Model Question Paper

Model Question Paper Financial Accounting (CPA510) Section A : Basic Concepts (30 Marks) • • • • 1.

Which of the following statements is true with respect to the accounting concepts? (a) (b) (c) (d) (e)

2.

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

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

The finished goods which have been produced internally for inventory should be priced at production cost The periodic system computes cost of goods sold as residual amount The perpetual system is more accurate but more costly The cost of acquisition of inventory does not include direct expenses Historical cost of inventory refers to the cost of acquisition of inventory.

Which of the following statements is true in respect of the entries recorded in the books of the drawee of a bill? (a) (b) (c) (d) (e)

6.

Capital expenditure results from outflow of cash relating to bringing an asset of an enduring nature into existence Revenue expenditure relates to those expenses which are incurred in earning the revenues and the benefit of which gets exhausted within the same accounting period If any asset is bought by an enterprise for resale, it becomes a capital expenditure for the enterprise Capital expenditure relates to such expenses, which generate benefits and assists the entity in earning revenue over a period of time Revenue expenditure of the period is matched with revenue receipts and is charged to profits during the period.

Which of the following statements is false with reference to inventories? (a)

5.

A cash sale of Rs.1,400 is omitted to be recorded in the sales account An amount of Rs.2,500 received from ‘A’ is posted on the debit side of B’s account A credit purchase of goods worth Rs.4,500 is recorded in the purchase book as Rs.5,400 An amount of Rs.3,200 paid to RX Ltd., is posted twice to the debit of RX Ltd.’s account A receipt of Rs.5,700 from a debtor is posted correctly in the cash account but on the correct side of debtors account as Rs.570.

Which of the following statements is false with respect to the classification of expenses as revenue and capital? (a)

4.

The concept of conservatism places a constraint on what should be recorded and reported Accounting period concept states that expenses are to be recognized in the period of their related revenue Going concern concept assumes that business will be carried on for a definite period Provision for bad and doubtful debts is created in recognition of realization concept Matching concept states that resources are consumed to earn the revenue and the cost of resources consumed should be set off to obtain income.

Which of the following errors is not disclosed by the trial balance? (a) (b) (c) (d) (e)

3.

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

When a bill is accepted, the account to be credited is drawer’s a/c When a bill is discharged, the account to be credited is bills payable a/c When a bill presented for payment by bank is dishonored, the account to be credited is bills payable a/c When noting charges of a dishonored bill is paid by the endorsee, the account to be credited is drawer’s a/c When a bill is retired before its maturity, the account to be credited is the bills payable a/c.

Consider the following data from the books of a trader for the year ended December 31, 2008: Particulars Balance of capital account as on January 01, 2008 Additional capital introduced during the year Balance of capital account as on December 31, 2008 Drawings in the beginning of the year Interest on opening capital Interest on drawings Profit earned during the year ended December 31, 2008 was

Rs. 4,00,000 1,00,000 8,00,000 2,00,000 5% p.a. 6% p.a.

(a) (b) (c) (d) (e) 7.

Which of the following statements is false? (a) (b) (c) (d) (e)

8.

The forfeited shares should not be re-issued at a premium At the time of forfeiture of shares, securities premium account 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 Securities 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.

While finalizing the current year accounts, Karthika Ltd., realized that closing stock of the previous year is over stated by Rs.15,000 and closing stock of the current year is overstated by Rs.36,000. Because of these errors, the net income for the current year is (a) (b) (c) (d) (e)

9.

Rs.4,92,000 Rs.3,00,000 Rs.5,00,000 Rs.5,12,000 Rs.5,32,000.

Understated by Rs.51,000 Overstated by Rs.51,000 Understated by Rs.36,000 Overstated by Rs.21,000 Understated by Rs.21,000.

The following information pertains to Soma Ltd., for the year 2007-08: Particulars April 1, 2007 (Rs.) March 31, 2008 (Rs.) Inventory 72,000 67,000 Sundry debtors 47,000 70,000 Sundry creditors 40,000 38,000 Total credit sales made during the year were Rs.6,75,000. The cost of goods sold of the company was 80% of the sales. If there were no cash sales and cash purchases during the year, cash paid to sundry creditors during the year was (a) Rs. 7,22,000 (b) Rs. 6,98,000 (c) Rs. 6,75,000 (d) Rs. 6,77,000 (e) Rs. 5,37,000.

10.

On September 01, 2008, Bharath accepted a bill drawn by Suraj for 6 months for Rs.4,725 being amount due. On September 04, 2008, Suraj got the bill discounted with his bank at 12% per annum (rounded off to the nearest rupee). On October 16, 2008, Bharath was declared as insolvent. A dividend of 20 paise in the rupee was received from his official receiver on December 16, 2008. The amount received from the official receiver on December 16, 2008 was (a) (b) (c) (d) (e)

11.

Rs.3,780 Rs. 840 Rs. 945 Rs.4,200 Rs.3,600.

Happy Club furnishes you the following information for the year 2007-08: Particulars Subscriptions received during the year 2007-08 Subscriptions received in advance for the year 2008-09 Subscriptions outstanding for 2007-08 Subscriptions outstanding for 2006-07

Rs. 4,000 800 400 300

The amount of subscriptions to be shown in the income and expenditure account of 2007-08 is (a) (b) (c) (d) (e) 12.

Rs.4,800 Rs.4,400 Rs.3,300 Rs.3,200 Rs.3,900.

Firex Coal Ltd., took a coalfield on lease from Bhuma Ltd., for a period of 25 years from April 01, 2004. Royalty should be paid at the rate of Rs.5 per ton of coal extracted. A minimum rent of Rs.3,00,000 per annum should be paid. Lessee has authority to recoup the short workings during the first three years of the lease. The coal extracted for the past four years was as follows:

Year 2004-05 2005-06 2006-07 2007-08

Coal in tonnes 10,000 70,000 80,000 1,20,000

The amount payable to Bhuma Ltd., during the year 2006-07 was (a) (b) (c) (d) (e) 13.

Rs.3,00,000 Rs. 50,000 Rs.1,00,000 Rs.2,50,000 Rs.2,00,000.

Ranky Ltd., has furnished the following data from its Balance Sheet: Liabilities 15,000, 10% Preference shares of Rs.10 each fully paid-up 1,20,000, Equity shares of Rs.10 each, Rs.7 paid-up General reserve Securities premium Capital reserve Profit and Loss account

Rs. 1,50,000 8,40,000 2,00,000 50,000 1,00,000 3,50,000

The directors decided to issue one bonus share for every three shares held, after making the final call of Rs.3 per share. It was decided to use capital reserve, securities premium, general reserve to the fullest extent possible and the deficit to be adjusted from Profit and Loss account. The capital reserve includes a cash gain of Rs.60,000 against the sale of machinery. The securities premium includes Rs.10,000 being the amount of premium on the shares issued to promoters. The amount to be adjusted from Profit and Loss account, for the issue of bonus shares is (a) (b) (c) (d) (e) 14.

The reserve created by the insurance companies to provide for the high amount of claims due to losses occurred in the calamity such as earthquake, floods, war, etc. is known as (a) (b) (c) (d) (e)

15.

Rs.2,56,400 Rs.2,50,400 Rs.2,46,600 Rs.2,50,000 Rs.2,49,600.

The incomes or expenses which arise in the current year as a result of errors or omissions in the preparation of financial statements of one or more previous years are known as (a) (b) (c) (d) (e)

17.

General Reserve Revaluation Reserve Capital Redemption Reserve Catastrophe Reserve Reserve for unexpired risk.

The balance in the creditors account of Shirdibaba Ltd., as at the beginning of the month of December 2008 was Rs.3,40,000. During the month a sum of Rs.2,00,000 was paid to the creditors. The creditors were allowed a sum of Rs.5,600 as cash discount. A bill for Rs.6,000 accepted by the company earlier in favour of a creditor could not be honoured on the due date and hence was dishonoured on December 20, 2008. The balance in the creditors’ account at the end of the month of December 2008 was Rs.3,90,400. The amount of credit purchases made during the month of December 2008 was (a) (b) (c) (d) (e)

16.

Rs.1,00,000 Rs. 90,000 Rs.1,20,000 Rs.1,50,000 Rs. 50,000.

Prior period items Extraordinary items Contingent items Preliminary items Equity items.

Liquidator’s Final Statement of Account is in the nature of (a) (b) (c) (d)

Real account Representative personal account Personal account Nominal account

(e) 18.

Bills receivable a/c of Pavan Ltd., showed a balance of Rs.75,000, on December 01, 2008. New bills accepted by debtors during the month of December 2008 amounted to Rs.9,000 and bills dishonoured by drawees amounted to Rs.12,000 and bills honoured by drawees amounted to Rs.37,500. Bills receivable account balance as on December 31, 2008 was (a) (b) (c) (d) (e)

19.

Rs. 6,000 Rs.12,000 Rs.15,600 Rs.11,400 Rs.18,000.

The reversionary bonus is (a) (b) (c) (d) (e)

21.

Rs. 91,500 Rs. 34,500 Rs. 72,000 Rs.1,15,500 Rs.1,09,500.

Shakthi Ltd., gave a Bauxite mine on lease to Rakhi Ltd., at a royalty of Rs.4 per ton of Bauxite raised and a minimum rent of Rs.12,000 per annum. Since there was a provision for sublease, Rakhi Ltd., subleased a part of the mine to Vishu Ltd., at a royalty of Rs.5 per ton and a minimum rent of Rs.6,000 per annum. At the end of the first year, Bauxite raised by Vishu Ltd., was 1,050 tonnes and Rakhi Ltd., was 2,850 tonnes (exclusive of 1,050 tones). The amount of royalty receivable by Shakthi Ltd., is (a) (b) (c) (d) (e)

20.

A statement, but not an account.

The amount that the policy holder can get immediately in cash if he stops paying further premium Bonus payable in cash at the end of every year Bonus payable on maturity of policy pending the ascertainment of profit Bonus payable in cash but utilized by policy holder to adjust premium due from him Bonus payable only on the maturity of the policy.

The following information is extracted from the Balance Sheet of Acess Bank Ltd., for the year 2007-08: Particulars Advances Deposits Investments Cash and balances with RBI Fixed assets Other assets Balances with banks and money at call & short notice

Rs. 1,80,20,000 41,25,000 60,15,000 7,60,000 15,30,000 5,15,000 4,10,000

The total amount on assets side of the balance sheet of Acess Bank Ltd., was (a) (b) (c) (d) (e) 22.

Rs.2,40,35,000 Rs.3,13,75,000 Rs.2,53,60,000 Rs.2,72,50,000 Rs.2,21,45,000.

The following data was extracted from the books of Deepu Ltd., as on March 31, 2008: • • • •

Total sundry debtors as per Trial Balance Rs.60,900. Bad debts identified after the preparation of Trial Balance Rs.900. Provision for bad debts to be created @ 5% on sundry debtors. Provision for discount on sundry debtors to be created @ 2%.

The net amount of sundry debtors shown in the balance sheet of Deepu Ltd., as on March 31, 2008 was (a) (b) (c) (d) (e) 23.

Rs.55,860 Rs.60,000 Rs.57,000 Rs.60,900 Rs.58,800.

The life insurance fund of Abhaya Insurance Company on December 31, 2008 showed a balance of Rs.71,58,750. It was later found that the following adjustments were not taken into account: Particulars Dividend from investment Income tax on above Bonus in reduction of premium

Amount (Rs.) 3,90,000 18,750 7,00,875

Claims covered under re-insurance Claims intimated but not accepted and paid by the company

3,47,250 5,81,250

Balance of fund after incorporating the above transactions was (a) (b) (c) (d) (e) 24.

If the difference in trial balance is transferred to Suspense a/c, what will be the Suspense a/c balance due to the following errors? i. ii iii. iv. (a) (b) (c) (d) (e)

25.

Rs.74,04,375 Rs.65,62,875 Rs.65,54,625 Rs.65,95,125 Rs.65,45,625.

Debited Purchases a/c by Rs.6,500 for furniture purchased. Debited Jain’s a/c and Salary a/c by Rs.3,000 each for salary paid to him. Debited Agarwal’s a/c by Rs.7,350 for goods purchased from him on credit. Credited Samanth’s a/c by Rs.100 for cash discount allowed by him. Rs.16,750 Rs.10,250 Rs.17,500 Rs.24,200 Rs.24,100.

Bank pass book of Mr.Vishnu showed a favourable balance of Rs.20,000, as on March 31, 2008. The pass book balance did not agree with the balance as per cash book. On scrutiny, the following errors and omissions were noticed: • • • •

A cheque for Rs.4,000 issued has not been presented for payment till date. Rent of Rs.10,000 directly deposited into the bank account by the tenant is not accounted in the cash book. A cheque for Rs.15,000 deposited in the bank is not yet realized. The interest on debentures directly collected by the bank, amounting to Rs.10,000 is not accounted in the cash book.

The bank balance as per cash book is (a) (b) (c) (d) (e) 26.

Debit balance of Rs.40,000 Credit balance of Rs.11,000 Credit balance of Rs.20,000 Debit balance of Rs.11,000 Debit balance of Rs.19,000.

Always Bank Ltd., has furnished the following data for the year ended March 31, 2008: Bill No. 1. 2. 3. 4.

Rs. 1,20,000 2,00,000 8,00,000 60,000

Due date inclusive of 3 days of grace 01.05.2008 28.02.2008 29.07.2008 01.06.2008

The above bills were discounted at 5% p.a. The unexpired discount as on March 31, 2008 was (a) (b) (c) (d) (e) 27.

Rs.13,710 Rs.13,170 Rs.14,710 Rs.14,701 Rs.14,170.

The book value of stock as on March 14, 2008 was Rs.1,30,000. Goods worth Rs.6,000 were destroyed in fire on March 15, 2008, against which claim for Rs.4,000 was admitted by the Insurance Company. Which of the following is the appropriate accounting treatment for the above transaction? (a) (b) (c) (d)

Debit Rs.4,000 to Profit & Loss a/c and show Rs.4,000 as claim receivable on the asset side of Balance Sheet Debit Rs.6,000 to Profit & Loss a/c and show Rs.4,000 as claim receivable on the asset side of Balance Sheet Deduct Rs.6,000 from the value of closing stock; debit Rs.2,000 to Profit & Loss a/c and show Rs.4,000 as claim receivable on the asset side of Balance Sheet Deduct Rs.6,000 from the value of closing stock; debit Rs.6,000 to Profit & Loss a/c and show Rs.4,000 as claim receivable on the asset side of Balance Sheet

(e) 28.

Credit Rs.2,000 to Profit & Loss a/c and show Rs.4,000 as claim receivable on the asset side of Balance Sheet.

Physical stock of a company was found to be Rs.35,000. It was taken on April 07, 2008, a week after the end of the accounting year March 31, 2008. Additional information: i. Goods costing Rs.5,000 were sold during the week. ii. Goods costing Rs.4,000 were purchased during the week. iii. Goods earlier purchased but returned during the period amounted to Rs.1,000. iv. Goods earlier purchased but not received Rs.6,000. The book value of stock held as on March 31, 2008 was (a) (b) (c) (d) (e)

29.

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

30.

Rs.27,000 Rs.19,000 Rs.43,000 Rs.51,000 Rs.35,000.

Income tax provision relating to current year is a charge against Profit & Loss appropriation account Income tax provision relating to previous year should be debited to Profit & Loss account Interim dividend should be debited to Profit & Loss account Managing director’s salary should be debited to Profit & Loss account Provision for doubtful debts relating to current year is a charge against Profit & Loss appropriation account.

Alphons Ltd., issued 1,000 equity shares of Rs.10 par value at Rs.30 per share and all shares are subscribed and total amount duly received. The journal entry to record this transaction would include a (a) (b) (c) (d) (e)

Debit to Cash for Rs.10,000 Credit to Share capital for Rs.30,000 Debit to Share premium Rs.20,000 Credit to Share capital for Rs.10,000 Credit to Cash for Rs.20,000. END OF SECTION A

Financial Accounting (CPA510) 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.

Grace Ltd., has furnished the following trial balance prepared by their newly appointed accounts assistant as on March 31, 2008: Particulars Dr. (Rs.) Cr. (Rs.) Share Capital (2,00,000 equity shares of Rs.10 each) 20,00,000 Purchases 20,00,000 Stock as on April 01, 2007 3,50,000 Creditors 2,50,000 Bad debts 1,500 Fixed assets at cost: Land 8,50,000 Furniture 2,50,000 Buildings 12,50,000 Motor vehicles 1,55,000 Accumulated depreciation: Buildings 30,000 Motor vehicles 25,000 Furniture 50,000 Postage and telegram 5,000 Motor vehicle expenses 22,500 Interest received 7,500

Auditors’ fees 13% Debentures Cash and Bank balances Calls-in-arrears Sales Debtors Provision for doubtful debts Bad debts recovered Salaries Printing and stationery Investments (at cost) Directors’ fess Profit & Loss a/c (Cr. Balance) Total

2,500 9,00,000 87,850 6,000 27,50,000 7,25,000 2,500 100 1,75,000 7,500 2,50,000 7,250 1,30,000 61,45,100

61,45,100

Additional information: i.

The value of stock as on March 31, 2008 is Rs.5,00,000.

ii.

Grace Ltd., has appointed an agent during the year and goods were sent out at an invoice price of Rs.2,50,000 which was determined by adding 25% margin on cost. As on March 31, 2008, the entire stock was still lying with the agent as unsold, which is not included in the value of closing stock.

iii.

Depreciation should be provided on written-down values of the assets at the following rates: Buildings 5%; Furniture 10%; and Motor vehicles 20%.

iv.

Market value of investments as on March 31, 2008 was Rs.3,25,000.

v.

Provision for doubtful debts is required to be maintained at Rs.5,000. A provision for discounts on debtors is to be created at 0.5% of debtors.

vi.

The debentures had been issued on October 01, 2007. Interest is payable semi-annually on March 31 and September 30.

vii.

Provision for income tax to be created at 50%. The depreciation allowable for income tax calculation is Rs.1,75,000.

viii. The directors proposed a dividend of 10% on capital. You are required to prepare:

2.

a.

Profit and Loss account for the year ended March 31, 2008.

( 6 marks)

b.

Balance Sheet as on March 31, 2008.

( 4 marks)

Showtime Electronics Ltd., started selling television sets on hire purchase from April 1, 2007. The relevant information for the year ended March 31, 2008 was as follows: Particulars Cost per television set (Rs.) 13,000 Cash Price per television set (Rs.) 14,000 Cash down payment per television set (Rs.) 2,000 Monthly Installment amount per television set (Rs.) 1,400 Number of installments on each television set 10 Number of television sets sold on hire purchase 200 Five television sets on which only 4 installments could be collected were repossessed. These were valued at Rs.32,000. After reconditioning them at a cost of Rs.3,000, they were sold out-right for Rs.45,000. With respect to other television sets sold on hire purchase basis, 550 installments have been collected and 50 installments are due. You are required to prepare all relevant accounts under the Stock and Debtors system to reveal the profit of the Company for the year ended March 31, 2008. Show your workings. ( 10 marks)

3.

Sunshine Appliances Ltd., has its branches at Ahmadabad and Bhubaneswar to whom goods are invoiced at cost plus 25%. Following information is available of the transactions at Ahmadabad Branch for the year ended March 31, 2008: Balances on April 01, 2007: Stock at invoice price Rs. 80,000 Debtors Rs. 24,000 Petty Cash Rs. 300

Transactions pertaining to Ahmadabad Branch during the year 2007-08: Particulars Goods sent to branch at invoice price Goods returned to head office at invoice price Cash sales Credit sales Normal loss at invoice price Goods pilfered at invoice price Goods lost by fire at invoice price Insurance company paid to head office Cash sent for petty expenses Bad debts Goods transferred to Bhubaneswar branch at invoice price Insurance charges paid by head office Goods returned by debtors

Rs. 8,40,000 30,000 2,10,000 3,60,000 700 6,000 8,000 6,000 64,000 800 24,000 400 1,000

Balances on March 31, 2008: Debtors

Rs.22,000

Petty Cash

Rs.

500

Goods transferred to Bhubaneswar Branch were in transit on March 31, 2008. You are required to prepare the following accounts for Ahmadabad Branch for the year ended March 31, 2008: i. Branch Stock account. ii. Branch adjustment account. iii. Branch Profit and Loss account. iv. Stock reserve account. v. Branch Debtors account. ( 10 marks) 4.

Techno Ltd., has furnished the following information as on September 30, 2008: Particulars 9% Debentures (issued @ Rs.95 per Debenture) Debentures Redemption Fund Discount on issue of Debentures Debentures Redemption Fund Investment

Rs. 19,00,000 18,74,000 52,000 18,74,000

Additional information: •

Investments include Debentures of the face value of Rs.4,00,000 (own Debentures) purchased on August 1, 2008 @ Rs.99 ex-interest.

•

Interest on Debentures is payable on June 30 and December 31.

•

All debentures were redeemable at par in December 2008.

•

Income from outside investments of Redemption Fund was Rs.90,000.

• All outside investments were sold at a profit of 10% over cost. You are required to prepare all the relevant ledger accounts as on December 31, 2008 after considering the above transactions. ( 10 marks) 5.

A fire accident occurred at the premises of Hitesh Ltd., on September 13, 2008, and destroyed a substantial part of the stock. It also destroyed some of the office records. The company has insured the stock for Rs.1,68,000. The following figures were included in the profit calculation for the year ended March 31, 2008: Particulars Sales Purchases Stock on 01.04.2007 Stock on 31.03.2008

Rs. 8,12,000 6,12,000 1,40,000 1,60,000

Additional information: i.

The stock on April 01, 2007 included Rs.12,000 representing goods which had been reduced in value at the stock taking and were all sold during the period 2007-08 for the same reduced amount.

ii.

The stock at March 31, 2008 included Rs.20,000 representing goods which were reduced to half-cost at the time of stock taking. Of these, Rs.12,000 were sold in April 2008, and Rs.4,000

were scrapped in May 2008, without any revenue at all, and the balance had not been disposed of at the time of fire. iii.

The cost price of stock on September 13, 2008 unaffected by the fire was Rs.52,286, but the rest of the stock was completely destroyed, and this included the balance of the marked-down referred to in (ii) above.

iv.

The purchases during the period from April 01, 2008 to September 13, 2008 were Rs.2,91,000, and sales for the same period were Rs.3,80,000 and there were returns from customers of Rs.8,000.

You are required to calculate the amount that can be claimed by the company for the loss of stock. Show your workings. ( 10 marks) END OF SECTION B

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

This section consists of questions with serial number 6 - 7. Answer all questions. Marks are indicated against each question. Do not spend more than 25 - 30 minutes on Section C.

6.

‘Financial statements portray the effects of financial transactions by grouping these into broad classes according to their elements’. In this context, explain the elements of financial statements. ( 10 marks)

7.

Briefly explain the different methods of redemption of debentures. END OF SECTION C END OF QUESTION PAPER

( 10 marks)

Suggested Answers Financial Accounting (CPA510) Section A : Basic Concepts 1.

2.

3.

4.

Answer Reason E Option (a) is not true as the concept of materiality places a constraint on what should be recorded and reported but not conservatism concept. Option (b) is not true because, matching concept states that expenses are to be recognized in the period of their related revenue and not accounting period concept. Option (c) is not true as going concern concept assumes that business will be carried on for indefinite period but not definite period. Provision for bad and doubtful debts is created in recognition of conservatism concept and not realization concept. Hence, option (d) is not true. Option (e) is true as matching concept states that resources are consumed to earn the revenue, and the cost of resources consumed should be set off to obtain income. Hence, the answer is (e). A credit purchase of goods worth Rs.4,500 is recorded in the purchase book as Rs.5,400 is not disclosed C by the trial balance as both the purchase account and creditors account are posted on the correct side with Rs.5,400, so the error does not cause a disagreement of the trial balance. All the other given options are the errors disclosed by trial balance. Hence, the answer is (c). C If any asset is bought by an enterprise for resale, it becomes revenue expenditure for the enterprise and if it is not meant for resale it becomes capital expenditure. All the other options are true about the features of capital and revenue expenditure. Hence, the answer is (c). D The cost of acquisition includes direct expenses. •

The finished goods which have been produced internally for inventory should be priced at production cost.

•

The periodic system computes cost of goods sold as residual amount.

•

The perpetual system is more accurate but more costly.

•

The cost of acquisition of inventory includes direct expenses.

• Historical cost of inventory refers to the cost of acquisition of inventory. Hence, (d) is correct answer. 5.

6.

D

•

When a bill is accepted, the account to be credited is bills payable a/c.

•

When a bill is discharged, the account to be credited is cash a/c.

•

When a bill presented for payment by bank is dishonored, the account to be credited is drawer’s a/c.

•

When noting charges of a dishonored bill is paid by the endorsee, the account to be credited is drawer’s a/c.

•

At the time of retirement of a bill, the account to be credited is the cash a/c.

A Particulars Closing capital Add: Drawings in the begining of the year Interest on drawings @ 6% Less: Additional capital Interest on opening capital @ 5% on Rs.4,00,000 Opening capital Profit earned during the period

7.

A

8.

D

Rs. 2,00,000 12,000

Rs. 8,00,000 2,12,000 10,12,000

1,00,000 20,000 4,00,000

5,20,000 4,92,000 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 at a discount, only after one year from the commencement of business; Share premium can be utilized only for 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. Alternative (a) is the correct answer. Over statement of closing stock of previous year leads to the overstatement of opening stock of the current year. Over statement of opening stock results in the understatement of profit by Rs.15,000. Over statement of closing stock of current year results in the overstatement of profit by Rs.36,000. So, the net effect on the profit = Rs.36,000 – Rs.15,000 = Rs.21,000 over stated.

9.

10.

11.

E

C

Inventory account Particulars Rs. Particulars To Balance b/d 72,000 By Goods sold (Rs.6,75,000 × .80) To Sundry creditors 5,35,000 By Balance c/d 6,07,000 Sundry creditors account Particulars Rs. Particulars Rs. To Cash 5,37,000 By Balance 40,000 b/d To Balance 38,000 By Purchases 5,35,000 b/d 5,75,000 5,75,000 In the books of Suraj Bharath Account Partciulars Rs. Partciulars To Balance b/d 4,725 By Bills receivable account To Bank account 4,725 By Cash account (20% on Rs.4,725) By Bad debts account 9,450

67,000 6,07,000

Rs. 4,725 945 3,780 9,450

C Rs. Subscriptions received during the year Less: subscriptions received for the year 2008-09 Less: subscriptions outstanding for the year 2006-07 Add: subscriptions outstanding for the year 2007-08

12.

A

13.

A

14.

Rs. 5,40,000

D

800 300

Rs. 4,000 1,100 2,900 400 3,300

Royalty per ton – Rs.5 Minimum Rent – Rs.3,00,000 per annum Analysis of Royalties Payable Coal Actual Minimum Excess Amount Year Shortworkings extracted Royalties Rent Working Payable Written Suffered Recouped C/F – off Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. 200410,000 50,000 3,00,000 2,50,000 2,50,000 3,00,000 2005 200570,000 3,50,000 3,00,000 50,000 50,000 2,00,000 3,00,000 2006 200680,000 4,00,000 3,00,000 1,00,000 1,00,000 1,00,000 NIL 3,00,000 2007 20071,20,000 6,00,000 3,00,000 3,00,000 6,00,000 2008 The amount payable to Bhuma Ltd., during the year 2006-07 was Rs.3,00,000. Number of bonus shares = 1,20,000 / 3 = 40,000 Particulars Rs. Amount of bonus issue = 40,000 × Rs.10 4,00,000 Less: Amount to be adjusted against: Capital reserve (amount realized in cash) 60,000 Securities premium (Rs.50,000 – Rs.10,000) 40,000 General reserve 2,00,000 Amount to be utilized from Profit and Loss 1,00,000 account The securities premium collected in cash can be utilized for the bonus issue. Hence the amount of Rs.10,000 on issue of shares to promoters cannot be utilized for issue of bonus shares. Sometimes, due to reasons such as earthquake, floods, war, etc., an insurance company can be subjected to high amount of claims due to losses occurred in the calamity. To provide for such contingency, an insurance company has to create catastrophe reserve in its accounts in accordance with any norms which may be prescribed by the IRDA in this respect. Dr. Creditors account Cr.

15.

D

16.

A

17.

A

18.

B

19.

C

20.

E

21.

D

22.

A

Particulars To Cash To Discount To Balance c/d

Rs. Particulars Rs. 2,00,000 By Balance b/d 3,40,000 5,600 By Bills payable 6,000 3,90,400 By Credit purchases (b/f) 2,50,000 5,96,000 5,96,000 According to Accounting Standard-5, the incomes or expenses which arise in the current period as a result of errors or omissions in the preparation of financial statements of one or more prior periods is known as prior period items. Extraordinary items are income or expenses that arise from events or transactions that are clearly distinct from the ordinary activities of the enterprise and, therefore, are not expected to recur frequently or regularly. Contingent items are gains or losses, which arise only on the occurrence or non-occurrence of a one or more uncertain future events. Preliminary items are those expenses incurred for the incorporation of the company. Equity items are the items like equity share capital, calls-in-arrears, which are related to equity shareholders. The main job of the liquidator is to collect the assets of the company and realize them and distribute the money realized among right claimants. For this purpose, liquidator is required to prepare an account of winding up known as Liquidator’s Final Statement of Account after the affairs of the company are fully wound up. This account takes the form of cash account. Hence, it is a real account. Dr.

Bills Receivable account Cr. Particulars Rs. Particulars Rs. To Balance b/d 75,000 By Debtors a/c 12,000 To Debtors a/c 9,000 By Cash a/c 37,500 By Balance c/d 34,500 84,000 84,000 Balance of Bills receivable as on December 31, 2008 was Rs.34,500. Where the original lessee subleases the asset, he is liable to the landlord for the total output (own + sublease). Hence, Rakhi Ltd., is liable to pay royalty on 3,900 tonnes (2,850 + 1,050) = 3,900 × Rs.4 per tonne = Rs.15,600. The reversionary bonus is the bonus payable only on maturity of the policy. Bonus payable in cash at the end of every year is called bonus in cash, bonus payable on maturity of policy pending the ascertainment of profit is interim bonus, bonus payable in cash but is utilized by policy holder to adjust premium due from him is bonus in reduction of premium and the amount the policy holder can get immediately in cash if he stops paying premium is the surrender value. Hence, (a) is the correct answer. Particulars Schedule Cash and balances with RBI 6 Balances with banks and money at call & short notice 7 Investments 8 Advances 9 Fixed assets 10 Other assets 11 Total assets Deposits falls under schedule 3 in liabilities side of the balance sheet. Particulars Total sundry debtors as per Trial Balance Less: Bad debts identified after the preparation of Trial Balance Less: Provision for bad debts @5% on Rs.60,000

23.

D

Provision for discount on sundry debtors will be 2 × Rs.57,000 100 The net amount of sundry debtors shown in the balance sheet Statement showing life insurance fund Particulars Balance of fund as on December 31, 2008 Add: Dividend Re-insurance recoveries Sub-total

Rs. 7,60,000 4,10,000 60,15,000 1,80,20,000 15,30,000 5,15,000 2,72,50,000

Rs. 60,900

Rs.

900

60,000 3,000 57,000 1,140 55,860

Rs. 3,90,000 3,47,250

Rs. 71,58,750 7,37,250 78,96,000

Less: Income tax Bonus in reduction of premium Claims intimated but not accepted and paid by the company Balance of fund after adjustments 24.

C

Dr. Particulars To Jain account To Agarwal account

25.

D

Suspense account Rs. Particulars 3,000 By Difference in Trial balance 14,700 By Samanth a/c 17,700 Rs. 15,000

Less: Cheques issued but not presented for payment Rent deposited directly into the bank Interest on debentures directly collected by bank Favourable balance as per cash book (debit balance)

65,95,125 Cr. Rs. 17,500 200 17,700 Rs. 20,000 15,000 35,000

4,000 10,000 10,000

24,000 11,000

E

1.

1,20,000

Due date inclusive of 3 days of grace 01.05.2008

2.

8,00,000

29.07.2008

120 days

3.

60,000

01.06.2008

62 days

Sl. No.

27.

C

28.

C

Amount (Rs.)

Unexpired period 31 days

D

Calculations in Rs. 1,20,000 × .05 × 31/365 8,00,000 × .05 × 120/365 60,000 × .05 × 62/365

Interest amount in Rs. 510 13,150 510

14,170 Deduct Rs.6000 from the value of closing stock; Debit Rs.2000 to P&L A/c and show Rs.4000 as claim receivables on the asset side of B/S –To estimate the actual stock held, value of stock destroyed in fire to be deducted. As against the loss of Rs.6000 claim admitted is only Rs.4000.The difference of Rs.2000 to be treated as a loss and taken to P&L A/c. As the claim amount is receivable it is to be taken on the asset side of B/s. Particulars Value of physical stock Add: Goods purchased but not received Goods sold during the week Goods earlier purchased but returned

29.

13,00,875

Bank Reconciliation Statement Particulars Favourable balance as per Pass book Add: Cheque deposited, yet to be realised

26.

18,750 7,00,875 5,81,250

Rs.

Rs. 35,000

6,000 5,000 1,000

12,000

47,000 Less: Goods purchased during the 4,000 week Closing stock as on March 31, 2008 43,000 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 •

• •

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. Income tax provision relating to previous year is a charge against profit and loss appropriation account and not profit and loss account. 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.

Provision for doubtful debts is a potential expenditure and it is a charge against profit and loss account and not profit and loss appropriation account. The credit to share capital should be for Rs.10,000; the amount of the legal capital requirement as determined by the Rs.10 par value (1000 shares × Rs.10 per share). The entire entry to record this transaction would be debit Cash, Rs.30,000; credit Share capital, Rs.10,000; and credit share premium Rs.20,000. •

30.

D

Section B : Problems 1.

Grace Ltd. Profit and Loss Account for the year ended March 31, 2008 Particulars Rs. Rs. Particulars Rs. To Opening stock 3,50,000 By Sales To Purchases 20,00,000 By Closing Stock a/c 5,00,000 To Gross profit c/d 11,00,000 Add: Stock with 2,00,000 Agent (Note 1) 34,50,000 To Salaries 1,75,000 By Gross profit b/d To Postage & Telegram 5,000 By Interest received To Printing & Stationery 7,500 By Bad debts recovered To Motor Vehicle Expenses 22,500 To Depreciation (Note 6) On Buildings 61,000 On Furniture 20,000 On Vehicles 26,000 1,07,000 To Bad debts 1,500 To Provision for doubtful debts New 5,000 Less:Old 2,500 2,500 To Prov. For discount on 3,600 debtors (Note2) To Directors’s fees 7,250 To Auditor’s fees 2,500 To Interest on debentures 58,500 (Note 4) To Provision for tax (Note 3,23,375 3) To Net Profit c/d 3,91,375 11,07,600 To Proposed dividend (Note 1,99,400 By Balance b/d 5) To Balance c/d 3,21,975 By Net profit b/d 5,21,375

Dr.

Liabilities Share Capital: Authorised (2,00,000 shares of Rs.10 each) Issued & Sub. (2,00,000 sh.of Rs.10 each) Called-up capital Less: Calls-in-arrears Reserves and Surplus: Profit & Loss a/c Secured Loans: 13% Debentures Add: Accrued Interest Unsecured Loans: Current Liabilities & Provisions: A: current Laibilities Sundry Creditors B: Provisions Provision for taxation Proposed dividend

Balance Sheet of Grace Ltd. as at March 31, 2008 Rs. Rs. Assets Fixed Assets: Land 20,00,000 Buildings (at cost)

Rs.

Cr. Rs. 27,50,000 7,00,000 34,50,000 11,00,000 7,500 100

11,07,600 1,30,000 3,91,375 5,21,375

Rs. 8,50,000

12,50,000

20,00,000 20,00,000 6,000

9,00,000 58,500

Less: Accumulated depreciation 19,94,000 Furniture (at cost) Less: Accumulated depreciation

91,000 2,50,000 70,000

3,21,975 Motor Vehicles (at cost) Less: Accumulated depreciation Investments: 9,58,500 Investments (at cost) Nil (Market value Rs.3,25,000) Current Assets, Loans and Advances: A: Current Assets 2,50,000 Stock-in-trade Sundry Debtors 3,23,375 Less: Provision for doubtful debts 1,99,400

1,55,000 51,000

11,59,000 1,80,000

1,04,000 2,50,000

7,00,000 7,25,000 5,000 7,20,000

3,600

Less: Provision for discount Cash and Bank balances B: Loans & Advances Miscellaneous Expenditure:

7,16,400 87,850 Nil Nil 40,47,250

40,47,250 Working Notes: (1) Cost of goods with the agent: Invocie price of goods Less: Margin included (25/125 × Rs.2,50,000 (3)

Provision for income tax Profit before tax Add: Book depreciation

Less: Depreciation as per I.T rules Provision for tax @ 50% (6)

Calculation of Depreciation Orginal cost (Rs.) Less: Accumulated depreciation Written-down-value Depreciation

2. Dr. Cr. Date 2007-08

Provision for Discount on Debtors

Particulars To Goods Sold on Hire Purchase a/c (Note 1)

Particulars To Hire Purchase Stock a/c (Note 5)

Rs.

2,50,000

Balance of debtors as on 31.3.2008 50,000 Less: Provision for bad debts (New) Good Debts 2,00,000 Provision for discount on Rs. debtors @ 0.5% 7,14,750 (4) Interest on Debentures 1,07,000 13% interest for 6 months on Rs.9,00,000 8,21,750 (5) Proposed Dividend 1,75,000 Paid-up share capital (Rs.20,00,000 – Rs.6,000) Proposed dividend @ 10% on 6,46,750 Rs.19,94,000 3,23,375 Building @ 5% 12,50,000 30,000

Furniture @10% 2,50,000 50,000

Rs. 32,00,000

7,25,000 5,000 7,20,000 3,600 Rs. 58,500 Rs. 19,94,000 1,99,400

Motor Vehicles @ 20% 1,55,000 25,000

12,20,000 2,00,000 61,000 20,000 In the books of Showtime Electronics Ltd. Hire Purchase Stock Account

Dr. Date 2007-08

Rs. (2)

1,30,000 26,000

Date 2007-08

Particulars By Hire Purchase Debtors a/c (Note 5)

31.03.08

By Goods Repossessed a/c (Note 6) By Balance c/d (Note 3)

31.03.08 32,00,000 Hire Purchase Debtors Account Rs. Date Particulars 12,68,000 2007-08 By Cash a/c (Note 2) 31.03.08 12,68,000

By Balance c/d (Note 7)

Rs. 12,68,000 42,000 18,90,000 32,00,000 Cr. Rs. 11,98,000 70,000 12,68,000

Dr. Date 31.03.08 31.03.08

Dr. Date 31.03.08 31.03.08 31.03.08

Dr. Date 31.03.08

31.03.08

31.03.08

Goods Sold on Hire Purchase Account Particulars Rs. Date Particulars To Hire Purchase 6,00,000 31.03.08 By Hire Adjustment a/c (Note 1) Purchase Stock a/c To Purchase a/c 26,00,000 (Transfer) 32,00,000

Goods Repossessed Account Particulars Rs. Date To Hire Purchase 42,000 31.03.08 Stock a/c To Bank a/c (Expenses) To Hire Purchase Adjustment a/c (profit on sale of repossessed goods)

3,000

31.03.08

Cr. Rs. 32,00,000

32,00,000

Cr. Particulars By Hire Purchase Adjustment a/c (loss on repossessed goods) By Bank a/c

Rs. 10,000 45,000

10,000

55,000 Hire Purchase Adjustment Account Particulars Rs. Date Particulars To Goods 10,000 31.03.08 By Goods Sold on Repossessed a/c (loss Hire Purchase a/c on repossessed (Loading) goods) To Stock Reserve a/c 3,54,375 31.03.08 By Goods (Note 4) Repossessed a/c (profit on sale of repossessed goods) To Profit & Loss a/c 2,45,625 6,10,000

Working notes: (1) H.P. Sales Rs. Cost of H.P. Sales 32,00,000 Television – 200 × Rs.13,000 Television – 200 × Rs.16,000 Total loading = Rs.32,00,000 – Rs.26,00,000 = Rs.6,00,000. (2) Cash Received for T.V. Rs. (4) Stock Reserve 4,00,000 Hire Purchase Price per set Down payment – Rs.2,000 × 200 Installments collected – 7,70,000 Less: Cost Rs.1,400 × 550 Amount collected on goods 28,000 Profit per set repossessed – Rs.1,400 × 4 × 5 sets Total Cash Received 11,98,000 Reserve: 3,000 / 16,000 × 18,90,000 = Rs.3,54,375 (3) Installment not yet due (5) Hire Purchase total amount due Total installments on (195 1,950 Cash down – 200 × Rs.2,000 sets × 10) Less: Installments collected 550 Installments received & due – (550 + 50) = 600 × Rs.1,400 Installments received on 1,400 repossessed goods – 5 × 4 × Rs.1,400 Less: Installments due but 50 not received

55,000 Cr. Rs. 6,00,000

10,000

6,10,000 Rs. 26,00,000

Rs. 16,000 13,000 3,000

Rs. 4,00,000

8,40,000 28,000

12,68,000

Installments not yet due

Amount of installments not yet due (Rs.1,400 × 1,350)

3. Dr. Date 1.4.2007 31.3.2008

1,350

18,90,000

(6)

Installments not yet due on repossessed Television sets – 6 installments on 5 sets @ Rs.1,400 (7) Installment due but not yet paid Television – 50 × Rs.1,400

In the books of Sunshine Appliances Ltd. Branch Stock Account Particulars Rs. Date Particulars To Balance B/d 80,000 31.3.2008 By Goods Sent to Branch A/C (Returns) To Goods Sent to 8,40,000 By Bank a/c (Cash Sales) Branch a/c By Branch Debtors a/c (Credit Sales) 1,000 By Goods Pilfered a/c To Branch Debtors a/c (Returns) By Goods Lost by Fire a/c By Goods Sent to Bhubaneswar Branch a/c (Transfer) By Normal Loss a/c (Note 1) By Balance c/d 9,21,000

Dr. Date 31.3.2008

Dr. Date 31.3.2008

Branch Adjustment Account Particulars Rs. Date To Normal loss a/c (Note 1) 700 1.4.2007 To Goods Pilfered a/c 1,200 (Loading –Note 4) To Goods Lost by Fire a/c 1,600 (Loading Note 5) 4,800 To Goods Sent to Bhubaneswar Branch a/c (Note 7) To Branch Stock Reserve a/c 56,460 (Note 7) To Branch Profit and Loss a/c 1,13,240 1,78,000

31.3.2008

Particulars BranchAdjustment

To a/c To Balance c/d

Stock Reserve Account Rs. Date 16,000 1.4.2007 56,460 72,460

31.3.2008

Rs.70,000

Cr. Rs. 30,000 2,10,000 3,60,000 6,000 8,000 24,000 700 2,82,300 9,21,000 Cr. Rs. 16,000

1,62,000

1,78,000

Branch Profit and Loss Account Particulars Rs. Date To Goods Pilfered a/c 4,800 31.3.2008 (cost) To Branch Expenses a/c: Bad debts 800 Insurance Charges 400 Petty Expenses 63,800 (Note 8) To Net profit 43,440 (Transferred to General P&L a/c) 1,13,240

Dr. Date 1.4.2007

Particulars By Branch Stock Reserve a/c (Note 6) By Goods Sent to branch a/c (Note 2)

Rs.42,000

Particulars By Branch Adjustment a/c

Particulars By Balance b/d (Note 6) By branch Adjustment a/c (Note 7)

Cr. Rs. 1,13,240

1,13,240 Cr. Rs. 16,000 56,460 72,460

Dr. Date 01.4.2007 31.3.2008

4.

Cr.

Branch Debtors Account Rs. Date Particulars 24,000 31.3.2008 By Branch Expenses a/c (Bad Debts) 3,60,000 31.3.2008 By Branch Stock a/c (Returns) By Bank a/c (Cash collected) By Balance c/d 3,84,000

Particulars To Balance b/d To Branch Stock a/c

Rs. 800 1,000 3,60,200 22,000 3,84,000

Working Notes : (1) For Calculating Branch Closing Stock (when it is not given), normal loss is credited to Branch Stock Account at invoice price. Normal Loss Account is closed by debiting to Branch Adjustment Account. (2) Loading on net goods sent: Goods sent to branch Rs. 8,40,000 less goods returned to head office Rs.30,000. Therefore, net goods sent = Rs.8,10,000. Loading is 1/5 of Rs.8,10,000 = Rs. 1,62,000. (3) Loading on goods transferred to Bhubaneswar Branch: 1/5 of Rs.24,000 = Rs.4,800. (4) Loading on goods Pilfered: 1/5 of Rs.6,000 = Rs.1,200. Cost of goods pilfered Rs.4,800 (Rs.6,000 – Rs.1,200) will be debited to Branch profit and loss Account. (5) Loading on goods lost by fire: 1/5 of Rs.8,000 = Rs.1,600. Cost of goods lost by fire Rs.6,400 (Rs.8,000 – Rs.1,600) will be debited to General Profit and Loss Account. (6) Loading on opening stock: 1/5 of Rs.80,000 = Rs.16,000. (7) Loading on closing stock: 1/5 of Rs.2,82,300 = Rs.56,460. (8) Petty Expenses = Opening petty cash Rs.300 plus cash sent by head office for petty expenses = Rs.64,000 less closing petty cash Rs.500 = Rs.63,800. In the books of Techno Ltd. Dr. 9% Debentures Account Cr. Date Particulars Rs Date Particulars Rs 31.12.08 To Own Debentures Investment 3,96,000 1.10.08 By Balance b/d 19,00,000 a/c 31.12.08 To Debentures Redemption Fund a/c (Profit on 4,000 cancellation) 31.12.08 To Bank a/c 15,00,000 19,00,000 19,00,000 Dr.

Debentures Redemption Fund Investment Account Cr.

Date 1.10.08

Particulars To Balance b/d

Rs. 18,74,000

To Debentures Redemption Fund a/c (profit on sale of investments)

Date 1.10.08

1,47,800

Particulars By Own Debentures Investment a/c (Transferred to separate account) By Bank a/c (Rs.18,74,000 – Rs.3,96,000) × 110/100

Rs. 3,96,000

16,25,800

20,21,800 Dr. Date 1.08.08

Own Cr. Particulars To Debentures Redemption Fund Investment a/c

Dr.

Rs. 3,96,000

20,21,800 Debentures Date 31.12.08

Debentures

Investment

Account

Particulars By 9% Debentures a/c

Redemption

Fund

Rs. 3,96,000

Account

Cr. Date 31.12.08

Particulars To Discount on

Rs. 52,000

Date 1.10.08

Particulars By balance b/d

Rs. 18,74,000

31.12.08

31.12.08

Issue of Debenture a/c To Capital Reserve a/c (Note 1) To General Reserve a/c

4,000

31.12.08

20,74,800

31.12.08 31.12.08

By Debenture Interest a/c (Interest on own Debentures of Rs.4,00,000 for 5 months) By Interest on Debentures Redemption Fund Investment a/c By 9% Debentures a/c (Profit on Cancellation) By Debentures Redemption Fund Investment a/c (Profit on sale)

15,000

90,000 4,000 1,47,800

21,30,800 Dr.

Discount

21,30,800 on

Issue

of

Debentures

Account

Cr. Date 1.10.08

5.

Particulars To Balance b/d

Rs. 52,000

Date 31.12.08

Particulars By Debentures Redemption Reserve Fund a/c

Notes: Profit on cancellation of own debentures should be treated as a capital profit. In the books of Hitesh Ltd. Memorandum Trading Account for the period from April 01 to September 13, 2008 Normal Normal Abnormal Total Abnormal Particulars items Particulars items items (Rs.) (Rs.) items (Rs.) (Rs.) (Rs.) 1,40,000 40,000 1,80,000 By sales 3,68,000 12,000 To Opening stock (Note 2) Less: 8,000 – Returns To Purchases 2,91,000 – 2,91,000 By Net sales 3,60,000 12,000 By Loss – 24,000 (Note -3) To Gross 1,08,000 1,08,000 By Closing 1,79,000 4,000 profit (30% on stock (b/f) Rs.3,60,000) 5,39,000 40,000 5,79,000 5,39,000 40,000

Rs. 52,000

Total (Rs.) 3,80,000

8,000 3,72,000 24,000 1,83,000

5,79,000

Statement of claim for loss of stock as on September 13, 2008 Particulars Rs. Book value of stock 1,83,000 Less: Stock unaffected 52,286 Loss of stock 1,30,714 The policy was taken for Rs.1,68,000, but the stock on the date of fire was Rs.1,83,000. Therefore, the average clause is applicable: Net claim = Loss of stock × Policy value / Value of Stock on date of fire = Rs.1,30,714 × Rs.1,68,000 / Rs.1,83,000 = Rs.1,20,000 approximately. Working notes: Note : 1 Particulars To Opening stock To Purchases To Gross profit

Trading account for the period ended March 31, 2008 Normal Abnormal Total (Rs.) items (Rs.) items (Rs.) 1,28,000 12,000 1,40,000 6,12,000 2,40,000

– –

6,12,000 2,40,000

Particulars By Sales By Closing stock (Note-2)

Normal Abnormal Total (Rs.) items (Rs.) items (Rs.) 8,00,000 12,000 8,12,000 1,80,000

9,80,000 12,000 9,92,000 9,80,000 Rate of gross profit = Gross profit/sales × 100 = Rs.2,40,000 / Rs.8,00,000 × 100 = 30%

– 12,000

1,80,000 9,92,000

Note: 2 – On March 31, 2008, stock representing Rs.20,000 were reduced to half cost. It means the actual cost of those goods were Rs.20,000 × 2/1 = Rs.40,000. Cost of other goods were Rs.1,60,000 – Rs.20,000 = Rs.1,40,000. Total closing stock on March 31, 2008 = Rs.1,40,000 + Rs.40,000 = Rs.1,80,000. Note: 3 – Original cost of abnormal item = Rs.40,000. Rs.20,000 was reduced for stock taking purpose and further Rs.4,000 were scrapped. Therefore, total loss = Rs.24,000. Closing stock at reduced price = Rs.40,000 – Rs.12,000 – Rs.24,000 = Rs.4,000.

Section C: Applied Theory 6.

7.

Elements of Financial Statements Financial statements portray the effects of financial transactions by grouping these into broad classes according to their economic characterstics. These broad characterstics are termed as the elements of financial statements. SFAC 6 defines ten interrelated elements: Assets Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. Liabilities Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events. Equity The residual interest that remains in the assets after deducting its liabilities. In a business enterprise, the equity is the ownership interest. Revenues Inflows or other enhancements of assets of an entity or settlement of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major and central operations. Expense Outflows or other using up of assets or incurrences of liabilities (or a combination of both) from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major and central operations. Gains Increases in Equity (Net Assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity except those that result from expenses or distribution to owners. Losses Decrease in equity (Net Assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity except those that result from expenses or distribution to owners Comprehensive Income The change in equity of a business enterprise during a period from transactions and other events and circumstances from sources other than investments by owners or distribution to owners. Investments By Owners Increases in equity of a particular business enterprise resulting from transfers to it for the purpose of increasing ownership interests. Distribution to Owners Decreases in the equity of a particular business enterprise resulting from transferring assets, rendering services, or incurring liabilities to owners. Methods of Redemption The company can redeem its debentures in any of the following methods: a. Redemption in a lump sum after the expiry of a certain period. b. Drawing of lots. c. Redemption by purchase in the open market. d. By conversion. Redemption of Debentures in a Lump Sum after the Expiry of a Certain Period Under this method, the company redeems all the debentures in one lump sum after expiry of a certain period agreed upon in the prospectus issued at the time of issue of debentures. One advantage of this method is that the

company can plan for the financial resources as the liability is known in advance. This will be done generally by creating a sinking fund or by taking an insurance policy. A sinking fund is created to collect funds for redemption of debentures after their specified life and without disturbing the working capital requirements. An amount can be set apart every year out of the profits of the company using sinking fund tables, and further invested in safe securities. This reinvestment also holds good for the periodical interest earned on such investments. These investments are sold at the time of redemption to make available the necessary funds. Under the Sinking Fund method, every year certain amount (calculated as per the financial tables) is appropriated from the profits and the said amount is invested in outside securities. When the time of redemption comes, the securities are realized and the sale proceeds utilized for the purpose of redemption. Purchase of Debentures in the Open Market A company can purchase its own debentures in the open market, i.e., in a stock exchange either for immediate cancellation or for the purpose of keeping them as investments. This kind of purchase will be generally taken up specially when they are quoted at the low prices. The advantage in this method is that the company can redeem the debentures at its convenience, i.e., whenever it has surplus funds. The purchase may be at the prices less than the paid up value of the debentures. In such case, the company earns profits on cancellation of such debentures. The said profit is a capital profit and it can be used for writing-off of any capital loss such as discount on issue of debentures, etc., or it can be transferred to capital reserve. Sometimes, the debentures may be purchased in the open market at the higher prices than the nominal value of the debentures. In such cases, the company suffers a loss and again it is a capital loss which can be written-off either from the P&L account or from any capital profit. A company can opt to buy its debentures in the open market and these when cancelled amounts to redemption. In practice, the company may redeem only a portion of the debentures by purchase in the open market and the rest may be redeemed on the expiry of the stipulated period in the normal course. Redemption of debentures after purchasing them in the open market can either be at a premium or at par or even at a discount. Debentures will be redeemed at a discount when the company buys the debentures in the open market at a price lower than the face value of the debentures. The debentures can be redeemed at a premium, if the terms of the issue provide, and thus the company will credit the ‘Premium on redemption of debentures a/c’ with the premium payable at the time of redemption The Profit/Loss on cancellation of debentures a/c, as the case may be, will be credited or debited with the amount arrived at by comparing the purchase price of own debentures cancelled and the face value plus the premium payable on redemption Redemption of Debentures by Conversion The debentures that can be converted at holder’s option into equity shares are known as convertible debentures. The debentures may be Fully Convertible Debentures (FCDs) or Partly Convertible Debentures (PCDs). The ratio at which debentures are exchanged for the equity shares may be stated in the form of conversion price or conversion ratio. The Non-Convertible Debentures (NCDs) means they are not convertible into shares. An option for converting their holding into new class of shares gives debenture holders a privilege in as much as they keep themselves as secured creditors at the time when the company was in its infancy and now with the option enjoy the right of becoming the proprietors of the company by convertibility when the solvency and managerial efficiency are assured.