Model Test Paper - 1 IPCC Gr. I Paper - 1 Accounting Question No. 1 is Compulsory. Attempt any five question from the remaining six question. 1.

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1 Model Test Paper - 1 IPCC Gr. I Paper - 1 Accounting Question No. 1 is Compulsory. Attempt any five question from the remaining six question. 1. (a) M/s Progressive Company Limited has not charged depreciation for the year ended on 31 st March, 2012, in respect of a spare bus purchased during the financial year and kept ready by the company for use as a stand-by, on the ground that, it was not actually used during the year. State your views with reference to Accounting Standard 10 Property, Plant and Equipment. Further during the year company made additions to its factory by using its own workforce, at a cost of ` 4,50,000 as wages and materials. The lowest estimate from an outside contractor to carry out the same work was ` 6,00,000. The directors contend that, since they are fully entitled to employ an outside contractor, it is reasonable to debit the Factory Building Account with ` 6,00,000. Comment whether the directors contention is right in view of the provisions of Accounting Standard 10? [Modified] (5 marks) Answer : Provisions: According to AS 10, Property, Plant and Equipment, : Depreciation is a measure of wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes. Accordingly, depreciation may arise even when asset has not been used in the current year but was ready for use in that year. The need for using the stand by bus may not have arisen during the year but that does not imply that the useful life of the bus has not been affected. Therefore, non-provision of depreciation on the ground that the bus was not used during the year is not tenable. 1.1

2 1.2 O Solved Scanner IPCC Gr. I Paper - 1 As per AS 10, Property, Plant and Equipment, the gross book value of the self constructed fixed asset includes the costs of construction that relate directly to the specific asset and the costs that are attributable to the construction activity in general can be allocated to the specific asset. If any internal profit is there it should be eliminated. Saving of ` 1,50,000 on account of using its own workforce is an unrealized/internal profit, which should not be capitalized/recorded as per the standard. Analysis and Conclusion: Therefore only ` 4,50,000 should be debited to the factory building account and not ` 6,00,000. Hence, the contention of the directors of the company to capitalize ` 6,00,000 as cost of factory building, on the ground that the company is fully entitled to employ an outside contractor is not justifiable. 1. (b) M/s. Laghu Udyog Limited has been charging depreciation on an item of Plant and Machinery on straight line basis. The machine was purchased on at ` 3,25,000. It is expected to have a total useful life of 5 years from the date of purchase and residual value of ` 25,000. Calculate the book value of the machine as on and the total depreciation charged till under SLM. The company wants to change the method of depreciation and charge 20% on WDV from Is it valid to change the method of depreciation? Explain the treatment required to be done in the books of accounts in the context of AS-10. Ascertain the amount of depreciation to be charged for and the net book value of the machine as on after giving effect of the above change. (5 marks)

3 Model Test Paper O 1.3 Answer: Book Value of Machine and Depreciation under SLM as on Cost of Machine purchased on Less: Residual Value Depreciable amount Useful life of Machine Depreciation for 2 Years (3,00,000 x 2/5) Book value as on ` 3,25,000 ` 25,000 ` 3,00,000 5 Years ` 1,20,000 ` 2,05,000 As per AS 10, Property, Plant and Equipment, a change from one method of providing depreciation to another should be made only if the adoption of the new method is required by statute or for compliance with an accounting standard or if it is considered that the change would result in a more appropriate preparation or presentation of the financial statements of the enterprise. When a change in the method of depreciation is made, depreciation should be recalculated in accordance with the new method from the date of the asset coming into use. The deficiency or surplus arising from retrospective recomputation of depreciation in accordance with the new method should be adjusted in the accounts in the year in which the method of depreciation is changed. In case the change in the method results in deficiency in depreciation in respect of past years, the deficiency should be charged in the statement of profit and loss. In case the change in the method results in surplus, the surplus should be credited to the statement of profit and loss. Such a change should be treated as change in accounting policy and its effect should be quantified and disclosed. In the given case, the company cannot change the method of depreciation from year without making re-computations for

4 1.4 O Solved Scanner IPCC Gr. I Paper - 1 the previous year s also according to new method. Depreciation for and net book value of Machine as on after effect of the change Purchase value of Machinery as on Depreciation for 2 years under 20% (` 65,000 + ` 52,000) Book value as on under WDV (i) Book value as on under SLM (ii) Excess depreciation credited to Statement of Profit & Loss (i-ii) Current year depreciation as per new method (WDV) (2,08,000 X 20%) Net Book value as on (2,08,000 41,600) ` 3,25,000 1,17,000 2,08,000 2,05,000 3,000 41,600 1,66, (c) Year to year results of a company were not found comparable on the basis of gross profit margin. List out the probable reasons. (2 marks) Answer : The probable reasons could be the change in the accounting policy viz. (a) Change in method of recognition of sales revenue from cash basis to accrual basis or vice versa; or (b) Change in valuation of closing inventory by adopting different methods year to year such as LIFO to FIFO to weighted average or vice versa. 1. (d) What are the basic characteristics of a Pvt. Ltd. Company? (2 marks) Answer: Characteristics of a Private Company (As per Companies Act, 2013) 1. Restricts the rights of members to transfer its shares. 2. Limits the number of its member to 200 excluding: (i) persons

5 Model Test Paper O 1.5 who are in employment of the company; and (ii) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased. For this purpose joint holders of shares will be counted as a single member. 3. Prohibits any invitation to the public to subscribe to any shares in, or debentures of, the company. 4. Prohibits any invitation or acceptance of deposits from any person other than its members, directors and relatives. 1. (e) Sumo Ltd. has a profit of ` 25 lakhs before charging depreciation for Financial year Depreciation in the books was ` 11 lakhs and depreciation chargeable under Section 123 comes to ` 17 lakhs. Compute divisible profit for the year. (2 marks) Answer : Computation of Divisible Profit Particulars Amount (` In lakhs) Profit for the year Less: Depreciation changeable under Section Divisible profit for the year 8 1. (f) The Companies Act, 2013 limits the payment of managerial remuneration. What is the maximum managerial remuneration, which can be paid in case of a company consistently earning profits and has more than one managerial persons. (2 marks) Answer: Sec. 197 of the Indian Companies Act, 2013 prescribes the overall maximum managerial remuneration payable and also managerial remuneration in case of absence or inadequacy of profits. In the given case, the company is earning profits consistently and has

6 1.6 O Solved Scanner IPCC Gr. I Paper - 1 more than one managerial person. Hence, the maximum limit is 10% of net profit. 1. (g) Explain contract costs as per Accounting Standard-7 related to Construction Contracts. (2 marks) Answer : According to AS 7 Construction Contracts (revised 2002), contract cost should comprise: 1. Costs that relate directly to the specific contract; 2. Costs that are attributable to contract activity in general and can be allocated to the contract; 3. Other costs as are specifically chargeable to the customer under the terms of the contract. 2. J Ltd. presents you the following information for the year ended 31 st March, 2007: (` in Lacs) (i) Net Profit before tax provision 36,000 (ii) Dividend paid 10,202 (iii) Income-tax paid 5,100 (iv) Book value of Assets sold 222 Loss on sale of Asset 48 (v) Depreciation debited in P & L account 24,000 (vi) Capital grant received amortised in P & L A/c 10 (vii) Book value of investment sold 33,318 Profit on sale of investment 120 (viii) Interest income from investment credited in P & L A/c 3,000 (ix) Interest expenditure debited in P & L A/c 12,000 (x) Interest actually paid (Financing activity) 13,042 (xi) Increase in working Capital Excluding cash and Bank Balance. 67,290 (xii) Purchase of fixed assets 22,092 (xiii) Expenditure on construction work 41,688 (xiv) Grant received for Capital projects 18

7 Model Test Paper O 1.7 (xv) Long-term borrowings from Banks 55,866 (xvi) Provision for Income-tax debited in P & L A/c 6,000 Cash and Bank Balance on ,000 Cash and Bank Balance on ,000 You are required to prepare a Cash flow statement as per AS-3 (Revised). (16 marks) Answer : Cash Flow Statement for the period ended on (A) (B) Particulars Cash flow from Operating Activity Net profit before tax Adjustment for: Depreciation Loss on sale of asset Government grant amortised Profit on sale of investment Interest received Interest debited Operating profit before working Capital charge Increase in working capital Amount in lacs (`) 36,000 24, (10) (120) (3,000) 12,000 68,918 (67,290) 1,628 Amount in lacs (`) Tax paid (5,100) Net cash used in operating activity (3,472) Cash flow from Investing Activity Purchase of fixed asset Interest income Sale of investment Sale of asset Exp. On Capital project Net Cash used in investing activity (22,092) 3,000 33, (41,688) (27,168)

8 1.8 O Solved Scanner IPCC Gr. I Paper - 1 (C) Cash flow from Financing Activity Dividend paid Grant received Interest paid Long term borrowing Net cash provided from financing activity Net increase in cash and cash equivalent Cash and cash equivalent of the beginning of the year Cash and cash equivalent at the closing of year (10,202) 18 (13,042) 55,866 32,640 2,000 6,000 8, (a) The partners of Shri Enterprises decided to convert the partnership firm into a Private Limited Company Shreya (P) Ltd. with effect from 1 st January, However, company could be incorporated only on 1 st June, The business was continued on behalf of the company and the consideration of ` 6,00,000 was settled on that day along with 12% per annum. The company availed loan of ` 10% per annum on 1 st June, 2008 to pay purchase consideration and for working capital. The company closed its accounts for the first time on 31 st March, 2009 and presents you the following summarized profit and loss account : ` ` Sales 19,80,000 Cost of goods sold 11,88,000 Discount to dealers 46,200 Directors remuneration 60,000 Salaries 90,000 Rent 1,35,000 Interest 1,05,000 Depreciation 30,000 Office expenses 1,05,000 Sales promotion expenses 33,000

9 Model Test Paper O 1.9 Preliminary expenses (to be written off in first year itself) 15,000 18,07,200 Profit 1,72,800 Sales from June, 2008 to December, 2008 were 2½ times of the average sales, which further increased to 3½ times in January to March quarter, The company recruited additional work force to expand the business. The salaries from July, 2008 doubled. The company also acquired additional showroom at monthly rent of ` 10,000 from July, You are required to prepare a Profit and Loss Account showing apportionment of cost and revenue between pre-incorporation and post-incorporation periods. Also suggest how the pre-incorporation profits/losses are to be dealt with. (10 marks) Answer : Shreya (P) Limited Profit & Loss Account (for 15 months ended 31 st March, 2009) Sales Less: Cost of Sales WN-1 Gross Profit Less: Administrative Expenses allocated (a) Directors Remuneration (b) Salary (WN-2) (c) Rent (WN-3) (d) Interest (WN-4) (e) Depreciation (f) Office Expenses Sales Promotion Expenses Discount to dealers Preliminary Expenses Ratio Pre incorporation (5 months) 5:28 3,00,000 1,80,000 5:19 1,20,000 18,750 15,000 30,000 10,000 35,000 5,000 7,000 Post incorporation (10 months) 16,80,000 10,08,000 6,72,000 60,000 71,250 1,20,000 75,000 20,000 70,000 28,000 39,200 15,000

10 1.10 O Solved Scanner IPCC Gr. I Paper - 1 Net Profit/Loss (750) 1,73,750 Treatment of pre-incorporation loss : Pre-incorporation loss may, either be considered as a reduction from any capital reserve accruing in relation to the transaction or be treated as goodwill. Working Notes : 1. Computation of sales ratio : Let the average sales per month in pre-incorporation period be a Average Sales (Pre-incorporation) = a 5 = 5a Sales (Post incorporation) from June to December, 2008 = 2½a 7 = 17.5a From January to March, 2009 = 3½a 3 = 10.5a Total Sales 28.0a Sales ratio of pre-incorporation & post incorporation is 5a : 28a 2. Computation of ratio for salaries : Let the average salary be a Pre-incorporation salary = a 5 = 5a Post incorporation salary June, 2008 = a July to March, 2009 = a 9 2 =18a 19a Ratio is 5 : Computation of Rent : Total rent 1,35,000 Less: Additional rent for 9 10,000 p.m. 90,000 Rent of old premises apportioned in time ratio 45,000 Apportionment Pre Inc. Post Inc. Old premises rent 15,000 30,000 Additional Rent 90,000 15,000 1,20, Computation of interest : Pre-incorporation period from January, 2008 to May, 2008

11 Model Test Paper O 1.11 = 30,000 Post incorporation period from June, 2008 to March, 2009 = 75,000 1,05, (b) A firm M/s. Alag, which was carrying on business from 1 st July, 2010 gets itself incorporated as a company on 1 st November, The first accounts are drawn upto March 31, The gross profit for the period is ` 56,000. The general expenses are ` 14,220; Director s fees ` 12,000 p.a.; incorporation expenses ` 1,500. Rent upto 31 st December was ` 1,200 p.a., after which it is increased to ` 3,000 p.a. Salary of the manager, who upon incorporation of the company was made a director, is ` 6,000 p.a. His remuneration thereafter is included in the above figure of fees to the directors. Give Profit and Loss Account showing pre and post incorporation profit. The net sales are ` 8,20,000, the monthly average of which for the first four months is one-half of that of the remaining period. The company earned a uniform profit. Interest and tax may be ignored. (6 marks) Answer : Profit & Loss Account (For 9 months ended on 31 st March, 2011) Gross Profit on the basis of Sales Less: Administrative Expenses (a) General Expenses (b) Rent ( ) (WN-ii) (c) Manager s Salary Director s Fees Ratio Time Ratio Actual Actual Pre incorporation 16,000 6, ,000 Post incorporation 40,000 7, ,000

12 1.12 O Solved Scanner IPCC Gr. I Paper - 1 Formation Expenses Actual 1,500 Net profit t/f to Capital Reserve 7,280 Net Profit t/f to P&L App. A/c 24,650 Working Notes : (i) Calculation of sales ratio Let the average monthly sales of first four months = 100 and next five months = 200 Total sales of first four months = = 400 and total sales of next five months = = 1,000 The ratio of sales = 400 : 1,000 = 2:5 (ii) Rent Till 31 st December, 2010, rent was ` 1,200 p.a. i.e. ` 100 p.m. So, Pre-incorporation rent = ` months = ` 400 Post-incorporation rent = ( ` months) + (` months) = ` 950 (iii) Time Ratio Pre : Post = 1 st July to 31 st Oct : 1 st Nov to 31 st March = 4 months : 5 months Thus, Time ratio = 4:5 4. (a) Following is the extract from the Balance Sheet of M/s. Yahoo Ltd. as at 31 st March, 2011: In ` Authorised Capital : 50,000, 10% preference share of ` 10 each 5,00,000 2,00,000 equity shares of ` 10 each 20,00,000 Issued and Subscribed Capital : 40,000; 10% preference shares of ` 10 each fully paid 4,00,000 1,80,000; equity shares of ` 10 each, of which ` 7.50 paid up 13,50,000 Reserve and Surplus : General Reserve 2,40,000 Capital Reserve 1,50,000 Securities Premium 50,000

13 Model Test Paper O 1.13 Profit and Loss Account 3,00,000 On 1 st April, 2011, the company has made a final ` 2.50 each on 1,80,000 equity shares. The call money was received by 30 th April, There after the company decided to capitalize its reserves by issuing bonus shares at the rate of one share for every three shares held. Securities premium of ` 50,000 includes a premium of ` 20,000 for shares issued to vendor for purchase of a special machinery. Capital reserve includes ` 60,000 being profit on exchange of plant and machinery. Show necessary Journal Entries in the books of the company and prepare the extract of the Balance Sheet after bonus issue. Necessary assumption, if any should form part of your answer. (8 marks) Answer : Assumptions : 1. According to SEBI Guideline, only Capital Reserve and Securities Premium collected in cash can be utilized for the purpose of issue of bonus shares. it is assumed that balance of capital reserve and securities premium is collected in cash only. 2. It is also assumed that necessary resolutions have been passed and requisite legal requirements related to the issue of bonus shares have been complied with before issue of bonus shares. Working Note: On the basis of the above assumptions, the Authorised Capital should be increased as under: Required for bonus issue ` 6,00,000 Less: Balance of authorised equity share capital (available) (` 2,00,000) Authorised capital to be increased ` 4,00,000 Total authorised capital after bonus issue (` 20,00,000 + ` 4,00,000) = ` 24,00,000. In the books of M/s. Yahoo Ltd. Journal Entries

14 1.14 O Solved Scanner IPCC Gr. I Paper - 1 Date Particulars ` ` Equity share final call A/c Dr. To Equity share capital A/c (Being the final call of ` 2.50 per share on 1,80,000 equity shares made) Bank A/c Dr. To Equity share final call A/c (Being final call money on 1,80,000 shares received) Securities premium A/c (50,000-20,000) Dr. Capital reserve A/c (1,50,000-60,000) Dr. General reserve A/c Dr. Profit and loss A/c Dr. To Bonus to shareholders A/c (Being utilisation of reserves for bonus issue of one share for every three shares held) Bonus to equity shareholders A/c Dr. To Equity share capital A/c (Being bonus shares issued) 4,50,000 4,50,000 30,000 90,000 2,40,000 2,40,000 6,00,000 Extract of Balance Sheet (After bonus issue) Authorised capital : 50,000, 10% Preference shares of ` 10 each 2,40,000, Equity shares of ` 10 each (refer W.N.) Issued and subscribed capital : 40,000, 10% Preference shares of ` 10 each fully paid 2,40,000, Equity shares of ` 10 each fully paid Out of the above, 60,000 equity shares of ` 10 each have been issued by way of bonus Reserves and Surplus: Capital reserve Securities premium Profit and loss A/c (3,00,000-2,40,000) 4,50,000 4,50,000 6,00,000 6,00,000 ` 5,00,000 24,00,000 4,00,000 24,00,000 60,000 20,000 60,000

15 Model Test Paper O (b) The following notes pertain to Brite Ltd. s Balance Sheet as on 31 st March, 2012 : Notes : ` in lakhs 1. Share Capital Authorised : 20 crore shares of ` 10 each 20,000 Issued and Subscribed : 10 crore Equity Shares of ` 10 each 2 crore 11% Cumulative Preference Shares of ` 10 each 10,000 2,000 Total 12,000 Called and paid up : 10 crore Equity Shares of ` 10 each, ` 8 per share called and paid up 2 crore 11% Cumulative Preference Shares of ` 10 each, fully called and paid up 8,000 2,000 Total 10, Reserve and Surplus : Capital Reserve Capital Redemption Reserve Securities Premium General Reserve Surplus i.e. credit balance of Profit & Loss (Appropriation) Account 485 1,000 2,000 1, Total 4,798 On 2 nd April, 2012 the company made the final call on equity ` 2 per share. The entire money was received in the month of April, On 1 st June, 2012 the company decided to issue to equity

16 1.16 O Solved Scanner IPCC Gr. I Paper - 1 shareholders bonus shares at the rate of 2 shares for every 5 shares held and for this purpose, it decided to utilize the capital reserves to the maximum possible extent. Pass journal entries for all the above mentioned transactions. Also prepare the notes on Share Capital and Reserves and Surplus relevant to the Balance Sheet of the company immediately after the issue of bonus shares. (8 marks) Answer: In the books of Brite Ltd. Journal Entries Date Particulars Dr. Cr. ` in lakhs ` in lakhs 2012 April 2 Equity Share Final Call A/c Dr. To Equity Share Capital A/c (Final call of ` 2 per share on ` 10 crore equity shares made due) 2,000 2,000 Bank A/c Dr. To Equity Share Final Call A/c (Final call money on ` 10 crore equity shares received) 2,000 2,000

17 Model Test Paper O 1.17 June 1 Capital Reserve A/c Dr. Capital Redemption Reserve A/c Dr. Securities Premium A/c Dr. General Reserve A/c Dr. To Bonus to Shareholders A/c (Bonus issue of two shares for every five shares held by utilising various reserves as per Board s resolution dated...) 485 1,000 2, ,000 Bonus to Shareholders A/c To Equity Share Capital A/c (Capitalisation of profit) Dr. 4,000 4,000 Notes on Share Capital and Reserves & Surplus Particulars ` in lakhs Share Capital Authorised share capital 20 crore shares of ` 10 each Issued, subscribed and fully paid up share capital 14 crore Equity shares of ` 10 each, fully paid up (Out of the above, 4 crore equity ` 10 each were issued by way of bonus) 2 crore, 11% Cumulative Preference share capital of ` 10 each, fully paid up Reserves and Surplus Capital Reserves ,000 14,000 2,000 16,000

18 1.18 O Solved Scanner IPCC Gr. I Paper - 1 Less : Utilized for bonus issue Capital Redemption reserve Less : Utilized for bonus issue Securities Premium Less : Utilized for bonus issue General Reserve Less : Utilized for bonus issue Surplus (Profit and Loss Account) Total (485) 1,000 (1,000) 2,000 (2,000) 1,040 (515) Notes : As per SEBI Guidelines, Capital reserve and Securities premium have been assumed as realized in cash and hence can be used for issue of fully paid bonus shares. 5. Following is the Balance Sheet of ABC Ltd. as at 31 st March, 2007: Liabilities ` Assets ` Share Capital: Plant and Machinery 9,00,000 2,00,000 Equity Shares of Furniture and Fixtures 2,50,000 ` 10 each fully paid up 20,00,000 Patents and Copyrights 70,000 6,000 8% preference shares Investments (at cost) 68,000 of ` 100 each 6,00,000 (Market value ` 55,000) 9% Debentures 12,00,000 Stock 14,00,000 Bank overdraft 1,50,000 Sundry Debtors 14,39,000 Sundry Creditors 5,92,000 Cash and Bank Balance 10,000 Profit and Loss 4,05,000 45,42,000 45,42,000 The following scheme of reconstruction was finalised : (i) Preference shareholders would give up 30% of their Capital in exchange for allotment of 11% Debentures to them. (ii) Debentureholders having charge on Plant and Machinery would accept Plant and Machinery in full settlement of their dues. (iii) Stock equal to ` 5,00,000 in book value will be taken over by Sundry Creditors in full settlement of their dues.

19 Model Test Paper O 1.19 (iv) Investment value to be reduced to Market price. (v) The Company would issue 11% Debentures for ` 3,00,000 and augment its working capital requirement after settlement of bank overdraft. Pass necessary Journal Entries in the books of the company. Prepare Capital reduction account and Balance Sheet of the company after internal reconstruction. (16 marks) Answer : Particulars L.F. Dr. (`) Cr. (`) 8% Pref. Share Capital To Pref. Shareholder A/c To Capital Reduction A/c (Being 30% reduction in liability of preference share capital) Dr. 6,00,000 Preference shareholders A/c To 11% Debentures A/c (Being the issue of debentures to preference shareholders) Dr. 4,20,000 9% Debentures A/c Dr. 12,00,000 To Debentureholders A/c (Being transfer of 9% debentures to debentureholders A/c) 9% Debenture Dr. 12,00,000 To Plant & Machinery To Capital Reduction (Being settlement of debentureholders by allotment of plant & machinery) Trade Payables Dr. 5,92,000 To Stock To Capital Reduction A/c (Being settlement of creditors by giving stocks) 4,20,000 1,80,000 4,20,000 12,00,000 9,00,000 3,00,000 5,00,000 92,000

20 1.20 O Solved Scanner IPCC Gr. I Paper - 1 Capital reduction A/c To Investment (Being decrease in investment adjusted through capital reduction account) Dr. 13,000 Bank Dr. 3,00,000 To 11% Debenture A/c Bank Overdraft A/c Dr. 1,50,000 To Bank (Being settlement of bank overdraft) Capital Reduction Dr. 5,59,000 To P&L A/c To Capital Reserve A/c (Bal. fig.) (Being decrease in Profit & Loss Account and balance of capital reduction transferred to capital reserve) 13,000 3,00,000 1,50,000 4,05,000 1,54,000 Capital Reduction A/c Particulars ` Particulars ` To Investment To P&L A/c To Capital reserve 13,000 By Pref. Share 4,05,000 By 9% debenture 1,54,000 By Trade Payables 1,80,000 3,00,000 92,000 5,72,000 5,72,000 Balance Sheet (As on...)

21 Model Test Paper O 1.21 Particulars Notes No. Amt. (`) I. Equity and Liabilities 1. Shareholders Fund (a) Share Capital (b) Reserves and Surplus 2. Non - Current Liabilities 11% Debenture II. Assets 1. Non-Current Assets (a) Fixed Assets (b) Investment 2. Current Assets (a) Inventories (Stock) (b) Trade Receivable (Debtors) (c) Cash and cash equivalents ,00,000 1,54,000 7,20,000 Total 28,74, ,20,000 55,000 9,00,000 14,39,000 1,60,000 Total 28,74,000 Notes to Accounts : Share Capital 2,00,000 equity 10 each Reserves and Surplus Capital Reserve Non-Current Liabilities 11% Debenture issued to preference shareholder Amt. (`) Amt. (`) 20,00,000 1,54,000

22 1.22 O Solved Scanner IPCC Gr. I Paper Add: Fresh issue Fixed Assets (a) Tangible Asset Furniture & Fixture (b) Intangible Assets Patent & Copyright Investment Investment - before amalgamation Less: Issued to creditors for settlement Inventories Stock before amalgamation Less: Issued to creditors for settlement Cash at Bank Balance before amalgamation Add: 11% Debenture issued Less: Bank overdraft paid 4,20,000 3,00,000 2,50,000 70,000 68,000 (13,000) 14,00,000 (5,00,000) 10,000 3,00,000 (1,60,000) 7,20,000 3,20,000 55,000 9,00,000 1,50, Following is the Receipts and Payments Account of M/s Tiptop Club for the year ended 31 st March, 2006 : Receipts ` Payments ` To Cash in hand on 1 st April, ,000 By Payments for cosmetics 15,000 To Subscription 45,000 By Honorarium to Beautician 8,000 To Donation 4,500 By Salaries 18,000 To Interest on Investments at 6% for 3,000 By Sundry expenses 1,000 the year By Rent for building 12,000 To Fashion show proceeds 50,500 By Equipments purchased 13,000 By Fashion show expenses 34,000 By Cash in hand on 31 st March, ,000 Total 1,12,000 Total 1,12,000 Additional Information : On 1 st April, On 31 st March,

23 Model Test Paper O 1.23 (`) (`) (i) Subscription due 500 2,000 (ii) Subscription received in advance 1,500 1,000 (iii) Stock of cosmetics 10,000 7,000 (iv) Amount due to cosmetics suppliers 8,000 11,000 (v) Rent paid in advance 1,000 1,500 (vi) Salary outstanding 1,500 2,000 (vii) Value of Equipments 21,500 29,000 (viii) Value of Furniture and Fixtures 40,000 36,000 You are required to prepare Income and Expenditure Account for the year ended 31 st March, 2006 and Balance Sheet as on date of M/s. Tiptop Club. Show all workings. (20 marks) Answer : In The Books of M/s Tiptop Club Income & Expenditure A/c (For the year ended 31st March, 2006) Particulars ` Particulars ` To Consumption of Cosmetics To Honorarium to Beautician To Salaries To Sundry expenses 21,000 8,000 18,500 1,000 By Subscription (W. N. - 1) By Donation By Interest on investment By Proceed from Fashion 47,000 4,500 3,000 50,500 To Rent To Fashion Show Expenses To Depreciation on equipments To Depreciation on Furniture To Income over Expenditure 11,500 34,000 5,500 4,000 1,500 Show 1,05,000 1,05,000 Balance Sheet of M/s Tiptop Club (As on 31 st March, 2006) Particulars ` Particulars ` Capital Add: Income over Expenditure 1,21,000 Current Liability Subscription received in advance Due to Cosmetic Supplier 1,500 1,22,500 1,000 11,000 Equipment Add: Purchase Less: Depreciation Furniture Less: Depreciation Investment 21,500 13,000 (5,500) 29,000 40,000 (4,000) 36,000 50,000

24 1.24 O Solved Scanner IPCC Gr. I Paper - 1 Outstanding salary 2,000 Current Asset Cash in hand Subscription due Stock Rent paid ignorance 11,000 2,000 7,000 1,500 1,36,500 1,36,500 Working Notes : 1. Calculation of subscription : Subscription received 45,000 Less: Due (Last year) (500) Add: Due (Current year) 2,000 Add: Received in advance (Last year) 1,500 Less: Received in advance (Current year) (1,000) Subscription of the year 47, Calculation of Purchase of Cosmetics : Cosmetic A/c Particulars ` Particulars ` To Cash To Balance c/d 15,000 11,000 By Bal. b/d By Purchase 8,000 18,000 26,000 26, Calculation of Consumption of Cosmetics : Opening Stock 10,000 Add: Purchase Less: Closing stock (7,000) 21, Calculation of Salaries : Salary Paid 18,000

25 Model Test Paper O 1.25 Less: Outstanding Salary (Last year) (1,500) Add: Outstanding Salary (Current year) 2,000 18, Calculation of Rent : Rent Paid 12,000 Add: Paid in Advance (Last year) 1,000 Less: Paid in Advance (Current year) (1,500) 11, Calculation of Operating Capital : Balance Sheet (as on ) Particulars ` Particulars ` Capital Subscription received in advance Due to Cosmetic Supplier Salary Outstanding 1,21,000 1,500 8,000 1,500 Subscription due Stock of Cosmetic Rent paid in advance Investment Equipment Furniture and fixture Cash ,000 1,000 50,000 21,500 40,000 9,000 1,32,000 1,32, Write Short Notes on any four of the following: (a) Market is full of ready-made accounting softwares. What factors will you consider to choose one of them for your enterprise? (4 marks) Answer : It is very difficult task for an organisation to choose appropriate accounting software from the bundle of softwares available in the market. Some basic criteria should be considered while selecting the software: 1. Fulfilment of Buyers try to match their own requirement

26 1.26 O Solved Scanner IPCC Gr. I Paper - 1 business needs with the available softwares. 2. Easy to use Such software which is easily operative should be selected. 3. Provides maximum reports 4. Goodwill of the Vendor 5. Cost comparison Some software packages are available in the market which might provide extra reports or such report as they want. A stable vendor with good past records will always be preferred because his continuous support is essential for any software. First analyse various softwares and then select most economic software. 6. Regular update Vendor normally provides regular updates to take care of the changes of law as well as adds new features to the existing software. So, select the vendor whose past record in this context is good. 7. (b) Arun and Varun were partners sharing profits in the ratio of 13:11 respectively. On 1 st April, 2012 they admitted Tarun as a new partner on the following conditions: (i) All partners would share profits equally in the new firm. (ii) Tarun would bring in ` 52,000 as his capital and ` 36,000 as his share of goodwill. No goodwill account appeared in the books of the firm at the time of Tarun s admission and it was decided not to open any goodwill account. Adjustment for Tarun s goodwill being made through capital accounts. Pass journal entries to record all the transactions on Tarun s admission. Clearly show the calculation of ratio of sacrifice. (5 marks) Answer: Journal Entries on Tarun s admission

27 Model Test Paper O 1.27 Date Particulars Dr. ` Cr. ` 2012 Bank A/c Dr. 88,000 1 st April To Tarun s Capital A/c (52, ,000) (Being amount brought by Tarun towards his capital and share of goodwill) 88,000 Tarun s Capital A/c Dr. 36,000 To Arun s Capital A/c To Varun s Capital A/c 22,500 13,500 [Being Tarun s share of goodwill in the firm ` 36,000, has been credited to the old partners in the sacrificing ratio 5:3] (WN)] Working Note: Calculation of Sacrificing Ratio Old Ratio New Ratio Sacrificing Ratio (Old new) Arun 13/24 1/3 (13/24 1/3) = 5/24 Varun 11/24 1/3 (11/24 1/3) = 3/24 Tarun 1/3 Hence, sacrificing ratio is 5 : (c) On 15 th December, 2012, a fire occurred in the premises of M/s. OM Exports. Most of the stocks were destroyed. Cost of stock salvaged being ` 1,40,000. From the books of account, the following particulars were available: (i) Stock at the close of account on 31 st March, 2012 was valued at ` 9,40,000. (ii) Purchases from to amounted to ` 13,20,000 and the sales during that period amounted to ` 20,25,000. On the basis of his accounts for the past three years, it appears that average gross profit ratio is 20% on sales.

28 1.28 O Solved Scanner IPCC Gr. I Paper - 1 Compute the amount of the claim, if the stock were insured for ` 4,00,000. (5 marks) Answer: Memorandum Trading Account Dr. For the period to Cr. Particulars Amt. ` Particulars Amt. ` To Opening stock To Purchases To Gross 20% 9,40,000 13,20,000 4,05,000 By Sales By Closing Stock (Bal. figure) 20,25,000 6,40,000 26,65,000 26,65,000 Statement of Claim Particulars Estimated value of Stock as at date of fire Less: Value of Salvaged Stock Estimated Value of Stock lost by fire Amt. ` 6,40,000 1,40,000 5,00,000 As the value of stock is more than insured value, amount of claim would be subject to average clause. Amount of Claim = Actual Loss of Stock Amount of Claim = 5,00,000 = ` 3,12, (d) Rose Ltd. had made an investment of ` 500 lakhs in the equity shares of Nose Ltd. on The realisable value of such investment on became ` 200 lakhs as Nose Ltd. lost a case of patent rights. Rose Ltd. follows financial year as accounting year. How will you recognize this reduction in Financial statements for the year (4 marks) Answer: Provision and Conclusion: Recognition of reduction in value of investment would depend upon the nature of investment and nature of decline as per Accounting

29 Model Test Paper O 1.29 Standard 13 Accounting for Investments. According to provisions of the standard, if the investments were acquired for long term and decline is temporary in nature reduction in value will not be recognized and investments would be carried at cost. If the decline is of permanent nature, it will be charged to profit and loss account. If the investments are current investments, then the reduction should be recognized and charged to Profit and Loss Account as the current investments are carried at cost or fair value, whichever is less. 7. (e) A trader intends to take a loss of profit policy with indemnity period of 6 months, however, he could not decide the policy amount. From the following details, suggest the policy amount : ` Turnover in last financial year 4,50,000 Standing charges in last financial year 90,000 Net profit earned in last year was 10% of turnover and the same trend expected in subsequent year. Increase in turnover expected 25% To achieve additional sales, trader has to incur additional expenditure of ` 31,250. (4 marks) Answer : (a) Computation of Gross Profit Gross Profit = = = 30% (b) Computation of policy amount to cover loss of profit

30 1.30 O Solved Scanner IPCC Gr. I Paper - 1 Particulars Turnover in the last financial year Add : 25% increase in turnover Gross profit on increased turnover (5,62,500 30%) Add : Additional standing charges ` 4,50,000 1,12,500 5,62,500 1,68,750 31,250 Policy Amount 2,00,000 Therefore, the trader should go in for a loss of profit policy of ` 2,00,000.