Question Paper

Financial Accounting (CFA510): October 2007

• Answer all questions.
• Marks are indicated against each question.

< Answer >

1. Which of the following is a real account?
(a) Bank account
(b) Stock of stationery account
(c) Returns inward account
(d) Outstanding rent account
(e) Capital account.
(1 mark)
< Answer >
2. Which of the following statements is false?
(a) Ledger is the main book of account in which all accounts are maintained
(b) The credit balance of a nominal account indicates income received
(c) Debit balance in commission account indicates commission paid
(d) Cash account always shows credit balance
(e) In case of bank overdraft bank account shows credit balance.
(1 mark)
< Answer >
3. In a manufacturing company, which of the following systems is called product costing system?
(a) Perpetual inventory system
(b) Periodic inventory system
(c) Accrual system
(d) Weighted average method
(e) Specific identification method.
(1 mark)
< Answer >
4. The value of inventory far in excess of the normal requirement of a firm is shown under
(a) Current assets
(b) Fictitious assets
(c) Intangible assets
(d) Non-current assets
(e) Miscellaneous expenditure.
(1 mark)
< Answer >
5. The books of Bharat Ltd. revealed the following information:
Particulars Rs.
Opening inventory 6,00,000
Purchases during the year 2006-2007 34,00,000
Sales during the year 2006-2007 48,00,000
On March 31, 2007, the cost of missing inventory that may have been pilfered by the storekeeper was
estimated to be Rs.75,000. The company’s rate of gross profit on sales has remained constant at 25%.
The value of inventory on March 31, 2007 was
(a) Rs.3,25,000
(b) Rs.1,25,000
(c) Rs.1,00,000
(d) Rs.1,50,000
(e) Rs.2,25,000.
(2 marks)
< Answer >
6. Which of the following items is generally not considered as part of inventory?
(a) Raw-material
 (b) Work-in-process
(c) Consumables
(d) Finished goods
(e) Machinery spares.
(1 mark)
< Answer >
7. Which of the following inventory valuation methods shows higher profits during a period of rising
prices?
(a) FIFO (First In First Out)
(b) LIFO (Last In First Out)
(c) Weighted average
(d) Simple average
(e) Specific cost.
(1 mark)
< Answer >
8. Mohan withdrew Rs.10,000 from firm bank account for his personal use. The entry to be passed is
Debit (Rs.) Credit (Rs.)
(a) Cash account Dr. 10,000
To Bank account 10,000
(b) ‘Mohan’ account Dr. 10,000
To Cash account 10,000
(c) Drawings account Dr. 10,000
To Bank account 10,000
(d) Bank account Dr. 10,000
To Cash account 10,000
(e) Bank account Dr. 10,000
To Drawings account 10,000.
(1 mark)
< Answer >
9. Which method of depreciation is most appropriate for petroleum and mining companies for charging
depreciation on oil wells and mines?
(a) Straight line method
(b) Diminishing balance method
(c) Units-of-production method
(d) Sum-of-the-years’ digits method
(e) Annuity method.
(1 mark)
< Answer >
10. The cost price of a machine is Rs.1,20,000 and the depreciated value of the machine after 3 years is
Rs.66,000. If the company charges depreciation under straight line method, the rate of depreciation is
(a) 25%
(b) 20%
(c) 18%
(d) 15%
(e) 12%.
(2 marks)
< Answer >
11. The balances extracted from the books of M/s. Good Food as on March 31, 2007 were as under:
Particulars Rs.
Salaries 11,000
Interest on loan from Mr. Agarwal 2,000
Sales 96,000
Purchases 93,000
Rent 13,000
Machinery 1,00,000
Sundry debtors 16,000
Sundry creditors 29,000
5% Loan from Mr. Agarwal (taken on April 01, 2006) 50,000
Capital account 70,000
 Cash 10,000
However, Mr. Girish, the proprietor, forgot to consider the following information:
– Outstanding salaries of Rs.1,000.
– Depreciation on Machinery at the rate of 10% per annum.
– Rent paid in advance of Rs.1,000.
The total of the adjusted trial balance after considering all the relevant information was
(a) Rs.2,46,500
(b) Rs.2,45,000
(c) Rs.2,46,000
(d) Rs.2,65,000
(e) Rs.2,57,000.
(2 marks)
< Answer >
12. Ex-ante income means
(a) Original expectation of expected future cash flows at the end of the period less original
expectation of expected future benefits at the beginning of the period
(b) Capital at the end of the period less capital at the beginning of the period
(c) Revised expectation of expected future cash flows at the end of the period less original
expectation of expected future benefits at the beginning of the period
(d) Gross sales less returns
(e) The profit which is disclosed in profit and loss account.
(1 mark)
< Answer >
13. Under cash basis of accounting, revenue is recognized when
(a) Sale is made
(b) Cash is received
(c) Goods are delivered
(d) Services are rendered
(e) Sales are accounted.
(1 mark)
< Answer >
14. Provision for bad debts is made as per the
(a) Conservatism concept
(b) Cost concept
(c) Consistency concept
(d) Going concern concept
(e) Time period concept.
(1 mark)
< Answer >
15. The following account balances were extracted from the books of John & Co. as on April 01, 2007:
Particulars Rs.
Cash on hand 330
Cash at bank 6,050
Bills payable 3,300
Furniture & fittings 6,600
Sundry creditors 11,400
Sundry debtors 14,520
Stock in trade 12,200
The capital account balance as on April 01, 2007 was
(a) Rs.27,500
(b) Rs.39,700
(c) Rs.28,320
(d) Rs.51,900
(e) Rs.25,000.
(2 marks)
< Answer >
16. Following balances were extracted from the books of Prem Enterprises for the year ended March 31,
2007:
Particulars Rs.
Opening stock 80,000
Purchases 2,50,000
Sales 3,50,000
Returns inward 10,000
Octroi 2,150
Freight inwards 1,500
Returns outward 12,500
Closing stock 1,10,000
Commission paid on sales @ 5%
The amount of gross profit for the year ended March 31, 2007 was
(a) Rs.1,05,820
(b) Rs.1,06,820
(c) Rs.1,31,000
(d) Rs.1,28,850
(e) Rs.1,30,000.
(2 marks)
< Answer >
17. Consider the following data pertaining to a company for the year 2006-07:
Opening balance of sundry debtors Rs.2,20,000
Closing balance of sundry debtors Rs.1,80,000
Amount transferred from profit & loss account to the credit Rs. 20,000
of provision for doubtful debts account
If the company maintains 5% provision for doubtful debts, the amount of bad debts written off during
the year 2006-07 was
(a) Rs.15,000
(b) Rs.17,000
(c) Rs.22,000
(d) Rs.25,000
(e) Rs.27,000.
(2 marks)
< Answer >
18. Sonny Ltd. has furnished the following information for the year 2006-07:
Particulars Amount (Rs.)
Balances as on April, 01, 2006:
Provision for bad debts 5,000
Provision for discount on debtors 2,000
During 2006-07:
Bad debts written off 1,000
Discount allowed 1,500
The company maintains a provision for bad debts at 5% and provision for discount on debtors at 2.5%
of the debtors. If the debtors as on March 31, 2007, before writing off bad debts and discount allowed
amounted to Rs.1,00,000, the balance in the provision for discount on debtors account on March 31,
2007 stood at (rounded off to nearest rupees)
(a) Rs.2,500
(b) Rs.2,463
(c) Rs.2,438
(d) Rs.2,316
(e) Rs.2,410.
(2 marks)
< Answer >
19. Swedish Ltd. depreciates machinery at 20% p.a. on the original cost. It purchased a second hand
machine for Rs.5,00,000 on April 1, 2005 and spent immediately Rs.60,000 and Rs.40,000 on its repairs
and installation respectively. On October 1, 2007 they disposed off the machinery purchased on April 1,
 2005 for Rs.4,00,000.
The profit/(loss) on sale of machinery was
(a) Rs.1,20,000
(b) (Rs.1,00,000)
(c) Rs.1,60,000
(d) Rs.1,00,000
(e) (Rs.1,60,000).
(2 marks)
< Answer >
20. Different valuation bases are used in accounting and in this context, realizable value means
(a) The amount paid or payable to acquire a benefit
(b) The amount that needs to be paid if the asset is to be acquired currently
(c) The present discounted value of future inflows that an item is expected to generate in the normal course
of business
(d) The net amount collectible in the event of the asset’s disposal
(e) The amount paid or payable to lose a benefit.
(1 mark)
< Answer >
21. Errors disclosed by a trial balance include
(a) Complete omission of the recording of a transaction from the books of accounts
(b) Posting of an aspect of a transaction on the correct side of a wrong account
(c) Recording both aspects of a transaction more than once in the books of accounts
(d) Posting of an aspect of a transaction more than once
(e) Recording a transaction at an amount which is totally different from the actual amount.
(1 mark)
< Answer >
22. Capital expenditure is an expenditure which
(a) Benefits in the current accounting period only
(b) Will benefit only in the next accounting period
(c) Results in the acquisition of a permanent asset
(d) Results in the acquisition of a current asset
(e) Results in the acquisition of a current asset and a permanent asset.
(1 mark)
< Answer >
23. Manila who is yet to prepare the final accounts found that a cash sale of Rs.1,234 to Mr. Nadir correctly
entered in the cash book, was posted to the debit of Mr. Nadir’s personal account in the ledger. The
aggregate amount of sales is correctly posted. The entry required to rectify the above error is
Rs. Rs.
(a) Sales account Dr. 1,234
To Nadir’s account 1,234
(b) Nadir’s account Dr. 1,234
To Sales account 1,234
(c) Suspense account Dr. 1,234
To Nadir’s account 1,234
(d) Sales account Dr. 1,234
To Suspense account 1,234
(e) Suspense account Dr. 2,468
To Sales account 1,234
To Nadir’s Account 1,234.
(2 marks)
< Answer >
24. Accounting does not record non-financial transactions due to
(a) Business entity concept
(b) Going concern concept
(c) Accounting period concept
(d) Money measurement concept
 (e) Cost concept.
(1 mark)
< Answer >
25. Which of the following is generally not used as a valuation base in accounting?
(a) Historical cost
(b) Opportunity cost
(c) Current cost
(d) Realizable value
(e) Present value.
(1 mark)
< Answer >
26. The annual financial statements should be approved by the _______ before being signed by the auditors.
(a) Board of directors
(b) Registrar of companies
(c) Shareholders
(d) Audit Committee
(e) Nominee directors.
(1 mark)
< Answer >
27. Current liabilities are such obligations which are to be satisfied
(a) Within three months
(b) Within six months
(c) Within one year
(d) Within two years
(e) Within three years.
(1 mark)
< Answer >
28. The balances of prepaid expenses of a company as on March 31, 2006 and March 31, 2007 were
Rs.40,320 and Rs.32,720 respectively. If the expenditure paid by the company during the year 2006-
2007 was Rs.1,20,000, then the total expenditure incurred during the year was
(a) Rs.1,60,320
(b) Rs.1,52,720
(c) Rs.1,27,600
(d) Rs.1,20,000
(e) Rs.1,13,400.
(2 marks)
< Answer >
29. The amount of profit earmarked for distribution to the shareholders is known as
(a) Net profit after tax
(b) Retained earnings
(c) Dividends
(d) Operating profit
(e) Profit before tax.
(1 mark)
< Answer >
30. The balance sheet gives information regarding the
(a) Results of operations of the firm for a particular period
(b) Financial position of the firm during a particular period
(c) Profit earning capacity of the firm for a particular period
(d) Financial position of the firm on a particular date
(e) Operating efficiency of the firm on a particular date.
(1 mark)
< Answer >
31. The accountant of ABC Ltd. reported a profit of Rs.6,50,000 for the year ended March 31, 2007. On
scrutiny, the following errors were noticed:
• Building rent of Rs.1,500 per month was paid upto January 2007. Rent debited to Profit and loss
account was Rs.15,000.
• Sales book was overcast by Rs.20,000.
 • Rs.20,000 paid for the repair of second hand machinery purchased, to bring it to the working
condition, was debited to Repairs and Maintenance as Rs.2,000.
• Ignore depreciation on second hand machinery.
The correct net profit made by the company for the year ended March 31, 2007 after the rectification
was
(a) Rs.6,29,000
(b) Rs.6,49,000
(c) Rs.6,32,000
(d) Rs.6,25,000
(e) Rs.6,47,000.
(2 marks)
< Answer >
32. Consider the following data pertaining to Bond Bros.:
i. Average profits of the last four years Rs.1,21,500
ii. Remuneration from alternative employment of Rs. 21,500
the owners
iii. Average capital employed Rs.6,00,000
If fair rate of return in similar business is 12%, the value of goodwill on the basis of 3 years’ purchase
of super profits of the business, is
(a) Rs.1,21,500
(b) Rs.1,00,000
(c) Rs. 84,000
(d) Rs. 72,000
(e) Rs. 28,000.
(2 marks)
< Answer >
33. During the year 2006-07, Fizz Ltd. reported a profit of Rs.4,20,000 after paying tax at the rate of 50%.
This profit includes an income of Rs.45,000 being a claim lodged in the month of January 2006 for
which no entry was passed in the year 2005-06. The company expects to introduce a new product in the
year 2007-08. The introduction of the new product leads to an increase of fixed expenses by Rs.50,000.
The estimates for the new product are as under:
Sales Rs.5,00,000
Direct expenses (including material and wages) Rs.2,25,000
The future maintainable post-tax profit of the company for the year 2007-08 (after introduction of the
new product) is
(a) Rs.4,47,500
(b) Rs.5,10,000
(c) Rs.4,75,000
(d) Rs.2,60,000
(e) Rs.4,70,000.
(2 marks)
< Answer >
34. The following data is extracted from the books of Sarovar Ltd. for the year ended March 31, 2007:
Particulars Rs.
Gross profit 75,000
Salaries and wages 22,000
Printing and stationery 3,000
Rent paid 12,000
Insurance 3,700
Carriage outward 2,500
The Manager of the company is entitled to a commission of 6% on net profit after charging his
commission. The commission payable to the Manager for the year ended March 31, 2007 was
(a) Rs.1,800
(b) Rs.1,668
(c) Rs.2,366
(d) Rs.1,908
 (e) Rs.1,574.
(2 marks)
< Answer >
35. Cost of production is equal to
(a) Materials consumed + Other manufacturing cost
(b) Materials consumed + Direct labour
(c) Materials consumed + Direct labour – Other manufacturing cost + Administration cost
(d) Materials consumed + Direct labour + Other manufacturing cost + Opening WIP – Closing WIP
(e) Materials consumed + Direct labour + Opening stock of finished goods – Closing stock of
finished goods.
(1 mark)
< Answer >
36. The cost of self-constructed assets is taken as
(a) Direct material + Direct labour + Indirect cost for construction of the asset
(b) Construction cost + Interest cost on funds borrowed for construction till all the inputs are
acquired
(c) Construction cost + Interest cost on funds borrowed for construction till the asset is ready for its
intended use
(d) Construction cost + Interest on borrowing – Losses due to strikes
(e) Total construction cost or market value, whichever is less.
(1 mark)
< Answer >
37. Which of the following statements is true with respect to depreciation under diminishing balance
method?
(a) The amount of depreciation keeps increasing every year while the rate of depreciation keeps
decreasing
(b) The amount of depreciation and the rate of depreciation decrease every year
(c) The amount of depreciation decreases while the rate of depreciation remains the same
(d) The amount of depreciation and the rate of depreciation increase every year
(e) The amount of depreciation increases while rate of depreciation remains the same.
(1 mark)
< Answer >
38. As per Schedule VI of the Companies Act, 1956, which of the following statements is true regarding
the treatment of calls-in-arrears in the final accounts of a company?
(a) The amount will be shown under the head ‘current assets’ on the assets side of the balance sheet
(b) The amount will be deducted from the called-up capital in the balance sheet
(c) The amount will be shown under the head ‘current liabilities’ in the balance sheet
(d) The amount will be shown in the profit and loss account as a loss without showing it in the
balance sheet
(e) The amount will be added to the share capital in the balance sheet.
(1 mark)
< Answer >
39. A special auditor to conduct special audit of a company is appointed by the
(a) Board of directors of the company
(b) Members of the company
(c) Central Government
(d) Statutory auditors
(e) Income tax authorities.
(1 mark)
< Answer >
40. According to Schedule VI of the Companies Act, 1956, which of the following assets is/are shown
under the head ‘Investments’ in the balance sheet of a company?
I. Investments in the capital of partnership firms.
II. Investments in trust securities.
III. Investments in shares.
IV. Investments in debentures.
(a) Only (I) above
 (b) Only (II) above
(c) Both (III) and (IV) above
(d) (II), (III) and (IV) above
(e) All (I), (II), (III) and (IV) above.
(1 mark)
< Answer >
41. Which of the following items should not be deducted from the gross profit to arrive at the net profit for
calculation of Managerial Remuneration?
(a) Any tax notified by the Central Government as being in the nature of a tax on excess or
abnormal profit
(b) Any tax on business profits imposed for special reasons or in special circumstances and notified
by Central Government in this behalf
(c) Interest on unsecured loans and advances
(d) Any compensation, damages or payments made voluntarily
(e) Bad debt written-off or adjusted during the year.
(1 mark)
< Answer >
42. Which of the following items should not appear under the heading ‘unsecured loans’ in the Balance
Sheet of a company?
(a) Sinking fund
(b) Loans and advances from subsidiaries
(c) Short term loans and advances from banks
(d) Loans and advances from others
(e) Fixed deposits from public.
(1 mark)
43. As per the Companies Act, the item “Proposed additions to reserves” should be included in < Answer >
(a) Reserves and surplus
(b) Miscellaneous expenditure
(c) Current liabilities and provisions
(d) Share capital
(e) Securities premium.
(1 mark)
< Answer >
44. According to Part II of Schedule VI of Companies Act, the classification of foreign exchange earnings
does not include
(a) Export of goods calculated on Free On Board (F.O.B.) basis
(b) Dividends from subsidiary company in India
(c) Royalty and know-how from foreign companies
(d) Professional and consultation fees from foreign companies
(e) Interest and dividend from foreign companies.
(1 mark)
< Answer >
45. Which of the following items appears in the Profit and Loss Appropriation account?
(a) Provision for bad debts
(b) Provision for taxation for current year
(c) Director’s remuneration
(d) Interim dividend
(e) Penalty paid for delay in payment of tax.
(1 mark)
< Answer >
46. The following balances have been extracted from the books of Statham Ltd., as on March 31, 2006:
Particulars Amount (Rs.) Particulars Amount (Rs.)
Freehold properties 28,57,000 Provision for depreciation:
Freehold properties 4,27,000
Additional information:
Sale proceeds of freehold properties is Rs.1,20,000 (which had cost of Rs.1,00,000 and on which
depreciation of Rs.20,000 had been provided).
 Depreciation on freehold properties of Rs.26,000 for the year ended March 31, 2007.
The net book value of freehold properties as on March 31, 2007 was
(a) Rs.23,69,800
(b) Rs.24,49,800
(c) Rs.23,24,000
(d) Rs.24,89,900
(e) Rs.25,69,800.
(2 marks)
< Answer >
47. Consider the following data pertaining to Rising Sun Ltd., as on March 31, 2007:
Share Capital:
Issued, subscribed and called-up Rs.20,00,000
Calls-in-arrears Rs. 10,000
Profit and loss account (Cr.) as on April 01, 2006 Rs. 67,000
Profit for the year Rs. 1,90,610
The company wants to create a Debenture Redemption Reserve and to transfer Rs.50,000 every year out
of profits to redeem the debentures.
The company declared 10% dividends.
The balance of Profit and Loss Appropriation account transferred to Balance Sheet after effecting the
above transactions is
(a) Rs.1,88,549
(b) Rs. 58,610
(c) Rs. 8,610
(d) Rs. 7,610
(e) Rs.1,81,849.
(2 marks)
< Answer >
48. The directors of a company have proposed a dividend of 18% of the paid-up capital. The percentage of
profits which will have to be compulsorily transferred to reserves is
(a) 2.5%
(b) 5.0%
(c) 7.5%
(d) 20.0%
(e) 12.5%.
(1 mark)
< Answer >
49. Which of the following is an unidentifiable intangible asset that increases the earning capacity of a
business?
(a) Patents
(b) Copyrights
(c) Trade marks
(d) Licenses
(e) Goodwill.
(1 mark)
< Answer >
50. Unearned income account is
(a) A current asset
(b) A current liability
(c) An expense
(d) An income
(e) A contingent liability.
(1 mark)
< Answer >
51. Under Simple Profit Method, which of the following is/are to be considered to calculate the goodwill of
a business?
I. Average of the adjusted profits of the chosen period.
II. The number of years of purchase.
 III. Normal Rate of Earnings.
IV. Capital employed in the business.
(a) Only (I) above
(b) Only (II) above
(c) Both (I) and (II) above
(d) Both (III) and (IV) above
(e) (I), (III) and (IV) above.
(1 mark)
< Answer >
52. An asset can be depreciated at 10% p.a. under the straight line method or at 25% p.a. under the written
down value method. The straight line method will give higher amounts of depreciation from the
(a) Fourth year
(b) Fifth year
(c) Sixth year
(d) Seventh year
(e) Eighth year.
(2 marks)
< Answer >
53. Which of the following is the correct response to indicate the impact of new capital introduced on
assets, owner’s equity and total liabilities of a firm?
Assets Owner’s equity Total Liabilities
(a) Increase Increase Decrease
(b) Decrease Increase No effect
(c) Increase Increase Increase
(d) No effect Increase Decrease
(e) Decrease Increase Decrease.
(1 mark)
< Answer >
54. The balance in the accumulated depreciation account of Vali Ltd. as on April 01, 2006 was Rs.2,00,000,
when the original cost of the assets amounted to Rs.10,00,000. The company charges 10% depreciation
on a straight line basis. One such asset costing Rs.5,00,000 (accumulated depreciation of Rs.80,000)
was disposed off at the beginning of the year. The balance of the accumulated depreciation account as
on March 31, 2007 was
(a) Rs.2,20,400
(b) Rs.1,70,000
(c) Rs.1,20,000
(d) Rs.2,50,000
(e) Rs.1,75,000.
(2 marks)
< Answer >
55. Mr. Nair commenced his business on April 01, 2006 with a capital of Rs.57,000. The break-up of his
capital includes cash amounting to Rs.40,000. All his transactions are on cash basis only. He purchased
stock worth Rs.25,000. He paid for miscellaneous expenses of Rs.2,700. During the year he withdrew
Rs.450 per month for his personal use. The depreciation for the year was estimated at Rs.3,500 and
other expenses Rs.1,700. If the sales made during the year was Rs.32,000, cash balance as on March 31,
2007 was
(a) Rs.32,450
(b) Rs.37,200
(c) Rs.33,700
(d) Rs.37,300
(e) Rs.32,700.
(2 marks)
< Answer >
56. Alpha Ltd. agreed to purchase Beta Ltd. on April 1, 2007. Net profits of Beta Ltd. for the last five years
are as follows:
Year Profit (Rs.) Year Profit (Rs.)
2002-2003 Rs.35,000 2005-2006 Rs.48,000
 2003-2004 Rs.40,000 2006-2007 Rs.50,000
2004-2005 Rs.44,000
If the goodwill of the company is valued at 3 years’ purchase of simple average profit of the last 5
years, then the value of goodwill is
(a) Rs. 66,300
(b) Rs.1,42,000
(c) Rs.1,24,810
(d) Rs.1,19,600
(e) Rs.1,30,200.
(2 marks)
< Answer >
57. The following payments were made by Sheeba & Co. in respect of insurance premium.
Date of payment Particulars
April 02, 2006 Payment of Rs.32,000 for 3 months ended July 31, 2006
July 15, 2006 Payment of Rs.64,000 for 6 months ended January 31, 2007
December 31, 2006 Payment of Rs.48,600 for 4 months ended April 30, 2007
The insurance premium outstanding/prepaid as on March 31, 2007 (if any ) was
(a) Rs.10,667 (prepaid)
(b) Rs.10,667 (outstanding)
(c) Rs.12,150 (prepaid)
(d) Rs.12,150 (outstanding)
(e) Nil.
(2 marks)
< Answer >
58. Which of the following is/are the basic requirement(s) in the preparation and presentation of final
accounts of a company in terms of provisions of the Companies Act, 1956?
I. Balance sheet must exhibit a true and fair view of the state of affairs of the company.
II. Balance sheet must be in the form set out as per Schedule VI of the Companies Act.
III. Contingent liabilities should be shown by way of ‘Notes’ to the balance sheet.
(a) Only (I) above
(b) Only (II) above
(c) Both (I) and (II) above
(d) Both (II) and (III) above
(e) All (I), (II) and (III) above.
(1 mark)
< Answer >
59. Which of the following statements is true with respect to dividends?
(a) Dividend can always be paid out of capital
(b) Interim dividend can always be declared by the directors only after obtaining approval of the
shareholders
(c) Dividend is also payable on the calls paid in advance
(d) Dividend declared is not regarded as a current liability
(e) Dividend is payable on paid-up capital.
(1 mark)
< Answer >
60. As per the Companies Act, “Interest accrued and due on debentures” should be shown under
(a) Debentures
(b) Current liabilities
(c) Provisions
(d) Reserves and surplus
(e) Current assets.
(1 mark)
< Answer >
61. The following data is extracted from the books of Dynamics Ltd.:
Year 2003-04 2004-05 2005-06 2006-07
Profit (in Rs.) 16,000 20,000 24,000 36,000
 The firm has average capital investment of Rs.1,00,000
Rate of return on investment = 15%
The landlord has decided to increase rent of building by Rs.1,000
The value of goodwill under ‘Capitalization of super profit method’ is
(a) Rs.53,333
(b) Rs.43,333
(c) Rs.32,000
(d) Rs.42,000
(e) Rs.56,667.
(2 marks)
< Answer >
62. Cherry Ltd. maintains its inventory records under perpetual system of inventory. Consider the following
data pertaining to the inventory of Cherry Ltd. for the month of September, 2007:

Date & Month Particulars Quantity in Units Cost per unit (Rs.)
September 1 Opening inventory 15 400
September 4 Purchases 20 450
September 6 Purchases 10 460
If the company sold 32 units on September 24, 2007, value of closing inventory under FIFO method
was
(a) Rs.5,200
(b) Rs.5,681
(c) Rs.5,800
(d) Rs.5,850
(e) Rs.5,950.
(2 marks)
< Answer >
63. The following figures are drawn from the books of a trader:
Particulars Rs.
Opening capital 2,00,000
Additional capital 50,000
Closing capital 4,00,000
Drawings 1,00,000
Interest on opening capital 5%
Interest on drawings 6%

Net profit earned during the year is

(a) Rs.2,50,000
(b) Rs.1,50,000
(c) Rs.2,46,000
(d) Rs.2,56,000
(e) Rs.2,66,000.
(2 marks)
< Answer >
64. 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 Bansal’s A/c and Salary A/c by Rs.3,000 each for salary paid to Bansal.
iii. Debited D.Gupta & Co.’s A/c by Rs.7,350 for goods purchased from them on credit.
iv. Credited M/s Roy & Co.’s A/c by Rs.100 for cash discount allowed by them.
(a) Rs.16,750
(b) Rs.10,250
(c) Rs.17,500
(d) Rs.24,200
(e) Rs.24,100.
 (2 marks)
< Answer >
65. Leo Ltd. has provided the following information:
Particulars Rs.
Stock as on March 31, 2007 60,000
Accounts payable as on April 01, 2006 30,000
Accounts payable as on March 31, 2007 40,000
Amount paid to creditors during the year 2006-07 1,50,000
Sales 2,00,000
It is noticed that goods worth Rs.30,000 were destroyed due to fire. Against this, the insurance company
accepted a claim of Rs.20,000.
The company sells goods at cost plus 33 S%. The value of opening inventory, after taking into account
the above information was
(a) Rs. 10,000
(b) Rs. 30,000
(c) Rs.1,00,000
(d) Rs.1,10,000
(e) Rs. 80,000.
(2 marks)
66. Tripti Ltd. follows perpetual inventory system. On March 31 of every year, the company undertakes < Answer
physical stock verification. On March 31, 2007, the value of stock as per the records differed from the >
value as per physical stock. On scrutiny, the following differences were noticed:
• Stock register was overcast by Rs.6,000.
• Goods purchased for Rs.10,000 were received and included in the physical stock but no entry
was made in the books.
• Goods costing Rs.30,000 were sold and entered in the books but the stock is yet to be delivered.
• Goods worth Rs.5,000 returned to the suppliers is omitted to be recorded.
If the inventory is valued in the books at Rs.1,50,000, the value of the physical inventory is
(a) Rs.1,11,000
(b) Rs.1,89,000
(c) Rs.1,79,000
(d) Rs.1,59,000
(e) Rs.1,19,000.
(2 marks)
< Answer >
67. If the opening inventory is understated and closing inventory is overstated
(a) The gross profit will increase and current assets will also increase
(b) The gross profit will decrease and current assets will decrease
(c) The gross profit will increase but current assets will decrease
(d) The gross profit will decrease but current assets will increase
(e) There will not be any change in gross profit or current assets.
(1 mark)
< Answer >
68. Which of the following is entered in the sales book?
(a) Promissory Notes for advance given
(b) Credit sale of goods
(c) Rent accrued but not received
(d) Sale of old furniture on credit
(e) Tax paid in advance.
(1 mark)
< Answer >
69. Astute Limited has been charging depreciation under the straight line method. It charges full year
depreciation even if the machinery is utilized only for part of the year. An equipment which was
purchased for Rs.3,50,000 now stands at Rs.2,97,500 after being depreciated at the rate of 5% on a
straight line basis. Now the company decides to change the method of depreciation with retrospective
 effect. The applicable reducing balance rate for this machinery would be 8% p.a. Assuming that before
the effect of this change could be accounted, depreciation for the current year is already charged based
on straight line method and is reflected in the depreciated value of Rs.2,97,500, the extra depreciation to
be provided based on the changed method is
(a) Rs.24,960
(b) Rs.17,500
(c) Rs.10,500
(d) Rs.46,763
(e) Rs.36,263.
(2 marks)
< Answer >
70. Consider the following data pertaining to Universal Computers Ltd.:
Book value of furniture (Rs.) 25,600
Rate of depreciation (%) 12
No. of years depreciation charged 3
If the company charged depreciation under straight line method, the acquisition cost of the furniture is
(a) Rs.28,672
(b) Rs.35,000
(c) Rs.38,000
(d) Rs.40,000
(e) Rs.42,000.
(2 marks)
< Answer >
71. Which of the following need not be stated in the Director’s Report?
(a) Technology absorption
(b) Financial state of affairs of the company
(c) Foreign exchange earnings of the company
(d) Statement of accounting policies
(e) Conservation of energy.
(1 mark)
 Suggested Answers
Financial Accounting (CFA510): October 2007
1. Answer : (b) < TOP >
Reason : Bank account, capital account, and outstanding rent account are personal accounts. Returns inward
account is a nominal account. Stock of stationery account is a real account.
2. Answer : (d) < TOP >
Reason : That cash account always shows credit balance is wrong statement. One cannot pay more than what is
received. Hence cash account will always show debit balance as cash is debited when received. All the
other statements are true. Hence, (d) is correct answer.
3. Answer : (a) < TOP >
Reason : In a manufacturing company, the perpetual inventory system is called product costing system. In such
system, the cost of each product is accumulated as it flows through the production process
4. Answer : (d) < TOP >
Reason : The value of inventory far in excess of the normal requirement of a firm is shown under non-current
assets.
5. Answer : (a) < TOP >
Reason : Stock account
Particulars Rs. Particulars Rs.
To Balance b/d 6,00,000 By Cost of goods sold 36,00,000
To Purchases 34,00,000 (Rs.48,00,000 × 75%)
By Missing inventory 75,000
By Balance c/d 3,25,000
(balancing figure)
40,00,000 40,00,000
6. Answer : (e) < TOP >
Reason : Machinery spares is not considered as part of inventory. All other items are included in inventory and
treated as current asset.
7. Answer : (a) < TOP >
Reason : FIFO method is based on the assumption that costs are charged against revenue in the order in which
they occur. It means, the first unit in stock is the first unit to be out. The closing inventory consists of the
units purchased last. If the prices are rising, goods are issued at lower price and closing stocks are valued
at higher price. It will help to create more profit. Hence, (a) is correct answer.
8. Answer : (c) < TOP >
Reason : The entry to record withdrawal of cash from firm bank a/c. for the personal use of the proprietor would
be
Drawings account Dr. Rs.10,000
To Bank account Rs.10,000.
9. Answer : (c) < TOP >
Reason : In case of companies extracting natural resources, after estimating the total production potential, the unit
cost can be computed by using units of production method. Straight-line method Diminishing Balance
method and Sum-of-The-Years’-Digits methods are not appropriate. Hence, (c) is correct answer.
10. Answer : (d) < TOP >
Reason : Let the rate of depreciation = x
The depreciated value of machine = Rs.1,20,000 (1 – 3x) = Rs.66,000

1 – 3x = = 0.55
3x = 1 – 0.55 = 0.45
x = 0.45 ÷ 3 = 0.15 or 15%.
Thus, the rate of depreciation = 15%.
11. Answer : (a) < TOP >
 Reason :
Adjusted Trial Balance
Debit Credit
Particulars
Rs. Rs.
Salaries (Rs.11,000 + Rs.1,000) 12,000
Outstanding salaries 1,000
Interest on loan from Mr. Agarwal (Rs.2,000
2,500
+ Rs.500)
Outstanding Interest 500
Sales 96,000
Purchases 93,000
Rent (Rs.13,000 – Rs.1,000) 12,000
Prepaid rent 1,000
Machinery (Rs.1,00,000-Rs.10,000) 90,000
Depreciation (10% of Rs.1,00,000) 10,000
Sundry debtors 16,000
Sundry creditors 29,000
Loan from Mr. Agarwal 50,000
Capital account 70,000
Cash 10,000
2,46,500 2,46,500
12. Answer : (a) < TOP >
Reason : Ex-ante income = Original expectation of expected future cash flows at the end of the period less
original expectation of expected future benefits at the beginning of the period.
13. Answer : (b) < TOP >
Reason : Under the cash basis of accounting, revenue is recognized when cash is collected for sale of goods and
services. Hence (b) is correct answer.
14. Answer : (a) < TOP >
Reason : Conservatism concept means the early recognition of unfavorable events. Under this concept, the
business must provide all expected losses but not for anticipated profit. Provision for bad debt is made
out of profit for future loss that may arise on account of bad debts. Hence (a) is correct answer.
15. Answer : (e) < TOP >
Reason : The balance of capital in the books of John & Co. as on April 1, 2007
Particulars Rs. Rs.
Cash on hand 330
Cash at bank 6,050
Sundry debtors 14,520
Furniture & fittings 6,600
Stock in trade 12,200 39,700

Sundry creditors 11,400

Bills payable 3,300 14,700
Capital account balance as on April1, 25,000
2007
16. Answer : (d) < TOP >
Reason : Trading account of Prem Enterprises for the year ended March 31, 2007
Particulars Rs. Rs. Particulars Rs. Rs.
To Opening stock 80,000 By Sales 3,50,000
To Purchases 2,50,000 Less returns 10,000
3,40,000
inwards
Less: Returns 12,500
2,37,500
outwards
To Octroi 2,150
To Freight inwards 1,500
By closing stock 1,10,000
To Gross profit (Bal
1,28,850
 fig)
4,50,000 4,50,000
17. Answer : (c) < TOP >
Reason :
Dr. Provision for Bad debts account Cr.
Partciulars Rs. Particulars Rs.
To Bad debts written off 22,000 By Balance b/d (Rs.2,20,000 × 11,000
5%)
To Balance c/d (Rs.1,80,000 x 5%) 9,000 By Profit and loss account 20,000
31,000 31,000
Amount of bad debts written off = Rs.11,000 + Rs.20,000 – Rs.9,000 = Rs.22,000.
18. Answer : (d) < TOP >
Reason :
Provision for Discount on Debtors
Particulars Rs. Particulars Rs.
To Discount allowed 1,500 By Balance b/d 2,000
To Balance c/d 2,316 By Profit and Loss a/c. 1,816
(2.5% on Rs.92,625)
3,816 3,816
Sundry debtors Rs.1,00,000
Less Bad debts written off Rs. 1,000
Discount allowed Rs. 1,500
Rs. 97,500
Less: Provision for bad debts @5% Rs. 4,875
Rs. 92,625
Provision for discount @2.5% on Rs. 92,625 = Rs.2315.6 = Rs.2,316.
19. Answer : (d) < TOP >
Reason :
Date Particulars Rs. Rs.
01.04.2005 Cost of second hand machine 5,00,000
01.04.2005 Repairs of second hand 60,000
machine
01.04.2005 Installation charges 40,000 6,00,000
31.03.2006 Less: Depreciation for 2005- 1,20,000
06 @ 20% on Rs.6,00,000
31.03.2006 Less: Depreciation for 2006- 1,20,000
07
01.10.2007 Less: Depreciation for six 60,000 3,00,000
months
01.10.2007 Book value of machinery 3,00,000
01.10.2007 Sale value of machinery 4,00,000
01.10.2007 Profit on sale of machinery 1,00,000
20. Answer : (d) < TOP >
Reason : Realizable value is the net amount collectible in the event of the asset’s disposal. (a) Historical cost is
the amount paid or payable to acquire a benefit. (b) the amount that needs to be paid if the asset is to be
acquired currently is the current cost. (c) the present discounted value of the future inflows that an item
is expected to generate in the normal course of business is the present value (e)any valuation cannot be
done with a view to lose benefit. Hence the correct answer is (d).
21. Answer : (d) < TOP >
Reason : Posting an aspect of transaction more than once is disclosed by a trial balance, for example, if an
amount of Rs.2,000 paid to X has been posted to the debit of X account twice, then the debit will exceed
the credit by Rs.2,000. The other errors will not be disclosed by trial balance. Hence the correct answer
is (d).
22. Answer : (c) < TOP >
Reason : Capital expenditure is a non-recurring expenditure whose benefit lasts for more than one accounting
period. So acquisition of permanent asset is a capital expenditure. Hence, (c) is correct answer.
23. Answer : (c) < TOP >
Reason : The entry required to rectify the mistake is
Partciulars Rs. Rs.
Suspense account Dr. 1,234
To Nadir’s account 1,234
24. Answer : (d) < TOP >
Reason : Accounting records only those transactions which are expressed in monetary terms. Accounting does
not record non-financial transactions. It is the concept of money measurement. Hence, (d) is correct
answer.
25. Answer : (b) < TOP >
Reason : The frequently used valuation bases in accounting are Historical Cost, Current cost, Realizable value
and present value. Opportunity cost will not be used generally. Hence, (b) is correct answer.
26. Answer : (a) < TOP >
Reason : The annual financial statements should be approved by the Board of directors before being signed by
the auditors.
27. Answer : (c) < TOP >
Reason : Current liabilities are such obligations which are to be satisfied within one year.
Hence, (c) is correct answer.
28. Answer : (c) < TOP >
Reason :
Expenditure paid by the company Rs.1,20,000
Add : Prepaid expenditure as on March 31, 2006 Rs. 40,320
Rs.1,60,320
Less : Prepaid expenditure as on March 31, 2007 Rs. 32,720
Total expenditure for the year 2006-2007 Rs.1,27,600
29. Answer : (c) < TOP >
Reason : (a) Profit after tax is the difference between profit before tax and tax for the year.
(b) Retained earnings is the difference between profit after tax and dividend.
(c) Dividends represent the amount earmarked for distribution to share holders.
(d) Operating profit is the difference between gross profit and operating expenses.
(e) Profit before tax is obtained by deducting interest from profits before interest and taxes.
Hence, (c) is correct answer.
30. Answer : (d) < TOP >
Reason : Balance sheet is prepared on a particular date to know the financial position of the concern.
Hence, option (d) is correct answer.
31. Answer : (a) < TOP >
Reason :
Particulars Rs.
Profit as per Profit & Loss a/c. 6,50,000
(–) Outstanding building rent 3,000
6,47,000
(–) Overcast of sales book 20,000
6,27,000
(+) Repairs for machinery (wrongly debited) 2,000
Correct net profit 6,29,000
32. Answer : (c) < TOP >
Reason :
Particulars (Rs.)
 Average profits: 1,21,500
Less: Remuneration from alternative employment 21,500
1,00,000
Less: Normal profit @ 12% on average capital 72,000
employed (12% of Rs.6,00,000)
Super Profit 28,000
Goodwill: 3 years purchase of super profits
3 × Rs.28,000 = Rs.84,000.
33. Answer : (b) < TOP >
Reason :
Particulars Rs. Rs.
Post-tax profits of 2006-2007 4,20,000
Pre-tax profits of 2006-2007 (4,20,000 / 50%) 8,40,000
Less: Income relating to 2005-2006 45,000
Normal profit of 2006-2007 7,95,000
Add: Estimated profit from new product
Sales for the year 2007-08 5,00,000
Less: direct expenses 2,25,000
Less: Additional fixed expenses 50,000 2,25,000
10,20,000
Less: Tax @50% 5,10,000
Future maintainable post tax profit for the year 2007- 5,10,000
2008
34. Answer : (a) < TOP >
Reason :
Profit and loss account of Sarovar Ltd. for the year ended March 31, 2007
Dr. Cr.
Particulars Rs. Particulars Rs.
To Salaries and wages 22,000 By Gross profit 75,000
To Printing and stationery 3,000
To Rent 12,000
To Insurance 3,700
To Carriage outward 2,500
To Manager’s commission 1,800
To Net Profit 30,000
75,000 75,000
Profit before charging Manager’s commission = Rs. 31,800

Manager’s Commission = .
35. Answer : (d) < TOP >
Reason : Cost of production = Material consumed + Direct labour + Other Manufacturing cost + Opening WIP –
Closing WIP.
36. Answer : (c) < TOP >
Reason : The cost of self-constructed assets is taken as construction cost plus Interest cost on funds borrowed for
construction till the asset is ready for its intended use. Hence, (c) is correct answer.
37. Answer : (c) < TOP >
Reason : Under the written-down value method of depreciation, the percentage of depreciation is fixed, but it
applies to the value of the asset at which the asset stands in the books in the beginning of the year.
Therefore, the amount of depreciation decreases as the fixed rate of depreciation is charged on written-
down values of the asset. Hence, (c) is correct answer.
38. Answer : (b) < TOP >
Reason : As per Schedule VI of the Companies Act, 1956, the amount of calls-in-arrears will be deducted from
the called-up capital in the liability side of the balance sheet. Hence, (b) is correct answer.
39. Answer : (c) < TOP >
 Reason : Special Auditor to conduct special audit of a company is appointed by the Central Government. Hence,
alternative (c) is correct answer.
40. Answer : (e) < TOP >
Reason : According to the Schedule VI of the Companies Act, 1956, the following assets are shown under the
head ‘Investments’ in the balance sheet of a company
I. Investments in the capital of partnership firms
II. Investments in trust securities
III. Investments in shares
IV. Investments in debentures.
Hence the alternative (e) the combination of all the investments mentioned above is the correct answer.
41. Answer : (d) < TOP >
Reason : Any compensation, damages or payments made voluntarily shall not be deducted from the gross profit,
except this all the other above mentioned items should be deducted from the gross profit to arrive at the
net profit to calculate managerial remuneration. Hence the answer is (d).
42. Answer : (a) < TOP >
Reason : Sinking fund is created out of profit. It is the part of profit and should be listed under the heading
“Reserves and Surplus” and not under “unsecured loans”. Loans and advances from subsidiaries, short
term loans and advances from banks, loans and advances from others and fixed deposits are unsecured
loans.
43. Answer : (a) < TOP >
Reason : As per the Companies Act, the item “Proposed additions to reserves” should be included under (a)
Reserves and Surplus in the Balance Sheet of a company
44. Answer : (b) < TOP >
Reason : Dividend from subsidiary companies in India is included in Profit and loss a/c. Except this, all the other
items are the classification of foreign exchange earnings. Hence alternative (b) is correct answer.
45. Answer : (d) < TOP >
Reason : Profit and loss appropriation account depicts appropriation of net profit. Interim dividend (d) is
appropriation of net profit. It appears in Profit and loss appropriation account. Provisions for bad debts
(a), provision for taxation for current year (b), Director’s remuneration (c) and penalty paid for delay in
payment of tax (e) all are charged against profit and loss account. Hence, (d) is correct answer.
46. Answer : (c) < TOP >
Reason :
Fixed assets Freehold (Rs)
Cost as on 31.03.2006 28,57,000
Less: Freehold sold on 01.11.06 1,00,000
27,57,000
Less: Depreciation Up to 31.03.06 4,27,000
23,30,000
Add: Depreciation recouped on sale 20,000
23,50,000
Less: Depreciation for the year 26,000
Book value as on 31.03.07 23,24,000
47. Answer : (c) < TOP >
Reason :
Dr. Profit and Loss appropriation account Cr.
Particulars Rs. Particulars Rs.
To Transfer to Debenture By Balance b/d 67,000
Redemption Reserve 50,000 By Profit for the year 1,90,610
b/d
To Proposed Dividend (10% of 1,99,000
Rs.19,90,000)
To Surplus carried to Balance Sheet 8,610
2,57,610 2,57,610
48. Answer : (c) < TOP >
 Reason : The directors of a company have proposed a dividend of 18% of the paid-up capital. The percentage of
profits which will have to be compulsorily transferred to reserve is 7.5%.
49. Answer : (e) < TOP >
Reason : Goodwill is the unidentifiable intangible asset that increases the earning capacity of a business. The
other intangible assets (a), Patents (b) Copyrights, (c) Trade marks and (d) Licenses are identifiable
intangible assets that increase the earning capacity of business. Alternative (e) is the correct answer.
50. Answer : (b) < TOP >
Reason : Unearned income is a current liability till it is earned. Once it is earned, it becomes income. (b) is the
correct answer.
51. Answer : (c) < TOP >
Reason : Under Simple Profit Method, (I) Average of the adjusted profits of the chosen period and (II) The
number of years of purchase are to be considered to calculate goodwill of a business. The combination
of the statements in (I) and (II) i.e. alternative (c) is the correct answer.
The average annual profit expected to accrue in the future is to be arrived at based on the past profits of
the chosen period adjusting against non-recurring incomes and expenses. The statements in (III) Normal
rate of earnings and (IV) Capital employed of the business are to be considered in case of calculation of
goodwill under Super Profit method.
52. Answer : (b) < TOP >
Reason : Let the original value of the asset be Rs.100, depreciation under SLM and WDV is as follows:
Year SLM WDV
1 10 25.00
2 10 18.75
3 10 14.06
4 10 10.54
5 10 7.91
Thus, the straight line method will give higher amount of depreciation from fifth year.
53. Answer : (c) < TOP >
Reason : When capital is introduced owner’s equity increases, total liabilities increase and assets also increase.
Hence, (c) is correct answer.
54. Answer : (b) < TOP >
Reason :
Particulars Rs.
The opening balance in the accumulated depreciation A/c 2,00,000
as on April 01, 2006
Less : Accumulated depreciation of the asset disposed 80,000
1,20,000
Add : Current year’s depreciation 50,000

(10,00,000 – 5,00,000) x
The balance of the accumulated depreciation account as 1,70,000
on March 31, 2007
55. Answer : (b) < TOP >
Reason :
Cash Account in the books of Mr. Nair
Dr. Cr.
Particulars Rs. Particulars Rs.
To Capital Account 40,000 By Purchases 25,000
To Sales 32,000 By Misc. expenses 2,700
By Drawings (450 x 12) 5,400
By Other expenses 1,700
By balance c/d 37,200
72,000 72,000
To Balance b/d 37,200
56. Answer : (e) < TOP >
Reason : Average profits
= (35,000 + 40,000 + 44,000 + 48,000 + 50,000)/5 = Rs.2,17,000/5 = Rs.43,400
Since goodwill is based on 3 years average = 3 × Rs.43,400 = Rs.1,30,200.
57. Answer : (c) < TOP >
Reason : The payments made on April 02, 2006 for 3 months ended July 31, 2006 and July 15, 2006 for 6 months
ended January 31, 2007 fully belong to the relevant accounting year, 2006-07. However, in respect of
the payment of Rs.48,600 made on December 01, 2006 in respect of the period ended April 30, 2007 one
month insurance is prepaid, since the financial year 2006-2007 ends on March 31, 2007. This implies a
month’s advance payment was made in respect of the next financial year.
Hence, the prepaid insurance = Rs.48,600/4 = Rs.12,150.
58. Answer : (e) < TOP >
Reason : Section 211 and 212 (1) of the Companies Act, 1956 lays down that the final accounts of a company
must present an overall true and fair view of the affairs of the company presented in the form set out as
per schedule VI of the Companies Act, 1956 and giving due regard to ‘Notes’ at the end of balance sheet
for contingent liabilities. Hence, (e) is the correct answer.
59. Answer : (e) < TOP >
Reason : Dividend is payable only on paid-up capital. It is not payable on calls-in-advance amount, dividend
declared should be regarded as current liability. Dividend cannot be paid out of capital. Interim dividend
can be declared by the directors without any approval of shareholders. Therefore (e) is correct answer.
60. Answer : (a) < TOP >
Reason : Interest accrued and due on debentures (though it is a short-term liability) as per the Companies Act, it
must be shown in the Balance Sheet along with the amount outstanding in respect of debentures. Hence,
(a) is correct answer.
61. Answer : (a) < TOP >
Reason :
Particulars Calculations Rs.
Average profit Rs.(16,000 + 20,000 + 24,000 + 36,000)/4 24,000
Maintenable profit Average profit – increase in rent 23,000
Rs.24,000 – Rs.1,000 = Rs.23,000
Normal profit Capital employed x Normal rate 15,000
Rs.1,00,000 x 15%
Super profit Maintenable profit – Normal profit 8,000
Under capitalization of super Super prfoit /Normal rate of return = 53,333
profit method Goodwill will be Rs.8000/15%
62. Answer : (e) < TOP >
Reason : Total units in hand before sale = 15 + 20 + 10 = 45
Number of units sold = 32
Number of units in hand = 13
Under first in first out method of inventory valuation, value of closing inventory is calculated as
follows:
3 Units @ Rs.450 = Rs.1,350
10 Units @ Rs.460 = Rs.4,600
Value of closing inventory = Rs.5,950
63. Answer : (c) < TOP >
Reason :
Particulars Rs. Rs.
Closing capital 4,00,000
Add: Drawings 1,00,000
Interest on drawings @ 6% 6,000 1,06,000
Total 5,06,000
Less: Additional capital 50,000
Interest on opening capital @ 5% on Rs.2,00,000 10,000
Opening capital 2,00,000 2,60,000
 Net profit earned during the year 2,46,000
64. Answer : (c) < TOP >
Reason : Purchase A/c debited for furniture purchased is an error of principle and does not affect trial balance.
For salary paid Bansal’s A/c is also debited. This is an excess debit of Rs.3,000.
For goods purchased from D. Gupta’s, their account should have been credited by Rs.7,350 instead of
being debited their A/c. The difference in trial balance due to the above error is double the amount i.e.,
Rs.7,350 × 2 = Rs.14,700. For cash discount allowed by Roy & Co., their A/c should have been debited
instead of giving rise to a difference of Rs.200 in the trial balance. So the Suspense A/c will have a debit
of Rs.17,700 (Rs.3,000 + Rs.14,700) and a credit of Rs.200. The net difference is Rs.17,700 less Rs.200
= Rs.17,500.
Dr. Suspense account Cr.
Particulars Rs. Particulars Rs.
To Bansal account 3,000 By Difference in Trial balance 17,500
To D Gupta account 14,700 By M/s Roy & Co. 200
17,700 17,700
65. Answer : (e) < TOP >
Reason :
Dr. Accounts Payable Cr.
Particulars Rs. Particulars Rs.
To Cash 1,50,000 By Balance b/d 30,000
To Balance c/d 40,000 By Purchases 1,60,000
(Balancing figure)
1,90,000 1,90,000
Dr. Stock A/c Cr.
Particulars Rs. Particulars Rs.
To Balance b/d 80,000 By Cost of goods 1,50,000
(Balancing figure) sold*
To Purchases 1,60,000 By Goods lost 30,000
By Balance c/d 60,000
2,40,000 2,40,000

Profit is on cost of goods sold = on cost or on sales.

*Cost of goods sold = Rs.2,00,000 × = Rs.1,50,000

66. Answer : (c) < TOP >
Reason :
Computation of Inventory
Particulars Rs. Rs.
Inventory as per books 1,50,000
Add Purchases received but not
10,000
accounted for
Sales yet to be delivered 30,000 40,000
1,90,000
Less Returns outward 5,000
Amount overcast in stock sheet 6,000 11,000
Value of physical inventory 1,79,000
67. Answer : (a) < TOP >
Reason : When opening stock is understated and closing stock is overstated, the gross profit as well as net profit
will increase. Closing stock appearing as an asset in the Balance-sheet when overstated, will also
increase the current assets. Hence, (a) is correct answer.
68. Answer : (b) < TOP >
Reason : Credit sale of goods is entered in sales book. The transactions mentioned in other options are not
entered in sales book. Hence, (b) is the correct answer.
69. Answer : (a) < TOP >
Reason : Straight line depreciation per annum = Rs. 3,50,000 x 5% = Rs. 17,500
Number of years for which depreciation has been charged on this basis

= years

If 8% depreciation was charged by the reducing balance method, written down values (WDV’s) would
be
WDV at the end of the 1st year (3,50,000 x 92%) Rs.3,22,000
WDV at the end of 2nd year (3,22,000 x 92%) Rs.2,96,240
WDV at the end of 3rd year (2,96,240 x 92%) Rs.2,72,541
So extra depreciation to be provided = 2,97,500 – 2,72,541 = Rs. 24,959 or Rs. 24,960
70. Answer : (d) < TOP >
Reason : Rate of Depreciation : 12%
No. of years : 3
Depreciation method : Straight line
Book value : Rs.25,600
Cost of machine (x) : x(1 – 0.36) = Rs.25,600
x0.64 = Rs.25,600

x= × 100 = Rs.40,000
71. Answer : (d) < TOP >
Reason : Statement of accounting policies need not be stated in the Director’s Report. It is to be stated in
Auditors’ Report.
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