ASSIGNMENT SOLUTIONS GUIDE ( ) E.C.O.-14

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3 ASSIGNMENT SOLUTIONS GUIDE ( ) E.C.O.-14 Accountancy-II Disclaimer/Special Note: These are just the sample of the Answers/Solutions to some of the Questions given in the Assignments. These Sample Answers/Solutions are prepared by Private Teacher/Tutors/Authors for the help and guidance of the student to get an idea of how he/she can answer the Questions given the Assignments. We do not claim 100% accuracy of these sample answers as these are based on the knowledge and capability of Private Teacher/Tutor. Sample answers may be seen as the Guide/Help for the reference to prepare the answers of the Questions given in the assignment. As these solutions and answers are prepared by the private teacher/tutor so the chances of error or mistake cannot be denied. Any Omission or Error is highly regretted though every care has been taken while preparing these Sample Answers/ Solutions. Please consult your own Teacher/Tutor before you prepare a Particular Answer and for up-to-date and exact information, data and solution. Student should must read and refer the official study material provided by the university. NBalance Sheet of...co. Limited as at Attempt all the questions. Q. 1. (a) Give specimen of company s balance sheet as per part I of schedule VI of Indian Companies Act, Ans. Legal Requirements As To Company s Balance Sheet (Schedule VI Part I) Part 1 to Schedule VI of the Companies Act, 1956 gives the format in which the balance sheet is to be prepared. The schedule gives 2 types of formats, the horizontal format and the vertical format. A company can prepare its balance sheet in either of the 2 formats. In the horizontal format, the liabilities including the share capital are placed on the left side and assets of all types on the right. The main heads in this form are arranged as under: Horizontal Form: Horizontal Form: Figures for Figures for Figures for the Figures for the previous Liabilities the current Assets the current year Rs. Rs. year Rs. Rs. year Rs. (1) Share Capital: Authorised Capital: Shares of Rs. each Issued Capital: Equity Shares of Rs. each Preference Share of Rs. each Subscribed Capital: Equity Shares of Rs. each Rs. Called up Preference Share of Rs. each Rs. Called up Less Calls Unpaid (i) By directors (ii) By Others Add: Forfeited shares (2) Reserves and Surplus: 1. Capital Reserve, not available for Dividend (1) Fixed Assets: 1. Goodwill 2. Land 3. Building 4. Leaseholds 5. Railway Sidings 6. Plant and Machinery 7. Furniture and Fittings 8. Development of Property 9. Patents, Trade Marks and Designs 10. Live Stocks 11. Vehicles etc. (2) Investments: (3) Current Assets, Loans and Advances: (A) Current Assets: 3

4 Figures for Figures for Figures for the Figures for the previous Liabilities the current Assets the current year Rs. Rs. year Rs. Rs. year Rs. 2. Capital Redemption Reserve 3. Share Premium Account 4. Other Reserves specifying the nature of reserve and the amount in respect thereof. Less: Debit balance in Profit and Loss account (if any) 5. Surplus, that is balance in Profit and Loss account after providing for proposed allocation namely: Dividend, Bonus or Reserves N 6. Proposed addition to reserves 7. Sinking Funds (3) Secured Loans: 1. Debentures 2. Loans and Advances from Banks 3. Loans and Advances from subsidiaries 4. Other Loans and Advances 5. Interest accrued and due on secured loans (4) Unsecured Loans: 1. Fixed Deposits 2. Loans and Advances from subsidiaries 3. Short Term Loans and Advances From Banks From Others 4. Other Loans and Advances From Banks From Others (5) Current Liabilities and Provisions: (A) Current Liabilities: 1. Acceptances 2. Sundry Creditors 3. Subsidiary Companies 4. Unclaimed Dividends 5. Interest accrued but not due on loans 6. Advance payments and unexpired discounts for the portion for which value has still to be given, e.g. in the case of the following classes of companies: Newspaper, Fire Insurance, Theatres, Clubs, Banking, Steamship Companies etc. 1. Interest accrued on investments 2. Stores and Spare parts 3. Loose Tools 4. Stock in trade 5. Work-in-progress 6. Sundry Debtors: Debts outstanding for a period exceeding 6 months Other DebtsLess: Provision 7. (a) Cash balance in hand (b) Bank balance: With scheduled Banks With others (B) Loans and Advances: 8. (a) Advances and loans to subsidiaries (b) advances and loans to partnership firms in which the Company or any of its subsidiaries is a partner 9. Bills of Exchange 10. Advances recoverable in cash or in kind (e.g. Rates, Taxes, Insurance, etc. prepaid) 11. Balances with customs, Port Trusts, and excise authorities etc. (4) Miscellaneous Expenditure: 1. Preliminary Expenses 2. Expenses, including Commission or Brokerage on underwriting of Shares or Debentures 3. Discount allowed on the issue of Shares or Debentures 4. Interest paid out of capital during construction period 5. Development expenditure not adjusted 6. Other sums (specifying nature) 5. Profit and Loss Account: (This is shown only when its debit balance count not be written off out of others reserves) 4

5 Figures for Figures for Figures for the Figures for the previous Liabilities the current Assets the current year Rs. Rs. year Rs. Rs. year Rs. 7. Other Liabilities (if any) (B) Provisions: 8. Proposed Dividends 9. Provision for Taxation 10. Provision for Contingencies 11. Provision for Provident Fund schemes 12. Provision for insurance, pension and similar staff benefit schemes. 13. Other Provisions (6) CONTINGENT LIABILITIES (by way of footnote only): 1. Uncalled liabilities on partly paid shares 2. Liabilities under Guarantee 3. Arrears of dividends on cumulative preference shares 4. Claim against the company now acknowledged as debts 5. Liabilities on Bills Receivable N discounted but not matured. (b) Differentiate between Profit & Loss Account and Profit & Loss Appropriation Account. Ans. The difference between profit and loss account and profit and loss appropriation account is given below: 1. Profit & Loss A/c is the Income Statement showing Income and Expenses for a particular Accounting period to arrive at the Profit earned or Loss incurred. Where as Profit & Loss Appropriation Account is a statement showing the utilisation of Profit shown in the P&L A/c above. 2. Sales and/or Service Revenue,Other income, Operating, Administration, Marketing/Selling & other expenses for the period are shown in the P&L A/c, Whereas Transfer of Profit to Reserves, Proposed Dividend, Taxes, etc., are shown in P& L Appropriation A/c 3. In the vertical format P&L A/c items are referred to as Above the Line items & P&L Appropriation items are referred to as Below the Line items. 4. Profit and loss account records all the operating and non operating incomes and expenses and incomes to arrive at net profit. This is Net Profit before tax. Further, we record provision for tax on the debit side of the Profit and loss account and get net profit after tax. Profit and Loss Appropriation account showcases the appropriation of profit. In case of Companies, only transfer to the various reserves and proposed dividend are recorded on the debit side. Whereas, on the credit side appears Net profit after tax broughtdown from the profit and loss account and the balance broughtdown from the last year s profit and loss appropriation account. Q. 2. X Ltd. sends goods to its Karnal branch at cost plus 25%. All expenses are paid by H.O. From the following particulars you are required to show Branch Debtors Account, Branch Stock Account, Stock Adjustment Account and Branch Profit & Loss Account in the books of Head Office. Particulars Amount (Rs.) Opening Stock 36,000 Closing Stock 42,000 Opening Debtors 27,500 Closing Debtors 41,100 Good Supplied to branch 1,94,000 Cash received from Customers 98,800 Bad Debts 6,000 5

6 Discount 1,600 Expenses 5,200 Cash Sales 58,400 Goods returned by Branch 8,000 Branch s Furniture (Provide 20% Depreciation) 10,000 Ans. Branch Account Opening Stock 36,000 Closing Stock 42,000 Opening Debtors 27,500 Closing Debtors 41,100 Goods sent to branch 194,000 Goods Sent to branch (goods returned) 8,000 Branch P&L A/c 12,000 branch debtor a/c 120,000 cash a/c (cash sales) 58,400 Total 269,500 Total 269,500 Branch Stock Account Opening Stock 36,000 Good sent to branch (Goods retruned) 8,000 Goods Sent to branch 194,000 Branch Cash 58,400 Branch Debtors 120,000 Closing Stock 42,000 Total 230, ,400 Branch Debtors Account Opening balance 27,500 Branch A/c (Cash) 98,800 branch P&L a/c( Sales) 120,000 Branch P&L Account (bad debt) 6,000 Branch P&L A/c (Discount) 1,600 Closing balance 41, , ,500 Branch Stock Adjustment Account N To goods sent to branch by Stock reserve ( goods returned) 1,600 (loading opening stock) 7,200 to stock reserve (closing stock) 8,400 by goods sent to branch (loading on goods sent) 178,480 to branch P&L 175,680 Total 185, ,680 Branch Profit and loss account To Branch Debtor accout (bad debt) 6,000 by Branch account (excess of stock) 12,000 To Branch Debtor accout (discount) 1,600 by Branch Stock adjustment accout 175,680 To Cash (expenses) 5,200 To Depreciation 2,000 To P& L Account 172,880 Total 187, ,680 Q. 3. M/s Raj and Bros. purchased a motor car from Sanjay Automobiles on 1st Jan on the hire purchase system. The cash price of the motor car was Rs. 11,170. Rs. 3,000 was to be paid on signing the agreement and the balance in the three annual installments of Rs. 3,000 each. 5% p.a. is charged by the vendor. The purchaser had decided to write off 10% depreciation annually on the written down value method. The purchaser could not pay off the installment due on 31st Dce., 2013 and as a result of this, the vendor took possession of the motor-car and the vendor estimated its value Rs. 5,500 and spent Rs. 400 on it. Later on this motor-car was sold for Rs. 6,400. Prepare necessary accounts in the books of both the parties. 6

7 Ans. In the books of Raj Bros Car Account 1/1/2012 Cash a/c 3, /31/2012 By 1, /31/2012 Sanjay Automobiles 2, /31/2012 By Balance B/f 4, Total 5, Total 5, /1/2013 To Balance B/d 4, /31/2012 By 1, /31/2013 Sanjay Automobiles 2, /31/2013 Sanjay Automobiles 6, Total 7, Total 7, Sanjay Automobiles N 12/31/2012 Cash 3, /31/2012 Interest on HP /31/2012 Car A/c 2, Total 3, Total 3, /31/2012 Car A/c (default) 6, /31/2012 Interest on HP /31/2012 Car A/c 2, /31/2012 Loss on Hire Purchase 3, Total 6, Total 6, In the books of Sanjay Automobiles Raj Bros 1/1/2012 Sale on HP A/c 11, /1/2012 By Cash 3, /31/2012 To interest /31/2012 By Cash 3, /31/2012 By Balance B/f 5, Total 11, Total 6, /1/2013 To Balance B/d 5, /31/2013 By Goods Repossed A/c 5, /31/2013 To interest Total 5, Total 5, Goods Repossessed Account 12/31/2013 To Raj Bros 5, Cash /31/2013 Cash ( Being exp paid) 400 Profit on sale , , Q. 4. Why are assets and liabilities revalued at the time of admission of a new partner? Prepare a Revaluation Account with the help of imaginary figures. Ans. Revaluation of Assets and Liabilities Revaluation of assets and liabilities is another major step prior to admission or retirement. Revaluation is important, as there are hidden profits or losses in the difference between book value and actual market value of assets or liabilities. Revaluation is necessary whenever there is a change in profit sharing ratio, even without admission or retirement. The hidden profits or losses should be distributed in the ratio prior to change (Old ratio). Revised values of assets and liabilities are brought into books by opening a temporary account called revaluation account. The purpose of revaluation account is to summarise effect of revaluation of assets and liabilities. Revaluation account represents the combined capital account of partners. Any gain on revaluation of asset or liabilities, which are to be 7

8 credited to partners, will be credited in revaluation account. Similarly any loss on revaluation will be debited in revaluation account instead of capital accounts. The revaluation account is closed by transferring its net balance to partner s capital accounts in the profit sharing ratio. In the event of reconstitution of the partnership firm, revaluation of assets and reassessment of liabilities may be required. Revaluation of assets becomes necessary because the present value of the assets may be different from their book value. For example, a piece of land when purchased is shown in the books at the purchase price but its current market value may be higher than the amount at which it is shown in the books of account, hence a revaluation of the land on the reconstitution of the firm becomes necessary. Similarly, the firm may be having certain amount of closing stock. The market value of the closing stock may be less than its book value because of change in the demand; hence its value has to be lowered down. In the same manner, the liabilities of the firm may have to be reassessed. A partner(s) who gains on account of such a change should compensate the partner(s) who looses on account of such a gain. Revaluation Account: When the value of one asset is to be increased in the books it can be easily done by debiting the asset and crediting the profit to partners capital accounts in the profit sharing ratio. But when there is a major shake up, values of almost every asset and liability have to be revised. Distributing each change to the partners would be a lengthily process. For the sake of convenience, all those profits and losses on change in values of assets and liabilities are brought into a temporary account called revaluation account. The revaluation account summarises the effect of revaluation of assets and liabilities. Revaluation account Nis a special profit and loss account representing the combined capital accounts of partners. Any gain on revaluation of asset or liability, to be credited to partners, will be credited in the revaluation account. Similarly any loss on revaluation will be debited in revaluation account instead of debiting the capital accounts. The final balance in revaluation account indicates the profit or loss on the entire revaluation process. The revaluation account is closed by transferring this profit or loss to partner s capital accounts in the ratio before revision (old profit sharing ratio). All assets and liabilities will appear at their revised values in the books and in all future balance sheets. When the partners want to adjust the profit or loss on revaluation process without actually changing the values of assets and liabilities in the books they can do so by opening a memorandum revaluation account. This revaluation account has two parts. The first part is a normal revaluation account and the profit or loss on this part is transferred in the old profit sharing ratio. The second part of memorandum revaluation account is almost a mirror image of the first part. Whatever debited in the first section is credited in the second and whatever credited is debited. Naturally if there was profit in the first section, there will be loss in the second and vice-versa. The profit or loss in the first part is transferred to capital accounts in the old ratio, and that at the second part will be transferred to capital accounts new profit sharing ratio. As a result of this exercise the effect of profit or loss on revaluation will be fairly embedded in the capital accounts of partners. Dr. Revaluation A/c Cr. Particulars (Rs) Particulars (Rs) To Machinery Depreciation 2,000 By Investments 6,000 To Furniture Depreciation 1,000 By Loss transfered to capital A/C To Stock 2,000 A/s 1,250 To Provision for debtors 1,500 B/s 1,250 To goods purchased 2,000 By Loss on Revaluation 2,500 8,500 8,500 Q. 5. Write short notes on the following: (a) Pro-rata Allotment of shares Ans. Pro-rata Allotment: Pro-rata allotment means allotment in proportion of shares applied for. For example, a company offers to the public 10,000 shares for subscription. The company receives applications for 32,000 shares. If the shares are to be allotted on pro-rata basis, applicants for 12,000 shares are to be allotted 10,000 shares, i.e., on the 12,000: 10,000 or 6: 5 ratio. Any applicant who has applied for 6 shares will be allotted 5 shares. Under pro-rata allotment, the excess application money received is adjusted against the amount due on allotment or calls. Surplus money after making adjustment against future calls is returned to the applicants. There is no separate journal entry for forfeiture of shares when there is a pro-rata allotment. But it requires calculating the net amount due on allotment or any other call, and also the total amount forfeited. When there is a pro-rata allotment, the total application money 8

9 paid by an applicant is more than the exact amount due on application. The excess amount is treated as an advance against allotment or any other future calls. The net amount due on allotment or any other calls is the difference between the amount due on allotment or any other calls and the excess amount received in application. (b) Issue of share at discount Ans. Shares are said to be issued at a discount when they are issued at a price lower than the face value. For example if a share of Rs. 10 is issued at Rs. 9, it is said that the share has been issued at discount. The excess of the face value over the issue price [i.e. Re.1 (Rs. 10 Rs. 9)] is called as the amount of discount. Share discount account showing a debit balance denotes a loss to the company which is in the nature of capital loss. Therefore, it is desirable, but not compulsory, to write it off against any Capital Profit available or Profit and Loss Account as soon as possible, and the unwritten off part of it is shown in the asset side of the Balance Sheet under the heading of Miscellaneous Expenditure in a separate account called Discount on issue of Shares Account. Conditions for issue of shares at discount: For issue of shares a discount the company has to satisfy the following conditions given in section 79 of the Companies Act, 1956: (1) At least one year must have elapsed since the company became entitled to commence business. It means that a new company cannot issue shares at a discount at the very beginning. (2) If the company has already issued such types of shares. (3) An ordinary resolution to issue the shares at a discount has been passed by the company in the General Meeting of shareholders and sanction of the Company Law Tribunal has been obtained. (4) The resolution must specify the maximum rate of discount at which the shares are to be issued but the rate of discount must not exceed 10% of the face value of the shares. For more than this limit, sanction of the Company Law Tribunal is necessary. (5) The issue must be made within two months from the date of receiving the sanction of the Company Law Tribunal or within such extended time as the Company Law Tribunal may allow. N (c) Re-issue of forfeited shares Ans. Forfeited of Shares When any company allots share to the applicants, it is done on the basis of a legal contract between the company and the applicant, which makes it binding upon the shareholders to pay the amount of allotment and calls whenever they are due. Now if any shareholder fails to pay the allotment and or call money due to him, the shareholder violates the contract and the company is entitled to take its share back, which is known as forfeiture of shares. The company can forfeit such shares if authorised by the Articles of Association. Forfeiture of share can be done according to the rules laid shown in the Articles and if no rules are given in Articles, the provisions of Table A, regarding forfeiture will apply. Forfeiture of shares means cancellation of allotment to defaulting shareholders and to treat the amount already received on such shares is not returnable to him it is forfeited. Procedure in Case of Share Forfeiture The usual procedure is that the defaulting shareholder must be given a minimum 14 days notice requiring him to pay the amount due on his shares along with interest on it stating that if he fails to pay the amount and the interest on it, the shares will be forfeited. In spite of this notice, the shareholder does not pay the unpaid amount. The directors after passing a resolution will forfeit the shares and information will be given to the defaulting shareholder about the forfeiture his shares. Re-issue of Forfeited shares Shares forfeited becomes the property of the company and the directors of a company have an authority to reissue the shares once forfeited by them in accordance with the provisions contained in Articles of Association. Table A provides that A forfeited shares may be sold or otherwise disposed off on such terms and in such manner as the Board thinks fit. They can re-issue the forfeited shares at par, at premium or at discount. However, if the shares are re-issued at discount, the amount of the discount does not exceed the amount paid on such shares by the original shareholder but in case of shares originally issued at a discount, the maximum permissible discount will be amount paid on such shares by the original shareholder plus the amount of original discount. 9

10 (d) Over Subcription of shares Ans. Oversubscription of Shares : When the application received from the public are more than the shares issued by the company, this situation is called as over subscription of issue. The Board of Directors cannot allot shares more than that offered to the public, in such a condition the Directors of the company make the allotment of shares on the basis of reasonable criteria. The journal entry for application money will be passed for all the shares applied for, but while transferring the application money to share capital account, only the application money on shares issued will be considered. Method Course of Action Journal Entry Explanation Share application A/c Dr. To Bank A/c To Share capital A/c 1. To reject the excess applications and to allot in full to other applicants. 2. To reject the excess applications and to allot in full to other applicants. 3. Any combination of the above two alternatives such as: To reject some of the applications and make pro-rata allotment to remaining applicants. To allot in full to some of the applicants and make pro-rata allotment to remaining applicants To reject some of the applications allot in full to some of the applications and make pro-rata allotment to remaining applicants. Letter of regret along with the refund of application. Letters of regret along with the refund of application money are sent to the applicants of rejected applications and letters of allotment are sent to applicants of accepted applications. NShare application A/c Letters of allotment are sent to all the applicants and excess application money received is adjusted towards the amount due on allotment, calls of shares allotted and the balance application money left after adjustment will be refunded. Letters of regret along with the refund of application money are sent to the applicants of rejected applications and letters of allotment are sent to the applicants and excess application money received is adjusted towards the amount due on allotment, calls of shares allotted and the balance application money left after adjustment will be refunded. Dr. To Share allotment A/c To Calls-in-advance A/c To Bank A/c Share application A/c Dr. To Share allotment A/c To Calls-in-advance A/c To Bank A/c With the total amount received on application. With the amount refunded on applications rejected. With the application money on shares issued. With the total amount received on application. With the amount retained for allotment. With the amount retained for calls. With the amount refunded on applications rejected. With the total amount received on application. With the amount retained for allotment. With the amount retained for calls. With the amount refunded on applications rejected. 10

UNIT 2 : ISSUE, FORFEITURE AND RE-ISSUE OF SHARES

COMPANY ACCOUNTS 10.17 UNIT 2 : ISSUE, FORFEITURE AND RE-ISSUE OF SHARES LEARNING OUTCOMES After studying this unit, you will be able to: Appreciate various types of shares and share capital. Learn the