required to prepare the Investment account in the books of Mr. Shyam for the year
ended 31.03.2020 assuming that the shares are being valued at average cost.
[RTP May 2021]

ANSWER:
In the books of Mr. Shyam
For the year ending on 31-3-2020
(Scrip: Equity Shares of X Limited)

Date Particulars Qty Amount Date Particulars Qty Amount

1.4.2019 To Balance 1000 1,20,000 8.04.2019 By Bank A/c 3,400
b/d (W.N.1)

5.04.2019 To Bank 200 27,000 10.10.2019 By Bank A/c 350 49,000

(200x ₹135) (350x ₹140)
10.10.2019 To Profit & 7,117 31.3.2020 By Balance c/d 850 1,01,717
Loss A/c (W.N.3)
(W.N.2)

1200 1,54,117 1200 1,54,117

Working Notes:
1. Sale of Rights ₹ 4,000
The market price of all shares of X Ltd after shares becoming ex-rights has been reduced by ₹
3,400
In this case out of sale proceeds of ₹4,000; ₹ 3,400 may be applied to reduce the carrying amount
to the market value and ₹ 600 would be credited to the profit and loss account.
2. Profit on sale of 350 shares

Amount
Sale price of 350 shares (350 shares x 140 each) ₹ 49,000

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 Less: Cost of 350 shares [(1,20,000 + 27,000 – 3,400) x 350] /1200 ₹ 41,833
Profit ₹ 7,117

3. Valuation of 850 shares as on 31.03.2020

Particulars Amount
Cost price of 850 shares ₹ 1,01,717
[(1,20,000 +27,000 -3,400) x 850 /1,200]
Fair Value as on 31.03.2020 [850 X ₹ 125 each] ₹ 1,06,250
Cost price or fair value whichever is less ₹ 1,01,717

Q.4: Paridhi Electronics Ltd. invested in the shares of Dhansukh Ltd. on 1st May 2020 at a
cost of ₹ 10,00,000. Three fourth of these investments were current investments and the
remaining investments were intended to be held for more than a year. The published
accounts of Dhansukh Ltd. received in January, 2021 reveals that the company has incurred
cash losses with decline in market share and investment of Paridhi Electronics Ltd. may not
fetch more than 7,50,000. The reduction in value is apparent to be non-temporary.
You are required to explain how you will deal with the above in the financial statements of
the Paridhi Electronics Ltd. as on 31.3.21 with reference to AS 13? [RTP May 2021]

ANSWER:
As per AS 13, “Accounting for Investments”, carrying amount for current investments is the lower of
cost and fair value. But long term investments should be carried in the financial statements at cost.
However, provision for diminution shall be made to recognize a decline, other than temporary, in
the value of the investments, such reduction being determined and made for each investment
individually. The standard also states that indicators of the value of an investment are obtained by
reference to its market value, the investee's assets and results and the expected cash flows from the
investment.
Paridhi Ltd. made three fourth of ₹ 10,00,000 ie. ₹7,50,000 as current investment and remaining ₹
2,50,000 as long term. The facts of the case given in the question clearly suggest that the provision
for diminution should be made to reduce the carrying amount of shares for both categories of shares
to bring them to market value. Hence the carrying value of investments will be shown at amount of
₹ 7,50,000 in the financial statements for the year ended 31st March, 2021 and charge the difference
of loss of ₹ 2,50,000 to profit and loss account.

Q.5: Kunal Securities Ltd. wants to reclassify its investments in accordance with AS-13
(Revised). State the values, at which the investments have to be reclassified in the following
cases:
(i) Long term investment in Company A, costing ₹ 10.5 lakhs is to be re-classified as
current investment. The company had reduced the value of these investments to ₹ 9
lakhs to recognize a permanent decline in value. The fair value on the date of
reclassification is ₹ 9.3 lakhs.

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(ii) Long term investment in Company B, costing ₹ 14 lakhs is to be re-classified as current
investment The fair value on the date of reclassification is ₹ 16 lakhs and book value is
₹ 14 lakhs.
(iii) Current investment in Company C, costing ₹12 lakhs is to be re-classified as long term
investment as the company wants to retain them. The market value on the date of
reclassification is ₹ 13.5 lakhs.
(iv) Current investment in Company D, costing ₹ 18 lakhs is to be re-classified as long term
investment. The market value on the date of reclassification is ₹ 16.5 lakhs.
[Jan 21 (5 Marks)]

ANSWER:
As per AS 13 (Revised) ‘Accounting for Investments’, where long-term investments are reclassified as
current investments, transfers are made at the lower of cost and carrying amount at the date of
transfer. And where investments are reclassified from current to long term, transfers are made at lower
of cost and fair value on the date of transfer.
Accordingly, the re-classification will be done on the following basis:
(i) In this case, carrying amount of investment on the date of transfer is less than the cost; hence this
re-classified current investment should be carried at ₹ 9 lakhs in the books.
(ii) The carrying / book value of the long-term investment is same as cost i.e., ₹ 14 lakhs. Hence this
long-term investment will be reclassified as current investment at book value of ₹ 14 lakhs only.
(iii) In this case, reclassification of current investment into long-term investments will be made at ₹
12 lakhs as cost are less than its market value of ₹ 13.5 lakhs.
(iv) Market value of the investment is ₹ 16.5 lakhs, which is lower than its cost i.e., ₹ 18 lakhs.
Therefore, the transfer to long term investments should be done in the books at the market value
i.e., ₹ 16.5 lakhs.

Q.6: P Ltd. had 8,000 equity shares of K Ltd., at a book value of ₹ 15 per share (face value of
₹ 10 each) on 1st April, 2019. On 1st September, 2019, P Ltd. acquired another 2,000 equity
shares of K Ltd. at a premium of ₹ 4 per share. K Ltd. announced a bonus and right issue for
existing shareholders.
The term of bonus and right issue were:
(i) Bonus was declared at the rate for two equity shares for every five shares held on 30th
September, 2019.
(ii) Right shares are to be issued to the existing shareholders on 1st December, 2019. The
Company had issued two right shares for every seven shares held at 25% premium on
face value. No dividend was payable on these shares. The whole sum being payable
by 31st December, 2019.
(iii) Existing shareholders were entitled to transfer their right to outsiders either wholly or
in part.
(iv) P Ltd. exercised its option under the issue for 50% of its entitlements and sold the
remaining rights for ₹8 per share.

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(v) Dividend for the year ended 31st March, 2019 at the rate of 20% was declared by K
Ltd. and received by P Ltd. on 20th January, 2020.
(vi) On 1st February, 2020, P Ltd. sold half of its shareholdings at a premium of ₹ 4 per
share.
(vii) The market price of share on 31st March, 2020 was ₹13 per share.
You are required to prepare the Investment account of P Ltd. for the year ended 31st March,
2020 and determine the value of shares held on that date, assuming the investment as
current investment. Consider average cost basis for ascertainment for cost for equity
shares sold. [Jan 21 (10 Marks)]

ANSWER:
Investment Account-Equity Shares in K Ltd.

Date No. of Dividend Amount Date No. of Dividend Amount

shares shares
₹ ₹ ₹ ₹
1.4.19 To 8,000 - 1,20,000 20.1.20 By Bank 16,000 4,000
Bal.b/d (dividend)
[8,000 x
10 x 20%]
and
[2,000 x
10 x 20%]
1.9.19 To Bank 2,000 - 28,000 1.2.20 By Bank 8,000 1,12,000
30.9.19 To Bonus 4,000 —
Issue
31.12.19 To Bank 2,000 - 25,000 31.3.20 By Balance 8,000 84,500
(Right) c/d (W.N.
(W.N.1) 3)

20.1.20 To Profit 16,000

&
Loss
A/
c
(Dividend
income)
1.2.20 To P& L 27,500
A/c
(profit on
sale)
16,000 16,000 2,00,500 16,000 16,000 2,00,500
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Working Notes:
1. Right shares
No. of right shares issued = (8,000 + 2,000 + 4,000)/ 7 X 2= 4,000
No. of right shares subscribed = 4,000 x 50% = 2,000 shares
Value of right shares issued = 2,000 x ₹12.50 = ₹ 25,000
No. of right shares sold = 2,000 shares
Sale of right shares = 2,000 x ₹ 8 = ₹ 16,000 to be credited to statement of profit and loss
2. Cost of shares sold — Amount paid for 16,000 shares

₹
(₹1,20,000 + ₹ 28,000 + ₹ 25,000) 1,73,000
Less: Dividend on shares purchased on Sept.1 (since the dividend pertains to (4,000)
the year ended 31st March, 2019, i.e., the pre-acquisition period)
Cost of 16,000 shares 1,69,000
Cost of 8,000 shares (Average cost basis) 84,500
Sale proceeds (8,000 X ₹14) 1,12,000
Profit on sale 27,500

3. Value of investment at the end of the year

Assuming investment as current investment, closing balance will be valued based on lower of
cost or net realizable value.
Here, Net realizable value is ₹13 per share i.e., 8,000 shares x ₹ 13 = ₹ 1,04,000 and cost =
84,500. Therefore, value of investment at the end of the year will be ₹ 84,500.

Q.7: Prepare cash flow from investing activities as per AS-3 of M/s Subham Creative Limited
for year ended 31.3.2019.

Particulars Amount (Rs.)

Machinery acquired by issue of shares at face value 2,00,000
Claim received for loss of machinery in earthquake 55,000
Unsecured loans given to associates 5,00,000
Interest on loan received from associate company 70,000
Pre-acquisition dividend received on investment made 52,600
Debenture interest paid 1,45,200
Term loan repaid 4,50,000
Interest received on investment (TDS of Rs. 8,200 was deducted on the 73,800
above interest)
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 Book value of plant & machinery sold (loss incurred Rs. 9,600) 90,000

[MTP March 21 (4 Marks)]

ANSWER:
Cash Flow Statement from Investing Activities of Subham Creative Limited for year ended
31-03-2019

Cash generated from investing activities Rs. Rs.

Interest on loan received 70,000
Pre-acquisition dividend received on investment made 52,600
Unsecured loans given to subsidiaries (5,00,000)
Interest received on investments (gross value) 82,000
TDS deducted on interest (8,200)
Sale of Plant & Machinery Rs. (90,000 – 9,600) 80,400 (2,23,200)
Cash used in investing activities before extra-ordinary item) 55,000
Extraordinary claim received for loss of machinery
Net cash used in investing activities (after extra-ordinary item) (1,68,200)

Note:
1. Debenture interest paid and Term Loan repaid are financing activities and therefore not
considered for preparing cash flow from investing activities.
2. Machinery acquired by issue of shares does not amount to cash outflow, hence also not considered
in the above cash flow statement.

Q.8: A Ltd. purchased on 1st April, 2020 8% convertible debenture in C Ltd. of face value of
Rs. 2,00,000 @ Rs. 108. On 1st July, 2020 A Ltd. purchased another Rs. 1,00,000 debentures
@ Rs. 112 cum interest. On 1st October, 2020 Rs. 80,000 debentures were sold @ Rs. 105.
On 1st December, 2020, C Ltd. give option for conversion of 8% convertible debentures into
equity share of Rs. 10 each. A Ltd. received 5,000 equity shares in C Ltd. in conversion of
25% debentures held on that date. The market price of debenture and equity share in C Ltd.
on 31st December, 2020 is Rs. 110 and Rs. 15 respectively. Interest on debenture is payable
each year on 31st March, and 30th September. Prepare investment account in the books of
A Ltd. on average cost basis for the accounting year ended 31st December, 2020.
[MTP April 21 (8 Marks)]

ANSWER:
Investment Account for the year ending on 31st December, 2020
Scrip : 8% Convertible Debentures in C Ltd.
[Interest Payable on 31st March and 30th September]

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 Date Particulars Nominal Interest Cost Rs. Date Particulars Nominal Interest Cost
value Rs. Rs. Value (Rs.) (Rs.)
(Rs.)

1.4.20 To Bank A/c 2,00,000 - 2,16,000 3.9.20 By Bank A/c - 12,000 -

[Rs. 3,00,000
x 8% x 6/12]

1.7.20 To Bank A/c 1,00,000 2,000 1,10,000

(W.N.1)

31.12.20 To P&L A/c - 14,033 - 1.10.20 By Bank A/c 80,000 84,000

[Interest]

1.10.20 By P & L A/c 2,933

(loss) (W.N.3)

1.12.20 By Bank A/c 733

(Accrued
interest)
(Rs. 55,000 x
.08 x 2/12)

1.12.20 By Equity 55,000 59,767

shares in C
Ltd. (W.N. 3
and 4)

31.12.20 By Balance c/d 1,65,000 3,300 1,79,300

(W.N.5)

3,00,000 16,033 3,26,000 3,00,000 16,033 3,26,000

SCRIP: Equity Shares in C Ltd.

Date Particulars Cost (Rs.) Date Particulars Cost (Rs.)

1.12.20 To 8 % debentures 59,767 31.12.20 By balance c/d 59,767

Working Notes:
(i) Cost of Debenture purchased on 1st July = Rs.1,12,000 – Rs.2,000 (Interest) = Rs.1,10,000
(ii) Cost of Debentures sold on 1st Oct.
= (Rs.2,16,000 + Rs.1,10,000) x 80,000/3,00,000 = Rs. 86,933
(iii) Loss on sale of Debentures = Rs. 86,933– Rs.84,000 = Rs.2,933
Nominal value of debentures converted into equity shares =Rs. 55,000
[(Rs. 3,00,000 – 80,000) x.25]
Interest received before the conversion of debentures
Interest on 25% of total debentures = 55,000 x 8% x 2/12 = 733
(iv) Cost of Debentures converted = (Rs. 2,16,000 + Rs.1,10,000) x 55,000/3,00,000
= Rs. 59,767
(v) Cost of closing balance of Debentures = (Rs. 2,16,000 + Rs.1,10,000) x 1,65,000 / 3,00,000
= Rs. 1,79,300
(vi) Closing balance of Debentures has been valued at cost.

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(vii) 5,000 equity Shares in C Ltd. will be valued at cost of Rs. 59,767 being lower than the market
value Rs. 75,000 (Rs. 15 x5,000)
Note: It is assumed that interest on debentures, which are converted into cash, has been received at
the time of conversion.

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 INSURANCE CLAIMS

QUESTIONS AND ANSWERS

Q.1: A Fire occurred in the premises of M/s B & Co. on 30th September, 2019. The firm had
taken an insurance policy for ₹ 1,20,000 which was subject to an average clause. Following
particulars were ascertained from the available records for the period from 1st April, 2018
to 30th September, 2019:

Amount (₹)
Stock at cost on 1-04-2018 2,11,000
Stock at cost on 31-03-2019 2,52,000
Purchases during 2018-19 6,55,000
Wages during 2018-19 82,000
Sales during 2018-19 8,60,000
Purchases from 01-04-2019 to 30-09-2019 (including purchase of 4,48,000
machinery costing ₹ 58,000)
Wages from 01-04-2019 to 30-09-2019 (including wages for installation of 85,000
machinery costing ₹ 7,000)
Sales from 01-04-2019 to 30-09-2019 6,02,000
Sale value of goods drawn by partners (1-4-19 to 30-9-19) 52,000
Cost of Goods sent to consignee on 18th September, 2019 lying unsold with 44,800
them
Cost of Goods distributed as free samples(1-4-19 to 30-9-19) 8,500

While valuing the Stock at 31st March, 2019, ₹ 8,000 were written off in respect of a slow
moving item, cost of which was ₹ 12,000. A portion of these goods was sold at a loss of ₹
4,000 on the original cost of ₹ 9,000. The remainder of the stock is estimated to be worth the
original cost. The value of Goods salvaged was estimated at ₹ 35,000.
You are required to ascertain the amount of claim to be lodged with the Insurance Company
for the loss of stock. [Nov 2020 (10 Marks)]

ANSWER:
Memorandum Trading Account
For the period 1st April, 2019 to 30th September, 2019

Normal Abnormal Total Normal Abnormal Total

Items Items Items Items
₹ ₹ ₹ ₹ ₹ ₹

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To 2,48,000 12,000 2,60,000 By Sales 5,97,000 5,000 6,02,000
Opening
stock
To 3,39,900 - 3,39,900 By Goods 44,800
Purchases sent to 44,800 -
(W.N. 2) consignee

To Wages 78,000 - 78,000 By Loss - 4,000 4,000

(85,000 –
7,000)
To Gross 1,19,400 - 1,19,400 By Closing 1,43,500 3,000 1,46,500
Profit stock (Bal.
@20% fig.)

7,85,300 12,000 7,97,300 7,85,300 12,000 7,97,300

Statement of Claim for Loss of Stock

₹
Book value of stock as on 30.9.2019 1,46,500
Less: Stock salvaged (35,000)
Loss of stock 1,11,500

Amount of claim to be lodged with insurance company

= Loss of stock x

= ₹ 1,11,500 x 1,20,000/1,46,500 = ₹91,331 (approx.)

Working Notes:
1. Rate of gross profit for the year ended 31st March, 2019
Trading Account for the year ended 31st March, 2019

₹ ₹
To Opening Stock 2,11,000 By Sales 8,60,000
To Purchases 6,55,000 By Closing stock 2,52,000
Add: written off 8,000
To Wages 82,000 2,60,000
To Gross Profit (b.f.) 1,72,000
11,20,000 11,20,000

Rate of Gross Profit in 2018-19

x 100

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 = 1,72,000 x 100 / 8,60,000 = 20%
2. Calculation of Adjusted Purchases

₹
Purchases (4,48,000 – 58,000) 3,90,000
Less: Drawings [52,000 – (20% of 52,000)] (41,600)
Free samples (8,500)
Adjusted purchases 3,39,900

Note: The answer has been given considering that the value of stock (at cost) on 31.3.19
amounting ₹ 2,52,000 is after adjustment of written off amount in respect of slow-moving item.

Q.2: Ram’s godown caught fire on 29th August, 2020. Large part of the stock of goods was
destroyed and goods costing ₹ 56,350 could be salvaged. Ram provides you the following
additional information:

₹
Cost of stock on 1st April, 2019 3,55,250
Cost of stock on 31st March, 2020 3,95,050
Purchases during the year ended 31st March, 2020 28,39,800
Purchases from 1st April, 2020 to the date of fire 16,55,350
Cost of goods distributed as samples for advertising from 1st April, 2020
to the date of fire 20,500
Cost of goods withdrawn by trader for personal use from 1st April, 2020
to the date of fire 1,000
Sales for the year ended 31st March, 2020 40,00,000
Sales from 1st April, 2020 to the date of fire 22,68,000

Ram had taken the fire insurance policy for ₹ 4,00,000 with an average clause. You are
required to compute the amount of the claim that will be admitted by the insurance company.
[RTP May 2021]

ANSWER:
Memorandum Trading Account for the period 1st April, 2020 to 29th August 2020

₹ ₹
To Opening Stock 3,95,050 By Sales 22,68,000
To Purchases 16,55,350 By Closing stock (Bal. fig.) 4,41,300
Less: Advertisement (20,500)
Drawings (1,000) 16,33,850
To Gross Profit [30% of
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 Sales] [W N] 6,80,400
27,09,300 27,09,300

Statement of Insurance Claim

₹
Value of stock destroyed by fire 4,41,300
Less: Salvaged Stock (56,350)
3,84,950

Note: Since policy amount is less than the value of stock on date of fire, average clause will apply.
₹ 4,00,000/4,41,300 X 3,84,950= ₹ 3,48,924 (rounded off)
Therefore, claim amount of ₹ 3,48,924 will be admitted by the Insurance Company.
Working Note:
Trading Account for the year ended 31st March, 2020

₹ ₹
To Opening Stock 3,55,250 By Sales 40,00,000
To Purchases 28,39,800 By Closing stock 3,95,050
To Gross Profit 12,00,000
43,95,050 43,95,050

Rate of Gross Profit in 2019-20

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

Q.3: A Fire occurred in the premises of M/S MJ & Co., on 31st December, 2019. From the
following particulars related to the period from 1st April 2019 to 31st December 2019, you
are required to ascertain the amount of claim to be filed with the insurance policy for ₹
1,00,000 which is subject to average clause. The value of goods salvaged was estimated at
₹ 31,000. The average rate of gross profit was 20% throughout the period:

Particulars Amount (₹)

(i) Opening stock as on 1st April,2019 1,50,000
(ii) Purchases during the year 4,20,000
(iii) Goods withdrawn by the proprietor for his self-use at Sales Value 10,000
(iv) Goods distributed as charity at cost 4,000
(v) Purchases include ₹ 5,000 of Tools purchased, these tools should
have been capitalized.
(vi) Wages (include wages paid for the installation of machinery ₹6,000) 90,000

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 (vii) Sales during the year 6,10,000
(viii) Cost of goods sent to consignee on 1st November,2019, lying unsold 25,000
with the consignee.
(ix) Sales Return 10,000

[Jan 21 (10 Marks)]

ANSWER:
Memorandum Trading Accounting for the period 1st April, 2019 to 31st Dec 2019

₹ ₹
To Opening Stock 1,50,000 By Sales 6,00,000
(6,10,000 - 10,000)
To Purchases 4,20,000 By Consignment stock 25,000
Less: Tools purchased (5,000) By Closing Stock (Bal. 1,32,000
fig.)
Goods distributed as (4,000)
Charity

Cost of goods taken by (8,000)

proprietor

4,03,000
To Wages 84,000
(90,000 – 6,000)
To Gross Profit 1,20,000
[20% of Sales)
7,57,000 7,57,000

* For financial statement purposes, this would form part of closing stock (since there is no sale).
However, this has been shown separately for computation of claim for loss of stock since the goods
were physically not with the concern and, hence, there was no loss of such stock.
Statement of Insurance Claim

₹
Value of stock destroyed by fire 1,32,000
Less: Salvaged Stock (31,000)
Loss of stock 1,01,000

Note:
Since policy amount is less than value of stock on date of fire, average clause will apply. Therefore,
claim amount will be computed by applying the formula:

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Claim = x Loss suffered

Claim amount = ₹ 1,01,000/1,32,000X1,00,000 = ₹ 76,515 (Rounded off)

NOTE: The average rate of 20% has been given in the question. In the above solution, Gross Profit
is calculated @ 20% on sales. Alternative answer considering Gross Profit of 20% is also possible.

Q.4: A fire engulfed the premises of a business of M/s Kite in the morning, of 1st October,
2019. The entire stock was destroyed except, stock salvaged of Rs. 50,000. Insurance
Policy was for Rs. 5,00,000 with average clause.
Stock in hand on 31st March, 2019 Rs. 3,50,000
The following information was obtained from the records saved for the period from 1st April
to 30th September, 2019:

Rs.
Sales 27,75,000
Purchases 18,75,000
Carriage inward 35,000
Carriage outward 20,000
Wages 40,000
Salaries 50,000

Additional Information:
(1) Sales upto 30th September, 2019, includes Rs. 75,000 for which goods had not been
dispatched.
(2) On 1stJune, 2019, goods worth Rs. 1,98,000 sold to Hari on approval basis which was
included in sales but no approval has been received in respect of 2/3rd of the goods
sold to him till 30th September, 2019.
(3) Purchases upto 30th September, 2019 did not include Rs. 1,00,000 for which purchase
invoices had not been received from suppliers, though goods have been received in
godown.
(4) Past records show the gross profit rate of 25% on sales.
You are required to prepare the statement of claim for loss of stock for submission to the
Insurance Company. [MTP March 21 (8 Marks)]

ANSWER:
Computation of claim for loss of stock

Rs.
Stock on the date of fire (i.e. on 1.10.2019) 3,75,000
Less: Stock salvaged (50,000)
Stock destroyed by fire (Loss of stock) 3,25,000

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Insurance claim amount = Rs. 3,25,000
(Average clause is not applicable as insurance policy amount (Rs. 5,00,000) is more than the value of
closing stock ie. Rs. 3,75,000)
Memorandum Trading A/c
(1.4.19 to 30.9.19)

Particulars (Rs.) Particulars (Rs.)

To Opening stock 3,50,000 By Sales 25,68,000
To Purchases 19,75,000 By Goods with customers* (for 99,000
(Rs. 18,75,000 + Rs. 1,00,000) approval) (W.N.1)

To Carriage inward 35,000 By Closing stock (bal. fig). 3,75,000

To Wages 40,000
To Gross profit
(Rs. 25,68,000 x 25%) 6,42,000
30,42,000 30,42,000

* For financial statement purposes, this would form part of closing stock (since there is no sale).
However, this has been shown separately for computation of claim for loss of stock since the goods
were physically not with the entity and, hence, there was no loss of such stock.
Working Notes:
1. Calculation of goods with customers
Since no approval for sale has been received for the goods of Rs. 1,32,000 (i.e. 2/3 of Rs.
1,98,000) hence, these should be valued at cost i.e. Rs. 1,32,000 – 25% of Rs. 1,32,000 = Rs.
99,000.
2. Calculation of actual sales
Total sales – Goods not dispatched- Sale of goods on approval (2/3rd)=
Sales (Rs. 27,75,000 –75,000– Rs.1,32,000) = Rs. 25,68,000

Q.5: A fire engulfed the premises of a business of M/s Preet on the morning of 1st July 2020.
The building, equipment and stock were destroyed and the salvage recorded the following:
Building – Rs. 4,000; Equipment – Rs. 2,500; Stock – Rs. 20,000. The following other
information was obtained from the records saved for the period from 1st January to 30th
June 2020:

Rs.
Sales 11,50,000
Sales Returns 40,000
Purchases 9,50,000
Purchases Returns 12,500
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 Cartage inward 17,500
Wages 7,500
Stock in hand on 31st December, 2019 1,50,000
Building (value on 31st December, 2019) 3,75,000
Equipment (value on 31st December, 2019) 75,000
Depreciation provided till 31st December, 2019 on:
Building 1,25,000
Equipment 22,500

No depreciation has been provided after December 31st 2019. The latest rate of
depreciation is 5% p.a. on building and 15% p.a. on equipment by straight line method.
Normally business makes a profit of 25% on net sales. You are required to prepare the
statement of claim for submission to the Insurance Company. [MTP April 21 (8 Marks)]

ANSWER:
Memorandum Trading Account for the Period from 1.1.2020 to 30.6.2020

Rs. Rs.

To Opening Stock (1.1.2020) 1,50,000 By Sales 11,50,000

To Purchases 9,50,000 Less: Sales Returns (40,000) 11,10,000
Less: Returns (12,500) 9,37,500
To Cartage Inwards 17,500 By Closing Stock 2,80,000
To Wages 7,500 (Bal. Fig.)
To Gross Profit 2,77,500
(25% of Rs. 11,10,000)

13,90,000 13,90,000

Stock Destroyed Account

Rs. Rs.
To Trading Account 2,80,000 By Stock Salvaged Account 20,000
By Balance c/d (For Claim) 2,60,000
2,80,000 2,80,000

Statement of Claim

Items Cost Depreciation Salvage Claim

(Rs.) (Rs.) (Rs.) (Rs.)
A B C D (E=B-C-D)
Stock 2,80,000 20,000 2,60,000
Buildings 3,75,000 1,25,000 + 9,375 4,000 2,36,625

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Equipment 75,000 22,500 + 5,625 2,500 44,375
5,41,000

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 HIRE PURCHASE

QUESTIONS AND ANSWERS

Q.1: On 1st April, 2017, Mr. Nilesh acquired a Tractor on Hire purchase from Raj Ltd. The
terms of contract were as follows:
(i) The Cash price of the Tractor was ₹ 11,50,000.
(ii) ₹ 2,50,000 were to be paid as down payment on the date of purchase.
(iii) The Balance was to be paid in annual instalments of ₹ 3,00,000 plus interest at the end
of the year.
(iv) Interest chargeable on the outstanding balance was 8% p.a.
(v) Depreciation @ 10% p.a. is to be charged using straight line method.
Mr. Nilesh adopted the Interest Suspense method for recording his Hire purchase
transactions.
You are required to :
Prepare the Tractor account, Interest Suspense account and Raj Ltd.’s account in the books
of Mr. Nilesh for the period of hire purchase. [Nov 2020 (8 Marks)]

ANSWER:
Tractor Account

Date Particulars ₹ Date Particulars ₹

1.4.2017 To Raj 11,50,000 31.3.2018 By Dep. 1,15,000
By Balance c/d 10,35,000
11,50,000 11,50,000
1.4.2018 To Balance b/d 10,35,000 31.3.2019 By Dep. 1,15,000
By Balance c/d 9,20,000
10,35,000 10,35,000
1.4.2019 To Balance b/d 9,20,000 31.3.2020 By Dep. 1,15,000
By Balance c/d 8,05,000
9,20,000 9,20,000

H.P. Interest Suspense Account

Date Particulars ₹ Date Particulars ₹

1.4.2017 To Raj Ltd. A/c 1,44,000 31.3.2018 By Interest A/c 72,000
(W.N.)
By Balance c/d 72,000

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 1,44,000 1,44,000
1.4.2018 To Balance b/d 72,000 31.3.2019 By Interest A/c 48,000
By Balance c/d 24,000
72,000 72,000
1.4.2019 To Balance b/d 24,000 31.3.2020 By Interest A/c 24,000

Total Interest = ₹ 72,000 + ₹ 48,000 + ₹ 24,000 = ₹ 1,44,000

Raj Ltd. Account

Date Particulars ₹ Date Particulars ₹

1.4.2017 To Bank A/c 2,50,000 1.4.2017 By Tractor A/c 11,50,000
31.3.2018 To Bank A/c 3,72,000 By H.P. Interest 1,44,000
Suspense A/c
To Balance c/d 6,72,000
12,94,000 12,94,000
31.3.2019 To Bank A/c 3,48,000 1.4.2018 By Balance b/d 6,72,000
To Balance c/d 3,24,000
6,72,000 6,72,000
31.3.2020 To Bank A/c 3,24,000 1.4.2019 By Balance b/d 3,24,000

Q.2:
(a) What is meant by repossession. What is the treatment for repossession in the books of
Hire Purchaser?
(b) On 1st April 2018 M/s KMR acquired a machine on hire purchase from M/s PQR on the
following terms:
(1) Cash price of the machine was ₹ 2,40,000.
(2) The down payment at the time of signing the contract was ₹ 96,000.
(3) The balance amount is to be paid in 3 equal annual instalments plus interest.
(4) Interest is chargeable @ 8% p.a.
On this basis prepare the H.P. Interest Suspense Account and Account of M/s PQR in the
books of the purchaser for the period of hire purchase. [RTP May 2021]

ANSWER:
(a) Repossession is the Right of the Seller to take back the goods sold from the Hire purchaser in case
of any default by the Hire purchaser and can sell the goods after reconditioning to any other
person. The hire purchaser closes the Hire Vendor’s Account by transferring the balance of Hire
Vendor Account to Hire Purchase Asset and then finding the profit and loss on repossession in
Asset Account.
(b) In the books of M/s KMR (purchaser)
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 H.P. Interest Suspense Account

Date Particulars ₹ Date Particulars ₹

1.4.18 To M/s PQR A/c (W.N.) 23,040 31.3.19 By Interest A/c 11,520

31.3.19 By Balance c/d 11,520

23,040 23,040
1.4.19 To Balance b/d 11,520 31.3.20 By Interest A/c 7,680
31.3.20 By Balance c/d 3,840
11,520 11,520
1.4.20 To Balance b/d 3,840 31.3.21 By Interest A/c 3,840

M/s PQR Account

Date Particulars ₹ Date Particulars ₹

1.4.18 To Bank/Cash A/c 96,000 1.4.18 By Machine A/c 2,40,000
31.3.19 To Bank/Cash A/c 59,520 1.4.18 By H.P. Interest 23,040
Suspense A/c
31.3.18 To Balance c/d 1,07,520
2,63,040 2,63,040
31.3.20 To Bank/Cash A/c 55,680 1.4.19 By Balance b/d 1,07,520
31.3.20 To Balance c/d 51,840
1,07,520 1,07,520
31.3.21 To Bank/Cash A/c 51,840 1.4.20 By Balance b/d 51,840

Working Note:
Cash Price 2,40,000
Down Payment 96,000
1,44, 000
₹ 1,44,000 to be paid in 3 instalments ie. ₹ 48,000 plus interest
Total interest = ₹ 11,520 + ₹ 7,680 + ₹ 3,840 = ₹ 23,040

Q.3: Jai Ltd purchased a machine on hire purchase basis from KM Ltd. on the following
terms:
(a) Cash price ₹ 1,20,000.
(b) Down payment at the time of signing the agreement on 1-1-2016, ₹ 32,433.
(c) 5 annual instalments of ₹23,100, the first to commence at the end of twelve months from
the date of down payment.

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(d) Rate of interest is 10% p.a.
Your are required to calculate the total interest and interest included in each instalment.
Also prepare the Ledger Account of KM Ltd. in the books of Jai Ltd. [Jan 21 (8 Marks)]

ANSWER:
Calculation of Interest

Total (₹) Interest in each Cash price in each

instalment instalment
(1) (2)
Cash Price 1,20,000
Less: Down Payment (32,433) Nil ₹ 32,433
Balance due after down payment 87,567
Interest/Cash Price of 1st instalment - ₹ 87,567 x 10/100 ₹ 23,100 – ₹ 8,757
= 8,757 = ₹ 14,343

Less: Cash price of 1st instalment (14,343)

Balance due after 1st instalment 73,224
Interest/cash price of 2nd instalment - ₹ 73,224 x 10/100 ₹ 23,100 - ₹ 7,322
= ₹ 7322 = ₹ 15,778
Less: Cash price of 2nd instalment (15,778)
Balance due after 2nd instalment 57,446
Interest/Cash price of 3rd instalment - ₹ 57,446 x 10/100 ₹ 23,100 - ₹ 5745
= ₹ 5745 = ₹ 17,355
Less: Cash price of 3rd instalment (17,355)
Balance due after 3rd instalment 40,091
Interest/Cash price of 4th instalment - ₹ 40,091 x 10/100 ₹ 23,100 - ₹ 4,009
= ₹ 4,009 =₹ 19,091

Less: Cash price of 4th instalment (19,091)

Balance due after 4th instalment 21,000
Interest/Cash price of 5th instalment - ₹21,000 x 10/100 ₹ 23,100 – ₹ 2,100
= ₹ 2,100 = 21,000
Less: Cash price of 5th instalment (21,000)

Total Nil ₹ 27,933 ₹1,20,000

Total interest can also be calculated as follow:

(Down payment + instalments) – Cash Price = ₹ [32,433 +(23,100 x 5)] – ₹1,20,000 = ₹ 27,933
KM Ltd. Account in the books of Jai Ltd.

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 Date Particulars ₹ Date Particulars ₹
1.1. 2016 To Bank A/c 32,433 1.1.2016 By Machine A/c 1,20,000
31.12.2016 To Bank A/c 23,100 31.12.2016 By Interest A/c 8,757
31.12.2016 To Balance c/d 73,224
1,28,757 1,28,757
31.12.2017 To Bank A/c 23,100 1.1.2017 By Balance b/d 73,224
31.12.2017 To Balance c/d 57,446 31.12.2017 By Interest A/c 7,322
80,546 80,546
31.12.2018 To Bank A/c 23,100 1.1.2018 By Balance b/d 57,446
31.12.2018 To Balance c/d 40,091 31.12.2018 By Interest A/c 5,745
63,191 63,191
31.12.2019 To Bank A/c 23,100 1.1.2019 By Balance b/d 40,091
31.12.2019 To Balance c/d 21,000 31.12.2019 By Interest A/c 4,009
44,100 44,100
31.12.2020 To Bank A/c 23,100 1.1.2020 By Balance b/d 21,000
31.12.2020 By Interest A/c 2,100
23,100 23,100

Q.4: Identify four differences between Hire Purchase and installment Payment agreement.
[MTP March 21 (4 Marks)]

ANSWER:
Statement showing differences between Hire Purchase and Installment System

Basis of Hire Purchase Installment System

Distinction
1. Governing Act It is governed by Hire Purchase Act, It is governed by the Sale of
1972. Goods Act, 1930.
2. Nature of Contract It is an agreement of hiring. It is an agreement of sale.
3. Passing of Title The title to goods passes on last The title to goods passes
(ownership) payment. immediately as in the case of
usual sale.
4. Right to Return The hirer may return goods without Unless seller defaults, goods
goods further payment except for accrued are not returnable.
installments.

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 5. Seller’s right to The seller may take possession of the The seller can sue for price if
repossess goods if hirer is in default. the buyer is in default. He
cannot take possession of the
goods.
6. Right of Disposal Hirer cannot hire out, sell, pledge or The buyer may dispose off the
assign entitling transferee to retain goods and give good title to
possession as against the hire the bonafide purchaser.
vendor.
7. Responsibility for The hirer is not responsible for risk The buyer is responsible for
Risk of Loss of loss of goods if he has taken risk of loss of goods because
reasonable precaution because the of the ownership has
ownership has not yet transferred. transferred.
8. Name of Parties The parties involved are called Hirer The parties involved are
involved and Hire vendor. called buyer and seller.
9. Component other Component other than Cash Price Component other than Cash
than cash price. included in installment is called Hire Price included in Installment is
charges. called Interest.

Note: Any four differences may from part of the answer.

Q.5: M/s. Kodam Enterprises purchased a generator on hire purchase from M/s. Sanctum
Ltd. on 1st April, 2019. The hire purchase price was Rs.48,000. Down payment was
Rs.12,000 and the balance is payable in 3 annual instalments of Rs.12,000 each payable at
the end of each financial year. Interest is payable @ 8% p.a. and is included in the annual
payment of Rs.12,000.
Depreciation at 10% p.a. is to be written off using the straight line method.
You are required to calculate the cash price of the generator and the interest paid on each
instalment. [MTP March 21 (4 Marks)]

ANSWER:
Calculation of Interest and Cash Price
Ratio of interest and amount due = 8 / (100 + rate of interest) i.e. 8/108
To ascertain cash price, interest will be calculated from last instalment to first instalment as follows:

No. of Amount due at the Interest Cumulative

instalments time of instalment Cash price
[1] [2] [3] (2-3) = [4]
3rd 12,000 8/108 of Rs.12,000 = Rs. 889 11,111
2nd 23,111 [W.N.1] 8/108 of Rs. 23,111 = Rs. 1,712 21,399
1st 33,399 [W.N.2] 8/108 of Rs.33,399 = Rs. 2,474 30,925
5,075

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Total cash price = Rs. 30,925 + Rs. 12,000 (down payment) = Rs.42,925
Working Notes:
1. Rs. 11,111 + 2nd instalment of Rs. 12,000 = Rs. 23,111
2. Rs. 21,399 + 1st instalment of Rs. 12,000 = Rs. 33,399

Q.6: A acquired on 1st January, 2020 a machine under a Hire-Purchase agreement which
provides for 5 half-yearly instalments of Rs. 6,000 each, the first instalment being due on
1st July, 2020. Assuming that the applicable rate of interest is 10 per cent per annum,
calculate the cash value of the machine. All working should form part of the answer.
[MTP April 21 (4 Marks)]

ANSWER:
Statement showing cash value of the machine acquired on hire-purchase basis

Instalment Interest @ 5% half Principal Amount

Amount yearly (10% p.a.) = (in each instalment)
5/105 = 1/21)
(in each instalment)
Rs. Rs. Rs.
5th Instalment 6,000 286 5,714
Less: Interest (286)
5,714
Add: 4th Instalment 6,000
11,714 558 5,442
Less: Interest (558) (11,156 – 5,714)
11,156
Add: 3rd instalment 6,000
17,156 817 5,183
Less: Interest (817) (16,339 – 11,156)
16,339
Add: 2nd instalment 6,000
22,339 1,063 4,937
Less: Interest (1,063) (21,276 – 16,339)
21,276
Add: 1st instalment 6,000
27,276 1,299 4,701
Less: Interest (1,299) ________ (25,977 – 21,276)

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 25,977 4,023 25,977

The cash purchase price of machinery is Rs. 25,977.

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 DEPARTMENTAL ACCOUNTS

QUESTIONS AND ANSWERS

Q.1: Department A sells goods to Department B at a profit of 20% on cost and to Department
C at 50% on cost. Department B sells goods to Department A and Department C at a profit
of 15% and 10% on sales respectively. Department C sells goods to Department A and
Department B at a profit of 10% and 5% on cost respectively.
Stock lying at different departments at the end of the year are as follows:

Department A Department B Department C

(₹) (₹) (₹)
Transfer from Department A 1,14,000 60,000
Transfer from Department B 55,000 15,200
Transfer from Department C 52,800 1,11,300

Calculate Department wise unrealized profit on Stock. [Nov 2020 (4 Marks)]

ANSWER:
Calculation of unrealized profit of each department

Dept. A Dept. B Dept. C Total

₹ ₹ ₹ ₹
Unrealized Profit
of:
Department A 1,14,000 x 60,000 x 50/150 39,000
20/120 = 19,000 = 20,000

Department B 55,000 x .15 = 15,200 x .10 = 9,770

8,250 1,520
Department C 52,800 x 10/110 1,11,300 x 5/105
= 4,800 5,300 10,100

Q.2: Below balances are taken from the records of M/s Big Shopping Complex for the year
ended 31st March, 2020:

Details Department P (₹) Department Q (₹)

Opening Stock 1,00,000 80,000
Purchases 13,00,000 18,20,000
Sales 20,00,000 30,00,000

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 Closing stock of Department P was ₹ 2,00,000 including goods transferred from
Department Q for ₹ 40,000.
 Closing stock of Department Q was ₹ 4,00,000 including goods transferred from
Department P for ₹ 60,000.
 Opening stock of Department P included goods for ₹ 20,000 transferred from
Department Q and Opening stock of Department Q included goods for ₹ 30,000
transferred from Department P.
 Assume that above transfer amounts are cost to the transferee departments and the
rate of gross profit is uniform from year to year.
 Total selling expenses incurred were ₹ 2,50,000 for both the departments.
From the above information, prepare Departmental Trading Account and Profit & Loss
Account for the year ended 31st March 2020, after adjusting the unrealized departmental
profits, if any. [RTP May 2021]

ANSWER:
Departmental Trading and Profit & Loss A/c for M/s Big Shopping Complex
For the year ended 31st March 2020

Details Deptt. P Deptt. Q Details Deptt. P Deptt. Q

(₹) (₹) (₹) (₹)
To Opening Stock 1,00,000 80,000 By Sales 20,00,000 30,00,000
To Purchases 13,00,000 18,20,000 2,00,000 4,00,000

To Gross Profit 8,00,000 15,00,000 By Closing Stock

22,00,000 34,00,000 22,00,000 34,00,000
To Selling Exp 1,00,000 1,50,000 By Gross Profit 8,00,000 15,00,000
(in ratio of sales)
To Profit transferred 7,00,000 13,50,000
to General P&L A/c
8,00,000 15,00,000 8,00,000 15,00,000

General Profit and Loss A/c for M/s Big Shopping Complex
For the year ended 31st March 2020

Details Amount (₹) Details Amount (₹)

To Stock Reserve By Profit transferred from
Deptt. P WN 1 & 2 Deptt. P 7,00,000
50% x (40,000 – 20,000) 10,000 Deptt. Q 13,50,000
Deptt. Q WN 1 & 3
40% x (60,000 – 30,000) 12,000
20,28,000

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 To Net Profit 20,50,000 20,50,000

Working Notes:
1. Gross Profit Ratios are: Deptt. P = 8,00,000 / 20,00,000 = 40% and of Deptt. Q = 15,00,000
/ 30,00,000 = 50%.
2. Stock Reserve for Deptt. P shall be adjusted as per the gross profit ratio of Deptt. Q i.e. 50% (On
Closing Stock – Opening Stock)
3. Stock Reserve for Deptt. Q shall be adjusted as per the gross profit ratio of Deptt. P i.e. 40% (On
Closing Stock – Opening Stock)

Q.3: XYZ Garage consists of 3 departments: Spares, Service and Repairs, each department
being managed by a departmental manager whose commission was respectively 5%, 10%
and 10% of the respective departmental profit subject to a minimum of ₹5,000 in each case.
Inter departmental transfers take place at a “loaded” price as follows:
From Spares to Service 5% above cost
From Spares to Repairs 10% above cost
From Spares to Service 10% above cost
In respect of the year ended March 31st 2019 the firm had already prepared and closed the
departmental trading and profit and loss account. Subsequently it was discovered that the
closing stocks of department had included inter-departmentally transferred goods at
“loaded” price instead of the correct cost price.
From the following information, you are required to prepare a statement re-computing the
departmental profit or loss:

Spares Service Repairs

₹ ₹ ₹
Final Net Profit/Loss (after 38,000 50,400 72,000
charging commission) (Loss) (Profit) (Profit)
Inter-departmental transfers 65,000 4,202
Included at “loaded” price in the (21,000 from Spares (from Spares)
departmental stocks and 44,000 from
Repairs)

[Jan 21 (10 Marks)]

ANSWER:
Calculation of correct Departmental Profits or Losses

Department Department Department

Spares (₹) Service (₹) Repair (₹)
Profit after charging Manager’s Commission (38,000) 50,400 72,000

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Add: Manager’s Commission (1/9) 5,000 (Minimum) 5,600 8,000
(33,000) 56,000 80,000
Less: Unrealized profit on Stock (WN) (1,382) (4,000)
Profit Before Manager’s Commission (34,382) 56,000 76,000
Less: Manager’s Commission 10% (5,000) (5,600) (7,600)
Correct Profit after Manager’s Commission (39,382) 50,400 68,400

Working Note:

Department Department Department Repair Total (₹)

Spares (₹) Service (₹) (₹)
Unrealized Profit of:
Department Spares 21,000 X 5 / 105 = 4202 X 10 / 110 = 382 1,382
1,000
Department Repair 44000 X 10 / 110 = 4,000
4000

Q.4: On 1st April, 2019, Rajat has 50,000 equity shares of P Ltd. at a book value of Rs. 15 per
share (face value Rs. 10 each). He provides you the further information:
(1) On 20th June, 2019 he purchased another 10,000 shares of P Ltd. at Rs. 16 per share.
(2) On 1st August, 2019, P Ltd. issued one equity bonus share for every six shares held by
the shareholders.
(3) On 31st October, 2019, the directors of P Ltd. announced a right issue which entitles
the holders to subscribe three shares for every seven shares at Rs. 15 per share.
Shareholders can transfer their rights in full or in part.
Rajat sold 1/3rd of entitlement to Umang for a consideration of Rs. 2 per share and
subscribed the rest on 5th November, 2019.
You are required to prepare Investment A/c in the books of Rajat for the year ending 31st
March, 2020. [MTP March 21 (8 Marks)]

ANSWER:
In the books of Rajat
Investment Account
(Equity shares in P Ltd.)

Date Particulars No. of Amount Date Particulars No. of Amount

shares (Rs.) shares (Rs.)

1.4.19 To Balance b/d 50,000 7,50,000 31.3.20 By Balance c/d 90,000 12,10,000
(Bal. fig.)

20.6.19 To Bank A/c 10,000 1,60,000

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 1.8.19 To Bonus issue 10,000 --
(W.N.1)
5.11.19 To Bank A/c
(right shares)
(W.N.4)
20,000 3,00,000

90,000 12,10,000 90,000 12,10,000

Working Notes:
, ,
(1) Bonus shares = = 10,000 shares

, , ,
(2) Right shares = x 3 = 30,000 shares

(3) Sale of rights = 30,000 shares x x Rs. 2 = Rs. 20,000 to be credited to P & L A/c as per AS
13.

(4) Rights subscribed = 30,000 shares x x ₹ 15 = Rs. 3,00,000

Q.5: The following balances were extracted from the books of Beta. You are required to
prepare Departmental Trading Account and General Profit & Loss Account for the year
ended 31st December, 2020:

Particulars Deptt. A Deptt. B

(Rs.) (Rs.)
Opening Stock 3,00,000 2,40,000
Purchases 39,00,000 54,60,000
Sales 60,00,000 90,00,000

General expenses incurred for both the Departments were Rs. 7,50,000 and you are also
supplied with the following information:
(i) Closing stock of Department A Rs. 6,00,000 including goods from Department B for
Rs. 1,20,000 at cost to Department A.
(ii) Closing stock of Department B Rs. 12,00,000 including goods from Department A for
Rs. 1,80,000 at cost to Department B.
(iii) Opening stock of Department A and Department B include goods of the value of Rs.
60,000 and Rs. 90,000 taken from Department B and Department A respectively at cost
to transferee departments.
(iv) The gross profit is uniform from year to year. [MTP March 21 (8 Marks)]

ANSWER:
Departmental Trading Account for the year ended on 31st December, 2020

Particulars A B Particulars A B
Rs. Rs. Rs. Rs.

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To Opening Stock 3,00,000 2,40,000 By Sales 60,00,000 90,00,000
To Purchases 39,00,000 54,60,000 By Closing Stock 6,00,000 12,00,000
To Gross Profit 24,00,000 45,00,000
66,00,000 1,02,00,000 66,00,000 1,02,00,000

General profit and loss account of Beta for the year ended on 31st December, 2020

Particulars Amount Particulars Amount

Rs. Rs.
To General expenses* 7,50,000 By Stock reserve (opening stock)
To Stock reserve (Closing Dept. A 30,000
Stock)
Dept. A 60,000 Dept. B 36,000
Dept. B 72,000 By Gross Profit
To Net Profit 60,84,000 Dept. A 24,00,000
Dept. B 45,00,000
69,66,000 69,66,000

Working Notes:

Dept. A Dept. B
1. Percentage of Profit 24,00,000/60,00,000 x 100 45,00,000/90,00,000 x 100
40% 50%
2. Opening Stock reserve 60,000 x 50% = 30,000 90,000 X 40% = 36,000
3. Closing Stock reserve 1,20,000 x 50%=60,000 1,80,000 x 40% = 72,000

Q.6: X Ltd has three departments A, B and C. From the particulars given below compute: (i)
the values of stock as on 31st Dec. 2020 and (ii) the departmental results showing actual
amount of gross profit.

A B C
Rs. Rs. Rs.
Stock (on 1.1. 2020) 24,000 36,000 12,000
Purchases 1,46,000 1,24,000 48,000
Actual sales 1,72,500 1,59,400 74,600
Gross Profit on normal selling price 20% 25% 33 1/3%

During the year ended 31st Dec. 2020, certain items were sold at discount and these
discounts were reflected in the value of sales shown above. The items sold at discount were:

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 A B C
Rs. Rs. Rs.
Sales at normal price 10,000 3,000 1,000
Sales at actual price 7,500 2,400 600

[MTP April 21 (6 Marks)]

ANSWER:
Calculation of Departmental Results (Actual Gross Profit)

A (Rs.) B (Rs.) C (Rs.)

Actual Sales 1,72,500 1,59,400 74,600
Add back: Discount (Refer W.N.) 2,500 600 400
Normal sales 1,75,000 1,60,000 75,000
Gross profit % on normal sales 20% 25% 33.33%
Normal gross profit 35,000 40,000 25,000
Less: Discount (2,500) (600) (400)
Actual gross profit 32,500 39,400 24,600

Computation of value of stock as on 31st Dec. 2020

Departments A B C
Rs. Rs. Rs.
Stock (on 1.1. 2020) 24,000 36,000 12,000
Add: Purchases 1,46,000 1,24,000 48,000
1,70,000 1,60,000 60,000
Add: Actual gross profit 32,500 39,400 24,600
2,02,500 1,99,400 84,600
Less: Actual Sales (1,72,500) (1,59,400) (74,600)
Closing stock as on 31.12.2020 (bal.fig.) 30,000 40,000 10,000

Working Note:
Calculation of discount on sales:

Departments A B C
Rs. Rs. Rs.
Sales at normal price 10,000 3,000 1,000
Less: Sales at actual price (7,500) (2,400) (600)
2,500 600 400

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 BRANCH ACCOUNT

QUESTIONS AND ANSWERS

Q.1: Vijay & Co. of Jaipur has a branch in Patna to which goods are sent @ 20% above cost.
The branch makes both cash & credit sales. Branch expenses are paid direct from Head
office and the branch has to remit all cash received into the bank account of Head office.
Branch doesn't maintain any books of accounts, but sends monthly returns to the head
office.
Following further details are given for the year ended 31st March, 2020:

Amount (₹)
Goods received from Head office at Invoice Price 8,40,000
Goods returned to Head office at Invoice Price 60,000
Cash sales for the year 2019-20 1,85,000
Credit Sales for the year 2019-20 6,25,000
Stock at Branch as on 01-04-2019 at Invoice price 72,000
Sundry Debtors at Patna branch as on 01-04-2019 96,000
Cash received from Debtors 4,38,000
Discount allowed to Debtors 7,500
Goods returned by customer at Patna Branch 14,000
Bad debts written off 5,500
Amount recovered from Bad debts previously written off as Bad 1,000
Rent, Rates & taxes at Branch 24,000
Salaries & wages at Branch 72,000
Office Expenses (at Branch) 9,200
Stock at Branch as on 31-03-2020 at cost price 1,25,000

Prepare necessary ledger accounts in the books of Head office by following Stock and
Debtors method and ascertain Branch profit. [Nov 2020 (10 Marks)]

ANSWER:
Branch Stock Account

₹ ₹ ₹ ₹
1.4.19 To Balance b/d 72,000 31.3.20 By Sales:
(opening
stock)

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31.3.20 To Goods Sent to 8,40,000 Cash 1,85,000
Branch A/c Credit 6,25,000
To Branch P&L 94,000 Less:
Return (14,000) 6,11,000 7,96,000
By Goods 60,000
sent to
branch -
returns
By Balance 1,50,000
c/d
(closing
stock)
10,06,000 10,06,000
1.4.20 To Balance b/d 1,50,000

Branch Debtors Account

₹ ₹
1.4.19 To Balance b/d 96,000 31.3.20 By Cash 4,38,000
31.3.20 To Sales 6,25,000 By Returns 14,000
By Discounts 7,500
By Bad debts 5,500
By Balance c/d 2,56,000
7,21,000 7,21,000
1.4.20 To Balance b/d 2,56,000

Branch Expenses Account

₹ ₹
31.3.20 To Salaries & Wages 72,000 31.3.20 By Branch P&L A/c 1,18,200
To Rent, Rates & Taxes 24,000
To Office Expenses 9,200
To Discounts 7,500
To Bad Debts 5,500
1,18,200 1,18,200

Branch Profit & Loss Account for year ended 31.3.20

₹ ₹
31.3.20 To Branch Expenses A/c 1,18,200 31.3.20 By Branch stock 94,000

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 To Net Profit transferred By Branch Stock 1,17,000
to Adjustment account

General P & L A/c 93,800 By Bad debts recovered 1,000

2,12,000 2,12,000

Branch Stock Adjustment Account for year ended 31.3.20

₹ ₹
31.3.20 To Goods sent to 10,000 31.3.20 By Balance b/d 12,000
branch (72,000x1/6)
(60,000x1/6)
returns
To Branch P & L A/c 1,17,000 By Goods sent to 1,40,000
branch
(8,40,000x1/6)
To Balance c/d 25,000
(1,50,000x1/6)
1,52,000 1,52,000

Q.2: Alpha Ltd. has a retail shop under the supervision of a manager. The ratio of gross profit
at selling price is constant at 25 per cent throughout the year to 31st March, 2020.
Branch manager is entitled to a commission of 10 per cent of the profit earned by his branch,
calculated before charging his commission but subject to a deduction from such
commission equal to 25 per cent of any ascertained deficiency of branch stock. All goods
were supplied to the branch from head office.
The following details for the year ended 31st March, 2020 are given as follows:

₹ ₹
Opening Stock (at cost) 74,736 Chargeable expenses 49,120
Goods sent to branch (at cost) 2,89,680 Closing Stock (Selling Price) 1,23,328
Sales 3,61,280
Manager’s commission paid on 2,400
account

From the above details, you are required to calculate the commission due to manager for
the year ended 31st March, 2020. [RTP May 2021]

ANSWER:
In the books of Alpha Ltd.
Step 1 : Calculation of Deficiency
Branch Stock account (at invoice price)

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 Particulars ₹ Particulars ₹
To Opening Stock (₹ 74,736 + 1/3 of By Sales 3,61,280
₹ 74,736) 99,648
To Goods sent to Branch A/c By Closing Stock 1,23,328
(₹ 2,89,680 + 1/3 of ₹ 2,89,680) 3,86,240 By Deficiency at sale price
[Balancing figure] 1,280
4,85,888 4,85,888

Step 2 : Calculation of Net Profit before Commission

Branch account

Particulars ₹ Particulars ₹
To Opening Stock 99,648 By Sales 3,61,280
[₹74,736 + 1/3 of ₹ 74,736]
To Gross sent to Branch A/c 3,86,240 By Closing Stock 1,23,328
(₹ 2,89,680 + 1/3 ₹ 2,89,680)
To Expenses 49,120 By Stock Reserve A/c 24,912
To Stock Reserve A/c 30,832 By Goods sent to Branch A/c 96,560
[₹ 1,23,328 x 25/100]
To Net Profit – subject to manager’s
commission 40,240
6,06,080 6,06,080

Step 3 : Calculation of Commission still due to manager

₹
A Calculation at 10% profit before charging his commission [₹ 40,240 x 10/100] 4,024
B Less: 25% of cost of deficiency in stock [25% of (75% of ₹ 1,280)] (240)
C Commission for the year [A-B] 3,784
D Less: Paid on account (2,400)
E Balance due (C-D) 1,384

Q.3: Give Journal Entries in the books of Branch to rectify or adjust the following:
(1) Branch paid ₹ 5,000 as salary to H.O supervisor, but the amount paid by branch has
been debited to salary account in the books of branch.
(2) Asset Purchased by branch for ₹ 25,000, but the Asset account was retained in H.O
Books.
(3) A remittance of ₹8,000 sent by the branch has not been received by H.O.

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(4) H.O collected ₹ 25,000 directly from the customer of Branch but fails to give the
intimation to branch.
(5) Remittance of funds by H.O to branch ₹5,000 not entered in branch books.
[Jan 21 (4 Marks)]

ANSWER:
Journal Entries in Books of Branch A

Particulars Dr. Cr.

Amount ₹ Amount ₹
(i) Head office account Dr. 5,000
To Salaries Account 5,000
(Being the rectification of salary paid on behalf of H.O.)
(ii) Head office account Dr. 25,000
To Bank / Liability A/c 25,000
(Being Asset purchased by branch but Asset account
retained at head office books)
(iii) No Entry in Branch Books
(iv) Head office account Dr. 25,000
To Debtors account 25,000
(Being the amount of branch debtors collected by H.O.)
(v) Bank A/c Dr. 5,000
To Head Office 5,000
(Remittance of Funds by H.O. to Branch)

Q.4: Moon Star has a branch at Virginia (USA). The Branch is a non-integral foreign
operation of the Moon Star. The trial balance of the Branch as at 31st March, 2020 is as
follows:

Particulars US $
Dr. Cr.
Office equipments 48,000
Furniture and Fixtures 3,200
Stock (April 1, 2019) 22,400
Purchases 96,000
Sales --- 1,66,400
Goods sent from H.O 32,000
Salaries 3,200
Carriage inward 400

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 Rent, Rates & Taxes 800
Insurance 400
Trade Expenses 400
Head Office Account --- 45,600
Sundry Debtors 9,600
Sundry Creditors --- 6,800
Cash at Bank 2,000
Cash in Hand 400
2,18,800 2,18,800

The following further information is given:

(1) Salaries outstanding $ 400.
(2) Depreciate office equipment and furniture & fixtures @10% p.a. at written down value.
(3) The Head Office sent goods to Branch for Rs.15,80,000.
(4) The Head Office shows an amount of Rs. 20,50,000 due from Branch.
(5) Stock on 31st March, 2020 - $21,500.
(6) There were no transit items either at the start or at the end of the year.
(7) On April 1, 2018 when the fixed assets were purchased the rate of exchange was Rs.
43 to one $. On April 1, 2019, the rate was 47 per $. On March 31, 2020 the rate was Rs.
50 per $. Average rate during the year was Rs. 45 to one $.
Prepare Trial balance incorporating adjustments given converting dollars into rupees and
Trading, Profit and Loss Account for the year ended 31st March, 2020 of the Branch as
would appear in the books of Moon Star for the purpose of incorporating in the main Balance
Sheet. [MTP March 21 (8 Marks)]

ANSWER:
In the books of Moon Star
Trial Balance (in Rupees) of Virginia (USA) Branch as 31st March, 2020

Dr. Cr. Conversion Dr. Cr.

US $ US $ rate Rs. Rs.
Office Equipment 43,200 50 21,60,000
Depreciation on Office 4,800 50 2,40,000
Equipment
Furniture and fixtures 2,880 50 1,44,000
Depreciation on furniture 320 50 16,000
and fixtures
Stock (1st April, 2019) 22,400 47 10,52,800
Purchases
96,000 45 43,20,000
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Sales 1,66,400 45 74,88,000
Goods sent from H.O. 32,000 15,80,000
Carriage inward 400 45 18,000
Salaries (3,200+400) 3,600 45 1,62,000
Outstanding salaries 400 50 20,000
Rent, rates and taxes 800 45 36,000
Insurance 400 45 18,000
Trade expenses 400 45 18,000
Head Office A/c 45,600 20,50,000
Trade debtors 9,600 50 4,80,000
Trade creditors 6,800 50 3,40,000
Cash at bank 2,000 50 1,00,000
Cash in hand 400 50 20,000
Exchange gain (bal. fig.) 4,66,800
2,19,200 2,19,200 1,03,64,800 1,03,64,800

Q.5: DM Delhi has a branch in London which is an integral foreign operation of DM. At the
end of the year 31st March, 2021, the branch furnishes the following trail balance in U.K.
Pound:

Particulars £ £
Dr. Cr.
Fixed assets (Acquired on 1st April, 2017) 24,000
Stock as on 1st April, 2020 11,200
Goods from head Office 64,000
Expenses 4,800
Debtors 4,800
Creditors 3,200
Cash at bank 1,200
Head Office Account 22,800
Purchases 12,000
Sales 96,000
1,22,000 1,22,000

In head office books, the branch account stood as shown below:

London Branch A/c

Particulars Amount Particulars Amount

Rs. Rs.

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 To Balance b/d 20,10,000 By Bank A/c 52,16,000
To Goods sent to branch 49,26,000 By Balance c/d 17,20,000
69,36,000 69,36,000

The following further information is given:

(a) Fixed assets are to be depreciated @ 10% p.a. on WDV.
(b) On 31st March, 2021:
Expenses outstanding - £ 400
Prepaid expenses - £ 200
Closing stock - £ 8,000
(c) Rate of Exchange:
1st April, 2017 - Rs. 70 to £ 1
1st April, 2020 - Rs. 76 to £ 1
31st March, 2021 - Rs. 77 to £ 1
Average - Rs. 75 to £ 1
You are required to prepare: (1) Trial balance, incorporating adjustments of outstanding and
prepaid expenses, converting U.K. pound into Indian rupees; and (2) Trading and profit and
loss account for the year ended 31st March, 2021 of London branch as would appear in the
books of Delhi head office of DM. [MTP April 21 (8 Marks)]

ANSWER:
Trial Balance of London Branch as on 31st March, 2021

Particulars U.K. Rate Per Dr. (Rs.) Cr. (Rs.)

Pound U.K. Pound
Fixed Assets 24,000 70 16,80,000
Stock (as on 1st April, 2020) 11,200 76 8,51,200
Goods from Head Office 64,000 - 49,26,000
Sales 96,000 75 72,00,000
Purchases 12,000 75 9,00,000
Expenses (4,800 + 400 – 200) 5,000 75 3,75,000
Debtors 4,800 77 3,69,600
Creditors 3,200 77 2,46,400
Outstanding Expenses 400 77 30,800
Prepaid expenses 200 77 15,400
Cash at Bank 1,200 77 92,400
Head office Account - 17,20,000

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 Difference in Exchange 12,400
92,09,600 92,09,600

Closing stock will be (8,000 × 77) = Rs. 6,16,000

Trading and Profit & Loss A/c
for the year ended 31st March, 2021

Particulars Amount Particulars Amount

(Rs.) (Rs.)
To Opening Stock 8,51,200 By Sales 72,00,000
To Purchases 9,00,000 By Closing Stock 6,16,000
To Goods from H.O. 49,26,000
To Gross Profit 11,38,800
78,16,000 78,16,000
To Expenses 3,75,000 By Gross Profit 11,38,800
To Depreciation 1,68,000 By Profit due to Exchange
To Net Profit 6,08,200 difference 12,400
11,51,200 11,51,200

Working Note:
Since London Branch is an integral foreign operation. Hence, (1) Fixed assets (cost and depreciation)
are translated using the exchange rate at the date of purchase of the assets. (2) Exchange difference
arising on translation of the financial statement is charged to Profit and Loss Account.

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 ACCOUNTS FROM INCOMPLETE RECORDS

QUESTIONS AND ANSWERS

Q.1: M/s Rohan & Sons runs a business of Electrical goods on wholesale basis. The books
of accounts are closed on 31st March every year. The Balance Sheet as on 31st March, 2019
is as follows:

Liabilities ₹ Assets ₹
Capital 12,50,000 Fixed Assets 6 50,000
Closing stock 3,75,000
Trade Debtors 3,65,000
Trade Creditors 1,90,000 Cash & Bank 1,95,000
Profit & Loss A/c 1,45,000
15,85,000 15,85,000

The management estimates the purchase & sales for the year ended 31st March,2020 as
under:

Particulars Upto 31.01.2020 February 2020 March 2020

(₹) (₹) (₹)
Purchases 16,20,000 1,40,000 1,25,000
Sales 20,75,000 2,10,000 1, 75,000
All Sales and Purchases are on credit basis. It was decided to invest ₹ 1,50,000 in purchase
of Fixed assets, which are depreciated @ 10% on book value. A Fixed Asset of book value
as on 01.04.2019, ₹ 60,000 was sold for ₹ 56,000 on 31st March, 2020.
The time lag for payment to Trade Creditors for purchases is one month and receipt from
Trade debtors for sales, is two months. The business earns a gross profit of 25% on
turnover. The expenses against gross profit amounts to 15% of the turnover. The amount of
depreciation is not included in these expenses.
Prepare Trading & profit & Loss Account for the year ending 31st March, 2020 and draft a
Balance Sheet as at 31st March, 2020 assuming that creditors are all Trade creditors for
purchases and debtors are all Trade debtors for sales and there is no other current asset
and liability apart from stock and cash and bank balances.
Also, prepare Cash & Bank account and Fixed Assets account for the year ending 31st
March, 2020. [Nov 2020 (10 Marks)]

ANSWER:
Trading and Profit and Loss Account of M/s Rohan & Sons for the year ended 31st March,
2020

₹ ₹
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To Opening stock 3,75,000 By Sales 24,60,000
To Purchases 18,85,000 By Closing stock 4,15,000
To Gross Profit c/d (25%) 6,15,000 (Balancing Figure)
28,75,000 28,75,000
To Depreciation 80,000 By Gross profit b/d 6,15,000
To Expenses (15% of ₹ 3,69,000 By Profit on sale of Fixed assets 2,000
24,60,000)
To Net Profit (b.f.) 1,68,000
6,17,000 6,17,000

Balance Sheet of M/s Rohan Sons as on 31st March, 2020

Liabilities ₹ Assets ₹
Capital 12,50,000 Fixed assets (less Dep.) 6,66,000
Profit & Loss A/c 3,13,000 Stock 4,15,000
(1,45,000 + 1,68,000)
Trade Creditors 1,25,000 Debtors 3,85,000
Cash and bank 2,22,000
16,88,000 16,88,000

Cash and Bank Account

To Bal. b/d 1,95,000 By Creditors (1,90,000 + 19,50,000

16,20,000 + 1,40,000)
To Debtors 24,40,000 By Expenses 3,69,000
(3,65,000 + 20,75,000)
To Fixed assets 56,000 By Fixed assets 1,50,000
By Bal. c/d 2,22,000
26,91,000 26,91,000

Fixed Assets Account

To Bal. b/d 6,50,000 By Cash 56,000

To Profit on sale of Fixed asset 2,000 By Depreciation on sold fixed asset 6,000
By Depreciation 74,000
(59,000 + 15,000)
To Bank A/c 1,50,000 By Bal. c/d 6,66,000
8,02,000 8,02,000

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Q.2: Following is the Balance Sheet of M/s. S Traders as on 31st March, 2019:

Liabilities Amount (₹) Assets Amount (₹)

Capital 1,50,000 Fixed Assets 1,05,000
11% Bank Loan 80,000 Closing stock 76,000
Trade payables 52,000 Debtors 68,000
Profit & Loss A/c 56,000 Deferred Expenditure 24,000
Cash & Bank 65,000
3,38,000 3,38,000

Additional Information:
(i) Remaining life of Fixed Assets is 6 years with even use. The net realizable value of
Fixed Assets as on 31st March, 2020 is ₹ 90,000.
(ii) Firm's Sales & Purchases for the year ending 31st March, 2020 amounted to ₹ 7,80,000
and ₹ 6,25,000 respectively.
(iii) The cost & net realizable value of the stock as on 31st March, 2020 was, ₹ 60,000 and
₹ 66,000 respectively.
(iv) General expenses (including interest on Loan) for the year 2019-20 were ₹ 53,800.
(v) Deferred expenditure is normally amortised equally over 5 years starting from the
Financial year 2018-19 i.e. ₹ 6,000 per year.
(vi) Debtors on 31st March, 2020 is ₹ 65,000 of which ₹ 5,000 is doubtful. Collection of
another ₹ 10,000 debtors depends on successful re-installation of certain products
supplied to the customer.
(vii) Closing Trade payable ₹ 48,000, which is likely to·be settled at 5% discount.
(viii) There is a prepayment penalty of ₹ 4,000 for Bank loan outstanding.
(ix) Cash & Bank balances as on 31st March, 2020 is ₹ 1,65,200.
Prepare Profit & Loss Account for the year ended 31st March, 2020 and
[Nov 2020 (4 Marks)]

ANSWER:
Profit and Loss Account of M/s S traders for the year ended 31st March, 2020 (business is
not a going concern)

Amount (₹) Amount (₹)

To Opening Stock 76,000 By Sales 7,80,000
To Purchases 6,25,000 By Trade payables 2,400
To General expenses 53,800 By Closing Stock 66,000
To Depreciation (1,05,000 less 90,000) 15,000
To Provision for doubtful debts 15,000
To Deferred expenditure 24,000

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To Loan penalty 4,000
To Net Profit (b.f.) 35,600
8,48,400 8,48,400

Balance Sheet M/s S Traders as on 31st March, 2020

Liabilities and Capital ₹ Assets ₹

Capital 1,50,000 Fixed assets 90,000
Profit & Loss A/c Debtors
opening balance 56,000 (65,000 less provision for 50,000
doubtful debts ₹ 15,000)
Profit earned during the year 35,600 91,600 Closing stock 66,000
11% Loan 84,000 Cash & Bank balance 1,65,200
Trade payables 45,600
3,71,200 3,71,200

Q.3: Ram carried on business as retail merchant. He has not maintained regular account
books. However, he always maintained ₹ 10,000 in cash and deposited the balance into the
bank account. He informs you that he has sold goods at profit of 25% on sales.
Following information is given to you:

Assets and Liabilities As on 1.4.2020 As on 31.3.2021

Cash in Hand 10,000 10,000
Sundry Creditors 40,000 90,000
Cash at Bank 50,000 (Cr.) 80,000 (Dr.)
Sundry Debtors 1,00,000 3,50,000
Stock in Trade 2,80,000 ?
Ram’s capital 3,00,000 ?

Analysis of his bank pass book reveals the following information:

(a) Payment to creditors ₹ 7,00,000
(b) Payment for business expenses ₹ 1,20,000
(c) Receipts from debtors ₹ 7,50,000
(d) Loan ₹ 1,00,000 taken on 1.10.2020 at 10% per annum
(e) Cash deposited in the bank ₹ 1,00,000
He informs you that he paid creditors for goods ₹ 20,000 in cash and salaries ₹ 40,000 in
cash. He has drawn ₹ 80,000 in cash for personal expenses. During the year Ram had not
introduced any additional capital. Surplus cash if any, to be taken as cash sales. All
purchases are on credit basis.

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You are required to prepare: Trading and Profit and Loss Account for the year ended
31.3.2021 and Balance Sheet as at 31st March, 2021. [RTP May 2021]

ANSWER:
Trading and Profit and Loss Account of Ram
for the year ended 31st March, 2021

₹ ₹
To Opening stock 2,80,000 By Sales
To Purchases 7,70,000 Cash 2,40,000
To Gross Profit @ 25% 3,10,000 Credit 10,00,000 12,40,000
By Closing Stock (bal.fig.) 1,20,000
13,60,000 13,60,000
To Salaries 40,000 By Gross Profit 3,10,000
To Business expenses 1,20,000
To Interest on loan 5,000
(10% of 1,00,000 x 6/12)
To Net Profit 1,45,000
3,10,000 3,10,000

Balance Sheet of Ram as at 31st March, 2021

Liabilities ₹ ₹ Assets ₹
Ram’s capital: Cash in hand 10,000
Opening 3,00,000 Cash at Bank 80,000
Add: Net Profit 1,45,000 Sundry Debtors 3,50,000
4,45,000 Stock in trade 1,20,000
Less: Drawings (80,000) 3,65,000
Loan (including interest due) 1,05,000
Sundry Creditors 90,000 _______
5,60,000 5,60,000

Working Notes:
1. Sundry Debtors Account

₹ ₹
To Balance b/d 1,00,000 By Bank A/c 7,50,000
To Credit sales (Bal. fig) 10,00,000 By Balance c/d 3,50,000
11,00,000 11,00,000

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2. Sundry Creditors Account

₹ ₹
To Bank A/c 7,00,000 By Balance b/d 40,000
To Cash A/c 20,000 By Purchases (Bal. fig.) 7,70,000
To Balance c/d 90,000
8,10,000 8,10,000

3. Cash and Bank Account

Cash Bank Cash Bank

₹ ₹ ₹ ₹
To Balance b/d 10,000 By Balance b/d 50,000
To Sales (bal. fig) 2,40,000 By Bank A/c (C) 1,00,000
To Cash (C) 1,00,000 By Salaries 40,000
To Debtors 7,50,000 By Creditors 20,000 7,00,000
To Loan 1,00,000 By Drawings 80,000
By Business 1,20,000
expenses
By Balance c/d 10,000 80,000
2,50,000 9,50,000 2,50,000 9,50,000

Q.4: Mr. Prakash furnishes following information for his readymade garments business:
(i) Receipts and Payments during 2019-20:

Receipts Amount (₹) Payments Amount (₹)

Bank Balance as on Payment to Sundry
1-4-2019 16,250 Creditors 3,43,000
Received from Sundry Salaries 75,000
Debtors 4,81,000
General Expenses 22,500
Cash sales 1,70,800 Rent and Taxes 11,800
Capital brought in the Drawings 96,000
Business during the year 50,000
Cash Purchases 1,22,750
Interest on Investment Balance at Bank on
Received 9,750 31-03-2020 36,600
Cash in hand on
31-03-2020 20,150

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 7,27,800 7,27,800

(ii) Particulars of other Assets and Liabilities are as follows:

1st April, 2019 31st March, 2020

(₹) (₹)
Machinery 85,000 85,000
Furniture 24,500 24,500
Trade Debtors 1,55,000 ?
Trade Creditors 60,200 ?
Stock 38,600 55,700
12% Investment 85,000 85,000
Outstanding Salaries 12,000 14,000

(iii) Additional Information:

(1) 20% of Total sales and 20% of total purchases are in cash.
(2) Of the Debtors, a sum of ₹ 7,200 should be written off as Bad debt and further a
provision for doubtful debts is to be provided @2%.
(3) Provide depreciation @10% p.a. on Machinery and Furniture.
You are required to prepare Trading and Profit & Loss account for the year ended
31st March, 2020, and Balance Sheet as on that date. [Jan 21 (10 Marks)]

ANSWER:
Trading and Profit & Loss Account for the year ended 31-03-2020

₹ ₹ ₹
To Opening Inventory 38,600 By Sales 8,54,000
To Purchases 6,13,750 By Closing Inventory 55,700
To Gross profit c/d (b.f.) 2,57,350
9,09,700 9,09,700
To Salaries By Gross Profit b/d
77,000 2,57,350
(75,000+14,000-12,000)
To Rent 11,800 By Interest on 10,200
investment
To General expenses 22,500 (9,750 + 450)
To Depreciation:
Machinery @ 10% 8,500
Furniture @ 10% 2,450 10,950
To Bad Debts 7,200

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 To Provision for doubtful 7,000 14,200
debts
To Balance being profit
carried to Capital A/c
(b.f.) 1,31,100
2,67,550 2,67,550

Balance Sheet as on 31st March, 2020

Liabilities ₹ ₹ Assets ₹ ₹
A. Adamjee’s Capital Machinery 85,000
on 1st April, 2019 3,32,150 Less: Depreciation (8,500) 76,500
Add: Fresh Capital 50,000 Furniture 24,500
Add: Profit for the year 1,31,100 Less: Depreciation (2,450) 22,050
5,13,250
Less: Drawings (96,000) 4,17,250 Inventory-in-trade 55,700
Sundry debtors 3,57,200
Sundry creditors 2,08,200 Less: Provision for
Outstanding expenses 14,000 Doubtful debtors (14,200) 3,43,000
Investment 85,450
(including accrued
interest ₹ 450)
Cash at bank 36,600
Cash in hand 20,150
6,39,450 6,39,450

Working Notes:
1. Balance sheet as on 1-4-2019

₹ ₹
Sundry creditors 60,200 Machinery 85,000
Capital 3,32,150 Furniture 24,500
(balancing figure) Inventory 38,600
Outstanding salaries 12,000 Sundry debtors 1,55,000
Investments 85,000
Bank balance (from Cash statement) 16,250
4,04,350 4,04,350

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2. Total Debtors Account

₹ ₹
1.4.19 To Balance b/d 1,55,000 31.3.20 By Cash 4,81,000
31.3.20 To Credit sales 6,83,200 31.3.20 By Bad debts 7,200
(1,70800/20 x 80) By Balance c/d 3,50,000
(Bal. Fig.)
8,38,200 8,38,200

3. Total Creditors Account

₹ ₹
31.3.20 To Cash 3,43,000 1.4.19 By Balance b/d 60,200
31.3.20 To Balance 2,08,200 31.3.20 By Credit Purchases 4,91,000
c/d (1,22,750/20 x 80)
(Bal. Fig.)

5,51,200 5,51,200

Q.5: Archana Enterprises maintain their books of accounts under single entry system. The
Balance-Sheet as on 31st March, 2018 was as follows :

Liabilities Amount (Rs.) Assets Amount (Rs.)

Capital A/c 6,75,000 Furniture & fixtures 1,50,000
Trade creditors 7,57,500 Stock 9,15,000
Outstanding expenses 67,500 Trade debtors 3,12,000
Prepaid insurance 3,000
Cash in hand & at bank 1,20,000
15,00,000 15,00,000

The following was the summary of cash and bank book for the year ended 31st March, 2019:

Receipts Amount (Rs.) Payments Amount (Rs.)

Cash in hand & at Bank 1,20,000 Payment to trade creditors 1,24,83,000
on 1st April, 2018
Cash sales 1,10,70,000 Sundry expenses paid 9,31,050
Receipts from trade 27,75,000 Drawings 3,60,000
debtors Cash in hand & at Bank on
31st March, 2019 1,90,950
1,39,65,000 1,39,65,000

Additional Information:

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(i) Discount allowed to trade debtors and received from trade creditors amounted to Rs.
54,000 and Rs. 42,500 respectively (for the year ended 31st March, 2019).
(ii) Annual fire insurance premium of Rs. 9,000 was paid every year on 1st August for the
renewal of the policy.
(iii) Furniture & fixtures were subject to depreciation @ 15% p.a. on diminishing balance
method.
(iv) The following are the balances as on 31st March, 2019:
Stock Rs. 9,75,000
Trade debtors Rs. 3,43,000
Outstanding expenses Rs. 55,200
(v) Gross profit ratio of 10% on sales is maintained throughout the year.
You are required to prepare Trading and Profit & Loss account for the year ended 31st
March, 2019, and Balance Sheet as on that date. [MTP March 21 (12 Marks)]

ANSWER:
Trading and Profit and Loss Account of Virginia Branch
For the year ended 31st March, 2020

(Rs.) (Rs.)
To Opening stock 10,52,800 By Sales 74,88,000
To Purchases 43,20,000 By Closing stock 10,75,000
To Goods from Head Office 15,80,000 (21,500 US $ × 50)
To Carriage inward 18,000
To Gross profit c/d 15,92,200
85,63,000 85,63,000
To Salaries 1,62,000 By Gross profit b/d 15,92,200
To Rent, rates and taxes 36,000
To Insurance 18,000
To Trade expenses 18,000
To Depreciation on office equipment 2,40,000
To Depreciation on furniture and 16,000
fixtures
To Net Profit c/d 11,02,200
15,92,200 15,92,200

Trading and Profit and Loss Account of Archana Enterprises

for the year ended 31st March, 2019

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 (Rs.) (Rs.)
To Opening Stock 9,15,000 By Sales
To Purchases (W.N.2) 125,97,000 Cash 110,70,000
To Gross profit c/d 13,93,000 Credit (W.N.1) 28,60,000 139,30,000
(10% of 139,30,000) By Closing stock 9,75,000
149,05,000 149,05,000
To Sundry expenses (W.N.4) 9,18,750 By Gross profit b/d 13,93,000
To Discount allowed 54,000 By Discount received 42,500
To Depreciation 22,500
(15% Rs. 1,50,000)
To Net Profit (b.f.) 4,40,250
14,35,500 14,35,500

Balance Sheet of Archana Enterprises as at 31st March, 2019

Liabilities Amount Amount

Rs. Rs.
Capital Furniture & Fittings 1,50,000
Opening balance 6,75,000 Less: Depreciation (22,500) 1,27,500
Less: Drawing (3,60,000) Stock 9,75,000
3,15,000 Trade Debtors 3,43,000
Add: Net profit for Unexpired insurance 3,000
the years 4,40,250 7,55,250
Trade creditors 8,29,000 Cash in hand & at 1,90,950
(W.N.3) bank
Outstanding expenses 55,200
16,39,450 16,39,450

Working Notes:
1. Trade Debtors Account

(Rs.) (Rs.)
To Balance b/d 3,12,000 By Cash/Bank 27,75,000
To Credit sales 28,60,000 By Discount allowed 54,000
(Bal. fig.) By Balance c/d 3,43,000
31,72,000 31,72,000

2. Memorandum Trading Account

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 (Rs.) (Rs.)
To Opening stock 9,15,000 By Sales 139,30,000
To Purchases (Balancing figure) 125,97,000 By Closing stock 9,75,000
To Gross Profit (10% on sales) 13,93,000
149,05,000 149,05,000

3. Trade Creditors Accounts

(Rs.) (Rs.)
To Cash/ Bank 124,83,000 By Balance b/d 7,57,500
To Discount received 42,500 By Purchases (as 125,97,000
calculated in W.N.2)
To Balance c/d (balancing figure) 8,29,000
133,54,500 133,54,500

4. Computation of sundry expenses to be charged to Profit & Loss A/c

(Rs.)
Sundry expenses paid (as per cash and Bank book) 9,31,050
Add: Prepaid expenses as on 31-3-2018 3,000
9,34,050
Less: Outstanding expenses as on 31-3-2018 (67,500)
8,66,550
Add: Outstanding expenses as on 31-3-2019 55,200
9,21,750
Less: Prepaid expenses as on 31–3–2019 (Insurance paid till July, 2019)
(9,000 x 4/12) (3,000)
9,18,750

Q.6: The following is the Balance Sheet Chirag as on 31st March, 2020:

Liabilities Rs. Assets Rs.

Capital Account 48,000 Building 32,500
Loan 15,000 Furniture 5,000
Creditor 31,000 Motor car 9,000
Stock 20,000
Debtors 17,000
Cash in hand 2,000
Cash at bank 8,500
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 94,000 94,000

A riot occurred on the night of 31st March, 2021 in which all books and records were lost.
The cashier had absconded with the available cash. He gives you the following information:
(a) His sales for the year ended 31st March, 2021 were 20% higher than the previous
year’s sales. He always sells his goods at cost plus 25%; 20% of the total sales for the
year ended 31st March, 2021 were for cash. There were no cash purchases.
(b) On 1st April, 2020 the stock level was raised to Rs. 30,000 and stock was maintained
at this new level all throughout the year.
(c) Collection from debtors amounted to Rs. 1,40,000 of which Rs. 35,000 was received in
cash, Business expenses amounted to Rs. 20,000 of which Rs. 5,000 was outstanding
on 31st March, 2021 and Rs. 6,000 was paid by cheques.
(d) Analysis of the Pass Book revealed the Payment to Creditors Rs. 1,37,500, Personal
Drawing Rs. 7,500, Cash deposited in Bank Rs. 71,500, and Cash withdrawn from Bank
Rs. 12,000.
(e) Gross profit as per last year’s audited accounts was Rs. 30,000.
(f) Provide depreciation on Building and Furniture at 5% and Motor Car at 20%.
(g) The amount defalcated by the cashier may be treated as recoverable from him.
You are required to prepare the Trading and Profit and Loss Account for the year ended 31st
March, 2021 and Balance Sheet as on that date. [MTP April 21 (12 Marks)]

ANSWER:
Trading and Profit and Loss Account for the year ending on 31st March, 2021

Particulars Rs. Particulars Rs.

To Opening Stock 20,000 By Sales 1,80,000
To Purchases (bal.fig.) 1,54,000 By Closing Stock 30,000
36,000
To Gross Profit c/d (@20% on sales) 2,10,000
2,10,000
20,000
To Sundry Business Expenses By Gross Profit b/d 36,000
To Depreciation:
Building 1,625
Furniture 250
Motor 1,800 3,675
To Net profit transferred to Capital A/c 12,325 ______
36,000 36,000

Balance Sheet as at 31st March, 2021

Liabilities Rs. Assets Rs.

Capital Account: Building 32,500
Opening Balance 48,000 Less: Depreciation (1,625) 30,875
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 Add: Net profit 12,325 Furniture 5,000
60,325 Less: Depreciation (250) 4,750
Less: Drawings (7,500) 52,825 Motor Car 9,000
Loan 15,000 Less: Depreciation (1,800) 7,200
Sundry Creditors 47,500 Stock in trade 30,000
Outstanding Expenses 5,000 Sundry Debtors 21,000
Cash at Bank 22,000
Sundry Advances
(Amount recoverable
from Cashier) 4,500
1,20,325 1,20,325

Working Notes:
(i) Total Debtors Account

Particulars Rs. Particulars Rs.

To Balance b/d 17,000 By Bank (Rs. 1,40,000 – Rs. 35,000) 1,05,000
To Sales (80% of Rs. 1,80,000) 1,44,000 By Cash A/c 35,000
By Balance c/d 21,000
1,61,000 1,61,000

(ii) Total Creditors Account

Particulars Rs. Particulars Rs.

To Bank 1,37,500 By Balance b/d 31,000
To Balance c/d 47,500 By Purchases 1,54,000
1,85,000 1,85,000

(iii) Cash Book

Particulars Cash Rs. Bank Rs. Particulars Cash Rs. Bank Rs.
To Balance b/d 2,000 8,500 By Business Expenses 9,000 6,000
To Sales 36,000 - By Drawings 7,500
To Sundry Debtors 35,000 1,05,000 By Sundry Creditors 1,37,500
To Cash (Contra) - 71,500 By Bank (Contra) 71,500
To Bank (Contra) 12,000 By Cash (Contra) 12,000
By Defalcation (Bal fig.) 4,500
By Balance c/d (Bal fig.) 22,000
85,000 1,85,000 85,000 1,85,000

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(iv) Last year’s Total Sales = Gross Profit x 100/20 = Rs. 30,000 x 100/20 = Rs. 1,50,000
(v) Current year’s Total Sales = Rs. 1,50,000+ 20% of Rs. 1,50,000= Rs. 1,80,000
(vi) Current year’s Credit Sales = Rs. 1,80,000 x 80%= Rs. 1,44,000
(vii) Cost of Goods Sold = Sales – G.P. = Rs.1,80,000 – Rs. 36,000 = Rs. 1,44,000
(viii) Purchases = Cost of Goods Sold + Closing Stock – Opening Stock
= Rs. 1,44,000 + Rs. 30,000 – Rs. 20,000 = Rs. 1,54,000

Q.7: Opening Balance Sheet of Mr. A is showing the aggregate value of assets, liabilities and
equity Rs. 8 lakh, Rs. 3 lakh and Rs. 5 lakh respectively. During accounting period, Mr. A has
the following transactions:
(1) Earned 10% dividend on 2,000 equity shares held of Rs. 100 each
(2) Paid Rs. 50,000 to creditors for settlement of Rs. 70,000
(3) Rent of the premises is outstanding Rs. 10,000
(4) Mr. A withdrew Rs. 9,000 for his personal use.
You are required to show the effect of above transactions on Balance Sheet in the form of
Assets - Liabilities = Equity after each transaction. [MTP April 21 (5 Marks)]

ANSWER:
Effects of each transaction on Balance sheet of the trader is shown below:

Assets Liabilities Equity

Transactions – =
Rs. lakh Rs. lakh Rs. lakh
Opening 8.00 – 3.00 = 5.00
(1) Dividend earned 8.20 – 3.00 = 5.20
(2) Settlement of Creditors 7.70 - 2.30 = 5.40
(3) Rent Outstanding 7.70 – 2.40 = 5.30
(4) Drawings 7.61 – 2.40 = 5.21

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 ACCOUNTING STANDARDS : 1
Disclosure of Accounting Policies

QUESTIONS AND ANSWERS

Q.1: The draft results of Surya Ltd. for the year ended 31st March, 2020, prepared on the
hitherto followed accounting policies and presented for perusal of the board of directors
showed a deficit of ₹ 10 crores. The board in consultation with the managing director,
decided to value year-end inventory at works cost (₹ 50 crores) instead of the hitherto
method of valuation of inventory at prime cost (₹ 30 crores). As chief accountant of the
company, you are asked by the managing director to draft the notes on accounts for
inclusion in the annual report for 2019-2020. [RTP May 2021]

ANSWER:
As per AS 1, any change in the accounting policies which has a material effect in the current period or
which is reasonably expected to have a material effect in later periods should be disclosed. In the case
of a change in accounting policies which has a material effect in the current period, the amount by
which any item in the financial statements is affected by such change should also be disclosed to the
extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact should be
indicated. Accordingly, the notes on accounts should properly disclose the change and its effect.
Notes on Accounts:
“During the year inventory has been valued at factory cost, against the practice of valuing it at prime
cost as was the practice till last year. This has been done to take cognizance of the more capital
intensive method of production on account of heavy capital expenditure during the year. As a result
of this change, the year-end inventory has been valued at ₹ 50 crores and the profit for the year is
increased by ₹ 20 crores.”

Q.2: HIL Ltd. was making provision for non-moving stocks based on no issues having
occurred for the last 12 months upto 31.03.2019. The company now wants to change it and
make provision based on technical evaluation during the year ending 31.03.2020. Total
value of stock on 31.3.20 is Rs. 120 lakhs. Provision required based on technical evaluation
amounts Rs. 3.00 lakhs. However, provision required based on 12 months (no issues) is Rs.
4.00 lakhs. You are required to discuss the following points in the light of Accounting
Standard (AS)-1:
(i) Does this amount to change in accounting policy?
(ii) Can the company change the method of accounting?
(iii) Explain how it will be disclosed in the annual accounts of HIL Ltd. for the year 2019-20.
[MTP March 21 (5 Marks)]

ANSWER:

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The decision of making provision for non-moving inventories on the basis of technical evaluation does
not amount to change in accounting policy. Accounting policy of a company may require that
provision for non-moving inventories should be made but the basis for making provision will not
constitute accounting policy. The method of estimating the amount of provision may be changed in
case a more prudent estimate can be made.
In the given case, considering the total value of inventory, the change in the amount of required
provision of non-moving inventory from Rs. 4 lakhs to Rs. 3 lakhs is also not material. The disclosure
can be made for such change in the following lines by way of notes to the accounts in the annual
accounts of HIL Ltd. for the year 2019-20 in the following manner:
“The company has provided for non-moving inventories on the basis of technical evaluation unlike
preceding years. Had the same method been followed as in the previous year, the profit for the year
and the value of net assets at the end of the year would have been lower by Rs. 1 lakh.”

Q.3: State whether the following statements are 'True' or 'False' in line with the provisions
of AS 1. Also give reason for your answer.
(i) Certain fundamental accounting assumptions underline the preparation and
presentation of financial statements. They are usually specifically stated because their
acceptance and use are not assumed.
(ii) If fundamental accounting assumptions are not followed in presentation and
preparation of financial statements, a specific disclosure is not required.
(iii) All significant accounting policies adopted in the preparation and presentation of
financial statements should form part of the financial statements.
(iv) Any change in an accounting policy, which has a material effect should be disclosed.
Where the amount by which any item in the financial statements is affected by such
change is not ascertainable, wholly or in part, the fact need not to be indicated.
(v) There is no single list of accounting policies which are applicable to all circumstances.
[MTP April 21 (5 Marks)]

ANSWER:
(i) False; As per AS 1 “Disclosure of Accounting Policies”, certain fundamental accounting
assumptions underlie the preparation and presentation of financial statements. They are usually
not specifically stated because their acceptance and use are assumed. Disclosure is necessary if
they are not followed.
(ii) False; As per AS 1, if the fundamental accounting assumptions, viz. Going Concern, Consistency
and Accrual are followed in financial statements, specific disclosure is not required. If a
fundamental accounting assumption is not followed, the fact should be disclosed.
(iii) True; To ensure proper understanding of financial statements, it is necessary that all significant
accounting policies adopted in the preparation and presentation of financial statements should
be disclosed. The disclosure of the significant accounting policies as such should form part of the
financial statements and they should be disclosed at one place.

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(iv) False; Any change in the accounting policies which has a material effect in the current period or
which is reasonably expected to have a material effect in later periods should be disclosed. Where
such amount is not ascertainable, wholly or in part, the fact should be indicated.
(v) True; As per AS 1, there is no single list of accounting policies which are applicable to all
circumstances. The differing circumstances in which enterprises operate in a situation of diverse
and complex economic activity make alternative accounting principles and methods of applying
those principles acceptable.

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 ACCOUNTING STANDARDS : 2
“Valuation of Inventories”

QUESTIONS AND ANSWERS

Q.1: The inventory of Rich Ltd. as on 31st March, 2020 comprises of Product – A: 200 units
and Product – B: 800 units.
Details of cost for these products are:
Product – A: Material cost, wages cost and overhead cost of each unit are ₹ 40, ₹ 30 and ₹
20 respectively, Each unit is sold at ₹ 110, selling expenses amounts to 10% of selling costs.
Product – B: Material cost and wages cost of each unit are ₹ 45 and ₹ 35 respectively and
normal selling rate is ₹ 150 each, however due to defect in the manufacturing process 800
units of Product-B were expected to be sold at ₹ 70.
You are requested to value closing inventory according to AS 2 after considering the above.
[RTP May 2021]

ANSWER:
According to AS 2 ‘Valuation of Inventories’, inventories should be valued at the lower of cost and
net realizable value.
Product – A

Material cost ₹ 40 x 200 = 8,000

Wages cost ₹ 30 x 200 = 6,000
Overhead ₹ 20 x 200 = 4,000
Total cost ₹ 18,000
Realizable value [200 x (110-11)] ₹ 19,800
Hence inventory value of Product -A ₹ 18,000

Product – B

Material cost ₹ 45 x 800 = 36,000

Wages cost ₹ 35 x 800 = 28,000
Total cost ₹ 64,000
Realizable value (800 x 70) ₹ 56,000
Hence inventory value of Product-B ₹ 56,000
Total Value of closing inventory i.e. Product A + Product B (18,000+ 56,000) ₹ 74,000

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Q.2: Mr. Jatin gives the following information relating to the items forming part of the
inventory as on 31.03.2019. His enterprise produces product P using Raw Material X.
(ii) 900 units of Raw Material X (purchases @ ₹ 100 per unit). Replacement cost of Raw
Material X as on 3103.2019 is ₹ 80 per unit
(i) 400 units of partly finished goods in the process of producing P. Cost incurred till date
is ₹ 245 per unit. These units can be finished next year by incurring additional cost of ₹
50 per unit.
(ii) 800 units of Finished goods P and total cost incurred is ₹ 295 per unit.
Expected selling price of product P is ₹280 per unit, subject to a payment of 5% brokerage
on selling price.
Determine how each item of inventory will be valued as on 31.03.2019.
Also calculate the value of total Inventory as on 31.03.2019. [Jan 2021 (5 Marks)]

ANSWER:
As per AS 2 (Revised) “Valuation of Inventories”, materials and other supplies held for use in the
production of inventories are not written down below cost if the finished products in which they will
be incorporated are expected to be sold at cost or above cost. However, when there has been a
decline in the price of materials and it is estimated that the cost of the finished products will exceed
net realizable value, the materials are written down to net realizable value. In such circumstances, the
replacement cost of the materials may be the best available measure of their net realizable value. In
the given case, selling price of product P is ₹ 266 and total cost per unit for production is ₹ 295.
Hence the valuation will be done as under:
(i) 900 units of raw material X will be written down to replacement cost as market value of finished
product is less than its cost, hence valued at ₹ 80 per unit.
(ii) 400 units of partly finished goods will be valued at 216 per unit i.e., lower of cost (₹ 245) or
Net realizable value ₹ 216 (Estimated selling price ₹ 266 per unit less additional cost of ₹ 50).
(iii) 800 units of finished product P will be valued at NRV of ₹ 266 per unit since it is lower than
cost ₹ 295.
Valuation of Total Inventory as on 31.03.2019:

Units Cost (₹) NRV/Replacement Value = units x cost or

cost NRV whichever is less (₹)
Raw material X 900 100 80 72,000
Partly finished goods 400 245 216 86,400
Finished goods P 800 295 266 2,12,800
Value of Inventory 3,71,200

Q.3: In a production process, normal waste is 5% of input. 5,000 MT of input were put in
process resulting in wastage of 300 MT. Cost per MT of input is Rs. 1,000. The entire quantity
of waste and finished output is in stock at the year end. State with reference to Accounting

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Standard, how will you value the inventories in this case? What will be treatment for normal
and abnormal waste? [MTP March 21 (5 Marks)]

ANSWER:
As per para 13 of AS 2 (Revised), abnormal amounts of wasted materials, labour and other production
costs are excluded from cost of inventories and such costs are recognized as expenses in the period in
which they are incurred.
In this case, normal waste is 250 MT and abnormal waste is 50 MT. The cost of 250 MT will be
included in determining the cost of inventories (finished goods) at the year end. The cost of abnormal
waste (50 MT x 1,052.6315 = Rs. 52,632) will be charged to the profit and loss statement.
Cost per MT (Normal Quantity of 4,750 MT) = 50,00,000 / 4,750 = Rs. 1,052.6315
Total value of inventory = 4,700 MT x Rs. 1,052.6315 = Rs. 49,47,368.

Q.4:
(i) “In determining the cost of inventories, it is appropriate to exclude certain costs and
recognize them as expenses in the period in which they are incurred”. Provide
examples of such costs as per AS 2 ‘Valuation of Inventories’.
(ii) X Limited purchased goods at the cost of Rs. 40 lakhs in October, 2020. Till March,
2021, 75% of the stocks were sold. The company wants to disclose closing stock at Rs.
10 lakhs. The expected sale value is Rs. 11 lakhs and a commission at 10% on sale is
payable to the agent. Advise, what is the correct value of closing stock to be disclosed
as at 31.3.2021. [MTP April 21 (5 Marks)]

ANSWER:
(i) As per AS 2 ‘Valuation of Inventories’, certain costs are excluded from the cost of the inventories
and are recognized as expenses in the period in which incurred. Examples of such costs are:
(a) Abnormal amount of wasted materials, labour, or other production costs;
(b) Storage costs, unless those costs are necessary in the production process prior to a further
production stage;
(c) Administrative overheads that do not contribute to bringing the inventories to their present
location and condition; and
(d) Selling and distribution costs.
(ii) As per AS 2 “Valuation of Inventories”, the inventories are to be valued at lower of cost or net
realizable value. In this case, the cost of inventory is Rs. 10 lakhs. The net realizable value is
11,00,000 × 90% = Rs. 9,90,000. So, the stock should be valued at Rs. 9,90,000.

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 ACCOUNTING STANDARDS : 10
“Property, Plant & Equipment”

QUESTIONS AND ANSWERS

Q.1: A Ltd. had following assets. Calculate depreciation for the year ended 31st March, 2020
for each asset as per AS 10 (Revised):
(i) Machinery purchased for ₹ 10 lakhs on 1st April, 2015 and residual value after useful life
of 5 years, based on 2015 prices is ₹ 10 lakhs.
(ii) Land for ₹ 50 lakhs.
(iii) A Machinery is constructed for ₹ 5,00,000 for its own use (useful life is 10 years).
Construction is completed on 1st April, 2019, but the company does not begin using the
machine until 31st March, 2020.
(iv) Machinery purchased on 1st April.2017 for ₹ 50,000 with useful life of 5 years and
residual value is NIL. On 1st April, 2019, management decided to use this asset for
further 2 years only.
[Nov 2020 (5 Marks)]

ANSWER:
Computation of amount of depreciation as per AS 10

₹
(i) Machinery purchased on 1/4/15 for ₹ 10 lakhs Nil
(having residual value of ₹ 10 lakhs)
Reason: The company considers that the residual value, based on prices
prevailing at the balance sheet date, will equal the cost. Therefore, there is no
depreciable amount and depreciation is correctly zero.
(ii) Land (50 lakhs) (considered freehold) Nil
Reason: Land has an unlimited useful life and therefore, it is not depreciated.
(iii) Machinery constructed for own use (₹ 5,00,000/10) 50,000
Reason: The entity should begin charging depreciation from the date the machine
is ready for use i.e. 1st April, 2019. The fact that the machine was not used for a
period after it was ready to be used is not relevant in considering when to begin
charging depreciation.
(iv) Machinery having revised useful life 15,000
Reason: The entity has charged depreciation using the straight-line method at ₹
10,000 per annum i.e (50,000/5 years). On 1st April, 2019 the asset's net book
value is [50,000 – (10,000 x 2)] i.e. ₹ 30,000. The remaining useful life is 2 years
as per revised estimate. The company should amend the annual provision for

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 depreciation to charge the unamortized cost over the revised remaining life of 2
years. Consequently, it should charge depreciation for the next 2 years at ₹
15,000 per annum i.e. (30,000 / 2 years).

Q.2: You are required to give the correct accounting treatment for the following in line with
provisions of AS 10:
(a) Trozen Ltd. operates a major chain of supermarkets all over India. It acquires a new
store in Pune which requires significant renovation expenditure. It is expected that the
renovations will be done in 2 months during which the store will be closed. The budget
for this period, including expenditure related to construction and remodelling costs (₹
18 lakhs), salaries of staff (₹ 2 lakhs) who will be preparing the store before its opening
and related utilities costs (₹ 1.5 lakhs), is prepared. The cost of salaries of the staff and
utilities are operating expenditures that would be incurred even after the opening of
the supermarket. What will the treatment of all these expenditures in the books of
accounts?
(b) ABC Ltd is setting up a new refinery outside the city limits. In order to facilitate the
construction of the refinery and its operations, ABC Ltd. is required to incur
expenditure on the construction/development of railway siding, road and bridge.
Though ABC Ltd. incurs the expenditure on the construction/development, it will not
have ownership rights on these items and they are also available for use to other
entities and public at large. Can ABC Ltd. capitalize expenditure incurred on these
items as property, plant and equipment (PPE)? [RTP May 2021]

ANSWER:
(b) Trozen Ltd. should capitalize the costs of construction and remodelling the supermarket, because
they are necessary to bring the store to the condition necessary for it to be capable of operating
in the manner intended. The supermarket cannot be opened without incurring the remodelling
expenditure. Therefore, this construction and remodelling expenditure of ₹ 18 lakh should be
considered as part of the cost of the asset. However, the cost of salaries of the staff ₹ 2 lakh and
utilities cost ₹ 1.5 lakh are operating expenditures that would be incurred even after the opening
of the supermarket. Therefore, these costs are not necessary to bring the store to the condition
necessary for it to be capable of operating in the manner intended by the management and
should be expensed.
(c) AS 10 states that the cost of an item of property, plant and equipment shall be recognized as an
asset if, and only if:
(a) It is probable that future economic benefits associated with the item will flow to the entity;
and
(b) The cost of the item can be measured reliably.
Further, the standard provides that the standard does not prescribe the unit of measure for
recognition, i.e., what constitutes an item of property, plant and equipment. Thus, judgement is
required in applying the recognition criteria to an entity’s specific circumstances. The cost of an
item of property, plant and equipment comprise any costs directly attributable to bringing the

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 asset to the location and condition necessary for it to be capable of operating in the manner
intended by management.
In the given case, railway siding, road and bridge are required to facilitate the construction of
the refinery and for its operations. Expenditure on these items is required to be incurred in order
to get future economic benefits from the project as a whole which can be considered as the unit
of measure for the purpose of capitalization of the said expenditure even though the company
cannot restrict the access of others for using the assets individually. It is apparent that the aforesaid
expenditure is directly attributable to bringing the asset to the location and condition necessary
for it to be capable of operating in the manner intended by management.
In view of this, even though ABC Ltd. may not be able to recognize expenditure incurred on
these assets as an individual item of property, plant and equipment in many cases (where it
cannot restrict others from using the asset), expenditure incurred may be capitalized as a part of
overall cost of the project. From this, it can be concluded that, in the given case the expenditure
incurred on these assets, i.e., railway siding, road and bridge, should be considered as the cost of
constructing the refinery and accordingly, expenditure incurred on these items should be
allocated and capitalized as part of the items of property, plant and equipment of the refinery.

Q.3: Explain how financial capital is maintained at historical cost?

Kishore started a business on 1st April, 2019 with ₹ 15,00,000 represented by 75,000 units
of ₹20 each. During the financial year ending on 31st March, 2020, he sold the entire stock
for ₹ 30 each. In order to maintain the capital intact, calculate the maximum amount, which
can be withdrawn by Kishore in the year 2019-20 if Financial Capital is maintained at
historical cost. [Jan 21 (4 Marks)]

ANSWER:
Financial capital maintenance at historical cost: Under this convention, opening and closing assets are
stated at respective historical costs to ascertain opening and closing equity. If retained profit is greater
than or equals to zero, the capital is said to be maintained at historical costs. This means the business
will have enough funds to replace its assets at historical costs. This is quite right as long as prices do
not rise.
Maximum amount withdrawn by Kishore in year 2019-20 if Financial capital is maintained at historical
cost

Particulars Financial Capital Maintenance at Historical

Cost (₹)
Closing equity (₹ 30 x 75,000 units) 22,50,000 represented by cash
Opening equity 75,000 units x ₹ 20 = 15,00,000
Permissible drawings to keep Capital intact 7,50,000 (22,50,000 – 15,00,000)

Thus ₹ 7,50,000 is the maximum amount that can be withdrawn by Kishore in year 2019-20 if
Financial capital is maintained at historical cost.

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Q.4: Neon Enterprise operates a major chain of restaurants located in different cities. The
company has acquired a new restaurant located at Chandigarh. The new-restaurant
requires significant renovation expenditure. Management expects that the renovations will
last for 3 months during which the restaurant will be closed.
Management has prepared the following budget for this period –
Salaries of the staff engaged in preparation of restaurant before its opening Rs. 7,50,000
Construction and remodelling cost of restaurant Rs. 30,00,000
Explain the treatment of these expenditures as per the provisions of AS 10 "Property, Plant
and Equipment". [MTP March 21 (5 Marks)]

ANSWER:
As per provisions of AS 10, any cost directly attributable to bring the assets to the location and
conditions necessary for it to be capable of operating in the manner indicated by the management are
called directly attributable costs and would be included in the costs of an item of PPE.
Management of Neon Enterprise should capitalize the costs of construction and remodelling the
restaurant, because they are necessary to bring the restaurant to the condition necessary for it to be
capable of operating in the manner intended by management. The restaurant cannot be opened
without incurring the construction and remodelling expenditure amounting Rs. 30,00,000 and thus
the expenditure should be considered part of the asset.
However, the cost of salaries of staff engaged in preparation of restaurant Rs. 7,50,000 before its
opening are in the nature of operating expenditure that would be incurred if the restaurant was open
and these costs are not necessary to bring the restaurant to the conditions necessary for it to be capable
of operating in the manner intended by management. Hence, Rs. 7,50,000 should be expensed.

Q.5: Explain in brief, the alternative measurement bases, for determining the value at which
an element can be recognized in the Balance Sheet or Statement of Profit and Loss.
[MTP March 21 (4 Marks)]

ANSWER:
The Framework for Recognition and Presentation of Financial statements recognizes four alternative
measurement bases for the purpose of determining the value at which an element can be recognized
in the balance sheet or statement of profit and loss. These bases are: (i) Historical Cost; (ii) Current
cost (iii) Realizable (Settlement) Value and (iv) Present Value.
A brief explanation of each measurement basis is as follows:
1. Historical Cost: Historical cost means acquisition price. According to this, assets are recorded at
an amount of cash or cash equivalent paid or the fair value of the asset at the time of acquisition.
Liabilities are generally recorded at the amount of proceeds received in exchange for the
obligation.
2. Current Cost: Current cost gives an alternative measurement basis. Assets are carried out at the
amount of cash or cash equivalent that would have to be paid if the same or an equivalent asset

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 was acquired currently. Liabilities are carried at the undiscounted amount of cash or cash
equivalents that would be required to settle the obligation currently.
3. Realisable (Settlement) Value: As per realizable value, assets are carried at the amount of cash
or cash equivalents that could currently be obtained by selling the assets in an orderly disposal.
Liabilities are carried at their settlement values; i.e. the undiscounted amount of cash or cash
equivalents paid to satisfy the liabilities in the normal course of business.
4. Present Value: Under present value convention, assets are carried at present value of future net
cash flows generated by the concerned assets in the normal course of business. Liabilities under
this convention are carried at present value of future net cash flows that are expected to be
required to settle the liability in the normal course of business.

Q.6: Mohan Ltd. has an existing freehold factory property, which it intends to knock down
and redevelop. During the redevelopment period the company will move its production
facilities to another (temporary) site.
The details of the incremental costs which will be incurred are: Setup costs of Rs. 5,00,000
to install machinery in the new location; Rent of Rs. 15,00,000; Removal costs of Rs. 3,00,000
to transport the machinery from the old location to the temporary location.
Mohan Ltd. wants to seek your guidance as whether these costs can be capitalized into the
cost of the new building. You are required to advise in line with AS 10 “Property, Plant and
Equipment”. [MTP April 21 (5 Marks)]

ANSWER:
Constructing or acquiring a new asset may result in incremental costs that would have been avoided
if the asset had not been constructed or acquired. These costs are not be included in the cost of the
asset if they are not directly attributable to bringing the asset to the location and condition necessary
for it to be capable of operating in the manner intended by management. The costs to be incurred
by the company are in the nature of costs of reducing or reorganizing the operations of the accompany.
These costs do not meet that requirement of AS 10 “Property, Plant and Equipment” and cannot,
therefore, be capitalized.

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 ACCOUNTING STANDARDS : 11
“Foreign Exchange Transactions”

QUESTIONS AND ANSWERS

Q.1:
(a) Classify the following items into Monetary and Non-monetary:
(i) Share capital; (ii) Trade Payables; (iii) Cash balance; (iv) Property, plant and
equipment
(b) Trade payables of CAT Ltd. include amount payable to JBB Ltd., ₹ 10,00,000 recorded
at the prevailing exchange rate on the date of transaction, transaction recorded at US
$1 = ₹ 80.00. The exchange rate on balance sheet date (31.03.2020) was US $1 = ₹
85.00. You are required to calculate the amount of exchange difference and also
explain the accounting treatment needed for this as per AS 11 in the books of CAT Ltd.
[RTP May 2021]

ANSWER:
(a) Share capital - Non-monetary; Trade Payables – Monetary
Cash balance – Monetary; Property, plant and equipment - Non-monetary
(b) Amount of Exchange difference and its Accounting Treatment

Foreign ₹
Currency Rate
Trade payables
Initial recognition US $ 12,500 (₹10,00,000/80) 1 US $ = ₹ 80 10,00,000
Rate on Balance sheet date 1 US $ = ₹ 85
Exchange Difference loss US $ 12,500 x ₹ (85-80) 62,500
Treatment:
Debit Profit and Loss A/c by ₹ 62,500 and Credit Trade
Payables

Thus, Exchange Difference on trade payables amounting ₹ 62,500 is required to be transferred

to Profit and Loss.

Q.2: Explain briefly the accounting treatment needed in the following cases as per AS 11 as
on 31.03.2020
(i) Debtors include amount due from Mr. S ₹ 9,00,000 recorded at the prevailing exchange
rate on the date of sales, transaction recorded at US $1 = ₹ 72.00 US $ 1=₹73.50 on
31st March,2020 US $ 1= ₹ 72.50 on 1st April,2019.

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(ii) Long term loan taken on 1st April, 2019 from a U.S. company amounting to ₹ 75,00,000.
₹5,00,000 was repaid on 31st December, 2019, recorded at US $ 1 = ₹ 70.50. interest
has been paid as and when debited by the US company.
US $1= ₹ 73.50 on 31st March,2020
US $1=1₹ 72.50 on 1st April, 2019. [Jan 21 (5 Marks)]

ANSWER:
As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, exchange differences arising on the
settlement of monetary items or on reporting an enterprise’s monetary items at rates different from
those at which they were initially recorded during the period, or reported in previous financial
statements, should be recognized as income or as expenses in the period in which they arise.
However, at the option of an entity, exchange differences arising on reporting of longterm foreign
currency monetary items at rates different from those at which they were initially recorded during the
period, or reported in previous financial statements, in so far as they relate to the acquisition of a non-
depreciable capital asset can be accumulated in a “Foreign Currency Monetary Item Translation
Difference Account” in the enterprise’s financial statements and amortized over the balance period of
such long-term asset/ liability, by recognition as income or expense in each of such periods.

Foreign Currency ₹
Rate
Debtors
Initial recognition US $12,500 (9,00,000/72) 1 US $ = ₹72 9,00,000
Rate on Balance sheet date 1 US $ = ₹ 73.50
Exchange Difference Gain US $ 12,500 X (73.50 – 72) 18,750
Treatment: Credit Profit and Loss A/c by ₹ 18,750
Long term Loan
Initial recognition US $ 1,03,448.28 1 US $ = ₹ 73.50 75,00,000
(75,00,000/72.50)
Rate on Balance sheet date 1 US $ = ₹ 73.50
Exchange Difference Loss after adjustment of exchange gain
on repayment of ₹ 5,00,000
₹ 67,987.48 [82,171.88 (US $ 96,356.08 X ₹ 73.5 less ₹
70,00,000) less profit 14,184.40
[US $ 7,092.2 (5,00,000/70.5) x ₹ 2)] NET LOSS 67,987.48*
Treatment: Credit Loan A/c and
Debit FCMITD A/c or Profit and Loss A/c by ₹ 67,987.48

Thus, Exchange Difference on long term loan amounting ₹ 67,987.48 may either be charged to Profit
and Loss A/c or to Foreign Currency Monetary Item Translation Difference Account but exchange
difference on debtors amounting ₹ 18,750 is required to be transferred to Profit and Loss A/c.

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NOTE 1: *Exchange Difference Loss (net of adjustment of exchange gain on repayment of ₹ 5,00,000)
has been calculated in the above solution. Alternative considering otherwise also possible.
NOTE 2: Date of sales transaction of ₹ 9 lakhs has not been given in the question and hence it has
been assumed that the transaction took place during the year ended 31 March 2020.

Q.3: Shan Builders Limited has borrowed a sum of US $ 10,00,000 at the beginning of
Financial Year 2019-20 for its residential project at 4 %. The interest is payable at the end of
the Financial Year. At the time of availment, exchange rate was ₹ 56 per US $ and the rate
as on 31st March, 2020 ₹ 62 per US $. If Shan Builders Limited had borrowed the loan in
India in Indian Rupee equivalent, the pricing of loan would have been 10.50%. You are
required to compute Borrowing Cost and exchange difference for the year ending 31st
March, 2020 as per applicable Accounting Standards. [RTP May 21]

ANSWER:
(i) Interest for the period 2019-20
= US $ 10 lakhs x 4% × ₹ 62 per US $ = ₹ 24.80 lakhs
(ii) Increase in the liability towards the principal amount
= US $ 10 lakhs × ₹ (62 - 56) = ₹ 60 lakhs
(iii) Interest that would have resulted if the loan was taken in Indian currency
= US $ 10 lakhs × ₹ 56 x 10.5% = ₹ 58.80 lakhs
(iv) Difference between interest on local currency borrowing and foreign currency borrowing = ₹
58.80 lakhs - ₹ 24.80 lakhs = ₹ 34 lakhs.
Therefore, out of ₹ 60 lakhs increase in the liability towards principal amount, only ₹ 34 lakhs will be
considered as the borrowing cost. Thus, total borrowing cost would be ₹ 58.80 lakhs being the
aggregate of interest of ₹ 24.80 lakhs on foreign currency borrowings plus the exchange difference to
the extent of difference between interest on local currency borrowing and interest on foreign currency
borrowing of ₹ 34 lakhs. Hence, ₹ 58.80 lakhs would be considered as the borrowing cost to be
accounted for as per AS 16 “Borrowing Costs” and the remaining ₹ 26 lakhs (60 - 34) would be
considered as the exchange difference to be accounted for as per AS 11 “The Effects of Changes in
Foreign Exchange Rates”.

Q.4: Omega Limited has borrowed a sum of US $ 10,00,000 at the beginning of Financial
Year 2019-20 for its residential project at 4 %. The interest is payable at the end of the
Financial Year. At the time of availment of loan exchange rate was Rs. 56 per US $ and the
rate as on 31st March, 2020 was Rs. 62 per US $. If Omega Limited had borrowed the loan
in India in Indian Rupee equivalent, the pricing of loan would have been 10.50%.

You are required to compute Borrowing Cost and exchange difference for the year ending
31st March, 2020 as per applicable Accounting Standards. [MTP March 21 (4 Marks)]

ANSWER:
(i) Interest for the period 2019-20

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 = US $ 10 lakhs x 4% × ₹ 62 per US $ = ₹ 24.80 lakhs
(ii) Increase in the liability towards the principal amount
= US $ 10 lakhs × ₹ (62 - 56) = ₹ 60 lakhs
(iii) Interest that would have resulted if the loan was taken in Indian currency
= US $ 10 lakhs × ₹ 56 x 10.5% = ₹ 58.80 lakhs
(iv) Difference between interest on local currency borrowing and foreign currency borrowing = ₹
58.80 lakhs - ₹ 24.80 lakhs = ₹ 34 lakhs.
Therefore, out of ₹ 60 lakhs increase in the liability towards principal amount, only ₹ 34 lakhs will be
considered as the borrowing cost. Thus, total borrowing cost would be ₹ 58.80 lakhs being the
aggregate of interest of ₹ 24.80 lakhs on foreign currency borrowings plus the exchange difference to
the extent of difference between interest on local currency borrowing and interest on foreign currency
borrowing of ₹ 34 lakhs.
Hence, ₹ 58.80 lakhs would be considered as the borrowing cost to be accounted for as per AS 16
and the remaining ₹ 26 lakhs (60 - 34) would be considered as the exchange difference to be
accounted for as per AS 11.

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 ACCOUNTING STANDARDS : 12
“Accounting for Government Grants”

QUESTIONS AND ANSWERS

Q.1: On 1st April, 2016, Mac Ltd. received a Government Grant of ₹ 60 lakhs for acquisition
of machinery costing ₹ 300 lakhs. The grant was credited to the cost of the asset. The
estimated useful life of the machinery is 10 years. The machinery is depreciated @ 10% on
WDV basis. The company had to refund the grant in June 2019 due to non-compliance of
certain conditions.
How the refund of the grant is dealt with in the books of Mac Ltd. assuming that the company
did not charge any depreciation for the year 2019-20.
Pass necessary Journal Entries for the year 2019-20. [Nov 2020 (5 Marks)]

ANSWER:

(₹ in lakhs)
1st April, 2016 Acquisition cost of machinery 300.00
Less: Government Grant 60.00
240.00
31st March, 2017 Less: Depreciation @ 10% (24.00)
1st April, 2017 Book value 216.00
31st March, 2018 Less: Depreciation @ 10% (21.60)
1st April, 2018 Book value 194.40
31st March, 2019 Less: Depreciation @ 10% (19.44)
1st April, 2019 Book value 174.96
Less: Depreciation @ 10% for 2 months (2.916)
1st June, 2019 Book value 172.044
June 2019 Add: Refund of grant* 60.00
Revised book value 232.044

Depreciation @10% on the revised book value amounting to ₹ 232.044 lakhs is to be provided
prospectively over the residual useful life of the machinery.
*considered refund of grant at beginning of June month and depreciation for two months already
charged. Alternative answer considering otherwise also possible.
Journal Entries

Machinery Account Dr. 60

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 To Bank Account 60
(Being government grant on asset partly refunded which
increased the cost of fixed asset)
Depreciation Account Dr. 19.337
To Machinery Account 19,337
(Being depreciation charged on revised value of fixed
asset prospectively for 10 months)
Profit & Loss Account Dr. 22.253
To Depreciation Account 22.253
(Being depreciation transferred to Profit and Loss
Account amounting to ₹(2.916 + 19.337 = 22.253)

Q.2: Darshan Ltd. purchased a Machinery on 1st April, 2016 for ₹ 130 lakhs (Useful life is
4Years). Government grant received is ₹ 40 lakhs for the purchase of above Machinery.
Salvage value at the end of useful life is estimated at ₹ 60 lakhs.
Darshan Ltd. decides to treat the grant as deferred income.
Your are required to calculate the amount of depreciation and grant to be recognized in
profit & loss account for the year ending 31st March, 2017,31st March, 2018, 31st March,
2019 & 31st March, 2020.
Darshan Ltd. follows straight line method for charging depreciation. [Jan 21 (5 Marks)]

ANSWER:
As per 12 “Accounting for government grants”, grants related to depreciable assets, if treated as
deferred income are recognized in the profit and loss statement on a systematic and rational basis over
the useful life of the asset.
Amount of depreciation and grant to be recognized in the profit and loss account each year
Depreciation per year:

₹ in lakhs
Cost of the Asset 130
Less: Salvage value (60)
70
Depreciation per year (70 lakhs/4) 17.50

₹ 17.50 Lakhs depreciation will be recognized for the year ending 31st March, 2017, 31st March, 2018,
31st March, 2019 and 31st March, 2020.
Amount of grant recognized in Profit and Loss account each year:
40 lakhs /4 years = ₹ 10 Lakhs for the year ending 31st March, 2017, 31st March, 2018, 31st March,
2019 and 31st March, 2020.

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Q.2:
(i) Hygiene Ltd. had received a grant of ₹ 50 lakh in 2012 from a State Government
towards installation of pollution control machinery on fulfilment of certain conditions.
The company, however, failed to comply with the said conditions and consequently
was required to refund the said amount in 2020.
The company debited the said amount to its machinery account in 2020 on payment of
the same. It also reworked the depreciation for the said machinery from the date of its
purchase and passed necessary adjusting entries in the year 2020 to incorporate the
retrospective impact of the same. State whether the treatment done by the company
is correct or not.
(ii) ABC Ltd. received two acres of land received for set up of plant. It also received ₹2
lakhs received for purchase of machinery of ₹ 10 lakhs. Useful life of machinery is 5
years. Depreciation on this machinery is to be charged on straight-line basis. How
should ABC Ltd. recognize these government grants in its books of accounts?
[RTP May 2021]

ANSWER:
(i) As per the facts of the case, Hygiene Ltd. had received a grant of ₹ 50 lakh in 2012 from a State
Government towards installation of pollution control machinery on fulfilment of certain
conditions. However, the amount of grant has to be refunded since it failed to comply with the
prescribed conditions. In such circumstances, AS 12, “Accounting for Government Grants”,
requires that the amount refundable in respect of a government grant related to a specific fixed
asset is recorded by increasing the book value of the asset or by reducing the capital reserve or
the deferred income balance, as appropriate, by the amount refundable. The Standard further
makes it clear that in the first alternative, i.e., where the book value of the asset is increased,
depreciation on the revised book value should be provided prospectively over the residual useful
life of the asset. Accordingly, the accounting treatment given by Hygiene Ltd. of increasing the
value of the plant and machinery is quite proper. However, the accounting treatment in respect
of depreciation given by the company of adjustment of depreciation with retrospective effect is
improper and constitutes violation of AS 12.
(ii) ABC Ltd. should recognize the grants in the following manner:
 As per AS 12, government grants may take the form of non-monetary assets, such as land
or other resources, given at concessional rates. In these circumstances, it is usual to account
for such assets at their acquisition cost. Non-monetary assets given free of cost are recorded
at a nominal value. Accordingly, land should be recognised at nominal value in the balance
sheet.
 The standard provides option to treat the grant either as a deduction from the gross value
of the asset or to treat it as deferred income as per provisions of the standard. Under first
method, the grant is shown as a deduction from the gross value of the asset concerned in
arriving at its book value. The grant is thus recognised in the profit and loss statement over
the useful life of a depreciable asset by way of a reduced depreciation charge. Accordingly,
the grant of ₹ 2 lakhs is deducted from the cost of the machinery. Machinery will be

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 recognised in the books at ₹ 10 lakhs – ₹ 2 lakhs = ₹ 8 lakhs and depreciation will be
charged on it as follows:
₹ 8 lakhs/ 5 years = ₹ 1.60 lakhs per year.
Under the second method, grants related to depreciable assets are treated as deferred
income which is recognised in the profit and loss statement on a systematic and rational
basis over the useful life of the asset. Such allocation to income is usually made over the
periods and in the proportions in which depreciation on related assets is charged. ₹ 2 lakhs
should be recognised as deferred income and will be transferred to profit and loss over the
useful life of the asset. In this case, ₹ 40,000 [₹ 2 lakhs / 5 years] should be credited to profit
and loss each year over the period of 5 years.

Q.3: Viva Ltd. received a specific grant of Rs. 30 lakhs for acquiring the plant of Rs. 150
lakhs during 2016-17 having useful life of 10 years. The grant received was credited to
deferred income in the balance sheet and was not deducted from the cost of plant. During
2019-20, due to non-compliance of conditions laid down for the grant, the company had to
refund the whole grant to the Government. Balance in the deferred income on that date was
Rs. 21 lakhs and written down value of plant was Rs. 105 lakhs. What should be the
treatment of the refund of the grant and the effect on cost of the fixed asset and the amount
of depreciation to be charged during the year 2019-20 in profit and loss account?
[MTP March 21 (5 Marks)]

ANSWER:
As per AS-12, ‘Accounting for Government Grants’, “the amount refundable in respect of a grant
related to specific fixed asset should be recorded by reducing the deferred income balance. To the
extent the amount refundable exceeds any such deferred credit, the amount should be charged to
profit and loss statement.
In this case the grant refunded is Rs. 30 lakhs and balance in deferred income is Rs. 21 lakhs, Rs. 9
lakhs shall be charged to the profit and loss account for the year 2019-20. There will be no effect on
the cost of the fixed asset and depreciation charged will be on the same basis as charged in the earlier
years.

Q.4: Ram Ltd. purchased machinery for Rs. 80 lakhs (useful life 4 years and residual value
Rs. 8 lakhs). Government grant received was Rs. 32 lakhs. The grant had to be refunded at
the beginning of third year. Show the Journal Entry to be passed at the time of refund of
grant and the value of the fixed assets in the third year and the amount of depreciation for
remaining two years, if the grant had been credited to Deferred Grant A/c.
[MTP April 21 (5 Marks)]

ANSWER:
As per AS 12 ‘Accounting for Government Grants,’ income from Deferred Grant Account is allocated
to Profit and Loss account usually over the periods and in the proportions in which depreciation on
related assets is charged. Accordingly, in the first two years (Rs. 32 lakhs /4 years) = Rs. 8 lakhs x 2

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years= Rs. 16 lakhs will be credited to Profit and Loss Account and Rs. 16 lakhs will be the balance of
Deferred Grant Account after two years. Therefore, on refund of grant, following entry will be passed:

(Rs.) (Rs.)
Deferred Grant A/c Dr. 16 lakh
Profit & Loss A/c Dr. 16 lakh
To Bank A/c 32 lakhs
(Being Government grant refunded)

a. Value of Fixed Assets after two years but before refund of grant
Fixed assets initially recorded in the books = Rs. 80 lakhs
Depreciation for each year = (Rs. 80 lakhs – Rs.8 lakhs)/4 years = Rs. 18 lakhs per year
Book value of fixed assets after two years = Rs. 80 lakhs – (Rs. 18 lakhs x 2 years) = Rs. 44 lakhs
b. Value of Fixed Assets after refund of grant
On refund of grant the balance of deferred grant account will become nil. The fixed assets will
continue to be shown in the books at Rs. 44 lakhs.
c. Amount of depreciation for remaining two years
Depreciation will continue to be charged at Rs. 18 lakhs per annum for the remaining two years.

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 ACCOUNTING STANDARDS : 16
“Accounting for Borrowing Costs”

QUESTIONS AND ANSWERS

Q.1: On 15th April, 2019 RBM Ltd. obtained a Term Loan from the Bank for ₹ 320 lakhs to be
utilized as under:

₹ (in lakhs)
Construction for factory shed 240
Purchase of Machinery 30
Working capital 24
Purchase of Vehicles 12
Advance for tools/cranes etc. 8
Purchase of technical know how 6

In March, 2020 construction of shed was completed and machinery was installed. Total
interest charged by the bank for the year ending 31st March, 2020 was ₹ 40 lakhs.
In the context of provisions of AS 16 'Borrowing Costs', show the treatment of interest and
also explain the nature of Assets. [Nov 2020 (5 Marks)]

ANSWER:
As per AS 16 A qualifying asset is an asset that necessarily takes a substantial period of time to get ready
for its intended use or sale. Other investments and those inventories that are routinely manufactured
or otherwise produced in large quantities on a repetitive basis over a short period of time, are not
qualifying assets. Assets that are ready for their intended use or sale when acquired also are not
qualifying assets. Borrowing costs that are directly attributable to the acquisition, construction or
production of a qualifying asset should be capitalized as part of the cost of that asset. Other borrowing
costs should be recognized as an expense in the period in which they are incurred.
Construction of factory shed amounting ₹ 240 lakhs is qualifying asset in the given case. The interest
for this amount during the year will be added to the cost of factory shed. All others (purchase of
machinery, vehicles and technical know how, working capital, advance for tools/cranes) are non-
qualifying assets and related borrowing cost will be charged to Profit and Loss statement.
Qualifying Asset as per AS 16 (construction of a shed) = ₹ 240 lakhs
Borrowing cost to be capitalized = ₹ 40 lakhs x 240/320 = ₹ 30 lakhs
Interest to be debited to Profit or Loss account: ₹ (40 – 30) = ₹ 10 lakhs.
Note: Assumed that construction of factory shed completed on 31st March, 2020.

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Q.2: When capitalization of borrowing cost should cease as per Accounting Standard 16?
Explain in brief. [RTP May 2021]

ANSWER:
Capitalization of borrowing costs should cease when substantially all the activities necessary to prepare
the qualifying asset for its intended use or sale are complete. An asset is normally ready for its intended
use or sale when its physical construction or production is complete even though routine
administrative work might still continue. If minor modifications such as the decoration of a property
to the user’s specification, are all that are outstanding, this indicates that substantially all the activities
are complete. When the construction of a qualifying asset is completed in parts and a completed part
is capable of being used while construction continues for the other parts, capitalization of borrowing
costs in relation to a part should cease when substantially all the activities necessary to prepare that
part for its intended use or sale are complete.

Q.3: A company incorporated in June 2020, has setup a factory within a period of 8 months
with borrowed funds. The construction period of the assets had reduced drastically due to
usage of technical innovations by the company and the company is able to justify the reasons
for the same. Whether interest on borrowings for the period prior to the date of setting up
the factory should be capitalized although it has taken less than 12 months for the assets to
get ready for use. You are required to comment on the necessary treatment with reference
to AS 16. [MTP April 21 (5 Marks)]

ANSWER:
As per AS 16 ‘Borrowing Costs’, a qualifying asset is an asset that necessarily takes a substantial period
of time to get ready for its intended use or sale. Further, the standard states that what constitutes a
substantial period of time primarily depends on the facts and circumstances of each case. However,
ordinarily, a period of twelve months is considered as substantial period of time unless a shorter or
longer period can be justified on the basis of facts and circumstances of the case. In estimating the
period, time which an asset takes, technologically and commercially, to get it ready for its intended
use or sale is considered.
It may be implied that there is a rebuttable presumption that a 12 months period constitutes substantial
period of time.
Under present circumstances where construction period has reduced drastically due to technical
innovation, the 12 months period should at best be looked at as a benchmark and not as a conclusive
yardstick. It may so happen that an asset under normal circumstances may take more than 12 months
to complete. However, an enterprise that completes the asset in 8 months should not be penalized
for its efficiency by denying it interest capitalization and vice versa.
The substantial period criteria ensures that enterprises do not spend a lot of time and effort capturing
immaterial interest cost for purposes of capitalization.
Therefore, if the factory is constructed in 8 months then it shall be considered as a qualifying asset.
The interest on borrowings for the same shall be capitalised although it has taken less than 12 months
for the asset to get ready to use.

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