PAPER – 1 : ACCOUNTING

Answer all questions.

Working notes should form part of the answer.

Question 1
From the following balance sheets of Sneha Ltd. as on 31.3.2003 and 31.3.2004 prepare
a statement of sources and applications of fund and a schedule of changes in working capital
for the year ending 31.3.2004:
Balance Sheets
Liabilities 31.3.2003 31.3.2004 Assets 31.3.2003 31.3.2004
Rs. Rs. Rs. Rs.
Equity share capital 13,00,000 16,90,000 Goodwill 65,000 42,500
Profit and loss account 4,90,100 8,77,500 Building 11,70,000 11,37,500
10% Debentures 16,25,000 13,00,000 Machinery 16,18,500 21,38,500
Creditors 9,00,000 10,00,000 Non-trade investments 5,07,000 3,93,250
Bills payable 42,500 1,70,000 Debtors 4,16,000 11,70,000
Provision for tax 2,60,000 9,75,000 Stock 5,07,000 7,99,500
Dividend payable − 42,250 Cash 2,60,000 2,92,500
Prepaid expenses 42,250 52,000
Debenture discount 31,850 29,000
46,17,600 60,54,750 46,17,600 60,54,750

The following additional information is given:

(i) Building Machinery
Rs. Rs.
Accumulated depreciation 31.3.2003 4,87,500 15,92,500
Accumulated depreciation 31.3.2004 5,20,000 15,66,500
Depreciation for 2003-2004 32,500 1,36,500

(ii) Profit and loss account for 2003-2004 is as follows:

Rs.
Balance as on 31.3.2003 4,90,100
Add: Profit for 2003-2004 4,71,900
9,62,000
Less: Dividend 84,500
8,77,500

(iii) During 2003-2004 machinery costing Rs. 2,92,500 was sold for Rs. 97,500.
(iv) Investments which were sold for Rs. 1,17,000 had cost Rs. 97,500.
(v) Provision for Taxation and Dividend are to be taken as Non-current liabilities. (20 marks)
4 PROFESSIONAL EDUCATION (EXAMINATION – II) : NOVEMBER, 2004

Answer
(a) Sneha Ltd.
Fund Flow Statement
for the year ended 31st March, 2004
Amount (Rs.)
Sources of funds
Share capital 3,90,000
(Rs. 16,90,000 − Rs. 13,00,000)
Sale of machinery 97,500
Sale of investments 1,17,000
Funds from operation (W.N. 1) 16,70,500
22,75,000

Applications of funds
Debentures redeemed 3,25,000
(Rs. 16,25,000 − Rs. 13,00,000)
Machinery purchased (W.N. 4) 7,86,500
Tax paid∗ 2,60,000
Dividend (Rs. 84,500 − Rs. 42,250) 42,250
Increase in working capital 8,61,250
22,75,000
Schedule of Changes in Working Capital
for the year ended 31st March, 2004
Balance as on Changes in working capital
1.4.2003 31.3.2004 Increase Decrease
Rs. Rs. Rs. Rs.
Current Assets:
Debtors 4,16,000 11,70,000 7,54,000 −
Stock 5,07,000 7,99,500 2,92,500 −
Cash 2,60,000 2,92,500 32,500 −
Prepaid expenses 42,250 52,000 9,750 −
A 12,25,250 23,14,000
Current Liabilities:
Creditors 9,00,000 10,00,000 1,00,000
Bills payable 42,500 1,70,000 1,27,500
B 9,42,500 11,70,000 10,88,750 2,27,500
Working capital (A – B) 2,82,750 11,44,000
Increase in working
capital ________ 8,61,250
10,88,750 10,88,750

∗
The provision for taxation has been treated as a non-current liability as per the requirement of the
question. Last year’s provision for taxation amounting Rs. 2,60,000 has been assumed to be paid in
the current year ended 31st March, 2004.
 PAPER – 1 : ACCOUNTING 5

Working Notes:
1. Statement showing funds generated from operations
(Rs.)
Increase in profit and loss account during the year 3,87,400
(Rs. 8,77,500 – Rs. 4,90,100)
Add: Non-cash expenditures
(1) Loss on sale of machinery (W.N. 4) 32,500
(2) Investments written off (W.N. 2) 16,250
(3) Provision for tax 9,75,000
(4) Depreciation
on building (Rs. 11,70,000 – Rs. 11,37,500) 32,500
on machinery (W.N. 3) 1,36,500 1,69,000
(5) Goodwill written off (Rs. 65,000 – Rs. 42,500) 22,500
(6) Debenture discount written off (Rs. 31,850 – Rs. 29,000) 2,850
(7) Dividend 84,500 13,02,600
16,90,000
Less: Non-cash incomes
(1) Profit on sale of investments (Rs. 1,17,000 – Rs. 97,500) 19,500
Funds from operations 16,70,500

2. Non Trade Investment Account

Dr. Cr.
Rs. Rs.
To Balance b/d 5,07,000 By Bank -Sale 1,17,000
To Profit on sale 19,500 By Profit and loss account –
(Rs. 1,17,000 − Rs. 97,500) written off (balancing figure) 16,250
_______ By Balance c/d 3,93,250
5,26,500 5,26,500

3. Provision for Depreciation on Machinery Account

Dr. Cr.
Rs. Rs.
To Machinery -sale 1,62,500 By Balance b/d 15,92,500
(balancing figure) By Depreciation 1,36,500
To Balance c/d 15,66,500
17,29,000 17,29,000

4. Machinery Account
Dr. Cr.
Rs. Rs.
To Balance b/d 16,18,500 By Bank (sale) 97,500
Add: Provision By Depreciation 1,62,500
for depreciation 15,92,500 32,11,000 By Loss on sale 32,500
To Bank -purchase By Balance c/d
(balancing figure) 7,86,500 W.D.V. 21,38,500
6 PROFESSIONAL EDUCATION (EXAMINATION – II) : NOVEMBER, 2004

Add: Provision
________ for depreciation 15,66,500 37,05,000
39,97,500 39,97,500

Question 2
Lucky does not maintain proper books of accounts. However, he maintains a record of
his bank transactions and also is able to give the following information from which you are
requested to prepare his final accounts for the year 2003:
1.1.2003 31.12.2003
Rs. Rs.
Debtors 1,02,500 −
Creditors − 46,000
Stock 50,000 62,500
Bank Balance − 50,000
Fixed Assets 7,500 9,000

Details of his bank transactions were as follows:

Rs.
Received from debtors 3,40,000
Additional capital brought in 5,000
Sale of fixed assets (book value Rs. 2,500) 1,750
Paid to creditors 2,80,000
Expenses paid 49,250
Personal drawings 25,000
Purchase of fixed assets 5,000

No cash transactions took place during the year. Goods are sold at cost plus 25%. Cost
of goods sold was Rs. 2,60,000. (16 marks)

Answer
Trading and Profit and Loss Account
for the year ended 31st December, 2003
Amount Amount
Rs. Rs.
To Opening stock 50,000 By Sales (Rs. 2,60,000 × 125/100) 3,25,000
To Purchases (balancing By Closing stock 62,500
figure) 2,72,500
To Gross profit c/d
(Rs. 2,60,000 × 25/100) 65,000
_______ _______
3,87,500 3,87,500
 PAPER – 1 : ACCOUNTING 7

To Expenses 49,250 By Gross profit b/d 65,000

To Loss on sale of fixed
assets 750
To Depreciation on fixed
assets (W.N.1) 1,000
To Net profit 14,000 ______
65,000 65,000

Balance Sheet as on 31st December, 2003

Amount Amount
Liabilities Rs. Assets Rs.
Capital (W.N. 5) 1,69,000 Fixed assets 9,000
Add: Additional capital 5,000 Debtors (W.N. 3) 87,500
Net profit 14,000 Stock 62,500
1,88,000 Bank balance 50,000
Less: Drawings 25,000 1,63,000
Creditors 46,000 _______
2,09,000 2,09,000

Working Notes:

1. Fixed assets account

Dr. Cr.
Rs. Rs.
To Balance b/d 7,500 By Bank (sale) 1,750
To Bank 5,000 By Loss on sale of fixed asset 750
By Depreciation (balancing figure) 1,000
_____ By Balance c/d 9,000
12,500 12,500

2. Bank account
Dr. Cr.
Rs. Rs.
To Balance b/d (balancing figure) 62,500 By Creditors 2,80,000
To Debtors 3,40,000 By Expenses 49,250
To Capital 5,000 By Drawings 25,000
To Sale of fixed assets 1,750 By Fixed assets 5,000
_______ By Balance c/d 50,000
4,09,250 4,09,250
8 PROFESSIONAL EDUCATION (EXAMINATION – II) : NOVEMBER, 2004

3. Debtors account
Dr. Cr.
Rs. Rs.
To Balance b/d 1,02,500 By Bank 3,40,000
To Sales 3,25,000 By Balance c/d 87,500
125 (balancing figure)
(Rs. 2,60,000 × ) _______ _______
100
4,27,500 4,27,500

4. Creditors account
Dr. Cr.
Rs. Rs.
To Bank 2,80,000 By Balance b/d (balancing figure) 53,500
To Balance c/d 46,000 By Purchases (from trading account) 2,72,500
3,26,000 3,26,000

5. Balance Sheet as on 1st January, 2003

Liabilities Rs. Assets Rs.
Creditors (W.N. 4) 53,500 Fixed assets 7,500
Capital (balancing figure) 1,69,000 Debtors 1,02,500
Stock 50,000
_______ Bank balance (W.N. 2) 62,500
2,22,500 2,22,500

Question 3
(a) The Life Insurance Fund of an Insurance Company was on 31.3.2004 Rs. 60 lakhs before
providing for dividend of Rs. 20,000 for the year 2003-2004. While ascertaining the
above fund figure, the following items were omitted:
(i) Interest received on investments Rs. 63,000 after deduction of tax at source 10%.
(ii) Bonus utilized for reduction of premium Rs. 14,000.
(iii) Death claim intimated, but not yet admitted Rs. 36,000.
(iv) Death claim covered under re-insurance Rs. 12,000.
(v) Consideration for annuities granted Rs. 9,000.
Interim bonus for the valuation period paid was Rs. 80,000.
Net liabilities as per valuation was Rs. 50 lakhs. It is now proposed to carry forward
Rs.2,70,000.
The company declared a reversionary bonus of Rs.12 per Rs. 1,000 and gave the
policyholders an option to get the bonus in cash for Rs. 5 per Rs. 1,000. Total business
of the company is Rs. 15 crores, 40% of the policyholders decided to get bonus in cash.
 PAPER – 1 : ACCOUNTING 9

Prepare:
(i) Valuation Balance Sheet as on 31.3.2004.
(ii) Distribution Statement showing the amount due to the policyholders.
Also give Journal Entries relating to reversionary bonus.
(b) Power Electric Company decides to replace one of its old plant by an improved plant with
larger capacity. The cost of the new plant is Rs. 16,00,000.
Materials and Labour earlier and now are in the ratio of 4 : 6.
Original cost of the old plant is Rs. 3,00,000. Materials cost has gone up by 2½ times
and Labour cost by 3 times since then. Old materials worth Rs. 10,000 were used in the
construction of the new plant and Rs. 20,000 were realised from the sale of old materials.
Give the necessary Journal Entries for recording the above transactions.
(10 + 6 = 16 marks)
Answer
(a) Valuation Balance Sheet as on 31.3.2004
Rs. Rs.
To Net liabilities 50,00,000 By Life insurance fund (adjusted) 60,34,000
To Net profit 10,34,000 (W.N. 1) ________
60,34,000 60,34,000
Distribution Statement
Rs.
Net profit as per Valuation Balance Sheet 10,34,000
Add: Interim bonus paid 80,000
11,14,000
Less: Dividend provided for 2003-2004 20,000
10,94,000
Less: Carried forward 2,70,000
True surplus 8,24,000

Policy holders will get 8,24,000 × 95% 7,82,800

Less: Interim bonus paid 80,000
Amount due to policy holders 7,02,800

Journal Entries
Particulars Dr. Cr.
Amount Amount
Rs. Rs.
Profit and loss account Dr. 3,00,000
To Bonus payable in cash 3,00,000
(Being the bonus payable in cash)
10 PROFESSIONAL EDUCATION (EXAMINATION – II) : NOVEMBER, 2004

Profit and loss account Dr. 10,80,000∗

To Life insurance fund 10,80,000
(Being transfer to Life insurance fund for new
liability)

Working Notes:
1. Calculation of Adjusted Life Insurance Fund as on 31.3.2004
Rs.
Life insurance fund before adjustments 60,00,000
Add: Interest on investment (gross)
63,000× 100 70,000
(100 - 10)
Less: Tax deducted at source 7,000 63,000
Consideration for annuities granted 9,000 72,000
60,72,000
Less: Death claim intimated 36,000
Less: Death claim covered under
re-insurance 12,000 24,000
Bonus utilized in reduction of premium 14,000 38,000
Adjusted Life Insurance Fund 60,34,000

2. Bonus
Rs. 15 crores × 4/10 × 5/1,000 = Rs. 3,00,000 payable in cash
Rs. 15 crores × 6/10 × 12/1,000 = Rs. 10,80,000 transfer to fund
(b) Journal Entries
Particulars Dr. Cr.
Amount Amount
Rs. Rs.
Plant account Dr. 7,70,000
To Bank account 7,60,000
To Replacement account 10,000
(Being the additional cost incurred and old
materials utilized in new plant)
Replacement account Dr. 8,40,000
To Bank account 8,40,000
(Being the current cost of replacement)

∗
Note: In the present case, the total of bonus payable in cash amounting Rs. 3,00,000 and the bonus by
transfer to life insurance fund amounting 10,80,000 comes to Rs. 13,80,000 which is more than the amount
due to policyholders (Rs. 7,02,800).
The above solution has been worked out on the basis that the company has sufficient balance in profit and
loss account for declaration of bonus.
 PAPER – 1 : ACCOUNTING 11

Bank account Dr. 20,000

To Replacement account 20,000
(Being the old materials sold)
Revenue account Dr. 8,10,000
To Replacement account 8,10,000
(Being the balance of replacement account
transferred to revenue account)

Working Note:
Old cost of the plant Rs. 3,00,000:
4
Material = 3,00,000 × = 1,20,000
10
6
Labour = 3,00,000 × = 1,80,000
10
Rs.
Cost of materials increased by 250% = 1,20,000 × 250% 3,00,000
Cost of labour increased by 300% = 1,80,000 × 300% 5,40,000
Current cost of replacing old plant 8,40,000
Less: Sale of old materials 20,000
Old materials utilized in new plant 10,000 30,000
Amount to be transferred to Revenue account 8,10,000

Cash cost of the new plant 16,00,000*

Add: Old materials utilized 10,000
16,10,000
Less: Current cost of replacing old plant 8,40,000
Amount to be capitalized 7,70,000
* The cost of new plant has been given as Rs. 16,00,000 in the question. It has been
assumed in the above solution that this cost does not include the cost of old
materials used in the construction of new plant worth Rs. 10,000.
Question 4
(a) Liquidation of YZ Ltd. commenced on 2nd April, 2004. Certain creditors could not
receive payments out of the realisation of assets and out of the contributions from A list
contributories. The following are the details of certain transfers which took place in 2003
and 2004:
Shareholders No. of Shares Date of Ceasing to be Creditors remaining unpaid
transferred a member and outstanding on the date
of such transfer
A 2,000 1st March, 2003 Rs. 5,000
P 1,500 1st May, 2003 Rs. 3,300
Q 1,000 1st October, 2003 Rs. 4,300
12 PROFESSIONAL EDUCATION (EXAMINATION – II) : NOVEMBER, 2004

R 500 1st November, 2003 Rs. 4,600

S 300 1st February, 2004 Rs. 6,000
All the shares were of Rs. 10 each, Rs. 8 per share paid up. Show the amount to be
realised from the various persons listed above ignoring expenses and remuneration to
liquidator etc.
(b) The position of Valueless Ltd. on its liquidation is as under:
Issued and paid up Capital:
3,000 11% preference shares of Rs. 100 each fully paid.
3,000 Equity shares of Rs. 100 each fully paid.
1,000 Equity shares of Rs. 50 each Rs. 30 per share paid.
Calls in Arrears are Rs. 10,000 and Calls received in Advance Rs. 5,000. Preference
Dividends are in arrears for one year. Amount left with the liquidator after discharging all
liabilities is Rs. 4,13,000. Articles of Association of the company provide for payment of
preference dividend arrears in priority to return of equity capital. You are required to
prepare the Liquidators final statement of account. (8 + 8 = 16 marks)

Answer

(a) Statement of liabilities of B list contributories

Share- No. of Maximum Division of Liability as on
holders shares liability 1.5.2003 1.10.2003 1.11.2003 1.2.2004 Total
transferred (upto Rs. 2
per share)
Rs. Rs. Rs. Rs. Rs. Rs.
P 1,500 3,000 1,500 − − − 1,500
Q 1,000 2,000 1,000 555 − − 1,555
R 500 1,000 500 278 188 − 966
S 300 600 300 167 112 21 600
3,300 6,600 3,300 1,000 300 21 4,621

Working Note:
Date Cumulative liability Increase in liability Ratio of no. of
shares held by the
members
1.5.2003 3,300 − 30 : 20 : 10 : 6
1.10.2003 4,300 1,000 20 : 10 : 6
1.11.2003 4,600 300 10 : 6
1.2.2004 6,000 1,400 Only S
Liability of S has been restricted to the maximum allowable limit of Rs. 600, therefore
amount payable by S is restricted to Rs. 21 only, on 1.2.2004.
 PAPER – 1 : ACCOUNTING 13

Notes:
1. A will not be liable to pay to the outstanding creditors since he transferred his
shares prior to one year preceding the date of winding up.
2. P will not be responsible for further debts incurred after 1st May, 2003 (from the
date when he ceases to be member). Similarly, Q and R will not be responsible for
the debts incurred after the date of their transfer of shares.
(b) Liquidators’ Final Statement of Account

Receipts Rs. Payments Rs.

Cash 4,13,000 Return to contributors:
Realisation from: Preference dividend 33,000
Calls in arrears 10,000 Preference shareholders 3,00,000
Final call of Rs. 5 per Calls in advance 5,000
equity share of Rs. 50 each Equity shareholders of
(Rs. 5 × 1,000) 5,000 Rs. 100 each (3,000 × Rs. 30) 90,000
4,28,000 4,28,000

Working Note:
Rs.
Cash account balance 4,13,000
Less: Payment for dividend 33,000
Preference shareholders 3,00,000
Calls in advance 5,000 3,38,000
75,000
Add: Calls in arrears 10,000
85,000
Add: Amount to be received from equity shareholders of Rs. 50 each
(1,000 × 20) 20,000
Amount disposable 1,05,000

Number of equivalent equity shares:

3,000 shares of Rs. 100 each = 6,000 shares of Rs. 50 each
1,000 shares of Rs. 50 each = 1,000 shares of Rs. 50 each
= 7,000 shares of Rs. 50 each
Amount left for distribution
Final payment to equity shareholders =
Total number of equivalent equity shares
= Rs. 1,05,000 / 7,000 shares = Rs. 15 per share to equity shareholders of Rs. 50 each.
14 PROFESSIONAL EDUCATION (EXAMINATION – II) : NOVEMBER, 2004

 100 
Therefore for equity shareholders of Rs. 100 each  Rs. 15 × 
 50 
= Rs. 30 per share to equity shareholders of Rs. 100 each.
Calls in advance must be paid first, so as to pay the shareholders on prorata basis. Equity
shareholders of Rs. 50 each have to pay Rs. 20 and receive Rs. 15 each. As a result, they
are required to pay net Rs. 5 per share.

Question 5
(a) FGH Ltd. has three departments I.J.K. The following information is provided for the year
ended 31.3.2004:
I J K
Rs. Rs. Rs.
Opening stock 5,000 8,000 19,000
Opening reserve for unrealised profit • 2,000 3,000
Materials consumed 16,000 20,000 •
Direct labour 9,000 10,000 •
Closing stock 5,000 20,000 5,000
Sales • • 80,000
Area occupied (sq. mtr.) 2,500 1,500 1,000
No. of employees 30 20 10

Stocks of each department are valued at costs to the department concerned. Stocks of I
are transferred to J at cost plus 20% and stocks of J are transferred to K at a gross profit
of 20% on sales. Other common expenses are salaries and staff welfare Rs. 18,000,
rent Rs. 6,000.
Prepare Departmental Trading, Profit and Loss Account for the year ending 31.3.2004.
(b) Give Journal Entries in the books of Branch A to rectify or adjust the following:
(i) Head Office expenses Rs. 3,500 allocated to the Branch, but not recorded in the
Branch Books.
(ii) Depreciation of branch assets, whose accounts are kept by the Head Office not
provided earlier for Rs. 1,500.
(iii) Branch paid Rs. 2,000 as salary to a H.O. Inspector, but the amount paid has been
debited by the Branch to Salaries account.
(iv) H.O. collected Rs. 10,000 directly from a customer on behalf of the Branch, but no
intimation to this effect has been received by the Branch.
(v) A remittance of Rs. 15,000 sent by the Branch has not yet been received by the
Head Office.
(vi) Branch A incurred advertisement expenses of Rs. 3,000 on behalf of Branch B.
(10 + 6 = 16 marks)
 PAPER – 1 : ACCOUNTING 15

Answer
(a) FGH Ltd.
Departmental Trading and Profit and Loss Account
for the year ended 31st March, 2004
I J K Total I J K Total
Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs.
To Opening stock 5,000 8,000 19,000 32,000 By Sales 80,000 80,000
To Material 16,000 20,000 36,000 By Inter-
consumed departmental
To Direct labour 9,000 10,000 19,000 transfer 30,000 60,000 90,000
To Inter-departmental By Closing stock 5,000 20,000 5,000 30,000
transfer 30,000 60,000 90,000
To Gross profit 5,000 12,000 6,000 23,000 ______ ______ ______ _______
35,000 80,000 85,000 2,00,000 35,000 80,000 85,000 2,00,000
To Salaries and staff By Gross profit b/d 5,000 12,000 6,000 23,000
welfare 9,000 6,000 3,000 18,000 By Net loss 7,000 7,000
To Rent 3,000 1,800 1,200 6,000
To Net profit ______ 4,200 1,800 6,000 _____ _____ _____ _____
12,000 12,000 6,000 30,000 12,000 12,000 6,000 30,000
To Net loss (I) 7,000 By Stock reserve b/d 5,000
To Stock reserve (J + K)
(J+K) Net profit (J + K) 6,000
(Refer W.N.) 3,000 By
To Balance
transferred to
Profit and loss
account 1,000 _____
11,000 11,000

Working Note:
Calculation of unrealized profit on closing stock
Rs.
Stock reserve of J department
Cost 30,000
Transfer from I department 30,000
60,000
Stock of J department 20,000
Rs.30,000
Proportion of stock of I department = Rs. 20,000× = Rs.10,000
Rs.60,000
20
Stock reserve =Rs.10,000 × = Rs.1667 (approx.)
120
Stock reserve of K department Rs.
Stock transferred from J department 5,000
Less: Profit (stock reserve) 5,000 × 20% 1,000
Cost to J department 4,000
Rs.30,000
Proportion of stock of I department =Rs. 4,000 × = Rs.2,000
Rs.60,000
16 PROFESSIONAL EDUCATION (EXAMINATION – II) : NOVEMBER, 2004

20
Stock reserve = Rs.2,000 × = Rs.333 (approx.)
120
Total stock reserve = Rs.1,000 + Rs.333 = Rs.1,333
(b) Books of Branch A
Journal Entries
Particulars Dr. Cr.
Amount Amount
Rs. Rs.
(i) Expenses account Dr. 3,500
To Head office account 3,500
(Being the allocated expenditure by the
head office recorded in branch books)
(ii) Depreciation account Dr. 1,500
To Head office account 1,500
(Being the depreciation provided)
(iii) Head office account Dr. 2,000
To Salaries account 2,000
(Being the rectification of salary paid on
behalf of H.O.)
(iv) Head office account Dr. 10,000
To Debtors account 10,000
(Being the adjustment of collection from
branch debtors)
(v) No entry in branch books
(vi) Head Office account Dr. 3,000
To Cash account 3,000
(Being the expenditure on account of
Branch B, recorded in books)

Question 6
Attempt any four of the following:
(a) On 20.4.2003 JLC Ltd. obtained a loan from the Bank for Rs. 50 lakhs to be utilised as
under:
Rs.
Construction of a shed 20 lakhs
Purchase of machinery 15 lakhs
Working capital 10 lakhs
Advance for purchase of truck 5 lakhs

In March, 2004 construction of shed was completed and machinery installed. Delivery of
truck was not received. Total interest charged by the bank for the year ending 31.3.2004
was Rs. 9 lakhs. Show the treatment of interest under AS 16.
 PAPER – 1 : ACCOUNTING 17

(b) A limited company created a provision for bad and doubtful debts at 2.5% on debtors in
preparing the financial statements for the year 2003-2004.
Subsequently on a review of the credit period allowed and financial capacity of the
customers, the company decided to increase the provision to 8% on debtors as on
31.3.2004. The accounts were not approved by the Board of Directors till the date of
decision. While applying the relevant accounting standard can this revision be
considered as an extraordinary item or prior period item?
(c) Explain the treatment of cost arising from alteration in retirement benefit cost as per AS
15.
(d) From the following information find out the amount of provisions to be shown in the Profit
and Loss Account of a Commercial Bank:
Assets Rs. (in lakhs)
Standard 4,000
Sub-standard 2,000
Doubtful upto one year 900
Doubtful upto three years 400
Doubtful more than three years 300
Loss Assets 500
(e) What are the features of farm accounting in India?
(f) Write a short note on Reserve for Unexpired Risks in an Insurance Company.
(4 × 4 = 16 marks)
Answer
(a) As per AS 16, borrowing costs that are directly attributable to the acquisition,
construction or production of a qualifying asset should be capitalized. A qualifying asset
is an asset that necessarily takes a substantial period of time (usually 12 months or
more) to get ready for its intended use or sale. If an asset is ready for its intended use or
sale at the time of its acquisition then it is not treated as a qualifying asst for the
purposes of AS 16.
Treatment of interest as per AS 16
Particulars Nature Interest to be capitalized Interest to be charged to
profit and loss account
(1) Construction Qualifying  Rs. 20 lakhs 
of a shed asset  Rs. 9 lakhs × 
 Rs. 50 lakhs 
= Rs. 3.60 lakhs
(2) Purchase of Not a  Rs. 15 lakhs 
machinery qualifying  Rs. 9 lakhs × 
 Rs. 50 lakhs 
asset∗
= Rs. 2.70 lakhs.

∗
On the basis that machinery is ready for its intended use at the time of its acquisition/purchase.
18 PROFESSIONAL EDUCATION (EXAMINATION – II) : NOVEMBER, 2004

(3) Working Not qualifying  Rs. 10 lakhs 

capital asset  Rs. 9 lakhs × 
 Rs. 50 lakhs 
= Rs. 1.80 lakhs
(4) Advance for Not a  Rs. 5 lakhs 
purchase of qualifying  Rs. 9 lakhs × 
 Rs. 50 lakhs 
truck asset
= Rs. 0.90 lakhs
Total Rs.3.60 lakhs Rs.5.40 lakhs

(b) The preparation of financial statements involve making estimates which are based on the
circumstances existing at the time when the financial statements are prepared. It may be
necessary to revise an estimate in a subsequent period if there is a change in the
circumstances on which the estimate was based. Revision of an estimate, by its nature,
does not bring the adjustment within the definitions of a prior period item or an
extraordinary item [para 21 of AS 5 (Revised) on Net Profit or Loss for the Period, Prior
Period Items and Changes in Accounting Policies].
In the given case, a limited company created 2.5% provision for doubtful debts for the
year 2003-2004. Subsequently in 2004 they revised the estimates based on the changed
circumstances and wants to create 8% provision. As per AS-5 (Revised), this change in
estimate is neither a prior period item nor an extraordinary item.
However, as per para 27 of AS 5 (Revised), a change in accounting estimate which has
material effect in the current period, should be disclosed and quantified. Any change in
the accounting estimate which is expected to have a material effect in later periods
should also be disclosed.
(c) Alteration in the retirement benefit cost may arise from introduction of a retirement
benefit scheme for existing employees or because of making of improvements to an
existing scheme. As per AS 15 any alternation in retirement benefit cost arising from
changes in the actuarial method used or assumptions adopted should be charged or
credited to the statement of profit or loss as they arise in accordance with AS 5 “Net
Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies”.
Additionally, a change in the actuarial method should be treated as a change in
accounting policy and disclosed in accordance with AS 5. The cost of additional benefits
provided to retired employees due to amendments in the retirement benefit scheme
should also be treated in the same manner (i.e. charged to profit and loss statement of
the year).
(d) Computation of provision:
Assets Amount % of Provision Provision
(Rs. in lakhs) (Rs. in lakhs)
Standard 4,000 0.25 10
Sub-standard 2,000 10 200
Doubtful upto one year* 900 20 180
Doubtful upto three years* 400 30 120
 PAPER – 1 : ACCOUNTING 19

Doubtful more than three years* 300 50 150

Loss 500 100 500
1160

* Doubtful assets are taken as fully secured.

(e) The features of farm accounting are as follows:
(i) Agricultural sector in India is unorganized and dominated by small farmers. Most
agricultural farms are family oriented and part of the farms produce is consumed by
the family members. Level of the education of the average farmers appears to be
the principal barrier for adaptation of agricultural accounting system. Farmers are
not aware of the technique of using accounting data for the purpose of management
decision and usefulness of data base management.
(ii) The family takes part in management and provides labour for the farm. Farmers
cannot afford the additional expenses involved in hiring a person to maintain
accounts.
(iii) Agriculture is in some cases a seasonal occupation and many farmers have other
occupations also. Farming operations are uncertain due to natural calamities.
(iv) There are many divisions in farm accounting. Finished product of one division can
become the raw material for another.
(v) Tax authorities do not rigorously insist on maintenance of books of account.
Collection of statistics by the government is also not adequate.
(f) In most cases policies are renewed annually except in some cases where policies are
issued for a shorter period. Since insurers close their accounts on a particular date, not
all risks under policies expire on that date. Many policies extend into the following year
during which the risk continues. Therefore on the closing date, there is unexpired liability
under various policies which may occur during the remaining term of the policy beyond
the year and therefore, a provision for unexpired risks is made at normally 50% in case of
Fire Insurance and 100% of in case of Marine Insurance. This reserve is based on the
net premium income earned by the insurance company during the year