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Departmental Accounts – CA Inter Accounts Question Bank is designed strictly as per the latest syllabus and exam pattern.

Departmental Accounts – CA Inter Accounts Question Bank

Question 1.
Basis of aNocation of common expenditure among different departments. (Nov 1998, 4 marks)
Answer:
Basis of allocation of common expenditure among different departments:
At the time of preparing department accounts, expenses should be distributed among the different departments on the basis of the following principles:
1. Expenses incurred specially for each department are charged directly to it. For example, insurance charges of stock held by a department.

2. The expenses which are not capable of correct measurement are dealt in the following ways:
(i) Expenses incurred on selling.are charged on the basis of sales for e.g. discount, bad debts. selling commission etc.
(ii) Administrative and other expenses such as salaries of managers, directors, common advertisement expenses, depreciation on assets etc. are allocated equally among all the caepartmerts that have benefitted thereby. Alternatively, no allocation may be made and such expenses may be charged to the combined profit and loss account.

3. Common expenses, the advantages of which is shared by all the departments and which are competent enough of precise allocation (e.g. rent, lighting expenses etc.) are distributed among the departments related on some particular basis which are considered suitable for the circumstances. Rent are charged to different departments as per the floor area occupied by each department. Lighting and heating expenses are distributed on the basis of consumption of energy by every department and so on.

Question 2.
State the basis on which the following common expenses, the benefit of which is shared by all the departments is distributed among the departments:
(i) Rent, rates and taxes, Insurance of building;
(ii) Selling expenses such as discount, bad debts, selling commission, and other such selling expenses:
(iii) Carriage Inward;
(iv) Depreciation;
(v) Interest on loan;
(vi) Profit or loss on sale of investment;
(vii) Wages;
(viii) Lighting and Heating Expenses (Nov 2013, 4 marks)
Answer:

Expenses	Basis
(i) Rent, rates & taxes, insurance of building	Floor area occupied by each department (It given) otherwise on time basis.
(ii) Selling expenses such as discount, bad debts etc.	Sales of each department.
(iii) Carriage Inward	Purchase of each department.
(iv) Depreciation	Value of assets of each department or time basis.
(v) Interest on loan	Utilisation of loan amount in each department (if identifiable) otherwise in combined P&L A/c.
(vi) Profit or loss on sale of investment	Equal or shown in general P&L A/c.
(Vii) Wages	Time devoted to each department.
(viii) Lighting & Heating expenses	Consumption of energy by each department.

Question 3.
Give the basis of allocation of the following common expenditure among Different departments:
(i) Insurance of Building
(ii) Discount and bad debts
(iii) Discount received
(iv) Repairs and maintenance of capital assets
(v) Advertisement expenses
(vi) Labour welfare expenses
(vii) PFFESI contributions
(viii) Carnage Inward (May 2016, 4 marks)
Answer:

Item	Basis
(i) Insurance of Building	Floor area of each department
(ii) Discount and bad debts	Sales of each department
(iii) Discount received	Purchases of each department
(iv) Repairs and maintenance of capital assets	Assets value of each department
(v) Advertisement expenses	Sales of each department
(vi) Labour welfare expenses	No. of employees in each dept.
(vii) PF/ESI contributions	Wages and Salaries of each department
(viii) Carriage inward	Purchases of each department

Question 4.
Department X sells goods to Department Y at a profit of 25% on cost and to Department Z at 10% profit on cost. Department Y sells goods to X and Z at a profit of 15% and 20% on sales, respectively. Department Z charges 20% and 25% profit on cost to Departments X and Y, respectively. Department Managers are entitled to 10% commission on net profit subject to unrealised profit on departmental sales being eliminated. Departmental profits after charging Managers commission, but before adjustment of unrealised profit are as under:

(Nov 2001, 8 Marks)
Answer:

Question 5.
Goods are transferred from Department P to Department O at a price 50% above cost. If dosing stock of Department Q is ₹ 27,000, compute the amount of stock reserve. (Nov 2009, 2 marks)
Answer:

Question 6.
Department R sells goods to Department S at a profit of 25% on cost and Department T at 10% profit on cost. Department S sells goods to R and T at a profit of 15% and 20% on sales respectively. Department T charges 20% and 25% profit on cost to Department R and S respectively.
Department Managers are entitled to 10% commission on net profit subject to unrealised profit on departmental sales being eliminated. Departmental profits after charging Manager’s commission, but before adjustment of unrealised profit are as under:

(Nov 2010, 8 marks)
Answer:

Question 7.
Department A sells goods to Department B at a profit of 20% on cost and Department C at 15% profit on cost. Department B sells goods to A and C at a profit of 10% and 20% on sales respectively. Department C sells goods to A and B at 15% and 10% profit on cost respectively.

Departmental managers are entitled to 10% commission on net profit subject to unrealized profit on departmental sales being eliminated. Departmental profits after charging manager’s commission, but before adjustment of unrealized profit are as under:
Department A ₹ 36,000
Department B ₹ 27,000
Department C ₹ 18,000
Stock lying at different departments at the end of the year are as below:

(Nov 2012, 8 marks)
Answer:

Question 8.
Department A sells goods to Department B at a profit of 50% on cost and to Department C at 20% on cost. Department B sells goods to A and C at a profit of 25% and 15% respectively on sales. Department C charges 30% and 40% profit on cost to Department A and B respectively.
Stock lying at different departments at the end of the year are as under:

Calculate the unrealized profit of each department and also total unrealized profit. (May 2013, 4 marks)
Answer:

Question 9.
Department P sells goods to Department S at a profit of 25% on cost and to Department O at a profit of 15% on cost. Department S sells goods to P and Q at a profit of 20% and 30% on sales respectively. Department Q sells goods to P arid S at 20% and 10% profit on cost respectively.

Departmental Managers are entitled to 10% commission on net profit subject to unrealized profit on departmental sales being eliminated. Departmental profits aller charging Manager’s commission, but before adjustment of unrealized profits are as below:
Department P ₹90,000
Department S ₹60,000
Department Q ₹ 45,000
Stock lying at different Departments at the end of the year are as below:

(May 2014,8 Marks)
Answer:

Question 10.
There is transfer/sale among the three departments as below Department X sells goods to Department Y at a profit of 25% on cost and to Department Z at 20% profit on cost. Department Y sells goods to X and Z at a profit of 15% and 20% on sales
respectively.

Department Z charges 20% and 25% profit on cost to Departments X and Y respectively. Department Managers are entitled to 10% commission on net profit subject to unrealised profit on departmental sales being eliminated. Departmental profits after charging Managers’ commission, but before adjustment of unrealised profit are as under:

Find out the correct departmental profits after charging Managers’ commissions. (May 2016, 8 marks)
Answer:

Question 11.
Department X sells goods to Department Y at a profit of 50% on cost and to Department Z at 20% on cost. Department Y sells goods to Department X and Z at a profit of 25% and 15% respectively on sales. Department Z charges 30% profit on cost to Department X and 40% profit on sale to Y. Stocks lying at different departments at the end of the year are as under:

Calculate the unrealized profit of each department and also total unrealized profit.
(Nov 2017, 4 marks)
Answer:

Question 12.
Axe Limited has four departments, A, B, C, and D. Department A sells goods to other departments at a profit of 25% on cost. Department B sells goods to other departments at a profit of 30% on sales. Department C sells goods to other departments at a profit of 10% on cost. Department D sells goods to other departments at a profit of 15% on sales. Stock lying at different departments at the year-end was as follows:

Departmental managers are entitled to 10% commission on net profit subject to unrealized profit on departmental sales being eliminated. Departmental profits after charging manager’s commission, but before adjustment of unrealized profit are as under:
Department  A ₹ 2,25,000
Department B ₹ 3,37,500
Department C ₹ 1,80,000
Department D ₹ 4,50,000
Calculate the correct departmental profits after charging Manager’s commission. (Nov 2018, 5 marks)
Answer:

Question 13.
Answer the following:
Department A sells goods to Department B at a profit of 20% on cost and to Department C at 50% on cost. Department B sells goods to Department A and Department C at a profit of 15% and 10% on sales respectively. Department C sells goods to Department A and Department B at a profit of 10% and 5% on cost respectively.

Calculate Department wise unrealised profit on Stock. (Nov 2020, 5 marks)

Question 14.
XYZ Garage consists of 3 departments: Spares, Service, and Repairs, each department being managed by a departmental manager whose commission was respectively 5%. 10% and 10% of the respective departmental polit subject to a minimum of ₹ 5000 in each case. Interdepartmental transfers take place at a  loaded price as follows:
From Spares to Service 5% above cost
From Spares to Repairs 10% above cost
From Repairs to Service 10% above cost
In respect of the year ended March 31st, 2019, the firm had already prepared and closed the departmental trading and profit and loss account. Subsequently, it was discovered that the closing stocks of department had
included inter-departmentally transferred goods at loaded price instead of the correct cost price.
From the following information, you are required to prepare a statement re-computing the departmental profit or loss:

(Jan 2021,10 Marks)

Question 15.
FGH Ltd has three departments I. J. K. The following information is provided for the year ended 31.3.2004

Stocks of each department are valued at costs to the department concerned. Stocks of I are transferred to J at cost plus 20% and stocks of J are transferred to K at a Gross Profit of 20% on sales. Other common expenses are Salaries and Staff Welfare ₹ 18,000, Rent ₹ 6,000. Prepare Departmental Trading, Profit and Loss Account for the year ending 31 .3.2004. , (Nov 2004, 10 marks)
Answer:

Question 16.
Brahma Limited has three departments and submits the following information for the year ending on 31st March 2011.

Particulars	A	B	C	Total (₹)
Purchases (units)	5,000	10,000	15,000
Purchases (Amount)				8,40,000
Sales (units)	5,200	9,800	15,300
Selling price (₹ per unit)	40	45	50
Closing Stock (Units)	400	600	700

You are required to prepare departmental trading account of Brahma Limited assuming that the rate of profit on sales is uniform in each case. (May 2011, 5 marks)
Answer:

Question 17.
M/s. AM Enterprise had two departments, Cloth and Readymacle Clothes. The Readymade clothes were made by the firm itself out of the cloth supplied by the Cloth Department at its usuel selling price. From the following figures, prepare Departmental Trading and Profit & Loss Account for the year ended 31 March, 2011:

	Cloth Department  ₹	Readymade Clothes Department ₹
Opening Stock on 1st April 2010	31,50,000	5,32,000
Purchases	2,10,00,000	1,68,000
Sales	2,3100,000	47,25,000
Transfer to Ready-made
Clothes Department	31,50,000	–
Manufacturing Expenses	–	6,30,000
Selling Expenses	2,10,000	73,500
Rent & Warehousing	8,40,000	5,60,000
Stock on 31st’ March, 2011	21,00,000	6,72,000

In addition to the above, the following information is made available for necessary consideration:
The stock In the Readymacie Clothes Department may be considered as consisting of 75% cloth and 25% other expenses. The Cloth Department earned a gross profit at the rate of 15% in 2009-10. General Expenses of the business as a whole amount to ₹ 10,85,000. (Nov 2011, 8 marks)
Answer:
Working Note:
Calculation of Stock Reserve:
Rate of Gross Profit of Cloth Department, for the year 2010-11
= \(\frac{\text { Gross Profit }}{\text { Total Sales }} \times 100\)
= \(\frac{₹ 42,00,000}{₹(2,31,00,000+31,50,000)} \times 100\) = 16%
Closing Stock of cloth in Readymade Clothes Department = 75%
i.e. 6,72,000 x 75% = ₹ 5,04,000
₹ 5,04,000 x 16% = ₹ 80,640
Stock Reserve for unreaLized profit included In opening stock of readymade clothes @ 15% i. e. (₹ 5,32,000 x 75% x 15%) = ₹ 59,850
Additional Stock Reserve required during the year = ₹ 80,640 – ₹ 59,850
= ₹ 20,790.

Question 18.
Mega Ltd. has two departments, A and . From the following particulars. prepare departmental Trading A/c and General Profit & Loss Account for the year ended 31st March. 2014.

Purchased goods have been transferred mutually at their respective departmental purchase cost and finished goods at departmental market price and that 30% of the closing finished stock with each department represents finished goods received from the other department. (Nov 2014,8 marks)
Answer:

Particulars	Department A (₹)	Department B (₹)
Stock of Finished Goods	1,02,000	62,000
Stock related to other departments (30% of Finished Goods)	30,600	18,600

** Net transfer of Finished Goods by
Department A to B = ₹ (1,75,000 – 45,000) = ₹ 1,30,000
Department B to A = ₹ (150,000 – 32,000) = ₹ 1,18,000

2. Unrealised profit included In the closing stock
Department A = 27.16% of ₹ 30,600 (30% of Stock of Finished Goods
₹ 1,02,000) = ₹ 831100
Department B = 24.79% of ₹ 18,600 (30% of Stock of Finished Goods ₹ 62,000) = ₹ 4611.00.

Question 19.
M/s. Suman Enterprises has two Departments, Finished Leather and Shoes. Shoes are made by the Firm, itself out of leather supplied by Leather Department at its usual selling price. From the following figures. prepare Departmental Trading and Profit & Loss Account for the year ended 31st March 2014:

	Finished Leather Department (₹)	Shoes Department (₹)
Opening Stock (As on 01.04.2013)	30,20,000	4,30,000
Purchases	1,50,00,000	2,60,000
Sales	1,80,00,000	45,20,000
Transfer to Shoes Department	30,00,000	5,00,000
Manufacturing Expenses	–	–
Selling Expenses	1,50,000	60,000
Rent and Warehousing	5,00,000	3,00,000
Stock on 31.03.2014	12,20,000	5,00,000

The following further information available for necessary consideration:
(i) The stock in Shoes Department may be considered as consisting of 75% of Leather and 25% of other expenses.
(ii) The Finished Leather Department earned a Gross Profit @ 15% In 2012-1 3.
(iii) General expenses of the business as a whole amount to ₹ 8,50,000. (May 2015, 8 marks)
Answer:

Stock Reserve for this year 75,000 – 48,375 = ₹ 26,625

Question 20.
The following balances were extracted from the books of Beta. You are required to prepare Departmental Trading Account and General Profit & Loss Account for the year ended 31st December 2016:

Particulars	Deptt A ₹	Deptt. B ₹
Opening Stock	3,00,000	2,40,000
Purchases	39.00,000	60,00,000
Sales	54,60,000	90,00,000

General expenses incurred for both the Departments were ₹ 7,50,000 and you are also supplied with the following information:
(i) Closing stock of Department A ₹ 6,00,000 including goods from Department B for ₹ 1,20,000 at cost to Department A.
(ii) Closing stock of Department B ₹ 12,00,000 including goods for Department A for 180,000 at cost to Department B.
(iii) Opening stock of Department A and Department B include goods of the value of ₹ 60,000 and ₹ 90,000 taken from Department B and Department A respectively at cost to transferee departments.
(iv) The gross profit is uniform from year to year. (May 2017, 8 marks)
Answer:

Question 21.
M/s Delta is a Departmental Store having three departments X, Y, and Z. The information regarding three departments for the year ended 31st March 2018 are given below:

Particulars	Dept. X	Dept. Y	Dept. Z
Opening Stock	18,000	12,000	10,000
Purchases	66,000	44,000	22,000
Debtors at end	7,500	5,000	5,000
Sales	90,000	67,500	45,000
Closing Stock	22,500	8,750	10,500
Value of furniture in each Department	10,000	10,000	5,000
Floor space occupied by each Dept. (in sq It)	1,500	1,250	1,000
Number of employees in each Department	25	20	15
Electricity consumed by each Department (in units)	300	200	100

Additional Information:

	Amount (₹)
Carriage inwards	1,500
Carriage outwards	2,700
Salaries	24,000
Advertisement	2,700
Discount allowed	2,250
Discount received	1,800
Rent, Rates, and Taxes	7,500
Depreciation on furniture	1,000
Electricity Expenses	3,000
Labour welfare expenses	2,400

Prepare Departmental Trading and Profit & Loss Account for the year ended 31st March 2018 after providing provision for Bad Debts at 5%. (May 2018, 10 marks)
Answer:

Question 22.
The following details are available in respect of a business for a year.

Department	Opening Stock	Purchase	Sales
A	120 units	1000 units	1,020 units at  ₹ 20.00 each
B	80 units	2,000 units	1,920 units at ₹ 22.50 each
C	152 units	2,400 units	2,496 units at ₹ 25.00 each

The Total Value of Purchases is 1,00,000. It is observed that the rate of Gross Profit is the same in each department. Prepare Departmental Trading Account for the above year.

Answer:

2. Computation of Gross Profit Ratio
We are informed that the GP Ratio is the same for all Departments. Selling Price is given for each department products but the Sale Quantity is different from that of Purchase Quantity. To find the Uniform GP Rate, the Sale Value of Purchase Quantity should be compared with the Total Cost of Purchase, as under:

Question 23.
The following balances were extracted from the books of ABC Sons. You are required to prepare Departmental Trading Account and Profit and Loss Account for the year ended 31 March after adjusting the unrealized Department Profits if any.

Particulars	Deptt. A	Deptt. B
Opening Stock	₹ 50,000	₹ 40,000
Purchases	₹ 6,50,000	₹ 9,10,000
Sales	₹ 10,00,000	₹ 15,00,000

General Expenses incurred for both the Departments were ₹ 1,25,000 and you are also supplied with the following information:
(a) Closing Stock of Department A ₹ 1,00,000 including goods from Department B for ₹ 20,000 at cost of Department A.
(b) Closing Stock of Department B ₹ 2,00,000 including goods from Department A for ₹ 30,000 at cost to Department B.
(c) Opening Stock àf Department A and Department B include goods of the value of ₹ 10,000 and ₹ 15,000 taken from Department B and Department A respectively at cost to Transferee Departments.
(d) The rate of Gross Profit is uniform from year to year.
Answer:

Question 24.
XY and Z carried on a business of Drapers and Tailors in Delhi; X was in charge of Department “A” dealing in cloth, Y of Department B (or selling garments and Z of Department ‘C the tailoring section. It had been agreed that each of the three partners would receive 75% of the profits disclosed by accounts of the department of which he was in charge and the balance of the profits would be shared in the proportion. X ½, Y 1/4, and Z 1/4. The following is the Trading and Profit and Loss Account of the firm for the six months ended 31st March 2012.

After consideration of the following, prepare Departmental Accounts and Profit and Loss Appropriation Account.
(i) Cloth of the value of ₹ 10,700 and other goods of the value of ₹ 600 were transferred at selling price by Departments A and B respectively to Department C.
(ii) Cloth and garments are sold in the showroom. Tailoring work is carried out in the workshop.
(iii) The details of salaries and wages were as follows:
(a) General Office 50%, showroom 25%, and 25% for workshop 75% of which is for tailoring alone.
(b) Allocate General Office Expenses, in the proportion of 3:2:1 among the Departments A, B, C.
(c) Distribute showroom expenses in the proportion of 1:2 between Departments A and B.
(iv) The workshop rent is ₹ 1,000 per month. The rent of the General Office and Showroom is to be divided equally between Departments A and B.
(v) Depreciation charges are to be allocated equally amongst the three Departments.
(vi) All other expenses are to be allocated on the basis of turnover (excluding Internal Transfers).
(vii) Discounts received are to be credited to the three Departments as follows: A ₹ 400; B ₹ 250; C ₹ 150.
(viii) The opening stock of Department C does not include any goods transferred from Department A.
Answer:

Note: Gross profit of Department A is 30% in Sales (including transfer to Dept C). There is some unrealised profit only on inter-departmental stock. 30% of ₹ 5,700 is required as stock reserve. This will be debited to Profit and Loss Appropriation account.

Question 25.
ABC Ltd., has 3 departments, A, B, C. The following information is provided:

Stock of each department is valued at cost to the department concerned. Stocks of A department are transferred to B at a margin of 50% above departmental cost. Stocks of B department are transferred to C department at a margin of 10% above departmental cost. Other expenses were: Salaries ₹ 2,000, Printing & Stationery ₹ 1,000. Rent ₹ 6,000, Interest paid ₹ 4,000, Depreciation ₹ 3000, Allocate expenses in the ratio of departmental gross profit. Opening figures of reserves for unrealised profits on departmental stocks were; Department B ₹ 1,000; Department C ₹ 2,000. Prepare Departmental Trading and Profit and Loss Account for the year ending on March 31, 2012.
Answer:

Question 26.
Martis Ltd. has several departments. Goods supplied to each department are debited to a Memorandum Departmental Stock Account at cost, plus a fixed percentage (markup) to give the normal selling price. The mark-up is credited to a memorandum departmental ‘Mark-up account’, any reduction in selling prices (mark-down) will require adjustment r the stock account and in mark-up account. The markup for Department A for the last three years has been 25%. Figures relevant to Department A for the year ended 31st March 2013 were as follows:
Opening stock as on 1 April 2012, at cost ₹ 65,000
Purchase at cost ₹ 2,00,000
Sales ₹ 3,00,000
It is further ascertained that:
(1) Shortage of stock found in the year ending 31.03.2013, costing to ₹ 1,000 were written oil.
(2) Opening stock on 01.04.12 including goods costing ₹ 6,000 had been sold during the year and had been marked down in the selling price by ₹ 600. The remaining stock had been sold during the year.
(3) Goods purchased during the year were marked down by ₹ 1,200 from a cost of ₹ 15,000. Marked-down stock costing ₹ 5,000 remained unsold on 31 .03.13.
(4) The departmental closing stock is to be valued a cost subject to adjustment for markup and mark-down.
You are required to prepare:
(i) A Departmental Trading Account for Department A for the year ended 31st March 2013 in the books of Head Office.
(ii) A Memorandum Stock Account for the year.
(iii) A Memorandum Mark-up Account for the year. (Nov 2023, 12 marks)
Answer:

Question 27.
M/s Shyam Udyog, a retail store, has two departments, Department X and Department Y for each of which stock account and memorandum ‘mark-up’ account are kept. All the goods supplied to each department are debited to the stock account at cost plus a markup’, which together make up the selling price of the goods, and in the account the sale proceeds of the goods are credited. The amount of ‘mark-up’ is credited to the Departmental Mark-up amount. If the selling price of any goods is reduced below its normal selling price, the reduction ‘marked down’ is adjusted both in the Stock Account and the Departmental Mark-up Account. The rate of ‘Mark up’ for X Department is 33-1/3% of the cost and for Y Department it is 50% of the
cost. The following figures have been taken from the books for the year ended March 2016:

	X Department Amount (₹)	Y Department Amount (₹)
Stock as on April 1st at cost	3,15,000	5,58,000
Purchases	22,77,000	28,02,000
Sales	28,68,000	37,50,000

(1) The stock of Department X on April 1st, 2015 included goods the selling price of which had been marked down by ₹ 37,800. These goods were sold during the year at the reduced prices.
2) Certain stock of the value of ₹ 2,07,000 purchased from the Department X was later in the year transferred to the Department Y and sold for ₹ 3,10,500. As a result, though cost of the goods is Included in the Department X the sale proceeds have been credited to the Department Y.
(3) During the year 2015-16 to promote the goods, they were marked down as follows:

	Cost (₹)	Marked  down (₹)
Department X	1,68,000	10,800
Department Y	3,00,000	60,000

All the goods marked down, were sold except of Department Y of the value of 1,50,000 marked down by ₹ 30,000.
(4) At the time of stock-taking on 31st March 2016, it was discovered that cloth of Department X of the cost of ₹ 11,700 was missing and it was decided that the amount be written off. You are required to prepare for both the departments for the year ended 31st March 2016:
(a) The Memorandum Stock Account and
(b) The Memorandum Mark-up Account. (Nov 2016, 8 marks)
Answer:

Question 28.
ABC Ltd. has several departments. Goods supplied to each department are debited to a Memorandum Departmental Stock Account at cost plus a fixed percentage (marks-up) to give the normal selling price. The amount of markup is credited to a Memorandum Departmental Markup account. if the selling price of goods is reduced below its normal selling prices, the reduction (mark-down) will require adjustment both in the stock account and the mark-up account. The markup for department X for the last three years has been 20%. Figures relevant to department X for the year ended 31st March 2019 were as follows:
Stock as on 1 April, 2018 at cost ₹ 1,50,000
Purchases at cost ₹ 4,30,000
Sales ₹ 6,50,000
It is further ascertained that:
1. Shortage of stock found in the year ending 31.3.2019, costing ₹ 4,000 were written off.
2. Opening stock on 1.4.2018 including goods costing ₹ 12,000 had been sold during the year and had been marked down in the selling price by ₹1,600. The remaining stock had been sold during the year.
3. Goods purchased during the year were marked down by ₹ 3,600 from a cost of ₹ 30,000. Marked-down stock costing ₹ 10,000 remained unsold on 31 .3.2019.
4. The departmental closing stock is to be valued at cost subject to adjustment for mark-up and mark-down.
You are required to prepare for the year ended 31st March, 2019:
(i) Departmental Trding Account for department X for the year ended 31st March, 2019 in the books of head office.
(ii) Memorandum Stock Account for the year ended 31st March 2019.
(iii) Memorandum Mark-Up account for the year ended 31st March 2019. (Nov 2019, 10 marks)
Answer:

Note: It has been assumed that markup (given in the question) is determined as a percentage of cost.

Question 29.
A B & C is a Retail Store having 2 Departments A and B. The Company maintains Memorandum Stock Account & Memorandum Mark-Up Account for each of the Departments. Supplies issued to the Departments are debited to the Memorandum Stock Account of the Department at Cost plus Mark-Lip, and Departmental Sales are credited to this Account. The Mark Up on supplies issued to the Departments is credited to the Mark-Up Account for the Department. When it is necessary to reduce the Selling Price below the Normal Selling Price. i.e. Cost plus Mark-Up, the reduction (Mark-Down) is entered in the Memorandum Stock Account and Mark-up Account. Department P has a markup of 1/3rd on Cost, and Department Q has a markup of 50% on Cost. The following information has been extracted from the records of the Company for a year ending 31st December.

Particulars	A	B
Opening Stock (at Cost)	24,000	36,000
Purchases	1,62,000	1,90,000
Sales	2,10,000	2,85,000

Opening Stock of Department A includes goods on which the Selling Price has been marked down by ₹ 510. These goods were sold in January at the reduced Selling Price.
Certain goods purchased during the year for ₹ 2,700 for Department A, were transferred during the year to Department B and sold for ₹ 4,500. Purchases and Sales are recorded in the Purchases of Department A and the Sales of Department B respectively, but no entries have been made in respect of the transfer.

Goods purchased during the year were marked down as follows:

	A	B
Cost	8,000	21,000
Markdown	800	4,100

At the end of the year there were some items ¡n the stock of Department B, which had been marked down to ₹ 2,300. With this exception, all goods marked down during the year were sold during the year at reduced prices.
During stock-taking at the end of the year, goods which had cost ₹ 240 were found to be missing in Department
It was determined that loss should be regarded as irrecoverable. Closing Stock in both Departments are to be valued at Cost for the purpose of the annual accounts.

Prepare for the year ended 31st December –
1. Trading A/c,
2. Memorandum Stock A/c, and
3. Memorandum Mark Up A/c.
Answer:

Note 1: Mark Down In Unsold Stock of Department Q
Total Mark down × \(\frac{\text { Value of Stock }}{\text { Value of Mark Down Goods }}=4,100 \times \frac{2,300}{27,400} \) = ₹ 344
Value of Mark Down G00ds = Cost (+) Normal Mark Up 50% (-) Amount Marked Down
= ₹ 21,000 (+) ₹ 10,500 (-) ₹ 4,100 (given)
= ₹ 27,400

Question 30.
ABC Limited is a retail organisation with several departments. Goods supplied to each department are debited to a Memorandum Departmental Stock Account at cost, plus fixed percentage (markup) to give the normal selling price. The markup Is credited to a Memorandum Departmental “Mark-up Account”. Any reduction in selling prices (mark-down) will require adjustment In the stock account and in mark-up account. The markup for Department A for the last three years has been 40%. Figures relevant to Department A for the ended 31st Dec. 2018 were as follows:
Stock 1st Jan., 2018 at cost, ₹ 80,000, Purchases at cost ₹ 1,80,000, Sales 3,20,000. It is further ascertained that:
(a) Goods purchased in the period were marked down by ₹ 1,400 from a cost of ₹ 16,000. Marked-down stock costing ₹ 4,000 remained unsold on 31st’ Dec 2018.
(b) Stock shortages at the year-end, which had cost 1,200 were to be written off.
(c) Stock at 1st Jan. 2018 including goods costing ₹ 8,200 had been sold during the year and has been mark down in the selling price by ₹ 740. The remaining stock had been sold during the year.
(d) The departmental closing stock is to be valued at cost subject to adjustments for mark-up and mark-down.
Prepare
(i) A Departmental Trading Account
(ii) A Memorandum Stock Account
(iii) A Memorandum Mark-up Account for the year 2018.
Answer:

Question 31.
Fbb Store Ltd. is a retail store operating two departments. The company maintains Memorandum Stock account and memorandum mark-up account for each of the departments. Supplies issued to the department are debited to the Memorandum Stock account of the department at cost plus the Mark up, and departmental sales are credited to this account. The markup on supplies issued to the departments is credited to the Mark-up account for the department. When it is necessary to reduce the selling price below the normal selling price. i.e. cost plus Mark-up, the reduction (markdown) is entered in the Memorandum Stock account and in the mark-up account.

Department A has a Mark-up of 33-1/3% on cost, and Department B 50% on cost. The following information has been extracted from the records of Southern Store Ltd. for the year ended 31st December 2018.

	Department A ₹	Department B ₹
Stock, 1 January. 2012 at cost	24,000	36,000
Purchases	1,62,000	1,90,000
Sales	2,10,000	2,85,000

(a) The stock of Department A on 1st January 2018 included goods on which the selling price has been marked down by ₹ 510. These goods were sold in January. 2018 at the reduced price.
(b) Certain goods purchased in 2012 for ₹ 2,700 for Department A were transferred during the year to Department B and sold for ₹ 4,050. Purchase and sale are recorded in the purchases of Department A and the sales of Department B respectively, but no entries in respect of the transfer have been made.
(C) Goods purchased In 2018 were marked down as follows:

	Department A ₹	Department B ₹
Cost	8,000	21,000
Mark down	800	4,100

At the end of the year there were some items in the stock of Department B which had been marked clown to ₹ 2,300. With this exception all goods marked down in 2018, were sold during the year at the reduced prices:
(d) During stocktaking on 31st December 2018, goods which had cost ₹ 240 wore found to be missing in department A, It was determined that the loss should be regarded as irrecoverable.
(e) The closing stock in both departments are to be valued at cost for the purpose of the annual accounts. Prepare for each department for the year ended 31st December, 2018
(i) a Trading Account,
(ii) a Memorandum Stock Account, and
(iii) a Memorandum Mark-up Account.
Answer:

Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Question Bank is designed strictly as per the latest syllabus and exam pattern.

Hire Purchase and Instalment Sale Transactions – CA Inter Accounts Question Bank

Question 1.
Explain the special features of hire purchase agreement. (Nov 2017, 4 marks)
Answer:
1. Possession:
The hire vender transfers possession of the goods to the hire purchaser immediately after the contract of hire purchase is made.

2. Installments:
The goods are delivered by hire vender on the condition that a hire purchaser should pay the amount in periodical installments.

3. Down Payment:
The hire purchaser generally makes a down payment i.e., an amount on signing the agreement.

4. Constituents of Hire Purchase Installments:
Each installment consists partly of a finance charges (interest) and partly of a capital payment.

5. Ownership:
The property in goods is to pass to the hire purchaser on the payment of the last installment and exercising the option conferred upon him under the agreement.

6. Repossession:
In case of default in respect of payment of even the last installment, the hire vendor has the right to take the goods back without making any compensation.

Question 2.
A acquired on 1st January 2003 a machine under a Hire-Purchase agreement which provides for 5 half-yearly Instalments of ₹ 6,000 each, the first installment being due on 1st July 2003. Assuming that the applicable rate of interest Is 10 percent per annum, calculate the cash value of the machine. All working should form part of the answer. (May 2003, 8 marks)
Answer:

Question 3.
Ram & Co. acquired a motor lorry on hire- purchase basis. It has to make cash down payment of ₹ 1,00,000 at the beginning. The payments to be made subsequently are ₹ 2,63,000; ₹ 1,85,000 and ₹ 1,14,000 at the end of first year, second year and third year respectively, Interest charged is @ 14% per annum. Calculate th cost price of motor lorry and Interest paid in each installment. (May 2008, 4 marks)
Answer:

Working Note:
Third Instalment = ₹ 1,14,000
lnterest= \(\frac{1,14,000 \times 14}{114}\) = 14,000(I₁)
Principal = ₹ 1,00,000 (P₁)

Second Instalment = ₹ 1,85,000
Amount outstanding = ₹ 1,00,000
Total 1,85,000 + 1,00,000 = ₹ 2,85,000
Interest) = \(\frac{2,85,000 \times 14}{114} \) = 35,000 (I₂)
∴ Principal = 1,50,000 (P₂)

Question 4.
From the following. calculate the cash price of the asset:

	₹
Hire purchase price of the asset	50,000
Down payment	10,000
Four annual installments at the end of each year	10,000
Rate of Interest	5% p.a.

(May 2010, 2 marks)
Answer:
Computation of Cash Price of the Asset

Number of Instalments	Closing balance	Amount of Installment	Total	Interest 5/105	Opening balance
4	0	10,000	10,000	476	9,524
3	9,524	10,000	19,524	930	18,594
2	18,594	10,000	28,594	1,362	27,232
1	27,232	10,000	37,232	1,773	35,459

Cash price of the asset
= Down payment + ₹ 35,459
= ₹ 10,000 + ₹ 35,459
= ₹ 45,459

Question 5.
On 1st April 2012 Fastrack Motors Co. sells a truck on hire purchase basis to Teja Transport Co. for a total hire purchase price of ₹ 9,00,000 payable as to ₹ 2,40,000 as down payment and the balance in three equal annual installments of ₹ 2,20,000 each payable on 31st March 2013, 2014 and 2015. The hire vendor charges interest @10% per annum. You are required to ascertain the cash price of the truck for Teja Transport Co. Calculations may be made to the nearest rupee. (Nov 2012, 5 marks)
Answer:
Ratio of Interest and amount due = \(\frac{\text { Rate of Interest }}{100+\text { Rate of Interest }}=\frac{10}{110}=\frac{1}{11} \)
There is no interest element in the down payment as it is paid on the date of the transaction. Instalments paid after certain period include interest portion also. Therefore, to ascertain cash price, interest will be calculated from last instalment to first instalment in the following way:

Total cash price = 5,47,107 + 2,40,000 (down payment) = ₹ 7,87,107.
Working Notes:
(i) ₹ 2,00,000 + 2nd instalment of ₹ 2,20,000 = ₹ 4,20,000
(ii) ₹ 3,81,818 + 1st instalment of ₹ 2,20,000 = ₹ 6,01,818

Question 6.
A Ltd., purchased a machinery on hire purchase basis from B Ltd. on the following terms:
(a) Cash Down Payment – 33-1/3%, (b) Three hall-yearly instalments of ₹ 16,400, ₹ 14,880, and ₹ 12,600, the first to commence at the end of 6 months from the date of cash down payment, (c) Interest to be charged by the vendor 10% p.a. calculated on half yearly rests. Compute the Cash Price of the Machine.
Answer:

Let the Cash Price = X
X = ₹ 40,000+33 – 1/3% of X
66-2/3% of X =₹ 40,000
X =₹ 60,000

Question 7.
On 1.1.2018 XYZ Ltd. purchased a machine on hire purchase basis. The terms of agreement provided for 40% as cash down payment and the balance in three Instalments of ₹ 1,63,000 on 31.12.2018 ₹ 1,20,000 on 31.12.2019 and ₹ 1,10,000 on 31.12.2020. The rate of interest charged by the vendor is 10% p.a. compounded annually. Calculate the Cash Price.
Answer:

Let the Cash Price be X
X = ₹ 3,00,000 + 40% of X
0.6 X = ₹ 3,00,000
X = ₹ 3,00,000/0.6 = ₹ 5,00,000

Question 8.
On 1.1.2017 XYZ Ltd. purchased a machine from ABC Ltd. on hire purchased basis. The terms of agreement provided for 40% as cash down payment and the balance in three instalments of ₹ 1,30,000 on 31.12.201 7, ₹ 1,20,000, on 31 .1 2.2018 and ₹ 1,21,000, on 31 .12.201 9. The rate of interest charged by the vendor is 10% p.a. compounded annually. Calculate the Cash Price.
Answer:

Let the Cash Price be X
X = ₹ 3,00,000 + 40% of X
0.6 X = ₹ 3,00,000
X = ₹ 3,00,000/0.6 = ₹ 5,00,000

Question 9.
Mr. X purchased a machine on hire-purchase system. ₹ 30,000 being paid on delivery and the balance In five installments of ₹ 60,000 each, payable annually on 31st December. The cash price of the machine was ₹ 3,00,000. Compute the amount of interest for each year. (May 2009, 2 marks)
Answer:
1st year = Amount outstanding for interest after down payment, 3,00.000
2nd year = Amount outstanding for interest after 1st Instalment 2,40,000
3rd-year Amount outstanding for interest alter 2nd installment 1,80,000
4th year = Amount outstanding for interest after 3rd instalment 1,20,000
5th year = Amount outstanding for interest after 4th instalment 60,000
Total interest = Hire Purchase price – Cash Price
= 3,30,000 -3,00,000= 30,000
Installment outstanding ratio= 3.00,000:2,40,000:1,80,000:120,000:60,000 = 5:4:3:2:1

Question 10.
On 1st April 2009, a car company sold to Arya Bros., a motor car on hire- purchase basis. The total hire-purchase price was ₹ 4,60000 with down payment of ₹ 1,60,000. Balance amount was to be paid in three annual instalments of ₹ 1,00,000 each. The first instalment payable on 31st March 2010. The cash price of the car was ₹ 4,00,000. How will Arya Bros. account for interest over three accounting years assuming books of accounts are dosed on 31st March every year. (May 2010, 2 marks)
Answer:
Total interest on hire purchase transactions = ₹ 4,60,000 – ₹ 4,00,000 = ₹ 60,000
As balance payment is made in three equal installments, so interest is to be allocated in the ratio of 3 : 2: 1
Interest for 1st year = ₹ 60,000 x \(\frac{3}{6}\) = ₹ 30,000
2nd year = ₹ 60,000 x \(\frac{2}{6}\) = ₹ 20,000
3rd year = ₹ 60,000 x \(\frac{1}{6}\) = ₹ 10,000

Question 11.
Jai Ltd. purchased a machine on hire purchase basis from KM Ltd. on the following terms:
(a) Cash price ₹ 1,20,000.
(b) Down payment at the time of signing the agreement on 1-1-2016,₹ 32,433.
(c) 5 annual installments of ₹ 23,100, the first to commence at the end of twelve months from the date of down payment.
(d) Rate of interest is 10% p.a.
You are required to calculate the total interest and interest included in each installment. Also prepare the Ledger Account of KM Ltd. in the books of Jal Ltd. (Jan 2021, 8 marks)

Question 12.
XYZ Ltd. purchased a machine on Hire Purchase System. The total cost price of the machine was ₹ 30,00,000 payable 20% down and four annual installments of ₹ 8,40,000, ₹ 7,80,000, ₹ 7,20,000 and ₹ 6,60,000 at the end of first, second, third and fourth years respectively. Calculate the interest included in each year’s instalment assuming that the sales were made at the beginning of the year.
Answer:
Hire Purchase Price = Down Payrrierit + Instalments
= ₹ 6,00.000 + (₹ 8,40,000 + ₹ 7,80,000 + ₹ 720,000 + ₹ 6,60,000)
Total Interest = H.P.Price – Cash Price =₹ 36,00,000 – ₹ 30,00,000 = ₹ 6,00,000

Question 13.
Calculate the amount of Interest and Instalments in each of the following alternatives.

Answer:

Question 14.
Happy Valley Florists Ltd. acquired a delivery van on hire purchase on 01.04.2010 from Ganesh Enterprises. The terms were as follows:

Particulars	Amount (₹)
Hire Purchase Price	1,80,000
Down Payment	30,000
1st installment payable after 1 year	50,000
2nd installment after 2 years	50,000
3rd installment after 3 years	30,000
4th installment after 4 years,	20,000

Cash price of van ₹ 1,50,000 and depreciation is charged at 10% WDV.
You are required to
(i) Calculate Total Interest and Interest induded in each installment.
(ii) Prepare Van A/c., Ganesh Enterprises A/c. in the books of Happy Valley Florists Ltd. up to 31.032014. (May 2014, 8 marks)
Answer:
CaIcultion of Total Interest & Interest Included In Each Installment.
Total Interest = Hire Purchase Price – Cash Price
= ₹ 1,80,000 – ₹1,50,000
= ₹ 30,000

Total Interest will be spread in the Ratio of Hire Purchase Price outstanding at the beginning of each year.
Ratio of Hire Purchase Price Outstanding at the beginning of each year
= 1,50,000:1,00,000:50,000:20,000
=15:10:5:2

Question 15.
On 1st April 2017, Mr. Nilesh acquired a Tractor on Hire purchase from Raj Ltd. The terms of contract were as follows;
(i) The Cash price of the Tractor was ₹ 11,50,000.
(ii) ₹ 2,50,000 were to be paid as down payment on the date of purchase.
(iii) The Balançe was to be paid in annual instalments of ₹ 3,00,000 plus interest at the end of the year.
(iv) Interest chargeable on the outstanding balance was 8% p.a.
(v) Deprecation @ 10% p.a is to be written off using straight line method.
Mr. Nilesh adopted the Interest Suspense method for recording his Hire purchase transactions.
You are required to:
Prepare the Tractor account, Interest Suspense account, and Raj Ltd.s’ account in the books of Mr. Nilesh. (Nov 2020, 8 marks)

Question 16.
Omega Corporation sells computers on hire purchase basis at cost plus 25%. Terms of sales are ₹ 10,000 as down payment and 8 monthly instalments of ₹ 5,000 for each computer. From the following particulars prepare Hire Purchase Trading Account for the year 1999. As on 1st January, 1999 last Instalment on 30 computers was outstanding as these were flot due up to the end of the previous year.

During 1999 the firm sold 240 computers. As on 31st December, 1999 the position of instalments outstanding were as under:
1. Instalments due but not collected:
2 instalments on 2 computers and last instalment on 6 computers. Instalments not yet due: ‘
8 instalments on 50 computers, 6 instalments on 30 and last instalment on 20 computers.
Two computers on Which 6 instalments were due and one instalment not yet due on 31.12.99 had to be repossessed. Repossessed stock is valued at 50% of cost. All other instalments have been received. (May 2000, 10 marks)
Answer:

Question 17.
Welwash (Pvt.) Ltd. sells washing machines for outright cash as well as on hire-purchase basis. The cost of a washing machine to the company is ₹ 10,500. The company has fixed casti price of the machine at ₹ 12,300 and hire-purchase price at ₹ 13,500 payable as to ₹ 1,500 down and the balance in 24 equal monthly nstalments of ₹ 500 each.
On 1st April, ₹ 2000 the company had 26 washing machines lying in its showroom. On that date 3 instalments had fallen due, but not yet received and 675 instalments were yet to fall due in respect of machines lying with the hire-purchase customers.

During the year ended 31st March, 2001 the company sold 130 machines on cash basis and 80 machines on hire-purchase basis. After paying five monthly instalments, one customer failed to pay subsequent instalments and the company had to repossess the washing machine.

After spending ₹ 1,000 on it, the company resold it for ₹ 11,500.
On 31st March 2001 there were 21 washing machines in stock, 810 installments were yet to fall due and 5 installments had fallen due, but not yet received In respect of washing machines lying with the hire-purchase customers. Total selling expenses and office expenses including depreciation on fixed assets totaled ₹ 1,60,000 for the year. You are required to prepare for the Accounting Year ended 31st
March 2001:
(i) Hire-purchase Trading Account, and
(ii) Trading and Profit & Loss Account showing net profit earned by the company after making provision for Income-tax @ 35%. (Nov 2001,16 marks)
Answer:

Question 18.
Sameera Corporation sells Computers on Hire-purchase basis at cost plus 25%. Terms of sales are 5,000/- as Down payment and 10 monthly instalments of 2,500/- for each Computer. From the following particulars. prepare Hire-purchase Trading A/c for the year 2002-03:
As on 1st April, 2002, last instalment on 20 Computers were Outstanding as these were not due upto the end of the previous year. During 2002-03, the Firm sold 120 Computers. As on 31st March 2003 the position of instalments outstanding were as under:
Instalments due but riot collected 4 Instalments on 4 Computers and Last instalment on 9 Computers.
Instalment not yet due 6 Instalments on 50 Computers, 4 Instalments on 20, and Last Instalment on 40 Computers.
Two Computers on which 8 Instalments were due and one Instalment not yet due on 31.03.2003, had to be repossessed. Repossessed stock is valued at 50% of cost. All other Instalments have been received. (May 2004, 14 marks)
Answer:

Question 19.
ABC Ltd. sells goods on Hire-purchase by adding 50% above cost from the following particulars, prepare Hire-purchase Trading account to reveal the profit for the year ended 31.3.2005:

		₹
1.4.2004	Installments due but not collected	10,000
1.4.2004	Stock at shop (at cost)	36,000
1.4.2004	Installment not yet due	18,000
31.3.2005	Stock at shop	40,000
31.3.2005	Installment due but not collected	18,000

Others details:
Total instalments became due . 1,32,000
Goods purchased 1,20,000
Cash received from customers 1,21,000

Goods on which due instalments could not be collected were repossessed and valued at 30% below original cost. The vendor spent ₹ 500 on getting goods overhauled and then sold for ₹ 2,800. (May 2005, 16 marks)
Answer:

Question 20.
S Ltd. has a Hire-purchase department. Goods are sold on hire-purchase at cost plus 60%. From the following particulars draft Hire-purchase trading account and compute profit or loss for the year ended 31st March 2007:
Goods with customers on 1.4.2006 (installments are not due) 3.20.000
instalments due on 1.4.2006 (customers are paying) 20,000
Goods sold on hire-purchase during the year 16,00,000
(Le., from 1.4.2006 to 31.3.2007)
Cash received from customers 11,20,000
Goods re-possessed from customers valued at 40% 16,000
Unpaid instalments in respect of re-possessed goods 40,000
Goods with customers as on 31.3.2007 720,000
(at hire-purchase price) (May 2007, 8 marks)
Answer:
Working Notes:
1. Opening H.P. Stock reserve, 3,20,000 x \(\frac{60}{160}\) ₹ 1,20,000
2. Loading on goods sold on H.P 16,00,000 x \(\frac{60}{160}\) ₹ 6,00,000
3. Closing H.P. Stock reserve 7,20,000 x \(\frac{60}{160}\) ₹ 2,70,000
4. Commutation of instalments due at the end of the year Opening H.P. Stock + Opening Instalments clue + H.P. Sales

Question 21.
Wye sells goods on Hirepurchase. The term of purchase at cost plus 50% prepare Hire-purchase Trading A/c from the information given below:

	₹
Stock with customers on hire-purchase price (Opening)	1,62,000
Stock in hand at shop (Opening)	3,24,000
Installments overdue (Opening)	1,35,000
Purchases during the year	10,80,000
Goods repossessed (Instalments not due 36,000)	9,000
Stock at shop excluding re-possessed goods (Closing)	3,60,000
Cash received during the year	10,35,000
Installments overdue (Closing)	1,62,000

The vendor spent ₹ 2000 on goods re-possessed and then sold it for ₹ 15,000. (Nov 2008, 8 marks)
Answer:

Question 22.
On 1st April. 2012, M/s. Power Motors sold on hire purchase basis a truck whose cash price was ₹ 9,00,000 to MIs. Singh & Singh, a firm of transporters. The terms of the contract were that the transporters were to pay ₹ 3,00,000 down and six four-monthly instalments of ₹ 1,00,000 plus interest on outstanding amount of cash price for the intervening four months. The instalments were payable on 31st July, 30th November and 31st March in each one of the two accounting years. Interest was calculated @ 12% per annum. M/s. Singh & Singh duly paid the instalment on 31st July 2012 but failed to pay the instalment on 30th November 2012. M/s. Power Motors, after legal formalities, repossessed the truck valuing it at ₹ 7,00000.

M/s. Power Motors spent? 80,000 on repairs and repainting of the truck and on 7th January 2013 sold it for ₹ 7,50,000 cash. You are required to prepare the account of M/s. Singh & Singh and Goods Repossessed Account in the books of Mis. Power Motors. (May 2013, 6 marks)
Answer:

Question 23.
Lucky bought 2 tractors from Happy on 1-10-2011 on the following terms:
Down payment ₹ 5,00,000
1st installment at the end of first year ₹ 2,65,000
2nd installment at the end of 2nd year ₹ 2,45,000
3rd installment at the end of 3rd year ₹ 2,75,000
Interest is charged at 10% p.a.
Lucky provides depreciation @ 20% on the diminishing balances.

On 30-9-2014 Lucky failed to pay the 3”’ installment upon which Happy repossessed 1 tractor. Happy agreed to leave one tractor with Lucky and adjusted the value of the tractor against the amount due. The tractor taken over was valued on the basis of 30% depreciation annually on written down basis. The balance amount remaining in the vendor’s account after the above adjustment was paid by Lucky after 3 months with interest @ 18% p.a.
You are required to:
(1) Calculate the cash price of the tractors and the interest paid with each installment.
(2) Prepare Tractor Account and Happy Account In the books of Lucky assuming that books are closed on September 30 every year. Figures may be rounded off to the nearest rupee. (May 2015, 8 marks)
Answer:

Question 24.
Girish Transport Ltd., purchased from NCR Motors 3 electric rickshaws costing ₹ 60,000 each on the hire purchase system on 1.1.2013. Payment was to be made ₹ 30,000 down and the remainder in 3 equal Installments payable on 31.12.2013,31.12.2014 and 31.12.2015 together with interest @ 10% p.a. Girish Transport Ltd. writes oft depreciation @ 20% p.a. on the reducing balance. It paid the installment due at the end of 1st year i.e. 31.12.2013 but could not pay next on 31.12.2014. NCR Motors agreed to leave one e-rickshaw with the purchaser on 31.12.2014 adjusting the value of the other two e-rickshaws against the amount due on 31.12.2014.
The e-rickshaws were valued on the basis of 30% depreciation annually on WDV basis.
Show the necessary Ledger accounts in the books of Girish Transport Ltd. for the year 2013, 2014 and 2015. (May 2016, 8 marks)
Answer:

Loss per Auto rickshaw
= 38,400 – 29,400
= 9,000
Total loss = 9,000 x 2 = 18,000

Question 25.
Srikumar bought 2 cars from ‘Fair Value Motors Pvt Ltd. on 1-4-2012 on the following terms:
Down payment 6,00.000
1st Installment at the end of first year 4,20,000
2nd Installment at the end of 2nd year 4.90,000
3rd Installment at the end of 3rd year 5,50.000
Interest is charged at 10% p.a.
Srikumar provides depreciation @ 25% on the diminishing balances.

On 31-3-15 Srikumar failed to pay the 3 installment upon which ‘Fair Value Motors Pvt Ltd.’ repossessed 1 car. Srikumar agreed to leave one car with Fair Value Motors Pvt Ltd. and adjusted the value of the car against the amount due. The car taken over was valued on the basis of 40% depreciation annually on written down basis.

The balance amount remaining in the vendor’s account after the above adjustment was paid by Srikumar after 3 months with interest @ 20% p.a.

You are required to:
(i) Calculate the cash price of the cars and the interest paid with each installment.
(ii) Prepare Car Account and Fair Value Motors Pvt Ltd. Account in the books of Srikumar assuming books are closed on March 31, every year. Figures may be rounded off to the nearest rupee. (Nov 2016, 8 marks)
Answer:

Question 26.
M/s Amar bought six Scooters from M/s Bhanu on 1” April 2015 on the following terms:
Down payment, ₹ 3,00,000
1st installment payable at the end of 1st year ₹ 1,59,000
2nd installment payable at the end of 2nd year ₹ 1,47,000
3rd instalment payable at the end of 3rd year ₹ 1,65,000
Interest is charged at the rate of 10% per annum.
M/s Amar provides depreciation @ 20% per annum on the diminishing balance method.

On 31st March, 2018 M/s Amar failed to pay the 3 instalment upon which M/s Bhanu repossessed two Scooters. M/s Bhariu agreed to leave the other four Scooters with M/s Amar and adjusted the value of the repossessed Scooters against the amount due. The Scooters taken over were valued on the basis of 30% depreciation per annum on written down value.

The balance amount remaining in the vendor’s account after the above adjustment was paid by M/s Amar after 5 months with interest @ 15% per annum. M/s Bhanu incurred repairing expenses of ₹ 15,000 on repossessed scooters and sold scooters for ₹ 1,05,000 on 25 April, 2018.
You are required to:
1. Calculate the cash price of the Scooters and the interest paid with each instalment.
2. Prepare Scooters Account and M/s Bhanu Account in the books of M/s Amar.
3. Prepare Goods Repossessed Account in the books of M/s Bhanu. (May 2019,10 marls)
Answer:

Question 27.
A Machinery is sold on l-lire Purchase. The terms of purchase is 4 Annual Instalments of ₹ 6000 at the end of ‚each year commencing from the date of agreement. Interest is charged @ 20% and is included in the annual payment of ₹ 6000. Show Machinery A/c and Hire Vendor A/c in the books of the Hire Purchaser who defaulted in the payment of the 3 yearly payments whereupon the Vendo repossessed the Machinery. The Hire Purchaser provides Depreciation on Machine at 10% p.a.
Answer:

Question 28.
ABC Transporters Ltd. purchased from Hans Motors 3 Trucks costing ₹ 50000 each on the Hire Purchase System on 01.01.2016. Payment was to be made 30,000 clown and the remainder in 3 equal annual instalments payable on 31.12.2009, 31.12.2017 and 31.12.2018 together with interest at 9% pa. ABC Transporters Ltd. writes off depreciation at 20% on the diminishing balance. It paid the instalment due at the end of the first year i.e. 31.122016 but could not pay the next on 31.12.2017.

Hans Motors agreed to leave one Trucks with the purchaser on 01.01.2018 adjusting the value of other 2 Trucks against the amount due on 01.01.2018. The Trucks were valued on the basis of 30% depreciation annually. Prepare the necessary accounts in the books of ABC Transporters Ltd. for the years 2016, 2017 and 2018.
Answer:

Question 29.
Y Ltd. sold 3 Machinery for a total cash salo price of 6,00,00 on hire purchase basis to X on 1.1.2018. The terms of agreement provided for 30% as cash down and the balance of the cash price in three equal instalments together with interest at 10% per annum compounded annually. The instalments were payable as per the following schedule:
1st instalment on 31.12.2019; 2nd instalment on 31.12.2020 and 3rd instalment on 31.12.2021. X paid the 1 instalment on time but failed to pay thereafter. On his failure to pay the second instalment, Y Ltd. repossessed two machineries and valued them at 50% of the cash price. X charges 10% p.a. depreciation on straight line method. Prepare necessary ledger accounts in the books of X for 2018-2020.
Answer:

Question 30.
ABC and Co. purchased seven trucks on hire purchase on 1 July, 2018. The cash purchase price of each truck was ₹ 50,000. The company has to pay 20% of the cash purchase price at the time of delivery and the balance in five half-yearly instalment starting from 31st December. 2018 with interest at 5% per annum at half yearly rest. On the Company’s failure to pay the instalment due on 30th June 2019 it was agreed that the Company would return 3 trucks to the vendor and the remaining four
would be retained. The vendor agreed to allow him a credit for the amount paid against these 3 trucks less 25%. Vendor after spending ₹ 1,000 on repairs sold away all the three trucks for ₹ 40,000.
Prepare the relevant Accounts in the books of the purchaser and vendor assuming the books are closed in June every year and depreciation @ 20% p.a. is charged on Trucks.
Answer:

Question 31.
On 1.1.2018 X, a television dealer, bought 5 television sets from LG Television Co. on hire-purchase. The cash price of each set was ₹ 20,000. It was agreed that ₹ 25,000 should be paid immediately and the balance in three instalments of ₹ 30,000 each at the end of each year. The LG Television Co. charges interest @ 10% p.a. The buyer depreciates television sets at 20% p.a. on the diminishing balance method.

X paid cash down and two instalments but failed to pay the last instalment. Consequently, the LG Television Co. repossessed three sets, leaving two sets with the buyer and adjusting the value of 3 sets against the amount due. The sets repossessed were valued on the basis of 30% depreciation p.a. on the written down value. The sets repossessed were sold by the LG Television Co. for ₹ 30,000 after necessary repairs amounting to ₹ 5,000 on 30th June 2021. Open the necessary ledger account in the books of both the parties.
Answer:


Working Notes:
(i) Total Interest = Hire Purchase Price – Cash Price
= [₹ 25,000 + (₹ 30000 x 3)) – (₹ 20,000 x 5)
= ₹ 1,15,000 – ₹ 1,00,000 = ₹ 15,000
(ii) Interest for 3 year = ₹ 15,000 – ₹ 7,500 – ₹ 5,250 = ₹ 2,250
(iii) Agreed Value of 3 TV Repossessed on the bases of depreciation @ 30% p.a.

Question 32.
The following particulars relate to hire purchase transactions:
(a) X purchased three cars from Y on hire purchase basis, the cash price of each car being ₹ 2,00000.
(b) The hire purchaser charged depreciation @ 20% on diminishing balance method.
(c) Two cars were seized by on hire vendor when second installment was not paid at the end of the second year. The hire vendor valued the two cars at cash price less 30% depreciation charged under It diminishing balance method.
(d) The hire vendor spent 10,000 on repairs of the cars and then sold them for a total amount of ₹ 1,70,000.

You are required to compute:
(i) Agreed value of two cars taken back by the hire vendor.
(ii) Book value of car left with the hire purchaser.
(iii) Profit or loss to hire purchaser on two cars taken back by their hire vendor.
(iv) Profit or loss of cars repossessed when sold by the hire vendor.
Answer:

Question 33.
Distinguish between Hire Purchase system and Installment system. (Nov 2014, 4 marks each)
Answer:
Differences between Hire Purchase and Installment System

Basis of Distinction	Hire Purchase Agreement’	Installment Purchase Agreement
1. Governing Act	It is governed by Hire Purchase Act, 1972.	It is governed by the Sale of Goods Act, 1930.
2. Nature of Contract	It is an agreement of hiring.	It is an agreement of sale.
3. Passing of Title (ownership)	The title to goods passes on last payment.	The title to goods passes immediately as in the case of usual sale.
4. Right to Return goods	The hirer may return goods without further payment except for accrued installments.	Unless seller defaults, goods are not returnable.
5. Seller’s right to repossess	The seller may take possession of the goods if hirer is in default.	The seller can sue for price the buyer is ¡n default. He cannot take possession of the goods.
6. Right of Disposal	Hirer cannot hire out, sell, pledge or assign entitling transferee to retain possession as against the hire vendor.	The buyer may dispose off the goods and give good title to the bonafide purchaser.
7. Responsibility for Risk of Loss	The hirer is not responsible for risk of loss of goods if he has taken reasonable precautions because the ownership has not yet been transferred.	The buyer is responsible for risk of loss of goods because the ownership has transferred.
8. Name of Parties Involved	The parties involved are called Hirer and Hire vendor.	The parties involved are called buyer and seller.
9. Component other than cash price.	Component other than Cash Price included in installment is called Hire charges.	Component other than Cash Price included in Installment is called Interest.

Insurance Claims for Loss of Stock and Loss of Profit – CA Inter Accounts Question Bank is designed strictly as per the latest syllabus and exam pattern.

Insurance Claims for Loss of Stock and Loss of Profit – CA Inter Accounts Question Bank

Question 1.
Write short notes on the following:
Average clause under Fire insurance Policy. (Nov 2005, 5 marks)
Answer:
The objective of average clause ¡s discouraging the insured to under insurance. It is not necessary to include average clause in fire insurance policy. It is applicable only in those areas where the insured has underinsured. Underinsurance Implies that insurance made for the lesser value of stock. It the amount of policy is less than the estimated value of stock destroyed, then the insurance company will settle the claim proportionately by applying the average dause. On applying average clause, actual claim can be determined as:
Claim = Loss suffered × \(\frac{\text { Insurance Policy Value }}{\text { Actual Insurable Value }}\)
Note: In case the account insured is more than actual stock value, average clause is not applicable.

Question 2.
Answer the following:
What is average clause under insurance claim? (May 2009, 2 marks)
Answer:
When a businessman wants to reduce the burden of Insurance Premiums and wants to take an insurance policy which Is less than the value of average stock, it Is known as under insurance. For discouraging the under-insurance, fire insurance policies contain an average clause. In such a case, the net claim is calculated by using following formula.
Amount of claim = \(=\frac{\text { Amount of Policy }}{\text { Insurable Amount }}\) × Actual Loss

Question 3.
Mr. ‘A prepares accounts on 30th September each year, but on 31st December 2001 fire destroyed the greater part of his stock. Following information was collected from his books:
Stock as on 1.10.2001 ₹ 29,700
Purchases from 1.1 0.2001 to 31.12.2001 ₹ 75,000
Wages from 1.10.2001 to 31.12.2001 ₹ 33,000
Sales from 1.10.2001 to 31.12.2001 ₹ 1,40,000
The rate of Gross Profit is 33 % on cost. Stock to the value of ₹ 3,000 was salvaged. Insurance policy was for ₹ 25,000 and Claim was subject to average clause.

Additional Informations:
(i) Stock, in the beginning, was calculated at 10% less than cost.
(ii) A Plant was installed by firm’s own worker. He was paid ₹ 500, which was included in wages.
(iii) Purchases include the purchase of the plant for ₹ 5,000. You are required to calculate the claim for the loss of Stock. (Nov 2002, 7 marks)
Answer:

Question 4.
A fire occurred in the workshop of Mr. A on 31st March 2006 where a large part of the stock was destroyed. Scrap realised ₹7,500. Mr. A gives you the following information for the period of 1st January to 31st March 2006:
(i) Purchases ₹42,500
(ii) Sales ₹ 45,000
(iii) Goods costing ₹ 1,000 were taken by Mr. A for personal use.
(iv) Cost price of stock on 1st January 2006 was ₹ 20,000.
(v) Over the past few years. Mr. A has been selling goods at a consistent gross profit margin of 30%.
(vi) The Insurance policy was for ₹ 25,000. It included an average clause. Prepare a statement of claim to be made on the Insurance Company by Mr. A. (May 2006, 6 marks)
Answer:

Working Note:
(1) Calculations of Gross Profit:
GP Ratio = \(\frac{\text { Gross Profit }}{\text { Sales }} \times 100\)
30 = \(\frac{\mathrm{GP}}{45,000} \times 100\)
\(\frac{30 \times 45,000}{100}\) = GP
Gross Profit = ₹ 13,500

Statement of claim to be made on the insurance co., by Mr. A Average Clause = \(\frac{\text { Amt. of Policy }}{\text { Value of Stock }} \times \text { Actual loss of Stock } \) = \(\frac{25,000}{30,000}\) × (30,000 – 7500 Salvage) ₹ = 18.750
Claim to be made by A = ₹ 18,750.

Question 5.
On 2.6.2007 the stock of Mr. Black was destroyed by fire. However,
following particulars were furnished from the records saved:
Stock at cost on 1.4.2006 ₹1,35,000
Stock at 90% of cost on 31.3.2007 ₹ 1,62,000
Purchases for the year ended 31.3.2007 ₹ 6,45,000
Sales for the year ended 31.3.2007 ₹ 9,00,000
Purchases from 1.4.2007 to 2.6.2007 ₹ 2,25,000
Sales from 1.4.2007 to 2.6.2007 ₹ 4,80,000
Sales up to 2.6.2007 includes 75,000 being the goods not dispatched to the customers. The sales invoice price is ₹ 75,000. Purchases upto 2.6.2007 includes a machinery acquired for ₹15,000. Purchases up to 2.6.2007 does not include goods worth ₹ 30,000 received from suppliers, as invoice not received up to the date of fire. These goods have remained in the godown at the time of fire. Value of stock salvaged from fire 22,500 and this has been handed over to the insurance company. The insurance policy is for ₹1,20,000 and it is subject to average clause. Ascertain the amount of claim for loss of stock. (May 2007, 8 marks)
Answer:

Question 6.
On 11.11.2007 the premises of Rocky Ltd. was destroyed by fire. The following information is made available:
Stock as on 1.4.2006 ₹ 3,75,000
Purchases from 1 .4.2006 to 31.3.2007 ₹ 5,20,000
Sales from 1.4.2006 to 31.3.2007 ₹ 8,55,000
Stock as on 31.3.2007 ₹ 2,00,000
Purchase from 1.4.2007 to 11.11.2007 ₹ 3,41,000
Sales from 1.4.2007 to 11.11.2007 ₹ 4,35,500
In valuing the stock on 31.3.2007. due to damage, 50% of the value of the stock which originally cost ₹ 22,000 was written off. In June 2007 about 50% of this stock was sold for ₹ 5,500 and the balance of obsolete stock is expected to realise the same price (i.e. 50% of the original cost). The gross profit ratio is to be assumed as uniform in respect of other sales. Stock salvaged from fire amounts to ₹ 11,500. Compute the value of stock lost in fire. (May 2008, 8 marks)
Answer:

Working Note 2:
Calculation of Gross Profit rate
GP Ratio = \(\frac{G P}{\text { Sale }} \times 100 \)
= \(\frac{171,000}{8,55,000} \times 100\) = 20%

Question 7.
A fire broke out in the godown of a business house on 8th July 2009. Goods costing ₹ 2,03,000 in a small sub-godown remain unaffected by fire. The goods retrieved in a damaged condition from the main godown were valued at ₹ 1,97,000.
The following particulars were available from the books of accounts:
Stock on the last Balance Sheet date at 31st March 2009 was ₹ 15,72,000. Purchases for the period horn 1st April 2009 to 8th July 2009 were ₹ 37,10.000, and sales during the same period amounted to ₹ 52,60,000. The average gross profit margin was 30% on sales.
The business house has a fire insurance policy for ₹ 10,00.000 respect of its entire stack. Assist accountant of the business house in computing amount of claim of loss by fire.(Nov 2009, 8 marks)
Answer:

Calculation of amount of claim	₹	₹
Value of stock as on 8th July 2009 (Refer W. N.)		16,00,000
Less: Value of stock remaining unaffected by fire Agreed value of damaged goods	2,03,000 1,97,000	4,00,000
Loss of Stock		12,00,000

Applying average clause:
Amount of claim = \(\frac{\text { Amount of Policy }}{\text { Stock on the date of file }} \times \text { loss of Stock } \)
= \(\frac{₹ 10,00,000}{₹ 16,00,000} \times 12,00,000 \)
= ₹ 7,50,000

Question 8.
In January 2010 a firm took an insurance policy for ₹ 60 lakhs to insure goods in its godown against fire subject to average cLause. On 7th March 2010, a fire broke out destroying goods costing ₹ 44 Iakhs. Stock in the godown was estimated at ₹ 80 lakhs. Compute the amount of insurance claim. (May 2010, 2 marks)
Answer:
Amount of insurance daim Amount of insurance policy
= \(\text { Amount of loss due to fire } \times \frac{\text { Amount of insurance policy }}{\text { Total stock in the godown }}\)
= \( ₹ 44 \text { lakhs } \times \frac{₹ 60 \text { lakhs }}{₹ 80 \text { lakhs }}\) = ₹ 33 lakhs

Question 9.
On 30th March 2011 fire occurred in the premises of Mis Suraj Brothers. The concern had taken an insurance policy of ₹ 60.000 whIch was subject to the average clause. From the books of accounts, the following particulars are available relating to the period 1st January to 30th March 2011.
1. Stock as per Balance Sheet at 31st December 2010, ₹ 95,600
2. Purchases (including purchase of machinery costing ₹ 30,000) ₹ 1,70,000.
3. Wages (including wages? 3,000 for installation of machinery) ₹ 50,000.
4. Sales (including goods sold on approval basis amounting to ₹ 49,500.) ₹ 2,75,000. No approval has been received in respect of 2/3rd of the goods sold on approval.
5. The average rate of gross profit is 20% of sales.
6. The value of the salvaged goods was ₹ 12,300.
You are required to compute the amount of the daim to be lodged to the insurance company. (May 2011, 5 marks)
Answer:

2. Calculation of goods with customers
Since no approval for sale has been received for the goods of ₹ 33,000
(i.e. 2/3 of ₹ 49,500) hence, these should be valued at cost i.e. ₹ 33,000
– 20% of ₹ 33,000 = ₹ 26,400

3. Calculation of actual sales
Total Sales – Sale of goods on approval = ₹ 2,75,000 – ₹ 33,000 = ₹ 2,42,000.

Question 10.
A fire occurred in the premises of M/s. Fireproof Co.on 31st August 2010. From the following particulars relating to the period from 1st April 2010 to 31st August 2010 you are requested to ascertain the amount of claim to be filed with the insurance company for the loss of stock. The concern had taken an insurance policy for ₹ 60,000 which is subject to average clause.
(i) Stock as per Balance Sheet at 31-03-2010 ₹ 99,000
(ii) Purchases ₹ 1,70,000
(iii) Wages (including wages for the installation of a machine ₹ 3,000) ₹ 50,000
(iv) Sales ₹ 2,42,000
(V) Sale value of goods drawn by partners ₹ 15,000
(vi) Cost of goods sent to consignees on 16” August, ₹ 16,500 2010, lying unsold with them
(vii) Cost of goods distributed as free samples ₹ 1,500
While valuing the stock at 31 March 2010, ₹ 1,000 were written off in respect of a slow-moving item, The cost of which was ₹ 5,000. A portion of these goods were sold at a loss of ₹ 500 on the original cost of ₹ 2,500.
The remainder of the Stock is now estimated to be worth the original cost. The value of goods salvaged was estimated at ₹ 20,000. The average rate of gross profit was 20% throughout. (Nov 2011, 10 marks)
Answer:

Question 11.
On 29th August 2012, the godown of a trader caught fire and a large part of the stock of goods was destroyed. However, goods costing ₹ 108,000 could be salvaged incurring firefighting expenses amounting to ₹ 4,700. The trader provides you the following additional information:
Cost of stock on 1st April, 2011 ₹ 7,10,500
Cost of stock on 31st March, 2012 ₹ 7,90,100
Purchases during the year ended 31st March, 2012 ₹ 56,79,600
Purchases from 1st April 2012 to the date of fire ₹ 33,10,700
Cost of goods distributed as samples for advertising from 1st April 2012 to the date ol fire 41,000
Cost of goods withdrawn by trader for personal use from 1st April 2012 to the date of fire 2,000
Sales for the year ended 31st March, 2012 ₹ 80,00,000
Sales from 1st April 2012 to the date of fire ₹ 45,36,000
The insurance company also admitted fire fighting expenses. The trader had taken the life insurance policy for 9,00,000 with an average clause. Calculate the amount of the claim that will be admitted by the insurance company. (Nov 2012, 8 marks)
Answer:

Note: Because (policy amount is more than daim amount). Average clause will not apply. Hence, claim amount of only 7,79,300 Will be admitted by the Insurance Company.

Rate of Gross Profit in 2011 – 12
\(\frac{\text { Gross profit }}{\text { Sales }} \times 100=\frac{24,00,000}{80,00,000} \times 100\) = 30%

Question 12.
On 15th December 2012. a fire occurred on the premises of M/s. OM Exports. Most of the stocks were destroyed. Cost of stock salvaged being ₹ 1,40,000. From the books of account, the following particulars were available:
(i) Stock at the close of account on 31 March 2012 was valued at ₹ 9,40,000.
(ii) Purchases from 01-04-2012 to 15-12-2012 amountea to ₹ 13,20,000 and the sales during that period amounted to ₹ 20,25,000. On the basis of his accounts for the past three years, it appears that average gross profit ratio is 20% on sales. Compute the amount of the claim, if the stock were insured for ₹ 4,00,000. (May 2013, 5 marks)
Answer:

As the value of stock is more than insured value, amount of claim would be subject to average, clause.
Amount of Claim = \(\frac{\text { Amount of Policy }}{\text { Value of Stock }} \times \text { Actual Loss of Stock }\)
Amount of Claim = \(\frac{4,00,000}{6,40,000} \times 5,00,0000\) = ₹ 3,12,500

Question 13.
A fire occurred in the premises of M/s Kailash & Co. on 30th September 2013. From the following particulars relating to the period from 1st April 2013 to 30th September 2013, you are required to ascertain the amount of claim to be filed with the Insurance Company for the loss of stock. The company has taken an Insurance policy for ₹ 75,000 which is subject to average clause. The value of gn3ds salvaged was estimated at ₹ 27,000. The average rate of Gross Profit was 20% throughout the period.

Particulars	Amount in ₹
i. Opening Stock.	1,20,000
ii. Purchases made	2,40,000
iii. Wages paid (including wages for the Installation of a machine ₹ 5000)	75,000
iv. Sales	3,10,000
v. Goods taken by the Proprietor (Sale Value)	25,000
vi. Cost of goods sent to Consignee on 20th September 2013, lying unsold with them	18,000
vii. Free Samples distributed-Cost	2,500

(Nov 2014, 8 marks)
Answer:

Claim = \(\frac{\text { Loss }}{\text { Estimated stock }} \times \text { Policy Amount }\)
= \(\frac{1,14,500}{1,41,500} \times 75,000\)
Claim of Stock = ₹ 60,689

Question 14.
On 1st April 2016, the stock of Mr. Hariprasad was destroyed by fire but sufficient records were saved from which following particulars were as certained:
‘Stock at cost 1 Jan 2015 ₹ 1,47,000
Stock at cost 31st Dec. 2015 ₹ 1,59,200
Purchases year ended 31st Dec. 2015 ₹ 7,96.000
Sales year ended 31st Dec. 2015 ₹ 9,74,000
Purchases 1-1 -2016 to 31-3-2016 ₹ 3,24,000
Sales 1-1 -2016 to 31-3-2016 ₹ 4,62,400
In valuing the stock for the Balance Sheet at 31’ Dec. 2015 ₹ 4,600 had been written off on certain stock which was a poor selling line having the cost ₹ 13,800. A portion of these goods were sold in March 2016 at a loss of ₹ 500 on original cost of ₹ 6,900. The remainder of this stock was now estimated to be worth its original cost. Subject to the above exception gross profit had remained at a uniform rate throughout the year. The value of stock salvaged was ₹ 11,600. The policy was for ₹ 1,00,000 and was subject to average clause. Work out the amount of the claim of loss by fire. (Nov 2016, 8 marks)
Answer:

Normal Gross Profit Ratio = \(\frac{\text { GP }}{\text { Sales }} \times 100=\frac{1,94,800}{9,74,000} \times 100 \) = 20%.

Admissible claim = \(\text { Net claim } \times \frac{\text { Policy Amount }}{\text { Value of loss }}\)
= \(1,04,500 \times \frac{1,00,000}{1,16,100} \) = ₹ 90,00,8.61

Question 15.
On 27th July, 2016, a fire occurred in the godown of Mis. Vijay Exports and
most of the stocks were destroyed. However, goods costing ₹ 5,000 could be salvaged Their firefighting expenses were amounting to ₹ 1,300. From the salvaged accounting records, the following Information is available relating to the period from 1.4.2016 to 27.7.2016:
1. Stock as per balance sheet as on 31.3.2016 ₹ 63.000
2. Purchases (including purchase of machinery costing ₹ 10,000) ₹ 2,92,000
3. Wages (including wages paid for installation of machinery ₹ 3,000) ₹ 53,000
4. Sales (including goods sold on approval basis amounting to ₹ 40,000). No approval has been received in respect of 1/4th of the goods sold on approval. ₹ 4,12,300
5. Cost of goods distributed as free sample ₹ 2,000

Other Information:
i) While valuing the stock on 31.3.2016, ₹ 1,000 had been written off in respect of certain slow-moving items costing ₹ 4,000. A portion of these goods were sold in June, 2016 at a loss of ₹ 700 on original cost of ₹ 3,000. The remainder of these stocks is now estimated to be worth its original cost.
(ii) Past record shows the normal gross profit rate is 20%.
(iii) The insurance company also admitted firefighting expenses. The Company had taken the fire insurance policy of ₹ 55,000 with the average clause.
Compute the amount of daim of stock destroyed by fire, to be lodged to the Insurance Company. Also prepare Memorandum Trading Account to be for the period 1.4.2016 to 27.7.2016 for normal and abnormal items. (Nov 2017, 10 marks)
Answer:

Question 16.
On 30th March, 2018 fire occurred In the premises of M/s Alok & Co. The concern had taken an insurance policy of ‘ 1.20,000 which was subject to the average clause. From the books of accounts, the following particulars are available relating to the period 1st January to 30th March, 2018.
(i) Stock as per Balance Sheet at 31’ December, 2017 ₹ 1,91,200
(ii) Purchases (induding purchase of machinery costing ₹ 60,000). ₹ 3,40,000
(iii) Wages (including wages ₹ 6,000 for installation of ₹ 1,00,000 machinery)
(iv) Sales (including goods sold on approval basis ₹ 5,50,000 amounting to ₹ 99,000)
No approval has been received in respect of 2/3rd of the goods sold on approval.
(v) The average rate of gross profit is 20% of sales.
(vi) The value of the salvaged goods was ₹ 24,600
You are required to compute the amount of the claim to be lodged to the Insurance Company. (May 2018, 10 marks)
Answer:

A claim of ₹ 96,422 (approx) should be lodged by M/s. Alok & Co. to the insurance company.

For financial statement purposes, this would form part of dosing stock (since there is no sale). However, this has been shown separately for computation of claim for loss of stock since the goods were physically not with the concern and, hence, there was no loss of such stock.

2. CalculatIon of goods with customers Since no approval for sale has been received for the goods of ₹66,000 (i.e. ⅔ of ₹ 99,000) hence, these should be valued at cost i.e. ₹ 66,000- 20% of 66.000 = ₹ 52,800.

3. Calculation of actual sales Total sales – sales of goods on approval (⅔rd = ₹ 5,50,000 – ₹ 66,000 = ₹ 4,84,000

Question 17.
A tire engulfed the premises of a business of M/S Kite Ltd. in the morning, of 1st October, 2017. The entire stock was destroyed except, stock salvaged of ₹ 50,000. Insurance Policy was for ₹ 5,00,000 with average clause. The following information was obtained from the records saved for ‘the period from 1st April to 30th September 2017:

	₹
Sales	27,75,000
Purchases	18,75,000
Carriage inward	35,000
Carriage outward	20,000
Wages	40,000
Salaries	50,000
Stock in hand on 31st March’, 2017	3,50,000

Additional Information:
(1) Sales upto 30th September, 2017, includes ₹ 75,000 for which goods had not been dispatched.
(2) On 1st June. 2017, goods worth ₹ 1,98,000 sold to Hari on approval basis which was included In sales but no approval has been received in respect of 2/3rd of the goods sold to him till 30th September, 2017.
(3) Purchases up to 30th September 2017 did not Include ₹ 1,00,000 for which purchase invoices had not been received from suppliers, through goods have been received in godown.
(4) Past records show the gross profit rate of 25% on sales. You are required to prepare the statement of claim for loss of stock for submission to the Insurance Company. (Nov 2018, 10 marks)
Answer:

Insurance claim = ₹ 3,25,000
(Average clause is not applicable as insurance policy amount (₹ 5,00,000)
is more than the value of dosing stock i.e. ₹ 3,75,000)

Working Note:
1. Calculation of goods with customers Since no approval for sale has been received for the goods of ₹ 1,32,000 (i.e. 2/3 of ₹ 1,98,000) hence, these should be valued at cost i.e. ₹1,32,000 – 25% of ₹ 1,32,000 = ₹ 99,000.

2. For financial statement purposes, this would form part of closing stock (since there is no sale). However, this has been shown separately for computation of claim for loss of stock since the goods were physically not with the entity and, hence, there was no loss of such stock.

Question 18.
A Fire occurred In the premises of M/s B & Co. on 30th September. 2019. The firm had taken an insurance policy for ₹ 1,20,000 which was subject to an average dause. Following particulars were ascertained from the available records for the period from 1st April 2018 to 30th September 2019:

	Amount (₹)
Stock at cost on 01-04-2018	2,11,000
Stock at cost on 31-03-2019	2,52,000
Purchases during 2018-19	6,55,000
Wages during 2018-19	82,000
Sales during 2018-19	8,60,000
Purchases from 01-04-2019 to 30-09-2019 (including purchase of machinery costing 58,000)	4,48,000
Wages from 01-04-2019 to 30-09-2019 (including wages foc installation of machinery costing ₹ 7,000)	85,000
Sales from 01-04-2019 to 30-09-2019	6,02,000
Sale value of goods drawn by partners (1-4-19 to 30-9-19)	52,000
Cost of Goods sent to consignee on 18” September, 2019 lying unsold with them	44,800
Cost of Goods distributed as free samples	8,500

While valuing the Stock at 31st March, 2019, ₹ 8,000 were written off in respect of a slow moving item, cost of which was ₹ 12,000. A poflion of these goods were sold at a loss of ₹ 4,000 on the original cost of ₹ 9,000.
The remainder of the stock is estimated to be worth the odginal cost. The value of Goods salvaged was estimated at ₹ 35,000.
You are required to ascertain the amount of claim to be lodged with the Insurance Company for the loss of stock. (Nov 2020, 10 marks)

Question 19.
A Fire occurred in the premises of M/S MJ & Co., on 31st December 2019. From the following particulars related to the period from 1st April, 2019 to 31st December, 2019. you are required to ascertain the amount of daim to be filed with the Insurance company for the loss of stock. The company has taken an insurance policy for ₹ 1,00,000 which is subject to average clause. The value of goods salvaged was estimated at ₹ 31,000. The average rate of gross profit was 20% throughout the period:

Particulars	Amount (₹)
Opening stock as on 1 April 2019	1,50,000
Purchases during the year	4,20,000
Goods withdrawn by the proprietor for his self use at Sales Value	10,000
Goods distributed as charity at cost	4,000
Purchases include 5,000 of Tools purchased, these Tools should have been capitalized.
Wages (include wages paid for the installation of 90,000 machinery	6,000
Sales during the year	6,10,000
Cost of goods sent to consignee on 1st November 2019, lying unsold with the consignee.	25,000
Sales Return	10,000

(Jan 2021, 10 marks)

Question 20.
Ramesh prepares accounts on 30th September each year, but on 31st December, a fire destroyed the greater part of his Stock. Following Information was collected from his books:
Stock as on 1st October 29,700
Purchases from 1st October to 31st December 75,000
Wages from 1st October to 31st December 33,000
Sales from 1st October 31st December 1,40,000
The Gross Profit rate is 33.33% on Cost. Stock to the value of ₹ 3,000 was salvaged. Insurance Policy was for ₹ 25,000 and claim was subject to Average Clause.
Calculate the daim for the Loss of Stock from the following additional information:
Stock, in the beginning, was valued at 10% less than cost.
A Plant was installed by Firm’s own worker. He was paid ₹ 500, which was induded in Wages.
Purchases include Purchase of the plant for ₹ 5,000.
Answer:

Question 21.
A Fire occurred on the premises of a merchant on 15th June and a considerable part of the Stock was destroyed. The value of Stock saved was ₹ 9,000. The books disclosed that on 1st April, Stock was valued at ₹ 73,500, Purchases to the date of tire amounted to ₹ 2,09,880, and Sales ₹ 3,13,000. On investigation, it was found that during the past five years, the average Gross Profit on Sales was 36%. Prepare a statement showing the amount, the Merchant should claim from the Insurance Company in respect of Stock destroyed by fire.
Answer:

Question 22.
Due to a fire on 1st July, the entire Stock was burnt except some costing ₹ 70,000. The information available from the books of accounts saved were as follows:
The Average Gross Profit was 25% on Sales.
The Stock on 31st December, valued as per practice at 10% above cost was ₹ 2,20,000.
The Purchases and Sales from 1st January upto the date of fire were ₹ 300,000 and ₹ 6,80,000 respectively.
The Wages for the period amounted to ₹ 1,44,000.
The Company insured Stock for ₹ 1,20,000.
The Policy had an Average Clause.
Prepare a statement showing the amount of Stock lost by fire and the claim to be lodged with the Insurance Company.
Answer:

Question 23.
On 20th July 2019, the Godown and Business Premises of Raj were affected by fire, and from the accounting records salvaged, the following information is made available to you:

Sales upto 20m July, 2019 included ₹ 40,000 for which goods had not been despatched. Further, Purchases upto 201h July, 2019 did not include ₹ 20,000 for which Purchase invoices had not been received for Suppliers, though goods have been received at the Godown. Goods salvaged from the accident were worth ₹ 12,000 and these were handed over to the insurer. Ascertain the value of the claim for loss of Goods/Stock.
Answer:

Question 24.
A fire engulfed the premises of a business of M/s Preet on the morning of 1st July 2018. The building, equipment, and stock were destroyed and the salvage recorded the following:
Building – ₹ 4,000; Equipment – ₹ 2,500; Stock – ₹ 20,000. The following other information was obtained from the records saved for the period from 1st January to 30th June 2018:

Particulars	₹
Sales	11,50,000
Sales Return	40,000
Purchases	9,50,000
Purchase return	12,500
Cartago inward	17,500
Wages	7,500
Stock in hand on 31st December 2017	1,50,000
Building (value on 31 December 2017)	2,75,000
Equipment (value on 31 December 2017)	75,000
Depreciation provision tilt 31st December 2017 on: Building,	1,25,000
Equipment	22,500

No depreciation has been provided since December 31st, 2017. The latest rate of depreciation is 5% p.a. on building and 15% p.a. on equipment by straight-line method. Normally business makes a profit of 25% on net sales. You are required to prepare the statement of claim for submission to the Insurance Company.
Answer:

Question 25.
Compute the amount of claim from the following information:
Sum Insured against the loss of furniture ₹ 73,000
Value of Salvaged Furniture ₹ 6,000
Actual Value of furniture as on date of fire ₹ 1,70,000
Answer:

Question 26.
The premises of Fire Proof Ltd. were destroyed by tire on 30.6.2024. The following figures were ascertained. You are required to prepare a statement of claim in respect of loss of stock to be submitted to the insurance company.

In 2021, while valuing closing stock, some defective goods costing ₹ 500 were valued at 400. These were sold for ₹ 450 in 2022. In 2022, an item costing ₹ 600 was wrongly valued at ₹ 700. This was sold for ₹ 550 in 2023.

In 2013, item costing 1,200 were valued at ₹ 1,000, 50% of these were sold in June 2024 for ₹ 600. Subject to this, the gross profit rate is more or less uniform. The value of salvage was 800 and the sum insured was ₹4,500.
Answer:

Gross Profit Ratio = \(\frac{\text { Gross Profit }}{\text { Net Sales }} \times 100=\frac{₹ 3,880}{₹ 19,400} \times 100 \) = 20%.

Question 27.
Answer the following:
What is Consequential loss policy and what items are generally covered by such policy? (May 2017, 4 marks)
Answer:
Consequential Loss Policy:
When a tire occurs, apart from the direct loss on accounts of stock or other assets destroyed, there is also a consequential loss because, for sometimes, the business is disorganised or has to be discontinued, and during that period, the standing expenses of the business like rent, salaries, etc. Continue.
The consequential loss policy covered the following items:

1. Loss of net profit
2. Standing charges
3. Any increased cost of working e.g., renting of temporary premises.

Question 28.
On account of a fire on 15th June 2002 in the business house of a company, the working remained disturbed upto 15th Dec. 2002 as a result of which, it was not possible to affect any sales. The company had taken out an insurance policy with an average clause against consequential losses for ₹ 1,40,000 and a period of 7 months has been agreed upon as indemnity period. An increase of 25% was marked in the current year’s sales as compared to last year. The company incurred an additional expenditure of 12,000 to make sales possible and made a saving of 2,000 in the insured standing charges. Ascertain the claim under the consequential loss policy keeping the following additional information In view:
Actual Sales from 15 June 2002 to 15th” Dec. 2002 ₹ 70,000
Sales from 15th’ June 2001 to 15th Dec. 2001 ₹ 2,40,000
Net profit tor last Financial year ₹ 80,000
Insured standing charges for the last Financial year ₹ 70,000
Total standing charges for the last Financial year ₹ 1,20,000
Turnover for the last Financial year ₹ 6,00,000
Turnover for one year: 16th June 2001 to 15th June 2002 ₹ 5,60,000.
(Nov 2003, 9 marks)
Answer:

Question 29.
Answer the following:
A Company ‘lodged a daim to insurance company for ₹ 5,00,000 in September. 2006. The claim was settled in February 2007 for ₹ 3,50,000. How will you record the shortfall in claim settlement in the books of the company. (Nov 2007, 2 marks)
Answer:

Question 30.
From the following details, calculate the consequential loss claim:
1. Date of fire: 1st September following;
2. Indemnity period: 6 months;
3. Penod of disruption: 1st September to 1st February;
4. Sum insured: ₹ 1,08,00;
5. Sales were ₹ 6,00,000 for preceding financial year ended on 31st March.
6. Net profit for preceding financial year 36,000 plus insured sanding charges ₹ 72,000;
7. Rate of Gross profit 18%;
8. Uninsured standing charges ₹ 6,000;
9. Turnover during the disruption period 67,500;
10. Annual turnover for 12 months immediately preceding the date of fire ₹ 6,60,000;
11. Standard turn over i.e. for corresponding months (1 September to 1 February) in the year preceding the date of fire ₹ 2,25,000;
12. Increase in the cost of Working capital ₹ 12,000 with a saving of insured standing charges ₹ 4,500 during the disruption period;
13. Reduced turnover avoided through increase In Working capital ₹ 30,000;
14. Special clause stipulated:
(a) Increase in rate of G.P. 2%
(b) Increase in turnover (Standard and Annual) 10%. (Now 2008, 8 marks)
Answer:

2. Increased rate of G.P. = 18% + 2 = 20% on sales.
3. Loss of profit on short sales = 20% of ₹ 1,80,000 = ₹ 36,000.
4. Calculation of claim for Increased cost of working capital Increased cost of working will be lower of ₹
(i) Actual expenses 12,000
(ii) Additional expenses x

\(12,000 \times \frac{1,45,200}{1,45,200+6,000} \) 11,523
(iii) G.P. on additional sales = 30,000 × 20% 6,000 ₹ 6,000 is lower’oI above three, so additional expenses would be ₹ 6,000.
Net claim for increased cost of working capital = ₹ 6,000 minus
savings in insured standing charges.
=₹6,000 – ₹ 4,500=₹ 1,500

Question 31.
Answer the following:
A trader intends to take a loss of profit policy with indemnity period of 6 months, however, he could not decide the policy amount. From the following details, suggest the policy amount:
Turnover in last financial year ₹ 4,50,000
Standing charges in last financial year ₹ 90,000
Net profit earned in last year was 10% of turnover and the same trend expected in subsequent year.
Increase in turnover expected 25%
To achieve additional sales, trader has to incur additional expenditure of ₹ 31,250. (Nov 2010, 4marks)
Answer:

Question 32.
Monalisa & Co. runs plastic goods shop. Following details are available from quarterly sales tax return filed.

Period ₹
Sales from 16-09-2011 to 30-09-2011 34,000
Sales from 16-09-2012 to 30-09-2012 Nil
Sales from 16-12-2011 to 31-12-2011 60,000
Sales from 16-12-2012 to 31 -12-2012 20,000
A loss of profit policy was taken for ₹ 1,00,000. Fire occurred on 15th September 2012. Indemnity period was for 3 months. Net Profit was ₹ 1,20,000 and standing charges (afl insured) amounted to ₹ 43,990 for year ending 2011. Determine the Insurance Claim. (Nov 2013, 16 marks)
Answer:
1. Period of Indemnity (given) = 3 months (15.09.2012 to 15.12.201 2)
2. Computation of GP Ratio
GP Rate for Claim Purposes
= \(\frac{\text { Net Profit }+ \text { Insured standing charges }}{\text { Sales }} \times 100\)
= \(\frac{1,20,000+43,990}{8,19,950}\) = 20%

Question 33.
M/s. Platinum Jewellers wants to take up a loss of Profit Policy” for the year 2015. The extract of the Profit and Loss Account of the previous year ended 31-12-2014 provided below:

Turnover is expected to grow by 25% next year.
To meet the growing working capital needs the partners have decided to avail overdraft facilities from their bankers @ 12% p.a. interest.
The average daily overdraft balance will be around ₹ 2 lakhs.
The wages for the skilled craftsmen will increase by 20% and salaries by
10% in the current year. All other expenses will remain the same.
Determine the amount of policy to be taken up for the current year by M/s. Platinum Jewellers. (May 2015, 6 marks)
Answer:

Question 34.
A trader intends to take a loss of profit policy with indemnity period of 6 months, however, he could not decide the policy amount. From the following details, suggest the policy amount:
Turnover in last financial year ₹ 6,75,000
Standing charges in the last financial year ₹ 1,14,750
Net profit earned in last year was 10% of turnover and the same trend expected In subsequent year.
Increase in turnover expected 30%.
To achieve additional sales, trader has to incur additional expenditure of ₹ 42,500. (Nov 2015, 8 marks)
Answer:

Question 35.
A firm has decided to take out a loss of profit policy for the year 2016 and given the following information for the last accounting year 2015. Variable manL’facturing expenses ₹ 14,20,000, Standing charges ₹ 1.50,000, Net profits ₹ 80,000, Non-operating income ₹ 2,500. Sales ₹ 18,00,000.
Compute the sum to be insured In each of the following alternative cases showing the anticipation for the year 2016:
(i) If sales will increase by 15%.
(ii) It sales will increase by 15% and only 50% of the present standing charges are to be insured.
(iii) If sales and variable expenses will increase by 15% and standing charges will increase by 10%.
(iv) If sales will increase by 15% and variable expenses will decrease by 5%.
(v) If sales will increase by 10% and standing charges will increase by 15%.
(vi) If the turnover and standing charges will increase by 15% and variable expenses will decrease by 10% but only 50% of the present standing charges are to be insured. (May 2016, 8 marks)
Answer:

Note:

1. The above solution is based on the assumption that increase in sale is due to increase in volume of sales. Alternatively, it may be assumed that this increase is because of rise in selling price. In that case, there will be no proportionate increase in variable expenses and the answer will get changed accordingly.
2. In case (vi), it is given ¡ri the question that 50% of the present standing charges are to be insured. It is assumed in the above answer that 50% of the increased standing charges are insured.
3. In case (iii), 15% increase in variable expenses has been calculated after proportionate increase in variable expenses due to increase In turnover.

Question 36.
A fire occurred in the premises of M/s Bright on 25th May 2017. As a result of fire, sales adversely affected up to 30m September. 2017. The firm had taken LOSS of profit policy (with an average clause) for ₹ 3,50,000 having indemnity period of 5 months.
There is an upward trend of 10% in sales.
The firm incurred an additional expenditure of ₹ 30,000 to maintain the sales.
There was a saving of 5,000 in the insured standing charges.

Actual turnover from 25th May 2017 to 30m September 2017	₹1,75,000
Turn over from 25th May, 2016 to 31st September, 2016	₹ 6,00,000
Net profit for last financial year	₹ 2,00,000
Insured standing charges for the last financial year	₹ 1,75,000
Total standing charges for the last financial year	₹3,00,000
Turnover for the last financial year	₹ 15,00,000
Turnover for one year from 25th May, 2016 to ₹ 4th May, 2017	₹ 14,00,000

You are required to calculate the loss of profit claim amount, assuming that entire sales during the interrupted period was due to additional expenses.(May 2019,10 marks)
Answer:

2. Calculation of Loss of Profit:
Gross Profit on reduction in turnover @ 25% on ₹ 4,85,000 1,21.250 (see working note 1)
Add: Additional Expenses
Lower of
(i) Actual = ₹ 30,000
(ii) \(\text { Additional Exp. } \times \frac{\text { Gross Profit on Adjustedturnover }}{\text { Gross Profit as above }+ \text { UninsuredStanding Charges }} \)
= \(₹ 30,000 \times \frac{3,85,000}{(3,85,000+1,25,000)}\) = ₹ 22,647

(iii) Gross Profit on sales generated by additional expenses
1,75.000 x 25% = ₹ 43,750
It is given that entire sales during the Interrupted period was due to additional expenses

3. ApplIcation of Average Clause:
\(\frac{\text { Amount of Policy }}{\text { Gross Profit on Annual Turnover }} \times \text { Amount of Claim }\)
\(\left(\frac{3,50,000}{3,85,000}\right) \) × 1,38,897 = ₹ 1,26,270
Amount of claim under the policy = ₹ 1,26,270

Turnover for the last financial year 15,00,000
Rate of Gross Profit = \(\frac{3,75,000}{15,00,000} \times 100\) = 25%

Question 37.
A fire occurred in the premises of M/s Kirti & Co. on 15th December 2018. The working remained disturbed up to 15th March 2019 as a result of which sales adversely affected. The firm had taken out an insurance policy with an average clause against consequential losses for 2,50,000. Following details are available from the quarterly sales tax return filed / GST return filed:

A period of 3 months (i.e. from 16-12-2018 to 153-2019) has been agreed upon as indemnity period.
Sales from 16-12-2017 to 31-12-2017 68,000
Sales from 16-12-2018 to 31-12-2018 Nil
Sales from 16-03-2018 to 31-03-2018 1,20,000
Sales from 16-03-2019 to 31 -03-2019 40,000
Net profit was 2,50,000 and standing charges (all insured) amounted to 77,980 for the year ending 31st March 2018.
You are required to calculate the loss of profit claim amount. (Nov 2019, 10 marks)
Answer:

Calculation of Short Sale:
Indemnity period = 16-12-2018 to 15-03-2019 (3 months) standard sales to be calculated on the basis of the corresponding period of year 2017-18:

3. Loss of Gross Profit:
Short Sales × Gross Profit Ratio = ₹ 1,21,200 x 20% = ₹ 24,240

4. Application of Average Clause:
\(\text { Net claim }=\text { Gross claim } \times \frac{\text { PolicyValue }}{\text { GrossProfitonnormal turnover }} \)
= \(₹ 24,240 \times \frac{₹ 2,50,000}{₹ 3,26,240} \text { (W.N.3) } \)
Amount of claim = ₹ 18,575

Working Notes:
1. Sales for the period 01-01-2018 to 15-03-2018:
Sales for 01-01-2018 to 31-03-2018 (given) = ₹ 3,80,000
Sales for 16-03-2018 to 31-03-2018 (given) = ₹ 1,20,000
Sales for the period 01-01-2018 to 15-03-2018 = ₹ 2,60,000

2. Calculation of upward trend in Sales:
Total Sales in year 201 5-16 = ₹ 12,40,000
Increase in Sales in the year 2016-17 as = ₹ 1,86,000
compared to 2015-16

Question 38.
A Loss of Profit Policy was taken for ₹ 80,000. Fire occurred on 15th March 2021. Indemnity Period was for three months. Net Profit for year ending on 31st December 2020 was ₹ 56,000 and Standing Charges (all Insured) amounted to ₹ 49,600. Determine the Insurance Claim from the following details available from quarterly GST Returns:

Answer:
1. Period of Indemnity (given) = 3 months (15.03.2021 to 15.06.2021)

Question 39.
A fire occurred on 1st February 2018, in the premises of Fbb Ltd. a Retail Store, and business was partially disorganised upto 30th June 2018. The Company was insured under a Loss of Profits Pohey for ₹ 1,25,000 with a six months indemnity Period. From the following information, compute the amount of claim under the
Loss of Profit Policy.

Particulars	₹
Actual Turnover from 1 February to 30th June 2018	₹ 80,000
Turnover from 1st February to 30th June 2017	₹ 2,00,000
Turnover from 1st February 2017 to 31st January 2018	₹ 4,50,000
Net Profit for last Financial Year	₹ 70,000
Insured Standing Charges for last Financial Year	₹ 56,000
Total Standing Charges for last Financial Year	₹ 64,000
Turnover for the last Financial Year	₹ 4,20,000

The Company incurred Additional Expenses amounting to ₹ 6,700 which reduced the loss in Turnover. There was also a saving during the Indemnity Period of ₹ 2,450 in the Insured Standiñg Charges as a result of the fire. There had been a considerable increase in trade since the date of the Last Annual Accounts and it has been agreed that an adjustment of 15% be made in respect of the upward trend in Turnover.
Answer:

Question 40.
The premises of ABC Limited were partially destroyed by fire on 1st March 2019. and as a result, the business was practically disorganised up to 31st August 2019. The Company Is insured under a Loss of Profits Policy for ₹ 1,65,000 having an Indemnity Period of 6 months. From the following information, prepare a claim under the policy:

Particulars	₹
Actual Turnover during the period of dislocation (01-03-2019 to 31-08-2019)	₹ 80,000
Turnover for the corresponding period (dislocation) in 12 months immediately before tire (1-3-2019 to 31-8-2019)	₹ 2,40,000
Turnover for the 12 months immediately preceding the fire (01- 03-2019 to 28-02-2019)	₹ 6,00,000
Net Profit for the last financial year	₹ 90,000
Insured Standing Charges for the last financial year	₹ 60,000
Uninsured Standing Charges	₹ 5,000
Turnover for the last financial year	₹ 5,00,000

Due to a substantial increase in trade, before and up to the time of the fire, it was agreed that an adjustment of 10% should be made in respect of the upward trend in turnover. The Company incurred Additional Expenses of ₹ 9,300 ‘immediately after the fire and but for this expenditure, the Turnover during the period of dislocation would have been only ₹ 55,000. There was also a saving during the indemnity period of ₹ 2,700 in insured standing charges as a result of the fire.
Answer:

Assumption: It is assumed that Trend Adjustment is required on the Total Amount of Annual Turnover. However, part of the Annual Turnover represents the trend-adjusted figure. Alternatively, the students may ignore trend and take only -the given Annual Turnover. The Claim would be ₹ 55,000, which is more than the Claim as computed above. So, it is possible that the Insurance Company would insist on trend adjusted on Annual Turnover.

Question 41.
From the following information, compute the amount of claim under the loss of profit policy:

Sum Insured	₹ 1,00,000
Indemnity Period	6 Months
Reason for Damage	Due to Fire Accident on 1.3.2012
Period of Interruption	1.3.2018 to 31.7.2018
Accounting Year	Calendar Year
Gross Profit Ratio	30%
Saving in Insured Standing Charges	₹ 6,774
Increase in cost of working	₹ 20,000 for 80% of the turnover
No Clause for Upward/Downward Trend	during dislocation period
Turnover for the year ended 31st December 2017	₹ 5,00,000
Turnover for the period from 1.3.2017 to 28.2.2018	₹ 5,20,000
Turnover for the period from 1.3.2017 to 31 .7.2017	₹ 2,60,000
Turnover for the period from 1.3.2018 to 31.7.2018	₹ 1,00,000
Sales were evenly throughout the period Uninsured Standing Charges	₹ 25,000
Net Profit	₹ 90,000

Answer:

Working Notes:
(i) Agreed G.P. Ratio = G.P. Ratio as per last accounting year + Agreed Increase/Decrease
\(\text { G.P. Ratio }=\frac{\text { Net Profit }+ \text { Insured Standing Charges }}{\text { Turnover of last Accounting year }} \times 100\)
= \(\frac{₹ 90,000 \times ₹ 35,000}{₹ 5,00,000} \times 100\) = 25%
Notes: All Standing Charges = Gross Profit – Net Profit
= 30% of ₹ 5,00,000 – ₹ 90,000 = ₹ 1,50,000 – ₹ 90,000 = ₹ 60,000
Insured Standing Charges = All Standing Charges less Uninsured Standing Charges
= ₹ 60,000 – ₹ 25,000 = ₹ 35,000
(ii) Claim Penad being the least of the Indemnity Period (6 months) & Dislocation Period (5 months) is 5 months.
(iii) Calculation of Turnover lost in claim period
A. Turnover for the corresponding daim period in the preceding year ₹ 2,60,000
B. Add: Agreed Increase –
C. Less: Actual Turnover during the daim period ₹ 1,00,000
D. Turnover lost in claim penad (A + B – C) 1,60,000

(iv) Gross Profit lost = Turnover last during the claim period × Agreed G.P. Ratio
= 1.60,000 × 25%= ₹40,000
(v) Sum Insurable = Adjusted Turnover during 12 months immediately preceding the fire × Agreed G.P. Ratio
= ₹ 5,20,000 × 25% = ₹ 1,30,000
(vi) Calculation of the-Net daim for the Increased Cost of Working
A. Gross claim for Increased Cost of Working (being the least of the following three amounts) ₹ 16.774
1. Actual Expenses ₹ 20,000
2. Proportionate Increase in Cost of Working
\(₹ 20,000 \times \frac{25 \% \text { of } 5,20,000}{₹ 1,30,000+₹ 25,000}=\) = ₹ 16,774
3. Maximum saving of liability of the insurer = Reduction in Turnover avoided through increased Cost of Working × Agreed G.P. Ratio
= 80,000 × 25% = ₹ 20,000
B. Less: Saving in Insured Standing Charges ₹ 6.774
C. Net Claim for Increased Cost of Working (A-B) ₹ 10,000

Question 42.
From the following information, compute the amount of claim under the loss of profit policy:

Sum Insured	₹ 1.20 Lakh
Indemnity Period	6 Months
Reason for Damage	Due to Fire Accident on 1.3.2018
Period of Interruption	1.3.2018 to 31.7.2018
Accounting Year	Calendar Year
Gross Profit Ratio	25%
Increase in Cost of working	₹ 0.30 Lakh
Saving in Insured Standing Charges	₹ 0.09478 Lakh
Turnover For the year ended 31st Dec., 2017	₹ 10.00 Lakh
Turnover For the period from 1.3.2017 to 28.2.2018	₹ 9.00 Lakh
Turnover For the period from 1.3.201710 31.7.2017	₹ 5.00 Lakh
Turnover For the period from 1.3.2018 to 31.7.2018	₹ 3.00 Lakh
Sales were evenly throughout the period Standing Charges (out of which ₹ 50,000 have not been insured)	₹ 2.50 Lakh
No clause for upward/Downward Trend

Answer:

(vi) Calculation of the Net claim for the Increased Cost of Working
A. Gross claim for Increased Cost of Working (being the least of the following three amounts) ₹ 23,478
1. Actual Expenses ₹ 30,000
2. Proportionate Increase in Cost of Working
\(\text { Increased Cost of Working } \times \frac{\text { Gross Profit on Adjusted Turnover }}{\text { Gross Profit as above }+ \text { Uninsured Standing Charges }} \)
= \(₹ 30,000 \times \frac{20 \% \text { of } ₹ 9,00,000}{₹ 1,80,000+₹ 50,000}\) = ₹ 23,478
3. Maximum saving of liability of the insurer = Reduction in Turnover avoided through Increased Cost of Working × Agreed
G.P. Ratio =₹ 3,00,000 × 20% = ₹ 60,000
B. Less: Saving in Insured Standing Charges ₹ 9.478
C. Net claim for Increased Cost of Working (A – 13) ₹ 14,000
(vii) In the absence of information, it has been assumed that the Actual Turnover in the claim period has been affected as a result of additional expenses.

Question 43.
From the following information, compute the amount of daim under the loss of profit policy:

Sum Insured	₹ 1,24,200
Indemnity Period	6 Months
Reason for Damage	Due to Fire Accident on 1.3.2018
Period of Interruption	1.3.2018 to 31.7.2018
Accounting Year	Calendar Year
Net Profit for 2011	₹ 70,000
Increase in cost of working	₹ 6,700
Saving in Insured Standing Charges	₹ 2,522
Turnover For the year ended 31st December 2017	₹ 420,000
Turnover For the period from 1.3.2017 to 28.2.2018	₹ 4,50,000
Turnover For the period from 1.3.2017 to 31.7.2017	₹ 2,10,000
Turnover For the period from 1.3.2018 to 31.7.2018.	₹ 75,000
Sales were evenly throughout the period, Standing Charges (Out of which ₹ 8,000 have not been insured)	₹ 64,000
Agreed Increase for upward trend in turnover 15%

Answer:

Question 44.
Ramda & Sons had taken out policies (without Average Clause) both against loss of stock and loss of profit, for ₹ 2,10,000 and ₹ 3,20,000 respectively. A fire occurred on 1st July, 2011 and as a result of which sales were seriously affected for a period of 3 months. Trading and Profit & Loss A/c of Ramda & Sons for the year ended on 31st
March, 2011 is given below:

Further detail provided is as below:
(a) Sales, Purchases, Wages and Manufacturing Expenses for the period
01.04.2011 to 30.06.2011 were ₹ 3,36,000, ₹ 2,14,000 ₹ 51,000 and ₹ 12,000 respectively.
(b) Other Sales figure were as follows:
From 01.04.2010 to 30.06.2010 ₹ 3,00,000
From 01.07.2010 to 30.09.2010 ₹ 3,20,000
From 01.07.2011 to 30.09.2011 ₹ 48,000
(c) Due to decrease in the material cost, Gross Profit during 2011-12 was expected to increase by 5% on sales.
(d) ₹ 1,98,000 were additionally incurred during the period after fire. The amount of policy included ₹ 1,56,000 for expenses leaving ₹ 42,000 uncovered.
Compute the claim for stock, loss of profit, and additional expenses. (May 2012, 16 marks)
Answer:

Investment Accounts – CA Inter Accounts Question Bank is designed strictly as per the latest syllabus and exam pattern.

Investment Accounts – CA Inter Accounts Question Bank

Question 1.
Mr. T purchased 1,000 nos. 10% debentures of ₹ 100 each on 1st April 2009 at ₹ 96 cum-intest, the previous interest date being 31st December 2008. Compute cost of investment. (May 2009, 2 marks)
Answer:
Total amount payable 1,000 x 96 = 96.000
Less: Interest included in the price for January, February, and March i.e. 1,00,000 x \(\frac{10}{100} \times \frac{3}{12}\) = 2.500
Cost of the Investment 93,500

Question 2.
Mr. X purchased 1,000, 6% Government Bonds of ₹ 100 each on 31st January 2009 at ₹ 95 each. Interest is payable on 30th June and 31st December. The price quoted is cum interest. Journalise the transaction. (May 2010, 2 marks)
Answer:

Question 3.
MY Ltd. had acquired 200 equity shares of YZ Ltd. at ₹ 105 per share on 01.01.2009 and paid 200 towards brokerage, stamp duty and STT. On 31st March, 2009 Shares of YZ Ltd. were traded at ₹ 110 per share. At what value investment is to be shown in the Balance Sheet of MY Ltd. as at 31st March. 2009. (Nov 2009, 2 marks)
Answer:

CalcuIaton of Cost of Investment

Particulars	₹
Purchase price of Equity shares of YZ Ltd. (200 shares x ₹ 105 per share)	21,000
Add: Brokerage, Stamp duty and STT	200
Cost of investment	21,200

If the investment is long then it will be shown at cost. Therefore value of investment will be ₹ 21,200. However, if the investment is a current investment, then it will be shown at lower of cost (i.e. ₹ 21,200) or net realizable value (i.e. ₹ 200 x 110 = ₹ 22,000). Therefore, value of investment will be ₹ 21200.

Question 4.
Rose Ltd. had made an investment of 500 lakhs in the equity shares of Nose Ltd. on 10.01.2009. The realisable value of such investment on 31.03.2009 became 200 lakhs as Nose Ltd. lost a case of patent rights. Rose Ltd. follows financial year as accounting year. How will you recognize this reduction in Financial statements for the year 2008-09. (Nov 2009, 4 marks)
Answer:
Provision and Conclusion:
Recognition of reduction in value of investment would depend upon the nature of investment and nature of decline as per Accounting Standard 13 “Accounting for Investments”. According to provisions of the standard, if the investments were acquired for long term and dedine is temporary in nature reduction in value will not be recognized and investments would be carried at cost.

If the decline Is of permanent nature, it will be charged to profit and loss account. If the Investments are current investments, then the reduction should be recognized and charged to Profit and Loss Account as the current investments are carried at cost or fair value, which ever is less.

Question 5.
On 1st April 2019, Mr. H had 30,000 equity shares of ABC Ltd. at a book value of 18 per share (Nominal value 10 per share). On 10th June 2019, H purchased another 10,000 equity shares of the ABC Ltd. at ₹ 16 per share through a broker who charged 1.5% brokerage.

The directors of ABC Ltd. announced a bonus and a right issue. The terms of the issues were as follows:

• Bonus shares were declared at the rate of one equity share for every four shares held on 15th July 2019.
• Right shares were to be issued to the existing equity shareholders on 31st August 2019. The company decides to issue one right share for every five equity share held at 20% premium and the due date for payment will be 30th September 2019. Shareholders were entitled to transfer their rights in full or in part.
• No dividend was payable on these issues. Mr. H subscribed 60% of the rights entitlements and sold the remaining rights for consideration of ₹ 5 per share. Dividends for the year ending 31st March 2019 was declared by ABC Ltd. at the rate of 20% and received by Mr. Hon 31st October 2019.

On 15th January 2020, Mr. H sold half of his shareholdings at ₹ 17.50 per share and brokerage was charged @ 1%. You are required to prepare Investment account In the books of Mr. H for the year ending 31st March 2020, assuming the shares are valued at average cost. (Nov 2020, 10 marks)

Question 6.
P Ltd. had 8,000 equity shares of K Ltd., at a book value of ₹ 15 per share (face value of ₹ 10 each) on 1st April 2019. On 1st September 2019, p Ltd. acquired another 2,000 equity shares of K Ltd. at a premium of ₹ 4 per share. K Ltd. announced a bonus and right issue for existing shareholders. The term of bonus and right issue were:
(i) Bonus was declared at the rate of two equity shares for every five shares held on 30th September 2019.
(ii) Right shares are to be issued to the existing shareholders on 1st December 2019. The Company had issued two right shares for every seven shares held at 25% premium on face value. No dividend was payable on these shares. The whole sum being payable by 31st December 2019.
(iii) Existing shareholders were entitled to transfer their rights to outsiders either wholly or in part.
(iv) P Ltd. exercised its option under the issue for 50% of its entitlements and sold the remaining rights for ₹ 8 per share.
(v) Dividend for the year ended 31st March 2019 at the rate of 20% was declared by K Ltd. and received by P Ltd. on 20Th January 2020.
(vi) On 1st February 2020, p Ltd. sold half of its shareholdings at a premium of ₹ 4 per share.
(vii) The market price of shares on 31st March 2020 was ₹ 13 per share. You are required to prepare the Investment account of P Ltd. for the year ended 31st March 2020 and determine the value of shares held on that date, assuming the investment as current investment. Consider average cost basis for ascertainment of cost for equity share sold. (Jan 2021,10 marks)

Question 7.
On 1st April 2008, Mr. Noel purchased 5.000 equity shares of ₹ 100 each in X Ltd. @ ₹ 120 each from a Broker, who charged 2% brokerage. He incurred ½’% as cost of shares transfer stamps. On 31st January 2009, Bonus was declared in the ratio of 1: 2 Before and after the record date of bonus shares, the shares were quoted at ₹ 175 per share and ₹ 90 per share respectively. On 31st March 2009, Mr. Neel sold bonus shares to a broker, who charged 2% brokerage.

Show the Investment Account in the books of Mr. Neel, who held the shares as current assets and dosing value of investments shall be made at cost or Market value, whichever is lower. (May 2009,8 marks)
Answer:

Working Notes:
1.CaIculation of Cost of equity shares purchased on 1.4.08 = 5,000 × ₹ 120 of ₹ 60,000 + \(\frac{1}{2}\)% of ₹ 6,00,000 = ₹ 6,15,000

2. Calculation of profit proceeds of equity shares sold on 31.3.09
= 2,500 x ₹ 90 – 2% of ₹ 2,25,000 = ₹ 2,20,500

3. Calculation of profit on sale of bonus shares on 31.3.09
= Sale proceeds – Average cost
= 2,20.500 – 2,05,000 i.e. (₹ 6,15,000 × \(\frac{2,50,000}{7,50,000}\) = ₹ 15,500

4. Valuation of equity shares on 31.3.09
Cost = 6,15,000 x \(\frac{5,00,000}{7,50,000}\) = ₹ 4,10,000
Market value = 5000 shares x ₹ 90 = ₹ 4,50,000
Closing Balance has been valued at ₹ 4,10,000 i.e. at cost which is lower than the market value.

Question 8.
Gamma Investment Company holds 1,000, 15% debentures of ₹ 100 each in Beta Industries Ltd. as on April 1, 2009, at a cost of ₹ 1,05,000. Interest is payable on June, 30 and December, 31 each year.

On May 1, 2009. 500 debentures are purchased cum-interest at ₹ 53,500. On November 1st, 2009, 600 debentures are sold ex-mterest at ₹ 57,300. On November 30, 2009, 400 debentures are purchased ex-interest at ₹ 38,400. On December 31, 2009,400 debentures are sold cum interest for ₹ 55,000. Prepare the investment account showing value of holdings on March 31, 2010, at cost, using FIFO method. (May 2010,6 marks)
Answer:

Question 9.
H purchased 500 equity shares of loo each in the ABC Company Limited for ₹ 62,500 inclusive ol brokerage and stamp duty. Some years later the company decided to capita1ise its profit and to issue to the holders of equity shares one equity share as Bonus for every equity share held by them.

Prior to capitalization, the shares of ABC Company Limited were quoted at ₹175 per share. After the capitalization, the shares were quoted at ₹ 92.50 per share. H sold the Bonus shares and received ₹ 90 per share. Show Investment A/c in H’s books on average cost basis as per AS-13. (Nov 2010, 5 marks)
Answer:
Working Notes:

1. Computation of profit on sale of bonus shares:
Sale price of bonus shares 45,000
Less : Average cost of shares sold \(\frac{62,500}{1,00,000}\) × 50,000 = (31,250)
Profit 13.750

2. ValuatIon of closing investment: .
Market value of shares \(\frac{50,000}{100} \) x 92.50 = 46,250
Cost price of shares (W.N. 1) = 31,250
= 46,250
Value of investment will be ‘east of market value or average cost price, i.e. 31,250.

Question 10.
On 1st April 2010, Rajat has 50,000 equity shares of P Ltd.. at a book value of ₹ 15 per share (face value ₹ 10 each). He provides you the further information:
1. On 20th June 2010 he purchased another 10,000 shares of P Ltd. at ₹ 16 per share.
2. On,15t August 2010. P Ltd. issue one equity bonus share for every Six shares held by the shareholders.
3. On 31st October 2010 the directors of P Ltd. announced a right issue which entitle the holders to subscribe three shares for every seven shares at ₹ 15 per share. Shareholders can transfer their rights in full or in part.
Rajat sold 1/3rd of entitlement to Umang for a consideration of ₹ 2 per share and subscribe the rest on 5th November 2010.
You are required to prepare Investment A/c in the books of Rajat for the year ending 31st March 2011. (May 2011, 5 marks)
Answer:

Working Notes:

1. Bonus shares = \(\frac{50,000+10,000}{6}\) = 10,000 shares
2. Right shares = \(\frac{50,000+10,000+10,000}{7} \) x 3 = 30,000 shares
3. Sale of rights = 30,000 shares × \(\frac{1}{3}\) × ₹ 2 = ₹ 20,000
4. Rights subscribed =30,000 shares × \(\frac{2}{3}\) ×₹ 15= ₹ 3,00,000

Question 11.
Mr. Brown has made following transactions during the financial year 2011- 12:

Date	Particulars
01.05.2011	Purchased 24,000 12% Bonus of 100 each at ₹ 84 cum Interest. Interest Is payable on 30th September and 31st March every year.
15.06.2011	Purchased 1,50,000 equity shares of ₹ 10 each in Alpha Limited for ₹ 25 each through a broker, who charged brokerage @ 2%.
10.07.2011	Purchased 60,000 equity shares of ₹ 10 each in Beata Limited for ₹ 44 each through a broker, who charged broke rage @ 2%.
14.10.2011	Alpha Limited made a bonus issue of two shares for every three shares held.
31.10.2011	Sold 80,000 shares in Alpha Limited for ₹ 22 each.
01.01.2012	Received 15% interim dividend on equity shares of Alpha Limited.
15.01.2012	Beeta Limited made a right issue of one equity share for every four shares held at ₹ 5 per share. Mr. Brown exercised his option for 40% of his entitlements and sold the balance rights in the market at ₹ 2.25 per share.
01.03.2012	Sold 15,000 12% Bonds at ₹ 90 ex-interest.
15.03.2012	Received 18% interim dividend on equity shares of Beeta Limited.

Interest on 12% Bonds was duty received on due dates. Prepare separate investment account for 12% Bonds, Equity Shares of Alpha Limited, and Equity Shares of Beeta Umited in the books of Mr. Brown for the year ended on 31st March 2012. (May 2012, 8 marks)
Answer:

4. Closing balance as on 31.3.2012 of equity shares of Alpha Ltd.
\(\frac{38,25,000}{2,50,000}\) × 170.000 = ₹ 26.01,000

5. Calculation of right shares subscribed by Beeta Ltd.
Right Shares = \(\frac{60,000 \text { shares }}{4}\) × 1 = 15,000 shares
Shares subscribed by Mr. Brown = 15,000 x 40% = 6,000 shares
Value of right shares subscribed = 6.000 shares @ ₹ 5 per share = ₹ 30,000

6. Calculation of sale or right entitlement by Beets Ltd.
No. of right shares sold = 15,000 – 6,000 = 9,000 shares
Sale value of right = 9,000 shares x ₹ 2.25 per share = ₹ 20,250
Note: Shares are assumed to be purchased on cum right basis, therefore, amount received from sale of rights is credited to Investment A/c.

Question 12.
On 01.04.2011, Mr. T. Shekharan purchased 5,000 equity shares of ₹ 100 each In V. Ltd. @ ₹ 120 each from a broker, who charged 2% brokerage. He incurred 50 paisa per ₹ 100 as cost of shares transfer stamps. On 31.01.2012 bonus was declared in the ratio of 1: 2. Before and after the record date of bonus shares, the shares were quoted at ₹ 175 per share and ₹ 90 per share respectively. On 31.03.2012 Mr. T. Shekharan sold bonus shares to a broker, who charged 2% brokerage.

Show the Investment Account in the books of T. Shekharan, who held the shares as Current Assets and dosing value of investments shall be made at cost or market value whichever is lower. (Nov 2012, 8 marks)
Answer:

Working Notes:
1. Cost of equity share purchased on 1st April 2011
= Cost + Brokerage + Cost of transfer stamps
= 5,000 × ₹120+2% of ₹ 6,00,000+14% of ₹ 6,00,000 = ₹ 6,15,000

2. Sale proceeds of equity shares sold on 31st March, 2012
= Sale price – Brokerage
= 2,500 × ₹ 90 – 2% of ₹ 2,25,000 = ₹ 2,20,500 ‘

3. Profit on sale of bonus shares on 31st March 2012
= Sales proceeds – Average cost
Sales proceeds = ₹ 2,20,500
Average cost = ₹ [6,15,000 × 2,50,000/7,50,000] = ₹ 2,05,000
Profit = ₹ 2,20,500 – ₹ 2,05,000 =₹ 15,500

4. Valuation of equity shares on 31st March 2012
Cost = ₹ [6,15,000 × 500.000/7,50,000] = ₹ 4,10,000 i.e. ₹ 82 per share
Market Value = 5,000 shares x ₹ 90 = ₹ 4,50,000
Closing stock of equity shares has been valued at ₹ 4,10,000 i.e. cost being lower than the market value.

Question 13.
In 2011. M/s. Wye Ltd. issued 12% fully paid debentures of ₹ 100 each. interest being payable halt yearly on 30th September and 31st March of every accounting year. On 1st December, 2012, M/s, Bull & Bear purchased 10,000 of these debentures at ₹101 cum-interest price, also paying brokerage @ 1% of cum-interest amount of the purchase. On 1st March 2013, the firm sold all of these debentures at ₹ 106 cum-Interest price, again paying brokerage © 1% of cum-inte rest amount. Prepare Investment Account in the books of M/s. Bull & Bear for the period 1st December 2012 to 1st March 2013. (May 2013, 5 marks)
Answer:

Question 14.
On 01-05-2012, Mr. Mishra purchased 800 equity shares of ₹ 10 each in Filico Ltd. @ ₹ 50 each from a broker who charged 5%. He incurred 20 paisa per ₹ 100 as cost of shares transfer stamps. On 31-10-2012, bonus was declared in the ratio 1:4. The shares were quoted at ₹ 110 and ₹ 60 per share before and after the record date of bonus shares respectively.

On 30- 11-2012, Mr. Mishra sold the bonus shares to a broker who charged 5%. You are required to prepare Investment Account in the books of Mr. Mishra for the year ending 31 -1’2-201 2 and dosing value of Investment shall be made at cost or market value whichever is lower. (Nov 2013, 4 marks)
Answer:

Question 15.
Smart Investments made the following Investments in the year 2013-14:
12% State Government Bonds having face value ₹ 100

Date	Particulars
01.04.2013	Opening Balance (1200 bonds) book value of ₹ 1.26,000
02.05.2013	Purchased 2,000 bonds @ ₹ 100 cum interest
30.09.2013	Sold 1,500 bonds at ₹ 105 ex-interest. Interest on the bonds is recelvéd on 30th June and 31st Dec. each year. Equity shares of X Ltd.
15.04.2013	Purchased 5,000 equity shares @ ₹ 200 on cum right basis Brokerage of 1% was paid in addition (Face Value of shares ₹ 10)
03.06.2013	The company announced a bonus issue 2 shares for every 5 shares held.
16.08.2013	The company made a rights issue of 1 share for every 7 shares held at ₹ 250 per share. The entire money was payable by 31.08.2013
22.08.2013	Rights to the extent of 20% was sold @ ₹ 60. The remaining rights were subscribed.
02.09.2013	Dividend @ 15% for the year ended 31.03.2013 was receive on 16.09.2013
15.12.2013	Sold 3,000 shares ₹ 300. Brokerage of 1% was incurred extra.
15.01.2014	Received interim dividend @ 10% for the year 2013-14
31.03.2014	The shares were quoted in the stock exchange @ ₹ 220

Prepare Investment Accounts In the books of Smart Investments. Assume that the average cost method is followed. (May 2014, 8 marks)
Answer:

Working Notes:
1. ProfIt on sale of bonds on 30.9.13
= Sales proceeds – Average cost
Sales proceeds = ₹ 1,57,500
Average cost = ₹ [(1,26,000+1.92,000) × 1 ,500/3,200]
= 1,49,062.50
Profit = 1,57,500 – ₹1,49,062.50 = ₹ 8,437.50

2. Valuation of bonds on 31st March 2014
Cost = ₹ 3,18,000/3,200 × 1,700 = 1,68,937.50

3. Cost of equity shares purchased on 1514/2013
= Cost + Brokerage
= (5,000 × ₹ 200) + 1% of (5,000 × ₹ 200) = ₹ 10,10,000

4. Sale proceeds of equity shares on 15/12/2013
= Sale price – Brokerage
= (3,000 × ₹ 300) – 1% of (3,000 × ₹ 300) = × ₹ 8,91,000

5. Profit on sale of 31st shares on 15/12/2013
= Sales proceeds – Average cost
Sales proceeds = ₹ 8,91.000
Average cost = ₹ [(10,10,000 + 2,00,000 – 12,000 – 7,500) × 3,000/7,800]
= ₹ [11,90,500 × 3,000/7,800] = 4,57,885
Profit = ₹ 8,91,000 – ₹ 4,57,865 = ₹ 4,33,115.

6. Valuation of equity shares on 31st March 2014
Cost = ₹ [11,90,500 × 4.800/7,800] = ₹ 7,32,615
Market Value = 4,800 shares × ₹ 220 = 10,56,000
Closing stock of equity shares has been valued at ₹ 7,32,615 i.e. cost being lower than the market value.

Note:
1. It is presumed that no divided is received on bonus shares as bonus shares are declared on 3.6.2013 and dMcend pertains to the year ended 31.03.2013.
2. The amount of dividend for the period, for which shares were not held by the investor, has been treated as capital receipt.
3. On sale of Right share consideration of ₹ 12,000 received should be credited to P&L A/c as per AS13.

Question 16.
On 1st April 2014, Hasan has 20,000 equity shares of Vayu Ltd., at a book value of ₹ 20 per share (face value of ₹ 10 each). He provides the following information:
(i) On 1 0l June 2014, he purchased another 5,000 shares in Vayu Ltd.,@ ₹ 15 per share.
(ii) On 1st August 2014, Vayu Ltd., issued one bonus share for every five shares held by the shareholders.
(iii) On 31st August 2014, the directors of Vayu Ltd., announced a rights issue which entitle the shareholders to subscribe two shares for every six shares held @ of ₹ 15 per share. The shareholders can transfer their rights in full or in part.
Hasan sold ¼th of his right shares holding to Harsh for a consideration of 3 per share and subscribed the rest on 31st of October 2014. Prepare Investment A/c in the books of Hasan as on 31st October 2014. (Nov 2014, 8 marks)
Answer:

Working Notes:

1. Bonus shares = \(\frac{25,000}{5}\) = 5,000 shares
2. Rights shares = \(\frac{25,000+5,000}{6} \) x 2 = 10,000 shares
3. Sale of rights = 10,000 shares × ¼ × 3 = ₹ 7,500
4. Rights subscribed = 10,000 ¾ × ₹ 15= ₹ 1,12,500

Question 17.
Mr. Chatur had 12% Debentures of Face Value ₹ 1oo of MIs. Unnati Ltd. as current investments. He provides the following details relating to the investments.
1-4-2014 Opening balance 4000 debentures costing ₹ 98 each
1-6-2014 Purchased 2000 debentures @ ₹ 120 cum interest
l-9-2014 Sold 3000 debentures @ ₹ 110 cum Interest
1-12-2014 Sold 2000 debentures @ ₹ 105 ex Interest
31-1-2015 Purchased 3000 debentures @ ₹ 100 ex interest
31-3-2015 Market value of the investments ₹ 105 each
Interest due dates are 30th June and 31st December.
Mr. Chatur closes his books on 31-3-2015. He incurred 2% brokerage for all his transactions. Show investment account in the books of Mr. Chatur assuming FIFO method is followed. (May 2015, 8 marks)
Answer:

Question 18.
A Limited purchased 5000 equity shares (face value loo each) of Allianz Limited for ₹ 105 each on 1st April, 2014. The shares were quoted cum dividends. On 15th May, 2014, Allianz Limited declared & paid dMdend of 2% for year ended 31st March 2014. On 30th June, 2014 Allianz Limited issued bonus shares in ratio of 1:5. On 1st October, 2014 Allianz Limited issued rights share in the ratio of 1:12 @ 45 per share. A limited subscribed to half of the rights issue and the balance was sold at ₹ 5 per right entitlement.

The company declared interim dividend of 1% on 30th November 2014. Right shares were not entitled to dividend. The company sold 3000 shares on 31st December 2014 at 95 per share. The company A Ltd. incurred 2% as brokerage while buying and selling shares. You are required to prepare Investment Account in books of A Ltd. (Nov 2015, 10 marks)
Answer:

Working Notes:

1. Cost of Purchase = (5000 x 105) + 2% Brokerage = ₹ 5,35,500
2. Dividend = 5000 x 100 x 2% = ₹ 10,000
3. Pre Acquisition No. of Bonus Shares = \(\frac{5000}{5}\) = ₹ 1000
4. No. of Rights share eligible = (5,000 + 1,000) x = 500
5. No. of Right Share subscribed = 500 × \(\frac{1}{2}\) = 250 shares @ ₹ 45 = ₹ 11,250
6. No. of Rights share Renounced = 500 – 250 = 250 @ 5 = ₹ 1,250
7. Interim Dividend on 30/11/2014 = (5,000 + 1,000) × ₹ 100 × 1% = ₹ 6,000 (To be taken to P&L)
8. Cost of Shares sold on 31/12/2014 = (5,35,500+11,250-10,000) × \(\frac{3,000}{6,250}\) = ₹ 2,57,640
9. Net Sale proceeds for sale on 31/12/2014 = (3000 shares × ₹ 95) Less Brokerage 2% =₹ 2,79,300
10. Profit on Sale of Shares on 31/1212014 Net Sale Proceeds ₹ 2,79,300 Less Cost 2,57,640 = ₹ 21.660

Question 19.
A Ltd. purchased on 1st April 2015 8% convertible debenture in C Ltd. of face value of ₹ 2,00,000 @ ₹ 108. On 1st July 2015 A Ltd. purchased another ₹ 100,000 debenture @ ₹ 112 cum interest.

On 1st October 2015 ₹ 80,000 debenture was sold @ ₹ 105. On 1st December, 2015, C Ltd. give option for conversion of 8% convertible debentures into equity share of ₹ 10 each. A Ltd. receive 5000 equity share in C Ltd. in conversion of 25% debenture held on that date. The market price bi debenture and equity share in C Ltd. at the end of year 2015 is ₹ 110 and ₹ 15 respectively. Interest on debenture is payable each year on 31st March, and 30th September. The accounting year of A Ltd. is calendar year. Prepare investment account in the books of A Ltd. on average cost basis. (May 2016, 8 marks)
Answer:

Cost of Debenture purchased on 1st July
= ₹ 1,12,000 – 2,000 (Interest)
= ₹ 1,10,000

Cost of Debentures sold on 1st Oct.
= (₹ 2,16000+₹ 1,10,000) x 80,000/3,00,000
= ₹ 86,933

Loss on sale of Debentures
=₹ 86,933 – ₹ 84,000
= ₹ 2,933
Nominal value of debentures converted into equity shares = ₹ 55,000.
[(₹ 3,00,000 – 80,000) × 0.251]
Interest received before the conversion of debentures
Interest on 25% of total debentures 55,000 × 8% × 2/12 = ₹ 733

Cost of Debentures converted
= (₹ 2,16,000 + ₹ 1,10,000) × 55,000/3,00000
= ₹ 59,767

Cost of closing balance of Debentures
= (₹ 2,16,000 + ₹ 1,10,000) × 1,65,000/3,00,000
= ₹ 1,79,300

Closing balance of Debentures has been valued at cost being lower then ‘he market value i.e.₹ 1,81,500 (₹ 1,65,000 @ ₹ 110) 5,000 equity Shares in C Ltd. will be valued at cost of ₹ 59.767 being lower than the market value ₹ 75,000 (₹ 15 × 5,000)

Question 20.
On 1st December 2015, M/s. Blue & Black purchased, 20,000 12% fully paid debentures of ₹ 100 each at 105 cum interest price, also paying brokerage @ 1% of cum interest amount of the purchase. On 1st March 2016, the firm sold all these debentures at ₹ 110 cum-interest price, again paying brokerage @ 1% of cum Interest amount. Prepare Investment Account in the books of M/s. Blue & Black for the period 1st Dec., 2015 to 1st March 2016. Interest being payable half yearly on 30th September and 31st March of every accounting year. (Nov 2016, 4 marks)
Answer:

Question 21.
Akash Ltd. had 4,000 equity share of X Limited, at a book value of ₹ 15 per share (face value of ₹ 10 each) on 1st April 2016. On 1st September 2016, Akash Ltd. acquired 1,000 equity shares of X Limited at a premium of ₹ 4 per share. X Limited announced a bonus and right issue for existing shareholders.
The terms of bonus and right issue were:
(1) Bonus was declared, at the rate of two equity shares for every five equity shares held on 30th September, 2016.
(2) Right shares are to be issued to the existing shareholders on 1st December 2016. The company issued two right shares for every seven shares held at 25% premium. No dividend was payable on these shares. The whole sum being payable by 31st December, 2016.
(3) ExIsting shareholders were entitled to transfer their rights to outsiders, either wholly or in part.
(4) Akash Ltd. exercised its option under the issue for 50% of its entitlements and sold the remaining rights for ₹ 8 per share.
(5) Dividend for the year ended 31st March, 2016, at the rate of 20% was declared by the company and received by Akash Ltd. on 20th January 2017.
(6) On 1st February. 2017, Akash Ltd. sold half of its shareholdings at a premium of ₹ 4 per share.
(7) The market price of share on 31.03.2017 was ₹ 13 per share. You are required to prepare the Investment Account of Akash Ltd. for the year ended 31st March 2017 and determine the value of share held on that date assuming the investment as current investment. (May 2017, 8 marks)
Answer:

Working Notes:
1. DivIdend Received on shares acquired on 1-9-16.
= 1,000 shares × 10 × 20% = 2,000

2. Profit on sale of shares:
Sale proceeds – Average Cost ,
Sale Proceeds = 4,000 shares × ₹ 14 = 56,000
Average Cost = \( \left(\frac{60,000+14,000+12,500-2,000}{8,000}\right)\) × 4,000
=1,05,625 × 4,000
= 42,250
Profit = 56,000- 42,250 = 13,750
Here, cost price of share is less than the market value of ₹ 13 per share. Thus, it should be valued at cost.

Question 22.
Mr. Vijay entered into the following transactions of purchase ano sale of equity shares of JP Power Ltd. The shares have paid up value of ₹ 10 per share.
Date No. of Shares Terms
01.01.2016 600 Buy @ ₹ 20 per share
15.03.2016 900 Buy @ ₹ 25 per share
20.05.2016 1000 Buy @ ₹ 23 per share
25.07.2016 2500 Bonus Shares received
20.12.2016 1500 SaIe @ ₹ 22 per share
01 .02.2017 1000 SaIe @ ₹ 24 per share
Additional Information:
1. On 15.09.2016 dividend @ 3 per share was received for the year ended 31 .03.2016.
2. On 12.11.2016 company made a right issue of equity shares in the ratio of one shar6 for five shares held on payment of ₹ 20 per share. He subscribed to 60% of the shares and renounced the remaining shares on receipt of the premium of ₹ 3 per share.
3. Shares are to be valued on weighted average cost basis. You are required to prepare Investment Account for the year ended 31 .03.2016 and 31 .03.2017. (May 2018, 10 marks)
Answer:

Working Notes:
1. Calculation of Weighted average cost of equity shares
600 shares purchased at ₹ 12,000
900 shares purchased at ₹ 22,500
1.000 shares purchased at ₹ 23,000
2,500 shares at nil cost
600 right shares purchased at ₹ 12,000
Total cost of 5,600 shares is ₹ 66,500 [₹ 69,500 less ₹ 3,000 (pre-acquisition dividend received on 1,000 shares purchased on 20.5.17) Hence, weighted average cost per share will be considered as ₹ 11.875 per share (66,500/5,600).

2. It has been considered that no dividend was received on bonus shares as the dividend pertains to the year ended 31st March 2016.

3. Calculation of right shares subscribed by Vijay Right Shares (considering that right shares have been granted on Bonus Shares also) = 5,000/5 × 11,000 shares
Shares subscribed = 1,000 × 60%= 600 sharps
Value of right shares subscribed = 600 shares @ ₹ 20 per share = ₹ 12,000
Calculation of sale of right renouncement
No. of right shares sold = 1,000 × 40% = 400 shares
Sale value of right = 400 shares × ₹ 3 per share = ₹ 1,200
Note: As per para 13 of AS 13, sale Prepare of rights is to be credited to P & L A/c.

Question 23.
Following transactions of Nisha took place during the financial year 2017-18:

1st April 2017	Purchased ₹ 9,000 8% bonds of ₹ 1oo each at ₹ 80.50 cum-Interest. Interest is payable on 1st November and 1st May.
1st May 2017	Received half year’s interest on 8% bonds.
10th July 2017	Purchased 12,000 equity shares of ₹ 10 each in Moon Limited for ₹ 44 each through a broker, who charged brokerage @ 2%.
1st October 2017	Sold 2.250 8% bonds at ₹ 81 Ex-interest.
1st November 2017	Received half year’s interest on 8% bonds.
15th January 2018	Moon Limited made a rights issue of one equity share for every four Equity shares held at ₹ 5 per share. Nisha exercised the option for 40% of her entitlements and sold the balance rights in the market at 2.25 per share.
15th March 2018	Received 18% interim dividend on equity shares of Moon Limited

Prepare separate investment accounts for 8% bonds and equity shares of Moon Limited in the books of Nisha for the year ended on 31st March 2018. Assume that the average cost method is followed. (Nov 2018, 10 marks)
Answer:

Working Notes:
1. Purchase of bonds on 01/04/2017:
Interest element in purchase of bonds = 9,000 × 100 × 8% × \(\frac{5}{12} \) = ₹ 30,000
Investment element n purchase of bonds (9,000 × 80.50) – 30,000 = ₹ 6,94,500

2. Sale of bonds on 01/10/2017:
Interest element in Sale of bonds = 2,250 × 100 × 8% × 5/12 = ₹ 7,500
Investment element in sale of bonds = 2,250 × 81 = ₹ 1,82,250

4. Closing Balance as on 31/03/2018 of 8% Bonds:
= \(\frac{6,94,500}{9,000}\) × 6,750 = ₹ 5,20,875
Interest accrued on bonds on 31/03/2018 = 6750 × 1oo × 8% ×\(\frac{5}{12}\) = ₹ 22,500

5. Calculation of right shares subscribed by Moon Limited Right shares \( \frac{12,000 \text { shares }}{4}\) × 1 = 3000 shares
Shares subscribed by Nisha = 3,000 × 40% = 1,200 shares
Value of right shares subscribed = 1,200 shares @ ₹ 5 per share = ₹ 6,000

6. Calculation of Sale of right entitlement by Moon Limited:
No. of right shares sold = 3,000 – 1,200 = 1,800 shares
Sale value of right 1.800 shares × ₹ 2.25 per share = ₹ 4,050.
Note: As per Para 13 of AS 13, Sale proceeds of rights is to be credited to P & L A/c

Question 24.
Mr. Harsh provides the following details relating to his holding in 10% debentures (face value of ₹ 1oo each) of Exe Ltd., held as current assets:
1.4.2018 opening balance – 12,500 debentures, cost ₹ 12,25,000
1.6.2018 purchased 9000 debentures @ ₹ 98 each ex-interest
1.11.2018 purchased 12,000 debentures @ ₹ 115 each cum-interest
31.1.2019 sold 13,500 debentures @ ₹ 110 each cum-interest
31.3.2019 Market value of debentures @ ₹ 115 each
Due dates of interest are 30” June and 31st December.
Brokerage at 1% is to be paid for each transaction. Mr. Harsh closes his books on 31.3.2019. Show investment account as it would appear in his books assuming FIFO method is followed. (Nov 2019, 10 marks)
Answer:

Working Notes:
1. Purchase of debentures on 1/612018:
Interest element = 9.000 × 100 × 10% × 5/12 = ₹ 37,500
Investment element = (9,000 × 98) + [(1% (9,000 × 98)]
= ₹ 8,90,820

2. Purchase of debenture on 1/11/2018:
Interest element = 12,000 × 1oo × 10% × 4/12 = ₹ 40,000
Investment element = [(12,000 × 115) + [1% (12,000 × 115)]-40,000 = ₹ 13,53,800

3. Profit on Sale of debenture on 31/1/2019:
Sales price of debentures (13.500 × ₹ 110) = ₹ 14,85,000
Less: Brokerage @ 1% = 14,850
Less: Interest (13,500 × 100 × 10% × 1/12) = ₹ 11,250
Cost (Sale Proceeds) = ₹ 14,58,900

Question 25.
Ram furnishes the following details relating to his holding in 16% Debentures of Sita Ltd
(a) Opening Balance (1st Jan) Face Value ₹ 60,000 – Cost ₹ 59,000
(b) 1st March Purchased 100 Debentures ex-interest at ₹ 98
(c) 1st JuIy Sold 200 Debentures ex-interest Out of the original holding at ₹ 100
(d) 1st October Purchased 50 Debentures at ₹ 98 cum -interest.
(e) 1st November Sold 200 Debentures ex-interest at ₹ 99 out of the original holdings.
(f) Interest Dates are 30th September and 31st March.
Anugraha closes his books every 31st December. Brokerage at 1% is to be paid for each transaction.
Prepare the Investment Account as it would appear in his books. Market Value of Debentures on 31st December is ₹ 99.
Answer:

Note:
Net Gain on Sale of Investments (from Point 3) = ₹ 133- ₹ 65 = ₹ 68, transferred to P&L A/c at the end of the year. Alternatively, the Gain of 1 33 and Loss of 65 can be separately transferred to P&L, on the dates of sale itself.
. Market Value of Investments at year-end = 350 x ₹ 99= ₹ 34,650. Cost as per above A/c Closin9 Balance bal. figure = ₹ 34,513. So, B/Sheet Value = Lower of Cost or Market Value = Cost ₹ 34,513.

Question 26.
On 1st April 2017, ‘A’ had 25,000 Equity Shares of ABC Ltd. at a Book Value of ₹ 15 per Share (Face Value ₹ 10). On 20th June 2017, he purchased another 5,000 Shares of the Company at ₹ 16 per Share. The Directors of ABC Ltd. announced a Bonus and Rights Issue. No Dividend was payable on their issues. The terms of the issue are as follows:
Bonus Basis 1:6 (Date: 16th August 2017)
Rights Basis 3:7 (Date: 31st August 2017) Price ₹ 15 per Share. Due date for payment 30th September 2017.
Shareholders can transfer their rights In full oc in part. Accordingly. ‘A’ sold 1/3rd of his entitlement to ‘B’ for a consideration of ₹ 2 per Share. Dividends: Dividends for the year ended 31st March 2017 at the rate of 20% were declared by ABC Ltd. and received by ‘A’ on 31st ‘ October 2017.

Dividends for Shares acquired by him on 20th June 2017 are to be adjusted against cost of purchase. On 15th November 2017, ‘A’ sold 25,000 Equity Shares at a Premium of ₹ 5 per Share. ‘
Prepare –
(1) Investment Account, and
(2) Profit & Loss Account in the books of ‘A’. Assume that the books are closed on 31st December, 2017, and Shares are valued at Average Cost.
Answer:

Question 27.
ABC Limited held on 1st April 2017 ₹ 2,00,000 of 19% Government Loan at ₹ 1,90000 (Face Value of Loan ₹ 1oo each). Three month’s interest had accrued on the above date.
(a) On 31st May 2017, the Company purchased the same Loan having a Face Value of ₹ 80,000 at ₹ 95 (net) cum-interest.
(b) On 1st June, 2017, ? 60,000 Face Value Loan was sold at ₹ 94 (net) ex-interest.
(c) Interest on the Loan was paid each year on 30th June and 31st December and was credited by the Bank on the same date.
(d) On 30th November 2017, ₹ 40,000 Face Value of the loan was sold at ₹ 97 (net) cum-interest.
(e) On 1st December 2017, the Company purchased the same loan ₹ 10,000 at ex-interest.
(f) On 1st March 2018, the Company sold ₹ 10,000 Face Value of the Loan at ₹ 95 ex-interest.
(g) The Market Price of the Loan on 31st March 2018 was ₹ 96. Prepare the 9% Government Loan Account in the books of ABC Limited. FIFO Method shall be followed and the balance of the Loan held by the Company shall be valued at Total Average Cost or Market Price, whichever is lower. Calculation shall be made to the nearest Rupee or multiple thereof.
Answer:

Note = Avg Cost p.u = \(\frac{₹ 1,68,500}{18000 \text { units }}\) = ₹ 93.61. Since, Cost ( 93.61)

Question 28.
‘A’ carried out the following transactions in the Shares of ABC Ltd.
(a) On 1st April 2017, he purchased 20,000 Equity Shares of ₹ 1 each fully paid up for ₹ 30,000.
(b) On 15th May 2017, he sold 4,000 Share for ₹ 7,600.
(c) At a Meeting on 15th June 2017, the Company decided –
(i) To make a Bonus Issue of one fully paid-up Share for every four Shares held on 1st June 2017, and
(ii) To give its Members, the right to apply for one Share for every five Shares held on 1st June, 2017 at a Price of ₹ 1.50 per Share of which ₹ 0.75 is payable on or before 15th July 2017, and the balance, ₹ 0.75 per Share, on or before 15th September 2017. The Shares issued under (i) and (il) were not to rank for dividend for the year ending 31st ‘ December 2017.
(d) ‘A’ received his Bonus Shares and took up 2,000 Shares under the Rights, paying the sum thereon when due and selling the Rights of the remaining Shares at ₹ 0.40 per Share, the proceeds were received on 30th September 2017.
(e) On 15th March 2018, ‘A’ received a dividend from ABC Ltd. of 15% in respect of the year ended 31st December 2017.
(f) On 30th March 2018, ‘A’ received ₹ 14,000 from the Sale of 10,000 Shares.
Record these transactions the Investment Account in A’s books for the year ended 31st March 2018 transferring any Profits or Losses on these transactions to Profit and Loss Account. Apply Average Basis. Expenses and Tax to be ignored.
Answer:

Question 29.
On 1st April 2017, XYZ Ltd. has 15,000 Equity Shares of ABC Ltd., at a Book Value of ₹ 15 per Share (Face Value 10 per Share). On 1st June 2017, XYZ Ltd. acquired 5.000 Equity Shares of ABC Ltd., for ₹ 1,00,000 on cum-rights basis. Vaikuntam Ltd. announced a Bonus and Rights Issue.
(a) Bonus was declared, at the rate of one Equity Share for every five Shares held, on 1st July 2017.
(b) Rights Shares re to be issued to the existing Shareholders on 1st September, 2017. The Company will issue one Right Share for every 6 Shares at 20% Premium. No. dividend was payable on these Shares.
(c) Dividend for year ended 31-3-2017 was declared by ABC Ltd. at 20%, and received by XYZ Ltd. on 31 October 2017.
(d) XYZ Ltd. – (i) Took up half the Rights Issue, and (ii) Sold the remaining rights for ₹ 8 per Share.
(e) XYZ Ltd. sold half of its shareholdings on 1st January 2018 at ₹ 16.50 per Share, Brokerage being 1%.
Prepare Investment alc of XYZ Ltd. for the year ended 31st March 2018, assuming the Shares are valued at Average Cost.
Answer:

Note:50% of the Shareholdings are sold, for which cost is ₹ 1,69500 as per WN. 6. Hence. Cost of Balance 50% Shareholdings at period -end is also ₹1,69,500.

Important Notes
Sale Proceeds of Rights is to be credited to P&L A/c and not Investment A/c, since the Ex-Rights Price Is not lower than the Cost of Acquisition.
Reduce the Dividend on Shares acquired on 1st June 2017 from the cost of acquisition, to arrive at the Net Cost of Shares as on 31st March 2018. since it is Pre Acquisition Dividend.

Question 30.
The following transactions of Ram took place during the year ended 31st March 2018.

1st April 2017	Purchased 12,00,000 8% Bonds at ₹ 80.5 cuminterest. Interest is payable on 1st November and 1st May.
12th April 2017	Purchased 1,00,000 Equity Shares of ₹ 10 each in Shyam Ltd. for ₹ 40,00,000.
1st May 2017	Received half-year’s interest on 8% Bonds.
15th May 2017	Shyam Ltd. made a bonus Issue of three Equity Shares for every two held. Ram sold 1,25.000 Bonus Shares at ₹ 20 each.
1st October 2017	Sold ₹ 3,00,000 8% Bonds at ₹ 81 ex-interest.
1st November 2017	Received half year’s Bond Interest.
1st December 2017	Received 18% Dividend on Equity Shares in Shyam Ltd.

Prepare the relevant Investment Accounts in the books of Ramajayam for the year ended 31st March 2018.
Answer:

Question 31.
A Ltd. purchased on 1st April 2018 8% convertible debenture in C Ltd. of face value of ₹ 2,00,000 @ ₹ 108 on 1st July 2018 A Ltd. purchased another ₹ 1,00,000 debenture @ ₹ 112 cum interest. On 1st October 2018, ₹ 80,000 debenture was sold @ ₹ 108. On 1st December 2018, C Ltd. give option for conversion of 8% convertible debentures into equity share of 10 each. A Ltd. receive 5,000 equity share in C Ltd. in conversion of 25% debenture held on that date. The market price of debenture and equity share in C Ltd. at the end of yea 2018 is ₹ 110 and ₹ 15 respectively. Interest on debenture is payable each year on 31st March and 30th September. The accounting year of A Ltd. is calendar year. Prepare investment account in the books of A Ltd. on average cost basis.
Answer:

Working Notes: :
(i) Cost of Debenture purchased on 1st July = ₹ 1,12,000 – ₹2,000 (Interest) = ₹ 1,10,000

(ii) Cost of Debentures sold on 1st Oct. = ₹ 86,933 = (₹ 2,16,0O0 + ₹ 1 ,10,000) × 80,000/3,00,000 = ₹ 86933

(iii) Loss on sale of Debentures = ₹ 86,933 – ₹ 84,000 = ₹ 2,933 Nominal value of debentures converted into equity = ₹ 55,000 shares
[(₹ 3,00,000 -80,000) × 25]
Interest received before the conversion of debentures
Interest on 25% of total debentures = 55,000 × 8% × 2/12 = 733

(iv) Cost of Debentures converted = (₹ 2,16.000 + ₹ 1,10,000) × 55,000/3,00,000 = ₹ 59,767

(v) Cost of dosing balance of Debentures
= ( ₹2,16,000 + ₹ 1,10.000) × 1,65,000/ 3,00,000 = 1,79,300

(vii) Closing balance of Debentures has been valued at cost being lower than the market value i.e. ₹ 1,81,500 (₹ 1,65,000 @ ₹ 110)
(viii) 5,000 equity Shares in C Ltd. will be valued at cost of ₹ 59,767 being lower than the market value ₹ 75,000 ( ₹ 15 x 5,000)
Note: It is assumed that interest on debentures, which are converted into cash, has been received at the time of conversion.

Redemption of Debentures – CA Inter Accounts Question Bank is designed strictly as per the latest syllabus and exam pattern.

Redemption of Debentures – CA Inter Accounts Question Bank

Question 1.
Comment on adequacy of Debenture Redemption Reserve (DRR) w.r.t. following:
Debentures issued by
(i) All India Financial Institutions regulated by Reserve Bank of India and Banking companies.
(ii) For other Financial Institutions within the meaning given in the Companies Act.
(iii) For debentures issued by NBFCs registered with the RBI.
(iv) For debentures issued by other companies including manufacturing and infrastructure companies. (May 2015, 4 marks)
Answer:

Question 2.
ABC Ltd. has Authorized Capital of 8,00,000 Equity Shares of ₹ 10 each. But out of these 2,40,000 shares have been issued as fully paid. The Company has an outstanding 14% Debentures Loan of ₹ 24,00,000 redeemable at 102% and interest has been paid up to date. The Directors resolved to redeem the Debentures on 1st January and the Holders are given an option to receive payment either wholly in cash or wholly in fully Paid Equity Shares @ 8 Shares for every ₹ 100 of Debentures.

On that date, the balance of the Debenture Redemption Reserve Account is 20.00,000 and corresponding Investment Account ₹ 20,00,000 (at cost) of which the Market Value is ₹ 18,00,000. 75% of the Holders decided to exercise the option for taking Shares in repayment and cash for the rest is procured by realizing an adequate amount of Investment at the prevailing Market Value. Draw up Journal Entries (including Cash Book Entries) to give effect to the above transactions.
Answer:

Question 3.
Mention the ways by which Redeemable Debentures may be redeemed under Companies Act, 2013. (May 2016,4 marks)
Answer:
The following are the ways by which Redeemable Debentures may be redeemed:

1. By Payment in Lumpsum	In this method, the payment of entire debt is made one lot at the expiry of a specified period (i.e. at maturity) or even before expiry of the specified period after passing necessary resolution at the meeting of the debenture holders.
2. By Payment In Instalments	In this method, the payment of specified portion of debentures debt s made in instalments at specified rates for e.g., a debentures of ₹ 100 may be discharged as 20% or ₹ 20 on 1/1/2011,20% or ₹ 20 on 1/1/2013, 30% or ₹ 30 on 1/1/2015, 30% or ₹ 30 on 1/1/2017 or etc.
3. Redemption by Purchase in the open market	When a company purchases its own debentures in the open market for the purpose of cancellation, such an act of purchasing and cancelling the debentures constitutes redemption by purchase in the open market.

Question 4.
A Company purchased its own 11% debentures In the open market for ₹ 50,00.000 (Cum-interest). The interest amount included in the purchase price is ₹ 1,50,000. The face value of the debentures purchased is ₹ 52,00,000. The Company cancelled the debentures so purchased. Pass Journal Entries in the books of the Company or purchase and immediate cancellation of debentures.(Nov 2007, 4 marks)
Answer:

Question 5.
Rama Limited issued 8% Debentures of ₹ 300,000 in earlier year on which interest is payable half yearly on 31st March and 30th September. The company has power to purchase its own debentures in the open market for cancellation thereof. The following purchases were made during the financial year 2009-10 and cancellation made on 31st March 2010:
(a) On 1st April 50,000 nominal value purchased for ₹ 49,450, ex-interest.
(b) On 1st September 30,000 nominal value purchased for ₹ 30,250 cum interest.
Show the Journal Entries (without narrations) for the transactions held in the year 2009-10. (Nov 2010, 5 marks)
Answer:

Question 6.
On 1st April 2010, A Ltd had outstanding In its books 1,00,000 Debentures of ₹ 100 each, interest @ 12% per annum. The interest on debentures was paid half-yearly on 30th September and 31st March of every year. On 31st May 2010, the company purchased 30,000 Debentures of its own @ ₹ 98 (ex-interest) per debenture. The company cancelled the debentures so purchased on 31st March 2011. Pass the necessary Journal Entries to record the above transactions for the year ended 31st March 2011. (Nov 2011, 5 marks)
Answer:

Question 7.
Himalayas Ltd. had 10,00,000/-8% Debentures of ₹ 100 each as on 31st March, 2011. The company purchased in the open market following debentures for immediate cancellation:
On 01-07-2011 – 1000 debentures @ ₹ 97/(cum interest)
On 29-02-2012- 1800 debentures @ ₹ 99/(ex interest)
Debenture interest due date is 30th September and 31st March. Give Journal Entries in the books of the company for the year ended 31st March, 2012. (Nov 2012, 8 marks)
Answer:

Question 8.
M/s. Piyush Ltd. had the following among their ledger opening balances on January 1, 2014:
11% Debenture A/c (2002 issue) ₹ 80,00000
Debenture Redemption Reserve A/c ₹ 70,00,000
13.5% Debenture in Sneha Ltd. A/c (Face Value ₹ 30,00,000) ₹ 29,00,000
Own Debentures A/c (Face Value ₹ 30,00,000) 27,00,000
As 31st December 2014 was the date of redemption of the 2002 debentures, the company started buying own debentures and made the following purchases in the open market:
1 -2-2014 – 5000 debentures at ₹ 98 cum-interest
1-6-2014 – 5000 debentures at ₹ 99 ex-interest.
Half-yearly interest is due on the debentures on 30th June and 31st December in the case of both the companies.
On 31st December 2014, the debentures in Sneha Ltd. were sold for ₹ 95 each ex-interest. On that date, the outstanding debentures of M/s. Piyush Ltd. were redeemed by payment and by cancellation. Show the entries in the following ledger accounts of M/s. Piyush Ltd. during 2014:
(i) Debenture Redemption Reserve Account.
(ii) Own Debenture Account.
The face value of a debenture was ₹ 100. (May 2015, 12 marks)
Answer:

Question 9.
Answer the following:
Gurudev Limited purchases for immediate cancellation 6,000 of its own 12% debentures of ₹ 100 each on 1st November, 2017. The dates of interest being 31st March and 30th September. Pass necessary journal
entries relating to the cancellation if:
(i) Debentures are purchased at ₹ 98 ex-interest.
(ii) Debentures are purchased at ₹ 98 cum-interest. (May 2018, 5 marks)
Answer:

Question 10.
A Company had issued 1,000 12% debentures of ₹ 100 each redeemable at the company’s option at the end of 10 years at par or prior to that by purchase in open market or at ₹ 102 after giving 6 months notice. On 31st December, 2016, the accounts of the company showed the following balances:
On debenture redemption fund ₹ 53,500 represented by 10% Govt. Loan of a nominal value of ₹ 42,800 purchased at an average price of ₹ 101 and ₹ 10,272 uninvested cash in hand.

On 1st January 2017, the company purchased ₹ 11,000 of its own debentures at a cost of ₹ 10,272. On 30 June 2017, the company gave a six months notice to the holders of ₹ 40,000 debentures and on 31st December, 2017 carried out the redemption by sale of ₹ 40,800 worth of Govt. Loan at par and also cancelled the own debentures held by it. Prepare ledger account of Debenture Redemption Fund Account and Debenture Redemption Fund Investment Account for the year ended 31.12.2017, assuming that, interest on company debentures & Govt. loan was payable on 31st December every year. (Nov 2018,8 marks)
Answer:

Question 11.
Sumit Ltd. (an unlisted company other than AIFI, Banking company, NBFC and HFC) had 8,000, 9% debentures of 100 each outstanding as on 1st April, 2019, redeemable on 31st March, 2020.
On 1st April, 2019, the following balances appeared in the books of accounts:
Investment in 1,000, 7% secured Govt. bonds of ₹ 100 each, ₹ 1,00,000.
Debenture Redemption Reserve is ₹ 50,000.
Interest on investments ¡s received yearly at the end of financial year. 1,000 own debentures were purchased on 30th March 2020 at an average price of ₹ 96.50 and cancelled on the same date.

On 31st March 2020, the investments were realized at par and the debentures were 1edeemed. You are required to write up the following accounts for the year ended 31st March 2020:
(1) 12% Debentures Account.
(2) Debenture Redemption Reserve Account.
(3) DRR Investment Account.
(4) Own Debentures Account. (Nov 2020,10 marks)

Question 12.
ABC Ltd. issued ₹ 10,00,000, 6% Debenture Stock at par on 21.01.2014. Interest was payable on 30th June and 31st December, in each year. Under the terms of the, Debenture Trust Deed the stock is redeemable at par. The Trust Deed obliges the Company to pay to the Trustees on 31.12.2015, and annually thereafter the sum of ₹ 1,00,000 to be utilised for the redemption and cancellation of an Equivalent Amount of Stock, which is to be selected by drawing lots.

Alternatively, the Company is empowered as from 01.01.2015, to purchase its Own Debentures on the Open Market. These Debentures must be surrendered to the Trustees for cancellation and any adjustments for Accrued Interest recorded in the Books of Account. If any year, the Nominal Amount of the stock surrendered under this alternative does not amount to ₹ 1,00,000, then the shortfall is to be paid by the company to the Trustees in cash on 31 December. The following Purchases of Stock were made by the Company.

Date	Nominal Value of Stock Purchased (₹)	Purchase Price per ₹ 100 of stock (₹)
30.09.2015	1,20,000	98(Cum Interest)
31.05.2016	75,000	95(Ex-Interest)
31 .07.2017	1,15,000	92(Cum Interest)

Assuming that the Company fulfilled all its obligations under the Trust Deed, prepare the following Ledger Accounts – (a) Debenture Stock A/c, (b) Debenture Redemption A/c, and (c) Debenture Interest A/c. Ignore costs of transaction and taxation.
Answer:

Question 13.
ABC Limited ssued 10% Debentures at par for ₹ 8 Lakhs. Interest was payable half yearly on 30th June and 31st December every year. Under the terms of the Trust Deed, the Debentures are redeemable at par (three years after issue) by the Company purchasing them in the Open Market and cancelling, them with a minimum redemption of ₹ 80,000 every year.

In case, there is a shortfall in redemption by the Company by Open Market Operations, the shortfall would be made good by the Company by payment on the last day of the accounting year to the Trustees, who would then draw lots and redeem the balance Debentures.

The Company purchased its Own Debentures for cancellation as under:
30.09.2018 ₹ 1.00,000 at ₹ 98 cum-interest.
31.05.2019 ₹ 60,000 at ₹ 95 ex-interest.
31.07.2020 ₹ 90,000 at ₹ 96 cum-interest.
The Company carned out its obligations under the Trust Deed. Prepare the following Ledger Accounts In the books of the Company, for Calendar Years 2018, 2019 and 2020 – (a) Debenture A/c, (b) Debenture Redemption A/c, and (c) Debenture Interest A/c. Ignore Taxation.
Answer:

Question 14.
Conversion of debt into equity is a non-cash transaction.” Comment. (Nov 2009, 2 marks)
Answer:
Under certain cases, debenture holders are offered an option to convert their debts into equity by issuing equity share capital. in such circumstances, debentures are redeemed by issuing fresh share capital.
Journal Entry will be as follows:

In such entry, no cash account is opened. Therefore, one can conclude that the conversion of debt to equity is a non-cash transaction.

Question 15.
The Balance Sheet of Dee Limited on 31st March. 2009 was as follows:

At the General meeting, it was resolved to:
1. Pay proposed dividend of 10% in cash.
2. Give existing shareholders the option to purchase one share of ₹ 10 each at ₹ 15 for every five shares held. This option was taken up by all the shareholders.
3. Redeem the debentures at a premium of 5% and also confer option to the debenture holders to convert 50% of their holding into equity shares at a predetermined price of ₹ 15 per share and balance payment to be made in cash.

Holders of 3,000 debentures opted to get their debentures redeemed in cash only while the rest opted for getting the same converted into equity shares as per the terms of issue. Debenture redemption fund investments realised ₹ 1,80,000 on” Sales.

You are required to redraft the Balance Sheet after giving effects of the tight issue and redemption of debentures. Also, show the calculations in respect of number of equity shares issued and cash payment. (2009- Nov, 16 marks)
Answer:

Working Notes:

Question 16.
A Company had issued 20,000, 13% Convertible debentures of ₹ 100 each on 1st April 2007. The debentures are due for redemption on 1st July 2009. The terms of issue of debentures provided that they were redeemable at a premium of 5% and also conferred option to the debenture holders to convert 20% of their holding into equity shares (Nominal value ₹ 10) at a price of ₹ 15 per share.

Debenture holders holding 2,500 debentures did not exercise the option. Calculate the number of equity shares to be allotted to the Debenture holders exercising the option to the maximum. (May 2010, 2 marks)
Answer:

Redemption value of 3,500 debentures at a premium of 5% [3,500 x (100 + 5)] ₹ 3,67,500
Equity shares of 10 each issued on conversion [ ₹ 3,67,500/₹ 15] 24,500 shares

Question 17.
XYZ Ltd. had issued 30,000, 15% convertible debenture of ₹ 100 each on 1st April 2008. The debentures are due for redemption on 1st March, 2011. The terms of issue of debentures provided that they were redeemable at a premium of 5% and also conferred option to the debenture holders to convert 20% of their holding into equity shares (Nominal Value ₹ 10) at a price of ₹ 15 per share. Debenture holders holding 2500 debentures did not exercise the option. Calculate the number of equity shares to be allotted to the Debenture holders exercising the option to the maximum. (May 2011, 4 marks)
Answer:
Computation of number of equity shares allotted to be debenture holders

Question 18.
M Limited recently made a public issue of debentures. The following information is available in respect of the issue:
(i) 3,00,000 partly convertible debentures of face value and issue price of ₹ 100 per debenture were issued; .
(ii) Conversion of 50% of each debenture is to be done on expiry of 6 months from date of close of issue;
(iii) Date of closure of subscription list is 1st June 2012. Date of allotment is 1st July 2012.
(iv) Interest on debenture at the rate of 12% is payable from date of allotment;
(v) Equity share of ₹ 10 each are issued at ₹ 50 per share for the purpose of conversion;
(vi) Underwriting commission is 2%;
(vii) 2,25,000 debentures were applied for;
(viii) Interest on debentures is payable halt yearly on 30th September and 31st March.
Give Journal entries for all transactions relating to the above, including cash and bank entries or the year ended 31st March, 2013. (Nov 2013,8 marks)
Answer:

Question 19.
The summarized Balance Sheet of Spices Ltd. as On 31st March 2013 read as under:

The debentures are due for redemption on 1st April, 2013. The terms of issue of debentures provided that they were redeemable at a premium 5% and also conferred option to the debenture holders to convert 25% of their holding into equity shares at a predetermined price of ₹ 11.90 per share and the balance payment in cash.
Assuming that:
(i) Except for debenture holders holding 12,000 debentures in aggregate, rest of them exercised the option for maximum conversion,
(ii) The investments realized ₹ 32,00,00 on sale,
(iii) All the transactions were taken place on 1st April 2013 with out any lag,
(iv) Premium on redemption of debentures is to be adjusted against General Reserve.
Redraft the Balance Sheet of Entyce Ltd. as on 01.04.2013 after giving effect to the redemption. Show your calculations in respect of the number of equity shares to be allotted and the cash payment necessary.
Answer:

Question 20.
Venus Limited recently made a public issue in respect of which the following information is available:
(i) No. of partly convertible debentures issued 4,00,000; face value and issue price of ₹ 100 per debenture.
(ii) Convertible portion per debenture – 80%, date of conversion – on expiry of 7 months from the date of closing of issue.
(iii) Date of closure of subscription list – 01.06.2013, date of allotment – 01.07.2013, Rate of interest on debentures – 10% pa. payable from the date of allotment. Value of equity share for the purpose of conversion – 40 (Face value ₹ 10)
(iv) Underwriting commission – 3%
(v) No. of debentures applied for 3,00,000
(vi) Interest payable on debentures – halt yearly on 30th September and 31st March.
Write relevant journal entries for all transactions arising out of the above during the year ended on 31st March 2014 (including cash and bank entries). (Nov 2014, 8 marks)
Answer:

Question 21.
Answer the following:
A company had issued 40,000, 12% debentures of ₹ 100 each On 1st April 2015. The debentures are due for redemption on 1st March 2019. The terms of issue of debentures provided that they were redeemable at a premium of 5% and also conferred option to the debenture holders to convert 20% of their holding into equity shares (nominal value ₹ 10) at a predetermined price of ₹ 15 per share and the payment in cash, 50 debentures holders holding totally 5,000 debentures did not exercise the option. Calculate the number of equity shares to be allotted to the debenture holders and the amount to be paid in cash on redemption. (Nov 2019, 5 marks)
Answer:

Question 22.
During the year 2019-20, A Limited (a listed company) made a public issue in respect of which the following information is available:
(i) No. of partly convertible debentures issued – 1,00,000; face value and issue price ₹ 100 per debenture. (Whole issue was underwritten by X Ltd.)
(ii) Convertible portion per debenture- 60%, date of conversion- on expiry of 6 months from the date of closing of issue.
(iii) Date of closure of subscription lists- 1st May 2019, date of allotment- 1st June 2019, rate of interest on debenture -15% p.a. payable from the date of allotment, value of equity share for the purpose of conversion – ₹60 (face value ₹ 10)
(iv) Underwriting Commission -2%
(v) No. of debentures applied for by public – 80,000
(vi) Interest is payable on debentures half yearly on 30th September and 31st March each year. Pass relevant journal entries for all transactions arising out of the above
during the year ended 31st March 2020. (including cash and bank entries) (Jan 2021, 8 marks)

Question 23.
The summarized Balance Sheet of Spices Ltd. as on 31st March 2018 read as under:

The debentures are due for redemption on 1st April 2018. The terms of issue of debentures provided that they were redeemable at a premium 10% and also conferred option to the debenture holders to convert 40% of their holding into equity shares at a predetermined price of ₹ 11 pe share and the balance payment in cash.
Assuming that:
(i) Except for debenture holders holding 200 debentures In aggregate, rest of them exercised the option for maximum conversion,
(ii) The investments realized ₹ 56,000 on sale,
(iii) All the transactions were taken place on 1st April, 2018
(iv) Premium on redemption of debentures is to be adjusted against General Reserve.
You are required to
(a) Redraft the Balance Sheet of Spices Ltd. as on 01.04.2018 after giving effect to the redemption.
(b) Show your calculations in respect of the number of equity shares to be allotted and the cash payment necessary.
Answer:

Redemption of Preference Shares – CA Inter Accounts Question Bank is designed strictly as per the latest syllabus and exam pattern.

Redemption of Preference Shares – CA Inter Accounts Question Bank

Question .1
What are the conditions which must be fulfilled for redemption of preference shares? (June 2011, 6 marks)
Answer:
As per Sec. 55 of the Companies Act, 2013 the condtions which must be fulfilled for redemption of preference shares are as follows:

1. Such shares must be fully paid up.

2. Such shares shall be redeemed only out of profits or out of the proceeds of a fresh Issue of shares made for the purpose of redemption.

3. ln case the company proposes redemption of shares out of the profits of the company, there shall, out of such profits, be transferred, a sum equal to the nominal amount of the shares to be redeemed, to a reserve, to be called the Capital Redemption Reserve Account, and the provisions of this Act relating to reduction of share capital of a company shall, except as provided in this section, apply as if the Capital Redemption Reserve Account were paid-up share capital of the company. The capital redemption reserve account may be applied by the company, in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares.

4. Certain class of companies as may be prescribed and whose financial statements comply with the accounting standards prescribed under Section 133, for such class of companies, the premium if any, payable on redemption shall b provided for out of the profits of the company. before the shares are! redeemed. For other companies the premium if any, payable on redemption shall be provided for out of the profits of the company or out of the company’s securities premium account, before such shares are redeemed.

5. No company limited by shares shall after the commencement of the companies issue any preference shares which is irredeemable or is redeemable after the expiry of a period of twenty years from the date of issue.

Question 2.
Jolly Ltd. has the following balance sheet as on 31st March 2008: (June 2009, 6 marks)

The preference shares are to be redeemed at 10% premium. Fresh issue of equity shares is to be made to the extent it is required under the Companies Act, 2013 for the purpose of this redemption. The shortfall in funds for the purpose of the redemption after utilising the proceeds of the fresh issue are to be met by taking a bank loan. Show journal entries.
Answer:

Question 3.
Extract of ledger balances of Kalpana Ltd. as on 31st March 2015 includes the following:
2,000, 12% Preference shares of 100 each, fully paid ₹ 2,00,000
Surplus ₹40,000
Securities premium ₹12,000
Under the terms of issue, the preference shares are redeemable on 31st March 2015 at a premium of 10%. The directors desire to make a minimum fresh issue of equity shares of 10 each at a premium of 5% for redemption purpose. You are required to ascertain the amount of fresh issues to be made and pass necessary journal entries in the books of the company. (June 2016, 5 marks)
Answer:

Question 4.
Dheeraj Limited had 5,000 10% Redeemable Preference Shares of ₹ 100 each, fully paid up. The company had to redeem these shares at a premium of 10%.
It was decided by the company to issue the following:
(i) 40.000 Equity Shares of ₹10 each at par
(ii) 2,000 12% Debentures of ₹ 100 each.
The issue was fully subscribed and all accounts were received in full. The payment was duly made. The company had sufficient profits. Show journal entries in the books of the company.  (May 2018, 10 marks)
Answer:

Working Note:
1. Amount to be transferred to Capital Redemption Reserve Account

Question 5.
Answer of the following:
Explain the conditions when a company should issue new equity shares for redemption of the preference shares. Also, discuss the advantages and disadvantages of redemption of preference shares by issue of equity shares. (Nov 2018, 5 marks)
Answer:
A company may prefer Issue of new equity shares on the basis of following conditions:

1. When the company realises that the capital is needed permanently and it makes more sense to issue equity shares in place of Redeemable Preference Shares which carry a fixed rate of dividend.
2. When the balance of profit, which would otherwise be available for dividend, is insufficient.
3. When the liquidity position of the company Is not good enough.

Advantages of redemption of preference shares by issue of fresh equity shares:

1. No cash outflow of money is required now or later.
2. New equity shares may be valued at a premium
3. Shareholders retain their equity interest.

Disadvantages of redemption of preference shares by issue of tresh equity shares:

1. There will be dilution on future earnings:
2. Share-holding In the company is changed.

Question 6.
The Summarized Balance Sheet of Clean Ltd. as on 31 March 2019 is as follows:

The Share Capital of the company consists of ₹ 50 each Equity shares of ₹ 4,50,000 and ₹ 100 each 8% Redeemable Preterence Shares of ₹ 1.30,000 (issued on 1.4.2017)
Reserves and Surplus comprise statements of profit and loss only. In order to facilitate the redemption of preference shares at a premium of 10%, the Company decided:
(a) to sell all the investments for ₹ 30,000.
(b) to finance part of redemption from company funds, subject to, leaving a Bank balance of ₹ 24,000.
(C) to issue minimum equity share of ₹ 50 each at a premium of ₹ 10 per share to raise the balance of funds required.
You are required to
1. Pass Journal Entries to record the above train stations.
2. Prepare Balance Sheet upon completion of the above transactions. (May 2019, 10 marks)
Answer:

Working Note:
1. Calculation of Number of Shares:

Question 6.
The Books of Arpit Ltd. shows the following Balances as on 31 December 2019:

	Amount (₹)
600,000 Equity shares of  ₹ 10 each fully paid up	60,00,000
30,000, 10% Preference shares of  ₹ 100 each,  ₹ 80 paid tip	24,00,000
Securities Premium	6,00,000
Capital Redemption Reserve	18,00,000
General Reserve	35,00,000

Under the terms of issue, the Preference Shares are redeemable on 31 March 2020 at a premium of 10%. In order to finance the redemption, the Board of Directors decided to make a fresh issue of 1,50,000 Equity shares of ₹ 10 each at a premium of 20%. ₹ 2 being payable on application, ₹ 7 (Including premium) on allotment and the balance on 1 January 2021. The issue was fully subscribed and allotment made on March 2020. The money due on allotment was received by 20th March 2020.

The preference shares were redeemed after fulfilling the necessary conditions of Section 55 of the Companies Act, 2013. You are required to pass the necessary Journal Entries and also show how the relevant items will appear in the Balance Sheet of the company after the redemption carried out on 31st March 2020. (Nov 2020, 12 marks)

Question 7.
The Capital structure of a company BK Ltd. consists of 30,000 Equity Shares of ₹10 each fully paid up and 2,000 9% Redeemable Preference Shares of ₹ 100 each fully paid up as on 31.03.2020. The other particulars as at 31.03.2020 are as follows:

	Amount (₹)
General Reserve	1,20,000
Profit & Loss Account	60,000
Investment Allowance Reserve (not free for- distribution as dividend)	15,000
Cash at bank	1,95,000

Preference Shares are to b redeemed at a premium of 10%. For the purpose of redemption. the directors are empowered to make fresh issue of Equity Shares at par after utilizing the undistributed reserve & surplus. subject to the conditions that a sum of 40,000 shall be retained in General Reserve and which should not be utilized.
Company also sold investment of 4500 Equity Shares In G Ltd., costing ₹ 45,000 at 9 per share. Pass Journal entries to give effect to the above arrangements and also show how the relevant items will appear In the Balance Sheet as at 31.03.2020 of BK Ltd., after the redemption carried out.  (Jan 2021, 12 marks)

Question 8.
The capital structure of a AP Ltd. consists of 20.000 Equity Shares of 10 each fully paid up and 1.000 8% Redeemable Preference Shares of loo each fully paid up (issued On 1.4.2011). Undistributed reserve and surplus stood as: General Reserve 80,000; Profit and Loss Account 20,000; Investment Allowance Reserve out of which 5,000, (not free for distribution as dividend) 10,000; Cash at bank amounted to ₹ 98,000.

Preference shares are to be redeemed at a Premium of 10% and for the purpose of redemption, the directors are empowered to make fresh issue of Equity Shares at par after utilising the undistributed reserve and surplus, subject to the conditions that a sum of ₹ 20,000 shall be retained In general reserve and which should not be
utilised.

Pass Journal Entries to give effect to the above arrangements and also show how the relevant items will appear In the Balance Sheet of the company after the redemption carried out.
Answer:

Working Note:
No of Shares to be issued for redemption of Preference Shares:
Face value of shares redeemed ₹ 1,00,000
Less Profit available for distribution as dividend:
General Reserve: (80,000-20,000) ₹ 60,000
Profit and Loss (20,000 – 10,000 set aside for adjusting premium payable on redemption of preference shares) ₹ 10,000

Therefore, no. of shares to be issued =25,000/₹ 10 = 2,500 shares.

Question 9.
Shreya Ltd. had an issue of 1,000, 12% redeemable preference shares of ₹100 each, repayable at a premium of 10%. These shares are to be redeemed now Out 0f the accumulated reserves, which are more than the necessary sum required for redemption. Show the necessary entries in the books of the company, assuming that the premium on redemption of shares has to be written out against the company’s securities premium reserve account. (June 2013, 6 marks)
Answer:

Question 10.
Lily Ltd.. having sufficient balance to the credit of general reserve and 1,00,000 balance in securities premium account, decides to:
Redeem 5,000, 10% redeemable preference shares of ₹ 100 each fully paid-up at a premium of 5%; and – Capital redemption reserve arising as a result of redemption be utilised in allotting the un-issued shares of the company as fully paid equity shares of 10 each by way of bonus to its members. Show journal entries for redemption of preference shares and issue of bonus shares  (Dec 2016, 5 marks)
Answer:

Question 11.
The following are the extracts from the Balance Sheet of Meera Ltd. as on 31st December 2017. Share capital: 60,000 Equity shares of ₹ 10 each fully paid – ₹ 6,00,000; 1,500 10% Redeemable preference shares of ₹ 100 each fully paid – ₹ 1,50,000.

Reserve & Surplus: Capital reserve – 75,000; Securities premium – ₹ 75,000; General reserve – ₹ 1,12,500; Profit and Loss Account – ₹ 62,500 On 1st January 2018, the Board of Directors decided to redeem the preference shares at premium of 10% by utilisation of reserve. You are required to prepare necessary Journal Entries including cash transactions in the books of the company.
Answer:

Question 11.
The Balance Sheet of ABC Ltd. as at the beginning of a financial year, inter alla, includes the following: (₹)
50,000 8% Preference Shares of ₹ 100 each ₹ 70 paid up ₹ 35,00,000
100,000 Equity Shares of ₹ 100 each fully paid up ₹ 1,00,00,000
Securities Premium ₹ 5,00,000
Capital Redemption Reserve ₹ 20,00,000
Genera! Reserve ₹ 50,00,000
Under the terms of their issue, the Preference Shares are redeemable at the end of the year at a Premium of 5%. In order to finance the redemption, the Company ms.s a Rights Issue of 50,000 Equity Shares of ₹ 100 each at ₹ 110 per Share, 20 being payable on Application, ₹ 35 (including Premium) on Allotment, and the balance to be called in the next financial year. The issue was fully subscribed and allotment made on December. The Moneys due on allotment were promptly received by the end of the year.

The Preference Shares were redeemed after fulfilling the necessary conditions of the Companies Act. The Company deelded to make the minimum utilisation of General Reserve. Assume that Securities Premium A/c is usable for providing the Premium on redemption of Preference Shares. You are asked to pass the necessary Journal Entries and show the relevant extracts from the Balance Sheet as at the end of the year with the corresponding figures for the previous year.
Answer:

Question 12.
Extract nf Balance Sheet of ABC Ltd. as at …………………. (after redemption of Preference Shares) (₹ 000’s)

Answer:

Question 13.
Following is the balance sheet of Anupam Ltd. as on 31st March 2008:

On 1st April 2008, the Board of directors decided that –
(i) The fully paid preference shares are to be redeemed at a premium of 4% on 1st May 2008 and for that purpose 6 lakh equity shares of 10 each are to be issued at a premium of 5%.
(ii) 3,000 Equity shares owned by Mohan, an existing shareholder, who has failed to pay the allotment money and the first call money @ ₹ 3 and ₹ 2.50 per share respectively, equity shares are to be forfeited on 31st May 2008.
(iii) The final call of ₹2 per share is to be made on July, 2008 on equity shares. All the above are duly complied with according to schedule. The amount due on the issue of fresh issue and on final call are also duly received except from Sohan who had failed to pay the first call for his 1,400 equity shares, has again failed to pay the final call also. These shares of Sohan are to be forfeited on 31 August 2008. Show the necessary journal entries. (Dec 2008, 9 marks)
Answer: