Mb131 - 2003 - 04 (april)

Question Paper Financial Accounting (MB131) : April 2003 Part A : Basic Concepts (30 Points) • • • • 1.

The accounting concept of money measurement is evident under which of the following circumstances? a. b. c. d. e.

2.

Making provision for doubtful debts and discount on debtors Recording all transactions at a price paid for it Recording non-monetary fixed assets at historical cost less accumulated depreciation Recording all events/transactions through a common denominator, namely the monetary unit Both (c) and (d) above.

Amortization of unidentified intangible assets is in terms of a. b. c. d. e.

3.

This part consists of questions with serial number 1 - 30. Answer all questions. Each question carries one point. Maximum time for answering Part A is 30 Minutes.

Conservatism concept Going concern concept Matching concept Time period concept Business entity concept.

Consider the following data pertaining to AB Ltd.: Particulars Cost of the machinery purchased on April 1, 2002 Installation charges Market value as on March 31, 2003

Rs. 6,60,000 40,000 8,00,000

While finalizing the annual accounts, if the company values the machinery at Rs.8,00,000, which of the following concepts is violated by the company? a. b. c. d. e. 4.

Cost Matching Realisation Periodicity Business Entity.

In double entry system of book-keeping, every business transaction affects a. b. c. d. e.

Two accounts The same account on two different dates Two sides of the same account Two accounts on two different dates Two accounts on the same side.

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5.

Consider the following data pertaining to XL Ltd. for the month of March 2003: Particulars

Rs.

i.

Balance as per Bank pass book (Overdraft)

5,100

ii.

Bank charges for collection of up-country cheque

225

iii.

Amount of interest on UTI deposits directly collected by the bank

425

Balance as per bank column of the cash book of XL Ltd. as on March 31, 2003 is a. b. c. d. e. 6.

Which of the following errors will not cause a mismatch in the trial balance? a. b. c. d. e.

7.

Rs.4,670 (Debit) Rs.4,700 (Credit) Rs.5,030 (Debit) Rs.5,300 (Credit) Rs.5,360 (Credit).

Recording a transaction in the wrong subsidiary book Posting to an account on the wrong side Omitting to write the cash balance in the trial balance Wrong casting of a subsidiary book Both (a) and (d) above.

Consider the following data with regard to plant and equipment pertaining to Mittal Ltd.: Cost of the plant (Rs.) Installation charges (Rs.) Estimated useful life (years) Scrap value (Rs.)

5,00,000 30,000 8 50,000

If the firm follows the straight line method of depreciation, the rate of depreciation is a. b. c. d. e. 8.

5.25% 6.00% 9.50% 10.10% 11.32%.

Consider the following data pertaining to Banjara Ltd. for the year 2002-2003: Particulars Provision for doubtful debts as on April 1, 2002 Sundry debtors as on March 31, 2003 Bad debts to be written off

Rs. 8,000 3,00,000 20,000

If the company makes 5% provision on the debtors balances, the charge against profit and loss account for the year ended March 31, 2003 is a. b. c. d. e. 9.

Rs. 7,000 Rs.14,000 Rs.22,000 Rs.26,000 Rs.35,000.

Aslam Co. purchased furniture worth Rs.2,050 in exchange for its old furniture (book value of Rs.1,680), and a cash payment of Rs.600. Amount of loss recognized on this transaction is a. b. c. d. e.

Rs. 230 Rs. 370 Rs. 600 Rs. 970 Rs.1,080. 2

10. Which of the following is not an item of revenue expenditure? a. b. c. d. e.

Interest on deposits accepted Annual insurance premium on inventory Customs duty paid in connection with the import of equipment Repairs and maintenance on machinery Expenditure on assets like paper weight and pin cushion.

11. Which of the following is/are fixed asset(s)? a. b. c. d. e.

Closing inventory Fixed Deposit in a bank Patent Prepaid expenses Both (b) and (c) above.

12. Consider the following data pertaining to Moon Ltd. for the month of March 2003: Rs. 1,86,000 14,000 12,500 6,000

Particulars Purchase of goods for resale Freight in Freight out Returns outward Cost of goods available for sale is a. b. c. d. e.

Rs.1,88,000 Rs.1,89,000 Rs.1,94,000 Rs.1,99,500 Rs.2,01,500.

13. All non-cash transactions should be primarily recorded in a. b. c. d. e.

Double column cash book Analytical petty cash book Journal Cash book Ledger

14. Which of the following is/are source(s) of funds? a. b. c. d. e.

Disposal of an asset Payment to creditors Acceptance of bills payable Purchase of an asset Both (a) and (c) above

15. The expenses that have fallen due for payment but not paid are a. b. c. d. e.

Outstanding expenses Prepaid expenses Deferred expenses Accrued revenues Capital expenses

16. Which of the following concepts assumes that a business will last indefinitely? a. b. c. d. e.

Business entity Going concern Periodicity Duality Consistency.

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17. According to which of the following accounting concepts consolidated financial statements are prepared when a parent-subsidiary relationship exists? a. b. c. d. e.

Going concern Business entity Materiality Cost Periodicity

18. Which of the following factors is used as multiplier of super profits in valuation of goodwill of a business? a. b. c. d. e.

Average capital employed in the business Simple profits Number of years’ purchase Normal rate of return Normal profits.

19. XLNT Ltd. purchased 12% bonds with a face value of Rs.2,00,000 at a discount of 15% in the open market as investments and intends to hold them to maturity. The market value of the investments is Rs.1,80,000. The investments should be accounted at a. b. c. d. e.

Rs.2,24,000 Rs.2,00,000 Rs.1,84,000 Rs.1,80,000 Rs.1,70,000.

20. Which of the following statements is false with regard to consolidated financial statements? a. b. c. d. e.

The object of consolidated financial statement is to present financial position of a parent and its subsidiary as a single economic activity These are prepared in the same format as that followed by the parent, for preparation of its separate financial statements These are not substitutes for separate financial statements Dissimilar activities of parent and its subsidiary can be a reason for non-preparation of consolidated financial statements Their preparation is made mandatory by Securities Exchange Board of India (SEBI).

21. XY Ltd. has a share capital of 6,000 equity shares of Rs.100 each having a market value of Rs.176 per share. The company wants to raise additional funds and offers to existing equity shareholders the right to apply for a new share at Rs.106 per share for every four shares held by them. The value of right is a. b. c. d. e.

Rs.176 Rs.120 Rs. 56 Rs. 40 Rs. 14.

22. H. Ltd. acquired 80% shares of S. Ltd. on December 1, 2002. S. Ltd. owed Rs.50,000 for purchase of stock from H. Ltd. The entire stock was held by S. Ltd. as on March 31, 2003. H. Ltd. made a profit of 30% on selling price. The unrealized profit on that stock was a. b. c. d. e.

Rs.16,000 Rs.15,000 Rs.14,400 Rs.12,000 Rs.10,000.

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23. Aski Ltd purchased land and building from Cibera Company for a book value of Rs.2,00,000. The consideration was paid by issue of 12% debentures of Rs.100 each at a discount of 20%. The debenture account is credited with a. b. c. d. e.

Rs.2,60,000 Rs,2,50,000 Rs.2,40,000 Rs.1,00,000 Debentures cannot be issued otherwise than for cash.

24. The excess price received over the par value of shares, should be credited to a. b. c. d. e.

Calls-in-advance account Share capital account Reserve capital account Securities premium account Share allotment account.

25. Rights shares are the shares a. b. c. d. e.

Issued by a newly formed company Legally issued to the public at large Offered to the existing equity shareholders That have a right of redemption That have a right to cumulative dividends.

26. On July 1, 2002, Delux Ltd. purchases 100 of its own 12% debentures for a price of Rs.9,900 which is the cum-interest price. The company pays interest half-yearly on September 30 and March 31 every year. The cost of 100 debentures is a. b. c. d. e.

Rs.10,300 Rs.10,000 Rs. 9,900 Rs. 9,700 Rs. 9,600

27. Amazon Ltd. issued 20,000 shares of Rs.100 each at a premium of Rs.10 per share, of which 18,000 shares are subscribed for. The amount to be paid is as follows: Rs.60 - on application, including premium of Rs.10 Rs.30 - on allotment Rs.20 - on first and final call. Call money was not received on 1,000 shares. On forfeiture of these shares, the amount standing to the credit of securities premium account is a. b. c. d. e.

Rs.2,00,000 Rs.1,80,000 Rs.1,60,000 Rs.1,40,000 Rs. 20,000.

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28. Consider the following data pertaining to Detofex Ltd.: Particulars Nominal equity share capital Issued and called-up capital Paid-up capital Calls in advance 20% Preference share capital (fully paid-up)

Rs. 25,000 24,000 24,000 1,000 25,000

If the company declares a dividend of 20%, the total dividend payable is a. b. c. d. e.

Rs.10,100 Rs.10,000 Rs. 9,900 Rs. 9,800 Rs. 9,500.

29. Consider the following data pertaining to Sapru Ltd. as on April 1, 2002: Particulars 12% Debentures Debenture sinking fund Debenture sinking fund investment (represented by 18%, secured bond worth Rs.46,000).

Rs. 50,000 40,000 40,000

The company sold the investments at 80% on March 31, 2003 and the debentures were paid off. The loss incurred on account of sinking fund investment account is a. b. c. d. e.

Rs.6,000 Rs.4,000 Rs.3,700 Rs.3,200 Rs.2,300.

30. Which of the following denotes the dividend declared by the directors between two annual general meetings? a. b. c. d. e.

Proposed dividend Final dividend Interim dividend Declared dividend Unpaid dividend. END OF PART A

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Part B : Problems (50 Points) • • • • • 1.

2.

This part consists of questions with serial number 1 - 5 Answer all questions. Points are indicated against each question. Detailed workings should form part of your answer. Do not spend more than 110 - 120 minutes on Part B.

In the month of April 2003, the accountant of Western Machinery Ltd. identified the following errors in the books of accounts for the year 2002-2003, in spite of the agreed balance sheet: i. Closing stock was understated by Rs.5,100 due to a casting error in the stock register. ii. Returns inward book was overcast by Rs.2,350. iii. A sum of Rs.6,500, written off as depreciation on machinery, has not been debited to depreciation account. iv. The total of Purchases day book was carried forward as Rs.83,900 instead of Rs.89,300. v. A fixed deposit of Rs.40,000 with Dena Bank matured and Rs.47,740 was realized, which was credited to fixed deposit account. vi. A collection of Rs.2,500 from Mr. Rakesh, a customer, was entered in the creditors account. You are required to pass rectification entries for the above errors and compute the effect of corrections on the profit for the year 2002-2003. (9 points) On April 1, 2002 the balance of 12% Debentures of Rs.100 each of Roplas Ltd. was Rs.5,00,000. The company reserves the right to redeem the debentures in any year by purchase in the open market. Interest on debentures is payable on September 30 and March 31, every year. On July 1, 2002, the company purchased 1,000 of its own 12% Debentures as investment at Rs.99 cuminterest. The company cancelled its own 1,000 debentures on March 31, 2003. You are required to pass journal entries in the books of the company for the above transactions for the year 2002-2003. (8 points)

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3.

Following is the trial balance of Shiva Ltd. for the year ended March 31, 2003: Trial balance for the year ended March 31, 2003 Particulars Opening stock Purchases Sales returns

Debit balance (Rs.) 30,000 6,62,000 40,000

Particulars Purchases returns Sundry creditors Sales

Credit balance (Rs.) 28,000 1,20,000 15,85,000

Sundry debtors

1,50,000

Discount received

Plant & machinery

6,50,000

Share Capital

7,00,000

Building

3,80,000

10% Debentures

4,80,000

Furniture & fixtures

1,40,000

Reserves & Surplus

1,80,000

Salaries

3,80,000

Wages

2,10,000

Rent, rates & taxes Telephone expenses Discount allowed

80,000 1,23,000 12,000

Insurance premium

5,400

Carriage inward

6,800

Carriage outward

8,200

Cash at bank Investments (10%)

10,400

26,000 2,00,000 31,03,400

31,03,400

The company has furnished the following additional information: i. Closing stock was valued at Rs.32,000 as on March 31, 2003. ii. Goods worth Rs.4,000 were distributed by salesmen as free sample, but no entry has been made for this. iii. Provide depreciation on the assets at the following rates: Building – 5% Furniture & Fixtures – 5% Plant & Machinery – 8% iv. A cheque for Rs.4,000 received from a customer was dishonoured by the bank but the same has not been recorded in the books. The customer has become insolvent and 50% of the amount is expected to be realized from his estate. v. A purchase invoice of Rs.6,000 received from a supplier has not been entered by oversight. On the basis of above trial balance and additional information, you are required to prepare Trading and Profit & loss A/c for the year ended March 31, 2003 and Balance Sheet of the company as on that date. (11 points)

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4.

The following is the balance sheet of Daruwala Engineering Ltd. as on March 31, 2003: Balance Sheet as on March 31, 2003 Liabilities

Rs.

Assets

Rs.

Equity shares of Rs.10 each

8,00,000 Goodwill

General reserve

1,40,000 Machinery at cost

7,50,000

Profit & loss Account

2,30,000 Furniture

1,50,000

Provision for depreciation on Machinery

1,20,000 Building

3,00,000

Staff welfare fund

30,000 Stock

1,00,000

Proposed dividend

80,000 Sundry debtors

2,00,000

Sundry creditors

2,20,000 Bank

30,000

30,000

Advertisement suspense

40,000

Preliminary expenses

20,000

16,20,000

16,20,000

Other information: i. Sundry debtors include Rs.20,000 which may be irrecoverable. ii. Stocks are valued at Rs.80,000. iii. Machinery and furniture are to be revalued at Rs.6,00,000 and Rs.1,80,000, respectively. iv. Goodwill is to be valued at 4 years’ purchase of super profits. v. Normal return on capital employed in similar business is 10%. vi. Profits before tax for last four years are: Year

Profit (Rs.)

1999-2000

Rs.1,40,000

2000-2001

Rs.1,90,000

2001-2002

Rs.1,60,000

2002-2003

Rs.2,30,000

vii. Company profits are taxed at the rate of 35%. viii. Depreciation on revaluation of assets may be ignored. You are required to compute the value of each equity share of the company. 5.

(12 points) Hi-Hik Ltd issued 5,000 equity shares of Rs.10 each at a premium of Rs.2 per share payable as follows: On application Rs.7 (including premium) On allotment Rs.3 On first & final call Rs.2 The company has received 6,000 applications for 5,000 equity shares. The allotment was made on prorata. Excess application moneys were utilized towards dues on allotment. Mr. Gaurav who held 200 shares, failed to pay allotment money and first & final call. These shares were forfeited. The company reissued 150 shares out of 200 forfeited shares to Mr. Sudhakar as fully paid for Rs.8 per share. You are required to pass journal entries in the books of the company for the above transactions. (10 points)

END OF PART B

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Part C : Applied Theory (20 Points) • • • •

6.

This part consists of questions with serial number 6 - 8. Answer all questions. Points are indicated against each question. Do not spend more than 25 -30 minutes on Part C.

Write short notes on: a. Non-current liabilities b. Intangible assets c. Fixed assets. (2 + 2 + 2 = 6 points)

7.

Briefly explain with examples the Money Measurement Concept. (7 points)

8.

What is Value Added Statement? Explain the advantages of Value Added Statement (7 points) END OF PART C END OF QUESTION PAPER

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Suggested Answers Financial Accounting (MB131) : April 2003 Part A : Basic Concepts 1.

Answer : (d) Reason : Recording, classification and summarization of business transactions requires a common unit of measurement which is taken as money. Thus, recording of all events, transactions through a common denominator depicts the money measurement concept. Making provision for doubtful debts and discount on debtors (a) is in terms of recognition of expenses as soon as they are reasonably possible which is implied in conservatism concept. Recording of all transactions at a price paid for it, (b) and recording of non-monetary fixed assets at historical cost less accumulated depreciation (c) are the resultants of cost concept. Thus, (d) is the correct answer.

2.

Answer : (c) Reason : Intangible assets are amortized like tangible fixed assets. If costs benefit more than one accounting period, they should be systematically and rationally allocated to all accounting periods. Matching concept involves recognizing costs as expenses on the basis of direct association with assets. Thus amortization of intangible assets is in systematic allocation of costs over a several periods in recognition of matching concept. The other concepts do not recognize allocation of costs of fixed assets. Conservatism concept is not meant to introduce a bias into financial reporting. It is a prudent reaction to uncertainty to try to ensure that inherent risks in business are adequately considered. Going concern concept (b) assumes that the business entity is assumed to be a going concern in the absence of evidence to the contrary. Time Period concept (d) requires accounting information to be reported at regular intervals to foster comparability. Business entity concept explains that in accounting business is to be considered as a separate entity from the owner. It does not speak about amortization.

3.

Answer : (a) Reason : In terms of cost concept the value of an asset is to be determined on the basis of acquisition cost. Valuation of machinery at market value is in violation of cost concept unless the machine is actually sold, realizable value will give only a hypothetical figure. Market value is highly subjective because to know the value of the asset one has to chase the uncertain future. The other concepts matching concept (b) deals with matching costs with revenue, Realization concept (c) deals with recognition of income at various levels of production, Periodicity concept (d) explains how the accounting information is to be reported at regular intervals to foster comparability, Business entity concept (e) explains the owner is different from the business entity. Thus, the concepts (b), (c), (d), and (e) do not explain how the fixed assets are to be recorded.

4.

Answer : (a) Reason : In double entry system of book-keeping every business transaction affects two or more than two accounts (a) one account affects debit aspect while the other credit aspect. It does not affect the same account on two different dates (b) nor two sides of the same account (c). It does not affect two accounts on two different dates (d) it does not affect same side of two accounts (e). Answer : (d) Reason :

5.

Particulars Overdraft balance as per bank pass book Less:Bank charges on collection of upcountry cheques Add: Interest on UTI deposits directly collected by the bank Credit balance as per bank column of the cash book

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Rs. 5,100 225 4,875 425 5,300

6.

Answer : (a) Reason : Making an entry in the wrong subsidiary book (a) will not cause a mismatch in the trial balance. The wrong recording is carried over at all stages and the trial balance is not affected by this wrong recording. The mistakes stated in other alternatives results in a mismatch in the trial balance. The posting of an amount on debit side instead of credit side or vice versa (b) omitting to write the cash balance in the trial balance (c) and wrong casting of a subsidiary book (d) affects the agreement of trial balance.

7.

Answer : (e) Plant value - Scrap value Reason : Depreciation

= =

Life of the plant (Rs.5, 00, 000 + Rs.30, 000) − Rs.50, 000 8 years

=

Rs.5, 30, 000 − Rs.50, 000 8 years

= 8.

=

Rs.4,80, 000 = Rs.60, 000 8 years

Rs.60, 000 × 100 = 11.32% 5,30, 000

Answer : (d) Reason : Particulars Opening Provision Bad debts to be written off Shortfall of provision Provision required 5% of Rs.2,80,000 (Rs.3,00,000 – Rs.20,000) Charge against profit and loss account

9.

Rs. 8,000 20,000 12,000 14,000 26,000

Answer : (a) Reason : Particulars Book value of old furniture Add: Cash paid for exchange

Rs. 1,680 600 2,280 2,050 230

Less:Value of new furniture Loss recognized on this transaction

10. Answer : (c) Reason : Revenue expenditure is incurred for day to day running of the business. Any item of expenditure which improves the earning capacity of a business entity or the expenditure incurred till the asset is ready for use is capital expenditure. From the viewpoint of this, the customs duty paid in connection with the import of equipment (c) is not revenue expenditure. The expenses mentioned in other alternatives Interest on deposits accepted (a) Annual insurance premium (b) repairs and maintenance (d) Expenditure on assets like paperweight (e) are items of revenue expenditure. 11. Answer : (c) Reason : Fixed assets are for use over relatively long period and they are not meant for resale. Patents (c) satisfy the characteristics of fixed assets and are shown under the category of Fixed assets. Closing inventory (a) Fixed deposit in bank (b) and Prepaid expenses (d) are current assets. Thus (c) is the correct answer.

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12. Answer : (c) Reason : Cost of goods = Purchases – Returns outward + Freight in = Rs.1,86,000 – Rs.6,000 + Rs.14,000 = Rs.1,94,000. 13. Answer : (c) Reason : The journal is said to be the book of first entry for all transactions which cannot be recorded in the cash book. Thus, all non-cash transactions should be recorded in the journal. The alternatives (a) Double column cash book and (d) Cash book are cash books where transactions involving cash and discount and cash alone are recorded and alternative (b) analytical petty cash book is meant for recording petty expenses and the alternative (e) Ledger is the main book of account where all transactions are posted and it contains a classified summary of all accounts. 14. Answer : (e) Reason : In a business, funds can be raised by increasing liabilities and reducing assets. Thus alternative (a) reduction in asset and alternative (c) increase in liability are the sources of funds. The other alternatives (b) payment of creditors leads to reduction in liability and (d) purchase of an asset increases assets and they are uses of funds. 15. Answer : (a) Reason : The nominal accounts record the actual expenses paid during the accounting period. The expenses which have fallen due for payment but have not been paid are the accrued expenses or outstanding expenses. The alternative (b) is the reverse of it i.e. these are the expenses which have not fallen due but paid in advance like insurance premium also known as unexpired expenses. The recorded expenses that are apportioned between two or more than two accounting periods (like huge expenditure on advertisement) is deferred expenditure (c) and the alternative (d) Accrued revenue is the portion of an income which has fallen due for receipt but has not yet been received. Capital expenses which increase the earning capacity of an entity and whose benefit yields for more than one accounting period (e) Thus, the alternatives (b), (c), (d) and (e) are not correct. 16. Answer : (b) Reason : According to going concern concept (b), a business entity is assumed to carry on its operations forever. Seemingly inconsequential, this is a fundamental concept which has far reaching consequences. The other concepts, business entity concept (a) treats business distinct from the entity of its owners. According to the concept of periodicity (c) the income or loss of the business is measured periodically, one year is the usual accounting period. The duality (d) concept is also known as accounting equivalence concept implies that the uses of funds must be equal to the sources of funds i.e. Assets = owners’ Equity + outside liability. The liabilities and assets that appear in the Balance sheet are governed by this concept. The consistency concept (e) requires that once an entity has decided on one method of treating an event in recording it in books of accounts, it will treat all subsequent events of the same character in the same fashion. Thus, the alternative (b) is the correct answer. 17. Answer : (b) Reason : Consolidated financial statements should reflect the economic activities of a business enterprise measured without regard to the boundaries of the legal entity. A parent and subsidiary are legally separate but are treated as a single business enterprise in consolidated statements, in recognition of Business entity concept (b). The other concepts do not explain about consolidation of financial statements. The Going concern concept (a) assumes that the business entity will continue to operate in the absence of evidence to the contrary. Materiality (c) requires reporting the information that has a value significant enough to affect decisions of those using the financial statements. Cost concept (d) explains how the assets are to be recorded in the books of accounts. According to this, fixed assets are to be recorded at cost less accumulated depreciation. Periodicity (e) explains that the financial accounting process is meant to provide the information about the economic activities of the business enterprise at regular intervals. It does not speak about consolidation of financial statements.

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18. Answer : (c) Reason : Number of years’ purchase is the factor with which the super profits would have to be multiplied in order to arrive at the value of goodwill. Super profits

:

Average annual profits – (Average capital employed x Normal rate of return)

Goodwill

:

Number of years’ purchase x super profits

19. Answer : (e) Reason : The price of the bonds is at a discount of 15% on the face value of Rs.2,00,000. Thus, the acquisition cost (Face value – Discount) 15

Discount = Rs.2,00,000 x

= Rs.30,000

100 = Rs.2,00,000 – Rs.30,000 = Rs.1,70,000. 20. Answer : (d) Reason : AS-21 deals with the objectives, scope and procedure of consolidation of financial statements. Dissimilar activities of parent and its subsidiaries cannot be the ground for non-consolidation of financial statements. Thus, statement in alternative (d) is false. As per AS 21, consolidation is not mandatory. But SEBI has made it mandatory for consolidation of financial statements (e). The object of consolidated financial statements is to present the financial status of parent and subsidiary as a single entity (a) and these are prepared as per the format followed by the parent company (b) and these are not substitutes for separate financial statements (c). Separate financial statements are to be prepared by the entities as per governing law. Thus, the statements in alternatives (a), (b), (c) and (e) are true. 21. Answer : (e) Reason : Value of right R =

=

=

1 4 +1 1

r N+r

(M – S)

x (Rs.176 – Rs.106)

x Rs.70 = Rs.14

5 22. Answer : (d) Reason : Profit on stock = 30% of Rs.50,000 = Rs.15,000 Unrealized profit = Rs15,000 × 80% = Rs.12,000. 23. Answer : (b) Reason : Sometimes the companies may go for issue of debentures towards consideration for purchase of fixed asset. In such cases, the debentures may be issued at par / at discount / at premium. In the present case, the journal entry will be: For purchase of Land and Building: i.

Land and Building a/c.

Dr.

Rs.2,00,000

To Avanti & Company a/c.

Rs.2,00,000

For issue of debentures at discount of 20% ii.

Avanti & Company a/c.

Dr.

Rs.2,00,000

Discount on issue of debentures

Dr.

Rs. 50,000

To 12% Debentures a/c.

Rs.2,50,000

(Issue of 2,500 debentures of face value Rs.100 each at a discount of 20%) 14

Thus 12% debentures are figured at Rs.2,50,000. 24. Answer : (d) Reason : If by the terms of issue, the price payable is above the par value of shares, it is called an issue at premium. The amount so received is to be credited to securities premium account. 25. Answer : (c) Reason : Rights shares are the shares that are offered to the existing equity shareholders (c). These are not issued by a newly formed company (a) They are not the shares issued to the public at large. They are issued only to the existing shareholders. (b). It does not indicate the right of redemption of shares issue (d). These are not the shares with cumulative dividend right. 26. Answer : (e) Reason : The cum-interest price includes the interest accrued. If the company is required to pay the debenture interest for the accrued period, the price quoted is ex-interest. Thus, the removal of interest component from cum-interest price gives ex-interest price. The interest accrued from April 1, 2002 to June 30, 2002 is for three months @ 12% on 10,000. = 10,000 x

12

x

3

= Rs.300 100 12 Cum-interest price – Interest = Ex-interest price i.e. cost of debentures = Rs.9,900 – Rs.300 = Rs.9,600. 27. Answer : (b) Reason : The amount received on account of securities premium is 18,000 shares x Rs.10 = Rs.1,80,000. There is no impact of forfeiture of shares on securities premium account. The amount of premium received is to be utilized as per the provisions of the Companies Act.

28. Answer : (d) Reason : Dividend is paid on paid-up capital Equity share capital + Preference share capital = Rs.24,000 + Rs.25,000 = Rs.49,000 = 20% of 49,000 = Rs.9,800 29. Answer : (d) Reason : The loss on account of disposal of sinking fund investments is Rs.3,200 Balance

=

Rs.40,000

Rs.46,000 x .8 =

Rs.36,800

Loss

Rs. 3,200

Sale:

=

30. Answer : (c) Reason : Though dividends can be declared only by a resolution of the shareholders, if the articles permit, the directors can declare an interim dividend (c) between two annual general meetings. The dividend recommended by the directors is termed as Proposed dividend (a) till such time it is approved by the shareholders in the AGM. The dividend finally decided by the shareholders in the AGM as payable is termed as Declared dividend (d). The unclaimed portion of it is un-paid/ un-claimed dividend (e). Final dividend (b) gives rise to an enforceable obligation.

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Part B : Problems 1.

Western Machinary Ltd. Journal Entries Particulars i.

ii.

iii.

iv.

v.

vi.

Opening Stock A/c. To Profit & Loss Adjustment A/c. (Being closing stock undercast by Rs.5,100 now rectified) Suspense A/c. To Profit & Loss Adjustment A/c (Being returns inward book undercast by Rs.2,350, now rectified) Profit & Loss Adjustment A/c. To Suspense A/c. (Being depreciation on Machinery not posted to depreciation a/c. now rectified) Profit & Loss Adjustment A/c. To Suspense A/c. (Being the total carried forward as Rs.83,900 in place of Rs.89,300 (i.e. Rs.5,400 = Rs.89,300 – Rs.83,900) now rectified) Fixed Deposit A/c. To Profit & Loss Adjustment A/c. (Being interest on fixed deposit wrongly credited to fixed deposit a/c, now rectified) Creditors A/c. To Debtors A/c. (Being collection from debtors wrongly posted in the creditors A/c, now rectified)

Dr.

Dr.

Dr. (Rs.) 5,100

Cr. (Rs.) 5,100

Dr.

2,350 2,350

Dr.

6,500 6,500

Dr.

5,400 5,400

Dr.

7,740 7,740

Dr.

2,500 2,500

Profit & Loss Adjustment A/c. Particulars

Rs.

Cr. Particulars

Rs.

To Suspense A/c

6,500 By Opening Stock

5,100

To Suspense A/c

5,400 By Suspense A/c.

2,350

To Net Profit (transferred)

3,290 By Fixed deposit

7,740

15,190

16

15,190

2.

Roplas Ltd. Journal Entries Date

Particulars

July 1, 2002

Own Debenture A/c. Dr. Interest on Debenture A/c. Dr. To Bank A/c. (Being the purchase of 1000 own debentures at the rate of Rs.99 cum interest. Interest for 3 months from April 1,2002 to June 30, 2002 is Rs.3,000) Interest on debenture A/c. Dr. To Bank A/c. To Interest on own Debenture A/c. (Being the payment of interest on 4,000 debentures for 6 months and 1,000 debentures for 3 months). 6 3 (4000 × Rs.100 × 12% × ; 1000 X Rs100 x 12% × ) 12 12 Interest on Debenture A/c. Dr. To Bank A/c. To Interest on own Debentures A/c. (Being the payment of half yearly interest held by outside debenture holders and by the company itself) Profit & loss A/c. Dr. To Interest on Debenture A/c. (Being the transfer of interest on debentures to profit & loss A/c.) Interest on own debenture A/c. Dr. To Profit & loss A/c. (Being the transfer of interest on own debentures to profit & loss A/c.) 12% Debentures A/c. Dr. To Own debenture A/c. To Capital reserve A/c. (Being the profit on redemption of debentures transferred to capital reserve A/c.)

Sep. 30, 2002

March 31, 2003

17

Dr. (Rs.) 96,000 3,000

Cr. (Rs.)

99,000

27,000 24,000 3,000

30,000 24,000 6,000

60,000 60,000

9,000 9,000

1,00,000 96,000 4,000

3.

SHIVA Ltd. Trading and Profit & Loss A/c. for the year ended March 31, 2003

Dr.

Particulars To Opening stock To Purchases Less: Purchases returns Add: Purchases To Wages To Carriage inward To Gross profit

Rs. 6,62,000 28,000 6,34,000 6,000

To To To To To To To To To

Salaries Rent, rates & taxes Telephone expenses Discount allowed Insurance premium Carriage outward Interest on debentures Advertisement Depreciation: Plant & machinery 52,000 Building 19,000 Furniture & fixtures 7,000 To Provision for insolvent customer

Cr.

Rs. Particulars Rs. Rs. 30,000 By Sales 15,85,000 Less:Sales returns 40,000 15,45,000 By Advertisement (Free samples) 4,000 By Closing stock 32,000 6,40,000 2,10,000 6,800 6,94,200 15,81,000 15,81,000 3,80,000 By Gross Profit 6,94,200 80,000 By Discount received 10,400 1,23,000 By Interest on investments 20,000 12,000 5,400 8,200 48,000 4,000

78,000 2,000 By Net Loss 7,40,600

16,000 7,40,600

Balance Sheet as on March 31, 2003 Liabilities Share Capital Reserves & surplus 10% Debentures Interest on Debentures Current Liabilities: Sundry creditors: Add: Purchase invoice omitted

Rs. 7,00,000 1,80,000 4,80,000 48,000 1,20,000 6,000

Assets Fixed Assets: Plant & Machinery Less: Depreciation @ 8% Buildings Less: Depreciation @ 5% Furniture & fixtures 1,26,000 Less: Depreciation @ 5% Investments Interest on Investments Current Assets: Closing stock Sundry debtors Add: Dishonored cheque Less:Provision for Insolvent customer Cash at bank Less: Dishonored cheque Expenditure & losses: Profit & loss A/c.

15,34,000

18

Rs. 6,50,000 52,000 3,80,000 19,000 1,40,000 7,000

5,98,000 3,61,000 1,33,000 2,00,000 20,000 32,000

1,50,000 4,000 1,54,000 2,000 26,000 4,000

1,52,000 22,000 16,000 15,34,000

4.

Daruwala Engineering Ltd. Computation of capital employed: Rs.

Rs.

Sundry assets: Machinery Furniture Building Stock Sundry debtors (Rs.2,00,000 – Rs.20,000)

6,00,000 1,80,000 3,00,000 80,000 1,80,000

Bank

30,000 13,70,000

Less: Proposed dividend Sundry creditors

80,000 2,20,000

3,00,000 10,70,000

Less:½ of adjusted current year’s profit after tax

55,250

Average capital employed

10,14,750 Rs.

i.

ii.

Profit for 2002-2003: (–) Decrease in stock (–) Bad debt provision

Rs.

2,30,000 (20,000) (20,000)

1,90,000

Computation of Average maintainable profit: Average profit =

Rs.1, 40, 000 + Rs.1, 90, 000 + Rs.1, 60, 000 +1, 90, 000 4

=

Rs.6, 80, 000

=

Rs.1,70,000

4

Rs. Average Profit

1,70,000

Less: Corporate tax 35%

59,500 1,10,500

Less:Normal return on capital employed (10% on Rs.10,14,750) Super Profit iii. iv.

1,01,475 9,025

Goodwill = 4 × Rs.9,025 = Rs.36,100

Computation of net assets available to equity shares: Capital employed

10,70,000

Goodwill

36,100

Net assets available to equity shareholders

11,06,100

19

= Rs.11,06,100 ÷ 80,000

v.

Value of each equity share

vi.

Value of each equity share (cum dividend) =

Rs.11, 06,100 + Rs.80, 000

= Rs.13.83

= Rs.14.83

80, 000 Note: Advertisement suspense is a fictitious asset and not included in sundry assets. Staff welfare fund is an appropriation of profits and is not an outside liability.

5.

Hi-Hik Ltd. Journal Entries Particulars Bank A/c. Dr. To Equity Share Application A/c. (Being the application money received on 6,000 shares at the rate of Rs.7 per share) Equity Share Application A/c. Dr. To Equity Share Capital A/c. To Share Premium A/c. (Being the amount transferred to Equity Share Capital A/c. and Share Premium A/c.) Equity Share Allotment A/c. Dr. To Equity Share Capital A/c. (Being the allotment money due on 5,000 shares) Bank A/c. Dr. Equity Share Application A/c. Dr. To Equity Share Allotment A/c. (Being the part of allotment money was adjusted from equity share application A/c. Balance amount of Rs.1.60 per share realized except on 200 shares) Equity Share First & Final call A/c. Dr. To Equity Share Capital A/c. (Being the first & final call money due on 5,000 shares) Bank A/c. Dr. To First and Final call A/c. (Being the amount of first & final call received by the company except 200 shares held by Mr. Gaurav) Equity Share Capital A/c. Dr. To Equity Share Forfeiture A/c. To Equity Share Allotment A/c. To Equity Share First & Final call A/c. (Being 200 shares held by Mr. Gaurav have been forfeited) Bank A/c. (150 Shares × Rs.8) Dr. Equity Shares Forfeiture A/c. (150 shares × Rs.2) Dr. To Equity Share Capital A/c. (Being 150 shares were reissued at a price of Rs.8 per share fully paid) Equity Share Forfeiture A/c. Dr. To Capital Reserve A/c. (Being profit on reissue of 150 shares transferred to Capital Reserve A/c.)

20

Dr. (Rs.) 42,000

Cr. (Rs.) 42,000

35,000 25,000 10,000

15,000 15,000 7,680 7,000 14,680

10,000 10,000 9,600 9,600

2,000 1,280 320 400 1,200 300 1,500 660 660

Working Notes: (Rs.) Amount received form 6,000 applicants

42,000

Less: Amount for 5,000 shares

35,000

Surplus money

Surplus amount per share =

7,000

Rs.7,000 = Rs.1.40. 5,000 shares

Profit on reissue of shares: (Rs.) Amount received from 150 shares 150 shares × (Rs.5 +Rs.1.40)

960

Amount utilized as discount for reissue of shares 150 shares × Rs.2

300

Profit on reissue of forfeiture shares

660

21

Part C: Applied Theory 6.

a.

b.

c.

7.

Non-Current Liabilities All such liabilities payable over a longer period of time, generally after one year, are non-current liabilities. Eg. Debentures, Long-term loans, etc. Intangible Assets The assets which do not have physical existence, and their real value depends upon the earning capacity of the business concern. Example Goodwill. Fixed Assets Fixed asset is an asset held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business. Fixed assets often comprise a significant portion of the total assets of an enterprise, and therefore are important in the presentation of financial position. Financial statements disclose certain information relating to fixed assets. In many enterprises these assets are grouped into various categories, such as land, buildings, plant and machinery, vehicles, furniture and fittings, goodwill, patents, trade marks and designs.

In financial accountancy, a record is made only of information that can be expressed in monetary terms. Recording, classification and summarization of business transactions requires a common unit of measurement, which is taken as money. If events cannot be quantified in monetary terms then they do not facilitate accounting. The activities and their attributes considered for inclusion in the financial statements will be based on the yardstick of whether they are amenable to be translated in currency terms. Money is the standard of exchange and the changes in purchasing power caused by inflation are ignored for the purpose of accounting because the assumption about the stability of money, notwithstanding its limitations, is a necessity for ensuring a smooth accounting process. Hence, all transactions are recorded through a common denominator, namely the monetary unit. Thus, if a certain event, no matter how significant for the health or even existence of the business, cannot be measured in monetary terms, such an event is not recorded in accounting. For example, purchase of an inconsequential asset, which is easily measured in rupee terms, is accounted for in the business. However, the retirement or death of the Chairman of a company, even though it has far reaching consequences for the health of the business is not accounted for, since no monetary measurement of the event is feasible. Needless to say if different assets and liabilities are expressed in different measures they cannot be compiled to discern the financial health of the business. This difficulty is obviated if all the assets and liabilities are expressed in money terms. The total liabilities when deducted from the total assets yield the Net worth of the organization.

8.

Value-added (VA) statement is the statement of profit that reflects the addition of wealth made by the organization with the efforts of management and employees using capital presented in a different form. VA statement is presented under two parts. In the first part, the value-added by the firm is arrived. In the second part, application of the added value by the firm is arrived. Advantages of VA Statements 1.

VA concept is the most relevant concept of the social responsibility concept of the enterprise. Social responsibility concept says that the organization is a social institution working for the benefit of many interested groups in the society. Thus, VA statement reflects the broader view of the company’s objectives and responsibilities. This enhances the attitude of the employees towards their employing firms.

2.

VA statement can be taken as a means in introducing the productivity linked bonus scheme for employees.

3.

VA based ratios can be used for comparisons with other companies and international comparisons.

4.

VA statement can be used to measure the size and importance of a company in the economy. This statement shows the company’s contribution to national income. 22

5.

VA statement is formed on the basis of the general concepts like going concern, matching, consistency on which the current balance sheets and income statements are based. So, VA statement is a complementary to the existing statements.

23