Sl. No. Name Designation - DelE Directorate of · PDF fileCHAPTER 1 ACCOUNTING FOR PAR TNERSHIP FIRMS FUNDAMENT ALS According to Section-4 of the Indian Partnership Act, 1932 : “Partnership

[1] [Class XII : Accountancy]

REVIEW TEAM : 2014-15

Sl. No. Name Designation

1. Mrs. Rajni Rawal Govt. Girls Sr. Sec. School No. 1

(Principal) Tagore Garden, Delhi

[Team Leader]

2. Mrs. Rita Rani Gugnani SBV, D-Block, Janakpuri, Deli

(Vice Principal)

3. Mr. Anil Kumar Rajkiya Pratibha Vikas Vidyalaya,

(Lecturer) Sector XI, Rohini, Delhi-85

4. Mr. Rajesh Kumar SBV, Anandvas, Delhi-34

(Lecturer)

1. Remembering – (Knowledge basedSimple recall questions, to knowspecific facts, terms, concepts,principles, or theories; Identify,define, or recite, information)

2. Understanding – (Comprehension-to be familiar with meaning and tounderstand conceptually, interpret,compare, contrast, explain,paraphrase, or interpret information)

3. Application – (Use abstractinformation in concrete situation, toapply knowledge to new situations;Use given content to interpret asituation, provide an example, orsolve a problem)

4. High Order Thinking Skills –(Analysis & Synthesis classify,compare, contrast, or differentiatebetween different pieces ofinformation; organise and/orintegrate unique pieces ofinformation from a variety ofsources)

5. Evaluation and Multi-Disciplinary– (Appraise, judge, and/or justify thevalue or worth of a decision oroutcome, or to predict outcomesbased on values)

TOTAL

ACCOUNTANCY (CODE NO. 055)

Time : 3 hours Max. Marks 70

3 1 2 1 - 20 25%

2 - 1 1 1 20 35%

- 2 1 1 - 16 20%

2 - 1 1 1 16 20%

1 1 1 - - 08 10%

8×1=8 4×3=12 5×4=29 4×6=24 2×8=16 80(23) 100%20

Project

Sl.No. Typology of Questions VSA SA-I SA-II LA-I LA-II Marks %MCQ (3M) (4M) (6M) (8M)(1M)

CONTENTS

Chapter 1

Accounting for Partnership Firms Fundamentals 5

Chapter 2

Goodwill Nature and Valuation 32

Chapter 3

Reconstitution of Partnership 39

Chapter 4

Accounting for Partnership Firms : Admission of a Partner 49

Chapter 5

Retirement/Death of a Partner 74

Chapter 6

Dissolution of a Partnership Firm 93

Chapter 7

Accounting for Share Capital 110

Chapter 8

Accounting for Debentures 147

Chapter 9

Company Accounts–Redemption of Debenture 168

Chapter 1

Financial Statements of a Company 186

Chapter 2

Financial Statement Analysis 201

Chapter 3

Tools for Financial Statement Analysis 203

Chapter 4

Accounting Ratios 212

Chapter 5

Cash Flow Statement 233

Model Papers 298

CHAPTER 1

ACCOUNTING FOR PARTNERSHIP FIRMS

FUNDAMENTALS

According to Section-4 of the Indian Partnership Act, 1932 :

“Partnership is the relations between two or more persons who have agreed to

share the profits of a business carried on by all or any one of them acting for all.”

Features of Partnership

1. There must be at least two persons to form a valid partnership. The maximum

number of partners cannot exceed 10 for carrying on banking business and

20 for other kind of business.

2. Partnership comes into existence by an agreement (either written or oral)

among the partners. The written agreement among the partners is called

Partnership Deed.

3. A partnership can be formed for the purpose of carrying on legal business.

4. An agreement between the partners must be aimed at sharing the profits.

Specific provision in the deed may allow some partners not to bear losses.

5. A partnership can be carried on by all or any one of them acting for all.

Partnership Deed

The partnership deed is a written agreement among the partners which contains

the terms of agreement. A partnership deed should contain the following points :

1. Name and address of the firm as well as partners.

2. Name and addresses of the partners.

3. Nature and place of the business.

4. Terms of partnership.

5. Capital contribution by each partner.

[Class XII : Accountancy] [6]

6. Interest on capital.

7. Drawings and interest on drawings.

8. Profit sharing ratio.

9. Interest on loan.

10. Partner's Salary/commission etc.

11. Method for valuation of goodwill and assets.

12. Accounting period of the firm and duration of partnership.

13. Rights and duties of partners how disputes will be settled.

14. Decisions taken if some partner becomes insolvent.

15. Opening of Bank Account – whereas it will be in the name of firm or partners.

16. Rules to be followed in case of admission & settlement of accounts or

retirement or death of partner.

Benefits of Partnership Deed

(1) Helps to avoid dispute in future.

(2) It is an evidence in the court.

(3) Facilitates functioning of business by avoiding misunderstanding.

Rules applicable in the absence of partnership deed

Profit sharing Ratio Equal

Interest on Capital No Interest on Capital is to be allowed to any

Partner

Interest on Drawings No interest on Drawings is to be charged from

any partner

Salary or Commission to a Partner Not allowed

Interest on loan by a Partner Interest is allowed @ 6% per annum.

Distribution of Profits among Partners

A Profit and Loss Appropriation Account is prepared to show the distribution of

profits among partners as per the provision of Partnership Deed (or as per the provision

of Indian Partnership Act, 1932 in the absence of Partnership Deed). It is an extension

of Profit and Loss Account. It is nominal account.


The Journal Entries regarding Profit and Loss Appropriation Account are as follows:

1. For transfer of balance of Profit and Loss Account

Profit and Loss A/c Dr.

To Profit and Loss Appropriation A/c

(Being net profit transferred to P&L Appropriation A/c)

2. For Interest on Capital

For allowing Interest on capital

1. Interest on Capital A/c

To Partners' Capital/Current A/cs

(Being interest on capital allowed @ % p.a.)

2. For transferring Interest on Capital to Profit and Loss

Appropriation A/c :

Profit and Loss Appropriation A/c Dr.

To Interest on Capital A/c

(Being interest on capital transferred to P&L Appropriation A/c)

3. For Salary or Commission payable to a partner

i. For allowing Salary or Commission to a partner :

Partners Salary/Commission A/c Dr.

To Partner's Capital/Current A/cs

(Being salary/commission payable to a partner)

ii. For transferring Partner's Salary/Commission A/c to Profit and Loss

Appropriation A/c :


To Partner's Salary/Commission A/c

4. For transfer of Reserves :


To Reserve A/c

(Being reserve created)


5. For Interest on Drawings:

1. For charging interest on a partner's drawings :

Partner’s Capital/Current A/c. Dr.

To Interest on Drawings A/c

(Being interest on drawings charged @ —% p.a.)

2. For transferring Interest on drawings to Profit and Loss

Appropriation A/c : Dr.

Interest on Drawings A/c

To Profit and Loss Appropriation A/c

(Being interest on drawings transferred to P&L Appropriation A/c)

6. For transfer to Profit (i.e. Credit Balance of Profit and Loss Appropriation

Account


To Partners Capital A/c

(Being profits distributed among partners)

SPECIMEN OF PROFIT AND LOSS APPROPRIATION ACCOUNT

Profit and Loss Appropriation Account

For the year ending on_________________

Dr. Cr.

Particulars L Particulars L

To Interest on Capital : By Profit and Loss A/c

A (Net Profits transferred

B from P & L A/c)

To Partner's Salary/Commission By Interest on Drawings :

To Reserves A

To Profits transferred to B

Capital A/cs of :

A

B


Illustration 1 : Radha and Raman are partners in a firm sharing profits and losses

in the ratio of 5:2. Capital contributed by them is L 50,000 and L 20,000. Radha was

given salary of L 10,000 and Raman L 7,000 per annum. Radha advanced loan of L20,000 to firm without any agreement to rate of interest in deed while in deed rate of

interest on capital was mentioned as 6% p.a. Profits for the year are L 29,400. Prepare

Profit and Loss Appropriation Account for the year ending 31st March 2012.


For the year ending on 31.03.2012

Dr. Cr.


To Interest on Capital By Profit & Loss A/c

Radha 3,000 (Net Profits) 29,400

Raman 1,200 4,200 Less : Interest

To Partner's Salary on Radha's loan 1,200 28,200

Radha 10,000

Raman 7,000 17,000

To Profits transferred to

capital A/c of 5,000

Radha 2,000 7,000

28,200 28,200

When appropriation are more than available profits

In such case available profits are distributed in the ratio of appropriation.

Illustration 2: Ram & Sham are partners sharing profits & losses in ratio of 3:2. Ram

being non-working partner contributes L 20,00,000 as his capital & Shyam being a

working parties, gets a salary of L 8000 per month. As per partnership deed interest is

paid @ 8% p.a. & salary is allowed. Profits before providing that for year ending 31st

March 2014 were L 80,000. Show the distribution of profits.

Profit & Loss Appropriation Account for the year ended 31.3.14

Dr. Cr.


To Ram's Capital A/c 50,000 By Profit & Loss A/c 80,000

(Interest) (Net Profits)

To Shyam's Capital A/c 30,000

(Salary)

80,000 80,000


Working Notes : Interest on capital = 20,00,000 × 8

100= L 1,60,000

Salary = 8000×12 = L 96,000

Total 2,56,000

Ratio of Interest & Salary = 1,600,000 : 96,000 = 5 : 3

Profits share given to Ram =5

80, 0008 = L 50,000

Shyam =3

80, 0008 = L 30,000

Partner’s Capital Accounts

Partner’s Capital Accounts : It is an account which represents the partners interest

in the business.

In case of partnership business, a separate capital account is maintaining for each

partner. The capital accounts of partners may be maintained by any of the following two

methods.

1. Fixed Capital Accounts

2. Fluctuating Capital Accounts

1. Fixed Capital Accounts

Under this method the following two accounts are maintained :

(1) Capital Account

This account will always show a credit balance : Balance of Capital account

remains fixed and only the following two transactions are recorded in the Fixed Capital

Accounts:

• Additional Capital Introduced

• Capital Withdrawn or Drawings out of Capital only


Partner's Capital A/cs

Dr. Cr.

Particulars X (L) Y (L) Particulars X (L) Y (L)

To Cash/Bank A/c By Balance b/d

(Capital Withdrawn) (Opening Cr. Balance)

To Balance c/d By Cash/Bank A/c

(Closing balance) Additional Capital

Introduced

(2) Current Account

The Current account may show a debit or credit balance. All the usual adjustments

such as Interest on Capital, partner's salary/commission, drawings (out of profits), interest

on drawings and share in profits or losses etc. are recorded in this account.

Partner's Current A/cs

Dr. Cr.


To Balance b/d By Balance b/d

(Opening Dr. Balance) (Opening Cr. Balance)

To Drawings By Interest on Capital

(out of Profits) By Partner's Salary or

To Interest on Commission

Drawings

To Profit and Loss A/c By Profit and Loss

(Share in losses) Appropriation A/c

To Balance c/d (Share in Profits)

(Closing credit Balance) By Balance c/d

Closing Dr. Balance

Note :

1. Debit balance of Current Account is shown in Assets side of Balance Sheet.

2. Credit balance of Current Account is shown in Liabilities side of

Balance Sheet.

3. Balance of Capital Accounts are always shown in Liabilities side of Balance

Sheet as this account will always show a credit balance when capital is

fixed.


2. Fluctuating Capital Accounts

In this method only one account i.e., Capital Account of each and every partner is

prepared and all the adjustment such as interest on capital interest on drawings etc. are

recorded in this account under this method, Capital account may show a debit or credit

balance and the balance of this account changes frequently from time to time therefore

it is called fluctuating Capital Account.

Partner's Capital

Dr. Cr.


To Balance b/d By Balance b/d

(Opening Dr. Balance) (Opening Cr. Balance)

To Cash/Bank A/c By Cash/Bank A/c

(Capital Withdrawn) (Additional Capital

To Drawings Introduced)

(out of profits) By Interest on Capital

To Interest on Drawings By Partner's Salary or

To Profit and Loss A/c Commission

(Share in losses) By Profit and Loss

To Balance c/d Appropriation A/c

(Closing credit Balance) (Share in Profits)

By Balance c/d

(Closing Dr. Balance)

Illustration 3 : Amit and Sumit commenced business as partners on 01.04.2011.

Amit contributed L 40,000 and Sumit L 25,000 as their share of capital. The partners

decided to share their profits in the ratio of 2:1. Amit was entitled to salary of L 6,000

p.a. Interest on capital was to be provided @ 6% p.a. The drawings of L 4,000 was

made by Amit and L 8,000 was made by Sumit. The profits after providing salary and

interest on capital were L 12,000.

Draw up the capital accounts of the partners

1. When capitals are fluctuating

2. When capitals are Fixed

Solution :

1. When capitals are fluctuating


Capital Accounts of Amit and Sumit

Dr. Cr.

Particulars Amit Sumit Particulars Amit Sumit

L L L L

To Drawing A/c 4,000 8,000 By Bank A/c 40,000 25,000

(Capital)

To Balance c/d 52,400 22,500 By Salary A/c 6,000

By Interest on 2,400 1,500

capital A/c

By Profit and Loss 8,000 4,000

Appropriation A/c

56,400 30,500 56,400 30,500

When capitals are Fixed

Capital Accounts

Dr. Cr.


L L L L

To Balance c/d 40,000 25,000 By Bank A/c 40,000 25,000

(Capital)

40,000 25,000 40,000 25,000

Current Accounts

Dr. Cr.


L L L L

To Drawing A/c 4,000 8,000 By Salary A/c 6,000 –

To Balance c/d 12,400 – By Interest on 2,400 1,500

capital A/c

By Profit and Loss

Appropriation A/c 8,000 4,000

To Balance c/d – 2,500

(Closing Balance)

16,400 8,000 16,400 8,000


Working Notes : Profits after salary and interest L 12,000

Amit share = 2/3 × 12,000 = 8,000

Sumit share = 1/3 ×12,000 = 4,000

Difference between Fixed Capital Account & Fluctuating Capital Account :

Basis Fixed Capital Account Fluctuating Capital Account

1. No. of Accounts Two accounts for each partner Only one account is maintained

maintained Fixed Capital Account & current for each partner, i.e., capital

Account. Account.

2. Balance change Balance does not change except Balance changes frequently

under specific circumstances from period to period.

(introduction of additional capital

and capital withdrawn)

3. Adjustments All adjustments for drawing All adjustments for drawings,

interest on drawing, interest interest on drawing & capital,

on capital, salary and profit/loss salary, profit/loss are made in

are made in current account. in Capital Accounts.

4. Balance Fixed Capital Account. Capital Fluctuating Capital Account can

Account has credit balance always have debit or credit balance.

However, current account may

have debit or credit balance.

INTEREST ON CAPITAL

Interest on partners capital will be allowed only when it has been specifically

mentioned in the partnership deed. Interest on Capital can be treated as either:

a. An Appropriation of profit; or

b. A charge against profit.

A. Interest on Capital : An Appropriation of Profits :

In case of Losses Interest on Capital is NOT ALLOWED

In cases of Sufficient Profits Interest on Capital is ALLOWED IN FULL

In case of Insufficient Profits Interest on Capital is allowed only to the extent

of profits in the ratio of interest on capital of

each partner.


B. Interest on Capital : As a Charge against Profits :

Interest on Capital is always allowed in full irrespective of amount of profits or

losses.

Illustration 4 : X and Y invested L 20,000 & L 10,000. Interest on capital is

allowed @ 6% per annum. Profits are shared in ratio of 2:3. Profits for year ending

31.3.13 is L 1,500. Show allocation of profits when partnership deed.

(a) Allows interest on capital & deed is silent on treating interest as charge

(b) Interest is charge against profit.

Solution :

(a) When partnership deed is silent on treating interest as a charge.

Profit & Loss Appropriation Account for the year ending 31.3.13

Dr. Cr.


To Interest on Capital By Profit & Loss A/c 1,500

X 1000 (Net Profits)

Y 500 1,500

1500 1500

Working Notes : Interest on X's Capital = 6

20, 000 1200100

Y's Capital = 6

10, 000 600100

Total Interest = 1800

Ratio of Interest = 1200 : 600 = 2 : 1

Interest allowed to partner = Profit × Interest to be given to partner

Total Interest

Interest to X = 1200

15001800

= L 1000


Interest allowed by y = 6001500

1800 = L 500

(b) Interest is charge on profit – In such case full interest will be given & loss

is transferred to partner's capital accounts.

Profit & Loss Appropriation is not prepared in this case instead Profit & Loss

Account is prepared & deficit is treated as loss.

Profit & Loss Account

For the year ending on 31.3.2013

Dr. Cr.


To Interest on Capital By Profit before Interest 1,500

X 1200 By Loss transferred to

Y 600 1800 Capital A/cs

X 120

Y 180 300

1800 1800

(a) In case of Sufficient Profits



(Being interest on capital transferred to P&L Appropriation A/c

(b) In case of Insufficient Profits or Losses

Profit & Loss/Profit and Loss Adjustment A/c Dr.


(Being interest on capital transferred to P&L Adjustment A/c)

Note :

Interest on Capital is always calculated on the OPENING CAPITAL.

If Opening Capital is not given in the question, it should be ascertained as follows:


Particulars (L)

Capital at the End

Add : 1. Drawing xxxxxx

2. Interest on Drawings xxxxxx

3. Losses during the year xxxxxx _____________

Less : 1. Additional Capital Introduced (xxxxxx)

2. Profits during the year (xxxxxx)

Opening Capital ............... (.......................)

Illustration 5 : A and B are partners in business. Their capitals at the end of

year were L 48,000 & L 36,000 respectively. During the year ended March 31st 2014

A’s Drawings and B’s drawings were L 8,000 & L 12,000 respectively. Profits before

charging interest on capital during the year were L 32,000. Calculate Interest on

partners’ capitals @ 10% p.a.

Solution

Statement showing calculation of opening capitals

Particulars A (L) B (L)

Closing Capital 48,000 36,000

Add : Drawings already credited 8000 12,000

56,000 48,000

Less : Profits already credited 16,000 16,000

Opening capitals or capitals in the beginning 40,000 32,000

Interest on Capital @ 10% p.a. 4,000 3,200

For additional capital interest is calculated for period for which capital is utilized

e.g. if additional capital is introduced on 1 April in firm where accounts are closed on

31st December.

Interest = Amount introduced × Rate 9

100 12

As money is utilized for 9 months

INTEREST ON DRAWINGS

Interest on drawings is charged by the firm only when it is clearly mentioned in

Partnership Deed. It is calculated with reference to the time period for which the money

was withdrawn.


Case 1 : When Rate of Interest on Drawings is given in %

Interest on Drawings is calculated with a flat rate irrespective of date of drawing.

Case 2 : When Rate of Interest on Drawings is given in % p.a.

1. When date of Drawings is not given

Interest on Drawing = Total Drawings × Rate 6

100 12

Note : Interest is calculated for a period of 6 months

2. When date of Drawings is given

Interest on Drawing = Total Drawings × Time left after drawings in monthsRate

100 12

Case 3 : When different amount are withdrawn on different date :

We have the following two methods to calculate the amount of Interest on Drawing:

1. Simple Interest Method

In this method, interest on drawing is calculated for each amount of drawing

individually on the basis of periods for which it remained withdrawn.

2. Product Method

In this method, the amounts of drawings are multiplied by the period for

which it remained withdrawn during the period; Interest for 1 month is

calculated on the sum of these products.

We can explain the above mentioned two methods with the help of an example.

Example 6 : Aarushi and Simran are partners in a firm. During the year ended on

31st March, 2014 Aarushi makes the drawings as under :

Date of Drawing Amount (L)

01-08-2013 5,000

31-12-2013 10,000

31-03-2014 15,000

Partnership Deed provided that partners are to be charged interest on drawing @

12% p.a. Calculate the interest chargeable to Aarushi Drawing by using Simple Interest

Method and Product Method.


Solution:

1. Simple Interest Method

Date of Amount of Months till Interest

Withdrawal Drawings (L) March 31, 2014 @ 12% pm(L)

01.08.2013 5,000 08 400

31.12.2013 10,000 03 300

31.03.2014 15,000 00 000

700

2. Product Method

Date of Amount of Months for which Product

Withdrawal Drawings (L) Amount has Withdrawn (L)

till December 31, 2014

01.08.2013 5,000 08 40,000

31.12.2013 10,000 03 30,000

31.03.2014 15,000 00 00000

70,000

Interest on Drawing = Total Product ×Rate 1

100 12 (in months)

= 70,000 × 12 1

100 12 = 700

Case 4 : When an equal amount is withdrawn regularly

Interest on Drawing can be calculated using either Product Method or Direct Method

(i.e. Short Cut Method)

Direct Method will be used only if all the following three conditions are satisfied:

1. Amount should be same throughout the period

2. Date of Drawings should be same throughout the period

3. Drawings should be made regularly without any gap.

4. Interest on Drawing = Total Drawings ×Rate T

100 12

T = Time (in months) for which interest is to be charged

Time left after first drawing + Time left after last drawingT

2


Value of T under Different circumstances will be as under :

Monthly Quarterly Half yearly Monthly

Drawings for Drawings for Drawings for Drawings for

12 Months 12 Months 12 Months 06 Months

(last 6 months)

When drawing 6.5 7.5 9 3.5

are made in

the Beginning

of each period

When drawing 6 6 6 3

are made in

the Middle of

each period

When drawing 5.5 4.5 3 2.5

are made in

the End of

each period

Illustration 7 : Calculate interest on drawings of Mr. X @ 10% p.a. if he withdrew

1000 per month (i) in the beginning of each Month (ii) In the middle of each month

(iii) at end of each month. Total Amount with withdrawn = 1000 × 12 = 12,000.

(i) Interest on drawing = Amount × Rate 6.5

100 12

= 12,000 × 10 6.5

100 12 = 650

(ii) Interest on drawing = Amount × Rate 6

100 12

= 12,000 × 10 6

100 12 = 600

(iii) Interest on drawing = Amount × Rate 5.5

100 12

= 12,000 × 10 5.5

100 12 = 550

Illustration 8 : Calculate interest on drawing of Vimal if the withdrew 48000

in year withdrawn evenly (i) at beginning of each Quarter (ii) in the middle of each

Quarter (iii) at end of each Quarter. Rate of interest is 10% p.a.


Solution :

Case I - Drawing made on beginning of each Quarter

Interest on drawing = Amount × Rate 7.5

100 12

= 48,000 × 10 7.5

100 12 = 3,000

Case II - Drawing made in middle of each quarter

Interest on drawing = Amount × Rate 6

100 12

= 48,000 × 10 6

100 12 = 2,400

Case III - Drawings made at end of each quarter

Interest on drawing = Amount × Rate 4.5

100 12

= 48,000 × 10 4.5

100 12 = 1,800

Similarly Interest can be calculated by following formulae

Half yearly Drawings for year when

(a) Drawings are made in the beginning of each period (half-year)

Interest on drawing Rate 9

Amount100 12

(b) Drawings are made in the middle of each period (half year)


Amount100 12

(c) Drawings are made at the end of each period (half year)


Amount100 12


For monthly drawings for 6 months

(a) Drawings are made in the beginning of each month

Interest Rate 3.5

Amount100 12

(b) When drawings are made in the middle of each month

Interest Rate 3

Amount100 12

(c) When drawings are made at the end of each month

Interest Rate 2.5

Amount100 12

INTEREST ON PARTNERS LOAN

It is a charge against profits. It is provided irrespective of profits or loss. It will

also be provided in the absence of Partnership Deed @ 6% per annum.

The following entries are passed to record the interest on partner's loan

i. For allowing Interest on loan :

Interest on Partner's Loan A/c Dr.

To Partner's Loan A/c

(Being interest on loan allowed @ % p.a.)

ii. For transferring Interest on Loan to Profit and Loss A/c :


To Interest on Loan A/c

(Being interest on loan transferred to P&L A/c)

It is always DEBITED to Profit and Loss A/c

Rent paid to a partner is also a charge against profits and it will also be

DEBITED to Profit and Loss A/c

Illustration 9 : A and B entered into partnership on 1st April, 2010 without any

partnership deed. They introduced capitals of 5,00,000 and 3,00,000 respectively..

On 31st October, 2010, A advanced 2,00,000 by way of loan to the firm without

any agreement as to interest.


The Profit and Loss Account for the year ended 31-03-2011 showed a profit of

4,30,000 but the partners could not agree upon the amount of interest on Loan to

be charged and the basis of division of profits. Pass a Journal Entry for the distribution

of the Profits between the partners and prepare the Capital A/cs of both the partners

and Loan A/C of ‘A’.

Solution :


For the year ending on 31st March, 2011

Dr. Cr.

Particulars Particulars

To Profits transferred to By Profit and

Capital A/c of : Loss A/c

A 2,12,500 Net Profits 4,30,000

B 2,12,500 4,25,000 Less : Int. on

A's Loan 5,000 4,25,000

4,25,000 4,25,000

Dr. Partner’s Capital A/cs Cr.

Date Particulars A B Date Particulars A B

1.3.11 To balance 7,12,500 5,12,500 01.04. By Bank 500000 300000

c/d 2010 A/c

31.03 By Profit

2011 and Loss

Appropria-

tion A/c 2,12,500 2,12,500

7,12,500 5,12,500 7,12,500 5,12,500

Journal

Date Particulars LF. Debit (` ) Credit (` )

31.03.11 Profit and Loss Appropriation A/C Dr. 4,25,000

To A’s Capital A/c 2,12,500

To B’s Capital A/c 2,12,500

(Being profit distributed among the

partners)


A’s Loan A/c

Dr. Cr.

Date Particulars Amount Date Particulars Amount

(` ) (` )

2011 To Balance c/d 2,05,000 2010

March, Oct., 31 By Bank A/c 2,00,000

31 2011

Mar., 31 By interest on

Loan A/c 5,000

2,05,000 2,05,000

Note : Interest on A’s Loan Rate Time left after loan taken

Loan Amount100 12

6 052,00,000

100 12 = 5,000

In absence of partnership deed no interest on capital will be allowed & profits will

be divided equally.

PAST ADJUSTMENTS

If, after preparation of Final Accounts of firm, it is found that some errors or

omission in accounts has occurred than such errors or omissions are rectified in the next

year by passing an adjustment entry.

A statement is prepared to ascertain the net effect of such errors or omissions on

partner’s capital/current accounts in the following manner.

Statement showing Adjustment

Particulars A (` ) B (` ) C (` )

A. Amount to be given credited

* Interest on Capital

(Not allowed or provided at a lower rate)

* Partner’s Salary or Commission etc.

(Omitted to be recorded)

* Actual Profits

(To be distributed in correct ratio)


Total A

B. Amount already given to be taken back

now debited

* Interest on Capital

(If given at a higher rate)

* Interest on Drawings

(If not changed)

* Profits already distributed in wrong ratio

(debited now)

Total B

Net Effect (A–B) +/- +/- +/-

+ Indicates Amount to be Credited to Partner’s Capital Account

– Indicates Amount to be Debited to Partners Capital Account

Journal


Partners Capital A/c Dr.

(Amount to be Debited)

To Partners’ Capital A/c

(Amount to be Credited)

(Bing adjustment entry passed)

During Past : Adjustment it is not compulsory that capital accounts of all

partners are affected. More than one partners Capital Account may be debited or

credited but amount of debit & credit should be equal.

Illustration 10 : Manoj Sahil and Dipankar are partners in a firm sharing profits

and losses equally. The have omitted interest on Capital @ 10% per annum for three

years ended on 31st March, 2011. Their fixed Capital on which interest was to be

calculated throughout were :

Manoj 3,00,000

Sahil 2,00,000

Dipankar 1,00,000

Give the necessary adjusting journal entry with working notes.


Solution:

Books of Manoj, Sahil and Dipankar

Journal


Dipankar’s Current A/c Dr. 30,000

To Manoj’s Current A/c 30,000

(Bing adjustment entry passed)

STATEMENT SHOWING ADJUSTMENT

Particulars Manoj Sahil Dipankar

( ) ( ) ( )

A. Amount to be given (Credited)

Interest on Capital 90,000 60,000 30,000

Total A 90,000 60,000 30,000

B. Amount already given to be taken back

now (Debited) :

Excess Profit taken back from the partners in

their profit sharing ratio 60,000 60,000 60,000

(L 90,000+60,000+30,000=1,80,000)

Total B 60,000 60,000 60,000

Net Effect (A–B) 30,000 Nil 30,000

Credit Debit

Illustration 11 : A and B are partners in a firm sharing profits and losses in the

ratio of 3:2. The following was the Balance Sheet of the firm as on 31.3.2011.

Balance Sheet

As on 31-3-2011

Liabilities Assets

Capitals : Sundry Assets 80,000

A 60,000

B 20,000 80,000

80,000 80,000

The profits 30,000 for the year ended 31-03-2011 were divided between the

partners without allowing interest on capital @ 12% p.a. and salary to A 1,000 per

month. During the year A withdrew 10,000 and B 20,000.


Pass the necessary adjustment entry and show your working clearly.

Solution

Book of A and B

Journal


B’s Capital A/c Dr. 5,280

To A’s Capital A/c 5,280

(Being interest on capital and salary to

A not Charged, now rectified)

Working Notes :

1. Calculation of Opening Capital : As Closing Balance Sheet is given so before

calculation of interest opening capital should be calculated.

Particulars A ( ) B ( )

Capital at the End 60,000 20,000

Add : Drawings 10,000 20,000

70,000 40,000

Less : Profits during the year (18,000) (12,000)

Opening Capital 52,000 28,000

2. Calculation of Net Effect

STATEMENT SHOWING ADJUSTMENT

Particulars A ( ) B ( )

A. Amount to be given (Credited)

Interest on Capital 6,240 3,360

(Not provided)

Salary to A 12,000 —

(Not provided)

Total A 18,240 3.360

B. Amount already given to be taken back now

(Debited) :

Loss to the firm due to Interest on Capital and Salary to

A be debited to the partners in their profit sharing ratio

(L 18,240 + 3,360 = 21,600) 12,960 8,640

Total B 12,960 8,640

NET Effect (A–B) 5,280 5,280

Credit Debit


When interest is less charged

Illustration 12 : Ram, Shyam & Mohan are partners in a firm sharing profits

& losses in the ratio of 2:1:2. Their fixed capitals were 3,00,000, 1,00,000 and

2,00,000 respectively. Interest on capital for the year ending 31st March, 2012 was

credited to them @ 9% p.a. instead of 10% p.a. The profits for the year before

charging interest was 2,50,000. Prepare necessary adjustment entry..

Solution :

Journal

Date Particulars L.F. Debit ( ) Credit ( )

31.3.12 Shyam’s Current A/c Dr. 200

Mohan’s Current A/c Dr. 400

To Ram’s Current A/c 600

(For Interest less charged on

capital now rectified)

Working Notes :

Table Showing Adjustment

Ram Shyam Mohan Total

( ) ( ) ( )

Interest already credited @ 9% 27,000 9,000 18,000 54,000

Interest that should have been credited @ 10% 30,000 10,000 20,000 60,000

Partners less credited 3,000 1,000 2,000 6,000

Debit profits which were reduced

by 6,000 in ratio of 2:1:2 2,400 1,200 2,400 6,000

600 200 400 —

Cr. Dr. Dr. —

When interest charged is more

Illustration 13 : A, B & C are patterns in a firm sharing profits & losses in ratio

of 2:3:5. Their fixed capitals were 15,00,000, 30,00,000 & 60,00,000 respectively..

For the year ended 31st March 2014, interest was credited 12% instead of 10%. Pass

the necessary adjustment entry.


Solution

Journal

Date Particulars L.F. Debit ( ) Credit ( )

31.3.14 C’s Current A/c Dr. 15,000

To A’s Current A/c 12,000

To B’s Current A/c 3,000

(For interest excessive charged

now rectified)

Table Shwing Adjustment

A B C Total

( ) ( ) ( )

Interest already credited @ 12% 1,80,000 3,60,000 7,20,000 12,60,000

Interest that should have been credited @ 10% 1,50,000 3,00,000 6,00,000 10,50,000

Partners over credited with 30,000 60,000 1,20,000 2,10,000

By recovering this interest profits will be

increased by 2,10,000 & divided in 2:3:5 42,000 63,000 1,05,000 2,10,000

Net Effect 12,000 3,000 15,000 —

Cr. Cr. Dr. —

GUARANTEE OF PROFITS TO A PARTNER

Guarantee is an assurance given to the partner of the firm that at least a fixed

amount shall be given to him/her irrespective of his/her actual share in profits of the firm.

If actual share in profits is less than the guaranteed amount in that case the deficit amount

shall be borne either by the firm or by any partner as the case may be.

Note : Guarantee to a partner is given for minimum share in profits. If the actual

share in profits is more than the minimum guaranteed amount then the actual profits will

be allowed to the partner.

Case: 1. When guarantee is given by FIRM (i.e. by all the Partners of the firm)

1. If share in actual profits is less than the guaranteed amount then.

Guaranteed amount to a partner is written in Profit and Loss

Appropriation A/c.

2. Remaining profits are distributed among the remaining partners in the

remaining ratio.


Case 2 : When guarantee is given by a partner or partners to another partner.

1. Calculate the share in profits for the partner to whom guarantee is

given.

2. If share in profits is more than the guaranteed amount, distribute the

profit as per the profit and loss sharing ratio in usual manner.

3. If share in profits is less than the guaranteed amount, find the difference

between the share in profits and the guaranteed amount and the

difference known as Deficiency.

Deficiency is contributed by the partner or partners who guaranteed in

certain ratio and subtracted from his or their respective shares.

Illustration 14 : A and B were partners in a firm sharing profits and losses in

the ratio of 3:2. They admit C for 1/6th share in profits and guaranteed that his share

of profits will not be less then 25,000. Total profits of the firm were 90,000.

Calculate share of profits for each partner when :

1. Guarantee is given by firm.

2. Guarantee is given by A

3. Guarantee is given by A and B equally.

Solution :

Case 1. When Guarantee is given by firm.



Dr. Cr.

Particulars ( ) Particulars ( )

To A’s Capital A/c By Profit and Loss A/c

(3/5 of 65,000) 39,000 90,000

To B’s Capital A/c

(2/5 of 65,000) 26,000

To C’s Capital A/c

(1/6 of 90,000 or

25,000 whichever is more 25,000

90,000 90,000


Case 2. When Guarantee is given by A



Dr. Cr.



(3/6 of 90,000) 45,000 (Net Profits) 90,000

Less : Deficiency

Borne for C (10,000) 35,000


(2/6 of 90,000) 30,000


(1/6 of 90,000) 15,000

Add : Deficiency

Recover from A 10,000 25,000

90,000 90,000

Case 3. When Guarantee is given by A



Dr. Cr.



(3/6 of 90,000) 45,000 (Net Profits) 90,000

Less : Deficiency

Borne for C

(1/2 of 10,000) 5,000 40,000


(2/6 of 90,000) 30,000

Less : Deficiency

Borne for C

(1/2 of 10,000) 5,000 25,000


(1/6 of 90,000) 15,000

Add : Deficiency

Recovered from A 5,000

Deficiency

Recovered from B 5,000 25,000

90,000 90,000


CHAPTER 2

GOODWILL NATURE AND VALUATION

Goodwill places the organization at a good position due to which the organization

is able to earn higher profits without any extra efforts. Goodwill cannot be seen and

touched but felt. Therefore goodwill is called an intangible asset.

Goodwill is divided into two categories.

I. Purchased Goodwill : Purchased goodwill means goodwill for which a

consideration has been paid e.g. when business is purchased the excess of purchase

consideration of its net assets i.e. (Assets - Liabilities) is the Purchased Goodwill

Characteristics

(i) It arises on purchase of a business or brand.

(ii) Consideration is paid for it so recorded in books.

(iii) Shown in balance sheet as on asset.

(iv) It is amortised (depreciated).

(v) Value is a subjective judgement & ascertained by agreement of seller &

purchaser.

II. Self-generated Goodwill also called as inherent goodwill. It is an internally

generated goodwill which arises from a number of factors that a running business possesses

due to which it is also to generate higher profits.

Features

(i) It is generated internally over the years.

(ii) According to AS-26 it is intangible asset & not recorded in books.

(iii) Value depends on subjective judgement of the valuer.

Factors Affecting the Value of Goodwill

1. Efficient management


2. Quality of products

3. Location of business

4. Availability of raw materials

5. Favorable contracts

Need for Valuing Goodwill : Whenever the mutual rights of the partners changes

then party which makes a sacrifice must be compensated. This basis of compensation is

goodwill so we need to calculate goodwill.

Mutual rights change under following circumstances

1. When profit sharing ratio changes

2. On admission of a partner

3. On Retirement or death of a partner

4. When amalgamation of two firms taken place

5. When partnership firm is sold.

Method of valuation of goodwill

1. Average profit method

2. Super profit method

3. Capitalization method

Average Profit Method

The profit earned by a Firm during previous accounting periods on an average basis

is called average profit. Goodwill is calculated on the basis of average profit due to future

expectations of earning capacity of the firm.

Formula for calculation of goodwill

Goodwill = Average Profits × Number of years of purchase

Number of years of purchase means for how many years the firm will earn the

same amount of profits.

Average Profits = Total Profits/Number of years

Illustration 1. (Average Profit Method) : Akansha, Chetna and Dipanshu are

partners in a firm sharing profits and losses in the ratio of 3:2:1. They decide to take


Jatin into partnership from January 1, 2012 for 1/5 share in the future profits. For this

purpose, goodwill is to be valued at 2 times the average annual profits of the previous

four years. The average profits for the past four years were.

Year ( )

2008 96,000

2009 60,600

2010 62,400

2011 84,400

Calculate the value of goodwill.

Formula

Average Profit = Total Profits/No. of Years.

Goodwill = Average Profit × Number of years purchase.

Solution

Year ( )

2008 96,000

2009 60,600

2010 62,400

2011 84,400

Total Profits 3,03,400

Average Profit = Total Profits No. of Years

Average profit = 3,03,400/4 = 75,850

Goodwill = Average Profit × Number of Years of Purchase

Goodwill = 75,850 × 2 = 151,700

Weighted Average Profit Method : In this Method each year’s profit is assigned

a weight. The highest weight is attached to profit of most recent year. Each year profits

are multiplied by assigned weights. Products are added & divided by total number of

weights. Weighted average is multiplied by agreed Number of years of Purchase.

Weighted Average Profit : Total product of profits

Total of weights

Goodwill = Weighted Average Profit × No. of years of purchase.


Illustration : The profits of a firm for the last five years were :

Year 2009 2010 2011 2012 2013

Profits ( ) 45,000 50,000 52,000 65,000 85,000

Calculate the value of goodwill on the basis of two years of purchase of weighted

average profits, the weights to be used are

2009–1, 2010–2, 2011–3, 2012–4 & 2013–5

Solution

Weights

Year Profit ( ) Weights Profit × Weight

2009 43,000 1 43,000

2010 50,000 2 1,00,000

2011 52,000 3 1,56,000

2012 65,000 4 2,60,000

2013 85,000 5 4,25,400

Total 15 9,84,400

Weighted Average Profit = Total product of profits

Total of weights9,84,000

15 = 65,600

Goodwill = Weighted Average Profit × No. of years of purchase

65600 × 2 = 1,31,200

Super Profit Method

Super Profit are the excess of actual profit over normal profits. Where Normal

profits are profits earned by similar business.

If a firm earns higher profit in comparison to normal profit (generally earned by

other firms of same industry) then the difference is called Super Profit. Goodwill is

calculated on the basis of Super profit due to future expectations of earning capacity of

the firm.

Goodwill is calculated by the formula

Goodwill = Super Profit × Number of years of purchase

Super profit = Average profit – Normal profit

Normal Profit = Investment (Capital Employed) × Normal Rate of Return

100


Illustration 2 : (Super Profit Method)

A firm earned net profits during the last three years as :

Year 2008-09 2009-10 2010-11

Profit ( ) 36,000 40,000 44,000

The capital investment of the firm is 1,20,000. A fair return on the capital having

regard to the risk involved is 10%. Calculate the value of goodwill on the basis of three

years purchase of the super profit for the last three years.

Solution :

Average profit : 36,000 40,000 44,000

40, 0003

Normal profit = Capital Employed Normal Rate of Return

100

Normal Profit = 12,000 10

100

= 12,000

Super profit = Average profit – Normal profit

= 40,000 – 12,000 = 28,000

Goodwill = Super profit × number of years purchased

= 28,000 × 3 = 84,000

Capitalised Method

In this method capitalised value of the firm is calculated on the basis of normal rate

of return. Difference between the capitalized value and actual capital employed is called

goodwill.

Capitalised value of the firm Average profits × 100

=Normal rate of return

Capital employed = Total assets – Outside liabilities

Goodwill = Capitalized value – Capital Employed

Illustration 3 (Capitalisation Method) : A earns 1,20,000 as its annual profits,

the rates of normal profit being 10%. The assets of the firm amounted to 14,40,000 and

liabilities to 4,80,000. Find out the value of goodwill by capitalisation method.


Solution :

Capitalised value of the firm Average Profit 100

×Normal Rate of Return

= 1, 20, 000 100

10

= 12,00,000

Capital employed = Total assets – liabilities

= 14,40,000 – 4,80,000 = 9,60,000

Goodwill = Capitalised value – Capital Employed

= 12,00,000 – 9,60,000 = 2,40,000

Illustration 4. (Average profit method) : A and B are partners in a firm. They

admit C into the firm. The goodwill for the purpose is to be calculated at 2 year’s

purchase of the average normal profits of the last three years which were 10,000,

15,000 and 30,000 respectively. Second years profit included profit on sale of

Machinery 10,000. Find the value of goodwill of the firm on C’s Admission.

Solution :

(1) Calculation of Average Profit :

Year ended

1st Year 10,000

2nd Year ( 15,000– 10,000) 5,000

3rd Year 30,000

Total Profits 45,000

Average profitTotal profit 45000

No. of years 3 = 15,000

Goodwill = Average profit × No. of years of purchase

= 15000 × 2 = 30,000

Illustration 5 (Super profit method) : The average net profits expected of a

firm in future are 68,000 per year and capital invested in the business by the firm

is 3,50,000. The rate of interest expected from capital invested in this class of

business is 12%. The remunerating of the partners is estimated to be 8,000 for the

year. You are required to find out the value of goodwill on the basis of two years’

purchase of super profits.


Solution

Average Profit = Average Net Profit – Partner’s remuneration

(i) Average profit = 68,000 – 8,000 = 60,000

(ii) Normal profitCapital employed Normal rate of return

100

= 3,50,000 × 12

100= 42,000

(iii) Super Profit = Average profit – Normal profit

= 60,000 – 42,000 = 18,000

(iv) Value of goodwill = Super profit × No. of years’ purchase

= 18,000 × 2 = 36,000

Illustration 6 : (Super profit method) : On April 1st, 1998 an existing firm

had assets of 75,000 including cash of 5,000. The partners’ capital accounts showed

a balance of 60,000 and reserves constituted the rest. If the normal rate of return

is 20% and the goodwill of the firm is valued at 24,000 at 4 years purchase of super

profits, find the average profits of the firm.

Solution :

(1) Calculation of Normal Profit

Capital employed Normal rate

100

75, 000 20

100

15,000

(2) Calculation of Super Profit :

Goodwill = Super profit × No. of years’ purchase

24,000 = Super Profit × 4

Super Profit = 24, 000

2 = 6,000

(3) Calculation of Average Profit :

Super Profit = Average Profit – Normal Profit

6,000 = Average Profit – 15,000

Average Profit = 6,000 + 15,000 = 21,000


CHAPTER 3

RECONSTITUTION OF PARTNERSHIP

Meaning of Reconstruction

Any change in agreement of partnership or profit sharing ratio is called

reconstitution of partnership firm. In following circumstances a partnership firm may

be reconstituted:

1. Change in Profit Sharing Ratio

2. Admission of a partner

3. Retirement/Death of a partner.

CHANGE IN PROFIT SHARING RATIO AMONG THE EXISTING PARTNERS

Meaning : A Change in profit sharing ratio means one or more partners acquires

interest from another partner or partners. Here it share of profit of one or more

partners increases then share of one or more partner decreases to same extent.

When all the partners of a firm agree to change their profit sharing ratio, the ratio

may be changed.

New profit sharing ratio : The ratio in which the partners are to share the

profits in future on reconstitution is known as New profit sharing ratio.

Gaining Ratio : It is the ratio in which the profit sharing ratio of gaining

partners increases. It is calculated by taking difference between New profit

sharing ratio and old profit sharing ratio.

Sacrificing Ratio : It is the ratio in which the profit sharing ratio of sacrificing

partners decreases. It is calculated by taking difference between old profit sharing

ratio and new profit sharing ratio.


Note : If old ratio-new ratio is positive it means sacrifice and if it is negative

it means gain.

Accounting Treatment of Goodwill

In case of change in profit sharing ratio, the gaining partner must compensate the

sacrificing partner by paying the proportionate amount of goodwill.

Illustration 1 : Amit and Kajal were partners in a firm sharing profits in the

ratio of 3:2. With effect from January 1, 2012 they agreed to share profits equally.

For this purpose the goodwill of the firm was valued at 60,000. Pass the necessary

journal entry.

Solution

Old ratio of Amit and Kajal = 3:2

New ratio of Amit and Kajal = 1:1

Sacrifice or Gain

Amit = 3/5 – 1/2 = 6 5 1

– sacrifice10 10 10

Kajal = 2/5–1/2 = 4 5 1

– – gain10 10 10

Journal

Date Particulars L.F. Debit Credit

( ) ( )

2012 Kajal capital A/c Dr. 6,000

Jan. 1 To Amit’s Capital A/c 6,000

(Adjustment for goodwill on change

in profit sharing ratio).

Accounting Treatment of Reserves and Accumulated Profits

Case (i) When reserves and accumulated profits/losses are to be distributed

At the time of change in profit sharing ratio, if there are some reserves or accumulated

profits/losses existing in the books of the firm, these should be distributed to partners in

their old profit sharing ratio.


Journal Entries

(i) For Transfer of Reserves & Accumulated Profits

Reserve A/c Dr.

Profit & Loss A/c Dr.

Workmen’s Compensation Reserve A/c Dr. (Excess of reserves over

Actual Liability

Investment Fluctuation Reserve A/c Dr. (Excess of Reserves over

difference between Book

Value & Market Value)

To old Partner’s Capital or

Current A/c (in old ratio)

(ii) For transfer of Accumulated Losses.

Old Partner’s Capital or Current A/cs Dr. (in old ratio)

To Profit & Loss A/c (Dr. Balance)

To Deferred Revenue Expenditure A/c (e.g. Advertisement

expense)

Illustration 2 : Vaishali, Vinod and Anjali are partners sharing profits in the

ratio of 4:3:2. From April 1, 2011; they decided to share the profits equally. On that

date their book their books showed a credit balance of 3,60,00 in the profit and loss

account and a balance of 90,000 in the General reserve. Record the journal entry

for distribution of these profits and reserves.

Solution :

Journal


( ) ( )

2011 Profit & Loss A/c Dr. 3,60,000

Apr. 1 General Reserve A/c Dr. 90,000

To Vaishali’s Capital A/c 2,00,000

To Vinod’s Capital A/c 1,50,000

To Anjali’s Capital A/c 1,00,000

(Profit and general reserve distributed

in old ratio)

Illustration 3 : Anjun and Kanchan are partner sharing profits and losses in the

ration of 3:2, From April 1, 2011 they decided to share the profits in the ratio of 2:1.


On that date, profit and loss account showed a debit balance of 1,20,000. Record

the Journal for transferring this to partner’s capital accounts.

Solution :

Journal


( ) ( )

2011 Anjun’s capital A/c Dr. 72,000

Apr. 1 Kanchan’s capital A/c Dr. 48,000

To Profit and Loss A/c 1,20,000

(Undistributed losses transferred to

partners’ capital accounts in old ratio)

Case (ii) : When accumulated profits/losses are not be distributed at the time of

change in ratio

Partners may decide that reserves and accumulated profits/losses will not affected

and remains in the books with same figure. In this case, the gaining partner must

Compensate the sacrificing partner by the share gained by him i.e.

Gaining Partner’s Capital A/c Dr.

To Sacrificing Partner’s Capital A/c

Illustration 4 : Keshav, Meenakshi and Mohit sharing profit and losses in the

ratio of 1:2:2, decide to share future profit equally with effect from April 1, 2011. On

that date general reserve showed a balance of 2,40,000. Partners do not want to

distribute the reserves. You are required to give the adjusting entry.

Solution : Keshav ;Meenakshi; Mohit

Old ratio 1/5 : 2/5 : 2/5

New ratio 1/3 : 1/3 : 1/3

Sacrifice or Gain :

Keshav = 1/5 – 1/3 = 3 5 2

– gain15 15 15

Meenakshi = 2/5 – 1/3 = 6 5 1



Mohit = 2/5 – 1/3 = 6 5 1


Journal


( ) ( )

2011 Keshav’s capital A/c Dr. 32,000

Apr. 1 To Meenakshi capital A/c 16,000

To Mohit’s capital A/c 16,000

(Adjustment for General reserve on

change in profit sharing ratio)

Illustration 5 : Neha, Niharika, and Nitin are partners sharing profits and losses

in the ratio of 2:3:4. They decided to change their ratio and their new ratio is 4:3:2.

They also decided to pass a single journal entry to adjust the following without

affecting their book values.

( )

Profit & Loss account 80,000

General Reserve 40,000

Advertisement Suspense A/c 30,000

You are required to give the single journal entry to adjust the above.

Solution :

Profit & Loss Account 80,000

Add : General Reserve 40,000

1,20,000

Less : Advertisement Suspense 30,000

Total amount to be adjusted 90,000

Neha Niharika Nitin

Old ratio 2/9 3/9 4/9

New ratio 4/9 3/9 2/9

Sacrifice or Gain

Neha = 2/9 – 4/9 = 2/9 (Gain)

Niharika = 3/9 – 3/9 = 0 (No change)


Nitin = 4/9 – 2/9 = 2/9 (Sacrifice)

Journal


( ) ( )

Neha’s capital A/c Dr. 20,000

To Nitin’s capital A/c 20,000

(Adjustment for Profit & Loss A/c, General

Reserves and Advertisement Suspense A/c)

Accounting treatment for Revaluation of Assets and Reassessment of Liabilities

on change in Profit sharing ratio :

At the time of change in profit sharing ratio of existing partners, Assets and liabilities

of a firm must be revalued because actual realizable value of assets and liabilities may

different from their book values. Change in the assets and liabilities belongs to the period

prior to change in profit sharing ratio and therefore it must be shared in old profit sharing

ratio.

Revaluation of assets and liabilities may be treated in two ways :

(i) When revised values are to be shown in the books.

(ii) When revised values are not to be shown in the books.

When revised values are to be shown in the books :

In this case revaluation of assets and liabilities is completed with the help of

“Revaluation Account”. This account is also known as “Profit and Loss Adjustment

Account”. All losses due to revaluation are shown in debit side of this account and all

gains due to revaluation are shown in credit side of this account.

Note :

(1) Increase in the value of an Asset and decrease in the value of a liability result

in profit.

Assets A/c Dr.

To Revaluaion A/c

(2) Decrease in the value of any asset and increase in the value of a liability

gives loss.

Revaluation A/c Dr.

To Assets A/c

(iii) For increase in the value of liabilities.

Revaluation A/c Dr.

To Liabilities A/c

(Increase in value of Liability)


(iv) For decrease in the value of Liabilities

Liabilities A/c Dr.

To Revaluation A/c

(Decrease in the value of Liabilities)

(v) When Revaluation account shows profit

Revaluation A/c Dr.

To Partner’s Capital A/c

(Profit credited to Partner’s Capital A/c in old ratio)

(vi) In case of Revaluation Loss.

Partner’s Capital A/c’s Dr.

To Revaluation A/c

(Loss debited to Partner’s Capital A/cs in old ratio)

SPECIMEN/PROFORMA OF REVALUATION ACCOUNT

Revaluation Account

Dr. Cr.


To Assets (individually) By Assets (individually)

Decrease in value increase in value of Asset

To Liabilities increase By Liabilities (individually)

on revaluation Decrease on revaluation

To Unrecorded Liability By Unrecorded asset

To profits transferred to By Loss transferred to partners

partner’s capital A/c Capital A/c (in old ratios)

(in old ratio)

Illustration 6 : Piyush, Puja and Praveen are partners sharing profits and losses in

the ratio of 3:3:2. There balance sheet as on March 31st 2011 was as follows :

Liabilities ( ) Assets ( )

Sundry creditors 48,000 Cash at bank 74,000

Bank Loan 72,000 Sundry debtors 88,000

Capital : Stock 2,40,000

Piyush 4,00,000 Machinery 3,18,000

Puja 3,00,000 Building 4,00,000

Praveen 3,00,000 10,00,000

11,20,000 11,20,000


Partners decided that with effect from April 1, 2011, they would share profits and losses

in the ratio of 4:3:2. It was agreed that :

(i) Stock be valued at L 2,20,000.

(ii) Machinery is to be depreciated by 10%.

(iii) A provision for doubtful debts is to be made on debtors at 5%.

(iv) Building is to be appreciated by 20%.

(v) A liability for L 5,000 included in sundry creditors is not likely to arise.

Partners agreed that the revised value are to be recorded in the books. You

are required to prepare journal, revaluation account, partner’s capital Acounts

and revised Balance Sheet.

Journal


( ) ( )

2011 Revaluation A/c Dr. 56,200

To Stock 20,000

To Machinery 31,800

To Provision for doubtful debts A/c 4,400

(Revaluation of assets)

Building A/c 80,000

Sundry creditor A/c 5,000

To Revaluation A/c 85,000

(Revaluation of assets and liabilities)

Revaluation A/c 28,800

To Piyush’s capital A/c 10,800

To Pooja’s capital A/c 10,800

To Praveen’s capital A/c 7,200

(Profit on revaluation)

Revaluation Account

Dr Cr.


To Stock 20,000 By Building 80,000

To Machinery 31,800 By Sundry creditors 5,000

To Provision for doubtful debts 4,400

To profits distributed


Piyush 10,800

Pooja 10,800

Praveen 7,200 28,800

85,000 85,000

Partner’s Capital A/cs

Particulars Piyush Pooja Praveen Particulars Piyush Pooja Praveen

To balance 410,000 3,10,000 3.07,200 By bal. b/d 4,00,000 3,00,000 3,00,000

c/d By Revaluation 10,800 10,800 7,200

A/c

4,10,800 3,10,800 3,07,200 4,10,800 3,10,800 3,37,200

Balance Sheet

As on April 1, 2011


Sundry creditors 43,000 Cash at bank 74,000

Bank Loan 72,000 Sundry debtors 88,000

Capital account : Less : provision 5% 4,400 83,600

Piyush 4,10,000 Stock 2,20,000

Pooja 3,10,800 Machinery 2,86,200

Praveen 3,07,200 Build in 4,,80,00

10,28,800

11,43,800 11,43,800

When revised values are not to be shown in the books.

Illustration 7 : In Illustration 6, Partners agreed that the revised value of assets and

liabilities are not to be shown in the books. You are required to record the effect

by passing a single journal entry. Also prepare the revised Balance Sheet.

Gain due to revaluation

Building 80,000

Sundry creditors 5,000

Total A 85,000

Less : Loss due to revaluation

Stock 20,000

Machinery 31,800

Provision for doubtful debts 4,400

Total B 56,200


Net gain from revaluation Total (A–B) 28,800

Old Ratio = 3:3:2

New Ratio = 4:3:2

Sacrifice or Gain

Piyush = 3/8–4/9 = –5/72 (Gain)

Pooja = 3/8–3/9 = 3/72 (Sacrifice)

Praveen = 2/8–2/9 = 2/72 (Sacrifice)

Amount to be adjusted :

Piyush = 28,800 × 5/72 = 2,000 Debit

Pooja = 28,800 × 3/72 = 1,200 Credit

Praveen = 28,800 × 2/72 = 800 Credit

Journal


( ) ( )

2011 Piyush’s capital A/c Dr. 2,000

Apr. 1 To Pooja’s capital A/c 1,200

To Praveen’s capital A/c 800

(Adjustment for profit on revaluation)

Capital Accounts

Particulars Piyush Pooja Praveen Particulars Piyush Pooja Praveen

To Pooja’s 1,200 – – By Balance b/d 4,00,000 3,00,000 3,00,000

To Praveen By Piyush’s

Capital A/c 800 – – Capital A/c – 1,200 800

To Balance c/d 3,98,000 3,01,200 3,09,800

4,00,000 3,01,200 3,00,800 4,00,000 3,01,200 3,00,800

Balance Sheet

As on April 1, 2001

Balance Sheet of Vijay, Vivek and Vinay

Abilities Assets

Sundry Creditors 48,000 Cash at bank 74,000

Bank Loan 72,000 Sundry Debtors 88,000

Capital account: Stock 2,40,000

Piyush 3,98,000 Machinery 3,18,000

Puja 3,01,200 Building 4,00,000

Praveen 3,00,800

10,10,000

11,20,000 11,20,000


CHAPTER 4

ACCOUNTING FOR PARTNERSHIP FIRMS :

ADMISSION OF A PARTNER

Meaning

When a new partner is admitted in a running business due to the requirement of

more capital or may be to take advantage of the experience and competence of the newly

admitted partner or any other reason, it is called admission of a partner in partnership

firm.

According to section 31(1) of Indian partnership Act, 1932, “A new partner can be

admitted only with the consent of all the existing partners”

At the time of admission of new partner, following adjustments are required :

1. Calculation of new profit sharing ratio and sacrificing ratio.

2. Accounting treatment of Goodwill.

3. Accounting treatment of accumulated profit, reserves and accumulated losses.

4. Accounting treatment of revaluation of assets and reassessment of liabilities.

5. Adjustment of capital in new profit sharing ratio.

1. Calculation of new profit sharing ratio

Following types of problems may arise for the calculation of new profit sharing

ratio.

Case (i) When old ratio is given and share of new partner is given.

Illustration 1 : (When new partner acquires his share from old partners in their

old ratio).

A and B are partners in a firm sharing profits and losses in the ratio 1:2. They

admitted C into the partnership and decided to give him 1/3rd share of the future profits.

Find the new ratio of the partners. (CBSE 2003)


Solution :

(i) Calculation of Sacrifice Share :

A’s sacrifice = 1/3 of 1/3 = 1/9

B’s sacrifice = 2/3 of 1/3 = 2/9

Sacrificing Ratio = 1/9 : 2/9 = 1:2

which is equal to old ratio

(ii) Calculation of new Profit sharing Ratio :

New share = Old share – Sacrifice share

A’s new share = 1/3 – 1/9 = 3 – 1/9 = 2/9

B’s new share = 2/3 – 2/9 = 6 – 2/9 = 4/9

C’s new share = 1/9 + 2/9 = 3/9

New ratio among A, B and C : 2/9 : 4/9 : 3/9 = 2:4:3 respectively

Note : Unless agreed otherwise, it is presumed that the new partner acquires his share

in profits from the old partners in their old profit sharing ratio.

Alternative Method :

Old Ratio = A : B

1 : 2

Left the profit of the firm = 1

C’s share (New Partner) = 1/3

Remaining Profit = 1–1/3 = 2/3

Now this profit 2/3 will be divided

between the old partners in their old ratio i.e., 1:2

A’s new Profit = 1/3 of 2/3 = 1/3 × 2/3 = 2/9

B’s new Profit = 2/3 of 2/3 = 2/3 × 2/3 = 4/9

C’s profit = 1/3 or 1/3 × 3/3 = 3/9

Hence the new ratio = 2:4:3

Note : In this case only New Partners share is given then

Sacrificing ratio = Old Ratio

= 1 : 2 there is not need to calculate it


Case (ii) When new partner acquires his/her share from old partners in agreed

share.

Illustration 2 : (When new partner acquires his share from old partners in

agreed share) L and M are partners in a firm sharing profits and losses in the ratio

of 7:3. They admitted N for 3/7th share which he takes 2/7th from L and 1/7 from

M Calculate the new profit sharing ratio. (CBSE 1999 Compt., 2001, 2003).

Solution

(i) As sacrifice share of old partners are given in the question itself, hence there

is no need to calculate it.

(ii) Calculation of New profit sharing ratio :

New share = old share – sacrifice share

L’s new share = 7/10 – 2/7 = 49 – 20/70 = 29/70

M’s new share = 3/10 – 1/7 = 21 – 10/70 = 11/70

N’s new share = 2/7 + 1/7 = 3/7 (given)

New ratio among L, M and N = 29/70 : 11/70 : 3/7 = 29:11:30/70 = 29:11:30

Case (iii) When new partner acquires his/her share from old partners in

certain ratio.

Illustration 3 : X and Y are partners in a firm sharing profit and losses in the

ratio of 3:2 Z is admitted as partner in the firm for 1/6th share in profits. Z acquires

his share from X and Y in the ratio of 2 : 1 Calculate new profit sharing ratio of

partners. (CBSE 2003)

Solution :

(i) Calculation of Sacrifice share :

Given sacrificing Ratio = X : Y 2:1,

therefore,

X’s sacrifice = 2/3 of 1/6 = 2/18

Y’s sacrifice = 1/3 of 1/6 = 1/18

(ii) Calculation of New Profit Sharing Ratio :



X’s new share = 3/5 – 2/18 = 54 – 10/90 = 44/90

Y’s new share = 2/5 – 1/18 = 36 – 5/90 = 31/90

Z’s new share = 2/168 + 1/18 or 1/6 (Given)

New ratio among X, Y and Z = 44/90:31/90:1/6 = 44:31:15/90 = 44:31:15

Case (iv) When new partner acquires his/her share from old partners as a

fraction of their share.

Illustration 4 : (When new partner acquires his share from old partners as a

fraction of their share).

A and B are partners in a firm sharing profit and losses in the ratio of 5:3. A

surrenders 1/5th of his share, whereas B surrenders 1/3 of his share in favour of C,

a new partner. Calculate the new profit sharing ratio. (CBSE 2003, AI 2004)

Solution :

(i) Calculation of sacrifice share

A sacrifices 1/5 of his share i.e. 1/5 of 5/8 = 1/8

B sacrifices 1/3th of his share i.e. 1/3 of 3/8 = 3/24 or 1/8

(ii) Calculation of New profit sharing Ratio

New share = Old share – sacrifice share

A’s new share = 5/8 – 1/8 = 4/8

B’s new share = 5/8 – 1/8 = 2/8

C’s new share = 1/8 + 1/8 = 2/8

New ratio among A, B and C = 4/8:2/8:2/8 = 4:2:2/8 = 2:1:1

Case (v) When new partner does not acquire his/her share from all partners.

Illustration 5. (When new partner does not acquire his share from all partners)

A, B and C are partners sharing profits in the ratio of 3:2:1. They admit D for 1/6

share. C would retain his old share. Calculate new ratio of all partners.

(CBSE 2002 Compt.)

Solution :

(i) Calculation of sacrifice share : (Only A and B sacrifice in ratio of 3 :2)

(ii) A’s sacrifice = 3/5 of 1/6 = 3/30 or 1/10


B’s sacrifice = 2/5 of 1/6 = 2/30 or 1/15

C’s sacrifice = Nil

(iii) Calculation of new profit sharing ratio :


A’s new share = 3/6 – 1/10 = 30 – 6/60 = 24/60

B’s new share = 2/6 – 1/15 = 30 – 6/90 = 24/90

C’s new share = 1/6 – 0 = 1/6

D’s new share = 1/10 + 1/15 = 3 + 2/30 = 5/30 = 1/6

New ratio among A, B, C and D

24/60 : 24/90 : 1/6 : 1/6 = 72 : 48 : 30 : 12 : 8 : 5: 5

12 : 8 : 5 : 5180

Case (vi) When more than one partner is admitted.

Illustration 6. (When more than one partner is admitted simultaneously) : X

and Y are partners sharing profits in the ratio of 3:2. They admit P and Q as new

partners. X surrendered 1/3 of his share in favour of P and Y surrendered 1/4 of his

share in favour of Q. Calculate the new profit sharing ratio of X, Y, P and Q.

(CBSE 2002 Compt.)

Solution :

(i) Calculation of Sacrifice Ratio

X surrenders 1/3 of his share in favour of P = 1/3 × 3/5 = 3/15

Y surrenders 1/4 of his share in favour of Q = 1/4 × 2/5 = 2/30

X’s new share = 3/5 – 3/15 = 6/15

Y’s new share = 2/5 – 2/10 = 6/20

New profit sharing ratio = X : Y : P : Q = 6/15 : 6/20 : 3/15 : 2/20

= 4 : 3 : 2 : 1

2. Accounting Treatment of Goodwill

At the time of admission of a partner, treatment of Goodwill is necessary to

compensate the old partners for their sacrifice. The incoming partner must

compensate the existing partners because he is going to acquire the right to


share future profits and his share is sacrificed by old partners. If goodwill

(Premium) is paid to old partners privately or outside the business by the new

partner then no entry is required in the books of the firm.

There may be different situations about the treatment of goodwill at the time

of the admission of the new partner.

(i) Goodwill (premium) brought in by the new partner in cash and retained

in the business

Illustration 7. (All partners sacrifice) : A and B partners sharing profits and

losses in the ratio of 3:2. They admit C into partnership for 1/4 share in profits. C

brings 3,00,000 as capital and 1,00,000 as goodwill. New profit sharing ratio of

the partners shall be 3:3:2. Pass necessary Journal entries. (CBSE 2003)

Journal


( ) ( )

Bank A/c Dr. 4,00,000

To Premium for Goodwill A/c 1,00,000

To C’s Capital A/c 3,00,000

(Being the amount of goodwill and capital

brought in by new partner C)

Premium for Goodwill A/c Dr. 1,00,000

To A’s capital A/c 90,000

To B’s capital A/c 10,000

(Being the amount of goodwill distributed

between A and B in their sacrificing ratio

i.e., 9 : 1)

Note : Sacrificing = Old ratio – New ratio

A = 3/5 – 3/8 = 24 – 15/40 = 9/40

B = 2/5 – 3/8 = 16 – 15/40 = 1/40

This sacrificing ratio between A and B i.e., 9 : 1.

Illustration 8. (Sacrificing ratio is to be calculate) : A and B are partners in

a firm sharing profits and losses in the ratio of 3:2. C is admitted as a new partner.

A surrenders 1/5 of his share and B 2/5 of his share in favour of C. For purpose of

C’s admission, goodwill of the firm is valued at 75,000 and C brings his share of


goodwill in cash which is retained in the firm’s books. Journalise the above transactions.

(CBSE 2003)

Journal


( ) ( )

Bank A/c Dr. 21,000

To Premium for Goodwill A/c 21,000



Premium for Goodwill A/c Dr. 21,000





i.e., 3 : 4)

Note : (i) Calculation of sacrificing ratio :

A’s sacrifice, 1/5 of his share = 1/5 of 3/5 = 3/25

B’s sacrifice, 2/5 of his share = 2/5 of 2/5 = 4/25

Sacrificing ratio between A and B i.e., 3/25 : 4/25 = 3 : 4

(ii) Calculation of C’s share of profit :

C’s share of profit = 3/25 + 4/25 = 7/25

(iii) Calculation of C’s share of goodwill :

75,000 × 7/25 = 21,000

Treatment of Existing Goodwill shown in the books

If goodwill already shown in the balance sheet, it should be written off by debiting

old partners in their old profits sharing ratio.

Illustration 9. (Existing good to be written off) : A and B are partners in a

firm sharing profits and losses in the ratio of 3:2. They admit C into partnership for

1/5 share. C brings 30,000 as capital and 10,000 as goodwill. At the time of

admission of C, goodwill appears in the balance sheet of A and B at 3,000. New

Profit sharing ratio of partners shall be 5:3:2. Pass necessary entries.


Journal


( ) ( )

Bank A/c Dr. 40,000


To C’s Capital A/c 10,000





To B’s Capital A/c 5,000



i.e., 1 : 1)

A’s Capital A/c Dr. 1,800

B’s Capital A/c Dr 1,200

To Goodwill A/c 3,000

(Being existing goodwill written off

between old partners in their old ratio

i.e., 3:2)

Notes : Sacrificing ratio = Old ratio – New ratio

A = 3/5 – 5/10 = 6 – 5/10 = 1/10

B = 2/5 – 3/10 = 4 – 3/10 = 1/10

Sacrificing ratio between A and B = 1 : 1 i.e., equal.

Case (ii) Premium brought in kind

Illustration 10. (premium brought in kind) : Anubhav and Babita are partners

in a firm sharing profits and losses in the ratio of 3:2. On April 1, 2003 they admit

Deepak as a new partner for 3/13 share in the profits. Deepak contributed the following

assets towards his capital and for his share of goodwill.

Land 90,000, Machinery 70,000 stock 60,000 and debtors 40,000. On the

date of admission of Deepak, the goodwill of the firm was valued at 5,20,000,

which is not appear in the books. Record necessaries journal entries in the books of

the firm. Show your calculations clearly. (NCERT, CBSE 2004 Compt.)


Journal


( ) ( )

Land A/c Dr. 90,000

Machinery A/c Dr. 70,000

Stock A/c Dr. 60,000

Debtors A/c Dr. 40,000

To Premium for Goodwill A/c 1,20,000

(5,20,000×3/13)

To Deepak’s Capital A/c 1,40,000

(Balancing figure)


brought in kind by new partner)

Premium for Goodwill A/c Dr. 1,20,000

To Anubhav’s Capital A/c 72,000

To Babita’s Capital A/c 48,000


between Anubhav and Babita in their

sacrificing ratio i.e., 3 : 2)

Note : Here Sacrificing Ratio = Old Ratio i.e., 3 :2

Case (iii) Amount of goodwill which was brought in by new partner, is withdrawn

by old partners :

In this case one additional Journal entry may be passed :

Old Partners’ Capital A/c Dr.

To Bank/Cash A/c

(Cash withdrawn by old partners)

Case (iv) when the new partner is unable to bring his share of goodwill in cash.

Sometimes the new partner does not bring his share of goodwill in cash. Then his

share of goodwill is calculated and adjusted by the following Journal entry.

New Partners’ Capital A/c Dr.

To old partners Capital A/cs

(in the sacrificing ratio)


Illustration 11 : Neeta and Sumita are partners sharing profits and losses in the ratios

of 2:1. They admit Geeta as a partner for 1/4th Share. Geeta pays 50,000 as

capital but does not bring any amount for goodwill. The goodwill of the new firm

is valued at 36,000. Give Journal entries. (CBSE 1997, 2003)

Solution

Journal


( ) ( )

1. Cash A/c Dr. 50,000

To Geeta’s Capital A/c 50,000

(Being the amount of Capital brought in

cash by the new partner)

2. Geeta’s Capital A/c Dr. 9,000

To Neeta’s Capital A/c 6,000

To Sunita’s Capital A/c 3,000

(Being the amount of new Partner’s share

of goodwill transferred to old Partner’s

Capital A/c in their sacrificing ratio i.e. 2:1;)

Working Note :

(1) As nothing is given about sacrifice etc. except the old ratio and the new

partners share of profit.

Sacrificing Ratio = Old Ratio = 2 : 1

(2) Goodwill of the firm = 36,000

Geeta’s share of profit = 1/4

Geeta’s share of Goodwill = 36,000 Ù 1/4 = 9,000

Case (v) Partly goodwill brought in by new partner :

Illustration 12. (Partly premium brought in cash) : Sheetal and Raman share

profits equally. They admit Chiku into partnership. Chiku pays only 1,000 for

premium out of his share of premium of 1,800 for 1/4 share of profit. Goodwill

Account appears in the books at 6,000. All partners have decided that goodwill

should not appear in the books of the new firm. Journalise. (CBSE : 1997/2003)


Journal


( ) ( )

Bank A/c Dr. 1,000


(Being the amount of goodwill brought in

cash by new partner)


Chiku’s Capital A/c Dr. 800

To Sheetal’s Capital A/c 900

To Raman’s Capital A/c 900

(Being Chiku’s share of goodwill

transferred to sacrificing partners in their

sacrificing ratio i.e., 1:1)

Sheeta’s Capital A/c Dr. 3,000

Raman’s Capital A/c Dr. 3,000


(Being existing goodwill written of

between old partners in their old ratio

i.e., equal)

Case (vi) Gain made by an old partner:

Illustration 13. (Sacrifice/Gain made by an old partner) : Ashok and Ravi were

partners in a firm sharing profits and losses in the ratio of 7:3. They admitted

Chander as a new partner. The new profit ratio between Ashok, Ravi and Chander

will be 2:2:1. Chander brought 24,000 for his share of goodwill.

Pass necessary journal entries for the treatment of goodwill. (CBSE 2000)

Solution :

Journal


( ) ( )

Bank A/c Dr. 24,000



by new partner)



Ravi’s Capital A/c Dr. 12,000

To Ashok’s capital A/c 36,000

(Being the goodwill credited to Ashok’s

capital A/c)

Note : Calculation of sacrifice/gain share of partners(s) :

Sacrificing ratio = Old ratio – New ratio

Ashok = 7/10 – 2/5 = 7 – 4/10 = (3/10)

Ravi = 3/10 – 2/5 = 3 – 4/10 = (–1/10) gain

Being negative result, it shows gain. Since Ravi is gaining equal to 1/10 in the

profits, therefore, he will also compensate Ashok proportionately. For 1/5 share Chander

brought 24,000, therefore, Ravi will compensate Ashok by 12,000 i.e., 24,000 × 5/

1× 1/10.

Case (vii) Hidden Goodwill

Illustration 14 : A an B are partners with capitals of 26,000 and 22,000

respectively. They admit C as partner with 1/4th share in the profits of the firm. C

brings 26,000 as his share of capital. Give journal entry to record goodwill on C’ss

admission. (CBSE 2001 Compt.)

Journal


( ) ( )

Bank A/c Dr. 26,000

To C’s capital A/c 26,000


by new partner)

C’s Capital A/c Dr. 7,500



(Being the goodwill credited to sacrificing

partners’ capital a/cs in their sacrificing

ratio i.e., equal)

Note : (1) Calculation of C’s share of goodwill:

Total capital of new firm no basis of C’s capital i.e., 26,000 × 4/1 = 1,04,000

Total capital of A and B and C i.e., 26,000 + 22,000+ 26,000 = 74,000)


Goodwill of the firm = total capital of new firm – combined capital

= 1,04,000–74,000 = 30.000

Thus C’s share of goodwill = 30,000 × 1/4 = 7,500

(2) In the absence of information, profits will be shared equally.

3. Accounting treatment of Accumulated Profits

Accumulated profits and reserves are distributed to partners in their old profit

sharing ratio. If old partners are not interested to distribute, these accumulated profits are

adjusted in the same manner as goodwill and the following adjusting entry will be passed.

New Partner’s capital A/c Dr. (New share)

To old partner’s capital A/c (Sacrificing ratio)

4. Accounting treatment for revaluation of assets and re-assessment of liabilities

The assets and liabilities are generally revalued at the time of admission of a new

partner. Revaluation Account is prepared for this purpose in the same way was in case

of change in profit sharing ratio. This account is debited with all losses and credited with

all gains. Balance of Revaluation Account is transferred to old partners in their old ratio.

Illustration 15 : Following is the Balance Sheet of Shashi and Ashu sharing

profit as 3 : 2.

Particulars ( ) Assets ( )

Creditors 18,000 Debtors 22,000

General reserve 25,000 Less: Provision for DD 1,000 21,000

Workmens compensation fund 15,000 Land and Building 18,000

Capital : Shashi 15,000 Plant and machinery 12,000

Ashu 10,000 Stock 11,000

Bank 21,000

83,000 83,000

On admission of Tanya for 1/6th share in the profit it was decided that :

(i) Provision for doubtful debts to be increased by 1,500.

(ii) Value of land and building to be increased to 21,000.

(iii) Value of stock to be increased by 2,500.


(iv) The liability of workmen’s compensation fund was determined to be

12,000.

(v) Tanya brought in as her share of goodwill 10,000 in cash.

(vi) Tanya was to bring further cash of 15,000 for her capital.

Prepare Revaluation A/c, Capital A/cs and the Balance Sheet of the new firm.

(CBSE 2001)

Solution :

Revaluation Account

Particulars ( ) Assets ( )

To Provision for D.D. 1,500 By Land and Building A/c 3,000

To Capital A/cs : By Stock 2,500

Shashi 3/5 2,400

Ashu 2/5 1,600 4,000

5,500 5,500

Partners’ Capital Account

Dr. Cr.

Particulars Shashi Ashu Tanya Particulars Shashi Ashu Tanya

To balance c/d 40,200 26,800 15,000 By balance b/d 15,000 10,000 —

By general

reserve 15,000 10,000 —

By workmen’s

compensation

A/c 1,800 1,200 —

By Revaluation

A/c 2,400 1,600 —

By Bank A/c — — 15,000

By Premium

for goodwill 6,000 4,000 —

40,200 26,800 15,000 40,2000 26,800 15,000


Balance Sheet of the New Firm



Less : provision

Work compensation fund1 2,000 for D.D. 2,500 19,500

Capital : Shashi 40,200 Land and Building 21,000

Ashu 26,800 Plant and Machinery 12,000

Tanya 15,000 Stock 13,500

Bank 46,000

1,12,000 1,12,000

Illustration 16 : A, B and C are partners sharing profits and the ratio of 2:3:5.

On 31st March 2001, their Balance Sheet was as follows 44,000


Capital Cash 18,000

A 36,000 Bills receivable 24,000

B 44,000 Furniture 28,000

C 52,000 1,32,000 Stock 44,000


Bill Payable 32,000 Investments 32,000

Profit and Loss Account 14,000 Machinery 34,000

Goodwill 20,000

2,42,000 2,42,000

They admit D int partnership on the following terms :

(i) Furniture and Machinery to be depreciated by 15%.

(ii) Stock is revaluated at 48,000.

(iii) Goodwill to be valued at 24,000.

(iv) Outstanding rent amount 1,800.

(v) Prepaid salaries 800.

(vi) D to bring 32,000 towards his capital for 1/6th share.

Prepare Revaluation Account, Partners Capital Accounts and Balance Sheet of the

new firm. (CBSE 2001)


Solution :


To furniture A/c 4,200 By Stock A/c 4,000

To Machinery A/c 5,100 By Prepaid salaries A/c 800

To Outstanding rent A/c 1,800 By Capital A/c (loss) :

A 2/10 1,260

B 3/10 1,890

C 5/10 3,150 6,300

11,100 11,100

Partners’ Capital Accounts

Particulars A B C D Particulars A B C D

( ) ( ) ( ) ( ) ( ) ( ) ( ) ( )

To Revaluation 1,260 1,890 3,150 — By balance 36,000 44,000 52,000 —

A/c c/d

To Goodwill A/c 4,000 6,000 10,000 — By P/L A/c 2,800 4,200 7,000 —

To A’s capital — — — 800 By D’s — — — —

To B’s capital — — — 1,200 capital 800 1,200 2,000 —

To C’s capital — — — 2,000

To Balance c/d 34,340 41,510 47,850 28,000 By Cash A/c — — — 32,000

39,600 49,400 61,000 32,000 39,600 49,400 61,000 32,000



Creditors 18,000 Cash 50,000

Capital : Bill Receivable 24,000

A 34,340 Furniture 23,800

B 41,510 Stock 48,000

C 47,850 Debtors 42,000

D 28,000 1,51,700 Investment 32,000

Creditors 64,000 Machinery 28,900

Bills Payable 32,000 Prepaid salaries 800

Outstanding rent 1,800

2,49,500 2,49,500


5. Adjustment of Capital in New Profit Sharing Ratio

Illustration 17 : A, B and C are partners sharing profits and losses in the ratio

of 5:3:2. On March 31st, 1998 their Balance Sheet was as follows :


Capital : Cash 18,000

A 36,000 Bills receivable 14,000

B 44,000 Stock 44,000

C 52,000 1,32,000 Debtors 42,000

Creditors 64,000 Machinery 94,000

Bills Payable 32,000 Goodwill 20,000

General Reserve 14,000

2,32,000 2,32,000

They decided to admit D into the partnership on the following terms :

(i) Machinery is to be depreciated by 15%.

(ii) Stock is to be revalued at 48,000.

(iii) Outstanding rent is 1,900.

(iv) D is to bring 6,000 as goodwill and sufficient capital for a 2/5th share

in the capitals of firm.

Prepare Revaluation A/c, Partner’s Capital A/cs, Cash A/c and Balance Sheet of the

new firm. (CBSE 2001 Compt.)

Solution.

Revaluation Account


To Machinery A/c 14,100 By Stock A/c 4,000

To Outstanding Rent 1,900 By Capital A/c (Loss) :

A 5/10 6,000

B 3/10z 3,600

C 2/10 2,400 12,000

16,000 16,000




( ) ( ) ( ) ( ) ( ) ( ) ( ) ( )

To Goodwill 10,000 6,000 4,000 — By Balance 36,000 44,000 52,000 —

A/c b/d

To Revalua- 6,000 3,600 2,400 — By General 7,000 4,200 2,800 —

tion A/c reserve

By Premium 3,000 1,800 1,200

To Balance 30,000 40,400 49,600 80,000 By Cash A/c 80,000

c/d

46,000 50,000 56,000 80,000 46,000 50,000 56,000 80,000

By balance

b/d 30,000 40,400 49,600 80,000

Note: Combined capital of A, B and C for 3/5 (1-2/5) = 1,20,000

Thus total capital of the firm = 1,20,000 × 5/3 = 2,00,000

D’s share of capital = 2,20,000×2/5 = 80,000



Creditors 64,000 Cash 1,04,000

Bill Payable 22,000 Bills receivable 14,000

Outstanding rent 1,900 Stock 48,000

Capital : Debtors 42,000

A 30,000 Machinery 79,900

B 40,400

C 49,600

D 80,000 2,00,000

2,87,900 2,87,900

Illustration 18 : Following is the Balance Sheet of A, B and C sharing profits and

losses in the ratio of 6:5:3 respectively.



Bill Payable 12,600 Debtors 52,920

General reserve 21,000 Stock 58,800


A’s capital 70,800 Furniture 14,700

B’s capital 59,700 Land and Building 90,300

C’s capital 29,100 Goodwill 10,500

2,31,000 2,31,00

They agreed to be take D into partnership giving 1/8th share in profits on the

following terms :

(a) Furniture to be depreciated by 1,840 Stock by 10%

(b) A provision of 2,640 to be made for an outstanding bill for repairs.

(c) That land and building be brought up to 1,19,700.

(d) That the goodwill is valued at 28,140.

(e) That D should bring in 35,400 as his capital and his share of goodwill

(f) After making the above adjustments the capital of old partners be adjusted

in proportion to D’s Capital by bringing in cash or excess to be paid off.

Prepare Revaluation Account, Capital Account of Partners and Balance Sheet of

new firm. (CBSE 1997 Compt.)

Solution :

Revaluation Account


To furniture A/c 1,840 By Land and Building A/c 29,400

To Stock A/c 5,880

To Outstanding repairs A/c 2,640

To capital A/cs :

A 6/4 8,160

B 5/14 6,800

C 3/14 4,080 19,040

29,400 29,400




( ) ( ) ( ) ( ) ( ) ( ) ( ) ( )

To Goodwill 4,500 3,750 2,250 — By Balance 70,800 59,700 29,100 —

A/c b/d

By General 9,000 7,500 4,500 —

reserve

By revaluation 8,160 6,800 4,080 —

A/c

By Premium for 1,508 1,256 754 —

Goodwill A/c

To balance c/d 95,646 79,705 47,823 31,882 By cash A/c 10,678 8,199 11,639 31,882

1,00,146 81,455 50,073 35,400 100,146 83,455 50,073 35,4000

Balance b/d 95,646 79,705 47,823 31,882


Liabilities Assets


Bills Payable 12,600 Debtors 52,920

Outstanding repairs 2,640 Stock 52,920

Capital Furniture 12,860

A 95,646 Land Building 1,19,700

B 79,705

C 47,823

D 31,882 2,55,056

3,08,096 3,08,096

Note: Calculation of New Profit Sharing Ratio :

1. Share given to D = 1/8, Balance of profit = 1–1/8 = 7/8.

Hence, A’s Share = 7/8 × 6/4 = 42/112

B’s Share = 718 × 5/14 = 35/112

C’s Share = 7/8 × 3/14 = 21/112

A : B : C : D

New Ratio : 41/112 : 35/112 : 21/112 : 1/8 = 42: 35 : 21 : 14/112 or 6 : 5:

3 : 2


Capital of D = 35,400 – 35/8 = 31,882

Total capital of Firm = 31882 × 16/2 = 255056

Capital of A = 255056 × 6/16 = 95,646

Capital of B = 255056 × 5/16 = 79705

Capital of C = 255056 × 3/16 = 47,823

2. Calculation of new capital of A, B, and C based on D’s Capital for 1/8 share

is 31,882. Thus

Capital of whole firm = 31,882 × 8/1 = 2,55,056.

Therefore A’s Capital = 2,55,056 × 6/16 = 95,646

B’s Capital = 2,55,056 × 5/16 = 79,705

C’s Capital = 2,55,056 × 3/16 = 47,823.

Illustration 19 : A and B are parents in a firm sharing profits and losses in the

rati of 3:2. Their balance sheet was as follows on 1st January, 1993 :

Liabilities Assets

Sundry Creditors 15,000 Plant 30,000

Capital Patents 10,000

A 30,000 Stock 20,000

B 25,000 55,000 Debtors 18,000

General reserve 10,000 Bank 2,000

80,000 80,000

C is admitted as a partner on the above date on the following terms :

(i) He will pay 10,000 as goodwill for one-fourth share in the profit of

the firm.

(ii) The assets are to be valued as under :

Plant at 32,000; Stock at 18,000; Debtors at book figure less a

provision of 5 percent for bad debts.

(iii) It was found that the creditors included a sum of 1,400 which was not

be paid. But it was also, found that there was a liability for compensation

to workers amount in to 2,000.

(iv) C was to introduce 20,000 as capital and the capitals of other partners

were to be adjusted in the new profit sharing ratio for this purpose,

current accounts were to be opened.


Prepare Revaluation Account, Capital Account and Balance Sheet after

C’s admission. (CBSE 1994)

Solution: A’s share = 3/4 × 3/5 = 9/20 A : B : C

B’s share = 3/4 × 2/6 = 6/20 : 6/20 9/20 : 6/20 : 1/4

C’s share (given) = 1/4 or 9:6:5/20 = 9:6:5

(2) New capital of A and B : Based on C’s capital, the total capital f the firm will

work out i.e.,

C’s capital for 1/4th share = 20,000

Thus the capital of whole firm = 20,000 × 4/1 = 80,000

Therefore, based on their new profit new profit sharing ratio, the capital of A and

B will be.

A’s share of capital = 80,000 × 9/20 = 36,000

B’s share of capital = 80,000 × 6/20 = 24,000

Solution :

Dr. Revaluation Account Cr.


To stock A/c 2,000 By Plant A/c 2,000

To provision for D.D. A/c 900 By Creditors A/c 1,400

To outstanding liability A/c 2,000 By Capital A/c (loss):

A 3/5 900

B 2/5 600 1,500

4,900 4,900

Dr. Capital Account Cr.

Particulars A ( ) B ( ) C ( ) Particulars A ( ) B ( ) C ( )

To Revaluation A/c 900 600 - By Balance b/d 30,000 25,000 -

To Balance c/d 41,100 32,400 20,000 By General 6,000 4,000 -

Reserve

By Bank A/c - - 20,000

By Premium 6,000 4,000 -

42,000 33,000 20,000 42,000 33,000 20,000

To Current A/c 5,100 8,400 -


To Balance c/d 36,000 24,000 20,000 By balance b/d 41,100 32,400 20,000

41,100 32,400 20,000 41,000 32,400 20,000

Dr. Partner’s Current Account Cr.

Particulars A ( ) B ( ) C ( ) Particulars A ( ) B ( ) C ( )

To balance A/c 5,100 8,400 - By Capial b/d 5,100 8,400 –

Balance Sheet

(after C/s admission)

Liabilities Assets

Sundry Creditors 13,600 Plant 32,000

Outstanding liability 2,000 Patents 10,000

Capital A/cs: Stock 18,000

A 36,000 Debtors 18,000

B 24,000 Less ; Provision for

D. D. (900) 17,00

C 20,000 80,000 Bank 32,000

Current A/cs:

A 5,100

B 8,400 13,500

1,09,100 1,09,100

Note : (1) Calculation of new profit sharing ratio

Share given to C=1/4; Balance of Profit = 1-1/4 =3/4

Adjustment of capital on basis of old partners’ calculation of proportionate

capital of New Partners’.

Illustration 20: Sahaj & Nimish are partners in a firm. They share profits &

losses in ratio of 2:1. Since both of them are specially abled sometimes they find it

difficult to run a business so admitted Gauri a common friend decided to help them.

Therefore, they admitted her into partnership for 1/3 share. She brought her share of

goodwill in cash & proportionate capital. At the time her admission Balance Sheet

of Sahaj & Nimish was as under


Liabilities Assets

Capital A/c Machinery 1,20,000

Sahay 1,20,000 Furniture 80,000

Nimish 80,000 2,00,000 Stock 50,000

General Reserve 30,000 Sundry Debtors 30,000


Employees Provident Fund 40,000

3,00,000 3,00,000

It was decided to :

(a) Reduce the value of stock by 5,000

(b) Depreciate furniture by 10% and appreciate machinery by 5%.

(c) 3,000 of the debtors proved bad. A provision of 5% was to be created on

Sundry Debtors for doubtful debts.

(d) Goodwill of the firm was valued at 45,000

Prepare Revaluation Account, Partner’s Capital Accounts and Balance Sheet

of reconstituted firm. Identify the values conveyed.

Solution :



To stock A/c 5,000 By Machinery A/c 6,000

To Furniture 8,000 By Less transferred to 1,400

To Sundry Debtors 3,000 Sahay’s capital A/c 7,567

To prevision for bad debts 1350 Nimish’s capital A/c 5783

530, 000 – 3000

100 11,350

17,350 17,350

Dr. Partner’s capital Accounts Cr.

Particulars ( ) ( ) ( ) Particulars ( ) ( ) ( )

Sahay Nimish Gauri Sahay Nimish Gauri

To Revaluation A/c 7,567 3783 - By Balance b/d 1,20,000 80,000 -

To balance c/d 1,42,433 91,217 1,16825 By General Reserve 20,000 10,000 -

By Premium A/c 10,000 50,00

By Bank A/c 1,16,825

1,50,000 95,000 1,16825 1,50,000 95,000 1,16825


Balance Sheet of New Firm

Liabilities Assets

Capital A/c Machinery 1,26,000

Sahay 1,42,433 Furniture 72,000

Nimish 91,217 Stock 45,000

Gauri 1,16,825 3,50,475 Sundry Debtors 30,000

Creditors 30,000 Less Bad debts 3,000

Employees provident Fund 40,000 Less Provision 1350 25,650

Cash 20,000

Bank 1,31,825

4,20,475 4,20,475

Values conveyed : Friendship, Sympathy.

Working Notes :

Gauri’s share of goodwill = 45000 × 1/3 = 15,000

Total adjusted capital of old partner for 2/3 share = 1,42,433 + 91,217 = 2,33,650

Proportionate capital of Gauri 1/3 share = 2,33,650 × 3/2 × 1/3 = 233650/2 = 1,16,855

Dr. Bank A/c Cr.


To Gauri’s Capital 1,16,825 By balance c/d 1,31,825

To Premium for goodwill 15,000

1,31,825 1,31,825


CHAPTER 5

RETIREMENT/DEATH OF A PARTNER

Retirement of a partner means ceasing to be partner of the firm. A partner may retire

(i) of there is agrement to this effect (ii) all partners give consent (iii) At will by giving

written notice.

Introduction

Like admission and changes in profit sharing ratio in case of retirement or death

also the existing partnership deed comes to an and the new one comes into existence

among the remaining partners. There is not much difference in the accounting treatment

at the time of retirement or in the event of death.

Amount due to Retiring / Deceased

Partner (To be credited to his capital account)

1. Credit Balance of his capital.

2. Credit Balance of his current account (if any).

3. Share of Goodwill.

4. Share of Reserves or Undistributed Profits.

5. His share in the profit on revaluation of assets and liabilities.

6. Share in profits upto the date of Retirement/Death.

7. Interest on capital if involved.

8. Salary if any

Deduction from the above sum (to be debited to the capital account)

1. Debit balance of his current account (if any)

2. Share of existing Goodwill to be written off.

3. Share of Accumulated loss.

4. Drawings and interest on drawings (if any).


5. Share of loss on account of Revaluation of assets and liabilities.

6. His share of business loss upto the date of Retirement/Death

Accounting Treatment

1. Calculation of new profit sharing ratio and gaining ratio

2. Treatment of goodwill.

3. Revaluation a/c preparation with the adjustment in the respect of unrecorded

assets/liabilities.

4. Distribution of reserves and accumulated profits/loss.

5. Ascertainment of share of profit/loss till the date of retirement/death.

6. Adjustment of capital if required.

7. Settlement of the Accounts due to Retired/Deceased partner.

New Profit Sharing Ratio & Gaining Ratio

New Profit Sharing Ratio : It is the ratio in which the remaining partners will share

future profits after retirement/death.

Gaining ratio : It is the ratio in which the continuing partners have acquired the

share from the outgoing partner. Gaining Ratio = New Ratio - Old Ratio.

Calculation of the two ratios.

Following situations may arise

1. When no information about new ratio or gaining ratio is given in the

question

In this case it is considered that the share of the retiring partner is acquired

by the remaining partners in the old ratio. Then no need to calculate the new

ratio/gaining ratio as it will be the same as before.

Example 1: A, B and C are partners sharing profit and loss in the ratio of 3:3:1 then

on retirement of the gaining ratio/new, ratio will be

On A’s Retirement 2 : 1

On B’s Retirement 3 : 1

On C’s Retirement 3 : 2

2. Gaining ratio is given which is different than the old ratio in this case

New share of continuing partner = has old share + gained from the

outgoing partner.


Example 2 : A, B, & C share profit in the ratio 3:2:1. On C’s death his share is taken

by A&B in the ratio of 2:1 Calculate new ratio

Solution : In this case gaining ratio = 2:1 (given)

A’s old share - 3/6, B’s old share = 2/6 & C’s share = 1/6

A’s gain = 2/3 of C’s share 2/3* 1/6 = 2/18

B’s gain = 1/3 of C’s share = 1/3* 1/6 = 1/18

A’s new share = A’s old + A’s gain

= 3/6 + 2/18 = 11/18

B’s new share = B’s old share + B’s gain

= 2/6 + 1/18 = 7/18

New ratio = 11:7

3. If the new ratio is given the Gaining ratio = New Ratio-Old Ratio

Example 3 : A, B, & C are partners in the ratio of 3:2:1 C retires & A & B decide to

share future profit in the ratio of 5:3

Solution. A’s Gain = 5/8- 3/6=3/24

B’s Gain = 3/8-2/6 = 1/24

Gaining ratio = 3:1

Distinction between the Sacrificing and Gaining Ratio

Basic Sacrificing Ratio Gaining Ratio

1. Meaning It is the ratio in which the old It is the ratio in which the

partners surrender a part of their remaining partners acquire

share of profits in favour of a the outgoing partner’s share

new partner. of profit

2. When Calculated At the time of admission of a At the time of retirement or

new partner death of a partner.

3. Formula Sacrificing Ratio = Gaining Ratio = New Ratio

Old Ratio - New Ratio Old Ratio

4. Purpose New partners share of goodwill Retiring or deceased partner’s

| is divided between old partners share of goodwill is paid by

in this ratio. the continuing partners in

this ratio.


TREATMENT OF GOODWILL

According to accounting standards - 10, Goodwill account can’t be raised as only

purchased goodwill is recorded in books. Therefore only adjustment entry is done for

goodwill.

Steps to be followed

1. When old goodwill appears in the books then first of all this is written off

in the old ratio. Remember Old Goodwill Old Ratio.

All Partner’s capital A/c Dr.

To Goodwill A/c

2. After written off old goodwill adjustment of retiring partner’s share of goodwill

will be made through the following journal entry.

Remaining Partner’s Capital A/c Dr. (in gaining ratio)

To Retiring / Deceased Partner’s Capital A/c

Example 4 : M. N. & P are partners in a firm P retires & the goodwill of the

firm is valued at ` 30000. M & N decide to share future profits in the ratio of 3:2.

Pass necessary adjustment entries.

1. If goodwill A/c already appears in the books at `18000

2. When no goodwill A/c appears in the books.

Solution

Old ratio of M, N & P = 1:1:1 (since profit sharing ratio is not given it is treated

as equal) New ratio = 3:2

M’s gain = 3/5 1/3 = 4/15

N’s gain = 2/5 - 1/3 = 1/15

Gaining ratio = 4:1

Ps share of goodwill = 30,000*1/3

= ` 10,000


Journal


M’s Capital A/c Dr. 9000

N’s Capital A/c Dr. 6,000

P’s Capital A/c Dr 6,000


(Being the existing goodwill written off

in old ratio i.e. 1:1:1

M’s Capital A/c Dr. 8,000

N’s Capital A/c Dr. 2,000

To P’s Capital A/c 10,000

(Being adjustment made for goodwill on

retirement in giving ratio i.e. 4:1)

Case 2 : When No goodwill already appears in the books then only second entry

will be done.

Hidden Goodwill

Sometimes goodwill is not given in the question directly, But if a firm agrees to pay

a sum which is more than retiring partner’s balance in capital also after making all

adjustment with respect to reserves, revaluation of assets and liabilities etc. then excess

amount is treated as his share of goodwill (known as hidden goodwill)

Examples 5 : R, S &% are partners in a firm sharing profit & loss in the ratio of

2:2:1. T Retires and his balance in capital a/c after adjustment for reserve & revaluation

of assets & liabilities comes out to be `50000. R &S agree to pay him `60000. Give

journal entry for the adjustment of goodwill.

Solution :

New ratio between R & S = gaining ratio = 2:2 or 1:1

T’s share of goodwill (hidden) = 60000-50000=10000

Hence adjustment entry is

Journal

R’s capital A/c Dr. 5000

S’s capital A/c Dr. 5000

To T’s capital A/c 10000

(T’s share of goodwill adjusted in gaining ratio i.e. 1:1)


3. Revaluation of Assets and Reassessment of Liabilities

Revaluation A/c is prepared in the same way as in the case of admission of

a new partner. Profit and loss on revaluation is transferred among all the

partners in old ratio.

4. Adjustment of Reservation and Surplus (Profits)

(Appearing in the Balance Sheet - Liability Side)

(a) General Reserve A/c Dr.

Reserve Fund A/c Dr.

Profit & Loss A/c (Credit Balance) Dr.

To all partners Capital/Current

A/c (in old ratio)

Example 6 : X, Y and Z are partners in a firm sharing profits and losses in the ratio

of 2:1:1, Y retires on 31st March, 2011. On that date, there was a balance of `24,000

in general reserve and `16,000 in profit and loss A/c of the firm. Give Journal

entries.

Solution

Journal

General Reserve A/c Dr. 24,000

P&LA/c Dr. 16,000

To X’s Cap A/c Dr. 20,000

To Y’s Cap A/c 10,000

To Z’s Cap A/c 10,000

(Reserve & Surplus amount distributed

in old ratio on Y’s retirement)

(b) Specific Funds - If the specific funds such as workmen’s compensation fund

or investment fluctuation fund are in excess of actual requirement, the excess

will be transferred to the Capital A/c in old ratio.

Workmen Compensation Fund A/c Dr.

Investment Fluctuation Funds A/c Dr.

To All Partner’s Cap A/cs

Examples 7 : P, Q and R are partner’s sharing profits and losses in the ratio of 3:2:1.

P retires and on that date there was workmen’s compensation fund amount `30,000


in the Balance Sheet. But actual liability on this account was for `12,000 only on that

date. Give Journal Entry.

Solution

Excess amount in Workmen’s Compensation Fund =

` 30,000 – `12,000 = `18,000 (Cr.).)

This will be transferred to all partner’s Capital A/c in old ratio

Journal Entry

W. Compensation Fund A/c Dr. 18,000

To P’s Cap A/c 9000

To Q’s Cap A/c 6000

To R’s Cap A/c 3000

(Excess amount in Workmen Compensation

Fund capital A/cs in old ratio) is transferred

to parties

(c) For distributing accumulated losses

(i.e. P & LA/c debit balance shown on the Asset side of Balance Sheet) All

partner’s Capital/Current A/c Dr. (in old ratio)

To P& LA/c

Example 8 : A, B and C are equal partners. A retires and on that date there was a

debit balance of L 15,000 in P & LA/c. Give Journal entry.

Solution:


A’s Capital A/c Dr. 5,000

B’s Capital a/c Dr. 5,000


To P&L A/c 15,000

(Loss in P&L A/c written off (in old ratio)

on A’s retirement


Disposal of the Amount Due to the Retiring Partner

The outgoing partners A/c is settled as per the terms of partnership deed. Three

cases may be there as given below-

1. When the retiring partner is paid full amount either in cash or by cheque.

Retiring Partner’s Capital A/c Dr.

To Cash or Bank A/c

2. When the retiring partner is paid nothing in cash then the whole amount due

is transferred to his loan A/c

Retiring Partner’s Capital A/c Dr.

To retiring partner’s Loan A/c

3. When Retiring Partner is partly paid in cash and the remaining amount is

treated Loan.

Retiring Partner’s Capital A/c Dr. (Total Amount due)

To Cash/Bank A/c (Amount Paid)

To Retiring Partner’s Loan A/c (Amount of Loan)

Settlement of Loan of the Retiring Partner

Loan of the retiring partner is disposed off accordingly to the pre decided terms and

conditions among the partners. Normally the Principal amount is paid in few equal

installments. In such cases interest is credited to the Loan A/c on the basis of the

amount outstanding at the beginning of each year and the amount paid is debited to

loan A/c. The following Journal entries are done

a For interest on Loan.

Interest A/c Dr.

To Retiring partner’s Loan A/c

b. For the payment of instalment.

Retiring Partner’s Loan A/c Dr.

To Cash/Bank A/c (including interest)

Example 10 : A, B, and C are partners in a firm. B retires from the firm on 1st Jan

2008. On the date of his retirement L 66, 000 were due to him. It was decided that

the payment will be done in 3 equal yearly installments together with interest @ 10%

p.a. on the unpaid balance, Prepare B’s Loan A/c.


B’s Loan A/c

Date Particulars LF Date Particulars LF

2008 2008 B’s Cap A/c 66,000

Dec 31 Bank A/c Jan 1

(22,000+6600) 28,600 Dec 31 Interest A/c

Balance c/d 44,000 (10% of 66,000) 6,600

2009 72,600 72,600

Dec 31 Bank A/c 26,400 2009 Balance C/d 44,000

Balance c/d 22,000 Jan 1 Interest A/c (10%

of 44,000) 4,400

48,400 48,400

2010 20100

Dec 31 Bank A/c 24,200 Jan 1 Balance b/d 22,000

(Final Payment) Dec 31 Interest A/c 2,200

24,200 10 of 22,000 24,200

Adjustment of Capitals

At the time of retirement /death, the remaining partners may decide to adjust their

capitals in their new profit sharing Ratio. Then

• The sum of their capitals will be treated as the total capital of the new firm

which will be divided in their New Profit Sharing Ratio.

• Excess of Deficiency of capital in the individual capital A/c is calculated.

• Such excess or shortage is adjusted by withdrawal or contribution in cash or

transferring to their current A/cs.

Journal Entries

(a) For excess Capital withdrawn by the Partners

Partner’s capital A/c Dr.

To Cash/Bank A/c

(b) For deficiency, cash will be brought in by the partner

Cash/Bank A/c Dr.


Example 11 : X, Y and Z are partners in a firm sharing profits in the ratio of 2:2:1

X retires and after all adjustments the Capital A/cs of the Y and Z have a balance of


`70,000 and `50,000 respectively. They decided to adjust their capitals in new profit

sharing ratio by withdrawing or bringing cash. Give necessary Journal entries and

show your working clearly.

Solution

The capital of the new firm

= Total Capital of Y and Z after adjustments

= 70,000 + 50,000

= 1,20,000

Y ( ) Z ( )

New Capital based on New Ratio 80000 40,000

i.e. 2:1 (total being 1,20,000)

Existing capital after adjustments 70,000 50,000

Cash is being brought or 10,000 10,000

paid off (brought in) (to be paid)

Journal Entries

Particulars LF. Debit (` ) Credit (` )

1. Bank A/c Dr. 10,000

To Y’s Capital A/c 10,000

(Amount to be brought in by Y)

2. Z’s Capital A/c Dr. 10,000

To Bank A/c 10,000

(Amount to be withdrawn by Z)

Problem 1 : (Preparation of balance sheet of the reconstituted firm) Vijay, Vivek

and Vinay are partners in a firm sharing profits in 2:2:1 ratio, On 31.3.2006 Vivek

retires from the firm. On the date of Vivek’s retirement the balance sheet of the firm

was as follows:

Balance Sheet of Vijay, Vivek and Vinay

Liabilities Assets

Creditors 54,000 Bank 55,200

Bills Payable 24,000 Debtor 12,000

Outstanding Rent 4,400 Less : Provision for

Provision for Legal 12,000 doubtful 800 11,200


Claim Stock 18,000

Capitals : Furniture 8,000

Vijay 92,000 Premises 1,94,000

Vivek 60,000

Vinay 40,000 1,92,000

2,86,400 2,86,400

On Vivek’s retirement it was agreed that :

Premises will be appreciated by 5% and furniture will be appreciated by L 2,000.

Stock will be depreciated by 10%

ii. Provision for bad debts was to be made at 5% on debtors and provision for

legal damages to be made for L 14,400.

iii. goodwill of the firm is valued at L 48,000.

iv. `50,000 from Vivek’s Capital A/c will be transferred to his loan A/c and the

balance will be paid by cheque.

Prepare revaluation a/c, partners Capital A/cs and Balance Sheet of Vijay and

Vinay after Vivek’s retirement. (CBSE 2007 (Outside Delhi)

Solution :



To Stock 1,800 By Premises 9,700

To Provision for legal 2,400 By Furniture 2,000

Claim By Provision For 200

To Profit Transferred doubtful debts

Vijay 3,080

Vivek 3,080

Vinay 1,540 7,400

11,900 11,900


Dr. Capital Account Cr.

Particulars Vijay Vivek Vinay Particulars Vijay Vivek Vinay

Vivek’s Capital 12,800 - 6,400 By Balance b/d 92,000 60,000 40,000

Vivek’s Loan - 50,000 - By revaluation A/c 3,080 3,080 1,540

Bank - 32,280 - By Vijay’s

Capital - 12,800 -

Balance c/d 82,280 - 35,140 By Vinay’s

Capital - 6,400 -

95,080 82,280 41,540 95,080 81,280 41,540

Balance Sheet

As at 31st March 2006

Liabilities Assets

Creditors 54,400 Bank 22,920

Bills Payable 24,000 Debtors

Outstanding Rent 4,400 12,000

Provision for legal claims 14,400 Less provision

Vivek’s Loan 50,000 600 11,400

Vijay’s Capital 82,280 Stock 16,200

Vinay’s Capital 35,140 Furniture 10,000

Premises 2,03,700

2,64,220 2,64,220

Working Note:

1. New Provision of bad debts on debtors (5%) = 5% of `12,000=600 Old

provision `800 as given in the balance Sheet. Excess of `200 is profit and

transferred to revaluation A/c

2. Goodwill of the firm = 48,000 Vivek share = 48,000*2/5= `19,200 will be

given by Vijay & Vinay in Gaining Ratio i.e. 2:1

Goodwill contributed by Vijay = `19200×2/3 = `12800.

Goodwill contributed by Vijay = `19200 ×1/3 = `6,400

3. Vivek’s total amount due on retirement = L 82,280

Less: amount transferred to his loan A/c = `50,000

Amount to be paid by cheque `32,280


DEATH OF A PARTNER

Accounting treatment in the case of death is same as in the case of retirement

except the following:

1. The deceased partners claim is transferred to his executer’s account.

2. Normally the retirement takes place at the end of the Accounting

Period but the death may occur at any time. Hence the claim of

deceased partner shall also include his share or profit or loss, interest

on capital and drawings if any from the date of the last balance

sheet to the date of his death.

3. On death of a partner, the insurance company pays the entire amount

of the sum assured on JLP.

The treatment of profit and JLP will be taken up one by one as follow.

1. Calculation of profits/Loss for the intervening Period.

it is calculated by any one of the two methods given below:

a. On Time Basis : In this method proportionally profit for the time period is

calculated either on the basis of last year’s profit or on the basis of average

profits of last few years and then deceased partner’s share is calculated

based on his share of profits.

Example 1 : A, B and C are partner sharing profits in the ratio of 3:2:1. A dies on

31st July 2011. The profits of the firm for the year ending 31st March 2011 were

`42000. Calculate A’s share for the period from 1st April to 31st July 2011 on the

basis of last year’s profits. Pass necessary journal entry also.

Solution

A’s Profit = Preceding year’s profit × Proportionate Period × Share of A

= `42,000 × 4/12 × 3/6

= `7,000

Journal Entries

Particulars. L.F. Debit (` ) Credit (` )

P&L Suspense A/c Dr. 7,000


(A’s share of profit transferred to his capital A/c)


b. On Turnover or Sales Basis : In this method the profits upto the date of

death for the current year are calculated on the basis of current year’s sales

upto the date of death by using the formula.

Profits for the current year upto the date of death =

(Sales of the current year upto the date of death/total sales of last year) ×

Profit for the last year.

Then from this profit the deceased partner’s share of profit is calculated.

Examples 2 : If in the example-1 given above the sales for the last year are `

2,10,000 and for the current year upto 31st July are say `90,000 then Profits from

Ist April to 31st July 2011.

90, 00042, 000

2,10, 000

= `18,000

A’s share = ` 18,000×3/6 = 9,000

Journal Entry will be

P&L Suspense A/c Dr. 9,000


(Being A’s share of profit till date of his

death transferred to his capital A/c

c. Life Policy : Life policies on the lives of the partners is taken by a firm to

arrange money to settle the account of deceased partner. It may be of two types.

1. Joint Life Policy : It is taken, jointly by the firm on the lives of all the

partners. If any of the partners dies, the insurance company pays whole

of the amount.

2. Individual life policies : Sometimes the firm takes individuals life

policies on the lives of partners instead of one single Joint life policy.

In this case the insurance company pays the full sum assured on the life

policy of the deceased partner only.

Complete question generally asked for 6 marks

Problem 2 (Death of a partner) M, N and 0 were partners in a firm sharing profits

and losses equally.


Their Balance Sheet on 31-12.2009 was as follows:

Liabilities Assets

Capitals :

M 70,000 Plant and machinery 60,000

N 70,000 Stock 30,000

O 70,000 Sundry Debtors 95,000

2,10,000 Cash at Bank 40,000

General Reserve 30,000 Cash in Hand 35,000

Creditors 20,000

2,60,000 2,60,000

N died on 14th March, 2010. According to the Partnership Dead, executers of the

deceased partner are entitle to:

(i) Balance of partner’s capital A/c

(ii) Interest on capital @ 5% p.a.

(iii) Share of goodwill calculated on the basis of twice the average of past three

years profits.

(iv) Share of profits from the closure of the last accounting year till the date of

death on the basis of twice the average of three completed year’s profits

before death. Profits for 2007, 2008 and 2009 were L 80,000, L 90,000, L1,00,000 respectively. Show the working for deceased partner’s share of

goodwill and profits till the date of his death. Pass the necessary journal

entries and prepare N’s Capital A/c to be renderer to his executers.

(CBSE 2011, Delhi)

Solution

Journal


2010 General Reserve A/c Dr. 10,000

14th To N’s Capital A/c 10,000

March (Being transfer of N’s share of general

reserve of his Capital A/c)

Interest on Capital A/c Dr. 700

To N’s Capital A/c 700

(being interest 5% p.a. credited to N’s

Capital A/c upto 14/03.2010)


M’s Capital A/c Dr. 30,000

O’s Capital A/c Dr. 30,000

To N’s Capital A/c 60,000

(Being goodwill adjusted in gaining

ratio i.e. 1:1)

Profit and Loss Suspenses A/c Dr. 12,000

To N’s Capital A/c 12,000

(Being the transfer to N’s share of profit

to his capital A/c)


N’s Capital A/c Dr. 1,52,700

To N’s Executor A/c 1,52,700

(Being the transfer of amount due to N’s

executor A/c)

N’s Capital A/c


To N’s Executors A/c 1,52,700 By Balance b/d 70,000

By General Reserve A/c 10,000

By Interest on Capital A/c

(70,000*5/100*73/365) 700

By M’s Capital A/c 30,000

By O’s Capital A/c 30,000

By Profit & Loss

Suspense A/c

(90,000*2*73/365*1/3) 12,000

1,52,700 1,52,700

Working Note :

1. Calculation of Goodwill

Average profit for 3 years

(`80,000+90,000+1,00,000)/3=90,000

Goodwill of the firm=Average Profit * No. Of year of Purchase = 90,000*2

= `1,80,000

Total N’s Share in Goodwill = 1,80,000*1/3 = 60,000

2. Time from the date of last balance Sheet (31st December, 2009) to the date

of death (14th March, 2010)


= 31 days of January + 28 days of Feb (2010 is not a leap year) + 14 days

of March = 73 days

Payment for deceased : partner payment for deceased partner either in lumpsum

or in instalments.

a. When payment is made in full (lumpsum)

Accounting entry in this case will be

Deceased Partner’s Executor A/c Dr.

To Bank A/c

b. When Payment is made in instalments. When payment is made in instalments

interest is paid on instalments at agreed price or @ 6% per annum

Journal entries are

(i) When interest is allowed

Interest A/c Dr.

To Deceased Partner’s Executor A/c

(ii) When instalment is paid

Deceased partner’s Executors A/c Dr.

To Bank A/c (interest & instalment amount)

Problem 3 : The balance sheet of PQ & R as at 31st Dec.2012 was as follows.

Liabilities Assets

Bills Payable 20,000 Cash at Bank 1,58,000

Employees Provident Fund 50,000 Bills Receivable 8,000

Workmen compensation reserve 90,000 Stock 90,000

Loan 1,71,000 Sundry Debtors 1,60,000

Capital Accounts Furniture 20,000

P 2,27,500 Plant & Machinery 65,000

Q 1,52,500 Building 3,00,000

R 1,20,000 5,00,000 Advertisement Suspense 30,000

8,31,000 8,31,000

The profit ratio was 3:2:1 R died on 30th April 2013. The partnership deed provides

that :


a. Goodwills is to be calculate on the basis of 3 years purchase of preceding 5

years average profits. The profits were 2012. `2,40,000, 2011 `1,60,000,

2010-`2,00,000, 2009 `1,00,000 and 2008 - `50,000.

b. Deceased partner should be given share of profits upto the date of death on

the basis of previous your profits.

c. The assets have been revalued as under

Stock `1,00,000, Debtors `1,50,000, Furniture `15,000. Plant and Machinery

`50,000, Building `3,50,000. A bill for `6000 was found worthless.

d. A sum of `72,330 was paid immediately to R’s executor & balance is paid

in two equal instalments (annual) with interest of 10% p.a on outstanding

amount. Ist instalment was paid on 30th April 2014.

Prepare Revolution account & R’s executor account till it is finally settled. Accounts

are closed on 31st December each year.

Solution



To provision for Doubtful debts 10,000 By Stock 10,000

To Furniture 5,000 By Building 50,000

To Plant & Machinery 15,000

To Bill Receivable 6,000

To profits transferred to

P’s capital A/c 12,000

Q’s Capital A/c 8,000

R’s Capital A/c 4000 24,000

60,000 60,000

Dr. R’s Capital Account Cr.

Date Particulars Date Particulars

30.4.13 To advertisement 1.1.13 By Balance b/d 1,20,000

A/c 1

30, 0006

5,000 By workmen compen-

To R’s Executor A/c 2,22,330 sation reserve 15,000

By Revaluation A/c 4,000

By P’s Capital A/c (Goodwill) 45,000

By Q’s capital A/c (Goodwill) 30,000

By P&L Suspence A/c 13,330

2,27,330 2,27,330


Dr. R’s Executor Account Cr.


30.4.13 To Bank A/c 72,330 30.4.13 By R’s capital A/c 2,22,330

31.12.13 To Balance c/d 1,60,000 31.12.13 By interest A/c 10,000

2,32,3308

10% 1, 50, 00012

on 2,32,330

30.4.14 To Bank A/c 75000 1.1.14 By Balance b/d 1,60,000

+ interest 15,000 90,000 30.4.14 By interest A/c

31.12.14 To Balance c/d 80,000 31.12.1410 4

1, 50, 000100 12

5000

Add10 8

75000100 12

5000 10,000

1,70,000 1,70,000

30.4.15 To Bank A/c 75,000 1.1.15 By Balance b/d 80,000

Add Interest 7,500 82,500 30.4.15 By interest A/c

1075000 4

100

2,500

82,500 82,500

Working Note :

Average Profit – 2,40,000 + 1,60,000 + 2,00,000 + 1,00,000 + 50,000 = `1,50,000

Goodwill = `1,50,000 × 3 = `4,50,00

R’s share = 1

4, 50, 0006

= `75,000

contribution by P&Q in ratio 3:2

P’s share 3

75000 450005

Q’s share 2

7500 30, 0005

R’s share of profits 4 1

2, 40, 00012 6

= `13,330


CHAPTER 6

DISSOLUTION OF A PARTNERSHIP FIRM

Dissolution of a firm : As per Indian Partnership Act, 1932 : “Dissolution of firm

means termination of partnership among all the partners of the firm”. When a firm

is dissolved, the business of the firm terminates. All the assets of the firm are disposed

off and all outsiders’ labilities and partners’ loan and partner capital are paid.

Dissolution of Partnership : Dissolution of Partnership refers to termination of

old partnership agreement (i.e., Partnership Deed) and a reconstruction of the firm.

It may take place on

• Change in profit sharing ratio among the existing partner;

• Admission of a partner; and

• Retirement or Death of partner.

It may or may not result into closing down of the business as the remaining partners

may decide to carry on the business under a new agrement.

Types of dissolution of firms : A Partnership firm can be dissolved in any of the

following ways:

(A) Without the intervention of the court;

(1) When all partners agree to dissolve the firm (Sec.40);

(2) Compulsory Dissolution (Sec. 41)

(i) When all or except but one partner of the firm become insolvent.

(ii) When business of the firm become unlawful.

(3) On the happening of any of the following events : (Sec. 42)

(i) on the insolvency of a partner.

(ii) On the fulfilment of the objective of the firm for which the firm

was formed.

(iii) On the expiry of the (period) for which the firm was formed.


(4) By Notice (Sec. 43) : When the duration of the partnership firm is not

fixed and it is at will of the partners. Any partner by giving notice to

other partners can dissolve the firm.

(B) Dissolution by order of the court (Sec 44) : A court on application by a

partner may order the dissolution of the firm under the following circumstances:

(1) When a partner has become of unsound mind.

(2) When a partner has become permanently incapable of performing his

duties as a partner.

(3) When a partner is found quality of misconduct that may harm the

partnership.

(4) When a partner consistently and deliberately commits breach of

partnership agreement.

(5) When a partner transfer whole of is interest in the business firm to a

third party, without the consent of existing partners.

(6) When the court is satisfied that the partnership firm cannot be carried

on except at a loss.

(7) When the court finds that the dissolution of firm is justified and equitable

ACCOUNTING TREATMENT ON DISSOLUTION

On dissolution of a firm, the following accounts are opened to close the books of

the firm.

• Realisation Account;

• Partner’s Loan Account;

• Partner’s Capital Accounts; and

• Cash or Bank Account.

Realisation Account : It is nominal account opened on the dissolution of a firm

to ascertain the profit or loss on realisation of assets and payment of outsiders

liabilities. This account is closed by transferring the balance (i.e., profit or loss on

realisation) to partner’s capital accounts.


PREPARATION OF REALISATION ACCOUNT

The following Journal Entries are passed :

A. For Closing Assets Accounts:

Realisation A/c Dr.

To sundry Assets A/c

(Being assets transferred to Realisation A/c)

Note :

1. Cash and Bank balance are not transferred to Realisation Account.

2. Asses (tangible and intangible) are transferred to Realisation Account at their

Gross Value

3. Fictitious Asset such as Debit balance of Profit and Loss Account or

Advertisement Suspenses Account etc. are not transferred to Realisation

Account. These are directly debited to partners’ capital accounts in their

profit sharing ratio by passing the following entry:

Partner’s capital A/c Dr.

To Profit and Loss A/c

To Advertisement Suspense A/c

(Being Balance of losses transferred to capital accounts)

4. Provision against assets such as Provision for Depreciation of Provision for

Bad & Doubtful debts etc. are transferred to Realisation Account by passing

a Separate entry:

Provision’s for Bad Debts A/c Dr.

Provision’s for Depreciation A/c Dr.

Joint Life Policy Reserve A/c Dr.

Investment Fluctuation Fund A/c Dr.

Machinery Replacement Reserve A/c Dr.

(Being Provision & Reserves Against Assets transferred to Realisation Account)

B. For Closing Liabilities Accounts :

Sundry Liabilities A/c Dr.


To Realisation A/c

(Being sundry liabilities transferred to Realisation A/c)

Note :

1. Only third parties liabilities/outsiders ‘liabilities are transferred to Realisation

A/c

2. Balance of Partner’s Loan Accounts are not transferred to Realisation Account.

Separate accounts are opened to settle such liabilities.

3. Undistributed profits and reserves are also not transferred to Realisation

A/c These are directly credited to partners’ capital accounts in their profit

sharing ratio by passing the following entry:


General Reserves A/c Dr.

Reserve fund A/c Dr.

Contingency Reserve A/c Dr.

To Partner’s Capital A/cs

(Being balance of undistributed profits transferred to capital accounts)\

4. Provident Fund is a liability on the firm towards employees and hence it is

transferred to Realisation A/c.

*5. If any liability is expected to arise against any fund or reserve e.g., Workmen’s

Compensation Fund, then an amount equal to such liability is transferred to

Realisation A/c and balance, if any, distributed among the partners in their

profit-sharing ratio by passing the following entry.

Workmen’s Compensation Fund A/c Dr.

To Realisation A/c (Liability)

To Partners’ Capital A/cs (Balance, if any)

(Being liability against workmen’s compensation fund transferred to Realisation

A/c and balance Distributed among partners.)

Example. Workmen’s Compensation Funds show in the liability side of Balance

Sheet is L 50,000. At the time of dissolution liability against this fund is estimated

at L 30,000. Pass necessary Journal Entry:


Workmen’s Compensation Fund A/c Dr. 50,000

To Realisation A/c 30,000

To A’s Capital A/cs 10,000

To B’s Capital A/cs 10,000

(Being liability against workmen’s compensation fund transferred to Reahsation

A/c and balance distributed among parties.)

C. For Realisation of Assets (whether recorded or unrecorded)

a. When assets are sold for cash

Cash/Bank A/c Dr.

To Realisation A/c

(Being assets sold for cash)

b. When assets are taken over by any partner.

Partner’s Capital A/c Dr.

To Realisation A/c

(Being assets taken over by any partner)

c. When assets are taken over by any creditor in part of full payment of

his dues:

I. In case of Full Settlement:

i. NO ENTRY is passed for the transfer of assets to the creditor.

ii. NO ENTRY is passed for the payment to creditor

II. In case of Part Settlement:

i. NO ENTRY is passed for the transfer of assets to the creditor.

ii. The agreed amount of asset is deducted from the claims of the

creditors and the balance is paid to him.

Note :

1. If nothing is stated regarding the realisation of any tangible assets then

such assets should be assumed to be realized at Zero.

2. If noting is stated regarding the realisation of any intangible assets like

goodwill, patents, trade marks etc. then it is assumed that such assets have

not realized any amount.


D. For Payment of Liabilities

a. When liabilities are paid in cash

Realisation A/c Dr.

To Cash/Bank A/c

(Being liabilities paid in cash)

b. When liabilities are taken over by any partner

Realisation A/c Dr.


(Being liabilities taken over by a partner)

Note : If nothing is stated regarding the settlement of any outside liability,

then it should be assumed that the amount equal to book value is paid.

E. For Realisation Expenses

a. When expenses are paid by firm and borne by firm:

Realisation A/c Dr.

To Cash/Bank A/c

(Being realization expenses paid in cash).

b. When expenses are paid by any partner and borne by firm :

Realisation A/c Dr.


(Being realization expenses paid by a partner)

c. When expenses are paid by firm (on behalf of any partner) and borne

by an partner.


To Cash/Bank A/c

(Being realization expenses paid on behalf of a partner)

d. When expenses are paid by any partner and borne by same partner:


No Entry

e. When a partner is paid a fixed amount for bearing realization expenses

then: Actual expenses are not be considered;

ii. Realisation A/c Dr. (With Fixed Amount)


(Being realization expenses paid by a partner)

f. When expenses are paid by one partner and borne by another partner;

Partner’s Capital A/c Dr. (Who borne the expenses)

To Partner’s Capital A/c (Who pays the expenses)

(Being realization expenses paid by one partner and borne by another

partner.)

F. For Closing Realisation Account

a. When Realization A/c Discloses profit (in case total of credit side is

more than the total of debit side)

Realisation A/c Dr.

To Partner’s Capital A/cs

(Being profit on realization transferred to partners’ capital A/cs)

b. When Realisation A/c discloses loss (in case total of debit side is more

than the total of credit side)

Partners’ Capital A/c Dr.

To Realisation A/c

(Being loss on realization transferred to partners capital A/cs)

FORMAT OF REALISATION ACCOUNT

Dr. Realisation Account Cr.


To Sundry Assets A/c By Sundry Liabilities A/c

(Excluding cash or bank (Excluding Cr. Balance of

balance, fictitious assets, Dr. P & L A/c, Reserves, Partners’

balance of P & LAc, Dr. Capital / current A/cs, Loan


balance of partner’s Capital/ from Partner and Bank

current A/cs, Loans to partners Overdraft)

To Cash / Bank A/c By Provision on any Assets A/c

(Amount paid for discharging (Such as provision for Depreciation,

Liabilities-recorded and unrecorded Provision for Doubtful Debts, Joint

Life Policy Reserve etc.

To Cash Bank A/c By Cash/Bank A/c

Expenses on Realisation (Amount received on realisation of

assets-recorded and unrecorded)

To Partner’s Capital A/cs By Partners’ Capital A/c

(Liabilities taken over by a (Assets taken over by a partner

commission payable to him or recorded or unrecorded)

any expenses payable to him or

To Partner’ Capital A/cs By partners’ Capital A/cs

(For transferring profit on Realisation) (For transferring loss on Realisation)

PREPARATION OF PARTNERS’ LOAN ACCOUNT

If a partner has given any loan to firm, his loan will be paid

• After payment of all the outside liabilities : but

• Before making any payment to partners on account of capital

Partner’s Loan A/c Dr.

To Cash / Bank A/c

(Being loan of a partner paid)

Dr. Partner’s Loan A/c Cr.


To Cash / Bank A/c By Balance b/d

If the firm has given a loan to any partner then such loan account will show a debit

balance and will appear on the asset side of Balance Sheet of the firm. Such loan

accounts are settled through partner’s capital account by passing the following entry:


Partner’s Loan A/c Dr.

To Partner’s Loan A/c

(Being loan to partner transferred to his Capital A/c)

Preparation of Partner capital Accounts

After the transfer of

• Undistributed profits and reserves

• Profit on Realisation

• Any liability taken over by any partner

And

• Undistributed losses and fictitious assets

• Loss on realisation

• Any assets taken over by any partner

The balance of partners’ capital A/cs are closed in the following manner

a. For making final payment to a partner (if total of credit side is more

than the total of debit side)


To Cash / Bank A/c

(Being excess paid to partner in cash)

b. For any amount received from a partner against debit balance in his

capital account.

Cash/Bank A/c Dr.

To Partner’s Capital

(Being cash brought in by any partner)

Dr. Partner’s Capital A/c Cr.


To Balance b/d By balance bid

(Dr. Balance) (Cr. Balance)

To Profit and Loss A/c By General Reserve A/c


To Advertisement Suspense A/c By Profit and Loss A/c

To Realisation A/c By workmen’s

(Assets taken) Compensation Fund

To Realisation A/c By Realisation A/c

(Loss on Realisation (Liabilities taken)

To Cash/Bank A/c By Realisation A/c

(Excess cash paid) (Profit on Realisation)

By Cash/Bank A/c Cash brought in)

Preparation of Cash or Bank Account

This account is prepared at the end and closed last of all. This account helps in

verification of the arithmetically accuracy of accounts as both sides of this account must

be equal.

Note : If cash and bank balance both are given in the Balance Sheet, one A/c is

prepared, either a Cash A/c or a Bank A/c If Cash A/c is opened, an entry of

withdrawing the bank balance is made:

Cash A/c Dr.

To Bank A/c

(Being cash withdrawn from Bank)

If Bank A/c is opened, an entry for depositing the cash into bank is passed.

Bank A/c Dr.

To Cash A/c

(Being cash deposited into Bank)

Dr. Cash/Bank A/c Cr.


To Balance By Balance b/d

(Cash in Hand or Cash at Bank (Bank overdraft)

To Realisation A/c By Realisation A/c

(Assets Realised) (Liabilities Paid)

To Partner’ Capital A/cs By Realisation A/c

(Cash brought in by partner) (Realisation Expenses Paid)

By Partner’s Loan A/c

(Partner’s Loan Paid)

By Partner’s Capital A/cs

(Excess cash paid to partner


Distinction between Revaluation Account Realisation Account

Basic of Difference Revaluation Account Realisation Account

Purpose It is prepared to show assets It is prepared to ascertain

and labilities in the books at profit or loss on sale of

their revised values assets and repayment of

Liabilities

When to be prepared it is prepared at the time of It is prepared at the time

change in profit sharing ratio of dissolution of a firm

among the existing partner,

admission, retirement and

death of a partner

Preparation of Account This account may be prepared This account is prepared

at a number of times during once during the life of a

the life of a firm firm

Content This account records only those This account records all

assets and liabilities whose book assets (except cash, fic-

values have been changed tious assets etc.) and all

outside liabilities

Result A Firm continues its business A firm comes to an end

even after the preparation of after preparation of

revaluation account. realisation account

PREPARATION OF MEMORANDUM BALANCE SHEET

If a balance sheet on the date of dissolution is not given in the question, then it is

always advisable to prepare Memorandum Balance Sheet on the date of dissolution to

ascertain the amount of balancing figure.

Note

• In the absence of any other information “Sundry Assets” should be treated

as balancing figure on the assets side of Balance Sheet.

• If the balance of Partners’ Capital A/cs are not given as on the date of

dissolution, first we will find the balance of partners’ capital accounts as

on the date of dissolution by recasting the capital accounts.

• When “Sundry Assets” are given in the question and nothing is specified

about the difference on the asset side of Balance Sheet, the difference

should be treated as Dr. balance of Profit and Loss A/c.


Some common mistakes committed by students

• Entries for Assets or liabilities taken by partners

• Dissolutions Expenses

• Realisation of unrecorded assets

• Payment of Unrecorded Liabilities

• Treatment of Fictitious Assets

Due care should be taken while showing the effect of above mentioned items.

Practical Problem

Q1. Following is the Balance Sheet of X and Y, who share profits and losses in

the ratio of 4.1, as at 31st March, 2011

BALANCE SHEET

As on 31st March, 2011


Sundry Creditors 8,000 Bank 20,000

Bank Overdraft 6,000 Debtors 17,000

X’s Wife Loan 8,000 Less : Provision (2,000) 15,000

Y’s Loan 3,000 Stock 15,000

Investment Fluctuation fund 5,000 Investments 25,000

Capital Buildings 25,000

X 50,000 Goodwill 10,000

Y 40,000 Profit and Loss A/c 10,000

1,20,000 1,20,000

The firm dissolved on the above date and the following arrangement were decided

upon :

(i) X agreed to pay off his wife’s loan.

(ii) Debtors of L 5,000 proved bad.

(iii) Other assets realised-Investment 20% less; and Goodwill at 60%

(iv) One of the creditors for L 5,000 was paid only L 3,000

(v) Buildings were auctioned for L 30,000 and auctioner’s commission

amounted to L 1,000.


(vi) Y took over part for Stock at L 4,000 (being 20% less that the book

value. Balance stock realised 50%.

(vii) Realisation expenses amounted to L 2,000.

Prepare Realisation A/c, Partner’s Capital A/cs and Bank A/c

Dr. Revolution Account Cr.


To Goodwill 10,000 By Investment Fluctuation

To Buildings 25,000 Fund 5,000

To Investments 25,000 By Provision for Doubtful

To Stock 15,000 Debts 2,000

By Creditors 8,000

To Debtors 17,000 By Bank overdraft 6,000

To X’s Capital A/c By X’s Wife Loan 8,000

(X’s wife loan) 8,000 By Bank A/c

(Asset realised)

To Bank A/c

(Bank overdraft) 6,000 Debtors 12,000

To Bank A/c

(Creditors) (3000+3000) 6,000 Investment 20,000

To Bank A/c Goodwill 6,000

(Expenses on Realisation 2,000 Buildings 30,000

To Bank A/c auctioneer Commission 1,000 Stock 5,000

73,000

By Y’s Capital A/c (Stock) 4,000

By Loss transferred to:

X’s Capital A/cs 7,200

Y’s Capital A/cs 1,800 9,000

1,15,000 1,15,000

Dr. Y’s Loan A/c Cr.


To Bank A/c 3,000 By Balance b/d 3,000


Dr. Partner’s A/c Cr.


To Profit and Loss A/c 8,000 3,000 By Balance b/d 50,000 40,000

To Realisation A/c (Cr. Balance)

(Assets taken) – 4,000 (By Realisation A/c 8,000 –

To Realisation A/c Liabilities taken)

(Loss on Realisation 7,200 1,800

To Bank A/c

(Excess cash paid) 42,800 32,200

58,000 58,000 58,000 40,000



To Balance b/d By Balance b/d 6,000

(Cash at Bank) 20,000 (Bank Overdraft)

To Realisation A/c By Realisation A/c 1,000

(Assets Realised) 73,000 (Liabilities Paid)

By Realisation A/c 6,000

By Realisation A/c

(Exp. Paid) 2,000

By Y’s Loan A/c 3,000

(Partner’s Loan Paid)

By X’ Capital A/c 42,800

By Y’s Capital A/c 32,200

93,000 93,000

Q2. A and B were partners in a firm from 1-4-2008 with capitals of L 60,000 and

L 40,000 respectively. They shared profits and losses in the ratio of 3:2. The

carried on business for 2 years. In the first year, they made a profit of L50,000 and in the 2nd year ending on 31st March, 2010, they incurred a loss

of L 20,000. As the business was no longer profitable, they decided to wind

up. Creditors on that date were L 20,000. The partners withdrew L 8,000

each per year for their personal expenses. The assets realised L 1,00,000. The

expenses on realisation were L 3,000. Prepare Realisation A/c and Partner’s

Capital A/c and show your working clearly.




To Sundry Assets 1,18,000 By Creditors 20,000

To Bank A/c By Bank A/c

(Creditors) 20,000 (Assets realised) 1,00,000

To Bank A/c By Loss transferred to:

(Expenses on Realisation 3,000 A’s Capital A/cs 12600

B’s Capital A/cs 8,400 21,000

1,41,000 1,41,000

Working Notes : (i)



2008 To Bank A/c 8,000 8,000 1.04.08 By cash A/c 60,000 40,000

? (Drawing) 31.3.01 By Profit and

31.03.09 To Balance 82,000 52,000 Loss A/c 30,000 20,000

c/d 90,000 60,000 90,000 60,000

2009 1.04.09 By Balance

To Bank A/c b/d 82000 52,000

(Drawings) 8,000 8,000

31.03.09 To Profit and

Loss A/c 12,000 8,000

31.03.09 To Balance

c/d 62,000 36,000

82,000 52,000 82,000 52,000

1.4.10 By Balance

b/d 62,000 36,000

01.04.10 To Realisation

A/c (Loss) 12,600 8,400

To Bank A/c 49,400 27,600

62,000 36,000 62,000 36,000


Memorandum Balance Sheet

Liabilities Assets

Capital Sundry Assets

(Balancing Figure) 1,18,000

L

A 62,000

B 36,000 98,000

Creditors 20,000

1,18,000 1,18,000

Q3. A and B share profits and losses in the ration of 5:2. They have decided to/

dissolve the firm. Assets and external liabilities have been transferred to

Realisation A/c Pass the Journal Entries to affect the following:

(a) Bank Loan of 12,000 is paid off.

(b) A was to bear all expenses of Realisation for which he is given a

commission of 400.

(c) Deferred Advertisement Expenditure A/c appeared in the book at

28,000.

(d) Stock worth 1,600 was taken over by B at 1,200.

(e) As unrecorded Computer realized 7,000.

(f) There was an outstanding bill for repairs for L 2,000. which was paid

off.

Solution


a Realisation A/c Dr. 12,000

To Bank A/c 12,000

(Being bank loan discharged)

b Realisation A/c Dr. 400

To A’s Capital A/c 400

(Being commission credited to A)

c A’s Capital A/c Dr. 20,000

B’s Capital A/c Dr. 8,000

To Deferred Advertisement


Expenditure A/c 28,000

(Being the deferred advertisement

expenditure Written off)

d B’s Capital A/c Dr. 1,200


(Being Stock taken over by B at

L 1,2000)

e Bank A/c Dr. 7,000


(Being unrecorded computer

sold for L 7,000)

f Realisation A/c Dr. 2,000

To Bank A/c 2,000

(Being bank loan discharged)


CHAPTER 7

ACCOUNTING FOR SHARE CAPITAL

(Share and Share Capita : Nature and types)

“A Company is an artificial person created by law, having separate entity with a

perpetual succession and a common seal.”

Definition given by Prof. Haney

Characteristics (Features) of a company

1. The certificate of incorporation of a company is issued by registrar of

companies as per procedure/guidelines given in the Companies Act, 1956.

The law considers a company as an artificial legal person.

2. A Company is a separate legal entity from its owner (shareholders).

3. A company has perpetual existence, not affected by the death, lunancy or

insolvency of its shareholders. It can be wounded up only by the law (Court

or registrar of company.)

4. Every company has it own common seal, which act as the official signature

of the company.

5. The shares of a company is transferable subject to certain conditions (e.g.

some conditions for private company.)

6. The company is managed by the ‘Board of Directors’, the directors are

representative of the shareholders (owners). So, management and ownership

are separate in company organization.

7. The liability of a shareholder is limited upto the nominal price of shares

subscribed by one.

Class / Types of Shares : There are two classes of shares

1. Preference shares : are shares which get preferential right in respect of

(a) Right of dividend

(b) Repayment of capital on winding up


2. Equity shares : The shares which are not preference shares are called equity

shares and do not get preference in above respect.

Distinction between Equity Share and Preference Share

Basic Equity Share Preference Share

Types OR Classes of Preference Shares

(a) With Reference to Divided :

(i) Cumulative Preference shares : Cumulative preference shares are these

preference shares, the holders of which are entitled to receive arrears of

dividend before any dividend is paid on equity shares.

Equity share cannot

redeemable, however, a

company may buy back its

equity shares as condition

prescribed in section 77A

1. Refund of Capital On Winding up, the equity

share capital is paid after the

preference share capital is paid

or equity shareholder received

residual amount.

On winding up, the preference

Share capital is paid before the

Equity share capital is paid or

preference shareholder have to

preference to get refund of

capital over Equity share-

holders.

2. Right of Dividend Dividend is paid on Equity

shares after payment of divided

on preference shares.

Dividend is paid on preference

share before payment of

divided on Equity shares.

3. Right of Dividend No fixed rate of dividend. It is

decided by board of directors

every year and vary

periodically.

Fixed rate of dividend

prescribed on the face of

preference shares e.g. 9%

Preference same in this case

rate of dividend is 9%.

4. Right to Vote Equity shareholder have the

right to vote in meeting of

shareholders and they elect

director for managing the

company.

In normal course of business,

preference shareholders do not

enjoy the right to vote in the

meetings of shareholders. But

they have it only in special

circumstances.

5. Redemption Preference share are always

redeemable, now a company

cannot issue irredeemable

preference shares.


(ii) Non-cumulative preference shares : Non-cumulative preference shares

are those preference share, the holders of which do not have the right

to receive arrear of divided. If no dividend is declared in any year due

to any reason. Such shareholders get nothing, nor they can claim unpaid

dividend in any subsequent years.

(b) With Reference to Participation

(i) Participating preference shares : such shares, in addition to the fixed

preference dividend, carry a right to participating in the surplus profit,

if any, after providing dividend at a stipulated rate to equity shareholders.

(ii) Non-Participating preference shares : Such shares get only a fixed rate

of dividend every year and do not have a right to participate in the

surplus profit.

(c) With Reference to convertibility

(i) Convertible preference shares are those preference shares which have

the right/option to be converted into equity shares.

(ii) Non-convertible preference shares : are those preference shares which

do not have the right/option to be converted into Equity shares.

(d) With Reference to Redemption

(i) Redemable preference shares : are those preference shares the amount

of which can be redemed by the company at the time specified for their

repayment or earlier.

(ii) Irredeemable preference shares : are those preference shares the amount

of which cannot be returned by the company unless the company is

wound up. Now a company cannot issue irredeemable preference shares.

Some important Terms used in Accounting for Share Capital

Minimum Subscription : It is number of shares on which amount received is sufficient

to commence business.

Prospectus : It is an invitation to public for subscription of shares or debentures.

Capital : means amount invested in the business for the purpose of earning revenue.

In case of company money is contributed by public and people who contributed

money are called shareholders.

Share Capital : Capital raised by issue of shares is called shares capital.


Authorised Capital : Also Called as Nominal or registered capital. It is the maximum

amount of capital a company can issue. It is stated in Memorandum of Association.

Issued Capital : This is part of authorized capital which is offered to public for

subscription. It cannot exceed authorized capital.

Called Up Capital : It is the amount of nominal value of shares that has been called

up by the company for payment by the subscriber towards the share.

Paid Up Capital : It is part of called up capital that the members of company or

shareholders have paid.

Reserve Capital : It is that part of uncalled capital which the company reserve to be

called only upon winding up of company. For this a special resolution has to be

passed

Capital Reserve : It is capital profit not available for distribution as dividend. It is

represented in balance sheet of company as Reserves and Surplus under the heading

Shareholder’s Funds.

Disclosure of share capital in Company’s Balance Sheet.

Illustration : S T L Global Ltd. was formed with a nominal Share Capital of L40,00,000 divided into 4,00,000 shares of L 10 each. The Company offers 1,30,000

shares to the public payable L 3 per share on Application, L 3 per share on Allotment

and the balance on First and Final Call. Applications were received for 1,20,000

shares. All money payable on allotment was duly received, except on 200 shares held

by. Y. First and Final Call was not made by the Company.

How would you show the relevant items in the Balance Sheet of STL Global Ltd.?

Solution 1

Balance Sheet (Extract) of S T L Global Ltd. (Relevant Part only)

As at ________________

Particulars Notes No. ( )

Equity and Liabilities

Shareholder’s Funds :

(a) Share Capital (1) 7,14,000

Assets

Current Assets :

Cash and Cash Equivalents (cash at Bank) 7,14,000


Particulars Details ( )

(1) Share Capital

Authorised Capital :

4,00,000 shares of L 10 each 40,00,000

Issued Capital :

1,30,3000 shares of L 10 each 13,00,000

Subscribed but not Fully Paid Capital:

1,20,000 shares of L 10 each L 6 per share called-up 7,20,000

Less : Calls in Arrears (200 shares × L 3) 6,000

7,14,000

Illustration 2. On 1st April, 2012, Janta Ltd. was formed with an authorized capital

of 50,00,000 divided into 1,00,000 equity shares of 50 each. The company issued

prospectus inviting application for 90,000 Shares. The issue price was payable as

under:

On Applicant : `15

On Allotment : ` 20

On call : Balance amount

The issue was fully subscribed and the company allotted shares to all he applicants.

The company did not make the call during the year.

Show the following :

(a) Share capital in the Balance sheet of the company as per revised schedule -

VI, Part-I of the companies Act, 1956.

(b) Also prepare’ Notes to Account’s for the same.

Solution :

Balance Sheet of Janta Ltd.

As at......................... (As per revised schedule vi)

Particulars Note No. Amount Amount

Current Years Pervious years

Equity & labilities

1. Shareholder’s funds

(a) Share Capital 1. 31,50,000


Notes to Accounts

Particulars (` )

1. Share Capital

Authorised Capital

1,00,000 equity shares of ` 50 each 50,00,000

Issued Capital

90,000 equity shares of ` 50 each 45,00,000

Subscribed Capital

Subscribed but not fully paid

90,000 shares of ` 50 each ` 35 called up ` 31,50,000

Issue of Shares

Shares can be issued in two ways

1. for cash

2. for consideration other than cash

Terms of Issue of Shares

Shares can be issued in three ways.

1. Issue of shares at Par

2. Issue of shares at Premium

3. Issue of shares at Discount

Issue of shares against Lump sum payment : When whole amount due on shares

is payable in one instalment. The journal entries will be as follow:

Illustration 3 : Vaibhav Ltd. issued 1,00,000 shares of ` 10 each at per. The whole

amount was payable with application. Pass the necessary journal entries in the books

of company.

Solution

Journal


Bank A/c Dr. 10,00,000

To Share Application and allotment A/c 10,00,000

(Being the application money received on


1,00,000 shares at L 10 per share)

Share Application and Allotment A/c Dr. 10,00,000

To Share Capital A/c 10,00,000

(Being the share allotted and transfer of

application money on 1,00,000 shares to

share capital account)

Shares Payable in Instalments

1. First instalment paid along with application is called as applications money.

2. Second instalment paid on allotment is called as allotment money.

3. Subsequent instalment paid are called as call money calls can be more than

one and called First call, second call or as the case may be

Issue of Shares for Cash at Par : This means shares are issued at face value

Journal entries.

For Application Bank Account Dr. (No. of Application X

money To Share Application A/c Application amount per share)

On acceptance of Share Application A/c Dr. (No. of Share allotted X

Applications To Share Capital A/c application amount called on cash)

For allotment Share Allotment A/c Dr. (No. of Shares alloted X amount

money due To Share Allotment A/c called on allotment for each share

On receipt of Bank Account Dr. (No. of allotment share x Amount

allotment money To Share Allotment A/c received on allotment for each

share)

or actual amount received)

For call money due Share Call A/c Dr. (No. of shares allotted x amount

To share Capital A/c called on each call share)

On receipt of Calls Bank A/c (No. of application allotted x

money To share Call A/c Amount received on each share)

Illustration 4 : X Ltd. invited application for 10,000 shares of the value of

L 10 each. The amount is payable as L 2 on application and L 5 on allotment and

balance on First and final Call. The whole of the above issue was applied and cash

duly received. Give Journal entries for the above transaction.


Journal


Bank A/c Dr. 20,000

To Share Application A/c 20,000


10,000 shares at L 2 per share)

Share Application A/cv Dr. 20,000

To Share Capital A/c 20,000

(Being the transfer of application money on

10,000 shares to share capital account).

Share Allotment A/c Dr. 50,000


(Being the amount due on 10,000 shares

at L 5 per share)

Bank A/c Dr. 50,000

To Share Allotment A/c 50,000

(Being the receipt of L 5 on 10,000 shares)

Share first & final call A/c Dr. 30,000


(Being the amount due on 10,000 shares

at L 3 per share)

Bank A/c Dr. 30,000

To share first & final call A/c 30,000

(Being the receipt of L 3 on 10,000 shares)

Note : For each entry narration is compulsory

Issues of Shares At Premium : It is issue of share at more than face value.

This premium can be utilize for : (Section 78 and 77A)

1. Issue of fully paid bonus shares to the shareholders.

2. Write off preliminary expenses of the company.

3. Writing off securities issue expenses commission paid discount on issue of

securities.

4. For providing the premium payable on redemption of Redeemable preference

shares or debentures of the company.

5. For Buy back of its own shares as per Section 77A.

Journal Entries for accounting of securities premium, the securities premium may

be collected by the company with application money / Allotment money / First call/Final


Call depend upon the terms of issue of shares. If questions is silent regarding the securities

premium) amount due, it is assumed that securities premium money is due with the

allotment money. Following are the various situation of securities premium received with

application, allotment and call.

1. For Application Bank Account Dr. (No. of Application X

money To Share Application A/c Application amount per share)

On acceptance of Share Application A/c Dr. (No. of Share alloted X

Applications To Share Capital A/c application amount called on cash)

To Securities Premium A/c (Amount of Securities Premium

Received if any)

2. For allotment Share Allotment A/c Dr. (No. of Shares alloted X amount

money due To Share Allotment A/c called on allotment for each share

To Securities Premium A/c (Securities Premium due)

On receipt of Bank Account Dr. (No. of allotment share x Amount

allotment money To Share Allotment A/c received on allotment for each

share) or actual amount received)

3. For call money Share Call A/c Dr. (No. of shares allotted x amount

due To share Capital A/c called on each call share)

To Securities Premium A/c (Securities Premium due)

On receipt of Bank A/c (No. of application allotted x

Cells money To share Call A/c Amount received on each share)

Illustration 5 : V Ltd. Issued 20,000 Equity shares of L 10 each at a premium of

L 3 payable as follows:

On Application L 4

On Allotment L 5 (including Securities Premium Reserved)

On First Cell L 2

On Final Call L 2

All shares were duly subscribed and all money duly received. Pass necessary

Journal Entries.

Solution :

In the Book of X Ltd.


Bank A/c Dr. 80,000

To Equity Share Application A/c 80,000


(Being the application money received

on 20,000 Equity Shares at L 4 per

Equity Share)

Equity Share Application Account Dr. 80,000

To Equity Share Capital Account 80,000

(Being the transfer of application money

on 20,000 Equity Shares to Equity Share

capital account)

Equity Share Allotment Account Dr. 1,00,000

To Equity share Capital Account 40,000

To Securities Premium Reserve A/c 60,000

(Being the amount due on 10,000 Equity

Shares at L 5 including Premium L 3 Shares)

Bank Ac/ Dr. 1,00,000

To Equity Share Allotment A/c 1,00,000

(Being the receipt of L 5 on 10,000

Equity Shares)

Equity Shares First Call A/c Dr. 40,000



Shares at L 2 per Equity Share)

Bank A/c Dr. 40,000

To Equity Share First call A/c 40,000


Equity Shares)

Equity Share Final call A/c Dr. 40,000

To Equity Share Final call A/c 40,000


Equity Shares)

Bank A/c Dr. 40,000



Equity Shares)

Issue of Shares at Discount : When a company issues shares at price less than its

face value it is issue of shares at discount.

Section 79 imposes restrictions on issue at discount According to this

1. Shares must of the class already issued.

2. Ordinary resolution must be passed in the general meeting which should

specify maximum discount.


3. Rate of discount should not be more than 10%

4. Sanction from company Law board must be obtained and shares must

be issued within two months of permission.

5. At least one year should have passed since commencement of business

has begun.

If nothing is mentioned in question the discount should be assumed with the

allotment, the journal entries will be:

Journal


Share Allotment A/c Dr. Net amount due

Discount on issue of shares A/c Dr. Discount due

To Share Capital Account Total of above

(Being the allotment due)

Bank A/c Dr. Net amount

To Share Allotment A/c Received

(Being the amount received on allotment)

Question - 6

Shree Ganesh Jewelry House Ltd. issued 40,000 Equity shares of ` 10 each at a

discount of 10%

Payable were to be made as - on Application ` 3; on Allotment ` 4 and on First

and Final Call `2.

Application were received for 36,000 shares and all were accepted. All money was

duly received.

Pass necessary entries in the Books of Company and also show the Balance Sheet

of the Company.

Solution :

Journal


Bank A/c Dr. 1,08,000

To Equity Share Application A/c 1,08,000



Equity Share)


Equity Share Application A/c Dr. 1,08,000

To Equity Share Capital A/c Dr. 1,08,000



capital account)

Equity Share Allotment Account Dr. 1,44,000

Discount issue of shares A/c 36,000

To Equity Share Capital A/c 1,80,000

(Being the amount due on 36,000

Equity Shares at L 4)

Bank A/c Dr. 1,44,000



Equity Shares)

Equity Share First & Final A/c Dr. 72,000



Shares at L 2 per Equity Share for call)

Bank A/c Dr. 72,000

To Equity Share First & Final call A/c 72,000


Equity Shares)

Balance sheet (extract) of Shri Ganesh Ltd. (Relevant Part only)

As at .....................




Share Capital 1 3,60,000

Total 3,60,000

Other Current /Non-Current Assets

Unamortized Expenses 2 36,000

Current Assets :

Cash and Cash Equivalents 3 3,24,000

Total 3,60,000



1 Share Capital

Authorised Capital

Issue Capital :

4,00,000 shares of L 10 each 40,00,000

Subscribed and fully paid :

36,000 shares of L 10 each fully paid up 3,60,000

2. Unamortized Expenses

Discount on issue of shares 36,000

3. Cash and Cash Equivalents

Cash at Bank 3,24,000

Illustration 7 : Cinvistas Ltd. issued 30,000 Preference shares of 100 each at a

discount of 5%. Payments were to be made as- 25 on Application; 35 on

Allotment and 35 on First and Final Call.

The application for 28,000 shares were received and all were accepted. All the

money was duly received except the first and final call on 400 shares.

Give the necessary Journal Entries and prepare Cash Book of the Company.

Also give the Opening Balance Sheet of the Company.

Solution :

Dr. Cash Book (Bank Column only) Cr.


To Preference Share Application A/c 7,00,000 By Balance C/d 26,46,000

To Preference Share Allotment A/c 9,80,000

To preference Share First & Final

Call A/c 9,66,000

26,46,000 26,46,000

Journal


Preference Share Application Account Dr. 7,00,000

To Preference Share Capital A/c 7,00,000

(being the transfer of application money on

28,000 Preference Shares to Preference

Share capital account)


Preference Share Allotment Account Dr. 9,80,000

Discount on issue of shares Also. Dr. 1,40,000



Preference Share at L 35)

Preference Share First & Final call A/c Dr. 9,80,000



Preference Shares at L 35)

Call in Arrear A/c Dr. 14,000

to Preference Share First &

Final call A/c 14,000

(Being the calls in arrear on 400 shares

@ ` 35 each

Balance Sheet (Extract) of S T L Global Ltd. (Relevant Part only)

As at .......................





Total 27,86,000

Other Current Non-Current Assets

Unamortized Expenses 2 1,40,000

Current Assets :


Total 27,86,000

Notes to Accounts


1 Share Capital

Authorised Capital ...................

Issue Capital :

30,000 shares of L 100 each 30,00,000


28,000 shares of L 100 each 28,00,000


Less : Calls in arrear 14,000 27,86,000


Discount on issue of shares 1,40,000



Shares Issue for Consideration Other Than Cash

When a company purchases any fixed asset or business and makes the payment to

the vendor in form of issue of shares in place of cash it is called the issue of shares for

consideration other than cash.

Share can be issued at par, at premium or discount.

Journal entries for issue of shares to vendors/consideration other than cash

Journal


On Purchases of asset : Amount of

Sundry Asset Account Dr. purchase

To Vendor price

On purchases of business :

When purchases consideration is more

than net asset

Sundry Asset Account Dr. Agreed

Goodwill Account (B/F) Value

To Liability consideration Agreed

To Vendor -Net Assets value

Purchase

Consideration

When purchases consideration is

less than net asset

Sundry Asset Account Dr. Agreed Value Agreed

To Liability Value

To Vender Purchases

To Capital Reserve A/c (B/F) Considera-

tion

Difference

On Issue of Share (a) at Par Vendor Dr.

(b) On Issue of share At Premium

Vendor Dr.


To Share Capital A/c

To Securities premium Reserve A/c

(c) On Issue of Share At Discount

Vendor Dr.

Discount on issue of Shares A/c Dr/


Note : When name of vendor is given then we write the name of vendor

Illustration 8 : Atlas Co. Ltd. Purchased a machine from HMT Co. for Rs

64,000. It was decided to pay L 10,000 in cash and balance will be paid by issue of

shares of L 10 each,

Pass journal entries shares

(a) Issued at par

(b) Issued at premium of 20%

(c) Issued at discount of 10%

Solution :

Journal


Machinery Account Dr. 64,000

To HMT Ltd. 54,000

To Bank Account 10,000

(Being the machine purchased and L10,000 paid cash and balance to be paid

by issue of shares)

(a) When shares are issued at par

HMT Ltd. (Vendor) Dr. 54,000

To Share Capital 54,000

(Being 5,400 shares of L 10 each at pa

to HMT Ltd.)

(b) When shares are issued at premium

HMT Ltd. (vendor) Dr. 54,000

To Share Capital Account 45,000

To Security Premium Account 9,000

(Being 4,500 shares of issued to vendor at

a premium of L 2 per share 54,000/10+2

= 4500)


(c) When shares are issued at discount

HMT Ltd. (Vendor) Dr. 54,000

Discount on issues of shares Account Dr. 6,000

To Share Capital Account 60,000

(Being 6,000 shares issued at 10%

discounts to HMT Ltd. 54,000/10-9=6000)

10 – 9 = 9

Illustration 9 : A company issued 15,000 fully paid up equity shares of L 100 each

for the purchases of the following assets and liabilities from Gupta Bros.

Plant - L 3,50,000; Stock L 4,50,00;

Land and Building L 6,00,000; Sundry Creditors L 1,00,000

Pass necessary Journal entries.

Solution:

Journal


Plant A/c Dr. 3,50,000

Land and Buildings A/c Dr. 6,00,000

Stock Account Dr. 4,50,000

Goodwill Account Dr. 2,00,000

To Sundry Creditors A/c 1,00,000

To Gupta Bros. 15,00,000

(Being the purchases of business)

Gupta Bros. Dr. 15,00,000

To Equity Shares Capital Account 15,00,000

(Being issue of 15,000 shares of L 100

each as payment of business price)

Note : Calculation : Goodwill = Purchases consideration + Liabilities - assets = L 15,00,000

+ L 1,00,000 = L 14,00,000 ` 2,00,000.

Illustration 10 : A company purchased a running business from Mahesh for a sum

of `1,50,000 payable as ` , 1,20,000 in fully paid equity shares of ` 10 each and

balance in cash. The assets and liabilities consisted of the following

Plant and Machinery `40,000; Stock `50,000; Building `40,000; Cash `20,000

Sundry debtors `30,000; Sundry creditors `20,000


Pass necessary Journal entries.

Solution

Journal


Plant and Machinery A/c Dr. 40,000

Buildings A/c Dr. 40,000

Sundry Debtors A/c Dr. 30,000

Stock Account Dr. 50,000

Cash A/c Dr. 20,000

To Sundry Creditors A/c 20,000

To Mahesh 1,50,000

To Capital Reserve A/c 10,000


Mahesh Dr. 1,50,000

To Equity Shares Capital A/c 1,20,000

To Bank A/c 30,000

(Being the payment made to Mahesh in

form of shares)

Note : Calculation; Net assets - liabilities = L 1,800,000- L 20,000 L 1,60,000 Capital

reserve = Net Asset - Purchase consideration = L 1,60,000 - L 1,50,000 = L 10,000

Illustration 11 : Pass necessary journal entries for the following transactions in the

Books of Rajan Ltd.

(a) Rajan Ltd. purchased machinery of ̀ 7,20,000 from Kundan Ltd. The payment

was made to Kundan Ltd. by issue of equity shares of `100 each at 10%

discount.

(b) Rajan Ltd. purchased a running remaining business from Viask Ltd. for a sum

of `2,50,000 payable as `2,20,000 in fully paid equity shares of `10 each

and balance by a bank draft. The assets and liabilities consisted of the

following:

Plant & Machinery `90,000; Buildings ` 90,000;

Sundry Debtors `30,000; Stock `50,000; Cash ` 20,000;

Sundry Creditors `20,000


Solution

Rajan Ltd.

Journal


(a) Machinery A/c Dr. 7,20,000

To Kundan Ltd. 7,20,000

(Machinery purchased from Kundan)

Kundan Ltd. Dr. 7,20,000

Discount on issue of shares A/c Dr. 80,000

To Equity share capital A/c 8,00,000

(8,000 Equity shares of L 100 each

issued as purchase consideration)

(b) Plant & Machinery A/c Dr. 90,000

Buildings A/c Dr. 90,000

Sundry Debtors A/c Dr. 30,0000


Cash A/c Dr. 20,000

To Sundry Creditors A/c 20,000

To Vikash Ltd. 2,50,000


(Business Purchased)

Vikas Ltd. Dr. 2,50,000


To Bank A/c 30,000

(Shares issued and draft given)

Private Placement of shares : [Section 81 (1A) This is an issue of shares of securities

to a relatively small selected group of persons not to the public.

This is governed by SEBI guidelines and requires special resolution to be passed in

General Body meeting.

Under subscription : When the number of Share application received is less than the

number of shares offered to public it is under subscription.

Over subscription : When the number of Share application received is less than the

number of shares offered to public it is under subscription


1. Either reject the excess applications

2. Make pro-rata allotment

3. partially refund amount and on other applications pro-rata allotment is made.

Call in arrear : Any Amount which has been called or demand by company from

shareholders but not paid by the shareholder till the last date mentioned in call

letter is called as call in arrear, Company can charge interest on this at rate

mentioned in Article of Association or 5% as per Table A.

Calls in advance : Any amount paid in excess of what they has asked to pay is called

as call in advance. Interest is paid on this at rate mentioned in Article of Association

or 6% as per Table A.

Fortfeiture of shares : If on allotment of share allotees fail to pay the amount on

any call, his money is forfeited or withheld by company this is called forfeiture of

so forfeit means to take away or to withdraw the right of a person.

Forfeiture of share refers to the cancellation or termination of membership of a share

holder by taking away the shares and rights of membership.

Forfeiture of Shares Issued at par

Journal


Share Capital A/c Dr. Amount called

To Vanous Calls/calls in arrer A/c Unpaid Amt.

To Forfeited Share A/c Amount

Received

Illustration 12 : Ram holding 10 shares of L10 each of which L2 on application L3

on allotment but could not pay L3 on first call. His shares were forfeited by the

Directors. The Final call is not made as yet. Give Journal entries in the book of

company.

Solution :

Journal


Share Capital A/c (10 × 8) Dr. 80

To Share First Calls/calls in arrear A/c 30

To Forfeited Share A/c 50

(Being 10 Shares forfeited for nonpayment

of first call money)


Forfeiture of Shares Issued at Premium : (i) when the premium has been received;

(ii) When the premium has not been received.

Case 1: When the premum has been received : In such cases premium received will not

be forfeited and will not record anywhere in the forfeiture journal entry

Journal



To Vanous Calls/calls in arrear A/c (Exclusing Unpaid Amt.

To Forfeited Share A/c Premium) Amt. received

(Exc lud ing

Premium)

Illustration 13 : 1000 shares of L 10 each issued at a premium of L 2 per share are

forfeited on which L 8 (including premium) have been received. Final call of

L 4 has not been received. Pass necessary journal entry in the books of company.

Solution :

Journal


Share Capital A/c (1000 × 10) Dr. 10,000

To Various Calls/calls in arrear A/c 4,000

To Forfeited Share A/c (1000 × 6) 6,000

(Being 1000 Shares forfeited for

non-payment of Final call money)

The premium has not been received : In such case security premium reserve

is debited with the amount for premium not receive.


Journal



Securities Premium Reserve A/c Dr.

To Vanous Calls/calls in arrear A/c Premium not Unpaid Amt.

To Forfeited Share A/c received (including

Premium Net

Amt. Recd.


Illustration 14 : 1000 Shares of L 10 each issued at a premium of L 2 per share are

forfeited on which only application money of L 4 has been received and L 8 (including

premium) has not been received. Pass necessary entries.

Solution :

Journal


Share Capital A/c Dr. 10,000

Securities Premium Reserve A/c Dr. 2,000


To Forfeited Share A/c 4,000

(Being 1,000 shares forfeited for non

payment of allotment and calls money)

Forfeiture os shares issued at discount : The discount amount for forfeited shares

which was debited at the time of issue of share will be credited to the Discount

on issue of shares A/c.


Journal



Including Discount Amt

To Discount on issue of Share A/c discount) Unpaid Amt.

To Various Calls/calls in arrear A/c Amt.

To Forfeited Share A/c Received

Illustration 15 : A Ltd. Forfeited 1000 shares of L 100 each issued at discount

of L 10 per share final call of L 20 has not been made on these shares. L 40 has been

received per share. Pass necessary journal entries.

Journal



To Discount on issue of share A/c Dr. 10,000


To Forfeited Share A/c 40,000

(Being 1,000 shares forfeited)


Reissue of forfeited shares : forfeited shares can be issued to some investor. This

is called as reissue of shares These can be issued at par, premium or discount but

discount cannot exceed the forfeited amount received on the reissued shares.

Journal


When shares Reissued at par

Bank A/c Dr.


When shares Reissued at Premium

Bank A/c Dr.


To Securities Premium Reserve A/c

When shares Reissued at Discount

When were issued at issued at par or at

premium originally

Bank A/c Dr.

Forfeited Shares A/c Dr.


When shares Reissued at Discount

Which were issued at issued at discount

Bank A/c Dr.

Discount on issue of shares Dr.

Forfeited Shares A/c Dr.


After reissue of share, the balance related

to reissued shares in forfeiture account

(Profit on Reissue of shares) transferred

to capital reserve A/c

Forfeited shares A/c Dr.

To Capital Reserve A/c

Illustration 16 : A Ltd. Forfeited 200 shares of L 10 each fully called up held by X

for non payment of allotment money of L 3 per share and First & Final call of L 4

per share. He paid the application money of L 3 per share. These shares were reissued

to Y for L 8 per shares pass necessary journal entries.

Solution :


Journal



To share Allotment Account (200×3) 600

To Shares First & Final Call Account

(200×4) 800

To Shares Forfeited Account (200×3) 600

(Being 200 shares forfeited held by X)

Bank Account (200×8) Dr. 1,600

Forfeited Shares Account (200×2) Dr. 400

To Share Capital Account (200×10) 2,000

(Being re-issued of forfeited shares to Y)

Forfeited Shares Account Dr. 200

To Capital Reserve Account 200

(Being the transfer of profit on reissue

to Capital Reserve)

Forfeiture of Shares originally issued at premium and reissued at a discount

Illustration 17 : A Ltd. Forfeited 100 shares of L 100 each issued at a premium of

50% to be paid at time allotment on which first call of L 30 per equity share was not

received, final call of L 20 is yet to be made. These shares were reissued at L70 per

share at L 80 paid up. pass necessary journal entries.

Solution :

Journal


Share Capital A/c (100×80) Dr. 8,000

To Shares First call A/c (100×30) 3,000

To Shares Forfeited A/c (100×50) 5,000

(Being 100 shares forfeited for non

payment of first call money)

Bank A/c (100×70) Dr. 7,000

Forfeited Shares A/c (100×10) Dr. 1,000

To Shares Capital Account (100×80) 8,000

(Being re-issued of 100 forfeited shares at

L 70 per share at L 80 Paid up)


Forfeited Shares Account (40×100) L 4,000

To Capital Reserve Account 4,000

(Being the transfer of profit o n reissue

to Capital Reserve)

Forfeiture of Shares originally issued at discount and reissued at a premium

Illustration 18 : Y Ltd. Forfeited 800 equity shares of L 100 each issued at a

discount of 10% for non-payment of first and final call of L 30 per share. The

forfeited shares were reissued at L 120 per share as fully paid up.

Pass necessary journal entries in the books of company

Solution :

Journal


Share Capital A/c (100×800) Dr. 80,000

To Discount on issue of share A/c

(800×10) 8,000

To Shares First call A/c (800×30) 24,000

To Shares Forfeited A/c (800×60) 48,000

(Being 800 shares forfeited for non

Payment of first call money)

Bank A/c (800×120) Dr. 9,6000

To Share Capital A/c (800×100) 80,000


(800×20) 16,000

(Being re-issued of 800 forfeited shares at

L 120 per share as fully paid up)

Forfeited Shares A/c Dr. 48,000



to Capital Reserve)

Pro-Rata-Allotment When there is oversubscription of shares either the excess amount

is refunded or proportions shares are allotted. Allotment of proportionate shares

as Pro-rata Allotment.


Illustration 19 : AB Ltd. invited applications for 1,00,000 Equity Shares L 10 each

payable as L 2 application, L 3 on Allotment and the balance on first and final call.

Application were received for 3,00,000 shares and shares were allotted on prorata

basis. The excess application money was to be adjusted against allotment only. Ram,

a shareholder who has applied for 3,000 shares failed to pay the call money and his

shares were forfeited and re-issued at L8 per share as fully paid. Pass necessary

journal entries in the books of company.

Solution :

Journal


Bank A/c Dr. 6,00,000



3,00,00 Equity Shares at L 2 per Equity

Shares)

Equity Share Application Account Dr. 6,00,000

To Equity Share Capital Account 2,00,000

To Equity Share Allotment Account 3,00,000

To Bank A/c 1,00,000


into share capital and allotment and balance

refunded)

Equity Share Allotment A/c Dr. 3,00,000



Shares at L 3 Share)

Equity Share First & Final call A/c Dr. 5,00,000


(Being the amount due on 1,00,000

Equity Shares at L 5 per Equity Share)

Bank A/c Dr. 4,95,000

To Equity Share First & Final call A/c 4,95,000

(Being the receipt of L 5 on 99,000 Equity

Shares)

Equity Share Capital A/c Dr. 10,000

To Equity Share First & Final A/c 5,000


To Forfeited Shares A/c 5,000

(Being 1000 Shares forfeited due to non

payment of first and final all money)

Bank A/c (1000×8) Dr. 8,000

Forfeited Shares A/c (1000×2) Dr 2,000

To Equity Share Capital A/c (1000×10) 10,000

(Being the Reissue of 1000 Equity Shares

at L 8 per share as fully paid up)



(Being the transfer of profit on reissue to

Capital Reserve)

Note : there is no bank account on allotment as all due money is already received

When Cash Book Entries are asked in the question, all cash transactions are

to be recorded in Cash Book, other non-cash transaction should be entered in

the Journal.

Illustration 20 : If in Illustration 16 the company prepare cash and journal for the

above transaction then the book and journal entries will be made as follow:

Solution :

Journal






into share capital and allotment and

balance refunded)




Equity Shares at L 3 Share)

Equity Share First & Final Call A/c Dr. 5,00,000


(Being the amount due on 1,00,000 Equity

Shares at L 5 per Equity Share)





(Being 1000 Shares forfeited to non

payment of first and final call money)

Forfeited Shares A/c (1000×2) Dr. 2,000


(Being the Reissue of 1000 Equity Shares at

L 8 per share as fully paid up)




to Capital Reserve)

Dr. Cash Book (Bank Column only) Cr.


To Equity Share By Equity Share

Application A/c 6,00,000 Application A/c 1,00,000

To Equity Share First By Balance C/d 10,03,000

& Final Calls A/c 4,95,000

To Equity Share Capital A/c 8,000

11,03,000 11,03,000

Illustration 21 : Sibar Media & Entertainment Ltd. invited applications for 1,00,000

Equity shares of L 10 each at a discount of 6% payable as follow:

On Application 3

On Allotment 2.40

On First and Final Call 4

The application were received for 90,000 shares and all of these were accepted. All

money due were received except the first and final call on 2,000 shares which were

forfeited. 1,000 shares were re-issued @ L 9 per share as fully paid. Assuming that all

requirements of law were complied with, pass Entries in the Journal of the company. Also

show how these transaction will be reflected in the company’s Balance Sheet.

Solution :


In the books of Sibar Media & Entertainment Ltd.


Bank A/c Dr. 2,70,000




Equity Share)





capital account)





Shares at L 40 per share and 6% discount)

Bank A/c Dr. 2,16,000


(Being the receipt of L 2.4 on 90,000

Equity Shares)

Equity Share First & Final call A/c Dr. 3,60,000



Shares at L 4 per Equity Share for call)

Bank A/c Dr. 3,52,000

To Equity Share First & Final call A/c 3,52,000


Shares)


To Discount on issue of shares A/c 1,200




payment of first and final call money)

Bank A/c (1000×9) Dr. 9,000


Discount on issue of Shares A/c(1000×0.6) Dr. 600

forfeited Shares A/c (1000×0.4) Dr. 400



at L 9 per share as fully paid up, L 6

share debited to share discount and balance

L 0.4 debited to forfeited shares A/c)




of 1,000 share to Capital Reserve)

Balance Sheet of Sibar Media & Entertainment Ltd.

As on...........................

Particulars Notes No. Amount ( )




Reserve and Surplus 2 5,000

Total 9,00,400

Other Current/Non-Current Assets


Current Assets :


Total 9,00,400

Notes to Accounts


1 Share Capital

Authorised Capital

Issue Capital :

1,00,000 shares of L 10 each 10,00,000


89,000 shares of L 10 each 8,90,000

Add : Forfeited Share A/c 5,400 8,95,400

2. Capital Reserve

Forfeited amount on 2,000 shares is L 10,800


Forfeited amount on 1,000 shares which 5,400

were reissued (10, 800×100/200)=5,400

Less : Loss on Reissue of Share Debited –400

Amount Transferred to Capital Reserve 5,000 5,000

3. Unamortized Expenses 54,000

Discount on issue of shares –1200

Less : Discount Credited on Forfeiture +600

Add : Discount Debited on Reissue

53,400

Discount on issue of shares

4. Cash and Cash Equivalents 8,47,000

Cash at Bank

Illustration 22 : Daisy Systems Ltd. Issued 50,000 Equity Shares of L 10 each, at

a discount of 10%, payable as follow:

On Application ` 2.50 per share

On Allotment ` 3 per share

on First Call `1.50 per share

On Final Call The balance amount

Applications were received for 65,000 shares and the Directors made pro-rata

allotment to the applicants for 60,000 shares.

The Directors did not make the final Call. X did not pay allotment and first call

money on 1,000 shares allotted to him while Y did not pay the First Call on his 2,000

Shares. These shares were forfeited and 2,200 of those shares were reissued to Mr. Gupta

as `8 paid at ` 6.50 per share, whole of Y’s shares being included in the re-issued

shares. Show the journal entries to record the above transactions and prepare the Balance

Sheet.

Solution

Journal


Bank A/c Dr. 1,62,500



65,000 Equity shares at L 2.5 per Equity

share)


Equity Share Application Account Dr. 1,62,500


To Equity Share Allotment A/c 25,000

To Bank A/c 12,500

(Being to transfer of application money

into share capital and allotment and

balance refunded)





Shares at L 3 per share and 10% discount)

Bank A/c Dr. 1,22,500



Shares)

Equity Share First call A/c Dr. 75,000



Shares at L 1.5 per Equity Share for call)

Bank A/c Dr. 70,500


(Being the receipt of L 1.5 on 47,000

Equity Shares)


To Discount on issue of shares A/c 3,000

To Equity Shares Allotment A/c 2,500

To Equity Share First Account 4,500



Payment of allotment and first call money)

Bank A/c (22000×6.5) Dr. 14,300

Discount on issue of shares A/c (2200×1) 2,200

Forfeited Shares A/c (2200×05) 1,100



L 6.5 per share as L 8 paid up, ` 1 per


share debited to share discount and balance

` 0.5 debited to forfeited shares A/c)

Forfeited Shares Account Dr. 10,500



of 2200 share to Capital Reserve)

Balance Sheet of Daisy System Ltd.

As on .............................





Reserve and Surplus 2 10,500

Total 4,06,500

Other Current Non-Current Assets


Current and Cash Equivalents 4 3,57,300

Total 4,06,500

Notes to Accounts


1 Share Capital

Authorised Capital

Issue Capital :

50,000 shares of L 10 each 5,00,000


49,200 shares of L 10 each L 8 Called up 3,93,600

Add : Forfeited share A/c (3,000-600) 2,400 3,96,000

2. Capital Reserve

Forfeited amount on 3,000 shares 14000

Fofeited amount on 2,200 shares which were

reissued (11000 + 600) = 11,600

Forfeited on Y’s Shares (5.5×2000) 11,000

Forfeited on X’s 200 Shares (3000×1000/200)=600 600

Less : Loss on Reissue of Share Debited –1,100


Amount Transferred to Capital Reserve 10,500 10,500



Less : Discount Credited on Forfeiture –3,000

Add : Discount Debited on Reissue +2,200




Illustration 23 : XYZ Ltd. invites application for 40,000 equity shares of `100 at

a discount of 6%. The amount payable as follows:

On Application and allotment – `75 per share.

On First and final call - The balance amount.

Application for 60,000 shares were received. Applications for 10,000 shares were

rejected ad shares were allotted on pro-rata basis to remaining applicants. Excess application

money received on application and allotment was adjusted towards sum due on first and

final call. The calls were made. A shareholders who applied for 50 shares, failed to pay

the first and Final call money. His shares were forfeited. All the forfeited shares were

reissued at `97 per share fully paid up.

Pass necessary journal entries for the above transactions in the books of XYZ Ltd.

(CBSE, 2014 Modified)

Solution :

Journal


Bank A/c Dr. 45,00,000

To Equity Shares Application 45,00,000

and Allotment A/c

(Application & Allotment money

received for 60,000 shares)

Equity shares Application and Allotment A/c Dr. 45,00,000

Discount on issue of share A/c Dr. 2,40,000

To Equity share Capital A/c 32,40,000

To Equity share first and final call A/c 7,50,000



(40,000 Shares alloted & money refunded for

10,000 shares)

Equity Shares first and final call A/c Dr. 7,60,000


(Call made @ 19 On 40,000 shares)

Bank A/c Dr. 9,990

To Equity Shares First and 9,990

Final call A/c

(call money received Except 40 shares)

Equity shares capital A/c Dr. 4,000

To discount on issue of shares A/c 240

To equity Shares first & final Call A/c 10

To forfeited shares A/c 3,750

(40 shares for feited due to non payment

of call money)

Bank A/c Dr. 3,880

Discount on issue of shares Dr. 120


(Reissue of 40 equity share @ ` 97)



(Profit on forfeited transferred to

Capital Reserve A/c

Notes : Shares Alloted to defaulter shareholders 40, 000

50 40 Shares50, 000

1. Excess Application Allotment amount received from defaulter shareholder

(Applied shares-Allotted share) × Application amount.

(50 Shares – 40 Shares) × 75 = ` 750-00

2. Calculation of Amount of call money not paid by defaulter share holder.

Amount due – 40 × 19 = `760-00

Less : Excess Application & allotment money = `750-00

Already received from him.

Amt. not paid by him 10–100

(40,000 Shares alloted & money refunded for

10,000 shares)

Equity Shares first and final call A/c Dr. 7,60,000


(Call made @ 19 On 40,000 shares)

Bank A/c Dr. 9,990

To Equity Shares First and 9,990

Final call A/c

(call money received Except 40 shares)

Equity shares capital A/c Dr. 4,000

To discount on issue of shares A/c 240

To equity Shares first & final Call A/c 10


(40 shares for feited due to non payment

of call money)

Bank A/c Dr. 3,880

Discount on issue of shares Dr. 120


(Reissue of 40 equity share @ ` 97)



(Profit on forfeited transferred to

Capital Reserve A/c

Notes : Shares Alloted to defaulter shareholders 40, 000

50 40 Shares50, 000

1. Excess Application Allotment amount received from defaulter shareholder

(Applied shares-Allotted share) × Application amount.

(50 Shares – 40 Shares) × 75 = ` 750-00

2. Calculation of Amount of call money not paid by defaulter share holder.

Amount due – 40 × 19 = `760-00

Less : Excess Application & allotment money = `750-00

Already received from him.

Amt. not paid by him


3. Calculation of total call amount received :

Total call due 40,000 × ` 19 = 7,60,000

Less : (i) Allotment money ` 7,50,000

(ii) Amt not paid by defaulter 10

Share holder 7,50,010

Actual amount received on calls 9,990

In Original question the application and allotment amount was `90 per share. In

that cas Excess money on Account of the Application & Allotment is (50-40 shares) ×

90 = 900 & Amount due on call (40 × 4) ` 160 which is less than advance money already

received with application default on call, so shares couldn’t forfeited. This question may

be solved by `75 or less application and allotment money and thereafter in case of any

default on call shares may be forfeited.

Illustration 24 : AB Ltd. invited applications for issuing 75,000 equity of ` 100 each

a premium of `30 per share. The amount was payable as follows:

On Application & Allotment – `85 per share (including premium)

On First and Final call the balance Amount

Applications for 1,27,500 shares were received. Applications for 27,500 shares

were rejected and shares were allotted on pro-rata basis to the remaining applicants.

Excess money received on application and allotment was adjusted towards sums due on

first and final call. The calls were made. A shareholder, who applied for 1,000 shares,

failed to pay the first and final call money. His shares were forfeited. All the forfeited

shares were reissued at `150 per share fully paid up.

Pass necessary journal entries for the above transactions in the books of AB Ltd.

Solution :

AB Ltd.

Journal


Bank A/c Dr. 1,08,37,000

To Equity shares Application 1,08,37,500

and allotment A/c

(Application received fro 1,27,500 shares)

Equity Shares Application and Allotment A/c Dr. 1,08,37,500



To Securities Premium A/c 22,50,000

To Equity Shares first and final

call A/c 21,25,000

To Bank A/c 23,37,500

(Shares allotted & Refund of 27500 Shares

Application money

Equity Shares First and final call A/c Dr. 33,75,000


(First final call amount due on 75000

shares @ ` 45

Bank A/c Dr. 12,37,500

To Equity shares first & final call A/c 12,37,500

(Call money received Except 750 Shares)

Equity Shares capital A/c Dr. 75,000

To Equity shares first and final call A/c 12,500


(750 Shares forfeited)

Bank A/c Dr. 1,12,500


To Securities Premium A/c 37,500

(750 equity shares issued @ ` 150 pershare)

Forfeited shares A/c Dr. 62,500


Forfeited amount transferred to capital reserve)


CHAPTER 8

ACCOUNTING FOR DEBENTURES

Debentures : A debenture is a documents that either creates a debt or acknowledges

it. In corporate finance, the term is used for a medium to long-term debt instrument

used by large companies to borrow money. In some countries the term in used

interchangeably with bond, loan stock or note. A debenture is thus like a certificate

of loan or a loan bond evidencing the fact that the company is liable to pay a

specified amount with interest and although the money raised by the debentures

becomes a part of the company’s capital structure, it does not become share capital.

Debentures are generally freely transferable by the debenture holder. Debenture

holders have no rights to vote in the company’s general meetings of shareholders.

The interest paid to them is a charge against profit in the company’s financial

statements.

TYPES OF DEBENTURES

Convertibility point of view : There are two types of debentures :

Convertible debentures, which can be converted into equity shares of the issuing

company after a predetermined period of time.

These may be Partly Convertible Debentures (PCD) : A part of these instruments

are converted into Equity shares in the future at notice of the issuer. The issuer

decides the ratio for conversion. This is normally decided at the time of subscription.

Fully convertible Debentures (FCD) : These are fully convertible into Equity shares

at the issuer’s notice. The ratio of conversion is decided by the issuer. Upon

conversion the investors enjoy the same status as ordinary shareholders of the

company.

Non-convertible debentures, which are simply regular debentures, cannot be converted

into equity shares of the liable company. They are debentures without the

convertibility feature, they usually carry higher interest rates than their convertible

counterparts.

On basis of Security, debentures are classified into:


Secured Debentures : These instruments are secured by a charge on the fixed assets

of the issuer company. So if issuer fails on payment of either the principal or

interest amount, his assets can be sold to repay the liability to the investors.

Unsecured Debentures : These instrument are unsecured in the sense that if the

issuer defaults on payment of the interest or principal amount, the investor is

treated like along other unsecured creditors of the company.

From Redemption point of view

Redeemable Debentures : Redeemable debentures are those which are redeemed or

paid off after the termination of fixed term. The amount paid off includes the

principal amount and the current year’s interest. The company always has the

option of either to redeem a specific number of debentures each year or redeem

all the debentures at specified date.

Irredeemable or Perpetual Debentures : Irredeemable debentures are those

debentures which do not have any fixed date of redemption. They are redeemed

either in the event of winding up or at a very remote period of time. Irredeemable

or perpetual debenture holders can never force the company to redeem their

debentures.

Distinguish between a Share and Debenture

Basis Share Debenture

Ownership Shareholders are the owners Debenture holders are the

of company lenders of company

Form of return Dividend Interest

Security Not secured Secured by a charge on assets

Voting right Equity shareholders have the No voting right in normal

voting right course of business

Risk More risk as compare to Risk Free due to secured

Debentures Debentures

Issue of Debentures

Debentures can be issued in following ways

1. for cash

2. for consideration other than cash

3. As collateral security


Terms of Issue

Debentures can be issued in following ways:

1. Issue of Debentures at Par

2. Issue of Debenture at Premium

3. Issue of Debentures at Discount.

Debenture Payable in Iinstalments

1. First instalment paid along with application is called as application

money.

2. Second instalment paid on allotment is called as allotment money

3. Subsequent instalments paid are called as call money calls can be more

than one and called First call, second call or as the case may be.

Issue of Debentures for Cash

(a) When Debentures amount received in lump sum with the application

On receipt of Bank A/c Dr. With the application money

application money To Debenture Application received

and Allotment A/c

On acceptance of Debenture Application and

application money Allotment A/c Dr. With Amount of application

To X% Debentures A/c money on allotted debentures,

To Bank A/c and Excess amount refunded.

(b) When Debentures amount received in installments.

In this case accounting entries will be same as at the time of issue of shares in

instalments with small change in the name of term like-the share capital word replaced

with the X% Debentures A/c, and Share word replaced with Debentures e.g. Equity share

capital into 8% Debentures, Equity share application into Debentures Application and

follows on.

AT Par : the means debentures are issued of face value

Illustration 1 : Raj Ltd. Issued 2,000 12% Debentures of `100 each at par payable

`25 Application, `50 on Allotment and the balance on first and final call. In all 3,000

application were received.


Allotment was made to 2,000 applicant other were rejected. Give Journal entries.

Solution :

In the Books of X Ltd.


Bank A/c Dr. 75,000

To Debentures Application A/c 75,000


3,000 Debentures at ` 25 per Debentures)

Debentures Application Account Dr. 75,000

To 12% Debentures Account 50,000

To Bank A/c 25,000


on 2,000 Debentures to 12% Debentures A/c)

Debentures Allotment Account Dr. 1,00,000

To 12% Debentures Account 1,00,000


Debentures at ` 50 per Debentures

Bank A/c Dr. 1,00,000

To Debentures Allotment A/c 1,00,000

(Being the receipt of ` 50 on 2,000 Debentures)

Debentures First & Final Call A/c Dr. 50,000

To 12% Debentures Account 50,000


Debentures at ` 25 per Debentures)

Bank A/c Dr. 50,000

To Debentures First & Final call A/c 50,000

(Being the receipt of ` 25 on 2,000 Debentures)

Issue of Debentures at premium : It is issue of Debenture at more than its face

value

Note : Premium is presumed to be demanded on Allotment unless specified and

Credited to Securities Premium Reserve Account

Illustration 2 : Z Ltd. Invited application for 5,000, 8% Debentures of L100 each

at a premium of 2%, L40 were payable on Application and balance on allotment.

Applications were received for 4,800 shares and accepted in full. All money duly

received. Journalise the transactions.


Solution :

Journal


Bank A/c Dr. 1,92,000

To Debenture Application A/c 1,92,000


4800 debentures @ ` 40 per debenture)

Debentures Application A/c Dr. 1,92,000

To Debenture A/c 1,92,000

(Being the transfer of application money to

8 % debentures account)

Debenture Allotment A/c Dr. 2,97,600

To 8% Debenture A/c 2,88,000

To Security Premium Reserve A/c 9600

(Being the allotment money due on

4,800 debentures @ ` 60 and premium

of ` 2 share)

Bank A/c Dr. 2,97,600

To Debenture Allotment A/c 2,97,600

(Being the application money received)

Oversubscription of debentures : In such case excess application are rejected or

partial or Pro-rata allotment is done or combination of both is carried on.

Illustration 3 : Ganga Ltd. issued 2,000 12% debentures of L100 each at a premium

of 10% payable L25 on application; L40 (including premium) payable on allotment

and balance on First and final Call. In all 3,500 application were received 500

application were rejected and allotment was made to applicants to 3,000 debentures

on Pro-rata basis. The excess money was adjusted on allotment. Give journal entries.

Solution :

Journal


Bank A/c Dr. 87,500

To 12% Debentures Application A/c 87,500


3,500 debentures @ ` 25 per debenture)

12% Debenture Application A/c Dr. 87,500

To 12% Debentures A/c 50,000

To Bank Account 12,500


To Debentures Allotment A/c 25,000


to Debenture A/c and refund made on

rejected Application)

12% Debenture Allotment A/c Dr. 80,000

To 12% Debenture Account 60,000

To Security Premium A/c 20,000

(Being the allotment money due on 2,000

debentures @ ` 30 and premium of ` 10)

Bank A/c Dr. 55,000

To 12% Debenture Allotment A/c 55,000

(Being the Allotment money received

` 80,000 - ` 25,000)

12% Debenture First & Final Call A/c Dr. 90,000

To 12% Debenture Account 90,000

(Being the call money due on, 2000

debentures @ ` 45)

Bank A/c Dr. 90,000

To 12% Debenture First & Call A/c 90,000

(Being the call money received)

Issue of Debentures for Consideration other than cash

When Debentures are issued for purchases of asset

When Debentures Sundry Asset A/c Dr. With the purchases consideration

Issued for purchases To Vendor

Asset at par Vendor Dr.

To Debenture Account

When Debentures Sundry Assets A/c Dr. With the purchases Consideration

are issued for pur- To Vendor

chases of asset at Vendor Dr.

premium To Debenture A/c No. of debentures par value

To Security Premium No. of debentures x premium

Reserve A/c

When business is When Purchase consideration

Purchased is equal to net value of assets

Sundry Assets A/c Dr. Value of asset

To Sundry Liabilities A/c Value of liabilities

To Vendor Purchases consideration

When Purchases consideration

more than net value of assets

Sundry Asset Account Dr. Value of asset


Goodwill Account Dr. Excess of purchase value (B/F)



When Purchase consideration

is less than net value of asset

Sundry Assets Account Dr. Value of asset


To Capital Reserve Difference (B/F)


Illustration 4 : A company purchased assets of book value of `99,000 from Girish.

It was agreed that Purchase consideration be paid by issuing 11% Debentures of

`100 each. Assume Debentures have been issued (i) at par (ii) at a premium of 10%

Give journal entries in the books of company.

Solution

Journal


(i) Sundry Assets A/c Dr. 99,000

To Girish 99,000

(Assets Purchased from Girish)

Debentures are issued at par

(ii) Girish Dr. 99,000


(For the issue of debenture at par)

Debentures are issued at premium :

(iii) Girish Dr. 99,000


To Security Premium Reserve A/c 9,000

(For issue of 900 Debentures of ` 100

each at 9,000 10% premium)

When Purchases consideration is more than net value of assets

Illustration 5 : A Company issued debentures of `100 each at par for the purchases

of the following assets and liabilities from Gupta Bros. at purchase consideration of

` 15,00,000

Plant– L 3,50,000 Stock L 4,50,000

Land and Building L 6,00,000 Sundry Creditors L 1,00,000

pass necessary Journal entries.

Solution :


Journal


(i) Plant A/c Dr. 3,50,000

Land And Building A/c Dr. 6,00,000

Stock A/c Dr. 4,50,000

Good will A/c Dr. 2,00,000


To Gupta Bros. 15,00,000

(Being the purchase of business)

Gupta Bros Dr. 15,00,000

To Debenture A/c 15,00,000

(Being issue of 15,000 shares of L 100

each as payment of business price)

Calculation : Goodwill = Purchases consideration + liabilities – assets =

`15,00,000 + `1,00,000 - `14,00,000 = `2,00,000

When Purchases consideration is less than net value of assets

Illustration 6 : Zee Ltd. Took over the following assets and liabilities of business of

Usha Ltd. Assets : Machinery-` 1,00,000, Furniture ` 1,80,000 Stock ` 20,000

Liabilities-Creditors `80,000

The purchases price was agreed at `1,08,000. This is to settle by issue of 12%

Debentures at premium of 20% pass necessary Journal entries.

Solution :

Journal


Machine A/c Dr. 1,00,000

Furniture A/c Dr. 1,80,000


To Creditors A/c 80,000

To Capital Reserve A/c (B/F) 1,12,000

To Usha Co. Ltd. 1,08,000


Usha Co. Ltd. 1,08,000

To 12% Debenture A/c 90,000


(Being issue of 900 debentures of

` 100 each at premium of 20%%


Calculations Net assets = Total assets-liabilities = `3,00,000 – `80,000

=`2,20,000 Capital reserve = Net assets – Purchases consideration = `2,20,000 –

`1,08,000 = `1,12,000

Illustration 7 : Kirloskar Multimedia Ltd. Purchased machinery costing `16,72,000.

It was agreed that the purchase consideration be paid by issuing 13% Debentures of

`100 each. Assume debentures are issued (i) at par, (ii) at a premium of 10% and (iii)

at a discount of 5%. Give necessary journal entries.

Journal


Machinery A/c Dr. 16,72,000

To Vendor 16,72,000

(Machinery purchased from vendor)

(i) Vendor Dr. 16,72,000

To 13% Debentures 16,72,000

(16,720 13% debentures of ` 100 each

issued at par)

(ii) Vendor Dr. 16,72,000


To Securities Premium Reserve A/c 1,52,000

(15,200 13% debentures of ` 1,00 each

issued at a premium of 10%)

(iii) Vendor Dr. 16,72,000

Discount on issue of debentures A/c Dr. 88,000

To 13% debentures A/c 17,60,000

(17,600 13% debentures of ` 100 each

issued at a discount of 5%)

(ISSUE OF DEBENTURES AS COLLATERAL SECURITY)

Collateral Security : Collateral security means security provided to lender in addition

to the principal security. It is a subsidiary or secondary security. Whenever a company

takes loan from bank or from any financial institution it may issue its debentures as

secondary security which is in addition to the principal security. Such an issue of debentures

is known as ‘issue of debentures as collateral security’. The lender will have a right over

such debentures only when company fails to pay the loan amount and the principal

security is exhausted. In case the need to exercise the right does not arise debentures will

be returned back to the company. No interest is paid on the debentures issued as collateral

security because company pays interest on loan.


In the accounting books of the company issue of debentures as collateral security

can be credited in two ways.

(i) First method : No Journal entry to be made in the books of accounts of the

company for debentures issued as collateral security. A note of this fact is

given in this case.

(ii) Second method : Entry to be made in the books of accounts of the company

A journal entry is made on the issue of debentures as a collateral security,

Debentures Suspense Account is debited because no cash is received for such

issue

Following journal entry will be made

Journal


Debenture Suspense A/c Dr.

To % Debentures A/c

(Being the issue of Debentures of ` ...

each issued as collateral security)

Illustration 8 : X Ltd. Had `12,00,000, 11% Debentures outstanding on 1st April,

2012. During the year, it took a loan of L 4 Lakh from Canara Bank for which

company deposited debentures of L Lakh as collateral security.

Pass journal entries and show how these transactions will appear in Balance

Sheet of the company.

FIRST METHOD. NO ENTRY IS PASSED FOR DEBENTURES

Journal


2012 Bank A/c Dr. 4,00,000

1st April To Canara Bank’s loan A/c 4,00,000

(Loan taken from bank against collateral

security of debentures worth ` 5 Lakhs)


Balance Sheet of X Ltd.

As at 1st April, 2012



3. Non-Current Liabilities

(a) Long-Term Borrowings 1 16,00,000

Notes to Balance Sheet

( )

Note No. 1

Long-Term Borrowings :

11% Debentures 12,00,000

Bank Loan (Against collateral security of debentures ` 5,00,000 4,00,000

16,00,000

Second method. Entry for issue of debentures is passed.

Journal


Bank A/c Dr. 4,00,000

To Canara Bank’s loan A/c 4,00,000

(Loan taken from bank)

Debentures Suspense A/c Dr. 5,00,000

To 11% Debentures A/c 5,00,000

(Issue of ` 5,00,000 Debentures issued

as collateral Securities)

Presentation of debenture and Bank loan will remain same as explained in Balance

Sheet under 1st methods, however, presentation of information in note will differ.

Balance Sheet of X Ltd.

As at 31st March, 2012 (ASSUMED)


1. Equity and Liabilities


(a) Long-term Borrowings 1 16,00,000


IInd method

Notes to Balance Sheet

( ) ( )

Note No. 1

Other Long-term Borrowings :

11% Debentures (12,00,000 + 5,00,000) 17,00,000

Less : Debentures Suspense A/c 5,00,000 12,00,000

Bank Loan (Against collateral security of debentures

` 5,00,000) 4,00,000

16,00,000

Illustration 9 : On 1st April, 2012 A Ltd. took a loan of `5,00,000 from the State

Bank of India for which the company issued 8 % Debentures of `6,0,000 as collateral

security. Record the issue of debentures in the books of the Co. and also show how

the debentures and bank loan will appear in the Balance Sheet of the company.

Solution :

Journal


Bank A/c Dr. 5,00,000

To Bank’s loan A/c 5,00,000

(Loan taken from bank)



(Issue of ` 6,00,000 debenture as

collateral Securities)

Balance Sheet of A Ltd.

As at 1st April, 2012

Particulars Notes No. Figure as Figure as

at the end at the end

of current of Previous

accounting accounting

period period

1. Equity and Liabilities

(1) Shareholder’s Funds

(2) Share Application Money Pending Allotment

(3) Non-Current Liabilities 1 5,00,000

Total 5,00,000


( ) ( )

Note No. 1

Other Long-term Borrowings :


Less : Debentures Suspense A/c (6,00,000) Nil

Bank Loan 5,00,000

5,00,000

Illustration 10 : ABC Ltd had ` 15,00,000, 10% Debentures outstanding as on April,

2012. On 1st Sept. 2012 Company took a loan of `5,00,000 from the Punjab National

Bank for which the company placed with the bank, 10% Debentures for `7,00,000

as collateral Security. Pass journal entries, if any. Also show how the debentures and

Bank Loan will appear in the company’s Balance Sheet as on 31st March, 2013.

Journal of ABC Ltd.


2012 Bank A/c Dr. 5,00,000

1st Sept. To Bank Loan A/c 5,00,000

(Loan taken from bank of 5,00,0000)



(Issue of Debentures as Collateral Security)

Balance Sheet of ABC Ltd.

As at 31 march 2013 (` in ‘000)

Particulars Notes No. 2012-13 2011-12

1. EQUITY AND LIABILITIES

(1) Shareholder’s Funds

(2) Non-Current Labilities

Long-term Borrowing 1 2,000 1,500

(3) Current Liabilities


Notes to Accounts :

Note 1.

Particulars As on As on

31.03.2012 31.03.2012

(` ) (` )

Long Term Borrowing

(i) 10% Debentures 22,00,000

Less : Debentures Suspense A/c (7,00,000) 15,00,000 15,00,000

(ii) Bank Loan 5,00,000 –

Total 20,00,000 15,00,000

Various cases for the issue of debentures from Redemption point of view

Case No. Condition issue Condition of redemption

1. Issued at par Redemption at par

2. Issued at premium Redemption at par

3. issued at par Redemption at premium

4. Issued at premium Redemption at premium

5. Issued at Discount Redemption at par

6. Issued at Discount Redemption at premium

1. When Debentures are issued at par and redeemable at par

Journal


Bank A/c Dr.

To % Debenture Application and

Allotment A/c


Debenture Application and Allotment A/c Dr.

To % Debenture A/c


to % Debenture A/c

Illustration 11 : Larson and Turbo Ltd. Issued 50,000 8% debentures of `100 each

payable on. Application at par and redeemable at par any time after 7 years from the

date of the issue. Record necessary entries for the issue of debentures in the book of

Company.


Solution :

In the books of Larson & Toubro Ltd.

Journal


Bank A/c Dr. 50,00,000


Allotment A/c 50,00,000


Debenture Application and Allotment A/c Dr. 50,00,000


(Being the transfer of application money to

debenture account)

2. When Debentures are issued at Premium redeemable at par

Journal


Bank A/c Dr.

To % Debentures Application and

Allotment A/c


Debenture Application and Allotment A/c Dr.

To % Debenture A/c


(Being the debenture issued at premium

and redeemable at par)

Illustration 12 : Green Ltd. Issued `80,000, 9% Debenture at a premium of 5%

redeemable at par Give the necessary Journal entry

Solution :

Journal


Bank A/c Dr. 84,000

To 9% Debentures Application and

Allotment A/c 84,000



9% Debenture Application and Allotment A/c Dr. 84,000

To 9% Debenture A/c 80,000



and redeemable at par)

3. When Debentures are issued at par redeemable at premium

Journal


Bank A/c Dr.

To % Debentures Application &

Allotment A/c


% Debenture Application & Allotment A/c Dr,

Loss on issue of Debenture A/c Dr.

To % Debenture Account

To Premium on Redemption of

Debentures A/c

(Being the debentures issued at par and

redeemable at premium)

Illustration 13 : White Ltd. Issued `60,000 Debenture at par and redeemable at 10%

premium. Give the necessary Journal entry.

Solution :

Journal


Bank A/c Dr. 60,000




%Debenture Application and Allotment A/c Dr. 60,000

Loss on issue of Debenture A/c Dr. 6,000

To % Debenture A/c 60,000


Debentures A/c 6,000

(Being the debenture issued at par and



4. When Debentures are issued at Premium redeemable at premium

Journal


Bank A/c Dr.

To % Debenture Application &

Allotment A/c

(Being the application money receive)

% Debenture Application & Allotment A/c Dr.

Loss on issue of Debenture A/c

To % Debenture A/c



Debenture A/c


and redeemable at premium)

Illustration 14 : Gives Journal Entry assuming the face value of 10% debentures at

L 100 issued at L 105 and repayable at L 110..

Solution :

Journal


Bank A/c Dr. 105


Allotment A/c 105


% Debenture Application and Allotment A/c Dr. 105

Loss on Issue of Debentures A/c Dr. 10

To %Debenture A/c 100

To Securities Premium Reserve A/c 5


Debenture A/c 10

(Being the debenture issued at 5%

Premium and redeemable at 10% premium


5. When Debentures are issued at Discount but Redeemable at Par

Journal


Bank A/c Dr.


Allotment A/c

(Being the application money received.)


Discount on Issue of Debenture A/c Dr.

To % Debenture A/c

(Being debentured issued at discount but

redeemable at part)

6. When Debentures are issued at Discount and Redeemable at premium

Journal


Bank A/c Dr.


Allotment A/c



Discount on Issue of Debentures A/c Dr.

Loss on Issue of Debentures A/c Dr.

To % Debenture A/c


Debentures A/c

(Being the debentures issued at discount

and redeemable at premium)

Illustration 15 : Claris Life Sciences Ltd. issued 5,000 14% Debentures of `100

each at a discount of 10%. Pass the necessary journal entries in the books of the

company for the issue of debentures when debentures were to be:

(i) Redeemed at par.

(ii) Redeemed at a premium of 5%.


Journal


Bank A/c Dr. 4,50,000

To Debenture Application and Allotment 4,50,000

(Application money received on 5,000

debentures @ ` 90 each)

(i) Debenture Application and Allotment Dr. 4,50,000

Discount on issue of debentures Dr. 50,000


(5,000 14% Debentures of ` 100 each

issues at a discount of 10%)

(ii) Debenture Application and Allotment Dr. 4,50,000

Loss on issue of debenture A/c Dr. 75,000


To Premium on redemption of

Debentures 25,000

(5,000, 14% debentures of ` 100 each

issues at a discount of 10% but

redeemable at a premium of 5%)

INTEREST ON DEBENTURES

Interest on Debentures is calculated at a fixed rate on its face value and is usually

payable half yearly & is paid even company is suffering from loss because it is charge

on profit.

Income Tax is deducted from interest before payment to debenture holders. It is

called T.D.S. (Tax deducted at source).

JOURNAL ENTRIES

(1) When interest is Due

Debenture’s Interest A/c Dr. (Gross Interest)

To Debenture holder a/c (Net interest)

To Income Tax Payable A/c (Income Tax deducted)

(2) When interest is paid

Debenture holder A/c Dr. (With interest)

To Bank A/c


(3) On payment of Income Tax to Government

Income Tax Payable A/c Dr. (Amount of Income)

To Bank A/c Tax deducted at source)

(4) On transfer of Interest on debenture

to Statement of Profit and Loss A/c

Statement of Profit & Loss Dr.

To Debenture Interest A/c (Amount of Interest)

Illustration 16 : ABC Company Ltd., had 6% debentures of `1,00,000 on 1st January

2009 on @which interest is paid on 3th June and 31st December. Pass necessary

journal entries for the payment of interest for the year 2009, 10% tax is deducted at

source from interest and remitted immediately. Books are closed on 31st December.

Solution :

ABC Ltd.

Journal


2009

June Interest On Debenture A/c Dr. 3,000

30 To Debenture holder A/c 2,700

To Income Tax Payable A/c 300

(half yearly debenture interest due and tax

deducted at source)

June Debenture holder A/c Dr. 2,700

30 Income Tax Payable A/c Dr. 3,00

To Bank 3,000

(Interest & Tax paid)

Dec. Interest on Debenture A/c Dr. 3,000

31 To Debenture holder A/c 2,700

To Income Tax Payable 300

(half yearly debenture interest due

and tax deducted at source)

Dec. Debenture holders A/c Dr. 2,700

31 Income Tax Payabler A/c Dr. 300 2,700

To Bank A/c 3,000

(Being Interest & Tax paid)


Dec. Statement of Profit and Loss Dr. 6,000

31 To Interest on Debenture A/c 6,000

(Debenture Interest (3000+3000)

Transferred to Statement of Profit and loss)

Illustration 17 :B.G. Ltd. issued 2,000, 12% debentures of `100 each on 1st April

2012. The issue was fully subscribed. According to the terms of issue, interest on

debentures is payable half yearly on 30th September and 31st Mach and tax deducted

at source is 10%.

Pass necessary journal entries related to the debenture interest for the half-yearly

ending 31st March, 2013 and transfer of interest on debentures of the year to the Statement

of Profit & Loss.

Solution :

Books of B.G. Ltd.

Dr. Journal Cr.


2013 Interest on Debentures A/c Dr. 12,000

March 31 To Debentureholder’s A/c 10,800

To Income Tax Payable A/c /TDS 1,200

from Debenture interest A/c

(Half yearly interest due on debentures

and tax deducted at source)

March 31 Debentureholder’s A/c Dr. 10,800

To Bank A/c 10,800

(Payment of Interest)

March 31 Income Tax Payable / TDS from

Debentures Interest A/c Dr. 1,200

To Bank A/c 1,200

(TDS deposited with income tax authorities)

March 31 Statement of Profit & Loss Dr. 24,000

To Interest on Debentures A/c 24,000

(Interest transferred to Statement of P/L)


CHAPTER 9

COMPANY ACCOUNTS-REDEMPTION

OF DEBENTURE

Meaning : Redemption of debentures means repayment of the due amount of

debentures to the debenture holders. It may be at par or at premium.

Time of Redemption

(a) At maturity : - When repayment is made at the date of maturity of debentures

which is determined at the time of issue of debentures.

(b) Before maturity : If articles of association and terms of issue mentioned in

prospectus allows, then a company can redeem its debentures before maturity

date.

Redemption Methods

(1) Redemption in Lump-sum : When redemption is made at the expiry of a

specific period, as per the terms of issue.

(2) Redemption by draw of lots : In this method a certain proportion of

debentures are redeem each, year, the debenture for which repayment is to be

made is selected by draw of lots.

(3) Redemption by purchases in open market : If articles of association of a

company authorize, it may purchases its own debentures from open market

i.e. stock exchange

Advantages of this Method

(1) When market price of own debentures is low than the redeemable value is

less then the amount payable on maturity.

(2) Decrease the amount of interest payable to outsiders.

(3) If term of issue is provided that debentures are to be redeemed at premium

then such premium can be reduced.


Sometimes company can purchases the debentures at more than the redeemable

value due to the following reasons:

1. To maintain the solvency ratio.

2. To utilize the surplus money or funds which are lying idle with the

company.

3. When rate of interest on debentures is more than the current market rate

of interest on debentures in the industry.

Sources of Redemption of Debentures

1. Proceeds from fresh issue of Share Capital or Debentureholder.

2. From accumulated profit.

3. Proceeds from sale of fixed assets.

4. A company may purchases its own debentures out of its surplus funds.

Two terms which are used in the redemption of debentures :

1. Redemption out of capital : When a company has not used its reserve

or accumulated profit for redemption of its debentures, it is called

redemption out of capital, So company using this method have not

transferred its profit to DRR A/c. But as per SEBI guidelines it is

necessary for a company to transfer 50% amount of nominal value of

debentures to be redeemed in DRR A/c before redemption of debentures

commence.

2. Redemption out of profit :Redemption out of profit means that adequate

amount of profits are transferred to DRR A/c from Statement of Profit

& Loss before the redemption of debenture commences. This reduces

the amount available for dividends to shareholders.

Note : If it is mentioned in question that redemption is out of capital then DRR

should also created with 50% of the nominal value of debentures.

It is mentioned that redemption is out profit then DRR should be created with

the 100% of the nominal value of debentures.

It nothing is mention about the source of redemption than as per SEBI guidelines

50% of nominal value of debentures is to be transferred to DRR A/c.

If in any particulars questions DRR is already existed with more than 50%

amount of nominal value of debentures, then in this case total 100% of nominal value

of debentures is to be transferred to DRR A/c.


Debenture Redemption Reserve : Debenture redemption reserve is a reverse

representing retentions out of profit made for the purpose of redemption of

debentures.

Amount of DRR to be created : Section 117 (c) of the Companies Act, 1956

requires that, an adequate amount of profits should be transferred to DRR before

redemption commences. However, the adequate amount is not specified by the

companies act. SEBI has issued guidelines for the redemption of debentures whereby:

1. An amount equivalent to 50% of the amount of debentures issue must be

transferred to DRR before redemption of debentures commences.

This provision is applicable for non-convertible debentures or non-convertible part

of partly convertible debentures.

After all the debentures are redeemed, this account is closed by transferring to

general reserve account.

Exception to the creation of DRR as per SEBI guidelines.

1. All infrastructure companies, wholly engaged in the business related to

development, maintenance and operation of infrastructure facilities.

2. A company issuing debentures maturity period of not more than 18 months.

3. Debentures issued by Banking companies.

4. Companies issuing privately placed debentures.

The above types of companies are exempted by SEBI from creating DRR. However

the above types of companies can create DRR (at it option) for the redemption of

debentures.

Redemption Methods : (1) Redemption in Lump-sum

(A) Redemption at Par

Illustration 1 : X Ltd. Redeemed its 10,000 10% Debentures of `10 each at par on

31st March 2011

X Ltd.


2011 Balance in Statement of Profit & Loss A/c Dr. 50,000

31st To Debenture Redemption Reserve A/c 50,000

March (Being transfer of profit to Debenture Red.

Reserve)


31st 10% Debenture A/c Dr. 1,00,000

March To Debentureholder A/c 1,00,000

(Being the amount due to Debentureholders)

31st Debenture holder A/c Dr. 1,00,000

March To Bank A/c 1,00,000

(Being the amount paid to Debentureholders)

31st Debenture Redemption Reserve A/c Dr. 50,000

March To General Reserve A/c 50,000

(Being DRR A/c closed by transfer to

General Reserve A/c after redemption of

all Debentures)

(B) Redemption at Premium

Illustration 2 : Z Ltd. Redeemed its 1,00,000 10% Debentures of `10 each at 5%

premium on 31 March 2011.

Z Ltd.


2011 Balance in Statement of Profit & Loss A/c Dr. 5,00,000

31st To Debenture Redemption Reserve A/c 5,00,000

March (Being transfer of profit to Debenture

Redemption Reserve)

31st 10% Debenture A/c Dr. 10,00,000

March Premium on Redemption of Debentures A/c Dr. 50,000

To Debentureholders A/c 10,50,000

(Being the amount due to Debenturesholders)

31st Debentureholders A/c Dr. 10,50,000



31st Debenture Redemption Reserve A/c Dr. 5,00,000

March To General Reserve A/c 5,00,000



all Debentures)

Illustration 3 : Rajesh Export Ltd. has 2,000, 9% Debentures of `100 each due on

redemption on 31st march 2011. Debentures redemption reserve has a balance of


`30,000 on that date. Record the necessary journal entries at the time of redemption

of debentures.

Rajesh Export Ltd.



31st To Debenture Redemption Reserve A/c 70,000


Redemption Reserve)

31st 10% Debentures A/c Dr. 2,00,000

March To Debentureholders A/c 2,00,000


31st Debenturesholders A/c Dr. 2,00,000


(Being the amount paid to Debenturesholders)



(Being DRR A/c closed by transfer to General

Reserve A/c after redemption of all Debentures)

Illustration 4 : Rahul Ltd. has 50,000 9% Debentures of `50 each due on redemption

on 31st March 2011. Debentures redemption reserve has a balance of `15,00,000 on

that date. Record the necessary journal entries at the time of redemption of debentures.

Journal





Redemption Reserve)




31st Debentureholders A/c Dr. 25,00,000


(Being the amount paid to Debentureholder)

31st Debenure Redemption Reserve A/c Dr. 25,00,000


(Being DRR A/c Closed by transfer to


all debentures


Note : In this case DRR is Already more than 50% of nominal value of debentures,

then it is created upto the 100% of the nominal value of debenture.

Illustration 5 : Saket Ltd. (an infrastructure co.) has outstanding 10,000, 9%

Debentures of `50 each due on redemption on 31st March 2011. Record the necessary

journal entries at the time of redemption of debentures.

Rajesh Export Ltd.





Redemption Reserve)




31st Debentureholder A/c Dr. 5,00,000






General Reserve A/c After redemption of

all Debentures)

Note : The infrastructure Companies are exempted from creating DRR as per SEBI

guideline. However these companies may create DRR at its option).

Illustration 6 : AB Power Ltd., an infrastructure company has outstanding 10 lac,

9% Debentures of `5 each due for redemption on 30st Sept. 2012. Record the

necessary entries at the time of redemption of debentures.

Solution :

Journal of AN Power Ltd.

(` in La c)


2012 9% Debentures A/c Dr. 50

30th To Debentureholders A/c 50

Sept. (Being the amount due to Debentureholders

on redemption

30th Debentureholders A/c Dr. 50


Sept. To Bank A/c 50

(Being the amount due to

Debentureholders paid)

Note : As per SEBI Guideline, Infrastructure companies are exempted from creating

Debenture Redemption Reserve.

Illustration 7 : Abha Ltd. has 5,000 10% Debentures of `20 each due for redemption

on 30th Sept. 2012. Debenture Redemption Reserve has a balance of `20,000 on that

date. Record the necessary entries at the time of redemption of debentures.

Journal in the Books of Abha Ltd.


2012 Balance in Statement of Profit and Loss A/c Dr. 30,000

30th To Debenture Redemption Reserve A/c 30,000

Sept. (Being the required amount transferred to

DRR)

30th 10% Debentures A/c Dr. 1,00,000

Sept. To Debentureholder’s A/c 1,00,000

(Being the amount due to Debentureholders

on redemption)

30th Debentureholder’s A/c Dr. 1,00,000

Sept. To Bank A/c 1,00,000


paid

30th Debenture Redemption Reserve A/c Dr. 50,000

Sept To General Reserve A/c 50,000

(Being the DRR transfer to General Reserve)

Illustration 8 : Vivek Transport Ltd. Has 5,000 ; 10% Debentures of `20 each due

for redemption on 30th sept. 2012. Debenture Redemption Reserve has a Balance of

`80,000 on that date. Record the necessary entries at the time of redemption of

debentures.

Solution :

Journal in the Books of Vivek Transport Ltd.


2012 Balance in Statement of Profit and Loss A/c Dr. 20,000


Sept. (Being the required amount transferred to DRR)



Sept. To Debentureholder’s A/c 1,00,000


on redemption)




paid)

30th Debenture Redemption Reserve A/c Dr. 1,00,000

Sept To General Reserve A/c 1,00,000

(Being the DRR transfer to General Reserve)

Note : DRR exits in the books more than 50% of the debentures face value, so it

assumed that redemption is out profit. In this case DRR is to be created upto 100%

face value of Debentures. So DRR A/c is credited with the difference amount i.e.

`1,00,000-`80,000=`20,000.

Illustration 9 : Rahul Ltd. redeemed `25,00,000; 12% Debentures at a premium of

5% out of Profit on 30th Sept. 2012. Pass the necessary journal entries for the

redemption of debentures.

Solution :

Journal in the Books of Rahul Ltd.


2012 Balance in Statement of Profit and Loss A/c Dr. 25,00,000

30th To Debenture Redemption Reserve A/c 25,00,000

|Sept. (Being the required amount transferred to DRR)


Sept Premium on Redemption of Debentures A/c 1,25,000

To Debentureholder’s A/c 26,25,000


on redemption)




paid)

30th Debenture Redemption Reserve A/c Dr. 25,00,000

Sept. To General Reserve A/c 25,00,000

(Being the DRR transferred to General

Reserve on the redemption of all Debentures)


Note : (1) If in any question it is mentioned that redemption of debenture is out of

profit, then the Debenture Redemption Reserve A/c should be created with the full

face value (100%) of debentures. If DRR is created only with 50% of the total

amount of debentures, it would mean that remaining 50% of the debentures have been

redeemed out of capital.

(2) So, it would be clear if in a question it is mentioned that the redemption is out

of profit, then an amount equal to total amount of debentures (100% of face value

of debentures) is to be transferred to DRR A/c. in all other case (except Companies

exempted by the SEBI) DRR would be created with the 50% of the face of the

debentures.

Illustration 10 : Rajesh Ltd. has issued 25,000; 10% Debentures of `100 each of

which half the amount is due for redemption on 30th Sept. 2012 at a premium of 5%.

The company has in its Debenture Redemption Reserve Account a balance of

`5,40,000, Record the necessary journal entries at the time of Redemption of

Debentures.

Solution :

Journal in the Books of Rajesh Ltd.


2012 Balance in Statement of Profit and Loss A/c Dr. 7,10,000

30th To Debenture Redemption Reserve A/c 7,10,000

Sept. (Being the required amount transferred to DRR)


Sept. Premium on Redemption of

Debenture A/c 62,500

To Debentureholders’ A/c Dr. 13,12,500


on redemption)

30th Debentureholders’ A/c Dr. 13,12,500


(Being the amount due to Debentureholders paid)

Note 1 : In this questions only half of the total, debenture is to be redeemed, as per

SEBI guideline A company shall create DRR equivalent to atleast of 50% of the

amount of debentures issued before starting the redemption of debentures So, DRR

A/c is to be created with the amount `12,50,000 (i.e. 50% of `25,00,000), not related

with the amount of debentures to be redeemed.

(2) Debenture Redemption Reserve will be transferred to General Reserve when all

the debentures are redeemed.


Redemption method : 2 Draw of lots

Illustration 11 : S Ltd. redeemed its `10,000, 8% Debentures out of capital by

drawing a lot on 30 Nov. 2011. Journalise.

Solution

Journal of S. Ltd.




Nov. (Being transfer of profit to Debenture

Redemption Reserve)

30th 10% Debentures A/c Dr. 10,000

Nov. To Debentureholders A/c 10,000


30th Debentureholders A/c Dr. 10,000

Nov. To Bank A/c 10,000


Note : The DRR Balance will be transferred to General Reserve after all the debentures

are redeemed.)

Illustration 12 : Y Ltd redeemed its L 20,000, 9% debentures out of profit by

drawing of lot on 30th Nov. 2011 Journalise.

Y Ltd.




Nov. (Being transfer of profit to Debenture

Redemption Reserve)

30th 10% Debentures A/c Dr. 20,000

Nov. To Debentureholders A/c 20,000


30th Debentureholders A/c Dr. 20,000

Nov. To Bank A/c 20,000


Note : The DRR Balance will be transferred to General Reserve after all the debentures

are redeemed.


Illustration 13 : Pass the necessary journal entries for this issue and redemption of

Debentures in the following cases:

(i) 10,000, 10% debentures of `120 each issued at 5% premium, repayable at

par.

(ii) 20,000, 9% Debentures of `200 each issued at 20% premium, repayable at

30% premium.

Journal


(i) Bank A/c Dr. 12,60,000

To Debenture Application And


(Being receipt of Application money

Debenture Application and Allotment A/c Dr. 12,60,000



(Being Issue of 10% Debenture at

premium redeemable at par)

At the 10% Debenture A/c Dr. 12,00,000

time of To Debentureholder A/c 12,00,000

redemption (Being amount due to debentureholder)

Debentureholder A/c Dr. 12,00,000

To Bank A/c 12,00,000

(Being the amount paid to debentureholders

(ii) Bank A/c Dr 48,00,000

To Debenture Application And


(Being receipt of Application money)

Debentures Application and Allotment A/c Dr. 48,00,000

Loss on Issue of Debentures A/c Dr. 12,00,000


To Securities Premium Reserve A/c 8,00,000


Debentures A/c 12,00,000

(Being Issue of 9% Debenture at premium


At the 9% Debenture A/c Dr. 40,00,000

time of Premium on Redemption of

redemption Debenture A/c Dr. 12,00,000


To Debentureholder A/c 52,00,000

(Being amount due to debentureholder)

Debentureholder A/c Dr. 52,00,000

To Bank A/c 52,00,000


Redemption Method 3 : Redemption of debentures by the purchase of own debentures

in the open market. According to the Companies Act, a company can redeem its

debentures in full or in part by purchasing its own debentures in the open market

(Stock exchange) provided the company is authorised to do so by its Articles of

Association.

Suitability of this Method

1. When interest rate on own debentures is higher than the market interest rate.

2. When own debentures are quoted at a discount in the open market, a company

can earn profit on redemption as debentures are available at below its nominal

value in the market, otherwise normal redemption may be at part or at premium.

Debenture Redemption Reserve : Creation of Debenture Redemption Reserve (DRR)

is necessary if debentures have been purchased for cancellation. Unless otherwise

stated in question, it is assumed that the company has adequate balance in DRR

before initiating the process of purchase of debentures for cancellation.

Purchases of debentures in the open market

(A)For immediate

cancellation

(B)For investment

purpose

B(1)Re-sale in the market

B(s)Cancel at later date


(A) When Debentures are purchased from the open market for immediate

cancellation : The purchase cost (market price paid + Brokerage + other

purchase exp.) of own debentures may be equal to or less than the nominal

value of debentures.


(i) When own debentures are purchased : e.g. if a company purchase 1,000

of its own debentures of 50 each at 49 (including all purchase exp.)

in the open market for immediate cancellation.

Journal


Own debentures A/c Dr. 49,000

To Bank A/c 49,000

(Being the purchase of 1000 own debentures

@ 49 each)

(ii) For cancellation of own debentures :

There may be three case – (a) when own debentures are purchased at

nominal price – the entry passed is for cancellation :

X% Debentures Dr. (Nominal Face Value of Deb.)

To Own Debentures A/c{Purchase Cost}

(b) When own debentures are purchased at price below Nominal value of

Debentures : the entry passed is for cancellation:

(i) X% Debentures A/c Dr. [Nominal/Face Value Debentures]

To Own Debentures A/c (Purchase cost of own Deb.)

To Profit on Cancellation of own

Debentures A/c [Profit]

Hint : (Profit on cancellation is the Excess of nominal value over purchase cost of own

debentures cancelled)

Profit on cancellation of own debentures is a capital profit and therefore, is transferred

to capital Reserve (or it may be used to write off discount/Loss on issue of debentures)

the entry is :

To writing off Capital losses.

(ii) Profit on cancellation of own debentures A/c or

To Capital Losses (if any) A/c


in above example the entries for cancellation of debentures will be :


Journal


X % Debentures A/c Dr. 50,000

To Own debentures A/c 49,000

To Profit on cancellation of own 1,000

debentures A/c

(Cancellation of own debentures)

Profit on Cancellation of Own Debentures A/c Dr. 1,000

To Capital Reserve 1,000

(Profit on conciliation of own Den.

is transferred to capital Reserve)

(C) When own debentures are purchased at a price above its face value. e.g.

Debentures of the face value of 40,000 are purchased in the open market

at 42,000, the entry will be

Journal


Own Debentures A/c Dr. 42,000

To Bank A/c 42,000

(Purchases of own debentures for L 42000)

X% Debentures A/c Dr. 40,000

Loss on Redemption of Debentures A/c Dr. 2,000

To own Debentures A/c 42,000

(Cancellation of own debentures)

‘Loss on Redemption of Debentures’ is a capital loss and is therefore

written off against capital profit or in the absence of capital profit is written

off from statement of profit and loss.

(B) Purchase of own Debentures from open market for investment purpose : e.g.

if a company purchase it 9% debentures of 50,000 at 49,000 as investment

the entry will be:

Journal


Investment in Own Debentures A/c Dr. 49,000

To Bank A/c 49,000

(Being Purchases of own debentures as investment)


It should be noted that in the above entry an account named “Investment in own

debentures A/c” is debited with purchase cost instead of “own debentures A/c” because

own debentures have been purchased as an assets. “Investment in own debenture” will

appear on the assets side under Non-Current Investment or current investment depending

upon the time of Cancellation/Redemption or resell time.

Advantages : Reasons for Purchase of own Debentures as Investment :

(i) Debentures are available in open market at a price below its nominal

value.

(ii) These debentures can be resell at profit in the market OR can be cancelled

if the market price of such debentures further goes down.

(iii) Interest payment on such debentures is saved which would otherwise be

paid to debenture holders.

Bill : Resell these debenture in the market : the journal entries will be :

Bank A/c Dr.

(Net amount realised from own Deb.)

Loss on sale of own Debentures A/c*Dr. (Excess of cost over sale price)

To Investment in own Debentures A/c(cost of own debentures)

To Profit on sale of own Debentures A/c*(Excess of sale price over cost)

Note : *There will be one entries from two above Profit or Loss as the case. Loss

or Profit on sale of own debentures will be transferred to Statement of profit and loss

at the end of accounting year.

Profit on sale of own Debentures A/c Dr.

To Statement of Profit and Loss

B (II) On Cancellation of Debentures at a later date :

(a) X% Debentures A/c Dr.

Loss on cancellation of own Debentures A/c Dr..

To Investment in own Debentures A/c

To Profit on cancellation of own Debentures A/c

(b) Profit on cancellation of own Debentures A/c Dr.



Illustration 14: Raj Electrical Ltd. had 5,00,000; 10% Debentures of 100 each

outstanding on 31st Jan 2014. On this date, company decided to purchase 50,000

worth debentures at 97 in the open market.

Give Journal entries if:

(i) Debentures are purchased for immediate cancellation.

(ii) Debentures are purchase as investment (A), and on 31st March 2014

sold for 52,000 or (B) if cancelled on 31st March, 2014 (treatment of

interest is to be ignored).

Solution

I. Debentures Purchased for Cancellation

Journal


2014 Own Debentures A/c Dr. 48,500

Jan.31 To Bank A/c 48,000

(` 50,000 debentures Purchased at` 97

per debentures for cancellation)

Jan.31 10% Debentures A/c Dr. 50,000

To Own Debentures A/c 48,500

To Profit on Canciliation of Own 1,500

Debentures A/c

(Cancellation of own debenture)

Profit cancellation of Own Debentures A/c Dr. 1,500


(Profit cancelletion transferred to Capital

Reserve)

II. When Debentures are purchase as investment.

Journal


2014 Investment in Own Debentures A/c Dr. 48,500

Jan.31 To Bank A/c 48,500

(Purchase of 500 Debentures @ ` 97 each

as investment)


II. (A) If Debentures purchases as investment are sold for `52,000 on 31st

March 2014

Journal


2014 Bank A/c Dr. 52,000

Mar.31 To Investment in Own Debenture A/c 48,500

To Profit on sale of Own Debenture A/c 3,500

(Sale of investment in own debentures)

Mar.31 Profit on sale of Own Debentures A/c Dr. 3,500

To Statement of Profit & Loss A/c 3,5000

(Profit on sale of own debentures transferred

to statement of P/L

II. (B) If debentures purchased as investment are cancelled.

Journal


2014 10% Debentures A/c Dr. 50,000

Mar.31 To Investment in Own Debentures A/c 48,500

To Profit on cancellation of Own


(Being own debentures concealed)

Mar.31 Profit on cancellation of Own Deb. A/c Dr. 1500

To Capital reserve A/c 15000

(Being Profit on cancelletion transferred to

capital reserve

Treatment of Interest on own Debentures : When a company purchase it own

debentures for investment and has not cancelled them upto the interest payment due date.

The company will pay interest only to outside debentures holders and interest on own

debentures held by the company is retained by the company entries will be:

(i) When interest becomes due on Debentures:

Debentures interest A/c Dr. (Total interest)

To Debentureholder’s A/c (Int. for outsides)

To Int. on own Debentures A/c (Interest on Own

Debentures)


(ii) On Payment of interest to outsider debentures holders:

Debentures holders A/c Dr.

To Bank A/c

(iii) Transfer of Int. to statement of P/L at the end of accounting year:

(a) Statement of Profit & Loss Dr. (Total Int. of accounting

To Debentures interest A/c year transferred)

Transfer of Interest on own debentures to statement of Profit & Loss

Interest on own debentures A/c Dr.

To Statement of Profit & Loss

Illustration 15 : If in illustration no. 14. Interest on debentures to be provided on

30th Sept. 31st March every year. Give the journal entries for int. on debentures on

31st March, 2014.

Solution

Journal


2014 Debenture Interest A/c Dr. 25,000

Mar.31 To Debenturesholders A/c 22,500

To Interest on own debentures A/c 2,500

(Inst. on ` 4,50,000 debentures @ 10%

p.a. for half year and on ` 50,000 own Deb.)

Mar.31 Debenturesholders A/c Dr. 22,500

To Bank A/c 22,500

(Interest paid on ` 4,50,000 debentures)

Mar.31 Statement of Profit & Loss Dr. 50,000

To Debentures interest A/c 50,000

(Interest of whole year transferred to statement

of Profit & Loss)

Mar.31 Interest on Own Debentures A/c Dr. 2,500

To Statement of Profit & Loss 2,500

(Interest earned on own debentures transferred

to Statement of Profit & Loss


CHAPTER 1

FINANCIAL STATEMENTS OF A COMPANY

• Financial Statements are the end products of accounting process and are

prepared at end of the accounting period to reveal the financial position of

the enterprise at a particular date and the result of its business operations

during an accounting period.

• Financial Statements includes :

1. Balance Sheet or Position Statement

2. Statement of Profit and Loss or Income Statement

3. Notes to Accounts.

• Balance Sheet : It is a statement of assets, liabilities and capital of a business

and it is prepared to show the financial position of the enterprise at a

particular date.

A balance sheet of a company is prepared as per the formal prescribed in Part

I of Schedule VI of the Companies Act, 1956.

• The Revised Schedule VI prescribes only the vertical format for presentation

of financial statements. Thus, a company will now not have an option to use

horizontal format for the presentation of financial statements as prescribed in

Old Schedule VI.

Important contents of Balance Sheet

• An asset is a resource controlled by the enterprise as a result of past events

from which future economic benefits are expected to flow to the enterprise.

• A liability is a present obligation of the enterprise arising from past events,

the settlement of which is expected to result in an outflow from the enterprise

of resources embodying economic benefits.

• Equity is the residual interest in the assets of the enterprise after deducting

all its liabilities.


Part I - Form of Balance Sheet

Particulars Note No. Figures as at Figures as at

end of current the end of the

reporting previous reporting

period period

1 2 3 4

I. EQUITY AND LIABILITY

(1) Shareholders’ funds

(a) Share capital

(b) Reserves and surplus

(c) Money received against share warrants

(2) Share application money pending

allotment

(3) Non-current liabilities

(a) Long-term borrowings

(b) Deferred tax liabilities (Net)

(c) Other Long term liabilities

(d) Long-term provisions

(4) Current liabilities

(a) Short-term borrowings

(b) Trade payables

(c) Other current liabilities

(d) Short-term provisions

TOTAL

II. ASSETS

(1) Non-current assets

(a) Fixed assets

(i) Tangible assets

(ii) Intangible assets

(iii) Capital work-in-progress

(iv) Intangible assets under

development

(b) Non-current investments

(c) Deferred tax assets (net)

(d) Long-term loans and advances

(e) Other non-current assets


(2) Current Assets

(a) Current investments

(b) Inventories

(c) Trade receivables

(d) Cash and cash equivalents

(e) Short term loans and advances

(f) Other current assets

TOTAL

I. Equity and Liabilities

I. (1) Shareholders’ Funds

Under this head, following line items are to be disclosed :

• Share Capital;

• Reserves and Surplus;

• Money received against Share Warrants.

I. (1) b. Reserves and Surplus

(i) Reserves and Surplus shall be classified as :

(a) Capital Reserves;

(b) Capital Redemption Reserve;

(c) Securities Premium Reserve;

(d) Debenture Redemption Reserve;

(e) Revaluation Reserve;

(f) Share Options Outstanding Account;

(g) Other Reserves - (specify the nature and purpose of each reserve and the

amount in respect thereof such as Tax Reserve);

(h) Surplus i.e. Balance in Statement of Profit & Loss.

(ii) Debit balance of statement of profit and loss shall be shown as a negative

figure under the head ‘Surplus’. Similarly, the balance of ‘Reserves and

Surplus’, after adjusting negative balance of surplus, if any, shall be

shown under the head ‘Reserves and Surplus’ even if the resulting

figure is in the negative.


1.3 Non-current liabilities

A liability shall be classified as non-current if it is not a current liability. The

following items shall be disclosed under non-current liabilities.

Long-term borrowings;

Deferred tax liabilities (Net);

Other Long term liabilities;

Long-term provisions.

I.3.a. Long-term borrowings :

1.3.a.1. Long-term borrowings shall be classified as :

(a) Bonds/debentures;

(c) Term loans;

from banks;

from other parties;

(c) Deferred payment liabilities;

(d) Deposits;

(e) Loans and advances from related parties;

(f) Long term maturities of finance lease obligations;

(g) Other loans and advances (specify nature).

1.3.c. Other Long-term liabilities

This should be classified into :

(a) Trade payables; (payable after 12 months from date of Balance Sheet or after

operating cycle); and

(b) Others.

A payable shall be classified as ‘trade payable’ if it is in respect of amount due on

account of goods purchased or services received in the normal course of business

operations.

1.3.d. Long-term Provisions

The amounts shall be classified as :


(a) Provision for employee benefits. Example: Provision for Provident Fund

(b) Others (specify nature). Example: Provision for Warranties.

I. 4. Current Liabilities

1. A liability shall be classified as current when it satisfies any of the following

criteria:

(a) it is expected to be settled in the company’s normal operating cycle; or

(b) it is held primarily for the purpose of being traded; or

(c) it is due to be settled within twelve months after the reporting date; or

(d) the company does not have an unconditional right to defer settlement of

the liability for at least twelve months after the reporting date. Terms of

a liability that could, at the option of the counter party, result in its

settlement by the issue of equity instruments do not affect its

classification.

2. An operating cycle is the time between the acquisition of assets for processing

and their realization in cash or cash equivalents. Where the normal operating cycle

cannot be identified, it is assumed to have a duration of 12 months.

Current Liabilities should be classified on the face of the Balance Sheet as follows:

Short-term borrowings;

Trade payables; (Creditors & Bills Payables)

Other current liabilities;

Short-term provisions.

I.4.c Other current liabilities


(a) Current maturities of long-term debt;

(b) Current maturities of finance lease obligations;

(c) Interest accrued but not due on borrowings;

(d) Interest accrued and due on borrowings;

(e) Income received in advance;

(f) Unpaid dividends;


(g) Application money received for allotment of securities and due for

refund and interest accrued thereon;

(h) Unpaid matured deposits and interest accrued thereon;

(i) Unpaid matured debentures and interest accrued thereon;

(j) Other payables (specify nature).

I.4.d. Short-term Provisions

Provisions which are expected to mature within 12 months are classified as short

term provisions.


(a) Provision for employee benefits;

(b) Others (specify nature).

Others would include Provision for Dividend, Provision for Taxation, Warranty

Provisions, etc. These amounts should be disclosed separately specifying nature thereof.

II. Assets

1. Non-Current Assets

(a) Fixed Assets

(i) Tangible Assets

(ii) Intangible Assets

(iii) Capital work-in-progress

(iv) Intangible assets under development

(b) Non-current investments

(c) Deferred Tax assets (net)

(d) Long-term loans and advances

(e) Other non-current assets

II. 1.a.i. Tangible Assets

Tangible assets are the assets which have a physical existence. Assets that can be

touched and seen are known as tangible assets.


The company shall disclose the following in the notes to accounts as per Part I of

the Revised Schedule VI :

(a) Land;

(b) Buildings;

(c) Plant and Equipment;

(d) Furniture and Fixtures;

(e) Vehicles;

(f) Office equipment;

(g) Others (specify nature)

II.1.a.ii. Intangible Assets

Intangible assets are the assets which do not have a physical existence. These assets

can not be seen and touched.

(i) Classification shall be given as :

(a) Goodwill;

(b) Brands/trademarks;

(c) Computer software;

(d) Mastheads and publishing titles;

(e) Mining rights;

(f) Copyrights, patents and other intellectual property rights, services and

operating rights;

(g) Recipes, formulae, models, designs and prototypes;

(h) Licenses and franchise;

(i) Others (specify nature).

II.1.a.iii. Capital Work-in-Progress

It includes Fixed Assets which are under construction by the company itself.

II.1.a.iv. Intangible Assets under Development

Intangible assets under development should be disclosed under this head provided

they can be recognized based on the criteria laid down in AS-26.


11.1.b. Non-Current Investments

(i) Non-current investment shall be classified as :

i. Trade investments; and

ii. Other investments.

Trade Investment

The “trade investment” is an investment made by a company in shares or

debentures of another company, to promote the trade or business of the first

company.

Non-Current Investments is further classified as :

(a) Investment in property;

(b) Investments in Equity Instruments;

(c) Investments in preference shares;

(d) Investments in Government or trust securities;

(e) Investments in debentures or bonds.

(f) Investments in Mutual Funds;

(g) Investments in partnership firms;

(h) Other non-current Investments (specify nature)

Note : If a debenture is to be redeemed partly within 12 months and balance after

12 months, the amount to be redeemed within 12 months should be disclosed

as current and balance should be shown as non-current.

II.1.d. Long-term loans & advances

Loans and advances that are not expected to be received back in cash or in the form

of an asset within 12 months are known as Long-Term loans and advances.

(i) Long-term loans and advances shall be classified as :

(a) Capital Advances;

(b) Security Deposits;

(c) Loans and advances to related parties (giving details thereof);

(d) Other loans and advances (specify nature).

Capital advances are advances given for procurement of fixed assets which are non-

current assets.


II.1.e. Other Non-Current Assets

Other non-current assets shall be classified as :

(i) Long Term Trade Receivables (including trade receivables on deferred credit

terms);

(ii) Other (specify nature)

A receivable shall be classified as ‘trade receivable’ if it is in respect of the

amount due on account of goods sold or services rendered in the normal

courses of business.

Important : The Revised Schedule VI does not contain any specific disclosure

requirement for the unamortized portion of expense items such as share issue expenses,

ancillary borrowing cost and discount or premium relating to borrowings. The Old

Schedule VI required these items to be included under the head “Miscellaneous

Expenditure.”

We should disclose the unamortized portion of such expenses as “Unamortized

expenses”, under the head ‘Other current/non-current assets”, depending on whether

the amount will be amortized in the next 12 months or thereafter.

II.2. Current Assets

1. An asset shall be classified as current when it satisfies any of the following

criteria :

(a) it is expected to be realized in, or is intended for sale or consumption

in the company’s normal operating cycle; or

(b) it is held primarily for the purpose of being traded; or

(c) it is expected to be realized within twelve months after the reporting

date; or

(d) it is cash or cash equivalent unless it is restricted from being exchanged

or used to settle a liability for at least twelve months after the reporting

date.

All other assets shall be classified as non-current.

2. An operating cycle is the time between the acquisition of assets for processing

and their realization in cash or cash equivalents. Where the normal operating

cycle cannot be identified, it is assumed to have a duration of 12 months.


II.2.a. Current Investments

Current Investments are the investments which are held to be converted into cash

within, short period, i.e., within 12 months.

Current investments shall be classified as :

(a) Investments in Equity Instruments;

(b) Investments in Preference Shares;

(c) Investments in Government or trust securities;

(d) Investments in debentures or bonds;

(e) Investments in Mutual Funds;

(f) Investments in partnership firms.

(g) Other investments (specify nature).

II.2.b. Inventories

Inventories shall be classified as :

(a) Raw materials;

(b) Work-in-progress;

(c) Finished goods;

(d) Stock-in-trade (in respect of goods acquired for trading);

(e) Stores and spares;

(f) Loose tools;

(g) Other (specify nature).

The heading Finished Goods should comprise of all finished goods other than those

acquired for trading purposes.

II.2.c. Trade Receivables (current)

A receivable shall be classified as a ‘trade receivable’ if it is in respect of the

amount due on account of goods sold or services rendered in the normal course of

business.

A trade receivable will be treated as current if it is likely to be realized within 12

months from the date of Balance Sheet or Operating cycle of the business.


II.2.d. Cash and Cash Equivalents

As defined in AS-3, Cash flow Statement, cash and cash equivalents are short term

highly liquid investments that are readily convertible into known amount of cash and

which are subject to an insignificant risk of change in value.

(i) Cash and cash equivalents shall be classified as :

(a) Balances with banks;

(b) Cheques, drafts on hand,

(c) Cash in hand;

(d) Others (specify nature).

II.2.e. Short-term Loans and Advances

(i) Short-term loans and advances shall be classified as :

(a) Loan and advances to related parties (giving details thereof):

(b) Others (specify nature).

(ii) Allowance for bad and doubtful loans and advances shall be disclosed under

the relevant heads separately.

II.2.e.f. Other Current Assets (specify nature)

This is an all-inclusive heading, which incorporates current assets that do not fit

into any other asset, categories e.g. Unbilled Revenue. Unmortised Premium on Forward

Contracts etc.

Statement of Profit and Loss

• Statement of Profit and Loss : It is a statement prepared to show the result

of business operations during an accounting period.

It shows the operating performance of a company during the accounting

period.

A Statement of Profit & Loss of a Company is prepared as per the format

prescribed in Part II of Schedule VI of the Companies Act, 1956 and Revised

Schedule VI Part II has prescribed a vertical format for it.


PART II - FORM OF STATEMENT OF PROFIT AND LOSS

Statement of Profit & Loss

for the year ended.......

( in . . . . .)

Particulars Note Figures for the Figures for the

No. current reporting previous reporting

period period

I. Revenue from operations ............... ...............

II. Other Income ............... ...............

III. Total Revenue (I+II) ............... ...............

IV. Expenses :

• Cost of Material consumed

• Purchases of Stock-in-Trade

• Changes in Inventories of Finished

Goods, work-in-progress and

stock-in-trade

• Employees Benefit Expenses

• Finance Cost

• Depreciation & Amortisation Expenses .............. ..............

• Other Expenses .............. ..............

Total Expenses .............. ..............

V. Profit before Tax (III–IV) .............. ..............

VI. Less : Tax (............) (............)

VII. Profit after Tax (V–VI) .............. ..............

CONTENTS OF STATEMENT OF PROFIT AND LOSS

1. Revenue from Operations : It refers to the revenue earned by the company

from its business operations.

For example :

(1) Revenue from sale of products or services

(2) Revenue from sale of scrap.

2. Other Income : It refers to the revenue earned by the company from activities

other than its business operations.


For example :

(i) Interest Income

(ii) Dividend Income

(iii) Profit from sale of investments or fixed assets.

3. Cost of Material Consumed :

= Opening inventory of Raw Materials + Net Purchases of Raw Materials –

Closing Inventory of Raw Materials.

Note : Inventory of work-in-progress, Finished goods and Stock-in-

raid are not considered for calculating cost of material consumed.

4. Purchase of Stock-in-Trade : It includes goods purchased for resale purpose

in same form i.e., without any further processing.

5. Changes in Inventories of work-in-progress, finished goods and stock-in-

trade.

= Opening Inventories – Closing Inventories

6. Employees Benefit Expenses : It includes all expenses incurred by the

company on its employees such as :

(i) Wages, salaries, bonus etc.

(ii) Leave encashment, staff welfare expenses, etc.

(iii) Contribution to employees provident fund and other funds.

7. Finance Cost : It means cost incurred by a company on its borrowings i.e.,

debentures issued or loan taken by it.

Borrowing costs such as loan processing fees are also included in finance

cost.

8. Depreciation and Amortisation expenses : Depreciation is the cost of tangible

fixed assets written of over their useful life such as on building, plant &

machinery etc.

Amortisation is the cost of intangible fixed assets written off over their useful

life such as on patents, trade marks, computer software etc.

9. Other Expenses : Expenses that are not shown in any of the above mentioned

heads are shown here.

For example :

(i) Carriage Inwards/Outwards


(ii) Audit Fees

(iii) Insurance charges

(iv) Rates & taxes

(v) Bank charges

(vi) Advertisement expenses

(vii) Administrative expenses

(viii) Selling and distribution expenses

(ix) Power and electricity expenses

(x) Repairs of Fixed Assets etc.

Illustration : Under which major sub-heading the following items will be placed in

the Balance Sheet of a Company as per Schedule-VI, Part I of the Companies Act,

1956 :

(i) Accrued Incomes

(ii) Loose Tools

(iii) Provision for employees benefits

(iv) Unpaid dividend

(v) Short-term loans

(vi) Long-term loans

Solution :

Item Sub-heading

Accrued Incomes Other Current Assets

Loose tools Inventories

Provision for Employees benefits Long-term provisions

Unpaid Dividends Other Current Liabilities

Short-term loans Short-term borrowings/Short-term loans

and advances

Long-term loans Long-term borrowings/Long-term loans

and advances

Illustration : List the items which are shown under the heading, ‘Current Assets’ in

the Balance Sheet of a company as per provisions of Schedule VI, of the Companies

Act, 1956.


Solution :

(a) Current Investments

(b) Inventories

(c) Trade Receivables


(e) Short-term loans and advances

(f) Other Current Assets

Illustration : Name the major headings under which the equity and liabilities side

of a company’s Balance Sheet is organised and presented.

Solution :

The major headings on the Equity and Liabilities side are :

I. Shareholder’s funds

II. Share Application money pending allotment

III. Non Current Liabilities

IV. Current Liabilities

Illustration : List the items that are included under Inventories.

Solution :

(i) Raw materials

(ii) Work-in-progress

(iii) Finished goods

(iv) Stock-in-trade

(v) Stores and spares

(vi) Loose tools


CHAPTER 2

FINANCIAL STATEMENT ANALYSIS

Financial statement analysis is a systematic process of studying the relationship

among the various financial factors contained in the financial statements to have a better

understanding of the working and the financial position of a business.

“Financial Analysis consists in separating facts according to some definite plan,

arranging them in groups according to certain circumstances and then presenting

them in a convenient and easily read and understandable form.”

— Finney and Miller

Objectives or Purposes of Financial Statement Analysis

• To measure the Profitability or Earning Capacity of the business

• To measure the Financial Strength of the business

• To make Comparative Study within the firm and with other forms

• To judge the Efficiency of Management

• To provide Useful Informations to the Management

• To find out the Capability for payment of interest, dividend etc.

• To measure the Short-term and Long-term Solvency of the business

Limitation of Financial Statement Analysis

• Based on basic financial statement which themselves suffer from certain

limitations.

• Ignores changes in price level.

• Affected by the personal ability and bias of the analyst.

• Lack of qualitative analysis as only those transaction and events are recorded

which can be measured in terms of money.

• When different accounting policies are followed by the two firms then

comparison between their financial statement becomes unreliable.


• Analysis of single year’s financial statement have limited use.

• Also affected by the Window dressing

Types of Financial Statement Analysis

There are two main approaches for the analysis of financial statements.

Horizontal Analysis : In this type of analysis, figure in the financial statements for

two or more years are compared and analysed. It helps in knowing the trends of the

business over a period of time. It is also known as Time series analysis or Dynamic

Analysis.

Vertical Analysis : In this type of analysis, figures in the financial statement for a

single year are analysed. It involves the study of relationship between various items of

Balance Sheet or Statement of Profit & Loss of a single year or period. It is also known

as Static Analaysis.

Significance or Importance of Financial Analysis :

• For Management : To know the profitability, liquidity and solvency position

to measure the effectiveness of its own decisions taken and to take corrective

measure in future.

• For Investors : Investors want to know the earning capacity and future

growth prospects of the business which helps in assessing the safety of their

investment and reasonable return.

• For Creditors : Short-term creditors want to know the liquidity position of

the business where as long term creditors want to know about the solvency

position and ability to pay the interest consistently.

• For Govt. : To know the profitability position for taking taxation decision

and to take decisions about the price regulations.

• For Employees : To know the progress of the company for assessing bonus,

possible increase in wages and ensure stability of their jobs.

• For Customers : To know about the continuance of the business in future.


CHAPTER 3

TOOLS FOR FINANCIAL STATEMENT ANALYSIS

The various tools used for analysis of financial statements are :

• Comparative Statement : Financial Statements of two years are compared

and changes in absolute terms and in percentage terms are calculated. It is a

form of Horizontal Analysis.

• Common Size Statement : Figures of Financial Statements are converted in

to percentage with respect to some common base.

In Comparative Income Statement Sales/Revenue from Operations is taken

as base where as in Comparative Balance Sheet Total assets or Total Equity

and Liabilities are taken as base.

• Ratio Analysis : It is a technique of Study of relationship between various

items in the Financial Statements.

• Cash Flow Statement : It is a statement that shows the inflow and outflow

of cash and cash equivalents during a particular period which helps in finding

out the causes of changes in cash position between the two balance sheet

dates.

Comparative Statements

It is a statement that shows changes in each item of the financial statement in

absolute amount and in percentage, taking the amounts of the preceding accounting

period as the base.

Types of Comparative Statements :

1. Comparative Balance Sheet; and

2. Comparative Statement of Profit and Loss.

Comparative Balance Sheet : It shows the increases and decreases in various

items of assets, equity and liabilities in absolute term and in percentage term by taking

the corresponding figures in the previous year’s balance sheet as a base.


Format for a Comparative Balance Sheet

Comparative Balance Sheet of .............Ltd.

As at 31st March 2012 and 2013

Particulars 2012 2013 Absolute Percentage

Change Change

%

EQUITY AND LIABILITIES :

Shareholders’ Funds

Share Capital

Reserve and Surplus

Non-Current Liabilities

Long term Borrowings

Other long term liabilities

Long term provisions

Current liabilities

Short term Borrowings

Trade payables

Other current liabilities

Short term provisions

Total

ASSETS :

Non-current Assets

Fixed Assets

Non-current investments

Long term Loans and Advances

Current Assets

Current investments

Inventories

Trade receivables

Cash and cash equivalents

Short term loans and advances

Other current assets

Total


COMPARATIVE STATEMENT OF PROFIT AND

LOSS/COMPARATIVE INCOME STATEMENT

Comparative Income Statement : It shows the increases and decreases in various

items of income Statement in absolute amount and in percentage amount by taking the

corresponding figures in the previous year’s Income Statement as a base.

Format for a Comparative Statement of Profit and Loss

Comparative Statement of Profit and Loss

For the years ended on 31st March, 2012 and 2013


Change Change

%

I. Revenue from Operations

II. Add : Other Income

III. Total Revenue I + II

IV. Expenses :

a. Cost of Material Consumed

b. Purchases of Stock-in-Trade

c. Changes in inventories of

Finished Goods, work-in-progress

and Stock-in-Trade

d. Employees benefit expenses

e. Finance costs

f. Depreciation

g. Other expenses

Total Expenses

V. Profit before tax (III-IV)

Less : Income Tax

VI. Profit after tax

Importance of Comparative Statement

• To make the data simple and more understandable.

• To indicate the trend with respect to the previous year.

• To compare the firm performance with the performance of other firm in the

same business.


Common Size Statement

Common Size Financial Statements are the statements in which amounts of the

various items of financial statements are converted into percentages to a common base.

Types of Common Size Statements :

1. Common Size Balance Sheet; and

2. Common Size Statement of Profit and Loss.

Common Size Balance Sheet : It is a statement in which every item of assets,

equity and liabilities is expressed as a percentage to the total of all assets or to the total

of Equity and Liabilities.

Format for a Common Size Balance Sheet :

Common Size Balance Sheet of .............Ltd.

As at 31st March 2012 and 2013

Particulars Absolute Amounts Percentage of Balance

Sheet Total

2012 2013 2012 2013

% %

EQUITY AND LIABILITIES :

Shareholders’ Funds

Share Capital

Reserve and Surplus


Long term Borrowings

Other long term liabilities

Long term provisions

Current liabilities

Short term Borrowings

Trade payables

Other current liabilities

Short term provisions

Total

ASSETS :

Non-current Assets

Fixed Assets


Non-current investments

Long-term loans and advances

Current Assets

Current investments

Inventories

Trade receivables

Cash and cash equivalents

Short term loans and advances

Other current assets

Total

Common Size Income Statement or Statement of Profit and Loss : It is a

statement in which every item of Statement of Profit and Loss is expressed as a percentage

to the amount of Revenue from Operations.

Format for a Common Size Statement of Profit and Loss

Common Size Statement of Profit and Loss

For the years ended on 31st March, 2012 and 2013

Particulars Absolute Amounts Percentage of Revenue

from operation

(Net Sales)

2012 2013 2012 2013

% %

I. Revenue from Operations

II. Add : Other Income

III. Total Revenue I + II

IV. Expenses :

a. Cost of Material Consumed

b. Purchases of Stock-in-Trade

c. Changes in inventories of

Finished Goods, work-in-progress

and Stock-in-Trade

d. Employees benefit expenses

e. Finance costs

f. Depreciation

g. Other expenses

Total Expenses


V. Profit before tax (III-IV)

Less : Income Tax

VI. Profit after tax

Illustration : Prepare a ‘Common Size Balance Sheet’ on the basis of the information

given in the Balance Sheet of Z Ltd. as at 31st March 2014.

Particulars Note 31-3-2014

No. ( )

I. EQUITY AND LIABILITIES

1. Shareholders’ Funds

(a) Share Capital 6,00,000

(b) Reserve and Surplus 1,00,000


(a) Long term borrowings 2,50,000

3. Current Liabilities

(a) Trade Payable 50,000

Total 10,00,000

II. ASSETS


(a) Fixed Assets

(i) Tangible Assets 6,50,000

(b) Non-Current Investments 1,50,000

2. Current Assets

(a) Inventories 70,000

(b) Trade Receivables 50,000

(c) Cash and cash equivalents 80,000

Total 10,00,000

Common Size Balance Sheet of Z Ltd.

As at 31st March, 2014

Particulars Note Absolute Percentage of

No. Amount Balance Sheet

( ) Total

I. EQUITY AND LIABILITIES


(a) Share Capital 6,00,000 60%

(b) Reserve and Surplus 1,00,000 10%


(a) Long term borrowings 2,50,000 25%



(a) Trade Payable 50,000 5%

Total 10,00,000 100%

II. ASSETS


(a) Fixed Assets

(i) Tangible Assets 6,50,000 65%

(b) Non-Current Investments 1,50,000 15%

2. Current Assets

(a) Inventories 70,000 7%

(b) Trade Receivables 50,000 5%

(c) Cash and cash equivalents 80,000 8%

Total 10,00,000 100%

Illustration : From the following information for the years ended on 31st March,

2012 and 2013, prepare a ‘Comparative Statement of Profit & Loss’ of Beta Ltd.

Particulars Note No. 2012-2013 2011-12

Revenue from operations 7,00,000 5,00,000

Expenses 4,50,000 3,75,000

Other Incomes 75,000 1,00,000

Rate of Income Tax was 50%

Solution :

Comparative Statement of Profit and Loss of Beta Ltd

for the years ended 31st March, 2012 and 2013

Particulars Note 2011-12 2012-13 Absolute Change in

No. change in % age

Revenue from operations 5,00,000 7,00,000 2,00,000 40%

Add : Other Income 1,00,000 75,000 (25,000) (25%)

Total Revenue 6,00,000 7,75,000 1,75,000 29.17%

Less : Expenses 3,75,000 4,50,000 75,000 20%

Profit before tax 2,25,000 3,25,000 1,00,000 44.44%

Less : Tax @ 50% 1,12,600 1,62,500 50,000 44.44%

Profit after tax 1,12,500 1,62,500 50,000 44.44%


Illustration : Prepare a Comparative Income Statement and Common Size Statement

of Profit and Loss from the following information :

Particulars 31st March 31st March

2012 2012

Revenue from operations 125% 140%

(% of cost of Material Consumed)

Cost of Material Consumed 2,40,000 2,50,000

Other expenses (% of Revenue from Operations) 10% 12%

Other Income 15,000 20,000

Tax Rate 30% 30%

Solution

COMMON SIZE STATEMENT OF PROFIT AND LOSS

For the years ended on 31st March 2012 and 2013

Particulars Absolute Amounts Percentage of Revenue from

Operations (Net Sales)

2012 ( ) 2013( ) 2012% 2013%

I. Revenue from Operations 3,00,000 3,50,000 100.00 100.00

II. Add : Other Income 15,000 20,000 5.00 5.71

III. Total Revenue (1+II) 3,15,000 3,70,000 105.00 105.71

IV. Expenses :

a. Cost of Material Consumed 2,40,000 2,50,000 80.00 71.43

b. other expenses 30,000 42,000 10.00 12.00

Total Expenses 2,70,000 2,92,000 90.00 83.43

V. Profit before tax (III-IV) 45,000 78,000 15.00 22.28

Less : Income Tax (13,500) (23,400) (4.50) (6.69)

VI. Profit after tax 31,500 54,600 10.50 15.59


COMPARATIVE INCOME STATEMENT

For the years ended on 31st March 2012 and 2013

Particulars Absolute Amounts Absolute Percentage

Change Change

2012 ( ) 2013( ) ( ) %

I. Revenue from Operations 3,00,000 3,50,000 50,000 16.67

II. Add : Other Income 15,000 20,000 5,000 33.33

III. Total Revenue (I+II) 3,15,000 3,70,000 55,000 17.46

IV. Expenses :

a. Cost Material Consumed 2,40,000 2,50,000 10,000 4.16

b. Other expenses 30,000 42,000 12,000 40.00

Total Expenses 2,70,000 2,92,000 22,000 8.15

V. Profit before tax (III-IV) 45,000 78,000 33,000 73.33

Less : income Tax (13,500) (23,400) (9,900) 73.33

VI. Profit after tax 31,500 54,600 23,100 73.33


CHAPTER 4

ACCOUNTING RATIOS

Accounting Ratio : It is an arithmetical relationship between two accounting variables.

Ratio Analysis : It is a technique of analaysis of financial statements to conduct a

quantitative analysis of information in a company’s financial statements.

“Ratio analysis is a study of relationship among various financial factors in a business.”

–Myers

Expression of ratios : Ratios are expressed in following four ways:

• Pure Ratio Like 2:1 . All liquidity and solvency ratios are expressed in pure

form.

• Percentage e.g. 15%. All profitability ratios are presented in percentage

form.

• Times Like 4 times. All turnover ratios and Interest Coverage Ratio are

presented in this form.

• Fraction like 3/4.

Classification or Types of Ratios :

Ratios can be classified into following 4 categories :

1. Liquidity Ratios

2. Solvency Ratios

3. Activity Ratios also known as Turnover Ratios or Performance Ratios.

4. Profitability Ratios

IMPORTANT POINT

Note : For Calculation of ratios Formula must be written as it carries marks

Liquidity Ratios : These measure short term solvency, i.e. the firm’s ability to pay

its current dues. In Liquidity Ratios the following two ratios are included.


1. Current Ratio also called Working Capital Ratio.

2. Liquid Ratio also called Quick Ratio or Acid Test Ratio.

1. Current Ratio : It shows the relationship of current assets with current

liabilities.

CurrentAssetsCurrentRatio=

CurrentLiabilties

Current Assets

An asset shall be classified as current when it satisfies any of the following criteria:

(a) it is expected to be realized in, or is intended for sale or consumption in, the

company’s normal operating cycle:

(b) it is held primarily for the purpose of being traded:

(c) it is expected to be realized within twelve months after the reporting date; or

(d) it is cash or cash equivalent unless it is restricted from being exchanged or

used to settle a liability for at least twelve months after the reporting date.

The following items are include under Current Assets:

(a) Current investments

(b) Inventories

(c) Trade receivables (Debtors and Bills Receivables) after deducting any provision

for Doubtful Debts)


(e) Short term loans and advances

(f) Other current assets (Excluding items of Fictitious Assets)

Current Liabilities

A liability shall be classified as current when it satisfies any of the following

criteria:

(a) It is expected to be settled in the company’s normal operating cycle;

(b) It is held primarily for the purpose of being traded:

(c) It is due to be settled within twelve months after the reporting date; or

(d) the company does not have an unconditional right to defer settlement of the


liability for at least twelve months after the reporting date. Terms of a liability

that could, at the option of the counter party’ result in its settlement by the

issue of equity instruments do not affect its classification.

The following items are include under Current Liabilities :

• Short term borrowings

• Trade payables (Creditors and Bills Payable)

• Other current liabilities

• Short terms provisions

1. Significance : It assesses the ability of a business to pay its short term liability on time.

2. Ideal Ratio : 2:1 is considered as best.

• A Low ratio indicates that the company can not meet its short term liability

on time.

• A High ratio indicates that funds have not been used efficiently and lying

idle.

2. Quick Ratio : It shows the relationship of quick assets with current liabilities

QuickAssetsorLiquidAssetsQuickRatio =

CurrentLiabilties

Quick Assets = Current Assets - Inventory - Prepaid Expenses

1. Significance : It assesses the ability of a business to pay it short term liability

promptly.

2. Ideal Ratio : 1: 1 is considered as best.

3. It is better indicator of liquidity as some current assets are not easily convertible

into cash.

Illustration : Working Capital L 36,000; Current Ratio 2.8:1; Inventory L 16,000.

Calculate Current Assets, Current Liabilities and Quick Ratio.

Solution

Current Assets 2.8Current Ratio = =

Current Liabilities 1

Let the Current Liabilities be X


The Current Assets will be 2.8 X

Working Capital = Current Assets - Current Liabilties

36,000 = 2.8 X – X = 1.8 X

36,000X = = . 20, 000 1.8 L

Quick Assets / Liquid AssetsQuick Ratio = Current Liabilities

Liquid Assets = Current Assets - Inventory

L 56,000–16,000 = L 40,000

L.40,000Quick Ratio = = 2 : 1 L.20,000

Illustration : Current Assets of a company are L 15,00,000. Its current Ratio is 2.5

and liquid Ratio is 0.85. Calculate Current liabilities, Liquid Assets and Inventory.

Solution

Current AssetsCurrent Ratio =

Current Liabilities

15,00,0002.5Current Liabilities

L

15,00,000Current Liabilities 6, 00, 000

2.5L

L

Liquid AssetsLiquid Ratio = Current Liabilities

Liquid Assets0.85= L 6,00,000

Liquid Assets = L 6,00,000 × 0.85 = L 5,10,000

Inventory = Current Assets – Liquid Assets

= L 15,00,000 – L 5,10,000

= L 9,90,00


Solvency Ratios : Solvency ratios convey an enterprise’s ability to meet its long term

obligations as and when they becomes due.

Important solvency ratios are :

1. Debt Equity Ratio

2. Total Assets to Debt Ratio

3. Proprietary Ratio

4. Interest Coverage Ratio

1. Debt Equity Ratio : It show relationship between Debts (Long term

Liabilities or Non Current Liabilties) and Equity (Shareholders’ Funds).

Debts or Long Term LiabilitiesDebtEquityRatio= Equity or Shareholder's Funds

Debts = Long-term borrowings + Long-term provisions

Equity/Shareholders’ Funds = Share Capital + Reserves and Surplus –

Non-Trading Investments

OR

Equity/Shareholders’ Funds = Fixed Assets (Tangible and Intangible) +

Non Current Investment (Excluding Non

Trading investment) + Long Terms Loans

and Advances + Current Assets (Excluding

Fictitious Assets included in other Current

Assets) – Current Liabilties - Long-term

borrowings-Long-term provision

1. Significance : It assesses the long term soundness of financial position of a

business.

2. Ideal Ratio : 2: 1 is considered as best but it should not be more than this.

Illustration : Calculate ‘Debt-Equity Ratio’ from the following information :

Total Assets : L 3,50,000

Total Debt : L 2,50,000

Current Liabilities : L 80,000

Solution

Debts or Long Term LiabilitiesDebt Equity Ratio = Equity or Shareholders' Funds


Debts = Total Debt - Current Liabilties

= 2,500,000 - 80,000 = 1,70,000

Equity = Total Assets - Total Debts

= 3,50,000 - 2,50,000 = 1,00,000

L 1,70,000Deb - Equity Ratio = = 1.7 : 1L 1,00,00

2. Total Assets to Debt Ratio : It shows the relationship between Total Assets

and Debts.

Total AssetsTotal Assets To Debt Ratio = Debts or Long Liabilities

Total Asses = Fixed Assets (Tangible and Intangible) + Non Current Investment

(Excluding Non Trading Investment) + Long Term Loans and Advances +

Current Assets (Excluding Fictitous Assets included in Other Current Assets)

Debts=Long-term borrowing + Long-term provisions

1. Significance : It measures the safety margin available to the providers of

long term loans.

2. Ideal Ratio : No ideal ratio but a high ratio indicates higher safety to lenders

and low ratio represents risky position.

3. Proprietary Ratio : It shows the relationship between Proprietors’ Funds/

Shareholders’ Funds and Total Assets of the business.

Equity or Shareholders'FundsProprietary Ratio = Total Assets

Proprietors’ Funds=Share Capital+Reserves and Surplus-Non Trading

Investment

OR

Equity/Proprietors’ Funds = Fixed Assets (Tangible and intangible) + Non

Current investments (Excluding Non Trading investment)+Long Terms Loans

and Advances +Current Assets (Excluding Fictitious Assets included in Other

Current Assets)–Current Liabilities - Long-term borrowings-Long term

provisions.

Total Assets= Fixed Assets (Tangible and Intangible) + Non Current Investment

(Excluding Non Trading Investment) + long Term Loans and Advances +

Current Assets (Excluding Fictitious Assets included in Other Current Assets)


1. Significance : It measures the proportion of total assets financed by the

Proprietors of the business. It shows the safety margin available to the

lenders of the business as they can ascertain the portion of the shareholders

in the business.

2. Ideal Ratio: No ideal ratio but a high ratio indicates higher safety to

lenders and law ratio represents risky position from lender’s point of view.

Illustration : From the following information calculate Proprietary Ratio and Total

Assets to Debt Ratio

Balance Sheet of ABC Ltd.

Particulars Note Figure for

No. Current Years

(L)



(a) Share Capital 4,50,000

(b) Reserve and Surplus 1,80,000


Long Term borrowing (12% Debentures) 75,000


Trade Payable (Creditors) 45,000

Total 7,50,000

Assets

1. Non Current Assets

(a) Fixed Assets 3,75,000

(b) Non-Current Investments 2,25,000

2. Current Assets

Inventory 1,50,000

Total 7,50,000

Solution

Equity or Shareholders' FundsProprietary Ratio = Total Assets

Shareholders’ Funds = Share Capital + Reserves and Surplus = 4,50,00 +

1,80,000 = 6.30,000

0.84 L 6,30,000Proprietary Ratio = L 7,50,000


Total AssetsTotal Assets to Debt Ratio =

Debts or Long Term Liabilities

L 7,50,00= = 10 Times

L 75,000

Total Assets to Debt Ratio = 10 Times

4. Interest Coverage Ratio : This ratio establishes relationship between the

Net Profit before Interest & Tax and interest payable on long term debts

(Fixed Interest Charges)

Net Profit before Interest & TaxInterest Coverage Ratio =

Fixed Interest Charges

1. Since interest is a charge on profits, net profit taken to calculate this

ratio is before interest & tax.

2. Objective & Significance-Objective is to ascertain the amount of profit

available to cover the interest charge. It determines ease with which a

company can pay interest expense on outstanding debt.

3. Parties interested in this ratio are debentureholders and lenders of long

term credit.

4. High Ratio is better for lenders as it indicates higher safety margin.

Illustration : Calculate Interest Coverage Ratio from the following information:

Net Profit (after taxes) = 1,00,000

Fixed interest charges on long term borrowing = 20,000

Rate of Income Tax 50%

Solution

Net Profit before Interest & TaxInterest Coverage Ratio =


L L L 1,00,000 + 1,00,000 (tax) + 20,000=

L 20,000

L 2,20,000= = 11 Times

L 20,000


Illustration : From the following information calculate interest coverage ratio:

L10,000 equity shares to L 10 each 1,00,000

8% Preference Shares 70,000

10% Debentures 50,000

Long term Loans from Banks 50,000

Interest on long term loans from bank 5,000

Profit after tax 75,000

Tax 9,000

Solution

Interest on Debentures = L 50,000 × 10/100 = L 5000

Profit before Interest & Tax = Profit after tax + Tax + Interest on debentures

+ Interest Long term Loans

= L 75,000+9,000+5000+5000 = L 94,000

Net Profit Before Interest & TaxInterest Coverage Ratio =


= 94,000/10,000 = 9.4 Times

Illustration : From the following information compute Debt-Equity Ratio:

L

Long term borrowing 8,00,000

Long term provisions 4,00,000

Current Liabilities 2,00,000

Non Current Assets 14,40,000

Current Assets 3,60,000

Solution

DebtDebt Equity Ratio = Equity

Debt = Long term borrowing + Long term Provision

= 8,00,000 + 4,00,000


= 12,00,000

Equity = Non Current Assets + Current Assets - Debt-Current Liabilities

= 14,40,000 + 360,000–12,00,000–2,00,000

= 18,00,000–14,00,000

= 4,00,000

12, 00, 00Debt Equity Ratio = = 3 : 1

4, 00, 000

Activity Ratios/Turnover Ratios/Performance Ratios

These ratios measure the efficiency of asset management and measure the

effectiveness with which a concern uses resources at its disposal. These show rotation of

concerned item within accounting period.

1. Stock Turnover Ratio/Inventory Turnover Ratio

2. Debtor Turnover Ratio/Trade Receivables Turnover Ratio

3. Creditors Turnover Ratio/Trade Payables Turnover Ratio

4. Working Capital Turnover Ratio

1. Inventory Turnover Ratio : It is also called as Stock turnover ratio. This

ratio is a relationship between the Cost of goods sold i.e, Cost of Revenue

from Operations during a particular period of time and the Cost of average

inventory during a particular period. It is expressed in number of times.

Cost of Goods Sold/Cost of Revenue from OperationsInventory/Stock turnover Ratio =

Average Inventory

1. Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses -

Closing Stock

OR

= Revenue from Operations – Gross Profit

2. Cost of Revenue from Operation = Cost of Material Consumed + Net Purchases

of Stock in Trade + Changes in inventories of Finished Goods, work in

Progress and Stock-in-Trade+Direct Expenses

3. Cost of Material Consumed = Raw Material Purchased + Changes in inventory

of Raw Material

4. Changes in inventory = Opening Inventory – Closing Inventory


5.Opening Inventory + Closing Inventory)Average Inventory/Stock = 2

This ratio indicates whether investment in stock is within proper limit or not.

This shows how quickly inventory is sold. Generally higher ratio is considered

better but very high ratio shows over trading and low ratio means stock is piled up or

over investment in stock.

Example : Cost of Revenue from Operations is 5,00,000. The opening stock is

40,000 and the closing stock is 60,000 (at cost). Calculate inventory turnover

ratio.

Solution

Cost of Revenue from operationInventory Turnover Ratio = Average stock

Opening Stock + Closing stockAverage Stock = 2

= L 40,000 + L 60,000/2 = L 50,000

5,00,00Inventory Turnover Ratio = = 10 Times50,000L

Illustration :

Cost of Revenue from operation = L 2,00,000

Inventory Turnover Ratio = L 8 Times

Inventory in the beginning is 1.5 times more than the inventory at the end. Calculate

values of opening and closing inventory.

Solution:

Cost of Revenue from operationsInventory Turnover Ratio = Average Inventory

L 2,00,0008 = Average Inventory

L 2,00,000Average Inventory = = L 25, 0008OpeningInventory+ClosingInventoryAverage Inventory = 25000 = L 2


Opening Inventory + Closing Inventory = 25000 × 2 = L 50,000

Let the closing Inventory = x

then opening Inventory will be = x + 1.5x = 2.5x

Hence, x + 2.5x = 50000

3.5x = 50,000

x = 50, 000 14, 286

2.5

Closing Inventory = L 14,286

Opening Inventory = 14,286 × 2.5

= L 35,714

2. Debtors Turnover Ratio/Trade Receivables Turnover Ratio:

It shows the relationship between Net Credit Sales i.e., Net Credit Revenue

from Operations and Average Debtors/Average Trade Receivables

(Debtors + Bills Receivables).

This ratio is expressed in TIMES.

Net Credit Sales/Revenue from OperationsTrade Receivable/Debtors Turnover Ratio =

Average Debtors/Average Trade Receivables

1. Net Credit Sales = Total Sales - Sales Return i.e., Returns inwards - Cash

Sales

2. Opening Trade Receivable + Closing Trade Receivables

Average Trade Receivable =2

3. Receivable are taken before deducting any Provision for Doubtful Debts.

4. If details regarding cash and credit sales are not given then all the sales are

taken on credit basis.

5. If details regarding opening and closing values of trade receivable are not

given then closing trade receivables are used for calculation of this ratio.

This ratio indicates the number of times the trade receivables are turned in relation

to credit sales over a year.

This shows how quickly cash is realized from trade receivables. Generally higher

is the ratio, the more efficient is the management of the trade receivables.


Illustration : Calculate Debtors Turnover Ratio if Closing Debtors are L 40,000;

Opening Debtors L 60,000; Cash Sales is 25% of Credit Sales and Total Sales are

L 2,00,000.

Solution

Net Credit Sales / Net Credit Revenue from OperationsDebtors Turnover Ratio =

Average Debtors / Average Trade Receivable

Cash Sales = 25% of Credit Sales

Let the Credit Sales be L X

Then Cash Sales is 25% of X = X × 25/100 = X/4

Total Sales = Cash Sales + Credit Sales = X + X/4 = 5X/4

2,00,000 = 5x/4

X = Credit Sales = 2,00,000 x 4/5 = L 1,60,000

Average Debtors = (Opening Debtors + Closing Debtors)/2

= 60,000 + 40,000/2 = 50,000

1, 60, 000Debtors Turnover Ratio = = 3.2 Times50, 000

3. Creditors Turnover Ratio/Trade Payable Turnover Ratio:

It show the relationship between Net Credit Purchases and Average

Creditors/Average Trade Payables (Creditors + Bills Payable).

This ratio is expressed in TIMES.

//

Net Credit Purchases

Trade Payable Creditors turnover RatioAverage Creditors Average Trade Payables

1. Net Credit Purchases = Total Purchases – Purchases Return/Returns Outwards

Cash Purchases

2.

( )

2Opening Trade Payables Closing Trade Payables

AverageTrade Payable

3. If details regarding cash and credit purchases are not given then all the

purchases are taken on credit basis.

4. If details regarding opening and closing values of trade payables are not

given then closing trade payables are used for calculation of this ratio.

This ratio indicates the number of times the Trade Payables are turned over in

relation to credit purchases over a year.


This shows how quickly cash is paid to Trade Payables. Generally lower ratio

indicates that more credits are available for a longer period.

4. Working Capital Turnover Ratio : It establishes the relationship between

Net Working Capital and Revenue from Operations i.e., Net Sales.

Revenue from Operations( Net Sales)Working Capital Turnover Ratio = Net Working Capital

1. Net Working Capital = Current Assets excluding Fictitious assets - Current

liabilities.

2. This ratio can also be calculated on the basis of the Cost of Revenue from

Operations i.e., cost of Goods Sold.

3. This Ratio is Calculated in Times

This ratio indicates the number of times the working capital has been turned over

in relation to revenue from operations over a year.

Generally a higher ratio indicates efficient use of working capital.

Illustration : Compute Working Capital Turnover Ratio from the following

information:

L

Cash Sales 1,30,000

Credit Sales 3,80,000

Sales Return 10,000

Liquid Assets 1,40,000

Inventory 90,000

Current Liabilities 1,05,000

Solution

Revenue from Operations( Net Sales)Working Capital Turnover Ratio = Net Working Capital

Net Sales = Cash Sales + Credit Sales - Sales Return

= 1,30,000 + 3,80,000 – 10,000 = L 5,00,000

Working Capital = Current Assets - Current Liabilities

Current Assets = Liquid Assets + Inventory


= 1,40,000 + 90,000 = L 2,30,000

Working Capital = 2,30,000 - 1,05,000 = L 1,25,000

Working Capital Turnover Ratio = 5,00,000 / 1,25,000 = 4 Times

Profitability Ratio:

These ratios are used to assess the profitability or earning capacity of the business.

These ratios are very important as profitability is the measurement of the overall

performance and efficiency of the management.

The important Profitability ratios are:

1. Gross Profit Ratio

2. Operating Ratio

3. Operating Profit Ratio

4. Net Profit Ratio

5. Return on Investment or Return on Capital Employed.

All Profitability ratios are shown in percentage form.

1. Gross Profit Ratio : It shows the relationship between Gross Profits and Net

Sales i.e., Net Revenue from Operations.

Gross ProfitsGross Profit Ratio = × 100 = _ _ %Net Sales/Net Revenue from Operations

This Ratio indicates the margin of gross profits available on Revenue

from Operations. Generally a higher ratio indicates better profitability.

Illustration : Calculate ‘Gross Profit Ratio’ from the following information:

Net Revenue from Operations 80,000

Cost of Revenue from Operations 60,000

Operating Expenses 10,000

Indirect Expenses 6,000

Solution

Gross ProfitsGross Profit Ratio = × 100Net Revenue from Operations


= 80,000-60,000 = 20,000

= 20,000/80,000 × 100 = 25%

2. Operating Ratio : It shows the relationship between Operating Costs and

Net Sales i.e., Net Revenue from Operations.

100Operating Costs

Operating Ratio __%Net Sales / Net Revenue fromOperations

Operating Cost = Cost of Revenue from Operations + Operating Expenses

Operating Expenses = Office and Administration Expenses + Selling and

Distribution Expenses+ Depreciation + Bad debts + Discount on Debtors +

Interest on Short term loans.

OR

Operating Cost = Cost of Material Consumed + Net Purchases of Stock in

Trade + Changes in Inventories of Finished Goods, Work in Progress and

Stock-in-Trade+Direct Expenses + Employees Benefit Expenses + Other

Expenses such as Office Administration Expenses + Selling and Distribution

Expenses + Depreciation + Bad debts + Discount on Debtors + Interest on

Short term loans.

This ratio indicates the percentage of Operating costs to Revenue from

Operations

Generally a lower ratio indicates better cost management and profitability.

3. Operating Profit Ratio : It shows the relationship between Operating Profit

and Net Sales i.e., Net Revenue from Operations.

100 __ %/Operating profits

Operating profit RatioNet Sales Net revenue fromOperations

Operating Profit = Net Revenue from Operations - Operating Cost

OR

Operating Profit = Gross Profit – Operating Expenses

OR

Operating Profit =

Net Profit + Non Operating Expenses – Non Operating Income

Important Points

1. This ratio indicates the margin of operating profits available on Revenue


from Operations to cover non operating expenses such as indirect Expenses

and Financial Expenses.

2. Generally a higher ratio indicates better profitability.

3. Operating Ratio + Operating Profit Ratio = 1

Illustration : Calculate ‘Operating Profit Ratio’ and ‘Operating Ratio’ from the

following information:





Solution:

Operating ProfitsOperating Profit Ratio = × 100

Net Revenue from Operations

Operating Profits = Net Revenue from Operations - Operating Cost

Operating Cost = Cost of Revenue from Operations + Operating Expenses

= 60,000 + 10,000 = 70,000

Operating Profits = 80,000 -70,000 = 10,000

10, 000 100 12.5%80, 000

Operating Profit Ratio =

Operating CostsOperating Ratio = × 100Net Revenue from Operations

= 70,000/80,00 × 1000 = 87.5%

4. Net Profit Ratio : It shows the relationship between Net Profits and Net

Sales i.e., Net Revenue from Operations.

Net Profit after TaxNet Profit Ratio = × 100 = _ _ %Net Sales/Net Revenu from Operations

Net Profit = Net Revenue from Operations – Operating Cost – Non

Operating expenses + Non Operating Income

OR


Net Profit = Gross Profit - Operating Expenses - Non Operating Expenses

+ Non Operating Income

OR

Net Profit = Operating Profit - Non Operating Expenses + Non Operating

Income

Important Points

1. This ratio indicates the percentage of net profits in relation to Revenue

from Operations.

2. Generally a higher ratio indicate better profitability.

3. Net Profits may be taken Before Tax Profits.

Illustration : Calculate ‘Net Profit Ratio’ from the following Information:





Indirect Income 4,000

Solution

Net ProfitNet Profit Ratio = × 100Net Revenu from Operations

Net Profit = Net Revenue from Operations – Cost of Revenue from operations –

Operating Expenses – Indirect Expenses + Indirect Income

= 80,000 – 60,000 – 10,000 – 6,000 + 4,000 = 8,000

Net ProfitNet Profit Ratio = × 100 =Net Sales/Net Revenue from Operations

= 8,000 / 80,000 × 100 = 10%

5. Return on Investment or Return on Capital Employed:

It shows the relationship between Net Profit before interest, Tax and

Dividend and Capital Employed of the business.


Net Profit Interest, Tax & DividendReturn on Investment( ROI) = × 100 = _ _ %

Capital Employed

By Liability Approach:

Capital Employed = Share Capital + Reserves and Surplus – Non Trading

Investments + Non Current Liabilities

OR

Capital Employed = Shareholders’ Funds + Non Current Liabilities

By Assets Approach

Capital Employed = Fixed Asets (Tangible and Intangible) + Non

Current Investment (Excluding Non Trading Investment) + Long Term

Loans and Advances + Current Assets (Excluding fictitous Assets

included in Other Current Assets) - Current Liabilities.

OR

Capital Employed = Fixed Assets (Tangible and Intangible) + Non Current

Investment (Excluding Non Trading Investment) + Long Term Loans and

Advances + Working Capital

OR

Capital Employed = Non Current Assets + Working Capital

OR

Capital Employed = Total Assets – Current Liabilties

Important Points

1. This Ratio indicates the percentage of Net profits before interest, tax and

dividend in relation to Capital Employed of the business.

2. This Ratio is considered as best measurement of the overall performance of

the enterprise.

3. Generally a higher ratio indicates better profitability.

4. As we are not including Non Trading Investments as part of Capital Employed

therefore Income from Non Trading Investments will not be taken into account

for calculation of Net Profits.

5. If profits after tax are given in the question then we will find profits before

tax with the help of the following formula:


Profits after TaxProft before Tax = × 100( 100 – Tax Rate)

Illustration : Calculate ‘Return on Investment’ with the following information:

Net Profit after interest and Tax 2,10,000

Rate of income Tax 30%

Shareholders’ Funds 13,00,000

12% Long term Debts 1,00,000


Solution

Net Profits before interest, Tax & DividendReturn on Investment = × 100

Capital Employed

Profits before Tax = Profits after Tax / (100 – Tax Rate) × 100

= 2,10,000 / (100 – 30) × 100 = 2,10,000 / 70 × 100 = 3,00,000

Profits before Interest, Tax and Dividend = Profits before Tax + Interest on

Long Debts + Interest on Debentures = 3,00,000 + 12,000 + 20,000 = 3,32,000

Capital Employed = Shareholders’ Funds + 12% Long term debts + 10%

Debentures = 13,00,000 + 1,00,000 + 2,00,000 = 16,00,000

Returns on Investment = 3,32,000/16,00,000 × 100 = 20.75%

Illustration : The Quick Ratio of X Ltd. is 1:1. State with reason which of the

following transactions would (i) increase; (ii) decrease or (iii) not change the ratio:

1. Included in the trade payable was a Bills payable of 3,000 which was net

on maturity.

2. Debentures of 50,000 were converted into Equity Shares.

Solution

(1) No Change

Reason : Both current Assets and current Liabilities are decreasing with

the same amount.

(2) No Change

Reason : Neither current Assets nor current Liabilities are changing.


Illustration : Calculate ‘Return on Investment’ and ‘Debt-Equity Ratio’ from the

following information:

Net Profit after interest and Tax 6,00,000

10 % Debentures 10,00,000

Tax Rate 40%

Capital Employed 80,00,000

Solution

Net Profits before interest, TaxReturn on Investment = × 100

Capital Employed

Net Profit Tax × 100Net Profit before Tax =

(100 – Tax Rate)

1010, 00, 000 Rs.1, 00, 000

100

Interest on 10% Debentures = 10

10, 00, 000100

= 1,00,000

Net Profit before Interest and Tax = 10,00,000 + 1,00,000

= 11,00,000

11,00,000Return on Investment = × 100 = 13.75%

80,00,000

2. Debt-Equity Ratio Debt

Equity

Debt = 10% Debentures = 10,00,000

Equity = Capital Employed – Debt

= 80,00,000 – 10,00,000 = 70,00,000

10, 00, 000Debt Equity Ratio 1 : 7

70, 00, 000

= 0.14 : 1


CHAPTER 5

CASH FLOW STATEMENT

Meaning : It is a statement that shows flow (Inflow or outflow) of cash and cash

equivalents during a given period of time.

As per Accounting Standard-3 (Revised) the changes resulting in the flow of cash

& cash equivalent arises on account of three types of activities i.e.,

(1) Cash flow from Operating Activities.

(2) Cash flow from Investing Activities.

(3) Cash flow from Financing Activities.

Cash : Cash comprises cash in hand and demand deposits with bank.

Cash equivalents : Cash equivalents are short-term, highly liquid investment that are

readily convertible into known amount of cash and which are subject to an

insignificant risk of change in the value (of short-term investment). Generally

theses investments have a maturity period of less than three months.

Some examples of cash equivalent : Bank overdraft, cash credit, short-term deposits,

marketable securities, treasury bills, commercial papers, money market funds,

investment in preference shares if redeemable within three months and ensure that

there is no risk of the failure of the company.

Some types of transaction which are considered movement between cash and cash

equivalents are given below:

1. Cash deposited into bank.

2. Cash withdrawn from bank.

3. Sale of cash equivalent securities (e.g. Sale of short-term investment, sale of

commercial papers)

4. Purchases of cash equivalent securities (e.g. Purchase of short-term investment,

Purchases of Treasury bills).

The above years of transaction are part of cash and equivalents, so these are included

in opening and closing cash and cash equivalent only. So these types of transaction not


to be included in cash flow from different activities like operating, investing, financing

activities.

Preparation of cash flow statement ..................

Cash flow from operating activities ..................

Cash flow from investing activities ..................

Cash flow from financing activities ..................

Net increase/decrease in cash & cash equivalent (Total of the above

three activities)

Add : Cash & Cash equivalent in the

beginning of the year (Give in opening balance sheet) ..................

Cash & Cash equivalent at the end of the year ..................

Note : The student should ensure that the Cash & Cash equivalent at the end of the

year as calculated above will be same as cash & cash equivalent given in closing

balance sheet

Objectives of Cash Flow Statement

1. To ascertain how much cash or cash equivalents have been generated or

used in different activities i.e., operating/investing/financing activity.

2. To ascertain the net changes in cash and cash equivalents.

3. To assess the causes of difference between actual cash & cash equivalent

and related net earning/income.

4. To help in formulation of financial policies such as dividend policy, fixed

assets policy, capital structure related policy.

5. To help in short-term financial planning.

6. To ascertain the liquidity of enterprises.

Limitations of Cash Flow Statement

1. Non cash transaction are not taken into consideration like shares or

debentures issued to vendors, depreciation charged during the year.

2. It is a statement related with past data.

3. It is not used for judging the profitability of enterprise.


4. Accrual accounting concept is ignored in this statement e.g. credit sales,

credit purchases, outstanding expenses, accrued income are not included.

Computation of Cash flows from different activities.

(1) Cash flow from operating activities : operating activities are the main

revenue generating activities of the enterprises. It also includes all those

transactions which are not included in investing and financing activities.

(A) Indirect Method of calculating the cash flow from Operating Activities:

Under this method Net Profit before Tax and Extra-ordinary Item is the

starting point for further calculations.

Calculation of Net Profit before Tax and Extra-ordinary Item:

Difference between closing balance and opening balance of Balance in

Statement of Profit & Loss A/c ..................

Add: 1. Proposed dividend for current year ..................

2. Interim Dividend paid during the year ..................

3. Profit Transferred to Reserve ..................

(If reserve of current year increased from previous year) ..................

4. Provision for Taxation made during the year ..................

5. Preference Dividend ..................

6. Extra Ordinary Item if any Debited to Statement

of Profit & Loss ..................

Less: 1. Refund of Tax credited to Statement of P&L ..................

2. Extraordinary-item if any Credited to Statement of P&L ..................

Net Profit Tax and Extra-ordinary item ..................

Extraordinary items : These items are not related to normal business operation.

Format Cash Flow from Operating Activities

Particulars

1. Cash Flow from Operating Activities

(A) Net Profit Before Tax and Extra-Ordinary Items

Adjustment for Non-cash and Non-operating items

Add : 1. Depreciation charged during the current year

2. Preliminary expenses, Discount on issue of shares and

shares and debentures, share issue expenses etc. written off


3. Goodwill, Patents and Trademark amortized/written off

4. Interest on Long term borrowing and Debentures

5. Loss on Sales of Fixed Assets/Investments

Less : 1. Interest income

2. Dividend Income

3. Rental income

4. Profit on sale of Fixed Assets/Investments

Operating Profit before Working Capital changes

Adjustment for changes in Working Capital :

Add: Increase in Current Liabilities and

Decrease in Current Assets

(other than cash and cash equivalent)

Less: Increase in Current Assets (other than cash and cash equivalent) and

Decrease in Current Liabilities)

Cash Generated from operations before tax and extraordinary items.

Less: Income tax paid (Net of Refund received)

Cash flow before Extraordinary item

Extraordinary items + /-

Net Cash From (or used in) Operating Activities

For the calculation of Proposed Dividend during the current year the proposed

dividend account is to be prepared as follows:

Dr. Proposed Dividend Account Cr.


To Bank (Dividend Paid ............. By Balance b/d .............

during the year) By Balance in Statement

To Balance c/d ............. of P&L A/c .............

(Proposed dividend during

............. the current year) .............

For the calculations of Provision for Taxation made during the current year, the

Provision for Taxation A/c is to be prepared as follows.

Dr. Provision for Taxation Account Cr.


To Bank A/c (Tax Paid ............. By Balance b/d .............

during the current year) By Statement of P&L .............

To Balance c/d ............. (Provision for taxation

made during the current

............. year) .............


Illustration 1. X Ltd. made a profit of 1,00,000 after considering the following items:

1. Depreciation of fixed assets 20,000

2. Writing off preliminary expenses 10,000

3. Loss on sale of furniture 1,000

4. Provision of Taxation 1,60,000

5. Transfer to General reserve 14,000

6. Profit on sale of Machinery 6,000

The following additional information is available to you:

Particulars 31.03.2013 ( ) 31.03.2014 ( )

Debtors 24,000 30,000

Creditors 20,000 30,000

Bills Receivables 20,000 17,000

Bills Payables 16,000 12,0000

Prepaid Expenses 400 600

Calculate Cash Flow from Operating Activities.

Solution:

Calculation of Net Profit before Tax and Extra-ordinary items :

Net Profit (Given) 1,00,000

Add: Provision for Taxation 1,60,000

Transfer to general reserve 14,000

Net Profit before Tax and Extra-ordinary item 2,74,000

Cash Flow From Operating Activities

Particulars

1. Cash flow from Operating Activities

Net Profit Before Tax And Extra-ordinary Item 2,74,000

Adjustment for non-cash and non-operating items

Add : Depreciation on fixed assets 20,000

Preliminary expenses written off 10,000

Loss on sale of furniture 1,000 31,000

3,05,000


Less : Profit on sale on machinery 6000 (6,000)

Operating Profit before working capital changes 2,99,000

Adjustment for Working Capital Charges

Add : Increase in creditors 10,000

Decrease in Bills Receivables 3,000 13,000

3,12,000

Less : Increase in Debtors 6,000

Increase in Prepaid Expenses 200

Decrease in Bills Payable 4,000 (10,200)

Cash generated from operation before Tax 3,01,800

Less : Income tax Paid (1,60,000)

Net Cash Inflow from Operating Activities) 1,41,800

2. Cash Flow from Investing Activities

Investing activities are those activities which related to the acquisition (buying) and

disposal (selling) of fixed assets and investment (other than cash equivalents). It also

includes income from fixed assets and investment like rent received, interest received on

investment, dividend received on investment in shares and mutual funds.

Inflows of Cash: (Plus items) Outflows of Cash (minus items)

Cash Received from sales of Fixed Assets. Cash paid for purchase of fixed assets.

Cash Received from sales of Investment. Cash paid for purchase of investment.

Cash Received from sale of intangible Cash paid for purchase of intangible

assets like Patents. fixed assets like goodwill, patents and copy

Interest Received, rights.

Dividend Received,

Rent Received

For the calculation of sale or purchase of fixed assets and investment, the following

accounts are prepared:

1. Fixed Assets Account 2. Investment Account

Fixed Assets Account: Fixed assets accounts may be prepared by two methods:

(a) At written down value method (when provision for depreciation account/

accumulated depreciation account is not maintained):


Dr. Fixed Assets Account (at written down value) Cr.


To Balance b/d ........... By Bank A/c .............

To Bank A/c (Additional ........... (Sale of investment) .............

Purchase) By Depreciation A/c

To Profit on sale of fixed (Dep.on fixed assets sold)

assets A/c ............ By Loss on sale of fixed

assets A/c .............

By Depreciation A/c

(Current year dep. on .............

remaining fixed assets)

............. By Balance c/d .............

(b) Fixed Assets (at cost); When provision for depreciation account or

accumulated depreciation account has been separately maintained. In

this method two separate accounts named Fixed Assets Account and Provision

for Depreciation account are maintained.

Dr. Fixed Assets Account (at original cost) Cr.


To Balance b/d By Bank A/c ...........

To Bank A/c (Additional (Sale of investment)

Purchase) By Provision for ...........

To Profit on sale of fixed Depreciation A/c

Assets A/c (Dep.on fixed assets sold)

By Loss on sale of fixed ...........

Assets A/c ...........

............ By Balance c/d .............

Dr. Provision for Depreciation Account Cr.


To Fixed Assets A/c ............. By Balance b/d .............

(Total Depreciation on By Statement of Profit .............

Fixed assets sold) & Loss A/c

To balance c/d ............. (Depreciation charged on

fixed assets during the

............. current year) .............


Preparation of Investment Account:

Dr. Investment Account Cr.


To Balance b/d ............. By Bank A/c .............

To Bank A/c (Additional (Sale of investment)

Purchase) By Loss on sale of .............

To Profit on sale of ............. Investment A/c

investment A/c ............. By balance c/d .............

Illustration 2. From the following information calculate cash flow from investing activities:

Particulars 31-03-2013 ( ) 31.03.2014 ( )

Machinery (at Cost) 5,00,000 5,50,000

Accumulated Depreciation 1,00,000 1,20,000

Patents 2,00,000 1,20,000

Goodwill 1,50,000 1,00,000

Investment 2,50,000 5,00,000

Additional Information

(i) During the year, a machine costing 50,000 with its accumulated depreciation

of 25,000 was sold for 20,000.

(ii) Patents were written off to the extent of 60,000 and some patents were sold

at a profit of 10,000.

(iii) 40% of the investments held in the beginning of the year were sold at 10%

Profit.

(iv) Interest received on investment 25,500.

(v) Dividend received on investment 8,500.

(vi) Rent received 5,000.

Solution:

Cash Flow from Financing Activities

Particulars ( )

Proceeds from sale of machinery 20,000

Proceeds from sale of investment 1,10,000

Proceeds from sale of Patents 30,000

Cash paid purchase of machinery (1,00,000)


Cash Paid purchase of Investment (3,50,000)

Interest Received 25,500

Dividend Received 8,500

Rent Received 5,000

Net Cash Used in Investing Activities (2,51,000)

Working Notes:

Dr. Investment Account Cr.


To Balance b/d 2,50,000 By Bank A/c 1,10,000

To Profit on sale of (Sale of investment)

Investment A/c 10,000 By balance c/d 5,00,000


(Additional Purchase)

6,10,000 6,10,000

Dr. Machinery Account (at original cost) Cr.


To Balance b/d 5,00,000 By Bank A/c 20,000

To Bank A/c (additional (Sale of investment)

Purchase) 1,00,000 By Pro for Depreciation A/c 25,000

(Dep. on Machinery sold)

By Loss on sale of

Machinery A/c 5,000

By balance c/d 5,50,000

6,00,000 6,00,000

Dr. Provision for Depreciation Account Cr.


To Machinery A/c 25,000 By Balance b/d 1,00,000

(Total Depreciation on By Statement of Profit 45,000

Machinery sold) & loss (Depreciation

To balance c/d 1,20,000 charged on machinery

during the current year)

1,45,000 1,45,000


Dr. Patents Account Cr.


To Balance b/d 2,00,000 By Bank A/c 30,000

To Profit on sale of (B/F – Sale of Patents)

patents A/c 10,000 By Statement of Profit 60,000

& Loss (Written off)

By balance c/d 1,20,000

2,10,000 2,10,000

3. Cash Flow from Financing Activities

Financing activities are those activities that result in the changes in size and

composition of the share capital (equality and preference) and borrowed fund of the

business enterprises. Generally cost related to these funds also included in financing

activities like interest paid on loans and debentures and dividend paid on equity and

preference share capital.

Inflows of Cash : (Plus items) Outflows of Cash (minus items)

1. Cash Received from Issue of equity 1. Cash paid for repayment of long-term

Share capital. loan.

2. Cash Received from Issue of preference 2. Redemption of Preference share capital

shares capital. in cash.

3. Cash Received from taking long-term 3. Redemption of Debenture in cash

loan and issue of debentures. 4. Buy back of Equity shares (Extra Ordinary

Item)

5. Interest paid on long-term loan and

debentures

6. Final Dividend paid.

7. Interim dividend paid.

8. Dividend paid on Preference Shares

Illustration 3. From the following information, calculate the net cash flow from Financing

Activities:

Particulars 31-03-2013 ( ) 31.03.2014 ( )

Equity Share Capital 10,00,000 16,00,000

9% Debentures 1,50,000 1,00,000

Proposed Dividend 3,00,000 3,50,000

Dividend Payable ........... 50,000

10% Preference Share Capital 2,00,000 3,00,000


Additional Information

1. Interest paid on Debentures 12,500.

2. During the year 2010-2011, company issued bonus shares to equity

shareholders in the ratio of 2:1 by capitalizing reserve.

3. The interim dividend of 75,000 has been paid during the year..

4. 9% Debentures were redeemed as 5% premium.

5. 10% preference shares were issued at 2% discount.

Solution:

Cash Flow from Financing Activities

Particulars ( )

Proceeds from Issue of Equity Share Capital 1,00,000

Proceeds from Issue of 10% Preference Share Capital (1,00,000 × 98%) 98,000

Cash paid for Redemption of 9% Debentures (50,000 × 105%) (52,500)

Interest paid on Debentures (12,500)

interim Dividend paid (75,000)

Final Dividend paid (3,00,000-50,000) (2,50,000)

Net Cash Used in Financing Activities) 1,92,000

Note:

1. Bonus shares worth 5,00,000 issued to equity shareholder are not to beshown

in the cash flow statement because there is no flow of cash by this activity.

2. If any other information is not given in the question about final dividend paid

amount then the previous year proposed dividend is assumed as dividend

payable in current year. Current year proposed dividend amount is assumed

as proposed dividend in current year and to be added in operating activities

to calculated net profit before tax and extraordinary item.

3. Previous year proposed dividend- unpaid dividend = final dividend paid during

the current year is cash used in financing activities.

Financing Business Enterprise Transaction Treatment in Cash Flow Statement

Financing business enterprises are the business enterprises which deal in finance

like investment companies, mutual fund house, banks. These enterprises purchases

and sale of securities as their stock, so it is treated as operating activities and


interest received, dividend received and interest paid are considered as routine

business activities and included in their operating activities.

Comprehensive Illustration 5: From the following Balance Sheets of X Ltd. as on

31.03.2011 and 31.03.2012. Prepare a cash flow statement.

Balance Sheet as at 31st March, 2011 and 2012

Particulars Note No. Figures as at the Figures as at the

end of 31.3.2011 end of 31.3.2012

( ) ( )

I. Equity and Labilities

Shareholders’ funds

(a) Share capital 45,000 65,000

(b) Reserves and surplus 25,000 42,500

Current liabilities

Trade payables 8,700 11,000

Total 78,700 1,18,500

II. Assets

(1) Non-current assets

(a) Fixed assets

(i) Tangible Assets 46,700 83,000

(2) Current Assets

Inventories 11,000 13,000

Trade receivables 18,000 19,500

Cash and cash equivalents 3,000 3,000

Total 78,700 1,18,500

Notes to Accounts

Particulars Figures as at the Figures as at the

end of 31.3.2011 end of 31.3.2012

( ) ( )

Note No.1. Reserve and Surplus: General Reserve 15,000 27,500

Balance in Statement of P&L A/c 10,000 15,000

Total 25,000 42,5000

Additional Information:

(i) Depreciation on fixed assets for the year 2011-12 was 14,700.


(ii) An interim dividend 7,000 has been paid to the shareholders during the year.

Solution:

Calculation of Net Profit before Tax and Extraordinary item:

Net Profit as per Balance in Statement of Profit & Loss A/c

(15000–10,000) 5,000

Add: Transfer to General Reserve (27,500 – 15,000) 12,500

Add: Interim dividend paid during the year 7,000

Net Profit before Tax and Extraordinary item 24,500

Cash Flow Statement

For the year ended 31st March 2012

Particulars Details ( ) Amounts ( )

A. Cash flow from Operating Activities

Net Profit Before Tax And Extra-ordinary Item 24,500

Adjustment for non-cash and non-operating items

Add : Depreciation on fixed assets 14,700

Operating Profit before working capital changes 39,200

Adjustment for Working Capital Changes :

Add: Increase in Trade Payables 2,300

41,500

Less : Increase in trade receivable (1,500)

Increase in Inventories (2,000)

Net Cash Inflow from Operating Activities 38,000

B. Cash Flow from Investing Activities

Purchase of Fixed Assets (51,000)

Net Cash Used in Investing Activities (51,000)

C. Cash Flow From Financing Activities

Issue of share capital 20,000

Payment of interim dividend (7,000)

Cash Flow from Financing Activities 13,000

Net Increase in Cash & Cash Equivalent Nil

Add : Cash & Cash Equivalent at the beginning of

year 3,000

Cash & Cash Equivalent at the end of year 3,000


Dr. Fixed Assets Account Cr.


To Balance b/d 46,700 By Depreciation A/c 14,700

To Bank A/c (additional 51,000 (Current year dep. on

Purchase) remaining fixed assets)

By Balance c/d 83,000

97,700 97,700

Illustration : Prepare a Cash Statement on the basis of the information given in the

Balance Sheets of Liva Ltd. as at 31.3.2013 and 31.3.2012:

Particulars Note No. 31.3.2013 31.3.2012

( ) ( )

I. Equity and Labilities


(a) Share capital 2,10,000 1,80,000

(b) Reserves and surplus 1 1,32,000 24,000

(2) Non-current Liabilities

(a) Long term-borrowings 1,50,000 1,50,000


(a) Trade Payables 75,000 27,000

Total 5,67,000 3,81,000

II. Assets

(1) Non-current Assets

(a) Fixed Assets

(i) Tangible Assets 2,94,000 2,52,000

(b) Non-current Investments 48,000 18,000

(2) Current Assets

(a) Current-Investments (Marketable) 54,000 60,000

(b) Inventories 1,07,000 24,000

(c) Trade Receivables 40,000 17,500

(d) Cash and Cash-equivalents 24,000 9,500

Total 5,67,000 3,81,000

Notes to Accounts:

Note-1

Particulars 2013 ( ) 2012 ( )

Reserve and Surplus

Surplus (Balance in statement of profit and loss) 1,32,000 24,000


Solution:

Cash Flow Statement of Liva Ltd.

For the year ended 31st March 2013 as per AS-3 (Revised)


Cash Flows from Operating Activities:

Net Profit before tax & extraordinary items 1,08,000

Add : Non cash and Non-operating charges –

Operating profit before working capital changes 1,08,000

Add : Increase in Current Liabilities

Increase in trade payables 48,000

Less : Increase in Current Assets

Increase in trade receivables (22,500)

Increase in inventories (83,000)

Cash generated from Operating Activities 50,500

Cash flow from Investing Activities:

Purchase of fixed assets (42,000)

Purchase of non current investments (30,000)

Cash used in investing activities. (72,000)

Cash flows from Financing Activities:

Issue of share capital 30,000

Cash flow from financing activities 30,000

Net increase in cash & cash equivalents 8,500

Add : Opening balance of cash & cash equivalents :

Marketable Securities 60,000

Cash & cash Equivalents 9,500

69,500

Closing balance of cash & cash equivalents:

Marketable Securities 54,000

Cash & Cash equivalents 24,000

78,000


CBSE ANNUAL EXAM : 2013

ACCOUNTANCY

Time Allowed: 3 hours Maximum Marks: 80

General Instructions:

(i) This question paper contains three parts, A, B and C

(ii) Part A is compulsory for all candidates.

(iii) Candidates can attempt only one part of the remaining parts B and C.

(iv) All parts of the questions should be attempted at one place.

Part - A

(ACCOUNTING FOR PARTNERSHIP FIRMS AND COMPANIES)

1. When the partner capitals are fixed, where the drawing made by a partner

will be recorded? 1

2. State the ratio in which the partners share profits or losses on revaluation of

assets and liabilities when there is change in profit sharing ratio amongst

existing partners? 1

3. Name the account which is opened to credit the share of profit of the deceased

partners, till the time of the death to his Capital account.

4. Give the journal entry to distribute ‘Workman Compensation Reserve’ of

60,000 at the time of retirement of Sajjan, when there is no claim against

it. The firm has three partners Rajat, Sajjan and Kavita. 1

5. What is meant by ‘Securities Premium’? 1

6. What rate of interest the company pays on calls in advance if, it has not

prepared its own Articles of Associations? 1

7. What is meant by issue of debentures as a collaeral security. 1

8. Mona, Nisha and Priyanka are partners in a firm. They contributed 50,000

each as capital three years ago. At that time Priyanka agreed to look after the


business as Mona and Nisha were busy. The profits for the past three years

were 15,000, 25,000 and 50,000 respectively. While going through the

books of accounts, Mona noticed that the profit had been distributed in the

ratio of 1:1:2. When she enquired from Priyanka about this, Priyanka answered

that since she looked after the business she should get more profit. Mona

disagreed and it was decided to distribute profit equally retrospectively for

the last three years.

(a) You are required to make necessary corrections in the books of accounts

of Mona, Nisha and Priyanka by passing an adjustment entry.

(b) Identity the value which was not practiced by Priyanka while distributing

profits. 1

9. Pass the necessary journal entries for issue of 1,000, 7% Debentures of 100

each in the following cases:

(a) Issued at 5% premium redeemable at a premium of 10%.

(b) Issued at a discount of 5% redeemable at par.

10. Taneja Constructions Ltd. has an outstanding balance of 5,00,000, 7%

debentures of 100 each redeemable at a premium of 10%. According to the

terms of redemption, the company redeemed 30% of the above debentures by

converting them into shares of 50 each at a premium of 20%. Record the

entries for redemption of debentures in the books of Taneja Constructions Ltd.

11. Abhay and Beena are partners in firm. They admit Chetan as a partner with

1/4th share in the profits of the firm. Chetan brings 2,00,000 as his share

of capital. The value of the total assets of the firm is 5,40,000 and outside

liabilities are valued at 1,00,000 on that date. Give the necessary entry to

record goodwill at the time of Chetan’s admission. Also show your working

notes.

12. Naresh, David and Aslam are partners sharing profits in the ration of 5:3:7.

On April 1st, 2012, Naresh gave a notice to retire from he firm. David and

Aslam decided to share future profits in the ratio of 2:3. The adjusted capital

accounts of David and Aslam show a balance of 33,000 and 70,500

respectively. The total amount to be paid to Naresh is 90,500. This amount

is to be paid by David and Aslam in such a way that their capitals become

proportionate to their new profit sharing ratio. Pass necessary journal entries

for the above transactions in the books of the firm. Show your working

clearly.


13. Madhav Ltd. issued fully paid equity share of 80 each at a discount of 5

per share for the purchase of a running business from Gupta Bros. for a sum

of 15,00,000.

The assets and liabilities considered of the following:

Plant 5,00,000; Trucks 7,00,000; Stock 3,00,000; Machinery 6,00,000

and Sundry Creditors 5,00,000.

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

in the books of Madhav Ltd.

14. The authorised capital of Suhani Ltd. is 45,00,000 divided into 30,000

shares of 150 each. Out of these company issued 15,000 shares of 150

each at a premium of 10 per share. The amount was payable as follows:

50 per share on application, 40 per share on allotment (including premium),

30 per share on first call and balance on final call. Public applied for 14,000

shares. All the money was duly received.

Prepare an extract of Balance Sheet of Suhani Ltd. as per Revised Schedule

VI Part-I of the Companies Act 1956 disclosing the above information. Also

prepare ‘notes of accounts’ for the same.

15. Ali, Bimal and Deepak are partners in a firm. On 1st April, 2011 their capital

accounts stood at 4,00,000, 3,00,000 and 2,00,000 respectively. They

shared profits and losses in the proportion of 5:3:2. Partners are entitled to

interest on capital @ 10% per annum and salary to Bimal and Deepak @

2,000 per month and 3,000 per quarter respectively as per the provisions

of the partnership deed.

Bimal’s share of profit (excluding interest on capital but including salary) is

guaranteed at a minimum of 50,000 p.a. Any deficiency arising on that

account shall be met by Deepak. The profits of the firm for the year ended

31st March, 2012 amounted to 2,00,000. Prepare Profits & Loss

Appropriation accounts for the year ended on 31st March, 2012. 6

16. The Balance Sheet of Sudha, Rahim and Kartik who were sharing profit in

the ratio of 3:3:4 as on 31st March, 2012 was as follows:

Liabilities Assets

General Reserve 10,000 Cash 16,000

Bills Payable 5,000 Stock 44,000

Loan 12,000 Investments 47,000


Capital : Land & Building 60,000

Sudha : 60,000 Sudha’s loan 10,000

Rahim : 50,000

Kartik : 40,000 1,50,000

1,77,000 1,77,000

Sudha died on June 30th 2012. The partnership deed provided for the following

on the death of partner:

(a) Goodwill of the firm be valued at two years purchase of average profits

for the last three years.

(b) Sudha’s share of profit or loss till the date of her death was to be

calculated on the basis of sales. Sales for the year ended 31st March,

2012 amounted to 4,00,000 and that from 1st April to 30th June 2012

to 1,50,000. The profit for the year ended 31st march, 2012 was

1,00,000.

(c) Interest on capital was to be provided @ 6% p.a.

(d) The average profits of the last three years were 42,000.

(e) According to Sudha’s will, the executors should donate her share to

“Matri Chhaya-an orphanage for girls”.

Prepare Sudha’s Capital Account to be rendered to her executor. Also identify

the face value being highlighted in the question. 6

17. Money Plus Company issued for public subscription 75,000 shares of the

value of 10 each at a discount 10% payable as follows:

2 per share on application, 3 per share on allotment and 4 per share on

call.

The company received applications for 1,50,000 shares. The allotment was

done as under :

(a) Applications of 15,000 shares were allotted 5,000 shares.

(b) Applications of 70,000 shares were allotted 40,000 shares.

(c) Remaining applications were allotted 30,000 shares.

Money in excess to allotment was returned. Hari, a shareholder who had

applied for 3,500 shares out of group ‘B’ failed to pay allotment and call

money, Rohan, a shareholder who was allotted 3,000 shares paid the call

money along with the allotment., Rohan also belonged to group ‘B’.


Pass necessary journal entries to record the above transactions in the books

of the company. Show your working notes clearly.

OR

Record the journal entries for forteiture and reissue of shares in the following

cases:

(a) X Ltd. forteited 20 shares of 10 each, 7 called up on which the

shareholder had paid application and allotment money of 5 per share.

Out of these, 15 shares were re-issued to Naresh as 7 per share paid

up for 8 per share.

(b) Y Ltd. forfeited 90 shares of 10 shares, 8 called up issued at a

premium of 2 per share to ‘R’ for non-payment of allotment money of

5 per share (including premium). Out of these, 80 shares were re-

issued to Sanjay as 8 called up for 10 per share.

(c) Z Ltd. forfeited 3000 shares of 10 each issued at a discount of 1 per

share for non-payment of first and final call of 3 per share. Out of

these 200 shares were reissued at 3 per share fully paid up.

18. Shahaj and Nimish are partners in firm. They share profits and losses in the

ratio 2:1. Since both of them are specially abled, sometimes they find it

difficult to run the business on their own. Gauri, a common friend decides to

help them. Therefore, they admitted her into partnership for a 1/3rd share.

She brought her share of goodwill in cash and proportions capital. At the time

of Gauri’s admission, the Balancesheet of Sahaj and Nimish was as under:

Liabilities Assets

Capital Accounts : Machinery 1,20,000

Sahaj 1,20,000 Furniture 80,000

Nimish 80,000 2,00,000 Stock 50,000

General Reserve 30,000 Sundry Debtors 30,000


Employees Provident Fund 40,000

3,00,000 3,00,000

It was decided to:

(a) Reduce the value of stock by 5,000.

(b) Depreciate furniture by 10% and appreciate machinery by 5%.

(c) 3,000 of the debtors proved bad. A provision of 5% was to be created

on Sundary Debtors for doubtful debts.


(d) Goodwill of the firm was valued at 45,000.

Prepare Revolution Account, Partners’ Capital Accounts and Balance Sheet

of the reconstituted firm, Identify the value being conveyed in the question.

OR

Prachi, Ritika, Ishita were partners in a firm sharing profits and losses in the

ratio of 5:3:2. Inspite of repeated reminders by the authorities., they kept

dumpting hazardous material into a nearby river. The Court ordered for the

dissolution of their partnership firm on 31st March 2012. Prachi was deputed

to realise the assets and pay the liabilities. She was paid 1,000 as commission

for her services. The final position of the firm was as follows:

Liabilities Assets

Creditors 10,000 Furniture 37,000

Investment Fluctuation Fund 4,500 Stock 5,500

Capital Investments 15,000

Prachi 40,000 Cash 9,000

Ritika 30,000 Ishita’s Capital 18,000

84,500 84,500

Following was agrees upon:

Prachi took over investments for 12,500. Stock and Furniture realized

41,500. There was old furniture which has been written off completely from

the books. Ritika agreed to take away the same at the price of 3,000.

Compensation paid to the employees amounted to 8,000. The liability was

not provided in the above Balance Sheet. Realization expenses amounted to

1,000. Prepare Realisation Account. Partners’. Capital Accounts and Cash

A/c to close the books of the firm.

Also identify the value being conveyed in the question.

Part-B

(FINANCIAL STATEMENTS ANALYSIS)

19. Under which type of activity will you classify ‘Dividend received by a finance

company’ while preparing Cash Flow Statement? 1

20. What is meant by ‘Cash from operating activities? 1

21. State any one objective of financial Statements Analysis. 1


22. Under what heads and sub-heads the following items will appear in the

Balance Sheet of a company as per revised Schedule VI, Part-I of companies

Act 1956.

(i) Premium on redemption of Debentures

(ii) Loose tools

(iii) Balance with Banks

23. (a) Compute ‘Working Capital Turnover Ratio’ from the following

information:

Cash Sales 1,30,000; Credit Sales 3,80,000; Sales Returns 10,000;

Liquid Assets 1,40,000; current Liabilities 1,05,000 and Inventory

90,000.

(b) Total Assets 23,50,000; Total Debt 2,50,000 and Current Liabilities

80,000.

24. From the following Statement of Profit and Loss of Suntrack Ltd. for the

years ended 31st March 2011 and 2012, prepare a ‘Comparative Statement of

Profit & Loss’.


( ) ( )


Other Income 12,00,000 9,00,000

Expenses 13,00,000 10,00,000

25. Following is the Balance Sheet of Wisben Ltd. as on 31st March 2012.

Particulars Note No. 2012 2011

( ) ( )



(a) Share capital 7,00,000 6,00,000

(b) Reserve and Surplus (Profit

& Loss Balance) 2,00,000 1,10,000

(2) Non-Current Liabilities

Long term borrowings 3,00,000 2,00,000


Trade Payables 30,000 25,000

Total 12,30,000 9,35,000


II. Assets

(1) Non-Current Assets

(a) Fixed assets

Tangible Assets 11,00,000 8,00,000

(2) Current Assets

(a) Inventories 70,000 60,000

(b) Trade Receivables 32,000 40,000

(c) Cash and Cash Equipments 28,000 35,000

Total 12,30,000 9,35,000

Adjustments

During the year a piece of machinery of the book value of 80,000 was sold for

65,000. Depreciation provided on tangible assets during the year amounted to 2,00,000.

Prepare a Cash Flow Statement.


MARKING SCHEME ACCOUNTANCY : 2013

1. When the partner.................................will be recorded. 1

Ans. Drawings made by a partner will be recorded in partners current account.

2. State the ratio.................................Existing partners. 1

Ans. In case of change in profit sharing ratio, profit or losses on revolution of

assets & liabilities are shared in old profit sharing ratio/existing profit

sharing ratio.

3. Name the account................................. Capital account? 1

Ans. P&L suspense A/c.

4. Give the journal.................................Rajat, Sajjan, & Kavita. 1

Ans.


Workman Compensation Reserve A/c Dr. 60,000

To Rajat’s Capital A/c 20,000

To Sajjan’s Capital A/c 20,000

To Kavit’a Capital A/c 20,000

(Being Workmen Compensation Reserve

transferred to partner’s Capital account in

equal ratio)

5. What is meant ......................................... Premium? 1

Ans. When shares/debentures are issued at a price higher than the face value

then the excess amount received is known as Securities premium.

6. What rate of ........................................... Association? 1

Ans. The rate of interest the company pays on calls in advance is 6% p.a.

7. What is meant ......................................... Collateral security? 1

Ans. When a company takes loan & debentures are issued as secondary

security in addition to principal security, it is known as Debentures issued

as collateral security.


8. Mona, Nisha & Priyanka ....................................... Distributing profits.

Journal


Priyanka’s Capital A/c Dr. 15,000

To Mona’s Capital A/c 7,500

To Nish’a Capital A/c 7,500

(Being the Capital accounts of Partner’s adjusted)

1

Working Notes

Profits for last three years = 15,000 + 25,000 + 50,000 = 90,000

Mona Nisha Priyanka

Profit already distribution (Dr.) 22,500 22,500 45,000

To be distributed as equally (Cr.) 30,000 30,000 30,000

1

b. The value which was not practiced by Priyanka (any one)

* Honesty * Loyalty

* Truthfulness. 1

Note: (Any other individual response with suitable justification should also be accepted

even if there is no reference to the text.)

9. Pass the necessary ............................................. At Par.

Ans.

Journal


(a) Bank A/c Dr. 1,05,000

To 7% Debenture Application &


(Being application money received on

1000, 7% debentures at premium of 5%)

7% Debenture Application & Allotment A/c Dr. 1,05,000





To Premium on Redemption of Debentures A/c 10,000

(Being 1,000 debentures issued at 5% premium.

redeemable at 10% premium)

(b) Bank A/c Dr. 95,000

To 7% Debentures Application &


(Being application money received on 1000

debentures at 5% discount.

7% Debentures Application & allotment A/c Dr. 95,000

Discount on issue of debentures A/c Dr. 5,000


(Being 1,000 debentures issued at discount,

redeemable at par)

Note : if an examinee has written securities premium no marks to be deducted.

½+1+½+1= 3

10. Taneja Constructions ........................................ Ltd.

Ans.

Journal


7% Debenture A/c Dr. 1,50,000

Premium on Redemption of Debenture A/c Dr. 15,000

To Debenture Holder’s A/c 1,65,000

(Being 1,500 debentures due for redemption) 1½

Debenture Holder’s A/c Dr. 1,65,000


To Securities premium Reserve A/c 27,500

(Being 2750 shares issued @ ` 50 each

at 20% premium) 1½

Working Note:-

165000No of shares = = 2, 750 shares60 1½+1½=3

11. Abhay ............................. your working notes.

Ans.


Journal


Chetan’s Capital A/c /Chetan’s Current A/c Dr. 40,000

To Abhay’s Capital A/c 20,000

To Been’as Capital A/c 20,000

(Being amount of goodwill transferred

to old partners capital account in sacrificing

ratio)

Working Notes:

1. In the absence of any agreement Profits are divided equally.

2. Calculation of Hidden Goodwill:

Chetan’s Capital for ¼ share = 2,00,000

(a) Total Capital of New Firm = 2,00,000 × 4/1 = 8,00,000

Net Worth=Sundry Assets – Outside Liabilities = 5,40,000 – 1,00,000 = 4,40,000

Actual Capital = Net Worth + Capital of new partner = 4,40,000 + 2,00,000=6,40,000

Goodwill of the Firm = 8,00,000 – 6,40,000 = 1,60,000

Chetan’s Share = 1,60,000 × ¼= 40,000

2+2=4

12. Naresh .................................... Working clearly.

Ans.

Journal


(i) Cash A/c Dr. 90,500

To David’s Capital A/c 44,600

To Aslam’s Capital A/c 45,900

(Being cash brought in by David &

Aslam to adjust Capital in new profit

Sharing Ratio)

Naresh’s Capital A/c Dr. 90,500

To Cash A/c Bank A/c 90,500

(Being amount paid to Naresh)

1½


Working Notes:

(i) David’s Capital = 33,000

Aslam’s Capital = 70,500

Naresh to be paid = 90,500

Total Capital of new firm = 1,94,000

David’s New Capital = 1,94,000 × 2/5 = 77,600

Aslam’s New Capital = 1,94,000 × 3/5 = 1,16,400 1

(ii)

Adjustment of Capital

David (` ) Aslam(` )

Old Capital 33,000 70,500

Less : New Capital 77,600 1,16,400

Cash to be brought in 44,600 45,900

David should bring 44,600

Aslam should bring 45,900 1½+1½+1=4

13. Madhav Ltd...................................Ltd.

Ans.

Journal


1. Plant A/c Dr. 5,00,000

Trucks A/c Dr. 7,00,000


Machinery A/c Dr. 6,00,000


To Gupta Bros. A/c 15,00,000


(Being business purchases from Gupta Bros.) 2

2. Gupta Bros. A/c Dr. 15,000,000

Discount on issue of shares A/c Dr. 1,00,000


(Being 20,000 shares issued in purchase

consideration) 2


Working Notes:

No. of Shares = 15,00,000 / 75 = 20,000 shares 2+2=4

14. The authorize .........................................for the same.

Ans.

Suhani Ltd.

Balance Sheet as at (an extract)

Particulars Note No. ( )

1. Equity & liabilities

(a) Share holders’ funds:

(i) Share Capital 1 21,00,000

(ii) Reserve & Surplus 2 1,40,000

2. Assets

Current Assets

Cash & cash equivalents 3 22,40,000

1

Notes to Account:

1. Share Capital

Authorized Capital

30,000 Shares @ 150 each 45,00,000 1

Issued Capital

15,000 shares @ 150 each 22,50,000 1

Subscribed Capital

Subscribed & fully paid 14,000 shares @ 150 each 21,00,000 1

2. Reserves & Surplus

Securities premium (reserve) 1,40,000

3. Cash & Cash equivalents

Cash at bank 22,40,000

Note: If an examine has presented the Balance Sheet as per pre-revised schedule due

credit should be given. 1×4 =4

15. Ali, Bimal & Deppak....................................31st March, 2012.


Dr. Profit & Loss Appropriation Account Cr.


To Interest on Capital By Profit & Loss A/c 1 2,00,000

½ Ali 40,000

½ Bimal 30,000

½ Deepak 20,000 90,000

To Salary

1 Bimal 24,000

1 Deepak 12,000 36,000

To Profit transferred to Capital A/c

½ Ali 37,000

½ Bimal 22,200

\Add Deficiency 3,800

26,000

Deepak 14,800

½ Less

Deficiency borne 3,800

11,000 74,000

2,00,000 2,00,000

Calculation:

Deficiency = Guaranteed amount – (amount received)

= 50,000 – ( 24,000 + 22,200) = 50,000 – 46,200 = 3,800

(½×6)+(1×3)=6

16. The Balance sheet ..................................... the question.

Dr. Sudha’s Capital A/c Cr.


To Sudha’s loan A/c ½ 10,000 By Balance b/d 60,000 ½

To Sudha’s executors A/c ½ 90,350 By Rahim’s capital A/c 10,800 ½

By Kartik’s capital A/c 14,400 ½

By P&L suspense A/c 11,250 1

By Interest on capital 900 1

By General Reserve A/c 3,000 ½

1,00,350 1,00,350


Values being highlighted are (any one)

* Sympathy

* Empathy

* Charity

* Fulfilling Social Responsibility. (Any another individual response with suitable

justification should be accepted even if there is no reference to the text.)

(a) Average profit = 42,000

Goodwill = 2 × 42,000 = 84,000

Sudha’s Share of goodwill 3/10 × 84,000 = 25,200

(b) If sales is 4,00,000 profit = 1,00,000

If sales is 1 Profit =1,00,000 1,00,000

Pr ofit 1,50,0004,00,000 4,00,000

37,500

Sudha’s Share = 3

3750010

11,250

(c) Interest on Capital = 60,000 × 6 3

60,000100 12

900

17. Money Plus company ............................................ notes clearly.

Journal


1. Bank A/c Dr. 3,00,000

To Share Application A/c 3,00,000 1

(Being application money received)

2. Share application A/c Dr. 3,00,000


To Share Allotment A/c 1,45,000

To Bank A/c 5,000 1

(Being excess money adjusted & refunded)

3. Share Allotment A/c Dr. 2,25,000


To Share Capita A/c 3,00,000 1


(Being the allotment money due)

4. Bank A/c Dr. 89,000

Call in Arrear A/c Dr. 3,000

To Share Allotment A/c 80,0001½

To Calls in Advance A/c 12,000

(Being allotment money received) OR

Bank A/c Dr. 89,000


To Share First & Final Call/Calls in

Advance 12,000

(Being Allotment money received)

5. Share First & Final Call A/c Dr. 3,00,000

To Share Capital A/c 3,00,000 1

(Being call money due)

6. Bank A/c Dr. 2,80,000

Calls in Advance A/c Dr. 12,000

Calls in Arrears A/c Dr. 8,000

To Share First & Final Call A/c 3,00,0001½

OR

Bank A/c Dr. 2,80,000

To Share First & Final Call A/c 2,80,000

(Being Call money received)

Working Notes : Hari applied for 3,500 shares from Group B

He has been allotted 4= x 3500 = 2000 Shares7

Application Application Excess Allot due Refund

money Transferred to

Received Capital

Group A 15000 × 2 = 30,000 5000 × 2 = 10,000 20,000 15,000 5,000

Group B 70000 × 2 = 1,40,000 40000 × 2 = 80,000 60,000 1,20,000 Nil

Group C 65000 × 2 = 1,30,000 30000 × 2 = 60,000 70,000 90,000 Nil

(a) Hari sent for application = 7,000

Transferred to Capital = 4,000

Excess 3,000 1


Allotment due

2000 × 3 = 6,000

Adjusted 3,000

Calls in Arrears on allotment 3,000

Calls in Arrears on First Call of Hari 2000 × 4 = 8,000.

(b) Calls in Advance of Rohan = 3000 × 4 = 12,000 or 1½×2+1×5=8

17. Record the journal ..............................................paid up.

Ans.

Journal


(a) 1. Share Capital A/c Dr. 140

To Forfeited Shares A/c 100 1

To Unpaid Call A/c Call in arrear A/c 40

(Being 20 share forfeited for non-payment of

call money)

2. Bank A/c Dr. 120

To Share Capital A/c 105 1


(Being 15 shares re-issued)

3. Forfeited Shares A/c Dr. 75

To Capital Reserve A/c 75 1

(Being amount transferred to Capital Reserve)

(b) 1. Share Capital A/c Dr. 720

Securities Premium Reserve A/c Dr. 180

To Forfeited Shares A/c 450 1

To Share Allotment A/c / Calls in Arrear A/c 450

(Being 90 shares forfeited for nonpayment

of allotment money)

2. Bank A/c Dr. 800

To Share Capital A/c 640 1


(Being shares reissued)

3. Share Capital A/c Dr. 3,000 1


To Discount on issue of shares A/c 300

To Forfeited Shares A/c 1800

To Share First & Final Call A/c / Call in

Arrears A/c 900

(Being 300 shares forfeited)

2. Bank A/c Dr. 600

Discount on issue of shares A/c Dr. 200

Share forfeited A/c Dr. 1,200 1


(Being Shares re issued)

1×8=8

18. Sahaj & Nimish are partners ........................... question.

Ans.



To Stock A/c 5,000 By Machinery A/c 6,000

To Furniture A/c 8,000 By Loss transferred to

To Bad Debts A/c 3,000 Capital A/c

To provision for bad debts A/c 1,350 Sahaj 7,567

Nimish 3,783 11,350

17,350 17,350

½×6=3

Dr. Partner’s Capital Account Cr.

Particulars Sahaj Nimish Gauri Particulars Sahaj Nimish Gauri

To Reventuation 7,567 3,783 - By Balance b/d 1,20,000 80,000 -

A/c By General

reserve A/c 20,000 10,000 -

By Premium 10,000 5,000 -

A/c (Goodwill)

By Bank A/c - - 1,16,825

To Balance c/d 1,42,433 91,217 1,16,825

1,50,000 95,000 1,16,825 1,50,000 95,000 1,16,825

2


Balance Sheet of Sahaj, Nimish & Gauri (As on ................)

Liabilities Assets

Capitals A/c Machinery (1,20,000+6000) 1,26,000

Sahaj 1,42,433 Furniture (80,000–8,000) 72,000

Nimish 91,217 Stock (50,0000–5,000) 45,000

Gauri 1,16,825 3,50,475 Debtors 30,000

Creditors 30,000 Less : Bad Debt 3,000

27000

Less: Provision for

bad Debts 1350 25,650

Emp. Provident Fund 40,000 Cash/Bank 1,51,825

420475 420475

2

Working Note:

(a) Gauri’s Share = 45000 × 1/3 = 15000

(b) Calculation of Gauris Capital

Sahaj’s Capital =142433

Nimish’s Capital = 91217

Capital for 2/3 Share = 2,33650

Total Capital = 233650 × 3/2

Gauri’s Capital = 233650 × 3/2 × 1/3 = 1,16,825

Value Being highlighted are (any one)-

- Sympathy

- Kindness 1

Note: (Any other individual response with suitable justification should also be accepted

even if there is no reference to the next.) OR 3+2+2+1=8

18. Prachi, Ritika ........................................... in the question.

Ans.


Dr. Realisation A/c Cr.


To Assets A/c By Creditors A/c 10,000

Furniture 37,000 By Investment Fluction fund A/c 4,500

Stock 5,500 By Prachi’s Capital A/c 12,500

Investment 15,000 57,500 (Investment) 41,500

By Cash A/c

To Cash A/c

(Liabilities paid) By Ritika’s Capital A/c 3,000

Creditors 10,000 (Old Furniture take over)

Compensation 8,000 18,000 By Loss Transferred to:

To Cash A/c 1,000 Prachi Cap A/c 3,000

(Realisation Exp.) Ritika Cap A/c 1,800

To Prachi Capital A/c Ishita Cap A/c 1,200 6,000

(Commission) 1,000

77,500 77,500

Dr. Partner’s Capital Account Cr.

Particulars Prachi Ritika Ishita Particulars Prachi Ritita Ishita

To Balance b/d - - 18,000 By Balance b/d 40,000 30,000 -

To Realisation A/c 3,000 1,800 1,200 By Realisation 1,000 - -

(Loss) (Commission paid)

To Realisation A/c 12,500 - -

Investment By Cash A/c - - 19,200

Take Over)

To Realisation A/c - 3,000 -

(Furniture taken

over)

To Cash A/c 25,500 25,200 -

(Final Payment)

41,000 30,000 19,200 41,000 30,000 19,200

2

Dr. Cash A/c Cr.


To Balance b/d 9,000 By Realisation 18,000

(Liabilities Paid)

To Realisation A/c 41,500 By Realisation (Exp.) 1,000


To Ishita’s Capital A/c 19,200 By Prachi’s Capital A/c

(Cash brought in) (Final Payment) 25,500

By Ritika Cap A/c

(Final Payment) 25,200

69,700 69,700

2

Value Highlighted (Any One)

1. Respect for law : There should be respect for all for survival & growth of

business.

2. Environment protection.

3. Social responsibility towards society. 1

Note: (Any other individual response with suitable justification should also be

accepted even if there is no reference to the text.) 3+2+2+1=8

Part-B


19. Under which type .................................Statement? 1

Ans. Operating Activity.

20. What is meant ............................... activities?

Ans. It means cash flow from business transactions which have a direct relation

in calculating net income of business. 1

21. State any one ......................................Analysis (any one)

Ans. 1. Knowing the profitability of business.

2. Knowing the Solvency of business.

3. Judging the growth & financial strength of business.

4. Forecasting & preparing budgets. 1

22. Under What ....................................................With banks.

Items Heading/Sub Heading

Premium on redemption of debentures Non Current liability/Other long term liabilities

Lose tools Current Assets/Inventory

Balance with Bank Current Assets/Cash & Cash Equivalents

Note: If an examine has mentioned either heading or sub-heading full credit may be allowed.

1×3=3


23. Compute working ......................................................80,000.

Ans. (A). Calculation of “working Capital turnover Ratio.”

Working Capital turnover Ratio

Net Sales 5, 00, 0004 Times

Net Working Capital 1, 25, 000 ½

Net Sales = Cash Sales + Credit Sales – Sales Returns

= 1,30,000 + 3,80,000 – 10,000 = 5,00,000 ½

Net Working Capital = CA – CL = 2,30,000 – 1,05,000 = 1,25,000 ½

CA = Liquid Assets + Inventory = 1,40,000 + 90,000 = 2,30,000 ½

CL= 1,05,000 (Given)1

(B) Calculation of Debt Equity Ratio

Debt Equity Ratio = Debt / Long Term Debt

Equity / Share Holder Fund ½

Debt = Total Debt – Current Liabilities

= 2,50,000 – 80,000 = 1,70,000 ½

Equity = Total Assets – Total Debts

= 3,50,000 – 2,50,000 = 1,00,000 ½

Debt Equity Ratio = 1, 70, 000

1.71, 00, 000

½ 2+2=4

24. From the following ...................................... Profit & Loss.

Ans. Comparative statement of Profit & Loss for the year ended 31 Mar 2011

& 2012.

S.No. Particulars 2010-11 2011-12 Absolute % Change

Changes or increase

decrease decrease

1. Revenue from operation 12,00,000 20,00,000 8,00,000 66.6

2. Add other Income 9,00,000 12,00,000 3,00,000 33.3

Total Revenue (1+2) 21,00,000 32,00,000 11,00,000 52.4

3. Less Expenses 10,00,000 13,00,000 3,00,000 30.0

4. Profit before tax 11,00,000 19,00,000 8,00,000 73


Note: If an examinee has presented the above statement as per previous format due credit

is to be given 1×4=4

25. Following is ..................................... 31st March 2012.

Ans.

Cash Flow Statement AS-3 (Revised)

(for the year ended 31st March 2012)


A. Cash Flow from operating Activities:

Profit as per statement of profit & Loss before tax &

extra ordinary items. 90,000

Adj: Non Cash & Non Operating items

Add:

1. Depreciation 2,00,000

2. Loss on sale of March 15,000 2,15,000

Operating Profit before working capital changes 3,05,000

Adjustment for current assets & current liabilities

except cash & bank

Add Increase in trade payables 5,000

Less Increase in Ineventories (10,000)

Add Decrease in Trade receivable 8000 3,000

Net Cash Inflow from Operating Activities 3,08,000

B. Cash Flow from Investing Activities:

Sales of Machinery 65,000

Purchases of Tangible assets (5,80,000)

Net Cash Outflow from Investing Activities (5,15,000)

C. Cash flow from Financing Activities

Issue of Shares 1,00,000

Loan raised 1,00,000

Net Cash Inflow from financing Activities 2,00,000

Decrease in cash and cash Equivalents (7,000)

Add: Opening balance of cash & cash Equivalents 35,000

Closing Balance of Cash & Cash Equivalents 28,000


Dr. Tangible Assets A/c Cr.

To balance b/d 8,00,000 By Dep. A/c 2,00,000

To Bank A/c (Purchases) 5,80,000 By Mach Sold A/c 80,000

By Balance C/d 11,00,000

13,80,000 13,80,000

Dr. Machinery Sold A/c Cr.


To Tangible Assets A/c 80,000 By Bank A/c 65,000

By Loss on sale of 15,000

Machinery A/c

80,000 80,000

½×12=6 marks


ACCOUNTANCY (055)

SAMPLE QUESTION PAPER

CLASS XII (2012-13)

Time Allowed: 3 Hours Maximum Marks:80

General Instruction:

1. This question paper contains three parts, A, B and C.

2. Part A is Compulsory for all.

3. Attempt only one part of the remaining parts B and C.

4. All Parts of questions should be attempted at one place.

Part-A

PARTNERSHIP FIRMS AND COMPANY ACCOUNTS

Q.1 Alka, Barkha and Charu are partners in a firm having no partnership agreement,

Alka, Barkha and Charu contributed 2,00,000, 1,50,000 and 1,00,000

respectively. Alka and Barkha desire that the profits should be divided in the

ratio of capital contribution. Charu does not agree to this. Is Charu correct?

Give reason.

Q.2 Pawan and Jayshree are partners. Bindu is admitted for 1

4th share. What is

the ratio in which Pawan and Jayshree will sacrifice their share in favour of

Bindu?

Q.3. State any two occasion on which a firm may be reconstituted.

Q.4. When is Partner’s Executors’ Account prepared?

Q.5. What is the maximum amount of discount at which forfeited shares can be

re-issued?

Q.6. What is meant by ‘Minimum Subscription’?

Q.7. What is meant by ‘Debentures issued at a collateral security?


Q.8. On 31st March 2005, after the closing of books of accounts, the capital

Accounts of A, B and C stood at 24,000; 20,000; 12,000 respectively..

The profit for the year 36,000 was distributed equally..

Subsequently, it was discovered that interest on capital @ 5% p.a. has been

omitted. The profit-sharing ratio was 2:2:1. Pass an adjustment Journal entry.3

Q.9 On 31st March,, 2010, Rhythm Limited issued 1,000 10% debentures of

500 each at par. Debentures are redemmable after 7 years. However, the

company gave an option to debenture holders to get their debentures converted

into equity shares of 100 each at a premium of 25 per share anytime after

the expiry of one year.

Shivansh, holder of 200 debentures, informed on Jan. 1, 2012 that he wanted

to exercise the option of conversion of debentures into equity shares.

Pass necessary journal entries to record the issue of debentures on Jan.1,

2010 and conversion of debentures on Jan.1, 2012.

Q.10. Pass the necessary journal for ‘issue of debentures’ for the following:

(i) Jain Ltd. issued 750, 12% Debentures of 100 each at a discount of

10% redeemable at a premium of 5%.

(ii) Sohan Ltd. issued 800, 9% Debentures of 100 each at a premium of

20 per Debenture redeemable at a premium of 10 per Debenture.

Q.11 Shabir and David were partners in a firm supplying school uniform. They

share profits in the ratio of 4:3. Their capitals as on 1st April, 2011 were

1,00,000 and 50,000 respectively. On this date Shabir suggested David to

start supplying low cost school uniforms also to the students who belong to

low income group and requested to admit his friend Charu, a visually

handicapped unemployed person into the firm, however Charu will not

contribute any capital, Shabir agrees to it. They were in need of more capital.

Shabair, therefore persuaded a rich friend of his, Rafiq, who hailed from

Assam to be a partner.

1. Ratiq contributed 7,00,000 in cash, Delivery van of 2,75,000 and

furniture of 25,000 as his capital.

2. The new profit sharing ratio is 3:2:1:1.

(a) Identify any four values which according to you motivated them

to form the partnership firm.

(b) Pass necessary journal entry for capital contributed by Rafiq in

the form of Cash and Assets.


Q.12 P, Q and R were partners in a firm sharing profit in 2:2:1 ratio. The firm

closes its books on 31st March every year. P died three month after the last

accounts were prepared. On the date, the goodwill of firm was valued at

90,000. P’s share of profit till date of his death should be calculated on the

basis of average profit of the last four years. The profits of last four years

were:

Year ended 31.03.2007 2,00,000

Year ended 31.03.2006 1,80,000

Year ended 31.03.2005 2,10,000

Year ended 31.03.2004 1,70,000 (Loss)

Pass the necessary Journal entries for the treatment of goodwill and P’s share

of Profit on his death. Show clearly the calculation of P’s share of profit. 4

Q.13 Raghav limited purchased a running business from Krishna Traders for a sum

of 15,00,000 payable 3,00,000 by cheque and for the balance issued equity

shares of 100 each at a premium of 20%.

The assets and liabilities consisted of the following:

Plant and Machinery 4,00,000

Building 6,00,000

Stock 5,00,000

Sundry Debtors 3,00,000

Sundry Creditors 2,00,000

Record necessary Journal entries in the books of Raghav limited. 4

Q.14 Janta Ltd. had an authorised capital of 2,00,000 divided into equity shares

of 10 each. The company offered for subscription 1,00,000 shares. The

issue was fully subscribed. The amount payable on application was 2 per

share. 4 share was payable each on allotment and first and final call. AA

share holder holding 100 shares failed to pay the allotment money. His shares

were forfeited. The company did not make the first & final call.

Show how the ‘Share Capital’ will be shown in the company’s balance-sheet.

Also prepare Notes to Accounts for the same. 4

Q.15 A, B and C were partners in a firm having capitals of 60,000; 60,000 and

80,000 respectively. Their Current Account balance were A: 10,000; 5,000

and C: 2,000 (Dr.). According to the Partnership Deed, the partners were


entitled to interest on capital @ 5% p.a. C being the working partner was also

entitled to a salary of 6,000 p.a. The profits were to be credited to their

capital as follows:

(i) The first 20,000 in proportion to their capitals.

(ii) Next 30,000 in the ratio of 5:3:2.

(iii) Remaining profits to be shared equally.

The firm made a profit of 1,56,000 before charging any of the above items.

Prepare the Profit and Loss Appropriation Account and pass the necessary

Journal entry for apportionment of profit.

Q.16 A, B and were partners in a firm sharing profits in the ratio of 5:3:2. On 31st

March, 2005, their Balance Sheet was:

Liabilities Assets

Creditors 7,000 Building 20,000

Reserve 10,000 Machinery 30,000

Capital A/c Stock 10,000

A 30,000 Patents 6,000

B 25,000 Debtors 8,000

C 15,000 70,000 Cash 13,000

87,000 87,000

B died on 1st October, 2005. It was agreed between his executors and the

remaining partners that:

(i) Goodwill be valued at two years’ purchase of the average profit of the

previous five years, which were 2001: 15,000; 2002: 13,000;

2003: 12,000; 2004: 15,000 and 2005: 20,000.

(ii) Patents be valued at 8,000; Machinery at 28,000; and Building at

30,000.

(iii) Profit for the year 2005-06 be taken as having accured at the same rate

as the previous year.

(iv) Interest on Capital is to be provided @ 10% p.a.

(v) A sum of 4,250 was to be paid to his executors immediately. Prepare

B’s Capital Account and his Executors Account at the time of his death.

Q.17 Srijan Limited issued 10,000 shares divided into shares of 100 each at a

premium of 20 per share, payable as under:


On Application 10 Per Share

On Allotment 40 Per Share

(Including Premium of 10 per share)

On First and Final

Call Balance

Over-payments on application were to be applied towards sums due on

allotment and first and final call. Where no allotment was made, money was

to be refunded in full.

The issue was oversubscribed to the extent of 13,000 shares. Applicants for

12,000 shares were allotted only 2000 shares and applicants for 3,000 shares

were sent letters of regret. Share were allotted in full to the remaining

applicants.

All the money due was duly received.

(a) Which value been affected by rejecting the application of the applicants

who has applied for 3,000 shares? Suggest a better alternative for the

same.

(b) Give Journal Entries to record the above transactions (including cash

transaction) in the books of the company. 8

OR

Sangita Limited invited application for issuing 60,000 shares of 10

each at par. The amount was payables as follows:

On Application 2 per Share

On Allotment 3 per Share

On First and Final Call 5 per Share

Applications were received for 92,000 shares. Allotment was made on the

following basis:

(i) To applicants for 40,000 shares - Full

(ii) To applications for 50,000 shares - 40%

(iii) To applications for 2,000 shares - Nil. Most of this category had applied

for less than 50 shares each.

1,08,000 was realized on account of allotment (excluding the amount carried

from application money) and 2,50,000 on account of call.


The directors decided to forfeit shares of those applicants to whom full

attotment was made on which allotment money was overdue.

(a) Which value has been affected by the rejection of application of category

(iii) applicants? Suggest a better alternative for the same.

(b) Pass journal entries in the books of Sangita Limited to record the above

transactions.

Q.18. L and M share profits of a business in the ratio 5:3. They admit N into the

firm for a fourth share in the profits to be contributed equally by L & M. On

the date of admission, the Balance Sheet of L&M was as follows:

Balance Sheet as at..................

Liabilities Assets

L’s Capital 30,000 Machinery 26,000

M’s Capital 20,000 Furniture 18,000

Reserve Fund 4,000 Stock 10,000

Bank Loan 12,000 Debtors 8,000


68,000 68,000

Terms of N’s admission were as follows:

(i) N will bring 25,000 as his capital.

(ii) Goodwill of the firm is to be evalued at 4 years purchase of the average

super profits of the last three years. Average profits of the last three years are

20,000; while the normal profits that can be earned on the capital employed

are 12,000.

(iii) Furniture is to be revalued at 24,000 and the value of stock to be reduced

by 20% Prepared Revaluation Account, Partners Capital Accounts and Balance

Sheet of the firm after admission of N.

OR

Following is the Balance A sheet of X, and Y, who share profits and losses

in the ratio of 4:1, as at 31st march, 2012:

Liabilities Assets

Sundry Creditors 8,000 Bank 20,000

Bank Overdraft 6,000 Debtors 17,000

X’s Brother’s Loan 8,000 Less : Provision (2,000) 15,000


Y’s Loan 3,000 Stock 15,000

Investment Fluctuation Fund 5,000 Investment 25,000

Capital X 50,000 Buildings 25,000

Y 40,000 Goodwill 10,000

Profit & Loss A/c 10,000

1,20,000 1,20,000

The firm was dissolved on the above date and the following arrangement

were decide upon:

(i) X agreed to pay off his brother’s Loan.

(ii) Debtors of 5,000 proved bad.

(iii) Other assets realised—Investments 20% less; and Goodwill at 60%.

(iv) One of the creditos for 5,000 was paid only 3,000.

(v) Buildings were auctioned for 30,000 and the auctioners commission

amounted 1,000.

(vi) Y took over part of stock at 4,000 (being 20% less than the book

value), balance stock realised 50%.

(vii) Realisation expenses amounted to 2000.

Prepare:

(i) Realization A/c

(ii) Partner’s Capital Accounts

(iii) Bank A/c

Part-B


Q.19 X Ltd. has a Debt-Equity at 3:1. According to the management it should

maintained at 1:1. What are the two choice to do so?

Q.20. State whether cash deposited in bank will result in inflow, outflow or no flow

of cash.

Q.21. Interest received by a finance company is classified under which kind of

activity preparing a cash flow statement?

Q.22. List the items which are shown under the heading, ‘Current Assets’ in the


Balance Sheet of a company as per provisions of Schedule VI, of the companies

Act 1956.

Q.23 From the following information prepare the Comparative Income Statement

of Victor Ltd:

Particulars 2012 2013

Revenue from Operation 15,00,000 18,00,000

Cost of Materials Consumed 11,00,000 14,00,000

Employees Benefit Expenses 20% of Gross Profit 25% of Gross Profit

Income Tax 50% 50%

Q.24 Calculate ‘Return on Investment’ and ‘Debit-Equity Ratio’ from the following

informations:

Net Profit after Interest and Tax 3,00,000


Tax Rate 40%

Capital Employed 40,00,000

Q.25 From the following summarized balance sheets of a company, Calculate cash

flow from operating activities:


( ) ( )

1. Equity & Liabilities

Shareholders Funds


Reserve and Surplus 1 30,000 60,000


Long term borrowings 2 60,000 80,000

Current Liabilities

Trade Payables 60,000 45,000

Other Current Liabilities 40,000 45,000

Total 2,90,000 3,30,000

II. Assets

Non-Current Assets

Fixed assets 1,50,000 1,90,000

Non-Current investments 40,000 30,000


Current Assets

Inventories 40,000 55,000

Trade Receivables 40,000 45,000

Cash and Cash equivalents 20,000 10,000

Total 2,90,000 3,30,000

Notes:

1. Reserves and Surplus:

Profit & Loss Balance 30,000 60,000

2. Long-term Borrowing:

6% Debentures 60,000 80,000

Additional Information:

(i) A piece of machinery coting 5,000 on which depreciation of 2,000 had

been charged was sold for 1,000. Depreciation charged during the year

was 17,000.

(ii) New debentures have been issued on 1st August, 2011.


MARKING SCHEME

SAMPLE QUESTION PAPER

CLASS XII (2012-13)

Part-A

PARTNERSHIP FIRMS AND COMPANY ACCOUNTS

1. Charu is correct.

Reason: In the absence of Partnership deed profits are shared equally.

2. Old Ratio i.e. 1:1

3. A partnership firm may be reconstituted in the following circumstances: (Any

two).

(i) Change in the profit sharing ratio among the existing partners;

(ii) Admission of a new partner and

(iii) Death of a partner.

4. Partner’s executors account is prepared at the time of death of a partner.

5. Maximum amount of discount at which the forfeited shares can be re-issued

is the amount forfeited on such shares.

6. Minimum subscription refers to the minimum amount which in the opinion

of board of directors must be raised through the issue of shares so that the

company has the necessary funds to carry out its business. It is 90% of the

issued amount.

7. When the debentures are issued as a secondary security for obtaining loan,

such debentures are said to have been issued as ‘collateral security’.

Journal


2005 C’s Capital Dr. 5,000

April To A’s Capital A/c 2,600


(Being the effect of adjustment recorded)

(WN 1 and 2)


Working Notes:

1. Statement showing the calculation of opening capital and interest on capital.

Particulars A(` ) B(` ) C(` )

Closing Capitals as at 31.3.2005 24,000 20,000 12,000

Less : Profit already credited 12,000 12,000 12,000

Opening Capital 12,000 8,000 Nil

Interest on Capital @ 5% p.a. 600 400 Nil

2. Table Showing the adjustment to be made

Particulars A(` ) B(` ) C(` ) Firm(` )

(i) Distribution of profit `36,000 in wrong

ratio, i.e., equal to be cancelled Dr. 12,000 12,000 12,000 36,000

(ii) Amount which should have been

credited: Interest on Capital (WN 1) Cr. 600 400 Nil 1,000

Share of Profit (`36,000–`1,000) (2:2:1) Cr. 14,000 14,000 7,000 35,000

14,600 14,400 7,000 36,000

(iii) Net effect to be debited or credited 2,600 (Cr.) 2,400(Cr.) 5,000(Dr.) Nil

Journal


2010 Bank A/c Dr. 5,00,000

Jan 1 To 10% Debenture Application &



1,000 debentures @ 500)

10% Debenture Application & Dr.

Jan 1 Allotment A/c 5,00,000


(Being application money transferred to

10% debentures account consequent upon

allotment)

2012 10% Debenture A/c Dr. 1,00,000

Jan 1 To Debenture holder A/c 1,00,000

(Being amount due to Debenture holder

on conversion)


2012 Venture holder A/c Dr. 1,00,000

Jan 1 To Equity share capital A/c 80,000


(Being the issue of 800 equity share of

100 each at a premium of 25 per share)

Journal


(i) Bank A/c Dr. 67,500

Jan 1 To 12% Debenture Application &



750 debentures @ 90 each)

12% Debenture Application and

Allotment A/c Dr. 67,500

12% Debenture Application and


Discount on issue of Debenture A/c Dr. 7,500

Loss issue of debentures A/c Dr. 3,750

To 12% Debentures 75,000

To Premium on redemption of 3,750

Debentures

(Being issue of 750 debentures @ 100

each at a discount of 10% redeemable at

a premium of 5%)

(ii) Bank A/c Dr. 96,000

To 9% Debenture Application &


(Being application and allotment money

received on 800 dentures @ 120 each)

9% Debenture Application &








(Being issue of Debentures at premium


11.(a) Values: (Any four)

(i) Secularism

(ii) Supporting the implementation of “Right to Education Act 2009”.

(iii) Sensitivity towards differently abled individuals.

(iv) Empowering women entrepreneurship.

(v) Providing entrepreneurial opportunities to people from different areas of the

country.

(b) Journal


Cash A/c Dr. 7,,00,000

Delivery Van A/c Dr. 2,75,000

Furniture A/c Dr. 25,000

To Rafiq’s Capital A/c 10,00,000

(Being cash, delivery van and furniture

totaling 10,00,000 brought in by Rafiq)

Q.12.

Ans

(i) P’s share of Profit = Average Profit × 3/12 × 2/5

2, 00, 000 1, 80, 000 2, 10, 000 – 1, 70, 000Average Pr ofit

4

= 1,05,000

P’s Share of Profit = 1,05,000 × 3/12 × 2/5 = 10,500

(ii) P’s Share in goodwill = 90,000 × 2/5 = 36,000


2007 Profit and Loss Suspense A/c Dr. 10,500

Jan 30 To P’s Capital A/c 10,500

(Being P’s share of profit credited)


Q’s Capital A/c Dr. 24,000

R’s Capital A/c Dr. 12,000

To P’s Capital A/c 36,000

(Being P’s Share of goodwill contributed

by the continuing partners)

13.


Plant and Machinery A/c Dr. 4,00,000

Building A/c Dr. 6,00,000]


Sundry Debtors A/c Dr. 3,00,000


To Krishna Traders A/c ` 15,00,000


(Being the purchase of assets and

liabilities of Krishna Traders)

Krishna Traders A/c Dr. 3,00,000

To Bank A/c

3,00,000

(Being 3,00,000 paid to Krishna Traders by

cheque)

Krishna Traders A/c Dr. 12,00,000



(Being the balance of 12,00,000 discharged

by issue of equity shares at 20% premium)

14.

Balance Sheet of Janta Ltd.

As at .........................

(Presentation of Share Capital)

Particulars Notes No.

1. EQUITY AND LIABILITIES

Shareholder’s Funds

Share Capital 1 59,600

Notes of Accounts:


Authorised Capital

20,000 equity shares of 10 each 2,00,000

Issued Capital

10,000 equity shares of 10 each 1,00,000

Subscribed, but not fully paid

9,900 shars of 10 each 6 called up 59,400

Add: Share Forfeited A/c 200 59,600

15.

Dr. Profit and Loss Appropriation Account Cr.


To A’s Current A/c (Interest of Capital) 3,000 By Profit and Loss A/c 1,56,000

To B’s Current A/c (Interest of Capital) 3,000

To C’s Current A/c (Interest of Capital) 4,000

To C/s Current A/c (Salary) 6,000

To Partners Current A/cs

(Share of Profit)

A 51,000

B 45,000

C 44,000 1,40,000

1,56,000 1,56,000

* Division of Profit among partners A( ) B( ) C( )

First 20,000(3:3:4) 6,000 6,000 8,000

Next 30,000 (5:3:2) 15,000 9,000 6,000

Remaining profit 90,000

(equally) 30,000 20,000 30,000

51,000 45,000 44,000

Journal


( ) ( )

Profit and Loss Appropriate A/c Dr. 1,40,000

To A’s Current A/c 51,000

To B’s Current A/c 45,000

To C’s Current A/c 44,000

(Being the divisible profit transferred toPartner’s Current Accounts)


16.

Balance Shete as at................


To B’s Executors’ A/c 44,250 By Balance b/d 25,000

By Reserve ( 1,000 × 3/10) 3,000

By Revaluation A/c (WN 1) 3,000

By profit and Loss Suspense 3,000

A/c ( 20,000 × 6/12×3/10)

By Interest on Capital A/c

(for months) 1,250

By A’s Capital A/c (Good

will) (WN 2) 6,429

By C’s Capital A/c (Good

will) (WN 2) 2,571

44,250 44,250

Dr. B’s Executor’s Account Cr.


To Cash A/c 4,250 By B’s Capital A/c 44,250

To B’s Executor’s Loan A/c 40,000

44,250 44,250

Working Notes :

1.

Dr. REVALUATION ACCOUNT Cr.


To Machinery Ac/ 2,000 By Patents A/c 2,000

To Profit transferred to: By Buildings A/c 10,000

A’s Capital ; A/c 5,000

B’s Capital A/c 3,000

C’s Capital A/c 2,000 10,000

12,000 12,000

2. Calculation of B’s share of Goodwill :


(15,000 13,000 12,000 15,000 20,000)Firm 's Goodwill 2

5

Goodwill = 15,000 × 2 = 30,000

B’s share of goodwill = 30,000 × 3/10 = 9,000, which is adjusted

between A and C in their gaining ratio, i.e., 5 : 2.

A’s share = 9,000 × 5/7 = 6,429 and C’s share = 9,000 × 2/7 =

2,571.

17. (a) Value of Equity has affected by rejecting the applications of the retail

investors fromhaving shares of the company.

The better alternative may be to allot the shares proportionately to all the

applicants so that such applicantsmay not’ be demotivated from investing in

the capital of big companies in future. (1 marks)

Journal


( ) ( )

(i) Bank A/c Dr. 2,30,000

To Share Application A/c 2,30,000

(Being application money received on

23,000 Share

@ 10 per share

(ii) Share Application A/c Dr. 2,30,000



To Calls-in-advance A/c 20,000

To Bank A/c 30,000

(Being application money adjusted

and balance refunded)

(iii) Share Allotment A/c Dr. 4,00,000



(Being Allotment money due)

(iv) Bank A/c Dr. 3,20,000


(v) Share First & Final Call A/c Dr. 7,00,000



To Share Premium A/c 1,00,000

(Being Call money due)

(vi) Bank A/c Dr. 6,80,000

Calls-in Advance A/c Dr. 20,000

To Share First & Final Call A/c 7,00,000

(Being call money received)

(1 × 6 = 6 marks) 2 + 6 = 8 marks

Working Notes :

(i) Total amount received on application = 10 × 23,000 = 2,30,000

(ii) Pro rate category applied 12,000 : Alloted 2, 000(i.3., 6 : 1)

Money received on application 12,000 × 10 = 1,20,000

Money required on application 2,000 × 10 = 20,000

Excess mone received on application = 1,00,000

Money required on allotment 2,000 × 40 = 80,000

So entire amount due on allotment is already received. Excess 20,000 is transferred

call in advance. This amount will be credited to Calls in Advance A/c. In that case Calls

In advance A/c willl be debited in entry No. 6 along with Bank A/c and Share First and

Final Call A/c will be credited with full amount of 7,00,000.

(a) Value of Equilit has been affected by rejecting the applications of the retail

investors from having shares of the company.

The better alternatrive may be to allot the shares proportionately to all the

applicants so the such applicants may not be demotivated from investing inn

the capital of big companies in future. (1 marks)

Journal


( ) ( )

(i) Bank A/c Dr. 1,84,000

To Share Application A/c 1,84,000

(Being application mone received on

92,000 Share @ 2 per share)

(ii) Share Application A/c Dr. 1,84,000


To Share capital A/c 1,20,000

To Bank A/c 4,000

To Share Allotment A/c

(Being the application money adjusted

towards share capital and share allotment

and surplus refunder)

(iii) Share Allotment A/c Dr. 1,80,000


(Being allotment money due on 60,000

share @ 3 per share)

(iv) Bank A/c Dr. 1,08,000


(Being allotment money received)

(v) Share First and Final Call A/c Dr. 3,00,000

To Share capital A/c 3,00,000

(Being First and Final money due on

60,000 share @ 5 per share)

(vi) Bank A/c Dr. 2,50,000

To Share First and Final Call A/c 2,50,000

(Being first and final call money received)

(vii) Share Capital A/c Dr. 40,000


To Share First and Final Call A/c 20,000

To Share Forfeited A/c 8,000

(Being 4,000 shares forfeited due to non-

payment of allotment and first and final call)

(Note 1)

(1+1+1+1+½+½+1 = 6 marks)

Note (1)

Total Amount due on Allotment = 1,80,000

Less : Excess Application money 60,000

1,20,000

Amount received on Allotment 1,08,000

Amount not received on Allotment 12,000


This amount has not been received from those applicants to whom full allotment

was made. Hen number of shares from whom allotment money has not been received =

12,000 = 4,000 Shares.

18.

REVALUATION ACCOUNT


To Stock A/c 2,000 By Furniture A/c 6,000


L 2,500

M 1,500 4,000

6,000 6,000

PARTNER’S CAPITAL ACCOUNTS

Particulars L M N L M N

To Balance C/d 39,00 27,000 25,000 By Balance bd/ 30,000 20,000 –

By Reserve Fund 2,500 1,500 –

By Revalution A/c 2,500 1,500 –

By Cash A/c – 25,000

By N’s Current

A/c (1) 4,000 4,000 –

39,000 27,000 25,000 39,000 27,000 25,000

(1½ × 3 = ½)

Balance Sheet as at................


Capital c/d Machinery 26,000

L 39,000 Furniture 24,000

M 27,000 Stock 8,000

N 25,000 91,000 Debtors 31,000

Bank Loan 12,000 Cash 31,000

Creditors 2,000 N’s Current A/c 8,000

1,05,000 1,05,000


Working Note (1) :

Super Profits = Average Profits – Normal Profit

= 20,000 – 12,000 = 8,000

Goodwill of the Firm = 8,000 × 4 = 32,000

N’s Share = 32,000

8,0004

N’s Current A/c Dr. 8,000

To L’s Capital A/c 4,000

To M’s Capital A/c 4,000

(1½ + 4 ½ + 2 = 8)

Or

REALISATION ACCOUNT


To Debtors 17,000 By Sundry Creditors 8,000

To Stock 15,000 By Provision for Doubtful

Debts 2,000

To Investment 25,000 By Investments Fluctuation

Fund 5,000

To Buildings 25,000 By X’s Borther’s Loan A/c 8,000

To Goodwill 10,000 By Bank A/c

To X’s Capital A/c Assets realised

(X’s borther’s Loan) 8,000 Debtors 12,000

To Bank A/c Investments 20,000

Creditors 6,000 Goodwill 6,000

To Bank A/c Buildings 29,000

(Realisation Expenses) 2,000 Stock 5,000 72,000

By Y’s Capital (Stock)

By Loss transferred to

X’s Capital A/c 7,200

Y’s Capital A/c 1,800 9,000

1,08,000 1,08,000


Y’S LOAN ACCOUNT


To Bank A/c 3,000 By Balance b/d 3,000

PARTN’ERS CAPITAL ACCOUNT


To Profit & Loss A/c 8,000 2,000 By Balance b/d 50,000 40,000

To Realisation A/c (Stock) – 4,000 By Realisation A/c

To Realisation A/c Loss 7,200 1,800 (X’s brother’s loan) 8,000

To Bank A/c 42,800 32,200

58,000 40,00 58,000 40,000

(2)

BANK ACCOUNT


To Balance b/d 20,000 By Balance b/d (Overdraft) 6,000

To Realisation A/c (Assets Realized) 72,000 By Y’s Loan A/c 3,000

By Realisation A/c 6,000

(Creditors paid off) 6,000

By Realisation A/c (Exp.) 2,000

By X’s Capital A/c 42,800

By Y’s Capital A/c 32,200

92,000 92,000

(2)

(4 + 2 + 2 = 8)

PART B


19. The two choices to maintain Debt equity at 1 : 1 form 3 : 1 are : (any Two)

(i) To increase equity

Or (ii) To reduce Debt

(iii) Both i.e. increase in equity and reduce Debt. ½×2=1

20. No Flow


21. Operating Activity

Balance Sheet...........

as at 3 1st March, 2012

(B) IN THE BOOKS OF SANGHA LTD.

Parcticulars Note No. ( ) ( )

II. Assets

(2) Current Assets

(a) Current Investments

(b) Inventories

(c) Trade Receivable

(d) Cash and Cash Equivalents

(e) Short Term Loans and advance

(f) Other Current Assets

(1½×6 = 3 Marks)

23.

COMPARATIVE INCOME STATEMENT OF VICTOR LTD.

of the years 2012 and 2013


Changes %

I. Revenue from operation

(Total Revenue) 15,00,000 18,00,000 3,00,000 20

II. Expense

(a) Cost of Material Consumed 11,00,000 14,00,000 3,00,000 27.27

(b) Employees Benefit Expenses 80,000 1,00,000 20,000 25

Total Expenses 11,80,000 15,00,000 3,20,000 27.11

III Net Profit before Tax (I-II) 3,20,000 3,00,000 (20,000) (6.25)

Less Tax 50% 1,60,000 1,50,000 (10,000) (6.25)

IV Net Profit after Tax 1,60,000 1,50,000 (10,000) (6.25)

(one mark for each correct Row - 1 × 4 = Marks)

Ans. Return of Investment Net Profit before Interest and Tax

100Capital Employeed

1

2


= 5,50,000

40,00,000× 100 = 13.75%

Note Calculation of Net Profit Interest and Tax1

2

Net Profit after interet and tax 3,00,000

Add : Tax 3,00,000 × 40

602,00,000

Net Profit before Tax 5,00,000

Add : Interest on 10% Debentures 50,000

Net Profti before Interest and tax 5,50,000

DebtDebit Equity Ratio =

Equity

5,00,000 (Note)

35, 00,000= 1: 7 1

Debit = 10% Debentures = 5,00,000

Note Debit = 10% Debentures = 5,00,0001

2

Equity = Capital Employed – Debt1

2

= 40,00,00 – 5,00,000 = 35,00,0001

2

25. Calcuation of Cash Flow from Operating Activities :

Cash flow from Operation Activities

Net Profit before Tax and Extra-ordonary items 30,000

(W. Note-1)

Non cash and Non operarting items

Depreciation 17,000

Interest on Debentures (W. Note-2) 4,400

Loss on sale of Machinery 2,000 23,400

Operating profit before working capital changes 53,400

Adjustment for working capital changes

Increase in Current Liabilities

Increase in other Current Liabilities 5,000

58,400


Decrease in Current Liabilities

Trade Payable 15,000

Increase in Current Assets

Inventory 15,000

Trade Receivable 5,000 (35,000)

Net Cash Inflow form Operating Activities 23,400

Working Notes

1. Closing Balance of Profit & Loss A/c = 60,000

Less: Opening Balance of Profit & Loss A/c = 30,000

Net Profit for the year = 30,000

2. Interest on Debentures:

On 60,000 for 4 monthes = 4 6

60, 000 × × = 1, 20012 100

On 80,000 for 8 months = 8 6

80, 000 × × = 3, 20012 100

= 1,200 + 3,200 = 4,400


CLASS XII

MODEL PAPER : ACCOUNTANCY

PART A

Q1. Can regular drawing be treated as drawing out of capital when capitals

are fixed? (1)

Q2. Why goodwill is an intangible asset and not a fictitious asset? (1)

Q3. What is capital reserve?

Q4. Name two sources of finance for redemption of debentures. (1)

Q5. Would a charitable dispensary run by 4 members be deemed a

partnership firm? Give reason. (1)

Q6. Avni Ltd. Purchased assets from Hamid Ltd. for 8,40,000 at an

agreed value of 8,00,000 along with liabilities of 20,000. Avni Ltd

paid 3,80,000 by issuing a cheque and balance was settled by issuing

12% Debentures of 10 each at a premium of 20% Pass necessary

Journal Entries in the books of Avni Ltd. (3)

Q7. A and B are partners with capitals 25,000 and 15,000 respectively..

They admit C as a partner with ¼th share in the profits of the firm. C

brings 18,000 as his capital. Calculate the amount of goodwill &

pass necessary entries. (3)

Q8. Give the necessary Journal entries in each of the following cases of the

face value of debenture is 100 (3)

(a) Debenture issued at 104 repayable at 100.

(b) A debenture issued at 100 repayable at 105


Q9. A, B and C are partners in a firm sharing profits & losses in ratio of

2:2:1. their fixed capitals are 1,00,000, , 80,000 and 70,000

respectively. For the year interest on capital was credited to them @9%

per annum instead of 12% B noticed the error and brought it to the

notice of all partners. You are required to give adjustment entry &

identify the value fulfilled by B.

Q10. Sunflowers Ltd. has an authorised capital of 10,00,000 divided into

1,00,000 Equity Shares of 10 each. The company invited applications

for 60,000 shares. Applications for 55,000 shares were received. All

calls were made and were duly received except final call of Rs. 2 per

share on 1,000 shares. Show how share capital will appear in the Balance

Sheet of company. Also prepare notes to accounts. (4)

Q11. After doing their graduation Shabir suggested to his classmate David

to form a partnership to sell low cost school uniforms to the students

belonging to law income group who have been admitted to private

schools of the city as per RTE 2009. David agreed to proposal &

requested to admit his friend Charu a specially abled unemployed person

also to be a member of prepared firm. They had insufficient capital so

persuaded rich friend Rafiq from Assam, to be partner and contribute

the required capital. Terms of partnership

(i) Shabir will contribute 1,00,000; David 50,000, Rafiq

10,00,000 and Charu will not contribute to capital.

(ii) Profits will be shared equally & interest allowed will be @ 5%

p.a. The profits of the firm ending 31st March 2012 were

1,50,000.

Identify four values & prepare Profit & Loss Appropriation

Account for the year ending March 2012. (4)

Q12. A and B were partners in a firm from 1.4.2010 with capital of 60,000

and 40,000 respectively. They shared profits & losses in the ratio of

3:2. They carried on business for 2 years. In the first year they made

a profit of 50,000 and second year incurred loss of 20,000. As the

business was no longer profitable they decided to wind up. Creditors

on that date were 20,000. The partners withdrew 8,000 per year for

personal expenses. The assets realised 1,00,000. The expenses on


realisation were 3,000. Prepare Realisation Account & show your

working clearly. (6)

13. (a) Mohit Ltd. has 10,000 12% Debentures of 100 each due for

redemption on 31st March 2011. Assuming that Debentures are

to be redeemed out of profits fully and Debentures Redemption

Reserve has a balance of 3,60,000 on that date record necessary

Journal Entries at the time of redemption of debentures.

(b) Give Journal Entries for forfeiture and re-issue of shares Chirag

Ltd. forfeited 3000 shares of 10 each, 7 called up issued at

a premium of 20% to be paid at the time of allotment for non-

payment of first call of 2 per share. Out of these 1800 shares

were re-issued as 7 paid up for 4 per share. (4+2)

Q14. A, B, C were partner A, B and C were partners ssisn a firm sharing

profits in ratio of 5:3:2. On 31st March 2013 their Balance Sheet as

under :

Liabilities Assets

Creditors 11,000 Building 20,000

Reserves 6,000 Machinery 30,000

Capital Accounts Stock 10,000

A 30,000 Patents 11,000

B 25,000 Debtors 8,000

C 15,000 70,000 Cash at Bank 8,000

87,000 87,000

A died on 1st October 2013. It was agreed between the executor and

remaining partners that

(a) Goodwill to be valued at 2½ years purchase of average profits

of previous four years which are 2010 - 13,000; 2011 - 12,000;

2012 - 20,000 & 2013 - 15,000.

(b) Patents are valued at 8,000, Machinery at 28,000 & Building

- 25,000.

(c) Profits for the year 2013-14 be taken as having accrued at the

same rate as that of previous year.


(d) Interest on capital be provided @ 10% p.a.

(e) Half of the amount due to A is paid immediately and balance

is transferred to Executor’s Loan A/c.

Q15. Sahara Ltd. was formed for the purchase of X Ltd. and was registered

with a nominal capital of 5,00,000 divided into 2000 shares of 250

each 1000 shares were offered for public subscription at a premium of

50 payable as

On Application 80

On Allotment 120 (including premium)

On First all 60

On Second call 40

1000 shares were also issued to vendors as fully paid for the payment

of purchase consideration.

Application were received for 900 shares which were duly allotted.

Allotment money was received in full but when first call was made a

holder of 200 shares failed to pay first call money and his shares were

forfeited. These shares were revised as 210 paid up at rate of 180

per share. The final call was not made. Pass necessary journal entries.

OR

A company invited application for issue of 30,000 Equity Shares of

10 each at a discount of 1 per share. Applications were received for

40,000 shares. 10% of applications were rejected and balance issued on

pro-rata basis. Amount payable were as follows 2 on application, 3

on allotment & balance on first & final Call. M who had applied for

3,000 shares failed to pay allotment money & his shares were

immediately forfeited. S who was allotted 2000 shares paid only 4,000

on allotment. On failure to pay the first call, S’s shares were also

forfeited. Pass necessary Journal Entries to record the above transactions.

What value was not observed by management?

Q16. The Balance Sheet of Ram & Shyam who were sharing profits in the

ratio of 3:1 as on 31st March 2012 was as follows :


Liabilities Assets

Creditors 28,000 Cash at Bank 20,000

Employees Provident Fund 12,000 Debtors 65,000

General Reserve 20,000 Less : Provision

Capital : for bad Debts (5000) 60,000

Ram 60,000 Stock 30,000

Shyam 40,000 1,00,000 Investments 50,000

1,60,000 1,60,000

They decided to admit Mohan on April 1st 2012 for 1/5 share on the

following terms.

(i) Mohan shall bring 60,000 as his share of premium

(ii) The unaccounted accrued income of 1000 be provided for

(iii) The market value of investment was 45,000

(iv) A debtor whose dues of 5,000 was written of as bad debts paid 4000

in full settlement.

(v) Mohan to bring in capital to the extent of 1/5 of total capital of the new

firm.

Prepare Revaluation A/c. Partners’ Capital A/cs & Balance Sheet of the

new firm.

OR

X, Y and Z were partners in a firm with profit sharing ratio of 3:2:1.

The Balance Sheet of the firm at 31st March 2014 was as follows :

Liabilities Assets

Trade Creditors 21,000 Goodwill 6,000

Workman Compensation Reserve 12,000 Cash at Bank 5,750

Employees Provident Fund 6,000 Debtors 40,000

Investment Fluctuation Reserve 6,000 Less : Provision

Capital : for bed Debts (2000) 38,000

X’s Capital 68,000 Stock 37,650

Y’s Capital 32,000 Investments (Market


Z’s Capital 21,000 1,21,000 value Rs. 17,600) 15,000

Patents 10,00

Machinery 50,000

Advertisement

Suspense A/c 3,600

1,66,000 1,66,000

Z retired on 1.4.14 on the following terms.

(i) Goodwill of the firm was valued at 30,000

(ii) Value of patents was to be reduced by 20% and Machinery to

90%.

(iii) Provision for Doubtful Debts was to be raised to 6%

(iv) Liability on account of Provident Find was only 3,000

(v) Liability for workman compensation to the extents of 6000 is

to be created

(vi) Z took over the Investments at Market Value.

(vii) Amount due to Z is to be settled on the following basis 50% on

retirement 50% of balance within one year and balance by bill

of exchange (without interest) at 3 months.

You are required to show entries for the treatment of Goodwill;

Revaluation A/c, Partner’s Capital Accounts and the Balance

Sheet of X & Y after Z’s retirement.

PART B

Q17. An accountant while preparing Cash Flow Statement of a financial

company writes interest paid under Financing Activity. Is he correct if

not under which activity it should be written? (1)

Q18. Write names of two tools of financial analysis. (1)

Q19. State whether cash deposited in bank will result in inflow, outflow or

no flow of cash. Give reason.


Q20. Under what heads & subheads following items appear in Balance Sheet

of a company as per Revised Schedule VI of Company Act.

(a) Security Premium Reserve (b) Trade Mark (c) Government Securities

(d) Bills Receivable (e) Proposed Dividend (f) Calls-in-advance.

Q21. From the following statement of Profit & Loss of X Ltd. for the year

ended 31st March 2013 & 2014 prepare comparative Statement of

Profit & Loss. (3)


( ) ( )


Expenses 3,00,000 2,40,000

Other Incomes 30,000 20,000

Income Tax 1,30,000 80,000

Q22. (a) Net profit after interest but before tax is 1,40,000, 15% Long

Term Debts 4,00,000, Shareholder’s Funds 2,40,000. Taxax

rate 50%. Calculate Return on Capital Employed.

(b) Working capital of X Ltd. is 7,20,000, Trade Payables are

40,000. Others Current Liabilities are 2,00,000. Calculate

Working Capital Ratio. (2+2)

Q23. Prepare a Cash Flow Statement on the basis of the information given

in the Balance Sheet of Z Ltd.


( ) ( )



(a) Share capital 6,30,000 5,60,000

(b) Reserves and surplus 3,08,000 1,82,000

(2) Current liabilities

(a) Trade Payables 2,80,000 1,82,000

(b) Other Current liabilities 14,000 28,000

Total 12,32,000 9,52,000

Assets


1. Non Current Assets

Fixed Assets, Plant & Machinery 3,92,000 2,80,000

2. Current Assets

(a) Inventory 1,26,000 1,82,000

(b) Trade Receivable 6,30,000 4,20,000

(c) Cash & Cash Equivalent 84,000 70,000

Total 12,32,000 9,52,000

Notes to Accounts

Particulars 31.3.2014 (` ) 21.3.2013 (` )

1. Share Capital


8% Preference Share capital 2,00,000 2,00,000

6,30,000 5,60,000

2. Surplus-Balance in statement of

profit & loss) 3,08,000 1,82,000

Q1. No, it cannot be treated as Drawing out of Capital.

Q2. Because it is not visible it is intangible but subject to fluctuation so it

is fictitious asset.

Q3. It is a reserve capital created out of capital profits.

Q4. Two sources of finance are (i) Redemption out of capital (ii) Redemption

out of profits.

Q5. No it cannot be a partnership firm as there is no sharing of profits and

purpose is charity not profits.

Q6.Journal


Sundry Assets A/c Dr. 8,40,000

To Sundry Liabilities A/c 20,000

To Hamid Ltd. 8,00,000


(Being purchase of assets & liabilities

from Hamid Ltd.)


Hamid Ltd. Dr. 8,00,000




(Being 3,80,000 paid by cheque &

balance by issue of 12% debentures)

Working notes : No. of Debenture = Amount Payable 4, 20, 000

= = 3, 500100 + Premium 100 + 20

Q7. Total capital of firm based on C’s share = 18,000 × 4 = 72,000

Combined capital of A, B & C = 25,000 + 15,000 + 18000

= 58,000

Value of goodwill = Capital of new firm – Combined capital of all

partners

= 72,000 – 58,000 = 14,000

C’s share of goodwill = 14,000 × 1/4 = 3,500

Journal Entries


Bank A/c Dr. 18,000

To C’s Capital A/c 18,000

(Cash brought in by C as his capital)




(Credit given for goodwill to A & B on

C’s admission in sacrificing ratio 1:1)

Journal Entries


(a) Bank A/c Dr. 104

To Debenture Application and

Allotment A/c 104

(Being receipt of debenture application money)


Debenture Application and Allotment A/c Dr. 104

To % Debenture A/c 100

To Securities Premium A/c 4

(Being issue of debentures of 4% premium)

(b) Bank A/c Dr. 100

To Debenture Application and

Allotment A/c 100

(Being receipt of debenture application

money)

Debenture Application and Allotment A/c Dr. 100

Loss on issue of Debenture A/c Dr. 5

To % Debenture A/c 100

To Premium on Redemption A/c 5

(Being issue of debentures at par redeemable

at 5% premium

Solutions :

Q9.Adjustment Entry (Journal)


B’s Current A/c Dr. 600

To C’s Current A/c 600(Being interest loss credited now rectified.

Values : B is vigilant & honest.

Working Notes :

Adjustment Table

Particulars A B C Firm

Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.

( ) ( ) ( ) ( ) ( ) ( ) ( ) ( )

Wrong interest 9,000 7,200 6,300 22,500credited @ 9% p.a

Current interest to be 12,000 9,600 8,400 30,000given @ 12% p.aLoss divided in ratioof 2:2:1 3,000 3,000 1,500 7,500

12,000 12,000 10,200 9,600 7,800 8,400 30,000 30,000

Adjustment to be made Nil 600 Dr. 600 Cr. Nil


Sunflower Ltd.

Extract of Balance Sheet as at...........

Particulars Note No. Current Year Previous year

Amount ( ) Amount ( )



(a) Share capital 1 5,48,000

Notes to Accounts

1. Share Capital

Authorised Capital

1,00,000 Equity Shores of Rs. 10 each 10,00,000

Issued Capital

60,000 Equity Shares of Rs. 10 each 6,00,000

Subscribed & Fully Paid Capital

54,000 Equity Shares of Rs. 10

each fully called 5,40,000

Subscribed but not fully paid

capital 100 Equity Shares of

Rs. 10 each fully called 10,000 8000

Less: unpaid cells 2,000 5,48,000

Q11. Values : Sensitivity towards differently abled.

(i) Secularism

(ii) Opportunity for backward area

(iii) Support of Right to Education Act.


for the year ending 31st March 2012

Dr. Cr.


To Interest on Capital By Net Profit 1,50,000

Shabir 5,000

David 2,500

Rafiq 50,000 57,500

To Profits transferred to


Shabir’s Capital A/c 23,125

David’s Capital A/c 23,125

Rafiq’s Capital A/c 23,125

Charu’s Capital A/c 23,125 92,500

1,50,000 1,50,000

Q12.



31.3.11 To drawing A/c 8,000 8,000 1.4.2010 By Bank A/c 60,000 40,000

To Balance b/d 82,000 52,000 By Profits Loss

appropriation A/c 30,000 20,000

90,000 60,000 90,000 60,000

31.3.12 To Drawing A/c 8,000 8,000 1.4.2011 By Balance b/d 82,000 52,000

To Profit &

& Loss A/c 12,000 8,000

To Balance b/d 62,000 36,000

82,000 52,000 82,000 52,000

Memorandum Balance Sheets

Liabilities Assets

Creditors 20,000 Sundry Assets 1,18,000

Capitals :A/c’s (Balancing Figure)

A 62,000

B 36,000 98,000

118,000 1,18,000

Realisation Account


To Sundry Assets A/c 1,18,000 By Creditors A/c 20,000

To Bank A/c (Creditors) 20,000 By Bank A/c Realisation 1,00,000

To Bank A/c (Realisation expenses) 3,000 By Loss Transferred to

A’s Capital A/c 12,600

B’s Capital 8,400 21,000

1,41,000 1,41,000


Q13.(a)

Journal


Statement of Profit & loss A/c Dr. 6,40,000

To Debenture Redemption Reserve 6,40,000

(Being transfer of profit to DRR)

31.12.11 12% Debentures A/c Dr. 10,00,000

To Debentureholder A/c 10,00,000

(Being amount due to Shareholder)

Debentureholders’ A/c Dr. 10,00,000

To Bank A/c 10,00,000

(Being the payment made to debentures holder

Debenture Redemption Reserve A/c Dr. 10,00,000

To General Reserve 10,00,000

(Being transfer of DRR to General Reserve)

Q13.(b)

Journal of Chirag Ltd.


Share Capital A/c (3000 × 7) Dr. 21,000

To Share forfeiture A/c (3000 × 5) 15,000

To Share First call A/c (3000 × 2) 6,000

(forfeiture of 3000 shares for non payment

of Rs. 2 of premium already receive

Bank A/c (1800 × 4) Dr. 7,200

Share Forfeiture A/c Dr. 5,400

To Share Capital (1800 × 7) 12,600

(Reissue of 1800 Shares @ Rs. 4 each)



(Profit transferred to capital Reserve)

Working Notes : Forfeited Amount on 1800 shares = 15000 18000

90003000


Profit on 1800 shares : Frfeited Amount – Discount

= 9000 – 5400 = 3,600

Q14.(i)Valuation of Goodwill :

Total Profits : 13,000 + 12,000 + 20,000 + 15,000 = 60,000

Average Profits Total Profits 60, 000

No. of years 4 15,000

Goodwill = Average Profit × No. of years of purchase

= 15, 000 5

2

37,500

A’s share of goodwill 37, 000 5

10

18,750

Goodwill contributed by (both in 3:2)

3 18750B 11, 250

5

2 18750C 7, 500

5

(ii) Share of Profits payable to A (till date of death)

6 515000

12 10 3,750

Interest on capital 10 6

30, 000100 12

1,500

Revaluation Account

Debit Credit


To Patents A/c 3,000 By Building A/c 5,000

To Machinery A/c 2,000

5,000 5,000

There is neither profit nor loss due to revaluation


A’s Capital Account

Debit Credit


To A’s Executor A/c 57,000 By balance b/d 30,000

By Reserves 3,000

By B’s Capital A/c

(Goodwill) 11,250

By C’s Capital A/c

(Goodwill) 7,500

By Profit & Loss

Surpase A/c 3,750

By Interest on capital 1,500

57,000 57,000

A’s Executor Account


To Bank A/c 28,500 By A’s Capital A/c 57,000

To A’s Executor’s Loan A/c 28,500

57,000 57,000

Q15.Journal Entries


Sundry Assets Dr. 2,50,000

To X Ltd. 2,50,000

(Being Assets purchased from X Ltd.)

X Ltd.

To Equity Share Capital A/c Dr. 2,50,000

(Being 1000 shares @ Rs. 250 issued to

vendors) 2,50,000

Bank A/c Dr. 72,000

To Equity Share Application A/c 72,000

(Being application money received on 900

Share @ 80)

Equity Share Application A/c Dr. 72,000

To Equity Share Capital 72,000

(Being amount transferred to share capital)





(Being amount due on 900 shares)

Bank A/c Dr. 1,08,000

To Share allotment A/c 1,08,000

(Being allotment money received)

Equity Share capital A/c Dr. 54,000


(Being first call due on 900 Share @ Rs. 60)

Bank A/c Dr. 42,000

To Equity Share capital A/c 42,000

(amount received on 700 shares @ 60)


To Equity Share First Call A/c 12,000

To Share Forfeiture A/c 30,000

(Being 200 shares forfeited due to

non-payment of first cell)

Bank A/c Dr. 36,000



(Being Shares reissued @ Rs. 180

Rs. 210 called up

Share Fofeiture A/c Dr. 24,000


(Being balance on forfeiture transferred

to capital Reserve)

OR

Journal


Bank A/c Dr. 80,000

To Share Application A/c 80,000

(Application money received on 40,000 Shares)

Shares Application A/c DR. 80,000

To Shares Capital A/c 60,000

To Bank A/c 8,000



(Application money adjusted)

Share Allotment A/c Dr. 90,000

Discount on Issue of Shares A/cd Dr. 30,000

To Share Capital 1,20,000

(Being amount Due)

Bank A/c Dr. 70,300


(Being Allotment money Received)

Share Capital A/c Dr. 15000

To Discount on Issue of Shares A/c 2,500


To Share faofeited A/c 6,000

(2500 Shares fofeited for non-payment

of allotment money)

Share First & Final Call A/c Dr. 1,10,000


(Call money due on 27,500 shares)

Bank A/c Dr. 1,02,000

To Share First & Find call A/c 1,02,000

(All money received on 25,500 shares)

Share Capital A/c (2,000 × 100) Dr. 20,000


To Sh. First & Final Call A/c 8,000

To Discount on Issue of Shares A/c 2,000

To Forfeited Shares. 8,800

(2000 Shares forfeited for non payment of

allotment & call money.

Working Notes :

Shares Allotted to M = 30, 000

3000 2, 50036, 000

share

Excess application Money = (3000–2500) × 2 = 1,000

Amount due on allotment from M = (2500×3) = 7500

Less : Excess application money adjusted = 1000


Money not paid no allotment = 6,500

Total No. of shares applied by S = 36, 000

2000 2400 shares30, 000

Excess application money received from S = (2400 – 2000) × 2 = 800

Amount due from S on allotment 2000 × 3 = 6,000

Less : Excess received on application = 800

4,000

Allotment money received = 4800

Allotment money received from S = 6000 – 4800 = 1,200

Allotment money not Received from S =

Total Amount due on allotment = 30,000 × 3 = 90,000

Less : Excess money adjusted = 12, 000

78, 000

Less : Allotment money not received

From M = 6,500

From S = 1,200 = 7, 700

70, 300

Ans. Q16.

Revaluation Account

Debit Credit


To Investments 5,000 By Account Income 1,000

By Bad Debts Recovered A/c 4,000

5,000 5,000


Partner’s Capital Account

Debit Credit

Particulars Ram Shyam Mohan Particulars Ram Shyam Mohan.

To balance c/d 1,20,000 60,000 – By balance b/d 60,000 40,000

By General Reserve 15,000 5,000

By Premium for 45,000 15,000

Goodwill A/c

1,20,000 60,000 1,20,000 60,000

To Balance c/d 1,20,000 60,000 45,000 By balance b/d 1,20,000 60,000

By Bank A/c 45,000

1,20,000 60,000 45,000 1,20,000 60,000 45,000

Balance Sheet as at 1.4.2012

Liabilities Assets

Creditors 28,000 Cash at Bank 1,29,000

Employs’s Provident Fund 12,000 Debtors 65,000

Capital : Less : Provision

for doubtful debts (5000) 60,000

Ram 1,20,000 Stock 30,000

Shyam 60,000 Investment 45,000

Mohan 45,000 2,25,000 Accrued Income 1,000

2,65,000 2,65,000

Working Notes :

Combined capital of Ram & Shyam = 1,20,000 + 60,000 = 1,80,000

Total Capital of firm = 1,80,000 × 5

4 = 2,25,000

Mohan’s share = 2,25,000 × 1

5 = 45,000

Cash at Bank = Opening Balance + Bad Debts Recovered + Mohan’s Capital

+ Premium = 20,000 + 4000 + 45000 + 60,000 = 1,29,000

There is no effect of bad debts recovered on the amount of debtor appearing

in balance sheet.


OR

Journal


1.4.14 X’s Capital A/c Dr. 3,000

Y’s Capital A/c Dr. 2,000

Z’s Capital A/c Dr. 1,000


(Being existing goodwill written off)

1.4.14 X’s Capital A/c Dr. 3,000

Y’s Capital A/c Dr. 2,000

To Z’s Capital A/c 5,000

(Being Z’s share of goodwill credited &

remaining partners debited in gaining ratio

i.e. 3:2

Revaluation Account


To Patents A/c 2,000 By Investment A/c 2,600

To Machinery A/c 5,000 By Employees Provident Fund 3,000

To Provision for Doubtful Debts 400 By Loss Transferred to

X’s Capital A/c 900

Y’s Capital A/c 600

Z’s Capital A/c 300 1800

7,400 7,400

Partner’s Capital Account

Particulars X Y Z Particulars X Y Z.

To Goodwill A/c 3,000 2,000 1,000 By Balance b/d 68,000 32,000 21,000

To Z’s Capital A/c 3,000 2,000 - By Workman

Compensation

To Revaluation A/c 900 600 300 Reserve A/c 3,000 2,000 1,000

To Advertisement

Suspense A/c 1,800 1,200 600 By Investment

Fluctuation


To Investment - - 17,600 Reserve A/c 3,000 2,000 1,000

To Bank A/c 4,250 By X’s Capital A/c 3,000

To Z’s Loan A/c 2,125 By Y’s Capital A/c 2,000

To Bills Payable A/c 2,125

To Balance c/d 65,300 30,200

74,000 36,000 28,000 74,000 36,000 28,000

Balance Sheet of X and Y as at 1.4.2014

Liabilities Assets

Trade Creditors 21,000 Cash at Bank 1,500

Workmen Compensation Claim 6,000 Debtors 40,000

Employees Provident Fund 3,000 Less : Provision

Bills Payable 2,125 for bad Debts (2,400) 37,600

Z’s Loan A/c 2,125 Patents 8,000

X’s Capital A/c 65,300 Machinery 45,000

Y’s Capital A/c 30,200

129,750 1,29,750

Working Notes :

Amount Due to Z = (21,000 + 1000 + 1000 + 3000 + 2000) – (1000 + 300

+ 600 + 17600) = 8,500

Amount paid on retirement = 50

100× 8500 = 4,250

Within one year (50% of balance) = 50

100 × 4250 = 2,125

Bills payable = 2,125

PART B

Solutions :

Q17. No he is not correct. This is operating Activity in case of Financial

Company.

Q18. Tools for financial Analysis (any two)


(1) Comparative Statements

(2) Ratio Analysis

(3) Cash Flow Statement

Q19. No Flow of Cash as movement between items of cash and Cash

Equivalent are not regarded as Cash Flow.

Q20.

Items Headings & Subheadings

Security Premium Reserve Shareholder’s Funds & Reserve& Surplus

Trade Mark Fixed Assets-Intangible assets.

Government Securities Non-Current Assets- Non Current Invest

ments

Bills Receivable Current Assets-Trade Receivable

Proposed Dividend Current Liability-Short term Provision

Calls-in Advance Current Liability-other current Liabilities

Q21. Comparative Statement of Profit & Loss for the year ended 31st March

2013 & 2014.

Particulars Note 2012-13 2013-14 Absolute %

No. Change Change

Revenue from operation 4,00,000 5,00,000 1,00,000 25%

Add : Other Incomes 20,000 30,000 10,000 50%

Total Revenue 4,20,000 5,30,000 1,10,000 26.19%

Less : Expenses 2,40,000 3,00,000 60,000 25%

Profit Before Tax. 1,80,000 2,30,000 50,000 27.78%

Tax 80,000 1,30,000 50,000 62.5%

Profit after tax 1,00,000 1,00,000 - 0%

Q22.(a) Net Profit after Interest but before tax = 1,40,000

Interest = 15% of 4,00,000 = 60,000

Net Profit before Interest Tax = 2,00,000

Capital Employed = Long term Debts + Shareholders’ Funds


= 4,00,000 + 2,40,000 = 6,40,000

Return on Capital Employed Net profit before Interest & Tax

100Capital Employed

= 2, 00, 000

100 31.25%6, 40, 000

(b) Working Capital Ratio is Current Ratio Current Assets

Current Liabilities

Current Liabilities = Trade Payable + Other Current Liabilities

40,000 + 2,00,000 = 2,40,000

Working Capital = Current Assets – Current Liabilities

= 7,20,000 = Current Assets – 2,40,000

= Current Assets = 7,20,000 + 2,40,000 = 9,60,000

Working Capital Ratio = 9, 60, 000

4 :12, 40, 000

Q23

Cash Flow Statement

For the year ended 31st March 2013


A. Cash Flow from Operating Activities

Profit as per statement of profit & loss before

tax & extra ordinary items 1,82,000

Add : Non cash and non operating Expense 28,000

Less : Non-Cash and non operating Income 2,10,000

Profit on sale of Machinery (14,000)

Operating Profits before working capital changes 1,96,000

Adjustment for current assets & current liabilities

Add: Decrease in Inventories 56,000

Increase in Trade Payable 98,000 1,54,000

3,50,000


Less: Increase in Trade Receivable (2,10,000)

Decrease in other current Liabilities (14,000) (2,24,000)

Net Cash Flow from Operating Activities 1,26,000

B. Cash Flow from investing Activities

Sale of Machinery 56,000

Purchase of Machinery (1,82,000)

Cash used in investing activities (1,26,000)

C. Cash Flow from Financing Activities

Issue of Equity Shares 70,000

Dividend Paid (56,000)

Net Cash Flow from Financing Activities 14,000

Net Increase in cash & cash Equivalent (A+B+C) 14,000

Add: Cash & Cash Equivalent in the beginning of year 70,000

Cash & cash Equivalent at the end of year 84,000

Working Notes :

Closing Balance of Surplus : 3,08,000

Less : Opening Balance of Surplus (1,82,000)

1,26,000

Add : Dividend Paid 56,000

Net Profit Before Tax & Extra Ordinary items 1,82,000

Plant and Machinery Account

Dr. Cr.


To balance b/d 2,80,000 By Bank A/c (Sale) 56,000

To Profit on sale By Depreciation A/c 28,000

(Statement of Profit & Loss) 14,000 By balance c/d 2,92,000

To Bank A/c

(B/F–Purchase of Machinery) 1,82,000

4,76,000 4,76,000

Documents

Sl. No. Name Designation - DelE Directorate of · PDF fileCHAPTER 1 ACCOUNTING FOR PAR TNERSHIP FIRMS FUNDAMENT ALS According to Section-4 of the Indian Partnership Act, 1932 : “Partnership