CA Inter p1 Accounts All Question Papers Answers @CA Inter

© The Institute of Chartered Accountants of India

PAPER – 1 : ACCOUNTING
Question No. 1 is compulsory.
Answer any four questions from the remaining five questions.
Wherever necessary, suitable assumptions may be made and indicated in answer by the
candidates.
Working Notes should form part of the answer.
Question 1
(a) On 01.04.2014, XYZ Ltd. received Government grant of ` 100 Lakhs for an acquisition of
new machinery costing ` 500 lakhs. The grant was received and credited to the cost of
the assets. The life span of the machinery is 5 years. The machinery is depreciated at
20% on WDV method.
The company had to refund the entire grant in 2 nd April, 2017 due to non-fulfilment of
certain conditions which was imposed by the government at the time of approval of grant.
How do you deal with the refund of grant to the Government in the books of XYZ Ltd., as
per AS 12?
(b) ABC Ltd. borrowed US $ 5,00,000 on 01/07/2017, which was repaid as on 31/07/2017.
ABC Ltd. prepares financial statement ending on 31/03/2017. Rate of Exchange between
reporting currency (INR) and foreign currency (USD) on different dates are as under:
01/01/2017 1 US$ = ` 68.50
31/03/2017 1 US $ = ` 69.50
31/07/2017 1 US $ = ` 70.00
You are required to pass necessary journal entries in the books of ABC Ltd. as per
AS 11.
(c) Rohit Ltd. has provided the following information
Particulars `
Depreciation as per accounting records 2,50,000
Depreciation as per tax records 5,50,000
Unamortised preliminary expenses as per tax record 40,000
There is adequate evidence of future profit sufficiency. How much deferred tax
assets/liability should be recognized as transition adjustment when the tax rate is 50%?

2 INTERMEDIATE (NEW) MAY, 2018
(d) PQR Ltd. is in the process of finalizing its accounts for the year ended 31 st March, 2018.
The company seeks your advice on the following:
(i) Goods worth ` 5,00,000 were destroyed due to flood in September, 2015. A claim
was lodged with insurance company. But no entry was passed in the books for
insurance claim in the financial year 2015-16. In March, 2018, the claim was passed
and the company received a payment of ` 3,50,000 against the claim. Explain the
treatment of such receipt in final account for the year ended 31 st March, 2018.
(ii) Company created a provision for bad and doubtful debts at 2.5% on debtors in
preparing the financial statements for the year 2017-18.
Subsequently, on a review of the credit period allowed and financial capacity of the
customers, the company decides to increase the provision to 8% on debtors as on
31.03.2018. The accounts were not approved by the Board of Directors till the date
of decision. While applying the relevant accounting standard, can this revision be
considered as an extra ordinary item or prior period item?
(4 Parts x 5 Marks = 20 Marks)
Answer
(a) According to AS 12 on Accounting for Government Grants, the amount refundable in
respect of a grant related to a specific fixed asset (if the grant had been credited to the
cost of fixed asset at the time of receipt of grant) should be recorded by increasing the
book value of the asset, by the amount refundable. Where the book value is increased,
depreciation on the revised book value should be provided prospectively over the
residual useful life of the asset.
(` in lakhs)
1st April, 2014 Acquisition cost of machinery (` 500 – ` 100) 400.00
31st March, 2015 Less: Depreciation @ 20% (80)
1st April, 2015 Book value 320.00
31st March, 2016 Less: Depreciation @ 20% (64)
31st March, 2017 Less: Depreciation @ 20% (51.20)
2nd April, 2017 Add: Refund of grant 100.00
Revised book value 304.80
Depreciation @ 20% on the revised book value amounting ` 304.80 lakhs is to be
provided prospectively over the residual useful life of the asset.

PAPER 1: ACCOUNTING 3
(b) Journal Entries in the Books of ABC Ltd.

Date Particulars ` (Dr.) ` (Cr.)
Jan. 01, 2017 Bank Account (5,00,000 x 68.50) Dr. 342,50,000
To Foreign Loan Account 342,50,000
Mar. 31, 2017 Foreign Exchange Difference Account Dr. 5,00,000
To Foreign Loan Account 5,00,000
[5,00,000 x (69.50-68.50)]
Jul. 31, 2017 Foreign Exchange Difference Account 2,50,000
[5,00,000 x (70-69.5)] Dr.
Foreign Loan Account Dr. 347,50,000
To Bank Account 350,00,000
(c) Table showing calculation of deferred tax asset / liability
Particulars Amount Timing Deferred tax Amount
difference @ 50%
` `
Excess depreciation as per 3,00,000 Timing Deferred tax 1,50,000
tax records (` 5,50,000 – liability
` 2,50,000)
Unamortised preliminary 40,000 Timing Deferred tax
expenses as per tax records asset (20,000)
Net deferred tax liability 1,30,000
Net deferred tax liability amounting ` 1,30,000 should be recognized as transition
adjustment.
(d) (i) As per the provisions of AS 5 “Net Profit or Loss for the Period, Prior Period Items
and Changes in Accounting Policies”, prior period items are income or expenses,
which arise, in the current period as a result of error or omissions in the preparation
of financial statements of one or more prior periods. Further, the nature and
amount of prior period items should be separately disclosed in the statement of
profit and loss in a manner that their impact on current profit or loss can be
perceived.
In the given instance, it is clearly a case of error/omission in preparation of financial
statements for the year 2015-16. Hence, claim received in the financial year 2017-
18 is a prior period item and should be separately disclosed in the statement of
Profit and Loss.

(ii) In the given case, a limited company created 2.5% provision for doubtful debts for
the year 2017-2018. Subsequently, the company revised the estimates based on
the changed circumstances and wants to create 8% provision.
As per AS 5, the revision in rate of provision for doubtful debts will be considered as
change in estimate and is neither a prior period item nor an extraordinary item.
The effect of such change should be shown in the profit and loss account for the
year ending 31st March, 2018.
Question 2
(a) Mr. Vijay entered into the following transactions of purchase and sale of equity shares of
JP Power Ltd. The shares have paid up value of ` 10 per share.
Date No. of Shares Terms
01.01.2016 600 Buy @ ` 20 per share
15.03.2016 900 Buy @ ` 25 per share
20.05.2016 1000 Buy @ ` 23 per share
25.07.2016 2500 Bonus Shares received
20.12.2016 1500 Sale @ ` 22 per share
01.02.2017 1000 Sale @ ` 24 per share
Addition information:
(1) On 15.09.2016 dividend @ ` 3 per share was received for the year ended
31.03.2016.
(2) On 12.11.2016 company made a right issue of equity shares in the ratio of one
share for five shares held on payment of ` 20 per share. He subscribed to 60% of
the shares and renounced the remaining shares on receipt of the premium of ` 3
per share.
(3) Shares are to be valued on weighted average cost basis.
You are required to prepare Investment Account for the year ended 31.03.2016 and
31.03.2017.
(b) On 30th March, 2018 fire occurred in the premises of M/s Alok & Co. The concern had
taken an insurance policy of ` 1,20,000 which was subject to the average clause. From
the books of accounts the following particulars are available relating to the period
1st January to 30 th March, 2018:
(i) Stock as per Balance Sheet at 31st December, 2017 ` 1,91,200
(ii) Purchases (including purchase of machinery costing ` 60,000) ` 3,40,000
(iii) Wages (including wages ` 6,000 for installation of machinery) ` 1,00,000

(iv) Sales (including goods sold on approval basis amounting to ` 5,50,000

` 99,000)
No approval has been received in respect of 2/3rd of the goods sold on approval.
(v) The average rate of gross profit is 20% of sales.
(vi) The value of the salvaged goods was ` 24,600
You are required to compute the amount of the claim to be lodged to the Insurance
Company. (2 Parts x 10 Marks = 20 Marks)
Answer
(a) Investment in Equity shares of JP Power Ltd.
Date Particulars No. Dividend Amount Date Particulars No. Dividend Amount
` ` ` `
1.1.16 To Bank 600 12,000 31.3.16 By Balance 1,500 34,500
A/c c/d
15.3.16 To Bank 900 22,500 ____ ______
A/c
1,500 34,500 1,500 34,500
1.4.16 To 1,500 34,500 15.9.16 By Bank - 4,500 3,000
Balance dividend
b/d
20.5.16 To Bank 1,000 23,000 20.12.16 By Bank 1,500 33,000
A/c
25.7.16 To Bonus 2,500 _ 1.2.17 By Bank 1,000 24,000
shares
12.11.16 To Bank 600 12,000 31.3.17 By Balance 3,100 36,812.50*
A/c c/d
20.12.16 To P& L
A/c (profit 15,187.50*
on sale)
1.2.17 To P& L 12,125
A/c (profit
on sale)
31.3.17 To P & L 4,500
A/c
(dividend)
5,600 4,500 96,812.50 5,600 4,500 96,812.50
Working Notes:
1. Calculation of Weighted average cost of equity shares
600 shares purchased at ` 12,000

900 shares purchased at ` 22,500

1,000 shares purchased at ` 23,000
2,500 shares at nil cost
600 right shares purchased at ` 12,000
Total cost of 5,600 shares is ` 66,500 [` 69,500 less ` 3,000 (pre-acquisition
dividend received on 1,000 shares purchased on 20.5.17].
Hence, weighted average cost per share will be considered as ` 11.875 per share
(66,500/5,600).
2. It has been considered that no dividend was received on bonus shares as the
dividend pertains to the year ended 31 st March, 2016.
3. Calculation of right shares subscribed by Vijay
Right Shares (considering that right shares have been granted on Bonus shares
also) = 5,000/5 x 1= 1,000 shares
Shares subscribed = 1,000 x 60%= 600 shares
Value of right shares subscribed = 600 shares @ ` 20 per share = ` 12,000
Calculation of sale of right renouncement
No. of right shares sold = 1,000 x 40% = 400 shares
Sale value of right = 400 shares x ` 3 per share = ` 1,200
Note: As per para 13 of AS 13, sale proceeds of rights is to be credited to P & L A/c.
4. Profit on sale of equity shares
As on 20.12.16
Sales price (1,500 shares at ` 22) 33,000.00
Less: Cost of shares sold (1,500 x ` 11.875) (17,812.50)
Profit on sale 15,187.50
As on 1. 2.17
Sales price (1,000 shares at ` 24) 24,000
Less: Cost of shares sold (1,000 x ` 11.875) (11,875)
Profit on sale 12,125
Balance of 3,100 shares as on 31.3.17 will be valued at ` 36,812.50 (at rate of
` 11.875 per share)

(b) Computation of claim for loss of stock

`
Stock on the date of fire i.e. on 30th March, 2018 (W.N.1) 1,25,200
Less: Value of salvaged stock (24,600)
Loss of stock 1,00,600
Insured value 96,422
Amount of claim = x Loss of stock (approx.)
Total cost of stock on the date of fire
 1,20,000 
=   1,00,600  96,422(approx) 
 1,25,200 
A claim of ` 96,422 (approx.) should be lodged by M/s Alok & Co. to the insurance
company.
Working Notes:
1. Calculation of closing stock as on 30 th March, 2018
Memorandum Trading Account for
(from 1st January, 2018 to 30 th March, 2018)
Particulars Amount Particulars Amount
(`) (`)
To Opening stock 1,91,200 By Sales (W.N.3) 4,84,000
To Purchases By Goods with customers
(3,40,000-60,000) 2,80,000 (for approval) (W.N.2) 52,800*
To Wages 94,000 By Closing stock (Bal. fig.) 1,25,200
(1,00,000 – 6,000)
To Gross profit
(20% on sales) 96,800
6,62,000 6,62,000
* For financial statement purposes, this would form part of closing stock (since there is
no sale). However, this has been shown separately for computation of claim for loss of
stock since the goods were physically not with the concern and, hence, there was no loss
of such stock.
2. Calculation of goods with customers
Since no approval for sale has been received for the goods of ` 66,000 (i.e. 2/3 of
` 99,000) hence, these should be valued at cost i.e. ` 66,000 – 20% of ` 66,000 =
` 52,800.

3. Calculation of actual sales

Total sales – Sale of goods on approval (2/3 rd) = ` 5,50,000 – ` 66,000 =
` 4,84,000.
Question 3
(a) M/s. Delta is a Departmental Store having three departments X, Y and Z. The information
regarding three departments for the year ended 31 st March, 2018 are given below:
Particulars Dept. X Dept. Y Dept. Z
Opening Stock 18,000 12,000 10,000
Purchases 66,000 44,000 22,000
Debtors at end 7,500 5,000 5,000
Sales 90,000 67,500 45,000
Closing Stock 22,500 8,750 10,500
Value of furniture in each Department 10,000 10,000 5,000
Floor space occupied by each Dept. (in sq. ft.) 1,500 1,250 1,000
Number of employees in each Department 25 20 15
Electricity consumed by each Department (in
300 200 100
units)
Additional Information:
Amount (`)
Carriage inwards 1,500
Carriage outwards 2,700
Salaries 24,000
Advertisement 2,700
Discount allowed 2,250
Discount received 1,800
Rent, Rates and Taxes 7,500
Depreciation on furniture 1,000
Electricity Expenses 3,000
Labour welfare expenses 2,400

Prepare Departmental Trading and Profit & Loss Account for the year ended
31st March, 2018 after providing provision for Bad Debts at 5%.
1
(b) Ayan Ltd. invoices goods to its branch at cost plus 33 %. From the following
3
particulars prepare Branch Stock Account, Branch Stock Adjustment Account and Branch
Profit and Loss Account as they would appear in the books of head office.
`
Stock at commencement at Branch at invoice Price 3,60,000
Stock at close at Branch at Invoice Price 2,88,000
Goods sent to Branch during the year at invoice price (including 24,00,000
goods invoiced at ` 48,000 to Branch on 31.03.2018 but not
received by Branch before close of the year).
Return of goods to head office (invoice Price) 1,20,000
Credit Sales at Branch 1,20,000
Invoice value of goods pilfered 24,000
Normal loss at Branch due to wastage and deterioration of stock (at 36,000
invoice price)
Cash Sales at Branch 21,60,000
Ayan closes its books on 31 st March, 2018. (2 Parts x 10 Marks = 20 Marks)

1
There was a printing error in the question. 33 % was wrongly printed as 33 % in the question paper.
3

Answer
10
(a) In the Books of M/s Delta
Departmental Trading and Profit and Loss Account
for the year ended 31 st March, 2018
Particulars Deptt.X Deptt.Y Deptt.Z Total Particulars Deptt.X Deptt.Y Deptt.Z Total
` ` ` ` ` ` ` `
To Stock (opening) 18,000 12,000 10,000 40,000 By Sales 90,000 67,500 45,000 2,02,500
To Purchases 66,000 44,000 22,000 1,32,000 By Stock (closing) 22,500 8,750 10,500 41,750
INTERMEDIATE (NEW) MAY, 2018

To Carriage Inwards 750 500 250 1,500
To Gross Profit c/d (b.f.) 27,750 19,750 23,250 70,750
1,12,500 76,250 55,500 2,44,250 1,12,500 76,250 55,500 2,44,250
To Carriage Outwards 1,200 900 600 2,700 By Gross Profit b/d 27,750 19,750 23,250 70,750
To Electricity 1,500 1,000 500 3,000 By Discount received 900 600 300 1,800
To Salaries 10,000 8,000 6,000 24,000
To Advertisement 1,200 900 600 2,700
To Discount allowed 1,000 750 500 2,250
To Rent, Rates and Taxes 3,000 2,500 2,000 7,500
To Depreciation 400 400 200 1,000
To Provision for Bad Debts 375 250 250 875
@ 5% of debtors
To Labour welfare expenses 1,000 800 600 2,400
To Net Profit (b.f.) 8,975 4,850 12,300 26,125
28,650 20,350 23,550 72,550 28,650 20,350 23,550 72,550

Working Note:
Basis of allocation of expenses
Carriage inwards Purchases (3:2:1)
Carriage outwards Turnover (4:3:2)
Salaries No. of Employees (5:4:3)
Advertisement Turnover (4:3:2)
Discount allowed Turnover (4:3:2)
Discount received Purchases (3:2:1)
Rent, Rates and Taxes Floor Space occupied (6:5:4)
Depreciation on furniture Value of furniture (2:2:1)
Labour welfare expenses No. of Employees (5:4:3)
Electricity expense Units consumed (3:2:1)
Provision for bad debts Debtors balances (3:2:2)
(b) In the books of Head Office
Branch Stock Account
Particulars ` Particulars `
To Balance b/d 3,60,000 By Bank A/c (cash Sales) 21,60,000
To Goods sent to Branch 24,00,000 By Branch Debtors A/c 1,20,000
A/c (Credit Sales)
To Branch Adjustment 36,000 By Goods sent to Branch 1,20,000
A/c – balancing fig. A/c (Returns to H.O.)
(Surplus)***
By Branch Adjustment A/c* 6,000
(` 24,000 x25/100)
By Branch P&L A/c * 18,000
(Cost of Abnormal Loss)
By Branch Adjustment 36,000
A/c** (Invoice price of
normal loss)
By Balance c/d:
In hand 2,88,000
_______ In transit 48,000
27,96,000 27,96,000
*Alternatively, combined posting for the amount of ` 24,000 may be passed through Goods
pilfered account.

12 INTERMEDIATE (NEW) EXAMINATION: MAY 2018
** Alternatively, it may first be transferred to normal Loss account which may ultimately be closed
by transfer to Branch Adjustment account. The final amount of net profit will however remain
same.
*** It has been considered that the surplus may be due to sale of goods by branch at price higher
than invoice price.
Branch Stock Adjustment Account
Particulars ` Particulars (`)
To Branch Stock A/c 6,000 By Stock Reserve A/c 90,000
(Loading on (` 3,60,000 x 25/100)
Abnormal Loss)
To Branch Stock A/c 36,000 By Goods Sent to Branch A/c 5,70,000
(Normal Loss) (` 24,00,000 – ` 1,20,000)
x 25/100
To Stock Reserve A/c 84,000 By Branch Stock A/c (Surplus) 36,000
(` 3,36,000 x25/100)
To Gross Profit t/f to P 5,70,000
& L A/c _______ _______
6,96,000 6,96,000
Branch Profit and Loss Account
To Branch Stock A/c (Cost 18,000 By Branch Adjustment A/c 5,70,000
of Abnormal Loss) (Gross Profit)
To Net Profit t/f to General 5,52,000
P & L A/c _______ _______
5,70,000 5,70,000
Question 4
(a) A and B carrying on business in partnership sharing profits and losses equally, wished to
dissolve the firm and sell the business to AB Limited Company on 31.03.2018 when th e
firm's position was as follows:
Liabilities (`) Assets (`)
A’s Capital 7,50,000 Land & Building 5,00,000
B’s Capital 5,00,000 Furniture 2,00,000
Sundry Creditors 3,00,000 Stock 5,00,000

PAPER – 1 : ACCOUNTING 13
Debtors 3,30,000
Cash 20,000
15,50,000 15,50,000
The arrangement with AB Limited Company was as follows:
(i) Land and Building was purchased at 20% more than the book value.
(ii) Furniture and stock were purchased at book value less 15%.
(iii) The Goodwill of the firm was valued at ` 2,00,000.
(iv) The firm's debtors, cash and creditors were not to be taken over, but the company
agreed to collect the book debts of the firm and discharge the creditors of the firm
as an agent, for which services the company was to be paid 5% on all collections
from the firm's debtors and 3% on cash paid to firm's creditors.
(v) The purchase price was to be discharged by the company in fully paid equity shares
of ` 10 each at a premium of ` 2 per share.
The company collected all the amounts from the debtors. The creditors were paid off less
by ` 5,000 allowed as discount. The company paid the balance due to the vendors in
cash.
Prepare the Realisation A/c, the Capital Accounts of the Partners and the Cash Account
in the books of the Partnership firm. (15 Marks)
(b) Write short notes on extent of liability of LLP and its Partners. (5 Marks)
Answer
(a) In the Books of Partnership Firm
Realization Account
` `
To Land & Building 5,00,000 By Sundry Creditors 3,00,000
To Furniture 2,00,000 By AB Ltd. Co. - Purchase 13,95,000

consideration –
(W.N.1)
To Stock 5,00,000 By AB Ltd. Company – 3,30,000
Sundry Debtors
To Debtors 3,30,000 Less: Commission
5% on 3,30,000 16,500 3,13,500
To AB Ltd. Co. - Sundry 2,95,000
Creditors (3,00,000

less 5,000)
To AB Ltd. Co. – 8,850
(Commission 3% on
2,95,000)
To Profits transferred to:
A’s Capital A/c 87,325
B’s Capital A/c 87,325 1,74,650
20,08,500 20,08,500
Capital Accounts of Partners
A B A B
` ` ` `
To Shares in AB By Balance b/d 7,50,000 5,00,000
Ltd. Co.– 8,19,900 5,75,100
(W.N.2)
To Cash – Final By Realization a/c -
Payment 17,425 12,225 Profit 87,325 87,325
8,37,325 5,87,325 8,37,325 5,87,325
Cash Account
` `
To Balance b/d 20,000 By A’s Capital A/c- Final
payment 17,425
To AB Ltd. Co. (Amount realized By B’s Capital A/c- Final
from Debtors less amount Payment 12,225
paid to creditors) –(W.N.3) 9,650
29,650 29,650
Working Notes:
1. Calculation of Purchase consideration:
`
Land & Building 6,00,000
Furniture 1,70,000
Stock 4,25,000
Goodwill 2,00,000
13,95,000

2. Distribution of shares among partners

The shares received from the company have been distributed between the two partners
A & B in the ratio of their final claims i.e., 8,37,325: 5,87,325*.
No. of shares received from the company = 13,95,000/12= 1,16,250
A gets [(1,16,250 X 8,37,325)/14,24,650] = 68,325 shares valued at 68,325 x 12 =
` 8,19,900. B gets the remaining 47,925 shares, valued at ` 5,75,100 (47,925  12)
3. Calculation of net amount received from AB Ltd on account of amount realized
from debtors less amount paid to creditors.
`
Amount realized from Debtors 3,30,000
Less: Commission for realization from debtors (5% on 3,30,000) 16,500
3,13,500
Less: Amount paid to creditors 2,95,000
18,500
Less: Commission for cash paid to creditors (3% on 2,95,000) 8,850
Net amount received 9,650

Note: In the above situation, shares received from AB Ltd. Company have been
distributed between two partners A and B in the ratio of their final claims. Alternatively,
shares received from AB Ltd. can be distributed among the partners in their profit sharing
ratio i.e. ` 13,95,000 x ½ = ` 6,97,500 each. In that case, firm will pay cash amounting
` 1,39,825 to A and will receive cash ` 1,10,175 from B. Partners’ capital accounts and
cash account will, accordingly get changed.
(b) Extent of Liability of LLP and its partners
Every partner of an LLP for the purpose of its business is an agent of the LLP but is not
an agent of other partners. Obligations of LLP are solely its obligations and liabilities of
LLP are to be met out of properties of LLP.
The partners of an LLP in the normal course of business are not liable for the debts of
the LLP. The LLP is liable if a partner of LLP is liable to any person as a result of
wrongful or omission on his part in the course of business of the LLP or with his
authority. However, a partner will be liable for his own wrongful acts or commissions, but
will not be liable for the wrongful acts or commissions of other partners of the LLP. Thus
a partner may be called to pay the liability of an LLP under exceptional circumstances.
If an LLP or any of its partners act with the intent to defraud creditors of the LLP or any
other person or for any fraudulent purpose, then the liability of the LLP and the
concerned partners is unlimited. However, where the fraudulent act is carried out by a

partner, the LLP is not liable if it is established by the LLP that the act was without the
knowledge or authority of the LLP. Where the business is carried out with fraudulent
intent or for fraudulent purpose, every person who was knowingly a party is punishable
with imprisonment and fine.
Question 5
(a) The promotors of Shiva Ltd. took over on behalf of the company a running business with
effect from 1 st April 2017. The company got incorporated on 1st August 2017. The annual
accounts were made up to 31 st March, 2018 which revealed that the sales for the whole
year totalled ` 2400 lakhs out of which sales till 31st July, 2017 were for ` 600 lakhs.
Gross profit ratio was 20%.
The expenses from 1 st April 2017, till 31st March, 2018 were as follows:
Particulars ` in lakhs
Salaries 75
Rent, Rates and Insurance 30
Sundry Office Expenses 72
Traveller's Commission 20
Discount allowed 16
Bad Debts 8
Directors' Fee 30
Tax Audit Fee 16
Depreciation on Tangible Assets 15
Debenture Interest 14
Prepare a statement showing the calculation of profits for the pre-incorporation and Post
incorporation periods.
(b) Dheeraj Limited had 5,000, 10% Redeemable Preference Shares of ` 100 each, fully
paid up. The company had to redeem these shares at a premium of 10%.
It was decided by the company to issue the following:
(i) 40,000 Equity Shares of ` 10 each at par
(ii) 2,000 12% Debentures of ` 100 each.
The issue was fully subscribed and all accounts were received in full. The payment was
duly made. The company had sufficient profits. Show journal entries in the books of the
company. (2 Parts x 10 Marks =20 Marks)

Answer
(a) Statement showing the calculation of Profits for the pre-incorporation and post-
incorporation periods
Particulars Total Basis of Pre- Post-
Amount Allocation incorporation incorporation
(` in (` in lakhs) (` in lakhs)
lakhs)
Gross Profit (20% of ` 2,400) 480 Sales 120 360
Less: Salaries 75 Time 25 50
Rent, rates and Insurance 30 Time 10 20
Sundry office expenses 72 Time 24 48
Travellers’ commission 20 Sales 5 15
Discount allowed 16 Sales 4 12
Bad debts 8 Sales 2 6
Directors’ fee 30 Post - 30
Tax Audit Fees* 16 Sales 4 12
Depreciation on tangible 15 Time 5 10
assets
Debenture interest 14 Post - 14
Net profit 184 41 143
* Tax Audit Fees allocated in the ratio of sales.
Thus, pre-incorporation profits is ` 41 lakhs and post- incorporation profit is ` 143 akhs.
Working Notes:
1. Sales ratio
(` in lakh)
Sales for the whole year 2400
Sales up to 31st July, 2017 600
Therefore, sales for the period from 1st August, 2017 to 31st March, 1,800
2018
Thus, sale ratio = 600:1800 = 1:3
2. Time ratio
1st April, 2017 to 31 st July, 2017 : 1 st August, 2017 to 31 st March, 2018
= 4 months: 8 months = 1:2, Thus, time ratio is 1:2.

(b) In the books of Dheeraj Limited

Journal Entries
Date Particulars Dr. (`) Cr. (`)
Bank A/c Dr. 4,00,000
To Equity Share Capital A/c 4,00,000
(Being the issue of 40,000 equity shares of ` 10
each at par as per Board’s resolution
No……dated…..)
Bank A/c Dr. 2,00,000
To 12% Debenture A/c 2,00,000
(Being the issue of 2,000 Debentures of ` 100
each as per Board’s Resolution No…..dated……)
10% Redeemable Preference Share Capital A/c Dr. 5,00,000
Premium on Redemption of Preference Shares Dr. 50,000
A/c
To Preference Shareholders A/c 5,50,000
(Being the amount payable on redemption
transferred to Preference Shareholders Account)
Preference Shareholders A/c Dr. 5,50,000
To Bank A/c 5,50,000
(Being the amount paid on redemption of
preference shares)
Profit & Loss A/c Dr. 50,000
To Premium on Redemption of Preference 50,000
Shares A/c
(Being the adjustment of premium on redemption
against Profits & Loss Account)
Profit & Loss A/c Dr. 1,00,000
To Capital Redemption Reserve A/c 1,00,000
(Working Note)
(Being the amount transferred to Capital
Redemption Reserve Account as per the
requirement of the Act)

Working Note:
Amount to be transferred to Capital Redemption Reserve Account
Face value of shares to be redeemed ` 5,00,000
Less: Proceeds from new issue (` 4,00,000)
Balance ` 1,00,000
Question 6
Answer any four from the following:
(a) Briefly explain the elements of financial statements.
(b) Following are the balances appear in the trial balance of Arya Ltd. as at 31st March.
2018.
Issued and Subscribed Capital:
`
10,000; 10% Preference Shares of ` 10 each fully paid 1,00,000
1,00,000 Equity Shares of ` 10 each ` 8 paid up 8,00,000
Reserves and Surplus:
General Reserve 2,40,000
Securities Premium (collected in cash) 25,000
Profit and Loss Account 1,20,000
On 1st April, 2018 the company has made final call @ ` 2 each on 1,00,000 Equity
Shares. The call money was received by 15 th April, 2018. Thereafter the company
decided to issue bonus shares to equity shareholders at the rate of 1 share for every 5
shares held and for this purpose, it decided that there should be minimum reduction in
free reserves. Pass Journal entries.
(c) Gurudev Limited purchases for immediate cancellation 6,000 of its own 12 % debentures
of ` 100 each on 1st November, 2017. The dates of interest being 31 st March, and
30th September. Pass necessary journal entries relating to the cancellation if:
(i) Debentures are purchased at ` 98 ex-interest.
(ii) Debentures are purchased at ` 98 cum-interest.
(d) M/s Nathan Limited has three segments namely P, Q and R. The assets of the company
are ` 15 crores. Segment P has 4 crores, Segment Q has 6 crores and Segment R has 5
crores. Deferred tax assets included in the assets of each segment are P - ` 1 crore,

Q - ` 0.90 crores and R - ` 0.80 crores. The accountant contends all these three
segments are reportable segments. Comment.
(e) Classify the following activities as
(i) Operating Activities, (ii) Investing activities, (iii) Financial activities and (iv) Cash
Equivalents.
(1) Cash receipts from Trade Receivables
(2) Marketable Securities
(3) Purchase of investment
(4) Proceeds from long term borrowings
(5) Wages and Salaries paid
(6) Bank overdraft
(7) Purchase of Goodwill
(8) Interim dividend paid on equity shares
(9) Short term Deposits
(10) Underwriting commission paid (4 Parts x 5 Marks = 20 Marks)
Answer
(a) Elements of Financial Statements
Asset Resource controlled by the enterprise as a result of past events from
which future economic benefits are expected to flow to the enterprise
Liability Present obligation of the enterprise arising from past events, the
settlement of which is expected to result in an outflow of a resource
embodying economic benefits.
Equity Residual interest in the assets of an enterprise after deducting all its
liabilities
Income/gain Increase in economic benefits during the accounting period in the
form of inflows or enhancement of assets or decreases in liabilities
that result in increase in equity other than those relating to
contributions from equity participants
Expense/loss Decrease in economic benefits during the accounting period in the
form of outflows or depletions of assets or incurrence of liabilities
that result in decrease in equity other than those relating to
distributions to equity participants

(b) Arya Ltd.

Journal Entries
Dr. Cr.
2018 ` `
April 1 Equity Share Final Call A/c Dr. 2,00,000
(Final call of ` 2 per share on 1,00,000 equity
shares due as per Board’s Resolution dated....)
April 15 Bank A/c Dr. 2,00,000
To Equity Share Final Call A/c 2,00,000
(Final Call money on 1,00,000 equity shares
received)
Securities Premium A/c Dr. 25,000
General Reserve A/c* Dr. 1,75,000
To Bonus to Shareholders A/c 2,00,000
(Bonus issue @ one share for every 5 shares
held by utilizing various reserves as per Board’s
Resolution dated...)
April 15 Bonus to Shareholders A/c Dr. 2,00,000
(Capitalization of profit)
Note: Profit and Loss Account balance may also be utilized along with General Reserve
for the purpose of issue of Bonus shares.
(c) In the books of Gurudev Ltd.
Journal Entries
(i) In case of ex-interest
Date Particulars ` `
1.11.2017 Own Debentures A/c Dr. 5,88,000
Debentures Interest A/c Dr. 6,000
[6,000 x 100 x 12% x (1/12)]
(Purchase of 6,000 Debentures @ 98 ex
interest for immediate cancellation)
1.11.17 12% Debentures A/c Dr. 6,00,000

To Own Debentures A/c 5,88,000

To Capital reserve A/c (Profit on 12,000
cancellation of debentures)
(Being profit on cancellation of 6,000
Debentures transferred to capital reserve
account)
(ii) In case of cum interest
1.11.17 Own Debenture A/c Dr. 5,82,000
Debenture Interest Account A/c Dr. 6,000
[6,000 x100 x12% x (1/12)]
(Being 6,000 debentures purchased @ ` 98
cum interest for immediate cancellation)
1.11.17 12% Debenture A/c Dr. 6,00,000
To Own Debentures A/c 5,82,000
To Capital reserve A/c (Profit on 18,000
cancellation of debentures)
(Being profit on cancellation of 6,000
Debentures transferred to capital reserve
account)
(d) According to AS 17 “Segment Reporting”, segment Assets do not include income
tax assets.
Therefore, the revised total assets are 12.3 crores [` 15 – (` 1 + 0.9 + 0.8).
Details of Segment wise assets
Segment P holds total assets of ` 3 crores (` 4 crores – ` 1 crores);
Segment Q holds ` 5.1 crores (` 6 crores – 0.9 crores);
Segment R holds ` 4.2 crores (` 5 crores – ` 0.8 crores).
Thus, all the three segments hold more than 10% of the total assets, all segments are
reportable segments.
Hence, the contention of the Accountant that all three segments are reportable segments
is correct.
(e) (a) Operating Activities: Items 1 and 5.
(b) Investing Activities: Items 3,7 and 9
(c) Financing Activities: Items 4,6,8 and 10
(d) Cash Equivalent: 2

candidates.
Question 1
(a) Neon Enterprise operates a major chain of restaurants located in different cities. The
company has acquired a new restaurant located at Chandigarh. The new-restaurant
requires significant renovation expenditure. Management expects that the renovations
will last for 3 months during which the restaurant will be closed.
Management has prepared the following budget for this period –
Salaries of the staff engaged in preparation of restaurant before its opening ` 7,50,000
Construction and remodelling cost of restaurant ` 30,00,000
Explain the treatment of these expenditures as per the provisions of AS 10 "Property,
Plant and Equipment".
(b) (i) ABC Ltd. a Indian Company obtained long term loan from WWW private Ltd., a U.S.
company amounting to ` 30,00,000. It was recorded at US $1 = ` 60.00, taking
exchange rate prevailing at the date of transaction. The exchange rate on balance
sheet date (31.03.2018) was US $1 = ` 62.00.
(ii) Trade receivable includes amount receivable from Preksha Ltd.,` 10,00,000
recorded at the prevailing exchange rate on the date of sales, transaction recorded
at US $1 = ` 59.00. The exchange rate on balance sheet date (31.03.2018) was US
$1 = ` 62.00.
You are required to calculate the amount of exchange difference and also explain the
accounting treatment needed in the above two cases as per AS 11 in the books of ABC
Ltd.
(c) HIL Ltd. was making provision for non-moving stocks based on no issues having
occurred for the last 12 months upto 31.03.2017. The company now wants to make
provision based on technical evaluation during the year ending 31.03.2018.
Total value of stock ` 120 lakhs
Provision required based on technical evaluation ` 3.00 lakhs.
Provision required based on 12 months no issues ` 4.00 lakhs.
You are requested to discuss the following points in the light of Accounting Standard
(AS)-1:

2 INTERMEDIATE (NEW) EXAMINATION: NOVEMBER, 2018
(i) Does this amount to change in accounting policy?

(ii) Can the company change the method of accounting?
(d) The accounting year of Dee Limited ended on 31st March, 2018 but the accounts were
approved on 30th April, 2018. On 15th April, 2018 a fire occurred in the factory and office
premises. The loss by fire is of such a magnitude that it was not possible to expect the
enterprise Dee Limited to start operation again.
State with reasons, whether the loss due to fire is an adjusting or non- adjusting event
and how the fact of loss is to be disclosed by the company in the context of the
provisions of AS-4 (Revised). (4 Parts x 5 Marks = 20 Marks)
Answer
(a) As per provisions of AS 10, any cost directly attributable to bring the assets to the
location and conditions necessary for it to be capable of operating in the manner
indicated by the management are called directly attributable costs and would be includ ed
in the costs of an item of PPE.
Management of Neon Enterprise should capitalize the costs of construction and
remodelling the restaurant, because they are necessary to bring the restaurant to the
condition necessary for it to be capable of operating in the manner intended by
management. The restaurant cannot be opened without incurring the construction and
remodelling expenditure amounting ` 30,00,000 and thus the expenditure should be
considered part of the asset.
However, the cost of salaries of staff engaged in preparation of restaurant ` 7,50,000
before its opening are in the nature of operating expenditure that would be incurred if the
restaurant was open and these costs are not necessary to bring the restaurant to the
conditions necessary for it to be capable of operating in the manner intended by
management. Hence, ` 7,50,000 should be expensed.

(b) Amount of Exchange difference and its Accounting Treatment

Long term Loan Foreign `
Currency Rate
(i) Initial recognition US $ 50,000 1 US $ = ` 60 30,00,000
` (30,00,000/60)
Rate on Balance sheet date 1 US $ = ` 62
Exchange Difference Loss US $ 50,000 x 1,00,000
` (62 – 60)
Treatment: Credit Loan A/c
and Debit FCMITD A/c or Profit and Loss A/c
by ` 1,00,000
Trade receivables
(ii) Initial recognition US $ 16,949.152* 1 US $ = ` 59 10,00,000
(`10,00,000/59)
Rate on Balance sheet date 1 US $ = ` 62
Exchange Difference Gain US $ 16,949.152* x 50,847.456*
` (62-59)
Treatment: Credit Profit and Loss A/c by
` 50,847.456*
And Debit Trade Receivables
Thus, Exchange Difference on Long term loan amounting ` 1,00,000 may either be
charged to Profit and Loss A/c or to Foreign Currency Monetary Item Translation
Difference Account but exchange difference on trade receivables amounting
` 50,847.456 is required to be transferred to Profit and Loss A/c.
(c) The decision of making provision for non-moving inventories on the basis of technical
evaluation does not amount to change in accounting policy. Accounting policy of a
company may require that provision for non-moving inventories should be made but the
basis for making provision will not constitute accounting policy. The method of estimating
the amount of provision may be changed in case a more prudent estimate can be made.
In the given case, considering the total value of inventory, the change in the amount of
required provision of non-moving inventory from ` 4 lakhs to ` 3 lakhs is also not
material. The disclosure can be made for such change in the following lines by way of
notes to the accounts in the annual accounts of HIL Ltd. for the year 2017-18 in the
following manner:

“The company has provided for non-moving inventories on the basis of technical
evaluation unlike preceding years. Had the same method been followed as in the
previous year, the profit for the year and the value of net assets at the end of the year
would have been lower by ` 1 lakh.”
(d) As per AS 4 (Revised) “Contingencies and Events occurring after the Balance Sheet
Date”, an event occurring after the balance sheet date should be an adjusting event even
if it does not reflect any condition existing on the balance sheet date, if the event is such
as to indicate that the fundamental accounting assumption of going concern is no longer
appropriate.
T he fire occurred in the factory and office premises of an enterprise after 31 March, 2018
but before approval of financial statement of 30.4.18. The loss by fire is of such a
magnitude that it is not reasonable to expect the Dee Ltd. to start operations again, i.e.,
the going concern assumption is not valid. Since the fire occurred after 31/03/18, the loss
on fire is not a result of any condition existing on 31/03/18. But the loss due to fire is an
adjusting event the entire accounts need to be prepared on a liquidation basis with
adequate disclosures by the company by way of note in its financial statements in the
following manner:
“Major fire occurred in the factory and office premises on 15 th April, 2018 which has made
impossible for the enterprise to start operations again. Therefore, the financial
statements have been prepared on liquidation basis.”
Question 2
(a) Following transactions of Nisha took place during the financial year 2017-18:
1st April, 2017 Purchased ` 9,000 8% bonds of ` 100 each at ` 80.50 cum-
interest. Interest is payable on 1 st November and 1st May.
1st May, 2017 Received half year’s interest on 8% bonds.
10 July, 2017 Purchased 12,000 equity shares of ` 10 each in Moon Limited
for ` 44 each through a broker, who charged brokerage
@ 2%.
1st October 2017 Sold 2,250 8% bonds at ` 81 Ex-interest.
1st November, 2017 Received half year’s interest on 8% bonds.
15th January, 2018 Moon Limited made a rights issue of one equity share for
every four Equity shares held at ` 5 per share. Nisha
exercised the option for 40% of her entitlements and sold the
balance rights in the market at ` 2.25 per share.
15th March, 2018 Received 18% interim dividend on equity shares of Moon
Limited.

Prepare separate investment account for 8% bonds and equity shares of Moon Limited in
the books of Nisha for the year ended on 31 st March, 2018. Assume that the average
cost method is followed.
(b) A fire engulfed the premises of a business of M/S Kite Ltd. in the morning, of 1 st October,
2017. The entire stock was destroyed except, stock salvaged of ` 50,000. Insurance
Policy was for ` 5,00,000 with average clause.
The following information was obtained from the records saved for the period from
1st April to 30th September, 2017:
`
Sales 27,75,000
Purchases 18,75,000
Carriage inward 35,000
Carriage outward 20,000
Wages 40,000
Salaries 50,000
Stock in hand on 31st March, 2017 3,50,000
(1) Sales upto 30th September, 2017, includes ` 75,000 for which goods had not been
dispatched.
(2) On 1st June, 2017, goods worth ` 1,98,000 sold to Hari on approval basis which
was included in sales but no approval has been received in respect of 2/3rd of the
goods sold to him till 30th September, 2017.
(3) Purchases upto 30th September, 2017 did not include ` 1,00,000 for which
purchase invoices had not been received from suppliers, though goods have been
received in godown.
(4) Past records show the gross profit rate of 25% on sales.
You are required to prepare the statement of claim for loss of stock for submission to the
Insurance Company. (10 + 10 = 20 Marks)
Answer
(a) In the books of Nisha
8% Bonds for the year ended 31 st March, 2018
Date Particulars No. Income Amount Date Particulars No. Income Amount
` ` ` `
2017 1 May By Bank-Interest - 36,000
1 April, To Bank A/c 9,000 30,000 6,94,500 2017

Oct. 1
2018 To P & L A/c - - 8,625 1 Oct. By Bank A/c 2,250 7,500 1,82,250
March (W.N.1) 2017
31
To P & L A/c 40,500 1 Nov. By Bank-Interest 27,000
2018
2018 By Balance c/d
Mar. 31 (W.N.2)
6,750 - 5,20,875
9,000 70,500 7,03,125 9,000 70,500 7,03,125
Investment in Equity shares of Moon Ltd. for the year ended 31 st March, 2018
` ` ` `
2017 To Bank 12,000 -- 5,38,560 2018 By Bank – - 23,760
July 10 A/c March dividend
15 *
2018 To Bank 1,200 - 6,000 March By Balance
Jan. 15 A/c 31 c/d
(W.N. 3) (bal. fig.) 13,200 - 5,44,560
March 31 To P & L
A/c - 23,760
13,200 23,760 5,44,560 13,200 23,760 5,44,560
* Considering that dividend was received on right shares also.
Working Notes:
1. Profit on sale of 8% Bonds
Sales price ` 1,82,250
Less: Cost of bond sold = 6,94,500/9,000x 2,250 (` 1,73,625)
Profit on sale ` 8,625
2. Closing balance as on 31.3.2018 of 8 % Bonds
6,94,500/ 9,000 x 6,750= ` 5,20,875
3. Calculation of right shares subscribed by Moon Ltd.
Right Shares = 12,000/4 x 1= 3,000 shares
Shares subscribed by Nisha = 3,000 x 40%= 1,200 shares
Value of right shares subscribed = 1,200 shares @ ` 5 per share = ` 6,000

4. Calculation of sale of right entitlement by Moon Ltd.

No. of right shares sold = 3,000 – 1,200 = 1,800 rights for ` 4,050
Note: As per para 13 of AS 13, sale proceeds of rights are to be credited to P & L
A/c.
`
Stock on the date of fire (i.e. on 1.10.2017) 3,75,000
Less: Stock salvaged (50,000)
Stock destroyed by fire (Loss of stock) 3,25,000
Insurance claim = ` 3,25,000
(Average clause is not applicable as insurance policy amount (` 5,00,000) is more than
the value of closing stock ie. ` 3,75,000)
Memorandum Trading A/c
(1.4.17 to 30.9.17)
Particulars (` ) Particulars (` )
To Opening stock 3,50,000 By Sales 25,68,000
To Purchases 19,75,000 By Goods with customers* 99,000
(` 18,75,000+` 1,00,000) (for approval) (W.N.1)
To Carriage inward 35,000 By Closing stock (bal. fig.) 3,75,000
To Wages 40,000
To Gross profit _______
(` 25,68,000 x 25%) 6,42,000
30,42,000 30,42,000
stock since the goods were physically not with the entity and, hence, there was no loss of
such stock.
Working Notes:
1. Calculation of goods with customers
Since no approval for sale has been received for the goods of ` 1,32,000 (i.e. 2/3 of
` 1,98,000) hence, these should be valued at cost i.e. ` 1,32,000 – 25% of
` 1,32,000 =` 99,000.

2. Calculation of actual sales

Total sales – Goods not dispatched - Sale of goods on approval (2/3 rd) =
Sales (` 27,75,000 – 75,000 – `1,32,000) = ` 25,68,000
Question 3
(a) Aman, a readymade garment trader, keeps his books of account under single entry
system. On the closing date, i.e. on 31st March, 2017 his statement of affairs stood as
follows:
Liabilities Amount ` Assets Amount `
Aman's capital 4,80,000 Building 3,25,000
Loan 1,50,000 Furniture 50,000
Creditors 3,10,000 Motor car 90,000
Stock 2,00,000
Debtors 1,70,000
Cash in hand 20,000
Cash at bank 85,000
9,40,000 9,40,000
Riots occurred and a fire broke out on the evening of 31st March, 2018, destroying the
books of accounts. On that day, the cashier had absconded with the available cash. You
are furnished with the following information:
1. Sales for the year ended 31st March, 2018 were 20% higher than the previous
year's sales, out of which, 20% sales were for cash. He always sells his goods at
cost plus 25%. There were no cash purchases.
2. Collection from debtors amounted to ` 14,00,000, out of which ` 3,50,000 was
received in cash.
3. Business expenses amounted to ` 2,00,000, of which ` 50,000 were outstanding on
31st March, 2018 and ` 60,000 paid by cheques.
4. Gross profit as per last year's audited accounts was ` 3,00,000.
5. Provide depreciation on building and furniture at 5% each and motor car at 20%.
6. His private records and the Bank Pass Book disclosed the following transactions for
the year 2017-18:
`
Payment to creditors (paid by cheques) 13,75,000
Personal drawings (paid by cheques) 75,000

Repairs (paid by cash) 10,000

Travelling expenses (paid by cash) 15,000
Cash deposited in bank 7,15,000
Cash withdrawn from bank 1,20,000
7. Stock level was maintained at ` 3,00,000 all throughout the year.
8. The amount defalcated by the cashier is to be written off to the Profit and Loss
Account.
You are required to prepare Trading and Profit and Loss A/c for the year ended
31st March, 2018 and Balance Sheet as on that date of Aman. All the workings should
form part of the answer.
(b) Axe Limited has four departments, A, B, C and D. Department A sells goods to other
departments at a profit of 25% on cost. Department B sells goods to other department at
a profit of 30% on sales. Department C sells goods to other departments at a profit of
10% on cost, Department D sells goods to other departments at a profit of 15% on sales.
Stock lying at different departments at the year-end was as follows:
Department Department Department Department
A B C D
Transfer from Department A - 45,000 50,000 60,000
Transfer from Department B 50,000 - - 75,000
Transfer from Department C 33,000 22,000 - -
Transfer from Department D 40,000 10,000 65,000 -
Departmental managers are entitled to 10% commission on net profit subject to
unrealized profit on departmental sales being eliminated.
Departmental profits after charging manager's commission, but before adjustment of
unrealized profit are as under:
`
Department A 2,25,000
Department B 3,37,500
Department C 1,80,000
Department D 4,50,000
Calculate the correct departmental profits after charging Manager's commission.
(15 + 5= 20 Marks)

Answer
(a) Trading and Profit and Loss Account of Aman
for the year ended 31st March, 2018
` `
To Opening Stock 2,00,000 By Sales 18,00,000
To Purchases (Bal. fig.) 15,40,000 By Closing Stock 3,00,000
To Gross Profit c/d 3,60,000 _______
21,00,000 21,00,000
To Business Expenses 2,00,000 By Gross Profit b/d 3,60,000
To Repairs 10,000
To Depreciation:
Building 16,250
Machinery 2,500
Motor Car 18,000 36,750
To Travelling Expenses 15,000
To Loss by theft (cash 20,000
defalcated)
To Net Profit 78,250 _______
3,60,000 3,60,000
Balance Sheet of Aman as at 31 st March, 2018

Liabilities ` ` Assets ` `
Capital 4,80,000 Building 3,25,000
Add: Less: Depreciation (16,250) 3,08,750

Net Profit 78,250 Furniture 50,000
Drawings (75,000) 4,83,250 Less: Depreciation (2,500) 47,500
Loan 1,50,000 Motor car 90,000
Less: Depreciation (18,000) 72,000
Sundry Creditors 4,75,000 Stock in Trade 3,00,000
Outstanding Sundry Debtors 2,10,000
business 50,000 Bank Balance 2,20,000
Expenses
11,58,250 11,58,250

Working Notes:
1. Cash and Bank Account
Particulars Cash Bank Particulars Cash Bank
To Balance 20,000 85,000 By Payment to - 13,75,000
b/d Creditors
To Collection 3,50,000 10,50,000 By Business 90,000 60,000
from Expenses
Debtors
To Sales 3,60,000 – By Repairs 10,000 –
(18,00,000
x 20% )
To Cash (C) – 7,15,000 By Cash (C) 1,20,000
(withdrawal)
By Bank (C) 7,15,000
To Bank (C) 1,20,000 - By Travelling 15,000 –
Expenses
By Private - 75,000
Drawings
By Balance c/d 2,20,000
By Cash defalcated 20,000
_____ ______ (balancing fig.)
8,50,000 18,50,000 8,50,000 18,50,000
2. Calculation of sales during 2017-18 `

Gross profit (last year i.e. for year ended 3,00,000
31.3.2017
Goods sold at cost plus 25% i.e. 20% of sales 15,00,000
Sales for 2016-17 3,00,000/0.2
Sales for 2017-18 (15,00,000 x 1.2) 18,00,000
Credit sales for 2017-18 14,40,000
(80% of 18,00,000)
3. Debtors Account
To Bal. b/d. 1,70,000 By Cash 3,50,000
To Sales (18,00,000 x 80%) 14,40,000 By Bank 10,50,000
By Bal. c/d 2,10,000
______
16,10,000 16,10,000

4. Creditors Account
To Bank 13,75,000 By Bal. b/d 3,10,000
To Bal. c/d (bal. fig.) 4,75,000 By Purchases 15,40,000
_______ _____
18,50,000 18,50,000
(b) Calculation of correct departmental Profits
Department Department Department Department
A B C D
` ` ` `
Profit after charging 2,25,000 3,37,500 1,80,000 4,50,000
managers’ commission
Add back: Managers’ 25,000 37,500 20,000 50,000
commission (1/9)
2,50,000 3,75,000 2,00,000 5,00,000
Less: Unrealized profit on 31,000 37,500 5,000 17,250
stock (Working Note)
Profit before Manager’s 2,19,000 3,37,500 1,95,000 4,82,750
commission
Less: Commission for
Department Manager @ 21,900 33,750 19,500 48,275
10%
Correct Departmental
Profits after manager’s
commission 1,97,100 3,03,750 1,75,500 4,34,475
Working Note :
Stock lying with
Dept. A Dept. B Dept. C Dept. D Total
` ` ` `
Unrealized Profit
of:
Department A 45,000 x 25/125 50,000 x 60,000 x 25/125 31,000
= 9,000 25/125 = 12,000
=10,000
Department B 50,000 x 0.3 75,000 x 0.3 37,500
= 15,000 = 22,500

Department C 33,000 x10/110 22,000x 10/110 5,000

= 3,000 = 2,000
Department D 40,000 x 0.15 10,000 x 0.15 65,000 x 17,250
= 6,000 = 1,500 0.15 = 9,750
Question 4
E, F and G were partners in a firm, sharing profits and losses in the ratio of 3:2:1, respectively.
Due to extreme competition, it was decided to dissolve the partnership on 31 st December,
2017. The balance sheet on that date was as follows:
Liabilities ` Assets `
Capital accounts: Machinery 1,54,000
E 1,13,100 Furniture & fittings 25,800
F 35,400 Investments 5,400
G 31,500 1,80,000 Stock 97,700
Current accounts: Debtors 56,400
E 26,400 Bank 29,700
G 6,000 32,400 Current account: F 18,000
Reserves 1,08,000
Loan account: G 15,000
Creditors 51,600
3,87,000 3,87,000
The realization of assets is spread over the next few months as follows:
February, Debtors, ` 51,900; March, Machinery, ` 1,39,500; April, Furniture, etc.
` 18,000; May, G agreed to take over investment at ` 6,300; June, Stock, ` 96,000.
Dissolution expenses, originally provided, were ` 13,500, but actually amounted to
` 9,600 and were paid on 30th April. The partners decided that after creditors were settled for
` 50,400, all cash received should be distributed at the end of each month in the most
equitable manner.
You are required to prepare a statement of actual cash distribution as received using
"Maximum loss basis" method. (20 Marks)
Answer
Statement of Distribution of Cash by ‘Maximum Loss Method’
Creditors G ’s Loan E F G Total
` ` ` ` `
Feb: Balance due 51,600 15,000 1,93,500 53,400 55,500 3,02,400*

Cash available 29,700

Collection from debtors 51,900
81,600
Less: prov for expenses 13,500
68,100
Creditors & Loan paid
(50,400 +15,000) 65,400 (50,400) (15,000)
1,200 -
Discount written off (1,200)
Available for E, F & G 2,700 -
Maximum possible loss
(3,02,400-2,700) =2,99,700
In ratio of 3:2:1 (1,49,850) (99,900) (49,950) (2,99,700)
43,650 (46,500) 5,550
Adjustment for F’s deficiency (36,370) 46,500 (10,130)
in ratio of 1,13,100: 31,500
7,280 - (4,580)
Adjustment for G’s deficiency (4,580) - 4,580
2,700
Cash paid to E 2,700
Balance due 1,90,800 53,400 55,500 (2,99,700)
March
Cash available ` 1,39,500
` 2,99,700 – ` 1,39,500
= ` 1,60,200 in ratio of 3:2:1 (80,100) (53,400) (26,700) (1,60,200)
Cash paid 1,10,700 - 28,800 1,39,500
Balance 80,100 53,400 26,700 1,60,200
April
18,000 +3,900 (saving in
expenses) = 21,900
` 1,60,200-21,900= 1,38,300 (69,150) (46,100) (23,050) (1,38,300)
in ratio of 3:2:1
Cash paid 10,950 7,300 3,650 21,900
Balance
May 69,150 46,100 23,050 1,38,300

Investment taken by G 6300 6300

Balance 69150 46100 16750 132000
Maximum loss (66,000) (44,000) (22,000) (1,32,000)
(1,38,300 less 6,300)
Balance 3,150 2,100 1,050 6,300
Cash brought by G 5,250 5,250
(6,300 less 1,050)
Cash paid to E and F (3,150) (2,100) (5,250)
Balance 66,000 44,000 22,000 1,32,000
June
Stock 96,000
Maximum loss (18,000) (12,000) (6,000) 36,000
(1,32,000-96,000)
Cash paid 48,000 32,000 16,000 96,000
Unpaid balance (18,000) (12,000) (6,000) 36,000
*Partners’ capital balances after adjusting reserves and current A/c balance.
Working Note:
Statement showing the cash available for distribution:
Feb. ` 29,700 + 51,900 - 13,500 = ` 68,100
March ` 1,39,500
April ` 18,000 + 3,900 = 21,900
May - Nil
June ` 96,000
Question 5
(a) Sun Limited took over the running business of a partnership firm M/s A & N Brothers with
effect from 1st April, 2017. The company was incorporated on 1 st September, 2017. The
following profit and loss account has been prepared for the year ended 31 st March, 2018.
To salaries 1,33,000 By Gross Profit b/d 7,50,000
To rent 96,000
To carriage outward 75,000
To audit fees 12,000
To travelling expenses 66,000

To commission on sales 48,000

To printing and stationery 24,000
To electricity charges 30,000
To depreciation 80,000
To advertising expenses 24,000
To preliminary expenses 9,000
To Managing Director’s
8,000
remuneration
To Net Profit c/d 1,45,000
7,50,000 7,50,000
Additional Information :
1. Trend of sales during April, 2017 to March, 2018 was as under:
April, May ` 85,000 per month
June, July ` 1,05,000 per month
August, September ` 1,20,000 per month
October, November ` 1,40,000 per month
December onwards ` 1,50,000 per month
2. Sun Limited took over a machine worth ` 7,20,000 from A&N Brothers and
purchased a new machine on 1st February, 2018 for ` 4,80,000. The company
decides to provide depreciation @ 10% p.a.
3. The company occupied additional space from 1st October, 2017 @ rent of ` 6,000
per month.
4. Out of travelling expenses, ` 30,000 were incurred by office staff while remaining
expenses were incurred by salesmen.
5. Audit fees pertains to the company.
6. Salaries were doubled from the date of incorporation.
You are required to prepare a statement apportioning the expenses between pre and
post incorporation periods and calculate the profit/(loss) for such periods.
(b) A Company had issued 1,000 12% debentures of ` 100 each redeemable at the
company's option at the end of 10 years at par or prior to that by purchase in open
market or at ` 102 after giving 6 months notice. On 31 st December, 2016, the accounts of
the company showed the following balances:

Debenture redemption fund ` 53,500 represented by 10% Govt. Loan of a nominal value
of ` 42,800 purchased at an average price of ` 101 and ` 10,272 uninvested cash in
hand.
On 1st January 2017, the company purchased ` 11,000 of its own debentures at a cost
of ` 10,272.
On 30th June, 2017, the company gave a six months notice to the holders of ` 40,000
debentures and on 31 st December, 2017 carried out the redemption by sale of ` 40,800
worth of Govt. Loan at par and also cancelled the own debentures held by it.
Prepare ledger account of Debenture Redemption Fund Account and Debenture
Redemption Fund Investment Account for the year ended 31.12.2017, assuming that,
interest on company debentures & Govt. loan was payable on 31st December every year.
(12+ 8 = 20 Marks)
Answer
(a) Statement showing calculation of profits for pre and post incorporation periods
for the year ended 31.3.2018
Particulars Pre-incorporation Post- incorporation
period period
` `
Gross profit (1:2) 2,50,000 5,00,000
Less: Salaries (5:14) 35,000 98,000
Carriage outward (1:2) 25,000 50,000
Audit fee - 12,000
Travelling expenses (W.N.3) 24,500 41,500
Commission on sales (1:2) 16,000 32,000
Printing & stationary (5:7) 10,000 14,000
Rent (office building) (W.N.4) 25,000 71,000
Electricity charges (5:7) 12,500 17,500
Depreciation 30,000 50,000
Advertisement (1:2) 8,000 16,000
Preliminary expenses - 9,000
MD remuneration _____- 8,000
Pre-incorporation profit – ts/f to Capital 64,000 -
reserve (Bal. Fig.)
Net profit (Bal. Fig.) - 81,000

Working Notes:
1. Time Ratio
Pre incorporation period = 1 st April, 2017 to 31st August, 2017
i.e. 5 months
Post incorporation period is 7 months
Time ratio is 5: 7.
2. Sales ratio
April 85,000
May 85,000
June 1,05,000
July 1,05,000
August 1,20,000
5,00,000
September 1,20,000
Oct & Nov. 2,80,000
Dec. to March (1,50,000 x 4) 6,00,000
10,00,000
5,00,000:10,00,000 = 1:2
3. Travelling expenses
` `
Pre-incorporation Post- incorporation
30,000 office staff (5:7) 12,500 17,500
36,000 sales (1:2) 12,000 24,000
24,500 41,500
4. Rent
`
Rent for additional space ` (6,000 x 6) 36,000
Remaining rent ` (96,000-36,000) 60,000
Pre-incorporation period (5/12 of 60,000) 25,000
Post- incorporation period `35,000 + `36,000 71,000

5. Salaries
Suppose x for a month in pre- incorporation period then salaries for pre-
incorporation period = 5x salaries for post- incorporation period = 2x X 7= 14x
Ratio = 5:14
6. Depreciation
` `
Pre- Post-
` incorporation incorporation
Total depreciation 80,000
Less: Depreciation exclusively for post 8,000
incorporation period
(` 4,80,000 x 10 x 2/12) 8,000
72,000
Depreciation for pre-incorporation period
(` 72,000 x 5/12) 30,000
Depreciation for post incorporation period 42,000
(` 72,000 x 7/12)
30,000 50,000
(b) Debenture Redemption Fund Account
Date Particulars ` Date Particulars `
31.12.17 To Debenture 1.1.17 By Balance b/d 53,500
Redemption
Fund Investment 408
A/c
To Premium on 800 31.12.17 By interest on 4,280
redemption of DRFI (10%
debentures of ` 42,800)
To Balance c/d 57,892 By interest on 1,320
own
debentures
(ie. 12% on
` 11,000)
______
59,100 59,100
1.1.18 To Balance b/d 57,892

Debenture Redemption Fund Investment Account

` `
1.1.17 To Balance b/d 43,228 31.12.17 By Bank A/c 40,800
(428 x ` 101) By Debenture 408
redemption Fund
(1% of ` 40,800)
By 12% Debentures 11,000

1.1.17 To Bank 10,272 By Balance c/d 2,020
31.12.17 To capital 728
Reserve
(Profit on
cancellation of
Debentures)
54,228 54,228
1.1.18 To Balance b/d 2, 020
Question 6
Answer any four of the following:
(a) "Accounting Standards standardize diverse accounting policies with a view to eliminate
the non-comparability of financial statements and improve the reliability of financial
statements. "Discuss and explain the benefits of Accounting Standards.
(b) "One of the characteristic of the financial statement is neutrality."Do you agree with this
statement? Explain in brief.
(c) AXE Limited purchased fixed assets costing $ 5,00,000 on 1st Jan. 2018 from an
American company M/s M&M Limited. The amount was payable after 6 months. The
company entered into a forward contract on 1st January 2018 for five months @ ` 62.50
per dollar. The exchange rate per dollar was as follows :
On 1st January, 2018 ` 60.75 per dollar
On 31st March, 2018 ` 63.00 per dollar
You are required to state how the profit or loss on forward contract would be recognized
in the books of AXE Limited for the year ending 2017-18, as per the provisions of AS 11.
(d) Explain the conditions when a company should issue new equity shares for redemption of
the preference shares. Also discuss the advantages and disadvantages of redemption of
preference shares by issue of equity shares.
(e) Amit paid ` 50,000 as premium to other partners of the firm at the time of his admission
to the firm, with a condition that it will not be dissolved before expiry of five years. The
firm is dissolved after three years. Amit claims refund of premium. Explain -

(1) Whether he is entitled to get a refund of the premium? If yes, list the criteria for the
calculation of the amount of the refund.
(2) Also explain any two conditions when no claim in this respect will arise.
(4 x 5 Marks = 20 Marks)
Answer
(a) Accounting Standards standardize diverse accounting policies with a view to eliminate
the non-comparability of financial statements and improve the reliability of financial
statements. Accounting Standards provide a set of standard accounting policies,
valuation norms and disclosure requirements. Accounting standards aim at improving the
quality of financial reporting by promoting comparability, consistency and transparency,
in the interests of users of financial statements.
The following are the benefits of Accounting Standards:
(i) Standardization of alternative accounting treatments: Accounting Standards
reduce to a reasonable extent confusing variations in the accounting treatment
followed for the purpose of preparation of financial statements.
(ii) Requirements for additional disclosures: There are certain areas where
important is not statutorily required to be disclosed. Standards may call for
disclosure beyond that required by law.
(iii) Comparability of financial statements: The application of accounting standards
would facilitate comparison of financial statements of different companies situated in
India and facilitate comparison, to a limited extent, of financial statements of
companies situated in different parts of the world. However, it should be noted in
this respect that differences in the institutions, traditions and legal systems from one
country to another give rise to differences in Accounting Standards adopted in
different countries.
(b) Yes, one of the characteristics of financial statements is neutrality. To be reliable, the
information contained in financial statement must be neutral, that is free from bias.
Financial Statements are not neutral if by the selection or presentation of information, the
focus of analysis could shift from one area of business to another thereby arriving at a
totally different conclusion based on the business results. Information contained in the
financial statements must be free from bias. It should reflect a balanced view of the
financial position of the company without attempting to present them in biased manner.
Financial statements cannot be prepared with the purpose to influence certain division,
i.e. they must be neutral.
(c) As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, an enterprise may
enter into a forward exchange contract to establish the amount of the reporting currency
required, the premium or discount arising at the inception of such a forward exchange
contract should be amortized as expenses or income over the life of the contract.
Forward Rate ` 62.50

Less: Spot Rate (` 60.75)

Premium on Contract ` 1.75
Contract Amount US$ 5,00,000

Total Loss (5,00,000 x 1.75) ` 8,75,000
Contract period 5 months
3 months falling in the year 2017-18; therefore loss to be recognized in 2017-18
(8,75,000/5) x 3 = ` 5,25,000. Rest ` 3,50,000 will be recognized in the following year
2018-19.
(d) A company may prefer issue of new equity shares in the following situations:
(a) When the company realizes that the capital is needed permanently and it makes
more sense to issue Equity Shares in place of Redeemable Preference Shares
which carry a fixed rate of dividend.
(b) When the balance of profit, which would otherwise be available for dividend, is
insufficient.
(c) When the liquidity position of the company is not good enough.
Advantages of redemption of preference shares by issu e of fresh equity shares
(1) No cash outflow of money is required – now or later.
(2) New equity shares may be valued at a premium.
(3) Shareholders retain their equity interest.
Disadvantages of redemption of preference shares by issue of fresh equity sha res
(1) There will be dilution of future earnings;
(2) Share-holding in the company is changed.
(e) If the firm is dissolved before the term expires, as is the case, Amit, being a partner who
has paid premium on admission, will have to be repaid / refunded.
The criteria for calculation of refund amount are:
(i) Terms upon which admission was made,
(ii) The time period for which it was agreed that the firm will not be dissolved,
(iii) The time period for which the firm has already been in existence
No claim for refund will arise if:
(i) The firm is dissolved due to death of a partner or If the dissolution of the firm is
basically because of misconduct of,
(ii) If the dissolution is through an agreement and such agreement does not have a
stipulation for refund of premium.

candidates.
Question 1
(a) First Ltd. began construction of a new factory building on 1st April, 2017. It obtained
` 2,00,000 as a special loan to finance the construction of the factory building on
1st April, 2017 at an interest rate of 8% per annum. Further, expenditure on construction of
the factory building was financed through other non-specific loans. Details of other
outstanding non-specific loans were:
Amount (` ) Rate of Interest per annum
4,00,000 9%
5,00,000 12%
3,00,000 14%
The expenditures that were made on the factory building construction were as follows:
Date Amount (` )
1 April, 2017
st 3,00,000
31 May, 2017
st 2,40,000
1st August, 2017 4,00,000
31st December, 2017 3,60,000
The construction of factory building was completed by 31 st March, 2018. As per the
provisions of AS 16, you are required to:
(1) Calculate the amount of interest to be capitalized.
(2) Pass Journal entry for capitalizing the cost and borrowing cost in respect of the factory
building.
(b) On 15th June, 2018, Y limited wants to re-classify its investments in accordance with
AS 13 (revised). Decide and state the amount of transfer, based on the following
information:
(1) A portion of long term investments purchased on 1st March, 2017 are to be re-
classified as current investments. The original cost of these investments was ` 14
lakhs but had been written down by ` 2 lakhs (to recognise 'other than temporary'

decline in value). The market value of these investments on 15 th June, 2018 was
` 11 lakhs.
(2) Another portion of long term investments purchased on 15 th January, 2017 are to be
re-classified as current investments. The original cost of these investments was ` 7
lakhs but had been written down to ` 5 lakhs (to recognize 'other than temporary'
decline in value). The fair value of these investments on 15 th June, 2018 was ` 4.5
lakhs.
(3) A portion of current investments purchased on 15 th March, 2018 for ` 7 lakhs are to
be re-classified as long term investments, as the company has decided to retain them.
The market value of these investments on 31st March, 2018 was ` 6 lakhs and fair
value on 15th June 2018 was ` 8.5 lakhs,
(4) Another portion of current investments purchased on 7 th December, 2017 for ` 4 lakhs
are to be re-classified as long term investments. The market value of these
investments was:
on 31st March, 2018 ` 3.5 lakhs
on 15th June, 2018 ` 3.8 lakhs
(c) State whether the following statements are 'True' or 'False'. Also give reason for your
answer.
(1) As per the provisions of AS-5, extraordinary items should not be disclosed in the
statement of profit and loss as a part of net profit or loss for the period.
(2) As per the provisions of AS-12, government grants in the nature of promoters'
contribution which become refundable should be reduced from the capital reserve.
(3) As per the provisions of AS-2, inventories should be valued at the lower of cost and
selling price.
(4) As per the provisions of AS-13, a current investment is an investment, that by its
nature, is readily realisable and is intended to be held for not more than six months
from the date on which such investment is made.
(5) As per the provisions of AS-4, a contingency is a condition or situation, the ultimate
outcome of which (gain or loss) will be known or determined only on the occurrence
of one or more uncertain future events.
(d) The financial statements of PQ Ltd. for the year 2017-18 approved by the Board of
Directors on 15th July, 2018. The following information was provided :
(i) A suit against the company's advertisement was filed by a party on 20th April, 2018,
claiming damages of ` 25 lakhs.
(ii) The terms and conditions for acquisition of business of another company have been
decided by March, 2018. But the financial resources were arranged in April, 2018 and
amount invested was ` 50 lakhs.

(iii) Theft of cash of ` 5 lakhs by the cashier on 31st March, 2018 but was detected on
16th July, 2018.
(iv) Company sent a proposal to sell an immovable property for ` 40 lakhs in March,
2018. The book value of the property was ` 30 lakhs on 31st March, 2018. However,
the deed was registered on 15 th April, 2018.
(v) A, major fire has damaged the assets in a factory on 5th April, 2018. However, the
assets are fully insured.
With reference to AS-4 "Contingencies and events occurring after the balance sheet date",
state whether the above mentioned events will be treated as contingencies, adjusting
events or non-adjusting events occurring after the balance sheet date.
Answer
(a) (i) Computation of average accumulated expenses
`
` 3,00,000 x 12 / 12 = 3,00,000
` 2,40,000 x 10 / 12 = 2,00,000
` 4,00,000 x 8 / 12 = 2,66,667
` 3,60,000 x 3 / 12 = 90,000
8,56,667
(ii) Calculation of average interest rate other than for specific borrowings
Amount of loan (`) Rate of interest Amount of
interest (`)
4,00,000 9% = 36,000
5,00,000 12% = 60,000
3,00,000 14% = 42,000
1,38,000
Weighted average rate of interest = 11.5%
 1,38,000 
 12,00,000  100 
 
(iii) Amount of interest to be capitalized
`
Interest on average accumulated expenses:
Specific borrowings (` 2,00,000 x 8%) = 16,000

Non-specific borrowings (` 6,56,667 x 11.5%) = 75,517

Amount of interest to be capitalised = 91,517
(iv) Total expenses to be capitalised for building
`
Cost of building ` (3,00,000 + 2,40,000 + 4,00,000 + 3,60,000) 13,00,000
Add: Amount of interest to be capitalized 91,517
13,91,517
(v) Journal Entry

Date Particulars Dr. (`) Cr. (` )
31.3.2018 Building A/c Dr. 13,91,517
To Building WIP  A/c 13,00,000
To Borrowing costs A/c 91,517
(Being amount of cost of building and
borrowing cost thereon capitalised)
(b) As per AS 13 (Revised) ‘Accounting for Investments’, where long-term investments are
reclassified as current investments, transfers are made at the lower of cost and carrying
amount at the date of transfer; and where investments are reclassified from current to long
term, transfers are made at lower of cost and fair value on the date of transfer.
Accordingly, the re-classification will be done on the following basis:
(i) In this case, carrying amount of investment on the date of transfer is less than the
cost; hence this re-classified current investment should be carried at ` 12 lakhs in the
books.
(ii) In this case also, carrying amount of investment on the date of transfer is less than
the cost; hence this re-classified current investment should be carried at ` 5 lakhs in
the books.
(iii) In this case, reclassification of current investment into long-term investments will be
made at ` 7 lakhs as cost is less than its fair value of ` 8.5 lakhs on the date of
transfer.
 ( ` 8,56,667 – ` 2,00,000)
 Considering that ` 13,00,000 was debited to Building WIP A/c earlier.

(iv) In this case, market value (considered as fair vale) is ` 3.8 lakhs on the date of
transfer which is lower than the cost of ` 4 lakhs. The reclassification of current
investment into long-term investments will be made at ` 3.8 lakhs.
(c) (1) False: The nature and the amount of each extraordinary item should be separately
disclosed in the statement of profit and loss in a manner that its impact on current
profit or loss can be perceived.
(2) True: When grants in the nature of promoters’ contribution becomes refundable, in
part or in full to the government on non-fulfillment of some specified conditions, the
relevant amount refundable to the government is reduced from the capital reserve.
(3) False: Inventories should be valued at the lower of cost and net realizable value (not
selling price) as per AS 2.
(4) False: A current investment is an investment that is by its nature readily realizable
and is intended to be held for not more than one year from the date on which such
investment is made.
(5) False: A contingency is a condition or situation, the ultimate outcome of which, gain
or loss, will be known or determined only on the occurrence, or non-occurrence, of
one or more uncertain future events.
(d) (i) Suit filed against the company is a contingent liability but it was not existing as on
balance sheet date as the suit was filed on 20 th April after the balance Sheet date.
As per AS 4, 'Contingencies' used in the Standard is restricted to conditions or
situations at the balance sheet date, the financial effect of which is to be determined
by future events which may or may not occur. Hence, it will have no effect on financial
statements and will be a non-adjusting event.
(ii) In the given case, terms and conditions for acquisition of business were finalised and
carried out before the closure of the books of accounts but transaction for payment
of financial resources was effected in April, 2018. This is clearly an event occuring
after the balance sheet date. Hence, necessary adjustment to assets and liabilities
for acquisition of business is necessary in the financial statements for the year ended
31st March 2018.
(iii) Only those significant events which occur between the balance sheet date and the
date on which the financial statements are approved, may indicate the need for
adjustment to assets and liabilities existing on the balance sheet date or may require
disclosure. In the given case, theft of cash was detected on 16 th July, 18 after approval
of financial statements by the Board of Directors, hence no treatment is required.
(iv) Adjustments to assets and liabilities are not appropriate for events occurring after the
balance sheet date, if such events do not relate to conditions existing at the balance
sheet date. In the given case, sale of immovable property was under proposal stage
(negotiations also not started) on the balance sheet date. Therefore, no adjustment

to assets for sale of immovable property is required in the financial statements for the
year ended 31st March, 2018.
(v) The condition of fire occurrence was not existing on the balance sheet date. Only the
disclosure regarding event of fire and loss being completely insured may be given in
the report of approving authority.
Question 2
(a) M/s Amar bought six Scooters from M/s Bhanu on 1st April, 2015 on the following terms:
Down payment ` 3,00,000
1st instalment payable at the end of 1st year ` 1,59,000
2nd instalment payable at the end of 2nd year ` 1,47,000
3 instalment payable at the end of 3rd year
rd ` 1,65,000
Interest is charged at the rate of 10% per annum.
M/s Amar provides depreciation @ 20% per annum on the diminishing balance method.
On 31st March, 2018 M/s Amar failed to pay the 3 rd instalment upon which M/s Bhanu
repossessed two Scooters. M/s Bhanu agreed to leave the other four Scooters with M/s
Amar and adjusted the value of the repossessed Scooters against the amount due. The
Scooters taken over were valued on the basis of 30% depreciation per annum on written
down value. The balance amount remaining in the vendor's account after the above
adjustment was paid by M/s Amar after 5 months with interest@ 15% per annum.
M/s Bhanu incurred repairing expenses of ` 15,000 on repossessed scooters and sold
scooters for ` 1,05,000 on 25th April, 2018.
You are required to :
(1) Calculate the cash price of the Scooters and the interest paid with each instalment.
(2) Prepare Scooters Account and M/s Bhanu Account in the books of M/s Amar.
(3) Prepare Goods Repossessed Account in the books of M/s Bhanu.
(b) A fire occurred in the premises of M/s Bright on 25th May, 2017. As a result of fire, sales
were adversely affected up to 30 th September, 2017. The firm had taken Loss of profit
policy (with an average clause) for ` 3,50,000 having indemnity period of 5 months. There
is an upward trend of 10% in sales.
The firm incurred an additional expenditure of ` 30,000 to maintain the sales.
There was a saving of ` 5,000 in the insured standing charges.
Actual turnover from 25th May, 2017 to 30th September, 2017 ` 1,75,000
Turnover from 25 May, 2016 to 30th September, 2016
th ` 6,00,000
Net profit for last financial year ` 2,00,000

Insured standing charges for the last financial year ` 1,75,000

Total standing charges for the last financial year ` 3,00,000
Turnover for the last financial year ` 15,00,000
Turnover for one year from 25th May, 2016 to 24th May, 2017 ` 14,00,000
You are required to calculate the loss of profit claim amount, assuming that entire sales
during the interrupted period was due to additional expenses. (10 + 10 = 20 Marks)
Answer
(a) (i) Calculation of Interest and Cash Price
No. of Outstanding Amount due Outstanding Interest Outstanding
installments balance at at the time of balance at balance at
the end installment the end the beginning
after the before the
payment of payment of
installment installment
[1] [2] [3] [4] = 2 +3 [5] = 4 x 10/110 [6] = 4-5
3rd - 1,65,000 1,65,000 15,000 1,50,000
2 nd 1,50,000 1,47,000 2,97,000 27,000 2,70,000
1 st 2,70,000 1,59,000 4,29,000 39,000 3,90,000
Down 3,00,000
payment
Total of interest and Total cash price 81,000 6,90,000
(ii) In the books of M/s Amar
Scooters Account
1.4.2015 To Bhanu A/c 6,90,000 31.3.2016 By Depreciation A/c 1,38,000
6,90,000 6,90,000
1.4.2016 To Balance b/d 5,52,000 31.3.2017 By Depreciation A/c 1,10,400
Balance c/d 4,41,600
5,52,000 5,52,000
1.4.2017 To Balance b/d 4,41,600 31.3.2018 By Depreciation A/c 88,320
By M/s Bhanu a/c (Value of 78,890
2 Scooters taken over)
By Profit and Loss A/c (Bal. 38,870
fig.)


4
(4,41,600 - 88,320)
6
4,41,600 4,41,600
(iii) M/s Bhanu Account

1.4.15 To Bank (down 3,00,000 1.4.15 By Scooters A/c 6,90,000
payment) 31.3.16 By Interest A/c 39,000
31.3.16 To Bank (1st 1,59,000
Installment)
To Balance c/d 2,70,000
7,29,000 7,29,000
31.3.17 To Bank (2nd 1,47,000 1.4.2016 By Balance b/d 2,70,000
Installment) 31.3.2017 By Interest A/c 27,000
2,97,000 2,97,000
31.3.18 To Scooter A/c 78,890 1.4.2017 By Balance b/d 1,50,000
To Balance c/d (b.f.) 86,110 31.3.2018 By Interest A/c 15,000
1,65,000 1,65,000
31.8.18 To Bank (Amount 91,492 1.4.2018 By Balance b/d 86,110
settled after 5 31.8.2018 By Interest A/c (@ 15 %
months) on bal.) 5,382
(86,110 x 5/12 x 15/100)
91,492 91,492
(iv) In the Books of M/s Bhanu

Goods Repossessed A/c
31.3.18 To Amar A/c 78,890 31.3.2018 By Balance c/d 78,890
78,890 78,890
1.04.2018 To Balance b/d 78,890 25.4.2018 By Bank (Sale) 1,05,000
25.4.2018 To Repair A/c 15,000
25.4.2018 To Profit & Loss A/c 11,110
1,05,000 1,05,000

Working Note:
Value of Scooters taken over
`
2 Scooters (6,90,000/6 x 2) 2,30,000
Depreciation @ 30% WDV for 3 years
(69,000 + 48,300 +33,810) (1,51,110)
78,890
(b) Computation of the amount of claim for the loss of profit
1. Reduction in turnover `
Turnover from 25th May, 2016 to 30th September, 2016 6,00,000
Add: 10% expected increase 60,000
6,60,000
Less: Actual Turnover from 25 th May, 2017 to 30th September, 2017 (1,75,000)
Short Sales 4,85,000
2. Calculation of loss of Profit
Gross Profit on reduction in turnover @ 25% on ` 4,85,000 1,21,250
(see working note 1)
Add: Additional Expenses
Lower of
(i) Actual = ` 30,000
(ii) G.P. on Adjusted Annual Turnover
Additional Exp. x
G.P. as above + Uninsured Standing Charges
30,000x [3,85,000/(3,85,000+1,25,000)] = ` 22,647

(iii) G.P. on sales generated by additional expenses
175000 x 25% = ` 43,750
It is given that entire sales during the interrupted period was due to additional
expenses.
Therefore, lower of above is (i, ii & iii) ` 22,647
1,43,897
Less: Saving in Insured Standing Charges (5,000)
Amount of claim before application of Average Clause 1,38,897

3. Application of Average Clause:

Amount of Policy
× Amount of Claim
G.P. on Annual Turnover
(3,50,000/3,85,000) x 1,38,897= ` 1,26,270
Amount of claim under the policy = ` 1,26,270
Working Notes:
1. Rate of Gross Profit for last Financial Year: `
Net Profit for last financial year 2,00,000
Add: Insured Standing Charges 1,75,000
Gross Profit 3,75,000
Turnover for the last financial year 15,00,000
Rate of Gross Profit = 3,75,000 ×100 = 25%
15,00,000
2. Annual Turnover (adjusted):

Turnover from 25 May, 2016 to 24 May, 2017 14,00,000
Add: 10% expected increase 1,40,000
15,40,000
Gross Profit on ` 15,40,000 @ 25% 3,85,000
Standing charges not Insured (3,00,000 – 1,75,000) 1,25,000
Gross profit + Uninsured standing charges 5,10,000
Question 3
(a) The following balances appeared in the books of M/s Sunshine Traders:
As on As on
31-03-2018 31-03-2019
(` ) (` )
Land and Building 2,50,000 2,50,000
Plant and Machinery 1,10,000 1,65,000
Office Equipment 52,500 42,500
Sundry Debtors 77,750 1,10,250
Creditors for Purchases 47,500 ?
Provision for office expenses 10,000 7,500
Stock ? 32,500

Long Term loan from ABC Bank @ 10% per annum 62,500 50,000
Bank 12,500 ?
Capital 4,65,250 ?
Other information was as follows:
In (` )
- Collection from Sundry Debtors 4,62,500
- Payments to Creditors for Purchases 2,62,500
- Payment of office Expenses 21,000
- Salary paid 16,000
- Selling Expenses paid 7,500
- Total sales 6,25,000
Credit sales (80% of Total sales)
- Credit Purchases 2,70,000
Cash Purchases (40% of Total Purchases)
- Gross Profit Margin was 25% on cost
- Discount Allowed 2,750
- Discount Received 2,250
- Bad debts 2,250
- Depreciation to be provided as follows:
Land and Building - 5% per annum
Plant and Machinery - 10% per annum
Office Equipment - 15% Per annum
- On 01.10.2018 the firm sold machine having book value, ` 20,000 (as on 31.03.2018)
at a loss of ` 7,500. New machine was purchased on 01.01.2019.
- Office equipment was sold at its book value on 01.04.2018.
- Loan was partly repaid on 31.03.2019 together with interest for the year.
You are required to prepare:
(i) Trading and Profit & Loss account for the year ended 31 st March, 2019.
(ii) Balance Sheet as on 31st March 2019. (12 Marks)

(b) M/s Rani & Co. has head office at Singapore and branch at Delhi (India). Delhi branch is
an integral foreign operation of M/s Rani & Co. Delhi branch furnishes you with its Trial
Balance as on 31st March, 2019 and the additional information thereafter:
Dr. Cr.
Rupees in thousands
Stock on 1st April, 2018 600 -
Purchases and Sales 1,600 2,400
Sundry Debtors and Creditors 800 600
Bills of Exchange 240 480
Wages 1,120 -
Rent, rates and taxes 720 -
Sundry Expenses 320 -
Computers 600 -
Bank Balance 520 -
Singapore Office A/c - 3,040
Total 6,520 6,520
Additional information :
(a) Computers were acquired from a remittance of Singapore dollar 12,000 received from
Singapore Head Office and paid to the suppliers. Depreciate Computers at the rate
of 40% for the year.
(b) Closing Stock of Delhi branch was ` 15,60,000 on 31st March, 2019.
(c) The Rates of Exchange may be taken as follows :
(i) on 1.4.2018 @ ` 50 per Singapore Dollar
(ii) on 31.3.2019 @ ` 52 per Singapore Dollar
(iii) Average Exchange Rate for the year @ ` 51 per Singapore Dollar.
(iv) Conversion in Singapore Dollar shall be made upto two decimal accuracy.
(d) Delhi Branch Account showed a debit balance of Singapore Dollar 59,897.43 on
31.3.2019 in the Head office books and there were no items pending for reconciliation.
In the books of Head office you are required to prepare :
(1) Revenue statement for the year ended 31st March, 2019 (in Singapore Dollar)
(2) Balance Sheet as on that date. (in Singapore Dollar) (8 Marks)

Answer
(a) Trading and Profit and Loss A/c for the year ended 31.3.2019
` `
To Opening stock 82,500 By Sales- Cash 1,25,000
(Balancing figure) (W.N.1)
To Purchases-Cash 1,80,000 Credit 5,00,000 6,25,000
Credit (W.N.1) 2,70,000 4,50,000 By Closing stock 32,500
To Gross profit c/d 1,25,000
6,57,500 6,57,500
To Loss on sale of 7,500 By Gross profit b/d 1,25,000
Machine By Discount
To Depreciation received 2,250
Land & Building 12,500
Plant & Machinery 11,875
Office Equipment 6,375 30,750
To Expenses paid
Salary 16,000
Selling Expenses 7,500
Office Expenses 18,500 42,000
To Bed debt 2,250
To Discount allowed 2,750
To Interest on loan 6,250
To Net profit 35,750
1,27,250 1,27,250
Balance Sheet as on 31-3-2019
Capital (Balancing 4,65,250 Land & Building 2,50,000
Figure)
Add: Net profit 35,750 5,01,000 Less: Depreciation (12,500) 2,37,500
Sundry creditors (W.N.3) 52,750 Plant & Machinery 1,65,000
Bank loan 50,000 Less: Depreciation (10,875) 1,54,125
Provision for expenses 7,500 Office Equipment 42,500

Less: Depreciation (6,375) 36,125

Debtors 1,10,250
Stock 32,500
Bank balance 40,750
(W.N.4)
6,11,250 6,11,250
Working Notes:
1. Calculation of Sales and Purchases
Total sales = ` 6,25,000
Cash sales = 20% of total sales (6,25,000) = ` 1,25,000
Credit sales = 80% of total sales = (6,25,000) ` 5,00,000
25
Gross Profit 25% on cost = 6,25,000 x = `1,25,000
125
Credit purchases = ` 2,70,000
Credit purchases = 60% of total purchases
Cash purchases = 40% of total purchases
2,70,000
Total purchases = 100 ` 4,50,000
60
Cash purchases = 4,50,000 – 2,70,000 = ` 1,80,000
2. Plant & Machinery
` `
To Balance b/d 1,10,000 By Sale of Machinery A/c 20,000
To Cash-purchase (Bal. Fig.) 75,000 By Balance c/d 1,65,000
1,85,000 1,85,000
Depreciation on Plant & Machinery:
@ 10% p.a. on ` 20,000 for 6 months = 1,000
@ 10% p.a. on ` 90,000 (i.e. ` 1,10,000 – ` 20,000) = 9,000
@ 10% p.a. on ` 75,000 for 3 months (i.e. during the year) = 1,875
11,875

Sale of Machinery Account

To Plant and Machinery 20,000 By Depreciation (20,000 x 10% 1000
x 1/2
By Profit and Loss A/c 7,500
By Bank (Balancing figure) 11,500
20,000 20,000
3. Creditors Account
` `
To Cash 2,62,500 By Balance b/d 47,500
To Discount received 2,250 By Credit purchases (W.N.2) 2,70,000
To Balance c/d (Bal. Fig.) 52,750
3,17,500 3,17,500
Debtors Account
` `
To Balance b/d (Given) 77,750 By Cash 4,62,500
To Sales (Credit) 5,00,000 By Discount allowed 2,750
By Bad debts 2,250
5,77,750 5,77,750
Provision for Office Expenses Account
` `
To Bank 21,000 By balance b/d 10,000
To balance c/d 7,500 By Expenses. (Bal. fig.) 18,500
28,500 28,500
4. Bank Account
` `
To Balance b/d 12,500 By Creditors 2,62,500
To Debtors 4,62,500 By Purchases 1,80,000
To Office Equipment 10,000 By Expenses 44,500
(sales) ` (16,000 + 7,500 + 21,000)
To Cash sales (W.N.1) 1,25,000 By Bank loan paid 18,750

To Machine sold 11,500 By Machine purchased (W.N.4) 75,000

By Balance c/d (Bal. Fig.) 40,750
6,21,500 6,21,500
5. Office Equipment Account
To balance b/d 52,500 By Sales 10,000
By balance c/d 42,500
52,500 52,500
(b) Revenue Statement
for the year ended 31 st March, 2019
Singapore dollar Singapore dollar
To Opening Stock 12,000.00 By Sales 47,058.82
To Purchases 31,372.55 By Closing stock 30,000.00
To Wages 21,960.78 (15,60,000/52)
To Gross profit b/d 11,725.49
77,058.82 77,058.82
To Rent, rates and taxes 14,117.65 By Gross profit c/d 11,725.49
To Sundry Expenses 6,274.51 By Net loss b/d 13,466.67
To Depreciation on computers
(Singapore dollar 12,000 × 0.4) 4,800.00
25,192.16 25,192.16
Balance Sheet of Delhi Branch
as on 31st March, 2019
Liabilities Singapore Assets Singapore Singapore
dollar dollar dollar
Singapore Office A/c 59,897.43 Computers 12,000.00
Less: Net Loss (13,466.67) 46,430.76 Less: Depreciation (4,800.00) 7,200.00
Sundry creditors 11,538.46 Closing stock 30,000.00
Bills payable 9,230.77 Sundry debtors 15,384.61
Bank balance 10,000.00
Bills receivable 4,615.38
67,199.99 67,199.99

Working Note:
M/s Rani & Co.
Delhi Branch Trial Balance in (Singapore $)
as on 31st March, 2019
Conversion Dr. Cr.
rate per Singapore Singapore
Singapore dollar dollar
dollar
(`)
Stock on 1.4.18 6,00,000.00 50 12,000.00 –
Purchases and sales 16,00,000.00 24,00,000.00 51 31,372.55 47,058.82
Sundry Debtors and 8,00,000.00 6,00,000.00 52 15,384.61 11,538.46
Creditors
Bills of exchange 2,40,000.00 4,80,000.00 52 4,615.38 9,230.77
Wages 11,20,000.00 51 21,960.78 –
Rent, rates and taxes 7,20,000.00 51 14,117.65 –
Sundry Expenses 3,20,000.00 51 6,274.51 –
Computers 6,00,000.00 – 12,000.00 –
Bank balance 5,20,000.00 52 10,000.00 –
Singapore office A/c – 59,897.43
1,27,725.48 1,27,725.48
Question 4
The following is the Balance Sheet of M/s Red and Black as on 31st March, 2018:
Liabilities (` ) Assets (` )
Red’s Capital 80,000 Building 1,00,000
Black's Capital 1,00,000 1,80,000 Closing Stock 60,000
Red's Loan 20,000 Sundry Debtors 40,000
General Reserve 20,000 Investment 40,000
Sundry Creditors 40,000 (6% Debentures in Cool Ltd.)
Cash 20,000
2,60,000 2,60,000
It was agreed that Mr. White is to be admitted for a fifth share in the future profits from
1st April, 2018. He is required to contribute cash towards goodwill and ` 20,000 towards capital.
(a) The following further information is furnished:

(i) The partners Red and Black shared the profits in the ratio of 3 : 2.
(ii) Mr. Red was receiving a salary of ` 1,000 p.m. from the very inception of the firm in
addition to the share of profit.
(iii) The future profit ratio between Red, Black and White will be 3 : 1 : 1. Mr. Red will not
get any salary after the admission of Mr. White.
(iv) The goodwill of the firm should be determined on the basis of 2 years' purchase of the
average profits from business of the last 5 years. The particulars of profits/losses are
as under :
Year Ended (` ) Profit/Loss
31.3.2014 40,000 Profit
31.3.2015 20,000 Loss
31.3.2016 40,000 Profit
31.3.2017 50,000 Profit
31.3.2018 60,000 Profit
The above profits and losses are after charging the salary of Mr. Red. The profit of
the year ended 31st March, 2014 included an extraneous profit of ` 60,000 and the
loss for the year ended 31st March, 2015 was on account of loss by strike to the
extent of ` 40,000.
(v) It was agreed that the value of the goodwill should not appear in the books of the firm.
(b) Trading profit for the year ended 31 st March, 2019 was ` 80,000 (Before charging
depreciation)
(c) Each partner had drawn ` 2,000 per month as drawing during the year 2018-19.
(d) On 31st March, 2019 the following balances appeared in the books:
Building (Before Depreciation) ` 1,20,000
Closing Stock ` 80,000
Sundry Debtors Nil
Sundry Creditors Nil
Investment ` 40,000
(e) Interest was @ 6% per annum on Red's loan was not paid during the year.
(f) Interest on Debenture was received during the year.
(g) Depreciation is to be provided @ 5% on Closing Balance of Building.
(h) Partners applied for conversion of the firm into a private Limited Company i.e. RBW Private
Limited. Certificate received on 1.4.2019.

They decided to convert Capital accounts of the partners into share capital, in the ratio of
3: 1: 1 (on the basis of total Capital as on 31.3.2019). If necessary, partners have to
subscribe to fresh capital or withdraw.
You are required to prepare :
(1) Profit & Loss Account for the year ended 31st March, 2019 in the books of M/s Red
and Black.
(2) Balance Sheet as on 1st April, 2019 in the books of RBW Private Limited. (20 Marks)
Answer
M/s Red, Black and White
Statement of Profit & Loss for the year ended on 31 st March, 2019
` `
To Depreciation on Building (1,20,000 x 5%) 6,000 By Trading Profit 80,000
To Interest on Red’s loan (20,000 x 6%) 1,200 By Interest on 2,400
To Net Profit to : Debentures
Red’s Capital A/c 45,120
Black’s Capital A/c 15,040
White’s Capital A/c 15,040
82,400 82,400
Balance Sheet of the RBW Pvt. Ltd. as on 1-4-2019
Notes No. `
I Equity and Liabilities
Shareholders funds 2,39,040
Non-current liabilities
Long term borrowings 1 21,200
Total 2,60,240
II Assets
Non-current assets
Property, Plant & Equipment
Tangible assets 2 1,14,000
Non-current investments 40,000
Current assets
Inventories 80,000
Cash and cash equivalents 26,240
Total 2,60,240

Notes to Accounts
`
1. Borrowings
Loan from Red 21,200
2. Tangible assets
Land and Building ` (1,20,000 – 6,000) 1,14,000
Working Notes:
1. Calculation of goodwill
Year ended March, 31
2014 2015 2016 2017 2018
₹ ` ` ` `
Book Profits 40,000 (20,000) 40,000 50,000 60,000
Adjustment for extraneous profit of
2014 and abnormal loss for 2015 (60,000) 40,000 — — —
(20,000) 20,000 40,000 50,000 60,000
Add Back: Remuneration of Red 12,000 12,000 12,000 12,000 12,000
(8,000) 32,000 52,000 62,000 72,000
Less: Debenture Interest being non-
operating income (2,400) (2,400) (2,400) (2,400) (2,400)
(10,400) 29,600 49,600 59,600 69,600
Total Profit from 2015 to 2018 2,08,400
Less: Loss for 2014 (10,400)
Accumulated Profit 1,98,000
Average Profit 39,600
Goodwill equal to 2 years’ purchase 79,200
Contribution from White, equal to 1/5 15,840
2. Partners’ Capital Accounts
Red Black White Red Black White
` ` ` ` ` `
To Drawings 24,000 24,000 24,000 By Balance b/d 80,000 1,00,000 —
To Black A/c 15,840 By General 12,000 8,000 —
To Balance c/d 1,13,120 1,14,880 11,040 Reserve

By White A/c 15,840 —

By Bank A/c — — 35,840
By Profit & 45,120 15,040 15,040
Loss A/c
1,37,120 1,38,880 50,880 1,37,120 1,38,880 50,880
3. Balance Sheet as on 31 st March, 2019
Red’s Capital 1,13,120 Land & Building 1,20,000
Black’s Capital 1,14,880 Less: Depreciation (6,000) 1,14,000
White’s Capital 11,040 Investments 40,000
Red’s Loan 20,000 Stock-in-trade 80,000
Add: Interest due 1,200 21,200 Cash (Balancing figure) 26,240*
2,60,240 2,60,240
4. Conversion into Company

`
Capital: Red 1,13,120
Black 1,14,880
White 11,040
Share Capital 2,39,040
Distribution of share: Red (3/5) 1,43,424
Black (1/5) 47,808
White (1/5) 47,808
Red should subscribe shares of ` 30,304 (` 1,43,424 – ` 1,13,120) and White should
subscribe shares of ` 36,768 (` 47,808 less 11,040). Black withdraws ` 67,072
(` 47,808 – ` 1,14,880).
5 Adjustment for Goodwill
To be raised in old Raio To be written off in new ratio Difference
Red 47,520 47,520 Nil
Black 31,680 15,840 15,840 Cr.
White 15,840 15,840 Dr.

6. Closing cash balance* can also be derived as shown below:

` `
Trading profit (assume realised) 80,000
Add: Debenture Interest 2,400
Add: Decrease in Debtors Balance 40,000
1,22,400
Less: Increase in stock 20,000
Less: Decrease in creditors 40,000 (60,000)
Cash Profit 62,400
Add: Opening cash balance 20,000
Add: Cash brought in by White 35,840
1,18,240
Less: Drawings 72,000
Less: Additions to Building 20,000 (92,000)
26,240
Question 5
(a) The Summarized Balance Sheet of Clean Ltd. as on 31 st March, 2019 is as follows:
Particulars (` )
EQUITY AND LIABILITIES
1. Shareholder's funds:
(a) Share Capital 5,80,000
(b) Reserves and Surplus 96,000
2. Current Liabilities:
Trade Payables 1,13,000
Total 7,89,000
ASSETS:
1. Non-Current Assets
(a) Property, Plant and Equipment
Tangible Assets 6,90,000
(b) Non-current investments 37,000
2. Current Assets
Cash and cash equivalents (Bank) 62,000
Total 7,89,000

The Share Capital of the company consists of ` 50 each Equity shares of ` 4,50,000 and
` 100 each 8% Redeemable Preference Shares of ` 1,30,000 (issued on 1.4.2017).
Reserves and Surplus comprises statement of profit and loss only.
In order to facilitate the redemption of preference shares at a premium of 10%, the
Company decided:
(a) to sell all the investments for ` 30,000.
(b) to finance part of redemption from company funds, subject to, leaving a Bank balance
of ` 24,000.
(c) to issue minimum equity share of ` 50 each at a premium of ` 10 per share to raise
the balance of funds required.
You are required to
(1) Pass Journal Entries to record the above transactions.
(2) Prepare Balance Sheet after completion of the above transactions.
(b) The following information was provided by PQR Ltd. for the year ended 31st March, 2019 :
(1) Gross Profit Ratio was 25% for the year, which amounts to ` 3,75,000.
(2) Company sold goods for cash only.
(3) Opening inventory was lesser than closing inventory by ` 25,000.
(4) Wages paid during the year ` 5,55,000.
(5) Office expenses paid during the year ` 35,000.
(6) Selling expenses paid during the year ` 15,000.
(7) Dividend paid during the year ` 40,000 (including dividend distribution tax).
(8) Bank Loan repaid during the year ` 2,05,000 (included interest ` 5,000)
(9) Trade Payables on 31st March, 2018 were ` 50,000 and on 31st March, 2019 were
` 35,000.
(10) Amount paid to Trade payables during the year ` 6,10,000
(11) Income Tax paid during the year amounts to ` 55,000
(Provision for taxation as on 31st March, 2019 ` 30,000)·
(12) Investments of ` 8,20,000 sold during the year at a profit of ` 20,000.
(13) Depreciation on furniture amounts to ` 40,000.
(14) Depreciation on other tangible assets amounts to ` 20,000.
(15) Plant and Machinery purchased on 15 th November, 2018 for ` 3,50,000.

(16) On 31st March, 2019 ` 2,00,000, 7% Debentures were issued at face value in an
exchange for a plant.
(17) Cash and Cash equivalents on 31 st March, 2018 ` 2,25,000.
(A) Prepare cash flow statement for the year ended 31st March, 2019, using direct method.
(B) Calculate cash flow from operating activities, using indirect method. (10 + 10 = 20 Marks)
Answer
(a) Journal Entries
Particulars Dr. (` ) Cr. (` )
1 Bank A/c Dr. 75,000
To Share Application A/c 75,000
(For application money received on 1,250 shares @
` 60 per share)
2 Share Application A/c Dr. 75,000
To Equity Share Capital A/c 62,500
To Securities Premium A/c 12,500
(For disposition of application money received)
3 Preference Share Capital A/c Dr. 1,30,000
Premium on Redemption of Preference Shares A/c Dr. 13,000
(For amount payable on redemption of preference
shares)
4 Profit and Loss A/c Dr. 13,000
To Premium on Redemption of 13,000
Preference Shares A/c
(For writing off premium on redemption out of
profits)
5 Bank A/c Dr. 30,000
Profit and Loss A/c (loss on sale) A/c Dr. 7,000
To Investment A/c 37,000
(For sale of investments at a loss of ` 3,500)
6 Preference Shareholders A/c Dr. 1,43,000
To Bank 1,43,000
(Being amount paid to Preference shareholders)

7 Profit and Loss A/c Dr. 67,500

To Capital Redemption Reserve A/c 67,500
(For transfer to CRR out of divisible profits an
amount equivalent to excess of nominal value of
preference shares over proceeds (face value of
equity shares) i.e., ` 1,30,000 - ` 62,500)
Balance Sheet of Clean Ltd. (after redemption)
Particulars Notes No. `
1. Shareholders’ funds
a) Share capital 1 5,12,500
b) Reserves and Surplus 2 88,500
2. Current liabilities
Total 7,14,000
ASSETS
1. Non-Current Assets
Property Plant and Equipments
Tangible asset 6,90,000
2. Current Assets
Cash and cash equivalents (bank) 3 24,000
Total 7,14,000
Notes to accounts
`
1. Share Capital
Equity share capital ` (4,50,000 + 62,500) 5,12,500
2. Reserves and Surplus
Capital Redemption Reserve 67,500
Profit and Loss Account ` (96,000 – 13,000 – 7,000 – 67,500) 8,500
Security Premium 12,500
88,500
3. Cash and cash equivalents
Balances with banks ` (62,000 + 75,000 +30,000 – 1,43,000) 24,000

Working Note:
Calculation of Number of Shares: `
Amount payable on redemption (1,30,000 + 10% Premium) 1,43,000
Less: Sale price of investment (30,000)
1,13,000
Less: Available bank balance (62,000 - 24,000) (38,000)
Funds required from fresh issue 75,000
No. of shares = 75,000/60 = 1,250 shares
(b) (i) PQR Ltd.
Cash Flow Statement for the year ended 31 st March, 2019
(Using direct method)
Particulars ` `
Cash flows from Operating Activities
Cash sales (` 3,75,000/25%) 15,00,000
Less: Cash payments for trade payables (6,10,000)
Wages Paid (5,55,000)
Office and selling expenses ` (35,000 + 15,000) (50,000) (12,15,000)
Cash generated from operations before taxes 2,85,000
Income tax paid (55,000)
Net cash generated from operating activities (A) 2,30,000
Cash flows from Investing activities
Sale of investments ` (8,20,000 + 20,000) 8,40,000
Payments for purchase of Plant & machinery (3,50,000)
Net cash used in investing activities (B) 4,90,000
Cash flows from financing activities
Bank loan repayment (including interest) (2,05,000)
Dividend paid (including dividend distribution tax) (40,000)
Net cash used in financing activities (C) (2,45,000)
Net increase in cash (A+B+C) 4,75,000
Cash and cash equivalents at beginning of the period 2,25,000
Cash and cash equivalents at end of the period 7,00,000

(ii) ‘Cash Flow from Operating Activities’ by indirect method

`
Net Profit for the year before tax and extraordinary items 2,80,000
Add: Non-Cash and Non-Operating Expenses:
Depreciation 60,000
Interest Paid 5,000
Less: Non-Cash and Non-Operating Incomes:
Profit on Sale of Investments (20,000)
Net Profit after Adjustment for Non-Cash Items 3,25,000
Less: Decrease in trade payables 15,000
Increase in inventory 25,000 (40,000)
Cash generated from operations before taxes 2,85,000
Working Note:
Calculation of net profit earned during the year
` `
Gross profit 3,75,000
Less: Office expenses, selling expenses 50,000
Depreciation 60,000
Interest paid 5,000 (1,15,000)
2,60,000
Add: Profit on sale of investments 20,000
Net profit before tax 2,80,000
Question 6
Answer any four of the following :
(a) Write short note on Timing difference and Permanent Difference as per AS 22.
(b) Summarised Balance Sheet of Cloth Trader as on 31.03.2017 is given below:
Liabilities Amount Assets Amount
(` ) (` )
Proprietor's Capital 3,00,000 Fixed Assets 3,60,000
Profit & Loss Account 1,25,000 Closing Stock 1,50,000
10% Loan Account 2,10,000 Sundry Debtors 1,00,000

Sundry Creditors 50,000 Deferred Expenses 50,000

Cash & Bank 25,000
6,85,000 6,85,000
Additional Information is as follows :
(1) The remaining life of fixed assets is 8 years. The pattern of use of the asset is even.
The net realisable value of fixed assets on 31.03.2018 was ` 3,25,000.
(2) Purchases and Sales in 2017-18 amounted to ` 22,50,000 and ` 27,50,000
respectively.
(3) The cost and net realizable value of stock on 31.03.2018 were ` 2,00,000 and
` 2,50,000 respectively.
(4) Expenses for the year amounted to ` 78,000.
(5) Deferred Expenses are amortized equally over 5 years.
(6) Sundry Debtors on 31.03.2018 are ` 1,50,000 of which ` 5,000 is doubtful. Collection
of another ` 25,000 depends on successful re-installation of certain product supplied
to the customer;
(7) Closing Sundry Creditors are ` 75,000, likely to be settled at 10% discount.
(8) Cash balance as on 31.03.2018 is ` 4,22,000.
(9) There is an early repayment penalty for the loan of ` 25,000.
You are required to prepare: (Not assuming going concern)
(1) Profit & Loss Account for the year 2017-18.
(2) Balance Sheet as on 31 st March, 2018.
(c) Tarun Ltd. was incorporated on 1 st July, 2018 to acquire a running business of Vinay Sons
with effect from 1st April, 2018. During the year 2018-19, the total sales were
` 12,00,000 of which ` 2,40,000 were for the first six months. The Gross Profit for the
year is ` 4,15,000. The expenses debited to the Profit and Loss account included:
(i) Director's fees ` 25,000
(ii) Bad Debts ` 6,500
(iii) Advertising ` 18,000 (under a contract amounting to ` 1,500 per month)
(iv) Company Audit Fees ` 15,000
(v) Tax Audit Fees ` 10,000
(1) Prepare a statement showing pre-incorporation and post incorporation profit for the
year ended 31st March, 2019.
(2) Explain how profits are to be treated.

(d) State the circumstances when Garner V/s Murray rule is not applicable.
(e) Wooden Plywood Limited has a normal wastage of 5% in the production process. During
the year 2017-18, the Company used 16,000 MT of Raw material costing ` 190 per MT. At
the end of the year, 950 MT of wastage was in stock. The accountant wants to know how
this wastage is to be treated in the books.
(1) Calculate the amount of abnormal loss.
(2) Explain the treatment of normal loss and abnormal loss. [In the context of AS-2
(Revised)] (4 Parts x 5 Marks = 20 Marks)
Answer
(a) Matching of taxes against revenue for a period poses special problems arising from the
fact that in number of cases, taxable income may be different from the accounting income.
The divergence between taxable income may be different from the accounting income
arises due to two main reasons: Firstly, there are differences between items of revenue
and expenses as appearing in the statement of profit and loss and the items which are
considered as revenue, expenses or deductions for tax purposes, known as Permanent
Difference. Secondly, there are differences between the amount in respect of a particular
item of revenue or expense as recognised in the statement of profit and loss and the
corresponding amount which is recognised for the computation of taxable incom e, known
as Timing Difference.
Permanent differences are the differences between taxable income and accounting income
which arise in one accounting period and do not reverse subsequently. For example, an
income exempt from tax or an expense that is not allowable as a deduction for tax
purposes.
Timing differences are those differences between taxable income and accounting income
which arise in one accounting period and are capable of reversal in one or more
subsequent periods. For e.g., Depreciation, Bonus, etc.
(b) Profit and Loss Account for the year ended 2017-18(not assuming going concern)
` `
To Purchases 22,50,000 By Closing Stock 2,50,000
To Expenses* 78,000 By Trade payables 7,500
To Depreciation 35,000
To Provision for doubtful debts 30,000
To Deferred cost 50,000
To Loan penalty 25,000

To Net Profit (b.f.) 3,89,500

30,07,500 30,07,500
Balance Sheet as at 31 st March, 2018 (not assuming going concern)
` `
Capital 3,00,000 Fixed Assets 3,25,000
Profit & Loss A/c 5,14,500 Stock 2,50,000
10% Loan 2,35,000 Trade receivables (less provision) 1,20,000
Trade payables 67,500 Deferred costs Nil
Bank 4,22,000
11,17,000 11,17,000
*Assumed that ` 78,000 includes interest on 10% loan amount for the year.
(c) Statement showing the calculation of Profits for the pre-incorporation and post-
For the year ended 31 st March, 2019
Gross Profit 4,15,000 Sales (1:9) 41,500 3,73,500
Less: Directors’ fee 25,000 Post 25,000
Bad debts 6,500 Sales (1:9) 650 5,850
Advertising 18,000 Time (1:3) 4,500 13,500
Company Audit Fees 15,000 Post 15,000
Tax Audit Fee 10,000 Sales (1:9) 1,000 9,000
Net Profit 3,40,500 35,350 3,05,150
Pre-incorporation profits to be transferred to capital reserve and post-incorporation profit
to be transferred to profit & Loss A/c.
Working Notes:
(i) Sales ratio
Particulars `
Sales for period up to 30.06.2018 (2,40,000 x 3/6) 1,20,000
Sales for period from 01.07.2018 to 31.03.2019 (12,00,000 – 10,80,000
1,20,000)

Thus, Sales Ratio = 1 : 9 (1,20,000 : 10,80,000)

(ii) Time ratio
1st April, 2018 to 30 June, 2018: 1 st July, 2018 to 31st March, 2019
= 3 months: 9 months = 1: 3
Thus, Time Ratio is 1: 3
(d) Garner vs Murray rule is non-applicable in the following cases:
1. When the solvent partner has a debit balance in the capital account.
Only solvent partners will bear the loss of capital deficiency of insolvent partner in
their capital ratio. If incidentally a solvent partner has a debit balance in his capital
account, he will escape the liability to bear the loss due to insolvency of another
partner.
2. When the firm has only two partners.
3. When there is an agreement between the partners to share the deficiency in capital
account of insolvent partner.
4. When all the partners of the firm are insolvent.
(e) (i) As per AS 2 (Revised) ‘Valuation of Inventories’, abnormal amounts of wasted
materials, labour and other production costs are excluded from cost of inventories
and such costs are recognised as expenses in the period in which they are incurred.
The normal loss will be included in determining the cost of inventories (finished goods)
at the year end.
Amount of Abnormal Loss:
(ii) Material used 16,000 MT @ ` 190 = ` 30,40,000
Normal Loss (5% of 16,000 MT) 800 MT (included in calculation of cost of
inventories)
Net quantity of material 15,200 MT
(iii) Abnormal Loss in quantity (950 - 800) 150 MT
Abnormal Loss ` 30,000
[150 units @ ` 200 (` 30,40,000/15,200)]
Amount of ` 30,000 (Abnormal loss) will be charged to the Profit and Loss statement.

candidates.
Question 1
Answer the following questions:
(a) Prepare cash flow from investing activities as per AS 3 of M/s Subham Creative Limited
for year ended 31.3.2019.
Particulars Amount (`)
Machinery acquired by issue of shares at face value 2,00,000
Claim received for loss of machinery in earthquake 55,000
Unsecured loans given to associates 5,00,000
Interest on loan received from associate company 70,000
Pre-acquisition dividend received on investment made 52,600
Debenture interest paid 1,45,200
Term loan repaid 4,50,000
Interest received on investment (TDS of ` 8,200 was deducted on the 73,800
above interest)
Purchased debentures of X Ltd., on. 1 st December, 2018 which are 3,00,000
redeemable within 3 months
Book value of plant & machinery sold (loss incurred ` 9,600) 90,000
(b) Karan Enterprises having its Head Office in Mangalore, Karnataka has a branch in
Greenville, USA. Following is the trial balance of Branch as at 31-3-2019:
Particulars Amount ($) Amount ($)
Dr. Cr.
Fixed assets 8,000
Opening inventory 800
Cash 700
Goods received from Head Office 2,800
Sales 24,050
Purchases 11,800

Expenses 1,800
Remittance to head office 2,450
Head office account 4,300
28,350 28,350
(i) Fixed assets were purchased on 1st April, 2015.
(ii) Depreciation at 10% p.a. is to be charged on fixed assets on straight line method. ·
(iii) Closing inventory at branch is $ 700 as on 31-3-2019.
(iv) Goods received from Head Office (HO) were recorded at ` 1,85,500 in HO books.
(v) Remittances to HO were recorded at ` 1,62,000 in HO books.
(vi) HO account is recorded in HO books at ` 2,84,500.
(vii) Exchange rates of US Dollar at different dates can be taken as :
1-4-2015 ` 63
1-4-2018 ` 65 and
31-3-2019 ` 67
Prepare the trial balance after been converted into Indian rupees in accordance with
AS-11.
(c) Mr. Rakshit gives the following information relating to items forming part of inventory as on
31st March, 2019. His factory produces product X using raw material A.
(i) 800 units of raw material A (purchased @ ` 140 per unit). Replacement cost of raw
material A as on 31 st March, 2019 is ` 190 per unit.
(ii) 650 units of partly finished goods in the process of producing X and cost incurred till
date ` 310 per unit. These units can be finished next year by incurring additional cost
of ` 50 per unit.
(iii) 1,800 units of finished product X and total cost incurred ` 360 per unit.
Expected selling price of product X is ` 350 per unit.
In the context of AS-2, determine how each item of inventory will be valued as on
31st March, 2019. Also, calculate the value of total inventory as on 31st March, 2019.
(d) Sheetal Ltd. has provided the following information for the year ended 31st March, 2019:
Particulars Amount ( `)
Accounting profit 9,00,000
Book profit as per MAT 5,25,000
Profit as per Income Tax Act 95,000

Tax rate 30%

MAT rate 7.5%
You are required to calculate the deferred tax asset/liability as per AS-22 and amount of
tax to be debited to the profit and loss account for the year.
Answer
(a) Cash Flow Statement from Investing Activities of
Subham Creative Limited for the year ended 31-03-2019
Cash generated from investing activities ` `
Interest on loan received 70,000
Pre-acquisition dividend received on investment made 52,600
Unsecured loans given to subsidiaries (5,00,000)
Interest received on investments (gross value) 82,000
TDS deducted on interest (8,200)
Sale of Plant & Machinery ` (90,000 – 9,600) 80,400
Cash used in investing activities (before extra-ordinary item) (2,23,200)
Extraordinary claim received for loss of machinery 55,000
Net cash used in investing activities (after extra-ordinary item) (1,68,200)
Note:
1. Debenture interest paid and Term Loan repaid are financing activities and therefore
not considered for preparing cash flow from investing activities.
2. Machinery acquired by issue of shares does not amount to cash outflow, hence also
not considered in the above cash flow statement.
3. The investments made in debentures are for short-term, it will be treated as ‘cash
equivalent’ and will not be considered as outflow in cash flow statement.
(b) Trial Balance of Foreign Branch (converted into Indian Rupees) as on March 31, 2019
Particulars $ (Dr.) $ (Cr.) Conversion Rate ` (Dr.) ` (Cr.)
Basis
Fixed Assets 8,000 Transaction Date 63 5,04,000
Rate
Opening Inventory 800 Opening Rate 65 52,000
Goods Received 2,800 Actuals 1,85,500
from HO

Sales 24,050 Average Rate 66 15,87,300

Purchases 11,800 Average Rate 66 7,78,800
Expenses 1,800 Average Rate 66 1,18,800
Cash 700 Closing Rate 67 46,900
Remittance to HO 2,450 Actuals 1,62,000
HO Account 4,300 Actuals 2,84,500
Exchange Rate Balancing Figure 23,800
Difference
28,350 28,350 18,71,800 18,71,800
Closing Stock 700 Closing Rate 67 46,900
Depreciation 800 Fixed Asset Rate 63 50,400
(c) As per AS 2 (Revised) “Valuation of Inventories”, materials and other supplies held for use
in the production of inventories are not written down below cost if the finished products in
which they will be incorporated are expected to be sold at cost or above cost. However,
when there has been a decline in the price of materials and it is estimated that the cost of
the finished products will exceed net realizable value, the materials are written down to net
realizable value. In such circumstances, the replacement cost of the materials may be the
best available measure of their net realizable value. In the given case, selling price of
product X is ` 350 and total cost per unit for production is ` 360.
Hence the valuation will be done as under:
(i) 800 units of raw material will be valued at cost 140.
(ii) 650 units of partly finished goods will be valued at 300 per unit* i.e. lower of cost
(` 310) or Net realizable value ` 300 (Estimated selling price ` 350 per unit less
additional cost of ` 50).
(iii) 1,800 units of finished product X will be valued at NRV of ` 350 per unit since it is
lower than cost ` 360 of product X.
Valuation of Total Inventory as on 31.03.2019:
Units Cost NRV / Value = units `
(`) Replacement x cost or NRV
cost whichever is
` less (`)
Raw material A 800 140 190 1,12,000 (800 x 140)
Partly finished goods 650 310 300 1,95,000 (650 x 300)
Finished goods X 1,800 60 350 6,30,000 (1,800 x 350)
Value of Inventory 9,37,000
*It has been assumed that the partly finished unit cannot be sold in semi-finished form and its NRV
is zero without processing it further.

(d) Tax as per accounting profit 9,00,00030%= ` 2,70,000

Tax as per Income-tax Profit 95,00030% =` 28,500
Tax as per MAT 5,25,0007.50%= ` 39,375
Tax expense= Current Tax +Deferred Tax
` 2,70,000 = ` 28,500+ Deferred tax
Deferred Tax liability as on 31-03-2019
= ` 2,70,000 – ` 28,500 = ` 2,41,500
Amount of tax to be debited in Profit and Loss account for the year 31-03-2019
Current Tax + Deferred Tax liability + Excess of MAT over current tax
= ` 28,500 + ` 2,41,500+ ` 10,875 (39,375 – 28,500)
= ` 2,80,875
Question 2
(a) G, S & J were partners sharing profits and losses in the ratio of 4:3:2, no partnership salary
or interest on capital being allowed. Their Balance Sheet as on 31.3.2019 is as follows:
Liabilities Amount Amount Assets Amount Amount
(`) (`) (`) (`)
Partners’ fixed Fixed assets:
capital accounts:
G 24,000 Goodwill 48,000
S 24,000 Land 9,600
J 12,000 60,000 Plant & Machinery 15,360
Partners’ current Motor car 840 73,800
accounts:
G 600 Current assets:
S 10,800 Stock 4,680
J (480) 10,920 Trade debtors 2,400
Loan from G 9,600 Less: provision 120 2,280
Trade creditors 14,880 Cash at bank 240
Miscellaneous losses:
Profit & loss sale 14,400
95,400 95,400

On 1st April, 2019, the partnership was dissolved. Motor car was taken over by G at a value
of ` 600, but no cash was given specifically in respect of this transaction. Sale of other
assets realized the following amounts:
Particulars `
Goodwill Nil
Land 8,400
Plant & machinery 6,000
Stock 3,600
Trade debtors 1,920
Trade creditors were paid ` 14,040 in full settlement of their debts. The cost of dissolution
amounted to ` 1,800. The loan from G was repaid; G and S both were fully solvent and
able to bring in any cash required but J was forced into bankruptcy and was only able to
bring 1/2 of the amount due.
You are required to prepare:
(i) Cash & Bank account
(ii) Realization account, and
(iii) Partners’ Fixed Capital Accounts (after transferring current accounts balances)
Apply Garner Vs. Murray rule.
(b) AD, BD & SD are partners sharing profits and losses in the ratio of 5:3:2. There capitals
were ` 13,440, ` 8,400, ` 11,760 respectively.
Liabilities and assets of the firm are as under:
Liabilities: `
Trade creditors 2.800
Loan from partners 1,400
Assets of the firm:
Patent 1,400
Furniture 2,800
Machinery 1,680
Stock 5,600
The assets realized in full in the order in which they are listed above. B D is insolvent.
You are required to prepare a statement showing the distribution of cash as and when
available, applying maximum possible loss procedure. (15 + 5 = 20 Marks)

Answer
(a) Cash & Bank Account
` `
To Balance b/d 240 By Realisation A/c-Creditors 14,040
To Realisation A/c- By Realisation A/c-Expenses 1,800
Land 8,400 By G’s Loan A/c 9,600
Plant and Machinery 6,000 By G’s Capital A/c 16,280
Stock 3,600 By S’s Capital A/c 28,680
Trade Debtors 1,920
To Capital Accounts:
G 27,200
S 20,400
J 2,640 50,240
70,400 70,400
Realisation Account
` `
To Goodwill 48,000 By Trade Creditors 14,880
To Land 9,600 By Provision for Bad Debts 120
To Plant and Machinery 15,360 By Bank:
To Motor Car 840 Land 8,400
To Stock 4,680 Plant and Machinery 6,000
To Sundry Debtors 2,400 Stock 3,600
To Bank (Creditors) 14,040 Debtors 1,920 19,920
To Bank (Expenses) 1,800 By G (Car) 600
By Capital Accounts:
(Loss)
G 27,200
S 20,400
J 13,600 61,200
96,720 96,720

Partners’ Fixed Capital Accounts

G S J G S J
` ` ` ` ` `
To Current A/c 5,800 — 3,680 By Balance b/d 24,000 24,000 12,000
(Transfer)
To Realisation A/c 27,200 20,400 13,600 By Current A/c — 6,000 —
(Loss) (Transfer)
To Realisation A/c 600 - — By Bank — — 2,640
(Car)
To J's Capital A/c 1,320 1,320 By Bank* 27,200 20,400 —
(Deficiency) (realisation loss)
To Bank* 16,280 28,680 — By G & S — — 2,640
(Deficiency)
51,200 50,400 17,280 51,200 50,400 17,280
Note:
1. G, S and J will bring cash to make good their share of the loss on realization.
2. As per Garner Vs. Murray rule, solvent partners- G and S have to bear the loss due
to insolvency of a partner J in their fixed capital ratio.
*Alternatively, posting may be done for the net amount being received from /paid to G and
S respectively.
Working Note:
Current account balances of partners have been arrived after adjusting profit and loss
account debit balance as follows:
Current account balance Profit & loss
G 600 (6,400) 5,800 Dr.
S 10,800 (4,800) 6,000 Cr.
J (480) (3,200) 3,680 Dr.
(b) Statement of Distribution of Cash
Realization Trade Loans Partners’ Capitals
Creditor from
partners
AD BD SD Total
` ` ` ` ` ` `
Balances due (1) 2,800 1,400 13,440 8,400 11,760 33,600

(i) Sale of Patent 1,400 (1,400) -

1,400 1,400
(ii) Sale of furniture 2,800 (1,400) (1,400)
(iii) Sale of machinery 1,680
Maximum possible loss ` 31,920 (15,960) (9,576) (6,384) (31,920)
(total of capitals ` 33,600
less cash available
` 1,680) allocated to
partners in the profit
sharing ratio i.e. 5 : 3 : 2
Amounts at credit (2,520) (1,176) 5,376 1,680
Deficiency of AD and BD 2,520 1,176 (3,696) -
written off against SD
Amount paid (2) – – 1,680 1,680
Balances in capital 13,440 8,400 10,080 31,920
accounts (1 – 2) = (3)
(iv) Sale of stock 5,600
Maximum possible loss 26,320
(` 31,920 – ` 5,600)
allocated
to partners in the ratio
5:3:2 (13,160) (7,896) (5,264) (26,320)
Amounts at credit and
cash paid (4) 280 504 4,816 5,600
Balances in capital 13,160 7,896 5,264 26,320
accounts left unpaid—
Loss (3 – 4) = (5)
Question 3
(a) Mr. Harsh provides the following details relating to his holding in 10% debentures (face
value of ` 100 each) of Exe Ltd. held as current assets:
1.4.2018 opening balance - 12,500 debentures, cost ` 12,25,000
1.6.2018 purchased 9,000 debentures@ ` 98 each ex-interest
1.11.2018 purchased 12,000 debentures @ ` 115 each cum interest
31.1.2019 sold 13,500 debentures@ ` 110 each cum-interest
31.3.2019 Market value of debentures @ ` 115 each
Due dates of interest are 30 th June and 31st December.

Brokerage at 1% is to be paid for each transaction. Mr. Harsh closes his books on
31.3.2019. Show investment account as it would appear in his books assuming FIFO
method is followed.
(b) A fire occurred in the premises of M/s Kirti & Co. on 15 th December, 2018. The working
remained disturbed upto 15 th March, 2019 as a result of which sales got adversely affected.
The firm had taken out an insurance policy with an average clause against consequential
losses for ` 2,50,000.
Following details are available from the quarterly sales tax return filed/GST return filed:
Sales 2015-16 2016-17 2017-18 2018-19
(`) (`) (`) (`)
From 1st April to 30 th June 3,80,000 3,15,000 4,11,900 3,24,000
From 1st July to 30th September 1,86,000 3,92,000 3,86,000 4,42,000
From 1st October to 31 st December 3,86,000 4,00,000 4,62,000 3,50,000
From 1st January to 31 st March 2,88,000 3,19,000 3,80,000 2,96,000
Total 12,40,000 14,26,000 16,39,900 14,12,000
A period of 3 months (i.e. from 16-12-2018 to 15-3-2019) has been agreed upon as
indemnity period.
Sales from 16-12-2017 to 31-12-2017 68,000
Sales from 16-12-2018 to 31-12-2018 Nil
Sales from 16-03-2018 to 31-03-2018 1,20,000
Sales from 16~03-2019 to 31-03-2019 40,000
Net profit was ` 2,50,000 and standing charges (all insured) amounted to ` 77,980 for the
year ending 31st March, 2018.
You are required to calculate the loss of profit claim amount. (10 + 10 = 20 Marks)
Answer
(a) Investment Account of Mr. Harsh
for the year ending on 31-3-2019
(Scrip: 10% Debentures of Exe Limited)
(Interest Payable on 30 th June and 31 st December)
Date Particulars Nominal Interest Cost Date Particulars Nominal Interest Cost
Value Value
` ` ` ` ` `
1.4.18 To Balance 12,50,000 31,250 12,25,000 30.6.18 By Bank - 1,07,500 -
b/d 21,500 x 100

x 10% x 1/2
1.6.18 To Bank 9,00,000 37,500 8,90,820 31.12.19 By Bank 1,67,500
(ex-Interest) 33,500 x
(W.N.1) 100x10% x
1/2
1.11.18 To Bank 12,00,000 40,000 13,53,800 31.1.19 By Bank 13,50,000 11,250 14,58,900
(cum- (W.N.3)
Interest)
(W.N.2)
31.1.19 To Profit & 1,34,920 31.3.19 By Balance 20,00,000 50,000 21,45,640
Loss A/c c/d (W.N.4) -
(W.N.3)
31.3.19 To Profit & 2,27,500
Loss A/c
(Bal. fig.)
33,50,000 3,36,250 36,04,540 33,50,000 3,36,250 36,04,540
Working Notes:
1. Purchase of debentures on 1.6.18
Interest element = 9,000 x 100 x 10% x 5/12 = ` 37,500
Investment element = (9,000 x 98) + [1%(9,000 x 98)] = ` 8,90,820
2. Purchase of debentures on 1.11.2018
Interest element = 12,000 x 100 x 10% x 4/12 = ` 40,000
Investment element = 12,000 X 115 X 101% less 40,000 = ` 13,53,800
3. Profit on sale of debentures as on 31.1.19
`
Sales price of debentures (13,500 x ` 110) 14,85,000
Less: Brokerage @ 1% (14,850)
14,70,150
Less: Interest (1,35,000/ 12) (11,250)
14,58,900
Less: Cost of Debentures [(12,25,000 + (890820 X
(13,23,980)
1,00,000/9,00,000)]
Profit on sale 1,34,920
4. Valuation of closing balance as on 31.3.2019:
Market value of 20,000 Debentures at ` 115 = ` 23,00,000
Cost of

8,000 Debentures = 8,90,820/ 9,000 X 8,000 = 7,91,840

12,000 Debentures = 13,53,800
Total 21,45,640
Value at the end is ` 21,45,640, i.e., which is less than market value of ` 23,00,000.
(b) Gross profit ratio `
Net profit for the year 2017-18 2,50,000
Add: Insured standing charges 77,980
3,27,980
Ratio of Gross profit = = 20% 3,27,980
16,39,900
Calculation of Short sales
Indemnity period: 16.12.2018 to 15.3.19
Standard sales to be calculated on basis of corresponding period of year 2017-18
`
Sales for period 16.12.2017 to 31.12.17 68,000
Sales for period 1.1.2018 to 15.3.2018 (Note 1) 2,60,000
Sales for period 16.12.2017 to 15.3.2018 3,28,000
Add: upward trend in sales (15%) (Note 2) 49,200
Standard Sales (adjusted) 3,77,200
Actual sales of disorganized period
Calculation of sales from 16.12.18 to 15.3.19
Sales for period 16.12.18 to 31.12.18 Nil
Sales for 1.1.19 to 15.3.19 (` 2,96,000 – ` 40,000) 2,56,000
Actual Sales 2,56,000
Short Sales (` 3,77,200 - ` 2,56,000) 1,21,200
Loss of gross profit
Short sales x gross profit ratio = 1,21,200 x 20% 24,240
Application of average clause
policy value
Net claim = Gross claim x
gross profit on annual turnover

2,50,000
= 24,240 x
3,26,240 (W.N.3)
Amount of loss of profit claim = ` 18,575
Working Notes:
1. Sales for period 1.1.18 to 15.3.18 `
Sales for 1 Jan. to 31 March (2017-18) (given) 3,80,000
Less: Sales for 16.3.18 to 31.3.18 (given) (1,20,000)
Sales for period 1.1.18 to 15.3.18 2,60,000
2. Calculation of upward trend in sales
Total sales in year 2015-16 = ` 12,40,000
Increase in sales in year 2016-17 as compared to 2015-16 = ` 1,86,000
1,86,000 (14,26,000 - 12,40,000)
% increase = = 15%
12,40,000
Increase in sales in year 2017-18 as compared to year 2016-17
2,13,900 (16,39,900 - 14,26,000)
% increase = = 15%
14,26,000
Thus annual percentage increase trend is of 15%
3. Gross profit on annual turnover `
Sales from 16.12.17 to 30.12.17 (adjusted) (68,000 x 1.15) 78,200
1.1.18 to 31.3.18 (adjusted) (3,80,000 x1.15) 4,37,000
1.4.18 to 30.6.18 3,24,000
1.7.18 to 30.9.18 4,42,000
1.10.18 to 15.12.18 (3,50,000 – Nil) 3,50,000
Sales for 12 months just before date of fire* 16,31,200
Gross profit on adjusted annual sales @ 20% 3,26,240
NOTE*: Alternatively, the annual adjusted turnover may be computed as `17,98,000

(` 15,64,000 X 1.15) considering the annual % increase trend for the entire period of last
12 months preceding to the date of fire. In that case, the gross profit on adjusted annual
sales @ 20% will be computed as ` 3,59,720 and net claim will be computed accordingly.

Question 4
(a) ABC Ltd. has several departments. Goods supplied to each department are debited to a
Memorandum Departmental Stock Account at cost plus a fixed percentage (mark-up) to
give the normal selling price. The amount of mark-up is credited to a Memorandum
Departmental Markup account. If the selling price of goods is reduced below its normal
selling prices, the reduction (mark-down) will require adjustment both in the stock account
and the mark-up account. The mark-up for department X for the last three years has been
20%. Figures relevant to department X for the year ended 31 st March, 2019 were as
follows:
Stock as on 1st April, 2018, at cost ` 1,50,000
Purchases at cost ` 4,30,000
Sales ` 6,50,000
It is further ascertained that:
(1) Shortage of stock found in the year ending 31.3.2019, costing ` 4,000 were written
off.
(2) Opening stock on 1.4.2018 including goods costing ` 12,000 had been sold during
the year and had been marked-down in the selling price by ` 1,600. The remaining
stock had been sold during the year.
(3) Goods purchased during the year were marked down by ` 3,600 from a cost of
` 30,000. Marked-down stock costing ` 10,000 remained unsold on 31.3.2019.
(4) The departmental closing stock is to be valued at cost subject to adjustment for mark-
up and mark-down.
You are required to prepare for the year ended 31 st March, 2019 :
(i) Departmental Trading Account for department X for the year ended 31st March, 2019
in the books of head office.
(ii) Memorandum Stock Account for the year ended 31 st March, 2019.
(iii) Memorandum Mark-Up account for the year ended 31 st March, 2019.
(b) Archana Enterprises maintain their books of accounts under single entry system. The
Balance-Sheet as on 31st March, 2018 was as follows :
Liabilities Amount (`) Assets Amount (`)
Capital A/c 6,75,000 Furniture & fixtures 1,50,000
Trade creditors 7,57,500 Stock 9,15,000
Outstanding expenses 67,500 Trade debtors 3,12,000
Prepaid insurance 3,000

Cash in hand & at bank 1,20,000

15,00,000 15,00,000
The following was the summary of cash and bank book for the year ended 31st March,
2019:
Receipts Amount ( `) Payments Amount (`)
Cash in hand & at Bank on 1,20,000 Payment to trade 1,24,83,000
1st April, 2018 creditors
Cash sales 1,10,70,000 Sundry expenses paid 9,31,050
Receipts from trade debtors 27,75,000 Drawings 3,60,000
Cash in hand & at Bank
on 31st March, 2019 1,90,950
1,39,65,000 1,39,65,000
(i) Discount allowed to trade debtors and received from trade creditors amounted to
` 54,000 and ` 42,500 respectively (for the year ended 31st March, 2019).
(ii) Annual fire insurance premium of ` 9,000 was paid every year on 1st August for the
renewal of the policy.
(iii) Furniture & fixtures were subject to depreciation @ 15% p.a. on diminishing balance
method.
(iv) The following are the balances as on 31st March, 2019:
Stock ` 9,75,000
Trade debtors ` 3,43,000
Outstanding expenses ` 55,200
(v) Gross profit ratio of 10% on sales is maintained throughout the year.
You are required to prepare Trading and Profit & Loss account for the year ended
31st March, 2019, and Balance Sheet as on that date. (10 + 10 = 20 Marks)
Answer
(a) (i) Department Trading Account for Department X
For the year ending on 31.03.2019
In the books of Head Office

To Purchases 4,30,000 By Shortage 4,000

To Gross Profit c/d 1,05,000 By Closing Stock 31,000
6,85,000 6,85,000
(ii) Memorandum Stock Account (for Department X) (at selling price)

To Balance b/d 1,80,000 By Profit & Loss A/c 4,000
(` 1,50,000+20% of (Cost of Shortage)
` 1,50,000)
To Purchases 5,16,000 By Memorandum Departmental 800
(` 4,30,000 + 20% of Mark up A/c (Load on
` 4,30,000) Shortage) (` 4,000 x 20%)
By Memorandum Departmental 3,600
Mark-up A/c (Mark-down on
Current Purchases)
By Debtors A/c (Sales) 6,50,000
By Memorandum Departmental 1,600
Mark-up A/c
(Mark Down on Opening Stock)
By Balance c/d 36,000
6,96,000 6,96,000
(iii) Memorandum Departmental Mark-up Account

To Memorandum 800 By Balance b/d 30,000
Departmental Stock A/c (` 1,80,000 x 20/120)
(` 4,000 × 20/100)
To Memorandum Departmental 3,600 By Memorandum 86,000
Stock A/c Departmental Stock A/c
To Memorandum 1,600 (` 5,16,000 x 20/120)
Departmental Stock A/c
To Gross Profit transferred 1,05,000
to Profit & Loss A/c
To Balance c/d [(` 36,000
+ 1,200*) x 20/120 - ` 1,200] 5,000

1,16,000 1,16,000
*[` 3,600 ×10,000/30,000] = ` 1,200. Alternatively, this adjustment of ` 1,200 may be

routed through Memorandum Stock Account.
Working Notes:
(i) Calculation of Cost of Sales
`
A Sales as per Books 6,50,000
B Add: Mark-down in opening stock (given) 1,600
C Add: mark-down in sales out of current Purchases
(` 3,600 x 20,000 /30,000) 2,400
D Value of sales if there was no mark-down (A+B+C) 6,54,000

E Less: Gross Profit (20/120 of ` 6,54,000) subject to Mark Down (1,09,000)
F Cost of sales (D-E) 5,45,000
(ii) Calculation of Closing Stock

`
A Opening Stock 1,50,000
B Add: Purchases 4,30,000
C Less: Cost of Sales (5,45,000)
D Less: Shortage (4,000)
E Closing Stock (A+B-C-D) 31,000
(b) Trading and Profit and Loss Account of Archana Enterprises

` `
To Opening Stock 9,15,000 By Sales
To Purchases (W.N. 2) 125,97,000 Cash 110,70,000
To Gross profit c/d 13,93,000 Credit (W.N. 1) 28,60,000 139,30,000
(10% of 139,30,000) By Closing stock 9,75,000

149,05,000 149,05,000
To Sundry expenses 9,18,750 By Gross profit b/d 13,93,000
(W.N. 4)
To Discount allowed 54,000 By Discount received 42,500
To Depreciation 22,500
(15% ` 1,50,000)

14,35,500 14,35,500
Balance Sheet of Archana Enterprises as at 31st March, 2019
` `
Capital Furniture & Fittings 1,50,000
Opening 6,75,000 Less: Depreciation (22,500) 1,27,500
balance
Less: Drawing (3,60,000) Stock 9,75,000
3,15,000 Trade Debtors 3,43,000
Add: Net profit Unexpired insurance 3,000
for the years 4,40,250 7,55,250
Trade creditors 8,29,000 Cash in hand & at bank 1,90,950
(W.N. 3)
Outstanding 55,200
expenses
16,39,450 16,39,450
Working Notes:
1. Trade Debtors Account
` `
To Balance b/d 3,12,000 By Cash/Bank 27,75,000
To Credit sales 28,60,000 By Discount allowed 54,000
(Bal. fig.) By Balance c/d 3,43,000
31,72,000 31,72,000

2. Memorandum Trading Account

` `
To Purchases (Balancing figure) 125,97,000 By Closing stock 9,75,000
To Gross Profit (10% on sales) 13,93,000
149,05,000 149,05,000
3. Trade Creditors Account

` `
To Cash/Bank 124,83,000 By Balance b/d 7,57,500
To Discount received 42,500 By Purchases (as calculated 125,97,000
To Balance c/d in W.N. 2)
(balancing figure) 8,29,000
133,54,500 133,54,500
4. Computation of sundry expenses to be charged to Profit & Loss A/c

`
Sundry expenses paid (as per cash and Bank book) 9,31,050
Add: Prepaid expenses as on 31–3–2018 3,000
9,34,050
Less: Outstanding expenses as on 31–3–2018 (67,500)
8,66,550
Add: Outstanding expenses as on 31–3–2019 55,200
9,21,750
Less: Prepaid expenses as on 31–3–2019 (Insurance paid till July, 2019)
(9,000 x 4/12) (3,000)
9,18,750
Question 5
(a) From the following particulars furnished by the Prashant Ltd., prepare the Balance Sheet
as at 31st March, 2019 as required by Schedule III of the Companies Act, 2013 :

Particulars Debit (`) Credit (`)

Equity share capital (face value of ` 10 each) 15,00,000
Calls-in-arrears 5,000
Land 5,50,000
Building 4,85,000
Plant & machinery 5,60,000
General reserve 2,70,000
Loan from State Financial Corporation 2,10,000
Inventories 3,15,000
Provision for taxation 72,000
Trade receivables 2,95,000
Short-term loans & advances 58,500
Profit & loss account 1,06,800
Cash in hand 37,300
Cash at bank 2,85,000
Unsecured loans 1,65,000
Trade payables 2,67,000
Total 25,90,800 25,90,800
The following additional information is also provided :
(1) 10,000 equity shares were issued for consideration other than cash.
(2) Trade receivables of ` 55,000 are due for more than six months.
(3) The cost of building and plant & machinery is ` 5,50,000 and ` 6,25,000 respectively.
(4) The loan from State Financial Corporation is secured by hypothecation of plant &
machinery. The balance of ` 2,10,000 in this account is inclusive of ` 10,000 for
interest accrued but not due.
(5) Balance at Bank included ` 15,000 with Aakash Bank Ltd., which is not a scheduled
bank.
(b) The partners of C&G decided to convert their existing partnership business into a private
limited called CG trading Pvt. Ltd. with effect from 1.7.2018.
The same books of accounts were continued by the company which closed its accounts
for the first term on 31.3.2019.
The summarized profit & loss account for the year ended 31.3.2019 is below:

Particulars ` in lakhs ` in lakhs

Turnover 245.00
Interest on investments 6.00 251.00
Less: Cost of goods sold 124.32
Advertisement 3.50
Sales Commission 7.00
Salaries 18.00
Managing Director’s Remuneration 6.00
Interest on Debentures 2.00
Rent 5.50
Bad debt 1.15
Underwriting Commission 1.00
Audit fees 3.00
Loss on sale of Investments 1.00
Depreciation 4.00 176.47
74.53
The following additional information was provided :
(i) The average monthly sales doubled from 1.7.2018, GP ratio was constant.
(ii) All investments were sold on 31.5.2018.
(iii) Average monthly salaries doubled from 1.10.2018.
(iv) The company occupied additional space from 1.7.2018 for which rent of ` 20,000 per
month was incurred.
(v) Bad debts recovered amounting to ` 60,000 for a sale made in 2016-17 has been
deducted from bad debts mentioned above.
(vi) Audit fees pertains to the company.
Prepare a statement apportioning the expenses between pre and post incorporation
periods and calculate the profit / loss for such periods.
Answer
(a) Prashant Ltd.
Balance Sheet as on 31 st March, 2019
Particulars Notes `
Equity and Liabilities

1 Shareholders' funds
a Share capital 1 14,95,000
b Reserves and Surplus 2 3,76,800
2 Non-current liabilities
Long-term borrowings 3 3,65,000
3 Current liabilities
a Trade Payables 2,67,000
b Other current liabilities 4 10,000
c Short-term provisions 5 72,000
Total 25,85,800
Assets
1 Non-current assets
Property, Plant and Equipment 6 15,95,000
2 Current assets
a Inventories 3,15,000
b Trade receivables 7 2,95,000
c Cash and bank balances 8 3,22,300
d Short-term loans and advances 58,500
Total 25,85,800
Notes to accounts
`
1 Share Capital
Equity share capital
Issued & subscribed & fully paid up
1,50,000 Equity Shares of ` 10 each
(of the above 10,000 shares have been issued for
consideration other than cash) 15,00,000
Less: Calls in arrears (5,000) 14,95,000
2 Reserves and Surplus
Profit & Loss balance 1,06,800
Total 3,76,800
3 Long-term borrowings

Secured
Loan from State Financial Corporation (2,10,000-10,000)
(Secured by hypothecation of Plant and Machinery) 2,00,000
Unsecured Loan 1,65,000
Total 3,65,000
4 Other current liabilities
Interest accrued but not due on loans (SFC) 10,000
5 Short-term provisions
Provision for taxation 72,000
6 Property, Plant & Equipment
Land 5,50,000
Building 5,50,000
Less: Depreciation(b.f.) (65,000) 4,85,000
Plant & Machinery 6,25,000
Less: Depreciation (b.f.) (65,000) 5,60,000
Total 15,95,000
7 Trade receivables
Outstanding for a period exceeding six months 55,000
Other Amounts 2,40,000
Total 2,95,000
8 Cash and bank balances
Cash and cash equivalents
Cash in hand 37,300
Other bank balances Nil
Total 3,22,300
(b) C G Trading Private Limited
Statement showing calculation of Profit/Loss for Pre and Post Incorporation Periods
` In lakhs
Ratio Total Pre Post
Incorporation Incorporation
Sales 1:6 245.00 35.00 210.00
Interest on Investments Pre 6.00 6.00 -
Bad debts recovered Pre 0.60 0.60 _

(i) 251.6 41.60 210.00

Cost of goods sold 1:6 124.32 17.76 106.56
Advertisement 1:6 3.50 0.50 3.00
Sales commission 1:6 7.00 1.00 6.00
Salary (W.N.3) 1:5 18.00 3.00 15.00
Managing director’s remuneration Post 6.00 - 6.00
Interest on Debentures Post 2.00 - 2.00
Rent (W.N.4) 5.50 0.93 4.57
Bad debts (1.15 + 0.6) 1:6 1.75 0.25 1.50
Underwriting commission Post 1.00 - 1.00
Audit fees Post 3.00 - 3.00
Loss on sale of Investment Pre 1.00 1.00 -
Depreciation 1:3 4.00 1.00 3.00
(ii) 177.07 25.44 151.63
Net Profit [(i) – (ii)] 74.53 16.16 58.37
Working Notes:
1. Calculation of Sales Ratio
Let the average sales per month be x
Total sales from 01.04.2018 to 30.06.2018 will be 3x
Average sales per month from 01.07.2018 to 31.03.2019 will be 2x
Total sales from 01.07.2018 to 31.03.2019 will be 2x X 9 =18x
Ratio of Sales will be 3x: 18x i.e. 3:18 or 1:6
2. Calculation of time Ratio
3 Months: 9 Months i.e. 1:3
3. Apportionment of Salary
Let the salary per month from 01.04.2018 to 30.09.2018 is x
Salary per month from 01.10.2018 to 31.03.2019 will be 2x
Hence, pre incorporation salary (01.04.2018 to 30.06.2018) = 3x
Post incorporation salary from 01.07.2018 to 31.03.2019 = (3x + 12x) i.e.15x
Ratio for division 3x: 15x or 1: 5
4. Apportionment of Rent ` In Lakhs
Total Rent 5.5 0

Less: additional rent from 1.7.2018 to 31.3.2019 1.80

Rent of old premises for 12 months 3.70
Pre Post
Apportionment in time ratio 0.93 2.77
Add: Rent for new space - 1.80
Total 0.93 4.57
Question 6
(a) The following extract of Balance Sheet of Prabhat Ltd. (Non investment Company) was
obtained:
Balance Sheet (Extract) as on 31 st March, 2019
Liabilities `
Issued and subscribed capital:
30,000, 12% preference shares of ` 100 each (fully paid) 30,00,000
24,00,000 equity shares of `10 each, ` 8 paid up 1,92,00,000
Share suspense account 40,00,000
Reserves and Surplus:
Securities premium 1,00,000
Capital reserves ( ` 3,00,000 is revaluation reserve) 3,90,000
Secured loans:
12% debentures 1,30,00,000

Unsecured loans:
Public deposits 7,40,000
Current liabilities:
Trade payables 6,90,000
Cash credit from SBI (short term) 9,30,000
Assets
Investments in shares, debentures etc. 1,50,00,000
Profit & loss account (Dr. balance) 30,50,000
Share suspense account represents application money received on shares, the allotment
of which is not yet made.
You are required to compute effective capital as per the provisions of Schedule V. Would
your answer differ if Prabhat Ltd. is an investment company?
(b) Following is the extract of Balance Sheet of Prem Ltd. as at 31 st March, 2018 :
`
Authorized capital:
3,00,000 equity shares of `10 each 30,00,000
25,000,10% preference shares of `10 each 2,50,000
32,50,000
Issued and subscribed capital:
2,70,000 equity shares of ` 10 each fully paid up 27,00,000
24,000, 10% preference shares of ` 10 each fully paid up 2,40,000
29,40,000
Reserves and surplus:
Capital redemption reserve 1,20,000
Securities premium (collected in cash) 75,000
Profit and loss account 6,00,000
11,55,000
On 1st April, 2018, the company decided to capitalize its reserves by way of bonus at the
rate of two shares for every five shares held.
Show necessary journal entries in the books of the company and prepare the extract of the
balance sheet after bonus issue.

(c) Mac Ltd. gives the following data regarding to its six segments:
(` in lakhs)
Particulars A B C D E F Total
Segment assets 80 160 60 40 40 20 400
Segment results 100 (380) 20 20 (20) 60 (200)
Segment revenue 600 1,240 160 120 160 120 2,400
The accountant contends that segments 'A' and 'B' alone are reportable segments. Is he
justified in his view? Discuss in the context of AS-17 'Segment Reporting'.
(d) Give an analytical statement of distinction between an ordinary partnership firm and a
limited liability partnership.
(e) A company had issued 40,000, 12% debentures of ` 100 each on 1st April, 2015. The
debentures are due for redemption on 1st March, 2019. The terms of issue of debentures
provided that they were redeemable at a premium of 5% and also conferred option to the
debenture holders to convert 20% of their holding into equity shares (nominal value ` 10)
at a predetermined price of ` 15 per share and the payment in cash. 50 debentures holders
holding totally 5,000 debentures did not exercise the option. Calculate the number of equity
shares to be allotted to the debenture holders and the amount to be paid in cash on
redemption. (4 Parts x 5 Marks = 20 Marks)
Answer
(a) Computation of effective capital
Where Prabhat Ltd. Is Where Prabhat Ltd.
a non-investment is an investment
company company
` `
Paid-up share capital —
30,000, 12% Preference shares 30,00,000 30,00,000
24,00,000 Equity shares of ` 8 paid up 1,92,00,000 1,92,00,000
Capital reserves (3,90,000 – 3,00,000) 90,000 90,000
Securities premium 1,00,000 1,00,000
12% Debentures 1,30,00,000 1,30,00,000
Public Deposits 7,40,000 7,40,000
(A) 36,130,000 36,130,000
Investments 1,50,00,000 —

Profit and Loss account (Dr. balance) 30,50,000 30,50,000

(B) 1,80,50,000 30,50,000
Effective capital (A–B) 1,80,80,000 3,30,80,000
(b) Prem Ltd.
Journal Entries
Dr. Cr.
April 1 Capital Redemption Reserve A/c Dr. 1,20,000
General Reserve A/c Dr. 3,60,000
Profit and Loss A/c (b.f.) Dr. 5,25,000
To Bonus to Equity Shareholders A/c 10,80,000
(Bonus issue @ two shares for every five
shares held by utilizing various reserves as
per Board’s Resolution dated...)
Bonus to Shareholders A/c Dr. 10,80,000
(Issue of bonus shares)
Balance Sheet (Extract) as on 1st April, 2018 (after bonus issue)
Particulars Notes Amount (`)
1 Shareholders’ funds
b Reserves and Surplus 2 75,000
Notes to Accounts
1 Share Capital (`)
Authorized share capital:
3,78,000* Equity shares of ` 10 each 37,80,000*
25,000 10% Preference shares of ` 10 each 2,50,000
Total 40,30,000

Issued, subscribed and fully paid share capital:

3,78,000 Equity shares of ` 10 each, fully paid
(Out of above, 1,08,000 equity shares @ ` 10 each
were issued by way of bonus) 37,80,000
24,000 10% Preference shares of ` 10 each 2,40,000
Total 40,20,000
2 Reserves and Surplus
Capital Redemption Reserve 1,20,000 Nil
Less: Utilized 1,20,000
Securities Premium 75,000
Less: Utilised for bonus issue (75,000) Nil
Less: Utilised for bonus issue (3,60,000) Nil
Profit & Loss Account 6,00,000
Less: Utilised for bonus issue (5,25,000) 75,000
Total 75,000
Note: *Authorized capital has been increased by the minimum required amount i.e. `
7,80,000 (37,80,000 – 30,00,000) in the above solution.
(c) As per AS 17 ‘Segment Reporting’, a business segment or geographical segment should
be identified as a reportable segment if:
Its revenue from sales to external customers and from other transactions with other
segments is 10% or more of the total revenue- external and internal of all segments; or
Its segment result whether profit or loss is 10% or more of combined result of all
segments in profit; or combined result of all segments in loss, whichever is greater in
absolute amount; or
Its segment assets are 10% or more of the total assets of all segments.
If the total external revenue attributable to reportable segments constitutes less than 75%
of total enterprise revenue, additional segments should be identified as reportable
segments even if they do not meet the 10% thresholds until at least 75% of total enterprise
revenue is included in reportable segments.
On the basis of turnover criteria segments A and B are reportable segments.
On the basis of the result criteria, segments A, B and F are reportable segments (since
their results in absolute amount is 10% or more of ` 400 lakhs).
On the basis of asset criteria, all segments except F are reportable segments.

Since all the segments are covered in at least one of the above criteria all segments have
to be reported upon in accordance with Accounting Standard (AS) 17. Hence, the opinion
of accountant is wrong.
(d) Distinction between an ordinary partnership firm and an LLP
Key Elements Partnerships LLPs
1 Applicable Law Indian Partnership Act The Limited Liability
1932 Partnerships Act, 2008
2 Registration Optional Compulsory with ROC
3 Creation Created by an Agreement Created by Law
4 Body Corporate No Yes
5 Separate Legal Entity No Yes
6 Perpetual Partnerships do not have It has perpetual succession and
Succession perpetual succession individual partners may come
and go
7 Number of Partners Minimum 2 and Maximum Minimum 2 but no maximum
20 (subject to 10 for limit
banks)
8 Ownership of Assets Firm cannot own any The LLP as an independent
assets. The partners own entity can own assets
the assets of the firm
9 Liability of Partners/ Unlimited: Partners are Limited to the extent of their
Members severally and jointly liable contribution towards LLP except
for actions of other in case of intentional fraud or
partners and the firm and wrongful act of omission or
their liability extends to commission by a partner.
personal assets
10 Principal Agent Partners are the agents Partners are agents of the firm
Relationship of the firm and of each only and not of other partners
other
(e) Calculation of number of equity shares to be allotted
Number of debentures
Total number of debentures 40,000
Less: Debenture holders not opted for conversion (5,000)
Debenture holders opted for conversion 35,000

Option for conversion 20%

Number of debentures to be converted (20% of 35,000) 7,000
Redemption value of 7,000 debentures at a premium of 5%

[7,000 x (100+5)] ` 7,35,000
Equity shares of ` 10 each issued to debenture holders on redemption
[` 7,35,000/ ` 15] 49,000 shares
Amount of cash to be paid
Amount to be paid into cash [42,00,000 (40,000 x ` 105 ) – 7,35,000] ` 34,65,000
on redemption

candidates.
Question 1
Answer the following:
(a) A Ltd. had following assets. Calculate depreciation for the year ended 31st March, 2020
for each asset as per AS 10 (Revised):
(i) Machinery purchased for ` 10 lakhs on 1st April, 2015 and residual value after
useful life of 5 years, based on 2015 prices is ` 10 lakhs.
(ii) Land for ` 50 lakhs.
(iii) A Machinery is constructed for ` 5,00,000 for its own use (useful life is 10 years).
Construction is completed on 1st April, 2019, but the company does not begin using
the machine until 31st March, 2020.
(iv) Machinery purchased on 1st April.2017 for ` 50,000 with useful life of 5 years and
residual value is NIL. On 1st April, 2019, management decided to use this asset for
further 2 years only.
(b) On 1st April, 2016, Mac Ltd. received a Government Grant of ` 60 lakhs for acquisition of
machinery costing ` 300 lakhs. The grant was credited to the cost of the asset. The
estimated useful life of the machinery is 10 years. The machinery is depreciated @ 10%
on WDV basis. The company had to refund the grant in June 2019 due to non-
compliance of certain conditions.
How the refund of the grant is dealt with in the books of Mac Ltd. assuming that the
company did not charge any depreciation for the year 2019-20.
Pass necessary Journal Entries for the year 2019-20.
(c) A Limited invested in the shares of XYZ Ltd. on 1st December, 2019 at a cost of
` 50,000. Out of these shares, ` 25,000 shares were purchased with an intention to hold
for 6 months and ` 25,000 shares were purchased with an intention to hold as long-term
Investment.
A Limited also earlier purchased Gold of ` 1,00,000 and Silver of ` 30,00,000 on 1st
April, 2019. Market value as on 31st March, 2020 of above investments are as follows:
Shares ` 47,500 (Decline in the value of shares is temporary.)
Gold ` 1,80,000

Silver ` 30,55,000
How above investments will be shown in the books of accounts of M/s A Limited for the
year ended 31st March, 2020 as per the provisions of AS 13 (Revised)?
(d) On 15th April, 2019 RBM Ltd. obtained a Term Loan from the Bank for ` 320 lakhs to be
utilized as under:
` (in lakhs)
Construction for factory shed 240
Purchase of Machinery 30
Working capital 24
Purchase of Vehicles 12
Advance for tools/cranes etc. 8
Purchase of technical know how 6
In March, 2020 construction of shed was completed and machinery was installed. Total
interest charged by the bank for the year ending 31st March, 2020 was ` 40 lakhs.
In the context of provisions of AS 16 'Borrowing Costs', show the treatment of interest
and also explain the nature of Assets. (4 Parts X 5 Marks = 20 Marks)
Answer
(a) Computation of amount of depreciation as per AS 10
`
(i) Machinery purchased on 1/4/15 for ` 10 lakhs Nil
(having residual value of ` 10 lakhs)
Reason: The company considers that the residual value, based on prices
prevailing at the balance sheet date, will equal the cost. Therefore, there
is no depreciable amount and depreciation is correctly zero.
(ii) Land (50 lakhs) (considered freehold) Nil
Reason: Land has an unlimited useful life and therefore, it is not
depreciated.
(iii) Machinery constructed for own use (` 5,00,000/10) 50,000
Reason: The entity should begin charging depreciation from the date the
machine is ready for use i.e. 1st April,2019. The fact that the machine
was not used for a period after it was ready to be used is not relevant in
considering when to begin charging depreciation.
(iv) Machinery having revised useful life 15,000
Reason: The entity has charged depreciation using the straight-line
method at ` 10,000 per annum i.e (50,000/5 years). On 1 st April,2019 the

asset's net book value is [50,000 – (10,000 x 2)] i.e. ` 30,000. The
remaining useful life is 2 years as per revised estimate. The company
should amend the annual provision for depreciation to charge the
unamortized cost over the revised remaining life of 2 years.
Consequently, it should charge depreciation for the next 2 years at
` 15,000 per annum i.e. (30,000 / 2 years).
(b)
(` in lakhs)
1st April, 2016 Acquisition cost of machinery 300.00
Less: Government Grant 60.00
240.00
Less: Depreciation @10% for 2 months (2.916)
1st June, 2019 Book value 172.044
June 2019 Add: Refund of grant* 60.00
Revised book value 232.044
Depreciation @10% on the revised book value amounting to ` 232.044 lakhs is to be
provided prospectively over the residual useful life of the machinery.
*considered refund of grant at beginning of June month and depreciation for two months
already charged. Alternative answer considering otherwise also possible.
Journal Entries
Machinery Account Dr. 60
To Bank Account 60
(Being government grant on asset partly refunded
which increased the cost of fixed asset)
Depreciation Account Dr. 19.337
To Machinery Account 19.337
(Being depreciation charged on revised value of
fixed asset prospectively for 10 months)
Profit & Loss Account Dr. 22.253

To Depreciation Account 22.253

(Being depreciation transferred to Profit and Loss
Account amounting to ` (2.916 + 19.337= 22.253)
(c) As per AS 13 (Revised) ‘Accounting for Investments, for investment in shares - if the
investment is purchased with an intention to hold for short-term period (less than one
year), then it will be classified as current investment and to be carried at lower of cost
and fair value.
In the given case ` 25,000 shares held as current investment will be carried in the books
at ` 23,750 (` 47,500/2).
If equity shares are acquired with an intention to hold for long term period (more than one
year), then should be considered as long-term investment to be shown at cost in the
Balance Sheet of the company. However, provision for diminution should be made to
recognize a decline, if other than temporary, in the value of the investments. Hence,
` 25,000 shares held as long-term investment will be carried in the books at ` 25,000.
Gold and silver are generally purchased with an intention to hold them for long term
period (more than one year) until and unless given otherwise.
Hence, the investment in Gold and Silver (purchased on 1 st March, 2019) should
continue to be shown at cost (since there is no ‘other than temporary’ diminution) as on
31st March, 2020. Thus Gold at ` 1,00,000 and Silver at ` 30,00,000 respectively will be
shown in the books.
(d) As per AS 16 A qualifying asset is an asset that necessarily takes a substantial period of
time to get ready for its intended use or sale. Other investments and those inventories
that are routinely manufactured or otherwise produced in large quantities on a repetitive
basis over a short period of time, are not qualifying assets. Assets that are ready for their
intended use or sale when acquired also are not qualifying assets. Borrowing costs that
are directly attributable to the acquisition, construction or production of a qualifying asset
should be capitalized as part of the cost of that asset. Other borrowing costs should be
recognized as an expense in the period in which they are incurred.
Construction of factory shed amounting ` 240 lakhs is qualifying asset in the given case.
The interest for this amount during the year will be added to the cost of factory shed. All
others (purchase of machinery, vehicles and technical know how, working capital,
advance for tools/cranes) are non-qualifying assets and related borrowing cost will be
charged to Profit and Loss statement.
Qualifying Asset as per AS 16 (construction of a shed) = ` 240 lakhs
Borrowing cost to be capitalized = ` 40 lakhs x 240/320 = ` 30 lakhs
Interest to be debited to Profit or Loss account: ` (40 – 30) = ` 10 lakhs.
Note: Assumed that construction of factory shed completed on 31 st March, 2020.

Question 2
(a) Vijay & Co. of Jaipur has a branch in Patna to which goods are sent @ 20% above cost.
The branch makes both cash & credit sales. Branch expenses are paid direct from Head
office and the branch has to remit all cash received into the bank account of Head office.
Branch doesn't maintain any books of accounts, but sends monthly returns to the head
office.
Following further details are given for the year ended 31st March, 2020:
Amount (` )
Goods received from Head office at Invoice Price 8,40,000
Goods returned to Head office at Invoice Price 60,000
Cash sales for the year 2019-20 1,85,000
Credit Sales for the year 2019-20 6,25,000
Stock at Branch as on 01-04-2019 at Invoice price 72,000
Sundry Debtors at Patna branch as on 01-04-2019 96,000
Cash received from Debtors 4,38,000
Discount allowed to Debtors 7,500
Goods returned by customer at Patna Branch 14,000
Bad debts written off 5,500
Amount recovered from Bad debts previously written off as Bad 1,000
Rent, Rates & taxes at Branch 24,000
Salaries & wages at Branch 72,000
Office Expenses (at Branch) 9,200
Stock at Branch as on 31-03-2020 at cost price 1,25,000
Prepare necessary ledger accounts in the books of Head office by following Stock and
Debtors method and ascertain Branch profit.
(b) M/s Rohan & Sons runs a business of Electrical goods on wholesale basis. The books of
accounts are closed on 31 st March every year. The Balance Sheet as on 31st March,
2019 is as follows :
Capital 12,50,000 Fixed Assets 6 50,000
Closing stock 3,75,000
Trade Debtors 3,65,000
Trade Creditors 1,90,000 Cash & Bank 1,95,000

Profit & Loss A/c 1,45,000

15,85,000 15,85,000
The management estimates the purchase & sales for the year ended 31st March,2020 as
under:
Particulars Upto 31.01.2020 February 2020 March 2020
(` ) (` ) (` )
Purchases 16,20,000 1,40,000 1,25,000
Sales 20,75,000 2,10,000 1, 75,000
All Sales and Purchases are on credit basis. It was decided to invest ` 1,50,000 in
purchase of Fixed assets, which are depreciated @ 10% on book value. A Fixed Asset
of book value as on 01.04.2019, ` 60,000 was sold for ` 56,000 on 31st March, 2020.
The time lag for payment to Trade Creditors for purchases is one month and receipt from
Trade debtors for sales, is two months. The business earns a gross profit of 25% on
turnover. The expenses against gross profit amounts to 15% of the turnover. The
amount of depreciation is not included in these expenses.
Prepare Trading & profit & Loss Account for the year ending 31st March, 2020 and draft
a Balance Sheet as at 31st March, 2020 assuming that creditors are all Trade creditors
for purchases and debtors are all Trade debtors for sales and there is no other current
asset and liability apart from stock and cash and bank balances.
Also, prepare Cash & Bank account and Fixed Assets account for the year ending
31st March, 2020. (10+10=20 Marks)
Answer
(a) Branch Stock Account
` ` ` `
1.4.19 To Balance b/d 72,000 31.3.20 By Sales:
(opening
stock)
31.3.20 To Goods Sent 8,40,000 Cash 1,85,000
to Branch A/c Credit 6,25,000
To Branch P&L 94,000 Less:
Return (14,000) 6,11,000 7,96,000
By Goods 60,000
sent to
branch -
returns
By Balance 1,50,000
c/d
(closing
stock)

10,06,000 10,06,000
1.4.20 To Balance b/d 1,50,000
Branch Debtors Account

` `
1.4.19 To Balance b/d 96,000 31.3.20 By Cash 4,38,000
31.3.20 To Sales 6,25,000 By Returns 14,000
By Discounts 7,500
By Bad debts 5,500
7,21,000 7,21,000
1.4.20 To Balance b/d 2,56,000
Branch Expenses Account
` `
31.3.20 To Salaries & Wages 72,000 31.3.20 By Branch P&L 1,18,200
A/c
To Rent, Rates & 24,000
Taxes
To Office Expenses 9,200
To Discounts 7,500
To Bad Debts 5,500
1,18,200 1,18,200
Branch Profit & Loss Account for year ended 31.3.20

` `
31.3.20 To Branch 1,18,200 31.3.20 By Branch stock 94,000
Expenses A/c
To Net Profit By Branch Stock 1,17,000
transferred to Adjustment
account
General P & L 93,800 By Bad debts 1,000
A/c recovered
2,12,000 2,12,000

Branch Stock Adjustment Account for year ended 31.3.20

` `
31.3.20 To Goods sent to 10,000 31.3.20 By Balance b/d 12,000
branch (72,000x1/6)
(60,000x1/6) -
returns
To Branch P & L 1,17,000 By Goods sent to 1,40,000
A/c branch
(8,40,000x1/6)
To Balance c/d 25,000
(1,50,000x1/6)
1,52,000 1,52,000
(b) Trading and Profit and Loss Account of M/s Rohan & Sons
` `
To Purchases 18,85,000 By Closing stock 4,15,000
To Gross Profit c/d 6,15,000 (Balancing Figure)
(25%)
28,75,000 28,75,000
To Depreciation 80,000 By Gross profit b/d 6,15,000
To Expenses (15% of 3,69,000 By Profit on sale of Fixed 2,000
` 24,60,000) assets
6,17,000 6,17,000
Balance Sheet of M/s Rohan Sons as on 31st March, 2020
Liabilities Assets `
Capital 12,50,000 Fixed assets (less Dep.) 6,66,000
Profit & Loss A/c 3,13,000 Stock 4,15,000
(1,45,000 + 1,68,000)
Trade Creditors 1,25,000 Debtors 3,85,000
_______ Cash and bank 2,22,000
16,88,000 16,88,000

Cash and Bank Account

To Bal. b/d 1,95,000 By Creditors (1,90,000 + 19,50,000
16,20,000 + 1,40,000)
To Debtors 24,40,000 By Expenses 3,69,000
(3,65,000 + 20,75,000)
To Fixed assets 56,000 By Fixed assets 1,50,000
By Bal. c/d 2,22,000
26,91,000 26,91,000
Fixed Assets Account
To Bal. b/d 6,50,000 By Cash 56,000
To Profit on sale of Fixed asset 2,000 By Depreciation on sold 6,000
fixed asset
By Depreciation 74,000
(59,000 + 15,000)
To Bank A/c 1,50,000 By Bal. c/d 6,66,000
8,02,000 8,02,000
Question 3
(a) On 1st April, 2019 Mr. H had 30,000 equity shares of ABC Ltd. at book value of ` 18 per
share (Nominal value 10 per share). On 10th June, 2019, H purchased another 10,000
equity shares of the ABC ltd. at ` 16 per share through a broker who charged 1.5%
brokerage.
The directors of ABC Ltd. announced a bonus and a right issue. The terms of the issues
were as follows:
(i) Bonus shares were declared at the rate of one equity share for every four shares
held on 15th July, 2019.
(ii) Right shares were to be issued to the existing equity shareholders on 31st August,
2019. The company decides to issue one right share for every five equity shares
held at 20% premium and the due date for payment will be 30th September, 2019.
Shareholders were entitled to transfer their rights in full or in part.
(iii) No dividend was payable on these issues.
Mr. H subscribed 60% of the rights entitlements and sold the remaining rights for
consideration of ` 5 per share.
Dividends for the year ending 31st March, 2019 was declared by ABC Ltd. at the rate of
20% and received by Mr. H on 31st October, 2019.

On 15th January, 2020 Mr. H sold half of his shareholdings at ` 17.50 per share and
brokerage was charged @1 %.
You are required to prepare Investment account in the books of Mr. H for the year ending
31st March, 2020, assuming the shares are valued at average cost.
(b) A Fire occurred in the premises of M/s B & Co. on 30th September, 2019. The firm had
taken an insurance policy for ` 1,20,000 which was subject to an average clause.
Following particulars were ascertained from the available records for the period from 1st
April, 2018 to 30th September, 2019:
Amount
(` )
Stock at cost on 1-04-2018 2,11,000
Stock at cost on 31-03-2019 2,52,000
Purchases during 2018-19 6,55,000
Wages during 2018-19 82,000
Sales during 2018-19 8,60,000
Purchases from 01-04-2019 to 30-09-2019 (including purchase of 4,48,000
machinery costing ` 58,000)
Wages from 01-04-2019 to 30-09-2019 (including wages for installation 85,000
of machinery costing ` 7,000)
Sales from 01-04-2019 to 30-09-2019 6,02,000
Sale value of goods drawn by partners (1-4-19 to 30-9-19) 52,000
Cost of Goods sent to consignee on 18 th September, 2019 lying unsold 44,800
with them
Cost of Goods distributed as free samples(1-4-19 to 30-9-19) 8,500
While valuing the Stock at 31st March, 2019, ` 8,000 were written off in respect of a slow
moving item, cost of which was ` 12,000. A portion of these goods was sold at a loss of
` 4,000 on the original cost of ` 9,000. The remainder of the stock is estimated to be
worth the original cost. The value of Goods salvaged was estimated at ` 35,000.
You are required to ascertain the amount of claim to be lodged with the Insurance
Company for the loss of stock. (10+10=20 Marks)

Answer
(a) In the books of Mr. H
Investment in equity shares of ABC Ltd. for the year ended 31 st March, 2020
` ` ` `
2019 To Balance b/d 30,000 - 5,40,000 2019 By Bank - 60,000 20,000
April 1 Oct. A/c
(W.N. 5)
June To Bank A/c 10,000 -- 1,62,400 20X2 By Bank 28,000 - 4,85,100
Jan. A/c
(W.N.4)
July To Bonus Issue 10,000 - - March By Balance 28,000 - 3,77,200
(W.N. 1) 31 c/d
(W.N. 6)
Sept. To Bank A/c 6,000 - 72,000
(W.N. 2)
2020 To P & L A/c - - 1,07,900
Jan. (W.N. 4)
March To P & L A/c - 60,000 -
31
56,000 60,000 8,82,300 56,000 60,000 8,82,300
Working Notes:
1. Calculation of no. of bonus shares issued
Bonus Shares = (30,000 + 10,000) divided by 4= 10,000 shares
2. Calculation of right shares subscribed
30,000 shares+10,000 shares+10,000 shares
Right Shares =
5
= 10,000 shares
Shares subscribed 10,000 x 60% = 6,000 shares
Value of right shares subscribed = 6,000 shares @ ` 12 per share = ` 72,000
3. Calculation of sale of right entitlement
Amount received from sale of rights will be 4,000 shares x ` 5 per share
= ` 20,000 and it will be credited to statement of profit and loss.
4. Calculation of profit/loss on sale of shares-
Total holding = 30,000 shares original
10,000 shares purchased
10,000 shares bonus

6,000 shares right shares

56,000
50% of the holdings were sold i.e. 28,000 shares (56,000 x1/2) were sold.
Cost of total holdings of 56,000 shares
= ` 5,40,000 + ` 1,62,400 + ` 72,000– ` 20,000 = ` 7,54,400
Average cost of shares sold would be:
= 7,54,400 × 28,000 = ` 3,77,200

56,000
`
Sale proceeds of 28,000 shares (28,000 x `17.50) 4,90,000
Less: 1% Brokerage (4,900)
4,85,100
Less: Cost of 28,000 shares sold (3,77,200)
Profit on sale 1,07,900
5. Dividend received on investment held as on 1 st April, 2019
= 30,000 shares x ` 10 x 20%
= ` 60,000 will be transferred to Profit and Loss A/c and
Dividend received on shares purchased on 10 th June, 2019
= 10,000 shares x ` 10 x 20% = `20,000 will be adjusted to Investment A/c
6. Calculation of closing value of shares (on average basis) as on 31st March, 2020
7,54,400
× 28,000 = ` 3,77,200
56,000
(b) Memorandum Trading Account
for the period 1st April, 2019 to 30th September, 2019
Normal Abnormal Total Normal Abnormal Total
Items Items Items Items
` ` ` ` ` `
To Opening 2,48,000 12,000 2,60,000 By Sales 5,97,000 5,000 6,02,000
stock
To 3,39,900 - 3,39,900 By Goods
Purchases sent to 44,800 - 44,800
(W.N. 2) consignee

To Wages 78,000 - 78,000 By Loss - 4,000 4,000

(85,000 –
7,000)
To Gross 1,19,400 - 1,19,400 By Closing 1,43,500 3,000 1,46,500
profit stock
@20% (Bal. fig.)
7,85,300 12,000 7,97,300 7,85,300 12,000 7,97,300
Statement of Claim for Loss of Stock

`
Book value of stock as on 30.9.2019 1,46,500
Less: Stock salvaged (35,000)
Amount of claim to be lodged with insurance company
Policy value
= Loss of stock x
Value of stock on the date of fire
= ` 1,11,500 x 1,20,000/1,46,500 = `91,331 (approx.)
Working Notes:
1. Rate of gross profit for the year ended 31 st March, 2019
Trading Account for the year ended 31 st March, 2019
` `
To Purchases 6,55,000 By Closing stock 2,52,000
Add: written off 8,000
To Wages 82,000 2,60,000
To Gross Profit (b.f.) 1,72,000
11,20,000 11,20,000
Rate of Gross Profit in 2018-19
Gross Profit
× 100
Sales
= 1,72,000 X 100 / 8,60,000 = 20%
2. Calculation of Adjusted Purchases
`
Purchases (4,48,000 – 58,000) 3,90,000

Less: Drawings [52,000 – (20 % of 52,000)] (41,600)

Free samples (8,500)
Adjusted purchases 3,39,900
Note: The answer has been given considering that the value of stock (at cost) on 31.3.19
amounting ` 2,52,000 is after adjustment of written off amount in respect of slow-moving
item.
Question 4
(a) The following figures have been extracted from the books of Manan Jo Limited for the
year ended on 31.3.2020. You are required to prepare the Cash Flow statement as per
AS 3 using indirect method.
(i) Net profit before taking into account income tax and income from law suits but after
taking into account the following items was ` 30 lakhs :
(a) Depreciation on Property, Plant & Equipment ` 7.50 lakhs.
(b) Discount on issue of Debentures written off ` 45,000.
(c) Interest on Debentures paid ` 5,25,000.
(d) Book value of investments ` 4.50 lakhs (Sale of Investments for ` 4,80,000).
(e) Interest received on investments ` 90,000.
(ii) Compensation received ` 1,35,000 by the company in a suit filed.
(iii) lncome tax paid during the year ` 15,75,000.
(iv) 22,500, 10% preference shares of ` 100 each were redeemed on 02-04-2019 at a
premium of 5%.
(v) Further the company issued 75,000 equity shares of ` 10 each at a premium of 20%
on 30.3.2020 (Out of 75,000 equity shares, 25,000 equity shares were issued to a
supplier of machinery)
(vi) Dividend for FY 2018-19 on preference shares were paid at the time of redemption.
(vii) Dividend on Equity shares paid on 31.01.2020 for the year 2018-2019 ` 7.50 lakhs
(including dividend distribution tax) and interim dividend paid ` 2.50 lakhs for the
year 2019-2020.
(viii) Land was purchased on 02.4.2019 for ` 3,00,000 for which the company issued
22,000 equity shares of ` 10 each at a premium of 20% to the land owner and
balance in cash as consideration.
(ix) Current assets and current liabilities in the beginning and at the end of the years
were as detailed below :

As on 01.04.2019 As on 31.3.2020
` `
Inventory 18,00,000 19,77,000
Trade receivables 3,87,000 3,79,650
Cash in hand 3,94,450 16,950
Trade payables 3,16,500 3,16,950
Outstanding expenses 1,12,500 1,22,700
(b) Sumit Ltd. (an unlisted company other than AIFI, Banking company, NBFC and HFC) had
8,000, 9% debentures of ` 100 each outstanding as on 1st April, 2019, redeemable on
31st March, 2020.
On 1st April, 2019, the following balances appeared in the books of accounts:
• Investment in 1,000, 7% secured Govt. bonds of ` 100 each, ` 1,00,000.
• Debenture Redemption Reserve is ` 50,000.
Interest on investments is received yearly at the end of financial year.
1,000 own debentures were purchased on 30 th March, 2020 at an average price of
` 96.50 and cancelled on the same date.
On 31st March, 2020, the investments were realized at par and the debentures were
redeemed. You are required to write up the following accounts for the year ended 31st
March, 2020.
(1) 9% Debentures Account.
(2) Debenture Redemption Reserve Account.
(3) DRR Investment Account.
(4) Own Debentures Account. (10+10=20 Marks)
Answer
(a) Manan Ltd.
Cash Flow Statement
` `
Cash flow from Operating Activities
Net profit before income tax and extraordinary items: 30,00,000
Adjustments for:
Depreciation on Property, plant and equipment 7,50,000

Discount on issue of debentures 45,000

Interest on debentures paid 5,25,000
Interest on investments received (90,000)
Profit on sale of investments (30,000) 12,00,000
Operating profit before working capital changes 42,00,000
Adjustments for:
Increase in inventory (1,77,000)
Decrease in trade receivable 7,350
Increase in trade payables 450
Increase in outstanding expenses 10,200 (1,59,000)
Cash generated from operations 40,41,000
Income tax paid (15,75,000)
Cash flow from ordinary items 24,66,000
Cash flow from extraordinary items:
Compensation received in a suit filed 1,35,000
Net cash flow from operating activities 26,01,000
Cash flow from Investing Activities;
Sale proceeds of investments 4,80,000
Interest received on investments 90,000
Purchase of land (3,00,000 less 2,64,000) (36,000)
Net cash flow from investing activities 5,34,000
Cash flow from Financing Activities
Proceeds of issue of equity shares at 20% premium 6,00,000
Redemption of preference shares at 5% premium (23,62,500)
Preference dividend paid (2,25,000)
Interest on debentures paid (5,25,000)
Dividend paid (7,50,000 + 2,50,000) (10,00,000)
Net cash used in financing activities (35,12,500)
Net decrease in cash and cash equivalents during the (3,77,500)
year
Add: Cash and cash equivalents as on 31.3.2019 3,94,450
Cash and cash equivalents as on 31.3.2020 16,950

(b) 9% Debentures Account

30th March, To Own 96,500 1 April, By Balance b/d
st 8,00,000
2020 Debentures A/c 2019
30thMarch, 2020 To Profit on
cancellation 3,500
31st March, To Bank A/c 7,00,000
2020
8,00,000 8,00,000
Debenture Redemption Reserve (DRR) Account
Date Particulars Date
` Particulars `
1st April, By Balance b/d 50,000
2019
31st March, To General 80,000 1st April, By Profit and loss A/c
2020 Reserve A/c 2019 [Refer Working Note 30,000
3]
80,000 80,000
Debenture Redemption Reserve Investments (DRRI) Account
Date Particulars Amount Date Particulars Amount
1st April To Balance b/d 1,00,000 31 March, By Bank A/c
st
15,000
2019 2020 (1,000 x 100 x 15%)
(Refer Working Note
2)
1st April To Bank A/c 20,000 31 March, By Bank A/c
st
1,05,000
2019 (Refer Working 1,20,000 2020 (Refer Working Note 1,20,000
Note 1) 2)
Own Debentures A/c

Date Particulars Amount Date Particulars Amount
30th March, To Bank 96,500 30th March, By 9% Debentures 96,500
2020 A/c* 2020
96,500 96,500
* interest not considered.

Working Notes:
1. Debenture Redemption Reserve Investment A/c
The company would be required to invest an amount equivalent to 15% of the value
of the debentures in specified investments which would be equivalent to:
= Total No of debentures X Face value per debenture X 15%
= 8,000 X 100 X 15% = `1,20,000/-
The company has already invested in specified investments i.e. 7% Govt bonds for
an amount of `1,00,000 as per the information given in the question. The balance
amount of `20,000 (i.e. ` 1,20,000 less ` 1,00,000) would be invested by the
company on 1 April 2019.
2. Redemption of Debenture Redemption Reserve Investments on 31.3.2020
Since the company purchased 1,000 own debentures on 31 March 2020, the
company would also realize the investments of 15% corresponding to these
debentures for which computation is as follows:
= No of own debentures to be bought X Face value per debenture X 15%
= 1,000 X 100 X 15% = ` 15,000/-
The remaining debentures i.e. total debentures less own debentures would be
redeemed on 31 March 2020 and hence the company would also realize the
balance investments of 15% corresponding to these debentures for which
computation is as follows:
= (Total no of debentures - No of own debentures) X Face value per debenture X
15% = (8,000 - 1,000) X 100 X 15% = `1,05,000/-
3. Debenture Redemption Reserve
The company would be required to transfer an amount equivalent to 10% of the
value of the debentures in Debentures Redemption Reserve Account. The value of
debentures is 8,00,000 thus 10% of it i.e. 80,000 should be there in DRR a/c. The
available balance in DRR a/c is only 50,000 therefore 30,000 (80,000 – 50,000)
additional amount will be transferred from General Reserve or Profit and loss A/c to
DRR A/c.
Question 5
(a) On 1st April, 2017, Mr. Nilesh acquired a Tractor on Hire purchase from Raj Ltd. The
terms of contract were as follows:
(i) The Cash price of the Tractor was ` 11,50,000.
(ii) ` 2,50,000 were to be paid as down payment on the date of purchase.

(iii) The Balance was to be paid in annual instalments of ` 3,00,000 plus interest at the
end of the year.
(iv) Interest chargeable on the outstanding balance was 8% p.a.
(v) Depreciation @ 10% p.a. is to be charged using straight line method.
Mr. Nilesh adopted the Interest Suspense method for recording his Hire purchase
transactions.
Prepare the Tractor account, Interest Suspense account and Raj Ltd.’s account in the
books of Mr. Nilesh for the period of hire purchase.
(b) The Books of Arpit Ltd. shows the following Balances as on 31st December, 2019:
Amount (` )
6,00,000 Equity shares of ` 10 each fully paid up 60,00,000
30,000, 10% Preference shares of ` 100 each, ` 80 paid up 24,00,000
Securities Premium 6,00,000
Capital Redemption Reserve 18,00,000
Under the terms of issue, the Preference Shares are redeemable on 31st March, 2020 at
a premium of 10%. In order to finance the redemption, the Board of Directors decided to
make a fresh issue of 1,50,000 Equity shares of ` 10 each at a premium of 20%, ` 2
being payable on application, ` 7 (including premium) on allotment and the balance on
1st January, 2021. The issue was fully subscribed and allotment made on 1st March,
2020. The money due on allotment was received by 20th March, 2020.
The preference shares were redeemed after fulfilling the necessary conditions of Section
55 of the Companies Act, 2013.
You are required to pass the necessary Journal Entries and also show how the relevant
items will appear in the Balance Sheet of the company after the redemption carried out
on 31st March, 2020. (8+12=20 Marks)
Answer
(a) Tractor Account
1.4.2017 To Raj 11,50,000 31.3.2018 By Dep. 1,15,000
_______ By Balance c/d 10,35,000
11,50,000 11,50,000
1.4.2018 To Balance b/d 10,35,000 31.3.2019 By Dep. 1,15,000

________ By Balance c/d 9,20,000

10,35,000 10,35,000
1.4.2019 To balance b/d 9,20,000 31.3.2020 By Dep. 1,15,000
_______ By Balance c/d 8,05,000
9,20,000 9,20,000
H.P. Interest Suspense Account
1.4.2017 To Raj Ltd. A/c 1,44,000 31.3.2018 By Interest A/c 72,000
(W.N.)
31.3.2018 By Balance c/d 72,000
1,44,000 1,44,000
1.4.2018 To Balance b/d 72,000 31.3.2019 By Interest A/c 48,000
31.3.2019 By Balance c/d 24,000
72,000 72,000
1.4.2019 To Balance b/d 24,000 31.3.2020 By Interest A/c 24,000
Total Interest = ` 72,000 + ` 48,000 + ` 24,000 = ` 1,44,000
Raj Ltd. Account
1.4.2017 To Bank A/c 2,50,000 1.4.2017 By Tractor A/c 11,50,000
31.3.2018 To Bank A/c 3,72,000 By H.P. Interest 1,44,000
Suspense A/c
12,94,000 12,94,000
31.3.2019 To Bank A/c 3,48,000 1.4.2018 By Balance b/d 6,72,000
To Balance c/d 3,24,000 _______
6,72,000 6,72,000
31.3.2020 To Bank A/c 3,24,000 1.4.2019 By Balance b/d 3,24,000
(b) Journal Entries
` `
1 10% Preference Share Final Call A/c Dr. 6,00,000
To 10% Preference Share Capital A/c 6,00,000
(For final call made on preference shares @ ` 20
each to make them fully paid up)

2 Bank A/c Dr. 6,00,000

To 10% Preference Share Final Call A/c 6,00,000
(For receipt of final call money on preference shares)
3 Bank A/c Dr. 3,00,000
To Equity Share Application A/c 3,00,000
(For receipt of application money on 1,50,000 equity
shares @ ` 2 per share)
4 Equity Share Application A/c Dr. 3,00,000
(For capitalization of application money received)
5 Equity Share Allotment A/c Dr. 10,50,000
To Securities Premium A/c 3,00,000
(For allotment money due on 1,50,000 equity shares
@ ` 7 per share including a premium of ` 2 per
share)
6 Bank A/c Dr. 10,50,000
To Equity Share Allotment A/c 10,50,000
(For receipt of allotment money on equity shares)
7 10% Preference Share Capital A/c Dr. 30,00,000
Premium on Redemption of Preference Shares A/c Dr. 3,00,000
(For amount payable to preference shareholders on
redemption at 10 % premium)
8 General Reserve A/c Dr. 3,00,000
To Premium on Redemption A/c 3,00,000
(Writing off premium on redemption of preference
shares)
9 General Reserve A/c Dr. 19,50,000
(For transfer of CRR the amount not covered by the
proceeds of fresh issue of equity shares i.e.,
30,00,000 - 3,00,000 - 7,50,000)
10 Preference Shareholders A/c Dr. 33,00,000

To Bank A/c 33,00,000

(For amount paid to preference shareholders)
Balance Sheet (extracts)
Particulars Notes As at As at
No. 31.3.2020 31.12.2019
` `
a) Share capital 1 70,50,000 84,00,000
b) Reserves and Surplus 2 59,00,000 59,00,000
Notes to Accounts:
As at As at
31.3.2020 31.12.2019
1. Share Capital
Issued, Subscribed and Paid up:
6,00,000 Equity shares of ` 10 each fully paid 60,00,000 60,00,000
up
1,50,000 Equity shares of ` 10 each ` 7 paid up 10,50,000 -
30,000, 10% Preference shares of ` 100 each, - 24,00,000
`80 paid up
70,50,000 84,00,000
Capital Redemption Reserve 37,50,000 18,00,000
Securities Premium 9,00,000 6,00,000
General Reserve 12,50,000 35,00,000
59,00,000 59,00,000
Note:
1. Securities premium has not been utilized for the purpose of premium payable on
redemption of preference shares assuming that the company referred in the question
is governed by Section 133 of the Companies Act, 2013 and comply with the
Accounting Standards prescribed for them.
2. Amount received (excluding premium) on fresh issue of shares till the date of
redemption should be considered for calculation of proceeds of fresh issue of
shares. Thus, proceeds of fresh issue of shares are `10,50,000 (`3,00,000

application money plus ` 7,50,000 received on allotment towards share capital) and
balance ` 19,50,000 to taken from general reserve account.
Question 6
(a) Department A sells goods to Department B at a profit of 20% on cost and to Department
C at 50% on cost. Department B sells goods to Department A and Department C at a
profit of 15% and 10% on sales respectively. Department C sells goods to Department A
and Department B at a profit of 10% and 5% on cost respectively.
Stock lying at different departments at the end of the year are as follows:
Department A Department B Department C
(` ) (` ) (` )
Transfer from Department A 1,14,000 60,000
Transfer from Department B 55,000 15,200
Transfer from Department C 52,800 1,11,300
Calculate Department wise unrealized profit on Stock.
(b) What are the qualitative characteristics of the Financial Statements which improve the
usefulness of the information furnished therein?
(c) Following is the draft Profit & Loss Account of X Ltd. for the year ended 31st March, 2020:
Amount Amount
(` ) (` )
To Administrative Expenses 5,96,400 By Balance b/d 7,25,300
To Advertisement Expenses 1,10,500 By Balance from Trading A/c 42,53,650
To Sales Commission 1,05,550 By Subsidies received from 3,50,000
Government
To Director's fees 1,48,900
To Interest on Debentures -56,000
To Managerial 3,05,580
Remuneration
To Depreciation on Fixed 5,78,530
Assets
To Provision for taxation 12,50,600
To General Reserve 5,50,000
To Investment Revaluation 25,800
Reserve


53,28,950 53,28,950
Depreciation on Fixed Assets as per Schedule II of the Companies Act, 2013 was
` 6,51,750. You are required to calculate the maximum limits of the managerial
remuneration as per Companies Act, 2013.
(d) Following is the Balance Sheet of M/s. S Traders as on 31st March, 2019:
Liabilities (` ) Assets (` )
Capital 1,50,000 Fixed Assets 1,05,000
11% Bank Loan 80,000 Closing stock 76,000
Trade payables 52,000 Debtors 68,000
Profit & Loss A/c 56,000 Deferred Expenditure 24,000
Cash & Bank 65,000
3,38,000 3,38,000
(i) Remaining life of Fixed Assets is 6 years with even use. The net realizable value of
Fixed Assets as on 31st March, 2020 is ` 90,000.
(ii) Firm's Sales & Purchases for the year ending 31st March, 2020 amounted to
` 7,80,000 and ` 6,25,000 respectively.
(iii) The cost & net realizable value of the stock as on 31 st March, 2020 was, ` 60,000
and ` 66,000 respectively.
(iv) General expenses (including interest on Loan) for the year 2019-20 were ` 53,800.
(v) Deferred expenditure is normally amortised equally over 5 years starting from the
Financial year 2018-19 i.e. ` 6,000 per year.
(vi) Debtors on 31st March, 2020 is ` 65,000 of which ` 5,000 is doubtful. Collection of
another ` 10,000 debtors depends on successful re-installation of certain products
supplied to the customer.
(vii) Closing Trade payable ` 48,000, which is likely to·be settled at 5% discount.
(viii) There is a prepayment penalty of ` 4,000 for Bank loan outstanding.
(ix) Cash & Bank balances as on 31st March, 2020 is ` 1,65,200.
Prepare Profit & Loss Account for the year ended 31st March, 2020 and Balance Sheet
as on 31st March, 2020 assuming the firm is not a going concern.

(e) Moon Ltd. was incorporated on 1st August, 2019 to take over the running business of a
partnership firm w.e.f. 1st April, 2019. The summarized Profit & Loss Account for the
year ended 31st March, 2020 is as under:
Amount
(` )
Gross Profit 6,30,000
Less: Salaries 1,56,000
Rent, Rates & Taxes 72,000
Commission on sales 40,600
Depreciation 60,000
Interest on Debentures 36,000
Director's fees 24,000
Advertisement 48,000 4,36,600
Net Profit for the year 1,93,400
Moon Ltd. initiated an advertising campaign which resulted in increase of monthly sales
by 25% post incorporation.
You are required to prepare a statement showing the profit for the year between pre-
incorporation and post-incorporation. Also, explain how these profits are to be treated in
the accounts? (4 Parts X 4 Marks = 16 Marks)
Answer
(a) Calculation of unrealized profit of each department
Dept. A Dept. B Dept. C Total
` ` ` `
Unrealized Profit
of:
Department A 1,14,000 x 60,000 x 50/150 39,000
20/120 = 19,000 = 20,000
Department B 55,000 x .15 15,200 x.10 9,770
= 8,250 = 1,520
Department C 52,800 x 10/110 1,11,300 x 5/105
= 4,800 5,300 10,100

(b) The qualitative characteristics are attributes that improve the usefulness of information
provided in financial statements. Financial statements are required to show a true and
fair view of the performance, financial position and cash flows of an enterprise. The
framework for Preparation and Presentation of Financial Statements suggests that the
financial statements should maintain the following four qualitative characteristics to
improve the usefulness of the information furnished therein.
1. Understandability: The financial statements should present information in a
manner as to be readily understandable by the users with reasonable knowledge of
business and economic activities and accounting.
2. Relevance: The financial statements should contain relevant information only.
Information, which is likely to influence the economic decisions by the users, is said
to be relevant. Such information may help the users to evaluate past, present or
future events or may help in confirming or correcting past evaluations. The
relevance of a piece of information should be judged by its materiality. A piece of
information is said to be material if its misstatement (i.e., omission or erroneous
statement) can influence economic decisions of a user.
3. Reliability: To be useful, the information must be reliable; that is to say, they must
be free from material error and bias. The information provided are not likely to be
reliable unless transactions and events reported are faithfully represented. The
reporting of transactions and events should be neutral, i.e. free from bias and be
reported on the principle of 'substance over form'. The information in financial
statements must be complete. Prudence should be exercised in reporting uncertain
outcome of transactions or events.
4. Comparability: Comparison of financial statements is one of the most frequently
used and most effective tools of financial analysis. The financial statements should
permit both inter-firm and intra-firm comparison. One essential requirement of
comparability is disclosure of financial effect of change in accounting policies.
(c) Calculation of net profit of X Ltd. as per the Companies Act, 2013
` `
Balance from Trading A/c 42,53,650
Add: Subsidies received from Government 3,50,000
46,03,650
Less: Administrative expenses 5,96,400
Advertisement expenses 1,10,500
Sales commission 1,05,550
Director’s fees 1,48,900

Interest on debentures 56,000

Depreciation on fixed assets as per Schedule II 6,51,750 (16,69,100)
Profit u/s 198 29,34,550
Maximum Managerial remuneration under Companies Act, 2013 = 11% of ` 29,34,550
= ` 3,22,800 (rounded off).
(d) Profit and Loss Account of M/s S Traders for the year ended 31 st March, 2020
(business is not a going concern)
` `
To Opening Stock 76,000 By Sales 7,80,000
To Purchases 6,25,000 By Trade payables 2,400
To General expenses 53,800 By Closing Stock 66,000
To Depreciation (1,05,000 less 15,000
90,000)
To Provision for doubtful debts 15,000
To Deferred expenditure 24,000
To Loan penalty 4,000
To Net Profit (b.f.) 35,600
8,48,400 8,48,400
Balance Sheet M/s S Traders as on 31st March, 2020
Liabilities and Capital ` Assets `
Capital 1,50,000 Fixed assets 90,000
Profit & Loss A/c Debtors
opening balance 56,000 (65,000 less provision 50,000
for doubtful debts
` 15,000)
Profit earned during the 35,600 91,600 Closing stock 66,000
year
11% Loan 84,000 Cash & Bank balance 1,65,200
Trade payables 45,600
3,71,200 3,71,200

(e) Statement showing the calculation of Profits for the pre-incorporation and post-
` ` `
Gross Profit (W.N.2) 6,30,000 2:5 (sales) 1,80,000 4,50,000
Less: Salaries 1,56,000 Time (52,000) (1,04,000)
Rent, rates and taxes 72,000 Time (24,000) (48,000)
Commission on sales 40,600 2:5 (sales) (11,600) (29,000)
Depreciation 60,000 Time (20,000) (40,000)
Interest on debentures 36,000 Post (36,000)
Directors’ fee 24,000 Post (24,000)
Advertisement 48,000 Post ( 48,000)
Net profit 72,400 1,21,000
Pre-incorporation profit will be transferred to Capital Reserve.
Post-incorporation profit will be transferred to Profit & Loss Account.
Working Notes:
1. Sales ratio
Let the monthly sales for first 4 months (i.e. from 1.4.2019 to 31.7.2019) be = x
Then, sales for 4 months = 4x
Monthly sales for next 8 months (1 st August, 2019 to 31st March, 2020)
= x + 25% of x= 1.25x Then, sales for next 8 months = 1.25x X 8 = 10x
Total sales for the year = 4x + 10x = 14x. Hence Sales Ratio = 4 x :10x i.e. 2:5
2. Time ratio
1st April, 2019 to 31st July, 2019 : 1st August, 2019 to 31st March, 2020
= 4 months: 8 months = 1:2. Thus, time ratio is 1:2.

candidates.
Question 1
(a) Darshan Ltd. purchased a Machinery on 1 st April, 2016 for ` 130 lakhs (Useful life is
4Years). Government grant received is ` 40 lakhs for the purchase of above Machinery.
Salvage value at the end of useful life is estimated at ` 60 lakhs.
Darshan Ltd. decides to treat the grant as deferred income.
Your are required to calculate the amount of depreciation and grant to be recognized in
profit & loss account for the year ending 31 st March, 2017,31 st March, 2018, 31 st March,
2019& 31st March, 2020.
Darshan Ltd. follows straight line method for charging depreciation.
(b) Kunal Securities Ltd. wants to reclassify its investments in accordance with AS -13
(Revised). State the values, at which the investments have to be reclassified in the
following cases:
(i) Long term investment in Company A, costing ` 10.5 lakhs is to be re-classified as
current investment. The company had reduced the value of these investments to
` 9 lakhs to recognize a permanent decline in value. The fair value on the date of
reclassification is ` 9.3 lakhs.
(ii) Long term investment in Company B, costing ` 14 lakhs is to be re-classified as
current investment The fair value on the date of reclassification is ` 16 lakhs and
book value is ` 14 lakhs.
(iii) Current investment in Company C, costing `12 lakhs is to be re-classified as long
term investment as the company wants to retain them. The market value on the
date of reclassification is ` 13.5 lakhs.
(iv) Current investment in Company D, costing ` 18 lakhs is to be re-classified as long
term investment. The market value on the date of reclassification is ` 16.5 lakhs.
(c) Mr. Jatin gives the following information relating to the items forming part of the inventory
as on 31.03.2019. His enterprise produces product P using Raw Material X.
(i) 900 units of Raw Material X (purchases @ ` 100 per unit). Replacement cost of
Raw Material X as on 3103.2019 is ` 80 per unit
2 INTERMEDIATE (NEW) EXAMINATION: JANUARY 2021
(ii) 400 units of partly finished goods in the process of producing P. Cost incurred till
date is ` 245 per unit. These units can be finished next year by incurring additional
cost of ` 50 per unit.
(iii) 800 units of Finished goods P and total cost incurred is ` 295 per unit.
Expected selling price of product P is `280 per unit, subject to a payment of 5%
brokerage on selling price.
Determine how each item of inventory will be valued as on 31.03.2019.
Also calculate the value of total Inventory as on 31.03.2019.
(b) Explain briefly the accounting treatment needed in the following cases as per AS 11 as
on 31.03.2020
(i) Debtors include amount due from Mr. S ` 9,00,000 recorded at the prevailing
exchange rate on the date of sales, transaction recorded at US $1 = ` 72.00
US $ 1=`73.50 on 31 st March,2020
US $ 1= ` 72.50 on 1 st April,2019.
(ii) Long term loan taken on 1st April, 2019 from a U.S. company amounting to
` 75,00,000. `5,00,000 was repaid on 31 st December, 2019, recorded at US $ 1 =
` 70.50. interest has been paid as and when debited by the US company.
US $1= ` 73.50 on 31 st March,2020
US $1=1` 72.50 on 1st April, 2019. (4 Parts X 5 Marks = 20 Marks)
Answer
(a) As per 12 “Accounting for government grants”, grants related to depreciable assets, if
treated as deferred income are recognized in the profit and loss statement on a
systematic and rational basis over the useful life of the asset.
Amount of depreciation and grant to be recognized in the profit and loss account
each year
Depreciation per year:
`in lakhs
Cost of the Asset 130
Less: Salvage value (60)
70
Depreciation per year(70lakhs/4) 17.50
` 17.50 Lakhs depreciation will be recognized for the year ending 31 st March, 2017, 31 st
March, 2018, 31 st March, 2019 and 31 st March, 2020.
Amount of grant recognized in Profit and Loss account each year:

40 lakhs /4 years = ` 10 Lakhs for the year ending 31st March, 2017, 31 st March, 2018,
31st March, 2019 and 31 st March, 2020.
(b) As per AS 13 (Revised) ‘Accounting for Investments’, where long-term investments are
reclassified as current investments, transfers are made at the lower of cost and carrying
amount at the date of transfer. And where investments are reclassified from current to
long term, transfers are made at lower of cost and fair value on the date of transfer.
Accordingly, the re-classification will be done on the following basis:
(i) In this case, carrying amount of investment on the date of transfer is less than the
cost; hence this re-classified current investment should be carried at ` 9 lakhs in
the books.
(ii) The carrying / book value of the long-term investment is same as cost i.e.,
` 14 lakhs. Hence this long-term investment will be reclassified as current
investment at book value of ` 14 lakhs only.
(iii) In this case, reclassification of current investment into long-term investments will be
made at ` 12 lakhs as cost are less than its market value of ` 13.5 lakhs.
(iv) Market value of the investment is ` 16.5 lakhs, which is lower than its cost i.e., ` 18
lakhs. Therefore, the transfer to long term investments should be done in the books
at the market value i.e., ` 16.5 lakhs.
(c) As per AS 2 (Revised) “Valuation of Inventories”, materials and other supplies held for
use in the production of inventories are not written down below cost if the finished
products in which they will be incorporated are expected to be sold at cost or above cost.
However, when there has been a decline in the price of materials and it is estimated that
the cost of the finished products will exceed net realizable value, the materials are written
down to net realizable value. In such circumstances, the replacement cost of the
materials may be the best available measure of their net realizable value. In the given
case, selling price of product P is ` 266 and total cost per unit for production is
` 295.
Hence the valuation will be done as under:
(i) 900 units of raw material X will be written down to replacement cost as market value
of finished product is less than its cost, hence valued at ` 80 per unit.
(ii) 400 units of partly finished goods will be valued at 216 per unit i.e., lower of cost
(` 245) or Net realizable value ` 216 (Estimated selling price ` 266 per unit less
additional cost of ` 50).
(iii) 800 units of finished product P will be valued at NRV of ` 266 per unit since it is
lower than cost ` 295.
Valuation of Total Inventory as on 31.03.2019:

Units Cost ( `) NRV/Repl Value = units x cost
acement or NRV whichever is
cost less ( `)
Raw material X 900 100 80 72,000
Partly finished goods 400 245 216 86,400
Finished goods P 800 295 266 2,12,800
Value of Inventory 3,71,200
(d) As per AS 11 “The Effects of Changes in Foreign Exchange Rates”, exchange
differences arising on the settlement of monetary items or on reporting an enterprise’s
monetary items at rates different from those at which they were initially recorded during
the period, or reported in previous financial statements, should be recognized as income
or as expenses in the period in which they arise.
However, at the option of an entity, exchange differences arising on reporting of long -
term foreign currency monetary items at rates different from those at which they were
initially recorded during the period, or reported in previous financial statements, in so far
as they relate to the acquisition of a non-depreciable capital asset can be accumulated in
a “Foreign Currency Monetary Item Translation Difference Account” in the enterprise’s
financial statements and amortized over the balance period of such long-term asset/
liability, by recognition as income or expense in each of such periods.
Foreign `
Currency Rate
Debtors
Initial recognition US $12,500 (9,00,000/72) 1 US $ = `72 9,00,000
Rate on Balance sheet date 1 US $ = ` 73.50
Exchange Difference Gain US $ 12,500 X (73.50- 18,750
72)
Treatment: Credit Profit and Loss A/c by ` 18,750
Long term Loan
Initial recognition US $ 1,03,448.28 1 US $ = ` 73.50 75,00,000
(75,00,000/72.50)
Rate on Balance sheet date 1 US $ = ` 73.50
Exchange Difference Loss after adjustment of
exchange gain on repayment of ` 5,00,000
` 67,987.48 [82,171.88 (US $ 96,356.08 X ` 73.5
less ` 70,00,000) less profit 14,184.40
[US $ 7,092.2 (5,00,000/70.5) X ` 2)] NET LOSS 67,987.48*

Treatment: Credit Loan A/c and
Debit FCMITD A/C or Profit and Loss A/c by
` 67,987.48
Thus, Exchange Difference on Long term loan amounting ` 67,987.48 may either be
charged to Profit and Loss A/c or to Foreign Currency Monetary Item Translation
Difference Account but exchange difference on debtors amounting ` 18,750 is required
to be transferred to Profit and Loss A/c.
NOTE 1: *Exchange Difference Loss (net of adjustment of exchange gain on repayment
of ` 5,00,000) has been calculated in the above solution. Alternative considering
otherwise also possible.
NOTE 2: Date of sales transaction of ` 9 lakhs has not been given in the question and
hence it has been assumed that the transaction took place during the year ended 31
March 2020.
Question 2
(a) XYZ Garage consists of 3 departments: Spares, Service and Repairs, each department
being managed by a departmental manager whose commission was respectively 5%,
10% and 10% of the respective departmental profit subject to a minimum of `5,000 in
each case.
Inter departmental transfers take place at a “loaded” price as follows:
From Spares to Service 5% above cost
From Spares to Repairs 10% above cost
From Spares to Service 10% above cost
In respect of the year ended March 31 st2019 the firm had already prepared and closed
the departmental trading and profit and loss account. Subsequently it was discovered
that the closing stocks of department had included inter-departmentally transferred goods
at “loaded” price instead of the correct cost price.
From the following information, you are required to prepare a statement re-computing the
departmental profit or loss:
Spares Service Repairs
` ` `
Final Net Profit/Loss (after 38,000 50,400 72,000
charging commission) (Loss) (Profit) (Profit)
Inter-departmental transfers 65,000 4,202
Included at “loaded” price in (21,000 from (from Spares)
the departmental stocks Spares and 44,000

from Repairs)
(b) Mr. Prakash furnishes following information for his readymade garments business:
(i) Receipts and Payments during 2019-20:
Receipts Amount ` Payments Amount `
Bank Balance as on Payment to Sundry
1-4-2019 16,250 Creditors 3,43,000
Received from Sundry Salaries 75,000
Debtors 4,81,000
General Expenses 22,500
Cash sales 1,70,800 Rent and Taxes 11,800
Capital brought in the Drawings 96,000
Business during the year 50,000
Cash Purchases 1,22,750
Interest on Investment Balance at Bank on
Received 9,750 31-03-2020 36,600
Cash in hand on
31-03-2020 20,150
7,27,800 7,27,800
(ii) Particulars of other Assets and Liabilities are as follows:
1st April, 2019 31st March, 2020
( `) ( `)
Machinery 85,000 85,000
Furniture 24,500 24,500
Trade Debtors 1,55,000 ?
Trade Creditors 60,200 ?
Stock 38,600 55,700
12% Investment 85,000 85,000
Outstanding Salaries 12,000 14,000
(iii) Additional information:
(1) 20% of Total sales and 20% of total purchases are in cash.
(2) Of the Debtors, a sum of ` 7,200 should be written off as Bad debt and further
a provision for doubtful debts is to be provided @2%.
(3) Provide depreciation @10% p.a. on Machinery and Furniture.

You are required to prepare Trading and Profit & Loss account for the year ended
31st March, 2020, and Balance Sheet as on that date. (10+10=20 Marks)
Answer
(a) Calculation of correct Departmental Profits or Losses
Department Department Department
Spares (`) Service (`) Repair (`)
Profit after charging Manager’s (38,000) 50,400 72,000
Commission
Add: Manager’s Commission (1/9) 5,000(Minimum) 5,600 8,000
(33,000) 56,000 80,000
Less: Unrealized profit on Stock (WN) (1,382) (4,000)
Profit Before Manager’s Commission (34,382) 56,000 76,000
Less: Manager’s Commission 10% (5,000) (5,600) (7,600)
Correct Profit after Manager’s (39,382) 50,400 68,400
Commission
Working Note:
Department Department Department Repair Total
Spares (`) Service (`) (`) (`)
Unrealized Profit of:
Department Spares 21,000X5/105 4202X10/110 = 382 1,382
= 1,000
Department Repair 44000X10/110 4,000
= 4000
(b) Trading and Profit & Loss Account for the year ended 31-03-2020
` ` `
To Opening Inventory 38,600 By Sales 8,54,000
To Purchases 6,13,750 By Closing Inventory 55,700
To Gross profit c/d (b.f.) 2,57,350
9,09,700 9,09,700
To Salaries 77,000 By Gross Profit b/d 2,57,350
(75,000+14,000-12,000)
To Rent 11,800 By Interest on 10,200
investment
To General expenses 22,500 (9,750+450)

To Depreciation:
Machinery @ 10% 8,500
Furniture @ 10% 2,450 10,950
To Bad Debts 7,200
To Provision for doubtful 7,000 14,200
debts
To Balance being profit
carried to Capital A/c 1,31,100
(b.f.)
2,67,550 2,67,550
Balance Sheet as on 31st March, 2020
A. Adamjee’s Capital Machinery 85,000
on 1st April, 2019 3,32,150 Less: Depreciation (8,500) 76,500
Add: Fresh Capital 50,000 Furniture 24,500
Add: Profit for the year 1,31,100 Less: Depreciation (2,450) 22,050
5,13,250
Less: Drawings (96,000) 4,17,250 Inventory-in-trade 55,700
Sundry debtors 3,57,200
Sundry creditors 2,08,200 Less: Provision for
Outstanding expenses 14,000 Doubtful debts (14,200) 3,43,000
Investment 85,450
(including accrued
interest ` 450)
Cash at bank 36,600
Cash in hand 20,150
6,39,450 6,39,450
Working Notes:
1. Balance sheet as on 1-4-2019
` `
Sundry creditors 60,200 Machinery 85,000
Capital 3,32,150 Furniture 24,500
(balancing figure) Inventory 38,600
Outstanding salaries 12,000 Sundry debtors 1,55,000

Investments 85,000
Bank balance (from Cash 16,250
statement)
4,04,350 4,04,350
2. Total Debtors Account
` `
1.4.19 To Balance b/d 1,55,000 31.3.20 By Cash 4,81,000
31.3.20 To Credit sales 6,83,200 31.3.20 By Bad debts 7,200
(1,70800/20x80) By Balance c/d 3,50,000
(Bal. Fig.)
8,38,200 8,38,200
3. Total Creditors Account
` `
31.3.20 To Cash 3,43,000 1.4.19 By Balance b/d 60,200
31.3.20 To Balance 2,08,200 31.3.20 By Credit Purchases 4,91,000
c/d (1,22,750/20x80)
(Bal. Fig.)
5,51,200 5,51,200
Question 3
(a) P Ltd. had 8,000 equity shares of K Ltd., at a book value of ` 15 per share (face value of
` 10 each) on 1 st April,2019. On 1 st September, 2019, P Ltd. acquired another 2,000
equity shares of K Ltd. at a premium of ` 4 per share. K Ltd. announced a bonus and
right issue for existing shareholders.
The term of bonus and right issue were:
(i) Bonus was declared at the rate for two equity shares for every five shares held on
30th September, 2019.
(ii) Right shares are to be issued to the existing shareholders on 1 st December, 219.
The Company had issued two right shares for every seven shares held at 25%
premium on face value. No dividend was payable on these shares. The whole sum
being payable by 31 st December, 2019.
(iii) Existing shareholders were entitled to transfer their right to outsiders either wholly
or in part.
(iv) P Ltd. exercised its option under the issue for 50% of its entitlements and sold the
remaining rights for `8 per share.
(v) Dividend for the year ended 31 st March,2019 at the rate of 20% was declared by K
Ltd. and received by P Ltd. on 20 th January, 2020.
(vi) On 1st February, 2020, P Ltd. sold half of its shareholdings at a premium of ` 4 per
share.
(vii) The market price of share on 31 st March,2020 was `13 per share.
You are required to prepare the Investment account of P Ltd. for the year ended
31st March,2020 and determine the value of shares held on that date, assuming the
investment as current investment. Consider average cost basis for ascertainment for
cost for equity shares sold. (10 Marks)
(b) A Fire occurred in the premises of M/S MJ & Co., on 31 st December, 2019. From the
following particulars related to the period from 1st April 2019 to 31 st December 2019, you
are required to ascertain the amount of claim to be filed with the insurance policy for
` 1,00,000 which is subject to average clause. The value of goods salvaged was
estimated at ` 31,000. The average rate of gross profit was 20% throughout the period:
(i) Opening stock as on 1 st April,2019 1,50,000
(ii) Purchases during the year 4,20,000
(iii) Goods withdrawn by the proprietor for his self-use at Sales 10,000
Value
(iv) Goods distributed as charity at cost 4,000
(v) Purchases include ` 5,000 of Tools purchased, these tools
should have been capitalized.
(vi) Wages (include wages paid for the installation of machinery 90,000
`6,000)
(vii) Sales during the year 6,10,000
(viii) Cost of goods sent to consignee on 1 st November,2019, lying 25,000
unsold with the consignee.
(ix) Sales Return 10,000
(10 Marks)
Answer
(a) Investment Account-Equity Shares in K Ltd.
Date No. of Dividend Amount Date No. of Dividend Amount
shares shares
` ` ` `
1.4.19 To Bal.b/d 8,000 - 1,20,000 20.1.20 By Bank 16,000 4,000
(dividend)
[8,000 x 10
x 20%] and
[2,000 x 10
x 20%]
1.9.19 To Bank 2,000 - 28,000 1.2.20 By Bank 8,000 1,12,000
30.9.19 To Bonus 4,000 —
Issue
31.12.19 To Bank 2,000 - 25,000 31.3.20 By Balance 8,000 84,500
(Right) c/d (W.N. 3)
(W.N.1)
20.1.20 To Profit & 16,000
Loss A/c
(Dividend
income)
1.2.20 To P& L 27,500
A/c (profit
on sale)
16,000 16,000 2,00,500 16,000 16,000 2,00,500
Working Notes:
1. Right shares
No. of right shares issued = (8,000 + 2,000 + 4,000)/ 7 X 2= 4,000
No. of right shares subscribed = 4,000 x 50% = 2,000 shares
Value of right shares issued = 2,000 x `12.50 = ` 25,000
No. of right shares sold = 2,000 shares
Sale of right shares = 2,000 x ` 8 = ` 16,000 to be credited to statement of profit
and loss
2. Cost of shares sold — Amount paid for 16,000 shares
`
(`1,20,000 + ` 28,000 + ` 25,000) 1,73,000
Less: Dividend on shares purchased on Sept.1 (since the dividend (4,000)
pertains to the year ended 31st March, 2019, i.e., the pre-acquisition
period)
Cost of 16,000 shares 1,69,000
Cost of 8,000 shares (Average cost basis) 84,500
Sale proceeds (8,000 X `14) 1,12,000
Profit on sale 27,500
3. Value of investment at the end of the year
Assuming investment as current investment, closing balance will be valued based
on lower of cost or net realizable value.
Here, Net realizable value is `13 per share i.e., 8,000 shares x ` 13 =
` 1,04,000 and cost = 84,500. Therefore, value of investment at the end of the year
will be ` 84,500.
(b) Memorandum Trading Account for the period 1st April, 2019 to 31 st Dec 2019
` `
(6,10,000 - 10,000)
To Purchases 4,20,000 By Consignment stock 25,000
Less: Tools purchased (5,000) By Closing Stock (Bal. 1,32,000
fig.)
Goods distributed as (4,000)
Charity
Cost of goods taken
by proprietor (8,000)
4,03,000
To Wages 84,000
(90,000 – 6,000)
To Gross Profit 1,20,000
[20% of Sales)
7,57,000 7,57,000
stock since the goods were physically not with the concern and, hence, there was no loss
of such stock.
Statement of Insurance Claim
`
Value of stock destroyed by fire 1,32,000
Less: Salvaged Stock (31,000)
Note:
Since policy amount is less than value of stock on date of fire, average clause will apply.
Therefore, claim amount will be computed by applying the formula:
Insured value
Claim = ×Loss suffered
Total cost
Claim amount = ` 1,01,000/1,32,000X1,00,000 = ` 76,515 (Rounded off)
NOTE: The average rate of 20% has been given in the question. In the above solution,
Gross Profit is calculated @ 20% on sales. Alternative answer considering Gross Profit of
20% is also possible.
Question 4
(a) During the year 2019-2020, A Limited (a listed company) made a public issue in respect
of which the following information is available:
(i) No. of partly convertible debentures issued-1,00,000; face value and issue price
`100 per debenture. (Whole issue was underwritten by X Ltd.)
(ii) Convertible portion per debenture -60%, date of conversion -on expiry of 6 months
from the date of closing of issue.
(iii) Date of closure of subscription lists -1st May,2019, date of allotment – 1st June,
2019, rate of interest on debenture -15% p.a. payable from the date of allotment,
value of equity share for the purpose of conversion – `60 (face value `10)
(iv) Underwriting Commission –2%
(v) No. of debentures applied for by public –80,000
(vi) Interest is payable on debentures half yearly on 30 th September and 31st March
each year.
Pass relevant journal entries for all transactions arising out of the above during the year
ended 31st March,2020. (including cash and bank entries) (8 Marks)
(b) Following information was extracted from the books of S Ltd. for the year ended
31st March,2020 :
(1) Net profit before talking into account income tax and after talking into account the
following items was `30 lakhs;
(i) Depreciation on Property, Plant & Equipment `7,00,000
(ii) Discount on issue of debentures written off `45,000.
(iii) Interest on debentures paid `4,35,000
(iv) Investment of Book value `3,50,000 sold for `3,75,000.
(v) Interest received on Investments `70,000
(2) Income tax paid during the year ` 12,80,000
(3) Company issued 60,000 Equity Shares of `10 each at a premium of 20% on
10th April,2019.
(4) 20,000,9% Preference Shares of `100 each were redeemed on 31 st March, 2020 at
a premium of 5%
(5) Dividend paid during the year amounted to `11 Lakhs (including dividend
distribution tax)
(6) A new Plant costing `7 Lakhs was purchased in part exchange of an old plant on 1 st
January,2020. The book value of the old plant was `8 Lakhs but the vendor took
over the old plant at a value of `6 Lakhs only. The balance amount was paid to
vendor through cheque on 30 th March,2020.
(7) Company decided to value inventory at cost, whereas previously the practice was to
value inventory at cost less 10%. The inventory according to books on 31.03.2020
was ` 14,76,000.
The inventory on 31.03.2019 was correctly valued at ` 13,50,000.
(8) Current Assets and Current Liabilities in the beginning and at the end of year
2019-2020 were as:
As on 1st April,2019 As on 31st March,2020
(` ) (` )
Inventory 13,50,000 14,76,000
Trade Receivables 3,27,000 3,13,200
Cash &Bank Balances 2,40,700 3,70,500
Trade Payables 2,84,700 2,87,300
Outstanding Expenses 97,000 1,01,400
You are required to prepare a Cash Flow Statement for the year ended 31 st March, 2020
as per AS 3 (revised) using the indirect method. (12 Marks)
Answer
(a) Journal Entries in the books of A Ltd.
Date Particulars Amount Dr. Amount Cr.
` `
1.5.2019 Bank A/c Dr. 80,00,000
To Debenture Application A/c 80,00,000
(Application money received on 80,000
debentures @ `100 each)
1.6.2019 Debenture Application A/c Dr. 80,00,000
Underwriters A/c Dr. 20,00,000
To 15% Debentures A/c 1,00,00,000
(Allotment of 80,000 debentures to
applicants and 20,000 debentures to
underwriters)
Underwriting Commission Dr. 2,00,000

To Underwriters A/c 2,00,000
(Commission payable to underwriters
@ 2% on ` 1,00,00,000)
Bank A/c Dr. 18,00,000
(Amount received from underwriters in
settlement of account)
01.06.2019 Debenture Redemption Investment A/c Dr. 6,00,000
To Bank A/c
(100,000 X 100 x 15% X 40%) 6,00,000
(Being Investments made for
redemption purpose)
30.9.2019 Debenture Interest A/c Dr. 5,00,000
(Interest paid on debentures for 4
months @ 15% on ` 1,00,00,000)
31.10.2019 15% Debentures A/c Dr. 60,00,000
To Securities Premium A/c 50,00,000
(Conversion of 60% of debentures into
shares of ` 60 each with a face value
of ` 10)
(Interest paid on debentures for the
half year)
(Refer working note below)
Working Note:
Calculation of Debenture Interest for the half year ended 31st March, 2020
On ` 40,00,000 for 6 months @ 15% = `3,00,000
On ` 60,00,000 for 1 months @ 15% = ` 75,000
`3,75,000
(b) S Ltd.
Cash Flow Statement for the year ended 31st March, 2020
` `
Cash flows from operating activities
Net profit before taxation* 30,00,000
Adjustments for:
Depreciation on PPE 7,00,000
Discount on debentures 45,000
Profit on sale of investments (25,000)
Interest income on investments (70,000)
Interest on debentures 4,35,000
Stock adjustment 1,64,000
{14,76,000 less 16,40,000(14,76,000/90X100)}
Operating profit before working capital changes 12,49,000
Changes in working capital 42,49,000
(Excluding cash and bank balance):
Less: Increase in inventory (2,90,000)
{16,40,000(14,76,000/90X100) less 13,50,000}
Add: Decrease in Trade receivables 13,800
Increase in trade payables 2,600
Increase in o/s expenses 4,400 (2,69,200)
Cash generated from operations 39,79,800
Less: Income taxes paid (12,80,000)
Net cash generated from operating activities 26,99,800
Cash flows from investing activities
Sale of investments 3,75,000
Interest received 70,000
Payments for purchase of fixed assets (1,00,000)
(7,00,000 – 6,00,000)
Net cash used in investing activities 3,45,000
Cash flows from financing activities
Redemption of Preference shares (21,00,000)
Issue of shares 7,20,000

Interest paid (4,35,000)
Dividend paid (11,00,000)
Net cash used in financing activities (29,15,000)
Net increase in cash 1,29,800
Cash at beginning of the period 2,40,700
Cash at end of the period 3,70,500
*Net profit given in the question is after considering only the items listed as information
point (1) of the question ; hence amount of loss on plant not added back.
Question 5
(a) The Capital structure of a company BK Ltd., consists of 30,000 Equity Shares of ` 10
each fully paid up and 2,000 9% Redeemable Preference Shares of ` 100 each fully paid
up as on 31.03.2020. the other particulars as at 31.03.2020 are as follows:
Amount (`)
Profit &Loss Account 60,000
Investment Allowance Reserve (not free for distribution as 15,000
dividend)
Preference Shares are to be redeemed at a premium of 10%. For the purpose of

redemption, the directors are empowered to make fresh issue of Equity Shares at per
after utilizing the undistributed reserve &surplus, subject to the conditions that a sum of
` 40,000 shall be retained in General Reserve and which should not be utilized.
Company also sold investment of 4500 Equity Shares in G Ltd., costing `45,000 at ` 9
per share. (12 Marks)
Pass Journal entries to give effect to the above arrangements and also show how the
relevant items will appear in the Balance Sheet as at 31.03.2020 of BK Ltd., afte r the
redemption is carried out.
(b) Jai Ltd purchased a machine on hire purchase basis from KM Ltd. on the following terms:
(a) Cash price ` 1,20,000.
(b) Down payment at the time of signing the agreement on 1-1-2016, ` 32,433.
(c) 5 annual instalments of `23,100, the first to commence at the end of twelve months
from the date of down payment.
(d) Rate of interest is 10% p.a.

Your are required to calculate the total interest and interest included in each instalment.
Also prepare the Ledger Account of KM Ltd. in the books of Jai Ltd. (8 Marks)
Answer
(a) Journal Entries
Date Particulars Dr. (`) Cr. (`)
Bank A/c Dr. 84,500
To Equity Share Capital A/c 84,500
(Being the issue of 8,450 Equity Shares of
` 10 each as per Board’s Resolution
No…..dated…….)
9% Redeemable Preference Share Capital A/c Dr. 2,00,000
Premium on Redemption of Preference Shares A/c Dr. 20,000
(Being the amount paid on redemption transferred to
Preference Shareholders Account)
Bank A/c Dr. 40,500
Profit and Loss A/c (loss on sale) A/c Dr. 4,500
To Investment A/c 45,000
(Being investment sold at loss of ` 4,500)
Preference Shareholders A/c Dr. 2,20,000
(Being the amount paid on redemption of
preference shares)
To Premium on Redemption of 20,000
Preference Shares A/c
(Being the premium payable on redemption is
adjusted against Profit & Loss Account)
General Reserve A/c Dr. 80,000
(Being the amount transferred to Capital
Redemption Reserve Account)
Balance Sheet as on ………[Extracts]

Particulars Notes `
No.
b Reserves and Surplus 2 1,70,500
ASSETS
2. Current Assets
Cash and cash equivalents 1,00,000
(1,95,000 + 84,500+ 40,500 – 2,20,000)
Notes to accounts
1. Share Capital
38,450 Equity shares (30,000 + 8,450) of `10 each fully paid up 3,84,500
General Reserve 40,000
Profit and loss account NIL
Investment Allowance Reserve 15,000
1,70,500
Working Note:
Number of Shares to be issued for redemption of Preference Shares:
Face value of shares redeemed `2,00,000
Less: Profit available for distribution as dividend:
General Reserve: ` (1,20,000-40,000) `80,000
Profit and Loss (60,000 less 20,000 set aside for
adjusting premium payable on redemption of Pref.
shares less 4,500 loss on sale of investments) `35,500
` (1,15,500)
` 84,500
Therefore, No. of shares to be issued = 84,500/`10 = 8,450 shares.
(b) Calculation of interest

Total Interest in each Cash price in
(`) instalment each instalment
(1) (2)
Cash Price 1,20,000
Less: Down Payment (32,433) Nil ` 32,433
Balance due after down payment 87,567
Interest/Cash Price of 1st - ` 87,567x10/100 ` 23,100 –
instalment = ` 8,757 =
8,757 ` 14,343
Less: Cash price of 1st instalment (14,343)
Balance due after 1st instalment 73,224
Interest/cash price of 2 nd instalment - ` 73,224x 10/100 ` 23,100 -
= ` 7,322=
` 7322 ` 15,778
Less: Cash price of 2nd instalment (15,778)
Balance due after 2nd instalment 57,446
Interest/Cash price of 3rd instalment - ` 57,446 x 10/100 ` 23,100 -
= ` 5745=
` 5745 ` 17,355
Less: Cash price of 3rd instalment (17,355)
Balance due after 3rd instalment 40,091
Interest/Cash price of 4th instalment - ` 40,091x10/100= ` 23,100 -
` 4,009 ` 4,009=
` 19,091
Less: Cash price of 4th instalment (19,091)
Balance due after 4th instalment 21,000
Interest/Cash price of 5th instalment - `21,000 x10/100 ` 23,100 –
= ` 2,100 ` 2,100= 21,000
Less: Cash price of 5th instalment (21,000)
Total Nil ` 27,933 `1,20,000
Total interest can also be calculated as follow:
(Down payment + instalments) – Cash Price = ` [32,433 +(23,100 x 5)] – `1,20,000 =
` 27,933
KM Ltd. Account in the books of Jai Ltd
1.1. 2016 To Bank A/c 32,433 1.1.2016 By Machine A/c 1,20,000
31.12.2016 To Bank A/c 23,100 31.12.2016 By Interest A/c 8,757

31.12.2016 To Balance c/d 73,224
1,28,757 1,28,757
31.12.2017 To Bank A/c 23,100 1.1.2017 By Balance b/d 73,224
31.12.2017 To Balance c/d 57,446 31.12.2017 By Interest A/c 7,322
80,546 80,546
63,191 63,191
44,100 44,100
____ 31.12.2020 By Interest A/c 2,100
23,100 23,100
Question 6
(a) Explain how financial capital is maintained at historical cost?
Kishore started a business on 1st April, 2019 with ` 15,00,000 represented by 75,000
units of `20 each. During the financial year ending on 31 st March, 2020, he sold the
entire stock for ` 30 each. In order to maintain the capital intact, calculate the maximum
amount, which can be withdrawn by Kishore in the year 2019-20 if Financial Capital is
maintained at historical cost.
(b) The following is the Draft Profit & Loss A/c of Brown Ltd. the year ended
31st March,2020:
Amount Amount
(` ) (` )
To Administrative expenses 4,99,200 By Balance b/d 6,27,550

To Advertisement 1,18,200 By Balance from
To Commission on sales 95,225 Trading A/c 38,15,890
To Director’s Fees 1,35,940 By Subsidies
To Interest on debentures 28,460 received from Govt. 2,50,000
To Managerial remuneration 2,75,550 By Profit on sale of 20,000
forfeited shares
To Depreciation on fixed assets 4,82,565
To Provision for Taxation 11,50,200

To General Reserve 4,50,000
To Investment Revaluation Reserve 52,800
47,13,440 47,13,440
Depreciation on fixed assets as per Schedule II of the Companies Act, 2013 was
` 5,15,675. You are required to calculate the maximum limit of managerial remuneration
as per Companies Act, 2013.
(c) Give Journal Entries in the books of Branch to rectify or adjust the following:
(1) Branch paid ` 5,000 as salary to H.O supervisor, but the amount paid by branch
has been debited to salary account in the books of branch.
(2) Asset Purchased by branch for ` 25,000, but the Asset account was retained in H.O
Books.
(3) A remittance of `8,000 sent by the branch has not been received by H.O.
(4) H.O collected ` 25,000 directly from the customer of Branch but fails to give the
intimation to branch.
(5) Remittance of funds by H.O to branch `5,000 not entered in branch books.
(d) List the Criteria for classification of non-corporate entities as level I Entities for the
purpose of application of Accounting Standards as per the Institute of Chartered
Accountants of India.
(e) Following items appear in the Trail Balance of Star Ltd. as on 31 st March, 2019:
Particulars `
80,000 Equity shares of `10 each, ` 8 paid-up 6,40,000
Capital Reserve (including `45,000 being profit on sale of Machinery) 1,10,000
Revaluation Reserve 80,000
Capital Redemption Reserve 75,000
Securities Premium 60,000
Profit & Loss Account (Cr. Balance) 1,00,000
On 1st April,2019, the Company has made final call on Equity shares @` 2 per share.
The entire money was received in the month of April, 2019.
On 1st June, 2019, the Company decided to issue to Equity shareholders bonus shares at
the rate of 2 shares for every 5 shares held and for this purpose, it was decided that
there should be minimum reduction in free reserves.
Pass necessary journal entries in the Books of Star Ltd. (4 Parts x 5 Marks = 20 Marks)
Answer
(a) Financial capital maintenance at historical cost: Under this convention, opening and
closing assets are stated at respective historical costs to ascertain opening and closing
equity. If retained profit is greater than or equals to zero, the capital is said to be
maintained at historical costs. This means the business will have enough funds to
replace its assets at historical costs. This is quite right as long as prices do not rise.
Maximum amount withdrawn by Kishore in year 2019-20 if Financial capital is maintained
at historical cost
Particulars Financial Capital Maintenance at
Historical Cost (`)
Closing equity (` 30 x 75,000 units) 22,50,000 represented by cash
Opening equity 75,000 units x ` 20 = 15,00,000
Permissible drawings to keep Capital 7,50,000 (22,50,000 – 15,00,000)
intact
Thus ` 7,50,000 is the maximum amount that can be withdrawn by Kishore in year
2019-20 if Financial capital is maintained at historical cost.
(b) Calculation of net profit u/s 198 of the Companies Act, 2013
` `
Balance from Trading A/c 38,15,890
Add: Subsidies received from Government 2,50,000
40,65,890
Less: Administrative, selling and distribution expenses 7,12,625
(4,99,200 + 1,18,200 + 95,225)
Director’s fees 1,35,940
Interest on debentures 28,460
Depreciation on fixed assets as per Schedule II 5,15,675 (13,92,700)
Profit u/s 198 26,73,190
Maximum Managerial remuneration under Companies Act, 2013= 11% of ` 26,73,190
= ` 2,94,051 (rounded off).
Note:
1. Investment Revaluation reserve not to be deducted for calculation of profit under
section 198;
2. Profit on sale of forfeited shares not to added for calculation of profit under section
198.
*Alternative presentation of the above answer also possible by starting from Net
profit as per Profit and Loss Account.
(c) Journal Entries in Books of Branch A
Particulars Dr. Cr.
Amount Amount
` `
(i) Head office account Dr. 5,000
To Salaries account 5,000
(Being the rectification of salary paid on behalf
of H.O.)
(ii) Head office account Dr. 25,000
To Bank / Liability A/c 25,000
(Being Asset purchased by branch but Asset
account retained at head office books)
(iii) No Entry in Branch Books
(iv) Head office account Dr. 25,000
To Debtors account 25,000
(Being the amount of branch debtors collected
by H.O.)
(v) Bank A/c Dr. 5,000
To Head Office 5,000
(Remittance of Funds by H.O. to Branch)
(d) Criteria for classification of non-corporate entities as level 1 entities for purpose of
application of Accounting Standards decided by the Institute of Chartered Accountants of
India is given below:
Non-corporate entities which fall in any one or more of the following categories, at the
end of the relevant accounting period, are classified as Level I entities:
(i) Entities whose equity or debt securities are listed or are in the process of listing on
any stock exchange, whether in India or outside India.
(ii) Banks (including co-operative banks), financial institutions or entities carrying on
insurance business.
(iii) All commercial, industrial and business reporting entities, whose turnover (excluding
other income) exceeds rupees fifty crore in the immediately preceding accounting
year.
(iv) All commercial, industrial and business reporting entities having borrowings
(including public deposits) in excess of rupees ten crore at any time during the
immediately preceding accounting year.
(v) Holding and subsidiary entities of any one of the above.
(e) Journal Entries in the books of Star Ltd.
2019 Dr. Cr.
` `
April 1 Equity Share Final Call A/c Dr. 1,60,000
(Final call of ` 2 per share on 80,000
equity shares made due)
Bank A/c Dr. 1,60,000
(Final call money on 80,000 equity
shares received)
June 1 Capital Redemption Reserve A/c Dr. 75,000
Capital Reserve Dr. 45,000*
General Reserve A/c (b.f.) Dr. 1,40,000**
To Bonus to Shareholders A/c 3,20,000
(Bonus issue of two shares for every
five shares held, by utilizing various
reserves as per Board’s resolution
dated…….)
Bonus to Shareholders A/c Dr. 3,20,000
(Capitalization of profit)
* considering it as free reserve as it has been realized.
** Alternatively, different combination of profit and loss balance and general reserve
may also be used.
candidates.
Question 1
Answer the following questions:
(a) Joy Ltd. purchased 20,000 kilograms of Raw Material @ ` 20 per kilogram during the year
2020-21. They have furnished you with the following further information for the year ended
31st March, 2021:
Particulars Units Amount (`)
Opening Inventory:
Finished Goods 2,000 1,00,000
Raw Materials 2,200 44,000
Direct Labour 3,06,000
Fixed Overheads 3,00,000
Sales 20,000 11,20,000
Closing Inventory:
Finished Goods 2,400
Raw Materials 1,800
The plant has a capacity to produce 30,000 Units of finished product per annum.
However, the actual production of finished products during the year 2020-21 was 20,400
Units. Due to a fall in the market demand, the price of the finished goods in which the
raw material has been utilized is expected to be sold @ ` 40 per unit. The replacement
cost of the raw material was ` 19 per kilogram.
You are required to ascertain the value of closing inventory as at 31st March, 2021 as per
AS 2.
(b) (i) A Limited has contracted with a supplier to purchase machinery which is to be
installed at its new plant in four months' time. Special foundations were required for
the machinery which were to be prepared within this supply lead time. The cost of
the site preparation and laying foundations were ` 2,10,000. These activities were
supervised by an Architect during the entire period, who is employed for this purpose
at a salary of ` 35,000 per month. The machinery was purchased for ` 1,27,50,000

2 INTERMEDIATE (NEW) EXAMINATION: JULY, 2021
and a sum of ` 2,12,500 was incurred towards transportation charges to bring the
machinery to the plant site. An Engineer was appointed at a fees of ` 37,500 to
supervise the installation of the machinery at the plant site. You are required to
ascertain the amount at which the machinery should be capitalized in the books of A
Limited.
(ii) B Limited, which operates a major chain of retail stores, has acquired a new store
location. The new location requires substantial renovation expenditure. Management
expects that the renovation will last for 4 months during which the store will be closed.
Management has prepared the budget for this period including expenditure related to
construction and re-modelling costs, salary of staff who shall be preparing the store
before its opening and related utilities cost. How would such expenditure be treated
in the books of B Limited ?
(c) Alps Limited has received the following Grants from the Government during the year ended
31st March, 2021:
(i) ` 120 Lacs received as Subsidy from the Central Government for setting up an
Industrial undertaking in Medak, a notified backward area.
(ii) ` 15 Lacs Grant received from the Central Government on installation of Effluent
Treatment Plant.
(iii) ` 25 Lacs received from State Government for providing Medical facilities to its
workmen during the pandemic.
Advise Alps Limited on the treatment of the above Grants in its books of Account in
accordance with AS-12 "Government Grants".
(d) Prepare cash flow statement of Gama Limited for the year ended 31st March, 2021 in
accordance with AS-3(Revised) from the following cash account summary :
Cash summary Account
Inflows ` ('000) Outflows ` ('000)
Opening Balance 945 Payment to suppliers 54,918
Receipts from Customers 74,682 Purchase of Investments 351
Sale of Investments (Cost 459 Property, plant and 6,210
` 4,05,000) equipment acquired
Issue of Shares 8,100 Wages and salaries 1,863
Sale of Property, Plant and 3,456 Payment of Overheads 3,105
equipment
Taxation 6,561
Dividends 2,160

Repayment of Bank 6,750

Overdraft
Interest paid on Bank 1,350
Overdraft
Closing Balance 4,374
87,642 87,642
Answer
(a) Statement Showing the Computation of Value of Closing Inventory
Value of Closing Finished Goods
Cost of Raw Material consumed (20,400 units X ` 20 per kg) 4,08,000
Direct Labour 3,06,000
Fixed Overheads (3,00,000/30,000 x 20,400) 2,04,000
Cost of Production 9,18,000
Cost of Closing Inventory of Finished Goods per unit 45
(` 9,18,000/20,400)
Net Realizable Value (NRV) per unit 40
Since net realizable value is less than cost, closing inventory of Finished Goods will be
valued at ` 40 per unit
Value of Closing Raw Materials
As NRV of finished goods is less than its cost, the relevant raw material will be valued at
its replacement cost, which is the best available measure of its NRV i.e. @ ` 19 per kg.
Therefore, value of closing inventory would be as under:
Finished Goods 2,400 units @ ` 40/- per unit ` 96,000
Raw Materials 1,800 kg @ ` 19/- per kg ` 34,200
Total ` 1,30,200
Working Note:
Calculation of raw material consumed during the year
Particulars Unit (Kg)
Opening Inventory 2,200
Purchases 20,000
Less: Closing Inventory (1,800)
Raw Material Consumed 20,400

(b) (i) Statement Showing the Computation of the amount at which the Machinery
should be capitalized in the books of A Limited
Particulars Amount
(`)
Purchase cost of machinery Given 1,27,50,000
Add: Site Preparation Cost Given 2,10,000
Architect’s Salary Specific / Attributable 1,40,000
overheads for 4 months
(` 35,000 x 4)
Initial Delivery Cost Transportation 2,12,500
Professional Fees for Installation Engineer’s Fees 37,500
Total Cost of Machinery to be 1,33,50,000
capitalized
(ii) Management should capitalize the costs of construction and remodelling the store,
because they are necessary to bring the store to the condition necessary for it to be
capable of operating in the manner intended by management. The store cannot be
opened without incurring the remodelling expenditure, and thus the expenditure
should be considered part of the asset. However, if the cost of salaries, utilities and
storage of goods are in the nature of operating expenditure that would be incurred if
the store was open, then these costs are not necessary to bring the store to the
condition necessary for it to be capable of operating in the manner intended by
management and should be expensed.
(c) (i) As per AS 12 ‘Accounting for Government Grants’, where the government grants are
in the nature of promoters’ contribution i.e., they are given with reference to the total
investment in an undertaking or by way of contribution towards its total capital outl ay
and no repayment is ordinarily expected in respect thereof, the grants are treated as
capital reserve which can be neither distributed as dividend nor considered as
deferred income. In the given case, the subsidy received from the Central
Government for setting up an industrial undertaking in Medak is neither in relation to
specific fixed asset nor in relation in revenue. Thus, the amount of ` 120 Lacs should
be credited to capital reserve.
(Note: Subsidy for setting up an industrial undertaking is considered to be in the
nature of promoter’s contribution)
(ii) As per AS 12 ‘Accounting for Government Grants’, two methods of presentation in
financial statements of grants related to specific fixed assets are regarded as
acceptable alternatives –
(a) The grant is shown as a deduction from the gross value of the asset concerned
in arriving at its book value. The grant is thus recognised in the profit and loss

statement over the useful life of a depreciable asset by way of a reduced

depreciation charge. Where the grant equals the whole, or virtually the whole,
of the cost of the asset, the asset is shown in the balance sheet at a nominal
value.
(b) Grants related to depreciable asset are treated as deferred income which is
recognised in the profit and loss statement on a systematic and rational basis
over the useful life of the asset.
In the given case, ` 15 Lacs was received as grant from the Central Government for
installation of Effluent Treatment Plant. Since the grant was received for a fixed asset,
either of the above methods can be adopted.
(iii) ` 25 lacs received from State Government for providing medical facilities to its
workmen during the pandemic is a grant received in nature of revenue grant. Such
grants are generally presented as a credit in the profit and loss statement, either
separately or under a general heading such as “Other Income”. Alternatively, ` 25
lacs may be deducted in reporting the related expense i.e., employee benefit
expense.
(d) Gama Limited
Cash Flow Statement
For the Year Ended 31 st March 2021
Particulars Amount Amount
(`’000) (`’000)
Cash flow from Operating Activities:
Cash receipts from customers 74,682
Cash payments to suppliers (54,918)
Cash payments for wages & salaries (1,863)
Cash payments of overheads (3,105)
Cash Generated from Operations 14,796
Payment of Taxation (6,561)
Net Cash from Operating Activities 8,235
Cash Flow from Investing Activities:
Proceeds from sale of investments 459
Proceeds from sale of Property, Plant and Equipment 3,456
Purchase of Investments (351)
Purchase of Property, Plant and Equipment (6,210)
Net Cash Used in Investing Activities (2,646)

Cash Flow from Financing Activities:

Proceeds from issue of shares 8,100
Payment of Dividend (2,160)
Repayment of Bank Overdraft (6,750)
Interest paid on Bank Overdraft (1,350)
Net Cash Used in Financing Activities (2,160)
Net Increase in Cash & Cash Equivalent 3,429
Cash and Cash Equivalent in the Beginning of the year 945
Cash and Cash Equivalent in the end of the year 4374
Question 2.
Mr. Z has made following transactions during the financial year 2020-21:
Investment 1: 8% Corporate Bonds having face value ` 100.
Date Particulars
01-06-2020 Purchased 36,000 Bonds at ` 86 cum-interest. Interest is payable on 30th
September and 31st March every year
15-02-2021 Sold 24,000 Bonds at ` 92 ex-interest
Interest on the bonds is received on 30th September and 31st March.
Investment 2 : Equity Shares of G Ltd having face value ` 10
Date Particulars
01-04-2020 Opening balance 8000 equity shares at a book value of ` 190 per share
01-05-2020 Purchased 7,000 equity shares@ ` 230 on cum right basis; Brokerage of
1% was paid in addition.
15-06-2020 The company announced a bonus issue of 2 shares for every 5 shares held
01-08-2020 The company made a rights issue of 1 share for every 7 shares held at
` 230 per share. The entire money was payable by 31.08.2020
25-08-2020 Rights to the extent of 30% of his entitlements was sold @ ` 75 per share.
The remaining rights were subscribed.
15-09-2020 Dividend @ ` 6 per share for the year ended 31.03.2020 was received on
16.09.2020. No dividend payable on Right issue and Bonus issue.
01-12-2020 Sold 7 ,000 shares @ 260 per share. Brokerage of 1% was incurred extra.
25-01-2021 Received interim dividend @ ` 3 per share for the year 2020-21.
31-:03-2021 The shares were quoted in the stock exchange @ ` 260.

Both investments have been classified as Current investment in the books of Mr. Z. On 15th May
2021, Mr. Z decides to reclassify investment in equity shares of Z  Ltd. as Long term Investment.
On 15th May 2021, the shares were quoted in the stock exchange @ ` 180.
You are required to:
(i) Prepare Investment Accounts in the books of Mr. Z for the year 2020-21, assuming that
the average cost method is followed.
(ii) Profit and loss Account for the year 2020-21, based on the above information.
(iii) Suggest values at which investment in equity shares should be reclassified in accordance
with AS 13. (20 Marks)
Answer
I. In the books of Mr. Z
Investment in 8% Corporate Bonds Account
For the period 01 April 2020 to 31 March 2021
Date Particulars Nos Interest Amount Date Particulars Nos Interest Amount
(`) (`) (`) (`)
1/6/20 To Bank 36,000 48,000 30,48,000 30/9/20 By Bank A/c 1,44,000
A/c (WN1) (Interest
36,000 x 100 x
8% x 6/12)
15/2/21 To Profit & 1,76,000 15/2/21 By Bank A/c 24,000 72,000 22,08,000
Loss A/c (WN2)
(WN 3)
31/3/21 To Profit & 2,16,000 31/3/21 By Bank A/c 48,000
Loss A/c (Interest
12,000 x 100 x
8% x 6/12)
By Balance c/d 12,000 10,16,000
(WN 4)
Total 36,000 2,64,000 32,24,000 Total 36,000 2,64,000 32,24,000
Note: For computing the interest on the bonds sold on 15 Feb 2021, if number of days
(138 days) is taken instead of months, the interest received on 15.02.2021 should be
`72,592 and the total interest transferred to Profit & Loss Account should be ` 2,16,592.

Wrongly printed as Z Ltd. in the question paper. It should have been given as G Ltd.

Investment in Equity Shares of G Ltd

For the period 1st April 2020 to 31 March 2021
Date Particulars Nos Dividend Amount Date Particulars Nos Dividen Amount
(`) (`) d (`) (`)
01/4/20 To Balance 8,000 15,20,000 16/9/20 By Bank A/c 48,000 42,000
b/d (WN 7)
01/5/20 To Bank A/c 7,000 16,26,100 1/12/20 By Bank A/c 7000 18,01,800
(WN 5) (WN 8)
15/6/20 To Bonus 6,000 25/1/21 By Bank A/c 48,300
Shares (WN 10)
25/8/20 To Bank A/c 2,100 4,83,000
(Right
Shares)
(WN 6)
01/12/20 To Profit & 7,14,800
Loss A/c
(Sale of
shares)
(WN 9)
31/3/21 To Profit & 96,300
Loss A/c
31/3/21 By Balance c/d 16,100 25,00,100
(WN 11)
Total 23,100 96,300 43,43,900 Total 23,100 96,300 43,43,900
Working Notes
1. Computation of the Interest element in the bonds purchased on 01 June 2020
No of Bonds purchased 36,000
Face value per bond ` 100
Face value of the bonds purchased ` 36,00,000
Interest Rate 8%
Interest Amount 36,00,000 x 8% x 2/12
` 48,000
Cum-interest per bond ` 86
Value of bond excluding interest 36,000 x 86 – 48,000
` 30,48,000
2. Computation of the Interest element in the bonds sold on 15 Feb 2021

No of Bonds sold 24,000

Face value of the bonds sold ` 24,00,000

Interest Rate 8%
Interest Amount 24,00,000 x 8% x 4.5/12
= ` 72,000
3. Computation of Profit on Sale of Bonds on 15 Feb 2021

No of Bonds sold 24,000
Ex- interest Rate per bond ` 92
Sales proceeds ` 22,08,000
Average Cost of Bonds (30,48,000/36,000) x 24,000
` 20,32,000
Profit on sale of bonds Sale Proceeds – Average Cost
22,08,000 – 20,32,000
` 1,76,000
4. Valuation of Bonds as on 31 March 2021
No of Bonds held as on 31 Mar 2021 12,000
Average Cost of Bonds (30,48,000/36,000) x 12,000
` 10,16,000
5. Computation of the cost of the equity shares purchased on 01 May 2020

No of shares purchased 7,000
Cum right price per share ` 230
Cost of purchase ` 16,10,000
Brokerage @1% ` 16,100
Cost including brokerage ` 16,26,100
6. Right Shares
No of Right Shares Issued (8,000+7,000+6,000)/7 = 3,000 shares
No of right shares sold 3,000 shares x 30% = 900 shares
Proceeds from sale of right shares to be 900 shares x ` 75 = ` 67,500
credited to statement of profit & loss
No of right shares subscribed 3,000-900 = 2,100 shares
Amount of right shares subscribed 2,100 x 230 = ` 4,83,000

7. Computation of Dividend Received on 16 Sept 2020

No of shares held during the period of dividend 8,000 shares
Dividend per share `6
Dividend Amount 8,000 x 6 = ` 48,000
No of shares received after the period of dividend 7,000 shares
(excluding bonus & right shares)
Dividend per share `6
Dividend Amount 7,000 x 6 = ` 42,000
The amount of dividend for the period for which the shares were not held by the
investor has been treated as capital receipt. Thus ` 42,000 shall be treated as capital
receipt
8. Sale Proceeds for the shares sold on 1st Dec. 2020
No of shares sold 7,000 Shares
Sale price per share ` 260
Proceeds from sale of share 7,000 x 260 = ` 18,20,000
Less: Brokerage @ 1% ` 18,200
Net Sale Proceeds ` 18,01,800
9. Profit on sale of shares on 1st Dec. 2020
Sales Proceeds ` 18,01,800
Average Cost (15,20,000+16,26,100+4,83,000-42,000)/23,100x7000
= ` 10,87,000
Profit on sale of shares Sales Proceeds – Average Cost
= ` 18,01,800-10,87,000
= ` 7,14,800
10. Computation of Amount of Interim Dividend
No of shares held 8,000+7,000+6,000+2,100-7,000
= 16,100
Dividend per share ` 3 per share
Dividend Received 16,100 shares x ` 3 per share
= ` 48,300

11. Valuation of Shares as on 31 March 2021

Cost of Shares (15,20,000 + 16,26,100 + 4,83,000 – 42,000) / 23,100
x 16,100
= 25,00,100
Market Value of Shares ` 260 x 16,100 = ` 41,86,000
Closing stock of equity shares has been value at ` 25,00,100 i.e. cost being lower
than its market value.
(II) Profit & Loss Account (Extract)
For the period 01 April 2020 to 31 March 2021
Particulars Amount (`) Particulars Amount (`)
To Balance c/d 12,70,600 By Investment in 8% Corporate 1,76,000
Bonds Account (Profit on sale of
bonds)
By Investment in 8% Corporate 2,16,000
Bonds Account (Interest on bonds)
By Sale of Right Shares 67,500
By Investment in Equity Shares of G 7,14,800
Ltd (Profit on sale of shares)
By Investment in Equity Shares of G 96,300
Ltd (Dividend Income)
(III) As per AS 13, when investments are classified from Current Investments to Long term
Investments, transfer is made at Cost and Fair value, whichever is less (as on the date of
transfer). So, in the given case valuation shall be done as follows:
Date of reclassification/transfer – 15 May 2021
Per Unit Cost of 16,100 shares held – ` 25,00,100/16,100 shares – ` 155.29
Market Price/Fair Value per share – ` 180
As the cost per unit is lower than its fair value, the shares are to be transferred at its cost
i.e., at ` 155.29 per share on 15 May 2021
Note:
1. In the eight last line of the question, investment in equity shares of G Ltd. was wrongly
printed as Z Ltd. in the question paper. In the above solution, it has been considered
as investment in G Ltd. If considered as Investment in equity shares in Z Ltd. (some
other investment and not investment in G Ltd.), then the cost of the investme nt for
shares in Z Ltd. will not be available.

2. The entire amount of sale proceeds from rights has been credited to Profit and Loss
account in the above solution. However, the sale proceeds of rights in respect of
7,000 shares (purchased cum right on 1.5.20) can be applied to reduce the carrying
amount of such investments (without crediting it to profit and loss account)
considering that the value of these shares has reduced after becoming their ex -right.
In that case, ` 22,500 (67,500X 7/21) will be applied to reduce the carrying amount
of investment and ` 45,000 will be credited to profit and loss account.
Question 3
(a) Manohar of Mohali has a branch at Noida to which the goods are supplied from Mohali but
the cost thereof is not recorded in the Head Office books. On 31st March, 2020 the Branch
Balance Sheet was as follows:
Creditors Balance 62,000 Debtors Balance 2,24,000
Head Office 1,88,000 Building Extension A/c
Closed by transfer to H.O. A/c -
Cash at Bank 26,000
2,50,000 2,00,000
During the six months ending on 30-09-2020, the following transactions took place at
Noida:
` `
Sales 2,78,000 Manager's salary 16,400
Purchases 64,500 Collections from debtors 2,57,000
Wages Paid 24,000 Discounts allowed 16,000
Salaries (inclusive of 15,600 Discount earned 4,600
advance of 5,000)
General Expenses 7,800 Cash paid to creditors 88,500
Fire Insurance (Paid for one 11,200 Building Account (further 14,000
year) payment)
Remittance to H.O. 52,900 Cash in Hand 5,600
Cash at Bank 47,000
Set out the Head Office Account in Noida Books and the Branch Balance Sheet as on
30.09.2020. Also give journal entries in the Noida books. (10 Marks)

(b) Mr. Arun runs a business of readymade garments. He closes the books of accounts on
31st March. The Balance Sheet as on 31st March, 2020 was as follows :
Capital A/c 5,05,000 Furniture 50,000
Creditors 1,02,500 Closing Stock 3,50,000
Debtors 1,25,000
Cash in Hand 35,000
Cash at Bank 47,500
6,07,500 6,07,500
You are furnished with following information :
(1) His sales, for the year ended 31st March, 2021 were 20% higher than the sales of
previous year, out of which 20% sales was cash sales.
Total Sales during the year 2019-20 were ` 6,25,000
(2) Payments for all the purchases were made by cheques only.
(3) Goods were sold for cash and credit both. Credit customers pay by cheques only.
(4) Deprecation on furniture is to be charged 10% p.a.
(5) Mr. Arun sent to the bank the collection of the month at the last date of each month
after paying salary of ` 2,500 to the clerk, office expenses ` 1,500 and personal
expenses ` 625.
Analysis of bank pass book for the year ending 31st March, 2021 disclosed the following:
`
Payment to creditors 3,75,000
Payment to rent up to 31 st March, 2021 20,000
Cash deposited into bank during the year 1,00,000
The following are the balances on 31st March, 2021:
`
Stock 2,00,000
Debtors 1,50,000
Creditors for goods 1,82,500
On the evening of 31st March, 2021, the cashier absconded with the available cash in the
cash book.

You are required to prepare Trading and Profit and Loss A/c for the year ended
31st March, 2021 and Balance Sheet as on that date. All the working should form part of
the answer. (10 Marks)
Answer
(a) Journal Entries in the Books of Noida Branch
Particulars Debit Credit
(`) (`)
Salary Advance A/c Dr. 5,000
To Salaries A/c 5,000
(Being the amount paid as advance adjusted by debit to
Salary Advance A/c)
Prepaid Insurance A/c (11,200 X 6/12) Dr. 5,600
To Fire Insurance A/c 5,600
(Being the six months premium transferred to the Prepaid
Insurance A/c)
Head Office A/c Dr. 1,44,900
To Purchases A/c 64,500
To Wages A/c 24,000
To Salaries A/c (15,600 - 5000) 10,600
To General Expenses A/c 7,800
To Fire Insurance A/c (11,200 X 6/12) 5,600
To Manager’s Salary A/c 16,400
To Discount Allowed A/c 16,000
(Being the transfer of various revenue accounts to the HO
A/c for closing the accounts)
Sales A/c Dr. 2,78,000
Discount Earned A/c Dr. 4,600
To Head Office A/c 2,82,600
(Being the transfer of various revenue accounts to HO)
Head Office A/c Dr. 14,000
To Building A/c 14,000
(Being the transfer of amounts spent on building
extension to HO A/c)

Head Office Account

2020 Particulars Amount 2020 Particulars Amount
(`) (`)
Sept 30 To Cash Remittance 52,900 April 1 By Balance b/d 1,88,000
To Sundries* 1,44,900 By Sundries* (Revenue) 2,82,600
(Revenue)
To Building A/c 14,000
Total 4,70,600 Total 4,70,600
* Instead of using Sundries (Revenue) A/c, the concerned revenue accounts can be posted
in the ledger.
Balance Sheet of Noida Branch
As at 30th Sept 2020
Liabilities Amt (`) Assets Amt (`)
Creditors 33,400 Debtors 2,29,000
Head Office A/c 2,58,800 Salary Advance 5,000
Prepaid Insurance 5,600
Building Extension A/c transferred to HO
Cash in Hand 5,600
Cash at Bank 47,000
Total 2,92,200 Total 2,92,200
Working Notes
Cash and Bank Account
Particulars Amt (`) Particulars Amt (`)
To Balance b/d 26,000 By Wages 24,000
To Collection from debtors 2,57,000 By Salaries 15,600
By Insurance 11,200
By General Expenses 7,800
By HO A/c 52,900
By Manager’s Salary 16,400
By Creditors 88,500
By Building A/c 14,000
By Balance c/d

- Cash in Hand 5,600

- Cash at bank 47,000
Total 2,83,000 Total 2,83,000
Debtors Account
To Balance b/d 2,24,000 By Cash Collection 2,57,000
To Sales A/c 2,78,000 By Discount (Allowed) 16,000

Total 5,02,000 Total 5,02,000
Creditors Account
To Cash A/c 88,500 By Balance b/d 62,000
To Discount (Earned) 4,600 By Purchases 64,500
To Balance c/d 33,400
Total 1,26,500 Total 1,26,500
Note:
Since the date of payment of fire insurance has not been mentioned in the question, it is
assumed that it was paid on 01 April 2020. Alternative answer considering otherwise also
possible.
(b) In the books of Mr. Arun
Trading and Profit and Loss Account for the Year Ended 31 st March 2021
(`) (`)
To Opening Stock 3,50,000 By Sales (W.N. 3)
To Purchases (W.N.1) 4,55,000 Credit 6,00,000
To Gross Profit (b.f.) 1,45,000 Cash 1,50,000
By Closing Stock 2,00,000
Total 9,50,000 Total 9,50,000
To Salary (` 2,500 x 12) 30,000 By Gross Profit 1,45,000
To Rent 20,000
To Office Expenses (` 1,500 x 12) 18,000

To Loss of Cash (W.N.6) 29,500

To Depreciation on furniture 5,000
To Net Profit (b.f.) 42,500
Total 1,45,000 Total 1,45,000
Balance Sheet
As on 31 st March 2021
(`) (`)
Arun’s Capital 5,05,000 Furniture 50,000
Add: Profit 42,500 Less: Depreciation (5,000) 45,000
Less: Drawings (7,500) 5,40,000 Stock 2,00,000
(` 625 X12) Debtors 1,50,000

Creditors 1,82,500 Cash at bank 3,27,500
Total 7,22,500 Total 7,22,500
Working Notes:
(1) Calculation of Purchases
Creditors Account
Particulars Amount (`) Particulars Amount (`)
To Bank A/c 3,75,000 By Balance b/d 1,02,500
To Balance c/d 1,82,500 By Purchases (Bal Fig) 4,55,000
Total 5,57,500 Total 5,57,500
(2) Calculation of Total Sales
Sales for the year 2019-20 6,25,000
Add: 20% increase 1,25,000
Total sales for the year 2020-21 7,50,000
(3) Calculation of Credit Sales
Total Sales 7,50,000
Less: Cash sales (20% of total sales) (1,50,000)
Credit sales 6,00,000

(4) Calculation of cash collected from debtors

Debtors Account
Particulars (`) Particulars (`)
To Balance b/d 1,25,000 By Bank A/c (Bal Fig) 5,75,000
To Sales A/c 6,00,000 By Balance c/d 1,50,000
Total 7,25,000 Total 7,25,000
(5) Calculation of closing balance of cash at bank
Bank Account
Particulars (`) Particulars (`)
To Balance b/d 47,500 By Creditors A/c 3,75,000
To Debtors A/c 5,75,000 By Rent A/c 20,000
To Cash A/c 1,00,000 By Balance c/d (b.f) 3,27,500
Total 7,22,500 Total 7,22,500
(6) Calculation of the amount of cash defalcated by the cashier
Cash Balance as on 1st April 2020 35,000
Add: Cash sales during the year 1,50,000
Less: Salary (30,000)
Office Expenses (18,000)
Drawings of Arun (7,500)
Cash deposited into bank during the year (1,00,000)
Cash Balance as on 31 March 2021 (defalcated by the cashier) 29,500
Question 4
The following is the Trial Balance of H Ltd., as on 31st March, 2021:
Dr. Cr.
Equity Capital (Shares of ` 100 each) 8,05,000
5,000, 6% preference shares of ` 100 each 5,00,000
9% Debentures 4,00,000
Profit & Loss A/c (of previous year) 72,000

Sales 60,00,000
Provision for Depreciation on Plant & Machinery 1,72,000
Suspense Account 40,000
Land at cost 24,00,000
Plant & Machinery at cost 7,70,000
Trade Receivables 19,60,000
Inventories (31-03-2020) 9,50,000
Bank 2,30,900
Adjusted Purchases 22,32,100
Factory Expenses 15,00,000
Administration Expenses 3,00,000
Selling Expenses 14,00,000
Debenture Interest 36,000
Goodwill 12,50,000
1,30,29,000 1,30,29,000
(i) The authorised share capital of the company is :
5,000, 6% preference shares of ` 100 each 5,00,000
10,000, equity shares of ` 100 each 10,00,000
Issued equity capital as on 1st
April 2020 stood at ` 7,20,000, that is 6,000 shares fully
paid and 2,000 shares ` 60 paid. The directors made a call of ` 40 per share on 1st October
2020. A shareholder could not pay the call on 100 shares and his shares were then forfeited
and reissued @ ` 90 per share as fully paid.
(ii) On 31st March 2021, the Directors declared a dividend of 5% on equity shares, transferring
any amount that may be required from General Reserve. Ignore Taxation.
(iii) The company on the advice of independent valuer wishes to revalue the land at
` 36,00,000.
(iv) Suspense account of ` 40,000 represents amount received for the sale of some of the
machinery on 1-4-2020. The cost of the machinery was ` 1,00,000 and the accumulated
depreciation thereon being ` 30,000.

This should have been given as 31.3.2021.

(v) Depreciation is to be provided on plant and machinery at 10% on cost.

(vi) Amortize 1/5th of Goodwill.
You are required to prepare H Limited's Balance Sheet as on 31-3-2021 and Statement of Profit
and Loss with notes to accounts for the year ended 31-3-2021 as per Schedule III of the
Companies Act, 2013. Ignore previous years' figures & taxation. (20 Marks)
Answer
H Ltd
Balance Sheet as at 31st March 2021
Particulars Note No Amount in `
I. Shareholders’ Funds
a. Share Capital 1 13,00,000
b. Reserves and Surplus 2 53,91,900
II. Non-Current Liabilities
a. Long Term Borrowings 3 4,00,000
III. Current Liabilities
a. Trade Payables 4 10,40,000
b. Other Current Liabilities 5 70,000
Total 82,01,900
Assets
I. Non-Current Assets
a. Property, Plant and Equipment 6 40,61,000
b. Intangible Assets 7 10,00,000
II. Current Assets
a. Inventories 9,50,000
b. Trade Receivables 19,60,000
c. Cash and Cash equivalents 2,30,900
Total 82,01,900
Statement of Profit and Loss for the year ended 31st March 2021
Particulars Note No Amount in `
I. Revenue from operations 60,00,000
Total Revenue 60,00,000

II. Expenses
Purchases (adjusted) 22,32,100
Finance Costs 8 36,000
Depreciation and Amortization 9 3,17,000
Other Expenses 10 32,30,000
Total Expenses 58,15,100
III. Profit/(Loss) for the period 1,84,900
Notes to Accounts (Amount in `)
1 Share Capital
a. Authorized Capital
5,000, 6% Preference shares of ` 100/- each 5,00,000
10,000 Equity Shares of `100/- each 10,00,000
15,00,000
b. Issued & Subscribed Capital
5,000, 6% Preference shares of `100/- each 5,00,000
8,000, Equity shares of `100/- each 8,00,000
Total 13,00,000
2 Reserves & Surplus
Capital Reserve (100 X (90-40)) 5,000
Revaluation Reserve (36,00,000-24,00,000) 12,00,000
Surplus 1,84,900
Add: Balance from previous year 72,000
Less:
Dividends declared (70,000)
Profit/(Loss) carried forward to Balance Sheet 1,86,900
Total 53,91,900
3 Long-Term Borrowings
Secured
9% Debentures 4,00,000
4 Trade Payables 10,40,000

5 Other Current Liabilities

Dividend Payable
Preference Dividend 30,000
Equity Dividend 40,000
Total 70,000
6 Property, Plant and Equipment
Land
Opening balance 24,00,000
Add: Revaluation Adjustment 12,00,000
Closing Balance 36,00,000
Plant and Machinery
Opening Balance 7,70,000
Less: Disposed off (1,00,000)
Depreciation (2,09,000)
Closing Balance 4,61,000
Total 40,61,000
7 Intangible Assets
Goodwill 12,50,000
Less: Amortized (1/5th) (2,50,000)
Total 10,00,000
8 Finance Costs
Debenture Interest 36,000
9 Depreciation and Amortization
Plant and Machinery 67,000
Goodwill 2,50,000
Total 3,17,000
10 Other Expenses
Factory Expenses 15,00,000
Selling Expenses 14,00,000
Administrative Expenses 3,00,000
Loss on sale of Plant and Machinery
Book Value
(1,00,000-30,000) 70,000

Less: Sale Value (40,000) 30,000

Total 32,30,000
Note
1. The inventories (31.3.20) amounting ` 9, 50,000 (given in the trial balance of the question)
should have been as closing inventory i.e. as on 31.3.21. In the above solution, this
inventory has been considered as closing inventory i.e. for 31.3.21. If this is considered as
inventory of 31.3.20, the closing inventory (as on 31.3.21) will not be available for the
balance sheet as on 31.3.21 and in that case, the balance sheet will not tally without using
suspense account amounting ` 9,50,000.
2. The financial statements given in the above answer include adjustment for dividend
declared on 31st March, 2021, strictly, as per the information given in the question.
However, practically dividends are declared in the annual general meetings which take
place after the reporting date.
Question 5
(a) The firm, M/s K Creations has two Departments, Dyed fabric and readymade garments.
Readymade garments are made by the firm itself. Both dyed fabric and readymade
garments have independent market. Some of readymade garment department's
requirement is supplied by Dyed Fabric Department at its usual Selling Price.
From the following figures, prepare Departmental Trading and Profit & Loss Account for
the year ended 31st March 2021.
Particulars Dyed Fabric Readymade
Department garments
department
Opening stock as on April 1, 2020 5,40,000 15,20,000
Purchases (excluding inter department transfers) 20,12,080 1,50,00,000
Sales (excluding inter department transfers) 31,06,000 3,12,50,000
Transfer to Readymade garment 5,00,000 -
Direct wages 3,00,000 67,30,000
Direct expenses 1,00,000 19,50,000
Plant and Equipment for dyeing/stitching readymade 5,00,000 15,00,000
garments (WDV as on April 1, 2020)
Rent and warehousing 4,50,000 12,00,000
Stock as on March 31st 2021 6,00,000 22,50,000
The following further information are available for necessary consideration:

(i) The Stock in Readymade garments department may be considered as consisting of

60% of dyed fabric and 40% of Other Expenses.
(ii) The Dyed Fabric Department earned a Gross Profit @ 30% in 2019-2020.
(iii) On the plant and equipment, Depreciation @ 20% p.a. to be provided.
(iv) The following expenses incurred for both the departments were not apportioned
between the departments:
`
(a) Salaries 2,70,000
(b) Advertisement expenses 90,000

(c) General expenses 8,00,000
(v) Salaries in 1:2 ratio, Advertisement expenses in the turnover ratio and General
expenses in 1:3 ratio are to be apportioned between the Dyed Fabric Department and
Readymade Department respectively. (10 Marks)
(b) AB Limited (a listed company) recently made a public issue in respect of which the following
information is available:
(i) No. of partly convertible 8% debentures issued 3,00,000; face value and issue price
` 100 per debenture.
(ii) Convertible portion per debenture- 60%, date of conversion- on expiry of 7 months
from the date of closing of issue.
(iii) Date of closure of subscription lists 1-5-2020, date of allotment 1-6-2020, rate of
interest on debenture 8% payable from the date of allotment, market value of equity
share as on date of conversion ` 60 (Face Value ` 10).
(iv) Underwriting Commission 1%
(v) No. of debentures applied for 2,50,000.

(vi) Interest payable on debentures half-yearly on 30th September and 31st March.
Write relevant journal entries for all transactions arising out of the above during the year
ended 31st March, 2021 (including cash and bank entries). (10 Marks)

Answer
(a) M/s K Creations
Departmental Trading and Profit & Loss Account
For the Year Ended 31 st March 2021
Particulars Dyed Fabric Readymade Total Particulars Dyed Fabric Readymade Total
Department Garments Department Garments
Department Department
(`) (`) (`) (`) (`) (`)
To Opening Stock 5,40,000 15,20,000 20,60,000 By Sales 31,06,000 3,12,50,000 3,43,56,000
To Purchases 20,12,080 1,50,00,000 1,70,12,080 By Transfer 5,00,000 5,00,000
to
Readymade
Garments
To Transfer from 5,00,000 5,00,000 By Closing 6,00,000 22,50,000 28,50,000
Dyed Fabric Stock
Department
To Direct Wages 3,00,000 67,30,000 70,30,000
To Direct Expenses 1,00,000 19,50,000 20,50,000
To Depreciation  1,00,000 3,00,000 4,00,000
To Gross Profit 11,53,920 75,00,000 86,53,920
Total 42,06,000 3,35,00,000 3,77,06,000 Total 42,06,000 3,35,00,000 3,77,06,000
To Rent and 4,50,000 12,00,000 16,50,000 By Gross 11,53,920 75,00,000 86,53,920
Warehousing Profit
To Salaries 90,000 1,80,000 2,70,000
To Advertisement 8,137 81,863 90,000
Expenses
To General 2,00,000 6,00,000 8,00,000
Expenses
To Net Profit 4,05,783 54,38,137 58,43,920
Total 11,53,920 75,00,000 86,53,920 Total 11,53,920 75,00,000 86,53,920
Profit and Loss Account (Combined)

To Unrealized Profit (WN) 1,58,400 By Net Profit 58,43,920
To General Net Profit 56,85,520
Total 58,43,920 Total 58,43,920

Shown here as it relates with property, plant & equipment used for dyeing/stitching garments.

Calculation of Stock Reserve

Rate of Gross Profit of Dyed Fabric Department for the year 2020-21
= 11, 53,920 X (31, 06,000+5, 00,000) X 100 = 32%
Closing stock of Dyed Fabric in Readymade Garments Department
= 22, 50,000 x 60% = ` 13, 50,000
Stock reserve required for unrealized profit @ 32% on closing stock
= 13, 50,000 x 32% = ` 4, 32,000
Stock reserve for unrealized profit included in opening stock of Readymade Garments
Department = ` 15, 20,000 x 60% x 30% = ` 2, 73,600
Additional stock reserve required = ` 4, 32,000 - ` 2, 73,600 = ` 1, 58,400
(b)
Date Particulars Debit (`) Credit (`)
1.05.2020 Bank A/c Dr. 2,50,00,000
To Debenture Application A/c 2,50,00,000
(Being application money received on
2,50,000 debentures @ `100/- each)
1.06.2020 Debenture Application A/c Dr. 2,50,00,000
Underwriters A/c Dr. 50,00,000
To 8% Debentures A/c 3,00,00,000
(Being allotment of 2,50,000
debentures to applicants and 50,000
debentures to underwriters)
1.06.2020 Underwriting Commission A/c Dr. 3,00,000
(Being commission payable to
underwriters @ 1% on ` 3,00,00,000)
1.06.2020 Bank A/c Dr. 47,00,000
(Being amount received from
underwriters in settlement)
1.06.2020 Debenture Redemption Investments 18,00,000
A/c Dr. 18,00,000
To Bank A/c
(3, 00,000 x 100 x 15% x 40% - Being
investments for redemption purposes)


To Bank 8,00,000
(Being interest paid on debentures for 4
months @ 8% on ` 3,00,00,000)
30.11.2020 8% Debentures A/c Dr. 1,80,00,000
To Securities Premium A/c 1,50,00,000
(Being conversion of 60% of the
debentures into shares of ` 60 each
with a face value of `10/-)
(Being interest paid on debentures for 6
months @ 8%)
Working Note:
Calculation of Debenture Interest for the half year ended 31st March, 2021
On ` 1, 20, 00,000 for 6 months @ 8% = `4, 80,000
On ` 1, 80, 00,000 for 2 months @ 8% = ` 2, 40,000
`7, 20,000
Question 6
(a) A trader commenced business on April 1, 2020 with ` 120,000, represented by 6000 units
of a certain product at ` 20 per unit. During the year 2020-21 he sold these units at ` 30/-
per unit and had withdrawn ` 60,000. The price of the product at the end of financial year
was ` 25/- per unit. Compute retained profit of the trader under the concept of physical
capital maintenance at current cost. Also state, whether answer would be different if the
trader had not withdrawn any amount.
(b) On 13th Jan, 2021 fire occurred in the premises of Mr. X, a cloth merchant. The Goods
were totally destroyed. From the books of account, for the period 01 -04-2020 to the date
of fire the following particulars were available:
Particulars `
Stock as on 01-04-2020 57,000
Purchases 3,05,000
Manufacturing Expenses 60,000
Selling Expenses 24,200
Sales 4,98,000

At the time of valuing stock as on 31st March, 2020, a sum of ` 7,000 was written off on a
particular item, which was originally purchased for ` 20,000 and was sold during the year
for ` 18,000. Barring the transaction relating to this item, the gross profit earned during the
period was 25% on sales. Mr. X has insured his stock for ` 40,000. Compute the amount
of the claim.
(c) An Engineer purchased a compressing machine on hire purchase system. As per the terms
he is required to pay ` 1,40,000 down, ` 1,06,000 at the end of first year, ` 98,000 at the
end of the second year ` 87,000 at the end of the third year and ` 55,000 at the end of
fourth year. Interest charged @ 12% p.a. You are required to calculate total cash price of
the machine and the interest paid with each installment.
(d) S. Ltd. was incorporated on 30th November 2020 to take over the running Business of
proprietorship firm of Mr. S. The various expenses debited to the profit and loss Account
for the year 2020-21 included:
(i) Directors fees
(ii) Preliminary expenses written off
(iii) Salaries and general expenses
(iv) Statutory Audit fees
(v) Tax Audit fees u/s 44 AB of the Income Tax Act, 1961
(vi) Commission to travelling agents
(vii) Sale promotion expenses
(viii) Advertisement expenses
(ix) Rent expenses
(x) Bad debts
You are required to determine the basis of apportionment of above expenses between pre
incorporation and post incorporation periods.
(e) Following is the extract of the Balance Sheet of K Ltd (listed company) as at 31st March,
2020
Authorized capital: `
3,00,000 Equity shares of ` 10 each 30,00,000
30,00,000
Issued and Subscribed capital:
2,00,000 Equity shares of ` 10 each, 16,00,000
` 8 paid up

Reserves and surplus:

Securities premium (not realised in cash) 75,000
On 1st April, 2020, the Company has made final call @ ` 2 each on 2,00,000 equity shares.
The call money was received by 25th April, 2020. Thereafter, the company decided to
capitalize its reserves by way of bonus at the rate of one share for every four shares held.
Show necessary entries in the books of the company and prepare the extract of the
Balance Sheet immediately after bonus issue. (4 Parts x 5 Marks = 20 Marks)
Answer
(a) Physical Capital Maintenance at Current Cost
In the given case, the specific price index applicable to the product is 125 (25/20X100).
Current cost of opening stock = (` 1, 20,000 / 100) x 125 Or 6,000 units x ` 25
= ` 1, 50,000
Current cost of closing cash = ` 1, 20,000 (` 1, 80,000 – ` 60,000)
Opening equity at closing current costs = ` 1, 50,000
Closing equity at closing current costs = ` 1, 20,000
Retained Profit = ` 1, 20,000 – ` 1, 50,000 = (-) ` 30,000
The negative retained profit indicates that the trader has failed to maintain his capital. The
available fund of ` 1, 20,000 is not sufficient to buy 6,000 units again at increased price of
` 25 per unit. The drawings should have been restricted to ` 30,000 (` 60,000 – ` 30,000).
If the trader had not withdrawn any amount, then the answer would have been as
below:
Current cost of opening stock = ` 1, 80,000
Opening equity at closing current costs = ` 1, 50,000
Retained Profit = ` 1, 80,000 – ` 1, 50,000 = ` 30,000
If the trader had not withdrawn any amount, then the retained profit would have been
` 30,000.


Memorandum Trading Account as on 13.01.2021
Particulars Normal Abnormal Total Particulars Normal Abnormal Total
To Opening Stock 44,000 13,000 57,000 By Sales 4,80,000 18,000 4,98,000
To Purchases 3,05,000 - 3,05,000 By Closing 49,000 - 49,000
Stock
To Manufacturing 60,000 - 60,000
Expenses
To Gross Profit 1,20,000 5,000 1,25,000
Total 5,29,000 18,000 5,47,000 Total 5,29,000 18,000 5,47,000
Insurance policy was for ` 40,000 as such goods are under-insured. The amount of claim
should be restricted to the policy amount, ie. ` 40,000.
(c) Ratio of interest and amount due = Rate of interest = 12
100 + Rate of interest 112
No of instalments Instalment Amount due at the Interest Principal due at
amount time of instalment the beginning
(`) (`) (`) (`)
(1) (2) (3) (4)
4th 55,000 55,000 5,893 49,107
3rd 87,000 1,36,107 14,583 1,21,524
2nd 98,000 2,19,524 23,520 1,96,004
1st 1,06,000 3,02,004 32,358 2,69,646
Total Cash Price = ` 1,40,000 + ` 2,69,646 = ` 4,09,646
(d)
No. Particulars Basis of apportionment
(i) Directors Fees Charge to Post incorporation period
(ii) Preliminary Expenses written off Charge to Post incorporation period
(iii) Salaries and general expenses Time ratio
(iv) Statutory Audit Fees Charge to Post incorporation period

(v) Tax Audit Fees u/s 44 AB of the On the basis of sales /turnover ratio in the
Income Tax Act, 1961 respective periods
(vi) Commission to travel agents On the basis of sales / turnover ratio in the
respective periods
(vii) Sales Promotion expenses On the basis of sales / turnover ratio in the
respective periods
(viii) Advertisement Expenses On the basis of sales / turnover ratio in the
respective periods
(ix) Rent Expenses Time Ratio
(x) Bad Debts On the basis of sales / turnover ratio in the
respective periods
(e) Journal Entries

Date Particulars ` `
1.04.2020 Equity Share Final Call A/c Dr. 4,00,000
(Being final call of ` 2/- per share on 2,00,000
equity shares due as per Board’s resolution
dated ………..)
25.04.2020 Bank A/c Dr. 4,00,000
(Final Call money on 2,00,000 equity shares
received)
Capital Redemption Reserve A/c Dr. 1,20,000
General Reserve A/c Dr. 3,60,000
Profit and Loss A/c Dr. 20,000
To Bonus to shareholders 5,00,000
(Being provision for bonus shares at one share
for every four shares held as per Board’s
resolution dated…………)*
Bonus to shareholders Dr. 5,00,000
(Being issue of bonus shares)
*Any other logical method for utilization of reserves may be followed as per the Companies
Act, 2013.

Extract of Balance Sheet

Authorized Capital `
3,00,000 Equity shares of ` 10/- each 30,00,000
Issued and Subscribed Capital
2,50,000 Equity shares of `10/- each, fully paid 25,00,000
(Out of the above 50,000 Equity shares `10/- each were issued by way
of bonus shares)
Reserves and Surplus
Securities premium (not realized in cash) 75,000
Note: As per SEBI regulations, securities premium should be realized in cash, whereas
under the Companies Act, 2013 there is no such requirement. In accordance with Section
52, securities premium may arise on account of issue of shares other than by way of cash.
Thus, for unlisted companies, securities premium (not realized in cash) may be used for
issue of bonus shares, whereas the same cannot be used in case of listed companies.

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© The Institute of Chartered Accountants of India

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(b) Journal Entries in the Books of ABC Ltd.

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(iv) Sales (including goods sold on approval basis amounting to ` 5,50,000

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900 shares purchased at ` 22,500

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(b) Computation of claim for loss of stock

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3. Calculation of actual sales

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Ayan closes its books on 31 st March, 2018. (2 Parts x 10 Marks = 20 Marks)

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INTERMEDIATE (NEW) MAY, 2018

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To Furniture 2,00,000 By AB Ltd. Co. - Purchase 13,95,000

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2. Distribution of shares among partners

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(b) In the books of Dheeraj Limited

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(b) Arya Ltd.

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To Own Debentures A/c 5,88,000

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(i) Does this amount to change in accounting policy?

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(b) Amount of Exchange difference and its Accounting Treatment

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4. Calculation of sale of right entitlement by Moon Ltd.

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2. Calculation of actual sales

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Repairs (paid by cash) 10,000

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Balance Sheet of Aman as at 31 st March, 2018

Add: Less: Depreciation (16,250) 3,08,750

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2. Calculation of sales during 2017-18 `

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Department C 33,000 x10/110 22,000x 10/110 5,000

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Cash available 29,700

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