10. FINANCIAL STATEMENTS OF BANKING COMPANIES

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1 No.1 for CA/CWA & MEC/CEC MASTER MINDS 10. FINANCIAL STATEMENTS OF BANKING COMPANIES SOLUTIONS TO ASSIGNMENT PROBLEMS PROBLEM No. 1 Interest on performing assets is recognized on accrual basis but interest on NPA is recognized on cash basis. Advances On performing Assets On NPA Cash credit & OD Term Loan Bills purchased & Discounted 1, , PROBLEM No. 2 Calculation of amount of Provision to be made in the Profit and Loss Account Classification of Assets of Advances % age of Provision of provision Standard assets 20, Substandard assets 16,000 2,400 Doubtful assets: For one year (Secured) (D1) 6, ,500 For two to three years (Secured) (D2) 4, , For more than three years (Unsecured) (D3) 1,400 1,400 (Secured) Nonrecoverable assets (Loss assets) 1,500 1,500 provision required 9,080 PROBLEM No. 3 Doubtful Assets (more than 3 years) (D1) Less: Value of security (excluding DICGC cover) Less: DICGC cover Unsecured portion Provision: For unsecured % For secured % provision to be made in the books of KR Bank in lakhs 1,000 (400) () lakhs 400 lakhs 900 lakhs IPCC_33e_Accounts_GroupII_Financial Statement_Assignment Solutions 1

2 Ph: /26 PROBLEM No. 4 Uncertain Bank Journal Entries (Rupees in crores) Debit Credit Rebate on bills discounted A/c Dr To Discount on bills 9.00 (Being the transfer of opening balance in rebate on bills discounted account to discount on bills account) Bills purchased and discounted A/c Dr To Discount on bills Rs.4,000 crores To Clients A/c (Being the discounting of bills of exchange during the year) Discount on bills A/c Dr. To Rebate on bills discounted A/c (Being the unexpired portion of discount in respect of the discounted bills of exchange carried forward)(x18%x36.5/365) Discount on bills A/c Dr. To Profit and Loss A/c (Being the amount of income for the year from discounting of bills of exchange transferred to Profit and Loss A/c)(9+144) i March 31 To Rebate on bills discounted A/c To Profit and Loss A/c (bal.fig) transfer Ledger Accounts Discount on bills Account Date Rs. Date Rs April 1 By Rebate on bills discounted A/c By Bills purchased and discounted A/c ii April March 31 Rebate on bills discounted Account Date Rs. Date Rs To Discount on bills A/c 9.00 April 1 By Balance b/d To Balance c/d March 31 By Discount on bills A/c PROBLEM No. 5 Unexpired discount to be calculated as under: On 5% for 31 days (50,000 x 5/ x 31/366) = Rs.212 On 5% for 121 days (4,00,000 x 5/ x 121/366) = Rs.6,612 On 5% for 63 days (30,000 x 5/ x 63/366) = Rs.258 Rs.7,082 Note: Year 2012 is a leap year. IPCC_33e_Accounts_GroupII_Financial Statement_Assignment Solutions 2

3 No.1 for CA/CWA & MEC/CEC MASTER MINDS In the Books of Unique Bank Ltd. Journal Entries Date Debit Credit Interest and discount A/c Dr. 7,082 To Rebate on bills discounted A/c 7,082 (Proportionate discount on unexpired bills adjusted at the end of the year) Dec. 31 Customers liability for acceptance A/c Dr. 2,00,000 Customers current A/c Dr. 4,000 To B/P A/c (acceptance on behalf of customer) To Commission A/c 2,00,000 4,000 (Bills accepted on customers behalf and earned 2%) Dec. 31 Loans and Advances A/c Dr. 5,00,000 To Cash A/c 5,00,000 ( advanced on security of bills and goods on keyloan basis) i. Treatment in Profit and Loss Account and Balance Sheet (i) Discount earned (upto ) will be credited to Profit and Loss A/c and unexpired discount of Rs.7,082 will, be credited to Rebate on Bills Discounted A/c, which will appear on the liability side of the Balance Sheet. ii. Commission earned will be credited to Profit and Loss A/c whereas customers liability for acceptance will appear on the asset side of the Balance sheet in Schedule (9) and Acceptance on behalf of customer will appear in the liability side in Schedule (5) as contra items, and iii. Loans and advances will appear in the assets side of the Balance Sheet. PROBLEM No. 6 Schedule No. (Rs. In thousand) Income: Interest and Discount (8,860 30) Other Income Expenditure: Interest expenses Operating expenses Provision and Contingencies , ,080 2,720 2,662 4 Net Profit / Loss for the year 1,694 Calculation of Provision: Assets Standard Substandard Doubtful % unsecured Secured: Less than 1 year More than 1 year but less than 3 years More than 3 years Loss Other provisions Rs ,000 1, % of Provisions Provision Rs ,004 IPCC_33e_Accounts_GroupII_Financial Statement_Assignment Solutions 3

4 Ph: /26 Income: Interest and Discount Other income PROBLEM No. 7 Schedule No. (Rs. In thousand) ,13,000 Expenditure: Interest expenses Operating expenses Provision and Contingencies Net Profit / (Loss) for the year Profit brought forward Appropriations: Transfer to Statutory 25% Proposed dividend Balance carried over to balance sheet 16 40,74,000 26,00,000 7,29,000 1,82,250 2,00,000 3,46,750 Schedule 13 Interest earned Interest and discount earned (W.N.1) Schedule 14 Other Income Commission, exchange and brokerage Profit on sale of investment Rent 3,80,000 4,00,000 1,30,000 Interest paid on deposits Schedule Interest Expended Schedule 16 Operating Expenses 40,74,000 40,74,000 Payment and provisions for employees Rent and taxes paid Depreciation on bank s property Directors fee and allowance Auditors fees Law charges Postage and Telegram 4,00,000 1,80,000 60,000 60,000 10,000 80,000 1,20,000 IPCC_33e_Accounts_GroupII_Financial Statement_Assignment Solutions 4

5 No.1 for CA/CWA & MEC/CEC MASTER MINDS Working Notes: S.No. 1. Calculation of Interest earned: Interest and discount received 74,11,000 Add: Rebate on bills discounted as on 31 st March, ,000 74,35,000 Less: Rebate on bills discounted as on 31 st March, 2011 (32,000) 2. Provision and Contingencies: Provision for doubtful debts: Doubtful debts due to insolvency of a customer (50 % of Rs.20 lakhs) 10,00,000 Provision for other debts 3,00,000 Provision for income tax 13,00,000 13,00,000 26,00,000 PROBLEM No. 8 Relevant schedule (forming part of the Balance sheet) of DVD Bank A. Demand deposits ( ) B. Saving bank deposits C. Term deposits Schedule 3: Deposits ,250 Schedule 9: Advances A. B. i. Bills discounted and purchased ii. Cash credits and overdrafts ( + 250) iii. Term loans i. Secured by tangible assets (bal.fig) ii. Secured by bank / government guarantees (500 x 60%) iii. Unsecured ( x 20%) Schedule 5: Other Liabilities & Provisions ,0 1, ,0 Other (Provision for doubtful debts) Profit and Loss Account (an extract) Less: Provision for doubtful dents* 10 * Note: It is assumed that cash credit has been in doubtful category for more than three years. IPCC_33e_Accounts_GroupII_Financial Statement_Assignment Solutions 5

6 Ph: /26 PROBLEM No. 9 Capital fund tier I: Equity share capital Statutory reserves Capital reserves (arising out of sale of assets)( ) Rs. In lakhs 96,000 56,000 1,860 1,53,860 Capital fund tier II: Capital reserves (arising out of revaluation of assets) 560 Less: discount to the extent of 55% (308) Rs. In lakhs Percentage Fund risk assets: Cash balance with RBI Balances with other banks Certificates of deposits Other investments Loan and advances: i. guaranteed by government ii. guaranteed by public sector undertakings of central government iii. Others Premises, furniture and fixtures Other assets Off balance sheet items Acceptance, endorsements and letters of credit 960 2,500 5,700 1,56,500 25,640 1,40,420 10,40,500 36,400 40, Rs. In lakhs 252 1,54,112 () ,56,500 10,40,500 36,400 40,240 7,40,500 7,40,500 20,,780 Risk weighted assets ratio = capital funds / risk adjusted assets x = 1,54,112 / 20,,780 x = 7.65% Comment: Since the expected ratio is 9% the bank is required to improve the ratio. NOTE: There is a printing error in the problem. so kindly read the problem as follows. Loans and advances Others 10,40,500 Premises, furniture, fixtures 36,400 Other assets 40,240 THE END IPCC_33e_Accounts_GroupII_Financial Statement_Assignment Solutions 6

BANKING COMPANY FINAL ACCOUNTS

BANKING COMPANY FINAL ACCOUNTS Q.1. From the following information, prepare the profit and loss account of Trinity Bank Ltd, for the year ended 31 st March 03 Particulars Rs. Particulars Rs. Interest on