B.Com. (Hons.) CBCS

Semester - I

FINANCIAL ACCOUNTING

PAPER BCH-1.2

SHIV DAS & SONS

Publishers & Book-Sellers

SECTION A: THEORY

UNIT I. ACCOUNTING AS AN INFORMATION SYSTEM

Chapter 1. Accounting Theory

Chapter 2. Accounting Concepts & Accounting

Conventions

Chapter 3. Accounting Standards and IFRS

Chapter 4. Accounting Process

UNIT II. BUSINESS INCOME

Chapter 5. Measurement of Business Income

Chapter 6. Revenue Concepts

Chapter 7. Depreciation

Chapter 8. Inventory Valuations

Chapter 9. Preparation of Financial Statements

For Not For Profit Organizations

UNIT III. ACCOUNTING FOR HIRE PURCHASE & INSTALMENT SYSTEMS

Chapter 10. Hire Purchase Systems

UNIT IV. ACCOUNTING FOR INLAND BRANCHES

Chapter 11. Concept of Dependent Branches

UNIT V. ACCOUNTING FOR DISSOLUTION OF THE PARTNERSHIP FIRM

Chapter 12. Accounting for Dissolution of the Partnership Firm

SECTION B: PRACTICAL PROBLEMS (And their solutions)

UNIT I. Accounting Process

UNIT II. A. Depreciation

B. Inventory Valuation

C. Income And Expenditure Account

UNIT III. Accounting For Hire Purchase & Instalment System

UNIT IV. Accounting For Inland Branches

UNIT V. Accounting For Dissolution of The Partnership Firm

University Question Papers

onwards

SYLLABUS

B.Com. (Hons.) Semester - 1

PAPER BCH-1.2: FINANCIAL ACCOUNTING

Duration: 3 hours

Objective. To acquire conceptual knowledge of financial accounting and to provide

knowledge about the techniques for preparing accounts in different business organizations.

Unit I:

(a) Theoretical Framework. Accounting as an information system, the users of financial

accounting information and their needs. Qualitative characteristics of accounting information.

Functions, advantages and limitations of accounting. Branches of accounting. Basics of

accounting; cash basis and accrual basis.

The nature of financial accounting principles — Basic concepts and conventions; entity,

money measurement, going concern, cost, realization, accruals, periodicity, consistency,

prudence (conservatism), materiality and full disclosures.

Financial accounting standards: Concept, benefits, procedure for issuing accounting standards

in India. International Financial Reporting Standards (IFRS); Need and procedures,

Convergence to IFRS.

Distinction between Indian Accounting Standards (IND ASs) and Accounting Standards

(AS).

(b) Accounting Process. From recording of a business transaction to preparation of trial

balance including adjustments: Capital and Revenue Expenditures & Receipts. Preparation of

Profit & Loss Account and Balance Sheet (Sole Proprietorship only).

(c) Computerized Accounting Systems Practical Lab Computerized Accounting Systems.

Computerized Accounts by using any popular accounting software: Creating a Company;

Configure and Features settings; Creating Accounting Ledgers and Groups; Creating Stock

items and Groups; Vouchers Entry; Generating Reports-Cash Book, Ledger Accounts, Trial

Balance, Profit and Loss Account, Balance Sheet, Funds Flow Statement, Cash Flow

Statement, Selecting and shutting a Company; Backup and Restore data of a Company.

Unit II:

(a) Business Income. Measurement of business income-Net income; the accounting period,

the continuity doctrine and matching concept, Objectives of income measurement.

Revenue: Concept, Revenue recognition principles, Recognition of expenses.

The nature of depreciation. The accounting concept of depreciation. Factors in the

measurement of depreciation. Methods of computing depreciation: Straight line method and

diminishing balance method; Disposal of depreciable assets — change of method.

Inventories: Meaning, significance of inventory valuation, Inventory Record System; periodic

and perpetual Methods; FIFO, LIFO and Weighted Average.

(b) Preparation of financial statements of not for profit organization.

Unit III. Accounting for Hire Purchase and Installment System

Calculation of interest, partial and full repossession, Hire Purchase trading (total cash price

basis), stock and debtors system. Concepts of operating and financial lease.

Unit IV. Accounting for Inland Branches

Concept of dependent branches; accounting aspects; debtors system, stock and debtors

system, branch final accounts system and wholesale basis system, Independent branches,

Concept — Accounting treatment: important adjustment entries and preparation of

consolidated profit and loss account and balance sheet.

Unit V. Accounting for Dissolution of the Partnership Firm

Accounting for Dissolution of the Partnership Firm including Insolvency of partners, sale in a

limited company and piecemeal distribution.

Note:

(i) The relevant Indian Accounting Standards in line with the IFRS for all the above topics

should be covered.

(ii) Any revision of relevant Indian Accounting Standard would become applicable

immediately.

(iii) There shall be 4 Credit Hours for Lectures + one Credit hour (Two Practical per week

per batch) for Practical Lab + one credit hour for Tutorials (per group).

(iv) Examination Scheme for Computerised Accounting System — Practical for 20 marks.

The practical examination will be for 1 hour.

(v) Theory Exam shall carry 80 marks.

UNIT

I

Accounting As An Information System

Chapter 1. ACCOUNTING THEORY

Q. 1. Define accounting and explain the functions of accounting.

Ans. Meaning of Accounting. Accounting may be defined as the process of collecting,

recording, summarising and communicating financial information.

Definition of Accounting. American Institute of Certified Public Accountants (AICPA)

defined accounting in 1961 as follows:

"Accounting B the art of recording, classifying and summarising, in a significant manner,

and in terms of money, transactions and events which are, in part at least, of a financial

character, and interpreting the results thereof."

From the above the following attributes of accounting emerge:

(i) Identifying the financial transactions and events.

(a) It is the art of recording business transactions.

(iii) It is the art of classifying business transactions.

(iv) The transactions or events of business must be recorded in monetary terms. (v) It is the

art of summarising financial transactions.

(vi) It is an art of analysis and interpretation of these transactions.

(vii) The result of such analysis must be communicated to the persons who are to make

decisions or form judgement.

Functions of Accounting: Financial accounting performs the following functions:

1. Keeping Systematic records. Business transactions are properly recorded, classified and

summarised into financial statements — Income Statement (i.e., Profit & Loss Account) and

Balance Sheet.

2. Calculation of Profit or Loss. At the end of the accounting period, the income statement,

i.e., Profit & Loss Account is prepared to calculate net profit or loss. This is done to know the

results of the operations of the enterprise.

3. Ascertainment of financial position. 'Position statement, i.e., Balance Sheet is prepared as

at last date of the accounting period to know the financial position of an organisation.

4. Communicating accounting information to the users. Accounting is used to provide

financial information in respect of net profit/net loss, assets, liabilities etc., to the interested

parties.

5. Meeting legal needs. The provision of various laws such as Companies Act, Income tax

and Sales tax Act require the submission of various statements, i.e., annual accounts, income

tax returns, returns for sales tax purpose and so on. Accounting system aims at fulfilling the

requirement of law.

6. Protect business assets. Accounting keeps proper records of various assets and thus

enables the management to exercise proper control over them.

7. Accounting assists the management in the task of planning, control and coordination of

business activities.

Q. 2. Distinguish between 'Book-keeping' and 'Accounting'.

Ans. Book-keeping. Book-keeping is a part of accounting. It is concerned with the recording

of business transactions in a systematic manner and classifying them in the ledger. It is

mechanical and repetitive in nature.

Accounting. Accounting may be defined as the process of collecting, recording, summarising

and communicating financial information.

Accounting is based on a careful and efficient book-keeping. In fact the process of

accounting begins where that of book-keeping ends.

Distinction between Book-keeping and Accounting

Basis of Distinction Book-keeping Accounting

1. Scope Book-keeping involves:

• identifying the transactions;

• measuring the identified

transactions;

• recording the measured

transactions; and

• classifying the recorded

transactions.

In addition to Bookkeeping,

accounting is concerned with:

summarizing the classified

transactions, analysis and

interpretation of summarized

results and communicating the

interpreted information to the

interested parties.

2. Stages Book-keeping is the primary

stage.

Accounting is the secondary

stage. It begins where book-

keeping ends.

3. Objective To maintain systematic

records of financial results. To ascertain financial

performance (Net Profit/ Net

Loss) and financial position

and to communicate

financial information to various

users.

4. Knowledge level The book-keeper is not required

to have higher level of

knowledge than that of an

accountant.

The accountant must have

higher level of knowledge than

that of book-keeper.

5. Who performs Book-keeping work is

performed by junior staff.

Accounting work is performed

by senior staff.

6. Nature of Job The job of book-keeper is often The role of an accountant is

routine and clerical in nature. analytical in nature.

Q. 3. Write a short note on: Cash basis and Accrual basis of accounting. Ans. Basis of

Accounting. For recording business transactions, there are two basis of accounting which are

widely accepted:

1. Cash Basis of Accounting

2. Accrual Basis of Accounting

1. Cash Basis of Accounting. Under this basis of accounting actual cash receipt and actual

cash payments are recorded. Credit transactions are not recorded at all. Income is merely the

difference between the cash receipts and cash payments. Outstanding expenses, prepaid

expenses, accrued income and income received in advance are not adjusted while calculating

net profit.

Cash basis of accounting is very simple as there is no need of adjusting outstanding expenses,

prepaid expenses, accrued income and income received in advance.

The main disadvantage of cash basis of accounting is that it does not give a true and fair view

of the results of the operations of the enterprise.

2. Accrual Basis of Accounting. Under accrual basis of accounting net income for a period

is the result of the revenue realised in the period and the cost expired during the year. Accrual

basis of accounting is a method of recording transactions by which revenue, costs, assets and

liabilities are reflected in the accounts for the period in which they occur.

The accrual basis of accounting is widely used. Although this basis is not simple but it gives a

true and fair view of the results of the operation's of the business and of financial position of

the business. It is recognised by the Companies Act.

Q. 4. Distinguish between Cash and Accrual Basis of Accounting.

Ans. Distinction between Cash and Accrual Basis of Accounting

Cash Basis of Accounting Accrual Basis of Accounting

(i) In this: case only cash transactions are

recorded.

In this case both cash and credit transactions

are recorded.

(ii) Under this basis there is no outstanding or

prepaid expenses and income accrued or

income received in advance in the Balance

Sheet.

Under this basis there may be outstanding

expenses, prepaid expenses, accrued

income and income received in advance in

the

Balance Sheet.

(iii) Income statement will show lower

income in case there are items of prepaid

expenses and accrued income.

Income statement will show relatively

higher income if there are items of

prepaid expenses and accrued income.

(iv) Income statement will show relatively

higher income if there are items of

outstanding expenses and income received in

advance.

Income statement will show relatively

lower income if there are items of

outstanding expenses and income received

in advance.

(v) This basis of accounting is simple because

it does not require any technical knowledge.

This basis of accounting is technical

because it involves the adjustments of

accounts for preparing the final accounts.

(vi) It is not a reliable basis of

accounting because accurate profit or loss can

not be ascertained under this basis.

It is a reliable basis of accounting because

it makes a complete record of all cash and

credit transactions. It ascertains correct

profit or loss.

(vii) This basis is not recognised under the

Companies Act, 2013.

This basis is recognised under the

Companies Act, 2013.

(viii) Under this method an accountant has

no such option to follow alternative method

of depreciation or valuation of inventory.

Under this basis an accountant has the

option of following alternative method of

depreciation (i.e., SLM or DBM) or method

of valuation of inventory (i.e., LIFO or

FIFO etc.)

Q. 5. Write a note on: Accounting as an information system.

Ans. Accounting as an Information system. According to American Accounting

Association,

"Accounting is the process of identifying, measuring and communicating economic

information to permit informed judgements and decisions by users of information."

As an information system, accounting collects data and communicates economic information

about the organisation to a wide variety of users whose decisions and actions are related to its

performance. Accounting process begins with the identification of- transactions and ends

with the preparation of financial statements. Every step in the process of accounting generates

information. Generation of information is not an end in itself. It is a means to facilitate the

dissemination of information among different user groups. Such information enables the

interested parties to take appropriate decisions.

Accounting is often called the language of business. The basic function of language is to

serve as a means of communication. Accounting serves this function. It communicates the

results of business operations to various parties who have a stake in the business viz., the

proprietor, creditors, investors, government and other agencies. The accounting is, therefore,

also an information system.

Accounting information system should be such that the financial statements and reports can

be prepared not only at the end of the accounting year but also on quarterly and monthly basis

as the information may be timely communicated. Accounting information system should be

designed to meet the requirements of both internal and external users.

Q. 6. Who are the various users of accounting information?

Explain their information needs.

Ans. Users of Accounting Information and their Needs. There are a number of groups who

have a vested interest in the accounting information of the business. They may be internal

users (e.g., owners, management, employees etc.) or external users. Users need accounting

information to know the liquidity, solvency and profitability of the enterprise. Following are

some of the users who use the accounting information:

Users Need for Information

1. Owners/

Proprietors and

partners

They are interested to know the financial position of a concern, rate

of return on the capital employed, proper' and effective utilisation

of available resources.

2. Creditors and other

Lending Institutions

Since they have provided the funds, they are interested to get their

funds as well as interest thereon when due. As such, they are

naturally interested to know the profitability and short-term

solvency of the business.

3. Management Management needs information to review the firm's (i) short-term

& long-term solvency, (ii) profitability (iii) effective utilization of

available resources; and take necessary action to run the business

effectively.

4. Potential Investors

(those who want to

invest)

Before investing their funds they need accounting information to

know past and present profitability of the business, because their

investment should always be in safe hands. In other words, they

need information to judge prospects of an enterprise and to decide

whether they should buy the shares of the enterprise,

5. Employees They are interested in information about the earning capacity of the

business since their salary, bonus, profit-sharing, welfare and social

measures depend upon the profitability of the business.

6. Tax Authorities Tax authorities need information to access the tax liabilities of an

enterprise.

7. Government and

their agencies

Government and their agencies are interested in the allocation of

resources and therefore, the activities of the enterprise. They also

require information for controlling the activities of the enterprise,

determine taxation policies etc.

Q. 7. Write a short note on the importance of classifying business expenditure into

revenue expenditure, capital expenditure and deferred revenue expenditure.

Ans. The two financial statements — Profit & Loss Account and Balance Sheet are related

with each other. Both the statements are prepared from the balances appearing in the trial

balance. All items appearing in trial balance which are of revenue nature are transferred to

Profit and Loss Account and all items of capital nature are taken to the balance sheet. For

calculating and correcting the profits for the accounting period, the 'principle of matching of

revenue and expenses' is to be applied.

If there is an incorrect classification of any item in capital and revenue items, the profit or

loss figure as shown by Profit and Loss Account will be wrong. The Balance sheet will not

present a true and fair view of the financial affairs on a particular date. In other words, if

there is an incorrect classification of item into revenue items and capital items, financial

statements will not disclose the true and fair view of the financial position and income of the

period.

Sometimes some expenditure is incurred which by nature is revenue expenditure, but its

benefits are likely to be derived over a number of years. Such expenditure is called a deferred

revenue expenditure. Such expenses cannot be transferred to Profit and Loss Account of a

particular year and are deferred over a number of years so that profit of a particular year is

not unduly affected.

In short, deferred revenue expenditure is a type of revenue expenditure which is incurred

during the accounting period but is applicable either wholly or in part to future periods.

Examples of deferred revenue expenses are as under.

(i) Preliminary expenses

(ii) Brokerage on Issue of shares and debentures

(iii) Heavy amounts of advertisement

(iv) Research and Development expenses.

Q. 8. Explain the advantages and limitations of Financial Accounting.

Ans. Advantages of Financial Accounting:

(i) Replacement of Memory. All financial transactions are recorded in a systematic manner

in the books of accounts so that there is no need to rely on memory. Human memory is

limited by its very nature.

Accounting helps to overcome this limitation.

(ii) Preparation of financial statements. Systematic records enable the accountants to

prepare the Financial Statements

— Profit & Loss Account to ascertain profit or loss during a particular accounting period and

Balance Sheet to state the financial position of the business on a particular date.

(iii) Comparative Study. Systematic maintenance of business records enables the accountant

to compare profit of one year with that of earlier years to know the significant facts about the

change.

(iv) Acts as Legal Evidence. Proper books of accounts maintained in a systematic manner

act as legal evidence in case of disputes.

(v) Facilitates Raising loans. Accounting facilitates raising loans from lenders by providing

them required financial information.

(vi) Facilitates the Ascertainment of Value of Business. Accounting facilitates the

ascertainment of the value of business in case of transfer of business to another entity.

(vii) Assistance to Management. Accounting assists the management in taking managerial

decisions. For example, Projected Cash Flow Statement facilitates the management to know

about future receipts and payments and to take decisions regarding anticipated surplus or

shortage of funds.

(viii) Settlement of taxation liability. Accounting facilitates the settlement of tax liability

with the authorities by maintaining proper books of accounts in a systematic manner.

(ix) Facilitates control over Assets. Accounting facilitates control over assets by providing

information regarding Cash Balance, Bank Balance, Stock Debtors, Fixed Assets etc.

Limitations of Financial Accounting:

(i) Records only monetary transactions. Financial Accounting records only those

transactions which can be measured in monetary terms. It has no place for recording non-

monetary or non-financial transactions, though these matters also have a significant role in

affecting the soundness of the business.

(ii) No consideration of price level changes. Accounting accepts the cost concept and hence

does not consider the change in the price level from time to time. This is a very serious

limitation of Financial Accounting.

(iii) No realistic information. Accounting information may not be realistic as accounting

statements are prepared by following basic concepts and conventions. For example, Going

Concern Concept gives us an idea that the business will continue and assets are to be

recorded at cost but the book value, which the asset is showing, may not be actually

realisable.

(iv) Window dressing in Balance Sheet. When an accountant resorts to 'window dressing' in

the Balance Sheet, the Balance Sheet cannot exhibit the true and fair view of the state of

affairs of the business.

(v) Personal bias of accounting affects the accounting statements. Accounting statements

are influenced by the personal judgement of the accountant. He may select any method of

depreciation, valuation of stock, and treatment of deferred revenue expenditure. Such

judgement is based on integrity and competence of the accountant, and will affect the

preparation of accounting statements.

Q. 9. What are the branches of accounting?

Or

What are the sub-fields of accounting?

Ans. Accounting can be classified into the following categories:

(i) Financial Accounting. This branch of accounting is concerned with the recording,

classifying and summarising the business transactions in such a way that operating results for

a particular period and financial position on a particular date can be ascertained. In other

words, it is primarily concerned with the presentation and preparation of Financial

Statements.

(ii) Cost Accounting. It is the process of accounting and controlling the cost of a product,

operation or function. The purpose of this branch of accounting is to ascertain the cost, to

control the cost and to communicate information for decision-making.

(iii) Management Accounting. It relates to the use of accounting data collected with the help

of financial accounting and cost accounting for the purpose of policy formulation, planning,

control and decisionmaking by the management.

(iv) Social Responsibility Accounting. It is concerned with the social responsibility aspect

of a business. Management is held responsible for what it contributes to the social well-being

and progress. It is the process of identifying, measuring and communicating the social effects

of business decisions to permit informed judgement and decisions by the users of information.

(v) Tax Accounting. This branch of accounting is related to the taxation field such as

income-tax, sales-tax, VAT etc. An accountant is required to be fully aware of various tax

legislations.

Q. 10. Write a short note on: Generally Accepted Accounting Principles. Ans. Generally

Accepted Accounting Principles (GAAP). A principle may be defined as a rule of action or

guide to action. Accounting principles are broad guidelines and rules of action to be adopted

by accountants for the preparation of accounts.

Generally Accepted Accounting Principles may be defined as those rules of action or conduct

which are derived from experience and practice and when they prove useful, they become

accepted as accounting principles.

According to the American Institute of Certified Public Accountants (AICPA), the principles

which have substantial authoritative support become a part of GAAP.

Accounting is the language of business. To make the language convey the same meaning to

all people, accountants all over the world have developed certain rules, procedures and

conventions, which show a consensus view by the profession of good accounting practices

and procedures and are generally referred to as Generally Accepted Accounting Principles

(GAAP). Accounting Statements are prepared in conformity with these principles for

providing more reliability.

Essential features of GAAPs. The general acceptance of accounting principles depends upon

how well they meet the following three criteria:

• Usefulness (relevance), i.e., meaningful to the users;

• Objectivity, i.e., supported and supplemented by the basic facts or data; and

• Feasibility, i.e., practicable or feasible to attain.

Thus, Generally Accepted Accounting Principles (GAAPs) are the set of laws, rules,

guidelines or concepts used in recording accounting transactions.

Q. 11. State giving reasons in brief, whether each of the following statement is 'TRUE' or

'FALSE':

(i) Book Keeping and Accounting are synonymous terms.

(ii) Accounting, as a language, is used to communicate financial information to Government

only.

(iii) Accounts help in determining the tax liability.

(iv) Accounting is only an art and not a science.

(v) Accounting information can be presented for non-monetary events also.

(vi) Revenue is recognised at the point where cash is received in case of accural basis of

accounting.

Ans. (i) False. Book-Keeping and Accounting are not synonymous terms. Book-Keeping is a

part of accounting. Accounting starts where book-keeping ends.

(ii) False. Accounting is done not only by the Government. It is required for all entities-

business or non-business where finances are involved.

(iii) True. Accounting helps in the calculation of profits which are subject to tax liability.

(iv) False. Accounting is both a science and an art. Accounting is a science because it has to

follow certain generally accepted accounting principles or rules while recording the

transactions. Actual recording of transactions is an art.

(v) False. Non-monetary events cannot be recorded because accounting is essentially a

money-based discipline.

(vi) False. Revenue is usually recognised at the time of sale of goods in case of accrual basis

of accounting.

Chapter 2

ACCOUNTING CONCCPTS & ACCOUNTING CONVCNTIONS

If accounting has to serve its purpose of communicating the results of a business to the

outside world, it should be based on certain uniform and scientifically laid down principles.

Accounting principles may be defined as those rules of conduct or procedure which are

adopted by the accountants universally, while recording the accounting transactions.

Accounting principles can be classified into two categories:

(i) Accounting concepts, and

(ii) Accounting conventions

Q. 1. Explain various Accounting concepts in brief.

Ans. Accounting concepts. Accounting concepts mean and include those basic assumptions

or conditions upon which the science of accounting is based.

The following are the important accounting concepts:

1. Accounting Business Entity Concept. In accounting, a business is treated as a separate

entity that is distinct from its owner(s), and all other persons associated with it. For example,

in case of a proprietary firm, though the legal entity of the business and its proprietor is the

same, for the purpose of accounting, they are to be treated as separate from each other. If this

concept is not followed, the financial status and operating results of a business entity cannot

be ascertained.

In other words, this concept requires that for accounting purposes, a distinction should be

made between (a) personal transactions and business transactions, and (b) transactions of one

business entity and those of another business entity.

While recording financial transactions in accounting, the material point is how these affect

the business entity and not how these affect the persons who own and manage the business or

someone who is otherwise associated with the business.

This concept applies to all forms of business organisations, whether it is a sole trade,

partnership or a company.

2. Money Measurement Concept. Money measurement concept means that only those facts or

transactions which can be expressed in monetary terms, are recorded in the books of

accounts. Events which cannot be expressed in terms of money do not find a place in the

account books. For example, salary paid to a manager is recorded in the account books but

his competence which cannot be expressed in monetary terms is not recorded in the books of

accounts.

This concept is very significant in the field of accounting. This concept restricts the scope of

accounting as it does not record the fact that there is a strike in the factory or the Production

Manager is not on speaking terms with the Sales Manager. Accounting, therefore, does not

give a complete account of the happenings in a business unit. Money provides a common

denominator for measuring, but it does not take care of inflation which takes place with the

passage of time. Due to inflationary tendencies, the preparation of accounts and statements on

the basis of historical costs has made the statements thoroughly unreliable and irrelevant for

judging the true financial position of the business. In spite of this, this concept is still

followed by the accountants in general.

3. Going Concern Concept. According to this concept, unless there is good evidence to the

contrary, it is assumed that the business will continue in future for at least a reasonably long

period of time. Business events and transactions are recorded from this point of view. On the

basis of this assumption, fixed assets are recorded at actual cost and are depreciated year by

year regardless of the fact that the market value is greater than the book value of such assets.

According to E.K. Kolher, "The going concern concept is a concept basic to accounting of

importance in the valuation of intangible assets and the depreciation of tangible and

intangible assets." Continuity to activity is to be true of all forms of business organisation.

This concept has the following implications in accounting:

(i) Distinction between capital expenditure and revenue expenditure is made.

(ii) Assets are classified as current assets and fixed assets. Similarly, liabilities are classified

into current liabilities and long-term liabilities.

(iii) Cost of the depreciable asset is allocated over the useful life of the asset in a systematic

way.

(iv) Outstanding expenses, prepaid expenses, accrued income and income received in

advance are taken into consideration.

4. Dual Aspect. Assets are the economic resources of an organisation. There are two types of

claims against the assets. Liabilities are the claims of the creditors or outsiders against the

assets and capital is the claim of the owners against the assets. All the assets of the business

are claimed by creditors or outsiders and owners. Therefore, we can express the relationship

between assets, liabilities and capital in the form of an accounting equation as follows:

Assets = Liabilities + Capital Or Capital = Assets - Liabilities

Hence, the total of the assets will always be equal to the total of liabilities.

According to the dual aspect, every transaction has a two-fold effect. Accounting system is

designed in such a way that both aspects, i.e., change in assets and change in liabilities and

capital, each transaction is recorded. In other words, every transaction has a two-fold effect.

One aspect is debited and the other is credited.

This system of recording is known as the double entry system of accounting.

The concept is very useful in recording business transactions. If it is ignored, accounting

records will not show true financial position of the business.

5. Accounting Period Concept. According to the going concern concept, the life of the

business is assumed to be indefinite and will continue for a long period. But the proprietor of

the business cannot wait for such a long period to study the financial position and measure

the income of the business. He is interested to know the progress of the business from time to

time. Hence, the accountants choose some shorter period to measure the income (profit) of or

progress of the business. The time interval chosen is called the accounting period which is

usually one year for external reporting. Thus according to the accounting period concept,

financial statements should be prepared at regular intervals to provide information about

financial position and performance of an organisation.

The accounting period may be calender year (1st January to 31

st December) or financial year

(1st April to 31

st March).

This concept facilitates the preparation of financial statements.

6. Cost Concept or Concept of Historical Cost. According to this concept, an asset is

recorded at its cost in the books of accounts, i.e., the price which is paid at the time of

accruing it. If an asset is purchased or acquired, its cost price is the

only source by which the basis for all subsequent accounting in relation to the same can be

made. The asset, when it is acquired, is originally recorded at its cost price and gradually

reduced by way of depreciation. The market value of an asset may change with the passage of

time, but for accounting purposes it continues to be shown in the books at its book value i.e.

the cost of acquisition minus depreciation provided upto date. This concept is closely related

to the going concern concept.

This concept has the advantage of bringing objectivity in the accounts. Information given in

the financial statements is not influenced by the personal bias or judgement of those who

furnish such statements. But this concept also suffers from one limitation. The historical cost

concept ignores the effect of excessive inflation in the present economy, and thus becomes

irrelevant for the purpose of valuation of assets. Since there are a number of practical

difficulties, the historical cost concept still serves as a fair and adequate basis for the

valuation of assets.

7. Realisation Concept or Revenue Recognition. According to this concept, revenue is

considered as earned on the date when it is realised. Revenue is generally recognised when a

sale is made or service is provided. Sale is considered to be made at the point when the

property in goods passes to the buyer and he becomes legally liable to pay.

This can be well understood with the help of the following example:

X places an order with Y for supply of certain goods yet to be manufactured. After receiving

the order, Y purchases raw materials, employs workers, produces the goods and delivers them

to X. X makes payment on receipt of goods. In this case, the sale will be presumed to have

been made not at the time of receipt of the order for the goods but at the time when goods are

delivered to X.

In short, revenue is recognised at the point of sale or rendering service.

Exceptions. There are certain exceptions to this concept:

(i) Hire purchase. In case of hire purchase, the ownership of the goods passes to the buyer

only when the last instalment is paid, but sales are presumed to have been made to the extent

of instalments received and instalments outstanding (i.e., instalment due but not received).

(ii) Long-term service or construction contracts. In case of contract accounts, though the

contractor is liable to pay only when the whole contract is completed as per terms of the

contract, the profit is estimated on the basis of work certified year after year as per certain

accepted accounting norms. (iii) Gold mining. In case of gold mining revenue is recognised

at the point of production itself.

8. Accrual Concept. The essence of the accrual concept is that 'Revenue is recognised when

it is realised, that is when sale is completed or services are given it is immaterial whether

cash is received or not.' Similarly, expenses are recognised within the accounting period in

which they help in earning the revenue, whether cash is paid or not. Thus, according to this

concept, we record all expenses and incomes related to a particular accounting period

whether actual cash has been paid or received or not, so as to ascertain correct profit or loss

for an accounting period and to show the true and fair financial position of the business at the

end of the accounting period. Therefore as a result of the accrual concept, outstanding

expenses and outstanding incomes are taken into consideration while preparing final accounts

of a business entity. The accrual principle is one of the consequences of accounting period

postulate.

9. Matching Concept. This concept is based on the accounting period concept. The most

important objective of accounting is to ascertain the profit of a business periodically. The

determination of profit of particular period is essentially a process of matching the revenue

recognised during the period and the cost to be allocated to the period to earn revenue. It is,

thus, a process of matching revenue and expired cost, the residual amount being the net

profit or net loss of the period. Revenue is considered to be earned on the date at which it is

realised i.e., on the date when the goods are delivered or services rendered to the customer.

Like revenue, all costs incurred during the period are not taken, but only costs related to the

accounting period are taken. The price of fixed assets is not taken but only the depreciation

on fixed assets related to the accounting period is taken. Prepaid expenses are excluded from

the total cost but outstanding expenses are added to the total cost to arrive at the costs

attached to the period. Costs are matched with revenues and usually not vice versa. This

concept should be followed while preparing financial statements to have a true and fair view

of the profitability and financial position of a business entity.

10. Objective Evidence Concept. According to this concept, there must be objective

evidence of transactions which are capable of verification. In other words, entries which are

recorded in financial accounting from transactions must be supported by documentary

evidence such as vouchers, invoices, cash memos etc. Similarly the information reported in

financial statements must be based upon objectively determined evidence.

Q. 2. Explain various Accounting Conventions in brief.

Ans. Accounting Conventions. The term conventions denote circumstances or traditions

which guide the accountants while preparing accounting statements.

Concepts and conventions are often used interchangeably. The basic difference between them

is that concepts are concerned with maintenance of accounts whereas conventions are

applicable while preparing financial statements i.e., Profit & Loss Account and Balance

Sheet.

The following are the important accounting conventions:

1. Convention of Consistency. This doctrine implies that accounting rules, practices and

conventions should be continuously observed and applied. In other words, these should not

be changed from year to year or from one year to another. The comparison of one accounting

period with the other is possible when the convention of consistency is followed. For

example, the principles of valuing stock at cost or market price, whichever is lower, should be

followed every year for making proper comparison, i.e., the method adopted should be

consistent for the year. According to AS-1, consistency is a fundamental assumption and it is

assumed that accounting policies are consistent from one period to another. Where this

assumption is not followed, the fact should be disclosed together with reasons.

It is to be noted that consistency does not mean non-flexibility. It should permit introduction

of improved technique of accounting.

The convention of consistency helps in the following manner:

(i) It helps to eliminate the personal bias of an accountant since he is not allowed to change

any accounting method or principle as per his own opinion and desire from one year to

another.

(ii) It also helps to prepare a periodical financial statement which is more dependable, reliable

and comparable.

2. Convention of Full Disclosure. Apart from legal requirements, full disclosure of all

significant information should be made in the financial statements. For example, the basis of

valuation of fixed assets, investments and stock should be clearly stated in the Balance Sheet.

In other words, accounting statements should be honestly prepared. There should be full, fair

and adequate disclosure. This convention is so important that the Companies Act makes

ample provisions for the disclosure of essential information so that significant information

may not be left out to be disclosed.

This convention does not express that the trade secrets or other necessary information should

also be disclosed. It should reveal simply the full disclosure of all essential or significant

material information to the users of financial statements. The principle of full disclosure gains

more significance in case of a joint stock company because of separation of management and

ownership.

3. Convention of Materiality. Convention of Materiality implies that the transactions and

events that have immaterial or insignificant effects should not be recorded and reported in the

Financial statements. An information is considered to be material if the knowledge of this

information is significant to the users of accounting reports. What is material or immaterial

depends upon the circumstances and discretion of an accountant. The materiality of an event

or transaction can be decided in terms of its impact on the financial position, results of

operations, change in the financial position of an organisation and on evaluation or decisions

made by users. Thus materiality places a restriction on what should be disclosed. It is a

modifying principle as it modifies the principle of full disclosure.

4. Convention of Conservatism or Prudence. It refers to the policy of 'Playing safe'. As per

this convention, all prospective losses are taken into consideration but not all prospective

profits. In other words 'anticipate no profit but provide for all possible losses.' However, this

convention is being criticised on the ground that it goes not only against the convention of

full disclosure but also against the concept of matching costs and revenues. It encourages

creation of secret reserves by making excess provision for depreciation, bad and doubtful

debts etc.

The valuation of stock at the end of the period at 'market price or cost price', whichever is

less, provisions for doubtful debts and depreciation are based on the convention of

conservatism.

Q. 3. Explain the relevance of disclosure principle in accounting. [2009

Ans. Relevance of disclosure principle. The relevance of disclosure principle in accounting

is that the financial statements namely the Balance Sheet and Profit & Loss Account must

give true and fair view of the financial position and operating results of a business firm.

While preparing financial statements, it should be ensured that significant facts or

informations are not omitted. Disclosure should be full, fair and adequate. It would increase

the relevance and reliability of a financial statement. It is an obligation, in Company Law,

that a company has to disclose all relevant information and results of trading to its

shareholders. Generally, disclosure is required when:

• alternate polices are available (LIFO, FIFO, average cost etc. for inventory valuation)

• principle peculiar to a particular industry (revenue is recognised before completion of a job,

in case of long-term contracts); and

• unusual or innovative application of accounting principles (valuation of live stock-on herd

basis, in case of a dairy firm).

Q. 4. State giving reasons in brief, whether each of the following statements is 'TRUE'

or 'FALSE':

(i) Cost concept relates only to the income statements.

(ii) Consistency convention emphasizes that : "Anticipate no profits but

provide for all losses."

(iii) Since the life of the firm is assumed to be indefinite the going concern concept provides

that income statement should be prepared only when it (the firm) is dissolved.

(iv) Money measurement concept assumes a stability in the value of money.

(v) Accounting records the qualitative aspects of the business unit.

(vi) Lower of cost or market value rule should be followed only in the valuation of fixed

assets.

(vii) Accrual concept implies accounting on cash basis.

(viii) Separate entity is considered to be separate and apart from its (business) owner(s).

(ix) In accounting, all business transactions are recorded according to dual concept.

(x) Revenues should be recorded as early as possible and expenses as late as possible.

(xi) Prudence results in over-statement of profits.

Ans. (i) False. The cost concept is applicable to both the income statement in

connection with the expenses and balance sheet in respect of assets.

(ii) False. This statement is relevant for the convention of conservatism and not convention

of consistency.

(iii) False. Since going concern concept assumes continuity of business enterprise, income

statement has to be prepared at the end of each accounting period.

(iv) True. Money measurement concept assumes a stability in the value of money.

(v) False. Accounting has nothing to do with the qualitative aspect. Only those transactions

which are capable of being expressed in terms of money are included in the accounting

records.

(vi) False. Lower of cost or market value rule is applicable to the valuation of stock and not

the fixed assets.

(vii) False. Accrual concept implies accounting on "accrual basis."

(viii) True. In this way the private activities of the owner(s) would not be mixed up with their

business activities.

(ix) True. The double entry book-keeping system requires that each debit must have a

corresponding equal credit.

(x) False. The conservatism convention requires that revenues should be recorded in the

books of accounts when they are realised. But expenses should be recorded even when they

are anticipated.

(xi) False. Prudence does not result in overstatement of profits. On the other hand, it

decreases the amount of profit.

Chapter 3

ACCOUNTING STANDARD AND IFRS

Q. 1. What is meant by Accounting Standards?

State briefly the merits of issuing Accounting Standards.

Ans. Accounting Standards (ASs). Codified forms of the GAAPs are called Accounting

Standards. Accounting Standards are defined as "Codified or Written statements of

accounting rules and guidelines or practices necessary for the preparation of the uniform

and consistent financial statements." Accounting Standards can alternatively be defined as

the structural framework within which financial statementspted for treatment of various items

in accounting. Accounting Standards aim to improve the credibility and reliability of the

financial statements.

In the words of T.P. Ghosh, "Accounting standards arc the policy documents issued by the

recognised expert accounting body relating to various aspects of measurement, treatment and

disclosure of accounting transactions and events".

Thus, accounting standards provide a framework for the preparation of the financial

statements.

Objectives of Accounting Standards. The objective of accounting standards is to

standardise accounting policies and practices with a view to eliminate, to the extent possible,

the non-comparability of financial statements.

Advantages or Merits of Accounting Standards:

(i) Basis of Accounting. Accounting standards provide the basis on which accounts should

be prepared.

(ii) Disclosure. Accounting standards promote better understanding of accounting statements,

the disclosure of significant accounting policies and the manner in which accounting policies

are disclosed in the statements.

(iii) Reduction of effect of diverse accounting policies and practices.

Accounting standards eliminate or reduce the effect of diverse accounting policies and

practices and make the financial statements more meaningful and comparable.

(iv) Enhancement of Creditability and reliability of financial statements. Accounting

standards provide uniform guidelines for recognition, meosurement, treatment, preparation

and presentation of financial statements. They enhance the creditability and reliability of

financial statements and also help in enhancing transparency.

(v) Ensure Comparability. Financial statements of different enteprises can be compared if

they are prepared on uniform rules and guidelines.

(vi) Facilitate informed decision making. Accounting standards facilitate informed decision

making in lending and investment and thereby minimise the risk of financial distress.

Q. 2. Explain the procedure for issuing Accounting Standards (AS) in India. Ans. The

Institute of Chartered Accountants of India (1CAI) recognised the need to harmonize the

diverse accounting policies and practices at present in use in India and constituted an

Accounting Standards Board (ASB) on 21st April, 1977.

Procedure for Issuing Accounting Standards in India. Following is the procedure adopted

by the Accounting Standards Board (ASB) for issuing accounting standards in India:

(i) ASB shall determine the broad area in which Accounting Standards need

to be formulated and list them according to their priority.

(ii) In the preparation of Accounting Standards, ASB will be assisted by Study Groups and

provisions will be made for .wide participation by the members of ICAI and others. ASB will

also hold a dialogue with the representatives of the Government, Public Sector Undertakings,

industry and other organisations for getting their views.

(iii) On the basis of the work of the study groups and the dialogue with the organisation

referred to above, an exposure draft of the proposed standard will be prepared and issued for

comments by members of the institute and the public at large.

(iv) After taking into consideration the comments received, the exposure draft is finalised by

the ASB and submitted to the council of the Institute. (v) The council considers the final draft

and on approval of the council, an accounting standard is issued under the authority of the

council of ICAI.

(vi) National Advisory Committee of Accounting Standards may recommend it, with or

without modification, to the Ministry of Corporate Affairs for notifying the accounting

standard.

Q. 3. Discuss AS-1 relating to disclosure of accounting policies.

Ans. AS-1: Disclosure of Accounting Policies. AS-1 deals with the disclosure of significant

accounting policies followed in preparing and presenting financial statements.

The following are the salient features of AS-1:

(i) Meaning of Accounting Policies. Accounting policies are the specific accounting

principles and methods of applying those principles adopted by an enterprise in preparing and

presenting financial statements.

(ii) Areas where different Accounting Policies are followed. Different accounting policies

are followed by an enterprise while charging depreciation (e.g., Straight Line Method,

Reducing Balance Method etc.) or valuing inventories (e.g., LIFO, FIFO, Weighted Average

Method etc.).

(iii) Disclosure of Accounting Policies:

• Disclose all significant accounting policies adopted in the preparation and presentation of

financial statements at one place.

• Any change in the accounting policies which has a material effect in the current period or

which is reasonably expected to have a material effect in later periods should be disclosed.

(iv) Consideration in the selection of Accounting Policies:

• The primary consideration in the selection of accounting policies by an enterprise is that the

financial statements prepared and presented on the basis of such accounting policies should

result in a true and fair view of the financial position and performance.

• The basic consideration governing the selection and application of accounting policies

should be prudence, substance over form and materiality.

Prudence. Prudence means making provisions for all expected liabilities and losses but

anticipated profits are not recognised until realised.

Materiality. Financial statements should disclose all material items. Substance over form.

The accounting treatment and presentation in financial statements of transactions and events

should be governed by their substance and not merely by the legal form.

(v) Disclosure of Fundamental Accounting Assumptions. The following have been

generally accepted as fundamental accounting assumptions.

• Going Concern. Unless otherwise stated, the users of financial statements assume that the

enterprise is a going concern, and it will continue operation for a fairly long period in future.

• Consistency. Unless otherwise stated, the users of financial statements assume that there is

no change in the accounting policies from one period to another.

• Accrual. Unless otherwise stated, the users of financial statements assume that the financial

statements have been prepared on accrual basis.

If a fundamental accounting assumption is not followed, the fact should be disclosed.

Q. 4. Explain the International Financial Reporting Standards (IFRSs).

Ans. International Financial Reporting Standards (IFRSs). These are the Accounting

Standards which are accepted globally. Now these standards are framed and brought out by

the International Accounting Standards Board (IASB). This Board was established in the

year 2001 and the "International Accounting Standards Committee" (IASC) established

long back in the year 1973 was dissolved in the year 2001. All the Accounting Standards

issued by the IASC are called International Accounting Standards (lASs) and all these

were adopted by the IASB, i.e., Board of IASC.

But all the earlier lASs still continue to be called as LASs, though some of these have been

adopted as IFRSs. Not only this, the IASB has formulated and adopted IFRSs on certain

subjects for which there were no IASs earlier. In all till date, as many as forty one (41) IASs

have been issued. Some of these have been deleted or cancelled and some have been changed

to IFRSs with new numbers allotted to them (Nine).

What is IFRS?

It means a principle based Accounting Standard (AS) drafted in comparatively simple and

clear language than most of our ASs. Our ASs are rule based.

Why IFRSs?

In today's world of globalisation, corporate entities operate and raise funds globally. Now

many of our companies have become multi-national corporations (MNCs). There was a time

(pre-economic reforms) when India was averse to MNCs but now the situation is quite

different. Our economy or country now needs to converge our own ASs with IFRSs. This is

to make our financial statements internationally comparable, transparent and uniform.

Benefits of Convergence with IFRSs.

Adoption or convergence with IFRSs helps the economy, investors, industry and the

accounting professionals in the following way:

(i) Benefits to Economy. Convergence with IFRSs benefits the economy by increasing the

pace of growth of its global business. It encourages foreign direct investment and more

foreign capital flow to the country. It increases the capital formation and thereby leads to

higher economic growth.

(ii) Benefits to Corporates. The convergence of our ASs with IFRSs is to give our

corporates benefits such as

• access to the global capital markets;

• availability of relatively low cost funds available in foreign countries;

• increased uniformity in the Accounting Standards;

• better or improved quality of financial reporting; and

• avoidance of frauds.

(iii) Benefits to Investors. They are interested to get relevant, reliable, timely and

comparable financial information from enterprises - domestic or foreign. Financial statements

prepared using common set of accounting standards such as IFRSs would help them to

understand investment opportunities in a better way.

(iv) Benefits to Industry. Financial Statements based on global accounting standards will be

more transparent and thus create more confidence in the minds of investors. This will help the

industry to raise capital from markets at lower cost. The task of maintaining different set of

financial statements would be eliminated by adoption of IFRSs.

(v) Benefits to accounting professionals. This convergence of accounting practices would

foster the globalisation of the accounting profession. This will make easier for professionals

in one country to work in other countries.

(vi) Comparability. Common accounting standards such as IFRSs improve comparability of

financial statements of a company at the national as well as international level.

Q. 5. Distinguish between Indian Accounting Standards (IND ASs) and Accounting

Standards (ASs).

Ans. IFRS adoption means adopting the 1FRS (International Financial Reporting Standards)

and IFRS Convergence means formulating Indian Accounting Standards more or less in line

with IFRS. The main points between Ind ASs and ASs are as follows:

(i) Ind ASs are of regularity nature. ASs are in the nature of guidance notes. In other words,

ASs are rule based whereas Ind ASs are principle based.

(ii) Ind ASs emphasize on the substance of the transaction, irrespective of the legal form.

ASs, barring some exceptions, are based on legal rules. For example, preference shares are

classified as equity under ASs, whereas they are classified as liability under Ind ASs.

(iii) Ind ASs, barring exceptions, require fair value of assets and liabilities, whereas in case of

ASs, there is no equivalent standard. Accounting Standards follow the old age concept of

historical concept.

(iv) ASs are based on international Accounting Standards (IASs) formulated by International

Accounting Standard Board (IASB). But bid ASs are based on Standards issued by

International Financial Reporting Standard Board.

(v) ASs are drafted in technical language with more than one option as in the case of ASs-2

(Accounting Standard on Inventory Valuation). But Ind ASs are drafted in a lucid (simple

and clear) language.

(vi) ASs are issued under the authority of the council of ICAI while the Ind ASs require the

notification from Ministry of Corporate Affairs for date of issue of various Ind ASs.

(vii) ASs do not ensure uniformity in accounting information. But Ind Ass would ensure the

importance and quality of financial reporting.

(viii) ASs are treated with trust and reliance by the international investors. But Ind ASs based

on 1FRS would lead to increased trust and reliance because IFRS is considered as standard

reporting system or method for the preparation of credible financial statements.

Q. 6. State giving reasons in brief, whether each of the following statement is 'TRUE' or

'FALSE':

(i) Accounting standards are issued by the Institute of Cost and Works Accountants of

India.

(ii) "IFRSs coverage" means Indian Accounting Standards converged with

IFRSs.

(iii) Accounting standards in India are mandatory.

(iv) TCA1 is the premier body of Accounting in our country.

(v) Accounting standards and accounting concepts are one and the same thing.

Ans. (i) False. In India accounting standards are formulated by Accounting Standards Board

and then issued by the Council of the Institute of Chartered Accountants of India.

(ii) True. IFRS coverage means Indian Accounting Standards are more or less in line with

IFRS.

(iii) True. According to the Institute of Chartered Accountants of India, accounting standards

issued by it shall be mandatory from the respective dates mentioned in the Accounting

Standard(s). Moreover Section 211 of the Companies Act provides that every profit and loss

account and balance sheet shall comply with the accounting standards.

(iv) True. ICAI is the premier body of accounting.

(v) False. Accounting concepts are general statements and are not intended to develop

solution to specific issues in financial accounting. On the other hand, accounting standards

aim at providing solutions to specific issues inventory valuation, depreciation of fixed assets

etc.

Chapter 4

ACCOUNTING PROCESS

Q. 1. Write a short note on Accounting Process.

Ans. Accounting Process or Accounting cycle refers to the sequence of accounting

procedures used to record, classify and summarise the business transactions.

Following are the steps involved in accounting process:

(i) Recording. Recording the financial transactions in the primary book, i.e., Journal is the

first step. It is also called Journalising. Journal may be subdivided into Cash Book, Purchase

Book, Sales Book, Purchase Return Book, Sales Return Book, Bills Receivable Book, Bills

Payable Book and Journal Proper.

(ii) Classifying. Transactions recorded in the Journal are classified into various accounts in

the secondary book called Ledger. In other words, transactions recorded in the Journal are

transferred to the respective accounts opened in the Ledger. This process in known as

Posting.

(iii) Summarising. After preparing ledger, the accounts are balanced and list of all the

accounts with their balance is prepared. The list prepared is called Trial Balance.

(iv) Preparing final accounts. It is the last step of accounting process. It includes preparing

Trading and Profit & Loss Account and Balance Sheet. These are also called Income

statement and Position statement respectively.

Q. 2. What is Double Entry System?

What are its advantages?

Ans. Every business transaction has two aspects, viz (i) receiving of value and (ii) giving of

value. To have a complete record of a business transaction, both these aspects must be

recorded in the books of accounts. Therefore, two entries are required to be made. These two

entries are made in the two accounts — on the debit side of one account and on the credit side

of another account. In other words, for every debit there is a corresponding credit and every

debit has a corresponding credit. The recording of the two fold effect in the books is known

as "Double Entry System". The Double Entry system is so named since it records both the

aspects of a transaction. We may define the double entry system as: "The double entry system

is that system which records both the aspects of a transaction".

For example, when trader A purchases goods worth Rs. 20,000 from B on credit, two

accounts are affected at the same time which are (1) Purchase Account and (2) B's Account.

Goods when purchased are coming into the business and so Purchase Account is to be

debited. This account is receiving the benefit. On the other hand, B's Account will be credited

because he is supplying the goods, thus giving the benefit.

Advantages of Double Entry System:

(i) Complete record of transactions. It maintains a complex record of all business

transactions.

(ii) A check on Arithmetical accuracy of accounts. It helps to prepare a trial balance and

thereby to test the arithmetical accuracy of the books.

(iii) Ascertainment of financial results. The profit earned or loss suffered during a period

can be ascertained by preparation of Profit & Loss Account.

(iv) Ascertainment of financial position. It helps to ascertain the exact financial position of

the business at the end of the accounting period, through preparation of the Balance Sheet.

(iii) Details about every account. This system permits accounts to be kept in as much detail

as necessary and, therefore, offers significant information regarding every account.

(vii) Less possibility of fraud. As the system contains checks and counter checks, mistakes

can be avoided and frauds can be easily detected.

Q. 3. Explain the classification of Accounts with examples.

Ans. Modern Classification or based on Accounting equation. In this approach accounts

are classified as follows:

(i) Asset Accounts. Assets indicate the resources which the firm enjoys. These accounts may

be in the form of cash, cash at bank, stock of goods, debtors, land, building, machinery etc.

(ii) Liability Accounts. Liabilities indicate the amounts which the firm owes to outsiders.

These accounts include creditors, bills payable, overdraft, loan etc.

(iii) Capital Accounts. Capital indicates the amount which the proprietor can claim against

the firm. This account includes capital (proprietorship) and drawings accounts.

(iv) Expenses Accounts. Expenses indicate the amounts which have been spent or even lost

in carrying on business operations. These accounts include rent, salaries, wages, interest,

discount, commission etc.

(p) Revenue Accounts. Revenues indicate the amounts which, as a result of operations, are

earned by the firm. These accounts include sales, rent received, interest received etc.

Traditional classification of accounts. In this approach accounts may be classified as under:

1. Personal Accounts. These accounts are related to persons, debtors, or creditors. Examples

of these accounts are: Ram's Account, Shyam's Account, Satish & Co's Account etc.

2. Real Accounts. These accounts relate to the tangible or intangible real assets. Tangible—

Land Account, Intangible—Goodwill Account.

3. Nominal Accounts. These accounts relate to Expenses, losses, profits & gains. Expenses:

Purchase Account, Loss: Loss by fire Account Profits & Gains: Sales Account, Discount

received Account.

Q. 4. Give the rules of debit and credit with examples.

Ans. Rules of Debit and Credit are as follows:

(i) For any asset account. Debit means increase and credit means decrease. When there is an

increase in the amount of an asset its account is debited and if there is a decrease in the

amount of the asset concerned, its account will be credited. For example, a business concern

purchases furniture for Rs. 25,000 the furniture account will be debited by Rs. 25,000 as the

asset is increased by the same amount. (ii) For any liability account. Debit means decrease

and credit means increase. If there is an increase in the amount of liability, its account is

credited and if there is a decrease in the amount of the liability concerned, its account will be

debited. For example, a business concern borrows Rs. 50,000 from Ram. Ram's account will

be credited since Rs. 50,000 are now owed to him. If later, the business concern repays the

loan, Ram's account will be debited as the liability is decreased.

(iii) For capital account. Debit means decrease and credit means increase. If there is an

increase in the amount of capital, its account is credited and if there is a decrease in the

amount of capital, the capital account is debited. For example, the proprietor of the business

concern contributes additional capital Rs. 20,000. The capital account will be credited by Rs.

2Q,000. If he withdraws Rs. 8,000 from business, the capital account will be debited by this

amount because the amount of capital is decreased. (iv) For any revenue account. Debit

means decrease and credit means increase. Thus, if revenue increases it is credited and if

revenue decreases, it is debited. By an increase in revenue, the proprietor's capital also

increases. Therefore, the rule regarding capital account is also applicable here. For example,

if goods worth Rs. 2,000 are sold, it results in an increase in revenue, therefore revenue

account will be credited.

(v) For any expense account. Debit means increase and credit means decrease. If there is an

increase in the expense then it will be debited and if there is a decrease in expense, it will be

credited. The expense results in a decrease in capital. A decrease in capital is also recorded

on the debit side. For example, if Rs. 10,000 is paid for salary, this amount will be recorded

on the debit side of salary account, because it reduces the capital.

Rules given above are being summarised below:

(i) Increases in assets are debits; decreases are credits.

(ii) Increases in liabilities are credits; decreases are debits.

(iii) Increases in owner's capital are credits; decreases are debits.

(iv) Increases in expenses are debits; decreases are credits.

(v) Increases in revenue are credits; decreases are debits.

The above rules may be stated as follows:

(i) Debit the receiver and Credit the giver or Debit the debtor and Credit the creditor.

(ii) Debit what comes in and Credit what goes out.

(iii) Debit all expenses and losses and Credit all gains and incomes.

Q. 5. State briefly the subsidiary books, normally used in the Double Entry System.

Ans. The following subsidiary books are used in Double Entry System:

(i) Purchase Book. Purchase book is used to record credit purchase of goods only.

(ii) Sales Book. It is used to record credit sale of goods only.

(iii) Returns Outward Book. It is used to record all goods returned by the trader to his

supplier. This book is also called Purchase Return Book.

(iv) Returns Inward Book. It is used to record all goods returned to us by our customers.

This book is also called Sales Return Book.

(v) Bills Receivable Book. It is used to record Bills Receivable received by us.

(vi) Bills Payable Book. It is used to record bills accepted by us.

(vii) Cash Book. It is used to record Cash transactions only i.e., cash received and paid.

(viii) Journal Proper. Journal proper is used to record all transactions for which there is no

special subsidiary book. This book records opening entry, closing entry, adjusting entry,

credit purchase and sale of assets, entries of dishonour etc.

Q. 6. What is ledger?

How would you post the journal into ledger.

Ans. The book in which all the accounts are kept is called a 'ledger'. A ledger may be in a

bound or loose-leaf form. It is the principal book of accounting.

Ledger plays very important functions in accounting. When a Balance Sheet is prepared, the

balances of Assets, Liabilities and Capital Accounts are takan from the Ledger. When Profit

& Loss Account is prepared, the balances of expenses and revenue accounts are taken from

the Ledger. In this way, it performs many important functions.

Posting the entries into Ledger. Posting is the process whereby the debits and credits of the

journal entries are entered into the Ledger. The Journal indicates the accounts to be debited

and credited and also the amounts involved. The following are the rules for posting

transactions:

(i) The debit side of the journal entry is posted to the debit side of the Ledger account. In

particulars column reference is given of that fact which is put on the credit side of the journal

entry.

(ii) The credit side of the journal entry is posted on the credit side of the account. In

particulars column reference is given of that fact which is put on the debit side of the journal

entry.

It is a convention that the word 'To' is affixed in the particulars column on the debit side and

the word By' is affixed on the credit side. It is merely a custom to write these words.

Example, Consider the following journal entry.

S. No. Particulars L.F

. Dr. (Rs.) Cr.(Rs.)

2015

Mar. 16

Fumiture Account To D. Saran &

Co.

Dr. 10,000 10,000

In the above case, the amount of Rs. 10,000 will be debited to the Furniture Account and

credited to D. Saran & Co. In the Furniture Account in the particulars column we shall write

"To D. Saran & Co." In the account of D. Saran & Co. will be written;

"By Furniture Account." The two accounts will appear as follows:

Dr. Furniture Account Cr.

Date Particulars L.F. (Rs.) Date Particulars L.F. (Rs.)

2015

Mar 16

To D. Saran & Co. 10,00

0

Dr. __________M/S D. Saran & Co. Cr.

Date Particulars L.F. (Rs.) Date Particulars L.F. (Rs.)

2015

Mar.

16

By Furniture A/c 10,000

Q 7. What is a Trial Balance. What are the objectives of preparing a trial balance.

Ans. Trial Balance is a statement which shows names and balances of all the accounts in the

ledger and the cash and bank balances. It is not an account. It is prepared an a specific date

by taking the balances of various accounts as on that date.

The format of the trial balance is given below:

S. No. Partial, L.F

.

Dr. (Rs.) Cr.(Rs.)

Total — —

If all transactions are correctly recorded in the ledger and the balances are correctly

ascertained, the total of the 'Debit Column' and 'Credit Column' will be same. In this case, the

trial balance is said to agree.

Objectives of Preparing Trial Balance. The main objectives of preparing a trial balances

are as follows:

(i) To cheque the arithmetical accuracy of the books of accounts.

(ii) To help in detecting the errors.

(iii) To facilitate the preparation of financial statements i.e., Trading and Profit & Loss

Account and Balance Sheet.

Q. 8. Explain the limitations of trial balance.

Or, Explain the errors which are not disclosed by trial balances.

Ans. It is true that the agreement of trial balance is not a conclusive proof of the accuracy of

the books of accounts since certain types of errors are not disclosed by the trial balance. The

following types of errors are not disclosed by the trial balance:

(i) Errors of principle, i.e., errors which arise due to incorrect application of the principles of

accounting.

(ii) Compensating errors, i.e., group of errors which are committed in such a way that one

mistake is compensated by the other or others and the trial balance still agrees.

(iii) Errors of complete omission, i.e., an entry has not at all been posted in the ledger.

(iv) Posting correct amount and on the correct side but in the wrong account.

(v) Recording wrong amount in the books of original entry i.e., journal.

(vi) Recording both aspects of a transaction twice in the books of accounts.

Q. 9. Mention the errors which are disclosed by trial balance.

Ans. Following errors are disclosed by trial balances:

(i) Wrong balancing of an account.

(ii) Posting an account on the wrong side.

(iii) Wrong totalling of the subsidiary books.

(iv) Wrong posting i.e., recording the wrong amount.

(v) Omitting to post an amount from a subsidiary.

(vi) Omitting to post the totals of subsidiary books into ledger.

(vii) Omitting to enter the cash book balance in the trial balance.

(viii) Omitting to record the balance of an account in the trial balance.

(ix) Entering a balance in the wrong column of the trial balance.

(x) Totalling the trial balance wrongly.

Q. 10. Write a short note on: Suspense Account.

Ans. A suspense account is an account in which the amount of difference in trial balance is

put till such time that errors are located and rectified. If the debit side of trial balance is more

than the credit side, then the difference is put on the credit side of the suspense account. If the

credit side of trial balance is more than the debit side then the difference is put on the debit

side of the suspense account. Debit balance in the suspense account is shown on the assets

side of the balance sheet, while the credit balance is shown on the liabilities side. After

opening this account, one-sided errors are rectified by passing journal entry through suspense

account. Posting of these entries is made in the suspense account when all the errors leading

to disagreement of the trial balance are rectified and the suspense account is automatically

closed.

Q. 11. What are final accounts?

How are they prepared?

Ans. Final Accounts. After the preparation of a Trial Balance the next level of work is the

preparation of Final Accounts also known as Financial Accounts. The preparation of final

accounts involves the following:

1. Preparation of a Trading Account;

2. Preparation of a Profit & Loss Account;

3. Preparation of a Balance Sheet.

1. Trading Account. Preparation of Trading Account is the first stage in the process of the

preparation of final accounts. It is prepared to find out gross profit or gross loss. Gross Profit

or Gross Loss is the difference between the 'Cost of goods sold' and 'Sales'. If the sales are

more than cost of goods sold , the difference between the two is Gross Profit. On the other

hand, if the cost of goods sold is more than the sales, the difference is Gross Loss. Opening

stock, Purchases, Direct Expenses are entered on the debit side of the Trading Account and

items shown on the right side namely, Sales and Closing Stock are entered on the credit side

of the Trading Account. If the total of the credit side is more than that of the debit side, the

difference is Gross Profit which is entered on the debit side of the Trading Account. If the

total of the debit side is more than that of the credit side, the difference is Gross Loss which is

entered on the credit side of the Trading Account. Gross Profit or Gross Loss will be

transferred to Profit and Loss Account.

2. Profit & Loss Account. Gross Profit or Gross Loss is taken to Profit & Loss Account. All

the remaining expenses and losses which have not been entered into Trading Account are

shown on the debit side. Income and gains, other than sales, will be shown on the credit side.

The difference between the two sides is either net profit or net loss which is taken to the

capital account of the proprietor. Net Profit is added to the Capital and Net Loss is deducted

from the Capital.

3. Balance Sheet. Balance sheet may be defined as 'A statement which sets out the assets and

liabilities of a firm as at a certain date. It is true only on that date and not later. All assets and

liabilities are shown in the Balance Sheet. On the right hand side are shown the various assets

and on the left hand side are shown the liabilities and capital of the firm. Balance Sheet is

prepared to ascertain the financial position of the business at the end of the financial year.

Q. 12.What are the qualitative characteristics of accounting information?

Ans. Qualitative characteristics of Accounting information. Accounting information must

possess some qualitative characteristics. These are the attributes that make the information

provided in financial statement useful to users.

The four main qualitative characteristics are:

1. Reliability. Accounting information must be reliable. It should be free from bias and

personal influence or judgement. However, it is not possible to record all transactions in this

manner. For example, an entry for the provision for doubtful debts, In this case, a provision is

made for debts that are considered doubtful for recovery but the exact amount of bad debts

can never be determined in advance.

2. Relevance. Accounting information must be relevant to the user. Information is relevant if

it meets the needs of the user in decision making. For example, dividend paid by a company

in the previous year is relevant information for the investors. This is because it provides a

basis for forecasting dividends in future years and also provides a review of the past

performance of the company. Thus, the accountants must study the needs of the various users

and determine which information is relevant to the existing and potential decision makers.

3. Uderstandability. Accounting information must be presented is a manner for the users to

understand. It is assumed that the users have a basic knowledge of business transactions and

they devote time and effort in analysing the financial statements. However, the accountant

has a basic responsibility to describe business transactions clearly and concisely.

4. Comparability. Accounting information is more useful when it is comparable with similar

information for the same enterprise in different periods. It is also useful when similar

information across different enterprises during the same period can be compared.

Comparability is therefore a useful quality of accounting information. To achieve

comparability, consistency and disclosure of accounting policies are necessary.

Q. 13. Distinguish between Capital Expenditure and Revenue Expenditure. Ans. Capital

Expenditure and Revenue Expenditure:

(i) Capital expenditure relates to the acquisition of fixed assets and revenue expenditure

relates to the acquisition of current assets.

(ii) Capital expenditure is meant for enduring profit i.e., for more than one accounting period.

Revenue expenditure is meant for current accounting period only.

(iii) Capital expenditure is of non-recurring nature while revenue expenditure is of recurring

nature.

(to) Capital expenditure helps to increase the earning capacity of the business or to reduce the

operating cost. Revenue expenditure is incurred to maintain the existing earning capacity of

the business.

(v) Capital expenditure is capitalised while revenue expenditure is transferred to the Trading

or Profit & Loss Account. In other words, capital expenditure is entered into the Balance

Sheet and revenue expenditure is entered into the Trading and Profit & Loss Account.

(vi) Capital expenditure is not matched against capital receipts. Revenue expenditure is

matched against revenue receipts.

(vii) Capital expenditure may be incurred before the commencement of the business.

Revenue expenditure is incurred only after the commencement of business.

Q. 14. Write a short note on: Deferred Revenue Expenditure. How is it different from

Capital Expenditure?

Ans. Deferred Revenue Expenditure. Deferred revenue expenditure is revenue expenditure

by nature but it is not treated as revenue expenditure on the grounds that its benefit is not

fully exhausted in the accounting period in which it is incurred. The Guidance Note on

"Terms used in Financial Statements', issued by the Institute of Chartered Accountants of

India, (1CAI), defines "deferred revenue expenditure as those expenditures for which

payment has been made or a liability incurred but which is carried forward on the

presumption that it will benefit over a subsequent period or periods."

Deferred revenue expenditure is for the time being deferred from being charged against

revenue or to income. The unwritten off portion of the deferred revenue expenditure is shown

on the assets side of the Balance Sheet under the head "Miscellaneous Expenditure".

The examples of deferred revenue expenditure include cost of heavy advertisement campaign

to launch a new product or to explore a new market, and research and development

expenditure.

Q. 15. Write a short note on: Capital Receipts and Revenue Receipts.

Ans. Capital Receipts. Receipts of a non-recurring nature and meant for some specific

purpose are known as capital receipts. They are shown in the Balance Sheet. Capital

receipts are in the form of contribution from owner, loans and proceeds from sale of fixed

assets of the business.

Revenue Receipts. Receipts that are obtained in the course of normal business activities are

known as revenue receipts. Cash from sale of goods, rent received, commission received etc.,

are regarded as revenue receipts. They are shown in the Profit & Loss Account.

Q. 16. Distinguish between Prepaid Expenses and Deferred Revenue Expenditure.

Ans. Both prepaid expenses and deferred revenue expenditure are of revenue nature but the

nature of benefit to be available from these are different. The benefits from prepaid expenses

can be precisely estimated but that is not so in case of deferred revenue expenditure. Heavy

advertising to launch a new product is deferred expenditure, the benefit from it will be over

the next three to five years but we cannot say precisely how long.

On the other hand, insurance premium paid say for the year ending 30th

June, 2015, when an

accounting year ends on 31st March, 2015, will be an example of prepaid expense to the

extent of premium relating to three months i.e., from 1st

April, 2015 to 30th June, 2015.

Moreover, deferred revenue expenses are considered fictitious assets but prepaid expenses

are considered as current assets.

Q. 17. What is meant by Grouping and Marshalling in connection with the Balance

Sheet of a business@@ How are these done?

Ans. Balance Sheet is a statement of the financial position of a firm at a given date. This

given date is the date of close of the financial year. Balance Sheet has two sides: the Assets

side and the Liabilities side. It is not an account but is only a statement. This is done by

Grouping and Marshalling of the various items in the Balance Sheet. The term "Grouping"

means putting together various items of the same or common nature under one heading.

However "Marshalling" means or refers to the order in which the various assets and

liabilities are stated in the Balance Sheet. This may be done according to either of the two

methods:

(i) Liquidity order (ii) Permanence order

Under the liquidity order method, assets are arranged in the order of liquidity i.e., most liquid

assets (such as Cash, Bank) are shown or listed first and the least liquid asset is shown in the

last. Similarly liabilities are also arranged in order of the urgency of payment. Under the

permanence order of placement of items in the Balance Sheet, this very order is almost

reversed.

According to the liquidity order, the form of Balance Sheet would be like this:

Liabilities Assets

Bank Overdraft Cash

Bills Payable Bank

Creditors Bills Receivable

Outstanding Expenses Debtors

Incomes Received in Advance Inventories

Long-term Liabilities (e.g. Bank Loans) Prepaid Expenses (if any)

Borrowings (e.g. Debentures etc.) Accrued Incomes

Capital Investments

Plant and Machinery

Buildings

Furniture

Land

Deferred Revenue expenditures (if any)

Treatment of Various Adjustments

Adjustment Adjustment Entry Treatment in

Trading A/c

Treatment in

Profit & Loss

A/c

Treatment in

Balance Sheet

1. Closing Stock Closing Stock A/c

To Trading A/c

Dr. Shown on the

credit side

Shown on the

assets side

2, Outstanding

Expenses

Expenses A/c Dr. Added to the

respective

expense on

the debit side

Deducted

from the res-

pective

expense on

the debit side

Added to the

respective

expense on

the debit side

Deducted

from the

respective

expense on

the debit side

Shown on the

liabilities side

To Outstanding

Expenses A/c

3. Prepaid or

unexpired

Prepaid Expenses A/c Dr.

Shown on the

assets side

expenses To Expenses A/c

4. Accrued

Income (Income

Accrued Income A/c Dr. Added to the

respective

income on the

credit side

Deducted

from the

respective

income on the

credit side

Shown on the

debit side

Shown on the

assets side

earned but not

received)

To Income A/c

5. Unearned

Income (Income

Income A/c Dr.

Shown on the

liabilities side

received in

advance)

To Unearned Income

A/c

6. Depreciation Depreciation A/c Dr.

Deducted

from the

concerned

asset on the

assets side

To Asset A/c

7. Interest on

Capital

Interest on Capital A/c Dr. Shown on the

debit side

Added to the

capital on the

liabilities side

To Capital A/c

8. Interest on

Drawings

Drawings A/c Dr. Shown on the

credit side

Added to the

drawings and

then deducted

from capital

Added to the

loan on the

liabilities side

To Interest on

Drawings A/c

9. Interest on

Loan

Interest on Loan A/c Dr. Shown on the

debit side

(taken from

someone)

To Loan A/c

10. Additional

(further) Bad

Bad-Debts A/c Dr. Added to

Bad-debts

(given in Trial

Balance) on

the debit side

Deducted

from debtors

on the assets

side

debts To Sundry Debtors

A/c

11. Provision for

Doubtful Debts

Profit & Loss A/c Dr. Added to

Bad-debts on

the debit side

Deducted

from sundry

debtors on the

assets side

To Provision for

Doubtful Debts A/c

' Adjustment Adjustment Entry Treatment in Treatment in Treatment in

Trading A/c Profit & Loss

A/c

Balance Sheet

12. Provision for

Discount on

Profit & Loss A/c Dr

.

Shown on the

debit side

Deducted

from Debtors

on

Debtors To Provision for

Discount on Debtors

A/c

as a separate

item

the assets side

13. Abnormal

loss of stock

Insurance Company A/c Dr

.

Total amount

of loss is

Amount not

recovered

from

Amount

recovered

from

Profit & Loss A/c Dr

.

deducted

from

purchases

the insurance

company is

the insurance

company is

To Purchases A/c on the debit

side

shown on the

debit side

shown on the

assets side

14. Charity in the

form of goods

Charity A/c Dr

.

Deducted

from

purchases

Shown on the

debit side

To Purchases A/c on the debit

side

15. Goods

distributed as

free

Free samples A/c Dr

.

-do- Shown on the

debit side

samples To Purchases A/c

16. Drawings in Drawings A/c Dr -do- Deducted

goods . from capital

on

• To Purchases A/c the liabilities

side

17. Manager's

Commission

Manager's Commission

A/c

Dr

.

Shown on the

debit side

Shown on the

liabilities

To Outstanding

Commission A/c

side

18. Sale of goods

on approval

(i) Sales A/c Dr

.

Deducted

from sales on

Deducted

from debtors

on

basis To Debtors A/c the credit side the assets side

(Sale value of goods)

(ii) Closing stock A/c Dr

.

Added to

closing stock

on

Added to

closing stock

on

To Trading A/c the credit side the assets side

(Cost price of goods)

19. Goods sold

but omitted

Debtors A/c Dr

.

Added to

sales on the

Added to

Debtors on

the

to be recorded To Sales A/c credit side assets side

20. Goods

purchased but

Purchases A/c Dr

.

Added to

purchases on

Added to

Creditors on

the

omitted to be

recorded

To Creditors A/c the debit side liabilities side

UNIT

II

Business Income

Chapter 5: MEASUREMENT OF BUSINESS INCOME

Q. 1. What is meant by Business Income and Economic Income@@ How is it

measured@@ Outline its features.

Ans. Business Income, in accounting, we are mainly concerned with Business Income; a

term which is synonymous with the term Business Profit. It can be defined as the excess of

revenue over expenditure incurred by the business over a period.

"The Net Income for the period is the excess of revenues realised during the period by a

specific accounting entity over the cost expired (included losses) during the same period."

-Smith

"The Realised Net Income of an enterprise measures its effectiveness as an operative unit and

is the change in its net assets arising out of (a) the excess or deficiency of revenue compared

with related expired cost and (b) other gains or losses to the enterprise from sales, exchange

or other conversion of assets." —American Accounting Association

As per American Accounting Association, the term Business Income includes realised net

income and not income alone. It means, income will be considered to be Business Income

only when it has been actually realised. Notional Income such as appreciation in the market

value of the assets of the firm cannot be taken as Business Income unless the assets have

really been disposed off.

In short, the computation of income involves, matching the expired cost or expense with the

revenue.

Net Income or Profit = Revenues - Expenses

Procedure for measurement of Business Income. The following steps are needed for

measurement of business income:

Step 1. Determination of accounting period. For measurement of income, the determination

of accounting period is the first step. Now-a-days most of the business enterprises in India

maintain accounts on financial year basis i.e., April 1st to March 31

st as their accounting

period.

Step 2. Recognition of revenue. The second step in the measurement of business income is

identification of revenue relating to the accounting period Revenue is recognised on the basis

of realisation concept.

Step 3. Recognition of expenses and matching price. The third step in the measurement of

income is identification of expenses and matching of cost with revenue. An expense is

incurred when goods or services are consumed in the process of earning revenue. An expense

is recognised in the period in which associated revenue is recognised. Matching principle

requires that the revenue and expenses are recognised for an accounting period on a certain

basis. It may be (i) cash basis; (ii) accrual basis or (iii) hybrid basis. Matching of cost with

revenue on accrual basis is the most appropriate basis.

Features of Business Income:

(i) Business Income is based on the actual transactions entered into by the firm, primarily

revenue arising from the sale of goods/or services minus the costs necessary to achieve these

sales.

(ii) It is based on accounting period convention in the sense that it refers to the financial

performance of the business firm for a given period.

(iii) Business Income is based on the revenue principle.

(iv) It requires the measurement of expense in terms of historical cost.

(v) Accounting Income is based on Matching Principle.

(vi) It ignores unrealised gain/losses in the value of fixed assets.

(vii) Business Income is ex-post income. Ex-post income is the excess of the value of the

capital for the current period over that of the base period with reference to future expected

returns on current period basis.

Economic Income. Accountants and economists agree as to what income is, but they differ in

their approach to measurement of income. According to economists, the term 'Income' means

"the current flow of goods and services over a period of time." For example, if an economist

says that the national income of India during 2015-16 was Rs. 1,20,000 crores, he means,

goods and services worth Rs. 1,20,000 crores were produced during 2015-16. An economist

is mainly concerned with individual (per capita) or National Income.

The economic concept of income is based on Hick's definition of income as, "The amount

which a man can consume during a period and still remain as well off at the end of the period

as he was at the beginning." The emphasis is clearly on the words "as well off". Unlike

Business Income,. Economic Income is measured in real terms by eliminating the effect of

the changing value of money due to inflation or deflation. Moreover, Economic Income

results from the change in the value of assets and capital at the beginning and at the end of

the period rather than from the matching of revenues and expenses. That is why, the income

measured by economists is referred to as "Capital Maintenance Concept of Income". In short,

the basis of definition of Economic Income is consumption in the given period plus change in

the value of capital.

Which concept is more useful?

While determining the income of an individual or a society, an economist considers the real

income which, of course, is subject to high degree of subjectivity of value. On the other hand,

an accountant is mainly concerned with the monetary income, i.e., income earned by a

business capable of being expressed in monetary terms. Thus, an accountant is more exact in

the computation of income as compared to economists. An accountant's approach towards

measurement of income is practical and serves the purpose. In other words, the concept of

Accounting Income is more useful as compared to Economic Income.

Q. 2. What are the objectives of Income Measurement?

Ans. Objectives of Business Income Measurement. The following are the objectives of

business income measurement:

(i) Net Income or profit is calculated for assessing the overall performance or efficiency of

the business.

(ii) Profitability of the capital projects can be ascertained with the help of net income, a

project yielding higher return is favoured. Thus, net income reporting is a helpful technique.

(iii) The future course of the business can be predicted on the basis of previous years' income

figure.

(iv) Determination of net income lays emphasis on the need to distinguish between invested

capital and profit. This distinction is helpful in paying dividend out of income only and not

out of capital. Without the information of profit, it is possible that dividends may be paid out

of capital, which is not desirable. Dividends should always be paid out of revenue profits.

(v) Income tax is levied on individuals on the basis of their income. Similarly income

tax/corporate tax is levied on joint stock companies on the income earned by them. Therefore,

net income or profit earned by business firms acts as a basis for ascertaining the tax liability.

(vi) In evaluating the use of scarce resources, the use of income figure is a very helpful guide.

The activities which give more profit on scarce resources are to be preferred to increase the

wealth of the business.

(vii) The employees of business enterprises are interested in the amount of net profit earned

by the enterprise. If the enterprise earned more income then they can also legitimately

demand higher remuneration in the form of salaries, wages, bonus etc.

Q. 3. State whether each of the following statements is 'TRUE' or FALSE': (i) Net

income or profit is the amount accruing to the owners.

(ii) In the process of determination of net income it is the revenue that is matched with

the expenses.

(iii) The concept of accounting income strictly follows all the conventions of accounting.

(iv) The business income also includes the personal income of the proprietor of the

business.

(v) In case of inflationary condition, charging of depreciation on original cost of the

fixed asset will result in over-statement of business income. Ans. (i) True

(ii) False

(iii) False

(iv) False

(v) True

Chapter 6

REVENUE CONCEPTS, REVENUE RECOGNITION PRINCIPLES RECOGNITION

OF EXPENSES

Revenue Recognition Concept. Accounting Standard 9 deals with the recognition of

revenue items in the Profit and Loss Account of an enterprise. It lays down the conditions to

recognise revenue from various transactions. Revenue from sales or service transactions

should be recognised only when (/') the seller of goods has transferred the property in the

goods for a certain price to the buyer, and (ii) no significant uncertainty exists regarding the

amount of consideration. In a transaction involving the rendering of services, performance

should be measured either under the completed service contract method or under the

proportionate completion method. An enterprise should underline the circumstances in which

revenue recognition has been postponed due to the effect of uncertainties. It is considered as

revenue of the period in which it is properly recognised.

Measurement of Expenses. For measurement of expenses we must know as to when an

expense in recognised. Expense is give recognition in the period in which is:

(i) a direct identification or association with the revenue of the period, as in case of sale of

goods delivered to customers;

(ii) as an indirect association with the revenue of the period as in the case of office salaries or

rent, or

(iii) a measurable expiration of asset cost even though not associated with the production or

revenue for the current period, as in case of loss by fire or theft.

Business Income is the outcome of excess of revenue of over related expired cost (expenses).

It involves matching of cost with revenue.

Q. 1. Explain the salient features of AS-9 as to revenue recognition.

Ans. Revenue Recognition: Salient Features of AS-9. The following are the salient features

of Accounting Standard-9:

(i) Applicability. AS-9 explains how or when the revenue is to be recognised so far as it

affects the profit and loss account of an enterprise. This AS only deals with matters relating

to revenue which arise in the ordinary course of the business activities of an enterprise and

includes only:

• sale of goods;

• rendering of services; and

• use by others of enterprise resources against payments such as interests, royalties etc.

(ii) Non-Applicability. AS-9 does not deal with the following:

• Revenue arising from construction contracts.

• Revenue arising from hire purchase, lease agreement.

• Revenue arising from government grants and other similar subsidies.

• Revenue of insurance companies arising from insurance contracts.

(iii) Definition and Measure of Revenue. Revenue is the gross inflow of cash receivables or

other consideration arising in the course of ordinary

activities of an enterprise from the sale of goods, from the rendering of services, and from the

use by others of enterprise resources yielding interest, royalties and dividends.

Revenue is measured by the charges made to customers or clients for goods supplied and

services rendered to them and by the charges and rewards arising from the use of resouices by

them. In an agency relationship, the revenue is the amount of commission and not the gross

inflow of cash receivables or other consideration.

(iv) The following items are not included in the term 'Revenue' for the purpose of AS-9:

• Realised gains resulting from the disposal of, and unrealised gains resulting from the

holding of non-current assets e.g., appreciation in the value of fixed assets;

• Unrealised holding gains resulting from the change in value of current assets, and the

natural increases in herds and agricultural and forest products;

• Realised or unrealised gains resulting from changes in foreign exchange rates and

adjustments arising on the translation of foreign currency financial statements;

• Realised gains resulting from the discharge of an obligation at less than its carrying amount;

• Unrealised gains resulting from the restatement of the carrying amount of an obligation.

(v) Timing of Revenue Recognition. Revenue recognition means identifying the revenue for

a particular accounting period. It is mainly concerned with the recognition of revenue in the

statement of profit and loss of an enterprise.

• Sale of Goods. Revenue from sale of goods is recognised when all the following conditions

have been satisfied:

— The seller of goods has transferred to the buyer the property in the goods for a price.

— All significant risks and rewards of ownership have been transferred to the buyers.

— The seller retains no effective control of the goods transferred to a degree usually

associated with ownership.

— No significant uncertainty exists regarding the amount of the consideration that will be

derived from the sale of the goods.

• Rendering of Services. Revenue from service transactions should be recognized when:

— No significant uncertainly exists regarding the amount of consideration that will be

derived from rendering the service.

— At the time of performance it is reasonable to expect ultimate collection.

• Use of Enterprise Resources. Revenue arising from the use by others of enterprise

resources yielding interest, royalties and dividend. These revenues are recognised on the

following bases:

Item Basis of Recognising Revenue

(i) Interest On a time proportion basis.

(ii) Royalties On accrual basis as per the terms of agreement.

(iii) Dividend When the declaring company declares dividend.

Notes. 1. Revenue arising from the use by others of enterprise resources yielding interest

royalties and dividends should only be recognised when no significant uncertainity as to

measurability or collection exists.

2. When interest, royalties and dividends from foreign countries require exchange permission

and uncertainity in remittance is anticipated, revenue recognition may need to be postponed.

(vi) Amount of Revenue. The amount of revenue arising on a transaction is usually

determined by agreement between the parties involved in the transaction. The amount of

revenue depends on (a) its measurability and (b) its ultimate collection.

(viii) Disclosure Requirements. In addition to the disclosure required by Accounting

Standard-1 on Disclosure of Accounting Policies (AS-1), an enterprise also has to disclose

the circumstances in which revenue recognition has been postponed pending the resolution of

significant uncertainities.

Q. 2. Comment in brief on any two of the following naming the principles of accounting

on which these statements are based:

(i) Balance Sheet is not a valuation statement.

(ii) Advance received from a supplier is not taken as income or sales.

(iii) Calibre or quality of management team is not directly disclosed on the Balance

Sheet.

Ans. (i) A Balance Sheet is not a valuation statement. Since a business enterprise is

assumed to be a going concern. The values of the assets in the balance sheet are not based on

market value but on the basis of original cost less depreciation to the date. Hence, balance

sheet is not a valuation statement.

(ii) In accounting, we are mainly concerned with Business Income, a term which is

synonymous with the term Business Profit. It can be defined as the excess of revenue over

expenditure incurred by the business over a period. In the words of Smith, "The Net Income

for the period is the excess of revenue realised during the period by a specific accounting

entity over the cost expired (included losses) during the same period."

Advance received from a supplier is not taken as income or sales as per Accrual Concept.

According to this concept revenue must be recognised in that period in which it was realised

and cost must be matched with the revenue of that period in which the benefit of that cost has

been utilised. Advance received from a supplier is 'guarantee money' for proper supply of

goods. Such advance is a liability for a business which must be returned after the supply of

goods.

(iii) According to Money Measurement Concept, only those transactions which are capable

of being expressed in terms of money are included in the accounting records. In other words,

the information which can not be expressed in terms of money is not included in accounting

records. Due to this concept calibre or quality of the management team is not directly

disclosed on the Balance Sheet.

Chapter 7

DEPACCIATION

Q. 1. Define Depreciation. What are the contributory factors for decline in the value of fixed

assets.

Ans. Depreciation means a fall in the value of a fixed asset because of usage or with efflux of

time or due to obsolescence or accident. Every fixed asset loses its value, once it is put to use.

"The permanent and continuing diminution in the quality or value of an asset."

— Pickles

"Depreciation may be defined as a measure of the exhaustion of the effective life of an asset

from any cause during a given period." — Spicer and Pegler

In short, depreciation is a permanent, continuing and gradual shrinkage in the book value of a

fixed asset.

Here, it is important to note that depreciation is charged on all tangible fixed assets except

land. The reason is that unlike other fixed assets like machinery and furniture, land does not

have a finite economic life.

Contributing Factors for decline in value of fixed assets or Causes of depreciation. The main

causes of depreciation are:

(i) Use of asset. Constant use of asset leads to its wear and tear and thus fall in value.

(ii) Efflux of time. Some assets e.g., lease, have a definite life period. On the expiry of the life

period, the asset will cease to exist. Other assets, like plant and machinery may not have a

definite life; in their case the life is estimated.

(iii) Obsolescence. If a better machine comes in the market, old machines may have to be

scrapped even though they are capable of being used. It is a reduction in the usefulness of the

asset.

(iv) Accident. An asset may reduce in value because of some accident.

Q. 2. Give features of depreciation. Also explain the factors determining the amount of

Depreciation.

Ans. An analysis of the definitions given above highlights the characteristics of depreciation

as follows:

(i) It is related to depreciable fixed assets only.

(ii) It is a fall in the book value of depreciable fixed assets.

(iii) It is a charge against profit for a particular accounting period.

(iv) It is a process of systematic allocation of cost and not valuation of fixed assets.

(v) It is a permanent decrease in the book value of an asset.

(vi) It is a continuous decrease in the book value of an asset.

(vii) The fall in the book value of an asset is due to the use of asset in business operations,

effluxion of time, obsolescence, expiration of legal rights or any other cause.

Factors Affecting the amount of Depreciation. The amount of depreciation depends on

following three factors:

(i) Cost of Asset. Cost of an asset includes the price paid for acquiring the asset plus all other

incidental costs necessary to put the asset into working condition. The incidental charges

include legal charges, freight, installation charges, transit insurance etc.

(ii) Residual or Scrap Value. This is the estimated value of a fixed asset at the end of its

useful life. This is the amount which is expected to be received when the asset is sold,

because it is no more useful to the business unit. It is very difficult to estimate the scrap value

of an asset at the time of its acquisition. The purpose of estimating scrap value is to ascertain

the net cost of the asset (acquisition cost-scrap value).

(iii) Useful or Economic Life of Asset. According to AS-6 (Revised), useful or economic

life of a depreciable asset implies either the period over which a depreciable asset is expected

to be used by the enterprise or the number of production or similar units expected to be

obtained from the use of the asset by the enterprise.

Q. 3. Write a short note on the purpose of providing depreciation. Or, What is the need

or objective of charging depreciation?

Ans. Purpose of Providing Depreciation/Need or Objective of Charging Depreciation.

The following are the objectives of providing depreciation:

(i) To Ascertain the True Profit and Loss. To find out net profit or net loss of an

accounting period, we add the revenue of that period and deduct all expenses incurred in that

period for earning those revenues. One such expense is the portion of the cost of the fixed

assets that has expired during the year (i.e., depreciation). Unless depreciation is charged, the

true profit or loss of a particular period cannot be ascertained.

(ii) To ascertain a True and Fair view of Financial Position of the Business, the assets

must be valued correctly in the Balance Sheet. Unless depreciation is charged, the assets may

be overstated and Balance Sheet would not present a true and fair view of the financial

position of a business.

(iii) To Ascertain the True Cost of Production. Depreciation should be taken into

consideration for calculating the cost of production. If it is not done, the cost records would

not give a true and fair view of the cost of production.

(iv) To provide funds for replacement of asset. If depreciation is not provided, the profit of

the concern will be overstated and may be distributed among shareholders as dividend. After

the end of the working life of the asset, there will be no provision or funds at the disposal of

the concern and the concern has to borrow for acquiring new assets. For the replacement of

assets, depreciation must be provided.

(v) To comply with the legal requirements. In case of companies, it is compulsory to

charge depreciation on fixed assets before it declares dividend [Section 205 (i) of the

Companies Act, 2013].

(vi) To Ascertain Profit or loss on sale. A fixed asset is to be sold at the end of its useful life

or may be even before. If no depreciation is provided, the written down value of the asset

cannot be ascertained. In effect, the profit or loss on sale of asset cannot be determined.

(vii) To Avoid Overpayment of Income tax. Depreciation is a deductible expense for tax

purposes. If depreciation is not charged, profit would be overstated and hence more tax

liability.

(viii) To Allocate the Cost of Fixed Asset. The main objective of depreciation is to allocate

the depreciable cost of a fixed asset over its estimated useful life so that the cost can be

charged to Profit & Loss Account of the said periods.

Q. 4. 'Depreciation accounting is a process of allocation and not of valuation.

Explain.

Ans. Depreciation accounting treats the original cost of the asset as deferred expenses and the

original cost of the asset is therefore charged against the income of various accounting

periods by allocating it over its useful life in a systematic manner.

The following points may be emphasised to explain depreciation accounting: (i) It is

concerned with allocation of depreciable amount (i.e., cost less residual value) of an asset

over its estimated useful life in a systematic manner.

(ii) Depreciation is used on cost of the asset and not on the market value of the asset. Thus it

is a process of allocation of cost, not of valuation of assets.

(iii) Portion of depreciation amount, which is allocated to an accounting year and is charged

to Profit & Loss Account of that year, is called depreciation. Depreciation is a measure of fall

in the value of an asset during an accounting year.

(iv) Depreciation does not provide funds for replacing the asset when its useful life ends.

(v) Depreciation accounting is not concerned with the decline in the value of current assets

like inventories.

(vi) Land is not subject to depreciation.

Q. 5. Explain the meaning, advantages & disadvantages and suitability of straight line

and diminishing balance methods of depreciation.

Ans. (A) Straight Line Method or Fixed Percentage on Original Cost Method. This is the

easiest and most popular method of calculating depreciation. This method provides equal

periodic depreciation charges over the expected useful life of the asset. Under this method of

calculating annual depreciation, it is necessary to divide the original cost of assets (minus its

residual value, if any) by the estimated useful life (number of years) of the asset. This is the

annual amount of depreciation —the same amount each year.

The amount and rate of depreciation is calculated as follows:

Amount of Depreciation = Original Cost - Estimated Scrap Value/Estimated Useful Lire

Rate of Depreciation in (%) = Amount of Depreciation/Original Cost x 100

Example. A firm bought a machine for Rs. 3,60,000 and Rs. 40,000 is spent on its

installation. On 1st April, 2013, its life was estimated to be 5 years. Its break-up value at the

end of the period was Rs. 20,000. Find out the amount of depreciation and rate of

depreciation.

Sol. Determination of the Amount of Depreciation:

Depreciation = Cost - Estimated scrap value/Number of years of expected useful life

Annual Depreciate = (Rs..3,60.000 + Rs. 40,000) - Rs. 20,000/5 = Rs. 75,000

Rate of Depreciation = Annual Depreciation/Cost x 100

= 76,000/4,00,000 x 100 = 19%

Advantages:

(i) This method is simple and easy to understand.

(ii) It can reduce the book value of the asset equal to its residual value at the expiry of its

useful life.

Disadvantages:

(i) It ignores the fact that the efficiency of the asset falls and repairs and maintenance charges

increase with the passage of time. In other words, the amount of depreciation remains

constant year after year whereas the amount of repairs and renewals goes on increasing as the

asset grows older, as a result of which, the amount of total charge (i.e., depreciation plus

repairs and renewals) in later years is more as compared to that in earlier years.

(ii) It does not take into consideration the interest on capital invested in the asset.

(iii) It does not provide funds for replacement of assets.

(iv) It becomes difficult to calculate the depreciation on additions made during the year.

Suitability. This method is most appropriate when an asset is used uniformly from period to

period, as in the case with furniture. It is also applicable when the life of an asset is affected

primarily by the lapse of time rather than by the degree of use, for example, lease, copyrights,

patents rights etc.

(B) Diminishing Balance or Written Down Value Method. Under this method,

depreciation is charged at a fixed percentage every year on the reducing balance of the asset.

Therefore, the amount of depreciation goes on diminishing year after year. The rate of

depreciation under this method can be calculated by applying the following formula:

nS

r 1 100C

where r denotes the rate of depreciation,, n is the number of years, S is the residual value, and

C is the cost of the asset.

Example. A business unit purchases a new machine for Rs. 10,000 on 1.4.2012. The useful

life of the asset is estimated to be 4 years. The estimated scrap value, after 4 years is Rs.

2,000. We assume that the financial year is the accounting year (1st

April... to 31st March...).

The rate of depreciation is calculated as under:

2,000r 1 100 33.33

10,000

Advantages:

(i) This method puts an equal burden for use of the asset on each subsequent year.

(ii) The method is simple to understand and easy to follow.

(iii) This method is recognised by the income tax authorities in India.

Disadvantages:

(i) The value of the asset cannot be brought down to zero under this method.

(ii) The determination of rate of depreciation is difficult under this method as compared to the

straight line method.

Suitability. This method is suitable for those assets where the amount of repairs and

renewables are expected to be more in later years as compared to earlier years and for those

assets where the possibility of obsolescence is more.

Thus, the method is suitable for plant and machinery, building, computers etc.

Q. 6. Distinguish between Straight Line method and Diminishing Balance method of

depreciation.

Ans. Distinction between Straight Line and

Diminishing Balance Method of Depreciation

Points of Difference Straight Line Method (SIM) Diminishing Balance Method

(DBM)

1. Amount of

Depreciation

The amount of depreciation

remains constant.

The amount of depreciation

goes on decreasing year after

year.

2. Calculation of

Depreciation

Depreciation is calculated at a

fixed percentage on the original

cost of the asset.

Depreciation is calculated at a

fixed percentage on the original

cost (in first year) and on

written down value (in

subsequent years).

3. Book Value The book value of the asset

becomes zero or equal to its

scrap value.

The book value of the asset

does not become zero.

4. Suitability This method is suitable for those

assets in relation to which: (a)

repair charges are less (b) the

possibility of obsolescence is

less.

This method is suitable for

those assets in relation to

which: (a) the amount of repair

and renewal goes on increasing

as the assets grow older and (b)

the possibility of obsolescence

is more.

5. Calculation — easy

or difficult

It is easy to calculate the rate of

depreciation.

It is difficult to calculate the

rate of depreciation atleast in

comparison to SLM.

6. Tax Purposes This method is not applicable

for income tax purposes.

This method is applicable for

income tax purposes.

Q. 7. Explain the practical steps in recording a change in method of Depreciation with

Retrospective Effect.

Ans. Practical Steps involved in Recording a Change in the Method of Depreciation with

Retrospective Effect:

Step 1 : Calculate the total depreciation already provided on the existing assets (i.e.,

excluding the assets disposed off or discarded) from the back date (i.e., from the date of the

asset coming into use to the date of decision to change the method of charging depreciation)

under the existing method.

Step 2 : Calculate the total depreciation on the existing asset from the back date under the

new method and rate till date (i.e., from the date of the asset coming into use to the date of

decision to change the method).

Step 3 : Calculate the difference between the total depreciation under existing method (as per

Step 1) and under the new method (Step 2).

Step 4 : Adjust the short depreciation (excess of Step 2 over step 1) by debiting Profit & Loss

Account and Crediting the Asset Account/ Provision for Depreciation Account.

Or

Adjust the excess depreciation (Excess of Step 1 over Step 2) by debiting Asset Account/

Provision for Depreciation Account and Crediting Profit & Loss Account)

Step 5 : Charge depreciation from the current accounting year and onwards by adopting new

method.

Q. 8. Explain the salient features of Accounting Standard-6 (AS-6) relating to

Depreciation Accounting.

Ans. Salient features of Accounting Standard-6 (AS-6) relating to Depreciation Accounting:

(i) AS-6 deals with depreciation accounting and applies to all depreciable assets, except the

following items to which special considerations apply:

• forests, plantations and similar regenerative natural resources;

• wasting assets including expenditure on the exploration for and extraction of minerals, oils,

natural gas and similar non-regenerative resources;

• expenditure on research and development;

• goodwill; and

• live stock.

AS-6 does not apply to land unless it has limited useful life for the enterprise.

(ii) Meaning of Depreciation. 'Depreciation' is a measure of the wearing out, consumption or

other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence

through technology and market changes.

Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each

accounting period during the expected useful life of the asset.

Depreciation includes the amortisation of assets whose useful life is predetermined.

(iii) Meaning of Depreciable Assets. 'Depreciable assets' are assets which

• are expected to be used during more than one accounting period;

• have a limited useful life; and

• are held by an enterprise for use in the production or supply of goods and services, for rental

to others, or for administrative purposes and not for the purpose of sale in the ordinary course

of business.

(iv) Depreciable Amount 'Depreciable amount' of a depreciable asset is its historical cost, or

other amount substituted for historical cost in the financial statements less the estimated

residual value.

(v) Three factors which determine the amount of depreciation. Assessment of depreciation

and the amount to be charged in rerpect thereof in an accounting period are usually based on

the following three factors:

• historical cost i.e., (money outlay) or other amount substituted for the historical cost of the

depreciable asset when the asset has been revalued;

• expected useful life of the depreciable asset; and

• estimated residual value of the depreciable asset.

(vi) Change in Cost and Revaluation:

• In case of change in cost of the asset, revised unamortised depreciable amount is to be

allocated over the remaining useful life.

• In case of revaluation, depreciation over remaining useful life is to be based on the revalued

amount.

(vii) Change in method of Depreciation. The depreciation method selected should be applied

consistently from period to period. A change from one method of providing depreciation to

another should be made only if the method is required {n) by statute or (b) for compliance

with an Accounting Standard or (c) if it is considered that the change would result in a more

appropriate presentation of financial statements of the enterprise.

When the method of depreciation is changed, depreciation is recalculated in accordance with

the new method from the date of the asset coming into use. The surplus or deficiency arising

from retrospective le computation of depreciation in accordance with the new method should

be adjusted into the Profit and Loss Account.

Change in depreciation amount due to change in method is to be given retrospective effect

but in all other cases (like change in cost, life, revaluation etc.) change in depreciation is

given prospective effect.

(viii) Disclosure Requirements. AS-6 requires the disclosure of following facts:

• Total cost of each class of assets.

• Total depreciation for the period of each class of assets.

• Accumulated depreciation of each class of assets.

• Depreciation method used.

• Depreciation rate or the useful life of the asset, if these are different from the principal rates

specified in the statute governing the enterprise.

• If any depreciable asset is disposed of, discarded, demolished or destroyed, the net surplus

or deficiency, if material should be disclosed separately.

Chapter 8

INVENTORY VALUATION

Q. 1. Explain the significance of inventory valuation.

Ans. Meaning of Inventory. Any stock that a firm keeps to meet its future requirement of

production and sales is called 'inventory'. The basic reason for holding inventory is to keep

production activities unhampered.

The principal types of inventories are—{i) Raw material; (ii) Work-in-progress; and (iii)

Finished goods.

Raw materials. Raw materials are the items that are yet to be used in the production process.

Work-in-progress. Work in progress means the items that have been introduced in the

production process, but are yet to be completed.

Finished goods. Finished goods are the goods produced but which have not yet been sold to

the customers.

The nature of inventory depends upon the type of activity carried on. In case of a

manufacturing firm, inventory will generally include all type of inventories mentioned above,

while in case of a trading concern, it is stock-in-trade owned by it for sale to customers in the

normal course of business. Inventory needs effective control as it is one of the largest assets

of a business.

Significance of Inventory Valuation. The significance of inventory valuation is as follows:

(i) Proper determination of profit. The proper determination of profit depends upon the

correct valuation of inventory. If the ending inventory (closing stock) is valued at a lower

figure, profit is understated and if it is overvalued, profit is overstated. This shows that proper

method of valuation of inventory should be followed.

(ii) True Financial Position. Balance Sheet shows the financial position of the enterprise.

Inventory is a very important item of current asset. If inventory is not properly valued, the

Balance Sheet will not give a true and fair view of the financial position of the enterprise.

(iii) Financial Analysis. Inventory figures are required for financial analysis. For example,

for calculating current ratio and stock turnover ratio, inventory figures are required.

(iv) Sufficient inventory for production sale process. Adequate inventory is essential for the

'production sale' process of the enterprise as insufficient inventory hampers production and

fails to support sales. Inventory is purchased for sale and realised again from resale. The fact

of realising profit from resale of inventory makes it compulsory for a concern to follow a

proper method of inventory valuation.

(v) Compliance with rules and statutes. AS-2 requires that the financial statements should

disclose:

• accounting policies adopted in measuring inventories including the cost formula used; and

• total carrying amount of inventories; and

• classification of amount of inventories.

The Companies Act, 2013 requires that each class of inventory should be disclosed separately

alongwith the mode of valuation of raw materials, work-in-progress and finished goods.

Q. 2. Explain FIFO and LIFO methods of inventory valuation.

Ans. FIFO (First In First Out Method). This method assumes that goods received are issued

in the order in which they are received which means stock of goods is left out of the recent

purchases. In other words, it is based on the assumption that costs should be charged to

revenues in the order in which they are incurred. It means that units received first are

assumed to be sold first.

Under this method, first item purchased is assumed to be sold first. Thus the sales are

assumed to be made in the order in which goods are purchased or produced. This assumption

is made for the purpose of assigning costs and not for the purpose of the physical flow of

goods. The physical flow of goods therefore need not necessarily coincide with the pattern of

cost flow assumption. As the oldest stock Is assumed to be sold first or issued first, the

closing inventory represents the most recently purchased or produced items, cost of goods

sold represents the cost of items out of opening inventory and out of earlier purchases.

Advantages:

(i) Closing inventory is recorded at cost and, therefore, there is no unrealised holding gain or

loss,

(ii) Inventory costs are charged to products in the order in which these costs are incurred.

(iii) Closing inventory represents the most recently purchased or produced goods.

(iv) In periods of falling prices, lower income is reported since old costs (which are higher

than the current costs) are matched with current revenue. As a result, income tax liability is

reduced.

Disadvantages:

(i) In a period of fluctuating prices, the cost of an issue does not represent current market

price.

(ii) In periods of rising prices, higher income is reported since old costs (which are lower than

the current costs) are matched with current revenue. As a result, income tax liability is

increased.

(iii) Inventory gains and losses resulting from price change of the stock held cannot be

separated from the operating results (i.e., income from normal operations).

LIFO (Last In First Out Method). Under this method, goods issued are valued at the price

paid for the latest lot of goods in hand which means stock of goods in hand is valued at the

price paid for the earlier lot of goods. In other words, LIFO method assigns costs to goods

sold on the basis that goods that have been purchased recently are sold first. So cost of goods

sold is based on the price of recently purchased goods. Under this method, it is assumed that

last units purchased are first units sold. In other words, it is assumed that the sales are made

out of latest lot of goods purchased.

Advantages:

(i) Like FIFO method, LIFO method is simple to operate and is useful when

transactions are not too many and the prices are fairly steady.

(ii) There is better matching of cost with revenue in income statement.

(iii) It is based on actual cost.

Disadvantages:

(i) The stock in hand is valued at a price which does not reflect current market price.

Consequently, closing stock will be overstated or understated in the Balance Sheet.

(ii) Like FIFO method, LIFO method may lead to clerical errors as every time an issue is

made, the store ledger clerk will have to go through his record to ascertain the price to be

charged.

Q. 3. Compare the FIFO and LIFO methods of stock valuation with special reference to

their effect on pricing of issue of goods, valuation of Closing Stock and profits during a

period of rising prices.

Ans. Distinction between FIFO and LIFO methods

Points of Difference FIFO LIFO

1. Pricing of issue of

goods

Issue of goods is priced on the

basis of earliest costs.

Issue of goods is priced on the

basis of recent or latest costs.

2. Cost of ending

inventory

The more recent costs are

assigned to the unsold items.

The earliest unit costs are

taken into consideration for

valuing items of closing stock.

3. Profits during the

rising prices

This method shows a higher

taxable income in the period of

rising prices. As a result,

income tax liability is

increased.

This method gives lowest

income and consequently

lowest income tax in the

periods of rising prices.

Under inflationary conditions, LIFO method is recommended though physical movements

should always be according to FIFO method.

Q. 4. Write a short note on: Weighted Average Cost method of inventory valuation.

Ans. Weighted Average Cost Method. Under perpetual system, weighted average cost is

Calculated after each purchase by dividing the total cost of inventory (stock) in hand by the

total quantity of inventory in hand. Following formula is used to ascertain the weighted

average cost:

Weighted Average Cost per unit (perpetual) = Total cost of inventory in hand(after each

purchase)/Total number or units of inventory(after each purchase)

This rate is applied until a new lot is purchased and then a new rate is calculated. Under

periodic system, weighted average cost is calculated at the end of a specified period by

dividing the total cost of opening stock and purchase by the quantity of opening stock and

purchase during that period. The following formula is used for this:

Weighted Average Cost Per Unit (periodic) = Opening inventory in rupees + Purchases in

rupees/Opening inventory in units + Purchase in units

Or

Weighted Average Cost Per Unit (periodic) = Total cost of goods available for sale during the

period/No. of units available for sale during the period

Advantages:

(i) This method evens out the effect of fluctuations in prices on ending inventory.

(ii) This method is considered more scientific as inventory is valued at one rate.

Disadvantages:

(i) This method will not give current cost since it will always be influenced by price paid

previously.

(ii) Comparison of costs for the purpose of measuring efficiency is vitiated.

Q. 5. Distinguish between Periodic and Perpetual System of Inventory Valuation.

Ans. Periodic Inventory System. It is a method of recording inventory at the end of the

accounting year after making a physical verification of the quantity in hand. In this system,

inventory is ascertained by physical counting of the stock at the end of the year. All the items

of inventory are weighed, measured or counted, then listed and priced for getting the value of

inventory on the date. Thus inventory is valued by means of annual stock taking. It does not

require record keeping.

In this system Cost of Goods Sold is calculated as a residual figure as follows:

Cost of Goods Sold - Opening Inventory + Purchases - Closing Inventory Perpetual Inventory

System. It is a method of recording inventory balances after each receipt (purchase) and

issue. In order to ensure accuracy of perpetual inventory records, physical stocks should be

checked and compared with recorded balances. The discrepancies, if any, should be

investigated.

The Closing Inventory is calculated as a residual figure as follows:

Closing Inventory = Opening Inventory + Purchases - Cost of Goods Sold

Distinction between Periodic and Perpetual System of Inventory Valuation

Periodic System Perpetual System

(i) It is based on physical verification. It is based on regular consumption.

(ii) It provides periodic information about

stock and cost of sales.

It provides continuous information about

stock and cost of sales.

(iii) It directly determines stock and takes

cost of goods sold as a Residual Figure.

It directly determines cost of sales and takes

stock as Balancing Figure.

(iv) Under this system, cost of sales includes

lost goods.

In perpetual system, inventory includes lost

goods.

(v) It is a simple and less expensive method. It is a costlier method.

(vi) Inventory control is not possible under Inventory control can be exercised under this

this system. system.

(vii) it requires closure of business for

counting of stock.

Stock can be determined without affecting

the operation of business.

Q. 6. Explain briefly the salient features of Accounting Standard-2 (AS-2) as

recommended by the ICAI relating to inventory valuation.

Ans. Accounting Standard-2. The Institute of Chartered Accountants of India revised

Accounting Standard-2 (AS-2) Valuation of Inventories in July 1999. This revised Standard

comes into effect in respect of accounting periods commencing on or after 1st April, 1999 and

is mandatory in nature.

The salient features of AS-2 (Revised) are given as under:

1. The Standard begins with the definitions of inventories and net realisable value.

2. Meaning of Inventory. Inventories are assets that are: (a) held for sale in the ordinary

course of business e.g., finished goods (b) in the process of production for such sale e.g.,

work-in-progress or (c) in the form of materials or supplies to be consumed in the production

process or in the rendering of services e.g., raw materials.

Inventory = Finished Goods + Work-in-Progress + Raw Materials

3. Net realisable value is the estimated selling price in the ordinary course of business less the

estimated costs of completion and the estimated cost necessary to make the sale. The

Standard provides that the acceptable basis for inventory valuation or measurement of

inventories is cost or net realisable value whichever is lower or less.

4. Cost formula. AS-2 (Revised) mentions various formulae for determining the historical

cost such as (a) Specific Identification of Cost, (b) First-In-First-Out (FIFO) and (c)

Weighted Average Cost.

5. Techniques for the measurement of cost. Standard cost method or the retail method may

be used for convenience if the results approximate the actual cost.

6. Inventory valuation below cost. The net realisable value may be used for valuing

inventories that are damaged or that have become wholly or partially obsolete or if the selling

price has declined. The practice of writing down inventories below cost to net realisable

value is consistent with the view that assets should not be carried in excess of amounts

expected to be realised from their sale or use. However, materials and other supplies held for

use in the production of inventories are not written down below cost if the finished products

in which they will be used, are expected to be sold at or above cost. But when there has been

a decline in the price of materials and it is estimated that the cost of the finished products will

exceed net realisable value, the materials are written down to net realisable value. In such

circumstances, the replacement cost of materials may be the best available measure of their

net realisable value.

7. Disclosure in the Financial Statements. The Financial Statements should disclose

• Accounting Policies adopted in measuring inventories including Cost Formula used;

• Classification of inventories like finished goods, work-in-progress, raw materials, spare

parts and its carrying amount.

8. Non-Applicability. AS-2 does not apply to the following inventories:

• Work-in-progress arising under construction contracts;

• Work-in-progress arising in the ordinary course of business of service products;

• Shares, debentures and other financial instruments held as stock-in-trade; and

• Producer's inventories of livestock, agriculture and forest products.

Chapter 9

PREPRRATION OF FINANCIAL STATEMENTS OF NOT FOR PROFIT

ORGRN1SRTIONS

Q. 1. What is the accounting process adopted by Non-profit organisations@@ Explain.

Ans. Non-Profit Organisations (NPOs) and the Accounting Process. Nonprofit

Organisations are always non-business organisations. These organisations are not doing any

business or trading.

These organizations maintain only one subsidiary book i.e., Cash Book. Other subsidiary

books namely:

— Purchases Book

— Sales Book

— Purchase Returns Book

— Sales Returns Book

— Bills Receivable Book

— Bills Payable Book

are all not needed by these organizations since there is no trading or business done by them.

Even the Cash Book of these NPOs should rather be a multi-column Cash Book or at least

have two separate columns, i.e., cash and bank columns to record their transactions through

cash or bank. The Cash Book is a very important or rather the only book maintained by these

organizations.

It is from this detailed Cash Book that these organisations prepare a summary of Cash Book

at the end of the year and it is this summary of Cash Book which is called Receipts and

Payments A/c which is also one of their final accounts. In most cases, it is this Receipts and

Payments A/c which becomes the starting point for the preparation of other final accounts,

namely the Income and Expenditure A/c and also the Balance Sheet.

Thus, only two stages are involved in the process of accounting of NPOs:

• One is the preparation of Cash Book.

• Other is the preparation of Receipts and Payments A/c and also the Income & Expenditure

A/c and Balance Sheet at the end of the year.

Q. 2. Differentiate between Receipts and Payments A/c and Income and Expenditure

A/c.

Ans. Distinction between Receipts and Payments Account and

Income and Expenditure Account

Point of Distinction Receipts and Payments Account Income and Expenditure

Account

1. Nature of Account It is a statement of cash

transactions for a period. (Real

It is another name of Profit &

Loss Account of non-trading

Account) concerns viz. hospitals, clubs,

societies, educational

institutions etc. (Nominal

Account)

2. Commencement It commences with opening

balance of cash in hand and at

bank.

It does not begin with any

opening balance.

3. Closing Balance This shows cash in hand or at

bank at the end of the

accounting year.

There is no closing balance but

the difference between the two

sides shows either surplus or

deficit.

4. Basic Structure It is basically a summary of

Cash Book.

It is exactly a Profit & Loss

A/c, only the name is changed

as NPOs are non-profit entities

and are just allergic to the use

of the. words profit or loss.

Hence they use Income and

Expenditure Account.

5. Capital and

Revenue items

All items whether of capital or

revenue nature are shown in this

account.

Only revenue items are taken

into consideration while

preparing this account i.e.,

capital items are totally

excluded.

6. Period All receipts and payments

whether relating to the current

period, succeeding or preceding

periods are taken into

consideration.

Only current period's income

and expenditure are taken into

consideration while preparing

this account i.e., income and

expenditure relating to

succeeding or preceding

periods are excluded.

7. Balance Sheet It is not necessary to prepare

Balance Sheet alongwith this

account.

The Balance Sheet must be

prepared in order to

accommodate real and personal

accounts alongwith this

account.

8. Adjustments No adjustments are required to

be made at the end of the year.

In order to find out the true

income or expenditure of the

current year, all adjustments

(i.e., outstanding expenses,

prepaid expenses, income

received in advance) are made

at the end.

9. System of

Accountancy

It is based on cash system. It is based on accrual system.

Q. 3. How will you treat 'donations and legacies' in the financial statements of the Non-

Profit Organisations (NPOs)@@ Explain.

Ans. Legacies in principle are similar to Donations. The only difference between these two is

that donations are gifts received by the NPOs from donors who are also living persons

whereas legacies are gifts received by the NPOs from donors through their wills and the

amount reaches or comes to the NPO after the death of the donors. Generally legacies

received by NPOs may be a relatively bigger amount.

However treatment of both legacies and donations depends on the purpose for which these

are given by the donors. Such purpose may be general or specific. If donations or legacies

(whatever way or mode the moneys are received) are given without mentioning any specific

purpose, then the same may be treated as general income of the NPO and just credited to the

Income and Expenditure A/c. Money so received may be used by the NPO for any purpose.

However, if the amount is given to the NPO by the donor stating that it should be used for

only a specific purpose mentioned, then the amount should not be treated as general income

and not credited in the Income and Expenditure A/c. The amount so received should then be

credited in the Balance Sheet under a special fund created for that special purpose. For

example, if the donor has specified that money given to the NPO should be used for

construction of a building, then it should be credited to the Building Fund A/c and put in the

Balance Sheet, or if the money is received by the NPO with obligation to be used for say a

'tournament then it should be credited in the Balance Sheet under Tournament Fund.

Legacies received by the NPOs are usually for some specific purposes only. Hence, legacies

received are not credited in the Income and Expenditure A/c as general incomes but are

shown in the Balance Sheet as a liability credited to the specific funds.

Q. 4. Explain the procedure of preparing Income and Expenditure A/c from the

Receipts and Payments Account.

Ans. Conversion of Receipts and Payments Account into an Income and Expenditure

Account. When it is desired to convert a Receipts and Payments Account into an Income and

Expenditure Account, the following steps are taken:

— Leave the opening and closing balance of cash and bank given in the Receipts "and

Payments Account.

— Take only revenue items of income and expenditure and leave all those items which are of

capital nature.

— Make all adjustments for outstanding and prepaid expenses, accrued income, income

received in advance, provision for depreciation or bad debts etc.

— Take items only for the current period i.e., items relating to the preceding and succeeding

periods are to be ignored.

Following Table I shows how to calculate Revenue Income which will appear in the income

side of the Income and Expenditure Account:

Table I: Ascertain the Revenue Income (e.g., subscription) for the current accounting

period

Rs. Rs.

A. Revenue Receipts as per Cash Book during the current year XXX

B. Add: Outstanding Income at the end of the current year XXX

Advance Income in the beginning of current year XXX XXX

C. Less: Outstanding Income in the beginning of the current year XXX

Advance Income at the end of the current year XXX XXX

D. Revenue Income for the current year (A + B - C) XXX

Table II: Ascertain 'Revenue Expenses' (e.g., Salaries) for the current accounting period

as under and show on the debit side of Income and

Expenditure Account

Rs. Rs.

A. Revenue Payments as per Cash Book (Receipts and Payments

A/c)

During the current year XXX

B. Add: (i) Outstanding Expenses at the end of current year XXX

(ii) Prepaid Expenses in the beginning of current year XXX XXX

C. Less: (i) Outstanding Expenses in the beginning of current year XXX

(ii) Prepaid Expenses at the end of current year XXX XXX

D. Revenue expenses for the current year (A + B - C) XXX

After taking above steps, now calculate the difference between the total of debit side

(Expenditure Side) and the total of credit side (Income Side). If the total of credit side

exceeds the total of debit side, difference will be Surplus (i.e. excess of Income over

Expenditure) and it will appear on the debit side. If the total of debit side exceeds the total of

credit side, it will show Deficit (i.e. excess of Expenditure over Income) which will appear on

the credit side of Income & Expenditure Account.

UNIT

III

Accounting for Hire Purchase and Instalment Systems

Chapter 10: HIRE PURCHASE & INSTALMENT SYSTEMS

Q. 1. What is Hire Purchase System@@ What are its characteristics?

Ans. Hire Purchase System is a special system of purchase and sale of goods. In this system

the purchaser pays the price of the goods in instalments, these instalments may be monthly,

quarterly or yearly etc. Goods are delivered to the purchaser at the time of Hire Purchase

Agreement* but the purchaser will become the owner of goods only on the payment of the

last instalment. All the instalments paid are treated as hire till the last instalment is paid off.

The purchaser is called as Hire Purchaser and the seller is known as Hire Vendor.

"Under the Hire-Purchase system, goods are delivered to a person who agrees to pay the

owner by equal periodical instalments, such instalments are to be treated as hire of these

goods until a certain fixed amount has been paid, when these goods become the property of

the hirer." — J.R. Batliboi

*Hire Purchase Agreement [Section 2 (i)]. Hire purchase agreement means an agreement

under which goods are let on hire and under which the hirer has an option to purchase them

in accordance with the terms of the agreement and includes the agreement under which:

(i) Possession of goods is delivered by the owner thereof to a person on the condition that

such person pays the agreed amount in periodical instalments.

(ii) The property in the goods is to pass to such a person on the payment of the last

instalment; and

(iii) Such a person has a right to terminate the agreement at any time before the property so

passes.

Every Hire Purchase Agreement shall be in writing and signed by all the parties thereto.

Characteristics of Hire Purchase System. Following are the main features of Hire Purchase

System:

(i) There is an agreement between the seller and the purchaser.

(ii) Goods are delivered by the seller to the buyer at the time of commencement of the

agreement.

(iii) Buyer agrees to pay hire purchase price (i.e., cash price + interest) in instalments.

(iv) Instalments paid are treated as hire charges till the last instalment is paid.

(v) After the payment of the last instalment, ownership is transferred in the name of the

buyer.

(vi) In the case of default in the payment by the buyer, the seller has got a right to repossess

the goods, as ownership lies with the seller till the payment of last instalment.

Transactions with above mentioned features are called hire purchase transactions because of

hire cum purchase nature of these transactions.

ACCOUNTS FOR HIRE PURCHASE TRANSACTIONS

Terms Used in Hire Purchase Agreement:

(i) Hire Purchaser. He is the buyer in a hire purchase agreement.

(ii) Hire Vendor. He is the seller in a hire purchase agreement.

(ii) Cash Price. It is the amount to be paid for outright purchase in cash.

(iv) Down Payment It is the amount of initial payment payable by the hire purchaser at the

time of entering into a hire purchase agreement.

(v) Hire Purchase Price. It is the total amount payable by the hire purchaser to the hire

vendor for goods purchased under the hire purchase system.

Q. 2. Distinguish Between Hire Purchase System and Instalment Payment System.

Ans. Distinction between

Hire Purchase System and Instalment Payment System

Basis Hire Purchase System Instalment Payment System

1. Nature of Contract It is an agreement of hiring. It is an agreement of sale.

2. Passing of Title

(Ownership)

The title of the goods is passed

on to the buyer after the

payment of the final instalment.

The title of goods passes

immediately (i.e., at the time of

signing the agreement) as in the

case of usual sale.

3. Right of Seller If the buyer fails to pay any of

the instalments, the goods can

be repossessed

by the seller.

The seller cannot repossess the

goods. He can sue the buyer for

the amount due.

4. Right of Disposal The buyer cannot hire out, sell,

transfer, destroy, pledge the

goods.

The buyer can hire out, sell,

transfer, destroy, pledge the

goods and the bonafide

purchaser can get a good title to

the goods.

5. Option to Return

Goods

The buyer may return the

goods without further payment,

except for accrued instalments.

Except for seller's default the

goods cannot be returned.

6. Forfeiture of Amount

Received

In case of default, the total

amount of instalmens paid is

forefeited and considered as

hire charges.

In case of default, the total

amount of instalments paid by

the buyer cannot be forfeited.

Q. 3. Write a Short Note on Default and Repossession in Hire Purchase.

Ans. Default and Repossession in Hire Purchase. In Hire Purchase agreement, the hire

purchaser has an obligation to pay upto the last instalment so that the ownership of goods

passes on to him. If the hire purchaser makes default in the payment of any instalment, the

vendor has a right to repossess the goods sold on hire purchase and forfeit whatever amount

he has already received considering it as a hire charge.

There are two possibilities in repossession of goods —

• when the vendor takes back the complete repossession of asset i.e., Full Repossession, and

• when the vendor takes repossession of only a part of the asset sold to the hire purchaser i.e.,

Partial Repossession.

Accounting Treatment:

I. Full Repossession. All entries till the date of default are passed in the usual manner. The

additional treatment is as follows:

In the Books of Hire Purchaser. In case of full repossession, the hire purchaser closes the

Hire Vendor's Account and transfers the balance to Asset's Account. The Asset's Account

is also closed by transferring the balance in Profit & Loss Account.

(i) For Closing Hire Vendor's Account:

Hire Vendor's A/c Dr. Amt. due

To Asset A/c Amt. due

(ii) For Closing Asset's Account:

(a) If the Book value of the Asset exceeds the amount due to Hire vendor:

Profit & Loss A/c Dr.

To Asset A/c

(with the balance left in the Asset A/c)

(b) If the book amount to Hire-vendor exceeds the book value of the Asset:

Asset A/c Dr.

To Profit & Loss A/c

In the Books of Hire Vendor. The hire vendor closes the Hire Purchaser's Account and

transfers the balance to Goods Repossessed Account, (with the revalued amount of goods

repossessed). (i) On Repossession of Goods:

Goods Repossessed A/c Dr. Revalued amt.

To Hire Purchaser's A/c Revalued amt.

(ii) For amount spent on reconditioning of Goods Repossessed:

Goods Repossessed A/c Dr.

To Cash A/c or Bank A/c

(iii) For Sale of Goods Repossessed:

Cash A/c or Bank A/c Dr.

To Goods Repossessed A/c

(iv) For Loss on Sale of Goods Repossessed:

Profit & Loss A/c Dr.

To Goods Repossessed A/c

Note: In case of profit, a reverse entry will be passed.

II. Partial Repossession. All entries till the date of default are passed in the usual manner.

The additional treatment is as follows:

In the Books of Hire Vendor

(i) On Repossession of Goods at an agreed value:

Goods Repossessed A/c Dr. Agreed value

To Hire Purchaser's A/c Agreed value

Note: Entries 2, 3, 4 will be the same as in the case of Full Repossession.

In the Books of Hire Purchaser

(i) For transfer of the agreed value of Goods Repossessed:

Hire Vendor A/c Dr.

To Asset A/c

(ii) For transfer of loss on default:

Profit & Loss A/c Dr.

To Assets A/c

IMPORTANT.

(i) Loss on default = Book Value of Goods Repossessed as on the date of repossession -

Agreed value of Goods Repossessed (ii) In case of profit on default, reverse of the above

entry will be passed.

Q. 4. Explain the Hire Purchase Trading Account or Debtors method of calculating

profit in the books of hire vendor in case of goods of small value.

Ans. Hire Purchase Trading Account Method. Under this method, Hire Purchase Trading

Account is prepared to ascertain the profit earned or loss suffered by the hire vendor. Hire

purchase trading account can be prepared at cost price or at hire purchase price. In case of

hire purchase price, entries for removal of loading need to be passed.

Accounting Entries for Preparing Hire Purchase Trading Account:

(i) For goods sold on hire purchase:

Hire Purchase Trading A/c HP Price

To Goods Sold on Hire Purchase A/c HP Price

(ii) On Receipt of instalments:

Cash A/c Dr.

To Hire Purchase Trading A/c

(iii) For instalments due at the end of the year but not received:

Instalments Due or H.P. Debtors A/c Dr.

To Hire Purchase Trading A/c

Note: For Opening balance of instalments due, a reverse entry will be passed.

(iv) For goods repossessed due to non-payment of instalments:

Goods Repossessed A/c Dr. " With the estimated

To Hire Purchase Trading A/c value of goods received

(v) For goods lying with customers in respect of which instalments are not due:

Hire Purchase Stock A/c Dr. HP Price

To Hire Purchase Trading A/c HP Price

Note: For Opening stock of such goods reverse entry will be passed.

(vi) To remove the loading in hire purchase sales:

Goods Sold on Hire Purchase A/c Dr.

To Hire Purchase Trading A/c For loading only

(vii) To remove the loading in Closing stock:

Hire Purchase Trading A/c For loading only

To Stock Reserve A/c

Note: For removing the loading in opening stock, reverse entry will be passed.

(viii) Hire Purchase Trading Account is now complete and will show profit or loss which

will be closed by transfer to Profit and Loss Account:

(a) If Profit

Hire Purchase Trading A/c Dr.

To Profit & Loss A/c

(b) If Loss

Profit & Loss A/c Dr.

To Hire Purchase Trading A/c

At the beginning of the next year, Instalment Due Account, Hire Purchase Stock Account

and Stock Reserve Account will be closed by transfer to the Hire Purchase Trading

Account.

Dr. Hire Purchase Trading Account (HPP Basis) Cr.

Particulars ?

Particulars Rs.

To Balance b/d:

Hire Purchase Stock (at HPP)

XXX By Stock Reserve

(Load on opening stock)

XXX

Hire Purchase Debtors XXX By Goods sold on Hire Purchase XXX

To Goods Sold on Hire Purchase

(HPP)

XXX (Load on goods sold)

To Stock Reserve (Load on stock

with customer at the end)

XXX By Cash/Bank A/c

(Down Payment + Instalment

Received)

xxx

To Hire Purchase Expenses A/c XXX By Goods Repossessed

To Profit on Hire Purchase (at realisable value) XXX

(Transfer to Profit & Loss A/c) XXX By Balance c/d:

Hire Purchase Stock (HPP) xxx

Hire Purchase Debtors xxx

XXX xxx

Q. 5. Explain the Stock and Debtors System of Calculating Profit in the books of Hire

Vendor in case of goods of small value.

Ans. Stock and Debtors Method. Under this method instead of preparing Hire Purchase

Trading Account, the following accounts are prepared as part of books of the hire vendor to

ascertain the profit earned or loss incurred on sale of goods of small value on hire purchase:

(i) Stock at Shop Account

(ii) Hire Purchase Stock Account

(iii) Hire Purchase Debtors Account

(iv) Goods Sold on Hire Purchase Account

(v) Shop Stock Account

(vi) Hire Purchase Adjustment Account

(vii) Stock Reserve Account

Following entries are passed in the books of the hire vendor relating to hire purchase

transactions:

(i) For goods purchased for Shop Stock:

Shop Stock A/c Dr. Cost price

To Purchases A/c

(ii) For goods sold on hire purchase:

Hire Purchase Stock A/c Dr. At sale price

To Goods Sold on Hire Purchase A/c

(iii) For total instalments which become due:

Hire Purchase Debtors A/c Dr. Hire Purchase Price

To Hire Purchase Stock A/c

(iv) For Cash received from Debtors:

Cash A/c Dr.

To Hire Purchase Debtors A/c

(v) When Goods are repossessed on default and loss is transferred to Hire

Purchase Adjustment A/c:

Goods Repossessed A/c Dr. For realisable value

Hire Purchase Adjustment A/c Dr. Loss

To Hire Purchase Debtors A/c Instalments due and

not received in cash

To Hire Purchase Stock A/c For instalments not

yet due

To Hire Purchase Adjustment A/c Profit on Repossession

(vi) For transfer of Goods Sold on Hire Purchase:

Goods Sold on Hire Purchase A/c Dr.

To Hire Purchase Adjustment A/c For Loading

To Trading A/c Cost Price

(vii) For Reserve on Closing stock:

Hire Purchase Adjustment A/c Dr. For Loading

To Stock Reserve A/c

(viii) For Reserve on Opening stock:

Stock Reserve A/c For Loading

To Hire Purchase Adjustment A/c

(ix) For profit or loss on hire purchase:

(a) If Profit

Hire Purchase Adjustment A/c Dr.

To Profit & Loss A/c

(b) If Loss

Profit & Loss A/c Dr.

To Hire Purchase Adjustment A/c

Q. 6. What is lease@@ Explain the types of lease.

Ans. In a Lease agreement there are two parties: (i) Lessor and (ii) Lessee. Lessor is the party

who transfers the rights over an asset and Lessee is the other party who gets the rights to use

the asset without assuming ownership. So in a lease agreement the lessor conveys to the

lessee the right to use the asset for an agreed period of time. This is so' done in return for

payment or a series of payments or both. Leases are usually for a long-term and also are non-

cancellable in nature. In many cities in India e.g., land is sold by the land owning or

developing agency e.g., D.D.A. etc. on hold basis. Sometimes, leases are for a specific time

whereas sometimes these are without any time limit or constraint, say perpetual.

Such leases are of two types:

(i) Finance lease or (ii) Operating lease

Finance lease is one whereby the lesser transfers all the rights and obligations connected

with the asset to the other party namely the lessee involving all the rewards as well as risks

attached with the ownership of the asset.

Operating lease is one which is not finance lease. In finance lease, the agreement is for a

relatively longer period or for most of the useful life of the asset whereas in operating lease

the rights are transferred only for a relatively shorter period. Even the responsibility to

maintain the asset still remains that of the lessor. Operating lease agreement usually is

revocable also in nature as compared to the finance lease.

Difference between Operating lease and Financial Lease

Operating Lease Financial Lease

(i) Shorter duration with no relation to the

economic life of the asset.

Normally coinciding with economic useful

life of the asset.

(ii) Can be revoked. Normally non-revocable.

(iii) Lessee protected against the risk of

obsolescence.

Lessee not protected against the risk of

obsolescence.

(iv) Cost of repairs and maintenance of asset Lessee normally bears such expenses.

are borne by the lessor.

(v) Least' rentals are not sufficient to cover

the cost of asset.

Lease rentals are normally equal to cost of

asset to the lessor plus a reasonable return on

investment made by the lessor in the asset.

UNIT

IV

Accounting for Inland Branches

Chapter 11: Concept of Dependent Branches

Q. 1. Write a Short Note on Dependent and Independent Branches.

Ans. Dependent Branch. When the policies and administration of a branch are totally

controlled by the head office, who also maintains its accounts, the branch is called a

Dependent Branch.

Following are the features of a dependent-branch:

(i) A dependent branch does not maintain its own set of books. The Head

Office maintains a record of all the transactions.

(ii) Generally, all goods are supplied to the Branch by the Head Office. Sometimes the branch

may be allowed to make purchases from the local parties for which the payments are made

directly by the Head Office.

(iii) Goods are generally sold by such branches in cash. Such branches can sell goods on

credit with the permission of the Head Office.

(iv) The amount collected from Cash Sales or Debtors is either remitted to the Head Office

immediately or deposited into the account of the Head Office in some local bank.

(v) All major expenses of the branch are paid as far as possible by the Head Office.

(vi) For meeting Petty Expenses, the Branch manager is provided with cash, which is

reimbursed by the Head Office from time to time on an imprest system or otherwise.

Independent Branch. When the size of the branch is very large, their functions become

complex. In such a situation, it is desirable or practical for each branch to establish its own

double entry book-keeping system quite separate from those of the head office. Under this

system of branch accounting, the branches are treated as separate, independent units. These

type of branches are known as Independent Branches. The features of an independent branch

may be listed as under: (i) An independent branch may be a home branch or a foreign branch.

(ii) An independent branch enjoys more autonomy and powers than a dependent branch.

(iii) An independent branch is allowed to make purchases in the open market.

(iv) An independent branch maintains full system of accounting. It records all the transactions

in its own books, extracts its own trial balance and these are sent to the head office. Head

Office incorporates all Branch accounts in its books so that a consolidated Profit & Loss

Account and Balance Sheet can be prepared for the business as a whole.

Q. 2. Distinguish between a Dependent Branch and an Independent Branch.

Ans. Distinction between a

Dependent Branch and an Independent Branch

Dependent Branch Independent Branch

(i) A dependent branch is one whose policies

and administration are totally controlled by

the Head Office and the Head Office main-

tains the accounts of the branch.

The branch which maintains a complete

record of its transactions is said to be an

independent one.

(ii) A dependent branch operates as a

distribution centre only. Such branches sell

only those goods which are received from the

Head Office and are not allowed to make

purchases in the open market except with the

express permission of the Head Office.

Independent branch is that branch which also

purchases goods from the market besides

getting the goods from the Head Office. It

can also supply goods to the Head Office,

pay expenses from the cash realised and

deposit cash in its own account.

(iii) These branches send monthly or

quarterly reports to the Head Office.

These branches keep all their records

separately and independently.

(iv) The record of all transactions relating to

branch is maintained by the Head Office.

Such branches keep complete set of Double

Entry books and prepare their own Trial

Balance, Trading and Profit & Loss Account

and Balance Sheet.

Q. 3. Discuss Debtors System of accounting in branch accounts.

Ans. Debtors System. This system of accounting is applied when a branch is small in size.

Under this system, a Branch Account is opened for each branch in the Head Office ledger.

All transactions are recorded in this account. The Branch Account is prepared in such a way

that it discloses the profit or loss of the branch. Branch Account is a Nominal Account in

nature. The Head office may send goods to branch either at "Cost Price" or "Selling Price"

(also called invoice price) and accordingly it may prepare "Branch Account" in its books

adopting "Cost Price approach" or "Invoice Price approach".

Following items are to be ignored while preparing Branch Account under this method:

(i) Bad debts, discount allowed, Credit sales, Sales returns by customers to branch. Cash

received by Branch from Branch Debtors etc., since the debtors at the end appear at the

adjusted figure.

(a) Depreciation and Profit/Loss on sale of fixed assets since fixed assets at the end appear at

the adjusted figure.

(iii) Abnormal Losses since stock at the end appears at the adjusted figure.

(iv) Expenses met by Branch out of cash, since either reduced cash balance at the end is

decreased or the liability at the end is increased.

(v) Purchase of Goods/Fixed Assets by Branch since book value of Goods/ Fixed Assets at

the end is increased and either the amount of remittances is reduced or the Creditors at the

end are increased.

(vi) Sale of Goods/Fixed Assets by Branch since book value of Goods/Fixed Assets at the end

is decreased and either the amount of remittances is increased or the Debtors at the end are

increased.

(vii) Petty Cash Expenses paid by the Branch. The Branch Account is debited with the

opening balance of Petty Cash and the amount of Petty Cash sent by the head office and is

credited with the closing Petty Cash. For calculating closing Petty Cash, all expenses paid by

the branch are taken into consideration. Therefore it should be ignored for preparation of

Branch Account. When the petty cash is maintained on Imprest System, the expenses met by

the branch are to be shown in the same manner as the branch expenses met by the Head

Office. In such a case, petty cash balance at the end appears as the same amount at which it

appears in the beginning.

Format of Branch Account. A format of Branch Account (Cost Price Approach) is given

below:

Dr. Branch Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d (Opening

Balances):

By Balance b/d

Stock XXX (Opening Balance of Liabilities):

Debtors XXX Creditors XXX

Petty Cash XXX Outstanding Expenses XXX

Fixed Assets XXX By Bank (remittances to HO):

Prepaid Expenses XXX by Branch XXX

To Goods sent to Branch A/c: by Branch Debtors directly to HO XXX

Goods sent by HO XXX By Goods Sent to Branch A/c:

Goods sent by other Branches XXX Returned by Branch XXX

To Bank (Remittances by HO) XXX Returned by Branch Debtors directly

to HO

XXX

To Balance c/ld Sent to other Branches XXX

(Closing Balance of Liabilities) By Balance c/d: Stock XXX

Creditors XXX Debors XXX

Outstanding Expenses XXX Petty Cash XXX

To Net Profit t/f to General Fixed Assets XXX

Profit & Loss A/c {Balancing

Figure)"

XXX Prepaid Expenses XXX

By Net Loss t/f to General

Prorit & Loss N0{Balancing

Figure)*

XXX

XXX XXX

* Only one figure shall appear.

Invoice Price. Sometimes, the head office does not want to reveal the cost of the goods to the

branch and therefore, invoices goods at a price which is higher than the Cost Price (CP). Such

price is known as Invoice Price (IP). The difference between the Invoice Price (IP) and the

Cost Price (CP) is called Loading.

How to Eliminate/Remove Loading. When goods are sent at invoice price, for ascertaining

correct profit/loss on Branch, the items recorded at invoice price should be brought down to

cost price level. For this purpose, the loading included in the various items should be

eliminated by passing the following adjusting entries:

(i) For Loading on Opening Stock

Stock Reserve A/c Dr.

To Branch A/c

(ii) For Loading on (Net) Goods Sent to Branch (i.e., Goods sent to Branch less Returns by

Branch or Branch customers to HO):

Goods Sent to Branch A/c Dr.

To Branch A/c

(iii) For Loading on Closing Stock

Branch A/c Dr.

To Stock Reserve A/c

Calculation of Loading. For calculating loading, the following procedure is adopted:

Suppose goods are invoiced at cost plus 25%. If the cost is Rs. 100, profit will be Rs. 25,

selling price therefore, is Rs. 125. The ratio of profit to selling price is 25/125 = 1/5.

Adjustment for the difference or excess price in value between the invoice price and the cost

price, therefore, will be made on the basis of l/5th of the invoice price.

If the percentage is given on sale price, e.g., it is 25% on sale price. In this case the sale

price is then supposed to be Rs. 100 and the profit will be Rs. 25. Therefore cost will be Rs.

100 - Rs. 25 = Rs. 75. So the percentage on cost will be 25/75 or 33 1/3% or 1/3rd

of cost.

Q. 4. Discuss 'Stock and Debtors Method' under Branch Accounting.

Ans. Stock and Debtors System. Stock and Debtors system is generally used when the

goods are sent to the branch at an invoice price and the size of the branch is large. Under this

system the Head Office usually maintains the following accounts:

Accounts Purpose

(i) Branch Stock Account at Invoice Price To ascertain any shortage or surplus

(ii) Goods Sent to Branch Account To ascertain the net cost of Goods sent to

Branch

(iii) Branch Debtors Account To ascertain the closing Debtors

(iv) Branch Expenses Account To ascertain the total expenses incurred at the

branch

(v) Branch Adjustment Account To ascertain Gross Profit/Gross Loss

(vi) Branch Profit & Loss Account To ascertain Net Profit/Net Loss

(vii) Branch Cash Account To record all Cash transactions of the Branch.

(viii) Branch Fixed Assets Account To record all transactions relating to Branch

fixed assets.

The ruling of Branch Stock Account, Branch Adjustment Account, Branch Expenses

Account, Branch Profit & Loss Account, Branch Debtors Account and Goods sent to Branch

Account are given below:

Dr. A. Branch Stock Account (at Invoice Price) Cr.

Particulars Rs. Particulars Rs.

To Balance b/d XXX By Branch Cash A/c (Cash Sales) XXX

To Goods Sent to Branch A/c XXX By Branch Debtors A/c (Credit

Sales)

XXX

To Branch Debtors A/c By Goods Sent to Branch A/c

(Return by Customers to Branch) XXX (Returns to HO) XXX

To Goods Sent to Branch A/c By Goods Sent to Branch A/c

(t/f of goods from other Branch) XXX (t/f of Goods to other Branch) XXX

To Branch Adjustment A/c By Branch Adjustment A/c (Load on

[Excess of Selling Price over Abnormal Loss due to fire, theft etc.) XXX

Invoice Price (i.e.. Surplus)] XXX By Branch Profit & Loss A/c (Cost

of

Abnormal Loss due to fire etc.) XXX

By Branch Adjustment A/c (Normal

Loss)

XXX

By Balance c/d: In hand XXX

In transit XXX

XXX XXX

Dr. B. Branch Adjustment Account_______ Cr.

Particulars Rs. Particulars Rs.

To Branch Stock A/c (Load on By Stock Reserve A/c

Abnormal Loss due to fire, etc.) XXX (Loading on opening stock) XXX

To Branch Stock A/c (Normal Loss) XXX By Goods Sent to Branch A/c

To Stock Reserve A/c (Load on Net Goods Sent) XXX

(Load on Closing Stock) XXX By Branch Stock A/c [Excess of

selling

To Gross Profit t/f to Branch price over invoice price (Surplus)] XXX

Profit & Loss A/c XXX

XXX XXX

Dr. C. Branch Expenses Account Cr.

Particulars Rs. Particulars Rs.

To Salaries XXX By Branch Profit & Loss A/c XXX

To Rent XXX

To Petty Expenses XXX

To Bad Debts XXX

To Discount XXX

To Depreciation XXX

XXX XXX

Dr. D. Branch Profit & Loss Account Cr.

Particulars Rs. Particulars Rs.

To Branch Stock A/c By Branch Adjustment A/c (Gross

Profit)

XXX

(Cost of Abnormal Loss) XXX By Branch Cash A/c (Insurance

claim)

XXX

To Branch Expenses XXX By Net Loss t/f* to General Profit &

Loss A/c

XXX

To Net Profit t/f* to General Profit

& Loss A/c

XXX

XXX XXX

*Either Net profit or Net Loss, only one figure shall appear.

Dr. E. Branch Debtors Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d XXX By Branch Cash A/c (Collection) XXX

To Branch Stock A/c (Credit Sales) xxx By Bills Receivable A/c xxx

To Bills Receivable A/c By Branch Expenses A/c:

(B/R dishonoured) XXX — Discount Allowed xxx

— Bad Debts xxx

By Branch Stock A/c (Return) xxx

By Balance c/d xxx

xxx xxx

UNIT

V

Accounting for Dissolution of The Partnership Firm

Chapter 12: Recounting for Dissolution of the Partnership Firm

Q. 1. What is 'Dissolution of a firm@@ Explain the modes of Dissolution of firm. Ans.

Dissolution of partnership between all the partners of a firm is called the 'dissolution of the

firm'. Thus, dissolution of a firm means complete closure of business of the firm due to any

reason. On dissolution of a firm, all the assets are disposed off and liabilities are paid off. The

remaining balance, if any, is paid to the partners in settlement of their capital accounts.

Modes of Dissolution of Firm. Following are the modes of dissolution of partnership firms:

(i) Dissolution by Agreement. A firm may be dissolved with the consent of all the partners.

(ii) Compulsory Dissolution.

• On the insolvency of all the partners or all except one partner.

• On business becoming unlawful.

(iii) Contingent Dissolution: Subject to contract between the partners, a firm is dissolved

• by the expiry of the term for which the firm was formed, or

• by the completion of the venture for which the firm was formed, or

• by the death of a partner, or

• by the adjudication of a partner as insolvent.

(iv) Dissolution by Notice. In case of partnership at will, the firm may be dissolved by any

partner giving notice in writing to other partners of his intention to dissolve the firm.

(v) Dissolution by Court. A court may dissolve a firm on any of the following grounds:

• Insanity of a partner.

• Permanent incapacity of a partner.

• Misconduct of a partner.

• Persistent breach of agreement by a partner.

• Transfer of interest by a partner.

• Continued losses.

• Any other ground on which court is satisfied that it would be just and equitable to dissolve

the firm.

Q. 2. Distinguish between Dissolution of Partnership and Dissolution of firm. Ans.

Distinction between

Dissolution of Partnership and Dissolution of firm

Dissolution of Partnership Dissolution of Firm

(i) A partnership is dissolved when a new

partner is admitted or an old partner retires or

dies or there is a change in the profit-sharing

ratio.

A firm is dissolved by the partners mutually

or by the court.

(ii) The dissolution of partnership does not

necessarily mean the termination of the

business of the partnership.

The dissolution of firm means the termination

of partnership business.

(iii) The dissolution of partnership will lead

to revaluation of assets and liabilities.

The dissolution of firm will lead to disposal

of partnership assets and settlement

liabilities.

(iv) The dissolution of a partnership will

create a new partnership.

The dissolution of a firm will not create a

new partnership.

Q. 3. Distinguish between Revaluation Account and Realisation Account.

Ans. Distinction between

Revaluation account and Realisation account

Revaluation Account

(i) It is prepared whenever assets and

liabilities are required to be revalued. For

example, at the time of admission, retirement,

death of a partner or change in the profit-

sharing ratio.

Realisation Account

It is prepared at the time of dissolution of the

firm.

(ii) It is the recording of an asset or a liability

at its current value. It is a process of placing a

different valuation on an asset or a liability

from its book value.

It is used to record the closing transactions,

showing profit or loss on realisation of assets

and settlement of liabilities.

(iii) It is prepared to determine the profit or

loss on revaluation of assets and liabilities.

It is prepared to determine the profit or loss

on realisation of assets and liabilities.

(iv) The profit/loss on revaluation is

transferred to Old Partners' Capital in the

profit-sharing ratio.

The profit/loss on realisation is transferred to

All Partners' Capital Accounts in the profit-

sharing ratio.

Q. 4. Distinguish between Private Debts and Firm's Debts.

Ans. Distinction between Private Debts and Firm's Debts

Private Debts Finn's Debts

(i) It arises from private transactions of the

partners.

It arises from the firm's transactions.

(ii) The partner is liable to pay his private

debts personally.

All partners are liable to pay firm's debts

jointly and severally.

(iii) The private property of any partner shall

be applied first in the payment of his private

debts.

The property of the firm shall be applied first

for the payment of firm's debts.

(iv) Excess of private estate over private

debts can be utilised for payment of firm's

debts.

Excess of firm's estate over firm's debts can

be utilised for payment of partner's private

debts in proportion to his share of profit.

Q. 5. Explain the provisions of Section 48 of the Indian Partnership Act, 1932 dealing

with settlement of accounts of the partners.

Ans. Settlement of Accounts on Dissolution of Firm (Section 48). The provisions of

Section 48 relating to settlement of accounts at the time of dissolution of firm are given

below:

(i) Treatment of losses. If the assets of the firm are insufficient to discharge the debts and

liabilities of the firm, the partners shall bear deficiency in the proportion in which they were

entitled to share profits. Thus, losses including deficiencies of capital are to be paid in the

following manner:

• First of all, out of profits,

• Next, out of capital, and

• Lastly, if necessary, by the partners individually in their profit-sharing ratio.

(ii) Application of assets. The assets of the firm (including any sum contributed by the

partners to make up for the deficiency) will be applied for settling the debts of the firm, in the

following order:

• First, in paying off the debts due of the firm to third parties;

• Then, in paying to each partner rateably any advance or loans given by him;

• Then, in paying the capital contributed by the partners;

• The surplus, if any, shall be divided among the partners in their profit-sharing ratio.

Q. 6. How would you treat unrecorded asset and unrecorded liability at the time of

dissolution of firm?

Ans. Accounting treatment of unrecorded assets and unrecorded liabilities: Unrecorded

Assets. Assets, which are owned by the firm but not appearing in the Balance Sheet of the

firm, are called Unrecorded Assets. These assets may have a market value and thus either can

be sold or be taken by a partner or by a creditor in settlement of his outstanding amount.

Following entry is passed for it:

Cash/Bank A/c ...Dr. (if sold for cash)

Partner's Capital A/c ...Dr. (if taken by a partner)

To Realisation A/c

Note: If the asset is taken by a creditor, no entry is passed.

Unrecorded Liabilities. Liabilities which do not appear in the Balance Sheet of the firm, but

are payable by the firm, are known as Unrecorded Liabilities. Such a liability may either be

paid in cash or undertaken by a partner to be paid by him. Following entry is passed:

Realisation A/c ...Dr.

To Cash/Bank A/c (if paid in cash)

To Partner's Capital A/c (if partner has agreed to pay)

Note: Unrecorded Assets and Unrecorded Liabilities are not transferred to Realisation

Account, since there is no account for such assets and liabilities.

Q. 7. Explain the rule in Garner vs. Murray. [2022

Ans. Rule of Garner vs. Murray. If a partner's capital account shows a debit balance on the

dissolution of the firm, he is to pay the debit balance to the firm to settle his account. But if

such a partner is insolvent i.e., unable to satisfy his debt to the firm, then his deficiency,

which he is not able to bring in, will be borne by the other solvent partners in accordance

with the decision in Garner vs. Murray.

Following is the gist of the Judgement given by Justice Joyce in the case of Garner vs.

Murray:

1. The realisation profit or loss will be divided amongst all the solvent and insolvent partners

in their profit sharing ratio, as it is like a trading loss of the business.

2. The solvent partners will bring their shares of realisation in cash. In other words, the

solvent partners should bring in cash equal to their share of loss on realisation.

3. In absence of any agreement to the contrary, the solvent partners will bear the deficiency of

the insolvent partner (i.e., the amount which the insolvent partner is not able to bring) in

proportion to their capitals (i) If the capitals are fixed, in the fixed capital ratio, (ii) If the

capitals are fluctuating, the loss due to insolvency is divided among the other solvent partners

in the ratio of capital balance arrived at after transferring any transferable balances appearing

in the Balance Sheet (i.e., Profit & Loss Account, General Reserve, Capital Reserve etc.) but

before adjusting the profit or loss on realisation, (iii) If a partner's capital account shows a

debit balance on the date of dissolution of the firm, he need not share the capital loss of the

insolvent partners which stood before the dissolution of the firm.

Q. 8. How is the insolvency of a partner treated in accounts@@ Explain.

Ans. Insolvency of a partner means that a partner is unable to pay his/her debts to the firm. At

the end of the dissolution of the firm and settlement of accounts of all liabilities in order as

required u/s 48 of the Partnership Act, 1932, if there remains a debit balance in the Capital

Account of a partner, then it means that the firm has to receive money from that partner. This

balance is to be checked after transferring the profit or loss to the firm on account of

realisation amongst all the partners in their Profit Sharing Ratio. If a partner has a debit

balance in his capital account, it means that the partner has to pay to the firm.

Suppose, that a particular partner is unable to pay his debts to the firm, then he/ she is

assumed to be 'insolvent' at least so from commercial point of view whether or not he/she

has been adjudged 'insolvent' legally.

In such a case, rule of the famous case "Garner vs. Murray" is applied. The loss arising to

the firm because of non-payment of his/her dues or debts to the film is to be transferred to the

Capital Accounts of all the other partners in the ratio of the balances in their Capital

Accounts which stood just before the dissolution process had started.

These balances in the Capital Accounts of the other partners are to be checked after

transferring all the divisible balances appearing in the Balance Sheet, e.g.. Profit and Loss

Account, General Reserves, Capital Reserves, or Accumulated past losses etc. but before

adjusting the profit or loss on the Realisation Account.

If in the Capital Account of any partner there was a "Debit" Balance just before the

dissolution process starts, then he/she need not share any loss arising to the firm because of

insolvency of a partner.

This rule of Garner vs. Murray case (though an English case of old times) is applied in

present times because the basis suggested is very just and equitable. So this loss should not

be shared by other solvent partners in their Profit Sharing Ratio unless it is so laid down in

their Partnership Deed.

Some people are of the view that in India the decision in Garner vs. Murray does not apply.

But there is nothing in the Indian Partnership Act, 1932 which goes against the rule laid down

in Garner vs. Murray case. Therefore, it would be safe to follow it till an Indian court gives

a definite decision contrary to the decision given in Garner vs. Murray.

IMPORTANT NOTE.

If an examination problem states that the rule in Garner vs. Murrary is to be followed, the

solvent partners should bring in cash in proportion of their respective shares of Loss on

Realisation. If no mention is made of Garner vs. Murray decision in the problem to be solved,

the solvent partners may not be required to do so. But the other ruling given in Garner vs.

Murray must be followed, that is, the solvent partners should bear the loss arising due to the

insolvency of a partner in proportion to the balances in their Capital Accounts which stood

before the dissolution of the firm or before adjusting profit or loss on Realisation Account in

their Capital Accounts.

Q. 9. What is meant by Piecemeal Distribution of cash@@ Explain maximum loss

method of piecemeal distribution with the help of an example. [2024

Ans. Piecemeal Distribution of Cash. The assumption of realisation of all the assets and the

payments of all the liabilities as on the date of dissolution is far away from practice. In actual

practice, assets are realised gradually and liabilities are paid gradually depending upon the

amount realised from the sale of assets. Available cash is used in this order: (i) Payments for

realisation expenses; (ii) Payments to external liabilities, that is, other than partners' loans or

capital. When cash is gradually collected, the external liabilities are paid pro rata; (iii) Once

all the liabilities due to outsiders are paid off in full, the amount due to a partner as loan is to

be paid. Where loans are due to more than one partner, the payment, if not sufficient, has to

be made pro rata, i.e., rateably. (iv) When firm's creditors and loans of the partners have been

paid in full, any balance of cash

remaining will be applied in paying the partners the amounts owed to them, i.e., the sum total

of their Capitals and Current Accounts, so far as possible.

Maximum loss method of piecemeal distribution. In this method, it is assumed that every

instalment realised is a final realisation, i.e., the remaining assets will realise nothing.

Following procedure is used for distribution of cash among the partners (after the payment of

outside liabilities and partners' loans):

For Example: Refer to Q. 2, Unit V (Practicals), Page P-107.

Step 1: Calculate the adjusted capital of the partners after making adjustments for

accumulated profits/reserves/losses, transfer of balance of Current Accounts etc.

Step 2: Calculate the maximum loss assuming that the remaining assets are worthless.

Maximum Loss = Total of Balances of Capital Accounts of Partners - Cash available

Step 3: Distribute the maximum loss among the partners in their profit-sharing ratio.

Step 4: Calculate the balance of Capital Accounts of the partners after distributing maximum

loss.

Step 5: If balances of Capital Accounts of all partners (Step 4) show +ve balances (i.e., Cr.

Bal.), distribute the available cash among the partners equal to their respective capital

balances.

If balance of a Capital Account of any partner (Step 4) shows a -ve balance (i.e., debit

balance), transfer the same to the Capital Accounts of other partners (having Cr. balances), in

the ratio of their capitals just before dissolution assuming the partner having -ve balance as

insolvent. Repeat this process till the -ve balance is abolished.

Step 6. Go to Step 2 on next realisation and repeat the process till the final realisation.

Q. 10. Explain the proportionate method of piecemeal distribution.

Ans. Proportionate Capital method of Piecemeal Distribution. According to this method,

a partner, who has contributed more than his proportionate share of capital, is paid first in

priority to the other partners. For identifying the partner who is to be paid first, the partner's

capital, who has contributed the least, is taken as the base.

Suppose there are three partners—X, Y and Z sharing profits in the ratio of 2 : 2 : 1 and

having capitals of Rs. 3,00,000, Rs. 2,00,000 and Rs. 1,70,000 respectively. Dividing the

capital of each partner by the respective proportion of their share in the profit, we find that Y

has contributed the minimum capital i.e., Rs. 1,00,000 per share. On the basis of this

minimum, the capital should have been X Rs. 2,00,000, Y Rs. 2,00,000 and Z Rs. 1,00,000.

Hence both X and Z have surplus capital of Rs. 1,00,000 and Rs. 70,000 respectively.

Dividing the surplus of X and Z by their respective proportion of share in profit, we find that

X's surplus is the minimum, i.e., Rs. 50,000 (i.e., n,00,000/ 2) per share, and on this basis, Z

has an absolute surplus of Rs. 20,000 (i.e., Rs. 70,000 - Rs. 50,000). Hence, the priority of

payment will be first Rs. 20,000 to Z, next Rs. (1,00,000 + 50,000) or, Rs. 1,50,000 to X and

Z in the ratio of 2 :1 and any amount realised over Rs.(20,000 + 1,50,000) or. Rs. 1,70,000 to

X, Y and Z in profit sharing ratio of 2 : 2 :1.

Q. 11. Explain the accounting procedure involved in the sale of the business of a

partnership firm to company.

Ans. Accounting procedure involved in the sale of the business of a partnership firm to a

company.

(i) Sometimes, a partnership firm may desire to expand its business. Hence, it may convert

itself into a company.

(ii) Sometimes the business of a firm may be acquired or taken over by an existing company.

(iii) In either case, the firm is dissolved.

(iv) Firm's accounts are settled using Realisation Account.

(v) In either case, generally the entire business of the firm is sold or transferred to the

company.

(vi) Purchase Consideration (PC) is calculated as:

Agreed Value of all Assets including Goodwill and Cash/Bank Balance - Agreed Value of all

Liabilities except Partners' Capitals or Funds

(vii) Purchase Consideration is payable by the issue of shares or debentures of the company

on making due the purchase consideration, the Purchasing company's Account should be

debited and Realisation Account should be credited. On receipt of purchase consideration.

Cash Account/Equity or Preference shares of Purchasing Co. should be debited at their issue

price and Purchasing Company's Account should be credited.

(viii) In the absence of an agreement as to the division shares or debentures among the

partners. Shares or debentures are ultimately divided amongst partners in the ratio of their

final claims.

Q. 12. State with reasons whether the following statements are 'TRUE' or 'FALSE'.

(i) If the business carried on by a Partnership Firm becomes illegal, it stands dissolved.

(ii) A partner's loan is transferred to Realisation Account.

(iii) Assets, when realised are credited to Realisation Account.

(iv) Any amount realised from the sale of unrecorded asset is credited to Realisation

Account.

(v) Any solvent partner with even a debit balance on the date of dissolution has to bear

the deficiency of the insolvent partner.

(vi) Employees Provident fund is transferred to the capital accounts of the partners in

their profit sharing ratio.

(vii) At the time of dissolution, a partner's private estate is first used to pay off the firm's

debts.

(viii) The Garner vs. Murray rule is applied to settle the claims of the customers' dues.

(ix) Realisation Account and Revaluation Account are the same.

(x) Goodwill at the time of dissolution is treated like any other asset and is closed by

transferring it to realisation account.

(xi) On dissolution, cash balance in hand is transferred to Realisation Account.

Ans. (i) True. A partnership firm is compulsorily dissolved when its business becomes

illegal as per Section 41 of the Partnership Act.

(ii) False. A partner's loan is not transferred to Realisation Account. It is paid separately.

(iii) True. Assets, when realised are credited to Realisation Account.

(iv) True. In case of any unrecorded assets, cash realised from the sale of such assets is

credited to Realisation Account.

(v) False. According to Garner vs. Murray rule, the deficiency in the capital account of an

insolvent partner shall be borne by the solvent partners in the ratio of their capitals on the

date of dissolution. Debit balance in the capital account means non-existence of capital.

(vi) False. It is a liability. Therefore, it is transferred to Realisation Account.

(vii) False. Partner's private estate is used to pay the partner's private liability first.

(viii) False. Garner vs. Murray rule is applied to settle the deficiency in the capital account of

the insolvent partner by the solvent partners in the absence of any agreement to this respect.

(ix) False. Realisation Account is prepared on dissolution of the firm for recording sale of

assets and payment of liabilities. Revaluation Account is made at the time of admission, death

or retirement of a partner to update the value of assets and liabilities.

(x) True. Goodwill at the time of dissolution is treated like any other asset and is closed by

transferring it to Realisation Account.

(xi) False. On dissolution, cash balance in hand is transferred to Cash Account.

UNIT

I

Accounting Process

Q. 1. From the following Trial Balance of Shri Ganesh prepare Trading and Profit &

Loss Account for the year ending 31st December, 2012 and Balance Sheet as on that date

after taking into consideration the adjustments given at the end of the Trial Balance:

[2008

Trial Balance as on 31-12-12

Particulars Dr. (Rs.) Cr.(Rs.)

Sales — 7,40,000

Purchase (adjusted) 6,99,200 —

Wages 900 —

Capital A/c — 48,500

National Insurance 300 —

Carriage In 400 —

Carriage Out 500 —

Lighting 600 —

Rates and Insurance (including premium of Rs. 300 p.a. paid upto

30-6-2012)

400 —

Stock on 31-12-2012 61,250 —

Cash in hand and at Bank 1,750 —

Discount earned — 600

Building 30,000 —

Discount allowed 100 —

Debtors and Creditors 6,000 20,000

Furniture 8,000 —

Dividends received — 300

8,09,400 8,09,400

Adjustments:

(i) National Insurance balance also includes employees contribution Rs. 150.

Wages are shown 'net' after deducting national insurance contribution borne by the

employees,

(ii) Owing to the nature of employment, some employees are housed in the building of the

business. The rental value of such portion is assessed at Rs. 500 p.a.

(iii) Sales as shown in the trial balance include the sale of old furniture (effected half way

through the year) realising Rs. 200. The book value of the furniture at the commencement of

the period was Rs. 300. The depreciation has been written off at 20% p.a.

(iv) The manager is to get a commission of 1/5th

on the net profits after charging his

commission but before considering income from dividend.

(v) Depreciate building by 5%.

Sol. Trading and Profit & Loss Account of Shri Ganesh

Dr. for the year ended 31st December, 2012 Cr.

Particulars Rs. Particulars Rs.

To Purchases (Adjusted) 6,99,200 By Sales 7,40,000

To Wages 900 Less: Sale of furniture 200 7,39,800

Add: Employees' contribution

to National Insurance 150

Add: Rental value of building*-,

500

1,550

To Carriage in 400

To Gross Profit c/d 38,650

7,39,800 7,39,800

To National Insurance 150 By Gross Profit b/d 38,650

(Employer's contribution) By Discount earned 600

To Carriage out 500 By Dividend received 300

To Rates & Insurance 400 By Rental value of building

Less: Prepaid 150 250 occupied by employees 500

To Lighting 600

To Discount allowed 100

To Loss on Sale of fumiture*2 70

To Depreciation:

(i) Building 1,500

(ii) Furniture 1,570 3,070

To Manager's Commission*3 5,835

To Net Profit 29,475

40,050 40,050

Balance Sheet of Shri Ganesh

as on 31st December, 2012

Liabilities Rs. Assets Rs.

Sundry Creditors 20,000 Cash in hand and at Bank 1,750

Manager's Commission due 5,835 Sundry Debtors 6,000

Capital 48,500 Closing Stock 61,250

-Add: Net Profit 29,475 77,975 Prepaid Insurance 150

Furniture 8,000

Less: Book value of furniture

sold 300

7,700

Less: Depreciation 1,540 6,160

Building 30,000

Less: Depreciation 1,500 28,500

1,03,810 1,03,810

Working notes:

*1 Employees' contribution to National Insurance and rental value of building occupied by

workers are part of gross wages!

*2 Calculation of depreciation on furniture and loss on sale of furniture: Rs.

(a) Furniture sold: Book Value at the beginning 300

Less: Depreciation for 6 months [Rs. 300 * 20/100 x 6/12] 30

Less: Selling Price 270

200

Loss on Sale of furniture 70

(b) Furniture in hand [Rs. 8,000 - Rs. 300 (Book Value of furniture sold)] 7,700

Depreciation 20% of Rs. 7,700 1,540

Add: 6 months depreciation on furniture sold (a) 30

Total Depreciation on furniture 1,570

*3 Calculation of Manager's Commission:

Net Profit before dividend income

= Rs.[38,650 + 600 + 500 - 150 - 500 - 250 - 600 - 100 - 70 - 3,070] = Rs. 35,010

Manager's commission = Rs. 35,010 x 20/120 = Rs. 5,835

Q. 2. The following is the Trial Balance of a Trader as on 31st March, 2013:

Particulars Dr. (Rs.) Cr. (Rs.)

Cash in hand 5,000 —

Land and Building 80,000 —

Plant and Machinery 50,000 —

Debtors and Creditors 25.000 40,000

Stock on 1-4-2012 10,000 —

15% Investment on 1-4-2012 20,000 —

Purchases and Sales 95,000 1,90,000

Bank Overdraft — 20,000

Wages 28,000 —

Salaries 16,000 —

Rent, Rates and Taxes 15,000 —

Bad Debts 6,000 —

Drawings 5,000 —

Bills Receivable and Bills Payable 15,000 21,000

Carriage Inwards 6,000 —

Customs Duty on Purchases 16,000 —

Fire Insurance Premium 4,000 —

Advertisement 30,000 —

Provision for Doubtful Debts — 2,000

Interest on Investments — 2,000

Sundry Expenses 11,000 —

Furniture 20,000 —

Value Added Tax — 25,000

Capital — 1,57,000

4,57,000 4,57,000

Additional Information:

(i) Stock on 31st March, 2013 was valued at Rs. 40,000.

(ii) Included in debtors are Rs. 8,000 due from Ram and included in creditors are Rs. 6,000

due to Ram.

(iii) Bills Receivables include a bill of Rs. 5,000 received from Mohan, which has been

dishonoured.

(iv) Sales include Rs. 5,000 for the goods sold on approval basis. Approval was not received

till 31st March. Goods are sold at a profit of 25% on cost.

(v) Wages include Rs. 5,000 spent on erection of machinery on 1-4-2012.

(vi) Create a provision for doubtful debts at 5% on debtors.

(vii) Prepaid rates and taxes amounted to Rs. 2,000.

(vii) Depreciate machinery by 10%.

Prepare Trading and Profit & Loss Account for the year ended 31st March, 2013 and a

Balance Sheet as on that date. [2009

Sol.

Trading and Profit & Loss Account

Dr. for the year ended 31st March, 2013 Cr.

Particulars Rs. Particulars Rs.

To Opening Stock 10,000 By Sales 1,90,000

To Purchases 95,000 Less: On approval 5,000 1,85,000

Add: Customs Duty 16,000 1,11,000 By Closing Stock 40,000

To Wages 28,000 Add: Stock with Customers

Less: For Machine 5,000 23,000 at cost (5,000 x 100/125) 4,000 44,000

To Carriage Inwards 6,000

To Gross Profit c/d 79,000

2,29,000 2,29,000

To Salaries ' 16,000 By Gross Profit b/d 79,000

To Rent, Rates & Taxes 15,000 By Interest on Investments 2,000

Less: Prepaid 2,000 13,000 -Add: Accrued Interest 1,000 3,000

To Bad Debts 6,000 By Provision for Doubtful

Debts2,000

To Fire Insurance

Premium

4,000 Less: New Provision for

To Advertisement 30,000 Doubtful Debts 950 1,050

To Sundry Expenses 11,000 By Net Loss transferred to

To Depreciation on

Machinery

Capital Account 2,450

10/100 [Rs. 50,000 + Rs.

5,000]

5,500

85,500 85,500

Balance Sheet

as on 31st March, 2013

Liabilities Rs. Assets Rs.

Bank Overdraft 20,000 Land & Building 80,000

Bills Payable 21,000 Plant and Machinery 50,000

Creditors 40,000 Add: Installation Cost 5,000

Less: Common debts 6,000 34,000 55,000

Value Added Tax 25,000 Less: Depreciation 5,500 49,500

Capital •1,57,00

0

Furniture 20,000

Less: Drawings 5,000 15% Investments 20,000

1,52,000 Prepaid, rates and taxes 2,000

Less: Net Loss 2,450 1,49,550 Bill Receivable 15,000

Less: Dishonoured 5,000 10,000

Accrued Interest 1,000

Debtors 25,000

Less: Sale on approval (5,000)

Less: Common Debts (6,000)

Add: B/R Dishonoured 5,000

19,000

Less: Provision for

Doubtful Debts 950 18,050

Closing Stock

Rs.(40,000 + 4,000) 44,000

Cash in hand 5,000

2,49,550 2,49,550

Q. 3. Given below is the Trial Balance of Mr. Ramesh as on 31st Dec, 2012:

Particulars Dr. (Rs.) Cr. (Rs.)

Land and Building 1,20,000 —

Office Machinery 70,000 —

Furniture and Fittings 20,000 —

Stock on 1-1-2012 16,000 —

Purchases and Sales 90,000 2,20,000

Salaries 20,000 —

Bad Debts 10,000 —

Debtors and Creditors 35,000 40,000

Sales Tax 10,000 —

Rent. Rates and Taxes 15,000 —

Advertisement 18,000 —

Drawings 5,000 —

Loan to Ashok @ 16% p.a. on 1-7-2012 20,000 —

Wages 33,000 —

Interest on Loan to Ashok — 1,000

Bills Receivable 10,000 —

Trade Mark 8,000 —

Discount 1,000 —

Wages Payable — 2,000

Capital — 1,98,000

Bank Overdraft — 40,000

5,01,000 5,01,000

Additional Information:

(i) The value of Stock on 3i-12-2012, Rs. 30,000.

(ii) Sales include Rs. 5,000 for the goods sold on approval to Hemant. Goods are sold at a

profit of 25% on cost. Approval was not received till 31st Dec.

(iii) Furniture purchased during the year for Rs. 5,000 was wrongly debited to Purchase

Book.

(iv) A cheque of Rs. 8,000 received from customers was deposited in the bank in the last

week of December. It was reported to have been dishonoured.

(v) Free samples worth Rs. 4,000 were distributed during the year.

(vi) Write off further bad debts Rs. 2,000. Also create a provision for doubtful debts at 10%

on debtors.

(vii) Depreciate furniture by 10% and office machinery by 5%.

Prepare Trading and Profit & Loss Account for the year ended 31st

December, 2012 and

a Balance Sheet as on that date. [2020

Sol. Trading and Profit & Loss Account of Mr. Ramesh

Dr. for the year ended 31sf December, 2012 Cr.

Particulars Rs. Particulars Rs.

To Opening Stock 16,000 By Sales 2,20,000

To Purchases 90,000 Less: Sale on approval 5,000

Less: Transf. to Furniture A/c

5,000

2,15,000

85,000 Less: Sales Tax 10,000 2,05,000

Less: Free Samples 4,000 81,000 By Closing Stock 30,000

To Wages 33,000 By Stock with Customers (at

cost)

4,000

To Gross Profit c/d 1,09,000

2,39.000 2,39,000

To Salaries 20,000 By Gross Profit b/d 1,09,000

To Bad Debts 10,000 By Interest on Loan to

Arid: Further Bad Debts 2,000 Ashok 1,000

Add: Provision for Doubtful Add: Accrued Interest 600 1,600

Debts (New) 3,600 15,600

To Rent, Rates and Taxes 15,000

To Advertisement 18,000

To Discount 1,000

To Free Samples 4,000

To Depreciation on Furniture 2,500

To Dep. OR Office Machinery 3,500

To Net Profit trsf. to Capita! A/c 31,000

1,10,600 1,10,600

Balance Sheet of Mr. Ramesh

as on 32s' December, 2012

Liabilities Rs. Assets Rs.

Capital 1,98,000 Land & Building 1,20,000

Add: Net Profit 31,000 Office Machinery 70,000

2,29,000 Less: Depreciation 3,500 66,500

Less: Drawings 5,000 2,24,000 Furniture & Fittings 20,000

Creditors 40,000 Add: Trsf. from

Purchase

5,000

Wages Payable 2,000 25,000

Bank Overdraft 40,000 Less: Depreciation 2,500 22,500

Add: Dishonour of

Cheque

8,000 48,000 Loan to Ashok 20,000

Bills Receivable 10,000

Trade Mark 8,000

Debtors 35,000

Less: Sale on Approval 5,000

30,000

Less: Further Bad Debts 2,000

28,000

Add: Cheque

Dishonoured

8,000

36,000

Less: Provision for

Doubtful Debts 3,600 32,400

Accrued Interest 600

Closing Stock 30,000

Stock with Customers 4,000

3,14,000 3,14,000

Q. 4. From the following Trial Balance and additional information, prepare Trading and

Profit & Loss Account of Mr. Mukul for the year ended 31st

March, 2013 and Balance Sheet

as at that date: [2011

Particulars Dr. (Rs.) Cr. (Rs.)

Capital / Drawings 10,000 1,70,000

Plant and Machinery 1,10,000 —

Sales / Purchases 84,000 1,65,000

Returns 5,000 4,000

Bad debts / Bad debts Recovered 5,000 26,450

Freight inwards 5,000 —

Freight outwards 7,000 —

Discount 2,000 1,000

Commission 4,000 3,000

Rent 3,000 4,000

Interest 2,500 3,000

Office and Administrative Expenses 6,000 —

Selling and Distribution Expenses 10,000 —

Creditors/Debtors 2,15,000 2,02,000

Bills Payable/Bills Receivable 10,000 5,600

Loan 20,000 50,000

Investments 50,000 —

Opening Stock 54,000 —

Cash in hand 5,000 —

Cash at Dena Bank 45,550 —

Bank overdraft at Canara Bank — 20,000

Wages and Salaries 1,000 —

6,54,050 6,54,050

Additional Information:

(i) Closing Stock at market price as at 31st March, 2013 was Rs. 61,500.

However, its cost was Rs. 80,000.

(ii) Provide for depreciation on Plant and Machinery @ 10% p.a.

(iii) Provide interest on capital @ 6% p.a. and an additional capital of Rs. 10,000 was

introduced on 1st Oct. 2012.

(iv) Charge interest on drawings @ 9% p.a.

(v) Goods costing Rs. 10,000 were destroyed due to fire on 30th

March, 2013. The Insurance

Company accepted claim to the extent of 60% only and paid the claim money on 10th

April,

2013.

(vi) Goods worth Rs. 10,000 were sent to a customer on approval basis and have been

accounted for in the books as actual sale. These goods remained unapproved on 31st March,

2013. The cost of such goods was Rs. 8,000.

(vii) Received credit purchase invoice of Rs. 10,500 on 27th March 2013 and recorded in the

books but the goods were not received till the end of the accounting year.

(viii) Manager is entitled to a commission on 5% of net profit after charging the commission.

Sol. Trading and Profit & Loss Account

Dr. for the year ended 32 s' March, 2013 Cr.

Particulars Rs. Particulars Rs.

To Opening Stock 54,000 By Sales A/c 1,65,000

To Purchases 84,000 Less: Returns 5,000

Less: Returns 4,000 Less: Goods on approval 10,000 1,50,000

Less: Loss by fire 10,000 70,000 By Closing Stock*1 61,500

To Freight inwards 5,000 Add: With the Customer*2 8,000

To Wages and Salaries 1,000 Add: Goods in-transit*1 10,500 80,000

To Gross Profit b/f 1,00.000

2,30,000 2,30,000

To Bad Debts 5,000 By Gross Profit 1,00,000

To Freight outwards 7.000 By Bad Debts recovered 26,450

To Discount 2,000 By Discount received 1,000

b/f 14.000 1,2.7,450

To Commission 4,000 By Commission received 3,000

To Rent 3,000 By Rent received 4,000

To Interest 2.5C0 By Interest received 3.000

To Office & Administrative

Expenses

6,000 By Interest on Drawings*4 450

To Selling & Distribution

Expenses

10.000 [Rs. 10,000 x 9/10 x 6/12]

To Depreciation: Plant &

Machinery

11,000

To Interest on Capital:

[Rs. 1.60,000 x 6/100] 9,600

[Rs. 10,000 x 6/110 x 6/12] +

300

9,900

To Goods Lost due to Fire A/c

10,000

Less: Claim accepted 6,000 4,000

To Manager's Commission*5 3,500

To Net Profit 70,000

1,37,900 1,37,900

Balance Sheet

as on 31st March, 2013

Liabilities Rs. Assets Rs.

Capital 1,70.00

0

Plant & Machinery 1,10,00

0

Add: Net Profit 70,000 Less: Depreciation 11,000 99,000

Add: Interest on Capital 9,900 Debtors 2,15,00

0

2,49,90

0

Less: Goods sent on

app.

10,000 2,05,000

Less: Drawings 10,000 Bills Receivable 10,000

Less: Interest on

Drawings

450 2,39,450 Loan 20,000

Creditors 2,02,000 Investments 50,000

Bills Payable 5,600 Cash in hand 5,000

Loan 50,000 Cash at Dena Bank 45,550

Bank overdraft at

Canara Bank

20,000 Closing Stock 61,500

Manager's Commission

Outstanding

3,500 Add: Goods with

CustomerRs.

8,000

Add: Goods in-transit 10;500 80,000

Insurance Claim Due 6,000

5,20,550 5,20,550

Working notes:

*1 Closing Stock is valued @ Rs. 61,500 as per Principle of Cost or Market Price, whichever

is lower.

*2 Goods with customers (not yet approved as sale) are treated as unsold and included in

Closing Stock @ cost Rs. 8,000.

*3 Credit purchase invoice of fl0,500 recorded in the books is alright but as goods were not

received till the end of the year. Hence, the same are treated as part of Closing Stock (Goods

in-transit).

*4 Interest on Drawings @ 9% p.a. is charged for 6 months (average basis).

*5 Manager's Commission is 5/100 (profit before commission)

Assume Commission is 'C. Profit before commission = Rs.[1,37,900 - 64,400] = Rs. 73,500

Hence C = 5/100(Rs. 73,500 - C) 20 C = Rs. 73,500 - C

21 C = Rs. 73,500 C = Rs. 73,500 + 21 = Rs. 3,500

Q. 5. The following is the Trial Balance of Ms. AJIT Traders as on 31st March, 2013:

[2011 Sem

Particulars Dr.(Rs.) Cr. (Rs.)

Drawings and Capitals 19,000 65,690

Stock 1st April 2012 46,800 —

. Purchases and Sales 3,21,700 3,89,600

Returns 8,600 5,800

Debtors and Creditors 24,000 14,800

Discount 1,800 4,110

Bank Loan @ 14% p.a. — 20,000

Carriage Inward 19,600

Rent and Taxes 9,300

Salaries & Wages 4,000

Printing & Stationery 8,700

Interest on Bank Loan 1,100

Travelling Expenses 870

Postage & Telephone 2,000

Insurance 6,400

General Expenses 12,750

Furniture 5.000

Cash Balance 380

Bank Balance 8,000

5,00,000 5,00,000

Adjustments:

(i) Closing Stock on 31-3-2013 was Rs. 78,600.

(ii) Credit purchases of Rs. 400 have not been entered in the Books.

(iii) Printing and Stationery amounting to Rs. 3,600 is to be carried forward.

(iv) Interest on Bank Loan shall be provided for whole year.

(v) Personal purchases of proprietor amounting to Rs. 600 have been recorded in Purchase

Day Book.

(vi) Depreciate furniture by 10%.

(vii) Provision for Bad & Doubtful Debts to be created @ 5% on Debtors and 2% for

Discount on Debtors.

(viii) Included among Debtors Rs. 3,000 due from him and included among Creditors Rs.

1,000 due to him.

Prepare Trading, Profit & Loss A/c for the year ending 31st March, 2013 and a Balance

Sheet as on that date.

Sol.

Trading and Profit & Loss A/c of Ms. AJ1T Traders

Dr. for the year ended 3Vl March, 2013 Cr.

Particulars Rs. Particulars Rs.

To Opening Stock 46,800 By Sales 3.89,600

To Purchases 3,21,700 Less: Sale Returns 8,600 3,81,000

Less: Purchase Returns 5,800 By Closing Stock 78,600

3,15,900

Add: Omitted 400

3,16,300

Less: Charged from Mr. Ajit 600 3,15,700

To Carriage Inward 19,600

To Gross Profit (trans, to P&L

A/c)

77,500

4,59,600 4,59,600

To Discount allowed 1.800 By Gross Profit

To Rent & Taxes 9,300 (From Trading A/c) 77,500

To Salaries & Wages 4,000 By Discount Received 4.110

To Printing & Stationery 8,700

Less: Unused 3,600 5,100

To Interest on Bank Loan 1,100

Add: Unpaid 2,800

n/f 23,000 81,610

To Travelling Expenses 870

To Postage & Telephone 2,000

To Insurance 6,400

To General Expenses 12,750

To Dep. on Furniture 500

To Prov. for Doubtful Debts*2

(5/100 x Rs. 23,000) 1,150

To Prov. for Discount on

Debtors

2/100 [Rs. 23,000 - Rs. 1.150] 437

To Net Profit 34,503

81,610 . 81,610

Balance Sheet of Ms. AJIT Traders

as on 31st March, 2013

Liabilities Rs. Assets Rs.

Capital of Mr. Ajit 65,690 Debtors 24,00

0

Less: P. Purchases 600 Less: Common Dr./Cr. 1,000

Less: Drawinqs 19,000 19,600 Less: Prov. for Doubtful

Debtst2

1,150

46,090 Less: Prov. for Discount 437 21,413

Add: Net Profit 34,503 80,593 Furniture 5,000

Creditors*, 14,800 Less: Depreciation 500 4,500

Add: Purchase Omitted 400 Cash in hand 380

15,200 Bank balance 8,000

Less: Common Dr/Cr. 1,000 14,200 Stationery unused 3,600

Bank Loan 20,000 Closing Stock 78,600

Interest on bank loan unpaid 1,700

1,16,493 1,16,493

Working notes:

*1 Rs. 600 Personal Purchases are and will remain included in Creditors.

*2 Provision for doubtful debts (5%) is created on net Debtors, i.e., (Rs. 24,000 - Rs. 1,000) =

Rs. 23,0O0.

*3 Provision for discount (2%) is calculated on net realisable amount of debtors, i.e.,

Rs. 23,000 - Rs. 1,150 = Rs. 21,850.

Q. 6. From the following Trial Balance of Sachin as on 31st March, 2011 you are

required to prepare a Trading and Profit & Loss Account for the year ended 31st

March, 2011 and a Balance Sheet as on that date, after making the necessary

adjustments as mentioned hereunder: [2022

Particulars Dr.

(Rs.)

Cr.(Rs.)

Sachin's Capital Account — 1,60,000

Sachin's Drawings 24,000 —

Furniture and Fixtures 8,000 —

P'3nt and Machinery 60,000 —

Patents (Ten years from 01-04-2010) 40,000 —

Stock on 01-04-2010 40,000 —

Purchases 1,70,000 —

Salaries 14,800 —

Wages 30,000 —

Sundry Debtors 20,400 —

Sales — 2,64.000

Cash in hand 13,250 —

Land 28,350 —

Loan from Kapil (@ 6% on 01-10-2011) — 20,000

Postage and Fax 3,000 —

Rent, Rates and Taxes 7,200 —

Bad Debts 800 —

Sundry Creditors — 24,000

Discount — 1,200

Carriage Inwards 400 —

Interest on Loan 300 —

Insurance 1,600 —

Travelling Expenses 1,000 —

Sundry Expenses 600 —

Cash at Bank 20,500 —

Bank Overdraft — 15,000

4,84,20

0

4,84,200

Adjustments:

(i) Stork on 31-03-2011 is valued Rs. 30,000.

(ii) A new machine was installed on 01-04-2010 for Rs. 3,000. No entry in this respect was

passed in the books. Wages Rs. 1,000 paid for installation of the machine were debited to

wages account.

(iii) Of the sundry debtors Rs. 200 are bad and to be written off. You are required to maintain

a provision for doubtful debts @ 5% on debtors and a provision for discount on debtors @

2%.

(iv) Goods costing Rs. 2,000 were given away as free samples for publicity.

(v) Depreciate plant and machinery at 20% and furniture and fixtures at

10%.

(vi) Goods costing Rs. 1,000 were sent to a customer for Rs. 1,200 on 27th March, 2011 on

sale or return basis. This was recorded as actual sale.

Sol.

Trading and Profit & Loss Account

Dr. for the year ended 31st March, 2011 Cr.

Particulars Rs. Particulars Rs.

To Opening Stock 40,000 By Sales 2,64,00

0

To Purchases 1,70,000 Less: Goods sent on

Less: Free Samples 2,000 1,68,000 approval basis 1,200 2,62,800

To Carriage Inwards 400 By Closing Stock 30,000

To Wages 30,000 Add: Stock with

Less: Installation Charges 1,000 29,000 customer at cost 1,000 31,000

To Gross Profit c/d 56,400

2,93,800 2,93,800

To Salaries 14,800 By Gross Profit b/d 56,400

To Postage and Fax 3,000 By Discount Received 1,200

To Rent, Rates and Taxes 7,200

To Insurance 1,600

To Travelling Expenses 1,000

To Sundry Expenses 600

To Interest on Loan 300

Add: Accrued Interest 300 600

To Advertisement (Free Sample) 2,000

b/f 30,800 57,600

To Bad Debts 800

Add: Further Bad Debts 200

1,000

Add: New Provision for

Doubtful Debts 950 1,950

To Provision for Discount on

Debtors

361

To Depreciation:

Plant and Machinery:

Old 12,000

New 800

Furniture. 800

Patents 4,000 17,600

To Net Profit transferred

to Capital Account 6,889

57,600 57,600

Balance Sheet of Sachin

as on 31st March, 2011

Liabilities Rs. Assets Rs.

Capital 1,60,000 Cash ,n Hand 13,250

Add: Net Profit 6,889 Cash at Bank 20,500

1.66,889 Closing Stock 30,000

Less: Drawings 24,000 1,42,869 Add: On Approval 1,000 31,000

Loan from Kapil 20,000 Sundry Debtors 20,400

Add: Accrued Interest 300 20,300 Less: On Approval 1,200

Sundry Creditors 24,000 19,200

Creditors for

Machinery

3,000 Less: Bad Debts 200

Bank overdraft 15,000 19,000

Less: Provision for

Doubtful Debts 950

18,050

Less: Provision for

Discount on Debtors 361 17,689

Furniture and Fixture 8,000

Less: Depreciation 800 7,200

Plant and Machinery 60,000

Add: New Machinery 4,000

(3,000 + 1,000) 64,000

Less: Depreciation

(12,000 + 800) 12,800 51,200

Patents 40,000

Less: Written off 4,000 36,000

Land 28,350

2,05,189 2,05,189

Q. 7. From the following balances taken from the ledger of Ms. Jenny on 31st

March, 2013,

prepare the Trading and Profit & Loss Account for the year ended 31st March, 2013 and the

Balance Sheet as on that date: [2013

Particulars Rs. Particulars Rs.

Sundry creditors 19,000 Bad debts 100

Building 15,000 Loan from John 2,500

Income-tax 1,025 Sundry Debtors 9,500

Loose Tools 1,000 Investments 6,500

Cash at Bank 16,200 Bad debts reserve 1,600

Sundry Expenses 1,990 Rent and Rates 850

Bank Interest (Credit) 75 Furniture 3,000

Purchases 1,57,000 Stock (1.4.2012) 27,350

Wages 10,000 Capital 47,390

Carriage Inwards 1,120 Discount allowed 630

Sales 1,85,000 Dividend Income 535

Motor Van 12,500 Drawings 2,000

Cash in hand 335 Bills payable 10,000

Adjustments:

(i) Write off further Rs. 300 as bad debts out of Sundry Debtors and create a reserve for bad

debts at 20% on debtors.

(ii) Dividend accrued on investments is Rs. 135, Rates paid in advance Rs. 100 and wages

owing Rs. 450.

(iii) On 31-3-2013, stock was valued at Rs. 15,000 and loose tools were valued at Rs. 800.

(iv) Write off 5% for depreciation on building and 40% on motor van.

(v) In case of profits, manager is entitled to a commission of 5% on net profits.

(vi) Provide for interest at 12% per annum due on loan taken from John on 1-6-2012.

Sol.

Trading and Profit & Loss Account

Dr. for the year ending 31st March, 2013 Cr.

Particulars Rs. Particulars Rs.

To Opening Stock 27,350 By Sales 1,85,000

To Purchases 1,57,000 By Closing Stock 15,000

To Wages 10,000

Add: Outstanding Wages 450 10,450

To Carriage Inwards 1,120

To Gross Profit c/d 4,080 i

2,00,000 2,00,000

To Sundry expense 1,990 By Gross Profit b/d 4,080

To Bad Debts 100 By Bank Interest 75

Add: Further Bad debts 300 By Dividend Income 535

Prov. for Doubtful Debt (New)

1,840

Add: Dividend accrued

2,240 on Investment 135 670

Less: Bad Debts Reserve 1,600 640 By Net Loss transferred to

Capital A/c

5,385

To Rent and Rates 850

Less: Rates paid in advance 100 750

To Discount allowed 630

To Interest on Loan [Rs. 2.500

12/100 x 10/12]

250

To Depreciation on:

Building 750

Motor Van 5,000

Loose tools 200 5,950

10,210 10,210

Balance Sheet of Mr. Maneet

as at 31st March 2013

Liabilities Rs. Assets Rs.

Sundry Creditors 19,000 Cash in hand 335

Bills Payable 10,000 Cash at Bank 16,200

Loan from John 2,500 Sundry debtors 9,500

Outstanding Wages 450 Less: Further Bad

debts

300

Interest on Loan 250 9,200

Capital 47,390 Less: Reserve for

Less: Drawings 2,000 Doubtful Debts 1,840 7,360

Less: Income-tax 1,025 Closing Stock 15.000

44,365 Investments 6,500

Less: Net Loss 5,385 38,980 Furniture 3,000

Building 15,000

Less: Depreciation 750 14,250

Motor Van 12,500

Less: Depreciation 5,000 7,500

Accrued Dividend 135

Prepaid Rates 100

Loose Tools 800

71,180 71,180

Q. 8. From the following trial balance and information, prepare Trading and Profit &

Loss Account of Mr. Rishabh for the year ended 31st March, 2013 and a Balance Sheet

as on that date: [2014

Particulars Dr. (Rs.) Cr, (Rs.)

Capital •- 1,00,000

Drawings 12,000 —

Land and Building 90,000 —

Plant and Machinery 20,000 —

Furniture 5,000 —

Sales — 1,40,000

Returns outward — 6,000

Debtors 18,400 —

Loan from Gajanand on 1-7-2012 @ 6% p.a — 30,000

Purchases 80,000 —

Returns inward 5,000 —

Carriage 10,000 —

Sundry expenses 600 — .

Printing and Stationery 500 —

Insurance expenses 1,000 —

Provision for bad and doubtful debts — 1,000

Provision for discount on debtors — 380

Bad debts 400 —

Opening Stock on 1-4-2012 21,300 —

Salaries and Wages 18,500 —

Creditors — 12,000

Trade expenses 800 —

Cash at Bank 4,600 —

Cash in hand 1,280 —

2,89,380 2,89,380

Additional information:

(i) Value of Closing Stock on 31-3-2013 was Rs. 27,300.

(ii) Fire occurred on 23rd

March, 2013 and Rs. 10,000 worth of general goods were destroyed.

The insurance company accepted claim for Rs. 6,000 only and paid the claim money on 10th

April, 2013.

(iii) Bad debts amounting to Rs. 400 are to be written off. Provisions for bad and doubtful

debts is to be made at 5% and for discount at 2% on debtors. Make a provision of 2% on

Creditors for discount.

(iv) Received Rs. 6,000 worth of goods on 27th March, 2013 but the Invoice of purchases was

not recorded in Purchase Book.

(v) Rishabh took away good worth Rs. 2,000 for personal use but no record was made

thereof.

(vi) Charge depreciation at 2% on land & building, 20% on plant & machinery and 5% on

furniture.

(vii) Insurance prepaid amounts to Rs. 200.

Sol.

Trading and Profit & Loss Account of Mr. Shyam Lal

Dr. for the year ended 31st March, 2013 Cr.

Particulars Rs. Particulars Rs.

To Opening Stock 21,300 By Sales 1,40,000

To Purchases 80,000 Less: Returns Inward 5,000 1,35,000

Less: Returns Outward 6,000 By Loss due to fire 10,000

74,000 By Closing Stock 27,300

Less: Drawinqs 2,000

72,000

Add: Omitted 6,000 78,000

To Carriage 10,000

To Gross Profit c/d 63,000

1,72,300 1,72,300

To Interest on Loan Outstanding By Gross Profit b/d 63,000

Rs.[30,000 x 6/100 x 9/12] 1,350 By Provision for Discount

To Sundry Expenses 600 on Debtors (Old) 380

To Printing & Stationery 500 Less: Provision for Discount

To Insurance 1,000 on Debtors (New) 342 38

Less: Prepaid 200 800 By Provision for Discount

To Salaries and Wages 18,500 on Creditors* 360

To Trade Expenses 800

To Loss due to fire 10,000

Less: Insurance claim 6,000 4,000

To Depreciation on:

Land & Building 1,800

Plant & Machinery 4,000

Furniture 250 6,050

To Provision for Bad & Doubtful

Debts

(New) 5/100 Rs.[18,400 - 400]

900

Add: Bad Debts 400

Add: Further Bad Debts 400

1,700

Less: Provision for Bad &

Doubtful Debts 1,000 700

To Net Profit trans, to Capital

A/c

30,098

63,398 63,398

Balance Sheet of Mr. Shyam Lai

as on 31st March, 2013

Liabilities Rs. Assets Rs.

Creditors 12,000 Cash in hand 1,280

Add: Omitted Purchases 6,000 Cash at Bank 4,600

18,000 Prepaid Insurance 200

Less: Prov. for Discount 360 17,640 Closing Stock 27,300

Loan from Gajanand @

6%

30,000 Insurance Company (claim due) 6,000

Interest accrued on Loan 1,350 Debtors 18,400

Capital 1,00,00

0

Less: Further Bad

Debts

400

Add: Net Profit 30,098 18,000

1,30,09

8

Less: Prov. for

Doubtful Debts

900

Less: Drawings 17,100

Rs.[12,000 + 2,000] 14,000 1,16,098 Less: Prov. for

Discount

342 16,753

Furniture 5,000

Less: Depreciation 250 4,750

Land & Building 90,000

Less: Depreciation 1,800 88,200

Plant & Machinery 20,000

Less: Depreciation 4,000 16,000

1,65,088 1,65,088

*Note: Making provision for discount on creditors is against the Convention of

Conservatism. As per this Convention expected profit should be ignored.

Q. 9. The following is the Trial Balance of Mr. Lai as at 31st March, 2013:

Particulars Dr. (Rs.) Cr. (Rs.)

Lai's Capital — 86,690

Opening Stock 46,800 —

Purchases and Sales 3,21,700 3,89600

Returns 8,600 5,800

Freight and Carriage 18,600 —

Rent and Taxes 5,700 —

Salaries and wages 9,300 —

Sundry Debtors and Creditors 24,000 14,800

Bank Loan @ 6% p.a. — 20,000

Bank Interest on Loan 900 —

Printing and Advertising 14,600 —

Miscellaneous Income — 250

Cash at Bank 8,000 —

Discount 1,800 4,190

Furniture and Fittings 5,000 —

General Expenses 11,450 —

Insurance 1,300 —

Postage and Telegrams 2,330 —

Cash in hand 380 —

Travelling Expenses 870 —

Drawings 40,000 —

5,21,330 5,21,330

The following adjustments should be made:

(i) Included amongst the Debtors is Rs. 3,000 due from Anand and included among the

creditors Rs. 1,000 due to him.

(ii) Provision for Bad and Doubtful Debts to be created at 5% and Reserve for Discount @

2% on Sundry Debtors.

(iii) Depreciate Furniture and Fittings by 10%.

(iv) Personal Purchases amounting to Rs. 600 had been included in the Purchases Day Book.

(v) Interest on Bank Loan shall be provided for the whole year.

(vi) One quarter of the amount of Printing and Advertising is to be carried forward to next

year.

(vii) Credit purchase invoice amounting to Rs. 400 had been omitted from the books.

(viii) Stock on 31st March, 2013 was Rs. 78,600.

Prepare Trading and Profit & Loss Account for the year ended 31st March, 2013 and

Balance Sheet as on that date. [2014 Nov.

Sol.

Trading ye and Profit & Loss Account of Mr. Lal

Dr. for the ar ended 31st March 2013 Cr.

Particulars Rs. Particulars Rs.

To Opening Stock 46,800 By Sales 3,89,600

To Purchases 3.21,700 Less: Returns Inward 8,600 3,81,000

Less: Returns Outward 5,800 By Closing Stock 78,600

3,15,900

Less: Drawings 600

3,15,300

Add: Omitted Invoice 400 3,15,700

To Freight and Carriage 18,600

To Gross Profit transferred to

Profit & Loss Account 78,500

4,59,600 4,59,600

To Rent and taxes 5,700 By Gross Profit 78,500

To Salaries and Wages 9,300 By Miscellaneous Income 250

To Interest on Bank Loan 900 By Discount 4.190

Add: Outstanding 300 1,200

To Printing & Advertising

14,600

Less: C/f to next year 3,650 10,950

To Discount 1,800

To General Expenses 11,450

To Insurance 1,300

To Postage and Telegram 2,330

To Travelling Expenses 870

To Depreciation on:

Furniture & Fittings 500

To Provision for Bad & Doubtful

Debts 5% of Rs.[24.000-1.000] 1,150

To Provision for Discount

2% of Rs.[24,000-1.000-1,150] 437

To Net Profit transferred to

Capital Account 35,953

82,940 82,940

Balance Sheet of Mr. Lai

as .on 31st March, 2013

Liabilities Rs. Assets Rs.

Lai's Capital 86,690 Cash at Bank 8,000

Less: Drawing 40,000 Cash in hand 380

46,690 Sundry Debtors 24,000

Less: Personal

Purchase

600 Less: Common debt 1,000

46,090 23,000

Add: Net Profit 35,953 82,043 Less: Provision for

Doubtful Debts

1,150

Sundry Creditors 14,800 21,850

Less: Common Debt 1,000 Less: Provision for

Discount

437 21,413

13,800 Closing Stock 78,600

Add: Omitted Invoice 400 14,200 Printing and Stationary 3,650

Bank Loan 20,000 Furniture & Fittings 5,000

Outstanding Interest on

Bar

k Loan 300 Less: Depreciation 500 4,500

1,16,543 1,16,543

Q. 10. Mr. Ajay, a shopkeeper, had prepared the following trial balance from his ledger as on

31st March, 2015:

Particulars Dr. (Rs.) Cr. (Rs.)

Purchases and Sales 6,20,000 8,30,000

Cash in Hand 4,200 —

Cash at Bank 24,000 —

Stock of Goods on 1-4-2014 1,00,000 —

Capital A/c — 5,77,200

Drawings 8,000 —

Salaries 64,000 —

Postage and Telephones 23,000 —

Salesmen's Commission 70,000 —

Insurance 18,000 —

Advertising 34,000 —

Furniture 44,000 —

Printing and Stationery 6,000 —

Motor Car 96,000 —

Bad Debts 4,000 —

Cash Discount 8,000 —

General Expenses 60,000 —

Carriage Inwards 20,000 —

Carriage Outwards 44,000 —

Wages 40,000 —

Debtors and Creditors 2,00,000 80,000

14,87,200 14,87,200

You are required to prepare Trading and Profit & Loss Account for the year ended 31st

March 2015 and Balance Sheet as on that dale. You are also given the following

information:

(i) Stock on 31-03-2015 wasRs. 1,45,000.

(ii) Mr. Ajay had withdrawn goods worthRs. 5,000 during the year.

(iii) Purchases include purchase of furniture worthRs. 10,000.

(iv) Debtors are bad to the extent of Rs. 5,000.

(v) Creditors include a balance of Rs. 4,000 to the credit of Mr. Vijay in respect of which it

has been decided and settled with the party to pay only Rs. 1,000.

(vi) Sales include goods worth Rs. 15,000 sent to Siksham on approval and remaining unsold

as on 31-3-2015. The cost of the goods was Rs. 10,000.

(vii) Provision for Bad Debts is to be created at 5% on Sundry Debtors. (viii) Depreciate

Furniture by 15% and Motor Car by 20%.

(ix) The salesmen are entitled to a commission of 10% on total sales. [2025

Sol.

Trading and Profit & Loss Account

Dr. for the year ended 31s1

March, 2015 Cr.

Particulars

Rs. Particulars Rs.

To Opening Stock 1,00,000 By Sales 8,30,000

To Purchase 6,20,00

0

Less: Goods sent on

Less: Drawings (5,000) approval basis (15,000) 8,15,000

Less: Furniture (10,000

)

6,05,000 By Closing stock 1,45,000

To Carriage Inwards 20,000 Add. Stock on app. (Cost) 10,000 1,55,000

To Wages 40,000

To Gross Profit c/d 2,05,000

9,70,000 9,70,000

To Salaries 64,000 By Gross Profit b/d 2,05,000

To Postage &

Telephones

23,000 By Discount received (Mr. vijay) 3,000

To Salesmen's

commission

70,000 By Net Loss (Transfered to

Add: Outstanding 11,500 81,500 Capital Account) 1,75,800

To Insurance 18,000

To Advertising 34,000

To Printing & Stationery 6,000

To Bad Debts 4,000

Add: Further bad debts 5,000 9,000

To Cash discount 8,000

To General Expenses 60,000

To Carriage outwards 44,000

To Provisions for Bad

debts

9,000

To Depreciation on:

Furniture 8,100

Motor car 19,200 27,300

3,83,800 3,83,800

Balance Sheet

as on 31st March, 2015

Liabilities Assets Rs.

Capital 5,77,200 Cash in Hand Rs.(4,200 - 1,000) 3,200

Less: Drawings (Cash) (8,000) Cash at Bank 24,000

Less: Drawings (Goods) (5,000) Furniture 44,000

Less: Net Loss (1,75,800) 3.88,400 Add: Purchases 10,000

Creditors 80,000 Less: Depreciation (8.100) 45,900

Less: Paid during the year

(4,000)

76,000 Motor Car 96,000

Outstanding Salesmen's

Commission

11,500 Less: Depreciation (19,200) 76,800

Debtors 2,00,000

Less: Further Bad

debts

(5,000)

Less: Good sent on

approval basis (15,000)

1,80,000

Less: Provision for

Bad De

bts

(9,000)

1,71,000

Closing stock 1,45.000

Add: Stock on

Approval

10,000 1,55.000

4,75,900 4,75,900

UNIT

II

A. Depreciation

Q. 1. ABC Ltd. purchased on 1st Jan., 1998 second hand plant for Rs. 30,000 and

immediately spent Rs. 20,000 in overhauling it. On 1st July, 1998 additional machinery of a

cost of Rs. 25,000 was purchased. On 1st July, 2000, the plant purchased on 1

st Jan., 1998

became obsolete and was sold for Rs. 10,000. On that date new machinery was purchased at

cost of Rs. 60,000.

Depreciation was provided at 10% p.a. on the original cost of the asset. In 2001 the company

changed this method of providing depreciation to 15% p.a. W.D.V. with retrospective effect.

Show Plant and Machinery A/c and provision for Depreciation A/c for the years 1998-2001.

[2008

Sol. Note-(Ml -Machine 1; M2-Machine 2; M3-Machine 3.)

Dr. Plant and Machinery Account Cr.

Date Particulars Rs. Date Particulars Rs.

1998 1998

Jan. 1 To Bank A/c (M1) (Cost) 30,000 Dec. 31 By Balance c/d

Jan. 1 To Bank A/c 20,000 M1 (Machine 1) 50,00

0

(Overhauling exp.) M2 (Machine 2) 25,00

0

75,000

July 1 To Bank A/c

(M2)

25,000

75,000 75,000

1999 1999

Jan. 1 To Balance b/d Dec. 31 By Balance c/d

M1 50,000 M1 50,00

0

M2 25,000 75,000 M2 25,00

0

75,000

75,000 75,000

2000 2000

Jan. 1 To Balance b/d July 1 By Bank A/c (Sale of

M1)

10,000

M1 50,000 By Profit & Loss A/c*1 27,500

M2 25,000 75,000 By Provision for Dep.

A/c

12,500

July 1 To Bank A/c: M3

(Machine 3)

60,000 Dec. 31 By Balance c/d

M2 25,00

0

M3 60,00

0

85,000

1,35,000 1,35,000

2001 2001

Jan. 1 To Balance b/d Dec. 31 By Balance c/d

M2 25,000 M2 25,00

0

M3 60,000 85,000 M3 60,00

0

85,000

85,000 85,000

Dr. Provision for Depreciation Account Cr.

Date Particulars Rs. Date Particulars Rs.

1998 1998

Dec.

31

To Balance c/d Dec. 31 By Depreciation A/c

M1 (Machine 1) 5,000 M1 [Rs. 50,000 x

10/100]

5,000

M2 (Machine 2) 1,250 M2 [Rs. 25,000 x 10/100

x 6/12]

1,250

6,250 6,250

1999 1999

Jan. 1 To Balance c/d Jan. 1 By Balance b/d

M1 [Rs. 5,000 + Rs.

5,000]

10,000 M1 5,000

M2 [Rs. 1,250+ Rs.

2,500]

3,750 M2 1,250 6,250

Dec. 31 By Depreciation A/c

M1 [750.000 x 10/100] 5,000

M2 [725,000 x 10/100] 2,500

13,750 13,750

2000 2000

July 1 To Plant & Machinery

A/c

Jan. 1 By Balance b/d

(M1) [Rs. 10.000 + Rs.

2,500]

12,500 M1 10,000

Dec.

31

To Balance c/d M2 3,750 13,750

M2 [Rs. 3,750 +

Rs. 2,500

6,250 July 1 By Depreciation A/c*,

(M1)

2,500

M3 3,000 Dec. 31 By Depreciation A/c

M2 [Rs. 25,000 x

10/100]

2,500

M3 [Rs. 60,000 x 6/12 x

10/100]

3,000

21,750 21,750

2001 2001

Dec.

31

To Balance c/d Jan. 1 By Balance b/d

M2 10,79

8

M2 6,250

M3 12,82

5

23,623 M3 3,000 9,250

Dec. 31 By Deprication A/c*2 3,542

(Additional)

By Depreciation A/c*3

M2 . 2,506

M3 8,325

23,623 23,623

Working notes:

1 Calculation of Profit/Loss on Sale of Machine 1 on 1-7-2000: Rs.

Value on 1-1-1998 50,000

Less; Depreciation for 1998 5,000

Value on 1-1-1999 45,000

Less: Depredation for 1999 5,000

Value on 1-1-2000 40,000

Less: Depreciation for 2000 (1/2 year) 2,500

37,500

Less: Sales Value on 1-7-2000 10,000

Loss on sale of Machine 1 27,500

*2 Calculation of Excess/Short Depreciation of Machine 2 and

Machine 3:

M2(7) M3 (7) Total (7)

A. Depreciation on the original cost (SLM) basis @ 10%

p.a.

6,250 3,000 9,250

B. Depreciation on W.D.V @ 15% for: 1998 1,875* - 1,875

1999 3,469* - 3,469

2000 2,948* 4,500 7,448

8,292 4,500 12,792

C. Additional Depreciation to be adjusted (B - A) i.e., Rs. 2,792 - Rs. 9,250 = Rs. 3,542

For Machine 2 = Rs. 8,292 - Rs. 6,250 = Rs. 2,042

For Machine 3 = Rs. 4,500 - Rs. 3,000 = Rs. 1,500

* Depreciation for 1998 = Rs. 25,000 x 2/100 x 5/12 = 1,875

Depreciation for 1999 = 15/100 (25,000 - 1,875) = Rs. 3,469

Depreciation for 2000 = ,5/100 (25,000 - 1,875 - 3,469) = Rs. 2,948

** Depreciation on Machine 2 for 2000 = Rs. 60,000 x 15/100 x 6/12 = Rs. 4,500

*1 Calculation of Depreciation on Machine 2 and Machine 3 for current year.

Machine 2 Machine 3

Rs. Rs.

A. Cost 25,000 60,000

B. Less: Depreciation (as per*2) 8,292 4.500

C. W.D.V. on 1.1.2001 16,708 55,500

D. Less: Depreciation for 2001 @ 15% p.a. 2,506 8,325

14,202 47,175

Q. 2. M/s S.S. Traders commenced business on 1st January, 2005, when they purchased

machinery of Rs. 7,00,000. They adopted a policy of

(i) charging depreciation at 15% p.a. on diminishing balance basis, and

(ii) charging full year's depreciation on additions made during the year.

Over the year, the purchases of machinery have been:

Date ?

1-8-2006 1,50,000

30-9-2008 2,00,000

On 1st January, 2008, it was decided to change the method of depreciation and rate of

depreciation to 10% on straight line basis with retrospective effect from 1-1-2005, the

adjustment being made in the accounts for the year ending 31st December, 2008.

Prepare Machinery Account and Provision for Depreciation Account for the year 2008.

[2009

Sol. Dr. Machinery Account Cr.

Date Particulars Rs. Date Particulars Rs.

2008 2008

Jan. 1 To Balance b/d*1 8,50,000 Dec. 31 By Balance c/d 10,50,000

Sep.

30

To Bank A/c (M3) 2,00,000

10,50,000 10,50,000

Dr. Provision for Depreciation Account

Date Particulars Rs. Date Particulars Rs.

2008 2008

Dec.

31

To Profit & Loss A/c

(Excess

Jan. 1 By Balance b/d*2 3,11,738

Depreciation written

back)*3

71,738

Dec.

31

To Balance c/d 3,45,000 Dec. 31 By Depreciation A/c 1,05,000

4,16,738 4,16,738

Working notes:

Dr. Machinery Account Cr.

Date Particulars Rs. Date Particulars Rs.

2005 2005

Jan. 1 To Bank A/c (M1) 7,00,000 Dec. 31 By Balance c/d 7,00,000

2006 2006

Jan. 1 To Balance b/d 7,00,000 Dec. 31 By Balance c/d 8,50,000

Aug. 1 To Bank A/c(M2) 1.50,000

8,50,000 8,50,000

2007 2007

Jan. 1 To Balance b/d 8,50,000 Dec. 31 By Balance c/d 8,50.000

Dr. *2Provisi

on for

Deprec

iation

A/c

Cr.

Date Particulars Rs. Date Particulars Rs.

2005 2005

Dec.

31

To Balance c/d 1.05,000 Dec. 31 By Depreciation A/c

(M1) [7,00,000 x 15/100] 1,05,000

1,05,000 1,05,000

2006 2006

Dec.

31

To Balance c/d Jan. 1 By Balance b/d 1,05,000

M1 (1,05.000 + 89.250) Dec. 31 By Depreciation A/c

1,94,250 •(M1) 5,95,000x 15/100

M2 (22.500) 22.500 2,16,750 89,250

(M2) 1,50,000x 15/100

22,500 1,11,750

2,16,750 2,16,750

2008 2007

Dec.

31

To Balance c/r 3,11.738 Jan. 1 By Balance b/d 2,16,750

Dec. 31 By Depreciation A/c

(M1) 5,05,750 x 15/100

75,863

(M2) 127500x 15/100

19.125 94,988

3,11,738 3,11,738

*3 Calculation of difference in the amount of depreciation with effect from 1.1.2005.

Year W.D.V.

(15%)

S.LM.(10%)

Rs. Rs.

2005 1,05,000 70,000

2006 1,11,750 85,000

2007 94,988 85,000

3,11,738 2,40,000

Excess depreciation already charged and to be written back on 31.12.2008

= Rs. 3,11,738 - Rs. 2,40,000 = Rs. 71,738

*t Depreciation for 2008 as per S.L.M.

Machinery bought on 1.1.05 (M,) = Rs. 7,00,000 @ 10% Rs. 70,000

Machinery bought on 1.8.06 (M2) = Rs. 1,50,000 @ 10% Rs. 15,000

Machinery bought on 30.9.08 (M,) = Rs. 2,00,000 @ 10% Rs. 20,000

Total Depreciation Rs. 1,05,000

Q. 3. Mayur Traders, which depreciates its machinery at 10% p.a. according to

Diminishing balance method, had on 1-1-2009 Rs. 4,86,000 balance in Machinery

Account. Part of the machinery purchased on 1-1-2007 for Rs. 60,000 was sold for Rs.

40,000 on 1st July, 2009 and a new machinery at a cost of Rs. 70,000 was purchased and

installed on the same date, installation charges being Rs. 5,000.

Mayur Traders wanted to change its method of depreciation on 1-1-2009 from

Diminishing balance method to Straight line method with effect from 1-1-2007. The rate

of depreciation remains the same as before.

Show Machinery Account for the year 2009. Also show your workings clearly. [2010

Sol.

Dr. Machinery Account Cr.

Date Particulars Rs. Date Particulars Rs.

01-01-09 To Balance b/d 4,86,000 01-07-

09

By Bank A/c 40,000

01-07-09 To Bank A/c By Depreciation A/c 3,000

Rs.(70,000 + 5000) 75,000 (on machine sold)

By Profit & Loss A/c 5,600

(Loss on Sale)*1

31-12-

09

By Profit & Loss A/c 5,400

• (Additional

Depreciation)*2

By Depreciation A/c*3 57,750

By Balance c/d 4,49,250

5,61,000 5,61,000

*1 Calculation of Loss on Sale of Machinery: Rs.

Cost of Machinery sold as on 01-01-07 60,000

Less: Depreciation for 2007 6,000

Book Value on 01-01-2008 54,000

Less: Depreciation for 2008 5,400

Book Value on 01-01-2009 48,600

Less: Depreciation for half year upto 1st July, 2009 as per SLM

[760,000 x 10/100 x 6/12] 3,000

Book Value on the date of Sale (01-07-09) 45,600

Less: Realised Value 40,000

Loss on Sale of Machinery 5,600

*2 Calculation of Additional Depreciation:

Cost of Machinery on 01-01-2007 = Rs. 4,86,000 x 100/81 = Rs. 6,00,000

Book Value on 01-01-2007, excluding the machinery sold = Rs.(6,00,000 - 60,000)

= Rs. 5,40,000

Calculation of Depreciation under Straight Line Method (SLM) and Diminishing

Balance Method or Written-down Value (WDV) Method:

WDV

(Rs.)

SIM

(Rs.)

Book value on 01-01-2007 excluding the machinery sold

Rs.(6,00,000 - 60,000)

5,40,000 5,40,000

Less: Depreciation for 2007 54,000 54,000

Book value on 01-01-2008 4,86,000 4,86,000

Less: Depreciation for 2008 48,600 54,000

Book value on 01-01-2009 4,37,400 4,32,000

Depreciation for 2 years (2008 & 2009) by SLM (Rs. 54,000 + Rs. 54,000) ?

1,08,000

Depreciation for 2 years (2008 & 2009) by WDV (754,000 + Rs. 48,600) 1,02,600

Additional depreciation to be charged due to change in method:

Charged to Profit & Loss A/c 5,400

*3 Depreciation charged for 2009:

On Rs. 5,40,000 @ 10% on SLM 54,000

On machinery purchased on 1st July 2009 for 6 months @ 10% p.a.

(Rs. 75,000 x 10/100 x 6/12) 3,750

57,750

Q. 4. ABC Ltd. purchased on 1st October, 2004, a machinery for Rs. 4,50,000 and spent Rs.

10,000 on freight and transit insurance. On 25th

December, 2004, it further spent Rs. 40,000

on its erection. The machinery was put to use on 1-1-2005. On 1st July 2005, it purchased

another machinery for Rs. 1,00,000. During the year 2006, it spent Rs. 10,000 for repairs on

1-4-2006.

However, on 1-4-2007, a part of the machinery, purchased on 1-10-2004, costing Rs.

2,00,000 was sold for Rs. 1,50,000. On 1-10-2007 it purchased another machinery for Rs.

3,00,000.

On 1st July, 2008, however, machinery purchased on 1

st July, 2005 was sold for Rs.

65,000. Depreciation was charged by the firm @ 10% p.a. by written down value

method. During the year 2008, ABC Ltd. decided to change the method of providing

depreciation and adopted the Straight Line Method of charging depreciation @ 10%

p.a. Prepare Machinery Account as per the provisions of AS-6 upto the year ending 31-

12-2008. [2012

Sol. Dr. Machinery Account Cr.

Date Particulars Rs. Date Particulars Rs.

01-10-04 To Bank A/c(M1) 4,50,000 31-12-

04

By Depreciation A/c Nil

To Bank A/c (Freight 31-12-

04

By Balance c/d—M1 5,00,000

& Insurance)—M1 10,000

25-12-04 To Bank A/c (Erection)

(M1)

40,000

5,00,000 5,00,000

01-01-05 To Balance b/d (M1) 5,00,000 31-12-

05

By Depreciation A/c

01-07-05 To Bank A/c (M2) 1,00,000 M1 [Rs. 5,00,000 x

10/100]

50,000

M2[Rs. 1,00,000 x

10/100 x 6/12]

5,000

By Balance c/d

M1 [Rs. 5,00,000 -

50,000]

4,50,000

M2[Rs. 1,00,000 -

5,000]

95,000

6,00,000 6,00,000

01-01-06 To Balance b/d 31-12-

06

By Depreciation A/c

M1 4,50,000 M1 45,000

M2 95,000 M2 9,500

By Balance c/d

M1[Rs. 4,50,000-Rs.

45,000]

4,05,000

M2 [Rs. 95,000 - Rs.

9,500]

85,500

5,45,000 5,45,000

01-01-07 To Balance b/d 31-03-

07

By Depreciation A/c

M1(a)*1

4,050

M1 4,05,000 By Bank A/c (Sale) M1 1,50,000

(a)

M2 85,500 By Loss on Sale

of Machine A/c*2 7,950

01-10-07 To Bank A/c (M3) 3,00,000 31-12-

07

By Depreciation A/c

M1(b)*3

24,300

M2 8,550

M3 [Rs. 1,00,000 x

10/100 x 3/12]

7,500

31-12-

07

By Balance c/d

M1(b) [Rs. 2,43,000 -

Rs. 4.300]

2,18,700

M2[Rs. 85,500-Rs.

8,550]

76,950

M3 [Rs. 3,00,000 - Rs.

7,500]

2,92,500

7,90,500 7,90,500

01-01-08 To Balance b/d 01-07-

08

By Depreciation A/c

M1(b) 2,18,700 M2 (for 6 months)*4 3,848

M2 76,950 By Bank A/c (M2 Sale) 65,000

M3 2.92,500 By Loss on Machine

sold A/c*5 8,102

31-12-

08

By Profit & Loss A/c*3 8,700

b/f 5,88,150 85,650

By Depreciation A/c

M1(b) 30,000

M2 (Sold) Nil

M3 30,000

By Balance c/d

M1(b) 1,80,000

M2 Nil

M3 2,62,500

5,88,150 5,88,150

Working notes:

*1 Total cost of machine purchased on 01-10-04 was Rs. 5,00,000 and part costing 72,00,000

(two fifth) Ml(a) was sold on 01-04-07.

Hence depreciation on the part is Rs. 4,05,000 x10/100 x 2/5 x 3/12 i.e., Rs. 4,050 for 3

months.

*2 Depreciated value of this part of machine on 01-01-07 is Rs. 4,05,000 x 2/5 , i.e., Rs.

1,62,000

Depreciated value of this part of machine on the date of its sale (i.e., 01-04-2007) is

Rs.(1,62,000 - 4,050) = Rs. 1,57,950. Hence loss on its sale is Rs.(1,57,950 - 1,50,000) = Rs.

7,950.

*3 Difference of depreciation charged during 2008 due to change of method (Effect of

Retrospective change) is calculated as under:

WDV (Rs.) (10% p.a.) SIM (Rs.) (10% p.a.)

Machinery M1(b)

Original cost Rs. 3,00,000 (2005) 30,000 30,000

Value in 2006 (72,70,000) 27,000 30,000

Value in 2007 (72,43,000) 24,300 30,000

Machinery M3 81,300 90,000

Original cost Rs. 3,00,000 (2007) 7,500 7.500

Total Depreciation 88,800 97,500

Difference to be charged as additional depreciation is Rs.(97,500 - 88,800) = Rs. 8,700 and it

is only in respect of Machinery Ml(b). It is to be charged to Profit & Loss A/c of 2008.

*4 Depreciation on Machinery M2 is charged as per w.d.v. method @ 10% p.a. for 6 months,

i.e., Rs. 76,950 x 10/100 x6/12 = Rs. 3,848

*5 Loss on sale of Machinery (M2) = 76,950 - [3,848 + 65,000] = Rs. 8,102

Q. 5. A firm purchased on 1st January, 2008, certain machinery for Rs. 3,88,000 and

spent Rs. 12,000 on its creation. On 1st July, 2008 additional machinery costing Rs.

2,00,000 was purchased. On 1st July, 2010, the machine purchased on 1

st January, 2008,

having become obsolete was auctioned for Rs. 2,00,000 and on the same date a new

machine was purchased for Rs. 3,00,000.

Depreciation was provided for annually on 31st December @ 10% P.A. on original cost

of the machinery. No depreciation need be provided when machinery is sold/auctioned.

In 2011, however, the firm changed the method of providing depreciation and adopted

the method of writing off 15% P.A. on written down value method with retrospective

effect.

Prepare Machinery Account for the years 2008 to 2011. [2012

Sol. Dr. Machinery Account Or.

Date Particulars Rs. Date Particulars Rs.

2008 To Bank A/c

(I)

2008

Jan. 1 Rs.[3,88,000 +12,000] 4,00,000 Dec. 31 By Depreciation A/c:

July 1 To Bank A/c

(II)

2,00,000 I 40,000

II (6 month) 10,000 50,000

Dec. 31 By Balance c/d:

I 3,60,00

0

II 1,90,00

0

5,50,000

6,00,000 6,00,000

2009 To Balance

b/d:

2009

Jan. 1 I 3,60,000 Dec. 31 By Depreciation A/c:

II 1,90,000 5,50,000 I 40,000

II 20,000 60,000

Dec. 31 By Balance c/d:

I 3,20,00

0

II 1,70,00

0

4,90,000

5.50,000 5,50,000

2010 2010

Jan. 1 To Balance

b/d:

July 1 By Bank A/c (1) (Sale) 2,00,000

I 3,20,000 By Loss on sale of

machine

1,20,000

II 1,70,000 4,90,000 Dec. 31 By Depreciation A/c:

July 1 To Bank A/c

(III)

3,00,000 II 20,000

III (6 months) 15,000 35,000

By Balance c/d:

II 1,50,00

0

IIII 2,85,00

0

4,35,000

7,90,000 7,90,000

2011 2011

Jan. 1 To Balance

b/d:

Dec. 31 By Profit & Loss A/c

II 1,50,000 (Extra Depreciation)*1

III 2,85,000 4.35,000 Dec. 31 II 16,338

III 7,500 23,838

Dec. 31 By Depreciation A/c:

II 20,049

• III 41,625 61,674

Dec. 31 By Balance c/d:

II

1,13,61

3

III 2,35,87

5

3,49,488

4,35,000 4,35,000

Working notes: *1 Calculation of Additional Depreciation because of change in method:

Machine II Machine III

SIM 10% (Rs.) WDV 15%

(Rs.)

SLM 10% (Rs.) WDV 15% (Rs.)

Cost Price 2,00,000 2,00,000 Cost 3,00,000 3,00,000

Less: Dep.(2008) 10,000 15.000 less: Dep. (2010) 15.000 22,500

1,90,000 1,85,000 2,85,000 2.77,500

Additional Depreciation

required:

Less: Dep. (2009) 20.000 27.750 Rs. 2,85,000 - Rs. 2,77,500 =

Rs. 7,500

1,70,000 1,57,250 Dep. for 2011 = 15% of Rs. 2,77,500 = Rs.

41,625

Less: Dep. (2010) 20,000 23,588

1,50,000 1.33.662

Additional Pep. required = 1,50,000 - 1,33,662

= Rs. 16,338

Depreciation for 2011 = 15% of Rs. 1,33,662 - Rs. 20,049

Q. 6. A company acquired the following assets as under:

(i) On 01-01-2009 a plant costing Rs. 75,000 and having estimated life of 15 years.

(ii) On 01-04-2009 a plant costing Rs. 37,500 and with an estimated life of 10 years.

(iii) On 01-07-2010 a plant costing Rs. 30,000 and its estimated life 8 years.

(iv) On 01-05-2011 a plant costing Rs. 50,000 having an estimated life of 6 years.

On 01-07-2011 a part of the plant costing Rs. 15,000 on 01-01-2009 was sold for Rs.

8,400. Residual value of each of the plant acquired is 10% of its original cost. Company

charges depreciation on Straight Line Method and closes its books of accounts on 31st

December each years.

Prepare Plant Account for the years 2009, 2010 and 2011. [2012 Nov.

Sol.

Working notes:

*, Annual Depreciation = Cost - Residual value/Useful life

(i) Depreciation on Plant No. 1 = 75,000 - 7,500/15 = Rs. 4,500 p.a.

(ii) Depreciation on Plant No. 2 = 37 500 - 3 750/10 = Rs. 3,375 p.a,

(iii) Depreciation on Plant No. 3 = 30 000- 3 000/8 = Rs. 3,375 p.a.

(iv) Depreciation on Plant No. 4 = 50 000 - 5 000/6 = Rs. 7,500 p.a.

*2 Loss on Sale of (Part) Plant No. 1 = Cost - Depreciation charged till the date of Sale

= Rs. 15,000 - Depreciation [@ Rs. 900 p.a. for 2 1/2 years, i.e., Rs. 2,250]

Written down value = Rs. 15,000 - Rs. 2,250 = Rs. 12,750

Less: Sale proceeds Rs. 8,400

Loss on Sale of Plant No. 1 (Part) Rs. 4,350

Dr. Plant Account Cr.

Date Particulars Date Particulars Rs.

2009 2009 .

Jan. 1 To Bank A/c (Plant I) 75,000 Dec. 31 By Depreciation A/c 7,031

April 1 To Bank A/c (Plant II) 37,500 Rs. 4,500 + (Rs. 3,375 x

9/12)

Dec. 31 By Balance c/d 1,05,469

1,12,500 1,12,500

2010 2010

Jan. 1 To Balance b/d 1,05,469 Dec. 31 By Depreciation A/c

July 1 To Bank A/c (Plant III) 30,000 I 4,500

II 3,375

III (3,375 x 6/12) 1,688 9,563

Dec. 31 By Balance c/d 1,25,906

1,35,469 1,35,469

2011 2011

Jan. 1 To Balance b/d 1,25,906 July 1 By Bank A/c (Sale) 8,400

May 1 To Bank A/c (Plant IV) 50,000 July 1 By Depreciation A/c (I) 450

By Profit & Loss A/c*2 4,350

(Loss on Sale)

Dec. 31 By Depreciation A/c*3 15,350

By Balance c/d 1,47,356

1,75,906 1,75,906

Working notes:

*3 Depreciation for the year 2011 has been worked out as follows: Rs.

On Ist Plant on 4/5

th of Rs. 4,500 (Out of Rs. 75,000 worth, Rs. 15,000 sold

away)

3,600

On IInd

Plant 3,375

On IIIrd

Plant 3,375

On IVth Plant (only for 8 months) 5,000

15,350

Q. 7. On 1st April, 2008, a new plant was purchased for Rs. 80,000 and a further sum of Rs.

4,000 was spent on its installation. On 1st October, 2010, another plant was acquired for Rs.

50,000. Due to an accident on 3rd

January, 2011, the first plant was totally destroyed and was

sold for Rs. 2,000 only. On 21st January, 2012, a second-hand plant was purchased for Rs.

60,000 and a further sum of Rs. 10,000 was spent for bringing the same to use from 15th

March 2012. Depreciation has been provided @10% on straight line basis. It was a practice to

provide depreciation for full year on all acquisitions made at any time during any year and to

ignore depreciation on any item sold and disposed off during the year. None of the assets

were insured. The accounts are closed annually on 31st

March. It is now decided to follow the

rate of 20% on diminishing balance method with retrospective effect in respect of the existing

items of plant and to make the necessary adjustment entry on 1st April, 2012.

You are required to make: (i) Plant Account (ii) Provision for Depreciation Account (iii)

Journal Entries, where necessary. Show all the working notes.

[2013

Sol. Dr. Plant Account Cr.

Date Particulars Rs. Date Particulars Rs.

2008 2009

April 1 To Bank A/c 80,000 Mar. 31 By Balance c/d 84,000

To Bank A/c 4,000

84,000 84,000

2009 2010

April 1 To Balance b/d 84,000 Mar. 31 By Balance c/d 84,000

84,000 84,000

2010 2011

April 1 To Balance b/d 84,000 Jan. 3 By Bank A/c 2,000

Oct. 1 To Bank A/c 50,000 Jan. 3 By Provision for Dep.

A/c

16,800

Jan. 3 By Profit & Loss A/c

(Loss)

65,200

Mar. 31 By Balance c/d 50,000

1,34,000 1,34,000

2011 2012

April 1 To Balance b/d 50,000 Mar. 31 By Balance c/d 1,20,000

2012

Jan. 21 To Bank A/c 60,000

To Bank A/c 10,000

1,20,000 1,20,000

Dr. Provision for Depreciation Account Cr.

Date Particulars Rs. Date Particulars Rs.

2009 2009

Mar. 31 To Balance c/d (M1) 8,400 Mar. 31 By Depreciation A/c . 8,400

2010 2009

Mar. 31 To Balance c/d 16,800 April 1 By Balance b/d 8,400

2010

Mar. 31 By Depreciation A/c 8,400

16,800 16,800

2011 2010

Jan. 3 To Plant A/c 16,800 April 1 By Balance b/d 16,800

2011

Mar. 31 To Balance c/d 5,000 Mar. 31 By Depreciation A/c 5,000

21,800 21,800

2012 2011

Mar. 31 To Balance b/d 17,000 April 1 By Balance b/d 5,000

2012

Mar. 31 By Depreciation A/c 12,000

17,000 17,000

2012

April 1 By Balance b/d 17,000

By Depreciation A/c

(Additional)* 15,000

January Entry

Date Particulars LP, Dr. (Rs.) Cr. (Rs.)

2012 Depreciation A/c* Dr. 15,000

Apr.

1

To Provision for Depreciation A/c 15,000

(Being the provision for additional depreciation made due

to

change in the rate and method with retrospective effect)

* Difference in Depreciation now to be charged @20% on Diminishing Balance Method

Plant Purchased Original Cost Depreciation Total

(Rs.) 2010-22 2011-12 (Rs.)

2010-11 50,000 10,000 8,000 18,000

2011-12 70,000 — 14,000 14,000

10,000 22,000 32,000

Provision already made 5,000 12,000 17,000

Additional Depreciation

required

5,000 10,000 15,000

Q. 8. Metropol Ltd. acquired a machine for Rs. 5,40,000 on 1stApril, 2010. Depreciation

was to be charged at 20% on Straight Line Method. During 2012-13 a modification was made

to improve its technical reliability at a cost of Rs. 50,000 which it was considered would

extend the useful life of the machine for two years. At the same time an important component

of the machine was replaced at a capital cost of Rs. 10,000 because of excessive wear and

tear. Routine maintenance during the said accounting period cost Rs. 7,500. Show the

Machine Account and Provision for Depreciation on Machine Accountc and charges to Profit

& Loss Account for the year ending 31st March, 2013 only. [2023 Nov.

Sol.

Dr. Machinery Account Cr.

Date Particulars Rs. Date Particulars Rs.

01-04-

12

To Balance b/d 5,40,000 31-03-

13

By Balance c/d 6,00,000

2012-

13

To Bank A/c 50,000

To Bank A/c 10,000

6,00,000 6,00,000

Dr. Provision for Depreciation Account Cr.

Date Particulars Rs. Date Particulars Rs.

31-03-

13

To Balance c/d 2,92,800 01-04-

12

By Balance b/d*3 [2

years]

2,16,000

31-03-

13

By Depreciation A/c*4 76,800

2,92,800 2,92,800

Dr. An extract of Profit & Loss Account Cr.

Date Particulars Rs. Date Particulars Rs.

To Repair & maintenance 7,500

To Depreciation on Machinery 76,800

Working notes:

*1 The amount spent on routine maintenance is of revenue nature and not of capital nature

and

hence is not debited to Machinery Account.

*2 The unamortised depreciable amount (i.e., Rs. 5,40,000 - Rs. 2,16,000 + Rs. 50,000 + Rs.

10,000) has been

charged over the revised remaining useful life (i.e., 5 years).

*3 Depreciation for 2 years ending 31st March, 2011 and 2012 = Rs. 5,40,000 x 20/100 x 2 =

Rs. 2,16,000

*4 Depreciation for 2012-13 on Rs.[5,4000 - 2,16000] + Rs. 50,000 + Rs. 10,000 = Rs.

3,84,000 x 20/100 = Rs. 76,800

Q. 9. XYZ Ltd. purchased on 1st Jan., 2009, certain machinery for Rs. 1,94,000 and spent Rs.

6,000 on its erection. On 1st July 2009, additional machinery costing Rs. 1,00,000 was

purchased. On 1st July 2011, the machinery purchased on 1

st Jan. 2009 was auctioned for Rs.

1,00,000 and on the same date, new machinery was purchased at a cost of Rs. 1,50,000.

Depreciation was provided annually on 31st

Dec. @ of 10% p.a. on the original cost. No

depreciation need be charged during the year of sale of machinery for that part of the year

when the machine was used. In 2013, however the company has changed the method of

depreciation to written down value method @ of 15% p.a. from the straight line method.

Show the machinery account for the period from 2009 to 2013. [2024

Sol.

Dr. Machinery Account Cr.

Date Particulars Rs. Date Particulars Rs.

2009 2009

Jan. 1 To Bank A/c Dec. 31 By Depreciation A/c:

(Purchase Price Machine

I)

1,94,000 Machine I 20,000

Jan. 1 To Bank A/c (Erection

Exp.)

6,000 Machine II 5,000 25,000

July 1 To Bank A/c (Purchase

Price

By Balance c/d:

Machine II) 1,00,000 Machine I 1,80,00

0

Machine II 95,000 2,75,000

3,00,000 3,00,000

2010 2010

Jan. 1 To Balance b/d: Dec. 31 By Depreciation A/c:

Machine I 1,80,00

0

Machine I 20,000

Machine II 95,000 2,75,000 Machine II 10,000 30,000

By Balance c/d:

Machine I 1,60,00

0

Machine II 85,000 2,45,000

2,75,000 2,75,000

2011 2011

Jan. 1 To Balance b/d: July 1 By Bank A/c (Machine

I)

1,00,000

Machine I 160,000 July 1 By Loss on sale of

Machine A/c

Machine II 85,000 2,45,000 Rs.(1,60,000- 1,00,000) 60,000

July 1 To Bank A/c (Purchase

Price

1,50,000 Dec. 31 By Depreciation A/c:

Machine III) Machine II 10,000

Machine III 7,500 17,500

b/f 3,95,000 1,77,500

Dec. 31 By Balance c/d:

Machine II 75,000

Machine III 1,42,50

0

2,17,500

3,95,000 3,95,000

2012 2012

Jan. 1 To Balance b/d: Dec. 31 By Depreciation A/c:

Machine II 75,000 Machine II 10,000

Machine III 1,42,500 2,17,500 Machine III 15,000 25,000

Dec. 31 By Balance c/d:

Machine II 65,000

Machine III 1,27,50

0

1,92,500

2,17,500 2,17,500

2013 2013

Jan. 1 To Balance b/d: Dec. 31 By Depreciation A/c 17,756

Machine II 65,000 Additional Dep. due

Machine III 1,27,500 1,92,500 to change of method*,

Dec. 31 By Depreciation A/c

Machine II 8,521

Machine III 17,691 26,212

Dec. 31 By Balance c/d

Machine II

Rs.[56,806 -

8,521)48,285

Machine III

Rs.[1,17,938- 17,691]

1,00,24

7

1,48,532

1,92,500 1,92,500

Working notes: % Calculation of Depreciation or Surplus Depreciation:

Year Straight Line Method (Dep. on

original cost (Old method)

Written Down Value method (New

method)

Machine 11 (Rs.) Machine HI (Rs.) Machine II (Rs.) Machine III (Rs.)

2009 5,000 - 7,500 -

2010 10,000 - 13,875 -

2011 10,000 7,500 11,794 11,250

2012 10,000 15,000 10,025 20,812

35,000 22,500 43,194 32,062

Depreciation is higher as per the new method.

Deficiency of depreciation = Rs.(43,194+32,062) - Rs.(35,000+22,500) = Rs. 75,256 - Rs.

57,500 = Rs. 17,756

Depreciation as per written down value method has been calculated as follows:

Particulars Machine II (Rs.) Machine III

(Rs.)

Cost 1,00,000 1,50,000

Depreciation for 2009 of 6 months at 15% 7,500 -

W.D.V. as on 1.1.2010 92,500

Depreciation for 2010 at 15% 13,875 -

W.D.V. as on 1.1.2011 78,625

Depreciation for 2011 at 15% 11,794 11,250

W.D.V. as pm 1.1.2012 66,831 1,38,750

Depreciation for 2012 10,025 20,812

W.D.V. as on 1.1.2013 56,806 1,17,938

Depreciation for 2013 8,521 17,691

48,285 1,00,247

Q. 10. Ram Ltd. which depreciates its machinery @ 10% p.a. on Diminishing Balance

Method, had on 1st Jan., 2013, Rs. 9,72,000 on the debit side of Machinery

Account. During the year 2013 machinery purchased on 1st Jan., 2011 for Rs. 80,000 was

sold for Rs. 45,000 on 1st July, 2013 and a new machinery at a cost of Rs. 1,50,000 was

purchased and installed on the same date, installation charges being Rs. 8,000. The company

wanted to change the method of Depreciation from Diminishing Balance Method to Straight

Line Method with effect from 1st

January, 2011. Difference of depreciation up 31st December,

2013 to be adjusted. The rate of depreciation remains the same as before. Show Machinery

Account for the year 2013. [2014 Nov.

Sol. Dr. Machinery Account Or.

Date Particulars Rs. Date Particulars Rs.

01.01.1

3

To Balance b/d 9,72,000 01.07.1

3

By By Bank A/c (Sale) 45,000

01.07.1

3

To Bank A/c

(Machinery)

1,50,000 01.07.1

3

By Depreciation A/c

01.07.1 To Bank A/c 8,000 (on machinery sold) 3,240

3 (Installation)

01.07.1

3

By Loss on sale of

Machinery*,

16,560

31.12.1

3

By Profit & Loss A/c

(Dep. for prior

period)*2&3

11,200

31.12.1

3

By Depreciation A/c 1,19,900

31.12.1

3

By Balance c/d 9,34,100

11,30,000 11,30,000

Working notes:

*1 Calculation of Profit or Loss on sale of machinery on 1.7.2013 Rs.

Book Value on 1.1.2011 80,000

Less: Depreciation for 2011 (31.12.2011) 8,000

Written down value (W.D.V.) on 1.1.2012 72,000

Less: Depreciation for 2012 (31.12.2012) 7,200

W.D.V. on 1.1.2013 64,800

Less: Depreciation for 2013 (30.06.2013) 3,240

Book value on 1.7 201 61,560

Less: Sale value on 1.7.2013 45,000

Loss on Sale of Machinery 16,560

*2 Calculation of Book value of machinery after sale (9,72,000 - 64,800) on

1.1.2011

7

Let the Book value on 1.1.2011 100

Less: Depreciation for 2011 10

W.D.V. on 1.1.2012 90

Less: Depreciation for 2012 9

Book value on 1.1.2013 81

Hence, value of machine on 1.1.2011 = Rs. 9,07,200 x 100/81 = Rs. 11,20,000

*3 Calculation of Additional Depreciation as per SLM on Rs. 11,20,000

Depreciation @ 10% 2011 2012

On Rs. 11,20,000 (SLM) 1,12,000 + 1,12,000 = 2,24,000

On Rs. 11,20,000 (WDV) 1,12,000 + 1,00,800 = 2,12,800

Additional Depreciation to be charged = f 11,200

*4 Depreciation for 2013

On Rs. 11,20,000 for 1 year = Rs. 1,12,000

On Rs. 1,58,000 (New Machine) for 1/2 year = Rs. 7,900 Rs. 1,19,900

Q. 11. The Plant and Machinery Account of Noya Ltd. had a debit balance of Rs. 1,47,390 on

April 1, 2014. The company was incorporated in April, 2011 and has been following the

practice of charging full year's depreciation every year on Diminishing Balance System @

15%. In 2014 it was, however, decided to change the method from Diminishing Balance to

Straight Line with retrospective effect from April, 2011 and to give effect the change while

preparing the final accounts for the year ending 31st March, 2014, the rate of depreciation

remaining same as before. In 2014-15, new machinery was purchased at a cost of Rs. 50,000.

All the other machines were acquired in 2011-12.

Show the Plant and Machinery Account from 2011-12 to 2014-15. [2015

Sol. Working notes:

1. Calculation of Purchase Price (Cost): Rs.

Let Cost of machinery 100

Less: Depreciation (2012) (15)

85

Less: Depreciation (2013) (12.75)

72.25

Less: Depreciation (2014) (10.8375)

61.4125

Purchase Price = Rs. 1,47,390/61,4125 x 100 = Rs. 2,40,000

2. Calculation of Depreciation: SLM (Rs.) DBM

(Rs.)

Cost 2,40,000 2,40,000

Less: Depreciation (15%) (2012) (36,000) (36,000)

2,04,000 2,04,000

Less: Depreciation (15%) (2013) 136,000) (30,600)

1,68,000 1,73,400

Less: Depreciation (15%) (2014) (36,000) (26,010)

Value as on 01.04.2014 1,32,000 1,47,390

So, addihonal depreciation due to Change in method - Rs.(1,47,390 - 1,32,000) - Rs. 15,390

Depreciation to be charged during 2014-15:

On Old Machinery = Rs. 36,000

On New Machinery = Rs. 7,500, i.e., (50,000 x 15/100)

Total Depreciation for 2014-15 = Rs.(36,000 + 7,500) = Rs. 43,500

Dr. Plant & Machinery Account Cr.

Date Particulars Rs. Date Particulars Rs.

2011 2012

Apr. 1 To Bank A/c 2,40,000 Mar.

31

By Depreciation A/c 36,000

By Balance c/d 2,04,000

2,40,000 2,40,000

2012 2013

April 1 To Balance b/d 2,04,000 Mar.

31

By Depreciation A/c 30,600

By Balance c/d 1,73,400

2,04,000 2,04,000

2013 2014

April 1 To Balance b/d 1,73,400 Mar.

31

By Depreciation A/c 26,010

By Balance c/d 1,47,390

1,73,400 1,73,400

2014 2015

April 1 To Balance b/d 1,47,390 Mar.

31

By Profit & Loss A/c

To Bank A/c 50,000 (Additional

Depreciation'

15,390

By Depreciation A/c 43,500

By Balance c/d 1,38,500

1,97,390 1,97,390

UNIT

II

B. Inventory Valuation

Q. 1. From the following information find out the value of stock as on 31-3-2007

according to AS-2: [2008

(i) Cost of physical stock on 31-3-2007 was Rs. 2,00,000.

(ii) Cost of stock held as consignee was Rs. 40,000.

(iii) Stock was expected to realise the normal selling price of 150% of cost except for the

following goods:

(1) Goods costing Rs. 10,000 were damaged and an expenditure of 10% of normal selling

price was necessary to realise the cost.

(2) Goods costing Rs. 20,000 were damaged beyond repair and were expected to realise Rs.

5,000 only.

Sol.

Valuation of Stock

as on 31-3-2007

Rs.

Physical Stock as on 31-3-2007 2,00,000

Less: Stock held as consignee 40,000

Cost of Stock 1,60,000

Less: Reduction in value due to valuation at below cost:

(i) Repairable Damaged Goods (10% of 150% of Rs. 10,000) 1,500

(ii) Non-Repairable Damaged Goods (Rs. 20,000 - Rs. 5,000) 15,000 16,500

Value of Stock 1,43,500

Q. 2. A company started its business on 1st January, 2008. It purchased and used raw

material during the year 2008 as stated below: [2009

January 10 800 kgs @ Rs. 62 per kg

February 28 1,200 kgs @ Rs. 57 per kg

March 10 Issued 1,000 kgs

March 26 Issued 500 kgs

May 20 900 kgs @ Rs. 65 per kg

June 28 Issued 600 kgs

Calculate the value of closing stock of raw materials on June 30 according to

(i) Last in First out basis, and

(ii) Weighted average basis, using perpetual inventory system.

Sol. (i) Valuation of Closing Stock of Raw Materials (LIFO)

Date Receipts Issues Balan

ce

Units Rate Value Units Rate Value Units Rate Value

2008 kgs (Rs.) (Rs.) kgs (Rs.) (Rs.) kgs (Rs.) (Rs.)

Jan. 10 800 62 49,600 — — — 800 62 49,600

— — —, — — — 800 62 49,600

Feb. 28 1,200 57 68,400 — — — 1,200 57 68,400

Mar. 10 — — — 1,000 57 57,000 800 62 49,600

— — — — — — 200 57 11,400

Mar. 26 — — — 200 57 11,400 — — —

— — — 300 62 18,600 500 62 31,000

May 20 900 65 58,500 — — — 500 62 31,000

— — — — — — 900 65 58,500

— — — — — — 500 62 31,000

June 28 — — — 600 65 39,000 300 65 19,500

Value of Closing Stock = Rs. 31,000 + Rs. 19,500 = Rs. 50,500

(ii) Valuation of Closing Stock of Raw Materials (Weighted Average)

Date Receipts Issues Balan

ce

Units Rate Value Units Rate Value Units Rate Value

2008 kgs (Rs.) (Rs.) kgs (Rs.) (Rs.) kgs (Rs.) (Rs.)

Jan. 10 800 62 49,600 — — — 800 62 49,600

Feb. 28 1,200 57 68,400 — — — 2,000* 59" 1,18,000

Mar. 10 — — — 1,000 59 59,000 1,000 59 59,000

Mar. 26 — — — 500 59 29,500 500 59 29,500

May 20 900 65 58,500 — — — 1,400 62.86 88,004

June 28 — — — 600 62.86 37,716 800 62.86 50,288

Value of Closing Stock = Rs. 50,288

* Total Units = 800 + 1,200 = 2,000 kgs

** Weighed average = Rs. 1,18,000/2,000 units = Rs. 59

Q. 3. The following are the details of material of Sai Mills: [2010

01-01-2009 Opening Stock 100 units @ Rs. 25 per unit

01-01-2009 Purchases 200 units @ Rs. 30 per unit

15-01-2009 Issued for consumption 100 units

01-02-2009 Purchases 400 units @ Rs. 40 per unit

15-02-2009 Issued for consumption 200 units

20-02-2009 Issued for consumption 200 units

01-03-2009 Purchases 300 units @ Rs. 50 per unit

15-03-2009 Issued for consumption 200 units

Find out the cost of closing stock as on 31-3-2009 according to:

(i) First in first out basis, and

(ii) Weighted average price basis, using perpetual inventory system. Also calculate cost

of closing inventory on LIFO basis under periodic system.

Sol, (i)

Stores Ledger (FIFO: Perpetual)

Date Receipts Issues Balan

ce

Units Rate Value Units Rate Value Units Rate Value

(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

01-01-09 — — — — — — 100 25 2,500

01-01-09 200 30 6,000 — — — 100 25 2,500

— — — — — — 200 30 6,000

15-01-09 100 25 2,600 200 30 6,000

01-02-09 400 40 16,000 — — — 200 30 6,000

— — — — — — 400 40 16,000

15-02-09 — — — 200 30 6,000 400 40 16,000

20-02-09 — — — 200 40 8,000 200 40 8,000

01-03-09 300 50 15,000 — — — 200 40 8,000

— — — — — — 300 50 15,000

15-03-09 — — — 200 40 8,000 300 50 15,000

Value of Closing Stock: 300 units @ Rs. 50 = Rs. 15,000

(ii) Stores Ledger (Weighted Average: Perpetual)

Date Receipts Issues Balanc

e

Units Rate Value UnitRs. Rate Value Units Rate Value

(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

01-01-09 — — — — — — 100 25 2,500

01-01-09 200 30 6,000 300 28.33* 8,500

15-01-09 — — — 100 28.33 2,833 200 28.33 5,667

01-02-09 400 40 16,000 — — — 600 36.11 21,667

15-02-09 — — — 200 36.11 7,222 400 36.11 14,445

20-02-09 — — — 200 36.11 7,222 200 36.11 7,223

01-03-09 300 50 15,000 — — — 500 44.45 22,223

15-03-09 — — — 200 44.45 8,890 300 44.45 13,333

* Issue Price (Weighted Average) = Rs. 8,500/300 = Rs. 28.33

Value of Closing Stock: 300 units @ Rs. 44.45 = Rs. 13,333

Value of Closing Inventories on LIFO basis under periodic system:

Stock of materials (units) = (Op. Stock + Purchases) - (Issued for consumption)

= (100 + 200 + 400 + 300) - (100 + 200 + 200 + 200)

= 1,000 - 700 = 300 units

Cost of Closing Inventory (material) = 100 units @ Rs. 25 = Rs. 2,500

= 200 units @ Rs. 30 = Rs. 6,000

Rs. 8,500

Q. 4. The following are the details of material in respect of a certain item of M/s Ajay &

Company: [2011

1-1-2008 Purchases 600 units @ Rs. 20 each

1-2-2008 Purchases 200 units @ Rs. 24 each

15-2-2008 Sales 200 units @ Rs. 30 each

1-4-2008 Purchases 300 units @ Rs. 30 each

15-4-2008 Sales 400 units @ Rs. 40 each

1-6-2008 Purchases 300 units @ Rs. 40 each

15-6-2008 Sales 350 units @ Rs. 50 each

Find out the cost of closing stock as on 30-6-2008 according to:

(i) First-in-first-out basis, and

(ii) Weighted average price basis, using perpetual inventory system.

Sol. (i) Store Ledger FIFO Basis

Purchases (In) Saks (Out) Slock

Date Units Rate Amount Units Rate Amount Units Rate Amount

(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

01-01-08 600 20 12,000 — 600 20 12,000

01-02-08 200 24 4,800 -- 600 20 12,000

200 24 4,800

15-02-08 — 200 20 4,000 400 20 8,000

200 24 4,800

01-04-08 300 30 9,000 — 400 20 8,000

200 24 4,800

300 30 9,000

15-04-08 — 400 20 8,000 200 24 4,800

300 30 9,000

01-06-08 300 40 12,000 200 24 4,800

300 30 9,000

300 40 12,000

15-06-08 — 200 24 4,800 150 30 4,500

150 30 4,500 300 40 12,000

16,500*

(ii) Weighted Average Cost Basis

Purchases (In) Sales (Out) Stock

Date Units Rate Amount Units Rate Amount Units Rate Amount

(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

01-01-08 600 20 12,000 — 600 20 12,000

01-02-08 200 24 4,800 — 600 20 12.000

200 24 4,800

800 21 16,800

15-02-08 — 200 21 4,200 600 21 12,600

01-04-08 300 30 9,000 — 600 21 12,600

300 30 9,000

900 24 2f,600

15-04-08 — 400 24 9,600 500 24 12,000

01-06-08 300 40 12,000 — 500 24 12,000

300 40 12,000

BOO 30 24,000

15-06-08 — 350 30 10,500 450 30 13,500*

* Value of Closing Stock.

Q. 5. From the following information calculate cost of sales, gross profit, and value of closing

stock for the month of January, 2012, according to FIFO, LIFO and weighted average

method. [2012

Date Particulars No. of Units Rate per Unit (Rs.)

01-01- 2012 Opening Stock 500 8

05-01-2012 Purchased 800 9

14-01-2012 Purchased 700 9

21-01-2012 Purchased 1000 10

23-01-2012 Purchased 500 9

During January 2012 Sold 2900 17

Sol. Opening Stock of Material 500 units

Add: Purchase of Material [800 + 700 + 1000 + 500J 3,000 units

3,500 units

Less: Quantity of Material sold 2,900 units

Closing Stock of Material 600 units

1. FIFO Method:

Cost of Closing Stock = (500 x Rs. 9) + (100 x Rs. 10) = Rs. 4,500 + Rs. 1,000 = Rs. 5,500

Cost of Goods sold = (500 x Rs. 8) + (800 x Rs. 9) + (700 x Rs. 9) + (900 x Rs. 10)

= Rs. 4,000 + Rs. 7,200 + Rs. 6,300 + Rs. 9,000 = Rs. 26,500 ...(i)

Sales Value = 2,900 x Rs. 7 - Rs. 49,300 ...(ii)

Gross Profit - Rs. 49,300 - Rs. 26,500 - Rs. 5,500 = Rs. 7,300

2. UFO Method:

Cost of Closing Stock = (500 x Rs. 8) + (100 x Rs. 9) = Rs. 4,000 + Rs. 900 = Rs. 4,900

Cost of Goods sold = (500 x Rs. 9) + (1,000 x Rs. 10) + (700 x Rs. 9) + (700 x Rs. 9)

= Rs. 4,500 + Rs. 10,000 + Rs. 6,300 + Rs. 6,300 - Rs. 27,100 ...(i) Sales Value = 2,900 x Rs.

17 = Rs. 49,300 ...(ii)

Gross Profit = Rs. 49,300 - Rs. 27,100 - Rs. 4,900 = Rs. 17,300

3. Weighted Average Method:

Cost of Total Goods = (500 x Rs. 8) + (800 x Rs. 9) + (700 x Rs. 9) + (1,000 x Rs. 10) + (500

x Rs. 9)

= Rs. 4,000 + Rs. 7,200 + Rs. 6,300 + Rs. 10,000 + Rs. 4,500 = Rs. 32,000

Total Quantity of Material = [500 + 800 + 700 + 1,000 + 500] = 3,500 units

Weighted Average Price = Rs. 32,000/3,500 = Rs. 9.14 per unit

Cost of Closing Stock = 600 x Rs. 9.14 = Rs. 5,484

Cost of Goods sold = 2,900 x Rs. 9.14 = Rs. 26,506 ...(i)

Sales Value = 2,900 x Rs. 17 = Rs. 49,300 ...(ii)

Gross Profit = Rs. 49,300 - Rs. 26,506 - Rs. 5,484 = Rs. 17,310

Q. 6. Nidhi Ltd. gives following details of raw material:

Oct. 01, 2012 Opening Stock 100 units @ 25 per unit

Oct. 01, 2012 Purchases 200 units @ 30 per unit

Oct. 03, 2012 Issued for Consumption 100 units

Oct. 05, 2012 Purchases 400 units @ 40 per unit

Oct. 10, 2012 Issued for Consumption 200 units

Oct. 15, 2012 Issued for Consumption 200 units

Oct. 21, 2012 Purchases 300 units @ 50 per unit

Oct. 28, 2012 Issued for Consumption 150 units

Oct. 31, 2012 *Wastage of raw material 50 units

Find the value of Closing Stock using perpetual inventory system under following

methods:

(i) First In First Out

(ii) Weighted Average Price [2012 Sem

Sol. Stores Ledger-FIFO Method

Date Receip

ts

Issues Balan

ce

Units Rate Amount Units Rate Amount Units Rate Amount

2022 (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

Oct. 1 100 25 2,500

Oct. 1 200 30 6,000 — ~ — 100 25 2,500

200 30 6,000

Oct. 3 — — — 100 25 2,500 200 30 6,000

Oct. 5 400 40 16,000 — — — 200 30 6,000

— — — 400 40 16,000

Oct. 10 — — — 200 30 6,000 400 40 16,000

Oct. 15 — — — 200 40 8,000 200 40 8,000

Oct. 21 300 50 15,000 — — — 200 40 8,000

300 50 15,000

Oct. 28 — — — 150 40 6,000 50 40 2,000

300 50 15,000

Oct. 31 50 40 2,000 300 50 15,000

(wastag

e)

— —

Closing Inventory = Rs. 15,000

Stores Ledger—Weighted Average Price

Date Receip

ts

Issues Balan

ce

Units Rate Amount Units Rate Amount Units Rate Amount

2012 (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

Oct. 1 100 25 2,500

Oct. 1 200 30 6,000 — — — 300 28.33 8,500

Oct. 3 — — — 100 28.33 2,833 200 28.33 5,667

Oct. 5 400 40 16,000 — — — 600 36.11 21,667

Oct. 10 — — — 200 36.11 7,222 400 36.11 14,445

Oct. 15 — — — 200 36.11 7,222 200 36.11 7,223

Oct. 21 300 50 15,000 — — — 500 44.45 22,225

Oct. 28 — — — 150 44.45 6,668 300 44.45 13,335

Oct. 31 — — — 50 44.45 2,222 350 44.45 15,557

Q. 7. At the beginning of January, 2013, Amit Limited had in stock 200 units @ Rs. 25 per

unit. Further information for the month of January is as follows:

January 2013

2 Purchases : 400 units @ Rs. 30 per unit

5 Sales : 300 units @ Rs. 40 per unit

10 Purchases : 500 units @ Rs. 35 per unit

15 Sales : 200 units @ Rs. 40 per unit

20 Sales : 200 units @ Rs. 42 per unit

25 Purchases : 600 units @ Rs. 36 per unit

28 Sales : 300 units @ Rs. 42 per unit

Calculate the cost of closing inventory and gross profit by FIFO method under:

(i) Perpetual system of inventory

(ii) Periodic system of inventory [2013

Sol. (i) Perpetual System of Inventory

_____________________Stock Ledger-FIFO Method

Date Receiv

ed

Issued Balan

ce

Units Rate Amount Units Rate Amount Units Rate Amount

2013 (Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

Jan. 1 200 25 5,000

Jan. 2 400 30 12,000 — — — 200 25 5,000

400 30 12,000

Jan. 5 — — — 200 25 5,000

100 30 3,000 300 30 9,000

Jan. 10 500 35 17,500 — — — 300 30 9,000

500 35 17,500

Jan.15 -- — — 200 30 6,000 100 30 3,000

500 35 17,500

Jan. 20 -- — — 100 30 3,000

100 35 3,500 400 35 14,000

Jan. 25 600 36 21,600 — — — 400 35 14,000

600 36 21,600

Jan. 28 — — — 300 35 10,500 100 35 3,500

51,100 31,000 600 36 2f,600

Thus Closing Inventory under FIFO method is Rs. 25,100, i.e., (Rs. 3,500 + Rs. 21,600).

It consists 100 units @ Rs. 35 and 600 units @ Rs. 36.

(ii) Periodic System of Inventory. Since FIFO method of pricing issues or cost

determination is followed, the closing entry of 700 units consists of most recent purchases.

Most recent purchases are: 600 units out of the latest purchase @ Rs. 36 and remaining 100

units would be priced out of the second last purchase @ Rs. 35. Therefore, the cost of

Closing Inventory would be as follows:

600 units @ Rs. 36 Rs. 21,600

100 units @ Rs. 35 Rs. 3,500

Closing Inventory Rs. 25,100

It should be noted that closing inventory would be the same under both the systems.

Calculation of Gross Profit:

Perpetual Inventory System Sales = 300 x Rs. 40 + 200 x Rs. 40 + 200 x Rs. 42 + 300 x Rs.

42

= Rs. 41,000

Cost of Goods sold = Rs. 5,000 + Rs. 3,000 + Rs. 6,000 + Rs. 3,000 + Rs. 3,500 + Rs. 10,500

= Rs. 31,000

Gross Profit = Sales - Cost of Goods sold

= Rs. 41,000 - Rs. 31,000 = Rs. 10,000

Periodic Inventory System

Sales = Rs. 41,000

Cost of Goods sold = Opening inventory + Purchases - Closing inventory

= Rs. 5,000 + Rs. 51,100 - Rs. 25,100 = Rs. 31,000

Gross Profit = Sales - Cost of Goods sold

= Rs. 41,000 - Rs. 31,000 = Rs. 10,000

Q. 8. From the following data calculate the value of Closing Stock according to FIFO

using: [2013 Nov.

(i) Periodic Inventory System

(ii) Perpetual Inventory System

Opening Stock October 1 400 Units @ Rs. 750 each

Purchases October 5 600 Units @ Rs. 8 each

October 15 500 Units @ Rs. 9 each

October 25 400 Units @ Rs. 8.50 each

October 30 300 Units @ Rs. 9.50 each

Issues October 3 300 Units

October 10 500 Units

October 17 400 Units

October 26 500 Units

October 31 200 Units

Sol. (i) Value of Closing Stock (FIFO) — Periodic Inventory System:

Units (Rs.)

Opening Inventory (400 units @ Rs. 7.50) 400 3,000

Add: Purchases [Rs. 4,800 + Rs. 4,500 + Rs. 3,400 + Rs. 2,850] 15,550

[600 + 500 + 400 + 300] 1,800 18,550

2,200

Less: Cost of Goods sold [Rs. 2,250 + Rs. 3,950 + Rs. 3,400 + Rs.

4.400 + Rs. 1,700]

15,700

[300 + 500 + 400 + 500 + 200] 1,900

Closing Inventory [300 Units @ Rs. 9.50] 300 2,850

(ii)

Stock Ledger Sheet (FIFO)

Date Receiv Issued Balan

ed ce

Units Rate Amount Units Rate Amount Units Rate Amount

(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

Oct. 1 — — — — — — 400 7.50 3,000

Oct. 3 — — — 300 7.50 2,250 100 7.50 750

Oct. 5 600 8.00 4,800 — — — 100 7.50 750

600 8.on 4,800

Oct. 10 — — — 100 7.501 — — — —

— — — 400 8.00 3,950 200 8.00 1,600

Oct. 15 500 9.00 4,500 — — — 200 8.00 1,600

— — — — — — 500 9.00 4,500

Oct. 17 — — — 200 8.001 — — — —

— — — 200 9.001 3,400 300 9.00 2,700

Oct. 25 400 8.50 3,400 — — — 300 9.00 2,700

— — — — — — 400 8.50 3,400

Oct. 26 — — — 300 9.00 — — — —

— — — 200 8.50 4,400 200 8.50 1,700

Oct. 30 300 9.50 2,850 — — — 200 8.50 1,700

— — — — — — 300 9.50 2,850

Oct. 31 — — — 200 8.50 1,700 300 9.50 2,850

Q. 9. From the following information calculate cost of sales, gross profit, and value of

Closing Stock for the month of January, 2012, according to FIFO, LIFO and weighted

average method.

Date Particulars No. of Units Rate per unit

01-01-2012 Opening Stock 500 Rs. 8

05-01-2012 Purchased 800 Rs. 9

14-01-2012 Purchased 700 Rs. 9

21-01-2012 Purchased 1,000 Rs. 10

23-01-2012 Purchased 500 Rs. 9

During Jan. 2012 Sold 2,900 Rs. 17

Sol. Inventory Valuation

FIFO LIFO WAC

Closing Stock

3,500 - 2,900

500 x Rs. 9 =Rs. 4,500 500 x Rs. 8 = Rs.

4,000

= 600 units 100 x Rs. 10=Rs.

1,000

100 x Rs. 9 = Rs. 900 Rs. 32,000*1/3,500 x 600

Rs. 5,500 Rs. 4,900 Rs. 5,486

Cost of Goods sold = Opening Stock + Purchases - Closing Stock

FIFO = Rs. 4,000 + Rs. 28,000*2 - Rs. 5,500 = Rs. 26,500

LIFO = Rs. 4,000 + Rs. 28,000 - Rs. 4,900 = Rs. 27,100

WAC = Rs. 4,000 + Rs. 28,000 - Rs. 5,486 = Rs. 26,514

Gross Profit - Sales - Cost of Goods sold

FIFO = Rs. 49,300*3 - Rs. 26,500 = Rs. 22,800

LIFO = Rs. 49,300 - Rs. 27,100 = Rs. 22,200

WAC = Rs. 49,300 - Rs. 26,514 = Rs. 22,786

Working notes:

*1 Total cost of 3,500 units

= (500 x Rs. 8) + (800 x Rs. 9) + (700 x Rs. 9) + (1,000 x Rs. 10) + (500 x Rs. 9)

= = Rs. 4,000 + Rs. 7,200 + Rs. 6.300 + Rs. 10,000 + Rs. 4,500 - Rs. 32,000

*2 Purchases = (800 x Rs. 9) + (700 x Rs. 9) + (1,000 x Rs. 10) + (500 x Rs. 9)

= Rs. 7,200 + Rs. 6,300 + Rs. 10,000 + Rs. 4,500 - Rs. 28,000

*3 Safes - 2 900 x Rs. 17 = Rs. 49,300

UNIT

II

C. Income & Expenditure Account

Q. 1. Show what amount will appear in Income & Expenditure A/c for the year ending

31-3-08 and Balance Sheet as at that date in each of the following cases: [2008

Case (i)- Prize Fund as at 31-3-2007 Rs. 12,000. Donations for prizes received during the

year 2007-08 Rs. 2,800; Prizes awarded Rs. 2,000; 10% prize fund investments as at 31-3-

2007 Rs. 12,000. Interest received on prize fund investments Rs. 600.

Case (ii) — Stock of stationery on 31-3-07 Rs. 3,000. Creditors of stationery on 31-3-07 Rs.

2,000; advance paid for stationery carried forward from 2006-07 Rs. 200; Amount paid for

stationery during the year 2007-08 Rs. 10,800, Stock of stationery on 31-3-08 Rs. 500,

creditors for stationery on 31-3-08 Rs. 1,300 and advance paid for stationery on 31-3-08 Rs.

300.

Case (iii) — Subscription outstanding as on 31-3-07 Rs. 2,000, subscription

received in advance on 31-3-07 Rs. 3,000. Amount of subscription received during 2007-08

Rs. 35,000 out of which Rs. 1,500 related to 2006-07 and Rs. 800 related to 2008-09. On 31-

3-08 subscription outstanding for 2007-08 amounted to Rs. 1,300.

Sol. Case (i) Balance Sheet (only Relevant Items)

as at 31st March, 2008

Liabilities Rs. Assets Rs.

Prize fund 12,000 Prize fund investments 12,000

Add: Donations for Prizes 2,800 Accrued interest on prize fund* 600

Interest received on prize

fund

investments 600

Accrued interest* 600

16,000

Less: Prizes awarded 2,000 14,000

Working notes: Rs.

* Yearly interest on prize fund investment [10% of Rs. 12,000] 1,200

Less: Interest received during the year 600

Accrued interest but not received 600

Case (ii)

Dr. Creditors for Stationery Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 200 By Balance b/d 2,000

To Bank A/c 10,800 By Stock of Stationery A/c

To Balance c/d 1,300 (Credit Purchases)* (Bal. Fig.) 10,000

By Balance c/d 300

12,300 12,300

Dr. Stock of Stationery Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 3,000 By Income & Expenditure A/c

To Creditors for Stock of (Stationery consumed) (Bal. Fig.) 12,500

Stationery (Transfer)' 10,000 By Balance c/d 500

13,000 13,000

An extract of Income and Expenditure Account

Dr. for the Year ending on 31st March, 2008 Cr.

Expenditure Rs. Income Rs.

To Stationery Consumed 12,500

An extract of Balance Sheet as at 31st March 2008

Liabilities Rs. Assets Rs.

Creditors for Stationery 1,300 Advance for Stationery 300

Stock of Stationery 500

Case (iii)

Dr. Subscription Account Cr.

Particulars Rs. Particulars Rs.

To Outstanding Subscription A/c 2,000 By Advance Subscription A/c 3,000

To Income & Expenditure A/c By Bank A/c 35,000

(Balancing Figure) 37,000 By Outstanding Subscription A/c

To Advance Subscription 800 2006-07(2,000-1,500) 500

(2008-09) 2007-08 1,300 1,800

39,800 39,800

An extract of Income and Expenditure Account

for the year ended 31st March, 2008

Expenditure Rs. Income Rs.

By Subscription A/c 37,000

An extract of Balance Sheet as at 31st March, 2008

Liabilities Rs. Assets Rs.

Subscription Received Subscription

Outstanding

in Advance 800 2006-07 500

2007-08 1,300 1,800

Q. 2. The following is the Receipts and Payments Account of a Sports Club for the year

ended 31st December, 2008: [2009

Receipts Rs. Payments Rs.

To Balance b/d 7,500 By Salaries 14,000

To Subscriptions (including Rs.

2,000

By Match Expenses 28,000

for the year 2007) 40,000 By 12% Investment on 1-1-2008 40,000

To Donations 15,000 By Sports Materials 15,000

To Life Membership Fees 35,000 By Printing & Stationery 12,000

To Sale of Furniture at book

value

5,000 By Honorarium 5,000

To Entrance Fees 10,000 By Furniture 15,000

To Int. on 10% Investments for

full year

20,000 By Magazines & Journals 10,000

To Match Fund 40,000 By Books 35,000

To Donation for Building Fund 45,000 By Municipal Taxes 6,000

To Sale of Newspapers 2,500 By Balance c/d 40,000

2,20,000 2,20,000

Additional information:

(i) The position of the Club on January 1, 2008 was as follows :

Subscriptions due - Rs. 3,000

Furniture - Rs. 10,000

Books - Rs. 20,000

Building - Rs. 1,25,000

Stock of Sports Materials - Rs. 4,500

Creditors for Printing - Rs. 2,500

(ii) The Club has 1,000 members each paying an annual subscription of Rs. 50. 20 members

paid their subscription in advance in 2007. In the year 2008, subscription was received in

advance from 15 members.

(iii) Municipal Taxes paid every year on 1st April.

(iv) One member donated a Billiard Table worth Rs. 50,000.

(v) Books were worth Rs. 46,000 on 31st December, 2008 and stock of sports

materials on that date amounted to Rs. 4,000.

(vi) 12% investments include Rs. 30,000 invested from donations received for building fund.

Prepare Income and Expenditure Account for the year ended 31st December, 2008 and a

Balance Sheet as on that date.

Sol. Income and Expenditure Account

Dr. for the year ended 31st December, 2008 Cr.

Expenditure Rs. Income Rs.

To Salaries 14,000 By Subscriptions 40,000

To Sports Materials: Add: Advance Received

Opening Stock 4,500 (2007) 1,000

Add: Purchases 15,00

0

Outstanding

19,50

0

(2008) 11,750*1 12,750

Less: Closing Stock 4,000 15,500 52,750

To Printing & Stationery 12,00

0

Less: Outstanding

Less: Outstanding for

2007

2,500 9,500 (2007) 2,000

To Honorarium 5,000 Received in Advance

To Magazines and

Journals

10,000 (2008) 750 2,750 50,000

To Depreciation on Books By Donations 15,000

[20,000 + 35,000 - 46,000 ] 9,000 By Interest on 10% Investments 20,000

To Municipal taxes 6,000 By Sale of Newspapers (Old) 2,500

Add: Prepaid (2007) 1,500 By Accrued Interest on 12%

7,500 Investment [10,000 x 12/100]*2 1,200

Less: Prepaid (2008) 1,500 6,000

To Surplus (i.e., excess of

Income over Expenditure) 19,700

88,700 88,700

Balance Sheet as on 31st December, 2008

Liabilities Rs. Assets Rs.

Subscriptions Received in

Advance

750 Building 1,25,000

Match Fund 40.000 Furniture 10,000

Less: Match Expenses 28,000 12,000 Addition 15,000

Donation for Billiard

Table

50,000 25,000

Donation for Building

Fund

45,000 Less: Sold 5,000 20,000

Add: Accrued interest 3,600 48,600 Books (20,000 + 35,000 - 9,000) 46,000

(Rs. 30,000 x 12/100) Stock of Sports

Materials

4,000

Capital Fund*3 3,68,00

0

10% Investments 2,00,000

Add: Surplus 19,700 12% Investment 40,000

Life Membership Fees 35,000 Accrued Interest on 12%

Investment

4,800

Entrance Fees 10,000 4,32,700 Billiard Table 50,000

Prepaid Municipal

Taxes

1,500

Subscriptions

Outstanding

2007 (3000 - 2000) 1,000

2008 11,750 12,750

Cash in hand 40,000

5,44,050 5,44,050

Working notes:

*1 Dr. Subscription Account (2008) Cr.

Particulars Rs. Particulars Rs.

To Subscriptions Due A/c 3,000 By Subscriptions Received in

To Income & Expenditure A/c

(1000x50)

50,000 Advance A/c (20 "50), 2007 1,000

To Subscriptions Received in

Advance

By Receipts & Payments A/c 40,000

(50 x 15)*2 2008 750 By Subscnptions Due:

2007 (3,000 - 2,000) 1,000

2008 (Balancing figure) 11,750

53,750 53,750

12% investment on 1.1.2008:Rs.40,000

[Include Rs.30,000 investment [Remaining investment (Rs.40,000-

From donation received for building. Rs.30,000=Rs.10,000)is general investment

So intrest of this (Rs.30,000%12/100= (10,000*12/100=Rs.1,200) is treated as

Rs.3,600)Should be credited to income and credited to income & expenditure

building fund] A/c]

Balance sheet as on 31 december,2007

Liabilities Rs. Assets Rs.

Creditors for Printing 2,500 Cash in hand 7,500

Subscriptions Received in

Advance

Prepaid Municipal Taxes 1,500

(20 x 50) 1,000 Subscriptions Outstanding 3,000

Capital Fund {Balancing figure) 3,68,000 Furniture 10,000

Books 20,000

Building 1,25,000

10% Investments (Rs. 20,000 x 2,00,000

100/10)

Stock of Sports Material 4,500

3,71,500 3,71,500

Q. 3. From the following Income and Expenditure Account of Mayur Club for the year ended

31st December, 2009, prepare Receipts and Payments Account for the year ended 31

st

December, 2009 and a Balance Sheet as on that date: [2020

Income and Expenditure Account

for the year ended 31-12-2009

Expenditure Rs. Income Rs.

To Salaries 48,000 By Subscriptions 1,56,000

To Stationery 3,200 By Donations 16,000

To Postage & Telephone 6,400 By Billiard Room Collections 14,000

To Rates and Taxes 12,000 By Entrance Fees 24,000

To Repairs 16,000 By Interest from Investments 5,400

To Table Tennis Balls 2,400

To Printing of Magazines 4,000

To Electricity Charges 12,000

To Billiard Room Expenses 6,000

To Upkeep of Ground 18,800

To Depreciation on Assets 4,000 .

To Excess of Income over

Expenditure

82,600

2,15,400 2,15,400

Additional Information:

11.2009 (Rs.) 32.22.2009 (Rs.)

Fixed Assets 96,000 64,000

Investments 54,000 94,000

Cash at Bank 3,600 Rs.

Subscriptions Outstanding 6,000 10,000

Subscriptions received in advance 12,000 20,000

Expenses Outstanding: Stationery 1,200 800

Telephone 600 400

Electricity 1,400 600

Sol. Receipts and Payments Account

for the year ended 32s' December, 2009

Receipt Rs. Payment Rs.

To Balance b/d: Cash at Bank 3,600 By Salaries 48,000

To Subscriptions 1,56,000 By Stationery 3,200

Add: Subscriptions O/s Add: Outstanding (2008) 1,200

(2008) 6,000 4,400

Subscriptions received Less: Outstanding (2009) 800 3,600

in advance (2009) 20,000 26,000 By Postage & Telephone 6,400

1,82,000 Add: Outstanding (2008) 600

Less: Subscriptions O/s 7,000

(2009) 10,000 Less: Outstanding (2009) 400 6,600

Subscriptions received By Rates & Taxes 12,000

in advance (2009) 12,000

22,000

1,60,000 By Repairs 16,000

To Donations 16,000 By Table Tennis Balls 2,400

To Billiard Room Collections 14,000 By Printing of Magazines 4,000

To Entrance Fees 24,000 By Electricity Charges 12,00

0

To Interest from Investments 5,400 Add: Outstanding (2008) 1,400

To Sale of Fixed Assets*2 28,000 13,40

0

Less: Outstanding (2009) 600 12,800

By Billiard Room

Expenses

6,000

By Upkeep of Ground 18,800

By Investments 40,000

By Balance c/d: Cash at

Bank

80,800

2,51,000 2,51,000

Balance Sheet as on 31st December 2009

Liabilities Rs. Assess Rs.

Capital Fund*, 1,44,40

0

Fixed Assets 64,000

Add: Surplus 82,600 2,27,000 Investments 54,000

Subscriptions received in advance 20,000 Add: Addition 40,000 94,000

Creditors for Stationery 800 Cash at Bank 80,800

Telephone Bill

Outstanding

400 Subscriptions

Outstanding

10,000

Electricity Bill

Outstanding

600

2,48,800 2,48,800

Working notes:

*1 Calculation of Capital Fund as on 1-1-2009:

________________________________Balance Sheet as on 1-1-09

liabilities Rs. Assets Rs.

Subscription received in

advance

12,000 Fixed Assets 96,000

Expenses Outstanding: Investments 54,000

Stationery 1,200 Cash at Bank 3,600

Telephone 600 Subscriptions Outstanding 6,000

Electricity 1,400 3,200

Capital Fund (Bal. figure) 1,44,400

1,59,600 1,59,600

*2 Dr. Fixed Assets Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 96,000 By Depreciation A/c 4,000

By Bank A/c (Sale) (Bal. figure) 28,000

By Balance c/d 64,000

96,000 96,000

Q. 4. Prepare Income and Expenditure Account of Lions Club for the year ending 31st

March 2009 and a Balance Sheet as on that date from the following:

[2012

Receipts and Payments Account

for the year ending 31-3-2009

Receipts Rs. Payments Rs.

To Balance b/d: By Salary:

Cash 20,000 Secretary 60,000

Bank 1,20,000 1,40,000 Staff 50,000 1,10,000

To Subscription: By Canteen expenses 1,20,000

2007-08 5,000 By Miscellaneous

Expenses

25,000

2008-09 55,000 By Construction of

building

1,50,000

2009-10 4,000 64,000 By Balance c/d:

To Interest from Bank 10,000 Cash 13,000

To Sale of Old

Furniture

20,000 Bank 40,000 53,000

To Sale of Newspapers 4,000

To Canteen Collections 1,20,000

To Donation for

Building

1,00,000

4,58,000 4,58,000

Additional Information: 31-03-08 (Rs.) 31-03-09 (Rs.)

(i) Subscription outstanding as on 10,000 6,000

(ii) Subscription in advance as on 2,000 4,000

(iii) Salary of staff outstanding 10,000 20,000

(iv) Canteen expenses prepaid 10,000 15,000

(v) Furniture at book-value 1,40,000 —

(vi) Buildings (under construction) 1,50,000 4,00,000

(vii) Fixed Deposits with Bank 1,00,000 1,00,000

(viii) Building fund 2,00,000 —

Book value of furniture sold during the year was Rs. 15,000 and depreciation on

furniture is charged @ 10% p.a. on closing balance.

Sol.

Dr. Income and Expenditure Account Cr.

Expenditure Rs. Income Rs.

To Salary: By Subscriptions 55,000

Secretary 60,000 Add: Reed, last year 2,000

Staff 50,000 Add: Outstanding*1 1,000 58,000

Less: Paid for last year (10,000) By Interest from Bank 10,000

Add: O/s for current year 20,000 60,000 By Sale of Newspapers 4,000

To Canteen Expenses 1,20,000 By Canteen Collections 1,20,000

Add: Paid last year 10,000 By Profit on Sale of

Less: Prepaid C/year (15,000) 1,15,000 Old Furniture 20.000

To Miscellaneous Expenses 25.000 Less: Book Value 15,000 5,000

To Depreciation on furniture 12,500 By Excess of Expenses over

Income

(Deficit) 75,500

2,72,500 2,72,500

Workings notes: Balance Sheet

as on 31-03-2008

Liabilities Rs. Assets Rs.

Capital Fund (Balancing figure) 3,38,000 Cash 20,000

Subscriptions received in

Advance

2,000 Bank 1,20,000

Salary (Staff) outstanding 10,000 Subscriptions outstanding 10,000

Building Fund 2,00,000 Canteen Expenses Prepaid 10,000

Furniture 1,40,000

Buildings (Under construction) 1,50,000

Bank Fixed Deposits 1,00,000

5.50.000 5.50.000

Balance Sheet

as on 31-03-2009

Liabilities Rs. Assets Rs.

Capital Fund Furniture 1.40,00

0

as on 01-04-08 3,38,000 Less: Sale (15,000)

Less: Deficit 75,500 2.62,500 1,25,00

0

Building Fund Less: Depreciation (12,500) 1,12,500

Opening Balance 2,00,000 Buildings (under construction). 4,00,000

Add: Donation received 1,00,000 3,00,000 Bank Fixed Deposits 1,00,000

Buildings (under construction*2

unpaid

1,00,000 Cash 13,000

Subscriptions received in

advance

4,000 Bank 40,000

Salaries Outstanding A/c 20,000 Subscriptions Due:

2007-08 5,000

2008-09*! 1,000 6,000

Canteen Expenses

Prepaid

15,000

6,86,500 6,86,500

Working note:

*1 Subscriptions outstanding for 2008-09 Rs.

= (Sub. o/s on 31 03-09) - (Sub. o/s on 31-03-08 - Reed, for 2007-08)

= Rs. 6,000 - (10.000 - 5,000) = Rs.(6,000 - 5,000) - Rs. 1,000

*2 Building (under construction) Rs.

Closing Balance 4,00,000

Less: Opening Balance 1,50,000

2,50,000

Less: Payments made during the year 1,50,000

Buildings (under construction): Unpaid 1,00,000

Q. 5. The following particulars relate to Ganeev Sports Club: [2011 Nov.

Income and Expenditure Account

Dr. for the year ending on 31st March, 2011 Cr.

Expenditure Rs. Income Rs.

To Secretary's Salary 15,000 By Entrance Fees 1,05,000

To Printing and Stationery 22,000 By Subscriptions 1,56,000

To Advertising 16,000 By Rent 28,000

To Audit Fees 5,000 By Interest on Investments 12,000

To Fire Insurance 10,000

To Depreciation:

Sports Equipments 90,000

Furniture 5,000

To Surplus 1,38,000

3,01,000 3,01,000

Receipts and Payments Account

for the year ending on 31st March, 2011

Receipts Rs. Payments Rs.

To Balance b/d 42,000 By Secretary's Salary 10,000

To Entrance Fee: By Printing and Stationery 26,000

2010 10,000 By Advertising 16,000

2011 1,00,000 By Fire Insurance 12,000

To Subscriptions: By 12% Investments

2010 6,000 (Purchased on 1-10-2011) 2,00,000

2011 1,50,000 By Furniture 20,000

2012 4,000 By Balance c/d 58,000

To Rent received 24.000

To Interest received 6,000

3,42,000 3,42,000

The assets as on 31st March, 2010 included Club Grounds and Pavilion Rs. 4,40,000, Sports

Equipments Rs. 2,50,000 and Furniture and Fixtures Rs. 40,000. Subscriptions in arrear on

that date were Rs. 8,000. Subscriptions received in advance on that date were Rs. 2,000.

Creditors for Printing and Stationery on that date were Rs. 5,000.

Prepare the Balance Sheet as on 31-3-2010 and 31-3-2011.

Sol. Balance Sheet of Ganeev Sports Club

Dr. as on 31st March, 2010 Cr.

Liabilities Rs. Assets Rs.

Subscriptions Received in

Advance

2,000 Clubs Grounds & Pavilion 4,40,000

Printing and Stationery

Outstanding

5,000 Sports Equipments 2,50,000

Capital Fund (Balancing Figure) 7,83,000 Furniture & Fixtures 40,000

Subscriptions in Arrear 8,000

Entrance Fee (Receivable as

per Receipts & Payments A/c) 10,000

Cash in hand (Opening Bal. as

per Receipts & Payments A/c) 42,000

7,90,000 7,90,000

Balance Sheet of Ganeev Sports Club

as on 31st March, 2011

Liabilities Rs. Assets Rs.

Expenses Unpaid Cash in Hand (As per R&P A/c) 58,000

(i) Secretary's Salary 1,000 Subscriptions in Arrears

(ii) Printing & Stationery 5,000 for 2009-10 2,000

(iii) Audit Fees 5,000 for 2010-11 4,000 6,000

Subscriptions Received in Entrance Fees Receivable 5,000

Advance 4,000 Rent Receivable 4,000

Capital Fund Interest on Investments

Receivable

6,000

As on 1-4-10 7,83,000 Fire Insurance Prepaid 2,000

Add: Surplus 1,38,000 9,21,000 12% Investments 2,00,000

Sports Equipments 2,50,00

0

Less: Depreciation 90,000 1,60,000

Furniture & Fixtures as

on 1-4-10

40,000

Add: New 20,000

60,000

Less: Depreciation 5,000 55,000

Clubs Grounds & Pavilion 4,40,000

9,36,000 9,36,000

Q. 6. The following is Income and Expenditure Account of Delhi Club for the year

ended 31st March, 2012: [2012

Income and Expenditure Account

for the year ended 31st March, 2012

Expenditure Rs. Income Rs.

Salaries 39,000 Subscriptions 1,36,000

Rent 9,000 Donations 10,000

Printing 1,500

Insurance 1,000

Audit Fees 1,500

Games and Sports 7,000

Subscription Written off 700

Miscellaneous Expenses 29,000

Loss on Sale of Furniture 5,000

Depreciation on: Sports

equipment

12,000

Furniture 6,200

Excess of Income over

Expenditure

34,100

1,46,000 1,46,000

Additional Information: 31-03-11 (Rs.) 31-03-12 (Rs.)

Subscription in Arrears 5,200 7,400

Advance Subscription 2,000 3,000

Outstanding Exp: Rent 1,000 1,600

Salaries 2,400 700

Audit Fees 1,000 1,500

Sports Equipment less Depreciation 50,000 48,000

Furniture less Depreciation 60,000 55,800

Prepaid Insurance — 300

Book value of Furniture sold is Rs. 14,000. Entrance fee capitalized Rs. 8,000. On 1st

April 2011, there was no cash in hand but bank overdraft was Rs. 30,000. On 31st

March, 2012, cash in hand amounted to Rs. 1,700 and the rest was bank balance.

Prepare Receipt and Payment Account of the club for the year ended 31st March, 2012.

Sol. Receipts and Payments Account of Delhi Club

for the year ended 31st March, 2012

Receipt Rs. Payments Rs.

To Subscription^ 1,34,100 By Balance b/d: Bank overdraft 30,000

To Donations 10,000 By Salary 39,000

To Sale of Furniture 9,000 Add: Opening Outstanding 2,400

To Entrance fee 8,000 41,400

Less: Closing Outstanding 700 40,700

By Rent 9,000

Add: Opening Outstanding 1,000

10,000

Less: Closing 1,600 8,400

By Insurance 1,000

Add: Closing Prepaid 300 1,300

By Printing 1,500

By Audit Fees 1,500

Add: Opening Outstanding 1,000

2,500

Less: Closing Outstanding 1,500 1,000

By Games & Sports 7,000

By Mislleaneous Expenses 29,000

By Sports eguipment*2 10,000

By Furniture*3 16.000

By Balance c/d:

Cash 1,700

Bank (Balancing figure) 14,500 16,200

1,61,100 1,61,100

Working notes:

*1 Dr. Subscription Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d (Opening

Arrears)

5,200 By Balance b/d (Opening

Advance)

2,000

To Income & Expenditure A/c 1,36,000 By Income & Expenditure A/c

(written off)

700

To Balance c/d By Bank A/c (Balancing figure) 1,34,100

(Advance at the end) 3,000 By Balance c/d (Closing Arrears) 7,400

1,44,200 1,44,200

*2

Dr. Sports Equipment Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 50.000 By Depreciation A/c 12,000

To Bank A/c (Purchase—Bal.

figure)

10,000 By Balance c/d 48,000

60.000 60,000

*3

Dr. Furniture Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 60,000 By Depreciation A/c 6,200

To Bank A/c (Purchase-Bal.

figure)

16,000 By Bank A/c (Sale) 9,000

By Income & Expenditure A/c 5,000

(Loss on Sale)

By Balance c/d 55,800

76,000- 76,000

Q. 7. Given below is the Receipts and Payments Account of Resident Welfare

Association Sports Club for the year ending 31-12-2012.________[2013

Receipts Rs. Payments Rs.

Balance b/d 2,100 Purchase of sports material 7,000

Subscription (including Rs. 1,400 Stationery 5,700

for 2011 and Rs. 1,500 for 2013) 18,000 Honorarium 3.000

Life membership fees 9,000 Upkeep of ground 2,600

Legacies 2,000 Salaries 7,000

Entrance fees 4,000 Telephone charges 2,000

Donations for building fund 18,000 Refreshments 1,400

Hire of club hall 5,000 Tournament expenses 6,000

Sale of old bats and balls 500 Miscellaneous expenses 1,000

Sale of old furniture 700 10% Investment (on 1-7-2006) 12,000

Furniture (part payment) 5,000

Balance c/d 6,600

Total 59,300 Total 59,300

Additional Information:

1-1-12 31-22-12

(Rs.) (Rs.)

Subscription due 1,400 2,400

Subscription received in advance — 1,500

Audit fees outstanding — 1,000

Creditors for stationery 600 500

Stock of stationery - 800

Stock of sports material 1,100 1,500

Building 40,000 40,000

Furniture was sold on 1-1-2012 at its book value. On the same date furniture for Rs. 8,000

was purchased. Depreciation is to be charged at 10% p.a. on furniture.

Prepare Income and Expenditure Account for the year ended 31-12-2012 and Balance

Sheet as on that date.

Sol. Income and Expenditure Account

for the year ended 31st Dec. 2012

Expenditure Rs. Income Rs.

To Sports material consumed*1 6,600 By Subscriptions*3 17,500

To Stationery*2 4,800 By Hire of Club hall 5,000

To Honorarium 3,000 By Sale of old Bats & Balls 500

To Upkeep of ground 2,600 By Accrued Interst on

To Salaries 7,000 Investment*4 600

To Telephone charges 2,000 By Deficit (Balancing figure) 12,600

To Refreshments 1,400

To Tournament expenses 6,000

To Miscellaneous expenses 1,000

To Outstanding Audit fee 1,000

To Depreciation on furniture 800

36,200 36,200

Balance Sheet

as on 31st December, 2012

Liabilities Rs. Assets Rs.

Subscription received in advance 1,500 Cash in hand 6,600

Audit fees Outstanding 1,000 Subscription due 2,400

Creditors for Stationery 500 Stock of Stationery 800

Creditors for Furniture 3,000 Stock of Sports material 1,500

Entrance Fees 4,000 Building 40,000

Life membership fees 9,000 Furniture 8,000

Legacies 2,000 Less Depreciation 800 7,200

Donation for building fund 18,000 Accrued Interest on Investment 600

Capital fund*5 44,700 10% Investment 12,000

Less: Deficit 12,600 32,100

71,100 71,100

Working notes: *1 Rs.

Purchase of Sport material 7,000

Add: Opening Stock 1,100

8,100

less: dosing Stock 1,500

Sport material consumed 6,600

*2 Rs.

Payment for Stationery 5,700

Less Creditors for last year 600

5,100

Add: Creditors for current 500

5,600

Stock 800

4,800

*3 Dr. Subscription Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 1,400 By Balance b/d

To Income & Expenditure A/c

(Bal. fig.)

17,500 By Bank A/c 18,000

To Balance c/d By Balance c/d 2.400

(Received in advance for 2013) 1,500

20,400 20,400

*4 Accrued Interest on Investment = Rs. 12,000 x 10/100| x 6/12 = Rs. 600

*5 Balance Sheet

Dr. as on 1st January, 2012 Cr.

Particulars Rs. Particulars Rs.

Creditors for Stationery 600 Subscription due 1,400

Capital Fund Stock of Sports Materials 1,100

(Balancing figure) 44,700 Buildings 40,000

Furniture 700

Cash 2,100

45.300 45.300

Q. 8. Income and Expenditure Account of a Hospital as on 31st December, 2013 is given

to you: [2014

Expenditure Rs. Income Rs.

Salaries 2,35,000 Subscriptions 2,20,000

Diet Expenses 20,000 Donations 40,000

Rent and Rates 5,000 Interest on Investment

Insurance 2,000 for full year @ 5% p.a. 90,000

Office Expenses 8,000 Miscellaneous Receipts 6,000

Surgery and Dispensary Expenses 10,000

Depreciation: Building 37,500

Furniture 1,200

Instruments 8,000 46,700

Surplus of Income over

Expenditure

29,300

3,56,000 3,56,000

The other informations supplied to you are as under:

31.12.2012 (Rs.) 31.12.2013 (Rs.)

Cash in hand 2,000 1,500

Cash at Bank 54,000 ?

Building 7,50,000 ?

Furniture 20,000 ?

Instruments 35,000 ?

Subscriptions outstanding 15,000 45,000

Subscriptions received in advance 6,000 8,000

Salaries outstanding 18,000 20,000

Instruments purchased during the year were Rs. 5,000.

You are required to prepare the Receipts and Payments Account of the Hospital for the

year ended December, 2013 and the Balance Sheet as on that date. Submit your

workings clearly.

Sol. Receipts and Payments Account of Charitable Hospital

for the year ending on 31st December 2013

Receipts Rs. Rs. Payments Rs. Rs.

Balance b/d: Cash 2,000 Salaries 2,35,000

Bank 54,000 56,000 Add: Outstanding

(2012)

18,000

Subscriptions 2,20,00

0

2,53,000

Add: Outstanding (2012) 15,000 Less: Outstanding

(2013)

20,000 2,33,000

2,35,00

0

Diet Expenses 20,000

Less: Outstanding (2013) 45,000 Rent and Rates 5,000

1,90,00

0

Insurance 2,000

Add: Advance (2013) 8,000 Office Expenses 8,000

1,98,00

0

Surgery and Dispensary

expenses

10,000

Less: Advance (2012) 6,000 1,92,000 Instruments 5,000

b/f 2,46,000 b/f 2,83,000

Donations 40,000 Balance c/d:

Interest on Investments 90,000 Cash 1,500

Miscellaneous Receipts 6,000 Bank (Balancing figure) 99,500

3,84,000 3,84,000

Balance Sheet

as on 3P' December 2013

Liabilities Rs. Rs. Assets Rs. Rs.

Capital Fund* 26.52,00

0

Building 7,50,000

Add: Surplus 29,300 26,81,300 Less: Depreciation 37,500 7,12,500

Subscriptions Received in

Advance

8,000 Furniture 20,000

Outstanding Salary 20,000 Less: Depreciation 1,200 18,800

Instruments 35,000

Add: Purchases 5,000

40,000

Less: Depreciation 8,000 32.000

Investments 18,00,000

Subscriptions outstanding 45,000

Cash in hand 1,500

Cash at Bank 99,500

27,09,300 27,09,300

* Calculation of Opening Capital Fund:

Balance Sheet

Dr. as on 31st December 2012 Cr.

Liabilities Rs. Assets Rs.

Subscriptions Cash in hand 2,000

Received in Advance 6,000 Cash at Bank 54,000

Salaries Outstanding 18,000 Building 7,50,000

Capital Fund 26,52,000 Furniture 20,000

(Balancing figure) Instruments 35,000

Subscriptions outstanding 15,000

Investment [Rs. 90,000 x 100/5] 18,00,000

26,76,000 2,76,000

Q. 9. The following is the Receipts and Payments Account of a Charitable Trust for the year

ending 31st March, 2013: [2014 Nov.

Receipts and Payments Account

Receipts Rs. Payment Rs.

To Balance b/d: By Capital Payments:

Cash 10,000 Investments 1,00,000

Bank 1,40,000 Furniture 40,000

To Capital funds: Clinical Equipment 50,000

Donation for Clinic Fund 60,000 By Revenue Payments:

To Revenue Receipts: Salaries 62,000

Interest 3,00,000 Medicines 1,40,000

Rent 1,20,000 Scholarships 1,00,000

Sundries 30,000 Printing etc. 8,000

Travelling 10,000

By Balance c/d: Cash 16,000

Bank 1,34,000

6,60.000 6,60,000

Trust fund originally consisted of:

Building valued at Rs. 15,00,000, 9% Government Securities Rs. 32,00,000 (Nominal Value

Rs. 35,00,000) and Bank balance Rs. 1,00,000.

Bank Interest receivable at the end of year was Rs. 25,000. Interest accrued on investments

on 1-4-2012 was Rs. 35,000 and on 31-3-2013 Rs. 50,000. The Trust owed suppliers of

medicines Rs. 12,000 and Rs. 8,000 on 1-4-2012 and 31-3-2013 respectively. Furniture stood

in the books at Rs. 30,000 on 1-4-2012.

You are required to prepare final accounts of the Trust for the year ending 31st March,

2013 after providing 2 1/2% depreciation on the book value of the building and 20% on

other assets.

Sol. Income and Expenditure Account

for the year ended 31st March, 2013

Expenditure Rs. Rs. Income Rs. Rs.

To Salaries A/c 62,000 By Interest A/c 3,00,000

To Medicines 1,40,0

00

Add: Bank Interest Receivable

25,000

Add: Current year 0/s 8,000 Less: Accrued Previous year

(35,000)

1,48,0 Add: Accrued Current year 3,40,000

00 50,000

Less: Previous year 0/s 12,000 1,36,000 By Rent 1,20,000

To Scholarships 1,00,000 By Sundries 30,000

To Printing etc. 8,000

To Travelling 10,000

To Depreciation on:

Building @ 2 1/2% 37,500

Furniture @ 20% 14,000

Clinical equipment 10,000 61,500

To Surplus—Excess of Income

over expenditure 1,12,500

4,90,000 4,90,000

Balance Sheet

as on 31st March, 2013

Liabilities Rs. Rs. Assets

Rs.

Rs.

Trust Fund 48,00,000 Cash 16,000

Add: Donations 60,000 48,60,000 Bank 1.34,000

Revenue Fund 1,03,000 Bank Interest Accrued 25.000

Add: Surplus 1.12,500 2,15,500 Accrued Interest on Investment 50,000

Suppliers for medicines 8,000 9% Government securities

(Face value - Rs. 35,00,000) 32,00,000

New Investments 1,00,000

Furniture 30,000

Add: New 40,000

70,000

Less: Depreciation 14,000 56,000

Clinical Equipment 50,000

Less: Depreciation 10,000 40,000

Building 15,00,0

00

Less: Depreciation 37,500 . 14,62.500

50,83,500 50,83.500

Balance Sheet

as on 1st April, 2012

Liabilities Rs. Rs. Assets Rs. Rs.

Suppliers of medicines 12,000 Cash 10,000

Trust Fund* 48,00,000 Bank 1,40,000

Revenue Fund (Balancing figure) 1,03,000 Accrued Interest on Investment 35,000

Investment at cost 32,00,000

Furniture 30,000

Building 15.00,000

49,15,000 49,15,000

Note: Alternatively Trust fund and Revenue Fund may be treated as Capital fund. Since

Capital and Revenue items are shown separately in Receipts and Payments Account the same

have been treated separately. Trust fund as given is Rs. 48,00,000 which consists of:

Building Rs. 15,00,000

9% Government Securities Rs. 32,00,000

Bank BalanceRs. 1,00,000

Q. 10. The following is the Receipts and Payments Account of Ekta Women's Welfare

Club for the year ended December 31, 2014: [2015

Receipts Rs. Payments Rs.

Balance b/d 7,250 Salary 12,500

Subscriptions 81,750 Stationery 1,700

Donations 3,000 Electricity Charges 9,550

Grant from Government 15,000 Insurance 7,500

Sale of Newspapers 300 Equipments 30,000

Proceeds of Charity Show 16,500 Petty Expenses 500

Interest on investments @ 10% Expenses on Charity Show 12,900

for full year 7,000 Newspapers 1,000

Sundry Income 400 Lecturers' Fee 16,500

Honorarium to Secretary 12,000

Balance c/d 27,050

1,31,200 1,31,200

Additional Information:

1.1.2014 (Rs.) 31.12.2014 (Rs.)

Outstanding Salaries 1,200 1,800

Insurance Prepaid 700 300

Subscriptions Outstanding 3,750 2.500

Subscription Received in Advance 1,750 1,000

Electricity Charges Outstanding — 1,250

Stock of Stationery 2,250 700

Equipments 25,600 50,200

Building 1,20,000 1.14,000

Prepare:

(a) Income and Expenditure Account for the year ended December 31, 2014 and

(b) Balance Sheet as on that date.

Income & Expenditure Account

Dr. for the year ended 31st December, 2014 Cr.

Expenditure Rs. Income Rs.

To Salary 12,500 By Subscription 81,75

0

Less: O/s Salary (2013) (1,200

)

Add: Advance (2013) 1,750

Add: O/s Salary (2014) 1,800 13,100 Less: Outstanding (2013) (3,75

0)

To Stationery 1,700 Add: Outstanding (2014) 2,500

Add: Stationery (2013) 2,250 Less: Advance (2015) (1,00

0)

81,250

Less: Stationery (2014) (700) 3,250 By Donations 3,000

To Electricity charges 9,550 By Grant from Government 15,000

Add: Outstanding (2014) 1,250 10,800 By Sale of Newspapers 300

To Insurance 7,500 By Proceeds of Charity Show 16,500

Add: Prepaid (2013) 700 By Interest on Investment 7,000

Less: Prepaid (2014) (300) 7,900 By Sundry Income 400

To Depreciation on*:

Equipments 5,400

Building 6,000 11,400

To Petty Expenses 500

To Expenses on Charity Show 12,900

To Newspapers 1,000

To Lecturers' fee 16,500

To Honorarium to Secretary 12,000

To Surplus 34,100

1,23,450 1,23,450

Balance Sheet

as on 1st January, 2014

Liabilities Rs. Assets Rs.

Capital fund (Balancing figure) 2,26,600 Cash 7,250

Outstanding Salaries 1,200 Insurance Prepaid 700

Advance Subscription 1,750 Outstanding Subscription 3,750

Stock of Stationery 2,250

Equipments 25,600

Building 1,20,000

Investments (7,000 x 100/10) 70,000

2,29,550 2,29,550

Balance Sheet

as on 31st December, 2014

Liabilities (Rs.) Assets (Rs.)

Capital fund 2,26,600 Cash 27,050

Add: Surplus 34,100 2,60,700 Insurance Prepaid 300

Outstanding Salaries 1,800 Outstanding Subscription 2,500

Advance Subscription 1,000 Stock of Stationery 700

Electricity charges outstanding 1,250 Equipments 50,200

Building 1,14,000

Investments 70,000

2,64,750 2,64,750

Working notes: *Depreciation = Opening Value of Asset + Purchased during the year -

Closing value Equipment - Rs.(25,600 + 30,000 - 50,200) = Rs. 5,400

Building = Rs.(1,20,000 + NIL - 1,14,000) = Rs. 6,000

UNIT

III

Accounting for Hire Purchase and Instalment System

Q. 1. X Ltd. purchased 2 machines costing Rs. 80,000 each from Y Ltd. on 1st Jan. 2010 on

hire purchase system. The terms were:

Payment on delivery Rs. 20,000 for each machine; Balance in 3 equal instalments together

with interest at 10% p.a. to be paid at the end of each year.

X Ltd. writes off 25% depreciation each year on the diminishing balance method. X Ltd. paid

the instalments due on 31.12.10 and on 31.12.11 but could not pay the final instalment. Y

Ltd. repossessed one machine adjusting its value against the amount due. The repossession

was done on the basis of 30% p.a. depreciation on the Diminishing Balance Method. The

vendor spent Rs. 8,560 for the repairs and overhauling of the machine and sold it for Rs.

40,000.

Pass Journal entries in the books of Y Ltd. and prepare Ledger Accounts in the books of 'X'

Ltd. [2008

Sol. Ledger of X Ltd.

Dr. Machinery Account Cr.

Date Particulars Rs. Date Particulars Rs.

2010 2010

Jan. 1 To Y Ltd. 1,60,000 Dec. 31 By Depreciation A/c 40,000

[Rs. 1,60,000 x 25/100]

By Balance c/d 1,20,000

1,60,000 1,60,000

2011 2011

Jan. 1 To Balance b/d 1,20.000 Dec. 31 By Depreciation A/c 30,000

[Rs. 1,20,000 x 25100]

By Balance c/d 90,000

1,20,000 1,20,000

2012 2012

Jan. 1 To Balance b/d 90,000 Dec. 31 By Depreciation A/c 22,500

[Rs. 90,000 x 25/100]

By Y Ltd. (Machine

seized)*1

27,440

By Profit & Loss A/c

(Loss

6,310

on machine seized)

By Balance c/d

(W.D.V. of

one machine still in

possession) 33,750

90,000 90,000

Dr. Y Ltd. Cr.

Date Particulars Rs. Date Particulars Rs.

2010 2010

Jan. 1 To Bank A/c 40,000 Jan. 1 By Machines A/c 1,60,000

Dec. 31 To Bank A/c 52,000 Dec. 31 By Interest A/c 12,000

To Balance c/d 80,000 [10% of Rs. 1,20,000]

1.72,000 1,72,000

2011 2011

Dec. 31 To Bank A/c 48,000 Jan. 1 By Balance b/d 80,000

Rs.[40,000 + 8,000] Dec. 31 By Interest A/c 8,000

To Balance c/d 40,000 [10% of Rs. 80,000]

88,000 88,000

2012 2012

Dec. 31 To Machine A/c*1 27,440 Jan. 1 By Balance b/d 40,000

To Balance c/d 16,560 By Interest A/c 4,000

[10% of Rs. 40,000]

44,000 44,000

In the Books of Y Ltd.

Sol.

Journal Entries

Date Particulars L.F. Dr. Cr.

(Rs.) (Rs.)

2010

Jan. 1 X Ltd. Dr. 1,60,000

To Hire Purchase Sales A/c 1,60,000

(Being the goods sold on hire purchase)

Jan. 1 Bank A/c Dr. 40,000

To X Ltd. 40,000

(Being the receipt of down payment)

Dec. 31 X Ltd. Dr. 12,000

To Interest A/c 12,000

(Being the interest charged @ 10% on Rs.

1,20,000)

Dec. 31 Bank A/c (Rs. 40,000 + Rs. 12,000) Dr. 52,000

To X Ltd. 52,000

(Being the first instalment received alongwith

interest)

Dec. 31 Interest A/c Dr. 12,000

To Profit & Loss A/c 12,000

(Being the transfer of interest)

2011

Dec. 31 X Ltd. Dr. 8,000

To Interest A/c 8,000

(Being the interest charged @ 10% on Rs.

80,000)

Dec. 31 Bank A/c [Rs. 40,000 + Rs. 8,000] Dr. 48,000

To X Ltd. 48,000

(Being the second instalment received alongwith

interest)

Dec. 31 Interest A/c Dr. 8,000

To Profit & Loss A/c 8,000

(Being the transfer of interest)

2012

Dec. 31 X Ltd. Dr. 4,000

To Interest A/c 4.000

(Being the interest charged @ 10% on Rs.

40,000)

Dec. 31 Goods Repossessed A/c*1 Dr. 27,440

To X Ltd. 27,440

(Being one machine repossessed on default)

Dec. 31 Goods Repossessed A/c Dr. 8,560

To Bank A/c 8,560

(Being expenses incurred on the repair and

overhauling

of the machine repossessed)

Bank A/c Dr. 40,000

To Goods Repossessed A/c 40,000

(Being repossessed machine sold)

Goods Repossessed A/c Dr. 4,000

To Profit & Loss A/c 4,000

(Being Profit*2 on sale of goods

repossessed)

Working notes:

*1 Value of one machine on repossession:

2020 (Rs.) 2011 (Rs.) 2012 (Rs.)

Cost/W.D.V in the beginning 80,000 56.000 39,200

Depreciation for the year @ 30% 24,000 16,800 11,760

56,000 39,200 27,440

*2 Goods Repossessed Account

Particulars Rs. Particulars Rs.

To Y Ltd 27.440 By Bank A/c 40,000

To Bank A/c (expenses) 8.560

To Profit & Loss A/c (Profit on 4,000

Sale)

40,000 40,000

Q. 2. Jain and Co. have a hire purchase department. Goods are sold on hire purchase at cost

plus 33 1/3%. From the following particulars prepare Shop Stock Account, H.P. Debtors

Account, H.P. Stock Account and H.P. Adjustment Account: [2008

1-4-12 Rs.

Stock out with H.P. customers at S.P. 4,000

Stock at shop at cost 500

Instalments due 300

1-4-12 to 31-3-13

Cash received from customers 8,000

Goods repossessed (instalment due Rs. 2,000) valued at 500

(this has been included at the end at Rs. 500)

31-3-13

Instalments due (customers paying) 500

Stock at shop at cost (including goods repossessed) 1,200

Stock out with H.P. customers at S.P. 4,600

Verify your results by preparing Hire Purchase Trading Account.

Sol.

Dr. Shop Stock Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 500 By Cost of Goods Sold A/c* 8,100

To Purchases A/c (Balancing

figure)

8,300 [Rs. 10,800 x 3/4]

By Balance c/d [Rs. 1,200 - Rs.

500]

700

8,800 8,800

*Note: Balancing figure of Hire Purchase Stock Account Rs. 10,800.

Dr. Hire Purchase (H.P.) Debtors Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 300 By Cash A/c 8,000

To Hire Purchase Stock A/c 10,200 By Repossessed Stock 500

(Balancing figure) By Hire Purchase Adjustment A/c 1,500

By Balance c/d 500

10,500 10,500

Dr. Hire Purchase (H.P.) Stock Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 4,000 By Hire Purchase Debtors A/c 10,200

To Goods sold on H.P. (Bal.

figure)

10,800 By Balance c/d 4,600

14,800 14,800

Dr. Hire Purchase (H.P.) Adjustment Account Cr.

Particulars Rs. Particulars Rs.

To Stock Reserve A/c 1,150 By Stock Reserve A/c (Opening

Stock)

1,000

(Closing H.P. Stock) [74,600 x

1/4]

[Rs. 4,000 x 1/4]

To H.P. Debtors A/c 1,500 By Goods sold on H.P. Stock A/c 2,700

To Profit & Loss A/c (Profit) 1,050 [Rs. 10,800 x 1/4]

3,700 3,700

Verification:

Dr. Hire Purchase Trading Account Cr.

Particulars Rs. Particulars Rs.

To H.P. Stock A/c 4,000 By Cash A/c 8,000

To Instalment Due 300 By Repossessed Stock 500

To Goods sold on H.P. A/c 10,800 By Hire Purchase Stock A/c 4,600

To Stock Reserve*3 [74,600 x

1/4]

1,150 By Instalment Due 500

To Profit & Loss A/c (Profit) 1,050 By Stock Reserve*4 [74,000 x

1/4]

1,000

By Goods sold on H.P. A/c*2 2,700

[710,800 x 1/4]

17,300 17,300

Working notes:

*1 Goods are sold at a profit of 33 1/3% on cost. It means, if the cost is Rs. 100, then profit is

Rs. 33.33

and hire purchase price = Rs. 100 + Rs. 33.33 = Rs. 133.33.

Therefore, loading on Hire Purchase Price = Rs. 33.33/Rs. 133.33 = 1/4

*2 Loading on goods sold on Hire Purchase = 1/4 of Rs. 10,800 = Rs. 2,700

*3 Loading on Closing Balance of Hire Purchase Stock = 1/4 of Rs. 4,600 = Rs. 1,150

*4 Loading on Opening Balance of Hire Purchase Stock = 1/4 of Rs. 4,000 = Rs. 1,000

Q. 3. Mayur Eleciricals Ltd. sells TV sets and Music systems on hire purchase basis. From

the following particulars prepare Hire Purchase Trading Account and Goods Repossessed

Account to find out the profit (show your workings clearly): [2009

T.V. Sets Music Systems

Cost Rs. 16,200 Rs. 6,000

Cash Price Rs. 8,900 Rs. 7,200

Down Payment Rs. 2,700 Rs. 1,200

Monthly Instalments Rs. 1,800 Rs. 600

Number of Instalments 10 12

During the year ended 31st December, 2013, the company sold 200 TV sets and 240 Music

systems on hire purchase basis. 4 TV sets on which only 3 instalments each could be

collected and 8 Music systems on which only 5 instalments each could be collected were

repossessed for non-payment of other instalments. These were valued at 50% of their costs

and after spending Rs. 6,000 for their reconditioning, they were sold for Rs. 84,000. Other

instalments collected and due (customers still paying) were respectively as follows:

T.V. Sets 540 and 40

Music systems 800 and 60

Sol. Working notes:

*1 Cost and H.P. Price of goods sold on hire purchase: Cost (Rs.)

T.V Sets 200 x Rs. 16,200 32,40,000

Music Systems 240 x Rs. 6,000 14,40,000

46,80,000

H.P. Price (Rs.)

T.V. Sets 200 x Rs. 20,700* 41,40,000

Music Systems 240 x Rs. 8,400** 20,16,000

61,56,000

* Rs. 2,700 + (Rs. 1,800 x 10) = Rs. 20,700

** Rs. 1,200 + (Rs. 600 x 12) = Rs. 8,400

*2 Loading on goods sold on H.P. = Rs. 61,56,000 - Rs. 46,80,000 = Rs.

14,76,000

*3 Cash collection on:

T.V. Sets Rs.

Down Payment Rs. 2,700 x 200 5,40,000

Instalments Rs. 1,800 x 540 9,72,000

On goods repossessed Rs. 1,800 x 4 x 3 21,600

15,33,600

Music Systems (Rs.)

Down Payment Rs. 1,200 x 240 2,88,000

Instalments Rs. 600 x 800 4,80,000

On goods repossessed Rs. 600 x 8 x 5 24,000

7,92,000

*4 Instalments not yet due on: (Rs.)

TV Sets

Total number of Instalments 196 x 10 1,960

Less: No. of Instalments collected + Due (540 + 40) 580

1,380

Amount due 1,380 @ Rs. 1,800 = Rs. 24,84,000

Music Systems

Total number of Instalments 232 x 12 2,784

Less: No. of Instalments Collected + Due (800 + 60) 860

1,924

Amount due 1,924 @ Rs. 600 = Rs. 11,54,400

Total Amount due = Rs. 24,84,000 + Rs. 11,54,400 = Rs. 36,38,400

*5 (0 Stock Reserve on T.V. Sets: (Rs.)

Hire Purchase Price 20,700

Less: Cost Price 16,200

Profit per Set 4,500

Stock Reserve = Rs. 4,500/Rs. 20,700 x Rs. 24,84,000 = Rs. 5,40,000

(ii) Stock Reserve on Music Systems: (Rs.)

Hire Purchase Price 8,400

Less: Cost Price 6,000

Profit per Set 2,400

Stock Reserve = Rs. 2,400/Rs. 8,400 x Rs. 2,4001I,54,400 = Rs.

3,29,829

Total Stock Reserve = Rs. 5,40,000 + Rs. 3,29,829 = Rs. 8,69,829

*6 Value of Goods Repossessed: (Rs.)

T.V. Sets: Cost of 4 Sets Rs. 16,200 x 4 64,800

Music Systems: Cost of 8 Sets Rs. 6,000 x 8 48,000

1,12,800

Valuation of Goods Repossessed = 50% of Rs. 1,12,800 = Rs. 56,400

Dr. Hire purchase Trading Account Cr.

Particulars Rs. Particulars Rs.

To Goods sold on Hire 61,56,000 By Goods sold on Hire 14,76.000

Purchase A/c Purchase A/c (Loading)

To Stock Reserve A/c 8,69.829 By Cash A/c:

(Loading) T.V. sets 15,33,600

To Profit & Loss A/c 5,78,571 Music systems 7,92,000 23,25,600

By Goods Repossessed A/c 56.400

By Stock with Customers A/c 36,38,400

By Instalments Due:

T.V. Sets [40 x Rs. 1800] 72,000

Music systems [60 x Rs. 600] 36,000

76,04,400 76,04,400

Dr. Goods Repossessed Account Cr.

Particulars Rs. Particulars Rs.

To Hire Purchase Trading A/c 56,400 By Cash A/c 84,000

To Cash A/c (expenses incurred) 6,000 (Sale proceeds)

To Profit & Loss (Profit on Sale 21,600

of Goods Repossessed)

84,000 84,000

Total Profit = Rs. 5,78,571 + Rs. 2l,600 = Rs. 6,00,171

Q. 4. X Co. Ltd. purchased on 01.01.2011 from M/s R.V. Traders four machines having cash

price Rs. 80,000 each on hire purchase basis. The payment was to be made as follows:

10% of cash price down, and

25% of cash price at the end of each of the following four years.

X Co. Ltd. paid the first instalment but failed to pay the second instalment due on

31.12.2012. M/s R.V. Traders repossessed three machines leaving remaining one machine

with the buyer. The value of three machines was taken at cost less depreciation @ 20 p.a. on

reducing balance method. M/s X Co. Ltd. charges depreciation at 10% p.a. on reducing

balance method on 31st Dec. of each year.

M/s R.V. Traders spent Rs. 42,000 on overhauling of the machines repossessed and sold two

of the repossessed machines for Rs. 1,20,000. Prepare necessary Ledger Accounts in the

books of both the parties. [2020

Sol.

Books of X Co. Ltd.

Dr. M/s R.V. Traders

Date Particulars Rs. Date Particulars Rs.

2011 2011

Jan. 1 To Bank A/c 32.000 Jan. 1 By Machinery A/c 3,202,000

Dec. 31 To Bank A/c 80.000 Dec. 31 By Interest A/c*1 12,800

Dec. 31 To Balance c/d 2,20,800

3,32,800 3,32,800

2012 2012

Dec. 31 To Machines A/c*2 1,53,600 Jan. 1 By Balance b/d 2,20.800

Dec. 31 To Balance c/d 76,800 Dec. 31 By Interest A/c*1 9,600

2,30,400 2,30.400

Dr. Machinery Account Cr.

Date Particulars Rs. Date Particulars Rs.

2011 2011

Jan. 1 To RV Traders A/c 3.20,000 Dec. 31 By Depreciation A/c 32,000

Dec. 31 By Balance c/d 2.88.000

3,20,000 3,20,000

2012 2012

Jan. 1 To Balance b/d 2,88,000 Dec. 31 By Depreciation A/c 28,800

By R.V. Traders A/c*2 t,53,600

By Profit & Loss A/c*4 40,800

(Loss on default)

Dec. 31 By Balance c/d*3 64.800

2,88,000 2,88,000

Books of M/s. R.V. Traders

Dr. X Co. Ltd. Account Cr.

Date Particulars Rs. Date Particulars Rs.

2011 2011

Jan. 1 To Hire Purchase A/c 3,20,000 Jan. 1 By Bank A/c 32,000

Dec. 31 To Interest A/c 12,800 Dec. 31 By Bank A/c 80.000

Dec. 31 By Balance c/d 2.20,800

3,32,800 3,32,800

2012 2012

Jan. 1 To Balance b/d 2,20,800 Dec. 31 By Goods Repossessed

A/c*2

1,53,600

Dec. 31 To Interest A/c 9,600 Dec. 31 By Balance c/d 76.800

2,30,400 2,30,400

Dr. Goods Repossessed Account Cr.

Date Particulars Rs. Date Particulars Rs.

2012 2012

Dec. 31 To R.V, Traders 1,53,600 Dec. 31 By Bank A/c 1,20,000

To Bank A/c 42.000 By Profit & Loss A/c*5

(Loss on Sale of

goods repossessed) 10,400

By Balance c/d*6 65,200

1,95,600 1,95,600

Working notes:

*1 Calculation of Interest

Total Cash Price of 4 machines = Rs. 80,000 x 4 = Rs. 3,20,000

Down Payment (10% of Cash Price) = Rs. 32,000

Four Instalments (25% of Cash Price) = Rs. 80,000 each

Hence Total Hire Purchase Price = Rs. 32,000 + Rs. 3,20,000 = Rs. 3,52,000

and Total Interest = Rs. 3,52,000 (Hire Purchase Price) - Rs. 3,20,000 (Cash Price) = Rs.

32,000

Interest on each instalment is calculated as follows:

Hire Purchase Price Outstanding at the beginning of each year:

Rs. 3,20,000 (1st Year), Rs. 2,40,000 (2

nd Year), Rs. 1,60,000 (3

rd Year), Rs. 80,000 (4

th

Year).

Ratio 4:3:2:1

1st Year's interest - Rs. 32,000 x 4/10 = Rs. 12,800;

2nd

Year's interest = Rs. 32,000 x 3/10 = Rs. 9,600;

3rd

Year's interest = Rs. 32,000 x 2/10 = Rs. 6,400;

4th

Year's interest = Rs. 32,000 x 1/10 = Rs. 3,200.

*2 Value of three Machines Repossessed: Rs.

Cost of Machines (Rs. 80,000 x 3) 2,40,000

Less: Depreciation @ 20%: 1st year 48,000

1,92,000

Less: Depreciation @ 20%: 2nd

year 38,400

1,53,600

*3 Value of one Machine left with the buyer:

Cost of Machine 80,000

Less: Depreciation @ 10%: 1st year 8,000

72,000

Less: Depreciation @ 10%: 2nd

year 7,200

64,800

*4 Calculation of Loss on default:

Book Value of three machines on the date of default

[3/4 (Rs. 2,88,000 - Rs. 28,800)] Or 3/4 (Rs. 2,59,200) 1,94,400

Agreed Value of three machines taken away by the seller*2 1,53,600

Loss on default 40,800

*5 Calculation of Loss on Sale of Goods repossessed:

(i) Value of 3 machines repossessed (71,53,600 + Rs. 42,000) 1,95,600

(ii) Value of 2 machines repossessed (Rs. 1,95,600 x 2/3) 1,30,400

Less: Sale of 2 machines repossessed 1,20,000

Loss on Sale of 2 machines 10,400

*6 Value of one machine in Stock = Rs. 1,95,600/3 = Rs. 65,200

Q. 5. Deepak purchased four second-hand cars on hire purchase system. Cash price being Rs.

52,500 each. The hire purchase price for all the four cars was Rs. 2,40,000. The payment was

to be made Rs. 60,000 on signing the agreement and three instalments of Rs. 60,000 each at

the end of each of the three years. Deepak charges depreciation @ 10% p.a. on Straight Line

Method.

Deepak paid the down payment and first instalment but could not pay the second instalment.

The vendor, after negotiations, took back three cars. These cars were taken back after

depreciating them @ 20% p.a. on Written Down Value method. One car was left with the

purchaser.

The vendor spent Rs. 3,600 on repairs and sold two of these cars for Rs. 80,000.

Show necessary Ledger Accounts in the books of both the parties. [2011

Sol.

Table Showing Interest and

Cash Price Payments

Cash Price (Rs.) interest (Rs.) Hire Purchase Price (Rs.)

Down Payment 60,000 Nil 60,000

1st Instalment 45,000 15,000 60,000

2nd

Instalment 50,000 10,000 60,000

3rd

Instalment 55,000 5,000 60,000

2,10,000 30,000 2,40,000

Total interest is allocated over three years in the ratio of 3 : 2 :1.

Three years are marked as Y1, Y2, and Y3

Books of Hire Purchaser (Deepak)

Dr. Hire Vendor's Account Cr.

Date Particulars Rs. Date Particulars Rs.

01-04-

Y1

To Bank A/c (Down

payment]

60,000 01-04-Y1 By Cars A/c 2,10,000

31-03-

Y2

To Bank A/c (1st

Instalment)

60.000 31-03-Y2 By Interest A/c 15,000

31-03-

Y2

To Balance c/d 1,05,000

2,25,000 2,25,000

31-03-

Y2

To Cars A/c*1

(Repossession;

1,00,800 01-04-Y2 By Balance b/d 1,05,000

31-03-

Y3

To Balance c/d 14,200 31-03-Y3 By Interest A/c 10,000

1,15,000 1,15,000

Dr. Cars Account (Asset) Cr.

Date Particulars Rs. Date Particulars Rs.

01-04-Y1 To Hire Vendor's A/c 2,10,000 31-03-Y2 By Depreciation A/c 21,000

(Cash Price of cars) (10% SLM)

By Balance c/d 1,89,000

2,10,000 2,10,000

01-04-Y2 To Balance b/d 1,89.000 31-03-Y3 By Depreciation A/c 21,000

(10% SLM on all cars)

By Hire Vendor's A/c*, 1,00,800

(Repossessed)

By Loss on Cars

Repossessed A/c*3 25,200

By Balance c/d 42,000

(one car)*3

1,89,000 1,89,000

Books of Hire Vendor

Dr. Hire Purchaser's Account Deepak) Cr.

Date Particulars Rs. Date Particulars Rs.

01-04-Y1 To Sales A/c 2,10,000 01-04-Y1 By Bank A/c (Down

Payment)

60,000

31-03-Y2 To Interest A/c 15,000 31-03-Y2 By Bank A/c (1st

Instalment)

60,000

31-03-Y2 By Balance c/d 1,05,000

2,25.000 2,25,000

01-04-Y2 To Balance b/d 1,05,000 01-04-Y2 By Goods Repossessed

A/c

1,00,800

31-03-Y3 To Interest A/c 10,000 (3 cars)

31-03-Y3 By Balance c/d*2 14,200

1,15,000 1,15,000

Dr. Goods Repossessed Account Cr.

Date Particulars Rs. Date Particulars Rs.

31-03-Y2 To Hire Purchaser's A/c 1,00,800 By Bank A/c 80,000

(Deepak) (Sale of two cars)

To Bank A/c (Repairs) 3,600 By Balance c/d 34,800

To Profit on Goods 10,400 (one car) 1/3 of

Repossessed A/c Rs.[1,00,800+3,600]

1,14,800 1,14,800

Working notes:

*1 Value of Goods repossessed (Three cars) with the Vendor is calculated as: Rs.

Cost of 3 cars (@ Rs. 52,500) 1,57,500

Less: Depreciation (@ 20% p.a. w.d.v. for 2 years): I Year (31,500)

II Year (25,200)

7,00,800

*2 Balance Rs. 14,200 is yet to be received from the Hire Purchaser.

*3 Value of the car/s with the Hire Purchaser/Hire Vendor. One car

(Rs.)

Three cars

(Rs.)

Cost Price 52,500 1,57,500

. Less: Depreciation @ 10% p.a. (SLM) I Year (5,250) (15,750)

II Year (5,250) (15,750)

42,000 1,26,000

Loss to Hire Purchaser on Repossession = (Rs. 1,26,000 - Rs. 1,00,800) = Rs. 25,200

*4 Profit on Goods repossessed resold (two cars) Rs. 10,400 is to be transferred to Profit &

Loss

Account at the end of the year.

Q. 6. X Sells goods on hire purchase basis also. He fixes hire purchase price by adding

50% to the cost of goods to him. The following are the figures relating to the hire

purchase business for the year 2012: [2011 Sem

Balance on Hire purchase Stock Account on 1st January, 2012 1,20,000

Balance on Hire purchase Debtors Account on 1st January, 2012 3,000

Selling Price of the goods sold on Hire purchase basis during the year 9,06,000

Cash received from customers 9,24,000

Total amount of instalments that fell due during the year 2012 9,27,000

One customer to whom goods had been sold for Rs. 12,000 paid only three

instalments of Rs. 1,000 each. On his failure to pay the monthly instalment of

11,000 due on 4th

Dec. 2012, the goods were repossessed on 27-12-2012 after

legal notice. Prepare Hire Purchase Trading Account for the year ended 31-12-

2012. Also verify your answer by preparing Hire Purchase Adjustment Account.

Sol.

Hire Purchase Trading Account

Dr. (In Hire Vendor's Books) Cr.

Date Particulars Rs. Date Particulars Rs.

01-01-

12

To Balance b/f 01-01-

12

By Balance b/f

HP. Stock A/c 1,20,000 H.P. Stock Res. A/c 40,000

H.P. Debtors A/c 3,000 31*12-

12

By Goods sold on H.P.

A/c

31-12-

12

To Goods sold on H.P.

A/c

(RP of Goods sold) 3,02,000

(HPP) 9,06,000 By Goods Repossessed

A/c

To Balance c/f (value)* 6,000

HP. Stock Reserve A/c

(RP)

30,333 By Bank A/c 9,24,000

To P&L A/c (Net Profit) 3,08,667 By Balance c/f

H.P. Stock A/c (HPP) 91,000

H.P. Debtors A/c 5,000

13,68,000 13,68,000

Dr. Hire Purchase Stock Account Cr.

Date Particulars Rs. Date Particulars Rs.

2012 2012

Jan. 1 To Balance b/f 1,20,000 Jan. 1 By HP Debtors A/c 9,27,000

To Goods sent on HP A/c

(HPP)

9,06,000 By HP Debtors A/c 8,000

By Balance of 91,000

10,26,000 10,26,000

Dr. Hire Purchase Debtors Account Cr.

Date Particulars Rs. Date Particulars Rs.

2012 2012

Jan. 1 To Balance b/f 3,000 Jan. 1 By Bank A/c 9,24,000

To H.P. Stock A/c 9,27,000 By Goods Repossessed

A/c*1

6,000

To HP. Stock A/c (CP of

Goods

8,000 By Bad Debts 3,000

Repossessed) By Balance c/f 5,000

9,38,000 9,38,000

Dr. Hire Purchase Adjustment Account Cr.

Particulars Rs. Particulars Amt. (Rs.)

To H.P. Stock Res A/c (RP of HP 30,333 By HP Stock A/c 40,000

Stock A/c at the end) 1/3 x

91,000)

(RP of Opening Stock)

To Gross Profit (Balancing

figure)

3,11,667 By Goods sold on HP A/c (RP of

Goods sold on HP during the

year)

3,02,000

3,42.000 3,42,000

Dr. Hire Purchase Profit & Loss Account Cr.

Particulars Rs. Particulars Rs.

To Bad Debts 3,000 By HP Adjustment A/c (GP) 3,11,667

To Net Profit (Balancing figure) 3,08,667

3,11,667 3,11,667

Working notes:

*1 Value of Goods Repossessed is cost price of Amount due or remaining unpaid, i.e., 2/3 x

Rs. 9,000 = Rs. 6,000. It should not be more than this as per LCM Principle.

Q. 7. X Sells goods on hire purchase basis, the price being cost plus 50%. From the

following information calculate profit by preparing Ledger Accounts on Stock and

debtor system for the year ended 31st March, 2012. [2022

April 1st 2012 Rs.

Stock at the shop at cost 1,08,000

Stock on hire at selling price 54,000

Instalment due at beginning 30,000

Received from customers 3,60,000

Goods Repossessed (Instalment due Rs. 12,000) 3,000

Instalment due at the end 54,000

Closing Stock at shop including goods repossessed 1,23,000

Purchases made during the year 3,60,000

Sol.

Dr. Shop Stock Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 1,08,000 By Goods sold on HP A/c 3,48,000

To Purchases A/c 3,60,000 (Cost Price) {Balancing figure)

By Balance c/d 1,23,000

Less: Goods Reposs. 3,000 1,20,000

4,68,000 4,68,000

Dr. Hire Purchase Stock Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 54,000 By Hire Purchase Debtors A/c 3,96,000

To Goods sold on Hire Purchase

A/c

5,22,000 By Balance c/d f,80,000

Rs.[3,48,000 + 50%] {Balancing figure)

5,76,000 5,76,000

Dr. Hire Purchase Debtors Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 30,000 By Bank A/c 3,60,000

To Hire Purchase Stock A/c 3,96,000 By Goods "Repossessed A/c 12,000

{Balancing figure) By Balance c/d 54,000

4,26,000 4,26,000

Dr. Hire Purchase Adjustment Account Cr.

Particulars Rs. Particulars Rs.

To Stock Reserve A/c (Closing) 60,000 By Stock Reserve A/c (Opening) 18,000

[Rs. 1,80,000 x 50/150] [Rs. 54,000 x 50/150]

To Goods Repossessed A/c 9,000 By Goods Sold on H.P A/c 1,74,000

(Loss on Repossession) (Load) [Rs. 5,22,000 x 50/150]

To Profit on Hire Purchase 1,23,000

1,92,000 1,92,000

Q. 8. X purchased 5 trucks on 1st Oct., 2011, the cash price of each truck being Rs. 11 lakh. X

was to pay 20% of the cash price at the time of delivery and 25% of cash price at the end of

each of the subsequent four half yearly periods beginning from 31st March, 2012.

On X's failure to pay the instalment due on 30th September, 2012, it was agreed that X could

keep three trucks, on the condition that value of two trucks would be adjusted against the

amount due, the trucks being valued at cost less 25% depreciation.

Show the necessary ledger accounts in the books of X, assuming that his books are closed on

31st March each year and he charges depreciation @15% on original cost of trucks. [2013

Sol. In X's Ledger

Dr. Trucks on Hire Account Cr.

Date Particulars Rs. Date Particulars Rs.

01-10-

11

To Hire Vendor A/c 55,00,000 31-03-

12

By Depreciation A/c 4,12,500

(Rs. 55,00,000 x 6/12 x

15/100)

31-03-

12

By Balance c/d 50,87,500

55,00,000 55,00,000

01-04-

12

To Balance b/d 50,87,500 30-09-

12

By Depreciation A/c*2 1,65,000

30-09-

12

By Hire Vendor A/c*3 16,50,000

30-09-

12

By Loss on Default*4 2,20,000

(to be trans, to

Profit & Loss A/c)

31-03-

13

By Depreciation A/c 4,95,000

(for full year

on 3 trucks)

[Rs. 33,00,000 x

15/100]

By Balance c/d 25,57,500

50,87,500 50,87,500

Dr. Hire Vendor's Account Cr.

Date Particulars Rs. Date Particulars Rs.

01-10-

11

To Bank A/c 11,00,000 01-10-

11

By Trucks on Hire A/c 55,00,000

31-03-

12

To Bank A/c 13,75,000 31-03-

12

By Interest A/c *1 4,40,000

31-03-

12

To Balance c/d 34,65,000

59,40,000 59,40,000

30-09-

12

To Trucks on Hire A/c 16,50,000 01-04-

12

By Balance b/d 34,65,000

31-09-

12

To Balance c/d 21,45,000 30-09-

12

By Interest A/c*1 3,30,000

37,95,000 37,95,000

Working notes:

*1 Calculation of Interest:

Cash Price = Rs. 11,00,000 x 5 = Rs. 55,00,000

Down Payment = 20% of Rs. 55,00,000 = Rs. 11,00,000

Instalment = 25% of Rs. 55,00,000 = Rs. 13,75,000

Hire Purchase Price = Down Payment + Total Instalments

= Rs. 11,00,000 + Rs. 55,00,000 = Rs. 66,00,000

Total Interest = Hire Purchase Price - Cash Price

= Rs. 66,00,000 - Rs. 55,00,000 = Rs. 11,00,000

Interest for the first six months (four instalments) = Rs. 11,00,000 x 4/10 = Rs. 4,40,000

Interest for the second six months (three instalments)= Rs. 11,00,000 x 3/10 = Rs. 3,30,000

Interest for the third six months (two instalments) = Rs. 11,00,000 x 2/10 = Rs. 2,20,000

Interest for the fourth six months (one instalment) = Rs. 11,00,000 x 1/10 = Rs. 1,10,000

*2 Calculation of Depeciation on two trucks taken away after 6 months:

= Rs. 22,00,000 x 6/12 x 15/100 = Rs. 1,65,000

*3 Calculation of agreed value of two trucks repossessed:

= Rs. 22,00,000 (Cash Price) - 25% of Rs. 22,00,000 = Rs. 16,50,000

*4 Calculation of loss on default: Rs.

Cost of two trucks repossessed 22,00,000

Less: Depreciation at 15% (or one year 3,30,000

Book Value on 30-9-2012 18,70,000

Loss on default (Rs. 18,70,000 - Rs. 16,50,000) = Rs. 2,20,000

Q. 9. Saksham Ltd. sold three cars for a total cash price of Rs. 9,00,000 on hire purchase

basis to Mr. Vardaan on 1st January, 2010. The terms of agreement provided for Rs. 2,70,000

as cash down and the balance of the cash price in three equal instalments together with

interest at 10% p.a. The instalments were payable at the end of each year. Mr. Vardaan paid

the first instalment on time but failed to pay thereafter. On his failure to pay the second

instalment, Saksham Ltd. repossessed two cars and valued them at 50% of the cash price. Mr.

Vardaan charges 25% p.a. depreciation on written down value method. Prepare necessary

Ledger Accounts in the books of both the parties. [2014

Sol.

In the Books of Mr. Vardaan

Dr. Saksham Ltd.'s Account Cr.

Date Particulars Rs. Date Particulars Rs.

01.01.201

0

To Bank A/c 2,70,000 01.01.201

0

By Cars A/c 9,00,000

31.12.201

0

To Bank A/c 2,73,000 31.12.201

0

By Interest A/c 63,000

Rs.P.10.000 +

63,000]

[10%ofRs. 6,30,000]

To Balance c/d 4,20,000

9,63,000 9,63,000

31.12.201

1

To Cars A/c 3,00,000 01.01.201

1

By Balance b/d 4,20,000

31.12.201

1

To Balance c/d 1,62,000 31.12.201

1

By Interest A/c 42,000

4,62,000 4,62,000

01.01.201

2

By Balance b/d 1,62,000

Dr. Cars Account Cr.

Date . .... Particulars Rs. Date Particulars Rs.

01.01.201

0

To Saksham Ltd. 9,00,000 31.12.201

0

By Depreciation A/c 2,25,000

By Balance c/d 6,75,000

9,00,000 9,00,000

01.01.201

1

To Balance b/d 6,75,000 31.12.201

1

By Depreciation A/c 1,68,750

By Saksham Ltd.*1 3,00,000

By P&LA/c 37,500

(Bal. figure-Loss)

By Balance c/d*2 1,68,750

6,75,000 6,75,000

Working notes:

*1 Calculation of the value of the two cars Repossessed: (Rs.)

Cash Price of two cars 6,00,000

Value of two cars repossessed @ 50% of Rs. 6,00,000 3,00,000

*2 Calculation of the value of one car left with Mr. Vardaan:

Cash Price 3,00,000

Less: Depreciation @ 25% for 2010 75,000

2,25,000

Less: Depreciation @ 25% for 2011 56,250

1,68,750

In the Books of Saksham Ltd.

Dr. Mr. Vardaan's Account Cr.

Date Particulars Rs. Date Particulars Rs.

01.01.201

0

To Hire Sales A/c 9,00,000 01.01.201

0

By BankA/c 2,70,000

31.12.201

0

To Interest A/c 63,000 31.12.201

0

By BankA/c 2,73,000

31.12.201

0

By Balance c/d 4,20,000

9,63,000 9,63,000

01.01.201

1

To Balance b/d 4,20,000 31.12.201

1

By Goods Rep. A/c 3,00,000

31.12.201

1

To Interest A/c 42,000 31.12.201

1

By Balance c/d 1,62,000

4,62,000 4,62,000

01.01.201

2

To Balance b/d 1,62,000

Q. 10. A Ltd. sells goods on hire purchase at cost plus 60%. From the following information

calculate profit or loss for the year ending 31st March, 2013 under Stock and Debtors system:

[2024 Nov.

2012 Rs.

April 1 Instalments Not Due 1,60,000

2013

March 31 Goods sold on hire purchase at hire purchase price 8,00,000

Cash received during the year 5,60,000

Goods repossessed (instalments due Rs. 20,000) valued 3,000

at Goods with hire purchase customers 3,60,000

Sol. Let the cost be = 100

Hire Purchase Price = 100 + 60 = 160

Loading = 60/160

Dr. Instalments Not Due Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 1,60,000 By Instalments Due A/c 9,40,000

To Shop Stock A/c By Balance c/d (Balancing figure) 20,000

Rs.[8,00,000 - 3,00,000]* 5,00,000

To Hire Purchase Adjustment A/c

[Rs. 8,00.000 x 60/160] 3,00,000

9,60,000 9,60,000

= Rs. 8,00,000 x 60/160 = Rs. 3,00,000

Dr. Instalments Due Account Cr.

Particulars Rs. Particulars Rs.

To Instalments Not Due A/c 9,40,000 By Cash A/c 5,60,000

By Goods Repossessed A/c 3,000

By H.P. Adjustment A/c 17,000

By Balance c/d 3,60,000

9,40,000 9,40,000

Dr. Hire Purchase Adjustment Account Cr.

Particulars Rs. Particulars Rs.

To Instalment Due A/c 17,000 By Stock Reserve A/c (Opening)

To Stock Reserve (Closing) Rs. 1,60,000 x 60/160] 60,000

[Rs. 20,000 x 60/160] 7,500 By Instalment Not Due A/c 3,00,000

To General Profit & Loss A/c

(Balancing figure) 3,35,500

3,60,000 3,60,000

Q. 11. Vikrant sells goods on hire purchase at cost plus 60%. From the following

particulars for the year ending on 31-12-2014, prepare: [2015

(i) Hire Purchase Debtors Account

(ii) Hire Purchase Stock Account

(iii) Shop Stock Account and

(iv) Hire Purchase Adjustment Account

1-1-2014 Rs.

Stock with hire purchase customers at selling price 12,000

Stock at the shop at cost 5,000

Instalments overdue 8,000

31-22-2024

Stock at the shop at cost (including goods repossessed Rs. 400) 2,000

Total instalments that fell due during the year 1,89,440

Cash received from customers

(including down payments of Rs. 1 5,440) 1,75,440

Goods repossessed (instalment due Rs. 500) 400

Purchases during the year 1,20,000

Hire expenses 3,400

Sol. Dr. Hire Purchase Debtors Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 8,000 By Cash A/c 1,75,440

To Hire Purchase Stock A/c 1,89,440 By Goods Repossessed 500

By Balance c/d (Balancing figure) 21,500

1,97,440 1,97,440

Dr. Hire Purchase Stock Account (at HPP) Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 12,000 By Hire Purchase Debtors A/c 1,89,440

To Goods sold on Hire Purchase

A/c

By Balance c/d (Balancing figure) 20,000

[Rs. 1,23,400 x 160/100] 1,97,440

2,09,440 2,09,440

Dr._______ Stock at Shop Account (at Cost) Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 5,000 By Goods sold on Hire Purchase

A/c

To Purchases A/c 1,20,000 (Balancing figure) 1,23,400

By Balance c/d Rs.(2,000 - 400) 1,600

(Excluding goods repossessed)

1,25,000 1,25,000

Dr. Hire Purchase Adjustment Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 5,000 By Stock Reserve A/c 4,500

To Goods Repossessed A/c 100 [Rs. 12,000 x 10/160]

(Loss on repossession of goods) By Goods sold on Hire Purchase

A/c

(Rs. 500 - 400) [Rs. 1,97,440 x 60/160] 74,040

To Hire Expenses A/c 3,400

To Stock Reserve A/c

[Rs. 20,000 x 60/160] 7,500

To Profit & Loss A/c (Profit)- 62,540

78,540 78,540

UNIT

IV

Accounting for Inland Branches

Q. 1. The following is the Trial Balance of Kolkata Branch as on 31st Mar., 2008:

Particulars Dr. (Rs.) cr.(Rs.)

Mumbai Head Office A/c 32,400

Stock on 14-2007 60,000 —

Purchases 1,78,000 --

Goods received from HO 90,000 —

Sales — 3,80,000

Goods supplied to HO — 60,000

Salaries 15,000 —

Debtors 37,000 —

Creditors — 18,500

Rent 9,600 —

Office expenses 4,700 —

Cash and Bank balance 17,800 —

Furniture 14,000 —

4,58,500 4,58,500

Closing stock was valued at Rs. 27,000. The Branch Account in the books of Head Office

stood at Rs. 4,600 (Debit Balance) on 31-3-08. On 28th March, 2008 the Head Office

forwarded goods to the value of Rs. 25,000 to the branch where they were received on 3rd

April 2008. Required in the books of HO:

(i) Branch Trading and Profit & Loss Account.

(ii) Journal entries to incorporate the above Trial Balance; and

(iii) Kolkata Branch Account. [2008

Sol. (i) Branch Trading and Profit & Loss Account

Dr. for the year ended 31st March 2008 Cr.

Particulars Rs. Particulars Rs.

To Branch A/c By Kolkata Branch

A/c:

Stock 60,000 Sales 3,80,000

Purchases 1.78,000 Goods Supplied to HO

60,000

Goods from HO 90,000 3,28,000 Closing Stock 27,000 4,67,000

To Branch P & A/c (Gross Profit) 1,39,000

4,67,000 4,67,000

To Branch A/c: By Branch Trading

A/c

1,39,000

Salaries 15,000 (Gross Profit)

Rent 9,600

Office Expenses 4,700 29,300

To General P & L A/c (Net Profit) 1,09,700

1,39,000 1,39,000

(ii) Journal Entries

Date Particulars L.F. Dr. (Rs.) Cr. (Rs.)

Goods-in-transit A/c Dr. 25,000

To Kolkata Branch A/c 25,000

(Being adjustment of goods-in transit)

Cash-in-transit A/c Dr. 12,000

To Kolkata Branch A/c* 12,000

(Being adjustment of remittance-in-transit)

Kolkata Branch Trading A/c Dr. 3,28,000

To Kolkata Branch A/c 3,28,000

[Stock Rs. 60,000 + Purchases Rs. 1,78,000 +

Goods Received

from HO Rs. 90,000]

(Being incorporation of debit items of Trading

Account)

Kolkata Branch A/c Dr. 4,67,000

To Kolkata Branch Trading A/c 4,67,000

[Sales Rs. 3,80,000 + Goods supplied to H.O.

Rs. 60,000

+ Closing Stock Rs. 27,000]

(Being incorporation of credit items of Trading

Account)

Kolkata Branch Trading A/c Dr. 1,39,000

To Kolkata Branch Profit & Loss A/c 1,39,000

(Being transfer of Gross Profit to Profit & Loss

Account

Kolkata Branch Profit & Loss A/c Dr. 29,300

To Kolkata Branch A/c 29,300

[Salaries Rs. 15,000 + Rent Rs. 9,600 + Office

Expenses Rs. 4,700]

(Being the debit items of Profit & Loss Account

incorporated'

Kolkata Branch Profit & Loss A/c Dr. 1,09,700

To General Profit & Loss A/c . 1,09,700

(Being transfer of branch profit to General Profit &

Loss A/c)

Kolkata Branch Debtors A/c Dr. 37,000

Kolkata Branch Cash A/c Dr. 17,800

Kolkata Branch Furniture A/c Dr. 14,000

Kolkata Branch Stock A/c Dr. 27,000

To Kolkata Branch A/c 95,800

(Being incorporation of branch assets)

Kolkata Branch A/c Dr. 18,500

To Kolkata Branch Creditors A/c 18,500

(Being incorporation of branch creditors)

Dr. Kolkata Branch Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 4,600 By Goods in transit 25,000

To Branch Trading A/c 4,67,000 By Cash in transit 12,000

To Branch Liabilities (creditors) 18,500 By Branch Trading A/c 3,28,000

By Branch Profit & Loss A/c 29,300

By Branch Assets A/c 95,800

4,90,100 4,90,100

Working notes:

* While attempting a question on an Independent Branch, the students are advised to check

whether the balance as shown by the Head Office Account in Branch books and the Branch

Account in the Head Office books reconcile with each other or not. In the present question,

there

is a difference of Rs. 37,000 [i.e., Dr. Balance of Head Office Account of Rs. 32,400 (in the

books of Branch) + Dr. Balance of Branch Account Rs. 4,600 (in the books of Head Office)].

The difference is due to Goods-in-transit and Cash-in-transit. Goods-in-transit is Rs. 25,000

(given). So, Cash-in-transit will be Rs. 37,000 - Rs. 25,000 x Rs. 12,000.

Q. 2. From the following figures for a year relating to the Delhi branch of a H.O. which

invoices goods to its branch at cost plus 100%, prepare: [2008

(i) Branch Account;

(ii) Branch Stock Account;

(iii) Branch Debtors Account; and

(iv) Branch Adjustment and Profit & Loss Account.

Transactions during the year: Rs.

Goods invoiced to branch 1,00,000

Goods received by branch 1,10,000

Cash sent for expenses 25,000

Actual expenses at branch 28,000

Cash expenses at branch 27,000

Sales (at invoice price) 1,40,000

Cash received from debtors 1,25,000

Discount allowed to branch debtors 5,000

Goods returned by branch debtors direct to H.O. 20,000

Closing balances:

Branch Stock 30,000

Branch Debtors 20,000

Sol. Dr. (i) Branch Account Cr.

Particulars Rs. Particulars Rs.

To Branch Stock By Stock Reserve

(See Branch Stock A/c) 60,000 (Loading on Opening Stock) 30,000

To Branch Debtors By Goods-in-transit (Loading

on

(See Branch Debtors A/c) 30,000 opening Goods-in-transit) 5,000

To Goods-in-transit*, 10,000 By Cash remitted to H0*2 1,23,000

To Goods sent to Branch A/c 1.00,000 By Goods sent to Branch A/c

To Cash A/c (Cash for expenses) 25,000 (Loading on Goods sent

To Goods sent to Branch A/c

(Loading

to Branch) 50,000

on goods returned by debtors to

HO)

10,000 By Goods sent to Branch A/c 20,000

To Stock Reserve By Balance c/d:

(Loading on Closing Stock) 15,000 Branch Stock 30,000

To Balance c/d: Branch Debtors 20,000

Outstanding Expenses*3 1,000

To Profit transferred to General

Profit & Loss A/c (Balancing

fig.)

27,000

2,78,000 2,78,000

Dr. (ii) Branch Stock Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d (Opening Stock) By Sales A/c 1,40,000

(Balancing figure) 60,000 By Balance c/d 30,000

To Goods-in-transit*t 10,000

To Goods sent to Branch A/c 1,00,000

1,70,000 1,70,000

Dr. (iii) Branch Debtors Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d By Cash A/c 1,25,000

{Balancing figure) 30,000 By Discount Allowed 5,000

To Sales (credit) 1,40,000 By Goods Returned 20,000

By Balance c/d 20,000

1,70,000 1,70,000

Dr. (iv) Branch Adjustment and Profit & Loss Account Cr.

Particulars Rs. Particulars Rs.

To Stock Reserve (Rs. 30,000 x

1/2)

15,000 By Stock Reserve A/c (Rs.

60,000 x 1/2)

30,000

To Goods sent to Branch A/c By Goods sent to Branch A/c

(Goods returned by branch

debtors

(Rs. 1,00,000 x 1/2) 50,000

direct to H.O.) (Rs. 20,000 x 1/2) 10,000 By Goods-in-transit (Loading)

To Gross Profit c/d (Balancing

figure)

60,000 (Rs. 10,000 x 1/2) 5,000

85,000 85,000

To Branch Expenses 28,000 By Gross Profit b/d 60,000

To Discount 5,000

To Net Profit (Balancing figure) 27,000

60,000 60,000

Working notes:

*1 Calculation of Goods-in-transit:

Since, goods received by branch Rs. 1,10,000 are more than the goods sent to them by H.O.,

i.e.,

Rs. 1,00,000, the difference Rs. 10,000 is Goods-in-transit in the beginning of the year.

*2 Calculation of Cash remitted to H.O.:

Cash remitted to H.O. is cash received from debtors (Rs. 1,25,000)

Less: extra spent on branch expenses (Rs. 2,000), i.e., Rs. 1,23,000.

*3 Calculation of Closing outstanding expenses:

Since actual expenses at branch (Rs. 28,000) are more than the expenses paid (Rs. 27,000),

the

difference is outstanding expenses at the end of the year, i.e., Rs. 1,000.

Q. 3. Mayur Stores Ltd. with their Head Office in Delhi, invoiced goods to its branch at

Noida at 20% less than the list price which is cost plus 100% with instructions that cash

sales were to be made at invoice price and credit sales at list price. From the following

particulars, prepare Branch Stock Account, Branch Debtors Account, Branch Expenses

Account, Branch Adjustment Account and Branch Profit & Loss Account for the year

ended 31st December, 2008: [2009

Rs.

Branch Stock on 1-1-2008 at cost to Branch 40,000

Branch Debtors on 1-1-2008 30,000

Goods received from HO at invoice price 3,60,000

Cash sales 90,000

Credit sales 3,00,000

Cash received from Debtors 2,40,000

Goods in Transit 40,000

Branch Expenses 40,000

Bad Debts 2,000

Loss of Goods by fire at invoice price 2,400

Transfer of goods to Faridabad Branch at IP 6,000

Pilferage at IP (Normal) 1,000

Remittance to Head Office 3,30,000

Insurance claim admitted against loss by fire 1,200

Debtors on 31-12-2008 88,000

Stock on 31-12-2008 at Invoice Price 60,000

Sol. Dr. Branch Debtors' Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 30,000 By Branch Cash A/c 2,40,000

To Branch Stock A/c (Credit

Sales)

3,00,000 By Branch Expenses A/c (Bad

Debts)

2,000

By Balance c/d 88,000

3,30,000 3,30,000

Dr. Branch Expenditure Account Cr.

Particulars Rs. Particulars Rs.

To Bank A/c 40,000 By Branch Profit & Loss A/c 42,000

To Branch Debtors A/c (Bad

Debts)

2,000

42,000 42,000

Dr. Noida Branch Stock Account Cr.

Particulars Rs. Particulars Rs.

To Balance c/d 40,000 By Branch Cash A/c (Sales) 90,000

To Goods sent to Branch A/c By Branch Debtors A/c (Credit

Sales)

3,00,000

(Rs. 3.60.000 + Rs. 40,000) 4,00,000 By Loss by fire:

To Branch Adjustment A/c Branch Adjustment A/c

(Excess profit on Credit

Sales)*,

60,000 (2,400 * 60/160) 900

Branch Profit & Loss A/c

(2,400 - 900) 1,500

By Faridabad Branch A/c

(Transfer)

6,000

By Branch Adjustment A/c

(Normal Loss) 1,000

By Shortage (Balancing figure)

Branch Adjustment A/c

(600 x 60/160) 225

Branch Profit & Loss A/c

(600 - 225) 375

By Balance c/d:

In hand 60,000

In Transit 40,000 1,00,000

5,00,000 5,00,000

Dr. Branch Adjustment Account Cr.

Particulars Rs. Particulars Rs.

To Branch Stock A/c 900 By Stock Reserve A/c 15,000

To Goods Sent to Branch A/c 2,250 (40,000 x 60/160)

(Faridabad) (Rs. 6,000 x 60/160) By Goods sent to Branch A/c 1,50,000

To Branch Debtors A/c 1,000 (4,00,000 x 60/160)

To Branch Adjustment A/c 225 By Branch Stock A/c 60,000

To Stock Reserve A/c 37,500

(1.00,000 x 60/160)

To Gross Profit c/d 1,83,125

2,25,000 2,25,000

Dr. Branch Profit and Loss Account Cr.

Particulars Rs. Particulars Rs.

To Branch Stock A/c 375 By Gross Profit b/d 1,83,125

To Branch Stock A/c 1,500 By Bank A/c

To Branch Expenses A/c 42,000 (Insurance Claim) 1,200

To Profit & Loss A/c 1,40,450

1,84,325 1,84,325

Working notes:

*1 Cost = Rs. 100 List Price - Rs. 200

Invoice Price = Rs. 200 - 20/100 X 200 = Rs. 160

Loading on Invoice Price = Profit/Invoice Price = 60/160

Surplus on Sale of goods on Credit @ 20% = 20/100 X 3,00,000 = Rs. 60,000

Q. 4. X Ltd. with its Head Office in Delhi, invoiced goods to its Chandigarh branch at

20% less than the catalogue price which is cost plus 50%, with instructions that cash

sales were to be made at invoice price and credit sales at catalogue price. From the

following particulars available from the branch, prepare Branch Account for the year

ended 31st December, 2008: [2009

Rs.

Stock on 1-1-2008 at IP 48,000

Goods received from HO at invoice price 5,28,000

Debtors on 1-1-2008 40,000

Cash sales 1,84,000

Credit sales 4,00,000

Cash received from customers 3,42,540

Discount allowed to customers 53,460

Branch Expenses 25,000

Remittance to Head Office 4,80,000

Debtors on 31-12-2008 44,000

Cash in hand on 31-12-2008 23,000

Closing Stock on 31-12-2008 60,000

It was reported that a part of stock at the branch was lost by fire during the year whose value

is to be ascertained. It is decided to provide for discount on debtors @ 15%.

Sol.

Dr. Chandigarh Branch Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d: By Cash A/c (Remittance to HO) 4,80,000

Stock 48,000 By Stock Reserve A/c

Debtors 40,000 (M8.000 x 20/120) 8,000

Cash*, 1,460 89,460 By Goods Sent to Branch A/c

To Goods sent to Branch A/c 5,28,000 (Rs. 5,28,000 x 20/120) 88,000

To Provision for Discount on

Debtors

By Balance c/d:

(15% of Rs. 44,000) 6,600 Stock 60,000

To Stock Reserve A/c (60,000 x

20/120)

10,000 Debtors 44,000

To Profit & Loss A/c Profit 68,940 Cash 23,000 1,27,000

7,03,000 7,03,000

Working notes:

Dr. Chandigarh Branch Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d (Balancing

figure)

1,460 By HO A/c 4,80,000

To Sales A/c 1,84,000 By Branch Expenses A/c 25,000

To Debtors 3,42,540 By Balance c/d 23,000

5,28,000 5,28,000

Q. 5. X Co. Ltd. Mumbai invoices goods to its Delhi Branch at cost plus 25%. All

expenses of the branch are met by Head Office and cash collected by the branch is sent

to Head Office. From the following information, prepare Branch Account and Goods

sent to Branch A/c in the books of Head Office: [2010

Branch Stock at invoice price on 1-1-09 Rs.

20,000

Branch Debtors on 1-1-09 25,000

Branch Furniture on 1-1-09 40,000

Petty Cash on 1-1-09 3,000

Salary due for December, 2008 4,000

Goods sent to branch during the year (including goods in transit) 2,00,000

Goods returned by Branch to Head Office 5,000

Goods returned by customers to Branch 4,000

Loss of goods in transit at IP (not insured) 10,000

Cash Sales 70,000

Cash received from customers 90,000

Goods spoiled at IP (normal) 4,000

Bad Debts 1,000

Discount allowed 2,000

Petty expenses incurred by Branch 2,000

Cheque received from Head Office for Rs.

Salaries @ Rs. 4,000 p.m. 48,000

Rent 10,000

Petty Cash 3,000

Delivery Van 50,000 1,11,000

Branch Debtors on 31-12-09 30,000

Branch Stock on 31-12-09 Rs.

Depreciate furniture and delivery van @ 10%.

Sol. In the Books of Head Office

Dr. Branch Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d: By Balance b/d: Salary due 4,000

Stock 20,000 By Goods Sent to Branch A/c

Debtors 25,000 (Goods returned by Branch) 5,000

Furniture 40,000 By Goods Sent to Branch A/c

Petty Cash 3,000 (Loading: Rs. 2,00,000 x 25/125) 40,000

To Goods Sent to Branch A/c 2,00,000 By Stock Reserve (Loading)

To Bank A/c (Expenses) (Rs. 20,000 x 25/125) 4,000

Salaries 48,000 By Bank A/c (Remittances):

Rent 10,000 Cash Sales 70,000

Petty Cash 3,000 Cash received

Delivery Van 50,000 1,11,000 from customers 90,000 1,60,000

b/f 3.09,000 2,13,000

By Balance c/d:

To Goods Sent to Branch

(Loading)

Delivery Van 45,000

(Rs. 5,000 x 25/125) 1,000 Debtors 30,000

To Stock Reserve (Loading) Stock*, 33,000

(Rs. 33,000 x 25/125) 6,600 Furniture (Rs. 40,000 - Rs. 4,000) 36,000

To Balance c/d: Petty Cash

Outstanding Salary 4,000 (Rs. 3,000 + Rs. 3,000 - Rs.

2,000)

4,000

By Net Loss transferred to

General Profit & Loss A/c 49,600

4,10,600 4,10,600

Dr. Goods Sent to Branch Account Cr.

Particulars Rs. Particulars Rs.

To Branch Stock A/c 5,000 By Branch Stock A/c 2,00,000

To Branch Adjustment A/c

(Loading)

39,000

(Net) (Rs. 1,95,000 x 25/125)

To Purchases A/c 1,56,000

2,00,000 2,00,000

Working notes:

*1 Dr. Branch Stock Account (IF) Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 20,000 By Goods Sent to Branch A/c 5,000

To Goods Sent to Branch 2,00,000 (Return by branch)

To Sales Return 4,000 3y Loss of Goods in transit 10,000

By Cash Sales 70,000

By Branch Debtors A/c (Cr.

Sales)

1,02,000

By Branch Adjustment A/c

(Normal loss)

4.000

By Balance c/d (Balancing

figure)

33,000

2,24,000 2,24,000

*2 Dr. Branch Debtors Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 25,000 By Sales Return 4,000

To Credit Sales {Balancing

figure)

1,02,000 By Cash A/c 90,000

By Bad Debts 1,000

By Discount Allowed 2,000

By Balance c/d 30,000

1,27,000 1.27,000

Q. 6. A Head Office invoices goods to its branch at 20% less than the list price. The list

price is made up by adding 100% to cost price. Goods are sold to customers at list price

both by H.O. and Branch. From the following particulars, prepare Trading and Profit

& Loss Accounts for the year ended 31st March, 2010 to show profit made by Head

Office and Branch on Wholesale Basis: [2020

Head Office Branch

Rs. Rs.

Opening Stock at Cost (at invoice price for branch) 60,000 24,000

Purchases 6,00,000 —

Goods sent to Branch at invoice price — 1,44,000

Sales 9,00,000 1,20,000

Expenses 1,30,000 6,000

Sol. Trading and Profit & Loss Account

Dr. for the year ended 31st March, 2010 Cr.

Particulars HO (Rs.) Branch

(Rs.)

Particulars HO(Rs.) Branch

(Rs.)

To Opening Stock 60,000 24,000 By Sales 9,00,000 1,20,000

To Purchases 6,00,000 — By Goods Sent to

Branch

1,44,000 —

To Goods Sent to

Branch

— 1,44,000 By Closing Stock* 1,20,000 72,000

To Gross Profit c/d 5,04,000 24,000

11,64,00

0

1,92,000 11,64,00

0

1,92,000

To Expenses 1,30,000 6,000 By Gross Profit b/d 5,04,000 24,000

To Stock Reserve By Stock Reserve

(Rs. 72,000 x 60/160) 27,000 — (Rs. 24,000 x 60/160) 9.00C —

To Net Profit 3,56,000 18,000

5,13,000 24,000 5,13,000 24,000

Working notes:

* Let Cost Price = Rs. 100 List Price = Rs. 200

(???) Invoice Price = 20% less than the list price, i.e., Rs. 200 - 20% of Rs. 200 =

Rs. 160

(i) Calculation of Closing Stock at Head Office:

Rs.

Rs.

ling Stock 60,000

Add: Purchases 6,00,000

6,60,000

Cost of Goods Sold (9,00,000 x 100/200) 4,50,000

of Goods sent to Branch (1,44,000 x 100/160) 90,000 5,40,000

Closing Stock 1,20,000

(if) Calculation of Closing Stock at Branch:

Opening Stock at Invoice Price 24,000

Add: Goods received from Head Office 1,44,000

1,68,000

Invoice Price of Goods sold [1,20,000 x 160/200] 96,000

Closing Stock 72,000

Q. 7. M/s XYZ Ltd. has branches at Delhi and Agra and goods are invoiced at cost plus

a profit of 20% on sales. The following information is available of the transactions at

Delhi branch for the year ending 319t

March, 2011: [2011

01-04-2010 (Rs.) 31-03-2011 (Rs.)

Stock at Invoice Price 40,000 —

Debtors 12,000 11,000

Petty Cash 150 250

Transactions during 2010-11: Rs.

Goods sent to branch at cost to HO 3,36,000

Goods returned by branch to HO 15,000

Cash Sales 1,05,000

Credit Sales 1,80,000

Normal Loss at IP 350

Goods pilfered at IP 3,000

Goods lost by fire at IP 4,000

Insurance Co. paid to HO for loss by fire at Delhi 3,000

Cash sent for petty expenses 32,000

Bad debts at Delhi branch 400

Goods transferred to Agra branch under instructions from HO at IP 12,000

Insurance charges paid by HO 200

Goods returned by Debtors 500

Note: Goods transferred to Agra branch were in transit (given above) on 31st March, 2011.

Prepare:

(i) Branch Stock Account; (ii) Branch Adjustment Account;

(iii) Branch Profit & Loss Account; (iv) Stock Reserve Account; and

(v) Branch Debtors Account

Sol. IP = CP + RP => 100 = 80 + 20

Dr. Branch Stock Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/f 40,000 By Goods sent to Branch A/c

(IP)

15,000

To Goods sent to Branch A/c (IP) By Branch Cash A/c (Cash

Sales)

1,05,000

(Rs. 3,36,000 x 100/80) 4,20,000 By Branch Debtors (Credit

Sales)

1,80,000

To Branch Debtors A/c By Branch Adj. A/c (Normal

Loss)

350

(Sales Returns) 500 By Branch Adjustment A/c

(Loading on Goods pilfered)

(Rs. 3,C00 x 20/100) 600

By Branch P & L A/c

(Cost of Goods Pilfered) 2,400

By Branch Adjustment A/c

(Loading

on Goods destroyed by fire) 800

By Branch Profit & Loss A/c

(CP)

(Goods destroyed by fire) 3,200

By Goods sent to Branch A/c

(IP)

(Goods transferred to Agra) 12,000

By Balance c/f (Closing stock at

Branch)

1,41,150

4,60,500 4,60,500

Dr. Branch Debtors Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/f 12,000 By Branch Expenses (Bad Debts) 400

To Branch Stock A/c 1,80,000 By Branch Stock A/c 500

(Credit Sales) (Returns by Debtors)

By Branch Cash A/c (Received

from Debtors) (Balancing figure) 1,80,100

By Balance c/f 11,000

1,92,000 1,92,000

Dr. Branch Adjustment Account Cr.

Particulars Rs. Particulars Rs.

To Goods sent to Branch A/c 3,000 5y Branch Stock Reserve A/c 8,000

(Loading on goods returned) By Goods sent to Branch A/c

(IP)

To Branch Stock A/c (Normal

Loss)

350 (Rs. 4,20,000 x 1/5) 84,000

To Branch Stock A/c

(Loading on Goods pilfered) 600

To Branch Stock A/c

(Loading on Goods lost by fire) 800

To Branch Stock A/c

(Loading on Goods tmsf. to

Agra)

2,400

To Branch Stock Reserve A/c 28,230

(Loading on Closing Stock)

To Gross Profit tmsf. to P & L

A/c

56,620

92,000 92,000

Dr. Branch Profit & Loss Account Cr.

Particulars Rs. Particulars Rs.

To Branch Stock A/c By Gross Profit

(Goods pilfered at Cost) 2,400 (Per Branch Adjustment A/c) 56,620

To Branch Stock A/c

Cost Price of loss by fire 3,200

Less: Claim 3,000 200

To Bad Debts 400

To Insurance Charges A/c 200

To Branch Expenses A/c

(Per Branch Petty Cash A/c)*, 31,900

To Net Profit 21,520

56,620 56,620

Dr. Branch Stock Reserve Account Cr.

Date Particulars Rs. Date Particulars Rs.

01-04-

10

To Branch Adjustment

A/c

8,000 01-04-

10

By Balance b/f 8,000

31-03-

11

To Balance c/d 28,230 31-03-

11

By Branch Adjustment

A/c

28,230

Workings notes:

Dr. Branch Petty Cash Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/f 150 By Branch Expenses (transferred

To HO A/c (Cash Received) 32,000 to Branch P&L A/c) (Bat figure) 31,900

By Balance c/f 250

32,150 32,150

Dr. Branch Cash Account Cr.

Particulars Rs. Particulars Rs.

To Branch Stock A/c (Cash

Sales)

1.05,000 By Remittance to HO*2 2,85,100

To Branch Debtors 1,80,100

2,85,100 2,85,100

Working notes:

*1 Branch expenses are Rs. 31,900 the balancing figure of Branch Petty Cash Account.

*2 Branch should have remitted all the cash received to the H.O., i.e., Rs. 2,85,100.

*3 Branch Petty Cash Account and Branch Cash Account are only in working narrations as

these accounts have no meaning for the HO.

Q. 8. From the following details relating to Delhi branch for the year ending March 318t

,

2011, prepare Branch Account and Goods sent to Branch Account in the books of Head

Office. Show your workings clearly: [2011

Stock on 1-4-2010 Rs. 25,000

Debtors on 1-4-2010 Rs. 10,000

Furniture on 1-4-2010 Rs. 6,000

Petty Cash on 1-4-2010 Rs. 1,000

Insurance prepaid on 1-4-2010 Rs. 300

Salaries outstanding on 1-4-2010 Rs. 4,000

Goods sent during the year 2010-11 Rs. 2,00,000

Cash sales during the year Rs. 2,70,000

Total Salt- Rs. 3,50,000

Cash received from Debtors Rs. 65,000

Cash paid by Debtors direct to HO Rs. 5,000

Goods returned by branch Rs. 2,000

Goods returned by Debtors Rs. 1,600

Cash sent to Branch for expenses:

Rent (Rs. 800 p.m.) 9,600

Salary (Rs. 4,000 p.m.) 48,000

Petty Cash 2,000

Insurance (upto June 2011) 1,200 60,800

Petty Cash Expenses 2,200

Discount allowed to Debtors 500

Stock on 31-3-2011 15,000

Depreciation on furniture at 10% p.a.

Goods costing Rs. 2,500 were damaged in transit and a sum of Rs. 2,000 was recovered

by branch from the insurance company in full settlement of the claim.

Sol.

In the Books of Head Office

Dr. Branch Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/f: By Balances b/f: Salaries

outstanding

4,000

Stock 25,000 By Bank A/c:

Debtors 10,000 Cash Sales 2,70,000

Furniture 6,000 Collection from Debtors 65,000

Petty Cash 1,000 Paid by Debtors directly to HO 5,000

Insurance Prepaid 300 Received from Insurance Co. 2,000

To Goods sent to Branch A/c 2,00,000 By Goods sent to Branch A/c

To Bank A/c: (Returns) 2,000

Rent 9,600 By Balances c/f:

Salary 48,000 Stock 15,000

Petty Cash 2,000 Debtors*1 18,500

Insurance 1,200 60,800 Furniture*3 5,400

To Balances c/d: Petty Cash*2 800

Salaries outstanding A/c*5 4,000 Insurance Prepaid*4 300

To Profit & Loss A/c (Net profit

of

Branch transf. to General P&L

A/c)

80,900

3,88,000 3,88,000

Working notes:

*1 Dr. Branch Debtors Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/f 10,000 By Branch Cash A/c

To Sales (Credit) 80,000 (Received from Debtors) 65,000

By Head Office 5,000

By Sales Return 1,000

By Discount A/c 500

By Balance elf (Balancing 18,500

figure)

90,000 90,000

*2 Dr. Branch Petty Cash Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/f 1,000 By Branch Petty Expenses 2,200

To Head Office 2,000 By Balance c/f*2 800

3,000 3,000

*3 Furniture balance on 31-03-2011 is Rs. 6,000 - Rs. 600 - Rs. 5,400.

*4 Insurance is prepaid on 31-03-2011 for 3 months, i.e., 1/4 x Rs. 1,200 or Rs. 300.

*5 Outstanding Salaries Rs. 4,000 remain o/s as only Rs. 48,000 (Rs. 4,000 x 12) were paid

during the year.

Q. 9. Linken Ltd. has its branches in Ambala and Ludhiana to whom goods are invoiced

at cost plus 25%. The following information is available of the transactions at Ambala

Branch for the year ending 31st March, 2009:[2011 Nov.

Balance at 1st April, 2008 Rs.

Stock at invoice price 20,000

Debtors 6,000

Petty Cash 475

Transactions during 2008-09

Goods sent to branch at invoice price 2,40,000

Goods returned to HO at invoice price 7,500

Cash Sales 60,000

Credit Sales (Sold at cost + 50%) 90,000

Normal loss at invoice price 300

Goods pilfered at invoice price 1,500

Goods lost in fire at invoice price 3,000

Insurance Co. paid to HO for loss by fire at Ambala 2,000

Cash sent for petty expenses 16,000

Goods transferred to Ludhiana branch under instructions

from HO at invoice price 6,000

Insurance charges paid by HO 1,000

Goods returned by debtors 500

Cash received from debtors 89,500

Balance on 31st March, 2009

Petty cash Rs. 425, Debtors Rs. 5,500, Stock ?

Prepare:

(i) Branch Stock Account; (ii) Branch Adjustment Account;

(iii) Branch Profit & Loss Account; (iv) Branch Debtors Account;

(v) Goods sent to Branch Account.

Sol. Invoice Price (IP) = Cash Price (CP) + Reserve Price

125 = 100 + 25

Dr. Branch Stock Account Cr.

Date Particulars Rs. Date Particulars Rs.

01-04-

08

To Balance b/f 20,000 By Goods sent to Branch

A/c

(IP) (Goods returned to

HO)

7,500

By Branch Cash A/c

(Cash Sales) 60,000

31-03-

09

To Goods sent to Branch

A/c

31-03-

09

By Branch Debtors A/c

(IP) 2,40,000 (Credit Sales) 90,000

To Branch Debtors A/c By Branch Adjustment

A/c

(Sales Returns) 500 (Normal Loss) (60 +

240)

300

To Branch Adjustment

A/c

By Branch P&L A/c

(Cost

(Excess Price)*1 14,917 Price of Goods Lost)*2 3,600

By Branch Adj. A/c

(Reseive

Price of Goods Lost)*2 900

By Goods sent to Branch

A/c

(IP) (Goods transferred

to

Ludhiana Branch) 6,000

By Balance c/f 1,07,117

2,75,417 2,75,417

Dr. Branch Debtors Account Cr.

Particulars Rs. Particulars Rs.

To Balance 6,000 By Branch A/c (Cash received

To Branch Stock A/c from Debtors by Branch) 89,500

(Credit Sales) 90,000 By Branch Stock A/c (Sales

Returns)

500

By Discount A/c (Balancing

figure)

500

By Balance c/f (Given) 5,500

96,000 96,000

Dr. Branch Adjustment Account Cr.

Particulars Rs. Particulars Rs.

To Goods sent to Branch A/c By Branch Stock Reserve A/c

(RP of Goods returned to HO) (Reserve Price of Opening Stock)

(7,500 x 1/5) 1,500 (20,000 x 1/5) 4,000

To Branch Stock A/c By Goods sent to Branch A/c

(RP a.id Cost of Normal Loss) 300 (RP of Goods sent to Branch)

To Branch Adjustment A/c (2,40,000 x 1/5) 48,000

(Reserve Price of Goods Lost) 900 By Branch Stock A/c (Excess

Price)*,

14,917

To Goods sent to Branch A/c

(RP of Goods transferred to

Ludhiana Branch) (6,000 x 1/5) 1,200

To Branch Stock Reserve A/c

(Reserve Price of Closing Stock) 21,423

To Branch P & L A/c (Gross 41,594

Profit)

66,917 66,917

Dr. Branch Profit & Loss Account Cr.

Particulars Rs. Particulars Rs.

To Goods Lost A/c By Branch Adjustment A/c

Pilfered (CP) 1,200 (Gross Profits) 41,594

Fire (CP) 2,400

3.600

Less: Insurance 2,000 1,600

To Discount A/c 500

To Petty Expenses

Rs.(475 + 16,000 -425) 16,050

To Insurance Charges 1,000

To Net Profit 22,444

41,594 41,594

Working notes:

*l Excess Price = Sales Price (Credit Sales) - Invoice Price. EP is the balancing figure of

Branch

Stock Account.

Branch Stock Account is maintained at invoice price in order to find out shortage or surplus

of

goods. Since credit sales are at cost +50%, which is more than invoice price, the difference

between selling price and invoice price (i.e., cost + 25%) is additional gross profit earned and

is

transferred to Branch Adjustment Account in full.

Net Credit Sales = Rs. 90,000 - Rs. 500 (Sales Return) = Rs. 89,500

Invoice price of these goods = Rs. 89,500 x 125/150----- = Rs. 74,583

Additional Gross Profit (Excess Price) = Rs. 89,500 - Rs. 74,583 = Rs. 14,917

*2 Goods Lost includes both Goods Pilfered as well as Goods Lost by Fire.

DR. Goods Sent to (Ambala) Branch Cr.

Particulars Rs. Particulars Rs.

To Bank A/c 48,000 By Branch Stock A/c (IP) 2,40,000

To Branch Stock A/c (IP)- 7,500 By Branch Adjustment A/c (RP) 1,500

To Ludhiana Branch Stock A/c

(IP)

6,000 By Branch (Ambala) Adjustment

A/c

1,200

To Trading A/c (Deducted for

Purchase A/c)

1,81,200

2,42,700 2,42,700

Q. 10. Hari Traders invoices goods to its branch at Delhi at cost. Goods are generally

sold by the branch at a profit of 10% of cost. From the following information, prepare

Branch Account to find out the profit & loss of the branch and also necessary working

notes. [2011 Nov.

Opening Balances: Branch Stock Rs. 5,000

Branch Debtors Rs. 7,500

Branch Furniture Rs. 4,000

Branch Salary outstanding Rs. 2,500

Transactions during the year: Rs.

Goods sent to Branch 50,000

Goods received by Branch 47,500

Cash sent to Branch for Expenses 12,500

Actual Branch Expenses (including Branch Salary outstanding) 14,500

Cash Sales 25,000

Credit Sales 30,000

Cash received from debtors 27,500

Discount 3,000

Cash sent to branch for direct purchases from local market 10,000

Cost of direct purchases 12,500

Closing balances: Branch Stock Rs.

Branch Debtors Rs.

Branch Cash 250

Cash remitted by the branch to HO Rs. 2,750 was not received till close of the

accounting period by HO. Provide 10% depreciation on Furniture.

Sol. Dr. Branch Account (in HO Books) Cr.

Date Particulars Rs. Date Particulars Rs.

01-4-

CY

To Balance b/f: 01-4-

CY

By Balance b/f:

Branch Stock 5.000 Salaries O/s A/c 2,500

Branch Debtors 7,500

Branch Furniture 4,000

31-3-

CY

To Goods sent to Branch

A/c

50,000 31-3-

CY

By Bank A/c*3 (Cash

received

To Bank A/c (Cash sent) 12,500 from Branch) 45,000

To Bank A/c (For

purchases)

10,000 By Balances c/f:

Branch Stock A/c*1 17,500

Branch Debtors A/c*2 7,000

Branch Petty Cash A/c 250

Br. Cash in Transit (CIT) 2,750

Branch Furniture A/c

Rs.(4,000 - 400) 3,600

By P&L A/c (Branch

Loss)

10,400

89,000 89,000

Working notes:

*1 Unsold Stock at the Branch at the end of the year is calculated as Rs.

Opening Stock at Branch 5,000

Add: Goods from HO 50,000

Add: Goods Locally Purchased 12,500

67,500

Less: Cost Price of Goods Sold @ Branch (10/11 x 55,000) 50,000

Unsold Stock at the end (Cost Price) 17,500

*2 Dr. Branch Debtors Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/f 7,500 By Branch Cash A/c 27,500

To Branch Credit Sales 30,000 By Discount A/c 3,000

By Balance c/f *2 (Balancing

figure)

7,000

37,500 37,500

*3 Dr. Branch Cash Account Cr.

Particulars Rs. Particulars Rs.

To HO A/c 12,500 By Branch Expenses 14,500

To Branch Cash Sales 25,000 By Branch Purchases (Local) 12.500

To Branch Debtors 27,500 By HO A/c (Remitted to HO)

(Bal. fig.)*3

45,000

To HO A/c (Cash for Local

Purchases)

10,000 By Balances c/f: Cash at Branch 250

Cash in Transit 2,750

75,000 75,000

Note: Narrations in these accounts in the Workings are just given for explanation. These are

not part of Double Entry System.

Q. 11. S.K. Brothers has a branch at Delhi. Goods are invoiced at a profit of 20% on

sales. The following information is available of the transactions at Delhi Branch for the

year ending 31st March, 2012: [2012

Balance as on 01-04-2011: Branch stock at invoice price Rs. 50,000

Branch Debtors Rs. 34,000

Branch Cash Rs. 8,000

Balance as on 31-03-2012: Branch stock at invoice price Rs.

Branch Debtors Rs. 47,840

Branch Cash Rs. 18,000

Transactions during 2011-12:

Good invoiced to Branch Rs.

6,50,000

Goods received by the Branch Rs.

6,00,000

Goods returned by Branch to HO Rs. 25,000

Credit sales at Branch Rs.

3,50,000

Cash sales at Branch Rs.

2,05,000

Normal loss at Branch Rs. 10,000

Goods lost by fire at Branch Rs. 15,000

Cash remitted to HO Rs.

Cash received from branch debtor Rs.

3,14,600

Bills receivable received from Branch debtors Rs. 20,000

Amount received by the Branch on discounting of the above bills Rs. 19,600

Cash sent to Branch for expenses Rs. 72,000

Actual cash expenses at Branch Rs. 71,800

Cash discount allowed to customers Rs. 1,560

Make a provision for Bad and Doubtful debts @ 5% on Debtors.

Prepare: (i) Branch Stock Account; (ii) Branch Debtors Account;

(iii) Branch Expenses Account; (iv) Branch Cash Account;

(v) Branch Adjustment Account; {vi) Branch Profit & Loss Account.

Sol. Dr. Branch Stock Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 50,000 By Goods sent to Branch A/c

(Return;

25,000

To Goods sent to Branch A/c 6.50,000 By Branch Debtors A/c (Credit

Sales)

3,50,000

[76,00,000 + Rs. 50,000] By Branch Cash A/c (Cash

Sales)

2,05,000

By Branch Adj. A/c (Normal

Loss)

10,000

By Abnormal Loss:

Branch Adj. A/c 3,000

Branch P&LA/c 12,000 15,000

By Balance c/d: Rs.(45,000 +

50,000)

95,000

7,00,000 7,00,000

Dr. Branch Debtors Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 34,000 By Branch Cash A/c 3,14,600

To Branch Stock A/c 3,50,000 By Bills Receivable A/c 20,000

(Credit Sales) By Discount Allowed A/c 1,560

By Balance c/d 47,840

3,84,000 3,84,000

Dr. Branch Expenses Account Cr.

Particulars Rs. Particulars Rs.

To Branch Cash A/c 71.800 By Branch Profit & Loss A/c 71,800

Dr. Branch Cash Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 8,000 By Branch Expenses A/c 71,800

To Branch Stock A/c (Cash

Sales)

2,05,000 By Cash A/c (Sent to HO) 5,29,400

To Branch Debtors A/c 3,14,600 By Balance c/d 18,000

To B/R (Discounted) 19,600

To Cash A/c (From HO) 72,000

6,19,200 6,19,200

Dr. Branch Adjustment Account Cr.

Particulars Rs. Particulars Rs.

To Branch Stock A/c (Normal

loss)

10,000 By Stock Reserve 10,000

To Branch Stock A/c (Abnormal

Loss)

3,000 By Goods sent to Branch 1,30,000

To Goods sent to Branch 5,000

To Stock Reserve 19,000

To Branch P&L A/c (Gross

Profit)

1,03,000

1,40,000 1,40,000

Dr. Branch Profit & Loss Account Cr.

Particulars Rs. Particulars Rs.

To Branch Exp. A/c 71,800 By Branch Adjustments A/c 1,03,000

To Branch Debtors A/c

(Discount)

1,560 (Gross Profit)

To Discount on B/R 400

To Branch Stock A/c (Abnormal

Loss)

12,000

To Provision for Bad & Doubtful

Debts

(Rs. 47,840 x 5/100] 2,392

To Net Profit c/d 14,848

1,03,000 1,03,000

Q. 12. M/s Virat & Company with their Head Office at Delhi, have a branch at Noida.

They supply goods to its branch at selling price less 20%. The company as well as the

branch sells goods to consumers at a profit of 100% on cost. M/s Virat & Co. also sells

goods to their approved dealers at the same price at which they are invoicing to their

branch at Noida. From the following particulars, prepare Trading and Profit & Loss

Account of the Head Office and of the Branch for the year ending 31st March, 2012:

[2022

Head Office (Rs.) Branch (Rs.)

Stock at beginning 1,50,000 8,000

Purchases during the year 12,80,000 —

Goods sent to Branch 2,00,000 —

Goods received from HO — 2,00,000

Goods sold to approved Dealers 3,00,000 —

Goods sold to customers 6,00,000 1,80,000

Expenses 50,000 15,000

Sol. Head Office Trading and Profit & Loss Account

Dr. for the year ending March 31, 2012 Cr.

Particulars Rs. Particulars Rs.

To Opening Stock 1,50,000 By Goods sent to Branch 2,00,000

To Purchases 12,80,000 By Sales: to Approved dealers 3,00,000

To Gross Profit c/d 4,87,500 to Customers 6,00.000

By Closing Stock *1 8,17,500

19,17,000 19,17,000

To Expenses 50,000 By Gross Profit b/d 4,87,500

To Stock Reserve for unrealised By Stock Reserve for unrealised

profit (Rs. 64,000 x 60/160) 24,000 profit (Rs. 8,000 x 60/160) 3,000

To Net Profit 4,16,500

4,90,500 4,90,500

Branch Trading and Profit & Loss Account

Dr. for the year ending March 31, 2012 Cr.

Particulars Rs. Particulars Rs.

To Opening Stock 8,000 By Sales 1,80,000

To Goods received from HO 2,00,000 By Closing Stock*2 64,000

To Gross Profit c/d 36,000

2,44,000 2,44,000

To Expenses 15,000 By Gross Profit b/d 36,000

To Net Profit c/d 21,000

36,000 36,000

Working notes:

*l Calculation of Closing Stock at Head Office Rs.

Opening Stock 1,50,000

Add: Purchases 12,80,000

14,30,000

Less: Cost of Goods sold to approved Dealers [Rs. 3,00,000 x

100/160]

1,87,500

Cost of Goods sent to Branch [Rs. 2,00,000 x 100/160) 1,25,000

Cost of Goods sold to Customer [Rs. 6,00,000 x 100/200] 3,00,000

(6,12,500)

Closing Stock at Head Office 8,17,500

*2 Calculation of Closing Stock at Branch Rs.

Opening Stock at invoice price 8,000

Add: Goods received from HO 2,00,000

2,08,000

Less: Cost to Branch (invoice price) of goods sold by Branch (1,80,000 x

160/200)

1,44,000

Closing Stock of Branch 64,000

Q. 13. Delhi Head Office supplies goods to its branch at Noida at invoice price which is

cost plus 50%. All cash received by the branch is remitted to Delhi and all branch

expenses are paid by the Head Office. From the following particulars related to Noida

branch for the year 2012 prepare: [2023

(a) Branch Stock Account {b) Branch Debtors Account

(c) Branch Expenses Account and

{d) Branch Adjustment Account in the books of Head Office so as to find out the gross

profit and net profit made by the branch: ?

Stock with Branch on 1-1-2012 (Invoice Price) 1,20,000

Branch Debtors on 1-1-2012 24,000

Petty Cash Balance on 1-1-2012 200

Goods received from HO 3,72,000

Goods returned by debtors direct to HO 6,000

Allowances to Customers off Selling Price 4,000

Cash Sales 2,08,000

Credit Sales 1,74,000

Cash received from debtors 1,80,000

Discount allowed to debtors 4,800

Expenses paid by HO in Cash: Rent Rs. 4,800

Salaries Rs. 48,000

Petty Cash Rs. 2,000 54,800

Stock with Branch on 31-12-2012 1,08,000

Petty Cash Balance on 31-12-2012 200

Sol. In the books of Head Office

Dr. Branch Stock Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 1.20,000 By Branch Cash A/c (Cash

Sales)

2,08,000

To Goods sent to Branch A/c 3,72,000 By Branch Debtors A/c (Credit

Sales)

1,74,000

To Branch Debtors A/c 6,000 By Goods sent to Branch A/c

(Returned by Debtors to HO) (Returned by Debtors to HO) 6,000

To Branch Adjustment A/c By Branch Adjustment A/c

(Allowance

(Trading surplus) (Balancing

fig.)

2,000 to Customers off-selling price

already adjusted) 4,000

By Balance c/d 1,08,000

5,00,000 5,00,000

Dr. Branch Debtors Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 24,000 By Branch Cash A/c 1,80,000

To Branch Stock A/c (Credit

Sales)

174,000 By Branch Expenses A/c (Dis.

allowed)

4,800

By Branch Stock A/c (Goods

returned

to HO by Debtors) 6,000

By Balance c/d 7,200

1,98,000 1,98,000

Dr. Branch Expenses Account Cr.

Particulars Rs. Particulars Rs.

To Cash A/c: By Branch Adjustment A/c

Rent 4,800 (Profit & Loss A/c portion) 59,600

Salaries 48,000

Petty Cash 2,000 54,800

To Branch Debtors A/c

(Discount)

4,800

59,600 59,600

Dr. Branch Adjustment Account Cr.

Particulars Rs. Particulars Rs.

To Goods sent to Branch A/c By Stock Reserve A/c (Opening

Load (Rs. 6,000 x 50/150) 2,000 Load) (Rs. 1,20,000 x 50/150) 40,000

To Branch Stock A/c By Goods sent to Branch A/c

(Decrease in gross profit due to Load (Rs. 3,72,000 x 50/150) 1,24,000

sale of goods at less than invoice By Branch Stock A/c 2,000

price by giving allowance to (Trading surplus assumed to be

customers at the time of sale) 4,000 due to sale at a higher price

To Stock Reserve A/c—Closing 36,000 than IP)

(Rs. 1,08,000 x 50/150)

To Gross Profit c/d 1,24,000

1,66,000 1,66,000

To Branch Expenses A/c 59,600 By Gross Profit c/d 1,24,000

(including Discount)

To Net Profit trans, to General

P&L A/c

64,400

1,24,000 1,24,000

Working notes:

*1 Allowance to customers off-selling price already adjusted while invoicing has been treated

as an item affecting gross profit. Therefore, it has been transferred to the debit side of first

part of the Branch Adjustment Account.

*2 Returns of goods by branch debtors directly to the Head Office has been divided into two

parts: namely (»') Sales Return, and (ii) Return of Goods by Branch to the Head Office. The

entries have been passed accordingly. Alternatively, a direct entry can be passed without

affecting Branch Stock Account by Debiting Goods sent to Branch Account and Crediting

Branch Debtors Account.

Q. 14. Vaani Co. Delhi has a branch at Kolkata. It invoices goods to the branch at

selling price which is cost plus 33 1/3%. From the following particulars, prepare Branch

Account at invoice price. Show also Branch Debtors Account and Goods sent to Branch

Account in the books of Vaani Co. Delhi. [2024

Stock on 1st April, 2013 (invoice price) Rs.

15,000

Debtors on 1st April, 2013 Rs.

11,400

Goods invoiced to branch during the year at IP Rs.

67,000

Sale at branch: Cash Rs. 31,000

Credit Rs. 37,400 Rs.

68,400

Cash received from debtors Rs.

40,000

Discount allowed to customers Rs. 300

Bad debts written off Rs. 250

Cheque sent to branch: Salaries Rs. 5,000

Sundry expenses Rs. 1,700 Rs. 6,700

Stock on 31st March, 2014 (invoice price) Rs.

13,400

Sol.

In the Books of Vaani Co.

Kolkata Branch Account

Particulars Rs. Particulars Rs.

To Balance b/d: Stock 15,000 By Stock Reserve A/c

Debtors 11,400 (Loading Opening Stock) 3,750

To Goods sent to Branch A/c 67,000 By Goods sent to Branch A/c

(Loading)

16,750

To Bank A/c: (Expenses) By Bank A/c: (Remittance

received

Salaries 5,000 from Branch)

Sundry Expenses 1,700 6,700 Cash Sales 31,000

To Stock Reserve A/c 3,350 Cash received from Dr. 40,000 71,000

(Loading on Closing Stock) By Balance c/d: Stock 13,400

To Net Profit trans to General

P&L A/c

9,700 Debtors 8,250 21,650

1,13,150 1,13,150

Dr. Goods sent to Branch Account Cr.

Particulars Rs. Particulars Rs.

To Branch A/c (Loading) 16,750 By Branch A/c 67,000

To Purchase A/c (Cost of

goods sent to Branch) 50,250

67,000 67,000

Dr. Branch Debtors Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 11,400 By Cash A/c 40,000

To Credit Sales 37,400 By Discount Allowed 300

By Bad Debts 250

By Balance c/d 8,250

48,800 48,800

Working notes:

Invoice Price = Cost + Profit = 100 + 100/3 = 400/3

Rate of Profit at Invoice Price = 100/3 x 3/400 = 1/4

Q. 15. A company with its Head Office at Delhi has a Branch at Agra. Goods are

invoiced to the branch at cost plus 33 1/3% which is the selling price. The following

information is given in respect of the branch for the year ended 31st

March, 2014: [2014

Goods sent to branch during the year at invoice price Rs. 4,80,000

Stock on 1st April, 2013 (invoice price) Rs. 24,000

Cash Sales Rs. 1,80,000

Returns from customers Rs. 6,000

Branch expenses paid for cash Rs. 53,500

Branch debtors balance (1-4-2013) Rs. 30,000

Discount allowed Rs. 1,000

Bad debts Rs. 1,500

Stock on 31st March, 2014 (invoice price) Rs. 48,000

Branch debtors balance (31-3-2014) Rs. 36,500

Collections from Debtors Rs. 2,70,000

Branch debtors' cheque returned dishonoured Rs. 5,000

You are required to ascertain the Profit made by the Branch by preparing the necessary

accounts under the Branch Adjustment Method.

Sol.

In the Books of Head Office

Dr. Branch Stock Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 24,000 By Branch Cash A/c (Cash

Sales)

1,80,000

To Goods sent to Branch 4,80,000 By Branch Debtors (Credit

Sales)

2,80.000

To Branch Debtors (Sales

Return)

6,000 By Shortage (Balancing figure)

Branch Adjustment A/c

(Loading) 500

By Adjustment A/c (Cost) 1,500 2,000

By Balance c/d 48,000

5,10,000 5,10,000

Dr. Branch Debtors Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 30,000 By Returns Inwards 6,000

To Credit Sales (Bal. figure) 2,80,000 By Discount Allowed A/c 1,000

To Cheque dishonoured 5,000 By Bad Debts 1,500

By Cash A/c 2,70,000

By Balance c/d 36,500

3,15,000 3,15,000

Dr. Branch Adjustment Account Cr.

Particulars Rs. Particulars Rs.

To Stock Reserve (Vi of Rs.

48,000)

12,000 By Stock Reserve (Vi of Rs.

24,000)

6,000

To Branch Stock (Shortage) By Goods Sent to Branch

(Vi of Rs. 2,000) (Loading) 500 (1/4 of Rs. 4,80,000) 1,20,000

To Gross Profit c/d 1,13,500

1,26,000 1,26,000

To Branch Expenses A/c 53,500 By Gross Profit b/d 1,13,500

To Branch Debtors:

Discount Allowed 1,000

Bad Debts 1,500 2,500

To Branch Stock A/c (Shortage

Cost)

1,500

To Net Profit transferred to

General Profit & Loss A/c 56,000 •

1,13,500 1,13,500

Working notes:

Invoice Price = Cost + Profit = 100 + 100/3 = 400/3

Rate of Profit at Invoice Price = 100/3 x 3/400 = 1/4

Q. 16. KP Ltd. invoices goods to its Kanpur Branch at 20% less than list price which is

cost plus 100% with instructions that cash sales are to be made at invoice price and

credit sales at catalogue price (i.e. list price).

From the following particulars for the year ended 31st March, 2013, prepare Kanpur

Branch and Goods sent to Branch accounts: [2024 Nov.

Branch Stock as on 1-4-2012 at invoice price Rs. 60,000

Branch Debtors on 1-4-2012 Rs. 15,000

Goods sent to Branch during the year at invoice price Rs. 3,00,000

Branch expenses paid by HO Rs. 18,000

Goods returned by Branch to HO at invoice price Rs. 36,000

Cash Sale Rs. 1,70,000

Credit Sale Rs. 1,20,000

Goods returned by credit customers Rs. 20,000

Normal loss at invoice price Rs. 6,000

Loss by fire at invoice price Rs. 12,ooo

Claim accepted by insurance company Rs. 8,000

Branch Bad debts Rs. 7,000

Cash received from debtors Rs. 80,000

Discount allowed Rs. 3,000

Branch stock at invoice price as on 31-3-2013 Rs. 56,000

Branch debtors on 31-3-2013 Rs.

Sol. Note: Let the Cost = Rs. 100

then, List price = Rs. 100 + 100% = Rs. 200

and. Invoice price = 200 - 20% = 200 - 40 = Rs. 160

Load on Invoice Price = Profit/Invoice Price = 60/160

Kanpur Branch Account

Particulars Rs. Particulars Rs.

To Balance b/d: By Balance b/d:

Branch Stock 60.000 Stock Reserve (Rs. 60,000 x

60/160)

22,500

Branch Debtors 15,000 By Goods sent to Branch

(Loading)

To Goods sent to Branch 3,00,000 (Rs. 3,00,000 x 60/160) 1,12,500

To Cash (Expenses) 18,000 By Goods sent to Branch 36,000

To Goods sent to Branch

(Loading)

By Branch Cash*2 2,50,000

(Rs. 36.000 * 60/160) 13,500 By Balance c/d:

To General Profit & Loss A/c 82,500 Insurance Company 8,000

To Balance c/d: Branch Stock 56,000

Stock Reserve (Rs. 56,000 x

60/160)

21,000 Branch Debtors^ 25,000

5,10,000 5,10,000

Dr. Goods sent to Branch Account Cr.

Particulars Rs. Particulars Rs.

To Kanpur Branch A/c 1,12,500 By Kanpur Branch A/c 3,00,000

To Kanpur Branch A/c 36,000 By Kanpur Branch A/c 13,500

To Purchase (Balancing figure) 1,65,000

3,13,500 3,13,500

Working notes:

*1 Dr. Branch Debtors Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 15.000 By Branch Stock (Return) 20,000

To Sales (Branch Stock) 1,20,000 By Bad Debts 7,000

By Discount 3.00C

By Branch Cash A/c 80,000

By Balance c/d (Balancing

Figure)

25,000

1,35,000 1,35,000

*2 Dr. Branch Cash Account Cr.

Particulars Rs. Particulars Rs.

To Sales (Branch Stock) 1,70,000 By Cash Remittance (Balancing

figure)

2,50,000

To Branch Debtors 80,000

2,50,000 2,50,000

Q. 17. The following is the Trial Balance of Allahabad Branch as at 31st March, 2013: 2024

Nov.

Particulars Dr. (Rs.) Cr. (Rs.)

Delhi Head Office 64,000 —

Stock (1-4-2012) 1,10,000 —

Purchases 3,78,000 —

Goods received from HO 1,60,000 —

Sales — 8,28,000

Goods returned to HO — 30,000

Salaries 35,000 —

Debtors 71,000 —

Creditors — 42,000

Rent 11,000 —

Office Expenses 34,500 —

Cash in hand and at Bank 8,500 —

Furniture 12,000 —

Machinery 16,000 —

9,00,000 9,00,000

Closing stock was valued at Rs. 38,000. The Branch Account in the Head Office books stood

at Rs. 6,000 (Debit balance) on 31st March, 2013. The difference in balances of H.O. and

Branch was caused by goods in transit.

You are required to prepare Trading and Profit and Loss Account and pass journal entries to

incorporate the Trial Balance of the Branch in the books of Head Office.

Sol. Goods in Transit = Rs. 64,000 (Dr.) H.O. A/c + Rs. 6,000 (Dr.) Branch A/c

= Rs. 70,000

Trading and Profit & Loss Account

for the year ended 31-3-2013

Particulars Rs. Particulars Rs.

To Branch A/c: By Branch A/c:

Opening Stock 1,10,000 Sales 8,28,000

Purchases 3,78,000 Goods Returned 30,000

To Goods sent to Branch Closing Stock 38,000

(1,60,000 + 70,000) 2,30,000 7,18,000 Goods-in-transit 70.000 9,66,000

To Branch Profit and Loss A/c 2,48,000

9,66,000 9,66,000

To Branch A/c: By Branch Trading

A/c

2,48,000

Salaries 35,000

Rent 11,000 -

Office Expenses 34,500 80,500

To General Profit and Loss A/c 1,67,500

2,48,000 2,48,000

Dr. Branch Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 6,000 By Branch Trading A/c 7,18,000

To Branch Trading A/c 9,66,000 By Branch Profit and Loss A/c 80,500

To Branch Creditors A/c 42,000 By Branch Assets (Sundries) A/c 2,15,500

10,14,000 10,14,000

In the Books of Head Office Journal Entries

Date Particulars L.F. Dr. (Rs.) Cr. (Rs.)

Branch Trading A/c Dr. 7,18,000

To Branch A/c 7,18,000

(Being incorporation of opening stock Rs. 1,10,000;

Purchases

73,78,000 and Goods sent to Branch Rs.

2,30,000)

Branch A/c Dr. 9,66,000

To Branch Trading A/c 9.66,000

(Being incorporation of Sales Rs. 8,28,000; Goods

returned

Rs. 30,000, Closing Stock Rs. 38,000 & Goods-in-

transit Rs. 70,000)

Branch Trading A/c Dr. 2,48,000

To Branch Profit & Loss A/c 2,48,000

(Being the entry for transfer of gross profit)

Branch Profit & Loss A/c Dr. 80,500

To Branch A/c 80,500

(Being incorporation of Salary Rs. 35,000;

Rent Rs. 11,000

and Office Expenses Rs. 34,500)

Branch Profit & Loss A/c Dr 1,67,500

To General Profit & Loss A/c 1,67,500

(Being the transfer of branch net profit)

Goods-in-transit A/c Dr. 70,000

Debtors A/c Dr. 71,000

Cash in hand/Bank Dr. 8,500

Furniture A/c Dr. 12,000

Machinery A/c Dr. 16,000

Closing Stock Dr. 38,000

To Branch A/c 2,15,500

(Being the incorporation of Branch Assets)

Branch A/c DR. 42,000

To Creditors A/c 42,000

(Being the incorporation of branch liabilities)

In the Books of Branch Journal

Date Particulars L.F. Dr. (Rs.) Cr. (Rs.)

Goods-in-transit A/c Dr. 70,000

To Head Office A/c 70,000

Q. 18. (a) Vaani Music System invoices goods to its Faridabad branch at cost plus 20%.

During the accounting year 2014-15, Vaani Music System invoiced goods amounting Rs.

15,000 were damaged in transit and insurance company admitted the claim of Rs.

15,000. Show the treatment of loss in the books of Head Office under:

(i) Debtors System

(ii) Stock and Debtors System [2015

(b) Saksham Ltd. has its branch at Mumbai to which goods are invoiced at cost plus

20%. Prepare Branch Account in the books of the head office after taking into

consideration the following information:

Opening Stock at Branch Rs. 72,000

Cash Sales at Branch Rs. 52,500

Credit Sales at Branch Rs. 1,23,000

Collections from Branch debtors Rs. 1,13,700

Goods received from head office Rs. 90,000

Branch Expenses:

Paid by Head Office Rs. 9,000

Paid by Branch Rs. 18,000

Expenses unpaid Rs. 4,200

Closing Stock at Branch Rs. 54,000

Closing Balance of Bills Receivable at Branch Rs. 3,000

Closing Balance of Branch debtors Rs. 24,480

Goods sent from head office to Branch remaining in

transit on closing day Rs. 10,800

Sol, (a)

Working note:

Selling price (Invoice Price) = Cost + 20%

Let the Cost of good be Rs. 100

Then Selling Price, 100 + 20 = Rs. 120

20% Profit on Invoice Price = 20/120 = 1/6

In the Books of Head Office Journal of Faridabad Branch

(i) Debtors System

S.No. Particulars L.F. Dr. (Rs.) Cr. (Rs.)

1 Abnormal Loss A/c Dr. 15,000

To Branch A/c 15,000

(Being goods damaged in transit)

2 Insurance claim A/c Dr. 15,000

To Abnormal Loss A/c 15,000

(Being ciaim received from Insurance

company)

(ii) Stock & Debtors System

S.No. Particulars L.F. Dr. (Rs.) Cr. (Rs.)

1 Abnormal Loss A/c Dr. 15,000

To Branch Stock A/c 15,000

(Being goods damaged in transit)

2 Branch Adjustment A/c (Rs. 15,000 * 1/6) Dr. 2,500

Branch Profit & Loss A/c (Cost) Dr. 12,500

To Abnormal Loss A/c 15,000

(Being Abnormal loss adjusted)

3 Insurance Claim A/c Dr. 15,000

To Branch Profit & Loss A/c 15,000

(Being claim received from Insurance

company)

(b) In the books of Head Office

Dr. Mumbai Branch Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d By Stock Reserve A/c (Rs.

72,000x1/6)

Stock 72,000 (Opening Stock Load) 12,000

Debtors 18,180 90,180 By Goods sent to Branch (Load)

To Goods sent to Branch (Rs. 1,00.800 x 1/6) 16,800

(Including Rs. 10,800 in transit) 1,00,800 By Cash A/c (Remittance):

To Bank A/c (Expenses paid by

HO)

9,000 Cash Sales 52,500

To Stock Reserve A/c Less: Expenses paid by

Rs.(54,000 + 10,800) x 1/6 10,800 Branch (18,000)

To Balance c/d (Expenses

unpaid)

4,200 Collection from Debtors

1,13,700

1,48,200

To Profit & Loss A/c (Profit) 54,300 By Balance c/d:

Stock 54,000

Goods in transit 10,800 64,800

By Bills Receivable 3,000

By Debtors 24,480

2,69,280 2,69,280

Dr. Memorandum Branch Debtors Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d (Balancing

figure)

18,180 By Cash A/c 1,13,700

To Credit Sales A/c 1,23,000 By Bills Receivable 3,000

By Balance c/d 24,480

1,41,180 1,41,180

Q. 19. Nitin Bros, has a branch at Allahabad. Goods are invoiced at cost plus 25%.

From the following particulars, prepare Branch Adjustment and Profit and Loss

Account and Branch Account for the year ended 31st March 2015:

Balances as on April 1, 2014: Branch Stock (Invoice Price) Rs. 12,500

Branch Debtors Rs. 8,500

Branch Cash Rs. 2,000

Balances as on March 31, 2015: Branch Stock (Invoice Price) Rs. 29,925

Branch Debtors Rs. 11,960

Branch Cash Rs. 4,500

Transactions during 2014-15:

Goods invoiced to Branch 1,62,500

Goods returned by Branch to Head Office 6,250

Cash remitted to Head Office Rs.

Credit Sales at Branch 87,500

Cash sales at Branch 51,250

Cash received from Debtors of branch 78,650

Bills Receivable received from debtors at branch 5,000

Amount received by branch on discounting of the above mentioned bills 4,900

Cash sent to branch for expenses 18,000

Actual cash expenses at branch 17,950

Shortage of stock at branch (Invoice Price) 75

Cash discount allowed to branch customers 390

Make a provision for bad and doubtful debts ® 5% of the debtors.

Sol. In the books of Head Office

Dr. Allahabad Branch Adjustment Account Cr.

Particulars Rs. Particulars Rs.

To Stock A/c Reserve (Load on By Stock Reserve A/c (Load on

Closing stock) (Rs. 29,925 x 1/5) 5,985 Opening stock) (Rs. 12,500 x

1/5)

2,500

To Goods sent to Branch A/c By Goods sent to Branch A/c

(Load on Returned goods) (Load) (Rs. 1,62,500 x 1/5) 32,500

(Rs. 6,250 x 1/5) 1,250

To Shortage (Load) (775 x 1/5) 15

To Gross Profit transf. to P&L

A/c

27,750

35,000 35,000

Dr. Allahabad Branch Profit & Loss Account Cr.

Particulars Rs. Particulars Rs.

To Discount (Bills Receivable) 100 By Gross Profit b/d 27,750

To Expenses (Actual) 17.950

To Shortage (Cost) 60

To Discount allowed 390

To Provision for Bad Debts

(Rs. 119,60 x 5/100) 598

To Net Profit 8,652

27,750 27,750

Working notes:

Dr. Allahabad Branch Cash Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 2,000 By Expenses (Actual) 17,950

To Sales 51.250 By HO (Remittance) (Balancing

figure)

1,32,350

To Debtors 78,650 By Balance c/d 4,500

To Bills Receivable 4.900

To Branch (for expenses) 18,000

1,54,800 1,54,800

Selling price (Invoice Price) = Cost + 25%. Let the cost of good be = Rs. 100. Therefore, then

Selling price 100 + 25 = 125. 25% Profit on Invoice Price = 25/125 = 1/5

In the books of Head Office

Dr. Allahabad Branch Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d: By Stock Reserve A/c (Load)

Stock 12,500 (Rs. 12,500 x 1/5) 2,500

Debtors 8,500 By Goods sent to Branch (Load)

Cash 2,000 23,000 (Rs. 1,62.500 x 1/5) 32,500

To Goods sent to Branch 1,62,500 By Cash A/c (Remittance) 1,32,350

To Goods sent to Branch By Goods sent to Branch

(Returns)

6,250

(Return load) (6.25C x 1/5) 1,250 By Balance c/d:

To Cash (sent by Branch for exp.) 18,000 Stock 29,925

To Stock Reserve A/c (Load on Debtors 11,960

closing stock) (Rs. 29,925 x 1/5) 5,985 Prov. for Bad Debts (598)

To Profit & Loss A/c (Profit) 8,652 Cash 4,500 45,787

2,19,387 2.19.387

Notes: There is no need to make Memorandum Debtors Account because the Opening &

Closing Balance of Debtors is given.

UNIT

V

Accounting for Dissolution of The Partnership Firm

Q. 1. A, B and C are partners in a firm sharing profits and losses in the ratio of 2 : 2 :1.

They decided to dissolve and appoint B to realise the assets and distribute the proceeds

for which he is to receive as his remuneration 5% of the amounts ultimately paid to A

and C but in lieu of this he is to bear all expenses of realisation. The Balance Sheet of

the firm on the date of dissolution is as under: [2008

Liabilities Rs. Assets Rs.

Creditors 1,317 Debtors 4,229

A's Capital 3,960 Less: Provision 211 4,018

B's Capital 2,970 Stock 1,872

Cash 290

Other assets 1,710

C (overdrawn) 357

8,247 8,247

B informs of the following realisations:

Debtors Rs. 3,462, Stock Rs. 1.444, Goodwill Rs. 50 and Other assets Rs. 914.

Creditors which were not recorded in books are now paid Rs. 100.

The expenses of realisation amount to Rs. 310. C is able to contribute only Rs. 100 beyond

which he expresses his inability. Commission payable to B is to be treated as business

expenses.

Close the books of the firm.

Sol. Dr. Realisation Account Cr.

Particulars Rs. Particulars Rs.

To Sundry Assets: By Creditors 1,317

Debtors 4,229 By Provision for Doubtful Debts 211

Stock 1.872 By Cash A/c:

Others 1,710 7,811 Debtors 3,462

To Cash A/c (Creditors paid) 1,417 Stock 1,444

[Rs. 1,317 + Rs. 100] Goodwill 50

To B's Capital A/c*, 140 Other Assets 914 5,870

(Commission)

By Loss to Capital A/c:

A 788

B 788

394 1,970

9,368 9,368

Dr. Cash Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 290 By Realisation A/c (creditors) 1,417

To Realisation A/c (Assets) 5,870 By A's Capital A/c*1 2,800

To C's Capital A/c 100 By B's Capital A/c 2,043

6,260 6,260

Dr. Partners' Capital Accounts Cr.

Particulars A B C Particulars A B C

Rs. Rs. Rs. Rs. Rs. Rs.

To Balance b/d — — 357 By Balance b/d 3,960 2,970 —

To Realisation A/c 788 788 394 By Cash A/c — — 100

To C's Capital

A/c*2

372 279 — By Realisation

A/c

— 140 —

To Cash A/c 2,800 2,043 — (Commission)

By A's Capital

A/c

— — 372

By B's Capital

A/c

— — 279

3,960 3,110 751 3,960 3,110 751

Working notes:

*1 Calculation of Commission Payable to B:

(a) B's Commission is 5% of amounts ultimately paid to A and C, therefore the actual

expenses

on Realisation are to be ignored.

Here ultimately nothing is being paid to C, hence B's commission is to be 5% of the amount

finally paid to A.

Let B's commission be denoted by 'x'.

We can find the realisation loss before taking into account B's commission. It is Rs. 1,830 as

shown in the following Realisation Account:

Dr. Realisation Account Cr.

Particulars Rs. Rs. Particulars Rs. Rs.

To Sundry Assets: By Creditors 1,317

Debtors 4,229 By Provision for Doubtful Debts 211

Stock 1,872 By Cash A/c:

Others 1,710 7,811 Debtors 3,46

2

To Cash A/c (Creditors Paid) Stock 1,44

4

(Rs. 1,317 + Rs. 100) 1,417 Goodwill 50

Other Assets 914 5,870

By Loss (before B's

Commission)

1,830

(Balancing figure)

9,228 9,228

Loss after B's commission = Rs. 1,830 + (x)

A's Share of this loss = 2/5 [Rs. 1/830 + (x)] or Rs. 732 + (2x/5)

B's Share of this loss = 2/5 [Rs. 1/830 + (x)] or Rs. 732 + (2x/5)

C's Share of this loss = 1/5 [Rs. 1,830 + (x)] or Rs. 366 + (x/5)

(b) Calculation of loss because of C's insolvency (inability)

C's overdrawn Balance Rs. 357

Add: C's Share of loss Rs. 366 + (x/5)

= Rs. 723 + (x/5)

Less: C's Contribution Rs. 100

= Rs. 623 + (x/5)

Loss borne by A and B in their Capital Ratio,

i.e., Rs. 3,960 : Rs. 2,970 or 4 : 3 (Garner VS. Murray)

A's Share in this loss (deficiency) = 4/7 of Cs insolvency (inability), i.e., 4/7[+ 623 + (x/5)]

Thus, amount finally paid to A is as under:

A's Capital = Rs. 3,960

Less: Realisation loss = Rs. 732 + (2x/5)

Less: C's Loss (deficiency) = 4/7 [+ 623 + (x/5)

B's Commission, i.e., (x) is: x = 5/100 [Rs. 3,960 - (Rs. 732 + 2x/5) - 4/7 (Rs. 623 + x/5)]

or x = 1/20 [Rs. 3,960 - Rs. 732 - 2x/5 - 2,492/7 - 4x/35]

or X = 1/20 [Rs. 1,38,600 - Rs. 25,620 - 14x - Rs. 12,460 - 4x/35]

or 20x = Rs. 1,00,520 -18x/35 or 700x = Rs. 1,00,520 - 18x

or 718x = Rs. 1,00,520 or 'x' = Rs. 140 (B's commission)

which is otherwise also 5% of Rs. 2,800 finally paid to A.

*2 A's share in C's loss (deficiency) = 4/7 [Rs. 623 + (140/5)] = Rs. 372

B's share in Cs loss (deficiency) = 3/7 [Rs. 623 + (140/5)] = Rs. 279

Q. 2. Ram, Shyam and Mohan are in partnership sharing profits and losses in the ratio of 3 : 2

:1 respectively. They decided to dissolve the business on 31-12-2006 on which date their

Balance Sheet was as follows: [2008

Liabilities Rs. Assets Rs.

Capital A/cs: Land & Building 30,810

Ram 35,700 Motor Car 5,160

Shyam 8,680 Investments 1,080

Mohan 10,100 54,480 Stock 19,530

General Reserve 6,000 Debtors 11,280

Mohan's Loan A/c 3,000 Cash 5,940

Creditors 10,320

73,800 73,800

The assets were realised as follows and it was agreed that cash should be distributed as and

when received:

2007 Rs.

15th

January 10,380

20th

February 27,900

23rd

March 3,600

15th

April Mohan took over investments at a value of 1,260

27th

April 19,200

Dissolution expenses were originally estimated at Rs. 2,700 but actual amount spent on 23rd

March, 2007 was Rs. 1,920. The creditors were settled for Rs. 10,080.

You are required to prepare a statement showing distribution of cash amongst the partners on

piecemeal basis using maximum loss method.

Sol.

Note:

* Partners' Capital should be considered after adjustment of General Reserve:

A B C

Rs. Rs. Rs.

Capital Balance (as on 31-12-2006) 35,700 8,680 10,100

Add: Reserve Fund Rs. 6,000 3,000 2,000 1,000

38,700 10,680 11,100

Detailed Statement of distribution of Cash among Partners

Details Creditor

s

Mohan'

s Loan

Ram's

Capital

Rs.

Shyam's

Capital

Rs.

Mohan's

Capital

Rs.

Balance on 1.1.2008 10,320 3,000 38,700 10,680 11,100

Cash in hand 5,940

Less: Provision for expenses 2,700

Cash paid to creditors 3,240 3,240

Balance due 7,080 3,000 38,700 10,680 11,100

Realisation on 15.1.2008 10380

Paid to Creditors 6,840

Paid to Mohan's loan 3,000 6,840 3,000

240 X 38,700 10,680 11,100

Discount allowed by creditors 240

Balance due X X 38,700 10,680 11,100

Maximum loss:

= Rs.(38,700 + 10,680 + 11,100 - 540) = Rs.

59,940

Distribute among partners in profit sharing

ratio (3:2:1) 29,970 19,980 9,990

8,730 (9,300) 1,110

Shyam's Capital deficiency be allocated

between

Ram and Mohan in their Capital Ratio (129 :

37)

(7,227) 9,300 (2,073)

1,503 X (963)

Mohan's Capital deficiency be borne by Ram (963) X 963

540 X X

Balance cash available be paid to Ram 540

Balance due on 20.2.2008 38,160 10,680 11,100

Maximum Loss: Rs.(59,940 - 27,900) = Rs.

32,040

Distribute among partners in Profit Sharing

Ratio

(3:2:1) 16,020 10,680 5,340

Sharing Ratio 22,140 X 5,760

Balance at credit and available cash paid 22,140 X 5,760

Balance due on 23.3.2008 16,020 10,680 5,340

Maximum loss: = Rs.(32,040 - 3,600) = Rs.

28,440

Distribute among partners in Profit Sharing

Ratio

14,220 9,480 4,740

Sharing Ratio 1,800 1,200 600

Balance at credit and available cash paid 1,800 1,200 600

Balance due on 29.3.2008 14,220 9,480 4,740

Maximum Loss = Rs.(28,440 - 780) = Rs.

27,660

Distribute among all partners in Profit

Sharing Ratio (3:2:1) 13,830 9,220 4,610

Sharing Ratio 390 260 130

Balance at credit and available cash paid 390 260 130

Balance due on 15.4.2008 13,830 9,220 4,610

Investments taken over by Mohan at Rs. 1,260 1,260

Balance due on 27.4.2008 13,830 9,220 3,350

Cash Rs. 6,300 paid to Ram and Shyam in

the ratio of value of Investments 3,780 2,520

Balance Due 10,050 6,700 3,350

Maximum Loss: Rs. 20,100 - Rs.(19,200 -

6,300]

= Rs. 7,200

Distribute among all partners in Profit

Sharing Ratio (3:2:1) 3,600 2,400 1,200

Balance at credit and available cash paid 6,450 4,300 2,150

Balance still unpaid (Deficiency) 3,600 2,400 1,200

* Since the method of distribution cash among partners is not specified, the question can also

be solved by Proportionate Capital Method.

Alternate Solution Proportionate or Surplus Capital Method Determination of Surplus

Capital

Details Ram Shyam Mohan

Rs. Rs. Rs.

Capital Claim (Including General Reserve) 38,700 10,680 11,100

Profit sharing ratio 3 2 1

Capital in the profit sharing ratio taking Shyam's Capital as base,

being the

minimum per unit of profit LB., 3:2:1 16,020 10,680 5,340

Surplus Claim 22,680 X 5,760

Between Ram and Mohan, Mohan's Capital is lesser. Taking

Mohan's

Capital as base, proportionate Capital of Ram and Mohan 17,280 X 5,760

Ultimate Surplus Capital to be paid first 5,400 X X

Next Rs. 23,040 (i.e. Rs. 17,280 and Rs. 5,760) to be paid in the ratio of 3 :0 :1.

All other realisations will be paid in the ratio of 3 : 2 : 1.

Statement showing the distribution of Proceeds of Realisation (According to

Proportionate Capital Method)

Details Creditors Loan Ram Shyam Mohan

Rs. Rs. Rs. Rs. Rs.

A. Balance Due (including General Reserve) 10,320 3,000 38,700 10,680 11,100

B. Paid to Creditors (Rs. 5,940 - Rs. 2,700) 3,240

C. Balance Due (A - B) 7,080 3,000 38,700 10.680 11,100

D. Amount paid on 15th January 6,840 3,000 540

240 X 38,160 10,680 11,100

E. Less written off 240 X

F. Balance Due (D - E) X X 38,160 10.680 11,100

G. (i) Amount paid on 20th February out of cash

realised Rs. 27,900, Rs. 4,860 be paid first to

Ram

so that Ram and Mohan's Capitals are in

their Profit Sharing Ratio 4,860

33,300 10,680 11,100

(ii) Balance Rs. 23,040 (Rs. 27,900 - Rs. 4,860)

to be paid

to Ram & Mohan in their Profit Sharing Ratio

3:1

17,280 5,760

H. Balance Due (F - G) 16,020 10,680 5,340

I. Amount paid on 23rd

March - Cash realised

Rs. 3,600

be paid to partners in the ratio of 3 : 2 :1 1,800 1,200 600

J. Balance Due (H -1) 14,220 9,480 4,740

K. Amount paid on 28th

March (being excess

over the

estimated expenses Rs. 780) in the ratio of 3 : 2

:1

390 260 130

L. Balance Due (J - K) 13,830 9,220 4,610

M. Investment taken over by Mohan 1,260

N. Balance Due (L - M) 13,830 9.220 3,350

Out of cash realised Rs. 9,200, Rs. 6.300*1 be

paid to Ram

& Shyam in the ratio of value of investment i.e.

3 : 2, so that all partners' capitals become in their

Profit Sharing Ratio 3,780 2,520

10,050 6,700 3,350

Remaining cash Rs. 12,900 to be paid to partners

in

their Profit Sharing Ratio 6,450 4,300 2,150

Final Loss to Partners 3,600 2,400 1,200

Working notes:

*1 Value of Investment taken over by Mohan = Rs. 1,260

Mohan's share = 1/6

Total amount to be adjusted = Rs. 1,260 x 6 = Rs. 7,560

Out of this, investment worth Rs. 1,260 is taken over by Mohan Remaining amount Rs. 6,300

(i.e., Rs. 7,560 - Rs. 1,260) to be paid to Ram and Shyam in their profit sharing ratio 3 : 2.

Q. 3. A, B and C were partners sharing profits and losses in the ratio of 3 : 2 :1. On 31st

March, 2013, their Balance Sheet was as follows:

Liabilities Rs. Assets Rs.

Sundry Creditors 30,000 Cash at Bank 9,500

Bills Payable 5,000 Stock 15,500

As Loan 6,000 Sundry Debtors 32,000

Reserve Fund 12,000 Furniture 5,000

Profit & Loss A/c 6,000 Plant 21,000

Capital Accounts: A's Drawings 4,000

A 20,000 B's Drawings 1,000

B 15,000 C's Capital A/c 6,000

94,000 94,000

The firm was dissolved on that date. Assets realised as follows:

Stock-Rs. 12,200; Debtors -Rs. 30,100 and Furniture realised -Rs. 4,200. Plant was taken

over by A at Rs. 18,000. A contingent liability for bill discounted is settled at Rs. 600.

Realisation expenses amounted to Rs. 600. C is isolvent and only Rs. 1,900 could be

recovered from his private estate. Prepare necessary Ledger Accounts to close the books

of the firm. Apply Garner vs. Murray.

Sol. Dr. Realisation Account Or.

Particulars Rs. Particulars Rs.

To Stock A/c 15,500 By Creditors 30,000

To Sundry Debtors A/c 32,000 By Bills Payable 5,000

To Furniture A/c 5,000 By Bank A/c:

To Plant A/c 21,000 Stock 12,200

To Bank A/c: Debtors 30,100

Furniture 4,200 46,500

By As Capital A/c

(Plant)

18,000

b/f 73,500 99,500

Sundry Creditors 30,000 By Loss (Rs. 10,200) transferred

to:

Bills Payable 5,000 A's Capital A/c 5,100

Contingent Liability 600 B's Capital A/c 3,400

Expenses on Realisation 600 36,200 C's Capital A/c 1,700 10,200

1,09,700 1,09,700

Dr. A's Loan Account Cr.

Particulars Rs. Particulars Rs.

To Bank A/c 6,000 By Balance b/d 6,000

Dr. C's Capital Account Cr

Particulars Rs. Particulars Rs.

To Balance b/d 6,000 By Reserve Fund 2,000

To Realisation A/c (Loss) 1,700 By Profit & Loss A/c 1,000

By Bank A/c 1.900

By A's Capital A/c*1 1,556

By B's Capital A/c*1 1,244

7,700 7,700

Dr. A's Capital Account Cr.

Particulars Rs. Particulars Rs.

To Drawing A/c 4,000 By Balance b/d 20,000

To Realisation A/c 18,000 By Reserve Fund 6,000

To Realisation A/c (Loss) 5,100 By Profit & Loss A/c 3,000

To C's Capital A/c 1,556 By Bank A/c 5,100

To Bank A/c 5,444

34,100 34,100

Dr. B's Capital Account Cr

Particulars Rs. Particulars Rs.

To Drawing A/c 1,000 By Balance b/d 15,000

To Realisation A/c (Loss) 3,400 By Reserve Fund 4,000

To C's Capital A/c 1,244 By Profit & Loss A/c 2,000

To Bank A/c 18,756 By Bank A/c 3,400

24,400 24,400

Dr. Bank Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 9,500 By Realisation A/c (Creditors) 36,200

To Realisation A/c 46,500 By A's Loan A/c 6,000

To A's Capital A/c 5,100 By A's Capital A/c 5,444

To B's Capital A/c 3,400 By B's Capital A/c 18.756

To C's Capital A/c 1,900

66,400 66,400

Working notes: *1, Capital deficiency of C = Rs. 2,800.

Capital deficiency of C will be borne by A and C in the ratio of their Capital which stood

before the date of dissolution, i.e.. 5 : 4 calculated as follows:

A(Rs.) B(Rs.)

Balance b/d 20,000 15,000

Reserve Fund 6,000 4,000

Profit & Loss A/c 3,000 2,000

29,000 21,000

Less: Drawings 4,000 1,000

Capital 25,000 20,000

Q. 4. AB Ltd. was formed to acquire the business of A and B who share profits in the

ratio of 3 : 2 respectively. The Balance Sheet of A and B as on 31st

December, 2008 was

as under: [2009

Liabilities Rs. Assets Rs.

Capital Accounts: Land & Building 40,000

A 64,000 Machinery 20,000

B 40,000 Stock 24,000

Mrs. A's Loan 3,200 Debtors 23,200

Bills Payable 7,200 Bills Receivable 6,400

Sundry Creditors 21,600 Investments 4,800

Cash at Bank 9,600

Goodwill 8,000

1,36,000 1,36,000

It was agreed by the company to take over the assets at book value with the exception of land

and building, stock and goodwill which are taken over at Rs. 45,000, Rs. 20,000 and Rs.

28,800 respectively. The investments were retained by the firm and sold for Rs. 4,000. The

firm discharged the loan of Mrs. A. The company took over the remaining liabilities. The

purchase consideration was discharged by issuing 10,000 equity shares of Rs. 10 each in AB

Ltd. and the balance was paid in cash. Close the books of the firm assuming that shares are

distributed amongst partners in their profit sharing ratio.

Sol. Dr. Realisation Account Cr.

Particulars Rs. Particulars Rs.

To Land & Building 40,000 By Bills Payable A/c 7,200

To Machinery 20,000 By Sundry Creditors 21,600

To Stock 24,000 By AB Ltd.

To Debtors 23,200 (Purchase consideration)*, 1,24,200

To Bills Receivable 6,400 By Bank A/c (Investment) 4,000

To Investments 4,800

To Cash at Bank 9,600

To Goodwill 8,000

To Profit (Rs. 21,000) transferred to

A's Capital A/c 12,600

B's Capital A/c 8.400 21,000

1,57,000 1,57,000

Dr. AB Ltd. Account Cr.3

Particulars Rs. Particulars Rs.

To Realisation A/c 1,24,200 By Shares in AB Ltd. 1,00,000

By Bank A/c 24,200

1,24,200 1,24,200

Dr. Shares in AB Ltd. Account Cr.

Particulars Rs. Particulars Rs.

To AB Ltd. 1,00,000 By A's Capital A/c 60,000

By B's Capital A/c 40,000

1,00,000 1,00,000

Dr. Mrs. A's Loan AccountCr.

Particulars Rs. Particulars Rs.

To Bank A/c 3,200 By Balance b/d 3,200

3,200 3,200

Dr. Partners' Capital Accounts Cr.

Particulars A B Particulars A B

To Shares in AB Ltd. 60,000 40,000 By Balance b/d 64,000 40,000

To Bank A/c 16,600 8,400 By Realisation A/c 12,600 8,400

76,600 48,400 76,600 48,400

Dr. Bank Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 9,600 By Realisation A/c 9,600

To AB Ltd. 24,200 By Mrs. A's Loan 3,200

To Realisation A/c 4.000 By A's Capital A/c 16,600

By B's Capital A/c 8,400

37,800 37,800

Working notes:

*1 Calculation of Purchase Consideration

Rs.

Land & Building 45,000

Stock 20,000

Machinery 20,000

Debtors 23,200

Bills Receivable 6,400

Bank 9,600

Goodwill 28,800

1,53,000

Less: Bills Payable 7,200

Creditors 21,600 28,800

1,24,200

Q. 5. A, B and C shared profits and losses in the ratio of 5 : 3 : 2 respectively. On 31st

March, 2013 their Balance Sheet was as follows: [2020

Liabilities Rs. Assets Rs.

A Capital A/c 60,000 Furniture 22,000

B's Capital A/c 40,000, Stock 96,000

C's Capital A/c 20,000 Cash 2,000

Creditors 60,000 Profit & Loss A/c 80,000

Bank Loan 20,000

2,00,000 2,00,000

The bank had a charge on all the assets.

Furniture realised Rs. 6,000 and stock was sold for Rs. 50,000. B's private estate realised Rs.

12,000 and his private liabilities were Rs. 10,000. C was unable to contribute anything. A

paid one-third of what was due from him on his own account.

Prepare Realisation Account, Cash Account and Partners' Capital Accounts, passing all

matters relating to realisation of assets and payment of liabilities through Realisation

Account.

Sol.

Working notes: Suppose A will contribute x amount.

Dr. Memorandum Realisation Account Cr.

Particulars Rs. Particulars Rs.

To Sundry Assets: By Creditors 60,000

Furniture 22,000 By Bank Loan 20,000

Stock 96,000 1,18,000 By Cash A/c (Assets

Realised)

56.000

To Cash A/c (Bank

Loan)

20,000 By Loss:

To Cash A/c (Creditors) 40.000 +x A 21,000 + %

B 12,600+ 3x/10

C 8,400 + 2*/10 42,000 + x

1.78,000 +

x

1,78,000+ x

Dr. Memorandum Cash Account _ Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 2,000 By Realisation A/c

To Realisation A/c 56,000 (Bank Loan) 20.000

To B's Capital A/c Rs.[12,000 -

10,000]

2,000 By Realisation A/c (Creditors) 40,000*%

To As Capital A/c X (Balancing figure)

60,000 +x 60,000+x

Dr. Memorandum A's Capital Account Cr.

Particulars Rs. Particulars Rs.

To Profit & Loss A/c (Loss) 40,000 By Balance b/d 60,000

To Realisation A/c (Loss) 21,000 +

5x/10

By Balance c/d 1,000 + x/2

61.000 +

5x/10

61,000 + x/2

A contributed 1/3 of (1,000 + x/2) (1,000/3 + x/6) = x

2,000 + x = 6x 5x = Rs. 2,000

x = Rs. 400 Amount contributed by A = Rs. 400

Dr. Realisation Account Cr.

Particulars Rs. Particulars Rs.

To Sundry Assets: By Creditors 60,000

Furniture 22,000 By Bank Loan 20,000

Stock 96,000 1,18,000 By Cash A/c:

To Cash A/c (Bank

Loan)

20.000 Furniture 6,000

To Cash A/c (Creditors) 40.400 Stock 50,000 56,000

By Loss transferred to:

A's Capital A/c 21,200

B's Capital A/c 12,720

C's Capital A/c 8,480 42,400

1,78,400 1,78,400

Dr. Capital Accounts of Partners Cr.

Particulars A B C Particulars A B C

(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

To Realisation A/c By Balance b/d 60,000 40,000 20,000

(Loss) 21,200 12,720 8,480 By Cash 400 2,000 —

To Profit & Loss A/c 40,000 24,000 16,000 By Deficiency

A/c

800 — 4,480

To Deficiency A/c — 5,280 —

61,200 42,000 24,480 61,200 42,000 24,480

Dr. Deficiency Account Cr.

Particulars Rs. Particulars Rs.

To A's Capital A/c 800 By B's Capital A/c 5,280

To C's Capital A/c 4,480

5,280 5,280

Q. 6. A, B and C were partners sharing profits and losses in the ratio of 4 ; 3 :1. Their

Balance Sheet as on 31st March, 2013 was as follows: [2010

Liabilities Rs. Assets Rs.

A's Capital A/c 1,05,000 Building 90,000

B's Capital A/c 45,000 Machinery 30,000

C's Capital A/c 75,000 Stock 82,500

Bank Loan (Secured) 13,500 Debtors 90,000

Creditors 39,000

A's Loan 15,000

2,92,500 2,92,500

They decided to dissolve the business. The assets were realised gradually and the net

amounts were distributed immediately as follows:

2013 Rs. Rs.

May 30 33,000 Expenses paid 3,000

July 30 25,200 Expenses paid 2,200

Sept. 30 57,000 Expenses paid 4,500

Nov. 30 68,000 Expenses paid 8,000

Dec. 31 1,08,000 Expenses paid 10,000

Show the distribution of cash among partners using maximum possible loss method.

Sol. Statement of Distribution of Cash

Bank

Loan

Creditor

s

A's Loan A's Capital B's

Capital

C's Capital

Rs. Rs. Rs. Rs. Rs. Rs.

Balance as per Balance

Sheet 13,500 39,000 15,000 1,05,000 45,000 75,000

30-05-2013

Net Cash Realised

[33,000 - 3,000] = Rs.

30,000

Bank Loan &

Creditors paid Rs.

30,000

13,500 16,500 — — — —

Balance Due — 22.500 15,000 1,05,000 45,000 75,000

30-07-2013

Net Cash Realised

[25,200 - 2,200] = Rs.

23,000

Paid to Crs.

& A's Loan Rs. 23,000 22,500 500

Balance Due — 14,500 1,05,000 45,000 75,000

30-09-2013

Net Cash Realised

[57,000-4,500] = Rs.

52,500

Paid A's Loan Rs.

14,500

Cash available Rs.

33,000

14,500

Maximum Loss

(Rs. 2,25,000* - Rs.

38,C90)

= Rs. 1,87,000

Distributed among A, B

& C

in the ratio of 4 : 3 :1 (93,500) (70,125) (23,375)

— 11,500 (25,125) 51,625

B's deficiency borne by

A &

C in their Capital Ratio

7:5

(14,655) 25,125 (10,470)

(3,155) —, 41,155

As Deficiency to be

borne by C 3,155 (3,155)

Amount Paid to C — — 38,000

Balance Due 1,05,000 45,000 37,000

30-11-2013

Net Cash Realised

[68,000-8,000] = Rs.

60,000

Maximum Loss

(Rs. 1,87,000-Rs.

60,000)

= Rs. 1,27,000

Distributed among

Partners

in the ratio of 4 : 3 :1 (63,500) (47,625) (15,875)

41,500 (2,625) 21,125

B's deficiency to be

borne by A& C in

Capital Ratio, i.e., 7: 5 (1,532) 2,625 (1,093)

Amf. paid to A&C 39,968 — 20,032

Balance Due 65,032 45,000 16,968

01-12-2013

Net Cash Realised

[Rs. 1,08,000 - Rs.

10,000]

= Rs. 98,000

Maximum Loss

(Rs. 1,27,000 - Rs.

98.000)

=Rs. 29,000

Distributed among

partners

in the ratio of 4 : 3 :1 (14,500) (10,875) (3,625)

Paid to A,B&C 50,532 34,125 13,343

Balance unpaid or

Final Loss 14,500 10,875 3,625

(Balance Due - Amount

Paid)

* Rs. 1,05,000 (A's Capital) + Rs. 45,000 (B's Capital) + Rs. 75,000 (Cs Capital) - Rs.

2,25,000

Q. 7. A and B were partners sharing profits and losses in proportion of 3/5 and 2/5

respectively. Their Balance Sheet as on 31st December, 2013 was as under:

Liabilities Rs. Assets Rs.

Bills Payable 3,500 Cash 4,500

Sundry Creditors 6,400 Book Debtors 7,500

Reserve Fund 15,000 Investments 4,000

Capitals: Stock 31,000

A 70,260 Plant & Machinery 50,000

B 46,840 1,17,100 Freehold Premises 45,000

1,42,000 1,42,000

AB Limited was formed with an authorised capital of Rs. 5,00,000 divided into 25,000

equity shares of Rs. 10 each and 25,000 preference shares of Rs. 10 each to acquire the

going concern of A and B upon the following terms:

(i) The company took over all assets except investments. It valued the stock and plant and

machinery at 10 per cent less than the book value and the freehold premises at 20 per cent

more than the book value.

(ii) The liabilities were to be discharged by the company.

(iii) The goodwill of the firm was to be valued at 2 years' purchase of the average profits of 3

years. The working results of the firm showed that it had made profits of Rs. 15,000 in 2010,

Rs. 18,000 in 2011 and Rs. 2l,000 in 2012 after setting aside Rs. 5,000 to reserve fund every

year.

(iv) The purchase price was agreed upon to be paid Rs. 53,000 in fully paid equity shares, Rs.

50,000 in fully paid preference shares, Rs. 30,000 in debentures and the balance in cash.

(v) The partners sold the investments and realised Rs. 4,100.

You are required to prepare in the books of the firm of A and B:

(i) Realisation Account;

(ii) Capital Accounts of the partners; and

(iii) Cash Account,

assuming that shares and debentures are to be distributed in profit sharing ratio, the

final settlement being made in Cash. [2011

Sol. Goodwill = Average profits of last 3 years x 2

Average Profits of last 3 years (Pre-Reserves)

= Rs.[(15,000 + 18,000 + 21,000) + Rs. 15,000 (Reserves)] + 3 .

= Rs. 69,000 - 3 = Rs. 23,000

/. Goodwill = Rs. 23,000 x 2 = Rs. 46,000

Purchase Consideration is calculated as Rs. Rs.

Cash* 4,500

Book Debtors 7,500

Stock (Rs. 31,000 - Rs. 3,100) 27,900

Plant & Machinery (Rs. 50,000 - Rs. 5,000) 45,000

Freehold Premises (Rs. 45,000 + 20% of Rs. 45,000) 54,000

Goodwill 46,000 1,84,900

Less: Bills Payable 3,500

Creditors 6,400 9,900

1,75,000

Working Note:

* Cash is included as company is formed to acquire the Going Concern of A and B.

Above purchase price Rs. 1,75,000 is payable as under: Rs. Rs.

(i) Equity Shares (5,300 @ Rs. 10) 53,000

(ii) Preference Shares (5,000 @ Rs. 10) 50,000

(iii) Debentures 30,000

(iv) Cash (Balance) 42,000 1,75,000

Q. 8. A, B and C were partners sharing profits and losses in the ratio of 3 : 2 :1. On 31st

December, 2008, their Balance Sheet was as follows: [2011

Balance Sheet

Liabilities Rs. Assets Rs.

Sundry Creditors 30,000 Cash at Bank 9,500

Bills Payable 5,000 Stock 15,500

A's Loan 6,000 Sundry Debtors 32,000

Reserve fund 12,000 Furniture 5,000

Profit & Loss A/c 6,000 Plant 21,000

Capital Accounts:, Drawings Account:

A 20,000 A 4,000

B 15,000 B 1,000

C's Capital 6,000

94,000 94,000

The firm was dissolved on that date. Stock realised Rs. 12,200, Debtors Rs. 30,000 and

Furniture Rs. 4,200. Plant is taken over by A at Rs. 18,000. A contingent liability for bills

discounted materialised to the extent of Rs. 600. Realisation expenses amounted to Rs. 600. C

is insolvent, but his private estate paid Rs. 1,900.

Prepare Realisation Account, Capital Accounts and Bank Account. Apply Garner vs.

Murray rule.

Sol.

Books of Firm

Dr. Realisation Account Cr.

Particulars Rs. Particulars Rs.

To Sundry Assets: By Liabilities:

(per Balance Sheet) (per Balance Sheet)

Stock 15,500 S. Creditors 30,000

Sundry Debtors 32,000 Bills Payable 5,000

Furniture 5,000 A's Loan*2 6,000 41,000

Plant 21,000 73,500 By Bank A/c:

To Bank A/c: Stock 12,200

Sundry Creditors 30,000 Sundry Debtors 30,000

Bills Payable 5,000 Furniture 4,200 46,400

Contingent Liability 600 By A's Capital A/c (Plant) 18,000

Realisation Expenses 600 By Loss on Realisation

transferred to:

A's Loan 6,000 42,200 A's Capital A/c 5,150

B's Capital A/c 3,433

C's Capital A/c 1,717 10,300

1,15,700 1,15,700

Dr. Bank Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/f 9,500 By Realisation A/c:

To Realisation A/c: Sundry Creditors 30,000

Stock 12,200 Bills Payable 5,000

Sundry Debtors 30,000 Contingent Liability 600

Furniture 4,200 46,400 Realisation Expenses 600

To C's Capital A/c 1,900 A's Loan 6,000 42,200

By A's Capital A/c 285

By B's Capital A/c 15,315

57,800 57,800

Dr. A's Capital Account Cr.

Particulars Rs. Particulars Rs.

To Drawings A/c 4,000 By Balance b/f 20,000

4,000 By Reserve Fund 6,000

To Realisation A/c (Plant taken) 18,000 By Profit & Loss A/c 3,000

To Realisation A/c (Loss) 5,150 29,000

To C's Capital A/c 1,565

(Share of C's Capital Deficiency)

To Bank A/c (Balancing figure) 285

29,000 29,000

Dr. B's Capital Account Cr.

Particulars Rs. Particulars Rs.

To Drawings A/c 1,000 By Balance b/f 15,000

1,000 By Reserve Fund 4,000

To Realisation A/c (Loss) 3,433 By Profit & Loss A/c 2,000

To C's Capital A/c 1,252 21,000

(Share of C's Capital Deficiency)

To Bank A/c (Balancing figure) 15,315

21,000 21,000

Dr. C's Capital Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/f 6,000 By Reserve Fund 2,000

To Realisation A/c (Loss) 1,717 By Profit & Loss A/c 1,000

By Bank A/c 1,900

. By A's Capital A/c*1 [ 5/9 x Rs.

2,817]

1,565

0 By B's Capital A/c*1 [4/9 x Rs.

2,817]

1,252

7,717 7,717

Working notes:

*1 For applying rule of Garner vs. Murray, effective capitals of A and B before the start of

dissolution are Rs. 25,000 and Rs. 20,000 (Above dotted lines in Capital Accounts).

Therefore they contribute for C's deficiency in the ratio 5:4.

*2 A's Loan has been treated through Realisation Account as a liability of the Firm.

Q. 9. Khanak and Nitya were carrying on business. Their Balance Sheet as on 31st March,

2011 was as follows: [2011

Liabilities Rs. Assets Rs.

Creditors 65,500 Plant & Machinery 1,82,000

Bank Overdraft 30,000 Furniture 15,000

Bills Payable 12,500 Leasehold Premises 34,500

Capital: Joint Life Policy 9,500

Khanak 1,50,000 Stock 54,000

Nitya 1,48,000 Book Debts 73,000

Profit & Loss A/c 26,000

Drawings:

Khanak 9,000

Nitya 3,000

4,06,000 4,06,000

The business was carried on till 30th

September, 2011. The partners withdrew in amounts half

the amount of profits made during the period of six months (April-September, 2011) after

depreciating leasehold premises and plant and machinery by 10% p.a. and furniture by 5%

p.a. Meanwhile, creditors were reduced by Rs. 10,000. On 30th September, 2011 stock was

valued at Rs. 63,400. Bills payable and bank overdraft were reduced by Rs. 2,300 and Rs.

15,000 respectively. Book debts were valued at Rs. 65,000, the Joint Life Policy was realised

for Rs. 9,500 and the amount was utilised to reduce the bank overdraft. Other items remained

as on 31st March, 2011.

On 30th

September, 2011 the firm sold the business to Jalaj Ltd. Goodwill was estimated at

Rs. 1,08,000 and other assets were valued on the basis of Balance Sheet as on 30th

September,

2011. The purchase consideration was paid in fully paid equity shares of Rs. 10 each.

Prepare relevant Ledger Accounts in the books of partnership firm.

Sol.

Revised Balance Sheet of Firm

Dr. as on 30-01-2011 Cr.

Liabilities Rs. Assets Rs.

Creditors 65,500 Plant & Machinery 1,82,000

(10,000) 55,500 Less: Depreciation 9,100 1,72,900

Bank Overdraft 30,000 Furniture 15,000

(15,000) Less: Depreciation 375 14,625

(Joint Life Policy) (9,500) 5,500

Bills Payable 12,500 Leasehold Premises 34,500

(2,300) 10,200 Less: Depreciation 1,725 32,775

Capitals of partners*1 2,77,500 Stock in hand 63,400

(Balancing figure) Book Debts 65,000

3,48,700 3,48,700

New Accounts on Firm's Dissolution are as under:

Dr. Realisation Account Cr.

Particulars Rs. Particulars Rs.

To Sundry Assets By Sundry Liabilities:

(as per above Revised (as per above Revised

Balance Sheet) 3,48,700 Balance Sheet)

To Profit on Realisation

transferred to:

Creditors 55,500

Khanak's Capital A/c 54,000 Bank Overdraft 5,500

Nitya's Capital A/c 54,000 Bills Payable 10,200 71,200

By Jalaj Ltd.*3

(Purchase Consideration) 3,85,500

4,56,700 4,56,700

Dr. Jalaj Ltd. Account Cr.

Particulars Rs. Particulars Rs.

To Realisation A/c 3,85,500 By Shares of Jalaj Ltd. 3,85,500

3,85,500 3,85,500

Dr. Partners' Capital Accounts*2 Cr.

Date Particular* Khunak Nitya Date Particulars Khanak Nitya

(Rs.) (Rs.) (Rs.) (Rs.)

To P&LA/c 01-4-11 By Balance b/f 1,50,000 1,48,000

1,50,000 1,48,000

(Loss as per 30-9-11 By Profits

Balance Sheet) 13,000 13,000 (6 months') 17,500 17,500

13,000 13,000

To Drawings

A/c

9,000 3,000 By Realisation

A/c

54,000 54,000

To Drawings

A/c

8,750 8,750 30-9-11

To Shares of

Jalaj

Ltd. 1,90,750 1,94,750

2,21,500 2,19,500 2,21,500 2,19,500

Working notes:

*1 Capitals of Partners on 31-03-2011 was

Opening Capitals of Partners - P&L A/c (Dr. Bal.) - Drawings of Partners,

i.e.. Rs.(1,50,000 + 1,48,000) - Rs. 26,000 - Rs. 12,000, i.e., Rs. 2,60,000

Profit made during 6 months were Rs. 2,77,500 - Rs. 2,60,000 = Rs. 17,500 x 2 or Rs. 35,000

as half of profits have already been withdrawn.

*2 Capital Accounts of two partners have been shown above from 01-04-2011. Portion above

dotted lines states position as on 31-3-2011 or 01-4-2011 and below dotted lines shows the

position for the next 6 months.

*3 Purchase Consideration payable by M/s Jalaj Ltd. is calculated under: (Rs.) (Rs.)

Value of all the assets as per Revised Balance Sheet 3,48,700

Add: Value of Goodwill 1,08,000 4,56,700

Less: Liabilities (Total) 71,200

Purchase Consideration 3,85,500

Q. 10. Bini, Mini and Tini are partners sharing profits and losses in the ratio of 4 : 3 : 2.

Their Balance Sheet as on 31st March, 2011 stood as follows:

Liabilities Rs. Assets Rs.

Creditors 20,000 Cash 2,000

Bank Overdraft Debtors 18,000

(Secured against stock) 15,000 Less: Provision 1,000 17,000

Loan (Secured against

Machinery)

25,000 Stock 25,000

Capitals: Machinery 40,000

Bini 20,000 Profit & Loss A/c 9,000

Mini 10,000

Tini 3,000

93,000 93,000

The firm was dissolved. Stock was taken over by the Banker and it realised Rs. 20,00Q. Bank

paid back Rs. 4,000 after recovering its overdraft and interest due thereon. Machinery was

disposed off for Rs. 24,000 and debtors realised Rs. 14,000 only. Loan was fully paid off

along with interest due Rs. 1,000. There was an unrecorded asset valuing Rs. 5,000 which

was taken over by a creditor at Rs. 2,000. Expenses amounted to Rs. 300 which were paid by

Bini. Tini became insolvent. Tini's private liabilities amounted Rs. 1,000 while his private

estate realised Rs. 1,950.

Prepare necessary Ledger Accounts to close the books of the firm.

[2022

Sol.

Dr. Realisation Account Cr.

Particulars Rs. Particulars Rs.

To Sundry Assets: By Sundry Liabilities:

(Per Balance Sheet) (Per Balance Sheet)

Debtors 18,000 Provision for D. Debtors 1,000

Stock 25,000 Creditors 20,000

Machinery 40,000 83,000 Bank Overdraft 15,000

To Bank/Cash A/c: Loan 25,000 61,000

Bank Overdraft + Interest By Bank/Cash A/c:

Rs.(15,000 + 1,000) 16,000 Stock 20,000

Loans Rs.(25,000 + 1,000) 26,000 Machinery 24,000

Creditors 18,000 Debtors 14,000

To Creditors (C) 2,000 By Unrecorded Asset (C) 2,000

To Bini's Capital A/c (Expenses) 300 By Loss transferred to: Bini 10,800

Mini 8,100

Tini 5,400

1,45,300 1,45,300

Dr. Bank/Cash Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/f 2,000 By Realisation A/c:

To Realisation A/c: Bank Overdraft + Interest 16,000

Stock 20,000 Loan Rs.(25,000 + 1,000) 26,000

Machinery 24,000 Creditors 18,000

Debtors 14,000 By Bini's Capital A/c 3,100

To Tini's Capital A/c 950

To Mini's Capital A/c 2,150

63,100 63,100

Dr. Bini's Capital Account Cr.

Particulars Rs. Particulars Rs.

To Profit & Loss A/c (Dr.) (4/9) 4,000 By Balance b/f 20,000

To Realisation A/c (4/9) 10,800 By Realisation A/c

To Tini's Capital A/c 2,400 (Expenses paid) 300

To Cash A/c (Final payment) 3,100

20,300 20,300

Dr. Mini's Capital Account Cr.

Particulars Rs. Particulars Rs.

To Profit & Loss A/c (Dr.) (3/9) 3,000 By Balance b/f 10,000

To Realisation A/c (3/9) 8,100 By Cash A/c (Final payment) 2,150

To Tini's Capital A/c 1,050

12,150 12,150

Tini's Capital Account

Particulars Rs. Particulars Rs.

To Profit & Loss A/c (Dr.) (2/9) 2,000 By Balance b/f 3,000

To Realisation A/c (2/9) 5,400 By Cash A/c 950

By Bini's Capital A/c (16/23) 2,400

By Mini's Capital A/c (7/23) 1,050

7,400 7,400

Loss arising because of Tini's insolvency = Rs. 7,400 - Rs. 3,950 = Rs. 3,450 is shared by

Bird and Mini in the ratio of their capitals just before dissolution, i.e., Rs. 16,000: Rs. 7,000.

Hence, Bini's share Rs. 3,450 x 16/23 = Rs. 2,400

Mini's share Rs. 3,450 x 7/23 = Rs. 1,050 (Garner vs. Murray rule)

No need for partners to bring in cash for their shares of Realisation Losses.

Q. 11. X, Y and Z are three partners in a firm, sharing profits and losses in the ratio of 5

: 3 : 2. The Balance Sheet of the firm as on 31-03-2013 was as under:

Liabilities Rs. Assets Rs.

Creditors 1.60,000 Building 3,20,000

Bills Payable 80,000 Furniture 40,000

Bank Loan 80,000 Investments 1,20,000

Capitals: X 2,40,000 Profit & Loss Account 3,20,000

Y 1,60,000

Z 80,000

8,00,000 8,00,000

The Bank loan was secured by charge on the building. Assets realised as under: Building Rs.

1,60,000; Furniture Rs. 16,000 and Investments Rs. 54,000. [2012

Y's private estate realised Rs. 48,000 and his private liabilities are Rs. 40,000. Z was

insolvent. X could just contribute 1/3 of what was finally due from his own account. Record

all matters relating to realisation of assets only through realisation account. Prepare necessary

ledger accounts in the books of the firm.

Sol.

Dr. Realisation Account Cr.

Particulars Rs. Particulars Rs.

To Building A/c 3,20,000 By Bank A/c (Assets realised) 2,30,000

To Furniture A/c 40,000 By Loss to Capital Accounts:

To Investment A/c 1,20,000 X 1,25,000

Y 75,000

Z 50,000 2,50,000

4,80,000 4,80,000

Dr. Bank Loan Account Cr.

particulars Rs. Particulars Rs.

To Bank A/c 80,000 By Balance b/d 80,000

80,000 80,000

Dr. Creditors and Bills Payable Account Cr.

Particulars Rs. Particulars Rs.

To Bank A/c 1,73,000 By Balance A/c:

To Deficiency A/c (Bal. figure) 67,000 Creditors 1,60,000

Bills Payable 80,000 2,40,000

2,40,000 2,40,000

Dr. Bank Account Cr.

Particulars Rs. Particulars Rs.

To Realisation A/c 2,30,000 By Bank Loan A/c 80,000

To X's Capital A/c 15,000 By Creditors and B/P A/c

To Y's Capital A/c 8,000 (Proportionately) (Bal. figure) 1,73,000

2,53,000 2,53,000

Dr. Capital Accounts of Partners Cr.

Particulars X Y Z Particulars X Y Z

(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

To Profit & Loss

A/c

1,60,000 96,000 64,000 By Balance b/d 2,40,000 1,60,00

0

80,000

To Realisation A/c 1,25,000 75,000 50,000 By Bank A/c — 8,000 —

By Bank A/c

(Rs. 45,000 x 1/3) . 15,000 — —

By Deficiency

A/c

30,000 3,000 34,000

2,85,000 1,71,00

0

1,14,00

0

2,85,000 1,71,00

0

1,14,00

0

Dr. Deficiency Account Cr.

Particulars Rs. Particulars Rs.

To X's Capital A/c 30,000 By Creditors and Bills Payable

A/c

67,000

To Y's Capital A/c 3,000

To Z's Capital A/c 34,000

67,000 67,000

Q. 12. X, Y, Z carry on business in partnership sharing profits and losses in the ratio 4 :

3 :1. On 31st March, 2012, they agreed to sell their business to AB Ltd. Their position on

that date was as follows: [2022

Liabilities Rs. Assets Rs.

X's Capital 2,00,000 Freehold premises 2,40,000

Y's Capital 1,50,000 Machinery 2,10,000

Z's Capital 1,30,000 Stock 1,15,000

Loan on Mortgage 80,000 Bood Debts 75,000

Sundry Creditors 90,000 Cash 10,000

6,50,000 6,50,000

The company took the following assets at the valuation shown:

(Rs.) (Rs.)

Freehold Property 3,05,000 Book Debts 70,000

Machinery 1,59,000 Goodwill 50,000

Stock 1,10,000

The company agreed to pay the creditors Rs. 88,500. The company paid Rs. 3,35,000 in

shares and the balance in cash. Expenses on realisation amounted to Rs. 1,500. Prepare

relevant ledger accounts in the books of the firm.

Sol.

Calculation of purchase consideration:

Assets taken over Rs. Discharge of purchase Rs.

consideration

Freehold Premises 3,05,000 Shares 3,35,000

Machinery 1,59,000 Cash Rs.(6,05,500 - 3,35,000) 2,70,500

Stock 1,10,000

Book Debts 70,000

Goodwill 50,000

6,94,000

Less: Creditors takenover 88,500

6,05,500 6,05,500

Dr. Realisation Account Cr.

Particulars Rs. Particulars Rs.

To Freehold Premises 2,40,000 By Loan on Mortgage A/c 80,000

To Machinery 2,10,000 By Sundry Creditors A/c 90,000

To Stock 1,15,000 By AB Ltd. A/c 6,05,500

To Book Debts 75,000

To Cash A/c (Expenses) 1,500

To Bank A/c (Loan on Mortgage) 80,000

To Capital Accounts:

(Profit on Realisation)

X 27,000

Y 20,250

Z 6.750 54,000

7,75,500 7,75,500

Dr. Capital Accounts of Partners Cr.

Particulars X Y Z Particulars X Y Z

(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

To Shares in AB

Ltd.*1

1,42,41

0

1.06,80

0

85,790 By Balance c/d 2,00,000 1,50,00

0

1,30,00

0

To Bank A/c (Bal.

fig.)

84,590 63,450 50,960 By Realisation

A/c

(Profit) 27,000 20,250 6,750

2,27,00

0

1,70,25

0

1,36,75

0

2,27,000 1,70,25

0

1,36,75

0

Dr. Cash and Bank Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 10,000 By Realisation A/c 1,500

To AB Ltd. 2,70,500 By Realisation A/c 80,000

By Capital A/cs:

X 84,590

Y 63,450

Z 50,960 1,99,000

2,80,500 2,80,500

Dr. AB Ltd. Account Cr.

Particulars Rs. Particulars Rs.

To Realisation A/c 6,05,500 By Shares in AB Ltd. A/c 3,35,000

By Bank A/c 2,70,500

6,05,500 6,05,500

Working notes:

*1 Distribution of Shares among partners:

Final claims: X = Rs. 2,27,000

Y = Rs. 1,70,250

Z = Rs. 1,36,750

Number of shares: X = 33,500 x 2,27,000/5,34,000 = 14,241 (App.) = Rs. 1,42,410

Y = 33,500 x 1,70,250/5,34,000 = 10,680 (App.) = Rs. 1,06,800

Z = 33,500 x 1,36,750/5,34,000 = 8,579 (App.) = Rs. 85,790

Q. 13. A, B and C had the following Balance Sheet on 31-03-11: [2013

Liabilities Rs. Assets Rs.

Trade Creditors 40,000 Fixed Assets 40,000

Loan from Mrs. A 15,000 Debtors 25,000

(with a charge on stock) Stock 20,000

Loan from A 10,000 Profit & Loss A/c 30,000

Capital Accounts:

A 20,000

B 20,000

C 10,000

1,15,000 1,15,000

The firm was dissolved. Stock realised 50% and fixed assets and debtors realised Rs. 30,000

in all. The positive position of the partners was as under:

Private Estate Private Liabilities

(Rs.) (Rs.)

A 10,000 15,000

B 8,000 6,000

C was able to pay 50 paise in the rupee of what was payable on his own account to the firm.

The partners shared profits and losses in the ratio of 4 : 3 : 3 for A, B and C respectively. The

loss on realisation is to be determined after considering the amount finally paid to the

creditors.

You are required to close the books of the firm by preparing the necessary ledger

accounts.

Sol.

Working notes:

*1 Let us assume that contribution by C = Rs. x

Dr. Provisional Realisation Account Cr.

Particulars Rs. Particulars Rs.

To Fixed Assets 40,000 By Trade Creditors 40,000

To Debtors 25,000 By Mrs. As Loan A/c 15,000

To Stock 20,000 By Bank A/c:

To Bank A/c (Mrs. As Loan) 10,000 Stock 10,000

To Bank A/c (Mrs. As Loan and 32,000 + x Fixed Assets & Debtors 40,000

Creditors) 30,000

By Loss:

A 12,800 + 4x/10

B 9,600 + 3x/10

C 9,600 + 3x/10 32,000 + x

1,27,000 +

x

1,27,000 +

x

*2 Dr. Provisional C's Capital Account Cr.

Particulars Rs. Particulars Rs.

To Profit & Loss A/c 9,000 By Balance b/d 10,000

To Realisation A/c 9,600 +

3x/10

By Final Balance before Cash

Contribution 8,600 +

3x/10

18,600 +

3x/10

18,600 +

3x/10

*3 Dr. Provisional Bank Account Cr.

Particulars Rs. Particulars Rs.

To Realisation A/c 40,000 By Realisation A/c 10,000

To B's Capital A/c (Rs. 8,000 -

Rs. 6,000)

2,000 By Realisation A/c 32,000 + x

To C's Capital A/c X

42,000 + x 42,000 + x

C has contributed 1/2, of (Rs. 8,600 + 3x/10) Loss on Realisation:

X = 1/2(Rs. 8,600 + 3x/10) = 8,600/2 + 3x/20 A +Rs. 12,800 + 4x/10 = Rs. 14,823

x = Rs. 4300 + 3x/20 B Rs. 9,600 + 3x/10 = Rs. 11,118

Multiplying both sides by 20, we get C Rs. 9,600 + 3x/10 = Rs. 11,118

20x = 86,000 + 3x

17x = Rs. 86,000 x = Rs. 5,059

In the books of the firm of A, B and C

Dr. Realisation Account Cr.

Particulars Rs. Particulars Rs.

To Fixed Assets 40,000 By Trade Creditors 40,000

To Debtors 25,000 By Loan from Mrs. A 15,000

To Stock 20,000 By Bank A/c:

To Bank A/c: Stock 10,000

Mrs. A's Loan 10,000 Fixed Assets &

Creditors & Balance of Debtors 30,000 40,000

Mrs. A's Loan Rs.(40,000 +

5.000)

By Capital Accounts:

(Balancing figure) 37,059 (Loss on Realisation*3

A's Capital A/c 14,823

B's Capital A/c 11,118

C's Capital A/c 11,118 37,059

1,32,059 1,32,059

Dr. Bank Account Cr.

Particulars Rs. Particulars Rs.

To Realisation A/c 40,000 By Realisation A/c 10,000

To B's Capital A/c 2,000 (Mrs. A's Loan)

To C's Capital A/c 5,059 By Realisation A/c 37,059

(Creditors & Mrs. A's Loan)

47,059 47,059

Dr. A's Capital Account Cr.

Particulars Rs. Particulars Rs.

To Profit & Loss A/c 12,000 By Balance b/d 20,000

To Realisation A/c (Loss) 14,823 By A's Loan 10,000

To Deficiency A/c 3,177

30,000 30,000

Dr. B's Capital Account Cr.

Particulars Rs. Particulars Rs.

To Profit & Loss A/c 9,000 By Balance b/d 20,000

To Realisation A/c (Loss) 11,118 By Bank A/c 2,000

To Deficiency A/c 1,882

22,000 22,000

Dr. C's Capital Account Cr.

Particulars Rs. Particulars Rs.

To Profit & Loss A/c 9,000 By Balance b/d 10,000

To Realisation A/c (Loss) 11,118 By BankA/c 5,059

By Deficiency A/c 5,059

20,118 20,118

Dr. Deficiency Account Cr.

Particulars Rs. Particulars Rs.

To C's Capital A/c 5,059 By A's Capital A/c 3,177

By B's Capital A/c 1,882

5,059 5,059

Q. 14. A, B, C and D are partners in a firm sharing profits and losses in the ratio of 4 :1:

2 : 3. The following is their Balance Sheet as at 31st March, 2014:

Liabilities Rs. Assets Rs.

Sundry Creditors 3,00,000 Sundry Debtors 3,50,000

Capital A/c: Less: Provision for bad debts 50,000

A 7,00,000 3,00,000

D 3,00,000 Stock 2,00,000

Cash in hand 1,40,000

Other Assets 3,10,000

Capital A/c:

B 2,00,000

C 1,50,000 3,50,000

13,00,000 13,00,000

The firm is dissolved on the following terms:

(i) A is to take over sundry debtors at 80% of book value.

(ii) D is to take over Stock at 95% of the book value.

(iii) C is to discharge Sundry Creditors.

(iv) Other assets realize Rs. 3,00,000 and expenses of realisation come to Rs. 30,000.

(v) B is found insolvent and Rs. 21,900 is realized from his estate.

Prepare Realisation Account and Capital Accounts of the partners. Show also

the Cash Account. The loss arising out of capital deficiency may be distributed

following the decision in Garner vs. Murray case. [2024

Sol.

Dr. Realisation Account Cr.

Particulars Rs. Particulars Rs.

To Sundry Debtors A/c 3,50,000 By Provison for Bad Debts 50,000

To Stock 2,00,000 By Sundry Creditors 3,00,000

To Other Assets 3,10,000 By A's Capital A/c

(Debtors)

To C's Capital A/c (Creditors) 3,00,000 (80% of Rs. 3,50,000) 2,80,000

To Cash A/c By D's Capital A/c

(Realisation Expenses) 30,000 (Stock 95% of Rs. 2,00,000) 1,90,000

By Cash A/c

(Other Assets) 3,00,000

By Loss on Realisation

transferred to:

A's Capital A/c 28,000

B's Capital A/c 7,000

C's Capital A/c 14,000

D's Capital A/c 21,000 70,000

11,90,000 11,90,000

Dr. Partners' Capital Accounts Cr.

Particulars A(Rs.) B(Rs. c(Rs.) D(Rs.) Particulars A(Rs.) B(Rs.) C(Rs. D(Rs.)

) )

To Balance

b/d

— 2,00,0

00

1,50,0

00

— By Balance

b/d

7,00,0

00

— — 3,00,00

0

To Realisation

A/c

2,80.0

00

— — — By

Realisation

A/c

— — 3,00,0

00

—

To Realisation

A/c

— —. 1,90,0

00

By Cash A/c 28,000 — 14,00

0

21,000

To Realisation

A/c

By Balance

c/d

— 2,07,0

00

— —

(Loss) 28,000 7,000 14,00

0

21.000

To Balance

c/d

4,20,0

00

— 1,50,0

00

1,10,0

00

7,28,0

00

2,07,0

00

3,14,0

00

3,21,0

00

7,28,0

00

2,07,0

00

3,14,0

00

3,21,00

0

To Balance

b/d

— 2,07,0

00

— — By Balance

b/d

4,20,0

00

— 1,50,0

00

1,10,00

0

To B's Capital

A/c

1,29,5

70

— — 55,530 By Cash A/c — 21,900 — —

To Cash A/c 2,90,4

30

— 1,500

00

54,470 By As Capital

A/c

— 1,29,5

70

— —

By D's Capital

A/c

— 55,530 — —

4,20,0

00

2,07,0

00

1,50,0

00

1,10,0

00

4,20,0

00

2,07,0

00

1,50,0

00

1,10,00

0

Dr. Cash Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 1,40,000 By Realisation A/c (Expenses) 30,000

To Realisation A/c (Other

Assets)

3,00,000 By A's Capital A/c (Final

Payment)

2,90,430

To B's Capital A/c 21,900 By C's Capital A/c (Final

Payment)

1,50,000

To A's Capital A/c 28,000 By D's Capital A/c (Final

Payment)

54,470

To C's Capital A/c 14,000

To D's Capital A/c 21,000

5,24,900 5,24,900

Notes: B's deficiency will be borne by A and D in the ratio of 7 : 3. C will not bear any

portion of the deficiency as at the time of dissolution there was debit balance in his Capital

Account

A's share of deficiency = 1,85/100 x 7/10 = Rs. 1,29,570; D's share of deficiency = l,85,100 x

3/10 = Rs. 55,530

Q. 15. Humpty and Dumpty carrying on business in partnership and sharing profits

and losses in the ratio 2 :1 had the following balances to the credit of their accounts in

the books of their firm as on 31st December, 2011. [2013

Humpty Rs. 3,45,000

Dumpty Rs. 1,80,000

A statement of affairs prepared on 31st December 2012 disclosed the following position

of the business:

Particulars Rs. Particulars Rs.

Sundry Creditors: Cash in hand 67,500

For goods 1,95,000 Cash at Bank 45,000

For expenses 39,000 Sundry Debtors 2,55,000

Stock 3,30,000

Furniture 42,000

During the year, Humpty had drawn Rs. 99,000 from the firm. He had also taken for his

personal use, goods worth Rs. 12,000. He had sold some goods of the business for Rs. 27,000

and retained the money himself. He had personally paid to some of the employees of the firm

Rs. 49,500 towards their salaries which he was entitled to be reimbursed. Dumpty had

withdrawn Rs. 37,500 in cash, had also taken for his personal use goods worth Rs. 7,500. He

had paid towards some expenses of the firm for Rs. 24,000 from his private estate.

Prepare a statement showing profit of the firm for the year ending 31st

December, 2012

as well as Balance Sheet of the firm as on that date.

Sol. Humpty and Dumpty Statement of Profit & Loss

for the year ended 31st December, 2012

Particulars Rs. Rs.

Net Assets as on 31st Dec. 2012 [Rs. 67,500 + Rs. 45,000

+

Rs. 2,55,000 + Rs. 3,30,000 + Rs. 42,000 - Rs. 1,95.000 -

Rs. 39,000]

5,05,500

Add: Drawings of Humpty:

Cash withdrawn 99,000

Goods for personal use 12,000

Sale proceeds retained 27,000 1,38,000

Add: Drawings of Dumpty:

Cash withdrawn 37,500

Goods for personal use 7,500 45,000 1,83,000

Less: Additional Capital introduced by: 6,88,500

Humpty (Payment to employees) 49,500

Dumpty (Payment of expenses) 24,000 73,500

Less: Net Assets on 31st December, 2011: 6,15,000

Humpty's Capital 3,45,000

Dumpty's Capital 1,80,000 5,25,000

Net Profit (Balancing figure): 90,000

Humpty's Share 60,000

Dumpty's Share 30,000

Balance Sheet of Humpty and Dumpty

as on 31st Dec. 2012

Liabilities Rs. Assets Rs.

Capital Accounts: Cash in hand 67,500

Humpty 3,45,000 Cash at Bank 45,000

Net Profit 60,000 Sundry Debtors 2,55,000

Additional Capital 49,500 Stock 3,30,000

4,54,500 Furniture 42,000

Less: Drawings 1,38,000 3,16,500

Dumpty 1,80,000

Net Profit 30,000

Additional Capital 24,000

2,34,000

Less: Drawings 45,000 1,89,000

Creditors: For goods 1,95,000

For expenses 39,000 2,34,000

7,39,500 7,39,500

Q. 16. A, B and C had the following Balance Sheet on 31-3-2013: [2014 Nov.

Liabilities Rs. Assets Rs.

Trade Creditors 4,00,000 Fixed Assets 4,00,000

Loan from Mrs. A Debtors 2,40,000

(with a charge on stock) 1,50,000 Stock 2,00,000

Loan from A 1,00,000 Cash at Bank 10,000

Capital A/c: Profit & Loss A/c 3,00,000

A 2,00,000

B 2,00,000

C 1,00,000

11,50,000 11,50,000

The firm was dissolved. Stock realised 50% and fixed assets and debtors realised Rs.

3,00,000 in all. The private position of the partners was as under:

Particulars Private Assets (Rs.) Private Liabilities (Rs.)

A 1,50,000 1,00,000

B 60,000 80,000

C was able to pay 50 paise in the rupee of what was payable on his own account to the firm.

The partners shared profit and losses in the ratio of 4 : 3 : 3 for A, B and C respectively. The

loss on realisation is to be determined after considering the amount finally paid to the

creditors. You are required to close the books of the firm preparing the necessary ledger

accounts.

Sol.

Dr. Memorandum Realisation Account Cr.

Particulars Rs. Particulars Rs.

To Fixed Assets 4,00,000 By Trade Creditors 4,00,000

To Debtors 2,40,000 By Loan from Mrs. A 1,50,000

To Stock 2,00,000 By Bank (1,00,000+ 3,00,000) 4,00,000

To Bank (Mrs. A) 1,00,000 By Realisation Loss: 3,50,000 +x

To Bank (Mrs. A & Creditors)* 3,60,000 +

x

13,00,000

+ x

13,00,000 +

x

* 10,000 (Original balance) + 4,00,000 (Sale of Assets) + 50,000 (As Contribution) -

1,00,000

(Loan of Mrs. A paid) + x (notional contribution by C) Rs. 3,60,000 + x

Share of C in the loss = 3/10 of (3,50,000 + x) = Rs. 1,05,000 + (3/10)x

Dr. Memorandum C's Capital Account Cr.

Particulars Rs. Particulars Rs.

To Profit & Loss Ac 90,000 By Balance b/d 1,00,000

To Realisation Ac (Share of

Loss)

1,05,000+

3x/10

By C's Deficiency 95,000 +

3x/10

1,95,000 +

3x/10

1,95,000+

3x/10

C's contribution = 50% (95,000 + 3/10). Equating it to * and solving,

we get 1/2 (95,000 + 3/10x) - x x = Rs. 55,882

Now we solve the problem accordingly.

Dr. Realisation Account Cr.

Particulars Rs. Particulars Rs.

To Fixed Assets 4,00,000 By Trade Creditors 4,00,000

To Debtors 2,40,000 By Loan from Mrs. A 1,50,000

To Stock 2,00,000 By Bank A/c:

To Bank A/c (Mrs. A's loan) 1,00,000 Stock 1,00,000

To Bank A/c (Mrs. A and

Creditors)

4,15,882 Fixed Assets 3,00,000 4,00,000

By Loss transferred to:

A's Capital A/c 1,62,353

B's Capital A/c 1,21,765

C's Capital A/c 1,21,764 4,05,882

13,55,882 13,55,882

Dr. Bank Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 10,000 By Realisation A/c (Mrs. A) 1,00,000

To Realisation A/c 4,00,000 By Realisation A/c

To A's Capital A/c 50,000 (Mrs. A Trade Creditors) 4,15,882

To C's Capital A/c 55,882

5,15,882 5,15,882

Dr. A's Capital Account Cr.

Particulars Rs. Particulars Rs.

To Profit & Loss A/c 1,20,000 By Balance b/d 2,00,000

To Realisation A/c 1,62,353 By A's Loan A/c 1,00,000

To Deficiency A/c 67,647 By Bank A/c 50,000

3,50,000 3,50,000

Dr. B's Capital Account Cr.

Particulars Particulars Rs.

To Profit & Loss A/c 90,000 By Balance b/d 2,00,000

To Realisation A/c 1,21,765 By Deficiency A/c 11,765

2,11,765 2,11,765

Dr. C's Capital Account Cr.

Particulars Rs. Particulars Rs.

To Profit & Loss A/c 90,000 By Balance b/d 1,00,000

To Realisation A/c 1,21,764 By Bank A/c 55,882

By Deficiency A/c 55,882

2,11,764 2,11,764

Dr Deficiency Account Cr.

Particulars Rs. Particulars Rs.

To B's Capital A/c 11,765 By A's Capital A/c 67,647

To C's Capital A/c 55,882

67,647 67,647

Q. 17. The Balance Sheet of A, B and C who were sharing profits and losses in the ratio of 2 :

2 :1, was as follows on 31st March, 2013: [2014 Nov.

Liabilities Rs. Assets Rs.

Sundry Creditors 12,00,000 Cash 10,000

Bank Loan (with charge on

stock)

5,00,000 Stock 6,00,000

A's Capital 3,00,000 Other Assets 10,90,000

B's Capital 2,00,000 Goodwill 3,00,000

C's Capital 2,00,000

22,00,000 22,00,000

Stock realised ^5,20,000 and other assets was sold for Rs. 9,00,000. Expenses on realisation

amounted to Rs. 30,000. Assuming all partners are insolvent, prepare necessary Ledger

Accounts to close the books of the firm.

Sol. Dr. Realisation Account Cr.

Particulars Rs. Particulars Rs.

To Stock 6,00,000 By Sundry Creditors 12,00,000

To Other Assets 10,90,000 By Bank Loan 5,00,000

To Goodwill 3,00,000 By Cash A/c:

To Cash A/c (Expenses) 30,000 Stock 5,20,000

To Cash A/c (Bank Loan &

Creditors)

14,00,000 Other Assets 9,00,000 14,20,000

By Loss transferred to:

A's Capital A/c 1,20,000

B's Capital A/c 1,20,000

C's Capital A/c 60,000 3,00,000

34,20,000 34,20,000

Dr. Cash Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 10,000 By Realisation A/c (Expenses) 30,000

To Realisation A/c 14,20,000 By Realisation A/c

(Bank Loan & Creditors) 14,00,000

14,30,000 14,30,000

Dr. A's Capital Account Cr.

Particulars Rs. Particulars Rs.

To Realisation A/c (Loss) 1,20,000 By Balance b/d 3,00,000

To Deficiency A/c 1,80,000

3,00,000 3,00,000

Dr. B's Capital Account Cr.

Particulars Rs. Particulars Rs.

To Realisation A/c 1,20,000 By Balance b/d 2,00,000

To Deficiency A/c 80,000

2,00,000 2,00,000

Dr. C's Capital Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 2,00,000 By Deficiency A/c 2,60,000

To Realisation A/c 60,000

2,60,000 2,60,000

Dr. Deficiency Account Cr.

Particulars Rs. Particulars Rs.

To C's Capital A/c 2,60,000 By A's Capital A/c 1,80,000

By B's Capital A/c 80,000

2,60,000 2,60,000

Q. 18. A, B and C share profits and losses in the proportion of 4/10/ 5/10 and 1/10. Their

Balance Sheet as on 31st December, 2014 was as follows: [2015

Liabilities Rs. Assets Rs.

A's Capital A/c 15,000 Cash 3,000

B's Capital A/c 12,000 Other Assets 56,000

C's Capital A/c 3,000

A's Loan 6,000

B's Loan 3,000

Reserve Fund 6,000

Creditors 10,000

Contingent Reserve 4,000

59,000 59,000

The partnership is dissolved and the assets realised are as follows:

Rs.

First Realisation 10,000

Second Realisation 20,000

Third Realisation 17,000

On the date of dissolution, there was a contingent liability of Rs. 1,000 against the firm which

was settled at Rs. 700 at the time of second realisation. Realisation

expenses were estimated at Rs. 2,000 but actually came at Rs. 1,500. C took stock worth Rs.

500 at the time of third realisation.

Prepare a statement showing how the distribution should be made. 15

Sol. Note:

Partners' Capital should be considered after adjustment of the following:

A (Rs.) B (Rs.) C (Rs.)

Capital Balance on 31-12-14 15,000 12,000 3,000

Add: Reserve Fund (4:5:1) 2,400 3,000 600

Contingent Reserve (Rs. 4,000) 1,600 2,000 400

19,000 17,000 4,000

Statement Showing Piecemeal Distribution of Cash

Particulars Loans Capitals

(Rs.) Creditors A B A B c

Balance in 31.12.2014 10,000 6,000 3,000 19,000 17,000 4,000

Cash in hand 3,000

Add: First Realisation 10,000

13,000

Less: Provision for

Expenses

2,000

11,000

Less: Contingent liability 1,000 10,000

6,000 3,000 19,000 17,000 4,000

Second Realisation 20,000

Less/Loan Paid 9,000 6,000 3,000

11,000 19,000 17,000 4,000

Add: Contingent liability 300

11,300

Maximum loss 28,700 11,480 14,350 2,870

Rs.(40,000-11,300)(4:5 :1)

Paid to Partners 11,300 7,520 2,650 1,130

Balance 11,480 14,350 2,870

Third Realisation 17,000

Add: Frov. for Expenses

500

17,500

Maximum Loss 11,200 4,480 5,600 1,120

Rs. (28,700 - 17,500) (4 :

5 : 1)

Paid to Partners 17,500 7,000 8,750 1,750

Loss to. Partners 4,480 5,600 ^ 1,120

Notes: *1 In the above question method for solving the question is not specified. Here

Maximum Possible Loss method is used but the students can also use Capitalization method.

*2 The first Realisation Amount is Rs. 10,000 + Rs. 3,000 (Available Cash) - Rs. 2,000

(Realisation Expenses) - Rs. 1,000(Contingent Liability).

Q. 19. A, B and C are three partners in a firm with profit sharing ratio of 5 : 3 : 2. The

Balance Sheet of the firm was as under on 31st March, 2015:

Liabilities Rs. Assets Rs.

Creditors 40,000 Buildings 80,000

Bills Payable 20,000 Furniture 10,000

Bank Loan 20,000 Investments 30,000

Capitals: A 60,000 Profit and Loss Account 80,000

B 40,000

C 20,000

2,00,000 2,00,000

The bank loan was secured by charge on the buildings.

Assets realised as under: Rs.

Buildings 40,000

Furniture 4,000

Investments 14,000

B's private estate realised Rs. 12,000 and his private liabilities are Rs. 10,000. C was

insolvent. A could just contribute 1/3rd

of what was finally due from him on his own account.

Show the ledger accounts closing the books of the firm assuming creditors etc. are paid

through Realisation Account. 15

Sol. Let A's Contribution = x

Dr. Memorandum Realisation Account Cr.

Particulars Rs. Particulars Rs.

To Building's 80,000 By Creditors 40,000

To Furniture 10,000 By Bills Payable 20,000

To Investments 30,000 By Bank Loan 20,000

To Cash (Bank Loan) 20,000 By Cash (Asset Realised) 58,000

To Cash (Creditors & Bills

Payable)

40.000 + x By Loss 42,000 + x

1,80,000 +

x

1,80,000 +

x

Dr. Memorandum A's Capital Account Cr.

Particulars Rs. Particulars Rs.

To Profit & Loss A/c 40,000 By Balance b/d 60,000

To Realisation A/c 21,000+ x/2 By Deficiency A/c 1,000 + x/2

61,000 + x/2 61,000 + x/2

A will contribute 1/3rd

of finally due amount,

So, 1/3(l,000 + x/2) =x

1,000/2 + x/6 = x

=> 2,000 + x/6 = x

=> 6x = 2,000 + x => 5x = 2,000

=> x= 2,000/5 = Rs. 400

Dr. Realisation Account Cr.

s Rs. Particulars Rs.

To Buildings 80,000 By Creditors 40,000

To Furniture 10,000 By Bills Payable 20,000

To Investments 30,000 By Bank Loan 20,000

To Cash (Bank Loan) 20,000 By Cash (Assets

Realised):

58,000

To Cash (Creditors & Bills

Payable)

40,400 By Loss transferred to:

A's Capital A/c 21,200

B's Capital A/c 12,720

C's Capital A/c 8,480 42,400

1,80,400 1,80,400

Dr Partners' Capital Accounts Cr.

Particulars A B C Particulars A B C

(Rs.) (Rs.) (Rs.) (Rs.) (Rs.) (Rs.)

To Profit & Loss

A/c

40,000 24,000 16,000 By Balance b/d 60,000 40,000 20,000

To Realisation A/c By Cash A/c 400 2,000 —

(Loss) 21,200 12,720 8,480 By Deficiency

A/c

800 — 4,480

To Deficiency A/c — 5,280 —

61,200 42,000 24,480 61,200 42,000 24,480

Dr. Deficiency Account Cr.

Particulars Rs. Particulars Rs.

To A's Capital A/c 800 By B's Capital

A/c

5,280

To C's Capital A/c 4,480

5,280 5,280

2008

Name of the Paper : Financial Accounting

Name of the Course : B.Com. (Hons.)

Time: Part A- 2 1/2 hours Maximum marks Part A: 45 For students of

Part B-30 minutes Part B: 10 regular College

Maximum marks Part A: 61 For students

Part B: 14 of SOL

This question paper has two parts. Part A is compulsory for all examinees. Part B is meant only for those examinees who have not offered computerised accounts (applicable for

students of regular colleges). Students of SOL have to attempt Part A and Part B.

Part A and Part B are to be answered on separate answer-books,

PART A

Q. 1. Comment in brief on any two of the following naming the principles of accounting on which these statements are based:

(i) Balance Sheet is not a valuation statement.

(ii) Advance received from a supplier is not taken as income or sales.

(iii) Calibre or quality of management team is not directly disclosed on the

Balance Sheet. 5

Ans. See Q. 2, Chapter 6. [Page T-36

Q. 2. (a) Explain 'accounting income' and 'economic income'. Which concept

is more useful and why Rs.

(b) ABC Ltd. purchased on 1st January, 1998 second hand plant for Rs. 30,000 and

immediately spent Rs. 20,000 in overhauling it. On 1st July, 1998 additional machinery of a cost of Rs. 25,000 was purchased. On 1st July, 2000, the plant purchased on 1st

January, 1998 became obsolete and was sold for Rs. 10,000. On that date new

machinery was purchased at cost of Rs. 60,000. Depreciation was provided at 10% p.a. on the original cost of the, asset. In 2001 the company changed this method of providing depreciation to 15% p.a. WDV with retrospective effect.

Show Plant and Machinery Account and provision for Depreciation Account

for the years 1998-2001. 10

Ans. (a) See Q. 1, Chapter 5. [Page T-31

(b) See Q.1, Unit II, A. Depreciation. [Page P-20

Or

(a) Compare and contrast LIFO and FIFO methods of Inventory Valuation.

(b) From the following information find out the value of stock as on 31-3-2007 according to AS-2:

(i) Cost of physical stock on 31-3-2007 was Rs. 2,00,000.

(ii) Cost of stock held as consignee was Rs. 40,000.

(iii) Stock was expected to realise the normal selling price of 150% of cost except for the following goods:

1. Goods costing Rs. 10,000 were damaged and an expenditure of 10% of normal selling price was necessary to realise the cost.

2. Goods costing Rs. 20,000 were damaged beyond repair and were expected to realise Rs. 5,O0O only. 6,8

Ans. (a) See Q. 3, Chapter 8. [Page T-46

(b) See Q. 1, Unit II, B. Inventory Valuation. [Page P-35

Q. 3. From the following Trial Balance of Shri Ganesh prepare Trading and

Profit & Loss Account for the year ending 31st December, 2012 and Balance

Sheet as on that date after taking into consideration the adjustments given at

the end of the Trial Balance:

Trial Balance as on 31-12-12

Particulars Dr. (Rs.) cr. (Rs.)

Sales — 7,40,000

Purchase (adjusted) 6,99,200 —

Wages 900 —

Capital A/c — 48,500

National Insurance 300 —

Carriage In 400 —

Carriage Out 500 —

Lighting 600 —

Rates and Insurance (including premium of Rs. 300 p.a. paid upto

30-6-2012)

400 —

Stock on 31-12-2012 61,250 —

Cash in hand and at Bank 1,750 —

Discount earned — 600

Building 30,000 —

Discount allowed 100 —

Debtors and Creditors 6,000 20,000

Furniture 8,000 —

Dividends received — 300

8,09,400 8,09,400

Adjustments:

(i) National Insurance balance also includes employees contribution Rs. 150. Wages are shown 'net' after deducting national insurance contribution borne by the employees.

(ii) Owing to the nature of employment, some employees are housed in the building of the business. The rental value of such portion is assessed at Rs. 500 p.a.

(iii) Sales as shown in the trial balance include the sale of old furniture, (effected half way through the year) realising Rs. 200. The book value of the furniture at the commencement of

the period was Rs. 300. The depreciation has been written off at 20% p.a.

(iv) The manager is to get a commission of l/5th on the net profits after charging his commission but before considering income from dividend.

(v) Depreciate building by 5%.

Sol. See Q. 1, Unit I, Accounting Process. [Page P-1

Or

(a) Distinguish between Income & Expenditure Account and Receipts & Payments Account.

(b) Show what amount will appear in Income & Expenditure Account for the year ending 31-3-08 and Balance Sheet as at that date in each of the following cases:

Case (i)— Prize Fund as at 31-3-2007 Rs. 12,000. Donations for prizes received during the year 2007-08 Rs. 2,800; Prizes awarded Rs. 2,000; 10% prize

fund investments as at 31-3-2007 Rs. 12,000. Interest received on prize

fund investments Rs. 600.

Case (ii) — Stock of stationery on 31-3-07 Rs. 3,000. Creditors of stationery on

31-3-07 Rs. 2,000; advance paid for stationery carried forward from

2006-07 Rs. 200; Amount paid for stationery during the year

2007-08 Rs. 10,800, Stock of stationery on 31-3-08 Rs. 500, creditors for

stationery on 31-3-08 Rs. 1,300 and advance paid for stationery on 31-

3-08 Rs. 300.

Case (iii) — Subscription outstanding as on 31-3-07 Rs. 2,000, subscription received

in advance on 31-3-07 Rs. 3,000. Amount of subscription received

during 2007-08 Rs. 35,000 out of which Rs. 1,500 related to 2006-07 and

Rs. 800 related to 2008-09. On 31-3-08 subscription outstanding for

2007-08 amounted to Rs. 1,300. 5,9

Ans. (a) See Q. 2, Chapter 9. [Page T-49

(b) See Q. 1, Unit II, C. Income & Expenditure Account. [Page P-44

Q. 4. X Ltd. purchased 2 machines costing Rs. 80,000 each from Y Ltd. on 1st

January, 2004 on the hire purchase system. The terms were:

Payment on delivery Rs. 20,000 for each machine; Balance in 3 equal instalments together with interest at 10% p.a. to be paid at the end of each year. X Ltd. writes off 25% depreciation each year on the diminishing balance method. X Ltd. paid the instalments due on 31-12-2004 and on 31-12-2005 but could not pay the final instalment. Y Ltd. repossessed one machine adjusting its value against the amount due. The repossession was done on the basis of 30% p.a. depreciation on the

diminishing balance method. The vendor spent Rs. 8,560 for the repairs and

overhauling of the machine and sold it for Rs. 40,000. Pass journal entries in the books of Y Ltd. and prepare ledger accounts in the books of X Ltd. 14

Sol. See Q. 1, Unit III, Accounting for Hire Purchase and Instalment System.

[Page P-61

Or

Jain and Co. have a hire purchase department. Goods are sold on hire

purchase at cost plus 33 1/3%. From the following particulars prepare Shop

Stock Account, HP Debtors Account, HP Stock Account and HP Adjustment

Account:

1-4-04: Stock out with HP customers at SP Rs. 4,000

Stock at shop at cost Rs. 500

Instalments due Rs. 300

1-4-04 to 31-3-05

Cash received from customers 8,000

Goods repossessed (instalments due Rs. 2,000) valued at 500

(this has been included at the end at Rs. 500)

31-3-05: Instalments due (customers paying) 500

Stock at shop at cost (including goods repossessed) 1,200

Stock out with HP customers at SP 4,600

Verify your results by preparing Hire Purchase Trading Account. 14

Sol. See Q. 2, Unit III, Accounting for Hire Purchase and Instalment System.

[Page P-63

Q. 5. The following is the Trial Balance of Kolkata Branch as on 31 Mar., 2008:

Particulars Dr. (Rs.) Cr. (Rs.)

Mumbai Head Office A/c 32,400 —

Stock on 1-4-2007 60,000 —

Purchases 1,78,000 —

Goods received from HO 90,000 —

Sales — 3,80,000

Goods supplied to HO — 60,000

Salaries 15,000 —

Debtors 37,000 —

Creditors — 18,500

Rent 9,600 —

Office expenses 4,700 —

Cash and Bank balance 17,800 —

Furniture 14,000 —

4,58,500 4,58,500

Closing stock was valued at Rs. 27,000. The Branch Account in the books of Head Office stood at 74,600 (Debit Balance) on 31-3-08. On 28th March, 2008 the Head Office forwarded goods to the value of 725,000 to the branch where they were received on 3rd April 2008. Required in the books of HO:

(i) Branch Trading and Profit & Loss Account

(ii) Journal entries to incorporate the above Trial Balance; and

(iii) Kolkata Branch Account. 14

Sol. See Q. 1, Unit IV, Accounting for Inland Branches. [Page P-77

Or

From the following figures for a year relating to the Delhi branch of a HO which invoices goods to its branch at cost plus 100%, prepare:

(i) Branch Account;

(ii) Branch Stock Account;

(iii) Branch Debtors Account; and

(iv) Branch Adjustment and Profit & Loss Account.

Transactions during the year: Rs.

Goods invoiced to branch 1,00,000

Goods received by branch 1,10,000

Cash sent for expenses 25,000

Actual expenses at branch 28,000

Cash expenses at branch 27,000

Sales (at invoice price) 1,40,000

Cash received from debtors 1,25,000

Discount allowed to branch debtors 5,000

Goods returned by branch debtors direct to HO 20,000

Closing balances:

Branch Stock 30,000

Branch Debtors 20,000

Sol. See Q. 2, Unit IV, Accounting for Inland Branches. [Page P-79

PART'B'

Q. 6. A, B and C are partners in a firm sharing profits and losses in the ratio of 2:2:1. They decided to dissolve and appoint B to realise the assets and distribute the proceeds for which he is to receive as his remuneration 5% of the amounts ultimately paid to A and C but in lieu of this he is to bear all expenses of realisation. The Balance Sheet of the firm on the date of dissolution is as under:

Liabilities Rs. Assets Rs.

Creditors 1,317 Debtors 4,229

A's Capital 3,960 Less: Provision 211 4,018

B's Capital 2,970 Stock 1,872

Cash 290

Other assets 1,710

C (overdrawn) 357

8,247 8,247

B informs of the following realisations:

Debtors Rs. 3,462, Stock Rs. 1,444, Goodwill Rs. 50 and Other assets Rs. 914.

Creditors which were not recorded in books are now paid Rs. 100.

The expenses of realisation amount to Rs. 310. C is able to contribute only Rs. 100 beyond which he expresses his inability. Commission payable to B is to be treated as business expenses.

Close the books of the firm.

Sol. See Q. 1, Unit V, Accounting for Dissolution of the Partnership Firm.

[PageP-105

Or

Ram, Shyam and Mohan are in partnership sharing profits and losses in the ratio of 3

: 2 : 1 respectively. They decided to dissolve the business on 31-12-2006 on which date their Balance Sheet was as follows: [2008

Liabilities Rs. Assets Rs.

Capital A/cs: Ram 35,700 Motor Car 5,160

Shyam 8,680 Investments 1,080

Mohan 10,100 54,480 Stock 19,530

General Reserve 6,000 Debtors 11,280

Mohan's Loan A/c 3,000 Cash 5,940

Creditors 10,320

. 73,800 73,800

The assets were realised as follows and it was agreed that cash should be distributed as and when received:

15th Jan. 2007 Rs. 10,380

20th February, 2007 Rs. 27,900

23rd March, 2007 Rs. 3,600

15th April, 2007 Mohan took over investments at a value of Rs. 1,260

27th April, 2007 Rs. 19,200

Dissolution expenses were originally estimated at Rs. 2,700 but actual amount spent on 23rd March, 2007 was Rs. 1,920. The creditors were settled for n0,080. You are required to prepare a statement showing distribution of cash amongst the partners on piecemeal basis using maximum loss method.

Sol. See Q. 2, Unit V, Accounting for Dissolution of the Partnership Firm.

[PageP-107

2009

Name of the Paper : Financial Accounting

Name of the Course : B.Com. (Hons.)

Time: Part A-2 1/2 hours Maximum marks Part A: 45 For students of Part B-30 minutes Part B: 10 regular College Maximum marks Part A: 61 For students

Part B: 14 of SOL

This question paper has two parts. Part A is compulsory for all examinees. Part B is meant only for those examinees who have not offered computerised accounts (applicable for

students of regular colleges). Students of SOL have to attempt Part A and Part B.

Part A and Part B are to be answered on separate answer-books.

PART A

Q. 1. State with reasons whether the following statements are True or False: (i) Expenses incurred to keep the machine in working condition is a capital expenditure.

(ii) Accrual concept implies accounting on cash basis.

(iii) Depreciation cannot be provided in case of loss in a financial year.

(iv) Prudence is a concept to recognise unrealised profits and not losses.

(v) The receipts and payments account records receipts and payments of revenue nature only.

Ans. (i) False. Expenses incurred to keep the machine in working condition is a revenue

expenditure because there is no increase in the capacity of the machine to produce more.

(ii) False. According to accrual concept, revenues are credited to the period in which they are earned whether they have been actually received or not. Similarly, expenses are charged to the period to which they relate whether they have been actually paid or not. In other words, this concept recognises revenues and expenses as they are earned or incurred respectively ignoring the date of receipt or payment. Hence it is not accounting on cash basis.

(iii) False. Depreciation expense is a charge against the profit and not an item of appropriation. Hence it must be debited to the Profit & Loss Account whether the firm makes profit or incurs loss.

(iv) False. Prudence concept is expressed, as "Recognise all losses and anticipate no

gains". In other words, prudence means anticipate all losses but record profits only when they are realised.

(v) False. Receipts and Payments Account records all types of receipts and payments whether they are of capital nature or revenue nature.

Q. 2. (a) Distinguish between capital expenditure and revenue expenditure.

(b) \M/s S.S. Traders commenced business on 1st January, 2005, when they

purchased machinery of Rs. 7,00,000. They adopted a policy of

(i) charging depreciation at 15% p.a. on diminishing balance basis, and (ii) charging full year's depreciation on additions made during the year. Over the year, the purchases of machinery have been: 10

Date Rs.

1-8-2006 1,50,000

30-9-2008 2,00,000

On 1st January, 2008, it was decided to change the method of depreciation and rate of depreciation to 10% on straight line basis with retrospective effect from 1-1-2005, the adjustment being made in the accounts for the year ending 31st December, 2008.

Prepare Machinery Account and Provision for Depreciation Account for the year 2008.

Ans. (a) See Q. 13, Chapter 4. [Page T-26

(b) See Q. 2, Unit II, A. Depreciation. [Page P-22

Or

(a) Distinguish between periodic and perpetual system of inventory valuation. 4

(b) A company started its business on 1st January, 2008. It purchased and used raw material during the year 2008 as stated below:

January 10 800 kgs @Rs. 62 per kg.

February 28 1,200 kgs @Rs. 57 per kg.

March 10 Issued 1,000 kgs.

March 26 Issued 500 kgs.

May 20 900 kgs @Rs. 65 per kg

June 28 Issued 600 kgs.

Calculate the value of closing stock of raw materials on June 30 according to (i) Last in First out basis, and

(ii) Weighted average basis, using perpetual inventory system. 10

Ans. (a) See Q. 5, Chapter 8. [Page T-47

(b) See Q. 2, Unit II, B. Inventory Valuation. [Page P-35

Q. 3. Explain the relevance of disclosure principle in accounting. 4

Ans. See Q. 3, Chapter 2. [PageT-13

Or

The following is the Trial Balance of a trader as on 31st March, 2008:

Particulars Dr. (Rs.) Cr. (Rs.)

Cash in hand 5,000 —

Land and Building 80,000 —

Plant and Machinery 50,000 —

Debtors and Creditors 25,000 40,000

Stock on 1-4-2012 10,000 —

15% Investment on 1-4-2012 20,000 —

Purchases and Sales 95,000 1,90,000

Bank Overdraft — 20,000

Wages 28,000 —

Salaries 16,000 —

Rent, Rates and Taxes 15,000 —

Bad Debts 6,000 —

Drawings 5,000 —

Bills Receivable and Bills Payable 15,000 21,000

Carriage Inwards 6,000 —

Customs Duty on Purchases 16,000 —

Fire Insurance Premium 4,000 —

Advertisement 30,000 —

Provision for Doubtful Debts — 2,000

Interest on Investments — 2,000

Sundry Expenses 11,000 —

Furniture 20,000 —

Value Added Tax — 25,000

Capital — 1,57,000

4,57,000 4,57,000

Additional Information:

(i) Stock on 31st March, 2013 was valued at Rs. 40,000.

(ii) Included in debtors are Rs. 8,000 due from Ram and included in creditors

are Rs. 6,000 due to Ram.

(iii) Bills Receivables include a bill of Rs. 5,000 received from Mohan, which has

been dishonoured.

(iv) Sales include Rs. 5,000 for the goods sold on approval basis. Approval was

not received till 31st March. Goods are sold at a profit of 25% on cost.

(v) Wages include Rs. 5,000 spent on erection of machinery on 1-4-2012.

(vi) Create a provision for doubtful debts at 5% on debtors.

(vii) Prepaid rates and taxes amounted to Rs. 2,000.

(vii) Depreciate machinery by 10%.

Prepare Trading and Profit & Loss Account for the year ended 31st March, 2013 and a Balance Sheet as on that date.

Sol. See Q. 2, Unit I, Accounting Process. [Page P-3

Q. 4. Mayur Electricals Ltd. sells TV sets and Music systems on hire purchase basis. From the following particulars prepare Hire Purchase Trading Account and Goods Repossessed Account to find out the profit (show your workings clearly):

T.V. Sets Music Systems

Cost Rs. 16,200 Rs. 6,000

Cash Price Rs. 18,900 Rs. 7,200

Down Payment Rs. 2,700 Rs. 1,200

Monthly Instalments Rs. 1,800 Rs. 600

Number of Instalments 10 12

During the year ended 31st December, 2013, the company sold 200 TV sets and 240 Music systems on hire purchase basis. 4 TV sets on which only 3 instalments each could be collected and 8 Music systems on which only 5 instalments each could be collected were repossessed for non-payment of other instalments. These were valued at 50% of their costs and after spending Rs. 6,000 for their reconditioning, they were

sold for Rs. 84,000. Other instalments collected and due (customers still paying) were respectively as follows: T.V. Sets 540 and 40

Music systems 800 and 60

Sol. See Q. 3, Unit III, Accounting for Hire Purchase and Instalment System.

[PageP-65

Or

The following is the Receipts and Payments Account of a Sports Club for the year ended 31st December, 2008:

Receipts Rs. Payments Rs.

To Balance b/d 7,500 By Salaries 14,000

To Subscriptions (including By Match Expenses 28,000

Rs. 2,000 for the year 2007) 40,000 By 12% Investment on 1-1-2008 40,000

To Donations 15,000 By Sports Materials 15,000

To Life Membership Fees 35,000 By Printing & Stationery 12,000

To Sale of Furniture at book value

5,000 By Honorarium 5,000

To Entrance Fees 10,000 By Furniture 15,000

To Interest on 10% Investments for full year

20,000 By Magazines & Journals 10,000

To Match Fund 40,000 By Books 35,000

To Donation for Building Fund 45,000 By Municipal Taxes 6,000

To Sale of Newspapers 2,500 By Balance c/d 40,000

2,20,000 • 2,20,000

Additional information:

(i) The position of the Club on January 1, 2008 was as follows:

Subscriptions due -Rs. 3,000

Furniture -Rs. 10,000

Books -Rs. 20,000

Building -Rs. 1,25,000

Stock of Sports Materials -Rs. 4,500

Creditors for Printing -Rs. 2,500

(ii) The Club has 1,000 members each paying an annual subscription of Rs. 50. 20 members

paid their subscription in advance in 2007. In the year 2008, subscription was received in advance from 15 members.

(iii) Municipal Taxes paid every year on 1st April.

(iv) One member donated a Billiard Table worth Rs. 50,000.

(v) Books were worth Rs. 46,000 on 31st December, 2008 and stock of sports materials on that date amounted to Rs. 4,000.

(vi) 12% investments include Rs. 30,000 invested from donations received for building fund.

Prepare Income and Expenditure Account for the year ended 31st December, 2008 and a Balance Sheet as on that date.

Sol. See Q. 2, Unit II, C. Income & Expenditure Account. [Page P-45

Q. 5. Mayur Stores Ltd. with their Head Office in Delhi, invoiced goods to its branch at Noida at 20% less than the list price which is cost plus 100% with instructions that cash sales were to be made at invoice price and credit sales at list price. From the following particulars, prepare Branch Stock Account, Branch Debtors Account, Branch Expenses Account, Branch Adjustment Account and Branch Profit & Loss Account for the year ended 31st December, 2008:

Branch Stock on 1-1-2008 at cost to Branch Rs.

40,000

Branch Debtors on 1-1-2008 30,000

Goods received from HO at invoice price 3,60,000

Cash sales 90,000

Credit sales 3,00,000

Cash received from Debtors 2,40,000

Goods in Transit 40,000

Branch Expenses 40,000

Bad Debts 2,000

Loss of Goods by fire at invoice price 2,400

Transfer of goods to Faridabad Branch at LP. 6,000

Pilferage at LP. (Normal) 1,000

Remittance to Head Office 3,30,000

Insurance claim admitted against loss by fire 1,200

Debtors on 31-12-2008 88,000

Stock on 31-12-2003 at invoice price 60,000

Sol. See Q. 3, Unit IV, Accounting for Inland Branches. [Page P-80

Or

X Ltd. with its Head Office in Delhi, invoiced goods to its Chandigarh branch at 20% less than the catalogue price which is cost plus 50%, with instructions that cash sales were to be made at invoice price and credit sales at catalogue price. From the following particulars available from the branch, prepare Branch Account for the year

ended 31st December, 2008:Rs.

Stock on 1-1-2008 at IP 48,000

Goods received from HO at invoice price 5,28,000

Debtors on 1-1-2008 40,000

Cash sales 1,84,000

Credit sales 4,00,000

Cash received from customers 3,42,540

Discount allowed to customers 53,460

Branch Expenses 25,000

Remittance to Head Office 4,80,000

Debtors on 31-12-2008 44,000

Cash in hand on 31-12-2008 23,000

Closing Stock on 31-12-2008 60,000

It was reported that a part of stock at the branch was lost by fire during the year

whose value is to be ascertained. It is decided to provide for discount on debtors @ 15%.

Sol. See Q. 4, Unit IV, Accounting for Inland Branches. [Page P-82

PART 'B'

Q. 6. (a) What is gradual distribution of Cash Rs. 4

(b) A, B and C were partners sharing profits and losses in the ratio of 3 : 2:1. On 31st March, 2013, their Balance Sheet was as follows:

Liabilities Rs. Assets Rs.

Sundry Creditors 30,000 Cash at Bank 9,500

Bills Payable 5,000 Stock 15,500

A's Loan 6,000 Sundry Debtors 32,000

Reserve Fund 12,000 Furniture 5,000

Profit & Loss A/c 6,000 Plant 21,000

Capital Accounts: A's Drawings 4,000

A 20,000 B's Drawings 1,000

B 15,000 C's Capital A/c 6,000

94,000 94,000

The firm was dissolved on that date. Assets realised as follows:

Stock -Rs. 12,200; Debtors -Rs. 30,100 and Furniture realised -Rs. 4,200. Plant was taken over by A at Rs. 18,000. A contingent liability for bill discounted is settled at Rs. 600.

Realisation expenses amounted to Rs. 600. C is isolvent and only Rs. 1,900 could be

recovered from his private estate.

Prepare necessary Ledger Accounts to close the books of the firm. Apply Garner vs. Murray.

Ans. (a) See Q. 9, Chapter 12. [Page T-69

(b) See Q. 3, Unit V, Accounting for Dissolution of the Partnership Firm.

[Page P-110

Or

AB Ltd. was formed to acquire the business of A and 6 who share profits in the ratio of 3 : 2 respectively. The Balance Sheet of A and B as on 31st December, 2008 was as under:

Liabilities Rs. Assets Rs.

Capital Accounts: Land & Building 40,000

A 64,000 Machinery 20,000

B 40,000 Stock 24,000

Mrs. A's Loan 3,200 Debtors 23,200

Bills Payable 7,200 Bills Receivable 6,400

Sundry Creditors 21,600 Investments 4,800

Cash at Bank 9,600

Goodwill 8,000

1,36,000 1,36,000

It was agreed by the company to take over the assets at book value with the exception of land and building, stock and goodwill which are taken over at Rs. 45,000, Rs. 20,000 and

Rs. 28,800 respectively. The investments were retained by the firm and sold for Rs. 4,000.

The firm discharged the loan of Mrs. A. The company took over the remaining liabilities. The purchase consideration was discharged by issuing 10,000 equity shares of Rs. 10 each in

AB Ltd. and the balance was paid in cash. Close the books of the firm assuming that shares are distributed amongst partners in their profit sharing ratio.

Sol. See Q. 4, Unit V, Accounting for Dissolution of The Partnership Firm.

[PageP-112

2010

Name of the Paper : Financial Accounting

Name of the Course : B.Com. (Hons.)

Time: Part A - 2 1/2 hours Maximum marks

Part A: 45 For students of Part B-30 minutes Part B; 10 regular College

Maximum marks Part A: 61 For students

Part B: 14 of SOL

This question paper has two parts. Part A is compulsory for all examinees. Part B is meant

only for those examinees who have not offered computerised accounts (applicable for students of regular colleges). Students of SOL have to attempt Part A and Part B.

Part A and Part B are to be answered on separate answer-books.

PART A

Q. 1. State with .easons whether the following statements are True or False:

(i) A business entity can keep its accounts on accrual basis of accounting.

(ii) Legal Fees paid to acquire a property is capital expenditure.

(iii) Higher depreciation will not affect cash profit of the business.

(iv) Receipts and Payments Account highlights total income and expenditure.

(v) Deferred revenue expenditure is current year's revenue expenditure to be paid in later years.

Ans. (i) True. Accrual basis of accounting involves recognition of revenues and costs as they are earned (revenues) and become payable (costs) irrespective of actual receipts and payments. This basis of accounting gives a complete picture of the financial transactions of the business as it makes a record of all transactions related to a period. Therefore, a business entity can keep its account on accrual basis of accounting.

(ii) True. Legal fees paid to acquire a property is part of the cost of that property. It is

incurred to acquire the ownership right of the property and hence a capital expenditure.

(iii) True. Depreciation is not a cash expenditure and as such, the amount of

depreciation does not affect cash profit of the business.

(iv) False. Receipts and Payments Account is a classified summary of cash receipts and cash payments for an accounting period together with the cash and bank balances at the beginning and end of the accounting period.

(v) False. Deferred revenue expenditure is that expenditure for which payment has been

made or liability incurred but which is carried forward on the presumption that it will be of benefit over a subsequent number of years/periods, e.g., heavy advertisement expenses.

Q. 2. (a) Define depreciation. What are the contributory factors for decline in the value of fixed assets. 4

(b) Mayur Traders, which depreciates its machinery at 10% p.a. according to Diminishing balance method, had on 1-1-2009 Rs. 4,86,000 balance in Machinery

Account. Part of the machinery purchased on 1-1-2007 for Rs. 60,000 was sold for Rs. 40,000 on 1st July, 2009 and a new machinery at a cost of Rs. 70,000 was purchased

and installed on the same date, installation charges being Rs. 5,000.

Mayur Traders wanted to change its method of depreciation on 1-1-2009 from Diminishing balance method to Straight line method with effect from 1-1-2007. The rate of depreciation remains the same as before.

Show Machinery Account for the year 2009. Also show your workings

clearly. 10

Ans. (a) See Q. 1, Chapter 7. [Page T-37

(b) See Q. 3, Unit II, A. Depreciation. [Page P-23

Or

The following are the details of material of Sai Mills:

1-1-2009 Opening Stock 100 units @Rs. 25 per unit

1-1-2009 Purchases 200 units @Rs. 30 per unit

15-1-2009 Issued for consumption . 100 units

1-2-2009 Purchases 400 units @Rs. 40 per unit

15-2-2009 Issued for consumption 200 units

20-2-2009 Issued for consumption 200 units

1-3-2009 Purchases 300 units @Rs. 50 per unit

15-3-2009 Issued for consumption 200 units

Find out the cost of closing stock as on 31-3-2009 according to:

(i) First in first out basis, and

(ii) Weighted average price basis, using perpetual inventory system. Also calculate cost of closing inventory on LIFO basis under periodic system.

Sol. See Q. 3, Unit II, B. Inventory Valuation. [Page P-36

Q. 3. (a) What is a contingent liability Rs. Give three examples of contingent liabilities. 4

(b) Given below is the Trial Balance of Mr. Ramesh as on 31st December, 2009:

Particulars Dr. (Rs.) Cr. (Rs.)

Land and Building 1,20,000 —

Office Machinery 70,000 —

Furniture and Fittings 20,000 —

Stock on 1-1-2012 16,000 —

Purchases and Sales 90,000 2,20,000

Salaries 20,000 —

Bad Debts 10,000 —

Debtors and Creditors 35,000 40,000

Sales Tax 10,000 —

Rent, Rates and Taxes 15,000 —

Advertisement 18,000 —

Drawings 5,000 —

Loan to Ashok@16%p.a. on 1-7-2012 20,000 —

Wages 33,000 —

Interest on Loan to Ashok — 1,000

Bills Receivable 10,000 —

Trade Mark 8,000 —

Discount 1,000 —

Wages Payable — 2,000

Capital — 1,98,000

Bank Overdraft — 40,000

5,01,000 5,01,000-

Additional Information:

(i) The value of Stock on 31-12-2009, Rs. 30,000.

(ii) Sales include Rs. 5,000 for the goods sold on approval to Hemant. Goods are sold at a

profit of 25% on cost. Approval was not received till 31st December.

(iii) Furniture purchased during the year for Rs. 5,000 was wrongly debited to

Purchase Book.

(iv) A cheque of Rs. 8,000 received from customers was deposited in the bank in

the last week of December. It was reported to have been dishonoured.

(v) Free samples worth Rs. 4,000 were distributed during the year.

(vi) Write off further bad debts Rs. 2,000. Also create a provision for doubtful

debts at 10% on debtors.

(vii) Depreciate furniture by 10% and office machinery by 5%.

Prepare Trading and Profit & Loss Account for the year ended 31st December, 2009 and a Balance Sheet as on that date.

Ans. (a) Contingent liability refers to an obligation to pay on the happening or not

happening of an uncertain event. It is not an actual liability and therefore, it is not provided

for in the Balance Sheet. These liabilities appear as footnotes to the Balance Sheet.

Examples:

(i) Claims against company which are not accepted by the company.

(ii) Liability for the amount uncalled on partly-paid shares.

(iii) Arrears of fixed cumulative dividends.

(iv) Liability for bills discounted.

(b) See Q. 3, Unit I, Accounting Process. [Page P-5

Q. 4. X Co. Ltd. purchased on 1-1-2008 from M/s R.V. Traders four machines having cash price Rs. 80,000 each on hire purchase basis. The payment was to be made as follows:

10% of cash price down, and

25% of cash price at the end of each of the following four years.

X Co. Ltd. paid the first instalment but failed to pay the second instalment due on 31-12-2009. M/s R.V. Traders repossessed three machines leaving remaining one machine with the buyer. The value of three machines was taken at cost less depreciation @ 20% p.a. on reducing balance method. M/s X Co. Ltd. charges depreciation at 10% p.a. on reducing balance method on 31st Dec. of each year.

M/s R.V. Traders spent Rs. 42,000 on overhauling of the machines repossessed and sold two of the repossessed machines for Rs. 1,20,000.

Prepare necessary Ledger Accounts in the books of both the parties. 14

Sol. See Q. 4, Unit III, Accounting for Hire Purchase and Instalment System.

[PageP-66

Or

From the following Income and Expenditure Account of Mayur Club for the year ended 31st December, 2009. Prepare Receipts and Payments Account for the year ended 31st December, 2009 and a Balance Sheet as on that date:

Income and Expenditure Account

for the year ended 31-12-2009

Expenditure Rs. Income Rs.

To Salaries 48,000 By Subscriptions 1,56,000

To Stationery 3,200 By Donations 16,000

To Postage & Telephone 6,400 By Billiard Room Collections 14,000

To Rates and Taxes 12,000 By Entrance Fees 24,000

To Repairs 16,000 By Interest from Investments 5,400

To Table Tennis Balls 2,400

To Printing of Magazines 4,000

To Electricity Charges 12,000

To Billiard Room Expenses 6,000

To Upkeep of Ground 18,800

To Depreciation on Assets 4,000

To Excess of Income over Expenditure

82,600

2,15,400 2,15,400

Additional Information:

7.7.2009 (Rs.) .37.72.2009 (Rs.)

Fixed Assets 96,000 64,000

Investments 54,000 94,000

Cash at Bank 3,600 Rs.

Subscriptions Outstanding 6,000 10,000

Subscriptions received in advance 12,000 20,000

Expenses Outstanding: Stationery 1,200 800

Telephone 600 400f

Electricity 1,400 600

Sol. See Q. 3, Unit II, C. Income & Expenditure. [Page P-47

Q. 5. X Co. Ltd. Mumbai invoices goods to its Delhi Branch at cost plus 25%.

All expenses of the branch are met by Head Office and cash collected by the

branch is sent to Head Office. From the following information, prepare Branch

Account and Goods sent to Branch Account in the books of Head Office:

Rs.

Branch Stock at invoice price on 1-1-09 20,000

Branch Debtors on 1-1-09 25,000

Branch Furniture on 1-1-09 40,000

Petty Cash on 1-1-09 3,000

Salary due for December, 2008 4,000

Goods sent to branch during the year (including goods in transit) 2,00,000

Goods returned by Branch to Head Office 5,000

Goods returned by customers to Branch 4,000

Loss of goods in transit at IP (not insured) 10,000

Cash Sales 70,000

Cash received from customers 90,000

Goods spoiled at IP (normal) 4,000

Bad Debts 1,000

Discount allowed 2,000-

Petty expenses incurred by Branch 2,000

Cheque received from Head Office for: Rs.

Salaries @ f 4,000 p.m. 48,000

Rent 10,000

Petty Cash 3,000

Delivery Van 50,000 1,11,000

Branch Debtors on 31-12-09 30,000

Branch Stock on 31-12-09 Rs.

Depreciate furniture and delivery Van @ 10%. 14

Sol. See Q. 5, Unit IV, Accounting for Inland Branches. [Page P-83

Or

(a) Distinguish between Hire purchase system and Instalment system. 4

(b) A Head Office invoices goods to its branch at 20% less than the list price. The list price is made up by adding 100% to cost price. Goods are sold to customers at list price both by Head Office and Branch. From the following particulars, prepare Trading and Profit & Loss Accounts for the year ended 31st March, 2010 to show profit made by Head Office and Branch on Wholesale Basis:

Head Office (Rs.)

Branch (Rs.)

Opening Stock at Cost (at invoice price for branch) 60,000 24,000

Purchases 6,00,000 —

Goods sent to Branch at invoice price — 1,44,000

Sales 9,00,000 1,20,000

Expenses 1,30,000 6,000

Sol. (a) See Q. 2, Chapter 10. [Page T-54

(b) See Q. 6, Unit IV, Accounting for Inland Branches. [Page P-84

PART 'B'

Q. 6. A, B and C shared profits and losses in the ratio of 5 : 3 : 2 respectively. On 31st March, 2013 their Balance Sheet was as follows:

Liabilities Rs. Assets Rs.

A' Capital A/c 60,000 Furniture 22,000

B's Capital A/c 40,000 Stock 96,000

C's Capital A/c 20,000 Cash 2,000

Creditors 60,000 Profit & Loss A/c 80,000

Bank Loan 20,000

2,00,000 2,00,000

The bank had a charge on all the assets. Furniture realised Rs. 6,000 and stock was sold for

Rs. 50,000. B's private estate realised Rs. 12,000 and his private liabilities were Rs. 10,000. C was unable to contribute anything. A paid one-third of what was due from him on his own account.

Prepare Realisation Account, Cash Account and Partners' Capital Accounts, passing all matters relating to realisation of assets and payment of liabilities through Realisation Account.

Sol. See Q. 5, Unit V, Accounting for Dissolution of the Partnership Firm.

[PageP-113

Or

(a) Explain the rule of Garner vs. Murray. 4

(b) A, B and C were partners sharing profits and losses in the ratio of 4:3:1. Their Balance Sheet as on 31st March, 2013 was as follows: [2010

Liabilities Rs. Assets Rs.

A's Capital A/c 1,05,000 Building 90,000

B's Capital A/c 45,000 Machinery 30,000

C's Capital A/c 75,000 Stock 82,500

Bank Loan (Secured) 13,500 Debtors 90,000

Creditors 39,000

A's Loan 15,000

2,92,500 2,92,500

They decided to dissolve the business. The assets were realised gradually and the net amounts were distributed immediately as follows:

2013 Rs. Rs.

May 30 33,000 Expenses paid 3,000

July 30 25,200 Expenses paid 2,200

Sept. 30 57,000 Expenses paid 4,500

Nov. 30 68,000 Expenses paid 8,000

Dec. 31 1,08,000 Expenses paid 10,000

Show the distribution of cash among partners using maximum possible loss method.

Sol. (a) See Q. 7, Chapter 12, [Page T-68

(b) See Q. 6, Unit V, Accounting for Dissolution of the Partnership Firm.

[Page P-115

2011

Name of the Paper : Financial Accounting

Name of the Course : B.Com. (Hons.)

Time: Part A - 2 1/2 hours Maximum marks

Part A: 45 For students of

Part B-30 minutes Part B: 10 regular College

Maximum marks Part A: 61 For students

Part B: 14 of SOL

This question paper has two parts. Part A is compulsory for all examinees. Part B is

meant only for those examinees who have not offered computerised accounts (applicable

for students of regular colleges). Students of SOL have to attempt Part A and Part B.

Part A and Part B are to be answered on separate answer-books.

PART A

Q. 1. State with reasons whether the following statements are True or False:

(i) Depreciation is decrease in the market value of a fixed asset.

(ii) Revenue and income are one and the same thing.

(iii) According to accrual concept revenues are recognised only when cash is

actually received.

(iv) Assets 'represent expired costs while expenses are unexpired costs.

(v) Outstanding rent account is a personal account.

Ans. (i) False. Depreciation is a fall in the book value of depreciable fixed asset.

Depreciation is not the result of fluctuations in the value of fixed assets, the fluctuation (increase/decrease in the market value) is concerned with the market price of the fixed asset whereas depreciation is concerned with the historical cost.

(ii) False. 'Revenue' and 'Income' are not one and the same thing. Revenue means the gross inflow of cash receivables or any other form of consideration. It may arise in the course of ordinary activities of the business. It is measured by the charge made to the customers of the business for goods supplied or services rendered to them. 'Income', however, means surplus of revenue over cost. Income belongs to the owners of the business. This surplus arises as a result of matching all the revenues of a particular period with all the expenses of the same period.

(iii) False. According to accrual concept revenues are recognised or taken into account

when sale process is just completed whether cash is received or not.

It is so even if the claims to cash are acquired, e.g., debtors or bills receivable.

(iv) False. Assets rather represent unexpired costs and not expired ones. Such unexpired

costs are then treated as expenditure in the coming years or future by way of depreciation, the depleting value of the assets.

(v) True. 'Outstanding Rent Account' is a personal liability. It is a representative personal

account and it represents an amount payable to the landlord and it is a Liability Account. It carries only a credit balance.

Q. 2. ABC Ltd. purchased on 1st October, 2004, a machinery for Rs. 4,50,000 and spent Rs. 10,000 on freight and transit insurance. On 25th December, 2004, it further spent

Rs. 40,000 on its erection. The machinery was put to use on 1-1-2005.

On 1st July 2005, it purchased another machinery for Rs. 1,00,000. During the year 2006, it spent Rs. 10,000 for repairs on 1-4-2006.

However, on 1-4-2007, a part of the machinery, purchased on 1-10-2004, costing Rs. 2,00,000 was sold for Rs. 1,50,000. On 1-10-2007 it purchased another machinery for

Rs. 3,00,000.

On 1st July, 2008, however, machinery purchased on 1st July, 2005 was sold for Rs. 65,000. Depreciation was charged by the firm @10% p.a. by written down value method. During the year 2008, ABC Ltd. decided to change the method of providing depreciation and adopted the Straight Line Method of charging depreciation @ 10% p.a. Prepare Machinery Account as per the provisions of AS-6 upto the year ending 31-12-2008.

Sol. See Q. 4, Unit II, A. Depreciation. [Page P-24

Or

(a) What is meant by accounting standards Rs. State briefly the merits of issuing accounting standards. 4

(b) The following are the details of material in respect of a certain item of M/s Ajay & Company: 10

1-1-2008 Purchases 600 units @Rs. 20 each

1-2-2008 Purchases 200 units @Rs. 24 each

15-2-2008 Sales 200 units @Rs. 30 each

1-4-2008 Purchases 300 units @Rs. 30 each

15-4-2008 Sales 400 units @Rs. 40 each

1-6-2008 Purchases 300 units @Rs. 40 each

15-6-2008 Sales 350 units @Rs. 50 each

Find out the cost of closing stock as on 30-6-2008 according to:

(i) First-in-first-out basis, and

(ii) Weighted average price basis, using perpetual inventory system.

Sol. (a) See Q. 1, Chapter 3. [Page T-15

(b) See Q. 4, Unit II, C. Inventory Valuation. [Page P-37

Q. 3. From the following Trial Balance and additional information, prepare Trading and Profit & Loss Account of Mr. Mukul for the year ended 31st March, 2013 and Balance Sheet as at that date:

Particulars Dr. (Rs.) Cr. (Rs.)

Capital / Drawings 10,000 1,70.000

Plant and Machinery 1,10,000 —

Sales / Purchases 84,000 1,65,000

Returns 5,000 4,000

Bad debts / Bad debts Recovered 5,000 26,450

Freight inwards 5,000 —

Freight outwards 7,000 —

Discount 2,000 1,000

Commission 4,000 3,000

Rent 3,000 4,000

Interest 2,500 3,000

Office and Administrative Expenses 6,000 —

Selling and Distribution Expenses 10,000 —

Creditors/Debtors 2,15,000 2,02,000

Bills Payable/Bills Receivable 10,000 5,600

Loan 20,000 50,000

Investments 50,000 —

Opening Stock 54,000 —

Cash in hand 5,000 _ .

Cash at Dena Bank 45,550 —

Bank overdraft at Canara Bank . — 20,000

Wages and Salaries 1,000 _

6,54,050 6,54,050

Additional Information:

(i) Closing Stock at market price as at 31st March, 2013 was Rs. 61,500.

However, its cost was Rs. 80,000.

(ii) Provide for depreciation on Plant and Machinery @ 10% p.a.

(iii) Provide interest on capital @ 6% p.a. and an additional capital of Rs. 10,000 was

introduced on 1st Oct. 2012.

(iv) Charge interest on drawings @ 9% p.a.

(v) Goods costing Rs. 10,000 were destroyed due to fire on 30th March, 2013. The Insurance

Company accepted claim to the extent of 60% only and paid the claim money on 10 th April, 2013.

(vi) Goods worth Rs. 10,000 were sent to a customer on approval basis and have been

accounted for in the books as actual sale'. These goods remained unapproved on 31st March, 2013. The cost of such goods was Rs. 8,000.

(vii) Received credit purchase invoice of Rs. 10,500 on 27th March 2013 and recorded in the

books but the goods were not received till the end of the accounting year.

(viii) Manager is entitled to a commission on 5% of net profit after charging the commission.

Sol. See Q. 4, Unit I, Accounting Process. [Page P-6

Q. 4. Deepak purchased four second-hand cars on hire-purchase system. Cash price

being Rs. 52,500 each. The hire purchase price for all the four cars was Rs. 2,40,000.

The payment was to be made Rs. 60,000 on signing the agreement and three instalments of Rs. 60,000 each at the end of each of the three years. Deepak charges depreciation @ 10% p.a. on Straight Line Method.

Deepak paid the down payment and first instalment but could not pay the second instalment. The vendor, after negotiations, took back three cars. These cars were taken back after depreciating them @ 20% p.a. on written down value method. One car was left with the purchaser.

The vendor spent Rs. 3,600 on repairs and sold two of these cars for Rs. 80,000.

Show necessary ledger accounts in the books of both the parties. 14

Sol. See Q. 5, Unit III, Accounting for Hire Purchase and Instalment System.

[PageP-68

Or

Prepare Income and Expenditure Account of Lions Club for the year ending 31st March 2009 and a Balance Sheet as on that date from the following:

Receipts and Payments Account

for the year ending 31-3-2009

Receipts Rs. Payments Rs.

To Balance b/d: By Salary:

Cash 20,000 Secretary 60,000

Bank 1,20,000 1,40,000 Staff 50,000 1,10,000

To Subscription: By Canteen expenses 1,20,000

2007-08 5,000 By Miscellaneous Expenses

25,000

2008-09 55,000 By Construction of building

1,50,000

2009-10 4,000 64,000 By Balance c/d:

To Interest, from Bank 10,000 Cash 13,000

To Sale of Old Furniture 20,000 Bank 40,000 53,000

To Sale of Newspapers 4,000

To Canteen Collections 1,20,000,

To Donation for Building

1,00,000

4,58,000 4,58,000

Additional Information: 31-03-08 (Rs.) 31-03-09 (Rs.)

(i) Subscription outstanding as on 10,000 6,000

(ii) Subscription in advance as on 2,000 4,000

(III) Salary of staff outstanding 10,000 20,000

(iv) Canteen expenses prepaid 10,000 15,000

(v) Furniture at book-value 1,40,000 —

(vi) Buildings (under construction) 1,50,000 4,00,000

(vii) Fixed Deposits with Bank 1,00,000 1,00,000

(viii) Building fund 2,00,000 —

Book value of furniture sold during the year was Rs. 15,000 and depreciation on

furniture is charged @ 10% p.a. on closing balance.

Sol. See Q. 4, Unit II, C. Income & Expenditure Account. [Page P-49

Q. 5. M/s XYZ Ltd. has branches at Delhi and Agra and goods are invoiced at

cost plus a profit of 20% on sales. The following information is available of the

transactions at Delhi branch for the year ending 31st March, 2011:

01-04-2010 (Rs.) 31-03-2011 (Rs.)

Stock at Invoice Price 40,000 —

Debtors 12,000 11,000

Petty Cash 150 250

Transactions during 2010-11: Rs.

Goods sent to branch at cost to HO 3,36,000

Goods returned by branch to HO 15,000

Cash Sales 1,05,000

Credit Sales 1,80,000

Normal Loss at IP 350

Goods pilfered at IP 3,000

Goods lost by fire at IP 4,000

Insurance Co. paid to HO for loss by fire at Delhi 3,000

Cash sent for petty expenses 32,000

Bad debts at Delhi branch 400

Goods transferred to Agra branch under instructions from HO at IP 12,000

Insurance charges paid by HO 200

Goods returned by Debtors 500

Note: Goods transferred to Agra branch were in transit (given above) on 31st March, 2011.

Prepare:

(i) Branch Stock Account; (ii) Branch Adjustment Account;

(iii) Branch Profit & Loss Account; (iv) Stock Reserve Account; and

(v) Branch Debtors Account

Sol. See Q. 7, Unit IV, Accounting for Inland Branches. [Page P-85

Or

From the following details relating to Delhi branch for the year ending March 31st, 2011, prepare Branch Account and Goods sent to Branch Account in the books of Head Office. Show your workings clearly:Rs.

Stock on 1-4-2010 25,000

Debtors on 1-4-2010 10,000

Furniture on 1-4-2010 6,000

Petty Cash on 1-4-2010 1,000

Insurance prepaid on 1-4-2010 300

Salaries outstanding on 1-4-2010 4,000

Goods sent during the year 2010-11 2,00,000

Cash sales during the year 2,70,000

Total Sales 3,50,000

Cash received from Debtors 65,000

Cash paid by Debtors direct to HO 5,000

Goods returned by branch 2,000

Goods returned by Debtors 1,000

Cash sent to Branch for expenses:

Rent (Rs. 800 p.m.) 9,600

Salary (Rs. 4,000 p.m.) 48,000

Petty Cash 2,000

Insurance (upto June 2011) 1,200 60,800

Petty Cash Expenses 2,200

Discount allowed to Debtors 500

Stock on 31-3-2011 15,000

Depreciation on furniture at 10% p.a.

Goods costing Rs. 2,500 were damaged in transit and a sum of Rs. 2,000 was recovered by

branch from the insurance company in full settlement of the claim.

Sol. See Q. 8, Unit IV, Accounting for Inland Branches. [Page P-87

PART B

Q. 6. A and B were partners sharing profits and losses in proportion of 3/5 and 2/5 respectively. Their Balance Sheet as on 31st December, 2013 was as under:

Liabilities Rs. Assets Rs.

Bills Payable 3,500 Cash 4,500

Sundry Creditors 6,400 Book Debtors 7,500

Reserve Fund 15,000 Investments 4,000

Capitals: Stock 31,000

A 70,260 Plant & Machinery 50,000

B 46,840 1,17,100 Freehold Premises 45,000

1,42,000 1,42,000

AB Limited was formed with an authorised capital of Rs. 5,00,000 divided into 25,000 equity shares of Rs. 10 each and 25,000 preference shares of Rs. 10 each to acquire the going concern of A and B upon the following terms:

(i) The company took over all assets except investments. It valued the stock and plant and machinery at 10 per cent less than the book value and the freehold premises at 20 per cent more than the book value.

(ii) The liabilities were to be discharged by the company.

(iii) The goodwill of the firm was to be valued at 2 years' purchase of the average profits of 3 years. The working results of the firm showed that it had made profits of Rs. 15,000 in 2010,

Rs. 18,000 in 2011 and Rs. 21,000 in 2012 after setting aside Rs. 5,000 to reserve fund

every year.

(iv) The purchase price was agreed upon to be paid Rs. 53,000 in fully paid equity shares, Rs. 50,000 in fully paid preference shares, Rs. 30,000 in debentures and the balance in

cash.

(v) The partners sold the investments and realised Rs. 4,100.

You are required to prepare in the books of the firm of A and B:

(i) Realisation Account;

(ii) Capital Accounts of the partners; and

(iii) Cash Account,

Assuming that shares and debentures are to be distributed in profit sharing ratio, the final settlement being made in Cash.

Sol. See Q. 7, Unit V, Accounting for Dissolution of the Partnership Firm.

[Page P-116

Or

A, B and C were partners sharing profits and losses in the ratio of 3 : 2 : 1. On 31st December, 2008, their Balance Sheet was as follows:

Balance Sheet

Liabilities Rs. Assets Rs.

Sundry Creditors 30,000 Cash at Bank 9,500

Bills Payable 5,000 Stock 15,500

A's Loan 6,000 Sundry Debtors 32,000

Reserve fund 12,000 Furniture 5,000

Profit & Loss A/c 6,000 Plant 21,000

Capital Accounts: Drawings Account:

A 20,000 A 4,000

B 15,000 B 1,000

C's Capital 6,000

94,000 94,000

The firm was dissolved on that date. Stock realised Rs. 12,200, Debtors Rs. 30,000 and Furniture Rs. 4,200. Plant is taken over by A at Rs. 18,000. A contingent liability for bills

discounted materialised to the extent of Rs. 600. Realisation expenses amounted to Rs. 600. C is insolvent, but his private estate paid Rs. 1,900.

Prepare Realisation Account, Capital Accounts and Bank Account. Apply Garner vs. Murray rule. 14

Sol. See Q. 8, Unit V, Accounting for Dissolution of the Partnership Firm.

[Page P-117

2012

Name of the Paper : Financial Accounting

Name of the Course : B.Com. (Hons.)

Time: Part A - 2 1/2 hours Maximum marks Part A: 45 For students of

Part B-30 minutes Part B: 10 regular College

Maximum marks Part A: 61 For students

Part B: 14 of SOL

This question paper has two parts. Part A is compulsory for all examinees. Part B is

meant only for those examinees who have not offered computerised accounts (applicable

for students of regular colleges). Students of SOL have to attempt Part A and Part B.

Part A and Part B are to be answered on separate answer-books.

PART A

Q. 1. State with reasons whether the following statements are True or False:

(i) Accounting is concerned only with identifying and recording of economic events.

(ii) Receipts & Payments Account is a summary of all capital receipts and payments.

(iii) Providing depreciation ensures sufficient cash for asset replacement.

(iv) Under stock and debtors system/Branch Account is a nominal account.

(v) The gain from sale of capital assets need not be added to revenue to ascertain the net profit of the business.

Ans. (i) False. Accounting is also concerned with classifying and summarising the financial

transactions and interpreting the results thereof.

(ii) False. Receipts and Payments Account is a summary of all cash/bank receipts and

payments whether of capital or revenue in nature.

(iii) False. Providing depreciation does not ensure sufficient cash for asset replacement

especially under inflationary conditions.

(iv) False. Under debtor system, Branch Account is a nominal account.

(v) True. The profit on sale of capital assets should not be added to ascertain the true net

profit of a business because it is not as a result of normal business operations.

Q. 2 .From the following Trial Balance of Sachin as on 31st March, 2011 you are required to prepare a Trading and Profit & Loss Account for the year ended 31st March, 2011 and a Balance Sheet as on that date, after making the necessary adjustments as mentioned hereunder:

Particulars Dr. (Rs.) cr. (Rs.)

Sachin's Capital Account — 1,60,000

Sachin's Drawings 24,000 —

Furniture and Fixtures 8,000 —

Plant and Machinery 60,000 —

Patents (Ten years from 01-04-2010) 40,000 —

Stock on 01-04-2010 40,000 —

Purchases 1,70,000 —

Salaries 14,800 —

Wages 30,000 "—

Sundry Debtors 20,400 —

Sales — 2,64,000

Cash in hand 13,250 —

Land — 28,350

Loan from Kapil (@ 6% on 01 -10-2011) — 20,000

Postage and Fax 3,000 —

Rent, Rates and Taxes 7,200 —

Bad Debts 800 —

Sundry Creditors — 24,000

Discount — 1,200

Carriage Inwards 400 —

Interest on Loan 300 —

Insurance 1,600 —

Travelling Expenses 1,000 —

Sundry Expenses 600 —

Cash at Bank 20,500 —

Bank Overdraft — 15,000

4,84,200 4,84,200

Adjustments:

(i) Stock on 31-03-2011 is valued Rs. 30,000.

(ii) A new machine was installed on 01-04-2010 for Rs. 3,000. No entry in this respect was passed in the books. Wages Rs. 1,000 paid for installation of the machine were debited to

wages account.

(iii) Of the sundry debtors Rs. 200 are bad and to be written off. You are required to maintain a provision for doubtful debts @ 5% on debtors and a provision for discount on debtors @ 2%.

(iv) Goods costing Rs. 2,000 were given away as free samples for publicity.

(v) Depreciate plant and machinery ac 20% and furniture and fixtures at

10%.

(vi) Goods costing Rs. 1,000 were sent to a customer for Rs. 1,200 on 27th March, 2011 on

sale or return basis. This was recorded as actual sale.

Sol. See Q. 6, Unit I, Accounting Process. [Page P-10

Q. 3. (a) Explain the concept of Deferred Revenue expenditure by giving suitable

examples. How is it different from capital expenditure Rs. 4

(b) A firm purchased on 1st January, 2008, certain machinery for Rs. 3,88,000 and

spent Rs. 12,000 on its creation. On 1st July, 2008 additional machinery costing Rs. 2,00,000 was purchased. On 1st July, 2010, the machine purchased on 1st January, 2008, having become obsolete was auctioned for Rs. 2,00,000 and on the same date a

new machine was purchased for Rs. 3,00,000.

Depreciation was provided for annually on 31st December @ 10% P.A. on original cost of the machinery. No depreciation need be provided when machinery is sold/auctioned. In 2011, however, the firm changed the method of providing depreciation and adopted the method of writing off 15% P.A. on written down value method with retrospective effect. 10

Prepare Machinery Account for the years 2008 to 2011.

Sol. (a) See Q. 14, Chapter 4. [Page T-26

(b) See Q. 5, Unit II, A. Depreciation. [Page P-26

Or

(a) Define the term revenue and state the conditions that should be satisfied for revenue recognition in sale of goods transactions. 4

(b) From the following information calculate cost of sales, gross profit, and value of closing stock for the month of January, 2012, according to FIFO, LIFO and weighted average method. 10

Date Particulars No. of Units Rate per Unit

Rs. (Rs.)

01-0 1- 2012 Opening Stock 500 8

05-01-2012 Purchased 800 9

14-01-2012 Purchased 700 9

21-01-2012 Purchased 1000 10

23-01-2012 Purchased 500 9

During January 2012 Sold 2900 17

Sol. (a) Revenue in business is the gross income received by an entity from its normal

business activities before any expenses have been deducted. A business generates revenue when it exchanges its goods or services with its customers in return for money or other

assets. A business incurs expenses by exchanging its assets for the goods and service activities that are needed to generate that revenue. A business makes a profit if its revenues exceed its expenses. However, if the costs of generating the revenue (expensed assets and service activities) are greater than the revenue received, then the business makes a loss.

Revenue recognition in sale of goods transactions. See Q. l(Point 7), Chapter 2.

[Page T-11

(b) See Q. 5, Unit II, B. Inventory Valuation. [Page P-38

Q. 4. The following is Income and Expenditure Account of Delhi Club for the year ended 31st March, 2012:

Income and Expenditure Account for the year ended 31st March, 2012

Expenditure Rs. Income Rs.

Salaries 39,000 Subscriptions 1,36,000

Rent 9,000 Donations 10,000

Printing 1,500

Insurance 1,000

Audit Fees 1,500

Games and Sports 7,000

Subscription Written off 700

Miscellaneous Expenses 29,000

Loss on Sale of Furniture 5,000

Depreciation on: Sports equipment

12,000

Furniture 6,200

Excess of Income over Expenditure

34,100

1,46,000 1,46,000

Additional Information: 31-03-11 (Rs.)

31-03-12 (Rs.)

Subscription in Arrears 5,200 7,400

Advance Subscription 2,000 3,000

Outstanding Exp: Rent 1,000 1,600

Salaries 2,400 700

Audit Fees 1,000 1,500

Sports Equipment less Depreciation 50,000 48,000

Furniture less Depreciation 60,000 55,800

Prepaid Insurance — 300

Book value of Furniture sold is Rs. 14,000. Entrance fee capitalized Rs. 8,000. On 1st April 2011, there was no cash in hand but bank overdraft was Rs. 30,000. On 31st

March, 2012, cash in hand amounted to Rs. 1,700 and the rest was bank balance. Prepare Receipt and Payment Account of the club for the year ended 31st March, 2012.

Sol. See Q. 6, Unit II, C. Income & Expenditure Account. [Page P-52

Or

(a) Distinguish between Operating lease and Financial lease. 4

(b) X sells goods at hire-purchase basis, the price being cost plus 50%. From the following information calculate profit by preparing Ledger Accounts on stock and debtor system for the year ended 31st March, 2012. 10

April 1st, 2011 Rs.

Stock at the shop at cost 1,08,000

Stock on hire at selling price 54,000

Installment due at beginning 30,000

Cash received from customers 3,60,000

Goods Repossessed (Installment due Rs. 12,000) 3,000

Installment due at the end 54,000

Closing stock at shop including goods Repossessed 1,23,000

Purchases made during the year 3,60,000

Sol. (a) See Q. 6, Chapter 10. [Page T-58

(b) See Q. 7, Unit III, Accounting for Hire Purchase and Instalment System.

[PageP-71

Q. 5. S.K. Brothers' has a branch at Delhi. Goods are invoiced at a profit of

20% on sales. The following information is available of the transactions at

Delhi Branch for the year ending 31st March, 2012:

Balance as on 01-04-2011 Rs.

Branch stock at invoice price 50,000

Branch Debtors 34,000

Branch Cash 8,000

Balance as on 31-03-2012:

Branch stock at invoice price Rs.

Branch Debtors 47,840

Branch Cash 18,000

Transactions during 2011-2012

Good invoiced to Branch 6,50,000

Goods received by the Branch 6,00,000

Goods returned by Branch to HO 25,000

Credit sales at Branch 3,50,000

Cash sales at Branch 2,05,000

Normal loss at Branch 10,000

Goods lost by fire at Branch 15,000

Cash remitted to HO Rs.

Cash received from branch debtor 3,14,600

Bills receivable received from Branch debtors 20,000

Amount received by the Branch on discounting of the above bills 19,600

Cash sent to Branch for expenses 72,000

Actual cash expenses at Branch 71,800

Cash discount allowed to customers 1,560

Make a provision for Bad and Doubtful debts @ 5% on Debtors.

Prepare:

(i) Branch Stock Account; (ii) Branch Debtors Account;

(iii) Branch Expenses Account; (iv) Branch Cash Account;

(v) Branch Adjustment Account; (vi) Branch Profit and Loss Account.

Sol. See Q. 11, Unit IV, Accounting for Inland Branches. [Page P-92

Or

(a) Distinguish between a 'dependent branch' and 'independent branch'.

(b) M/s Virat & Company with their Head Office at Delhi, have a branch at Noida. They supply goods to its branch at selling price less 20%. The company as well as the branch sells goods to consumers at a profit of 100% on cost. M/s Virat & Co. also sells goods to their approved dealers at the same price at which they are invoicing to their branch at Noida. From the following particulars, prepare Trading and Profit & Loss Account of the Head Office and of the Branch for the year ending 31st March, 2012:

Head Office (Rs.) Branch (Rs.)

Stock at beginning 1,50,000 8,000

Purchases during the year 12,80,000 —

Goods sent to Branch 2,00,000 --

Goods received from HO — 2,00,000

Goods sold to approved Dealers 3,00,000 —

Goods sold to customers 6,00,000 1,80,000

Expenses 50,000 15,000

Ans. (a) See Q. 2,, Chapter 11. [Page T-60

(b) See Q. 12, Unit IV, Accounting for Inland Branches. [Page P-94

PART B

Q. 5. X, Y and Z are three partners in a firm, sharing profits and losses in the ratio of 5 : 3 : 2. The Balance Sheet of the firm as on 31-03-2013 was as under:

Liabilities Rs. Assets Rs.

Creditors 1,60,000 Building 3,20,000

Bills Payable 80,000 Furniture 40,000

Bank Loan 80,000 Investments 1,20,000

Capitals: X 2,40,000 Profit & Loss Account 3,20,000

Y 1,60,000

Z 80,000

8,00,000 8,00,000

The Bank loan was secured by charge on the building. Assets realised as under: Building Rs. 1,60,000; Furniture Rs. 16,000 and Investments Rs. 54,000.

Y's private estate realised Rs. 48,000 and his private liabilities are Rs. 40,000. Z was insolvent. X could just contribute 1/3 of what was finally due from his own account. Record all matters relating to realisation of assets only through realisation account. Prepare necessary ledger accounts in the books of the firm.

Sol. See Q. 11, Unit V, Accounting for Dissolution of the Partnership Firm.

[Page P-123

Or

(a) Explain the rule in Garner vs. Murray.

(b) X, Y, Z carry on business in partnership sharing profits and losses in the ratio 4 : 3 :1. On 31st March, 2012, they agreed to sell their business to AB Ltd. Their position on that date was as follows:

Liabilities Rs. Assets Rs.

X's Capital 2,00,000 Freehold premises 2,40,000

Y's Capital 1,50,000 Machinery 2,10,000

Z's Capital 1,30,000 Stock 1,15,000

Loan on Mortgage 80,000 Bood Debts 75,000

Sundry Creditors 90,000 Cash 10,000

6,50,000 6,50„000

The company took the following assets at the valuation shown:

(Rs.) (Rs.)

Freehold Property 3,05,000 Book Debts 70,000

Machinery 1,59,000 Goodwill .50,000

Stock 1,10,000

The company agreed to pay the creditors Rs. 88,500. The company paid Rs. 3,35,000

in shares and the balance in cash. Expenses on realisation amounted to Rs. 1,500. Prepare relevant ledger accounts in the books of the firm. 10

Sol. (a) See Q. 7, Chapter 12. [Page T-68

(b) See Q. 12, Unit V, Accounting for Dissolution of the Partnership firm.

[PageP-124

2013

Name of the Paper : Financial Accounting

Name of the Course : B.Com. (Hons.)

Time allowed: Maximum marks: 75

Section A - 2 1/2 hours Section A - 55

Section B - 30 minutes Section B - 20

This Question Paper has 2 parts.

Section A and Section B are to be answered on separate Answer-books.

SECTION A

Q.1. (a) Write a note on significance of accounting standards in the changing

global economic and business environment. 6

(b) Differentiate between Cash and Accrual basis of accounting. 5

Ans. (a) See Q. 1, Chapter 3. [Page T-15

(b) See Q. 4, Chapter 1. [Page T-3

Q. 2. From the following balances taken from the ledger of Ms. Jenny on 31st

March, 2013, prepare the Trading and Profit & Loss Account for the year ended

31st March, 2013 and the Balance Sheet as on that date:

Particulars Rs. Particulars Rs.

Sundry creditors 19,000 Bad debts 100

Building 15,000 Loan from John 2,500

Income-tax 1,025 Sundry Debtors 9,500

Loose Tools 1,000 Investments 6,500

Cash at Bank 16,200 Bad debts reserve 1,600

Sundry Expenses 1,990 Rent and Rates 850

Bank Interest (Credit) 75 Furniture 3,000

Purchases 1,57,000 Stock (1.4.2012) 27,350

Wages 10,000 Capital 47,390

Carriage Inwards 1,120 Discount allowed 630

Sales 1,85,000 Dividend Income 535

Motor Van 12,500 Drawings 2,000

Cash in hand 335 Bills payable 10,000

Adjustments:

(i) Write off further Rs. 300 as bad debts out of Sundry Debtors and create a

reserve for bad debts at 20% on debtors.

(ii) Dividend accrued on investments is Rs. 135. Rates paid in advance Rs. 100 and

wages owing Rs. 450.

(iii) On 31-3-2013, stock was valued at Rs. 15,000 and loose tools were valued at

Rs. 800.

(iv) Write off 5% for depreciation on building and 40% on motor van.

(v) In case of profits, manager is entitled to a commission of 5% on net

profits.

(vi) Provide for interest at 12% per annum due on loan taken from John on 1-6-2012.

Sol. See Q. 7, Unit I, Accounting Process. [Page P-12

Or

Given below is the Receipts and Payments Account of Resident Welfare Association Sports Club for the year ending 31-12-2012.

Receipts Rs. Payments Rs.

Balance b/d 2,100 Purchase of sports material 7,000

Subscription (including Rs. 1,400 Stationery 5,700

for 2011 and Rs. 1,500 for 2013) 18,000 Honorarium 3,000

Life membership fees 9,000 Upkeep of ground 2,600

Legacies 2,000 Salaries 7,000

Entrance fees 4,000 Telephone charges 2,000

Donations for building fund 18,000 Refreshments 1,400

Hire of club hall 5,000 Tournament expenses 6,000

Sale of old bats and balls 500 Miscellaneous expenses 1,000

Sale of old furniture 700 10% Investment (on 1-7-2006) 12,000

Furniture (part payment) 5,000

Balance c/d 6,600

Total 59,300 Total 59,300

Additional Information: 2.1,2012

Rs.

31.12.2012

Rs.

Subscription due 1,400 2,400

Subscription received in advance — 1,500

Audit fees outstanding — 1,000

Creditors for stationery 600 500

Stock of stationery — 800

Stock of sports material 1,100 1,500

Building 40,000 40,000

Furniture was sold on 1-1-2012 at its book value. On the same date furniture for Rs. 8,000 was purchased. Depreciation is to be charged at 10% p.a. on furniture.

Prepare Income and Expenditure Account for the year ended 31-12-2012 and Balance Sheet as on that date.

Sol. See Q. 7, Unit II, C. Income & Expenditure Account. [Page P-54

Q. 3. Delhi Head Office supplies goods to its branch at Noida at invoice price which is cost plus 50%. All cash received by the branch is remitted to Delhi and all branch expenses are paid by the Head Office. From the following particulars related to Noida branch for the year 2012 prepare:

(a) Branch Stock Account

(b) Branch Debtors Account

(c) Branch Expenses Account and

(d) Branch Adjustment Account in the books of Head Office so as to find out the gross profit and net profit made by the branch: 11

Rs.

Stock with Branch on 1-1-2012 (Invoice Price) 1,20,000

Branch Debtors on 1-1-2012 24,000

Petty Cash Balance on 1-1-2012 200

Goods received from HO 3,72,000

Goods returned by debtors direct to HO 6,000

Allowances to Customers off Selling Price 4,000

Cash Sales 2,08,000

Credit Sales 1,74,000

Cash received from debtors 1,80,000

Discount allowed to debtors 4,800

Expenses paid by HO in Cash: Rent Rs. 4,800

Salaries Rs. 48,000

Petty Cash Rs. 2,000 54,800

Stock with Branch on 31-12-2012 1,08,000

Petty Cash Balance on 31-12-2012 200

Sol. See Q. 13, Unit IV, Accounting for Inland Branches. [Page P--95

Or

You are required to prepare:

(a) Trading and Profit and Loss Account of Kolkata Branch of Suparna Limited for the year ending 31st March 2013

(b) Journal Entries in the books of Suparna Limited necessary to incorporate the accounts of Kolkata Branch

(c) Kolkata branch account in the books of Suparna Limited. The following is the Trial Balance of Kolkata Branch as on 31-3-2013:

Particulars Dr. (Rs.) Cr. (Rs.)

Mumbai Head Office A/c 32,400 —

Stock on 1-4-2007 60,000 —

Purchases 1,78,000 —

Goods received from HO 90,000 —

Sales — 3,80,000

Goods supplied to HO — 60,000

Salaries 15,000 — -

Debtors 37,000 —

Creditors — 18,500

Rent 9,600 —

Office expenses 4,700 —

Cash and Bank balance 17,800 —

Furniture 14,000 —

4,58,500 4,58,500

Closing Stock was valued at Rs. 27,000. The Kolkata branch account in the books of Head Office stood at Rs. 4,600 (Debit balance) on 31st March, 2013. On 28th March, 2013, the

Head Office forwarded goods to the value of Rs. 25,000 to the Kolkata branch where they

were received on 3rd April, 2013. 11

Sol. See Q. 1, Unit IV, Accounting for Inland Branches. [Page P-77

Q. 4. X purchased 5 trucks on 1st October, 2011, the cash price of each truck being Rs. 11 lakh. X was to pay 20% of the cash price at the time of delivery and 25% of cash price at the end of each of the subsequent four half yearly periods beginning from 31st March, 2012.

On X's failure to pay the instalment due on 30th September, 2012, it was agreed that X could keep three trucks, on the condition that value of two trucks would be adjusted against the amount due, the trucks being valued at cost less 25% depreciation.

Show the necessary ledger accounts in the books of X, assuming that his books are closed on 31st March each year and he charges depreciation @15% on original cost of trucks. 11

Sol. See Q. 8, Unit III, Accounting for Hire Purchases and Instalment System.

[Page P-72

Or

(a) State the differences between Hire Purchase and Instalment System. 3

(b) Humpty and Dumpty carrying on business in partnership and sharing profits and losses in the ratio 2 :1 had the following balances to the credit of their accounts in the books of their firm as on 31st December, 2011.

Humpty Rs. 3,45,000

Dumpty Rs. 1,80,000

A statement of affairs prepared on 31st December 2012 disclosed the following position of the business:

Particulars Rs. Particulars Rs.

Sundry Creditors: Cash in hand 67,500

For goods 1,95,000 Cash at Bank 45,000

For expenses 39,000 Sundry Debtors 2,55,000

Stock 3,30,000

Furniture 42,000

During the year, Humpty had drawn Rs. 99,000 from the firm. He had also taken for his

personal use, goods worth Rs. 12,000. He had sold some goods of the business for Rs. 27,000 and retained the money himself. He had personally paid to some of the employees of the firm Rs. 49,500 towards their salaries which he was entitled to be reimbursed.

Dumpty had withdrawn Rs. 37,500 in cash, had also taken for his personal use goods worth Rs. 7,500. he had paid towards some expenses of the firm for Rs. 24,000 from his private

estate.

Prepare a statement showing profit of the firm for the year ending 31st December, 2012 as well as Balance Sheet of the firm as on that date. 8

Sol. (a) See Q. 2, Chapter 10. [Page T-54

(b) See Q. 15, Unit V, Accounting for Dissolution of the Partnership Firm.

[PageP-129

Q. 5. On 1st April, 2008, a new plant was purchased for Rs. 80,000 and a further sum of

Rs. 4,000 was spent on its installation. On 1st October, 2010, another plant was acquired for Rs. 50,000. Due to an accident on 3rd January, 2011, the first plant was

totally destroyed and was sold for Rs. 2,000 only. On 21st January, 2012, a second-

hand plant was purchased for Rs. 60,000 and a further sum of Rs. 10,000 was spent for bringing the same to use from 15th March 2012. Depreciation has been provided @10% on straight line basis. It was a practice to provide depreciation for full year on all acquisitions made at any time during any year and to ignore depreciation on any item sold and disposed off during the year. None of the assets were insured. The accounts are closed annually on 31st March. It is now decided to follow the rate of 20% on diminishing balance method with retrospective effect in respect of the existing items of plant and to make the necessary adjustment entry on 1st April, 2012.

You are required to make: (i) Plant Account (ii) Provision for Depreciation Account (iii) Journal Entries, where necessary. Show all the working notes. 11

Sol. See Q. 7, Unit II, A. Depreciation. [Page P-29

Or

(a) Write short notes on:

(i) AS-2 (ii) AS-6 (2.5 x 2)

(b) At the beginning of January, 2013, Amit Limited had in stock 200 units @Rs. 25 per unit. Further information for the month of January is as follows:

January 2013

2 Purchases 400 units @Rs. 30 per unit

5 Sales 300 units @Rs. 40 per unit

10 Purchases 500 units @Rs. 35 per unit

15 Sales 200 units @Rs. 40 per unit

20 Sales 200 units @Rs. 42 per unit

25 Purchases 600 units @Rs. 36 per unit

28 Sales 300 units @Rs. 42 per unit

Calculate the cost of closing inventory and gross profit by FIFO method under:

(i) Perpetual system of inventory

(ii) Periodic system of inventory 6

Sol. (a) (i) AS-2. See Q. 6, Chapter 8. [Page T-48

(ii) AS-6. See Q. 8, Chapter 7. [Page T-42

(b) See Q. 7, Unit II, B. Inventory Valuation. [Page P-40

SECTION-B

Q. 6. A, B and C had the following Balance Sheet on 31-03-11:

Liabilities Rs. Assets Rs.

Trade Creditors 40,000 Fixed Assets 40,000

Loan from Mrs. A 15,000 Debtors 25,000

(with a charge on stock) Stock 20,000

Loan from A 10,000 Profit & Loss A/c 30,000

Capital Accounts:

A 20,000

B 20,000

C 10,000

1,15,000 1,15,000

The firm was dissolved. Stock realised 50% and fixed assets and debtors realised Rs. 30,000 in all. The positive position of the partners was as under:

Private Estate Private Liabilities

(Rs.) (Rs.)

A 10,000 15,000

B 8,000 6,000

C was able to pay 50 paise in the rupee of what was payable on his own account to the firm. The partners shared profits and losses in the ratio of 4 : 3 : 3 for A, B and C respectively. The loss on realisation is to be determined after considering the amount finally paid to the creditors.

You are required to close the books of the firm by preparing the necessary ledger accounts.

Sol. See Q. 13, Unit V, Accounting for Dissolution of the Partnership Firm.

[PageP-126

Or

(a) Ram, Shyam and Mohan are in partnership sharing profits and losses in the ratio of 3 : 2 :1 respectively. They decided to dissolve the business on 31-12-2006 on which date their Balance Sheet was as follows:

Liabilities Rs. Assets Rs.

Capital A/cs: Land & Building 30,810

Ram 35,700 Motor Car 5,160

Shyam 8,680 Investments 1,080

Mohan 10,100 54,480 Stock 19,530

General Reserve 6,000 Debtors 11,280

Mohan's Loan A/c 3,000 Cash 5,940

Creditors 10,320

73,800 73,800

The assets were realised as follows and it was agreed that cash should be distributed as and when received:

2007 Rs.

15th January 10,380

20th February 27,900

23rd March 3,600

15th April Mohan took over investments at a value of 1,260

27th April 19,200

Dissolution expenses were originally estimated at Rs. 2,700 but actual amount spent on 23rd March, 2007 was Rs. 1,920. The creditors were settled for Rs. 10,080.

You are required to prepare a statement showing distribution of cash amongst the partners on piece-meal basis using maximum loss method.

(b) Briefly explain the rule laid in Garner vs. Murray case. 5

Ans. (a) See Q. 2, Unit V, Accounting for Dissolution of the Partnership Firm.

[Page P-107

(b) See Q. 7, Chapter 12. [Page T-68

2014

Name of the Paper : Financial Accounting

Name of the Course : B.Com. (Hons.)

Time allowed: Maximum marks: 75

Section A - 2 1/2 hours Section A - 55

Section B - 30 minutes Section B - 20

Attempt All questions. Use of simple calculator is allowed.

Workings shall form part of your answer.

SECTION-A

Q. 1. State with reasons whether the following statements are True or False:

(i) Advance taken from a customer is taken as income or sales.

(ii) Periodic inventory gives a continuous balance of stock in hand.

(iii) Depreciation has to be provided even in case of loss in a financial year.

(iv) IFRS have been issued by Institute of Chartered Accountants of India

(ICAI).

(v) Credit sale of machinery should be recorded in the sales book.

(vi) Heavy advertising expenditure to introduce a new product is revenue expenditure.

(vii) Income is a source of capital.

Ans. (i) False. Advance taken from a customer is a 'guarantee money' for proper supply of goods. Such advance is a liability for a business which must be returned or adjusted after the supply of goods, i.e., sale.

(ii) False. As the name implies, we can get inventory balance only on a particular date

periodically.

(iii) True. Depreciation is a charge against the profit and not an appropriation of profit. So

depreciation has to be provided even in case of loss in a financial year.

(iv) False. IFRS have been issued by 'International Accounting Standards

Board (IASB).

(v) False. Credit sale of machinery should be recorded in Journal proper.

(vi) False. Such expenditure is not revenue expenditure because the firm will get benefit for more than one year. Hence it is of the nature of deferred revenue expenditure. It is also not Capital expenditure because no real asset is created by such heavy expenditure.

(vii) True. The part of Income which is retained becomes a source of Capital.

Q. 2. From the following trial balance and information, prepare Trading and Profit & Loss Account of Mr. Rishabh for the year ended 31st March, 2013 and a Balance Sheet as on that date:

Particulars Dr. (Rs.) Cr. (Rs.)

Capital — 1,00,000

Drawings 12,000 —

Land and Building 90,000 —

Plant and Machinery 20,000 —

Furniture 5,000 —

Sales — 1,40,000

Returns outward — 6,000

Debtors 18,400 —

Loan from Gajanand on 1-7-2012 @ 6% p.a. — 30,000

Purchases 80,000 —

Returns inward 5,000 —

Carriage 10,000 —

Sundry expenses 600 —

Printing and Stationery 500 —

Insurance expenses 1,000 —

Provision for bad and doubtful debts — 1,000

Provision for discount on debtors — 380

Bad debts 400 —

Opening Stock on 1-4-2012 21,300 —

Salaries and Wages 18,500 —

Creditors — 12,000

Trade expenses 800 —

Cash at Bank 4,600 —

Cash in hand 1,280 —

2,89,380 2,89,380

Additional information:

(i) Value of Closing Stock on 31-3-2013 was Rs. 27,300.

(ii) Fire occurred on 23rd March, 2013 and Rs. 10,000 worth of general goods were

destroyed. The insurance company accepted claim for Rs. 6,000 only and paid the claim money on 10th April, 2013.

(iii) Bad debts amounting to Rs. 400 are to be written off. Provisions for bad and doubtful debts is to be made at 5% and for discount at 2% on debtors. Make a provision of 2% on

Creditors for discount.

(iv) Received Rs. 6,000 worth of goods on 27th March, 2013 but the Invoice of purchases was not recorded in Purchase Book.

(v) Rishabh took away good worth Rs. 2,000 for personal use but no record was made thereof.

(vi) Charge depreciation at 2% on land and building, 20% on plant and machinery and 5% on furniture.

(vii) Insurance prepaid amounts to Rs. 200.

Sol. See Q. 8, Unit I, Accounting Process. [Page P-14

Or

Income and Expenditure Account of a Hospital as on 31st December, 2013 is given to you:

Expenditure Rs. Income Rs.

Salaries 2,35,000 Subscriptions 2,20,000

Diet Expenses 20,000 Donations 40,000

Rent and Rates 5,000 Interest on Investment

Insurance 2,000 for full year @ 5% p.a. 90,000

Office Expenses 8,000 Miscellaneous Receipts 6,000

Surgery and Dispensary Expenses

10,000

Depreciation: Building 37,500

Furniture 1,200

Instruments 8,000 46,700

Surplus of Income over Expenditure

29,300

3,56,000 3,56,000

The other informations supplied to you are as under:

31.12.2012 (Rs.) 31.12.2013 (Rs.)

Cash in hand 2,000 1,500

Cash at Bank 54,000 Rs.

Building 7,50,000 Rs.

Furniture 20,000 Rs.

Instruments 35,000 Rs.

Subscriptions outstanding 15,000 45,000

Subscriptions received in advance 6,000 8,000

Salaries outstanding 18,000 20,000

Instruments purchased during the year were Rs. 5,000.

You are required to prepare the Receipts and Payments Account of the Hospital for the year ended December, 2013 and the Balance Sheet as on that date. Submit your workings clearly. 12

Sol. See Q. 8, Unit II, C. Income & Expenditure Account. [Page P-56

Q. 3. XYZ Ltd. purchased on 1st Jan., 2009, certain machinery for Rs. 1,94,000 and spent Rs. 6,000 on its erection. On 1st July 2009, additional machinery costing Rs. 1,00,000 was

purchased. On 1st July 2011, the machinery purchased on 1st Jan. 2009 was auctioned for Rs. 1,00,000 and on the same date, new machinery was purchased at a cost of Rs. 1,50,000. Depreciation was provided annually on 31st Dec. @ of 10% p.a. on the original cost. No depreciation need be charged during the year of sale of machinery for that part of the year when the machine was used. In 2013, however the company has changed the method of depreciation to written down value method @ of 15% p.a. from the straight line method. Show the Machinery Account for the period from 2009 to 2013. 12

Sol. See Q. 9, Unit II, A. Depreciation. [Page P-31

Q. 4. (a) How will you deal with loss of stock under Stock and Debtors System Rs.

(b) Vaani Co. Delhi has a branch at Kolkata. It invoices goods to the branch at selling price which is cost plus 33 1/3%. From the following particulars, prepare Branch Account at invoice price. Show also Branch Debtors Account and Goods sent to Branch Account in the books of Vaani Co. Delhi: 3+9=12

Stock on 1st April, 2013 (invoice price) Rs. 15,000

Debtors on 1st April, 2013 m,400

Goods invoiced to branch during the year at IP Rs. 67,000

Sale at branch: Cash Rs. 31,000

Credit Rs. 37,400

Rs. 68,400

Cash received from debtors Rs. 40,000

Discount allowed to customers Rs. 300

Bad debts written off Rs. 250

Cheque sent to branch: Salaries Rs. 5,000

Sundry expenses Rs. 1,700 Rs. 6,700

Stock on 31st March, 2014 (invoice price) . Rs. 13,400

Sol. (a) Loss of Stock under Stock and Debtors System. Under this system following Journal entries shall be passed for normal and abnormal loss of stock:

1. To record abnormal loss of stock (due to abnormal factors like fire, flood, theft etc.)

Branch Adjustment A/c Dr. (Loading)

Branch Profit & Loss A/c Dr. (Cost)

To Branch Stock A/c (Invoice Price)

2. To record normal loss of stock (due to the inherent nature of the product)

Branch Adjustment A/c Dr. (Invoice Price)

To Branch Stock A/c (Invoice Price)

(b) See Q. 14, Unit IV, Accounting for Inland Branches. [Page P-96

Or

A company with its Head Office at Delhi has a Branch at Agra. Goods are invoiced to the branch at cost plus 33 1/3% which is the selling price. The following information is given in respect of the branch for the year ended 31st March, 2014:

Goods sent to branch during the year at invoice price Rs. 4,80,000

Stock on 1st April, 2013 (invoice price) Rs. 24,000

Cash Sales Rs. 1,80,000

Returns from customers Rs. 6,000

Branch expenses paid for cash Rs. 53,500

Branch debtors balance (1-4-2013) Rs. 30,000

Discount allowed Rs. 1,000

Bad debts Rs. 1,500

Stock on 31st March, 2014 (invoice price) Rs. 48,000

Branch debtors balance (31-3-2014) Rs. 36,500

Collections from Debtors Rs. 2,70,000

Branch debtors' cheque returned dishonoured Rs. 5,000

You are required to ascertain the Profit made by the Branch by preparing the necessary accounts under the Branch Adjustment Method. 12

Sol. See Q. 15, Unit IV, Accounting for Inland Branches. [Page P-97

Q. 5. (a) Discuss briefly the perpetual and periodical systems of stock taking.

3

(b) From the following data, calculate the value of closing inventory according to FIFO and Weighted Average Method on March 31, 2014 using perpetual inventory system: 9

March 1 Stock in hand 400 units @Rs. 7.50 each

Purchases:

March 5 600 units @Rs. 8 each

March 15 500 units @Rs. 9 each

March 25 400 units @Rs. 8.50 each

March 30 300 units @Rs. 9.50 each

Issues:

March 3 300 units

March 10 500 units

March 17 400 units

March 26 500 units

March 31 100 units

March 31 100 units (shortage)

Sol. (a) See Q. 5, Chapter 7. [Page T-47

(b) See Q. 8, Unit II, C. Inventory Valuation. [Page P-42

Or

(a) What is Hire Purchase Trading Account Rs. How is it prepared Rs. 3

(b) Saksham Ltd. sold three cars for a total cash price of Rs. 9,00,000 on hire-purchase basis to Mr. Vardaan on 1st January, 2010. The terms of agreement provided for Rs. 2,70,000 as cash down and the balance of the cash price in three equal instalments together with interest at 10% p.a. The instalments were payable at the end of each year. Mr. Vardaan paid the first instalment on time but failed to pay thereafter. On his failure to pay the second instalment, Saksham Ltd. repossessed two cars and valued them at 50% of the cash price. Mr. Vardaan charges 25% p.a. depreciation on written down value method. Prepare necessary Ledger Accounts in the books of both the parties. 9

Sol. (a) See Q. 4, Chapter 10. [Page T-56

(b) See Q. 9, Unit III, Accounting for Hire Purchase and Instalment System.

[PageP-73

SECTION B

Q. 5. A, B, C and D are partners in a firm sharing profits and losses in the ratio of 4 :1 : 2 : 3. The following is their Balance Sheet as at 31st March, 2014:

Liabilities Rs. Assets Rs.

Sundry Creditors 3,00,000 Sundry Debtors 3,50,000

Capital A/c: Less: Provision for bad debts 50,000

A 7,00,000 3,00,000

D 3,00,000 Stock 2,00,000

Cash in hand 1,40,000

Other Assets 3,10,000

Capital A/c:

B 2,00,000

C 1,50,000 3,50,000

" 13,00,000 13,00,000

The firm is dissolved on the following terms:

(i) A is to take over sundry debtors at 80% of book value.

(ii) D is to take over Stock at 95% of the book value.

(iii) C is to discharge Sundry Creditors.

(iv) Other assets realize Rs. 3,00,000 and expenses of realisation come to Rs. 30,000.

(v) B is found insolvent and Rs. 21,900 is realized from his estate.

Prepare Realisation Account and Capital Accounts of the partners. Show also the Cash Account. The loss arising out of capital deficiency may be distributed following the decision in Garner vs. Murray case. 20

Sol. See Q. 14, Unit V, Accounting for Dissolution of the Partnership Firm.

[PageP-128

Or

(a) Explain the Garner vs. Murray Rule with the help of an example. 10

(b) What is meant by Piecemeal Distribution of cash Rs. Explain maximum loss method of piecemeal distribution with the help of an example. 10

Ans. (a) See Q. 7, Chapter 12. [Page T-68

(b) See Q. 9, Chapter 12. [Page P-69

2014 (NOVEMBER)

Name of the Paper : Financial Accounting

Name of the Course : B.Com. (Hons.)

Time Part A: 2 1/2 hours Maximum marks: Part A-55

Time Part B: 30 minutes Maximum marks: Part B-20

This question paper has 2 Parts, Part A is compulsory for all examinees

Part B is meant only for those who have not offered Computerised Accounts.

Part A and Part B are to be answered on separate answer books.

Attempt All questions. Show your working notes clearly.

PART-A

Q. 1. Mention any seven of disclosures as per AS-L 7

Ans. Seven areas of disclosure as per AS-I are:

(i) Method of charging depreciation.

(ii) Valuation of inventories.

(iii) Valuation of investment and fixed assets.

(ii) Treatment of expenditure during construction.

(v) Treatment of goodwill.

(vi) Treatment of contingent liabilities.

(vii) Conversion of foreign currency items.

Or

"Revenue is recognised when sale is made or when services are rendered." Explain. State three exceptions to the general rule.

Ans. Revenue is the gross inflow of cash, receivables or other consideration arising in the course of ordinary activities of an enterprise from the sale of goods, rendering of services and from the use by others of enterprise's resources yielding interest, royalties and dividends.

The definition of revenue recognition is concerned with the "timing" of revenue, as well as the amount of revenue as per agreement between parties involved.

If uncertainty exists regarding the amount, it influences the timing of the revenue.

Exceptions: The following items are not included within the definition of revenue for the purpose of AS-9:

(a) Realised gain from disposal/unrealised gain from holding non-current assets;

(b) Unrealised gain from the change in the value of current assets;

(c) Realised/unrealised gain from change in the value of foreign exchange r.ate;

(d) Realised gain from discharging an obligation at less than carrying amount;

(e) Unrealised gain resulting from restatement of the carrying amount of an obligation.

Q. 2. The following is the Trial Balance of Mr. Lai as at 31st March, 2013:

Particulars Dr. (Rs.) Cr. (Rs.)

Lai's Capital — 86,690

Opening Stock 46,800 —

Purchases and Sales 3,21,700 3,89,600

Returns 8,600 5,800

Freight and Carriage 18,600 —

Rent and Taxes 5,700 —

Salaries and wages 9,300 —

Sundry Debtors and Creditors 24,000 14,800

Bank Loan @ 6% p.a. — 20,000

Bank Interest on Loan 900 —

Printing and Advertising 14,600 —

Miscellaneous Income — 250

Cash at Bank 8,000 —

Discount 1,800 4,190

Furniture and Fittings 5,000 —

General Expenses 11,450, —

Insurance 1,300 —

Postage and Telegrams 2,330 —

Cash in hand 380 —

Travelling Expenses 870 —

Drawings 40,000 —

5,21,330 5,21,330

The following adjustments should be made:

(i) Included amongst the Debtors is Rs. 3,000 due from Anand and included among the creditors Rs. 1,000 due to him.

(ii) Provision for Bad and Doubtful Debts to be created at 5% and Reserve for Discount @ 2% on Sundry Debtors.

(iii) Depreciate Furniture and Fittings by 10%.

(iv) Personal Purchases amounting to Rs. 600 had been included in the Purchases Day

Book.

(v) Interest on Bank Loan shall be provided for the whole year.

(vi) One quarter of the amount of Printing and Advertising is to be carried forward to next year.

(vii) Credit purchase invoice amounting to Rs. 400 had been omitted from the books.

(viii) Stock on 31st March, 2013 was Rs. 78,600.

Prepare Trading and Profit & Loss Account for the year ended 31st March, 2013 and Balance Sheet as on that date. 12

Sol. See Q. 9, Unit I, Accounting Process. [Page P-16

Q. 3. Ram Ltd. which depreciates its machinery @ 10% p.a. on Diminishing Balance Method, had on 1st January, 2013, 79,72,000 on the debit side of Machinery Account. During the year 2013 machinery purchased on 1st January, 2011 for Rs. 80,000 was

sold for Rs. 45,000 on 1st July, 2013 and a new machinery at a cost of Rs. 1,50,000 was

purchased and installed on the same date, installation charges being Rs. 8,000. The company wanted to change the method of Depreciation from Diminishing Balance Method to Straight Line Method with effect from 1st January, 2011. Difference of depreciation up 31st December, 2013

to be adjusted. The rate of depreciation remains the same as before. Show

Machinery Account for the year 2013. 12

Sol. See Q. 10, Unit II, A. Depreciation. [Page P-32

Or

(a) The following are the details of materials of Sai Mills: 8

01-01-2013 Opening Stock 100 Units @Rs. 25 per unit

01-01-2013 Purchases 200 Units @Rs. 30 per unit

15-01-2013 Issued for consumption 100 Units

01-02-2013 Purchases 400 Units @Rs. 40 per unit

15-02-2013 Issued for consumption 200 Units

20-02-2013 Issued for consumption 200 Units

01-03-2013 Purchases 300 Units @Rs. 50 per unit

15-03-2013 Issued for consumption 200 Units

Find out the cost of closing stock as on 31-3-2013 according to:

(i) First in first out basis, and

(ii) Weighted average price basis, using perpetual inventory system. Also, calculate cost of closing inventory on LIFO basis under periodic system.

(b) Explain the disclosure requirement of Accounting Standard-6 regarding depreciation. 4

Ans. (a) See Q. 3, Unit II, B. Inventory Valuation. [Page P-36

(b) Disclosure requirements of AS-6 regarding depreciation:

Para 28. The following information should be disclosed in the financial statements: (i) The historical cost or other amount substituted for historical cost of each

class of depreciable assets;

(ii) Total depreciation for the period for each class of assets; and

(iii) The related accumulated depreciation.

Para 29. The following information should also be disclosed in the financial statements along with the disclosure of other accounting policies:

(i) Depreciation methods used; and

(ii) Depreciation rates or the useful lives of the assets, if they are different

from the principal rates specified in the statute governing the enterprise.

Q. 4. KP Ltd. invoices goods to its Kanpur Branch at 20% less than list price

which is cost plus 100% with instructions that cash sales are to be made at

invoice price and credit sales at catalogue price (i.e., list price).

From the following particulars for the year ended 31st March, 2013, prepare Kanpur Branch and Goods sent to Branch accounts: 12

Branch Stock as on 1-4-2012 at invoice price Rs. 60,000

Branch Debtors on 1-4-2012 Rs. 15,000

Goods sent to Branch during the year at invoice price Rs. 3,00,000

Branch expenses paid by HO Rs. 18,000

Goods returned by Branch to HO at invoice price Rs. 36,000

Cash Sale Rs. 1,70,000

Credit Sale Rs. 1,20,000

Goods returned by credit customers Rs. 20,000

Normal loss at invoice price Rs. 6,000

Loss by fire at invoice price Rs. 12,000

Claim accepted by insurance company Rs. 8,000

Branch Bad debts Rs. 7,000

Cash received from debtors Rs. 80,000

Discount allowed Rs. 3,000

Branch stock at invoice price as on 31-3-2013 Rs. 56,000

Branch debtors on 31-3-2013 Rs.

Sol. See Q. 16, Unit IV, Accounting for Inland Branches. [Page P-98

Or

The following is the Trial Balance of Allahabad Branch as at 31st March, 2013:

Particulars Dr. (Rs.) Cr. (Rs.)

Delhi Head Office 64,000 —

Stock (1-4-2012) 1,10,000 —

Purchases 3,78,000 —

Goods received from HO 1,60,000 _

Sales — 8,28,000

Goods returned to HO — 30,000

Salaries 35,000 --

Debtors 71,000 _

Creditors ._ 42,000

Rent 11,000 —

Office Expenses 34,500 _

Cash in hand and at Bank 8,500 —

Furniture 12,000 —

Machinery 16,000 —

9,00,000 9,00,000

Closing stock was valued at Rs. 38,000. The Branch Account in the Head Office books stood at Rs. 6,000 (Debit balance) on 31st March, 2013. The difference in balances of HO

and Branch was caused by goods in transit.

You are required to prepare Trading and Profit and Loss Account and pass journal entries to incorporate the Trial Balance of the Branch in the books of Head Office. 12

Sol. See Q. 17, Unit IV, Accounting for Inland Branches. [Page P-100

Q. 5. (a) Distinguish between Operating Lease and Financial Lease. 4

(b) A Ltd. sells goods on hire purchase at cost plus 60%. From the following information calculate profit or loss for the year ending 31st March, 2013 under Stock and Debtors system: 8

2012 Rs.

April 1 Instalments Not Due 1,60,000

2013

March 31 Goods sold on hire purchase at hire purchase price 8,00,000

Cash received during the year 5,60,000

Goods repossessed (instalments due Rs. 20,000) valued at ' 3,000

Goods with hire purchase customers 3,60,000

Sol. (a) See Q. 6, Chapter 10. . [Page T-59

(b) See Q. 10, Unit III, Accounting for Hire Purchase and Instalment System.

[PageP-74

Or

The following is the Receipts and Payments Account of a Charitable Trust for the year ending 31st March, 2013:

Receipts and Payments Account

Receipts Rs. Payment Rs.

To Balance b/d: By Capital Payments:

Cash 10,000 Investments 1,00,000

Bank 1,40,000 Furniture 40,000

To Capital funds: Clinical Equipment 50,000

Donation for Clinic Fund 60,000 By Revenue Payments:

To Revenue Receipts: Salaries 62,000

Interest 3,00,000 Medicines 1,40,000

Rent 1,20,000 Scholarships 1,00,000

Sundries 30,000 Printing etc. 8,000

Travelling 10,000

By Balance c/d: Cash 16,000

Bank 1,34,000

6,60,000 6,60,000

Trust fund originally consisted of:

Building valued at Rs. 15,00,000, 9% Government Securities Rs. 32,00,000 (Nominal Value Rs. 35,00,000) and Bank balance Rs. 1,00,000.

Bank, Interest receivable at the end of year was Rs. 25,000. Interest accrued on investments on 1-4-2012 was Rs. 35,000 and on 31-3-2013 Rs. 50,000. the Trust owed suppliers of

medicines Rs. 12,00Q and Rs. 8,000 on 1-4-2012 and 31-3-2013 respectively. Furniture

stood in the books at Rs. 30,000 on 1-4-2012.

You are required to prepare final accounts of the Trust for the year ending 31st March, 2013 after providing 2 1/2% depreciation on the book value of the building and 20% on other assets. 12

Sol. See Q. 9, Unit II, C. Income & Expenditure Account. [Page P-57

PART B

Q. 1. (a) Explain the basis of distribution of non-cash consideration (Shares and Debentures) among the partners in case of sale of partnership firm to a limited company. 5

(b) A, B and C had the following Balance Sheet on 31-3-2013:

Liabilities Rs. Assets Rs.

Trade Creditors 4,00,000 Fixed Assets 4,00,000

Loan from Mrs. A Debtors 2,40,000

(With a charge on stock) 1,50,000 Stock 2,00,000

Loan from A 1,00,000 Cash at Bank 10,000

Capital A/c: "Profit & Loss A/c 3,00,000

A 2,00,000

B 2,00,000

C 1,00,000

11,50,000 11,50,000

The firm was dissolved. Stock realised 50% and fixed assets and debtors realised Rs. 3,00,000 in all. The private position of the partners was as under:

Particulars Private Assets (Rs.) Private Liabilities (Rs.)

A 1,50,000 1,00,000

B 60,000 80,000

C was able to pay 50 paise in the rupee of what was payable on his own account to the firm. The partners shared profit and losses in the ratio of 4 : 3 : 3 for A, B and C respectively. The loss on realisation is to be determined after considering the amount finally paid to the creditors. You are required to close the books of the firm preparing the necessary ledger accounts.

Ans. (a) Distribution of non-cash consideration (Shares and Debentures) among the partners in case of sale of partnership firm to a limited company. Partners can specify the ratio in which shares/debentures are to be shared by them in their partnership agreement. However if the partnership deed is silent on this point, such shares and debentures are distributed in the ratio of final balances appearing in the capital accounts (i.e., in the ratio of capitals standing after making all adjustments like transfer of profit/loss on realisation, accumulated profits/ reserves/ losses) of partners at the time of final settlement of accounts. Sometimes division of shares among partners is done in such a way as to preserve the rights as previously existed between them, that is, to maintain the same profit sharing ratio even after they have parted ways.

(b) See Q. 16, Unit V, Accounting for Dissolution of the Partnership Firm.

[PageP-130

Or

The Balance Sheet of A, B and C who were sharing profits and losses in the ratio of 2 : 2 :1, was as follows on 31st March, 2013:

Liabilities Rs. Assets Rs.

Sundry Creditors 12,00,000 Cash 10,000

Bank Loan (with charge on stock)

5,00,000 Stock 6,00,000

A's Capital 3,00,000 Other Assets 10,90,000

B's Capital 2,00,000 Goodwill 3,00,000

C's Capital 2,00,000

22,00,000 22,00.000

Stock realised Rs. 5,20,000 and other assets was sold for Rs. 9,00,000. Expenses on realisation amounted to Rs. 30,000.

Assuming all partners are insolvent, prepare necessary Ledger Accounts to close the books of the firm. 15

Sol. See Q. 17, Unit V, Accounting for Dissolution of the Partnership Firm.

[Page P-132

2015

Name of the Paper : Financial Accounting

Name of the Course : B.Com. (Hons.)

Time Part A: 2 18/2 hours Maximum marks: Part A-55

Time Part B: 30 minutes Maximum marks: Part B-20

PART A

Q. 1. State with reason whether the following statements are True or False:

(i) Going concern, consistency and accrual are the fundamental accounting assumptions.

(ii) Assets represent expired costs whereas expenses are unexpired costs.

(iii) The illness of proprietor, even if it results in losses to the firm, cannot be recorded in accounts.

(iv) AS-2 is related to recognition of the revenue and expenses.

(v) Depreciation is a process of allocation and not of valuation.

(vi) Heavy advertising to introduce a new product is capital expenditure.

(vii) IFRS are issued by Institute of Chartered Accountants of India after consulting central government. 7

Ans. (i) True. These three are the main fundamental accounting assumptions.

(ii) False. Assets rather represent unexpired costs and not expired ones. Such unexpired

costs are then treated as expenditure in the coming years by way of depreciation.

(iii) False. The proprietor's illness will not be recorded but the losses to the firm will be

recorded in accounts.

(iv) False. AS-2 is related to Cost and Net Realisable Value (NRV).

(v) True. Depreciation is the process of allocating the cost of a fixed asset (less scrap value) over its estimated useful life.

(vi) False. It is not a Capital Expenditure. It is a deferred revenue expenditure because no

real asset is created by such heavy expenditure.

(vii) False. IFRS have been issued by "International Accounting Standards Board" (IASB).

Q. 2. Mr. Ajay, a shopkeeper, had prepared the following trial balance from

his ledger as on 31st March, 2015: 12

Particulars Dr. (Rs.) Cr. (Rs.)

Purchases and Sales 6,20,000 8,30,000

Gash in Hand 4,200 —

Cash at Bank 24,000 __

Stock of Goods on 1-4-2014 1,00,000 —

Capital A/c — 5,77,200

Drawings 8,000 —

Salaries 64,000 —

Postage and Telephones 23,000 _

Salesmen's Commission 70,000 —

Insurance 18,000 —

Advertising 34,000 —

Furniture 44,000 —

Printing and Stationery 6,050 —

Motor Car 96,000 —

Bad Debts 4,000 —

Cash Discount 8,000 —

General Expenses 60,000 —

Carriage Inwards 20,000 —

Carriage Outwards 44,000 —

Wages 40,000 —

Debtors and Creditors 2,00,000 80,000

14,87,200 14,87,200

You are required to prepare Trading and Profit & Loss Account for the year ended 31st March, 2015 and Balance Sheet as on that date. You are also given the following information:

(i) Stock on 31-03-2015 was Rs. 1,45,000.

(ii) Mr. Ajay had withdrawn goods worth Rs. 5,000 during the year.

(iii) Purchases include purchase of furniture worth Rs. 10,000.

(iv) Debtors are bad to the extent of Rs. 5,000.

(v) Creditors include a balance of Rs. 4,000 to the credit of Mr. Vijay in respect of which it

has been decided and settled with the party to pay only Rs. 1,000.

(vi) Sales include goods worth Rs. 15,000 sent to Saksham on approval and remaining

unsold as on 31-3-2015. The cost of the goods was Rs. 10,000.

(vii) Provision for Bad Debts is to be created at 5% on Sundry Debtors.

iviii) Depreciate Furniture by 15% and Motor Car by 20%.

(ix) The salesmen are entitled to a commission of 10% on total sales.

Sol. See Q. 10, Unit I, Accounting Process. [Page P-18

Or

The following is the Receipt and Payment Account of Ekta Women's Welfare Club for the year ended December 31, 2014:

Receipts and Payments Account

Receipts Rs. Payments Rs.

Balance b/d 7,250 Salary 12,500

Subscriptions 81,750 Stationery 1,700

Donations 3,000 Electricity Charges 9,550

Grant from Government 15,000 Insurance 7,500

Sale of Newspapers 300 Equipments 30,000

Proceeds of Charity Show 16,500 Petty Expenses 500

Interest on Investments @ 10% Expenses on Charity Show 12,900

for full year 7,000 Newspapers 1,000

Sundry Income 400 Lecturers' Fee 16,500

Honorarium to Secretary 12,000

Balance c/d 27,050

1,31,200 1,31,200

Additional Information:

2.1.2014 (Rs.) 31.12.2014 (Rs.)

Outstanding Salaries 1,200 1,800

Insurance Prepaid 700 300

Subscriptions Outstanding 3,750 2,500

Subscription Received in Advance 1,750 1,000

Electricity Charges Outstanding — 1,250

Stock of Stationery 2.250 700

Equipments 25,600 50,200

Building 1,20,000 1,14,000

Prepare:

(a) Income and Expenditure Account for the year ended Dec. 31, 2014 and

(b) Balance Sheet as on that date 12

Sol. See Q. 10, Unit II, C. Income & Expenditure Account. [Page P-59 Q. 3. (a) Write a short note on the importance of classifying business

expenditure into revenue expenditure capital expenditure and deferred revenue expenditure. 4

Ans. (a) The importance of classification of business expenditure into revenue, capital

and deferred expenditure are:

(i) Classification of items is necessary to determine which item should appear in which financial statement. Revenue items will be shown in Profit & Loss Account, Capital items and Deferred revenue items will appear in the Balance Sheet.

(ii) Determination of Net Profit requires matching of revenue expenditure and revenue income.

Profit = Revenue Receipts - Revenue Expenses

Therefore, classification is necessary to adhere to. matching principle.

(iii) To enable true and fair view of financial statements.

(iv) Classification is necessary as per the provisions of the Law.

(v) To show correct financial results.

Or

The Plant and Machinery Account of Noya Ltd. had a debit balance of Rs. 1,47,390 on April 1, 2014. The company was incorporated in April, 2011 and has been following the practice of charging full year's depreciation every year on Diminishing Balance System @ 15%. In 2014 it was, however, decided to change the method from Diminishing Balance to Straight Line with retrospective effect from April, 2011 and to give effect the change while preparing the final accounts for the year ending 31st March, 2014, the rate of depreciation remaining same as before.

In 2010-11, new machinery was purchased at a cost of Rs. 50,000. All the other machines were acquired in 2011-12.

Show the Plant and Machinery Account from 2011-12 to 2014-15. 12

Sol. See Q. 11, Unit II, A. Depreciation. [Page P-33

Q. 4. (a) Vaani Music System invoices goods to its Faridabad branch at cost plus 20%. During the accounting year 2014-15, Vaani Music System invoiced goods amounting

Rs. 15,000 were damaged in transit and insurance company admitted the claim of Rs. 15,000. Show the treatment of loss in the books of Head Office under:

(i) Debtors System

(ii) Stock and Debtors System.

(b) Saksham Ltd. has its branch at Mumbai to which goods are invoiced at cost plus 20%. Prepare Branch Account in the books of the head office after taking into consideration the following information:

Opening Stock at Branch Rs. 72,000

Cash Sales at Branch Rs. 52,500

Credit Sales at Branch Rs. 1,23,000

Collections from Branch debtors Rs. 1,13,700

Goods received from head office Rs. 90,000

Branch Expenses:

Paid by Head Office Rs. 9,000

Paid by Branch Rs. 18,000

Expenses unpaid Rs. 4,200

Closing Stock at Branch Rs. 54,000

Closing Balance of Bills Receivable at Branch Rs. 3,000

Closing Balance of Branch debtors Rs. 24,480

Goods sent from head office to Branch remaining in

transit on closing day Rs. 10,8oo

Ans. (a) See Q. 18, Unit IV, Accounting for Inland Branches. [Page P-101

(b) See Q. 18, Unit IV, Accounting for Inland Branches. [Page P-101

Or

Nitin Bros, has a branch at Allahabad. Goods are invoiced at cost plus 25%. From the following particulars, prepare Branch Adjustment and Profit and Loss Account and Branch Account for the year ended 31st March 2015:

Balances as on April 1, 2014: Branch Stock (Invoice Price) Rs. 12,500

Branch Debtors Rs. 8,500

Branch Cash Rs. 2,0Q0

Balances as on March 31, 2015: Branch Stock (Invoice Price) Rs. 29,925

Branch Debtors Rs. 11,960

Branch Cash Rs. 4,500

Transactions during 2014-15: .,

Goods invoiced to Branch 1,62,500

Goods returned by Branch to Head Office 6,250

Cash remitted to Head Office Rs.

Credit Sales at Branch 87,500

Cash sales at Branch 51,250

Cash received from Debtors of branch 78,650

Bills Receivable received from debtors at branch 5,000

Amount received by branch on discounting of the above mentioned bills 4,900

Cash sent to branch for expenses 18,000

Actual cash expenses at branch 17,950

Shortage of stock at branch (Invoice Price) 75

Cash discount allowed to branch customers 390

Make a provision for bad and doubtful debts @ 5% of the debtors.

Sol. See Q. 19, Unit IV, Accounting for Inland Branches. [Page P-103

Q. 5. (a) Distinguish between Hire Purchase System and Instalment Purchase System. 4

(b) Vikrant sells goods on hire purchase at cost plus 60%. From the following particulars for the year ending on 31-12-2014, prepare:

(i) Hire Purchase Debtors Account

(ii) Hire Purchase Stock Account

(iii) Shop Stock Account and

(iv) Hire Purchase Adjustment Account

1-1-2014: Rs.

Stock with hire purchase customers at selling price 12,000

Stock at the shop at cost 5,000

Instalments overdue 8,000

31-12-2014:

Stock at the shop at cost (including goods repossessed Rs. 400) 2,000

Total instalments that fell due during the year 1,89,440

Cash received from customers

(including down payments of Rs. 15,440) 1,75,440

Goods repossessed (instalment due . Rs. 500) 400

Purchases during the year 1,20,000

Hire expenses 3,400

Am. (a) See Q. 2, Chapter 10. [Page T-54

(b) See Q. 11, Unit III, Accounting for Hire Purchase and Instalment System.

[PageP-75

Or

(a) Distinguish between periodic and perpetual inventory system. 4

(b) The following are the details of material of VK Mills: 8

01-01-2015 Opening Stock 100 Units @Rs. 25 p.u.

01-01-2015 Purchases 200 Units @Rs. 30 p.u.

15-01-2015 Issue 100 Units

01-02-2015 Purchases 400 Units @Rs. 40 p.u.

15-02-2015 Issue 200 Units

19-02-2015 Issue 200 Units

01-03-2015 Purchases 300 Units @Rs. 50 p.u.

15-03-2015 Issue 150 Units

The storekeeper reported that 50 units of material were spoiled due to rainy water. Using perpetual inventory system find out the cost of closing stock as on 31-3-2015 according to:

(i) First in First out basis, and

(ii) Weighted average price basis.

Sol. (a) See Q. 6, Chapter 10. [Page T-58

(b) See Q. 7, Unit III, Accounting for Hire Purchase and Instalment System.

[PageP-71

PART B

Q. 6. (a) Critically examine the applicability of Garner vs. Murray Rule in India. (b) A, B and C share profits and losses in the proportion of 4/10, 5/10 and 1/10. Their Balance Sheet as on 31st December, 2014 was as follows:

Liabilities Rs. Assets Rs.

A's Capital A/c 15,000 Cash 3,000

B's Capital A/c 12,000 Other Assets 56,000

C's Capital A/c 3,000

A's Loan 6,000

B's Loan 3,000

Reserve Fund 6,000

Creditors 10,000

Contingent Reserve 4,000

59,000 59,000

The partnership is dissolved and the assets realised are as follows:

First Realisation 10,000

Second Realisation 20,000

Third Realisation 17,000

On the date of dissolution, there was a contingent liability of Rs. 1,000 against the

firm which was settled at Rs. 700 at the time of second realisation. Realisation

expenses were estimated at Rs. 2,000 but actually came at Rs. 1,500. C took stock

worth Rs. 500 at the time of third realisation.

Prepare a statement showing how the distribution should be made. 11

Ans. (a) See Q. 7, Chapter 12. [Page T-68

(b) See Q. 18, Unit V, Accounting for Dissolution of the Partnership Firm.

[Page P-133

Or

(a) Write a note on piecemeal distribution of cash. 5

(b) A, B and C are three partners in a firm with profit sharing ratio of 5:3:2. The Balance Sheet of the firm was as under on 31st March, 2015:

Liabilities Rs. Assets Rs.

Creditors 40,000 Buildings 80,000

Bills Payable 20,000 Furniture 10,000

Bank Loan 20,000 Investments 30,000

Capitals: A 60,000 Profit and Loss Account 80,000

B 40,000

C 20,000

2,00,000 2,00,000

The bank loan was secured by charge on the buildings.

Assets realised as under:

Rs.

Buildings 40,000

Furniture 4,000

Investments 14,000

B's private estate realised Rs. 12,000 and his private liabilities are Rs. 10,000. C was

insolvent A could just contribute l/3rd of what Was finally due from him on his own account.

Show the ledger accounts closing the books of the firm assuming creditors etc. are paid through Realisation Account. 11

Ans. (a) See Q. 9, Chapter 12. [Page T-69

(b) See Q. 19, Unit V, Accounting for Dissolution of the Partnership Firm.

[Page P-134

2015 (NOVEMBER)

Name of the Paper : Financial Accounting

Name of the Course : B.Com. (Hons.)

Duration: 3 hours Maximum marks: 55

Attempt all questions. Show your working notes clearly.

Q. 1. State with reasons whether the following statements are True or False: 5

(a) Accrual concept implies accounting on cash basis.

(b) Prudence is a concept to recognize unrealised profits and not losses.'

(c) Any expenditure which is unreasonably large is capital expenditure.

(d) Heavy advertising expenditure to introduce a new product is revenue expenditure.

(e) All assets and liabilities not taken over by the vendee company are transferred to capital accounts of the partners.

Ans. (a) False. Accrual concept implies that revenues are credited to the period in which they are earned whether they have actually been received or not. Similarly, expenses are charged to the period to which they relate to whether they have been actually paid or not.

(b) False. Prudence (conservatism) concept says that "Anticipate no profit, but provide for all possible losses".

(c) False. Any expenditure which is unreasonably large is not capital expenditure as the amount of expenditure is usually not the criterion for deciding whether the expenditure is of capital nature or revenue nature. The decision depends on the nature of the expenditure.

(d) False. Heavy advertising expenditure to introduce a new product is deferred revenue expenditure and not a revenue expenditure.

(e) False. The Assets and liabilities not taken over by the vendee (purchasing) company are sold and settled with the capitals of partners respectively unless the partners agree to accept (take over) them.

Q. 2. (a) Explain: (i) The depreciable cost and (ii) Two reasons if or charging depreciation on tangible fixed assets. 2

(b) Ajay purchased on 1st Jan., 2012, certain machinery for Rs. 1,94,000 and spent Rs. 6,000 on its erection. On 1st July, 2012 additional machinery costing Rs. 1,00,000 was purchased. On 1st July, 2014 the machinery purchased on 1st Jan 2012 having become obsolete was auctioned for Rs. 1,00,000 and on the same date new machinery was

purchased at a cost of Rs. 1,50,000. Depreciation was provided annually on 31st Dec. at the rate of 15% p.a. on the WDV of the machinery. No depreciation need to be provided when a machinery is sold or auctioned, for that part of the year in which sale or auction took place. But for the rest of the machinery, depreciation is provided on time basis. In 2015, however, Ajay changed this method of providing depreciation and adopted the method of writing off 10% p.a. on the original cost of the machinery with effect from 1 Jan., 2012. 8

Show machinery account for the accounting years 2012 to 2015.

Sol. (a) (i) The depreciable cost means the total cost of the asset minus the salvage or residual value. In other words, it is the cost which is charged to revenue of the firm over the

useful life of the asset.

(ii) Reasons for charging depreciation on tangible fixed assets:

(a) Allocate cost of tangible fixed asset over the useful life of the asset.

(b) To ascertain the true and fair profit or loss.

(c) To show true and fair view of the financial position.

(b)

Dr. Machinery Account Cr.

Date Particulars Rs. Date Particulars Rs.

2012 2012

Jan. 1 To Bank A/c (M1) (Purchase)

1,94,000 Dec. 31

By Depreciation A/c

M1 30,000

Jan. 1 To Bank A/c 6,000 (Rs. 2,00,000 x 15/100)

(Erection Expenses) M2 7,500

July 1 To Bank A/c (M2) (Purchase)

1,00,000 (Rs. 1,00,000 x 15/100 x 6/12)

37,500

By Balance c/d

M1 1,70,000

M2 92,500 2,62,500

3,00,000 3,00,000

2013 2013

Jan. 1 To Balance b/d Dec. 31

By Depreciation A/c:

M1 1,70,000 M1 25,500

M2 92,500 2,62,500 (Rs. 1,70,000 x 15/100)

M2 13,875

(RS. 92,500 X 15/100) 39,375

By Balance c/d

M1 1,44,500

M2 78,625 2,23,125

2,62,500 2,62,500

2014 2014

Jan. 1 To Balance b/d July 1 By Bank A/c (Sale) 1,00,000

M1 1,44,500 July 1 By Loss on Sale of

M2 78,625 2,23,125 Dec. 31

Machinery A/c*, 44,500

July 1 To Bank A/c (M3) (Purchase)

1,50,000 By Depreciation A/c:

M2 11,794

(Rs. 78,625 x 15/100)

M3 11,250 23,044

(Rs. 1,50,000 x 15/100 x

6/12)

By Balance c/d

M2 66,831

M3 1,38,750 2,05,581

3,73,125 3,73,125

2015 2015

Jan. 1 To Balance b/d Dec. 31

By Depreciation A/c*3:

M2 66,831 M2 10,000

M3 1,38,750 2,05,581 M3 15,000 25,000

July 1 To Profits Loss A/c (Dep. By Balance c/d

reciation written back)*2 11,919 M2 65,000

M3 1,27,500 1,92,500

2,17,500 2,17,500

Working notes:

* 1Loss on Ml:Rs. 1,45,000 (Opening Balance on 01.01.14) -Rs. 1,00,000 =Rs. 45,000.

*2 Calculation of deficiency or surplus depreciation:

Year Depreciation on the W.D.V, of the machinery (Old Method)

Depreciation on the original Cost (SLM) (New Method)

Machine 2 (Rs.) Machine 3 (Rs.) Machine 2 (Rs.) Machine 3 (Rs.)

2012 7,500 (6 months) — 5,000 (6 months) —

2013 13,875 10,000 —

2014 11,794 11,250 (6 months)1

40,000 7,500 (6 months)

33,169 11,250 25,000 7,500

Depreciation is lower as per new method

Surplus of depreciation =Rs. 33,169 +Rs. ll,250 -Rs. 25,000 -Rs. 7,500 =Rs. 11,919

*3 Calculation of depreciation charged an at 3L12.2015: Depreciation = Original Cost x Rate/100 On Machine 2 =Rs. 1,00,000 x 10/100 =Rs. 10,000; On Machine 3 =Rs. 1,50,000

x 10/100 =Rs. 15,000 Total Depreciation = H0,000 +Rs. 15,000 =Rs. 25,000

Or

(a) Distinguish between perpetual and periodical system of inventory valuation.

(b) The following are the details of raw material of Shyam Ltd.

1-1-2015 Opening Stock Nil

1-1-2015 Purchases 100 units @Rs. 30 per unit

15-1-2015 Issued for consumption 50 units

1-2-2015 Purchases 200 units @Rs. 40 per unit

15-2-2015 Issued for Consumption 100 units

20-2-2015 Issued for Consumption 100 units

1-3-2015 Purchases 150 units @Rs. 50 per unit

15-3-2015 Loss by fire 100 units

Find out the value of stock as on 31-3-2015 if the company follows perpetual inventory method on FIFO basis and on LIFO basis. 2,8

Ans. (a) Difference between Perpetual and Periodical system of inventory valuation. See Q. 5, Chapter 8. [Page T-47

(b) Stores Ledger (FIFO): Perpetual Inventory Method

Date Receipts

issues Balance

2015 Units Rate (Rs.)

Value (Rs.)

Units Rate (Rs.)

Value (Rs.)

Units Rate (Rs.)

Value (Rs.)

Jan. 1 100 30 3,000 — — — 100 30 3,000

Jan. 15 — — — 50 30 1,500 50 30 1,500

Feb. 1 200 40 8,000 — — — 50 30 1,500

200 40 8,000

Feb. 15 — — — 50 30 1,500

— , — — 50 40 , 2,000 150 40 6,000

Feb. 20 — — — 100 40 4,000 50 40 2,000

March 1 150 50 7,500 — — — 50 40 2,000

150 50 7,500

March 15 LOSS by Fir

3 50 40 2,000

50 50 2,500 100 50 5,000

Closing Stock

100 50 5,000

Stores Ledger (LIFO): Perpetual Inventory Method

Date Receipts

Issues Balance

2015 Units Rate(Rs.)

Value (Rs.)

Units Rate (Rs.)

Value (Rs.)

Units Rate(Rs.)

Value (Rs.)

01-01-15 100 30 3,000 — 100 30 3,000

15-01-15 — — — 50 30 1,500 50 30 1,500

01-02-15 200 40 8,000 — — — 50 30 1,500

200 40 8,000

15-02-15 100 40 4,000 — — — 50 30 1,500

100 40 4,000

20-02-15 — — — 100 40 4,000 50 30 1,500

01-03-15 150 50 7,500 — — — 50 30 1,500

1 150 50 7,500

15-03-15 LOSS by Fir

3 100 50 5,000 50 30 1,500

50 50 2,500

Closing Stock

4,000

Q. 3. Following is the Income & Expenditure Account of the Rohini Sports Club for the year ended 31-3-2015:

You are required to prepare: (i) Receipts and Payments account for the year ended 31-3-2015 and (ii) Balance Sheet as on the date. 10

Income & Expenditure Account for the year ended 31-3-15

Expenditure Rs. Income Rs.

Salaries 24,000 Subscription 72,000

Rent 10,800 Entrance Fees 8,000

Rates and Taxes 600 Surplus on publication of brochure

4,500

Postage and Telephone 720 Profit on sales of old sports 1,200

assets

Affiliation fees to lawn tennis federation

1,200 Interest on 5% investment 600

Sports materials 15,750 Miscellaneous income 225

Electricity Charges 1,200

Repairs & Maintenance of tennis court

9,600

Depreciation on assets at 10% of

book value at the end of the year 4,800

Surplus 17,855

86,525 86,525

The following further information is made available:

31-3-2014 (Rs.) 31-3-2015 (Rs.)

1. Sundry Assets (including sports goods) 44,000 Rs.

2. Bank Balance 4,800 Rs.

3. Subscriptions in arrear 4,750 3,500

4. Subscriptions received in advance 1,400 2,600

5. 5% Investments 12,000 12,000

6, Expenses outstanding:

(a) Salaries 600 1,200

((b) Rent 900 1,800

(c) Rates and Taxes Nil 600

' (d) Tennis court maintenance 780 320

7. Outstanding for purchases of sports material 1,400 . 2,950

8. Prize fund 4,600 3,250

9. The book value as on 1-4-2014 of sports goods sold during the year was Rs. 4,000.

10. Prize fund is separately maintained—all receipts being credited to it separately and expenditure met out of the fund directly. During the year credits to the account amounted to Rs. 2,800.

11. Interest received this year was only for two quarters.

12. The club was admitted as a member of the lawn tennis federation on 1-10-2014, when it paid subscription till 30-9-2015.

13. Advertisement charges in brochure yet to be collected Rs. 450.

14. A fixed deposit of Rs. 25,000 was made on 31-3-2015.

Sol. Rohini Sports Club

Receipts and Payments Account for the year ended 31st March, 2015

Receipts Rs. Payments Rs.

To Balance b/d 4,800 By Salaries 24,000

To Subscription*1 74,450 Add: Outstanding (31-03-14) 600

To Entrance Fees 8,000 24,600

To Brochure Receipts Surplus 4,050 Less: Outstanding (31 -03-15) 1,200

23,400

(Rs. 4,500 -Rs. 450) By Rent Rs. (10,800 + 900 -1,800)

9,900

To Old Sports materials 5,200 By Postage & Telephone 720

(Rs. 4,000 + n,200) By Affiliation fees (Rs. 1,200 +Rs. 1,200)

2,400

To Interest on Investment 300 By Purchase of sports materials 14,200

(Rs. 600 -Rs. 2) (Rs. 15,750+Rs. 1,400-Rs. 2,950)

To Miscellaneous Income 225 By Electricity Charges 1,200

To Prize fund Receipts 2,800 By Repairs & Maintenance of tennis

10,060

court P.600 +Rs. 780 -Rs. 320)

By Sundry Assets*2 8,000

By Prize Fund

(Rs. 4,600 +Rs. 2,800 -Rs. 3,250)

4,150

By Fixed Deposit 25,000

By Balance c/d (Balancing figure)

795

99,825 99,825

Balance Sheet

as on 31st March, 2015

Liabilities Rs. Assets Rs.

Subscription received in advance 2,600 Sundry Assets 48,000

Outstanding for Less: Depreciation 4,800 43,200

Salaries 1,200 Cash at Bank (from R & P A/c) 795

Rent 1,800 Subscription outstanding 3,500

Rates.+ Taxes 600 5% Investments 12,000

Tennis court maintenance 320 Interest on Investment (Accrued) 300

Purchase of sports material 2,950

6,870. Advertisement charges receivable

450

Prize Fund 3,250 Advance Affiliation fees paid 1,200

Capital fund*3 55,870 Fixed deposit 25,000

Add: Surplus 17,855 73,725

86,445 86,445

Working notes: Rs. Rs.

*j Subscription as per Income and Expenditure Account 72,000

Add: Subscription in arrears (Opening) 4,750

Subscription received in advance (Closing) 2,600

79,350

Less: Received in advance (Opening) 1,400

Subscription in arrears (Closing) 3,500 4,900

Subscription received during the year 74,450

*2 Calculation of Sundry Assets purchased during the year: Rs.

Sale Price of assets realised (Rs. 4,000 +Rs. 1,200) 5,200

Add: Value of Sundry Assets at the end (Rs. 4,800 * 100/10) 48,000

53,200

Less: Opening balance of Sundry Assets 44,000

Less: Profit on sale of old sports assets 1,200 45,200

Sundry Assets Purchased during the year 8,000

*3 Calculation of Opening Capital Fund:

Balance Sheet

as at 31st March, 2014

liabilities Rs. Assets Rs.

Creditors for sports material 1,400 Subscriptions in arrear 4,750

Outstanding expenses Rs. (600 +

900 + 780)*

2,280 Bank Balance 4,800

Subscriptions Received in advance

1,400 Sundry Assets 44,000

Prize Fund 4,600 5% Investments 12,000

Capital Fund (Balancing figures) 55,870

65,550 65,550

Or

(a) What is a contingent liability Rs. Give three examples of contingent liabilities. 2

(b) The following Trial Balance has been prepared from the books of Mr. S, as on 31-3-15 after making necessary adjustments for depreciation of fixed assets, outstanding and accrued items and placing the difference under suspense account. Dr. Trial Balance Cr.

Particulars Rs. Particulars Rs.

Machinery 1,70,000 Sundry Creditors 82,000

Furniture 49,500 Capital A/c 2,45,750 •

Sundry Debtors 38,000 Outstanding expenses:

Drawings 28,000 Salaries 1,500

Travelling Expenses 6,500 Printing 600

Insurance 1,500 Audit Fees 1,000

Audit fees 1,000 Bank Interest 1,200

Salaries 49,000 Discount 1,800

Rent 5,000 Sales less returns 6,80,000

"Cash in hand 7,800

Cash at Bank 18,500

Stock in trade on (1-4-2014) 80,000

Prepaid insurance 250

Miscellaneous Expenses 21,200

Discount 1,200

Printing and Stationery 1,500

Purchases less returns 4,60,000

Depreciation: On machinery 30,000

On furniture 5,500

Suspense A/c 39,400

10,13,850 10,13,850

On a subsequent scrutiny the following mistakes were noticed:

1. A new machinery was purchased for Rs. 50,000 but the amount was wrongly posted to furniture account as Rs. 5,000.

2. Cash received from debtors Rs. 5,600 was omitted to be posted in the ledger.

3. Goods withdrawn by the proprietor for personal use but no entry was passed Rs. 5,000.

4. Sales included Rs. 30,000 as goods sold for cash on behalf of Mr. T who allowed 15%

commission on such sales for which effect is to be given.

5. Closing Stock on physical verification amounted to Rs. 47,500.

6. Depreciation on machinery and furniture has been provided @ 15% and 10% respectively on reducing balance system.

Full year's depreciation is provided on addition.

You are requested to prepare Trading and Profit & Loss Account for the year ended 31-3-2015 and Balance Sheet as on that date so as to represent a true and correct picture. 8

Sol. (a) Contingent liability and its examples.

See Q. 3(a), 2010. [Page P-13

(b) Trading and Profit & Loss Account

Dr. for the year ended 31st March, 2015 Cr.

Particulars Rs. Particulars Rs.

To Opening Stock 80,000 By Net Sales: 6,80,000

To Net Purchases 4,60,000 Less: Goods sent on

Less: Drawings 5,000 4,55,000 behalf of T 30,000 6,50,000*3

To Gross Profit c/d 1,62,500 By Closing Stock 47,500

6,97,500 6,97,500

To Travelling Expenses 6,500 By Gross Profit b/d 62,500

To Insurance 1,500 By Bank interest 1,200

To Audit Fees 1,000 By Discount received 1,800

To Salaries 49,000 By Commission on sale on behalf of T

To Rent 5,000 (Rs. 30,000 x 15/100) 4,500

To Miscellaneous Expenses 21,200

To Discount allowed 1,200

To Printing and Stationery 1,500 .

To Depreciation on:

Machinery*1

(30,000 + 7,500) 37,500

Furniture*2 (5,500 - 500)

i.e., 10% on Rs. 50,000 ' 5,000 42,500

To Net Profit transferred to Capital A/c

40,600

1,70,000 1,70,000

Balance Sheet of Mr. S

as on 31st March, 2015

Liabilities Rs. Assets Rs.

Sundry Creditors 82,000 Machinery*1 2,50,000

Capital 2,45,750 Less: Depreciation 37,500 2,12,500

Add: Net Profit 40,600 Furniture*2 50,000

2,86,350 Less: Depreciation 5,000 45,000

Less: Drawings Sundry Debtors*3 32,400

(Rs. 28,000 +Rs. 5,000)

33,000 2,53,350 Cash in hand 7,800

Cast)'at Bank 18,500

Outstanding Expenses: Stock , 47,500

Salaries 1,500 Prepaid Insurance 250

Printing 600

Audit fees 1,000 3,100

T's A/c (Amount Payable)

(Rs. 30,000 -Rs. 4,500)

25,500

3,63,950 3,63,950

Adjustment Entries for Rectification of Errors

Date Particulars. Rs. L.F. Dr, (Rs.) Cr. (Rs.)

(i) Machinery A/c Dr. 50,000

To Furniture A/c 5,000

To Suspense A/c 45,000

(ii) Suspense A/c Dr. 5,600

To Sundry Debtors 5,600

(iii) Drawings A/c Dr. 5,000

To Purchase A/c 5,000

(iv) Sales A/c Dr. 30,000

To T's A/c 25,500

To Commission A/c 4,500

Suspense Account

Particulars Rs. Particulars Rs.

To Balance b/d 39,400 By Machinery A/c 45,000

To Sundry Debtors 5,600

45,000 45,000

Working notes: (Rs.)

*j Machinery A/c: Balance as per Trial Balance 1,70,000

Add: Amount of Depreciation charged as per Trial Balance 30,000

2,00,000

Add: New Machinery Purchased during the year 50,000

2,50,000

Less: Depreciation @ 15% 37,500

2,12,500

*2 Furniture A/c: Balance as per Trial Balance 49,500

Add: Depreciation as per Trial Balance 5,500

55,000

Less: Wrong Debit 5,000

50,000

Less: Depreciation @ 10% 5,000

45,000

*3 Sundry Debtors: Balance as per Trial Balance 38,000

Less: Amount received but not posted in the ledger 5,600

32,400

Q. 4. (a) Distinguish between financial lease and operating lease. 2

(b) A Ltd. purchased on 1st Jan., 2014 from M/s SK Traders four machines having cash price of 78,00,000 each on hire purchase basis. The payment was to be made as follows —

10% of cash price down.

25% of cash price at the end of each of the following four years.

A Ltd. paid the first instalment but failed to pay the second instalment due on 31st Dec, 2015. M/s SK Traders repossessed three machines leaving remaining one machine with the buyer. The value of three machines was taken at cost less depreciation @ 20% p.a. on reducing balance method. A Ltd. charges depreciation @ 10% p.a. on reducing balance method on 31st Dec. every year. M/s SK Traders spent

Rs. 4,20,000 on overhauling of machines repossessed and sold two of the repossessed machines for 712,00,000.

Prepare necessary accounts in the books of both the parties. 8

Sol. (a) Difference between financial lease and operating lease. See Q. 6, Unit III. [Page T-

59

(b) Calculation of Interest: Total Hire Purchase Price: 7

10% of Down payment of Rs. 32,00,000 (Rs. 8,00,000 x 4) 3,20,000

Add: 4 Instalments of Cash price 32,00,000 35,20,000

Less: Cash Price (Rs. 8,00,000 x 4) 32,00,000

Interest 3,20,000

Since there are four equal instalments payable at the end of each of the four years, the ratio is 4 : 3 : 2 :1.

Interest on:

1st instalment =Rs. 3,20,000 x 4/10 =Rs. 1,28,000; 2nd instalment =Rs. 3,20,000 x 3/10 =Rs. 96,000

3rd instalment =Rs. 3,20,000 x 2/10 =Rs. 64,000; 4th instalment =Rs. 3,20,000 x 1/10 =Rs. 32,000

In the Books of A Ltd.

Dr. Machines on Hire Purchase Account Cr.

Dale Particulars Rs. Date Particulars Rs.

01-01-14 To M/s S.K. Traders 32,00,000 31-12-14 By Depreciation A/c 3,20,000

(Rs. 8,00,000 x 4) [10% of Rs. 32,00,000]

By Balance c/d 28,80,000

32,00,000 32,00,000

01-01-15 To Balance b/d 28,80,000 31-12-15 By Depreciation A/c 2,88,000

[10% of Rs. 28,80,000]

By S.K. Traders*2 15,36,000

By Profit & Loss A/c (Loss

4,08,000

on default) (Bal. fig.)

By Balance c/d*4 6,48,000

28,80,000 28,80,000

Dr. M/s S.K. Traders Cr.

Date Particulars Rs. Date Particulars Rs.

01-01-14 To Bank A/c 3,20,000 01-01-14 By Machines on Hire

31-12-14 To Bank A/c 8,00,000 Purchase A/c 32,00,000

31-12-14 To Balance c/d 22,08,000 31.12.14 By Interest A/c 1,28,000

33,28,000 33,28,000

31-12-15 To Machines on Hire 01-01-15 By Balance b/d 22,08,000

Purchase A/c*2 15,36,000 31-12-15 By Interest A/c 96,000

To Balance c/d 7,68,000

23,04,000 23,04,000

In the Books of S.K. Traders (Vendor)

Dr. A Ltd. Account Cr.

Date Particulars Rs. Date Particulars Rs.

1.1.14 To Hire Purchase Sales A/c

32,00,000 1.1.14 By Bank A/c 3,20,000

31.12.14 To Interest A/c 1,28,000 31.12.14 By Bank A/c 8,00,000

31.12.14 By Balance c/d 22,08,000

33,28,000 33,28,000

1.1,15 To Balance b/d 22,08,000 31.12.15 By Machines

Repossessed A/c 15,36,000

31.12.15 To Interest A/c 96,000 31.12.15 By Balance c/d 7,68,000

23,04,000 23,04,000

Dr. Machines Repossessed Account Cr.

Date Particulars Rs. Date Particulars Rs.

31.12.15 To A Ltd. 15.36.000 31.12.15 By Bank A/c (Sale) 12.00.000

To Bank A/c 4,20,000 By Loss on. sale of Machines

Repossessed A/c to be

transferred to P&L A/c 1.04,000*1

By Balance c/d*2 6,52,000

19,56,000 19,56,000

Working notes:

*1 Calculation of loss on sale of Machines repossessed: (Rs.)

Total Value of Machines repossessed 19,56,000

Value of Machines repossessed sold =Rs. 19,56,000 x 2/3 13,04,000

Less; Sale Price 12,00,000

Loss on Sale 1,04,000

*2 Closing balance of one Machine repossessed =Rs. 19,56,000 x 1/3 =Rs. 6,52,000

*3 Value of 3 Machines repossessed: Cash price of three machines (Rs. 8,00,000 x 3)

24,00,000

Less: Depreciation @ 20% p.a. (2014) 4,80,000

19,20,000

Less: Depreciation @ 20% p.a. (2015) 3,84,000

15,36,000

*4 Value of machine left with A Ltd.: Cost price of one machine 8,00,000

Less: Depreciation @ 10% p.a. (2014) 80,000

7,20,000

Less: Depreciation @ 10% p.a. (2015) 72,000

6,48,000

Or

(a) Distinguish between Hire Purchase System and Instalment Purchase System.

(b) R.C. Sales Corporation has a hire purchase department. Goods are sold on hire purchase at cost plus 25%. From the following particulars, prepare the ledger accounts by Stock and Debtors Method: 2,8

Rs.

Stock with hire purchase customers at selling price on 1-4-2014 15.000

Instalments due (Customers paying) on 1-4-2014 1,800

Sales on hire purchase basis during the year ended 31-3-2015 at selling price 96,500

Cash received during the year 98,300

Goods repossessed (instalment due Rs. 2,000) valued at 1.700

Instalment due (customers still paying) on 31-3-2015 1,100

Ans. (a) See Q. 2, Unit III. [Page T-54

(b) Dr. Hire Purchase Debtors Account Cr.

Dale Particulars Rs. Date Particulars Rs.

01-04-14

To Balance b/d 1,800 31-03-15

By Cash A/c 98,300

31-03-15

To Stock with HP Customers

31-03-15

By Goods Repossessed A/c

2,000

A/c (Bal. figure Transfer)

99,600 31-03-15

By Balance c/d 1,100

1,01,400 1,01,400

Dr. Stock With HP Customers Account Cr.

Date Particulars Rs. Date Particulars Rs.

01-04-14

To Balance b/d 15,000 31-03-15

By Hire Purchases Debtors A/c

99,600

31-03-15

To Goods sold on HP A/c

96,500 By Balance c/d 11,900

1,11,500 1,11,500

Dr. Hire Purchase Adjustment Account Cr.

Particulars Rs. Particulars Rs.

To Stock Reserve A/c 2,380 By Stock Reserve A/c 3,000

(Load:Rs. 11,900x 1/5) (Load:Rs. 15,000 x 1/5)

To Goods Repossessed A/c 300 By Goods sold on HP A/c 19,300

(2,000-1,700) (Load:Rs. 96,500 « 1/5)

To Profit & Loss A/c (Profit on HP)

79,620

22,300 22,300

Calculation of Profit Margin (load) on Hire Purchase Price:

Suppose Cost Rs. 100 Profit margin =Rs. 25/Rs. 125 = 1/5

Add: Profit Rs. 25

Hire Purchase Price Rs. 125

Q. 5. (a) Distinguish between a "Dependent Branch" and an "Independent Branch". 2

(b) T Ltd. has two Branches at Delhi and at Bombay. Goods are invoiced to branches at cost plus 50%. Goods are transferred by/to another branch at its cost. Following information is available of the transactions of Delhi Branch for the year ended 31-3-2015: 8

1. Opening stock at LP. 2,67,000

2. Goods sent to branch (including goods invoiced at Rs. 15,000 to branch on 31st

March, 2015 but not received by branch before the dose of the financial year) 7.83,000

3. Goods received from Bombay Branch 6.000

4. Goods transferred to Bombay Branch 51,000

5. Goods returned by branch to H.O. 11,700

6. Goods returned by credit customers to branch 5,700

7. Goods returned by credit customers directly to H.O. 1.200

8. Agreed allowance to customers off the selling price (already taken into account while invoicing)

1,000

9. Normal loss due to wastage and deterioration of stock (at stock) 1,000

10. Loss in transit (at invoice price)Rs. 6,600 against which a sum of Rs. 4.000 was from insurance company in full settlement of the claim

11. Cash sales Rs. 32,000 and credit sales Rs. 7,29,400

12. Branch expenses (including insurance charges)Rs. 50.000

13. Bad debts Rs. 1.000 and discount allowed to customers Rs. 500

Prepare Branch Stock Account, Branch Adjustment Account and Branch Profit & Loss Account, if the closing stock at branch at its cost as per physical verification amounted to Rs. 2,00,000.

Sol. (a) Difference between a Dependent Branch and an Independent Branch. See Q. 2, Unit IV. [Page T-61

(b) Dr. Delhi Branch Stock Account Or.

Particulars Rs. Particulars Rs.

To Balance b/d 2,67,000 By Goods sent to Branch A/c 51,000

To Goods sent to Branch A/c 7,83,000 (Transfer to Bombay Branch)

To Goods sent to Branch A/c 6,000 By Goods sent to Branch A/c 11,700

(Transfer from Bombay Branch)

(Returns to H.O.)

To Branch Debtors A/c 5,700 By Branch Profit & Loss A/c 4,400

(Returns to Branch) (Cost of Loss-in-transit)

By Branch Adjustment A/c 2,200

(Load on loss-in-transit)

By Branch Cash A/c (Cash Sales) 32,000

By Branch Debtors A/c (Credit Sales) 7,29,400

By Branch Adjustment A/c (Normal 1,500

Loss) [Rs. 1.000 + 50%of Rs. 1,000]

By Branch Adjustment A/c (agreement

allowance allowed) 1,000

bf 10,61,700 8,33,200

By Branch Profit & Loss A/c

(Cost of shortage) 9,000

By Branch Adjustment A/c

(Load on Shortage) 4,500 13,500

By Balance c/d:

In hand 2,00,000

In transit 15,000

10,61,700 10,61,700

Working notes: Journal Entry for return of goods by Debtors direct to the Head Office:

Goods sent to Branch A/c Dr.

To Branch Debtors A/c .

Alternatively, the following two entries may be passed when goods are returned by Debtors direct to the Head Office:

(a) Branch Stock A/c Dr.

To Branch Debtors A/c

(b) Goods sent to Branch A/c Dr.

To Branch Stock A/c

Dr. Delhi Branch Adjustment Account Cr.

Particulars Rs. Particulars Rs.

To Branch Stock 2,200 By Stock Reserve A/c 89,000

(Load on loss-in-transit) (Load on opening stock:

To Branch Stock A/c (Normal Loss)

1,500 1/3 of Rs. 2,67,000)

To Branch Stock A/c 1,000 By Goods sent to Branch A/c 2,41,700

(Agreed Allowance) . (Load on Net Goods sent)

To Branch Stock A/c (Load on shortage)

4,500 [(Rs. 7,83,000 +Rs. 6,000-Rs. 11,700

To Stock Reserve A/c (Load on 71,667 -Rs. 51,000-Rs. 1,200)x 50/150]

Closing Stock) (1/3 of Rs. 2,15,000)

To Gross Profit transfer to Branch

Profit & Loss A/c 2,49,833

3,30,700 3,30,700

Dr. Delhi Branch Profit and Loss Account Cr.

Particulars Rs. Particulars Rs.

To Branch Expenses A/c 50,000 By Branch Adjustment A/c 2,49,833

To Discount allowed 500 (Gross Profit)

To Net Profit transferred to General By Insurance Claim 4,000

Profit & Loss A/c 1,88,933

To Branch Stock A/c (Cost of shortage)

9,000

To Branch Stock A/c 4,400

(Cost of Loss-in-transit)

To Bad Debts 1,000

2,53,833

2,53,833

Or

(a) Explain the procedure of incorporating the Branch Trial Balance in H.O. Books. 2

(b) C Enterprises with their H.O. at Raj as than has a branch at Delhi. The goods are supplied to branch at 25% less than the list price which is cost plus 100% of cost. The Head Office also supplies goods to its dealers at the same price at which they are supplying to its branch at Delhi. 8

From the following particulars. Prepare Trading and Profit & Loss Account of the H.O. and that of its Branch:

Head Office (Rs.) Delhi Branch (Rs.)

Opening Stock 60,000 33,000

Purchase during the year 45,00,000 —

Goods sent to Branch 18,70,000 —

Goods received from H.O. — 18,70,000

Goods sold to dealers 25,10,000 —

Goods sold to customers at list price 32,00,000 24,00,000

Sol. (a) Procedure of incorporating the Branch Trial Balance in H.O. Books.

The process by which a consolidated or combined Balance Sheet of the whole business prepared is known as incorporation of branch trial balance in the books of head office. There are two methods of incorporation of branch trial balance in the books of head office—(Rs.) First Method (Detailed Incorporation); (ii) Second Method (Abridged Incorporation).

(b) Supply price = 25% less of cost plus 100% of cost = 100 + 100 - 25% = 250

C Enterprises

Dr. Head Office Trading Account Cr.

Particulars Rs. Particulars Rs.

To Opening Stock. 60,000 By Goods sent to Branch A/c 18,70,000

To Purchases 45,00,000 By Goods sold to Dealers 25,10,000

To Gross Profit 30,60,000 By Goods sold to customers 32,00,000

By Stock at the end*. 40,000

76,20,000 76,20,000

Dr. Delhi Branch Trading Account Cr.

Particulars Rs. Particulars Rs.

To Opening Stock 33,000 By Sales A/c 24,00,000

To Goods received from Head Office

18,70,000 By Closing Stock*2 1,03,000

To Gross Profit 6,00,000

25,03,000 25,03,000

Dr. Profit and Loss Account Cr.

Particulars Rs. Particulars Rs.

To Stock Reserve (Provision for un-

By Gross Profit b/d 30,60,000

realised profit on Closing Stock By Stock Reserve A/c

at bank: 1/3rd of Rs. 1,03,000) 34,333 (Provision for unrealised profit on

To Net Profit transferred to General

Opening stock at branch: 1/3 of

Profit & Loss A/c 30,36,667 Rs. 33,000) 11,000

30,71,000 30,71,000

Working notes:

*1 Calculation of Closing Stock at head office: (Rs.)

Opening Stock 60,000

Aid: Purchases 45,00,000

45,60,000

Less: Cost of Goods Supplied to dealers and branch:

10%50 x Rs. 43,80,000 (i.e., 18,70,000 + 25,10,000) 29,20,000

16,40,000

Less: Cost of goods sold to customers: 100/200 x Rs. 32,00,000 16,00,000

Closing Stock at Head Office 40,000

*2 Calculation of Closing Stock of Branch (Invoice Price): (Rs.)

Invoice price of goods available for sale Rs. (33,000 + 18,70,000) 19,03,000

Less: Cost of Goods sold: 150/200 x Rs. 24,00,000 18s00,000

Closing stock at Invoice Price 1,03,000

Q. 6. (a) What is Gradual (Piecemeal) distribution of cash Rs. 2

(b) R, Z and T shared profits and losses in the ratio of 5 : 3 : 2 respectively.

On 31st March, 2015, their balance sheet was as follows: 8

Liabilities Rs. Assets Rs.

Trade Creditors 30,000 Furniture 11,000

Bank Loan 10,000 Stock 48,000

Capital A/cs: R 30,000 Cash 1,000

Z 20,000 Profit & Loss A/c 40,000

T 10,000

1,00,000 1,00,000

The Bank had a charge on all assets. Furniture realised Rs. 3,000 while the entire stock was

sold for Rs. 25,000. Z's private estate realised Rs. 6,000. His private creditors were Rs. 5,000. T was unable to contribute anything. R paid one-third of what was due from him on his own account (before considering the one-third payment by him in his capital accounts). Prepare Realisation A/c, Cash Account, Partners' Capital A/c, passing all matters relating to realisation of assets and payment of liabilities through the Realisation Account. Clearly show calculation regarding cash brought in by R.

Or

Sol. (a) Gradual (Piecemeal) distribution of Cash. See Q. 9, Unit V. [Page P-69

(b) Dr. Realisation Account Cr.

Particulars Rs. Particulars Rs.

To Furniture 11,000 By Creditors 30,000

To Stock 48,000 By Bank Loan 10,000

To Cash (Bank Loan) 10,000 By Cash A/c (Asset Realised): Furniture

3,000

To Cash (Creditors)* 20,200 Stock 25,000

By Loss on Realisation transferred to:

R's Capital A/c* 10,600

Z's Capital A/c* 6,360

T's Capital A/c* 4,240 21,200

89,200 89,200

Dr. Capital Accounts of Partners Cr.

Particulars R(Rs.) Z (Rs.) T (Rs.) Particulars R (Rs.) Z (Rs.) T (Rs.)

To Profit & Loss A/c

20,000 12,000 8,000 By Balance b/d 30,000 20,000 10,000

To Realisation A/c 10,600 6,360 4,240 By Cash A/c 200 1,000 —

To R's Capital A/c — 400 — By Z's Capital A/c 400 — 2,240

To T's Capital A/c — 2,240 —

30,600 21,000 12,240 30,600 21,000 12,240

Dr. Cash Account Cr.

Particulars Rs. Particulars Rs.

To Balance b/d 1,000 By Realisation A/c (Bank loan) 10,000

To Realisation A/c (Assets 28,000 By Realisation A/c (Trade 20,200

realised) creditors)

To Z's Capital A/c 1,000

To R's Capital A/c 200

30,200 30,200

* Working notes: Calculation of the amount to be contributed by R:

Let the amount to be contributed by R be x.

(i) Dr. Memorandum Cash Account Cr

Particulars Rs. Particulars Rs.

To Balance b/d 1,000 By Realisation A/c

To Realisation A/c (Assets) 28,0.00 (Bank Loan) 10,000

To Z's Capital A/c 1,000 By Realisation A/c (Creditors) 20,000 +x

To R's Capital A/c X (Balancing figure)

30,000 +x 30,000 +x

(ii) Dr. Memorandum Realisation Account Cr.

Particulars Rs. Particulars Rs.

To Sundry Assets 59,000 By Sundry Liabilities 40,000

To Cash A/c (Bank Loan) 10,000 By Cash (Assets) 28,000

To Cash A/c (Creditors) 20,000+ x By Loss: R 10,500 + 5x/10

Z 6,300 + 3x/10

T 4,200 + 2x/10 21,000+x

89,000+x 89,000 +x

(iii) Dr. Memorandum R's Capital Account Cr.

Particulars Rs. Particulars Rs.

To Profit & Loss A/c (Loss) 20,000 By Balance b/d 30,000

To Realisation A/c (Loss) 10,500+ 5x/10

By Balance due 500 + 5x/10

30,500 + 5x/10

30,500 + 5x/10

Thus, x = 1/3 of (500 + 5 x/10) 3x = 500 + 5x/100 30x = 5,000 + 5x 25x = 5,000

x = 5,000/25 =Rs. 200.

Or

(a) Briefly explain the Garner vs. Murray Rule. 2

(b) A partnership was dissolved on 30th June 2015. Its Balance Sheet on the date of dissolution was as follows: 8

Liabilities Rs. Assets Rs.

Capitals: Cash 5,400

R 38,000 Sundry Assets 94,600

S 24,000

M 18,000

Loan Account of S 5,000

Sundry Creditors 15,000

1,00,000 1,00,000

The assets were realised in instalments and payment was made on the proportionate capital basis. Creditors were paid Rs. 14,500 in full settlement of their account. Expenses of realisation were estimated to be Rs. 2,700 but actual amount spent on this account was Rs. 2,000. This amount was paid on 15th Sep., 2015. Draw up a statement showing distribution of cash which was realised as follows:

On 5th July, 2015 Rs. 12.600

On 30th August, 2015 Rs. 30,000

On 15th September, 2015 Rs. 40,000

The partners shared profits and losses in the ratio 2:2:1. Give working notes.

Sol. (a) Garner vs. Murray Rule. See Q. 7, Unit V. [Page P-68

(b) Statement showing priority and amount of payment of partners (Proportionate Capital):

2 :2 :1

R (Rs.) S (Rs.) M (Rs.)

Capital 38,000 24,000 18,000

Taking S's Capital as base 24,000 24,000 12,000

Excess capital 14,000 — 6,000

Taking M's Capital as base 12,000 - 6,000

Excess Capital 2,000 - -

Statement Showing Distribution of Cash

Particulars Sundry Loan from R's S's M's Capital

Creditors (Rs.)

s (Rs.) Capital (Rs.)

Capital (Rs.)

(Rs.)

2015, July 1 15,000 5,000 ' 38,000 24,000 18,000

Cash in hand (Rs. 5,400 -

Rs. 2,700)

For expenses 2,700

Balance to be paid 12,300

July 5: Realisation Rs. 12,600

Cash Paid & availed discount

from creditors 11,800 800

4,200

Aug. 30: Realisation Rs. 30,000

Cash Paid 4,200

Balance available

Rs. (30,000 - 4,200) =Rs. 25,800

Cash Paid (Excess capital) 14,000 — 6,000

Balance available

Rs. (25,800 -20,000) 24,000 24,000 12,000

Cash paid Rs. 5,800 in the

profit

2,320 2,320 1,160

sharing profit 21,680 21,680 10,840 •

Sep. 15

Realisation 40,000

Add: Surplus from

Exp. Provision

Rs. (2,700 - 2,000) 700

Total Cash available 40,700

Paid to partners 16,280 16,280 8,140

Loss to be borne by Partners in

the ratio of 2 : 2 :1 5,400 5,400 2,700

Working notes:

The Statement of Priority payment must be prepared before any cash is paid to partners. The basis should be that partner's capital who has contributed the least in proportion of his

share of profit. In the question S has contributed the least of all (Profit-sharing wise). That is why S's Capital has been taken as the basis. But this has resulted in excess of two partners' (R & M) Capital. Hence further exercise is made to determine the first priority payment, which is that of Rs. 2,000.

Thus, it is clear that R should be paid Rs. 2,000 first.

Secondly, R and M should be paid in 2 : 1 ratio to the extent of Rs. 12,000 and Rs. 6,000

respectively. Once this excess Capital of Rs. 14,000 (Rs. 2,000 +Rs. 12,000) in case of R and Rs. 6,000 in case of M is paid, the balance and subsequent instalments will continue to

be paid in profit sharing ratio which is 2:2:1.

Lastly, the unsatisfied balance left will be in the profit sharing ratio (2:2:1) which is the loss to the partners on account of realisation.