Raju

Basic Concepts of Income Tax Act – CMA Inter Direct Tax Study Material is designed strictly as per the latest syllabus and exam pattern.

Basic Concepts of Income Tax Act – CMA Inter Direct Tax Study Material

Short Notes

Question 1.
Write short note on Explain the term ax planning and tax evasion” (Dec 2021, 3 marks)
Answer:
Tax planning: Tax planning is a way to reduce tax liability by taking full advantages provided by the Act through various exemptions, deductions, rebates & relief. In other words, it is a way to reduce tax liability by applying script & moral of law. It is the scientific planning so as to attract minimum tax liability or postponement of tax liability for the subsequent period by availing various incentives, concessions, allowances, rebates and relief provided in the Act.

Tax evasion: Tax evasion is the illegal way to reduce tax liability by deliberately suppressing income or sale or by increasing expenses, etc. which results in reduction of total income of the assessee. Tax evasion is illegal, both in script & moral. It is the cancer of modem society and work as a clog in the development of the nation.

Distinguish Between

Question 2.
Explain the difference between ‘Total Income’ and ‘Gross Total Income’. (Dec 2012, 2 marks)
Answer:

GTI	Total Income Sec. 5
1. Sum total of all 5 heads [Salary, House Property, Business Profession, Capital Gain, Other Sources]	1. GTI (-) deduction u/s chap. VI A
2. GTI is not rounded off	2. Rounded oft u/s 288A
3. No tax is calculated on GTI	3. Tax is calculated on TI

Descriptive Question

Question 3.
What are the circumstances in which previous year and assessment year will be the same? (Dec 2013, 3 marks)
Answer:
Previous year and the assessment year will be same in the following cases:

1. Shipping business of non-resident. (Section 172)
2. Persons leaving India. (Section 174)
3. AOP or BOl or Artificial juridical person formed for a particular event or purpose. (Section 174A)
4. Persons likely to transfer property to avoid tax. (Section 175)
5. Discontinued Business. (Section 176)

Question 4.
Explain the term “substantial interest” defined in Section 2(32) and its application in at least two situations. (June 2014, 3 marks)
Answer:
Substantial Interest

• For company- If individuals along with relatives hold not less than 20% equity shares beneficially.
• For others- If individual along with relatives is entitled to at least 20% of income.

Application
An individual is chargeable to tax in respect of any salary, commission, fees, or any other remuneration received by the spouse from a concern in which the individual has substantial interest.

• But that portion of salary etc., of spouse which is due to application of technical or professional knowledge or experience shall not be clubbed.
• If husband and wife both have substantial interest in the concern and both are receiving remuneration because of interest in the concern then the remuneration of both shall be clubbed in the hands of that spouse whose total income is greater, before clubbing such

Question 5.
Statu the situations in which the income of the assessee can be assessed in the previous year itself, instead of in the assessment
year. (June 2016, 5 marks)
Answer:
Incomes which are taxed in the assessment year Itself
The income of an assessee for a previous year is charged to income tax in the assessment year, following the previous year. However, in certain cases, the income is taxed in the previous year in which it is earned. These exceptions have been made to protect the interests of revenue. The exceptions are as follows:
(i) Where a ship, belonging to or chartered by a non-resident, carries passengers, livestock, mail, or goods shipped at a port in India, the ship is allowed to leave the port only when the tax has been paid or satisfactory arrangement has been made for payment thereof. 7.5% of the freight paid or payable to the owner or the charterer or to any person on his behalf, whether in India or outside India on account of such carriage is deemed to be his income which is charged to tax in the same year in which it is earned.

(ii) Where it appears to the Assessing Officer that any individual may leave India during the current assessment year or shortly after its expiry and he has no present intention of returning to India, the total income of such individual for the period from the expiry of the respective previous year up to the probable date of departure from India is chargeable to tax in that assessment year.

(iii) If an AOP/BOI etc. is formed or established for a particular event or purpose and the Assessing Officer apprehends that AOP/BOI is likely to be dissolved in the same year or, in the next year, he can made assessment of the income up to the date of dissolution as income of the relevant assessment year.

(v) Where any business or profession is discontinued in any assessment year, the income of the period from the expiry of the previous year up to the date of such discontinuance may, at the discretion of the Assessing Officer, be charged to tax in that assessment year.

Question 6.
Explain the following concepts
Tax Planning
Tax Avoidance
Tax Evasion (June 2018, 3 marks)
Answer:
Tax Planning: It means arranging the financial activities in such a way that maximum tax benefits are enjoyed by making use of all beneficial provisions in the tax laws which entitle the assessee to get certain rebates and reliefs. This is permitted nd not frowned upon by law.

Tax Avoidance: The line of demarcation between tax planning and tax avoidance is very thin and blurred. There could be elements of mala fide motive involved in tax avoidance also. Any planning which, though done strictly according to legal requirements defeats the basic intention of the Legislature behind the statute could be termed as instance of tax avoidance.

Tax Evasion: It refers to a situation where a person tries to reduce his tax liability by deliberately suppressing the income or by inflating the expenditure showing the income lower than the actual income and resorting to various types of deliberate manipulations. An assessee guilty of tax evasion is punishable under the relevant laws.

Practical Questions

Question 7.
With brief reasons, state whether the following constitute capital or revenue expenditure/ receipt:
(i) Compensation paid to customer for defect in goods supplied.
(ii) Outright purchase of patent by paying ₹ 25 lakhs.
(iii) Construction of building on land taken on lease basis.
(iv) Arrear wages to employees for earlier years after entering into agreement with Labour Union.
(v) Painting expenditure for company’s registered office building.
(vi) Liquidated damages received from supplier for delay in supply of machinery. (2019 Dec, 6 marks)
Answer:
(i) Compensation paid to Customer for defects in goods supplied It is a revenue expenditure because it is in the normal course of business.
(ii) Outright purchase of patent by paying ₹ 25 lakhs. Patent is a intangible assets for the company, it is capital expenditure
(iii) Construction of building on land on lease basis It is a Capital expenditure
(iv) Arrears wages to employee for earlier years, after entering into agreement with Labour Union, it is a revenue expenditure, because arrear, wages is also part of employee salary which is allowable expenditure.
(v) Painting expenditure for Company’s Registered office building, it is a revenue expenditure.
(vi) Liquidated damages received from supplier for delay in supply of machinery, it is a capital receipt because it is related to fixed assets and it is not a recurring nature of transaction.

CMA Inter Financial Accounting MCQs – CMA Inter Financial Accounting Study Material is designed strictly as per the latest syllabus and exam pattern.

CMA Inter Financial Accounting MCQs

Question 1.
From the four alternative answers given against each of the following cases, indicate the correct answer:
(i) Realisation account is opened at the time of
(A) Admission of a new partner
(B) Retirement of a partner
(C) Dissolution of the Firm
(D) In all the above situations
Answer:
(C) Dissolution of the Firm
Dissolution of the firm: At the time of Admission/ Retirement of a partner, revaluation account is opened but at the time of dissolution of a firm, realization a/c is opened.

Question 2.
(ii) In the hire purchase system interest charged by vendor is calculated on the basis of
(A) Outstanding Cash Price
(B) Hire Purchase Price
(C) Instalment amount
(D) None of the above
Answer:
(A) Outstanding cash price: In the hire purchase system H.P. price = Cash Price + Interest. In this system, ¡hterest will be calculated every time on outstanding principle amount i.e. cash price. Therefore option (B) is not correct. Option (C) is also not correct because installment amount includes both Principle and Interest.

Question 3.
(iii) Bad debts are apportioned among departments in the proportion of
(A) Sales of each department
(B) Number of units sold by each department
(C) Cost of sales of each department
(D) None of the above
Answer:
(A) Sales of each department: Bad debt is treated as selling and distribution expenses, therefore it will be apportioned on the basis of sales of each department. It is related to value only therefore option (B) and (C) is not correct.

Question 4.
(iv) The following account has a credit balance
(A) Plant and Equipment A/c
(B) Purchase Returns A/c
(C) Purchase A/c
(D) None of the above
Answer:
(B) Purchase returns A/c: At the time of purchase return, following journal entry is passed- creditors A/c ………… Dr.
To purchase return A/c
Therefore option (B) is Correct. Options (A) and (C) are incorrect since these accounts will be debited not credited.

Question 5.
(v) The amortisation of amount of software commences from the date when it is
(A) Available for use
(B) Put to use
(C) Developed up to 75%
(D) None of the above
Answer:
(A) Available for use: As per AS 26 “Intangible Assets amortisation of softwares should start when the asset is available for use and not put to use.

Question 6.
(vi) When prior period expenditure is paid subsequently and for which no provision was made earlier, the accounting entry would be
(A) Debit expenditure
(B) Debit prior period expenditure
(C) Debit deferred revenue expenditure
(D) None of the above.
Answer:
(B) Debit prior period expenditure: Example Rent paid in April 2013 ₹ 1,100,000 includes 60,000 for the month of March 2013. The Journal entry will be:
Rent A/c Dr. 40,000
Prior period expenses (Rent) A/c Dr. 60,000
To cash Bank A/c 1,00,000
Therefore option (B) is correct

Question 7.
(vii) In the case of non-profit organisation donations received by the organisation are reflected in
(A) Income and Expenditure Account
(B) Capital Account
(C) Receipts and Payments Account :
(D) None of the above (Dec 2012,1 x 7 = 7 marks)
Answer:
(C) Receipts and Payments A/c: In case of receipt of donation, the following entry will be passed
Cash/Bank A/c Dr.
To capital fund A/c
Therefore option (C) is correct.

Question 8.
(b) State whether the following statement is TRUE (T) or FALSE (F):
(v) Liquid assets plus stock in trade is called current assets. (1 mark)
Answer:
(b) (v) True: Current assets = Liquid assets + stock in trade
Liquid assets Cash in hand + Bank balance + Debtors + B/R.

Question 9.
(c) Fill up the blanks in the following sentences using appropriate word from the alternatives indicated:
(iii) Errors in principle ……………………. affect, tallying Balance Sheet (does/does not).
Answer:
(iii) Does not

(iv) In case of instalment sale ownership passes at the time of …………………… (sale/payment of last installment). (Dec 2012, 1 x 2 = 2 marks)
Answer:
(iv) Sale

Question 10.
(a) From the four alternatives given against each of the following cases, indicate the correct answer: (just state a, b, c, or d)
(i) At the year-end, an amount outstanding for electricity consumed during that year will be dealt in the Accounts for the year by following the accounting concept of
(a) Realisation
(b) Accrual
(c) Conservatism
(d) None of the above
Answer:
(b) Accrual
(i) When business procures goods or services with the agreement that the payment will be made at a future date. An obligation to pay for goods or services is created upon the procurement thereof.

Question 11.
(ii) Contingent Liability would appear
(a) On the liability side
(b) On the asset side
(c) As a note in Balance Sheet
(d) None of the above
Answer:
(c) As a note in Balance Sheet

Question 12.
(iii) The effect of timing difference is called as
(a) Current Tax
(b) Deferred Tax
(c) Minimum Tax
(d) None of the above (June 2013, 1 x3=3marks)
Answer:
(b) Deferred Tax
Current tax is the amount of income tax determined to be payable or recoverable in respect of the taxable income (tax
loss) for a period. According to Section 115JB of Income Tax Act. 1961, the payable on the total income as computed under
the Income Tax Act in respect of any previous year cannot be less than 18.5% of the Book Profit. Deferred tax is the timing
difference between accounting income & taxable income.

State whether the following statements are TRUE (T) or FALSE (F):

i. Sinking fund method of depreciation takes into account the cost of an asset as well as interest also thereon at given rate.
(ii) Purchase of a technical know-how is revenue expenditure.
(iii) Transactions are recorded on accrual basis in the ‘Income and Expenditure Account’.
(iv) When the goods are returned by Branch, goods sent to Branch account will be debited in the books of Head Office.
(June 2013, 1 x4=4 marks)
Answer:
(i) True
(ii) False If technical knowhow is one time investment then it is assets. On the other hand, pay for technical know-how in the nature of payment for consultancy it is purely an expense.
(iii) True
(iv) True

Fill up the blanks in the following sentences using appropriate word from the alternatives indicated:
ii. Revenue nature receipts and payments which relates to a particular accounting period are shown in the ……………..
account (Receipts and Payments/Income and Expenditure). (2 marks)
Answer:
Income & Expenditure

(e) In the following cases, one out of four answers is correct. lndicatate the correct answer (=1 mark) and give brief workings in support or your answer (=1 mark):
iii. A and B are partners sharing profit/loss in the ratio of 3: 2. They admit C into partnership for 1/6 share in the profit which he acquired equally from the old partners. The new profit-sharing ratio will be
(a) 3: 2: 1
(b) 1: 1: 1
(c) 31: 19: 10
(d) 14: 6: 4 (June 2013, 2 marks)
Answer:
(c) 31:19:10; A’s new share = \(\frac{3}{5}-\frac{1}{6} \times \frac{1}{2}=\frac{3}{5}-\frac{1}{2}=\frac{36-5}{60}=\frac{31}{60} \)
B’s new share = \(\frac{2}{5}-\frac{1}{6} \times \frac{1}{2}=\frac{2}{5}-\frac{1}{2}=\frac{24-5}{60}=\frac{19}{60}\)
C’s new share = \(\frac{1}{6} \text { or } \frac{10}{60} \)
Hence, new ratio = 31: 19: 10

Question 13.
Answer the following questions:
(a) Choose the most appropriate one from the stated options and write it down (only indicate (A) or (B) or (C) or (D) as you think correct.)
(i) Expenditures in respect of certain types of assets whose usefulness does not expires in the year of their occurrence but generally expires in the near future are called
(A) Revenue Expenditure
(B) Capital Expenditure
(C) Deferred Revenue Expenditure
(D) None of the above
Answer:
(C) Deferred Revenue Expenditure

Question 14.
(ii) The main objective of average clause contained in a fire insurance policy is to
(A) Encourage full Insurance
(B) Discourage full Insurance
(C) Encourage under Insurance
(D) Encourage full Insurance and Discourage under Insurance
Answer:
(D) Encourage full Insurance and Discourage under Insurance

Question 15.
(iii) AS-10 is applicable to which one of the following assets?
(A) Goodwill
(B) Live Stock
(C) Plantation
(D) Property, Plant and Equipment (June 2016, 1 x 3 = 3 marks)
Answer:
(D) Property, Plant and Equipment

State whether the following statements given below are TRUE or FALSE:

i. Income and Expenditure Account is prepared by adopting accrual principle of Accounting.
Answer:
True

ii. As per concept of conservatism, the Accountant should provide for all possible losses but should not anticipate profit.
Answer:
True

iii. The cost of developing software for a company engaged in software business is revenue expenditure. (June 2016, 1 x 3 = 3 marks)
Answer:
False

Question 16.
Answer the following questions:
(a) Choose the most appropriate one from the stated options and write it down (only indicate (A) or (B) or (C) or (D) as you think correct.):
(i) Any change in the accounting policy relating to inventories which has a material effect in the current or later periods should be disclosed. This is in accordance with the accounting principle of:
(A) Going Concern
(B) Conservatism
(C) Consistency
(D) Disclosure
Answer:
(C) Consistency

Question 17.
(ii) Depreciation is a process of
(A) Apportionment
(B) Valuation
(C) Allocation
(D) None of the above
Answer:
(C) Allocation

Question 18.
(iii) An amount spent in connection with obtaining a License for starting the factory is
(A) Revenue Expenditure
(B) Capital Expenditure
(C) Pre-paid Expenditure
(D) None of the above (Dec 2016, 1 x 3 = 3 marks)
Answer:
(A) Revenue Expenditure

State whether the following statements given below are TRUE or FALSE:

(i) In the case of consignment sales, revenue is to be recognised on sale of goods to a third party.
Answer:
True

(ii) Retiring a bill under rebate means payment of the bill before due date. (1 x 2 = 2 marks)
Answer:
True

Question 19.
Answer the following questions:
(a) Choose the most appropriate one from given four alternatives:
(i) Receipts and Payments account is a
(a) Nominal Account
(b) Real Account
(c) Personal Account
(d) Artificial Personal Account
Answer:
(b) Real Account

Question 20.
(ii) A resource owned by the business with purpose of using it for generating tuture profit, is known as
(a) Capital
(b) Asset
(c) Liability
(d) Surplus
Answer:
(b) Asset

Question 21.
(iii) Outward Invoice issued is a source document of
(a) Purchase Book
(b) Sales Book
(c) Return Inward Book
(d) Return Outward Book
Answer:
(b) Sales Book

Question 22.
(iv) Which of the following is of capital nature?
(a) Commission on purchases
(b) Cost of repairs
(c) Rent of factory
(d) Wages paid for installation of machinery
Answer:
(d) Wages paid for installation of machinery

Question 23.
(vi) If any stock is taken by a co-venturer, it will be treated as
(a) an income of the joint venture.
(b) an expense of the joint venture.
(c) to be ignored from joint venture.
(d) it will be treated in the personal books of the co-venturer.
Answer:
(a) an income of the joint venture.

Question 24.
(vii) Contingent liability would appear
(a) on the liability side of the Balance Sheet.
(b) on the assets side of the Balance Sheet.
(c) do not shown in the books of accounts.
(d) as a note in Balance Sheet.
Answer:
(d) as a note in Balance Sheet.

Question 25.
(viii) Income statement of a Charitable Institution is known as
(a) Statement of profit and loss
(b) Receipts and Payments Account
(c) Income and Expenditure Account
(d) Profit and Loss Account
Answer:
(c) Income and Expenditure Account

Question 26.
(ix) Which of the following accounts is mainly prepared at the time of dissolution of the firm
(a) Revaluation A/c
(b) Goodwill A/c.
(c) Realization A/c
(d) Memorandum Revaluation A/c
Answer:
(c) Realization A/c

Question 27.
(x) Advertisement expenses are apportioned among departments in the proportion of
(a) sales of each department
(b) purchases of each department
(c) no. of units sold by each department
(d) cost of sales of each department (June 2017, 1 x 9 = 9 marks)
Answer:
(a) sales of each department

State whether the following statements given below are true or false:
(i) One of the objectives achieved by providing depreciation is saving cash resources for future replacement of assets.
Answer:
True

(ii) Expenses incurred by branch out of petty cash balance are debited – to branch account by the head office.
Answer:
False

(iii) In absence of partnership deed the profit or loss should be distributed among partners in their capital ratio. (1 x 3 = 3 marks)
Answer:
False.

Fill in the blanks:
(i) The ………………………. discount is never entered in the books of accounts.
Answer:
trade

(ii) A bill of exchange drown on 12’ April 2017 for four months, the date of maturity will be ……………………. .
Answer:
14.08.2017

(iii) The parties of joint venture is called …………………….. .
Answer:
co-venturers

(iv) Outstanding subscription is shown in the ………………… side of Balance Sheet. (1 x 4 = 4 marks)
Answer:
assets

Question 28.
Answer the Following Questions:
(a) Choose the most appropriate one from given four alternatives:
(i) If an employee of the business files a legal suit on business, it is considered in the books as a
(a) Legal Expense
(b) Liability
(c) Contingent Asset
(d) Contingent Liability
Answer:
(d) Contingent Liability

Question 29.
(ii) At the end of the accounting year the capital expenditures are shown in the
(a) assets side ot the Balance Sheet.
(b) liabilities side of the Balance Sheet.
(c) debit side of the Profit and Loss A/c.
(d) credit side of the Profit and Loss A/c.
Answer:
(a) assets side ot the Balance Sheet.

Question 30.
(iii) Which of the following is not a method of charging depreciation?
(a) Sinking Fund Method
(b) Sum of years Digit Method
(c) Working hours Method
(d) Asset’s Life-cycle Method
Answer:
(d) Asset’s Life-cycle Method

Question 31.
(iv) If average inventory is ₹ 1,25,000 and closing inventory is ₹ 10,000 less than opening inventory then the value of closing inventory will be
(a) ₹ 1,35,000
(b) ₹ 1,15,000
(c) ₹ 1,30,000
(d) ₹ 1,20,000
Answer:
(d) ₹ 1,20,000

Question 32.
(v) The Accommodation bill is drawn
(a) to finance actual purchase or sale of goods.
(b) to facilitate trade transmission.
(c) when both parties are in need of funds.
(d) None of the above.
Answer:
(c) when both parties are in need of funds.

Question 33.
(viii) Accounting standards in India are issued by
(a) Government of India
(b) Reserve Bank of India
(c) The Institute of Chartered Accountants of India
(d) The Institute of Accounting Standard of India.
Answer:
(c) The Institute of Chartered Accountants of India

Question 34.
(ix) As on 31 March, 2017 debtors; and additional bad debts are ₹ 8,00,000 and ₹ 10,000 respectively. If the provision for bad debts is made at 5% on debtors then amount of such provision will be
(a) ₹ 40,000
(b) ₹ 50,000
(c) ₹ 39,500
(d) ₹ 40,500
Answer:
(c) ₹ 39,500

Question 35.
(x) Income and Expenditure Account is a
(a) Nominal Account
(b) Real Account
(c) Personal Account
(d) Artificial Personal Account (Dec 2017, 1 x 8 = 8 marks)
Answer:
(a) Nominal Account

State whether the following statements given below are ‘True’ or ‘False’:

i. Memorandum joint venture account ¡s prepared to find out amount due from co-venture.
Answer:
False

ii. Receipts and Payments Account is prepared by adopting cash principle of accounting.
Answer:
True

iii. Bad debts recovered is credited to debtor’s personal account.
Answer:
False

iv. New partners pays premium for goodwill, which will be shared by old partners in their new profit-sharing ratio. (Dec 2017, 1 x 4 = marks)
Answer:
False

(d) Fill in the blanks:

(i) The ……………………… discount is not recorded in the books of accounts.
Answer:
Trade

(ii) Profit or Loss on revaluation is shared among the partners in ………………… Ratio.
Answer:
Old profit sharing

(iii) At the time of goods sent to consignee, the proforma invoice is prepared by …………………. .
Answer:
Consignor

(iv) Memorandum revaluation account is prepared when the ………………………. of assets and liabilities are not altered.
Answer:
Book value

(v) Realisation account is opened at the time of ……………………… of firm. (Dec 2017, 1 x 5 = 5’marks)
Answer:
Dissolution of the firm

Question 36.
Answer the Following Questions:
(a) Choose the most appropriate one from the given following alternatives:
(i) Which of the following is not a Qualitative Characteristics of Financial Statement?
(a) Cost Principle
(b) Understandability
(c) Relevance
(d) Reliability
Answer:
(a) Cost Principle

Question 37.
(ii) Name the book in which, entries are recorded on the basis of credit notes issued.
(a) Sales Book
(b) Purchase Book
(c) Sales Return Book
(d) Purchase Return Book
Answer:
(c) Sales Return Book

Question 38.
(iii) Exception to consistency principle is
(a) Cost Principle
(b) Going Concern Principle
(c) Matching Principle
(d) Prudence Principle
Answer:
(d) Prudence Principle

Question 39.
(iv) Interest charged by vendor in Hire Purchase System, is calculated on the basis of
(a) Outstanding hire purchase price
(b) Outstanding cash price
(c) Instalment amount
(d) Cost price of the asset
Answer:
(b) Outstanding cash price

Question 40.
(v) The balance in consignment account shows
(a) Amount receivable from consignee
(b) Amount payable to consignee
(c) Profit/loss on consignment
(d) Closing stock with consignee.
Answer:
(c) Profit/loss on consignment

Question 41.
(vi) Provision for bad debts is
(a) Real Account
(b) Nominate account’
(c) Personal account
(d) None of the above
Answer:
(c) Personal account

Question 42.
(vii) The business is treated as distinct and separate from its owners on the basis of the
(a) Going concern concept
(b) Conservatism concept
(c) Matching concept
(d) Business entity concept
Answer:
(d) Business entity concept

Question 43.
(viii) Due to retrospective effect on revision of salary of employees, the arrears of salary relating to past years, payable in current year is
(a) Prior-period item
(b) Extra-ordinary item
(c) Ordinary item requiring separate disclosure
(d) Contingent item
Answer:
(c) Ordinary item requiring separate disclosure

Question 44.
(ix) Discount given in the Sales – Invoice itself is
(a) Cash discount
(b) Trade discount
(c) Rebate
(d) Allowance
Answer:
(b) Trade discount

Question 45.
(x) Canteen expenses are apportioned among departments in the proportion of
(a) Departmental floor space
(b) Departmental direct wages
(c) Departmental sales
(d) Departmental No. of employees (June 2018, 1 x 10 = 10 marks)
Answer:
(d) Departmental No. of employees

State whether the following statements given below are True or False:

i. Receipt & Payment Account only records the revenue nature of receipts and expenses.
Answer:
False

ii. Sales Book records both cash and credit sales.
Answer:
False

iii. Normal loss of goods sent on consignment is shown in Consignment Account.
Answer:
False

iv. In case of trading concern, cost of good sold and cost of sales are same.
Answer:
False

(v) In Proprietorship business, Income-tax payable is shown as a liability in Balance Sheet. (June 2018, 1 x 5 =5 marks)
Answer:
False

(d) Fill in the blanks:

(i) The Bank A/c is a ……………………. Account.
Answer:
Personal

(ii) Assets are classified as non-current asset and current assets as per ……………………… Principle.
Answer:
Going – Concern

(iii) ……………………….. Amount is the higher of asset’s net selling price and its value in use. (June 2018, 1 x 3 = 3 marks)
Answer:
Recoverable/Fair Value

Question 46.
Answer the following questions:
(a) Choose the most appropriate one from the given following alternatives:
(i) Both cash and credit transactions are recorded, on the basis of
(a) Accounting Period Concept
(b) Going Concern Concept
(c) Business Entity Concept
(d) Accrual Concept
Answer:
(d) Accrual Concept

Question 47.
(ii) Which of the following book is both a journal and a ledger?
(a) Cash Book
(b) Sales Day Book
(c) Bills Receivable Book
(d) Journal Proper
Answer:
(a) Cash Book

Question 48.
(iii) Interest received in advance account is a
(a) Nominal Account
(b) Real Account
(c) Artificial Personal Account
(d) Representative Personal Account
Answer:
(d) Representative Personal Account

Question 49.
(iv) Shiva draws a bill on Sanat on 25 October, 2018 for 90 days, the maturity date of the bill will be
(a) 27th January, 2019
(b) 26th January, 2019
(c) 25th January, 2019
(d) 28th January, 2019
Answer:
(c) 25th January, 2019

Question 50.
(v) Peeru and Simu are entered in the business of buy and sale of food grain for a period of one year and sharing the profit in the ratio of 3:2, this agreement is a
(a) Partnership
(b) Consignment
(c) Joint-venture
(d) Lease
Answer:
(c) Joint-venture

Question 51.
(vi) At the end of the year 201 7-18, Prepaid Insurance Premium ₹ 7,500 was appeared in the Trial Balance, it will be shown
(a) only in Profit & Loss Account.
(b) only in Balance Sheet.
(c) both in Profit & Loss Account and in Balance Sheet.
(d) not in both in Profit & Loss Account and in Balance Sheet.
Answer:
(b) only in Balance Sheet.

Question 52.
(vii) Contingent Liability would appear
(a) on the liabilities side of the Balance Sheet.
(b) on the assets side of the Balance Sheet.
(c) as a note in the Balance Sheet.
(d) None of the above.
Answer:
(c) as a note in the Balance Sheet.

Question 53.
(ix) Generally sacrifice ratio is concerned with the situation of
(a) Admission of a new partner
(b) Retirement of a partner
(c) Dissolution of firm
(d) Conversion of firm into company.
Answer:
(a) Admission of a new partner

Question 54.
(x) KCS purchased a machine from JPS on hire purchase system, whose cash price was ₹ 8,64,000. ₹ 2,16,000 being paid on delivery and balance in three annual instalments of ₹ 2,88,000 each. The amount of interest included in first instalment would be
(a) ₹ 72,000
(b) ₹ 57,600
(c) ₹ 1,08,000
(d) ₹ 36,000 (Dec 2018, 1 x 9 = 9 marks)
Answer:
(c) ₹ 1,08,000

Fill in the blanks:
(i) While posting an opening entry in the ledger, in case of an Account having debit balance, in ‘Particulars’ column the words ………………. are written on debit side.
Answer:
To Balance b/f

(ii) Depreciation Accounting is the process of ………………….. and not …………………. .
Answer:
Allocation Valuation

(iii) Finished goods are normally valued at cost or ………………… whichever is lower.
Answer:
Net Realisable Value

(iv) The relation between Consignee and Consignor is that of …………………… .
Answer:
Agent and Principal

(v) The relationship between Co-venturers is that of …………………… . (Dec 2018, 1 x 5 = 5 Marks)
Answer:
Co-owners

State with reason whether the following statements are true or false (No marks shall be awarded without valid reason):

i. Deferred revenue expenditure is current year’s revenue expenditure to be paid in the later years.
Answer:
False

ii. Reducing balance method for depreciation is followed to have a uniform charge for depreciation and repairs and maintenance together.
Answer:
True

(iii) Reserve for Discount on Creditors has a credit balance.
Answer:
False

(iv) A promissory note can be made payable to the bearer. (1 x 4 =4 marks)
Answer:
False

Question 55.
Answer the following questions:
(a) Choose the most appropriate one from the given following alternatives:
(i) Which of the following is a resource owned by the business with the purpose of using it for generating future profits?
(a) Loan from Bank
(b) Owner’s Capital
(c) Trade Mark
(d) All of the above
Answer:
(c) Trade Mark

Question 56.
(ii) Chandu & Co.’s Account is a
(a) Real Account
(b) Nominal Account
(c) Representative.Personal Account
(d) Artificial Personal Accounts
Answer:
(d) Artificial Personal Accounts

Question 57.
(iii) Purchase of a laptop for office use wrongly debited to Purchase Account. It is an error of
(a) Omission
(b) Commission
(c) Principle
(d) Misposting
Answer:
(c) Principle

Question 58.
(iv) Which of the following term is most suitable for writing off Patent?
(a) Depletion
(b) Amortization
(c) Depreciation
(d) All of the above
Answer:
(b) Amortization

Question 59.
(v) Memorandum Joint Venture Account ¡s prepared when
(a) the separate set of books is maintained for Joint Venture.
(b) the Each co-venturer keeps records of all transactions.
(c) the Each co-venturer keeps records of their own transactions only.
(d) All of the above cases
Answer:
(c) the Each co-venturer keeps records of their own transactions only.

Question 60.
(vi) Which of the following commission is allowed by the consignor to the consignee to encourage the consignee for putting-up hard work in introducing new product in the market?
(a) Del-credere Commission
(b) Over-riding Commission
(c) Hard Work Commission
(d) Ordinary Commission
Answer:
(b) Over-riding Commission

Question 61.
(vii) If Ram’s acceptance which was endorsed by us ¡n favour of Saleem is dishonoured, then the amount will be debited in our books to
(a) Saleem
(b) Ram
(c) Bills Receivable Account
(d) None of the above
Answer:
(b) Ram

Question 62.
(viii) In case of a Club, the excess of expenditure over income is called as
(a) Surplus
(b) Deficit
(c) Capital Fund
(d) Investment in Fixed Assets
Answer:
(b) Deficit

Question 63.
(ix) A Charitable Institution has 250 members with a annual subscription of ₹ 5,000 each. The subscriptions received during 2018-19 were ₹ 11,25,000. which include ₹ 65,000 and ₹ 25,000 for the years of 2017-18 and 2019-20 respectively. Amount of outstanding subscriptions for the 2018-19 will be
(a) ₹ 90,000
(b) ₹1,25,000
(c) ₹ 2,15,000
(d) ₹ 1,90,000
Answer:
(c) ₹ 2,15,000

Question 64.
(x) The following are details of dosing stock items in Aarvi Limited:

Items	Historical Cost (₹ In Lakh)	Net Realisable Value (₹ in Lakh)
A	30	27
B	15	18
C	35	35
D	40	45

The value of Closing Stock will be
(a) ₹ 120 Lakh
(b) ₹ 125 Lakh
(c) ₹ 117 Lakh
(d) ₹ 128 Lakh (June 2019, 1 x 10 = 10 marks)
Answer:
(c) ₹ 117 Lakh

(b) Match the following in Column I with the appropriate in Column II:

Column-I	Column-II
(1) Highest Relative Capital Method	(A) Departmental Accounts
(2) Basis of Apportionment of Expenses	(B) Insurance Claim
(3) Partial Repossession	(C) Piecemeal Distribution
(4) Indemnity Period	(D) Hire Purchase

(June 2019, 1 x 4 = 4 marks)
Answer:

Column-I	Column-II
(i) Highest Relative Capital Method	(C) Piecemeal Distribution
(ii) Basis of Apportionment of Expenses	(A) Departmental Accounts
(iii) Partial Repossession	(D) Hire Purchase
(iv) Indemnity Period	(B) Insurance Claim

State whether the following statements are True or False.

i. All these items of revenue nature which received during the period of accounts, are only shown in the Income and Expenditure Account.
Answer:
False

ii. When the capitalization of profits method is used then the value of goodwill on the basis of future maintainable profits is more than that of on the basis of super profits.
Answer:
False

iii. In the Stock and Debtors Method of accounting, balance of Branch Stock Account shows either Gross Profit or Gross Loss. (June 2019, 1 x 3 = 3 marks)
Answer:
False.

(d) Fill in the blanks:

(i) Net Worth is excess of ………………….. over.
Answer:
Total assets, total liabilities

(ii) The Sates ₹ 180 Lakh, Purchases ₹ 129 Lakh and Opening Stock ₹ 33 Lakh. If the rate of Gross Profit is 50% on cost, then the value of closing stock will be …………………. .
Answer:
₹ 42 Lakh

(iii) In case of Loss of Profit Policy, Gross Profit is the sum of Net Profit plus ………………….. Standing Charges.
Answer:
Insured

(iv) Interest to be allowed @ 0.75 percent per month on Partners Capital of ₹ 60 Lakh; Manager’s Commission @ 5 percent of Net Profit before charging such commission. If the Net Profit before charging interest on capital and manager’s commission amounted to ₹ 14.85 Lakh, then manager’s commission will be ………………….. .
Answer:
₹ 47,250

(v) A machinery was purchased on Hire Purchase System. Its cash price was ₹ 5,20,000 which was payable in annual instalments of ₹ 1,80,000 each including interest @ 15 per cent per annum. The amount of interest included in 2nd instalment would be …………………. . (June 2019, 1 x5 = 5 marks)
Answer:
₹ 62,700.

Question 65.
Answer the following questions:
(a) Choose the most appropriate one from the given following alternatives:
(i) When stock is valued at cost ¡n one accounting period and at lower of cost and Net realizable va’ue in another accounting period
(a) Prudence Principle conflicts with Consistency Principle.
(b) Matching Principle conflicts with Consistency Principle.
(c) Consistency Principle conflicts with Accounting Period Assumption.
(d) None of the above
Answer:
(a) Prudence Principle conflicts with Consistency Principle.

Question 66.
(ii) Materiality Principle is an exception to the
(a) Consistency Principle
(b) Full Disclosure Principle
(c) Accounting Period Assumption
(d) Prudence Principle
Answer:
(b) Full Disclosure Principle

Question 67.
(iii) In a Cash Book Debit balance of ₹ 112 brought forward as credit balance of ₹ 121, while preparing a Bank Reconciliation Statement taking the balance as per Cash Book as the starting point:
(a) ₹ 112 to be added
(b) ₹ 121 to be added
(c) ₹ 233 to be added
(d) ₹ 112 to be subtracted
Answer:
(c) ₹ 233 to be added

Question 68.
(iv) represents a potential obligation that could be created depending on the outcome of an event.
(a) Internal Liability
(b) Current Liability
(c) Contingent Liability
(d) Non-current Liability
Answer:
(c) Contingent Liability

Question 69.
(v) Opening Debtors, Collection Iron, Debtors, and Discount Allowed were ₹ 3,1 5,000; ₹ 18,30,000 and ₹ 35,000 respectively. If the closing debtors were 20% of credit sales of the period then closing debtors and credit sales would be
(a) ₹ 3,51,667 and ₹ 17,58,333
(b) ₹ 3,63,333 and ₹ 18,16,667
(c) ₹ 3,87,500 and ₹ 19,37500
(d) ₹ 3,10,000 and ₹ 15,50,000
Answer:
(c) ₹ 3,87,500 and ₹ 19,37500

Question 70.
(vi) Following information is given:

	₹
Opening Stock	2,13000
Purchases	16,55,000
Sales	21,32,000
Carriage Inwards	32,500
Carriage Outwards	38,600
Return Inwards	38,000

If the rate of gross profit is 25% on cost then value of closing stock will be
(a) ₹ 2,57,800
(b) ₹ 1,94,900
(c) ₹ 2,25,300
(d) ₹ 3,30,000
Answer:
(c) ₹ 2,25,300

Question 71.
(vii) Provision for Doubtful Debt on 1st April 2018 was ₹ 21 ,500. During the year 2018-19, the Bad-debt and Recovery of Bad-debt were ₹ 10,500 and ₹ 2,100 respectively. The Sundry Debtors on 31st March, 2019 were ₹ 2,25,000. Provision is to be made @ 5% on Debtors. If on 31st March 2019, there was additional bad debt of ₹ 2,500 then Provision for doubtful debt will be
(a) debited to Profit & Loss Account by ₹ 11,250.
(b) debited to Profit & Loss Account by ₹ 2,625.
(c) debited to Profit & Loss Account by ₹ 3,000.
(d) debited to Profit & Loss Account by ₹ 900.
Answer:
(b) debited to Profit & Loss Account by ₹ 2,625.

Question 72.
(viii) A and B enter a joint venture sharing profit and losses in the ratio of 3:2. A purchased goods costing 2,00,000.
B sold 95% goods for ₹ 2,50,000. A is entitled to get 1% commission on purchases and B is entitled to get 5% commission on sales. A drew a bill on B for an amount equivalent to 80% of original cost of goods. A got it discounted at ₹ 1,50,000. What is A’s share of profit?
(a) ₹ 15,300
(b) ₹ 21,300
(c) ₹ 18,900
(d) None of the above
Answer:
(b) ₹ 21,300

Question 73.
(ix) Subscription of ₹ 6,25,000 had been shown in the Income and Expenditure Account prepared for the year ending 31st March 2019. Additional information is as below:

	On 31st March, 2018 (₹)	On 31st March, 2019 (₹’)
Subscription Outstanding	55,000	72,000
Subscription Received in Advance	31,000	37,000

The amount of subscriptions received during the year 2018-19 would be
(a) ₹ 6,36,000
(b) ₹ 6,02,000
(c) ₹ 6,14,000
(d) ₹ 6,48,000
Answer:
(c) ₹ 6,14,000

Question 74.
(x) X and Y are partners with the capital of ₹’50,000 and ₹ 30,000 respectively. Interest Payable on Capital Is 10% p.a. If the profits earned by the firm is ₹’ 4,800, what will be the Interest on Capital for X and Y?
(a) ₹ 5,000 and ₹’3,000
(b) ₹ 3,000 and ₹ 1,800
(c) No interest will be paid to the partners
(d) None of the above (Dec 2019, 1 x 10=10 marks)
Answer:
(b) ₹ 3,000 and ₹ 1,800

Match the following:

Column A	Column B
(i) Endorsement	(A) AS 10
(ii) Amortisation	(B) Depreciation
(iii) Average Clause	(C) Bills Receivable
(iv) Recoverable Amount	(D) Insurance Claim

(1 x 4 = 4 marks)
Answer:

Column-A	Column-B
(i) Endorsement	(C) Bills Receivable
(ii) Amortisation	(B) Depreciation
(iii) Insurance Claim	(D) Average Clause
(iv) Recoverable Amount	(A) AS 10

State with reason whether the following statements are ‘True’ or ‘False’ (No Marks shall be awarded without valid reason):

i. Prudence is a concept to recognize all losses and not profits.
Answer:
False: Prudence is a concept to recognize all unrealized losses and not profits.

ii. Revenues are matched with expenses in accordance with the matching principle.
Answer:
False: Expenses are matched with revenùes in accordance with the matching principle. The concept of matching requires accrual and periodicity concepts as accrued reyenues are matched with accrued expenses of a definite accounting period.

iii. Depreciation is non-cash and non-operating expense which is to be provided for if there are profits.
Answer:
False: Depreciation is a non-cash, operating expense which is to be provided for whether there are profits or losses.

iv. Net Profit is reflected in higher cash balances and net loss is reflected in lower net worth.
Answer:
False: Net profit may not be reflected in higher cash balance because of credit transactions. On the other hand, cash may increase due to fresh loan or fresh capital. Net Worth may also be reduced by withdrawal by the proprietor/partners. So lower net worth may not necessarily reflect net loss.

v. If Partnership Deed is silent, Rate of Interest on loan by firm to a Partner shall be 6% p.a. (1×5 = 5 marks)
Answer:
False: The Partnership Act 1932, has not prescribed any Rate of Interest on Loan by firm to Partner.

Fill in the blanks:

(i) …………………. method for depreciation is followed to have a uniform charge for depreciation and repairs and maintenance together.
Answer:
Reducing balance

(ii) Reserve for Discount on Creditors has a …………………… balance.
Answer:
Debit

(iii) …………………….. can be made payable to the bearer.
Answer:
Bills Receivable

(iv) The gain from sale of capital assets need not be added to revenue to ascertain the ……………………… of a business.
Answer:
Operating Profit or Loss

(v) property may be the subject matter of consignment. (Dec 2019, 1 x 5 = 5 marks)
Answer:
Movable

Question 75.
In hire purchase system, cash price plus interest is known as …………………. .
(1) Hire purchase charges.
(2) Capital value of asset.
(3) Hire purchase price of assets.
(4) Book value of asset.
Answer:
(3) Hire purchase price of assets.

Question 76.
Depreciation is calculated from the date of-
(1) Assets put to use.
(2) Purchase of assets.
(3) Assets installed.
(4) Receipts of assets at business practices.
Answer:
Answer:
(1) Assets put to use.

Question 77.
Debit balance in the cash book is equivalent to:
(1) Overdraft as per cash book.
(2) None of these.
(3) Credit balance as per Passbook.
(4) Overdraft as per Passbook.
Answer:
(3) Credit balance as per Passbook.

Question 78.
Main elements of the accounting equation are:
(1) Cash, stock, and debtors.
(2) Bank balance, Investments, and bills receivable.
(3) Assets, liabilities, and capital.
(4) Capital, creditors, and bills payable.
Answer:
(3) Assets, liabilities, and capital.

Question 79.
A Bill of Exchange cannot be:
(1) Endorsed.
(2) Crossed.
(3) None of these.
(4) Accepted.
Answer:
(2) Crossed.

Question 80.
Spent amount on unsuccessful promotion policy is:
(1) Capital expenditure.
(2) Expenses.
(3) Revenue expenditure.
(4) Deferred revenue expenditure.
Answer:
(1) Capital expenditure.

Question 81.
Convention of Conservatism takes into account:
(1) All tutu re profits and not losses.
(2) Neither profits nor losses of the future.
(3) All future losses and not profits.
(4) All future profits and losses.
Answer:
(3) All future losses and not profits.

Question 82.
Balance Sheet is prepared with the balances of which of the following?
(1) All balances in the Ledger.
(2) Balances of real accounts.
(3) Balances of personal accounts.
(4) Balances of personal and real accounts.
Answer:
(4) Balances of personal and real accounts.

Question 83.
Which of these terms/concepts are not relevant to a joint venture?
(1) Co venturers.
(2) Temporary partnership.
(3) Principal and agent relationship.
(4) Sharing profit and loss of joint ventures.
Answer:
(3) Principal and agent relationship.

Question 84.
Sold goods worth list price of 8,000 at 10% trade discount and 2% cash discount. 25% received at the time of transaction only. The amount posted to the discount account will be:
(1) ₹ 144 on credit side.
(2) ₹ 36 on debit side.
(3) ₹ 144 oh debit side.
(4) ₹ 40 on credit side.
Answer:
(2) ₹ 36 on debit side

Question 85.
Bills payable honoured during the year, will be debited to.
(1) None of these.
(2) Creditors amount.
(3) Bills payable account.
(4) Cash account.
Answer:
(3) Bills payable account.

Question 86.
Which of the following is not an essential feature of a partnership firm?
(1) Mutual agency.
(2) Existence of business.
(3) Association of two or more people.
(4) Compulsory registration. ‘
Answer:
(4) Compulsory registration.

Question 87.
Sacrificing ratio is:
(1) New Profit sharing ratio – old profit sharing ratio.
(2) Equal to old profit-sharing ratio.
(3) Equal.
(4) Old profit sharing ratio- new profit sharing ratio.
Answer:
(4) Old profit sharing ratio – new profit sharing ratio.

Question 88.
Which of the following statements is not correct?
(1) Bad debts can be less than the amount of provision for doubtful debts.
(2) Bad debts can be more than the amount of provision for doubtful debts.
(3) Provision for doubtful debts account is the amount payable to debtors.
(4) . Provision for doubtful debts is shown in the balance sheet.
Answer:
(3) Provision for doubtful debts account is the amount payable to debtors.

Question 89.
Errors are:
(1) Frauds.
(2) Undetected mistake.
(3) Intentional mistake.
(4) Unintentional mistake.
Answer:
(4) Unintentional mistake.

Question 90.
Choose the correct statement.
(1) Financial statements need not take into consideration any statutory requirement.
(2) Only credit transactions are recorded in books of accounts.
(3) Financial statements prepared by two different accountants will always show identical results.
(4) Financial accounts, of an enterprise, are treated as evidence in the Court of Law.
Answer:
(4) Financial accounts, of an enterprise, are treated as evidence in the Court of Law.

Question 91.
Which of these is/are one of the methods of stocktaking?
(1) Periodic inventory
(2) Perpetua inventory.
(3) Both.
(4) None
Answer:
(3) Both. (Dec 2021,1 x 17 = 17 marks)

Accounting Standards – CMA Inter Financial Accounting Study Material is designed strictly as per the latest syllabus and exam pattern.

Accounting Standards – CMA Inter Financial Accounting Study Material

Short Notes

Question 1.
Write short note:
Recognition of Govt. grants related to specific fixed assets (PPE). (June 2017, 4 marks)
Answer:
Recognition of Govt. grants related to specific fixed assets (PPE):
Grants received specifically for fixed asset(PPE) is disclosed in the financial statement either
(i) by way of deduction from the gross block of the asset concerned, thus granted recognized in Profit and Loss Account through reduced depreciation (in case of funding of specific asset Cost entirely, the asset should be stated at a nominal value in Balance Sheet); or

(ii) the grant treated as deferred revenue income and charged off on a systematic and rational basis over the useful life of the asset, until appropriated disclosed as – Deferred Govt. grant under Reserves and Surplus in the Balance Sheet (grants relating to depreciable assets should be credited to Capital Reserve and suitably credited to Profit and Loss Account to offset the cost charged to income).

Question 2.
Write short note on the following:
Advantages of Accounting Standard (June 2017, 5 marks)
Answer:
Following are the Advantages of setting up Accounting Standards:

1. Standards reduce to a reasonable extent or eliminate altogether confusing variations in the Accounting Treatment used to prepare the Financial Statements.
2. There are certain areas where important information is not required by law to be disclosed. Standard may call for Disclosure that is beyond that is required by law.
3. It facilitates comparison of Financial statements of different Companies at different places.

Question 3.
Write short note on the following:
Bearer Plant. (June 2018, 5 marks)
Answer:
A bearer plant is a plant that:

• is used in the production or supply of agricultural produce;
• is expected to bear produce for more than a period of twelve months; and
• has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales.

The following are not bearer plants:

• plants cultivated to be harvested as agricultural produce;
• plants cultivated to produce agricultural produce when there is more than a remote likelihood that the entity will also harvest and sell the plant as agricultural produce, other than as incidental scrap sales;
• annual crops.

Question 4.
Write short flotes on the following:
Objective and necessity for providing Depreciation (Dec 2019, 5 marks)
Answer:
Objective and Necessity for Providing Depreciation:
Eric Kohler defined depreciation as the lost usefulness, expired utility, the diminution in service yield.” Its measurement and charging are necessary for cost recovery. It is treated as a part of the expired cost for an asset. For determination of revenue, that part or cost should be matched against revenue.

The objects or necessities of charging depreciation are as given below:

• Correct calculation of cost of production: Depreciation is an allocated cost of a fixed asset. It is to be calculated and charged correctly against the revenue of an accounting period. It must be correctly included within the cost of production.
• Correct calculation of profits: Costs incurred for earning revenues must be charged properly for correct calculation of profits. The consumed cost of assets (depreciation) has to be provided for correct matching of revenues with expenses.
• Correct disclosure of fixed assets at reasonable value: Unless depreciation is charged, the depreciable asset cannot be correctly valued and presented in the Balance Sheet. Depreciation is charged so that the Balance Sheet exhibits a true and fair view of the affairs of the business.
• Provision of replacement cost: Depreciation is a non-cash expense. But net profit, is calculated after charging it. Through annual depreciation, cash resources are saved and accumulated to provide replacement cost at the end of the useful life of an asset.
• Maintenance of capital: A significant portion of Capital has to be invested for purchasing fixed assets. The values of such assets are gradually reduced due to their regular use and passage of time. Depreciation on the assets is treated as an expired cost and it is matched against revenue. It is charged against profits. if it is not charged the profits will remain inflated. This will cause capital erosion.
• Compliance with technical and legal requirements: Depreciation has to be charged to comply with the relevant provisions of the Companies Act and Income Tax Act.

Question 5.
Write short flotes on Borrowing Cost as per AS-16. (Dec 2021, 3 marks)
Answer:
Borrowing Cost as per AS-16:
Borrowing costs are interests and other costs incurred by an enterprise in connection with the borrowing of funds. The standard is applied in accounting for borrowing costs which include:

1. interest and commitment charges on bank borrowing and other short-term borrowings;
2. Amortization of discounts/premiums relating to borrowings;
3. Amortization of ancillary cost incurred in connection with arrangement of borrowings;
4. Finance charges for assets acquired under finance lease or other similar arrangement
5. Exchange difference in foreign currency borrowing to the extent it relates to interest element

Descriptive Questions

Question 6.
Answer the following:
State the disclosure requirements under AS-12. (Dec 2013, 2 marks)
Answer:
Disclosure under AS-12:

• The accounting policy adopted for Gnvemment Grants including, method of presentation in the financial statement.
• The nature and extent of Govt. grants recognized in the financial statements, including grants of non-monetary assets given at a concessional rate or free of cost.

Question 7.
What are the disclosure requirements for an enterprise as per AS-11? (Dec 2013, 4 marks)
Answer:
Disclosure under AS -11:
An enterprise should disclose:

• The amount of exchange difference included in the net profit or loss for the period.
• The amount of exchange difference adjusted in the carrying amount of fixed assets (PPE) during the accounting period.
• The amount of exchange difference in respect of forward contracts to be recognized in the profit/loss for one or more subsequent accounting periods.
• Foreign currency risk management policy.

Question 8.
Answer the question:
What are disclosure requirements under AS-11? (Dec 2015, 4 marks)
Answer:
Disclosure under AS -11: An enterprise should disclose:

• The amount of exchange difference included in the net profit or loss for the period.
• The amount of exchange difference adjusted in the carrying amount of fixed assets (PPE) during the accounting period.
• The amount of exchange difference in respect of forward contracts to be recognized in the profit loss for one or more subsequent accounting periods.
• Foreign currency risk management policy.

Question 9.
What is a biological asset as per (AS-10)? (Dec 2021, 1 mark)
Answer:
Biological assets is a living animals or plants.

Practical Questions

Question 10.
On 31st December, 2011 two machines which were purchased on 1.10.2008 costing ₹ 50,000 and ₹ 20,000 respectively had to be discarded and replaced by two new machines costing ₹ 50,000 and ₹ 25,000 respectively. One of the discarded machines was sold for ₹ 20,000 and other for ₹ 10,000. The balance of Machinery Account on April 1st, 2011 was ₹ 3,00,000 against which the depreciation provision stood at ₹ 1,50,000. Depreciation was provided @ 10% on Reducing Balance Method. Prepare the Machinery Account, Provision for Depreciation Account, and Machinery Disposal Account. (June 2013, 5 marks)
Answer:

Question 11.
Answer the following question (give workings wherever required):
On 01.01.2010, M/s. Johnson arid Co. Ltd. purchased machinery for ₹ 1,00,000. Subsequently, 50,000 was paid for installation. Assuming that the rate of depreciation was 10% on Reducing Balance Method, determine the Closing Book Value of the Machine as at 31.12.2012. (Dec 2013, 2 marks)
Answer:

Year	₹	Rate	Depreciation	₹
2010	1,50,000	10%	15,000	1,35,000
2011	1,35,000	10%	13,500	1,21,500
2012	1,21500	10%	12,150	1,09,350

₹ 1,09,350

Question 12.
Answer the following:
From the following information for Rishab Ltd. for the year ended 31.03.2013, calculate the deferred tax asset/liability as per AS-22.
Accounting Profit ₹ 10,00,000
Book Profit as per MAT (Minimum Alternate Tax) ₹ 9,00,000
Profit as per Income Tax Act ₹ 1,00,000
Tax Rate 30%
MAT Rate 10%
(Dec 2013, 5 × 2 = 10 marks)
Answer:
Tax as per accounting profit 10,00,000 × 30% = ₹ 3,00,000
Tax as per income tax profit 1,00,000 × 30% = ₹ 30,000
Tax as pei MAT 9,00,000 × 10% = ₹ 90,000
Tax Expense = Current Tax + Deferred Tax
Therefore Deferred Tax Liability as on 31.3.2013= ₹ 3,00,000 – ₹ 30,000 = ₹ 2,70,000
Amount of Tax to be debited in Profit and Loss AIc for the year 31.3.2013:
= Current Tax + Deferred Amount of Tax liability + Excess of MAT over current tax
= 30,000 + 2,70,000 + (90,000 – 30,000) = ₹ 3,60,000

Alternative answer for second part of the answer
Amount of tax to be debited in Profit and Loss A/c for the year 31.3.2013
= Current Tax (MAT) + Deferred Tax = 90,000 + 2,70,000 = 3,60,000
Both the options can be considered favourably.

Question 13.
The following details are provided by an Import House:

Particulars	Exchange rate
Goods purchase done 24th August,2012	1 Us Dollar = ₹ 47.10
Us Dollar	2,00,000
Exchange rate on 31st March,2013	₹ 54.20
Exchange rate on date of actual payment on 25th May, 2013	₹ 56.30

Calculate gain or loss for the financial years 201 2-13 and 2013-14 and its accounting treatment. (Dec 2013, 4 marks)
Answer:
As per AS-11, all foreign currency transactions should be recorded by applying the exchange rate at the date of transaction. Therefore, goods purchased on 24m August, 2012 and corresponding creditor would be recorded at ₹ 47.10.
= 2,00,000 x 47.10 = ₹ 94,20,000

As per As-11, at the balance sheet date all monetary items should be reported using the closing rate. Therefore, the creditors of US $ 2,00,000 outstanding on 31st March, 2013 will be reported as:
= 2,00,000 x 54.20 = ₹ 1,08,40,000

Exchange loss ₹ 14,20,000(1,08,40,000 – 94,20,000) should be debited in profit and loss account for 2012-13.
As per AS-11, exchange difference on settlement on monetary items should be transferred to profit and loss account as gain or loss thereof:
= 2,00,000 x 56.30 = 1,12,60,000 – 1,08,40,000 = ₹ 4,20,000
₹ 4,20,000 should be debited to profit or loss for the year 201 3-14.

Question 14.
Answer the following question (give workings):

Cost of Machine	₹ 1,30,000
Residual value	Nil
Useful life	10 years
Method of Depreciation in use	Straight Line Method
After 8 years, the machine was revalued to	₹ 80,000

Compute Depreciation as per AS-10. (June 2014, 2 marks)
Answer:
Computation of Depreciation as per AS- 10

	Particulars	Amount (₹)
A	Original Cost	1,30,000
B	Less. Aggregate Depreciation up to 8 years (1,30,000-Nii) x 8/10	1,04,000
C	Existing unamortized Depreciation Amount (A – B)	26,000
D	Add: Profit on Revaluation (80,000 -26000)	54,000
E	Revised unamortized depreciable amount (C + D)	80,000
F	Depreciation for 9th year (₹ 80,000/2)	40,000

Question 15.
Jayakrishna Mills Ltd., runs a modern wheat flour mill. The CEO has prepared the draft accounts, duly considering the mandatory accounting standards. Following note appears: “The company purchased on 15.6.2013, a special purpose machinery for ₹ 75 lakhs. It received a State Government grant for 10% of the price. The machine has an effective lite of
10 years”. What is the proper method of accounting treatment for the above? (June 2014, 4 marks)
(ii) Springlily Ltd. borrowec US $ 6,00,000 on 31 .12.2013 which will be repaid (settled) as on 30.6.2014. The company prepares its financial statements ending on 31.3.2014.
Rate of exchange between reporting currency (Rupee) and foreign currency (US $) on different dates are as under:
31.12.2013 1 US$=₹ 64.00
31.03.2014 1 US$=₹ 64.50
30.06.2014 1 US $ = ₹ 6475
State the aspects to be noted while preparing the financial statements due to the applicable AS. How should the difference in exchange rates be treated? (June 2014, 4 marks)
Answer:
(i) AS-12 prescribes two methods in accounting treatment of Government grants for specific fixed assets(PPE).
Method I: Government grants related to depreciable fixed assets (PPE) to be treated as deferred income which is to be recognized in the Protit and Loss Account in proportion in which depreciation on those assets is charged over the useful life of the asset.

The deferred income pending its apportionment to Profit and Loss Account to be disclosed in the balance sheet separately with a suitable description, e.g. Deferred Government Grants, to be shown after “Reserves & Surplus” but before” Secured Loans”.

Method II: Grants received specifically for Fixed Asset(PPE) may be disclosed in the financial statement by way of deduction from the gross block of the asset concerned, thus grant is recognised in P/L Account through reduced depreciation.

In this case machinery will be recognised at ₹ 67.5 lakhs i.e. after deduction of ₹ 7.5 lakhs Govt. Grants ånd depreciation will be calculated on that ₹ 67.5 lakhs.
Answer:
(ii) As per AS-11, all foreign currency transactions should be recorded by applying the exchange rate at the date of transaction. Therefore, amount borrowed on 31.12.2013 and corresponding lender would be recorded at ₹ 64.00
= 6,00,000 x 64.00 = 3,84,00,000
As per AS-11, at the balance sheet date all monetary items should be reported using the closing rate. Therefore, the lenders of US $ 6,00,000 outstanding on 31 .3.14 will be reported as:
= 6,00,000x 64.50 = 3,87,00,000.
Exchange loss 300,000 = (3,87,00,000- 3,84,00,000) should be debited in profit and loss account for 2013-14.
As per AS-11, exchange difference on settlement on monetary items should be transferred to profit and loss account as gain or loss thereof:
6,00,000 x 64.75 = 3,88,50,000 – 3,87,00,000 = ₹ 1,50,000 should be debited to profit or loss for the year 2014-15.

Question 16.
Answer the following questions (Give workings):
A machine costing ₹ 13,75,000 is depreciated on a straight-line basis assuming 8 years working life and zero residual value. After third year machine’s remaining useful life was reassessed at 7 years. Calculate the amount of depreciation charged for 4e year. (Dec 2014, 2 marks)
Answer:
(a) WDV of Machinery at the end of 3rd year
= \(13,75,000-3\left(\frac{13,75,000-0}{8}\right) \)
= 8,59,375
Depreciation for 4th year
= \(\left(\frac{8,59,375-0}{7}\right) \)
= 1,22,768

Question 17.
Answer the questions:
During the year 2013-14, Purvi Limited received a grant from the Government of India aríounting to ₹ 35 lakh towards purchase of a piece of land for ₹ 140 lakh. You are required to show the accounting treatment of the above transaction in the books of PuM Limited, as per AS-12. (Dec 2014, 2 marks)
Answer:
As per AS-12, accounting for Government Grants reLated to non- depreciable assets should be credited to capital reserve.

Question 18.
Answer the question:
(a) A company writes off depreciation at 10% p.a. on the diminishing balance. On 1st January, 2011 the machinery account showed a balance of ₹ 1,49,000. It was discovered in 2011 that:
(i) A heavy repairs effected to plant and machinery account (completed on 30th June, 2009), were debited to the machinery. The amount was ₹ 15,000; and
(ii) A machine cost ₹ 6,000 was entered in the purchases on 15th October 2009. The expenses on installation, ₹ 400 were debited to General Expenses Account. Necessary corrections were to be made in 2011. On 3Qth June 2011, a machine which had cost ₹ 20,000 on 1st January, 2009 was disposed of for ₹ 15,000 and a machine costing ₹ 30,000 was installed on the same date, the expenses on installing the same being ₹ 500. Show Machinery Account for the year ended 31st December, 2011. Please show your working in detail. (Dec 2014, 12 marks)
Answer:

Note: As per AS-10 an item of property, plant, and equipment should be recognized as an asset if and only if it is probable that future economic benefits associated with the item will flow to the enterprise and cost of the item can be measured reliably.

Question 19.
Answer the questions:
Rukmani Limited purchased a plant for US $ 2,50,000 on 1st March, 2015, payable after three months. Company entered into a forward contract for three months @ ₹ 54.10 per dollar. Exchange rate per dollar on 1st March, 2015 was ₹ 53.74. Compute amount of profit or loss on forward contract as per AS-11. How will you recognise the same in the books of the company? (June 2015, 2 marks)
Answer:
Forward Premium = (54.10 – 53.74) x 2,50,000 = ₹ 90,000
As per AS- 11 this should be expended over the tenor of contract i.e. three months (01.03.2015 to 31 .05.2015).

Question 20.
Answer the question:
Patta Ltd. purchased a piece of Land for ₹ 25,00,000 for which it received a grant from the State Government amounting to ₹ 6,00,000. How will you treat government grant in the accounts as per AS-12? Also pass the necessary journal entries of the above in the books of the company. (June 2015, 3 marks)
Answer:
Grant related to non-depreciable Fixed Assets (PPE). (AS-12) Grant is shown as deduction from the gross value of assets in arriving at its book value when grant is equal to the cost of asset, the asset should be shown in the balance sheet at nominal value.

Question 21.
Answer the question:
JIMIRA LTD. bought a Machine on 30.09.2014 at a price of ₹ 248 Lakh after charging 6% Sales Tax and giving a trade discount of 1.3% on the quoted price. Transport charges and installation charges were 0.30% and 0.75% respectively on the quoted price. To meet machine purchase a loan of ₹ 240 Lakh was taken from the bank on which interest at 12%
P.A. was to be paid. Expenditure incurred on trial run was materials, wages and overheads ₹ 24,000, ₹ 18,000 and ₹ 11,000 respectively. Machine was ready for use on 01-12-2014. However, it was actually put to use only on 01-05-201 5. Entire loan amount remain unpaid on 01-05-2015.
Required:
Find the cost of machine as per AS-10 (June 2015, 4 marks)
Answer:

Question 22.
Answer the questions:
Shiva Limited has received a grant of ₹ 15 crores from the Government for setting up a manufacturing unit in a backward area. Out of this grant, the company distributed ₹ 4 crores as dividend. Also, Shiva Limited received land free of cost from the State Government but it has not recorded it at all in the books as no money has been spent. In the light of AS-12 examine, whether the treatment of both the grants is correct. (Dec 2015, 2 marks)
Answer:
As per AS -12 “Accounting for Government Grants,’ when Government Grant is received for a specific purpose, it should be utihzed for the same. So, the Grant received for setting up a manufacturing unit is not available for distribution of dividend. In the case, even if the company has not spent money for the acquisition of land, land should be recorded in the books of accounts at a nominal value. The treatment of both the elements in the treatment of the grant is incorrect as per AS -12.

Question 23.
M/s. Eagle Ltd. gives you the following information as on 31.03.2015:
(i) The Company has charged depreciation of ₹ 6,45,600 in its books of accounts, while as per income-tax computation, the depreciation available to the company is ₹ 7,64,100.
(ii) The expense of ₹ 6,85,500 has been charged to profit and loss account which are disallowed under the Income-tax Ad.
(iii) The Company has debited share issue expenses of ₹ 5,46,400, which will be available for deduction under the Income-tax Act for the next year.
(iv) The Company has made provision for doubtful debts for ₹ 45,600 during the year.
(v) The Company has made donation of ₹ 3,00,000, which has been debited to profit and loss account and only 50% thereof will be allowed as deduction as per Income-tax law.
You are required to compute the deferred tax assets and deferred tax liability as on 31.03.2015. The tax rate applicable is 30%. (Dec 2015, 5 marks)
Answer:

Question 24.
Answer the following questions (Give workings):
On April 1, 2014, ZOOM LTD. purchased a Machine for ₹ 5,50,000 and spent ₹ 30,000 on its installation, ₹ 5,000 for freight and cartage and ₹ 10,000 for Insurance Charges. The expected life of the Machine is 5 years, at the end of which the estimated scrap value will be ₹ 46,000. Calculate the amount of Annual Depreciation under Straight Line Method. ( Dec 2015, 2 marks)
Answer:

Question 25.
Answer the following:
From the following details ‘of Zebra Ltd., calculate the deferred tax asset/liability as per AS-22 and the amount of tax to be debited in the Profit & Loss A/c under different heads for the year ended 31-03 2016.

Particulars	₹
Accounting profit	15,00,000
Book profit as per MAT	13,50,000
Profit as per Income-tax Act	2,00,000
Tax rate	30%
MAT rate	7.50%

(Dec 2016, 5 marks)
Answer:

Tax expense as per accounting profit	15,00,000 x 30%	= ₹ 4,50,000
Tax as per Income tax profit	2,00,000 x 30%	= ₹ 60,000
Tax as per MAT	13,50,000 x 7.5%	= ₹ 1,01,250
Deferred tax liability as on 31-03-2016 (Tax expense – Current tax)	4,50,000 – 60,000	= ₹ 3,90,000

Amount of tax to be debited in the Profit & Loss A!c under different heads for the year ended 31-03-2016.

Current tax	₹ 60,000
Deferred tax liability	₹ 3,90,000
Excess of MAT over current tax	₹ 41,250
Total	₹ 4,91,250

Question 26.
Answer the following questions:
The following information relate to ZOOM Ltd.
Imported Raw materials on 25.02.2015 for US $ 10,000;
Exchange Rate on 25.02.2015 ₹ 60 per US $;
Exchange Rate on 31.03.2015 ₹ 60.50 per US $;
Date of Actual payment for import: 15.06.2015;
Exchange Rate on 15.06.2015 ₹ 61 per US $;
Calculate the (Loss)/Gain for the financial year 2015-16 (as per AS-11).

ATIMA LTD. purchased a fixed asset (PPE) for ₹ 45 Lakh on 05.04.201 5. The company received a grant from the Government of West Bengal during the year amounting to ₹ 18 Lakh. Show the accounting treatment of the above if it is non-depreciable asset as per AS-12. (Dec 2016, 2 marks each)
Answer:
As per AS-1 1 outstanding liability for creditors as on 31.03.2015 will be reported (10,000 × 60.50) = ₹ 6,05,000.
Hence (loss) /Gain for the year 2015-16 will be 10,000 × (61 -60.50) = (₹ 5,000)
As per AS-12 accounting for Government Grants related to non-depreciable assets should be credited to Capital Reserve.
Accounting entries:

Question 27.
Answer the following questions (Give workings):
BHARAT TUSHAR LTD. which depreciates its machinery at 10% p.a. on diminishing balance method, had on 1st April, 2015, ₹ 29,160, to the debit of Machinery Account. On 31st March, 2016, the company decided to change the method of depreciation to straight line method, the rate of depreciation remaining the same. Pass the necessary Journal entry for Depreciation on 31st March 2016. (Modified) (Dec 2016, 2 marks)
Answer:

Question 28.
Z Ltd. sold goods to a US Company for US $ 50000 on 10.02.2017 and realized the due on 30.06.2017. Z Ltd. closes the books of accounts on 31st March. Exchange rates were as follows:

Date	Rate
10.02.2017	65.40
31.03.2017	66.00
30.06.2017	65.80

Calculate the exchange loss/gain the reporting date and on the settlement date and comment on their treatment as per AS 11. (Dec 2017, 3 marks)
Answer:
As per AS 11, transactions such as purchase, sales etc. are to be recorded in the books of accounts at the exchange rate pfevailing on the date of transaction. Any exchange gain/ loss arising subsequently is to be transferred to Income Statement.

Value of the goods sold = $ 50000
Exchange rate on the date of transaction = ₹ 65.40/$
So sales to be recorded in the books = 50000 x 65.40 = ₹ 3,270.000
Exchange rate on the date of reporting (31.03.17) = ₹ 66.00/$’
Value of the receivables on 31.03.17 = 5000 x 66 = ₹ 3,300,000
Exchange gain on 31.03.2017 = (33,00,000 – 32,70,000) = ₹ 30,000, to be credited to P/L A/c.
Exchange rate on the date of settlement (30.06.17) = ₹ 65.80/$
Exchange loss on 30.06.17 = 50000 x (66.00 – 65.80) = 10.000 to be debited to P/L A/c.

Question 29.
Sanwar Ltd. made a loss of ₹ 50 Lakhs for the year ending 31st March, 2015. For the year ending 31 March, 2016 and 31 March, 2017 it made profits of ₹ 25 Lakhs and ₹ 32 Lakhs respectively. It is assumed that the loss of a year can be carried forward for eight years and tax rate is 30%. By the end of the 31.03.2015, the company feels that there will be sufficient taxable income in the future years against which carry forward loss can be set off. There is no difference between taxable income and accountimg income except that the carry forward loss is allowed in the years ending on 31st March, 2016 and 2017 for tax purposes. Prepare a statement showing Profit and Loss before Tax and after Tax for the years ending 31st March, 2015, 2016 and 2017. (Dec 2017, 8 marks)
Answer:

Question 30.
M/s. Ayush Ltd. began construction of a new building on 1st January, 2017. It obtained 3,00,000 lakh special loan to tinnce the construction of the building on 1st January ,201 7 at an Interest rate of 12% p.a. The company’s other outstanding two non-specific loans were:

Amount	Rate of Interest
₹ 6,00,000	11%p.a.
₹ 11,00,000	13%p.a.

The expenditure that were made on the building project were as follows: Building was completed on 31 December, 2017. Following the principles prescribed in AS 16 on ‘Borrowing Cost’, calculate the amount of interest to be capitalized and pass one Journal entry for capitalizing the cost and borrowing in respect of the building. (June 2018, 6 marks)
Answer:

	Amount (₹)
January, 2017	3,00,000
April, 2017	3,50,000
July, 2017	5,50,000
December, 2017	1,50,000

Building was completed on 31st December, 2017. Following the principles prescribed in AS 16 on ‘Borrowing Cost’, calculate the amount of interest to be capitalized and pass one Journal entry for capitalizing the cost and borrowing in respect of the building. (June 2018, 6 marks)
Answer:
(i) ComputatIon of average accumulated expenses:

	₹
₹ 3,00,000 × 12/12	3,00,000
₹ 3,50,000 × 9 / 12	2,62,500
₹ 5,50,000 × 6 / 12	2,75,000
₹ 1,50,000 × 1/12	12,500
₹ 13,50,000	8,50,000

(iii) Interest amount to be capitalized:

Particulars	₹
Specific borrowings (₹ 3,00,000 × 12%)	= 36,000
Non-specific borrowings [ (₹ 5,50,000 (₹ 8,50,000 – ₹ 3,00,000) × 12.29%]	= 67,595
Amount of interest to be capitalized	= 1,03,595

(iv) Computation of actual Interest costs incurred during the year:

Particulars	Amount (₹)
₹ 3,00,000 × 12%	36,000
₹ 6,00,000 × 11%	66,000
₹ 11,00,000 × 13%	1,43,000
	2,45,000

Amount to be capitalized is ₹ 13,50,000 +₹ 1,03,595 i.e. ₹ 14,53,595 which is not more than ₹ 2,45,000.

Question 31.
From the given information, you are required to compute the Deferred Tax Assets and Deferred Tax Liability for Ramanujam Limited as on 31st’ March, 2018. The tax rate applicable is 35%
(i) The Company has charged Depreciation of ₹ 7,42,900 in its Books of Accounts while as per Income Tax computation, the Depreciation available to the Company is ₹ 8,65,400.
(ii) The Company has made Provision for Doubtful Debts for ₹ 54,300 during the year.
(iii) The Company has debited Share Issue Expenses of ₹ 6,23,500 which will be available for deduction under the Income Tax Act from the next year.
(iv) The expenses of ₹ 7,84,500 has been charged to Profit and Loss Account which are disallowed tinder the Income Tax Act.
(v) The Company has made Donation of ₹ 2,00,000 which has been debited to Profit and Loss Account and only 50% thereof will be allowed as deduction as per Income Tax Law. (June 2018, 8 marks)
Answer:

Question 32.
K Ltd. purchased goods from a US Company for US $ 50000 on 10.02.2019 and settled the due on 30.06.2019. K Ltd. closes the books of accounts on 31st March. Exchange rates were as follows:

Date	Rate
10.02.2019	47.4
31.03.2019	46
30.06.2019	47.8

Calculate the exchange loss/gain on the reporting date and on the settlement date and comment on their treatment as per AS 11. (Dec 2019, 4 marks)
Answer:
As per AS 11, transactions such as purchase, sales, etc. are to be recorded in the books of accounts at the exchange rate prevailing on the date of transaction. Any exchange gain loss arising subsequently is to be transferred to Income Statement.

Value of the goods purchased = $ 50,000
Exchange rate on the date of transaction = ₹ 47.40/$
So, purchase to be recorded in the books = 50,000 × 47.40 = ₹ 23,70,000
Exchange rate on the date of reporting (31 .03.19) = ₹ 46.00/$
Value of the payables on 31.03.19 = 50,000 × 46 = ₹ 23,00,000
Exchange gain on 31.03.2019= (23,70,000 – 23,00,000) = ₹ 70,000, to be credited to P/L A/C.
Exchange rate on the date of settlement (30.06.19) = ₹ 47.80/$
Exchange loss on 30.06.19 – 50,000 × (47.80 – 46.00) = ₹ 90,000 to be debited, to P/L A/c.

Question 33.
Total borrowing and interest cost for the year ending on 31.03.2020 are given below:

Borrowing	Date of Borrowing	Amount (₹)	Interest (₹)
8% Term Loan	1.4.2019	20,00,000	1,60,000
8% Bank Loan	1.7.2019	60,00,000	3,60,000
6% Debentures	1.10.2019	40,00,000	1,20,00,000
		1,20,000	6,40,000

Qualifying assets in which these funds are utilized are:

Particulars	Amount (₹)	Period
Factory Shed	20,00,000	12 months
Plant A	14,00,000	8 months
Plant B	9,00,000	6 months

From the above information calculate
(i) Capitalization rate
(ii) Total Interest Cost to be capitalized. (Dec 2021, 6 marks)
Answer:

Average amount outstanding = \(\frac{10,20,00,000}{85,00,000} \) = 85,00,000
Capitalisation Rate = \(\frac{640,000}{85,00,000} \times 100 \) = 7.5% Approx.

(ii) Total interest cost to be capitalised

Particulars	Expenditure incurred	Month	Product
a	b	c	d =(b x c)
Factory Shed	20,00,000	12	2,40,00,000
Plant A	14,00,000	8	1,12,00,000
Plant B	9,00,000	6	54,00,000
			4,06,00,000

Average amount of Assets during a period
= \(\frac{4,06,00,000}{12} \) = 33,83,333
Interest to be capitalized = Average amount of Asset x Capitalization Rate
= 33,83,333 x 0.075 =2,53,750

Question 34.
M Ltd. sold goods to a US Company for US $1,00,000 on 10.01.2021 and realized the due on 30.06.2021. Y Ltd. closes the books of accounts on 31st March every year. Exchange rates were as follows:

Date	Rate (₹)
10.01.2021	69.2
31 .03.2021	76.1
30.06.2021	74.3

(i) Calculate the exchange loss/gain on the reporting date.
(ii) Calculate the exchange loss/gain on the settlement date. (Dec 2021, 4 marks)
Answer: ‘
(i) Calculation of exchange gain on the reporting date (31.3.2021)
Value of the goods sold = $ 1,00,000
Exchange rate on the date of transaction = ₹ 69.20 $
So sales to be reported ¡n the books 1,00,000 x 69.20 = ₹ 69,20,000
Exchange rate on the date of reporting (31.3.2021) – ₹ 76.10$
Value of the receivable on 31 .3.2021 = 1,00,000 x 76.10 = ₹ 76,10,000
Exchange gain on 31.3.2021
= 76,10,000 – 69,20,000 = ₹ 6,90,000

(ii) Calculation of loss on settlement date (30.6.2021)
Exchange rate on date on the date of settlement = ₹ 74.30$
Exchange loss on 30.6.2021 = 1,00,000 x (76.10 – 74.30) = ₹ 1,80,000

Question 35.
State your views with reasons whether the following statements are in line with the provisions of AS-1.
(i) Certain fundamental accounting assùmptions underline the preparation and presentation of financial statements. They are usually specifically stated because their acceptance and use are not assumed.
(ii) If fundamental accounting assumptions are not followed in presentation and preparation of financial statements, a specific disclosure is not required.
(iii) All significant accounting policies adopted ¡n the preparation and presentation of financial statements should form part of the financial statements.
(iv) Any change in an accounting policy, which has a material effect should be disclosed. Where the amount by which any item in the financial statements is affected by such change is not ascertainable, wholly or in part, the fact need not to be indicated.
(v) There is no single list of accounting policies which are applicable to all circumstances. (Dec 2022, 10 marks)

Question 36.
Omega Ltd, a supermarket chain, is renovating one of its major stores. The store will have more available space for store promotion outlets after the renovation and will include a restaurant. Management is preparing the budgets for the year after the store reopens, which include the cost of remodelling and the expectation of a 15% increase in sales resulting
from the store renovations, wh1ch will attract new customers. Decide whether Omega Ltd. can capitalize the remodelling cost or not as per provisions of AS-10 ‘Property Plant & Equipment’. (Dec 2022, 3 marks)

Accounting Standards CMA Inter Financial Accounting Notes

Generally Accepted Accounting Principles (GAAP) is a collection of commonly followed accounting rules and standards meant for accounting of transactions and ultimately their reporting.

Accounting Standards (AS)
Accounting Standards are written policy documents which discuss the aspects of recognition, measurement and treatment of specific accounting transactions, along with the presentation and disclosure there of in the financial statements of an entity.

Fundamental Accounting Assumptions

• Going Concern
• Consistency
• Accrual

Factors governing the selection and application of accounting policies are:

• Prudence
• Substance over form
• Matenality
• AS1

Changes in Accounting Policies
Any change in the accounting policies which has a material effect in the current period or which is reasonably expected to have a material effect in the later period should be disclosed, In the case of a change in accounting policies, having material effect in the current period, the amount by which any item in the financial statements, is affected by such change should also be disclosed to the extent as ascertainable, otherwise the fact that the effect is not (wholly or partially) ascertainable, should be disclosed.

Property Plant and Equipment (AS -10)
Property, plant and equipment are tangible items that:

• are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and
• are expected to be used during more than a period of twelve months. Recoverable amount is the higher of an asset’s net selling price and its value in use.

Useful life is:

• the period over which an asset is expected to be available for use by an enterprise; or
• the number of production or similar units expected to be obtained from the asset by an enterprise.

Cost Model
After recognition as an asset, an item of property, plant and equipment should be carried at its cost less any accumulated depreciation and any accumulated impairment losses.

Revaluation Model
After recognition as an asset, an item of property, plant and equipment whose fair value can be measured reliably should be carried at a revalued amount, being its far value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses.

Depreciation
Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item should be depreciated separately.

The depreciation charge for each period should be recognised in the Statement of Profit and Loss unless it is included in the carrying amount of another asset.

Property Plant and Equipment (AS -10)
Property, plane and equipment are tangible items that:

• are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and
• are expected to be used during more than a period of twelve months. Recoverable amount is the higher of an asset’s net selling price and its value in use.

Useful life is:

• the period over which an asset is expected to be available for use by an enterprise; or
• the number of production or similar units expected to be obtained from the asset by an enterprise.

Cost Model
After recognition as an asset, an item of property, plant and equipment should be carried at its cost less any accumulated depreciation and any accumulated impairment losses.

Revaluation Model
After recognition as an asset, an item of properly, plant and equipment whose fair value can be measured reliably should be carried at a revalued amount, being its far value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses.

Depreciation
Each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item should be depreciated separately. The depreciation charge for each period should be recognised in the Statement of Profit and Loss unless it is included in the carrying amount of another asset.

The Effects of Changes In Foreign Exchange Rate (AS 11)
Foreign Currency Transactions
Meaning:
A foreign currency transaction is a transaction which is denominated in or requires settlement in a foreign currency, including transactions arising when an enterprise either:

• buys or sells goods or services whose price is denominated in a foreign currency;
• borrows or lends funds when the amounts payable or receivable are denominated in a foreign currency;
• becomes a party to an unperformed forward exchange contract; or
• otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated in a foreign currency.

Integral foreign operations
A foreign operation that is integral to the operations of the reporting enterprise carries on its businos as if it were an extension of the reporting enterprise’s operations.

Non-integral foreign operations
A non-integral foreign operation accumulates cash and other monetary items, incurs expenses, generates income and arranges borrowings, all substantially in its local currency.

Accounting for Government Grants (AS 12)
Government grants are assistance by government in cash or kind to an enterprise for past or future compliance with certain conditions. They exclude those forms of government assistance which cannot reasonably have a value placed upon them and transactions with government which cannot be distinguished from tie normal trading transactions of the enterprise.

Methods of Accounting for Government Grants
Capital approach
Under this approach, a grant is treated as part of shareholders’ funds. This approach is followed because many government grants are in the nature of promoters’ contribution

Income approach
Under this approach, a grant is considered to be an item of income over one or more periods. This approach is followed when the government grants are not gratuitous in nature. The enterprise earns them through compliance with their conditions and meeting the envisaged obligations.

Non-monetary Government Grants
Government grants may take the form of nonmonetary assets, such as land or other resources, given at concessional rates. In these circumstances, it is usual to account for such assets at their acquisition cost. Non-monetary assets given tree of cost are to be recorded at a nominal value.

Presentation of Grants Related to Specific Fixed Assets
First method
The grant is shown as a deduction from the gross value of the asset concerned in arriving at its book value. The grant is thus recognised in the profit and loss statement over the useful life of a depreciable asset by way of a reduced depreciation. Where the whole, or virtually the whole, of the cost of the asset, the asset is shown in the balance sheet at a nominal value.

Second method
Grants related to depreciable assets are treated as deferred income which is recognised ¡n the profit and loss statement on a systematic and rational basis over the useful life of the asset. Such allocation to income is usually made over the periods and in the proportions in which depreciation on related assets is charged.

Refund of Government Grants
Government grants sometimes become refundable because certain conditions do not get fulfilled. A government grant that becomes refundable is treated as an extraordinary item (and treated accordingjy as per AS 5).

Borrowing Costs (AS 16)
Borrowing costs are interest and other costs that. an entity incurs in connection with the borrowing of funds.

Qualifying Asset —
A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.

Inclusions in Borrowing Coste Borrowing costs may include:

• interest and commitment charges on bank borrowings and other short-term and long-term borrowings;
• amortization of discounts or premiums relating to borrowings;
• amortization of ancillary costs incurred in connection with the arrangement of borrowings;
• finance charges in respect of assets acquired under finance leases or under other similar arrangements; and
• exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.

Capitalization of Borrowing Costs
1. Specific Borrowing:
To the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalization on that asset should be determined as the actual borrowing costs incurred on that borrowing during the period less any income on the temporary investment of those borrowings.

2. General borrowing:
To the extent that funds are borrowed generally and used for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation should be determined by applying a capitalisation rate to the expenditure on that asset.

Accounting for Taxes on In come (AS 22).
Accounting income (loss) is the net profit or loss for a period, as reported in the statement of profit and loss, before deducting income tax expense or adding income tax saving.

Taxable Income (tax loss) is the amount of the income (loss) for a period, determined in accordance with the tax laws, based upon which income tax payable (recoverable) is determined.

Tax expense (tax saving) is the aggregate of current tax and deferred tax charged or credited to the statement of profit and loss for the period.

Current tax is the amount of income tax determined to be payable (recoverable) in respect of the taxable income (tax loss) for a period.

Deferred tax is the tax effect of timing differences.

Timing differences are the differences between taxable income and accounting income for a period that originate in one period and are capable of reversal in one or more subsequent periods.

Permanent differences are the differences between taxable income and accounting income for a period that originate in one period and do not reverse subsequently.

Timing differences arise because the period in which some items of revenue and expenses are included in taxable income do not coincide with the period in which such items of revenue and expenses are included or considered in arriving at accounting income.

Recognition
Tax expense for the period, comprising current tax and deferred tax, should be included in the determination of the net profit or loss for the period. Taxes on income are considered to be an expense incurred by the enterprise in earning income and are accrued in the same period as the revenue and expenses to which they relate. Such matching may result into timing differences.

Hire Purchase and Installment Sale Transactions – CMA Inter Financial Accounting Study Material is designed strictly as per the latest syllabus and exam pattern.

Hire Purchase and Installment Sale Transactions – CMA Inter Financial Accounting Study Material

Distinguish Between
Question 1.
Distinction between Hire Purchase Agreement and Instalment Purchase Agreement (Dec 2018, 5 marks)
Answer:
Hire Purchase Agreement differs from Installment Purchase Agreement in the following respects:

Basis of Distinction	Hire Purchase Agreement	Installment Purchase Agreement
1. Act governing	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 Unless seller defaults, goods without further goods are not returnable.	payment, except for accrued installment.
5. Seller’s right to repossess	The seller may take possession of the goods it hirer is in default.	The seller can sue for price it the buyer is in default, He cannot take possession of the goods.
6. Right to Dispose off	Hirer cannot hire out, sell, pledge or assign entitling transferee to retain possession as against the hire vendor.	The buyer may dispose of 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 transferred.	The buyer is responsible for risk of loss of goods because of 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. Relationship between parties Involved	The relationship between hirer and hire vendor is that of Bailee and Bailor.	The relationship between the buyer and seller is that of a debtor and creditor till last installment is paid.
10. 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.
11. Method of Accounting	1. Sales Method for goods of substantial sales values 2. Stock Methods for Goods of small sales values	Interest Suspense Method.

Question 2.
Distinguish between Hire-Purchase and Instalment Purchase. (Dec 2022, 5 marks)

Descriptive Questions

Question 3.
State when the title of goods are transferred to the hirer. (Dec 2021, 1 mark)
Answer:
Title of goods are transferred only when the agreed sum (Higher purchase price) is paid by the hirer)

Practical Questions

Question 4.
China sells goods on hire purchase at cost plus 60 percent. Prepare Hire Purchase Trading Account from the following information for the year ending 31st March, 2012:

	₹
1.4.2011 Stock with customers at hire purchase price	96,000
31.3.2012 Sale of hire purchase goods during the year at hire purchase price	5,68,000
31.3.2012 Cash received from hire purchase customers	2,65,000
31.3.2012 Stock with customers’ at-hire purchase price	3,64,000

(Dec 2012, 4 marks)
Answer:

Question 5.
On 1st April, 2010 Guru purchased a machinery for cash price of 5,06,872 on hire purchase system from Machinery Mart. Payment to be made ₹ 1,50,000 down and the balance by four equal annual installments. Interest is charged @ 15% per annum. Guru depreciates machinery at 20% per annum on written down value method. Guru paid down payment and first two installments but could not pay the remaining installments. On 31st March, 2013 the Machinery Mart took possession of machinery. You are required to prepare Machinery Account and Machinery Mart Account in the books of Guru. (June 2013, 7 marks)
Answer:
Since the problem is silent regarding the amount of equal installment, it is assumed that the balance of cash price will be paid equally along with the interest on the amount outstanding.

Question 6.
Answer the following question (give workings):
₹ 30,000 is the annual installment to be paid for three years (given present value of an annuity of 1 p.a. @ 5% interest is ₹ 2.7232). Ascertain the cash price in cash of Hire Purchase. (June 2014, 2 marks)
Answer:
Cost price = 30,000 × PVAF (5%, 3 years)
= 30,000 × 2.7232
= 81,696

Question 7.
Answer the following question (Give workings):
Madhu purchased a machinery on hire purchase basis on 1st April 2014. ₹ 75,000 was paid immediately and the remaining amount was to be paid in three annual installments of ₹ 1,00,000 each. Interest rate is 15% per annum. Calculate the cash price. (Dec 2014, 2 marks)
Answer:
Calculation of cash price of Machine
Balance of cash price at the time of lO installment
= 1,00,000 – [1,00,000 × (15/115)] = 1 ,00,000- 13,043 = 86,957
Balance of cash price at the time of Il installment
= (1,00,000 + 86,957)- [1,86,957 × (15/115)]
= 1,86,957-24,386= 1,62,571
Balance of cash price at the time of I installment
= (1,00,000 + 1,62,571) – [2,62,571 × (15/115)]
= 2,62,571 – 34,248 = 2,28,323
Hence, Total cash price = 2,28,323 + down payment 75,000 = ₹ 3,03,323

Question 8.
Answer the question:
GOPI purchased a plant-on-hire purchase system from GOPAL on 01.04.2015. The hire purchase rate was settled at ₹ 72,000, payable at ₹ 22,000 on 01.04.2015 and ₹ 25,000 at the end of two successive years. Interest was charqed @ 5% P.A. [Given PVI FA (at 5%, 2 years) = 1.8594] Ascertain the cash price of the plant. (June 2015, 2 marks)
Answer:

Question 9.
The hire purchase department of RAVERA ELECTRO sells LCD TV Sets and Refrigerators. This department was newly started on 1st April, 2014. The relevant information is as follows:

(Amount in ₹ )
Particulars	LCD TV	Refrigerator
Cost	48,600	20,000
Cash Price	56,700	24,000
Cash down payment	8,100	4,000
Monthly Instalments	5,400	2,000
Number of Instalments	10	12

During the year ended March 31, 2015, 100 LCD TV Sets and 120 Refrigerators were sold on hire purchase (HP) basis. Two LCD TV Sets on which 3 installments only could be collected and 4 Refrigerators on which 5 installments had been collected were repossessed. These were valued at 95,000 and after reconditioning at a cost of 10,000 were sold outright for 1,30,000. Other installments collected and those due (Customer still paying) were respectively as follows:
LCD TV Sets 270 and 20
Refrigerators 400 and 30
Required:
Prepare necessary Ledger Accounts on ‘Stocks and Debtors System’ to record the above transactions and to reveal the profit of RAVERA ELECTRO. (Dec 2015, 2+1+2+1+2+4=12 marks)
Answer:

Working Note: .
(i) Hire Purchase price is 62,100 for each LCD TV set and ₹ 28,000 for each refrigerator:
Total cost and sales on this basis are as follows:

	H.P. Price (₹)	Cost (₹)
LCD TV Sets (100)	62,10,000	48,60,000
Refrigerators (120)	33,60,000	24,00,000
	95,70,000	72,60,000

(ii) Total Collection:

Particulars	LCD TV Sets (₹)	Refrigerators (₹)
Cash collected on down payment	(8100 x 100) 8,10,000	(4,000 x 120) 4,80,000
Installments collected	(5,400 × 270) 14,58,000	(2,000 × 400) 8,00,000
Amount collected on repossessed goods	(3 × 2 × 5,400) 32,400	(2,000 × 5 × 4) 40,000
Total collection	23,00,400	13,20,000
Installments dues not collected	(20 x 5,400) 1,08,000	(30 x 2,000) 60,000
H.P. DebtorsA/c	24,08,400	13,80,000
Total (24,08,400 + 13,80,000)		37,88,400

(iii) Installments not yet due:

LCD TV sets: Total installments on 98 sets (98 × 10)	980
Installments collected and due (270+ 20)	(290)
	690

(A) Amount of 690 installments @ ₹ 5,400 each 37,26,000 Refrigerators:

Total installments on 116 refrigerators [116 × 12]	1,392
Less: Installments collected and due (400 + 30)	430
	962

(B)

Particulars	₹
Amount of 962 installments @ 2,000 each	19,24,000

Total amount (A+B) 56,50,000

Stock Reserve:
Stock Reserve = \(\frac{\text { H.P. Frice-Cost Price }}{\text { H.P.Price }} \) × Amount of Installment not yet due
LCD TV sets = \(\frac{13,500}{62,100} \) × 37 26,000=8,10,000
Refrigerators = \(\frac{8,000}{28,000} \) × ₹19 24,000 = ₹ 5,49,714
Total = 13,59,714

(v) Installment not due on repossessed goods:

Particulars	₹
2 LCD TV sets 7 installments on each @ ₹ 5,400	75,600
4 Refrigerators 7 installments on each @ ₹ 2,000	56,000
	1,31,600

(vi) Installments due but not collected:

Particulars	₹
LCD TV sets (20 × ₹ 5,400)	1,08,000
Refrigerators (30 × ₹ 2,000)	60,000
	1,68,000

Question 10.
Answer the following question.
MS SOHALI purchased a LCD TV on hire purchase system from MENZ ENTERPRISE on 01 .03.2016. The hire purchase rate was settled at ₹ 1,20,000, payable at ₹ 45,000 on 01.03.201 6 and ₹ 25,000 at the end of three successive years. Interest was charged @ 6% RA. [Given PVIFA(at 6%, 3 years) = 2.6730.] Compute the Cash Price of LCD-TV. (June 2016, 2 marks)
Answer:
Cash Price = ₹ 45,000 (down payment) + ( ₹ 25,000 × 2.6730)
= ₹ 45,000 + ₹ 66,825 = ₹ 1,11,825

Question 11.
POOR VI STORES LTD. sells goods on hire purchase at Cost plus 25%. The following information is provided for the year ended March 31, 2016.

	₹
April 1st 2015 Stock with hire purchase customers at hire purchase price	5,00,000
April 1st Stock at shop	1,12,500
April 1st 2016 Instalments overdue	30,000
March 31st Cash received from HP customers during the year	14,75,000
March 31st Purchases for the year	12,50,000
March 31st Instalments overdue	55,000
March 31st Stock at shop	62,500
March 31st Stock with hire purchase customers at hire purchase price	6,25,000

You are required to prepare Hire Purchase Trading Account for the year ended March 31, 2016. (Dec 2016, 5+1=6 marks)
Answer:

Question 12.
Moon purchased a machine on Hire Purchase System. The total cost price of the machine was ₹ 15,00,000 payable 20% down and four annual installments of ₹ 4,20,000, ₹ 3,90,000, ₹ 3,60,000 and ₹ 3,30,000 at the end of the 1 year, 2’ year, 3 year and 4 year respectively. Calculate the interest included in each year’s installment assuming that the sales were made at the beginning of the year. (June 2017, 8 marks)
Answer:
Cash Price = 15,00,000
Hire Purchase Price = (15,00,000 x 20%) + 4,20,000 + 3,90,000 + 3,60,000 + 3,30,000 = 18,00,000
Total Interest = 18,00,000 – 15,00,000 = 3,00,000

Ratio of(a): (b): (C): (d) = 1500:1080: 690:330 = 50: 36 : 23: 11
Interest included in installment of:
1. 1st year = 3,00,000 × \(\frac{50}{120}\) = 1,25,000
2. 2nd year=3,00,000 × \(\frac{36}{120} \) =90,000
3. 3rd year 3,00,000 × \(\frac{23}{120} \) = 57,500
4. 4th year = 3,00,000 × \(\frac{11}{120}\) = 27,500

Question 13.
On 1 April, 2012, X Ltd. sells a Truck on hire purchase basis to X Transporters & Co. for a total purchase price of ₹ 18,00,000 payable as to ₹ 4,80,000 as down payment and the balance in three equal annual installments of ₹ 4,40,000 each payable on 31 March, 13, 2014 and 2015. The hire vendor charges interest @ 10% per annum. You are.required to ascertain the cash price of the truck for X Transporters & Co. Calculations may be made to the nearest rupee. (Dec 2017,8 marks)
Answer:
Ratio of interest and amount due = \(\frac{\text { Rate of Interest }}{100+\text { Rate of Interest }}=\frac{10}{100}=\frac{1}{11}\)
There is no interest element in the down payment as it is paid on the date of the transaction. Installments paid after certain period includes interest portion also. Therefore, to ascertain cash price, interest will be calculated from last installment to first installment as follows:

Question 14.
M/s. Zed Laptop Co. has a hire-purchase department and goods are sold on hire-purchase adding 25% to cost. From the following information (all figures are at hire-purchase price), Prepare Hire-Purchase Trading Account for the year ending, March 31, 2017:

	₹
April 01, 2016 goods with customers (installments not yet due)	80,000
Goods sold on Hire-purchase during the year	4,00,000
Cash received during the year from customers	3,00,000
Installments due but not yet received at the end of the year, customers paying	10,000

(June 2018, 5 marks)
Answer:

Question 15.
The following particulars relate to hire purchase transactions:
(i) X purchased three cars from Y on hire purchase basis, the cash price of each car being ₹ 2,00,000.
(ii) The hire purchaser charged depreciation @ 20% on diminishing balance method.
(iii) Two cars were seized by on hire vendor when second instalment 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.
(iv) 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. (June 2019, 8 marks)
Answer:

Particulars	₹
(i) Price of two cars = ₹ 2,00,000 x 2	4,00,000
Less: Depreciation for the first year @ 30%	1,20,000
	2,80,000
Less: Depreciation for the second year = ₹ 2, 80,000 x (30/100)	84,000
Agreed value of two cars taken back by the hire vendor	1,96,000
(ii) Cash purchase price of one car	2,00,000
Less: Depreciation on ₹ 2,00,000 @ 20% for the first year	40,000
Written drown value at the end of first year	1,60,000
Less: Depreciation on ₹ 1,60,000 @ 20% for the second year	32,000
(iii) Book value of car left with the hire purchaser	1,28,000
Book value of one car as calculated in working note (ii) above	1,28,000
Book value of Two cars = ₹ 1,28,000 x 2	2,56,000
Value at which the two cars were taken back, calculated in working note (i) above	1,96,000
Hence, loss on cars taken back ₹ 2,56,000 – ₹ 1,96,000 =	₹ 60,000
(iv) Sale proceeds of cars repossessed	1,70,000
Less: Value at which cars were taken back ₹ 1,96,000
Repair ₹ 10,000	2,06,000
Loss on resale	36,000

Question 16.
A acquired on 1st January, 2020 a machine under hire purchase agreement, which provides for 5 haIl yearly installments of ₹ 6,000 each. The first instalment is due on 1st July, 2020. Assuming that the applicable rate of interest is 10% per annum, Calculate the cash price of the machine. All working should form part of the answer. (Dec 2021, 6 marks)
Answer:
Cash Purchase price of Machine – ₹ 25,977.

Question 17.
A acquired on 1st January, 2021 a machine under a Hire-Purchase agreement which provides for 5 halt-yearly instalments of ₹ 6,000 each, the first instalment being due on 1st July, 2021. Assuming that the applicable rate of interest is 10 per cent per annum, calculate the cash value of the machine. All working should form part of the answer.
(Dec 2022, 10 marks)

Hire Purchase and Installment Sale Transactions CMA Inter Financial Accounting Notes

Hire-purchase System
Under this system the purchaser (Hirer) pays the entire amount in staggered way viz, monthly, quarterly or yearly with some interest. Possession of goods is delivered to a hirerbut the title to the goods (Ownership) are transferred only when the agreed sum (Hire Purchase price) is paid by the hirer. Such hirer has a right to terminate the agreement at any time before the property so passes.

Default and Repossession
If a hire purchaser fails to pay any instalment on the stipulated date, the hire purchaser is said to be at default. In case of default by the hire purchaser, the hire vendor may. repossess the goods. Repossession means taking back the possession of goods by the hire vendor. Subject to agreement, the repossession may be either complete or partial.

Meaning of Complete or Full Repossession
In case of complete or full repossession, the hire vendor takes back the possession of all the goods.

Partial Repossession
In case of partial repossession, the hire vendor takes back the possession of a part of the goods.

Insurance Claim for Loss of Stock and Loss of Profit – CMA Inter Financial Accounting Study Material is designed strictly as per the latest syllabus and exam pattern.

Insurance Claim for Loss of Stock and Loss of Profit – CMA Inter Financial Accounting Study Material

Short Notes

Question 1.
Write short note on the following:
Consequential Loss Policy. (Dec 2018, 5 marks)
Answer:
Business enterprises get insured against the loss of stock on the happening of certain events such as fire, flood, theft, earthquake, etc. Insurance being a contract of indemnity, the claim for loss is restricted to the actual loss of assets. Sometimes an enterprise also gets itself insured against consequential loss of profit due to decreased turnover, increased expenses, etc.

If loss of profits consequent to the event or mis-happening (Fire, flood, theft, etc.) is also insured, the policy is known as loss of profit or consequential loss policy. The Loss of Profit Policy normally covers the following items:

• Loss of net profit ‘
• Standing charges.
• Any increased cost of working e.g., renting of temporary premises.

Descriptive Questions

Question 2.
Under loss of profit insurance, what is meant by gross profit? (Dec 2021, 1 mark)
Answer:
Gross profit means net profit plus insured standing charges.

Practical Questions

Question 3.
Answer the following question (give workings wherever required):
A fire damaged the premises of a trader resulting in loss of stock of ₹ 1,10,000. The goods salvaged from fire was ₹ 40,000. The policy was for ₹ 50,000 eligible for average clause. Decide the quantum of claim to be lodged with the insurance company. (Dec 2013, 2 marks)
Answer:
Loss of Stock = ₹ 1,10,000
Less: Stock salvage = ₹ 40,000
Net Loss = ₹ 70.000
Applying average clause,
Amount of claim = Amount of policy x Net loss / Actual loss ‘of stock = ₹ 50,000 × 70,000/1,10,000
= ₹ 31,818

Question 4.
Due to flood, business of Mr. Singh was dislocated from 01.04.2013 to 31.08.2013 (5 months). From the following details, calculate the amount of claim to be lodged ¡n respect of loss of profit policy.

Particulars	₹
Policy amount	1,25,000
Turnover from 01.04.2013 to 31.08.2013	2,40,000
Standing charges from 01.04.2013 to 31.08.2013	60,000
Turnover during 01.04.2012 to 31.03.2013	12,00,000
Gross profit ratio	10% on sales
Standing charges for the year 2012-13	84,000

The turnover for the year 2013-14 was anticipated to increase y 10% over the turnover of the preceding year. (Dec 2013, 6 marks)
Answer:

Particulars	₹
Standard turnover per month (2012-13)	1,00,000
Add: Increase anticipated pIus 10%	10,000
Expected turnover per month	1,10,000
Standard turnover for the period of dislocation [1,10,000 x 5]	5,50,000
Less: Actual turnover for the period of dislocation	2,40,000
Short sales	3,10,000
Gross profit on short sales @ 10%	31,000
Add: Increased cost of working actual
Standard charges for the period of dislocation (7,000 x 5 = 35,000)
Actual standing charges incurred during the period of dislocation ₹ 60,000
Increase in cost of working during period of dislocation ₹ 60,000 – ₹ 35,000	25,000
Claim to be lodged	56,000

Note:

1. In absence of any information regarding Insured standing charges, Uninsured standing charges. Net profit etc. increase in cost of working during the period of dislocation is determined in this manner.
2. Since the Annual Tumover is not mentioned the A ve rage Clause is not applied.

Question 5.
From the following information, calculate a consequential loss claim:
(i) Financial year ends on 31st March.
(ii) Fire occurs on December 1 following.
(iii) Period of disruption: December 1 to March 31.
(iv) Period of indemnity: 6 months.
(v) Net profit for previous financial year ₹ 15,00,000
(vi) Insured standing charges ₹ 25,00,000
(vii) Uninsured standing charges ₹ 4,00,000
(viii) Increase in the cost of working ₹ 3,20,000
(ix) Saving in insured standing charges ₹ 1,00,000
(x) Reduced turnover avoided through increased cost of workings: ₹ 8,00,000
(xi) ‘Special circumstances clause’ stipulated:
(a) Increase in turnover (standard and annual): 20%
(b) Increase in rate of gross profit: 5%
(xii) Turnover for the four months 31st July 30th Nov. 31st March ending

I Year (₹)	40,00,000	90,00,000	70,00,000
II Year (₹)	60,00,000	1,10,00,000	20,00,000

(xiii) Sum insured: ₹ 50,00,000. (June 2014, 8 marks)
Answer:
Computation of Short Sales:

Particulars	Amount (₹)
Sales during the same period in last year	70,00,000
Add: 20% increase stipulated	14,00,000
Adjusted Sales	84,00,000
Less: Actual sales during disruption period	20,00,000
Amount of Short Sale	64,00,000

Computation of G.P.(Agreed):
Rate of Gross Profit (G.P.) for Proceeding accounting year:

= \(\frac{40,00,000}{2,00,00,000} \times 100-20 \%\)
∵ Agreed Rate of G.P. = 20% + 5% = 25%
Loss of profit on Short Sales = 25% of ₹ 64,00,000 i.e. 16,00,000.

Particulars	Amount (₹)
Annual Turnover [12 months immediately preceding the date of fire]	2,40,00,000
Add:20% Increase	48,00,000
Adjusted Annual Sales	2,88,00,000
GP on Adjusted Annual Sales or Insurable Amount ₹ 2,88,00,000 x 25%	72,00,000

Question 6.
There was a serious fire in the premises of M/s Fortunate on 1st September 2011. Their business activities were interrupted until 31st December 2011, when normal trading conditions were re-established. M/s Fortunate are insured under the loss of profit policy for ₹ 42,000 the period of indemnity being six months. You are able to ascertain the following information:
(i) The net profit for the year ended 31 December 2010 was ₹ 20,000
(ii) The annual insurable standing charges amounted to ₹ 30,000 of which ₹ 2,000 were not included in the definition of insured standing charge under the policy.
(iii) The additional cost of working in order to mitigate the damage caused by the fire amounted to ₹ 600, and, but for this expenditure, the business would have had to shut down. ‘
(iv) The savings in insured charges in consequence of the fire amounted to ₹ 1,500.
(v) The turnover for the period of four months ended April 30, August 31st, and December 31, for each of the years 2010 and 2011 was as under:

	₹	₹	₹
2010	65,000	80,000	95,000
2011	70,000	80,000	15,000

You are required to compute the relevant claim under the terms of the loss of profits policy. (Dec 2014, 8 marks)
Answer:
Calculation of short sales:
Standard turnover: Sales from September 1,201 to Dec. 31, 2010, ₹ 95,000
Less: Sales during disruption period (1-9-2011 to 31-12-2011) 15,000
Short Sales 80,000

Calculation of Rate of Gross Profit:

Gross Claim
Application of Average Clause:
Sum Insured /Gross Profit on 12 months (Sales preceding the date of fire) x Gross claim
= ₹ 42,000/20% of ₹ 2,45,000 (1) x 15,076 = ₹ 12922
Therefore, claim for loss of profit to be lodged is ₹ 12,922.

Question 7.
Answer the question:
On 15th December 2014 the premises of NAGAR LTD. were destroyed by fire, but sufficient records were saved from which the following particulars were ascertained:

	₹
Stock at cost on 1st April, 2013	2,20,500
Stock at cost on 31st March, 2014	2,38,800
Purchases less returns, year ended 31st March, 2014	11,94,000
Sales less returns, year ended 31st March, 2014	14,61000
Purchases less returns, 1st April, 2014 to 15th December, 2014	10,15,000
Sales less returns, 1st April, 2014 to 15th December, 2014	11,62,000

In valuing stock for Balance Sheet as at 31 March, 2014 ₹ 6,900 had been written oft for certain stock which was a poor selling line, having cost of ₹ 20,700. A portion of these goods were sold in June, 2014 at a loss of ₹ 750 on the original cost of ₹ 10,350. The remainder of this stock was now estimated to be worth the original cost. Subject to the above exception, gross profit had remained at a uniform rate throughout. The stock salvaged was ₹ 17,500. The stock was insured for ₹ 2,50,000.

Required:
Calculate the amount of claim to be lodged with the Insurance company for Loss of Stock. (June 2015, 8 marks)
Answer:

Application of Average Clause:
Claim = \( \text { Loss of stock } \times \frac{\text { Policy value }}{\text { stock on day of fire }}\)
= \(3,10,930 \times \frac{2,50,000}{3,28,430}\)
= 2,36,679

Question 8.
Answer the following question (Give workings):
The godown of KODIAC LTD. was engulfed in fire on 31st May 2015 as a result of which a part of stock burnt to ashes. The stock was covered by Fire Policy for ₹ 2,00,000 subject to Average Clause. The records of
the company revealed the following particulars.
Actual Value of Stock as on 31.05.2015: ₹ 4,00,000
The Value of Salvaged Stock: ₹ 90,000
You are required to ascertain the amount of claim to be lodged with the Insurance Company. (Dec 2015, 2 marks)
Answer:
Claim to be lodged = \(\text { loss of stock } \times \frac{\text { Policy amount }}{\text { Average stock }} \)
= 4,00,000 – 90,000 × \(\frac{2,00,000}{4,00,000} \)
= 1,55,000

Question 9.
A fire occurred in the premises of BRIGHT LTD. on 1st August 2015. The company had a loss of profit policy for ₹ 6.00 lakhs which was subject to average clause. Sale from 1st August 2014 to 31st July 2015 were ₹ 50 lakhs and from 1st August 2014 to 30th Nov. 2014 being ₹ 15 lakh. During the indemnity period which lasted four months sales amounted to only ₹ 2,00,000. The company made up its accounts on 31st March. The Profit and Loss Account for the year ended 31st March 2015 is given below:

Profit & Loss Account for the year ended 31st March, 2015
Particulars		Particulars
Opening Stock	5,00,000	Sales	47,50,000
Purchases	30,00,000	Closing Stock	2,50,000
Manufacturing Expenses	3,35,000
Variable Selling Expenses	4,52,500
fixed Expenses	3,62,500
Net Profit	3,50,000
	50,00,000		50,00,000

Comparing the sales of first four months of year 2015-16 those of year 2014-15, it was found that sales were 20% higher in the year 2015-16. You are required to compute the amount of claim to be lodged with the Insurance Company under the Loss of Profit Policy. (June 2016, 4 + 2 + 2 = 8 marks)
Answer:

Question 10.
The factory premises of AURISHI LTD. were engulfed in the fire on August 16, 2016, as a result of which a major part of stock burnt to ashes. The stock was covered by policy for ₹ 90,000, subject to Average Clause. The records at the office of the company revealed the following information:

	₹
Stock on 1st April 2015	1,1 5,200
Purchases during the year ended 31 March, 2016	4,80,000
Sales during the year ended 31st’ March, 2016	6,07,800
Closing stock on 31st March, 2016	95,400
Purchases from 1st April, 2016 to August 16, 2016	1,62,000
Sales from 1st April, 2016 to August 16, 2016	1,84,200

An item of stock purchased in 2014 at a cost of ₹ 30,000 was valued at ₹ 18,000 on 31st March 2015, due to obsolescence. Half of this stock was sold in July, 2015 for ₹ 7,800; th remaining was valued at ₹ 7,200 on 31st March, 2016. One-fourth of the original stock was sold in June, 2016, for ₹ 4,200.
Salvaged stock was valued at ₹ 36,000.
You are required to compute the amount of claim to be lodged with Insurance Company for Loss of Stock. (Dec 2016, 3 + 3 + 2 = 8 marks)
Answer:

Since there is an average clause in the policy, the claim will be:
(Amount of the policy/stock on the date of fire) × stock destroyed by fire = ₹ 72,000 × (90,000/1,08,000) = ₹ 60,000.

Note: As an item of stock as on 31st March, 2015 was valued below cost, it was an abnormal item. It is shown under abnormal stock column at its original cost i.e., ₹ 30,000. The normal items have been separated to arrive at the normal rate of gross profit.
Assume: Ratio of G.P. was uniform throughout.

Question 11.
Ram trader’s godown caught tire on 29th August, 2016, and a large part of the stock of goods was destroyed. However, goods costing ₹ 54,000 could be salvaged incurring firefighting expenses amounting to ₹ 2,350.
The trade provides you the following additional information:

	₹
Cost of stock on 1st April, 2015	3,55,250
Cost of stock on 31st March, 2016	3,95,050
Purchases during the year ended 31st March, 2016	28,39,800
Purchases from 1st April 2016 to the date of fire	16,55,350
Cost of goods distributed as samples for advertising from 1st April, 2016 to the date of fire	20,500
Cost of goods withdrawn by trader for personal use from 1st April, 2016 to the date of fire	1,000
Sales for the year ended 31st March, 2016	40,00,000
Sales from 1st April, 2016 to the date of fire	22,68,000

The insurance company also admitted fire fighting expenses. The trader had taken the tire insurance policy for ₹ 4,50,000 with an average clause. Calculate the amount of the claim that will be admitted by the insurance company. (June 2017, 7 marks)
Answer:

Statement of Insurance Claim

Particulars	₹
Value of stock destroyed by fire	44,1300
Less: Salvaged Stock	54,000
Add: Fire Fighting Expenses	2,350
Insurance Claim	3,89,650

Note: Since policy amount is more than claim amount, average clause will not apply. Therefore, claim amount of ₹ 3,89,650 will be admitted by the Insurance Company.

Question 12.
The premises of X Ltd. caught fire on 22 January, 2015 and the stock was damaged. The value of goods salvaged was negligible. The firm made up accounts to 31st March each year. On 31st March, 2014 the stock at cost was ₹ 13,27,200 as against ₹ 9,62,200 on 31st March, 2013. Purchases from 1st April, 2014 to the date of fire were ₹ 34,82,700 as against ₹ 45,25,000 for the full year 2013-2014 and the corresponding sales figures were ₹ 49,17,000 and ₹ 52,00,000 respectively.
You are given the following further information:
(i) In July 2014, goods costing ₹ 1,00,000 were given away for advertising purposes, no entries being made in the books.
(ii) The rate of gross profit is constant.
X Ltd. had taken an insurance policy of ₹ 5,50,000 which was subject to the average clause. From the above information, you are required to make an estimate of the stock in hand on the date of fire and compute the amount of the claim to be lodged to the insurance company. (Dec 2017, 10 marks)
Answer:

Computation of claim for loss of stock

Particulars	Amount (₹)
Stock on the date of fire i.e. on 22nd January, 2015 As the value of goods salvaged was negligible, therefore Loss of stock	7,76,300 7,76,300

As policy amount is less than claim amount, claim will be restricted to policy amount only. Therefore, claim of ₹ 5,50,000 should be lodged by X Ltd. to the insurance company.

Working Note:
Trading Account for the year ended on 31 March, 2014

Particulars	₹	Particulars	₹
To Opening Stock	9,62,200	By Sales	52,00,000
To Purchases	45,25,000	By Closing Stock	13,27,200
To Gross Profit	10,40,000
	65,27,200		65,27,200

Rate of gross profit to sales = 10,40,000/52,00,000 × 100 = 20%.

Question 13.
On 15th December 2017, a fire occurred in the premises of M/s. O/M 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 31st March, 2017 was valued at ₹ 9,40,000.
(ii) Purchases from 01.04.201710 15-12-2017 amounted 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. (June 2018, 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 = \(\frac{4,00,000}{6,40,000} \times 5,00,000 \) = ₹ 3,12,500.

Question 14.
CCL wants to take up a loss of profit policy. Turnover during the current year is expected to increase by 20%. The company will avail overdraft facilities from its bank @ 15% interest to boost up the sales. The average daily overdraft balance will be around ₹ 3 Lakh. All other fixed expenses will remain same. The following further details are also available from the previous year’s account:

	₹
Total variable expenses	24,00,000
Fixed expenses:
Salaries	3,30,000
Rent, Rates, and Taxes	30,000
Traveling expenses	50,000
Postage, Telegram, Telephone	60,000
Directors fees	10,000
Audit fees	20,000
Miscellaneous income	70,000
Net Profit	4,20,000

Determine the amount of policy to be taken for the current year. (Dec 2018, 7 marks)
Answer:

Working Notes:
1. Profit and Loss Account for the previous year

Particulars	Amount (₹)	Particulars	Amount (₹)
To variable expenses	24,00,000	By Sales	32,50,000
To Fixed expenses	5,00,000	By Misc. income	70,000
To Net profit’	4,20,000
	33,20,000		33,20,000

2. Gross profit of the previous year

Particulars	(₹)
Sales	32,50,000
Less: Variable Expenses	24,00,000
	8,50,000

Question 15.
On 31st January, 2019 the premises of Toli Textiles Limited were destroyed by tire. The records of the company revealed the following particulars:

	₹
Stock on 01.04.2017	11,35,000
Stock on 31.03.2018	12,64,100
Purchase Less returns, during the year ended 31st March, 2018	65,45,000
Sales Less returns, during the year ended 31st March, 2018	91,00,000
Purchase Less return, from 01.04.2018 to 31.01.2019	56,64,000
Sales Less returns, from 01.04.2018 to 31.01.2019	78,24,000

In valuing stock on 31 March, 2018 45,900 had been written off out of certain stock which was of a poor selling line, having cost ₹ 1,37,700. A portion of these goods were sold in October, 2018 at a loss ₹ 11,080 on the original cost of ₹ 55,080. The remaining stock of this goods on the date of fire was to be valued at 80% of its original cost. Subject to the above exception, gross profit had remained at a uniform rate throughout. The stock salvaged from fire was ₹ 1,23,800. You are required to compute the amount of claim to be lodged for loss of stock. The stock was insured for ₹ 12,50,000. (June 2019, 7 marks)
Answer:

Working Notes:
(i) Stock on 1.4.18. Abnormal Items ₹ 1,37,700; and Normal Items = ₹ 13,10,000 – ₹ 1,37,700 = ₹ 11,72,300
(ii) Sale of Abnormal Items = ₹ 55,080 – ₹ 11,080 = ₹ 44,000
(iii) Sale of Normal Items = ₹ 78,24,000 – ₹ 44,000 = ₹ 77,80,000.

Loss of Stock

	₹
Stock on the date of tire: Normal Items	13,90,300
Value of Abnormal Items (82,620 x 80%)	66,096
Value of Stock	14,56,396
Less: Stock Salvaged	1,23,800
Loss of Stock	13,32,596

Amount of Claim applying Average Clause:
Amount of Claim = (Insured Amount! Value of Stock at the date of Fire) ×
Loss of Stock = (₹ 12,50,000/₹ 14,56,396) × ₹ 13,32,596 = ₹ 11,43,745

Question 16.
On 02.06.2019 the stock of Mr. Black was destroyed by fire. However, following particulars were furnished from the record saved:

	₹
Stock at cost on 01.04.2018	1,35,000
Stock at 90% of cost on 31.03.2019	1,62,000
Purchases for the year ended 31.03.2019	6,45,000
Sales for the year ended 31.03.2019	9,00,000
Purchases from 01.04.2019 to 02.06.2019	2,25,000
Sales from 01.04.2019 to 02.06.2019	4,80,000

Sales up to 02.06.2019 includes ‘75,000 (invoice price) being the goods not dispatched to the customers.
Purchases up to 02.06.2019 includes machinery acquired for ₹ 15,000.
Purchases up to 02.06.2019 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. The insurance policy is for ₹ 1,20,000 and it is subject to average clause. Ascertain the amount of claim for loss of stock. (Dec 2019,7 marks)
Answer:

Calculation of Insurance Claim:
Claim subject to average
clause = \(\frac{\text { Actual Loss of Stock }}{(\text { Value of Stock on the date of fire } \times \text { Amount of policy })} \)
= 1,20,000 × \(\left(\frac{1,50,000}{1,50,000}\right)\) = ₹ 1,20,000

Working Notes:
G.P. Ratio = \frac{3,00,000}{9,00,000} \times 100=33 \frac{1}{3} \%\(\)
Amount of Gross Profit = ₹ 4,05,000 × 33\(\frac{1}{3}\) % = ₹ 1,35,000.

Question 17.
A fire engulfed the premises of a business of M/s Pritam on the morning of 1st July, 2020. The building equipment and stock were destroyed and the salvage recorded the following:
Building: ₹ 4,000
Equipment: ₹ 2500
Stock: ₹ 20,000
The following other information was obtained from the records saved from the period from 1st January, to 30th June, 2020.
Sales ₹ 11,50,000
Sales returns ₹ 40,000
Purchases ₹ 9,50,0O0
Purchases returns ₹ 12,500
Cartage inward ₹ 17,500
Wages ₹ 7,500 .
Stock in hand on 31st December, 2019 ₹ 1,50,000
Building valued on 31st December, 2019 ₹ 3,75,000
Equipment valued on 31st December, 2019 ₹ 75,000
Depreciation provided till 31 December, 2019 on:
– Building ₹ 1,25,000
– Equipment ₹ 22,500
No depreciation has been provided after December 31st, 2019. 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 computed as on 30-06-2020
(i) Amount of gross profit.
(ii) Amount of closing stock.
(iii) Amount of stock destroyed by fire.
(iv) Statement of claim
(a) Stock
(b) Building
(c) Equipment. (Dec 2021, 6 marks)
Answer:
Gross Profit – ₹ 2,77,500
Closing Stock – ₹ 2,80,000
Stock destroyed by Fire – ₹ 2,80,000
Statement of claim
Stock – ₹ 2,60,000
Building – ₹ 2,36,625
Equipments – ₹ 44,375
Total ₹ 5,41,000
Net Sales = 11,50,000 – 40,000 = 11,10,000
GP =11,10,000 × 25% = 2,77,500
COGS = 11,10,000 – 2,77,500 = 8,32,500

op st + Purchase + Direct expenses – CL Stock = COGS
1.50,000 + 9,50,000 – 12,500 + 17,500 + 7,500 Cl Stock = 8,32,500
Cl Stock = 2,80,000
Claim of stock =2,80,000 – 20,000 = 2,60,000

Depreciation on
(a) Building \(\frac{3,75,000 \times 5 \%}{2}=\frac{18,750}{2} \) = 9,375
Claim = 3,75,000 – 1,25,000 – 9,375 – 4,000 = 2,36,625
(b) Depreciation on Equipment \(\frac{75,000 \times 15 \%}{2}\) = 5,625
Claim = 7,500 – 22,500 – 5,625 – 2,500 = 44,375

Question 18.
Entity A carried plant and machinery its books at ₹2,00,000 which were destroyed n a fire. These machines were insured ‘New for Old’ and were replaced by the insurance company with new machines of fair value ₹ 20,00,000. The old destroyed machines were acquired by the insurance company and the company did not receive any cash compensation. State, how Entity A should account for the same. (Dec 2022, 2 marks)

Insurance Claim for Loss of Stock and Loss of Profit CMA Inter Financial Accounting Notes

Insurance Claims
The business pays insurance premium yearly or quarterly or as per agreement. If any accidental loss occurs, the business has to compute the amount of loss and file a claim for compensation to the Insurance Company.

Loss of Stock
As stocks constitute a considerable portion of the working capital of any business and specially for trading concerns, any loss of stock directly affects the solvency of the business. A business has to cover this risk
adequately. If stock records and stock are destroyed, it becomes difficult to ascertain the amount of stock lost. When the loss suddenly occurs, up-to-date value of stock does not become available.

Average Clause
It is a clause contained in a fire insurance policy, it encourages full insurance and discourages under-insurance. The insured person also has to bear a portion of loss himself in case the value of stock lost is more than the value of the policy.

Elimination of Abnormal! Defective Items
Goods which cannot fetch the usual rate of gross profit are considered as unusual or abnormal items.

Loss of Profit
A fire may create a consequential loss to a business over and above the instantaneous damage of stock. It disrupts normal activities for some time during which the business has to go on paying standing charges like rent, salaries, etc. without any effective return. It also causes a loss of profits which the business could have earned if normality was not disturbed by the accident.

Departmental Accounting – CMA Inter Financial Accounting Study Material is designed strictly as per the latest syllabus and exam pattern.

Departmental Accounting – CMA Inter Financial Accounting Study Material

Distinguish Between

Question 1.
Distinguish between Branch and Departmental Accounting. (June 2013, 2 marks)
Answer:
The differences between Branch and Departmental are listed below:-

Departmental	Branch
1. Departmental always in Inland	1. It is either Inland or Foreign.
2. All departments of a Business remain generally under one roof.	2. Branch of a concern is established at different place in the same town or at different town.
3. Departments are made to increase the efficiency of the Business.	3. Branch is opened to increase the Sale.

Practical Questions

Question 2.
Surya Co. Ltd. has three departments. It made purchases during the financial year 2012-13 as below

Stock as on 01.04.2012
Dept. A = 240 units
Dept. B = 160 units
Dept. C = 304 units

Sales made were
Dept. A  2040 units at ₹ 20 each
Dept. B 3840 units at ₹ 22.50 each
Dept. C 4992 units at ₹ 25 each
The rate of gross profit is uniform for all the departments. Assume the unit price of opening stock and purchase unit cost are uniform. Prepare Departmental Trading Account. (June 2013, 7 marks)
Answer:

Working Notes:
1. Cost of each unit of the different departments. Since the rate of G.P. is uniform for all products. Assuming if all goods purchased was sold then the gross profit would be:

Cost Price Per Unit
A= 20 – 20 × 20% = 16
B = 22.50 – 22.50 × 20% = 18
C = 25 – 25 × 20% 20

Purchase Price Per Unit
A = 2,000 × 16 = 32,000
B = 4,000 × 18 = 72,000
C = 4,800 × 20 = 96,000

2. Opening Stock
A = 240 × 16 = 3,840
B = 160 × 18 = 2,880
C = 304 × 20 = 6,080

4. Sales:
A:2,040 × ₹ 20 = 40,800
8: 3,840 × ₹22.5O = 86,400
C: 4,992 × ₹ 25 = 1,24,800

Question 3.
The following details are available in respect of a business for a year.

Department	Opening Stock	Purchase	Sales
X	120 units	1,000 units	1,020 units at ₹ 20.00 each
Y	80 units	2,000 units	1,920 units at ₹ 22.50 each
Z	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. (Dec 2017, 8 marks)
Answer:
1. Computation of Closing Stock Quantity (In units)

Particulars	X	Y	Z
Opening Stock	120	80	152
Add: Purchase	1,000	2000	2,400
Less: Units Sold	(1,020)	(1,920)	(2,496)
Closing Stock	100	160	56

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’s products but the Sale Quantity is different from that of Purchase Quantity. To find the Uniform
GP Hate, the sale value of Purchase Quantity should be compared with the Total Cost of Purchase, as under.

Opening and Closing Stocks are valued at Cost as indicated in WN 3 above. Sale Amount in the Trading Account is computed for the Sale Quantity only. Gross Profit is calculated at 20% of Sale Value.

Question 4.
The following information provided by the Shobha Departmental Store for the year ended 31 March, 2018:

Department	Purchase (units)	Sales	Closing Stock (units)
X	2500	2550 units @ ₹ 160 per unit	250
Y	5000	4800 units @ ₹ 180 per unit	400
Z	6000	6240 units @ ₹ 200 per unit	140

The total value of purchases is ₹ 15 Lakh. it is observed that the rate or gross profit is the same in each department.
You are required to prepare the Departmental Trading Account for the year ended 31st March, 2018. (Dec 2018, 9 marks)
Answer:
(i) Computation of Opening Stock Quantity (units):

Particulars	Dept. X	Dept. Y	Dept. Z
Sales- units Add: Closing Stock- units	2550 250	4800 400	6240 140
Less: Purchases-units	2800 2500	5200 5000	6380 6000
Opening Stock- units	300	200	380

(ii) Computation of Gross Profit Ratio:

	₹
Sales value of Total purchase Quantity:
Department – X = ₹ 160 x 2,500	4,00,000
Department – Y = ₹ 180 x 5,000	9,00,000
Department – Z = ₹ 200 x 6,000	12,00,000
Sale value of total purchase Quantity	25,00,000
Less: total purchase price	15,00,000
Gross profit	10,00,000
Rate of gross profit = (₹10 lakh/25 lakh) x 100 = 40%

(iii) Computation of Cost per unit for each Department

Particulars	Dept. X (₹)	Dept. Y (₹)	Dept. Z (₹)
Selling Price per unit	160	180	200
Less: G. P. @ 40%	64	72	80
Cost per unit	96	108	120

Question 5.
A firm has two departments-Sawmill and Furniture. Furniture is made with wood supplied by the Sawmill department at its usual selling price. From the following figures prepare Departmental Trading and Profit and Loss Account for the year 2018:

	Sawmill (₹)	Furniture (₹)
Opening Stock on 1 January, 2018	150,000	25,000
Sales	12,00,000	2,00,000
Purchases	10,00,000	7,500
Supply to Furniture Department	1,50,000	–
Selling expenses	10,000	3,000
Wages	30,000	10,000
Closing Stock on 31st December, 2018	1,00,000	30,000

The value of stocks in the Furniture Department consist of 75% wood and 25% other expenses. The Sawmill Department earned Gross Profit at 15% on sales in 2017. General expenses of the business as a whole came to ₹ 55,000. The firm adopts FIFO method for assigning costs to inventories. (Dec 2019, 8 marks)
Answer:

Working Notes:
1. Calculation of Stock Reserve (opening)
25,000 × 75% wood × 15% = ₹ 2,813

2. Calculation of closing stock reserve
Gross profit Rate of Sawmill of 2018
2,70,000/ (12,00,000 + 1,50,000) × 100 =20%
30,000 × 75% × 20% = ₹ 4,500

Question 6.
X Ltd. has three rt,A, B and C from the particulars given below compute:
(i) The values of stock as on 31st December 2020, and
(ii) The departmental result showing the actual amount of gross profit.

	A ₹	B ₹	C ₹
Stock (on 1.1.2020)	24,000	30,000	12,000
Purchases	1,46,000	1,24,000	48,000
Actual Sales	1,72,500	1,59,400	74,600
Gross Profit on normal selling price	20%	25%	33\(\frac{1}{3}\) %

During the year ended 31st December 2020, certain items were sold at discount, and these discounts were reflected in the value of sales shown above. The items sold at discount were:

	A ₹	B ₹	C ₹
Sales at normal price	10,000	3,000	1,000
Sales at actual price	7,500	2,400	600

(Dec 2021, 6 marks)
Answer:

Calculation of Departmental Result Deptt.	A	B	C
Gross Profit	₹ 32,500	39,400	24,600
Value of Stock (31/12/2020)	₹ 2,500	600	400

Departmental Accounting CMA Inter Financial Accounting Notes

Departmental Accounts
Departmental Accounts helps in identifying the performance of each department. Each department is considered to be an Activity Centre. It is. a tool which helps management in decision-making.

Advantage
Departmentation offers the following advantages:

• Proper Allocation
• Control
• Proper absorption

Inter-Departmental Transfer

• Transfer made by one department to another may be recorded either:
• At Cost Price; and
• At Invoice Price i.e., Market Based Price.

Branch Accounting – CMA Inter Financial Accounting Study Material is designed strictly as per the latest syllabus and exam pattern.

Branch Accounting – CMA Inter Financial Accounting Study Material

Short Notes

Question 1.
Write short note on:
Classification of Branches for Branch accounting purpose. (Dec 2012, 5 marks)
Answer: .
Branches are classified as two-way,
(i) Inland Branch,
(ii) Foreign Branch

(i) Inland Branches:
(a) Dependent Branches: Branches in respect of which the whole of the accounting records are kept at head office.
(b) Independent Branches: As the name indicates such branches maintain independent accounting records.

(ii) Foreign Branches: Branches which are located in a foreign country other then ¡n which the company is incorporated they maintain independent and complete record of business.

Methods of accounting are:

• Final Accounts method
• At wholesale price
• At Cost Price/At Invoice Price
• Debtors method;
• Stock and Debtors method; and
• Cash Basis System.

Descriptive Questions

Question 2.
Define branch as per section 2(14) of the Companies Act, 2013. (Dec 2021, 1 mark)
Answer:
Any establishment described as a branch by the company.

Practical Questions

Question 3.
Priya Sales Corporation of Jaipur has a Branch at Kota to which goods are sent @ 33% above cost. The Branch makes sales both for cash and on credit. Branch expenses are paid directly from Head Office and the Branch has to remit all cash received into the Head Office Bank Account at Kota.
Following further details are given for the year ended 31st March, 2012:

	(₹)
Goods sent to Branch at invoice price	18,00,000
Goods returned by Branch at invoice price	20,000
Stock at Branch on 1.4.2011 (at invoice price)	2,40,000
Branch Debtors on 1.4.2011	2,15,000
Sales during the year: Cash	5,80,000
Credit	11,40,000
Cash received from Branch debtors	10,45,000
Discount allowed to by Branch to debtors	14,800
Bad debts	9,200
Sales return at Kota Branch	25,000
Salaries and wages at Branch	1,80,000
Rent, Rates and Taxes at Branch	42,000
Sundry expenses at Branch	15,000

Stock at Branch on 31 .3.2012 at invoice price 3,60,000
You are required to show Branch Stock Account, Branch Adjustment Account, Branch Expenses Account, Branch Debtors Account, Branch Goods sent to Branch Account and Branch Profit & Loss Account in the books of the Head Office. (Dec 2012, 8 marks)
Answer:

Question 4.
A Company with its Head Office at Kolkata has a Branch at Chennai. The Branch receives all goods from Head Office who remits cash for all expenses. Total Sales by Branch for year ended 31.03.2012 amounted to 6,50,000 out of which 75% on Credit. Other details for Chennai Branch were as under:

	01.04.2011	31.03.2012
Stock	4,000	30,000
Debtor	45,000	30,000
Petty Cash	250	–

Petty Cash sent by Head Office ₹ 3,000 but ₹ 2,500 is spent for Petty Expenses. The Expenses of 45,000 are actually spent by Branch. All sales are made by the Branch at Cost plus 25%. You are required to prepare the Chennai Branch A/c in the Books of Head Office for the year ended 31.03.2012. (June 2013, 5 marks)
Answer:

Working Notes:
1. Petty Cash Account

To Balance b/d	250	By Petty Expenses	2,500
To Bank – Cash sent by H.O.	3,000	By Balance c/d	750
	3,250		3,250

2. Memorandum Debtors Account

To Balance b/d	45,000	By Bank A/c (Collection)	5,02,500
To Credit Sales (6,50,000) x 75%	4,87,500	By Balance c/d	30,000
	5,32,500		5,32,500

3. Calculation of Cost of Goods Sent:
(a) Cost of Goods Sold 6,50,000 x 100/1 25 = 5,20,000
(b) Cost of Goods Sold = Opening Stock + Cost of Goods Sent – Closing Stock
5,20,000 = 4,000 + Cost of Goods sent – 30,000
Hence, Cost of Goods sent = 5,46,000

Question 5.
Prepare a Branch Account in the books of Head Office from the following particulars for the year ended 31 March 2013, assuming that H.O. sold goods at cost plus 25%.

Particulars	₹	Particulars	₹
Stock on 01.04.2012	2,72,500	Bad debts	2,000
Debtors on 01.04.2012	15,000	Allowances to customers	1,000
Petty cash on 01.04.2012	1,000	Return inward	1,000
Goods sent to Branch	3,60,000	Rates & Taxes	5,000
Goods returned to H.O.	25,000	Salaries	18,000
Cash sales	54,000	Misc. Expenses	4,000
Cash received from debtors	2,30,000	Stock on 31.03.2013*	3,15,000
		Debtors on 31.03.2013	74,000
		Petty cash (31.03.2013)	5,000

Both opening and closing stock at invoice price. (Dec 2013, 6 marks)
Answer:

Question 6.
Prepare Branch account in the books of the Head Office and also debtors account from the following information given below: for the year 2013 The Unique Shoe Stores has an old branch at Kanpur. Goods are invoiced at the branch at 25% profit on cost price. The branch has been instructed to send all cash daily to the Head Office. All expenses are paid by the Head Office except petty expenses which are met by the Branch Manager.

	₹
Stock on 01.01.2013 (invoice price)	15,000
Sundry debtors on 01.01.2013	9,000
Cash in hand on 01.01.2013	400
Office furniture on 01.01.2013	1,200
Goods supplied by the Head Office (invoice price) for year	80,000
Goods returned to Head Office for year	1,000
Goods returned by debtors at the end of year	480
Debtors at the end of year	8,220
Cash sales for year	50,000
Credit sales for year	30,000
Discount allowed for year	300

Petty expenses paid by Branch Manager during year 280
Stock on 31.12.2013 14,000
Provide depreciation on furniture at 10% per year (June 2014, 4+2=6 marks)
Answer:

Question 7.
Answer the question:
TUSHAR Ltd. with its Head Office ¡n Delhi invoices goods to its Branches at Mumbai and Kolkata at 20% less than the catalogue price which is cost plus 50% with instructions that cash sales are to be made at invoice price and credit sales at catalogue price less discount at 15% on prompt payments. Provision is to be made for discount to be allowed to debtors, at year-end on the basis of year’s trend of prompt payments.

All branch expenses are paid by the Head Office and all branch collections are remitted daily to Head Office.
1. Opening Stock at Branch at its cost ₹ 12,000.
2. Opening Branch Debtors ₹ 10,000.
3. Goods Sent to branch (at cost to H.O.) ₹ 1,10,000.
4. Goods received by Branch till close of the year ₹ 1,27,000.
5. Transfer from Kolkata branch to Mumbai branch at catalogue price ₹ 75,000.
6. Transfer to Kolkata branch from Mumbai branch at catalogue price ₹ 30,000.
7. Goods purchased by Mumbai branch from local suppliers (cost) ₹ 30,000
Closing stock in hand at branch out of ‘local purchases (cost) ₹ 6,000.
8. Cash Sales ₹ 74,800.
9. Credit Sales ₹ 1,45,000.
10. Goods returned by Credit Customers to branch ₹ 30,000.
11. Goods returned by Credit Customers directly to RO. ₹ 15,000.
12. Goods returned by Branch to H.O. ₹ 24,000.
13. Cash remitted by Credit Customers directly to Branch ₹ 45,635.
14. Cash remitted by Credit Customers directly to H.O. ₹ 40,000.
15. Discount Allowed to Debtors ₹ 13,365.
16. Loss of Goods by fire (at invoice price) 3,000 against which 80% of cost was recovered from the insurance Company.
17. Loss of goods at Branch through normas pilferage (at catalogue price) ₹ 3,000.
18. Branch Expenses: Paid ₹ 9,000, Outstanding ₹ 741.
19. Branch Manager is entitled to a commission @ 6% of net profits after charging such commission.

Required:
Prepare Mumbai Branch Stock Account, Mumbai Branch adjustment A/c Mumbai Branch Expenses AIc and Mumbai Branch Profit & Loss A/c and Mumbai Branch Debtors Nc under Stock & Debtors Method. (Dec 2014, 12 marks)
Answer:

Calculation of provision for discount
Prompt paying debtors during year = \(\frac{13,365}{15 \%}\) =‘ 89,100
Total debtors who made payment during the year = 45,635 + 40,000 + 13,365 = 99,000
Proportion of prompt payers = \(\frac{89,100}{99,000}\) x 100 = 90%
Likely prompt paying debtors ¡n dosing debtors = 11000 x 90% = 9,900
Provision for discount = 9,900 x 15% = 1,485

Question 8.
Answer the question:
From the information of AMBA LTD. received from its branch – AB, calculate the invoice price of goods sent to branch and Profit included thereon.
Goods received from H.O. (AMBA LTD.) – ₹ 1,00,000
Goods in transit from HO. – ₹ 50,000
Goods are invoiced to branch at cost plus 25%. (June 2015, 2 marks)
Answer:
Branch Accounts
Goods “received” from H.O.  1,00,000
+ Goods in transit 50,000
Invoice Price of Goods Sent to Branch 1,50,000
Profit=Cost+25%
∴ 1/5 on Invoice Price
Profit = \(\frac{1,50,000}{5}\) = 30,000

Question 9.
Answer the following question (Give workings):
TULSIAN LTD. with its Head Office in Delhi invoices goods to its Branch at Mumbai at 20% less than the catalogue price which is cost plus 50% with instructions that cash sales are to be made at invoice price and credit sales at catalogue price.

Opening Stock at Branch at its cost	₹ 12,000
Goods sent to Branch (at cost to H.O.)	₹ 1,40,000
Goods received by Branch till close of the year	₹ 1,38,000
Cash Sales	₹ 46,000
Credit Sales	₹ 1,00,000
Stock lost by fire (at cost)	₹ 2,500

Required:
Calculate the amount of Closing Stock at Branch-Mumbai. (Dec 2015, 2 marks)
Answer:

Question 10.
LINKEN LTD., with a Head Office in Kolkata, sends goods to its /Madras branch at cost plus 25 per cent. The following particulars are available in respect of the Branch for the year ended 31st March, 2016.

	₹
Opening Stock at Branch at cost to Branch	4,00,000
Goods sent to Branch at invoice price	60,00,000
Loss-in-transit at invoice price	75,000
Pilferage at invoice price	30,000
Sales	60,95,000
Expenses	3,00,000
Closing Stock at Branch at cost to Branch	2,00,000
Recovered from Insurance company against lost-in-transit	50,000

You are required to prepare:
(i) Branch Stock Account
(ii) Branch Adjustment Account a
Branch Profit & Loss Account in the book of Linken Ltd. (June 2016, 5 + 2 + 2 = 9 marks)
Answer:

Question 11.
M/S YAVATI LTD. having its principal place of business at BENGALURU has a branch at New Delhi. The company sends goods to its branch at cost plus which is the selling price. The following information is given in respect of the branch for the year ended 31st March, 2016.

	₹
Goods sent to Branch (invoice value)	24,00,000
Stock at Branch (01.04.2015)at selling price	1,20,000
Cash Sales	9,00,000
Returns from Customers	30,000
Branch Expenses paid for cash	2,67,500
Branch Debtors’ Balance (01.04.2015)	1,50,000
Discounts allowed	5,000
Bad Debts	7,500
Stock at Branch (31.03.2016) at selling price	2,40,000
Branch Debtor’s Balance (31.03.2016)	1,82,500
Collections from Debtors	13,50,000
Branch Debtors’ Cheques returned dishonoured	25,000

You are required to prepare:
(i) Branch Stock Account
(ii) Branch Debtors Account and
(iii) Branch Adjustment Account to reveal the profit of the Branch for the year ended March 31, 2016. (Dec 2016, 3+2+4 = 9 marks)
Answer:

Question 12.
Prepare a Branch account in the books of Head Office from the following particulars for the year ended 31st March, 2017 assuming that H.O. supplied goods at cost plus 25%.

Particulars	Amount (₹)	Particulars	Amount (₹)
Stock on 1.4.2016 (I.P.)	12,500	Bad Debts	2,000
Debtors	5,000	Allowances to customers	1,000
Petty Cash	1,000	Returns Inwards	1,000
Goods sent to branch (l.P.) Goods return to H.O. (I. P.)	40,000 5,000	Cheques sent to Branch for expenses:
Cash Sales	12,000	Rates & Taxes	3,000
Cash received from debtors	30,000	Salaries	8,000
		Misc. Exps.	1,000
		Stock on 31.03.2017 (I.P.)	15,000
		Debtors	4,000
		Petty Cash	1,000

(June 2017, 9 marks)
Answer:

Note: Here loading is \(\frac{25}{125}=\frac{1}{5}\) of invoice price. Hence, loading on opening stock will be 15,000 × \(\frac{1}{5}\) = ₹ 2,500 and so on.

Question 13.
X Ltd. has its H.O. in Delhi and a branch in Mumbai. H.O. supplied goods to its branch at cost plus 33%. From the particulars given below prepare a Branch Trading Account for the year ended 31st March 2018
in the books of RO.:

Particulars	Amount (₹)	Particulars	Amount (₹)
Opening Stock (l.P)	40,000	Sales:
Goods sent to Branch (I.P.)	2,50,000	Cash	1,00,000
Return to H.O.(l.P.)	10,000	Credit	3,00,000
		Discounts allowed to customers	10,000
		Closing Stock (l.P.)	60,000

It is estimated that 2% of the goods received are lost through natural wastage. (June 2018, 6 marks)
Answer:

Note:
1. Discount allowed to customer will appear in Branch Profit & Loss Account.
2. Loss through natural wastage is a normal loss and as such, the same should be charged against branch’s gross profit. So, no adjustment is required.

Question 14.
Rukmani Stores, Delhi invoiced goods to its Jaipur Branch @ 20% less than the Catalogue price which is cost plus 50% with instructions that cash sales were to be made at invoice price and credit sales at catalogue price and allow discount on prompt payment. The following details related to branch are provided by Rukmani Stores for the year ended 31st March 2019:

It was decided to make provision for discount of ₹ 42,500 on closing debtors for prompt payment. Depreciate the furniture @ 10% per annum. You are required to prepare Jaipur Branch Account and Goods Sent to Branch Account in the books of Rukmani Stores. (June 2019, 8 marks)
Answer:

Notes on Jaipur Branch A/c:
1. Since in Question, Invoice Price is given therefore, Jaipur Branch Stock A/c should be prepared at Invoice Price.
2. In this case Debtor method of Branch Accounting is used therefore, petty expenses of ₹ 11,000 incurred by Branch itself would not be shown at the debit of Jaipur Branch A/c. These petty expenses are already adjusted in closing balance of Branch cash of ₹ 14,000.
3. On similar logic we have correctly not shown Bad Debts and Discount relating to Jaipur Branch A/c to the debit of Jaipur Branch A/c since these Bad Debts and Discount are already adjusted in closing balance of Branch Debtors.

Note on Good Sent to Branch AIc: Since in Question, Invoice Price is given therefore, Good Sent to Branch A/c should be prepared at Invoice Price.

Notes:

•  Furniture at on 31.03.2019 = ₹ 1,20,000 x 90% = ₹ 1,08,000.
• Cash Balance at Branch on 31.03.2019 = ₹ 13,60,000 (Cash Sales) + 18,65,000 (Collection from Debtors) – ₹ 32,00,000 (Remittances from Branch) – ₹ 11,000 (Petty Exp. Paid by Branch) = ₹ 14,000.
• Closing Branch Debtors:

Question 15.
From the following particulars relating to Pune Branch for the year ending December 31, 2018, prepare Branch Account in the books of Head Office:

		₹
Stock at Branch on January 1, 2018		10,000
Branch Debtors on January 1, 2018		4,000
Branch Debtors on December 31, 2018		4,900
Petty cash at branch on January 1, 2018		500
Furniture at branch on January 1, 2018		2,000
Prepaid fire insurance premium on January 1, 2018		150
Salaries outstanding at branch on January 1, 2018		100
Goods sent to Branch during the year		80,000
Cash Sales during the year		1,30,000
Credit Sales during the year		40,000
Cash received from debtors		35,000
Cash paid by the Branch debtors directly to the Head Office		2,000
Discounts allowed to debtors		100
Cash sent to Branch for Expenses:
Rent	2,000
Salaries	2,400
Petty Cash	1,000
Annual Insurance up to March 31, 2019	600	6,000
Goods returned by the Branch		1,000
Goods returned by the debtors		2,000
Stock on December 31, 2018		5,000
Petty Cash spent by Branch		850
Provide depreciation on furniture 10% p.a.

Goods costing ₹ 1,200 were destroyed due to fire and a sum of ₹ 1,000 was received from the Insurance Company. (Dec 2022, 15 marks)

Branch Accounting CMA Inter Financial Accounting Notes

Branch
A Branch is a subordinate division of an office.
Section 2(14) of the Companies Act, 2013 defines a Branch Office as- Any establishment described as a Branch by the Company.

Dependent Branches
Dependent branches are branches in respect of which the whore of the accounting records are kept at Head Office only.

Independent Branches
Independent branches are branches which maintain independent accounting records.

Foreign Branches
Foreign branches are located in a foreign country (i.e. in a country other than in which the company ¡s incorporated and registered).

Debtors Method
This method is usually adopted when the branch is of small size. Under this method, the head office maintains separate Branch Account for each branch. Its purpose is to ascertain profit or loss made by each branch.

Stock and Debtors Method
When there are large number of transactions, this method is particularly adopted by the H.O. to make efficient control over the branches.

Lease Accounting – CMA Inter Financial Accounting Study Material is designed strictly as per the latest syllabus and exam pattern.

Lease Accounting – CMA Inter Financial Accounting Study Material

Short Notes

Question 1.

Write short note:
Operating Lease and Finance Lease (Dec 2017, 4 marks)
Answer:
Operating Lease and Finance Lease
A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or sones of payments the right to use an asset for an agreed period of time.

A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an asset. Title may or may not eventually be transferred.

An operating lease is a lease other than a finance lease. As per AS 19, a lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership.

Question 2.
Write short note:
Finance Lease (June 2019, 4 marks)
Answer:
Finance Lease:
It is a lease, which transfers substantially all the risks and rewards incidental to ownership of an asset to the Lessee by the Lessor but not the legal ownership. In following situations, the lease transactions are called Finance Lease.

• The lessee will get the ownership of leased asset at the end of the lease term.
• The lessee has an option to buy the leased asset at the end of term at price, which is lower than its expected fair value at the date on which option will be exercised.
• The lease term covers the major part of the life of asset.
• At the beginning of lease term, present value of minimum lease rental covers substantially the initial fair value of the leased asset.
• The asset given on lease to lessee is of specialized nature and can only be used by the lessee without major modification.

Descriptive Questions

Question 3.
Answer the following:
State the types of lease to which AS-19 are not applicable. (June 2014, 2 marks)
Answer:
The Accounting Standard AS-19 is not applicable to the following types of Lease:

• Lease agreement to explore natural resources such as oil, gas, timber, metal and other material rights;
• Licensing agreements for motion picture film, video recording, Plays, manuscripts, patents and other rights;
• Lease agreement to use land.

Practical Questions

Question 4.
Kovid Limited has taken a Machinery on Lease from Krishna Limited.
The following information are provided by Kovid Limited:
Lease Term 5 years
Fair value at inception of Lease ₹ 20 Lakhs
Lease Rent ₹ 5 Lakhs per annum payable at the end of the year
Expected Residual value ₹ 3 Lakhs
Guaranteed Residual value ₹ 2 Lakhs
Implicit Interest rate 15.5% per annum
You are required to prepare Lease Rent Account and Lease Liability Account in the Books of Kovid Limited. (The present value of Re. 1 at Discount rate of 15.5% are 0.8658, 0.7496, 0.6490, 0.5619 and 0.4865 for year it year 5 respectively.) (Dec 2013, 8 marks)
Answer:

Present value of minimum lease payment (₹ 17,53,700) is less than fair value at the inception of lease ( ₹ 20,00,000) so the leased asset and liability should be recognized at ₹ 17,53,700.

Question 5.
Answer the question:
(a) Makkhu Limited leased a machine to Gunu Limited on the following terms:
(i) Fair value of the machine ₹ 72 lakhs
(ii) Lease term 5 years
(iii) Lease rental per annum ₹ 12 lakhs
(iv) Guaranteed residual value ₹ 2.40 lakhs
(v) Expected residual value ₹ 4.50 lakhs
(vi) Internairateot return 15%
Discounted rates at 15% for? 1, 1st year to 5th year are 0.8696, 0.7561, 0.6575, 0.5718 and 0.4972 respectively. Ascertain Unearned Finance Income. (June 2015, 8 marks)
Answer:
As per AS-19 on leases, unearned finance income is the difference between
(a) the gross investment in the lease and
(b) the present value of minimum lease payment under the finance lease from the standpoint of the lessor,
and any unguaranteed residual value accruing to the lessor, at the interest rate implicit in the lease.

where:
(a) Gross investments in the lease Is the aggregate of:
(i) minimum lease payments from the standpoint of the lessor and
(ii) any unguaranteed residual value accruing to the lessor.
Gross investment = Minimum Lease Payments + Unguaranteed Residual Value
= Total lease rent + Guaranteed Residual Value (GRV) + Unguaranteed Residual Value (URV)
= (12,00000 × 5) + 2,40,000 + 2,10,000
= 64,50,000 (a)

(b) Table showing present value of (1) Minimum Lease Payments (MLPs) and Unguaranteed Residual Value (URV):

Unearned finance income = (a) – (b)
= 64,50,000 – 42,46,380
= 22,03,620

Question 6.
Answer the question:
Classify the following into either Operating or Financial Lease (briefly give you reasoning):
1. Lessee has option to purchase the asset at lower than fair value, at the end of lease term. It is certain that the lessee will exercise the option
2. Economic life of the asset is 7 years, lease term is 6 years, but asset is not acquired at the end of lease term.
3. Economic life of the asset is 6 years, lease term is 2 years, but the asset is of special nature and has been procured only for use of the lessee.
4. Present value of minimum lease payment = X. Fair value of the asset = Y. (Dec 2015, 8 marks)
Answer:

1. Finance lease if it becomes certain at the inception of lease itself that the option will be exercised by the lease that also at a price which is lower than its expected fair value.
2. Finance lease, since a substantial portion of the life of the asset is covered by lease term.
3. Finance lease since the asset is procured only for the use of lessee.
4. Finance lease since at the beginning of the lease term, present value of minimum lease rental covers substantially the initial fair value of the leased asset. Where X is minimum tease rental and Y is initial fair value.

Question 7.
X Ltd. has leased equipment over its useful life that costs ₹7,46,55,100 for a three year lease period. After the lease term the asset would revert to the Lessor. You are informed that:
(i) The estimated unguaranteed residual value would be? 1 lakh only.
(ii) The annual lease payments have been structured in such a way that the sum of their present values together with that of the residual value of the asset will equal the cost thereof.
(iii) Implicit interest rate is 10%.
You are required to ascertain the annual lease payment and the unearned finance income P.V. factor @ 10% for years 1 to 3 are 0.909, 0.826, and 0.751 respectively. (June 2016, 6 marks)
Answer: .
Calculation of lease rental:
Cost of Assets
= Present value of lease rental + Present value of residual valued
7,46,55,100 = 2.486x + .751 × 1,00,000
7,46,55,100 -75,100 = 2.486x
\(\frac{7,45,80,000}{2.486}\) = x
x = 3,00,00,000

Calculation of Unearned Financial Income:
Gross investment – Net investment
[(3,00,00,000 x 3) + 1,00,000] – 7,46,55,1 00
9,01,00,030 – 7,46,55,100
1,54,44,900

Question 8.
M Ltd. sold machinery having WDV of ₹ 200 Lakhs to N Ltd. for ₹ 250 Lakhs and the same machinery was leased back by N Ltd. to M Ltd. The leaseback is an operating lease. Comment on the accounting treatment as per AS 19 in the following circumstances:
(i) Fair value is ₹ 230 Lakhs and sale price is ₹ 250 Lakhs
(ii) Fair value is ₹ 175 Lakhs and sale price is ₹ 195 Lakhs (June 2017, 4 marks)
Answer:
(i) Profit of ₹ 30 Lakhs (230 Lakhs – 200 Lakhs) to be immediately recognised in its books and balance profit of ₹ 20 Lakhs (250 Lakhs – 230 Lakhs) is to be amortized/deferred over lease period.

(ii) Loss of ₹ 25 Lakhs (200 Lakhs – 175 Lakhs) to be immediately recognised by M Ltd. in its books and profit of ₹ 20 Lakhs (195 Lakhs – 175 Lakhs) should be amortised/deferred over lease period.

Question 9.
A Ltd. has taken the assets on lease from X Ltd. The following information is given below:
Lease Term = 3 years
Fair value at inception of lease = ₹ 14,00,000
Lease Rent = ₹ 6,00,000 p.a. at the end of each year
Guaranteed Residual Value = ₹ 44,000
Implicit Interest Rate 15% p.a.
Calculate the value of the asset to be considered by A Ltd. and the interest (finance charges) in each year. Present value of ₹ 1.00 at 15% is given below.

Year	1	2	3
PVIF (15%)	0.869	0.756	0.657

(June 2019, 5 marks)
Answer:
Calculation of Present value of Minimum Lease Payments:

Year (end)	MLP (₹)	PVIF at 15%	Present Value (₹)
1	6,00,000	0.869	5,21,400
2	6,00,000	0.756	4,53,600
3	6,44,000(6,00.000+44,000)	0.657	4,23,108
			13,98,108

Value of the asset will be the lower of fair value at the inception of lease and present value of MLP plus residual value. Therefore, the value of the asset will be ₹ 13,98,108.

(Alternative Calculation)

Year	Liability (₹)	MLP (₹)	Finance Charge (₹)	Principle Amt. of reduction (₹)
1	13,98,108	–	–	–
2	10,07,824	6,00,000	2,09,716	3,90,284
3	5,58,998	6,00,000	1,51,174	4,48,826
4	–	6,44,000	83,850	5,60,150

Note: The difference between this figure and the guaranteed residual value (as per the problem) is due to approximation.

Question 10.
L Ltd. leased a machine to T Ltd. on the following terms:

Particulars	(₹ In Lakhs)
(i) Fair Value of the machine	72
(ii) Lease Term	5 Years
(iii) Lease rental per annum	12
(iv) Guaranteed residual value	2.4
(v) Expected residual value	4.5
(vi) Internal Rate of return	15%

Discounted rates @ 15% for 1 year to 5th year are 0.8696, 0.7561, 0.6575, 0.5718 and 0.4972 respectively.
From the above calculate
(i) Gross investment in the lease
(ii) Unearned Finance Income. (Dec 2021, 6 marks)
Answer:

As per AS-19 on leases, unearned finance income is the difference between
(a) the gross investment in the lease and
(b) the present value of minimum lease payment under the finance lease from the standpoint of the lessor,
and any unguaranteed residual value accruing to the lessor, at the interest rate implicit in the lease.

where:
(a) Gross investments in the lease Is the aggregate of:
(i) minimum lease payments from the standpoint of the lessor and
(ii) any unguaranteed residual value accruing to the lessor.
Gross investment = Minimum Lease Payments + Unguaranteed Residual Value
= Total lease rent + Guaranteed Residual Value (GRV) + Unguaranteed Residual Value (URV)
= (12,00000 × 5) + 2,40,000 + 2,10,000
= 64,50,000 (a)

(b) Table showing present value of (1) Minimum Lease Payments (MLPs) and Unguaranteed Residual Value (URV):

Unearned finance income = (a) – (b)
= 64,50,000 – 42,46,380
= 22,03,620

Lease Accounting CMA Inter Financial Accounting Notes

Lease
A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time.

Finance Lease
A finance lease is a lease that transfers substantially all the risks and rewards incident to ownership of an asset.

Operating Lease
An operating lease is a lease other than a finance lease.

Fair Value
Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm’s length transaction.

Economic Life
Economic life is either: (a) the period over which an asset is expected to be economically usable by one or more users; or (b) the number of production or similar units expected to be obtained from the asset by one or more users.

Useful Life
Useful life of a leased asset is either: (a) the period over which the leased asset is expected to be used by the lessee; or (b) the number of production or similar units expected to be obtained from the use of the asset by the lessee.

Residual value
Residual value of a leased asset is the estimated fair value of the asset at the end of the lease term.

Gross Investment In the Lease
Gross investment in the lease is the aggregate of the minimum lease payments under a finance lease from the standpoint of the lessor and any unguaranteed residual value accruing to the lessor.

Net Investment
Net investment in the lease is the gross investment in the lease less unearned finance income.

Contingent Rent
Contingent rent is that portion of the lease payments that is not fixed in amount but is based on a factor other than just the passage of time (e.g., percentage of sales, amount of usage, price indices, market rates of
interest).

Leases are classified into two types:
Finance Lease
A lease is classified as a finance lease if it transfers substantially all the risks and rewards incident to ownership. Title may or may not eventually be transferred.

Operating Lease
A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incident to ownership.

Sale and Leaseback Transactions
A sale and leaseback transaction involves the sale of an asset by the vendor and the leasing of the same asset back to the vendor. The lease payments and the sale price are usually interdependent as they are negotiated as a package.

Partnership Accounting – CMA Inter Financial Accounting Study Material is designed strictly as per the latest syllabus and exam pattern.

Partnership Accounting – CMA Inter Financial Accounting Study Material

Short Notes

Question 1.
Write short note:
Guaranteed Partnership. (June 2013, 5 marks)
Answer:
In a partnership, there may be special agreement by virtue of which partner may get the guarantee of earning a minimum amount of profit. The guarantee may be given by one partner in particular or by the firm. It is given generally to encourage a junior partner or any sincere clerk of the business inducted to the benefits of partnership.

Guarantee given by the partner:

• The appropriation of profit should be made in the general course by applying the existing profit-sharing ratio.
• The minimum amount guaranteed is to be decided.
• In case the guaranteed amount (ii) is more, the excess should be deducted from the share of profit of the partner giving guarantee and calculated under (i) above. The same amount should be added with the original share of profit of the partner to whom the guarantee has been given.

Question 2.
Write short flotes on Designated Partner in a Limited Liability Partnership and what are their liabilities.
(Nov 2016, 4 marks)
Answer:
Designated Partners:
As per Sec. 7 of the LLP Act, every limited liability partnership shall have at least two designated partners who are individuals and at least one of them shall be a resident in India.

Provided that in case of a limited liability partnership in which all the partners are bodies corporate or in which one or more partners are individuals and bodies corporate, at least two individuals who are partners of such limited liability partnership or nominees of such bodies corporate shall act as designated partners.

Explanation:
Subject to the purpose of this Section the term a resident in India means a person who has stayed in India for a period of not less 182 days during the immediately preceding one year. Subject to the provisions of sub-section (1).

1. If the incorporation document:

• Specifies who are to be designated partners, such persons shall be designated partners on incorporation; or
• States that each of the partners from time to time of limited liability partnership is to be designated partner, every such partner shall be a designated partner.

2. Any partner may become a designated partner by and in accordance with the limited liability partnership agreement and a partner may cease to be a designated partner in accordance with limited liability partnership agreement.

3. An individual shall not become a designated partner in any limited liability partnership unless he has given his prior consent to act as such to the limited liability partnership in such form and manner as may be prescribed.

4. Every limited liability participant shall file with the registrar the particulars of every individual who has given his consent to act as designated partner in such form and manner as may be prescribed within thirty days of his appointment.

5. An individual eligible to be a designated partner shall satisfy such conditions and requirements as may be prescribed.

Liabilities of Designated Partners:
As per Sec. 8 of LLP Act, unless expressly provided otherwise in this Act, a designated partner shall be:

• responsible for the doing of all acts, matters, and things as are required to be done by the LLP in respect of compliance of the provisions of this Act including filing of any document, return, statement and the like report pursuant to the provision of this act and as may be specified in the limited liability partnership agreement; and
• liable to all parties imposed on the limited liability partnership for any contravention of those provisions.

Question 3.
Write short notes on the following:
Criticism of the decision of Gamer vs. Murray. (Dec 2017, 5 Marks)
Answer:
Criticism of the decision of Garner vs. Murray
The following criticism may be advocated against the decisions laid down in Garner vs. Murray principle:

• If any solvent partner has a debit balance in capital account, he must not bear the deficiency of the insolvent partner;
• This principle does not apply it there are only two partners;
• In spite of having a credit balance in capital account the solvent partner must bring cash equal to the amount of loss on realization which is immaterial and useless; and
• If any solvent partner who possess more private asset but contributes less capital, he will naturally, as per Gamer vs. Murray’s decision, bear less amount of deficiency of the insolvent partner than the other solvent partner who possesses less private assets but contributes more capital to the firm. This is not justified.

Question 4.
Write short notes on extent of liability of LLP and its Partners. (May 2018, 5 marks)
Answer:
Under Sec. 27(3) of the LLP Act, 2008 an obligation of an LLP arising out of a contract or otherwise, shall be solely the obligation of the LLP. The limitations of liability Obtian LLP and Its partners are as follows:
The liabilities of an LLP shall be met out of the properties of an LLP:

• A partner is not personally liable, directly or indirectly (for an obligation of an LLP arising out of a contract or otherwise), solely by reason of being a partner in the LLP;
• An LLP is not bound by anything done by a partner in dealing with a person, if:
• The partner does not have the authority to act on behalf of the LLP in doing a particular acts, and
• The other person knows that the partner has no authority or does not know or believe him to be a partner in the LLP.
• The liability of the LLP and the partners perpetrating fraudulent dealings shall be unlimited for all or any of the debts or other liabilities of the LLP.

Question 5.
Write short note on the following:
(i) Applicability and Non-Applicability of Gamer vs. Murray Rule (Dec 2018, 5 marks)
Answer:
In the case of dissolution of a partnership firm due to insolvency, Gamer vs Murray rule is applicable at the time of any partner becoming insolvent. It requires –
1. That the solvent partners should bear the loss arising due to insolvency of a partner in their capital ratio after making adjustments for past accumulated reserves, profits or losses, drawings, interest on drawings/capitals, remuneration to partners, etc., to the date of dissolution but before making adjustment for profit or loss on realization in case of fluctuating capital. In case of fixed capital no such adjustments are required.

2. That the solvent partners should bring in cash equal to their respective shares of the loss on realization.

Non-Applicability:
This rule is not applicable when:

1. The solvent partner has a debit balance in the capital account.
2. Only one partner is solvent.
3. All partners are insolvent.
4. The partnership deed provides for a specific method to be followed in case of insolvency of a partner, then the conditions given in the deed would prevail.

Question 6.
Write a short note on the following:
Maximum Possible Loss Method (June 2019, 5 marks)
Answer:
Maximum Possible Loss Method:
Steps:

1. Prepare a statement showing the distribution of cash
2. Pay off the external Liabilities
3. After all the payment is made for the external liabilities, the partners will be paid off. a

4. The maximum loss shall be shared amongst the partners in their profit-sharing ratio, as it, there will be no further realization.
5. If any of the partner capitals, after step (4) is negative, that partner shall be treated like an insolvent partner.
6. The deficiency of the in3olvent partner as per step (5) shall be shared by the other solvent partners (i.e. those partners who has positive capital balances) in their capital contribution ratio as per Gamer vs. Murray Rule.
7. Repeat the steps (3) to (6) till final realisation.

Question 7.
Write short flotes on the following:
Applicability of Section 37 of the Indian Partnership Act, 1932 (Dec 2019, 5 marks)
Answer:
Applicability of Section 37 of the Indian Partnership Act 1932:
In case of retirement, the retiring partner or in case of death, the executor of the deceased partner, if the duos are not settled, then such retired partner or the executor is entitled to the following:
Maximum of: Interest @ 6% p.a. on the amount due to them (i.e. if the amount is unsettled, like, rate of interest on loan to be allowed to the retired partner or the executor is not mentioned)
Or
The share of profit earned for the amount due to the partner Conditions:

• The surviving partners/continuing partners continue to carry on the business of the firm.
• The business is carried on without any final settlement of accounts between the continuing partners and the outgoing partners or his estate.
• There is no contract to the contrary of the options contained in Section 37 i.e. share in the profits or interest @ 6% p.a. on the unsettled capital.

Distinguish Between

Question 8.
Answer the following:
What are the distinction between an Ordinary Partnership Firm and a Limited Liability Partnership (LLP)? (May 2016, 4 marks)
Answer:
Distinction between an Ordinary Partnership Firm and a Limited Liability Partnership (LLP):

Basis of Difference	Partnership	LIP
1. Applicable Law	Indian Partnership Act, 1932.	Limited Liability Partnerships Act, 2008.
2. Formation	Formed by an Agreement.	Formed by Law.
3. Registration	Optional.	Compulsory with ROC.
4. Body Corporate	Not a body corporate.	A Body Corporate After registration with ROC, it becomes a body corporate.
5. Separate Legal Identity	It has no separate legal identity.	All body corporate are said to have a separate legal Identity
6. Perpetual Succession	No perpetual succession.	It has perpetual succession.
7. Number of Partners	Minimum 2 and Maximum 100.	Minimum 2, but no maximum limit.
8. Liability of Partners/ Members	Liability of the partners is unlimited. Partners are severally and jointly liable for actions of other partners and the firm and their liability extends to personal assets.	Liability of the partners is limited to the extent of their contribution towards LLP except in case of intentional fraud or wrongful act of omission or commission by a partner.
9. Principal-Agent Relationship	Partners are the agents of the firm and of each other i.e. Mutual agency.	Partners are agents of the firm only and not of other partners. No Mutual agency.

Descriptive Questions

Question 9.
Answer the following:
Under what circumstances, an LLP can be wound up by the Tribunal. (May 2015, 4 Marks each)
Answer:
Circumstances when an LLP can be wound up by the tribunal:

• The partnership shall be dissolved if mere is unlawful object of the firm.
• The partnership firm shall be dissolved when all the partners become insolvent.
• The partnership firm is dissolved by order of court.
• If there is any criminal law or case on the firm, the firm shall be dissolved.
• If partnership is under ‘oss on continuous basis then firm shall be dissolved by the tribunal.
• If partnership violates any rule of partnership Act then court may give order for dissolution.

Question 10.
Explain the nature of Limited Liability Partnership. Who can be a designated partner in a Limited Liability Partnership? (Nov 2017, 4 marks)
Answer:
1. Nature of LLP:

Point	LLP
Governing law	The Limited Liability Partnership Act, 2008
Registration	Registration with registrar of LLP mandatory.
Name	Name should contain limited liability partnership suffix.
Creation	Created by law
Separate entity	Separate legal entity under LLP Act, 2008.
Perpetual succession	LLP has perpetual succession, and partners may come and go.
Legal proceedings	A LLP is a legal entity can sue and be sued.
Annual filing of forms	Annual Statement of Accounts and Solvency & Annual return to be filed with registrar every year.
Digital signature for partners	As e-forms are filled electronically at least one designated partner should have digital signature.
Agency Relationship	Partners act as agents of LLP and not of the other partners.
Liability of Partners	Limited, to the extent their contribution towards LLP, except in case of intentional fraud or wrongful act of omission or commission by partner.

2. Designated partners:
Sec. 7 of LLP Act deals with designed partners, and Sec. 8 deals with liabilities of Designated partners, given below:

• Every LLP shall at least 2 designated partners (DPs).
• OPs shall be individuals only.

(Note: !t all partners of LLP are bodies corporate, or one or more partners are individuals or bodies corporate, at least 2 individuals who are partners of such LLP or Nominees of such bodies corporate, shall act as designated partners).

• At least I DP should be resident in India. (Note: Resident means a person who has stayed in India ≥ 182 days during. The immediately preceding 1 year).
• An individual can become a DP in any LLP, only it he has given his consent to act as such, to the LLP.

Question 11.
Why is goodwill considered to be an intangible asset and not a fictitious asset? (Dec 2017, 1 mark)
Answer:
Goodwill is not a fictitious asset because it has a realisable value. It is an intangible asset because it cannot be seen and touched.

Question 12.
Answer the following:
Under what circumstances an LLP can be wound up by the tribunal? (Nov 2020, 5 marks)
Answer:
An LLP may be wound up by the Tribunal in the following circumstances:

• If the LLP decides that it should be wound up by the Tribunal;
• If for a period of more than six months, the number of partners of the LLP is reduced below two;
• If the LLP is unable to pay its debts;
• If the LLP has acted against the interests of the integrity and sovereignty of India, the security of the state or public order;
• If the LLP has defaulted in the filing of the Statement of Account and Solvency with the Registrar for five consecutive financial years;
• If the Tribunal is of the opinion that it is just and equitable that the LLP be wound up.

Question 13.
Explain the nature of a Limited Liability Partnership. Who can be a designated partner in a Limited Liability Partnership and what are their liabilities? (May 2022, 5 marks)
Answer:
Nature of Limited Liability Partnership:
A limited liability partnership is a body corporate formed and incorporated under the LLP Act, 2008, and is a legal entity separate from that of its partners. A limited liability partnership shall have perpetual succession and any change in the partners of a limited liability partnership shall not affect the existence, rights or liabilities of the limited liability partnership.

Designated Partners:
Every limited liability partnership shall have at least two designated partners who are individuals and at least one of them shall be resident in India. In case of a limited liability partnership in which all the partners are bodies corporate or in which one or more partners are individuals and bodies corporate, at least two individuals who are partners of such limited liability partnership or nominees of such bodies corporate shall act as designated partners.

Liabilities of designated partners:
As per section 8 of the LLP Act, unless expressly provided otherwise in this Act, a designated partner should be:

• Responsible for the doing of all acts, matters, and things as are required to be done by the Iimged liability partnership in respect of the provisions of this Act including tiling of any document, return, statement.
• Lable to all penalties imposed on the limited liability partnership for any contravention of those provisions.

Practical Questions

Question 14.
Ashok & Bala who where in partnership sharing 7/12 and 5/12 respectively admitted Chand as a partner giving him 1/5th share from 01.042011. The new profit-sharing ratio is 7: 5:3. Chand brought ₹ 96,000 towards goodwill to be shared by Ashok & Bala In their sacrificing ratio. The amount so brought was however credited to Chand’s capital account by mistake:
The Trial Balance of the firm as on 31 March, 2012 is given below:

Interest on drawings is to be ignored but interest on capital is to be charged at 5% per annum which was not made so far. Prepare new Balance Sheet as at 31.03.2012 gMng effect to above adjustments/omissions. (Dec 2012, 8 marks)
Answer:

Question 15.
Sachin & Ganguly are partners of a firm SG & Co. From the following information calculate the value of goodwill by super profit method and capitalization method:
(i) Average capital employed in the business ₹ 5,00,000.
(ii) Net trading profit of the firm for the last three years ₹ 1,50,000; ₹ 1,70,000 and ₹ 1,90,000.
(iii) Rate of return expected from capital having regard to risk involved @ 15 % per annum.
(iv) Goodwill to be valued at 2 years’ purchase. (Dec 2012, 5 marks)
Answer:
Calculation of Goodwill
(i) Super Profit Method
Goodwill = Super Profit x No. of years of purchase
= 95,000/- × 2 = 1.90,000/-
= Average Profit – Normal Profit
= 1,70,000 -(5,00,000 × 15%) = 95,000

Average Profit = \(\frac{1,50,000+1,70,000+1,90,000}{3}\) = 1,70,000

(ii) Capitalization Method
Goodwill = Value of Business – Avg. Capital Employed
= \(\left(\frac{1,70,000}{15 \%}\right)\) – 5,00,000
= 11,33,333 – 5,00,000 = 6,33,333/-

Question 16.
Ram, Rahim, and Robert are partners in a firm sharing profits and losses in the proportion of 3 : 3 : 2. Their Balance Sheet as on 31.03.2013 was as follows:

They decided to dissolve the firm on 01.04.2013. They report the result of realization as follows: .
Land and Buildings 90,000 – realized in cash
Debtors 60,000 – realized in cash
Investments 5,500 – taken over by Ram
Stock 75,500 – taken over by Rahim
Goodwill 18,000 – taken over by Robert
The realization expenses amounted to ₹ 2,000. Close the Accounts of the firm. (June 2013, 5 marks)
Answer:

Question 17.
A, B, and C started a partnership firm on 1.1.2012. A introduced ₹ 10,000 on 1.1.2012 and further introduced ₹ 4,000 on 1.7.2012. B introduced ₹ 25,000 at first on 1.1 .2012 but withdrew ₹ 5,000 from the business on 31.9.2012. C introduced ₹ 15,000 at the beginning on 1.1.2012, increased it by ₹ 5,000 on 1.4.2012, and reduced it to ₹ 10,000 on 1.11.2012.

During the year 2012 they made a net profit of ₹ 75,500. The partners decided to provide interest on their capitals at 10% p.a. and to divide the balance of profit in their effective capital contribution ratio. Prepare the Profit and Loss Appropriation Account for the year ended 31.12.2012. (June 2013, 5 marks)
Answer:

Question 18.
Answer the following question (give workings wherever required):
P, Q, and R are three partners sharing profit and loss equally. Their respective capitals as on 01.04.2012 were P- ₹ 80,000, Q – ₹ 60,000, and R- ₹ 50,000. They mutually agreed on the following points as per the partnership deed:
Interest on capital to be allowed @ 5%.
P to receive a salary of ₹ 500 per month.
Q to receive a commission @ 4% on net profit after charging such commission.
After charging all other items, 10% of the net profit to be transferred to General Reserve.
The firm made profit of ₹ 66,720 during the financial year 2012-13. What will be the Net Divisible Profit available to each partner? (Dec 2013, 2 marks)
Answer:

Net Divisible profit available to each of the partner will amount to = ₹ 44,325/3 = ₹ 14,775.

Question 19.
Kapil, Manoj and Chetan are partners sharing profits and losses in the ratio of 2 : 2: 1. On 1st January 2010, they took out a loint life policy of ₹ 2,00,000. Annual premium of ₹ 10,000 was payable on 1st January each year. Last premium was paid on 1st January, 2013. Manoj died on 1st March, 2013, and policy money was received on 31st March, 2013. The surrender value of policy as on 31st March each year were as follows:
2010:Nil .
2011: ₹ 2,000
2012: ₹ 5,000
Show Joint Life Policy accounts as on 31 March each year assuming that:
(i) The premium is charged to profit and loss account every year.
(ii) The premium is debited to joint life policy account and the balance of the joint life policy account is adjusted every year to its surrender value. (Dec 2013, 6 marks)
Answer:
1. In this case, premium paid is charged to Profit & Loss account every year. So nothing will appear in the joint life policy account of 2010, 2011, and 2012. However, in 2013, the joint life po1icy account will appear as follows.

Question 20.
Answer the following question (give workings):
(A) Babbu and Dabbu are partners, sharing profit or loss in the ratio 3:2. They admit Kachari for \(\frac{1}{6}\) th share of profits in the firms of which she takes \(\frac{2}{3}\) rd from Babbu and \(\frac{1}{3}\) rd from Dabbu. Find the new profit-sharing ratio. (June 2014, 2 marks)
Answer:
Share surrendered by Babbu = \(\frac{1}{6} \times \frac{2}{3}=\frac{2}{18}\)
Share surrendered by Dabbu = \(\frac{1}{6} \times \frac{1}{3}=\frac{1}{18} \)

New Ratio:
Babbu = \(\frac{3}{5}-\frac{2}{18}=\frac{44}{90} \)
Dabbu = \(\frac{2}{5}-\frac{1}{18}=\frac{31}{90} \)
Kachari = \(\frac{1}{6} \times \frac{15}{15}=\frac{15}{90} \)
NPSR = 44:31:15

Question 21.
The Balance Sheet of A, B, and C who are sharing profits in proportion to their capital stood as follows on March 31st, 2012:

B retired on the above date and the following was agreed upon:
(i) The stock be depreciated by 6%.
(ii) That the provision for doubtful debts be brought up to 5% on Debtors.
(iii) That the Land and Buildings be appreciated by 20%.
(iv) That a provision for ₹ 1,540 be made in respect of outstanding legal charges.
(v) That the Goodwill of the entire firm be fixed at ₹ 21,600 and B’s share of it be adjusted into the accounts of A and C who are going to share future profits in the ratio of 5 : 3.
(vi) That the assets and liabilities (except Cash at Bank) were to appear in the Balance Sheet at their old figures.
(vii) That the entire capital of the firm as newly constituted by fixed at ₹ 56,000 between A and C in the proportion of 5 : 3 (actual cash to be brought in as paid off, as the case may be). Show the Balance Sheet after B’s retirement. (June 2014, 10 marks)
Answer:

Note: Since assets and liabilities will appear in the Balance Sheet at their old figure Memorandum Revaluation Account should be opened.

Working Note:
Gaining Ratio
A = \( \frac{5}{8}-\frac{4}{9}=\frac{45-32}{72}=\frac{13}{72}\)
C = \(\frac{3}{8}-\frac{2}{9}-\frac{27-16}{72}=\frac{11}{72} \)
Hence, gaining ratio = 13:11

∴ B’s share of goodwill = ₹ 21,600 × 3/9 = ₹ 7,200

Question 22.
Answer the following question (Give workings):
Gunnu and Chinu are partners. They are entitled for 9% interest on their capital contributions. The firm allowed ₹ 54,000 towards interest on capital to partners. Calculate the capital contribution of each partner if interest on Gunnu’s capital is ₹ 13,500 more than the interest on Chinu’s capital. (Dec 2014, 2 marks)
Answer:
Let Chinu’s capital be x.
∴ Interest on Chinu’s capital = 0.09x
And interest on Gunnu’s capital = 0.09x + 13,500
0.09x + 0.09x + 13,500 = 54,000
0.18 x = 40,500
x = 2,25,000
Interest on Gunnu’s capital = (0.09 × 2,25,000) + 13,500 = 33,750
∴ Gunnu’s capital = 3,75,000
And Chinu’s captal (x) = 2,25,000

Question 23.
Answer the question:
Doll and Dolly are in partnership sharing profits and losses equally. They keep their books by Single Entry System. No ready figures are available for the total sales but they maintain a steady gross profit rate of 25% on sales. An abstract of their cash transactions for the year ended 30th June 2011 is given below:

Other Information:
(i) Discount allowed, ₹ 2,800.
(ii) Discoun4 earned, ₹ 2400.
(iii) Outstanding Printing, ₹ 500.
(iv) Capital of Doll as on 30th June, 2010 was ₹ 4,000 more than Capital of Dolly.
(v) Provide depreciation of Furniture @ 10% p.a.

From the above, you are required to prepare in the books of Doll and Dolly:
(i) The Trading and Profit and Loss Account for the year ended 3oth June, 2011 and
(ii) The Balance Sheet as on the date. (Dec 2014, 12 marks)
Answer:

G.P. on sales = 25%
∴ G.P.on cost = 33.33%
Cost = Opening stock + Purchase – Closing stock = 2,10,600
G.P. = 70,200

Question 24.
Answer the question:
X, Y, and Z are partners in the ratio of 3 : 2: 1. W is admitted with 1/6th share in future profits. Z would retains his original shares. Find out the new profit-sharing ratios of the partners. (June 2015, 2 marks)
Answer:
X’s New share = 3/6 – (1/6 x 3/5) = 12130
Y’s New share = 2/6 – (1/6 x 2/5) 1= 8/30
Z’sshare = 1/6
W’sshare = 1/6
Therefore, NPSR = X:Y:Z: W=12:8:5:5

Question 25.
A, B, and C were equal partners in a firm. Their Balance Sheet as on 31st March, 2015 was as follows:

Liabilities	Amount ₹	Assets	Amount ₹
A’s Capital’	1,60,000	Building	4,00,000
C’s Capital	1,00,000	Machinery	4,00,000
A’s Loan	2,00,000	Furniture and Fixtures	1,60,000
Creditors	10,00,000	Stock	1,60,000
		Book Debts	2,00,000
		Cash at Bank	10,000
		B’s Capital (Overdrawn)	1,30,000
	14,60,000		14,60,000

The firm was dissolved as all the partners were declared insolvent. The assets were realized as under:
Book debts: 45% less; Building: ₹ 1,60,000: Stock: ₹ 1,00,000; Machinery: ₹ 2,00,000; and Furnitures and fixtures; 40,000. Realization expenses were ₹ 10,000.

Partner	Private Assets ₹	Private Liabilities ₹
A	2,50,000	2,50,000
B	2,00,000	1,80,000
C	2,30,000	2,50,000

You are required to prepare:
(i) Realisation Account,
(ii) Bank Account,
(iii) Creditors Account,
(iv) Partner’s Capital Account, and
(v) Deficiency Account. (June 2015, 4 + 2 + 1 + 3 + 2 = 12 marks)
Answer:

Question 26.
A, B, and C have been in business partnership for some years, Sharing Profit in the proportions of 4:3:3. The balances in the books of the firm as on 31st March, 2015 subject to final Adjustment, were as under:

C died on 30.09.2014. The Partnership deed provided that:
(1) Interest was to be credited on Capital accounts of partners at 10% P.A. on the balance at the beginning of the year.
(2) On the death of a Partner
(i) Goodwill was to be valued at three years’ purchase of average Annual Profits of three years up to the date of death, after deducting interest on Capital Employed at 8% P.A. and a fair remuneration for each of the partners;
(ii) Fixed Assets were to be vali’d by an independent valuer and all other assets and liabilities to be taken at Book Value.
(3) Wherever necessary, profit or loss should be apportioned on a time basis.
(4) The amount due to the deceased partner’s Sole Heir was to receive interest @ 12% RA. from the date of death until paid.

It was ascertained that:
(a) Profits for three years, before charging partners’ interest were: 2011-1 2 – ₹ 3,36,000, 2012-13 – ₹3,78,000 and 2013-14 – ₹ 3,60,000 respectively.
(b) The independent valuation at the date of death revealed: Land and Buildings – ₹ 3,00,000 and Furniture and Fixtures – ₹30,000.
(c) A fair remuneration for each of the Partners would be ₹ 75,000 P.A. and that the Capital employed in business to be taken as ₹ 7,80,000 throughout.

It was agreed among the Partners that:
(i) Goodwill was not to be shown as an asset of the firm as on 31.03.2015. Therefore, adjustment for goodwill was to be made in Capital Accounts.
(ii) A and B would share equally from the date of death of C.
(iii) Depreciation on revised value of assets would be Ignored.
You are required to prepare:
(i) Revaluation Account
(ii) Partners’ Capftal Accounts
(iii) Partners’ Current Accounts
(iv) C’s Heir Account
(v) Balance Sheet as on 31 .03.2015 (Dec 2015, 1+2+1+1+4+3 = 12 marks)
Answer:

Question 27.
Answer the following question.
(i) S and N are partners sharing Profit /(Loss) in the ratio of 5:3. They admit J into partnership for \(\frac{3}{10}\) th in the Profit /(Loss) in which J acquired \(\frac{1}{5}\)th share from S and \(\frac{1}{10} \) th share from N respectively. Calculate the new Profit/Loss sharing ratios of the partners. (June 2016, 2 marks)
Answer:
Ss new share = \(\left(\frac{5}{8}-\frac{1}{5}\right)=\frac{25-8}{40}=\frac{17}{40}\)
N’s new share = \(\left(\frac{3}{8}-\frac{1}{10}\right)=\frac{15-4}{40}=\frac{11}{40} \)
J’s share = \(\frac{3}{10}=\frac{12}{40} \)
Hence New profit/loss sharing ratios of the partners = 17:11:12

Question 28.
A, B, and C are in partnership sharing Profits and Losses in the ratio 3:2:1 respectively. The Balance Sheet of the Partnership firm as on 31st March, 2016 is as under:

C decides to retire from the business as on the above date and D is admitted as a partner on that date. The following matters agreed:
(i) Assets revalued as: Premises – ₹ 2,40,000, Plant- ₹ 70,000 Stock – ₹1,08,358.
(ii) A provision of ₹ 6,000 is created against debtors.
(iii) Goodwill is to be recorded in the books on the day C retires at 84,000.

The partners in the new firm do not wish to maintain a Goodwill Account so that amount is to be written off against the New Partners Capital Accounts.
(iv) A and B are to share profit in the same ratio as before, and D is to have the same share of profits as B.
(v) C is to take a car at its book value of ₹ 7,800 in part payment, and the balance of all he is owed by the firm in cash except ₹ 40,000 which he is willing to leave as a Loan Account.
(vi) The partners in the new firm are to start on an equal footing so far as Capital and Current Accounts are concerned. D is to contribute cash to bring his Capital and Current Accounts to the same amount as the original partner from the old firm who has the lower investment in the business. The original partner in the old firm who has the higher investment will draw out cash so that his capital and current account balances equal those of his new partners.

(vii) Revaluation profit or loss is to be adjusted in the Partners’ Current Account.
You are required to prepare:
(a) Revaluation Account
(b) Partners’ Capital Accounts
(C) Partners’ Current Accounts
(d) C’s Loan Account.
(e) Bank Account.
(f) Balance Sheet of the New Firm as at 01.04.2016. (June 2016, 3+2+2+1+2+5 = 15 marks)
Answer:

Question 29.
Answer the following question (Give workings):
P and R are currently partners in a firm sharing Profit/Loss in the ratio of 4:3. A new partner D ¡s admitted and after his admission new Profit/Loss sharing ratio between P, R, and D becomes 5:3:2. What will be the sacrifice ratio of P and R after admission of D? (Dec 2016, 2 marks)
Answer: .
Calculation of sacrificing ratio of P&R after D’s admission:
Partners P R D
Old Ratio 4: 3: –
‘New Ratio 5: 3: 2
P = \(\frac{4}{7}-\frac{5}{10}=\frac{(40-35)}{70}=\frac{5}{70} \)
R = \(\frac{4}{7}-\frac{5}{10}=\frac{(40-35)}{70}=\frac{5}{70}\)
Sacrificing ratio or P&R = 5:9.

Question 30.
P, Q, R, and T have been carrying on business in partnership sharing profits and losses in the ratio of 4: 1: 2 : 3. The following is their Balance Sheet as on 31st March, 2016:

It has been agreed to dissolve the partnership on 1st April, 2016, on basis of following points agreed upon:
(i) P is to take over Trade Debtors at 80% of Book Value (₹ 3,50,000);
(ii) T is to take over the stock in Trade at 95% of the value; and
(iii) R is to discharge Trade Creditors.
(iv) The realisation is: Premises ₹ 2,75,000 and Furnitures ₹ 25,000.
(y) The expenses of realisation come to ₹ 30,000.
(vi) Q is found insolvent and ₹ 21,900 is realised from his estate.
Note: The loss arising out of capital deficiency may be distributed following decision in Garner vs. Murray.
You are required to Prepare:
(a) Realisation Account
(b) Bank/Cash Account
(c) Capital Accounts of the Partners. (Dec 2016, 5+4+5+1 = 15 marks)
Answer:

Question 31.
P, Q and R sharing profits and losses equally, had been trading for many years. R decided to retire on 31.3.2017 on which date Balance Sheet of the firm is as follows.

	₹		₹
Capital accounts:		Cash	36,000
P	1,20,000	Debtors	74,000
Q	85,000	Stock	60,000
R	75,000	Plant and Machinery	1,20,000
Creditors	85,000	Land and Building	75,000
	3,65,000		3,65,000

Value of goodwill was agreed as ₹ 93,000. Land and building increased in value, it being agreed at ₹ 1,05,600, plant and machinery was revalued at ₹ 1,00,500 and it was agreed to provide 6% in respect of debtors. Prepare revaluation account, capital accounts and balance sheet. (June 2017, 5 +5+5 = 15 marks)
Answer:

Question 32.
(ii) The Balance Sheet of a Partnership Firm had an Investment Fluctuation Reserve of ₹ 10,000. A new partner ¡s admitted. Value of Investment is ₹ 60,000 against its book value of ₹ 70,000. What amount of, the investment Fluctuation Reserve will be distributed among partners?
(iii) When does the Capital Account of a partner not show a debit balance in spite of regular losses incurred by the firm?
(iv) At the time of dissolution of Partnership Firm realisation expenses amounted to ₹ 3,000 paid by Nisha, a partner who was to bear these expenses. What entry is required in the Books of the firm? (Dec 2017, 1 mark each)
Answer:
(ii) Nil. There is no excess amount in the Investment Fluctuation Reserve Account as the fall in the value of the investment is equal to the reserve.
(iii) When partners maintain Fixed Capital Account, all adjustments including share of profit or loss is shown in their Current Account. Hence, the Capital Account of the partners will not be disturbed and this will not show a debit balance in spite of regular losses.
(iv) No entry is required as the expenses are to be borne by the partners.

Question 33.
Snehal, Suchita and Sindhu were partners sharing profits and losses in the ratio of 3:2:1. The firm was dissolved on 31.03.2015. After transfer of assets and liabilities to Realisation A/c, the following transactions
took place.
Give journal entries in the books on dissolution of the firm.
(i) Suchita’s Loan to the firm ₹ 30,000 was settled at ₹ 28,500.
(ii) A creditor for ₹ 50,000, took over Machinery of Book value ₹ 40,000 at ₹ 35,000.
The balance was settled in Cash.
(iii) Workmen Compensation Reserve – ₹ 40,000. A liability equal to 60% of the Reserve was settled
(iv) Sindhu was to receive 5% of the value of assets realised as remuneration for completing the dissolution work and was to bear realization expenses. Realization expenses were ₹ 5,500 that was paid by Sindhu. Assets realised ₹ 60,000.
(v) The Balance Sheet disclosed a footnote, contingent liability for ₹ 5,000 in respect of a bill discounted. The bill was received from Megha. On the date of dissolution, Megha was declared insolvent and was not able to pay the amount due. The bill had to be met by the firm.
(vi) Loss on realization amounted to ₹ 24,000. (Dec 2017, 7 marks)
Answer:

Question 34.
A and O were partners of a firm sharing profits and losses in the rabo 2: 1. The Balance Sheet of the firm as at 31st March, 2017 was as under:

Liabilities	Amount ₹	Assets	Amount ₹
Capital Accounts:		Plant and Machinery	5,00,000
A	8,00,000	Building	9,00,000
B	4,00,000	Sundry Debtors	2,50,000
Reserves	5,25,000	Stock	3,00,000
Sundry Creditors	2,75,000	Cash	1,50,000
Bills Payable	1,00,000
	21,00,000		21,00,000

They agreed to admit P and Q into the partnership on the following terms:
(i) The firm’s goodwill to be valued at 2 years’ purchase of the weighted average of the pr1 its’ of tho last 3 years. The relevant figures are:
Year ended 31.03.2014 – Profit ₹ 37,000
Year ended 31.032015- Profit ₹ 40,000
Year ended 31.03.2016 – Profit ₹ 45.000
(ii) The value of the stock and Plant and machinery were to be reduced by 10%.
(iii) The building was to be valued at ₹ 10,11,000.
(iv) There was an unrecorded liability of ₹ 10,000.
(v) A, B. P & Q agreed to share profits and losses in the ratio 3 : 2: 1: 1.
(vi) The value of reserve, the values of liabilities, and the values of assets other than cash were not to be altered.
(vii) P and Q were to bring capitals equal to their shares of Profit considering B’s capita’ as base after all adjustments.

You are required to prepare:
(1) Memorandum Revaluation Account,
(2 Partner’s Capital Accounts and
(3) The Balance Sheet of the newly constructed firm. (June 2018, 15 marks)
Answer:

1. Calculation of Goodwill
Weighted Average Profit:
Weighted Average Profit = ₹ 2,52,000/6 = 42,000
Goodwill is valued at 2 year’s purchase
Value of Goodwill: ₹ 42000 x 2 = ₹ 84,000

3. Calculation of closing capitals of P and O B’s capital is taken as base. Closing capital of B after all adjustments is ₹ 4,30,000. Total capital of firm will be = 4,30,000 x 7/2 = ₹ 15,05,000
Hence, P’s and O’s closing capital should be ₹ 2,15,000 (15,05,000 x 1/7) each i.e. at par with B (as per new profit and loss sharing ratio)

Question 35.
A, B, and C are partners in a firm sharing profits and losses as 3 : 2: 1. Their Balance Sheet as on 31st March, 2018 was as follows:

B died on 1st August, 2018. His account is to be settled under the following terms:
(i) Goodwill will be valued at 3 years purchase of last four accounting years average profit. Profits were :2014-15 ₹ 135 Lakh, 2015-16 ₹ 145 Lakh, 2016-17 ₹ 131 Lakh and 2017-18 ₹ 165 Lakh.
(ii) Land and Building will be valued at ₹ 250 Lakh and Plant and Machinery will be valued at ₹ 240 Lakh.
(iii) For the purpose of calculating B’s share in the profits of 01.04.2018 to 31.07.2018, the profits for the year 2017-18 will be taken as base.
(iv) Interest on Partners’ Loan will be calculated @ 6% per annum.
(v) A sum of ₹ 50 Lakh to be paid immediately to B’s Executor and the balance to be paid on 1st December 2018 together with interest @ 10% per annum.
You are required to pass necessary journal entries to record the above transactions and amount payable to B’s Executor’s Account. (Dec 2018, 15 marks)
Answer:

Working Notes:
(1) Calculation of Share of B in GoodwilL
Average of past tour years profits = (₹ 135 Lakh + ₹ 145 Lakh + ₹ 131 Lakh + ₹ 165 Lakh)/4 = ₹ 44 Lakh

Value of Firm’s Goodwill = ₹ 144 Lakh x 3 = ₹ 432 Lakh
B’s Share in Goodwill = ₹ 432 Lakh x 216 = ₹ 144 Lakh,
which will be credited to B’s Capita A/c and Debited to A’s Capital A/c & C’s Capital A/c in the ratio of 3:1
(2) B’s Share in profit f’om 01.04.18 to 1.8.18 = ( ₹165 x 4/12) x 216 = ₹ 18.333 Lakh
(3) Interest on B’s Loan from 01.04.18 to 1.8.18 = ₹ 20 Lakh x 6% x 4/1 = ₹ 40,000
(4) Interest to B’s Executor from 1.08.18 to 1.12.18 = ₹ 356.066 Lakh – ₹ 50 Lakh = ₹ 306.066 x 10% x 4/12 = ₹ 10.2022 Lakh

Question 36.
A, B, and C were partners in a firm sharing profits & losses in the ratio of 3:1: 1 agreed upon dissolution of there partnership. They each decide to take over certain assets and liabilities and continue business separately.

It is agreed as follows:
(i) Goodwill is to be ignored.
(ii) A is to take over all the Fixtures at ₹ 800; Debtors amounting to ₹ 20,000 at ₹ 17,200. The creditors of ₹ 6,000 to be assumed by A at that figure.
(iii) B is to take over all the stocks at ₹ 7,000 and certain of the sundry assets at ₹ 7,200 (being book value less 10%).
(iv) C takes over the remaining sundry assets at 90% of book values less ₹ 100 allowances and assumes responsibility for the discharge ot the loan, together with accruing interest of ₹ 30 which has not been recorded in the books of the firm.
(v) The expenses of dissolution were ₹ 270. The remaining debtors were sold to a debt-collecting agency for 50% of book values. Prepare Realisation Account, partners’ Capital Accounts, and Bank Account. (June 2019, 15 marks)
Answer:

Question 37.
The Balance Sheet of X and Y who shares profits and losses in the ratio of 3: 2, at 31 March, 2019 was as follows:

They decided to admit Z on that date for 1/4th share on the followng terms:
(a) New Profit sharing ratio will be 6 : 9: 5. Z is to bring in capita equal to 1/4th of the total capital of the new firm.
(b) Goodwill of the firm is to be valued at 4 years, purchase of the average super profits of the last three years. Average profits of the last three years are ₹ 70,000 while the normal profits that can be earned with the
capital employed are 30000. No Goodwill is to appear in the books. Z brings in ₹ 24,000 cash out of his share of Goodwill.
(c) Patents to be written down to ₹ 3,000 and Stock is undervalued by ₹ 2,000. 20% of General Reserve to be transferred to Provision for Doubtful Debts. ₹ 9,000 included ¡n Sundry Creditors be written back as
no longer payable.

(d) Out of the amount of insurance which was debited entirely to P & L A/c, ₹10,000 be carried forward as an Unexpired Insurance. Unaccounted Accrued Income of ₹ 2,000 to be provided for. A debtor whose dues of
₹ 10,000 were written off as Bad Debts paid 80% ¡n full settlement. A claim of ₹ 6,000 on account of workmen’s compensation to be provided for.

(e) The market value of investments was ₹ 90,000. Half of the investments were to be taken over by old partners in their old profit-sharing ratio. Prepare Revaluation Account, Capital Accounts of the Partners and the
Balance Sheet of new firm. (Dec 2019, 15 marks)
Answer:

Working Notes
1. X’s sacrifice = 3/5 – 6/20 = 6/20, Y’s gain = 2/5 – 9/20 = (1/20)
2. Firm’s Goodwill = Super Profits × 4 = (₹ 70,000 – ₹ 30,000) × 4 = ₹ 1,60,000
3. Z’s Share of Goodwill = ₹ 1,60,000 x 1/4 = ₹ 40,000
4. Ys Share of Goodwill = ₹ 1 ,60,000 x 1/20 = ₹ 8,000
5. Z’s New Capital (₹ 1,73,400+ ₹ 7600)x 1/3 = ₹ 83,000

Question 38.
X and Y were Partners sharing profit/losses as 3:2. They admit Z as a new partner, giving him 1/5th share of future profits. What should be the new profit-sharing ratio? (Dec 2021, 1 mark)
Answer:
12:8:5

Question 39.
The partners of a firm distributed the profits for the year ended 31/3/2021 ₹ 90,000 in the ratio of 3:2:1 without providing for the following adjustments.
(i) A and B were entitled to a salary of ₹ 1,500 each per annum.
(ii) B was entitled to a Commission of ₹ 4,500.
(iii) B&C had guaranteed a minimum profit of ₹ 35,000 P.a to A.
(iv) Profits were to be shared in the ratio of 3:3:2
Pass the necessary journal entries for the above adjustments in the Books of the Firm. (Dec 2021, 6 marks)
Answer:

Question 40.
X & Y are partners. They decided to dissolve their firm. Pass necessary entries assuming that various assets and external liabilities have been transferred to the Realisation account.
(i) X’s loan(partner) was appearing on the liability side of the balance sheet at ₹ 30,000. He accepted an unrecorded asset of ₹ 50,000 in full settlement of his account.
(ii) Runa, a creditor, to whom ‘ ₹ 30,000 were due to be paid, accepted an unrecorded computer of ₹ 20,000 at a discount of 10%, and the balance was paid to him in cash.
(iii) Suman, an unrecorded creditor of ₹ 45,000, accepted an unrecorded motor car of ₹ 30,000 at 35,000, and the balance was paid to him in cash.
(iv) There was a contingent liability in respect of bills discounted but not matured ₹ 30,000.
(v) Furniture of ₹ 15,000 and goodwill of ₹ 20,000 were appearing in the balance sheet but no other information was provided regarding these two items. (Dec 2021, 5 marks)
Answer:
(i) Debit X’s loan account and credit realisation account by ₹ 30,000
(ii) Debit realisation account and credit bank account by ₹ 12,000
(iii) Debit realisation account and credit bank account by ₹ 10,000
(iv) No entry.
(v) No entry.

Question 41.
P, Q, R, and S are sharing profits and losses in the ratio 3 : 3 : 2: 1. Frauds committed by R during the year were found out and it was decided to dissolve the partnership on 31st March, 2019 when their Balance Sheet was asunder:

Following information is given to you:
(i) A cheque for ₹ 7,000 received from debtor was not recorded in the books and was misappropriated by R.
(ii) Investments costing ₹ 8,000 were sold by R at ₹ 11,000 and the funds transferred to his personal account. This sale was omitted from the firm’s books.
(iii) A creditor agreed to take over investments of the book value of ₹ 9,000 at ₹ 13,000. The rest of the creditors were paid off at a discount of 5%.
(iv) The other assets realized as follows:
Building:110% of book value
Stock: ₹ 1,20,000
Investments: The rest of investments were sold at a profit of ₹ 7,000
Debtors: The rest of the debtors were realized at a discount of 10%.
(v) The bills payable were settled at a discount of ₹ 500.
(vi) The expenses of dissolution amounted to ₹ 8,000.
(vii) It was found out that realization from Rs private assets would only be ₹ 7,000.
Prepare Realization Account, Cash Account and Partner’s Capital Accounts. All workings should part of your answer. (Dec 2022, 15 marks)

Partnership Accounting CMA Inter Financial Accounting Notes

Admission of Partner
Partners of a continuing business may, by common consent, decide to admit a new partner for additional capital, technical skill or managerial efficiency.

Valuation of Inherent or Non-Purchased Goodwill

1. Average Profits Methods
2. Super Profits Method
3. Capitalization of Profits Methods
4. Annuity Method

Retirement of Partner
A Partner may leave the firm by taking retirement., Normally the retirement takes place by consent of all the partners and! or by other mode of communication by the intended Partner to all other partners.

Death of Partner
If a partner dies, the partnership is usually dissolved. But if the surviving partners desire so, they may purchase the share of the deceased partner and carry on the business. In that case, they have to decide (1) the total amount payable to the legal representative or executor of the deceased partner and (2) the mode of such payment.

Dissolution of a Partnership Firm
Whenever a reconstitution takes place within a Partnership in the form of admission, retirement or death of a Partner, the existing partnership is dissolved. The Partnership firm, may, however, continue, if the remaining partners desire so. But if the partnership firm is discontinued for any reason, that is called Dissolution of the firm.

Insolvency of a Partner
If a partner becomes insolvent and fails to pay his debit balance of Capital A/c either wholly or in part, the unrecoverable portion is a loss to be borne by the solvent partners.

The decision in Garner vs. Murray Case
Unless otherwise agreed, the decision in Gamer vs. Murray requires:

• That the solvent partners should bring in cash equal to their respective shares of the loss on realization;
• That the solvent partners should bear the loss arising due to the insolvency of a partner in the ratio of their Last Agreed Capitals.