Question Paper Financial Accounting (MB131): January 2005

Answer all questions. Marks are indicated against each question. 1. Under Hybrid system of accounting for revenues and expenses, the (a) (b) (c) (d) (e ) Accrual basis for revenues and cash basis for expenses is used Accrual basis for expenses and cash basis for revenues is used Accrual basis is used both for revenues and expenses Cash basis is used for both revenues and expenses Mercantile basis is used for both expenses and revenues. (1 mark) 2. If a concern proposes to discontinue its business from March 2004 and decides to dispose off all its < Answer > assets within a period of 4 months, the Balance Sheet as on March 31, 2004 should indicate the assets at their (a) Historical cost (c) Cost less depreciation (e) Replacement cost. (b) Net realizable value (d) Cost price or market value, whichever is lower (1 mark) 3. Which of the following is not a use of fund? (a) Acquiring assets (b) Incurring expenses (c) Incurring losses (d) Incurring liabilities (e) Paying dividends. (1 mark) 4. Which of the following statements is true? (a) (b) (c) (d) (e) Capital of a firm is reduced by the outside borrowings When there is no change in proprietors capital account, it is an indication of loss in the business Nominal account refers to the tangible transactions Real accounts relate to the assets of a business Bills Payable is a nominal account. (1 mark) 5. Which of the following statements is false? (a) The convention of disclosure implies that all material information should be disclosed in the accounts (b) The losses from the sale of capital assets need not be deducted from the revenue to ascertain the net income (c) In recognition of the principle of materiality, unimportant items are either omitted or merged with other items (d) The convention of consistency facilitates, the comparison of the results of one accounting period with that of the other (e) The specific intervals of time for which the income or loss of the business is measured periodically, is called the accounting period. (1 mark) 6. The impact of prior period items is required to be shown as (a) Retained profits (c) Previous year profits (b) Gross profits (d) Current year profits (e) Notes to accounts.
< Answer > < Answer > < Answer > < Answer > < Answer >

(1 mark) 7. Consider the following data pertaining to ABC Ltd. for the year 2003-2004: Opening balance of creditors Closing balance of creditors Total purchases during the year Rs. 80,000 Rs. 90,000 Rs.2,50,000
< Answer >

If the creditors were paid to the tune of Rs.1,80,000 and discount received was Rs.8,000, the credit purchases during the year 2003-2004 are (a) Rs.2,50,000 (b) Rs.1,98,000 (c) Rs.1,88,000 (d) Rs.1,70,000 (e) Rs.1,62,000. (1 mark) 8. Consider the following information of Hyder Ltd. Of Hyderabad for the year 2003-2004: Credit purchases during the year Payment made to creditors during the year Closing balance of sundry creditors account Discount received The opening balance of sundry creditors account was (a) Rs.25,000 (b) Rs.45,000 (c) Rs.75,000 (d) Rs.2,05,000 (e) Rs.1,25,000. (1 mark) 9. Consider the following data pertaining to Sun Ltd. for the month of December 2004: Particulars Purchase of goods for resale Freight in Freight out Returns outward Cost of goods available for sale is (a) Rs.1,88,000 (b) Rs.2,10,000 (c) Rs.2,18,000 (d) Rs.2,35,000 (e) Rs.2,40,000. (1 mark) 10. How does a mistake of overcasting of purchases day book affect the cost of sales and the profit? (a) (b) (c) (d) (e) Cost of sales is decreased and net profit is increased Cost of sales is increased and net profit is not affected Both cost of sales and gross profit are increased Cost of sales is increased and gross profit is decreased Both cost of sales and gross profit are decreased. (1 mark) 11. Which one of the following is a wrong entry in listing out the under mentioned accounts in the Trial < Answer > Balance of a business? (a) (b) (c) (d) (e) Plant & machinery - debit column Discount received - credit column Sales - credit column Carriage outward - credit column Interest paid - debit column. (1 mark) 12. As on March 31, 2004, the overdraft balance of Mr.X as per bank pass book is Rs.20,000. The pass < Answer >
< Answer > < Answer > < Answer >

Rs. 9,25,000 Rs.10,00,000 Rs. 40,000 Rs. 10,000

Rs. 2,10,000 30,000 25,000 22,000

book balance did not agree with the balance as per cash book. On scrutiny, the following omissions and commissions were noticed: A cheque for Rs.4,000 issued to Mr.Y has not been presented for payment till date Mr.Z, a tenant, directly deposited into the bank account an amount of Rs.10,000 towards rent and the same is not accounted in the cash book. A cheque for Rs.15,000 deposited in the bank is not yet realised The interest on debentures for this year, directly collected by the bank, amounted to Rs.10,000. The bank balance as per cash book is (a) Debit balance of Rs.23,500 (b) Credit balance of Rs.29,000 (c) Credit balance of Rs.16,500 (d) Debit balance of Rs.5,500 (e) Debit balance of Rs.16,500. (2 marks) 13. The withdrawal of cash from the bank will figure in both the bank and the cash columns of a three < Answer > column cash book. Such entries are called (a) Contra entries (c) Credit entries (b) Continuous entries (d) Contingent entries (e) Adjusting entries. (1 mark) 14. The following errors were made by the accountant of a company while preparing the profit and loss < Answer > account for the year 20032004: Salaries were overstated by Repairs were understated by Income from investments was understated by Rs.15,000 Rs. 7,000 Rs. 7,000

The impact of the errors on the net profit for the year was (a) Rs.22,000 (overstated) (c) Rs.15,000 (understated) (e) Rs.7,000 (overstated). (b) Rs.22,000 (understated) (d) Rs.7,000 (understated) (1 mark) 15. What is the net effect of the under mentioned errors on the trial balance of a firm? I. II. III. IV. (a) (b) (c) (d) (e) Total of sales was taken as Rs.58,726 instead of Rs.58,762. A discount of Rs.52 allowed to Mr.X was not posted in the discount account. Sale of old furniture of Rs.130 was credited to Machinery account. A credit sale of Rs.250 to Mr.S was posted twice in his account. Credit total of trial balance will be more than that of debit total by Rs.234 Debit total of trial balance will be more than that of credit total by Rs.234 Credit total of trial balance will be more than that of debit total by Rs.104 Debit total of trial balance will be more than that of credit total by Rs264 Debit total of trial balance will be more than that of credit total by Rs.286. (2 marks) 16. A credit sale of Rs.2,000 was wrongly entered in the purchases book. The impact of the mistake on < Answer > profit is, it (a) Decreases the gross profit by Rs.2,000 (c) Decreases the gross profit by Rs.4,000 (e) Has no impact. (b) Increases the gross profit by Rs.2,000 (d) Increases the gross profit by Rs.4,000 (1 mark) 17. Goods worth Rs.750 have been purchased from S & Co. But while posting the entry, the credit was < Answer > given to R & Co. The total of credit side of the trial balance is Rs.43,570. Assuming that, this is the only
< Answer >

error, indicate the total of the debit side of the trial balance before rectification. (a) Rs.43,570 Rs.42,070. (b) Rs.44,420 (c) Rs.42,820 (d) Rs.44,320 (e) (1 mark) 18. Consider the following data pertaining to Joy Ltd. for the year ended March 31, 2004: Cash sales Decrease in inventory Plant & Machinery Rent received Purchases Sales commission paid The company noticed the following: Rs 4,00,000 Rs. 40,000 Rs.1,70,000 Rs. 55,000 Rs 2,85,000 Rs. 12,000
< Answer >

An amount Rs.2,500 is the amount of rent received in advance. A credit purchase of Rs.15,000 was wrongly recorded in sales day book as Rs.51,000. The company has the practice of depreciating the Plant and Machinery at the rate of 15% per annum on straight line method. The original cost of the Plant and Machinery was Rs.2,00,000. Sales commission was paid only to the extent of two thirds of the amount payable.

Considering the above data and the additional information, the net profit of the company for the period ended March 31, 2004 was (a) Rs.18,000 Rs.18,500. (b) Rs.19,500 (c) Rs.13,500 (d) Rs.28,000 (e) (2 marks) 19. There was a fire in the factory of Mr. Anand and goods worth Rs.10,000 were lost. However, Mr. < Answer > Anand who was far-sighted, already insured the goods and the insurance company accepted the claim to the extent of Rs.8,000. The treatment of this is I. II. III. IV. (a) (c) (e) Debit Profit and Loss Account by Rs.2,000 Debit insurance company account by Rs.8,000 Credit Trading Account by Rs.10,000 Deduct Rs.2,000 from closing stock Only (I) above (b) Only (II) above Only (III) above (d) (I), (II), (III) and (IV) above (I), (II) and (III) above. (1 mark) 20. X Ltd. was showing a balance of Rs.30,000 to the debit of building account. It was sold for Rs.45,000. < Answer > The gain on the sale of building was transferred to the profit and loss account, thus making the net profit equal to Rs.1,70,000. The profit from operations will be (a) Rs.2,15,000 Rs.1,40,000. (b) Rs.1,70,000 (c) Rs.1,55,000 (d) Rs.2,00,000 (e) (1 mark) 21. Consider the following extracts of the trial balance of Nilgiri Ltd. as on March 31, 2004: Particulars Share Capital 12%Bank loan Sundry creditors Bills payable Land & building Cash at bank Rs. 5,76,900 1,50,000 50,000 10,000 4,36,000 23,500
< Answer >

Office equipment 1,99,700 Furniture 2,00,000 Closing stock 38,000 Bills receivable 9,000 Sundry debtors 55,000 Petty cash 210 Cash on hand 9,400 For the year ending March 31, 2004, the following adjustments were effected Depreciation on Office equipment: Rs.19,970, Furniture:Rs.30,000 Reserve for discount on Sundry creditors is Rs.720. Provision for discount on Sundry debtors is Rs.779 Sundry creditors include a debt of Rs.8,000 due to Mr.Madhukar who is also in the list of Sundry debtors for the same amount Accrued commission receivable amounted to Rs.13,000 and prepaid printing charges aggregated to Rs.1,850, Accrued interest on bank loan is of Rs.15,000.

After effecting the above adjustments, the net profit was Rs.1,33,731. The total of the Balance Sheet of the company as at March 31, 2004 was (a) Rs.9,36,911 Rs.9,26,970. (b) Rs.9,27,631 (c) Rs.9,26,911 (d) Rs.9,13,911 (e) (3 marks) 22. Consider the following data pertaining to Jagriti Ltd. as on March 31, 2004: Particulars Opening stock Sales Purchases Salaries Other expenses Fixed assets Sundry debtors Sundry creditors Cash and bank Share capital Short term loan Amount (Rs.) 90,000 4,56,000 86,000 73,000 5,00,000 45,000 32,000 53,000 6,00,000 36,000 13,03,000 Amount (Rs.) 6,35,000
< Answer >

13,03,000

The value of stock as on March 31, 2004 is Rs.75,000. The company has the practice of charging depreciation on the fixed assets at the rate of 15% on written down value method. The total of liabilities side of balance sheet as on March 31, 2004 is (a) Rs.7,38,000 Rs.7,43,000. (b) Rs.6,68,000 (c) Rs.6,73,000 (d) Rs.5,93,000 (e) (2 marks) 23. The amount earmarked for distribution to the shareholders is known as (a) Profit after tax (c) Dividends (b) Retained earnings (d) Operating profit (e) Profit before tax. (1 mark) 24. AB Ltd. follows perpetual inventory system. On March 31 every year, the company undertakes physical < Answer > stock verification. On March 31, 2004, the value of stock as per the records differed from the value as per the physical stock. On scrutiny, the following differences were noticed: Stock register was overcast by Rs.6,000.
< Answer >

Goods purchased for Rs.10,000 were received and included in the physical stock but no entry was made in the books. Goods costing Rs.30,000 were sold and entered in the books but the stock is yet to be delivered. Goods worth Rs.5,000 are returned to the suppliers but the same is omitted to be recorded.

If the inventory is valued in the books at Rs.1,50,000, the value of physical inventory is (a) Rs.1,11,000 Rs.1,19,000. (b) Rs.1,89,000 (c) Rs.1,79,000 (d) Rs.1,59,000 (e) (2 marks) 25. The following information pertains to Whitestar Ltd. for the year 20032004: Particulars April 1, 2003 March 31, 2004 Inventory Rs. 72,000 Rs. 67,000 Sundry debtors Rs. 47,000 Rs. 70,000 Sundry creditors Rs. 40,000 Rs. 38,000 Total of credit sales made during the year was Rs.6,75,000. The cost of goods sold of the company was 80% of the sales. Cash collected from the customers during the year was (a) Rs.7,22,000 Rs.5,37,000. (b) Rs.6,98,000 (c) Rs.6,75,000 (d) Rs.6,52,000 (e) (1 mark) 26. Consider the following data pertaining to Wren Ltd. for the year 2003-2004: Particulars Provision for doubtful debts as on April 1, 2003 Sundry debtors as on March 31, 2004 Bad debts to be written off Rs. 4,000 1,50,000 10,000
< Answer > < Answer >

If a provision equal to 5% is to be created on the debtors balances, the charge against profit and loss account for the year ended March 31, 2004 is (a) Rs.3,500 Rs.17,500. (b) Rs.7,000 (c) Rs.11,000 (d) Rs.13,000 (e) (1 mark) 27. Consider the following information pertaining to XYZ Ltd.: On April 01, 2003, the provision for bad debts account showed a balance of Rs.30,000. As on March 31, 2004, the status of the following debtors is
< Answer >

Mr. A had become insolvent and only 40 paise in a rupee is expected to be realized out of his estate in full settlement. He owed a total amount of Rs.20,000 Mr. B who owes an amount of Rs.10,000 became bankrupt and it was understood that no amount will be recovered from him. Mr. C has agreed to pay Rs.3,000 as final settlement against his dues of Rs.10,000 and the balance is irrecoverable.

If the company decided to maintain the provision at Rs.35,000 as on March 31, 2004, the amount to be debited to Profit and loss account, after considering the above, is (a) Rs.34,000 Rs.64,000. (b) Rs.29,000 (c) Rs.26,000 (d) Rs.35,000 (e) (1 mark)

28. Among the various methods for valuation of inventory, Specific Identification method is the most < Answer > suitable method for valuation of (a) Coal (d) Diamond Jewellery (b) Textiles (e) Food products. (c) Chemicals (1 mark) 29. Which of the following is not classified as inventory in the financial statements? (a) (b) (c) (d) (e) Finished goods Work-in-process Stores and spares Raw-materials and components Advance payment made to suppliers for raw materials. (1 mark) 30. Consider the following data pertaining to a company for the year 2003-2004: Opening balance of sundry debtors Credit sales Cash sales Cash collected from debtors Closing balance of sundry debtors The bad debts of the company during the year are (a) Rs.40,000 Rs.20,000. (b) Rs.35,000 (c) Rs.30,000 (d) Rs.25,000 (e) (2 marks) 31. The cost price of a machine is Rs.1,20,000 and the depreciated value of the machine after 3 years will be < Answer > Rs.66,000. If the company charges depreciation under straight line method, the rate of depreciation will be (a) 25% (b) 20% (c) 18% (d) 15% (e) 12%. (1 mark) 32. Taurus Ltd., a dealer in cosmetics, has the practice of selling goods only on credit. Consider the < Answer > following balances pertaining to the company as on April 01, 2003: Sundry debtors - Rs.10,000 Provision for doubtful debts - Rs. 400 and the following additional data of the company for the year 2003-2004: Particulars Sales for the year 2003-2004 Sales returns for the year 2003-2004 Collection from sundry debtors during the year 2003-2004 Bad debts written off during the year 2003-2004 Discount allowed during the year 2003-2004 Rs. 45,000 Rs.4,25,000 Rs. 20,000 Rs.4,00,000 Rs. 50,000
< Answer > < Answer >

Rs. 1,00,000 1,000 90,000 500 400

At the end of the financial year 2003-04, the provision for doubtful debts is required to be 5% of sundry debtors, after making a specific provision for a debt of Rs.200 from a customer who was declared bankrupt. The amount debited to profit and loss account by way of provision for bad and doubtful debts for the year ended March 31, 2004 was (a) Rs.505 (b) Rs.905 (c) Rs.1,095 (d) Rs.895 (e) Rs.1,195.

(3 marks) 33. Based on which of the following concepts, is share capital account shown on the liability side of < Answer > Balance sheet? (a) Business entity concept (c) Cost concept (e) Conservatism concept. (b) Money measurement concept (d) Going concern concept (1 mark) 34. The post-tax profits of Hima Ltd. for the past four years are: Year 2000-2001 2001-2002 2002-2003 2003-2004 Rs. 1,50,000 1,65,000 2,20,000 2,50,000
< Answer >

Additional information: The profits for the year 2002-2003 are calculated by taking an excess depreciation of Rs.10,000. During the year 2001-2002, there was a loss of Rs.20,000 due to a fire accident. In view of the diversification of business and resultant workload, it is expected to appoint two additional employees for a salary of Rs.10,000 each per annum. If the tax rate is 50%, the future maintainable post-tax profit is (a) Rs.1,90,000 (b) Rs.1,87,500 (c) Rs.2,00,000 (d) Rs.2,10,000 (e) Rs.1,86,250. (2 marks) 35. The Balance Sheet of Moonlight Ltd. disclosed the following financial position as on March 31, 2004: Liabilities Paid-up capital 30,000 shares of Rs.10 each fully paid Capital reserve Sundry creditors Provision for taxation Profit and loss account Assets Goodwill at cost 3,00,000 Land and buildings at cost (less depreciation) 20,000 Plant and machinery at cost (less depreciation) 71,000 Stock at cost 55,000 Book debts 66,000 Less: Provision for bad debts Cash at bank 5,12,000 Rs.98,000 Rs.3,000 Rs. Rs. 30,000 1,75,000 90,000 1,15,000 95,000 7,000 5,12,000
< Answer >

Additional Information: i. ii. iii. iv. Adequate provision has been made in the accounts for income tax and depreciation. The rate of income tax is 50%. The average rate of dividend declared by the company for the past five years was 15%. The reasonable return on capital invested in the class of business done by the company is 12%.

The value the Goodwill of Moonlight Ltd. on the basis of five years purchase of super profits is (a) Rs.63,000 Rs.33,000. (b) Rs.61,400 (c) Rs.1,16,400 (d) Rs.1,83,600 (e) (2 marks)

36. The profits of Kavya Ltd. for the past 5 years are as under: Year 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 Rs. 75,000 3,00,000 3,75,000 4,50,000 7,42,500

< Answer >

The company noticed the following errors, while computing the weighted average profits for the purpose of valuation of goodwill: On October 01, 2001, repair expenses of Rs.30,000 of machinery were capitalized. Kavya Ltd. provides depreciation at the rate of 10% on straight-line method. The profit for the year 2003-2004 includes profit of Rs.22,500 on the sale of plant.

The weighted average profit of the company to be considered for the valuation of goodwill is (a) Rs.4,76,100 Rs.3,78,500. (b) Rs.3,79,500 (c) Rs.2,84,100 (d) Rs.5,00,100 (e) (2 marks) 37. Super Ltd. issued 500 Debentures of Rs.100 each at a discount of 10% . Holders of these debentures < Answer > have an option to convert their holdings to equity shares of Rs.100 each at a premium of Rs.20 at any time within 5 years. The total number of equity shares to be issued, if all the debenture holders opt for the conversion, is (a) 500 (b) 450 (c) 430 (d) 416 (e) 375. (1 mark) 38. The profits for the past 5 years of Suhas Ltd. are as under: Year 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 The weighted average profit of the company is (a) Rs.55,172 Rs.52,456. (b) Rs.51,619 (c) Rs.48,065 (d) Rs.62,354 (e) (2 marks) 39. Goodwill Limited issued prospectus inviting applications for 1,00,000 equity shares of Rs.10 each < Answer > payable as under: On application On allotment On first & final call Rs.5 (including premium of Rs.2) Rs.4 Balance Amount Profit (Rs.) 42,364 43,456 53,126 56,789 62,354
< Answer >

Applications were received for 1,30,000 shares. Application money received on 10,000 shares was refunded and allotment was made on pro rata basis for the remaining. Mr.Lazy to whom 1,400 shares were allotted failed to pay the allotment money and his shares were forfeited later when he failed to pay the call money. The shares were reissued to Mr. Active at the rate

of Rs.8 as fully paid up. The amount outstanding to the credit of Share Premium account is (a) Rs.2,00,000 Rs.1,97,200. (b) Rs.Nil (c) Rs.2,40,000 (d) Rs.2,60,000 (e) (1 mark) 40. Sonic Ltd. issued 10,000 equity shares of Rs.10 each at a premium of 20%. The share amount was < Answer > payable as: On application On allotment (including premium) On first call On second and final call Rs.2 Rs.5 Rs.3 Rs.2

Applications were received for 14,000 shares and the shares were allotted to the applicants pro-rata. Vikas, who was allotted 300 shares, failed to pay the first call. On his subsequent failure to pay the second and final call, all his shares were forfeited. Out of the forfeited shares, 200 shares were re-issued @ Rs.9 per share as fully paid. The amount transferred to capital reserve is (a) Rs.200 (b) Rs.1,000 (c) Rs.800 (d) Rs.1,300 (e) Rs.1,200. (2 marks) 41. The Balance Sheet of Snigdha Ltd. as on March 31, 2004 is as under: Liabilities Share capital: Equity shares of Rs.100 each 12% Preference shares of Rs.10 each Reserves and surplus: General reserve Profit and loss account 18% Debentures Sundry creditors Bank overdraft 1,50,000 2,50,000 2,00,000 50,000 25,000 14,75,000 14,75,000 5,00,000 3,00,000 Rs. Assets Land and building Plant and machinery Furniture and fixtures Investments Sundry debtors Inventories Cash Rs. 4,00,000 3,00,000 2,50,000 2,25,000 1,00,000 1,50,000 50,000
< Answer >

The 12% preference shares are redeemable at a premium of 10% during the month of August 2004. The company wishes to maintain the cash balance at Rs.25,000. For the purpose of redemption of preference shares, company proposed to sell the investments for Rs.2,00,000. The company proposes to issue sufficient number of equity shares of Rs.100 each at a premium of 5% to raise required cash resources. The number of equity shares to be issued is (a) 1,500 (b) 1,000 (c) 500 (d) 2,000 (e) 750. (2 marks) 42. Krishi Ltd. issued 1,50,000 shares of Rs.100 each at a discount of 10%. Ramya, to whom 300 shares < Answer > were allotted, failed to pay the final call of Rs.30 per share and hence, all her shares were forfeited. At the time of forfeiture, the amount transferred to share forfeiture account was (a) Rs.9,000 Rs.30,000. (b) Rs.18,000 (c) Rs.21,000 (d) Rs.27,000 (e) (1 mark) 43. A company cannot issue redeemable preference shares for a period exceeding (a) 6 years (b) 7 years (c) 8 years (d) 20 years (e) 25 years.
< Answer >

(1 mark) 44. Consider the following information pertaining to M/s.Rainbow Ltd. as on March 31,2004: Liabilities Share capital (50,000 shares Rs.10 each) Reserves and surplus Sundry creditors Short term loan Rs. 5,00,000 4,60,600 50,000 80,000 Assets Land and building Plant and machinery Furniture Inventories Sundry debtors Loans and advances Cash on hand Cash at bank Preliminary expenses Rs. 3,60,000 2,70,000 1,75,000 90,000 60,000 75,000 10,000 35,000 15,600 10,90,600
< Answer >

10,90,600 The assets are to be revalued as under for the purpose of valuation of shares: Plant and machinery is to be revalued downwards by 10% Furniture is to be valued at Rs.1,80,000 Provision of 5% is to be provided for bad debts The value of share of Rainbow Ltd. is (a) Rs.22.00 (b) Rs.19.70 (c) Rs.18.40 (d) Rs.22.30

(e) Rs.19.20. (2 marks)

45. Invert Ltd. issued 20,000 12% debentures of Rs.10 each at a discount of 10%, redeemable at a premium < Answer > of 5%. The journal entry to be passed at the time of issue of debentures is Rs. 1,80,000 30,000 2,10,000 1,80,000 20,000 10,000 2,00,000 10,000 1,80,000 1,80,000 1,80,000 20,000 2,00,000 1,80,000 20,000 2,00,000. (2 marks) Rs.

(a)

Bank a/c. Dr. Discount on issue of debentures a/c. Dr. To 12% Debentures a/c. Bank a/c. Dr. Discount on issue of debentures a/c. Dr. Loss on redemption of debentures a/c. Dr. To 12% Debentures a/c. To Premium on redemption of debentures a/c. Bank a/c. Dr. To 12% Debentures a/c. Bank a/c. Dr. Discount on issue of debentures a/c. Dr. To 12% Debentures a/c. 12% Debentures a/c. Dr. Loss on redemption of debentures a/c. Dr. To Bank a/c.

(b)

(c)

(d)

(e)

46. OK Company issued 1000 shares of Rs.10 each at a premium of Rs.2 payable as follows : On application On allotment On first and final call Rs.6 (including premium) Rs.3 Rs.3

< Answer >

Mr. Jahar, a shareholder to whom 60 shares were allotted failed to pay the first and final call. His shares were forfeited. 60% of the forfeited shares were reissued to Mr.Ali as fully paid for Rs.11 per share. The credit balance in the share forfeiture account after the reissue of forfeited shares is (a) Rs.600 (b) Rs.420 (c) Rs.252 (d) Rs.180 (e) Rs.168. (1 mark) 47. Consider the following data pertaining to Cute Limited : i. Share capital: 50,000 equity shares of Rs.10 each fully paid-up. 2,000, 8% preference shares of Rs.100 each fully paid-up. ii. Reserves and surplus Rs.30,000. iii. The average expected profit after taxation is Rs.52,000. iv. Sundry creditors Rs.60,000. v. 10% of the profit after tax is transferred to reserves. vi. The normal profit earned on the market value of equity shares (fully paid) of the similar type of business is 12%. vii. Other external liabilities are Rs.1,20,000. viii. Preliminary expenses Rs.10,000. The intrinsic value per equity share is (a) Rs.14.60 (b) Rs.10.60 (c) Rs.10.40 (d) Rs.14.40 (e) Rs.18.00. (1 mark) 48. Growth Ltd. is planning to raise funds by making rights issue of equity shares to finance its expansion. < Answer > The existing equity share capital of the company is Rs.50,00,000 of Rs.10 each. The value of its share is Rs.42. The company offers its shareholders the right to buy 2 shares at Rs.11 each for every 5 shares held by them. The share capital outstanding after the issue of right shares is (a) Rs.70,00,000 Rs.77,00,000. (b) Rs.1,34,00,000 (c) Rs.50,00,000 (d) Rs.72,00,000 (e) (1 mark) 49. Ramesh was allotted 300 shares of Rs.10 each. The following payments were made by Ramesh: Rs.2 per share on application Rs.3 per share on allotment He failed to pay the first call of Rs.2 and final call of Rs.3. The company forfeited the shares after due notice. The shares were later reissued to Naik @ Rs.9 each fully paid. On forfeiture, the amount credited to the share forfeiture account and on reissue the amount transferred to capital reserve account respectively, are (a) Rs.3,000 ; Rs.300 (b) Rs.3,000 ; Rs.2,700 (c) Rs.1,500 ; Rs.300 (d) Rs.1,500 ; Rs.1,200 (e) Rs.1,500 ; Rs.400. (2 marks) 50. In a funds flow statement prepared on working capital basis, a short term loan repaid by the organization < Answer > (a) Is shown as a source of working capital
< Answer > < Answer >

(b) (c) (d) (e)

Is shown as an increase in cash Is shown as a decrease in cash Does not affect the working capital Is not shown either as a source or a use of funds. (1 mark)

51. The Board of director of Prinston Ltd. forfeited 2,500 shares (par value of Rs.10 each) for non payment < Answer > of final call of Rs.2 per share. All the shares were reissued at Rs.7 per share. How much amount should be transferred to capital reserve account? (a) Rs.7,500 Rs.20,000. (b) Rs.10,000 (c) Rs.12,500 (d) Rs.17,500 (e) (1 mark) 52. On August 1, 2003, H Ltd. acquired 75% shares of S Ltd. If machinery of S Ltd. is revalued upwards < Answer > by Rs.2,00,000 on the same day, the share of minority group of S Ltd. considered to be shown in the Consolidated Balance Sheet as on March 31, 2004 was (a) Rs.2,00,000 Rs.50,000. (b) Rs.1,50,000 (c) Rs.1,00,000 (d) Rs.75,000 (e) (1 mark) 53. Revenue profits for consolidation of balance sheet of holding company and its subsidiary company are (a) (b) (c) (d) (e) The post-acquisition profits of the holding company The post-acquisition profits of the subsidiary company The profits after the financial year but before the date of acquisition of the subsidiary company The profits earned by the holding company from regular transactions The profits earned by the subsidiary company from regular transactions. (1 mark) 54. On April 01, 2003, Parent Ltd. acquired 4000 shares of Ward Ltd at a price of Rs.4,50,000. The share < Answer > capital of Ward Ltd. consists of 5,000 equity shares of Rs.100 each. During the consolidation of accounts, it is noticed that the sundry creditors of Parent Ltd. include Rs.20,000 for goods purchased from Ward Ltd. on which the subsidiary company made a profit of Rs.5,000. Half of the goods sold above were still in the stock of Parent Ltd. as on March 31, 2004. The unrealized profit shown in the Consolidated Balance Sheet of Parent Ltd. as on March 31, 2004 is (a) (b) (c) (d) (e) Rs.2,000 Rs.4,000 Rs.8,000 Rs.Nil since the goods are purchased from subsidiary company Rs.6,000. (1 mark) 55. Consider the Balance Sheets H Ltd. and S Ltd. as on March 31, 2004: Liabilities Share Capital @ Rs.10 each Other Liabilities H Ltd. 20,000 10,000 30,000 S Ltd. 10,000 5,000 15,000 Assets Shares in S. Ltd. 800 Shares Other Assets H Ltd. 8,000 22,000 30,000 S Ltd. 15,000 15,000
< Answer > < Answer >

H Ltd. has acquired the shares on the closing date of the Balance Sheet. The minority interest shown in the Consolidated Balance Sheet as on March 31, 2004 is

(a) Rs.2,000 (b) Rs.2,500 (e) Insufficient data.

(c) Rs.5,000

(d) Rs.3,000 (1 mark)

56. Which of the following items should not appear under the heading unsecured loans in the Balance < Answer > Sheet of a company? (a) (b) (c) (d) (e) Sinking funds Loans and advances from subsidiaries Short term loans and advances from banks Loans and advances from others Fixed deposits. (1 mark) 57. Consider the following data pertaining to Premier Company as on April 01,2003: Subscribed and paid-up Capital: Equity Rs.80,00,000 6% Preference Rs.20,00,000 Profit and Loss account (cr.) Rs. 1,29,000 Dividend equalization reserve Rs.29,10,750 During the year 2003-04, the company suffered a loss of Rs.12,71,733. Directors propose to pay preference dividend and equity dividend at the rate of 5% and in the event of inadequacy of profits, dividend equalization reserve should be made use of to the extent necessary to make good the deficiency in the proposed amount of dividend.
< Answer >

The amount that is to be transferred from dividend equalization reserve to Profit and Loss Appropriation account, in lieu of the proposed dividend is (a) (b) (c) (d) (e) Rs.3,91,000 Rs.3,71,000 Rs.nil as the company incurred losses during the current year and dividends cannot be declared Rs.1,20,000,only with regard to Preference dividend Rs.16,62,733. (2 marks) 58. Consider the following data pertaining to Ravera Ltd. Authorized share capital Issued, called-up and paid -up capital Calls in advance Securities Premium Profit for the current year Rs.20,00,000 Rs.12,00,000 Rs. 80,000 Rs. 1,20,000 Rs. 2,55,600
< Answer >

The directors of the company proposed a dividend of 12%. The amount debited to Profit and Loss Appropriation account on account of the proposed dividend is (a) Rs.30,672 Rs.1,58,400. (b) Rs.2,40,000 (c) Rs.1,53,600 (d) Rs.1,44,000 (e) (1 mark) 59. Outstanding salaries represents (a) A personal account (c) A nominal account (b) A contingent liability (d) A deferred expense account (e) An asset. (1 mark)
< Answer >

60. Which of the following is a capital reserve? (a) (b) (c) (d) (e) A sum set aside to provide for repayment of debentures The surplus arising on a professional revaluation of fixed asset An amount set aside to provide for the increased cost of replacement of the fixed asset A sum set aside from profit towards a special publicity campaign which is to be started in the following year A sum retained to provide for loss that may arise out of doubtful debts. (1 mark) 61. A companys system of maintaining books of accounts (a) Must be the same as all the other companies which are in the similar line of business (b) Can be different from the other companies which are in the similar line of business (c) Must be disclosed, if it is different from the recognised system of accounting (d) Must be on accrual basis and according to the double entry system of accounting (e) Can be on cash basis of accounting on the approval of the Registrar of Companies. (1 mark)

< Answer >

< Answer >

62. A prospective shareholder wants to analyse the profitability of a company. The financial statement the < Answer > investor would consult is the (a) Income statement (c) Funds flow statement (b) Balance Sheet (d) Cash flow statement (e) Director report. (1 mark) 63. If the opening balance of a corporation's retained earnings account is Rs.25,000, net income for the year < Answer > is Rs.50,000 and the closing balance of the retained earnings account is Rs.55,000, the amount paid by the corporation in the form of dividends during the year is (a) Rs.80,000 (b) Rs.30,000 (c) Rs.20,000 (d) Rs.50,000 (e) Rs.5,000. (1 mark) 64. Which of the following is false with regard to value added? (a) (b) (c) (d) (e) Gross value added is derived by deducting depreciation from the net value added Value added is the most relevant concept of the social responsibility concept of the enterprise Value added equals pre-tax profit plus labour, plus depreciation and interest Value added measures the value of increase in resources Additive approach and subtractive approach are the approaches for computing value added. (1 mark) 65. Consider the following balances pertaining to Pioneer Engineers Ltd. as on March 31, 2004: Particulars Rs. Land 2,00,000 Building 3,50,000 Plant and Machinery 5,25,000 Furniture 50,000 The above assets were purchased on April 01, 2003 at the cost stated below: Particulars Rs. Land 2,00,000 Building 4,00,000 Plant and Machinery 7,00,000 Furniture 62,500 The amount of depreciation on the above assets charged to profit and loss account for the year ended on March 31, 2004 is
< Answer > < Answer >

(a) Rs.1,87,500 data.

(b) Rs.2,25,000

(c) Rs.4,37,500

(d) Rs.2,37,500 (e)Insufficient (1 mark)

66. Unique Ltd. has issued 1000, 6% Debentures of Rs.10 each at a premium of Rs.0.20. The interest on < Answer > debentures is payable semi-annually on September 30 and March 31. The annual interest debited to profit and loss account is (a) Rs.600 (b) Rs.1,200 (c) Rs.612 (d) Rs.306 (e) Rs.300. (1 mark) 67. The balance in machinery account of Taurus Ltd. as on April 01, 2003 was Rs.85,000. The following < Answer > transactions took place during the year 2003-2004: Date 01-07-2003 01-10-2003 01-01-2004 Particulars Machinery purchased Machinery sold (book value as on April 01, 2003 is Rs.40,000) New machinery purchased Amount (Rs.) 90,000 50,000 80,000

If the company charges depreciation at the rate of 10% per annum, on written down value method, the amount of depreciation charged for the year 2003-2004 is (a) Rs.23,250 (d) Rs.13,250 (b) Rs.15,500 (e) Rs.15,250. (c) Rs.19,500 (2 marks) 68. Rights shares are the shares (a) Issued by a newly formed company (b) Legally issued to the public at large (c) Offered to the existing equity shareholders (d) That have a right of redemption (e) That have a right to cumulative dividends. (1 mark) 69. Which of the following statements is/are true? According to the purchase of super-profit method of valuation of goodwill, goodwill is the product of the super profit and the number of years purchase. II. For calculating the amount of goodwill under super profit method, the fair value of the capital employed should be determined. III. There is only one method of valuing goodwill, i.e., super profit method. (a) (b) (c) (d) (e) Only (I) above Only (II) above Both (I) and (II) above Both (I) and (III) above Both (II) and (III) above. (1 mark) 70. The three columns on each side of the three columnar cash book represent (a) Real accounts and Capital accounts (c) Real and Nominal accounts (e) Real, Personal and Nominal accounts. (b) Personal Accounts and Nominal accounts (d) Real and Personal accounts (1 mark) 71. Which of the following is true with regard to the claims against the company not acknowledged as < Answer >
< Answer > < Answer > < Answer >

I.

debts? (a) (b) (c) (d) (e) Shown as current liabilities Shown as loans and advances Shown as notes to balance sheet Shown as directors report No separate disclosure is required. (1 mark) 72. The increase in equity from major activities of a business entity is known as (a) Capital (d) Net profit (b) Gross profit (e) Cash on hand. (c) Net worth (1 mark) 73. Which of the following statements can be used to assess the liquidity of a company? (a) Balance sheet (c) Profit and loss appropriation account (e) Manufacturing account. (b) Profit and loss account (d) Bank reconciliation statement (1 mark) 74. Which of the following is not generally used as a valuation base in financial accounting? (a) Historical Cost (c) Current cost (e) Present value. (b) Opportunity cost (d) Realizable value (1 mark) 75. Which of the following subsidiary books serves the purpose of ledger too, in addition to the recording of < Answer > accounting transactions? (a) Purchases book (c) Bills receivable book (b) Sales book (d) Cash book (e) Journal proper. (1 mark) 76. Bank reconciliation statement is (a) (b) (c) (d) (e) A part of the cash book A ledger account A part of trial balance A statement showing the causes for differences between the balances of cashbook and pass book A part of the cash flow statement. (1 mark) 77. Goods given by a proprietary concern as charity should be (a) (b) (c) (d) (e) Credited to purchases account Credited to charity account Credited to sales account Debited to proprietors drawings account Deducted from the capital of the proprietor. (1 mark) 78. Which of the following items is shown on the debit side of a Trial Balance? (a) Rent outstanding (c) Cash sales (e) Interest accrued on debentures. (b) Prepaid expenses (d) Returns outward
< Answer > < Answer > < Answer > < Answer > < Answer > < Answer >

(1 mark) 79. Closing stock is generally valued at (a) Cost price (b) Replacement cost (c) Market price (d) Realisable value (e) Cost price or market price whichever is lower. (1 mark)
< Answer >

Suggested Answers Financial Accounting (MB131): January 2005

1. Answer : (b ) Reason : Accrual basis is used under hybrid system of accounting for expenses and cash basis is used for revenue used. 2. Answer : (b) Reason : Financial accounting principles assume the going concern concept and hence the fixed assets will be valued at cost less depreciation. However, in the given case, the concern decided to close its operations. Hence, the fixed assets should be indicated in the balance sheet at net realizable value. Hence the answer is (b). The assets are not recorded at historical cost. Cost or market value, whichever is lower is used to record stock-in-trade but not fixed assets. The replacement cost is irrelevant when the firm is going to discontinue its operations. Answer : (d) Reason : Incurring liability is a source of fund but not a use of fund. Acquiring assets, incurring expenses, incurring losses and paying dividends are all uses of funds. Answer : (d) Reason : Real accounts represent the assets and properties of a business is the correct statement and (d) is the correct answer. Answer : (b ) Reason : The losses from sale of capital assets should be deducted fom the revenue to ascertain the net income The convention of disclosure implies that all material information should be disclosed in the accounts In keeping with the principle of materiality unimportant items are either left out or merged with other items. The comparison of the results of one accounting period with that in the past is possible when the convention of consistency is adhered to by the business. The income or loss of business is always computed with relevance to a specific period called the accounting period. Answer : (e ) Reason : Prior period items are to be debited to Profit &Loss A/c and its impact on the current year profit should be shown in the notes to the accounts. Answer : (b) Reason : Dr. Sundry Creditors Particulars To Cash To discount To Balance c/d Rs. 1,80,000 8,000 90,000 2,78,000 Cr. Date April 01, 2003 2003-2004 Particulars By Balance b/d By Purchases (balancing figure) Rs. 80,000 1,98,000 2,78,000 Rs. Payment made to creditors Discount received Closing balance 10,00,000 10,000 40,000 10,50,000
< TOP > < TOP >

< TOP >

3.

< TOP > < TOP > < TOP >

4.

5.

6.

< TOP > < TOP >

7.

Date 2003-2004

March 31, 2004 8. Answer : (e) Reason :

Less : Credit purchases Opening balance 9. Answer : (c) Reason : Cost of goods = Purchases Returns outward + Freight in = Rs.2,10,000 Rs.22,000 + Rs.30,000 = Rs.2,18,000

9,25,000 1,25,000
< TOP > < TOP > < TOP >

10. Answer : (d) Reason : A mistake of overcasting of purchases day book increases cost of sales and decreases gross profit. (d) is the correct answer. 11. Answer : (d) Reason : The thumb rule is that all expenses and assets are showing debit balances and incomes and liabilities credit balances. Carriage outward being an expense should be listed in debt column of the Trial Balance. 12. Answer : (b) Reason : Particulars Overdraft balance as per Pass book Add : Cheques issued to Mr. Y but not presented for payment 4,000 10,000 10,000 24,000 44,000 Less : Cheque deposited, yet to be realised Overdraft balance as per cash book 15,000 15,000 29,000 Bank Reconciliation Statement Rs. Rs. 20,000

< TOP >

Rent deposited by Mr. Z directly into the bank Interest on debentures directly collected by bank

13. Answer : (a) Reason : The withdrawal of cash from the bank will figure in both and cash columns of a cash book and such entries are called contra entries. (a) is the correct answer. 14. Answer : (c) Reason : Particulars Salaries overstated (Profit understated) Repairs understated (Profit overstated) Income of investment understated (Profit understated) 7,000 Net profit understated/decreased 15,000 22,000 7,000 7,000 22,0000 -22,000 Profit increased (Rs.) Profit decreased (Rs.) 15,000

< TOP > < TOP >

15. Answer : (b) Reason : i. Difference in sales a/c because of taking Rs.58,726 instead of Rs.58,762=Rs.36 whereby credit is less by the amount

< TOP >

Discount not debited Rs.52 on account of which debit balance is less by the amount Sale of old furniture credited to machinery a/c instead of furniture is not affecting the agreement of trial balance iv. Sale twice debited to S a/c has increased the debit balance by Rs.250 So excess debit Rs.250 plus short credit of Rs.36 minus short debit Rs.52 makes debit total more by Rs.234 of the Trial balance 16. Answer : (c) Reason : A credit sale of Rs.2,000 was wrongly entered in the purchases book. This mistake will result in a decrease in the gross profit of Rs.4,000. 17. Answer : (a) Reason :The mistake of posting of an item to the correct side of a wrong account will not affect the agreement of a trial balance . Thus, the total of credit side will be the total of debit side too. Thus, before and after rectification the total of the debit side will be Rs.43,570. (a) is the correct answer. 18. Answer : (c) Reason : Dr. Net Profit of Joy Ltd. for the year ending March 31, 2004 : Cr. Rs. Particulars Rs. By Cash sales 4,00,000 Less : Wrong Credit 51,000 Rs.
< TOP > < TOP >

ii. iii.

< TOP >

Particulars Rs. To Purchases 2,85,000 Add : Omitted to be recorded 15,000 To Decrease in inventory To Gross Profit To Sales Commission + Accrued To Depreciation To Net Profit The net profit is Rs.13,500 12,000 6,000

3,00,000 40,000 9,000 3,49,000 By Gross Profit 18,000 By Rent received 55,000 30,000 Less : received in advance 2,500 13,500 61,500

3,49,000

3,49,000 9,000 52,500 61,500

< TOP >

19. Answer : (e) Reason : When goods are lost and insurance company accepts the claim only to a certain extent, profit and loss account should be debited with net loss, Trading account will be credited with cost of goods lost and insurance company account will be debited with the amount of claim accepted. Thus the entry is Profit and Loss account Dr. Rs.2,000 Insurance company account Dr. Rs.8,000 To Trading account Rs. 10,000 20. Answer : (c) Reason : The net profit Rs.1,70,000 Rs.15,000(Profit on sale of building which is carried to P& L account (Rs.45,000 Rs.30,000) = Rs.1,55,000. The profit from operations will be Rs.1,55,000. 21. Answer : (c) Reason : Balance Sheet of Nilgir Ltd as on March 31, 2003. Liabilities Rs. Assets Share Capital 5,76,900 Land & building Profit and loss account 1,33,731 Office equipment 12% Bank Loan 1,50,000 Less : depreciation

< TOP > < TOP >

Rs. 4,36,000 1,99,700 19,970 1,79,730

Add : Outstanding interest 15,000 Sundry creditors 50,000 Less : Debtors set off 8,000 Provision for discount on creditors 720 Bills payable

Furniture 1,65,000 Less : depreciation Closing stock Sundry debtors Less : Provision for discount on debtors Creditors set off Bills receivable Cash at bank Petty cash Accrued commission Prepaid printing charges Cash on hand

2,00,000 30,000 55,000 779 8,000 46,221 9,000 23,500 210 13,000 1,850 9,400 9,26,911 1,70,000 38,000

41,280 10,000

9,26,911

22. Answer : (b) Reason : Dr. Trading and profit and loss account for the year ended March 31, 2004 Cr. Particulars To Opening stock To Purchases To Gross profit To Salaries To other expenses To Depreciation Rs. 90,000 4,56,000 1,64,000 7,10,000 86,000 73,000 75,000 2,34,000 Rs. 6,00,000 Particulars By Sales By Closing stock Rs. 6,35,000 75,000 7,10,000 1,64,000 70,000 2,34,000 Assets Fixed assets 5,00,000 Less : depreciation 75,000 Sundry debtors Closing stock Cash and bank Net loss Rs.

< TOP >

By Gross profit By Net loss

Balance sheet as on March 31, 2003 Liabilities Share capital

4,25,000 45,000 75,000 53,000 70,000 6,68,000

< TOP >

Sundry creditors Short tem loan

32,000 36,000

6,68,000

23. Answer : (c) Reason : Dividends represent the amount earmarked to distribute to the shareholders. Hence (c) is the answer. The amount of taxes is to be deducted from profit before tax and the amount to be transferred to reserves and other appropriations, if any, need to be made from profits after tax. Operating profit is the amount of profit other than non-operating surplus. Interest, taxes, other appropriations should be made to operating profit. Hence this is not the amount earmarked for distribution to shareholders.

24. Answer : (c) Reason :

Computation of inventory : Particulars Inventory value as per books Add Purchases received but not accounted Sales yet to be delivered Less Returns outward Amount overcast in stock sheet Inventory as per physical stock Rs. 10,000 30,000 5,000 6,000 Rs. 1,50,000 40,000 1,90,000 11,000 1,79,000

< TOP >

25. Answer : (d) Reason : Particulars Opening balance of sundry debtors Add : Credit sales Rs. 47,000 6,75,000 7,22,000 Less : Closing balance of Sundry debtors Cash collected from customers 26. Answer : (d) Reason : Particulars Opening Provision Bad debts to be written off Shortfall of provision Provision required 5% of Rs.1,40,000 (Rs.1,50,000 Rs.10,000) Charge against profit and loss account 27. Answer : (a) Reason : Date March 31, 2004 Dr. Particulars To A Provision for Bad debts Account Rs. 12,000 10,000 7,000 35,000 64,000 Date April 01, 2003 March 31, 2004 Particulars By Opening balance By P & L a/c Rs. 4,000 10,000 6,000 7,000 13,000 Cr. Rs. 30,000 34,000 70,000 6,52,000

< TOP >

< TOP >

< TOP >

To B To C To Closing balance

64,000
< TOP >

28. Answer : (d) Reason : For valuation of relatively expensive items whose physical identification at various stages is possible, Specific Identification method is most suited. Where the inventories are vast and physical identification is difficult, the method is not advisable. 29. Answer : (e) Reason : Advance payment made to suppliers for materials is not classified as inventory. Other items mentioned in (a), (b), (c) and (d) are classified as inventory in the financial statements as they are the components of inventory.

< TOP >

30. Answer : (e) Reason : Opening balance of Sundry debtors Add : Credit sales Less : Cash collected Less : Closing balance of sundry debtors Bad debts Rs. 45,000 Rs.4,25,000 Rs.4,70,000 Rs.4,00,000 Rs. 70,000 Rs. 50,000 Rs. 20,000

< TOP >

31. Answer : (d) Reason : Let the rate of depreciation = x The depreciated value of machine = Rs.1,20,000 (1 3x) = Rs.66,000

< TOP >

1 3x 3x =

Rs.66,000 Rs.1,20,000 = 0.55 = 1 0.55 = 0.45

x = 0.45 3 = 0.15 or 15%. Thus, the rate of depreciation = 15%. 32. Answer : (e) Reason : Dr. Date April 01, 2003 March 31, 2004
< TOP >

Sundry Debtors Account Particulars To Balance b/d To Sales a/c Rs. Date 10,000 March 31, 2004 1,00,000 March 31, 2004 March 31, 2004 March 31, 2004 March 31, 2004 1,10,000

Cr. Particulars By Returns inward a/c By Cash a/c By Bad debts a/c By Discount allowed a/c By Balance c/d Rs. 1,000 90,000 500 400 18,100 1,10,000 Cr. Particulars By Balance b/d By Profit & Loss a/c Rs. 400 1,195 1,595

Dr. Date March 31, 2004

Provision for Bad Debts Account Particulars To Bad Debts To Balance c/d Rs. Date 500 April 01, 2003 1,095 March 31, 2004 1,595

On March 31, 2004 the balance of sundry debtors is Rs.18,100. This amount includes Rs.200 due from a debtor who has been declared bankrupt. Therefore, provision for doubtful debts is to be created 100% on Rs.200 and 5% on Rs. 17,900 (Rs.18,100 Rs.200) The total provision on March 31, 2004 = Rs.200 + Rs.895 + 500 = Rs.1,595 and less existing provision of Rs.400 and amount debited to profit and loss account is Rs.1,195. 33. Answer : (a) Reason : Share capital is the contribution made by the owner(s) and is regarded as a liability to the business in the nature of owners equity. The underlying feature for this treatment is the distinction between the owner(s) and that of the business owned by them. According to business entity concept whenever an owner brings capital into the business, the business in turn is deemed to owe the capital
< TOP >

to the owner. As such the share capital account is treated as a liability to the business and shown under liabilities. The other concepts are not correct because (b) Money measurement concept explains that in financial accountancy, a record is made only of information that can be expressed in monetary terms and ignores other events, however significant they may be. It is silent about the treatment of share capital account. (c) Cost concept implies that in accounting all transactions are generally recorded at cost and not at market value. It does not explain why share capital account is to be treated as liability. (d) Going concern concept explains that the resources of the concern would continue to be used for the purposes for which they are meant to be used. The very categorization of assets into fixed and current presupposes the going concern concept. It does not deal about the treatment of share capital account. (e) Conservatism concept: The theme behind this principle is that recognition of revenue requires better evidence than recognition of expenses. It deals with revenues and expenses and not the share capital account. 34. Answer : (a) Reason : Particulars Post-tax profits Pre-tax profits Add: Excessive depreciation Abnormal loss 2000-01 (Rs.) 1,50,000 3,00,000 3,00,000 2001-02 (Rs.) 1,65,000 3,30,000 20,000 3,50,000 2002-03 (Rs.) 2,20,000 4,40,000 10,000 4,50,000 2003-04 (Rs.) 2,50,000 5,00,000 5,00,000
< TOP >

Average pre-tax profits Less: Additional salaries Less: Tax @50%

3, 00, 000 + 3,50, 000 + 4,50, 000 + 5, 00, 000 4 =

= Rs. 4,00,000 Rs. 20,000 Rs. 3,80,000 Rs. 1,90,000

< TOP >

Future maintainable profits Rs. 1,90,000 35. Answer : (b) Reason : Valuation of goodwill according to purchase of super profits method. a. Calculation of Capital Employed : Rs. Amount (Rs.) Assets Land and Buildings Plant and machinery Stock Book debts Less : Provision Cash at bank Gross total assets Less : Sundry creditors Provision for taxation 1,75,000 90,000 1,15,000 98,000 3,000 95,000 7,000 4,82,000 1,26,000

71,000 55,000

Capital employed b. Calculation of Normal Profits : (Normal rate of return x Capital Employed)/100 12/100 X Rs.3,56,000 = Rs.42,720.
c.

3,56,000

Calculation of Future Maintainable Profits (based on profits of previous year) : Actual profit after providing tax Rs.55,000.

(As the provision for taxation @ 50% is Rs.55,000, the profits would be Rs.l,10,000 and the profits after providing for taxation also would be Rs.55,000.)
d. Calculation of Super Profits

Actual profits Less : Normal profits Super profits 36. Answer : (a) Reason : 1999-2000 Rs. 75000

Rs. 55,000 42,720 12,280

< TOP >

Valuation of goodwill on five years purchase of super profits = Rs.12,280 x 5 = Rs.61,400.

Profit Less: repair expenses Add: Depreciation Less: profit on sale of plant Adjusted profits Weights Profits weights 37. Answer : (e) Reason :

2000-01 Rs. 300000

2001-02 Rs. 375000 - 30000 1500

2002-03 Rs. 450000 3000

2003-04 Rs. 742500 3000 22,500 723000 5 3615000

Total Rs.

75000 1 75000

300000 2 600000

346500 3 1039500

453000 4 1812000

7141500
< TOP >

Weighted average profits = Rs.71,41,500 / 15 = Rs.4,76,100

Rs.50,000 Rs. 5,000 Rs. 45,000 These Rs.45,000 debentures are converted into equity shares of Rs.100 each at a premium of Rs.20. So, the amount of equity share per unit = Rs.100 + Rs.20 = Rs.120 Rs.45, 000 No. of equity shares to be issued 38. Answer : (a) Reason : Year 1999-2000 2000-01 2001-02 2002-03 2003-04 Profit (Rs.) 42,364 43,456 53,126 56,789 62,354 Weight 1 2 3 4 5 Product 42,364 86,912 1,59,378 2,27,156 3,11,770 =
Rs.120

Debenture amount500 units Rs.100 Less: Discount 10%

= 375 shares.
< TOP >

15 Average profit = Rs.8,27,580 / 15 = Rs.55,172

8,27,580
< TOP >

39. Answer : (a) Reason : Share premium is received along with the application money and the share premium once received cannot be reversed. Hence, the share premium received on 1,00,000 shares at the rate of Rs.2 per share is un affected on account of forfeiture of shares. 40. Answer : (c) Reason : Amount transferred to capital reserve is Rs.800. Working Note: Particulars Amount received on 200 shares on forfeiture(200 x Rs.5) Less: Amount of discount allowed on 200 shares which were reissued (200 x Re-1.) Amount to be transferred to Capital Reserve 41. Answer : (b) Reason : Dr. Particulars To Balance b/d. To Investments To Equity shares (including premium) Cash account Rs. 50,000 2,00,000 Particulars By Preference shareholders (Rs.3,00,000 x 110%) By Balance c/d. Cr. Rs. 3,30,000 25,000 Rs. 1,000 200 800

< TOP >

< TOP >

1,05,000 3,55,000 No. of equity shares = Rs.1,05,000 / Rs.105 = 1000 shares.

355,000
< TOP >

42. Answer : (b) Reason : The shares were issued at a discount of 10% i.e. they were issued for Rs.90 per share. Ramya failed to pay the final call of Rs.30. Hence she has paid Rs.60 (Rs.90 Rs.30). The amount to be credited to shares forfeited account is Rs.60 x 300 shares = Rs.18,000 43. Answer : (d) Reason : As per the Companies Amendment Act, 1988, only preference shares, which are redeemable within 20 years, can be issued 44. Answer : (c) Reason : Particulars Land and building Plant and machinery (Rs.2,70,000 Rs.90%) Furniture Inventories Sundry Debtors (Rs.60,000 95%) Loans and advances Cash Bank Less: Sundry creditors Short term loan Net assets
Rs.9, 20, 000 = Rs.18.40 50, 000 Value of share =

< TOP > < TOP >

Rs.

Rs. 3,60,000 2,43,000 1,80,000 90,000 57,000 75,000 10,000 35,000 10,50,000 1,30,000 9,20,000

50,000 80,000

45. Answer : (b) Reason : In case of issue of debentures at discount and redeemable at a premium, discount on issue of debentures a/c should be debited with the amount of discount, loss on issue of debentures a/c should be debited with the amount of premium payable on redemption and Bank account should be debited with actual amount received. Corresponding credit should be given to debentures a/c with face value of debentures and premium on redemption of debentures a/c with amount of premium. Hence the entry is Rs. Rs. Bank a/c Dr. 1,80,000 Discount on issue of debentures a/c Dr. 20,000 Loss on issue of debentures a/c Dr. 10,000 To 12% Debentures a/c 2,00,000 10,000 To Premium on redemption of debentures 46. Answer : (e) Reason : Forfeited shares account = Forfeited shares x Amount paid by the shareholder = 60 x (Rs.6 + 3 2 = Rs.7) = 420 No.of forfeited reissued shares = 36 shares (60x60%) @ Rs.7 = Rs.252 Credit balance in the share forfeiture account = Rs.420 Rs.252 = Rs.168. 47. Answer : (c) Reason : Cute Ltd. Intrinsic Value of Shares 50,000 equity shares @ Rs.10 each 2,000, 8% preference shares @ Rs.100 each Reserves and surplus External liabilities Sundry creditors Total liabilities Total assets Less : Fictitious assets (preliminary expenses) Sundry creditors Extenral liabilities Preference shares Net assets available for equity shareholders Intrinsic value of shares
Net assets availabe for equity shareholders Number of equity shares =

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(Rs.) 5,00,000 2,00,000 30,000 1,20,000 60,000 9,10,000 (Rs.) 9,10,000 (10,000) (60,000) (1,20,000) (2,00,000) 5,20,000

Rs.5, 20, 000 50, 000 = = Rs.10.40.

48. Answer : (a) Reason : Present share capital Rs.50,00,000
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2 Rights issue Rs.50,00,000 x 5

Rs.20,00,000

Total Share Capital

Rs.70,00,000
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49. Answer : (d) Reason : The journal entry on forfeiture of share is Particulars Share Capital A/c. (300 Rs.10) To Share First Call A/c. (300 Rs.2) To Share Second and Final Call A/c. (300 Rs.3) To Shares Forfeited A/c. (300 Rs.5) (Being the forfeiture of 300 equity shares of Ramesh on non-payment of first and final call) Bank A/c. (300 Rs.9) Shares forfeited A/c. (300 Rs.1) To Share Capital A/c. (300 Rs.10) (Being the re-issue of 300 shares @ Rs.9 per share and discounted amount of Re.1 per share is to be transferred from share forfeiture a/c) Shares forfeited A/c. To Capital Reserve A/c. (Being the profit on re-issue of forfeited shares transferred to Capital Reserve) Dr.

Dr. (Rs.) 3,000

Cr. (Rs.) 600 900 1,500

Dr. Dr.

2,700 300 3,000

Dr.

1,200 1,200

50. Answer : (c) Reason : Repayment of short term loan is shown as a decrease in cash (c). Therefore, alternative (c) is the correct answer. It is not a source of working capital. Therefore, alternative (a) is not the correct answer. It is shown as increase in cash (b), is also not a correct answer. Does not affect the working capital (d) is also not a correct answer, since it is affecting the working capital. Is not shown either as a source or a use of funds (e) is also not the correct answer. Therefore, alternative (c) is the correct answer. 51. Answer : (c) Reason : Total amount received on forfeited shares =Rs.2500(10-2) =Rs.20,000 Reissue of shares @Rs.7 on fully paid =2500 x Rs.7 =Rs17,500 Shortfall on reissue =2500 x Rs3 =Rs.7,500 Balance in share forfeiture a/c after adjusting for shortfall =Rs.(20,000-7,500) =Rs.12,500. Transfer to capital reserve =Rs.12,500. 52. Answer : (e) Reason : Profit on revaluation of machinery = Rs.2,00,000. Share of minority group of S Ltd. = 25% Share of profit on revaluation = 25% of Rs.2,00,000

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25 Rs. 2,00,000 = Rs.50,000. 100

53. Answer : (b) Reason : The post-acquisition profits of subsidiary company are the Revenue profits for consolidation of balance sheet of holding company and its subsidiary company. 54. Answer: (a) Reason: Half of the stock remained unsold = Rs.20,000/2 = Rs.10,000
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Rs.5, 000 1 = RS.20, 000 4 = Profit percentage =

1 = Unrealised profit share = Rs.10,000 4 80% = Rs.2,000

55. Answer : (a) 800 Reason: 1, 000

4 Holding Company 5

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Minority Interest

(10,000 1/5) =

2,000.
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56. Answer : (a) Reason : Sinking fund is created out of profit. It is the part of profit and should be listed under the heading Reserves and Surplus and not under unsecured loans. Loans and advances from subsidiaries, short term loans and advances from banks, loans and advances from others and fixed deposits are unsecured loans. Answer: (a) 57. Reason: Profit and Loss Appropriation Account Particulars To Net loss To Proposed dividend Equity Rs. 12,71,733 4,00,000 1,20,000 Preference Total 17,91,733 Particulars By Balance b/d By Dividend equalization .reserve By Balance C/d. Total Rs. 1,29,000 3,91,000 12,71,733 17,91,733

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Amount to be transferred from dividend equalization reserve is Rs.3,91,000 58. Answer : (d) Reason : No dividends an paid on call in advance nor on calls in arrar Dividend = 12% on Rs. 12,00,000 = Rs. 1,44,000 59. Answer : (a) Reason : Outstanding salaries is the amount payable during a particular period which is not yet paid. It is Personal Account representing salaries due to employees. It is a representative personal account 60. Answer : (b) Reason : The surplus arising on a professional revaluation of fixed asset is a capital reserve. 61. Answer : (d) Reason : A companys system of maintaining books of accounts must be on the accrual basis and according to the double entry system of accounting. The systems in other alternatives are no systems at all or not recognized under the Act. Thus, alternative (d) is the correct answer. 62. Answer : (a) Reason: A shareholder wants to review the revenues and expenses of a company. The financial statement the investor would consult is the Income statement. (a) is the correct answer. 63. Answer : (c) Reason : The opening balance of retained earnings i.e. profit and loss appropriation account is Rs.25,000 and the profit earned during the year is Rs.50,000 thus total retained earnings is Rs.75,000 and the closing balance is Rs.55,000. Thus, the amount of dividends paid is Rs.20,000.

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64. Answer : (a) Reason : Net value added is derived by deducting depreciation from the gross value added and not vice versa. Thus the statement in alternative (a) is false. The value added is not the most relevant concept and the statement forms part of social responsibility reporting (b). It is arrived at by deducting only the cost of bought in materials and services (c). It measures the value of increase in resources (d). The approaches adopted are additive approach and subtractive approach in computing value added (e). Thus, the alternatives (b), (c), (d) and (e) are true. 65. Answer : (d) Reason: Depreciation charged to date Cost Rs. 2,00,000 4,00,000 7,00,000 62,500 13,62,500 Written down Value Rs. 2,00,000 3,50,000 5,25,000 50,000 11,25,000 Depreciation Rs. 50,000 1,75,000 12,500 2,37,500

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Land Building Plant and machinery Furniture

66. Answer : (a) Reason: The annual interest cost which is payable half yearly on a twenty-year, 6 %, Rs.10,000 debentures that are issued at Rs.10,200 is Rs.10,000 x 6% =Rs.600. 67. Answer : (e) Reason : Dr. Date 1-04-03 1-07-03 1-10-03 Machinery account Particulars Rs. To Opening balance 85,000 1-10-03 To Bank 90,000 31-3-04 To Profit and loss a/c 31-3-04 (Profit on sale of machine) 12,000 1-01-04 To Bank 80,000 2,67,000 Depreciation calculation: Cr. Particulars By Bank (sale) By Depreciation By Closing balance Rs. 50,000 15,250 2,01,750

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2,67,000 Rs. 6,750 2,000 2,000 4,500 15,250

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Particulars On machinery purchased on 1-7-03 (Rs.90,000 x 10% x 9/12) On machinery sold (40,000 x 10% x 6/12) On machinery purchased on 1-1-04 (Rs.80,000 x 10% x 3/12 ) On balance machinery (Rs,85,000 Rs.40,000) x 10%

68. Answer : (c) Reason : Rights shares are the shares that are offered to the existing equity shareholders (c). These are not issued by a newly formed company (a).They are not the shares issued to the public at large (b). They are issued only to the existing shareholders. It does not indicate the right of redemption of shares issue (d). These are not the shares with cumulative dividend right (e). Therefore, alternative (c) is the correct answer. 69. Answer : (c) Reason : According to the purchase of Super-Profit Method of valuing goodwill, goodwill is the product of the super profit and the number of years purchase and For calculating the amount of goodwill by the super profit method, it is necessary that the fair value of the capital employed should be determined. These two statements are true. Hence, the answer is (c ). 70. Answer : (e ) Reason : The three columns on each side of the three columnar cash book represent Real accounts, Personal

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accounts and Nominal accounts 71. Answer : (c) Reason : The claims against the company not acknowledged as debts represent contingent liabilities and should be included in the notes to balance sheet. 72. Answer : (d) Reason : The increase in equity or net assets from major or central transactions or activities of a business entity is from net profit. Capital is the investment made by the owner and not the increase from major activities of the business. Gross profit is subject to deduction of many expenses. Net worth is the net assets of an entity. Cash on hand cannot be termed as increase in equity. 73. Answer : (a) Reason : Balance sheet can be used to assess the liquidity of a company. The profit and loss account shows the profit or loss of the company but does not help in assessing the liquidity of the company. The profit and loss appropriation account gives the details of appropriations and the retained earnings. The bank reconciliation statement is prepared only to reconcile the differences in bank balance as per cashbook and pass book. The manufacturing account shows the cost of goods produced. Hence the answer is (a). 74. Answer : (b) Reason : The frequently used valuation bases in accounting are Historical Cost, Current cost, Realizable value and present value 75. Answer : (d) Reason : Cash book is a special journal in which all cash transactions are recorded directly. The cash book resembles a ledger with the debit and credit sides, and the balance represents the cash on hand at the end of the accounting period. Hence it serves the purpose of ledger. Cash account is not opened when a cash, book is maintained. Purchases book, sales book, bills receivables book and journal proper are the books of original entry and they do not serve the purpose of ledger. 76. Answer : (d ) Reason : Bank reconciliation statement is a statement showing the causes for differences between the balances of cashbook and pass book 77. Answer : (a) Reason : The value of goods given as charity will be debited to charity account and credited to purchase account .The debit balance in charity account will be transferred to P&L a/c. 78. Answer : (b) Reason : Prepaid expenses is shown on the debit side of a Trial Balance. 79. Answer : (e) Reason : Closing stock is valued at cost price or market price whichever is lower. It is not valued at cost price, replacement cost, market price or realisable value.
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