Test Series: October, 2017

MOCK TEST PAPER - 2

INTERMEDIATE (IPC): GROUP I
PAPER 1: ACCOUNTING
SUGGESTED ANSWERS/HINTS

1. (a) As per para AS 2 Valuation of Inventories, abnormal amounts of wasted materials, labour
and other production costs are excluded from cost of inventories and such costs are
recognized 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 Normal Loss and Abnormal Loss:
Material used 12,000 MT @ Rs. 150 = Rs. 18,00,000
Normal Loss (4% of 12,000 MT) 480 MT
Net quantity of material 11,520 MT
Abnormal Loss in quantity 150 MT (630 MT less 480 MT)
Abnormal Loss Rs. 23,437.50 [150 units @ Rs. 156.25
(Rs.18,00,000/11,520)]
Amount Rs. 23,437.50 will be charged to the Profit and Loss statement.
(b) Statement showing amount to be charged to Profit and Loss Statement as per AS 7
Rs. in crores
Cost of construction incurred upto 31.03.2014 120
Add: Estimated future cost 45
Total estimated cost of construction 165
Degree of completion (120/165 x 100) 72.73%
Revenue recognized (72.73% of 150) 109 (approx)
Total foreseeable loss (165 150) 15
Less: Loss for the current year (120 109) 11
Loss to be provided for 4
(c) As per AS 9 Revenue Recognition, where the ability to assess the ultimate collection with
reasonable certainty is lacking at the time of raising any claim, the revenue recognition is
postponed to the extent of uncertainty involved. In such cases, the revenue is recognized only
when it is reasonably certain that the ultimate collection will be made. In this case, the
company never realized interest for the delayed payments made by the agent. Hence, based
on the past experience, the realization of interest for the delayed payments by the agent is
very much uncertain. The interest should be recognized only if the ultimate collection is
certain. Therefore, the interest income of Rs. 5 lakhs should not be recognized in the books
for the year ended 31 st March, 2015. Thus the contention of accountant is incorrect. However,
if the agents have agreed to pay the amount of interest and there is an element of certainty
associated with these receipts, the accountant is correct regarding booking of Rs. 5 lakhs as
interest amount.

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 (d) Calculation of Purchase Consideration under Net Assets Method
Rs. Rs.
Sundry assets
75 112
18,00,000 15,12,000
100 100
25 92
18,00,000 4,14,000 19,26,000
100 100
Less: Liabilities:

10% Debentures 2,00,000

Trade payables 1,40,000
Bank overdraft 50,000
Unrecorded liability 25,000 (4,15,000)
Purchase consideration 15,11,000
2. (a) Surbhi Ltd. Cash Flow Statementfor
the year ended 31 st March, 20X1
Cash Flow from Operating Activities
Rs. Rs.
Increase in balance of Profit and Loss Account (1,00,000 40,000
60,000)
Dividend payable 2,00,000
Provision for taxation (W.N.1) 80,000
Transfer to General Reserve (2,00,000 1,50,000) 50,000
Depreciation (W.N.2) 1,25,000
Profit on sale of Plant and Machinery (15,000)
Operating Profit before Working Capital changes 4,80,000
Increase in Inventories (2,00,000)
Decrease in Trade receivables 2,00,000
Decrease in Trade payables (1,20,000)
Cash generated from operations 3,60,000
Income tax paid (50,000)
Net Cash from operating activities 3,10,000
Cash Flow from Investing Activities
Purchase of fixed assets (3,45,000)
Expenses on building (2,00,000)
(6,00,000 4,00,000)
Increase in investments (1,00,000)
Sale of old machine 35,000
Net Cash used in investing activities (6,10,000)

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 Cash Flow from Financing activities
Proceeds from issue of shares (10,00,000 8,00,000) 2,00,000
Proceeds from issue of debentures 2,00,000
Dividend paid (1,00,000)
Net cash used in financing activities 3,00,000
Net increase in cash or cash equivalents NIL
Cash and Cash equivalents at the beginning of the year 2,00,000
Cash and Cash equivalents at the end of the year 2,00,000
Working Notes:
1. Provision for taxation account
Rs. Rs.
To Cash (Paid) 50,000 By Balance b/d 70,000
To Balance c/d 1,00,000 By Profit and Loss A/c 80,000
(Balancing figure)
1,50,000 1,50,000
2. Plant and Machinery account
Rs. Rs.
To Balance b/d 5,00,000 By Depreciation 1,25,000
To Profit and Loss A/c 15000
(profit on sale of
machine)
To Cash (Balancing figure) 3,45,000 By Cash 35,000
(sale of machine)
_______ By Balance c/d 7,00,000
8,60,000 8,60,000
(b) Journal Entries in the books of Gaurav Ltd.
Particulars Debit Credit
Rs. Rs.
i 8% Preference share capital A/c (Rs. 100 each) Dr. 4,00,000
To 8% Preference share capital A/c (Rs. 80 each) 3,20,000
To Capital reduction A/c 80,000
ii Equity share capital A/c (Rs. 10 each) Dr. 10,00,000
To Equity share capital A/c (Rs. 2 each) 2,00,000
To Capital reduction A/c 8,00,000
iii Capital reduction A/c Dr. 32,000
To Equity share capital A/c (Rs. 2 each) 32,000
iv (a) 6% Debentures A/c Dr. 3,00,000
To Debenture holders A/c 3,00,000
(b) Debenture holders A/c Dr. 3,00,000
To Freehold Property A/c 3,00,000
v Accrued debenture interest A/c Dr. 24,000

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 To Bank A/c 24,000
vi Freehold property A/c Dr. 1,50,000
To Capital reduction A/c 1,50,000
vii Bank A/c Dr. 2,50,000
To Trade Investment A/c 2,00,000
To Capital reduction A/c 50,000
vii Directors loan A/c Dr. 3,00,000
To Equity share capital A/c (Rs. 2 each) 75,000
To Capital reduction A/c 2,25,000
ix Capital Reduction A/c Dr. 7,65,000
To Profit and loss A/c 5,25,000
To Trade receivables A/c 90,000
To Inventories A/c 1,20,000
To Bank A/c (10% of Rs. 3,00,000) 30,000
x Capital Reduction A/c Dr. 5,08,000
To Capital reserve A/c 5,08,000
3. (a) Megha Ltd.
Balance Sheet as on 31st March, 20X1
Particulars Notes Rs.
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 49,95,000
b Reserves and Surplus 2 14,83,500
2 Non-current liabilities
Long-term borrowings 3 13,17,500
3 Current liabilities
a Trade Payables 8,00,000
b Other current liabilities 4 37,500
c Short-term provisions 5 6,40,000
d Short-term borrowings 2,00,000
Total 94,73,500
Assets
1 Non-current assets
Fixed assets
Tangible assets 6 56,25,000
2 Current assets
a Inventories 7 12,50,000
b Trade receivables 8 10,00,000
c Cash and bank balances 9 13,85,000

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 d Short-term loans and advances 2,13,500
Total 94,73,500
Notes to accounts
Rs.
1 Share Capital
Equity share capital
Issued & subscribed & called up
50,000 Equity Shares of Rs. 100 each
(of the above 10,000 shares have been issued for
consideration other than cash) 50,00,000
Less: Calls in arrears (5,000) 49,95,000
Total 49,95,000
2 Reserves and Surplus
General Reserve 10,50,000
Add: current year transfer 20,000 10,70,000
Profit & Loss balance
Profit for the year 4,33,500
Less: Appropriations:
Transfer to General reserve (20,000) 4,13,500
Total 14,83,500
3 Long-term borrowings
Secured Term Loan
State Financial Corporation Loan (7,50,000-37,500)
(Secured by hypothecation of Plant and Machinery) 7,12,500
Unsecured Loan 6,05,000
Total 13,17,500
4 Other current liabilities
Interest accrued but not due on loans (SFC) 37,500
5 Short-term provisions
Provision for taxation 6,40,000
6 Tangible assets
Land and Building 30,00,000
Less: Depreciation (2,50,000) (b.f.) 27,50,000
Plant & Machinery 35,00,000
Less: Depreciation (8,75,000) (b.f.) 26,25,000
Furniture & Fittings 3,12,500
Less: Depreciation (62,500)(b.f.) 2,50,000
Total 56,25,000
7 Inventories
Raw Materials 2,50,000

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 Finished goods 10,00,000
Total 12,50,000
8 Trade receivables
Outstanding for a period exceeding six 2,60,000
months
Other Amounts 7,40,000
Total 10,00,000
9 Cash and bank balances
Cash at bank
with Scheduled Banks 12,25,000
with others (Omega Bank Ltd.) 10,000 12,35,000
Cash in hand 1,50,000
Other bank balances Nil
Total 13,85,000
(b) The entity has charged depreciation using the straight-line method at Rs. 1,00,000 per annum
i.e (5,00,000/5 years). On 1st January 2017, the asset's net book value is [5,00,000 (1,00,000
x 4)] Rs. 1,00,000. The remaining useful life is 4 years. The company should amend the annual
provision for depreciation to charge the unamortized cost over the revised remaining life of
four years. Consequently, it should charge depreciation for the next 4 years at Rs. 25,000 per
annum i.e. (1,00,000 / 4 years).
4. (a) Mahaveer hospital
Income & Expenditure Account
for the year ended 31 December, 2016
Expenditure Rs. Income Rs.
To Salaries 24,000 By Subscriptions 24,500
To Diet expenses 15,600 By Govt. Grants (Maintenance) 20,000
To Rent & Rates 1,700 By Fees, Sundry Patients 4,800
To Printing & Stationery 2,400 By Donations 8,000
To Electricity & Water-charges 2,400 By Benefit shows (net collections) 6,000
To Office expenses 2,000 By Interest on Investments 800
To Excess of Income over
expenditure transferred to
Capital Fund 16,000
64,100 64,100

Balance Sheet as at 31st Dec., 2016

Liabilities Rs. Rs. Assets Rs. Rs.
Capital Fund : Building :
Opening balance 49,300 Opening balance 90,000
Excess of Income Addition 50,000 1,40,000
Over Expenditure 16,000 65,300 Hospital Equipment :
Building Fund : Opening balance 34,000
Opening balance 80,000 Addition 17,000 51,000

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 Add : Govt. Grant 80,000 1,60,000 Furniture 6,000
Subscriptions Investments-
received in advance 2,400 8% Govt. Securities 20,000
Subscriptions receivable 1,400
Accrued interest 800
Prepaid expenses (Rent) 300
Cash at Bank 6,800
Cash in hand 1,400
2,27,700 2,27,700

Working Notes:
(1) Balance sheet as at 31st Dec., 2015
Liabilities Rs. Assets Rs.
Capital Fund Building 90,000
(Balancing Figure) 49,300 Equipment 34,000
Building Fund 80,000 Subscription Receivable 6,500
Creditors for Expenses: Cash at Bank 5,200
Salaries payable 7,200 Cash in hand 800
1,36,500 1,36,500
(2) Building Rs.
Balance on 31st Dec. 2016 1,40,000
Paid during the year (50,000)
Balance on 31st Dec. 2015 90,000
(3) Equipment
Balance on 31st Dec. 2016 51,000
Paid during the year (17,000)
Balance on 31st Dec. 2015 34,000
(4) Subscription due for 2015
Receivable on 31st Dec. 2015 6,500
Received in 2016 (5,100)
Still Receivable for 2015 1,400
(b) Capital Redemption Reserve A/c Dr. 30,000
Securities Premium A/c Dr. 40,000
General Reserve A/c Dr. 30,000
To Bonus to Shareholders 1,00,000
(Being issue of bonus shares by utilization of various
Reserves, as per resolution dated .)
Bonus to Shareholders A/c Dr. 1,00,000
To Equity Share Capital 1,00,000
(Being capitalization of Profit)

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 5 (a) Investment Account of Gopal
For the year ended 31.3.2016
(Script: 15% Debentures in Ritu Industries Ltd.)
(Interest payable on 30th June and 31 st December)
Date Particulars Nominal Interes Cost Date Particulars Nominal Interest Cost Rs.
Value t Rs. Rs. Value Rs. Rs.
Rs.
1.04.15 To Balance 2,00,000 7,500 2,10,000 30.06.15 By Bank A/c - 22,500
A/c
1.05.15 To Bank A/c 1,00,000 5,000 1,02,000 1.11.15 By Bank A/c 1,20,000 6,000 1,14,600
30.11.15 To Bank A/c 80,000 5,000 76,800 1.11.15 By Profit & - - 11,400
Loss A/c
31.12.15 To Profit & 20,000 31.12.15 By Bank A/c 80,000 6,000 1,04,000
Loss A/c
31.03.16 To Profit & 37,250 31.12.15 By Bank A/c - 13,500 -
Loss A/c
(Bal. fig.) 31.12.15 By Bank A/c - 6,750 -
31.3.16 By Bal. c/d 1,80,000 - 1,78,800
3,80,000 54,750 4,08,800 3,80,000 54,750 4,08,800

Working Notes:
15 3
(i) Accrued Interest as on 1 st April, 2015 = Rs. 2,00,000 x x ` 7,500
100 12
15 4
(ii) Accrued Interest as on 1.5.2015 = Rs. 1,00,000 x x ` 5,000
100 12
(iii) Cost of Investment for purchase on 1 st May = Rs. 1,07,000 Rs. 5,000 = Rs. 1,02,000
15 6
(iv) Interest received as on 30.6.2015 = Rs. 3,00,000 x x ` 22,500
100 12
(v) Accrued Interest on debentures sold on 1.11.2015
15 4
= Rs. 1,20,000 x x ` 6,000
100 12
15 5
(vi) Accrued Interest = Rs. 80,000 x x ` 5,000
100 12
15 6
(vii) Accrued Interest on sold debentures 31.12.2015 = Rs. 80,000 x x ` 6,000
100 12
(viii) Sale Price of Investment on 31 st Dec. = Rs. 1,10,000-Rs. 6,000 = Rs. 1,04,000
(ix) Loss on Sale of Debenture on 1.1.2015
Sale Price of debenture 1,14,600
Less: Cost Price of debenture
2,10,000
x ` 1,20,000 1,26,000
2,00,000
Loss on sale 11,400

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 15 6
(x) Accrued interest as on 31.12.2015 = Rs. 1,80,000 x x ` 13,500
100 12
15 3
(xi) Accrued Interest = Rs. 1,80,000 x x ` 6,750
100 12
(xii) Cost of investment as on 31 st March = Rs. 1,02,000 + Rs. 76,800 = Rs. 1,78,800
(xiii) Profit on debentures sold on 31 st December
= Rs. 1,04,000 (Rs. 2,10,000x800/2,000) =Rs. 20,000
(b) Memorandum Trading Account for the period 1st April, 2016 to 29th August 2016
Rs. Rs.
To Opening Stock 3,95,050 By Sales 22,68,000
To Purchases 16,55,350 By Closing stock (Bal. fig.) 4,41,300
Less: (20,500)
Advertisement
Drawings (1,000) 16,33,850
To Gross Profit [30%
of Sales] [W N] 6,80,400
27,09,300 27,09,300

Statement of Insurance Claim

Rs.
Value of stock destroyed by fire 4,41,300
Less: Salvaged Stock (54,000)
Add: Fire Fighting Expenses 2,350
Insurance Claim 3,89,650
Note: Since policy amount is more than claim amount, average clause will not apply.
Therefore, claim amount of Rs. 3,89,650 will be admitted by the Insurance Company.
Working Note:
Trading Account for the year ended 31st March, 2016
Rs. Rs.
To Opening Stock 3,55,250 By Sales 40,00,000
To Purchases 28,39,800 By Closing stock 3,95,050
To Gross Profit 12,00,000
43,95,050 43,95,050
Rate of Gross Profit in 2015-16
Gross Pr ofit
100 = 12,00,000/40,00,000 x 100 = 30%
Sales
6. Trading and Profit and Loss Account
for the year ended 31 st March, 2017
Rs. Rs.
Sales 1,20,000
Less: Cost of goods sold:
9

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 Opening Stock 15,500
Purchases 84,000
99,500
Less: Closing stock (18,550) (80,950)
Gross Profit 39,050

Half year to 30 th September 2016 Half year to 31 st March 2017

Rs. Rs. Rs. Rs.
Gross profit allocated on time 19,525 19,525
basis
Less: Expenses
Salaries (W.N. 1) 6,750 5,250
Travelling expenses 400 400
Office maintenance 600 600
Conveyance 250 250
Trade expenses (W.N.2) 625 625
Rent and rates (W.N. 3) 1,200 1,200
Bad debts 500 400
Provision for doubtful - 270
debts
Depreciation:
Plant and 1,100 1,100
machinery
Motor vehicles 1,500 1,500
Interest on loan (W.N. 4) - (12,925) 1,638 (13,233)
6,600 6,292
Appropriation of profits:
Remaining profits
L and M (2:1) 4,400
2,200 6,600 3,775
M and N (3:2) 2,517 6,292

Partners Capital Accounts

L M N L M N
Rs. Rs. Rs. Rs. Rs. Rs.
To L (goodwill) 4,000 6,000 By Balance b/d 24,000 12,000 -
To Drawings 2,000 3,000 1,000 By Cash - - 9,000
To Transfer to 36,400 - - By M (Goodwill) 4,000 - -
loan a/c
By N (Goodwill) 6,000 - -
To Balance - 10,975 4,517 By Profit 4,400 5,975 2,517
c/d

38,400 17,975 11,517 38,400 17,975 11,517

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 Balance Sheet as on 31 st March, 2017
Liabilities Amount (Rs.) Assets Amount (Rs.)
Capital A/c Plant & Machinery
M 10,975 Less: Depreciation
N 4,517 15,492 (22,000 6,600) 15,400
Ls Loan 36,400 Motor Car
Interest 1,638 38,038 Less: Depreciation
(30,000 9,000) 21,000
Current Liabilities Current Assets:
Creditors 10,100 Stock 18,550
Out-standing Trade 250 Debtors (Less: Provision 5,130
expenses (5,400-270) 600
Prepaid Rent 3,200
Balance at bank
Total 63,880 63,880
Working Notes:
Rs. Rs.
1. Salaries
Total as per trial balance 18,000
Less: Partners Drawings - L 2,000
M 3,000
N 1,000 (6,000)
12,000
Less: Ns Salary up to 30.09.2016 1,500
10,500

Upto 30.09.2016 Upto 31.03.2017

Allocation on time basis 5,250 5,250
Add: Ns salary upto 30.09.2016 1,500 0
6,750 5,250
2. Trade Expenses
Total as per trial balance 1,000
Add: Accrual 250
1,250
Allocation: on time basis (50 : 50) 625 625
3. Rent and rates
Total as per trial balance 3,000
Less: Rent paid in advance (600)
2,400
Allocation: on time basis (50 : 50) 1,200 1,200
4. Interest on loan account of L
Balance in Capital a/c as per trial balance 24,000
Less: Drawings (2,000)
Add: Share of Goodwill 10,000

11

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 Share in Profit 4,400 14,400
36,400
Interest payable @9% p.a. from 01.10.2016
to 31.03.2017 (6 months)
36,400 x 6/12 x 9/100 = 1,638
Adjustment of Ls share of Goodwill
Value of goodwill Rs. 15,000
Net entry for Goodwill
Ms Capital account Dr. Rs. 4,000
Ns Capital account Dr. Rs. 6,000
To Ls Capital account Rs. 10,000
(Ls share in goodwill adjusted to existing partners in their gaining ratio)
7. (a) Calculation of Cash Price The present value of an annuity of Rs. 1 paid for 3 year @ 5%
= Rs. 2.723. Hence, the present value of Rs. 30,000 for 3 years = 2.723 x 30,000 =
Rs. 81,690.
Thus, Cash Price will be computed as Rs. 81,690.
Cash price may also be calculated using the annuity formula:

Cash price = Annual instalment x

1 r n 1
r 1 r
n

= 30,000 x [(1 + 0.05)3 1]/ 0.05 (1 + 0.05)3

= Rs. 81697.
Note- The difference in cash price of Rs. 7 is on account of approximation.
(b) As per AS 1, any change in the accounting policies which has a material effect in the current
period or which is reasonably expected to have a material effect in later periods should be
disclosed. In the case of a change in accounting policies which has a material effect in the
current period, the amount by which any item in the financial statements is affected by such
change should also be disclosed to the extent ascertainable. Where such amount is not
ascertainable, wholly or in part, the fact should be indicated. Accordingly, the notes on
accounts should properly disclose the change and its effect.
Notes on Accounts:
So far, the company has been providing 2% of sales for meeting after sales expenses during
the warranty period. With the improved method of production, the proba bility of defects
occurring in the products has reduced considerably. Hence, the company has decided not to
make provision for such expenses but to account for the same as and when expenses are
incurred. Due to this change, the profit for the year is increased by Rs. 12 crores than would
have been the case if the old policy were to continue.
(c) In modern time, computerized accounting systems are used in various areas. The significance
of the computerized accounting system is as follows:
(1) Increase speed, accuracy and security - In computerized accounting system, the speed
with which accounts can be maintained is several fold higher. Besides speed, level of
accuracy is also high in computerized accounting system.

12

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 (2) Reduce errors - In computerized accounting, the possibilities of errors are also very less
unless some mistake is made while recording the data.
(3) Immediate information - In this system, with an entry of a transaction, corresponding
ledger posting is done automatically. Hence, trial balance will also be automatically tallied
and the user will get the information immediately.
(4) Avoid duplication of work - Computerized accounting systems also remove the
duplication of the work.
(d) Mr. S in Account Current with Mr. R as on 31 st Oct, 2016
Dr. Cr.
Rs. Days Product Rs. Days Product
(Rs.) (Rs.)
01.07.16 To Bal. b/d 750 123 92,250 20.08.16 By Sales 200 72 14,400
Returns
15.8.16 To Sales 1,250 77 96,250 22.09.16 By Bank 800 39 31,200
31.10.16 To Interest 18.48 15.10.16 By Cash 500 16 8,000
By Balance 1,34,900
of Products
_____ ______ 31.10.16 By Bal. c/d 518.48 ______
2018.48 1,88,500 2018.48 1,88,500
5 1
Interest = Rs. 1,34,900 x = Rs. 18.48
100 365
(e) Constructing or acquiring a new asset may result in incremental costs that would have been
avoided if the asset had not been constructed or acquired. These costs are not to be included
in the cost of the asset if they are not directly attributable to bring ing the asset to the location
and condition necessary for it to be capable of operating in the manner intended by the
management. The costs to be incurred by the company are in the nature of costs of relocating
or reorganizing operations of the company and do not meet the requirement of AS 10
(Revised) on Property, Plant and Equipment and therefore, cannot be capitalized. Therefore,
the costs with respect to shifting to or renting for the temporary new location will not be
capitalized.

13

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