399 538

POINTS TO REMEMBER
Not for profit organizations

– An Organization established with an objective of welfare to the society and not for earning
profit. Example Charitable Hospitals, Sports club, Recreational clubs
– Receipt and Payments Account is prepared by a not for Profit Organization. It begins with
opening cash and bank balance and ends with closing cash and bank balance.
– Income and Expenditure Account is prepared in place of Profit and Loss Account which is
prepared by commercial enterprises.
– Items included in Revenue receipts (income) Subscriptions, General donations, Grant,
Sale of old sports material.
— Items included in capital receipts Endowment Fund, Legacy, Life Membership Fees.
– Items included in Revenue Payments - Salary Postage & Telegram, Newspapers &
Magazines, Repairs & Maintenance, Charity, Electricity.
– Items of Capital payments - Books, Building, Equipment, Almirah, Bicycle or any Asset
purchased.
– Annual Membership Subscriptions- It is payable annually for renewal of membership.
– Donation – May be general or specific donation. For e.g. the donation for construction of
pavilion - i.e. specific donation is to be capitalised and shown on the liabilities side of the
Balance Sheet.
– Legacy is the amount received as donation (by a NPO) under will of a deceased person.
– General fund or capital fund is an unrestricted fund to which the surplus of the year is
added and in case of deficit it is deducted.
– Restricted fund is the fund the use of which is restricted either by the donor for a specified
purpose.
(a) Endowment fund is a donation with a stipulation by the donor, to use the income
earned from such funds so that the amount originally donated remains the same.
(b) Loan fund is set up to grant loans for specific purpose with the condition of repayment,
interest and security.
(c) Fixed assets fund is a fund earmarked for investment in fixed assets. e.g. Building
fund.
(d) Prize fund is set up to use for distribution as prizes.
– Entrance Fees - is the amount received from the new members at the time of admission,
to the organisation
(399)
– Life Membership Fees is the amount paid by the members of not for profit organization to
become life time members.
– Sale of Used Sports Materials - such amount realized is teated as income.
Steps in Preparation of
Income & Expenditure Account
Following points may be helpful while preparing an income and
Expenditure Account from a given Receipt and Payments Account :
(i) Exclude the capital receipts and capital payments as these are to be shown in the Balance
Sheet.
(ii) Consider only the revenue receipts to be shown on the income side of Income and
Expenditure Account. Some of these need to be adjusted by excluding the amounts
pertaining to the proceeding and the succeeding years and including the amounts relating
to the current year not yet received, the amount which is received in the previous year.
(iii) Take the revenue expenses to the expenditure side of the Income and Expenditure Account
with due adjustment as per the additional information provided relating to the amounts
paid in advance and those amounts which are not yet paid for the current year. Add the
amount not yet paid and subtract the amount paid in advance for next year.
Steps in the preparation of Balance Sheet

(i) Capital Fund at the beginning is ascertained by preparing opening Balance Sheet.
(ii) Any surplus revealed by Income & Expenditure Account must be added to opening capital
Fund or 'deficit, if any, must be deducted from the opening Capital Fund in the closing
Balance Sheet.
(iii) Outstanding assets like accrued incomes and prepaid expenses should be shown on the
assets side.
(iv) Assets in existence at the beginning of the year should be adjusted for additions, dispersals,
if any and also for depreciation.
(v) New assets acquired during the year which appear on the payment side of Receipts and
Payments Account should be shown on the asset side of the closing Balance Sheet.
(vi) Outstanding liabilities, outstanding expenses etc. as on the closing date should be shown
on the liabilities side.
(vii) The closing balance of Receipt and Payment A/c, should be shown in the balance sheet.
(Cash or Bank Balance)
(viii)Specific donation should be shown on the liability side of the Balance Sheet.
(400)
Formats of Financial statement of N.P.O.
Opening Balance Sheet
Liabilities Rs. Assets Rs.
Capital Fund (Balancing Figure) xxxxx Fixed Assets xxxxx

Subscription in Advance xxxxx Investments xxxxx
Specific Donation xxxxx Current Assets xxxxx
outstanding Expenses xxxxx Cash xxxxx
Receipts and Payments Account
Receipts Rs. Payments Rs.
To Balance B/d xxxxx By Revenue Payments xxxxx

To Revenue Receipts xxxxx By Capital Payments xxxxx
To Capital Receipts xxxxx By Balance c/d xxxxx
Income and Expenditure Account
Expenditure Rs. Income Rs.
To Revenue Payment xxxxx By Revenue Receipts xxxxx

+ Outstanding for current year xxxxx Outstanding for current year xxxxx
+ Prepaid in previous year xxxxx + Advance in Previous year xxxxx
– Paid for Previous year xxxxx + Received for Previous year
– Paid for Next year xxxxx – Received for next year
To Surplus (Balancing Figure) By Deficit (Balancing Figure)
Balance Sheet
Capital Fund xxxxx Assets xxxxx

Surplus - Deficit xxxxx + Capital Payments xxxxx
xxxxx xxxxx
Liabilities xxxxx
Capital Receipts xxxxx Cash
Accrued Income
Prepaid Expenses
(401)
Treatment of Incomes
Subscription : It is the main source of income for any N.P.O. It is the fee which is received
by an organization from its members to keep the membership active.
Subscription for the current year should be calculating keeping accrual basis in mind i.e.
total subscription which belong to current year should be shown as income whether fully
received or not. It means income to be received and income received last year in advance for the
current year should be added in current year's income.
Subscriptions received in current year belong to previous year or next year should not be
shown as income for the current year. It means income to be received for the last year and
Income received in Advance for the next year should be deducted from the total income received
this year.
Accounting Treatment of Income (like subscriptions)

Following example is representing different situations and each case is moving from easy
to difficult. Example : There are 204 members in Saraswati Ltd. and each is paying subscription
Rs. 250. Total subscription of an organization is in the year ended 2008 is 250×204 = 51000
Case 1. – Total subscription have been received .
Case 2. – Excess collection of subscription which includes subscription for the next year i.e.
sub. Read in Adv.
Case 3. – Some portion of subscription relating to previous year is also collected this year.
Case 4. – Subscriptions relating to previous year to be received is more that the income
collected this year for the previous year.
Case 5. – Subscription for the current year is still outstanding (to be received) and previous
year's subscription is also still outstanding.
Case 6. – The amount of current year's subscription outstanding has not been directly given
i.e. no. of members and their annual subscription have been given.
Case 7. – Subscription of current year has been received in previous year.
Case 1. – Receipt and Payment A/c for the year 2008 (Extract)
Dr. Cr.
To Subscription – 51,000/-
Ans. – Income and Expenditure A/c for the year 2008 (extract)
Dr. Cr.
By Subscription - 51,000/-
As there is no errore and no advance, therefore, subscription A/c will not be shown in B/S
anywhere.
(402)
Case 2. – R & P A/c for the year 2008 (extract)
To subscription - 56,000/-
Add. Infm. Rs. 5000 were included for the year 2009.
Ans. – Cr. Side I&E A/c 2008 B/s 2008 Liabilities Side
By Subscription 56,000 Recd. in Adv. 5000
(–) Recd. in Adv. 5000 51,000
Case 3. – R&A A/c for the year 2008

To subscription 58000
Add. Infm. : Rs. 2000 including as previous year's subscription and Rs. 5000 related to
the next year subscription
I & E. A/c (Cr. Side) B/s 2007 (Asset. Side) B/s 2008 (Liab. Side)
By Sub. 58000 Sub. Receivable 2000 Sub. Received 5,000
(–) Sub. Recd. in
Adv. – 5000
(–) Sub. to be received
for last yr. 2000 51,000
Case 4. – R&P A/c for the year 2008

To Subscription 58,000
Add. Infm. (i) Rs. 2000 received as previous year's subscription while subscription
receivable on 31st Dec. 2007 was Rs. 2500 (ii) Rs. 5000 included for subscription for the next
year i.e. 2009.
Ans. I & E. A/c B/s 2007 B/s 2008

By Sub. 58000 Sub. Receivable 2500 Sub. Received
(–) Sub. Recd. in in Adv. 5000
Adv. – 5000
(–) Sub. to be received
for last yr. 2000 51,000
Case 5. – R & P A/c for the year 2008

To subscription 57,000
Add. Infm. : (i) subscriptions include Rs. 5000 for the next year and received. Rs. 25000
out of which Rs. 2000 is received in this year. (ii) Subscription to be received for the year 2008
is Rs. 1000
(403)
Ans. I & E. A/c B/s 2007 B/s 2008
By Sub. Recd. 57000 Sub. Receiv 2500 Sub. Read. Sub. Recd.
(–) Sub. Recd. in able in Adv. 5000 for
Adv. – 5000 2007 -500
(–) Sub. received 2008 -1000
for 2007 2000 1500
Add. Sub. to be recd.
for 2008 1000 51,000
Case 6. – R&P A/c for the year 2008

To Subscription
2007 2000 +
2008 50,000 +
2009 5000 + 57000
There are 204 members and each paying Rs. 250 as subscription. Subscription receivable
for the year 2007 was 2500.
Ans. I & E. A/c B/s 2007 B/s 2008
By Sub. 50000 Sub. Recei –2500 Sub. Read. Sub. Read. for
Add Sub. to be able in Adv. – 5000 2007 + 500
Read. + 1000 51000 2008 – 1000 1500
204 × 250 – 50000 = 51000 – 50000 = 1000

Case 7. –
R&P A/c
To Subscription
2007 2000 +
2008 48,000 +
2009 5000 + 55000
There are 204 members each paying Rs. 250. 8 members paid their fees in advance during
previous year for the year 2008 Subcription receivable for the year 2007 was Rs. 2500.
Ans. I & E. A/c B/s 2007 B/s 2008

By Sub. 48000 Sub. Read–2000 Sub receiv Sub. Read. Sub. Recei
Add Recd. in Adv. in Adv. able – 2500 in Adv. -ble due1000
last year+ 2000 – 5000 500
Add Sub. to be 1500
Read. +1000
51000
Case 7. – Income that is shown in I&E A/c can be calculated by preparing subscription in
A/c
Sub. A/c for the year 2008

Bal. B/D. By sub. Read. in Advance last year 2000
To Sub. to be recd. last year 2500 By Bank as per R&P A/C 55000
To Income & Exp. A/c (B/f) 51,000 By Bal. C/D by 1500
To Sub. Read. in Adv. 5000 subscription to be recd.
For the next year 58000 for the current year 58000
(404)
Accounting Treatment of Expenses
Calculation of Rent (An expense) to be debited to Income and Expenditure Account of
Current year (2008)
Case - 1 Rs.
Rent outstanding on Jan. 1, 2008 800
Rent paid in advance as on Dec. 31, 2008 1,000
Rent paid during the year 2008 13,800
Income and expenditure A/c for the

year ended on Dec. 31, 2008
To rent 13,800
Less for 2007 800
13,000
Less : Advance for 2009 1,000 12,000
Case – 2 Rs.
Rent outstanding on Jan. 1, 2008 800
Prepaid Rent on Jan. 1, 2008 3,000
Rent outstanding on Dec. 31, 2008 10,000
Prepaid Rent on Dec. 31, 2008 6,000
Rent paid during the year 2008 13,800
Income and Expenditure Account

for the year ended on Dec. 31, 2008
To Rent 13,800
Less : 2007 800
13,000
Add. : Paid in previous 3000
year for 2008
16,000
Add : Outstanding 10,000
26,000
Less : Prepaid for 2009 6,000 20,000
Calculation of consumable goods to be debited to Income and Expenditure Account for the
current year (2008)
Rs.
Stock and stationery on Jan. 1, 2008 10,000
Amount paid to creditors for stationery during 2008 22,000
Creditors for stationery on Jan. 1, 2008 6,000
Creditors for stationery on Dec., 31, 2008 5,000
Stock of stationery on Dec. 31, 2008 2,000
(405)
Income & Expenditure Account
for the year ended on Dec. 31, 2008
To stationery
opening Stock 10,000
Add : Paid for stationery 22,000
32,000
Less for 2007 6,000
26,000
Add : outstanding 5,000
31,000
Less : Closing stock 2,000 29,000
Calculation of material consumed during the year (with no creditors and Adv. Payment)
Opening stock of material
Add. : Total payment made during the year _______________
Less. : Closing Stock and Material _______________
Amt. Debited to I & E A/c _______________
Calculation of material consumed with creditor and Advance Payment

Opening stock _______________
Add. : Purchase _______________
Add. : Creditors at the end. _______________
Add. : Advance payment in the beginning _______________
Less. : Creditors in the beginning _________
Less. : Adv. Payment at the end. _________
Amt. : Debited to I&E Ac. _________
In Ledger Form
Stock of Material
To Bal. b/d By I&E A/c
To Creditor for (material consumed)
material A/c By Bal. c/d
Creditor's for Material A/c

Particulars Amt Particulars Amt.
To balance b/d By balance b/d
(Advance in the beginning) (Creditors in the beginning)
To Bank A/c By stock of stationery A/c
(Amt. Paid for material) (material purchased)
To Balance C/d By Bal. C/d
(Creditors at the end) (Advance at the end)
(406)
Short Answer Questions (1 Mark)
1. During the year 2008 a club received Rs. 50,000 as entrance fees. According to the
accounting policy of the club 40% of the entrance fees is to be capitalised. How will you
deal with the entrance fees received by NPO ?
2. Opening Balance of Tournament Fund is Rs. 10,000; collection from sale of tournament
tickets is Rs. 5,000 while tournament expenses are Rs. 3,000. What is the closing balance
of tournament fund ?
3. When the Receipts and Payments Account is used in preparation of an Income and
Expenditure Account, an accounting concept is to be followed for the provisions of the
Accounts and Outstanding. Name the concept followed.
4. Distinguished between 'Income & Expenditure Account' and 'Receipt & Payment Account'
on the basis of "Nature of Items".
5. Subscriptions received during the year were Rs. 20,500 and included Rs. 4,500 for the
next year. What will be the amounts of subscription that will appear in Income and
Expenditure Account and Balance Sheet.
6. Opening stock of stationery = Rs. 9,000; purchases during the year = Rs. 45,000 and
closing stock = Rs. 7,000. Calculate the amount of stationery to be debited to Income and
Expenditure A/c as stationery consumed.
7. A sports club receives donation for construction of a Basket Ball Court. How will you show
it in the books of the Club ?
8. On April 1, 2008 a club had cash = Rs. 14,000; subscription outstanding rs. 500; Rent
outstanding Rs. 1,500; Books = Rs. 20,000 and Furniture = Rs. 5,000. Calculate the
Opening Balance Capital Fund.
9. While preparing the final accounts of a not - for - profit organization, how will you deal
with the life membership fees ?
10. Give the accounting treatment of Accrued Interest on Prize Fund Investment Account in
case of a Non Profit Organization ?
3 marks
1. Cross river complex provides the following :
Information show the treatment in Balance Sheet :
Tournament fund balance 20,000
Donations received for tournament 10,000
Expenses incurred on tournament 25,000
2. Yamuna sports complex has the following information. Show how would you deal with
them in I&E A/c and B/s.
(407)
Sports fund opening balance 2,00,000
Sports fund investment 1,00,000
Expenses during the year 70,000
Interest earned on fund investment @ 10% p.a.
Donation received for sports during the year 80,000
3. Show the accounting treatment of entrance fee. During the year 2007-08 entrance fee
received Rs. 1,00,000 and accounting policy of the organization is to capitalise 40% of its
entrance fees.
4. During the year 2007-08 salaries paid amounted to Rs. 20,000. Calculate the amount
chargeable to Income & Expend. A/c for the year ended. 31st March 2007 from the following
additional information :
Prepaid salaries on 31st March. 2008 3000
Prepaid salaries on 31st March. 2007 1500
Outstanding salaries on 31st March. 2008 1400
Outstanding salaries on 31st March. 2007 700
5. Furniture as on 31st March 2006 Rs. 20000. Furniture having a book value as on Apr. 1,
2006 of Rs. 40000 was sold at a Rs. 42000. Furniture is to be depreciated @ 10% p.a.. You
are required to prepare the Furniture Account for the year ending 31st March 2007
6. From the following information complete the amount charged through I&E A/c for the
year ended 31st March 2008
Stock of medicines on Apr. 1, 2007 Rs. 3600
Creditors for medicines on Apr. 1, 2007 1800
Advances for medicines on Apr. 1, 2007 1200
Amount paid during the year 10,000
Stock of medicine on March 31, 2008 3100
7. How will you deal with the following information related to Kokorazy Club. While
preparing final A/c for the year ending March 31, 2006.
Prize awarded Rs. 13000
Prizes fund as at 31-1-06 Rs. 62,000
8% Prize fund investment as at 31.3.06 Rs. 62000
6 Marks
1. Prepare Income and Expenditure A/c for the year ended on December 31, 2008 and Balance
Sheet from the following particulars of old Enterpreneur Club.
(408)
Receipts and Payments A/c of Old Entrepreneurs Club for
the year ended on December, 2008
To Balance b/d 53,500 By salaries 45,000
To subscription By postage 1,900
2007 2,500 By Rent 18,000
2008 1,05,000 By Printing & stationery 5,600
2009 1,500 By furniture (Purchased)
1,09,000 on January 1, 2008 70,000
To donations or swimming By investment in shares 1,25,000
Pool 1,50,000 By sports Material 20,000
To Entrance Fees 1,500 By miscellaneous Expenses 7,000
To sale of old furniture 3,000 By balance c/d 24,500
3,17,000 3,17,000
Balance Sheet as on January 1, 2008

Capital Fund 56,000 Cash 53,500
Subscription Receivable 2,500
56,00 56,00
Information :
(i) Subscription of Rs. 5,000 is outstanding for 2008
(ii) Depreciate Furniture at 10% and Sports Material is valued at Rs. 18,000 on December 31,
2008.
2. From the following Receipts and Payments A/c of a club and from the information supplied,
prepare an Income and Expenditure A/c for the year ended on December 31, 2008 and the
Balance Sheets as on January 1, 2008 and December 31, 2008.

for the year ended on December 31, 2008
To Balance b/d 700 By salaries 2,800
To subscription By general expenses 400
2007 500 By electricity charges
2008 2,000 By books 1,000
(409)
2009 400 2,900 By newspaper 800
To hall rent received 1,400 By Balance c/d 400
To proceeds from Entertainment 800
To sale of old newspaper 200
6,000 6,000
Informations :
(a) The club has 50 members each paying an annual subscriptions of Rs. 50. Subscriptions
outstanding on December 31, 2007 were to the value of Rs. 600.
(b) On December 31, 2008, salaries outstanding amounted to Rs. 200. Salaries paid in
2008 included Rs. 600 for the year 2007.
(c) On January 1, 2008 the club owned buildings valued at Rs. 20,000. Furniture worth
Rs. 2,000 and books Rs. 2,000.
3. Following is the Receipts and Payment Account of Shri Manav Save Sanstha for the year
ended on March 31, 2008.
for the year ended on March 31, 2008
To cash in hand on Apr. 1. 14,000 By payment for Medicines 60,000
To Subscription 1,00,000 By Honorarium to Doctors 20,000
To Sundry Donations 29,000 By Salaries 55,000
To Interest on Investment By Sundry expenses 1,000
@ 7% for the year 14,000 By equipment Purchased 30,000
To Charity Show Proceeds 20,000 By charity show expenses 2,000
By cash in hand on Mar. 31, 2008 9,000
1,77,000 1,77,000
Additional Informations :
Items April 1, 2007 March 31, 2008
(i) Subscription Due 1,000 2,000
(ii) Subscription received in advance 2,000 1,000
(iii) Stock of Medicines 20,000 30,000
(iv) Amount due to suppliers of Medicines 16,000 24,000
(v) Value of Equipments 21,000 30,000
(vi) Value of Buildings 80,000 76,000
You are required to prepare :
(a) Income and Expenditure Account for the year ended March 31, 2008.
(b) Balance Sheet as on that date :
(410)
4. The following is the Receipts and Payments Account of the Calcutta Citizen Club for the
year ended on Dec. 31, 2008.
To balance b/d 600 By Rent 10,400
To Entrance Fees 1,100 By stationery etc. 6,136
To Subscriptions :
2007 400 By Wages 10,660
2008 33,800 By Billiards Table 7,800
2009 600 34,800 By Repairs & Renewals 1,612
To Locker Rent 1,000 By Interest 3,000
To Subscription for C.M. Party 6,900 By Balance c/d 4,792
44,400 44,400
Locker rent Rs. 120 referred to 2007 and Rs. 180 is still owing. Rent Rs. 2,600 pertained to
2007 and Rs. 2,600 is still owing. Stationery etc. Rs. 624 related to 2007 and still owing Rs. 728.
Subscriptions unpaid for 2008 Rs. 1,736. Subscription for C.M. Party is outstanding Rs. 1,100.
The club owned Sports Materials of the value of Rs. 32,000 on January 1, 2008. This was
valued at Rs. 27,000 on Dec. 31 2008. The club took a loan of Rs. 40,000 in 2007.
Prepare the Income and Expenditure Account for the year ending December 31, 2008 and
Balance Sheet as on that date.
5. Kapil cricket Club gives you the following Receipts and Payments Account for the year
ended on March 31, 2008.
To Balance b/d By salaries & wages 24,000
At office 300 By sports equipments 93,570
At Bank 28,400 By stationery & Printing 2,440
28,700 By Maintenance of Ground 12,000
To Subscription 1,22,200 By prizes 2,120
To Admission Fees 700 By Balance C/d
To Interest on Investment At office 760
@ 9% p.a. For full year 18,000 At Bank 34,710
1,69,600 1,69,600
The following additional information is provided to you :
(411)
April 1, 2007 March 31, 2008
Subscription Due 960 1,120
Subscription Received in Advance 160 80
Sports Equipment 43,600 59,400
Land and Buildings
(Cost Less Depreciation) 1,60,000 1,52,000
You are required to prepare Income and Expenditure Account for the year ending 31st,
March 2008 and a Balance Sheet as on that date.
(412)
FUNDAMENTALS OF PARTNERSHIP
Points to remember
1. Profit & Loss Appropriation account is an extension of Profit & Loss Account.
The balance of P&L App.A/c may be used.
1. To provide for interest on the capital of partners .
2. To provide for salary or commission to partners
3. To transfer the profits to the General Reserve or the Specific reserve.
4. To distribute the profits and losses among the partners in their profit -sharing ratio
Journal Entries relating to above transactions

1. Interest on capital A/c
To Partners' capital A/cs/ current A/cs.
(For creating interest on capital to partners' capital A/c)
P & L Appropriation A/c
To Interest on Capital A/c
(For Transferring interest on capital to P & L App. A/c)
2. Partners' salary / commission A/c
To Partners' capital A/cs/current A/cs
(For crediting partner's salary to partner's capital A/c)
To Partners' salary/commission A/cs.
(For transferring partners salary to P & L App. A/c)
3. P & L Appropriation A/c
To Reserve A/c
(For transferring profit to Reserve A/c)
4. For distributing profit-
To partners' capital A/c/ current A/cs
(For transferring profits to partner's capital/current A/c)
(413)
Maintenance of Capital A/cs of Partners
1. Fixed Capital Method
2. Fluctuating Capital Method
In fixed capital method two accounts of each & every partner are to be opened viz Partner's
capital A/c and Partner's current A/c
(a) Format of Partner's Capital A/c

Date Particulars x y z Date Particulars x y z
To cash A/c - - - By balance b/d - - -
(Permanent cap By Cash A/c - - -
Withdrawn) (fresh capital introduced)
To balance c/d - - -
- - - - - -
Format of Partners' Current A/cs.

To Bal b/d (a) - - - By Bal b/d (a) - - -
To drawing A/c - - - By Interest on Cap.A/c - - -
To Interest on - - - By commission A/c - - -
drawings A/c - - - By salary A/c - - -
To loss as per - - - By Profit as per - - -
P & L App. A/c - - - P & L App. A/c - - -
To balance c/d (b) - - - By Balance c/d.(b) - - -
for (a) and (b) only one figure will appear in the A/c
Fluctuating Capital Method.

In this case only one account i.e. capital A/c of each & every partner is prepared
(414)
Format of Capital A/c
(When Capitals are Fluctuating)
To Balance b/d - - - By balance b/d - - -
To Drawings - - - By cash/Bank A/c - - -
To cash/Bank A/c - - - (Additional capital) - - -
(capitals withdrawn) By Interest on Capital - - -
To Interest on drawing - - - By commission - - -
To loss transferred to - - - By Salary - - -
P & L Adjustment A/c - - - By Profit transferred to - - -
To Bal. C/d - - - P & L App. A/c - - -
By Balance C/d - - -
The Proforma of P & L App. A/c

Particulars Amount Particulars Amt.
To Profit & Loss By Profit & Loss A/c
(in case of Loss) (In case of Profit)
To Interest on Capital By interest on Drawings
A------- A ----
B------- B ----
To Partners Salary ---
To Partner's commission--
To Reserve -- By Loss transferred to
To profit transferred to
A's capital A/c / Current A/c -- A's Capital A/c / current A/c
B's capital A/c / Current A/c -- B's Capital A/c / Current A/c
Interest on drawing
Case1.When same amount is withdrawn regularly with respect to time.
Formula - Months for which interest is to be charged =
Period left after first drawing + Period left after last drawing
2
(415)
(a) If the drawings are made at regular interval in the beginning of each month, interest is to
be charged for.
12 +1 13 1
Calculations = = =6 months
2 2 2
Similarly. When fixed amount of drawings are made at regular interval at the end of each
month.
Time period will be:
11 + 0 11 1
Calculation = = =5 months.
2 2 2
Simplified way to remember time periods
When fixed amount of drawings is made regularly the period will be taken as follows
for beginning middle end common difference
1 1
(1)Monthly basis 6 months 6 months 5 month (difference ½ month)
2 2
1 1 1
(2) Quarterly basis 7 months 6 months 4- month (difference 1 months)
2 2 2
(3) Semi annually 9 months 6 months 3 months (difference 3 months)

Case2. When fixed amount is withdrawn during 6 months ending of financial year (i.e. II
half) The time period will be taken as follows
(Where drawings Beginning Middle End

are made) in the
3.5 3 2.5
months months months
Case 3. When unequal amount is withdrawn at different dates. Following methods are used :
(a) Simple Method
(b) Product Method
Case4. When date of withdrawl is not given.
The interest will be calculated on total drawings for the year for six months on average
basis
Case5. When date of withdrawal is not given and rate of interest ‘per annum’ word is not
written
The interest will be calculated with given rate without considering the time factor.
(416)
Commission to a Partner
For rendering extra time or for doing some extra work partner(s) may be allowed to receive
remuneration in the form of commission. It may be allowed.
Case1. As % of Net Profit before charging commission
Net profit before commission × rate of commission

100
Case.2. As % of Net Profit after charging such commussion
Net Profit before commission × rate of commission

100 + rate of commission
Treatment of Interest on Partner's loan to the firm.

If a partner has given a loan to the firm, he is entitled to receive an agreed rate of interest.
If a partnership deed is silent on the rate of interest on loan, then it should be taken at the rate
of 6% p.a.
The interest on loan is a change against the profits. It is to be transferred to the debit side
of P&L A/c and not to the Profit & Loss App. A/c
Accounting treatment
Interest on Partner's loan A/c--- Dr.
To Partner's Loan A/c
(For interest provided on Partner's Loan)
P & L A/c ----- Dr.
To interest on Partner's Loan A/c
(For closing of interest on Partner's loan A/c)
Ans. Interest on Capital in allowed only if there is a profit
Interest on Partner's Capital under Various situations

Case1. When partnership deed is silent regarding the provision of interest on capital.
Ans. No interest on capital will be provided
Case 2 (a)When partnership agreement provides for interest on capital but is silent as to the
treatment of interest as a charge or appropriation.
Ans. After paying interest on capital. remaining profit will be distributed among partners.
(b) When firm earned insufficient profits to provide interest on capital.
Ans. The available profit will be distributed among partner in their ratio of interest on
capital.
(417)
(c) When firm incured a loss and partnership deed provides interest on capital.
Ans. No interest on capital will be give.
Case 3 When firm earned insufficient profit or incured loss but partnership deed provides.
Interest on capital as a charge.
Ans. Full interest will be provided. The excess of interest on capital over profit will be treated
as loss and will be divided in this profit sharing ratio.
Capital Ratio/Effective Capital Ratio

When capitals are fixed, profit will be distributed in their fixed capital ratio when partners
agree to share profits & losses in the Capital Ratio.
But if capitals are fluctuating & partners introduce or with draw capitals during the year
under thus situation, neither the capital in the beginning nor at the end determines the
ratio. The weighted average with reference to the time, the capital has been used in business
is computed to determine the ratio in which profits or losses will shared.
This is also called the average capital or effective capital ratio.
Points to remember
Past Adjustments refer to those adjustments which affect the distribution of
past profits, like
(a) Interest on Capital was credited @ 10% p.a. though there was no such provision in the
partnership deed
(b) Interest on capital was not credited @ 10% p.a though there was such provision in the
partnership deed.
(c) Interest on capital was credited @10% p.a instead of 12% p.a.
(d) Interest on capital was credited @ 12% p.a instead of 10% p.a
(e) Profits were distributed in the ratio of capital but the partnership was silent on profit
sharing ratio.
(f) Profits were distributed equally but the partnership deed provided for distribution in the
ratio of 3:2:1.
(g) Interest on drawings was credited @ 10% p.a though there was no such provision in the
partnership deed.
(h) Interest on drawings was not credited @ 10% p.a though there was provision in the
partnership deed.
(i) Omission of interest on Partner loan in the absence of partnership deed.
(j) Omision of outstanding Expenses before distribution of profit.
(k) Omision of Accrued Interest on Investments before distribution of profit.
Note.: The Students may be asked to pass adjusding enteries for the above mentioned case.
(418)
Simplest Format of Adjustment Table in given below:
Statement showing Adjustment to be made
A. Amounts already recorded. Name of Partners
A B C
Interest on capital - - -
Interest on Drawings ( ) ( ) ( )
Salary - - -
Share of profit - - -
Nill () show the balance.

B. Amounts which should have been received
Interest on Capital
Interest on drawings ( ) ( ) ( )
Salary
Commission
Share of Profit
(c) Different A - B
Adjusting Entry or Rectifiying Entry
Gaining Partners' Capital A/c / Current A/c Dr.
To scerificing partners' capital A/c / Current A/c.
Theory-Based Questions
- How will you deal with the profits of the firm in the absence of the Partnership deed?
- Are the partners allowed Interest on loan in the absence of partnership deed?
- State any two items which will appear on the debit side of Capital Accounts if capital A/c is
fluctuating.
- If the Partners are maintaining Fixed Capital Accounts, how will you treat ‘Interest on
Drawings?
- The partner is allowed a salary of Rs. 2500 per month, to pass the journal entry show the
effect on P&L app. A/c & partners capital Account.
- A & B are partners in a firm with capitals of Rs 1,00,000/- & Rs. 20,000 respectively. There
(419)
is no partnership Agreement and A is demanding interest on capital @ 10% per annum.
How will you deal with the above problem?
Past Adjustments
(Adjustment in the closed Account)
1 Amir, Salman & Yusuf are partners in a firm they have omitted interest on capital @ 10%
p.a for three years ended 31st March 2009. Their fixed capitals were Rs 10000, Rs 80,000
and Rs 70000, respectively. Give the necessary adjusting journal entry with working notes.
2 X, Y, & Z are partners sharing profits & losses in the ratio of 3:2:1. After the final
accounts have been prepared, it was discovered that interest on drawings @ 5% p.a had
not been taken into consideration. The drawings of the partners were : X Rs. 15000, Y
Rs. 12,600, Z Rs 12000. Give the necessary adjusting journal entry.
3 Asha & Lata ware partners in a firm sharing profits in the ratio of 7:5. Their respective
fixed capitals were Rs 10,00000 and Rs 7,00,000. The partnership deed provided for the
following :
(i) Interest on capital @ 12% p.a.
(ii) Asha's salary Rs 6000 p.m and Lata's salary Rs. 5000 p.m
The profit for the year ended 31-3-2008 was Rs 54,0000 which was devided equally without
taking the above matters. Pass adjustment entry.
4 The Partners Gambhir, Virender & Yuvraj the partners of a firm distributed the profits for
the year ended 31st March. 2003 Rs. 180,00,000 in the ratio of 1:2:3 without providing for
the following disconnects.
(i) Gambhir & Virender were entitled to a salary of Rs 1,50,000 p.m. each
(ii) Yuraj was entitled to a commission of Rs 4,50,000
(iii) Virender & Yuvraj has guaranteed a minimum profit of Rs. 35,00,000 p.a to Gambhir.
(iv) Profit were to be shared in the ratio of 2:3:3
Pass necessary journal entry for the above adjustments in the books of the firm.
5 The following Balance Sheet of Rathore & Bindra as on 31st Dec. 2008. Calculate interest
on capital @ 5% p.a. payable to them.

Rathore's capital 100,000 Sundry Assets 1,92,000
Bindra's capital 80,000 Rathore's drawings 18000
P & C Appropriation A/c 30,000
210000 210000
During the year 2008, Rathore's drawings were Rs. 18000 and Bindra's drawings Rs 12000.
Profit during the year was Rs. 58.000
(420)
Accounting For Partnership Firm
1 Mark Questions
1. Can a partner be exempted from sharing the losses in a firm? If yes under what
circumstances?
D;k ,d lk>snkj dks QeZ esa gksus okyh gkfu;ksa esa Hkkxhnkj gksus ls eqDr fd;k tk ldrk gS\ ;fn gk¡ rks fdu
ifjfLFkfr;ksa esa\
2. Why should a firm have a partnership deed?
,d QEkZ esa lk>snkjh foys; dk gksuk D;ksa vko';d gS\
3. How is interest on drawings calculated, if the drawings are made at regular intervals as on
first day of each month?
;fn vkgj.k izR;sd ekl ds izFke dh vUrjky esa fudkys tkrs gSa rks C;kt dh x.kuk dSls dh tkrh gS\
4. A, B & C are partners. A has advanced a loan of Rs 1,00,000 to a firm. The firm suffers a
loss. A demands an interest of 6% p.a on the loan. But B & C are not inclined to his request
on his plea as there is a loss. How will the dispute be resolved if the partnership deed is
silent in this regard.
v* ^c* rFkk ^l* rhu lk>snkj gSaA ^v* us QeZ dks 1]00]000 #i;s dk _.k iznku fd;k gSA QeZ dks gkfu gksrh
gSA ^v* 6 izfr'kr okf"kZd nj ls _.k ij C;kt dh ek¡x djrk gSA ijUrq ^c* rFkk ^l* mldh bl ek¡x ls
vlger gSAa ;fn lk>snkjh foys; bl ckjs esa k' kar gSA rks bl fookn dk fuiVkjk fdl izdkj fd;k tk;sxk\
5. X & Y started business on 1st April, 2008 with Capitals of Rs 5,00,000 & Rs. 3,00,000
respectively. Calculate the interest on Drawing of X @ 10 % p.a for the year ended on 31st
December 2008 if his drawings during the period were Rs 18,000.
6. 'A' & 'B' are partners. 'B' is entitled to 10% commission on net profit after charging such
commission, The net profit before charging such commission is 33,000. Calculate the
commission payable to 'B'
7. A & B are partners who were previously sharing profits in the ratio 1:1 now decide to
share profits & losses in the new ratio 3:2. Calculate the amount to be credited to A if the
divisible profits are Rs 60,000 to give effect to this change in ratio.
8. Name the two accounts made in Fixed capital method.
LFkk;h i¡wth fof/k ds vUrxZr dkSu ls ^2* [kkrs cuk;s tkrs gSaA
9. A & B admit 'c' into partnership for 1/5th share of profit with a minimum guarantee of Rs
8,000. At the end of the year the profit of the firm is Rs 50,000. How much will 'C' get?
3 or 4 marks questions
1. Gita, Rita and Sita have started business in partnership on April 1, 2006 with capital of Rs
30000, 40,000 and 60,000 respectively. They have decided to share profit & losses in the
ratio of 2:2:1 Gita is to be paid on salary of Rs 500 p.m and Sita a commission of Rs 3000.
Interest on capital was allowed @ 10% p.a The drawings for the year were : Gita Rs 5000,
(421)
Rita Rs 4000 and Sita Rs 2000. Interest on drawings of Rs 200 was charged on Gita's
drawings Rs 150 on Rita's drawings and Rs 80 on Sita's drawings.
The net profit as per profit & loss A/c for the year ending 31st March 2007 was Rs 32000.
Prepare the profit & loss A/c to show the distribution of profit among the partners and
Partners' capital A/cs and current A/cs.
2. Asha and Nisha were partners share profits in ratio of their capital contribution which
were Rs 400,000 and Rs 300,000 respectively. Share profit the firm closes its books on 31st
March each year according to the agrement.
(i) Interest on capital was to be given at the rate of 12% p.a and interest on drawings was
charged at 10% p.a
(ii) Asha and Nisha were allowed to get a salary of Rs 10,000 and Rs. 15000 p.m.
Respectively.
(iii) It was also agreed to transfer 10% of profits to General Reserve.
The profits of the firm for the year was Rs 6,00,000 before any appropriation. The drawings
of Asha & Nisha was Rs 200,000 & 2,50,000 respectively. Interest on drawings amounted
to Rs 10,000 & 12,500 resp. First 70,000 of divisible profits is divided equally and remaining
profit in their profit sharing ratio.
You are required to prepare Rs.. (App. A/c and partners' capital A/c)
3. Calculate interest on drawing on the drawings of following partners.
(a) Shyam withdraw Rs 12000 during the year and rate of interest on drawing is 12% p.a.
(b) Gopal withdraw Rs 12000 on 1.1.2006 and rate of interest on drawing is 12% p.a
(c) Krishan withdraw Rs 12000 and rate of drawing is 12%
4. X, Y & Z were sharing profit in the ratio of 2:2:1 Y is entitled to receive a commission of
10% on the profit before Charging any commission. While Z is entitled to receive a
commission of 25% on net profit after charging Y's and his own commission. Net profits
before charging Y and Z's commission was 50,000. Calculate the amount of commission
payable to Y & Z.
5. Ashok & Bharat started business on January 1, 2007 with Rs. 50,000 and Rs. 30,000 an
capitals respectively. They agree to share profits in the capital ratio. They have the following
Transactions during the year. Calculated capital Ratio.
CapitalIntroduced (Rs.) Capital Withdraw (Rs.)

Ashok Bharat Ashok Bharat
April 1 - 15000 30000 -
July 1 30,000 - - 15000
Sep 1 - 15000 - -
Oct 1 - 48000 6000 -
Nov 1 9000 - - 4500
(422)
RECONSTITUTION OF PARTNERSHIP
- Change in profit sharing ratio can be happend by agreement or at the time of reconstitutions
of partnership. The profit or loss arising due to the revaluation of assets and liabilities till
the date of change is divided among the partners in the old ratio.
It is calculated as New Ratio minus OLD Ratio which will result in gain for one partner
which will be equal to the sacrifice of the others.
- Goodwill is the value of the reputation of the firm, it represents the increased profit earning
capacity of the old firm as compared to the new firm in the same line of business.
It is an intangible assets shown on the Assets side of the Balance Sheets.
Goodwill needs to be valued on admission, retirement, death, sale of business or at the
time of change in profit sharing ratio.
Goodwill depends on favourable location, efficiency of management, possession of licence,
good quality of Products etc.
- Accumulated profits - All Reserves, accumulated profits or losses, Investment fluctuation
fund, work men's compensation fund are distributed (credited) among the partners in
their old ratio (After meeting liabilities thereof). Profit & loss A/c (Dr. Balance)
- Accumulated losses are distributed among the partners in the old ratio.
Revaluation Account is prepared at the time of reconstitution of the partnership firm to
revalue the assets and reassess the liabilities, and the profit or loss there in is shared by
the partners in the old profit sharing ratio.
Sacrificing Ratio is the ratio in which the old partners have agreed to sacrifice their share
of profit in favour of the new partner.
Sacrificing ratio = New ratio - old ratio. Rights of a new partner (i) To share the future
profit & loss of the firm and (ii) right to share the assets of the firm.
Gaining Ratio is the ratio in which the remaining partners acquire the share of out going
partners share. Gaining Ratio=New Raio - Old Ratio.
Retirement or Death of a Partner

After giving due notice in advance a partner has the right to retire from the firm.
A retiring partner is entitled to get.
1. Share in Capital
2. Share in goodwill
3. Share in Reserve
4. Share in Revaluation of Assets & Liabilities
5. Share in profits of current year till the date of his retirement
6. Share in J.L.P
(423)
Following adjustments are made at the time of retirement of a partner.
1. Calculation of new profit sharing ratio and ganiting ratio of continuing partners
2. Treatment of goodwill
3. Accounting treatment for Revaluation of Assets & Liabilities
4. Accounting treatment of Reserves, accumulated profits & losses
5. Accounting treatment of J.L.P
6. Payment to retiring partner.
7. Adjustment of capitals in proportion to profit sharing ratio.
THEORY BASED ON CONCEPTS
POINTS TO REMEMBER
- State the purpose of calculating the sacrificing and gaining ratio.
- In case of change in profit sharing ratio if a partner sacrifices his share of profit will it be
debited or credited?
(Pass the journal entry for the same)
- How will you treat the balance of profit and loss A/c shown on the assets side of the balance
sheet.
- Distinguish between Average profits and Super profits method for valuation of goodwill.
- If a new Partner brings in proportional capital, how will it be calculated?
Accounts of the old partners
- If capital are to be adjusted at the time of admission of the new partner, if the balance of
capital account is more resulting in a surplus, show the journal entry to be passed.
- Show the journal entry in a case where the new partner brings in partial amount of share
of goodwill in cash.
Reconstitution of Partnership
1. A & B are sharing profits & losses equally. With effect from 1st April, 2008, they agreed to
share profits in the ratio of 4:3. Calculate the individual partner's gain or sacrifice due to
the change in ratio.
2. Give the formula for calculating Sacrificing ratio.
R;kx vuqikr dh x.kuk djus ds fy;s lw=k nhft;sA
3. Give the formula for calculating Gaining ratio.
vf/kykHk vuqikr dh x.kuk djus ds fy;s lw=k nhft;sA
4. Sita, Geeta & Meeta were partners in a firm sharing profits in the ratio 7:6:7 Geeta retired
& her share was divided equally between Sita & Meeta, calculate the new profit sharing
(424)
ratio of Sita & Meeta.
5. Give two circumstances in which gaining ratio can be applied.
dksbZ 2 ifjfLFkfrfLFk;k¡ nhft;s ftlesa vf/kykHk vuqikr dk iz;ksx gksrk gSA
(a) Goodwill Nature :- Factors Affecting it, Valuation methods
1. If average profits of the firm is Rs 20,000 whereas Normal profit = Rs 6,000 then find the
value of Goodwill of the firm based on 3 years purchase of super profits.
2. Define Goodwill.
[;kfr dks ifjHkkf"kr dhft;sA
3. Give any two factors which affect value of goodwill.
[;kfr dks izHkkfor djus okys dksbZ nks dkjd nhft;sA
4. If average profits of a firm are Rs 60,000; normal rate of return is 10% while Net tangible
assets = Rs 4, 80,000 then calculate goodwill by capitalisation method.
5. If the profits of the firm for 3 consecutive years are Rs 70,000; Rs 1,20,000 & Rs 80,000,
then calculate the value of goodwill based on 2 years purchase of average of 3 years profits.
(b) Accounting for Revaluation of Assets & Liabilities & Distribution
of Roserves (Accoumlated Profits)
1. Give Journal entry for recording an unrecorded liability.
vfyf[kr nsunkjh dk cfg;ksa esa ys[kk djus ds fy;s jkstukepk izfof"V nhft;sA
2. Give Journal entry for transferring accumulated Reserve to capital Accounts of partners.
lafpr lapk;ksa dks lk>sankjksa ds iw¡th [kkrs esa gLrkUrfjr djus ds fy;s jkstukepk izfof"V nhft;sA
3. A & B are sharing Profits & losses in the ratio 3:4 Accumulated loss of Rs 14,000 appears
in the Balance Sheet. In order to close this Accumulated loss account will A's Account be
debited or credited & by what amount?
4. A & B are sharing profits & losses in ratio 2:1 They admit C for ¼th share of profit/loss. On
revaluation of assets & reassessment of liabilities there is a profit of Rs 12,000. Give the
Journal entry to record this profit.
5. Name any two occasions during the Reconstitution of Partnership firm when revaluation
Account is prepared.
dksbZ nks volj crkb;s tc lk>snkjh QeZ ds iquxZBu ij iwuewY;x [kkrs dk fuekZ.k gksrk gS\
(425)
ADMISSION OF A PARTNER
1 mark
1. A & B are partners sharing profit & losses in the ratio of 3:2, C is admitted for 1/6th share
in the profits. What is the sacrificing ratio of A & B.
2. Name the ratio in which the premium (goodwill) amount brought in cash by the new
partner is distributed among the old partners.
ml vuqikr dk uke crkb;s ftlesa u;s lk>h }kjk yk;h xbZ [;kfr dh jkf'k iwjkus lkf>nkjksa esa ckaVh tkrh gSA
3. Give the Journal entry for distribution of premium (goodwill) amount among the existing
partners' when only part of goodwill/premium is brought in by the new partner in cash.
tc u;k lk>hnkj [;kfr dk dsoy dqN Hkkx gh udn ds :i esa Ykrk gS rks] bl fLFkfr esa blds iwjkus lkf>;ksa esa vkoaVu
dh jkstukepk izfof"V nhft,A
4. What is the accounting treatment of all Reserve & Accumulated losses appearing in the
Balance Sheet of the firm just before the admission of the new partner.
u;s lk>h ds izok's iwoZ fLFkfr fooj.k esa mifLFkr lafpfr;ksa ,oa lafpr gkfu;ksa dk D;k ys[kkadu mipkB gksrk gS\
Change in Profit Sharing Ratio
3 mark Questions
1 A and B admitted a new partner C for 1/5th share in the profits. Goodwill of the firm is to
be valued at three year's purchase of the average profits of last five years which were:-
Year Profit (Rs.)

2004 5,000
2005 6,000
2006 8,000
2007 7,500
2008 8,500
2 A firm started business with a capital of Rs. 4,00,000. The normal rate of earning in this
class of business in 10%. The firm earned Rs. 60,000 as profit during the year. Calculate
goodwill on the basis of two year's purchase of super profits.
3 A firm has earned Rs. 50,000 as average profit during the last few years. Normal rate of
return in this class of business is 10%. Find out goodwill according to capitalisation of
super profit method, if the value of assets amounted to Rs. 5,00,000 and liabilities amounted
to Rs 1,00,000.
(426)
4 The profits of P, Q & R for the last five years were as under :
Years Profits (Rs.)

2003-04 1,00,000
2004-05 80,000
20005-06 80,000
2006-07 80,000
2007-08 1,00,000
Calculated the value of goodwill on the basis of two years' purchase of weighted average
profits based on weights 1, 2, 3, 4 and 5 respectively to the profits for the year 2003-04,
2004-05, 2005-06, 2006-07 and 2007-08.
5 The profits of last five years were 2004-Rs. 14000; 2005-Rs.12000;2006-Rs. 14,500; 2007-
Rs. 13,000 and 2008-Rs.12,500. The weights assigned to each year are 1, 2, 3, 4 and 5
respectively.
You are being informed that :-
(i) On August 1, 2008 a major repair to machinery to enhance its economic life was
undertaken. The firm incurred Rs. 45,000. The same was charged to revenue.
Deperciation@10% p.a was also not charged on this.
(ii) The closing stock for the year 2007 was undervalued by Rs. 4,000
(iii) To cover administrative expenses on annual charge of Rs 4,500 should be made for
the purpose of valuation of goodwill.
Calculate the goodwill of a firm on the basis of three year's purchase of the weighted
average profits of the last five years.
6. P, Q and R partners sharing profits in the ratio of 3:2:1 on January 1,2009 they decided
that in future they will share profits in the ratio of 2:2:3. Calculate sacrifice/gain of each
partner.
7. X, Y and Z were partners sharing profits and losses in the ratio of 4:3:2. Goodwill is worth
Rs. 36,000. The partners decided to share future profits in equal proportions. Give a journal
entry to record the above change. Also indicate the individual partner's gain or loss due to
change in the ratio.
8. P, Q and R are partners sharing profits equally. On 1-1-2009 they decided to share future
profits in the ratio of 1:2:2 on the same date the firm has a balance of Rs. 60,000 as General
Reserve and Rs. 36,000 in Profit and loss A/c (Dr.) Journalese.
(427)
9. X, Y and Z are partners sharing profits and losses in the ratio of 2:2:1. On April 1,2009
they decided to share the profits equally. The balance sheet as at March 31,2009 was as
under:
Balance Sheet as at March 31, 2009

Sundry creditors 20,000 Cash 4,000
Capitals Bank 6,000
X 10,000 Debtors 16,000
Y 12,000 Stock 10,000
Z 14,000 36,000 Machinery 20,000
56,000 56,000
It was decided to revalue assets and liabilities as under:
Rs.
Stock 12,000
Machinery 24,000
Sundry Creditors 18,000
Prepare Revelation Accounts, Partner's capital Account and Balance Sheet of reconstituted
firm.
10. P and Q are partners in a firm sharing profits in the ratio of 2:3. The Balance Sheet of the
firm as at March 31, 2009 is given below:
Balance Sheet (as at March 31,2008)

Creditors 1,55,000 Bills Receivables 90,000
Bills Payable 45,000 Stock 4,00,000
Capitals: Machinery 4,60,000
P 4,00,000 Land & Buildings 2,50,000
Q 60,00,000 10,00,000
12,00,000 12,00,000
The partners decided to share profit in equal ratio w.e.f. April 1,2009. The following
adjustments were agreed upon:
(i) Land & Building was valued at Rs. 4,00,000 and machinery at Rs. 4,10,000 and were
to appear at revalued amounts in the Balance Sheet.
(ii) The Goodwill of the firm was valued at Rs. 2, 00,000 but it was not to appear in books.
Pass the necessary Journal entries to give effect the above.
(428)
11 X and Y partners in a firm sharing profits in the ratio of 7:3. On March 1, 2009, they
admitted Z as a new partner for 1/6th share in the profits of the firm. They fixed the new
profit sharing ratio as 3:2:1. The P & L A/c on the date of admission showed a balance of
Rs. 10,000 (cr.) The firm also has a reserve of Rs. 75,000. Z is to bring Rs. 20,000 as premium
for her share of goodwill.
Pass necessary journal entries to record the above transactions.
Admission of a Partner
3 mark Questions
1 Akanksha and Rakhi are partners sharing profits in the ratio of 2:1. They admit Rehana
for 1/5th share. Calculate new ratio and sacrificing ratio.
2 Asha and Manju are partners sharing profits in the ratio of 2:1. Shikha is admitted. Shikha
gets 1/10th from Asha and 1/20th from Manju. Calculate new and sacrificing ratio
3 Sakshi and Ankit share profits in the ratio of 5:3. Gaurav, the new partner gets 1/5th of
Sakhi's share and 1/3rd of Ankit's share. Calculate new and sacrificing ratio in the above
case.
4 Kiran, Komal and Leena are partners sharing profits and losses in the ratio of 3:2:1. Shivaji
joins the firm and gets 1/5th share in the ratio of 1:1 from Kiran and Komal. Calculate new
ratio in the above case.
5 Aakash and Bijender are partners sharing profits in the ratio of 3:2. Sajid, the new partner
gets 1/5th share entirely from Aakash. Calculate new ratio.
6 Reshma, Shyama and Prerna share profits and losses in the ratio of 3:2:1. Upon admission
of Naseema, they agreed to share profits and losses in the ratio of 2:1:2:1. Calculate
sacrificing ratio.
7 Ashok and Bala are partners in the ratio of 5:3. They admit Shital for 1/4th share and
agree to share between them in the ratio of 2: in future. Calculate new and sacrificing
ratio.
8 Shubham and Vikram are partners sharing profits in the ratio of 2:1. They admit Vijay as
a partners for 1/4th share. His share of goodwill is Rs.3600. Give journal entries in the
following cases if:-
(a) The goodwill is received in cash and retained in business.
(b) The goodwill is received in cash and withdrawn by old partners.
(c) He is unable to bring his share of goodwill in cash.
9 X and Y are partners sharing profits in the ratio of 5:4. They admit Z in the firm for 1/3rd
profit, which she takes 2/9th from X and 1/9th from Y and brings Rs. 1,500 as premium.
Pass the necessary journal entries on Z's admission.
10 A and B are partners sharing profits equally. They admit C into partnership. C paying only
Rs 1,000 for premium out of his share of premium of Rs 1,800 for 1/4th share of profit.
Goodwill account appears in the books at Rs. 6,000. Give the necessary journal entries.
(429)
11 A and B are partners with capitals of Rs. 26,000 and Rs. 22,000 respectively. They admit C
as partner with 1/4th share in the profits of the firm. C brings Rs 26,000 as his share of
capital. Give journal entries to record the above.
12 A and B are partners sharing profits in the ratio of 3:2. They admit C into partnership
for1/4 share. C is unable to bring his share of goodwill in cash. The goodwill of the firm is
valued at Rs. 21,000. Give journal entry for the treatment of goodwill on c's admission.
13 Ajay and Manmohan are partners with capital of Rs 16,000 and Rs. 12,000 respectively.
They admit Rahul as partner with 1/4th share. Rahul brings Rs. 16,000 as his share of
capital. Give journal entries to record goodwill.
Admission of a Partners
6 marks
1. R and S are partners in a firm sharing profits & losses in the ratio of 3:1. The Balance
Sheet of the firm as on 31st March, 2009 was as follows:
Liabilities Amount Assets Amount

(Rs.) (Rs.)
Creditors 5,600 Bank Balance 2,000
Workmen's Compensation 2,400 Bills Receivable 7,000
Reserve Fund 4,200 Debtors 8,000
Capital Less : Provision 1,000 7,000
P 12,000 Stock 6,000
R 9,800 21800 Investments 10,000
Goodwill 2,000
34,000 34,000
On April 1,2009 they take Z into partnership with 2/5th share on the following terms:
(i) Accrued income not appearing in the books Rs. 200.
(ii) Market value of Investment is Rs. 9000.
(iii) Claim on account of workmen's compensations is estimated at Rs. 300.
(iv) X an old customer, whose account was written off as bad, has promised to pay Rs. 700
in settlement of his full debt.
(v) Z brought Rs. 16,000 as capital and Rs. 4000 as goodwill out of Rs. 4,800.
You are required to make journal entries and prepare Balance Sheet of the new firm.
(430)
2. Chetna and Priyanka share profit in the ratio of 5:3. Their balance sheet as on 31st March,
2009 was as follows:
Balance Sheet
Liabilities (Rs.) Assets (Rs)
Creditors 30,000 Cash at Bank 10,000
Provident Fund 30,000 Sundry Debtors 40,000
Workmen's Compensation
fund 11,600 Less: Provision 1,200 38,800
Capitals Stock 60,000
A : 1,40,000 Fixed Assets 1,60,000
B : 62,000 2,02,000 Profit and Loss A/c 4,8000
2,73,600 2,73,600
They admit Barkha into Partnership with 1/8th share in profits Barkha brings Rs. 40,000
as her capital and Rs. 24,000 for goodwill in Cash. Barkha acquires her share entirely from
Chetna. The other terms of agreement were as follows:-
(i) Provident fund is to be increased by Rs. 10,000
(ii) All Debtors proved good.
(iii) Stock includes Rs. 6,000 for obsolete items.
(iv) Creditors are to be paid Rs. 2,000 more.
(v) Fixed Assets are to be decreased to Rs. 1,40,000.
Pass journal entries & prepare the necessary ledger A/cs and Balance Sheet of New firm.
3. Radha and Krishan are partners in a business sharing profits in the ratio of 3:1. Their
Balance Sheet as at March 2009 was under :
Sundry creditors 41,000 Cash 87,000
Bills Payables 34,000 Debtors 45,000
Capital A/cs. Stock 13,000
Radha 50,000 Plant and Machinery 25,000
Krishan 75,000 1,25,000 Buildings 18,100
Bills Receivable 11,900
2,00,000 2,00,000
On 1st April 2009, Sudama is admitted as a new partner on the following terms:-
(431)
(i) The new profit sharing ratio is 9:6:3.
(ii) Provision for Doubtful Debts amounting to Rs. 2,500 be Created on each Debtors and
Bills Receivable.
(iii) Sudama will bring as Rs. 35000 capital and Rs. 25000 out of Rs. 30,000 as goodwill.
(iv) Buildings were found overvalued by Rs. 9,000 and Bills payables were found
undervalued by Rs. 30,000.
(v) Plant and Machinery was to be taken over by Radha and Krishan in the profit sharing
ratio.
Prepare revolution A/cs partners Capital A/cs. and the Balance Sheet of the new firm.
4. Ritika and Swati were partners sharing profit in the ratio of 3:1. The Balance Sheet of the
firm as on 31st March 2009 was as follows.
Liabilities (Rs.) Assets (Rs.)
Sundry Creditors 92,500 Cash at Bank 77,000
Reserve fund 67,500 Debtors 90,000
Capital A/cs. Loss: Provision
Ritika 95,500 For Doubtful Debts 2,500 87,500
Swati 69,000 1,64,500 Stock 100,100
Current A/cs. Motor vans 69,000
Ritika 73,000 Plant & Machinery 63,900
Swati 52,500 125,500 Factory Building 52,500
4,50,000 4,50,000
On the same date Rahul was admitted. Term's of Rahul's admission were as follows:
(i) Value of stock is found overvalued by 10%.
(ii) Rahul shall receive 1/5th share of the profits. The goodwill of the firm is to be value at
Rs. 50,000
(iii) Rahul bring Rs. 85000 as his share of capital and goodwill.
(iv) Provision for Doubtful Debts increased by Rs. 2,500 and motor vans are value less.
(v) Value of factory Buildings is to be appreciation by Rs. 50,000
Prepare Revaluation Account, Partner's Capital A/cs and the Balance Sheet of the
new firm.
(432)
5. Suneet and Sumeet are partners sharing profits in the ratio of 2:3. Their Balance Sheet as
on 31st March 2009 is as Under :

Bank overdraft 4,800 Debtors 43,200
Creditors 1,15,500 Less: provision 1,200 42,000
Salaries outstanding 3,000 Stock 50,000
Reserve fund 7,500 Plant & Machinery 71,500
Capital A/cs. Furniture 15,000
Suneet 67,500 Land & Building 75,000
Sumeet 57,000 1,24,500 Cash 1,800
2,53,300 2,55,300
C is admitted as partner on the same date on following terms :-
(i) The new Profit sharing ratio will be 5:2:1.
(ii) C will bring Rs. 48,000 as capital.
(iii) Since C was unable to bring anything in cash for his share of goodwill, partners decided
to value goodwill, which was to be calculated on the basis of C's share in profit and
the Capital contributed by him.
(iv) Following revaluation have to be made :-
Plant and machinery Rs. 89,000
Land & Building Rs. 90,000
Provision for Doubtful Debts is increased to Rs. 60,000
Stock is undervalued by 20%
Depreciation furniture by 10%
Prepare Revaluation A/c, Partner's Capital A/cs and Balance Sheet of the new firm.
6. Pratibha and Priyanka are partners and they share profits in the proportion of 3:1. Their
Balance Sheet as at 31.03.2009 was as follows:-
Liabilities (Rs.) Assets (Rs)
Creditors 1,01,300 Cash 37,500
Capital A/cs, Debtors 35,200
Pratibha 1,76,000 Bills Receivable 28,600
Priyanka 1,45,200 Stock 1,32,000
Furniture 24,200
Land 1,65,000
4,22,500 4,22,500
(433)
On 01.4.2009, Manish is admitted into partnership for 1/5th share on the following terms-
(i) Goodwill is to be valued at 3-1/2 year's purchase of average profits of last four years
which were Rs. 20,000; Rs, 17,000; Rs. 9,000 and Rs. 2000(loss) respectively.
(ii) Stock is found to be overvalued by Rs. 2,000; furniture is to be decreased and land to
be appreciated by 10% each, a provision for Bad Debts @12% is to be created on
Debtors, creditors allowed discount @ 4%.
(iii) A liability to the extent of Rs. 2500 should be created for a claim against the firm for
damages.
(iv) An item of Rs. 2,000 included in creditors is not Payable and hence it should be
written off.
Prepare necessary Ledger and Balance Sheet of the new firm if Manish is to contribute
necessary amount for his proportionate capital and goodwill. The capital of the partners
are to be in profit sharing ratio opening by current A/cs.
7. Dhanraj and Manish are Partners sharing profits and losses in the ratio of 3:2. Their
Balance Sheet on 31.03.2009 stood as under :
Capital: Machinery 76,000

Dhanraj 70,000 Furniture 30,000
Manish 60,000 Investment 40,000
Reserve Fund 20,000 Stood 54,000
Bank Loan 28,000 Debtors 38,000
Creditors 80,000 Less :-Provision 4,000 34,000
Cash 24,000
2,58,000 2,58,000
On this date they admitted Mohit for 25% share in profits in following terms:-
(i) Mohit brings capital proportionate to his share after all adjustments and Rs. 8,000
for goodwill out of his share of Rs. 14,000.
(ii) Depreciate funrniture by 10%.
(iii) Half of the investments were to be taken over by Dhanraj and Manish in their profit
sharing ratio and remaining valued at Rs. 26,000.
(iii) New ratio will be 3:3:2
Prepare revaluation Account, Capital Accounts and Balance Sheet after Manish's admission.
(434)
8. Aman and Arun are Partners sharing profits in the ratio of 3:2. Their Balance Sheet as at
31.3.2009 was as follows:-
Creditors 43,500 Cash 7,000
Employes' Provident Fund 6,000 Prepaid Insurance 3,500
Capitals Stock 15,000
Aman 26000 Debtors 9,400
Arun 13000 Less:- Provision 400 9000
Workman Compensation fund 2,500 Machinery 19,000
Contigency Reserve 2,500 Buildings 35,000
Furniture 5,000
93,500 93,500
Aradhya is admitted as a new partner introducing a capital of Rs. 16,000. The new profit
sharing ratio is decided as 5:3:2. Aradhya unable to bring in any cash for goodwill. So it is
decided to calculate the amount of goodwill on the basis of Aradhya's share in the profits
and the capital contributed by him. Following revaluations are made:
(i) Stock and furniture are to be depreciated by 5% and 10% respectively.
(ii) Provision for doubtful debts to be made at Rs. 500.
(iii) Buildings are valued at Rs. 40,000
Pass necessary journal entries and prepare the Balance Sheet of the new firm.
9. Dinesh, Dev and Vaibhav are partners sharing profit and losses in the ratio of 2:3:5. On
31st March 2009 their Balance Sheet was as follows:
Creditors. 69,000 Cash 23,500
Employees' Provident fund 37,500 Bills Receivables 29,000
Workmen Compensation fund 14,000 Furniture 28,000
Capitals: Stock 44,000
Dinesh 36,000 Debtors 42,000
Dev 44,000 Investment 32,000
Vaibhav 52,000 1,32,000 Machinery 34,000
2,52,500 2,52,500
They admit Deepak into partnership on the following terms:
(a) Furniture, Investments and Machinery to be depreciated by 15%.
(435)
(b) Stock is revalued at Rs. 48,000
(c) Goodwill to be valued at Rs. 24,000 and Deepak bring his share in cash.
(d) Out standing Rent amounted to Rs. 1,800.
(e) Prepaid Salaries Rs. 800.
(f) Deepak bring Rs. 32,000 towards Capital for 1/6th Share and partners to readjust
their capital accounts on the basis of their profit sharing ratio.
(g) Adjustment of Capitals to be made by Cash.
Prepare revaluation A/c, Partner's Capital A/cs. Cash A/c and Balance sheet of the new firm.
HOTS:
10. The following is the Balance Sheet at 31-03-2009 of Swati and Shikha who in partnership
and share profits & losses in the proportion of three-fifth and two-fifth respectively.
Liabilities (Rs) Assets (Rs.)
Sundry creditor 22,500 Freehold Premises 17,500
Bills Payable 4,500 Plant & Machinery 4,690
Provision for Doubtful Debts 4,000 Furniture 900
Capital A/cs. Stock 12,500
Swati 24,000 Debtors 22,500
Shikha 9,000 Investments 4,250
Cash 1,660
64,000 64,000
They admit Pushpa into partnership from 1st April 2009. The terms of agreement are as under:
(i) Pushpa to bring in Rs. 6,000 as Capital and Rs. 4,800 for goodwill in order to get to
seventh share in profit.
(ii) Rs. 4,800 paid by Pushpa to be credited to the Loan Accounts of Swati and Shikha in
respective proportions.
(iii) Freehold Premises is undervalued by Rs. 1000.
(iv) Plant and Machinery is under valued by Rs. 500.
(v) An old customer, whose account was written off as bad, has promised to pay Rs 4,000
in ful settlement of his full debt and Provision for doubtful debts be reduced by Rs.
1000.
(vi) Stock to be discounted at 10%.
(vii) Two-fifth of Investment were to be taken over by Swati and Shikha in their profit-
sharing ratio and remaining valued at Rs. 1500.
Pass Journal entries & prepare the Capital A/cs and Balance Sheet of New firm. Calculate
the new Ratio.
(436)
11. Sanjeev, Mukesh and Anil are Partners in a firm Sharing profit and losses in the ratio of
3:2:1. Their Balance Sheet as at 31-03-2009 is as follows:
Labilities Rs. Assets Rs.
Sundry Creditors 26,000 Cash 28,000
Bank overdraft 24,000 Investment 12,000
Bills Payable 6,800 Sundry Debtors 50,000
Reserve 15,000 Less :-Provision 2,500 47,500
Capital A/cs: Stock 60,000
Sanjeev. 60,000 Patents 6,000
Mukesh 60,000 Fixed Assets 98,500
Anil 50,000 1,70,000 Goodwill 15,000
2,41,800 2,41,800
On 1st April 2009, Manju is admitted into the firm with 1/4th share in the profits, which
she gets 1/8th from Sanjeev and 1/8 from Mukesh. Other terms of agreement are as under:
(i) Goodwill of the firm is valued at Rs. 72,000. However Manju is unable to bring her
share of goodwill in cash.
(ii) Manju will introduce Rs. 60,000 as her capital.
(iii) Rs. 3,000 of Sundry Debtors are bad and 20% of reserve is to remain as provision
against bad and doubtful debts.
(iv) A liability to the extent of Rs. 1,000, to be created in respect of a claim for damages
against the firm.
(v) An item of Rs 4000 included in Sundry creditors is not likely to be claimed.
(vi) Stock is to be reduced by 25% and patents to be written off in full.
(vii) Sanjeev agreed to pay the Bills payables
(viii)Investment and Bank overdraft not to be taken over by the new partnership firm.
11. After making the above adjustments the capital accounts of the old partners be adjusted
on the basis of Manju's capital to her share in the business i.e actual cash to be paid off to,
or brought in by, the old partners as the case may be.
Pass Journal entries & prepare the Capital Accounts, Cash A/c and the Balance Sheet of
the new firm.
(437)
Retirement/Death of Partner
1. A, B & C are partners sharing profit & losses equally. C retires & his share is acquired by
A & B in the ratio of 2:1. Give the new profit Sharing ratio.
2. State the ratio which the partners at the time of retirement of a partner share all the
accumulated profits & losses.
3. L, M & O are partners sharing profits & losses in the ratio of 4:3:2. M retires & the goodwill
is valued at Rs. 72,000. L & O decided to share the future profits & losses in the ratio of
5:3. Pass the necessary journal entry for treatment of goodwill.
4. Name the account in which the balance of capital account of the deceased partners is
transferred after all the adjustments.
5. Name the two bass on which the share of profit of the decesed partner is calculated from
the date of the closing of the last accounting year till the date of his death.
6. A, B & C are partners. 'B' retires & amount due to him after all adjustment comes out to be
Rs 1,00,000. But the firm pays him Rs 1,50,000 what is the additional amount paid Rs
50,000 called?
7. Is the retiring partner liable for firm's acts after his retirement?
8. If on revaluation of assets and reassessment of liabilities at the time of retirement of a
partner it was found that there was a bad debt of Rs. 1,000 but the provision for bad debt
was only for Rs, 600 what would be the treatment in Revaluation Account?
9. A, B & C are partners. After B's retirement A & C decided that their capitals would total Rs
5,00,000 in the ratio 3:2. After adjustment & paying off B's share the capital of A & C were
Rs. 2, 80,000 & Rs. 2,30,000 Calculate the amount to be brought in or paid off to/by A & C.
10. X, Y & Z are partners sharing profits & losses in the ratio of 3/10:2/5:3/10. X retires and
his share is acquired by Y & Z in the ratio of 1:3. Find out new ratio of Y & Z.
Retirement/Death of a Partner
3 mark Questions
1 P, Q and R are partners sharing profits in the ratio of 6:5:4. Calculate new profit sharing
ratio if
(i) P retires (ii) Q retires (iii) R retires
2 L, M and O were partners in a firm sharing profit in the ratio of 3:2:2. M retired and his
share was divided equally between L and O Calculate the new profit sharing ratio of L and
O.
3 A, B and C are partners sharing profit & losses in the ratio of 2:2:1. B retires and her
share is entirely taken by C. Calculate the new profit-sharing ratio.
4 Aakanksha, Pankaj and Abhishek were partners sharing profits and losses in the ratio of
2:2:1. On January 1,2009 Pankaj retires. The new profit sharing ratio of Aakanksha and
Abhishek will be 3:1. Calculate gaining ratio.
(438)
5 A, B and C are partners sharing profits in the ratio of 1/9:1/3 and 5/9. C retires and
surrenders 3/4th of her share in favour of A and remaining in favour of B. Calculate the
new ratio and gaining ratio.
6 P, Q and R are three partners sharing profits in the ratio of 4:3:2 respectively. Q retires and
the goodwill is valued at Rs. 5,400. P and R will share profits in future in the ratio of 5:3
respectively. Pass Journal entry.
7 X, Y and Z were partners sharing profits in the ratio of 2:3:4. On March 15,2009, Y died
and the new profit sharing ratio of X and Z was 5:4. On Y's death the goodwill of the firm
was valued at Rs. 1,50,000. Pass the necessary journal entry for the treatment of goodwill.
8 A, B and C are partners sharing profits in the ratio of 4:5:6. A retires, B and C decided to
share future profits equally. On that date, there was a balance of Rs. 37,500 in General
Reserve and a balance of Rs 15,000 in the Profit & Loss account of the firm. Record the
necessary journal entry.
9 P, Q and R are partners in a firm sharing profits in the ratio of 2:3:4. Q retired on March
15,2009, On this date the firm had a joint life policy of Rs 10,00,000. The annual premium
paid on the policy Rs. 32,000 was debited to Profit & Loss account. On the date of Q retirement,
the surrender value of the policy was Rs. 1,62,000. Record the necessary journal entry.
10 Hari, Mohan and Sohan were partners in a firm sharing profit in 2:2:1 ratio. The firm
closes its books on March 31 every year. Mohan died on August 24, 2009. On Mohan's
death the goodwill of the firm was valued at Rs. 75,000. The partnership deed provided
that on the death of a partner, his share in the profit of the firm in the year of his death will
be calculated on the basis of last year's profit. The profit of the firm for the year ended
March 31,2009 was Rs 20,00,000. Calculate Mohan's share of profit till the time of his
death and pass the necessary journal entries for the treatment of goodwill and his share of
profit.
11 A, B and C are partners sharing profit in the ratio of 3:2:1. The firm had insured the
partners lives severally, A for Rs 3,00,000; B for Rs. 2,25,000 and C for Rs. 1,50,000. The
Premium were charged to Profit & loss Account. The surrender value of each policy as on
March 31,2009 is 30% of the sum assured. B dies of March 31,2009. A and C decide to
share the profits and losses in 3:2 in future. Give the necessary journal entries.
12 P, Q and R sharing profits in the ratio of 4:3:2. P dies on September 30,2009. Accounts are
closed on Dec. 31 every year. Sales for the year 2008 amounted to Rs. 8,00,000. Sales of Rs
6,60,000 amounted between the period from Jan. 1,2009 to September 30,2009. The profit
for the year 2008 amounted to Rs. 1,20,000
Calculated the deceased partner's share in the current year's profits of the firm.
13 A, B and C were partners in the ratio of 3:2:1. They had a joint life policy of Rs. 1,44,000.
The annual premium of Rs. 9,600 has been charged to profit & loss account every year. A
died on March, 1,2009. Calculate A's share of policy at the time of his death.
14 X, Y and Z were partners with capital of Rs. 50,000 Rs 60,000 and Rs. 70,000 respectively.
Interest on capital is allowed@ 7% p.a. Z died on Jan 30,2009. Books are closed on March
31 every year. Calculate interest on capital to be credited to Z's capital Account for the year
2009-10.
(439)
Retirement of a Partner
3 2
1. A & B are partners sharing profit in the ratio of A= B= and transfer to reserve 1/6.
6 6
The Balance Sheet on
31st Dec. 2006 was as follow.
Employees Provident Fund 18000 Goodwill 15,000
Reserve Fund 10,000 Plant 90,000
Sundry Creditors 10,000 Petents 4,400
Profit & Loss A/c 24,000 Stock 30,000
Capital Investments 20,000
A - 80,000 Debtor - 20,000
B - 40,000 1,20,000 less Provision 400 19,600
Cash 5,000
1,84,000 1,84,000
B retires on 1st Jan, 2007 and the terms of retirement were:
(i) Goodwill is to be valued at Rs 50,000.
(ii) Value of Patents is to be increased by Rs 3000 but plant was found over valued by Rs
15,000.
(iii) Provision for doubtful debts should be 5% on debtors and provision for discount should
also be made on Debtors & creditors at 3%.
(iv) Out of insurance which was entirely debited to P & L A/c Rs 870 be carried foward as
unexpired insurance.
(v) Investments were revalued at Rs 16,000. Half of these investments were taken over
by B.
(vi) There is a claim of workmen's compensation to the extent of Rs 5000.
B was paid with amount kept in business and balance was transferred to his loan A/c.
Prepare Revaluation Account, Capital Accounts & Balance Sheet of A.
2. Pankaj, Navesh and Saurabh are partners sharing profits in the ratio of 3:2:1. Navesh
retired from the firm on that date the B/s of the firm was as follows:
(440)
Balance Sheet as on
March 31, 2007
General Reserve 12,000 Bank 7,000
Sundry Creditors 15,000 Debtors - 6,000
Bills Payable 12,000 (-) Prov debts for doubtful - 400 5,600
Outstanding Salary 2,200 Stock 9,000
Provision for legal Days 6,000 Furniture 41,000
Capitals : Premises 80,000
Pankaj - 46000
Navesh - 30000
Saurabh - 20,000 96000
1,43,200 1,43,200
Additional information
(i) Premises have appreciated by 20% stock depreciated to 90% and Provision for doubtful
debts was to be made 5% on debtors. Further provision for legal damages is to be
made for Rs. 1200 and furniture to be brought up to Rs 45000.
(ii) Goodwill of the firm be valued at Rs. 42,000
(iii) Rs. 26000 from Navesh's Capital A/c be transferred to his loan A/c and balance be
paid through bank. If required necessary loan may be obtained from bank.
(iv) New Profit sharing ratio of Pankaj & Saurabh is decided to be 5:1.
Give necessary ledger Account and Balance Sheet of the firm after Naresh's retirement.
Death of a Partner
1. Tina, Bina & Reena were partners in a firm Reena died on 28th Feb 2004. Her share of
profits from the date of death was to be calculated on the basis of the average of three
completed years of profits Profits for 2001, 2002 & 2003 were Rs 7000 Rs 8000 and Rs
9000 respectively.
Calculate Reena's share of profit till her death and pass necessary journal entry for the
same.
2. Girija Ganesh & Gopal were partners sharing profits in the ratio of 3:2:1. The firm had
insured the partners lives joint for Rs 51,000. Premium paid have been charged in P & L
A/c, which is prepared annually on 31st Dec.
Ganesh died on 31st March 2004. On this date under the partnership deed, the executors
of the deceased partner are entitled to
1. This Capital as per balance sheet
(441)
2. Interest on capital @ 10% up to the date of death
3. His share of profit to the date of death. Calculated on the basis of last year's profit.
4. His share of insurance money
Ganesh's Capital on 31st Dec. 2003 was Rs 40,000 and in 2004 he has withdrawn Rs 1200
p.m. at the beginning of each month and interest is to be charged @ 10% p.a. Last years
profit was Rs. 24,000
Prepare Ganesh's A/c to be render to his executors.
3. X, Y & Z who were sharing profits in proportion to their capitals on March 31, 2008 - their
Balance Sheet stood as follows:
Balance Sheet
Bills Payable 8000 Land & Buildings 50,000
General Reserve 6,000 Debtors - 1000
Capitals : less Provision - 200 9,800
X - 3,0000 Stock 14,000
Y - 3,0000 Machinery 8,200
Z - 15,000 75,000 Profit & loss Account 6,000
Employee's Provident Fund 17,000
1,18,000 1,18,000
Y retires and the following readjustments of the assets and liabilities have been agreed upon.
1. That the land & building be appreciated by 12%.
2. That the provision for doubtful debts be brought upto 10%.
3. That the provision of Rs. 1200 be made in respect of any outstanding bill for printing
& stationery.
4. That the goodwill of the firm will be valued at Rs 18000.
5. That the entire capital of the firm as newly constituted be fixed at Rs. 60,000 between
X & Z in the proportion of 3/4 & 1/4 after passing entries in their accounts for
adjustments i.e. actual cash to be paid off or to be brought in by the continuing partners
as the case may be, was to be paid Rs 5000 in cash and the balance be transferred to
his loan A/c
Pass necessary journal entries & Prepare the Balance Sheet after B's retirement.
4. A, B & C were carrying on business with the following assets with effect from 1-1-2000
Furniture Rs.18,000, Machinery Rs.72,000 Cash Rs 10,000 Debtors Rs, 20,000. Their profit
sharing ratio was 5:3:2 Capital is also shared in the same ratio. B died on 30.6.2000. His
(442)
son claimed his father's interest in the firm
The following was the settlement:
(i) Allow his Capital to his credit on the date of death
(ii) Give 5% p.a. interest on his capital
(iii) He had been drawing @ Rs 600 p.m which he withdraw at the beginning of each
month
(iv) Interest @ 6% p.a be charged on his drawings.
(v) They had joint life policy of Rs. 97000 for which premium of Rs 5000 has been paid
out of P & L A/c of the firm
(vi) Goodwill was valued at the average of profit (which were Rs 3600)
Prepare B's personal A/c
5. Following is the Balance Sheet of Kamal, Kishore & Keshav as on 31 -12-2004
Sundry creditors 3,000 Tools 1,000
Workmen Compensation Res. 32,00 Furniture 8,000
Capital Accounts Stock 6,000
Kamal - 10,000 Debtors 6,000
Kishore - 5,000 Cash at bank 5,000
Keshav - 5,000 20000 Cash in hand 2,00
26,200 26,200
Kishore died on 31st March 2005. Under the partnership agreement the executor of
Kishore was entitled to:
(i) Amount standing to the credit of Capital A/c
(ii) Interest on capital which hamounted to Rs 62.50
(iii) His share of goodwill Rs 3,500
(iv) His share of profit from the closing of last financial year to the date of death which
amounted to Rs 437.50
Kishore's executor was paid Rs 1800 on 1st April 2005 and the balance is equal yearly
instalment starting from 31-3-06 with interest @ 6% p.a.
Pass the necessary journal entries and draw Kishore's A/c to be rendered to his executors
& his executor's A/c till it is finally paid.
(443)
Dissolution of A firm
Meaning : Dissolution of a firm means the dissolution of partnership between all the
partners of the firm along with the termination of firm business.
Modes/ways of Dissolution of A firm :

(a) By Mutual Agreement [see.40]-when all partners agree to dissolve the firm.
(b) Compulsory dissolution [see.41]
1. On the in solvency of all the partners or all except one partner.
2. On business becoming unlawful.
(c) On happening certain contigency [see.42]- Subjeet to contract between the partners, a
firm is dissolved by-
1. The expiry of the term for which the firm was formed;
2. The completion of the venture (s) for which the firm was formed;
3. The death of a partner;
4. The adjudication of a partner as insolvent.
(d) By notice [see 43]- when any one of the partners gives a notice in writing to other partners
in case of partnership at will.
(e) Dissolution by court (Sec.44) : A court may dissolve a firm on any of the folowing grounds :
1. Insanity fo a partner.
2. Permanent incapacity of a partner
3. Miscounduct of / by a partner
4. Persistant breach of agreement by a partner.
5. Transfer of interest by a partner.
6. Improbability of carrying on the business except at a loss.
7. Any other ground on which court is satisfied that it would be just and equitable to
dissolve the firm.
Settlement of Accounts [sec.48]-

1. Treatment of losses (sec.48(a) losses including deficiencies of capital are to be paid in the
following manner;
(a) First out of profits; (b) Then out of capital; (c) Lastly by partners individually in their
profit-sharing ratio.
2. Application of Assets (sec.48(b)].
The Assets of the firm (including the sum, if any, contributed by the partners to make up
the deficieneies of capital) shall be applied in the following manner and order;
(444)
(a) First to pay off firm’s debts due to the third Parties; [Note: Secured creditors are to be
paid off first out of the proceeds of Seeured assets before any thing is paid to unseeured
creditors.
(b) Then to pay off loan from partners.
(c) Then to pay off capitals of partners.
(d) Lastly, the surplus, (if any), shall be divided among the partners in their profit-sharing
ratio.
Treatment of firm’s Debts and private Debts (sec.49):-

Firm Debts : Firm’s debts are incurred by the firm.
Private Debts : Private debts are incurred by a partner in the individual capacity of a
household and not in the capaeity of a partner of a firm.
Application of partner’s Private Property- Partner’s private proporty shall be applied
first in payment of his private debts and the surplus, (if any), in payment of firm’s debts if the
firm’s liabilities exceed the firm’s assets.
If the assets of the firm are not sufficient to pay off the firm’s creditors, then partners are
required to make contribution out of their Net private assets (ie. private Assets minus private
liabilities) beeause of the unlimited nature of the liability of partner.
Note: Students are requested to learn difference between the following from their text tbook.
(a) Distinction between realisation Account and Revaluation Account.
(b) Distinction between dissolution of partnership and dissolution of firm.
(1 Mark Questions)
1. Distinguish between ‘Dissolution of firm’ & ‘Dissolution of partnership’ on the basis of
Discount invation of business,
2. How can we know that the accounting treatment of the dissolution of partnership firm is
complete & accurate.
3. Distinguish between Realisation Account & Revaluation Account on the basis of ‘Time’
4. Pass journal entry for the following transation at the time of Dissolution of the firm:-
‘Z’ one of the partners, agreed to take over the creditor of Rs. 30,000 for Rs. 20,000.
5. What is the provision in section 48 (a) of Indian partnership Act,1932 regarding Treatment
of losses at the time of Dissolution of firm?
6. Distinguish between firm’s debts & private debts on the basis of ‘liability’,
7. Pass journal entry for the following adjustment at the time of Dissolution of the firm:-
‘B’ to bear realisation expenses for which he will get Rs.1,900. The actul expenses paid by
‘B’ were Rs. 1500,
8. Pass journal entry in the books of the firm at the time of its dissolution
(445)
‘There was an old type writer in the firm which had been written off completely from the
books, it is now estimated to realise Rs.300, it was taken away by ‘B’ at this estimated
price.
9. At the time of Dissolution of the firm creditors & Bills payable amounting to Rs.50,000 are
appeaning in the balance sheet of the firm. They are transferred to credit side of Realisation
Account, Now they were due on average basis of 1 month, but are immediately paid at 6%
discount per annum.What is the amount of discount?
10. What is the treatment of Goodwill at the time of dissolution of the firm when some amount
is realised for it?
(Long Questions)
1. Pass the journal entries, on the event of dissolution of a firm, for the following transactions:
a) Bills payable amounted to Rs. 4500 were paid at a discount of 10%
b) Vishal, a partner, takes over Machinery, valued Rs.47000 at Rs. 25000.
c) Aman, another partner, undertakes to make payments to creditors of the firm Rs.15000.
d) J.U.P, insured amount Rs.2,00,000, surrendered for 54%
e) The firm has to meet a contigent liability r.e.a for compensation against demages by paying
Rs 25000.
f) An unrecorded office equipment of Rs. 3500 was given to a creditor for Rs. 2500 in full
satisfaction.
2. Manoj & Mukesh are partners in a firm, sharing profit in the ratio 3:2, The firm is dissolved
on 31st Dec 2008, pass the Journal Entries for the following transaetions :
a) Creditors amounting to Rs. 4,00,000 are transferred to realisation Account. creditors of Rs
40,000 are not to be paid and remaning agreed to accept 20% less amount.
b) Creditors amounted to Rs 50,000, Invesments valued Rs 20,000 were not shown in the
books. one of the creditor took over there investments in full satisfaction of his debts of Rs
22,000. Remaining creditors were paid at 5% discount.
c) Half the stock was realised at 30% more than its book value and the remaining half at 50%
less than the book value [value of total stock Rs 40000]
d) Bills payable of Rs. 50,000 were due after 2 months ; as such, a rebate of 18% p.a. was
received on their payment.
3. Bhavya and Kamakshi were partners in a firm sharing profit and losses equalty Their firm
was dissolved on 15th March 2008, which resulted in a loss of Rs. 80,000. on that date the
capital accounts of Bhavya and Kamakshi showed a credit balance of Rs. 75000 and Rs.
65000 respectively. further, there was P/L A/C (Debit) Rs. 25000. you are required to pass
the necessary journal entries for the (a) transfer of loss and P/L A/C to the partners capital
A/C (b) making final payment to the partners.
4. Pass necessary journal entries for the following transactions at the time of dissolution of
the firm :
(446)
a) Undistributed Balance (Debit) of P& L A/C Rs. 45000. The firm has three partners Sunil,
Manish and Ashwani.
b) Manish who undertakes to carry out the dissolution proceedings is paid Rs. 8000 for the
same.
c) Loan of Rs. 40,000 advanced by Sunil to the firm was refunded.
d) Creditors of Rs. 20000 were paid Rs. 17500 in full settlement.
e) Ashwani takes over an unrecorded bill receivable at Rs. 2000.
f) Remaining Assets of the firm realised Rs. 75000.
5. Give journal eutries in each of the following cares:
a) Realisation expenses paid by the firm amounted to Rs. 5000 and the partner has to bear
the realisation expenses.
b) Realisation expenses amounted to Rs. 5000.
c) ‘Rohit’ one of the partner was to bear all the realisation expenses for which he was given
a commission of 2% of net cash realised from dissolution. cash realised from dissolution
was Rs. 2,50,000 and cash paid for liabilities amounted to Rs. 50,000.
6. Following was the Balance sheet of Neelam, Gurmeet & Hema on 15th March 2009:
Capital Gurmeet’s Capital 40,000
Neelam 2,00,000 Land & Building 4,90,000
Hema 3,00,000 5.00,000 Furniture 30,000
Workmen compensation fund 42,000 Stock 40,000
Rohit’s loan 22,000 Debtors 60,000
Gurmeet’s loan 16,000 Bank 40,000
Bills payables 20,000 Creditors 1,00,000
7,00,000 7,00,000
The firm was dissolved on the above date on the following terms:
a) Stock was taken over by Hema for Rs. 30,000 and furniture was sold for Rs. 24000 to
Mahesh.
b) Debtors realised Rs. 56,000; and creditors & bills payables were paid at discount of 10%
c) Land & Building was sold for Rs. 5,60,000.
d) Rohit’s loan was paid by a cheqne for the same amount.
e) There was an unrecorded asset of Rs. 40,000 which was sold for Rs. 28000.
f) The firm had a joint life policy of Rs. 10,00,000 with a surrende value of Rs. 1,72,000.
Journalise all the above effects till the final payments to partners.
7. X,Y, and Z were partners in a firm sharing profit & losses in the ratio of 3:2:1. following
(447)
transactions took place at the time of dissolution of firm:
a) X took over the investments at 25% more than the book value.
b) Y took over debtors amounting to Rs. 10000 at Rs 8000. Remaining debtos realised 75% of
the book value.
c) Joint life policy was surrendered for Rs. 36,000.
d) Z agreed to pay to creditors in full settlement Rs. 34600
e) Stock is sold for Rs .82,000 and plant is sold for Rs. 80,000.
f) Expenses of realisation amounted to Rs. 2,000. it was also found that there is a liability for
Rs. 16000 for damages which also had to be paid. prepare necessary accounts if the following
was balance sheet on the date of dissolution:
creditors 37,000 Bank 12000
Mrs x’s loan 10000 Debtors 30,000
X’s loan 16000 Less: provision 2000 28000
Investment fluctuation fund 15000 Stock 1,60,000
Joint Life Policy Fund 80,000 Investment 40,000
Capital Accounts Joint life policy 80,000
X: 1,50,000 Plant 1,50,000
Y: 132000 Goodwill 60,000
Z: 90000 3,72,000
5,30,000 5,30,000
8. Rahul, Sachin and Mohit were partners in a firm sharing profits & losses in the ratio of 1/
2:1/3:1/6 respectively. They agreed to dissolve their firm on 31st Dec. 2007, on which date
their Balance sheet was as under:
Capital Account Machimery 2,43,000
Rahul 234,000 Stock 45300
Sachin 1,16,000 3,50,000 Investment 88980
Mrs. Rahul’s loan 60000 Joint life policy 84000
Trade creditor 99000 Debtors 55800
Joint life policy fund 84000 Less: provission 3600 52,200
Workmen compensation fund 12000 Mohit’s capital 71,000
Employees P.F. 12000 Cash at bank 32520
6,17,000 6,17,000
The life policy is surrendered for Rs. 72000. The investments are taken over by Rahul for
(448)
Rs. 105,000. Rahul agrees to discharge the loan of his wife. Sachin takes over all the stock at Rs.
42,000 and debtors amounting toRs.30,000 at Rs. 24000. Machinery is sold for Rs. 3,30,000.
The remaiming debtors realised 50% of the book value. The expenses of realisation amounted
to Rs 3600 The investments of the value of Rs. 18000 were not recorded in the books These
were taken over by one of the trade creditors. Prepare the Realisation A/c Bank A/c and the
Capital Account of the partners.
9. Birbal and Vinod, who were sharing profit & cosses in the ratio of 60%b and 40% respectively,
decided to dissolve the firm on 31st March 2008 on which date some of the balances were
as follows:
Cash at bank 30,000 Birbal’s capital 4,80,000
Loan from Mrs.A 40,000 Vinod’s capital 50,000
Trade creditors 80,000 P/L A/C (Debit balance) 60,000
The assets (other than cash at bank) realised Rs. 3,80,000 and all creditors were paid off
less 5% discount. Realisation expenses amounted to Rs. 8000.
Prepare Realisation A/C, capital accounts and bank A/C assuming that both the partners
are solvent. [Hint: prepare balance sheet on the date of dissolution]
10. Pooja, Jyoti and Anamika shared profits in the ratio of 3:2:1. They dissolved the firm and
apponted Pooja to realise the assets. Pooja is to receive 5% commission on the role of assets
(except cash) and is to bear all expenses of realisation. the additional information are:
a) Pooja realised the assets as follows: Debtors Rs. 15000; stock Rs. 13000; investment at
75% value ; plant at Rs. 21375. Exp. of realisation amounted to Rs. 2050.
b) Commission received in advance is returned to the customers after reducing Rs. 1500 for work done.
c) Firm had to pay Rs. 3600 for outstanding salaries, not provided for earlier. compensation
to employees paid by the firm amounted to Rs. 4900. This liabelity was not provided for in
the above balance sheet. Rs. 12,500 had to be paid for providend fund. prepare necessary
accounts from above informatios and following balance sheet:
Capitals Profit & loss A/C 27000
Pooja 45000 Plant 45600
Jyoti 30000 Investment 7500
Anamika 5000 80,000 Stock 18000
Commission receved in advance 4000 Debtors 26150
Investment fluctuation fund 3000 Cash in hand 11250
Provident fund 6000
Creditors 30000
Bank overdraft 12500
1,35,500 1,35,500
(449)
11. Manju, Anju & Sanju shared profit in the ratio of 2:2:1. following is their Balance Sheet on
the date of dissolution:
Capital accounts: Current account:Sanju 44,000
Manju 120000 Plant 107,400
Anju 100,000 Furuiture 40,000
Sanju 40000 2,60,000 Stock 1,62,000
current accounts; Debtors 1,10,000
Manju 20,000 Bank 12,600
Anju 10,000 30,000
Bank loan@ 12% 40,000
Manju’s husband loan 24000
P/L A/C 24,000
Reserve for contigency 36,000
Sumdry creditor 62,000
4,76,000 4,76,000
a) There is a bill for Rs.10000 under discount. this bill was received from Rinku, Rinku
proved insolvent and 60% were received from her estste.
b) Manju agreed to accept furniture in full settetment of her husband’s loan.
c) It was found that an investment not recorded in the books is worth Rs. 16000. this is taken
over by one of the creditors at this value.
d) Assets realised as follows: Debtors Rs. 49,000; stock Rs. 120,000, plant Rs. 56,000 bank
loan was repaid alongwith interest for nine months. Prepare necessary accounts.
12. Aman, Arun and Asha are three partners sharing in the ratio of 3:1:1. on 28th March, 2009,
they decided to dissolve their firm. on that date their balance sheet was as under:-
bills payable 36000 Cash at bank 6400
Outstanding salaries 20000 Debtors 48400
Sundry creditors 12000 Less: provision 2400 46000
Loan from Mrs.Arun 3000 Stock 15600
Aman’s capital 49000 Investment 34000
Arun’s capital 18000 Fixed assets 2000
Asha’s capital 12000 Joint life policy 36000
Advertisement suspence A/C 10000
1,50,000 1,50,000
(450)
It is agreed as follows:
a) Aman is to take over all the fixed assets at Rs.400 less, debtors amounting to Rs.34,400 the
creditor of Rs.12000 to be assumed by ‘Aman’ at that figure.
b) Arun is to take over all stock at Rs.14000 and certain part of the investment at Rs.14,400
(being book value less 10%)
c) Asha is to take over the remaming investment at 90% of book value less Rs.200 allowances
and to assume responsibility for discharge of the Mrs.Arun’s loan together with accrued
interest of Rs.60 which has not been recorded in the books of the firm.
d) The remaiming debtors were sold to a debt collecting agency for 50% of book value.
e) Aman was entitled to receive Rs. 540 as remuneration for completing the dissolution work
and was to bear the realisation expenses. The expenses of realisation Rs. 340 were paid by
Aman out of his private funds.
f) The Joint life policy was surrendered to the Insurance co. the company paid a sum of Rs.
23000 after deducting an amount of Rs.13000 towards loan and interest there on by Arun
aganst the policy,
Prepare necessary ledger accounts.
13. A and B were partners in a firm sharing profits and losses equallty. Their firm was dissdved
on March 15,2009, Which resulted in a loss of Rs. 30,000. on that date the capital account
of 'A' showed a credit balance of Rs. 20,000 and that of B a credit balance of Rs.30,000 The
cash account had a balance of Rs. 20.000. You are required to pass the necessary Journal
entries for the (i) transfer of loss to the capital accounts of the partners and (ii) making
final payment to the partners.
14. What journal entries would be passed for the following transactions on the dissdution of a
firm, after various assets (other than cash) and outside liabilities have been transferred to
realisation account?
a) Stock worth Rs.30,000 is taken over by partner.
b) Compensation to employees paid by the firm amounted to Rs.40,000.
c) Sundry creditors amounted to Rs. 16,000. These were paid at a discount of 5%
d) There was an unrecorded asset of Rs.4,000 which was taken over by Y(a partner) at
Rs.3,000.
e) Profit on realisation Rs.42,000 was to be distributed between x and y in the ratio of 4:3.
15. Give the necessary journal entries in each of the following atternative cases.
a) Realisatioexpenses amounted to Rs.1,000.
b) Realisation expenses paid by the firm amounted to Rs.1,000 and the partner has to bear
the realisation expenses.
c) ‘P’ one of the partners was to bear all the realisation expenses for which she was given a
commission of 2% of net cash realised from dissolution, cash realised from assets was
Rs.50,000 and cash paid for liabilities amounted to Rs.10,000.
(451)
16. A & B are two partners sharing profits in the ratio of 2:1.Give journal entries at the time of
dissolution in the following cases:
a) Deferred revenue advertising exenditure appeared at Rs.60,000.
b) Profit & loss A/c was appearing on the asset side of Balance Sheet at Rs.1,20,000
c) An unrecorded investment realised at Rs.12,000.
(452)
COMPANY ACCOUNTS
ISSUE AND FORFEITURE OF SHARES
l Meaning of a Company : A company is an artificial person created by law, having
separate entity with a perpetual succession and a common seal.
l Characteristics of a Company : Incorporation, separate legal entity. Perpetuatal
succession/existence, limited liability, transferability of shares, common seal etc.
l Distinction between a private Company and Public Company : The basis of
distinction are number of members, transfer of shares, paid up share capital, prospectus
etc.
l Govt. Companies : A govt. Company is a company in which 51% or more shares are held
by the central govt. or state govt., or partly by the central govt. and partly by one or more
state govt.
l Prospectus : Prospectus means an invitation to the public for subscription of its shares
or debentures.
l Types of share capital : Authorized capital, issued capital, subscribed capital, called
up capital, paid up capital, uncalled capital, reserve capital.
l Distinction Between Reserve Capital and Capital Reserve : Basis of distinction :
Reserve Capital Capital Reserve

Meaning : It the part of uncalled share capital It is created out of capital profit
which shall be called only which the company
is to be would.
Mandatory : It is not mandatory It is mandatory in case of capital profit.
l Type of Shares : 1 Equity Shares, 2. Preference Shares

l Distinction between equity shares and preference shares.
Basis of Distinction : 1 Rate of dividend, 2. Voting Right, 3. Right to participate in the
management, etc.
l Minimum Subscription : Minimum subscription is that number of shares on which
amount received from shareholders is sufficient, from the point of view of directors.
l Issue of shares :
(i) by public subscription of shares
(ii) by private placement of shares
(iii) For consideration other than cash.
(453)
l Under Subscription of Shares : Means a situation where applications received for
shares are less than the number invited for subscription.
l Over Subscription of Share : When applications for shares received are more than the
number of shares offered to the public for subscription.
l Private Placement of Share : An issue, which is not a public issue but offered to a
selected group of persons such as directors, employees is called private placement of shares.
l Purpose for which amount of securities premium may be used (Section 78) :
(i) Issue of fully paid Bonus Shares to the existing shareholders.
(ii) Writing off preliminary expenses.
(iii) Writing off discount on shares or debentures.
(iv) Providing the premium payable on the redemption of preference shares or debentures.
(v) In purchase of its own shares (buy back of shares)
l Issue of shares at a discount (sec. 79) : The following conditions must be fulfilled :
(i) A resolution in this regard must be passed in the general meeting and sanctioned by
central govt.
(ii) The rate of discount on debenture must not exceed 10%. For more discount permission
from central govt. is required.
(iii) Not less than one year has been elapsed since the company entitled to commence its
business.
(iv) The shares are of a class already issued.
(v) The shares are issued within 2 months of the date on which the issue is sanctioned
by the central govt.
l Employees Stock Option Scheme (ESOS) : Meaning : A scheme under which the
company grants option ( a right but not an obligation ) to its employees to apply for shares
of the company at a predetermined price which is less than the market price.
l Calls-in-Arrears : Refers to the amount which is unpaid by the share holder after it is
due. It is subtracted from paid up capital.
l Calls-in-Advance : Refers to amount paid in advance by the shareholders before the
amount due on his shares.
l Interest on calls-in-Arrears : Is charged @ 5% p.a. as per Table A of Company Act,
1956 or as specified in the articles of association.
l Interest on Calls in Advance : Is given to the shareholders @ 6% p.a. as per Table A of
Company Act. 1956 or as specified in the articles of association.
l Forfeiture of Shares : When a shareholder fails to pay his arrears the directors of a
company have a right to forfeit his shares and the amount received on these shares is
credited to shares forfeiture A/c.
(454)
THEORY QUESTIONS
l Explain Authorised Capital and Paid up Capital.
l Distinguish between Reserve Capital and Capital Reserve.
l What is meant by ‘minimum subscription’.
l Give the case in which there is a decrease in the number of shares in issued capital of the
company. (When shares forfeited are not reissued)
l In which case share forfeiture account and capital reserve account will appear in the
company’s balance sheet. ( If the number of shares forfeited is more than the number
reissued )
l How will you deal with share forfeiture account when (a) all the forfeited shares have
been reissued (b) some of forfeited shares have been reissued? Give an example.
l Rose Ltd. company got the certificate of commencement of business on 1st January, 2008.
The directors decided to the raise additional share capital by issuing equity shares at a
discount of 15%. State if the decision is correct or not.
(Hint : As per sec. ‘79’ a newly started company cannot issue shares at a discount. The
maximum discount of 10% can be generally allowed & not more.)
l Moon company Ltd. has a balance of ten lacs in the securities premium account and the
debentures for fifty lacs have to be redeemed at 10% premium. Can the directors of the
company utilize the securities premium.
l As per section 78 of the Company Act the securities premium can be used to pay the
premium on redemption of debentures.
l The directors of the company forfeited shares originally issued at a discount and they
decide to reissue them at a premium, is it possible or not?
l The company decide to issue shares to same individuals without going through the
formalities of public issue, what is this process called.
l Under what option can the directors of the company decide to offer shares at a price lower
than the market price to its employees.
1 Mark questions
1. Distinguish between Reserve Capital & Capital Reserve on the basis of ‘creation’.
2. Distinguish between Preference share & Equity share on the basis of ‘Rate of Dividend’.
3. Can a company use amount in the credit of securities premium account to write off business
losses?
4. Can a company issue a new class of shares at a discount?
5. Name any two alternatives which are available to a company to allot shares to applicants
in case of over subscription of shares.
6. What is the rate of interest chargeable by the company, on calls in arrears as per Table ‘A’
(455)
of Companies Act 1956?
7. What is the rate of interest payable by the company on ‘Calls in Advance’ as per Table ‘A’
of companies Act 1956?
8. A company purchases another company acquiring sundry assets worth Rs. 1,00,000 &
sundry liabilities worth Rs. 40,000 for a purchase consideration of Rs. 70,000. Give journal
entry to record this transaction in the books of purchasing company.
9. A company forfeits 10 shares of Rs. 10 each for non payment of final call of Rs 2 per share.
Give journal entry to record this transaction.
10. Amount available in share forfeited account for 100 shares is Rs. 1000. Amount used for
reissue of 60 shares is Rs. 400. Calculate the amount to be transferred to capital reserve
account.
Forfeiture and Reissue d shares (3 Marks Questions)

1. XYZ Ltd. forfeited 50 shares of Rs. 100 each issued at a premium of Rs. 20, on which Rs. 90
( including premium) was called and Rs. 70 ( including premium ) was received. Out of
these, 40 shares were reissued as fully paid for Rs. 80 each Journalize.
2. The directors of a company forfeited 1000 shares of Rs. 10 each fully called up for non -
payment of first call of Rs. 2 per share and final call of Rs. 3 per share. 600 of these shares
were subsequently reissued at Rs. 6 per share fully paid up. Journalise the above.
3. Akshita holds 1000 shares of Rs. 10 each on which she has paid Re.1 and Rs. 2 per share on
application and allotment respectively. Takshita holds 3000 shares of Rs. 10 each and has
paid Rs.1, Rs. 2 and Rs. 3 on application, allotment and first call respectively. They fail to
pay their arrears and the second call of Rs. 2 per share has not been called. These shares
are forfeited and subsequently reissued at Rs. 11 per share as fully paid. Journalize.
4. Black Shine Ltd. issued 5000 equity shares of Rs. 100 each at a premium of 10% payable
as under :
On application Rs 20 On allotment Rs. 50 ( including premium )
On first call Rs. 20 On final call Rs. 20
The whole of the issue was called for by the company and all the money was duly received
except the allotment and call money on 50 shares. These shares were, therefore, forfeited
and later on reissued at Rs 90 per share as fully paid. Journalise the above.
5 XYZ Ltd. issued 5000 equity shares of Rs.20 each, payable Rs.6 on application, Rs.6 on
allotment and balance by equal two calls. All the calls were duly made and the amount so
received with the exception of the following.
(a) Mr. Mehta holding 50 shares did not pay the amount due on first call.
(b) Mr. Sharma holding 50 shares did not pay the amount due on final call. All the shares
were forfeited and reissued 75 shares (all of Mr.Sharma and balance of Mr. Mehta) to
Mrs. Kiran at Rs. 16per share and balance of Mr. Mehta’s shares to Mrs. Vinod at
Rs.17 per share. Journalizes.
6. Extreme Ltd. Forfeited 100 shares of Rs.100 each issued at a discount of 10% to Renu on
(456)
which she had paid Rs. 20 per share. Out of these 80 shares were re-issued at Rs. 60 per
share to Hema, Rs. 80 paid up. Journalize.
7. Aditya Ltd. Forfeited 100 shares of Rs. 10, Rs. 6 called up, issued at a discount of 10% to
Vidhi on which she had paid Rs 2 per share. Out of these 80 shares were reissued to
Shivali as Rs. 8 called up for Rs. 6 per share. Journalise.
Calls-in-Arrears/ calls-in-Advance
8. Sameer, the holder of 200 shares, paid his arrears in respect of shares first call of Rs. 25 on
1st August,2005 the due date of call being 1st May, 2005 the interest charges on calls-in-
arrears are 5% p.a. Pass Journal entries of calls-in-arrears and its payment along with
interest.
9. Sonali, the holder of 100 shares, paid her second call of Rs10 alongwith the share first call
money of Rs. 20 on 1st April, 2008. The second call made by the company on 1st July,2008.
The interest allowed on calls-in-advance is 6% p.a. Interest paid to the holders on 1st July
2008. Make journal entries for the above effects.
10. X Ltd. issued 45,000 equity shares of Rs. 10 each payable as follows :
On Application ....................................... Rs. 3.00
On Allotment .......................................... Rs. 2.50
On 1st call .............................................. Rs. 3.00
On Final call ........................................... Rs. 1.50
The applications were received for 90,000 equity shares. The allotment was made on 01-
10-07 as follows:
(a) Applications for 40,000 equity shares ...................... Full.
(b) Applications for 20,000 equity shares ..................... 25%.
(c) Remaining applications ................................ Rejected.
The 1st call was made on 01-11-07 and the 2nd call on 01-02-08. According to the terms of
issue the excess application money can be adjusted against amount due on allotment and
calls. One shareholder holding 5,000 shares paid the entire amount on his shares on
allotment. On 01-02-08 interest on calls in advance was paid according to ‘Table A’ of the
company Act 1956. Give journal entries assuming that all sums were duly received by the
company.
Issue of shares for consideration other than cash
(A. Questions without purchase consideration)
11. S. Ltd. Purchased business of G Ltd for Rs. 10,00,000. Give journal entries for the purchase
of business and issue of shares for consideration if S Ltd. paid Rs. 10,000 by cheque and
the balance by :
(a) issue of shares of Rs. 1000 each at par.
(b) issue of shares of Rs. 1000 each at a premium of 10%.
(457)
(c) issue of shares of Rs. 1000 each at a discount of 10%
12 M Ltd. Purchased following assets and liabilities of S Ltd.
Building Rs. 7,35,000 Stock Rs. 4,63,000
Machinery Rs. 4,65,000 Creditors Rs.2,18,000
Debtors Rs. 3,50,000 Bills Payable Rs. 1,45,000
Equity share of Rs.200 each at a premium of 50% were issued to S Ltd. against these
assets and liabilities. Journalize.
B Questions with Purchase Consideration

13 Moon Ltd. took over the assets of Rs 13,20,000 and Liabilities of Rs. 1,60,000 of sun Ltd.
for an agreed Purchase consideration of Rs 12,00,000 payable 10% in cash and the balance
by issue of fully paid equity shares of Rs.20 each. Show the necessary journal entries in
the book of Moon Ltd. assuming that -
(a) Shares are issued at par (b) Shares are issued at a premium of 20% (c) Shares are
issued at a discount of 10%.
14 Jounalise the entries for Question No. 12 if S Ltd. was to be paid a purchase consideration
of Rs.16,00,000 for Assets and liabilities and this purchase consideration was to be
discharged by paying Rs.70,000 through Bank draft and by issuing equity shares of Rs.
200 each at a discount of 15%.
Shares issued to Promoters/ Underwriters

15 K Ltd. issued 4,000 equity shares of Rs. 10 each as fully paid to its promoters as
remuneration of services rendered by them . Journalise.
16 Sai Ltd. issued 20,000 shares of Rs. 10 each credited as fully paid to the promoters for
their services and issued 10000 shares of Rs. 10 each credited as fully paid to the
underwriters for their underwriting services. Journalise.
Preparation of Balance Sheet :

17. X Ltd. has registered with an authorized capital of Rs. 10,00,000 divided into equity shares
of Rs. 10 each. The company invited applications for 50,000 shares and the applications
were received for 60,000 shares. The company rejected applications for 10,000 shares and
allotted the remaining applications in full, all calls were made and were duly received
except the final call of Rs. 2 per share on 100 shares. These shares were forfeited. Out of
these shares 75 shares were reissued at Rs. 7 per share as fully paid. Prepare the balance
sheet of the company as per schedule VI part 1 of the companies Act 1956.
Long Answer Questions ( 8 Marks )

1. Gupta Ltd. Company has a nominal capital of Rs. 5,00,000 in Rs 10 shares of these 16,000
shares were subscribed for by the public and during the first year Rs. 5 per share were
called up, payable Rs. 2 on application, Re. 1 on allotment, Re. 1 on first call and Re. 1 on
second call. The amounts received in respect of these shares were as follows :
On 12,000 shares the full amount called.
(458)
On 2,500 shares Rs. 4 per share
On 1,000 shares Rs. 3 per share
On 500 shares Rs. 2 per share
Give journal and prepare the balance sheet.
[Application money received for 16,000 shares allotment money received for 15,500 shares
i.e. (16,000-500) shares and so on .........]
2 Jain Ltd. issued a prospectus inviting applications for 20,000 shares of Rs. 10 each at a
premium of Rs. 2 per share payable as follows :
On application Rs. 2, on allotment Rs 5 ( including premium ) on first call Rs. 3, on second
and final call Rs. 2 .
Applications were received for 30,000 shares and pro-rata allotment was made on the
applications for 24,000 shares. Money overpaid on application was employed on account of
sums due on allotment. Anil to whom 400 shares were alloted failed to pay anything after
application and Sanjeev the holder applied for 720 shares failed to pay the two calls. Show
journals if (i) calls in arrear account is not opened (ii) calls in arrear account is opened.
3. Malamaal Ltd. issued a prospectus inviting applications for 25,000 shares of Rs. 20 each.
These shares were issued at par on the following terms :
On application Rs. 6 , on allotment Rs. 8, on first call Rs. 4, and on final call the balance.
Applications were received for 30,000 shares. Allotment were made on the following basis:
a) To applications, for 5,000 shares in full
b) To applications for 10,000 shares - 7,500 shares
c) To applications for 15,000 shares - 12,500 shares
All excess amount paid on allotment is to be adjusted against amount due on allotment.
The shares were fully called and paid up except amounts of allotment, first and final call
not paid by those who applied for 1,000 shares. (out of group(b) above)
All the shares on which the calls were not paid were forfeited by the company. 250 forfeited
shares were reissued as fully paid for Rs. 16 per share and 250 shares were reissued as
fully paid for Rs. 18 per share. Show the journal entries in the books of Malamaal Ltd.
4. Siemens Ltd. issued 25,000 shares of Rs. 10 each at a discount of 10% payable as follows:
On application Rs. 5, allotment Rs. 3 and on first & final call the balance.
Applications were received for 32,000 shares and allotment was made on pro-rata basis to
applicants for 30,000 shares. Anil had 300 shares and he did not pay the allotment and
the call money. His shares were, therefore forfeited. 200 of the forfeited shares were reissued
at Rs. 6 per share fully paid up. Pass journal and show cash book in the books of the company.
5 Good faith Ltd. was registered with a capital of Rs. 10,00,000 in shares of Rs. 20. It issued
a prospectus inviting applications for 5,000 shares and called up Rs. 16 per share as follows:
On Application Rs. 6 on Allotment Rs. 2
(459)
On first call Rs. 4 on second call Rs. 4
Applications were received for 4,500 shares. All money was duly received except the
following :
a) Mohit to whom 100 shares were alloted has paid only the application money.
b) Kanika to whom 200 shares were alloted failed to pay anything after first call money.
c) Ruchika to whom 150 shares were alloted failed to pay call money. Pass Journal and
prepare the Balance sheet.
6. Rana Ltd. issued 50,000 shares of Rs 20 each, payable as follows :
Rs 6 on application payable on 1st March, 2007
Rs. 4 on allotment payable on 1st May 2007
Rs. 4 on first call payable on 1st August 2007
Rs. 6 on second and final call payable on 1st December 2007
All these shares were subscribed and amount was received except, Priya, who had 5000
shares paid the amount of two calls alongwith allotment.
Vidhi, holding 2000 shares, failed to pay allotment and first call money but paid her arrears
alongwith final call.
Interest @ 6% per annum is payable on calls in advance and 5% per annum is charged on
calls in arrears. The interest was paid on 1st December 2007. Pass necessary journal entries
in the books of the company.
7. Zolta Ltd. Was registered with an authorized capital of Rs. 10,00,000 divided into shares
of Rs. 10 each. During the first year 20,000 shares were offered to the public and the
amount was payable on shares as follows :
On application Rs. 3, on allotment, Rs. 3 and on Ist call the balance.
Applications were received for 36,000 shares and the allotment was made as follows :
(a) Applicants for 5,000 shares - full.
(b) Applicants for 1,000 shares - 75%
(c) Applicants for 15,000 shares - 50%
(d) Applicants for 6,000 shares - NIL.
All money were duly received except the amount due on allotment and 1st call from Mohan
who applied for 1,000 shares in category (b) above. These shares were forfeited and 600 of
these shares were re-issued to Hari as fully paid on receipt of Rs. 8 per shares. Give
necessary journal entries of Zolta Ltd.
8. Moon Ltd. inviting applications for 10,000 shares of Rs. 20 each at a premium of Rs. 4 per
share, payable as follows :
On application Rs. 6 (including Rs. 2 premium); Ist call Rs. 6
On allotment Rs. 8 (including Rs. 2 premium); final call Rs. 4
(460)
Applications were received for 15000 shares and pro-rata allotment was made on the
applications for 12000 shares. It was decided to utilise excess application money towards
the amount due on allotment. Mahesh to whom 200 shares were alloted, failed to pay the
allotment money and on his subsequent failure to pay the first call, his shares were
forfeited.
Rajesh who applied for 360 shares failed to pay the two calls and on his such failure, his
shares were forfeited. Of the shares forfeited, 400 shares were sold to Kamal credited as
fully paid for Rs. 18/- per share, the whole of Mahesh's shares being included.
Give journal entries to record the above transactions :
9. Prakash Ltd. invited applications for 1,000 equity shares of Rs. 1,000 each. The amount
was payable as follows :
On application Rs. 600 (including premium Rs. 200)
On allotment Rs. 600 (including premium Rs. 200)
Balance on First and Final Call
Applications for 1,500 shares were received. Allotment was made to all the applicants on
pro-rata basis.
Manoj, to whom 20 shares were allotted, failed to pay allotment and call money. Vikram, to
whom 10 shares were allotted, failed to pay the call money. Their shares were forfeited
and afterwards re-issued as fully paid to R. Ltd. Against the purchase of machinery of Rs.
35000 and bill payable of Rs. 8,000. Give journal entries.
10. J.K. Co. Ltd. issued 30,000 shares of Rs. 10 each payable as Rs. 2 per share on application,
Rs. 4 per share on allotment and balance on first and final call. Applications for 46,000
shares were received on which the directors allotted as follows :
(a) Applications for 20,000 shares - Full
(b) Applications for 25,000 shares - 40%
(c) Applications for 1,000 shares - NIL
Rs. 86,000 was realised on account of allotment money (excluding the amount carried
from application money) and Rs. 1,00,000 on account of call. The directors decided to forfeit
those shares on which allotment and call money were overdue. Pass journal entries if
defaulters belong to pro-rata category.
11. Gautam Ltd. issued a prospectus inviting applications for 10,000 shares of Rs. 20 each at a
premium of Rs. 4 per share payable as follows : on application Rs. 6 (including premium
Rs. 2), on allotment Rs. 8 (including balance premium), on first call Rs. 6, on second and
final call Rs. 4.
Applications were received for 15,000 shares and prorata allotment was made on the
applications for 12,000 shares. It was decided to utilize excess application money towards
the sum due on allotment.
Ravi who applied for 240 shares, failed to pay the allotment money and on his subsequent
failure to pay the final call, his shares were forfeited. Meera, the holder of 300 shares,
(461)
failed to pay the two calls and on his such failure, his shares were forfeited. Of the shares
for feited, 250 shares were re-issued to Aditya for Rs. 16 per share fully paid (includes 100
shares of Ravi) and 150 shares were re-issued to Ashish for Rs. 17 per share fully paid
(include rest of Ravi's shares). Journalise the above transactions.
12. Plaza Ltd. issued 10,000 shares of Rs. 10 each at a premium of Rs. 3 payable as follows :
Rs. 6 on application (including Rs. 2 as premium); Rs. 5 on allotment (including Re. 1 as
premium) and Rs. 2 on Ist and final call. Applications for 20,000 shares were received. Out
of which applications for 4,000 shares were rejected and pro-rata allotment was made of
the rest.
All amounts were received except from Sita who had 250 shares and who did not pay the
allotment and the call money. Chandan who had applied for 640 shares, did not pay the
call money. Shares of both Sita and Chandan were forfeited after final call. Chandan's
shares were re-issued to M. Ltd. against an office equipment of Rs. 3,600 and creditors of
Rs. 200. Sita's shares were -reissued to Radha as fully paid for Rs. 1,850. Journalise the
above transactions.
13. ABC Ltd. Offered to the public 20,000 equity shares of Rs. 100 each at a premium of Rs. 10
per share. The payment was to be as followed:
On application : Rs. 20
On allotment : Rs. 40 (including premium)
On first call : Rs. 25
On second and final call : Rs. 25
Applications were received for 35,000 shares. Applications for 10,000 shares were rejected.
Applications for 15,000 shares were allotted 10,000 shares and remaining applications
were accepted in full. The directors made both the calls. One shareholder holding 500
shares failed to pay the two calls and as a consequence his shares were forfeited. 200 of
these shares were re-issued as fully paid at Rs. 80 per share. Expenses of issue came to Rs.
10000. Journalise and prepare Cash Book and Balance Sheet.
14. Sohan Ltd. invited applications for 20000 shares of Rs. 10 each at a premium of Rs. 2 per
share, payable Rs. 3 on application, Rs. 7 on allotment (including premium) and the balance
on 1st and final call.
Applications for 25,000 shares were received and it was decided :
(a) to refuse allotment to the applicants for 1,000 shares.
(b) to allot in full to applicants for 4,000 shares.
(c) to allot the balance of the shares on pro-rata basis.
Mr. Hari holding 200 shares to whom shares had been allotted on pro-rata basis failed to
pay the amount due on allotment. His shares were immediately forfeited after the allotment.
Mr. Shyam holding 100 shares to whom full allotment was made failed to pay the amount
due on call only. His shares were also forfeited after the call. 160 forfeited shares of Mr.
hari and 40 forfeited shares of Mr. Shyam were re-issued at a discount of Re 1 per share.
Pass journal entries in the books of the company.
(462)
15. Rajora Ltd. issued prospectus inviting applications for 200 shares of Rs. 10 each at a premium
of Rs. 3 per share.Payable as follows :
On application Rs. 6 (including premium Re. 1 per share)
On allotment Rs. 2 (including premium Re. 1 per share)
On 1st and final call Rs. 5 (including premium Re 1 per share)
Applications were received for 3,600 shares and pro-rata allotment was made on the
applications for 2,400 shares. It was decided to utilise excess application money towards
the amount due on allotment. Hari to whom 40 shares were allotted, failed to pay allottement
money and his shares were forfeited after the allotment.
Mohan, who applied for 72 shares failed to pay 1st and final call and his shares were also
forfeited. Of the forfeited shares, 86 shares were sold to Sarika credited as fully paid for Rs.
9 per share. The whole of Hari's shares being included. Pass the necessary journal entries
in the books of the company
(463)
ISSUE OF DEBENTURES
Debentures :- Meaning - A debenture is a document given by a company as evidence of
a debt to the holder usually arising out a loan and most commonly secured by a charge.
Types of Debenture :- (i) Secured/Mortgage Debentures
1. Secured Debenture having fixed charges :- When the charge is created against
specific assets of the enterprise then such a charge is called a fined charge. This charge is
created against those assets which are held by the company for use in operation and are
not meant for sale.
2. Secured Debenture having floating charge :- A floating charge is a kind of security
for which no specific asset is given, but all assets of the firm (excluding those given by of
specific charge to secured creditors) are under charge for such debentures. This implied
that before anything is paid to unsecured creditors, debentures /Loan holding a floating
charge will get their claim settled on priority basis.
Secured Debentures are those debentures which are secured by either a fined charge or a
floating charge on the assets of the company.
(ii) Unsecured Debentures/ Naked Debentures are those which are not secured by any
asset.
3. Redeemable Debentures are those which are repayable after a specific period in lymphs or
by installments during the life time of the company.
4. Irredeemable Debentures are those debentures which are not repayable during the life
time of the company and hence will be repaid only when the company goes into liquidation.
5. Registered Debentures are those which are payable to the persons whose name appears in
the Register of Debentureholders. Interest is paid to the registered holder.
6. Bearer Debentures are those which are payable to the bearer thereof. Interest is paid to
the person who produces the interest coupon attached to such debentures.
7. Convertible Debentures :- Those debentures which are convertible into equity shares
or other security either at the option of debenture holders or at the option of the company
as the case may be. Convertible debentures are of two types (i) fully convertible Debentures
(ii) Partly convertible Debentures.
8. Non-Convertible Debentures :- The debentures which cannot be converted into shares
or any other securities are called non-convertible debentures.
9. Specific Coupon rate debenture :-These debentures are issued with a specific rate of
interest, which is called the coupon rate. The specific rate may be fixed or floating.
10. Zero Coupon Rate Debentures/ Bond :-These debentures do not carry a specific rate
of interest. The difference between the face value and the issue price is the total amount
of interest related to the duration of the debentures.
Bonds Vs. Debentures :-The significant difference between bonds and debentures is
with respect to the issue condition i.e. bond can be issued without predetermined rate of
interest as is in case of deep discount bond.
(464)
Students are requested to learn the distinction between share and debenture from the
text book.
Collateral Security :-Means security provided to the lender over and above the prime
or Principal security. Collateral security is released only when the Principal security fails
to meet the loan liability.
Nature of Debentures :- Debenture represents a debt.
Nature of interest on debentures - Interest on debentures is charge against the
profits of the company.
Nature of Discount on issue of Debenture :- It represents capital loss. It should be
written off as soon as possible before the redemption of such debentures.
REDEMPTION OF DEBENTURES
Points to Remember
l Meaning :-Redemption of debentures means repayment of the amount of debentures to
the debenture holders or discharge of the liability on account of debentures.
l Sources of Redemption of Debentures :-(i) Raise fresh capital, (ii) Utilise the profits
(iii) Sale of assets (iv) Surplus fund.
Debenture Redemption Reserve (DRR) Guidelines

(A) For listed companies
l SEBI Guidelines
(i) Debenture redemption reserve should be created before the redemption starts .
(ii) A company is required to create a DRR of an amount equal to 50% of the amount of
debentures issued before redemption of debentures commences.
l Exceptions to the creation of DRR : (According to SEBI)
(i) Infrastructure companies.
(ii) If debentures maturity period is equal to or less than 18 months.
(B) *For Unlisted Companies : The government has issued guidelines for unlisted
companies, whereby an amount equal to 25% of face value of debentures should be
transferred to DRR before redemption commences.
(C) *DRR Guidelines of Companies Act : Section 117 C requires, all the companies
(including infrastructure and debentures issued maturity period less than 18 month
companies) that have issued non-convertible debentures must create DRR with adequate
amount out of its profit before commencing redemption of debentures.
Note : In the absence of any specific requirement as per the question, the student should
specify whether he/she is following 117C or SEBI Guidelines
(465)
Methods of Redemption of Debentures
1. On maturity in lumsum.
(a) Redemption of debentures out of capital;
(b) Redemption of debentures out of profit.
2. In installments by draw of lots.
3. By purchase in open market.
4. By conversion.
5. By Sinking fund/ Debenture Redemption ReserveFund method.
Redemption out of Accumulated Profits and Sinking Funds:

When before redemption of debentures, Debenture Redemption Reserve account is created
out of profits, then it is called Redemption out of profits.
When company set aside some part of its profits to a separate reserve, it is called debenture
Redemption fund or sinking fund.
Creation of Debenture Redemption Reserve is necessary before starting the redemption
of debentures.
Guidelines issued by SEBI for the Redemption of Debentures:
l It is obligatory for all companies to create a Debenture Redemption Reserve at least 50% of
the amount of debentures before commencement of redemption of debentures.
l According to SEBI Guidelines there are some exceptions regarding creation of Debenture
Redemption Reserve :
1. Infrastructure Companies
2. Issue of debentures with a maturity period of equal to or less than 18 months.
In the Case of Conversion of Debentures

1. If debentures originally issued at par or premium.
The number of new shares/ debentures to be issued =
The amount due to debenture holders

issue price of the shares
(including premium and less discount
which the case)
2. If debentures originally issued at discount and redeemed before the maturity period at
the option of debenture holders.
Number of new shares/ debentures to be issued =
The amount received on issue of debentures

Issue price
(466)of the shares
Issue and Redemption of Debentures
Debentures is the acknowledgment of a debt given under the seal of the company and
containing a contract for the repayment of the principal sum at a specified date and for
the payment of interest (usually half yearly) at a fixed % until principal sum is regard.
According to section 2(12) of the companies act, Debenture includes debenture, stock,
bonds and any other securities of a company.
Bond is also like debentures, is an acknowledgment of debts issued under the common
seal of a company and signed by an authorised signatory. Traditionally bonds had been
issued by the Government but now a days semi-Government and non-government
organisations are also issuing bonds.
Debentures are issued with a fixed rate of interest whereas bonds can be issued without
predetermined rate of interest where are called Deep Discount-Bonds or Zero Coupon
bonds.
Methods of redemption of debenture

1. Lump-sum payment at the end of stipulated period.
2. Payment in installments by draw of lots.
3. By purchase of own debentures in the open market.
4. By conversion into shares/ debentures.
Debentures - Issue & Redemption

Theory Based questions
1. The directors of the company decide not to give interest on debentures to the debenture
holders as there is a loss of Rs. 12,50,000 shown by the profit and loss A/c Give your reasons
for the answer.
(Hint : Interest on debentures is a fixed charge and has to be met as an expense by the
company).
2. How will you deal the account for the premium on redemption of debentures at the time of
issue of debentures? (Pass the journal entry)
3. A company purchased assets from X Co. Ltd. and the purchase consideration is settled by
issue of debentures for 75% of the amount at a premium of 10% and balance is paid in
cash. Assume an example and pass the Journal entry.
4. A company has to redeem debentures for Rs 10 lakhs after 15 months. Give the status of
Debenture Redemption Reserve Account.
5. Which type of company is exempt from creating a Debemption. Redemption reserve.
Account as per the guidelines of SEBI(Infrastructure Companies)
6. State the purpose of purchase of own Debentures by a company.
(467)
(Hint: for cancellation or for keeping them as an investment)
Issue of Debentures (1 mark)

1. Distinguish between a share and a debenture on the basis of ‘convertibility
2. A purchase consideration of Rs1,10,000 is to be settled by issue of debentures of face
value of Rs.100 at a premium of 10%. Determine the number of debentures issued.
3. Why would an investor prefer to invest in the debentures of a company rather than its
shares?
4. Give the Journal entry for issue of debentures as collateral security.
5. Give the Journal entry for issue of debenture at discount and redeemable at premium.
6. Debentures come under which major heading of the company’s Balance Sheet, as per
schedule VI part 1 of company Act, 1956.
7. X Ltd. purchased the assets of Rs.3,00,000 and took over liabilities of Rs.60,000 for a
purchase consideration of Rs.2,50,000. The amount of Rs.10,000 will be debited or credited
to which account?
8. Y limited purchase assets of Rs.4,00,000 & took over liabilities of Rs.80,000 of Z limited
for a purchase consideration of Rs. 3,00,000. The amount of Rs.20,000 will be debited or
credited to which account ?
9. A company issued 10,000, 8% debentures of Rs. 100 each at a discount of 5% and
redeemable at a premium of 10% after 5 years .What is the total amount of loss on issue of
debenture A/C to be written off in 5 years ?
10. Which method of calculating the amount of loss on debentures is adopted when debentures
are to be redeemed at the end of specific period ?
REDEMPTION OF DEBENTURES (1 MARK EACH)

1. To which account is the profit on cancellation of own debentures transferred by the
company ?
2. Y limited redeemed Rs. 9,900 debentures by converting them into equity shares of Rs. 10
each at a premium of 10% . Find the number of shares to be issued.
3. Z Ltd. Redeemed Rs. 99,000 debentures by converting them into equity shares of Rs. 10
each at a discount of 10%. Find the number of shares to be issued.
4. In which two situations the companies are exempted from transferring amount to debenture
redemption reserve as per SEBI guidelines?
5. Why does a company redeem debentures by purchasing them from open market?
6. When all the debentures have been redeemed then the balance of debenture redemption
reserve ( BARR ) A/c is transferred to which account?
7. An annual instalment of Rs 13,921 is to be set aside every year by the company to sinking
fund for redemption of debentures. Give journal entry.
(468)
8. R Ltd. purchased its own 200 debentures of the face value of Rs. 20,000 from the open
market for immediate cancellation at Rs. 92. Calculate profit on cancellation.
9. Explain in one sentence section 117- c (1) of companies Act 1956 regarding transfer of
amount to debenture redemption reserve.
10. When a company redeems debentures by paying back a portion each year to certain
debenture holder. What is it called?
Issue & Redemption of Debentures (3 marks )

Pass necessary journal entries from the following at the time of issue and at the time of
redemption :
(a) A Ltd. issued 20,000 ;12% debentures of Rs. 100 each at par redeemable at par.
(b) B Ltd. issued 60,000 ;12% debentures of Rs. 100 each at par redeemable at a premium
of 10%
(c) C Ltd. issued 40,000; 12% debentures of Rs. 100 each at a premium of 5% redeemable
at par.
(d) D Ltd. issued 50,000;12% debentures of Rs. 100 each at a discount of 10% redeemable
at par.
(e) E Ltd. issued 30,000; 12% debentures of Rs. 100 each at a premium of 5% redeemable
at a premium of 2%.
(f) F Ltd. issued 10,000 12% debentures of Rs. 100 each at a discount of 5% redeemable
at a premium of 5%.
Hint : According to Company Act 1956 Debentures can not be redeemed at discount.
3 Marks Questions
1. On 1st April, 2002, a Ltd. Company issued 12% debentures of Rs. 4,00,000 at a discount
of 10% repayable at the end of 4 years. Pass journal entries for the issue of debenture and
show debentures discount account for four years. (P. & L. A/c-10,000 every years)
2. On 1st January 2003 XYZ Ltd. Company issued 10,000 10% debentures of Rs. 100 each at
a discount of 10% repayable after 5 years at a premium of 5%
Show the Loss on Issue of Debentures A/C over the period.
3. PQR Ltd. issued debentures of the face value of Rs. 1,00,000 at a discount of 6% on 1st
July, 2005. These debentures are redeemable by annual drawings of Rs. 20,000 made on
30th June each year. The directors decided to write off discount on based on the debenture
outstanding each year. Prepare discount on debenture A/c.
4. LMN Ltd. issued 20,000 ; 10% debentures at 8% discount. Debentures are to be redeemed
in the following manner.
(469)
Year end Face value of debenture redeemed (Rs.)
2 20,000
3 40,000
4 60,000
5 80,000
Pass journal entries for issue of debentures and prepare debenture discount Account for 5
years.
5. B.Tech Ltd. issued 13% debentures of face value of Rs. 9,00,000 at a discount of 10%
repayable at par in equal proportions at the end of 5, 10 and 15 years. Show the amount of
discount to be written off at the end of each year.
6. M. Tech Ltd. issued 20,000 ; 12% debentures of Rs 100 each at a discount of 8% on 1st
April 1999 redeemable in four equal instalment starting from March 2001. Securities
premium account shows a balance of Rs. 20,000
(i) Calculate the amount of discount to be written off from P&L Account.
7. Rajlaxmi Ltd. issued 2,00,000 debentures of Rs. 100 each at a premium of 10% on June 30,
2000 redeemable on June30, 2004. The debentures were fully subscribed. The required
amount to debentures redemption reserve is transferred on 31st March, 2004 and
debentures were redeemed on due date. Pass necessary journal entries for the issue and
redemption of debentures.
8. Chandigarh Toll Bridge Corporation Ltd. an infrastructure company has outstanding 8
lakh; 13% debentures of Rs. 10 each issued in 2005. These were due for redemption on
30th Nov. 2009. Pass the necessary entries at the time of redemption of debentures.
9. Radhika Enterprises Ltd. issued 30,000; 8% debentures of Rs. 100 each on July 1, 2002.
These will be redeemed in 3 equal installments starting from Dec. 31, 2004. It was decided
by the Board of directors to transfer to debentures redemption reserve Rs. 8,00,000 on
Dec.31, 2003. The balance required will be transferred to DRR on Dec.31, 2004. Pass journal
entries. (ignore interest )
10. Kanha Ltd. Purchased its own debentures of the face value of Rs. 5,00,000 from the open
market for the purpose of immediate cancellation at Rs. 94. Pass necessary journal entries.
6 Marks Questions
1. On Ist Jan.,2006 Shivam Ltd. issued 1,000 8% debentures of Rs. 1,000 each at Rs. 960 per
debentures. According to terms of issue, debentures of Rs. 20,000 will be redeemed every
year starting from the end of year 2007 either by purchase or by drawings at par at the
companies option. Rs. 10,000 was also written off from the Debentures discount Account
in each of the year 2006 & 2007.
During 2007, the company purchased for cancellation debentures of the face value of Rs.
8,000 at Rs 950 per debenture and of Rs. 12,000 at Rs. 900 per debenture.
Journalise the above transactions ( ignore the entries of interest).
(470)
2. On 31st March, 2008 the following balances appeared in the books of X Ltd.
12% Mortgage debenture account - 50,000
Debenture Redemption fund Account - 33,000
Debenture Redemption fund policy account - 33,000
On Ist April 2008 the company paid the annual premium of Rs 11,000. On 31st March,
2009 . The policy amount of Rs. 50,000 was received and all the debentures were redeemed
at par.
Show the above mentioned in ledger accounts for the year ended 31stMarch,2009.
3. Rajan Ltd. has Rs. 1,20,000 ;6% debentures outstanding on Ist April, 2002. On that date
the debenture redemption fund stood at Rs. 1,00,000 represented by Rs. 1,18,000, 3%
loan of the government of India. The annual installment added to the debentures
redemption fund is Rs. 16,460. On 31st March, 2003. The balance at bank (after interest
on investment had been received ) was Rs. 31,280. On that date investments were sold at
83% net and the debentures were paid off.
Pass necessary journal entries and prepare ledger accounts for the year 2002-03.
4. SRK Industries Ltd. issued on Octs 1,2007, 42,00,000; 9% debenture of Rs. 100 each at a
premium of 10%. 7 redeemable by conversion of debentures into shares of Rs. 10 each at a
premium of 5% on July 1, 2009. Record necessary entries for issue and redemption of
debentures.
5. Pass necessary journal entries for the following transactions :
(i) Issued 6,000 ;9% debentures of Rs. 75 at a premium of Rs 25per debenture redeemable
after 4 years.
(ii) Purchased 3,000; 8% own debentures of Rs. 100 each at Rs. 97 for immediate
cancellation.
(iii) Converted 1,800, 9% debentures of Rs. 100 each into 12% debentures of Rs. 100 each
issued at a premium of 25% .
(iv) Redeemed 800, 9% debentures of Rs. 100 each by converting the same into equity
shares of Rs.100 each at a premium of 25%
(v) Redeemed 2,000, 7% debentures of Rs. 100 each at a discount of 10% by converting
them into equity shares of Rs. 100 each at a premium of 25%
(vi) Redeemed 4,000, 12% debentures of Rs. 100 each which were issued at a discount of
5% by converting them into equity shares of Rs. 10 each at a discount of 5%.
6. Rani Ltd. issued 20,000; 3% debentures of Rs. 100 each on 1st Jan.,2002 which will be
redeemed at a premium of 10% after 3 years. For this purpose sinking fund was established.
The investments were expected to earn 6% p.a. Sinking fund table shows that Re.0.31411
invested annually at 6% interest will amount to Re.1 in 3 years. On 31-12-05, investments
were sold at a profit of 20% and the bank balance was Rs. 2,00,000 before receipt of interest.
The debentures were redeemed on due date.
Pass necessary journal entries and prepare ledger Accounts.
(471)
7. The following balances appeared in the books of Kajal Company Ltd. on Ist Jan. ,2005
12% debenture - 2,80,000
10% deb. Sinking fund - 2,10,000
10% deb. Sinking fund investment - 2,10,000
(represented by 10% govt. bonds of the face value of Rs. 1,26,000 )
Annual contribution to sinking fund was Rs. 22,400 made on 31stDec. each year. On 31st,
Dec. 2005 balance at bank was Rs. 70,000 after receipt of interest. The company sold
investment at 80% and debentures were redeemed. You are required to prepare the
following Accounts for the year 2005.
(i) Debenture Account
(ii) Debenture Sinking Fund Account
(iii) Debenture Sinking Fund Investment Account
8 Given below the balance sheet of P. K. Ltd. as at March 31, 2003
Liabilities Amount (Rs.) Assets Amount (Rs.)

Share Capital Authorized 5,00,000
Share of Rs. 50 each Fixed Assets 80,00,000
Issued called up and paid up Current Assets 90,50,000
shares of Rs. 50 each 1,00,00,000 own debentures 8,50,000
(F.V. Rs. 9,00,000)
General Reserves 20,00,000 Cash at Bank 6,00,000
8% debentures 40,00,000
Sundry Creditors 25,00,000
1,85,00,000 1,85,00,000
The Hritik Ltd. Company decided the following :
1. To redeem all the 8% debentures due for redemption on Sep.30, 2003 and also to
cancel its own debentures.
2. To pay interest to debenture holders on the date of redemption.
Pass necessary entries on Sep.30, 2003.
(472)
Analysis of Financial Statements
Meaning : -Analysis of financial statements is the process of identifying the financial strength
and weaknesses of the firm by properly establishing relationship between the items of the
Balance Sheet and Income Statement.
Parties Interested in the Financial Analysis

1. Management
2. Creditors
3. Investors
4. Employees
5. Government
6. Financial Institutions
7. Stock Exchanges
8. Regulatory Authorities
9. Researchers
10. Public
Significance of Financial Analy sis

1. Measuring the operational efficiency of the Business.
2. Forecasting, budgeting and planning future line of Action.
3. Measuring short-term and long-term Financial Position.
4. Assessing the growth potential of the Business
5. Measuring the profitability
6. Indicating the Trend of Results
7. Simplified systematic and Intelligible presentation of Facts.
8. Intra-firm and Interfirm comparison of the performance.
Tools or Techniques of Financial Analysis

1. Comparative Statements
2. Common size statements
3. Trend analysis
4. Ratio analysis
5. Funds flow statement
6. Cash flow statement
7. Beak even point Analysis
(473)
Points to Remember
Balance sheets as per schedule
VI part I of the Company Act, 1956.
(i) Share Capital (i) Fixed Assets
(ii) Reserves and Surplus (ii) Investments
(iii) Secured loans (iii) Current Assets, loans
(iv) Un Secured loans and advances
(v) Current Liabilities and (a) Current Assets
Provisions (b) Loans and Advances
(a) Current Liabilities (iv) Miscellaneous Expenditure
(b) Provisions (v) Profit and Loss (Dr. Balance)
Limitations of Financial Analysis :

1. Incomplete and inexact information
2. It spots the symptoms and does not arrive at diagnosis
3. Qualitative informations are ignored
4. It is only a tool and not the final remedy
5. Historical informations
6. Affected by window dressing
7. Based on accounting concepts and conventions
8. Ignoring price level changes
9. Influenced by personal judgements
10. Value of human resources not being disclosed
Theory Questions
1. What is meant by analysis of Financial Statements?
2. Name the parties interested in analysis of financial statements.
3. Explain the significance of financial analysis.
4. What are the limitations of financial analysis?
5. Explain in brief various techniques of analysis of financial statements.
(474)
(475)
fictitious assets) ratio available to the providers of long term lacs it means that the ratio
Long term debts=secured long term debt debt. is 2:1 indicating that 2 time
Loans+ Unsecured Loans providers of the security is being provided
company. to long term debt providers.
2. It measures the
relationship
between total
debts and total
assets.
3. Proprietary Ratio Proprietors funds Proprietors' funds=Share Fraction 1. This ratio shows Higher ratio indicates If shareholders funds are
or Shareholders' Capital+ Reserve and Surplus- the extent to higher margin self & say 2 lacs and assets are
funds/Total Dr. Balance of P/L Account- which the assets self sufficiency say 1 lacs then this ratio is
Assets(Excluding Misc. Exp have been sufficiency. 2:1, It shows adequate
fictitious assets) Total Assets=Fxed Assets+ financed by the margin to lenders.
Current Assets (Excl .flctitious funds of the
assets) Proprietor.
111 PROFITABILITY RATIOS
1.
Gross Profit Ratio Gross Profit Ratio Gross Profit=Sales - Cost of 1. This ratio A higher ratio indicate Let Gross Profit be
x 100 Goods Sold indiacates gross s lower cost of sales. Rs. 4 lacswhereas sales
Sales= Sales - Sales return profit as be Rs. 12 lacs.
sales, So the ratio is 33%.
2. It is used to keep
(476)
a control on
direct costs.
2. Operating Ratio Cost of Goods Cost of Goods Sold= Opening Percentag 1. This Ratios is If this ratio is If cost of goods sold is Rs 6
Sold+ operating Stock+ Net Purchases+ Direct e calculated to subtractedrom 100 it lacs, operation expenses
Expenses/ Net Expenses-Closing Stock or = judge the gives Operating Profit are Rs 40,000; sales are
Sales x100 Sales -Gross Profit. operational ratio. Rs.8,20,000 and sales
Operating Expenses= Office efficiency of return comes 20,000 then
and administrative expenses+ business. this ratio comes out to be
Expenses 2. To determine 80%.It also shows that the
Net Sales= Sales-Sales Return whether the cost operation profit
content has margin is 20%.
increased or
decreased in the
figure of sales
when compared,
3.
Net Profit Ratio Net Profit/Sales
x100
expenses. the industry circumstances of the resulting in profit of 20 paise.
Sales = sales - average helps company.
sales returns company to plan
effeciently.
Return on Profit before Capital Employed= Total Percentage 1. It measures the It is the most If profit before interest etc is
Investment interest , tax and assets- current liabilities overall important ratio to be Rs 1,00,000 and capital
(Capital employed) dividend/capital OR = Fixed assets + performance of calculated and used. employed and Capital
employed x 100 Working capital the enterprise. employed is Rs 5,00,000 then
OR = Debt + Equity 2. Also called this ratio comes out to be 20%
Primary ratio it is
used to take
major decisions
in the business.
Earning per share Net profit after In Rs. This ratio helps Higher EPS indicates If net profit as required is Rs 1
tax- Preference in evaluative the better performance of lakh and the number of shares
Dividend/ No. of prevailing the company. It also is 20,000 then it indicates EPS
equity shares. market price of a indicates that the of Rs 5 per share.
share in light of company manages
profit earning both inside as well as
capacity. outside
Total dividend
paid to Equity Rs. The objective of this ratio Higher DPS indicates If the total dividend paid is Rs.
share holders/ is to measure the liberal the dividend 1 lac and the number of equity
No. of equity dividend distributed per paid to shareholders shares is 50,000 then this ratio
share equity share. is Rs. 2
(477)
Market price per Number of The objective of This ratio is used by If the market price of a share
share/Earning times computing this ratio is to the company to is Rs. 1000 and the Earning per
per share find out the expectation control the market share is = Rs. 20
of the share holders. price of the share.
1.
3. Creditors or Net Credit Purchase= Number of It indicates the number of If this ratio is high If net credit purchases are Rs.
Payables Total Purchase-Cash times times the creditors are more creditors are 1 lac and the average accounts
Turnover ratio Average Payables= turned over in relation to ready to give more payable are Rs. 20,000 then it
(Opening purchases. In other words credit to the company shows that the company pays
and closing Creditors and in indicates how many an average creditor 5 times a
Bills Payables)/2 times the company pays year which is the creditors'
to an average creditor. turnover ratio.
4. Working Capital Turnover Cost of goods Cost of goods sold=Opening Number of This ratio shows the Higher the ratio, If cost of goods sold is Rs. 2
Ratio sold or net sales/ stock + Purchases+Direct times number of tomes the better the efficiency lacs and the net working
Net working Expenses-Closing Stock working capital has been in the utilization of capital is Rs. 50,000 then the
capitlal Net working capital=Current employed in the process working capital working capital turnover ratio
Assets Current Liabilities of carrying on the is 4. It means that the
business. company on an average
(478)
employs the working capital 4
times a year.
5. Fixed Assets Turnover Net sales/Net Net sales=Sales return No. of This ratio measures the If the Net sales are Rs. 1 lakh
Ratio fixed assets Net fixed assets = Fixed times utilization of fixed assets and the net fixed assets are
assets - depreciation during the course of 50,000 Rs. then it indicates a
doing business by the fixed assets turnover ratio of 2
company. which means that on an
average the company recovers
its investment in fixed assets 2
time s a year.
Analysis of Financial Statements (Theory)
1 Mark Questions
1. Give any two limitations of Financial statements.
foÙkh; fooj.kksa dh dksbZ 2 lhek;sa nhft;sA
2. Name the major heads under which the following items appear in the Balance sheet
of the company as per schedule VI, part I of Indian Companies Act, 1956
(i) Goodwill (ii) Preliminary Expenses (iii) Securities Premium A/c (iv) Unclaimed
Dividends
3 mark Questions
1. What are the importance of Financial Statement Analysis?
foÙkh; fooj.k fo'y"s k.k ds D;k egRo gS\a
2. Explain briefly the interest of investors and creditors in the analysis of financial
statements of a company.
fofuosk' dksa ,oa ysunkjksa ds fy;s foÙkh; fooj.k fo'y"s k.k dk egRo la{ksi esa le>kb;sA
Ratio Analysis (1 mark Questions)
1. What will be the operating profit ratio, if operating ratio is 83.64%?
;fn izpkyu vuqikr 83-64 izfr'kr gks rks izpkyu ykHk vuqikr D;k gksxk\
2. Sale of goods for cash Rs 20,000 (Cost Rs. 24,000). Will this transaction improve,
reduce or not change the current ratio of 2:1?
;fn pkyw vuqikr 2%1 gks rFkk 24]000 #i;s ykxr tk;s rks pkyw vuqikr lq/kjsxk] de gksxk ;k vifjorZuh; jgsxk\
3. Company 'A' has a price Earning ratio of 10 whereas Company 'B' has a price Earning
ratio of 15.
dEiuh ^v* dk ewY; vtZu vuqikr 10 gS tcfd dEiuh ^c* dk ;gh vuqikr 15 gSA bu vkadM+ks ls D;k fu"d"kZ
fudyrk gS\
4. Will the following transaction increase, decrease or not affect the debt Equity ratio :-
Purchase of a Fixed Asset on long term derred payment basis.
fuEufyf[kr ysunsu ls D;k _.k lerk vuqikr D;k c<sxk] de gksxk ;k izHkkfor ugha gksxk\
LFkk;h laifÙk dks yEch vof/k ds vLFkfxr Hkqxrku vk/kkj ij Ø; djukA
5. The stock turnover ratio of a company during previous year was 5 times where as this
year it is 8 times. What conclusion can be drawn from this factin one sentence.
,d dEiuh dk Ldan vkorZ vuqikr fiNys o"kZ 5 xq.kk Fkk rFkk bl o"kZ 8 xq.kk gSA bl rF; ls vki ,d okD;
esa dEiuh ds ckjs esa D;k fu"d"kZ fudky ldrs gS\
6. A Company's current ratio is 4:1 whereas ideally it should be 2:1. How can the company
(479)
reach ideal position?
,d dEiuh dk pkyw vuqikr 4%1 gSA tcfd bls vkn'kZ :i esa 2%1 gksuk pkfg;sA dEiuh vkn'kZ fLFkfr esa fdl
izdkj igq¡p ldrh gSa\
7. Gross Profit =Rs 50,000. Sales = Rs 5,50,000 & Sales return = Rs 50,000. Calculate
Gross profit ratio.
ldy ykHk=50]000 :( fcØh=5]50]000: fcØ; okilh=50]000:
ldy ykHk vuqikr ifjdfyr dhft,1
8. Current Assets of a Company are Rs 4,00,000 & its current Liabilities are Rs. 1,25,000.
It purchased goods for Rs 75,000 on credit. Calculate the revised current ratio.
,d dEiuh dh pkyw laifÙk 400]000: gS rFkk pkyw nkf;Ro 1]25]000: gSA bl dEiuh }kjk 75]000: dk eky
m/kkj Ø; fd;k x;kA ifjofrZr pkyw vuwikr ifjdfyr dhft;sA
9. Total Assets =Rs 2,60,000; Total Debts Rs1,80,000; Current Liabilities =Rs. 20,000
Calculate Debt = Equity ratio.
dqy laifÙk;kWa=2]60]000:( dqy _.k=1]80]000:( pkyw nkf;Ro=20]000:
_.k lerk vuqikr ifjdfyr dhft;sA
10. Stock =Rs. 70,000; Debtors =Rs.50,000;
Cash = Rs 30,000; Creditors =Rs 50,000
Sales =Rs7,00,000
Calculate Working Capital Turnover ratio.
LVkd=70]000:( nsunkj=50]000: udn=30]000:( ysunkj=50]000: fcØ;=7]00]000:
dk;Zk' hy iwtaW h vkorZ vuqikr ifjdfyr djksA
Comparative and Common Size Statement (4 Marks Questions)
1. From the following, prepare comparative income statement:
Particulars 2006 (Rs) 2007 (Rs)

Sales 108000 1,35,000
Cost of Goods sold 63,000 67,500
Indirect Expenses 18000 22,500
Provision for Tax 5400 9000
2. From the following data you are required to prepare comparative income statements.
Particulars 2007 (Rs) 2008 (Rs)

Sales 1,50,000 1,90,000
Cross Profit Ratio 30% 40%
Office & Admn. Expenses 15% of sales 20% of sales
Income Tax Rate 40% 40%
(480)
3. Mr. Anil Kumar owns a business and provides the following figures for two successive
years :
Particulars Year (I (Rs) Year II (Rs)

Turnover 1,20,000 2,40,000
Cross Profit 30,000 48,000
Mr. Anil Kumar speaks very high of his manager who has increased the profit from Rs
30,000 to Rs 48000 and Labelled him dynamically successful, Do you agree with him? If
not. Why?
4. Prepare a comparative Income statement of 'Rose Ltd':
2005 (Rs) 2006 (Rs)

Sales 1,50,000 3,00,000
Cost of goods sold - 70% of sales
Gross Profit 40% of sales -
Indirect Expenses 10% of Gross Profit 15% of Gross Profit
Income Tax 50% 50%
5. Prepare a Comparative balance sheet along with your comments and interpretation from
the following Balance Sheet.
Liabilities 2006 (Rs) 2007 (Rs) Assets 2006 (Rs) 2007 (Rs)
Accounts Payable 7,00,000 12,00,000 Fixed Assets 46,00,000 70,00,000
Provision for Tax 1,00,000 4,00,000 less: Depreciation (6,00,000) (10,00,000
40,00,000 60,00,000
Long Term Debts 20,35,000 32,28,000 Current Assets 18,00,000 33,00,000
Reserve 16,00,000 8,00,000 Investment 2,25,000 3,20,000
Share Capital 16,00,000 40,00,000 Discount on issue 10,000 8000
of Debenture
60,35,000 96,28,000 60,35,000 96,28,000

6. Prepare a common size income statements from the following income statement:
(Rs) (Rs)
Net Sales 8,80,000 Advertisement 5000
Cost of goods sold 6,60,000 Loss on sales of fixed Assets. 15000
Salaries 48,000 Net Profit 64000
Administrative Exp. 4000
(481)
7. From the following Balance Sheet of ABC publishing house, prepare a common size Balance
Sheet:
Liabilities Rs. Assets Rs
Capital 19400 Machinery 10,000
Long Term Loans 5000 Building 20,000
Reserves 1000 Cash 600
Bills Payable 2000 Debtors 800
Sundry Creditors 5000 Stock 1000
32,400 32,400
Ratio Analysis (4 Marks Questions)

1. Sunshine Ltd. has total assets of Rs. 7,25,000, Fixed Assets Rs 2,50,000 long term debts
Rs.1,25,000, total debts Rs 3,75,000 stock and prepaid rent Rs 37500 and Rs. 12,500
respectively. Find its short term solvency ratios.
2. New Light Ltd. Carry quick ratio 1:1 will current Liabilities Rs,1,20,000. Calculate the
amount of current Assets if sales during the year were Rs 6,00,000, rate of gross profit on
sales is 20%, stock turnover ratio is 5 times and stock at the end of the year is Rs 8000
more than the stock is the beginning of the year.
3. Opening stock is 1.5 times more than the stock at the end. Find the values of opening
stock and closing stock if stock turnover ratio is 8 times and cost of goods sold in Rs. 301000.
4. Calculate the amount of opening Debtors and closing debtors from the following figures
Debtors turnover ratio 4 times, cost of goods sold Rs. 6,40,000. Gross ratio 20%. Closing
1
debtors were Rs. 20,000 more than the opening debtors. Cash sales bring 33 % of
3
credit sales.
5. Calculate Fixed assets turnover ratio if sales Rs 15,00,000 Gross Profit 25% of cost, Fixed
Assets (at original cost) Rs 4,00,000 and total depreciation Rs 1,50,000.
6. If Gross Profit is 25% of the cost, sales Rs 3,06,250, Bills Payable Rs 2000, Credits Rs 4000
and current assets Rs 23500, calculate working capital turnover ratio.
7. A businessman carries an Average stock of Rs 1,56,000. His inventory turnover ratio is 6
times. If he sells goods at a profit of 25% on sales, calculate his profit and sales.
8. Gross Profit of a Company was 45%. If credit sales were Rs 4,00,000 and its cash sales were
90% of the total sales. Indirect expenses of the company were Rs 2,40,000 and direct
expenses were Rs 3,00,000. calculate Net Profit Ratio.
9. If the credit sales is twice the cash sales and cash sales is Rs 6,00,000, selling & distribution
expenses Rs 1,00,000, commission received Rs 10,000 and Net Profit Ratio is 20%, Find
the Gross Profit Ratio.
10. Exact Ltd. has a current ratio of 4:1 and liquid ratio 3:1. If its inventory is Rs 36,000. Find
out the value of total current assets, quick assets and current abilities.
(482)
11. Advantage Ltd has fixed Assets Rs 6,00,000, current Assets Rs 2,10,000 total debts Rs
2,60,000 and working capital Rs 1,70,000. Find its debt Equity Ratio.
12. The following is the Balance Sheet of X Ltd. For the year ended 31st March 2007.
Liabilities Rs Assets Rs.

Share Capital 1,00,000 Fixed Assets 7,00,000
Profit & Loss A/c 32000 Debts 3,00,000
General Reserve 1,25,000 Stock 2,00,000
Loan @12% 4,04,800 Cash 50,000
10% Debentures 2,00,000 Prepaid Expenses 10,000
Creditors 4,03,200 Share Issue Expenses 5000
12,65,000 12,65,000
Calculate (a) Debt Equity Ratio (b) Total Assets to Debt Ratio and (c) Proprietory Ratio.
[Hint :- Share issue expenses will not be part of total Assets for the calculation of above
ratio but will be part of shareholder's funds]
13. From the following particular, determine Debtors at the end of the year : Total sales Rs
4,50,000 cash sales is 1/3rd of total sales, Average collection period 73 days and debtors at
the beginning of the year Rs 65,000.
14. Capital employed Rs 4,20,000, working capital Rs 80,000, cost of goods sold Rs 11,50,000,
Gross Profit Rs 3,58,000, Total Assets Rs 6,00,000. Find Current Assets Turnover Ratio.
15. Gross Profit Rs. 2,00,000 office & Administrative Expenses Rs 20,000, selling &
Distribution Expenses Rs 50,000, interest on Long term debts Rs 16,000. Tax Rs 24000,
Fixed Assets Rs 6,00,000, Current Assets Rs 3,00,000 and current liabilities Rs 250,000
calculate 'Return on Capital Employed'.
16. Calculate Price Earning Ratio from the following:-
Equity share capital Rs 10,00,000, ( Divided into shares of Rs 100 each), Reserve & surplus
Rs 2,30,000, 10% Debentures Rs 5,00,000, 15% Unsecured loan Rs 3,00,000, operating
profit Rs. 11,45,000, Market Price per share Rs 262.50, Income Tax Rate 50%.
17. A company had a liquid ratio of 1:5:1 and current ratio of 2:1 and inventory turnover ratio
6 times. It has total current assets of Rs 800,000. Find the amount of annual sales if goods
are sold at 20% profit on sales.
(483)
18. Calculate (a) Net Profit Ratio (b) Debt-Equity Ratio (c) Quick Ratio
Particulars (Rs) Particulars (Rs)

Paid up capital 10,00,000 Indirect Expenses 1,00,000
Capital Reserve 1,00,000 Current Assets 2,55,000
12% Debenture 4,35,000 Current Liabilities 1,50,000
Net Sales 7,00,000 Opening Stock 25000
Gross Profit 4,00,000 Closing Stock-20%. more
Commission received 50.000 than opening Stock
19. The ratio of current assets (Rs. 5,00,000) to current liabilities (Rs 400,000) is 5:4, the
company decided to make it an ideal current ratio by making payment for Bill Payable.
Calculate the amount paid for Bills Payable.
HOTS
20. Mr. Zeeshan owns a business and gives the following figures : -
Particulars 2007 2008

Sales 18,00,000 36,00,000
Gross Profit 4,50,000 7,20,000
Current Assets 6,00,000 9,00,000
Current Liabilities 3,00,000 5,00,000
Mr. Zeeshan is of the opinion that his manager is very efficient as there is an increase in
profit from Rs 1800,000 to 36,00,000 by his efforts. Moreover, he also thinks that his
business's short-term financial position has also become stronger as current labilities has
increased by Rs 200,000 where as current assets has increased by Rs 3,00,000, comment.
(484)
CASH FLOW STATEMENT
POINTS TO REMEMBER
l Meaning of Cash Flow Statement : A Statement Showing changes in Financial
position of a business during different intervals of time in terms of cash and cash equivalents
is known as cash flow statements.
l Objectives
(i) To assess flow from different activities separately.
(ii) To assess deviation of cash and cash equivalents from related net earnings.
(iii) Helps in formulating dividend policy.
(iv) Helpful in financial planning.
(v) Helps in preparing cash budget.
(vi) For judging the operational efficiency.
(vii) Statutory requirement.
l Business activities as per (AS - 3) revised are divided into three parts.
(i) Cash flow from operating activities : The operating activities of an enterprise
refer to revenue producing activities. They include all those activities, which are
helpful in ascertaining net profit or net loss of an enterprise.
(ii) Cash flow from investing activities : Investing activities of an enterprise refer
to purchase and sale of fixed assets and investments which are not held for resale
purpose.
(iii) Cash flow from financial activities : All those activities of an enterprise which
result in the change in capital and borrowing are referred to financial activities.
OPERATING ACTIVITIES
Cash Inflow Cash outflows
(i) Cash sales (i) Cash purchases
(ii) Cash received from debtors. (ii) Cash paid to creditors.
(iii) Cash received from royalty, (iii) Payment of operating expenses.
fees and commission.
(iv) Insurance claim received for loss (iv) Tax paid.
of stock.
(485)
INVESTING ACTIVITIES
Cash inflows Cash outflows
(i) Sales of fixed assets. (i) Purchase of fixed assets.
(ii) Sale of investment. (ii) Purchase of investment.
(iii) Interest and dividend received. (iii) Payment of capital gain tax.
(iv) Insurance chain received for
destruction of fixed assets.
FINANCING ACTIVITIES
Cash inflows Cash outflows
(i) Issues of shares for (cash). (i) Loan paid (short term as well as long term).
(ii) Issue of debentures for (cash). (ii) Redemption of preference shares.
(iii) Issue of bonds for (cash). (iii) Buy-back of equity shares.
(iv) Borrowing in cash (short term (iv) Redemption of Debentures for cash.
as well as long term (v) Payment of interest and dividend.
(vi) Payment of inter in dividend.
Limitations
(i) Non - cash transactions are ignored
(ii) Historical in nature.
(iii) Misleading results if based on wrong data.
(iv) Ignores basic accounting principles.
(v) Mere duplicacy of work.
There are two methods of preparation of cash flow statement.
(i) Direct method.
(ii) Indirect method.
l Extra Ordinary items : Extra ordinary items indicate items which result in cash
receipt or payment out of natural disasters like proceeds from earthquake disaster
settlement, payment for blood, payment for food relief etc. It may also include extra
ordinary items arising from business operations like receipt/payment resulting, out
of a legal proceeding in a court of law.
l Treatment of some special items according to As - 3 (revised)
1. Treatment of interest : Treatment of interest depends upon the nature of business
enterprise.
(i) If it is a financial enterprise : Cash flow interest part and interest received
(486)
should be treated as cash flow from operating activities.
(ii) If it is a non financial enterprise : Cash flows from interest paid should be
treated as cash flows from financing activities while interest received should be treated
as cash flows from investing activities.
2. Treatment of Dividend : This depends upon the nature of business enterpris. AS
-3 (revised)
(i) If it is financial enterprise : Cash flows from dividend received should be treated
as cash flows from operating activities. Cash flows from dividend paid should be treated
as cash flows from financing activities.
(ii) If it is a non financial enterprise : Cash flows from dividend received should be
treated as cash flows from investing activities. Cash flows from dividend paid should
be treated as cash flow from financing activities.
Note : Dividend paid should always be treated as cash flows from financing activities.
Theoretical Questions
1. What is Cash Flow Statement?
2. What is meant by cash Equivalents?
3. State the objectives of Cash Flow Statement?
4. Classify the following into operating, Investing and Financing Activities.
(i) Goods Sold
(ii) Operating Expenses
(iii) Machinery purchased
(iv) Interest Paid
(v) Cash received from Debtors
(vi) Cash received as royalty
(vii) Interest received
(viii)Debentures issued for cash
(ix) Redemption of preference shares
(x) Purchase of furniture
(xi) Payment to creditors
(xii) Cash Purchases
Cash Flow Statement (1 Mark Questions)

1. Identity the transanctions as belonging to
(a) Operating activity
(487)
(b) Investing Activity
(c) Financing Activity
(i) Interest income received by a Bank
(ii) Interest income received by a non - financial Company.
(iii) Commission & Royalty received
(iv) Purchase of Goodwill
(v) Buy back of equity Shares
(vi) Selling & distribution expenses
(vii) Income tax refund received
(viii) Cash received from Debtors
(ix) Rent received by a company whose main business is manufacturing.
(x) Purchase of Investment
(Each part carries 1 mark)
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2. Give any two examples of Cash Equivalents
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3. A Ltd. Made Profit of Rs. 2,70,000 before considering depreciation on machinery 5,000 &
profit sale of furniture Rs 20,000. State the amount to be shown as Cash Flows from
Operating Activities.
4. Purchase of machinery Rs 1,00,000; Sale of motor vehicle Rs 50,000; Diffident received by
the firm Rs 5,000. Calculate cash flow from investing activities.
5. Issue of Share Capital Rs 60,000; repayment of Bank Loan Rs 40,000; Payment of Dividend
Rs. 5,000. Calculate Cash Flow from Financing Activities.
(488)
6. A machine purchased for Rs 50,000 (Accumulated Depreciation thereon Rs 10,000) is sold
for Rs 32,000. Calculate Profit or loss on sale of machine.
7. State why non - cash transactions are ignored while preparing a Cash Flow Statement?
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8. When is Dividend received considered as operating Activity?
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9. Give an example of Extraordinary item in Operating Activity.
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10. Give an example of an extraordinary item in Investing activity.
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11. Give an example of an extraordinary item in financing Activity.
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3 marks Questions
1. The balance of plant and Machinery account and Accumulated Depreciation account as on
March 31,2008 and 2009 stood as follows:
Name of Account March 31, 2008 March 31, 2009

Rs. Rs.
Plant & Machinery 24,00,000 32,70,000
Accumulated Depreciation 7,02,500 11,05,000
Plant & Machinery costing Rs 6,40,000 accumulated depreciation thereon Rs. 2, 65,000
was sold at a loss of Rs. 1,30,000.
You are required to :

(i) Compute the amount of plant & Machinery purchased, sold and depreciation charged
for the year.
(ii) How each of the item related to plant & Machinery will be inserted in the statement
of cash flows.
2. Dynacons. Ltd. provides you the following information :
Rs.
Investments as on Dec. 31, 2009 2,40,000
Investments as on Dec. 31, 2008 80,000
During the year 2008, the company sold 80% of its original investments at a profit of 20%
on book value. Calculate sources and uses of cash.
(489)
3. From the following information, calculate cash from operating activities:
Rs.
Profit & loss A/c on Jan.1, 2008 (Debit) 24,000
Profit & loss A/c on Dec.31, 2008 (credit) 1,20,000
Writing off Preliminary Expenses 20,000
Transfer to General Reserve 80,000
Transfer to Provision for Doubtful Debts 12,000
Increase in Debtors 64,000
Creditors on Jan.1, 2008 1,20,000
Creditors on Dec. 31, 2008 1, 04,000
Prepaid Expenses on Jan. 1, 2008 15,000
Prepaid Expenses on Dec. 31, 2008 10,000
Outstanding Expenses on Jan. 1, 2008 8,000
4. From the following particulars, calculate cash flows from investing activities.
Purchased (Rs.) Sold (Rs.)

Land & Building 10,00,000 ____
Machinery 6,80,000 9,00,000
Investments 8,20,000 3,00,000
Patents _____ 1,20,000
Rs.
Dividend received on shares held as Investments 20,000
Interest received on debentures held as Investments 16,000
Dividend paid on equity share capital. 1,00,000
5. Calculate cash flows from financing activities from the following particulars:
March 31, 2009 March 31, 2008
Rs. Rs.
Equity Share capital 24,00,000 14,00,000
8% Preference Share capital ____ 2,00,000
9% Debentures 4,00,000 ____
7% Debentures ____ 2,00,000
(490)
Additional Information:
(i) Equity Shares were issued at a discount of 2%
(ii) 8% Preference shares were redeemed at a premium of 2%
(iii) 9% Debentures were issued at a discount of 1% and 7%
Debentures were redeemed at a premium of 5%
(iv) Underwriting commission on Equity shares was paid @ 2.5%
(v) Interest paid on 7% debentures Rs. 14,000.
(vi) Dividend paid on preference shares Rs. 16,000.
6 Marks Questions (Cash Flow Statement as per AS - 3 Revised)
1. From the following Balance Sheet of 'XYZ Ltd.' Prepare cash flow statement.
Liabilities 31.03.08 31.03.09 Assets 31.03.08 31.03.09

(Rs.) (Rs.) (Rs.) (Rs.)
Equity Share Capital 80,000 1,00,000 Good will 10,000 8,000
General Reserve 4,000 6,000 Land and Building 20,000 10,000
Profit and loss A/c 3,600 5,400 Plant 18,000 38,200
Proposed Dividend 5,600 7,800 Stock 15,600 21,000
Provision for Tax 6,400 7,200 Cash 42,600 59,600
Outstanding Exp. 8,600 11,800 Preliminary Exp. 2,000 1,400
1,08,200 1,38,200 1,08,200 1,38,200
Additional Information :- Depreciation has been charged on land and Building Rs. 10,000
and on Plant Rs. 5,000 during the year.
2. From the Balance Sheet of Rakesh Industries Ltd'. Prepare a Cash flow Statement.
Liabilities 31.3.08 31.3 09 Assets 31.3.08 31.3.09

(Rs) (Rs) (Rs) (Rs)
Equityshare Capital 1,78,000 2,10,000 Fixed Assets 2,40,000 4,00,000
Research and Surplus 84,000 1,00,000 Less: Accumulated Dep. 64,000 1,20,000
Bank Loan 1,60,000 1,40,000 1,76,000 2,80,000
Current Liabilities 2,58,000 2,54,000 Goodwill 64,000 56,000
Proposed Dividend 36,000 48,000 Debtors 3,20,000 3,32,000
Income Tax Payable 20,000 24,000 Bank 1,76,000 1,08,000
7,36,000 7,76,000 7,36,000 7,76,000

(491)
Additional Information :-
(i) During the year a part of the machinery costing Rs. 40,000 was sold for Rs. 20,000.
(ii) Depreciation provided during the year Rs. 80,000.
(iii) Interim Dividend paid during the year Rs. 20,000.
3. From the following Balance Sheets of 'Dev Ltd'. Prepare Cash flow statement .

(Rs) (Rs) (Rs) (Rs)
Equity Share Capital 3,00,000 2,75,000 Fixed Assets 3,25,000 3,25,000
9% Preference share 80,000 50,000 Investments 20,000 45,000
capital
8% Debentures 50,000 1,00,000 Current Assets. 90,000 1,52,500
Reserved & Surplus 10,000 50,000 Bank 25,000 30,000
Current liabilities 30,000 85,000 Discount issue 10,000 7500
of Equity shares
4,70,000 5,60,000 4,70,000 560,000
Additional Info : (i)A part of the Machine costing Rs. 40,000 (Accumulated Depreciation thereon
Rs. 25000) was sold for Rs. 7,500.
(ii) Depreciation charged during the year Rs. 25,000.
4. From the following Balance Sheets of Shivani Ltd. Prepare cash flow statement.

(Rs) (Rs) (Rs) (Rs)
Equity Share Capital 1,75,000 3,47,500 Fired Assets (Net) 7,01,500 9,89,000
15% Preference share 2,30,000 1,72,500 Investment (long term) 29,500 52,500
Capital Investment (short term) 10,750 14,200
12% Debentures 198750 2,30,000 Debtors 52,000 36,150
Reserve 126500 3,42,500 Stock 40,000 34,000
Provision for Bank 5750 2300
Doubtful debts 11,500 13,800 Cash 1,150 9,200
Current liabilities 95,450 17250 Discount on issue of 9200 6900
Provision for Taxation 12650 20,700 Shares
8,49,850 11,44,250 8,49,850 11,44,250

(492)
Add: info: (i) Preference Shares were redeemed on 31.3.2001 at Premium of 10%
(ii) Dividend at 12% was paid to Equity shares for the year 2007-08.
(iii) Depreciation provision stood at Rs. 1,15,000 on 31.3.2008 and Rs. 1,72,000 on
31.3.2009.
HOTS
5. From the following Balance Sheets of Aradhya Ltd. Prepare Cash flow Statement as per
AS - 3 (Revised)
Liabilities 31.3 08 31.3.09 Assets 31.3.08 31.3.09

(Rs.) (Rs.) (Rs.) (Rs.)
Equity Share Capital 84,000 92.000 Goodwill 18,000 15,600
Profit & loss A/c. 39.600 44,000 Other fixed Assets 1,12,000 152,000
Accumulated Dep. 32,400 27,200 Short-term Investment 8,000 4,800
Securities Premium 8,000 12,000 Other Current Assets 29,600 22,400
Current Liabilities 40,000 44,000 Preliminary Exp. 30,000 19,600
Discount Issue of shares 6,400 4,800
204,000 2,19,200 2,04,000 2,19,200

Add Info :
(i) Depreciation Provided during the year Rs. 17,600. A Part of the Machine costing Rs.
12,400 had been condemned and Scrapped.
(ii) Assets of Another company were purchased and Purchase consideration was paid as
under:
(a) Issuing Rs. 8,000 Equity shares at Premium.
(b) Balance in Cash.
HOTS
6. From the following Balance Sheets, Prepare cash flow statement for Vaibhav Ltd.
Liabilities 31-3-08 31-3-09 Assets 31-3-08 31-3-09

(Rs.) (Rs.) (Rs.) (Rs.)
Equity Share Capital 3,00,000 4,00,000 Goodwill 50,000 46,000
Profit & loss A/c 1,70,000 2,00,000 Land & Building 160,000 1,30,000
12% Debenture 50,000 - Plant & Machinery 80,000 72,000
Bank Loan - 30,000 Long term Investment 1,00,000 2,20,000
Provision for taxation 16,000 19,000 Debtors. 40,000 50,000
Current Liabilities 42,000 40,000 Stock 25,000 41,000
Cash & Cash Equivalents1,23,000 1,30,000
5,78,000 689000 57,8000 689,000
(493)
Additional information :- Dividend of Rs. 50,000 was proposed and paid during the year.
Income tax paid during the year includes Rs. 3,000 on account of Dividend Tax. Moreover,
during the year, Land and Building worth Rs. 30,000 was sold at a profit of 12.5% . The
rate of Depreciation as Plant and Machinery is 10%.
7. From the following Balance Sheets of PVR Ltd; Prepare cash flow statement.
Liabilities 31-3-2009 31-3-2008 Assets 31-3-2009 31-3-2009

(Rs) (Rs) (Rs) (Rs)
Equity Share Capital 210,000 1,85,000 Fixed Assets 2,10,000 2,12,000
12% Preferences 40,000 45,000 Less; Accumulated 30,000 22,000
Share Capital Depreciation
General Reserve 6,000 4,000 1,80,000 1,90,000
Profit & Loss A/c 4,400 2,000 Debtors 58,000 50,000
12% Debenture 12,000 10,000 10% Investment 80,000 70,000
Creditors 26,000 28,000 Prepaid Exp. 2,000 1,600
Provision for Tax 8,400 6,000 Cash in hand 6,000 9500
Proposed Dividend 11,600 10,000 Discount on 12%. 900 1400
Debentures
Bank overdraft 11,500 35,000 Discount on Equity
Share capital 3000 2,500
3,29,900 3,25,000 3,29,900 3,25,000
Additional info :
(i) Fixed Assets sold for. Rs. 10,000, Their cost Rs. 20,000 and Accumulated depreciation
till the date of sale of them Rs. 6000.
(ii) The interim dividend during the year Rs. 6,000
(iii) Tax Paid Rs. 7000.
(iv) Discount on 12% Debentures written off during the year was Rs. 800.
(494)
HOTS
8. From the following information, prepare cash flow statement.
Balance Sheets as at March 31,2008 and 2009
Liabilities 2009 2008 Assets 2009 2008
(Rs) (Rs) (Rs) (Rs)

Equity Share Capital 8,00,000 5,00,000 Goodwill 1,50,000 1,00,000
Profit & Loss A/c 3,50,000 2,00,000 Buildings 2,50,000 4,00,000
6% Debentures - 1,00,000 Land 1,00,000 1,50,000
Bank Loan 50,000 - Plant and Machinery 1,20,000 1,50,000
Provision for tax 65,000 50,000 10% Investment 75,000 50,000
Trade creditors 55,000 50,000 Stock 1,50,000 60,000
Bills Payables 25,000 55,000 Treasury Bills 4,00,000 25,000
Cash 1,00,000 20,000
13,45,000 9,55,000 13,45,000 9,55,000

Additional Info:
(i) Equity Share Capital issues includes shares issued for cash Rs. 1,50,000 and for
Purchase of goods, Rs. 1,00,000
(ii) Investment costing Rs. 10,000 were sold at a loss of 15% on 1st Oct. 2008 and on the
same date new Investment was purchased.
(iii) Rs. 60,000 paid as dividend during the year.
8. Rs. 1600
9. Section 117- C (i) Of the Companies Act, 1956 requires a Company to transfer out of profits
an adequate amount to Debenture Redemption Reserve before the actual redemption of
debentures.
10. Redemption of debenture by draw of lots.
(495)
Answers
Not for Profit Organisation

1 mark questions
1. Entrance fees Rs 30,000 (i.e. 60%. of Rs. 50,000) will be credited to 'Income & Expenditure
Account' and Rs 20,000 (i.e. 40% of Rs 50,000) will be added to capital fund in the Balance
Sheet.
2. Closing Balance of tournament fund = O.P. Balance+Collection-expenses = Rs10,000 +
Rs 5,000-Rs. 3,000 = Rs12,000.
3. Acrual basis or acrual concept
4. 'Income & Expenditure Account' records items of revenue nature only whereas 'Receipt &
Payments Account' records items of both revenue & Capital nature.
5. Subscription appearing on the credit side of Income Expenditure Account = 20,500-4,500
= Rs. 16,000. Subscriptions that would appear on the liabilities side after Balance Sheet
= Rs. 4,500.
6. Stationary Consumed=Opening Stock +Purchases-Closing Stock=Rs 9,000+Rs. 45,000-
Rs. 7,000= Rs. 47,000.
7. The donation will be shown on the liabilities side of the Balance Sheet.
8. Opening Balance of Capital Fund=Cash+Subs.
Outstanding+Books+Furniture-Rent o/s=14,000+500+20,000+5,000-1,500=Rs. 38,000.
9. It is a capital receipt & Shown on the liabilities side of the Balance Sheet till the membership
ceases and after that it will be transferred to the capital fund.
10. It will be added to both prize fund Account & Prize Fund investment Account in the
closing Balance Sheet of a Non Profit earning organization.
Ans of 3 Marks Questions.
1. Rs 5000
2. I/E A/C - Rs 2,20,000/-
B/S Rs. 1,00,000 Assets
3. I/E A/C Rs. 60,000 Cr. B/s Rs 40,000 Liability side
4. Rs 19200
5. Rs 1,50,000
6. Rs 9900
7. Rs 4960
Ans of 6 Marks Questions.
(496)
1. Surplus Rs. 25,000, B/s Rs. 2,32,500
2. Surplus Rs. 700, Capital Fund (Opening) Rs. 24,700, B/s Rs. 26,000
3. Surplus Rs. 13,000, Capital Fund (Opening) Rs. 3,39,000, B/s Rs. 3,77,000
4. Surplus Rs. 784, (Opening) Deficiency Rs. 10,104, B/s Rs. 51,928
FUNDAMENTALS OF PARTNERSHIP
Past adjustment (4 Marks Questions)
1. Salman (Dr) - Rs. 100, Yusuf Dr - Rs. 400, Amit Dr - 500
2. Z Dr - Rs. 135, X Dr - Rs. 120, Y Dr - Rs. 15
3. Late Dr - Rs 41000 Asha - Dr - Rs 41,000
4. Gaupha Dr 10,00,000 Virender Dr 4,50,000 Yuvraj Dr - 14,50,000
5. Intevest in Capital Rathore Rs. 4300 Bindra - Rs. 3900
1 Mark Questions
1. Yes when a partner is a minor.
2. The partnership deed is necessary to avoid disputs as it governs relationship among
partners.
3. Interest on Drawings=Total Drawings X Rate of interest/100 X 6½/12
4. 'A' is right or in the absence of any such case in the partnership deed a partner who has
advanced a loan to the firm is entitled to interest @ 6% P.A even if there is a loss to the
firm.
5. Average period = Total period / 2 =4½ months
Interest Drawings = Rs 18,000 X 4½ / 12 X 10/100 = Rs. 675
6. Commission = 10/110 X 33,000=Rs. 3,000
7. A's Gain = 3/5-1/2=6-5/10=1/10
Amount to be credited to A =1/10 X 60,000=Rs. 6,000
8. Capital Account & Current Account
9. Rs10,000 [1/5 X 50,000=Rs10,000]
4 Marks Questions
1. Profit = 32430 Shared as Gita = 4172; Rita = 4172, Sita = 2086
2. Profit = 178500 distributed as 97,000 & 81,500
3. 720; 1440; 1440
4. Y = 5000 Rs; Z=Rs 9,000.
5. Capital Ratio = 5:6
(497)
Reconstitution of Partnership (Answer)
Changes in PSR - Sacrifice & Gaining sli/o among existing partners
1. 'A' gains & B racrifices 1/14 in Share
2. Sacrificing ratio= Old Share - New Share
3. Gaining =New Share -old Share
4. New ration = 1:1
5. (i) Retirement of a partner (ii) Death of a partner
Goodwill - Factors and Valuation

1. Goodwill = (20,000-6,000)X3=14,000X3=Rs 42,000
4. Capital value for profit = 60,000 X100/10=Rs 6,00,000
Goodwill = 6,00,000-4,80,000=Rs 1,20,000
5. Average profit = 70,000+1,20,000+80,000/3=Rs,2,70,000/3=Rs 90,000
Goodwill = Rs 90,000X2=Rs 1,80,000.
Reconstitution of Partnership
(b) Accounting for Revaluation of Assets and Liabilities
1. Revaluations A/c Dr
To Unrecorded Liability
2. Accumulated Reserves Dr
To Partner's Capital A/c's
3. A'S capital Account will be debited by Rs 6,000.
4. Revaluation A/c Dr 12,000
To A'S capital A/c 8,000
To B's capital A/c 4,000
5. Admission & Retirement of partner.
Admission of Partner (Answer)

1. 3:2 [Hint :- When the old partner's continue to share profit's among themselves in the
same ratio then the sacrificing ratio is equal to old profit sharing ratio]
2. Sacrificing ratio
3. Premium A/c Dr (Amt brought in cash)
In coming partner capital A/c Dr (Shortfall)
To Sacrificing partner's capital A/c
(498)
4. Thy are credited or debited as the case may be in the capital/current accounts of the old
partner in their old profit sharing ratio.
Change in Profit Sharing Ratio
1. Goodwill - Rs. 21000
2. Goodwill - Rs. 40 000
3. Goodwill - Rs. 100,00
6. Asecrificies - 9/42 B secrificies 2/42 and C gains 11/42
7. X's secrifice - 1/9 Z's gains -1/9
8. A/c Debited with Rs. 1600 R's A/c Dr. Rs. 1600 and P's A/c Cr. Rs. 3200
9. Profit on revaluation - Rs. 5000 and Balance Sheet Total Rs. 62000
10. Journal Eulries
11. X Secrifice 6/30 Y's gains1/30
Admission of a Partner
3 Mark Questions
1. New Ratio 8:4:3 secrificing Ratio 2:1
2. New Ratio 34:17:9 secrificing ratio 2:1
3. New Ratio 2:1:1 secrificing 1:1
4. New Ratio 12:7:5:6
5. New Ratio 2:2:1
6. Reshma & Shyama secrificing 1:1 and Prema is gaining 1/6]
7. New Ratio 2:1:1, secrificing 1:1
Admission of a Partner (6 Marks Questions)

1. Revaluation Profit Rs 2000; New Ratio 9:3:8.
Total of Balance sheet Rs. 51,900.
2. Loss or Revaluation Rs. 36,800; Capital Chetna Rs. 1,45, 250; Priyanka Rs. 50,750; Barkha
Rs. 40,000.
Balance Sheet total Rs. 3,08,000 New Ratio 4:3:1.
3. Loss in Revaluation Rs. 44,000
Capital A/cs. Radha Rs. 43,250; Krishan Rs. 42,750:
Sudama, Rs. 30,000; Balance sheet total Rs. 2,21,000.
(499)
4. Loss on Revaluation Rs. 30,600; Partner's Current Accounts Ritika Rs. 1,08,175. Swati Rs.
64,225.
Partner's Capital A/cs. Ritika 95,500; Swati 69,000;
Rahul 75,000: Balance sheet total Rs 5,04,400.
5. Profit on Revaluation Rs. 38,700;
Partners Capital A/c. Suneet Rs. 79050; Sumeet Rs. 103,200 and C Rs. 36,450l; balance
Sheet total Rs. 3,42,000
Hidden Goodwill Rs. 69,300 C's share Rs 11,550 Seneet Also gaining, so his capital A/c will
be debited by Rs. 6,930.
6. Profit on Revaluation 10968; Partner Capital A/cs. Pratibha Rs. 254901; Priyanka Rs.
84,967 Manish Rs. 84967.
Current A/cs. Pratibha 64,900 (Dr)
Priyanka Rs. 64900 Cr.
Balance sheet total Rs. 587923
7. Profit on Revaluation Rs. 3,000; Partners Capital A/cs. Dhanraj 84,400; Manish 62,600;
Mohit Rs 55,000;
Current A/c Mohit Dr. 6,000
Balance sheet total Rs. 3,10,000.
8. Revaluation Profit Rs. 3,650; Capital A/cs. Aman Rs. 32825 Arun 18095; Aradhya Rs. 12,
730.
Balance sheet total Rs.- 1,13,150.
9. Loss on Revaluation Rs. 11,100 Capital A/cs. Dinesh Rs. 32,000; Dev Rs. 48000; Vaibhav
Rs. 80,000, Deepak Rs. 32000; Cash A/c 1,00,100; B/s total 3,00,300.
10. Revaluation Profit Rs.3,200; Capital A/cs. Swati Rs. 25,240 Shikha Rs. 92,60 Pushpa Rs.
6,000 B/s total Rs. 75,300
Hints: for point (ii) Premium A/c Dr. 4800
To Swati's Loan A/c 2880
To Shikha's Loan A/c 1920
(Premium for goodwill transferred to the loan A/c of old partners)
11. Pevaluation loss Rs 21,000; capital A/cs. Sanjeev Rs 90.000; Mukesh 50,000; Anil 40,000;
Manju Rs. 60,000 Amount brought by sanjeev 20,200; Amount paid off to Mukesh Rs.
15,000; Anil Rs. 8,000 B/s total 2,63,000.
(500)
Retirement & Death
(1 Marks Questions)
1. A'S New share =1/3+2/3x1/3=1/3+2/9=3/9+2/9=5/9
B'S Share=1-5/9=9-5/9=4/9
New ratio =5:4
2. Old ratio
3. 'L' Debited by Rs 13,000; 'O' Debited by Rs 11,000 & M credited by Rs 94,000.
4. Deceased Partner's Executor Account.
5. On the basis of time ; on the basis of turnover (sales)
6. Hidden Goodwill
7. No.
8. Debited by Rs. 400.
9. 'A' will bring in Rs. 20,000 & B will receive Rs 30,000 from the firm.
10. 19:21
6 Marks Questions (Retirement of a Partner)
Q.1 Revalation loss - 21000, B's loan A/c - Rs. 47000, Balance Sheet Total - 139700
Q.2 Profit on Revalation - Rs. 18000, Balance Sheet Total - 154800
6 Marks Questions (Death of a Partner)
1. Rs. 444
2. Rs. 56340
3. Profit - Rs. 6000, B/s - 131800
4. Rs. 68097
5. Rs. 10,06,700
Dissolution
(1 Marks Questions)
1. In dissolution of firm the business is discountinued but in case of dissolution of partnership
the business continues.
2. When the total of 'Debit' & 'Credit' side of cash account are equal & there is to balance
S/ctreatment of Dissolution is complete.
3. Revolution Account is prepared at the time of admission, retirement of death of a partner
while Realization Account is Prepare at the time of Dissolution of partnership firm.
(501)
4. Realization A/c Dr. 20,00
To Z's Capital A/c 20,000
5. Losses, including deficiencies of capital, shall be paid first out of profit, then out of capital
and lastly, if necessary, by the partners individually in the proportion in which they were
entitled to share profits.
6. All the partners are liable jointly & severally for firms debit whereas the concerned partner
is liable personally for his private debt.
7. Realizations A/c Dr. 1,900
To B's Capital A/c 1,900
8. B's capital A/c Dr. 300
To Realisation A/c 300
9. 6/100x1/12 x 50,000=Rs 250
10. Like any other asset goodwill is transferred to the Debit ride of Realisation account at
book value the amount realised for it is credited to realisation Account.
Long Questions (Dissolution)

7. Loss on Realisations Rs 1,07,600; Amount paid to Partners caps : Rs 16200 Y : Rs 68133 Z
: 96667; Total Bank A/c: Rs 22,5000
8. Profit on Realisation: Rs 1,94,820; Amount paid to Rahul : Rs 286410, Sachin : Rs 1,14,940
and amount paid by Mohit : Rs 38530; Bank A/c Total Rs 4,85,950
9. Loss on Realisations : Rs 1, 84000; Amount paid to Birbal Rs 3,33,600, amount paid by
Vinod: Rs 47,600: Total of Bank A/c : Rs 4,57,600
10. Loss on Realisation : Rs 55,500; Amount paid to Pooja Rs 4450, Jyoti Rs 2500; amount
paid by Anamika Rs 8750; Total of cash A/c : Rs 75000.
11. Loss on Realisations : Rs 1,16,000; Amount paid to Manju Rs 1,17,600, Anju Rs 87600 and
amount paid by Sanju Rs 15200; Total of Bank A/c Rs 2,58,800
12. Loss on Realisation : Rs 13600; Amount paid to Aman Rs 11380 and amount paid by Arun
: Rs 28120 and by Asha : Rs 5660; Total of Bank A/c Rs 67380.
(502)
Accounting for Share Capital
Answers 1 Marks
1. Reserve Capital is Created out of uncalled capital whereas capital Reserve is created out of
Capital Profit.
2. In Preference Share rate of dividend is fixed while in equity Share, the rate of dividend is
decided by Board of Directors year to year.
3. No.
4. No.
5. Any two of the following :-
(i) Full allotment to some & rejection of other applications.
(ii) Pro-rate allotment to all
(iii) A Combination of full allotment & pro - rata allotment.
6. 5 % P. a.
7. 6 % P. a.
8. Surdry Assets A/c Dr 1,00,000
Goodwill A/c Dr 10,000
To Surdry liabilities 40,000
To Vendor Company, A/c 70,000
9. Share Capital A/c Dr. 100
To share forfeited A/c 80
To Share final call A/c 20
10. Amount available for 60 share = Rs 600
less used Rs. 400
To be transferred to
Capital Reserve Rs. 200
Answers (3 Marks Questions)

1 Capital Reserve = Rs 1,200
2 Capital Reserve = Rs 600
3 Capital Reserve = Rs 21,000
5 Capital Reserve = Rs 10,25 (Rs 800 from 75 shares+Rs 225 from 25 shares)
(503)
7 Capital Reserve = Rs. 80
8 Interest on calls-in-Arrears = Rs 62.50
9 Interest on calls-in-Advance Rs 15
10 Interest on calls-in-Advance Rs 187.50+Rs 187.50=Rs 375
11 a) 990 shares issued b) 900 shares issued c) 11,00 shares issued.
12 5,500 shares issued.
13 Goodwill Rs 40,000
a) 54,000 shares issued b) 45,000 shares issues c) 60,000 shares issued
14 Capital Reserve Rs 50,000; 9000 shares issued
15 Goodwill A/c/Incorporation cost A/c Dr. 40.000
To share capital A/c 40,000
16. (a) Goodwill Dr. 2,00,000
To Share capital 2,00,000
b) Underwriting commission A/c Dr 1,00,000
To Underwriter's A/c 1,00,000
c) Underwriter's A/c Dr. 1,00,000
To share capital A/c 1,00,000
17 Total of Balance Sheet Rs 5,00,325
Answers :- Shares (8 Marks)
1 Amount received on :- Application = Rs 32,000 Share first call = Rs 14,500
Allotment = Rs 15,500 Share Second call =Rs 12,000
Balance sheet
Liabilities Rs. Assets Rs
Share Capital Curraut Assets
Authorized Cash at Bank 74000
50,000 Shares of Rs. 10 each 5,00,000
Issued & Subscribed
16000 Share of Rs 10 each
Paid up 1,60,000
16,000 Shares of Rs 10 each
Rs 5 called up 80,000
Less:Calls unpaid 6,000 74,000
74,000 74000
(504)
2 Amount received on allotment Rs 90,160 (excluding amount transferred from application),
First call Rs 57,000, share final call Rs 38,000.
(ii) Balance in calls in Arrear A/c Rs 6,840
3. Allotment money received Rs 1,65,500 (excluding amount transferred from application
money); capital Reserve Rs 2,500.
4 Capital Reserve Rs. 600.
5. Balance Sheet
Share Capital: Rs. Current Assets: Rs.
Authorized: Rs.20 Cash of Bank 69,000

50,000 Shares of Rs. 20 each 10,00,000
Issued & Subscribed
18,000 Shares of Rs 20 each 90,000
Paid up
18,000 Shares of Rs 20 each
Rs 16 called up 72,000
Less - calls in arrear 3,000 69,000
69,000 69,000
6. Interest on calls in Advance Rs 1,350
Interest on calls in Arrears Rs 366.67
7. Capital Advance Rs 1,200
8. Capital Advance Rs 2,240
9. Entry for re-issue:
Machinery A/c Dr. 35,000
Share forfeiture A/c Dr 3,000
To share capital A/c 30,000
To Bills Payable A/c 8,000
Capital Reserve = Rs 19000.
10. Share forfeiture A/c (cr.) =Rs. 26,000
11. Capital Reserve = Rs 1,590 (Rs. 1,020 from 250 shares and Rs 570 from 150 shares)
12. Capital Reserve = Rs 3,850 (Rs 2,600 from 400 shares and Rs 1250 from 250 shares)
13. Capital Reserve = Rs 6,000; Cash Balance Rs 21,81,000; Balance Sheet total Rs 21,91000
14. Capital Reserve Rs 720.
15. Capital Reserve Rs 438.
(505)
Debentures
Issue of Debentures (1 Marks Questions)
1. Share cannot be converted into denenture but viceversa truc.
2. No. of debenture=Purchase Consideration/Issue price of debenture =1,10,000/1000
debentures
3. Return on debenture is definate & gets priority over payment of dividend to shareholders.
4. Debenture Surpense/Ac Dr.
To X% Debenture A/c
5. Bank A/c Dr.
Loss on issue of Debenture A/c Dr.
To X% Debenture A/c
To Premium on redemption of Debenture A/c
6. Secured Loan
7. Goodwill Account (Debited)
8. Capital Reserve Account (Credited)
9. Rupees 1,50,000
10. Fixed instalment method
Redemption of Debentures (1 Marks Questions)

1. Capital Reserve Account
2. 900 Shares
3. 11000 Shres
4. (i) When the period of debenture is less than 18 months.
(ii) When the company is engaged in development of infrastructure.
5. (i) To take advantage of discounted prices of debentures.
(ii) To save on payment of interest.
6. General Reserve
7. Profit & Loss Appropriation A/c Dr 13921.
To sinking Fund A/c 13921.
8. Rs. 1600
9. Section 117-C (i) Of the Companies Act, 1956 requires a Company to transfer out of profits
an adequate amount to Debenture Redemption Reserve before the actual redemption of
debentures.
(506)
10. Redemption of debenture by draw of lots.
DEBENTURES (3 marks)
1. P & L A/c - Rs 10,000 every year
2. P & L A/c debited with 30,000 each year
3. Rs 2,000; Rs 16,00; Rs 12,00; Rs 800 Rs 400
4. Rs 40, 000 Rs 40,000 Rs 36,000 Rs 28,000 Rs 16,000
5. Rs 9,000x5; Rs 6000x5; Rs 3,000x5
6. Rs 40,000, Rs 40,000, Rs 30,000, Rs 20,000, Rs 10,000
8. General Reserve Rs 15,00,000/-
9. P & L App. A/c Dr. 70,000
To General Reserve 70,000
Debentues (6 marks Questions)
2. General Reserve Rs 50,000/-
Deb. Red. Fund A/c. Rs 12,000/-
3. General Reserve Rs 58,970
4. 4,00,000 equity shares of Rs 10 each
6. Amount of contribution Rs 6,91,042
Amount Invested Rs 69,1,000
Profit on sale of investment Rs 2,84,720
7. P.P of own deb. 8,50,000
Gain on cancellation 50,000
Interest on debenture 1,24,000
Analysis of Financial Statement
Theoretical Questions (1 Marks)
2. (i) Goodwill = Fixed Assets
(ii) Preliminary Expenses = Miscell aneous Expenses
(iii) Secrities Premium Account = Reserve & Surplus
(iv) Unclaimed Dividend = Current Liabilities
(507)
Ratio Analysis
(1 Marks Questions)
1. Operating Profit ratio= 100% - operating ratio

=100% - 83.64%
=16.36%
2. REDUCE
Reason :- Sale of goods at a loss will reduce the total of current assets but the total of
current liabilities will remain the same. Therefore, the current ratio will reduce.
3. A high price earning ratio indicates the faith of investors in the stability & appreciation of
company 'B's earning as compared to company A.
4. (Increase)
Reason :- Total Long term debts are increased but the total share holders funds remain
unchanged
5. The Company is more efficient in the 2nd year in recovering its investment in stock by
producing more sales.
6. The Company should sell of excessive stock & put surplus liquidity in long term profitable
investments.
7. Gross Profit ratio = 10%
8. Revised current ratio = 4,00,000+75,000/1,25,000+75,000
= 4,75,000/2,00,000=2.375:1
9. Shareholders Funds = Total Assets-Total Debt
= 2,60,000-1,80,000
80,000
Long Term Debts = Total Debts - Current Liabilities
= 1,80,000 - 20,000
1,60,000
Debt - Equity Ratio = Long Term Debts/Shareholders Funds
1,60,000/80,000=2:1
10. Current Assets =Stock +Debtors + Cash
= 70,000+50,000+30,000 =1,50,000
W.C=CA-C.L. = 1,50,000-50,000 =1,00,000
W-C, Turnover = 7,00,000/1,00,000 =7 times
(508)
4 Marks Questions
Q.1 Current Ratio = 1.9:1, Quick Ratio =1.7:1
Q.2. Average stock = Rs 96,000; Current Assets = Rs 2,20,000
Q.3. Average stock = Rs 37625; opening stock = Rs 53750; closing stock = Rs 21500
Q.4. Sales =Rs 8,00,000; credit sales = Rs 6,00,000; opening Debtors = Rs 1,40,000; closing
Debtors = Rs 1,60,000
Q.5. Fixed Assets Turnover Ratio = 6 times
Q.6. Working capital turnover ratio =14 times (calculated on the basis of COGS)
Q.7. Gross Profit = Rs 3,12,000; sales =Rs 12,48,000
Q.8. Total sales = Rs 40,00,000; Net Profit= Rs. 15,60,000; N.P. Ratio=39%
Q.9. net profit = Rs 3,60,000 Gross Profit = Rs 4,50,000; G.P.Ratio=25%
Q.10.C.L=Rs 36,000, C.A=Rs 1,44,000 and Q.A= Rs 10,8000
Q.11.Debt-Equity Ratio =0.4:1
Q.12.Debt -Equity Ratio = 2.4:1; Total Assets to Debts - 2.083:1 and Prop Ratio =0.2:1
Q.13.DTR = 5 times, Average Debtors = Rs 60,000; Closing Debtors = Rs. 55000
Q.14.Current Assets =Rs 260,000; Current Assets Turnover Ratio = 5.8 times [Hint : Net
Fixed Assets = capital Employed-Working Capital]
Q.15.Return on Capital Employed =20%
Q.16.EPS = Rs52.50 Price Earning Ratio = Rs 5
Q.17.Stock =Rs. 200000; COGS = Rs 1200,000; Sales=Rs.15 lakh
Q.18.Net Profit Ratio = 50% ; Debt Equity Ratio = 0.3:1 Quick Ratio = 1.5:1
[Hing:- Equity = paid up capital + capital reserve + net profit)
Q.19.Amount of Bill Payable paid: Rs 3,00,000
Q.20.His manager is not working efficiently. Though, there is an absolute increase in Gross
Profit but Gross profit Ratio has decreased from 25% to 20% Further current ratio is also
decreased from 2:1 to 1.8:1 which also indicates poor management of working capital.
Cash Flow Statement (1 mark Questions)

1. (i) Operating activity (ii) Investing Activity
(iii) Operating Activity (iv) Investing Activity
(v) Financing Activity (vi) Operating Activity
(vii) Operating Activity (viii) Operating Activity
(ix) Investing Activity (x) Investing Activity
(509)
2. Cash, in hand, cash at Bank, Marketable Security (Any two)
3. Rs 2, 55,000 (2,70,000 + 5,000 - 20,000)
4. Cash out flow = Rs 45,000. [1,00,000 - 50,000 - 5,000] from investing Activities.
5. Cash flow from Financing Activities (Inflow)
=Rs 15,000 [60,000 - 40,000 - 5, 000]
6. Loss on sale of machine = Rs 8,000
7. Never
8. Never
9. Any claim received from an Insurance Company against loss of stock or Payment to
employees under Voluntary Retirement Scheme;
10. Any claim for the destruction of building from an insurance company or Amount received
as compensation against the acquisition of land belonging to an enterprise.
11. Buy back of Share by a company from a share holder i.e. Payment made there of
3 Mark Questions
1. Purchase of plant & Machinery Rs. 15,10,000
Sale of Plant & Machinery Rs. 2,45,000
Depreciation for the year Rs. 6,67,500
loss on sale of Plant & Machinery Rs. 1,30,000
2. Sources Rs. 57.600; Uses Rs. 8,000
3. Rs. 1, 73,000 (In flow)
4. Rs. 11,44, 000 (Used)
5. Rs. 9,07000 (Inflow)
6 Marks Questions
1. Cash from operating Activities Rs 27,800
Cash used in Investing Activities Rs 25,200
Cash from financing Activities Rs 14,400
2. Cash from operating Activities Rs 1,56,000
Cash used in Investing Activities Rs 1,80,000
Cash used in financing Activities Rs 44,000
3. Cash flow from operating Activities Rs. 75,500
Cash used in Investing Activities Rs 57,500
(510)
Cash used in Financing Activities Rs 13,000
(It has been assumed that the new debenture have been issued in the beginning of the
current Accounting year.
4. Cash flow from operating Activities Rs 3,18,650
Cash used in Investing Activities Rs 3,68,000
Cash flow from financing Activities Rs. 57,400
Note :- Short Term investment have been Considered as cash equivalents
It is assumed that fresh debentures were issued at the beginning of 2008-09 and redemption
of preference shares assumed at the end of year.
5. Cash from operating Activities Rs. 37200
Cash used in investing Activities Rs. 40,400
Cash used in financing Activities Rs NIL
Hints:-Excess Depreciation Rs .10,400. deducted from operating Activities fixed Assets
purchased for cash Rs. 40,400.
6. Cash from operating Activities Rs. 72,250
Cash used in Investing Activities Rs 86250
Cash from financing Activities Rs. 21,000
Hints:- Total income taxes paid during the year Rs. 16,000
Less - Dividend tax paid given Rs 3,000 (financing Activities)
Income tax paid for operating Activities 13,000
Int. on Debenture paid Rs. 6000.
Provision for taxation A/c.
Particulars. Rs. Particulars Rs
To Cash A/c 16,000 By balance b/d 16,000
(Tax paid which includes By Profit & loss A/c 19,000
Rs. 3000 as dividend tax)
To balance c/d 19,000
35,000 35,000
7. Cash from operating Activities Rs. 26,240
Cash used in Investing Activities Rs. 10,000
Cash From financing Activities Rs. 3, 760.
Hints. Discount on issue of new redemption Rs. 300.
(511)
Loss on sale of fixed Assets Rs. 4,000
It is assumed that Investment Purchase and Debenture issues are purchase on issued in
the beginning of year.
8. Cash from operating Activities Rs. 2,93,750
Cash from Investing Activities Rs. 1,27,250
Cash from financing Activities Rs. 34,000
Hints :- Bonus shares issued Rs. 50,000
Decrease in stock Rs. 10,000 (60,000+100,000=160,000-1,50,000)
Int. on Investment Rs. 3,750
Loss on sale of investment Rs. 15,00
(512)
Sample Paper -1
Accountancy
Time allowed: 3 hour M.M. : 80
(Accounting for not for Profit organizations, partnership Firms and companies)
1. How would you treat the following items in case of not for profit organisations.?
Tournament Fund Rs.50,000
Tournament Expenses Rs.15,000
Receipts from Tournament Rs.20,000 (1)
2. Sheetal, Priyanka and Isha are partners sharing profit and loss in the ratio of 3:2:1 Isha is
to be paid commission @6% on the net profit after charging such commission. Total profit
of the firm was Rs. 3,498. Find out the total amount that will be received by Isha in the
form of commission and share of profit. (1)
3. X and Y are sharing profits in the ratio of 4:3. Z joins and the new ratio is 7:4:3 calculated
sacrificing ratio. (1)
4. A, B and C are partners sharing profits and losses in the ratio of 5:4:3 C retires and his
share is purchased by A and B in the ratio of 3:2 Give new profit sharing ratio. (1)
5. What is meant by calls in Arrears?
6. On April 1,2009 a club owned a building valued at Rs. 3,00,000 computers Rs 67,500,
furniture Rs. 45,000 and a cash balance of Rs 3,000. Subscriptions and salary due on that
date were Rs. 1,500 and Rs. 3,000 respectively. Calculate the amount of capital fund. (3)
7. Blank Engineering Ltd. redeemed Rs. 4,50,000, 12% debentures of Rs. 100 each, at Rs.
105 by converting them into 13% cumulative preference shares of Rs. 50 each, issued at a
discount of 10% Pass necessary journal to record the redemption of debentures. (3)
8. Ayush Ltd. issued 20,000 15% debentures of Rs. 100 each at par redeemable after 10 Year.
The debenture holders are given an option that they may get redeemed their debenture at
any time after 4 years @ Rs. 107 per debenture. A debenture holder holding 200 debentures
exercised the option. Pass necessary journal entries to record the issues and redemption
of debentures. (3)
9. A, B and C were partners in a firm. On 1.4,2008 their capitals stood at Rs. 60,000; Rs.
30,000 and Rs. 30,000 respectively. As per the provisions of the partnership deed:
(a) A was entitled for a salary of Rs. 5,000 p.a.
(b) Partners were entitled to interest on capital at 10% p.a.
(c) Profits were to be shared equally.
The net profit for the year 2008-09 of Rs. 50,000 before providing for the above terms.
Prepare profit and loss Appropriation Account. (4)
10. Rao, Ramesh and Gopal were partners in a firm sharing profits in the ratio of 3:5:2. They
(513)
admitted Sudarshan as a new partner. Rao, Ramesh and Gopal each surrendered 1/10th of
their share in favour of Sudarshan. Sudarshan brought Rs. 4,00,000 for his capital and Rs.
30,000 for his share of goodwill. Calculate new profit sharing ratio of Rao, Ramesh, Gopal
and Sudharshan and also pass necessary journal entries in the books of the firm for the
above transactions. (4)
11. J.P. Ltd. Purchased building costing Rs. 70,00,000 from M/s construction Ltd. The company
paid Rs. 20,50,000 by cheque and for the balance, Issued equity shares of Rs. 100 each in
favour of M/s constructions Ltd. Pass necessary Journal entries in th books of J.P. Ltd. for
the purchase of building and making payment if shares were issues (a) at 10% discount
and (b) at a premium of 25%. (4)
12. The sahitya Samiti's Balance sheet as on January 1,2008 was as under:-

Subscription in Advance3,200 Books 12,000
Salaries Unpaid 2,000 Furniture 10,000
Capital Fund 40,000 Building 20,000

Kavi Sammelan Fund 16,000 Subscription outstanding 2,800
Cash & Bank Balance 16,400
61,200 61,200
The Receipt and Payment Account for the year ended December 31, 2008 was as followings

To Balance b/d 16,400 By wages & Salaries 16,000
To subscriptions 36,000 By up keep of building 2,000
To sale of Books 500 By Stationery 9,000
To sale of old Furniture By AuditFees 4,000
(Book value Rs 2,000) 1600 By Exp. on Kavi Sammelan 3,000
To Entrance Fee 1,800 By Books 6,000
To Life Membership Fee 12,000 By Investments @5% (on 1-7-08) 8,000
To Donations for kavi Sammelan 4,000 By Balance c/d 24,3000
72,300 72,309
Additional Informations :-
i) Subscription due for 2008 are Rs. 1,200.
ii) Subscriptions received included Rs. 800 for Year 2009.
(514)
iii) Salaries unpaid Rs. 1,200
(iv) Books are now valued at Rs. 10,000.
Prepare Income and expenditure Account for the year ended December 31,2008 and balance
sheet as on that date. (6)
13. AB Ltd. issued 5,00,000, 7% debentures of Rs.50 each. Pass necessary journal entries in
the books of the company for the issue of debentures when debentures were:
(i) Issued at par, redeemable at 8% premium.
(ii) Issued at 4% premium redeemable at 5% premium.
(iii) Issued at 5% premium redeemable at per. (6)
14. Manmohan, Shivaji and Vikram were partners in a firm sharing profits and losses in the
ratio of 2:2:1, They decided to dissolve the firm on December 31,2008. The Balance Sheet
of the firm on the date of dissolution was as follows:

Creditors 1,07,000 Machinery 1,08,000
Joint life Policy Reserve 12,000 Joint life Policy 30,000
Provident Fund 18,000 Investments 25,000
Capitals : Stock 60,000
Manmohan 1,05,000 Debtors 36,000
Shivaji 42,000 Vikram's Capital 25,000
1,47,000
2,84,000 2,84,000
They appointed Shivaji to realise the assets and pay the labilities. For this purpose he was
to be paid Rs. 5,000. Joint Life Policy was surrendered for Rs. 20,000. Bad debts amounted
to Rs. 5,000. Stock realised Rs. 40,000 and Machinery realised Rs. 80,000. There was an
unrecorded asset which was sold for Rs. 3,000.
One of the creditors took over the investments at Rs. 23,000. Remaining creditors were
paid at a discount of Rs. 4,000.
Prepare Resolution Account, capital Accounts and cash Account. (6)
15. Gupta Ltd. invited application for issuing 50,000 Equity shares of Rs. 100 each at a discount
of 10% (to be given at the time of allotment).
Rs 40 per share were payable on application and the balance on allotment. Applications
for 1,00,000 shares were received. Shares were allotted on Pro-rata basis ot all the
applicants.
An applicant who was allotted 7500 shares failed to pay the allotment money.His shares
were, therefore forfeited. Pass necessary Journal entries in the books of the company. Show
your working clearly. (8)
(515)
or
Poonam Ltd. invited applications for issuing 1,00,000 equity shares of Rs 10 each at a
premium of Rs. 5 per share. The amount was payable as follows:
On Application and allotment Rs. 8
Balance on First & final call (including premium)
Application for 1,30,000 shares were received. Applications for 10,000 shares were rejected
and pro-rate allotment was made to the remaining applicants. All calls were made and
were duly received except the first and final call on 5,000 shares allotted to Megha. Her
shares were forfeitted. Out of the forfeited shares 3,000 were re-issued to sukriti at Rs. 9
per share as fully paid up. Pass necessary Journal entries in the books of poonam Ltd. (8)
16. A and B are with profit sharing ratio of 2:1. Their Balance sheet on 31 March, 2006 was as
follows:
Liabilities Amount (Rs) Assets Amount (Rs)

B/P 60,000 Cash in hand 20,000
Salariesoutstanding 10,000 Debtors 40,000
Profit and loss 30,000 Stock 60,000
Capitals Machinery 1,70,000
A 1,50,000 Goodwill 90,000
B 1,50,000 3,00,000
4,60,000 4,60,000
They admitted C into Partnership on March 31, 2009. New Profit sharing Ratio is agreed
2:1:1. Other terms of C's admission were as following:-
(i) He will bring in Rs. 1,20,000, through Cheque, as his share of Capital and Rs. 30000 as
his share of goodwill.
(ii) Machinery is to be appreciated by 10%.
(iii) Stock was over valued by Rs. 2000 now it is depreciated.
(iv) A provision for doubtful debts is to be created at 5% on debtors.
(v) Creditors are unrecorded to the extent of Rs. 7000.
Prepare Revaluation Account, Capitals Accounts of Partners and Balance Sheet of new
firm after C's admission. (8)
or
P, Q and R were partners in a firm sharing profits in the ratio of 2:3:5. On 31.03.2009 their
Balance sheet was as follows.
(516)
Liabilities Amount Rs. Assets Amount Rs.
Creditors 70,000 Bank 45,000
Capital Accounts Debtors 40,000
P 80,000 (-) Provision 5,000 35,000
Q 70,000 Stock 50,000
R 60,000 2,10,000 Building 1,40,000
Profit & Loss 10,000
2,80,000 2,80,000
On the above date R retired from the firm due to his illness on the following terms.
(i) Building was to be depreciated by Rs. 40,000
(ii) Provision for doubtful was to be maintained at 20% on debtors.
(iii) Salary outstanding Rs. 5000 was to be recorded and creditors of Rs. 4000 will not be
claimed.
(iv) Goodwill of the firm was valued at Rs. 72,000.
(v) R was to be paid Rs. 15000 through bank and the balance was to be transferred to his
loan Account.
Prepare Revaluation Account, Capital Accounts and Bank A/c of new firm. (8)
PART (B)
(Analysis of Financial Statements)
17. State one importance of financial statements. 1
18. When a Bill Receivable of Rs. 10,000 is endorsed to a creditors, how will it effect the flow of
cash? 1
19. State effect of payment of dividend on flow of cash. 1
20. State any three objectives of 'Analysis of Financial Statements'. 3
21. On the basis of the information given below, calculate any two of the following ratios:
(i) operating Ratio (ii) liquid Ratio (iii) Proprietary Ratio
Information:
Cash Sales Rs, 3,00,000; credit sales Rs. 2,80,000; sales Returns Rs. 20,000; cost of Goods
sold Rs. 4,00,000; selling and Distribution Expenses Rs. 7,000; Administration Expenses
Rs. 8,000; current Liabilities Rs. 2,30,000; current Assets Rs. 4,00,000 closing Stock Rs.
40,000; Equity share capital Rs. 5,00,000; 8% Preference share capital Rs. 2,00,000; Fixed
Assets Rs. 5,50,000. (4)
22.(a)From the following information, calculate the Stock Turnover Ratio:
(517)
Sales : Rs 2,00,000; Gross Profit: 25% on cost; opening Stock was 1/3rd of the value of
closing stock. Closing stock was 30% of seles.
(b) A business has a current ratio of 3:1 and a quick ratio of 1.2:1. If the working capital
is Rs. 1,80,000, calculate the total current assets and stock. (4)
23. From the following summarized Balance Sheet of a company, calculated the Cash Flow
from operating Activities:
Liabilities 31-3-2008 31-3-2009 Asset 31-3-2008 31-3-2009

Profit and loss A/c 20,000 25,000 Cash 20,000 10,000
Bills Payable 20,000 5,000 Investments 40,000 30,000
Current Liabilities 40,000 45,000 Stock 30,000 45,000
6% Debentures 60,000 80,000 Debtors 30,000 40,000
Share Capital 80,000 1,10,000 Gross block 1,00,000 1,40,000
2,20,000 2,65,000 2,20,000 2,65,000

(6)
Marking Scheme of Sample Paper -1

1. Balance Sheet as on - - -
Tournament Fund50,000
Add: Receipts 20,000
70,000
Less: Expenses 15,000 55,000
55,000
2. Total Profit 3,498
6
Less: commission 3,498× 198
106
3,300
1
Isha's share in profit = 3,300 × = 550
6
Total Amount Received by Isha = 198 + 550 = 748 1
4 7 8–7 1
3. Sacrifice of X = – = =
7 14 14 14
(518)
3 4 6–4 2
Sacrifice of Y = – = = 1
7 14 14 14
3 3 9
4. A takes from C = × =
12 5 60
3 2 6
B Takes from C = × =
12 5 60
5 9 25 + 9 34
New share of A = + = =
12 60 60 60
4 6 20 + 6 26
New share of B = + = =
12 60 60 60
Net Ratio = 34 : 26
or = 17:13
5. Calls is arrears is the amount not yet received by the company against the calls made.
6. Balance Sheet
as on April 1, 2009
Salaries Due 3,000 Building 3,00,000
Computers 67,500
Capital Fund(Balancing fig.) 4,14,000 Furniture 45,000
Cash 3,000
Subscription Due 1,500
4,17,000 4,17,000
7. Journal
Date Particulars Dr. (Amt. Cr.(Amt.)

12% Debentures Dr. 4,50,000
Premium on Redemption of Debenture Dr. 22,500 1½
To Debentureholders' 4,72,500
(4,500 12% debentures of Rs 100 each
due for conversion at a premium of 5%)
Debentureholders Dr. 4,72,500
Discount on Issue of share Dr. 52,500
T0 13% Preference Share capital A/c 5,25,000
(519)
(10,500, 13% Preference shares of Rs. 50 each 1½
Issue to debentureholders at a discount
of 10% on conversion of debentures)
8. Journal
Date Particulars Dr. (Amt. Cr.(Amt.)

Bank A/c Dr. 20,00,000
To Debenture Application A/c 20,00,000 1½
(Application money received on 20,000
15% debentures @ Rs. 100 each)
Debenture Application A/c Dr. 20,00,000
To 15% Debentures 20,00,000 1½
(20,000, 15% debentures inssued at par)
15% Debentures A/c Dr. 20,000
Loss on Redemption of Debentures Dr. 1,400 1½
To Debentureholder 21,400
(Debentureholder called under put option)
Debentureholder Dr. 21,400
To Bank A/c 21,400 1½
(Debenture Money paid to debentureholders)
Profit & Loss A/c Dr. 1,400
To loss on Redemption of Debenture A/c 1,400 1½
(Loss on redemption of debenture
transferred to profit & loss A/c)
9. Profit & Loss Appropriation Account for the year ended on March 31,2009
Particulars Rs. Particulars Rs.

To Salary of A 5,000 By Net Profit 50,000
To Interest on capitals
A 6,000
B 3,000
C 3,000 12,000
(520)
To Profit distributed to
Partners' Capitals
A 11,000
B 11,000
C 11,000
33,000
50,000 50,000
3 1 3
10. Rao surrenders for Sudershan = × =
10 10 100
5 1 5
Ramesh surrender for Sudershan = × =
10 10 100
2 1 2
Gopal surrender for sudershan = × =
10 10 100
3 3 30 – 3 27
New share of Rao = – = =
10 100 100 100
5 5 55
New share of Ramesh = – =
10 100 100
2 2 20 – 2 18
New share of Gopal = – = =
10 100 100 100
3 5 2 10
Share of Susershan = + + =
100 100 100 100
New Ratio = 27 :55 :18 : 10
Journal
Bank A/c Dr. 4,30,000
To Sudershan's capital A/c 4,00,000 1
To Premium A/c 30,000
(New partners introduced capital & Goodwill)
Premium A/c Dr. 30,000
To Rao's capital 9,000
To Ramesh's capital 15,000
To Sedershan's capital 6,000 1
(Premium A/c transferred to partners
Capital A/c in their sacrificing ratio)
(521)
11. Journal of J.P. Ltd.
Date Particulars Dr. (Amt.) Cr.(Amt.)

Building A/c Dr. 70,00,000
To M/s contractions Ltd. 70,00,000 1
(Building Purchased)
M/s constructions Ltd. Dr. 20,50,000
To Bank A/c 20,50,000 1
(Cheque issued)
(a) M/s constructions Ltd. Dr. 49,50,000
Discount on Issue of Shares A/c Dr. 5,50,000
To Equity share capital A/c 55,00,000 1
(55.000 Equity shares issued at discount of 10%)
(b) M/s constructions Ltd. Dr. 49,50,000
To Equity share capital A/c 3960,000 1
To Securities Premium A/c 9,90,000
(39,600 Equity shares issues at premium of 25%)
12. Income and Expenditure Account
(for the year ended on December 31,2008)
To wages & salaries 16,000 By subscriptions 36,000
Add: Unpaid 1,200 Add: Due 1,200
17200 Add: Received in 2007 3,200
Less: For 2007 2,000 15,200 40,400
To Depreciation of Books 7,500 Less: For 2007 2,800
37,600
To Loss on sale of Furniture 400 Less: For 2009 800 36,800
To Up keep of building 2,000 By Entrance Fee 1,800
To stationery 9,000 By Interest 200
To Audit Fees 4,000
To Surplus 700
38,800 38,800
3
(522)
Balance Sheet
as on December 31, 2008
Subscriptions in Advance 800 Subscription Due 1200
Salaries unpaid 1,200 Books 12,000
Capital Fund 40,000 Add: Additions 6,000
Add: Surplus 700 40,700 18,000
Less : sold 500
17,500
Kavi Sammelan Fund 16,000 Less: Depreciation 7,500 10,000
Add: Donation for K.S.F 4,000
20,000 Furniture 10,000
3000 17,000 Less: sold 2,000 8,000
Life Membership Fee 12,000 Building 20,000
Investment 8,000
Add. : Interest Accrued 200 8,2,00
Cash & Bank balance 24,300
7,17,00 71,700
3
13. Journal of A B Ltd.

(i) Bank A/c Dr. 2,50,00,000
To debenture Application A/c 2,50,00,000 1
(Application money received)
Debenture Application A/c Dr. 2,50,00,000
Loss on Issue of Debenture A/c Dr. 20,00,000
To 7% Debentures A/c 2,50,00,000
To Premium on Red. of Debenture 20,00,000 1
(5,00,000 7% debentures issued at par
but redeemable at premium of 8%)
(523)
(ii) Bank A/c Dr. 2,60,00,000
To Debenture Application A/c 2,60,00,000 1
Loss on Issue of Debenture A/c Dr. 12,50,000
To 7% Debentures 2,50,00,000
To Securities Premium 10,00,000 1
To premium on Red. of Debenture A/c 12,50,000
(5,00,000 7% Debentures issues at
premium of 4% but redeemable
at premium of 5%)
(iii) Bank A/c Dr. 2,62,50,000
To Debenture Application A/c 2,62,50,000 1
To 7% Debenture A/c 2,50,00,000 1
To Securities Premium A/c 12,50,000
(5,00,000 7% debentures of Rs. 50,each
issues at a premium of 5%)
14. Realisations Account

To Sundry Assets By Sundry Liabilities
Machinery 1,08,000 Creditors 1,07,000
Joint life policy 30,000 J.L.P. Reserve 12,000
Investments 25,000 Provident Fund 18,000
Stock 60,000 1,37,000
Debtors 36,000 By Cash
2,59,000 Joint life Policy 20,000
To Shivaji’s capital (Expenses) 5,000 Debtors 31,000
To Cash Stock 40,000
Creditors 80,000 Machinery 80,000
(524)
Provident Fund 18,000 Unrecorded Asset 3,000
98,000 1,74,000
By loss transferred to:
Manmohan 20 400
Shivaji 20,400
Vikram 10,200
51,000
3,62,000 3,62,000
2 Marks
Partners' Capital Account

Particulars Manmohan Shivaji Vikram Particulars Manmohan Shivaji Vikram
To balance b/a ____ ____ 2,5,000 By Balance 1,05,000 42,000 __
To Realization 20,400 20,400 10,200 By Realizations ___ 5,000 __
To Cash 84,600 26,600 ___ By Cash ___ ___ 35,200
105,000 47,000 35,200 1,05,000 47,000 35,200

1x3=3 Marks
Cash Account
To realization A/c 1,74,000 By Realization A/c 98,000
To Vikram’s capital A/c 35,200 By Manmohan’s Capital 84,600
By Shivaji’s Capital 26,600
2,09,200 2,09,200
1 Marks
15. Journal of Gupta Ltd.

Bank A/c Dr. 40,00,000
To Share Application A/c 40,00,000 1
(Application money received on 1,00,000
Equity Share @ Rs. 40 each)
Share Application A/cDr. 40,00,000
(525)
To Share capital A/c 20,00,000 2
To Share Allotment A/c 20,00,000
(Application money transferred to share
capital A/c and share allotment A/c)
Share Allotment A/c Dr. 25,00,000
Discount on Issue of share A/c Dr. 5,00,000
To share capital A/c 30,00,000 1
(Allotment money due on 50,000 Equity
Share@ Rs. 50. each after allowing a
discount of Rs. 10 each)
Bank A/c Dr. 4,25,000
To share Allotment A/c 4,25,000 2
(Allotment money received except
Rs.75,000)
Share Capital A/c Dr 7,50,000
To Discount on Issue of share A/c 75,000
To Share Allotment A/c 75,000 2
To Share Forfeited A/c 6,00,000
(7,500 Equity shares Forfeited
nonpayment of allotment money)
OR
Journal of Poonam Ltd.

Bank A/c Dr. 10,40,000
To Share Application & Allotment A/c 10,40,000 1
(Application & Allotment money
received on 1,30,000 shares @ Rs. 8 each)
Share Application & Allotment A/c Dr. 10,40,000
To Share capital A/c 8,00,000
To Bank A/c 80,000 2
To calls in Advance A/c 1,60,000
(526)
(Application & Allotment money transferred
to share capital A/c calls in Advance A/c
and remaining amount refunded)
Share First & Final Call A/c Dr. 7,00,000
To Share Capital A/c 2,00,000
To Share Premium A/c 5,00,000 1
(First & Final call money due on
1,00,000 Equity shares @ Rs. 7 each,
including premium of Rs. 5 each)
Bank A/c Dr. 5,13,000
Calls in Advance A/c Dr. 1,60,000
To Share First & Final call A/c 6,73,000 1
(First & Final call money received
except Rs. 27,000)
Share capital A/c Dr. 50,000
Securities Premium A/c Dr. 25,000
To Share First & Final call A/c 27,000
To Share Forfeited A/c 48,000 1
(5,000 Shares forfeited)
Bank A/c Dr. 27,000
Share Forfeited A/c Dr. 3,000
To Share capital A/c 30,000 1
(3,000 shares re-issued @ Rs.9 each)
Share Forfeited Dr. 25,800
To capital Reserve 25,800 1
(Share forfeited A/c in r/o re-issued
shares transferred to capital Reserve)
(527)
16. Revaluation Account
To Stock 2,000 By Machinery 17,000
To Provision for D. Debts 2,000
To Creditors 7,000
To Profit Distribute
A 4,000
B 2,000 6,000
17,000 17,000
2 Marks
Partners' Capital Account

Particulars A B C Particulars A B C]
To Goodwill 60,000 30,000 - By Balance b/d 1,50,000 1,50,000
By Bank 1,20,000
To Balance c/d 1,34,000 1,42,000 1,20,000 By Premium 20,000 10,000
By P & L A/c 20,000 10,000
By Revaluation 4,000 2,000
1,94,000 1,72,000 1,20,000 1,94,000 1,72,000 1,20,000
1x3=3 Marks
Balance Sheet as on April 1, 2009

Creditors 67,000 Machinery 1,87,000
B/p 60,000 Stock 58,000
Salaries outstanding 10,000 Debtors 40,000
Capital Less: Provision 2,000
A 1,34,000 38,000
B 1,42,000 Cash in hand 50,000
C 1,20,000 3,96,000 Cash at Bank 2,00,000
5,33,000 5,33,000
3 marks
(528)
Revaluation Account
PARTICUALRS AMT PARTICULARS AMT
To Building 40,000 By creditors 4,000
To prov. for Doubtful Debts 3,000 By less transferred to
To Salary outstanding 5,000 Partners' capital A/c
P 8,800
Q 13,200
R 22,000 44,000
48,000 48,000
Partners' capital Account

Particulars P Q R Particulars P Q R
To Profit & loss A/c 2,000 3,000 5,000 by Balance b/d 80,000 70,000 60,000
To Revaluation 8,800 13,200 22,000 By P's Capital 21,600
To R's Capital 21,600 14,400 By Q's Capital 14,400
To Bank 15,000
To R's loan A/c 54,000
To Balance c/d 47,600 39,400
80,000 70,000 96,000 80,000 70,000 96,000
2x3=6 Marks
Bank Account
PARTICULAR Amt Rs. PARTICULAR Amt Rs.
To Balance b/d 45,000 By R's Capital 15,000

By Balance c/d 30,000
45,000 45,000
1marks
17. Any one point of importance of Financial Statements related to:
(i) Potential Investors
(ii) Govt. and Its agencies
(iii) Money lenders
(529)
(iv) Employees & Trade Unions
(v) creditors
(vi) customers etc..
18. No flow of cash 1
19. Out flow of cash 1
20. Any three objectives of Analysis of Financial Statements:
(i) Judging the profitability
(ii) Making Forecast and preparing budgets
(iii) Judging the Managerial Efficiency
(iv) Inter-firm comparison
(v) Judging the Solvency of the Enterprise: 1×3 = 3
21. (i) Operating Expenses = selling & Distribution Expenses +Administration exp
= 7,000+8,000=15,000
Net sales =Cash sales+ credit sales – sales Return = 3,00,000 + 2,80,000 – 20,000 =
5,60,000
Cost of goods sold + operating Expenses

Operating Ratio = × 100 1
Net sales
4,00,000 + 15,000
× 100 = 83.04%
5,60,000
(ii) Liquid Assets = Current Assets – Stock 1
= 4,00,000 – 40,000 = 3,60,000
Liquid Assets 3,60,000

Liquid Ratio = = = 1.57 : 1 1
Current Liabilities 2,30,000
(iii) Shareholders Funds = Equity share Capital + 8% Prefer share capital
= 5,00,000+2,00,000=7,00,000
Total Assets = Fixed Assets + current Assets
= 5,50,000+ 4,00,000=9,50,000
Shareholders Funds
Proprietory Ratio =
Total Assets
7,00,000
= = 0.74 : 1
9,50,000
22. (a) Let the cost of goods sold = x
(530)
25 x x
Then, Gross profit = = 4
100
Cost of goods sold + Gross profit = sales
x
x+ 4 = 2,00,000
5x=8,00,000
x=1,60,000 1
cost of goods sold = 1,60,000
30
Closing stock = 2,00,00 × = 60,000
100
1
opening stock = 60,000 × = 20,000
3
Opening Stock + Closing Stock
Average stock =
2
20,000 + 60,000
= = 40,000
2
Cost of Goods sold 1,60,000

Stock turnover Retio = = = 4 Times 1
Average stock 40,000
(b) Let the current labilities =X

Then current Assets = 3X
and Quick Assets = 1.2x
Current Assets - Current liabilities = working capital
3x – x =1,80,000
2x = 1,80,000
x = 90,000
Current liabilities = 90,000
Current Assets = 3x90,000=2,70,000
Quick Assets = 1.2x90,000=1,08,000 1
stock = current Assets -Quick Assets
= 2,70,000-1,08,000
= 1,62,000 1
(531)
23. Cash Flow Statement =
(A) Cash from operating Activities
Profit & Loss A/c at the end 25,000
Less:Profit & Loss A/c at the beginnings 20,000 2
Profit made during the year 5,000
Add:Decrease in current Assets and
Increase in current Liabilities
other current Liabilities 5,000 1
10,000
Less: Increase in current Assets and
Decrease in current Liabilities
Bills Payable 15,000
Stock 15,000
Debtors 10,000
40,000
Cash used in Operating Activities (30,000)
3
(532)
Practice Paper
1. What do you mean by endowment fund and how it will be treated?...... (1)
2. How will you calculated interest on drawings when date of withdrawal is not given?..........(1)
3. Why is it necessary to revalue the assets and liabilities in case on admission of a
partner?.............(1)
4. At the time of the death of partner how profits are estimated to give share to deceased
partner?.............(1)
5. What is meant by subscribed capital?...................(1)
6. Yamuna sports complex has established a sports club, you are informed here with the
following information. How would you deal with these:
a. Sports fund opening balance Rs. 6,00,000
b. Sports fund investment Rs. 3,00,000
c. Expenses during the year on sports Rs. 1,50,000
d. Interest earned by fun investment@ 12% p.a
e. Donation received for sports fund during the year Rs. 3,00,000
7. Dhoni Ltd. Forfeited 80 shares of 10 each issued at 10% premium on which Rs. 9 called
up. Allotment money of Rs. 3 (Included premium) and first call of Rs. 2 were not received
on these shares. Out of these 18 shares were reissued as fully paid up for Rs. 8. share and
6 shares were reissued as fully paid up @ Rs. 12 per share. Pass journal entries to forfeiture
and reissue of these share....................(3)
8. Ankit Ltd. Purchased machinery worth Rs. 2,00,000 from Mohit. Rs. 1,10,000 was paid by
issue of 8% preference shares of Rs. 10 each at a premium of 10% . The balance was paid by
cheque. Pass necessary journal entries in the books of Ankit Ltd...............(3)
9. The partner of the firm distributed for the year ended 31st March, 2008 Rs. 2,10,000 in
the ratio of 2:2:1 without providing the following transactions..........(4)
a. A and B were entitled to a salary of Rs. 2250 per quarter.
b. C was entitled to a commission of Rs. 12,000.
c. A and C have guaranteed a minimum profit of Rs. 75,000 per annum to B.
d. Profits were to be shared in the raion of 3:3:2
Pass necessary adulation entry.
10. Anu, Monu and Sonu were partners in a trim. Sanu died on 28th Feb.2006. His share of
profit from the closure of lest accounting year till the date of death was to be calculated on
the basis of average of 3 completed years of profits before death. Profits 2003, 2004 and 05
were rs 7000, Rs. 5000 and Rs. 9000 resp. and Goodwill in calculated 2 year purchase of
last year’s profit.
Calculated sonu’s share of profit till his death and pass necessary towards for the same.
(533)
11. On 1st Jan 2008 Thorax company issued Rs.4,05,000, 10% debentures of Rs 100 each at
par. pass necessary journal entrees at the time of redemption of debenture. Company is
having Rs. 1,35,000 in debenture redemption reserve account. debentures will be redeemed
at the end of 4th year out of profit.........(4)
12. Following is the receipt & payment A/c of S.K.R. club for the year ended 31st March 2005.
Receipts & Payments Account

Receipts (Rs.) Payments (Rs)
To Cash in Hand 650 By Salaries 31,200
To Cash in Bank 7,345 By rent 9,360
To subscription (Include By postage 390
Rs 1,300 for 2003-2004 & By Printing & stationary 3,315
Rs 1,950 for 2005-200659,150 Telephone Charges 5,850
To Interests on Investments 26,000 By Purchases of
To Bank Interest 325 Library books 13,000
By Investments
To Sale of Furniture 3,900 By investments in Bonds 13,000
By Cash-in-Hand 2,015
By Cash at Bank 19,240
97,370 97,370
1. On lst April, 2009 the club was hand the following assets & liabilities truantries Rs
39,00; Library books Rs. 65,000, Investments Rs 5,20,in library for rent Rs 780 and
for salares Rs 2600
2. On 31st March 2005, rent of Rs 1040 and salaries of Rs. 3250 were in arrears.
3. The Bank value of furniture sold was Rs 3250 prepare I & E A/c for teh year ended
31st March 2005. and Balance stood on that date (6)
13. A, B and C were partners, sharing profits in the ratio of 5:3:2, their Balance Sheets
on 31.3.2005 was as follows:

Capital Accounts: Plant 24,000
A 20,000 Furniture 3,000
B 25,000 Debtors 14,000
C 12,500 57,500 Joint Life Policy (Surrender Value) 12,000
(534)
Bank Overdraft 19,000 Bills Receivable 9,000
Mrs.C’s Loan 7,000 Stock 30,000
Creditors 18,000 Loan to B 12,000
Bills Payable 8,500 Cash in Hand 6,000
1,10,000 1,10,000
The Joint Life Policy was for a sum of Rs. 30,000. B died on 1st April, 2005, and the firm
was dissolved. Assets realised only 50% fo its books value. Loan to B was adjusted against
his capital. A liability for Rs. 1,500 not shown in the Balance Sheet had to be paid. The
expenses on realisation came to Rs. 2,500. Prepare the Realization Account Partner’s Capital
Accounts and Cash Account to close the books of the firm. (6)
14. The following balance appeared in the books of Nutari Ltd. on Ist Jan 2007
14% Debentures A/c - Rs. 10,00,000
Sinking Fund A/c - Rs. 8,00,000
10% Sinking Fund Investment A/c Rs. 8,60,000 (Face Value)
Annual contribution on of Rs. 50,000 was made to Sinking Fund on Dec. 31 every year. On
Dec 31st2007 balance at bank was Rs. 5,40,000 after the receipt of interest on investment,
In vestment was sold at 84% and the debenture was paid off, prepare ledger accounts.
15. Amaya Ltd. Company has an authorised Capital of Rs. 2,50,000 in Rs. 10 Shares. Of these
4,000 shares were issued as fully paid in payment of building purchased; 8,000 shares
were subscribed for by the public, and during the first year Rs. 6 per share was called up,
payable Rs. 3, on application, Re. 1 on allotment, Re,1 on first call and Rs. 1 on second call.
The amount received in respect of these shares were as follows:
On 6,000 shares: the full amount called; On 1250 shares : Rs. 5 per share
On 500 shares : Rs 4 per share; On 250 shares : Rs. 3 per share
or
A Ltd. issued 20,000 equity shares of Rs. 10 each at a discount of Rs. 1 payable as Rs. 3 on
application, Rs. 3 on allotment (after discount) and Rs. 3 on call. The issue was
oversubscribed to the extent of 15,000 shares, and the allotment was done as follows: (a)
Applicatins of 5,000 shares ware given full allotment, (b)other applicants of shares were
alloted shares on a prorata basis: The excess application money received was to be adjusted
against allotment only. All money due were received with the exception of the call money
on 1,000 shares. Pass necessary journal to record the above transactions. (6)
(535)
16. X and Y partners in a business sharing profits and losses in the ratio of 3:2. Their balance
sheet on April 1,2003 stood as under:

Sundry creditors 31,200 Cash at Bank 10,200
Capitals: Sundry Debtors 24,600
X 55,000 Less: Provision 600 24,000
Y 45,000 1,00,000 Stock 22,000
Furniture 15,000
Buildings 60,000
1,31,200 1,31,200
They decided to admit Z on the following terms:
(i) That Z would bring Rs. 47,500 as capital and share of goodwill and he will receive 1/
4th share in the future profits.
(ii) That the value of goodwill be fixed at Rs. 30,000.
(iii) That buildings and furniture be depreciated at 5%
(iv) That a provision of Rs. 1,200 is required for doubtful debts.
(v) That a provision of Rs. 650 be made for outstanding repair bills.
(vi) That the capitals of the partners be adjusted in proportion to their profit sharing ratio
by opening current accounts.
Prepare Revaluation Account and a Balance Sheet of the firm as newly constituted.
or
X, Y and Z were partners sharing profit in the ratio 5:3:2 respectively thier balance sheet
on 31st March 2003 as follow :

Sundry Creditors 22,000 Fixed Assets 1,00,000
Bill Payable 8,000 Stock 45,000
Profit & Loss A/c 15,000 Debtors 45,000
Capital Accounts: Furniture 10,000
X 65,000
Y 50,000
Z 40,000 1,55,000
2,00,000 2,00,000
(536)
X retires on 31.12.2003 and for this purpose
Goodwill was valued at Rs. 25,000
Fixed Assets were valued at Rs. 1,25,000
Stock was considered worth Rs. 40,000
X was to be paid in cash brought in by Y and Z in such a way so as to make their capitals
proportionate to their new profit sharing ratio, which is 3:2 respectively. Minimum cash
balance is to be maintained at Rs. 7,000 Give journal entries in the books of firm.
Part B
17. What is the objective of preparing cash flow statement?
18. 'Divided Received case of financial company' will be classified in when Type of activities
for preparing cash flow statement
19. If G.P. ratio is 25% the state the rate of G.P on cost.
20. State any one objective one significance and only one limitation of analysis of financial
statement
21. Prepare Comparative Income Statement from the following information for the years ended
March 31, 2003 and 2004.
Particulars 2003 2004
(Rs.) (Rs.)
Net Sales 2,40,000 3,000
Administrative Expenses 60,000 70,000
Gross Profit Ration 40% 36%
Tax Rate 50% 50%
22 Calculate Debtors Turnover Ratio and Average Collection Period from the following
information :
Particulars Rs.
1. Opening Debtors as on April 1, 2003 5,00,000
2. Closing Debtors as on March 31,2004 9,00,000
3. Cash received from Debtors 40,00,000
4. Sales Returns 1,00,000
23. From the following information prepare Cash Flow Statement of Bloom Ltd. for the year
ended March 31, 2004.
(537)
Balance sheet of B. Ltd. As on March 31, 2004
Liabilities 2003 2004 Assets 2003 2004
(Rs.) Rs. (Rs) (Rs.)
Share Capital 2,00,000 3,50,000 Buildings (cost) 2,00,000 3,50,000
Profit & Loss Account 1,50,000 3,60,000 Machinery (cost) 4,00,000
Loan from UTI 3,00,000 1,20,000 Debtors 1,25,000 2,15,000
Loan from LIC - 2,00,000 Stock 75,000 85,000
Creditors 80,000 70,000 Cash 35,000 30,000
Provision for Depre. 25,00 34,000 Bank 60,000 99,000
Bills Payables 40,000 45,000
7,95,000 11,79,000 7,95,000 11,79,000

Marking Scheme
6. Int :- 36000
7. Capital, reserve Rs 54/-forfeiture/A/c Rs 280
8. no of share 10,000 payment by cheque 90,000.
9. A's capital a/c Dr Rs 12000, c's capital; credit Rs. 12000
10. Profit and loss suspense a/c debited Rs 800, sonu's capital a/c credited Rs. 800.
11. Amount transferred to drr is Rs 2,70,000. amt transferred to journal reserve rs. 4,05,000.
12. Surplus 31,850 B/s total 6,68,005. capital fund 625915
13. Realization loss 26000 final payment 7000, 5200,7300 cash balance 76000
14. Loss on sale of SF Invt - Rs 38800 Bank balance- 4,01,200, GR-454,200
15. Share Capital 4500 share forfeiture A/c Dr - 45 sntor -3000 or
cap res-4000 Sh FF A/c - 1200
16. Loss on rev - 5,000, Balance of Capital After arranged X - 72000 Y - 48000 Z - 40,000
Current A/c x -15000 X -15000 Y- 2000. Cash Balance -57000, Balance sheet Total - 191350
or
Profit of rev -20,000, cash bought by Y sz 56 200, 30,800 resp. Cap. A/cs -Y 112200 Z -74,800
Part - B
19. 33-1/3% on cost,22. 6.43 times. 57 days
23. Cash from open Activities - Rs. 114000
Investing Activities - (250000), Finance Activities - 170,000
(538)

399 538

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POINTS TO REMEMBER

Not for profit organizations

Steps in the preparation of Balance Sheet

Liabilities Rs. Assets Rs.

Capital Fund (Balancing Figure) xxxxx Fixed Assets xxxxx

Receipts and Payments Account

Receipts Rs. Payments Rs.

To Balance B/d xxxxx By Revenue Payments xxxxx

Income and Expenditure Account

Expenditure Rs. Income Rs.

To Revenue Payment xxxxx By Revenue Receipts xxxxx

To Surplus (Balancing Figure) By Deficit (Balancing Figure)

Expenditure Rs. Income Rs.

Capital Fund xxxxx Assets xxxxx

Accounting Treatment of Income (like subscriptions)

Case 3. – R&A A/c for the year 2008

Case 4. – R&P A/c for the year 2008

Ans. I & E. A/c B/s 2007 B/s 2008

Case 5. – R & P A/c for the year 2008

Case 6. – R&P A/c for the year 2008

204 × 250 – 50000 = 51000 – 50000 = 1000

Ans. I & E. A/c B/s 2007 B/s 2008

Sub. A/c for the year 2008

Income and expenditure A/c for the

Income and Expenditure Account

Calculation of material consumed with creditor and Advance Payment

Creditor's for Material A/c

Balance Sheet as on January 1, 2008

Receipts and Payments Account

The following additional information is provided to you :

Journal Entries relating to above transactions

(a) Format of Partner's Capital A/c

Date Particulars x y z Date Particulars x y z

To balance c/d (b) - - - By Balance c/d.(b) - - -

Fluctuating Capital Method.

The Proforma of P & L App. A/c

for beginning middle end common difference

(3) Semi annually 9 months 6 months 3 months (difference 3 months)

(Where drawings Beginning Middle End

Net profit before commission × rate of commission

Net Profit before commission × rate of commission

Treatment of Interest on Partner's loan to the firm.

Interest on Partner's Capital under Various situations

Capital Ratio/Effective Capital Ratio

Nill () show the balance.

Liabilities Rs. Assets Rs.

CapitalIntroduced (Rs.) Capital Withdraw (Rs.)

Retirement or Death of a Partner

Year Profit (Rs.)

Years Profits (Rs.)

Balance Sheet as at March 31, 2009

Balance Sheet (as at March 31,2008)

Liabilities Amount Assets Amount

Liabilities (Rs.) Assets (Rs.)

Sundry Creditors 92,500 Cash at Bank 77,000

Reserve fund 67,500 Debtors 90,000

Capital A/cs. Loss: Provision

Ritika 95,500 For Doubtful Debts 2,500 87,500

Swati 69,000 1,64,500 Stock 100,100

Current A/cs. Motor vans 69,000

Ritika 73,000 Plant & Machinery 63,900

Swati 52,500 125,500 Factory Building 52,500