Question Paper Financial Accounting (MB131) : July · PDF fileSuggested Answers with Examiner's Feedback Question Paper Financial Accounting (MB131) : July 2003 Part A : Basic Concepts

Suggested Answers with Examiner's Feedback

Question PaperFinancial Accounting (MB131) : July 2003

Part A : Basic Concepts (30 Points)

• This part consists of questions with serial number 1 - 30.• Answer all questions.• Each question carries one point.• Maximum time for answering Part A is 30 Minutes.

1. Which of the following is a real account?

a. Salary accountb. Cash account

c. Outstanding rent accountd. Sundry creditors accounte. Purchases account.

< Answer >

2. The balance as per bank statement of a company is Rs.12,500 (Dr.). The company deposited two cheques worth Rs.8,500, out of which one cheque for Rs.2,800 was dishonoured which was not entered in the cash book. The credit balance as per cash book is

a. Rs.21,000b. Rs.15,300c. Rs.12,500

d. Rs. 9,700e. Rs. 4,000.

< Answer >

3. Which of the following is a current liability?

a. Prepaid expensesb. Trade-markc. Discount on issue of shares

d. Outstanding salariese. Fixed deposits.

< Answer >

4. Purchase of fixed assets on credit is originally recorded in

a. Purchases bookb. Ledgerc. Cash book

d. Journal propere. Both (b) and (d) above.

< Answer >

5. Which of the following concepts is not considered as basic principle of accounting?

a. Materiality conceptb. Cost conceptc. Consistency conceptd. Matching concept

e. Logical concept.

< Answer >

http://www.icfai.org/suggested/MB131-0703.htm (1 of 22)12/22/2003 5:34:28 PM


6. In contract accounting, the percentage of completion method is an exception to the

a. Money measurement principleb. Going concern principlec. Historical cost principled. Business entity principle

e. Revenue recognition principle.

< Answer >

7. Consider the following data pertaining to M/s. Pradesh Co. for the year 2002-03:

Cost of goods available for sale (Rs.) 1,00,000Total sales (Rs.) 80,000Opening stock of goods (Rs.) 20,000Gross profit margin (%) 25

Closing stock of goods as on March 31, 2003 was

a. Rs.80,000b. Rs.60,000c. Rs.40,000d. Rs.36,000

e. Rs.20,000.

< Answer >

8. During the year 2002-2003, the opening stock and the closing stock of a company were Rs.1,20,000 and Rs.1,00,000 respectively. If the cost of goods sold during the year was Rs.3,40,000, the goods purchased by the company during the year amounted to

a. Rs.4,60,000b. Rs.4,40,000c. Rs.3,60,000d. Rs.3,40,000

e. Rs.3,20,000.

< Answer >

9. Consider the following:

I. Rate of depreciation under the written down method = 20% II. Original cost of the asset = Rs.1,00,000 III. Residual value of the asset at the end of useful life = Rs. 40,960

The estimated useful life of the asset, in years, is

a. 4b. 5c. 6d. 7e. 8.

< Answer >



10. During the year 2002-2003, a company paid Rs.1,20,000 as rent. If the outstanding rent as on March 31, 2002 and March 31, 2003 were Rs.24,000 and Rs.36,000 respectively, then the amount of rent charged to profit and loss account during the year was

a. Rs.1,08,000 b. Rs.1,20,000

c. Rs.1,32,000 d. Rs.1,44,000 e. Rs.1,56,000.

< Answer >

11. Which of the following represent(s) personal accounts in accounting parlance?

a. Sundry creditorsb. Bank accountc. Outstanding wagesd. Prepaid insurance

e. All of the above.

< Answer >

12. XL Ltd. paid wages of Rs.90,000 for construction of building. The journal entry for the transaction is

a. Debit wages account and credit profit & loss accountb. Debit wages account and credit cash accountc. Debit building account and credit profit & loss account

d. Debit building account and credit cash accounte. Debit building account and credit wages account.

< Answer >

13. The expenses that have fallen due for payment but not paid are

a. Outstanding expensesb. Prepaid expensesc. Deferred expensesd. Accrued revenuese. Capital expenses.

< Answer >

14. Which of the following inventory valuation methods shows higher profits during the period of rising prices?

a. First-in-First-out methodb. Last-in-First-out methodc. Weighted average cost methodd. Simple average cost methode. Specific cost method.

< Answer >

15. At the time of preparation of final accounts, bad debts recovered account will be transferred to

a. Debtor’s accountb. Profit & loss account

c. Profit & loss adjustment accountd. Profit & loss appropriation accounte. Provision for discount on debtors account.

< Answer >



16. The rate of interest payable on calls in advance is

a. 10% p.a.b. 9% p.a.c. 8% p.a.d. 7.5% p.a.

e. 6% p.a.

< Answer >

17. The long term investments are accounted for in the balance sheet at

a. Historical costb. Current market valuec. Net realizable valued. Present value of future cash flowse. Replacement cost.

< Answer >

18. Which of the following appears under the head “Miscellaneous expenditure” on the assets side of a balance sheet?

a. Bills discounted from bankb. Prepaid insurance premiumc. Directors’ remuneration

d. Discount on issue of sharese. Income tax paid in advance.

< Answer >

19. Which of the following is not a source of fund?

a. Sale of an assetb. Collection of bills receivable

c. Issue of sharesd. Borrowing from bankse. Operating profits.

< Answer >

20. Future maintainable profits of West Ltd. for the last 5 years were as follows:

1998-1999 Rs.1,32,0001999-2000 Rs.2,44,0002000-2001 Rs.2,74,0002001-2002 Rs.3,15,0002002-2003 Rs.3,32,000

The weighted average profits of the company are

a. Rs.14,54,000b. Rs.10,90,500c. Rs. 8,72,400d. Rs. 4,36,200

e. Rs. 2,90,800.

< Answer >



21. According to section 78 of the Companies Act, the amount in the share premium account cannot be used for the purpose of

a. Issue of fully paid bonus sharesb. Writing off losses of the company

c. Writing off preliminary expensesd. Writing off commission or discount on issue of sharese. Providing premium payable on the redemption of preference shares or debentures of the company.

< Answer >

22. The three column cash book represents

a. Real accountsb. Nominal accountsc. Nominal and personal accounts

d. Real, personal and nominal accountse. Real and personal accounts.

< Answer >

23. Carriage inward refers to the cost of transportation for

a. Purchase of materialsb. Sale of productsc. Returns outwardd. Return of unsold goodse. Both (a) and (b) above.

< Answer >

24. In double entry system of book-keeping, every business transaction affects

a. Two accountsb. The same account on two different datesc. Two sides of the same accountd. Two accounts on two different datese. Two accounts on the same side.

< Answer >

25. Which of the following is not an item of revenue expenditure?

a. Interest on deposits acceptedb. Annual insurance premium on inventory

c. Customs duty paid in connection with the import of equipmentd. Repairs and maintenance on machinerye. Expenditure on assets like paper weight and pin cushion.

< Answer >

26. Jasmine Ltd. has a share capital of 6,000 equity shares of Rs.100 each having a market value of Rs.176 per share. The company wants to raise additional funds and offers to its existing equity shareholders the right to apply for a new share at Rs.120 per share for every three shares held by them. The value of right is

a. Rs.176b. Rs.120c. Rs. 56d. Rs. 40

e. Rs. 14.

< Answer >



27. A credit sale to Mr. Gupta for Rs.7,500 was recorded in purchases book as Rs.5,700 and was posted to the debit side of Mr. Gupta’s account as Rs.7,500. The effect of this mistake, in trail balance is

a. Debit is more by Rs.13,200b. Debit is more by Rs.7,500c. Credit is more by Rs.5,700d. Debit is less by Rs.7,500e. Credit is more by Rs.13,200.

< Answer >

28. The periodical total of a purchases returns book is recorded to the

a. Debit side of the purchases accountb. Debit side of the purchases returns accountc. Credit side of the purchases account

d. Credit side of the purchases returns accounte. Credit side of creditors account.

< Answer >

29. The average capital employed of Sun Ltd. is Rs.12,00,000. The net trading profits of the company after payment of tax for the past 3 years were Rs.2,20,200, Rs.1,80,000 and Rs.2,21,400 respectively.

If the normal rate of return is 10%, the super profits of the company are

a. Rs. 62,160 b. Rs. 87,200

c. Rs.1,20,000d. Rs.1,90,800 e. Rs.5,01,600.

< Answer >

30. Samway Ltd. issued shares of Rs.10 each at a discount of 10%. Mr. Sujit who applied for 30 shares and paid Rs.2 on application and failed to pay the allotment money of Rs.3. If the company forfeites his entire shares, the forfeiture account will be credited by

a. Rs.90b. Rs.81

c. Rs.60d. Rs.54e. Rs.30.

< Answer >

END OF PART A



Part B : Problems (50 Points)

• This part consists of questions with serial number 1 - 5• Answer all questions. • Points are indicated against each question. • Detailed workings should form part of your answer. • Do not spend more than 110 - 120 minutes on Part B.

1. Mayur Ltd. has prepared the following trial balance as on March 31, 2003:

Particulars Debit (Rs.) Particulars Credit

(Rs.)Salaries 5,23,000 Share Capital 6,00,000Discount allowed 12,000 Electricity expenses 42,000 Sundry creditors 1,00,000Interest on loan 25,000 Loan (@ 12% p.a.) 2,50,000Bills receivable 1,12,000 Bills payable 78,000Cash on hand 8,000 Outstanding salaries 10,000Cash at bank 20,000 Gross profit 7,75,000Building 5,20,000 Discount received 10,000Furniture & fixtures 2,80,000 Interest on investments 10,000Plant & machinery 2,50,000 General reserve 2,50,000Sundry debtors 1,40,000 Provision for doubtful debts 9,000Telephone expenses 35,000 Investments (@ 12% p.a.) 1,00,000 Closing stock 25,000 20,92,000 20,92,000

The company has furnished the following additional information:

i. Provision for doubtful debts is to be made at the rate of 5% on sundry debtors. Sundry debtors include Rs.6,000 which have become bad.

ii. Depreciation is to be provided as follows:

Plant & machinery 10%Furniture & fixtures 5%Building 10%

iii. Telephone bills amounting to Rs.2,000 remain unpaid.

iv. Incidental charges of Rs.200 charged by bank is not recorded in cash book

v. Sales include Rs.8,000 in respect of sale of an old furniture on April 01, 2002, the book value of the furniture on April 01, 2002 was Rs.10,000.

You are required to prepare the profit and loss account for the year ended March 31, 2003 and the balance sheet as on that date after considering the above information.

(13 points) < Answer >

2. On April 01, 1999, Bhavan Construction Company acquired Machine A for Rs.1,00,000 and Machine B for Rs.1,20,000. On April 01, 2000, the company purchased Machine C for Rs.1,50,000. On April 01, 2001, Machine



A has become obsolete and a similar machine was purchased by exchanging Machine A and making a cash payment of Rs.1,00,000. On April 01, 2002, Machine C purchased on April 01, 2000 was destroyed by fire and the insurance company paid Rs.1,02,000 only. The company charges depreciation at the rate of 10% per annum on written down value method.

You are required to show the Machinery account for the years 1999-2000 to 2002-2003.


3. The following is the balance sheet of Sathya Steel Ltd. as on March 31, 2003:

Liabilities Rs. Assets Rs.

50,000 Equity shares of Rs.10 each 5,00,000 Goodwill 1,30,000

3,000, 10% Preference shares of Rs.100 each

3,00,000 Fixed Assets 12,00,000

General reserve 4,00,000 Investments 3,00,000

Profit & loss A/c. 1,20,000 Current Assets 3,70,000

10% Debentures 2,00,000

Fixed deposits 1,00,000

Current liabilities & provisions 3,80,000

20,00,000 20,00,000

Additional information: On March 31, 2003 the company has revalued the assets as follows: i. Goodwill Rs. 1,50,000 ii. Fixed Assets Rs.14,00,000 iii. Investments Rs. 4,00,000

You are required to calculate the value of each equity share of the company under intrinsic value method.


4. On March 31, 2003, the bank column of cash book of Dolphin Ltd. showed a credit balance of Rs.14,370. The following further information is available:

i. Cheques worth Rs.58,000 were deposited in the bank before March 27, 2003, but it appears from the bank pass book that cheques worth Rs.49,000 only had been credited before March 31, 2003.

ii. A cheque of Rs.2,000 debited by the bank on March 2, 2003 was not issued by the company.

iii. Cheques for Rs.42,000 were issued during the month of March, 2003, out of which 2 cheques aggregating to Rs.7,650 were presented on April 3, 2003, the remaining have been paid in the month of March itself.

iv. The cashier of the firm misappropriated a sum of Rs.3,500 by passing a fictitious entry as cash deposited in bank on March 2, 2003.



v. The pass book showed that the bank had collected Rs.650 as interest on Government securities on March 28, 2003.

vi. On March 30, 2003 the bank had charged interest of Rs.170 and bank charges of Rs.50. There was no entry in the cash book for the charges and interest.

vii. As per standing instructions, an amount of Rs.2,500 was debited by the bank on March 15, 2003 for payment of insurance premium.

You are required to prepare the bank reconciliation statement as on March 31, 2003.


5. Universe Ltd. invited applications for 5,000 equity shares of Rs.10 each at a premium of Rs.2 per share, payable as under:

On application Rs.6 (inclusive of premium)

On allotment Rs.4

On first and final call Rs.2

The applications were received for 5,000 equity shares.

The entire amount of share money is received in full with the exception of the allotment money on 300 shares and final call money on 400 shares (including the 300 shares on which the allotment money was not received).

The above 400 shares are duly forfeited. 300 shares, on which the allotment money was not received, are re-issued at Rs.8 per share as fully paid.

You are required to pass journal entries for the above transactions.


END OF PART B

Part C : Applied Theory (20 Points)

• This part consists of questions with serial number 6 - 8. • Answer all questions. • Points are indicated against each question. • Do not spend more than 25 -30 minutes on Part C.

6. An agreed trial balance cannot be regarded as conclusive proof of the correctness of the books of account. Explain the reasons for agreement of a trial balance despite the errors and omissions.




7. The financial requirements of a company may be met by raising share capital or by going for public borrowing in the nature of issue of debentures. Briefly explain how the shares are different from debentures.


8. ‘An audited balance sheet is not free from flaws’. In this context, discuss the limitations of a balance sheet.


END OF PART C

END OF QUESTION PAPER

Suggested AnswersFinancial Accounting (MB131) : July 2003

Part A : Basic Concepts1. Answer : (b) < TOP >

Reason : Real account represents assets like plant, machinery, cash etc. As on a particular date, this account shows the worth of the assets. Salary account and purchases account are nominal accounts. Sundry creditors account is personal account and outstanding rent account is representative personal account.

2. Answer : (d) < TOP >

Reason :

Particulars Rs.Balance as per bank statement (overdraft) 12,500Less: Cheque dishonored but not entered in the cash book 2,800Balance as per cash book (overdraft) (credit) 9,7003. Answer : (d) < TOP >

Reason : Outstanding salaries are short term obligations expected to be retired during the short



period of time. So, it is a current liability. Fixed deposit is the long term obligation or long term liability. Prepaid expenses, trade mark and discount on issue of shares are assets.


Reason : Purchase of fixed assets on credit is entered in journal proper and subsequently posted into the ledger. Hence the correct answer is (d). It is not recorded in purchases book as only purchase of goods will be recorded in purchases book. In cash book, only cash transactions will be recorded. As the fixed assets were purchased on credit, this transaction will not be recorded in the cash book.

5. Answer : (e) < TOP >

Reason : According to Generally Accepted Accounting Principles, materiality concept, cost concept, consistency concept and matching concept are considered as basic principles of accounting. Logical principle is not considered as basic principle of accounting.


Reason : In contract accounting, there is a reasonable certainty that the project would be completed and the return consideration is realized. In fact, return consideration may begin as soon as the work begins. So, revenue may be recognized at work-in-progress. This is the exception to the revenue recognition principle. Hence the correct answer is (e). It is not an exception to money measurement concept, going concern concept, historical cost concept and business entity concept.

7. Answer : (c) < TOP >

Reason :

Particulars Rs.Cost of goods available sale 1,00,000Less: Cost of goods sold Sales Rs.80,000 Less: Gross profit (25%) Rs.20,000 60,000Closing stock of goods 40,000


Reason :

Particulars Rs.Closing stock 1,00,000Add: Cost of goods sold 3,40,000 4,40,000Less: Opening stock 1,20,000Goods purchased 3,20,0009. Answer : (a) < TOP >

Reason :

Particulars Rs.Original cost of asset 1,00,000Less: Depreciation 20% year – 1 20,000 80,000



Less: Depreciation 20% year – 2 16,000 64,000Less: Depreciation 20% year – 3 12,800 51,200Less: Depreciation 20% year – 4 10,240 40,960

Useful life – 4 years.10. Answer : (c) < TOP >

Reason : Particulars Rs.

Cash paid during the year as rent 1,20,000Less: Outstanding rent as on March 31, 2002 24,000 96,000Add: Outstanding rent as on March 31, 2003 36,000Rent for the year charged to profit & loss a/c. 1,32,00011. Answer : (e) < TOP >

Reason : Personal accounts deal with accounts of individuals like creditors, debtors, banks etc. It shows the balance due to these individuals or due from them on a particular date and representative personal accounts represent the amounts due on account of accrual concept like accrued expenses and prepaid expenses or accrued incomes and pre-received incomes. By virtue of this, the accounts stated in alternatives (a) sundry creditors, (b) Bank account, (c) outstanding wages and (d) prepaid insurance represents personal accounts.


Reason : Journal entry of wages paid for construction of building. Rs. Rs.Building account Dr. 90,000 To cash account 90,000

Other entries given in (a), (b), (c) and (e) are not correct because, the affected aspects of the transaction are debit aspect building and credit aspect – cash

13. Answer : (a) < TOP >

Reason : The nominal accounts record the actual expenses paid during the accounting period. The expenses which have fallen due for payment but have not been paid are the accrued expenses or outstanding expenses. The alternative (b) is the reverse of it i.e. these are the expenses which have not fallen due but paid in advance like insurance premium also known as unexpired expenses. The recorded expenses that are apportioned between two or more than two accounting periods (like huge expenditure on advertisement) is deferred expenditure (c) and the alternative (d) Accrued revenue is the portion of an income which has fallen due for receipt but has not yet been received. Capital expenses which increase the earning capacity of an entity and whose benefit yields for more than one accounting period (e) Thus, the alternatives (b), (c), (d) and (e) are not correct.


Reason : FIFO method is based on the assumption that the costs are charged against revenue in the order in which they occur. It means, the first unit in stock is the first unit to be out. The closing inventory consists of the units purchased last. If the prices are rising, goods are issued at lower price and



closing stocks are valued at higher price. It will help to create more profit. Other inventory methods stated in (b), (c), (d) and (e) do not result in higher profits during the period of rising prices.

15. Answer : (b) < TOP >

Reason : Sometimes an amount written off as bad debts may be subsequently recovered and any such recovery must be treated as a windfall and transferred to the profit and loss account as a gain The journal entries passed are :

1. Cash account Dr To Bad debts recovered account2. Bad debts recovered account Dr To Profit and loss account

(a) Debtor’s account is the personal account which had already been closed by way of writing it off as bad debt during the accounting period in which the said amount was treated as non-recoverable.(c) Profit and loss adjustment account is the account meant for affecting the necessary adjustments in the event of detection of errors after finalization of the financial statements.(d) Profit and loss appropriation account is the account which reflects the entries of appropriation/allocation of profit.(e) Provision for discount on debtors is a charge against revenue to meet a known liability (discount) the amount of which cannot be determined with substantial accuracy.

Thus, the recovery of bad debts cannot be debited to any of the above accounts


Reason : The rate of interest payable on calls in advance is 6% per annum.


Reason : Long term investment is not accounted for in the balance sheet at current market value, net realizable value, replacement cost or present value of future cash flows. It is done at historical cost. Thus (a) is correct.


Reason : Discount on issue of shares appears under the head miscellaneous expenditure on the asset side of the balance sheet. Bill discounted amount will be debited in the cash book. Prepaid expenses and income tax paid in advance appear under current assets of the balance sheet. Directors’ remuneration will be entered in the debit side of profit and loss account. Hence (d) is correct.


Reason : Bills receivable is a part of fund and conversion of bill receivable into cash cannot be considered as source of fund. The sale of an asset, issue of shares, borrowing from banks and operating profits are sources of funds.


Reason : Year Profit

(Rs.)Weight Total (Profit x Weight) Rs.

1998-1999 1,32,000 1 1,32,000



1999-2000 2,44,000 2 4,88,0002000-2001 2,74,000 3 8,22,0002001-2002 3,15,000 4 12,60,0002002-2003 3,32,000 5 16,60,000

Total 15 43,62,000 Weighted average profit = = Rs.2,90,800


Reason : According to section 78 of the Companies Act, the share premium amount cannot be used for the purpose of writing off losses of the company. Hence, (b) is correct. It can be used for the purpose of issue of fully paid bonus shares, writing off preliminary expenses or commission or discount on issue of shares. It can also be used for providing premium payable on redemption of preference shares or debentures of the company.


Reason : The three column cash book is a refinement over single column cash book and double column cash book. Under three column cash book an additional column for discount is included on either side. Thus, it represents cash column-real account, Bank column-personal account and discount column-nominal account. The other alternatives (a) single column represents real account there is no cash book where only personal accounts (c) are represented. In some business organizations a cash book with bank column is maintained due to convenience where real and personal accounts (e) are reflected. The three column cash book represents real, personal and nominal accounts.


Reason : Carriage inward expense is related to the carrying cost of material purchased. If it is incurred for carrying new assets, it should be capitalized to the assets value. Carrying cost relating to sales of products, return outwards and return of unsold goods will not be treated as carriage inward expenses. Hence, (a) is correct.


Reason : In double entry system of book-keeping every business transaction affects two or more than two accounts (a) one account affects debit aspect while the other credit aspect. It does not affect the same account on two different dates (b) nor two sides of the same account (c). It does not affect two accounts on two different dates (d) it does not affect same side of two accounts (e).


Reason : Revenue expenditure is incurred for day to day running of the business. Any item of expenditure which improves the earning capacity of a business entity or the expenditure incurred till the asset is ready for use is capital expenditure. From the viewpoint of this, the customs duty paid in connection with the import of equipment (c) is not revenue expenditure. The expenses mentioned in other alternatives Interest on deposits accepted (a) Annual insurance premium (b) repairs and maintenance (d) Expenditure on assets like paperweight etc. are items of revenue expenditure.

26. Answer : (e) < TOP > Reason : Value of right R = (M – S) = x (Rs.176 – Rs.120)



= x Rs.56 = Rs.14


Reason : An amount of Rs.7,500 ( i.e credit sale) was not recorded on credit side and Rs. 5,700 was wrongly recorded on debit side. Hence, the debit side will be more by Rs.13,200 (i.e 7,500 + 5,700) Mr. Gupta’s account is correctly debited with Rs. 7,500 and hence will not affect the trial balance


Reason : Purchases account is a debit balance and purchase returns is a credit balance and the total of purchase returns will be recorded to the credit side of the purchase returns account. Hence (d) is the answer. It is not taken to debit side of purchases returns account. Hence (b) is not the answer. It is not taken to purchases account. Hence (a) and (c) are not the answers. The creditors account will be debited with the amount of purchase returns. Hence (e) is not the answer.


Reason : Average profit = = = Rs.2,07,200

Average profit Rs.2,07,200

Less: Normal rate of return on capital employed 10% on Rs.12,00,000 Rs.1,20,000

Super profit Rs. 87,200


Reason : Amount paid by Mr. Sujit = 30 shares × Rs.2 = Rs.60Therefore, share forfeiture account will be credited by Rs.60.

Part B : Problems1. Mayur Ltd.

Profit & loss a/c for the year ended March 31, 2003

Dr. Cr.

Particulars Rs. Particulars Rs.To Salaries 5,23,000 By Gross profit

(Rs.7,75,000 – Rs.8,000)7,67,000

To Discount allowed 12,000 By Discount received 10,000To Electricity expenses 42,000 By Interest on investment



To Interest on loan Rs. Received 10,000 Paid 25,000 Accrued 2,000 12,000 Add: Outstanding 5,000 30,000 To Telephone expenses 35,000 Add: Outstanding 2,000 37,000 To Bad debts 6,000 Add: Closing provision

6,700

12,700 Less: Opening provision

9,000 3,700

To Depreciation: Plant & Machinery 25,000 Building 52,000 Furniture 13,500 To Loss on sale of furniture 2,000 To Incidental charges 200 To Net profit 48,600

7,89,000 7,89,000Balance Sheet as at March 31, 2003

Liabilities Rs. Assets Rs.Share capital 6,00,000 Fixed assets: General reserve 2,50,000 Building 5,20,000

Profit & loss a/c 48,600 (-) Depreciation (10%) 52,000 4,68,000Secured loans Nil Plant & machinery 2,50,000

Unsecured Loan (12%) 2,50,000 (-) Depreciation (10%) 25,000 2,25,000Accrued Interest on loan 5,000 Furniture & fixtures 2,80,000

Current Liabilities & provisions (-) Sold out 10,000 Current Liabilities: 2,70,000 Sundry creditors 1,00,000 (-) Depreciation 13,500 2,56,500Bills payable 78,000 Investments @ 12% 1,00,000Outstanding expenses Current assets, loans & advances: Telephone expenses 2,000 Current assets: Salaries 10,000 12,000 Closing stock 25,000 Bills receivable 1,12,000 Cash & bank 28,000 (-) Incidental charges 200 27,800 Sundry debtors 1,40,000 (-) Bad debts 6,000 1,34,000 (-) Provision 6,700 1,27,300 Accrued interest on investments 2,000

13,43,600 13,43,600< TOP >



2. Bhavan Construction Company

Machinery Account Dr Cr.Date Particulars Rs.Date Particulars Rs.1.4.1999 To Bank : ( Machine A) 1,00,00031-3-2000 By Depreciation account 22,000 To Bank : (Machine B) 1,20,000 By Balance c/d 1,98,000 2,20,000 2,20,0001-4-2000 To Balance b/d 1,98,00031-03-2001 By Depreciation 34,800 To Bank (Machine C) 1,50,000 By Balance c/d 3,13,200 3,48,000 3,48,0001-4-2001 To Balance b/d 3,13,2001-4-2001 By Part exchange 81,000 To Bank (New Machine) 1,00,000 By Depreciation account

(Working 3) 41,320 To Part exchange 81,00031-03-2002 By Balance c/d 3,71,880 4,94,200 4,94,2001-4-2002 To Balance c/d 3,71,8801-04-2002 By Bank – Insurance claim 1,02,000 By Profit and loss a/c

(Working 4)Loss on machinery destroyed

19,500

31-03-2003 By Depreciation account 25,038 (Working 5) By Balance c/d (Working 6) 2,25,342 3,71,880 3,71,880

Workings:

1. Depreciation of Machine A:

Cost on 01-04-1999 Rs.1,00,000Less : Depreciation – 1999 • 2000 Rs. 10,000 Rs. 90,000Less : Depreciation – 2000-2001 Rs. 9,000Depreciation value Rs. 81,000

2. Cost of new machineCash Rs.1,00,000

Part exchange Rs. 81,000 Rs. 1,81,000 3. Depreciation – for 2001-2002 10% on Rs. (3,13,200 – 81,000 + 1,81,000 = 4,13,200 ) = Rs.41,320

4. Loss of Machine C destroyed

Cost on 01-04-2000 Rs.1,50,000Less: Depreciation – 2000-2001 Rs. 15,000 Rs.1,35,000Less: Depreciation – 2001-2002 Rs. 13,500 Rs.1,21,500



Less: Insurance claim Rs.1,02,000 Loss Rs. 19,500

5. Depreciation for 2002-200310% on Rs. 2,50,380 (3,71,880 – 1,21,500) = Rs.25,0386. The depreciated value of machinery as on 31-03-2003Machine B = Rs.1,20,000 (0.9) (0.9) (0.9) (0.9) = Rs. 78,732Similar type of machine A = Rs.1,81,000 (0.9) (0.9) = Rs.1,46,610 =Rs. 2,25,342

< TOP >

3.

Sathya Steel Ltd:

Value of shares

Under Intrinsic value method:

Rs. Rs.

Net Assets

Goodwill 1,50,000

Fixed assets 14,00,000

Investments 4,00,000

Current assets 3,70,000

23,20,000

Less Liabilities:

10% Debentures 2,00,000

Fixed deposits 1,00,000

Current liabilities & provisions 3,80,000

10% Preference shares 3,00,000 9,80,000

Funds available for equity shareholders 13,40,000

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4. Dolphin Ltd.

Bank Reconciliation Statement as on March 31, 2003. Particulars Rs. Rs.

Balance as per Cash book (Unfavorable) (Credit) (Overdrawn) 14,370



Add:

iv. Amount misappropriated and wrongly shown as deposited at Bank 3,500

ii. Cheques wrongly debited in pass book. 2,000

vi. Bank overdraft interest charged only in bank pass book. 170

Bank charges debited in the bank pass book 50

i. Cheques deposited but not presented for payment 9,000

vii. Insurance premium directly debited by bank 2,500 17,220 31,590Less :

iii. Cheques issued but not presented for payment 7,650

v. Interest on government securities directly credited in the bank pass book

650 8,300

Balance as per Pass book (Unfavorable) (Debit) (Overdraft) 23,290

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5. Super Power Ltd.Journal Entries Dr. (Rs.) Cr. (Rs.)

Bank a/c. Dr. 30,000 To Share Application a/c. 30,000(Application money received for 5,000 shares @ Rs.6 per share) Share Application a/c. Dr. 30,000 To Equity share capital a/c. 20,000 To Share premium a/c. 10,000(Transfer of application money to share capital a/c and share premium a/c in respect of 5,000 shares)

Share Allotment a/c. Dr. 20,000 To Equity Share capital a/c 20,000(Allotment money of Rs.4 per share due on 5,000 shares) Bank a/c. Dr. 18,800 To Share allotment a/c. 18,800(Allotment money received on 4,700 shares at the rate of Rs.4 per share) Share final call a/c. Dr. 10,000 To Equity share capital a/c. 10,000(Final call of Rs.2 per share due on 5,000 shares) Bank a/c. Dr. 9,200 To Share final call a/c. 9,200(Final call money received on 4,600 shares at the rate of Rs.2 each) Equity share capital a/c. (Rs.10 x 400) Dr. 4,000



To Share forfeiture a/c. (Rs.4 x 300 + Rs.8 x 100)

2,000

To Share Allotment a/c. (Rs.4 x 300) 1,200 To Share final call a/c. (Rs.2 x 400) 800(Forfeiture of 300 shares on which allotment & final call were due and 100 shares on which final call was due)

Bank a/c. (300 x Rs.8) Dr. 2,400 Share forfeiture a/c. (300 x Rs.2) Dr. 600 To Share Capital a/c. 3,000(Re-issue of 300 forfeited shares as fully paid up at Rs.8 per share) Share forfeiture a/c. Dr. 600 To Capital Reserve a/c. 600(Profit on re-issue of 300 forfeited shares transferred to capital reserve)

Workings:

Calculation of Profit on re-issue of 300 shares. Amount forfeited on 300 shares = 300 × Rs.4 (excluding premium amount) Rs.1200Lees: Amount applied for re-issue = 300 × Rs.2 Rs. 600Profit on re-issue of shares Rs. 600

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Part C: Applied Theory6. Even though a trial balance may be in agreement, certain errors might have been committed while recording the transactions. Such errors are referred to as errors not disclosed by Trial Balance. The errors which will not cause a mismatch in the totals of a trial balance are as follows:

a. Omission of the recording of a transaction from the books of accounts: If the withdrawal of goods worth Rs.1,200 by the proprietor is omitted to be recorded in the books, the trial balance will still agree as both the debit and the credit aspects have been omitted to be recorded. b. Recording a transaction at an amount which is totally different from the actual amount: If the purchases of goods worth Rs.7,500 is recorded in the purchase book as Rs.5,700 the error will not cause the trial balance to disagree. c. Compensating errors: These are quite difficult to detect. If a cash discount of Rs.215 allowed to a customer has been posted to the credit of his account as Rs.251 and a cash sale of Rs.2,851 has been posted to sales account as Rs.2,815, then the excess credit caused by the first error would be exactly compensated by the lower credit recorded by the second error and the trial balance will be in agreement. d. Posting of an aspect of a transaction on the correct side of a wrong account: If the amount of Rs.800 received from MN Ltd., a debtor, is posted to the credit of NM Ltd., account, also a debtor, the trial balance totals will still agree, because both are debit accounts and the total effect is the same. e. Recording both aspects of a transaction more than once in the books of accounts: If a sales of Rs.3,500 made to PQR Ltd. is entered in the sales book twice, the error will not cause a mismatch in the totals of the trial balance. f. Errors of principle: If the machinery account is debited for an amount of repair charges incurred for the machinery, the error will not be disclosed by the trial balance. This is because that both machinery account and repairs account are debit accounts and it is a question of principle that repair charges should not be debited to the machinery account. Hence, the total effect will be the same and hence the trial balance will



tally. g. Omission/mistake of extension and carry forward: When an item is omitted or wrong figure is taken while carrying forward to the next pages trial balance will not tally

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7. Differences between Shares and Debentures: a. Share is an ownership security. A shareholder is, to the extent of his holding, the owner of the company.

A debenture is a creditorshift security which makes the debentureholder a creditor of the company. b. Share can be issued at a discount subject to the specifications of section 79 of the Companies Act, 1956.

Debentures on the other hand do not have any such limitations and can be issued at a discount. c. The return to a shareholder is in the nature of dividends which are subject to the company earning profits during the relevant accounting period. Further, a company cannot be forced to pay dividends as the directors may retain the divisible profits for potential investment opportunities. The return to the debentureholder is in the form of interest payments which is a compulsory obligation which will have to be honored even in the face of losses.

d. Shares convertible into debentures cannot be issued while debentures (PCD - partly convertible debentures or FCD - fully convertible debentures) which can be converted into shares at the option of the debentureholders can be issued. e. In the event of dissolution of the company payment to the debentureholders takes precedence over the amount payable to the shareholders.

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8. The following limitations in respect of the position statement i.e. the balance sheet are worth noting: i. Though the balance sheet is claimed to be the statement of all assets and liabilities, still it does not contain certain assets and liabilities. Example: The Efficient Management force is a Human Asset available to the organization and so far no efforts are made to show the human assets under the asset side of the Balance Sheet. Similarly Dissatisfied labor force is a liability to the organization. ii. An investor who wishes to analyze the balance sheet is more concerned with the present and future whereas the balance sheet pertains to a point of time relating to past and therefore may not be quite helpful. iii. Personal judgment plays a great part in determining the figures for the balance sheet. Example: Provision for depreciation, stock valuation, provision for bad debts are more based on the personal judgment and are therefore not free from the bias. iv. Even the audited balance sheets also cannot give a complete seal of accuracy. Deliberate manipulations in the profits, current assets and closing stocks make the balance sheets unreliable. v. The factors which are having vital bearing on the earnings of the organization such as changes in the managerial personnel, cessation of agreements, loss of markets are not disclosed by the balance sheet. vi. Financial statements are based on accounting policies which vary from enterprise to enterprise both within the country and among the countries. The users of financial statements cannot understand them clearly and have comparisons unless the significant accounting policies which have been adopted in preparing the financial statements are disclosed very clearly.



vii. Balance sheet is prepared on a particular date and hence there is every possibility of `Window dressing’.

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