P.RAJENDRAN Assistant Professor PG& Research department of commerce Arumugam Pillai Seethai Ammal College, Tiruppattur SPECIAL ACCOUNTS

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1 P.RAJENDRAN Assistant Professor PG& Research department of commerce Arumugam Pillai Seethai Ammal College, Tiruppattur SPECIAL ACCOUNTS III YEAR VI SEMESTER COURSE CODE: 4BCO6C1

2 III YEAR VI SEMESTER COURSE CODE: 4BCO6C1 CORE COURSE XVI SPECIAL ACCOUNTS Unit I Bank Accounts Preparation of profit and loss accounts Balance Sheet (new forms) Unit II Insurance accounts Accounts of life insurance companies Accounts of general insurance companies. Unit III Double accounts nature features receipt and expenditure on capital accounts General Balance Sheet Revenue account Net revenue account Differences between single account system and double account system Replacement of an asset Accounts of Electricity Companies. Unit IV Holding companies Preparation of Consolidated Balance Sheet Minority interest Pre-acquisition profits Cost of control Inter-company balances Unrealized inter-company profits Revaluation of assets and liabilities Bonus shares Treatment of dividend. Unit V Voyage accounts Farm accounting

3 UNIT 1 Bank Bank is a place for keeping money and valuables safely, the money being paid out on the customer's order, that is cheques. Banking - Definition "Accepting, for the purpose of lending or investment, of deposits of money from the public repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise" - Sec. 5 of the Banking Regulation Act Non - Banking Assets A banking company may have to take possession of certain assets charged in its favour on account of the failure of a debtor to repay the loan on time. Such on assets is termed as non banking assets, It must be disposed off by the banking company within 7 years of its acquisition. Profit or loss on the sale of such an asset has to be shown separately in the Profit and Loss a/c of the banking company. Statutory Reserve (Sec. 17) It is obligatory for every banking company incorporated in India to create a statutory reserve fund of 25% of its annual profits as disclosed by its Profit and Loss a/c before any appropriations. Statutory Liquidity Ratio In addition to the cash reserve, every banking company is required to maintain in India in cash, gold and unencumbered securities, an amount which shall not be less than 25% of its time and demand liabilities.

4 Form B PROFIT & LOSS ACCOUNT For the year ended 31st March (Year) (000's omitted) Sche dule Year ended on (Current Year) Year ended on (Pre year) I. Income Interest earned Other income Total 11. Expenditure Interest expended Operting-expenses Provisions and contingencies Total III. Profit/Loss Net Profit/Loss for the year Profit/Loss brought forward Total IV. Appropriations Transfer to statutory reseve, Transfer to other reserve Transfer to Government/proposed dividend Balance carried over to balance sheet Total

5 FORM OF BALANCE SHEET BALANCE SHEET OF...(Name of the Banking Company) as on 31st March... (000's omitted) Capital and Liabilities Sche dule Capital 1 Reserves 2 Deposits 3 Borrowings 4 Other Liabilities and Provisions 5 Total Assets Cash and balance with Reserve Bank of India 6 Balance with Banks and Money at call and Short Notice 7 Investments 8 Advances 9 Fixed Assets 10 Other Assets 11 Total Contingent Liabilities Bills for Collection 12 as on 31.3 (Current Year) as on 31.3 (Previous Year). Non-Performing Assets An asset becomes non-performing when the interest and/cr installment of principal is delayed and not received before a stipulated time. A term loan is treated as non-performing asset when interest and/or instalment of principal remains over due for a period of more than 90 days.

6 Non - performing assets (N.P.A.) Provision for doubtful debts On 31st March 1998, Bharat Commercial Bank Ltd., finds its advances classified as follows: (PIS.) Standard assets 14,91,300 Sub-standard assets 92,800 Doubtful assets (secured) doubtful for one year 25,660 doubtful for one year to 3 years 15,640 doubtful for more than 3 years 6,580' Loss assets 10,350 Calculate the amount of provision to be made by the bank against the above mentioned advances. (Madras, B. Com (ICE) (UCYD) Oct 2008; Ist M. Com (ICE) Oct. 2008; B. Com, B. Cam (CS) Nov. 2007; B. Com (ICE) Ap 2007; M. Com (ICE) Oct [Thiruvalluvar, B.Com., Ap Solution: Amount () % required as provision Provision () Standard assets 14,91, ,728 Sub-standard assets 92, ,280 Doubtful assets- upto one year 25, ,132 one year to 3 years 15, ,692 more than 3 years 6, ,290 Loss assets 10, ,350 Total provision required 36,472 Interest on doubtful debts The Trial Balance of the Nedungadi Bank Ltd., as on 30th June 1984 shows e following balances.

7 Interest and discount 45,40,600 Rebate on bills discounted (1.7.83) 4,750 Bills discounted and purchased 3,37,400 The unexpired discount as on is estimated to be 5,560. Draft necessary adjusting entries and calculate the amount of interest and discount to be credited to Profit and Loss Account. [Periyar, A Cotm, Ap [Madras, R Conz., B. Com (CS) Ap 2007, Nov. 2006; R Cotm (PZ4A) Nov. 2006; 1st M. Cotm, Ap. 2007; M Cont. (Sem C41A) Nw.2005; April 2004; BCS (SY4B) Nov. 2005; B.Com (ICE) Oct. 2005; H M. Com, April 2002; B. Com., Oct Solution: Books of Nedungadi Bank Ltd. Journal (adjustment) Date Particulars L.F Dr Cr Rebate on bills discounted A/c Dr 4,750 To Discount A/c 4,750 [Being transfer of opening unexpired discount to Discomt A/c Dr 5,560 To Rebate on bills discounted 5,560 [Being closing unexpired discount out of the current Calculation oef amount of interest and discount to be credited to Profit & Loss Account: Interest and Discount given 45,40,600 Add: Opening balance of rebate on bills discounted 4,750 45,45,350 Less: Closing balance of rebate on bills discounted 5,560 Interest and discount to be credited to Profit and Loss A/c (schedule 13) 45,39,790

8 Preparation of Profit and Loss Account and Balance Sheet The following is the Trial Balance extracted from the books of Town Bank Ltd. Debit balances Credit Balances Balances with banks 46,350 Share capital 3,00,000 Investment in Government 1,94,370 Security deposit of employees 15,000 Other investments 1,55,630 SB Accounts 7, Interest accrued on investments 24,620 Fixed deposits 1,13,050 Silver 2,000 Reserve fund 1,40,000 Constituent's liability for Borrowings from banks 77,230 acceptances, etc. 56,500 Profit and Loss A/c 65M Building 65,000 Bills for collection 43,5W Furniture 5,000 Acceptances and endorsements 56,5W Money at call 26,000 Interest 72,000 Loans 2,00,000 Commission 25,300 Bills Discounted 12,500 Discounts 42,000 Interest 7,950 Rent 600 Bills for collection 43,500 Profit on Bullion 1,200 Audit fees 5,000 Miscellaneous income 2,700 Loss on sale of furniture 1,000 Accumulated depreciation Directors' fees 1,200 on building 20,000 Salaries 21,200 Postage 50 Managing director's 12,000 Loss on sale of investments 30,000 Cash in hand 25,000 Cash with RBI 50,000 Branch adjustment A/c 20,000 10,20,00 10,20,00

9 You are required to prepare the Profit and Loss Account and Balance Sheet after taking into consideration the following 1. Bad debts Rebate on bills 1, Current year's depreciation on building 2, Some current accounts are over drawn to the extent of 25,000 and total of credit balances is 1,22,000, [Bangalore, B.Com, Nov adapted] Solution: Profit and Loss Account for the year ended of Town Bank Ltd. Schedule No. Year ended Income Interest earned 13 1,13,000 Other income 14-1,200 Total 1,11, Expenditure : Interest expended 15 7,950 Operating expenses 16 41,450 Provisions and Contingencies: ,900 III. ProfitlLoss Net profit for the year (I - II) 61,900 Profit brought forward 6,500 Total 68,400 IV. Appropriations: Transfer to statutory reserve 25% of 61,900 15,475 Balance carried to Balance Sheet 52,925 Total 68,400 Note : Transfer to Statutory Reserve should be 25% of Net Profit. Working notes: Schedule 13 : Interest earned Interest 72,000 Discount 42,000 1,14,000 Less: Closing rebates on bill discounted 1,000 1,13,000 Schedule 14 : Other income Commission, etc. 25,300

10 Rent 600 Profit on Bullion 1,200 Miscellaneous income 2,700 29,800 Less: Loss on sale of furniture 1,000 Loss on sale of investments 30,000 31,000-1,200 Schedule 15 :Interest expended Interest 7,950 Schedule 16 : Operating expenses Salaries (including M.D's salary 33,200 Directors fees 1,200 Postage 50 Audit fees 5,000 Depreciation on buildings 2,000 41,450 Provisions and contingencies Bad debts 500 Balance sheet of Town Bank Ltd., as on Schedule As on Capital & Liabilities Capital 1 3,00,000 Reserves & Surplus 2 2,08,400 Deposit & Other accounts 3 2,42,470 Borrowings 4 77,230 Other liabilities & Provisions 5 16,000 Total 8,44,100 Assets Cash and balance with RBI 6 75,000 Balance with banks and money at call & 7 72,350 short Investments notice 8 3,65,130 Advances 9 2,37,000 Fixed assets 10 48,000 Other assets II 46,620 Total 8,44,100 Contingent liabilities 12 56,500 Bills for collection 43,500

11 Working notes: Schedule I : Share capital Share capital 3,00,000 Schedule 2. Reserves & Surplus Reserve fund 1,40,000 Add: Additions 15,475 Profit and Loss Account balance 52,925 Total 2,08,400 Schedule 3 : Deposits Savings deposits 7,420 Fixed deposits 1,13,05 Current deposits (97, ,000) 1,22,00 Total 2,42,470 Schedule 4 : Borrowings Borrowings from bank 77,230 Schedule 5: Other liabilities: Security deposits of employees 15,000 Rebate on bills discounted 1,000 16,000 Schedule 6 : Cash and balance with RBI Cash in hand 25,000 Cash with RBI 50,000 75,000 Schedule 7 : Balances with banks and money at call and short notice Balances with other banks Money at call and short notice 46,350 26,000 72,350 Total Schedule 8: Investments Government bonds 1,94,370 Other investments 1,55,630 Gold Bullion 15,130 3,65,130 Schedule 9 : Advances Loans, cash credits and overdrafts (2,00,000 + Bills discounted 2,24,500 12,500 Total 2,37,000 Schedule 10 : Fixed assets Premises (buildings) (65, ,000 43,000

12 Furniture 5,000 48,000 Schedule 11 : Other assets Branch adjustment A/c Silver 20,000 2,000 Interest accrued on investments 24,620 Total 46,620 Schedule 12. Contingent Liabilities Acceptances and endorsements 6,500 Bills for collection 43,500 From the following, you are required to prepare the Profit and Loss Account the Balance Sheet of Madras Bank Ltd., as on 31, according to Banking, Regulation Act Trial Balance as on in Thousands in Thousands Issued capital: 20,000 shares of 100 each 2000 Money at call and short notice 800 Reserve fund 700 Cash in hand 650 Deposits 2500 Cash at bank 950 Borrowings from SBI 500 Investments in Government securities 900 Secured loans 1,500 Cash credits 500 Premises less depreciation 580 Furniture less depreciation 120 Rent 5 60 Interest and discount 800 Commission and brokerage 70 Interest paid on deposits 300 Salary and allowances paid to staff 150 Interest paid on borrowings 50 Audit fees 10 Directors' fees 8 Non-banking assets 80

13 Depreciation on bank's property 13 Printing 3 Advertisement t Stationery 5 Postage and telegrams 2 Other expenses 3 6,630 6,630 Adjustments: a) Provide 20,000 for doubtful debts b) Provide 10,000 on bills discounted but not matured on c) Acceptances and endorsements on behalf of customers amounting to 4,00,000 d) Provide 60,000 for taxes. [Madras, B.Com (PZ4A) Nov [Kerala, B.Com., April Solution: Madras Bank Ltd. Profit and Loss Account for the year ended (000's omitted) Schedule No. Year ended ( in '000) 1. Income Interest earned Other income : I 920 II. Expenditure: Interest expended Operating expenses Provisions and contingencies III. Profit/Loss: Net profit for the year (I -- II) 290 Profit brought forward 290 IV Appropriations: Transfer to statutory reserve (25% on 2,90,000) 72.5 Transfer to other reserves Transfer to Government/proposed dividend Balance carried over to balance sheet

14 Note : Transfer to Statutory Reserve is now increased to 25%. Working notes: Schedule 13 : Interest earned ( in '000) Interest and discounts 800 Less: Closing rebate on bills discounted Schedule 14 : Other income Rent 60 Commission and brokerage Schedule 15, Interest expended Interest paid on deposits 300 Interest paid on borrowings Schedule 16 : Operating expenses ( in '000) Rent 5 Other expenses 3 Salary and allowances paid to staff 150 Postage and telegrams 2 Audit fees 10 Director's fees 9 Depreciation on banks property 13 Printing 3 Advertisement 1 Stationery Provisions and contingencies Provision for doubtful debts 20 Provision for tax Madras Bank Ltd. Balance Sheet as on (000's omitted)

15 Capital and liabilities Capital 1 2,000 Reserves and surplus Deposits 3 2,500 Borrowings Other liabilities and provisions Assets: Cash and balance with RBI Balance with banks & money at call and short notice 7 1,750 Investments Advances 9 1,980 Fixed assets (0 700 Other assets ,060 Contingent liabilities Bills for collection Nil Schedule I : Capital ( in '000) Working notes: Issued and paid up share capital 2,000 Schedule 2 : Reserves and Surplus Reserve fund Statutory reserve (current year's transfer) 72.5 Profit and Loss Account balance Schedule 3 : Deposits Deposits 2,500 Schedule 4 : Borrowings Borrowing from SBI 500 Schedule 5 : Other liabilities and Provisions Rebate on bills discounted 10 Provision for tax Schedule : 6 : Cash and balances with RBI Cash in hand 650 Schedule 7 : Balance with banks and money at call and short notice Money at call and short notice 800 Cash at bank 950

16 1,750 Schedule 8 : investments Investment in Government securities 900 Schedule 9 : Advances Secured loans 1500 Cash credits Less, Provision for doubtful debts 20 Schedule 10 : Fixed assets 1980 Premises 580 Furniture Schedule 11 : Other assets Non-banking assets 80 Schedule 12 - Contingent Liabilities Acceptances and endorsements 400

17 UNIT 2 INSURANCE - MEANING Insurance is a contract whereby insurers agree to compensate for a specific loss to the insured, who in consideration, agrees to pay regularly a sum of money called premium. The insurance company is known as the insurer and the person taking the policy from the insurance company is known as insured. Therefore, insurance is a commercialised form of spreading risk. INSURANCE - DEFINITION "Insurance is a co-operative device to spread the loss caused by a particular risk over a number of persons who are exposed to it and who agree to insurance themselves against the risk". - R.S. Sharma "Insurance is a contract in which a sum of money is paid to the insured in consideration of insurers incurring the risk of paying a large sum upon a given contingency".-justice tindle KINDS OF INSURANCE The following are the different kinds of insurance I. Life Insurance It is a contract between the insured and the insurance company in which the insurance company agrees to pay the death of the insured or on the maturity of the policy whichever is earlier. For this purpose the insured agrees to regularly remit a certain sum of money as premium. In addition the insured must have insurable interest in the person whose life is insured at the time when policy is obtained. Example :. Whole life, Endowment, Health insurance and so on. ii) General Insurance All insurance contracts other than life insurance are known as General

18 Insurance. Example Fire insurance, Marine insurance, Liability insurance, Motor vehicle, theft, Fidelity, Accident insurance. iii) Social Insurance It is to provide protection to the weaker section of the society who are unable to pay the premium for adequate insurance. With the increase of the socialistic ideas, the social insurance is an obligatory duty of the nation. Example : Pension plans, Disability benefits, Sickness insurance and Industrial insurance. INSURANCE BUSINESS IN INDIA The insurance industry as on comprised mainly two state players i) Life Insurance Corporation of India conducting life insurance business; and ii) General Insurance Corporation of India conducting general insurance business through its four subsidiaries, such as a) Oriental Insurance Company Limited b) The New India Assurance Company Limited c) National Insurance Company Limited and d) United India Insurance Company Limited However, as a result of continued liberalisation policy of the Government, the insurance business has now also been opened to the private sector.

19 FORM A-PL Name of the insurer : Registration No. and Date of Registration with the IRDA :.. PROFIT & LOSS ACCOUNT for the year ended 31st March, Shareholders' Account (Non-technical Account) Particulars Amounts transferred from/to the Policyholders Account (Technical Account) Income From Investments (a) Interest, Dividends & Rent - Gross (b) Profit on sale/redemption of Investments (c) Loss on sale/redemption of Investments Other Income (To be specified) TOTAL (A) Expenses other than those directly related to the insurance business Bad debts written off Provisions (Other than taxation) (a) For diminution in the value of investments (Net) (b) Provision for doubtful debts (c) Others (to be specified) TOTAL (B) Profitl(Loss) before Tax Provision for Taxation Profit/(Loss) after tax APPROPRIATIONS (a) Balance at the beginning of the year (b) Interim dividends paid during the year (c) Proposed final dividend (d) Dividend distribution on tax (e) Transfer to reserves/other accounts (to be specified) Profit carried... to the Balance Sheet Sche dule (Current Year) ( '000) (Previous Year) ( '000)

20 FORM A-BS Name, of the insurer. Registration No. and Date of Registration with the IRDA. BALANCE SHEET AS AT 31st MARCH, Particulars Sche dule SOURCES OF FUNDS Shareholders' Funds Share Capital 5 Reserves and Surplus 6 Credit/(Debit) Fair value Change Account Sub-total BORROWINGS Policyholders' Funds Credit/(Debit) Fair value Change Account Policy Liabilities Insurance Reserves Provision for Linked Liabilities Sub-total Funds for Future Appropriations TOTAL APPLICATION OF FUNDS INVESTMENTS Shareholders 8 Policyholders 8A Assets held to cover linked liabilities 8B Loans 9 Fixed Assets 10 Current Assets (A) Cash and Bank Balances 11 Advances and Other Assets 12 Sub-total (A) Current Liabilities (B) 13 Provisions 14 Sub-total (B) Net Current Assets (C) = (A) (B) Miscellaneous Expenditure (to the extent not written off or adjusted 15 Debit Balance in Profit & Loss Account (shareholders' account) Total (Apps. of funds + New current assets) Current year ('000) Previous year ('000)

21 Calculation of life insurance fund The Life Assurance Fund of sun Life Assurance Company Ltd. shows a balance of 38,43,750 on It was later observed that the following had not been taken into account : I. Dividend from investment 1,75,000 II. Income Tax on the above 16,000 III. Bonus utilised in reduction of premium 2,42,500 IV. Claims covered under insurance 1,62,500 V. Claims intimated but not year admitted by the company P 4,03,500 Ascertain the balance of Life Assurance Fund as from the above information. SOLUTION Statement showing Life Insurance fund Life Assurance Fund as on ,43,750 Add: Dividend from investment 1,75,000 Bonus utilised in reduction of premium 2,42,500 Claims covered under reinsurance 1,62,500 5,80,000 Less: Income tax on dividend 16,000 44,23,750 Claims intimated but not yet admitted 4,03,500 Bonus in reduction of premium 2,42,500 6,62,000 Life Assurance Fund 37,61,750 The Revenue Account of a Life Insurance Company shows the Life Assurance Fund on 31st March 2002 at 62,21,310 before taking into account the following items : i) Claims covered under reinsurance 12,000 ii) Bonus utilised in reduction of Life Insurance Premium 4,500

22 iii) Interest accrued on securities 8,260 iv) Outstanding premium 5,410 v) Claims intimated but not admitted 26,500 What is the Life Assurance Fund after, taking into account of the above information. SOLUTION Statement Showing Life Insurance Fund Rs Balance of Life Fund on Add : Bonus utilised in reduction of premium 4500 Interest accrued on securities 8260 Premium outstanding 5410 Claims covered under reinsurance Rs Less : Claims outstanding Bonus in reduction of premium Life Assurance Fund 62,20,480 The following figures are extracted from the General Leder of the Golden Life Assurance Company Ltd., for the year Life Fund on 1st April ,12,300 Claim by Survivance 64,452 Premium less Reinsurance 7,11,348 Surrenders 74,606 Consideration for annuities to Annuities 77,376 be granted 22,676 Bonus Paid 22,312 Interest and Dividends 4,47,07 Commission 22,834 Fines for Revival of policies Dividends to Share holders 19,756

23 Claims by death 6,75,910 'Expenses of Management 80,140 Claims covered under Income Tax 17,186 reinsurance 54,00 You are required to make out the Revenue Account for the year ended 31st March SOLUTION. Schedule - 1 Premium Earned (Net) Current Year Rs Premium less Reassurance 7,11348 Total Premium 7,11348 Schedule - 2 Commission Expenses Current Year Commission Paid 22,834 Schedule - 3 Operating Expenses Rs Total Premium 22,834 Current Year Expenses to management 80,140 Rs Total Premium 80,140 Schedule - 4 Benefits Paid (Net) Current Year Claims by death 6,75,910 Claims by Survivance (Maturity) 64,452 7,40,362 Less : Claims covered under reinsurance 54,000 6,86,362 Surrenders 74,606

24 Annuities 77,376 Total 8,38,344 GOLDEN ASSURANCE COMPANY LTD. Revenue Account for the year ended 31st March 2008 Particulars Sche dule (Current Year) Premiums earned-net 1 7,11,348 Income from Investments Interest, Dividends & Rent- Gross 4,47,070 Other Income Consideration for annuities to be granted 22,676 Fines for Revival of Policy 716 TOTAL (A) 11,81,810 Commission Operating Expenses Provision for doubtful debts Bad debts written off Provision Tax , ,140 17,186 TOTAL (B) 1,20,160 Benefits paid (Net) 4 8,38,344 Interim Bonus Paid 22,312 TOTAL (C) 8,60,656 Surplus (D) = (A) (B) (C) 2,00,994 Appropriations Transfers to Shareholders' Account 19,756 PBalance Being Funds for Future Appropriations 1,81,238 TOTAL (D) 2,09,994 From the figure given below prepare the revenue account of the bharath Life Assurance Company Ltd. for the year ended 31st March 2007.

25 RS. Premium received 26,00,000 Interest and dividends received 15,00,000 Bonus in cash 1,12,000 Bonus in reduction of premium 4,050 Claims paid 2,60,000 Surrenders 1,90,000 Annuities paid 1,14,000 Expenses of Management 2,20,000 Commission paid to agents 1,25,000 Re-assurance balance irrecoverable 2,000 Income Tax 2,e_0,000 Surplus on revaluation of reversion purchased 9,000 Consideration for annuities granted 85,000 Fines for revival of lapsed polices 1,250 SOLUTION : Schedule -1 Premium Earned (Net) Rs Premiums received 26,00,000 Total 26,00,000 Schedule - 2 Commission Expenses Rs Commission paid to agents 1,25,000 Schedule - 3 Operating Expenses Total 1,25,000 Rs Expenses of Management 2.20,000 Schedule - 4 Benefits Paid'(Net) Total 2,20,000

26 Claims paid Surrenders Annuities paid Rs 2,60,000 1,90,000 1,14,000 Total 5,64,000 BHARATH LIFE ASSURANCE COMPANY REVENUE ACCOUNT for the year ended 31st March 2007 Sche (Current Particulars Jule Year) Premiums eamed-net 1 26,00,000 Income from Investments : Interest Dividends & Rent- Gross 15,00,000 Transfer/Gain on revaluation change in fair value Other Income `;'000 Consideration for annuities granted 85,000 Fine for revival of lapsed policies 1,250 TOTAL (A) 41,95,250 Commission 2 1,25,000 Operating Expenses 3 2,20,000 Provision for doubtful debts - Bad debts written off (Reassurance irrecoverable) 2,00G Provis i on Tax 2,40,000 TOTAL (11) 5,87,000 Benefits Paid (Net) 4 5,64,000 Interim Bonus paid Cash 1,12,000 Bonus in reduction of Premium 4,050 TOTAL 6,80,050 Surplus (D) = (A) - (B) - (C) 29,28,200 Appropriations : Balance being Funds for Future Appropriations 29,28,200 TOTAL (D) 29,28,200

27 A Life Insurance Company gets its valuation made once in every two years Life Assurance fund on amounted to 63,84,000 before providing 64,000 for the shareholders' dividend for the year Its actuarial valuation due on disclosed a net liability of Rs, 60,80,000 under assurance annuity contracts. An interim bonus of 80,000 was paid to the policy holders during the two years ending Prepare a statement showing the amount now available as bonus to policy holders. Solution: Valuation Balance Sheet as on [Punjab, B.Com] To Net liability as per actuarial valuation 60,80,000 To Surplus (Balancing figure) 3,04,000 63,84,000 By Life assurance fund as per balance sheet 63,84,000 63,84,000 Statement showing bonus due to policy holders Surplus as per valuation Balance Sheet Add: Interim bonus paid to policy holders Less Dividend for due to shareholders Net profit Policy holders will get 95% of 3,20,000 Less: Bonus already paid to the policy holders Amount due to the policy holders Rs 3,04,000 80,000 3,84,000 64,000 3,20,000 3,04,000 80,000 2,24,000

28 From the following 1particulars prepare the fire insurance revenue account for Claims paid 2,40,000 Provision for unexpired Premium received 6,00,000 risk on ,60,000 Claims unpaid on Re-insurance premium 60,000 20, A0#~~ Commission 1,00,000 Claims unpaid on ,000 Expenses 1,50,000 Make provision against unexpired risk at the end of the year at 50% of net premium. SOLUTION: Schedule -1 Premium Earned (Net) Premium received Less : Re-insurance Premium 6,00,000 60,000 total 5,40,000 Schedule-2 Claims Incurred (Net) Claims paid Add claims unpaid on Less Claims unpaid on ,40,000 35,000 2,75,000 20,000 Total Claim paid 2,55,000

29 Claims paid 4,80,000 Premium received 12,00,00 0 Claims outstanding ,0001 Reinsurance Premium Paid 1,20,000 Claims intimated but not accepted and paid on Claims intimated and accepted but not paid on ,000 60,000 Commission Commission on reinsurance ceded Provision from expired risk on ,00,000 10,000 4,00,000 Commission on reinsurance accepted 5,000, Expenses of Management 3,17,000, Additional provision for unexpired risk on ,000 You are required to provide for additional reserve for unexpired risk at 1% of the net premium in addition to the opening balance. SOLUTION : Premium received Less : Re-insurance Premiums Schedule - 1 Premium (Net) 12,00,000 1,20,000 Total Premium Net 10,80,000 Schedule - 2 Claims incurred (Net) Claims Paid Add : Claim due on 31.3,2008 Claims intimated but not accepted on ,80,000 60,000 10,000 Less : Claims due on ,50,000 40,000 Total claim paid 5,10,000

30 Commission on direct business Add : on re-insurance accepted Less : Commission on re-insurance ceded Schedule - 3 Commission 2,00,000 5,000 2,05,000 10,000 Total 1,95,000 Schedule - 4 Operating expenses Expenses of Management 3,17,000 Total 3,17,000 Working Note : Provision tor unexpired risk 10,80,000 x 50/100 5,40,000 Add : Opening Additional reserve 20,000 Addition 10,80,000 x 1/100 10,800 30,800 Less : Opening provision for unexpire risk 4,00,000 5,70,800 Additional reserve 20,000 4,20,000 Additional reserve change in provision for unexpired risk 1, 50,800 ABC INSURANCE COMPANY LTD. Fire Revenue Account for the year ended Particulars Sche dule (Current Year) 1. Premiums Earned (Net) 1 10,80, Others (to be specified) 3. Change in provision for unexpired risk (-)1,50,800

31 4. Interest, Divided & Rent - Gross TOTAL (A) 9,29, Claims incurred (Net) 2 5,10, Commission 3 1,95, Operating Expenses 4 3,17, Others to be specified TOTAL (B) 10,22,000 Operating Loss (C) = (A B) ( ) 92,800

32 UNIT 3 DOUBLE ACCOUNT SYSTEM - MEANING It is a method of presenting annual financial statements generally used by the undertakings, prepare two balance sheets instead of one. ADVANTAGES OF DOUBLE ACCOUNT SYSTEM i) The capital account is similar to a cash account. This account gives the sources of capital and the manner in which the capital is used in the form of assets and the cash balance left. ii) iii) iv) The account can be easily understood by all. This system of accounting helps in the replacement of assets without affecting cash resources of the undertaking. This system provides the comparison of operating and non-operating activities. v) It helps in preparation of various statistical returns in a speedy manner. vi) This system helps in comparison of floating assets and floating liabilities. DISADVANTAGES OF DOUBLE ACCOUNT SYSTEM i) The Balance Sheet of double account system does not give a correct picture of assets, because all assets are shown in the capital account at cost. ii) iii) iv) Preliminary expenses and expenditure on promotion of bills are recorded in capital accounts. The double account system contains unnecessary details, which create confusion. Capital account includes assets of short duration. Such assets appear in the account, even after they are reduced to scrap value. v) The trading result is not disclosed in the revenue account as it does not include interest paid and interest received on loans and debetures.

33 vi) It is not always possible to calculate exactly the amount to be charged to revenue account on replacement of an asset by the construction of a new and improved assets. DISTINCTION BETWEEN DOUBLE ENTRY SYSTEM AND DOWILE ACCOUNT SYSTEM Double Entry System Double Account System i) Double entry system is a method ii) iii) iv) of book-keeping. It consists of profit and loss a/c, profit & Loss appropriation a/c and Balance Sheet. Under this method Balance Sheet at prepared in a single part. The fixed assets are shown as cost less depreciation in the Balance Sheet, v) Fixed assets and fixed liabilities vi) vii) are shown in the Balance Sheet Interest is charged to Profit and Loss a/c. The object of preparing Balance Sheet is to know the financial position of a business concern. Double account system is a Method of presenting final accounts. It consists of revenue account, net revenue account, receipts and expenditure on capital a/c and Balance Sheet. Under this method the Balance Sheet is prepared in two parts. The fixed assets are shown at cost in the capital account and the amount of depreciation fund is shown in the Balance Sheet. Fixed assets and fixed liabilities are shown in capital account. Interest is charged to net revenue account. The object of preparing Balance Sheet in two parts is to give details regarding the amount of fixed capital raised and its utilization towards purchase of fixed assets.

34 DISTINCTION BETWEEN DOUBLE ACCOUNT SYSTEM AND SINGLE ACCOUNT SYSTEM Single Account System i) Under this method Only one Balance Sheet is presented. Double Account System Under this method Balance, Sheet is presented in two parts. ii) iii) iv) The main purpose of preparing the Balance Sheet under this, method is to show the financial position of a concern on a particular data. Under this method fixed assets are shown in the balance sheet after depreciation Under this method Profit and Loss a/c and Profit and Loss appropriation a/c is prepared. Under this method the main purpose is to show how the capital is raised and how the same has been invested is fixed assets. Under this method fixed assets are shown at original cost in the capital a/c and accumulated depreciation fund a/c is shown on the liability side of Balance Sheet. Under this method revenue a/c and net revenue a/c is prepared REPLACEMENT OF AN ASSET Under double account system, if an asset is abandoned due to obsolescence or any other reasons, there is no need to write off such losses. The asset continues to be in the books at original cost. Once an asset appears in the capital a/c at a certain figure, its value is not reduced. However, its value may be increased as a result of extensions and additions to the assets. Therefore, there is a need to allocate the amount spent on replacement of an asset to capital representing the value of extension and to revenue representing the actual replacement of the original asset.

35 Journal Entries Date Particulars L. F. i) For the amount spent on new works New Works a/c Dr. (Amount to be capltallsed Replacement a/c Dr. (Amount to be written off to revenue) To Bank (Actual Amt. spent) ii) For the sale of old materials Bank a/c Dr. To Replacement a/c iii) For the value of old materials used in the construction New Works a/c To Replacement a/c iv) Dr. For the balance in the Replacement a/c: Revenue a/c Dr. To Replacement a/c Debit x x x x x Credit x x x x v) For the amount entirely spent on x new extension New Works a/c Dr. To Bank a/c x Note : The (v) entry will appear if a work is newly constructed. For replacement of assets the first four entries have to be passed. Revenue Account It is in the nature of Profit & Loss Account. All the expenses are shown on the debit side of this account and all the incomes are shown on the Credit side of this account. The balance found in this account represents either Profit or Loss which will be transferred to Net Revenue Account. The following is a specimen-form of a Revenue account:

36 Dr. Revenue A/c for the year ended Particulars Particulars ' To Staff Salaries By Incomes (except To Rent, rates & taxes interest earned and To Printing & Stationery government subsidy) To Postage & Telegrams By Net Revenue A/c to Repairs & Renewals (Loss if any, transferred) To Depreciation on Fixed assets (Bal. fig.) To Discount allowed To Miscellaneous expenses To Net Revenue A/c (Bal. fig.) Net Revenue A/c for the year ended... Particulars Particulars To Balance b/d (if any) By Balance b/d To Revenue A/c (Balance from last year) (Loss of current year By Revenue A/c transferred from Revenue A/c) (Profit of Current year To Interest on debentures transferred from Revenue A/c) To Interest on Loans By Government subsidy To Interest on Security deposits By Interest earned To Contingency Reserve By Transfer from Reserve To Dividend Control Reserve By General Balance Sheet To General Balance Sheet (Bal. fig.) (Loss if any, transferred to general balance sheet Bal. fig.) Cr.

37 Capital Account (or) Receipts and Expenditure on Capital Account This account is mainly prepared to show as to how much fixed or long term capital has been raised by a Public utility concern and how it has been utilised. The account is usually prepared in a three columnar form on either side. On the left side is recorded the Capital expenditure and on the right side Capital receipt. Expenditure Receipts and Expenditure on Capital A/c for the year ending Upto the end of Previous During the year Total Receipts Upto the end of Previous During the year Total To Preliminary By Equity expenses Shares To Land By Preference To Building x x x Shares To Plant By Debate By Loans By Calls-in- advance Total Expenditure Total Receipts To Balance transferred to General Balance Sheet General Balance Sheet In the General Balance Sheet the balance of the Capital account, the current assets and liabilities are recorded. As usual on the left side various funds created and other current liabilities are recorded such as depreciation fund, General fund. Sinking fund, investment fluctuation funds, creditors etc. On the right side, the current and floating assets and other debit balances are recorded, The proforma of General Balance Sheet is given below: Rs,

38 Liabilities Assets Capital A/c (Balance brought Stores forward from capital A/c) Sundry debtors Sundry Creditors for Capital A/c Cash at Bank Sundry Creditors on Open A/c Cash in hand Net Revenue A/c (Balance Securities brought forward from Special items Net Revenue A/c) Other assets Reserve Fund Depreciation Fund Sinking Fund Investment Fluctuation Fund Other Liabilities Clear Profits XVII of the Sixth Schedule of the Act provides guidelines for the computation of clear profits which means the difference between the amount of income and the sum of expenditure plus specific appropriations. This can be calculated in the following manner: Expenditure incurred on : (i) (ii) Generation & Purchase of energy Distribution and sale of energy (iii) Rent, rates and taxes other than all taxes on Income & Profits (iv) Interest on loans advanced by the board Income derived from i. Gross receipts from sale of energy less discounts ii. Rental on meters and other apparatus hired to consumers iii. Sale and repairs of lamps and apparatus iv. Rents v. Transfer fees Xxx Xxx Xxx

39 (v) Interest on loans borrowed from organisations (or) institutes approved by the State Government, (vi) Interest on debentures (vii) Interest on Security deposits (viii) Legal charges (ix) (x) Bad debts Auditors' fees vi. Investments, fixed and call deposits and bank balance Other general receipts accountable in the assessment of income tax incidental to the business of electricity supply Xxx (xi) Management expenses Depreciation (xiii) Other expenses admissible under the Income Tax Act (xiv) Contribution to Provident fund, Staff pension, gratuity, apprentice and other training scheme. (xv) Bonus to employees (xvi) Balance of Profit c/d Balance b/d Xxx (xvii) Previous losses (xviii) All taxes on Income & Profits (xix) Instalments in respect of intangible assets and expenses regarding issue of capital (xx) Contribution to Contingency Reserve (xxi) Arrears of depreciation (xxii) Development Reserve (xxiii) Other appropriations permitted by the State Govt. Clear Profit (Bal. fig.) x

40 Reasonable Return : In order to prevent electricity undertaking to earn too high a profit, a reasonable return has been allowed. Reasonable return means the stun of the following: (a) A yield at the standard rate which is the Bank. Rate stipulated by the RBI from time to time, plus 2% on the capital base. (b) Income derived from investments excluding investments made against the contingency reserve. (c) An amount equal to 1/2 % on any loans advanced by the Board. (d) An amount equal to 1/ 2% on the amounts borrowed from organisations of Institutions approved by the State Government. (e) An amount equal to 1/2 % on the amounts realised by the issue of debentures. (f) An amount equal to 1//2 % on the accumulations in the Development Reserve. Capital Base The Capital Base can be, computed as given below: (i) (ii) (iii) (iv) reserve (v) The original cost of fixed assets available The cost of intangible assets The original cost of work-in-progress The amount of investment made compulsorily against contingency The monthly average of the stores, materials, supplies and Cash and Bank balances held at the end of each month, Xxx Xxx Xxx Xxx Xxx Less i. The amount written off or set aside on account of depreciation on fixed assets and amounts written off in respect of intangible assets ii. Loans advanced by the Board Xxx Xxx

41 iii. iv. The amount of any loans borrowed from organisations or institutions approved by the State Govt. Debentures Security deposits of customers held in Cash The amount standing to the credit of Tariffs Xxx Xxx v. and Dividend Control Reserve vi. The amount set apart for the Development Reserve vii. Balance in the Consumer Benefit Reserve viii. Amount contributed by consumers Xxx Xxx Xxx Xxx Capital Base Disposal of Surplus Surplus is the excess of clear profits over reasonable return. If the clear profits exceeds the reasonable return, the surplus has to be disposed of as under : i. One-third of the surplus not exceeding 5% of the reasonable return will be at the disposal of the undertaking; ii. Of the balance, one-half will be transferred to tariffs and Dividend Control Reserve. iii. The balance will be distributed among consumers by way of reduction of rates or by way of special rebate. An electricity undertaking must so adjust the rates that the amount of clear profit in any year does not exceed the reasonable return by more than 20% of the reasonable return. Electric Supply Ltd. re-built and re-equiped one of their mains, at a cash cost of The cost of old main is 90,000 was realised from sale of old materials. Four old motors valued at 1,60,000 salvaged from the old main were used in the reconstruction. The cost of labour and materials is respectively 20%

42 and 15% higher now than when the old main was built. The proportion of labour (o materials in the main then and now is 1 : 2. Show the journal entries for recording the above transactios, if the accounts are maintained under double Account system. SOLUTION : Calculation of break-up cost of old lines Ratio between cost is 1 : 2 Material cost = 15,00,000 x2/ 3 = 10,00,000 Labour cost = 15,00,000 x 1/3 = 5,00,000 Calculation of Estimated Cost of Replacement Item Original cost () Increase due to price changes () Materials 10,00,000 10,00,000 x 15/100=1,50,000 Estimated Cost () 11,50,000 5,00,000 x 20/100=50000 Labour 5,00,000 5,50,000 Estimated cost of Replacement 17,00,000 Calculation of amount to be Capitalised Cost of re-building new main 40,00,000 Less : Estimated cost of Replacement 17,00,000 Amount to be Capitalised 23,00,000 Calculation of amount to be transferred to Revenue a/c Estimated cost of replacement 17,00,000 Less : Materials sold 90,000 Old motors reused 1,60,000 2,50,000 Amount to be transferred to Revenue a/c 14,50,000

43 Journal Entries Date Particulars L. F. New Main a/c Dr. Debit 23,00,000 Replacement a/c Dr. 17,00,000 Credit To Bank a/c 40,00,000 (Being the current cost of replacement charged to replacement a/c and the balance is capitalised) New Main a/c Dr. 1,60,000 To Replacement a/c 1,60,000 (Being the motors from old main reused in new main) Bank a/c Dr. 90,000 To Replacement a/c 90,000 (Being the old materials realised credited to replacement a/c) Revenue a/c Dr. 14,50,000 To Replacement a/c 14,50,000 (Being the net current cost of replacement transferred to Revenue a/c)

44 The XYZ Electricity company decided to replace some parts of its Plant by an im p Plant. The Plant to be replaced was built in 2003 for 54,00,000. It is estimated that it would now cost 80,00,000 to build a new Plant of the same size and capacity. The cost of the new Plant as per the improved design was 1,70,00,000 and in addition, material belonging to the old Plant valued at 5,50,000 was used in the construction of the new Plant. The balance of the old plant was sold for 3,00,000. Compute the amount to be capitalised. Also pass the journal entries and Replacement Account. Solution Working notes (i) Estimated Present cost of Replacement (given) (ii) Computation of Total cost of new Plant : Cost (given) Add Value of old material used in construction of new Plant (iii) Computation of amount of replacement to be capitalised - (iv) Total actual cost of new Plant Less.- Estimated Present cost of replacement Amount to be capitalised Computation of amount of replacement to be charged to Revenue A/c : Estimated present cost of replacement Less.- Amount realised on sale of old Plant 3,00,000 Value of Old Plant Materials used in construction of new Plant 5,50,000 80,00,000 1,70,00,000 5,50,000 1,75,50,000 1,75,50,000 80,00,000 95,50,000 80,00,000 8,50,000

45 Charge to Revenue (v) Computation of actual amount of Cash spent on replacement -- Total cost of new Plant Less : Value of Old material used for new Plant 71,50,000 1,75,50,000 5,50,000 1,70,00,000 Journal Entries Date Particulars LF Dr. 1. Replacement A/c [W.N.(i)] Dr New Plant A/c (Bal. Fig.) Dr To Bank A/c [W.N.(v)] [Being actual cash spent on replacement and extension i.e., new Plant A/c] 2. Bank A/c Dr To-Replacement A/C [Being amount realised on the sale of old Plant] 3. New Plant A/c Dr To Replacement A/c [Being value of old Plant Materials used in construction of new Plant transferred] 4. Revenue A/c Dr To Replacement A/c [Being balance in replacement a/c transferred to Revenue A/c] To Bank A/c Replacement A/c 80,00,000 By Bank A/c 80,00,000 90,00,000 3,00,000 5,50,000 71,50,000 By New Plant A/c Cr 1,70,00,000 3,00,000 5,50,000 71,50,000 PS, 3, ,50,000 71,50,000

46 80,00,000 By Revenue A/c Disposal of Profits City Electricity Ltd. earned a profit of 8,45,000 during the year ended 31st march 2004 after debenture 7 1 % on 2,50,000, With the help of the figures given below, show the disposal of profits Original cost of fixed assets 1,00,00,000 Formations and other expenses 5,00,000 Monthly average of current assets (net) 25,00,000 Reserve Fund (represented by 4% Govt. securities) 10,00,000 Contingencies Reserve Fund Investments 2,50,000 Loan from Electricity Board 15,00,000 Total depreciation written off to date 20,00,000 Tariff and Dividend Control Reserve 50,000 Security deposits received from customers 2,00,000 Assume Bank Rate to be 6%. Solution : (i) Computation of Capital Base Original cost of Fixed assets Formation and Other expenses 1,00,00,000 5,00,000 assets Monthly average of Current 25,00,000 Contingency Reserve Fund 2,50,000 Investments 1,32,50,000 Less: Depreciation written off Loans from Electricity Board Debentures Tariff and Dividend Control Reserve Security deposits from customers Capital Base 20,00,000 15,00,000 2,50,000 50,000 2,00,000 40,00,000

47 92,50,000 (ii) Computation of Reasonable Return : 8% on capital-base of 92,50,000 (6% Bank rate + 2%) 1/2 % on loan from Electricity Board (15,00,000 x 1/2%) ½ % on debentures (2,50,000 x 1/2 %) Income from Reserve Fund Investments (10,00,000 X - 4%) Reasonable Return (iii) Computation of Surplus Clear Profit (given) Less : Reasonable Return Surplus (iv) Computation of Disposal of Surplus ½ for the Company limited to 5% of Reasonable return (7,88,750 x 5% (or) 18,750, whichever is less) ½ of the balance to be credited to Tariff and Dividends Control Reserve (56,250 18,750) = 37,500 x 2 Balance credited to Consumer Benefit Reserve Total 7,40,000 7,500 1,250 40,000 7,88,750 8,45,000 7,88,750 56,250 18,750 18,750 18,750 56,250 The journal entry will be: Date Particulars L.F Dr Net Revenue A/c 37,500 Dr To Tariff and Dividend control Reserve Ale Cr Rs 18,750

48 To Consumer Benefit Reserve A/c [Being the Profit appropriated] 18,750 The following are the balances on in the books of the Emakulam power and Light company ltd. Lands on ,20,000 Lands expended during ,000 Machinery on ,80,000 Machinery expended during ,000 Mains including cost of laying 1,60,000 Mains expended during ,800 Equity shares 4,39,200 Debentures 1,60,000 Sundry Creditors 800 Depreciation Fund A/c 2,00,000 Sundry debtors for Current supplied 32,000 Other debtors 400 Cash 4,000 Cost of generation of electricity 28,000 Cost of distribution of electricity 4000 Rent rates and taxes 4000 Management Expenses 9600 Depreciation Sale of current 1,04,000 Rent of Meters 4,000 Interest on Debentures 8,000 Interim dividend 16,000 Net Revenue A/c Balance on ,800 9,30,800 9,30,800 From the above Trial Balance, Prepare Revenue A/c, Net Revenue A/c, Capital A/c and General Balance Sheet.

49 Solution Ernakulam Power and Light Company Ltd. Revenue A/c for the year ended March 31, 2004 Particulars Particulars To Cost of Generation 28,000 By Sale of Current 104,000 To Cost of Distribution 4,000 By Rent of Meters 4,000 To Rent, Rates & Taxes 4,000 To Management Expenses 9,600 ;To Depreciation 16,000 To Balance Carried to Net Revenue A/c 46,400 1,08,000 1,08,000 Net Revenue A/c for the year ended March 31, 2004 Particulars Particulars Rs To Interest on Debentures 8,000 By Balance b/d 22,800 To Interim dividend 16,000 By Revenue A/c 46,400 To Balance carried to General Balance Sheet 45,200 69,200 69,200

50 Receipts and Expenditure on Capital A/c for the year ending March 31, 2004 Expenditure upto During Total Receipts upto During Total To Land 1,20,000 4,000 1,24,000 By To Machine 4,80,000 4,000 4,84,000 Shares Equity 4,39,200-4,39,200 To Mains 1,60,000 40,800 2,00,800 By Debentures 1,60,000 1,60,000 7,60,000 48,800 8,08,800 5,99,200 5,99,200 By Balance c/d 2,09,600 8,08,800 8,08,800 General Balance Sheet as on March 31, 2004 Liabilities Assets Capital A/c - Total Receipts Sundry Creditors N e t R e v e n u e A / c Depreciation Fund 5,99, ,200 2,00,000 Capital A/c - Total Expenditure Sundry Debtors Other Debtors 8,08,800 32, ,000 8,45,200 8,45,200

51 Unit 4 HOLDING COMPANY A holding company may be defined as "a company which controls one or more other companies by means of holding shares in that company or companies or by having power to appoint directly or indirectly the whole or a majority of the board of directors of those" HOLDING COMPANY - MEANING A holding company is one which acquires all or working majority of the equity shares of any other company in order to control the operation of such other body corporate. SUBSIDIARY COMPANY MEANING A company controlled by a holding company is termed as a subsidiary company. MINORITY INTEREST A partly owned subsidiary is one in which the holding company does not hold all the shares. A part of its shares are held by the outside shareholders. The interest of outside shareholders is termed as "Minority Interest" SUBSIDIARY COMPANY - MEANING A company controlled by the subsidiary company is termed as a subsubsidiary of the principal holding company. Example : SS Ltd. is a subsidiary of S Ltd. and S Ltd. is a subsidiary of H Ltd. Then SS Ltd is the sub-subsidiary of H Ltd. OB J ECTIVES OF HOLDING COMPANY The following are the objectives of the holding company i. To promote combination movement, so that competition may be eliminated. ii. To secure the benefits of large scale production. iii. To have product diversification.

52 iv. To reduce cost through large scale purchase. v. To control the market. vi. To share raw materials supplies. vii. To ensure effective tax savings. Advantages of Holding Company i. It is very flexible form of combination as when a company wants to shift its control over other companies, it has simply to sell the shares of that company. ii. Subsidiary company enjoys separate identity, reputation and goodwill.. iii. Since separate entities of subsidiaries are maintained, their losses may be carried forward for income tax purpose. iv. Holding company is able to centralise control without affecting the individuality of the subsidiary company. v. A holding company is not required to bear any loss of subsidiary companies, Disadvantages of Holding company i. It makes room for fraudulent promotion and management. ii. Subsidiary companies are forced to appoint directors and officers at unduly higher remuneration. iii. There is a possibility of the danger of oppression of minority shareholders. iv. Holding company may exploit it the subsidiary companies because of substantial power. Capital Profit Profits existing in the subsidiary or earned by the subsidiary company upto the date of acquisition of shares by the holding company are called capital profit.