Question Paper Financial Accounting -I (MB131): October 2007

Transcription

1 Page 1 of 20 Question Paper Financial Accounting -I (MB131): October 2007 Answer all questions. Marks are indicated against each question. 1. Which of the following is a current asset? Building Goodwill Preliminary expenses Inventories Plant and Machinery. 2. Which of the following statements is true with regard to underwriting commission? I. According to the Companies Act, 1956, underwriting commission should not exceed 5% of the price at which shares are issued. II. The underwriter is an insurer against under subscription and is personally liable for subscription of unsubscribed shares/debentures. III. According to the Companies Act, 1956, underwriting commission should not exceed 2.5% of the price at which debentures are issued. Only (I) above Only (II) above Both (I) and (II) above Both (I) and (III) above All (I), (II) and (III) above. 3. Agreement of trial balance Indicates that accounts are free from errors Indicates all entries are correctly posted to the ledger Indicates arithmetical accuracy of the transactions of a business Is a conclusive proof of accuracy of the records of a business Indicates that accounts prepared are true and fair. 4. Discount on issue of debentures is a Revenue loss to be charged to the Profit and Loss account in the year of issue Capital loss to be written off from capital reserve Capital loss to be written off over the tenure of the debentures Capital loss to be shown as goodwill Revenue loss to be charged to the Profit and Loss Appropriation account. 5. Which of the following items appears on the asset side of the Balance Sheet? Capital reserve Retained earnings Sinking fund investment Security premium Specific reserve. 6. Carriage inward refers to the cost of transportation for Purchase of raw materials Sale of products Return outwards Return inwards

2 Page 2 of 20 Newly acquired machinery. 7. The loss on re-issue of forfeited shares is debited to General reserve account Goodwill account Revaluation reserve account Capital redemption reserve account Forfeited shares account. 8. Which of the following statements is correct in respect of a trial balance? The trial balance shows the profit earned by the concern during a period The trial balance is prepared after preparing the profit and loss account The trial balance shows only balances of assets and liabilities The trial balance shows only nominal account balances The trial balance shows balances of all real, personal and nominal accounts. 9. Depreciation of assets refers to the process of Asset valuation for the preparation of statement of financial position of the firm Allocating the cost of the asset over the period of its use Accounting for costs to reflect the change in general price levels Accumulating a fund for sale of the asset Asset valuation based on current replacement cost. 10. Outstanding salaries represents A representative personal account A current asset A nominal account A deferred expense account An intangible asset. 11.When all the ledger accounts are tabulated as a summary statement it is known as Cash flow statement Trial balance Balance sheet Profit and loss account Profit and loss appropriation account. 12.On August 01, 2006, Sawan Ltd. purchased 5,000, 15% own debentures of Rs.10 each for 95% of face value (ex-interest.) The company cancelled all its own debentures on March 31, Profit on cancellation of own debentures is (the interest factor may be ignored) Rs. 5,000 Rs. 2,500 Rs. 5,625 Rs.47,500 Rs.45, A separate cash book which is kept to record petty expenses is known as Single column cash book Two column cash book Three column cash book Bank pass book Petty cash book. 14.Which of the following conventions states Anticipate no profit and provide for all possible losses?

3 Page 3 of 20 Convention of materiality Convention of consistency Convention of disclosure Convention of conservatism Convention of matching. 15.Which of the following cannot be treated as revenue expenditure? Interest on loans and debentures Annual repairs and maintenance to machinery Registration fee paid in connection with the purchase of office building Free samples distributed to customers Purchase of small items like paper weights for office use. 16.Different valuation bases are used in accounting and in this context, realizable value means The amount paid or payable to acquire an asset The amount that needs to be paid if the asset is to be acquired currently The present discounted value of future inflows that an item is expected to generate in the normal course of business The net amount collectible in the event of the asset s disposal The amount paid or payable to lose a benefit. 17.Which of the followings statements is false? Ledger is the main book of account in which all accounts are maintained The credit balance of a nominal account indicates income received Debit balance in commission account indicates commission paid Cash account always shows credit balance In case of bank overdraft bank column of cash book shows credit balance. 18.Following is an extract of the trial balance of Dynamic Limited for the year ended March 31, 2007: Rs. Sales 2,60,000 Opening stock 31,000 Carriage inward 11,000 Purchases 2,00,000 Cash discount on sales 26,000 The closing stock with Dynamic Limited as on March 31, 2007 was Rs. 37,000. The gross profit of the company for the year ended March 31, 2007 was Rs. 55,000 Rs. 40,000 Rs. 29,000 (Rs. 8,000) (Rs.10,000). 19.When fixed assets are sold at book value The total assets will increase The total liabilities will increase The total assets will decrease There is no change in the total assets The total liabilities will decrease. 20.Which of the following costs is not categorized as Research and Development Costs? Cost of materials consumed in the process of research and development activity Overhead expenses related to research and development activity Depreciation of premises that is used for carrying the work of research activity Salaries and wages paid to personnel engaged in the research and development activities

4 Page 4 of 20 Promotional expenses on market research for existing products. 21. The accounts receivable of a business are shown in the balance sheet under Reserves and surplus Current assets Current liabilities Fixed assets Investments. 22. Which of the following is the correct response to indicate the impact on total assets, capital and liabilities of a firm on account of new building purchased for cash? Assets Capital Total Liabilities Increase Decreases No effect Increase No effect Increase Increase Decreases Increase No effect No effect No effect Increase Decreases Decrease. 23. Mr. Raj, owner of a firm withdrew money from firm bank account for his personal use. The entry to be recorded in the books of the business is Cash account Dr. To Bank account Mr. Raj account Dr. To Cash account Drawings account Dr. To Bank account Bank account Dr. To Cash account Drawings account Dr. To Mr. Raj account. 24.A credit sale of goods to Shivendra should be debited to Sales account Goods account Shivendra s account Purchases account Cash account. 25.Commission received in advance is an example of Real Account Nominal Account Impersonal Account Fictitious Account Personal Account. 26.ABC Ltd. maintains the inventory records under perpetual system of inventory. Consider the following data pertaining to inventory of ABC Ltd. for the month of March, 2007: Date Particulars Quantity (units) Cost per unit (Rs.) March 1 Opening inventory March 4 Purchases March 6 Purchases If the company sold 32 units on March 24, 2007, value of closing inventory under FIFO method is Rs.5,200 Rs.5,681 Rs.5,800 Rs.5,850 Rs.5,950.

5 Page 5 of As per Table-A of the Companies Act, 1956, interest on calls-in-arrears to be paid by the shareholder, for the period between the last date fixed for payment of calls and the actual date of payment, is 5.0% p.a. 5.5% p.a. 6.0% p.a. 6.5% p.a. Nil. 28. Treating a revenue expense as a capital expenditure is an example of Compensating error Error of principle Error of complete omission Error of commission Error of partial omission. 29.If the dividend proposed exceeds 12.5% but not 15% of the paid-up capital, the prescribed percentage of profits to be transferred to general reserve is 2.5% of the current profits 5.0% of the current profits 7.5% of the current profits 10.0% of the current profits 12.5% of the current profits. 30.Which account should be debited for the costs incurred prior to the incorporation of a company? Share capital General administrative expenses Preliminary expenses Profit and loss appropriation account Legal expenses. 31.A company forfeited 2,000 shares of Rs.10 each (which were issued at par) held by Mr. John for nonpayment of allotment money of Rs.4 per share. The called-up value per share was Rs.9. On forfeiture, the amount debited to share capital will be Rs.10,000 Rs. 8,000 Rs. 2,000 Rs.18,000 Rs. 6, Rosy Ltd. has 10,000, 5% preference shares of Rs.10 each. The company had forfeited 500 preference shares on which final call of Rs.2 had not been received. Remaining shares were redeemed at par out of reserves of the company. The amount to be credited to capital redemption reserve will be Rs.1,00,000 Rs. 95,000 Rs. 99,000 Rs. 99,500 Rs.1,01, The profits of Suhas Ltd. for the past 3 years were as under: Year Profit (Rs.) , , ,354

6 Page 6 of 20 The simple average profit of the company for the last 3 years for the valuation of goodwill is Rs. 57,423 Rs.1,72,269 Rs. 54,723 Rs. 75,234 Rs. 53, Consider the following data pertaining to Optimum Ltd.: i. Average capital employed in the business is Rs.18,00,000. ii. Rate of interest expected from capital having regard to the risk involved is 10%. iii. Average profit of the company for the last three years is Rs.3,10,800. iv. Fair remuneration to the directors for their services is Rs.36,000 per annum. The amount of super profit for calculation of goodwill is Rs.1,80,000 Rs. 36,000 Rs. 94,800 Rs.2,74,800 Rs.1,30, Consider the following data pertaining to Joy Ltd. for the year ended March 31, 2007: Gross profit Rs. 9,000 Plant & Machinery Rs.1,70,000 Rent received Rs. 55,000 Sales commission paid Rs. 12,000 The company noticed the following omissions: The company has the practice of depreciating the Plant and Machinery at the rate of 15% per annum on straight line method. The original cost of the Plant and Machinery was Rs.2,00,000. Sales commission outstanding was Rs.6,000. After making all the necessary adjustments, the net profit of the company for the year ended March 31, 2007 was Rs.18,000 Rs.19,500 Rs.16,000 Rs.28,000 Rs.18, Consider the following data relating to XYZ Ltd. for the month of June 2007: Particulars As on June 01, 2007 (Rs.) As on June 30, 2007 (Rs.) Accounts payable 40,000 50,000 The company makes all purchases on credit. During the month of June 2007, the company paid a sum of Rs.3,60,000 to the suppliers. The amount of credit purchases for the month of June 2007 was Rs.4,40,000 Rs.5,50,000 Rs.3,70,000 Rs.1,05,000 Rs.3,60, The following balances are extracted from the Trial Balance of a firm. Closing balance of sundry debtors Rs.1,50,600 Provision for discount on debtors as on April 1, 2006 Rs. 7,000

7 Page 7 of 20 If the sundry debtors include Rs.600 in respect of a bill dishonored (considered irrecoverable) and the company wishes to maintain the provision for discount on debtors at 6%, the amount debited/credited to profit and loss account on account of discount on debtors for the year ended March 31, 2007 was Rs.2,000 (debit) Rs.2,500 (debit) Rs.7,000 (debit) Rs.9,000 (debit) Rs.8,000 (debit). 38.A company has issued 12% Debentures of the face value Rs.100 each, at Rs.98 These debentures are redeemable after three years at Rs.102. The loss on issue of each debenture is Rs. 2 Rs. 4 Nil Rs.12 Rs Cash discount of Rs.93 allowed to Mohan has been credited to Morin s a/c as Rs.39. The error will be rectified by Debiting Morin s a/c with Rs.39 and crediting Mohan s a/c with Rs.39 Debiting Discount a/c with Rs.93 and crediting Mohan s a/c with Rs.93 Debiting Discount a/c with Rs.54, Morin s a/c with Rs.39 and crediting Mohan s a/c with Rs.93 Debiting Morin s a/c with Rs.39, Suspense a/c with Rs.54 and crediting Mohan s a/c with Rs.93 Debiting Suspense a/c with Rs.93 and crediting Mohan s a/c with Rs On June 30, 2007, the debit balance as per bank statement of Rainbow Ltd. is Rs.12,500. On June 20, 2007, the company deposited two cheques aggregating Rs.8,500. Of these, one cheque for Rs.2,800 was dishonoured on June 25, 2007 and the same was entered in the cash book on July 02, The bank balance as per cash book of the company as on June 30, 2007 was Rs. 4,000 (credit) Rs.15,300 (debit) Rs.12,500 (credit) Rs. 9,800 (debit) Rs. 9,700 (credit). 41.Goodwill is an intangible asset that is Reported as an asset only if it has been purchased from another company, but never if it has been developed internally Reported as an asset if it has been developed internally, but not if it has been purchased from another company Never reported, because the value of something intangible is too speculative Always not reported, because it is unidentifiable Always reported as an asset, if it has been purchased from another company or if it has been developed internally. 42.Bank reconciliation statement is A part of the cash book A ledger account A part of trial balance A statement reconciling differences between the balances of cash book and pass book A part of the cash flow statement. 43.Which of the following statements is false with respect to issue of shares at discount? The shares which are to be issued at a discount should be of a class which had already been issued The issue should be authorized by passing a resolution at the general meeting and sanctioned by

8 Page 8 of 20 the National Company Law Tribunal The maximum rate of discount at which the shares are to be issued should be specified in the resolution and the maximum limit is 5% At least an year should have elapsed from commencement of the business by the company before the shares are issued at discount The shares should be issued at a discount within two months from the date as specified by the National Company Law Tribunal. 44.A return inward book is maintained by a business to record Returns of goods sold for cash Returns of goods purchased on credit Returns of goods sold on credit Returns of capital goods sold on credit Returns of all capital goods sold. 45.The assets which are acquired for resale in the course of business are to be treated as Fixed assets Current assets Intangible assets Miscellaneous expenses Long term investments. 46.Vani Ltd. issued 25,000 equity shares of Rs.10 each payable as Rs.2 on application, Rs.3 on allotment, Rs.2 on first call and the balance Rs.3 on the final call. Archit, who has 1,000 shares, paid full value of shares along with the allotment money. The net amount received towards first call will be Rs.50,000 Rs.47,000 Rs.49,000 Rs.48,000 Rs.52, The following data is extracted from the books of Ahalya Ltd. for the year : Particulars Rs. Bad debts written off during the year 4,000 Closing balance of sundry debtors 1,00,000 Provision for bad debts as on April 1, ,000 If the company wishes to maintain the provision for bad debts at 10% of debtors, the amount debited/credited to profit and loss account for the year ended March 31, 2007 was Rs.10,000 (debit) Rs. 6,000 (debit) Rs. 8,000 (debit) Rs. 7,600 (debit) Rs. 6,000 (credit). 48.Change in accounting policy need not be disclosed if Amount is not material It is against accounting conventions It is against accounting concepts Amount can be determined in part only The entity is a Private limited company. 49.Under cash basis of accounting, revenue is recognized when Sale is made Cash is received Goods are delivered Services are rendered

9 Page 9 of 20 Sales are accounted. 50.Which of the following statements is/are true? I. According to the purchase of Super-Profit Method of valuing goodwill, goodwill is the product of the super profit and the number of years purchase. II. For calculating the amount of goodwill by the super profit method, it is necessary that the average capital employed should be determined. III. There is only one method of valuing goodwill, i.e., super profit method. Only (I) above Only (II) above Both (I) and (II) above Both (I) and (III) above Both (II) and (III) above. 51.Rent accrued during a year but not paid till the last day of the year should be debited to Rent account Outstanding rent account Prepaid rent account Miscellaneous expenditure account Cash account. 52.If the company issues Rs.40,000 worth of equity shares at a discount of 10% for redemption of preference shares of face value of Rs.1,50,000, then the amount to be transferred to capital redemption reserve account is Rs.1,21,500 Rs.1,10,000 Rs.1,17,500 Rs.1,23,000 Rs.1,14, The balance in the share forfeited account after the reissue of the forfeited shares is transferred to General reserve Capital redemption reserve Capital reserve Revaluation reserve Dividend equalization reserve. 54.Mr. Beta to whom 100 shares were allotted at the rate of Rs.10 each at par, paid Rs.3 on application and Rs.3 on allotment but could not pay the first and final call money of Rs.4. His shares were forfeited by the directors. The amount to be credited to shares forfeited account will be Rs. 500 Rs. 400 Rs. 600 Rs.1,000 Rs The periodical total of a purchases returns book is transferred to the Debit side of the purchases account Debit side of the purchases returns account Credit side of the purchases account Credit side of the purchases returns account Credit side of creditors account. 56.The expenditure which contributes income or benefit in future years is classified as Revenue expenditure

10 Page 10 of 20 Operating expenditure Administrative expenditure Deferred expenditure Selling and distribution expenditure. 57.Net worth is the amount of funds which belongs to Debenture holders Debtors Creditors Bankers Owners. 58.Consider the following data with regard to plant and equipment pertaining to Jalan Ltd.: Cost of the plant (Rs.) 6,00,000 Estimated useful life (years) 10 Scrap value (Rs.) 12,000 If the firm follows the straight line method of depreciation, the rate of depreciation is 9.81% 6.00% 5.90% 5.80% 5.00%. 59.Komal Ltd. issued 50,000, 8% debentures of Rs.10 each at par, which are redeemable after 5 years at a premium of 20%. The amount of loss on redemption of debentures to be written-off every year is Rs.40,000 Rs.10,000 Rs.20,000 Rs. 8,000 Rs. 5, A company issued 10,000 shares out of which 8,000 shares are underwritten by X. Out of the total 7,500 applications received, 6,500 were marked in favor of X. The net liability of X is 500 shares 1,000 shares 1,500 shares 2,000 shares 2,500 shares. 61.The capital account of Mr. Garnish showed a balance of Rs.2,50,000 on April 1, During the year Mr. Garnish brought in fresh capital of Rs.50,000 and withdrew Rs.10,000 by way of cash. He also took goods worth Rs.5,000 for personal use. If Mr. Garnish s account showed a balance of Rs.3,10,000 on March 31, 2007, the profits during the year were Rs.30,000 Rs.35,000 Rs.40,000 Rs.25,000 Rs.22, Viran Ltd. purchased Machinery from Indraja Company for Rs.4,00,000. The consideration was paid by issue of 10% Debentures of Rs.100 each at a discount of 20%. The 10% Debentures account is credited with Rs.4,00,000 Rs.5,00,000 Rs.3,20,000 Rs.4,80,000

11 Page 11 of 20 Rs.4,20, Propitious Ltd. has issued 5,000, 6% Redeemable Preference Shares of Rs.100 each. These Preference shares are to be redeemed at 10% premium. Fresh issue of equity shares is to be made to the extent of Rs.2,00,000 for the purpose of this redemption. The shortfall in cash for the purpose of the redemption after utilizing the proceeds of the fresh issue is to be met by taking a bank loan. The amount of bank loan required to be obtained will be Rs.5,50,000 Rs.3,50,000 Rs. 50,000 Rs.5,00,000 Rs.3,00, The subscribed share capital of Leo Ltd. is 80,000 shares of Rs.100 each. The final call made was paid on 77,500 shares. The calls in arrear was amounted to Rs.62,500. The final call per share is Rs Rs Rs Rs Rs The closing capital employed of Jagan Ltd. as on March 31, 2007 amounted to Rs.7,88,000. The profit before tax for the year was Rs.1,42,000. Income tax rate is 50%. The average capital employed for the purpose of goodwill computation by the company is Rs.6,36,000 Rs.6,46,000 Rs.7,12,000 Rs.7,50,000 Rs.7,52, A business is having an adjusted net profit of Rs.2,00,000 and capital employed is Rs.12,50,000 and the expected rate of return is 10%. If the goodwill is taken at 3 years purchase of super profits, the goodwill is Rs.2,25,000 Rs.2,00,000 Rs.2,50,000 Rs.3,00,000 Rs.3,75, The called-up capital of Rock Well Ltd. for 4,500 shares is Rs.3,82,500. Mr. Rakesh an allottee of 500 shares, failed to pay the call money of Rs.10 per share. The paid-up capital in the Balance Sheet of the company is Rs.5,05,000 Rs.5,15,000 Rs.3,77,500 Rs.3,87,500 Rs.3,67, Consider the following data pertaining to Libra Company: Particulars As on April 01, 2006 (Rs.) As on March 31, 2007 Cash & bank 60,000? Sundry creditors 70,000 80,000 During the year the sales were Rs.3,60,000 and all were on credit. The cash purchases were Rs.80,000 and credit purchases were Rs.2,00,000. Expenses paid during the year were Rs.70,000. Cash

12 Page 12 of 20 collected from debtors during the year was Rs.3,70,000. The cash and bank balance of Libra Company as on March 31, 2007 was Rs.50,000 Rs.90,000 Rs.70,000 Rs.80,000 Rs.60, The balances of prepaid insurance of a company as on March 31, 2006 and March 31, 2007 were Rs.20,160 and Rs.16,360 respectively. If the actual insurance premium paid by the company during the year is Rs.60,000, then the expense of insurance to be shown in the Profit and Loss account was Rs.80,160 Rs.76,360 Rs.63,800 Rs.60,000 Rs.56, The entry to record the issue of 8,000 equity shares of Rs.50 par value, at Rs.90 per share is/are I. Credit to Equity Share Capital with Rs.4,00,000. II. Debit Cash account with Rs.7,20,000. III. Credit Equity Share Capital with Rs.7,20,000. IV. Credit Securities Premium with Rs.3,20,000. Only (I) above Only (II) above Both (II) and (III) above Both (III) and (IV) above (I), (II) and (IV) above.

13 Page 13 of 20 Suggested Answers Financial Accounting - I (MB131): October Answer : Buildings, Goodwill, Preliminary expenses and Plant and Machinery are treated as fixed assets, whereas Inventory is a current asset. 2. Answer : Alternative, the combination of true statements (I), (II) and (III) is the correct answer. i. According to the Companies Act, 1956, underwriting commission should not exceed 5% of price at which shares are issued. ii. The underwriter is an insurer against under subscription, and is personally liable for subscription of unsubscribed shares. iii. According to the Companies Act, 1956, underwriting commission should not exceed 2.5% of price at which debentures are issued. 3. Answer : The trial balance is prepared to ensure the arithmetical accuracy of the transactions of a business. A trial balance in which the total of the debits equals the total of credits is not a conclusive proof of the accuracy of the records. Certain errors may not affect the agreement of a trial balance as the erroneous entries may not violate the dual aspect concept. It means that even if the trial balance agrees, steps should be taken to ensure that the records are free from the errors. Hence, the correct answer is. 4. Answer : Discount on issue of debentures is a Capital loss to be written off over the tenure of the debentures 5. Answer : All other options will appear on the liability side of the Balance-sheet under the head Reserves and Surplus. Sinking Fund investment on the other hand is cash or investment made against any specific reserve or purpose and hence it is an asset. Hence, is correct answer. 6. Answer : Carriage inward expense is related to the carrying cost of raw material purchased. If it is incurred for carrying new assets, it should be capitalized to the assets value. Carrying cost relating to sale of products, return outwards and return inwards will not be treated as carriage inward. Hence, is correct answer. 7. Answer : The loss on re-issue of forfeited shares is debited to forfeited shares account. It cannot be debited to goodwill account, capital reserve account, revaluation reserve account and capital redemption reserve account. Hence, is correct answer. 8. Answer : A Trial balance is a summary of all real, personal and nominal accounts as on a particular date. All the debit balances from the ledger are shown on one side and all the credit balances are shown on the other side. A trial balance is prepared before final accounts are prepared. 9. Answer : Depreciation is the acquisition cost less salvage value of an asset spread over the economic life of that asset. The purpose of charging depreciation over the economic life of the asset is to match the cost of the asset over the period for which revenue is earned by using the asset. Hence, is correct. 10. Answer : Outstanding salaries is the amount payable during a particular period which is not yet paid. It is Representative personal account representing salaries due to employees. 11. Answer : When all the ledger accounts are tabulated as a summary statement it is known as Trial balance. 12. Answer : Particulars Rs.

14 Page 14 of 20 15% Debentures of Rs.10 each (5,000 x Rs.10) 50,000 Less: Cost of Own debentures (Rs.50,000x 95%) 47,500 Amount transferred to Capital Reserve 2, Answer : The separate cash book kept to record petty expenses is known as petty cash book. 14. Answer : The convention of conservatism states that anticipate no profit and provide for all possible losses. Hence, is correct answer. 15. Answer : A revenue expenditure is an expenditure whose benefit expires within the current accounting period and is of recurring nature. Therefore, it is written off to profit and loss account. Registration fee paid in connection with the purchase of office building is a capital expenditure. Hence, is correct answer. 16. Answer : Reason: Historical cost is the amount paid or payable to acquire an asset. The amount that needs to be paid if the asset is to be acquired currently is the current cost. The present discounted value of the future inflows that an item is expected to generate in the normal course of business is the present value Realizable value is the net amount collectible in the event of the asset s disposal. Any valuation cannot be done with a view to lose benefit. Hence, the correct answer is. 17. Answer : That cash account always shows credit balance is wrong statement. One cannot pay more than what is received. Hence, cash account will always show debit balance. All the other statements are true. Hence, is correct answer. 18. Answer : Trading A/c of Dynamic Ltd for the year ended March 31, 2007 Rs. Rs. Opening stock 31,000 Sales 2,60,000 Purchases 2,00,000 Closing 37,000 stock Carriage 11,000 inward Gross Profit 55,000 2,97,000 2,97, Answer : When fixed assets are sold for book value, there will be no change in the total assets. Hence, is correct answer. 20. Answer : The following costs are categorized as Research and Development Costs: a. Cost of materials consumed in the process of research and development b. Overhead expenses related to research and development c. Depreciation of premises that is used for carrying the work of research d. Salaries and wages paid to personnel engaged in the research and development activities Promotional expenses on market research for existing products cannot be treated as Research and Development cost. Hence, is correct answer. 21. Answer : The accounts receivable of a business are shown in the balance sheet under current assets. Hence, is the correct answer. 22. Answer : When building is purchased, an asset is acquired; but cash is used to pay the cost of the building whereby another asset is being reduced. There is no effect on the assets as one asset is converted into another asset. There is no effect on capital and liabilities. Hence, is correct answer. 23. Answer :

15 Page 15 of 20 The entry to record withdrawal of cash from business bank account for the personal use of the owner would be Drawings account Dr. To Bank account. 24. Answer : A credit sale to Shivendra should be recorded as Shivendra s account Dr. To Sales account. Thus, Shivendra s account should be debited. 25. Answer : Though commission is a nominal account, commission received in advance is a representative personal account and a liability. 26. Answer : Total units in hand before sale = = 45 Number of units sold = 32 Number of units in hand = 13 Under First in First out method of inventory valuation value of closing inventory is calculated as follows: 3 Rs.450 = Rs.1, Rs.460 = Rs.4,600 Value of closing inventory = Rs.5, Answer : As per table-a of the Companies Act, 1956 when calls-in-arrears amount is received, interest is to be paid by the shareholder for the period from the last date of specified period till the date of actual payment at the rate of 5% p.a. 28. Answer : Treating a revenue expense as a capital expenditure is an example of Error of principle. 29. Answer : As per the Companies (Transfer of Profits to Reserves) Rules, 1975 and section 205 (2A), a company has to transfer a prescribed percentage of its profits to its reserves (free reserves) based on the extent of dividends it wishes to pay from its profits. The least amount that has to be transferred based on the amount of dividend that is proposed to be distributed is given in the table below. Proposed dividend (% of the paid-up capital). Minimum amount to be transferred to reserves (%of current profits) Exceeds 10 but does not exceed Exceeds 12.5 but does not exceed Exceeds 15 but does not exceed Exceeds Hence, the correct answer is. 30. Answer : The costs incurred prior to the incorporation of a company should be debited to preliminary expenses account. Subsequently, they will be written off over a period of time. 31. Answer : On forfeiture of Mr. John s shares, the amount debited to share capital will be Number of shares forfeited x called-up value per share = 2,000 x Rs.9 = Rs.18,000. Hence, is correct answer. 32. Answer : Particulars No. of shares Rs. Total preference shares issued 10,000 1,00,000 Less: shares forfeited 500 5,000 Amount to be credited to capital 9,500 95,000 redemption reserve for remaining shares Hence, is correct answer. 33. Answer : P

16 Page 16 of 20 Year Profit (Rs.) , , ,354 1,72,269 Simple Average profit = Rs.1,72,269 / 3 = Rs.57, Answer : Particulars Rs. Average Profit 3,10,800 Less : Remuneration of the directors 36,000 Average Maintainable Profits 2,74,800 Less : Normal Profit 10% on average 10 18,00,000 capital employed 100 1,80,000 Super Profit 94, Answer : Dr. Profit and Loss account of Joy Ltd. for the year ending March 31, 2007 Cr. Particulars Rs. Rs. Particulars Rs. Rs. To Sales Commission 12,000 By Gross Profit 9,000 Add: Outstanding 6,000 18,000 By Rent received 55,000 To Depreciation (15% of Rs.2,00,000) 30,000 To Net Profit 16,000 64,000 64,000 The net profit is Rs.16, Answer : Dr. Accounts payable Account Cr. Date Particulars Rs. Date Particulars Rs To Cash (paid) 3,60, By Balance b/d 40, To Balance c/d 50, By Purchases 3,70,000 (balancing figure) 4,10,000 4,10, Answer : Bills Receivable dishonored (considered irrecoverable) should be excluded in Sundry Debtors balance for the purpose of calculating the required provision for discount on debtors. i.e., Rs.1,50,600 - Rs.600 = Rs.1,50,000. thereon = 9,000 less existing provision Rs.7,000 = Rs.2,000. Dr. Provision for Discount Account Cr. Date Particulars Rs. Date Particulars Rs By Balance b/d 7, To Balance c/d 9, By Profit and Loss 2,000 a/c 9,000 9, Answer : Loss per debenture = Rs.4 (i.e) Rs.102 less Rs.98. Discount on issue of debentures + Premium on redemption = Rs.2 + Rs.2 = Rs Answer : >

17 Page 17 of 20 Particulars Debit (Rs.) Credit (Rs.) Morin account Dr. 39 Suspense account Dr. 54 To Mohan s account Answer : Bank Reconciliation statement as on June 30, 2007 Particulars Rs. Balance as per bank statement (overdraft) 12,500 Less : Cheque dishonoured but not entered in the cash 2,800 book Balance as per cash book (overdraft) (credit balance) 9, Answer : Goodwill is an intangible asset that is reported as an asset whether it has been purchased from another company or it has been developed internally is the correct answer. 42. Answer : Bank reconciliation statement is a statement reconciling differences between the balances of cash book and pass book. 43. Answer : The shares which are to be issued at a discount should be of a class which has already been issued The issue should be authorized by passing a resolution at the general meeting and sanctioned by the National Company Law Tribunal The maximum rate of discount at which the shares are to be issued should be specified in the resolution and the maximum limit is 10% At least an year should have elapsed from commencement of the business by the company before the shares are issued at discount The shares should be issued at a discount within two months from the date as specified by the National Company Law Tribunal. Hence, is correct answer. 44. Answer : A return inward book is maintained to record returns of goods sold on credit. Hence, is the correct answer. 45. Answer : If any assets are acquired for resale in the course of business, such assets are to be treated as current assets. Hence, is correct answer. 46. Answer : Particulars Rs. Amount due on first call (25,000 x Rs.2) 50,000 Less: Amount received in advance along with allotment (1,000 x Rs.2) 2,000 The net amount received towards first call 48, Answer : Dr. Provision for bad debts account Cr. Particulars Rs. Particulars Rs. To Bad debts 4,000 By Balance b/d 20,000 To Profit and loss account (balancing 6,000 figure) To Balance c/d (Rs.1,00,000 x 10%) 10,000 20,000 20, Answer : Change in accounting policy need not be disclosed if amount is not material. Hence, is correct answer. 49. Answer : Under cash basis of accounting, revenue is recognized when cash is received. Revenue is recognized under accrual basis when sale is made or goods are delivered or services are rendered when there is reasonable certainty regarding the amount of consideration. Hence,

18 Page 18 of 20 is correct answer. 50. Answer : According to the purchase of Super-Profit Method of valuing goodwill, (I) goodwill is the product of the super profit and the number of years purchase and (II) For calculating the amount of goodwill by the super profit method, it is necessary that the Average capital employed should be determined. (III) There are basically two methods of valuing goodwill (i) simple profit method, and (ii) super profit method. Hence,, combination of statements (I) and (II) is correct answer. 51. Answer : Rent to be paid during a year but not paid till the last date of the year should be debited to rent account and credited to outstanding rent account. 52. Answer : Particulars Rs. Rs. Redeemable preference share capital 1,50,000 Less: Issue of Equity shares for redemption of preference shares 40,000 Discount on issue of equity 10% 4,000 36,000 Amount to be transferred to capital redemption reserve account 1,14, Answer : The balance in the share forfeited account after the reissue of the forfeited shares is transferred to Capital reserve. 54. Answer : Amount paid towards application and allotment by Mr. Beta is 100 x (Rs.3 + Rs3) = Rs.600. Hence, amount to be credited to share forfeiture account is Rs Answer : The total of purchase returns book will be transferred to the credit side of the purchase returns account. 56. Answer : The deferred expenditure contributes income or benefit in future years. Hence, the same is deferred using matching concept. Revenue expenditure is the expenditure, which contributes benefit during the same year. Operating expenditure is incurred for the operations of the business. Administrative expenditure is incurred for administration. Selling and distribution expenditure is incurred for promoting sales and distribution. Hence, operating expenditure, administrative expenditure and sales and distribution expenditure contribute benefit only in the particular year in which they are incurred. Hence, is the correct answer. 57. Answer : Net worth is the amount of funds which belongs to owners of the business concern. 58. Answer : Depreciation = Plant value - Scrap value Life of the plant Rs.6, 00, 000 Rs.12, 000) Rs.5,88, 000 = 10 years = 10 years = Rs.58,800 Rs.58, 800 6, 00, = 9.81%. 59. Answer : Amount debited to loss on redemption of debentures = Rs.50,000 Rs.10 20% = Rs.1,00,000 Amount of loss on redemption of debentures to be written off every year = Rs.1,00,000/5 = Rs.20, Answer : No. of shares underwritten by X = 8,000 No. of shares marked in favour of X = 6,500 Net liability of X = 1,500 shares

19 Page 19 of 20 X will be liable for 1500 shares ( ) 61. Answer : Particulars Rs. Balance in capital account on ,10,000 Less : Fresh capital brought in 50,000 2,60,000 Add : Cash drawings 10,000 Add : Goods taken for personal use 5,000 2,75,000 Less : Capital at the beginning 2,50,000 Profit for the year 25, Answer : Sometimes the companies may go for issue of debentures towards payment of consideration for purchase of fixed asset. In such cases, the debentures may be issued at par / at discount / at premium. In the present case, the journal entry will be: i. For purchase of Machinery: Machinery a/c Dr. Rs.4,00,000 To Indraja Company a/c Rs.4,00,000 ii. For issue of debentures at discount of 20% Indraja Company a/c Dr. Rs.4,00,000 Discount on issue of debentures Dr. Rs.1,00,000 To 10% Debentures a/c. Rs.5,00,000 (Issue of 5,000 debentures of face value Rs.100 each at a discount of 20%) Or 4, 00, The debentures account shows balance = = Rs.5,00,000 Thus, 10% Debentures account shows a balance of Rs.5,00, Answer : Total amount required for redemption is Rs.5,00,000 Premium on redemption Rs. 50,000 Rs.5,50,000 Less : Cash received on issue of equity shares Rs.2,00,000 The amount of Bank loan to be obtained Rs.3,50, Answer : Calls in arrear amounted to Rs.62,500 on 2,500 shares. The final call per share is Rs.62,500/2,500 = Rs Answer : Particulars Rs. Profit before tax 1,42,000 Less : Income tax (50%) 71,000 Current year s profit 71,000 Closing Capital employed 7,88,000 Less : ½ of current year s profit after tax 35,500 Average capital employed 7,52, Answer : The normal rate of return on 10% = Rs.1,25,000 Super profits = Rs.2,00,000 Rs.1,25,000 = Rs.75,000. Goodwill = 3 years purchase = Rs.75,000 3 = Rs.2,25, Answer : Particulars Rs.

20 Page 20 of 20 Called-up capital 3,82,500 Less Calls-in-arrears (500 Rs.10) 5,000 Paid up Share capital 3,77, Answer : Dr. Sundry Creditors Cr. Date Particulars Rs. Date Particulars Rs To Cash 1,90,000 April 01, By Balance b/d 70,000 (balancing figure) 2006 March 31, To Balance c/d 80, By Purchases 2,00, ,70,000 2,70,000 Calculation of Cash and Bank balance Particulars Rs. Rs. Opening cash and bank balance 60,000 Add Cash received from sundry debtors 3,70,000 4,30,000 Less Cash paid to sundry creditors 1,90,000 Cash purchases 80,000 Expenses paid 70,000 3,40,000 Closing cash and bank balance 90, Answer : Actual Insurance Premium paid by the company Rs.60,000 Add : Prepaid Insurance as on March 31, 2006 Rs.20,160 Rs.80,160 Less : Prepaid Insurance as on March 31, 2007 Rs.16,360 Expense of insurance to be shown in profit and loss a/c. for the year Rs.63, Answer : The alternative, the combination of items in (I), (II) and (IV) is the correct answer. The entry to record the issue of 8,000 equity shares of par value Rs.50 at Rs.90 per share is Particulars Debit (Rs.) Credit (Rs.) Cash account (8,000 x Rs.90) Dr. 7,20,000 To Equity share capital account (8,000 x Rs.50) 4,00,000 To Securities premium account (8,000 x Rs.40) 3,20,000 (Being shares issued with premium) P OF THE DOCUMENT >