Financial Accounting Foundation Solution December - 2010 Paper -3 Question 1.

(a) (i) Same as 2007 - Dec [1] {C} (a) (ii) When a partner is unable to repay to the firm his indebtedness, he is said to be insolvent. In such cases, the ruling of Garner Vs. Murray is applied. The decision of Justice Joyce is as under :(a) All the solvent partners should bring cash equal to their share of loss for realisation, and (b) The loss on account of insolvency of a partner should be borne by the solvent partners in the ratio of their capital just before dissolution. If the capital accounts are fixed, the deficiency of the insolvent partner is borne by the solvent partners in proportion of their fixed capital. Whereas, in case of fluctuating capital, adjustments for reserves, drawings, undisclosed liabilities, etc. are to be made to ascertain the capital before dissolution. If any partner's capital account shows a debit balance, such a partner will not be required to bear loss on account of insolvency of other partner. (c) When two or more partners are insolvent, the loss on account of insolvency of that partner whose account shows maximum deficiency will be shared, first, by the remaining partners. Thereafter, the deficiency of the next insolvent partner will be shared and this process will continue till the capital accounts of all the insolvent partners are closed. (iii) Same as 1999 - June [1] {C} (i) (iv) Same as 2003 - June [2] (b) Question 1. (b) (i) false. The profit & loss A/C pertains with a period of time which is usually a year and Balance sheet is concerned to a point of time, usually at the end of an accounting period. (ii) false. A change in selling price is not only reason responsible for a change in gross profit rather there are more reasons for change in gross profit like a change in the purchase price or a change in quantity sold without changing selling price, etc. (iii) false. Though invisible, goodwill is not a fictitious asset because it is recorded in the books of accounts having a monetary value. (iv) false. A joint venture is only for a limited period or for a particular venture. Hence, the going concern concept does not apply to it. (v) false. Receipts & Payments A/C is not based on accrual concept. Rather the actual receipts, and actual payment during the accounting period are recorded in it.

Question 2. (a) (i) Each transaction has two aspects, debit and credit; this fact is known as Dual Aspect concept. (ii) Manufacturing account is prepared to ascertain the cost of goods manufactured. (iii) The total of purchases book is periodically posted to the debit of purchases account. (iv) The relationship between the consignor and the consignee is that of a principal and an agent. (v) Partnership business is carried on in the name of the partnership firm. (vi) Depletion method of depreciation is applicable in case of wasting assets. (vii) On dishonour of a bill of exchange, the noting charges have to be ultimately borne by the acceptor of the bill. (viii) Outstanding rent account is a Representative Personal account. Question 2. (b) (i) Journal Ledger (a) The transactions are recorded first in (a) All the transactions entered in the Journal as this is referred as Journal all later transferred to ledger. 'book of primary entry' As such, it is called a, 'book of final entry'. (b) Transactions are entered in a (b) Transactions are recorded in an analytical order and this is known as chronological order as and when 'posting'. they occur. This process of recording is called 'journalising'. (c) These books are considered more (c) Ledger is considered as less authentic and reliable as they are the authentic and reliable as entries are book of original entry. recorded at a later stage. (d) Final accounts/statements cannot be (d) Final statements can be prepared with prepared with the help of books of the help of ledger balances. original entry. (e) Accuracy of these books cannot be (e) Accuracy of the ledger accounts is tested. tested by preparing a Trial Balance. (ii) Same as 2008 - Dec [2] (b) (ii) (iii) Same as 2002 - Dec [2] (i) Question 3. (a) (i) Amount spent on an advertising campaign to launch a new product is___________ Deferred revenue expenditure. (ii) Rs. 10,000 receivable from Sohan were written off as bad debts. Now, a sum of Rs. 5,000 is received from Sohans estate as the first and final dividend. The

amount received should be credited to ___________bad debts recovered A/C. If the profit is 25/- of the cost price, then it is ___________20/- of the selling price. (iv) Balance sheet discloses ______________financial position of the business. (v) Principle of mutual agency is applicable in case of ____________partners of a firm. (vi) After adding three days of graces period, the date of maturity of a bill of exchange falls on 26th January. The effective due date of the bill will be __________25th January. (vii) Under single entry system, normally only one subsidiary book is maintained, namely cash book. (viii) Under single entry system, if a ledger is at all maintained, one can expect in it accounts of only __________ Trade debtors and trade creditors. Question 3. (b) (i) Depreciation is that portion of the cost of an asset, which is deducted from revenue for assets' use in routine business affairs. As William Pickles defines 'depreciation as the permanent and continuing diminution in the quality; quantity or the value of an asset.' Depreciation is a system in which the cost of tangible capital assets loss salvage over the estimated useful life is distributed in a systematic and rational manner. It is a process of allocation and not of valuation. Whenever a fixed asset is used to earn revenue for a number of accounting years, it is necessary that a part of the acquisition cost is treated or allocated as an expense in each of such years to ascertain the actual profit earned in that year. This allocation of cost in the form of an expense (shown in profit & loss A/C) is known as depreciation. In other words, the cost of fixed assets in the form of depreciation has to be matched against the revenues of the years over which the asset is used. And, this process is not the valuation of fixed assets but the allocation of expired cost. (ii) Refer 2009 - Dec [3] (b) (iii) (iii) Refer 2005 - June [3] (i) (iii)

Dr. Particulars Amt

Consignment A/C Particulars

Cr. Amt

To Goods sent on Consignment 1,20,000 By Puneet : A/C Goods sold : 1,03,000 6,000 Damaged goods : To Bank (Expenses) 2,800 To Puneet : Taken over 19,800 Commission 5,150 9,850 By Abnormal Loss Expenses 4,700 To Profit & Loss A/C (profit) 12,250 By Good sent on consignment A/C 1,48,100 Puneet's A/C Particulars To Consignment A/C (value of goods) Amt Particulars 1,25,600 By Bills Receivable A/C By Consignment A/C Commission 5,150 Expenses 4,700 By Bank (settlement) 1,25,600 Dr. Particulars To Consignment A/C To Trading A/C (bal. fig.) Goods Sent On Consignment A/C Amt Particulars 20,000 By Consignment A/C 1,00,000 1,20,000

1,25,600 2,500 20,000 1,48,100 Cr. Amt 70,000

Dr.

9,850 45,750 1,25,600

Cr. Amt 1,20,000 1,20,000

Working Notes : (1) Calculation of price of remaining goods taken over by Puneet i.e. consignee Y Invoice Price of total goods 1,20,000 Less : (a) Goods sold (1,20,000 4/5) 96,000 1,02,000 (b) Damaged 6,000 18,000 Add : 10% of Invoice price 1,800 Total price 19,800

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Calculation of Abnormal Loss Y Cost price of goods = + Expenses = = = 5,000 300

5,300 Less : Sale proceeds 2,800 Abnormal Loss = 2,500 Question 5. (a) Bank Reconciliation Statement as on 30th June, 2010 Particulars Plus Add : (1) (2) (3) Bank overdraft as per Pass Book Cheques paid into bank for collection but not cleared Bank charges on overdraft Bill discounted but later dishonoured on Maturity 31,000 2,300 10,100

Minus 46,000

Less : (1) Cheques issued but not presented for payment (2) Customer directly deposited with bank no entry in cash book (3) Dividend collected by bank but no intimation to Nataraj Overdraft as per Cash Book 43,400 34,900 78,300 Rectifying Journal entries Particulars (i) Suspense A/C To Purchase Returns A/C (Being total of Purchase Returns Book not posted earlier, now rectified) To Suspense A/C (Being a sale of 4,300 to Ram credited in his account as Rs. 3,400, now rectified) Dr.

22,000 8,300 2,000 78,300 78,300

Dr. (Rs.) Cr. (Rs.) 2,100 2,100

(ii) Ram

Dr.

7,700 7,700

(iii) Purchases A/C Dr. Sales A/C Dr. To Suspense A/C (Being a purchase by suresh wrongly entered in sales book, now rectified) (iv) Sales A/C Dr. Suspense A/C Dr. To Furniture's A/C (Being old furniture sold on credit wrongly recorded in sales book, now rectified) (v) Drawings A/C Dr. To purchases A/C (Being goods taken over by proprieter not recorded, now rectified) Dr. Particulars To Balance b/d (difference in Trial Balance) To Purchase Return A/C To Furniture A/C Amt. Suspense A/C Particulars 12,700 By Ram By Purchases A/C By sales A/C 2,100 900 15,700 Journal Entries Particulars Revaluation A/C Dr. To Furniture A/C To Provision for doubtful debts To Liability against bills discounted (being provision for depreciation, doubtful debts and liability against bills recorded) Building A/C To Revaluation A/C (Being increase in the value of building recorded) Dr.

4,000 4,000

8,000

4,500 900

5,400

750 750

Cr. Amt. 7,700 4,000 4,000

15,700

Dr. (Rs.) Cr. (Rs.) 15,000 2,400 5,400 7,200

75,000 75,000

Revaluation A/c Dr. To Amar's Capital A/C To Bharat's Capital A/C To Chatur's Capital A/C (Being the profit on revaluation transfered to old partners capital A/C) Bank A/C Dr. To Dalbir's Capital A/c (Being Dalbir's Capital and goodwill brought in on admission Dalbir's Capital A/C Dr. To Amar's Capital A/C To Bharat's Capital A/C To Chatur's Capital A/C (Being goodwill amount credited to old partners capital accounts in sacrificing ratio) Dr. Particulars To furniture A/C To provision for doubtful debts To liability against bills discounted To Amar's Capital A/C To Bharat's Capital A/C To Chatur's Capital A/C Amt. 2,400 5,400 7,200 20,000 20,000 20,000 75,000 Revaluation A/C Particulars By Building

60,000 20,000 20,000 20,000

2,40,000 2,40,000 90,000 30,000 30,000 30,000

Cr. Amt. 75,000

75,000

Dr.
Particulars Amar Bharat Chatur

Capital A/C
Dalbir Particulars

Cr.
Amar Bharat

Ch

To Amar's Capital A/C To Bharat's Capital A/C To Chatur's Capital A/C To Balance c/d

2,18,000 2,18,000

1,76,000 1,76,000

1,10,000 1,10,000

30,000 30,000 30,000 1,50,000 2,40,000

By Balance b/d By Revaluation A/C By Bank By Dalbir's A/c

1,68,000 20,000 30,000 2,18,000

1,26,000 20,000 30,000 1,76,000

60,000 20,000 30,000 1,10,000

2,40,000 2,40,000

Question 7. (a) Dr. Trading A/C for the year ended on 31stMarch 2010

Particulars To Opening stock

Rs. 4,00,000

Particulars By sales

Rs. 25,00,000

To Purchases To Gross profit (bal. fig.)

16,00,000 By closing stock 4,00,000 9,00,000 29,00,000 29,00,000

Hence, Gross Profit Ratio = = 36% Memorandum Trading A/C for the Period from 1st April, 2010 to 31st August, 2010 Dr. Particulars To Stock To Purchases To Gross profit (i.e. 36% of 6,60,000) Rs. 4,00,000 5,40,000 2,37,600 11,77,600 Calculation of loss of stock : Stock on 31st August, 2010 Less : salvage value Loss of stock Amount of claim : Loss of stock = = Rs. 2,42,272, Particulars By sales By Closing stock (Bal. fig.) Rs. 6,60,000 5,17,600 11,77,600 Cr.

= 5,17,600 = 99,600 = 4,18,000

Question 7. (b) In the book of Barun Journal Entries

Date

Particulars Dr.

Dr.

(Rs.) Cr. 10,000

(Rs.) 10,000

2010 Arun Jan 1 To Sales A/C (Being goods sold to Arun on credit) " " Bills Receivables A/C To Arun (Being a Bill accepted by Arun)

Dr.

10,000 10,000 9,800 200 10,000 10,000 10,000 5,000 5,000 125 125

Jan

4 Bank A/C Dr. Discount A/C Dr. To Bills Receivable A/C (Being bill discounted with bank @ 12% p.a.) Dr.

March7 Arun To Bank A/C (Being bill dishonoured) "

" Cash A/C Dr. To Arun (Being cash received from Arun as part payment) " Arun Dr. To Interest A/C (Being interest received on renewal @ 15% for two months) " Bills Receivable A/C To Arun (Being fresh bill accepted by Arun) Dr,

"

"

5,125 5,125

May 7 Bank To Bills Receivable A/C (Being bill's amount received on maturity)

Dr.

5,125 5,125

Question 8. (a) Machinery A/C

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Dr. Date

Particulars

Amt.

Date

Particulars

Cr. Amt. 18,000 1,62,000 1,80,000

2007 April 1 To Bank " To Bank

2008 1,50,000 March 31 By Depreciation A/C " By Balance C/d 30,000 1,80,000

2008 April 1 To Balance b/d Oct 1 To Bank

2009 March 31 By Depreciation A/C 1,62,000 (1) 1,62,000 @ 10% 1,20,000 16,200 (2) 1,20,000 @ 10% for 6 months 6,000 By Balance c/d (1) 1,45, 800 (2) 1,14,000 By Depreciation 30 " By Bank " By Profit & Loss A/C (Loss on sale) By Depreciation A/C = 11,400 (2) = 22,500 4 By Balance c/d (1) 1,02,600 (2) 2,77,500

22,200 2,59,800 2,82,000

2009 2009 April 1 To Balance b/d 2,82,000 June (1) 1,45,800 (2) 1,14,000 2,59,800 July 1 To Bank " To Bank 2,60,000 40,000

3,645

25,000 1,17,155

2010 (1) March 31

33,900

3,80,100 5,59,800

5,59,800

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Question 8. (b) Liabilities

Balance sheet as on 31st March, 2008 Amt. Assets Outstanding Subscription (4,000 + 5,000)

Amt. 9,000

Income & Expenditure A/C for the year ending on 31st March, 2009 Expenditure Rs. Income Rs. By subscription + Outstanding for the year 2,05,000 45,000 2,50,000

Balance Sheet as on 31st March, 2009 Liabilities Subscription received in advance for 2009 - 10 Amt. 6,000 Assets Outstanding subscription for = 2007 - 08 5,000 for = 2008 - 09 45,000 Amt.

50,000

Working Notes : Outstanding Subscription for the years is Total subscription (500 500) = 2,50,000 (-) Received = 2,05,000 during the year = 45,000 Total No. of Pages - 15 (Fifters)

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