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

Departmental Accounts – CA Inter Accounts Question Bank

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

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

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

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

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

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

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

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

(Nov 2001, 8 Marks)
Answer:

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

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

(Nov 2010, 8 marks)
Answer:

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

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

(Nov 2012, 8 marks)
Answer:

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

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

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

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

(May 2014,8 Marks)
Answer:

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

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

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

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

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

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

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

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

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

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

(Jan 2021,10 Marks)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Additional Information:

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

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

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

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

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

Answer:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Goods purchased during the year were marked down as follows:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Answer:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(Nov 2014, 8 marks)
Answer:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(Jan 2021, 10 marks)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Note:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Answer:

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

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

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

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

Answer:

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

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

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

Answer:

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

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

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

Investment Accounts – CA Inter Accounts Question Bank

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

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

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

CalcuIaton of Cost of Investment

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Working Notes:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Working Notes:

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

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

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

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

Working Notes:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Redemption of Debentures – CA Inter Accounts Question Bank

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Working Notes:

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

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

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

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

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

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

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

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

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

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

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

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

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

Redemption of Preference Shares – CA Inter Accounts Question Bank

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

1. Such shares must be fully paid up.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Working Note:
1. Calculation of Number of Shares:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Answer:

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

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

Accounting for Bonus Issue and Right Issue – CA Inter Accounts Question Bank is designed strictly as per the latest syllabus and exam pattern.

Accounting for Bonus Issue and Right Issue – CA Inter Accounts Question Bank

Question 1.
Write a note on ‘Bonus share?
Answer:
Bonus Shares: Bonus Shares are shares issued to existing Shareholders free of Cost by Capitalizing Free Reserves. But Company can issue Bonus Shares when Articles of Association authorize the same. In case the Company issuing bonus shares is a Listed Company, the Guidelines issued by SEBI must be complied with. Only existing Shareholders are entitled to receive Bonus Shares. Bonus Shares are be issued to only those Shareholders who hold fully paid up Shares. An issuer, announcing a bonus issue after the approval of its BOD, and not requiring shareholders approval for capitalisation of profits or reserves for making the bonus issue, shall implement the bonus issue within fifteen days from the date of approval of the issue by its BOD.

Question 2.
The following is the Balance Sheet of Bumbum Limited as at 31^st March, 2009:
Sources of Funds ₹

In Annual General Meeting held on 20^th June, 2009 the company passed the following resolutions:
(i) To split equity share of ₹ 10 each into 5 equity shares of ₹ 2 each from 1^st July, 09.
(ii) To redeem 8% preference shares at a premium of 5%.
(iii) To redeem 9% Debentures by making offer to debenture holders to convert their holdings into equity shares at ₹ 10 per share or accept cash on redemption.
(iv) To issue fully paid bonus shares in the ratio of one equity share for every 3 shares held on record date.

On 10^th July, 2009 investments were sold for ₹ 5,55,000 and preference shares were redeemed.
40% of Debentureholders exercised their option to accept cash and their claims were settled on 1^st August, 2009.
The company fixed 5^th September, 2009 as record date and bonus issue was concluded by 12^th September, 2009.
You are requested to journalize the above transactions including cash transactions and prepare Balance Sheet as at 30^th September, 2009. All working notes should form part of your answer. (Nov 2010, 12 marks)
Answer:
Bumbum Limited Journal Entries

Balance Sheet as at 30^th September, 2009

Notes to Accounts

Working Notes:

Question 3.
Following is the extract from the Balance Sheet of M/s. Yahoo Ltd. as at 31^st March, 2011:


On 1^st April, 2011, the company has made a final call @ ₹ 2.50 each on 1,80,000 equity shares. The call money was received by 30^th April, 2011. There after the company decided to capitalize its reserves by issuing bonus shares at the rate of one share for every three shares held. Securities premium of ₹ 50,000 includes a premium of ₹ 20,000 for shares issued to vendor for purchase of a special machinery. Capital reserve includes ₹ 60,000 being profit on exchange of plant and machinery.
Show necessary Journal Entries in the books of the company and prepare the extract of the Balance Sheet after bonus issue. Necessary assumption, if any should form part of your answer. (Nov 2011, 8 marks)
Answer:
Assumptions:
1. According to SEBI Guideline, only Capital Reserve and Securities Premium collected in cash can be utilized for the purpose of issue of bonus shares. It is assumed that balance of capital reserve and securities premium is collected in cash only.
2. It is also assumed that necessary resolutions have been passed and requisite legal requirements related to the issue of bonus shares have been complied with before issue of bonus shares.

Working Note:
On the basis of the above assumptions, the Authorised Capital should be increased as under:

Total authorised capital after bonus issue (₹ 20,00,000 + ₹ 4,00,000) = ₹ 24,00,000

In the books of M/s. Yahoo Ltd. Journal Entries

Extract of Balance Sheet (After bonus issue)

Question 4.
The following notes pertain to Brite Ltd.’s Balance Sheet as on 31^st March, 2012:

Notes :

On 2^nd April, 2012 the company made the final call on equity shares @ ₹ 2 per share. The entire money was received in the month of April, 2012.

On 1^st June, 2012 the company decided to issue to equity shareholders bonus shares at the rate of 2 shares for every 5 shares held and for this purpose, it decided to utilize the capital reserves to the maximum possible extent.
Pass journal entries for all the above mentioned transactions. Also prepare the notes on Share Capital and Reserves and Surplus relevant to the Balance Sheet of the company immediately after the issue of bonus
shares. (Nov 2012, 8 marks)
Answer:
In the books of Brite Ltd.
Journal Entries

Notes on Share Capital and Reserves & Surplus

Notes : As per SEBI Guidelines, Capital reserve and Securities premium have been assumed as realized in cash and hence car be used for issue of fully paid bonus shares.

Question 5.
Answer the following:
Following items appear in the Trial Balance of Saral Ltd. as on 31^st March, 2014:

The company decided to issue to equity shareholders bonus shares at the rate of 1 share for every 3 shares held. Company decided that there should be the minimum reduction in free reserves. Pass necessary Journal Entries in the books Saral Ltd. (May 2014, 4 marks)
Answer:
In the books of Saral Ltd.
Journal Entry

Question 6.
Following is the extract of balance sheet of Sunrise Ltd. as on 31^st March, 2015:
Issued and subscribed capital:
40,000, 10% Preference shares of ₹ 10 each fully paid : ₹ 4,00,000
1,80,000 Equity shares of ₹ 10 each, ₹ 7.50 paid-up : ₹ 13,50,000
Reserves and surplus:
Capital reserve : ₹ 1,60,000
General reserve : ₹ 2,00,000
Securities premium : ₹ 40,000
Surplus : ₹ 3,20,000
The company made the final call of ₹ 2.50 per share from equity shareholders and duly received it. Thereafter, it was decided to capitalise its reserves by issuing bonus shares at the rate of 1 share for every 3 shares held. Capital reserve includes ₹ 80,000 being profit on exchange of machinery.
Pass journal entries with necessary assumptions. (June 2016, 5 marks) [CS Exe -1]
Answer:
Journal Entries in the Books of Sunrise Ltd.

Question 7.
Following are the balances appear in the trial balance of Arya Ltd. as at 31^st March, 2018.
Issued and Subscribed Capital: ₹
10,000; 10% Preference Shares of ₹ 10 each fully paid. : ₹ 1,00,000
1,00,000 Equity Shares of ₹ 10 each, ₹ 8 paid up : ₹ 8,00,000
Reserves and Surplus:
General Reserve : ₹ 2,40,000
Securities Premium (collected in cash) : ₹ 25,000
Profit and Loss Account : ₹ 1,20,000

On 1^st April, 2018 the company has made final call @ ₹ 2 each on 1,00,000 Equity Shares. The call money was received by 15^th April, 2018. Thereafter the company decided to issue bonus shares to equity shareholders at the rate of 1 share for every 5 shares held and for this purpose, it decided that there should be minimum reduction in free reserves. Pass Journal entries. (May 2018, 5 marks)
Answer:
In the books of Arya Ltd. Journal Entries

Question 8.
Answer the following:
Following is the extract of Balance Sheet of Prem Ltd. as at 31^st March, 2018:

On 1^st April, 2018, the company decided to capitalize its reserves by way of bonus at the rate of two shares for every five shares held.
Show necessary journal entries in the books of the company and prepare the extract of the balance sheet after bonus issue. (Nov 2019, 5 marks)
Answer:
Journal Entries in the books of Prem Ltd.

Balance Sheet (Extract) as on 1^st April, 20 18 (after bonus issue)

Notes to Accounts:


Note: Authorized capital has been increased by the minimum required amount i.e. ₹ 7,80,000 (37,80,000 — 30,00,000) in the above solution.

Question 9.
Answer the following:
Following items appear in the Trial Balance of Star Ltd. as on 31^st March, 2019:

On 1^st April, 2019, the Company has made final call on Equity shares @ ₹ 2 per share. The entire money was received in the month of April, 2019.
On 1^st June, 2019, the Company decided to issue to Equity shareholders bonus shares at the rate of 2 shares for every 5 shares held and for this purpose, it decided that there should be minimum reduction in free reserves.
Pass necessary journal entries in the Books of Star Ltd. (Jan 2021, 5 marks)

Question 10.
The Balance Sheet of ABC Ltd. as at 31^st March, having Net Assets ₹ 17,00,000 contained the following:


The Company wanted to issue Bonus Shares to its Shareholders at the rate of One Share for every Two Shares held. Necessary resolutions were passed, requisite legal requirements were complied with.
Requires:
(a) Give effect to the proposal by passing Journal Entries in the books of the Company,
(b) Show the amended Balance Sheet.
Answer:
Journal Entries in the Books of the ABC Ltd.

Working Note:
1. Reserves not available for Bonus Issue: Plant Revaluation Reserve, Development Rebate Reserve and Investment Allowance Reserve, cannot be used for any type of Bonus Issue.

2. Types of Bonus Issue: There are two types of Bonus Issue in the above case:
(a) Converting ₹ 7.50 Paid up Shares into ₹ 10 Paid Up: Securities Premium and Capital Redemption Reserve cannot be used for this purpose. So, the Company can utilize General Reserve and P& L A/c only for this purpose.
(b) Issuing Additional Shares to Holders of Fully Paid Shares:
Securities Premium and Capital Redemption Reserve can be fully utilized for this purpose. For balance requirement, General Reserve and P&L A/c may be used.

Question 11.
The Paid up Capital of ABC Ltd. is ₹ 10,00,000 consisting of 60,000 Equity Shares of ₹ 10 eacti fully paid up and 50,000 Equity Shares of ₹ 10 each, ₹ 8 per share paid up. It has ₹ 40,000 in Securities Premium Account, ₹ 2,00,000 in Profit and Loss A/c (Cr.) ₹ 3,00,000 in General Reserve and ₹ 60,000 in Capital Redemption Reserve Account.

By way of Bonus Dividend, the Partly Paid up Shares are converted into Fully Paid Up Shares, and the holders of Fully Paid up Shares are also allotted Fully Paid Up Bonus Shares in the same ratio.
Pass Journal Entries showing separately the two types of Bonus Issues stated above. It is desired that there should be minimum reduction in Free Reserves.
Answer:
Journal Entries in the Books of the ABC Ltd.

Note:
1. Additional Shares issued: Ratio of Bonus declared on partly paid shares is ₹ 2 for every ₹ 8 Paid -up Capital. So, Bonus Shares are issued at the rate of 1 for every 4 Shares held. Hence, the amount of Bonus payable to the holders of Fully Paid Shares is (1 Bonus Share ÷ 4 Shares Held) × 60,000 Scares × ₹ 10 Issue Price = ₹ 1,50,000.

2. Bonus issue can be done by:
(a) Converting 50,000 ₹ 8 Paid Up Shares into ₹ 10 Paid Up: Securities Premium and Capital Redemption Reserve cannot be used for this purpose. Hence, the Company can utilize General Reserve and P&L Account only for this purpose.
(b) Issuing Additional Shares to the holders of fully paid shares: Securities Premium and Capital Redemption Reserve can be fully utilized for this purpose. For the balance requirements, General Reserve and Profit and Loss Account may be used.

Question 12.
Following is the extract of the Balance Sheet of Xeta Ltd. as at 31^st March, 2017:


On 1^st April, 2017, the Company has made final call @ ₹ 2 each on 2,70,000 equity shares. The call money was received by 20th April, 2017. Thereafter, the company decided to capitalize its reserves by way of bonus at the rate of one share for every four shares held.
You are required to give necessary journal entries in the books of the company and prepare the extract of the balance sheet as on 30^th April, 2017 after bonus issue.
Answer:
Journal Entries In the books of Xets Ltd.

Extract of Balance Sheet as at 30^th April, 2017 (after bonus issue)

Question 13.
Distinguish between the following :
‘Bonus shares’ and ‘rights shares’. (June 2011, 3 marks) [CS Exe -1]
Answer:
Following are the main points of distinction between bonus shares & right shares:

Basic	Bonus Shares	Right Shares
1. Meaning	Bonus shares are shares issued by a company free of cost to its existing shareholders on a pro rata basis out of free reserve.	When company issues further shares to existing shareholder in ratio of their holding Such issue is known as right issue.
2. Cash flow	In case of bonus issue there is no cash flow.	In case of right issue there is cash inflow to the company.
3. Consideration	Company does not receive any consideration in case of bonus issue.	Company receives consideration as shares are issued against cash.
4. Authorization	Bonus issue is made on the recommendation of the Board and authorization from general meeting of the company.	In case of right issue authorization from members through ordinary or special resolution is necessary.
5. Market value	Issue of bonus shares does not affect the market value of the company.	Right issue of shares affects the market value of the company.
6. Section	It is governed by Sec. 63 of the Companies Act, 2013.	It is governed by Sec. 62 of the Companies Act, 2013.

Question 14.
Fitness Ltd. is planning to raise funds by making rights issue of equity shares to part finance its expansion. The existing equity share capital of the company is ₹ 40 lakh and the market value is ₹ 45 per share. The company offered to its shareholders the right to buy 2 shares at ₹ 12 each for every 5 shares held. You are required to calculate –
(i) Theoretical market price per share after the rights issue;
(ii) The value of rights; and
(iii) Percentage increase in share capital. (Dec 2015, 5 marks) [CS Exe -1]
Answer:
(i) Calculation of Theoretical Market Price per Share after the Right Issue:

(ii) The Value of Rights = Market Price – Theoretical Market Price
= 45 – 35.57 = 9.43
(iii) Percentage increase in Share Capital:
\(=\frac{\text { No. of fresh Shares Issued }}{\text { Total no. of Shares before Right Issue }}\) × 100
= \(\frac{1,60,000}{4,00,000}\) × 100 = 40%

Working Notes:
1. No. of Shares Outstanding at Beginning
= \(\frac{40,00,000}{10}\) = 4,00,000 Shares
2. No. of Shares Issued as Right Issue
= 4,00,000 × \(\frac{2}{5}\) = 1,60,000 Shares.

Question 15.
The Share of ABC Ltd of a Face Value of ₹ 10 is being quoted at ₹ 24. The Company has a plan to make a Rights Issue of one Equity Share for every four shares currently held at a Premium of 40% per Share. You are required to –
1. Determine the Minimum Price that can be expected of Share after the issue.
2. Calculate the Theoretical Value of the Rights alone.
3. Show the effect of the Right Issue on the wealth of a Shareholder who has 1,500 Shares, if
(a) He sells the entire rights, and
(b) He ignores the rights.
Answer:
Theoritical value of Right:
Ratio 1 : 4
Ex-Rights Price per share = \(\frac{(₹ 24 \times 4)+(₹ 14 \times 1)}{5}\) = ₹ 22
∴ Issue Price = 10 + 40% = ₹ 14
Rights Value = ₹ 8
∴ Value of Right = \(\frac{₹ 8}{4 \text { shares }}\) = ₹ 2

2. Effect on the Wealth of a shareholder

Question 16.
ABC Limited’s shares are currently selling at ₹ 13 per share. There are 10,00,000 shares outstanding. The Company is planning to raise ₹ 20
Lakhs to finance a new project. Required:
What is the Ex-Right Price of Shares and the Value of a right, if
(a) The Firm offers one right share for every two Shares held.
(b) The Firm offers one right share for every four Shares held.
Answer:
Computation of Ex-Rights Price and Value of a right

Question 17.
Zeta Ltd. has decided to increase its existing share capital by making rights issue to its existing shareholders. Zeta Ltd. is offering one new share for every two shares held by the shareholder. The market value (cum-right) of
the share is ₹ 360 and the company is offering one right share of ₹ 180 each to its existing shareholders. You are required to calculate the value of a right. What should be the ex-right value of a share?
Answer:
Ex-right value of the shares = (Cum-right value of the existing shares + Rights shares × Issue Price) /(Existing Number of shares + Number of Right shares)
= (₹ 360 × 2 Shares + ₹ 180 × 1 Share)/(2 + 1) Shares
= ₹900/3 shares = ₹ 300 per share.
Value of right = Cum-right value of the share – Ex-right value of the share
= ₹ 360 – 300 = ₹ 60 per share.
Hence, any one desirous of having a confirmed allotment of one share from the company at ₹ 180 will have to pay ₹ 120 (2 shares × ₹ 60) to an existing shareholder holding 2 shares and willing to renounce his right of buying one
share in favour of that person.

Question 18.
Right Issue
A company offers new shares of 100 each at 25% premium to existing shareholders on one for four basis. The cum-right market price of a share is ₹ 150. Calculate the value of a right
Answer:
Ex-right value of the shares = (Cum-right value of the existing shares + Rights shares Issue Price) / (Existing Number of shares + Rights Number of shares)
= (₹ 150 × 4 Shares + ₹ 125 × 1 Share) / (4 + 1) Shares = ₹ 725 / 5 shares = ₹ 145 per share.
Value of right = Cum-right value of the share – Ex-right value of the share
= ₹ 150 – ₹ 145 = ₹ 5 per share.

Profit or Loss Pre and Post Incorporation – CA Inter Accounts Question Bank is designed strictly as per the latest syllabus and exam pattern.

Profit or Loss Pre and Post Incorporation – CA Inter Accounts Question Bank

Question 1.
Rama Udyog Limited was incorporated on August 1, 2008. It had acquired a running business of Rama & Co. with effect from April 1, 2008. During the year 2008-09, the total Sales were ₹ 36,00,000. The Sales per month in the first half year were one-half of what they were in the later half year. The net Profit of the company, ₹ 2,00,000 was worked out after charging the following expenses
(i) Depreciation ₹ 1,08,000,
(ii) Audit fees ₹ 15,000,
(iii) Directors’ fees ₹ 50,000,
(iv) Preliminary expenses ₹ 12,000,
(v) Office expenses ₹ 78,000,
(vi) Selling expenses ₹ 72,000 and
(vii) Interest to vendors upto August 31, 2008 ₹ 5,000.
Please ascertain pre-incorporation and post-incorporation profit for the year ended 31st March, 2009. (6 marks)
Answer:
Statement showing pre and post incorporation profit for the year ended 31^st March, 2009

Working Notes:
1. Sales ratio
The sales per month in the first half year were half of what they were in the later half year. If in the later half year, sales per month is ₹ 1 then it should be 50 paise per month in the first half year. So sales for the first four months (i.e. from 1^st April, 2008 to 31^st July, 2008) will be 4 × 0.50 = ₹ 2 and for the last eight months (i.e. from 1^st August, 2008 to 31^st March, 2009) will be (2 × 0.50 + 6 × 1) = ₹ 7. Thus sales ratio is 2:7.
2. Time Ratio
1^st April, 2008 to 31^st July, 2008 : 1^st August, 2008 to 31^st March, 2009 = 4 month : 8 month = 1:2
Thus, time ratio is 1:2.
3. Gross Profit
Gross profit = Net profit + All expenses
= ₹ 2,00,000 + ₹ (1,08,000 +15,000 + 50,000 +12,000 +78,000 +72,000 + 5,000)
= ₹ 2,00,000 + ₹ 3,40,000
= ₹ 5,40,000

Question 2.
The promoters of M/s. Glorious Ltd. took over on behalf of the company a running business with effect from 1^st April, 2012. The company got incorporated on 1^st August, 2012. The annual accounts were made upto 31^st March, 2013 which revealed that the sales for the whole year totaled
₹ 1,600 lakh out of which sales till 31^st July, 2012 were for ₹ 400 lakhs.
Gross profit ratio was 25%.
The expenses from 1^st April 2012, till 31^st March, 2013 were as follows:
: (₹ in lakhs)
Salaries : 69
Rent, Rates and Insurance : 24
Sundry Office Expenses : 66
Travellers’ Commission : 16
Discounts Allowed : 12
Bad Debts : 4
Directors’ Fee : 25
Audit Fee : 9
Depreciation on Tangible Assets : 12
Debenture Interest : 11
Prepare a statement showing the calculation of Profits for the pre-incorporation and post-incorporation periods. (May 2013, 8 marks)
Answer:
Statement showing the calculation of Profits for the pre-incorporation and post- incorporation periods

Working Notes:

1. Sales Ratio

2. Time Ratio
1^st April, 2012 to 31 st July, 2012: 1 st August, 2012 to 31^st March, 2013 = 4 months: 8 months = 1:2 Thus, time ratio is 1:2

Audit fee has been assumed to be related with tax audit and therefore apportioned into pre and post-incorporation periods on the basis of Sales.

Question 3.
Sneha Ltd. was incorporated on 1^st July, 2013 to acquire a running business of Atul Sons with effect from 1^st April, 2013. During the year 2013-14, the total sales were ₹ 24,00,000 of which ₹ 4,80,000 were for the first six months. The Gross profit of the company ₹ 3,90,800. The expenses debited to the Profit & Loss Account included:
(i) Director’s fees ₹ 30,000
(ii) Bad debts ₹ 7,200
(iii) Advertising ₹ 24,000 (under a contract amounting to ₹ 2,000 per month)
(iv) Salaries and General Expenses ₹ 1,28,000
(v) Preliminary Expenses written off ₹ 10,000
(vi) Donation to a political party given by the company ₹ 10,000.
Prepare a statement showing pre-incorporation and post-incorporation profit for the year ended 31^st March, 2014. (May 2014, 8 marks)
Answer:
Note : Sale of 1^st 6 months = 4,80,000
It seems that it should be sale of 1^st 3 months. Anyways we are solving, assuming that question is correct and sale of 4,80,000 is evenly spread even the 6 months.

P/L A/c for the year(2013-2014)

Working Notes:
1.

Sales Ratio = 24:216 = i.e. 1:9
2. Paid by Co. hence full amount is post incorporation period.
3. In sales Ratio (24:216) Pre = 7,200 × \(\frac{24}{240}\) = 720
Post = 7,200 × \(\frac{216}{240}\) = 6,480
4. Since it is monthly basis hence distributed on time basis
Pre = 3 × 2,000 = 6,000
Post = 9 × 2,000 = 18,000
5. On time Basis : Pre = 1,28,000 × 3/12 = 32,000
Post = 1,28,000 × 9/12 = 96,000
6. Full Preliminary Expense should be in the post incorporation period.
7. Donation is given by the Company, Hence full amount is changed to post incorporation period.

Question 4.
The partners Kamal and Vimal decided to convert their existing partnership business into a Private Limited Company called M/s. KV Trading Private Ltd. with effect from 1-7-2014.
The same books of accounts were continued by the company which closed its account for first term on 31-3-2015.
The summarized Profit and Loss Account for the year ended 31-3-2015 is below:

The following additional information was provided
(i) The average monthly sales doubled from 1 -7-2014. GP ratio was constant.
(ii) All investments were sold on 31-5-2014.
(iii) Average monthly salary doubled from 1 -10-2014.
(iv) The company occupied additional space from 1-7-2014 for which rent of ₹ 20,000 per month was incurred.
(v) Bad debts recovered amounting to ₹ 50,000 for a sale made in 2012, has been deducted from bad debts mentioned above.
(vi) Audit fees pertains to the company.
Prepare a statement apportioning the expenses between pre and post incorporation periods and calculate the Profit/Loss for such periods.
Also suggest how the pre-incorporation profits are to be dealt with. (May 2015, 10 marks)
Answer:
K V Trading Private Limited
Statement showing calculations of profit/loss for pre and post incorporation periods

*Note: ₹ 18.79 lakhs, pre-incorporation profit is a capital profit and will be transferred to Capital Reserve.
Working Notes:
1. Calculation of Sales Ratio
Let the average sales per month be x
Total sales from 01.04.2014 to 30.06.2014 will be 3x
Average sales per month from 01.07.2014 to 31.03.2015 will be 2x
Total sales from 01.07.2014 to 31.03.2015 will be 2x × 9 = 18x
Ratio for division 3x: 18x or 1 : 6

2. Apportionment of Salary
Let the salary per month from 01.04.2014 to 30.09.2014 is x
Salary per month from 01.10.2014 to 31.03.2015 will be 2x
Hence, pre incorporation salary (01.04.2014 to 30.06.2014) = 3x
Post incorporation salary from 01.07.2014 to 31.03.2015 = (3x + 12x) i.e.15x
Ratio for division 3x: 15x or 1 : 5

3. Apportionment of Rent

4. Calculation of time Ratio
3 Months : 9 Months i.e. 1 : 3

Question 5.
SALE Limited was incorporated on 01.08.2014 to take-over the business of a partnership firm w.e.f.01.04.2014. The following is the extract of Profit and Loss Account for the year ended 31.03.2015:

(i) SALE Limited initiated an advertising campaign which resulted increase in monthly average sales by 25% post incorporation.
(ii) The Gross profit ratio post incorporation increased to 30% from 25%.
You are required to apportion the profit for the year between pre-incorporation and post-incorporation, also explain how pre-incorporation profit is treated in the accounts. (Nov 2015, 8 marks)
Answer:
In the books of Sale Ltd. Profit & Loss A/c

Working Notes:

1. Gross profit ratio
From 1.4.2014 to 31.7.2014 gross profit is 25% of sales
Then, 25% of 4x = 1x
Gross profit for next 8 months (i.e. from 1.8.2014 to 31.3.2015) is 30%
Then, 30% of 10x = 3x
Therefore gross profit ratio will be 1: 3

2. Time ratio
1^st April, 2014 to 31^st July, 2014 : 1^st August, 2014 to 31^st March, 2015 = 4 months : 8 months = 1:2
Thus, time ratio is 1: 2.

3. Sales ratio
Let the monthly sales for first 4 months (i.e. from 1.4.2014 to 31.7.2014) be = x
Then, sales for 4 months = 4x
Monthly sales for next 8 months (i.e. from 1.8.2014 to 31.3.2015)
= x + 25% of x = 1.25x
Then, sales for next 8 months = 1.25x x 8 = 10x
Total sales for the year = 4x + 10x = 14x
Sales Ratio = 4x : 10x i.e. 2:5.

Question 6.
Roshani & Reshma working in partnership, registered a joint stock company under the name of Happy Ltd. on May 31^st 2016 to take over their existing business. The summarized Profit & Loss A/c as given by Happy Ltd. for the year ending 31^st March, 2017 is as under:

Happy Ltd.
Profit & Loss A/c for the year ending March 31, 2017

Prepare a Statement showing allocation of expenses & calculation of pre-incorporation & post-incorporation profits after considering the following information:
(i) GP ratio was constant throughout the year.
(ii) Depreciation includes ₹ 1,250 for assets acquired in post incorporation period.
(iii) Bad debts recovered amounting to ₹ 14,000 for a sale made in 2013-14 has been deducted from bad debts mentioned above.
(iv) Total sales were ₹ 18,00,000 of which ₹ 6,00,000 were for April to September.
(v) Happy Ltd. had to occupy additional space from 1st Oct. 2016 for which rent was ₹ 2,400 per month. (May 2017, 8 marks)
Answer:
A statement showing calculation of pre & post incorporation profit

Working Notes:

Question 7.
The promotors of Shiva Ltd. took over on behalf of the company a running business with effect from 1^st April 2017. The company got incorporated on 1^st August 2017. The annual accounts were made up to 31^st March, 2018 which revealed that the sales for the whole year totalled ₹ 2400 lakhs out of which sales till 31^st July, 2017 were for ₹ 600 lakhs. Gross profit ratio was 20%.
The expenses from 1^st April 2017, till 31^st March, 2018 were as follows:

Particulars : ₹ in Lakhs
Salaries : 75
Rent, Rates and Insurance : 30
Sundry Office Expenses : 72
Traveller’s Commission : 20
Discount allowed : 16
Bad Debts : 8
Directors Fee : 30
Tax Audit Fee : 16
Depreciation on Tangible Assets : 15
Debenture Interest : 14
Prepare a statement showing the calculation of profits for the pre-incorporation and Post incorporation periods. (May 2018, 10 marks)
Answer:
Statement showing the calculation of Profits for the Pre-incorporation and Post-incorporation periods:

Working Notes :

1. Sales Ratio:

	(₹ in lakh)
Sales for the whole year Sales up to 31st July, 2017	2,400 600
Therefore, sales for the period from 1st August, 2017 to 31st March,’ 2018	1,800

Thus, Sales Ratio = 600 : 1800 = 1 : 3

2. Time Ratio:
1^st April, 2017 to 31^st July, 2017 : 1^st August, 2017 to 31^st March, 2018 = 4 months : 8 months = 1 : 2
Thus, time ratio is 1 : 2

Question 8.
Tarun Ltd. was incorporated on 1^st July, 2018 to acquire a running business of Vinay Sons with effect from 1^st April, 2018. During the year 2018-19, the total sales were ₹ 12,00,000 of which ₹ 2,40,000 were for the first six months. The Gross Profit for the year is ₹ 4,15,000. The expenses debited to the Profit and Loss account included:
(i) Directors fees ₹ 25,000
(ii) Bad Debts ₹ 6,500
(iii) Advertising ₹ 18,000
(under a contract amounting to ₹ 1,500 per month)
(iv) Company Audit Fees ₹ 15,000
(v) Tax Audit Fees ₹ 10,000
1. Prepare a statement showing pre-incorporation and post-incorporation profit for the year ended 31^st March, 2019.
2. Explain how profits are to be treated. (May 2019, 5 marks)
Answer:
Statement showing the calculation of Profits for the pre-incorporation and post-incorporation periods for the year ended 31^st March 2019:

Working Notes:

1. Sales Ratio

Particulars	₹
Sales for period upto 30/06/18 (₹ 2,40,000 × 3/6) Sales from 1/7/18 to 31/3/19 (₹ 12,00,000 – ₹ 1,20,000)	1,20,000 10,80,000

Thus sales Ratio = 1 : 9

2. Time Ratio:
1^st April, 2018 to 30^th June 2016: 1^st July 2018 to 31^st March 2019
= 3 months = 9 months = 1: 3
Thus, Time Ratio = 1 : 3

Question 9.
The partners of C&G decided to convert their existing partnership business into a private limited called CG trading Pvt. Ltd. with effect from 1.7.2018. The same books of accounts were continued by the company which closed its accounts for the first term on 31.3.2019.
The summarized profit & loss account for the year ended 31.3.2019 is below:

The following additional information was provided:
(i) The average monthly sales doubled from 1.7.2018, GP ratio was constant.
(ii) All investments were sold on 31.5.2018.
(iii) Average monthly salaries doubled from 1.10.2018.
(iv) The company occupied additional space from 1.7.2018 for which rent of ₹ 20,000 per month was incurred.
(v) Bad debts recovered amounting to ₹ 60,000 for a sale made in 2016-17 has been deducted from bad debts mentioned above.
(vi) Audit fees pertains to the company.
Prepare a statement apportioning the expenses between pre and post incorporation periods and calculate the profit/ loss for such periods. (Nov 2019, 10 marks)
Answer:
CG Trading Pvt. Ltd.
Statement showing calculation of Profit / Loss for Pre and Post Incorporation Period.

Working Notes :
1. Calculation of Sales Ratio :
Let the average sales per month be x
Total sales from 01/04/2018 to 30/06/2018 will be 3x
Average sales per month from 01/07/2018 to 31/03/2019 will be 2x
Total sales from 01 /07/2018 to 31 /03/2019 will be 2x × 9 = 18x
Ratio of sales will be 3x:18x i.e., 3:18 or 1:6

2. Calculation of Time Ratio:
3 Months : 9 Months i.e., 1:3

3. Apportionment of Salaries :
Let the Salary per month from 01/04/2018 to 30/09/2019 is x salary per month from 01/10/2018* to 31/03/2019 will be 2x. Hence, pre incorporation salary (1/4/2018 to 30/06/2018) = 3x Post incorporation salary from 01 /07/2018 to 31 /03/2019 = (3x + 12x) i.e. 15x Ratio for division 3x : 15x or 1:5

4. Apportionment of Rent:

Question 10.
Moon Ltd. was incorporated on 1^st August, 2019 to take over the running business of a partnership firm w.e.f 1^st April, 2019. The summarized Profit & Loss Account for the year ended 31^st March, 2020 is as under:

Net profit for the year
Moon Ltd. initiated an advertising campaign which resulted in increase of monthly sales by 25% post incorporation.
You are required to prepare a statement showing the profit for the year between pre-incorporation and post-incorporation. Also, explain how profits are to be treated in the accounts? (Nov 2020, 5 marks)

Question 11.
ABC Ltd. was incorporated on 01.08.2017 to take over the running business of XYZ Bros. with assets from 01.04.2017. The accounts of the company were closed on 31.03.2018. The average monthly Sales during the first four months of the year (2017 — 2018) were twice the Average Monthly Sales during each of the remaining 8 months. Calculate Time Ratio and Sales Ratio.
Answer:
Computation of Time Ratio and Sales Ratio

Particulars	Per-Incorporation Period	Post- Incorporation Period	Total
(a) No. of Months = Time Ratio	01.04.2017 to 31.07.2017 = 4 months	01.08.2017 to 31.03.2018 = 8 months	4:8 = 1:2
(b) Sales per Month Ratio (given) Overall Sales Ratio	₹ 2 (twice that of later period) 4 month × ₹ 2	Base = Say, ₹ 1 per month 8 months × ₹ 1	8:8 = 1:1

Question 12.
Lotus Ltd. was incorporated on 1^st July, 2017 to acquire a running business of Feel goods with effect from 1^st April, 2017. During the year 2017-18, the total sales were ₹ 48,00000 of which ₹ 9,60,000 were for the first six months. The Gross profit of the company ₹ 7,81,600. The expenses debited to the Profit and Loss Account included:
(i) Director’s fees ₹ 60,000
(ii) Bad debts ₹ 14,400
(iii) Advertising ₹ 48,000 (under a contract amounting to ₹ 4,000 per month)
(iv) Salaries and General Expenses ₹ 2,56,000
(v) Preliminary Expenses written off ₹ 20,000
(vi) Donation to a political party given by the company ₹ 20,000.
Prepare a statement showing pre-incorporahon and post-incorporation profit for the year ended 31^st March, 2018.
Answer:
Statement showing the calculation of Profits for the pre-incorporation and post- Incorporation periods
For the year ended 31^st March, 2018

Working Notes:

1. Sales Ratio

Thus, Sales Ratio = 1 : 9

2. Time Ratio
1^st April, 2017 to 30 June, 2017: 1^st July, 2017 to 31^st March, 2018
= 3 months: 9 months = 1: 3
Thus, Time Ratio is 1: 3

Question 13.
The Partners of ABC & Co. decided to convert the partnership into a Private Limited Company called ABCD (P) Ltd. with effect from 1^st January. The consideration was agreed at ₹ 11,70,000 based on the Firm’s Balance Sheet as on that date.
However, due to some procedural difficulties, the Company could be incorporated only on 1^st April. Meanwhile, the business was continued on behalf of the Company, and the consideration was settled on that day with interest at 12% p.a.
The same books of account were continued by the company, which closed its account for the first time on 31^st March of the next year and prepared the following summarized Profit and Loss Account.

The Company’s only borrowal was a Loan ₹ 50,00,000 at 12% p.a. to pay the Purchase Consideration due to the Firm and for Working Capital requirements.
The Company was able to double the average monthly Sales of the Firm from 1^st April, but the Salaries trebled from that date. It had to obtain additional space from 1^st July, for which rent was ₹ 30,000 per month.
Prepare a Profit and Loss Account in columnar form apportioning costs and revenue between pre – incorporation and post-incorporation periods. Also, suggest how the pre-incorporation profits are to be dealt with.
Answer:
1. Computation of Ratios for apportionment purposes

Note:
1. Expenses apportioned on Sales Ratio Basis:
(a) Cost of Goods Sold,
(b) Advertisement, and
(c) Discounts.
2. Expenses apportioned on Time Ratio Basis :
(a) Depreciation,
(b) Miscellaneous Office Expenses.

2. Statement showing calculation of Profit/Losses for Pre and Post incorporation Periods

Note: Treatment of Negative Profit Prior to Incorporation:

1. The Loss may be considered as a reduction from any Capital Reserve arising on acquisition.
2. Alternatively, such loss may be treated as Goodwill and shown under Non-Current Assets.

Question 14.
The partners of Shri Enterprises decided to convert the partnership firm into a Private Limited Company Shreya (P) Ltd. with effect from 1^st January, 2008. However, company could be incorporated only on 1^st June, 2008. The business was continued on behalf of the company and the consideration of ₹ 6,00,000 was settled on that day along with interest @ 12% per annum. The company availed loan of ₹ 9,00,000 @ 10% per annum on 1st June, 2008 to pay purchase consideration and for working capital. The company closed its accounts for the first time on 31^st March, 2009 and presents you the following summarized profit and loss account:

Sales from June, 2008 to December, 2008 were 2 1/2 times of the average sales, which further increased to 3 1/2 times in January to March quarter, 2009. The company recruited additional work force to expand the business. The salaries from July, 2008 doubled. The company also acquired additional showroom at monthly rent of ₹ 10,000 from July, 2008.
You are required to prepare a Profit and Loss Account showing apportionment of cost and revenue between pre-incorporation and post- incorporation periods. Also suggest how the pre-incorporation profits/losses are to be dealt with. (Nov 2010, 10 marks)
Answer:
Shreya (P) Limited
Profit and Loss Account
(for 15 months ended 31^st March, 2009)

Treatment of pre-incorporation loss : Pre-incorporation loss may, either be considered as a reduction from any capital reserve accruing in relation to the transaction or be treated as goodwill.

Working Notes :

1. Computation of sales ratio :
Let the average sales per month in pre-incorporation period be a Average Sales (Pre-incorporation) = a × 5 = 5a
Sales (Post incorporation) from June to December,

Sales ratio of pre-incorporation & post incorporation is 5a : 28a

2. Computation of ratio for salaries:
Let the average salary be a Pre-
incorporation salary = a × 5 = 5a
Post incorporation salary

Ratio is 5 : 19

3. Computation of Rent:

4. Computation of interest:

Question 15.
A firm M/s. Alag, which was carrying on business from 1^st July, 2010 gets itself incorporated as a company on 1^st November, 2010. The first accounts are drawn upto March 31, 2011. The gross profit for the period is ₹ 56,000. The general expenses are ₹ 14,220; Director’s fees ₹ 12,000 p.a.; incorporation expenses ₹ 1,500. Rent upto 31^st December was ₹ 1,200 p.a., after which it is increased to ₹ 3,000 p.a. Salary of the manager, who upon incorporation of the company was made a director, is ₹ 6,000 p.a. His remuneration thereafter is included in the above figure of fees to the directors.
Give Profit and Loss Account showing pre and post incorporation profit. The net sales are ₹ 8,20,000, the monthly average of which for the first four months is one-half of that of the remaining period. The company earned a uniform profit. Interest and tax may be ignored. (Nov 2011, 6 marks)
Answer:
Profit & Loss Account
(For 9 months ended on 31^st March, 2011)

Working Notes :
1. Calculation of sales ratio
Let the average monthly sales of first four months.= 100 and next five months = 200
Total sales of first four months = 100 × 4 = 400 and total sales of next
five months = 200 × 5 = 1,000
The ratio of sales = 400 : 1,000 = 2:5

2. Time Ratio Pre: Post
= 1^st July to 31^st Oct: 1^st Nov to 31^st March
= 4 months : 5 months
Thus, Time ratio = 4:5

3. Rent
Till 31^st December, 2010, rent was ₹ 1,200 p.a. i.e. ₹ 100 p.m.
So, Pre-incorporation rent = ₹ 100 × 4 months = ₹ 400 Post-incorporation rent = (₹ 100 × 2 months) + (₹ 250 × 3 months) = ₹ 950

Question 16.
ABC Company limited was incorporated on 1^st July to take over as from 1^st April in the same year the existing business of XYZ Brothers. Under the takeover agreement, all profits made from 1st April belong to the company. The Purchase Consideration was ₹ 7,00,000. The Vendors received half of it in cash on 1^st Oct, in the same year together with interest at 10% per annum. For other half of the Purchase Consideration, they were allotted 3,500 fully paid up Shares of ₹ 100 each in the Company. The following balances appeared in the Company’s Ledger as at 31^st March (year-end):


1. Stock -in-Trade as at 31^st March amounted to ₹ 4,80,000.
2. Depreciation has to be written off on Building at 5%, Furniture and Fixtures at 10% and Transport Vehicles at 20%.
3. Bad Debts amounting to ₹ 1,000 out of which ₹ 500 related to Book Debts taken over by the Company, have to be written off and a provision of ₹ 5,000 to be made for Doubtful Debtors as at 31^st March.
Prepare:
1. Profit and Loss Account for the period from 1st April to 31^st March, and compute the Profit Prior to Incorporation,
2. Balance Sheet as on 31^st March.
Answer:
1. Computat on of Time Ratio and Sales Ratio

2. Trading Account for the year ending 31^st March

3. Statement showing appropriation of Profit/Losses for Pre and Post Incorporation Periods

Notes:

1. Preliminary Expenses can also be written off against Capital Reserve arising out of Pre-Incorporatlon Profit.
2. Interest to Vendors = ₹ 7,00,000 × 10% × 3/12, for each of Pro and Post Incorporation Periods.

4. Balance Sheet of as on 31^st March…..

Note 1: Share Capital

Note 2 : Reserves and Surplus

Note 3 : Short Term Borrowings

Note 4 : Tangible Assets

Note 5 : Trade Receivables

Question 17.
On 1^st June, AB and Co. sold their business to ABC Private Ltd. as of 1^st April for a total consideration of ₹ 1,00,000 – for Goodwill – ₹ 30,000, Building – ₹ 30,000, Machinery – ₹ 15,000 and Stock – ₹ 25,000.
ABC Private Ltd. was incorporated on 1^st June, and the Purchase Consideration was met by issue of Shares. The business was carried on by the Vendors on behalf of the Company from 1^st April, and the same set of account books was maintained till 30^th June, when the following Trial Balance was prepared –


Stocks on Hand on 30th June were ₹ 18,000.
On 30th June, ABC & Co. paid ₹ 10,000 for additional Shares and out of this amount, the Company incurred Preliminary Expenses of ₹ 6,000 and purchased a Typewriter for ₹ 3,000. Debtors and Creditors prior to 1st June were to be taken over by ABC & Co.
Prepare the Profit and Loss A/c of ABC Private Ltd. for the 3 months ended 30^th June, and a Balance Sheet (Extract) as at that date.
Answer:
1. Profit & Loss Account (Extract) of ABC Pvt. Ltd. for the period from 1^st April to 30^th June

2. Statement showing Apportionment of Net Profit

3. Journal Entries in the books of AB pvt. Ltd.

4. ABC Pvt. Ltd. Bank Account

Note: ABC & Co. Firm’s Bank A/c is retained by the Firm only, not taken over by the Company. Refer Journal Entry 3.

5. AB & Co. (Vendors) A/c

6. Capital Reserve

7. Balance Sheet of ABC Private Ltd. (Extract) as at 30^th June

Note 1: Share Capital

Note 2 : Tangible Assets

Note 3 : Trade Receivables

Question 18.
ABC Ltd. was incorporated on 1^st July, to take over the business of XYZ as and from 1^st April XYZ’s Balance Sheet as at that date was as under:

Debtors and Bank Balances are to be retained by the Vendor, and Creditors are to be paid off by him. Realisation of Debtors will be made by the Company on a commission of 5% on cash collected. ABC Ltd. is to issue XYZ with 10,000 Equity Shares of ₹ 10 each, ₹ 8 per Share paid up, and cash of ₹ 56,000.
ABC Ltd. issued to the public for Cash, 20,000 Equity Shares of ₹ 10 each, on which ₹ 8 per Share was called and paid up, except in the case of 1,000 Shares on which the third call of ₹ 2 per Share had not been realized as at the end of the financial year. Also, on 2,000 Shares, the Company had received the full amount of ₹ 10 each. The Shares issued was underwritten for 2% Commission, payable in Shares fully paid up.
In addition to the balances arising out of the above, the following were shown by the books of accounts.of ABC Ltd. as at the end of the relevant financial year:
Particulars : ₹
Discount (including ₹ 1,000 allowed on Vendor’s Debtors) : 6,000
Preliminary Expenses : ₹ 10,000
Directors Fees : ₹ 12,000
Salaries : ₹ 48,000
Debtors (including Vendor’s Debtors) : ₹ 1,60,000
Creditors : ₹ 48,000
Purchases : ₹ 3,20,000
Sales : ₹ 4,60,000

Stock at year end (31^st March) was ₹ 52,000. Depreciation at 10% on Furniture and Fittings and at 5% on Building is to be provided. Collections from Debtors belonging to the Vendor were ₹ 60,000 in the period.
Prepare the Trading and Profit and Loss Account for the period ended 31^st March of ABC Limited, and its Balance Sheet as at that date. Make suitable assumptions wherever necessary.
Answer:
1. Computation of Time Ratio

2. Computation of Goodwill on Acquisition

3. Underwriters Commission:
Commission payable to Underwriters is 2% on Face Value of ₹ 2,00,000 i.e. ₹ 4,000. Such Commission becomes due on completion of the job relating to Shares underwritten. It is assumed that the job relating to Public Issue was finished at the end of the year (31st March), and Shares were allotted to the Underwriter in discharge of his claim for Commission.

4. Cash Inflows from Public Issue of Equity Shares

5. Total Debtors Account

Note: Closing Balance of Company’s Debtors = Total Murali’s Debtors 29,000 = ₹ 1,31,000.

6. Total Creditors Account

7. XYZ’s (Vendor) Account

Note: The balance in Vendor’s A/c and Vendors’ Debtors A/c will be set off while preparing the Co.’s Balance Sheet.

8. Trading Account for the year ended 31^st March

9. Statement showing appropriation of Profit/Losses for Pre and Post incorporation periods

10. Cash/Bank Account

11. Capital Reserve Account

12. Balance Sheet of ABC Ltd. as on 31^st March

Note 1 : Share Capital

Note 2 : Tangible Assets

Note: In the absence of information, the other columns are not filled up in the above table.

Question 19.
V.I.P. Industries (P) Ltd. was incorporated on 1^st May. It took over the proprietary business of ABC with effect from 1^st April. The Balance Sheet of ABC as on that date is as follows:

It was agreed to pay ₹ 4,50,000 in Equity Shares to ABC. The Company decided to close its first year’s accounts as at 31^st March of the next year. The following are the further details furnished to you:
Depreciation may be provided at 10% on assets including additions. The Company requests you to prepare:
1. Journal Entries for the takeover.
2. ABC Account.
3. P and L A/c, showing separately Pre-Incorporation and Post- Incorporation Profits for the year ending 31st March.
Answer:
1. Journal Entries for the takeover in the books of VIP Industries (P) Ltd.

2. ABC (Vendor) Account

3. Trading Account for the year ending 31^st March

4. Statement showing computation of Profit/Loss for Pre and post Incorporation periods

Note:

1. In the absence of information, Gross Profit and Expenses have been apportioned in the Time Ratio i.e. 1:11. Otherwise, the Net Profit for the entire period can be calculated and then apportioned in Time Ratio, i.e. 1:11 since the ratio of apportionment of Gross Profit and each expense item, is the same.

2. Pre-Incorporation Profit of ₹ 4,375 is transferred to Capital Reserve A/c. Alternatively, this amount may be set off against the Goodwill of ₹ 42,300 arising on acquisition of business. (Refer Journal Entry 1).

Question 20.
Roshani & Reshma working in partnership, registered a joint stock company under the name of Happy Ltd. on May 31^st 2017 to take over their existing business. The summarized Profit & Loss A/c as given by Happy Ltd. for the year ending 31st March, 2018 is as under:
Happy Ltd.
Profit & Loss Account for the year ending March 31, 2018


You are required to prepare a Statement showing allocation of expenses and calculation of pre-incorporation and post- incorporation profits after considering the following information:
(i) GP ratio was constant throughout the year.
(ii) Depreciation includes ₹ 1,250 for assets acquired in post incorporation period.
(iii) Bad debts recovered amounting to ₹ 14,000 for a sale made in 2014-15 has been deducted from bad debts mentioned above.
(iv) Total sales were ₹ 18,00,000 of which ₹ 6,00,000 were for April to September.
(v) Happy Ltd. had to occupy additional space from 1^st Oct. 2017 for which rent was ₹ 2,400 per month.
Answer:
Pre-incorporation period is for two months, from 1^st April, 2017 to 31^st May, 2017. 10 months’ period (from 1^st June, 2017 to 31^st March, 2018) is post-incorporation period.
Statement showing calculation of profit/losses for pre and post Incorporation periods

Working Notes:
(i) Calculation of ratio of Sales
Sales from April to September = 6,00,000 (1,00,000 p.m. on average basis)
Oct. to March = ₹ 12,00,000 (2,00,000 p.m. on average basis) Thus, sales for pre-incorporation period = ₹ 2,00,000 post-incorporation period = ₹ 16,00,000
Sales are in the ratio of 1:8

(ii) Gross profit, sales commission and bad debts written off have been allocated in pre and post incorporation periods in the ratio of Sales.

(iii) Rent, salary are allocated on time basis.

(iv) Interest on debentures is allocated in post incorporation period.

(v) Audit fees charged to post incorporation period as relating to company audit.

(vi) Depreciation of ₹ 18,000 divided in the ratio of 1:5 (time basis) and ₹ 1,250 charged to post incorporation period.

(vii) Bad debt recovery of ₹ 14,000/- is allocated jn pre-incorporation

(viii) Rent

Financial Statements of Companies – CA Inter Accounts Question Bank is designed strictly as per the latest syllabus and exam pattern.

Financial Statements of Companies – CA Inter Accounts Question Bank

Question 1.
What are the basic characteristics of a Private Ltd. Company? (Nov 2009, 2 marks)
Answer:
Characteristics of a Private Company (As per Companies Act, 2013)

1. Restricts the rights of members to transfer its shares.
2. Limits the number of its member to 200 excluding:
(i) persons who are in employment of the company; and
(ii) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased. For this purpose joint holders of shares will be counted as a single member.
3. Prohibits any invitation to the public to subscribe to any shares in or debentures of the company.
4. Prohibits any invitation or acceptance of deposits from any person other than its members, directors and relatives.

Question 2.
In a concern, the opening provision for doubtful debts is ₹ 51,000. During the year a sum of ₹ 10,000 was written off as bad debt. The closing balance of sundry debtors amounts to ₹ 6,30,000. It was decided that 10% of the debtor is to be maintained as provision. Calculate the closing balance toward provision for doubtful debts and pass journal entry for giving effect to the provision maintained. (May 2008, 2 marks)
Answer:
For calculating balance towards provision for doubtful debts we should prepare an account for provision for doubtful debts:-

Journal Entries

Note:-
In this question closing debtor is given. It means that amount of Bad Debts (₹ 10,000) arises during the year is already adjusted during the year, no further adjustment is therefore required.

Question 3.
The Articles of Association of S Ltd. provide the following:
(i) That 20% of the Profits of each year shall be transferred to Reserve fund.
(ii) That an amount equal to 10% of equity dividend shall be set aside for Staff bonus.
(iii) That the balance available for distribution shall be applied :
(a) in paying 14% on cumulative Preference shares.
(b) in paying 20% dividend on Equity shares.
(c) one-third of the balance available as additional dividend on Preference shares and 2/3 as additional equity dividend.
A further condition was imposed by the articles viz. that the balance carried forward shall be equal to 12% on Preference shares after making provisions (i), (ii) and (iii) mentioned above. The company has issued 13,000, 14% Cumulative participating preference shares of ₹ 100 each fully paid and 70,000 Equity shares of ₹ 10 each fully paid up.
The profit for the year 2008 was ₹ 10,00,000 and balance brought from previous year ₹ 80,000. Provide ₹ 31,200 for depreciation and ₹ 80,000 for taxation before making other appropriations. Prepare Profit and Loss Appropriations A/c. (Nov 2008, 8 marks)
Answer:
Profit and Loss Appropriation A/c
(For the year ended 31^st March 2008)

Working Note:
Let remaining balance after staff bonus is x
Preference shareholders will get share from remaining balance x × \(\frac{1}{3}\) = \(\frac{1}{3}\) x
Equity shareholders will get share from remaining balance = x × \(\frac{2}{3}\) = \(\frac{2}{3}\) x
Bonus to Employees = \(\frac{2}{3}\)x × \(\frac{10}{100}\) = \(\frac{2}{30}\)x
\(\frac{2}{3}\)x × \(\frac{1}{3}\)x × \(\frac{2}{30}\)x = 2,99,040
32 x = 89,71,200
x = 89,71,200/32 = ₹ 2,80,350
Share of preference shareholders = ₹ 2,80,350 × \(\frac{1}{3}\) = ₹ 93,450
Share of equity shareholders = ₹ 2,80,350 × \(\frac{2}{3}\) = ₹ 1,86,900
Bonus to employees = ₹ 2,80,350 × \(\frac{2}{30}\) = ₹ 18,690

Question 4.
From the following information, calculate the amount of Sundry Debtors as on 31.3.2010:
Balance as on 1.4.2009 is ₹ 50,000.
Bad debts are 2% and discount to the customers is given @ 1% of the opening balance of Sundry Debtors.
Returns from the customers are ₹ 3,000.
Cash received from Debtors is ₹ 2,30,000.
Gash received from Debtors in transit is ₹ 14,000.
Cash Sales are ₹ 5,00,000.
Credit Sales are ₹ 2,50,000. (May 2010, 2 marks) [IPCC Gr. II]
Answer:
Computation of Sundry Debtors as on 31.03.2010

* It is assumed that information for cash in transit has already been received.

Question 5.
Following information of the Final Accounts of Kumaran Ltd. are missing as shown below :
Trading and Profit & Loss A/c for the year ended 31.03.2012

Balance Sheet as on 31.03.2012

You are required to provide the missing figures with the help of following information:
(i) Current Ratio 2:1.
(ii) Closing stock is 25% of sales.
(iii) Proposed dividends are 40% of the paid up capital.
(iv) Gross profit ratio is 60%.
(v) Ratio of Current Liabilities to Debentures is 2:1.
(vi) Transfer to General Reserves is equal to proposed dividends.
(vii) Profit carried forward are 10% of the proposed dividends.
(viii) Provision for taxation is 50% of profits.
(ix) Balance to the credit of General Reserves at the beginning of the year is twice the amount transferred to that account from the current profits. (Nov 2012, 16 marks)
Answer:
1. Amount of proposed dividend
= Paid up share capital × 40% = 10,000 × 40% = 4,000

2. Transfer to general reserves
= Amount of proposed dividend i.e. 4,000

3. Profit carried forward
= 10% of proposed dividend = 10% of 4,000 = 400

4. Net profit for the year
= Proposed dividend + Transfer to general reserve + Profit carried forward – Net profit carried forward = (4,000 + 4,000 + 400) – 1,400 = 7,000

5. Provision for taxation
Provision for taxation = 50% of profit (i.e. before net profit)
It means that net profit is 50% and provision for tax is 50%.
Therefore, if net profit is 7,000 then, Provision for taxation is also 7,000

6. Gross profit
= Net profit + All expenses – Commission received
= (7,000 + 7,000 + 600 + 7,400) – 1,000
= 21,000

7. Sales
= \(\left(\frac{\text { Gross profit }}{\text { Rate of profit }} \times 100\right)\)
= \(\left(\frac{21,000}{60} \times 100\right)\) = 35,000

8. Closing stock
= 25% of sales = 25% × 35,000 = 8,750

9. Purchases
= (Sales + Closing stock) – (Opening stock + Manufacturing expenses + Gross profit)
= (35,000 + 8,750) – (7,000 + 1,750 + 21,000)
= 43,750 – 29,750 = 14,000

10. Balance of general reserve as on 1.4.2011
= Twice the amount transferred to general reserve during the year
= 2 × 4,000 = 8,000

11. Amount of debentures
\(=\left(\frac{\text { Interest on debentures }}{\text { Rate of interest }} \times 100\right)\)
= \(\left(\frac{600}{10} \times 100\right)\) = 6,000

12. Current liabilities
= Current liabilities are twice of amount of debentures.
= 2 × 6,000 = 12,000

13. Current assets
Current Assets = Current ratio × Current liabilities
= 2 × 12,000 = 24,000

14. Sundry debtors
Sundry Debtors = Current assets – Stock in trade – Bank balance
= 24,000 – 8,750 – 1,250 = 14,000

15. Total of liabilities part of the balance sheet
= Shareholders’ capital + Non-current liabilities + Current liabilities
= (10,000+ 12,000+ 400)+ 6,000+ 12,000 = 40,400

16. Other PPE
= Total of Liabilities part of the balance sheet – (Current assets + Plant and Machinery)
= 40,400 – (24,000 + 14,000) = 2,400

Question 6.
Vasudha Ltd. provides following information:
Raw Material stock holding period : 3.5 months
Work-in progress holding period 1 month
Finished goods holding period : 4.5 months
Debtors collection period : 6 months
You are required to compute the operating cycle of Vasudha Ltd. What would happen if the trade payables of the company are paid in 14 months- whether these should be classified as current or non-current liability? (Nov 2013, 21/2 marks)[IPCCGr.II]
Answer:
As per Schedule III of the Companies Act, 2013, “An operating cycle is the time between the acquisition of assets for processing and their realization in cash or cash ‘equivalents”.

Therefore, operating cycle of Vasudha Ltd. will be computed as under:
Raw material stock holding period + WIP holding period + finished goods holding period + Debtor collection period = 3.5 + 1 + 4.5 + 6 = 15 months. A liability shall be classified as current when it is expected to be settled in the company’s normal operating cycle. Since the operating cycle of Vasudha Ltd. is 15 month.s, trade payables expected to be paid in 14 months should be treated as a current liability.

Question 7.
The management of Kshitij Ltd. contends that the work in progress is not valued since it is difficult to ascertain the same in view of the multiple processes involved. They opine that the value of opening and closing work in progress would be more or less the same. Accordingly, the management had not separately disclosed the work in progress in its financial statements. Comment in line with Schedule III. (21/2 marks) [IPCC Gr. II]
Answer:
Schedule III to the Companies Act, 2013 does not require to disclose in the statement of profit and loss, the amounts for which WIP have been completed at the beginning and at the end of the accounting period. Therefore, the non-disclosure in the financial statements by the company may not amount to violation of Schedule III if the differences between opening and closing WIP are not material.

Question 8.
On 31^st March, 2013 Bose and Sen Ltd. provides to you the following ledger balances after preparing its Profit and Loss Account for the year ended 31^st March, 2013:

The following additional information is also provided:
(i) 4,20,000 fully paid equity shares were allotted as consideration for land & buildings.
(ii) Cost of Building ₹ 28,00,000
Cost of Plant & Machinery ₹ 49,00,000
Cost of Furniture & Fixture ₹ 4,37,500
(iii) Sundry Debtors for ₹ 3,80,000 are due for more than 6 months.
(iv) The amount of Balances with Bank includes ₹ 18,000 with a bank
which is not a scheduled Bank and the deposits of ₹ 5 lakhs are for a period of 9 months.
(v) Unsecured loan includes ₹ 2,00,000 from a Bank and ₹ 1,00,000 from related parties.
You are not required to give previous year figures. You are required to prepare the Balance Sheet of the Company as on 31^st March, 2013 as required under Schedule III of the Companies Act, 2013. (Nov 2013, 16 marks)
Answer:
Balance Sheet of Bose & Sen Ltd. as on 31.3.2013

Notes:

Question 9.
The Articles of Association of Samson Ltd. provide the following :
(i) That 25%. of the net profit of each year shall be transferred to reserve fund.
(ii) That an amount equal to 10% of equity dividend shall be set aside for staff bonus.
(iii) That the balance available for distribution shall be applied :
(1) in paying 15% on cumulative preference shares.
(2) in paying 20% dividend on equity shares.
(3) one-third of the balance available as additional dividend on preference shares and two-third as additional equity dividend.

A further condition was imposed by the articles viz. that the balance carried forward shall be equal to 14% on preference shares after making provision (i), (ii) and (iii) mentioned above. The company has issued 12,000, 15% cumulative participating preference shares of ₹ 100 each fully paid and 75,000 equity shares of ₹ 100 each fully paid up.

The profit for the year 2013-14 was ₹ 10,00,000 and balance brought from previous year ₹ 1,50,000. Provide ₹ 37,500 for depreciation and ₹ 1,20,000 for taxation before making other appropriations.
Show net balance of Profit and Loss Account after making above adjustments. (May 2014, 8 marks)
Answer:

(i) 1/3 to Preference Share Holder
(ii) 2/3 to Equity Share Holder
(iii) 10% of 2/3 = \(\frac{0.2}{3}\) to Staff Bonus
∴ Total = \(\frac{1}{3}\) + \(\frac{2}{3}\) + \(\frac{0.2}{3}\) = \(\frac{3.2}{3}\)

∴ (i) Additional Dividend on Preference Share = 2,68,875 ÷ 3.2 = 84,023
(ii) Additional Dividend on Equity Share = 2,68,875 × \(\frac{2}{3.2}\) = 1,68,047
(iii) Additional Provision for staff Bonus = 2,68,875 × \(\frac{0.2}{3.2}\) = 16,805

P/L Appropriation A/c

Note: Nominal Value of Equity shares should be 75,000 Equity shares @ 10 instead of ₹ 100 in the question. It seems to be a misprint in the question.

Question 10.
From the following particulars furnished by Elegant Ltd., prepare the Balance Sheet as on 31^st March 2014 as required by Part I, Schedule III of the Companies Act.


The following additional information is also provided:
(I) Preliminary expenses Included ₹ 25,000 Audit Fees and ₹ 3,500 for out of pocket expenses paid to the Auditors.
(ii) 10000 Equity shares were Issued for consideration other than cash.
(iii) Debtors of ₹ 2,60,000 are due for more than 6 months.
(iv) The cost of the PPE were:
Building ₹ 30,00,000, Plant & Machinery ₹ 35,00,000 and Furniture ₹ 3,12,500
(v) The balance of ₹ 7,50,000 in the Loan Account with State Finance
Corporation is inclusive of ₹ 37,500 for Interest Accrued but not Due. The loan is secured by hypothecation of Plant & Machinery.
(vi) Balance at Bank includes ₹ 10,000 with Global Bank Ltd., Which is not a Scheduled Bank. (Nov 2014, 10 marks)
Answer:
Elegant Ltd.
Balance Sheet as on 31^st March, 2014

Notes to Accounts

Note : As per para 56 of AS 26, preliminary expenses are not shown in the balance sheet, thus they are written off. The amount of ₹ 25,000 as audit fee and out of pocket expenses paid to auditors amounting ₹ 3,500 have been included in the amount of ₹ 66,500. The combined figure of ₹ 66,500 has been reduced from Profit and Loss Account balance in the given solution.

Question 11.
From the following particulars furnished by the Prashant Ltd., prepare the Balance Sheet as at 31^st March, 2019 as required by Schedule III of the
Companies Act, 2013:

The following additional information is also provided:
1. 10,000 equity shares were issued for consideration other than cash.
2. Trade receivables of ₹ 55,000 are due for more than six months.
3. The cost of building and plants machinery is ₹ 5,50,000 and ₹ 6,25,000 respectively.
4. The loan from State Financial Corporation is secured by hypothecation of plant & machinery. The balance of ₹ 2,10,000 in this account is inclusive of ₹ 10,000 for interest accrued but not due.
5. Balance at Bank included ₹ 15,000 with Aakash Bank Ltd., which is not a scheduled bank. (Nov 2019, 10 marks)
Answer:
Prashant Ltd.
Balance Sheet as on 31^st March, 2019:

Notes to Accounts

Question 12.
From the following, prepare the Balance Sheet of ABC Ltd. as at 31^st March as required by Companies Act. Give Notes at the foot of the Balance Sheet as may be necessary: (amount in ₹)

The following additional information is provided-
1. 5,000 Equity Shares were issued for consideration other than cash.
2. Debtors of ₹ 1,02,000 are due for more than six months.
3. Cost of Assets are as follows:
(a) Building – ₹ 13,00,000
(b) Plant and Machinery – ₹ 20,00,000, and
(c) Furniture – ₹ 65,000.
4. The Balance of ₹ 3,00,000 in the Loan Account with State Financial Corporation is inclusive of ₹ 20,000 for interest accrued but not due. The Loan is secured by hypothecation of building.
5. The Balance of ₹ 5,00,000 in the Term Loan Account with Bank is Inclusive of ₹ 10,000 towards interest accrued and due. The Loan is secured by hypothecation of Plant and Machinery.
6. Bills receivable for ₹ 2,00,000 maturing on 15^th May, have been discounted.
7. The Company had a contract for the Erection of Machinery at ₹ 2,50,000 which is incomplete on 31^st March.
8. Proposed Dividend ₹ 2,10,000.
Answer:
Balance Sheet of ABC Ltd. as on 31st March

Note: Contingent Liabilities and Commitments, refer Note 9.

Note: Proposed Dividend = 14% of Paid Up Capital ₹ 15,00,000 = ₹ 2,10,000.
Dividend Per Share = \(\frac{2,10,000}{15,000 \text { Shares }}\) = ₹ 6.00

Note 1: Share Capital

Note 2: Reserves and Surplus (showing appropriations and transfers) all figures for this year)

Note: Preliminary Expenses is not recognised as Asset as per AS-26, arid is hence fully written off out of Surplus.

Note 3: Long Term Borrowings

Note 4: Other Current Liabilities

Note 5: Tangible Assets (Note: In the absence of data. Other Columns are not filled up in this Table).

Note 6: Inventories

Note 7: Trade Receivables (assumed as Secured and considered good)

Note 8: Cash and Cash Equivalents

Note 9: Contingent Liabilities and Commitments (to the extent not provided for):

Question 13.
You are required to prepare a Balance Sheet as at 31^st March 2018, as per Schedule III of the Companies Act, 2013, from the following information of Mehar Ltd.:

Additional Information:
1. Share Capital consist of-
(a) 1,20,000 Equity Shares of ₹ 100 each fully paid up.
(b) 40,000, 10% Redeemable Preference Shares of ₹ 100 each fully paid up.
2. The company declared dividend @ 5% of equity share capital. The dividend distribution tax rate is 17.647%.
3. Depreciate Assets by ₹ 20,00,000.
Answer:
Balance Sheet of Mehar Ltd, as at 31^st March, 2018

Notes to accounts

Working Note:
Calculation of Dividend distribution tax

(i) Grossing-up of dividend:

(ii) Dividend distribution tax @ 17.647% 2,07,612

Question 13.
Shweta Ltd. has the Authorised Capital of ₹ 15,00,000 consisting of 6,000 6% Preference shares of ₹ 100 each and 90,000 equity shares of ₹ 10 each. The following was the Trial Balance of the Company as on 31^st March, 2018:

You are required to prepare the Profit and Loss Statement for the year ended 31^st March, 2018 and the Balance Sheet as on 31^st March, 2018 as per Schedule III of the Companies Act, 2013 after taking into account the following –

1. Closing Stock was valued at ₹ 4,27,500.
2. Purchases include ₹ 15,000 worth of goods and articles distributed among valued customers.
3. Salaries and Wages include ₹ 6,000 being Wages incurred for installation of Electrical Fittings which were recorded under “Furniture”.
4. Bills Receivable include ₹ 4,500 being dishonoured bills. 50% of which had been considered irrecoverable.
5. Bills Receivable of ₹ 6,000 maturing after 31st March were discounted.
6. Depreciation on Furniture to be charged at 10% on Written Down Value.
7. Investment in shares is to be treated as non-current investments.
8. Interest on Debentures for the half year ending on 31st March was due on that date.
9. Provide Provision for taxation ₹ 12,000.
10. Technical Knowhow Fees is to be written off over a period of 10 years.
11. Salaries and Wages include ₹ 30,000 being Director’s Remuneration.
12. Trade receivables include ₹ 18,000 due for more than six months.

Answer:
Statement of Profit and Loss of Shweta Ltd. for the year ended 31^st March, 2018

Balance sheet of Shweta Ltd, as on 31^st March, 2018

Note: There is a Contingent liability for Bills receivable discounted with Bank ₹ 6,000

Notes to accounts

Working Note

Calculation of Sundry Debtors-Other Debts

Question 14.
The Companies Act, 2013 limits the payment of managerial remuneration. What is the maximum managerial remuneration, which can be paid in case of a company consistently earning profits and has more than one managerial persons. (Nov 2009, 2 marks)
Answer:
Sec. 197 of the Indian Companies Act, 2013 prescribes the overall maximum managerial remuneration payable and also managerial remuneration in case of absence or inadequacy of profits. In the given case, the company is earning profits consistently and has more than one managerial person. Hence, the maximum limit is 10% of net profit.

Question 15.
What are the maximum limits of managerial remuneration for companies having adequate profits? (May 2012, 4 marks)
Answer:
Managerial Remuneration: Maximum limits as per Sec. 197 of Companies Act, 2013.
For companies having profits:

1. Overall (excluding fee for attending meetings) : 11% of net profit
2. If there is one managerial person : 5% of net profit
3. If there are more than one managerial person : 10% of net profit
4. Remuneration of part-time directors:
   1. If there is no managing or whole-time director : 3% of net profit
   2. If there is a managing or whole-time director : 1% of net profit

Question 16.
Following particulars are available from the books of Rajat Ltd
Net profit before provision for income-tax and managerial remuneration, but after depreciation and provision tor repairs : ₹ 98,04,100
Depreciation provided in the books : ₹ 35,00,000
Provision for repairs of machinery during the year : ₹ 2,50,000
Depreciation allowable under Schedule II of the Companies Act, 2013 : ₹ 28,00,000
Actual expenditure incurred on repairs during the year : ₹ 1,50,000

You are required to calculate the managerial remuneration in the following cases:
(i) If there is one whole-time director; and
(ii) If there are two whole-time directors, a part-time director and a manager. (Dec 2007, 5 marks) [CS Exe -1]
Answer:
Section 197 of the Companies Act, 2013 prescribe the maximum percentage of profit that can be paid as managerial remuneration. For this purpose, profit is to be calculated in the manner as prescribed in Section 197 of the Companies Act, 2013.

Calculation of net profit u/s 197 of the Companies Act, 2013:

Calculation of managerial remuneration:
(i) If there is only one whole-time director:
Managerial remuneration = 5% of net profit = 5% of ₹ 1,06,04,100
= ₹ 5,30,205
(ii) If there are two whole-time directors, a part time director and a manager:
Managerial remuneration = 1 % of net prof it = 11% of ₹ 1,06,04,100
= ₹ 11,66,451

Question 17.
Answer the following :
The Managing Director of A Ltd. is entitled to 5% of the annual net profits, as his remuneration, subject to a minimum of ₹ 25,000 per month. The net profits, for this purpose, are to be taken without charging income-tax and his remuneration itself. During the year, A Ltd. made net profit of ₹ 43,00,000 before charging MD’s remuneration, but after charging provision for taxation of ₹ 17,20,000. Compute remuneration payable to the Managing Director. (May 2009, 2 marks)
Answer:
Calculation of remuneration of the Managing Director

Hence, in this case, remuneration to be paid to the Managing Director of A Ltd. = ₹ 3,01,000.

Question 18.
Following is the profit and loss account of Azad Ltd. for the year ended 31^st March, 2009 :

Additional information:

• Original cost of the machinery sold was ₹ 40,000.
• Depreciation on fixed assets as per Schedule II of the Companies Act, 2013 was ₹ 3,42,000.

You are required to calculate managerial remuneration in the following situations:
(i) when there is only whole-time director;
(ii) when there are two whole-time directors; and
(iii) when there are two whole-time directors, a managing director and a part-time director. (June 2009, 6 marks) [CS Exe -1]
Answer:

Computation of managerial remuneration:

Question 19.
Answer the following question :
Calculate the maximum remuneration payable to the Managing Director based on effective capital of a non-investment company for the year, from the information given below :
: (₹ in ‘000)
(i) Profit for the year : 3,000
(ii) Paid up Capital : 18,000
(iii) Reserves & Surplus : 7,200
(iv) Securities Premium : 1,200
(v) Long term Loans : 6,000
(vi) Investments : 3,600
(vii) Preliminary expenses not written off : ₹ 3000
(viii) Remuneration paid to the Managing Director during the year : ₹ 600 (Nov 2011, 5 marks)
Answer:
Assumption: It is assumed that the company is having inadequate net profit and is not exceeding the ceiling limit of ₹ 24,00,000 p.a.

Calculation of Effective Capital of the Company

As effective capital is less than 15 crores but more than ₹ 1 crore, therefore maximum remuneration payable to the Managing Director should be @ ₹ 1,00,000 per month.
So, maximum remuneration payable to the Managing Director for the year (₹ 1,00,000 × 12) = ₹ 12,00,000.

Question 20.
The following particulars are extracted from the statement of profit and loss of S.S. Ltd. for the year ended 31^st March, 2014:
(i) Gross profit : ₹ 40,00,000
(ii) Profit on sale of machinery (cost ₹ 8,00,000 and written down value ₹ 4,00,000) : ₹ 4,50,000
(iii) Subsidy from the Government : ₹ 1,00,000
(iv) Salaries and wages : ₹ 1,50,000
(v) Repairs to fixed assets : ₹ 50,000
(vi) General expenses : ₹ 40,000
(vii) Compensation for breach of contract : ₹ 25,000
(viii) Depreciation : ₹ 2,40,000
(ix) Loss on sale of investment : ₹ 35,000
(x) Expenditure on scientific research (cost of setting-up a new laboratory) : ₹ 2,50,000
(xi) Debenture interest : ₹ 75,000
(xii) Interest on unsecured loans : ₹ 15,000
(xiii) Provisions for income tax : ₹ 16,00,000
(xiv) Proposed dividends : ₹ 10,00,000
(xv) Net profit : ₹ 10,70,000
Calculate the overall managerial remuneration under section 197 of the Companies Act, 2013. (June 2014, 5 marks) [CS Exe -1]
Answer:
Calculation of the Managerial Remuneration under Sec. 197

Question 21.
Calculate the managerial remuneration from the following particulars of Zen Ltd. The company has only one Managing Director:
: ₹
Net profit : ₹ 20,00,000
Net profit is calculated after considering the following:
Depreciation : ₹ 4,00,000
Preliminary expenses : ₹ 1,00,000
Provision for tax : ₹ 31,00,000
Director’s fee : ₹ 80,000
Bonus : ₹ 1,50,000
Profit on sale of PPE
(original cost ₹ 2,00,000; WDV ₹ 1,10,000 : ₹ 1,55,000
Provision for doubtful debts : ₹ 90,000
Scientific research expenditure
(for setting-up new laboratory) : ₹ 2,00,000
Managing Director’s remuneration paid : ₹ 3,00,000

Other information:

• Depreciation allowable is ₹ 3,50,000.
• Bonus liability as per the Payment of Bonus Act, 1965 is ₹ 1,80,000.
• Looking at the past records of debtors, provision for doubtful debts is not required.
• Rate of managerial remuneration is 5%. (Dec 2014, 5 marks) [CS Exe – I]

Answer:
Calculation of Managerial Remuneration

Working Note; 1
Sale Price of Fixed Asset = Book Value + Profit
= ₹ 1,10,000 + 1,55,000
= ₹ 2,65,000
Original Cost = ₹ 2,00,000
Profit on sale of fixed assets (in excess of original cost)
= ₹ 2,65,000 – 2,00,000
= ₹ 65,000

Question 22.
Following is the statement of profit and loss of Target Ltd. for the year ended 31^st March, 2015:

Additional information:
Original cost of machinery sold was ₹ 55,000. The written down value as on the date of sale was ₹ 30,000.

Depreciation on PPE as per Schedule II of the Companies Act, 2013 was ₹ 4,75,340.
You are required to calculate and comment on managerial remuneration in the following cases in accordance with the provisions of the Companies Act, 2013 if:
(i) there is only one whole-time director;
(ii) there are two whole-time directors; and
(iii) there are two whole-time directors, a part-time director and a manager. (Dec 2015, 7 marks) [CS Exe – II]
Answer:
Calculation of Net Profit u/s 198 of the Companies Act, 2013:

Calculation of Managerial Remuneration

(i) When there is only one whole time director
When there is only one Whole time director, Managerial remuneration = 5% of ₹ 28,35,370 = ₹ 1,41,768.50

(ii) When there are two whole-time directors, Managerial remuneration = 10% of ₹ 28,35,370
= ₹ 2,83,537

(iii) When there are two whole time directors, a part time director and a manager. Managerial remuneration = 11 % of ₹ 28,35,370 = ₹ 311890.70 Since, the managerial remuneration as per profit and loss account is ₹ 2,85,350 which exceeds the maximum amount payable in situation (a) and (b) above, therefore the company should obtain the necessary approval.

Alternate Answer for calculation of Net Profit U/s 198 of the Companies Act, 2013

Question 23.
Answer the following:
The following extract of Balance Sheet of Prabhat Ltd. (Non-investment Company) was obtained:
Balance Sheet (Extract) as on 31^st March, 2019

Share suspense account represents application money received on shares, the allotment of which is not yet made.
You are required to compute effective capital as per the provisions of Schedule V. Would your answer differ if Prabhat Ltd. is an investment company? (Nov 2019, 5 marks)
Answer:
Computation of Effective Capital

Question 24.
Answer the following :
Following is the draft Profit & Loss Account of X Ltd. for the year ended 31^st March, 2020:

Depreciation on Fixed Assets as per Schedule II of the Companies Act, 2013 was ₹ 6,51,750. You are required to calculate the maximum limits of the managerial remuneration as per Companies Act, 2013. (Nov 2020, 5 marks)

Question 25.
The following is the Draft Profit & Loss A/c of Brown Ltd. the year ended 31^st March, 2020:

Depreciation on fixed assets as per Schedule II of the Companies Act, 2013 was ₹ 5,15,675. You are required to calculate the maximum limit of the managerial remuneration as per Companies Act, 2013. (Jan 2021, 5 marks)

Question 26.
ABC Ltd. is in the midst of finalising its accounts for the year-ended 31^st March. A Profit and Loss Account has been prepared in draft, the account balances as rounded of to the nearest thousands, are listed below:

In arriving at the Profit for the year, the following have been charged:

The Authorized Capital is 3,50,000 Equity Shares of ₹ 100 each. The Loan from the State Government is secured by a charge on the Land. Cash Credits by hypothecation of Stocks and” Book Debts and the Other Secured Loans on the Buildings and Plant and Machinery.

The following adjustments are yet to be made:

1. Investment Allowance Reserve to be created ₹ 5,400 (000’s)
2. Provision to be made for Income-Tax in ₹ 4,400 (000’s)
3. Provision to be made for Managing Director’s Commission at 1 % of the Net Profits.
4. Proposed Dividend at 10%.
   Depreciation as per Companies Act, is ₹ 10,424 (000’s)

Prepare:
(a) Show the computation of Commission Payable to the Managing Director, and
(b) Prepare the Balance sheet of the Company, based on all the above.
Answer:
Balance Sheet of ABC Ltd. as at 31^st March (in ₹ 000’s)


Note: Proposed Dividend = 10% of paid up Capital ₹ 25,000 (000s)
= ₹ 2,500 (000s)
Dividend per share = \(\frac{2,500(000 \mathrm{~s})}{250(000 \mathrm{~s}) \text { Shares }}\) = ₹ 10.00
Note 1: Share Capital

Note 2: Reserves and Surplus (showing appropriations and transfers) (all figures for this year)

Note: Preliminary Expenses is not recognised as Asset as per AS-26, and is hence fully written off out of Surplus.

Note 3: Long Term Borrowings

Note 4: Short Term Borrowings

Note 5: Trade Payables

Note 6: Other Current Liabilities

Note 7: Short Term Provisions

Note 8: Tangible Assets

Note: In the absence of information, the Other Columns are not filled up in the above Table.

Note 9: Inventories

Note 10: Trade Receivables (assumed as Secured and considered goods and not outstanding for a period > 6 months)

Note 11: Cash and Cash Equivalents

Working Note:

1. Profit and Loss Account (Extract)

2. Computation of Commission to the Managing Director

Note: Since the Commission Payable is within the statutory limits, it is provided for in the books.

Question 27.
PQ Ltd., a non-investment company has been incurring losses for the past few years. The company provides the following information for the current year:
Paid up equity share capital 180
Paid up preference share capital 30
Reserves (including Revaluation reserve ₹ 15 lakhs) 225
Securities premium 60
Long term loans 60
Deposits repayable after one year so
Application money pending allotment 1080
Accumulated losses not written off 30
Investments 270

PQ Ltd. has only one whole-time director, Mr. Hello. You are required to calculate the amount of maximum remuneration that can be paid to him as per provisions of Companies Act, 2013, if no special resolution is passed
at the general meeting of the company in respect remuneration for a period not exceeding three years of payment of remuneration for a period not exceeding three years.
Answer:
Calculation of effective capital and maximum amount of monthly remuneration

Since PQ Ltd. is incurring losses and no special resolution has been passed by the company for payment of remuneration, managerial remuneration will be calculated on the basis of effective capital of the company, therefore maximum remuneration payable to the Managing Director should be @ ₹ 60,00,000 per annum*.
*lf the effective capital is less then 5 Crore, limit of yearly remuneration payable should not exceed ₹ 60 lakhs as per Companies Act, 2013.

Question 28.
The following extract of Balance Sheet of Gaurav Ltd. was obtained:
Balance Sheet (Extract) as on 31^st March, 2018


Share suspense account represents application money received on shares, the allotment of which is not yet made. You are required to compute effective capital as per the provisions of Schedule V. Would your answer differ if Gaurav Ltd. is an investment-company?
Answer:
Computation of effective capital

Question 29.
Write a short note on the following:
Taxation on distributed profits. (June 2009, 3 marks)
Answer:
Corporate Dividend tax : Finance Act, 1997 introduced additional income tax, called tax on distributed profits, on Joint stock companies on the account of their profits distributed by them among the shareholder as dividends. This tax is known as Corporate Dividend Tax.
According to Sec. 115-O(1) of the Income tax Act, any amount declared, distributed or paid by domestic company by way of dividends, whether interim or otherwise shall be charged tax on distributed profits at the rate of 20.555%. (including surcharges and Health and Education cess).

As per Sec. 115 – O(3) provides that the tax has to be paid within 14 days from the date of:

1. Declaration of dividend
2. Distribution of dividend, or
3. Payment of dividend, whichever is earliest.

Note: Like rates of income tax the rate of corporate dividend tax may vary from one financial year to another financial year.

Question 30.
Write a short note on the following Tax on distributed profits. (June 2009, 3 marks) (CS Exe – I)
Answer:
Corporate Dividend tax : Finance Act, 1997 introduced additional income tax, called tax on distributed profits, on Joint stock companies on the account of their profits distributed by them among the shareholder as dividends. This tax is known as Corporate Dividend Tax.

According to Sec. 115-0(1) of the Income tax Act, any amount declared, distributed or paid by domestic company by way of dividends, whether interim or otherwise shall be charged tax on distributed profits at the rate of 20.555%. (including surcharges and Health and Education cess).

As per Sec. 115 – O(3) provides that the tax has to be paid within 14 days from the date of:

1. Declaration of dividend
2. Distribution of dividend, or
3. Payment of dividend, whichever is earliest.

Note: Like rates of income tax the rate of corporate dividend tax may vary from one financial year to another financial year.

Question 31.
Write a short note on the following:
Tax on distributed profit (June 2011, 3 marks) (Cs Exe -I)
Answer:
Tax on distributed Profits: It is a tax chargeable on any amount declared, distributed or paid by a domestic company by way of dividend whether interim or otherwise.
It is paid in addition to the income tax chargeable on total income.
Tax on distributed profit is payable to the credit of Central Government within 14 days from the date of declaration, distribution or payment whichever is earlier.
The present rate of tax is 17.647% plus surcharge @ 12% and Health and Education cess @ 4%.

Question 32.
Sumo Ltd. has a profit of ₹ 25 lakhs before charging depreciation for Financial year 2014-15. Depreciation in the books was ₹ 11 lakhs and depreciation chargeable under Section 123 comes to ₹ 17 lakhs. Compute divisible profit for the year.
Answer:
Computation of Divisible Profit

Overview of Accounting Standards – CA Inter Accounts Question Bank is designed strictly as per the latest syllabus and exam pattern.

Overview of Accounting Standards – CA Inter Accounts Question Bank

Question 1.
Accounting Standards are mandatory for all companies.” Comment (Dec 2009, 3 marks)
Answer:
Central Government to prescribe Accounting Standards According to Sec. 133 of Companies Act, 2013, the Central Government may prescribe the standards of accounting or any addendum thereto, as recommended by the Institute of Chartered Accountants of India, constituted under Sec. 3 of the Chartered Accountants Act, 1949, in consultation with and after examination of the recommendations made by the National Financial Reporting Authority. The Accounting Standard are mandatory and applicable to all companies while preparing financial statement of the company.

Where the financial statement of the company do not comply with the accounting standard, such companies shall disclose in its financial statement the following :

1. The deviation from the accounting standard;
2. The reasons for such deviation; and
3. The financial effect, if any, arising due to such deviation.

Question 2.
List the criteria to be applied for rating an enterprise as Level-I enterprise for the purpose of Compliance of Accounting Standards in India. (Nov 2007, 4 marks)
Answer:
Enterprises which fall in any one or more of following categories are classified as level I Enterprise –

1. Enterprises, whose equity or debt securities are either listed or are in the process to be listed in India or outside India.
2. Banks, Insurance Companies and Financial institutions.
3. All commercial, industrial and other reporting business enterprises, whose total turnover during the previous year exceeds ₹ 50 crores (as per the audited financial statement).
4. All commercial, industrial and other reporting business enterprises, whose total borrowings including public deposits during the previous year exceeds ₹ 10 crores (as per audited financial statement).
5. Holding or subsidiary company of any of the above enterprises any time during the year.

Question 3.
Answer the following:
List the Criteria for classification of non-corporate entities as level I Entities for the purpose of application of Accounting Standards as per The Institute of Chartered Accountants of India. (Jan 2021, 5 marks)

Question 4.
What are the three fundamental accounting assumptions recognised by Accounting Standard (AS) 1 ? Briefly describe each one of them. (May 2013, 4 marks)
Answer:
Accounting Standard-1 recognizes three fundamental accounting assumptions. These are as follows:

1. Going Concern
The financial statements are normally prepared on the assumption that an enterprise will continue its operations in the foreseeable future and neither there is intention, nor there is need to materially curtail the scale of operations.

2. Consistency The principle of consistency refers to the practice of using same accounting policies for similar transactions in all accounting periods unless the change is required

1. by a statute,
2. by an accounting standard or
3. for more appropriate presentation of financial statements.

3. Accrual Basis of
Under this basis of accounting, transactions are Accounting recognised as soon as they occur, whether or not cash or cash equivalent is actually received or paid.

Question 5.
In the books of M/s Prashant Ltd., closing inventory as on 31.03.2015 amounts to ₹ 1,63,000 (on the basis of FIFO method).
The company decides to change from FIFO method to weighted average method for ascertaining the cost of inventory from the year 2014- 15. On the basis of weighted average method, closing inventory as on 31.03.2015 amounts to ₹ 1,47,000. Realisable value of the inventory as on 31.03.2015 amounts to ₹ 1,95,000.
Discuss disclosure requirement of change in accounting policy as per AS -1. (Nov 2015, 5 marks)
Answer:
As per AS -1, Disclosure of Accounting Policies, accounting policies refers to the accounting principles and method of applying those principles in the preparation and presentation of financial statements.
So if there is change in the accounting policies the firm should disclose in it’s statements:

1. The fact that there is change in accounting policy.
2. The reason for change in accounting policies.
3. The effect of such change in the financial statements.

So in this case M/s. Prashant Ltd. changes valuation of inventory from FIFO to weighted average. Therefore, the firm should disclose in it’s financial statement:

1. There is a change in valuation of inventory from FIFO to weighted average.

2. The reason why such change is to be made: The company values its inventory at lower of cost and net realisable value. Since net realisable value of all items of inventory in the current year was greater than respective costs, the company valued its inventory at cost. In the present year i.e. 2014-15, the company has changed to weighted average method, which better reflects the consumption pattern of inventory, for ascertaining inventory costs from the earlier practice of using FIFO for the purpose.

3. The effect of such change in the financial statement: The change in policy has reduced current profit and value of inventory by ₹ 16,000.

Question 6.
ABC Financial Services Ltd. is engaged in the business of financial services and is undergoing tight liquidity position, since most of the assets of the company are blocked in various claims/petitions in a Special Court. ABC Financial Services Ltd. has accepted Inter-Corporate Deposits (ICDs) and it is making its best efforts to settle the dues. There were claims at varied rates of interest, from lenders, from the due date of ICDs to the date of repayment. The company has provided interest, as per the terms of the contract till the due date and a note for non-provision of interest from the due date to date of repayment was mentioned in financial statements.

On account of uncertainties existing regarding the determination of the amount and in the absence of any specific legal obligation at present as per the terms of contracts, the company considers that these claims are in the nature of “claims against the company not acknowledged as debt”, and the same has been disclosed by way of a note in the accounts instead of making a provision in the Profit and Loss Account.
State whether the treatment done by the company is correct or not as per relevant Accounting Standard. (May 2017, 5 marks)
Answer:
As per AS -1, “Disclosure of Accounting Policies,” following are considerations that govern selection of a particular Policy:

1. Prudence
2. Substance over form and
3. Materiality

As per the above considerations and in view of uncertainty associated with future events, profits are not anticipated, but losses are provided for as a matter of conservatism. Provision should be created for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information.

As per AS -1, ‘Accrual’ is one of the fundamental accounting assumptions. Irrespective of the terms of the contract, so long as the principal amount of a loan is not repaid, the lender cannot be placed in a disadvantageous position for non-payment of interest in respect of overdue amount. From the facts given in the question, it is apparent that the company has an obligation to pay because of the overdue interest amount.

Thus, in the given case, ABC Financial Services Ltd. should make provision for interest from the due date of ICDs to date of repayment even though the amount cannot be determined. Thus, it should represent only a best estimate in the light of available information.

Thus, the treatment done by the company that these claims are in nature of “claims against the company not acknowledged as debt” and the disclosure by way of note in the accounts instead of making a provision in the P & L A/c is not correct as per AS -1.

Question 7.
HIL Ltd. was making provision for non-moving stocks based on no issues having occurred for the last 12 months upto 31.03.2017. The company now wants to make provision based on technical evaluation during the year ending 31.03.2018.
Total value of stock ₹ 120 lakhs
Provision required based on technical evaluation ₹ 3.00 lakhs
Provision required based on 12 months no issues ₹ 4.00 lakhs
You are requested to discuss the following points in the light of Accounting Standard (AS) – 1:
(i) Does this amount to change in accounting policy?
(ii) Can the company change the method of accounting? (Nov 2018, 5 marks)
Answer:
The decision of making provision for non-moving inventories on the basis of technical evaluation does not amount to change in accounting policy. Accounting policy of a company may require that provision for non-moving stocks (inventories) should be made. The method of estimating the amount of provision may be changed. In case a more prudent estimate can be made. In the given case, considering the total value of stock, the change in the amount of required provision of non-moving stock from ₹ 4 lakhs to ₹ 3 lakhs is also not material. The disclosure can be made for such change in the following lines by way of notes to the accounts in the annual accounts of HIL Ltd. for the year 2017-18:

“The company has provided for non-moving stocks on the basis of technical evaluation unlike preceding years. Had the same method been followed as in the previous year; the profit for the year and the corresponding effect on the year end net assets would have been lower by ₹ 1 lakh.”

Question 8.
What are the items that are to be excluded in determination of the cost of inventories as per AS – 2? (May 2008, 4 marks)
OR
In determining the cost of inventories, it is appropriate to exclude certain costs and recognize them as expenses in the period in which they are incurred.” Provide example of such costs as per AS-2: Valuation of Inventories. (Nov 2012, 4 marks)
Answer:
Para 13 of AS-2 Valuation of Inventories lists down the specific costs which are to be excluded from cost of inventories.
The list is as follows:

1. Abnormal amounts of wasted materials, labour or other production cost.
2. Storage costs, unless those costs are necessary in the production process prior to a further production stage.
3. Administrative overheads that do not contribute to bringing the inventories to their present location and condition; and
4. Selling and distribution costs.

As per Para 12, Interest and other borrowing costs are usually considered as not related to bringing the inventories to their present location and condition and are therefore usually not included in the cost of inventory.

Question 9.
State whether the following statement is ‘True’ or False’. Also give reason for your answer.
3. As per the provisions of AS-2, inventories should be valued at the lower of cost and selling price. (May 2019, 1 mark)
Answer:
False:
As per AS 2, inventories should be valued at the lower of cost and net realiable value.
Net reliable value = Selling Price – Cost necessary to make sell.

Question 10.
From the following data, find out value of inventory as on 30.04.2009 using
(a) LIFO method, and
(b) FIFO method :
(1) 01.04.2009 Purchased 10 units @ ₹ 70 per unit
(2) 06.04.2009 Sold 6 units @ ₹ 90 per unit
(3) 09.04.2009 Purchased 20 units @ ₹ 75 per unit
(4) 18.04.2009 Sold 4 units @ ₹ 100 per unit. (Nov 2009, 2 marks)
Answer:
(a) Statement showing valuation of closing inventory by LIFO methoc

Value of closing inventory as per FIFO method:

(b) Statement showing valuation of closing inventory by FIFO method

Value of closing inventory as per FIFO method:

Question 11.
Raw materials inventory of a company includes certain material purchased at ₹ 100 per kg. The price of the material is on decline and replacement cost of the inventory at the year end is ₹ 75 per kg. It is possible to convert the material into finished product at conversion cost of ₹ 125.
Decide whether to make the product or not to make the product, if selling price is
(i) ₹ 175 and
(ii) ₹ 225. Also find but the value of inventory in each case. (May 2010, 4 marks)
Answer:
Provision:
According to Para 24 of AS-2 ‘Valuation of Inventories’, materials and -other supplies held for use in the production of inventories are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost. But when there has been a decline in the price of materials and it is estimated that the cost of the finished products will exceed net realizable value, the materials are written down to net realisable value.

Analysis and Conclusion:
In such circumstances, the replacement cost of the materials may be the best available measure of their net realisable value.

(i) When the selling price be ₹ 175
Incremental Profit = ₹ 175 – ₹ 125 = ₹ 50
Current price of the material = ₹ 75
Therefore, it is better not to make the product. Raw material inventory would be valued at net realisable value i.e. ₹ 75 because the selling price of the finished product is less than ₹ 225 (100 + 125) per kg.

(ii) When the selling price be ₹ 225
Incremental Profit = ₹ 225 -1125 = ₹ 100
Current price of the raw material = ₹ 75
Therefore, it is better to make the product.
Raw material inventory would be valued at ₹ 100 per kg because the selling price of the finished product is not less than ₹ 225.

Question 12.
HP is a leading distributor of petrol. A detail inventory of petrol in hand is taken when the books are closed at the end of each month. At the end of month following information is available :

Sales : ₹ 47,25,000
General overheads cost : ₹ 1,25,000
Inventory at beginning 1,00,000 litres @ 15/- per litre Purchases
June 1 two lakh litres @ 14.25
June 30 one lakh litres @ 15.15
Closing inventory 1.30 lakh litres

Compute the following by the FIFO as per AS-2 :
(i) Value of Inventory on June 30.
(ii) Amount of cost of goods sold for June.
(iii) Profit/Loss for the month of June. (Nov 2010, 5 marks)
Answer:
(i) Cost of Closing Inventory for 1,30,000 litres as on 30^th June

(ii) Computation of Cost of Goods Sold

(iii) Computation of Profit

Question 13.
Best Ltd. deals in five products, P, Q, R, S, and T which are neither similar nor interchangeable. At the time of closing of its accounts for the year ending 31^st March 2011, the historical cost and net realisable value of the items of the closing stock are determined as follows:

What will be the value of closing stock for the year ending 31^st March, 2011 as per AS-2 “Valuation of inventories”? (May 2011, 4 marks)
Answer:
According to AS 2 “Valuation of Inventories, inventories should be valued at the lower of cost and net realizable value. Inventories should be written down to net realizable value on an iterm-by-item basis.

Valuation of inventory (item wise) for the year ending 31^st March 2011

The value of inventory for the year ending 31^st March 2011 – ₹ 23,29,000

Question 14.
From the following information ascertain the value of stock as on 31^st March, 2012:

Stock as on 01.04.2011 : ₹ 28,500
Purchases : ₹ 1,52,500
Manufacturing Expenses : ₹ 30,000
Selling Expenses : ₹ 12,100
Administration Expenses : ₹ 6,000
Financial Expenses : ₹ 4,300
Sales : ₹ 2,49,000

At the time of valuing stock as on 31^st March, 2011 a sum of ₹ 3,500 was written off on a particular item, which was originally purchased for ₹ 10,000 and was sold during the year of ₹ 9,000. Barring the transaction relating to this item, the gross profit earned during the year was 20% on sales. (Nov 2012, 4 marks)
Answer:
Statement showing valuation of stock as on 31.3.2012

Question 15.
On 31^st March 2013 a business firm finds that cost of a partly finished unit on that date is ₹ 530. The unit can be finished in 2013-14 by an additional expenditure of ₹ 310. The finished unit can be sold for ₹ 750 subject to payment of 4% brokerage on selling price. The firm seeks your advice regarding:-

(i) the amount at which the unfinished unit should be valued as at 31^st March, 2013 for preparation of final accounts and
(ii) the desirability or otherwise of producing the finished unit. (May 2013, 4 marks)
Answer:
Valuation of unfinished unit:

Incremental cost ₹ 310 (cost to complete) is less than incremental revenue ₹ 720 (₹ 750 – ₹ 30). The enterprise will therefore decide to finish the unit for sale at ₹ 750.

Note: The aforesaid solution is based on assumption that partly finished unit cannot be sold in semi finished form and its NRV is zero without processing it further.

Question 16.
Capital Cables Ltd., has a normal wastage of 4% in the production process. During the year 2013-14 the Company used 12,000 MT of raw material costing ₹ 150 per MT.
At the end of the year 630 MT of wastage was in stock. The accountant wants to know how this wastage is to be treated in the books.
Explain in the context of AS 2 the treatment of normal loss and abnormal loss and also find out the amount of abnormal loss if any. (Nov 2014, 5 marks)
Answer:
According to AS-2, (Revised) ‘Valuation of Inventories’, abnormal amounts of wasted materials, labour and other production costs are excluded from cost of inventories and such costs are recognised as expenses in the period in which they are incurred.

The amount of normal loss will be included in computing the cost of inventories (finished goods) at the year end.

Amount of Abnormal Loss:

Therefore, ₹ 23,437.50 will be charged to the Profit and Loss Statement.

Question 17.
Mr. Mehul gives the following information relating to items forming part of inventory as on 31-3-2015. His factory produces Product X using Raw material A.
(i) 600 units of Raw material A (purchased @ ₹ 120). Replacement cost of raw material A as on 31 -3-2015 is ₹ 90 per unit.
(ii) 500 units of partly finished goods in the process of producing X and cost incurred till date ₹ 260 per unit. These units can be finished next year by incurring additional cost of ₹ 60 per unit.
(iii) 1500 units of finished Product X and total cost incurred ₹ 320 per unit. Expected selling price of Product X is ₹ 300 per unit.
Determine how each item of inventory will be valued as on 31-3-2015. Also calculate the value of total inventory as on 31 -3-2015. (May 2015, 5 marks)
Answer:
(i) Valuation of Raw Material: If finished product is expected to be sold below cost then raw material should be valued at NRV if there is decline in price of material. In such circumstances, the replacement cost of materials may be best available measure of their net realizable value.

Here product x is expected to be sold at ₹ 300 per unit which is below than total cost per unit which is ₹ 320. Then raw material is to be valued at replacement cost.
So, valuation of raw material is done as follows:
No. of units × Replacement Cost/unit = 600 × 90 = ₹ 54,000
Raw material is to be valued at ₹ 54,000

(ii) Valuation of WIP : 500 units of partly finished goods will be valued at ₹ 240 per unit i.e. lower of cost ₹ 320 (₹ 260 + additional cost ₹ 60) or Net estimated selling price ₹ 240 (Estimated selling price ₹ 300 per unit less additional cost of ₹ 60).

(iii) Cost of Finished Goods: As per AS-2, inventory is to be valued at cost or realizable value which ever is lower. Here the cost of finished good is ₹ 320 per unit and finished good is expected to be sold at ₹ 300 which is less than the cost of finished goods. So, finished good is valued at expected selling price, as calculated follows:
1500 units × ₹ 300 per unit = ₹ 4,50,000
So, finished good is valued at ₹ 4,50,000 to the year end.

Valuation of Total inventory as on 31 .3.2015

Question 18.
Z Limited ordered 13,000 kg. of chemicals at ₹ 90 per kg. The purchase price includes GST of ₹ 5 per kg. in respect of which full Input credit is admissible. Freight incurred amounted to ₹ 30,000. Normal transit loss is 4%. The company actually received 12,400 kg. and consumed 10,000 kg. The company has received trade discount in the form of cash amounting to ₹ 1 per kg. The chemicals were delivered in containers. The containers were not reusable, hence sold for ₹ 500. The administrative expenses incurred to bring the chemicals were ₹ 10,000.
Compute the value of inventory and allocate the material cost as per AS-2. [Modified] (May 2016, 5 marks)
Answer:
Cost of Inventory and allocation of material cost is shown below:

Allocation of Material cost:

The difference due to rounding off of normal cost per Kg. has been adjusted. Thus the inventory will be valued at ₹ 2,17,692.

Note:
1. The Company has received trade discount In the form of cash. Therefore, discount has been treated as trade discount in the given answer.

2. Abnormal losses are recognized as separate expenses.

3. Containers are used for delivery of the chemicals and are not reusable. Cost of these containers is treated as selling and distribution expense. The sale value of these containers will be credited to Profit and Loss Account and shall not be considered for the purpose of valuation of inventory.

Alternatively, the sales value of container amount of ₹ 500 may be deducted, while computing material cost. In that case the material cost will be computed as ₹ 11,31,500(11,32,000-500) instead of ₹ 11,32,000.
Accordingly the allocation of material cost will get changed.

Question 19.
A Limited is engaged in manufacturing of Chemical Y far which Raw Material X is required. The company provides you following information for the year ended 31^st March, 2017.

Additional Information:
(i) Total fixed overhead for the year was ₹ 4,00,000 on normal capacity of 20,000 units.
(ii) Closing balance of Raw Material X was 1,000 units and Chemical Y was ₹ 2,400 units.
You are required to calculate the total value of closing stock of Raw Material X and Chemical Y according to AS 2, when
(a) Net realizable value of Chemical Y is ₹ 800 per unit
(b) Net realizable value of Chemical Y is ₹ 600 per unit (Nov 2017, 5 marks)
Answer:
Valuation of finished goods stock:
(a) Cost per unit of finished goods:

∴ Cost per unit of finished goods = ₹ 660 per unit

(b) Valuation of finished goods will be:
if NRV is ₹ 800 per unit,
Value per unit (Lower of cost 660 & NRV) = 660
Total value of finished goods stock = ₹ 660 × 2400 units
= ₹ 15,84,000
If NRV is ₹ 600 per unit,
Value per unit (Lower of cost 660 & NRV) = 600
Total value of finished goods stock = ₹ 600 × 2400 units
= ₹ 14,40,000

Valuation of Raw Materials:

(a) Cost per unit of Raw Material:

(b) Total value of Raw Materials (Closing Stock)
1. Finished Goods are valued at cost

• Raw Materials cost per unit ₹ 440
• Replacement cost per unit ₹ 300
• Relevant value per unit ₹ 440 [Since finished goods are valued at cost.]
• Total value for 1.000 units = 1000 × ₹ 440
  = ₹ 440,000

2. Finished goods are valued at NRV

• Raw Materials cost per unit ₹ 440
• Replacement cost per unit ₹ 300
• Relevant value per unit ₹ 300 [Since finished goods are valued at NRV]
• Total value for ₹ 1,000 units = 1000 × ₹ 300
  = ₹ 3,00,000

Question 20.
Wooden Plywood Limited has a normal wastage of 5% in the production process. During the year 2017-18 the Company used ₹ 16,000 MT of Raw material costing ₹ 190 per MT. At the end of the year, 950 MT of wastage
was in stock. The accountant wants to know how this wastage is to be treated in the books.
You are required to:
1. Calculate the amount of abnormal toss.
2. Explain the treatment of normal loss and abnormal loss.
[In the context of AS-2 (Revised)] (May 2019, 5 marks)
Answer:
As per AS 2 (Revised) ‘Valuation of Inventories’, abnormal amounts of wasted materials, labours and other production costs are excluded from cost of inventories and such costs are recognised as expenses in the period in which they are incurred. The normal loss will be included in determining the cost of inventories (finished goods) at the year end.

Amount of Abnormal loss:
Material used 16000 MT @ ₹ 190 = ₹ 30,40,000
Normal loss (5% of 16000 MT) 800 MT
Net quantity of material 15,200 MT
Abnormal loss in quantity 150 MT
Abnormal loss ₹ 30,000
(150 units @ ₹ 200 (\(\frac{₹ 30,40,000}{15,200}\))
Amount of ₹ 30,000 will be charged to the Profit and Loss Statement.

Question 21.
Mr. Rakshit gives the following information relating to items forming part of inventory as on 31^st March, 2019. His factory produces product X using raw material A.
(i) 800 units of raw material A (purchased @ ₹ 140 per unit).
Replacement cost of raw material A as on 31^st March, 2019 is ₹ 190 per unit.
(ii) 650 units of partly finished goods in the process of producing X and cost incurred till date ₹ 310 per unit. These units can be finished next year by incurring additional cost of ₹ 50 per unit.
(iii) 1,800 units of finished product X and total cost incurred ₹ 360 per unit.
Expected selling price of product X is ₹ 350 per unit.
In the context of AS-2, determine how each Item of inventory will be valued as on 31^st March, 2019. Also, calculate the value of total inventory as on 31^st March. 2019. (Nov 2019, 5 marks)
Answer:
As per AS 2 (Revised) “Valuation of Inventories”, materials and other supplies held for use in the production of inventories are not written down below cost if the finished products in which they will be Incorporated are expected to be sold at cost or above cost. However, when there has been a decline in the price of materials and it is estimated that the cost of the finished products will exceed not realisable value, the materials are written down to net realisable value. In such circumstances, the replacement cost of the materials, may be the best available measure of their net realisable value. In the given case, selling price of product X is ₹ 350 and total cost per unit for production is ₹ 360.
Hence the valuation will be done as under:

1. 800 units of raw material A will be valued at cost of 140 per unit as being lower of cost and Replacement Cost
2. 650 units of partly finished goods will be valued at ₹ 300 per Unit i.e. lower of cost (₹ 310) or Net realisable value ₹ 300 (Estimated Selling Price ₹ 350 per unit less addition cost ₹ 50)
3. 1800 units of finished product X will be valued at NRV of ₹ 350 per unit since it is lower than cost 360 per unit of product X.

Valuation of Total Inventory as on 31.03.2019:

Note: It has been assumed that the partly finished unit cannot be sold in semi-finished form and Its NRV is zero without processing it further.

Question 22.
Answer the following:
Mr. Jatin gives the following information relating to the items forming part of the inventory as on 31.03.2019. His enterprise produces product P using Raw Material X.
(i) 900 units of Raw Material X (purchased @ ₹ 100 per unit). Replacement cost of Raw Material X as on 31.03.2019 is ₹ 80 per unit.
(ii) 400 units of partly finished goods In the process of producing P. Cost incurred till date is ₹ 245 per unit. These units can be finished next year by incurring additional cost of ₹ 50 per unit.
(iii) 800 units of Finished goods P and total cost incurred is ₹ 295 per unit.
Expected selling price of product P is 280 per unit, subject to a payment of 5% brokerage on selling price.

Determine how each item of inventory will be valued as on 31.03.2019. Also calculate the value of total Inventory as on 31.03.2019. (Jan 2021, 5 marks)

Question 23.
In the case of a manufacturing company:
(i) List the items of inflows of cash receipts from operating activities;
(ii) List the items of ‘outflows” of investing activities (2 × 2 = 4 marks)
Answer:
(i) Inflows of cash receipts from operating activities:
(a) Cash receipts from rendering of services.
(b) Cash receipts from the sale of goods.
(c) Refund of income-tax.
(d) Royalties, fees, commission and other revenues.

(ii) Outflows of Investing activities:
(a) Cash payment for acquiring fixed assets.
(b) Cash advances and loans to third parties.
(c) Cash payment for acquisition of shares, warrants or debt instruments of other enterprises and interest in joint ventures.

Question 24.
What are the main features of the cash flow statement? Explain with special reference to AS 3? (Nov 1999, 5 marks)
Answer:
Main features of Cash Flow Statements (As per AS-3):

1. According to AS-3, cash flow statement deals with the provisions of information about the historical changes in cash and cash equivalents of an enterprise during the stated period from operating, investing and financing activities.

2. Cash flow from operating activities can be reported using either:

1. the direct method, in which mostly the classes of gross cash receipts and gross cash payments are disclosed.
2. the indirect method, in this net profit or loss is adjusted for the purpose of transactions of non-cash nature.

3. According to AS-3, an enterprise must disclose the components of cash and cash equivalents and must present a reconciliation of amounts in its cash flow statement with the equivalent items reported In the balance
sheet.

4. When the cash flow statement is used along with the other financial statements, it provides information that enables the user to evaluate the changes in net assets of an enterprise. This statement also enhances
the comparability of the operating performances.

5. For companies listed on stock exchanges compliance of AS-3 is compulsory due to the listing agreement.

Question 25.
Define briefly the classification of activities, as suggested in Accounting Standard 3, to be used for preparing a cash flow statement. Give two examples of each such class of activities. (May 2001, 4 marks)
Answer:
According to AS-3 (Cash Flow Statement), the cash flow statement must report cash flows by operating, investIng and financing activities:

1. Operating Activities
These are the principal revenue producing activities of the enterprise. This activity does not include in it the investing and financing activities.
Examples of operating activities are cash receipt from the sale of goods and cash payment to the supplier of goods.

2. Investing Activities
These activities include the acquisition and disposal of long-term assets and other investments which are not included in cash equivalents.
Example of investing activities are paymeñt made on acquiring building for business or cash received from the sale of furniture.

3. Financing Activities
Those activities that results in changes in the size and composition of the owners capital and borrowing of the enterprise.
Example of the financing activities are cash proceed from issue of shares and cash paid to redeem debentures.

Question 26.
Classify the following activities as per AS-3 Cash Flow Statement:
(i) Interest paid by financial enterprise
(ii) Dividend paid
(iii) Tax deducted at source on interest received from subsidiary company
(iv) Deposit with Bank for a term of two years
(v) Insurance claim received towards loss of machinery by fire
(vi) Bad debts written off
Which activity does the purchase of business falls under and whether netting off of aggregate cash flows from disposal and acquisition of business units is possible? (May 2016, 4 marks)
Answer:

Purchase of business falls under cash flow from investing activities or operating activities depending upon situation.
No cash flows from Disposal and acquisition of business.

Question 27.
Classify the following activities as
(i) Operating Activities,
(ii) Investing activities,
(iii) Financing activities and
(iv) Cash Equivalents.
1. Cash receipts from Trade Receivables
2. Marketable Securities
3. Purchase of investment
4. Proceeds from long term borrowings
5. Wages and Salaries paid
6. Bank overdraft
7. Purchase of Goodwill
8. Interim dividend paid on equity shares
9. Short term Deposits
10. Underwriting commission paid. (May 2018,5 marks)
Answer:
Classification of Activities

Question 28.
Answer the following questions:
(a) Prepare cash flow from investing activities as per AS 3 of M/s Subham Creative Limited for year ended 31.3.2019.
Particulars : Amount (₹)
Machinery acquired by issue of shares at face value : ₹ 2,00,000
Claim received for loss of machinery in earthquake : ₹ 55,000
Unsecured loans given to associates : ₹ 5,00,000
nterest on loan received form associate company : ₹ 70,000
Pre-acquisition dividend received on Investment made : ₹ 52,800
Debenture interest paid : ₹ 1,45,200
Term loan repaid : ₹ 4,50,000
Interest received on investment (TDS of ₹ 8,200 was deducted on the above interest) 73,800
Purchased debentures of X Ltd., on 1^st December, 2018 which are redeemable within 3 months 3,00,000
Book value of plant & machinery sold (loss incurred ₹ 9,600) 90,000 (May 2016, 5 marks)
Answer:
Cash Flow Statement from Investing Activities of M/s Subham Creative Limited for the year ended 31-03-2019:

Note:

1. Debenture interest paid and Term Loan repaid are financing activities and therefore not considered for preparing cash flow from investing activities.
2. Machinery acquired by issue of shares does not amount to cash outflow, hence also not considered in the above cash flow statement.
3. Purchase of debentures of X Ltd. on 1^st December, 2018 which are redeemable within 3 months to be considered as cash equivalents and not part of financing activities.

Question 29.
Mention four Assets, where AS – 10 is not applicable. (Nov 2008, 2 marks)
Answer
AS-10 deals with “Property, Plant and Equipment”.
This Standard does not apply to:

1. Biological assets related to agricultural activity other than bearer plants. This Standard applies to bearer plants but it does not apply to the produce on bearer plants; and

2. Wasting assets including mineral rights, expenditure on the exploration for and extraction of minerals, oil, natural gas and similar non-regenerative resources.
However, this Standard applies to property, plant and equipment used to develop or maintain the assets described in (a) and (b) above.

Question 30.
What is the accounting entry to be passed as per AS-10 for the following situations;
(a) Increase in value of PPE by ₹ 50,00,000 on account of revaluation.
(b) Decrease in the value of PPE by ₹ 30,00,000 on account of revaluation. (May 2008, 2 marks)
Answer:

Note: It has been assumed that both the above instances are independent of each other and revaluation Is done for first time.

Question 31.
A company acquired a machine on 1.4.2006 for ₹ 5,00,000. The company charged depreciation upto 2008-09 on straight line basis with estimated working life of 10 years and scrap value of ₹ 50,000. From 2009 -10. the company decided to change depreciation method at 20% on reducing balance method. Compute the amount of depreciation to be debited to Profits and Loss A/c for the year 2009 – 10. (May 2010, 2 marks)
Answer:
Annual depreciation charged by the company up to 2008-09
\(=\frac{\text { Cost price of the machine-Scrap value }}{\text { Useful life of the machine }}\)
\(\frac{₹ 5,00,000-₹ 50,000}{10}\) = ₹ 45,000
WDV of machine at the end of 2008-09 by Straight Line Method (SLM)
= ₹ 5,00,000 – (₹ 45,000 × 3) = ₹ 3,65,000

Depreciation to be charged in 2009-2010
Book value of the machine as per SLM as on 2008-09 = 3,65,000
Dep. to be charged = 3,65,000 × \(\frac{20}{100}\) = 73,000

Question 32.
During the current year 2009 – 10 M/s L & C Ltd. made the following expenditure relating to its plant and machinery:
General repairs : ₹ 4,00,000
Repairing of Electric Motors : ₹ 1,00,000
Partial Replacement of parts of Machinery : ₹ 50,000
Substantial improvements to the electrical wiring system which will increase efficiency of the plant and machinery : ₹ 10,00,000
What amount should be capitalised according to AS-10? (May 2010, 4 marks)
Answer:
Provision:
According to AS-10 Property, Plant and Equipment, the cost of an item of PPE shall be recognised as an asset if and only if

1. It is probable that future economic benefits associated with the item will flow to the firm,
2. The cost can be measured, reliably.

Analysis and Conclusion:
Therefore, in the given case, repairs amounting ₹ 5 lakhs and partial replacement of parts of machinery worth ₹ 50,000 should be charged to statement of profit & loss. ₹ 10 lakhs incurred for substantial improvement to the electrical wiring system which will increase efficiency should be capitalized.

Question 33.
Carrying amount of a machine is ₹ 1,00,000 (Historical cost less depreciation). The machine is expected to generate ₹ 25,000 net cash flow for 5 years. The net realizable value (or net selling price) of the machine on current date is ₹ 85,000. The enterprises required rate of earning is 10% p.a. State the value at which the enterprise should carry its machine. The present value factors at 10% are 0.909, 0.826, 0.751, 0.683 and 0.621 at the end of first, second, third, fourth and fifth year respectively. (May 2011, 4 marks) [IPCC Gr. II]
Answer:
Value in use is the present value of estimated future cash flow expected to arise from the continuing use of an asset. Therefore,

Value in use = ‘₹ 25,000 × (0.909 +0.826 + 0.751+ 0.683 + 0.621) ₹ 94,750 Net selling price = ₹ 85,000
Recoverable amount is the higher of an asset’s value in use and its net selling price i.e.94,750.
Carrying value of a machine = ₹ 1,00,000 (recorded in the books)

Carrying amount is the amount at which an asset is recognized in the balance sheet after deduction any accumulated depreciation (amortization) and accumulated impairment losses thereon.

In the given case, carrying amount of machine will be lower of its recoverable amount ₹ 94,750 and its book value i.e. ₹ 1,00,000. Therefore, the enterprise should carry its machine at value of ₹ 94,750.

Question 34.
In the Trial Balance of M/s Sun Ltd. as on 31-3-2011, balance of machinery appears ₹ 5,60,000. The company follows rate of depreciation on machinery @ 10% p.a. On scrutiny it was found that a machine appearing in the books on 1-4-2010 at ₹ 1,60,000 was disposed of on 30- 9-2010 at ₹ 1,35,000 in part exchange of a new machine costing ₹ 1,50,000.

You are required to calculate:
(i) Total depreciation to be charged in the Profit and Loss Account.
(ii) Loss on exchange of machine.
(iii) Book value of machinery in the Balance Sheet as on 31 -3-2011. (Nov 2011, 5 marks)
Answer:
Assumption: The question has been solved on the basis of written down value method due to absence of related information regarding straight line method.
(i) Total Depreciation to be charged in the statement of Profit and Loss

(ii) Loss on Exchange of Machine Particulars

(iii) Book Value of Machinery in the Balance Sheet as on 31.03.2011

Question 35.
M/s. Tiger Ltd. allotted 7500 equity shares of 100 each fully paid up to Lion Ltd. in consideration for supply of a special machinery. The shares exchanged for machinery are quoted at National Stock Exchange (NSE) at ₹ 95 per share at the time of transaction. In the absence of fair market value of the mach nery acquired, how the value of the machinery would be recorded in the books of Tiger Ltd? (May 2012, 4 marks)
Answer:
Provision:
According to AS 10 ‘Property, Plant and Equipment:’
Depreciation is a measure of wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes.

Accordingly, depreciation may arise even when asset has not been used in the current year but was ready for use in that year.

The need for using the stand by bus may not have arisen during the year but that does not imply that the useful life of the bus has not been affected. Therefore, non-provision of depreciation on the ground that the bus was not used during the year is not tenable.

As per AS-10, ‘Property, Plant and Equipment,’ the gross book value of the self constructed fixed asset includes the costs of construction that relate directly to the specific asset and the costs that are attributable to the construction activity in general can be allocated to the specific asset.

If any Internal profit is there it should be eliminated. Saving of ₹ 1,50,000 on account of using its own workforce is an unrealized/internal profit, which should not be capitalized/recorded as per the standard.

Analysis and Conclusion:
Therefore only ₹ 4,50,000 should be debited to the factory building account and not ₹ 600,000.
Hence, the contention of the directors of the company to capitalize ₹ 6,00,000 as cost of factory building, on the ground that the company is killy entitled to employ an outside contractor is not justifiable.

Question 36.
A computer costing ₹ 60,000 is depreciated on straight line basis, assuming 10 years working life and Nil residual value, for three years. The estimate of remaining useful life after third year was reassessed at 5 years. Calculate depreciation as per the provisions of Accounting Standard 10 “Property, Plant and Equipment. (May 4 marks)
Answer:
Depreciation per year = ₹ 60,000/10 = ₹ 6,000
Depreciation on SLM charged for three years = ₹ 6,000 × 3 years = ₹ 18,000
Book value of the computer at the end of third year = ₹ 60,000 – ₹ 18,000
= ₹ 42,000
Remaining useful life as per previous estimate = 7 years
Remaining useful life as per revised estimate = 5 years
Depreciation from the fourth year onwards = ₹ 42,000/5 = ₹ 8,400 per annum

Question 37.
PQR Ltd. constructed a fixed asset and incurred the following expenses on its construction:
Materials : ₹ 16,00,000
Direct Expenses : ₹ 3,00,000
Total Direct Labour : ₹ 6,00,000
(1/15^th of the total labour time was chargeable to the construction)

Total Office & Administrative Expenses 9,00,000
(4% is chargeable to the construction)
Depreciation on assets used for the construction of this asset 15,000
Calculate the cost of the fixed asset. (Nov 2012, 4 marks)
Answer:
Calculation of cost of fixed assets

Note: It is assumed that 4% of office and administrative expenses are specifically attributable to construction of a fixed asset. Alternatively, it may be assumed that 4% of office and administrative expenses are only allocated to construction project and is not specifically attributable to it. In such a case, the cost of fixed assets will be ₹ 19,55,000.

Question 38.
Amna Ltd. contracted with a supplier to purchase a specific machinery to be installed in Department A in two months time. Special foundations were required for the plant, which were to be prepared within this supply lead time. The cost of site preparation and laying foundations were ₹ 47,290. These activities were supervised by a technician during the entire period, who is employed for this purpose of ₹ 15,000 per month. The Technician’s services were given to Department A by Department B. which billed the services at ₹ 16,500 per month after adding 10% profit margin.

The machine was purchased at ₹ 52,78,000. GST was charged at 18% on the invoice. ₹ 18,590 transportation charges were incurred to bring the machine to the factory. An Architect was engaged at a fee of ₹ 10,000 to supervise machinery installation at the factory premises. Also, payment under the invoice was due in 3 months. However, the Company made the payment in 2^nd month. The company operates on Bank Overdraft @ 11%. Ascertarn the amount at which the asset should be capitalized under AS 1o. (Nov 2013, 5 marks)
Answer:
Cost of machinery is calculated as under:

Note:

1. 18% of 52,78,000 = ₹ 9,50,040
2. Interest on Bank overdraft for earlier payment of invoice is not relevant under AS – 10.
3. Internally booked profits should be eliminated in arriving àt the cost of Fixed Assets.
4. It has been assumed that the purchase price of ₹ 52,78,000 excludes amount of GST.

Question 39.
On 01.04.2010 a machine was acquired at ₹ 4,00,000. The machine was expected to have a useful life of 10 years. The residual value was estimated at 10% of the original cost. At the end of the 3rd year, an attachment was made to the machine at a cost of ₹ 1,80,000 to enhance its capacity. The attachment was expected to have a useful life of 10 years and zero terminal value. During the same time the original machine was revalued upwards by ₹ 90,000 and remaining useful life was reassessed at 9 years and residual value was reassessed at NIL.
Find depreciation for the year, if
(i) attachment retains its separate identity.
(ii) attachment becomes integral part of the machine, (May 2014, 5 marks)
Answer:
(i) disposed a machine having attachment retains its Separate Identity
Cost of Machine on 1.4.10 = 4,00,000
Less: Residual Value 10% = 40,000
Depreciable Value = 3,60,000
Estimated Useful life = 10 years
Dep. p.a. = 3,60,000 ÷ 10 = ₹ 36,000
Total Dep in 3 years = 36,000 × 3 = ₹ 1,08,000
WDV for 4th year = 4,00,000 – 1,08,000 = 2,92,000
Upward Revaluation of Original Machine = 90,000
WDV for 4th year after revaluation = 2,92,000 + 90,000 = 3,82,000
Remaining useful life = 9 years
Dep. in 4th year = 3,82,000 ÷ 9
Dep. on attachment = 1,80,000 ÷ 10
Total Depreciation = 42,444 + 18,000 = ₹ 60,444

Note:

1 Since, upward revaluation of the machine and reassessment of remaining useful life had been made at the end of the 3rd year, it is implied that depreciation for the 3rd year has been charged on the basis of od calculation & remaining useful life of 9 years is to be calculated from the beginning of the 4th year onwards.
2. Depreciation for The 4th year i.e. 2013-14 has been given in the solution.

(ii) If attachment becomes Integral part of Machine
In this case it will be added to the value of machine and depreciated along with machine over the life of machine.
Value of Machine after Revaluation = 3,82,000
Add: Cost of Attachment = 1,80000
Total Value = 5,62000
Life = 9 years
Depreciation = 5,62,000 ÷ 9 = ₹ 62,444

Question 40.
In the books of Optic Fiber Ltd., plant and machinery stood at ₹ 6,32,000 on 1.4.2013. However on scrutiny it was found that machinery worth ₹ 1,20,000 was included in the purchases on 1.6.201 3. On 30.6.2013 the company disposed a machine having book value of ₹ 1,89,000 on 1.4.2013 at ₹ 1,75,000 in part exchange of a new machine costing ₹ 2,56,000. The company charges depreciation @ 20% WDV on plant and machinery.
You are required to calculate:
(i) Depreciation to be charged to P/L
(ii) Book value of Plant and Machinery A/c as on 31.3.2014
(iii) Loss on exchange of machinery. (Nov 2014, 5 marks)
Answer:
(i) Depreciation to be charged in the statement of Profit and Loss

(ii) Book Value of Plant and Machinery A/c as on 31 .03.2014

(iii) Loss on exchange of Machinery

Question 41.
From the following information state the amount to be capitalized as per AS 10. Give the explanations for your answers.
₹ 5 lakhs as routine repairs and ₹ 1 lakh on partial replacement of a part of a machine.
₹ 10 lakhs on replacement of part of a machinery which will improve the efficiency of a machine. (Nov 2014, 4 marks)
Answer:
As per AS-10 “Property, Plant and Equipment”, only those expenditures that increase the future benefits tram the existing assets, beyond its previously assessed standard of performance, are to be included in the gross book value.

Hence, in the given case, amount of ₹ 5 lakhs spent on routine repairs and ₹ 1 lakh on partial replacement of a part of the machinery should be charged to Profit and Loss Account as these amounts will help in maintaining the capacity but will not improve the efficiency of the machine.

However, ₹ 10 Lakhs incurred on replacement of a part of the machinery, which will increase the efficiency of a machine, should be capitalized by inclusion in the gross book value of machinery.

Question 42.
Versatile Limited purchased Machinery for ₹ 4,80,000 (inclusive of GST of ₹ 40,000). Input Tax credit is available for the GST paid. The Company incurred the following other expenses for installation.
Particulars : ₹
Cost of preparation of Site for installation : 21,000
Total labour charges (200 out of the total 600 man hours worked, were spent for installation of the Machinery) : 66,000
Spare parts and tools consumed in installation : 6,000
Total salary of supervisor (time spent for installation was 25% of the total time worked) : 24,000
Total administrative expenses (1/10 relates 40 the plant installation) : 32,000
Test rup and experimental production expenses : 23,000
Consultancy charges to architect for plant set up : 9,000
Depreciation on assets used for the installation : 12,000
The Machine was ready for use on 15^th January but was used from 1^st February. Due to this delay further costs ₹ 19,000 were incurred. Calculate the value at which the plant should be capitailzed. [Modified] (May 2015, 4 marks)
Answer:
Cost of PPE (ie. Machine) is calculated as under

Question 43.
A machinery with a useful life of 6 years was purchased on 1^st April, 2012 for ₹ 1,50,000. Depreciation was provided on straight line method for first three years considering a residual value of 10% of cost.
In the beginning of fourth year the company reassessed the remaining useful life of the machinery at 4 years and residual value was estimated at 5% of original cost.

The accountant recalculated the revised depredation historically and charged the difference to profit and loss account. You are required to comment on the treatment by accountant and calculate the depreciation to be charged for the fourth year. (Nov 2015, 5 marks)
Answer:
According to AS-10 “Property, Plant and Equipment”, if the depreciable assets are revalued, the provision for depreciation should be based on the revalued amount and on the estimate of the remaining useful lives of such assets. In case the revaluation has a material effect on the amount of depreciation, the same should be disclosed separately in the year in which revaluation is carried out.

As per the standard, when there is a revision of the estimated useful life of an asset, the unamortized depreciable ãmount should be charged over the revised remaining useful life. Accordingly revised depreciation shall be calculated prospectively. Thus, the treatment done by the accountant regarding recalculating the revised depreciation historically i.e. retrospectively is incorrect.

Calculation of Depreciation
Depreciation per year charged for first three years = ₹ 1,35,000 /6 = ₹ 22,500
WDV of the machine at the beginning of the fourth year = ₹ 1,50,000 – (₹ 22500 × 3)
= ₹ 82,500
Depreciable amount after reassessment of residual value = ₹ 82,500 – 7,500
= 75,000
Remaining useful life as per revised estimate = 4 years
Depreciation from the fourth year onwards = ₹ 75,000/4
= ₹ 18,750

Question 44.
Hema Ltd. purchased a machinery on 1.04.2008 for ₹ 15,00,000. The company charged straight line depreciation based on 15 years working life estimate and residual value ₹ 3,00,000. At the beginning of the 4 year, the company by way of systematic evaluation revalued the machinery upward by 20% of net book value as on date and also re-estimated the useful life as 7 years and scrap value as nil. The increase in net book value was credited directly to revaluation reserves. Depreciation (on SLM basis) later on was charged to Profit & Loss Account. At the beginning of 8^th year the company decided to dispose off the machinery and estimated the realizable value to ₹ 2,00,000.
You are required to ascertain the amount to be charged to Profit & Loss Account at the beginning of 8^th year with reference to AS-10. (Nov 2016, 5 marks)
Answer:
Calculation of Depreciation:
Cost of Machinery as on 1.4.2008 = ₹ 15,00,000
Depreciation p.a. = \(₹ \frac{15,00,000-3,00,000}{15}\)
= ₹ 80,000
∴ Depreciation for 3 years (1.4.2008 to 31.3.2011) = ₹ 80,000 × 3
= ₹ 2,40,000
∴ Net Book Value of Machinery as on 1.4.2011

Thus:
Increase in Revaluation to be taken to Revaluation Reserve
= ₹ 12,60,000 — ₹ 15,12,000 = ₹ 2,52,000
Revised Depreciation (p.a.) = \(\frac{₹ 15,12,000-\mathrm{Nil}}{7}\) = ₹ 2,16,000
(Assumption: Useful life = 7 years)
∴ Depreciation br years (1.04.2011 to 31 03.2015)
= ₹ 2,16,000 × 4 = ₹ 8,64,000
Thus:
Net Book Value of Machinery as on 1.4.2015:

Thus:
Loss to be debited (Adjusted in Revaluation Reserve)
= ₹ 4,48,000 — ₹ 3,40,000 = ₹ 1,08,000
Amount to be debited (Adjusted in Profit and Loss A/c)
= ₹ 4,48,000 — 1,08,000 = ₹ 3,40,000
Balance in Revaluation Reserve transferred to General Reserve
= ₹ 2,52,000 – ₹ 1,08,000 = ₹ 1,44,000.

Question 45.
ABC Ltd. Is installing a new plant at its production facility. It provides you the following information:
Cost of the plant (cost as per suppliers invoice) : ₹ 31,25,000
Estimated dismantling costs to be incurred after 5 years : ₹ 2,50,000
Initial Operating losses before commercial production : ₹ 3,75,000
Initial delivery and handling costs : ₹ 1,85,000
Cost of site preparation : ₹ 4,50,000
Consultants used for advice on the acquisition of the plant : ₹ 6,50,000
Please advise ABC Ltd. on the costs that can be capitalised for plant in accordance with AS 10: Property, Plant and Equipment. (Nov 2017, 5 marks)
Answer:
As per AS-10, PPE, the costs will be capitalised as follows:

Question 46.
Neon Enterprise operates a major chain of restaurants located in different cities. The company has acquired a new restaurant located at Chandigarh. The new restaurant requires significant renovation expenditure. Management expects that the renovations will last for 3 months during which the restaurant will be closed.
Management has prepared the following budget for this period —
Salaries of the staff engaged in preparation of restaurant before its opening : ₹ 7,50,000
Construction arid remodelling cost of restaurant : ₹ 30,00,000
Explain the treatment of these expenditures as per the provisions of AS 10 Property, Plant and Equipment”. (Nov 2018, 5 marks)
Answer:
As per provisions of AS 10, any cost directly attributable to bring the assets to the location and conditions necessary for it to be capable of operating in the manner indicated by the management are called directly attributable costs and would be included ¡n the costs of an item of PPE.

Management should capitalise the costs of construction and remodeling the restaurants, because they are necessary to bring the store to the condition necessary for it to be capable of operating in the manner intended by management. The restaurant cannot be opened without incurring the remodeling expenditure and thus the expenditure should be considered part of the asset. So, construction and remodeling cost of restaurant of ₹ 30,00,000 should be capitalised.

However, if the cost of salaries, utilities and storage of goods are in the nature of operating expenditure that would be incurred if the restaurant was open, then these costs are not necessary to bring the store to the condition necessary for it to be capable of operating in the manner intended by management should be expensed. So, salaries of the stall engaged in preparation of restaurant before its opening shall not be capitalised (₹ 7,50,000).

Question 47.
Answer the following question:
A Ltd. had following assets. Calculate depreciation for the year ending 31^st March, 2020 for each asset as per AS 10 (Revised)

(i) Machinery purchased for ₹ 10 lakhs on 1^st April, 2015 and residual value after useful life 0f 5 years, based on 2015 prices is ₹ 10 lakhs.
(ii) Land for ₹ 50 lakhs.
(iii) A Machinery is constructed for ₹ 5,00,000 for its own use (useful life is 10 years). Construction is completed on 1^st April, 2019, but the company does not begin using the machine until 31^st March. 2020.
(iv) Machinery purchased on 1^st April, 2017 for ₹ 50,000 with useful life of 5 years and residual value is NIL. On 1^st April 2019, management decided to use this asset for further 2 years only. (Nov 2020, 5 marks)

Question 48.
Preet Ltd. is installing a new plant at its production facility. It has incurred these costs:

Please advise Preet Ltd. on the costs that can be capitalised in accord with AS 10 (Revised).
Answer:
According to AS 10 (Revised), these costs can be capitailsed:

Note: Interest charges paid on Deferred credit terms” to the supplier of the plant (not a qualifying asset) of ₹ 4,00,000 and operating losses before commercial production amounting to ₹ 8,00,000 are not regarded as directly
attributable costs and thus cannot be capitalised. They should be written off to the Statement of Profit and Loss In the period they are incurred.

Question 49.
Explain “monetary Item” as per Accounting Standard 11. How are foreign currency monetary items to be recognized at each Balance Sheet date?
Classify the follôwing as monetary or non-monetary item:
(i) Share Capital
(ii) Trade Receivables
(iii) Investments
(iv) Fixed Assets (May 2013, 4 marks) (IPCC Gr. II)
Answer
According to AS 11 ‘The Effects of Changes in Foreign Exchange Rates, Monetary items are money held and assets and liablities to be received or paid in fixed or determinable amounts of money.

Foreign currency monetary items should be reported using the closing rate at each balance sheet date.

Whereas, in certain circumstances, the closing rate may not reflect with reasonable accuracy the amount in reporting currency that is likely to be realised from, or required to disburse, a foreign currency monetary item at the balance sheet date.

In such situation, the relevant monetary item should be reported in the reporting currency at the amount which is likely to be realised from or required to disburse, such item at the balance sheet date.

Question 50.
With reference to AS 11, define the following:
(i) Integral Foreign Operation.
(ii) Non-Integral Foreign Operation. (Nov 2016, 4 marks) [IPCC Gr. II]
Answer:
(i) integral Foreign Operation:
It is a foreign operation, the activities of which are an integral part of those of the reporting enterprise a foreign operation that is integral to the operations of the reporting enterprise carries on its business as if it were an extension of the reporting enterprise’s operation.

(ii) Non-Integral Foreign Operation:
It is a foreign operation that is not an integral foreign operation when there is a change between in the exchange rate between the reporting currency and the local currency. There is a little or no direct impact of the present and future cash flow from operations of either the non-integral foreign operation or the reporting enterprise the change in the exchange rate affects the reporting enterprise’s net investment in the non-integral foreign operation rather than the individual monetary and non-monetary Items held by the non-integral foreign operation.

Question 51.
: Exchange Rate
Goodš purchased on 1.1.2007 of US $ 10,000 : ₹ 45
Exchange rate on 31.3.2007 : ₹ 44
Date of actual payment 7.7.2007 : ₹ 43
Ascertain the loss/gain for financial years 2006-07 and 2007-08, also give their treatment as per AS-11. (Nov 2008, 4 marks) (IPCC Gr. II)
Answer:
Provision:
As per AS – 11 all foreign currency transaction should be recorded by applying the exchange rate at the date of transaction.

Analysis and Conclusion:
Therefore, goods purchased on 1.1.2007 and corresponding creditor would
be recorded at ₹ 45 = U$ 1. i.e; 10,000 × 45 = 4,50,000
As per AS 11 at the Balance Sheet date all monetary items should be reported using closing rate, therefore of US$ 10,000 outstanding on 31-3-2007 will be reported = 10,000 × 44 = 4,40,000.
Exchange Loss’Gain (4,40,000 – 4,50,000) = 10,000 Gain should be credited in P/L A/c for 2006-07.
As per AS-11, exchange difference on settlement on maturity items should be transferred to Profit and Loss A/c as gain or loss. Therefore 10,000 × 43 = 4,30,000 – 4,40,000 = ₹ 10,000 gain should be transferred to profit and loss for the year 2007 – 08.

Question 52.
Sterling Ltd. purchased a plant for US $ 20,000 on 31^st December, 07 payable after 4 months. The company entered into a forward contract for 4 months @ ₹ 48.85 per dollar. On 31^st December, 07, the exchange rate was ₹ 47.50 per dollar.

How will you recognise the profit or loss on forward contract in the books of Sterling Limited for the year ended 31^st March, 2008. (Nov 2009, 2 marks) (IPCC Gr. II)
Answer:
Calculation of profit or loss to be recognised In the books of Sterling Limited:

Balance loss of ₹ 6750 (i.e. ₹ 27,000 — ₹ 20,250) for the month of April, 2008 will be recognised in the financial year 2008 – 2009.

Question 53.
Sunshine Company Limited imported raw materials worth US Dollars 9,000 on 25^th February, 2011, when the exchange rate was ₹ 44 per US Dollar. The transaction was recorded in the books at the above mentioned rate. The payment for the transaction was made on 10th April, 2011, when the exchange rate was ₹ 48 per US Dollar. At the year end 31^st March, 2011, the rate of exchange was ₹ 49 per US Dollar.

The Chief Accountant of company passed an entry on 31^st March, 2011 adjusting the cost of raw material consumed for the difference between ₹ 48 and f 44 per US Dollar. Discuss whether this treatment is justified as per the provisions of AS-11 (Revised). (Nov 2011, 4 marks) [IPCC Gr. II]
Answer:
Provision:
As per para 9 of AS 11, ‘The Effects of Changes in Foreign Exchange Rates’, initial recognition of a foreign currency transaction is done in the reporting currency by applying the exchange rate at the date of the transaction.

Analysis and Conclusion:
Accordingly, on 25^th February 2011, the raw material purchased and its creditors will be recorded at US dollar 9,000 × ₹ 44 = ₹ 3,96,000.

Also, as per para 11 of the standard, on balance sheet date such transaction is reported at closing rate of exchange, hence it will be valued at the closing rate i.e. ₹ 49 per US dollar (USD 9,000 × ₹ 49 = ₹ 4,41,000) at 31^st March, 2011, irrespective of the payment made for the same subsequently at lower rate in the next financial year.

The difference of ₹ 5 (49 – 44) per US dollar i.e. ₹ 45,000 (USD 9,000 × ₹ 5) will be shown as an exchange loss in the profit and loss account for the year ended 31^st March, 2011 and will not be adjusted against the cost of raw materials.

In the subsequent year on settlement date, the company would recognize or provide the Profit and Loss Account an exchange gain of ₹ 1 per US dollar, i.e. the difference from balance sheet date to the date of settlement between ₹ 49 and ₹ 48 per US dollar i.e. ₹ 9,000. Hence, the accounting treatment adopted by the Chief Accountant of the company is incorrect i.e. it is not in accordance with the provisions of AS 11.

Question 54.
Beekay Ltd. purchased fixed assets costing to ₹ 5,000 lakh on 01.04.2012 payable in foreign currency (US $) on 05.04.2013. Exchange rate of 1 US $ = ₹ 50.00 and ₹ 54.98 as on 01.04.2012 and 31.03.2013 respectively.
The company also obtained a soft loan of US$ 1 lakh on 01.04.2012 payable in three annual equal instalments. First instalment was due on 01.05.2013. You are required to state, how these transactions would be accounted for in the books of accounts ending 31st March, 2013. (Nov 2013, 5 marks) [IPCC Gr. II]
Answer:
As per AS -11
(i) Difference arising on reporting of long-term foreign currency monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, in so far as they relate to requisition of depreciable capital asset, can be added to or deducted from cost of asset.

(ii) The MCA has given an option to capitalize the exchange differences arising on reporting of long term foreign currency monetary items till 31^st March, 2020.
Thus the company can capitalize the exchange differences arising due to long term loans linked with the acquisition of fixed assets.

1. Calculation of exchange difference on fixed assets
Foreign Exchange Liability = \(\frac{5,000}{50}\) = US $ 100 lakhs
Exchange Difference = US $ 100 lakhs × (₹ 54.98 – ₹ 50) = ₹ 498 lakhs.
Loss due to exchange difference amounting ₹ 498 lakhs will be capitalised and added in the carrying value of fixed assets. Depreciation on the unamortised amount will be provided in the remaining years.

2. Soft loan exchange difference (US $ 1 lakh i.e. ₹ 50 lakhs)
Value of loan 31.3.13 → US $ 1 lakh × 54.98 = ₹ 54,98,000
Now, AS -11 also provides that in case of liability such as longterm foreign currency monetary item, the exchange difference is to be accumulated in the Foreign Currency Monetary Item Translation Difference (FCMITD) and should be written off over the useful life of such long-term liability, by recognition as income or expenses in each of such periods.

Thus, Exchange difference between reporting currency (INR) and foreign currency (USD) as on 31.03.2013 = US $ 1.00 lakh × ₹ (54.98 – 50) = ₹ 4.98 lakhs.

Loan account is to be increased to 54.98 lakhs and FCMITD account is to be debited by 4.98 lakhs. Since loan is repayable in 3 equal annual instalments, ₹ 4.98 lakhs/3 = ₹ 1.66 lakhs is to be charged in Profit and Loss Account for the year ended 31^st March, 2013 and balance in FCMITD A/c ₹ (4.98 lakhs – 1.66 lakhs) = ₹ 3.32 lakhs is to be shown on the ‘Equity & Liabilities’ side of the Balance Sheet as a negative figure under the head ‘Reserve and Surplus’ as a separate line item.

Question 55.
Stem Ltd. purchased a Plant for US$ 30,000 on 30^th November, 2013 payable after 6 months. The company entered into a forward contract for 6 months @ ₹ 62.15 per dollar. On 30^th November, 2013, the exchange rate was ₹ 60.75 per dollar.
How will you recognise the profit or loss on forward contract in the books of Stem Ltd. for the year ended 31^st March, 2014? (Nov 2014, 5 marks) [IPCC Gr. II]
Answer:
Calculation of Profit or Loss

1. Value at the rate prevailing at the inception of forward contract
   = (USD ₹ 30,000 × 60.75) = ₹ 18,22,500
2. Value at forward rate = (USD 30,000 × 62.15) = ₹ 18,64,500
3. Total loss on entering into the forward contract = arising at inception for 6 months contract period = ₹ 42,000 (i.e. ₹ 18,64,500 – ₹ 18,22,500)
4. Loss to be recognised for the year ended 31^st March, 2014
   = 42,000 × \(\frac{4}{6}\) = ₹ 28,000

Question 56.
Explain briefly the accounting treatment needed in the following cases as per AS 11 as on 31.3.2015.
Sundry Debtors include amount receivable from Umesh ₹ 5,00,000 recorded at the prevailing exchange rate on the date of sales, transactions recorded at US $ 1 = ₹ 58.50.
Long term loan taken from a U.S. Company, amounting to ₹ 60,00,000. It was recorded at US $ 1 = ₹ 55.60, taking exchange rate prevailing at the date of transaction.
US$ 1 = ₹ 61.20 on 31.3.2015 (Nov 2015, 5 marks) [IPCC Gr. II]
Answer:
As per AS -11 “Accounting for Foreign Exchange transaction on initial recognition should be recorded by applying the foreign currency at the date of the transaction.
But the transaction as on the balance sheet date should be recorded as follows:

Monetary Items: Monetary items are money held and assets and liabilities to be received or paid in fixed or determinable amounts of money. So that the monetary items as on balance sheet date should be reported by using the closing exchange rates.

Non – Monetary items: Non-Monetary items are other than monetary items. Such items which are carried in terms of historical cost denominated in a foreign currency should be reported using the exchange rate at the date of the transaction:

(i) Here the sundry debtors which include the receivable from Umesh ₹ 5,00,000 to be recorded initially by applying exchange rate as on the date of transaction. As on balance sheet date this receivable recorded as rate on the 31 /3/2015 i.e. ₹ 61.20 as it is monetary item as per AS 11. And such difference of rate i.e. (61.20 – 58.50) = 2.7 × 8,547 = ₹ 23,077 is to be credited to P&L A/c as foreign exchange gain.

(ii) In this case firstly loan from US Company recorded at rate of initial recognition ₹ 55.60. On the balance sheet date the rate is ₹ 61.20 so that the loss on the exchange transaction i.e. (61.20 – 55.60) = ₹ 5.6 × 1,07,914 = ₹ 6,04,317. So that loss of ₹ 6,04,317 is to be debited to foreign exchange account and the loan is recorded in B/S at ₹ 55-60.

Question 57.
Shan Builders Limited has borrowed a sum of US $ 10,00,000 at the beginning of Financial Year 2014-15 for its residential project at LIBOR + 3%. The interest is payable at the end of the Financial Year. At the time of availment, exchange rate was ₹ 56 per US $ and the rate as on 31^st March, 2015 was ₹ 62 per US $. If Shan Builders Limited borrowed the loan in India in Indian Rupee equivalent, the pricing of loan would have been 10.50%. Compute Borrowing Cost and exchange difference for the year ending 31^st March, 2015 as per applicable Accounting Standards. (Applicable LIBOR is 1%). (Nov 2015, 5 marks) [IPCC Gr. II]
Answer:

1. Interest for the period 2014-15
   = US$ 10 lakhs × 4% × ₹ 62 per US$ = ₹ 24.80 lakhs
2. Increase in the liability towards the principal amount = US $ 10 lakhs × ₹ (62- 56) = ₹ 60 lakhs
3. Interest that would have resulted if the loan was-taken in Indian currency
   = US$ 10 lakhs × ₹ 56 × 10.5% = ₹ 58.80 lakhs
4. Difference between interest on local currency borrowing and foreign currency borrowing = ₹ 58.80 lakhs – ₹ 24.80 lakhs = ₹ 34 lakhs.

Therefore, out of ₹ 60 lakhs increase in the liability towards principal amount, only ₹ 34 lakhs will be considered as the borrowing cost. Thus, total borrowing cost would be ₹ 58.80 lakhs being the aggregate of interest of ₹ 24.80 lakhs on foreign currency borrowings plus the exchange difference to the extent of difference between interest on local currency borrowing and interest on foreign currency borrowing of ₹ 34 lakhs.

Hence, ₹ 58.80 lakhs would be considered as the borrowing cost to be accounted for as per AS 16 “Borrowing Costs” and the remaining ₹ 26 lakhs (60 – 34) would be considered as the exchange difference to be accounted for as per AS 11 “The Effects of Changes in Foreign Exchange Rates”.

Question 58.
M/s Power Track Ltd. purchased a plant for US $ 50,000 on 31^st October, 2015 payable after 6 months. The company entered into a forward contract for 6 months @ ₹ 64.25 per Dollar. On 31^st October, 2015 the exchange rate was ₹ 61.50 per Dollar.
You are required to recognise the profit or loss on forward contract in the books of the company for the year ended 31^st March, 2016. (May 2016, 5 marks) [IPCC Gr. II]
Answer:
Calculation of Profit or Loss to be charged or recognised in the books of M/s Power Track Ltd.

Thus, the loss amounting to ₹ 1,14,583 for the period is to be recognized in the year ended 31^st March, 2016.

Question 59.
ABC Ltd. borrowed US $ 5,00,000 on 01/01/2017, which was repaid as on 31/07/2017. ABC Ltd. prepares financial statement ending on 31 /03/2017. Rate of Exchange between reporting currency (INR) and foreign currency (USD) on different dates are as under:
01/01/2017 1 US $ = ₹ 68.50
31/03/2017 1 US $ = ₹ 69.50
31/07/2017 1 US $ = ₹ 70.00
You are required to pass necessary journal entries in the books of ABC Ltd. as per AS 11. (May 2018, 5 marks)
Answer:
Journal Entries in the books of ABC Ltd.

Question 60.
(i) ABC Ltd. a Indian Company obtained long term loan from WWW private Ltd., a U.S. company amounting to ₹ 30,00,000. It was recorded at US $1 = ₹ 60.00, taking exchange rate prevailing at the date of transaction. The exchange rate on balance sheet date (31.03.2018) was US $ 1 = ₹ 62.00.
(ii) Trade receivable includes amount receivable from Preksha Ltd., ₹ 10,00,000 recorded at the prevailing exchange rate on the date of sales, transaction recorded at US $1 = ₹ 59.00. The exchange rate on balance sheet date (31.03.2018) was US $ 1 = ₹ 62.00.

You are required to calculate the amount of exchange difference and also explain the accounting treatment needed in the above two cases as per AS 11 in the books of ABC Ltd. (Nov 2018, 5 marks)
Answer:
As per AS 11 “The effects of changes in Foreign Exchange Rates”, exchange differences arising on the settlement of monetary items or on reporting an enterprise’s monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, should be recognised as income or as expenses in the period in which they arise.

However, at the option of an entity, exchange differences arising on operating of long-term foreign currency monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, in so far as they relate to the acquisition of a non-depreciable capital asset can be accumulated in a “Foreign Currency Monetary Item Translation Difference Account” in the enterprises’s financial statements and amortised over the balance period of such long-term asset/liability, by recognition as income or expense in each of such periods.

Thus, Exchange Difference on Long term loan amounting ₹ 1,00,000 may either be charged to Profit and Loss A/c or to Foreign Currency Monetary Item Translation Difference Account but exchange difference on trade receivables amounting ₹ 50,847.45 is transferred to Profit & Loss A/c.

Question 61.
AXE Limited purchased fixed assets costing $ 5,00,000 on 1^st Jan. 2018 from an American company IWs M&M Limited. The amount was payable after 6 months. The company entered into a forward contract on 1^st January 2018 for five months @ ₹ 62.50 per dollar. The exchange rate per dollar was as follows:
On 1^st January, 2018 : ₹ 60.75 per dollar
On 31^st March, 2018 : ₹ 63.00 per dollar
You are required to state how the profit or loss on forward contract would be recognized in the books of AXE Limited for the year ending 2017-18, as per the provisions of AS 11. (Nov 2018, 5 marks)
Answer:
As per Para 39 of AS 11 ‘Changes in Foreign Exchange Rates’, in recording a forward exchange contract intended for trading or speculation purpose, the premium or discount on the contract is ignored and at each balance sheet date. the value of contract is marked to its Current market price and gain or loss on the contract is recognised.

3 months fallng in the year 2017-18; therefore loss to be recognized in 2017-18 (8,75,000/5) × 3 = ₹ 5,25,000. Rest ₹ 3,50,000 will be recognized in the following year 2018-19.

Question 62.
Karan Enterprises having its Head Office in Mangalore Karnataka has a branch in Greenville, USA. Following is the trial balance of Branch as at 31-3-2019:

(i) Fixed assets were purchased on 1^st April, 2015.
(ii) Depreciation at 10% p.a. s to be charged on fixed assets on straight line method.
(iii) Closing inventory at branch is $ 700 as on 31 -3-2019.
(iv) Goods received form Head Office (HO) were recorded at ₹ 1,85,500 in HO books.
(v) Remittances to HO were recorded at ₹ 1,62,000 in HO books.
(vi) HO account is recorded in HO books at ₹ 2,84,500.
(vii) Exchange rates of US Dollar at different dates can be taken as:
1-4-2015 ₹ 63;
1-4-2018 ₹ 65 and
31-3-2019 ₹ 67.
Prepare the trial balance after been converted into Indian rupees in accordance with AS-11. (Nov 2019, 5 marks)
Answer:
Trial Balance of the Foreign Branch converted into Indian Rupees as on March 31, 2019:

Question 63.
‘Answer the following:
Explain briefly the accounting treatment needed in the following cases as per AS 11 as on 31.03.2020.
(i) Debtors include amount due from Mr. S ₹ 9,00,000 recorded at the prevailing exchange rate on the date of sales, transaction recorded
at US S 1 = ₹ 72.00
US $ 1 = ₹ 73.50 on 31^st March, 2020
US $ 1 = ₹ 72.50 on 1^st April, 2019

(ii) Long term loan taken on 1^st April, 2019 from a U.S. company amounting to ₹ 75,00,000. ₹ 500,000 was repaid on 31^st December, 2019, recorded at US $ 1 = ₹ 70.50. Interest has been paid as and when debited by the US company.
US$1 = ₹ 73.50 0n 31^st March, 2020
US $ 1 = ₹ 72.50 on 1^st April, 2019 (Jan 2021, 5 marks)

Question 64.
: Exchange Rate per $
Goods purchased on 1.1.2017 for US $ 15,000 : ₹ 75
Exchange rate on 31.3.2017 : ₹ 74
Date of actual payment 7.7.2017 : ₹ 73
You are required to ascertain the loss/gain for financial years 2016-17 and 2017-18. also give their treatment as per AS 11.
Answer:
As per AS 11 on ‘The Effects of Changes in Foreign Exchange Rates’, all foreign currency transactions should be recorded by applying the exchange rate on the date of transactions. Thus, goods purchased on 1.1.2017 and corresponding Creditor would be recorded at ₹ 11,25,000 (i.e. ₹ 15,000 × ₹ 75)

According to the standard, at the balance sheet date all monetary transactions shoud be reported using the closing rate. Thus, creditors of US $15,000 on 31.3.217 will be reported at 11,10,000 (ie. $15,000 × ₹ 74) and exchange profit of ₹ 15,000 (i.e. 11,25,000 – 11,10,000) should be credited t0 Profit and Loss account in the year 2016-17.

On 7.7.2017, creditors of $15,000 is paid at the rate of ₹ 73. As per AS 11, exchange difference or settlement of the account should also be transferred to Profit and Loss Account. Therefore, ₹ 15,000 (i.e. 11,10,000 – 10,95,000) will be credited to Profit and Loss Account in the year 2017-18.

Question 65.
Rau Ltd. purchased a plant for US$ 1,00,000 on 01st February 2016, payable after three months. Company entered into a forward contract for three months @ ₹ 49.15 per dollar. Exchange rate per dollar on 01st Feb. concessional rates. In these circumstances, it is was ₹ 48.85. How will you recognise the profit or loss on forward contract in the books of Rau Ltd.?
Answer:

Two falling the year 2016-17; therefore loss to be recognised (30,000/3) × 2 = ₹ 20,000. Rest 10,000 will be recognised in the following year.

Question 66.
How Government grant relating to specific fixed asset is treated in the books as per AS-12?
Answer:
As per AS – 12 ‘Accounting for Government Grants’, Government grant relating to specific fixed asset is treated as follows:

1. Government grants related to specific fixed assets should be presented in the balance sheet by showing the grant as deduction from the gross value of the fixed assets concerned in arriving at their book value.

2. When the grant related to a specific fixed asset equal to the whole, or virtually the whole, of the cost of the asset, the asset should be shown in the balance sheet at a nominal value.

3. Alternatively, government grants related to depreciable fixed assets may be treated as deferred income which should recognised in the profit and loss statement on a systematic and rational basis over the useful life of
the asset. i.e. Such grants should be allocated to income over the periods and in the proportions in which depreciation on those assets is charged.

(i) Grant related to non – depreciable assets are credited to capital reserve under this method, as there is usually no charge to income in respect of such assets.

(ii) But, when a grant related to a non – depreciable asset requires the fulfillment of certain obligations, the grant is credited to income over the same period over which the cost of certain obligations, the grant is credited to income over the same period over which the cost of meeting such obligations to charged to income.

(iii) Any differed income is suitably disclosed in the balance sheet pending its apportionment to profit & loss account.

Question 67.
How would you record a non-monetary grant received from the Government as per AS-12? (May 2008, 2 marks) (IPCC Gr. II]
Answer:
Para 7 of AS-12 deals with the accounting treatment of Non-monetary Government Grants which says that Government grants may take the form of non-monetary 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 recorded at a nominal value.

Question 68.
Siva Limited received a grant of ₹ 1,500 lakhs during the last accounting year (2009-10) from Government for welfare activities to be carried on by the company for its employees. The grant prescribed conditions for its utilization. However during the year 2010-11, it was found that the conditions of the grant were not compiled with and the grant had to be refunded to the Government in full. Elucidate the current accounting treatment with reference to the provisions of AS-12. (May 2011, 4 marks) (IPCC Gr. II)
Answer:
According to AS 12 ‘Accounting for Government Grants’, Government Grant may, sometimes, become refundable if certain conditions are not fulfilled.

A government grant that becomes refundable is treated as extra ordinary item as per AS, 5 ‘Net Profit or Loss for the Period, Prior Period items and Changes in Accounting Policies.

The amount refundable in respect of a government grant related to revenue is applied first against any unamortized deferred credit remaining in respect of the grant. To the extent that the amount refundable exceeds any such deferred credit, or where no deferred credit exists, the amount is charged immediately to profit and loss statement.

In the given situation the amount of refund of grant of ₹ 1,500 lakhs should be charged to the profit and loss account in the year 2010-2011 as an extraordinary item.

Question 69.
Explain the treatment of Refund of Government Grants as per Accounting Standard-12. (Nov 2017, 4 marks) (IPCC Gr. II)
OR
Explain in brief the treatment of Refund of Government Grants in line with AS 12 in the following three situations:
(i) When Government Grant is related to revenue.
(ii) When Government Grant is related to specific fixed assets,
(iii) When Government Grant is in the nature of Promoter’s contribution. (May 2014, 4 marks) [IPCC Gr. II]
Answer:
Para 11 of AS 12, “Accounting for Government Grants”, explains treatment of government grants in following situations:

(i) When government grant is related to revenue:

(a) When deferred credit account has a balance: The amount of government grant refundable will be adjusted against unamortized deferred credit balance remaining in respect of the grant. To the extent that the amount refundable exceeds any such deferred credit the amount is immediately charged to profit and loss account.
(b) Where no deferred credit account balance exists: The amount of Government grant refundable will be charged to profit and loss account.

(ii) When government grant is related to specific fixed assets:

(a) Where at the time of receipt the amount of Government grant reduced the cost of asset: The amount of Government grant refundable will increase the book value of the asset.
(b) Where at the time of receipt the amount of government grant was credited to “Deferred Grant Account”: The amount of Government grant refundable will reduce the capital reserve or unamortized balance of deferred grant account as appropriate.

(iii) When Government grant is in the nature of Promoter’s contribution:
The amount of government grant refundable in part or in full on non fulfilment of specific conditions, the relevant amount recoverable by the Government will be reduced from capital reserve.
A Government grant that becomes refundable is treated as an extra ordinary item.

Question 70.
State whether the following statement is True’ or False’. Also give reason for your answer.
2. As per the provisions of AS-12, government grants in the nature of promoters’ contribution which become refundable should be reduced from the capital reserve. (May 2019, 1 mark)
Answer:
This statement is True.
As per AS 12, government grants in the nature of promoters contribution which become refundable should be reduced from the capital reserve.

Question 71.
X Ltd. received a revenue grant of ₹ 10 crores during 2006-07 from Government for welfare activities to be carried on by the company for its employees. The grant prescribed the conditions for utilisation. However during the year 2008-09, it was found that the prescribed conditions were not fulfilled and the grant should be refunded to the Government.
State how this matter will have to be dealt with in the financial statements of X Ltd. for the yew ended 2008-09. (2 marks) [IPCC Gr. II]
Answer:
Provision:
Acccording to AS 12 “Accounting for Government Grants”, a grant that became refundable should be treated as an extra-ordinary item as per Accounting Standard 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies. The amount refundable in respect of a government grant related to revenue, is applied first against any unamortised deferred credit remaining in respect of the grant. To the extent that the amount refundable exceeds any such deferred credit, or where no deferred credit exists, the amount is charged Immediately to profit and loss statement.

Analysis and Conclusion:
Therefore, refund of grant of ₹ 10 crores should be shown in the profit and loss account of the company as an extra-ordinary item during the financial year 2008-09.

Question 72.
Santosh Ltd. has received a grant of ₹ 8 crores from the Govt. for setting up a factory in a backward area. Out of this grant, the company distributed ₹ 2 crores as dividend. Also, Santosh Ltd. 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. (May 2010, 2 marks) (IPCC Gr. II]
Answer:
Provision and Analysis:
According to AS-12 ‘Accounting for Government Grants’, when government grant is received for a specific purpose, it should be utilised for the same. Therefore, the grant received for setting up a factory is not available for distribution of dividend.

In the second 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.

Conclusion:
The treatment of both the grants is incorrect according to AS-12.

Question 73.
ABC Limited purchased a machinery for ₹ 25,00,000 which has estimated useful life of 10 years with the salvage value of ₹ 5,00,000. On purchase of the assets Central Government pays a grant for ₹ 5,00,000. Pass the journal entries with narrations In the books of the company for the first year, treating grant as deferred income. (May 2012, 5 marks) (IPCC Gr. II)
Answer:
Journal Entries in the Books of ABC Ltd.

Question 74.
M/s. A Ltd. has set up its business In a designated backward area with an investment of ₹ 200 lakhs. The Company is eligible for 25% subsidy and has received ₹ 50 lakhs from the Government.
Explain the treatment of the Capital Subsidy received from the Government in the Books of the company. (May 2015, 4 marks) (IPCC Gr. II)
Answer:
As per AS-12, Accounting for Government Grants, the grant or subsidy received from government is recognised only when there is reasonable assurance that the enterprise will comply with conditions attached to them and the grants will be received.

Here, the company has been set up in backward area and eligible to receive the capital Subsidy and it has received the subsidy so that ₹ 50 lakhs shall be recognised in books of the company.

₹ 50 lakhs shall be recognised as Capital Reserve and to be written off over a period of time as expenditure incurred.

Question 75.
M/s ABC Ltd. purchased fixed assets for ₹ 50,00,000. Government grant received towards it is 20%. Residual value is ₹ 8,00,000 and useful life is 8 years. Assumed depreciation is on the basis of Straight Line Method.
Asset is shown in the Balance Sheet net of grant. After one year, grant becomes refundable to the extent of ₹ 7,00,000 due to non-compliance of certain conditions.
Pass Journal entries for 2^nd year in the books of the companý. (May 2016, 5 marks) (IPCC Gr. II)
Answer:
Journal Entries in the books of ABC Ltd. for 2^nd year

Working Note:
Depreciation for year 2

Question 76.
Ram Ltd. purchased machinery for ₹ 80 lakhs. (useful life 4 years and residual value ₹ 8 lakhs). Government grant received is ₹ 32 lakhs. Show the Journal Entry to be passed at the time of refund of grant and the value of the fixed assets in the third year and the amount of depreciation for remaining two years, if
(i) the grant is credited to Fixed Assets A/c.
(ii) the grant is credited to Deterred Grant A/c. (May 2007, 5 marks)
Answer:
In the books of Ram Ltd. Journal Entries
(At the time of refund of grant)
(i) if Grant is credited to Fixed Asset A/c:

(ii) The Balance of Fixed Asset in the 3^rd Year:
Fixed Asset initially recorded = 80 L – 32 L
= 48 L
Depreciation p.a. = \(\left(\frac{48,00,000-8,00,000}{4 \text { years }}\right)\) = ₹ 10,00,000 p.a.
1, 4years )
Value of Fixed Asset after 2 years but before
refund = 48,00,000 — (10,00,000 × 2) = ₹ 28,00,000
Value of Fixed Asset after refund
= ₹ 28,00,000 + 32,00,000
= ₹ 60,00,000

(iii) The amount of depreciation for remaining 2 years:
= \(\left(\frac{60,00,000-8,00,000}{2 \text { years }}\right)\) = ₹ 26,00,000 p.a.

If the grant is credited to Deferred Grant Account:
As per AS 12 ‘Accounting for Government Grants,’ income from Deferred Grant Account is allocated to Profit and Loss Account usually over the periods and in the proportions in which depreciation on related assets is charged.

Accordingly, in the first two years (₹ 32 lakhs /4 years) = ₹ 8 lakhs pa. × 2 years = ₹ 16 lakhs will be credited to Profit and Loss Account and ₹ 16 lakhs will be the balance of Deferred Grant Account after two years.

Therefore, on refund of grant, following entry will be passed:

1. Value of Fixed Assets after two years but before refund of grant:
Fixed assets initially recorded k the books = ₹ 80 lakhs
Depreciation p.a. = (₹ 80 lakhs – ₹ 8 lakhs)/4 years = ₹ 18 lakhs per year
Book value of fixed assets after two years = ₹ 80 lakhs – (₹ 18 lakhs × 2 years) = 44 Lakhs

2. Value of Fixed Assets after refund of grant:
On refund of grant the balance of deterred grant account will become Nil. The Fixed assets will continue to be shown in the books at ₹ 44 Lakhs.

3. Amount of depreciation for remaining two years:
Depreciation will continue to be charged at ₹ 18 Lakhs per annum for the remaining two years.

Question 77.
On 01.04.2014, XYZ Ltd. received Government grant of ₹ 100 Lakhs for an acquisition of new machinery costing ₹ 500 Lakhs. The grant was received and credited to the cost of the asset. The life span of the machinery is 5 years. The machinery is depreciated at 20% on WDV method. The company had to refund the entire grant in 2^nd April, 2017 due to non-fulfilment of certain conditions which was imposed by the government at the time of approval of grant.
How do you deal with the refund of grant to the government in the books of XYZ Ltd., as per AS 12? (May 2018, 5 marks)
Answer:
According to para 21 of AS 12 on Accounting for Government Grant, the amount refundable in respect of a grant related to a specific fixed asset should be recorded by increasing the book value of the asset or by reducing deferred income balance, as appropriate, by the amount refundable. Where the book value is increased depreciation on the revised book value should be provided prospectively over the residual useful life of the asset.

Depreciation @ 20% on the revised book value amounting ₹ 304.80 Lakhs is to be provided prospectively over the residual useful life of the asset.

Question 78.
Answer the following question:
On 1^st April, 2016, Mac Ltd. received a Government Grant of ₹ 60 lakhs for acquisition of machinery costing ₹ 300 lakhs. The grant was credited to the cost of the asset. The estimated useful life of the machinery is 10 years. The machinery is depreciated @ 10% on WDV basis. The company had to refund the grant in June 2019 due to non-compliance of certain conditions. How the refund of the grant is dealt with in the books of Mac Ltd. assuming that the company did not charge any depreciation for the year 2019-20. Pass necessary Journal Entries for the year 2019-20. (Nov 2020, 5 marks)

Question 79.
Answer the following:
Darshan Ltd. purchased a Machinery on 1^st April, 2016 for ₹ 130 lakhs (Useful life is 4 years). Government grant received is ₹ 40 lakhs for the purchase of above Machinery.
Salvage value at the end of useful life is estimated at ₹ 60 lakhs.
Darshan Ltd. decides to treat the grant as deferred income.

You are required to calculate the amount of depreciation and grant to be recognised in profit & loss account for the year ending 31^st March, 2017, 31^st March, 2018, 31^st March, 2019 & 31^st March, 2020.
Darshan Ltd. follows straight line method for charging depreciation. (Jan 2021, 5 marks)

Question 80.
A specific government grant of ₹ 15 lakhs was received by USB Ltd. for acquiring the Hi-Tech Diary plant of ₹ 95 lakhs during the year 2014-15. Plant has useful life of 10 years. The grant received was credited to deferred income in the balance sheet. During 2017-18, due to non- compliance of conditions laid down for the grant, the company had to refund the whole grant to the Government. Balance in the deferred income on that date was ₹ 10.50 lakhs and written down value of plant was ₹ 66.50 lakhs.

(i) What should be the treatment of the refund of the grant and the effect on cost of plant and the amount of depreciation to be charged during the year 2017 -18 in profit and loss account?
(ii) What should be the treatment of the refund, if grant was deducted from the cost of the plant during 2014-15 assuming plant account showed the balance of ₹ 56 lakhs as on 1.4.2017?
You are required to explain in the line with provisions of AS 12.
Answer:
As per para 21 of AS 12, ‘Accounting for Government Grants’, “the amount refundable in respect of a grant related to specific fixed asset should be recorded by reducing the deferred income balance. To the extent the amount refundable exceeds any such deferred credit, the amount should be charged to profit and loss statement.

(i) In this case the grant refunded is ₹ 15 lakhs and balance in deferred income is ₹ 10.50 lakhs, ₹ 4.50 lakhs shall be charged to the profit and loss account for the year 2017-18. There will be no effect on the cost of the fixed asset and depreciation charged will be on the same basis as charged in the earlier years.

(ii) If the grant was deducted from the cost of the plant in the year 2014-15 then, para 21 of AS 12 states that the amount refundable in respect of grant which relates to specific fixed assets should be recorded by increasing the book value of the assets, by the amount refundable.

Where the book value of the asset is increased, depreciation on the revised book value should be provided prospectively over the residual useful life of the asset. Therefore, in this case, the book value of the plant shall be increased by ₹ 15 lakhs. The increased cost of ₹ 15 lakhs of the plant should be amortized over 7 years (residual life). Depreciation charged during the year 2017-18 shall be (56+15)/7 years = ₹ 10.14 lakhs presuming the depreciation is charged on SLM.

Question 81.
Paridhi Electronics Ltd. has current investment (X Ltd.s shares) purchased for ₹ 5 lakhs, which the company want to reclassify as long term investment on 31.3.2018. The market value of these investments as on date of Balance Sheet was ₹ 2.5 lakhs. How will you deal with this as on 31.3.18 with reference to AS-13?
Answer:
As per AS 13 ‘Accounting for Investments’, where investments are reclassified from current to long-term, transfers are made at the lower of cost or fair value at the date of transfer.

In the given case, the market value of the investment (X Ltd. shares) is 2.50 lakhs, which is lower than its cost i.e. ₹ 5 lakhs. Therefore, the transfer to long term investments should be made at cost of ₹ 2.50 lakhs. The loss of. ₹ 2.50 lakhs should be charged to profit and loss account.

Question 82.
Mention two categories of investments defined by AS 13 and also State their valuation principles. (Nov 2008, 2 marks)
Answer:
As per AS 13 ‘Accounting for Investments’, there are two categories of investments, viz. Current Investments and Long Term Investments.

According to Para 14 of the standard, the carrying amount for Current Investments is the lower of cost and fair value whereas Long Terms Investments are valued at cost less permanent diminutions in value of investment. For current investments, according to this standard any reduction to fair value and any reversals of such reductions are included in the profit and loss statement.

Question 83.
State whether the following statement is ‘True’ or-False’. Also give reason for your answer.
4. As per the provisions of AS-13, a current investments is an investment that is by its nature is readily realisable and is intended to be held for not more than six months from the date on which such investment is made. (May 2019, 1 mark)
Answer:
This statement is False
As per AS 13, a current investment is an investment that is by its nature readily realisable and is intended to be held for not more than one year from the date on which such investment is made.

Question 84.
M/s Innovative Garments Manufacturing Company Limited invested in the shares of another company on 1^st October, 2011 at a cost of ₹ 2,50,000. It also earlier purchased Gold of ₹ 4,00,000 and Silver of ₹ 2,00,000 on 1^st March, 2009. Market value as on 31^st March, 2012 of above investments are as follows:
Shares : ₹ 2,25,000
Gold : ₹ 6,00,000
Silver : ₹ 3,50,000
How above investments will be shown in the books of accounts of M/s Innovative Garments Manufacturing Company Limited for the year ending 31^st March, 2012 as per the provisions of Accounting Standard 13 “Accounting for Investments”? (May 2012, 5 marks)
Answer:
Provision:
According to AS-13, Accounting for Investments, for investment in shares:

• If shares are purchased with an intention to hold for short-term period then it will be shown at the realizable value of ₹ 2,25,000 as on 31^st March, 2012.
• However, if equity shares are acquired with an intention to hold for long term period then it will be shown at cost of ₹ 2,50,000 in the Balance Sheet of the company.
• However, provision for diminution shall be made to recognize a decline, if other than temporary, in the value of shares.
• According to the standard, investment acquired for long term period shall be shown at cost. Gold and silver are generally purchased with an intention to hold it for long term period until and unless given otherwise.

Analysis and Conclusion:
The investment in Gold and Silver (purchased on 1^st March, 2009) shall continue to be shown at cost as on 31^st March, 2012 i.e., ₹ 4,00,000 and ₹ 2,00,000 respectively, though their realizable values have increased.

Question 85.
Blue-chip Equity Investments Ltd., wants to re-classify its investments in accordance with AS-13.

(i) Long term investments in Company A, costing ₹ 8.5 lakhs are to be re-classified as current. The company had reduced the value of these investments to ₹ 6.5 lakhs to recognize a permanent decline in value. The fair value on date of transfer is ₹ 6.8 lakhs.
(ii) Long term investments in Company B, costing ₹ 7 lakhs are to be re-classified as current. The fair value on date of transfer is ₹ 8 lakhs and book value is ₹ 7 lakhs.
(iii) Current investment in Company C, costing ₹ 10 lakhs are to be re-classified as long term as the company wants to retain them. The market value on date of transfer is ₹ 12 lakhs.
(iv) Current investment in Company D, costing ₹ 15 lakhs are to be re-classified as long term. The market value on date of transfer is ₹ 14 lakhs. (Nov 2014, 5 marks)
Answer:
(i) As per provisions of AS-13, ‘Accounting for investments’ whenever there is re-classification of investment, as long term investments are re-classified as current investments then transfer are made at lower of cost and carrying amount at the date of transfer.

Here, cost of investment is ₹ 8.5 lakhs and carrying value as on date of transfer is ₹ 6.5 lakhs. Then, investment is valued at ₹ 6.5 lakhs on re-classification.

(ii) As, on re-classification from long term investment to current investment than it is recognised lower of cost and carrying value on transfer date.

Here, long term investment in Company B to be re-classified as current cost of investment is ₹ 7 lakhs and carrying value is ₹ 7 lakhs. Then investment is re-classified as ₹ 7 lakhs which is lower of cost and fair value.

(iii) As per AS-13, when there is re-classification of investment from current to long term investments then valuation is to be done lower of cost and fair value at the date of transfer.

Here, investment in Company C shall be re-classified as long term. The cost of investment is ₹ 10 and fair value on transfer date is ₹ 12 lakhs. Then investment is valued at ₹ 10 lakhs which is lower of cost and fair value.

(iv) As per AS-13, when there is re-classification of investment from current to long term investments then valuation is to be done on lower of cost and fair value at the date of transfer.

Here investment in Company D shall be re-classified as long term. The cost of investment is ₹ 15 lakhs and fair value on transfer date is ₹ 14 lakhs. Then investment is valued of ₹ 14 lakhs which is lower of cost and fair value.

Note: This question states that Blue Chip Equity Investment Ltd. wants to reclassify its investments in accordance with AS 13. The values, at which the investments have to be reclassified, have been given in the above answer.

Question 86.
M/s Active Builders Ltd. invested in the shares of another company on 31^st October, 2015 at a cost of ₹ 4,50,000. It also earlier purchased Gold of ₹ 5,00,000 and Silver of ₹ 2,25,000 on 31^st March, 2013. Market values as on 31^st March, 2016 of the above investments are as follows:
Shares ₹ 3,75,000; Gold ₹ 7,50,000 and Silver ₹ 4,35,000
How will the above investments be shown in the books of account of M/s Active Builders Ltd. for the year ending 31^st March, 2016 as per the provision of AS-13? (May 2016, 5 marks)
Answer:
As per AS -13 “Accounting for Investments”, investments Which are for long-term purpose should be carried at cost whereas short-term Investments or current investments should be classified at lower of cost and fair value.

In this case, M/s. Active Builders Ltd. should disclose the investments as below as on 31/03/2016:

Loss in shares should be charged to Profit & Loss Account of ₹ 75,000.

Question 87.
How you will deal with following in the financial statement of the Paridhi Electronics Ltd. as on 31.3.16 with reference to AS-13?
(i) Paridhi Electronics Ltd. invested in the shares of another unlisted company on 1^st May, 2012 at a cost of ₹ 3,00,000 with the intention of holding more than a year. The published accounts of unlisted company received in Jan 2016 reveals that the company has incurred cash losses with decline market share and investment of Paridhi Electronics Ltd. may not fetch more than ₹ 45,000.

(ii) Also Paridhi Electronics Ltd. has current investment (X Ltd.’s shares) purchased for ₹ 5 lakhs, which the company wants to reclassify as long term investment. The market value of these investments as on date of Balance Sheet was ₹ 2.5 lakhs. (Nov 2016, 5 marks)
Answer:
(i) Provision:
Any reduction in the carrying amount and any reversal such as reduction should be charged and credited to Profit and Loss A/c.

Analysis:
Paridhi Electronics Ltd. invested in an unlisted company shares of ₹ 3,00,000. There is a decline in market share and investment may not fetch more than ₹ 45,000. The facts of the case clearly indicate that the decline in the value of the Long-Term Investment is not temporary.

Hence, a provision for diminution should be made to reduce the Carrying Amount of Long-Term Investment to ₹ 45,000 in the Financial Statements for the year ended 31.03.2016.
The Published Accounts of the unlisted company provide further evidence as to the conditions persisting at the Balance Sheet date. Hence, this is an “Adjusting Event”under AS-4.

Conclusion:
AS-13 requires disclosure of changes in carrying amounts of long-term investments.
Hence, reduction in carrying amount should be charged to Profit and Loss A/c (i.e.; ₹ 2,55,000).

(ii) Provision:
As per AS-13 ‘Accounting for Investments’, where investments are reclassified from current to long term, transfer are made at lower of cost and fair value on the date of transfer.

Analysis:
In the given case Paridhi Electronics Ltd. has current investment for ₹ 5 lakhs and fair value as on date is ₹ 2.5 lakhs.

Conclusion:
Hence, reclassification will be made at ₹ 2.5 lakhs as market value is less than the cost of ₹ 5 lakhs.

Question 88.
On 15^th June, 2018, Y limited wants to re-classify its investments in accordance with AS-13 (revised). Decide and state the amount of transfer, based on the following information:
1. A portion of long term investments purchased on 1st March, 2017 are to be re-classified as current investments. The original cost of these investments was ₹ 14 lakhs but had been written down by ₹ 2 lakhs (to recognise ‘other than temporary’ decline in value). The market value of these investments on 15^th June, 2018 was ₹ 11 lakhs.

2. Another portion of long term investments purchased on 15^th January, 2017 are to be re-classified as current investments. The original cost of these investments was ₹ 7 lakhs but had been written down to ₹ 5 lakhs (to recognise ‘other than temporary’ decline in value). The fair value of these investments on 15^th June, 2018 was ₹ 4.5 lakhs.

3. A portion of current investments purchased on 15^th March, 2018 for ₹ 7 lakhs are to be re-classified as long term investments, as the company has decided to retain them. The market value of these investments on 31^st March, 2018 was ₹ 6 lakhs and fair value on 15^th June, 2018 was ₹ 8.5 lakhs.
Another portion of current investments purchased on 7^th December, 2017 for ₹ 4 lakhs are to be re-classified as long term investments. The market value of these investments was:
Answer:

• As per AS 13, (Revised) Accounting for Investment, where long-term investments are reclassified as current investments, transfers are made at the lower of cost and carrying amount at the date of transfer.
• Where investments are reclassified from current to long-term, transfers are made at the lower of cost and fair value at the date of transfers.

1. In the first case, investment is written down by ₹ 2 lakhs as it is other than temporary decline in value. So carrying amount is ₹ 12 lakhs. ₹ 2 lakhs will be charged to P&L A/c. Now this investment is reclassified as current, which will be made at lower cf cost (i.e. 14 lakhs) and carrying amount (i.e. 12 lakhs). Hence, long term investment are reclassified as current investment should be carried at ₹ 12 lakhs.

2. In the second case, investment is written down to ₹ 5 lakhs as it is other than temporary decline in value so carrying amount is ₹ 5 lakhs. ₹ 2 lakhs will be charge to P&L A/c. Now this investment is reclassified as current, so transfer will be made at lower of cost (₹ 7 lakhs) and carrying amount (i.e. 5 lakhs). Hence, long term investment is reclassified as current investment should be carried at ₹ 5 lakhs.

3. In the third case, the fair value on 15^th June 2018 was ₹ 8.5 lakhs, which is higher then cost i.e. ₹ 7 lakhs. Therefore the transfer to long term investments should be carried at cost ₹ 7 lakhs.

4. In the forth case, the fair value on 15^th June 2018 was ₹ 3.8 lakhs, which is lower than cost i.e. ₹ 4 lakhs. Therefore, the transfer to long term investments should be carried at fair value i.e. ₹ 3.8 lakhs. The loss of ₹ 0.20 lakhs should be charged to P&L A/c.

Question 89.
Answer the following question:
A Limited invested in the shares of XYZ Ltd. on 1^st December, 2019 at a cost of ₹ 50,000. Out of these shares ₹ 25,000 shares were purchased with an intention to hold for 6 months and ₹ 25,000 shares were purchased with an intention to hold as long-term Investment.

A Limited also earlier purchased Gold of ₹ 1,00,000 and Silver of ₹ 30,00,000 on 1^st April, 2019. Market value as on 31^st March, 2020 of above investments are as follows:

Shares ₹ 47,500 (Decline in the value of shares is temporary.)
Gold ₹ 1,80,000
Silver ₹ 30,55,000

How above investments will be shown in the books of accounts of M/s A Limited for the year ending 31^st March, 2020 as per the provisions of AS 13 (Revised)? (Nov 2020, 5 marks)

Question 90.
Answer the following:
Kunal Securities Ltd. wants to reclassify its investments in accordance with AS-13 (Revised). State the values, at which the investments have to be reclassified in the following cases:
(i) Long term investment in Company A, costing ₹ 10.5 lakhs is to be reclassified as current investment. The company had reduced the value of these investments to ₹ 9 lakhs to recognize a permanent decline in value. The fair value on the date of reclassification is ₹ 9.3 lakhs.
(ii) Long term investment in Company B, costing ₹ 14 lakhs is to be re-classified as current investment. The fair value on the date of reclassification is ₹ 16 lakhs and book value is ₹ 14 lakhs.
(iii) Current investment in Company C, costing ₹ 12 lakhs is to be re-classified as long term investment as the company wants to retain them. The market value on the date of reclassification is ₹ 13.5 lakhs.
(iv) Current investment in Company D, costing ₹ 18 lakhs is to be re-classified as long term investment. The market value on the date of reclassification is ₹ 16.5 lakhs. (Jan 2021, 5 marks)

Question 91.
Write short note on ‘Suspension of Capitalisation’ in context of Accounting Standard 16. (May 2016, 4 marks) [IPCC Gr II]
Answer:
Suspension of Capitalisation:
As per AS-16 Borrowing cost is suspension of capitalisation are as follows:

(i) When all activities necessary to prepare the qualifying asset for its intended use or sale are in progress then capitalisation of borrowing costs should continue during the period in which active development is in progress.

(ii) When all the activities necessary to prepare the qualifying asset for its intended use or sale are interrupted then capitalisation of borrowing costs should be suspended during extended periods in which active development is interrupted.

(iii) When all the activities necessary to prepare the qualifying asset for its intended use or sale are complete then capitalisation of borrowing costs should cease completion of active development.

Question 92.
Enumerate two points which the financial statements should disclose in respect of Borrowing costs as per AS-16. (May 2009, 2 marks) [IPCC Gr. II]
Answer:
As per AS 16, the Financial Statements should disclose the following:

1. The accounting policy adopted for borrowing costs and
2. The amount of borrowing costs capitalized during the period.

Question 93.
Briefly indicate the items which are included in the expressions “Borrowing Cost” as per AS-16. (Nov 2009, 2 marks) [IPCC Gr. II]
Answer:
Borrowing costs are interest and other costs incurred by an enterprise in connection with the borrowing of funds.
Borrowing cost generally includes:

1. Interest and commitment charges on bank borrowings and other short term and long term borrowings.
2. Amortisation of discounts or premiums relating to borrowings.
3. Amortisation of ancillary costs incurred in connection with the arrangement of borrowings.
4. Finance charges in respect of assets required under finance leases or under other similar arrangements; and
5. Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs.

Question 94.
An industry borrowed ₹ 40,00,000 for purchase of machinery on 1.6.2007. Interest on loan is 9% per annum. The machinery was put to use from 1.1.2008. Pass journal entry for the year ended 31.3.2008 to record the borrowing cost of loan as per AS-16. (May 2008, 2 marks) [IPCC Gr. II]
Provision:
As per AS-16 a qualifying asset is an asset which takes substantial period of time for completion;
Also reference is drawn to Accounting standard Interpretation-1 which states as follows “The issue as to what constitutes a substantial period of time primarily depends on the facts and circumstances of each case. However, ordinarily, a period of twelve months is considered as substantial period of time unless a shorter or longer period can be justified on the basis of facts and circumstances of the case. In estimating the period, time which an asset takes, technologically and commercially, to get it ready for its intended use or sale should be considered.”

Analysis and Conclusion:
In the present question, it is assumed that the asset in question is a qualifying asset. Hence the borrowing cost incurred till the date of asset coming into use will be capitalized.

Question 95.
Axe Limited began construction of a new plant on 1^st April, 08 and obtained a special loan of ₹ 4,00,000 to finance the construction of the plant. The rate of interest on loan was 10%.
The expenditure that were made on the project of plant were as follows:

1^st April : ₹ 5,00,000
1^st August, 08 : ₹ 12,00,000
1^st January, 09 : ₹ 2,00,000

The company’s other outstanding non-specific loan was ₹ 23,00,000 at an interest rate of 12%.
The construction of the plant completed on 31^st March, 09. You are required to:
(a) Calculate the amount of interest to be capitalized as per the provisions of AS-16 “Borrowing cost”.
(b) Pass a journal entry for capitalizing the cost and the borrowing cost in respect of the plant. (Nov 2009, 5 marks) [IPCC Gr. II]
Answer:
Total expenses to be capitalized for borrowings as per AS 16 “Borrowing Costs”:

Working Notes:
1. Computation of average accumulated expenses

2. Amount of interest capitalised

Question 96.
Rohini Limited has obtained loan from an Institution for ₹ 500 lakhs for modernization and renovating its Plant and Machinery. The installation of plant and machinery was completed on 31.3.2009 amounting to ₹ 320 lakhs and ₹ 50 lakhs advanced to suppliers of additional assets and the balance of ₹ 130 lakhs has been utilized for working capital requirements. Total interest paid for the above loan amounted to ₹ 65 lakhs during 2008- 09. You are required to state how the interest on institutional loan is to be accounted for in the year 2008-09. (May 2010, 2 marks) [IPCC Gr. II]
Answer:
Provision:
According to AS 16 ‘Borrowing Costs’, borrowing costs that are directly attributable to the acquisition, construction or production of qualifying assets (Qualifying asset means an asset that necessarily takes substantial period of time to get ready for its intended use or sale.) should be capitalised as part of the cost of that asset. Other borrowing costs are recognized as expense in the period in which they are incurred.

Analysis and Conclusion:
The treatment for total interest amount of ₹ 65 lakhs can be given as:

Question 97.
On 1^st April 2009 Amazing Construction Ltd. obtained a loan of ₹ 32 crores to be utilized as under:
(i) Construction of sea link across two cities :
(work was held up totally for a month during the year due to high water levels) : ₹ 25 crores
(ii) Purchase of equipments and machineries : ₹ 3 crores
(iii) Working capital : ₹ 2 crores
(iv) Purchase of vehicles : ₹ 50,00,000
(v) Advance for tools/cranes etc. : ₹ 50,00,000
(vi) Purchase of technical know-how : ₹ 1 crores
(vii) Total interest charged by the bank for the year ending 31^st March 2010 : ₹ 80,00,000
Show the treatment of interest by Amazing Construction Ltd. (Nov 2010, 4 marks) [IPCC Gr. II]
Answer:
Provision:
As per AS – 16 ‘Borrowing costs’, qualifying asset is an asset that necessarily takes substantial period of time to get ready for its intended use.

Borrowing costs that, are directly attributable to the acquisition, construction or production of a qualifying asset should be capitalised as part of the cost of that asset. Other borrowing costs should be recognised as an expense in the period in which they are incurred. (AS 16 para 6)

Analysis and Conclusion:
The treatment of interest by Amazing Construction Ltd. can be shown

Question 98.
On 1^st April 2009 Amazing Construction Ltd. obtained a loan of ₹ 32 crores to be utilized as under:
(i) Construction of sea link across two cities:
(work was held up totally for a month during the year due to high water levels) : ₹ 25 crores
(ii) Purchase of equipments and machineries : ₹ 3 crores
(iii) Working capital : ₹ 2 crores
(iv) Purchase of vehicles : ₹ 50,00000
(v) Advance for tools/cranes etc. : ₹ 50,00000
(vi) Purchase of technical know-how : ₹ 1 çrores
(vii) Total Interest charged by the bank for the year ending 31^st March 2010 : ₹ 80,00,000
Show the treatment of interest by Amazing Construction Ltd. (Nov 2010, 4 marks) (IPCC Gr. II)
Answer:
Provision:
As per AS – 16 ‘Borrowing cost&, qualifying asset is an asset that necessarily takes substantial period of time to get ready for its intended use.

Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset should be capitalised as part of the cost of that asset. Other borrowing costs should be recognised as an expense in the period in whid they are incurred. (AS 16 para 6)

Analysis and Conclusion:
The treatment of Interest by Amazing Construction Ltd. can be shown as:

Question 99.
On 25^th April, 2010 Neel Limited obtained a loan from the bank for ₹ 70 lakhs to be utilised as under:
: ₹ in lakhs
Construction of factory shed : ₹ 28
Purchase of Machinery : ₹ 21
Working Capital : ₹ 14
Advance for purchase of truck : ₹ 7
In March 2011, Construction of shed was completed and machinery installed.
Delivery of truck was not received. Total interest charged by the bank for the year ending 31^st March, 2011 was ₹ 12 lakhs. Show the treatment of interest under Accounting Standard -16. (Nov 2011, 5 marks) [IPCC Gr. II]
Answer:
Treatment of Interest as per AS 16

Assumption:

1. It is assumed that construction of factory shed was completed at the end of March. 2011. Accordingly, interest for the full year has been capitalized.
2. It is assumed that machinery was ready to use at the time of purchase only and on this basis it has been treated as non-qualifying asset.

Question 100.
Raj & Co. has taken a loan of US$ 20,000 at the beginning of the financial year for a specific project at an interest rate of 6% per annum, payable annually. On the day of taking loan, the exchange rate between currencies
was ₹ 48 per 1 USS. The exchange rate at the closing of the financial year was ₹ 50 per 1 USS. The corresponding amount could have been borrowed by the company in Indian Rupee at an interest rate of 11% per annum. Determine the treatment of borrowing cost in the books 0f accounts. (Nov 2013, 4 marks) (ÎPCC Gr. II)
Answer:
The following computations would be made to determine the amount of borrowing costs for the purpose of AS 16’ Borrowing Costs’:

Interest for the period = US $ 20,000 × ₹ 50 per US $ × 6% = ₹ 60,000.
Increase in the liability towards the principal amount
US$ 20,000 × ₹ (50-48) = ₹ 40,000. (A)

Interest that would have resulted it the loan was taken in Indian Currency
= US $20,000 × 48 × 11% = ₹ 1,05,600
Difference between interest on local currency borrowing and foreign currency
borrowing = ₹ 1,05,600 – ₹ 60,000 = ₹ 45,600 (B)

In the above case, ₹ 40,000(A) is less than ₹ 45,600 (B), therefore the entire
exchange difference of ₹ 40,000 would be considered as borrowing costs.
The total borrowing cost would be 1,00,000 (₹ 60,000 + ₹ 40,000)

Question 101.
Suhana Ltd. issued 12% secured debentures of ₹ 100 Lakhs on 01.05.2013, to be utilized as under:
Particulars : Amount (₹ in Lakhs)
Construction of factory building : 40
Purchase of Machinery : 35
Working Capital : 25

In March 2014, construction of the factory building was completed and machinery was installed and ready for it’s intended use. Total interest on debentures for the financial year ended 31.03.2014 was ₹ 11,00,000. During the year 2013-14, the company had invested idle fund out of money raised from debentures in banks’ fixed deposit and had earned an interest of ₹ 2,00,000.

Show the treatment of interest under Accounting Standard 16 and also explain nature of assets. (May 2014, 5 marks) [IPCC Gr. II]
Answer:
As per AS 16 “Borrowing Costs”, borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset should be capitalised as part of the cost of that asset.

The amount of borrowing costs eligible for capitalisation should be determined in accordance with this Standard. Other borrowing costs should be recognised as an expense in the period in which they are incurred.

AS 16 also states that to the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation 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.

Thus, eligible borrowing cost
= ₹ 11,00,000 – ₹ 2,00,000 = ₹ 9,00,000

* Note : A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.

Question 102.
M/s. Ayush Ltd. began construction of a new building on 1^st January, 2014. It obtained ₹ 3 lakh special loan to finance the construction of the building on 1^st January, 2014 at an interest rate of 12% p.a. The company’s other outstanding two non-specific loans were:

Building was completed on 31^st December, 2014. Following the principles prescribed in AS 16 ‘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. (May 2015, 5 marks) [IPCC Gr. II]
Answer:
1. Calculation for Average Accumulated Expenses:

Out of above, ₹ 3,00,000 is from specific loan and balance ₹ 5,50,000 is from non-specific loans.

2. Calculation for Average Interest Rate:

1. Total interest Exp. = (₹ 6,00,000 × 11%) + (₹ 11,00,000 × 13%)
   = 66,000 + 1,43,000 = 2,09,000
2. Total loan amount = ₹ 17,00,000
3. Average rate \(=\frac{\text { Interest Exp. (i) }}{\text { Total Loan Amount (ii) }}\)
   = \(\)[\frac{2,09,000}{17,00,000}/latex] × 100 = 12.29%

3. Calculation for amount to be capitalised:

4. Journal Entry

Question 103.
M/s. Zen Bridge Construction Limited obtained a loan of ₹ 64 crores to be utilized as under:
(i) Construction of Hill link road in Kedarnath:
(work was held up totally for a month during the year due to heavy rain which are common in the geographic region involved) ₹ 50 crores
(ii) Purchase of Equipment and Machineries ₹ 6 crores
(iii) Working Capital ₹ 4 crores
(iv) Purchase of Vehicles ₹ 1 crore
(v) Advances for tools/cranes etc. ₹ 1 crore
(vi) Purchase of Technical Know how
(vii) Total Interest charged by the Bank for the year ₹ 2 crores ending 31^st March, 2016 ₹ 1.6 crores
Show the treatment of Interest according to Accounting Standard by M/s. Zen Bridge Construction Limited. (Nov 2016, 5 marks) [IPCC Gr. II]
Answer:
According to AS 16 ‘Borrowing costs’, qualifying asset is an asset that necessarily takes substantial period of time to get ready for its intended use. As per the standard, borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset should be capitalized as part of the cost of that asset. Other borrowing costs should be recognized as an expense in the period in which they are incurred. Capitalization of borrowing costs is also not suspended when a temporary delay is a necessary part of the process of getting an asset ready for its intended use or sale.

The treatment of interest by Zen Bridge Construction Ltd, can be shown as:

* Note: It is assumed that construction of hill road will normally take more than a year (substantial period of time), hence considered as qualifying asset.

Question 104.
M/s First Ltd. began construction of a new factory building on 1^st April, 2017. It obtained ₹ 2,00,000 as a special loan to finance the construction of the factory building on 1^st April, 2017 at an interest rate of 8% per annum. Further, expenditure on construction of the factory building was financed through other non- specific loans. Details of other outstanding non- specific loans were:

The expenditures that were made on the factory building construction were as follows:

The construction of factory building was completed by 31^st March, 2018.
As per the provisions of AS-16, you are required to:
1. Calculate the amount of interest to be capitalized.
2. Pass Journal entry for capitalizing the cost and borrowing cost in respect of the factory building. (May 2019, 5 marks)
Answer:
(i) Computation of average accumulated expenses :

(ii) Calculation of average interest rate other than for specific borrowings:

(iii) Interest on average accumulated expenses:

(iv) Total Expenses to be Capitalised for Factor” Building:

(v) Journal Entry

Question 105.
Answer the following question:
On 15^th April, 2019 RBM ltd. obtained a Term Loan from the Bank for ₹ 320 lakhs to be utilized as under:
: ₹ (in lakhs)
Construction for factory shed : 240
Purchase of Machinery : 30
Working Capital : 24
Purchase of Vehicles : 12
Advance for tools/cranes etc. : 8
Purchase of technical know how : 6
In March, 2020 construction of shed was completed and machinery was installed. Total interest charged by the bank for the year ending 31^st March, 2020 was ₹ 40 lakhs.
In the context of provisions of AS 16 ‘Borrowing Costs’ show the treatment of interest and also explain the nature of Assets. (Nov 2020, 5 marks)

Question 106.
A company incorporated in June 2017, has setup a factory within a period of 8 months with borrowed funds. The construction period of the assets had reduced drastically due to usage of technical innovations by the company. Whether interest on borrowings for the period prior to the date of setting up the factory should be capitalized although it has taken less than 12 months for the assets to get ready for use. You are required to comment on the necessary treatment with reference to AS 16.
Answer:
As per Para 3.2 to AS 16 ‘Borrowing Costs’, a qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.

Further, Explanation to the above para states that what constitutes a substantial period of time primarily depends on the facts and circumstances of each case. However, ordinarily, a period of twelve months is considered as substantial period of time unless a shorter or longer period can be justified on the basis of facts and circumstances of the case. In estimating the period, time which an asset takes, technologically and commercially, to get it ready for its intended use or sale is considered.

It may be implied that there is a rebuttable presumption that a 12 months period constitutes substantial period of time.

Under present circumstances where construction period has reduced drastically due to technical innovation, the 12 months period should at best be looked at as a benchmark and not as a conclusive yardstick. It may so happen that an asset under normal circumstances may take more than 12 months to complete. However, an enterprise that completes the asset in 8 months should not be penalized for its efficiency by denying it interest capitalization and vice versa.

The Substantial period criteria ensures that enterprises do not spend a lot of time and effort capturing immaterial interest cost for purposes of capitalization.

Therefore, if the factory is constructed in 8 months then it shall be considered as a qualifying asset: The interest on borrowings for the same shall be capitalised although it has taken less than 12 months for the asset to get ready to use.

Framework for Preparation and Presentation of Financial Statements – CA Inter Accounts Question Bank is designed strictly as per the latest syllabus and exam pattern.

Framework for Preparation and Presentation of Financial Statements – CA Inter Accounts Question Bank

Question 1.
Briefly define the Fundamental Accounting Assumptions? (Nov 2017, 4 marks) [IPCC Gr. II]
Answer:
Fundamental Accounting Assumptions
As per the Framework on Preparation and Presentation of Financial Statements, there are three fundamental accounting assumptions: Going Concern, Accrual Basis and Consistency.

1. Going Concern	Financial statements are normally prepared on the assumption that an enterprise will continue in operation in the foreseeable future and neither there is intention, nor there is need to materially curtail the scale of operations.
2. Accrual Basis	Under this basis of accounting, transactions are recognized as soon as they occur, whether cash or cash equivalent is actually received or paid. Accrual basis ensures better matching between revenue and cost and profit/loss obtained on this basis reflects activities of the enterprise during an accounting period, rather than cash flows generated by it.
3. Consistency	It refers to the practice of using same accounting policies for similar transactions in all accounting periods. The consistency improves comparability of financial statements through time.

Question 2.
Answer the following :
Summarised Balance Sheet of Cloth Trader as on 31.03.2017 is given below:

Liabilities	Amount (₹)	Assets	Amount (₹)
Proprietor’s Capital	3,00,000	Fixed Assets	3,60,000
Profit & Loss Account	1,25,000	Closing Stock	1,50,000
10% Loan Account	2,10,000	Sundry Debtors	1,00,000
Sundry Creditors	50,000	Deferred Expenses	50,000
		Cash & Bank	25,000
	6,85,000		6,85,000

Additional Information is as follows :
1. The remaining life of fixed assets is 8 years. The pattern of use of the asset is even. The net realisable value of fixed assets on 31.03.2018 was ₹ 3,25,000.
2. Purchases and Sales in 2017-18 amounted to ₹ 22,50,000 and ₹ 27,50,000 respectively.
3. The cost and net realizable value of stock on 31.03.2018 were ₹ 2,00,000 and ₹ 2,50,000 respectively.
4. Expenses for the year amounted to ₹ 78,000.
5. Deferred Expenses are amortized equally over 5 years.
6. Sundry Debtors on 31.03.2018 are ₹ 1,50,000 of which ₹ 5,000 is doubtful. Collection of another ₹ 25,000 depends on successful re-installation of certain product supplied to the customer.
7. Closing Sundry Creditors are ₹ 75,000, likely to be settled at 10% discount.
8. Cash balance as on 31.03.2018 is ₹ 4,22,000.
9. There is an early repayment penalty for the loan of ₹ 25,000.
You are required to prepare:
(Not assuming going concern)
1. Profit & Loss Account for the year 2017-18.
2. Balance Sheet as on 31^st March, 2018. (May 2019, 5 marks)
Answer:
1. Profit and Loss Account for the year 2017-18:

2. Balance Sheet as on 31^st March, 2018

Question 3.
Answer the following :
Following is the Balance Sheet of M/s. S. Traders as on 31^st March, 2019:

Additional information:

(i) Remaining life of Fixed Assets is 6 years with even use. The net realizable value of Fixed Assets as on 31st March, 2020 is ₹ 90,000.
(ii) Firm’s Sales & Purchases for the year ending 31st March, 2020 amounted to ₹ 7,80,000 and ₹ 6,25,000 respectively.
(iii) The cost & net realizable value of the stock as on 31st March, 2020 was ₹ 60,000 and ₹ 66,000 respectively.
(iv) General expenses (including interest on Loan) for the year 2019-20 were ₹ 53,800.
(v) Deferred expenditure is norm’ally amortised equally over 5 years starting from the Financial year 2018-19 i.e ₹ 6,000 per year.
(vi) Debtors on 31st March, 2020 is ₹ 65,000 of which ₹ 5,000 is doubtful. Collection of another ₹ 10,000 debtors depends on successful re-installation of certain products supplied to the customer.
(vii) Closing Trade payable ₹ 48,000, which is likely to be settled at 5% discount.
(viii) There is a prepayment penalty of ₹ 4,000 for Bank loan outstanding.
(ix) Cash & Bank balances as on 31^st March, 2020 is ₹ 1,65,200. Prepare Profit & Loss Account and Balance Sheet for the year ended 31^st March, 2020 assuming the firm is not a going concern. (Nov 2020, 5 marks)

Question 4.
What are the qualitative characteristics that improve the usefulness of information provided in the financial statements? (May 2007, May 2013, 4 marks each) [IPCC Gr. II]
Answer:
Qualitative characteristics are those attributes which make the information provided in the financial statement useful to the users.

The principal qualitative characteristics are as follows:

1. Understandable
The basic quality of financial statement is that it is understandable by the user. However to understand, the user is expected to have basic knowledge of business and accounting.

2. Relevance
The information provided in the financial statement will loose its importance if it is not relevant. An information is relevant when it influences the decision of users while evaluating the past, present and future.

3. Materiality
The information provided in a financial statement is relevant only if it is material. Materiality provides a threshold rather than being a primary qualitative characteristic.

4. Reliability
The financial statement loses its purpose it it is not reliable. Thus it should be error free and unbiased showing the true and fair picture.

5. Neutrality
The financial statement should be neutral, It should not be a manipulated statement.

6. Completeness
The financial statement should be complete in all respect within the boundary of materiality and cost. An omission can cause information misleading.

7. Substance over form
The purpose of financial statement is to provide information. it should be thus presented in accordance with their substance and economic reality arid not merely their legal form.

8. Comparability
The measurement and display of information should be consistent in order to make it comparable over times to come.

Question 5.
“One of the characteristics of financial statements in neutrality” – Do you agree with this statement? Explain in brief. (May 2008, 2, 5 marks) [IPCC Gr. II]
Answer:
Yes, one of the characteristics of financial statements is neutrality. To be reliable, the information contained in financial statements must be neutral, that is free from bias. Financial Statements are not neutral if by the selection or presentation of information, the focus of analysis could shift from one area of business to another thereby arriving at a totally different conclusion based on the business results.

Question 6.
Give the four qualitative characteristics which the financial statements should observe. (Nov 2008, 2 marks) [IPCC Gr. II]
Answer:
The financial statements should have the following qualitative characteristics:

1. Understandability
2. Relevance
3. Reliability
4. Comparability.

Question 7.
Answer the following :
What are the qualitative characteristics of the Financial Statements which improve the usefulness of the information furnished therein? (Nov 2020, 5 marks)

Question 8.
Write short note on main elements of Financial Statements. (May 2017, 4 marks) [IPCC Gr. II]
OR
Answer the following:
Briefly explain the elements of financial statements. (May 2018, 5 marks)
Answer:
Elements of Financial Statements:
The Framework for preparation and presentation of financial statements classifies items of financial statements. Financial statements can be classified in five broad groups depending on their economic characteristics:

1. Asset
Resource controlled by the enterprise as a result of past events from which future economic benefits are expected to flow to the enterprise.

2. Liability
Present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow of a resource embodying economic benefits.

3. Equity
Residual interest in the assets of an enterprise after deducting all its liabilities.

4. Income/Gain
lncease in economic benefits during the accounting period in the form of mf lows or enhancement of assets or decreases in liabilities that result in increase in equity other than those relating to contributions from equity participants.

5. Expense/Loss
Decrease in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decrease in equity other than those relating to distributions to equity participants.

Question 9.
Explain in brief, the alternative measurement bases, for determining the value at which an element can be recognized in the Balance Sheet or Statement of Profit and Loss. (Nov 2016, 4 marks) [IPCC Gr. II]
Answer:
Measurement is the process of determining money value at which an element can be recognised in the balance sheet or statement of profit and loss. The framework recognises four alternative measurement bases for the purpose. These basis relate explicitly to the valuation of assets and liabilities. The valuation of income or expenses, i.e. profit is implied, by the value of change in assets and liabilities.

Measurement basis are as follows:

1. Historical cost
2. Current cost
3. Realisable value
4. Present value

In preparation of financial statements, all or any of the measurement basis can be used in varying combinations to assign the cost.

Question 10.
Mohan started a business on 1^st April 2017 with ₹ 12,00,000 represented by 60,000 units of ₹ 20 each. During the financial year ending on 31^st March, 2018, he sold the entire stock for ₹ 30 each. In order to maintain the capital intact, calculate the maximum amount, which can be withdrawn by Mohan in the year 2017-18 if Financial Capital is maintained at historical cost.
Answer:

Thus, in order to maintain the capital intact Mohan can withdraw ₹ 6,00,000 as the maximum amount.

Question 11.
Answer the following:
Explain how financial capital is maintained at historical cost?
Kishore started a business on 1^st April, 2019 with ₹ 15,00,000 represented by 75,000 units of ₹ 20 each. During the financial year ending on 31^st March, 2020, he sold the entire stock for ₹ 30 each. In order to maintain the capital intact, calculate the maximum amount, which can be withdrawn by Kishore in the year 2019-20 if Financial Capital is maintained at historical cost. (Jan 2021, 5 marks)