Mb131 - 2003 - 07 (july)
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Question Paper Financial Accounting (MB131) : July 2003 Part A : Basic Concepts (30 Points) • • • • 1.
Which of the following is a real account? b.
2.
4.
< Answer >
a. Prepaid expenses b. Trade-mark c. Discount on issue of shares Outstanding salaries e. Fixed deposits. < Answer >
a. Purchases book b. Ledger c. Cash book Journal proper e. Both (b) and (d) above.
Which of the following concepts is not considered as basic principle of accounting?
e.
< Answer >
Rs.21,000 Rs.15,300 Rs.12,500 9,700 Rs. 4,000.
Purchase of fixed assets on credit is originally recorded in
d. 5.
a. b. c. Rs. e.
Which of the following is a current liability?
d.
< Answer >
a. Salary account Cash account c. Outstanding rent account d. Sundry creditors account e. Purchases account.
The balance as per bank statement of a company is Rs.12,500 (Dr.). The company deposited two cheques worth Rs.8,500, out of which one cheque for Rs.2,800 was dishonoured which was not entered in the cash book. The credit balance as per cash book is
d. 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.
a. Materiality concept b. Cost concept c. Consistency concept d. Matching concept Logical concept.
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< Answer >
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6.
e. 7.
< Answer >
In contract accounting, the percentage of completion method is an exception to the a. Money measurement principle b. Going concern principle c. Historical cost principle d. Business entity principle Revenue recognition principle.
< Answer >
Consider the following data pertaining to M/s. Pradesh Co. for the year 2002-03: Cost of goods available for sale Total sales
(Rs.) (Rs.)
Opening stock of goods
(Rs.)
20,000
(%)
25
Gross profit margin
1,00,000 80,000
Closing stock of goods as on March 31, 2003 was a. b. c. d. 8.
During the year 2002-2003, the opening stock and the closing stock of a company were Rs.1,20,000 and Rs.1,00,000 respectively. If the cost of goods sold during the year was Rs.3,40,000, the goods purchased by the company during the year amounted to
e. 9.
Rs.80,000 Rs.60,000 Rs.40,000 Rs.36,000 e. Rs.20,000.
a. Rs.4,60,000 b. Rs.4,40,000 c. Rs.3,60,000 d. Rs.3,40,000 Rs.3,20,000. < Answer >
Consider the following: I. II. III.
Rate of depreciation under the written down method Original cost of the asset Residual value of the asset at the end of useful life
The estimated useful life of the asset, in years, is a.
< Answer >
4 b. c. d. e.
5 6 7 8.
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= 20% = Rs.1,00,000 = Rs. 40,960
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10. During the year 2002-2003, a company paid Rs.1,20,000 as rent. If the outstanding rent as on March 31, 2002 and March 31, 2003 were Rs.24,000 and Rs.36,000 respectively, then the amount of rent charged to profit and loss account during the year was
c.
a. Rs.1,08,000 b. Rs.1,20,000 Rs.1,32,000 d. Rs.1,44,000 e. Rs.1,56,000.
11. Which of the following represent(s) personal accounts in accounting parlance?
e.
< Answer >
First-in-First-out method b. Last-in-First-out method c. Weighted average cost method d. Simple average cost method e. Specific cost method.
15. At the time of preparation of final accounts, bad debts recovered account will be transferred to b.
< Answer >
Outstanding expenses b. Prepaid expenses c. Deferred expenses d. Accrued revenues e. Capital expenses.
14. Which of the following inventory valuation methods shows higher profits during the period of rising prices? a.
< Answer >
a. Debit wages account and credit profit & loss account b. Debit wages account and credit cash account c. Debit building account and credit profit & loss account Debit building account and credit cash account e. Debit building account and credit wages account.
13. The expenses that have fallen due for payment but not paid are a.
< Answer >
a. Sundry creditors b. Bank account c. Outstanding wages d. Prepaid insurance All of the above.
12. XL Ltd. paid wages of Rs.90,000 for construction of building. The journal entry for the transaction is
d.
< Answer >
a. Debtor’s account Profit & loss account c. Profit & loss adjustment account d. Profit & loss appropriation account e. Provision for discount on debtors account.
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< Answer >
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< Answer >
16. The rate of interest payable on calls in advance is
e.
a. 10% p.a. b. 9% p.a. c. 8% p.a. d. 7.5% p.a. 6% p.a.
17. The long term investments are accounted for in the balance sheet at a.
Historical cost b. Current market value c. Net realizable value d. Present value of future cash flows e. Replacement cost.
18. Which of the following appears under the head “Miscellaneous expenditure” on the assets side of a balance sheet?
d.
< Answer >
a. Sale of an asset Collection of bills receivable c. Issue of shares d. Borrowing from banks e. Operating profits.
20. Future maintainable profits of West Ltd. for the last 5 years were as follows: 1998-1999 1999-2000 2000-2001 2001-2002 2002-2003 The weighted average profits of the company are
e.
< Answer >
a. Bills discounted from bank b. Prepaid insurance premium c. Directors’ remuneration Discount on issue of shares e. Income tax paid in advance.
19. Which of the following is not a source of fund? b.
< Answer >
a. b. c. d. Rs.
Rs.14,54,000 Rs.10,90,500 Rs. 8,72,400 Rs. 4,36,200 2,90,800.
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Rs.1,32,000 Rs.2,44,000 Rs.2,74,000 Rs.3,15,000 Rs.3,32,000
< Answer >
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21. According to section 78 of the Companies Act, the amount in the share premium account cannot be used for the purpose of b.
a. Issue of fully paid bonus shares Writing off losses of the company c. Writing off preliminary expenses d. Writing off commission or discount on issue of shares e. Providing premium payable on the redemption of preference shares or debentures of the company.
22. The three column cash book represents
d.
< Answer >
a. Interest on deposits accepted b. Annual insurance premium on inventory Customs duty paid in connection with the import of equipment d. Repairs and maintenance on machinery e. Expenditure on assets like paper weight and pin cushion.
26. Jasmine 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 its existing equity shareholders the right to apply for a new share at Rs.120 per share for every three shares held by them. The value of right is
e.
< Answer >
Two accounts b. The same account on two different dates c. Two sides of the same account d. Two accounts on two different dates e. Two accounts on the same side.
25. Which of the following is not an item of revenue expenditure?
c.
< Answer >
Purchase of materials b. Sale of products c. Returns outward d. Return of unsold goods e. Both (a) and (b) above.
24. In double entry system of book-keeping, every business transaction affects a.
< Answer >
a. Real accounts b. Nominal accounts c. Nominal and personal accounts Real, personal and nominal accounts e. Real and personal accounts.
23. Carriage inward refers to the cost of transportation for a.
< Answer >
a. b. c. d. Rs.
Rs.176 Rs.120 Rs. 56 Rs. 40 14.
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27. A credit sale to Mr. Gupta for Rs.7,500 was recorded in purchases book as Rs.5,700 and was posted to the debit side of Mr. Gupta’s account as Rs.7,500. The effect of this mistake, in trail balance is a.
Debit is more by Rs.13,200 b. Debit is more by Rs.7,500 c. Credit is more by Rs.5,700 d. Debit is less by Rs.7,500 e. Credit is more by Rs.13,200.
28. The periodical total of a purchases returns book is recorded to the
d.
< Answer >
< Answer >
a. Debit side of the purchases account b. Debit side of the purchases returns account c. Credit side of the purchases account Credit side of the purchases returns account e. Credit side of creditors account.
29. The average capital employed of Sun Ltd. is Rs.12,00,000. The net trading profits of the company after payment of tax for the past 3 years were Rs.2,20,200, Rs.1,80,000 and Rs.2,21,400 respectively.
< Answer >
If the normal rate of return is 10%, the super profits of the company are b.
a. Rs. c. d. e.
Rs. 62,160 87,200 Rs.1,20,000 Rs.1,90,800 Rs.5,01,600.
30. Samway Ltd. issued shares of Rs.10 each at a discount of 10%. Mr. Sujit who applied for 30 shares and paid Rs.2 on application and failed to pay the allotment money of Rs.3. If the company forfeites his entire shares, the forfeiture account will be credited by
c.
a. Rs.90 b. Rs.81 Rs.60 d. Rs.54 e. Rs.30. END OF PART A
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Part B : Problems (50 Points) • • • • • 1.
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.
Mayur Ltd. has prepared the following trial balance as on March 31, 2003: Particulars
Salaries Discount allowed Electricity expenses Interest on loan Bills receivable Cash on hand Cash at bank Building Furniture & fixtures Plant & machinery Sundry debtors Telephone expenses Investments (@ 12% p.a.) Closing stock
Debit (Rs.) 5,23,000 12,000 42,000 25,000 1,12,000 8,000 20,000 5,20,000 2,80,000 2,50,000 1,40,000 35,000 1,00,000 25,000 20,92,000
Share Capital
Credit (Rs.) 6,00,000
Sundry creditors Loan (@ 12% p.a.) Bills payable Outstanding salaries Gross profit Discount received Interest on investments General reserve Provision for doubtful debts
1,00,000 2,50,000 78,000 10,000 7,75,000 10,000 10,000 2,50,000 9,000
Particulars
20,92,000
The company has furnished the following additional information: i. Provision for doubtful debts is to be made at the rate of 5% on sundry debtors. Sundry debtors include Rs.6,000 which have become bad. ii.
Depreciation is to be provided as follows: Plant & machinery Furniture & fixtures Building
iii. iv.
10% 5% 10%
Telephone bills amounting to Rs.2,000 remain unpaid. Incidental charges of Rs.200 charged by bank is not recorded in cash book
v. Sales include Rs.8,000 in respect of sale of an old furniture on April 01, 2002, the book value of the furniture on April 01, 2002 was Rs.10,000. You are required to prepare the profit and loss account for the year ended March 31, 2003 and the balance sheet as on that date after considering the above information. (13 points) < Answer > 2. On April 01, 1999, Bhavan Construction Company acquired Machine A for Rs.1,00,000 and Machine B for Rs.1,20,000. On April 01, 2000, the company purchased Machine C for Rs.1,50,000. On April 01, 2001, Machine
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A has become obsolete and a similar machine was purchased by exchanging Machine A and making a cash payment of Rs.1,00,000. On April 01, 2002, Machine C purchased on April 01, 2000 was destroyed by fire and the insurance company paid Rs.1,02,000 only. The company charges depreciation at the rate of 10% per annum on written down value method. You are required to show the Machinery account for the years 1999-2000 to 2002-2003. (10 points) < Answer >
3.
The following is the balance sheet of Sathya Steel Ltd. as on March 31, 2003: Liabilities
Rs.
Assets
Rs.
50,000 Equity shares of Rs.10 each
5,00,000 Goodwill
3,000, 10% Preference shares of Rs.100 each
3,00,000 Fixed Assets
12,00,000
4,00,000 Investments
3,00,000
Profit & loss A/c.
1,20,000 Current Assets
3,70,000
10% Debentures
2,00,000
Fixed deposits
1,00,000
Current liabilities & provisions
3,80,000
General reserve
20,00,000
1,30,000
20,00,000
Additional information: On March 31, 2003 the company has revalued the assets as follows: i. Goodwill Rs. 1,50,000 ii. Fixed Assets Rs.14,00,000 iii. Investments Rs. 4,00,000 You are required to calculate the value of each equity share of the company under intrinsic value method. (5 points) < Answer > 4.
On March 31, 2003, the bank column of cash book of Dolphin Ltd. showed a credit balance of Rs.14,370. The following further information is available: i. Cheques worth Rs.58,000 were deposited in the bank before March 27, 2003, but it appears from the bank pass book that cheques worth Rs.49,000 only had been credited before March 31, 2003. ii.
A cheque of Rs.2,000 debited by the bank on March 2, 2003 was not issued by the company.
iii. Cheques for Rs.42,000 were issued during the month of March, 2003, out of which 2 cheques aggregating to Rs.7,650 were presented on April 3, 2003, the remaining have been paid in the month of March itself. iv. The cashier of the firm misappropriated a sum of Rs.3,500 by passing a fictitious entry as cash deposited in bank on March 2, 2003.
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v. The pass book showed that the bank had collected Rs.650 as interest on Government securities on March 28, 2003. vi. On March 30, 2003 the bank had charged interest of Rs.170 and bank charges of Rs.50. There was no entry in the cash book for the charges and interest. vii. As per standing instructions, an amount of Rs.2,500 was debited by the bank on March 15, 2003 for payment of insurance premium. You are required to prepare the bank reconciliation statement as on March 31, 2003. (11 points) < Answer > 5. Universe Ltd. invited applications for 5,000 equity shares of Rs.10 each at a premium of Rs.2 per share, payable as under: On application
Rs.6 (inclusive of premium)
On allotment
Rs.4
On first and final call
Rs.2
The applications were received for 5,000 equity shares. The entire amount of share money is received in full with the exception of the allotment money on 300 shares and final call money on 400 shares (including the 300 shares on which the allotment money was not received). The above 400 shares are duly forfeited. 300 shares, on which the allotment money was not received, are reissued at Rs.8 per share as fully paid. You are required to pass journal entries for the above transactions. (11 points) < Answer > END OF PART B
Part C : Applied Theory (20 Points) • • • •
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.
6. An agreed trial balance cannot be regarded as conclusive proof of the correctness of the books of account. Explain the reasons for agreement of a trial balance despite the errors and omissions. (6 points) < Answer > http://www.icfai.org/suggested/MB131-0703.htm (9 of 22)12/22/2003 5:34:28 PM
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7. The financial requirements of a company may be met by raising share capital or by going for public borrowing in the nature of issue of debentures. Briefly explain how the shares are different from debentures. (8 points) < Answer > 8.
‘An audited balance sheet is not free from flaws’. In this context, discuss the limitations of a balance sheet. (6 points) < Answer >
END OF PART C END OF QUESTION PAPER
Suggested Answers Financial Accounting (MB131) : July 2003 Part A : Basic Concepts 1. Answer : (b) TOP >
<
Reason : Real account represents assets like plant, machinery, cash etc. As on a particular date, this account shows the worth of the assets. Salary account and purchases account are nominal accounts. Sundry creditors account is personal account and outstanding rent account is representative personal account. <
2. Answer : (d) TOP > Reason : Particulars Balance as per bank statement (overdraft) Less: Cheque dishonored but not entered in the cash book Balance as per cash book (overdraft) (credit)
Rs. 12,500 2,800 9,700 <
3. Answer : (d) TOP >
Reason : Outstanding salaries are short term obligations expected to be retired during the short http://www.icfai.org/suggested/MB131-0703.htm (10 of 22)12/22/2003 5:34:28 PM
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period of time. So, it is a current liability. Fixed deposit is the long term obligation or long term liability. Prepaid expenses, trade mark and discount on issue of shares are assets. <
4. Answer : (d) TOP >
Reason : Purchase of fixed assets on credit is entered in journal proper and subsequently posted into the ledger. Hence the correct answer is (d). It is not recorded in purchases book as only purchase of goods will be recorded in purchases book. In cash book, only cash transactions will be recorded. As the fixed assets were purchased on credit, this transaction will not be recorded in the cash book. 5. Answer : (e) < TOP > Reason : According to Generally Accepted Accounting Principles, materiality concept, cost concept, consistency concept and matching concept are considered as basic principles of accounting. Logical principle is not considered as basic principle of accounting. <
6. Answer : (e) TOP >
Reason : In contract accounting, there is a reasonable certainty that the project would be completed and the return consideration is realized. In fact, return consideration may begin as soon as the work begins. So, revenue may be recognized at work-in-progress. This is the exception to the revenue recognition principle. Hence the correct answer is (e). It is not an exception to money measurement concept, going concern concept, historical cost concept and business entity concept. <
7. Answer : (c) TOP > Reason : Particulars Cost of goods available sale Less: Cost of goods sold Sales Rs.80,000 Less: Gross profit (25%) Rs.20,000
Rs. 1,00,000
60,000 40,000
Closing stock of goods 8. Answer : (e) TOP >
< Reason :
Particulars Closing stock Add: Cost of goods sold Less: Opening stock Goods purchased
Rs. 1,00,000 3,40,000 4,40,000 1,20,000 3,20,000
9. Answer : (a) TOP >
< Reason :
Particulars Original cost of asset Less: Depreciation 20% year – 1
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Rs. 1,00,000 20,000 80,000
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Less: Depreciation 20% year – 2 Less: Depreciation 20% year – 3 Less: Depreciation 20% year – 4
16,000 64,000 12,800 51,200 10,240 40,960
Useful life – 4 years. <
10. Answer : (c) TOP > Reason : Particulars Cash paid during the year as rent Less: Outstanding rent as on March 31, 2002 Add: Outstanding rent as on March 31, 2003 Rent for the year charged to profit & loss a/c. 11. Answer : (e) TOP >
Rs. 1,20,000 24,000 96,000 36,000 1,32,000 <
Reason : Personal accounts deal with accounts of individuals like creditors, debtors, banks etc. It shows the balance due to these individuals or due from them on a particular date and representative personal accounts represent the amounts due on account of accrual concept like accrued expenses and prepaid expenses or accrued incomes and pre-received incomes. By virtue of this, the accounts stated in alternatives (a) sundry creditors, (b) Bank account, (c) outstanding wages and (d) prepaid insurance represents personal accounts. < 12. Answer : (d) TOP > Reason : Journal entry of wages paid for construction of building. Rs. Rs. Building account Dr. 90,000 To cash account 90,000 Other entries given in (a), (b), (c) and (e) are not correct because, the affected aspects of the transaction are debit aspect building and credit aspect – cash 13. Answer : (a) < TOP > 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. < 14. Answer : (a) TOP > Reason : FIFO method is based on the assumption that the costs are charged against revenue in the order in which they occur. It means, the first unit in stock is the first unit to be out. The closing inventory consists of the units purchased last. If the prices are rising, goods are issued at lower price and http://www.icfai.org/suggested/MB131-0703.htm (12 of 22)12/22/2003 5:34:28 PM
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closing stocks are valued at higher price. It will help to create more profit. Other inventory methods stated in (b), (c), (d) and (e) do not result in higher profits during the period of rising prices. <
15. Answer : (b) TOP >
Reason : Sometimes an amount written off as bad debts may be subsequently recovered and any such recovery must be treated as a windfall and transferred to the profit and loss account as a gain The journal entries passed are : 1.
Cash account
Dr
To Bad debts recovered account 2.
Bad debts recovered account Dr To Profit and loss account
(a) Debtor’s account is the personal account which had already been closed by way of writing it off as bad debt during the accounting period in which the said amount was treated as non-recoverable. (c) Profit and loss adjustment account is the account meant for affecting the necessary adjustments in the event of detection of errors after finalization of the financial statements. (d) Profit and loss appropriation account is the account which reflects the entries of appropriation/ allocation of profit. (e) Provision for discount on debtors is a charge against revenue to meet a known liability (discount) the amount of which cannot be determined with substantial accuracy. Thus, the recovery of bad debts cannot be debited to any of the above accounts <
16. Answer : (e) TOP > Reason : The rate of interest payable on calls in advance is 6% per annum.
<
17. Answer : (a) TOP >
Reason : Long term investment is not accounted for in the balance sheet at current market value, net realizable value, replacement cost or present value of future cash flows. It is done at historical cost. Thus (a) is correct. <
18. Answer : (d) TOP >
Reason : Discount on issue of shares appears under the head miscellaneous expenditure on the asset side of the balance sheet. Bill discounted amount will be debited in the cash book. Prepaid expenses and income tax paid in advance appear under current assets of the balance sheet. Directors’ remuneration will be entered in the debit side of profit and loss account. Hence (d) is correct. <
19. Answer : (b) TOP >
Reason : Bills receivable is a part of fund and conversion of bill receivable into cash cannot be considered as source of fund. The sale of an asset, issue of shares, borrowing from banks and operating profits are sources of funds. <
20. Answer : (e) TOP > Reason : Year 1998-1999
Profit (Rs.) 1,32,000
Weight
Total (Profit x Weight) Rs.
1
1,32,000
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1999-2000 2000-2001 2001-2002 2002-2003
2,44,000 2 2,74,000 3 3,15,000 4 3,32,000 5 Total 15 Weighted average profit = = Rs.2,90,800
21. Answer : (b) TOP >
4,88,000 8,22,000 12,60,000 16,60,000 43,62,000 <
Reason : According to section 78 of the Companies Act, the share premium amount cannot be used for the purpose of writing off losses of the company. Hence, (b) is correct. It can be used for the purpose of issue of fully paid bonus shares, writing off preliminary expenses or commission or discount on issue of shares. It can also be used for providing premium payable on redemption of preference shares or debentures of the company. < 22. Answer : (d) TOP > Reason : The three column cash book is a refinement over single column cash book and double column cash book. Under three column cash book an additional column for discount is included on either side. Thus, it represents cash column-real account, Bank column-personal account and discount column-nominal account. The other alternatives (a) single column represents real account there is no cash book where only personal accounts (c) are represented. In some business organizations a cash book with bank column is maintained due to convenience where real and personal accounts (e) are reflected. The three column cash book represents real, personal and nominal accounts. < 23. Answer : (a) TOP > Reason : Carriage inward expense is related to the carrying cost of material purchased. If it is incurred for carrying new assets, it should be capitalized to the assets value. Carrying cost relating to sales of products, return outwards and return of unsold goods will not be treated as carriage inward expenses. Hence, (a) is correct. < 24. Answer : (a) TOP > 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). < 25. Answer : (c) TOP > 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 etc. are items of revenue expenditure. 26. Answer : (e) < TOP > Reason : Value of right R = (M – S) = x (Rs.176 – Rs.120)
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= x Rs.56 = Rs.14 <
27. Answer : (a) TOP >
Reason : An amount of Rs.7,500 ( i.e credit sale) was not recorded on credit side and Rs. 5,700 was wrongly recorded on debit side. Hence, the debit side will be more by Rs.13,200 (i.e 7,500 + 5,700) Mr. Gupta’s account is correctly debited with Rs. 7,500 and hence will not affect the trial balance <
28. Answer : (d) TOP >
Reason : Purchases account is a debit balance and purchase returns is a credit balance and the total of purchase returns will be recorded to the credit side of the purchase returns account. Hence (d) is the answer. It is not taken to debit side of purchases returns account. Hence (b) is not the answer. It is not taken to purchases account. Hence (a) and (c) are not the answers. The creditors account will be debited with the amount of purchase returns. Hence (e) is not the answer. 29. Answer : (b) < TOP > Reason : Average profit = = = Rs.2,07,200 Average profit
Rs.2,07,200
Less: Normal rate of return on capital employed 10% on Rs.12,00,000
Rs.1,20,000
Super profit
Rs. 87,200 <
30. Answer : (c) TOP > Reason : Amount paid by Mr. Sujit = 30 shares × Rs.2 = Rs.60 Therefore, share forfeiture account will be credited by Rs.60.
Part B : Problems 1.
Mayur Ltd. Profit & loss a/c for the year ended March 31, 2003 Dr. Cr. Particulars
To Salaries To Discount allowed To Electricity expenses
Rs. 5,23,000
Particulars By Gross profit (Rs.7,75,000 – Rs.8,000) 12,000 By Discount received 42,000 By Interest on investment
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Rs. 7,67,000 10,000
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To Interest on loan Paid Add: Outstanding To Telephone expenses Add: Outstanding To Bad debts Add: Closing provision Less: Opening provision To Depreciation: Plant & Machinery Building Furniture To Loss on sale of furniture To Incidental charges To Net profit
Rs. 25,000 5,000 35,000 2,000 6,000 6,700 12,700 9,000
Received Accrued
10,000 2,000
12,000
30,000 37,000
3,700
25,000 52,000 13,500 2,000 200 48,600 7,89,000
7,89,000
Balance Sheet as at March 31, 2003 Liabilities Share capital General reserve Profit & loss a/c Secured loans Unsecured Loan (12%) Accrued Interest on loan Current Liabilities & provisions Current Liabilities: Sundry creditors Bills payable Outstanding expenses Telephone expenses Salaries
Rs. Assets 6,00,000 Fixed assets: 2,50,000 Building 48,600 (-) Depreciation (10%) Nil Plant & machinery 2,50,000 (-) Depreciation (10%) 5,000 Furniture & fixtures (-) Sold out
2,000 10,000
Rs. 5,20,000 52,000 2,50,000 25,000 2,80,000 10,000 2,70,000 13,500
1,00,000 (-) Depreciation 78,000 Investments @ 12% Current assets, loans & advances: Current assets: 12,000 Closing stock Bills receivable Cash & bank 28,000 (-) Incidental charges 200 Sundry debtors 1,40,000 (-) Bad debts 6,000 1,34,000 (-) Provision 6,700 Accrued interest on investments 13,43,600
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4,68,000 2,25,000
2,56,500 1,00,000
25,000 1,12,000 27,800
1,27,300 2,000 13,43,600 < TOP >
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2. Bhavan Construction Company Machinery Account Dr
Cr.
Date Particulars 1.4.1999 To Bank : ( Machine A) To Bank : (Machine B) 1-4-2000 To Balance b/d To Bank (Machine C) 1-4-2001 To Balance b/d To Bank (New Machine) To Part exchange 1-4-2002
To Balance c/d
Rs.Date 1,00,00031-3-2000 1,20,000 2,20,000 1,98,00031-03-2001 1,50,000 3,48,000 3,13,2001-4-2001 1,00,000
Particulars By Depreciation account By Balance c/d By Depreciation By Balance c/d
By Part exchange By Depreciation account (Working 3) 81,00031-03-2002 By Balance c/d 4,94,200 3,71,8801-04-2002 By Bank – Insurance claim By Profit and loss a/c (Working 4) Loss on machinery destroyed 31-03-2003 By Depreciation account (Working 5) By Balance c/d (Working 6) 3,71,880
Workings: 1. Depreciation of Machine A: Cost on 01-04-1999 Less : Depreciation – 1999 • 2000
Rs.1,00,000 Rs. 10,000 Rs. 90,000 Rs. 9,000 Rs. 81,000
Less : Depreciation – 2000-2001 Depreciation value Cost of new machine 2. Cash Rs.1,00,000 Part exchange Rs. 81,000 Rs. 1,81,000 3. Depreciation – for 2001-2002 10% on Rs. (3,13,200 – 81,000 + 1,81,000 = 4,13,200 ) = Rs.41,320 Loss of Machine C destroyed 4. Cost on 01-04-2000 Less: Depreciation – 2000-2001 Less: Depreciation – 2001-2002
Rs.1,50,000 Rs. 15,000 Rs.1,35,000 Rs. 13,500 Rs.1,21,500
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Rs. 22,000 1,98,000 2,20,000 34,800 3,13,200 3,48,000 81,000 41,320 3,71,880 4,94,200 1,02,000 19,500 25,038 2,25,342 3,71,880
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Less: Insurance claim
Rs.1,02,000 Rs. 19,500
Loss 5. Depreciation for 2002-2003 10% on Rs. 2,50,380 (3,71,880 – 1,21,500) = Rs.25,038 6. The depreciated value of machinery as on 31-03-2003 Machine B = Rs.1,20,000 (0.9) (0.9) (0.9) (0.9) = Rs. 78,732 Similar type of machine A = Rs.1,81,000 (0.9) (0.9) = Rs.1,46,610 =Rs. 2,25,342 < TOP >
3. Sathya Steel Ltd: Value of shares Under Intrinsic value method: Rs.
Rs.
Net Assets Goodwill
1,50,000
Fixed assets
14,00,000
Investments
4,00,000
Current assets
3,70,000 23,20,000
Less Liabilities: 10% Debentures
2,00,000
Fixed deposits
1,00,000
Current liabilities & provisions
3,80,000
10% Preference shares
3,00,000
Funds available for equity shareholders
9,80,000 13,40,000
Intrinsic value of equity shares = < TOP > 4.
Dolphin Ltd. Bank Reconciliation Statement as on March 31, 2003.
Particulars Balance as per Cash book (Unfavorable) (Credit) (Overdrawn)
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Rs.
Rs. 14,370
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Add: iv.
Amount misappropriated and wrongly shown as deposited at Bank
3,500
ii.
Cheques wrongly debited in pass book.
2,000
vi.
Bank overdraft interest charged only in bank pass book.
170
Bank charges debited in the bank pass book
50
i.
Cheques deposited but not presented for payment
9,000
vii.
Insurance premium directly debited by bank
2,500
17,220 31,590
Less : iii.
Cheques issued but not presented for payment v.
7,650
Interest on government securities directly credited in the bank pass
650
8,300
book Balance as per Pass book (Unfavorable) (Debit) (Overdraft)
23,290 < TOP >
5.
Super Power Ltd.
Journal Entries Bank a/c. To Share Application a/c. (Application money received for 5,000 shares @ Rs.6 per share) Share Application a/c. To Equity share capital a/c. To Share premium a/c. (Transfer of application money to share capital a/c and share premium a/c in respect of 5,000 shares) Share Allotment a/c. To Equity Share capital a/c (Allotment money of Rs.4 per share due on 5,000 shares) Bank a/c. To Share allotment a/c. (Allotment money received on 4,700 shares at the rate of Rs.4 per share) Share final call a/c. To Equity share capital a/c. (Final call of Rs.2 per share due on 5,000 shares) Bank a/c. To Share final call a/c. (Final call money received on 4,600 shares at the rate of Rs.2 each) Equity share capital a/c. (Rs.10 x 400)
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Dr.
Dr. (Rs.) 30,000
Cr. (Rs.) 30,000
Dr.
30,000 20,000 10,000
Dr.
20,000 20,000
Dr.
18,800 18,800
Dr.
10,000 10,000
Dr.
9,200 9,200
Dr.
4,000
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To Share forfeiture a/c. (Rs.4 x 300 + Rs.8 x 100) To Share Allotment a/c. (Rs.4 x 300) To Share final call a/c. (Rs.2 x 400) (Forfeiture of 300 shares on which allotment & final call were due and 100 shares on which final call was due) Bank a/c. (300 x Rs.8) Share forfeiture a/c. (300 x Rs.2) To Share Capital a/c. (Re-issue of 300 forfeited shares as fully paid up at Rs.8 per share) Share forfeiture a/c. To Capital Reserve a/c. (Profit on re-issue of 300 forfeited shares transferred to capital reserve) Workings: Calculation of Profit on re-issue of 300 shares. Amount forfeited on 300 shares = 300 × Rs.4 (excluding premium amount) Lees: Amount applied for re-issue = 300 × Rs.2 Profit on re-issue of shares
2,000 1,200 800
Dr. Dr.
2,400 600 3,000
Dr.
600 600
Rs.1200 Rs. 600 Rs. 600 < TOP >
Part C: Applied Theory 6. Even though a trial balance may be in agreement, certain errors might have been committed while recording the transactions. Such errors are referred to as errors not disclosed by Trial Balance. The errors which will not cause a mismatch in the totals of a trial balance are as follows: a. Omission of the recording of a transaction from the books of accounts: If the withdrawal of goods worth Rs.1,200 by the proprietor is omitted to be recorded in the books, the trial balance will still agree as both the debit and the credit aspects have been omitted to be recorded. b. Recording a transaction at an amount which is totally different from the actual amount: If the purchases of goods worth Rs.7,500 is recorded in the purchase book as Rs.5,700 the error will not cause the trial balance to disagree. c. Compensating errors: These are quite difficult to detect. If a cash discount of Rs.215 allowed to a customer has been posted to the credit of his account as Rs.251 and a cash sale of Rs.2,851 has been posted to sales account as Rs.2,815, then the excess credit caused by the first error would be exactly compensated by the lower credit recorded by the second error and the trial balance will be in agreement. d. Posting of an aspect of a transaction on the correct side of a wrong account: If the amount of Rs.800 received from MN Ltd., a debtor, is posted to the credit of NM Ltd., account, also a debtor, the trial balance totals will still agree, because both are debit accounts and the total effect is the same. e. Recording both aspects of a transaction more than once in the books of accounts: If a sales of Rs.3,500 made to PQR Ltd. is entered in the sales book twice, the error will not cause a mismatch in the totals of the trial balance. f. Errors of principle: If the machinery account is debited for an amount of repair charges incurred for the machinery, the error will not be disclosed by the trial balance. This is because that both machinery account and repairs account are debit accounts and it is a question of principle that repair charges should not be debited to the machinery account. Hence, the total effect will be the same and hence the trial balance will http://www.icfai.org/suggested/MB131-0703.htm (20 of 22)12/22/2003 5:34:29 PM
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tally. g. Omission/mistake of extension and carry forward: When an item is omitted or wrong figure is taken while carrying forward to the next pages trial balance will not tally < TOP > 7.
Differences between Shares and Debentures: a. Share is an ownership security. A shareholder is, to the extent of his holding, the owner of the company. A debenture is a creditorshift security which makes the debentureholder a creditor of the company. b. Share can be issued at a discount subject to the specifications of section 79 of the Companies Act, 1956. Debentures on the other hand do not have any such limitations and can be issued at a discount.
d.
c. The return to a shareholder is in the nature of dividends which are subject to the company earning profits during the relevant accounting period. Further, a company cannot be forced to pay dividends as the directors may retain the divisible profits for potential investment opportunities. The return to the debentureholder is in the form of interest payments which is a compulsory obligation which will have to be honored even in the face of losses. Shares convertible into debentures cannot be issued while debentures (PCD - partly convertible debentures or FCD - fully convertible debentures) which can be converted into shares at the option of the debentureholders can be issued. e. In the event of dissolution of the company payment to the debentureholders takes precedence over the amount payable to the shareholders. < TOP >
8.
The following limitations in respect of the position statement i.e. the balance sheet are worth noting: i. Though the balance sheet is claimed to be the statement of all assets and liabilities, still it does not contain certain assets and liabilities. Example: The Efficient Management force is a Human Asset available to the organization and so far no efforts are made to show the human assets under the asset side of the Balance Sheet. Similarly Dissatisfied labor force is a liability to the organization. ii. An investor who wishes to analyze the balance sheet is more concerned with the present and future whereas the balance sheet pertains to a point of time relating to past and therefore may not be quite helpful. iii. Personal judgment plays a great part in determining the figures for the balance sheet. Example: Provision for depreciation, stock valuation, provision for bad debts are more based on the personal judgment and are therefore not free from the bias. iv. Even the audited balance sheets also cannot give a complete seal of accuracy. Deliberate manipulations in the profits, current assets and closing stocks make the balance sheets unreliable. v. The factors which are having vital bearing on the earnings of the organization such as changes in the managerial personnel, cessation of agreements, loss of markets are not disclosed by the balance sheet. vi. Financial statements are based on accounting policies which vary from enterprise to enterprise both within the country and among the countries. The users of financial statements cannot understand them clearly and have comparisons unless the significant accounting policies which have been adopted in preparing the financial statements are disclosed very clearly.
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vii. Balance sheet is prepared on a particular date and hence there is every possibility of `Window dressing’. < TOP >
< TOP OF THE DOCUMENT >
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Question Paper Financial Accounting (MB131) : July 2003 Part A : Basic Concepts (30 Points) • • • • 1.
Which of the following is a real account? b.
2.
4.
< Answer >
a. Prepaid expenses b. Trade-mark c. Discount on issue of shares Outstanding salaries e. Fixed deposits. < Answer >
a. Purchases book b. Ledger c. Cash book Journal proper e. Both (b) and (d) above.
Which of the following concepts is not considered as basic principle of accounting?
e.
< Answer >
Rs.21,000 Rs.15,300 Rs.12,500 9,700 Rs. 4,000.
Purchase of fixed assets on credit is originally recorded in
d. 5.
a. b. c. Rs. e.
Which of the following is a current liability?
d.
< Answer >
a. Salary account Cash account c. Outstanding rent account d. Sundry creditors account e. Purchases account.
The balance as per bank statement of a company is Rs.12,500 (Dr.). The company deposited two cheques worth Rs.8,500, out of which one cheque for Rs.2,800 was dishonoured which was not entered in the cash book. The credit balance as per cash book is
d. 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.
a. Materiality concept b. Cost concept c. Consistency concept d. Matching concept Logical concept.
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< Answer >
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6.
e. 7.
< Answer >
In contract accounting, the percentage of completion method is an exception to the a. Money measurement principle b. Going concern principle c. Historical cost principle d. Business entity principle Revenue recognition principle.
< Answer >
Consider the following data pertaining to M/s. Pradesh Co. for the year 2002-03: Cost of goods available for sale Total sales
(Rs.) (Rs.)
Opening stock of goods
(Rs.)
20,000
(%)
25
Gross profit margin
1,00,000 80,000
Closing stock of goods as on March 31, 2003 was a. b. c. d. 8.
During the year 2002-2003, the opening stock and the closing stock of a company were Rs.1,20,000 and Rs.1,00,000 respectively. If the cost of goods sold during the year was Rs.3,40,000, the goods purchased by the company during the year amounted to
e. 9.
Rs.80,000 Rs.60,000 Rs.40,000 Rs.36,000 e. Rs.20,000.
a. Rs.4,60,000 b. Rs.4,40,000 c. Rs.3,60,000 d. Rs.3,40,000 Rs.3,20,000. < Answer >
Consider the following: I. II. III.
Rate of depreciation under the written down method Original cost of the asset Residual value of the asset at the end of useful life
The estimated useful life of the asset, in years, is a.
< Answer >
4 b. c. d. e.
5 6 7 8.
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= 20% = Rs.1,00,000 = Rs. 40,960
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10. During the year 2002-2003, a company paid Rs.1,20,000 as rent. If the outstanding rent as on March 31, 2002 and March 31, 2003 were Rs.24,000 and Rs.36,000 respectively, then the amount of rent charged to profit and loss account during the year was
c.
a. Rs.1,08,000 b. Rs.1,20,000 Rs.1,32,000 d. Rs.1,44,000 e. Rs.1,56,000.
11. Which of the following represent(s) personal accounts in accounting parlance?
e.
< Answer >
First-in-First-out method b. Last-in-First-out method c. Weighted average cost method d. Simple average cost method e. Specific cost method.
15. At the time of preparation of final accounts, bad debts recovered account will be transferred to b.
< Answer >
Outstanding expenses b. Prepaid expenses c. Deferred expenses d. Accrued revenues e. Capital expenses.
14. Which of the following inventory valuation methods shows higher profits during the period of rising prices? a.
< Answer >
a. Debit wages account and credit profit & loss account b. Debit wages account and credit cash account c. Debit building account and credit profit & loss account Debit building account and credit cash account e. Debit building account and credit wages account.
13. The expenses that have fallen due for payment but not paid are a.
< Answer >
a. Sundry creditors b. Bank account c. Outstanding wages d. Prepaid insurance All of the above.
12. XL Ltd. paid wages of Rs.90,000 for construction of building. The journal entry for the transaction is
d.
< Answer >
a. Debtor’s account Profit & loss account c. Profit & loss adjustment account d. Profit & loss appropriation account e. Provision for discount on debtors account.
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< Answer >
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< Answer >
16. The rate of interest payable on calls in advance is
e.
a. 10% p.a. b. 9% p.a. c. 8% p.a. d. 7.5% p.a. 6% p.a.
17. The long term investments are accounted for in the balance sheet at a.
Historical cost b. Current market value c. Net realizable value d. Present value of future cash flows e. Replacement cost.
18. Which of the following appears under the head “Miscellaneous expenditure” on the assets side of a balance sheet?
d.
< Answer >
a. Sale of an asset Collection of bills receivable c. Issue of shares d. Borrowing from banks e. Operating profits.
20. Future maintainable profits of West Ltd. for the last 5 years were as follows: 1998-1999 1999-2000 2000-2001 2001-2002 2002-2003 The weighted average profits of the company are
e.
< Answer >
a. Bills discounted from bank b. Prepaid insurance premium c. Directors’ remuneration Discount on issue of shares e. Income tax paid in advance.
19. Which of the following is not a source of fund? b.
< Answer >
a. b. c. d. Rs.
Rs.14,54,000 Rs.10,90,500 Rs. 8,72,400 Rs. 4,36,200 2,90,800.
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Rs.1,32,000 Rs.2,44,000 Rs.2,74,000 Rs.3,15,000 Rs.3,32,000
< Answer >
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21. According to section 78 of the Companies Act, the amount in the share premium account cannot be used for the purpose of b.
a. Issue of fully paid bonus shares Writing off losses of the company c. Writing off preliminary expenses d. Writing off commission or discount on issue of shares e. Providing premium payable on the redemption of preference shares or debentures of the company.
22. The three column cash book represents
d.
< Answer >
a. Interest on deposits accepted b. Annual insurance premium on inventory Customs duty paid in connection with the import of equipment d. Repairs and maintenance on machinery e. Expenditure on assets like paper weight and pin cushion.
26. Jasmine 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 its existing equity shareholders the right to apply for a new share at Rs.120 per share for every three shares held by them. The value of right is
e.
< Answer >
Two accounts b. The same account on two different dates c. Two sides of the same account d. Two accounts on two different dates e. Two accounts on the same side.
25. Which of the following is not an item of revenue expenditure?
c.
< Answer >
Purchase of materials b. Sale of products c. Returns outward d. Return of unsold goods e. Both (a) and (b) above.
24. In double entry system of book-keeping, every business transaction affects a.
< Answer >
a. Real accounts b. Nominal accounts c. Nominal and personal accounts Real, personal and nominal accounts e. Real and personal accounts.
23. Carriage inward refers to the cost of transportation for a.
< Answer >
a. b. c. d. Rs.
Rs.176 Rs.120 Rs. 56 Rs. 40 14.
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< Answer >
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27. A credit sale to Mr. Gupta for Rs.7,500 was recorded in purchases book as Rs.5,700 and was posted to the debit side of Mr. Gupta’s account as Rs.7,500. The effect of this mistake, in trail balance is a.
Debit is more by Rs.13,200 b. Debit is more by Rs.7,500 c. Credit is more by Rs.5,700 d. Debit is less by Rs.7,500 e. Credit is more by Rs.13,200.
28. The periodical total of a purchases returns book is recorded to the
d.
< Answer >
< Answer >
a. Debit side of the purchases account b. Debit side of the purchases returns account c. Credit side of the purchases account Credit side of the purchases returns account e. Credit side of creditors account.
29. The average capital employed of Sun Ltd. is Rs.12,00,000. The net trading profits of the company after payment of tax for the past 3 years were Rs.2,20,200, Rs.1,80,000 and Rs.2,21,400 respectively.
< Answer >
If the normal rate of return is 10%, the super profits of the company are b.
a. Rs. c. d. e.
Rs. 62,160 87,200 Rs.1,20,000 Rs.1,90,800 Rs.5,01,600.
30. Samway Ltd. issued shares of Rs.10 each at a discount of 10%. Mr. Sujit who applied for 30 shares and paid Rs.2 on application and failed to pay the allotment money of Rs.3. If the company forfeites his entire shares, the forfeiture account will be credited by
c.
a. Rs.90 b. Rs.81 Rs.60 d. Rs.54 e. Rs.30. END OF PART A
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< Answer >
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Part B : Problems (50 Points) • • • • • 1.
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.
Mayur Ltd. has prepared the following trial balance as on March 31, 2003: Particulars
Salaries Discount allowed Electricity expenses Interest on loan Bills receivable Cash on hand Cash at bank Building Furniture & fixtures Plant & machinery Sundry debtors Telephone expenses Investments (@ 12% p.a.) Closing stock
Debit (Rs.) 5,23,000 12,000 42,000 25,000 1,12,000 8,000 20,000 5,20,000 2,80,000 2,50,000 1,40,000 35,000 1,00,000 25,000 20,92,000
Share Capital
Credit (Rs.) 6,00,000
Sundry creditors Loan (@ 12% p.a.) Bills payable Outstanding salaries Gross profit Discount received Interest on investments General reserve Provision for doubtful debts
1,00,000 2,50,000 78,000 10,000 7,75,000 10,000 10,000 2,50,000 9,000
Particulars
20,92,000
The company has furnished the following additional information: i. Provision for doubtful debts is to be made at the rate of 5% on sundry debtors. Sundry debtors include Rs.6,000 which have become bad. ii.
Depreciation is to be provided as follows: Plant & machinery Furniture & fixtures Building
iii. iv.
10% 5% 10%
Telephone bills amounting to Rs.2,000 remain unpaid. Incidental charges of Rs.200 charged by bank is not recorded in cash book
v. Sales include Rs.8,000 in respect of sale of an old furniture on April 01, 2002, the book value of the furniture on April 01, 2002 was Rs.10,000. You are required to prepare the profit and loss account for the year ended March 31, 2003 and the balance sheet as on that date after considering the above information. (13 points) < Answer > 2. On April 01, 1999, Bhavan Construction Company acquired Machine A for Rs.1,00,000 and Machine B for Rs.1,20,000. On April 01, 2000, the company purchased Machine C for Rs.1,50,000. On April 01, 2001, Machine
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A has become obsolete and a similar machine was purchased by exchanging Machine A and making a cash payment of Rs.1,00,000. On April 01, 2002, Machine C purchased on April 01, 2000 was destroyed by fire and the insurance company paid Rs.1,02,000 only. The company charges depreciation at the rate of 10% per annum on written down value method. You are required to show the Machinery account for the years 1999-2000 to 2002-2003. (10 points) < Answer >
3.
The following is the balance sheet of Sathya Steel Ltd. as on March 31, 2003: Liabilities
Rs.
Assets
Rs.
50,000 Equity shares of Rs.10 each
5,00,000 Goodwill
3,000, 10% Preference shares of Rs.100 each
3,00,000 Fixed Assets
12,00,000
4,00,000 Investments
3,00,000
Profit & loss A/c.
1,20,000 Current Assets
3,70,000
10% Debentures
2,00,000
Fixed deposits
1,00,000
Current liabilities & provisions
3,80,000
General reserve
20,00,000
1,30,000
20,00,000
Additional information: On March 31, 2003 the company has revalued the assets as follows: i. Goodwill Rs. 1,50,000 ii. Fixed Assets Rs.14,00,000 iii. Investments Rs. 4,00,000 You are required to calculate the value of each equity share of the company under intrinsic value method. (5 points) < Answer > 4.
On March 31, 2003, the bank column of cash book of Dolphin Ltd. showed a credit balance of Rs.14,370. The following further information is available: i. Cheques worth Rs.58,000 were deposited in the bank before March 27, 2003, but it appears from the bank pass book that cheques worth Rs.49,000 only had been credited before March 31, 2003. ii.
A cheque of Rs.2,000 debited by the bank on March 2, 2003 was not issued by the company.
iii. Cheques for Rs.42,000 were issued during the month of March, 2003, out of which 2 cheques aggregating to Rs.7,650 were presented on April 3, 2003, the remaining have been paid in the month of March itself. iv. The cashier of the firm misappropriated a sum of Rs.3,500 by passing a fictitious entry as cash deposited in bank on March 2, 2003.
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v. The pass book showed that the bank had collected Rs.650 as interest on Government securities on March 28, 2003. vi. On March 30, 2003 the bank had charged interest of Rs.170 and bank charges of Rs.50. There was no entry in the cash book for the charges and interest. vii. As per standing instructions, an amount of Rs.2,500 was debited by the bank on March 15, 2003 for payment of insurance premium. You are required to prepare the bank reconciliation statement as on March 31, 2003. (11 points) < Answer > 5. Universe Ltd. invited applications for 5,000 equity shares of Rs.10 each at a premium of Rs.2 per share, payable as under: On application
Rs.6 (inclusive of premium)
On allotment
Rs.4
On first and final call
Rs.2
The applications were received for 5,000 equity shares. The entire amount of share money is received in full with the exception of the allotment money on 300 shares and final call money on 400 shares (including the 300 shares on which the allotment money was not received). The above 400 shares are duly forfeited. 300 shares, on which the allotment money was not received, are reissued at Rs.8 per share as fully paid. You are required to pass journal entries for the above transactions. (11 points) < Answer > END OF PART B
Part C : Applied Theory (20 Points) • • • •
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.
6. An agreed trial balance cannot be regarded as conclusive proof of the correctness of the books of account. Explain the reasons for agreement of a trial balance despite the errors and omissions. (6 points) < Answer > http://www.icfai.org/suggested/MB131-0703.htm (9 of 22)12/22/2003 5:34:28 PM
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7. The financial requirements of a company may be met by raising share capital or by going for public borrowing in the nature of issue of debentures. Briefly explain how the shares are different from debentures. (8 points) < Answer > 8.
‘An audited balance sheet is not free from flaws’. In this context, discuss the limitations of a balance sheet. (6 points) < Answer >
END OF PART C END OF QUESTION PAPER
Suggested Answers Financial Accounting (MB131) : July 2003 Part A : Basic Concepts 1. Answer : (b) TOP >
<
Reason : Real account represents assets like plant, machinery, cash etc. As on a particular date, this account shows the worth of the assets. Salary account and purchases account are nominal accounts. Sundry creditors account is personal account and outstanding rent account is representative personal account. <
2. Answer : (d) TOP > Reason : Particulars Balance as per bank statement (overdraft) Less: Cheque dishonored but not entered in the cash book Balance as per cash book (overdraft) (credit)
Rs. 12,500 2,800 9,700 <
3. Answer : (d) TOP >
Reason : Outstanding salaries are short term obligations expected to be retired during the short http://www.icfai.org/suggested/MB131-0703.htm (10 of 22)12/22/2003 5:34:28 PM
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period of time. So, it is a current liability. Fixed deposit is the long term obligation or long term liability. Prepaid expenses, trade mark and discount on issue of shares are assets. <
4. Answer : (d) TOP >
Reason : Purchase of fixed assets on credit is entered in journal proper and subsequently posted into the ledger. Hence the correct answer is (d). It is not recorded in purchases book as only purchase of goods will be recorded in purchases book. In cash book, only cash transactions will be recorded. As the fixed assets were purchased on credit, this transaction will not be recorded in the cash book. 5. Answer : (e) < TOP > Reason : According to Generally Accepted Accounting Principles, materiality concept, cost concept, consistency concept and matching concept are considered as basic principles of accounting. Logical principle is not considered as basic principle of accounting. <
6. Answer : (e) TOP >
Reason : In contract accounting, there is a reasonable certainty that the project would be completed and the return consideration is realized. In fact, return consideration may begin as soon as the work begins. So, revenue may be recognized at work-in-progress. This is the exception to the revenue recognition principle. Hence the correct answer is (e). It is not an exception to money measurement concept, going concern concept, historical cost concept and business entity concept. <
7. Answer : (c) TOP > Reason : Particulars Cost of goods available sale Less: Cost of goods sold Sales Rs.80,000 Less: Gross profit (25%) Rs.20,000
Rs. 1,00,000
60,000 40,000
Closing stock of goods 8. Answer : (e) TOP >
< Reason :
Particulars Closing stock Add: Cost of goods sold Less: Opening stock Goods purchased
Rs. 1,00,000 3,40,000 4,40,000 1,20,000 3,20,000
9. Answer : (a) TOP >
< Reason :
Particulars Original cost of asset Less: Depreciation 20% year – 1
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Rs. 1,00,000 20,000 80,000
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Less: Depreciation 20% year – 2 Less: Depreciation 20% year – 3 Less: Depreciation 20% year – 4
16,000 64,000 12,800 51,200 10,240 40,960
Useful life – 4 years. <
10. Answer : (c) TOP > Reason : Particulars Cash paid during the year as rent Less: Outstanding rent as on March 31, 2002 Add: Outstanding rent as on March 31, 2003 Rent for the year charged to profit & loss a/c. 11. Answer : (e) TOP >
Rs. 1,20,000 24,000 96,000 36,000 1,32,000 <
Reason : Personal accounts deal with accounts of individuals like creditors, debtors, banks etc. It shows the balance due to these individuals or due from them on a particular date and representative personal accounts represent the amounts due on account of accrual concept like accrued expenses and prepaid expenses or accrued incomes and pre-received incomes. By virtue of this, the accounts stated in alternatives (a) sundry creditors, (b) Bank account, (c) outstanding wages and (d) prepaid insurance represents personal accounts. < 12. Answer : (d) TOP > Reason : Journal entry of wages paid for construction of building. Rs. Rs. Building account Dr. 90,000 To cash account 90,000 Other entries given in (a), (b), (c) and (e) are not correct because, the affected aspects of the transaction are debit aspect building and credit aspect – cash 13. Answer : (a) < TOP > 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. < 14. Answer : (a) TOP > Reason : FIFO method is based on the assumption that the costs are charged against revenue in the order in which they occur. It means, the first unit in stock is the first unit to be out. The closing inventory consists of the units purchased last. If the prices are rising, goods are issued at lower price and http://www.icfai.org/suggested/MB131-0703.htm (12 of 22)12/22/2003 5:34:28 PM
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closing stocks are valued at higher price. It will help to create more profit. Other inventory methods stated in (b), (c), (d) and (e) do not result in higher profits during the period of rising prices. <
15. Answer : (b) TOP >
Reason : Sometimes an amount written off as bad debts may be subsequently recovered and any such recovery must be treated as a windfall and transferred to the profit and loss account as a gain The journal entries passed are : 1.
Cash account
Dr
To Bad debts recovered account 2.
Bad debts recovered account Dr To Profit and loss account
(a) Debtor’s account is the personal account which had already been closed by way of writing it off as bad debt during the accounting period in which the said amount was treated as non-recoverable. (c) Profit and loss adjustment account is the account meant for affecting the necessary adjustments in the event of detection of errors after finalization of the financial statements. (d) Profit and loss appropriation account is the account which reflects the entries of appropriation/ allocation of profit. (e) Provision for discount on debtors is a charge against revenue to meet a known liability (discount) the amount of which cannot be determined with substantial accuracy. Thus, the recovery of bad debts cannot be debited to any of the above accounts <
16. Answer : (e) TOP > Reason : The rate of interest payable on calls in advance is 6% per annum.
<
17. Answer : (a) TOP >
Reason : Long term investment is not accounted for in the balance sheet at current market value, net realizable value, replacement cost or present value of future cash flows. It is done at historical cost. Thus (a) is correct. <
18. Answer : (d) TOP >
Reason : Discount on issue of shares appears under the head miscellaneous expenditure on the asset side of the balance sheet. Bill discounted amount will be debited in the cash book. Prepaid expenses and income tax paid in advance appear under current assets of the balance sheet. Directors’ remuneration will be entered in the debit side of profit and loss account. Hence (d) is correct. <
19. Answer : (b) TOP >
Reason : Bills receivable is a part of fund and conversion of bill receivable into cash cannot be considered as source of fund. The sale of an asset, issue of shares, borrowing from banks and operating profits are sources of funds. <
20. Answer : (e) TOP > Reason : Year 1998-1999
Profit (Rs.) 1,32,000
Weight
Total (Profit x Weight) Rs.
1
1,32,000
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1999-2000 2000-2001 2001-2002 2002-2003
2,44,000 2 2,74,000 3 3,15,000 4 3,32,000 5 Total 15 Weighted average profit = = Rs.2,90,800
21. Answer : (b) TOP >
4,88,000 8,22,000 12,60,000 16,60,000 43,62,000 <
Reason : According to section 78 of the Companies Act, the share premium amount cannot be used for the purpose of writing off losses of the company. Hence, (b) is correct. It can be used for the purpose of issue of fully paid bonus shares, writing off preliminary expenses or commission or discount on issue of shares. It can also be used for providing premium payable on redemption of preference shares or debentures of the company. < 22. Answer : (d) TOP > Reason : The three column cash book is a refinement over single column cash book and double column cash book. Under three column cash book an additional column for discount is included on either side. Thus, it represents cash column-real account, Bank column-personal account and discount column-nominal account. The other alternatives (a) single column represents real account there is no cash book where only personal accounts (c) are represented. In some business organizations a cash book with bank column is maintained due to convenience where real and personal accounts (e) are reflected. The three column cash book represents real, personal and nominal accounts. < 23. Answer : (a) TOP > Reason : Carriage inward expense is related to the carrying cost of material purchased. If it is incurred for carrying new assets, it should be capitalized to the assets value. Carrying cost relating to sales of products, return outwards and return of unsold goods will not be treated as carriage inward expenses. Hence, (a) is correct. < 24. Answer : (a) TOP > 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). < 25. Answer : (c) TOP > 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 etc. are items of revenue expenditure. 26. Answer : (e) < TOP > Reason : Value of right R = (M – S) = x (Rs.176 – Rs.120)
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= x Rs.56 = Rs.14 <
27. Answer : (a) TOP >
Reason : An amount of Rs.7,500 ( i.e credit sale) was not recorded on credit side and Rs. 5,700 was wrongly recorded on debit side. Hence, the debit side will be more by Rs.13,200 (i.e 7,500 + 5,700) Mr. Gupta’s account is correctly debited with Rs. 7,500 and hence will not affect the trial balance <
28. Answer : (d) TOP >
Reason : Purchases account is a debit balance and purchase returns is a credit balance and the total of purchase returns will be recorded to the credit side of the purchase returns account. Hence (d) is the answer. It is not taken to debit side of purchases returns account. Hence (b) is not the answer. It is not taken to purchases account. Hence (a) and (c) are not the answers. The creditors account will be debited with the amount of purchase returns. Hence (e) is not the answer. 29. Answer : (b) < TOP > Reason : Average profit = = = Rs.2,07,200 Average profit
Rs.2,07,200
Less: Normal rate of return on capital employed 10% on Rs.12,00,000
Rs.1,20,000
Super profit
Rs. 87,200 <
30. Answer : (c) TOP > Reason : Amount paid by Mr. Sujit = 30 shares × Rs.2 = Rs.60 Therefore, share forfeiture account will be credited by Rs.60.
Part B : Problems 1.
Mayur Ltd. Profit & loss a/c for the year ended March 31, 2003 Dr. Cr. Particulars
To Salaries To Discount allowed To Electricity expenses
Rs. 5,23,000
Particulars By Gross profit (Rs.7,75,000 – Rs.8,000) 12,000 By Discount received 42,000 By Interest on investment
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Rs. 7,67,000 10,000
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To Interest on loan Paid Add: Outstanding To Telephone expenses Add: Outstanding To Bad debts Add: Closing provision Less: Opening provision To Depreciation: Plant & Machinery Building Furniture To Loss on sale of furniture To Incidental charges To Net profit
Rs. 25,000 5,000 35,000 2,000 6,000 6,700 12,700 9,000
Received Accrued
10,000 2,000
12,000
30,000 37,000
3,700
25,000 52,000 13,500 2,000 200 48,600 7,89,000
7,89,000
Balance Sheet as at March 31, 2003 Liabilities Share capital General reserve Profit & loss a/c Secured loans Unsecured Loan (12%) Accrued Interest on loan Current Liabilities & provisions Current Liabilities: Sundry creditors Bills payable Outstanding expenses Telephone expenses Salaries
Rs. Assets 6,00,000 Fixed assets: 2,50,000 Building 48,600 (-) Depreciation (10%) Nil Plant & machinery 2,50,000 (-) Depreciation (10%) 5,000 Furniture & fixtures (-) Sold out
2,000 10,000
Rs. 5,20,000 52,000 2,50,000 25,000 2,80,000 10,000 2,70,000 13,500
1,00,000 (-) Depreciation 78,000 Investments @ 12% Current assets, loans & advances: Current assets: 12,000 Closing stock Bills receivable Cash & bank 28,000 (-) Incidental charges 200 Sundry debtors 1,40,000 (-) Bad debts 6,000 1,34,000 (-) Provision 6,700 Accrued interest on investments 13,43,600
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4,68,000 2,25,000
2,56,500 1,00,000
25,000 1,12,000 27,800
1,27,300 2,000 13,43,600 < TOP >
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2. Bhavan Construction Company Machinery Account Dr
Cr.
Date Particulars 1.4.1999 To Bank : ( Machine A) To Bank : (Machine B) 1-4-2000 To Balance b/d To Bank (Machine C) 1-4-2001 To Balance b/d To Bank (New Machine) To Part exchange 1-4-2002
To Balance c/d
Rs.Date 1,00,00031-3-2000 1,20,000 2,20,000 1,98,00031-03-2001 1,50,000 3,48,000 3,13,2001-4-2001 1,00,000
Particulars By Depreciation account By Balance c/d By Depreciation By Balance c/d
By Part exchange By Depreciation account (Working 3) 81,00031-03-2002 By Balance c/d 4,94,200 3,71,8801-04-2002 By Bank – Insurance claim By Profit and loss a/c (Working 4) Loss on machinery destroyed 31-03-2003 By Depreciation account (Working 5) By Balance c/d (Working 6) 3,71,880
Workings: 1. Depreciation of Machine A: Cost on 01-04-1999 Less : Depreciation – 1999 • 2000
Rs.1,00,000 Rs. 10,000 Rs. 90,000 Rs. 9,000 Rs. 81,000
Less : Depreciation – 2000-2001 Depreciation value Cost of new machine 2. Cash Rs.1,00,000 Part exchange Rs. 81,000 Rs. 1,81,000 3. Depreciation – for 2001-2002 10% on Rs. (3,13,200 – 81,000 + 1,81,000 = 4,13,200 ) = Rs.41,320 Loss of Machine C destroyed 4. Cost on 01-04-2000 Less: Depreciation – 2000-2001 Less: Depreciation – 2001-2002
Rs.1,50,000 Rs. 15,000 Rs.1,35,000 Rs. 13,500 Rs.1,21,500
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Rs. 22,000 1,98,000 2,20,000 34,800 3,13,200 3,48,000 81,000 41,320 3,71,880 4,94,200 1,02,000 19,500 25,038 2,25,342 3,71,880
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Less: Insurance claim
Rs.1,02,000 Rs. 19,500
Loss 5. Depreciation for 2002-2003 10% on Rs. 2,50,380 (3,71,880 – 1,21,500) = Rs.25,038 6. The depreciated value of machinery as on 31-03-2003 Machine B = Rs.1,20,000 (0.9) (0.9) (0.9) (0.9) = Rs. 78,732 Similar type of machine A = Rs.1,81,000 (0.9) (0.9) = Rs.1,46,610 =Rs. 2,25,342 < TOP >
3. Sathya Steel Ltd: Value of shares Under Intrinsic value method: Rs.
Rs.
Net Assets Goodwill
1,50,000
Fixed assets
14,00,000
Investments
4,00,000
Current assets
3,70,000 23,20,000
Less Liabilities: 10% Debentures
2,00,000
Fixed deposits
1,00,000
Current liabilities & provisions
3,80,000
10% Preference shares
3,00,000
Funds available for equity shareholders
9,80,000 13,40,000
Intrinsic value of equity shares = < TOP > 4.
Dolphin Ltd. Bank Reconciliation Statement as on March 31, 2003.
Particulars Balance as per Cash book (Unfavorable) (Credit) (Overdrawn)
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Rs.
Rs. 14,370
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Add: iv.
Amount misappropriated and wrongly shown as deposited at Bank
3,500
ii.
Cheques wrongly debited in pass book.
2,000
vi.
Bank overdraft interest charged only in bank pass book.
170
Bank charges debited in the bank pass book
50
i.
Cheques deposited but not presented for payment
9,000
vii.
Insurance premium directly debited by bank
2,500
17,220 31,590
Less : iii.
Cheques issued but not presented for payment v.
7,650
Interest on government securities directly credited in the bank pass
650
8,300
book Balance as per Pass book (Unfavorable) (Debit) (Overdraft)
23,290 < TOP >
5.
Super Power Ltd.
Journal Entries Bank a/c. To Share Application a/c. (Application money received for 5,000 shares @ Rs.6 per share) Share Application a/c. To Equity share capital a/c. To Share premium a/c. (Transfer of application money to share capital a/c and share premium a/c in respect of 5,000 shares) Share Allotment a/c. To Equity Share capital a/c (Allotment money of Rs.4 per share due on 5,000 shares) Bank a/c. To Share allotment a/c. (Allotment money received on 4,700 shares at the rate of Rs.4 per share) Share final call a/c. To Equity share capital a/c. (Final call of Rs.2 per share due on 5,000 shares) Bank a/c. To Share final call a/c. (Final call money received on 4,600 shares at the rate of Rs.2 each) Equity share capital a/c. (Rs.10 x 400)
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Dr.
Dr. (Rs.) 30,000
Cr. (Rs.) 30,000
Dr.
30,000 20,000 10,000
Dr.
20,000 20,000
Dr.
18,800 18,800
Dr.
10,000 10,000
Dr.
9,200 9,200
Dr.
4,000
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To Share forfeiture a/c. (Rs.4 x 300 + Rs.8 x 100) To Share Allotment a/c. (Rs.4 x 300) To Share final call a/c. (Rs.2 x 400) (Forfeiture of 300 shares on which allotment & final call were due and 100 shares on which final call was due) Bank a/c. (300 x Rs.8) Share forfeiture a/c. (300 x Rs.2) To Share Capital a/c. (Re-issue of 300 forfeited shares as fully paid up at Rs.8 per share) Share forfeiture a/c. To Capital Reserve a/c. (Profit on re-issue of 300 forfeited shares transferred to capital reserve) Workings: Calculation of Profit on re-issue of 300 shares. Amount forfeited on 300 shares = 300 × Rs.4 (excluding premium amount) Lees: Amount applied for re-issue = 300 × Rs.2 Profit on re-issue of shares
2,000 1,200 800
Dr. Dr.
2,400 600 3,000
Dr.
600 600
Rs.1200 Rs. 600 Rs. 600 < TOP >
Part C: Applied Theory 6. Even though a trial balance may be in agreement, certain errors might have been committed while recording the transactions. Such errors are referred to as errors not disclosed by Trial Balance. The errors which will not cause a mismatch in the totals of a trial balance are as follows: a. Omission of the recording of a transaction from the books of accounts: If the withdrawal of goods worth Rs.1,200 by the proprietor is omitted to be recorded in the books, the trial balance will still agree as both the debit and the credit aspects have been omitted to be recorded. b. Recording a transaction at an amount which is totally different from the actual amount: If the purchases of goods worth Rs.7,500 is recorded in the purchase book as Rs.5,700 the error will not cause the trial balance to disagree. c. Compensating errors: These are quite difficult to detect. If a cash discount of Rs.215 allowed to a customer has been posted to the credit of his account as Rs.251 and a cash sale of Rs.2,851 has been posted to sales account as Rs.2,815, then the excess credit caused by the first error would be exactly compensated by the lower credit recorded by the second error and the trial balance will be in agreement. d. Posting of an aspect of a transaction on the correct side of a wrong account: If the amount of Rs.800 received from MN Ltd., a debtor, is posted to the credit of NM Ltd., account, also a debtor, the trial balance totals will still agree, because both are debit accounts and the total effect is the same. e. Recording both aspects of a transaction more than once in the books of accounts: If a sales of Rs.3,500 made to PQR Ltd. is entered in the sales book twice, the error will not cause a mismatch in the totals of the trial balance. f. Errors of principle: If the machinery account is debited for an amount of repair charges incurred for the machinery, the error will not be disclosed by the trial balance. This is because that both machinery account and repairs account are debit accounts and it is a question of principle that repair charges should not be debited to the machinery account. Hence, the total effect will be the same and hence the trial balance will http://www.icfai.org/suggested/MB131-0703.htm (20 of 22)12/22/2003 5:34:29 PM
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tally. g. Omission/mistake of extension and carry forward: When an item is omitted or wrong figure is taken while carrying forward to the next pages trial balance will not tally < TOP > 7.
Differences between Shares and Debentures: a. Share is an ownership security. A shareholder is, to the extent of his holding, the owner of the company. A debenture is a creditorshift security which makes the debentureholder a creditor of the company. b. Share can be issued at a discount subject to the specifications of section 79 of the Companies Act, 1956. Debentures on the other hand do not have any such limitations and can be issued at a discount.
d.
c. The return to a shareholder is in the nature of dividends which are subject to the company earning profits during the relevant accounting period. Further, a company cannot be forced to pay dividends as the directors may retain the divisible profits for potential investment opportunities. The return to the debentureholder is in the form of interest payments which is a compulsory obligation which will have to be honored even in the face of losses. Shares convertible into debentures cannot be issued while debentures (PCD - partly convertible debentures or FCD - fully convertible debentures) which can be converted into shares at the option of the debentureholders can be issued. e. In the event of dissolution of the company payment to the debentureholders takes precedence over the amount payable to the shareholders. < TOP >
8.
The following limitations in respect of the position statement i.e. the balance sheet are worth noting: i. Though the balance sheet is claimed to be the statement of all assets and liabilities, still it does not contain certain assets and liabilities. Example: The Efficient Management force is a Human Asset available to the organization and so far no efforts are made to show the human assets under the asset side of the Balance Sheet. Similarly Dissatisfied labor force is a liability to the organization. ii. An investor who wishes to analyze the balance sheet is more concerned with the present and future whereas the balance sheet pertains to a point of time relating to past and therefore may not be quite helpful. iii. Personal judgment plays a great part in determining the figures for the balance sheet. Example: Provision for depreciation, stock valuation, provision for bad debts are more based on the personal judgment and are therefore not free from the bias. iv. Even the audited balance sheets also cannot give a complete seal of accuracy. Deliberate manipulations in the profits, current assets and closing stocks make the balance sheets unreliable. v. The factors which are having vital bearing on the earnings of the organization such as changes in the managerial personnel, cessation of agreements, loss of markets are not disclosed by the balance sheet. vi. Financial statements are based on accounting policies which vary from enterprise to enterprise both within the country and among the countries. The users of financial statements cannot understand them clearly and have comparisons unless the significant accounting policies which have been adopted in preparing the financial statements are disclosed very clearly.
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vii. Balance sheet is prepared on a particular date and hence there is every possibility of `Window dressing’. < TOP >
< TOP OF THE DOCUMENT >
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