Mb131 - 2004 - 10 (october)

Question Paper Financial Accounting (MB131) : October 2004 • Answer all questions. • Marks are indicated against each question.

1.

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Accounting does not record non-financial transactions due to (a) Business entity concept (c) Accounting period concept (e) Cost concept.

(b) Going concern concept (d) Money measurement concept (1 mark)

2.

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Which of the following statements can be used to assess the liquidity of a company? (a) Balance sheet (c) Profit and loss appropriation account (d) Bank reconciliation statement

(b) Profit and loss account (e) Manufacturing account. (1 mark)

3.

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A construction contractor usually records revenue and earnings on his project on (a) Cash basis (d) Period basis

(b) Sales basis (e) Workers basis.

(c) Completion basis (1 mark)

4.

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Which of the following is a real account? (a) Salary account (c) Outstanding rent account (e) Purchase inward account.

(b) Cash account (d) Sundry creditors account (1 mark)

5.

st

Opening entry for the following accounts was passed on 1 April 2004 in the books of Cash on hand Rs. 660 Cash at bank Rs.12,100 Bills Payable Rs. 6,600 Furniture & fittings Sundry Creditors Sundry Debtors Stock in trade Rs.24,400 Capital Rs.50,000

John & Co.

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Rs.13,200 Rs.22,800 Rs.29,040

After passing the above entry, the debit total of the above accounts will be (a) Rs.55,000

(b) Rs.79,400

(c) Rs.56,640

(d) Rs.1,03,800

(e) Rs.50,000. (2 marks)

6.

On September 30, 2004,the bank column of the cash book of Mars Ltd. showed a credit balance of Rs.1,62,000 which did not agree with the balance as per the bank statement. On scrutiny, the following omissions and commissions were noticed: As per bank statement, a cheque of Rs.7,000 was deposited on September 25,2004. But no entry was made in the cash book Receipt side of the bank column of the cash book was undercast by Rs.1,000 An amount of Rs.49,960 was credited by the bank on account of the proceeds of a cheque for Rs.50,000 deposited for collection. No entry was passed in the cash book for bank charges A cheque issued by a customer for Rs.5,300 was deposited in the bank on September 25, 2004. But the same was dishonoured on September 29, 2004. No entry was passed in the cash book for dishonour The amount of bills receivable collected directly by the bank aggregated to Rs.35,000 The amount of bank charges of Rs.250 was recorded twice in the cash book A bill of Rs.80,000 discounted for Rs.70,960 was dishonoured by the bank, and noting charges of 1

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Rs.150 was paid by the bank. No entry was made in the cash book. The bank balance as per the bank statement on September 30, 2004 was (a) Rs.2,14,940 (credit) (c) Rs.2,05,900 (debit) (e) Rs.1,34,940 (credit).

(b) Rs.1,34,940 (debit) (d) Rs.2,04,240 (debit) (3 marks)

7.

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The following information is extracted from the books of Jeet and Company: • • • •

Capital employed - Rs.1,00,000. Normal rate of return is -10%. Present value of annuity of Re.1 for five years at the rate of 10% – 3.78. Net profits for five years: Year Rs. 1 14,400 2 15,400 3 16,900 4 17,400 5 17,900. The profits included non-recurring profits on an average basis of Rs.1,000 and even recurring profits had a tendency of appearing at the rate of Rs.600 per annum. The value of goodwill under annuity method is (a) Rs.37,800

(b) Rs.6,000

(c) Rs.22,680

(d) Rs.60,480

(e) Rs.59,724. (2 marks)

8.

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Consider the following data pertaining to Lairs Ltd. for the month of June 2004: Date

01-06-2004 02-06-2004 10-06-2004 25-06-2004

Purchases Quantity Rate (Rs.) (Kg.)

Issues Quantity (Kg.)

Balance Quantity (Kg.) Rate (Rs.) 500

400 600

22.80

24 25 1,000

If the company uses weighted average method for inventory valuation, the value of inventory as on June 30, 2004 is (a) Rs.11,967

(b) Rs.12,000

(c) Rs.12,500

(d) Rs.11,400

(e) Rs.36,000. (2 marks)

9.

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A return inward book is maintained by a business to record (a) Return of goods sold on cash (c) Return of goods sold on credit (e) Return of goods purchased on cash.

(b) Return of goods purchased on credit (d) Return of anything sold/purchased (1 mark)

10. The overdraft as per the bank pass book of Mr. Suresh was Rs.13,880 as on March 31, 2004. What will be the overdraft as per his cashbook, if the following particulars are taken into account? • • • •

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Interest on overdraft for the quarter ended March 2004 – Rs.480 (not entered in cash book yet) Cheques deposited in the bank, but not cleared – Rs.1,800 Cheques issued but not presented – Rs.2,350 A cheque for Rs.1,000 which was discounted with the bank earlier was dishonoured Mr. Suresh was not aware of the dishonour.

(a) Rs.12,950

(b) Rs.14,810

(c) Rs.13,810

(d) Rs.13,950

(e) Rs.13,400. (2 marks) < Answer >

11. The process of transferring entries from journal to ledger is known as (a) Journalizing

(b) Ledgerizing 2

(c) Posting

(d) Transferring

(e) Appropriation. (1 mark)

12. The process of balancing of an account involves equalization of both sides of the account. If the debit side of an account exceeds the credit side, the difference is put on the credit side. The said balance is I. A debit balance III. An expenditure or an asset

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II. A credit balance IV. An income or a liability.

(a) Only (II) above (c) Both (I) and (III) above (e) Both (II) and (IV) above.

(b) Only (IV) above (d) Both (II) and (III) above (1 mark)

13. In the books of Pramod Ltd. goods worth Rs.7,850 returned by Mr. Prakash were entered in the purchases day book and recorded there from to Mr. Prateek’s account as Rs.8,750. At the time of preparation of the trial balance, the difference was posted to suspense account. The rectification entry to be passed is (a)

(a)

Sales account Prateek account Dr. To Purchases account To Prakash account To Suspense account (b) Returns inward account Dr. Prakash account To Purchases account To Prateek account (c) Suspense account Prateek account Dr. To Prakash account To Purchases account (d) Returns inward account Prateek account Dr. To Prakash account To Purchases account (e) Returns inward account Prateek account Dr. To Purchases account To Prakash account To Suspense account

Rs. Dr. 7,850 8,750

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Rs.

7,850 7,850 900 8,750 Dr. 7,850 7,850 8,750 Dr. 7,850 8,750 7,850 8,750 Dr. 7,850 7,850 7,850 7,850 Dr. 7,850 8,750 7,850 7,850 900. (2 marks) < Answer >

14. Which of the following statements is true? (a) (b) (c) (d) (e)

Compensating errors cause a mismatch in the trial balance Error of principle affects the agreement of trial balance Omission of recording of a transaction from the books affects only one account Recording a transaction at an amount which is totally different from the actual amount does not affect the agreement of trial balance Error of casting does not affect the agreement of trial balance. (1 mark) < Answer >

15. Error of commission arises when (a) (b) (c) (d) (e)

Any transaction is incorrectly entered partially Any transaction is incorrectly entered wholly Any transaction is not recorded either wholly or partially Any transaction is incorrectly entered either wholly or partially Any transaction is recorded in a fundamentally incorrect manner. (1 mark) < Answer >

16. The amount of purchases is, if 3

Cost of goods sold is Opening stock is and Closing stock is (a) Rs.80,500

Rs.80,700 Rs. 5,800 Rs. 6,000

(b) Rs.74,900

(c) Rs.74,700

(d) Rs.80,900

(e) Rs.86,500. (1 mark) < Answer >

17. Suspense account is opened to rectify those errors which have been located (a) (b) (c) (d) (e)

Before preparation of trial balance After preparation of trial balance Before or after preparation of trial balance After preparation of final accounts At the time of location of the mistake itself. (1 mark)

18. The following balances are extracted from the books of accounts of Libra Ltd. for the year 2003-2004: Opening stock Closing stock Purchases Returns outward

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Rs.17,500 Rs.20,000 Rs.92,000 Rs. 7,000

If the gross profit for the year was Rs.19,500, the total sales during the year were (a) Rs.1,22,000

(b) Rs.1,29,000

(c) Rs.1,09,000

(d) Rs.1,02,000

(e) Rs.95,000. (1 mark) < Answer >

19. Which of the following statements is true? (a)

Income tax provision relating to current year is a charge against profit & loss appropriation account (b) Income tax provision relating to previous year should be debited to profit & loss account (c) Interim dividend should be debited to profit and loss account (d) Managing director’s salary should be debited to profit & loss account (e) Provision for doubtful debts relating to current year is a charge against profit & loss appropriation account. (1 mark) < Answer >

20. While making an adjusting entry in respect of interest on capital we (a) Credit interest on capital (c) Credit profit and loss account (e) Debit drawings account.

(b) Credit capital account (d) Debit capital account (1 mark)

21.

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If the profit is 25% of the cost price, then it is (a) 25% of the sale price (c) 20% of the sale price (e) 17 % of the sale price.

(b) 33% of the sale price (d) 15% of the sale price (1 mark)

22. The general manager of a business firm is entitled to a commission of 5% on profits before charging such commission. If profit is Rs.10,500 the amount of commission is (a) Rs.500.00

(b) Rs.525.00

(c) Rs.552.65

(d) Rs.498.75

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(e) Rs.551.25. (1 mark)

23. If the proposed dividend of the company is exceeds 15% of paid-up capital but is less than 20%, then compulsory transfer of current years profits to reserve is (a) 2.5%

(b) 5%

(c) 7.5%

(d) 10%

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(e) 12.5%. (1 mark) < Answer >

24. Which of the following statements is true? 4

(a) (b) (c) (d) (e)

Bad debts recovered account is transferred to sundry debtors account Bill of exchange is drawn by the purchaser Trial balance establishes the arithmetical accuracy of the accounting records A well maintained asset need not be depreciated Drawing of goods by the owner is to be debited to profit and loss account. (1 mark)

25. The entry for rectifying the wrong entry of purchase of office furniture in Purchases Day Book is

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(a)

Debit Purchases A/c. and Credit Furniture A/c. (b) Debit Office Furniture A/c. and Credit Purchases A/c. (c) Debit Office Furniture A/c. and Credit Sundry Creditors A/c. (d) Debit Purchases A/c and Credit Sundry Creditors A/c. (e) Debit Office Furniture A/c and Credit Suspense A/c. (1 mark) < Answer >

26. Out of the followings, the example of a current asset is (a) Surrender value of life insurance policy (c) Debenture redemption fund investment (e) Goodwill.

(b) Discount on debentures (d) Bills receivable (1 mark) < Answer >

27. Consider the following data pertaining to Universe Ltd. as on March 31, 2004: • • • •

Total sundry debtors as per Trial Balance Rs.40,600 Bad debts identified after the preparation of Trial Balance Rs.600 Provision for bad debts to be created @ 5% on sundry debtors Provision for discount on sundry debtors to be created @ 2%.

The amount of provision for discount on sundry debtors created for the period ended March 31, 2004 was (a) Rs.760

(b) Rs.2,000

(c) Rs.771

(d) Rs.800

(e) Rs.812. (2 marks)

28. In case of downward revaluation of an asset, which is for the first time revalued, the account to be debited is (a) Fixed Asset Account (c) Profit & Loss Account

(b) Revalaution Reserve (d) General Reserve

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(e) Captital Reserve. (1 mark) < Answer >

29. Consider the following data pertaining to Optimum Ltd. • • • • •

Sundry assets of the company are Rs.22,50,800 and current liabilities are Rs.93,625 Average capital employed in the business is Rs.18,00,000 Rate of interest expected from capital having regard to the risk involved is 10% Net trading profits of the company for the past three years were Rs.3,22,800, Rs.2,72,100 and Rs.3,37,500 Fair remuneration to the directors for their services is Rs.36,000 per annum.

The value of goodwill on the basis of 3 years’ purchase of super profits calculated on the average of past three years profits is (a) Rs.3,92,400

(b) Rs.1,30,800

(c) Rs.2,84,400

(d) Rs.1,66,800 (e) Rs.1,77,247. (2 marks) < Answer >

30. Consider the following data pertaining to Taurus Ltd. Average Trading Profit Normal Profits

Rs.2,58,900 Rs.2,23,800 5

The goodwill was valued on the basis of 3 years’. Further, it has been resolved by the company to amortise the goodwill over a period of five years. The journal entry to be passed for amortisation of goodwill every year is (a)

Profit and Loss a/c. Dr. To Goodwill a/c. (b) Depreciation a/c. Dr. To Goodwill a/c. (c) Goodwill a/c. Dr. To Profit and Loss a/c. (d) Profit and Loss a/c. Dr. To Goodwill a/c. (e) General Reserve a/c. Dr. To Goodwill a/c.

Rs.21,060 Rs.21,060 Rs. 7,020 Rs. 7,020 Rs.21,060 Rs.21,060 Rs. 7,020 Rs. 7,020 Rs.21,060 Rs.21,060. (2 marks)

31. Windy Ltd. has the practice of creating provision for doubtful debts @ 8% on debtors. The balance of provision for doubtful debts on April 01, 2003 and March 31, 2004 was Rs.32,000 and Rs.44,000, respectively. During the year 2003-2004, the amount collected from debtors was Rs.60,50,000. Credit sales during the year were (a) Rs.60,50,000

(b) Rs.66,00,000

(c) Rs.62,00,000

(d) Rs.64,50,000

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(e) Rs.60,62,000. (2 marks) < Answer >

32. Which of the following is not manufacturing cost? (a) Wages (d) Advertising expenses

(b) Indirect labour (c) Power and light (e) Depreciation on machinery. (1 mark) < Answer >

33. For charging depreciation, on which of the following assets, is depletion method adopted? (a) Plant & machinery (b) Land & building (d) Wasting assets like mines and quarries (e) Patents.

(c) Goodwill (1 mark) < Answer >

34. The accounts receivable are shown in the balance sheet at (a) Current market value (b) Estimated net realizable value (c) Original cost when the asset is recorded in the books of account (d) Amount receivable when due (e) Cost less realized value. (1 mark)

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35. At the time of preparation of final accounts, bad debts recovered account will be transferred to (a) Debtor’s account (b) Profit & loss account (c) Profit & loss adjustment account (d) Profit & loss appropriation account (e) Provision for discount on debtors account. (1 mark)

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36. Consider the following data pertaining to Volga Ltd.: Particulars

Rs.

Cost of the machinery purchased on April 1, 2003 Installation charges

10,00,000 1,00,000

Market value as on March 31, 2004

12,00,000

While finalizing the annual accounts, if the company values the machinery at Rs.12,00,000, which of the following accounting concepts is violated by the company? (a) Cost

(b) Matching

(c) Realisation

(d) Periodicity

(e) Business Entity. (1 mark)

37. Consider the following Balance Sheet of Penguin Ltd. as on March 31, 2003: 6

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Liabilities Share capital Profit and loss account Provision for depreciation: Buildings Plant and machinery Furniture and fittings Short-term loan Sundry creditors

Rs. 20,00,000 1,00,000

Assets Land Buildings Plant and machinery Furniture and fittings Investments

2,00,000 5,00,000

Rs. 2,00,000 10,00,000 15,00,000 1,00,000 4,45,000

20,000

Sundry debtors

1,50,000

6,00,000 50,000 34,70,000

Closing stock Cash and bank

50,000 25,000 34,70,000

The company charges depreciation on all its fixed assets at the rate of 10% on written down value method. The amount to be charged to profit and loss account for the year ended March 31, 2004 on account of provision for depreciation is (a) Rs.2,60,000

(b) Rs.1,88,000

(c) Rs.2,80,000

(d) Rs.2,08,000 (e) Rs.9,08,000. (1 mark) < Answer >

38. If the opening inventory is understated and closing inventory is overstated (a) (b) (c) (d) (e)

The profitability will increase and currents assets will also increase The profitability will reduce and current assets will decrease The profitability will increase but current assets will decrease The profitability will reduce but current assets will increase There will not be any change in profitability or current assets. (1 mark) < Answer >

39. Which of the following is not an example of fixed asset? (a) Plant and machinery (d) Patent

(b) Land and Building (e) Office Furniture.

(c) Royalty (1 mark) < Answer >

40. Obsolescence of a depreciable asset may be caused by (a) Technological changes (b) Improvement in production method (c) Change in market demand for the product or service output (d) Legal or other restrictions (e) (a), (b), (c) and (d) above. (1 mark)

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41. Consider the following: I. Rate of depreciation under the written down method – II. Original cost of the asset III. Residual value of the asset at the end of useful life

20% – Rs.1,00,000 – Rs. 40,960

The estimated useful life of the asset, in years, is (a) 4

(b) 5

(c) 6

(d) 7

(e) 8. (1 mark)

42. Which of the following is a capital expenditure? (a) Wages paid (c) Heavy advertisement cost (e) Carriage inward.

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(b) Salaries paid (d) Patents acquired (1 mark) < Answer >

43. Inventory consists of (a) (b) (c) (d)

Raw-materials, work-in-process and finished goods Raw-materials, work-in-process and consumables Raw-materials, work-in-process, finished goods, consumables and loose tools Raw-materials, work-in-process, finished goods, consumables, loose tools and machinery spares 7

(e)

Raw-materials, work-in-process, finished goods and general stationery. (1 mark) < Answer >

44. Which of the following ratios indicate a firm’s ability to pay its debts in the short run? (a) Liquidity ratios (c) Coverage ratios (e) Leverage ratios.

(b) Turnover ratios (d) Profitability ratios (1 mark)

45. Leo Co. invested Rs.80,000 in 12% debentures of Gemini Ltd. on January 31, 2004. The company pays interest on debentures during April and October every year. As on March 31, 2004, the accrued interest revenue is shown in the financial statements of Leo Co. at (a) Rs.Nil

(b) Rs.9,600

(c) Rs.4,000

(d) Rs.2,400

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(e) Rs.1,600. (1 mark)

46.

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The following is not a method of valuing inventory? (a) FIFO method (c) Standard cost method

(b) Weighted average cost method (d) Retail method (e) ABC analysis. (1 mark)

47. Radhe Shyam purchased 1,000 shares in Mammoth Laboratories Ltd. at Rs.600 per share in the year 2002. There was a rights issue in the year 2004 at the rate of one share for every two shares held at a price of Rs.150 per share. The market value per share was Rs.700. If Radhe Shyam subscribed to the rights, the carrying cost of total shares in his books will be (a) Rs.6,00,000

(b) Rs.3,50,000

(c) Rs.6,75,000

(d) Rs.9,50,000

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(e) Rs.10,50,000. (2 marks)

48. Zidney Ltd. issued 20,000 equity shares of Rs.100 each at par, out of which, only Rs.85 is called up. Mr. Arun did not pay the call money of Rs.25 and hence all the 1,000 shares allotted to him were forfeited. If all these shares are to be re-issued as fully paid-up, the minimum amount to be collected is (a) Rs.40,000

(b) Rs.1,00,000

(c) Rs.15,000

(d) Rs.60,000

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(e) Rs.25,000. (2 marks) < Answer >

49. When debentures become due for redemption, the entry is (a) (b) (c) (d) (e)

Debit debentures a/c; Credit cash a/c Debit debentures a/c; Credit debenture holders a/c Debit debenture holders a/c; Credit cash a/c Debit debenture holders a/c; Credit debentures a/c Debit profit and loss a/c; Credit cash a/c. (1 mark) < Answer >

50. Earning per equity share equals (a) (b) (c) (d) (e)

Sales divided by shareholders' equity Net income divided by average shareholders' equity Net income divided by ending shareholders' equity Sales divided by average shareholders' equity Net income divided by opening shareholders’equity. (1 mark)

51. On April 01, 2004, the balance in debenture redemption fund account of Narmada Ltd. was Rs.80,000. This fund was invested in the following securities: Rs.40,000, 10% Government loan

Rs.35,000

Rs.25,000, 8% Debentures

Rs.21,000

200 Equity shares of Rs.100 each

Rs.24,000

On September 30, 2004, Government loan was sold at par, 8% debentures were sold at 98% and the equity shares were sold at Rs.125 per share. The amount transferred from debenture redemption fund 8

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investment account to debenture redemption fund account of the company was (a) Rs.9,500

(b) Rs.4,500

(c) Rs.89,500

(d) Rs.80,000

(e) Rs.70,500. (2 marks)

52. If forfeited shares (which were originally issued at discount) are reissued at a premium, the amount of such premium will be credited to (a) Share forfeiture account (c) Capital reserve account (e) Share capital account.

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(b) Share premium account (d) Discount on issue of shares account (1 mark)

53. Silver Coats Ltd. invited applications for 1,00,000 equity shares of Rs.10 each at a premium of Rs.2 per share. The entire issue was underwritten by three underwriters in the following percentages: Anil Vimal Sunil

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30% 40% 30%

The details of marked and unmarked applications received are: Marked applications of Anil Vimal Sunil Unmarked applications

22,000 shares 24,000 shares 28,000 shares 16,000 shares

The final liability of Vimal in terms of number of shares is (a) Nil

(b) 9,600

(c) 3,200

(d) 16,000

(e) 8,000. (2 marks)

54. Which of the following methods of valuation of shares is/are known as intrinsic value method? (a) Earning capacity method (c) Fair value method (e) Both (b) and (d) above.

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(b) Break-up value method (d) Assets backing method (1 mark) < Answer >

55. Consider the following particulars relating to Winner Ltd.: The equity share capital of Winner Ltd. consists of 1,50,000 equity shares of Rs.10 each fully paid-up. The net profits for the past three years are: Rs.2,52,500, Rs.3,10,000 and Rs.4,50,000. Out of these profits, 20% is transferred to general reserve. If the normal rate of return is 15%, the value of share under the yield method is (a) Rs.15.00

(b) Rs.8.33

(c) Rs.6.67

(d) Rs.10.00

(e) Rs.12.00. (2 marks) < Answer >

56. Sinking fund for redemption of debentures is created out of (a) Reserve capital account (c) Share premium account (e) Capital redemption reserve account.

(b) Capital reserve account (d) Current year profit (1 mark)

57. The cumulative preference shareholders enjoy preferential treatment over equity shareholders with regard to (a) Priority in payment of dividend (c) Voting rights (e) (a), (b) and (d) above.

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(b) Return of capital (d) Cumulation of dividends (1 mark)

58. Which of the following is to be deducted from the assets, while valuing the equity shares under intrinsic value method? 9

< Answer >

value method? (a) Preference share capital (c) Contingency reserve (e) Capital redemption reserve.

(b) Dividend equalization reserve (d) Debenture redemption fund (1 mark) < Answer >

59. The profit or loss on cancellation of own debentures is calculated at the time of (a) Issue of debentures (b) Creation of sinking fund for redemption (c) Purchase of own debentures (d) Cancellation of own debentures (e) Payment of interest at subsequent interval. (1 mark)

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60. Needs Ltd. issued 20,000 equity shares of Rs.100 each at a premium of 20% payable as under: On application On allotment On first call On second and final call

Rs.50 (inclusive of premium) Rs.30 Rs.20 Rs.20

Applications were received for 24,000 shares and the company has resolved to reject 4,000 applications in full and allot to 20,000 applicants in full. The journal entry passed at the time of receipt of application money is (a)

Bank account To Share application account (b) Share application account Dr. To Share Capital account (c) Bank account To Share Capital account (d) Bank account To Share Capital account To Share premium account To Bank account (e) Bank account To Share Capital account To Share premium account

Dr. Rs.12,00,000 Rs.12,00,000 Rs.12,00,000 Rs.12,00,000 Dr. Rs.12,00,000 Rs.12,00,000 Dr. Rs.12,00,000 Rs. 6,00,000 Rs. 4,00,000 Rs. 2,00,000 Dr. Rs. 8,00,000 Rs. 6,00,000 Rs. 2,00,000. (2 marks)

61. At the time of consolidation of accounts of the holding company, which of the following is/are to be considered for calculating the cost of control? I. Value of shares acquired. III. Profits/losses on revaluation of assets. V. Post-acquisition profits/losses.

II. Pre-acquisition profits/losses. IV. Profits/losses on revaluation of liabilities.

(a) Only (I) above (c) (I), (II) and (III) above (e) All (I), (II), (III), (IV) and (V) above.

(b) Both (I) and (II) above (d) (I), (II), (III) and (IV) above

< Answer >

(1 mark) < Answer >

62. Capital profits are the (a)

Profits earned by the subsidiary company up to the date of acquisition of shares by the holding company (b) Post-acquisition profits of the subsidiary company (c) Post-acquisition profits of the holding company (d) Pre-acquisition profits of the holding company (e) Profits earned by the subsidiary company by unusual transactions. (1 mark)

63. Which of the following transactions of Holding company and its subsidiary company are construed as inter-company transactions and are to be eliminated at the time of Consolidation of Balance Sheet? (a) The holding company or the subsidiary company may have granted short-term loans to each other (b) They may have sold/purchased goods on credit from each other 10

< Answer >

(c) They might have drawn bills of exchange on each other (d) Both (b) and (c) above (e) (a), (b) and (c) above. (1 mark) 64. Which of the following is not a current liability in the consolidated balance sheet of a holding company? (a) Bills payable (d) Unclaimed dividend

(b) Over draft (e) Declared dividend.

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(c) Minority interest (1 mark)

65. When the amount of investment in subsidiary is more than the nominal value of the share capital acquired by the holding company, the difference represents (a) Goodwill (c) Securities premium (e) Revenue reserve.

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(b) Capital reserve (d) Capital profit (1 mark) < Answer >

66. Which of the following statements is/are true? If ABC Corporation owns a controlling interest of 51% of the equity shares in XYZ Co., ABC Corporation is a (a) Parent company to XYZ Co. (b) Subsidiary company to XYZ Co. (c) Associate company to XYZ Co. (d) Fellow subsidiary to XYZ Co. (e) Co-subsidiary to XYZ Co. (1 mark)

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67. The primary means of communicating important accounting information to users is (a) Prospectus (c) Bank Reconciliation Statement (e) Statement of cash flow.

(b) Trial balance (d) Financial statements (1 mark)

68. Diana Ltd. has issued 10,000, 10% Preference Shares of Rs.100 each fully paid up and 1,30,000 equity shares of Rs.10 each fully paid up. The equity shares were issued at a premium of Rs.20 per share. The profit for the year 2003-04 is Rs.10,84,000 and the balance brought forward from the previous year amounted to Rs.1,52,800.

< Answer >

The company wanted to provide Rs.4,38,000 for taxation of the previous year before making any appropriations. The company declared an equity dividend of 10% and it has decided that an amount equal to 10% of equity dividend shall be set aside for bonus to staff. The total amount debited to Profit and Loss appropriation account on account of the above decisions is (a) Rs.2,30,000

(b) Rs.1,43,000

(c) Rs.6,81,000

(d) Rs.5,81,000

(e) Rs.5,68,000. (2 marks)

69. The Adams Ltd. paid a dividend of Rs.1,20,000 at the end of March 31, 2004. At the beginning of April 01, 2003, there was dividends in arrear of Rs.40,000. The company’s capital structure was 5,000 9%, cumulative preferences shares of Rs.100 each, and 10,000 equity shares of Rs.30 par value. How much did Adams Ltd. pay as dividends to its common shareholders? (a) Percentage not given (d) Rs.35,000

(b) Rs.75,000 (e) Rs.80,000.

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(c) Rs.45,000 (2 marks)

70. As per Schedule VI of the Companies Act, 1956, unclaimed dividends are to be shown (a) (b) (c) (d)

As a deduction from claimed dividends As an addition to unpaid interest As a deposit in a nationalized bank As a provision in Balance Sheet 11

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(e) As a current liability. (1 mark) < Answer >

71. Which of the following equations is equal to Net Value Added? (a) (b) (c) (d) (e)

Gross Value Added + Depreciation Gross Value Added + Interest Gross Value Added – Depreciation Gross Value Added – Inventory Gross Value Added – Net Inventory. (1 mark) < Answer >

72. The price for which a person could buy or sell an equity or preference shares is called as (a) Market value (c) Redemption value (e) Realisable value.

(b) Book value (d) Par value (1 mark) < Answer >

73. The following information is extracted from the books of Jeet Ltd. as on March 31, 2004: Particulars Opening stock (April 01, 2003) Purchases and sales Returns Manufacturing wages Carriage inward Sundry Manufacturing Expenses

Rs. Debit 1,86,420 7,18,210 12,680 1,09,740 4,910 19,240

Rs. Credit 11,69,900 9,850

On March 31, 2004 outstanding manufacturing wages stood at Rs.1,890. On the same date stock was valued at Rs.1,24,840. The Gross Profit for the year is (a) Rs.2,51,500 (e) Rs.2,80,900.

(b) Rs.2,60,000

(c) Rs.2,61,250

(d) Rs.2,70,100 (2 marks) < Answer >

74. Which of the following is not a characteristic of Bearer Debentures? (a) (b) (c) (d) (e)

They are treated as negotiable instruments Their transfer requires a deed of transfer They are transferable by mere delivery The interest on it is paid to the holder irrespective of identity They are one of the classifications of debentures from the recording point of view. (1 mark) < Answer >

75. Which of the following statements is/are true? (a) (b) (c) (d) (e)

Debenture is a debt The rate of interest on debentures is dependent on profit earned A debenture holder can vote at the meeting of a company Debentures can be issued only for cash Debentures cannot be issued at a discount. (1 mark)

76. Tantrum Ltd. invited applications for 5,000 shares of Rs.10 each at a premium of Rs.2 per share payable as follows: On application

– Rs.5 (including premium)

On allotment

– Rs.4

On final call

– Rs.3

Allotment was made on pro rata basis to the applicants of 6,000 shares. Mr. Beejay to whom 60 shares were allotted, failed to pay allotment money and call money. Mr. Raj, the holder of 100 shares, failed to 12

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pay call money. All these shares were forfeited after proper notice. On forfeiture, the amount debited to share capital account and share premium account respectively are (a) Rs.1,600; Rs.320 (c) Rs.1,600; Rs.nil (e) Rs.1,400; Rs.320.

(b) Rs.1,400; Rs.nil (d) Rs.1,120; Rs.320 (2 marks)

77. RSV Ltd. acquires the assets of BC Ltd. paying a sum of Rs.22,50,000 against the acquisition of the following assets of BC Ltd.: Particulars Cash at bank Cash on hand Accounts receivable Other identifiable assets

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Rs. 23,750 12,250 86,200 16,00,000

If Accounts Receivables are believed to have a realizable value of Rs.80,000 and other identifiable assets are estimated to have market value of Rs.18,50,000, the amount of goodwill to be recorded in the books of RSV Ltd. is (a) Rs.5,34,000

(b) Rs.2,90,200

(c) Rs.2,84,000

(d) Rs.5,40,200

(e) Rs.3,20,000. (2 marks) < Answer >

78. A credit sale of goods to Shivendra should be debited to (a) Sales account (c) Shivendra’s account (e) Cash account.

(b) Goods account (d) Purchases account (1 mark)

13

Suggested Answers Financial Accounting (MB131) : October 2004 1.

Answer : (d) Reason : Accounting records only those transactions which are expressed in monetary terms. Accounting does not record non-financial transactions. It is a concept of money measurement

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2.

Answer : (a) Reason : Balance sheet can be used to assess the liquidity of a company. The profit and loss account shows the profit or loss of the company but does not help in assessing the liquidity of the company. The profit and loss appropriation account gives the details of appropriations and the retained earnings. The bank reconciliation statement is prepared only to reconcile the differences in bank balance as per cashbook and pass book. The manufacturing account shows the cost of goods produced. Hence the answer is (a).

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3.

Answer : (c) Reason : A construction contractor usually takes up revenue and earnings on his project on completion basis

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4.

Answer : (b) 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 purchase inward account are nominal accounts. Sundry creditors account is personal account and outstanding rent account is representative personal account.

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5.

Answer : (b) Reason : The opening entry passed is to debit Rs. Cash on hand 660 Cash at bank 12,100 Sundry Debtors 29,040 Furniture &fittings 13,200 Stock in trade 24,400 79,400 And to credit Sundry Creditors 22,800 Bills Payable 6,600 Capital 50,000 79,400

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6.

Answer : (d) Reason : Bank Reconciliation Statement as on September 30, 2004

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Rs. Bank overdraft per the cash book Add : Cheque for Rs.50,000 deposited but collection as per bank statement Rs.49,960 i.e. bank charges Cheque dishonoured as per the bank statement Bill for Rs.80,000 discounted for Rs.70,960 dishonoured by the bank, noting charges being Rs.150 Less : Cheque deposited but not recorded in the cash book Debit side of the bank column cast short Bills collected directly by the bank Bank charges recorded twice in the cash book Bank overdraft as per the pass book (Dr.) 7.

Answer : (c) Reason : Average Profit Rs.14,400 + 15,400 + 16,900 + 17,400 + 17,900/5 Rs.16,400 14

Rs. 1,62,000

40 5,300 80,150 7,000 1,000 35,000 250

85,490 2,47,490

43,250 2,04,240 < TOP >

Less :

Rs. 1,000 Rs.15,400 Add : Recurring profit Rs. 600 Average adjusted profit Rs.16,000 Normal profit 1,00,000 x 10/100, Rs.10,000 Super profit = 16,000 – 10,000 = 6,000 a. Goodwill as per annuity method 6,000 x 3.78 = Rs.22,680. 8.

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Answer : (b) Reason :

Date

1-6-03 2-6-03 10-603 25-0603 9.

Non-recurring profit

Purchases Quantity Rate per (Kg) kg. (Rs.) 400 600

24 25

Amount (Rs.)

Issues Quantity (Kg)

Rate per kg. (Rs.)

Amount (Rs.)

9,600 15,000 1,000

24

24000

Balance Quantity (Kg)

Amount (Rs.)

500 900 1,500

Rate per kg. (Rs.) 22.80 23.33 24.00

500

24.00

12,000

11,400 21,000 36000

Answer : (c) Reason : A return inward book is maintained to record returns of goods sold on credit. (c) is the correct answer.

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10. Answer : (a) Reason : Amount (Rs.) Overdraft as per bank pass book

13,880

Less : Interest on overdraft not entered in cash book

480

Cheques deposited not cleared

1,800

Cheque discounted which was dishonoured

1,000 3,280 10,600

Add : Cheques issued but not paid

2,350

Overdraft as per cash book

12,950

11. Answer : (c) Reason : The process of transferring entries from journal to ledger is known as posting. Hence the answer is (c). The process of recording the transaction in the book of original entry is journalizing. Taking over the balance in nominal accounts to profit and loss account is transferring. The allocation of profit to reserves is known as appropriation. There is no term called ledgerizing.

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12. Answer : (c) Reason : The process of balancing of an account involves equalization of both sides of the account. If the debit side of an account exceeds the credit side, the difference is put on the credit side. The said balance is a debit balance and it represents either expenditure or an asset or both. Thus, the combination of items under I and III i.e. alternative (c) is the correct answer. The other alternatives are incorrect because, the excess of debit over credit side is not a credit balance and it is neither an income nor a liability. Thus, alternatives (b) : (d) and (e) the combination of II with III and IV are incorrect.

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13. Answer : (e) Reason : The correct entry which must have been recorded is Returns inward account Dr. Rs.7,850 To Prakash account Rs.7,850 Whereas, Prateek’s account is credited with Rs.8,750 and purchases account debited with Rs.7,850.

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Hence the rectification entry is Returns inward account Dr. Rs.7,850 Prateek account Dr. Rs.8,750 To Purchases account Rs.7,850 To Prakash account Rs.7,850 To suspense account Rs. 900 14. Answer : (d) Reason : The errors may arise because of mathematical mistakes, erroneous application of principles or misuse of existing information and depending upon their nature, they are classified as errors disclosed by the trial balance as they affect its agreement and errors not disclosed by trial balance. The statement (d) is true because if the recording of a transaction in the books of original entry is for an amount different from actual, the transaction is recorded/posted everywhere for the same amount. Ultimately it has no affect on agreement of trial balance. To illustrate, if a credit sale of Rs.15,000 to Mr. X is recorded as Rs.1,500 in sales daybook and posted to the debit of Mr. X as Rs.1,500, it has no affect in the agreement of trial balance. The alternative (a), compensating errors cause a mismatch in the trial balance is false, because if any error caused at first instance is compensated by a second error or series of errors, the trial balance will be in agreement and these are quite difficult to detect. The alternative (b), error of principle involves an incorrect allocation of expenditure or receipt between capital and revenue. Such errors do not affect the agreement of trial balance and they are not disclosed by trial balance. Thus, the alternative (b) is false. The statement (c), omission of recording a transaction from the books affects only one account is false, because it results in omission of both the debit and credit aspects of a transaction and thus affects the accounts involved. The Statement (e), error of casting does not affect the agreement of trial balance is false because wrong totaling in a subsidiary book/ledger account results in either higher amount or lower amount than actual and ultimately results in mismatch of the trial balance.

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15. Answer : (d ) Reason : Error of commission arises when any transaction is incorrectly entered either wholly or partially

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16. Answer : (d ) Reason : Purchases = cost of goods sold plus closing stock minus opening stock Rs.80,700+6,000 – 5,800= Rs.80,900

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17. Answer : (b) Reason : A suspense account is opened after preparation of trial balance but before preparation of final account. (b) is the correct answer.

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18. Answer : (d) Reason : Total sales during the year = Opening stock + Net purchases + Gross profit – Closing stock. = Rs.17,500 + Rs.85,000 (Rs.92,000 – 7,000)+Rs.19,500 – Rs.20,000 = Rs.1,02,000.

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19. Answer : (d) Reason : Profit and loss account is usually prepared on accrual basis. All expenses, incurred and due whether they are actually paid for or not and provisions are debited to profit and loss account. Managing director’s salary is an expenditure and is to be debited to profit and loss account like any other expenditure. Hence, the statement is true. The other alternatives are not correct because (a) Profit and loss appropriation account is a financial statement wherein allocation of profits is reflected. Income Tax provision relating to current year is a charge against profit and loss account and not profit and loss appropriation account. (b) Income tax provision relating to previous year is a charge against profit and loss appropriation account and not profit and loss account. (c) Interim dividend is allocation of profit and it is a charge against profit and loss appropriation account and should not be debited to profit and loss account. (e) Provision for doubtful debts is a potential expenditure and it is a charge against profit and loss

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16

account and not profit and loss appropriation account. 20. Answer : (b) Reason : While making an adjusting entry in respect of interest on capital we debit interest on capital credit capital account.

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21. Answer : ( c) Reason : If the profit is 25% of the cost price then it is 20% of the sales price. Suppose the cost price is Rs.100, profit is Rs.25 and sales price is Rs.125. Profit in percentage is 25/125=20% of sales price

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22. Answer : (a) Reason : The commission at the rate of 5% before charging such commission will be 5/105 of Rs.10,500 = Rs.500. (a) is the correct answer. 23. Answer : (c) Reason : As per the Companies Act, 1956 7.5% of profits should be transferred to reserve account.

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24. Answer : (c) Reason : Bad debts recovery amount will be transferred to profit and loss account and not to sundry debtors account. Hence, (a) is not correct. Bill of exchange is drawn by the drawer i.e. the seller and not the purchaser. According to Companies Act, all assets must be depreciated. Drawing of goods by the owner of a business will be debited to capital account and hence does not affect the profit and loss. Hence, (a), (b), (d) and (e) are not true. By tallying trial balance always proves the arithmetical accuracy of the accounting records. Hence, (c) is correct.

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25. Answer : (b) Reason : Furniture is an office item .Only those items which are meant for further processing or for sale qualify themselves to come under purchases. The correct entry would have been debit Office Furniture and fittings and credit the supplier as the purchase was on credit. Having entered in the purchase day book, the suppliers A/c might have been credited and purchase account debited. So the credit aspect of the transaction is rightly recorded. Hence rectification is needed for wrongly recording the debit aspect. The rectification entry is debit Office Furniture and Fittings A/c and credit Purchases A/c

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26. Answer : (d ) Reason : Bills receivables is the example of a current asset

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27. Answer : (a) Reason : Debtors as per trial balance Less : Bad debts written-off

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Less :

Rs.40,600 Rs. 600 Rs.40,000 Provision for bad debts@ 5% Rs. 2,000 Rs.38,000

2 × Rs.38, 000 = Rs.760 Provision for discount on sundry debtors will be 100

28. Answer : (c ) Reason : In the case of downward revaluation of an asset which is for the first time revalued, the account to be debited is Profit & Loss A/c.Had the asset been revalued upwards the revaluation loss can be adjusted against the revaluation reserve balance

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29. Answer : (c) Reason : Trading profits for the last three years :

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Particulars Year 1 Year 2 Year 3 Total Average Profit (9,32,400 / 3) Less : Remuneration of the directors Average Maintainable Profits

Rs. 3,22,800 2,72,100 3,37,500 9,32,400 3,10,800 36,000 2,74,800 17

Less :

Normal Profit expected @ 10% on average 1,80,000 10   18, 00, 000 ×  100   capital employed Super Profit 94,800 2,84,400 Goodwill at 3 years’ purchase (94,800 × 3) 30. Answer : (a) Reason : Average Trading Profit Rs.2,58,900 Normal Profits (-) Rs.2,23,800 --------------Super profits Rs. 35,100 Value of goodwill = 3 x Rs.35,100 = Rs.1,05,300 Amortisation – in five years = Yearly amortisation = Rs.1,05,300/5 = Rs.21,060. The journal entry will be Profit and Loss a/c. Dr. Rs.21,060 To Goodwill a/c. Rs.21,060. 31. Answer : (c) Reason :

Dr.

Sundry Debtors Account

Date Particulars April 01, 2002 To Opening balance (32,000/8%) 2002-2003 To Credit sales (Balance figure)

Rs. 4,00,000 62,00,000

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Cr.

Date Particulars 2002-2003 By Cash March 31, By Closing balance 2003 (44,000/8%)

66,00,000

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Rs. 60,50,000 5,50,000 66,00,000

32. Answer : (d) Reason : Advertising expense is not manufacturing cost.

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33. Answer : (d) Reason : Depletion method is adopted for charging depreciation on wasting assets likes mines, quarries, oil fields. This method is not appropriate for charging depreciation on assets such as land & building, plant& machinery, patent etc. and in case of goodwill as a practice many of the business firms do not write off.

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34. Answer : (b) Reason : The measurement attribute for accounts receivables is net realizable value. Thus, receivables are reported at their gross value minus an allowance for uncollectible accounts (provision for bad and doubtful debts). Hence (b) is the answer. The accounts receivable are not shown at current market value. A provision for bad debts is deducted from the original cost. Hence (c) is not the answer. The debtors are not recorded at the amount receivable when they become due. The cost less realizable value indicates the provision for bad debts.

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35. Answer : (b) 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 debt recovered account 2. Bad debt 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 nonrecoverable. (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) 18

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the amount of which can not be determined with substantial accuracy. Thus, the recovery of bad debts cannot be debited to any of the above accounts. 36. Answer : (a) Reason : In terms of cost concept the value of an asset is to be determined on the basis of acquisition cost. Valuation of machinery at market value is in violation of cost concept unless the machine is actually sold, realizable value will give only a hypothetical figure. Market value is highly subjective because to know the value of the asset one has to chase the uncertain future. The other concepts matching concept (b) deals with matching costs with revenue, Realization concept (c) deals with recognition of income at various levels of production, Periodicity concept (d) explains how the accounting information is to be reported at regular intervals to foster comparability, Business entity concept (e) explains the owner is different from the business entity. Thus, the concepts (b), (c), (d), and (e) do not explain how the fixed assets are to be recorded.

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37. Answer : (b) Reason :

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Particulars Depreciation : Buildings (Rs.10,00,000 – Rs.2,00,000) x 10% Machinery (Rs.15,00,000 – Rs.5,00,000) x 10% Furniture (Rs.1,00,000 – Rs.20,000) Total depreciation

Rs. 80,000 1,00,000 8,000 1,88,000

38. Answer : (a) Reason : When opening stock is understated and closing stock is overstated, the gross profit as well as net profit will increase. Closing stock appearing as an asset in the Balance-sheet when overstated, the current asset will also increase. All other answers are wrong

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39. Answer : (c) Reason : Royalty is a revenue expenditure and charged to P&L A/c. ,Preliminary expenses, and patent, are generally capitalized. .Plant &machinery and office furniture are fixed assets.

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40. Answer : (e) Reason : Obsolescence may occur due to (a) technological changes (b) improvement in production method (c) change in market demand for the product or service output (d) legal or other restrictions.

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41. Answer : (a) Reason :

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Particulars Original cost of asset Less : Depreciation 20% 1st year Less :

Depreciation 20% 2nd year

Less :

Depreciation 20% 3rd year

Less :

Depreciation 20% 4th year

Rs. 1,00,000 20,000 80,000 16,000 64,000 12,500 51,200 10,240 40,960

Useful life – 4 years. 42. Answer : (d) Reason : Patents acquired is capital expenditure .All others viz, salaries paid, heavy advertisement cost and carriage inward are revenue expenses.

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43. Answer : (c) Reason : Machinery spares and general stationery are not considered as inventories. Inventory includes consumables and loose tools. Therefore statement (c ) is the right choice.

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44. Answer : (a) Reason : Liquidity ratios are the ratios which judge the financial position of the concern inorder to highlight its relative strength in meeting their current obligations. These are used to measure firm’s ability to meet short run obligations. They are current ratios and quick ratios. Turnover ratios (b) are also known as performance ratios; Activity ratios will indicate position of

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19

assets usage. Coverage ratios (c) indicate the extent to which the interests of the persons entitled to get a fixed return or sc heduled repayment as per agreed terms are safe. Profitability ratios (d) are of utmost importance for a concern. These ratios enlighten the end results of business activities. Leverage ratios (e) refers to employment of funds to accelerate rate of return to owners. These ratios explain the extent to which the debt is employed in the capital structure of the concerns. Thus, the ratios (b), (c), (d) and (e) do not explain the firm’s ability to pay its debt in the short run. Hence, are not the correct answers. < TOP >

45. Answer : (c) Reason : The interest accrued on debentures as on 31, March is 5

Rs.80,000 × 12% × 12 = Rs.4,000 46. Answer : (e) Reason : ABC analysis is a inventory management technique. All others are various inventory valuation methods

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47. Answer : (c) Reason : In terms of paragraph 13 of As 13, where rights shares offered, are subscribed for, the cost of rights shares is added to the carrying amount of original holding. The computation accordingly is as under Rs. Particulars

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48. Answer : Reason :

49. Answer : Reason :

Cost of 1000X Rs.600 6,00,000 Cost of subscribing to rights 500XRs.150 75,000 Total carrying cost of 1500 shares 6,75,000 (a) The discount on reissue of forfeited shares should not exceed the amount forfeited, since the discount is written off as a charge against the share forfeiture account. Mr. Arun has paid Rs.60 (Rs.85 – Rs.25) per share = Rs.60 × 1,000 = Rs.60,000 The maximum discount on reissue should not exceed Rs.60,000 Hence, the minimum amount to be collected = Rs.1,00,000 – Rs.60,000 = Rs.40,000. (b) Debit debenture a/c; Credit debenture holders a/c

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50. Answer : (b) Reason: Return on equity is measured by dividing net income by average shareholders' equity, and not sales divided by shareholders' equity.

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51. Answer : (a) Reason : Dr. Debenture redemption fund investment account Particulars Rs. Particulars To Balance b/d. By Bank: 10% Government loan 35,000 10% Government loan 8% Debentures 21,000 8% Debentures Equity shares 24,000 Equity shares To Debenture redemption fund a/c. 9,500 89,500

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Cr. Rs. 40,000 24,500 25,000 89,500

52. Answer : (b) Reason : If the forfeited shares are reissued at a premium, the amount of such premium shall be credited to share premium account.

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53. Answer : (e)

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Reason :

(No. of shares) Particulars

Liability Less: Unmarked applications in the ratio of 3:4:3

Anil

Vimal

Sunil

Total

30,000

40,000

30,000

1,00,000

4,800

6,400

4,800

16,000

25,200

33,600

25,200

84,000

22,000

24,000

28,000

74,000

3,200

9,600

(2,800)

10,000

20 Less: Marked (Stamped) applications

Less: Division of Sunil’s surplus (in the ratio of 3:4) Final liability of each underwriter

1,200 2,000

1,600 8,000

2,800 Nil

– 10,000

54. Answer : (e) Reason : The intrinsic value method of valuation of shares is also known as break-up value method and asset backing method. The yield method is known as earning capacity method. The fair value method is an average of intrinsic value method and yield method. Hence the answer is (e).

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55. Answer : (e)

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Rs.2,52,500 + Rs.3,10,000 + Rs.4,50,000 3 = Rs.3,37,500 Reason : Average profits = Less: Transfer to general reserve = Rs.3,37,500 × 20% = Rs. 67,500 Average profits after transfer to general reserve = Rs.2,70,000 Expected profit Rs.2,70,000 ×100 ×100 Expected return on share capital = Paid-up share capital = Rs. 15,00,000 =18%

Expected rate 18% ×Paid-up value of share= ×10 = Rs.12 15% Value per share = Normal rate 56. Answer : (d) Reason : A sinking fund by definition is a fund created by a charge against or an appropriation of profits and represented by specific investments, and which is brought into existence for a special purpose such as the replacement of an asset on the expiration of its useful life or the redemption of debentures

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57. Answer : (e) Reason : Cumulative Preference shareholders enjoy preferential treatment with regard to priority in payment of dividend, (a) repayment of capital (b) and also in case of insufficient profits their dividends (undeclared) are cumulated (d) unlike equity shareholders. Equity shareholders enjoy voting rights (c) but not the preference shareholders. Thus, the alternatives (a), (b), and (d) are true in case of cumulative preference shareholders.

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58. Answer : (a) Reason : Dividend equalization reserve, Contingency reserve, Debenture redemption fund and Capital redemption reserve should not be deducted while calculating the value of equity shares under intrinsic value method. However, the preference share capital is to be deducted.

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59. Answer : (d) Reason : The profit or loss on cancellation of own debentures is calculated at the time of Cancellation of own debentures (d) is the correct answer. The profit loss on cancellation cannot be unless they are paid. Hence (d) is the correct answer.

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60. Answer : (a)

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Reason : The journal entry passed at the time of receipt of application money is Bank account Dr. Rs.12,00,000 To Share application account

Rs.12,00,000.

61. Answer : (d) Reason : While calculating the cost of control at the time of consolidation of accounts of the holding company, the proportionate of share of the holding company in the values stated in the statements: (I) Value of shares acquired (II) Pre-acquisition profits/losses (III) Profits/losses on revaluation of assets (IV) Profits/losses on revaluation of liabilities is considered. The combination of these statements i.e. alternative (d) is the correct answer. Post acquisition profits /losses are not considered while computing cost of control. The alternatives (a), (b), (c) and (e) which do not constitute the correct combination are not the correct answers.

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62. Answer : (a) Reason : Capital profits are the Profits earned by the subsidiary company up to the date of acquisition of shares by the holding company.

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21

63. Answer : (e) Reason: The following transactions construe inter company transactions with regard to Holding company and its subsidiary company (a) The holding company or the subsidiary company may have granted shortterm loans to each other (b) They may have sold/purchased goods on credit from each other (c) They might have drawn bills of exchange on each other. Thus, (e) the combination of all these is the correct answer.

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64. Answer : (c) Reason : Minority interest is the share of minority holders which consists of proportionate share in share capital, revenue profits and capital profits thus it is not a current liability.

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65. Answer : (a) Reason : When the value of investment in subsidiary company is more that the nominal value of the share capital acquired by the holding company, the difference represents Goodwill on consolidation (a) is the correct answer. On the other hand Capital reserve on consolidation (b) is the excess of the share in equity or net assets of the subsidiary over and above the price paid for the investment and is not the correct answer .Securities premium on consolidation (c) there is no such account on consolidation as regards the price paid for the control over the subsidiary company. Securities premium is the amount representing the value of the share over and above its face value and is not the correct answer. Capital profit (d) is the profit and reserves of the subsidiary company, of which the holding company will have proportionate share. The capital profits are the post-acquisition profits of the subsidiary company and is not the correct answer. The alternative (e) the revenue reserve is also wrong and thus, (a) is the correct answer.

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66. Answer : (a) Reason : A parent corporation (investor corporation) owns a controlling interest (more than 50% of the equity shares) in the subsidiary (investee corporation). Alternative (a) is the correct answer.

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67. Answer : (d) Reason : The users of accounting information of a company are investors, bankers, creditors, shareholders, management, employees, customers, government and regulatory agencies who are interested in the affairs of a company. The means of communicating information are financial statements; (d) i.e. profit and loss account and balance sheet. These are the means through which inferences like ratio analysis are drawn. Prospectus (a) is the document inviting the public to subscribe to its securities and there may be certain accounting statistics which are useful to the users. But it is not comprehensive. Hence it is false. Trial balance (b) is a summary of all ledger accounts prepared in a tabular form from which no useful inference can be drawn. Hence, it is not the correct answer. Bank reconciliation statement (c) is a statement prepared by a business only in the event of difference between balance as per bank statement and bank column of cash book, which has no relevance to the users. Hence, it is false. Statement of cash flow (e) is the statement depicting inflow and outflow of cash irrespective of nature of source and relevance of period. It is more or less of receipts and payments account of non profit organization which has no significance to the users and it is false.

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68. Answer : (c) Reason : Provision for taxation of the previous year = Rs.4,38,000 Dividend on 10% 10,000 Preference Shares of Rs.100 = 10% Dividend on 1,30,000 equity shares of Rs.10 each = Amount equal to 10% of equity dividend shall be set aside = for bonus to staff. The total amount debited to Profit and Loss appropriation account

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Rs.1,00,000 Rs.1,30,000 Rs. 13,000 =

Rs. 6,81,000.

69. Answer : (d) Reason : Of the Rs.1,20,000 paid, Rs 40,000 was paid toward dividends in arrears and Rs 80,000 was paid toward dividends for 2003-04. Of the Rs 80,000, Rs 45,000 was paid to preferred stockholders (5,000 shares x Rs 100 per share x .09), leaving Rs 35,000 to be paid to common stockholders (Rs 80,000 Rs 45,000).

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70. Answer : (e) Reason : As per Schedule VI of the companies Act, 1956 unclaimed dividends are to be shown As a current liability in Balance Sheet.

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71. Answer : (c)

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Reason : Net value-added is derived by deducting depreciation from the gross value added. Gross value added is arrived at by deducting cost of all materials and services and other extraordinary expenses from sales revenue and any other income. Therefore, Net value added = Gross value added – Depreciation.

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72. Answer : (a) Reason : The price for which a person could buy or sell equity/preference share of stock is called market value.

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73. Answer : (a) Reason :

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Particulars

Rs.

To Opening stock (1/4/2003)

To Purchases

Amount Rs. 1,86,420

By Sales Less : Returns

7,18,210

Less : Returns

9,850

To Wages

Particulars

7,08,360

Rs.

Amount Rs.

11,69,900 12,680

By Closing stock

11,57,220 1,24,840

1,09,740

+ Outstanding To Carriage inward To Sundry Manufacturing expenses To Gross Profit

1,890

1,11,630 4,910 19,240 2,51,500 12,82,060

12,82,060

74. Answer : (b) Reason : Debentures are classified as Registered or Bearer from the recording point of view (e). They are transferable by mere delivery (c). They are just like bearer cheques or government currency notes and treated as negotiable instruments (a) Interest coupons are attached to such debentures and their payment is made to the holder irrespective of identity (d). Thus, the alternatives (a), (c), (d) and (e) are features of bearer debentures. Their transfer does not require a deed of transfer. Thus, the alternative (b) is not a characteristic of Bearer Debentures.

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75. Answer : (a) Reason : Debenture may be defined as an acknowledgement of a debt or loan raised by a company. Which is the correct answer. All other options (b) The rate of interest on debentures is dependent on profit earned (c) A debenture holder can vote at the meeting of a company (d) Debentures can be issued only for cash (e) Debentures cannot be issued at discount are wrong.

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76. Answer: (c) Reason: The journal entry is Share capital account (160 x 10) Dr. Rs.1,600 To Share allotment account (240 – 60) Rs. 180 To Share final call account (160 x 3) Rs. 480 To Share forfeiture account (240 + 100 x 7) Rs. 940 (Forfeiture of 160 shares on which 60 shares paid only Rs.4 per share and 100 shares paid only Rs.7 per share.) Shares allotted = 60

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60 ×

5, 000 = 72 6, 000

Share applied = = 72 x 5 = Rs.360 – 120 = 240. Since share premium is received in full, there is no debit to share premium account. Thus, share capital account is debited with Rs.1,600 and share premium nil. < TOP >

77. Answer : (c) Reason : Particulars

Rs.

23

Rs.

Less : Cash at bank Cash on hand Accounts receivable Other identifiable assets

19,66,000 23,750 12,250 80,000 18,50,000

Goodwill

2,84,000

78. Answer : (c) Reason : A credit sale to Shivenra should be recorded as Shivndra’s account Dr. To Sales account. Thus, Shivendra’s account is debited. < TOP OF THE DOCUMENT >

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