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CA Accounting Important Questions

 

Q1. (a) Under what circumstances can an enterprise change its accounting policy?
(b) Ram Co. (P) Ltd. furnishes you the following information for the year ended 31.3.2005:

 

 Depreciation for the year ended 31.3.2005
 (under straight line method)
 Depreciation for the year ended 31.3.2005
 (under written down value method)
 Excess of depreciation for the earlier years calculated under written
 down value method over straight line method

 Rs 100 lakhs

 Rs 200 lakhs

Rs 500 lakh

 

The Company wants to change its method of claiming depreciation from straight line
method to written down value method.
Decide, how the depreciation should be disclosed in the Financial Statement for the year
ended 31.3.2005.


Answer
(a) A change in accounting policy is made only if the adoption of a different accounting policy
is required by statute or for compliance with an accounting standard or if it is considered
that the change would result in a more appropriate preparation or presentation of the financial
statements of the enterprise. A more appropriate presentation of events or transactions in the
financial statements occurs when the new accounting policy results in more relevant or reliable
information about the financial position, performance or cash flows of the enterprise.
(b) As per para 21 of AS 26 ‘Intangible Assets’, when a change in the method of depreciation
is made, depreciation should be calculated in accordance with the new method from the date
of the asset coming into use. The deficiency or surplus arising from retrospective
recomputation should be adjusted in the accounts in the year in which the method of
depreciation is changed. The deficiency should be charged to profit and loss account.
Similarly, any surplus should be credited in the statement of profit and loss. Such
change is a change in the accounting policy, and its effect should be quantified and disclosed.
In the given case, the deficiency of Rs 500 lakhs would be charged to the profit and loss account
of 31.3.2005. In the notes to account, the fact of change in method of depreciation should be
elaborated along with the effect of Rs 500 lakhs. The current depreciation charge of 200 lakhs
determined in accordance with the written down value method should be debited to the profit
and loss account.

Q2. (i) A machinery costing Rs 10 lakhs has useful life of 5 years. After the end of 5 years, its
scrap value would be Rs 1 lakh. How much depreciation is to be charged in the books of
the company as per Accounting Standard-6?

(ii) Garden Ltd. acquired fixed assets viz. plant and machinery for Rs20 lakhs. During the same
year it sold its furniture and fixtures for Rs5 lakhs. Can the company disclose, net cash outflow
towards purchase of fixed assets in the cash flow statement as per AS-3?

(iii) ABC Ltd. gave 50,000 equity shares of Rs 10 each (fully paid up) in consideration for supply
of certain machinery by X & Co. The shares exchanged for machinery are quoted on Bombay
Stock Exchange (BSE) at Rs 15 per share, at the time of transaction. In the absence of fair
market value of the machinery acquired, how the value of machinery would be recorded in the
books of the company?

(iv) A company took a construction contract for Rs 100 lakhs in January, 2006. It was found that
80% of the contract was completed at a cost of Rs 92 lakhs on the closing date i.e. on
31.3.2007. The company estimates further expenditure of Rs 23 lakhs for completing the
contract. The expected loss would be Rs 15 lakhs. Can the company recognise the loss in the
financial statements prepared for the year ended 31.3.2007?


Answer
(i) As per paragraph 20 of AS 6 ‘Depreciation Accounting’, the depreciable amount of a
depreciable asset should be allocated on a systematic basis to each accounting period during
the useful life of the asset. In the given case, the depreciation amount can be calculated as
follows:

   Rs
 Cost of machinery
 Less: Scrap value at the end of useful life
 Amount to be written off during useful life of machinery
 Useful life of the asset
 Depreciation to be provided each year (Rs9,00,000 / 5 years)
 10,00,000
 1,00,000
 9,00,000
 5 Years
 Rs 1,80,000

 

(ii) According to Para 21 of AS 3 (Revised) ‘Cash Flow Statements’, an enterprise should report
separately major classes of gross cash receipts and gross cash payments arising from investing
and financing activities, except to the extent that cash flows described in paragraphs 22 and 24
are reported on a net basis. Acquisition and disposal of fixed assets is not prescribed in para 22
and 24 of the standard.
Hence, the company cannot disclose net cash flow in respect of acquisition of plant and
machinery and disposal of furnitures and fixtures.

(iii) As per paragraph 22 of AS 10 ‘Accounting for Fixed Assets’ , fixed asset acquired in
exchange for shares or other securities in the enterprise should be recorded at its fair market
value, or the fair market value of the securities issued, whichever is more clearly evident. Since,
the market value of the shares exchanged for the asset is more clearly evident, the company
should record the value of machinery at Rs 7,50,000. (i.e., 50,000 shares Rs15 per share being
the market price)

(iv) As per paragraphs 31 and 35 of AS 7 on Construction Contracts, an expected loss on the
construction contract should be recognized as an expense immediately irrespective of (i)
whether or not the work has commenced on the contract; or (ii) the stage of completion of the
contract; or (iii) the amount of profits expected to arise in other contracts.
Hence, the company must recognize the loss immediately.

 

Q3. When can a company change its accounting policy?

Answer A change in accounting policy should be made in the following conditions:
(i) If the change is required by some statute or for compliance with an Accounting Standard.
(ii) Change would result in more appropriate presentation of the financial statement.
Change in accounting policy may have a material effect on the items of financial statements.
For example, if depreciation method is changed from straight-line method to written-down
value method, or if cost formula used for inventory valuation is changed from weighted average
to FIFO, or if interest is capitalized which was earlier not in practice, or if proportionate amount
of interest is changed to inventory which was earlier not the practice, all these may increase or
decrease the net profit. Unless the effect of such change in accounting policy is quantified, the
financial statements may not help the users of accounts. Therefore, it is necessary to quantify
the effect of change on financial statement items like assets, liabilities, profit / loss.

Q4. List the criteria to be applied for rating an enterprise as Level-I enterprise for the purpose of
compliance of Accounting Standards in India.


Answer 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

 

Q5. Best Ltd. deals in five products, P, Q, R, S, and T which are neither similar nor
interchangeable. At the time of closing of its accounts for the year ending 31st March 2010, the
historical cost and net realizable value of the items of the closing stock are determined as
follows:

 Items  Historical cost  Net realizable value
 P
 Q
 R
 S
 T
 5,70,000
 9,80,000
 3,16,000
 4,25,000
 1,60,000
 4,75,000
 10,32,000
 2,89,000
 4,25,000
 2,15,000

 

What will be the value of closing stock for the year ending 31st March, 2012 as per AS 2

“Valuation of Inventories”? (4 Marks, May, 2011) (IPCC)

Answer

As per para 5 of AS 2 “Valuation of Inventories, inventories should be valued at the lower of
cost and net relizable value. Inventories should be written down to net realizable value on an

item-by-item basis.

Valuation of inventory (item wise) for the year ending 31st March 2012

 Items  Historical cost  Net realizable value  Valuation of closing stock
   Rs  Rs  Rs
 P
 Q
 R
 S
 T
 5,70,000
 9,80,000
 3,16,000
 4,25,000
 1,60,000
 4,75,000
10,32,000
 2,89,000
 4,25,000
 2,15,000
 4,75,000
 9,80,000
 2,89,000
 4,25,000
 1,60,000
 23,29,000

 

The value of inventory for the year ending 31st March 2012 = Rs 23,29,000.

Q6. A computer costing Rs 60,000 is depreciated on straight line basis, assuming 10 years
working life and Nil residual value, for three years. The estimate of remaining useful life after
third year was reassessed at 5 years. Calculate depreciation as per the provisions of Accounting
Standard 6 "Depreciation Accounting".

Answer
Depreciation per year = Rs 60,000 / 10 = Rs 6,000
Depreciation on SLM charged for three years = Rs 6,000 x 3 years = Rs 18,000
Book value of the computer at the end of third year = Rs 60,000 – Rs 18,000 = Rs 42,000.
Remaining useful life as per previous estimate = 7 years
Remaining useful life as per revised estimate = 5 years
Depreciation from the fourth year onwards = Rs 42,000 / 5 = Rs 8,400 per annum

Q7. What are the three fundamental accounting assumptions recognised by Accounting Standard
(AS) 1? Briefly describe each one of them.
 

Answer
Accounting Standard (AS) 1 recognizes three fundamental accounting assumptions. These are
as follows:
(i) Going Concern: The financial statements are normally prepared on the assumption that an
enterprise will continue its operations in the foreseeable future and neither there is intention,
nor there is need to materially curtail the scale of operations.
(ii) Consistency: The principle of consistency refers to the practice of using same accounting
policies for similar transactions in all accounting periods unless the change is required (i) by a
statute, (ii) by an accounting standard or (iii) for more appropriate presentation of financial
statements.
(iii) Accrual basis of accounting: Under this basis of accounting, transactions are recognised as
soon as they occur, whether or not cash or cash equivalent is actually received or paid.

Q8. From the following information state the amount to be capitalized as per AS 10. Give the
explanations for your answer.
Rs 5 lakhs as routine repairs and Rs 1 lakh on partial replacement of a part of a machine.
Rs 10 lakhs on replacement of part of a machinery which will improve the efficiency of a
machine. (4 Marks, IPCC November, 2014)

Answer
As per para 12 of AS 10 “Accounting for Fixed Assets”, only those expenditures that increase
the future benefits from the existing assets, beyond its previously assessed standard of

performance, is to be included in the gross book value.
Hence, in the given case, amount of Rs 5 lakhs spent on routine repairs and Rs 1 lakh on partial
replacement of a part of the machinery should be charged to Profit and Loss Account as these
amounts will help in maintaining the capacity but will not improve the efficiency of the
machine.
However, Rs 10 lakhs incurred on replacement of a part of the machinery, which will increase
the efficiency of a machine, should be capitalized by inclusion in the gross book value of
machinery.
Q9. A company lodged a claim to insurance company for Rs 5,00,000 in September, 2006. The
claim was settled in February, 2007 for Rs 3,50,000. How will you record the short fall in claim
settlement in the books of the company.
 

Answer

Journal Entry

   Rs  Rs
 Profit and Loss A/c Dr.
 To Insurance Claim A/c
 [Being the shortfall in settlement of insurance
 claim charged to Profit and Loss A/c]

 1,50,000

 

 

 1,50,000

 

Q10. The Managing Director of A Ltd. is entitled to 5% of the annual net profits, as his
remuneration, subject to a minimum of Rs25,000 per month. The net profits, for this purpose,
are to be taken without charging income-tax and his remuneration itself. During the year, A Ltd.
made net profit of Rs 43,00,000 before charging MD’s remuneration, but after charging
provision for taxation of Rs 17,20,000. Compute remuneration payable to the Managing
Director.


Answer

 Calculation of remuneration of the Managing Director  
 Net profit as per books
Add: Provision for taxation
Annual profit for the purpose of managerial remuneration
Managing Director’s Remuneration @ 5% of above
Minimum remuneration to be paid to the Managing Director
= Rs 25,000 per month × 12
 43.00
17.20

60.20

3.01
3.00

 

Hence, in this case, remuneration to be paid to the Managing Director of A Ltd.
= Rs 3,01,000.in the year.


Q11. A company provided Rs 10,00,000 for dividend payment. Is the Corporate Dividend Tax
payable in this case? If yes, please compute Corporate Dividend Tax assuming rate of 15%
plus surcharge of 10% and disclose as it would appear in profit and loss account of the
company.


Answer
Note: Though current surcharge rate on DDT is 12% the question is solved on the basis of the
information given in the question. However, education cess of 3% is applied though not given
in the question. Therefore, total DDT arrives of 16.995%.
Yes, Corporate Dividend Tax (CDT)∗ is payable by the company which has provided for the
payment of dividend. CDT is payable even if no income tax is payable. This is payable by a
domestic company on distribution of profits to its shareholders.
In the given case Corporate Dividend Tax would be worked out as under:
(i) Grossing up of dividend:
10,00,000 x 100/85 = 11,76,470
(ii) CDT = 11,76,470 x 16.995 = 1,99,941
The liability in respect of CDT arises only if the profits are distributed as dividends
whereas the normal income-tax liability arises on the earning of the taxable profits.
Since the CDT liability relates to distribution of profits as dividends which are adjusted as
appropriation /allocation of profit in the ‘Notes to Accounts’ of ‘Reserves and Surplus’, it
is appropriate that the liability in respect of DDT should also be adjusted therein.
CDT liability should be presented separately in the ‘Notes to Accounts’ of ‘Reserves and
Surplus’, as follows:
Dividend xxxxx
Dividend Corporate tax thereon xxxxx xxxxx


Q12. Calculate the maximum remuneration payable to the Managing Director based on effective
capital of a non-investment company for the year, from the information given below:

     

 (i)


 (ii)
 (iii)
 (iv)
 (v)
 (vi)
 (vii)

 (viii)

 Profit for the year (calculated as per Section 349, 350
 & 351 of the Companies Act, 1956)


 Paid up capital
 Reserves & surplus
 Securities premium
 Long term loans
 Investment
 Preliminary expenses not written off

Remuneration paid to the Managing Director during
the year

   3000


18000
 7200
 1200
 6000
 3600
 3000

600

 

Answer
Note: Under the Companies Act, 2013, the Profits for the purposes of determining managerial
remuneration are computed in accordance with Section 198. Further, there is no provision for
computation of managerial remuneration on the basis of effective capital except in the case of
loss or inadequacy of profits in a financial year, hence this question is irrelevant in the new
context as there is no inadequacy of profits. Please refer to Sec 197, 198 and Schedule V of the
Companies Act 2013.


Q13. What are the maximum limits of managerial remuneration for companies having adequate
profits?


Answer
For companies having adequate profits, maximum limits of managerial remuneration in
different circumstances are as under:
(i) Overall (excluding fee for attending meetings) 11% of net profit
(ii) If there is one managing director or whole time director or manager 5% of net profit
(iii) If there is more than one managing director, whole time director or manager 10% of net
profit
(iv) Remuneration of directors who are neither managing directors nor whole time directors:
(a) If there is no managing or whole-time director 3% of net profit
(b) If there is a managing or whole-time director 1% of net profit
However, the above limits can be exceeded by the company approval at general
meetings with the Central Govt. approval.


Q14. (a) Raj Ltd. gives you the following information for the year ended 31st March, 2006:
(i) Sales for the year Rs 48,00,000. The Company sold goods for cash only.
(ii) Cost of goods sold was 75% of sales.
(iii) Closing inventory was higher than opening inventory by Rs 50,000.
(i) Trade creditors on 31.3.2006 exceed the outstanding on 31.3.2005 by Rs 1,00,000.
(ii) Tax paid during the year amounts to Rs 1,50,000.
(iii) Amounts paid to Trade creditors during the year Rs 35,50,000.
(iv) Administrative and Selling expenses paid Rs 3,60,000.
(v) One new machinery was acquired in December, 2005 for Rs 6,00,000.
(vi) Dividend paid during the year Rs 1,20,000.
(vii) Cash in hand and at Bank on 31.3.2006 Rs 70,000.
(viii) Cash in hand and at Bank on 1.4.2005 Rs 50,000.

Prepare Cash Flow Statement for the year ended 31.3.2006 as per the prescribed
Accounting standard.
(b) What all are the differences between Cash Flow statement and Fund Flow statement?

   Rs  Rs
 Cash flow from operating activities:
 Cash receipt from customers (sales)
 Cash paid to suppliers and expenses
( Rs35,50,000 + Rs3,60,000)
 Cash flow from operation
 Less: Tax paid
 Net cash from operating activities
 Cash flow from investing activities:
 Purchase of fixed assets
 Net cash used in investing activities
 Cash flow from financing activities:
 Dividend Paid
 Net cash from financing activities
 Add: Opening balance of Cash in Hand and at Bank
 Cash in Hand and at Bank on 31.3.2006
 

 48,00,000
 39,10,000



 8,90,000
 1,50,000


 (6,00,000)


 (1,20,000)


 

 

 7,40,000

 (6,00,000)

 (1,20,000)
 20,000
 50,000
 70,000

 

(b) The fund flow statement is no more included in the syllabus therefore the question is not
relevant.

Q15. What is meant by ‘Cash’ and ‘Cash equivalents’ as per AS 3?

Answer
As per AS 3 ‘Cash Flow Statements’, the term ‘Cash’ and ‘Cash equivalents’ mean the following:
Cash: It includes cash on hand and demand deposits with banks.
Cash Equivalents: It means short-term, highly liquid investments that are readily convertible
into known amounts of cash and which are subject to insignificant risk of changes in value.
Cash equivalents are held for the purpose of meeting short-term cash commitments rather

than for investment or other similar purposes. For an investment to qualify as a cash
equivalent, it must be readily convertible into a determinatble amount of cash and is subject to
an insignificant risk of changes in value. Therefore, an investment normally qualifies as a cash
equivalent only when it has a short maturity of, say, three months or less from the date of
acquisition and is virtually risk free. A short term investment in a highly risky asset will not
qualify as Cash Equivalent.

Q16. From the following summarised Cash account of S Ltd., prepare cash flow statement for the
year ended 31st March, 2009 in accordance with AS 3 (revised) using direct method.

                  Summarised Cash Account

       
 Opening balance
Issue of share capital
Received from customers
Sale of fixed assets
 

50
300
2800
100

3250


 

 Payment to suppliers
Purchase of fixed assets
Overhead expenses
Wages and salaries
Tax paid
Dividend paid
Bank loan
Closing balance
 2000
200
200
100
250
50
300
150

3250

 

 

Answer

    Cash Flow Statement for the year ended 31.3.2009

 

 

 

 

(Rs in 000)

Cash flow from Operating Activities

 

 

 

Cash received from customers

 

2800

 

Less: Cash paid to suppliers

2000

 

 

Cash paid for overhead expenses

200

 

 

Cash paid for wages and salaries

100

2300

 

 

 

500

 

Less: Income tax paid

 

250

 

Net cash generated from Operating Activities

 

 

250

Cash flow from Investing Activities

 

 

 

Sale of fixed assets

100

 

 

Less: Purchase of fixed assets

200

 

 

Net cash used in Investing Activities

 

 

(100)

Cash flow from Financing Activities Received from issue of share capital Less: Repayment of bank loan Payment of dividend

Net cash used in Financing Activities Net increase in cash and equivalents

Add: Cash and equivalents at the beginning of the year

Cash and equivalents at the end of the year

 

 

300

50

 

300

 

350

 

 

 

 

(50)

100

 

50

150

 

 

Q17. On the basis of the following information prepare a Cash Flow Statement for the year ended
31st March, 2013:
(i) Total sales for the year were Rs 199 crore out of which cash sales amounted to Rs 131 crore.
(ii) Cash collections from credit customers during the year, totalled Rs 67 crore.
(iii) Cash paid to suppliers of goods and services and to the employees of the enterprise
amounted to Rs 159 crore.
(iv) Fully paid preference shares of the face value of Rs 16 crore were redeemed and equity
shares of the face value of Rs 16 crore were allotted as fully paid up at a premium of 25%.
(v) Rs 13 crore were paid by way of income tax.
(vi) Machine of the book value of Rs 21 crore was sold at a loss of Rs 30 lakhs and a new
machine was installed at a total cost of Rs 40 crore.
(vii) Debenture interest amounting Rs 1 crore was paid.
(viii) Dividends totalling Rs 10 crore was paid on equity and preference shares. Corporate
dividend tax @ 17% was also paid.
(ix) On 31st March, 2012 balance with bank and cash on hand totalled Rs 9 crore.

Answer

Cash flow statement for the year ended 31st March, 2013

 

 

(Rs in crores)

(Rs in crores)

Cash flow from operating activities

 

 

Cash sales

131

 

Cash collected from credit customers

67

 

Less: Cash paid to suppliers for goods & services and to

 

 

Employees

(159)

 

Cash from operations

39

 

Less: Income tax paid

(13)

 

Net cash generated from operating activities

 

26.00

Cash flow from investing activities Payment for purchase of Machine Proceeds from sale of Machine

Net cash used in investing activities

 

Cash flow from financing activities Redemption of Preference shares Proceeds from issue of Equity shares Debenture interest paid

Dividend Paid

Net cash used in financing activities

Net decrease in cash and cash equivalent

Add: Cash and cash equivalents as on 1.04.2012 Cash and cash equivalents as on 31.3.2013

 

(40.00)

20.70

 

 

 

(16.00)

20.00

(1.00)

(11.70)

 

 

 

(19.30)

 

 

 

 

 

 

(8.70)

(2.00)

9.00

7.00

 

Q18. Intelligent Ltd., a non financial company has the following entries in its Bank Account. It has
sought your advice on the treatment of the same for preparing Cash Flow Statement.
(i) Loans and Advances given to the following and interest earned on them:
(1) to suppliers
(2) to employees
(3) to its subsidiaries companies
(ii) Investment made in subsidiary Smart Ltd. and dividend received
(iii) Dividend paid for the year
(iv) TDS on interest income earned on investments made
(v) TDS on interest earned on advance given to suppliers
(vi) Insurance claim received against loss of fixed asset by fire
Discuss in the context of AS 3 Cash Flow Statement


Answer
(i) Loans and advances given and interest earned
(1) to suppliers Operating Cash flow
(2) to employees Operating Cash flow
(3) to its subsidiary companies Investing Cash flow
(ii) Investment made in subsidiary company and dividend received
Investing Cash flow
(iii) Dividend paid for the year
Financing Cash Outflow
(iv) TDS on interest income earned on investments made
Investing Cash Outflow
(v) TDS on interest earned on advance given to suppliers

Operating Cash Outflow
(vi) Insurance claim received of amount loss of fixed asset by fire
Extraordinary item to be shown under a separate heading as ‘Cash inflow from Operating
activities’.

 

Q19. Rama Udyog Limited was incorporated on August 1, 2008. It had acquired a running
business of Rama & Co. with effect from April 1, 2008. During the year 2008-09, the total sales
were Rs 36,00,000. The sales per month in the first half year were half of what they were in the
later half year. The net profit of the company, Rs 2,00,000 was worked out after charging the
following expenses:
(i) Depreciation Rs 1,08,000, (ii) Audit fees Rs 15,000, (iii) Directors’ fees Rs 50,000, (iv)
Preliminary expenses Rs 12,000, (v) Office expenses Rs 78,000, (vi) Selling expenses Rs 72,000
and (vii) Interest to vendors upto August 31, 2008 Rs 5,000.
Please ascertain pre-incorporation and post-incorporation profit for the year ended 31st March,
2009.


Answer
Statement showing pre and post incorporation profit for the year ended 31st March, 2009

 

Particulars

Total Amount Rs

Basis of Allocation

Pre - incorporation Rs

Post- Incorporation Rs

Gross Profit

Less: Depreciation Audit Fee

Director’s Fee Preliminary Expenses Office Expenses Selling Expenses

Interest to vendors

5,40,000

1,08,000

15,000

50,000

12,000

78,000

72,000

5,000

2:7

1:2

1:2

Post Post 1:2

2:7

Actual

1,20,000

36,000

5,000

-

- 26,000

16,000

4,000

4,20,000

72,000

10,000

50,000

12,000

52,000

56,000

1,000

Net Profit (Rs 33,000 being preincorporation profit is transferred to capital reserve Account)

2,00,000

 

33,000

1,67,000

 

Working Notes:
1. Sales ratio
The sales per month in the first half year were half of what they were in the later half
year. If in the later half year, sales per month is Re.1 then it should be 50 paise per

month in the first half year. So sales for the first four months (i.e. from 1st April, 2008 to
31st July, 2008) will be 4 .50 = Rs 2 and for the last eight months (i.e. from 1st August,
2008 to 31st March, 2009) will be (2 × .50 + 6 × 1) = Rs 7. Thus sales ratio is 2:7.
2. Time ratio
1st April, 2008 to 31st July, 2008 : 1st August, 2008 to 31st March, 2009
= 4 months : 8 months = 1:2
Thus, time ratio is 1:2.
3. Gross profit
Gross profit = Net profit + All expenses
= Rs 2,00,000 + Rs ( 1,08,000+15,000+50,000+12,000+78,000+72,000+5,000)
= Rs 2,00,000 +Rs 3,40,000 = Rs 5,40,000.

 

Q20. A firm M/s. Alag, which was carrying on business from 1st July, 2010 gets Itself incorporated
as a company on 1st November, 2010. The first accounts are drawn upto 31st March 2011. The
gross profit for the period is Rs 56,000. The general expenses are Rs 14,220; Director's fee
Rs 12,000 p.a.; Incorporation expenses Rs 1,500. Rent upto 31st December was Rs 1,200 p.a
after which it is increased to Rs 3,000 p.a. Salary of the manager, who upon incorporation of
the company was made a director, is Rs 6,000 p.a. His remuneration thereafter is included in
the above figure of fee to the directors.
Give statement showing pre and post incorporation profit. The net sales are Rs 8,20,000, the
monthly average of which for the first four months is one-half of that of the remaining period.
The company earned a uniform profit. Interest and tax may be ignored.

Answer

Statement showing pre and post-incorporation profits

 

Particulars

Basis

Pre - incorporation

Post- Incorporation

Total

 

 

Rs

Rs

Rs

Gross Profit

Sales ratio

16,000

40,000

56,000

Less: General expenses

Time ratio

6,320

7,900

14,220

Directors’ fee

Actual

-

5,000

5,000

Formation expenses

Actual

-

1,500

1,500

Rent (600 + 750)

W.N. 2

400

950

1,350

Manager’s salary

Actual

2,000

--

2,000

Net Profit transferred to:

 

 

 

 

Capital Reserve

 

7,280

--

--

P & L A/c

 

-

24,650

31,930

 

Working Notes:
1. Calculation of sales ratio
Let the average monthly sales of first four months = 100
and next five months = 200
Total sales of first four months = 100 x 4 = 400 and
Total sales of next five months = 200 x 5 = 1,000
The ratio of sales = 400 : 1,000 =2 : 5
2. Rent
Till 31st December, 2011, rent was Rs 1,200 p.a. i.e. Rs 100 p.m.
So, Pre-incorporation rent = Rs 100 x 4 months = Rs 400
Post-incorporation rent = (Rs 100 x 2 months) + (Rs 250 x 3 months) = Rs 950

 

Q21. The promoters of Glorious Ltd. took over on behalf of the company a running business with
effect from 1st April, 2012. The company got incorporated on 1st August, 2012. The annual
accounts were made up to 31st March, 2013 which revealed that the sales for the whole year
totalled Rs 1,600 lakhs out of which sales till 31st July, 20I2 were for Rs 400 lakhs. Gross profit
ratio was 25%. The expenses from 1st April 2012, till 31st March, 2013 were as follows:

 

(Rs in lakhs)

Salaries

69

Rent, Rates and Insurance

24

Sundry Office Expenses

66

Travellers' Commission

16

Discount Allowed

12

Bad Debts

4

Directors' Fee

25

Audit Fee

9

Depreciation on Tangible Assets

12

Debenture Interest

11

 

Prepare a statement showing the calculation of Profits for the pre-incorporation and post
incorporation periods.


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

 

(Rs in lakhs)

 

(Rs in lakhs)

(Rs in lakhs)

Gross Profit (25% of Rs 1,600)

400

Sales

100

300

Less: Salaries

69

Time

23

46

Rent, rates and Insurance

24

Time

8

16

Sundry office expenses

66

Time

22

44

Travellers’ commission

16

Sales

4

12

Discount allowed

12

Sales

3

9

Bad debts

4

Sales

1

3

Directors’ fee

25

Post

-

25

Audit Fees

9

Sales

2.25

6.75

Depreciation on tangible assets

12

Time

4

8

Debenture interest

11

Post

-

11

Net profit

152

 

32.75

119.25

 

Working Notes:
1. Sales ratio

 

(Rs in lakhs)

Sales for the whole year Sales upto 31st July, 2012

Therefore, sales for the period from 1st August, 2012 to 31st March, 2013

1,600

400

1,200

 Thus, sale ratio = 400:1200
= 1:3
2. Time ratio
1st April, 2012 to 31st July, 2012 : 1st August, 2012 to 31st March, 2013
= 4 months: 8 months = 1:2
Thus, time ratio is 1:2

Q22. Sneha Ltd. was incorporated on 1st July, 2013 to acquire a running business of Atul Sons
with effect from 1st April, 2013. During the year 2013-14, the total sales were Rs 24,00,000 of
which Rs 4,80,000 were for the first six months. The Gross profit of the company Rs 3,90,800.
The expenses debited to the Profit & Loss Account included:
(i) Director's fees Rs 30,000
(ii) Bad debts Rs 7,200(iii) Advertising Rs 24,000 (under a contract amounting to Rs 2,000 per month)
(iv) Salaries and General Expenses Rs 1,28,000
(v) Preliminary Expenses written off Rs 10,000
(vi) Donation to a political party given by the company Rs 10,000.
Prepare a statement showing pre-incorporation and post-incorporation profit for the year
ended 31st March, 2014. (8 Marks, IPCC May, 2014)


Answer
Statement showing the calculation of Profits for the pre-incorporation and postincorporation
periods For the year ended 31st March, 2014

Particulars

Total Amount

Basis of Allocation

Pre - incorporation

Post- Incorporation

Gross Profit

3,90,800

Sales

39,080

3,51,720

Less:Directors’ fee

30,000

Post

 

30,000

Bad debts

7,200

Sales

720

6,480

Advertising

24,000

Time

6,000

18,000

Salaries & general expenses

1,28,000

Time

32,000

96,000

Preliminary expenses

10,000

Post

 

10,000

Donation to Political Party

10,000

Post

 

10,000

Net Profit

1,81,600

 

360

1,81,240

Pre-incorporation profit

 

 

 

 

transfer to Capital Reserve

 

 

 

 

 

Working Notes:
1. Sales ratio 

Particulars

Rs

Sales for period up to 30.06.2013 (4,80,000 * 3/6)

Sales for period from 01.07.2013 to 31.03.2014 (24,00,000 – 2,40,000)

2,40,000

21,60,000

 

Thus, Sales Ratio = 1 : 9
2. Time ratio
1st April, 2013 to 30 June, 2013: 1st July, 2013 to 31st March, 2014
= 3 months: 9 months = 1: 3
Thus, Time Ratio is 1: 3

Q23. Following items appear in the Trial Balance of Saral Ltd. as on 31st March, 2014:

Particulars

Amount

4,500 Equity Shares of Rs100 each

Capital Reserve (including Rs40,000 being profit on sale of Plant) Securities Premium

Capital Redemption Reserve General Reserve

Profit and Loss Account (Cr. Balance)

4,50,000

90,000

40,000

30,000

1,05,000

65,000

 

The company decided to issue to equity shareholders bonus shares at the rate of 1 share for every 3 shares held. Company decided that there should be the minimum reduction in free reserves. Pass necessary Journal Entries in the books Saral Ltd. (4 Marks, IPCC May, 2014) Answer

Capital Redemption Reserve A/c Dr. 30,000 Securities Premium A/c                                     Dr. 40,000 Capital Reserve (Realized in cash) Dr 40,000 General Reserve A/c                                                      Dr. 40,000

To Bonus to Shareholders                                        1,50,000 (Being issue of bonus shares by utilization of various

Reserves, as per resolution dated …….)

Bonus to Shareholders A/c              Dr. 1,50,000

To Equity Share Capital                                             1,50,000 (Being capitalization of Profit)

 

Q24. Pass journal entries for the following transactions :
(i) Conversion of 2 lakh fully paid equity shares of Rs 10 each into stock of Rs 1,00,000 and
balance as 12% fully convertible Debenture.
(ii) Consolidation of 40 lakh fully paid equity shares of Rs 2.50 each into 10 lakh fully paid
equity share of Rs 10 each.
(iii) Sub-division of 10 lakh fully paid 11% preference shares of Rs 50 each into 50 lakh fully paid
11% preference shares of Rs 10 each.
(iv) Conversion of 12% preference shares of Rs 5,00,000 into 14% preference shares Rs 3,00,000
and remaining balance as 12% Non-cumulative preference shares.

Answer

Journal Entries

 

 

 

 

 

(i) Equity share Capital A/c To Equity Stock

To 12% Fully Convertible Debentures

(Being conversion of 2 lakh equity shares of Rs 10 each into stock of Rs 1,00,000 and balance as 12% fully convertible debentures as per resolution dated…)

Dr,

 

 

 

 

 

 

Dr.

 

 

 

 

Dr.

 

 

 

 

Dr.

20,00,000

 

 

 

 

 

 

100,00,000

 

 

 

 

500,00,000

 

 

 

 

5,00,000

 

1,00,000

19,00,000

 

 

 

 

 

100,00,000

 

 

 

 

500,00,000

 

 

 

 

3,00,000

2,00,000

(ii) Equity Share Capital A/c (Rs 2.50) To Equity Share Capital A/c (Rs 10)

(Being consolidation of 40 lakh shares of Rs 2.50 each into 10 lakh shares of Rs 10 each as per

resolution dated…)

(iii) 11% Preference Shares Capital A/c (Rs 50) To 11% Preference Share Capital A/c (Rs 10)

(Being subdivision of 10 lakh preference shares of Rs 50 each into 50 lakh shares of Rs 10 each as per

resolution dated…)

(iv) 12% Preference Share Capital A/c To 14% Preference Share Capital

To 12% Non-cumulative Preference Share Capital (Being conversion of 12% preference shares of Rs 500,000 into 14% preference shares of Rs 300,000 and 12% non cumulative preference shares of Rs

200,000 as per resolution dated…)

 

Q25. The closing capital of Mr. A on 31.3.2007 was Rs 1,50,000. On 1.4.2006 his capital
was Rs 60,000. During the year he had drawn Rs 40,000 for domestic expenses. He
introduced Rs 25,000 as additional capital in February, 2007. Find out his net profit for the
year.


Answer


Statement showing calculation of profit for the year 31.3.2007 

Statement showing calculation of profit for the year 31.3.2007

 

 

Rs

Capital as on 31.3.2007

1,50,000

Add: Drawings during the year

40,000

 

1,90,000

Less: Additional capital introduced in February 2002

(25,000)

 

1,65,000

Less: Capital as on 1.4.2006

(60,000)

Net profit for the year

1,05,000

 

Q26. In a concern, the opening provision for doubtful debts is Rs 51,000. During the year a sum of
Rs 10,000 was written off as bad debt. The closing balance of sundry debtors amounts to Rs
6,30,000. It was decided that 10% of the debtors is to be maintained as provision.
Calculate the closing balance towards provision for doubtful debts and pass journal entry for
giving effect to the provision maintained.
Answer
Closing balance of Sundry Debtors = Rs 6,30,000
Closing provision for doubtful debts to be maintained @ 10% = Rs 63,000
Less: Opening Provision for doubtful debts = Rs 51,000
Additional provision to be maintained = Rs 12,000


Journal Entry

 

Rs

Rs

Profit and Loss A/c                                                                 Dr.

To Provision for doubtful debts

(Being additional provision on doubtful debts maintained @ 10%)

12,000

 

12,000

 

Q27. A company sold 25% of the goods on cash basis and the balance on credit basis. Debtors are
allowed 2 months credit and their balance as on 31.3.2008 is Rs 1,40,000. Assume that the sale
is uniform through out the year. Calculate the total sales of the company for the year ended
31.3.2008.


Answer
Debtors as on 31.3.2008 = Rs 1,40,000
Credit period allowed = 2 months
i.e. Debtors as on 31.3.2008 is standing for credit sales of February and March 2008
Credit sales per month = Rs 1,40,000/2 = Rs 70,000
Credit sales for the year 2007-2008 = Rs 70,000 × 12 = Rs 8,40,000
Add: Cash sales 84,000 × 25
75
= 2,80,000

Total sales of the company for the year ended 31.3.2008 Rs 11,20,000
Closing balance of Sundry Debtors = Rs 6,30,000
Closing provision for doubtful debts to be maintained @ 10% = Rs 63,000
Less: Opening Provision for doubtful debts = Rs 51,000
Additional provision to be maintained = Rs 12,000

Journal Entry

 

 

Rs

Rs

Profit and Loss A/c                                                                 Dr.

To Provision for doubtful debts

(Being additional provision on doubtful debts maintained @ 10%)

12,000

 

12,000

 

Q29. A trader purchased goods for Rs 1,70,000. The opening stock of inventory prior to the said
purchase was Rs 30,000. His sales was Rs 2,10,000. Find out the closing stock of inventory if
the Gross profit margin is 25% on cost.
Answer
Calculation of closing stock:
Cost of goods sold = Sales – Gross Profit
= Rs 2,10,000 – ( 2,10,000 × 25
125

= Rs 1,68,000
Closing stock = Opening Stock + Purchases – Cost of goods sold
= Rs 30,000 + Rs 1,70,000 – Rs 1,68,000
= Rs 32,000

Q30. Following information of the Final Accounts of Kumaran Ltd. are missing as shown below:
Trading and Profit & Loss A/c for the year ended 31-03-2012

 

 

Rs (000)

 

Rs (000)

To Opening Stock

7,000

By Sales

?

To Purchases

?

By Closing Stock

?

To Manufacturing Expenses

1,750

 

 

To Gross Profit c/d

?

 

 

Total

?

Total

?

To Office and Administration

7,400

By Gross Profit b/d

?

Expenses

 

By Commission Received

1,000

To Interest on Debentures

600

 

 

To Provision for Taxation

?

 

 

To Net Profit for the year c/d

?

Total

 

Total

?

By Balance b/d

?

To Proposed Dividends

?

By Net Profit for the year

1,400

To Transfer to General Reserves

?

b/d

?

To Balance Transfer to Balance Sheet

?

 

 

Total

?

Total

?

 

Balance Sheet as on 31-03-2012

Liabilities

Rs (000)

Assets

Rs (000)

Paid up Capital

10,000

Fixed Assets:

 

General Reserves:

 

Plant and Machinery

14,000

Balance at the beginning of the year

?

Other Fixed Assets

?

Proposed addition

?

Current Assets:

 

Profit and Loss Appropriation A/c

?

Stock in Trade

?

10% Debentures

?

Sundry Debtors

?

Current Liabilities

?

Bank Balance

1250

Total

?

Total

?

 

You are required to provide the missing figures with the help of following information:
(i) Current Ratio 2 :1.
(ii) Closing stock is 25% of sales.
(iii) Proposed dividends are 40% of the paid up capital.
(iv) Gross profit ratio is 60%.
(v) Ratio of Current Liabilities to Debentures is 2 : 1.
(vi) Transfer to General Reserves is equal to proposed dividends.

(vii) Profit carried forward are 10% of the proposed dividends.
(viii) Provision for taxation is 50% of profits.
(ix) Balance to the credit of General Reserves at the beginning of the year is twice the
amount transferred to that account from the current profits.(16 Marks, November 2012) (IPCC)

Answer

Rs ‘000

1. Amount of debentures
=
Interest on debentures
Rate of interes

× 100 =
600
10
× 100 = 6,000

2. Amount of proposed dividend
= Paid up share capital x 40%= 10,000 x 40% = 4,000
3. Transfer to general reserves
= Amount of proposed dividend i.e. 4,000
4. Profit carried forward
= 10% of proposed dividend = 10% of 4,000 = 400
5. Net profit for the year
= Proposed dividend + Transfer to general reserve + Profit carried forward – Net profit
carried forward
= (4,000 + 4,000 + 400) – 1,400 = 7,000
6. Provision for taxation
Provision for taxation = 50% of profit (i.e. before net profit)
It means that net profit is 50% and provision for tax is 50%.
Therefore, if net profit is 7,000 then, Provision for taxation is also 7,000
7. Gross profit
= Net profit + all expenses – Commission received
= (7,000 + 7,000 + 600 + 7,400) – 1,000 = 21,000
8. Sales
=
Gross profit
Rate of profit

× 100 =
21,000
60
× 100 = 35,000

9. Closing stock
= 25% of sales
= 25% x 35,000 = 8,750
10. Purchases
= (Sales + Closing stock) – (Opening stock + Manufacturing expenses + Gross profit)
= (35,000 + 8,750) – (7,000 + 1,750 + 21,000)

= 43,750 - 29,750 = 14,000
11. Balance of General Reserve as on 1.4.2011
= Twice the amount transferred to general reserve during the year
= 2 x 4,000 = 8,000
12. Current Liabilities
=Current liabilities is twice of amount of debentures
= 2 x 6,000 = 12,000
13. Current Assets
Current Assets = current ratio x current liabilities
= 2 x 12,000 = 24,000
14. Sundry Debtors
Sundry Debtors = Current assets – Stock in trade – Bank balance
= 24,000 – 8,750 – 1,250 = 14,000
15. Total of Equity and Liabilities part of the balance sheet
= Shareholders capital + Non-current liabilities + Current liabilities
= (10,000 + 12,000 + 400) + 6,000+ 12,000 = 40,400
16. Other Fixed Assets
= Total of Equity and Liabilities part of the balance sheet – (Current assets + Plant and
Machinery)
= 40,400 – (24,000 + 14,000) = 2,400

 

Q31. The details of Assets and Liabilities of Mr. 'A' as on 31-3-2012 and31-3-2013 are as follows:

 

31.3.2012

31.3.2013

 

Rs

Rs

Assets:

 

 

Furniture

50,000

 

Building

1,00,000

 

Stock

1,00,000

2,50,000

Sundry Debtors

60,000

1,10,000

Cash in hand

11,200

13,200

Cash at Bank

60,000

75,000

Liabilities :

 

 

Loans

90,000

70,000

Sundry Creditors

50,000

80,000

 

Mr. 'A' decided to provide depreciation on building by 2.5% and furniture by 10% for the period
ended on 31-3-2013. Mr. ‘A’ purchased jewellery for Rs 24,000 for his daughter in December

2012. He sold his car on 30-3-2013 and the amount of Rs 40,000 is retained in the business.
You are required to :
(i) Prepare statement of affairs as on 31-3-2012 and 31-3-2013.
(ii) Calculate the profit received by 'A' during the year ended 31-3-2013.


Answer


(i) Statement of Affairs

Liablilities

31.3.12

31.3.13

Assets

31.3.12

31.3.13

 

Rs

Rs

 

Rs

Rs

Loans

90,000

70,000

Furniture

50,000

45,000

Creditors

50,000

80,000

Building

1,00,000

97,500

Capital A/c

2,41,200

4,40,700

Stock

1,00,000

2,50,000

 

 

 

Debtors

60,000

1,10,000

 

 

 

Cash in hand

11,200

13,200

 

 

 

Cash at Bank

60,000

75,000

 

3,81,200

5,90,700

 

3,81,200

5,90,700

 

Working Note:
Dep. on Building Rs 2,500 (2.5% of Rs 1,00,000)
Dep. on Furniture Rs 5,000 (10% of Rs 50,000)
(ii) Calculation of Profit earned by A during the year ended 31st March, 2013
Capital Account 

 

 

Rs

 

Rs

To Drawings

24,000

By bal. b/d

2,41,200

To bal. c/d

4,40,700

By Additional Capital (Car sale proceeds)

40,000

 

 

By P&L A/c. (Bal. figure)

1,83,500

 

4,64,700

 

4,64,700

 

Q32. Ram & Co. acquired a motor lorry on hire-purchase basis. It has to make cash down
payment of Rs 1,00,000 at the beginning. The payments to be made subsequently are Rs
2,63,000; Rs 1,85,000 and Rs 1,14,000 at the end of first year, second year and third year
respectively Interest charged is @ 14% per annum. Calculate the cost price of motor lorry and
interest paid in each installment.


Answer
Calculation of cost price and total interest to be paid on motor lorry 

No. of instalment

Amount due at the time of instalment

Interest on cumulative instalment

Cash Price in each instalment

III II

 

I

 

Cash down payment Total

1,14,000

 

1,85,000

 

 

2,63,000

1,14,000 × 14 = 14,000

114

 

1,85,000 × 14 = 35,000

114

 

14

2,63,000 ×       = 63,000

114

 

 

 

 

1,12,000

1,00,000

 

 

1,50,000

 

2,00,000

 

1,00,000

 

5,50,000

 

* 1,00,000 + 1,85,000 = 2,85,000.
**2,63,000 + 1,50,000 + 1,00,000 = 5,13,000. 

 

Q33. From the following, calculate the cash price of the asset:

 

 

Rs

Hire purchase price of the asset Down payment

Four annual instalments at the end of each year

Rate of interest

50,000

10,000

10,000

5% p.a.

 

Answer

Calculation of cash price of the asset

 

Number of instalments

Closing balance

Amount of instalment

Total

Interest 5/105

Opening balance

4

3

2

1

0

9524

18594

27232

10,000

10,000

10,000

10,000

10,000

19,524

28,594

37,232

476

930

1,362

1,773

9,524

18,594

27,232

35,459

 

Cash price of the asset = Down payment + Rs 35,459
= Rs 10,000 + Rs 35,459
= Rs 45,459

Q34. On 1st April, 2012 Fastrack Motors Co. sells a truck on hire purchase basis to Teja Transport
Co. for a total hire purchase price of Rs 9,00,000 payable as to Rs 2,40,000 as down payment
and the balance in three equal annual instalments of Rs 2,20,000 each payable on 31st March,
2013, 2014 and 2015. The hire vendor charges interest @ 10% per annum.
You are required to ascertain the cash price of the truck for Teja Transport Co. Calculations
may be made to the nearest rupee.

Answer
Ratio of interest and amount due =

\(\text { Ratio of interest and amount due }=\frac{\text { Rate of Interest }}{100+\text { Rate of Interest }}=\frac{10}{1.10}=\frac{1}{11}\)

There is no interest element is there in the down payment as it is paid on the date of the
transaction. Instalments paid after certain period includes interest portion also. Therefore, to
ascertain cash price, interest will be calculated from last instalment to first instalment as
follows:

 

Calculation of Interest and Cash Price

 

No. of instalments

Amount due at the time of instalment

Interest

Cumulative Cash price

(1)

(2)

(3)

(2 - 3)= (4)

3rd 2nd

1st

2,20,000

4,20,000 [W.N.1]

6,01,818 [W.N.2]

1/11 of Rs 2,20,000 =Rs 20,000

1/11 of Rs 4,20,000= Rs 38,182

1/11of Rs 6,01,818= Rs 54,711

2,00,000

3,81,818

5,47,107

Total cash price = Rs 5,47,107+ 2,40,000 (down payment) =Rs 7,87,107
Working Notes:
1. Rs 2,00,000+ 2nd instalment of Rs 2,20,000= Rs 4,20,000.
2. Rs 3,81,818+ 1st instalment of Rs 2,20,000= Rs 6,01,818

 

Q35. On 1st April, 2012, M/s. Power Motors sold on hire purchase basis a truck whose cash price
was Rs 9,00,000 to M/s. Singh & Singh, a transport firm. The terms of the contract were that
the transporters were to pay Rs 3,00,000 down and six four-monthly instalments of Rs 1,00,000

plus interest on outstanding amount of cash price for the intervening four months. The
instalments were payable on 31st July, 30th November and 31st March in each one of the two
accounting years. Interest was calculated @ 12% per annum. M/s. Singh & Singh duly paid the
instalment on 31st July, 2012 but failed to pay the instalment on 30th November, 2012. M/s.
Power Motors, after legal formalities, repossessed the truck valuing it at Rs 7,00,000. M/s.
Power Motors spent Rs 80,000 on repairs and repainting of the truck and on 7th January, 2013
sold it for Rs 7,50,000 cash.
You are required to prepare M/s. Singh & Singh’s A/c and Goods Repossessed Account in the
books of M/s. Power Motors

 

In the books of M/s. Power Motors M/s. Singh & Singh’s Account

 

Date

Particulars

Rs

Date

Particulars

Rs

1.04.2012

To Hire Purchase Sales A/c (Cash Price)

 

To Interest A/c (6,00,000 × .12 ×

4

)

12

 

To Interest A/c (5,00,000 × .12 ×

4

)

12

 

To Profit & Loss Account

(Bal. fig.)

9,00,000

1.04.2012

By Bank (Down

3,00,000

 

 

 

payment)

 

31.07.2012

24,000

31.07.2012

By Bank

1,24,000

 

 

 

(1,00,000+24,000)

 

 

 

 

 

7,00,000

30.11.2012

20,000

30.11.2012

By Goods

 

 

 

 

Repossessed A/c

 

30.11.2012

1,80,000

 

 

 

 

 

11,24,000

 

 

11,24,000

 

 

Goods Repossessed Account

Date

Particulars

Rs

Date

Particulars

Rs

30.11.2012

To Singh & Singh’s A/c

7,00,000

7.1.2013

By Bank A/c

7,50,000

7.1.2013

To Bank A/c

80,000

7.1.2013

By By Profit & Loss

30,000

 

(Repairs)

 

 

A/c -loss

 

 

 

7,80,000

 

 

7,80,000

 

Q36. What are the differences between Hire Purchase and Installment System?


Answer
Statement showing differences between Hire Purchase and Installment System 

   Basis of Distinction  Hire Purchase  Installment System
 1   Governing Act  It is governed by Hire Purchase Act,
1972.
 It is governed by the Sale
of Goods Act, 1930.
 2  Nature of Contract  It is an agreement of hiring.  It is an agreement of sale.
 3.  Passing of Title
(ownership)
 The title to goods passes on last
payment
 The title to goods passes
immediately as in the case
of usual sale
 4  Right to Return
goods
 The hirer may return goods without
further payment except for accrued
installments
 Unless seller defaults,
goods are not returnable.
 5  Seller’s right to
repossess
 The seller may take possession of
the goods if hirer is in default
 The seller can sue for price
if the buyer is in default.
He cannot take possession
of the goods.
6  Right of Disposal  Hirer cannot hire out sell, pledge or
assign entitling transferee to retain
possession as against the hire
vendor.
 The buyer may dispose off
the goods and give good
title to the bona fide
purchaser.
7  Responsibility for
Risk
of Loss
 The hirer is not responsible for risk
of loss of goods if he has taken
reasonable precaution because the
ownership has not yet transferred
 The buyer is responsible
for risk of loss of goods
because of the ownership
has transferred.
8  Name of Parties
involved
 The parties involved are called Hirer
and Hire vendor

 The parties involved are
called buyer and seller.

9  Component other
than cash price
 Component other than Cash Price
included in installment is called Hire
charges
 Component other than
Cash Price included in
Installment is called
Interest

 

Q37. On 1st April, 2008, Mr. Neel purchased 5,000 equity shares of Rs 100 each in X Ltd. @ Rs
120 each from a Broker, who charged 2% brokerage. He incurred 1⁄2% as cost of shares transfer
stamps. On 31st January, 2009, Bonus was declared in the ratio of 1:2. Before and after the
record date of bonus shares, the shares were quoted at Rs 175 per share and Rs 90 per share
respectively. On 31st March, 2009, Mr. Neel sold bonus shares to a broker, who charged 2%

brokerage.
Show the Investment Account in the books of Mr. Neel, who held the shares as current assets
and closing value of investments shall be made at cost or Market value, whichever is lower.

 

Answer

Investment Account in the books of Mr. Neel
For the year ended 31st March, 2009
(Scrip: Equity Shares of X Ltd.)