Financial Accounting Solved Ans. C.s. Found. Dec.09 1

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1 Financial Accounting Solved Ans. C.s. Found. Dec.09 1 Qn.1. (A) Explain any two of the following: (i) Date of maturity of bills of exchange and promissory note (ii) Del credere commission? (iii) Manufacturing account (iv) Receipts and expenditure account. (i) Date of Maturity of bills of exchange and promissory note:- Mostly the amount of bill is payable after the expiry of the specified period of time calculated from the date of the bill. While calculating the due date of such bills, three days of grace have to be added to the term of the bill. In calculating the due date, the date on which the bill is drawn or presented, must be excluded. If the amount of a bill dated 3rd January, 2007, is payable two months after date, the due date of the bill will be 6th March, Further, if the due date happens to be a public holiday (including Sundays) the bill shall be deemed to be payable the next preceding business day. For example, a bill drawn on 12th May, payable 3 months after date would normally be payable on 15th August being a public holiday, the amount of the bill will be payable on 14th August. (ii) Del credere commission:- Generally, the consignee is remunerated by a commission which is usually calculated as an agreed percentage of the gross proceeds of sale. When goods are sold by the consignee on credit, there is a possibility that the amount may not be realizable by the consignee from the consignment debtors. Since the consignee sells goods as an agent of the consignor and not on his own account, it is the consignor who runs the risk of bad debts arising from credit sales. The consignor, not being in direct contact with customers may wish to have a guarantee from the consignee that he will pay if the customers fail to make the payment. The consignee gives such guarantee for covering the risk of bad debts in return for an extra commission which is known as del credere commission. (iii) Manufacture Account :- A manufacturing concern may like to ascertain the cost of goods during the accounting period and may prepare Manufacturing Account for this purpose. Trading Account is not capable of showing the cost of goods manufactured because it deals with stock of finished goods also and because some of the expenses connected with manufacture of goods (such as depreciation and repairs of machinery and factory, land and building) are debited to the Profit and Loss Account. Manufacturing Account is debited with all expenses incurred in the factory on production of goods. This means that depreciation and repairs to plant and machinery and factory building, salary to works manager, etc. are also debited to this account. The total of such expenses plus cost of raw material used give cost of goods manufactured during the period. This is transferred to Trading Account which deals with stock of finished goods and sales also. The remaining nominal accounts appear in Profit and Loss Account. (iv) Receipts and Expenditure Account :- professional people like solicitors, doctors, chartered accountants, etc., prepare for themselves Receipts and Expenditure Account which is a modified form of Income and Expenditure Account prepared by non-trading concerns. In Receipts and Expenditure Account, even outstanding expenses find place as usual in Profit and Loss Account and Income and Expenditure Account but professional income which has accrued but has not been received is not considered to be the income of the year in which it accrues or becomes due. This is because professional people do not file suit for recovery of their dues. In Receipts and Expenditure Account, the total income including that which has accrued or has become due but has not been received in cash is shown on the credit side but the 'account' is debited with a provision for outstanding income. In short, in Receipts and Expenditure Account income is determined on cash basis and expenditure on accrual basis. In the Balance Sheet the income yet to be collected is shown on the assets-side, deducting the provisions of an equal amount from the same thus giving zero as the net amount, (B) State, with reasons in brief, whether the following statements are true or false (i) For purposes of preparing hooks of account, a business is treated as an entity separate from its owner or owners. (ii) Contra entries in columnar cash book require no posting in the lodger, (iii) Heavy expenditure on advertising a new product is capital expenditure. (iv) Trade expenses account is transferred to trading account. (v) Depreciation is a charge against revenue for a particular accounting period. (i) True: As per entity concept (ii) False: they are required (iii) False: it is deferred revenue expenditure (iv) False: it is debited to P/L A/c (v) True: depreciation is charge against Revenue.

2 Financial Accounting Solved Ans. C.s. Found. Dec.09 2 Qn.2. (A) Re-write the following sentences after filling-in the blank spaces with appropriate word(s)/figure(s) : (i) The recognition of the two aspects to every transaction is known as concept, (ii) The expense whose benefit expires within the year of expenditure is termed as expenditure. (iii) is a process of allocation of expired cost and not of valuation of fixed assets. (iv) In a trade bill there is consideration, while in there is no consideration. (v) Surplus or deficit revealed by income and expenditure account is transferred to. fund. (vi) A system of book-keeping in which only cash book and personal accounts of customers and suppliers are maintained is called system. (vii) The debit balance of an account may represent cither or an expense or a loss. (viii) When an old fixed asset is sold on credit, the transaction is originally recorded in. (i) Dual aspect (ii) Revenue (iii) Depreciation (iv) Accomodation bill (v) Capital (vi) Single Entry (vii) Asset (viii) Journal Proper (B) Distinguish between any two of the following: (i) 'Book keeping' and 'accounting'. (ii) 'Double entry system' and 'single entry system'. (iii) 'Partners fixed capital accounts' and 'partners fluctuating capital accounts'. (i) BOOK -KEEPING AND ACCOUNTING:- Book-keeping and accounting are often used interchangeably but they are different from each other. Accounting is a broader and more analytical subject. It includes the design of accounting systems which the book-keepers use, preparation of financial statements, audits, cost studies, income-tax work and analysis and interpretation of accounting information for internal and external end-users as an aid to making business decisions. This work requires more skill, experience and imagination. The larger the firm, the greater is the responsibility of the accountant. It can be said that accounting begins where book-keeping ends. Book-keeping provides the basis for accounting. The following are the points of distinction between book-keeping and accounting : Book-keeping Accounting 1. It is concerned with the recording / of-transactions. 2. The work of book-keeping is mainly routine and clerical in nature and is increasingly being done by computers 3. Book-keeping constitute the base for accounting. 4. Book-keeping is done in accordance with basic accounting concepts and conventions. 5. Financial statements do not form part of book-keeping. 1. It is concerned with the summarizing of the recorded transactions. 2. The work of accountant requires higher level of knowledge, conceptual understanding and analytical skill. 3. Accounting is considered as the language of business. 4.The methods and procedures for accounting for analysis and interpretations for financial reports may vary from firm to firm. 5. Financial position of the business cannot be ascertained through bookkeeping records. (ii) DOUBLE ENTRY SYSTEM AND SINGLE ENTRY (i) Record of Transaction: Under double entry system, both the aspects i.e. debit and credit, of all the transactions are recorded. Under single entry system, there is no record of some transactions, some transactions are recorded only in one of their aspects whereas some other transactions are recorded in both of their aspects. (ii) Subsidiary Books: Under double entry system, various subsidiary books like sales book, purchases book, etc. are maintained. Under single entry system, no subsidiary books except cash book which is also considered as a part of ledger is maintained. (iii) Ledger Accounts: Under double entry system, there is a ledger which contains personal, real and nominal accounts. But under single entry system the ledger contains some personal accounts only. (iv) Trial Balance: Under double entry system, preparation of trial balance is possible. It is not possible to prepare a trial balance under the single entry System. Hence accuracy of work is uncertain.

3 Financial Accounting Solved Ans. C.s. Found. Dec.09 3 (v)final Accounts: Under double entry system trading and profit and loss account and balance sheet are prepared in a scientific manner. Under single entry system it is not possible; only a rough estimate of profit or loss is made and a statement of affairs is prepared which resembles balance sheet in appearance but which does not present an accurate picture of the financial position of the business. (vi) User: Single entry system is used only by very small business units; all others employ double entry system. (iii) The fixed capital and fluctuating capital methods may be distinguished as follows: Fixed Capital Method Fluctuating Capital Method 1. Two accounts are maintained, i.e capital account 1. Only one account i.e. capital account is maintained. and current account 2. Balance in capital account remains the same except when capital is introduced or capital is withdrawn. 3. All adjustments in respect of profit, loss, drawings, interest on capital, interest on drawings, salary, commission, etc. are made in the current account. 2. The balance in capital account changes every year because of profits/losses, drawings, interest on capital, interest on drawings, etc. 3. All adjustments in respect of profit, loss, drawings, interest on capital, interest on drawings, salary, commission, etc. are made in the capital account. 4. The capital account will always have plus or credit balance while the current account may have debit (negative) balance. 4. Fluctuating capital may sometimes show a debit (negative) balance. QN.3. (a) Choose the most appropriate answer from the given options in respect of the following : (i) Out of the following, which transaction is entered in journal proper (a) Furniture purchased for cash (b) Furniture purchased on credit (c) Salary paid to clerk (d) Goods returned by a customer. (ii) On 1 sl April, 20U7, a machinery was purchased for Rs.97,000, and Rs.3,000 were spent on its installation, On the basis of written down value method, the amount of depreciation for the year ended 31" March. per annum would be (a) Rs. (b) Rs. 9,700 (c) Rs. 9,000 (d) Rs. 8,730. (iii) The expense to be included proportionately while valuing unsold stock with the consignee is (a) Godown rent (b) Advertisement expense (c) Selling expense (d) Octroi duty. (iv) Out of the following items, which one is shown in the receipts and payments account (a) Outstanding salary (b) Depreciation (c) Life membership fees (d) Accrued subscription. (v) Trade marks account is a (a) Personal account (b) Real account (c) Nominal account (d) None of the above, (vi) The imprest system pertains to (a) Purchases book (b) Sales book (c) Cash book (d) Petty cash book. (vii) White-washing charges of Rs. were debited to building account. It is

4 (a) Error of commission (b) Error of commission (c) Error of principle (d) Compensating error. Financial Accounting Solved Ans. C.s. Found. Dec.09 4 (viii) A certain original cost of a fixed asset is written off every year. It is the depreciation by (a) Annuity method (b) Depreciation fund method (c) Fixed installments method (d) Depletion method. (i) (b) Furniture purchased on credit (ii) (c) Rs. 9,000 (iii) (d) Octroi duty. (iv) (c) Life membership fees (v) (b) Real account (vi) (d) Petty cash book. (vii) (c) Error of principle (viii) (c) Fixed installments method ; (B) Explain any two of the following statements: (i) A cash book is a journal as well as a part of ledger, (ii) Capital expenditure provides benefit to the firm for a number of years. (iii) Dissolution of a partnership need not necessarily lead to dissolution of the firm. (i) Cash book may be defined as the record of transactions concerning cash receipts and cash payments. In other words in Cash Book, all transactions (i.e., receipts and payments of cash) are recorded as soon as they take place. Cash Book is in the form of an account and actually it serves the purpose of Cash Account also. Items on the debit side of the Cash Book are posted on the credit side of the ledger accounts, and items on the credit side are posted on the debt side of the ledger accounts. Cash Book thus serves as purpose of a book of original entry as well as that of a ledger account. It performs the functions of both journal and ledger at the same time. (ii) The main feature of capital expenditure is that results in a benefit which will accrue to the business enterprise for a long time, say 10 or 15 years. Deferred revenue expenditure also results in a benefit which will accrue in future period but generally for 3 to 5 years. (iii) Dissolution of partnership does not necessarily mean dissolution of firm whereas dissolution of firm necessarily implies dissolution of partnership. Qn.4. A, B, C and D shared profits and losses in the ratio of 4:3:2:1 respectively. The firm was dissolved on 31 st March The firm's balance- sheet on that dale was as follows: Balance Sheet as on 31 st March, 2009 Liabilities Rs. Assets Rs, Bills payable Creditors Capital accounts: A C 20,000 80,000 Cash at bank Bills receivable Debtors Stock Capital accounts : B D 8,000 40,000 1,40,000 92,000 40, ,40,000 3,40,000 Bills receivable and debtors realised 90% of their book value Stock was sold for Rs.78,000. Outstanding salary of Rs which was not shown in the above balance sheet was also paid. The realisation expenses amounted to Rs.

5 Financial Accounting Solved Ans. C.s. Found. Dec ,000 and were paid by D. B was insolvent and only Rs. 32,000 could be recovered from his estate Garner vs. Murray rule was applied. Prepare realisation account and partners capital accounts. Realisation A/c To Bills receivable To Debtors To Stock To Bank Outstanding salaries Realisation Expenses Bills Payable Creditors Particular Amount Particular Amount 40, ,000 92,000 By, Bills payable By, Creditors 20,000 2,000 6,000 20,000 4,20,000 By Bank Bill Receivable Debtors Stock Capital Accounts: A s B s C s D s 36,000 1,26,000 78,000 16,000 12,000 8,000 4,000 4,20,000 Partner s Capital A/c Particular A B C D Particular A B C D To Balance b/d , ,000 By Balance b/d 80, To Realisation 16,000 12,000 8,000 4,000 By Cash A/c 16, , To B s A/c 8, , By Cash A/c , To Cash A/c 72, ,08, By A s A/c --- 8, By C s A/c , By Cash A/c ,000 96,000 52,000 1,28,000 24,000 96,000 52,000 1,28,000 24,000 Qn.5 (A) A firms purchased a plant on 1 st April, 2002 for Rs. 10, The plant had an estimated useful life off 5 years. The firm used straight line method of depreciation. An extension was carried out for Rs. 2,00,000 and it was made operational from 1 st April, Prepare the plant account for all the seven years assuming that the- extension was capable of being used independently of existing plant and expected to last 5 years from its installation, (A) Plant Account April 1 To Bank A/c 10,00,000 March 31 By Depreciation A/c 2,00,000 8,00,000 10,00, ,00,000 April 1 To Balance b/d 8,00,000 March 31 By Depreciation A/c 2,00,000 6,00,000 8,00,000 8,00, April 1 To Balance b/d To Bank A/c 6,00,000 2,00,000 March By Depreciation A/c (2,00, ,000) 2,40,000 5,60,000 8,00,000 8,00,000 April 1 To Balance b/d 5,60,000 March 31 By Depreciation A/c (2,00, ,000) 2,40,000 3,20,000

6 Financial Accounting Solved Ans. C.s. Found. Dec ,60,000 5,60,000 April 1 To Balance b/d 3,20,000 March 31 By Depreciation A/c (2,00, ,000) 2,40,000 80,000 3,20,000 3,20, April 1 To Balance b/d 80,000 March 31 By Depreciation A/c 40,000 40,000 80,000 80, April 1 To Balance b/d 40,000 March 31 By Depreciation A/c 40,000 40,000 40,000 (B) Kapil does not keep complete records of his business transactions. His statement of affairs as on 1 st April, 2008 is given below; Liabilities Rs. Assets Rs. Sundry creditors Outstanding expenses Capital 16,500 3,500 50,000 Cash Sundry debtors Stock Furniture 7, ,300 6,900 70,000 70,000 For the year ended 31 st March, 2009, his drawings have boon Rs.15,000. Goods worth Rs.600 have also been withdrawn by him for personal use. On 1 st October, 2008, there was a transfer of his household furniture worth Rs.2,100 to the business. On 31 st March. 2009, his assets and liabilities were as under : Sundry creditors 18,600 Cash 6,580 Outstanding expenses Sundry debtors Stock Furniture 9,000 Prepaid rent 400 Depreciate 10% per annum, create a provision for bad debts on sundry and allow 5% interest on capital which was at the beginning. Ascertain the profit or loss for the year ended 31 st March, 2009 and prepare the statement of affairs as on 31 st March, (B) : Statement of affairs Liabilities Amount Assets Amount 18,600 4,300 6,580 Sundry Creditors Outstanding Expenses Capital 50,000 (+) Furnitrodence 2,100 (-) Drawings 15,000 (+) Intt. On capital 2,500 (+) Net profit 28,060 67,660 Cash Sundry Debtors 36,900 Provision for Bad debts 1,845 Furniture 9,000 (-) Depreciation 795 (6,900 x 10% + 2,100 x5%) Stock Prepaid Rent 35,055 8,205 40,

7 Financial Accounting Solved Ans. C.s. Found. Dec.09 7 QN.6. (A) Kailash and Gopal entered into a joint venture for the. sale of plots of land A joint bank account was opened in which Kailash deposited Rs.30 lakh and Gopal deposited Rs.10 lakhs. They agreed to share profits and losses in the ratio of their respective capitals. A piece land was purchased for Rs.29 lakh Legal and registration fees of Rs.3 lakh were paid A sum of Rs.8 lakh was spent on development of the land. The land was divided into 40 plots 30 plots were Rs. 1.5 lakh each and 6 plots were sold to Rs. 1.2 lakh each. The brokerage of Rs. 2.2 lakh was paid for selling the plots. The remaining plots were taken over by Gopal and Kailash at the cost price in proportion of the ratio in which they shared profits and losses. Prepare the joint venture account, join bank account and the accounts of the two co-ventures. (A) Joint Venture To, Land A/c Legal and Registration Fees Develop of land Kailash A/c 12,15,000 Gopal A/c 4,05,000 29,00,000 3,00,000 8,00,000 16,20,000 By Joint Bank A/c 30 Rs. 1.5 lakhs 6 Rs. 1.2 lakhs Kailash A/c ( 3 Rs. 1 lakh) gopal A/c ( 4 Rs. 1 lakh) 45,00,000 7,20,000 3,00,000 1,00,000 56,20,000 56,20,000 Joint Bank A/c To, Kailash A/c To, Gopal A/c To Joint Venture A/c 30,00,000 10,00,000 52,20,000 By Joint Venture Land A/c Legal and Registration Fees Land development Kailash A/c Gopal A/c 29,00,000 3,00,000 8,00,000 39,15,000 13,05,000 92,20,000 92,20,000 Kailash A/c Particular Amount Particular Amount To Joint Venture To, Joint Bank A/c 3,00,000 39,15,000 By Joint Bank A/c By Joint venture A/c 30,00,000 12,15,000 42,15,000 42,15,000 Gopal A/c Particular Amount Particular Amount To Joint Venture To, Joint Bank A/c 1,00,000 13,05,000 By Joint Bank A/c By Joint venture A/c 10,00,000 4,05,000 14,05,000 14,05,000 (B) From the following particulars, ascertain the amount of claim under a loss of profit policy Assume a 10% upward trend in the sales of the current year over those of the previous year: (i) Indemnity period : 6 months (ii) Policv amount Rs. 6. lakh

8 Financial Accounting Solved Ans. C.s. Found. Dec.09 8 (iii) Date of fire 1st July (iv) Disruption upto 1 st November, 2009 (v) Sales for the year ended 31st March, 2008: Rs,24 lakh (vi) Net profit for the year ended 31st March, 2008 Rs.2, (vii) Insured standing charges for the year ended, 31 st March, 2008 : Rs.8,40,000 (viii) Sales from 1st July, 2008 to 30 th June, 2009: Rs.32 lakh (ix) Sales from 1st July to 1 st November, 2009: Rs.3 lakh (x) Sales from 1st July, 2008 to 1st November, 2008 : Rs. 10 lakhs. (1) Loss of turnover is the indemnity period : Turnover for the corresponding period in the proceeding year 10,00,000 Less: Actual turnover in indemnity period 3,00,000 Loss of turnover in the indemnity 7,00,000 Period 1,00,000 Add: Agreed increase for upward trend 8,00,000 2,60, ,40,000 x 100 Gross Profit Ratio = = 25% 24,00,000 Gross Profit lost during the indemnity period loss of gross profit = 8,00,000 x = 20,00,000 Statement of claim :- Claim for loss of profit as per above 2,00,000 less: saving Avg. clause :Insurable amount 25 x 32,00, = 8,00,000 2,00,000 x 6,00,000 Amount of net claim = = 150,000 8,00,000 Qn 7. (a) At the end of an accounting year, the trial balance of a concern agreed but the following errors were discovered after preparing the final accounts : (i) No adjustment entry was passed for an amount of Rs.2,000 of outstanding rent. (ii) Purchases book was overcast by Rs. 1,000. (iii) Depreciation of Rs.4,000 on machinery had been omitted to be recorded in the books. (iv) Rs.600 paid for purchase of stationery had been debited to purchases account. (v) Sales book was overcast by Rs.1,000. (vi) Rs.5,000 received in respect of book debts had been credited to sales account. Show the effect of each one of the abovementioned errors on the net profit, of the year to which these errors pertain. If the net profit as per profit and loss account is Rs.3,22,000, what is the correct profit arrived at after the rectification of above errors? Date Particular Amount Amount 01 P/L Adjustment A/c..Dr. To, outstanding rent 2,000 2, Suspense A/c.Dr. 1,000 To Profit & Loss A/c 1, Profit & Loss Adjustment..Dr. 4,000 To machinery A/c 4, Stationary A/c..Dr. 600 To Profit & Loss Adjustment A/c 600

9 05 06 Financial Accounting Solved Ans. C.s. Found. Dec.09 9 Profit & Loss Adjustment A/c Dr. 1,000 To, Suspense A/c 1,000 Profit & Loss Adjustment A/c.Dr. To debtors A/c Profit & Loss Adjustment Account 5,000 5,000 To, Outstanding rent A/c To, Machinery A/c To, Suspense A/c To, Debtors To Balance c/d 2,000 4,000 11,000 5,000 3,11,000 By Profit & Loss A/c By Suspense A/c By Stationary A/c 3,22,000 1, ,23,600 3,23,600 (B) While comparing the cash book of Mayank with the bank pass book on 30 lh September, 2009 you find the following: (i) The bank pass book showed a debit balance of Rs.15,000. (ii) Bank paid insurance premium Rs.2,000, but it was recorded as Rs.200 only in cash book. (iii) Cheques issued in favour of suppliers in September, 2009 amounted to Rs.55,000, but cheques for Rs.50,000 only were presented for payment upto 30 th September, (iv) Direct deposit of Rs. in Mayank's bank account by a customer on 25 th September, 2009 had not been recorded in the cash book. (v) Dividend collected by bank, but not recorded in cash book Rs. 1,000. (vi) Bank charged Rs.300 for its services, but they were yet to be recorded in cash book. (vii) Cheques amounting to Rs.78,000 were deposited with bank in the last week of September, 2009, but cheques for Rs.51,000 only had been cleared before 1 st October Prepare the bank reconciliation statement ascertaining bank balance/overdraft as per cash book. Over Draft Balance as Pass Book Add: Cheques issued in favour of suppliers Direct deposit by customer Dividend collected by bank Less: Insurance premium Bank Cheques Cheques were deposited Over draft balance as Cash Book ,000 (1800) (300) (27000) 1900 Qn.8. (A) On 1 st April, 2009, Rohit sold goods to Mahesh for Rs. and drew upon him a bill for the amount at 3 months. Mahesh accepted the bill. On 4 lh April,2009, Rohit. got the bill discounted with his per annum. Just before the due date, Mahesh approached Rohit with a request for renewal of the bill for 3 months. Rohit agreed on the condition that the new bill was for Rs.10,310 which included Rs.310 by way of interest. Mahesh found the condition as reasonable and accepted the new bill on 4 th July, On 29 th September, 2009, Mahesh was declared insolvent. On 2 nd November, 2009, a first and final dividend of 40 paise in a rupee was received from the insolvent's receiver. Pass journal entries in the books of Rohit for all the abovementioned transactions. 1 st April Mahesh A/c..Dr. To Sales A/c Bill Receivable A/c Dr. To Mahesh A/c

10 Financial Accounting Solved Ans. C.s. Found. Dec th April Bank A/c.Dr. Discount charges A/c Dr To Bill Receivable A/c Mahesh A/c Dr. To Bank A/c Mahesh A/c Dr. To Intt. A/c Bill Receivable A/c.Dr. To Mahesh A/c Mahesh A/c..Dr. To Bill Receivable Cash A/c.Dr. Bad Debts..Dr. To Mahesh ,310 10,310 4,124 6, ,310 10,310 10,310 (B) On 1 st April. 2008, Bharat Sports Club received a donation of Rs.40 lakh for holding a tournament every year. The amount was immediately invested in 6% Government Bonds acquired at par; half-yearly interest being receivable. 0n 30 th September and 31 st March in each accounting year. During the year ended 31 st March, 2009, the club spent Rs.2,58,000 by way of expenses on tournament. Gate collections in the final match of the tournament was Rs 24,200. Prepare the tournament fund account, tournament fund investments account and interest on tournament fund investments account for the year ended 31 st March, (Ignore tax.) Tournament Fund Date Particular Amount Date Particular Amount March 31 To, Tourn Exp. 2,58, April By Bank 4,00, March 31 To Balance c/d 40,06, By Int. on tournament 240,000 March 31 fund 42,64, March April By gate collection 24,200 42,64,200 By Balance b/d 40,06200 Tournament Fund Investment Account Date Particular Amount Date Particular Amount April 1 To, Bank 40,00, March 31 4,00,000 40,00,000 40,00,000 Int. on Tournament Fund Date Particular Amount Date Particular Amount To, Tournament fund 2008 By Bank A/c March 1 A/c 2,40,000 Sep. 30 2,40, Sep. 31 By Bank 2,40,000