IPCC MAY 2014 SUGGESTED ANSWERS Paper 1 ACCOUNTING

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1 IPCC MAY 2014 SUGGESTED ANSWERS Paper 1 ACCOUNTING Problem No.1 (a) As per AS.2 The net realisable value of the material and other supplies held for use in production of finished goods is estimated as under: If finished product in which raw material and supplies are used is sold at cost or above cost, then the estimated realisable value of raw material and supplies is considered more than its cost and therefore inventories of raw material will be valued at cost. If finished product in which raw material and supplies are used is sold below cost, then the estimated realisable value of raw material or supplies is equal to replacement price of raw material or supplies and thus raw material will be valued at replacement price. Inventories should be valued at lower of cost and net realisable value. Value of closing stock: Case 1: NRV of Finished good Y is Rs. 400 Copy Rights Reserved Cost per unit (Raw Material X) = 220 To, Guntur Cost per unit (Finished Good Y) = 330 NRV > Cost = 400 > 330 So, Value of finished good Y = 330 X 1200 units = 3,96,000 Value of Raw Material X = 220 X 500 units = 1,10,000 Case 2: NRV of finished good Y is Rs. 300 Cost per unit (Raw Material X = 220 Cost per unit (Finished Good Y) = 330 NRV < Cost = 300 < 330 So, Value of finished good Y = 300 X 1200 units = 3,60,000 Value of Raw Material X = 150 X 500 units = 75,000 (Replacement Cost) W N 1: Calculation of cost per unit (Raw Material): Particulars Amount Cost Price 200 Less: Excise Duty (10) Freight inward 20 Unloading charges 10 Total 220 Calculation of cost per unit (Finished Goods): Particulars Amount Material consumed 220 Direct Labour 60 Direct OH 40 2,00, FOH 20,000 Total 330 IPCC _May 2014_Accounting_ Suggested Answers 1

2 Ph: Problem No.1 (b) As per AS.10 Accounting for fixed assets, Addition or extension of capital nature to an existing asset. If integral part of existing asset it is generally added to gross book value of existing assets. If separate identity and capable to be used after the disposal of existing asset it is accounted for separately. (i) Attachment retains its separate identity: Machine Cost on = Rs.4,00,000 Useful life = 10 yrs Residual value = Rs.40,000 Rs.4,00,000 Rs.40,000 Depreciation = = Rs.36, years Depreciation up to 3 years = 36,000 x 3 = Rs.108,000 E Z Cost = 1,80,000 Revaluation = 90,000 Useful life = 10 yrs Book Value at the end of third year = Rs. 4,00,000 Rs = Rs. 2,92,000 Residual value = Nil Total Value at the end of the third year = Rs. 2,92,000 + Rs.90,000 = Rs.3,82,000 Depreciation = Rs.1,80,000 0 Useful life = 9 yrs = Rs. 18, years Residual value = Nil Depreciation = Total Depreciation for the year = Rs. 18,000 + Rs. 42,444 = Rs. 60,444 Case 2: Attachment becomes integral part of the machine. Rs.3,82,000 0 = Rs. 42,444 9 years Particulars Amount Cost 4,00,000 Depreciation for 3 years 1,08,000 Book value at the end of the third year 2,92,000 (+) Addition 1,80,000 (+) Upward revaluation 90,000 Total 5,62,000 Rs.5,62, ,444 Depreciation = 9 years Note: Depreciation has been calculated above for the 4 th year because there is no information for which year to calculate depreciation. Problem No.1 (c) (i) As per AS.26 Intangible assets, Internally generated Goodwill should not be recorded in the books. (ii) As per AS.10, fixed assets are retired from active use and held for disposal (a) such asset is stated at the lower of net book value and net realisable value in the financial statement. IPCC _May 2014_Accounting_ Suggested Answers 2

3 (b) Any expected loss is recognized immediately in the profit and loss statement. Book value of Asset on = 20,000 NRV = (2,000) Net Deficiency = 18,000 Should be charged to profit & loss account as per AS.10 fixed assets. Balance depreciable amount is = 1,00,000 (1,20,000 20,000) Less: Depreciation (100,000 x 15%) = 15,000 Book value as on = 85,000 Journal entries: P & L A/c 18,000 Dr. To Asset 18,000 Cr. (Being the deficiency on the equipment which is retired from the use and held for disposal has been charged to P & L A/c). (iii) As per AS.10, If fixed asset is purchased in exchange of shares then the fixed asset purchased should be recorded at fair market value of asset purchased (or) Fair market value of Shares issued which ever is more clearly evident. Book value as on = 7,20,000 Purchased on = 60,000 (Additional made to plant & machinery) (500 shares x 120) Less Depreciation = 76,000 (7,20,000 x 10%) = 72, ,000 x 10% x = 4, Book value of plant & machinery = 704,000 Here the fair market value of shares issued is clearly evident, so the value of machinery should be recorded at (500 shares x 120) = 60,000 Journal entries: Plant & Machinery Account 60,000 Dr. To Equity Share capital (500 x 10) 5,000 Cr. To Security Premium (500 x 110) 55,000 Cr. (Being Plant & Machinery purchased in exchange of shares Issued) Problem No.1 (d) As per AS.7, when it is probable that total contract cost will exceed total contract revenue, the expected losses should be recognized as an expense irrespective of- Whether or not work has commenced State of completion of contract The amount of profit on other contracts which are not treated as a single contract. Cost incurred to date = 120 crores Estimated Cost of completion = 45 crores Total Estimated Cost = 165 crores IPCC _May 2014_Accounting_ Suggested Answers 3

4 Ph: Cost to date Percentage of completion = x100 Total Estimated Cost 120 Crores = x crores = 72.73% Contract Revenue to be recognized = 150 crores x 72.73% = crores Total forcible loss = 15 crores (165 crores 150 crores) Less loss for the current year = crores Expected loss to be recognized = crores Extract of Profit & Loss A/c Rs.in crores To Construction cost 120 By Contract Revenue (150 crores x 72.73%) To provision for loss on contract By Net loss Problem No.2 (a) Statement of Profit and Loss for the year ending Particulars Amount Profit (Before Depreciation & Tax) 10,00,000 Loss: Depreciation 37,500 Profit before tax 9,62,500 Provision for tax (1,20,000) Profit / loss for the period 8,42,500 Balance of profit & loss brought forward 1,50,000 Total 9,92,500 Transfer to Reserves (8,42,500 x 25%) 2,10,625 Proposed preference dividend (180, ,023) 2,64,023 Proposed equity dividend (150, ) 3,18,047 Bonus to employees (15, ,805) 31,805 Total 8,24,500 Balance carried to balance sheet 1,68,000 W.N. 1: Balance of amount available for preferences preference & equity share holders and bonus for employee. Balance available 9,92,500 Less: Reserve 25% of NP ( x 25%) (2,10,625) Less: Proposed dividend (12,000 x 100 x 15%) (Note: 1) (1,80,0000) Less: Proposed equity dividend (75,000 x 10 x 20%) 15,000 Less: Staff Bonus (10% x 150,000) IPCC _May 2014_Accounting_ Suggested Answers 4

5 Less: Balance to be carried forward (12,000 x 100 x 14%) (1,68,0000) Balance available for distribution 2,68,875 Suppose remaining balance available after appropriation for 15% dividend on preference share capital and 20% dividend on equity share capital and staff bonus will be = X 1 1 Preference share holders will get = X x = X 3 3 Equity share holders will get = 3 2 X Bonus to employees = 3 2 X Now, 3 2 X 1 + X X = 2,68, X = 80,66,250 80,66,250 X = = 2,52, x 10% = X 30 Share of preference share holders = Rs. 2,52,070 x 3 1 = 84,023 Share of Equity share holders = 2,52,070 x 3 2 = 1,68,047 Bonus to employees = 2,52,070 x 30 2 = 16,805 Note: In the problem, it is given that face value of each equity share is 100/-. If that is the case then profit available after payment of preference dividend will not be sufficient to pay equity dividend as per the given rate i.e. 20%. So it is assumed that face value of each equity is 10/- instead of 100/- Problem No.2 (b) Statement showing pre profit and post profit for the year ended Particulars Basis Pre-Period Post Period Total Gross profit 1 : 9 39,080 3,51,720 3,90,800 Less: Directors Fees Post - 30,000 30,000 Less: Bad debts 1 : ,480 7,200 Less: Advertising Time Ratio 6,000 18,000 24,000 Less: Salaries & Expenditure 1 : 3 32,000 96,000 1,28,000 Less: Preliminary Expenditure Post - 10,000 10,000 Less: Donation to political party Post - 10,000 10,000 Net Profit to be transferred to capital ,81,600 reserve and carried to balance sheet. W.N.1: Given date of taken over = Copy Rights Reserved Date of incorporation = To, Guntur Date of closing of books = Pre Period = to (3 months) Post period = to (9 months) Time Ratio = 3:9 IPCC _May 2014_Accounting_ Suggested Answers 5

6 Ph: Total Sales = 24,00,000 First Six months sales = Rs.4,80,000 First three months sales = 3 Rs.2,40,000 (4,80,000 x ) 6 Remaining 9 months sales = 21,60,000 (24,00,000 2,40,000) Sales Ratio = 2,40,000 : 21,60,000 = 1 : 9 Problem No.3 Trading and Profit and Loss account for the year ended To Opening stock (W.N-3) 1,65,000 By Sales Cash sales = 2,50,000 Credit Sales = 10,00,000 12,50,000 To Purchases 9,00,000 By closing stock 65,000 To Gross Profit 2,50,000 Total 13,15,000 Total 13,15,000 By Gross Profit 2,50,000 To Expenses (W.N-5) 37,000 By Discount Received 4,500 To Salary 32,000 To Selling Exp 15,000 To Discount allowed 5,500 To Bad Debts 4,500 To Loss on sale of Asset (W.N-4) 15,000 To Depreciation On Land and Building= On Plant and machinery= On Equipment = ,500 To Interest 15,000 To Provison for tax 30,000 To Net profit 39,000 Total 2,54,500 Total 2,54,500 Balance sheet as on Liabilities Amount Assets Amount Capital (Bla.Fig) 9,00,000 Land and Buildings 5,00,000 Creditors for purchase 95,000 Plant and Equipment 2,20,000 Creditors for Expenses 20,000 Office Equipment 1,05,000 Long term loan 1,25,000 Debtors (W.N-1) 1,60,000 Provision for tax 35,000 Stock (W.N-3) 1,65,000 Bank 25,000 Total 11,75,000 Total 11,75,000 IPCC _May 2014_Accounting_ Suggested Answers 6

7 Balance sheet as on Liabilities Amount Assets Amount Capital = ,39,000 Land and Buildings 4,75,000 Add: Profit =39000 (5,00,000 25,000) Creditors for purchase (W.N-2) 1,05,500 Plant and Equipment (W.N-5) 3,08,250 Creditors for Expenses 15,000 Office Equipment (W.N-5) 72,250 Long term loan 1,00,000 Debtors 2,25,000 Provision for tax 30,000 Stock 65,000 Bank (W.N-5) 44,000 Total 11,89,500 Total 11,89,500 W.N. 1: Debtors Account: To balance b/d (Balance.fig) 1,60,000 By Bank 9,25, ,00,000 By discount allowed 5,500 To Sales (credit) 2,50,000x 20 W.N. 2: Creditors Account: By Bad debts (2% on 2,25,000) 4,500 By balance c/d 2,25,000 11,60,000 11,60,000 By balance b/d 95,000 To Discount received 4,500 By purchases 5,40,000 To Bank 5,25,000 To Balance c/d (Balance.fig) 1,05,500 6,35,000 6,35,000 W.N. 3: Calculation of opening stock: Given credit sales = 80% of total sales Cash sales = 20% of total sales Given cash sales = 2,50,000 Total sales = 12,50,000 and credit sales = 10,00,000 (12,50,000 x 80%) Total sales = Cash Sales + Credit Sales = 2,50, ,00,000 = 12,50,000 Gross profit = 12,50,000 x 20% = 2,50,000 (25% on cost (or) 20% on sales) Cost of goods sold = 12,50,000 2,50,000 = 10,00,000 Total purchases = 100 5,40,000 x = 9,00, Cost of goods sold = Opening stock + Purchases Closing Stock 10,00,000 = Opening Stock + 9,00,000 65,000 Opening Stock = 1,65,000 IPCC _May 2014_Accounting_ Suggested Answers 7

8 Ph: W.N. 4: Calculation of sale value of machine: Book value of machine = 40,000 Less: Depreciation for 6 months = 2,000 (40,000 x 10% x 12 6 ) Book value as on = 38,000 Loss on sale of machine = 15,000 Sale value of machine = 23,000 W.N. 5: Pant & Machinery A/c To Balance b/d 2,20, By Depreciation 2, To Bank (3,30,000 1,80,000) 1,50, By P & L A/c 15, By Bank 23, By Depreciation 1,50,000 x 10% x 12 3 = ,80,000 x 10% = 18, By balance c/d (Balance figure) 21, Total Total Office Equipment A/c To opening b/d 105, By Bank 20, By Depreciation (85,000 x 15%) By balance c/d (Balance figure) 12,750 72,250 Total 105, ,000 Creditors for office expenses A/c To Bank 42,000 By Balance b/d 20,000 To Balance c/d 15,000 By expenses (Bal.fig.) 37,000 Total 57,000 Total 57,000 Bank Account A/c Receipts Amount Payments Amount To Opening balance b/d 25,000 By creditors 5,25,000 To Debtors 9,25,000 By creditors(expenses) 42,000 To Cash sales 2,50,000 By salary 32,000 To sale of machine 23,000 By selling Exp 15,000 To sale of office Eqp 20,000 By Purchases (cash) 3,60,000 IPCC _May 2014_Accounting_ Suggested Answers 8

9 By plant and machinery 1,50,000 By Bank loan 25,000 By Interest on Bank loan (1,25,000 15,000 x 12%) By Provision for Tax 35,000 By Balance c/d 44,000 Total 12,43,000 Total 12,43,000 Problem No.4 In the Books of Srishti Ltd: Realisation A/C To Goodwill 5,00,000 By 9% Debentures 5,00,000 To Tangible assets 30,00,000 By Trade creditors 1,00,000 To Stock 10,40,000 By ANU Ltd (PC) 75,00,000 To Debtors 1,80,000 To Bank(Expenses) (75,000 25,000 50,000) To Equity Shareholders (Profit) 33,55,000 Total 81,00,000 Total 81,00,000 ANU Ltd A/c To Realisation 75,00,000 By Equity shares in ANU Ltd 67,50,000 To Bank (Realisation 50,000 By Cash / bank 7,50,000 expenses) By Bank (Realisation Expenses) 50,000 Total 75,50,000 Total 75,50,000 Equity shareholders a/c To Preliminary Exp 50,000 By Equity share capital 30,00,000 To Equity shares in ANU ltd 67,50,000 By Export Profit Reserve 8,50,000 To Cash / bank 10,05,000 By General Reserve 50,000 (2,80, ,50,000 25,000) By P& L account 5,50,000 By Realisation a/c 33,55,000 Total 78,05,000 Total 78,05,000 9% Debentures a/c To Realisation 5,00,000 By Balance b/d 5,00,000 Total 5,00,000 Total 5,00,000 W.N. 1: Calculation of Purchase consideration: Equity shares ( 4,50,000*15) = 67,50,000 Cash payment (3,00,000*2.5) = 7,50,000 Total consideration = 75,00,000 IPCC _May 2014_Accounting_ Suggested Answers 9

10 Ph: W.2: Calculation of Goodwill or capital reserve: Assets taken over: Tangible assets = 60,00,000 Stock = 7,10,000 Debtors (1,80,000 x 95%) = 1,71,000 Less: liabilities taken over 9% Debentures (5,00,000 x 120%) =6,00,000 Trade creditors = 100,000 Net assets taken over = 61,81,000 Less : Purchase consideration =75,00,000 Excess of PC over NAV of business taken over to be transferred to Goodwill. Journal Entries in the books of ANU Ltd. Nature of Amalgamation - Purchase Method of Amalgamation Purchase Method S.No = 13,19,000 Particulars Debit Credit Amount Amount Business purchase A/c Dr To Liquidator of Srishti Ltd (Being the amount payable to liquidator of srishti Ltd. as per agreement) Good will A/c Dr Tangible fixed assets A/c Dr Stock A/c Dr. 7,10,000 Debtors A/c Dr. 1,80,000 To 9% debentures A/c To trade creditors A/c 1,00,000 To provision for bad debts A/c 9,000 To Business Purchases A/c (Being assets and liabilities taken over and incorporated in the books of ANU Ltd.) Liquidator of srishti Ltd. A/c Dr To Equity share capital A/c To Security premium A/c 22,50,000 To cash A/c 7,50,000 (Being purchase consideration discharged) Discount on issue of debentures A/c Dr. 25,000 9% debentures To 8% debentures 6,25,000 (Being new % debentures in ANU Ltd. issued at 96% to 9% debenture holders) Good will A/c Dr. 50,000 To Bank A/c 50,000 (Being liquidation expenses reimbursed to srishti Ltd.) Amalgamation adjustment A/c Dr. 8,50,000 To Export profit reserve A/c 8,50,000 (Being Statutory reserve maintained by the ANU Ltd.) IPCC _May 2014_Accounting_ Suggested Answers 10

11 Problem No.5 (a) Dr. Van A/c Cr. Date Particulars Amount Date Particulars Amount To Ganesh enterprises 1,50, By Depreciation 15, By balance c/d 1,35,000 1,50,000 1,50, To balance b/d 1,35, By Depreciation 13, By balance c/d ,35,000 1,35, To balance b/d 1,21, By Depreciation 12, By balance c/d 1,09,350 1,21,500 1,21, To balance b/d 1,09, By Depreciation 10, By balance c/d 98,415 1,09,350 1,09,350 Dr. Ganesh Enterprises A/c Cr. Date Particulars Amount Date Particulars Amount To Bank 30, By Van A/c 1,50, To Bank 50, By Interest A/c 14, To Balance c/d 84,063 1,64,063 1,64, By Balance b/d 84, To Bank 50, By Interest A/c 9, To Balance c/d 43,438 93,438 93, By Balance b/d 43, To Bank 30, By Interest A/c 4, To Balance c/d 18,125 48,125 48, By Balance b/d 18, To Bank 20, By Interest A/c 1,875 20,000 20,000 W.N.1: Given hire purchase price Cash Price of Van = Rs.1,80,000 = Rs.1,50,000 Down payment = 30,000 Depreciation = 10% WDV Total Interest = Hire purchase price Cash price = 1,80,000 1,50,000 = 30,000 Total interest = 30,000 As there is no information about Rate of interest, total interest, total interest is apportioned in the ratio of hire purchase price outstanding during the year. IPCC _May 2014_Accounting_ Suggested Answers 11

12 Ph: Year Hire purchase price outstanding during the year 1 1,50,000 (1,80,000 30,000) 2 1,00000 (1,50,000 50,000) 3 50,000 (1,00,000 50,000) 4 20,000 (50,000 30,000) Ratio Interest x = x = x 32 5 = x 32 2 = 1875 Total 32 30,000 Note: It is assumed that installment is due at the end of each year. Problem No.5 (b) Due Dates for Interest payments 30 th June & 31 st Dec. Investments A/c Dr. Name of the scrip: 12% State Govt. Bonds Cr. Date Particulars NV Interest Cost Date Particulars NV Interest Cost To opening Balance b/d To Bank (W.N.1) To P & L A/c (W.N.3) 1,20,000 3,600 (1,20,000x 12%)*3/12 1,26, By Bank 19,200 (3,20,000x1 2%)*6/12 2,00,000 8,000 1,92, By Bank 1,50,000 4,500 1,57,500 (W.N.2) By Bank 10, To P & L A/c 27, By Balance c/d 1,70,000 5,100 (1,70,000x1 2%)*3/12) 1,68,937 Total 3,20,000 39,000 3,26,437 Total 3,20,000 39,000 3,26,437 W.N.1: Cum interest purchase price = 2,00,000 (2,000 x 100) (-) Interest accrued therein = 8, ,00,000 x x Cost of Investment = 1,92,000 W.N.2: Ex-interest Sale Price = 1500 x 105 = 1,57,500 Interest accrued = 1500 x 100 x 12% x 12 3 = 4,500 W.N.3: Calculation of profit or loss on sale Average Cost of Investment sold Total Cost = TotalNominal Value x Nominal value of bond sold 3,18,000 = x1,50, 000 = 1,49,063 3,20,000 Profit = 1,57,500-1,49,063 = 8,437 IPCC _May 2014_Accounting_ Suggested Answers 12

13 Investment Account Dr. Name of the scrip: Equity Shares of X Ltd. Cr. Date Particulars No. shares Dividend Cost Date Particulars To Bank 5,000 10,10, By Bank (200 x 60) To Bonus 2, By Bank (Pre Shares Acquisition Dividend) To Bank (Right Shares) To Profit on Sale (W.N.1) To P & L A/c 4, By Balance c/d (W.N.2) No. shares Dividend IPCC _May 2014_Accounting_ Suggested Answers 13 Cost 12,000 7, ,00, By Bank 3,000 8,91,000 4,33, By Bank 4,800 4,800 7,32,615 Total 7,800 4,800 16,43,115 Total 7,800 4, W.N.1: Profit on Sale: Average Cost of Investment sold TotalCost = xnominal value of Nominal Value sale 12,10,000 7,500 12,000 = x3, 000 = ,800 Profit = 8,91, = W.N.2: Closing value of equity shares: 12,10,000 7,500 12,000 Cost = x 4, 800 = ,800 Market value = 4,800 x 220 = 10,56,000 Investment in equity shares being short term in nature, should be valued at cost or market value which ever is lower as per AS-13. Note: 1. Bonus shares and Right shares are not entitled to receive dividend for the period Dividend was calculated on 5,000 shares and adjusted against cost of investment, because it is preacquisition dividend. 2. Interim dividend calculated on all the shares. Partners Current Accounts: Problem No.6 Particulars A B C D Particulars A B C D To balance b/d 10,000 By balance b/d 16,000 To loss on revaluation 8,000 8,000 8,000 6,000 By profit on 15,000 10,000 5,000 Revaluation (W.N.-2) To Goodwill (4:4:4:3) 16,000 16,000 16,000 12,000 By Goodwill (3:2:1) 30,000 20,000 10,000 To Capital A/c 20,000 40,000 60,000 To balance c/d 1,000 By Balance c/d 18,000 79,000 18,000 Total 45,000 64,000 94,000 18,000 Total 45,000 64,000 94,000 18,000 Partners Capital Account: Particulars A B C D Particulars A B C D To Balance c/d By Balance b/d 1,80,000 1,60,000 1,40,000 By Cash 1,50,000 2,00,000 2,00,000 2,00,000 1,50,000 By Current A/c 20,000 40,000 60,000 Total 2,00,000 2,00,000 2,00,000 1,50,000 Total 2,00,000 2,00,000 2,00,000 1,50,000

14 Ph: Balance Sheet of the new firm: Liabilities Amount Assets Amount Capital Accounts: 7,50,000 Machinery: 1,50,000 A = 2,00,000 B = 2,00,000 C = 2,00,000 D = 1,50,000 Current Accounts Furniture 1,50,000 A = 1,000 1,000 Creditors 1,20,000 Debtors = 80,000 Less: PBD = 4,000 76,000 Stock 2,10,000 Cash 1,70,000 Current Accounts B = 18,000 C = 79,000 D = 18,000 1,15,000 Total 8,71,000 Total 8,71,000 W.N.1: Calculation of new profit sharing ratio: Let us assume total share = 1 New partner share (D) = 5 1 Remaining share = = 5 4 Old partners ratio after admission will be equal = 1 : 1 : 1 (A : B : C) A = x = B = x = Copy Rights Reserved To, Guntur C = x = D = x = New Ratio = 4 : 4 : 4 : 3 W.N.2: Memorandum Revaluation A/c: To furniture 22,000 By Machinery 56,000 To Provision for bad debts 4,000 To Revaluation profit (3 : 2 : 1) A = 15,000 B = 10,000 C = 5,000 30,000 To Reversal of credits Machinery A/c 56,000 56,000 56,000 By Reversal of debits Furniture 22,000 Provision for bad debts 4,000 By Revaluation loss (4 : 4 : 4 : 3) 30,000 IPCC _May 2014_Accounting_ Suggested Answers 14

15 A = 8,000 B = 8,000 C = 8,000 D = 6,000 Total Total W.N.3: Calculation of closing capitals taking D s Capital as base D capital = 1,50,000 Total Capital = 1,50,000 x 1 5 = 7,50,000 A = 7,50,000 x 15 4 = 2,00,000 B = 7,50,000 x 15 4 = 2,00,000 C = 7,50,000 x 15 4 = 2,00,000 Problem No.7 (a) (i) Subscription Income of Rs. 28,000 should be shown in income and expenditure Account. (ii) Extract of Balance Sheet. Liabilities Amount Assets Amount Subscription Advance ( ) 5,000 Subscription outstanding : 1, : 3,000 4,000 Extract of Income & Expenditure A/c By Subscriptions (W.N-1) 28,000 W.N. 1: Subscription Account: To Subscriptions receivable A/c (P.Y O/S) 50,000 By Subscriptions received in Adv. (P.Y Adv.) 5,000 To Income and Exp. A/c (Bal.fig) 28,000 By Bank A/c 29,000 To Subscriptions received in abroad (C.Y- Adv.) 5,000 By Subscriptions receivable (C.Y- O/S) 4,000 Total 38,000 Total 38,000 Problem No.7 (b) As per AS-3 (i) Loans and Advances: (a) To suppliers Shown under Operating Activity (b) To employees Shown under Investment Activity (c) To its subsidiary companies Shown under Investment Activity (ii) Investment made in subsidiary and dividend received Shown under Investment Activity (iii) Dividend Paid for the year Shown under Financing Activity IPCC _May 2014_Accounting_ Suggested Answers 15

16 Ph: (iv) TDS on Interest Income earned on Investment made Shown under Investment Activity. (v) TDS on Interest earned on advance given to suppliers Shown under operating activity (Taxes Paid). (vi) Insurance Claim received against loss of fixed asset by fire Shown under extraordinary item after working capital changes. Problem No.7 (c) Definition: (ADD): Average Due date is an equated date of payment on which a single payment can be made is lieu of several payments due on different dates, without loss of interest to either party. Thus, ADD is the Arithmetic average of various payments. Ares where ADD used: 1. For calculation of ADD when various payments are due on different dates and single payment is to be made by the debtor (Including the settlement of various bills due on different dates). 2. For calculating Interest on Drawings made by partners on different dates. 3. For settlement of contra Accounts. 4. For calculation of Interest on loan. Depreciable Assets: Problem No.7 (d) As per AS.6 Those Assets which 1) are held for use in production of goods and rendering of services i.e, not for the purpose of sale in ordinary course of business. 2) have a limited useful life. 3) are expected to be used for more than one Accounting period. AS.6 Not applicable to land because the useful life of land can t be estimated i.e. it has unlimited useful life. So, land can be appreciated but not depreciated over the period of use. Problem No.7 (e) Journal entries in the books of Saral Ltd. S.No Particulars Debit Amount Capital redemption reserve A/c Dr. 30,000 Capital Reserve A/c Dr. 40,000 Security premium A/c Dr. 40,000 General Reserve A/c (Bal.fig) Dr. 40,000 Credit Amount To Bonus to shareholders A/c 1,50,000 Being capitalization of reserves) Bonus to shareholders A/c 1,50,000 To Equity share capital A/c 1,50,000 Being 1500 shares of 100 each issued to shareholders as bonus in the ratio of 1:3 IPCC _May 2014_Accounting_ Suggested Answers 16

17 W.N.1: 4,500 No. of Bonus shares to be issued = = 1,500 shares 3 Amount of reserves capitalized = 1500 x 100 = 1,50,000 Note: For the purpose of Bonus shares, capital profit realized in cash only can be utilized. THE END Copy Rights Reserved To, Guntur IPCC _May 2014_Accounting_ Suggested Answers 17