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Question Paper

Financial Accounting (MB131): January 2005

Answer all questions. Marks are indicated against each question.

1. Under Hybrid system of accounting for revenues and expenses, the

(a) Accrual basis for revenues and cash basis for expenses is used

(b) Accrual basis for expenses and cash basis for revenues is used

(c) Accrual basis is used both for revenues and expenses

(d) Cash basis is used for both revenues and expenses

(e ) Mercantile basis is used for both expenses and revenues.

(1 mark)

< Answer >

2. If a concern proposes to discontinue its business from March 2004 and decides to dispose off all its

assets within a period of 4 months, the Balance Sheet as on March 31, 2004 should indicate the assets at

their

(a) Historical cost (b) Net realizable value(c) Cost less depreciation (d) Cost price or market value, whichever is lower(e) Replacement cost.

(1 mark)

< Answer >

3. Which of the following is not a use of fund?

(a) Acquiring assets (b) Incurring expenses

(c) Incurring losses (d) Incurring liabilities (e) Paying dividends.

(1 mark)

< Answer >

4. Which of the following statements is true?

(a) Capital of a firm is reduced by the outside borrowings

(b) When there is no change in proprietors capital account, it is an indication of loss in the business(c) Nominal account refers to the tangible transactions

(d) Real accounts relate to the assets of a business

(e) Bills Payable is a nominal account.

(1 mark)

< Answer >

5. Which of the following statements is false?

(a) The convention of disclosure implies that all material information should be disclosed in the

accounts

(b) The losses from the sale of capital assets need not be deducted from the revenue to ascertain the

net income

(c) In recognition of the principle of materiality, unimportant items are either omitted or merged withother items

(d) The convention of consistency facilitates, the comparison of the results of one accounting periodwith that of the other

(e) The specific intervals of time for which the income or loss of the business is measuredperiodically, is called the accounting period.

(1 mark)

< Answer >

6. The impact of prior period items is required to be shown as

(a) Retained profits (b) Gross profits

(c) Previous year profits (d) Current year profits (e) Notes to accounts.

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(1 mark)

7. Consider the following data pertaining to ABC Ltd. for the year 2003-2004:

Opening balance of creditors Rs. 80,000

Closing balance of creditors Rs. 90,000

Total purchases during the year Rs.2,50,000

If the creditors were paid to the tune of Rs.1,80,000 and discount received was Rs.8,000, the credit

purchases during the year 2003-2004 are

(a) Rs.2,50,000 (b) Rs.1,98,000 (c) Rs.1,88,000 (d) Rs.1,70,000 (e) Rs.1,62,000.

(1 mark)

< Answer >

8. Consider the following information of Hyder Ltd. Of Hyderabad for the year 2003-2004:

Credit purchases during the year Rs. 9,25,000

Payment made to creditors during the year Rs.10,00,000

Closing balance of sundry creditors account Rs. 40,000

Discount received Rs. 10,000

The opening balance of sundry creditors account was(a) Rs.25,000 (b) Rs.45,000 (c) Rs.75,000 (d) Rs.2,05,000 (e) Rs.1,25,000.

(1 mark)

< Answer >

9. Consider the following data pertaining to Sun Ltd. for the month of December 2004:

Particulars Rs.

Purchase of goods for resale 2,10,000

Freight in 30,000

Freight out 25,000

Returns outward 22,000

Cost of goods available for sale is

(a) Rs.1,88,000 (b) Rs.2,10,000 (c) Rs.2,18,000 (d) Rs.2,35,000 (e) Rs.2,40,000.

(1 mark)

< Answer >

10. How does a mistake of overcasting of purchases day book affect the cost of sales and the profit?

(a) Cost of sales is decreased and net profit is increased(b) Cost of sales is increased and net profit is not affected

(c) Both cost of sales and gross profit are increased

(d) Cost of sales is increased and gross profit is decreased

(e) Both cost of sales and gross profit are decreased.

(1 mark)

< Answer >

11. Which one of the following is a wrong entry in listing out the under mentioned accounts in the Trial

Balance of a business?(a) Plant & machinery - debit column

(b) Discount received - credit column

(c) Sales - credit column

(d) Carriage outward - credit column(e) Interest paid - debit column.

(1 mark)

< Answer >

12. As on March 31, 2004, the overdraft balance of Mr.X as per bank pass book is Rs.20,000. The pass < Answer >

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book balance did not agree with the balance as per cash book. On scrutiny, the following omissions and

commissions were noticed:

A cheque for Rs.4,000 issued to Mr.Y has not been presented for payment till date Mr.Z, a tenant, directly deposited into the bank account an amount of Rs.10,000 towards rent and

the same is not accounted in the cash book.

A cheque for Rs.15,000 deposited in the bank is not yet realised The interest on debentures for this year, directly collected by the bank, amounted to Rs.10,000.The bank balance as per cash book is

(a) Debit balance of Rs.23,500 (b) Credit balance of Rs.29,000

(c) Credit balance of Rs.16,500 (d) Debit balance of Rs.5,500(e) Debit balance of Rs.16,500.

(2 marks)

13. The withdrawal of cash from the bank will figure in both the bank and the cash columns of a three

column cash book. Such entries are called

(a) Contra entries (b) Continuous entries

(c) Credit entries (d) Contingent entries (e) Adjusting entries.

(1 mark)

< Answer >

14. The following errors were made by the accountant of a company while preparing the profit and loss

account for the year 20032004:

Salaries were overstated by Rs.15,000

Repairs were understated by Rs. 7,000

Income from investments was understated by Rs. 7,000

The impact of the errors on the net profit for the year was

(a) Rs.22,000 (overstated) (b) Rs.22,000 (understated)(c) Rs.15,000 (understated) (d) Rs.7,000 (understated)

(e) Rs.7,000 (overstated).

(1 mark)

< Answer >

15. What is the net effect of the under mentioned errors on the trial balance of a firm?

I. Total of sales was taken as Rs.58,726 instead of Rs.58,762.

II. A discount of Rs.52 allowed to Mr.X was not posted in the discount account.III. Sale of old furniture of Rs.130 was credited to Machinery account.

IV. A credit sale of Rs.250 to Mr.S was posted twice in his account.

(a) Credit total of trial balance will be more than that of debit total by Rs.234

(b) Debit total of trial balance will be more than that of credit total by Rs.234(c) Credit total of trial balance will be more than that of debit total by Rs.104

(d) Debit total of trial balance will be more than that of credit total by Rs264

(e) Debit total of trial balance will be more than that of credit total by Rs.286.

(2 marks)

< Answer >

16. A credit sale of Rs.2,000 was wrongly entered in the purchases book. The impact of the mistake onprofit is, it

(a) Decreases the gross profit by Rs.2,000 (b) Increases the gross profit by Rs.2,000

(c) Decreases the gross profit by Rs.4,000 (d) Increases the gross profit by Rs.4,000

(e) Has no impact.

(1 mark)

< Answer >

17. Goods worth Rs.750 have been purchased from S & Co. But while posting the entry, the credit wasgiven to R & Co. The total of credit side of the trial balance is Rs.43,570. Assuming that, this is the only

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error, indicate the total of the debit side of the trial balance before rectification.

(a) Rs.43,570 (b) Rs.44,420 (c) Rs.42,820 (d) Rs.44,320 (e)Rs.42,070.

(1 mark)

18. Consider the following data pertaining to Joy Ltd. for the year ended March 31, 2004:

Cash sales Rs 4,00,000

Decrease in inventory Rs. 40,000

Plant & Machinery Rs.1,70,000Rent received Rs. 55,000

Purchases Rs 2,85,000

Sales commission paid Rs. 12,000

The company noticed the following:

An amount Rs.2,500 is the amount of rent received in advance. A credit purchase of Rs.15,000 was wrongly recorded in sales day book as Rs.51,000. The company has the practice of depreciating the Plant and Machinery at the rate of 15% per

annum on straight line method. The original cost of the Plant and Machinery was Rs.2,00,000.

Sales commission was paid only to the extent of two thirds of the amount payable.Considering the above data and the additional information, the net profit of the company for the period

ended March 31, 2004 was

(a) Rs.18,000 (b) Rs.19,500 (c) Rs.13,500 (d) Rs.28,000 (e)

Rs.18,500.

(2 marks)

< Answer >

19. There was a fire in the factory of Mr. Anand and goods worth Rs.10,000 were lost. However, Mr.

Anand who was far-sighted, already insured the goods and the insurance company accepted the claim tothe extent of Rs.8,000. The treatment of this is

I. Debit Profit and Loss Account by Rs.2,000

II. Debit insurance company account by Rs.8,000

III. Credit Trading Account by Rs.10,000IV. Deduct Rs.2,000 from closing stock

(a) Only (I) above (b) Only (II) above

(c) Only (III) above (d) (I), (II), (III) and (IV) above

(e) (I), (II) and (III) above.

(1 mark)

< Answer >

20. X Ltd. was showing a balance of Rs.30,000 to the debit of building account. It was sold for Rs.45,000.The gain on the sale of building was transferred to the profit and loss account, thus making the net profit

equal to Rs.1,70,000. The profit from operations will be

(a) Rs.2,15,000 (b) Rs.1,70,000 (c) Rs.1,55,000 (d) Rs.2,00,000 (e)

Rs.1,40,000.

(1 mark)

< Answer >

21. Consider the following extracts of the trial balance of Nilgiri Ltd. as on March 31, 2004:

Particulars Rs.

Share Capital 5,76,900

12%Bank loan 1,50,000Sundry creditors 50,000

Bills payable 10,000

Land & building 4,36,000Cash at bank 23,500

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Office equipment 1,99,700

Furniture 2,00,000

Closing stock 38,000

Bills receivable 9,000

Sundry debtors 55,000Petty cash 210

Cash on hand 9,400

For the year ending March 31, 2004, the following adjustments were effected

Depreciation on Office equipment: Rs.19,970, Furniture:Rs.30,000 Reserve for discount on Sundry creditors is Rs.720. Provision for discount on Sundry debtors is

Rs.779

Sundry creditors include a debt of Rs.8,000 due to Mr.Madhukar who is also in the list of Sundrydebtors for the same amount

Accrued commission receivable amounted to Rs.13,000 and prepaid printing charges aggregatedto Rs.1,850, Accrued interest on bank loan is of Rs.15,000.

After effecting the above adjustments, the net profit was Rs.1,33,731.

The total of the Balance Sheet of the company as at March 31, 2004 was

(a) Rs.9,36,911 (b) Rs.9,27,631 (c) Rs.9,26,911 (d) Rs.9,13,911 (e)Rs.9,26,970.

(3 marks)

22. Consider the following data pertaining to Jagriti Ltd. as on March 31, 2004:

Particulars Amount (Rs.) Amount (Rs.)

Opening stock 90,000

Sales 6,35,000

Purchases 4,56,000

Salaries 86,000Other expenses 73,000

Fixed assets 5,00,000

Sundry debtors 45,000

Sundry creditors 32,000Cash and bank 53,000

Share capital 6,00,000

Short term loan 36,000

13,03,000 13,03,000

The value of stock as on March 31, 2004 is Rs.75,000. The company has the practice of chargingdepreciation on the fixed assets at the rate of 15% on written down value method. The total of liabilities

side of balance sheet as on March 31, 2004 is


(2 marks)

< Answer >

23. The amount earmarked for distribution to the shareholders is known as

(a) Profit after tax (b) Retained earnings

(c) Dividends (d) Operating profit (e) Profit before tax.

(1 mark)

< Answer >

24. AB Ltd. follows perpetual inventory system. On March 31 every year, the company undertakes physicalstock verification. On March 31, 2004, the value of stock as per the records differed from the value as

per the physical stock. On scrutiny, the following differences were noticed:

Stock register was overcast by Rs.6,000.

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Goods purchased for Rs.10,000 were received and included in the physical stock but noentry was made in the books.

Goods costing Rs.30,000 were sold and entered in the books but the stock is yet to bedelivered.

Goods worth Rs.5,000 are returned to the suppliers but the same is omitted to be recorded.If the inventory is valued in the books at Rs.1,50,000, the value of physical inventory is

(a) Rs.1,11,000 (b) Rs.1,89,000 (c) Rs.1,79,000 (d) Rs.1,59,000 (e)

Rs.1,19,000.

(2 marks)

25. The following information pertains to Whitestar Ltd. for the year 20032004:

Particulars April 1, 2003 March 31, 2004

Inventory Rs. 72,000 Rs. 67,000

Sundry debtors Rs. 47,000 Rs. 70,000

Sundry creditors Rs. 40,000 Rs. 38,000

Total of credit sales made during the year was Rs.6,75,000. The cost of goods sold of the company was

80% of the sales.

Cash collected from the customers during the year was


(1 mark)

< Answer >

26. Consider the following data pertaining to Wren Ltd. for the year 2003-2004:

Particulars Rs.

Provision for doubtful debts as on April 1, 2003 4,000

Sundry debtors as on March 31, 2004 1,50,000

Bad debts to be written off 10,000

If a provision equal to 5% is to be created on the debtors balances, the charge against profit and loss

account for the year ended March 31, 2004 is

(a) Rs.3,500 (b) Rs.7,000 (c) Rs.11,000 (d) Rs.13,000 (e)

Rs.17,500.

(1 mark)

< Answer >

27. Consider the following information pertaining to XYZ Ltd.:

On April 01, 2003, the provision for bad debts account showed a balance of Rs.30,000. As on March 31,

2004, the status of the following debtors is

Mr. A had become insolvent and only 40 paise in a rupee is expected to be realized out of hisestate in full settlement. He owed a total amount of Rs.20,000

Mr. B who owes an amount of Rs.10,000 became bankrupt and it was understood that no amountwill be recovered from him.

Mr. C has agreed to pay Rs.3,000 as final settlement against his dues of Rs.10,000 and thebalance is irrecoverable.If the company decided to maintain the provision at Rs.35,000 as on March 31, 2004, the amount to bedebited to Profit and loss account, after considering the above, is

(a) Rs.34,000 (b) Rs.29,000 (c) Rs.26,000 (d) Rs.35,000 (e)

Rs.64,000.

(1 mark)

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28. Among the various methods for valuation of inventory, Specific Identification method is the most

suitable method for valuation of

(a) Coal (b) Textiles (c) Chemicals

(d) Diamond Jewellery (e) Food products.

(1 mark)

< Answer >

29. Which of the following is not classified as inventory in the financial statements?

(a) Finished goods

(b) Work-in-process(c) Stores and spares

(d) Raw-materials and components

(e) Advance payment made to suppliers for raw materials.

(1 mark)

< Answer >

30. Consider the following data pertaining to a company for the year 2003-2004:

Opening balance of sundry debtors Rs. 45,000

Credit sales Rs.4,25,000

Cash sales Rs. 20,000

Cash collected from debtors Rs.4,00,000Closing balance of sundry debtors Rs. 50,000

The bad debts of the company during the year are

(a) Rs.40,000 (b) Rs.35,000 (c) Rs.30,000 (d) Rs.25,000 (e)

Rs.20,000.

(2 marks)

< Answer >

31. The cost price of a machine is Rs.1,20,000 and the depreciated value of the machine after 3 years will be

Rs.66,000. If the company charges depreciation under straight line method, the rate of depreciation willbe

(a) 25% (b) 20% (c) 18% (d) 15% (e) 12%.

(1 mark)

< Answer >

32. Taurus Ltd., a dealer in cosmetics, has the practice of selling goods only on credit. Consider the

following balances pertaining to the company as on April 01, 2003:

Sundry debtors - Rs.10,000Provision for doubtful debts - Rs. 400

and the following additional data of the company for the year 2003-2004:

Particulars Rs.

Sales for the year 2003-2004 1,00,000

Sales returns for the year 2003-2004 1,000

Collection from sundry debtors during the year 2003-2004 90,000

Bad debts written off during the year 2003-2004 500Discount allowed during the year 2003-2004 400

At the end of the financial year 2003-04, the provision for doubtful debts is required to be 5% of sundry

debtors, after making a specific provision for a debt of Rs.200 from a customer who was declaredbankrupt.

The amount debited to profit and loss account by way of provision for bad and doubtful debts for the

year ended March 31, 2004 was

(a) Rs.505 (b) Rs.905 (c) Rs.1,095 (d) Rs.895 (e) Rs.1,195.

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(3 marks)

33. Based on which of the following concepts, is share capital account shown on the liability side ofBalance sheet?

(a) Business entity concept (b) Money measurement concept

(c) Cost concept (d) Going concern concept

(e) Conservatism concept.

(1 mark)

< Answer >

34. The post-tax profits of Hima Ltd. for the past four years are:

Year Rs.

2000-2001 1,50,000

2001-2002 1,65,000

2002-2003 2,20,000

2003-2004 2,50,000

Additional information:

The profits for the year 2002-2003 are calculated by taking an excess depreciation of Rs.10,000. During the year 2001-2002, there was a loss of Rs.20,000 due to a fire accident. In view of the diversification of business and resultant workload, it is expected to appoint two

additional employees for a salary of Rs.10,000 each per annum.

If the tax rate is 50%, the future maintainable post-tax profit is

(a) Rs.1,90,000 (b) Rs.1,87,500 (c) Rs.2,00,000 (d) Rs.2,10,000 (e)

Rs.1,86,250.

(2 marks)

< Answer >

35. The Balance Sheet of Moonlight Ltd. disclosed the following financial position as on

March 31, 2004:

Liabilities Rs. Assets Rs.

Paid-up capital Goodwill at cost 30,000

30,000 shares ofRs.10 each fully paid 3,00,000 Land and buildings at cost(less depreciation) 1,75,000

Capital reserve 20,000 Plant and machinery at cost

(less depreciation)

90,000

Sundry creditors 71,000 Stock at cost 1,15,000Provision for taxation 55,000 Book debts Rs.98,000

Profit and loss account 66,000 Less: Provision for bad debts Rs.3,000 95,000

Cash at bank 7,000 5,12,000 5,12,000

Additional Information:

i. Adequate provision has been made in the accounts for income tax and depreciation.

ii. The rate of income tax is 50%.iii. The average rate of dividend declared by the company for the past five years was 15%.

iv. The reasonable return on capital invested in the class of business done by the company is 12%.

The value the Goodwill of Moonlight Ltd. on the basis of five years purchase of super profits is

(a) Rs.63,000 (b) Rs.61,400 (c) Rs.1,16,400 (d) Rs.1,83,600 (e)

Rs.33,000.

(2 marks)

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36. The profits of Kavya Ltd. for the past 5 years are as under:

Year Rs.

1999-2000 75,000

2000-2001 3,00,000

2001-2002 3,75,000

2002-2003 4,50,000

2003-2004 7,42,500

The company noticed the following errors, while computing the weighted average profits for thepurpose of valuation of goodwill:

On October 01, 2001, repair expenses of Rs.30,000 of machinery were capitalized. Kavya Ltd.provides depreciation at the rate of 10% on straight-line method.

The profit for the year 2003-2004 includes profit of Rs.22,500 on the sale of plant.The weighted average profit of the company to be considered for the valuation of goodwill is

(a) Rs.4,76,100 (b) Rs.3,79,500 (c) Rs.2,84,100 (d) Rs.5,00,100 (e)

Rs.3,78,500.

(2 marks)

< Answer >

37. Super Ltd. issued 500 Debentures of Rs.100 each at a discount of 10% . Holders of these debentures

have an option to convert their holdings to equity shares of Rs.100 each at a premium of Rs.20 at any

time within 5 years. The total number of equity shares to be issued, if all the debenture holders opt forthe conversion, is

(a) 500 (b) 450 (c) 430 (d) 416 (e) 375.

(1 mark)

< Answer >

38. The profits for the past 5 years of Suhas Ltd. are as under:

Year Profit (Rs.)

1999-2000 42,364

2000-2001 43,456

2001-2002 53,126

2002-2003 56,789

2003-2004 62,354

The weighted average profit of the company is

(a) Rs.55,172 (b) Rs.51,619 (c) Rs.48,065 (d) Rs.62,354 (e)

Rs.52,456.

(2 marks)

< Answer >

39. Goodwill Limited issued prospectus inviting applications for 1,00,000 equity shares of Rs.10 each

payable as under:

On application Rs.5 (including premium of Rs.2) On allotment Rs.4 On first & final call Balance AmountApplications were received for 1,30,000 shares. Application money received on 10,000 shares was

refunded and allotment was made on pro rata basis for the remaining.

Mr.Lazy to whom 1,400 shares were allotted failed to pay the allotment money and his shares wereforfeited later when he failed to pay the call money. The shares were reissued to Mr. Active at the rate

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of Rs.8 as fully paid up. The amount outstanding to the credit of Share Premium account is

(a) Rs.2,00,000 (b) Rs.Nil (c) Rs.2,40,000 (d) Rs.2,60,000 (e)Rs.1,97,200.

(1 mark)

40. Sonic Ltd. issued 10,000 equity shares of Rs.10 each at a premium of 20%. The share amount was

payable as:

On application Rs.2

On allotment (including premium) Rs.5

On first call Rs.3

On second and final call Rs.2

Applications were received for 14,000 shares and the shares were allotted to the applicants pro-rata.

Vikas, who was allotted 300 shares, failed to pay the first call. On his subsequent failure to pay the

second and final call, all his shares were forfeited. Out of the forfeited shares, 200 shares were re-issued@ Rs.9 per share as fully paid. The amount transferred to capital reserve is

(a) Rs.200 (b) Rs.1,000 (c) Rs.800 (d) Rs.1,300 (e) Rs.1,200.

(2 marks)

< Answer >

41. The Balance Sheet of Snigdha Ltd. as on March 31, 2004 is as under:


Share capital: Land and building 4,00,000

Equity shares of Rs.100 each 5,00,000 Plant and machinery 3,00,000

12% Preference shares of Rs.10 each 3,00,000 Furniture and fixtures 2,50,000

Reserves and surplus: Investments 2,25,000

General reserve 1,50,000 Sundry debtors 1,00,000

Profit and loss account 2,50,000 Inventories 1,50,000

18% Debentures 2,00,000 Cash 50,000

Sundry creditors 50,000Bank overdraft 25,000

14,75,000 14,75,000

The 12% preference shares are redeemable at a premium of 10% during the month of August 2004. The

company wishes to maintain the cash balance at Rs.25,000. For the purpose of redemption of preferenceshares, company proposed to sell the investments for Rs.2,00,000. The company proposes to issue

sufficient number of equity shares of Rs.100 each at a premium of 5% to raise required cash resources.

The number of equity shares to be issued is

(a) 1,500 (b) 1,000 (c) 500 (d) 2,000 (e) 750.

(2 marks)

< Answer >

42. Krishi Ltd. issued 1,50,000 shares of Rs.100 each at a discount of 10%. Ramya, to whom 300 shareswere allotted, failed to pay the final call of Rs.30 per share and hence, all her shares were forfeited. Atthe time of forfeiture, the amount transferred to share forfeiture account was

(a) Rs.9,000 (b) Rs.18,000 (c) Rs.21,000 (d) Rs.27,000 (e)

Rs.30,000.

(1 mark)

< Answer >

43. A company cannot issue redeemable preference shares for a period exceeding

(a) 6 years (b) 7 years (c) 8 years (d) 20 years (e) 25 years.

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(1 mark)

44. Consider the following information pertaining to M/s.Rainbow Ltd. as on March 31,2004:


Share capital 5,00,000 Land and building 3,60,000

(50,000 shares Rs.10 each) Plant and machinery 2,70,000

Reserves and surplus 4,60,600 Furniture 1,75,000Sundry creditors 50,000 Inventories 90,000

Short term loan 80,000 Sundry debtors 60,000Loans and advances 75,000

Cash on hand 10,000

Cash at bank 35,000

Preliminary expenses 15,600

10,90,600 10,90,600

The assets are to be revalued as under for the purpose of valuation of shares:

Plant and machinery is to be revalued downwards by 10% Furniture is to be valued at Rs.1,80,000 Provision of 5% is to be provided for bad debts

The value of share of Rainbow Ltd. is

(a) Rs.22.00 (b) Rs.19.70 (c) Rs.18.40 (d) Rs.22.30 (e) Rs.19.20.

(2 marks)

< Answer >

45. Invert Ltd. issued 20,000 12% debentures of Rs.10 each at a discount of 10%, redeemable at a premiumof 5%. The journal entry to be passed at the time of issue of debentures is

Rs. Rs.

(a) Bank a/c.

Dr.

1,80,000

Discount on issue of debentures a/c.Dr.

30,000

To 12% Debentures a/c. 2,10,000(b) Bank a/c.

Dr.

1,80,000

Discount on issue of debentures a/c.

Dr.

20,000

Loss on redemption of debentures a/c. Dr. 10,000

To 12% Debentures a/c. 2,00,000

To Premium on redemption of debentures a/c. 10,000(c) Bank a/c.

Dr.

1,80,000

To 12% Debentures a/c. 1,80,000(d) Bank a/c.

Dr.

1,80,000

Discount on issue of debentures a/c.

Dr.

20,000

To 12% Debentures a/c. 2,00,000(e) 12% Debentures a/c.

Dr.

1,80,000

Loss on redemption of debentures a/c. Dr. 20,000To Bank a/c. 2,00,000.

(2 marks)

< Answer >

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46. OK Company issued 1000 shares of Rs.10 each at a premium of Rs.2 payable as follows :

On application - Rs.6 (including premium)On allotment - Rs.3

On first and final call - Rs.3

Mr. Jahar, a shareholder to whom 60 shares were allotted failed to pay the first and final call. His shares

were forfeited. 60% of the forfeited shares were reissued to Mr.Ali as fully paid for Rs.11 per share.

The credit balance in the share forfeiture account after the reissue of forfeited shares is

(a) Rs.600 (b) Rs.420 (c) Rs.252 (d) Rs.180 (e) Rs.168.

(1 mark)

< Answer >

47. Consider the following data pertaining to Cute Limited :

i. Share capital:50,000 equity shares of Rs.10 each fully paid-up.

2,000, 8% preference shares of Rs.100 each fully paid-up.

ii. Reserves and surplus Rs.30,000.iii. The average expected profit after taxation is Rs.52,000.

iv. Sundry creditors Rs.60,000.

v. 10% of the profit after tax is transferred to reserves.

vi. The normal profit earned on the market value of equity shares (fully paid) of the similar type of

business is 12%.vii. Other external liabilities are Rs.1,20,000.

viii. Preliminary expenses Rs.10,000.

The intrinsic value per equity share is

(a) Rs.14.60 (b) Rs.10.60 (c) Rs.10.40 (d) Rs.14.40 (e) Rs.18.00.

(1 mark)

< Answer >

48. Growth Ltd. is planning to raise funds by making rights issue of equity shares to finance its expansion.The existing equity share capital of the company is Rs.50,00,000 of Rs.10 each. The value of its share is

Rs.42. The company offers its shareholders the right to buy 2 shares at Rs.11 each for every 5 shares

held by them.

The share capital outstanding after the issue of right shares is

(a) Rs.70,00,000 (b) Rs.1,34,00,000 (c) Rs.50,00,000 (d) Rs.72,00,000 (e)Rs.77,00,000.

(1 mark)

< Answer >

49. Ramesh was allotted 300 shares of Rs.10 each. The following payments were made by Ramesh:

Rs.2 per share on application

Rs.3 per share on allotment

He failed to pay the first call of Rs.2 and final call of Rs.3. The company forfeited the shares after due

notice. The shares were later reissued to Naik @ Rs.9 each fully paid. On forfeiture, the amount credited

to the share forfeiture account and on reissue the amount transferred to capital reserve account

respectively, are

(a) Rs.3,000 ; Rs.300 (b) Rs.3,000 ; Rs.2,700

(c) Rs.1,500 ; Rs.300 (d) Rs.1,500 ; Rs.1,200 (e) Rs.1,500 ; Rs.400.

(2 marks)

< Answer >

50. In a funds flow statement prepared on working capital basis, a short term loan repaid by the organization

(a) Is shown as a source of working capital

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(b) Is shown as an increase in cash

(c) Is shown as a decrease in cash

(d) Does not affect the working capital

(e) Is not shown either as a source or a use of funds.

(1 mark)

51.The Board of director of Prinston Ltd. forfeited 2,500 shares (par value of Rs.10 each) for non payment

of final call of Rs.2 per share. All the shares were reissued at Rs.7 per share. How much amount should

be transferred to capital reserve account?

(a) Rs.7,500 (b) Rs.10,000 (c) Rs.12,500 (d) Rs.17,500 (e)

Rs.20,000.

(1 mark)

< Answer >

52. On August 1, 2003, H Ltd. acquired 75% shares of S Ltd. If machinery of S Ltd. is revalued upwardsby Rs.2,00,000 on the same day, the share of minority group of S Ltd. considered to be shown in the

Consolidated Balance Sheet as on March 31, 2004 was

(a) Rs.2,00,000 (b) Rs.1,50,000 (c) Rs.1,00,000 (d) Rs.75,000 (e)

Rs.50,000.

(1 mark)

< Answer >

53. Revenue profits for consolidation of balance sheet of holding company and its subsidiary company are

(a) The post-acquisition profits of the holding company(b) The post-acquisition profits of the subsidiary company

(c) The profits after the financial year but before the date of acquisition of the subsidiary company

(d) The profits earned by the holding company from regular transactions

(e) The profits earned by the subsidiary company from regular transactions.

(1 mark)

< Answer >

54. On April 01, 2003, Parent Ltd. acquired 4000 shares of Ward Ltd at a price of Rs.4,50,000. The sharecapital of Ward Ltd. consists of 5,000 equity shares of Rs.100 each.

During the consolidation of accounts, it is noticed that the sundry creditors of Parent Ltd. include

Rs.20,000 for goods purchased from Ward Ltd. on which the subsidiary company made a profit ofRs.5,000.

Half of the goods sold above were still in the stock of Parent Ltd. as on March 31, 2004.

The unrealized profit shown in the Consolidated Balance Sheet of Parent Ltd. as on March 31, 2004 is

(a) Rs.2,000

(b) Rs.4,000

(c) Rs.8,000(d) Rs.Nil since the goods are purchased from subsidiary company

(e) Rs.6,000.

(1 mark)

< Answer >

55. Consider the Balance Sheets H Ltd. and S Ltd. as on March 31, 2004:

Liabilities H Ltd. S Ltd. Assets H Ltd. S Ltd.

Share Capital @ Rs.10

each 20,000 10,000

Shares in S. Ltd. 800

Shares 8,000

Other Liabilities 10,000 5,000 Other Assets 22,000 15,000

30,000 15,000 30,000 15,000

H Ltd. has acquired the shares on the closing date of the Balance Sheet.

The minority interest shown in the Consolidated Balance Sheet as on March 31, 2004 is

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(a) Rs.2,000 (b) Rs.2,500 (c) Rs.5,000 (d) Rs.3,000

(e) Insufficient data.

(1 mark)

56. Which of the following items shouldnot appear under the heading unsecured loans in the Balance

Sheet of a company?

(a) Sinking funds(b) Loans and advances from subsidiaries(c) Short term loans and advances from banks

(d) Loans and advances from others

(e) Fixed deposits.

(1 mark)

< Answer >

57. Consider the following data pertaining to Premier Company as on April 01,2003:

Subscribed and paid-up Capital:

Equity Rs.80,00,000

6% Preference Rs.20,00,000

Profit and Loss account (cr.) Rs. 1,29,000

Dividend equalization reserve Rs.29,10,750 During the year 2003-04, the company suffered a loss of Rs.12,71,733. Directors propose to pay preference dividend and equity dividend at the rate of 5% and in the

event of inadequacy of profits, dividend equalization reserve should be made use of to the extent

necessary to make good the deficiency in the proposed amount of dividend.

The amount that is to be transferred from dividend equalization reserve to Profit and Loss Appropriation

account, in lieu of the proposed dividend is

(a) Rs.3,91,000(b) Rs.3,71,000

(c) Rs.nil as the company incurred losses during the current year and dividends cannot be declared(d) Rs.1,20,000,only with regard to Preference dividend

(e) Rs.16,62,733.

(2 marks)

< Answer >

58. Consider the following data pertaining to Ravera Ltd.

Authorized share capital Rs.20,00,000

Issued, called-up and paid -up capital Rs.12,00,000

Calls in advance Rs. 80,000

Securities Premium Rs. 1,20,000

Profit for the current year Rs. 2,55,600

The directors of the company proposed a dividend of 12%. The amount debited to Profit and Loss

Appropriation account on account of the proposed dividend is

(a) Rs.30,672 (b) Rs.2,40,000 (c) Rs.1,53,600 (d) Rs.1,44,000 (e)Rs.1,58,400.

(1 mark)

< Answer >

59. Outstanding salaries represents

(a) A personal account (b) A contingent liability

(c) A nominal account (d) A deferred expense account (e) An asset.

(1 mark)

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60. Which of the following is a capital reserve?

(a) A sum set aside to provide for repayment of debentures(b) The surplus arising on a professional revaluation of fixed asset

(c) An amount set aside to provide for the increased cost of replacement of the fixed asset

(d) A sum set aside from profit towards a special publicity campaign which is to be started in thefollowing year

(e) A sum retained to provide for loss that may arise out of doubtful debts.

(1 mark)

< Answer >

61. A companys system of maintaining books of accounts

(a) Must be the same as all the other companies which are in the similar line of business

(b) Can be different from the other companies which are in the similar line of business(c) Must be disclosed, if it is different from the recognised system of accounting

(d) Must be on accrual basis and according to the double entry system of accounting

(e) Can be on cash basis of accounting on the approval of the Registrar of Companies.

(1 mark)

< Answer >

62. A prospective shareholder wants to analyse the profitability of a company. The financial statement theinvestor would consult is the

(a) Income statement (b) Balance Sheet

(c) Funds flow statement (d) Cash flow statement (e) Director report.

(1 mark)

< Answer >

63. If the opening balance of a corporation's retained earnings account is Rs.25,000, net income for the year

is Rs.50,000 and the closing balance of the retained earnings account is Rs.55,000, the amount paid by

the corporation in the form of dividends during the year is

(a) Rs.80,000 (b) Rs.30,000 (c) Rs.20,000 (d) Rs.50,000 (e) Rs.5,000.

(1 mark)

< Answer >

64. Which of the following is false with regard to value added?

(a) Gross value added is derived by deducting depreciation from the net value added(b) Value added is the most relevant concept of the social responsibility concept of the enterprise

(c) Value added equals pre-tax profit plus labour, plus depreciation and interest

(d) Value added measures the value of increase in resources

(e) Additive approach and subtractive approach are the approaches for computing value added.

(1 mark)

< Answer >

65. Consider the following balances pertaining to Pioneer Engineers Ltd. as on March 31, 2004:

Particulars Rs.

Land 2,00,000

Building 3,50,000

Plant and Machinery 5,25,000

Furniture 50,000

The above assets were purchased on April 01, 2003 at the cost stated below:

Particulars Rs.

Land 2,00,000

Building 4,00,000

Plant and Machinery 7,00,000Furniture 62,500

The amount of depreciation on the above assets charged to profit and loss account for the year ended onMarch 31, 2004 is

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(a) Rs.1,87,500 (b) Rs.2,25,000 (c) Rs.4,37,500 (d) Rs.2,37,500 (e)Insufficient

data.

(1 mark)

66. Unique Ltd. has issued 1000, 6% Debentures of Rs.10 each at a premium of Rs.0.20. The interest on

debentures is payable semi-annually on September 30 and March 31. The annual interest debited toprofit and loss account is

(a) Rs.600 (b) Rs.1,200 (c) Rs.612 (d) Rs.306 (e) Rs.300.

(1 mark)

< Answer >

67. The balance in machinery account of Taurus Ltd. as on April 01, 2003 was Rs.85,000. The following

transactions took place during the year 2003-2004:

Date ParticularsAmount

(Rs.)

01-07-2003 Machinery purchased 90,000

01-10-2003 Machinery sold (book value as on April 01, 2003 is

Rs.40,000)

50,000

01-01-2004 New machinery purchased 80,000

If the company charges depreciation at the rate of 10% per annum, on written down value method, theamount of depreciation charged for the year 2003-2004 is

(a) Rs.23,250 (b) Rs.15,500 (c) Rs.19,500

(d) Rs.13,250 (e) Rs.15,250.

(2 marks)

< Answer >

68. Rights shares are the shares

(a) Issued by a newly formed company (b) Legally issued to the public at large

(c) Offered to the existing equity shareholders (d) That have a right of redemption

(e) That have a right to cumulative dividends.

(1 mark)

< Answer >

69. Which of the following statements is/are true?

I. According to the purchase of super-profit method of valuation of goodwill, goodwill is the

product of the super profit and the number of years purchase.

II. For calculating the amount of goodwill under super profit method, the fair value of the capitalemployed should be determined.

III. There is only one method of valuing goodwill, i.e., super profit method.

(a) Only (I) above

(b) Only (II) above(c) Both (I) and (II) above

(d) Both (I) and (III) above

(e) Both (II) and (III) above.

(1 mark)

< Answer >

70. The three columns on each side of the three columnar cash book represent

(a) Real accounts and Capital accounts (b) Personal Accounts and Nominal accounts(c) Real and Nominal accounts (d) Real and Personal accounts

(e) Real, Personal and Nominal accounts.

(1 mark)

< Answer >

71. Which of the following is true with regard to the claims against the company not acknowledged as < Answer >

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debts?

(a) Shown as current liabilities(b) Shown as loans and advances

(c) Shown as notes to balance sheet

(d) Shown as directors report(e) No separate disclosure is required.

(1 mark)

72. The increase in equity from major activities of a business entity is known as

(a) Capital (b) Gross profit (c) Net worth

(d) Net profit (e) Cash on hand.

(1 mark)

< Answer >

73. Which of the following statements can be used to assess the liquidity of a company?

(a) Balance sheet (b) Profit and loss account(c) Profit and loss appropriation account (d) Bank reconciliation statement

(e) Manufacturing account.

(1 mark)

< Answer >

74. Which of the following is not generally used as a valuation base in financial accounting?

(a) Historical Cost (b) Opportunity cost

(c) Current cost (d) Realizable value(e) Present value.

(1 mark)

< Answer >

75. Which of the following subsidiary books serves the purpose of ledger too, in addition to the recording ofaccounting transactions?

(a) Purchases book (b) Sales book

(c) Bills receivable book (d) Cash book (e) Journal proper.

(1 mark)

< Answer >

76. Bank reconciliation statement is

(a) A part of the cash book(b) A ledger account

(c) A part of trial balance

(d) A statement showing the causes for differences between the balances of cashbook and pass book

(e) A part of the cash flow statement.

(1 mark)

< Answer >

77. Goods given by a proprietary concern as charity should be

(a) Credited to purchases account

(b) Credited to charity account

(c) Credited to sales account(d) Debited to proprietors drawings account

(e) Deducted from the capital of the proprietor.

(1 mark)

< Answer >

78. Which of the following items is shown on the debit side of a Trial Balance?

(a) Rent outstanding (b) Prepaid expenses(c) Cash sales (d) Returns outward

(e) Interest accrued on debentures.

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(1 mark)

79. Closing stock is generally valued at

(a) Cost price (b) Replacement cost

(c) Market price (d) Realisable value

(e) Cost price or market price whichever is lower.

(1 mark)

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Suggested Answers

Financial Accounting (MB131): January 2005

1. Answer : (b )

Reason : Accrual basis is used under hybrid system of accounting for expenses and cash basis is used for

revenue used.

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2. Answer : (b)

Reason : Financial accounting principles assume the going concern concept and hence the fixed assets will be

valued at cost less depreciation. However, in the given case, the concern decided to close itsoperations. Hence, the fixed assets should be indicated in the balance sheet at net realizable value.

Hence the answer is (b). The assets are not recorded at historical cost. Cost or market value,whichever is lower is used to record stock-in-trade but not fixed assets. The replacement cost is

irrelevant when the firm is going to discontinue its operations.

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3. Answer : (d)

Reason : Incurring liability is a source of fund but not a use of fund. Acquiring assets, incurring expenses,

incurring losses and paying dividends are all uses of funds.

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4. Answer : (d)

Reason : Real accounts represent the assets and properties of a business is the correct statement and (d) is the

correct answer.

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5. Answer : (b )

Reason : The losses from sale of capital assets should be deducted fom the revenue to ascertain the net

income

The convention of disclosure implies that all material information should be disclosed in the

accounts

In keeping with the principle of materiality unimportant items are either left out or merged withother items. The comparison of the results of one accounting period with that in the past is possible

when the convention of consistency is adhered to by the business. The income or loss of business is

always computed with relevance to a specific period called the accounting period.

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6. Answer : (e )

Reason : Prior period items are to be debited to Profit &Loss A/c and its impact on the current year profit

should be shown in the notes to the accounts.

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7. Answer : (b)

Reason : Dr. Sundry Creditors Cr.

Date Particulars Rs. Date Particulars Rs.

2003-2004 To Cash1,80,000

April 01, 2003By Balance b/d 80,000

To discount 8,000

March 31, 2004 To Balance c/d 90,000

2003-2004 By Purchases(balancing figure)

1,98,000

2,78,000 2,78,000

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8. Answer : (e)

Reason : Rs.

Payment made to creditors 10,00,000

Discount received 10,000

Closing balance 40,000

10,50,000

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Less : Credit purchases 9,25,000

Opening balance 1,25,000

9. Answer : (c)

Reason : Cost of goods = Purchases Returns outward + Freight in

= Rs.2,10,000 Rs.22,000 + Rs.30,000 = Rs.2,18,000

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10. Answer : (d)

Reason : A mistake of overcasting of purchases day book increases cost of sales and decreases gross profit.

(d) is the correct answer.

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11. Answer : (d)

Reason : The thumb rule is that all expenses and assets are showing debit balances and incomes and liabilities

credit balances. Carriage outward being an expense should be listed in debt column of the TrialBalance.

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12. Answer : (b)

Reason : Bank Reconciliation Statement

Particulars Rs. Rs.

Overdraft balance as per Pass book 20,000

Add : Cheques issued to Mr. Y but not

presented for payment4,000

Rent deposited by Mr. Z directly into the bank 10,000

Interest on debentures directly collected by bank 10,000 24,000

44,000

Less :

Cheque deposited, yet to be realised 15,000 15,000

Overdraft balance as per cash book 29,000

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13. Answer : (a)Reason : The withdrawal of cash from the bank will figure in both and cash columns of a cash book and such

entries are called contra entries. (a) is the correct answer.

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14. Answer : (c)

Reason :

ParticularsProfit increased

(Rs.)

Profit decreased

(Rs.)

Salaries overstated (Profit understated) 15,000

Repairs understated (Profit overstated) 7,000

Income of investment understated (Profit

understated)

7,000

7,000 22,0000

Net profit understated/decreased 15,000 --

22,000 22,000

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15. Answer : (b)

Reason : i. Difference in sales a/c because of taking Rs.58,726 instead of Rs.58,762=Rs.36 whereby credit

is less by the amount

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ii. Discount not debited Rs.52 on account of which debit balance is less by the amount

iii. Sale of old furniture credited to machinery a/c instead of furniture is not affecting the

agreement of trial balance

iv. Sale twice debited to S a/c has increased the debit balance by Rs.250

So excess debit Rs.250 plus short credit of Rs.36 minus short debit Rs.52 makes debit total more byRs.234 of the Trial balance

16. Answer : (c)

Reason : A credit sale of Rs.2,000 was wrongly entered in the purchases book. This mistake will result in a

decrease in the gross profit of Rs.4,000.

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17. Answer : (a)

Reason :The mistake of posting of an item to the correct side of a wrong account will not affect the agreementof a trial balance . Thus, the total of credit side will be the total of debit side too. Thus, before and

after rectification the total of the debit side will be Rs.43,570. (a) is the correct answer.

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18. Answer : (c)

Reason : Net Profit of Joy Ltd. for the year ending March 31, 2004 :

Dr. Cr.

Particulars Rs. Rs. Particulars Rs. Rs.To Purchases 2,85,000 By Cash sales 4,00,000

Add : Omitted to be recorded15,000 3,00,000

Less : Wrong Credit 51,000

3,49,000

To Decrease in inventory 40,000

To Gross Profit 9,000

3,49,000

3,49,000

To Sales Commission 12,000 By Gross Profit 9,000

+ Accrued 6,000 18,000 By Rent received 55,000

To Depreciation 30,000 Less : received in advance 2,500 52,500

To Net Profit 13,500

61,500

61,500The net profit is Rs.13,500

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19. Answer : (e)

Reason : When goods are lost and insurance company accepts the claim only to a certain extent, profit and

loss account should be debited with net loss, Trading account will be credited with cost of goodslost and insurance company account will be debited with the amount of claim accepted. Thus the

entry is

Profit and Loss account Dr. Rs.2,000

Insurance company account Dr. Rs.8,000

To Trading account Rs. 10,000

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20. Answer : (c)

Reason : The net profit Rs.1,70,000 Rs.15,000(Profit on sale of building which is carried to P& L account

(Rs.45,000 Rs.30,000) = Rs.1,55,000. The profit from operations will be Rs.1,55,000.

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21. Answer : (c)

Reason : Balance Sheet of Nilgir Ltd as on March 31, 2003.


Share Capital 5,76,900 Land & building 4,36,000

Profit and loss account 1,33,731 Office equipment 1,99,700

12% Bank Loan 1,50,000 Less : depreciation 19,970 1,79,730

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Add : Outstanding interest

15,0001,65,000

Furniture 2,00,000

Sundry creditors 50,000 Less : depreciation 30,000 1,70,000

Less : Closing stock 38,000

Debtors set off 8,000 Sundry debtors 55,000

Provision for discounton creditors 720 41,280Less : Provision for discounton debtors 779

Creditors set off 8,000 46,221

Bills payable 10,000 Bills receivable 9,000

Cash at bank 23,500

Petty cash 210

Accrued commission 13,000

Prepaid printing charges 1,850

Cash on hand 9,400

9,26,911 9,26,911

22. Answer : (b)

Reason : Dr. Trading and profit and loss account for the year ended March 31, 2004 Cr.

Particulars Rs. Particulars Rs.

To Opening stock 90,000 By Sales 6,35,000

To Purchases 4,56,000 By Closing stock 75,000

To Gross profit 1,64,000

7,10,000 7,10,000

To Salaries 86,000 By Gross profit 1,64,000

To other expenses 73,000 By Net loss 70,000

To Depreciation 75,000

2,34,000 2,34,000Balance sheet as on March 31, 2003


Share capital 6,00,000 Fixed assets5,00,000

Less : depreciation

75,000

4,25,000

Sundry creditors 32,000 Sundry debtors 45,000

Short tem loan 36,000 Closing stock 75,000

Cash and bank 53,000

Net loss 70,000

6,68,000 6,68,000

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23. Answer : (c)

Reason : Dividends represent the amount earmarked to distribute to the shareholders. Hence (c) is the answer.

The amount of taxes is to be deducted from profit before tax and the amount to be transferred to

reserves and other appropriations, if any, need to be made from profits after tax. Operating profit is

the amount of profit other than non-operating surplus. Interest, taxes, other appropriations should be

made to operating profit. Hence this is not the amount earmarked for distribution to shareholders.

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24. Answer : (c)

Reason : Computation of inventory :

Particulars Rs. Rs.

Inventory value as per books 1,50,000

Add Purchases received but not accounted 10,000

Sales yet to be delivered 30,000 40,0001,90,000

Less Returns outward 5,000

Amount overcast in stock sheet 6,000 11,000

Inventory as per physical stock 1,79,000

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25. Answer : (d)

Reason :

Particulars Rs.

Opening balance of sundry debtors 47,000

Add : Credit sales 6,75,000

7,22,000

Less : Closing balance of Sundry debtors 70,000

Cash collected from customers 6,52,000

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26. Answer : (d)

Reason :

Particulars Rs.

Opening Provision 4,000

Bad debts to be written off 10,000

Shortfall of provision 6,000

Provision required 5% of Rs.1,40,000 (Rs.1,50,000 Rs.10,000) 7,000

Charge against profit and loss account 13,000

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27. Answer : (a)

Reason : Dr. Provision for Bad debts Account Cr.

Date Particulars Rs. Date Particulars Rs.

March 31,2004

To A 12,000April 01, 2003

By Opening balance 30,000

To B 10,000 March 31, 2004 By P & L a/c 34,000

To C 7,000

To Closing balance 35,000

64,000 64,000

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28. Answer : (d)Reason : For valuation of relatively expensive items whose physical identification at various stages is

possible, Specific Identification method is most suited. Where the inventories are vast and physicalidentification is difficult, the method is not advisable.

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29. Answer : (e)

Reason : Advance payment made to suppliers for materials is not classified as inventory. Other items

mentioned in (a), (b), (c) and (d) are classified as inventory in the financial statements as they are

the components of inventory.

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to the owner. As such the share capital account is treated as a liability to the business and shown

under liabilities. The other concepts are not correct because

(b) Money measurement concept explains that in financial accountancy, a record is made only of

information that can be expressed in monetary terms and ignores other events, however

significant they may be. It is silent about the treatment of share capital account.

(c) Cost concept implies that in accounting all transactions are generally recorded at cost and not

at market value. It does not explain why share capital account is to be treated as liability.(d) Going concern concept explains that the resources of the concern would continue to be used

for the purposes for which they are meant to be used. The very categorization of assets intofixed and current presupposes the going concern concept. It does not deal about the treatment

of share capital account.

(e) Conservatism concept: The theme behind this principle is that recognition of revenue requires

better evidence than recognition of expenses. It deals with revenues and expenses and not theshare capital account.

34. Answer : (a)

Reason :

2000-01 2001-02 2002-03 2003-04Particulars

(Rs.) (Rs.) (Rs.) (Rs.)Post-tax profits 1,50,000 1,65,000 2,20,000 2,50,000

Pre-tax profits 3,00,000 3,30,000 4,40,000 5,00,000

Add: Excessive depreciation 10,000

Abnormal loss 20,000

3,00,000 3,50,000 4,50,000 5,00,000

Average pre-tax profits =

3,00,000 3,50,000 4,50,000 5,00,000

4

+ + +

= Rs. 4,00,000

Less: Additional salaries Rs. 20,000

Rs. 3,80,000

Less: Tax @50% Rs. 1,90,000

Future maintainable profits Rs. 1,90,000

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35. Answer : (b)

Reason : Valuation of goodwill according to purchase of super profits method.

a. Calculation of Capital Employed :

Rs. Amount (Rs.)

Assets

Land and Buildings 1,75,000

Plant and machinery 90,000

Stock 1,15,000

Book debts 98,000

Less : Provision 3,000 95,000

Cash at bank 7,000

Gross total assets 4,82,000

Less : Sundry creditors 71,000

Provision for taxation 55,000 1,26,000

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Capital employed 3,56,000

b. Calculation of Normal Profits :

(Normal rate of return x Capital Employed)/100

12/100 X Rs.3,56,000 = Rs.42,720.

c. Calculation of Future Maintainable Profits (based on profits of previous year) :

Actual profit after providing tax Rs.55,000.

(As the provision for taxation @ 50% is Rs.55,000, the profits would be Rs.l,10,000 and the

profits after providing for taxation also would be Rs.55,000.)

d. Calculation of Super Profits

Rs.Actual profits 55,000

Less : Normal profits 42,720

Super profits 12,280

Valuation of goodwill on five years purchase of super profits = Rs.12,280 x 5 = Rs.61,400.

36. Answer : (a)

Reason :

1999-2000

Rs.

2000-01

Rs.

2001-02

Rs.

2002-03

Rs.

2003-04

Rs.

Total

Rs.

Profit 75000 300000 375000 450000 742500

Less: repair expenses - 30000

Add: Depreciation 1500 3000 3000

Less: profit on sale of plant

22,500

Adjusted profits 75000 300000 346500 453000 723000

Weights 1 2 3 4 5

Profits weights 75000 600000 1039500 1812000 3615000 7141500

Weighted average profits = Rs.71,41,500 / 15 = Rs.4,76,100

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37. Answer : (e)

Reason :

Debenture amount500 units Rs.100 Rs.50,000Less: Discount 10% Rs. 5,000

Rs. 45,000

These Rs.45,000 debentures are converted into equity shares of Rs.100 each at a premium of Rs.20.

So, the amount of equity share per unit = Rs.100 + Rs.20 = Rs.120

No. of equity shares to be issued =

Rs.45, 000

Rs.120 = 375 shares.

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38. Answer : (a)

Reason :

Year Profit (Rs.) Weight Product

1999-2000 42,364 1 42,364

2000-01 43,456 2 86,9122001-02 53,126 3 1,59,378

2002-03 56,789 4 2,27,156

2003-04 62,354 5 3,11,770

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15 8,27,580

Average profit = Rs.8,27,580 / 15 = Rs.55,172

39. Answer : (a)

Reason : Share premium is received along with the application money and the share premium once received

cannot be reversed. Hence, the share premium received on 1,00,000 shares at the rate of Rs.2 per

share is un affected on account of forfeiture of shares.

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40. Answer : (c)

Reason : Amount transferred to capital reserve is Rs.800.

Working Note:

Particulars Rs.

Amount received on 200 shares on forfeiture(200 x Rs.5) 1,000

Less: Amount of discount allowed on 200 shares which were reissued (200 x Re-1.) 200

Amount to be transferred to Capital Reserve 800

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41. Answer : (b)

Reason : Dr. Cash account Cr.


To Balance b/d. 50,000 By Preference shareholders(Rs.3,00,000 x 110%)

3,30,000

To Investments 2,00,000 By Balance c/d. 25,000

To Equity shares

(including premium) 1,05,000

3,55,000 355,000

No. of equity shares = Rs.1,05,000 / Rs.105 = 1000 shares.

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42. Answer : (b)

Reason : The shares were issued at a discount of 10% i.e. they were issued for Rs.90 per share.Ramya failed to pay the final call of Rs.30. Hence she has paid Rs.60 (Rs.90 Rs.30).

The amount to be credited to shares forfeited account is Rs.60 x 300 shares = Rs.18,000

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43.Answer : (d)

Reason : As per the Companies Amendment Act, 1988, only preference shares, which are redeemable within

20 years, can be issued

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44. Answer : (c)

Reason :

Particulars Rs. Rs.

Land and building 3,60,000

Plant and machinery (Rs.2,70,000 Rs.90%) 2,43,000Furniture 1,80,000Inventories 90,000

Sundry Debtors (Rs.60,000 95%) 57,000Loans and advances 75,000

Cash 10,000Bank 35,000

Less: 10,50,000

Sundry creditors 50,000

Short term loan 80,000 1,30,000

Net assets 9,20,000

Value of share =

Rs.9,20,000Rs.18.40

,000=

50

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45. Answer : (b)

Reason : In case of issue of debentures at discount and redeemable at a premium, discount on issue ofdebentures a/c should be debited with the amount of discount, loss on issue of debentures a/c should

be debited with the amount of premium payable on redemption and Bank account should be debited

with actual amount received. Corresponding credit should be given to debentures a/c with face valueof debentures and premium on redemption of debentures a/c with amount of premium. Hence the

entry isRs. Rs.

Bank a/c Dr. 1,80,000Discount on issue of debentures a/c Dr. 20,000

Loss on issue of debentures a/c Dr. 10,000

To 12% Debentures a/c 2,00,000

To Premium on redemption of debentures 10,000

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46. Answer : (e)

Reason : Forfeited shares account = Forfeited shares x Amount paid by the shareholder

= 60 x (Rs.6 + 3 2 = Rs.7) = 420

No.of forfeited reissued shares = 36 shares

(60x60%) @ Rs.7 = Rs.252Credit balance in the share forfeiture account = Rs.420 Rs.252 = Rs.168.

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47. Answer : (c)

Reason : Cute Ltd.

Intrinsic Value of Shares

(Rs.)

50,000 equity shares @ Rs.10 each 5,00,000

2,000, 8% preference shares @ Rs.100 each 2,00,000

Reserves and surplus 30,000

External liabilities 1,20,000Sundry creditors 60,000

Total liabilities 9,10,000

(Rs.)

Total assets 9,10,000Less : Fictitious assets (10,000)

(preliminary expenses)

Sundry creditors (60,000)

Extenral liabilities (1,20,000)

Preference shares (2,00,000)

Net assets available for equity shareholders 5,20,000

Intrinsic value of shares

=

Net assetsavai

Nu

labefor equityshareholders

mberof equityshares

=

Rs.5,20,000

,00050 = Rs.10.40.

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48. Answer : (a)

Reason : Present share capital Rs.50,00,000

Rights issue Rs.50,00,000 x Rs.20,00,000

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Total Share Capital Rs.70,00,000

49. Answer : (d)

Reason : The journal entry on forfeiture of share is

Particulars Dr. Cr.

(Rs.) (Rs.)

Share Capital A/c. (300

Rs.10) Dr. 3,000To Share First Call A/c. (300 Rs.2) 600To Share Second and Final Call A/c. (300 Rs.3) 900To Shares Forfeited A/c. (300 Rs.5) 1,500

(Being the forfeiture of 300 equity shares of Ramesh on

non-payment of first and final call)Bank A/c. (300 Rs.9) Dr. 2,700Shares forfeited A/c. (300 Rs.1) Dr. 300

To Share Capital A/c. (300 Rs.10) 3,000(Being the re-issue of 300 shares @ Rs.9 per share and

discounted amount of Re.1 per share is to be transferred

from share forfeiture a/c)Shares forfeited A/c. Dr. 1,200

To Capital Reserve A/c. 1,200

(Being the profit on re-issue of forfeited shares transferred

to Capital Reserve)

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50. Answer : (c)

Reason : Repayment of short term loan is shown as a decrease in cash (c). Therefore, alternative (c) is the

correct answer. It is not a source of working capital. Therefore, alternative (a) is not the correct

answer. It is shown as increase in cash (b), is also not a correct answer. Does not affect the working

capital (d) is also not a correct answer, since it is affecting the working capital. Is not shown eitheras a source or a use of funds (e) is also not the correct answer. Therefore, alternative (c) is the

correct answer.

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51. Answer : (c)

Reason : Total amount received on forfeited shares =Rs.2500(10-2) =Rs.20,000

Reissue of shares @Rs.7 on fully paid =2500 x Rs.7 =Rs17,500Shortfall on reissue =2500 x Rs3 =Rs.7,500

Balance in share forfeiture a/c after adjusting for shortfall =Rs.(20,000-7,500) =Rs.12,500.

Transfer to capital reserve =Rs.12,500.

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52. Answer : (e)

Reason : Profit on revaluation of machinery = Rs.2,00,000.

Share of minority group of S Ltd. = 25%

Share of profit on revaluation = 25% of Rs.2,00,000

.000,50.Rs000,00,2.Rs100

25=

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53. Answer : (b)

Reason : The post-acquisition profits of subsidiary company are the Revenue profits for consolidation of

balance sheet of holding company and its subsidiary company.

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54. Answer: (a)

Reason: Half of the stock remained unsold

= Rs.20,000/2 = Rs.10,000

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= Profit percentage =

Rs.5, 000 1

RS.20, 000 4=

1

4

= Unrealised profit share = Rs.10,000 80%

= Rs.2,000

55. Answer : (a)

Reason:

800

1, 000

4HoldingCompany

5

=

Minority Interest = (10,000 1/5) = 2,000.

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56. Answer : (a)

Reason : Sinking fund is created out of profit. It is the part of profit and should be listed under the heading

Reserves and Surplus and not under unsecured loans. Loans and advances from subsidiaries,short term loans and advances from banks, loans and advances from others and fixed deposits are

unsecured loans.

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57. Answer: (a)

Reason: Profit and Loss Appropriation Account


To Net loss 12,71,733 By Balance b/d 1,29,000

To Proposed dividend Equity 4,00,000 By Dividend equalization

.reserve

3,91,000

Preference

1,20,000 By Balance C/d. 12,71,733

Total 17,91,733 Total 17,91,733

Amount to be transferred from dividend equalization reserve is Rs.3,91,000

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58. Answer : (d)

Reason : No dividends an paid on call in advance nor on calls in arrar Dividend = 12% on Rs. 12,00,000 =

Rs. 1,44,000

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59. Answer : (a)

Reason : Outstanding salaries is the amount payable during a particular period which is not yet paid. It is

Personal Account representing salaries due to employees. It is a representative personal account

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60. Answer : (b)

Reason : The surplus arising on a professional revaluation of fixed asset is a capital reserve.T

61. Answer : (d)

Reason : A companys system of maintaining books of accounts must be on the accrual basis and according

to the double entry system of accounting. The systems in other alternatives are no systems at all ornot recognized under the Act. Thus, alternative (d) is the correct answer.

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62. Answer : (a)Reason: A shareholder wants to review the revenues and expenses of a company. The financial statement the

investor would consult is the Income statement. (a) is the correct answer.

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63. Answer : (c)

Reason : The opening balance of retained earnings i.e. profit and loss appropriation account is Rs.25,000 and

the profit earned during the year is Rs.50,000 thus total retained earnings is Rs.75,000 and theclosing balance is Rs.55,000. Thus, the amount of dividends paid is Rs.20,000.

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64. Answer : (a)

Reason : Net value added is derived by deducting depreciation from the gross value added and not vice versa.Thus the statement in alternative (a) is false. The value added is not the most relevant concept and

the statement forms part of social responsibility reporting (b). It is arrived at by deducting only the

cost of bought in materials and services (c). It measures the value of increase in resources (d). Theapproaches adopted are additive approach and subtractive approach in computing value added (e).

Thus, the alternatives (b), (c), (d) and (e) are true.

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65. Answer : (d)

Reason: Depreciation charged to date

Cost

Rs.

Written down Value

Rs.

Depreciation

Rs.

Land 2,00,000 2,00,000 -

Building 4,00,000 3,50,000 50,000

Plant and machinery 7,00,000 5,25,000 1,75,000

Furniture 62,500 50,000 12,500

13,62,500 11,25,000 2,37,500

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66. Answer : (a)

Reason: The annual interest cost which is payable half yearly on a twenty-year, 6 %, Rs.10,000 debentures

that are issued at Rs.10,200 is Rs.10,000 x 6% =Rs.600.

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67. Answer : (e)

Reason : Dr. Machinery account Cr.Date Particulars Rs. Particulars Rs.

1-04-03 To Opening balance 85,000 1-10-03 By Bank (sale) 50,000

1-07-03 To Bank 90,000 31-3-04 By Depreciation 15,250

1-10-03 To Profit and loss a/c(Profit on sale of machine) 12,000

31-3-04 By Closing balance 2,01,750

1-01-04 To Bank 80,000

2,67,000 2,67,000

Depreciation calculation:

Particulars Rs.On machinery purchased on 1-7-03 (Rs.90,000 x 10% x 9/12) 6,750

On machinery sold (40,000 x 10% x 6/12) 2,000

On machinery purchased on 1-1-04 (Rs.80,000 x 10% x 3/12 ) 2,000

On balance machinery (Rs,85,000 Rs.40,000) x 10% 4,500

15,250

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68. Answer : (c)

Reason : Rights shares are the shares that are offered to the existing equity shareholders (c). These are not

issued by a newly formed company (a).They are not the shares issued to the public at large (b). They

are issued only to the existing shareholders. It does not indicate the right of redemption of sharesissue (d). These are not the shares with cumulative dividend right (e). Therefore, alternative (c) is

the correct answer.

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69. Answer : (c)

Reason : According to the purchase of Super-Profit Method of valuing goodwill, goodwill is the product of

the super profit and the number of years purchase and For calculating the amount of goodwill by

the super profit method, it is necessary that the fair value of the capital employed should bedetermined. These two statements are true. Hence, the answer is (c ).

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70. Answer : (e )

Reason : The three columns on each side of the three columnar cash book represent Real accounts, PersonalT

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accounts and Nominal accounts

71. Answer : (c)

Reason : The claims against the company not acknowledged as debts represent contingent liabilities and

should be included in the notes to balance sheet.

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72. Answer : (d)

Reason : The increase in equity or net assets from major or central transactions or activities of a businessentity is from net profit. Capital is the investment made by the owner and not the increase frommajor activities of the business. Gross profit is subject to deduction of many expenses. Net worth is

the net assets of an entity. Cash on hand cannot be termed as increase in equity.

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73. Answer : (a)

Reason : Balance sheet can be used to assess the liquidity of a company. The profit and loss account showsthe profit or loss of the company but does not help in assessing the liquidity of the company. The

profit and loss appropriation account gives the details of appropriations and the retained earnings.

The bank reconciliation statement is prepared only to reconcile the differences in bank balance as

per cashbook and pass book. The manufacturing account shows the cost of goods produced. Hence

the answer is (a).

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74. Answer : (b)

Reason : The frequently used valuation bases in accounting are Historical Cost, Current cost, Realizable

value and present value

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75. Answer : (d)

Reason : Cash book is a special journal in which all cash transactions are recorded directly. The cash book

resembles a ledger with the debit and credit sides, and the balance represents the cash on hand at theend of the accounting period. Hence it serves the purpose of ledger. Cash account is not opened

when a cash, book is maintained. Purchases book, sales book, bills receivables book and journal

proper are the books of original entry and they do not serve the purpose of ledger.

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76. Answer : (d )

Reason : Bank reconciliation statement is a statement showing the causes for differences between the

balances of cashbook and pass book

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77. Answer : (a)

Reason : The value of goods given as charity will be debited to charity account and credited to purchase

account .The debit balance in charity account will be transferred to P&L a/c.

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78. Answer : (b)

Reason : Prepaid expenses is shown on the debit side of a Trial Balance.T

79. Answer : (e)

Reason : Closing stock is valued at cost price or market price whichever is lower. It is not valued at costprice, replacement cost, market price or realisable value.

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