MEPL C L A SSES

C M A INTERMEDIATE
PAPER 6 – FIN AN C IAL A C C O UN TIN G
Website-www.meplclasses.com
Mail Id:- [email protected]
Main Centre- 59 Jatindra Mohan Avenue Shobhabazar Kolkata-700005
(Time allowed: 3 hrs) (100 Marks)
Section A

Question 1
Multiple Choice Questions 10*1=10 M arks
a. Cost of registration and documentation of a newly formed company
(a) Revenue Expenditure
(b) Capital Expenditure
(c) Deferred Revenue Expenditure
(d) None of the above

b. Mr. T issued cheques worth Rs.25000 in March 2005 out of which eheques worth Rs.10000 only were presented for
payment by 31st March2005 balance as per pass book was Rs.45000. What would be balance as per Cash book?
(a) 30000
(b) 20000
(c) 25000
(d) 15000

c. Which one of the following statements is correct?

(a) Depreciation is not the process of valuation of asset - it is a process of allocation of cost of asset to the period of its
economic fife
(b) If the cost of machinery is more than the book value, then depreciation need not be provided
(c) When the plant and machinery are maintained in good condition, through repairs and renewals, depreciation need
not be provided

d. In case, Going Concern Assumption does not hold good for a concern, then during preparation of Financial
Statements, assets must be shown in the books at -
(a) Historical Cost
(b) Net realizable Value
(c) Cost Less Depreciation
(d) Lower of Cost Price or Market Value

e. Consider the following statements about balance sheet of a company -

1. It is always prepared from the point of view of the firm, company or business, and not from that of its owners,
creditors, directors or employees.
2. The financial relationship of the business of its owners is shown in the amount of capital, reserves and undistributed
profit.
3. It always relates to a particular period of time.
Which of the statements given above is / are correct?
(a) 1, 2 and 3 (b) 1 and 2
(c) 1 only (d) 2 only
 f. Unearned income is shown is
(a) An asset in the Balance Sheet (b) A liability in the Balance Sheet
(c) By adjusting it in the P & L a/c (d) Both (b) and (c) above

g. If del-credere commission is allowed by consignor to consignee the bad debt

treatment will be (in the books of Consignor):
(a) Will not be recorded in consignor’s books
(b) Bad Debt will be debited in Consignor’s A/c
(c) Bad Debt will be charged to General P/L A/c
(d) Bad Debt will be recoverable along with credit sales

h. While valuing closing stock lying with consignee which of these expenses is taken into consideration .
(a) Recurring expenses
(b) Non-recurring expenses
(c) Both Recurring and Non-recurring expenses
(d) None of these expenses

i. If X advances money to Y in the course of Joint venture then X debit such money to which of these accounts
(a) Joint venture A/c
(b) Expenses A/c
(c) Personal account of Y
(d) Memorandum Joint Venture A/c

j. X draws a bill on Y for Rs.50,000 for 3 months on 1.1.05. The bill is discounted with banker at a discount of Rs.1000 . At
maturity the bill return dishonoured. In the books of X, for dishonored , the bank account will be credited by:
(a) 49,900 (b) 50,000
(c) 40,100 (d) 39,800

Answer
a. C
b. A
c. A
d. B
e. B
f. A
g. A
h. B
i. C
j. B

TRUE O R FA LSE (10 x 1 = 10)

I. Economic life of an enterprise is artificially split into periodic intervals in accordance with Going Concern
Assumption
II. Profit/loss = Closing Capital + Additional Capital - Drawing - Opening Capital.
III. The least liquid asset is shown first and the least urgent payment to be made it shown last in order of permanence.
IV. A non-profit organization never undertakes trading activities.
V. The amount of goodwill brought in by the new partner is shared by partners is their old profit sharing ratio.
VI. A joint venture business has an indefinite life.
 VII. Depreciation generates funds.
VIII. Closing stock appearing in the trial balance is shown on the credit side of profit & loss account.
IX. In consignment the goods are dispatched on the basis that the goods will be sold on behalf or at the expenses of and at
the risk of consignor.
X. If a fixed amount is withdrawn on the first day of every month, the interest on the total amount of drawings will be
calculated for a period of 6.5 months.
Solution.
I. False (periodicity Concept)
II. False (Profit/loss = Closing Capital - Additional Capital + Drawing - Opening Capital)
III. False
IV. False
V. False
VI. False
VII. False
VIII. False
IX. True
X. True

Fill in the Blanks 5*1= 5 M arks

a. The Accounting convention of is the common rule of acting prudently ,carefully or cautiously.
b. Nominal A/c credit balance indicates
c. Branch account is prepared to ascertain of the branch
d. In case of a Hire-purchase sale the act of revival of custody of the asset is called .
e. If the policy value is the value of stock lost, it is called over insurance.

Solution
a. Conservatism
b. Income
c. Profit and Loss
d. Repossession
e. More than
 Section B
(Note: Attempt any 5 questions from the remaining 7 Questions)
Question 2 (15 x 1 = 15)
A fire occurred in the premises of M/s Kirti & Co. on 15th December, 2018. The working remained disturbed upto 15th
March, 2019 as a result of which sales got adversely affected. The firm had taken out an insurance policy with an
average clause against consequential losses for Rs. 2,50,000.
Following details are available from the quarterly sales tax return filed/GST return filed
Sales 2015-16 2016-17 2017-18 2018-19
(Rs.) (Rs.) (Rs.) (Rs.)

From 1st April to 30th June 3,80,000 3,15,000 4,11,900 3,24,000

From 1st July to 30th September 1,86,000 3,92,000 3,86,000 4,42,000

From 1st October to 31st December 3,86,000 4,00,000 4,62,000 3,50,000

From 1st January to 31st March 2,88,000 3,19,000 3,80,000 2,96,000

Total 12,40,000 14,26,000 16,39,900 14,12,000

A period of 3 months (i.e. from 16-12-2018 to 15-3-2019) has been agreed upon as indemnity period.

Sales from 16-12-2017 to 31-12-2017 68,000

Sales from 16-12-2018 to 31-12-2018 Nil
Sales from 16-03-2018 to 31-03-2018 1,20,000

Sales from 16-03-2019 to 31-03-2019 40,000

Net profit was Rs. 2,50,000 and standing charges (all insured) amounted to Rs. 77,980 for the year ending 31st March, 2018.
You are required to calculate the loss of profit claim amount.
Solution
Gross profit ratio Rs.
Net profit for the year 2017-18 2,50,000
Add: Insured standing charges 77,980 3,27,980
Ratio of Gross profit = 3,27,980 = 20%

16,39,900
Calculation of Short sales
Indemnity period: 16.12.2018 to 15.3.19
Standard sales to be calculated on basis of corresponding period of year 2017-18

Rs.
Sales for period 16.12.2017 to 31.12.17 68,00
0
Sales for period 1.1.2018 to 15.3.2018 (Note 1) 2,60,000
Sales for period 16.12.2017 to 15.3.2018 3,28,000
Add: upward trend in sales (15%) (Note 2) 49,200
Standard Sales (adjusted) 3,77,200
Actual sales of disorganized period
Calculation of sales from 16.12.18 to 15.3.19
Sales for period 16.12.18 to 31.12.18 Nil
Sales for 1.1.19 to 15.3.19 (Rs. 2,96,000 – Rs. 40,000) 2,56,000

Actual Sales 2,56,000

Short Sales (Rs. 3,77,200 - Rs. 2,56,000) 1,21,200

Loss of gross profit

24,240
Short sales x gross profit ratio = 1,21,200 x 20%=

Application of average clause

Net claim = Gross claim x policy value

gross profit on annual turnover

= 24,240 * 2,50,000 / 3,26,240 (WN 3)
Amount of loss of profit claim = 18,575

WorkingNotes:
1. Sales for period 1.1.18 to 15.3.18 Rs.
Sales for 1 Jan. to 31 March (2017-18) (given) 3,80,000
Less: Sales for 16.3.18 to 31.3.18 (given) (1,20,000)
Sales for period 1.1.18 to 15.3.18 2,60,000

2. Calculation of upward trends in sales

Total sales in year 2015-16 = Rs 12,40,000
Increase in sales in year 2016-17 as compared to 2015-16 = Rs 1,86,000
% increase ={1,86,000 (14,26,000 – 12,40,000)} / 12,40,000 = 15%
Increase in sales in year 2017-18 as compared to year 2016-17
% increase ={2,13,900 (16,39,900 – 14,26,000)} / 14,26,000 = 15 %
Thus annual percentage increase trend is of 15%

3. Gross profit on Annual Turnover

Sales from 16.12.17 to 30.12.17 (adjusted) (68,000 x 1.15) 78,200

1.1.18 to 31.3.18 (adjusted) (3,80,000 x1.15) 4,37,000

1.4.18 to 30.6.18 3,24,000
1.7.18 to 30.9.18 4,42,000
1.10.18 to 15.12.18 (3,50,000 – Nil) 3,50,000
Sales for 12 months just before date of fire* 16,31,200
Gross profit on adjusted annual sales @ 20% 3,26,240
Note*: Alternatively, the annual adjusted turnover may be computed as Rs.17,98,000 (Rs. 15,64,000 X 1.15) considering
the annual % increase trend for the entire period of last 12 months preceding to the date of fire. In that case, the gross
profit on adjusted annual sales @20% will be computed as Rs. 3,59,720 and net claim will be computed accordingly.
Question 3 (15 M arks)
M/s Complex has 3 departments, A, B, C. The following information is provided:

A B C

Opening Stock 3,000 4,000 6,000

Consumption of direct materials 8,000 12,000 □
Wages 5,000 10,000 □
Closing Stock 4,000 14,000 8,000
Sales □ □ 34,000
Stockofeachdepartmentisvaluedatcosttothedepartmentconcerned, Stocksof Adepartment are transferred to B at a margin of 50% above
departmental cost, Stocks of B department are transferred to C department at a margin of 10% above departmental cost. Other expenses were:

Salaries 2,000
Printing & Stationery 1,000
Rent 6,000
Interestpaid 4,000
Depreciation 3,000
Allocate expenses in the ratio of departmental gross profit. Opening figures of reserves for unrealised profits on departmental stock were:
Department B 1,000
Department C 2,000
PrepareDepartmentalTradingandProfit&LossAccountsfortheyearendingMarch31,2013 consideringthatclosingstockof
eachdepartmentconsistsofonlyfinishedgoods.
 Solution:
M/sC omplex Departmental Trading and Profit& LossAccountforyearended 31-3-2013

A B C Total A B C Total

To Opening Stock 3,000 4,000 6,000 13,00 By 18,000 33,000 - 51,000

0
Intern
To Direct material al - - 34,000 34,000
transf
consumption 8,000 12,000 - 20,000 er 4,000 14,000 8,000 26,000
To Wages 5,000 10,000 - 15,000 By Sales
To Internal transfer - 18,000 33,000 51,000
By Closingstock

To Gross Profit c/d 6,000 3,000 3,000 12,000

22,000 47,000 42,000 1,11,000 22,000 47,000 42,000 1,11,000
To Salaries 1,000 500 500 2,000 By Gross profit
To Printing & b/d 6,000 3,000 3,000 12,000
Stationery 500 250 250 1,000 By Net Lossc/d 2,000 1,000 1,000 4,000
To Rent 3,000 1,500 1,500 6,000
To Depreciation 1,500 750 750 3,000
To Interest paid 2,000 1,000 1,000 4,000
8,000 4,000 4,000 16,000 8,000 4,000 4,000 16,000
To Net Loss b/d To 4,000 By Reserve for 3,000
Reserve for unrealised
unrealised profit(on opening
profit on stock)
closing
stock By Balance
3,918
transferred
to P &L A/c

4,918
Working Notes : 7,918 7,918
Calculation of Unrealised Profit on closing stock : Dept B Closing Stock = 14,000

Cost Element transferred from Dept A= 14,000 x 18,000/40,000 =6,300 Profit added by Deptt A =

6,300 x 50/150 = 2,100

Clarification : Cost increased during the current period by Deptt B are Direct Material `12,000 wages `10,000 & transfer received
from Dept A `18,000 ;Total 40,000
So cost element of Dept A is `18,000 in closing stock is 18,000/40,000 Dept C Closing Stock is `8,000

Profit added by Dept B =8,000 x 10/110 =727

Cost element of Dept A = (8000 – 727) x 18,000/40,000 = 3273 Profit added by Dept A =

3273 x 50 /150 =1091

Total Unrealised profit = 2,100 + 1,818 = 3,918

Q uestion 4 (7+8=15 M arks)
Jai Ltd purchased a machine on hire purchase basis from K M Ltd. on the following terms:
(a) Cash price Rs. 1,20,000.
(b) Down payment at the time of signing the agreement on 1-1-2016, Rs. 32,433.
(c) 5 annual instalments of Rs.23,100, the first to commence at the end of twelve months from the date of down payment.
(d) Rate of interest is 10% p.a.

You are required to calculate the total interest and interest included in each instalment.
Solution:
Calculation of Interest
Total Interest in each Cash price in each
(Rs.) instalment instalment (2)
(1)
Cash Price 1,20,000
Nil Rs. 32,433
Less: Down Payment (32,433)
Balance due after down payment 87,567
Interest/Cash Price of 1st - Rs. 87,567x10/100 Rs. (23100 –8757)
instalment = 8,757 =Rs. 14,343

(14,343)
Less: Cash price of 1st instalment
Balance due after 1st instalment 73,224
Interest/cash price of 2nd - Rs. 73,224x 10/100 Rs. (23100 –7322)

instalment = Rs. 7,322 =Rs. 15,778

Less: Cash price of 2nd instalment (15,778)
Balance due after 2nd instalment 57,446
- Rs. 57,446 x10/100 Rs. (23100-5745)
Interest/Cash price of 3rd instalment =Rs. 5745 =Rs. 17,355

Less: Cash price of 3rd instalment (17,355)

Balance due after 3rd instalment 40,091
- Rs.40,091x 10/100 Rs. (23100 - 4009)
Interest/Cash price of 4th instalment
= Rs. 4,009 = Rs. 19,091

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

Balance due after 4th instalment 21,000
Interest/Cash price of 5th instalment - Rs.21,000 x10/100 Rs.(23100 –2,100)
= Rs. 2,100 = 21,000

Less: Cash price of 5th instalment Total

(21,000)

Nil Rs. 27,933 Rs.1,20,000

Total interest can also be calculated as follow:
(Down payment + instalments) – Cash Price = Rs.[32,433 +(23,100 x 5)]- Rs.1,20,000= Rs. 27,933
 b. There is transfer / sale among the three departments as below:
Department X sells goods to Department Y at a profit of 25% on cost and to Department Z at 20% profit on cost. Department Y sells
goods to X and Z at a profit of 15% and 20% on sales respectively. Department Z charges 20% and 25% profit on cost to
Departments X and Y respectively. Department Managers are entitled to 10% commission on net profit subject to urealised
profit on departmental sales being eliminated. Departmental profits after charging Managers' commission, but before
adjustment of unrealised profit are as under:
Rs
Department X 1,80,000
Department Y 1,35,000
Department Z 90,000

Stocks lying at different Departments at the end of the year are as under:
Dept. X Dept. Y Dept. Z
Transfer from Department X - 75,000 57,000
Transfer from Department Y 70,000 - 60,000
Transfer from Department Z 30,000 25,000 -
Find out the correct departmental profits after charging Managers' commission.
Solution:
Calculation of Correct Profit

Departmen Departmen Departmen

t X t Y t Z

Profit after charging managers’ 1,80,000 1,35,000 90,000

commission
Add back: Managers’ commission (1/9) 20,000 15,000 10,000
2,00,000 1,50,000 1,00,000
Less: Unrealized profit on stock (W.N.) (24,500) (22,500) (10,000)
Profit before Manager’s commission 1,75,500 1,27,500 90,000
Less: Commission for Department
Manager @ 10% (17,550) (12,750) (9,000)
Departmental Profits after manager’s
commission 1,57,950 1,14,750 81,000
Working Note:
Stock lying with
Dept. X Dept. Y Dept. Z Total

Unrealized Profit of:

Department X 1/5×75,000 20/120×57,000 24,500
= 15,000 = 9,500
Department Y 0.15×70,000 0.20×60,000 22,500
= 10,500 = 12,000
Department Z 20/120×30,000 25/125×25,000 10,000
= 5,000 = 5,000
 Q uestion 5 (15 M arks)
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 1,66,400
Sales ---
Goods sent from H . O 32,000
Salaries 3,200
Carriage inward 400
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 $.
Solution:
In the books of Moon Star
Trial Balance (in Rupees) of Virginia (USA) Branch as on 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 1,66,400 45 43,20,000 74,88,000
Sales 45
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

Trading and Profit & 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 By Gross profit b/d
1,62,000 15,92,200
To Rent, rates and taxes 36,000
To Insurance 18,000
To Trade expenses 18,000
To Depreciation on office 2,40,000
equipment
To Depreciation on furniture 16,000
and fixtures
To Net Profit c/d 11,02,200
15,92,200 15,92,200
 Question 6 (15 Marks)
Prepare Income and Expenditure Account and Balance Sheet of Bhagat Singh College Sports Club, Delhi from the following
information:
RECEIPTS A N D PAYMENTS A C C O U N T OF BHAGAT S I N G H COLLEGE SPORTS CLUB, DELHI
Dr. for the year ended on 31st March, 2018 Cr.
Receipts Rs. ’000 Payments Rs. ’000
To Balance b/d: Cash 500 By Rent 9,750
Bank 4,000 By Miscellaneous Expenses 28,800
Stamps 300 By Postage Expenses 1,200
To Subscription By Furniture 8,000
2016-2017 4,650 By Creditors for Sports Material 12,200
2017-2018 67,200 By Cost of prizes (to be awarded) 4,150
2018-2019 2,600 74,450 By Cash purchase of Sports Materials 2,000
To Entrance Fees 8,000 By Match Expenses 7,030
To General Donations 4,050 By Balance c/d:
To Donations for Prize Fund 2,800 Cash 545
To Sale of old Sports Materials 5,200 Bank 26,000
To Interest on Prize Fund Investments 300 Stamps 150 26,695
To Miscellaneous Receipts 225
99,825 99,825
Information:
Particulars 1.4,2017 31.3,2018
Rs. Rs.
Sports Materials 4,000 5,000
Furniture 40,000 ?
5% Prize Fund Investments (Face Value Rs. 12,000) 11,700 ?
Creditors for Sports Materials 1,400 2,950
Subscription in arrears 4,750 ?
Subscription in advance 1,400 ?
Prize Fund 12,000 ?
Rent paid in advance — 750
Outstanding Rent 750 —
Outstanding Miscellaneous Expenses 2,280 4,020
Miscellaneous Expenses paid in advance 750 850
Book Value of Sports Materials sold was Rs. 4,000. Depreciation on furniture is to be provided @10%.
Half of entrance fees to be capitalised. There are 720 members, each paying an annual subscription of Rs. 100.
SOLUTION
BHAGAT S I N G H COLLEGE SPORTS CLUB, DELHI I N C O M E A N D EXPENDITURE A C C O U N T
Dr. for the year ending on 31st March, 2018 Cr.
Expenditure Rs. 000 Income Rs. 000
To Rent 8,250 By Subscriptions 72,000
To Miscellaneous Expenses 30,440 By General Donations 4,050
To Postage Expenses: By Entrance Fees 4,000
Cash 1,050 By Profit on sale of old sports materials 1,200
Stamps 150 1,200 By Miscellaneous Receipts 225
To Sports Materials consumed 10,750
To Depreciation on Furniture 4,800
To Match Expenses 7,030
To Surplus trans. to Capital Fund 19,005
81,475 81,475
BHAGAT S I N G H COLLEGE SPORTS CLUB, DELHI BALANCE SHEET A S AT 31 ST MARC H, 2018
Liabilities ? ‘000 Assets Rs. ‘000
Capital Fund: Fixed Assets:
Opening Balance 48,170 Furniture 43,200
Add: Surplus 19,005 Investments:
Add: Entrance Fees 4,000 71,175 5% Prize Fund Investments 11,700
Prize Fund: Current Assets:
Opening Balance 12,000 Sports Materials 5,000
Add: Donations 2,800 Subscription in arrears
Add: Income @ 5% on Rs. 12,000 for 2016-2017 Rs. 100
600
15,400 for 2017-2018 Rs. 3,500
3,400
Less: Expenses 4,150 11,250 Prepaid Miscellaneous Expenses 850
Current Liabilities: Cash Balance 545
Creditors for sports materiels 2,950 Bank Balance 26,000
Subscription in advance 2,600 Stamps 150
Outstanding Miscellaneous Prepaid Rent 750
Expenses 4,020 Accrued Interest on Prize
Fund Investments ( Rs. 600 - Rs. 300) 300
91,995 91,995
Working Notes:
(I) BA L A N C E SHEET A S AT 31 ST M A RCH, 2018
Liabilities Rs. Assets Rs.
Capital Fund (Balancing figure) 48,170 Fixed Assets:
Prize Fund 12,000 Furniture 40,000
Current Liabilities: Investments: 11,700
Creditors for Sports Materials 1,400 5% Prize Funds Investments
Subscription in advance 1,400 Current Assets:
Outstanding Miscellaneous Exp. 2,280 Subscription in arrears 4,750
Rent Outstanding 750 Sports materials 4,000
Miscellaneous Exp. paid in advance 750
Cash Balance 500
Bank Balance 4,000
Stamps 300
66,000 66,000
Dr. (II) SUBSCRIPTION A C C O U N T Cr.
Particulars Rs. ‘000 Particulars Rs. ‘000
To Outstanding Subscription A/c 4,750 By Advance Subscriptions A/c 1,400
(In the beginning) (in the beginning)
To Income and Expenditure A/c By Bank A/c 74,450
(720 x Rs. 100) 72,000 By Outstanding Subscription A/c
To Advance Subscription A/c (at the end) 3,500
(at the end) 2,600
79,350 79,350
Dr. (Ill) MISCELLANEOUS EXPENSES A C C O U N T Cr.
Particulars Rs. Particulars Rs.
To Prepaid Expenses A/c 750 By Outstanding Expenses A/c 2,280
(in the beginning) (in the beginning)
To Bank A/c 28,800 By Income and Expenditure A/c
To Outstanding Expenses A/c (Balancing figure) 30,440
(at the end) 4,020 By Prepaid Expenses A/c
(at the end) 850
33,570 33,570
Dr. (IV) RENT A C C O U N T Cr.
Particulars Rs. Particulars Rs.
To Bank A/c 9,750 By Outstanding Rent A/c By Income and 750
Expenditure A/c
(Balancing figure) 8,250
By Prepaid Rent A/c (at the end) 750
9,750 9,750
Dr (V) CREDITORS FOR SPORTS MATERIALS A C C O U N T Cr.
Particulars Rs. Particulars Rs.
To Bank A/c 12,200 By Balance b/d 1,400
To Balance c/d 2,950 By Stock of Sports Materials
(Credit purchases)
(Balancing figure) 13,750
15,150 15,150
Dr. (VI) S TOC K OF SPORTS MATERIALS A C C O U N T Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 4,000 By Income and Expenditure A/c (b/f) 10,750
To Creditors for Sports Materials 13,750 By Bank A/c 5,200
(Credit purchases) By Balance c/d 5,000
To Bank A/c (Cash purchases) 2,000
To Income and Expenditure A/c
(Profit on sale) 1,200
20,950 20,950
Dr. (VII) FURNITURE A C C O U N T Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 40,000 By Depreciation A/c 4,800
To Bank A/c 8,000 By Balance c/d 43,200
48,000 48,000

Q uestion 7 (15 M arks)

A and B are partners sharing profits in the ratio of 3:2. They admit C as a new partner from 1st April.
They decide to share future profits in the ratio of 4 : 3 : 3. The Balance Sheet as at 31st March, 2018 is given below:
Liabilities Rs. Assets Rs.
A's Capital 17,600 Goodwill 1,000
B’s Capital 25,400 Land & Building 6,000
Workmen Compensation Fund 2,000 Investments [Market Value Rs. 4,500] 5,000
Investment Fluctuation Fund 1,000 Debtors 10,000
Employees’ Provident Fund 1,000 Stock 30,000
Provision for Doubtful Debts 1,000 Bank Balance 25,000
C's Loan 30,000 Advertisement Suspense A/c 1,000
78,000 78,000
Terms of C’s admission are as follows:
1. C contributes proportionate capital and 60% of his share of goodwill in cash.
2.Goodwill is to be valued at 2 years’ purchase of super profit of last three completed years. The profits were — 2015-2016 Rs.
48,000, 2016-2017 Rs. 93,000, 2017-2018 Rs. 1,38,000. The normal profits are Rs. 53,000. No Goodwill is to appear in the books of
new firm.
3. Land & Building was found undervalued by Rs. 10,000.
4. Stock was found overvalued by Rs. 7,000.
5. Provision for doubtful debts is to be made equal to 5% of the debtors.
6. Claim on account of workmen compensation is Rs. 1,000.
Required: Prepare Revaluation Account, Partners’ Capital Accounts and the Balance Sheet.

SOLUTION
Dr. REVALUATION A C C O U N T C r.
Particulars Rs. Particulars Rs.
To Stock 7,000 By Land & Building 10,000
To Profit on Revaluation t/f to: By Provision for Doubtful Debts 500
A’s Capital A/c 2,100 Existing 1,000
B’s Capital A/c 1,400 Less: Required [ Rs. 10,000 x 5/100] 500
10,500 10,500
Dr. CAPITAL A C C O U N T S OF PARTNERS Cr.
Particulars A( Rs.) B(Rs.) C (Rs.) Particulars A(Rs.) B(Rs.) C(Rs.)
To Goodwill A/c 600 400 — By Balance b/d 17,600 25,400 —
To Adv. Sus. A/c 600 400 — By C’s Loan A/c — — 30,000
To Balance c/d 35,400 34,600 30,000 By Premium
for Goodwill A/c 9,600 4,800 —
By C's Current A/c 6,400 3,200 —
By Revaluation A/c 2,100 1,400 —
By Work. Compt. F. 600 400 —
By Invest. Flu. Fund 300 200 —
36,600 35,400 30,000 36,600 35,400 30,000
 BALANCE SHEET A S AT APRIL 1, 2018
Liabilities Rs. Assets Rs.
A’s Capital 35,400 Land & Building 16,000
B’s Capital 34,600 Investments 4,500
C's Capital 30,000 Debtors 10,000
Employee Provident Fund 1,000 Less: Provision 500 9,500
Workmen Compensation Claim 1,000 Stock (30,000 — 7,000) 23,000
C's Loan 30,000 Bank Balance 69,400
C’s Current A/c 9,600
1,32,000 1,32,000
Working Notes:
1. C ALC ULATIO N OF I N C O M I N G PARTNER’S SHARE, SACRIFICING RATIO
Particulars A B
A Their Old Shares 3/5 2/5
B Their New Shares [A-B] 4/10 3/10
C Share surrendered by old partners 3/5-4/10 = 2/10 2/5-3/10 = 1/10
D C's Share = 3/10
E Sacrificing Ratio = 2/10:1/10 = 2:1
2. C ALC ULATION OF I N C O M I N G PARTNER’S SHARE OF GOODWILL
A. Average Profits = Rs. 48,000 + Rs. 93,000 + Rs. 1,38,000/3 = Rs. 93,000
B. Normal Profits = Rs. 53,000, C. Super Profits = Rs. 93,000 - Rs. 53,000 = Rs. 40,000
D. Firm's Goodwill = Rs. 40,000 x 2 = Rs. 80,000
E. C’s share of Goodwill = Rs. 80,000 x 3/10 = Rs. 24,000
3. JOURNAL ENTRY WITH RESPECT TO G OODWILL
Bank A/c Dr. Rs. 14,400
To Premium for Goodwill A/c Rs. 14,400
Premium for Goodwill A/c Dr. Rs. 14,400
To A’s Capital A/c To B’s Capital A/c Rs. 9,600
Rs. 4,800
C’s Current A/c Dr. Rs. 9,600
To A’s Capital A/c ( Rs. 9,600 x 2/3) Rs. 6,400
To B’s Capital A/c ( Rs. 9,600 x 1/3) Rs. 3,200
4. Calculation of C’s Capital
Let Total Capital of New Firm be X
X = Adjusted Old Capitals of A & B + 3/10 X
X = Rs. 35,400 + Rs. 34,600 + 3/10 X
X - 3/10 X = Rs. 70,000, X = Rs. 70,000 x 10/7.= Rs. 1,00,000
C’s Capital = Rs. 1,00,000 x 3/10 = Rs. 30,000
5. Calculation of Closing Bank Balance
Dr. BANK A C C O U N T Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 25,000 By Balance c/d 69,400
To Premium for Goodwill A/c 14,400
To C’s Capital A/c 30,000
69,400 69,400

Question 8 A nswer the following Questions : (5*3=15 Marks)

a. 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)?
Solution
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 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.

b. AXE Limited purchased fixed assets costing $ 5,00,000 on 1st Jan. 2018 from an American company M/s M&M
Limited. The amount was payable after 6 months. The company entered into a forward contract on 1st January 2018 for
five months @Rs. 62.50 per dollar.
The exchange rate per dollar was as follows : On 1st January, 2018
Rs. 60.75 per dollar On 31st March, 2018 Rs. 63.00
per dollar
You are required to state how the profit or loss on forward contract would be recognized in the books of AXE Limited for the
year ending 2017-18, as per the provisions of AS 11

Solution
As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, an enterprise may enter into a forward
exchange contract to establish the amount of the reporting currency required, the premium or discount arising at
the inception of such a forward exchange contract should be amortized as expenses or income over the life of the
contract.
Forward Rate Rs. 62.50
Less: Spot Rate (Rs. 60.75)
Premium on Contract Rs. 1.75
Contract Amount US$ 5,00,000
Total Loss (5,00,000 x 1.75) Rs. 8,75,000
Contract period 5 months
3 months falling in the year 2017-18;
Therefore, loss to be recognized in 2017-18 (8,75,000/5) x 3 = Rs. 5,25,000. Rest Rs. 3,50,000 will be recognized in
the following year 2018-19.

c. Omega Ltd. contracted with a supplier to purchase machinery which is to be installed in its one department in
three months' time. Special foundations were required for the machinery which were to be prepared within this supply
leadtime. Thecostofthesitepreparationandlayingfoundationswere Rs. 1,40,000. These activities were supervised by a
technician during the entire period, who is employed for this purpose at Rs. 45,000 per month.The machine was
purchased at Rs. 1,58,00,000 and Rs. 50,000 transportation charges were incurred to bring the machine to the
factory site. An Architect was appointed at a fee of Rs. 30,000 to supervise machinery installation at the factory site.
You are required to ascertain the amount at which the Machinery should be cap italized under AS 10.
Solution
Calculation of Cost of Machinery

Particulars Particulars Rs.

Purchase Price Given 1,58,00,000
Add: Site Preparation Cost Given 1,40,000
Technician’s Salary Specific/Attributable 1,35,000
overheads for 3
months (45,000 x3)
InitialDeliveryCost Transportation 50,000
Professional Fees for Installation Architect’s Fees 30,000

Total Cost of Asset 1,61,55,000