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Model Question Paper

Financial Accounting (CPA510)


Section A : Basic Concepts (30 Marks)
• This section consists of questions with serial number 1 - 30.
• Answer all questions.
• Each question carries one mark.
• Maximum time for answering Section A is 30 Minutes.

1. Which of the following statements is true with respect to the accounting concepts?
(a) The concept of conservatism places a constraint on what should be recorded and reported
(b) Accounting period concept states that expenses are to be recognized in the period of their related revenue
(c) Going concern concept assumes that business will be carried on for a definite period
(d) Provision for bad and doubtful debts is created in recognition of realization concept
(e) Matching concept states that resources are consumed to earn the revenue and the cost of resources
consumed should be set off to obtain income.
2. Which of the following errors is not disclosed by the trial balance?
(a) A cash sale of Rs.1,400 is omitted to be recorded in the sales account
(b) An amount of Rs.2,500 received from ‘A’ is posted on the debit side of B’s account
(c) A credit purchase of goods worth Rs.4,500 is recorded in the purchase book as Rs.5,400
(d) An amount of Rs.3,200 paid to RX Ltd., is posted twice to the debit of RX Ltd.’s account
(e) A receipt of Rs.5,700 from a debtor is posted correctly in the cash account but on the correct side of
debtors account as Rs.570.
3. Which of the following statements is false with respect to the classification of expenses as revenue and capital?
(a) Capital expenditure results from outflow of cash relating to bringing an asset of an enduring nature into
existence
(b) Revenue expenditure relates to those expenses which are incurred in earning the revenues and the benefit
of which gets exhausted within the same accounting period
(c) If any asset is bought by an enterprise for resale, it becomes a capital expenditure for the enterprise
(d) Capital expenditure relates to such expenses, which generate benefits and assists the entity in earning
revenue over a period of time
(e) Revenue expenditure of the period is matched with revenue receipts and is charged to profits during the
period.
4. Which of the following statements is false with reference to inventories?
(a) The finished goods which have been produced internally for inventory should be priced at production
cost
(b) The periodic system computes cost of goods sold as residual amount
(c) The perpetual system is more accurate but more costly
(d) The cost of acquisition of inventory does not include direct expenses
(e) Historical cost of inventory refers to the cost of acquisition of inventory.
5. Which of the following statements is true in respect of the entries recorded in the books of the drawee of a bill?
(a) When a bill is accepted, the account to be credited is drawer’s a/c
(b) When a bill is discharged, the account to be credited is bills payable a/c
(c) When a bill presented for payment by bank is dishonored, the account to be credited is bills payable a/c
(d) When noting charges of a dishonored bill is paid by the endorsee, the account to be credited is drawer’s
a/c
(e) When a bill is retired before its maturity, the account to be credited is the bills payable a/c.
6. Consider the following data from the books of a trader for the year ended December 31, 2008:
Particulars Rs.
Balance of capital account as on January 01, 2008 4,00,000
Additional capital introduced during the year 1,00,000
Balance of capital account as on December 31, 2008 8,00,000
Drawings in the beginning of the year 2,00,000
Interest on opening capital 5% p.a.
Interest on drawings 6% p.a.
Profit earned during the year ended December 31, 2008 was
(a) Rs.4,92,000
(b) Rs.3,00,000
(c) Rs.5,00,000
(d) Rs.5,12,000
(e) Rs.5,32,000.
7. Which of the following statements is false?
(a) The forfeited shares should not be re-issued at a premium
(b) At the time of forfeiture of shares, securities premium account should not be debited with the amount of
premium already received
(c) Shares can be issued at a discount only after one year from the commencement of business
(d) Securities premium cannot be utilized to redeem preference shares
(e) The loss on re-issue of shares cannot be more than the gain on forfeiture of those shares.
8. While finalizing the current year accounts, Karthika Ltd., realized that closing stock of the previous year is over
stated by Rs.15,000 and closing stock of the current year is overstated by Rs.36,000. Because of these errors, the
net income for the current year is
(a) Understated by Rs.51,000
(b) Overstated by Rs.51,000
(c) Understated by Rs.36,000
(d) Overstated by Rs.21,000
(e) Understated by Rs.21,000.
9. The following information pertains to Soma Ltd., for the year 2007-08:
Particulars April 1, 2007 (Rs.) March 31, 2008 (Rs.)
Inventory 72,000 67,000
Sundry debtors 47,000 70,000
Sundry creditors 40,000 38,000
Total credit sales made during the year were Rs.6,75,000. The cost of goods sold of the company was 80% of the
sales.
If there were no cash sales and cash purchases during the year, cash paid to sundry creditors during the year was
(a) Rs. 7,22,000
(b) Rs. 6,98,000
(c) Rs. 6,75,000
(d) Rs. 6,77,000
(e) Rs. 5,37,000.
10. On September 01, 2008, Bharath accepted a bill drawn by Suraj for 6 months for Rs.4,725 being amount due. On
September 04, 2008, Suraj got the bill discounted with his bank at 12% per annum (rounded off to the nearest
rupee). On October 16, 2008, Bharath was declared as insolvent. A dividend of 20 paise in the rupee was
received from his official receiver on December 16, 2008. The amount received from the official receiver on
December 16, 2008 was
(a) Rs.3,780
(b) Rs. 840
(c) Rs. 945
(d) Rs.4,200
(e) Rs.3,600.
11. Happy Club furnishes you the following information for the year 2007-08:
Particulars Rs.
Subscriptions received during the year 2007-08 4,000
Subscriptions received in advance for the year 2008-09 800
Subscriptions outstanding for 2007-08 400
Subscriptions outstanding for 2006-07 300
The amount of subscriptions to be shown in the income and expenditure account of 2007-08 is
(a) Rs.4,800
(b) Rs.4,400
(c) Rs.3,300
(d) Rs.3,200
(e) Rs.3,900.
12. Firex Coal Ltd., took a coalfield on lease from Bhuma Ltd., for a period of 25 years from April 01, 2004.
Royalty should be paid at the rate of Rs.5 per ton of coal extracted. A minimum rent of Rs.3,00,000 per annum
should be paid. Lessee has authority to recoup the short workings during the first three years of the lease. The
coal extracted for the past four years was as follows:
Year Coal in tonnes
2004-05 10,000
2005-06 70,000
2006-07 80,000
2007-08 1,20,000
The amount payable to Bhuma Ltd., during the year 2006-07 was
(a) Rs.3,00,000
(b) Rs. 50,000
(c) Rs.1,00,000
(d) Rs.2,50,000
(e) Rs.2,00,000.
13. Ranky Ltd., has furnished the following data from its Balance Sheet:
Liabilities Rs.
15,000, 10% Preference shares of Rs.10 each fully paid-up 1,50,000
1,20,000, Equity shares of Rs.10 each, Rs.7 paid-up 8,40,000
General reserve 2,00,000
Securities premium 50,000
Capital reserve 1,00,000
Profit and Loss account 3,50,000
The directors decided to issue one bonus share for every three shares held, after making the final call of Rs.3 per
share. It was decided to use capital reserve, securities premium, general reserve to the fullest extent possible and
the deficit to be adjusted from Profit and Loss account. The capital reserve includes a cash gain of Rs.60,000
against the sale of machinery. The securities premium includes Rs.10,000 being the amount of premium on the
shares issued to promoters. The amount to be adjusted from Profit and Loss account, for the issue of bonus
shares is
(a) Rs.1,00,000
(b) Rs. 90,000
(c) Rs.1,20,000
(d) Rs.1,50,000
(e) Rs. 50,000.
14. The reserve created by the insurance companies to provide for the high amount of claims due to losses occurred
in the calamity such as earthquake, floods, war, etc. is known as
(a) General Reserve
(b) Revaluation Reserve
(c) Capital Redemption Reserve
(d) Catastrophe Reserve
(e) Reserve for unexpired risk.
15. The balance in the creditors account of Shirdibaba Ltd., as at the beginning of the month of December 2008
was Rs.3,40,000. During the month a sum of Rs.2,00,000 was paid to the creditors. The creditors were allowed a
sum of Rs.5,600 as cash discount. A bill for Rs.6,000 accepted by the company earlier in favour of a creditor
could not be honoured on the due date and hence was dishonoured on December 20, 2008. The balance in the
creditors’ account at the end of the month of December 2008 was Rs.3,90,400. The amount of credit purchases
made during the month of December 2008 was
(a) Rs.2,56,400
(b) Rs.2,50,400
(c) Rs.2,46,600
(d) Rs.2,50,000
(e) Rs.2,49,600.
16. The incomes or expenses which arise in the current year as a result of errors or omissions in the preparation of
financial statements of one or more previous years are known as
(a) Prior period items
(b) Extraordinary items
(c) Contingent items
(d) Preliminary items
(e) Equity items.
17. Liquidator’s Final Statement of Account is in the nature of
(a) Real account
(b) Representative personal account
(c) Personal account
(d) Nominal account
(e) A statement, but not an account.
18. Bills receivable a/c of Pavan Ltd., showed a balance of Rs.75,000, on December 01, 2008. New bills accepted by
debtors during the month of December 2008 amounted to Rs.9,000 and bills dishonoured by drawees amounted
to Rs.12,000 and bills honoured by drawees amounted to Rs.37,500. Bills receivable account balance as on
December 31, 2008 was
(a) Rs. 91,500
(b) Rs. 34,500
(c) Rs. 72,000
(d) Rs.1,15,500
(e) Rs.1,09,500.
19. Shakthi Ltd., gave a Bauxite mine on lease to Rakhi Ltd., at a royalty of Rs.4 per ton of Bauxite raised and a
minimum rent of Rs.12,000 per annum. Since there was a provision for sublease, Rakhi Ltd., subleased a part of
the mine to Vishu Ltd., at a royalty of Rs.5 per ton and a minimum rent of Rs.6,000 per annum. At the end of the
first year, Bauxite raised by Vishu Ltd., was 1,050 tonnes and Rakhi Ltd., was 2,850 tonnes (exclusive of 1,050
tones). The amount of royalty receivable by Shakthi Ltd., is
(a) Rs. 6,000
(b) Rs.12,000
(c) Rs.15,600
(d) Rs.11,400
(e) Rs.18,000.
20. The reversionary bonus is
(a) The amount that the policy holder can get immediately in cash if he stops paying further premium
(b) Bonus payable in cash at the end of every year
(c) Bonus payable on maturity of policy pending the ascertainment of profit
(d) Bonus payable in cash but utilized by policy holder to adjust premium due from him
(e) Bonus payable only on the maturity of the policy.
21. The following information is extracted from the Balance Sheet of Acess Bank Ltd., for the year 2007-08:
Particulars Rs.
Advances 1,80,20,000
Deposits 41,25,000
Investments 60,15,000
Cash and balances with RBI 7,60,000
Fixed assets 15,30,000
Other assets 5,15,000
Balances with banks and money at call & short notice 4,10,000
The total amount on assets side of the balance sheet of Acess Bank Ltd., was
(a) Rs.2,40,35,000
(b) Rs.3,13,75,000
(c) Rs.2,53,60,000
(d) Rs.2,72,50,000
(e) Rs.2,21,45,000.
22. The following data was extracted from the books of Deepu Ltd., as on March 31, 2008:
• Total sundry debtors as per Trial Balance Rs.60,900.
• Bad debts identified after the preparation of Trial Balance Rs.900.
• Provision for bad debts to be created @ 5% on sundry debtors.
• Provision for discount on sundry debtors to be created @ 2%.
The net amount of sundry debtors shown in the balance sheet of Deepu Ltd., as on March 31, 2008 was
(a) Rs.55,860
(b) Rs.60,000
(c) Rs.57,000
(d) Rs.60,900
(e) Rs.58,800.
23. The life insurance fund of Abhaya Insurance Company on December 31, 2008 showed a balance of
Rs.71,58,750. It was later found that the following adjustments were not taken into account:
Particulars Amount (Rs.)
Dividend from investment 3,90,000
Income tax on above 18,750
Bonus in reduction of premium 7,00,875
Claims covered under re-insurance 3,47,250
Claims intimated but not accepted and paid by the company 5,81,250
Balance of fund after incorporating the above transactions was
(a) Rs.74,04,375
(b) Rs.65,62,875
(c) Rs.65,54,625
(d) Rs.65,95,125
(e) Rs.65,45,625.
24. If the difference in trial balance is transferred to Suspense a/c, what will be the Suspense a/c balance due to the
following errors?
i. Debited Purchases a/c by Rs.6,500 for furniture purchased.
ii Debited Jain’s a/c and Salary a/c by Rs.3,000 each for salary paid to him.
iii. Debited Agarwal’s a/c by Rs.7,350 for goods purchased from him on credit.
iv. Credited Samanth’s a/c by Rs.100 for cash discount allowed by him.
(a) Rs.16,750
(b) Rs.10,250
(c) Rs.17,500
(d) Rs.24,200
(e) Rs.24,100.
25. Bank pass book of Mr.Vishnu showed a favourable balance of Rs.20,000, as on March 31, 2008. The pass book
balance did not agree with the balance as per cash book. On scrutiny, the following errors and omissions were
noticed:
• A cheque for Rs.4,000 issued has not been presented for payment till date.
• Rent of Rs.10,000 directly deposited into the bank account by the tenant is not accounted in the cash
book.
• A cheque for Rs.15,000 deposited in the bank is not yet realized.
• The interest on debentures directly collected by the bank, amounting to Rs.10,000 is not accounted in the
cash book.
The bank balance as per cash book is
(a) Debit balance of Rs.40,000
(b) Credit balance of Rs.11,000
(c) Credit balance of Rs.20,000
(d) Debit balance of Rs.11,000
(e) Debit balance of Rs.19,000.
26. Always Bank Ltd., has furnished the following data for the year ended March 31, 2008:
Due date inclusive of 3
Bill No. Rs.
days of grace
1. 1,20,000 01.05.2008
2. 2,00,000 28.02.2008
3. 8,00,000 29.07.2008
4. 60,000 01.06.2008
The above bills were discounted at 5% p.a. The unexpired discount as on March 31, 2008 was
(a) Rs.13,710
(b) Rs.13,170
(c) Rs.14,710
(d) Rs.14,701
(e) Rs.14,170.
27. The book value of stock as on March 14, 2008 was Rs.1,30,000. Goods worth Rs.6,000 were destroyed in fire on
March 15, 2008, against which claim for Rs.4,000 was admitted by the Insurance Company. Which of the
following is the appropriate accounting treatment for the above transaction?
(a) Debit Rs.4,000 to Profit & Loss a/c and show Rs.4,000 as claim receivable on the asset side of Balance
Sheet
(b) Debit Rs.6,000 to Profit & Loss a/c and show Rs.4,000 as claim receivable on the asset side of Balance
Sheet
(c) Deduct Rs.6,000 from the value of closing stock; debit Rs.2,000 to Profit & Loss a/c and show Rs.4,000
as claim receivable on the asset side of Balance Sheet
(d) Deduct Rs.6,000 from the value of closing stock; debit Rs.6,000 to Profit & Loss a/c and show Rs.4,000
as claim receivable on the asset side of Balance Sheet
(e) Credit Rs.2,000 to Profit & Loss a/c and show Rs.4,000 as claim receivable on the asset side of Balance
Sheet.
28. Physical stock of a company was found to be Rs.35,000. It was taken on April 07, 2008, a week after the end of
the accounting year March 31, 2008.
Additional information:
i. Goods costing Rs.5,000 were sold during the week.
ii. Goods costing Rs.4,000 were purchased during the week.
iii. Goods earlier purchased but returned during the period amounted to Rs.1,000.
iv. Goods earlier purchased but not received Rs.6,000.
The book value of stock held as on March 31, 2008 was
(a) Rs.27,000
(b) Rs.19,000
(c) Rs.43,000
(d) Rs.51,000
(e) Rs.35,000.
29. Which of the following statements is true?
(a) Income tax provision relating to current year is a charge against Profit & Loss appropriation account
(b) Income tax provision relating to previous year should be debited to Profit & Loss account
(c) Interim dividend should be debited to Profit & Loss account
(d) Managing director’s salary should be debited to Profit & Loss account
(e) Provision for doubtful debts relating to current year is a charge against Profit & Loss appropriation
account.
30. Alphons Ltd., issued 1,000 equity shares of Rs.10 par value at Rs.30 per share and all shares are subscribed and
total amount duly received. The journal entry to record this transaction would include a
(a) Debit to Cash for Rs.10,000
(b) Credit to Share capital for Rs.30,000
(c) Debit to Share premium Rs.20,000
(d) Credit to Share capital for Rs.10,000
(e) Credit to Cash for Rs.20,000.

END OF SECTION A

Financial Accounting (CPA510)


Section B : Problems (50 Marks)
• This section consists of questions with serial number 1 – 5.
• Answer all questions.
• Marks are indicated against each question.
• Detailed workings should form part of your answer.
• Do not spend more than 110 - 120 minutes on Section B.

1. Grace Ltd., has furnished the following trial balance prepared by their newly appointed accounts
assistant as on March 31, 2008:
Particulars Dr. (Rs.) Cr. (Rs.)
Share Capital (2,00,000 equity shares of Rs.10 each) 20,00,000
Purchases 20,00,000
Stock as on April 01, 2007 3,50,000
Creditors 2,50,000
Bad debts 1,500
Fixed assets at cost: Land 8,50,000
Furniture 2,50,000
Buildings 12,50,000
Motor vehicles 1,55,000
Accumulated depreciation: Buildings 30,000
Motor vehicles 25,000
Furniture 50,000
Postage and telegram 5,000
Motor vehicle expenses 22,500
Interest received 7,500
Auditors’ fees 2,500
13% Debentures 9,00,000
Cash and Bank balances 87,850
Calls-in-arrears 6,000
Sales 27,50,000
Debtors 7,25,000
Provision for doubtful debts 2,500
Bad debts recovered 100
Salaries 1,75,000
Printing and stationery 7,500
Investments (at cost) 2,50,000
Directors’ fess 7,250
Profit & Loss a/c (Cr. Balance) 1,30,000

Total 61,45,100 61,45,100


Additional information:
i. The value of stock as on March 31, 2008 is Rs.5,00,000.
ii. Grace Ltd., has appointed an agent during the year and goods were sent out at an invoice price
of Rs.2,50,000 which was determined by adding 25% margin on cost. As on March 31, 2008,
the entire stock was still lying with the agent as unsold, which is not included in the value of
closing stock.
iii. Depreciation should be provided on written-down values of the assets at the following rates:
Buildings 5%; Furniture 10%; and Motor vehicles 20%.
iv. Market value of investments as on March 31, 2008 was Rs.3,25,000.
v. Provision for doubtful debts is required to be maintained at Rs.5,000. A provision for discounts
on debtors is to be created at 0.5% of debtors.
vi. The debentures had been issued on October 01, 2007. Interest is payable semi-annually on
March 31 and September 30.
vii. Provision for income tax to be created at 50%. The depreciation allowable for income tax
calculation is Rs.1,75,000.
viii. The directors proposed a dividend of 10% on capital.
You are required to prepare:
a. Profit and Loss account for the year ended March 31, 2008. ( 6 marks)
b. Balance Sheet as on March 31, 2008. ( 4 marks)
2. Showtime Electronics Ltd., started selling television sets on hire purchase from April 1, 2007. The
relevant information for the year ended March 31, 2008 was as follows:
Particulars
Cost per television set (Rs.) 13,000
Cash Price per television set (Rs.) 14,000
Cash down payment per television set (Rs.) 2,000
Monthly Installment amount per television set (Rs.) 1,400
Number of installments on each television set 10
Number of television sets sold on hire purchase 200
Five television sets on which only 4 installments could be collected were repossessed. These were
valued at Rs.32,000. After reconditioning them at a cost of Rs.3,000, they were sold out-right for
Rs.45,000.
With respect to other television sets sold on hire purchase basis, 550 installments have been collected
and 50 installments are due.
You are required to prepare all relevant accounts under the Stock and Debtors system to reveal the
profit of the Company for the year ended March 31, 2008. Show your workings. ( 10 marks)
3. Sunshine Appliances Ltd., has its branches at Ahmadabad and Bhubaneswar to whom goods are
invoiced at cost plus 25%. Following information is available of the transactions at Ahmadabad
Branch for the year ended March 31, 2008:
Balances on April 01, 2007:
Stock at invoice price Rs. 80,000
Debtors Rs. 24,000
Petty Cash Rs. 300
Transactions pertaining to Ahmadabad Branch during the year 2007-08:
Particulars Rs.
Goods sent to branch at invoice price 8,40,000
Goods returned to head office at invoice price 30,000
Cash sales 2,10,000
Credit sales 3,60,000
Normal loss at invoice price 700
Goods pilfered at invoice price 6,000
Goods lost by fire at invoice price 8,000
Insurance company paid to head office 6,000
Cash sent for petty expenses 64,000
Bad debts 800
Goods transferred to Bhubaneswar branch at invoice price 24,000
Insurance charges paid by head office 400
Goods returned by debtors 1,000
Balances on March 31, 2008:
Debtors Rs.22,000
Petty Cash Rs. 500
Goods transferred to Bhubaneswar Branch were in transit on March 31, 2008.
You are required to prepare the following accounts for Ahmadabad Branch for the year ended
March 31, 2008:
i. Branch Stock account.
ii. Branch adjustment account.
iii. Branch Profit and Loss account.
iv. Stock reserve account.
v. Branch Debtors account. ( 10 marks)
4. Techno Ltd., has furnished the following information as on September 30, 2008:
Particulars Rs.
9% Debentures (issued @ Rs.95 per Debenture) 19,00,000
Debentures Redemption Fund 18,74,000
Discount on issue of Debentures 52,000
Debentures Redemption Fund Investment 18,74,000
Additional information:
• Investments include Debentures of the face value of Rs.4,00,000 (own Debentures)
purchased on August 1, 2008 @ Rs.99 ex-interest.
• Interest on Debentures is payable on June 30 and December 31.
• All debentures were redeemable at par in December 2008.
• Income from outside investments of Redemption Fund was Rs.90,000.
• All outside investments were sold at a profit of 10% over cost.
You are required to prepare all the relevant ledger accounts as on December 31, 2008 after
considering the above transactions. ( 10 marks)
5. A fire accident occurred at the premises of Hitesh Ltd., on September 13, 2008, and destroyed a
substantial part of the stock. It also destroyed some of the office records. The company has insured
the stock for Rs.1,68,000. The following figures were included in the profit calculation for the year
ended March 31, 2008:
Particulars Rs.
Sales 8,12,000
Purchases 6,12,000
Stock on 01.04.2007 1,40,000
Stock on 31.03.2008 1,60,000
Additional information:
i. The stock on April 01, 2007 included Rs.12,000 representing goods which had been reduced in
value at the stock taking and were all sold during the period 2007-08 for the same reduced
amount.
ii. The stock at March 31, 2008 included Rs.20,000 representing goods which were reduced to
half-cost at the time of stock taking. Of these, Rs.12,000 were sold in April 2008, and Rs.4,000
were scrapped in May 2008, without any revenue at all, and the balance had not been disposed of at
the time of fire.
iii. The cost price of stock on September 13, 2008 unaffected by the fire was Rs.52,286, but the
rest of the stock was completely destroyed, and this included the balance of the marked-down
referred to in (ii) above.
iv. The purchases during the period from April 01, 2008 to September 13, 2008 were Rs.2,91,000,
and sales for the same period were Rs.3,80,000 and there were returns from customers of
Rs.8,000.
You are required to calculate the amount that can be claimed by the company for the loss of stock.
Show your workings. ( 10 marks)
END OF SECTION B

Section C : Applied Theory (20 Marks)


• This section consists of questions with serial number 6 - 7.
• Answer all questions.
• Marks are indicated against each question.
• Do not spend more than 25 - 30 minutes on Section C.

6. ‘Financial statements portray the effects of financial transactions by grouping these into broad
classes according to their elements’. In this context, explain the elements of financial statements. ( 10 marks)
7. Briefly explain the different methods of redemption of debentures. ( 10 marks)
END OF SECTION C

END OF QUESTION PAPER


Suggested Answers
Financial Accounting (CPA510)
Section A : Basic Concepts
Answer Reason
1. E Option (a) is not true as the concept of materiality places a constraint on what should be recorded and
reported but not conservatism concept. Option (b) is not true because, matching concept states that
expenses are to be recognized in the period of their related revenue and not accounting period concept.
Option (c) is not true as going concern concept assumes that business will be carried on for indefinite
period but not definite period. Provision for bad and doubtful debts is created in recognition of
conservatism concept and not realization concept. Hence, option (d) is not true. Option (e) is true as
matching concept states that resources are consumed to earn the revenue, and the cost of resources
consumed should be set off to obtain income. Hence, the answer is (e).
2. C A credit purchase of goods worth Rs.4,500 is recorded in the purchase book as Rs.5,400 is not disclosed
by the trial balance as both the purchase account and creditors account are posted on the correct side
with Rs.5,400, so the error does not cause a disagreement of the trial balance. All the other given options
are the errors disclosed by trial balance. Hence, the answer is (c).
3. C If any asset is bought by an enterprise for resale, it becomes revenue expenditure for the enterprise and if
it is not meant for resale it becomes capital expenditure. All the other options are true about the features
of capital and revenue expenditure. Hence, the answer is (c).
4. D The cost of acquisition includes direct expenses.
• The finished goods which have been produced internally for inventory should be priced at
production cost.
• The periodic system computes cost of goods sold as residual amount.
• The perpetual system is more accurate but more costly.
• The cost of acquisition of inventory includes direct expenses.
• Historical cost of inventory refers to the cost of acquisition of inventory.
Hence, (d) is correct answer.
5. D • When a bill is accepted, the account to be credited is bills payable a/c.
• When a bill is discharged, the account to be credited is cash a/c.
• When a bill presented for payment by bank is dishonored, the account to be credited is drawer’s
a/c.
• When noting charges of a dishonored bill is paid by the endorsee, the account to be credited is
drawer’s a/c.
• At the time of retirement of a bill, the account to be credited is the cash a/c.
6. A
Particulars Rs. Rs.
Closing capital 8,00,000
Add: Drawings in the begining of the year 2,00,000
Interest on drawings @ 6% 12,000 2,12,000
10,12,000
Less: Additional capital 1,00,000
Interest on opening capital @ 5% on
20,000
Rs.4,00,000
Opening capital 4,00,000 5,20,000
Profit earned during the period 4,92,000
7. A Forfeited shares can be re-issued at a premium. Thus, the statement in alternative (a) is false. The
statements in other alternatives are true, if share premium is already received, share premium account
cannot be debited with the amount of premium on forfeiture of shares; Shares can be issued at a
discount, only after one year from the commencement of business; Share premium can be utilized only
for specific purposes as per the provisions of section 78 of the Companies Act and it cannot be utilized
to redeem preference shares; The forfeited shares cannot be reissued for a loss more than the gain on
those shares. Alternative (a) is the correct answer.
8. D Over statement of closing stock of previous year leads to the overstatement of opening stock of the
current year.
Over statement of opening stock results in the understatement of profit by Rs.15,000.
Over statement of closing stock of current year results in the overstatement of profit by Rs.36,000.
So, the net effect on the profit = Rs.36,000 – Rs.15,000 = Rs.21,000 over stated.
9. E Inventory account
Particulars Rs. Particulars Rs.
To Balance b/d 72,000 By Goods sold (Rs.6,75,000 5,40,000
× .80)
To Sundry creditors 5,35,000 By Balance c/d 67,000
6,07,000 6,07,000
Sundry creditors account
Particulars Rs. Particulars Rs.
To Cash 5,37,000 By Balance 40,000
b/d
To Balance 38,000 By Purchases 5,35,000
b/d
5,75,000 5,75,000
10. C In the books of Suraj
Bharath Account
Partciulars Rs. Partciulars Rs.
To Balance b/d 4,725 By Bills receivable account 4,725
To Bank account 4,725 By Cash account (20% on Rs.4,725) 945
By Bad debts account 3,780
9,450 9,450
11. C
Rs. Rs.
Subscriptions received during the year 4,000
Less: subscriptions received for the year 2008-09 800
Less: subscriptions outstanding for the year 2006-07 300 1,100
2,900
Add: subscriptions outstanding for the year 2007-08 400
3,300
12. A Royalty per ton – Rs.5
Minimum Rent – Rs.3,00,000 per annum
Analysis of Royalties Payable
Coal Actual Minimum Excess Amount
Year Shortworkings
extracted Royalties Rent Working Payable
Written
Suffered Recouped C/F
– off
Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.
2004- 10,000 50,000 3,00,000 - 2,50,000 - - 2,50,000 3,00,000
2005
2005- 70,000 3,50,000 3,00,000 50,000 - 50,000 - 2,00,000 3,00,000
2006
2006- 80,000 4,00,000 3,00,000 1,00,000 - 1,00,000 1,00,000 NIL 3,00,000
2007
2007- 1,20,000 6,00,000 3,00,000 3,00,000 - - - - 6,00,000
2008
The amount payable to Bhuma Ltd., during the year 2006-07 was Rs.3,00,000.
13. A Number of bonus shares = 1,20,000 / 3 = 40,000
Particulars Rs.
Amount of bonus issue = 40,000 × Rs.10 4,00,000
Less: Amount to be adjusted against:
Capital reserve (amount realized in cash) 60,000
Securities premium (Rs.50,000 – Rs.10,000) 40,000
General reserve 2,00,000
Amount to be utilized from Profit and Loss 1,00,000
account
The securities premium collected in cash can be utilized for the bonus issue. Hence the amount of
Rs.10,000 on issue of shares to promoters cannot be utilized for issue of bonus shares.
14. D Sometimes, due to reasons such as earthquake, floods, war, etc., an insurance company can be subjected
to high amount of claims due to losses occurred in the calamity. To provide for such contingency, an
insurance company has to create catastrophe reserve in its accounts in accordance with any norms which
may be prescribed by the IRDA in this respect.
Dr. Creditors account Cr.
15. D Particulars Rs. Particulars Rs.
To Cash 2,00,000 By Balance b/d 3,40,000
To Discount 5,600 By Bills payable 6,000
To Balance c/d 3,90,400 By Credit purchases (b/f) 2,50,000
5,96,000 5,96,000
16. A According to Accounting Standard-5, the incomes or expenses which arise in the current period as a
result of errors or omissions in the preparation of financial statements of one or more prior periods is
known as prior period items. Extraordinary items are income or expenses that arise from events or
transactions that are clearly distinct from the ordinary activities of the enterprise and, therefore, are not
expected to recur frequently or regularly. Contingent items are gains or losses, which arise only on the
occurrence or non-occurrence of a one or more uncertain future events. Preliminary items are those
expenses incurred for the incorporation of the company. Equity items are the items like equity share
capital, calls-in-arrears, which are related to equity shareholders.
17. A The main job of the liquidator is to collect the assets of the company and realize them and distribute the
money realized among right claimants. For this purpose, liquidator is required to prepare an account of
winding up known as Liquidator’s Final Statement of Account after the affairs of the company are fully
wound up. This account takes the form of cash account. Hence, it is a real account.
18. B Dr. Bills Receivable account Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 75,000 By Debtors a/c 12,000
To Debtors a/c 9,000 By Cash a/c 37,500
By Balance c/d 34,500
84,000 84,000
Balance of Bills receivable as on December 31, 2008 was Rs.34,500.
19. C Where the original lessee subleases the asset, he is liable to the landlord for the total output (own +
sublease).
Hence, Rakhi Ltd., is liable to pay royalty on 3,900 tonnes (2,850 + 1,050)
= 3,900 × Rs.4 per tonne = Rs.15,600.
20. E The reversionary bonus is the bonus payable only on maturity of the policy. Bonus payable in cash at the
end of every year is called bonus in cash, bonus payable on maturity of policy pending the ascertainment
of profit is interim bonus, bonus payable in cash but is utilized by policy holder to adjust premium due
from him is bonus in reduction of premium and the amount the policy holder can get immediately in
cash if he stops paying premium is the surrender value. Hence, (a) is the correct answer.
21. D
Particulars Schedule Rs.
Cash and balances with RBI 6 7,60,000
Balances with banks and money at call & short notice 7 4,10,000
Investments 8 60,15,000
Advances 9 1,80,20,000
Fixed assets 10 15,30,000
Other assets 11 5,15,000
Total assets 2,72,50,000
Deposits falls under schedule 3 in liabilities side of the balance sheet.
22. A
Particulars Rs. Rs.
Total sundry debtors as per Trial Balance 60,900
Less: Bad debts identified after the preparation of Trial
900 60,000
Balance
Less: Provision for bad debts @5% on Rs.60,000 3,000
57,000
Provision for discount on sundry debtors will be
2 1,140
× Rs.57,000
100
The net amount of sundry debtors shown in the balance
55,860
sheet
23. D Statement showing life insurance fund
Particulars Rs. Rs.
Balance of fund as on December 31, 2008 71,58,750
Add: Dividend 3,90,000
Re-insurance recoveries 3,47,250 7,37,250
Sub-total 78,96,000
Less: Income tax 18,750
Bonus in reduction of premium 7,00,875
Claims intimated but not accepted and paid by the 5,81,250 13,00,875
company
Balance of fund after adjustments 65,95,125
24. C Dr. Suspense account Cr.
Particulars Rs. Particulars Rs.
To Jain account 3,000 By Difference in Trial balance 17,500
To Agarwal account 14,700 By Samanth a/c 200
17,700 17,700
25. D Bank Reconciliation Statement
Particulars Rs. Rs.
Favourable balance as per Pass book 20,000
Add: Cheque deposited, yet to be realised 15,000 15,000
35,000
Less: Cheques issued but not presented for
4,000
payment
Rent deposited directly into the bank 10,000
Interest on debentures directly collected by
10,000 24,000
bank
Favourable balance as per cash book (debit
11,000
balance)
26. E
Due date Un- Interest
Sl. Amount
inclusive of 3 expired Calculations in Rs. amount in
No. (Rs.)
days of grace period Rs.
1. 1,20,000 01.05.2008 31 days 1,20,000 × .05 × 510
31/365
2. 8,00,000 29.07.2008 120 days 8,00,000 × .05 × 13,150
120/365
3. 60,000 01.06.2008 62 days 60,000 × .05 × 510
62/365
14,170
27. C Deduct Rs.6000 from the value of closing stock; Debit Rs.2000 to P&L A/c and show Rs.4000 as claim
receivables on the asset side of B/S –To estimate the actual stock held, value of stock destroyed in fire to
be deducted. As against the loss of Rs.6000 claim admitted is only Rs.4000.The difference of Rs.2000 to
be treated as a loss and taken to P&L A/c. As the claim amount is receivable it is to be taken on the asset
side of B/s.
28. C
Particulars Rs. Rs.
Value of physical stock 35,000
Add: Goods purchased but not
6,000
received
Goods sold during the week 5,000
Goods earlier purchased but
1,000 12,000
returned
47,000
Less: Goods purchased during the
4,000
week
Closing stock as on March 31, 2008 43,000
29. D Profit and loss account is usually prepared on accrual basis. All expenses, incurred and due whether they
are actually paid for or not and provisions are debited to profit and loss account. Managing director’s
salary is an expenditure and is to be debited to profit and loss account like any other expenditure. Hence,
the statement is true.
The other alternatives are not correct because
• Profit and loss appropriation account is a financial statement wherein allocation of profits is
reflected. Income Tax provision relating to current year is a charge against profit and loss account
and not profit and loss appropriation account.
• Income tax provision relating to previous year is a charge against profit and loss appropriation
account and not profit and loss account.
• Interim dividend is allocation of profit and it is a charge against profit and loss appropriation
account and should not be debited to profit and loss account.
• Provision for doubtful debts is a potential expenditure and it is a charge against profit and loss
account and not profit and loss appropriation account.
30. D The credit to share capital should be for Rs.10,000; the amount of the legal capital requirement as
determined by the Rs.10 par value (1000 shares × Rs.10 per share). The entire entry to record this
transaction would be debit Cash, Rs.30,000; credit Share capital, Rs.10,000; and credit share premium
Rs.20,000.
Section B : Problems
1. Grace Ltd.
Dr. Profit and Loss Account for the year ended March 31, 2008 Cr.
Particulars Rs. Rs. Particulars Rs. Rs.
To Opening stock 3,50,000 By Sales 27,50,000
To Purchases 20,00,000 By Closing Stock a/c 5,00,000
To Gross profit c/d 11,00,000 Add: Stock with 2,00,000 7,00,000
Agent (Note 1)
34,50,000 34,50,000
To Salaries 1,75,000 By Gross profit b/d 11,00,000
To Postage & Telegram 5,000 By Interest received 7,500
To Printing & Stationery 7,500 By Bad debts 100
recovered
To Motor Vehicle Expenses 22,500
To Depreciation (Note 6)
On Buildings 61,000
On Furniture 20,000
On Vehicles 26,000 1,07,000
To Bad debts 1,500
To Provision for doubtful
debts
New 5,000
Less:Old 2,500 2,500
To Prov. For discount on 3,600
debtors (Note2)
To Directors’s fees 7,250
To Auditor’s fees 2,500
To Interest on debentures 58,500
(Note 4)
To Provision for tax (Note 3,23,375
3)
To Net Profit c/d 3,91,375
11,07,600 11,07,600
To Proposed dividend (Note 1,99,400 By Balance b/d 1,30,000
5)
To Balance c/d 3,21,975 By Net profit b/d 3,91,375
5,21,375 5,21,375

Balance Sheet of Grace Ltd. as at March 31, 2008


Liabilities Rs. Rs. Assets Rs. Rs.
Share Capital: Fixed Assets:
Authorised (2,00,000 Land 8,50,000
shares of Rs.10 each) 20,00,000
Issued & Sub. Buildings (at cost) 12,50,000
(2,00,000 sh.of Rs.10
each) 20,00,000
Called-up capital 20,00,000 Less: Accumulated depreciation 91,000 11,59,000
Less: Calls-in-arrears 6,000 19,94,000 Furniture (at cost) 2,50,000
Reserves and Less: Accumulated depreciation 70,000 1,80,000
Surplus:
Profit & Loss a/c 3,21,975 Motor Vehicles (at 1,55,000
cost)
Secured Loans: Less: Accumulated depreciation 51,000 1,04,000
13% Debentures 9,00,000 Investments:
Add: Accrued Interest 58,500 9,58,500 Investments (at cost) 2,50,000
Unsecured Loans: Nil (Market value Rs.3,25,000)
Current Liabilities & Current Assets, Loans and
Provisions: Advances:
A: current Laibilities A: Current Assets
Sundry Creditors 2,50,000 Stock-in-trade 7,00,000
B: Provisions Sundry Debtors 7,25,000
Provision for taxation 3,23,375 Less: Provision for doubtful 5,000
debts
Proposed dividend 1,99,400 7,20,000
Less: Provision for discount 3,600 7,16,400
Cash and Bank balances 87,850
B: Loans & Advances Nil
Miscellaneous Expenditure: Nil
40,47,250 40,47,250

Working Notes: Rs. (2) Provision for Discount on Rs.


(1) Cost of goods with the Debtors
agent:
Invocie price of goods 2,50,000 Balance of debtors as on 7,25,000
31.3.2008
Less: Margin included 50,000 Less: Provision for bad debts 5,000
(25/125 × Rs.2,50,000 (New)
2,00,000 Good Debts 7,20,000
(3) Provision for income tax Rs. Provision for discount on 3,600
debtors @ 0.5%
Profit before tax 7,14,750 (4) Interest on Debentures Rs.
Add: Book depreciation 1,07,000 13% interest for 6 months on 58,500
Rs.9,00,000
8,21,750 (5) Proposed Dividend Rs.
Less: Depreciation as per 1,75,000 Paid-up share capital 19,94,000
I.T rules (Rs.20,00,000 – Rs.6,000)
6,46,750 Proposed dividend @ 10% on
Rs.19,94,000 1,99,400
Provision for tax @ 50% 3,23,375

(6) Calculation of Depreciation Building @ 5% Furniture @10% Motor Vehicles @ 20%


Orginal cost (Rs.) 12,50,000 2,50,000 1,55,000
Less: Accumulated 30,000 50,000 25,000
depreciation
Written-down-value 12,20,000 2,00,000 1,30,000
Depreciation 61,000 20,000 26,000
2. In the books of Showtime Electronics Ltd.
Dr. Hire Purchase Stock Account
Cr.
Date Particulars Rs. Date Particulars Rs.
2007-08 To Goods Sold on 32,00,000 2007-08 By Hire Purchase 12,68,000
Hire Purchase a/c Debtors a/c (Note 5)
(Note 1)
31.03.08 By Goods Repossessed 42,000
a/c (Note 6)
31.03.08 By Balance c/d (Note 3) 18,90,000
32,00,000 32,00,000
Dr. Hire Purchase Debtors Account Cr.
Date Particulars Rs. Date Particulars Rs.
2007-08 To Hire Purchase 12,68,000 2007-08 By Cash a/c (Note 2) 11,98,000
Stock a/c (Note 5)
31.03.08 By Balance c/d (Note 70,000
7)
12,68,000 12,68,000
Dr. Goods Sold on Hire Purchase Account Cr.
Date Particulars Rs. Date Particulars Rs.
31.03.08 To Hire Purchase 6,00,000 31.03.08 By Hire 32,00,000
Adjustment a/c (Note 1) Purchase Stock
a/c
31.03.08 To Purchase a/c 26,00,000
(Transfer)
32,00,000 32,00,000

Dr. Goods Repossessed Account Cr.


Date Particulars Rs. Date Particulars Rs.
31.03.08 To Hire Purchase 42,000 31.03.08 By Hire Purchase 10,000
Stock a/c Adjustment a/c (loss
on repossessed goods)
31.03.08 To Bank a/c 3,000 31.03.08 By Bank a/c 45,000
(Expenses)
31.03.08 To Hire Purchase 10,000
Adjustment a/c
(profit on sale of
repossessed goods)
55,000 55,000
Dr. Hire Purchase Adjustment Account Cr.
Date Particulars Rs. Date Particulars Rs.
31.03.08 To Goods 10,000 31.03.08 By Goods Sold on 6,00,000
Repossessed a/c (loss Hire Purchase a/c
on repossessed (Loading)
goods)
31.03.08 To Stock Reserve a/c 3,54,375 31.03.08 By Goods 10,000
(Note 4) Repossessed a/c
(profit on sale of
repossessed goods)
31.03.08 To Profit & Loss a/c 2,45,625
6,10,000 6,10,000
Working notes:
(1) H.P. Sales Rs. Cost of H.P. Sales Rs.
Television – 200 × 32,00,000 Television – 200 × Rs.13,000 26,00,000
Rs.16,000
Total loading = Rs.32,00,000 – Rs.26,00,000 = Rs.6,00,000.
(2) Cash Received for T.V. Rs. (4) Stock Reserve Rs.
Down payment – Rs.2,000 × 4,00,000 Hire Purchase Price per set 16,000
200
Installments collected – 7,70,000 Less: Cost 13,000
Rs.1,400 × 550
Amount collected on goods 28,000 Profit per set 3,000
repossessed – Rs.1,400 × 4
× 5 sets
Total Cash Received 11,98,000 Reserve: 3,000 / 16,000 ×
18,90,000 = Rs.3,54,375
(3) Installment not yet due (5) Hire Purchase total amount due Rs.
Total installments on (195 1,950 Cash down – 200 × Rs.2,000 4,00,000
sets × 10)
Less: Installments collected 550 Installments received & due –
(550 + 50) = 600 × Rs.1,400 8,40,000
1,400 Installments received on 28,000
repossessed goods – 5 × 4 ×
Rs.1,400
Less: Installments due but 50 12,68,000
not received
Installments not yet due 1,350 (6) Installments not yet due on Rs.42,000
repossessed
Television sets – 6 installments
on 5 sets @ Rs.1,400
Amount of installments not 18,90,000 (7) Installment due but not yet paid Rs.70,000
yet due (Rs.1,400 × 1,350) Television – 50 × Rs.1,400

3. In the books of Sunshine Appliances Ltd.


Dr. Branch Stock Account Cr.
Date Particulars Rs. Date Particulars Rs.
1.4.2007 To Balance B/d 80,000 31.3.2008 By Goods Sent to Branch A/C 30,000
(Returns)
31.3.2008 To Goods Sent to 8,40,000 By Bank a/c (Cash Sales) 2,10,000
Branch a/c By Branch Debtors a/c 3,60,000
(Credit Sales)
To Branch Debtors a/c 1,000 By Goods Pilfered a/c 6,000
(Returns) By Goods Lost by Fire a/c 8,000
By Goods Sent to
Bhubaneswar Branch a/c
(Transfer) 24,000
By Normal Loss a/c (Note 1) 700
By Balance c/d 2,82,300
9,21,000 9,21,000

Dr. Branch Adjustment Account Cr.


Date Particulars Rs. Date Particulars Rs.
31.3.2008 To Normal loss a/c (Note 1) 700 1.4.2007 By Branch Stock 16,000
To Goods Pilfered a/c 1,200 Reserve a/c (Note
(Loading –Note 4) 6)
To Goods Lost by Fire a/c 1,600 By Goods Sent to 1,62,000
(Loading Note 5) branch a/c (Note 2)
To Goods Sent to 4,800
Bhubaneswar Branch a/c (Note
7)
To Branch Stock Reserve a/c 56,460
(Note 7)
To Branch Profit and Loss a/c 1,13,240
1,78,000 1,78,000

Dr. Branch Profit and Loss Account Cr.


Date Particulars Rs. Date Particulars Rs.
31.3.2008 To Goods Pilfered a/c 4,800 31.3.2008 By Branch 1,13,240
(cost) Adjustment a/c
To Branch Expenses a/c:
Bad debts 800
Insurance Charges 400
Petty Expenses 63,800
(Note 8)
To Net profit 43,440
(Transferred to General
P&L a/c)
1,13,240 1,13,240

Dr. Stock Reserve Account Cr.


Date Particulars Rs. Date Particulars Rs.
1.4.2007 To BranchAdjustment 16,000 1.4.2007 By Balance b/d 16,000
a/c (Note 6)
31.3.2008 To Balance c/d 56,460 31.3.2008 By branch 56,460
Adjustment a/c
(Note 7)
72,460 72,460
Dr. Branch Debtors Account Cr.
Date Particulars Rs. Date Particulars Rs.
01.4.2007 To Balance 24,000 31.3.2008 By Branch Expenses a/c (Bad 800
b/d Debts)
31.3.2008 To Branch 3,60,000 31.3.2008 By Branch Stock a/c (Returns) 1,000
Stock a/c By Bank a/c (Cash collected) 3,60,200
By Balance c/d 22,000
3,84,000 3,84,000

Working Notes :
(1) For Calculating Branch Closing Stock (when it is not given), normal loss is credited to Branch Stock
Account at invoice price. Normal Loss Account is closed by debiting to Branch Adjustment Account.
(2) Loading on net goods sent: Goods sent to branch Rs. 8,40,000 less goods returned to head office Rs.30,000.
Therefore, net goods sent = Rs.8,10,000. Loading is 1/5 of Rs.8,10,000 = Rs. 1,62,000.
(3) Loading on goods transferred to Bhubaneswar Branch: 1/5 of Rs.24,000 = Rs.4,800.
(4) Loading on goods Pilfered: 1/5 of Rs.6,000 = Rs.1,200. Cost of goods pilfered Rs.4,800
(Rs.6,000 – Rs.1,200) will be debited to Branch profit and loss Account.
(5) Loading on goods lost by fire: 1/5 of Rs.8,000 = Rs.1,600. Cost of goods lost by fire Rs.6,400
(Rs.8,000 – Rs.1,600) will be debited to General Profit and Loss Account.
(6) Loading on opening stock: 1/5 of Rs.80,000 = Rs.16,000.
(7) Loading on closing stock: 1/5 of Rs.2,82,300 = Rs.56,460.
(8) Petty Expenses = Opening petty cash Rs.300 plus cash sent by head office for petty expenses = Rs.64,000
less closing petty cash Rs.500 = Rs.63,800.
4. In the books of Techno Ltd.
Dr. 9% Debentures
Account Cr.
Date Particulars Rs Date Particulars Rs
31.12.08 To Own Debentures Investment 3,96,000 1.10.08 By Balance b/d 19,00,000
a/c
31.12.08 To Debentures Redemption
Fund a/c (Profit on 4,000
cancellation)
31.12.08 To Bank a/c 15,00,000
19,00,000 19,00,000

Dr. Debentures Redemption Fund Investment Account


Cr.
Date Particulars Rs. Date Particulars Rs.
1.10.08 To Balance b/d 18,74,000 1.10.08 By Own Debentures 3,96,000
Investment a/c
(Transferred to separate
account)
To Debentures 1,47,800 By Bank a/c 16,25,800
Redemption Fund (Rs.18,74,000 –
a/c (profit on sale of Rs.3,96,000) × 110/100
investments)
20,21,800 20,21,800

Dr. Own Debentures Investment Account


Cr.
Date Particulars Rs. Date Particulars Rs.
1.08.08 To Debentures 3,96,000 31.12.08 By 9% Debentures a/c 3,96,000
Redemption Fund
Investment a/c

Dr. Debentures Redemption Fund Account


Cr.
Date Particulars Rs. Date Particulars Rs.
31.12.08 To Discount on 52,000 1.10.08 By balance b/d 18,74,000
Issue of
Debenture a/c
31.12.08 To Capital 4,000 31.12.08 By Debenture Interest a/c 15,000
Reserve a/c (Note (Interest on own
1) Debentures of
Rs.4,00,000 for 5 months)
31.12.08 To General 20,74,800 31.12.08 By Interest on Debentures 90,000
Reserve a/c Redemption Fund
Investment a/c
31.12.08 By 9% Debentures 4,000
a/c (Profit on Cancellation)
By Debentures 1,47,800
Redemption Fund
Investment a/c (Profit on
sale)
21,30,800 21,30,800

Dr. Discount on Issue of Debentures Account


Cr.
Date Particulars Rs. Date Particulars Rs.
1.10.08 To Balance b/d 52,000 31.12.08 By Debentures 52,000
Redemption Reserve
Fund a/c
Notes:
Profit on cancellation of own debentures should be treated as a capital profit.
5. In the books of Hitesh Ltd.
Memorandum Trading Account for the period from April 01 to September 13, 2008
Normal Normal
Abnormal Total Abnormal Total
Particulars items Particulars items
items (Rs.) (Rs.) items (Rs.) (Rs.)
(Rs.) (Rs.)
To Opening 1,40,000 40,000 1,80,000 By sales 3,68,000 12,000 3,80,000
stock (Note
2)
Less: 8,000 – 8,000
Returns
To Purchases 2,91,000 – 2,91,000 By Net sales 3,60,000 12,000 3,72,000
By Loss – 24,000 24,000
(Note -3)
To Gross 1,08,000 1,08,000 By Closing 1,79,000 4,000 1,83,000
profit (30% on stock (b/f)
Rs.3,60,000)
5,39,000 40,000 5,79,000 5,39,000 40,000 5,79,000
Statement of claim for loss of stock as on September 13, 2008
Particulars Rs.
Book value of stock 1,83,000
Less: Stock unaffected 52,286
Loss of stock 1,30,714
The policy was taken for Rs.1,68,000, but the stock on the date of fire was Rs.1,83,000. Therefore, the average
clause is applicable:
Net claim = Loss of stock × Policy value / Value of Stock on date of fire
= Rs.1,30,714 × Rs.1,68,000 / Rs.1,83,000 = Rs.1,20,000 approximately.
Working notes:
Note : 1 Trading account for the period ended March 31, 2008
Particulars Normal Abnormal Total (Rs.) Particulars Normal Abnormal Total (Rs.)
items (Rs.) items (Rs.) items (Rs.) items (Rs.)
To Opening 1,28,000 12,000 1,40,000 By Sales 8,00,000 12,000 8,12,000
stock By Closing
To Purchases 6,12,000 – 6,12,000 stock
To Gross 2,40,000 – 2,40,000 (Note-2) 1,80,000 – 1,80,000
profit
9,80,000 12,000 9,92,000 9,80,000 12,000 9,92,000
Rate of gross profit = Gross profit/sales × 100 = Rs.2,40,000 / Rs.8,00,000 × 100 = 30%
Note: 2 – On March 31, 2008, stock representing Rs.20,000 were reduced to half cost. It means the actual cost of
those goods were Rs.20,000 × 2/1 = Rs.40,000. Cost of other goods were Rs.1,60,000 – Rs.20,000 = Rs.1,40,000.
Total closing stock on March 31, 2008 = Rs.1,40,000 + Rs.40,000 = Rs.1,80,000.
Note: 3 – Original cost of abnormal item = Rs.40,000. Rs.20,000 was reduced for stock taking purpose and further
Rs.4,000 were scrapped. Therefore, total loss = Rs.24,000.
Closing stock at reduced price = Rs.40,000 – Rs.12,000 – Rs.24,000 = Rs.4,000.

Section C: Applied Theory


6. Elements of Financial Statements
Financial statements portray the effects of financial transactions by grouping these into broad classes according
to their economic characterstics. These broad characterstics are termed as the elements of financial statements.
SFAC 6 defines ten interrelated elements:
Assets
Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or
events.
Liabilities
Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer
assets or provide services to other entities in the future as a result of past transactions or events.
Equity
The residual interest that remains in the assets after deducting its liabilities. In a business enterprise, the equity is
the ownership interest.
Revenues
Inflows or other enhancements of assets of an entity or settlement of its liabilities (or a combination of both) from
delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major
and central operations.
Expense
Outflows or other using up of assets or incurrences of liabilities (or a combination of both) from delivering or
producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major and
central operations.
Gains
Increases in Equity (Net Assets) from peripheral or incidental transactions of an entity and from all other
transactions and other events and circumstances affecting the entity except those that result from expenses or
distribution to owners.
Losses
Decrease in equity (Net Assets) from peripheral or incidental transactions of an entity and from all other
transactions and other events and circumstances affecting the entity except those that result from expenses or
distribution to owners
Comprehensive Income
The change in equity of a business enterprise during a period from transactions and other events and
circumstances from sources other than investments by owners or distribution to owners.
Investments By Owners
Increases in equity of a particular business enterprise resulting from transfers to it for the purpose of increasing
ownership interests.
Distribution to Owners
Decreases in the equity of a particular business enterprise resulting from transferring assets, rendering services,
or incurring liabilities to owners.
7. Methods of Redemption
The company can redeem its debentures in any of the following methods:
a. Redemption in a lump sum after the expiry of a certain period.
b. Drawing of lots.
c. Redemption by purchase in the open market.
d. By conversion.
Redemption of Debentures in a Lump Sum after the Expiry of a Certain Period
Under this method, the company redeems all the debentures in one lump sum after expiry of a certain period
agreed upon in the prospectus issued at the time of issue of debentures. One advantage of this method is that the
company can plan for the financial resources as the liability is known in advance. This will be done generally by
creating a sinking fund or by taking an insurance policy.
A sinking fund is created to collect funds for redemption of debentures after their specified life and without
disturbing the working capital requirements. An amount can be set apart every year out of the profits of the
company using sinking fund tables, and further invested in safe securities. This reinvestment also holds good for
the periodical interest earned on such investments. These investments are sold at the time of redemption to make
available the necessary funds.
Under the Sinking Fund method, every year certain amount (calculated as per the financial tables) is appropriated
from the profits and the said amount is invested in outside securities. When the time of redemption comes, the
securities are realized and the sale proceeds utilized for the purpose of redemption.
Purchase of Debentures in the Open Market
A company can purchase its own debentures in the open market, i.e., in a stock exchange either for immediate
cancellation or for the purpose of keeping them as investments. This kind of purchase will be generally taken up
specially when they are quoted at the low prices. The advantage in this method is that the company can redeem
the debentures at its convenience, i.e., whenever it has surplus funds. The purchase may be at the prices less than
the paid up value of the debentures. In such case, the company earns profits on cancellation of such debentures.
The said profit is a capital profit and it can be used for writing-off of any capital loss such as discount on issue of
debentures, etc., or it can be transferred to capital reserve.
Sometimes, the debentures may be purchased in the open market at the higher prices than the nominal value of
the debentures. In such cases, the company suffers a loss and again it is a capital loss which can be written-off
either from the P&L account or from any capital profit.
A company can opt to buy its debentures in the open market and these when cancelled amounts to redemption.
In practice, the company may redeem only a portion of the debentures by purchase in the open market and the
rest may be redeemed on the expiry of the stipulated period in the normal course.
Redemption of debentures after purchasing them in the open market can either be at a premium or at par or even
at a discount.
Debentures will be redeemed at a discount when the company buys the debentures in the open market at a price
lower than the face value of the debentures.
The debentures can be redeemed at a premium, if the terms of the issue provide, and thus the company will credit
the ‘Premium on redemption of debentures a/c’ with the premium payable at the time of redemption
The Profit/Loss on cancellation of debentures a/c, as the case may be, will be credited or debited with the amount
arrived at by comparing the purchase price of own debentures cancelled and the face value plus the premium
payable on redemption
Redemption of Debentures by Conversion
The debentures that can be converted at holder’s option into equity shares are known as convertible debentures.
The debentures may be Fully Convertible Debentures (FCDs) or Partly Convertible Debentures (PCDs). The
ratio at which debentures are exchanged for the equity shares may be stated in the form of conversion price or
conversion ratio. The Non-Convertible Debentures (NCDs) means they are not convertible into shares. An option
for converting their holding into new class of shares gives debenture holders a privilege in as much as they keep
themselves as secured creditors at the time when the company was in its infancy and now with the option enjoy
the right of becoming the proprietors of the company by convertibility when the solvency and managerial
efficiency are assured.