Foundation Accounting Edrona Mock tests | India's #1 Mock Test Platform: Supercharge Your Exam Preparation for Guaranteed Success!

Q-1 What do you mean by Accounting? Give its definition.

Answer: According to AICPA, “Accounting” is the art of recording, classifying and summarizing
in a significant manner and in terms of money, transactions and events which are, in part at
least, of a financial character, and interpreting the results thereof.

From the above, it is clear that accounting refers to:
• A procedure of writing financial transactions and events.
• A system of recording, classifying, summarizing, analyzing, interpreting and reporting periodically, in terms of money/which provides necessary financial formation.

The said financial information is used for taking necessary and proper decisions about the
allocation of economic resources and running the organisation successfully.

Accounting accumulates data systematically and supplies the necessary information to the
users of financial statements by which the users can take proper economic decisions and also
may make proper predictions, i.e., in short, it conveys financial information about an entity for
a specified period.

Q-2 Discuss the limitations which must be kept in mind while evaluating the Financial
Statements.

Answer: Limitations of Financial Statements:

1. Historical Cost:

The financial statements are prepared on the basis of historical cost, i.e. current market value
of the fixed asset is not taken into consideration. The value of the fixed asset continues to
decrease with the passage of time, but the effect of these subsequent changes in price is not
taken into account. The Balance Sheet loses its significance since it does not take into
consideration the economic realities of the business organization. Thus, heavy reliance on
historical cost makes the financial statements misleading & irrelevant for decision making.

2. Perpetual Continuity & Periodical Account:
Financial statements are prepared at the end of the year but the accounting records are
maintained on the going concern assumption (i.e. the business shall continue to exist forever).
As a result, many items of capital expenditure are distributed over a number of beneficial years
arbitrarily which may lead to incorrect preparation of financial statements.

3. Strengths & Weaknesses:
The assets which can be expressed in terms of money are recorded in the financial statements
of a company. The strengths & weaknesses of the business are not taken into consideration
while preparing the Balance Sheet.

For example: services, skills & loyalty of the employees are also important for the business, but
these are not shown in the Balance Sheet. Thus, it should be kept in mind while judging the
company’s financial position, that much non-monetary strength will not be reflected in the
Balance Sheet.

4. Intangible assets:
A company may have a number of intangible assets that are not recorded in its financial
statements, but the expenditure made in regard to those assets are charged to expense. This
policy can drastically affect the reliability of the financial statements of a company.

5. Window Dressing:
There is a possibility of fabrication of the financial statements by the management of the
company. In such a case, financial statements may not provide true & fair view of the financial
position of the company.

6. Different Accounting Policies:
The financial statements of different companies are not always comparable, because the
entities use different accounting policies. For example: One company may charge depreciation
on straight line method & another on written down value method. When different methods are
adopted by different companies for the treatment of a particular item, the results of
comparison between such enterprises shall be misleading.

Q-3 What are the branches of Accounting? Explain.

Answer: Accounting has basically three branches:

(a) Financial Accounting:

It is concerned with the maintenance of books of account of an enterprise.
Recording & classifying all its financial transactions and events with a view to prepare

Annual Financial Accounts.

To be used by various interest groups (i e. General Purpose Financial Statement).

(b) Management Accounting:

It refers to use of accounting data with proper analysis in reporting, so as to serve the

need of management.

To help them in decision making and exercising proper controls.
It may not have separate books of account but uses the data from financial accounts & cost accounts and Properly analyses it, compares it, calculate ratios etc. and present it to management periodically.

Generally manufacturing concerns maintains cost accounts.
With a view to ascertain the cost of goods manufactured or services rendered with

proper break-up of cost.

Also providing useful data to management for effective cost control and
Govt, also has prescribed maintenance of cost records by specific industries.

(d) Social Responsibility Accounting:

Concerned with measurement and reporting of the impact of the operations of an
organisation on the society.
Attempts to disclose the costs incurred and
Benefits accrued to the society as a consequence of the activities of the organization.

Q-4 Define Provision & Reserve.

Answer 1. Provision means

“any amount written off or retained by way of providing for depreciation, renewal or diminution in value of assets, or
retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy”.

2. Provision is a present liability which by its nature requires a significant amount of estimation.

3. The following are examples of amount retained in the business out of earning for different
purposes that are described as provisions.

Amount provided for meeting claims /liabilities which are admissible in principle but the

amount whereof has not been ascertained.

Amount provided for payment of taxes still to be assessed.
Amount set aside for writing off bad debts or for discounts.

4. The term ‘reserve’ is not defined in Part-III of Schedule VI except negatively in the sense that
profit retained in the business not having any of the attributes of a ‘provision’ is to be treated
as a reserve.

5. Also provisions in excess of the amount considered necessary for the purposes these were
originally made, are to be considered as reserves.

6. It is thus evident that provisions are a charge against profits, while reserve is an
appropriation of profits.

7. Reserve are accumulated profits hence part of owners equity, provision are in the nature of
liability due to outsiders.

8. Provision will be debited to P&L a/c and reserve to P&L appropriation A/c when created.

Q-5 Below is the trial balance of Shah as on December 31, 2005 :

Debit Balance	Rs.	Credit Balance	Rs.
Drawings	1,500	Capital Account	50,000
Adjusted purchases	6,99,200	Loan from Desai @ 9% (taken on 1st July, 2004)	20,000
Salaries	4,500	Sales	7,20,000
Carriage on Purchases		Discount	500
on sales		Sundry Creditors	20,000
Rates and Insurance	400
Buildings	400
Furniture	500
Sundry Debtors	8,000
Cash on Hand	250
Cash at Bank	1,500
Stock (31st December, 2005)	61,250
	8,10,500		8,10,500

Additional information:
1. Rates have been prepaid to the extent of RS. 175.
2. Bad debts Rs. 500 have to written off. A provision for doubtful debts @ 5% on debtors is
necessary.
3. Building has to be depreciated at 2% and Furniture @ 10%.
4. The manager is entitled to a commission of 5% of net profits before charging such
commission.

Solution: Trading and Profit and Loss Account of Shah for the Year ended on December 31,
2005

Particulars		Rs.	Particulars	Rs.
To Adjusted Purchases		6,99,200	By Sales	7,20,000
To Carriage on Purchases		400
To Gross Profit c/d		20,400
		7,20,000		7,20,000
To Salaries		4,500	By Gross Profit b/d	20,400
To Carriage on Sales		500	By Discount	500
To Rates & Insurance PaidTo Rates & Insurance Paid	400	225
Less: Prepaid	175	225
To Bad Debts written off		500
To Provision for Doubtful Debts (5% of t 7,500)		375
To Depreciation: Buildings (2%)	540	1,140
Furniture (10%)	600	1,140
To Interest		1,800
To Commission payable to manager (5% of Rs. 11,860)		593
To Net Profit		11,267
		20,900		20,900

20,900 less Rs. 9,040 (the total of all expenses so far), Manager is entitled to 5% of this figure.

(1) The trial balance gives “Adjusted Purchases”. It means that the opening stock has already
been transferred to the Purchases Account and thus been closed. Further, entry for closing
stock has already been passed by debiting the Closing Stock Account and crediting PurchaseAccount.

That is why closing stock appears inside the trial balance. It will now be shown in the
Balance Sheet and not in the Trading Account since purchases already stand reduced.

(2) There is a Loan of Desai @ 9% taken in 2004 i.e. in last accounting year. As per mercantile
system interest up to 31.12.04 must have been provided in the last years a/c itself. The trial
balance makes no mention of any interest being paid to him. Hence, interest @ 9% must be
provided for the whole of current year only.

Balance Sheet of Shah as on December 31, 2005

Liabilities		Rs.	Assets			Rs.
Capital Account	50,000	59,767	Fixed Assets: Buildings	27,000		26,460
Add: Net Profit	11,267
			Less: Depreciation	540
Less: Drawings	1,500
Loan from Desai	20,000	21,800	Furniture	6,000		5,400
Add: Interest Due	1,800		Less: Depreciation	600
Sundry Creditors		20,000	Current Assets:
Commission Payable		593	Cash on hand			250
			Cash at Bank			1,500
			Sundry Debtors Less: Provision for		7,500	7,125
			Doubtful debt		375
			Stock			61,250
			Prepaid Rates			175
		1,02,160				1,02,160

Q-6 Functions of accounting data

Answer: Accounting data serves the following functions:

Measurement: Account data helps to measure the performance & financial position of the enterprise. It measures Assets, Liabilities, Expenses & Incomes.
Forecasting: On the basis of past accounting data, forecasting about future plans are made.
Decision Making: Various decision requires timely & correct information which is provided by accounts.
Evaluation: Evaluation of an enterprise’s performance & financial health is done from accounting data.
Control: By adopting various accounting techniques, checks & balances the activity of the enterprise is controlled.
Stewardship : The management, manages the money of shareholders/owners, on their behalf.
Govt, regulation & Taxation : Accounting data serves the various requirements of govt, regulations & to assess proper tax liability.

Q- 7 What are Fundamental Accounting Assumptions? Explain them in detail.

Answer: Fundamental Accounting Assumptions:

Fundamental accounting assumptions underline the preparation and presentation of financial statements.
They are usually not specifically stated because their acceptance and use are assumed.
Disclosure is necessary if they are not followed.
The Institute of Chartered Accountants of India issued Accounting Standard (AS-1)‘Disclosure of
Accounting Policies’ according to which the following have been generally accepted as fundamental accounting assumptions: (i) Going Concern, (ii) Consistency and (iii)Accrual.

Q- 8 From the following Trial Balance of Hari and additional information prepare Trading and Profit & Loss Account for the year ended 31st March, 2006 and a Balance Sheet as on that date:

Trial Balance as at 31st March, 2006

Particulars	Dr.(Rs.)	Cr.(Rs.)
Capital	-	1,00,000
Furniture	20,000	-
Purchases	1,50,000	-
Debtors	2,00,000	-
Interest Earned	-	4,000
Salaries	30,000	-
Sales	-	3,21,000
Purchase Returns	-	5,000
Wages	20,000	-
Rent	15,000	-
Sales Return	10,000	-
Bad Debt Written off	7,000	-
Creditors	-	1,20,000
Drawings	24,000	-
Provision for Bad Debts	-	6,000
Printing & Stationery	8,000	-
Insurance	12,000	-

Opening Stock	50,000	-
Office Expenses	12,000	-
Provision for Depreciation	-	2,000
	5,58,000	5,58,000

Additional Information:
(1) Depreciate Furniture by 10% on original cost;

(2) A provision for Doubtful Debts is to be created to the extent of 5% on Sundry Debtors;

(3) Salaries for the month of March, 2006 amounting to Rs.3,000 were unpaid which must be provided for. However salaries included Rs. 2,000 paid in advance;

(4) Insurance amounting to Rs. 2,000 is prepaid;

(5) Provide for outstanding office expenses Rs.8,000;

(6) Stock used for private purpose Rs. 6,000;

(7) Closing Stock-in-Trade Rs. 60,000.

Solution: M/s Hari Trading and Profit and Loss Account for the year ended on 31.3.2006

Particulars		Rs.	Particulars		Rs.
To opening stock			By sales	3,21,000	3,11,000
			(-)return	10,000
To purchases	1,50,000	1,45,000	By goods used		6,000
(-) Return	5,100
To wages		20,000	By closing stock		60,000
To Gross profit c/d		1,62,000
		3,77,000			3,77,000
To salaries	30,000	31,000
(+) outstanding salary	3,000
(-) advance salary	2,000
To Rent		15,000
To bad debts	7,000	11000
(+) Provisions	4,000
To printing & Stationary		8,000
To Insurance	12,000	10000
(-) Prepaid	2,000
To Office Expenses	12,000	20,000
(+)outstanding	8,000
To deprecation		2,000
To Net Profit transferred to capital a/c		69,000
		1,66,000			1,66,000

M/s Hari. Balance Sheet as on 31.3.2006

Liabilities		Rs.	Assets		Rs.
Capital	1,00,000	1,39,000	Furniture	20,000	16,000
(+)Net Profit	69,000
(-)Drawings	24,000		(-)dep. Provisions: Bal. b/f	2,000
(-)Goods taken	6,000		(+) Current year dep.	2,000
Creditors		1,20,000	Stock		60,000
Salary payable		3,000	Debtors	2,00,000	1,90,000
			(-)prov. old b/f	6,000
			(+)additional prov.	4,000
Expenses payable		8,000	Advance salary		2,000
		2,70,000			2,70,000

Adjustment Entries

No.	Particulars	Dr.(Rs.)	Cr.(Rs.)
1.	Deprecation a/c Dr.	2,000
	To deprecation Provisions a/c		2,000
	(Deprecation for the current year provided by SLM )
2.	Bad debts a/c Dr.	4,000
	To provisions for bad debts a/c		4,000
	( Provisions for additional bad debts created. Required prov. 5% on bad debtors of Rs. 2,00,000 i.e. Rs. 10,000 less existing provisions Rs.6,000)
3.	Salary a/c Dr.	3,000
	To salary payable a/c		3,000
	(being the salary for the month of march due)
	Advance Salary a/c Dr.	2,000
	To salary a/c		2,000
	(Being advance salary paid transferred to advance a/c )
4.	Prepaid Insurance a/c Dr.	2,000
	To insurance expenses a/c		2,000
	(being premium paid for next year, transferred to prepaid a/c )
5.	Office expenses a/c Dr.	8,000
	To Expenses payable a/c		8,000
	Being provision made for expense payable)
6.	Drawings a/c Dr.	6,000
	To Goods used a/c		6,000
	(Being goods withdrawn by owner for personal use)
7.	Stock a/c Dr.	60,000
	To Trading a/c		60,000
	(Being closing stock adjusted)

Transfer Entries/Book Closing Entries

No.	Particulars	Dr.(Rs.)	Cr.(Rs.)
1.	Purchase return a/c Dr.	5,000
	To Purchase a/c		5,000
	(Being purchase return balance transferred to purchases a/c)
2.	Trading a/c Dr .	2,15,000
	To Opening stock a/c		50,000
	To Purchase a/c		1,45,000
	To Wages a/c		20,000
	(Being direct expenses of goods transferred to trading a/c)
3.	Sales a/c Dr.	10,000
	Sales return a/c		10,000
	(Being direct expenses of goods transferred to trading a/c)
4.	Sales a/c Dr.	3,11,000
	Goods used a/c	6,000
	To Trading a/c		3,17,000
	(Being sales a/c and goods used a/c transferred to trading a/c)
5.	Trading a/c Dr.	1,62,000
	To Profit & Loss a/c		1,62,000
	(Being gross profit shown by trading a/c transferred to P&L a/c)
6	Interest a/c Dr.	4,000
	To Profit & Loss a/c		4,000
	(Being indirect incomes transferred to P&L a/c)
7	Profit & Loss a/c Dr.	97,000

	To Salary a/c		31,000
	To Rent a/c		15,000
	To Bad debt a/c		11,000
	To Printing and stationery a/c		8,000
	To Insurance a/c		10,000
	To Office expense a/c		20,000
	To Depreciation a/c		2,000
	(Being expenses a/c transferred to P&L a/c)
8.	Profit & Loss a/c	69,000
	To Capital a/c		69,000
	(Being net profit as per P&L a/c transferred to capital a/c)
9.	Capital a/c Dr.	30,000
	To Drawings a/c		30,000
	(Being drawing adjusted against capital a/c)

Q-9 Explain Deferred Revenue Expenditure & Prepaid Expenses

Answer: Deferred Revenue Expenditure & Prepaid Expenses:

→ The Guidance Note on ‘Terms used in Financial Statement’, issued by the Institute of Chartered Accountants of India, defines “deferred revenue expenditure as those expenditure for which payment has been made or a liability incurred but which is carried forward on the presumption that it will be of benefit over a subsequent period or periods.”
→ In short, it refers to that expenditure that is, for the time being, deferred from being charged against income.

→ So long as deferred revenue expenditure is not written off, this is shown on the assets side of the balance sheet under the head “Miscellaneous Expenditure.”
→ Deferred revenue expenditure should be revenue expenditure by nature in the first instance, for example, advertisement. But its matching with revenue may be deferred considering the benefit to be accrued in future.
→ A thin line of difference exists between deferred revenue expenses and prepaid expenses.
→ The benefits available from prepaid expenses can be precisely estimated but that is not so in case of deferred revenue expenses.
→ Heavy advertising to launch a new product is a deferred expenses since the benefit from it will be available over the next three to five years but one cannot say precisely how long.
→ On the other hand, insurance premium paid, say, for the year ending 30th June, 2006, when the accounting year ends on 31st March, 2006 will be an example of prepaid expense to the extent of premium relating to three months’ period i.e. from 1st April, 2006 to 30th June, 2006.
→ Thus the insurance protection will be available precisely for three months after close of the year and the amount of the premium to be carried forward can be calculated exactly.
As per Accounting Standard 26 only those expenditures should be deferred which are expectedto give future benefits. While solving problem, student should defer an expense item only if specifically so required by the question.

Q-10 What are the basis of Accounting Policies selection? What are the different areas in which different accounting policies are possible?

Answer: The major considerations governing the selection and application of accounting
policies are:
 As per concept of Substance over form, the transaction should be recognized as per the
economic reality of the transaction & not mere legal form.
 All material information which is relevant for the proper disclosure of true & fair
position, should be disclosed prominently in the accounts & financial statements.
 If any fundamental accounting assumption is not followed – (Going concern,
Consistency or Accrual)
 The expenses or Income of periodic nature accrues on day to day basis.
 It implies that the concern will be continuing the business for foreseeable future.
 It is assumed that the enterprise has neither the intention nor the necessity of
liquidation or of curtailing materially the scale of the operations.
Areas in which differing accounting policies are encountered:

Areas	Differing Accounting Policies possible
Differing Accounting Policies possible	Straight line method, Written down value method
Treatment of expenditure during construction	Treatment of expenditure during construction
Valuation of inventories.	Different cost formulas FIFO, Weighted average cost, etc.
Treatment of goodwill.	Amortize, do not amortize.
Amortize, do not amortize.	Cost, lower of cost and fair value, fair value
Recognition of profit on long- term contracts.	Percentage of completion method, completed contract method, different ways of measuring percentage of completion.
Valuation of fixed assets	Costs less depreciation, costs, Costs less depreciation less impairment
Treatment of contingent liabilities.	Make provision, disclosures only.

Q-11 Classify the following accounts into Personal, Real and Nominal.

a. Cash Account

b. Wages Account

c. Building Account

d. Calcutta Tramway Co. Account

e. East Bengal Club Account

f. Rent Account

g. Capital Account

h. Drawings Account

i. Interest Account

j. Trade Mark Account

k. Dividend Account

l. Land Account

m. Goodwill Account

n. Patent Account

o. Bad Debts Account

p. Bank Account

q. Discount Allowed Account

r. Interest Received Account

s. Discount Received Account

t. Salary Payable

u. Bills Receivable

Solution:

Personal Accounts	d, e, g, h, p, t, u
Real Accounts	a, c, j, l, m, n
Nominal Accounts	b, f, i, k, o, q, r, s

Q-12 Pass necessary journal entries to rectify the following errors:

(i) An amount of Rs. 200 withdrawn by the proprietor for his personal use has been debited to
trade expenses account.

(ii) A purchase of goods from Nathan amounting to Rs. 300 has been wrongly entered through
the sales-book.

(iii) A credit sale of Rs. 100 to Santhanam has been wrongly passed through the purchases-
book.

(iv) Rs. 150 received from Malhotra have been credited to Mehrotra.

(v)Rs. 375 paid on account of salary to the cashier Dhawan stands debited to his personal account.

(vi) A contractor’s bill for extension of premises amounting to Rs. 2,750 has been debited to building repairs account.

(vii) On 25th June, goods of the value of Rs. 500 were returned by Akash Deep and were taken into stock but the returns were entered in the books under date 3rd July, ie., after the expiration of the financial year on 30th June.

(viii) A bill of Rs. 200 for old office furniture sold to Sethi were entered in the sales-day-book.

(ix) The periodical total of the sales-book was cast short by Rs. 100.

(x) An amount of Rs. 80 received on account of interest was credited to commission account.

Solution: Rectification of Entry in same Year

Solution: Rectification of Entry in same Year

	Particulars		Dr.	Cr.
(i)	Drawings a/c	Dr.	200
	To trade expenses a/c			200
	(being rectification of drawing wrongly debited to trade expenses a/c)
(ii)	Sale a/c	Dr.	300
	Purchase a/c		300
	To Nathan a/c			600
	(Being Purchase entered in sales book, consequently sales is credited & Nathan a/c debit instead of debiting purchase & crediting Nathan, now rectified)
(iii)	Santhanam a/c	Dr.	200
	To Purchase a/c			100
	To Sales a/c			100

	Being sale wrongly entered in purchase book now rectified)
(iv)	Mehrotra a/c	Dr.	150
	To Malhotra a/c			150
	Being sale wrongly entered in purchase book now rectified)
(v)	Salary a/c	Dr.	375
	To Dhawan's a/c			375
	(Being rectification of wrong debit to Dhawan's a/c in-stead of salary a/c)
(vi)	Premises a/c	Dr.	2750
	To Repairs a/c			2750
	(Being Capital expenditure wrongly debited to revenue exp. Now rectified)
(vii)	Sales Return a/c	Dr.	500
	To Akash deep a/c			500
	Being sales return was not recorded in current year now entered. Goods have been already correctly included in stock hence no correction there. Entry already passed in the next year's books will have to be reversed)
(viii)	Sales a/c	Dr.	200
	To Furniture a/c			200
	(Being sale of asset wrongly entered in sales book now rectified)
(ix)	Suspense a/c	Dr.	100
	To Sales a/c			100
	(Being short totalling sales book resulting into short credit to sale a/c, now rectified)
(x)	Commission a/c	Dr.	80
	To Interest a/c			80
	Being wrong credit to commission instead of Interest a/c now rectified)

Comment:

 Credit side of Trial balance was short by Rs. 100/-

 (i) to (viii) & (x) are double sided error, hence their rectification does not involve
suspense a/c but (ix) is one sided error, hence their rectification involves suspense a/c.

 (i), (vi), (viii) is Error of Principle, and (ii) to (v), (vii), (ix) & (x) are Error of commission.

Q-13 From the following particulars prepare a Bank Reconciliation Statement as on 31st December,2005

1. On 31st December, 2005 the Cash-book of a firm showed deposit with bank Dr. balance of Rs. 6,000.

2. Cheques had been issued for Rs. 5,000, out of which cheques worth Rs. 4,000 only were presented for payment.

3. Cheques worth Rs. 1,400 were deposited in the bank on 28th December, 2005 but had not been credited by the bank. In addition to this, one cheque for Rs. 500 was entered in the Cash- book on 30th December, 2005 but was banked on 3-1-2006.

4. A cheque from Susan for Rs.400 was deposited in the bank on 26th December, 2005 but was dishonoured and the advice was received on 2-1-2006.

5. Pass-book showed bank charges of Rs. 20 debited by the bank.

6. One of the debtors deposited a sum of Rs. 500 in the bank account of the firm on 20th December, 2005 but the intimation in this respect was received from the bank on 2-1-2006.

7. Bank Pass-book showed a credit balance of Rs. 5,180 on 31st December, 2005.

Solution: BRS in Add less form

Balance as per Cash Book (deposit)		6,000
Add: Cheques issued but not yet paid	1,000
Add: Cheques directly deposited in Bank	500	1,500
		7,500
Less: Cheques deposited but not yet realized	1,400
Cheques received & entered but not yet deposited	500
Cheques deposited & dishonoured	400
Bank charges charged by Bank	20	2,320
Balance as per Pass book (deposit)		5,180

Q-14 Explain Periodic inventory system

Answer: Periodic/Physical inventory system
 No records of inventory are maintained.

 Inventory is ascertained by physical counting at the end of the year and then valued.

 It is simple and commonly followed by small organisations.

Unless otherwise specified, we can always assume that inventory/closing stock for annual financial account purposes is ascertained by physical counting and then valuing.

Q-15 The following are the details of a spare part of Sriram Mills:

1-1-06	Opening stock	Nil
1-1	Purchases	100 units @ Rs. 30 per unit
15-1	Issued for consumption	50 units
1-2	Purchases	200 units @ Rs. 40 per unit
15-2	Issued for consumption	100 units
20-2	Issued for consumption	100 units
1-3	Purchases	150 units @ Rs. 50 per unit
15-3	Issued for consumption	100 units

Find out the value of stock as on 31-3-06 if the company follows:

1. First in First Out basis

2. Last in First Out basis

3. Weighted Average basis

Solution: Stores card/Stores ledger

Fifo Method: Item – Spare parts → Method of Valuation of issues → FIFO

Date			Receipt			Issue			Balance
2006	Particulars	V.no.	Qty.	Rate	Amt.	Qty.	Rate	Amt.	Qty.	Rate	Amt.
1.1	Open. Bal.								-	-	-
1.1	Purchase		100	30	3000				100	30	3000
15.1	Issue					50	30	1500	50	30	1500
1.2	Purchase		200	40	8000				50	30	1500
									200	40	8000
15.2	issue					100	50×30	1500	150	40	6000
							50×40
20.2	issue					100	100×40	4000	50	40	2000

1.3	Purchase	150	50	7500				50	40	2000
								150	50	7500
15.3	Issue				100	50 × 40	2000
						50 × 50	2500	100	50	5000
	Total	450		18500	350		13500	100		5000

Particulars	Qty.	Value
Purchases	450	18,500
Consumption	350	13,500
Closing Stock (Cost by FIFO Method)	100	5,000

Without making stores card, if we simply value the stock of 100 units from the last lot because the earlier lots have been issued, we get the same valuation 100 units @ Rs. 50/- = Rs. 5,000.

Lifo Method: Item – Spare parts → Method of Valuation of issues → LIFO

Date			Receipt			Issue			Balance
2006	Particulars	V.no.	Qty.	Rate	Amt.	Qty.	Rate	Amt.	Qty.	Rate	Amt.
1.1	Open. Bal.								-	-	-
1.1	Purchase		100	30	3000				100	30	3000
15.1	Issue					50	30	1500	50	30	1500
1.2	Purchase		200	40	8000				50	30	1500
									200	40	8000
15.2	Issue					100	40	4000	50	30	1500
									100	40	4000
20.2	Issue					100	40	4000	50	30	1500
1.3	Purchase		150	50	7500				50	30	1500

									150	50	7500
15.3	Issue					100	50	5000	50	30	1500

									50	50	2500
	Total		450		18,500	350		14,500	100		4000

Particulars	Qty.	Value
Purchases	450	18,500
Consumption	350	14,500
Closing Stock (Cost by LIFO Method)	100	4,000

Alternatively:
The shortcut valuation of closing stock by LIFO i.e. without preparing stores card, would have been 100 units @30/- = 3,000. It differs from the above valuation which is more correct if date wise issue is known.

Weighted Average Method: Item – Spare parts → Method of Valuation of issues → Weighted Average Method

Date			Receipt			Issue			Balance
2006	Particulars	V.no.	Qty.	Rate	Amt.	Qty.	Rate	Amt.	Qty.	Rate	Amt.
1.1	Open. Bal.								-	-	-
1.1	Purchase		100	30	3000				100	30	3000
15.1	Issue					50	30	1500	50	30	1500
1.2	Purchase		200	40	8000				250	38	9500
15.2	Issue					100	38	3800	150	38	5700
20.2	Issue					100	38	3800	50	38	1900
1.3	Purchase		150	50	7500				200	47	9400
15.3	Issue					100	47	4700	100	47	4700
	Total		450		18500	350		13800	100		4700

Alternatively periodic weighted average can be applied say quarterly weighted average = 3000 + 8000 + 7500/100 + 200 + 150 = 41.11
Closing stock = 41.11 x 100 = 4111

Particulars	Qty.	Value
Purchases	450	18,500
Consumption	350	13,800
Closing Stock (Cost by weighted Method)	100	4,700

Q-16 Raj Ltd. prepared their accounts for financial year ended on 31st March 2019. Due to unavoidable circumstances actual stock has been taken on 10th April 2019, when it was ascertained at Rs. 1,25,000. It has been found that;

(i) Sales are entered in the Sales Book on the day of dispatch and return inwards in the Returns
Inward Book on the day of the goods received back.

(ii) Purchases are entered in the Purchase Book on the day the Invoices are received.

(iii) Sales between 1st April 2019 to 9th April 2019 amounting to Rs. 20,000 as per Sales Day Book.

(iv) Free samples for business promotion issued during 1st April 2019 to 9th April 2019 amounting to Rs. 4,000 at cost.

(v) Purchases during 1st April 2019 to 9th April 2019 amounting to 110,000 but goods amounts to Rs. 2,000 not received till the date of stock taking.

(vi) Invoices for goods purchased amounting to Rs. 20,000 were entered on 28th March 2019 but the goods were not included in stock.

Rate of Gross Profit is 2596 on cost.

Ascertain the value of Stock as on 31st March 2019.

Particulars	Rs.
Stock as on 10th April, 2019	1,25,000
Add: Cost of Goods sold (20,000/100 x 80) [Note:- Profit 25% on cost= 20% on sale]	16,000
Add: Free samples distributed	4,000
Less: Goods purchased & received (10,000-2,000)	8,000
Add: Invoices entered but goods not included in stock	20,000
(Stock as on 31st March, 2019	1,57,000

Q-17 Define Sum of Years of Digits Method.

Answer: Sum of Years of Digits Method:
In this method the depreciation is calculated in the ratio of the remaining life of the asset in the beginning of that year to the sum of digits of the life remaining for all the year.

Dep. Of the year = Depreciable value ×

\(Number of years including the present year of remaining life of the asset \over Total of all digits of the life of the asset (in years )\)

Q-18 On 1st January, 2002 Hari Om purchased 6 machines for Rs. 15,000 each. His accounting year ends on 31st December. Depreciation at the rate of 10% on initial cost has been charged to profit and loss account and credited to a separate depreciation provision account.
On 1st January, 2003 one machine was sold for Rs.12,500 and on 1st January, 2004 a second machine was sold for Rs. 12,500. An improved model which cost Rs. 28,000 was purchased on
1st July, 2003. The same rate of depreciation was decided for the new machine was well. You are required to show:
1. The asset account
2. The asset disposal account
3. The depreciation provision account.
Solution: Ledger of Hari Om Machinery Account

2002	Particulars	Rs.	2002	Particulars	Rs.
Jan.1	To Bank a/c	90,000	Dec.31		90,000
		90,000			90,000
2003			2003
Jan.1	To Balance b/d	90,000	Jan. 1	Machinery disposal a/c	15,000
July 1	To Bank a/c	28,000	Dec. 31	By Balance c/d	1,03,000
		1,18,000			1,18,000

2004			2004
Jan. 1	To Balance b/d	1,03,000	Jan. 1		15,000
				To Balance c/d	88,000
		1,03,000			1,03,000
2005			2005
Jan. 1	To Balance c/d	88,000

Note: The balance in the asset account at any time represents the cost of assets retained by the firm.

Machinery Disposal Account

2003	Particulars	Rs.	2003	Particulars	Rs.
Jan. 1	To Machinery a/c	15,000	Jan. I	By Provision for depreciation a/c	1,500
			Jan. 1	By Cash a/c	12,500
			Dec. 31	By Profit and loss a/c (loss)	1,000
		15,000			15,000
2004		Rs.	2004		Rs.
Jan. 1	To Machinery a/c	15,000	Jan. 1	By Provision for depreciation a/c	3,000
Dec. 31	To P&L a/c (profit)	500	Jan. 1	By Cash a/c	12,500
		15,500			15,500

Note: Machinery disposal account is not a continuous account like machinery account. It must be prepared separately for each year.

Provision for Depreciation Account (SLM 10%)

2002	Particulars	Rs.	2002	Particulars	Rs.
Dec. 31	To Balance c/d	9,000	Dec.31	By Depreciation a/c	9,000

		9,000			9,000
2003			2003
Jan. 1	To Machinery disposal a/c- transfer	1,500	Jan. 1	By Balance b/d	9,000
Jan. 1	To Balance c/d	16,400	Dec.31	By Depreciation a/c (7500 + 1400)	8,900
		17,900			17,900
2004			2004
Jan. 1	To Machinery disposal a/c- transfer	3,000	Jan. 1	By Balance b/d	16,400
Dec. 31	To Balance c/d	22,200	Dec.31	By Depreciation a/c (6000+2800)	8,800
		25,200			25,200
2005			2005
			Jan. 1	By Balance b/d	22,200

Note : The balance in the provision account at any time shows the balance of accumulated depreciation in respect of retained assets.

Working of depreciation	Rs.
(1) On Rs. 75,000 (Rs. 90,000 – Rs. 15,000) @ 10% per annum	7,500
On Rs.28,000 @ 10% p.a. for 6 months	1,400
Depreciation for the year 2003	8,900
(2) On Rs. 60,000 (Rs. 75,000 – Rs. 15,000) @ 10% p.a.	6,000
On Rs. 28,000 @ 10% p.a. for one year	2,800
Depreciation for the year 2004	8,800

Q-19 Mr. A purchased a Plant costing 60,000 on 1st January, 2015. He purchased another Plant for Rs.50,000 on 1st July in the same year. On 1st October 2016, he sold 1/3rd part of 1st Plant for Rs.11,000 and purchased another Plant for Rs.30,000 on the same date. Prepare Plant A/c for three years in the following cases:
Case I- If rate of depreciation is 10% p.a. on SLM
Case II- If rate of depreciation is 10% p.a. on WDV
Solution: Case I:
Working Note:

Plant I		Plant II		Plant III
On Jan 1, 2015	60,000	On July 1, 2015	50,000	On Oct 1. 2016	30,000
Part I- 60,000 X 1/3	20,000	Less: Dep.	2,500	Less: Dep.	750
Less: Dep.	2,000		47,500		29,250
	18,000	Less: Dep	5,000	Less: Dep	3,000
Less: Dep	1,500		42,500		26,250
	16,500	Less: Dep	5,000
Less: Sold	11.000
Loss	5,500
Part II- 60,000 X 2/3	40,000
Less: Dep.	4,000
	36,000
Less. Dep.	4,000
	32,000
Less: Dep.	4,000

28,000

Plant Account:

Date	Particulars	L.F.	Amount	Date	Particulars	L.F.	Amount
2015				2015
Jan 1 July I	To Bank: Plant I To Bank: Plant II		60,000 50,000	Dec.31	By Depreciation on Plant I 6,000 Plant II 2,500		8,500
					By Bal. c/d Plant I 54,000 Plant II 47,500		1,01,500
			1,10,000				1,10,000
2016				2016
Jan. 1	To Balance b/d Plant I 54,000 Plant II 47,500		1,01,500	Oct.1	By Depreciation on Plant I		1,500
Oct.1	To Bank plant III		30,000		By Cash		11,000
					By P & L a/c (loss)		5,500
				Dec.31	By Depreciation on Plant I 4,000 Plant II 5,000 Plant III 750		9,750

				By Bal. c/d Plant I 32,000 Plant II 42,500 Plant III 29,250	1,03,750
		1,31,500			1,31,500
2017			2017
Jan1	To Bal. b/d Plant I 32,000 Plant II 42,500 Plant III 29,250	1,03,750	Dec.31	By Depreciation on Plant I 4,000 Plant II 5,000 Plant III 3000	12,000
				By Bal. c/d Plant I 28,000 Plant II 37,500 Plant III 26,250	91,750
		1,03,750			1,03,750

Case II: Working Note:

Plant I		Plant II		Plant III
On Jan 1, 2015	60,000	On July 1, 2015	50,000	On Oct 1. 2016	30,000
Part I- 60,000 X 1/3	20,000	Less: Dep.	2,500	Less: Dep.	750
Less: Dep.	2,000		47,500		29,250
	18,000	Less: Dep	4,750	Less: Dep	2,925

Less: Dep	1,350		42,500	26,325
	16,650	Less: Dep	4,275
Less: Sold	11.000
Loss	5,650
Part II- 60,000 X 2/3	40,000
Less: Dep.	4,000
	36,000
Less: Dep.	3,600
	32,400
Less: Dep.	3,240
	29,160

Plant Account:

Date	Particulars	L.F.	Amount	Date	Particulars	L.F.	Amount
2015				2015
Jan 1 July I	To Bank: Plant I To Bank: Plant II		60,000 50,000	Dec.31	By Depreciation on Plant I 6,000 Plant II 2,500		8,500
					By Bal. c/d Plant I 54,000 Plant II 47,500		1,01,500
			1,10,000				1,10,000
2016				2016
Jan. 1	To Balance b/d			Oct.1	By Depreciation on Plant I		1,350

	Plant I 54,000 Plant II 47,500	1,01,500
Oct.1	To Bank plant III	30,000		By Cash	11,000
				By P & L a/c (loss)	5,650
			Dec.31	By Depreciation on Plant I 3,600 Plant II 4,750 Plant III 750	9,100
				By Bal. c/d Plant I 32,400 Plant II 42,750 Plant III 29,250	1,04,400
		1,31,500			1,31,500
2017			2017
Jan1	To Bal. b/d Plant I 32,400 Plant II 42,750 Plant III 29,250	1,04,400	Dec.31	By Depreciation on Plant I 3,240 Plant II 4,275 Plant III 2,925	10,440
				By Bal. c/d Plant I 29,160

Plant II 38,475

Plant III 26,325

93,960

1,04,400

Q-20 Meaning of Bills of exchange.

Answer: Meaning of Bills of exchange:

A bill of exchange has been defined as:
• an “instrument in writing

• containing an unconditional order

• signed by the maker/drawer

• directing a certain person (drawee)

• to pay a certain sum of money only

• to a certain person or to the order of a certain person or to the bearer of the instrument” (payee)

Draft of a Bill of Exchange:

→ When such an order is accepted by writing on the face of the order itself, it becomes a valid bill of exchange.

→ A cheque is a bill of exchange but all bill of exchanges are not cheque.

→ In above bill of exchange ‘A’ is drawer as well as payee and ‘B’ is drawee

On 1st January 2018, Akshay draws two bills of exchange for Rs.16,000 and Rs. 25,000. The bill of exchange for Rs. 16,000 is for two months while the bill of exchange for Rs. 25,000 is for three months. These bills are accepted by Vishal. On 4th March, 2018, Vishal requests Akshay to renew the first bill with interest @ 1596 p.a. for a period of two months. Akshav agreed to this proposal. On 25th March, 2018, Vishal retires the acceptance for Rs. 25,000, the interest rebate i.e. discount being Rs.250. Before the due date of the renewed bill, Vishal becomes insolvent and only 50 paisa in a rupee could be recovered from hisestate.

Show the Journal Entries (with narrations) in the books of Akshay.

Solution: In the Books of Akshay:

Q-21 On 1st January 2018, Akshay draws two bills of exchange for Rs.16,000 and Rs. 25,000. The bill of exchange for Rs. 16,000 is for two months while the bill of exchange for Rs. 25,000 is for three months. These bills are accepted by Vishal. On 4th March, 2018, Vishal requests Akshay to renew the first bill with interest @ 1596 p.a. for a period of two months. Akshav agreed to this proposal. On 25th March, 2018, Vishal retires the acceptance for Rs. 25,000, the interest rebate i.e. discount being Rs.250. Before the due date of the renewed bill, Vishal becomes insolvent and only 50 paisa in a rupee could be recovered from his estate.

Show the Journal Entries (with narrations) in the books of Akshay

Solution: In the Books of Akshay:

Date	Particulars	Rs.	Rs.
2018	Bill Receivable a/c (I) Dr	16,000
	Bill Receivable a/c (II) Dr.	25,000
	To Vishal		41,000
	(Being two bills accepted by Vishal of 2 months & 3 months, respectively)
Mar 4	Vishal A/c Dr.	16,000
	To Bill Receivable a/c (I)		16,000
	(Being bill receivable of Rs. 16,000, drawn in favour of Vishal, cancelled)
	Vishal Dr	400
	To Interest a/c ( 16000×15%×2/12)		400
	(Being interest receivable from Vishal on the outstanding balance due from him)
	Bill Receivable a/c (Ill) Dr.	16,400
	To Vishal		16,400
	Being new bill of Rs.16,400 accepted by Vishal for a period of 2 months )
Mar.25	Cash a/c Dr.	24,750
	Rebate a/c Dr.	250
	To Bank Receivable a/c (II)		25,000
	(Being payment received and rebate allowed to Vishal)
	Vishal Dr.	16,400
	To Bills Receivable a/c (III)		16,400
	(Being 111rd bill of Rs.16,400 dishonoured on account of Vishal's insolvency)
	Cash A/c Dr.	8,200
	Bad Debts a/c Dr.	8,200
	To Vishal		16,400
	(Being 50 paisa in a rupee recovered from Vishal's estate)

Q-22 X’ supplied goods on sale or return basis to customers, the particulars of which are as under:

Date of Despatch	Party’s Name	Amount Rs.	Remarks
10.12.2005	ABC Co.	10,000	No information till 31.12.2005
12.12.2005	DEF Co.	15,000	Returned on 16.12.2005
15.12.2005	GHI Co.	12,000	Goods worth Rs. 2,000 Return on 20,12.2005
20.12.2005	DEF Co.	16,000	Goods Retained on 24.12.2005
25.12.2005	ABC Co.	11,000	Goods Retained on 28.12.2005
30.12.2005	GHI Co.	13,000	No information till 31.12.2005

Goods are to be returned within 15 days from the date of despatch, failing which it will be treated as Sales. The books of ‘X’ are closed on the 31st December, 2005.

Prepare the following account in the book of ‘X’:

(i) Goods on Sales or Return, Sold and Returned Day Books.

(ii) Goods on Sales or Return Total Account.

Solution: In the Books of ‘X’

(i) Goods on Sales or Return, Sold and Returned Day Books.

Date	Party to whom goods sent	L.F.	Sent Rs	Date sold	Sold Rs.	Returned Rs.	Balance Rs.
2005				2005
Dec.10	M/s ABC Co.		10,000	Dec. 25	10,000	-	-
Dec. 12	M/s DEF Co		15,000	Dec. 16		15,000
Dec. 15	M/s GH1 Co.		12,000	Dec. 20	10,000	2,000
Dec. 20	M/s DEF Co.		16,000	Dec. 24	16,000
Dec. 25	M/s ABC Co.		11,000	Dec. 28	11,000
Dec. 30	M/s GHI Co.		13,000				13.000
			77,000		47,000	17,000	13,000

(ii) Goods on Sales or Return Total Account

2005	Particulars	Rs.	2005	Particulars	Rs.
Dec 31	To customers A/c(return)	17,000	Dec 31	By customers a/c (Goods sent on sales or return)	77,000
	To customers a/c(sales)	47,000
	To bal. c/d (Sale value of closing stock)	13,000
		77,000			77,000

Note: (1) Entry for recording sales of Rs. 47,000/- will be passed in Accounts book debiting customers (debtors) a/c and crediting sales a/c. & Goods lying with customer sale value Rs. 13,000 will be included in closing stock at cost.

(2) The above are memorandum records.

Q-23 Define Del-Credere commission.

Answer: Del-Credere commission and Bad debt losses:

In normal course the bad debts loss due to credit sales is the loss of consignor (because he is the owner) and not of consignee.
But sometimes the consignee agrees to take the risk of bad debt losses and in return he gets extra commission, known as Del Credere commission.
Therefore, whenever Del Credere commission is payable, the bad debts loss will be borne by consignee and not the consignor.
The Del Credere commission to be calculated on total sales and not only on credit sales unless otherwise specified

Q-24 A trader having accepted the following several bills falling due on different dates, now desires to have these bills cancelled and to accept a new bill for the whole amount payable on the average due date :

Sl. No.	Date of bill	Amount	Usance of the bill
1	1st March 2020	400	2 months
2	10th March 2020	300	3 months
3	5th April 2020	200	2 months
4	20th April 2020	375	1 month

Solution:

Calculation of the average due date

Taking 4th May as the base date

Sl. No	Date of bill	Due Date of Maturity	Amount	No. of days from starting date (4th May)	Product
1	1st March 2020	4th May	400	0	0
2	10th March 2020	13th June	300	40	12000
3	5th April 2020	8th June	200	35	7000
4	20th April 2020	23rd May	375	19	7125
5	11th May 2020	14th July	500	71	35500
Total			1,775		61,625

Average Due Date is 61,625/1,775 = 34.71 i.e., 35 days after the assumed due date, 4th May, 2020. The new bill should be for Rs. 1,775 payable on June 8th, 2020.

Q-25 From the following information, prepare account current on 30th September, 2011 to be submitted by M to F.

2011	Particulars	Amount
July 1	Debit balance b/f	13,500
5	Sold goods to F	9,000
15	Received cash from F	13,500
August 4	Sold goods to F	19,200
16	Received cash from F	9,000
September 1	Bought goods from F	21,000
2	Paid cash to F	7,500
12	Sold goods to F	9,600
15	Paid cash to F	6,000

Interest is to be taken into account @ 1096 per annum; it may be calculated to the nearest rupee.

Solution: Account current rendered (sent/submitted) by ‘M’ to ‘F’ or ‘F’ in Account current with ‘M’ For the period 1.7.2011 to 30.9.2011

Date	Particulars	Rs.	Due Date	Days	Product	Date	Particulars	Rs.	Due Date	Days	Product
1.7	To Balance b/f	13,500	1.7	92	12,42.000	15.7	By cash a/c	13,500	15.7	77	10,39,500
5.7	To Sales a/c	9,000	5.7	87	7,83,000	16.8	By cash a/c	9,000	16.8	45	4,05,000
4.8	To Sales a/c	19,200	4.8	57	10,94,400	1.9	By purchase a/c	21,000	1.9	29	6,09,000
2.9	To Cash a/c	7,500	2.9	28	2,10,000	30.9	by balance c/d	21,722
12.9	To Sales a/c	9,600	12.9	18	1,72,800
15.9	To Cash a/c	6,000	15.9	15	90,000
30.9	To Interest a/c	422
		65,222			35,92,200			65,222			20,53,500

Interest recoverable for 1 day on debit products	35,92,200
Interest payable for 1 day on credit products	20,53,500
Net interest recoverable for 1 day on net debit products	15,38,700

\(Interest = 15,38,700 × {10\over 100}×{1\over365} = Rs. 422.\)

Entry	F a/c Dr.	422
	To Interest a/c		422

Q-26 Explain Red ink interest.

Answer: Red ink interest:

→ In account current interest is calculated on every transaction from its due date to the end of that period. When the due date is not given the date of transaction itself will be taken as due date

→ In case the due date falls beyond the end of that period, then no interest is to be given on it upto the period end.

→ But the negative interest (opposite interest) from the end of period to the due date should be calculated, & written in red ink on the side of transaction so that this Red ink products will be deducted from the other products of that side, OR alternatively to give this effect this products can be written by the same ink but on the Opposite side of that transaction.

→ Example – Account current is for the period 1.1.04 to 31.3.04. Due date of a particular transaction is say 20th April, then the red ink days (opposite days/negative days) will be 20 days.

Q-27 ‘R’ had the following bills receivable and bills payable against ‘S’. Calculate average due date when the payment can be made or received without any loss or gain of interest to either party.

Bills Receivable			Bills Payable
Date of the bill	Amount	Tenure in months	Date of the bill	Amount	Tenure in months
1.6.08	9,000	3	29.5.08	6,000	2
5.6.08	7,500	3	3.6.08	9,000	3
9.6.08	10,000	1	10.6.08	10,000	2
12.6.08	8,000	2	13.06.08	7,000	2
20.6.08	12,000	3	27.6.08	11,000	1

Holiday intervening in the period 15th August, 2008,16th August, 2008 and 6th September, 2008

Solution:

Date	Due date	No. of Days from base date	Amount (Z)	Products(t)
01.06.2008	04.09.2008	54	9,000	4,86,000
05.06.2008	08.09.2008	58	7,500	4,35,000
09.06.2008	12.07.2008	0	10,000	0
12.06.2008	14.08.2008*	33	8,000	2,64,000
20.06.2008	23.09.2008	73	12,000	8,76,000
			46,500	20,61,000

Bills Payable

Date	Due date	No. of Days from base date	Amount (Rs.)	Products(Rs.)
29.05.2008	01.08.2008	20	6,000	1,20,000
03.06.2008	05.09.2008*	55	9,000	4,95,000
10.06.2008	13.08.2008	32	10,000	3,20,000
13.06.2008	14.08.2008*	33	7,000	2,31,000
27.06.2008	30.07.2008	18	11,000	1,98,000
			43,000	13,64,000

Difference of Products = Rs.20,61,000 – Rs. 13,64,000 = Rs. 6,97,000

Difference of Amount = Rs. 46,500 – Rs.43,000 = Rs. 3,500 receivable

Average Due Date = Base Date +\( Diffrence of Product\over Diffrence of amount\)

\(= July 12 + {6,97,000\over3,500} = July 12 + 199.14 or 199 days\)

= 27th January, 2009

Q-28 Rs. 10,000 lent (advanced) by Das Bros, to Kumar & Sons, on 1st Jan. 2009, is repayable in 5 equal annual instalments commencing on 1st January 2010. Find the Average Due Date & Calculate Interest at 5% p.a. which Das Bros, will recover from Kumar & Sons.

Solution: Average due date = Date of lending + \(Sum of years each installmentsis away from date of lending \over No .of instalments\)

Average due date = \(1.1.2009 + {1+2+3+4+5\over 5} =1.1.2009 + 3 years = 1.1.2012\)

Interest = 10000 × \({5 \over100} × 3 (1.1.2009 to 1.1.12) = 1500\)

Due Date (1)	Amount (2)	Years(3)	Product (4)
1.1.2010	2,000	1	2,000 x 1
1.1.2011	2,000	2	2,000 x 2
1.1.2012	2,000	3	2,000 x 3
1.1.2013	2,000	4	2,000 x 4
1.1.2014	2,000	5	2,000 x 5
	2000× 5		2,000(1+2+3+4+5)

Average due date \(= Date of lending +{Sum of years each instalment is away\over ???????????????????????? ???????? ????????????????????????????????????ts}\)

Q-29 Somesh of Calcutta consigned 100 cases of candles to Sailesh of Bankura. Which cost him Rs. 30 per case. He incurred the following costs packing Rs.40 carriage Rs.20 and Railway Freight (paid in advance) Rs.40. Some of the cases were damaged in transit and Sailesh took delivery of 90 cases only. He (Sailesh) spent Rs. 10 for carriage and Rs. 40 for godown rent and sold consignment at RS. 35 per case. He sent the net amount to Somesh after deducting his expenses and commission at the rate of 5 per cent on the sale proceeds together with his Account sales. Somesh also received Rs. 180 from the Railway as damages. Show how the transactions would appear in the books of Somesh.

Solution: In the book of Somesh (consignor)

Consignment Account

Particulars	Amount	Particulars	Amount
To Goods Sent On Consignment A/c	3,000	By Sailesh (Sales) A/c	3,150
To Cash A/c		By Abnormal Loss A/c	310
Packing	40
Carriage	20
Freight	40
To Sailesh A/c
Carriage	10
Rent	40
To Sailesh A/c (Commission)	158
To Profit Transferred to P&L A/c	152
	3,460		3,460

With the freight, words ‘paid in advance’ is written it should not be mis-understood as ‘prepaid’ which means for the next financial year. Here it is paid before the journey starts hence advance is written, but it is for this consignment only and hence treated as expense.

Sailesh Account (Consignee):

Particulars	Amount	Particulars	Amount
To Consignment A/c (sales)	3,150	By Consignment A/c (exp. paid)	50

	By Consignment A/c (exp. paid)	158
	By Cash/Bank A/c (bal. recov- ered)	2,942
3,150		3,150

Goods sent on consignment A/c:

Particulars	Amount	Particulars	Amount
To Trading A/c	3,000	By Consignment A/c	3,000
	3,000		3,000

Abnormal loss A/c

Particulars	Amount	Particulars	Amount
To Consignment A/c	310	By Cash (claim from Railway)	180
		By Net abnormal Loss trf. to P&L A/c	130
	310		310

Calculation:

Particulars	Abnormal loss (10 class)
Basic cost @ (3,000/100 = 30)	300
Freight, packing @ (100/100 = 1)	10
Total cost	310

In the books of Sailesh (Consignee) Somesh (Consignors) a/c

Particulars	Amount	Particulars	Amount
To Cash bank (exp. paid)	50	By Cash/ bank/debtors (sales made)	3,150
To Commission a/c (due)	158
To Cash/Bank (net balance paid)	2,942

To Cash/Bank (net balance paid)	2,942
	3,150		3,150

Commission a/c

Particulars	Amount	Particulars	Amount
To P&L a/c (income transferred)	158	By Somesh a/c	158
	158		158

Q-30 Mr. Badhri sends goods to his customers on Sale or Return. The following transactions took place during the month of December 2017.

 December 2nd – Sent goods to customers on sale or return basis at Rs. 80,000 cost plus 25%

 December 10th – Goods returned by customers Rs. 35,000

 December 17th – Received letters from customers for approval Rs. 30,000

 December 23rd – Goods with customers awaiting approval Rs. 15,000 Mr. Badhri records sale or return transactions as ordinary sales.

You are required to pass the necessary Journal Entries in the books of Mr. Badhri assuming that the accounting year closes on 31st Dec. 2017.

Solution: (I) In the books of Mr. Badhri

Date	Particulars	L.F.	Dr.	Cr.
2017Dec.2	Trade recoverable A/c Dr.		80,000
	To Sales A/c			80,000
	Being the goods sent to customers on sale or return basis)

Dec 10	Return inward A/c Dr.	35,000
	To trade receivable A/c		35,000
	(being the goods returned by customers to whom the goods were sent on sale or return basis)
Dec 23	Sales A/c Dr.	15,000
	To Trade relievable		15,000
	(being the cancellation of original entry of sale in respect of goods on sale or return basis)
Dec 31	Inventories with customer on sale/return Ac/Dr.	12,000
	To Trading A/c		12,000
	(Being the adjustment for cost of goods lying with customers awaiting approval )

Note:

Alternatively, Sales account or Sales returns can be debited in place of Return Inwards account.
No entry is required for receiving letter of approval from customer.
Cost of goods with customers = Rs. 15,000 x 100/125 = Rs. 12,000
It has been considered that the transaction values are at invoice price (including profit margin).

Q- 31 Ramesh sends goods on approval basis as follows:

Date January,

2006

Customer's

name

Sale price of

Goods sent (Rs.)

Goods accepted

(Rs.)

Goods returned

(Rs.)

Jay

3500

3000

500

Vijay

2800

Sanjay

3680

Dhananjay

1260

1000

260

Show how the transactions will be dealt with when memorandum books are kept on double entry system.

Solution: Memorandum Records

Goods on sale or return register

Date	Party	Goods sent	Goods returned	Goods sold	Balance
8.1.2006	Jay	3500	500	3000	-
10.1.2006	Vijay	2800	-	2800	-
15.1.2006	Sanjay	3680	3680	-	-
22.1.2006	Dhananjay	1260	260	1000	-
		11240	4440	6800	-

(i) When goods are sent on approval

Individual customer a/c Dr. 11,240

To Sales on approval a/c 11,240

(ii) When goods are returned

Sales on approval a/c Dr. 4,440

To Individual customer a/c 4,440

(iii) When the goods are accepted/time expired

Sales on approval a/c Dr. 6800

To Individual customer a/c 6800

Note: Now this is the actual sales hence it will be recorded in accounts books in the usual manner debiting individual customer account and crediting sales a/c.

(iv) Balance of goods at the end of the year

This will show the sales value of goods still lying unsold with customers. Cost of such goods will be included and accounted as stock in books of account

Q-32 Mr. A consigned 200 cycles @ Rs. 500 each and paid Rs. 3,000 on freight. During the transit 20 cycles were lost by theft. Mr. B received the remaining stock and paid Rs. 3,600 on its clearing. He sold 150 cycles @ 2 800 per cycle. He was entitled for 10% commission on sales. He paid Rs. 5,000 as miscellaneous expenses. Prepare Consignment Account in books of Mr. A.

Solution: Consignment Account:

Particulars	Amount	Particulars	Amount
To goods sent on consignment A/c (200@ Rs. 500)	1,00,000	By Profit & Loss A/c (abnormal loss)	10,300
To Cash (freight)	3,000	By agent (150 @ Rs. 800)	1,20,000
To agent :		By stock on consignment A/c	16,050
Clearing charges	3,600
Commission	12,000
Miscellaneous exp.	5,000
To profit & Loss A/c	22,750
	1,46,350		1,46,350

Working Notes:

1.Calculation of Abnormal Loss	Rs.
20 Cycles @ Rs. 500 each	= 10,000
3000 Direct expenses [ × 20] 200	= + 300
	10,300
2. . Stock valuation (at invoice price)
30 cycles @ Rs. 500 each	= 15,000
3000 Direct expenses [ × 30] (before loss) 200	= + 450
3,600 Direct expenses [ × 30] 180	= + 600
(After loss)	16,050

Q-33 Mr. David draws two bills of exchange on 1-1-2006 for Rs.6,000 and Rs. 10,000. The bills of exchange for Rs. 6,000 is for two months while the bill of exchange for Rs. 10,000 is for three months. These bills are accepted by Mr. Thomas. On 4-3-2006 Mr. Thomas requests Mr. David to renew the first bill with interest at 18% p.a. for a period of two months. Mr. David agrees to this proposal.

On 20-3-2006 Mr. Thomas retires the acceptance for Rs. 10,000, the interest rebate i.e. discount being Rs.100. Before the due date of the renewed bill, Mr. Thomas becomes insolvent and only 50 paise in a rupee could be recovered from his estate. You are to give the journal entries in the books of Mr. David.

Solution: (Renewal & Retirement):

Transaction	Books of David
1.1.06
Bills Drawn	B.R. A/c Dr.	6,000

	B.R. A/c Dr.	10,000
	To Thomas' A/c		16,000
Renewal of 1st bill, old bill cancelled	Thomas' A/c Dr.	6,000
Renewal of 1st bill, old bill cancelled	To B.R. A/c		6,000
Interest due 18/100 × 2/12 ×6000	Thomas' A/c Dr.	180
Interest due 18/100 × 2/12 ×6000	To Int. A/c		180
Settlement by net will (3rd bill)	B.R. A/c Dr.	6,180
Settlement by net will (3rd bill)	To Thomas A/c		6,180
20.3.06
Retirement of 2nd bill	Cash/ Bank A/c Dr.	9,900
	Rebate A/c Dr.	100
	To B.R. A/c		10,000
Thomas declared insolvent hence 3rd bill dishonoured	Thomas A/c Dr.	6,180
Thomas declared insolvent hence 3rd bill dishonoured	To B.R. A/c		6,180
Full and final settlement at 50%	Cash/Bank A/c Dr.	3,090
	Bad Debts A/c Dr.	3,090
	To Thomas A/c		6,180

Transaction	Books of Thomas
1.1.06
Bills Drawn	David A/c Dr.	16,000
	B.R. A/c Dr.		6,000
	To B.P. A/c		10,000
Renewal of 1st bill, old bill cancelled	B.P. A/c Dr.	6,000
Renewal of 1st bill, old bill cancelled	To David's A/c		6,000
Interest due 18/100 × 2/12	Int. A/c Dr.	180

×6000	To David's A/c		180
Settlement by net will (3rd bill)	David A/c Dr.	6,180
Settlement by net will (3rd bill)	To B.P. A/c Dr.		6,180
20.3.06
Retirement of 2nd bill	B.P. A/c Dr.	10,000
	To Cash/ Bank A/c		9,900
	To Rebate A/c		100
Thomas declared insolvent hence 3rd bill dish-onoured	B.P. A/c Dr.	6,180
Thomas declared insolvent hence 3rd bill dish-onoured	To David A/c		6,180
Full and final settlement at 50%	David A/c Dr.	6,180
	To Cash/ Bank A/c		3,090
	To DeficiencyA/c		3,090

Q-34 B owes C a sum of Rs. 600/- On 1st April, 2006 he gives promissory note for the amount for 3 months to C who gets it discounted with his bankers for Rs. 590/-. On the due date the bill is dishonoured the bank paying Rs. 5/- as noting charges. B then pays Rs. 200/- in cash and accepts a bill of exchange drawn on him for the balance together with Rs. 10/- as interest. This bill of exchanges is for 2 months and on the due date the bill is again dishonoured, C paying Rs. 5/- for noting charges. Draft the journal entries to be passed in the books of B and C.

Date	Transaction	Journal of C	Dr,.	Cr.
1.4	Promissory note given by B to C	B.R. A/c Dr.	600
1.4	Promissory note given by B to C	To B A/c		600
	Bill discounted with bank	Bank/cash A/c Dr	590
	Bill discounted with bank	Discount A/c Dr.	10

		To B.R. A/c		600
4.7	Bill dishonoured, bank recovers from 'C' bill amount + noting charges	B A/c Dr.	605
		To Bank A/c		605

		B A/c Dr.	10
		To Int. A/c		10
	Settlement partly in Cash & balance by new bill.	Cash/bank a/c Dr.	200
		B.R. A/c Dr.	415
		To B A/c		615
7.9	Second bill dishonoured& noting charges paid by 'C'	B A/c Dr.	420
		To B.R. A/c		415
		To cash A/c		5

Date	Transaction	Journal of B	Dr.	Cr.
1.4	Promissory note given by B to C	C A/c Dr.	600
1.4	Promissory note given by B to C	To B.P. A/c		600
	Bill discounted with bank	No entry


4.7	Bill dishonoured, bank recovers from 'C' bill amount + noting charges	B.P. A/c Dr.	600
		Noting charges Dr.	5
		To C A/c		605
		Int. A/c Dr.	10
		To C A/c		10
	Settlement partly in Cash & balance by new	C A/c Dr.	615
	Settlement partly in Cash & balance by new	To B A/c		415

	bill.	To Cash A/c		200
7.9	Second bill dishonoured& noting charges paid by 'C'	B. P. A/c Dr.	415
		Noting charges Dr.	5

		To C A/c		420

Q-35 On 1.1.03 machinery was purchased for Rs. 80,000. On 1.7.04 addition were made to the amount of Rs. 40,000. On 31.3.05 machine purchased on 1.7.04 costing Rs. 12,000 was sold for Rs. 11,000 & on 30.6.05 machinery purchased on 1.1.03 costing Rs. 32,000 was sold for Rs. 26,700. On 1.10.05 addition were made to the amount of Rs. 20,000. Show Machinery a/c & Depreciation a/c for 3 years 2003, 04, 05. Depreciate Machinery at 10% p.a. by S.L.M.

Solution: Machinery A/c (SLM 10%)

Date	Particulars	Rs.	Date	Particulars	Rs.
1.1.03	To Bank a/c	80,000	31.12.03	By Depreciation a/c	8,000
				By Balance c/d	72,000
		80,000			80,000
1.1.04	To Balance b/d	72,000	31.12.04	By Deputation a/c (8000+2000)	10,000
				By Balance c/d	1,02,000
		1,12,000			1,12,000
1.1.05	To Balance b/d	1,02,000	31.3.05	By Bank a/c	11,000
30.6.05	To Profit on sale of Machinery a/c	2,700		By Depreciation a/c	300

1.10.05

To Bank a/c

20,000

30.6.05

By Lesson sale of

Machinery a/c

100

	By Bank a/c	26,700
	By Depreciation a/c	1,600
	By Depreciation a/c (7600+500)	8,100
	By Balance c/f	76,900
1,24,700		1,24,700

Depreciation a/c

Date	Particulars	Rs.	Date	Particulars	Rs.
31.12.03	To Machinery a/c	8,000	31.12.03	By P&L a/c	8,000
		8,000			8,000
31.12.04	To Machinery a/c	10,000	31.12.04	By P&L a/c	10,000
		10,000			10,000
31.3.05	To Machinery a/c	300	31.12.05	By P&L a/c 10,000
30.6.05	To Machinery a/c	1,600
31.12.05	To Machinery a/c	8,100
		10,000			10,000

Working notes

(1) Sold on 31.3.2005
1.7.2004	Cost	12,000
31.12.04	Depreciation	600
1.1.05	Balance	11400
31.3.05	Depreciation	300
	Balance	11,100
	Sold for	11,000
	Loss	100

(2) Sold on 30.6.2005

1.1.03	Cost	32,000
31.12.03	Depreciation	3,200
	Balance	28,800
31.12.04	Depreciation	3,200
1.1.05	Balance	25,600
30.6.05	Depreciation	1,600
	Balance	24,000
	Sold for	26,700
	Profit	2,700

(3) Depreciation on 31.12.2005
Original cost of remaining old machine
80,000 - 32,000	48.000
40,000 - 12,000	28,000
	7,6000
Depreciation @10%	7,600

On new machine
20,000 X 10 ÷ 100 X 3÷ 12	500
	8,100

Depreciation: Calculation by WDV and Accounting by credit to Depreciation Provision a/c

Q-36 From the following particulars for the years 2004 and 2005 determine the value of the closing stock at the end of 2005.

Particulars	2004 (Rs.)	2005 (Rs.)
Opening Stock	20,000	30,000
Purchases	1,20,000	1,90,000
Sales	2,00,000	2,40,000

Uniform rate of gross profit may be assumed. At the end of 2005, goods purchased were received, but no entry was made for this credit purchase since invoice was not received. These goods cost Rs. 20,000.

Solution: Closing stock of 2005 can be ascertained by preparing Trading a/c but gross profit ratio for 2005 is not given hence the same is ascertained by preparing Trading a/c of 2004. For this remember the closing stock of this year is the opening stock of next year.

Trading Account: For the year ending 31st December, 2004

Particulars	Rs.	Particulars	Rs.
To Opening Stock	20,000	By Sales	2,00,000
To Purchases	1,20,000	By Closing Stock	30,000
To Gross Profit (Balancing figure)	90,000
	2,30,000		2,30,000

Calculation of Rate of Gross Profit

\(Gross Profit Ratio = {Gross Profit \over????????????????????} × 100\)

\(Gross Profit Ratio = {90,000\over2,00,000} × 100 = 45%\)

Trading Account: For the year ending 31st December, 2005

Particulars	Rs.	Particulars	Rs.
To Opening Stock	30,000	By Sales	2,40,000
To Purchases 1,90,000 + unrecorded purchase 20,000	2,10,000	By Closing Stock (Balancing Figure)	1,08,000
To Gross Profit (45% of 1,08,000 2,40,000)	1,08,000
	3,48,000		3,48,000

Uniform Rate of gross Profit = 45% is taken from 2004. Stock as on 31-12-2005 including goods for which invoice was not accounted is Rs. 1,08,000

Ascertaining Stock, when stock of different date is known (Stock of latter date is known)

Q-37 Prepare a bank reconciliation statement from the following particulars as on 31 st March 2018:

Particulars	Rs.
Debit balance as per bank column of the cash book	18,60,000
Cheque issued to creditors but not yet presented to the bank for payment	3,60,000
Dividend received by the bank but not entered in the Cash book	2,50,000
Interest allowed by the bank	6,250
Cheque deposited into bank for collection but not collected by bank upto this date	7,70,000
Bank charges not entered into cash book	1,000
A cheque deposited into bank was dishonored, but no intimation received	1,60,000
Bank paid house tax on our behalf, but no intimation received from bank in this connection

Solution: Bank Reconciliation Statement (as on March 31, 2018)

Particulars	Amount (Rs.)	Amount (Rs.)
Debit balance as per Cash book		18,60,000
Add: cheque issued but not yet presented	3,60,000
Dividend received by the bank	2,50,000
Interest allowed by the bank	6,250	6,16,250
		24,76,250
Less: cheque deposited but not collected	7,70,000
Bank charges not entered in cash book	1,000
Cheque deposited into bank but dishonored	1,60,000
House tax paid by bank	1,75,000	11,06,000
Credit balance as per Pass Book		13,70,250

Q-38 The following mistakes were located in the books of a concern after its books were closed and a suspense Account was opened in order to get the Trial Balance agreed.

(a) Sales Day Book was over cast by Rs.100.

(b) A sales of Rs. 50 to X was wrongly debited to the account of Y.

(d) A bill receivable for Rs. 155 was passed through Bills payable Day Book – This bill was given by Z.

(e) Legal expenses Rs. 119 paid to Mr. Dufty was debited to his personal account.

(f) Cash received from C. Dass was debited to G. Dass Rs. 150.

(g) While carrying forward the total of one page of the Purchases Book to the next the amount of Rs. 1235 was written as Rs. 1325.

Find out the nature and amount of the Suspense Account and pass entries for the rectification of the above errors in the subsequent year’s books.

Solution: Rectification in Subsequent Year:

	Effect already given in a/c
a	Party A/c Dr.	1000
	To sales A/c		1100
b	Y A/c Dr.	50
	To sales A/c		50
c	General Exp. A/c Dr.	80
	To Cash A/c		18
d	Z a/c Dr.	155
	To B.P A/c		155
e	Mr. Dufty A/c Dr.	119
	To Cash A/C		119
f	G. Dass A/c Dr.	150
	Cash a/c Dr.	150
g	Purcahse a/c Dr.	1325
	To party a/c		1235

Note: balance of P& L Account after all rectification is transferred to capital account

	Correct effect
a	Party A/c Dr.	1000
	To sales A/c		1000
b.	X A/c Dr.	50
	To sales A/c		50

c	General Exp. A/c Dr.	18
	To Cash A/c		18
d	B.R.A/c Dr.	155
	To Z a/c		155
e	Legal Exp. A/c Dr.	119
	To cash A/c		119
f	cash A/c Dr.	150
	To C.Dass A/c		150
g	Purcahase a/c Dr.	1235
	To Party A/c		1235

	Rectification
a	P & L adj. A/c Dr.	100
	To suspense A/c		100
b	X A/c Dr.	50
	To y a/c		50
c	suspense A/c Dr.	62
	To ( General Exp. ) P & L A/C		62
d	B.R.A/c Dr.	155
	B.P.A/c Dr.	155
	To Z a/c (155+155)		310
e	P & L Adj. A/c (Legel Exp.) Dr.	119
	To Mr. Dufty a/c		119
f	suspense A/c Dr.	300
	To C Dass. A/c		150
	To G. Dass A/c		150
g	Suspense A/c Dr.	90

	To P & L Adj. A/c		90
h	Capital A/c Dr.	67
	To P & L Adj. A/c		67

Suspense Account

Particulars	Amount	Particulars	Amount
To sundries	300	By balance b/f	352
To P& L Adj. A/c	62	By P& L Adj. A/c	100
To P& L Adj. A/c	90
	452		452

P&L Adjustment Account:

Particulars	Amount	Particulars	Amount
To Suspense A/c	100	By Suspense A/c	62
To Mr. Dufty A/c	119	By Suspense A/c	90
		By Capital A/c	67
	219		219

Note: Debit balance Rs. 67 indicates that last year’s profit was shown excess.

Comment:

 Balance in suspense a/c indicates that in last year’s Trial balance, Credit side was short by Rs. 352

 As the rectification is being carried out in the next years books of account, the Profit & Loss adjustment account is debited/credited in place of income & expenses account.

 The debit balance of Rs. 67 in Profit & Loss adjustment account indicates that in last year excess profit was shown.

 (b), (d) & (e) is double sided error, hence their rectification does not involve suspense a/c but (a), (c), (f) & (g) are one sided error, hence their rectification involves suspense a/c.

 All errors are Error of commission although error (e) can also be considered as Error of Principle.

Q-39 What are the types of errors & their effects on agreement of trial balance?

Answer: Classification of Errors (types of errors) and its effect on agreement of Trial Balance:

1. Errors of Principle: That means there is error in applying some accounting principle.

• Such errors will not affect the agreement of trial balance i.e. these are double sided error.

Example – Treating a revenue expense as capital expenditure or vice versa or the recording of sale of a fixed asset as ordinary sale.

2. Clerical Errors:

• These are the errors committed in applying the accounting procedure.

• Such errors may or may not affect the agreement of trial balance.

These can be further classified as follows:

(a) Errors of Omission:

(i) Omitting an entry completely from the subsidiary book. Full omission hence Trial Balance will agree.

Example : Sale of Rs. 5,000 to A on 30.3.06 is not recorded.

(ii) Omitting to post the ledger account from the subsidiary books. Partial omission hence Trial Balance will not agree.

Example : A sale entry of Rs. 10,000 not posted to A’s a/c.

(b) Errors of Commission:

(i) Writing wrong amount in the Subsidiary book. Trial Balance will agree. Example: A purchase of Rs. 5,000 from ‘X’ is entered in purchase book as Rs. 500

(ii) Posting the wrong account in the ledger. Trial Balance will agree. Example: From Sales book A’s account is debited by Rs. 8000 instead of B’s account.

(iii) Wrong casting of subsidiary books. Example: Total of Bills Receivable book is taken as Rs. 1,05,000 instead of Rs. 1,00,500

(iv) Posting the wrong amount in the ledger.

Example: From Sales Return book A’s account is credited by Rs. 8,000 instead of Rs. 8,800

(v) Posting an amount on the wrong side of an account. Example: From Sales Book L’s account is credited

(vi) Wrong balancing of an account

. Example: Balance of Furniture account is taken as Rs. 7,000 instead of Rs. 3,000

Note: In case of errors described in (iii) to (vi) above, Trial Balance will not agree.

Two or more mistakes which compensate the effect of each other on trial balance & hence Trial Balance will agree.

Example: Excess debit Rs. 1,000 to Furniture a/c & Excess credit of Rs.1,000 to Sales a/c.

Q-40 Write up a three column cash book from the following:

1,Sep 2006	Cash balance	1,700.00
	Bank overdraft	5,600.00
5	Received dinanath cash Rs. 750 and cheque of Rs. 860 in full settlement of Rs. 1,650
7	Paid for office rent by cheque	500.00
8	Paid for wages in cash	250.00
9	Sold gold for cash Rs. 1,500 and received half amount in cash and half by cheque which is deposited in the bank
10	Bank pass book states that the bank has collected interest on investment	660.00
12	Cheque received on 5th paid into bank
15	Transferred Rs. 3000 from fixed deposits to current account
20	Drew for personal use cash Rs. 250 and a cheque of Rs. 375
25	Made cash purchase and paid by cheque Rs. 1595
30	Paid Dinesh Rs. 800 by cheque

Solution :

Triple Column Cash Book

Date	Date	Date	Date	Date	Date	Date	Date	Date	Date	Date	Date
1.9.06	To opening Bal.			1700	0	1.9.06	By Open. Bal.(OD)			0	5600
5	To Dinesh a/c		40	1610	0	7	By Rent a/c				500
	(cash+cheque)					8	By Wages a/c			250
9	To sales a/c			750	750	12	By Bank (ch. Deposit)	C		860
10	To Interest a/c				660	20	By Drawings a/c			250	375
12	To Cash (ch. Dep.	C			860	25	By Purchases a/c				1595
15	To fixed deposit a/c				3000	30	By Dinesh a/c				800

30	To Bal. c/f.(OD)				3600	30	By Balance c/f			2700
			40	4060	8870					4060	8870

Cheque received but not deposited in bank:

The usual practice in the books on ac-counting is to show such amount as cash and when the same is deposited in bank then cash a/c is credited and bank a/c debited (As done for Rs.860 in above problem). I (author) don’t consider it appropriate and suggest the following –

a. In real life it will be a daily routine to receive cheque and deposit it next day hence to obviate unnecessary confusion and complication, it should be debited to bank a/c on receipt itself.

b. When it is a year end situation, debit such cheque to cheques in hand a/c rather than in cash a/c. So that in balance sheet we will show cash balance (which is actual cash), cheques in hand and bank balance (which does not include cheque received but not deposited).

Q- 41 Define the Debit Note and Credit Note.

Answer: Debit Note:

 A debit note is a statement sent by one party to the other stating/informing him that his account has been debited with a specified amount and the reason for debit.

 A debit note is sent to the supplier when the goods purchased from him are returned (purchase return) or for discount to be received from him or for any expenses incurred for him.

 Entry:

In the books of sender of Debit note	In the books of sender of Debit note
Party (to whom it is sent) a/c Dr.	Sales return/Discount allowed etc. a/c Dr.

To Purchase return/Discount received etc.

To Party (who sent it) a/c

Credit Note:

 A Credit note is a statement/letter sent by one party to the other stating/informing him that his account has been credited with a specified amount and the reason for credit.

 A credit note is sent to the customer when we receive good returned by them or for discount to be allowed to him or for any expenses incurred for us by him.

Entry:

In the books of sender of Debit note	In the books of receiver of Debit note
Sales return/Discount allowed etc. a/c Dr	To Party (who sent it) a/c
To Party (to whom it is sent) a/c.	To Purchase return/Discount received etc

Q-42 Give difference between Provision and Contingent liability.?

Provision	Contingent liability
Provision is a present liability of uncertain amount, which can be measured reliably by using a substantial degree of estimation.	A Contingent liability is a possible obligation that may or may not crystallise depending on the occurrence or non-occurrence of one or more uncertain future events
A provision meets the recognition criteria.	A provision meets the recognition criteria.
Provision is recognized when (a) an enterprise has a present obligation arising from past events; an outflow of resources embodying economic benefits is probable, and (b) a reliable estimate can be made of the amount of the obligation.	Contingent liability includes present obligations that do not meet the recognition criteria because either it is not probable that settlement of those obligations will require outflow of economic benefits, or the amount cannot be reliably estimated.

If the management estimates that it is probable that the settlement of an obligation will result in outflow of economic benifts, it recognises a provision in the balance sheet.

If the management estimates, that it is less likely that any economic benefit will outflow from the firm to settle the obligation, it discloses the obligation as a contingent

liability.

Q-43 Following are the transaction between Sanjay and Ravi. Both allows one month credit to each other on sale/purchases.

Date	particulars	Rs.
Jan. 1	Balance due from Sanjay	2,000
Feb. 16	Purchased goods from him	12,000
28	Sold goods to him	20,000
March 16	Received a cheque	6,000
April 20	Sold him goods (invoiced on May 3)	20,000
June 16	Purchased goods from him (invoiced on July 10)	30,000
Sept. 23	Paid him cash	6,000
Oct. 24	Accepted his bill for 3 months	10,000
Nov. 26	Received his acceptance for 2 months	16,000

Prepare an account current of Sanjay with Ravi upto 31.12.03 reckoning interest @14% p.a. on the balance due.

Solution : Product of Transaction Method (Red Ink Interest Method)

Sanjay in Account Current with Ravi for the period 1.1.03 to 31.12.03

Date	Particulars	Amt.	Due date	Days	Product	Date	particulars	Amt.	Due Date	Days	Product
1.1	To opening balance	2,000	1.1	365	7,30,000	16.2	by Purchase a/c	12,000	16.3	290	34,80,000
28.2	To sales a/c	20,000	28.3	278	55,60,000	16.3	By Bank a/c	6,000	16.3	290	17,40,000
20.4	To sales a/c	20,000	20.5	225	45,00,000	16.6	By Purchase a/c	30,000	16.7	168	50,40,000
23.9	To Cash a/c	6,000	23.9	99	5,94,000	26.11	By B.R.a/c	16,000	29.1	0	0
24.1	To B.P. a/c	10,000	27.1	0	0
	Contra product						Contra product
	B.R. 16,000	0	29.1	29	4,64,000		B.P. 10,000		27.1	27	2,70,000
31.12	To interest	506
31.12	To Balance c/f	5,494
			64,000		1,18,48,000			64,000			1,05,30,000

Working Notes:

Interest recoverable on 1,18,48,000 – 1,05,30,000 = 13,18,000

\(Interest = 13,18,000 * {14\over100}×{1\over365} = ????????. 506\)

Entry for interest due:	Sanjay a/c Dr.	506
	To Interest a/c		506

Important points Regarding Due date:

1. When in case of sale, purchase, credit period is given the same will be added to date of transaction to get due date. Where invoice date is given (like in this question) the same will be taken as due date.

2. In case of bill of exchange/promissory note due date will be calculated by adding the period + 3 days of grace.

3. In case of sales/purchase return the due date of sale/purchase should be taken for return also because it is only a cancellation entry, hence interest effect should also get cancelled.

Red Interest/Contra Product: When due date of a transaction falls beyond the cut off date (i.e. 31.12.2003 in this case), there are no days from due date to cut off date rather there are reverse or opposite days from due date to cut off date. Such days are either written on same side by (-) sign or in red ink (followed by bank, hence the name red ink interest) or the same effect is created by writing the products on opposite side known as contra product.

Below is the trial balance of Shah as on December 31, 2005:

Debit Balance	Rs.	Credit Balance	Rs.
Drawings	1,500	Capital Account	50,000
Adjusted purchases	6,99,200	Loan from Desai @ 9% (taken on 1st July, 2004)	20,000
Salaries	4,500	Sales	7,20,000
Carriage on Purchases		Discount	500
on sales		Sundry Creditors	20,000
Rates and Insurance	400
Buildings	400
Furniture	500
Sundry Debtors	8,000
Cash on Hand	250
Cash at Bank	1,500
Stock (31st December, 2005)	61,250
	8,10,500		8,10,500

Additional information:

1. Rates have been prepaid to the extent of RS. 175.

2. Bad debts Rs. 500 have to written off. A provision for doubtful debts @ 5% on debtors is necessary.

3. Building has to be depreciated at 2% and Furniture @ 10%.

4. The manager is entitled to a commission of 5% of net profits before charging such commission.

Solution: Trading and Profit and Loss Account of Shah (for the Year ended on December 31, 2005)

Particulars		Rs.	Particulars	Rs.
To Adjusted Purchases		6,99,200	By Sales	7,20,000
To Carriage on Purchases		400
To Gross Profit c/d		20,400
		7,20,000		7,20,000
To Salaries		4,500	By Gross Profit b/d	20,400
To Carriage on Sales		500	By Discount	500
To Rates & Insurance Paid	400	225
Less: Prepaid	175	225
To Bad Debts written off		500
To Provision for Doubtful Debts (5% of t 7,500)		375
To Depreciation: Buildings (2%)	540	1,140
Furniture (10%)	600	1,140
To Interest		1,800
To Commission payable to manager (5% of Rs. 11,860)		593
To Net Profit		11,267
		20,900		20,900

20,900 less Rs. 9,040 (the total of all expenses so far), Manager is entitled to 5% of this figure. (1) The trial balance gives “Adjusted Purchases”. It means that the opening stock has already been transferred to the Purchases Account and thus been closed. Further, entry for closing stock has already been passed by debiting the Closing Stock Account and crediting Purchases Account. That is why closing stock appears inside the trial balance. It will now be shown in the Balance Sheet and not in the Trading Account since purchases already stand reduced.

(2) There is a Loan of Desai @ 9% taken in 2004 i.e. in last accounting year. As per mercantile system interest up to 31.12.04 must have been provided in the last years a/c itself. The trial balance makes no mention of any interest being paid to him. Hence, interest @ 9% must be provided for the whole of current year only.

Balance Sheet of Shah as on December 31, 2005

Liabilities		Rs.	Assets			Rs.
Capital Account	50,000	59,767	Fixed Assets: Buildings	27,000		26,460
Add: Net Profit	11,267
			Less: Depreciation	540
Less: Drawings	1,500
Loan from Desai	20,000	21,800	Furniture	6,000		5,400
Add: Interest Due	1,800		Less: Depreciation	600
Sundry Creditors		20,000	Current Assets:
Commission Payable		593	Cash on hand			250
			Cash at Bank			1,500
			Sundry Debtors Less: Provision for		7,500	7,125
			Doubtful debt		375
			Stock			61,250
			Prepaid Rates			175
		1,02,160				1,02,160

Q-45 Rules applicable in absence of partnership deed.

Answer: Rules applicable in absence of partnership deed: In the absence of any provision in partnership deed, following provisions of partnership Act are applicable:

• Profit/Loss sharing ratio will be equal

• No interest is to be allowed on capital

• No interest is to be charged on drawings

• 6% per annum interest is to be given on partner’s loan

• No salary is to be paid to any partner

• Interest and salary, if payable, will be paid only if there is profit unless agreement provides otherwise.

Q-46 The Chartered Accountants X, Y and Z form a partnership, profits being divisible in the ratio of 3 : 2 : 1 subject to the following:

i. Z’s share of profit is guaranteed to be not less than Rs. 15,000 p.a.

ii. Y gives guarantee to the effect that gross fees earned by him for the firm shall be equal to his average gross fee of the preceding five years when he was carrying on profession alone (which average works out at Rs. 25,000).

The profit for the first year of the Partnership is Rs. 75,000. The gross fees earned by Y for the firm are Rs. 16,000. You are required to show the distribution of profits.

Solution:

Particulars’		Rs.
Profit as given		75,000
Shortfall to be contributed by Y (25,000 - 16,000)		9,000
Total Profit		84,000
Z's share (1/6) Rs. 14,000
Minimum allowed to Z		15,000
Balance for X and Y		69,000
X's 3/5	41,400
Y's 2/5	27,600	69,000
		Nil

Summary

Partner	Share	Adjustment	Total
X	41,400		41,400
Y	27,600	- 9,000	18,600
Z	15,000		15,000
	84,000		75,000

Q-47 A and B were partners in 1:1. They admitted C as a new partner for 1 / 5th share. At the time of his admission following Revaluation were made:

Building of Rs. 60,000 at Rs. 1,00,000

Plant of Rs. 40,000 at Rs. 30,000

Creditors of Rs. 50,000 at Rs. 70,000 At the time of revaluation some unrecorded investment of Rs. 20,000 were found. Show necessary Accounting treatment in the following cases:

Case I. When Revised figures of Assets and Liabilities were to be shown in the Balance Sheet of the New Firm (or When Revaluation A/c is to be prepared)

Case II. When Revised figures of Assets and Liabilities were not to be taken in the Balance Sheet of the New Firm (or When Memorandum Revaluation Account is to be prepared)

Solution:

Case I: Revaluation Account

Particulars	Rs.	Particulars	Rs.
To Plant	10,000	By Building	40,000
To Creditors	20,000	By Investment	20,000
To Profit on Revaluation:
A's Capital A/c	15,000
B's Capital A/c	15,000
Total	60,000	Total	60,000

Journal entries:

Particulars	L.F.	Dr.	Cr.
1. Building A/c		40,000
Investment A/c Dr.		20,000
To Revaluation A/c			60,000
(Being increase in the value of assets recorded)			60,000
2. Revaluation A/c	Dr.	30,000
To Plant A/c			10,000

To Creditors A/c			20,000
Being reduction in the value of plant & increase in creditors recorded)
3. Revaluation A/c	Dr.	30,000
To A's Capital A/c			15,000
To B's Capital A/c			15,000
(Being transfer of profit on revaluation to old partners in their old profit sharing ratio)			15,000

Case II: Memorandum Revaluation Account

Particulars	Amount	Particulars	Amount
To Plant	10,000	By Building	40,000
To Creditors	20,000	By Investment	20,000
To Profit on Revaluation:
A's Capital A/c	15,000
B's Capital A/c	15,000
Total	60,000	Total	60,000
To Building	40,000	By Plant	10,000
To Investment	20,000	By Creditors	20,000
		By Loss on Revaluation:
		A's Capital A/c (New Ratio)	12,000
		B's Capital A/c (New Ratio)	12,000
		C's Capital A/c (New Ratio)	6,000
Total	60,000	Total	60,000

Particulars	A	B	C
Profit on Revaluation (in old ratio) Cr.	15,000	15,000	-
	12,000	12,000	6,000

3,000 Cr.

6,000 Dr.

Journal Entry	C’s Capital A/c Dr.	6,000
	To A’s Capital A/c		3,000
	To B’s Capital A/c		3,000
	(Being adjustment of profit or loss on revaluation made among the partners)

Q-48 The following is the balance sheet of A and B who share profits and losses as 4/7 and 3/7:

Particulars	Amount	Particulars	Amount
Creditors	15,000	Land and Buildings	36,000
Bills payable	5,000	Machinery	20,000
Capital Accounts		Furniture	2,000
A : 45,000		Stock	25,000
B : 35,000	80,000	Sundry Debtors	16,000
		Cash	1,000
	1,00,000		1,00,000

They agree to take C into partnership and give him a share of 20 paise in the rupee subject to the following terms and conditions:

1. C is to contribute capital @ Rs. 12000 for each 10 paise share in the rupee.

2. Land and Buildings are to be increased to Rs. 40000.

3. Machinery is to be depreciated by 1096 and Furniture by Rs. 500.

4. Stock is to be appreciated by Rs. 1000.

5. Goodwill of the firm is to be valued at 2 years’ purchase of average profits of the last three years. (Profits for the last three years were Rs. 14500, Rs. 20000 and Rs. 22500.)

6. A provision of 2 1/2% is to be made for bad debts and another of Rs. 2500 for outstanding expenses.

7. A trade creditor for Rs. 1600 is not traceable for a number of years and the amount is to be written back.

Show Journal entries and capital accounts of the partners assuming no goodwill account is to be opened and the book values of assets and liabilities are not to be disturbed.

Also prepare the Balance Sheet of the new firm.

Solution: Working notes:

(1) New Profit sharing ratio:

C comes for 20 paise share in the rupee, i.e., for share, the share left for A and B is (1 – 15) or 45

So, A’s share is 4/7 of 4/5 or 16/35 And, B’s share is 3/7 of 4/5 or 12/35

Hence, new ratio is 16/35 : 12/35 : 7/35

Value of Goodwill:

\(Average profit of the last three years : = {1,500+20,000+22,500 \over3 }= Rs. 19,000\)

Value of Goodwill on the basis of 2 years’ purchase Rs. 19,000 x 2 = Rs. 38,000

(2) Profit/Loss on revaluation	Rs.	Rs.
Value of assets to be increased :
Land and Buildings	4,000

Stock	1,000
Goodwill	38,000
Value of assets to be reduced :	Rs.	Rs.
Machinery	2,000
Furniture	500	-2,500
Provision to be made for :	Rs.	Rs.
Bad Debts	400
Outstanding Expenses	2,500	- 2,900
Liabilities to be written back :	Rs.	Rs.
Trade Creditors		+1,600
Profit on Revaluation & Goodwill		+ 39,200

(3) Adjustment required:

Particulars	A	B	C
Profit credited in the old ratio of 4 : 3	+22,400	+ 16,800
Profit written back in the new ratio of 16 : 12 : 7	-17,920	-13,440	-7,840
Net adjustment	+ 4,480	+ 3,360	- 7,840

Journal Entry

Particulars	L.F.	Dr.	Cr.
Cash A/c (12,000 X 2)	Dr.	24,000
To C's Capital A/c			24,000
(Capital introduced by C's on his admission @ ! 12,000 for each 10 paise share in the rupee)
C's Capital A/c	Dr.	7,840
To A's Capital A/c			4,480
To B's Capital A/c			3,360
(Adjustment for Goodwill & Revaluation of assets and

liabilities without altering the book values on admission of C)

Capital A/c

Particulars	A (Rs.)	B (Rs.)	C (Rs.)	Particulars	A (Rs.)	B (Rs.)	C (Rs.)
To Capital of A&B			7,840	By Balance b/f	45,000	35,000
To Balance c/d	49,480	38,360	16,160	By Cash			24,000
				By Capital of C	49,480	38,360
	49,480	38,360	24,000		49,480	38,360	24,000
				By Balance b/d	49,480	38,360	16,160

Balance Sheet as at …..

Liabilities	Rs.	Assets	Rs.
Creditors	15,000	Land & Buildings	36,000
Bills Payable	5,000	Machinery	20,000
Capital Accounts :		Furniture	2,000
A 49,480		Stock	25,000
B 38,360		Sundry Debtors	16,000
C 16,160	1,04,000	Cash (1,000 + 24,000)	25,000
	1,24,000		1,24,000

Q-49 Explain Donation. Answer:

Donation:

Donations are the voluntary contribution provided by the well wishers for general or specific purpose.
If donations are received for a particular purpose then it will be credited to that particular fund a/c say donation received for construction of building credited to Building fund a/c.
Otherwise general donations will be credited to Income & Expenditure a/c.
If question requires capitalisation, but does not specify the fund to which it should be credited, then credit such donation to trust fund a/c.
Donation may be in kind then stock or fixed asset whatever is received will be debited and the credit will be as explained in above points.

Q-50 The following information’s were obtained from the books of Delhi Club as on 31.3.2011 at the end of the first year of the Club. You are required to prepare Receipts and Payments Account for the year ended 31.3.2011:

(i) Donations received for Building and Library Room Rs. 2,00,000.

(ii) Other revenue receipts:

Particulars	Amount receipts (Rs.)
Entrance Fees	17,000
Subscription	19,000
Locker Rents	600
Sundry Income	1,060
Refreshment Account	16,000

(iii) Other actual payments:

Particulars

Amount payments (Rs.)

Land (cost Rs. 10,000)	10,000
Furniture (cost Rs. 1,46,000)	1,30,000
Salaries	4,800
Maintenance of Playgrounds	1,000
Rent	8,000
Refreshment Account	8,000

Donations to the extent of Rs. 25,000 were utilized for the purchase of Library Books, balance was still unutilized. In order to keep it safe, 9% Govt. Bonds of Rs. 1,60,000 were purchased on 31.3.2011. Remaining amount was put in the Bank on 31.3.2011 under the term deposit.

Solution: Delhi Club Receipt and Payments A/c for the year ended 31st March 2011

Receipts	Rs.	Payments		Rs.
To Building and library fund a/c	2,00,000	By Library book a/c	25,000
To Entrance fees a/c	17,000	By Bond 9% govt. a/c	1,60,000
To Subscription a/c	19,000	By Fixed deposit a/c (Bal.fig)	15,000	2,00,000
To Locker rent a/c	600	By Land a/c		10,000
To Sundry income a/c	1,060	By Furniture a/c		1,30,000
To Refreshment a/c	16,000	By Salaries a/c		4,800
To Closing balance (Overdraft bal. )	1,08,140	By Maintenance of playgrounds a/c		1,000
		By Rent a/c		8,000
		By Refreshment a/c		8,000
	3,61,800			3,61,800

Q-51 From the following, find out the amount of subscriptions to be included in the income and expenditure account for the year ended 31st March, 1999.

Subscriptions were received during the year 1998-99 as follows:

Particulars	Rs.
For the year 1997-98	2,000
For the year 1998-1999	30,000
For the year 1999-2000	3,000

Subscriptions outstanding as on 31st March, 1998 were Rs. 3,500 out of which Rs. 500 were considered to be irrecoverable. On the same date, subscription received in advance for 1998-99 were Rs. 2,000. Subscriptions still outstanding as on 31st March, 1999 amounted to Rs. 6,000.

Solution: Subscription a/c

Particulars	Rs.	Particulars		Rs.
To Op. outstanding subscription a/c	3,500	By Op. advance subscription a/c		2,000
To I & E a/c (income bal. figure)	37,000	By I& E (irrecoverable amount)		500
To Closing advance subscription a/c	3,000	By Cash/Bank a/c for
		1997-98	2,000
		1998-99	30,000
		1999-2000	3,000	35,000
		By Closing o/s subscription a/c		6,000
	43,500			43,500

Q-52 Difference between Authorised Capital and Issued Capital.

Answer:

Basis of Difference

Authorised Capital

Issued Capital

1.Disclosure in Memorandum of Association

It is the amount stated in the company’s Memorandum of Association. It is the maximum amount that a company can issue under each class of capital.

It is not stated in the Memorandum of Association of the company.

2. Limits

It is higher than or equal to the

issued and subscribed capital.

It cannot exceed authorised

capital.

Q-53 The following is the Receipt and Payment Account of Park View Club in respect of the year ended 31st March, 2011:

Receipts		Rs.	Payments	Rs.
To Balance b/d		1,02,500	By Salaries	2,08,000
To subscriptions:			By Stationery	40,000
2009-10	4,500		By Rent	60,000
2010-11	2,11,000		By Telephone Exp.	10,000
2011-12	7,500	2,23,000	By Investment	1,25,000
To Profit on sports meet		1,55,000	By Sundry Expenses	92,500
To Income from investments		1,00,000	By Balance c/d	45,000
		5,80,500		5,80,500

Additional information:

(i) There are 450 members each paying an annual subscription of Rs. 500. On 1st April, 2010, outstanding subscription was Rs. 5,000.

(ii) There was an outstanding telephone bill for Rs. 3,500 on 31st March, 2011.

(iii) Outstanding sundry expenses as on 31st March, 2010 totalled Rs. 7,000.

(iv) Stock of stationery:

On 31st March, 2010 Rs. 5,000

On 31st March, 2011 RS. 9,000

(v) On 31st March, 2010 building stood in the books at Rs. 10,00,000 and it was subject to depreciation @ 5% per annum.

(vi) Investment on 31st March, 2010 stood at Rs. 20,00,000.

(vii) On 31st March, 2011, income accrued on the investments purchased during the year amounted to Rs. 3,750.

Prepare an Income and Expenditure Account for the year ended 31st March, 2011 and the Balance Sheet as at that date.

Solution: Park View Club : Income and Expenditure Account for the year ended on 31st March 2011

Expenditure		Rs.	Income		Rs.
To Salaries		2,08,000	By Subscriptions (W.N. 2)		2,25,000
To Stationery consumed (W.N3)		36,000	By Profit on sports meet		1,55,000
To Rent		60,000	By Income on investment	1,00,000
To Telephone expenses	10,000		Add Income accrued	3,750	1,03,750
Add Closing Outstanding	3,500	13,500
To Sundry expenses	92,500
Less Opening Outstanding	(7,000)	85,500

To Depreciation of building

50,000

To Surplus (Carried to Capital

fund)

30,750

4,83,750

Balance sheet

Liability		Amount Rs.	Assets		Amount Rs.
Capital fund (W.N. I)	31,05,500		Outstanding subscriptions		14,500
Add:Surplus	30,750	31,36,250	Investment (20,00,000+1,25,000)	21,25,000
Subscriptions received in advance		7,500	Add Interest accrucd	3,750	21,28,750
Outstanding telephone bills		3,500	Building	10,00,000
			Less Depreciation	(50 000)	9,50,000
			Stock of stationery		9,000
			Cash balance		45,000
		31,47,250			31,47,250

Working Notes:

(1) Calculation of Opening Capital Fund

Balance Sheet as at 31st March 2010

Liability	Amount Rs.	Assets	Amount Rs.
Outstanding sundry expenses	7,000	Building	10,00,000
Capital fund (Balancing figure)	31,05,500	Investments	20,00,000
		Stock of stationery	5,000
		Cash balance	1,02,500
		Outstanding subscriptions	5,000
	31,12,500		31,12,500

(2) Calculation of subscriptions accrued during the year

Subscription A/c

Particulars’	Amount Rs.	Particulars	Amount Rs.
To Opening Outstanding Subscriptions	5,000	By Cash A/c (4,500 + 2,11,000 + 7,500)	2,23,000
To Income & Expenditure A/c (450 @ 500)	2,25,000	By Closing Outstanding subscriptions (Balancing figure)	14,500
To Subscriptions received in advance c/f	7,500
	2,37,500		2,37,500

(3) Calculation of stationery consumed during the year

Particulars	Rs.
Opening Stock of stationery	5,000
Add Purchased	40,000
Total	45,000
Less: Closing Stock of stationery	(9,000)
Stationery consumed	36,000

Q-54 A company purchased some plant of Rs. 2,00,000 from Mr. R. Company decided to issue its shares of Rs. 10 each against purchase considerations.

Show the necessary journal entries in the books of companies.

(1) If shares were issued @ Rs. 10 per share.

(2) If shares were issued @ Rs. 12.50 per share.

S. No.	Particulars	L.F.	Amount(Rs.)	Amount(Rs.)
	Plant a/c Dr.		2,00,000
	To Vendors a/c (Mr. R)			2,00,000
	(Being plant purchased by the company from Mr. R)
Case 1	Vendor's a/c (Mr. R) Dr.		2,00,000
	To Equity share capital a/c			2,00,000
	Being shares issued by the company @ Rs. 10 per share) NOTE : No. of shares to be issued = Amount payable/ issued price of shares = 2,00,000/10 = 20,000 shares.
Case 2	Vendor's a/c (Mr. R) Dr.		2,00,000
	To Equity share capital a/c			1,60,000
	To Securities Premium Reserve a/c			40,000
	(Being shares issued by the company @ Rs. 12.50 2,00,000 per share) , No. of shares to be issued = = 12.5 16,000 shares.

Q-55 ABC company issued 1000, 9% debentures ofRs.100 each at a discount of 5% on 1st Jan, 2011. These debentures were to be redeemed after 5 years. Show necessary journal entries at the time of issue of debentures. Also prepare discount on issue of 9% debentures a/c.

Solution : At the time of issue: Journal Entries

S. No.	Particulars	L.F.	Amount(Rs.)	Amount(Rs.)
2011	Bank a/c Dr.		95,000
	Discount on issue of 9% debentures a/c Dr.		5,000
	To 9% debenture a/c			1,00,000
	(Being 9% debenture issued @ a discount of 5%)

Discount on issue of 9% debenture a/c

Date	Particulars	J.F.	Amount	Date	Particulars	J.F.	Amount
2011			Rs.	2011			Rs.
1st Jan.	To 9% debentures a/c		5,000	31st Dec.	By Statement of Profit and loss a/c		1,000
					By balance c/d		4,000
			5,000				5,000
2012				2012
1st Jan.	To balance b/d		4,000		By Statement of Profit and loss a/c		1,000
					By balance c/d		3,000
			4,000				4,000
2013				2013
1st Jan.	To balance b/d		3,000		By Statement of Profit and loss a/c		1,000
					By balance c/d		2,000
			3,000				3,000
2014				2014
1st	To balance b/d		2,000		By Statement of		1,000

Jan.				Profit and loss a/c
				By balance c/d	1,000
		2,000			2,000
2015			2015
1st Jan.	To balance b/d	1,000		By Statement of Profit & loss a/c	1,000
		1,000

Balance sheet as at 31st December 2011

Assets	Note No.	Rs.
Non-current assets other non-current assets		3,000
Current assets other current assets		1,000

Working Note:

(1) = Rs. 5, 000 / 5 years = Rs. 1,000

Q-56 Pure Ltd. issues 1,00,000 12% Debentures of Rs. 10 each at Rs. 9.40 on 1st January, 2018. Under the terms of issue, the Debentures are redeemable at the end of 5 years from the date of issue.

Calculate the amount of discount to be written-off in each of the 5 years.

Solution: Total amount of Discount = 1,00,000 x 0.60 = Rs. 60,000

At the end of Year

Amount of outstanding debentures

Ratio

Amount of discount to

be written off

1st

10,00,000

1/5

60,000 = 12000

2nd

10,00,000

1/5

60,000 = 12000

3rd	10,00,000	1/5	60,000 = 12000
4th	10,00,000	1/5	60,000 = 12000
5th	10,00,000	1/5	60,000 = 12000

Q-57 Premium on issue of debentures and Premium on redemption of debentures.

Answer: Premium on issue of debentures and Premium on redemption of debentures:

Premium on Issue of Debentures

Premium on Redemption of Debentures

1. It is a capital profit and used in writing off

the capital loss.

It is a capital loss.

2. The balance of premium on issue of Debentures Account, (Securities Premium) is shown on the liabilities side, under the head ‘Shareholders’ Funds’ and sub-head ‘Reserves and Surplus’.

It is a liability and appears under the head ‘Non-Current Liabilities’ and sub-head ‘Long- term Borrowing’ till the redemption of debentures.

Q-58 Give necessary journal entries for the forfeiture and re-issue of shares: (i) X Ltd. forfeited 300 shares of Rs. 10 each fully called up, held by Ramesh for non-payment of allotment money of Rs. 3 per share and final call of Rs. 4 per share. He paid the application money of Rs. 3 per share. These shares were re-issued to Suresh for Rs. 8 per share.

(ii) X Ltd. forfeited 200 shares of Rs.10 each (Rs. 7 called up) on which Naresh had paid application and allotment money of Rs. 5 per share. Out of these, 150 shares were re-issued to Mahesh as fully paid up for Rs. 6 per share.

(iii) X Ltd. forfeited 100 shares of Rs. 10 each (Rs. 6 called up) issued at a discount of 10% to Dimple on which she paid Rs. 2 per share. Out of these, 80 shares were re-issued to Simple at Rs. 8 per share and called up for Rs. 6 per share.

Solution: (i) Journal

S. No.	Particulars	L.F.	Amount(Rs.)	Amount(Rs.)
(i)	Equity share capital A/c (300 X 10) Dr.		3,000
	To Equity Share Allotment A/c (300 X 3)			900
	To Equity Share First & Final Call A/c 1,200 (300 X 4)			1,200
	To Share Forfeiture A/c (300 X 3)			900
	(Being shares forfeited of X due to non-payment of allotment and final call)
(ii)	Bank A/c (300 X 8) Dr.		2,400
	Share Forfeiture A/c (300 X 2) Dr.		600
	To Equity Share Capital A/c (300 X 10)			3000
	(Being shares reissued at discount of Rs. 2)
(iii)	Share Forfeiture A/c Dr.		300
	To Capital Reserve A/c			300
	(Being profit on reissue transferred to Capital Reserve)

(ii) Journal

S. No.	Particulars	L.F.	Amount(Rs.)	Amount(Rs.)
(i)	Equity share capital A/c (200 X 7) Dr.		1,400
	To Call in Arrears A/c (200 X 2)			400
	To Share Forfeiture A/c (200 X 5)			1,000
	Being shares forfeited of X due to non-payment of

	final call)
(ii)	Bank A/c (150 X 6) Dr.	900
	Share Forfeiture A/c (150 X 4) Dr.	600
	To Equity Share Capital A/c (150 X 10)		1,500
	(Being shares reissued at discount of Rs. 4)
(iii)	Share Forfeiture A/c (150 X 1) Dr.	150
	To Capital Reserve A/c		150
	(Being profit on reissue transferred to Capital Reserve)

(iii) Journal

S. No.	Particulars	L.F.	Amount(Rs.)	Amount(Rs.)
(i)	Equity share Capital A/c (100 X 6) Dr.		600
	To Discount on Issue of Equity 100 Shares (100 X 1)			100
	To Calls in Arrears A/c (100 X 3)			300
	To Share Forfeiture A/c (100 X 2)			200
	(Being shares forfeited of X due to non-payment of allotment and final call)
(ii)	Bank A/c (80 X 8) Dr.		640
	Discount on Issue of Equity Shares (80 X 1) Dr.		80
	To Equity Share Capital A/c (80 X 6)			480
	Securities premium A/c (80 X 3)			240
	(Being share reissued at Rs. 8 and original discount cancelled)
(iii)	Share Forfeiture A/c (80 X 2) Dr.		160
	To Capital Reserve A/c			160
	(Being profit on reissue transferred to Capital Reserve)

Note: Although this question 6(a)(iii), containing issue of shares at discount, has been asked in the examination but as per Companies Act, 2013, a company cannot issue shares at discount to general public.

Q-59 Monika, Yedhant and Zoya are in partnership, sharing profits and losses equally. Zoya died on 30th June 2018. The Balance Sheet of Firm as at 31st March 2018 stood as:

Liabilities	Rs.	Assets	Rs.
Creditors	20,000	Land and Building	1,50, 000
General Reserve	12,000	Investments	65,000
Capital Accounts :		Stock in trade	15,000
Monika	1,00,000	Trade receivables 35,000
Yedhant	75,000	Less:Provision for doubtful debt 2,000	33,000
Zoya	75,000	Cash in hand	7,000
		Cash at bank	12,000
	2,82,000		2,82,000

In order to arrive at the balance due to Zoya, it was mutually agreed that:

(i) Land and Building be valued at Rs. 1,75,000

(ii) Debtors were all good, no provision is required

(iii) Stock is valued at Rs.13,500

(iv) Goodwill will be valued at one Year’s purchase of the average profit of the past five years. Zoya’s share of goodwill be adjusted in the account of Monika and Yedhant.

(v) Zoya’s share of profit from 1st April 2018, to the date of death be calculated on the basis of average profit of preceding three years.

(vi) The profit of the preceding five years ended 31st March were :

2018	2017	2016	2015	2014
25,000	20,000	22,500	35,000	28,750

You are required to prepare :

(1) Revaluation account

(2) Capital accounts of the partners and

(3) Balance sheet of the Firm as at 1st July 2018.

Solution: Revaluation Account

Particulars	Amount	Particulars	Amount
To Stock a/c	1,500	By Land & Building a/c	25,000
To Profit on Revaluation:		By Provision for Doubtful Debts a/c	2,000
Monika 8,500
Yedhant 8,500
Zoya 8,500
	27,000		27,000

Capital Account

Particulars

M (Rs.)

Y (Rs.)

Z (Rs.)

Particulars

M (Rs.)

Y (Rs.)

Z (Rs.)

To Zoya

4,375

By Balance b/d

1,00,000

75,000

To Z's

executor's a/c

98,125

By Revaluation

a/c (Profit)

8,500

To Balance c/d	1,08,125	83,125		By General Reserve a/c	4,000	4,000	4,000
				By M & Y (2)			8,750
				By Profit & Loss Suspense a/c (3)			1,875
	1,12,500	87,500	98,125		1,12,500	87,500	98,125

Balance Sheet of the firm as at 1st July, 2018(after death)

Liabilities	Rs.	Assets	Rs.
Capital a/c:-		Land & Building	1,75,000
Monika 1,08,125		Investments	65,000
Yedhant 83,125	1,91,250	Stock	13,500
Creditors	20,000	Debtors	35,000
Zoya's Executor's a/c	98,125	Cash in Hand	7,000
		Cash at Bank	12,000
		Profit & Loss Suspense a/c	1,875
	3,09,375		3,09,375

Working Notes:

(1) Calculation of Goodwill

Profits of the past five years

Years	Rs.
2014	28,750
2015	35,000
2016	22,500
2017	20,000
2018	25,000
	1,31,250

Average Profit = \(1,31,250 \over5\)

= Rs.26,250

= 26,250 × 1 year purchase

= Rs. 26,250

(2) Treatment of Goodwill

Monika	Dr.	4,375
Yedhant	Dr.	4,375
To Zoya			8,750
(Being goodwill adjusted in the gaining ratio 1:1)

(3) Calculation of Zoya’s share of profit, upto the date of death

2016	22,500
2017	20,000
2018	25,000
	67,500

Average Profit = \({67500 \over3} = ????????. 22,500\)

22,500 × 3/12× 1/3

= 1,875

Q-60 X, Y and Z were sharing profits and losses in the ratio of 1/2: 1/3: 1/6 respectively. The firm had insured the partner’s lives severally. The surrender values of the life policies appearing in the balance sheet as at 31st March, 2006 were – X for Rs. 5,000, Y for Rs. 4,000 and Z for Rs. 3,000. The surrender values represents 50% of the sum assured in each case. Y and Z decide to CAtestseries.org (Since 2015) – CA Final Inter Foundation online Test Series Page 102 share equally in future. Give the necessary journal entries assuming (a) If X retires on 31-3- 2006.

(b ) If X dies on 31-3-2006.

Date	Particulars	L.F.	Dr.	Cr.
31-3-06	Case (a)
31-3-06	No entry is to be passed since policies appear at surrender value and its real value is also surrender value, hence no unaccounted/undivided profit.
1-3-06	Case (b)
1-3-06	Insurance Company's A/c Dr.		10,000
	To X's Life Policy A/c			10,000
	(Being the claim due on X's death recorded by crediting X's Life Policy A/c)			10,000
	X's Life Policy A/c Dr.		5,000
	To X's Capital A/c			2,500
	To Y's Capital A/c			1,667
	To Z's Capital A/c			833
	(Being the transfer of balance in X's life policy A/c being profit)			833

Q-61 From the following information, prepare a Bank reconciliation statement as at 31st December:

1. Bank overdraft as per Cash Book on 31st December, 2017 is 22,45,900'

2. Interest debited by Bank on 26th December, 2017 but no advice received is 2,78,700

3. Cheque issued before 31st December, 2017 but not yet presented to Bank amounted to 6,60,000

4. Transport subsidy received from the State Government directly by the Bank but not advised to the company amounted to 14,25,000

5. Draft deposited in the Bank, but not credited till 31st December, 2017 is 13,50,000

6. Bills for collection credited by the Bank till 31st December, 2017 but no advice received by the company amounted to 8,36,000

7. Amount wrongly debited to company account by the Bank, for which no details are available amounted to 7,40,000

Solution : Bank Reconciliation Statement as on 31st December

Particulars	Amount (Rs.)
Bank overdraft as per cash book	(22,45,900)
Add:
Cheque issued but not presented	6,60,000
Subsidy received by back directly	14,25,000
Bills for collection credited by bank	8,36,000
Less:
Interest debited by bank	(2,78,700)
Cheque deposited but not cleared	(13,50,000)
Amount wrongly debited by bank	(7,40,000)
Overdraft per passbook	(16,93,600)

Q-62 The Pass Book of Ram shows Rs. 1,50,000 balance as on 30th June but you find that it does not agree with the balance as per the cash Book. On scrutiny, you find the following discrepancies:

1. Two cheques one from Vibhishan for Rs. 50,000 and another from Raavan for Rs. 1,12,500 were collected in first week of July although they were banked on 25th June

2. Am amount of Rs. 1,00,000 representing collection of Sita’s cheque was wrongly credited to the account of Ram by the bank in their bank statement.

3. A customer of the firm who received a cash discount of 4% on his account of Rs. 4,000 paid the firm a cheque on 12th June which has been cleared. The cashier erroneously entered the gross amount in the bank column of the cash book.

4. A debit of Rs. 100 appeared in the bank statement for an unpaid cheque, which had been returned marked ‘out of date’. The cheque had been re-dated by the customer and paid into Bank again on 5th July.

Prepare a bank reconciliation statement

Particulars	Amounts (in Rs.)
Balance as per pass book	1,50,000
Add: Cheques deposited in bank but not yet cleared (1,12,500 + 50,000)	1,62,500
Wrong recording in Cash book	160
Debit in Pass book	100
Less: Wrong credit by bank	(1,00,000)
Balance as per Cash Book	2,12,760

Q-63 D’s Cash Book shows an overdrawn position of Rs. 3,630 on 31.3. though the Bank Statement shows only Rs. 3,378 overdrawn. Detailed examination of two records reviled the following:

1. A cheque for Rs. 1,560 in favour of Rath Associates has been omitted by the Bank from its statement, thus, cheque having been debited to another customer’s account.

2. The debit side of owned book has been under caste by Rs. 300.

3. A cheque for Rs. 182 drawn in payment of electricity amount had been entered in the Cash Book on Rs. 128 & was shown correctly in the Bank statement.

4. A cheque for Rs. 210 from S. Gupta having been paid into Bank, was dishonoured & shown as such on Bank statement, although no entry relating to dishonoured had been made in Cash Book.

5. The Bank had debited a cheque for Rs. 126 to D’s Account in error. It should have been debited to Sukhal’s Account.

6. A dividend of Rs. 90 on D’s holding of equity shares has been duly shown by Bank, no entry has been made in Cash Book.

7. A lodgement of Rs. 1,080 on 31.3.2013 had not been credited by Bank.

8. Interest on Rs. 228 had been directly debited by Bank not recorded in Cash Book.

You are required to prepare a Bank Reconciliation Statement after necessary amendment in Cash Book as on 31.3.2013.

Solution: In the Books of Mr. D Adjusted Cash Book (Bank Column only)

Solution: In the Books of Mr. D Adjusted Cash Book (Bank Column only)

Date

Particulars

Amount

Date

Particulars

Amount

31 Mar	To Dividend A/c	90	31 Mar	By Balance b/d	3,630
	To Error (under casting in debit side)	300		By Electric Charges A/c (Cheque drawn for Rs. 182 wrongly recorded as Rs. 128 )	54
	To Balance c/d	3,732		By S. Gupta’s A/c	210
				By Bank Interest	228
		4,122			4,122

Bank Reconciliation Statement of Mr. D as at 31st March

Particulars	Amounts (in Rs.)
Overdraft as per Adjusted Cash Book	(3,732)
Less: A cheque for Rs. 126 wrongly debited by Bank.	(126)
A lodgement not credited by Bank	(1,080)
Add: A cheque was issued in favour of Rath Associates not debited by Bank	1,560
Overdraft as per Pass Book	(3,378)

Q-64 A manufacturer has the following record of purchases of a condenser, which he uses while manufacturing radio sets:

Date	Quantity (units)	Price per unit
Dec. 4	900	50
Dec. 10	400	55
Dec. 11	300	55
Dec. 19	200	60
Dec. 28	800	47
	2600

1,600 units were issued during the month of December. Calculate the value of inventory by weighted average method if company follows periodic system.

Solution: In the books of Manufacturer

Total No. of units purchased = 2,600

Less: Total No. of units sold = 1,600

Closing Stock = 1,000

Statement showing valuation of closing stock by weighted Average Method

Particulars	Rs.
The value of 1000 units at weighted average price of Rs.51.19	51,190
Value of Closing Inventory	51,190

Working note

Calculation of weighted average price:

Date	Quantity	Price	P x Q
Dec 4	900	50	45000
Dec 10	400	55	2200
Dec 11	300	55	16500
Dec 19	200	60	12000
Dec 28	800	47	37600
	2,600		1,33,100

Weighted Average Price = 133100 / 2600 = 51.19

Q-65 M/s Hrishikesh, Jagadguru and Jagadisha are in retail business, following information is obtained from their records for the year ended 31st March:

Goods received from suppliers (subject to trade discount and taxes) Trade discount 3% and sales tax 11%	Rs. 15,75,500
Direct expenses	Rs. 87,500
Sales during the year	Rs. 22,45,500
Sales price of closing inventories	Rs. 2,35,000

Calculate the historical cost of inventories using adjusted selling price method.

Solution: Determination of cost of purchases:

Particulars	Rs.
Goods received from suppliers	Rs. 15,75,500
Less: Trade discount 3%	(47,265)
	15,28,235
Add: Sales Tax 11%	1,68,106
	16,96,341
Add: Packaging and transportation charges	87,500
	(17,83.841)
Determination of estimated gross profit margin:
Sales during the year	22,45,500
Closing inventory at the selling price	2,35,000
	24,80,500
Less: Purchases	(17,83,841)
Gross profit	6,96,659
Gross profit margin (6,96,659/24,80,500 x 100)	28.09%
Inventory valuation:

Selling price of closing inventories	2,35,000
Less: Gross profit margin 28.09%	(66,012)
	1,68,988

Q- 66 Bharat Indian Oil is a bulk distributor of petrol. A periodic inventory of petrol on hand is taken when the books are closed at the end of each month. The following summary of information is available for the month of June:

Sales	Rs. 15,00,000
General administration cost	Rs. 45,500
Opening Stock: 1,00,000 litres @ Rs. 3 per litre	Rs. 3,00,000
Purchases (including freight inward):
June 1 2,00,000 litres @ Rs. 2.85 per litre
June 30 1,00,000 litres @ Rs. 3.03 per litre
June 30 Closing stock 1,30,000 litres

Compute the value of inventory on June 30 using LIFO method of inventory costing. Also compute the amount of Gross Profit and Net Profit.

Answer: Book of Bharat Indian Oil

Statement showing inventory by LIFO, Gross Profit and Net Profit

Particulars	Amount
Closing inventory
1,00,000 litres @ 3 per litre	3,00,000
30,000 litres @ 2.85 per litre	85,500
	3,85,500

Gross Profit
Sales (given)	15,00,000
Less: cost of goods sold (WN1)	(7,87,500)
	7,12,500
Net Profit
Gross Profit	7,12,500
Less: Administration cost	(45,500)
	6,67,000

Working note:

Cost of goods sold
1,00,000 litres @ 3.03 per litre	3,03,000
1,70,000 litres @ 3.03 per litre	4,84,500
	7,87,500

Q-67 M/s Surya & Co. took lease of a quarry on 1-1-2013 for Rs. 1,00,00,000. As per technical estimate the total quantity of mineral deposit is 2,00,000 tonnes. Depreciation was charged on the basis of depletion method. Extraction pattern is given in the following table:

Year	Quantity of Mineral extracted
2013	2,000 tonnes
2014	10,000 tonnes
2015	15,000 tonnes

Show the Quarry Lease Account and Depreciation Account for each year from 2013 to 2015.

Solution: Quarry Lease Account

Date	Particulars	Rs.	Date	Particulars	Rs.
2021			2021
Jan	To Bank A/c	1,00,00,000	Dec. 31	By Depreciation A/c [(2,000/2,00,000) × Rs. 1,00,00,000]	1,00,000
				By balance c/d	99,00,000
		1,00,00,000			1,00,00,000
Jan. 1, 22	To Balance b/d	99,00,000	Dec. 31	By Depreciation A/c	5,00,000
			Dec. 31	By Balance c/d	94,00,00
		99,00,000			99,00,000
Jan.1, 23	To Balance b/d	94,00,000	Dec. 31, 23	By Depreciation A/c	7,50,000
			Dec. 31	By Balance c/d	86,50,000
		94,00,000			94,00,000

Depreciation Account

Date	Particulars	Rs.	Date	Particulars	Rs.
Dec. 31	To Quarry lease A/c	1,00,000	Dec. 31	By Profit & Loss A/c	1,00,000
		1,00,000			1,00,000
Dec.31	To Quarry lease A/c	5,00,000	Dec.31	By Profit & Loss A/c	5,00,000
		5,00,000			5,00,000
Dec.31	To Quarry lease A/c	7,50,000	Dec.31	By Profit & Loss A/c	7,50,000
		7,50,000			7,50,000

Q-68 A machine is purchased for Rs. 7,00,000. Expenses incurred on its cartage and installation Rs. 3,00,000.

Calculate the amount of depreciation @ 20% p.a. according to Straight Line Method for the first year ending on 31st March, 2013, if this machine is purchased on:

1. 1st April, 2012

2. 1st July, 2012

3. 1st October, 2012

4. 1st January, 2013

Solution: Total Cost of Asset = Purchased Price + Cost of Cartage and Installation

= Rs. 7,00,000 + Rs. 3,00,000 = Rs. 10,00,000

SLM Depreciation = Total Cost of Asset × Rate of Depreciation × Time period Accordingly,

(a) If the machine was purchased on 1st April, 2021:

Amount of Depreciation = Rs. 10,00,000 × 20% ×\( {12 \over12} = Rs. 2,00,000\)

(b) If the machine was purchased on 1st July, 2021

Amount of Depreciation = Rs. 10,00,000 × 20% ×\( {6\over 12} = Rs. 1,00,000\)

(d) If the machine was purchased on 1st January, 2022

Amount of Depreciation = Rs. 10,00,000 × 20% × \({3 \over12} = Rs. 50,000\)

Q-69 You are required to prepare a Trading and Profit and Loss Account for the year ending 31st March and a Balance Sheet as on that date from the Trial Balance given below:

Particulars	Rs	Particulars	Rs
Debit Balance
Trade Receivable	3,50,000	Salaries	2,20,000
Inventory 1 st April 2015	5,00,000	Purchases	12,50,000
Cash in hand	5,60,000	Plant &Machinery	15,70,000
Wages	3,00,000	Credit Balance :
Bad debts	50,000	Capital	25,00,000
Furniture and Fixtures	1,50,000	Trade Payable	9,00,000
Depreciation	1,50,000	sales	17,00,000

On 31st March the Inventory was valued at Rs. 10,00,000.

Solution

Particulars	Rs.	Particulars	Rs.
To Opening Inventory	5,00,000	By Sales	17,00,000
To Purchases	12,50,000	By Closing Inventory	10,00,000
To Wages	3,00,000
To Gross Profit	6,50,000
	27,00,000		27,00,000
To Bad Debts	50,000	By Gross Profit	6,50,000
To Depreciation	1,50,000
To Salaries	2,20,000
To Net Profit transferred to Capital A/c	2,30,000
	6,50,000		6,50,000

Balance Sheet as at 31st March

Liabilities

Rs.

Assets

Rs.

Capital:			Cash in Hand	5,60,000
Previous Balance	25,00,000		TRade receivables	3,50,000
Add : Net Profit	2,30,000	27,30,000	Closing Inventory	10,00,000	19,10,000
Trade payables		9,00,000	Furniture & Fixtures	1,50,000
			Plant & Machinery	15,70,000	17,20,000
		36,30,000			36,30,000

Q-70 Mr. Birla is a proprietor engaged in business of trading electronics. An excerpt from his Trading & P&L account is as follows:

Commission is charged at the rate of 10%.

Selling Expenses amount to 1% of total sales.

You are required to compute the missing figures.

Solution: Computation of Net Profit: (F)

Commission Manager = Rate of Commission X Net Profit before charging such commission

So, Commission to manager = 10/100 × Net Profit before charging such commission

=> Rs. 2,00,000 = 10/100 × Net Profit before charging such commission

=> Net Profit before charging such commission = Rs. 20,00,000

=> Net Profit (F) = Rs. (20,00,000 - 2,00,000) = Rs.18,00,000

Computation of Selling Expenses: (E)

Total income appearing in P&L A/c =Rs.60,00,000

Total expenses other than selling expenses = Rs. (26,00,000 + 13,00,000 + 2,00,000)

= Rs.41,00,000

So, Selling Expenses + Remaining Expenses + Net Profit = Total Income

=> Selling Expenses = Rs.60,00,000 –Rs. 41,00,000 – Rs.18,00,000

=> Selling Expenses = Rs. 1,00,000

Computation of Sales: (A)

We have been given selling expenses amount to 1% of Sales

\(So, Sales = {Selling Expense\over 1} ×100\)

\(={1,00,000\over 1} × 100\)

=Rs. 100,00,000

Computation of Gross Profit: (B): In Trading A/c

Particulars	Rs.	Particulars	Rs.
To COGS	45,00,000	By Sales (from C above)	100,00,000
To Gross Profit (Balancing Figure)	55,00,000
Total (C)	100,00,000	Total (C)	100,00,000

So, Gross Profit (B) = Rs. 55,00,000

Miscellaneous Income = Total Income in P&L - Gross Profit (D)

= Rs. (60,00,000 - 55,00,000)

= Rs. 5,00,000

C = Rs. 100,00,000 (As computed in B above)

G = RS. 60,00,000 (Total of both sides of P&L is equal after balancing has been done)

Q-71 Rita owed Rs. 1,00,000 to Siriman. On 1st October, 2016, Rita accepted a bill drawn by Siriman for the amount at 3 months. Siriman got the bill discounted with his bank for Rs. 99,000 on 3rd October, 2016. Before the due date, Rita approached Siriman for renewal of the bill.

Siriman agreed on the conditions that Rs. 50,000 be paid immediately together with interest on the remaining amount at 12% per annum for 3 months and for the balance, Rita should accept a new bill at three months. These arrangements were carried out. But afterwards, Rita became insolvent and 40% of the amount could be recovered from his estate. Pass journal entries (with narration) in the books of Siriman.

Solution: In the books of Siriman Journal Entries

Particulars	L.F.	Rs.	Rs.
Bills Receivable A/c	Dr.	1,00,000
To Rita			1,00,000
(Being a 3 month’s bill drawn on Rita for the amount due)
Bank A/c	Dr.	99,000
Discount A/c	Dr.	1,000
To Bills Receivable A/c			1,00,000
(Being the bill discounted)
Rita	Dr.	1,00,000
To Bank A/c			1,00,000
(Being the bill cancelled up due to Rita’s inability to pay it)
Rita	Dr.	1,500
To Interest A/c			1,500
(Being the interest due on Rs.5,000 @ 12% for 3 months)
Bank A/c	Dr.	51,500
To Rita			51,500
(Being the receipt of a portion of the amount due on the bill together with interest)
Bills Receivable A/c	Dr.	50,000
To Rita			50,000
(Being the new bill drawn for the balance)
Rita	Dr.	50,000
To Bills Receivable A/c			50,000
(Being the dishonour of the bill due to Rita’s insolvency)
Bank A/c	Dr.	20,000
Bad Debts A/c	Dr.	30,000
To Rita			50,000
(Being the receipt of 40% of the amount due on the bill from rita’s estate)

Q-72 X supplied goods on sale or return basis to customers, the particulars of which are as under:

Date of dispatch	Party’s name	Amount in Rs.	Remarks
10.12.2016	ABC Co.	10,000	No information till 31.12.2016
12.12.2016	DEF Co.	15,000	Returned on 16.12.2016
15.12.2016	GHI Co.	12,000	Goods worth Rs. 2,000 returned on 20.12.2016
20.12.2016	DEF Co.	16,000	Goods Retained on 24.12.2016
25.12.2016	ABC Co.	11,000	Good Retained on 28.12.2016
30.12.2016	GHI Co.	13,000	No information till 31.12.2016

Goods are to be returned within 15 days from the dispatch, failing which it will be treated as sales.

The books of ‘X’ are closed on the 31st December, 2016. Prepare the following accounts in the books of ‘X’.

(a) Goods on “sales or return, sold and returned day books”.

(b) Goods on sales or return total account.

Solution: In the books of ‘X’ Goods on sales or return, sold and returned day book

Q- 73 X of Delhi purchased 10,000 metres of cloth for Rs. 2,00,000 of which 5,000 metres were sent on consignment to Y of Agra at the selling price of Rs. 30 per metre. X paid Rs. 5,000 for freight and Rs. 500 for packing etc .Y sold 4,000 metre at Rs. 40 per metre and incurred Rs. 2,000 for selling expenses. Y is entitled to a commission of 5% on total sales proceeds plus a further 20% on any surplus price realised over Rs. 30 per metre. 3,000 metres were sold at Delhi at Rs. 30 per metre less Rs. 3,000 for expenses and commission. Owing to fall in market price, the inventories of cloth in hand is to be reduced by 10%.

Prepare the Consignment Account and Trading and Profit & Loss Account in books of X.

Solution: In the books of Mr. X Consignment Account

Particulars	Amount Rs.	Particulars	Amount Rs.
To Goods sent on Consignment	1,50,000	By Y’s account: (Sales)	1,60,000
To Bank account: Freight and packing etc.	5,500	By Goods sent on consignment (Cancellation of loading)	50,000
To Y’s account: Selling expenses Commission (W.N.1)	2.000 16,000	By Inventories on consignment (W.N.2)	28,990
To Inventories Reserve [W.N.3]	10,000
To Profit and loss account (profit on consignment transferred)	55,490
	2,38,990		2,38,990

Trading and Profit and Loss Account for the year ended…….

Particulars

Amount Rs.

Particulars

Amount Rs.

To Purchases

2,00,000

By Sales

90,000

To Gross profit c/d

26,000

By Goods sent on

consignment

1,00,000

		By Inventories in hand Cost 40,000 Less: 10% 4,000	36,000
	2,26,000		2,26,000
To Expenses and commission	3,000	By Gross profit b/d	26,000
To Net profit	78,490	By Consignment A/c (profit on consignment)	55,490
	81,490		81,490

Working Notes:

i. Calculation of commission payable to Y:	Rs.
Total sale proceeds of Y	1,60,000
Surplus proceeds realised over Rs. 30 per metre [4,000 x Rs. (40-30)]	40,000
Commission:	8,000
5% of total sale proceeds (5% of Rs. 1,60,000)	8,000
20% of surplus (20% of Rs. 40,000)	16,000

ii. Inventories on Consignment:	Rs.
Cost of consignment Inventories (1000 mtrs@ Rs. 30)	30,000
Add: Expenses of consignor (5,500X1/5)	1,100
	31,100
Less: Reduction of 10% in cost due to fall in market price (20,000+1,100) x 10%	2,110
	28,990
iii. Loading ( Rs.10 x 1,000 mtrs)	10,000

Q-74 Develop the accounting equation from following information available at the beginning of accounting period:

Particulars	(Rs. in 000)
Capital	51,000
Loan	11,500
Trade payables	5,700
Fixed Assets	12,800
Inventory	22,600
Trade receivables	17,500
Cash and Bank	15,300

At the end of the accounting period the balances appear as follows:

Particulars	Rs.
Capital	?
Loan	11,500
Trade payables	5,800
Fixed Assets	12,720
Inventory	22,900
Trade receivables	17,500
Cash and Bank	15,600

(a) Reset the equation and find out profit.

(b) Prepare Balance Sheet at the end of the accounting period.

(All the figures in solution are in ‘000)

(a) Accounting equation is given by

Equity + Liabilities = Assets

Let us use E0, L0 and A0 to mean equity, liabilities and assets respectively at the beginning of the accounting period.

E0 = Rs. 51,000

L0 = Loan + Trade payables

= Rs.11,500 +Rs.5,700 = Rs.17,200

A0 = Fixed Assets + Inventories + Trade receivables + Cash at Bank

= Rs.12,800 +Rs.22,600 +Rs.17,500 +Rs.15,300 = Rs.68,200

So, at the beginning of accounting period

E0 + L0 = A0

i.e.,Rs.51,000 +Rs.17,200 =Rs.68,200

Let us use E1, L1, A1 to mean equity, liabilities and assets respectively at the end of the accounting period.

L1 = Loan + Trade payables

= Rs.11,500 +Rs.5,800 = Rs.17,300

A1 = Fixed Assets + Inventories + Trade receivables + Cash at Bank

= Rs.12,720 +Rs.22,900 +Rs.17,500 +Rs.15,600 = Rs.68,720

E1 = A1 - L1 =Rs.68,720 -Rs.17,300 =Rs.51,420

Profit = E1 - E0 =Rs.51,420 -Rs.51,000 =Rs.420

Balance Sheet

Liabilities

Rs.

Assets

Rs.

Capital Balance Add: Profit	51,000 420	51,420	Fixed Assets	12,720
Loan		11,500	Inventories	22,900
Trade payables		5,800	Trade receivables	17,500
			Cash at Bank	15,600
		68,720		68,720

Q-75 Show the effect of increase, decrease and no change on the assets of the following transactions:

Rs. Purchased office furniture, payment to be made next month.

Rs. Collected cash for repair services

Rs. Goods sold on credit.

Rs. Withdrawal of cash by the owner for personal use.

Rs. Hired an employee as sales manager of the north wing.

Rs. Returned goods worth Rs. 50,000.

Rs. One of our debtor agreed to pay his dues to Mr. C who is a creditor of the company with the same amount being due to him.

Rs. Entered into an agreement with Mehta & Co. to purchase all raw materials from their company from next year. Also give reasons for your answers.

S.No.

Increase (+) /

Reason

	Decrease (-) / No Change (0) in Assets
(a)	+	Furniture has been purchased making it an increase in assets and also it being purchased on credit it increases liability and there is no outflow of assets like cash or bank.
(b)	+	Cash has flowed in for services provided making it an increase in assets.
(c)	+	Here with goods sold there is a decrease in inventory (assets) but given there is an increase in debtors there will be a net increase in assets. Though if goods are sold at cost it will result in no change whereas sale at below cost will result in decrease in assets.
(d)	-	Here cash has been withdrawn from business resulting in decrease in assets and capital.
(e)	0	Only hiring of employee has been done resulting in no change in assets.
(f)	-	Outflow of goods has resulted in decrease in assets while money owed to creditors reduce on the liability side.
(g)	-	Here both assets and liabilities reduce by same amounts meaning a decrease in assets.
(h)	0	Only a purchase agreement has been entered into with no transaction taking place yet.

Q-76 State with reasons whether the following statements are ‘True’ or ‘False’.

1. Overhaul expenses of second-hand machinery purchased are Revenue Expenditure. CAtestseries.org (Since 2015) – CA Final Inter Foundation online Test Series Page 126

2. Money spent to reduce working expenses is Revenue Expenditure.

3. Legal fees to acquire property is Capital Expenditure.

4. Amount spent as lawyer’s fee to defend a suit claiming that the firm’s factory site belonged to the plaintiff’s land is Capital Expenditure.

5. Amount spent for replacement of worn out part of machine is Capital Expenditure.

6. Expense incurred on the repairs and white washing for the first time on purchase of an old building are Revenue Expenses.

7. Expenses in connection with obtaining a license for running the cinema is Capital Expenditure.

8. Amount spent for the construction of temporary huts, which were necessary for construction of the Cinema House and were demolished when the cinema house was ready, is Capital Expenditure.

Answer 1. False: Overhaul expenses are incurred to put second-hand machinery in working condition. So it should be capitalised.

2. False: It may be reasonably presumed that money spent for reducing revenue expenditure would have generated long-term benefits to the entity. So this is capital expenditure.

3. True: Legal fee paid to acquire any property is part of the cost of that property. It is incurred to possess the ownership right of the property and hence a capital expenditure.

4. False: Legal expenses incurred to defend a suit claiming that the firm’s factory site belongs to the plaintiff are maintenance expenditure of the asset. Maintenance expenditure in relation to an asset is revenue expenditure.

5. False: Amount spent for replacement of any worn out part of a machine is revenue expense since it is part of its maintenance cost.

6. False: Repairing and white washing expenses for the first time of an old building are incurred to put the building in usable / working condition. These are the part of the cost of building. Accordingly, these are capital expenditure.

7. True: The Cinema Hall could not be started without license. Expenditure incurred to obtain the license is pre-operative expense (incurred before the working condition) which is capitalised.

8. True: Cost of temporary huts constructed which were necessary for the construction of the cinema house is part of the construction cost of the cinema house. Therefore such costs are to be capitalised.

Q-77 State with reasons, how you would classify the following items of expenditure:

1. Overhauling expenses of Rs. 25,000 for the engine of a motor car to get better fuel efficiency.

2. Inauguration expenses of Rs. 25 lacs incurred on the opening of a new manufacturing unit in an existing business.

3. Compensation of Rs. 2.5 crores paid to workers, who opted for voluntary retirement.

Answer: 1. Overhauling expenses are incurred for the engine of a motor car to derive better fuel efficiency. So this expenditure should be capitalised.

2. Inauguration expenses incurred on the opening of a new unit is in the nature of revenue expenditure, as this expenditure is not necessary to bring assets into working condition.

3. The amount paid to workers on voluntary retirement is in the nature of revenue expenditure. But since the magnitude of the amount of expenditure is very high, it is better to capitalize it

Q-78 Are the following expenditures capital in nature?

(i) M/s ABC & Co. run a restaurant. They renovate some of the old cabins. Because of this renovation some space was made free and number of cabins was increased from 10 to 13. The total expenditure was Rs.20,000

(ii) M/s New Delhi Financing Co. sold certain goods on installment payment basis. Five customers did not pay installments. To recover such outstanding installments, the firm spent Rs.10,000 on account of legal expenses.

(iii) M/s Ballav & Co. of Delhi purchased a machinery from M/s Shah & Co. of Ahmedabad. M/s Ballav & Co. spent Rs 40,000 for transportation of such machinery. The year ending is 31st Dec, 2015.

Answer: i. Renovation of cabins increased the number of cabins. This has an effect on the future revenue generating capability of the business. Thus the renovation expense is capital expenditure in nature.

ii. Expense incurred to recover installments due from customer does not increase the revenue generating capability in future. It is a normal recurring expense of the business. Thus the legal expenses incurred in this case are revenue expenditure in nature.

iii. Expenses incurred on account of transportation of fixed asset are capital expenditure in nature.

Q- 79 X Co. Ltd. was incorporated with an authorized share capital of 90,000 equity shares of Rs.10 each. The company purchased land and buildings from Y Co. Ltd for Rs.4,00,000 payable in fully paid-up shares of the company. The balance of the shares were issued to the public, CAtestseries.org (Since 2015) – CA Final Inter Foundation online Test Series Page 129 which were fully subscribed and paid for. You are required to pass Journal Entries and to prepare the Balance Sheet.

Date	Particulars	Rs.	Rs.
1.	Land and Buildings A/c Dr.	4,00,000
	To Y Co. Ltd A/c		4,00,000
	(Being the land and buildings purchased from Y Co. Ltd as per agreement dated…).
2.	Y. Co. Ltd A/c Dr.	4,00,000
	To Equity Share Capital A/c		4,00,000
	(Being 40,000 shares of Rs. 10 each issued to Y Co. Ltd. on purchase of land and building)
3.	Bank A/c Dr	5,00,000
	To Equity Share Application & Allotment A/c		5,00,000
	(Being the issue of 50,000 shares of Rs.10 each as per Board’s Resolution No…..dated…)
4.	Equity Share Application and Allotment A/c Dr.	5,00,000
	To Equity Share Capital A/c		5,00,000
	(Being shares allotted for application money received.)

Balance Sheet of X Company Limited as at….

1.	Particulars	Notes No.	Rs.
	EQUITY AND LIABILITIES
	Shareholders’ funds
	Share capital	1	9,00,000
	Total		9,00,000
	ASSETS
1	Non Current assets
	Property, plant and Equipment

	Tangible assets	2	4,00,000
2	Current assets
	Cash and cash equivalents	3	5,00,000
	Total		9,00,000

Notes to accounts

	Particulars	Rs.
1	Share Capital
	Equity share capital
	Authorised share capital
	90,000 Equity shares of Rs.10 each	9,00,000
	Issued share capital
	90,000 Equity shares of Rs.10 each	9,00,000
	Subscribed Share Capital
	90,000 Equity Shares of Rs.10 each	9,00,000
	Called up and Paid up Capital
	90,000 Equity Shares of Rs.10 each Out of the above 40,000 shares have been allotted as fully paid up pursuant to Contract without payment being received in cash)	9,00,000
2.	Tangible Assets
	Land and Building	4,00,000
3	Cash and cash equivalents
	Balances with banks	5,00,000

Q-80 Ram, Rahim and Karim are partners in a firm. They have no agreement in respect of profit sharing ratio, interest on capital, interest on loan advanced by partners and remuneration payable to partners. In the matter of distribution of profits they have put forward the following claims:

(i) Ram, who has contributed maximum capital demands interest on capital at 10% p.a. and share of profit in the capital ratio. But Rahim and Karim do not agree.

(ii) Rahim has devoted full time for running the business and demands salary at the rate of Rs. 500 p.m. But Ram and Karim do not agree.

(iii) Karim demands interest on loan of Rs. 2,000 advanced by him at the market rate of interest which is 12% p.a.

How shall you settle the dispute and prepare Profit and Loss Appropriation Account after transferring 10% of the divisible profit to Reserve. Net profit before taking into account any of the above claims amounted to Rs. 45,000 at the end of the first year of their business.

Solution: There is no partnership deed. Therefore, the following provisions of the Indian Partnership Act are to be applied for settling the dispute.

(i) No interest on capital is payable to any partner. Therefore, Ram is not entitled to interest on capital.

(ii) No remuneration is payable to any partner. Therefore, Rahim is not entitled to any salary.

(iii) Interest on loan is payable @ 6% p.a. Therefore, Karim is to get interest @ 6% p.a. on Rs. 2,000 instead of 12%.

(iv) The profits should be distributed equally

Profit and Loss Appropriation Account for the year ended……….

Particulars

Rs.

Particulars

Rs.

To Interest on Karim Loan A/c

(Rs. 2,000 x 6/100)

120

By Profit and Loss A/c – (Net

profit)

45,000

To Reserve A/c – 10% of Rs. (45,000-120)	4,488
To Share of Profit A/c :	40,392
Ram: Rs. 13,464
Rahim Rs. 13,464
Karim: Rs. 13,464
	45,000	45,000

Q-81 What are the branches of Accounting? Explain.

Answer: Accounting has basically three branches:

(a) Financial Accounting:

 It is concerned with the maintenance of books of account of an enterprise.

 Recording & classifying all its financial transactions and events with a view to prepare Annual Financial Accounts.

 To be used by various interest groups (i e. General Purpose Financial Statement).

(b) Management Accounting:

 It refers to use of accounting data with proper analysis in reporting, so as to serve the need of management.

 To help them in decision making and exercising proper controls.

 It may not have separate books of account but uses the data from financial accounts & cost accounts and Properly analyses it, compares it, calculate ratios etc. and present it to management periodically.

CAtestseries.org (Since 2015) – CA Final Inter Foundation online Test Series Page 133

 Generally manufacturing concerns maintains cost accounts.

 With a view to ascertain the cost of goods manufactured or services rendered with proper break-up of cost.

 Also providing useful data to management for effective cost control and

 Govt, also has prescribed maintenance of cost records by specific industries. (d) Social Responsibility Accounting:

 Concerned with measurement and reporting of the impact of the operations of an organisation on the society.

 Attempts to disclose the costs incurred and

 Benefits accrued to the society as a consequence of the activities of the organization.

(e) Human Resource Accounting:

 It is the process of measuring the amount of investments done in the human resource of an enterprise.

 It also reports the information regarding the activities related to human resource performed by the organisation and

 The end results of the human resource related activities to the stakeholders.

Q-82 What is the role of Chartered Accountants in the society?

Answer: Role of accountant in the society → An accountant with his education, training, analytical mind and experience is best qualified to provide multiple need-based service to the ever-growing society.

→ The accountants of today can do full justice not only to matters relating to taxation, costing, management accounting, financial planning, company law and procedures but they can act in the fields relating to financial policies, budgetary policies, information technology, Software development and even economic principles.

→ The services rendered by accountants to the society include the following:

 To maintain the Books of Account in a systematic manner.

 To act as a Statutory Auditor (for example under the Companies Act, Income Tax Act, Co-operative Societies Act).

 To act as an Internal Auditor.

 To act as Social Auditor.

 To act as Taxation Advisor.

 To act as Management Accountant.

 To act as Financial Advisor.

 To provide Management Consultancy Services.

 To act as Company Law Advisor.

 To act as Liquidator.

 To act as Arbitrator.

 To act as Management Information System Consultant.

 To act in the held of software development.

Q-83 Give the relationship of accounting with other disciplines like:

(i) Economics

(ii) Statistics

(iii) Mathematics

(iv) Law

(v) Management

Answer: (i) Accounting and Economics:

 Economics is viewed as a science of rational decision making about the use of scarce resources.

 It is concerned with the analysis of efficient use of scarce resources for satisfying human wants.

 Accounting is viewed as a system which provides data to the users to permit informed judgment and decisions.

 Accounting overlaps economics in many respects and contributes a lot in improving the management decision making process.

 However, there exists a wide gulf between economists’ and accountants’ concepts of income and capital.

 Accountants got the ideas of value, income and capital maintenance from economists, but brushed suitably to make them usable in practical circumstances

(ii) Accounting and Statistics:

 The use of statistics in accounting can be appreciated better in the con-text of the nature of accounting records.

 Accounting information is very precise, it is exact to the last paisa.

 But such precision is not essential for making business decisions and hence statistical approximations are sought.

 In accounts all values are important individually because they relate to business transactions.

 As against this, statistics is concerned with the typical value, behaviour or trend over a period of time or the degree of variation over a series of observations.

 Therefore, wherever a need arises for only broad generalizations or the average of relationships, statistical methods have to be applied to accounting data.

 Accounting records generally take a short-term view of events and are confined to a year while statistical analysis is more useful if a longer view is taken for the purpose of decision making.

 Statistical methods are helpful in developing accounting data and in their interpretation & are useful even in valuation.

 Therefore, the study and application of statistical methods would add extra edge to the accounting data.

(iii) Accounting and Mathematics:

 Knowledge of arithmetic and algebra is a pre-requisite for accounting computation and measurements.

 The fundamental dual aspect concept of accounting is expressed in the form of a mathematical equation, popularly known as ‘accounting equation’.

 With the advent of the computer, mathematics is becoming a vital part of accounting.

 Statistical and econometric models are largely used for developing decision models for the users of accounts.

 The use of the technique of operations research has made accounting all the more mathematical.

 Presently graphs and charts are being extensively used for communicating accounting information.

 In addition to statistical knowledge, knowledge in geometry and trigonometry is also essential to have a better understanding about the accounting communication system.

(iv) Accounting and law:

 An economic entity operates within a legal environment.

 Every country has set of economic, fiscal and labour laws.

 All transactions with suppliers and customers are governed by the Contract Act, the Sale of Goods Act, the Negotiable Instruments Act, etc.

 The entity itself is created and controlled by laws. For example, a partnership business is controlled by Partnership Act and a company is created and controlled by the Companies Act, etc.

 Very often the accounting system to be followed is prescribed by law. For example, the Companies Act has prescribed the format of financial statements of companies and requires accrual principle to be applied.

 However, legal prescription about the accounting system is the product of developments in accounting knowledge.

 That is to say, a legislation about accounting system cannot be enacted unless there is a corresponding development in the accounting discipline.

 In that way accounting influences law and is also influenced by law.

(v) Accounting and Management:

 Management is broad occupational field which comprises many functions and encompasses application of many disciplines including those mentioned above.

 Accountants are well placed in the management and play a key role in the management team.

 A large portion of accounting information is prepared for management decision making.

 In the management team, an accountant is in a better position to understand and use such data.

 In other words, since an accountant plays an active role in management, he understands the data requirements. So the accounting system can be moulded to serve the management purpose.

 ‘Management accounting’ processes accounting data for management decision making.

 This indicates the linkage between management and accounting.

 Accounting is an essential service function of management.

Q-84 Accrual Concept: What is Accrual Concept. Explain with the help of example.

Answer:  The expenses or Income of periodic nature accrues on day to day basis.

 Therefore we make provision for interest etc. up to last date of accounting year although it may become due/payable on a later date.

 Following accrual concept means following mercantile system of accounting.

 Example of such items is Interest, Rent, Salary, Depreciation etc.

 As per accrual concept/Mercantile system, the income & expenses should be recognised (Le. accounted):

 In the accounting period to which they relate (Le. the period in which benefit/goods/services is given or taken)

 Not in the period in which actual money is received or paid.

Example.

Loan Rs. 10 lakh taken on 1.1.06 @ 15% interest. Interest is payable annually. Accounting year ends on 31.3.06.

Answer: Interest for 3 months from 1.1.06 to 31.3.06 Rs. 37,500 will have to be accounted even though

it is neither paid, nor due, but only accrued.

Accrual is a Fundamental accounting assumption

Q-85 What is Substance over form. Give example also.

Answer: Substance over form:

Foundation online Test Series Page 139 As per concept of Substance over form, the transaction should be recognized as per the economic reality of the transaction & not mere legal form.

Example.

A sales land to ‘B’ and gives possession of the land to B & receives full consideration. But sale deed is not yet registered for want of NOC from local authority.

Answer:

As per substance over form concept, A should recognize sale of land and consequent profit or loss and B should recognize Land as an asset in its books. Both will make suitable disclosure in notes to accounts.

Q-86 Distinguish between Going Concern concept and Cost concept

Answer: Going Concern Concept:

 It implies that the concern will be continuing the business for foreseeable future.

 It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially the scale of the operations.

 If such an intention or need exist, the financial statements may have to be prepared on a different basis and, if so, the basis is disclosed.

 Because of this, expenditure is divided into Capital & Revenue Expenditure & the Fixed Assets are valued at cost less Depreciation.

 Because of this account of the whole life is divided into smaller accounting periods, (periodicity concept) Going concern is a fundamental accounting assumption.

Cost Concept:

 The assets & properties are recorded at its cost to the concern & not at its market value.

 Except stock which may be valued at cost or market price which ever is lower.

 As per this concept Fixed assets are recorded at their acquisition cost & then depreciated over its useful life.

 Example – Building purchased for Rs.10 lakh. Its market value is Rs.11 lakh. In books of account building will be recorded at cost i.e. Rs. 10 lakh

Q-87 What is Capital Expenditure. Explain with the help of example

Answer: Capital Expenditure:

 Any amount spent by actual payment or for which a liability is incurred is known as an expenditure.

 Capital Expenditure is that expenditure which results in the acquisition of an asset (tangible or intangible) which can be later sold and converted into cash or which results in an increase in the earning capacity of the business or which affords some other advantage to the firm.

 In a nutshell, if the benefits of an expenditure are expected to accrue for a long time, the expenditure is capital expenditure.

 Obvious examples of capital expenditure are land, building, machinery, patents, etc.

 All these things stay with the business and can be used over and over again.

 Expenditure which does not result in increase in capacity or in reduction of day-to-day expenses is not capital expenditure, unless there is a tangible asset to show for it.

 All amounts spent upto the point an asset is ready for use should be treated as capital expenditure.

 Examples are: Fees paid to a lawyer for drawing up the purchase deed of land, overhauling expenses of second-hand machinery, interest paid on loans raised to acquire the assets but only for the period before the asset is ready for use.

 Any expenditure incurred to bring such asset into usable condition for the 1st time is also a capital expenditure like installation expenses etc.

 Additional expenditure on such assets in future will be capitalised only if it result into significant improvement over and above its originally assessed performance.

Q-88 Explain Capital Receipts and Revenue Receipts

Answer: Capital Receipts and Revenue Receipts:

 Receipts which are obtained in the course of normal trading operations are revenue receipts (e.g. sale of goods, interest income etc.).

 On the other hand, receipts which are not revenue in nature are capital receipts (e.g. sale of fixed assets, secured or unsecured loans, owners’ contribution etc.).

 Subscriptions by shareholders towards share capital of a company or for purchasing its debentures are considered by the company as capital receipts.

 By the same criterion, contributions by partners or proprietors to capital of their business are capital receipts.

 Sale value of fixed assets is also a capital receipts since these are distinguishable from revenue receipts, e.g., those from sale of merchandise, rent on property, interest on investment, professional fee for services rendered, etc.

 It will be evident that capital receipts emanate out of a fund already held or arise on conversion of an asset, whereas revenue receipts flow from personal exertion, use of a capital asset or from sale or transfer of floating assets like goods.

 Revenue and capital receipts are recognized on accrual basis as soon as the right of receipt is established.

 Revenue receipts are credited to the Profit and loss account.

 On the other hand, capital receipts are not directly credited to Profit and loss account.

 For example, when a fixed asset is sold, the entire capital receipts is not credited to Profit and Loss Account. Profit or loss on sale of fixed assets is calculated and recorded in Profit and Loss Account

Q-89 What do you mean by Accounting policies?

Answer: Meaning of Accounting Policy:

→ The accounting policies refers to the specific accounting principles and the methods of applying those principles

→ Adopted by the enterprise in the preparation and presentation of financial statements.

→ Management has to select, follow & disclose Accounting policies which it followed in preparation & presentation of financial statement, out of the different alternatives which may be permissible.

→ Example : Write off Depreciation by SLM or WDV, Value inventory cost by FIFO or Weighted Av.

→ Further Examples of Accounting Policies:

 Recognition of contract revenue by % of completion method

 Treatment of Goodwill

 Valuation of Investments

 Provision for Retirement benefits etc.

Preparation of financial statements is the responsibility of the management of an enterprise. This includes selecting appropriate accounting policies and applying them consistently from one period to another.

Requirements of AS-1 Disclosure of Accounting Policies:

For proper understanding of financial statements, all significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed.

→ Disclose all significant policies adopted in the preparation & presentation of financial statements preferably at one place.

→ The primary consideration in the selection of accounting policies by an enterprise is that: a the financial statements prepared and presented on the basis of such accounting policies should represent a true and fair view of the financial position & performance.

Q-90 When changes in accounting policies are permitted? What disclosures are to be made whenever change takes place?

Answer: Changes in accounting policies:

Changes is permitted:

(As per AS-5: Net Profit or loss for the period, Prior period items & Changes in accounting policy)

• To comply with law

• To comply with an accounting standard

• To give better information and true & fair picture

Disclosure to be made whenever change takes place:

• Any change in an accounting policy which has a material effect should be disclosed.

• Reason for change, which can be any of the above.

• The amount by which any item in the financial statements is affected by such change should also be disclosed.

• This disclosure is necessary as change in accounting policy violates the fundamental accounting assumption of consistency.

• Where such amount is not ascertainable, wholly or in part, the fact should be indicated.

• If such change has no material effect on the financial statements for the current period but is reasonably expected to do so in the later periods, the fact of such change should be appropriately disclosed in the period in which the change is adopted.

Examples of change in accounting policy:

• Change from straight line method of depreciation to WDV method.

• Making provision for doubtful debts on the basis of age analysis rather than ad hoc provision.

• Change from completed contract method to percentage of completion method to account for construction to comply with AS-7(Revised)

• Changes in the method of measurement of percentage of completion as at balance sheet date.

• Change in method of amortization of intangible asset to reflect the revised pattern benefits from it

• Re-estimating residual value of leased asset.

• Change from LIFO to FIFO method of ascertaining cost of inventory when AS-2 was revised

Q-91 Explain the Present Value.

Answer: Present Value:

 As per present value, an asset is carried at the present discounted value of the future net cash inflows that the item is expected to generate in the normal course of business.

 Liabilities are carried at the present discounted value of future net cash flows that are expected to be required to settle the liabilities in the normal course of business.

Example: Suppose we were talking as on 1.1.06 take it as time of reference. Now think the building purchased by ‘Ram’ on 1.1.95 can work for another 10 years and is supposed to generate cash @ Rs. 75,000 p.a. and scrap value Rs. 50,000.

Present value of building = 75,000 x 5.019 + 50,000 x .247 = 3,76,425 + 12,350 = Rs. 3,88,775

Q-92 Meaning of Transactions and events

Answer: Meaning of Transactions :

 A business dealing, which can be measured and expressed in terms of money and must be recorded in the books of account, is called a ‘transaction’.

 In a transaction, there must be some monetary change between the parties.

 In other words, the meaning of a transaction is to ‘receive’ and ‘give’, viz., one party receive and the other party gives, e.g. if X gives Rs. 400 to Y, Y is receiving Rs. 400 whereas X is giving the same and there is a monetary change between the parties.

 This give and take can be of Cash, Property, Goods, Services and benefits etc. which has monetary value.

 So, a transaction also means a change in affairs that alters the financial state of parties in any way.

 There are always two parties in a transaction of which one must be the entity in whose books, accounting is being done.

Meaning of Events:

 Event is happening of something, which has financial effect on the entity.

 Example – A fire destroys furniture, Stock Balance at the end of the year etc.

Q-93 Define the Suspense Account Answer: Suspense Account:

→ When trial balance does not tally, the difference is put to an account named as Suspense a/c. Difference is:

• debited (if debit side of trial balance is short) or • credited (if credit side of trial balance is short) to Suspense a/c

→ Thus with the help of suspense a/c trial balance is artificially tallied.

→ While passing rectification entry for one sided errors, the one effect Dr. or Cr. will go into the a/c in which mistake is committed & the other effect will be given to Suspense a/c.

→ When all such one sided errors are rectified the Suspense a/c will become Nil

→ While rectifying double sided errors, suspense account will not get affected.

Q-94 The accountant of X prepared the Trial Balance for the year ended 31st March, 2006. But there was a difference and the accountant put the difference in Suspense Account.

Rectify the following errors found and prepare the Suspense Account:

1. The total of the Returns outward book, Rs. 420 has not been posted in the ledger.

2. Purchase of Rs. 350 from Y has been entered in the sales book. However Y’s a/c has been correctly entered.

3. A sale of t 390 to Z has been credited to his account as Rs.290.

4. Old furniture sold for Rs.5,400 had been entered as Rs.4,500 in sales account.

5. Goods taken by proprietor, Rs. 500 have not been entered in the books at all.

Solution: Working note:

	Effect already given in a/c
1.	Party a/c Dr.	420
2.	To sales a/c		350
	To Y a/c		350
3.	To Z a/c		290
	To sales		390
4.	Cash a/c Dr.	5400
	To sales a/c		4500
5.	No effect

	correct
1.	Party a/c Dr.	420
	To purchase return a/c		420
2	Purchase a/c Dr.	350
	To Y a/c		350
3	Z a/c Dr.	390
	To sales		390
4	Cash a/c Dr.	5400
	To old furniture account		5400
5	Drawings a/c Dr.	500
	To goods used a/c		500

	Rectification Entry
1.	Suspense a/c Dr.	420
	To purchase return a/c		420
2.	Sales a/c Dr.	350
	To purchase a/c	350
	To Suspense a/c		700
3.	Z a/c Dr. (290+390)	680
	To Suspense a/c		680
4.	Suspense a/c Dr.	900
	Sales a/c Dr.	4500
	To old furniture account		5400
5.	Drawings a/c Dr.	500
	To goods used a/c		500

Suspense Account

Particulars	Amount	Particulars	Amount
To diff. in Trail Bal.	60	By Sundry a/c	700

To purchase Return a/c	420	By Z a/c	680
To old Furniture a/c	900
	1380		1380

Comment:

 Debit side of Trial balance was short by Rs. 60.

 (5) is double sided error, hence their rectification does not involve suspense. a/c but (1), (2), (3) & (4) are one sided error, hence their rectification involves suspense a/c.

 (4) is Error of Principle as well as Error of commission, (5) is Errors of Full omission, (1) is Errors of Partial omission and (2), & (3) are Error of commission.

Q-95 From the following information (as on 31.3.2006), prepare a Bank Reconciliation Statement after making necessary amendments in the Cash-book:

Particulars	Amounts
Bank balance as per Cash Book (Dr.)	3,25,000
'Cheques deposited, but not yet credited	4,47,500
'Cheques issued but, not yet presented for payment	3,56,200
Bank charges debited by Bank but not recorded in Cash-book	1,250
Dividend directly collected by bank	12,500
Insurance premium paid by bank as per standing instruction not intimated'	15,900
Cash sales wrongly recorded in the bank column of the Cash-book	25,500
Customer's cheque dishonoured by bank not recorded m Cash -book	13,000
Wrong Credit given by bank	15,000

Also show the bank balance that will appear in the Trial Balance as on 31.3.2006. Solution: Cash Book as on 31.3.2006 (Bank Column) (after making necessary amendments)

Particulars	Amounts	Particulars	Amounts
To Balance b/d	3,25,000	By Bank charges a/c	1,250
To Dividend income a/c	12,500	By Insurance premium a/c	15,900
		By Cash Sales (wrongly recorded)a/c	25,500
		By Debtors (cheque dishonoured) a/c	13,000
		By Balance c/d (corrected/ final balance)	2,81,850
	3,37,500		3,37,500

Bank Reconciliation Statement as on 31.3.200

Particulars	Rs.	Rs.
Bank balance as per Cash Book (deposit balance)		2,81,850
Add: Cheques issued, not yet presented for payment	3,56,200
Add: Wrong credit given by bank	15,000	3,71,200
		6,53,050
Less: Cheques deposited, not yet credited by bank		4,47,500
Balance as per Pass Book		2,05,550

Note: The bank balance of Rs.2,81,850 will appear in the trial balance as on 31st March, 2006 & consequently in Balance sheet. Final BRS as on 31.3.2006

Particulars	Dr.	Cr.
Corrected Balance as per Cash Book (Deposit)	281850
Cheques deposited by not yet realised by bank		447500
Cheques issued but not yet paid by Bank	356200
Wrong Credit given by Bank	15000
Balance as per Pass book (deposit)		205550

653050

Q-96 From the following particulars prepare an account current, as sent by Mr. AB to Mr. XY as on 31st October, 2018 by means of product method charging interest @5% p.a.

Date	Particulars	Rs.
1st July	Balance due from XY	1,500
20th August	Sold goods to XY	2,500
28th August	Goods returned by XY	400
25th September	XY paid by cheque	1,600
20th October	Received cash from XY	1,000

Solution: Mr. XY in Account Current with Mr. AB (Interest upto 31st October at 5% p.a.)

Date	Particulars	Due date	Amt.	Days	Product	Date	Particulars	Due date	Amt.	Days	Product
1.7.18	To bal. b/d		15,00	123	1,84,500	28.8.18	By sales Return A/c	28.8	400	64	25,600
20.8	To Sales A/c	20.9	2,500	72	1,80,000	25.9	By Bank A/c	25.9	1,600	36	57,600
31.1	To Interest a/c		37.03			20.1	By Cash A/c	20.1	1,000	11	11,000
						31.1	By Bal. of product				2,70,300
							By Bal. c/d		1,037.03
			4037.03		3,64,500				4037.03		3,64,500
1.11	To bal. b/d		1037.03

Q-97 A Company issued 10,000 shares of Rs. 10 each at a premium of Rs. 3 per share in the following manner:

Application Rs. 4

Allotment Rs. 5 + 3

On call Rs. 1

Company received application for 13,000 shares. Company rejected & refunded the amount of application of 1,000 shares and made pro rata on remaining applications. Mr. R holder of 500 shares failed to pay any amount after application money. Company forfeited his shares after making call and subsequently re-issued 350 shares out of them @ Rs. 8 per share. Give necessary journal entries in the books of the Company.

Solution: Journal Entries: In the books of the Company

S. No.	Particulars	L.F.	Amount	Amount
1.	Bank a/c (13000 X 4) Dr.		52,000
	To Equity share application a/c			52,000
	(Being application money received)
2	Equity share application a/c (13000 X 4) Dr.		52,000
	To Equity share capital a/c (10000 X 4)			40,000
	To Equity share allotment a/c			8,000
	To Bank a/c (1000 X 4)			4,000
	(Being pro rata allotment made on excess application received)
3.	Equity share allotment a/c (10,000 X 8) Dr.		80,000
	To Equity share capital a/c (10,000 X 5)			50,000
	To Securities Premium reserve a/c (10,000 X 3)			30,000
	(Being allotment money due)
4.	Bank a/c (1) Dr.		68,400
	To Equity share allotment a/c			68,400
	(Being allotment money received)
5.	Equity share Ist call a/c (10,000 X 1) Dr.		10,000

	To Equity share capital a/c		10,000
	(Being first call amount due)
6.	Bank a/c (9500 X I) Dr.	9,500
	To Equity share 1st call a/c		9,500
	(Being 1st call money received)
7.	Equity share capital a/c (500 X 10) Dr.	5,000
	Securities premium reserve a/c (500 X 3)Dr.	1,500
	To Equity share forfeiture a/c		2,400
	To Equity share allotment a/c		3,600
	To Equity share Ist call (500 X I)		500
	(Being 500 shares forfeited on non-payment of allot- ment & call money)
8	Bank a/c (350 X 8) Dr.	2800
	Equity share forfeiture a/c (350 X 2)	700
	To Equity share capital a/c (350 X 10)		3,500
	(Being 350 shares reissued @ RS. 8 per share)
9.	Equity share forfeiture a/c (2) Dr.	980
	To Capital Reserve a/c		980
	(Being balance transferred to Capital Reserve)

Working Note:

Allotted Applied

1. 10,000 – 12,000

500 – 12000/10000 x 500 = 600

Application money to be paid = 500 x 4 = 2000

Application money actually paid = 600 x 4 = 2400

Excess amount = 2400 – 2000 = 400 (included in allotment)

Particulars	Rs.
Amount received (10,000 X 8)	80,000
Less : Amount received earlier	(8,000)
Less : Default (500 X 8)	(4,000)
Allotment money received	68,000

No. of shares	Forfeited amount	Rs.
500	2400 × 350 = (application and extra money paid) 500	1,680
500	Less : Loss on reissue	(700)
	Transferred to Capital Reserve	980

Q 98 On 31st March, 2018, the Balance Sheet of M/s. A, B and C, sharing profits and losses in proportion to their capitals, stood as:

Answer:

Liabilities	Rs.	Assets	Rs.
Creditors	1,08,000	Cash at Bank	80,000
Capital A/cs:		Debtors 1,00,000
A	4,50,000	Less: Pro. for Doubt. Debts 2,000	98,000
B	3,00,000	Stock	90,000
C	1,50,000	Machinery	2,40,000
		Land and Building	5,00,000
	10,08,000		10,08,000

On that Date, B retires from the firm and the remaining partners decide to carry on. The following readjustments of Assets and Liabilities have been agreed upon before the ascertainment of the amount payable to B:

(i) That out of the fire insurance premium paid during the year, Rs. 10,000 be carried forward as unexpired.

(ii) That the Land and Building be appreciated by 10%.

(iii) That the Provision for Doubtful Debts be brought up to 5% Debtors.

(iv) That Machinery be depreciated by 5%.

(v) That a provision of Rs. 15,000 be made in respect of an outstanding bill for repairs.

(vi) That the Goodwill of the entire firm be fixed at Rs. 1,80,000 and B’s share of the same be adjusted in the accounts of A and C who share the future profits in the proportion of 3/4th and 1/4th respectively (no Goodwill Account being raised).

(vii) That B be paid Rs. 50,000 in cash and the balance be transferred to his Loan Account.

Required: Prepare the Revaluation Account, Capital Accounts of Partners and the Balance Sheet of the firm of A and C.

Answer: Revaluation Account

Particulars	Rs.	Particulars	Rs.
To Provision for Doubtful Debts A/c (Rs. 5,000 – Rs. 2,000)	3,000	By Unexpired Fire Insurance Premium A/c	10,000
To Depreciation on Machinery A/c [2,40,000 × 5/100]	12,000	By Land and Building A/c [5,00,000 × 10/100]	50,000
To Provision for Outstanding Repairs A/c	15,000

To Profit transferred to:
A’s Capital A/c = 15,000
B’s Capital A/c = 10,000
C’s Capital A/c = 5,000	30,000
	60,000	60,000

Particulars

A (Rs.)

B (Rs.)

C (Rs.)

Particulars

A (Rs.)

B (Rs.)

C (Rs.)

To B’s Capital

A/c

45,000

—

15,000

By Balance b/d

4,50,000

3,00,000

1,50,000

To Bank A/c

—

50,000

—

By Revaluation

A/c

15,000

10,000

5,000

To B’s Loan A/c

–Transfer

—

3,20,000

—

By A’s Capital

A/c

—

45,000

—

To Balance c/d

4,20,000

—

1,40,000

By C’s Capital

A/c

—

15,000

—

4,65,000

3,70,000

1,55,000

4,65,000

3,70,000

1,55,000

Liabilities	Rs.	Assets		Rs.
Creditors	1,08,000	Cash at Bank		80,000
Outstanding bills for repair	15,000	Stock		90,000
B’s Loan	3,20,000	Debtors	1,00,000
Capital A/cs:		Less: Provision	5,000	95,000
A	4,20,000	Unexpired Fire Insurance		10,000
C	1,40,000	Machinery	2,40,000
		Less: Depreciation	12,000	2,28,000
		Land and Building	5,00,000

		Add: Appreciation 50,000	5,50,000
	10,03,000		10,03,000

Note: B’s Share of Goodwill has been debited to A and C in their gaining ratio i.e. 3:1.

Q 99. State True or False for each of the following, with reason for the same

1. There is a single list of accounting policies, which are applicable to all enterprises in all circumstances.

2. Selection of accounting policy doesn’t impact financial performance and financial position of the business

3. If the errors are detected after preparing trial balance, then all the errors are rectified through suspense account.

4. A cheque for ₹ 80,000 that was discounted from bank was dishonoured and the bank charged Rs. 1,600 as the charges on account of same. While starting with debit balance in cash book for preparing bank reconciliation statement, we need to deduct Rs. 78,400 to reconcile with pass book.

5. Valuation of inventory, at cost or net realisable value, whichever less, is based on the principle of Conservatism.

6. Amount received as donation by an Non-profit organisation under the will of a deceased person is termed as legacy.

Answer: 1

False: There cannot be single list of accounting policies, which are applicable to all enterprises in all circumstances. There would always be different policies chosen by different industries under different circumstances.

2. False: Accounting policy has big impact on value of items goes under financial statements, hence it impacts financial performance and financial position of the business.

3. False: If the errors are detected after preparing trial balance, then all the errors are not rectified through suspense account. There may be principal errors, which can be rectified without opening a suspense account.

4. False: We need to deduct ₹81,600 (i.e. both cheque returned & charges) from debit balance in cash book to arrive at balance as per pass book.

5. True: The conservatism concept states that one shall not account for anticipated profits but shall provide all prospective losses. Valuing inventory at cost or net realisable value whichever is less, therefore is based on principle of Conservatism

6. True: While on the death bed, if there is any will written that the assets of a person shall be donated to any NPO- then such a donation to the NPO, is termed as LEGACY.

Q 100. From the following information of a club show the amounts of match expenses and match fund in the appropriate Financial Statements of the club for the year ended on 31st March, 2020:

Details	Amount (₹)
Match expenses paid during the year ended 31st March 2020	1,10,000
Match fund as on 01.04.2019	30,000

Donations for Match fund (received during the year)	55,000
Proceeds from the sale of the match tickets (during the year)	20,000

Answer: Balance sheet as at March 31st 2020 (extract)

Liabilities	Amount	Assets	Amount
Match fund	30,000
Add: Donation for match fund	55,000
Add: Proceeds from sale of tickets	20,000
Less: Match expenses (Note 1)	(1,05,000)
	NIL

Note: Since the expenses incurred are more than the Match fund available Rs. 105,000 we are limiting the expenses to Rs.1,05,000. The remaining expenses of Rs.5000 (1,10,000-1,05,000) will be debited to the Income and expenditure account