Guideline Answers for Accounting Group I

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1 Guideline Answers for Accounting Group I Question 1(a): 5 Marks Heramba Ltd gives you the following information for the year ended 31 st March 20X2: ` Sales for the year ` 48,00,000 (The Company sold goods for Cash only). 48,00,000 Cost of Goods Sold 75% of Sales Closing Inventory was higher than Opening Inventory by 50,000 Trade Creditors on X2 exceed the outstanding on X1 by 1,00,000 Tax paid during the year. 1,50,000 Amounts paid to Trade Creditors during the year 35,50,000 Administrative and Selling Expenses Paid 3,60,000 Cost of new Machinery acquired in December 20X1 6,00,000 Dividend paid during the year 1,20,000 Cash in hand and at Bank on X2 70,000 Cash in hand and at Bank on X1 50,000 Prepare Cash Flow Statement for the year ended X2. Cash Flow Statement for the year ended 31 st March 20X2 (Direct Method) ` ` A. CASH FLOW FROM OPERATING ACTIVITIES Cash received from Sale of Goods 48,00,000 Less: Cash Payment to Suppliers (35,50,000) Selling & Administrative Expenses (3,60,000) Cash Generated from Operations before Taxes and Extraordinary items 8,90,000 Less: Taxes paid (1,50,000) Net Cash Flow from / (used in) Operating Activities [A] 7,40,000 B. CASH FLOW FROM INVESTING ACTIVITIES = Fixed Asset Purchased [B] (6,00,000) C. CASH FLOW FROM FINANCING ACTIVITIES = Payment of Dividend [C] (1,20,000) D. Net Increase / (Decrease) in Cash and Cash Equivalents [A + B + C] 20,000 E. Opening Balance of Cash and Cash Equivalents 50,000 F. Closing Balance of Cash and Cash Equivalents 70,000 Question 1(b): 5 Marks Nidhi Ltd purchased Raw Materials at a basic price of ` 10,000 on which Excise Duty of ` 1,500 is paid. Cost of Inventory (of Raw Materials at this stage would be ` 11,500). The material is thereafter processed. For this purpose, Conversion Costs (Labour and Direct Overheads, and other Fixed Production Overheads) amounting to ` 1,800 are incurred. Excise Duty Liability on Finished Goods amounting ` 1,700 is being paid by the Company. The Company is entitled for a CENVAT credit of ` 1,500. Compute the value of Inventory. 1. Raw Materials: Since Materials have been fully consumed, there is no inventory as such. In case of Inventory of Raw Material, it will be valued net of Excise Duty, since the Company is entitled to CENVAT Credit thereon. 2. Finished Goods: Valuation of Finished Goods will be as under Cost of Materials (net of Excise Duty, since CENVAT Credit is available) 10,000 Cost of Conversion (given) 1,800 Excise Duty on Finished Product (given) as per AS 2 and Guidance Note on Accounting for ED 1,700 Total Value of FG Inventory 13,500 ` 1

2 Question 1(c): 5 Marks An item of Machinery was purchased on 1 st April 2012 for ` 2,00,000. The WDV Depreciation Rate applicable to the Machinery was 15%. The WDV of the Machinery on 31 st March 2014 was ` 1,44,500. On that date, the Enterprise decided to the change the method of depreciation from WDV to SLM, and write off the Book Value ` 1,44,500, over the remaining useful life of the machinery, i.e. 5 years. Out of the total useful life of 7 years, 2 years have already elapsed. Comment on whether the above accounting treatment is correct. If not, give the correct accounting treatment, with reasons therefor. Hint: Refer principles relating to change in method of depreciation with retrospective effect. The following computations are relevant in this regard. Computation ` 1. Depreciation p.a. under SLM (retrospective effect) for 7 years life 2,00,000 7 years 28, Book Value if SLM is used from to ,00,000 (28,571 2 years) 1,42, Difference in Book Value between SLM and WDV (Now, Asset Book Value should be reduced to SLM based value 1,42,858) 1,44,500 1,42,858 = to be written off /debited to P&L A/c 1,642 Question 1(d): 5 Marks An amount of ` 9,90,000 was incurred on a contract work upto 31 st March. Certificates have been received to date to the value of ` 12,00,000 against which ` 10,80,000 has been received in cash. The cost of work done but not certified amounted to ` 22,500. It is estimated that by spending an additional amount of ` 60,000 (including Provision for Contingencies) the work can be completed in all respects in another two months. The agreed Contract Price of the work is ` 12,50,000. Compute a conservative estimate of the profit to be taken to the P&L A/c as per AS 7. Total Cost = Cost incurred till Date + Estimated Additional Cost = 9,90, ,000 10,50,000 Cost incurred till date % of completion based on Cost = = Estimated Total Costs 9,90,000 10,50,000 ` 94.29% Contract Revenue to be recognised (12,50,000 x 94.29%) 11,78,625 Less: Contract Cost incurred till date 9,90,000 Contract Profit 1,88,625 Question 2(a): 12 Marks The Receipts and Payments Account, Income and Expenditure Account and additional information of a Sports Club for the year ended were as follows Receipts and Payments Account for the year ending on Receipts ` Payments ` To Balance b/d 42,000 By Secretary Salary 10,000 To Entrance Fees ,000 By Printing & Stationery 26,000 To Entrance Fees ,00,000 By Advertising 16,000 To Subscription ,000 By Fire Insurance 12,000 To Subscription ,50,000 By 12% Investments (Purchased on ) 2,00,000 To Subscription ,000 By Furniture 20,000 To Rent Received 24,000 By Balance c/d 58,000 To Interest Received 6,000 Total 3,42,000 Total 3,42,000 2

3 Income and Expenditure Account for the year ending on Expenditure ` Income ` To Secretary Salary 15,000 By Entrance Fees 1,05,000 To Printing and Stationery 22,000 By Subscription 1,56,000 To Advertising 16,000 By Rent 28,000 To Audit Fees 5,000 By Interest on Investments 12,000 To Fire Insurance 10,000 To Depreciation on Sports Equipment 90,000 To Depreciation on Furniture 5,000 To Surplus 1,38,000 Total 3,01,000 Total 3,01,000 Additional Information: The Assets and Liabilities as on include 1. Club Grounds & Pavilion ` 4,40,000, 4. Subscription in Arrear ` 8,000, 2. Sports Equipment ` 2,50,000, 5. Subscription Received in Advance ` 2,000 and 3. Furniture & Fixtures ` 40,000, 6. Creditors for Printing & Stationery ` 5,000. You are required to prepare the Balance Sheet of the Club as on A. Balance Sheet as on Capital and Liabilities ` Properties and Assets ` Capital Fund (Bal. Fig.) 7,83,000 Non Current Assets: Creditors for Printing and Stationery 5,000 Club Ground & Pavilion 4,40,000 Subscription Received in Advance 2,000 Sports Equipment 2,50,000 Furniture& Fixtures 40,000 Current Assets: Subscriptions Receivable 8,000 Entrance Fees Receivable 10,000 Cash in Hand 42,000 Total 7,90,000 Total 7,90,000 B. Balance Sheet as on Capital and Liabilities ` Properties and Assets ` Capital Fund: Non Current Assets: Club Ground and Pavilion 4,40,000 Opening Balance 7,83,000 Sports Equipment (2,50,000 90,000) 1,60,000 Add: Surplus during the year 1,38,000 9,21,000 Furniture& Fixtures (40,000 5,000+20,000) 55,000 Current Assets: Current Liabilities: 12% Investments 2,00,000 Subscriptions Received in Advance 4,000 Rent Receivable 4,000 Secretary Salary Due 5,000 Accrued Interest 6,000 Creditors for Printing 1,000 Fire Insurance paid in advance 2,000 (5, ,000 26,000) Entrance Fees Receivable 5,000 Audit Fees Payable 5,000 Subscription Receivable (a) ,000 (b) ,000 Cash in Hand 58,000 Total 9,36,000 Total 9,36,000 Question 2(b): Outline the considerations for selection of Pre Packaged Accounting Software. 3

4 1. Business Requirements: The Enterprise should identify its business requirements and try to match its requirement with functionalities offered by different software providers. 2. Reports: Software which is able to provide all the requisite reports (both routine and exception reporting) in a format understandable to the User, should be preferred. 3. Ease of Use: Software which is easier to use (both interface and performance wise), should be considered. Software which are very high on GUI may fall short on performance (speed) while handling high volume data. 4. Cost: Packages having more features cannot be opted because of the prohibitive high costs. 5. Support: Vendor Support is essential for any software. A Stable Vendor with reputation and good track record will always be preferred. 6. Regular Updates: Software which is constantly updated should be preferred against those Software where Vendors do not update their Software regularly. Question 3: 16 Marks E, F and G were Partners sharing Profits and Losses in the ratio of 5:3:2 respectively. On 31 st March 2013, the Balance Sheet of the Firm stood as follows Capital and Liabilities ` Properties and Assets ` Capital Accounts: Non Current Assets: Building 55,000 E 50,000 Furniture 25,000 F 40,000 Current Assets: Stock 42,000 G 28,000 1,18,000 Debtors 20,000 Current Liabilities:Creditors 33,500 Cash at Bank 11,200 Outstanding Expenses 1,700 Total 1,53,200 Total 1,53,200 On 31 st March 2013, E decided to retire, and F and G decided to continue as equal Partners. Other terms were as follows (a) Building is appreciated by 20%, Furniture be depreciated by 10% and a Provision of 5% be created on Debtors. (b) Goodwill is valued at two year s purchase of profit for the latest accounting year. The Firm s Profit for the year ended 31 st March 2013 was ` 25,000. No Goodwill account is to be raised in the books of account. (c) Fresh Capital be introduced by F and G to the extent of ` 10,000 and ` 35,000 respectively. (d) Out of sum payable to Retiring Partner E, a sum of ` 45,000 be paid immediately and the balance be transferred to his Loan Account bearing interest at 12% per annum. The loan is to be paid off by 31 st March One month after E s retirement, F and G agreed to admit E s son H as a Partner with one fourth share in Profit/Losses. E agreed that the balance in his Loan A/c be converted into H s Capital. E also agreed to forego one month s interest on his loan. It was also agreed that H will bring in his share of Goodwill through book adjustment, valued at the price on the date of E s retirement. No Goodwill Account is to be raised in the books. You are requested to pass necessary Journal Entries to give effect to above transactions, and prepare Partner s Capital Accounts. 1. Computation of Partners' Shares consequent to Retirement and Admission E F G H Ratio before Retirement of E 5/10 3/10 2/10 Ratio after Retirement of E ½ ½ Ratio after Admission of H ¾ ½ = 3/8 ¾ ½ = 3/8 ¼ So, Profit Sharing Ratio among F:G:H is 3:3:2 4

5 Get More Updates From 2. Computation of Goodwill and Adjustment upon retirement of E Amount of Goodwill = 2 Yrs Purchase Latest Year profit = 2 ` 25,000 = ` 50,000. It is distributed as follows Goodwill E F G Raised in the ratio of 5:3:2 50,000 5/10 = 25,000 50,000 3/10 = 15,000 50,000 2/10 = 10,000 Written Off in New ratio of 1:1 50, 000 1/2 = 25,000 50,000 1/2 = 25,000 Net Effect 25,000 Cr. 10,000 Dr. 15,000 Dr. 3. Revaluation Account (on Retirement) To Furniture A/c ( %) 2,500 By Building A/c (55,000 20%) 11,000 To Provision for Doubtful Debts (20,000 5%) 1,000 To Capital Accounts Profit Transferred (old PSR) E 3,750 F 2,250 G 1,500 7,500 Total 11,000 Total 11, Computation of Goodwill and Adjustment upon admission of H Goodwill Value on the date of retirement of E = ` 50,000. It is distributed as follows Goodwill F G H Raised in the ratio of 1:1 50,000 ½ = 25,000 50,000 ½ = 25,000 Written Off in New Ratio of 3:3:2 50,000 ⅜ = 18,750 50,000 ⅜ = 18,750 50,000 2/8 = 12,500 Net Effect 6,250 Cr. 6,250 Cr. 12,500 Dr. 5. Journal Entries in the books of the Firm S.No. Dr. Cr. 1. Building A/c Dr. 11,000 To Revaluation A/c 11,000 (Being value of Building appreciated by 20% on ` 55,000) 2. Revaluation A/c Dr. 3,500 To Provision for Doubtful Debts A/c 1,000 To Furniture A/c 2,500 (Being Furniture depreciated at 10% on ` 25,000 and Provision for Doubtful Debts created at 5% on ` 20,000) 3. Revaluation A/c Dr. 7,500 To E s Capital A/c 3,750 To F s Capital A/c 2,250 To G s Capital A/c 1,500 (Being profit on revaluation transferred in Old PSR 5:3:2) 4. Bank A/c Dr. 45,000 To F s Capital A/c 10,000 To G s Capital A/c 35,000 (Being Capital brought in by the Partners) 5. F s Capital A/c Dr. 10,000 G s Capital A/c Dr. 15,000 To E s Capital A/c 25,000 (Being Adjustment of Goodwill upon retirement of Partner E, without raising Goodwill in the Books) (WN 2) 6. E s Capital A/c Dr. 78,750 To E s Loan A/c 33,750 To Bank A/c 45,000 (Being of the amount due to E, Rs paid immediately and balance as Loan) 5

6 S.No. Dr. Cr. 7. E s Loan A/c Dr. 33,750 To H s Capital A/c 33,750 (Being of the Loan amount transferred to H s Capital after admission) 8. H s Capital A/c Dr. 12,500 To F s Capital A/c 6,250 To G s Capital A/c 6,250 (Being adjustment of Goodwill upon admission of H) (WN 4) 6. Partners Capital Account E F G H E F G H To E s Capital 10,000 15,000 By balance b/d 50,000 40,000 28,000 To Bank 45,000 By Revaluation 3,750 2,250 1,500 To E s Loan (b/f) 33,750 By F & G s Capital 25,000 To F & G s Capital 12,500 By Bank 10,000 35,000 To balance c/d 48,500 55,750 21,250 By E s Loan 33,750 By H s Capital 6,250 6,250 Total 78,750 58,500 70,750 33,750 Total 78,750 58,500 70,750 33,750 Question 4(a): 12 Marks Ananthu formed a Private Limited Company under the name of Ananthu (P) Ltd, to take over his existing business as from 1 st April, but the Company was not incorporated until 1 st July. No entries relating to transfer of the business were entered in the books, which were carried on without a break until 31 st March of the next year. You are required to prepare Trading and Profit and Loss Account for the year ended 31 st March, apportioning the periods before and after incorporation and a Balance Sheet as on that date. Ignore Depreciation and Taxation. The following Trial Balance was extracted from the books as on 31 st March (end of the year). Debit Credit Stock in Trade as at 1 st April (Opening Stock) 4,300 Purchases and Sales 18,900 27,800 Carriage Outwards 330 Travellers Commission 750 Office Salaries and Expenses 2,100 Rent and Rates 1,200 Ananthu s Capital Account as at 1 st April (Opening Balance) 23,000 Directors Fee 1,800 Fixed Assets 13,400 Current Liabilities 3,700 Current Assets (other than Stock in Trade) 11,200 Preliminary Expenses 520 Total 54,500 54,500 You are also given the following information: Stock as at 31 st March (end of the year) is ` 4,400. Purchase Consideration was agreed at ` 30,000, to be settled by issue of 3,000 Equity Shares of ` 10 each. The Gross Profit Margin is constant and the monthly sales in April, February and March are double the monthly sales for the remaining months of the year. Assume that Carriage Outwards and Travellers Commission vary in direct proportion to Sales. 6

7 Get More Updates From 1. Computation of Time Ratio and Sales Ratio Pre Inc Post Inc Total (a) No. of Months = Time Ratio 1 st Apr to 30 th Jun 1 st Jul to 31 st Mar 3 : 9= 1 : 3 = 3 Months = 9 Months (b) No. of Months in which Sales is Two Times the Normal Level 1 (April) 2 (Feb & Mar) (c) No. of Months of Normal Sales Level 2 7 (d) So, Overall Sales Ratio [(b 2) + c] : 11 Note: 1. Expenses divided on Sales Ratio (a) Carriage Outwards, and (b) Travellers Commission (given) 2. Expenses divided on Time Ratio (a) Office Salaries and Expenses, (b) Rent and Rates. 2. Trading Account for the year ending 31 st March To Opening Stock 4,300 By Sales 27,800 To Purchases 18,900 By Closing Stock 4,400 To Gross Profit c/d (balancing figure) 9,000 Total 32,000 Total 32, Statement showing calculation of Profit / Losses for Pre and Post incorporation Periods Ratio Pre Incorpn. Post Incorpn. A. Gross Profit (Apportioned in Sales Ratio) 4:11 2,400 6,600 B. Apportionment of Expenses Office Salaries and Expenses 3: ,575 Rent and Rates 3: Carriage Outwards 4: Travellers Commission 4: Directors Fees (Direct) 1,800 Total Expenses 1,113 5,067 C. Profit (A B) 1,287 1, Goodwill = Amount of Purchase Consideration Less Balance in Ananthu s Capital A/c on 1 st Apr = ` 30,000 Less ` 23,000 = ` 7, Capital Reserve Account To Preliminary Expenses w/off 520 By P & L A/c Pre Incorpn Profit 1,287 To Goodwill transfer (balancing figure) 767 Total 1,287 Total 1, Balance Sheet as on 31 st March as at 31 st March Note This Year Prev. Yr I EQUITY AND LIABILITIES: (1) Shareholders Funds: (a) Share Capital 1 30,000 (b) Reserves and Surplus Surplus (Balance in P&L A/c) 1,533 (2) Current Liabilities 3,700 Total 35,233 II ASSETS (1) Non Current Assets Fixed Assets: (i) Tangible Assets 13,400 (ii) Intangible Assets Goodwill (7,000 Capital Reserve 767) 6,233 7

8 as at 31 st March Note This Year Prev. Yr (2) Current Assets: (a) Inventories 4,400 (b) Other Current Assets 11,200 Note 1: Share Capital Authorised: Equity Shares of each Total 35,233 This Year Prev. Yr Issued, Subscribed & Paid up: 3,000 Equity Shares of ` 10 each 30,000 (All the above Shares have been issued for non cash consideration in Business Takeover) Total 30,000 Question 4(b): Calculate the Maximum Remuneration Payable to the Managing Director for the year, based on Effective Capital of Natarajan Ltd, a Non Investment Company, from the information given below: (` in 000 s) Profit for the year (calculated as per Sec.198) 3,000 Paid up Capital 18,000 Reserves & Surplus 7,200 Securities Premium 1,200 Long Term Loans 6,000 Investments 3,600 Preliminary Expenses nor written off 3,000 Remuneration paid to the Managing Director during the year 600 ` in 000 s Paid Up Share Capital 18,000 Add: Reserves & Surplus 7,200 Securities Premium 1,200 Long Term Loans 6,000 Profit and Loss A/c (3, ) 3,600 Sub Total 36,000 Less: Investments (3,600) Preliminary Expenses not written off (3,000) Effective Capital 29,400 Slab under which the Effective Capital falls Negative or Less than ` 5 Crores Annual Managerial Remuneration not to exceed (Sch V) (` 30 Lakhs, i.e. in 000s =) 30,00 Question 5: 16 Marks The Balance Sheet of Malini Ltd as on 31 st March is given below: Liabilities ` Assets ` 1,00,000 Equity Shares of ` 10 each fully paid up 10,00,000 Freehold Property 5,50,000 4,000, 8% Preference Shares of ` 100 each fully paid 4,00,000 Plant and Machinery 2,00,000 6% Debentures(secured by Freehold Property) 4,00,000 Trade Investments (at cost) 2,00,000 Add: Arrear Interest 24,000 4,24,000 Sundry Debtors 4,50,000 8

9 Liabilities ` Assets ` Sundry Creditors 1,01,000 Stock in Trade 3,00,000 Director s Loan 3,00,000 Deferred Advertisement Expenses 50,000 Profit and Loss Account 4,75,000 Total 22,25,000 Total 22,25,000 The Board of Directors of the Company decided upon the following Scheme of Reconstruction with the consent of respective Stakeholders: 1. Preference Shares are to be written down to ` 80 each and Equity Shares to ` 2 each. 2. Pref. Dividend in arrear for 3 years to be waived by 2/3 rd and for balance 1/3 rd, Equity Shares of ` 2 each to be allotted. 3. Debentureholders agreed to take one Freehold Property at its Book Value of ` 3,00,000 in part payment of their holding. Balance Debentures to remain as liability of the Company. 4. Arrear Debenture Interest to be paid in cash. 5. Remaining Freehold Property to be valued at ` 4,00, Investment sold out for ` 2,50, % of Directors Loan to be waived and for the balance, Equity Shares of ` 2 each to be allotted % of Sundry Debtors, 80% of Stock and 100% of Deferred Advertisement Expenses to be written off. 9. Company s Contractual Commitments amounting to ` 6,00,000 have been settled by paying 5% Penalty of Contract Value. Show the Journal Entries for giving effect to the Internal Reconstruction and draw the Balance Sheet of the Company after effecting the scheme. 1. Journal Entries in the books of Malini Ltd S.No Dr. (`) Cr. (`) 1. 8% Preference Share Capital (` 100) A/c Dr. 4,00,000 To 8% Preference Share Capital (` 80) A/c 3,20,000 To Reconstruction A/c 80,000 (Being 8% Preference Shares written down to ` 80 each vide approved Scheme of Reconstruction dated ) 2. Equity Share Capital (` 10) A/c Dr. 10,00,000 To Equity Share Capital (` 2) A/c 2,00,000 To Reconstruction A/c 8,00,000 (Being Equity Shares written down to ` 2 each vide approved Scheme of Reconstruction dated ) 3. Reconstruction A/c Dr. 32,000 To Equity Share Capital (` 2) A/c 32,000 (Being arrears of Preference Dividend ` 96,000 waived to 2/3 rd extent, balance settled by issue of 16,000 Equity Shares of ` 2 each) 4. 6% Debentures A/c Dr. 3,00,000 To Freehold Property 3,00,000 (Being Freehold Property taken over by 6% Debentureholders in part payment) 5. Arrears of Debenture Interest A/c Dr. 24,000 To Bank A/c 24,000 (Being Arrears of Debenture Interest paid immediately by Cash / Bank) 6. Freehold Property A/c Dr. 1,50,000 To Reconstruction A/c 1,50,000 (Being remaining Freehold Property revalued) [5,50,000 3,00,000] = 2,50,000, Increase in Value = ` 4,00,000 2,50,000 = ` 1,50, Bank A/c Dr. 2,50,000 To Trade Investments A/c 2,00,000 To Reconstruction A/c 50,000 (Being Trade Investments sold at a profit of ` 50,000) 9

10 Get More Updates From S.No Dr. (`) Cr. (`) 8. Directors Loan A/c Dr. 3,00,000 To Reconstruction A/c 2,25,000 To Equity Share Capital (` 2) A/c 75,000 (Being Directors Loan waived to an extent of 75% and for the balance Equity Shares of ` 2 each issued, Number of Shares = 37,500) 9. Reconstruction A/c Dr. 9,45,000 To Sundry Debtors A/c 1,80,000 To Stock A/c 2,40,000 To Deferred Advertisement Expenditure A/c 50,000 To Profit and Loss A/c 4,75,000 (Being Sundry Debtors, Stock, Deferred Advertisement Expenses and Debit Balance of Profit and Loss A/c written off under Reconstruction Scheme) 10. Reconstruction A/c Dr. 30,000 To Bank A/c 30,000 (Being 5% Penalty towards Contractual Commitments paid) 11. Reconstruction A/c Dr. 2,98,000 To Capital Reserve A/c (WN 2) 2,98,000 (Being balance in Reconstruction A/c credited to Capital Reserve) 2. Reconstruction A/c To Bank (Penalty Paid) 30,000 By 8% Preference Shares (reduction) 80,000 To Sundry Debtors (written off) 1,80,000 By Equity Share Capital A/c (reduction) 8,00,000 To Equity Share Capital (Arrears of Dvnd) 32,000 By Freehold Property A/c (revaluation) 1,50,000 To Stock (written off) 2,40,000 By Trade Investments (Profit on Sale) 50,000 To Deferred Advertisement Exps (written off) 50,000 By Director s Loan (Waiver) 2,25,000 To Profit & Loss A/c (written off) 4,75,000 To Capital Reserve (balancing figure) 2,98,000 Total 13,05,000 Total 13,05, Bank A/c To Trade Investments (Sale Proceeds) 2,50,000 By Arrears of Debenture Interest 24,000 By Reconstruction A/c Penalty paid 30,000 By balance c/d (balancing figure) 1,96,000 Total 2,50,000 Total 2,50, Balance Sheet of Malini Ltd as on 31 st March (after Reconstruction) as at 31 st March Note This Year Prev. Yr I EQUITY AND LIABILITIES: (1) Shareholders Funds: (a) Share Capital 1 6,27,000 (b) Reserves and Surplus Capital Reserve 2,98,000 (2) Non Current Liabilities: Long Term Borrowings 6% Debentures (Secured against Freehold Property) 1,00,000 (3) Current Liabilities: Trade Payables (Sundry Creditors) 1,01,000 Total 11,26,000 II ASSETS (1) Non Current Assets Fixed Assets: Tangible Assets 2 6,00,000 (2) Current Assets: (a) Inventories Stock in Trade (3,00,000 80%) 60,000 (b) Trade Receivables Sundry Debtors (4,50,000 40%) 2,70,000 (c) Cash and Cash Equivalents (WN 3) 1,96,000 Total 11,26,000 10

11 Note 1: Share Capital Authorised: This Year Prev. Yr Equity Shares of ` 2 each Preference Shares of ` 80 each Issued, Subscribed & Paid up: 1,53,500 Equity Shares of ` 2 each 3,07,000 4,000 8% Preference Shares of ` 80 each 3,20,000 Total 6,27,000 Number of Equity Shares = Given 1,00,000 + Pref Dividend Arrears 16,000 + Directors 37,500 = 1,53,500 Shares. Note 2: Tangible Assets This Year Prev. Yr (a) Freehold Property (Net Book Value 2,50,000 + Incr under Reconstruction 1,50,000) 4,00,000 (b) Plant & Machinery 2,00,000 Total 6,00,000 Question 6(a): CCL wants to take up a Loss of Profit Policy. Turnover during the current year is expected to increase by 20%. The Company will avail Overdraft Facilities from its Bank at 15% interest to boost up the Sales. The average daily Overdraft Balance will be around ` 3 Lakh. All other Fixed Expenses will remain the same. The following details are available from previous year Fixed Expenses: Salaries ` 3,30,000 Total Variable Expenses ` 24,00,000 Rent, Rates and Taxes ` 30,000 Miscellaneous Income ` 70,000 Travelling Expenses ` 50,000 Net Profit ` 4,20,000 Postage, Telegram, Telephone ` 60,000 Director s Fees ` 10,000 Audit Fees ` 20,000 Determine the amount to be taken for the Current Year. 1. Profit and Loss Account for Previous Year To Variable Expenses 24,00,000 By Sales (balancing figure) 32,50,000 To Fixed Expenses 5,00,000 By Miscellaneous Income 70,000 To Net Profit 4,20,000 Total 33,20,000 Total 33,20,000 Note: Total Fixed Expenses = ` 3,30,000 + ` 30,000 + ` 50,000 + ` 60,000 + ` 10,000 + ` 20,000 = ` 5,00, Computation of Insurance Policy to be taken Gross Profit (Sales ` 32,50,000 Less Variable Expenses ` 24,00,000) 8,50,000 Add: Additional GP for 20% increase in Turnover (` 8,50,000 20%) 1,70,000 Add: Increased Standing Charges (Interest on Overdraft) (` 3,00,000 15%) 45,000 Policy to be taken for Current Year 10,65,000 ` Question 6(b): 12 Marks Maruti has made following transactions during the financial year : Date Purchases 24,000 12% Bonds of ` 100 each at ` 84 cum interest. Interest is payable on 30 th September and 31 st March every year. 11

12 Date Purchases 1,50,000 Equity Shares of ` 10 each in Alpha Limited for ` 25 each through a Broker, who charged Brokerage at 2% Purchased 60,000 Equity Shares of ` 10 each in Beeta Limited for ` 44 each through a Broker, who charged Brokerage at 2% Alpha Limited made a Bonus Issue of two Shares for every three Shares held Sold 80,000 Shares in Alpha Limited for ` 22 each Received 15% Interim Dividend on Equity Shares of Alpha Limited Beeta Limited made a Rights Issue of one Equity Share for every four Shares held at ` 5 per Share. Maruti exercised his option for 40% of his entitlements and sold the balance rights in the market at ` 2.25 per Share Sold 15,000 12% Bonds at ` ex interest Received 18% Interim Dividend on Equity Shares of Beeta Limited. Interest on 12% Bonds was duly received on due dates. Prepare separate Investment Account for 12% Bonds, Equity Shares of Alpha Limited and Equity Shares of Beeta Limited in the books of Maruti for the year ended on 31 st March Computation of Interest at 12% p.a. on various dates Date FV (`) Period (months) Int. Amt at 12% p.a (`) 1 st May Interest on Cum Interest Purchase (24,000 ` 100) 24,00, , th Sept Interest Received on Holding 24,00, ,44,000 1 st Mar Interest on Ex Interest Sale (15,000 ` 100) 3,00, , st Mar Interest Received on Holding (12,00,000 3,00,000) 9,00, , Computation of Cost of Purchase Computation ` Amount paid on 1 st May 24,000 ` 84 20,16,000 Less: Interest (for Cum Interest purchase only) (WN 1) (24,000) Net Cost of Purchase 19,92, Computation of Profit / (Loss) on Sale of Investments Computation ` Sale Proceeds (No Interest adjt for ex interest sale) 15,000 ` 90 13,50,000 Less: Cost on FIFO basis ` 19,92,000 15,00,000 24,00,000 (12,45,000) Profit / (Loss) on Sale 1,05, Investment in 8% Bonds Account Date Item FV Int. Cost Date Item FV Int. Cost 1 May To Bank 24,00,000 24,000 19,92, Sept 1 Mar To P&L A/c Profit tfr 31Mar To P&L A/c Int tfr 1,05,000 1 Mar 2,49, Mar By Bank _ 1,44,000 _ (Int recd) By Bank 15,00,000 75,000 13,50,000 By Bank 54,000 (Int recd) do By bal c/d 9,00,000 7,47,000 Total 24,00,000 2,73,000 20,97,000 Total 24,00,000 2,73,000 20,97,000 12

13 5. Investment in Equity Shares of Alpha Ltd Date Shares Dvd. Cost Date FV Dvd. Cost 15 June To Bank 1,50,000 _ 38,25, Oct 14 To Bonus Oct Shares 31Mar To P&L Dividend By Bank (Sale at 22 per Share) 80,000 _ 17,60,000 1,00,000 1 Jan By Bank 2,55,000 (Dividend) 2,55,000 1 Jan To P&L A/c 2,80,000 Loss on Sale 31 By bal c/d 1,70,000 17,85,000 Mar Total 2,50,000 2,55,000 38,25,000 Total 2,50,000 2,55,000 38,25,000 80,000 Shares Note: Cost of Investments sold = ` 38,25,000 = ` 20,40,000. 1,50,000 Shares Hence, Loss on Sale = Sale Proceeds ` 17,60,000 less Cost as above ` 20,40,000 = ` 2,80, Investment in Equity Shares of Beeta Ltd Date Shares Dvd. Cost Date FV Dvd. Cost 10 Jul To Bank 60,000 26,92, Mar 14 To Bank 6,000 _ 30,000 Oct (Rights) Note: By bal c/d 66,000 27,22,800 Total 66,000 27,22,800 Total 66,000 27,22,800 Total Rights Entitlement = 60,000 1/4 th = 15,000 Shares. Of these, 40%, i.e. 6,000 Shares are subscribed for at ` 5 per Share. The balance 60%, i.e. 9,000 Shares are renounced at ` 2.25 per Share for ` 20,250. This amount received will be considered directly in the P&L A/c. Question 7(a): A Ltd purchases a Plant on Hire Purchase Basis for ` 1,00,000 and makes the payment in the following manner Down Payment ` 20, st Installment after 1 year ` 40,000, 2 nd Installment after 2 years ` 20,000, Last Installment after 3 years. The Cash Price of the Plant is ` 86,000. Calculate (a) Total Interest, and (b) Interest included in each Installment. Total Interest = Hire Purchase Price Cash Price = ` 1,00,000 ` 86,000 = ` 14,000. Apportionment of Interest for each year (Interest rate not given) Year Amount Outstanding Ratio Interest 1 ` 1,00,000 ` 20,000 = ` 80,000 4 ` 14, = ` 8,000 2 ` 40,000 2 ` 14, = ` 4,000 3 ` 20,000 1 ` 14, = ` 2,000 Question 7(b): From the following information for the month of March, furnished by Harini & Co, prepare Total Debtors Account. Sales (included Cash Sales of ` 7,000) 68,000 Cheques Dishonoured 2,000 Collections from Debtors (Cash) 57,000 Return Inward 700 Discount Allowed 2,000 Bad Debts Written Off now recovered 500 Bad Debts Written Off 1,500 Provision for Doubtful Debts 1,200 Cheques Received 10,000 Balance Outstanding on (Receivables) 20,000 Note: Old Bad Debts recovered, Provision for Doubtful Debts and Cash Sales will not be reflected in Total Debtors A/c. 13

14 Total Debtors Account To balance b/d 20,000 By Cash Collection from Debtors 57,000 To Credit Sales (68,000 7,000) 61,000 By Discount Allowed 2,000 To Bank Dishonour of Cheques 2,000 By Bad Debts written off 1,500 By Bank Cheques received 10,000 By Sales Returns 700 By balance c/d (balancing figure) 11,800 Total 83,000 Total 83,000 Question 7(c): Arjun and Balram are Partners in a Firm and share Profits and Losses equally. Arjun has withdrawn the following sums during the half year ending 30 th June Date 15 th January 10 th February 5 th April 20 th May 18 th June ` 5,000 4,000 8,000 10,000 9,000 Interest on Drawings is charged at 10% per annum. Find out the Average Due Date and compute the Interest on Drawings to be charged on 30 th June. Computation of Average Due Date (Note: Base Date = 15 th January) Due Date No. of Days from Base Date Amount (`) Product (`) Col. (1) Col. (2) Col. (3) Col. (4) = (2) (3) 15 th January 0 5, th February = 26 4,000 1,04,000 5 th April =80 8,000 6,40, th May = ,000 12,50, th June = 154 9,000 13,86,000 Total 36,000 33,80,000 Total of Products Average Due Date = Base Date ± = 15 th 33,80,000 January + Total of Amounts 36,000 = 15 th January + 94 days (approx.) = 19 th April Days from ADD to 30 th June (period end) = = 72 days. So, Interest = ` 36,000 10% 72 = ` Question 7(d): Virupaksh Ltd is engaged in manufacturing and supply of gear boxes to IA Ltd but 10% thereof is retained and paid after one year, if there is satisfactory performance of the parts supplied. Virupaksh Ltd accounts for only 90% of Invoice Values as sale at the time of supply, and balance 10% is accounted as sale in the year of receipt of payment. Comment 1. Revenue has to be recognized at the full Invoice Price, i.e. 100% has to be accounted as Sales Income. 2. However, based on past recovery pattern, the Seller Company may make a provision for Sales Income, which it is not likely to realize. 3. This amount should not be adjusted / netted off against the Gross Invoice Value. Question 7(e): Mrida Ltd has purchased Plant and Machinery 3 years back for ` 45 Lakhs. A balance of ` 5 Lakhs is still payable to the Suppliers for the same. The Supplier waived off the balance amount during the current Financial Year. The Company treated it as Income and credited to P&L A/c of current Financial Year. Is this correct? 1. Waiver by Supplier should be considered as a Price Adjustment. 2. Hence ` 5 Lakhs should be deducted from the cost of Fixed Assets. 3. The accounting treatment given by the Company is not correct. 14