Mb131 - 2004 - 01 (january)

Question Paper Financial Accounting (MB131) : January 2004 Section A : Basic Concepts (30 Marks) • • • 1.

Which of the following represent(s) personal accounts in accounting parlance? a. b. c. d. e.

2.

16% 15% 14% 12.5% 12%.

If the purchases day book of a firm is overcast, it will a. b. c. d. e.

7.

Errors of complete omission Compensating errors Errors of principle Recording dual aspects of a transaction more than once Errors of partial omission.

AB & Co. purchased a machine for Rs.10,00,000 on April 1, 2002. The salvage value of the machine is Rs.40,000. The useful life of the machine is 8 years. If the firm intends to depreciate the machinery on straight-line method, the rate of depreciation will be a. b. c. d. e.

6.

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.

Which of the following errors will cause a mismatch in the trial balance? a. b. c. d. e.

5.

FIFO method LIFO method Weighted average method Moving average method Base stock method.

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

4.

Sundry creditors Bank account Outstanding wages Prepaid insurance All of the above.

Which of the following methods of valuation of inventory is based on the assumption that costs are charged against revenue in the order in which they occur? a. b. c. d. e.

3.

This section consists of questions with serial number 1 - 30. Answer all questions. Each question carries one mark.

Increase gross profit and reduce net profit Reduce gross profit and increase net profit Reduce gross profit as well as net profit Increase gross profit as well as net profit Reduce gross profit but will not have any impact on net profit.

Which of the following is true when a debtor pays his dues? a. b. c. d.

The asset side of the balance sheet will decrease The asset side of the balance sheet will increase The liability side of the balance sheet will increase The liability side of the balance sheet will decrease

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e. 8.

Withdrawal of goods from stock by the owner of the business for personal use should be recorded by debiting a. b. c. d. e.

9.

There is no change in total assets or total liabilities.

Drawings account and crediting cash account Drawings account and crediting purchases account Capital account and crediting drawings account Purchases account and crediting drawings account Stock account and crediting capital account.

The cost price of a machine is Rs.1,20,000 and the depreciated value of the machine after 3 years will be Rs.66,000. If the company charges depreciation under straight-line method, the rate of depreciation will be a. b. c. d. e.

25% 20% 18% 15% 12%.

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10. Consider the following data pertaining to a firm: Credit balance as per bank column of cash book Bank interest on overdraft appeared only in the pass book Cheques deposited but not collected by the bank

Rs.13,500 Rs.2,100 Rs.5,000

The balance as per pass book is a. b. c. d. e.

Rs.20,600 (Dr. balance) Rs.18,500 (Dr. balance) Rs.18,500 (Cr. balance) Rs.15,600 (Dr. balance) Rs.20,600 (Cr. balance).

11. Consider the following data pertaining to a company for the year 2002-2003: Opening balance of sundry debtors Credit sales Cash sales Cash collected from debtors Closing balance of sundry debtors

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Rs. 45,000 Rs.4,25,000 Rs. 20,000 Rs.4,00,000 Rs. 50,000

The bad debts of the company during the year are a. b. c. d. e.

Rs.40,000 Rs.35,000 Rs.30,000 Rs.25,000 Rs.20,000.

12. The opening stock of a company is Rs.40,000 and the closing stock is Rs.50,000. If the purchases during the year are Rs.2,00,000 the cost of goods sold will be a. b. c. d. e.

Rs.2,10,000 Rs.2,00,000 Rs.1,90,000 Rs.1,80,000 Rs.1,50,000.

13. 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 a. b. c. d.

Rs.21,000 Rs.15,300 Rs.23,800 Rs. 9,700

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e.

Rs. 4,000.

14. During the year 2002-03, the profit of a business before charging manager’s commission was Rs.1,89,000. If the manager’s commission is 5% on profit after charging his commission, then the total amount of commission payable to manager is a. b. c. d. e.

Rs.10,000 Rs. 9,450 Rs. 9,000 Rs. 8,500 Rs. 9,947.

15. Which of the following statements is true? a. b. c. d. e.

The losses from the sale of capital assets need not be deducted from the revenue to ascertain net income Going concern concept requires that always non-monetary assets should be valued and recorded at market value According to consistency concept, the results of one accounting period of a business cannot be compared with that of in the past In terms of conservatism concept all probable losses must be considered in computation of income The system of recording transactions based on dual concept is double accounting system.

16. Which of the following ratios indicates the short-term liquidity of a business? a. b. c. d. e.

Inventory turnover ratio Debt-equity ratio Acid test ratio Proprietary ratio Net profit ratio.

17. Which of the following should be deducted in the Balance Sheet of a company from the share capital to find out paid-up capital? a. b. c. d. e.

Calls-in-advance Calls-in-arrears Share forfeiture Discount on issue of shares Share premium.

18. Which of the following statements is false? a. b. c. d. e.

The forfeited shares should not be issued at a premium At the time of forfeiture of shares, share premium should not be debited with the amount of premium already received Shares can be issued at a discount only after one year from the commencement of business Share premium cannot be utilized to redeem preference shares The loss on re-issue of shares cannot be more than the gain on forfeiture of those shares.

19. Which of the following accounting treatments is/are true in respect of accrued commission appearing on the debit side of a trial balance? a. b. c. d. e.

It is shown on the debit side of the profit and loss account It is shown on the credit side of the profit and loss account It is shown on the liabilities side of the balance sheet It is shown on the assets side of the balance sheet Both (b) and (d) above.

20. The maximum amount beyond which a company is not allowed to raise funds by issue of shares is a. b. c. d. e.

Issued capital Reserve capital Nominal capital Subscribed capital Paid-up capital.

21. The discount allowed on re-issue of forfeited shares is debited to

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a. b. c. d. e.

Discount on re-issue of shares account Profit and loss account Share premium account Discount on issue of shares account Forfeited shares account.

22. The interest on calls in advance is paid for the period from the a. b. c. d. e.

Date of receipt of application money to the date of appropriation Date of receipt of allotment money to the date of appropriation Date of receipt of advance to the date of appropriation Date of appropriation to the date of dividend payment Date of appropriation to the date of receipt of final call.

23. Which of the following items should not appear under the head ‘unsecured loans’ in the Balance Sheet of a company? a. b. c. d. e.

Sinking funds Loans and advances from subsidiaries Short term loans and advances from banks Loans and advances from others Fixed deposits.

24. Share premium cannot be used to a. b. c. d. e.

Issue bonus shares Redeem preference shares Write-off preliminary expenses Write-off discount on issue of shares Provide for premium payable on redemption of debentures.

25. Rishi Ltd. issued 1,50,000 shares of Rs.100 each at a discount of 10%. Rama, to whom 300 shares were allotted failed to pay the final call of Rs.30 per share and hence, all his shares were forfeited. At the time of forfeiture, the amount transferred to share forfeiture account was a. b. c. d. e.

Rs. 9,000 Rs.18,000 Rs.21,000 Rs.27,000 Rs.30,000.

26. Suma Ltd. announced a rights issue of four shares of Rs.100 each at a premium of 160% for every five shares held by the existing shareholders. The market value of the share at the time of rights issue is Rs.440. The value of right is a. b. c. d. e.

Rs.124 Rs.352 Rs. 80 Rs.110 Rs.180.

27. Which of the following statements is true? a. b. c. d. e.

A company will be deemed to be a holding company of another if, it holds more than 50 percent of both equity and preference share capital The financial year of the holding company and its subsidiary company must end on the same date The share capital of the subsidiary company does not appear in the Consolidated Balance Sheet The inter company owing will be shown in the Consolidated Balance Sheet Minority shareholders of the subsidiary are entitled to proportionate share in capital profits only.

28. On December 01, 2002 H Ltd. acquired 60% shares in S Ltd. The balance of profit and loss account of S Ltd. on April 01, 2002 and March 31, 2003 was Rs.90,000 and Rs.1,50,000, respectively. The profit is earned evenly throughout the year. The share of capital profit of H Ltd. in the profits of the subsidiary as on March 31, 2003 is a. b. c.

Rs. 36,000 Rs. 60,000 Rs. 72,000

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d. e.

Rs. 78,000 Rs.1,30,000.

29. On April 01, 2002, Sura Chemicals Ltd. issued 10,000, 18% Debentures of Rs.100 each. The company reserves the right to redeem its debentures in any year by purchase in open market. Interest on debentures is payable on September 30, and March 31, every year. • On July 1, 2002, the company purchased 2,000 of its own 18% debentures at Rs.98 cuminterest. • The company cancelled its own 2,000 debentures on March 31, 2003. The profit on cancellation of debentures transferred to Capital reserve is a. Rs. 4,000 b. Rs. 9,000 c. Rs.36,000 d. Rs.13,000 e. Rs.27,000. 30. Consider the following profits pertaining to a company for the last 3 years: Year 2000-01 2001-02 2002-03

Profit (Rs.) Rs.3,30,000 Rs.4,20,000 Rs.4,80,000

The weighted average profit of the company for the purpose of valuation of goodwill is a. b. c. d. e.

Rs.4,50,000 Rs.4,35,000 Rs.4,10,000 Rs.3,85,000 Rs.3,50,000. END OF SECTION A

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Section B : Problems (50 Marks) • • • • • 1.

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

The following is the balance sheet of Majestic Ltd. as on March 31, 2003. Liabilities 40,000 equity shares of Rs.10 each issue price Rs.13 each Securities Premium Profit & Loss a/c. Balance as on 01.4.2002 Profit for the year before providing for taxes Sundry creditors Provision for taxation

Rs. Assets 4,00,000 Goodwill

40,000 1,60,000

Rs. 40,000

1,20,000 Land & building Plant & Machinery Investments 2,00,000 Stock

2,00,000 2,90,000 1,00,000 85,000

80,000 Sundry debtors 40,000 Cash & Bank 8,40,000

95,000 30,000 8,40,000

Additional Information: i. Profit for the year includes Rs.10,000 income from investments. The market value of the assets is as follows: Land & building Rs.2,60,000 Plant & Machinery Rs.3,50,000 Investments Rs.1,50,000 Stock Rs. 80,000 Sundry debtors Rs. 90,000 ii. Normal return on capital employed in this type of business is 10%. iii. Adjustment of depreciation is not required for valuation of goodwill. iv. Income tax rate @ 50%. You are required to calculate the value of goodwill on the basis of 3 years purchase of super profits of the company. 2.

3.

(10 marks) < Answer > M/s. Sneha Associates imported a composite machine on October 01, 2000 for US$ 3,200 (equivalent Indian Rupees 1,60,000), paid customs duty and freight amounting to Rs.80,000 and incurred erection charges of Rs.60,000. Another local machine costing Rs.1,00,000 was purchased on April 01, 2001. On October 01, 2002, one third of the imported machine got out of order and was sold for Rs.34,800. On the same day, another machine was purchased to replace the same for Rs.50,000. The company depreciates machinery at the rate of 20% p.a. on the straight-line method. You are required to show the Machinery Account for the years 2000-2001; 2001-2002; and 2002-2003. (9 marks) < Answer > The following is the trial balance of Maithrei Ltd. as on March 31, 2003. The company was registered with a nominal capital of 1,00,000 equity shares of Rs.10 each. Out of which 60,000 shares were issued and called up and were fully paid-up. Trial Balance as on March 31, 2003 Particulars

Dr.(Rs.)

Cr.(Rs.)

Paid-up Share Capital of Rs.10 each Stock as on April 01, 2002 Sales returns and Sales Purchases and Purchases returns Carriage inward Rent & taxes Sundry creditors Sundry debtors Bank loan (interest at the rate of 12% per annum) Interest on bank loan Advertisement Expenses Bad debts Income from Investments Cash at bank Discount (allowed and received) Investments (10%) Furniture & Fittings Audit fees Insurance premium Travelling expenses Cash in hand Salaries Wages Building Plant & Machinery

6,00,000 40,000 80,000 6,64,000 27,800 12,000

9,60,000 84,000

1,16,000 2,40,000 40,000 4,000 24,000 2,000 4,000 21,000 4,050 40,000 45,000 5,400 2,400 2,200 5,400 1,37,550 50,000 2,50,000 1,50,000 18,06,800

2,800

18,06,800

Additional Information: i. Closing stock as on March 31, 2003 was Rs.42,500. ii. One fourth of the amount of advertisement expenses is to be carried forward to the next year. iii. Depreciation is to be provided as follows: Furniture & fittings – 10% Plant & machinery – 20% Building – 10% iv. Salaries outstanding as on March 31, 2003 were Rs.12,450. v. Create a provision for bad and doubtful debts at 5% on debtors. vi. Sundry debtors include an amount of Rs.5,000 due from Mr.Amar and Sundry creditors include Rs.3,000 due to Mr.Amar. Considering the above information and the trial balance, you are required to prepare: a. Trading and Profit & loss account of Maithrei Ltd. for the year ended March 31, 2003. b. Balance Sheet of Maithrei Ltd. as at March 31, 2003. (8 + 6 = 14 marks) < Answer > 4.

The accountant of Jay Ltd. has reconciled the trial balance for the financial year 2002-03 by putting the difference in a suspense account and has prepared Trading and Profit and loss account and Balance Sheet for the period. Subsequent scrutiny of the books disclosed the following errors: i. A credit purchase of goods from Mr. Rohan for Rs.21,000 has been debited to his account. ii. Goods purchased from Mr. Kanithkar amounting to Rs.12,000 were entered in the purchases day book, but were omitted to be entered in the name of Mr. Kanithkar in the creditors ledger. iii. Office furniture purchased for Rs.21,000 has been passed through the purchases account. iv. Repairs to office car of Rs.8,500 were debited to the office car account.

You are required to a. Pass the journal entries for rectification of the above errors. b. Prepare suspense account. 5.

(5 + 2 = 7 marks) < Answer > ABC Ltd. issued 10,000 equity shares of Rs.100 each at a premium of 10% per share. The amount is payable as follows: Rs. On application 25 On allotment (including premium) 35 On first call 20 On final call 30 The applications were received for 9,000 shares and these were allotted in full. All moneys due were received except the first and final call money on 200 shares, which were forfeited. Out of these shares, 100 shares were subsequently re-issued @ Rs.90 per share as fully paid. You are required to pass journal entries for recording the above transactions in the books of ABC Ltd. (10 marks) < Answer >

END OF SECTION B

Section C : Applied Theory (20 Marks) • • • •

6.

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

The concepts of capital and revenue are of fundamental importance to the correct determination of accounting profit for a period. Discuss the basic principles which would guide you in allocating expenditure as capital expenditure, revenue expenditure and deferred revenue expenditure.

7.

(9 marks) < Answer > The Chief Accounts Officer of Shriya Ltd., found that Priya Ltd. who owes a large amount to the company is rumored to be going into liquidation. As a prudent Accounts Officer of the company, you are required to explain the concept which you consider in making suitable amount of provision for bad and doubtful debts.

8.

(6 marks) < Answer > A company which has built up substantial reserves decides to capitalize a part of these retained earnings by issuing bonus shares to the existing shareholders. In this context, explain the provisions relating to the issue of bonus shares under the SEBI guidelines. (5 marks) < Answer >

END OF SECTION C END OF QUESTION PAPER

Suggested Answers Financial Accounting (MB131) : January 2004

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Answer : (e) 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 represent personal accounts. Answer : (a) Reason : The basis for pricing inventory is either cost of production or cost of acquisition. FIFO method of identifying inventory is based on the assumption that costs are charged against revenue in the order in which they occur. In case of other methods i.e. LIFO (b) method matches the most recent costs incurred with current revenue, leaving the first cost incurred to be included as inventory. Weighted-Average method (c) assumes that costs are charged against revenue based on an average of the number of units acquired at each price level. Moving average method (d) can be used only with a perpetual inventory. The cost per unit is recomputed after every addition to the inventory. The ending inventory is valued at the last moving average unit cost for the period. Base stock method (e) wherein a minimal level of it is a permanent investment, which is necessary for the normal business activities. Base stock would be carried at historical cost. Thus, FIFO method is the correct answer. 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 etc. are items of revenue expenditure. Answer : (e) Reason : A trial balance in which the total of the debits does not equal to the total of credits due to errors committed in the process of accounting. One among the errors is Partial omission of an entry If the debit or credit aspect of a transaction has been omitted to be recorded, the trial balance will disagree. For example, if a cash sales of Rs.800 is omitted to be recorded in the Sales account then the total debits will exceed the total credits by Rs.800. Thus, results in a mismatch in the trial balance. But, in case of errors mentioned in alternatives (a), (b), (c) and (d) the agreeing of trial balance is not affected as explained hereunder: 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. 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. 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 tally. Recording both aspects of a transaction more than once in the books of accounts: If a sale 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. Answer : (e) Reason : Value of machine Rs.10,00,000 Less: Salvage value Rs. 40,000 Depreciable value Rs. 9,60,000 Life of the machine 8 years Depreciation =

9, 60, 000 = Rs.1,20,000 8

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1, 20, 000 × 100 Rate of depreciation = 10, 00, 000 = 12%

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Answer : (c) Reason : If purchase day book is overcast, it shows higher cost of production or goods sold. It reduces gross profit which in turn reduces net profit. It cannot increase gross profit and net profit. Therefore, (c) is the correct answer. Answer : (e) Reason : If a debtor pays his dues, debtors balance will decrease and cash balance will increase. Thus, the composition of assets will change. But there is no change in the total assets or liabilities and hence (e) is true. Answer : (b) Reason : If the owner withdraws goods from the business, journal entry will be Drawings account ……… Dr To Purcahses account Other options, given in a, c, d and e, relating to drawings are not correct. Answer : (d) Reason : Let the rate of depreciation = x The depreciated value of machine = Rs.1,20,000 (1 – 3x) = Rs.66,000 1 – 3x

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3x

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Rs.66,000 Rs.1,20,000 = 0.55 1 – 0.55 = 0.45

x = 0.45 ÷ 3 = 0.15 or 15%. Thus, the rate of depreciation = 15%. Alternatively Cost Price Rs.1,20,000 WDV Rs.66,000 54, 000 Total depreciation for 3 years 54,000; Depreciation per year Rs. 3 = Rs.18,000

18, 000 x 100 1, Rate of Depreciation = Rs. 20, 000 = 15% 10.

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Answer : (a) Reason : Credit balance as per bank column of cash book Add: Bank interest on overdraft debited in pass book Cheques deposited but not collected by bank Debit balance as per pass book

Rs.13,500 Rs. 2,100 Rs. 5,000 Rs.20,600

and the amounts mentioned in other alternatives are not correct. 11.

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Answer : (e) Reason : Opening balance of Sundry debtors Add: Credit sales Less: Less: debtors Bad debts

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Answer : (c)

Cash collected Closing balance of sundry

Rs. 45,000 Rs.4,25,000 Rs.4,70,000 Rs.4,00,000 Rs. 70,000 Rs. 50,000 Rs. 20,000 < TOP >

Reason : Opening stock Add: Purchases

Rs. 40,000 Rs.2,00,000 Rs.2,40,000 Rs. 50,000 Rs.1,90,000

Less: Closing stock Cost of goods sold 13.

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Answer : (d) Reason : Particulars Balance as per banks statement (overdraft) Less: Cheque returned but not entered in the cash book Balance as per cash book (overdraft)

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Answer : (c) Reason : Let the profit Commission

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12,500 2,800 9,700 < TOP >

= =

100% 5% 105%

Amount of commission payable to manager 15.

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5% = Rs.1,89,000 × 105% = Rs.9,000

Answer : (d) Reason : The conservatism concept states that the revenues are to be recognized when they are certain and losses are to be considered when they are probable. Thus, the statement in alternative (d) is true. The statements in other alternatives are false since, The losses from the sale of capital assets are to be deducted from revenue to ascertain the net income (a) Going concern pre-supposes that the assets are categorized into fixed and current and the non-monetary assets are to be recorded at the historical cost and not at market value (b) The consistency concept facilitates the comparison of the results of one accounting period with that of the past (c) and the system of recording transactions based on dual aspect concept is double entry system and not the double account system (e). Hence, the correct answer is (d). Answer : (c) Reason : Acid test ratio or quick ratio is a liquidity ratio which is an indicator of short term solvency of a business. Hence © is the correct answer. The ratios mentioned in other alternatives do not indicate the short term solvency of a business and are not the correct answers. Answer : (b) Reason : Called up capital is the amount on the shares which is actually demanded by the company to be paid. However, there may be some shareholders who may make default in the payment. The money due from them is called calls-in-arrears. This amount should be deducted from the called up capital to arrive at the paid-up capital. Thus, (b) is the correct answer. Answer : (a) Reason : Forfeited shares can be re-issued at a premium. Thus, the statement in alternative (a) is false. The statements in other alternatives are true-, if share premium is already received, share premium account cannot be debited with the amount of premium on forfeiture of shares; Shares can be issued a discount, only after one year from the commencement of business; Share premium can be utilized only specific purposes as per the provisions of section 78 of the Companies Act and it cannot be utilized to redeem preference shares; The forfeited shares cannot be reissued for a loss more than the gain on those shares. Answer : (d) Reason : If accrued commission is shown on the debit side list of balances in the trial balance, it indicates that it is already adjusted in the commission received /receivable and it does not require any adjustment in the profit and loss account. It directly appears as a current asset in the balance sheet. Hence (d) is true Answer : (c) Reason : The maximum amount beyond which a company is not allowed to raise funds by issue of shares is called nominal capital or authorized capital. The issued capital is that part of the nominal capital issued to the public and subscribed capital is that part of the issued capital which is subscribed by the public. Paid up capital is the amount which is paid-up by the shareholders. Reserve capital is that capital which

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will be called-up only in case of liquidation. Thus, alternative (c) is the correct answer. Answer : (e) Reason : Discount allowed on re-issue of forfeited shares is debited to forfeited shares account. It cannot be debited to discount on re-issue of shares, since there is no such account maintained, it is not a usual discount to be debited to (b) Profit and loss account. The share premium account (c) can be debited only for the purposes as per the provisons of the Compnaies Act. The discount on issue of shares (d) can be debited only in the event of issue of shares at a discount originally. Thus, (e) is the correct answer. Answer : (c) Reason : The company may receive from the shareholders the amount uncalled on the shares held by them even though the amount is not called for. In such a case the company is compelled to pay interest on the calls in advance at prescribed rate from the date of receipt of advance to the date of appropriation i.e. the date when the call is made and the advance received is appropriated from calls in advance account to the relevant call account. Answer : (a) Reason : Sinking fund is created out of profit. It is the part of profit and should be listed under the heading “Reserves and Surplus” and not under “unsecured loans”. Loans and advances from subsidiaries, short term loans and advances from banks, loans and advances from others and fixed deposits are unsecured loans. Answer : (b) Reason : Share premium should not be used for redemption of preference shares whereas they can be used to provide for premium on redemption of preference shares or debentures, to issue bonus shares, to writeoff preliminary expenses and discount on issue of shares. Answer : (b) Reason : The shares were issued at a discount of 10% i.e. they were issued for Rs.90 per share. Rama failed to pay the final call of Rs.30. Hence he has paid Rs.60 (Rs.90 – Rs.30). The amount to be credited to shares forfeited account is Rs.60 x 300 shares = Rs.18,000 Answer : (c)

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 r    (M − S) Reason : Value of right =  N + r  Where r = No of rights issued N = No. of existing shares M = Market price S = Issue price of rights= Rs.100 + 160% premium = Rs.100 + Rs.160 = Rs.260

 4    (440-260) ∴Value of rights =  4+5  27.

= Rs.80

Answer : (c) Reason : The share capital of the subsidiary company does not appear in the Consolidated Balance Sheet (c) is the correct statement and the share capital of the subsidiary company is not shown in the consolidated balance sheet. and other statements are not true. A company will be deemed to be a holding company of another if it holds more than 50 percent of both equity and preference share capital is not true because it should hold share only in equity capital and preference share capital will not be considereed for deciding the cost of control. and (a) is not the correct answer. b. The financial year of the holding company and its subsidiary company must end on the same date is not the correct answer because it need not be on the same date. d.

The inter company owing will be shown in the Consolidated Balance Sheet is incorrect because intercompany owing are eliminated in the consolidated balance sheet and hence it is not the correct answer. e. Minority of the subsidiary is entitled to proportionate share in capital profits only is incorrect because they are entitled for both capital profits and revenue profit and there is no difference between the two profits in computation of minority interest. Thus, alternative © is the correct answer.

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Answer : (d) Reason : Profit for the year 2002-2003 = Rs.1,50,000 – Rs.90,000 = Rs.60,000 Profit for 8 months (from April 01, 2002 to December 01, 2002)=

60, 000 ×

8 = Rs.40, 000 12

Share of capital profit of H Ltd. = (90,000 + 40,000) x 60% = Rs.78,000. 29.

Answer : (d) Reason : The profit on cancellation of debentures transferred to capital reserve is Rs.13,000

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On purchase of debentures, the journal entry to be made is Rs. Rs. Own debentures a/c Dr 1,87,000 Interest on debentures a/c Dr 9,000 To Cash a/c 1,96,000 On cancellation of the debentures, the journal entry to be made is 18% Debentures a/c Dr To Own debentures To Capital Reserve 30.

Rs. 2,00,000

Rs. 1,87,000 13,000 < TOP >

Answer: (b) Reason: Weighted average profit Year 1 Year 2 Year 3

Rs.3,30,000 × 1 Rs.4,20,000 × 2 Rs.4,80,000 × 3 6

Rs. 3,30,000 Rs. 8,40,000 Rs.14,40,000 Rs.26,10,000

∴Weighted average profit = Rs.26,10,000 ÷ 6 = Rs.4,35,000

Section B : Problems (MB131) Majestic Ltd. 1.

Average trading capital employed Land & Building Plant & Machinery Stock Sundry debtors Cash & Bank

Rs. 2,60,000 Rs. 3,50,000 Rs. 80,000 Rs. 90,000 Rs. 30,000 Rs. 8,10,000

Less: Current Liabilities Sundry creditors Rs.80,000 Provision for taxation Rs.40,000 Less: Half of current year’s profit (See note below) Average capital employed Note:

Profit for the year Less: Non-trading income Less: Income tax (50%) Current year’s profit

Rs. 1,60,000 Rs. 10,000 Rs. 1,50,000 Rs. 75,000 Rs. 75,000

Rs. 1,20,000 Rs. 6,90,000 Rs. 37,500 Rs. 6,52,500

Super Profit Rs. 1,60,000 10,000 1,50,000 75,000 75,000 65,250 9,750

Profit for the year Less: Income from investments Less: Income tax (50%) Less: Normal return – 10% on average capital employed of Rs.6,52,500 Super profit Value of Goodwill = Rs.9,750 × 3 years = Rs.29,250.

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2. Sneha Associates Machinery Account Dr. Cr. Date 2000 Oct 01

Particulars To Bank A/c (Purchase price) To Bank A/c (Customs Duty and Freight) To Erection charges

Rs. 1,60,000

Date. Particulars 2001 By Depreciation A/c (1/2 March 31 year) 80,000 By Balance c/d

Rs. 30,000 2,70,000

60,000 3,00,000

2001 April 01

3,00,000 2,70,000

To Balance b/d To Bank A/c New machine

2002 April 01

To Balance b/d

To Bank A/c New machine

2003 April 01

To Balance b/d

2002 By Depreciation A/c (Note March 31 2) 1,00,000 By Balance c/d 3,70,000 2002 By Depreciation A/c ½ year 2,90,000 Oct 01 By Bank sale Proceeds By Profit and Loss a/c 50,000 2003 By Depreciation A/c (Note March 31 1) By Balance c/d 3,40,000 2,05,000

80,000 2,90,000 3,70,000 10,000 34,800 25,200 65,000 2,05,000 3,40,000

Working Notes: Calculation of Depreciation 2000-01 Rs. st 30,000 1 Machinery – 2nd Machinery rd – 3 Machinery Total 30,000 *1/2 year, ** 20% of Rs.2,00,000 Rs.(3,00,000 – 1,00,000 machinery sold). (2) Acquired 1-10-2000 1-04-2001 1-04-2002

Rs. 3,00,000 1,00,000 50,000

2001-02 Rs. 60,000 20,000 – 80,000

Rs.

2002-03 Rs. **40,000 20,000 *5,000 65,000

Calculation of 1/3 of W.D.V on machinery purchase on Oct 01, 2000 Original cost 01-10-2000 (without depreciation for 2000 - 2001 Less: Depreciation for 2000-2001 (1/2 year) Less Depreciation for 2001-2002 Less sale proceeds Less: Depreciation for 2002-03 (1/2 year) Loss on sale of one third of machine

1,00,000 10,000 90,000 20,000 70,000 34,800 10,000 25,200 < TOP >

3.

Maithrei Ltd. Profit & Loss account for the year ended March 31, 2003 Dr. Particulars To Opening stock To Purchases Less Purchases returns To Wages To Carriage inward To Gross Profit

Cr. Rs. 6,64,000 84,000

To Rent & taxes To Interest on bank Loan 4,000 (12%) Add: Accrued 800 To Advertisement 24,000 Less: Unexpired 6,000 (1/4 of the Rs.24,000) To Bad debts To Discount allowed To Audit fee To Insurance To Travelling expenses To Salaries 1,37,550 Add: Outstanding 12,450 To Depreciation Furniture & fittings (10%) Plant & Machinery (20%) Building (10%) To Provision for doubtful debts. (5% on Rs.2,37,000)

Rs. Particulars 40,000 By Sales Less Sales return 5,80,000 50,000 27,800 By Closing stock 2,24,700 9,22,500 12,000 By Gross Profit

Rs. 9,60,000 80,000

Rs. 8,80,000

42,500 9,22,500 2,24,700

4,800 18,000 By Income from investments 2,000 By Discount received 4,050 By Net loss 5,400 2,400 2,200

4,000 2,800 40,700

1,50,000 4,500 30,000 25,000 11,850

2,72,200

Balance Sheet as at March 31, 2003

2,72,200

Liabilities Share Capital Authorised Capital 1,00,000 shares of Rs.10 each Issued called-up and Paid-up Capital 60,000 share @Rs.10 each

Rs.

Bank Loan Add Interest

40,000 800

Rs.

Assets Fixed Assets By Furniture & Fittings 10,00,000 Less: Depreciation (10%)

6,00,000

Current Liabilities & Provision A. Current Liabilities Sundry Creditors 1,16,000 Less Due to Mr. Amar 3,000 Outstanding salaries

40,800

1,13,000 12,450

Rs.

Rs.

45,000 4,500

40,500

By Building 2,50,000 Less: Depreciation (10%) 25,000 By Plant & Machinery 1,50,000 Less Depreciation (20%) 30,000 Investments Current Assets, Loans & advances Current Assets Closing Stock Sundry debtors 2,40,000 Less: Mr. Amar 3,000 2,37,000 Less: Provision for doubtful debenture (5%) 11,850 2,25,150 Cash at Bank Cash in hand Unexpired expenses Advertisement expenses unexpired Miscellaneous Expenditure Profit & loss a/c.

7,66,250

2,25,000 1,20,000 40,000

42,500

2,25,150 21,000 5,400 6,000 – 40,700 7,66,250 < TOP >

4.

a.

Jay Ltd. Journal Entries Particulars a.

b.

c.

d.

Suspense a/c

Dr. Mr. Rohan account (Sales to Mr. Roshan wrongly credited to his account, now rectified) Suspense account Dr. To Mr. Kanithkar (Purchase from Mr. Kanithkar omitted to be posted to his account in the ledger, now rectified) Office Furniture account Dr. To Profit and loss adjustment account (Purchase of office furniture wrongly passed through the purchase day book, now rectified) Profit and loss adjustment account Dr. To Office car account (Repairs to office car wrongly debited to office car account, now rectified)

b.

Dr. Cr. (Rs.) (Rs.) 42,000 42,000 12,000 12,000

21,000 21,000

8,500 8,500

Suspense Account Dr. Cr. Particulars To Kanithkar To Rohan

Amount 12,000 42,000 54,000

Particulars By Diff. In trial balance

Amount 54,000

54,000 < TOP >

5. In the books of ABC ltd. Journal Entries Particulars Bank A/c. Dr. To Share Application A/c. (Being application money on 9,000 shares @ Rs.25 each received Share Application A/c. Dr. To Share Capital A/c. (Being application money on 9,000 shares @ Rs.25 each transferred to Share Capital Account as per Board’s Resolution No….dated…) Share Allotment A/c Dr. To Share Capital A/c To Securities Premium A/c (Being allotment money due on 9,000 shares @ Rs.35 each as per Board’s Resolution No…dated) Bank A/c Dr.` To Share Allotment A/c (Being allotment money received on 9,000 shares @ Rs.35 each) Share First Call A/c Dr. To Share Capital A/c (Being first call money due on 9,000 shares @ Rs.20 each as per Board’s Resolution No…dated…) Bank A/c Dr. To Share First Call A/c (Being first call money received on 8,800 shares @ Rs.20 each) Share Final Call A/c Dr. To Share Capital A/c (Being final call money due on 9,000 shares @ Rs.30 each as per Board’s Resolution No…. dated….) Bank A/c To Share Final Call A/c (Being final call money received on 8,800 share @ Rs.30 each) Share Capital A/c Dr. To Share First Call A/c To Share Final Call A/c To Forfeited Shares A/c (Being forfeiture of 200 shares of Rs.100 each for non-payment of first and final call money as per Board’s Resolution No…dated..) Bank A/c Dr. Forfeited Shares A/c Dr. To Share Capital A/c (Being re-issue of 100 shares of Rs.100 each @ Rs.90 each as fully paidup as per Board’s Resolution No… dated…) Forfeited Shares A/c To Capital Reserve A/c (Being profit on re-issue transferred to Capital Reserve Account)

Dr. (Rs.) 2,25,000

Cr. (Rs.) 2,25,000

2,25,000 2,25,000 3,15,000 2,25,000 90,000 3,15,000 3,15,000 1,80,000 1,80,000 1,76,000 1,76,000 2,70,000 2,70,000 2,64,000 2,64,000 20,000 4,000 6,000 10,000 9,000 1,000 10,000 4,000

Here, securities premium on the forfeited shares has already been realized, so securities premium be debited at the time of forfeiture of shares.

4,000

should not

Working Note: (1) Calculation of Amount to be Transferred to Capital Reserve Amount forfeited per share= Rs.10,000 /200 = Rs.50; Less: Loss per share = Rs.10; Surplus per share Rs.40; Amount to be transferred = 100 × Rs.40 = Rs.4,000 and Rs.50 × 100 = Rs.5,000 should be shown as an addition to share capital. < TOP >

Section C: Applied Theory 6.

Expenditure incurred with respect to the operating activities in the normal course of the business is termed as revenue expenditure. Expenditure which results in the additional capacity or increase in the utility or operating efficiency of the fixed assets is termed as capital expenditure. Expenditure of an exceptional magnitude relative to the size of the enterprise and which is expected to extend its benefit for a period exceeding the year of incurrence is termed as deferred revenue expenditure. The benefit of revenue expenditure expires in the year of its incidence (within one year) is charged off to the Profit and Loss account of that year. The benefit arising as a result of capital expenditure lasts for a longer tenure and is added to the gross block of fixed assets. It is in the case of capital expenditures that a suitable and reasonable amount is charged to the Profit and Loss account in the form of depreciation, amortization etc., to account for the utilization of the fixed assets. In the case of deferred revenue expenditures the classification is dependent on customs, usage and generally accepted accounting practices as it is often a cumbersome task of christening an expenditure of such a nature to be a capital expenditure or a deferred revenue expenditure. Once determined, a portion of direct relevance to the current year is charged to the Profit and Loss account and the balance is carried forward as deferred revenue expenditure in the assets side of the Balance Sheet under a separate heading “Miscellaneous expenditures to the extent not yet adjusted”. Examples of revenue expenditure include administrative expenses, salaries, depreciation, provisions, interest charges etc. Examples of capital expenditures are installation costs, wages/insurance/freight and other incidental expenses incurred with respect to the capital assets etc. Examples of deferred revenue expenditures include advertisement, preliminary expenses, discount on the issue of shares or debentures, research & development costs etc. < TOP >

7.

Conservatism concept is the concept to be considered in making provision for all possible losses. This is the policy of playing safe. It takes into consideration all prospective losses and recognizes revenues only when they are reasonably certain. The principle behind this concept is that the recognition of revenue requires better evidence than recognition of expenses. The principle of conservatism is applied when there is an uncertainty inherent in the activity like the useful life of an asset, occurrence of loss, realization of income and estimated liability. Making provision for doubtful and discount on debtors in anticipation of actual bad debts and discount is a citing example of conservatism. The accounts officer of Shriya Ltd. comes to know that Shriya Ltd. is rumored to be going into liquidation, as a prudent officer of the company, the CAO should advice the company to make suitable provision for the amounts owed by them keeping in view the conservatism concept provide for all probable losses. < TOP >

8.

Bonus shares are allotted to the existing shareholders without any consideration being received from them, if authorized by the articles of association. They are issued to capitalize the profits of the company. Bonus shares can be issued only out of free reserves built out of the genuine profits or share premium collected in cash. Issue of Bonus Shares shall be subject to the prescribed SEBI guidelines which inter alia provide for the following. i. Bonus issue shall not be made within 12 months of any public/rights issue. ii. Bonus issue shall be made out of reserves built out of genuine profits or share premium collected in cash. iii. Reserves created out of revaluation of fixed assets shall not be capitalized. iv. Bonus issue shall not be made in lieu of dividend. v. Bonus issue shall not be made unless partly paid shares, if any existing are made fully paid-up. < TOP >

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