Accounts & Adv Account Book

CONTENTS
Sr. No. Chapter Page No.
1. Accounting Standards 1 - 31
2. Redemption of Redeemable Preference shares 32 - 37
3. Redemption of Debentures 38 - 45
4. Company Final Account 46 - 63
5. Cash Flow Statement
6. Profit Prior to Incorporation 64 - 70
7. Investments Accounts 71 - 74
8. Fire Insurance Claims 75- 86
9. Hire Purchase and Installment Selling 87 - 93
10. Departmental Accounts 94 - 100
11. Branch Accounts 101 - 121
12. Single Entry System 122 - 135
13. Partnership Accounts 136 - 160

CONTENTS
Sr. No. Chapter Page No.
1. Accounting Standards 161 - 191
2. Company Accounts (ESOP & BUY BACK) 192 - 197
3. Underwriters Liability 198 - 202
4. Internal Reconstruction 203- 216
5. Amalgamation, Absoroption and External Reconstruction 217 - 234
6. Liquadation of Companies 235 - 247
7. Financial Statements of Insurance Companies 248 - 262
8. Financial Statements of Banking Companies 263 - 281
9. Financial Reporting for Financial Institutions 282 - 284
10. Valuation of Goodwill 285 - 296
11. Consolidated Financial Statement 297 - 306

J. K. SHAH CLASSES INTER C.A. - ACCOUNTING
CHAPTER-1
1. What are Accounting Policies?

Accounting policies are rules or principles and methods to adopt such principles in finan-
cial accounts for true and fair recording and presentation of financial statements.
2. Examples of different accounting policies
• Methods of Amortization (AS 26)
• Valuation of Inventories (AS 2)
• Valuation of Investments (AS 13)
• Valuation of Fixed Assets (AS 10)
• Treatment of Government Grants (AS 12)
• Treatment of Contingent liabilities (AS 29)
• Conversion of Foreign currency items (AS 11), etc.
3. Why AS 1?
There is no single list of accounting policies which are applicable in all circumstances.
The differing circumstances in which enterprises operate in a situation of diverse and
complex economic activity make alternative accounting principles and methods of apply-
ing those principles acceptable.
If every entity follows separate method to comply with principle then even if they follow the
correct accounting policy but still books are not comparable, so there is need for disclo-
sure.
4. Disclosure requirement
• SIGNIFICANT ACCOUNTING POLICIES:
All significant accounting policies adopted in preparation and presentation of fi-
nancial statements should be disclosed.
Significant accounting policies means those accounting policies which deals with
material items of assets, liabilities, incomes and expenses.
Such disclosure should form part of financial statements.
These significant accounting policies should be disclosed at one place.
• INSIGNIFICANT ACCOUNTING POLICIES:
All accounting policies relating to immaterial items of assets, liabilities, incomes
and expenses need not be disclosed.
: 1 : ACCOUNTING STANDARDS
• FUNDAMENTAL ACCOUNTING ASSUMPTIONS:
Fundamental accounting assumptions form the basis for preparations and presen-
tation of financial statements.
They are usually not specifically stated because their acceptance and use are as-
sumed. Disclosure is necessary if they are not followed.
The following are generally accepted fundamental accounting assumptions :
• Going concern
The enterprise is normally viewed as going concern, that is, as continuing in
operations for foreseeable future.
It is assumed that enterprise neither has any need nor any will to shut down
business in near future. (As per SA 570 going concern issued by the ICAI suggests
that foreseeable future means 12 months from the date of financial statements)
• Consistency:
It is assumed that accounting policies are consistent from one period to another.
However, Consistency is not an excuse to adopt/ continue to adopt inappropriate
accounting policies.
• Accrual:
It is assumed that revenues and costs are:¬> Recognized as they are earned/in-
curred rather than as and when money is received /paid.
• Recorded in financial statements of the period to which they relate.
5. Factors to be considered while choosing an accounting policies:

The primary consideration in selection of accounting policies by an enterprise is that fi-
nancial statements prepared and presented on the basis of such accounting policies should
represent a true and fair view of state of affairs of enterprise as at balance sheet date and
profit/loss for the period ended on that date.
Secondary consideration governing selection and application of accounting policies are:
• Prudence:
Anticipated profits should not be recorded, anticipated losses are to be recorded.
• Substance over form:
The accounting treatment and presentation in financial statements of transaction
and events should be governed by their substance and not merely by legal form.
Substance refers to economic reality.
• Materiality:
Financial statements should disclose all material items i.e. items the knowledge of
which might influence the decisions of the user of financial statements. Determina-
tion of materiality is a matter of professional judgement.
6. Changes in accounting policies:
Accounting policies can be changed if such change is required by
• Law
• AS
• Management, if they can justify better presentation and preparation of financial statements.
Any change that has material effect should be disclosed.
The amount by which any item in GPFS is affected by such change should be disclosed.
Where such amount is not ascertainable, wholly/ in part, the fact should be indicated.
1. Appropriate / In-appropriate valuation of inventory affects both the profit / loss from
operations & financial position as reflected in the Balance Sheet
2. According to AS 2, Inventories are assets
a. held for sale in the ordinary course of business or
b. in the process of production for such sale or
c. in the form of materials or supplies to be consumed in the production process
or in the rendering of services
3. Thus, Inventory consists of :
a. Goods purchased & held for re-sale
b. Finished goods produced for sale
c. Work in progress
d. Stores, spares, loose tools etc. awaiting use in production process (of goods
meant for sale)
4. AS 2 does not cover :
a. Financial instruments such as shares, debentures etc. held as stock
b. Work in progress under construction contracts
c. Work in progress arising in the ordinary course of business of service providers
d. Live stock, agricultural & forest products, mineral oils (for whose valuation
certain established practices may exist)
5. Inventories are valued at COST or NRV, whichever is less.
6. Cost = Purchase cost + conversion cost + other costs incurred to bring the inventory
to its present location & condition
7. Purchase cost = purchase price + duties & taxes + freight inward + other directly
attributable expenses (like in-transit insurance) – (duties & taxes recoverable + trade
discount & rebates etc.).
8. Conversion cost = Direct labour + variable production overheads (calculated on actual
production) + fixed production overheads (calculated on normal capacity)
In case of joint products, the conversion cost is allocated on rational & consistent
basis (e.g. : sales).
In case of by products, the NRV of by product is deducted from the conversion cost
Inventory Cost does not include : Administration cost, Selling & distribution cost,
abnormal wastage, storage costs etc.
9. Normal capacity means the production expected to be achieved on an average over
a number of periods under normal conditions. Fixed production overheads per unit
will be revised if actual production exceeds normal capacity so that inventories are
not measured above their cost.
10. Interest & other borrowing costs are usually not included in inventory valuation.
However, they can be included if time plays a major factor in bringing about a change
in the condition of inventories.
11. Excise duty paid / payable is an element of cost & should be included in the inventory
valuation. However, any amount recoverable from tax authorities by way of CENVAT
credit will have to be excluded from the valuation of finished goods.
12. Methods of inventory valuation :
a. Inventory not ordinarily interchangeable : specific identification method
b. Inventory ordinarily interchangeable : FIFO or weighted avg. method
Specific identification method tracks the actual physical flow of goods. It is also called
the actual cost method because specific job bears the actual cost of materials bought
for the job. This method is suited for antique shops, expensive jewellery, custom-made
merchandise etc.
13. Other methods allowed are standard cost method or retail price method if it were to
result in estimation of value of inventory that approximates the actual cost. Standard
cost is a pre-determined cost based on attainable efficiency standard for a given
volume of output. Retail price method is generally adopted by retail stores having
numerous low unit cost items. Cost is measured by deducting gross margin from retail
prices of year end inventory.
14. NRV = estimated selling price in the ordinary course of business – estimated cost of
completion – estimated costs necessary to make the sale. Considerations governing
estimation of NRV are :
a. Most reliable evidence available at the time estimates are made as to amounts
that inventories are expected to realize &
b. Fluctuations of prices or costs directly relating to events occurring after the
Balance Sheet date, to the extent that such events confirm the conditions existing
at the Balance Sheet date.
15. Materials & other supplies held for use in production are not written down below the
cost if finished goods in which they will be used are expected to be sold at or above
cost. When finished goods are not expected to fetch the cost & there is a decline in
process of material & other supplies then the materials & other supplies are written
down to their NRV. In such a case, the replacement cost is the NRV.
16. Disclosures required :
a. Accounting policy applied in measuring inventories including cost formula
b. Carrying amount of inventory classified appropriately e.g. : finished goods, work
in progress, raw material, spare parts, loose tools etc.
c. Any changes in accounting policy with respect to valuation of inventory & its
effect on the financial statements.
1. Cash Flow Statement shows relationship between Profitability and Cash generating
ability and hence the "quality of profits" of the reporting entity.
2. It is mandatory for listed companies and entities with a turnover exceeding ` 50 crores.
3. Cash comprises cash on hand & demand deposits with bank.
Cash equivalents are short term highly liquid investments that are readily convertible
into known amounts of cash & which are subject to an insignificant risk.
4. Classification of Activities : According to the revised Accounting Standard 3, the
cash flow statement should show cash flows during the period classified by
operating, investing & financing activities.
(a) Operating Activities : This are principle revenue producing activities of an
enterprise other activities which are not investing or financing activities. Cash
flows from operating activities generally result from the transactions & other
events that determine the net profit or loss of the business. e.g. of cash flows
from Opening activities are :
(i) Cash receipts from sale of goods & rendering of services.
(ii) Cash Receipts from commission, fees, royalties etc.
(iii) Cash payments suppliers of goods & services.
(iv) Cash payments of operating expenses such as salaries & wages, rent,
electricity etc.
(v) Cash payments or refund of income tax.
(b) Investing Activities : This are acquisition & disposal of Long-term assets
such as land, building, plant, furniture, goodwill, trademarks, copyrights and
investments not included in cash equivalents e.g.
(i) Cash payments to acquire fixed assets.
(ii) Cash payments relating to capatalisation research & development cost.
(iii) Cash received on disposal of fixed assets.
(iv) Loans made to third parties.
(v) Cash received from repayments of loans made to third parties.
(vi) Interest received on investments / Income from investment.
(c) Financing Activities : This are activities that result in changes in the size and
composition of owners capital including preference share capital & borrowings
of a business e.g.
(i) Cash receipts from issue of shares, debts, bonds, loans & other borrowings.
(ii) Cash repayment of loans taken.
(iii) Cash payment to redeem preference shares.
(iv) Interest and dividend paid.
5. Net basis reporting is allowed in following situations.
(a) Cash Flows reflecting activities of customers rather than those of the reporting
entity (e.g. deposits and withdrawals by a bank's customers).
(b) Cash Flows in respect of items in which the taken over is quick and amounts are large
and maturities are short (e.g. principal amounts relating to credit card customers).
AS 4 : CONTINGENCIES & EVENTS OCCURING AFTER BALANCE SHEET DATE
EVENTS OCCURRING AFTER THE BALANCE SHEET DATE :

1. Post Balance Sheet events are those that occur between Balance Sheet date & the date
on which the financial statements are approved.
2. Events occurring after Balance Sheet date fall under 2 categories :
a. Events that require adjustment of Assets & Liabilities &
b. Other events, financial impact of which requires a disclosure.
3. a. Adjusting events provide additional evidence that assist in estimation of amounts
relating to conditions existing on the Balance Sheet date. For e.g. :
Elements constituting the principle Example
b. Adjusting events may provide evidence that the Fundamental Accounting

Assumption of going concern is not appropriate.
4. Non-adjusting events do not affect Balance Sheet figures but the impact of these events
have to be appropriately disclosed (in the Directors’ report)
Elements constituting the principle Example
5. Examples of Adjusting & Non-adjusting events :

Adjusting events :
a. Subsequent determination of proceeds of sale of FAs purchased or sold before year
end.
b. Property valuation that provides evidence of a permanent decrease in value.
c. Evidence regarding NRV < cost
d. Retrospective changes in tax rates.
e. Discovery of error or fraud
Non-adjusting events that occur after year end :
f. Mergers or acquisitions, investment or reconstruction
g. Issue of shares
h. Extension of activities
i. Changes in exchange rates
AS 5 : NET PROFIT OR LOSS FOR THE PERIOD,

PRIOR PERIOD ITEMS AND CHANGES
N ACCOUNITNG POLICIES
1. Net profit or loss for the period includes:
All items of income and expense including extra ordinary items and effects of changes in
accounting estimates which are recognized in a period.
The net profit or loss for the period comprises the following component, each of which
should be disclosed on the face of the statement of profit and loss:
• Profit or loss from ordinary activities and
• Profit or loss from extra ordinary activities.
- Profit or loss from ordinary activities:
Any activities which are undertaken by an enterprise as a part of its business and
Such related activities in which the enterprise engages in furtherance of, incidental to, or
arising from, these activities.
When the items of income and expense from ordinary activities are of such size, nature or
incidence that their disclosure is relevant to explain the performance of the enterprise for
the period, the nature and amount of such items should be disclosed separately.
Following are items of income/expense which require separate disclosure:
a. The write down of inventories to NRV
b. Disposal of fixed assets
c. Disposal of long term investments
d. Litigation settlements, etc.
- Profit or loss from extra ordinary activities:
Extra ordinary items are incomes or expenses that arise from events or
transactions that are clearly distinct from ordinary activities of the enterprise and,
therefore, are not expected to occur frequently. The nature and amount of each
extraordinary items should be separately disclosed in the statement of profit or loss
in a manner that its impact on profit or loss can be perceived.
Examples of extraordinary items:
a. Loss due to earthquake
b. Attachment of property
c. Government Grants becoming refundable
d. Loss due to fire
e. Loss due to enemy attack, etc.
2. Changes in Accounting estimates:
As a result of the uncertainties inherent in business activities, many financial statements
items cannot be measured with precision but can only be estimated based on the latest
information available. Estimates may be required, for example, of bad debts, inventory
obsolescence or lives of assets.
The estimates can be revised if-
Changes occur regarding the circumstances on which the estimates are based As a result
of new information, more experience or subsequent developments.
NOTE: Revision of accounting estimates is not an extra-ordinary item or a prior period
item. Classification of change in accounting estimates:
The effect of a change in an accounting estimate should be classified under the same
classification in the statement of profit or loss as was used previously for the estimate.
The effect of a change in an accounting estimate which was previously included in profit or
loss from ordinary activities is included in that component of net profit or loss.
The effect of a change in an accounting estimate which was previously included in profit or
loss as extra-ordinary item is reported as extra-ordinary item.
3. Changes in accounting policies:
Accounting policies can be changed if such change is required by
• Law
• AS
• Management, if they can justify better presentation and preparation of financial
statements. Any change that has material effect should be disclosed.
The amount by which any item in GPFS is affected by such change should be disclosed.
Where such amount is not ascertainable, wholly/ in part, the fact should be indicated.
The following are not changes in accounting policies:
• The adoption of a new accounting policy for events or transactions that differ in
substance from previously occurring events or transactions.
• The adoption of a new accounting policy for events or transactions which did not
occur previously or that were material.
4. Prior period items:
Prior period items are incomes or expenses which arises in current period as a result of
error or omissions in the preparation of financial statements of one or more prior periods.
Errors may be occur as a result of:
• Mathematical mistakes,
• Mistakes in applying accounting policies,
• Misinterpretation of facts, or
• Oversight.
The nature and amount of prior period items should be separately disclosed in the state-
ment of profit and loss in a manner that their impact on the current profit or loss can be
perceived.
Examples of prior period item:
a. Error in calculation of depreciation
b. Use of incorrect rates of depreciation
c. Omission to provide depreciation
d. Non provision for bad/doubtful debts, etc.
Fixed asset is on asset held with the intention of being used for the purpose of producing or
providing goods or services is not held for sale in normal course of business.
Non Applicability
- Biological assets
• Living animals
• Living Plants (Does not include bearer plants)
- Wasting assets
- Asset Covered by another AS
Note:- AS is applicable on bearer plants
At what value should any asset be shown?

- Historic Cost
- Revalued Price
Historic Cost
Cost Under different circumstances

- Purchased
Cost of an item of fixed asset comprises of its purchase prices, including non refundable
taxes, any directly attributable cost and PV of decommissioning.
- Self generated fixed asset
Include all directly attributable cost (exclude any internal profits)
- Exchange
FMV of asset that goes out , if it is more evident otherwise FMV of asset that comes in
recd.
- Free
Record @ Nominal Value
- Cost of jointly held assets
Prorata cost of such jointly owned asset is grouped together with similar fully owned assets.
- Cost of assets acquired under consolidated basis
Cost of each fixed asset @ FMV By component valuation officer.
Revalued Price
- Ist time upward revaluation –RR
- Ist time downward revaluation- P/L
- Present increase is credited to RR if previous revaluation also led to increase
- Present increase is relatable to previous decrease the credit revenue to the extent of
previous decrease and remaining increase in RR
- Present decrease is charged to P/L if previous revaluation also led to decrease
- If present decrease is relatable to previous increase then change RR to intent of previous
increase & remaining in P/L
NOTE: Revaluation should be performed for an ENTIRE CLASS of PPE
Component accounting
- An asset may consist of several different and significant physical components.
- If an item of PPE may consist two or More Significant components with substantially
different useful life or usage then each component must be recorded and depreciated
SEPARATELY
Note:- When a significant component is replaced, the old component is de-recognized.
Subsequent Expenditure
- It is the expenditure, which is incurred after the initial recognition i.e. after the asset is
ready to use or being used. Here, we discuss whether subsequent expenditure will go to
P&L or will be capitalized along with PPE. It depends on the nature and benefits from the
expenditure incurred.
Does the subsequent expenditure increases future economic benefits

i.e satisfies the recognition criteria?
YES NO
Capitalise along with PPE Charge to P&L statement
- If subsequent expenditure increases the future economic benefits i.e. satisfies recognition
criteria then such expense is recognized as a separate component and depreciated over
its useful life.
- Costs of day to day servicing are primarily the costs of labour and consumables, and may
include the cost of small parts. The purpose of such expenditures is often described as for
the “repairs and maintenance” of item of PPE and these expenses should be charged to
Profit and loss Account.
- If a part of PPE is replaced then it should be capitalized as Component of PPE if it meets
recognition criteria given by AS, otherwise, it will be charged to P&L statement.
- A condition of continuing to operate an item of PPE may be performed in regular intervals
as major inspection for faults regardless of whether parts of PPE are replaced. When
each such major inspections are performed, its cost is capitalized as part of PPE as a
replacement if the recognition criteria is satisfied.
Depreciation
- Depreciable amount= Cost-SV
- It is systematic allocation of depreciable amount of an asset over its useful life
- Determinants-Cost-SV-Life-Future Economic benefits
- Methods- SLM, WDV, on basis of future economic benefits
- Changes in methods/ determinant – Change in Accounting estimate, effect prospective
as per AS 5
Retirement
Value @ Net Book Value

Or
Net realizable value, whichever is lower
Disposal
- If Entity followed cost model then profit or loss on sale will go to profit or loss account.
- If entity followed revaluation model then profit or loss on sale will go to P/L a/c (after
disposal Revaluation reserve will be transferred to general reserve)
Disclosure
- Depreciation method
- Depreciation rate
- Life of PPE
- Measurement basis (cost model or revaluation method)
- Cost model
• In balance sheet show: Gross BV – Accumulated depreciation - Accumulated
Impairment loss = Net BV
- Revaluation Model
• In balance sheet show: Gross BV – SUBSEQUENT accumulated depreciation –
SUBSEQUENT accumulated impairment loss = Net BV
- Reconciliation between :
• Addition
• Retirement
• Disposal
• Acquisition
• Revaluation
• Depreciation
• Impairment loss
- Contractual commitment for acquisition of PPE
- Existence and restriction on title and PPE pledged as securities
- If the asset is revalued
• Date of revaluation
• Valuer is independent or not
• Methods and assumption of revaluation
• Revaluation surplus, if any
AS 11 (REVISED) : THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES
1. AS 11 applies to the following :

a. Accounting for transactions in foreign currency.
b. Translating the financial statements of foreign operations for inclusion in Company’s
financial statements.
c. Accounting for foreign currency transactions in the nature of forward exchange
contracts.
2. Definitions :
a. Reporting Currency : Currency used in presenting financial statements.
b. Foreign Currency : Currency other than reporting currency of an enterprise.
c. Exchange Rate : It is the ratio for exchange of 2 currencies.
d. Average Rate : It is the mean of the exchange rates in force during a period
e. Forward Rate : It is the agreed exchange rate for exchange of 2 currencies at a
specified future date.
f. Forward Exchange Contract : It is an agreement to exchange different currencies
at a forward rate.
g. Closing Rate : It is the Exchange Rate at the Balance Sheet date.
h. Monetary items : They are money held & assets & liabilities to be received or
paid in fixed or determinable amounts of money. E.g. : Cash, Bank balance,
Receivables, Payables etc.
i. Non-monetary items : They are assets & liabilities other than monetary items.
E.g. : FAs, Inventories, Investment in equity shares etc.
j. Settlement date : Date on which a receivable is due to be collected / a payable is
due to be paid.
k. Foreign Operation : A Subsidiary, Associate, JV or Branch of the reporting
enterprise, the activities of which are based or conducted in a country other than the
country of the reporting enterprise. Under AS 11, a foreign operation is classified
as either ‘Integral Foreign Operation’ or ‘Non-Integral Foreign Operation’, based
on the way of financing & operation in relation to the reporting enterprise.
l. Integral Foreign Operation (IFO) : Its activities are an integral part of those of the
reporting enterprise, its business is carried on as if it was an extension of the
reporting enterprise’s operations, IFOs generally carry on business in a single
foreign currency of the country where it is located, cash flows from operations of the
reporting enterprise are directly & immediately affected by a change in the exchange
rate between the reporting currency & currency of the IFOs country, change in
exchange rate affect individual monetary items held by the IFO rather than the
reporting enterprise’s investment in IFO etc.
m. Non-Integral Foreign Operation (NFO) : It is a foreign operation that is not an

IFO. The business of NFO is carried on in a substantially independent manner in its
local currency, NFOs may also enter into business transactions in foreign currencies,
including transactions in reporting currency, change in the exchange rate between
the reporting currency & local currency has little or no direct effect on the present or
future cash flows from operations of the NFO or the reporting enterprise, change in
the exchange rate affects the reporting enterprise’s net investment in the NFO rather
than the individual monetary / non-monetary items held by that NFO.
3. Initial Recognition : A foreign currency transaction should be recorded in the reporting
currency by applying to the foreign currency amount, the exchange rate between the
reporting currency & the foreign currency at the date of the transaction i.e. Spot Rate.
Average rate that approximates the actual rate can be adopted for a period instead of
spot rate of each transaction date, provided the exchange rates do no fluctuate significantly.
4. Monetary items in the B/S are reported at closing rate. Non-monetary items are reported
at the exchange at the date of the transaction. Contingent Liabilities are to be reported
using closing rate.
5. A single transaction may have to be translated more than once. E.g. : a credit sale of
goods would be first translated on the transaction date at the spot rate prevailing on that
date. Then, if the said receivable is not settled on the Balance Sheet date, then such
debtor would again be translated using the Closing Rate. Finally, the exchange rate may
have varied when the settlement date arrives, requiring 1 more translation. Any profit/loss
on account of re-translation of monetary / non-monetary items will give rise to exchange
gain/loss, which has to be credited / charged to the P&L in the period in which it arises.
6. Any profit / loss arising on account of exchange rate differences on repayment / retranslation
of Fixed Asset linked Liability should not be adjusted against the carrying amount of FAs.
Instead, it should be credited / charged to the P & L A/c.
7. Accounting for IFO : The financial statements of IFOs should be translated using such
principles & procedures as if the transactions of the foreign operations had been those of
the reporting enterprise itself.
8. Accounting for NFO : In translating the financial statements of NFOs for incorporation in
its financial statements, the reporting enterprise should use the following procedure :
a. The assets & liabilities, both monetary & non-monetary, should be translated at the
closing rate.
b. Income & expense items of NFO should be translated using the average rate.
c. All resulting exchange differences should be accumulated in a Foreign Currency
Translation Reserve (FCTR) until the disposal of the net investment.
9. Disclosures : An enterprise should disclose :
a. The amount of exchange differences included in the net profit / loss for the period &
b. Net exchange difference accumulated in FCTR as a separate component of
shareholders’ funds & a reconciliation of the amount of such exchange differences
at the beginning & end of the period.
1. Government Grants are assistance by government in cash or in kind to an enterprise for past
or future compliance with certain conditions. Government here means Central or State
government, government agencies whether local, national or international (e.g. : world bank)
2. AS 12 does not deal with the following :
b. Tax exemptions in backward / notified areas.

3. Government Grants should be recognized only if there is reasonable assurance that the
conditions attached will be complied & grants will be received
4. There are 2 approaches to accounting for government grants :
a. Capital Approach : Under this approach, the grant received is credited to the capital
reserve & is treated as a part of shareholders’ funds.
b. Income Approach : Under this approach, the grant is credited to P & L A/c over 1 or more
periods. The unamortised amount is carried in the ‘Deferred Government Grant A/c’.
5. Government grants may be in the form of cash or kind. Non-monetary government grants e.g.:
grants in the form of assets (such as land etc.) are recorded at nominal value. If grants are at a
concessional rate then such assets are recorded at actual cost.
6. Monetary grants may be related to FAs or revenue or capital.
7. Grants related to non-depreciable FAs like land are to be credited to Capital Reserve. However,
if conditions are attached to the grant, then the grant is to be credited to income over the same
period over which the cost of meeting such conditions are charged to income.
8. Grants related to depreciable FAs can be accounted in the following 2 ways :
a. Grants are deducted from the gross value of the FAs & only the net BV is then depreciated.
b. Grants are treated as deferred income. The deferred income is transferred to the P & L
over the periods & in the proportion in which depreciation on the related asset is charged
to the P & L.
9. Government grants related to revenue are recognized in the P & L over the period necessary
to match them with the related costs. They may be shown as other income or can even be
deducted from the related expenses.
10. Government grants in the nature of promoters’ contribution are credited to capital reserve &
are treated as a part of shareholders’ funds.
11. Government grants which become refundable due to non-fulfilment of conditions attached are
treated as extra-ordinary item under AS 5.
12. Refund of revenue related grants should be adjusted against the balance in DGG A/c, if any, &
the balance is charged to P & L A/c.
13. When grant received was credited to capital reserve then the refundable amount is to be
adjusted with the capital reserve.
14. Treatment of refund of government grant related to FA depends on the accounting done at the time
of receipt of grant. If grant received was deducted from FA, then refundable amount should be
added to the BV of the asset. Depreciation on revised BV will be provided prospectively over the
remaining life of the asset. If grant received was treated as deferred income, then the refundable
amount is adjusted against the balance in DGG A/c & balance if any, will be charged to P & L A/c.
15. The following disclosures are required :
a. The accounting policy adopted for government grants including methods of presentation
in the financial statements.
b. The nature & extent of government grants recognized in financial statements including
non-monetary assets given at a concessional rate or free of cost.
1. What are Investments?

Investments are :-
• Assets
• Held by an enterprise for earning incomes by way of dividends, interest, and, rentals,
for capital appreciation, or for other benefits to the investing enterprise.
Assets held as stock in trade are not 'investments'.
Some investments have no physical existence and are represented merely by certificates
or similar documents while others exist in physical form.
2. Determination of Cost:
• If investments are purchased:
The cost of an investment includes acquisition charges such as brokerage, fees
and duties. Interest, dividends and rentals receivables in connection with an invest-
ment are generally regarded as income, being the return on investment. However,
in some circumstances, such inflows represent a recovery of cost and do not form
part of income. In such case, it should be deducted from the cost.
• If investments are acquired for consideration other than cash:
Sr. no. Consideration in the form of Valued at
1. Shares or securities Fair value of securities issued
2. Other assets Fair value of asset given up or Fair value
of asset acquired whichever is known
more appropriately.
• Cost of right shares:
- When right shares offered are subscribed for, the cost of right shares is added
to the carrying amount of the original holding.
- If the right shares are not subscribed for but are sold in the market, the sale
proceeds are taken to the profit and loss statement.
• However, where the investments are acquired on cum cum-right basis and the mar-
ket value of investments immediately after their becoming ex-right is lower than the
cost for which they were acquired, it may be appropriate to apply the sale proceeds
of right to reduce the carrying amount of such investments to the market value.
4. Determination of fair value:
Fair value is the amount for which an asset could be exchanged between a knowledge-
able, willing buyer and a knowledgeable, willing seller in an arms' length transaction.
5. Determination of carrying amount of Investments:
• Current investments
Current Investments should be carried in the financial statement at lower of cost or
fair value. The lower of cost or fair value should not be determined on overall basis.
It should be determined-
a. On an individual investment basis (More prudent) or
b. By category of investment.
Any reduction to fair value of current investments or any reversal of such reduction
should be included in profit or loss account.
• Long term Investments:
Long term investments are usually carried at cost.
However, when there is a decline, other than temporary, in the value of a long term
investment, the carrying amount is reduced to recognize the decline.
Such reduction should be determined and made for each long term investments
individually.
6. Disposal:
On disposal of an investment, the difference between the carrying amount and disposal
proceeds, net of expenses, is recognized in profit or loss account.
When disposing of a part of the holding of an individual investment, the carrying amount to
be allocated to that part is to be determined on the basis of the average carrying amount
of the total holding of the investment (i.e. weighted average cost)
7. Reclassification:
• The accounting policies for determination of carrying amount of investments.
• An Enterprise should disclose current Investments and long term investments sepa-
rately.
• As per Schedule III of Companies Act, 2013 further classification should disclose
investments in :
a. Government securities
b. Shares, Debentures or bonds
c. Investment properties
d. Others-Specifying nature.
• The amounts included in profit or loss statement for:
a. Interest, dividends and rentals on investments showing separately such in-
come from long term and current investments. Gross income should be stated,
the amount of income tax deducted at source being included under Advance
Taxes paid.
b. Profit or loss on disposal of current investments and changes in the carrying
amount of such investments.
c. Profit or loss on disposal of Long term investments and changes in the car-
rying amount of such investments.
• Significant restrictions on the rights of ownership, realisability of investments or the
remittance of income and proceeds of the disposal.
1. A qualifying asset (QA) is an asset that necessarily takes substantial period of time to get
ready for its intended use (FA) or sale (inventory). Inventories produced over a short period of
time or assets ready to use at the time of acquisition are not QAs. Ordinarily a period of 12
months is considered substantial period unless a shorter or longer period can be justified.
2. If funds are borrowed to acquire a QA then the matching principle requires that the interest on
funds borrowed be expensed in such a manner that it would match with future revenue generated
from the asset. Borrowing costs of a QA are to be capitalized within certain limits.
3. Borrowing costs include :
a. Interest & commitment charges on bank borrowings.
b. Other ancillary costs for arranging borrowings.
c. Finance charges in respect of assets under Finance lease, hire purchase etc.
d. Exchange rate differences relatable to foreign currency borrowings to the extent that
they are regarded as an adjustment of interest costs.
4. Borrowing costs can be related either to specific borrowings or general borrowings :
a. Specific borrowings are those that could have been avoided if the expenditure on QA
was not to be incurred.
b. General borrowings are loans, debentures, working capital borrowings etc used either
wholly or partly for expenditure on QAs.
5. Capitalization rate is the rate at which borrowing costs will be capitalized. Incase of specific
borrowing, the capitalization rate is the rate at which actual borrowing costs are incurred. Any
income on temporary investment of fund from specific borrowing should be deducted from
borrowing costs & only the net amount should be capitalized. In case of general borrowings,
the capitalization rate would be the weighted average of borrowing costs outstanding during
the relevant period, where time is the weight provider.
6. Borrowing costs capitalized should not exceed the actual borrowing costs incurred. This may
happen in case of general borrowing.
7. Borrowing costs can be capitalized only if the following 3 conditions are satisfied :
a. Expenditure on QAs is being incurred
b. Borrowing costs are being incurred &
c. Activities which are essential to prepare the asset for its intended use should be in
progress.
8. Where activities necessary to prepare the asset for its intended use or sale stand suspended,
then borrowing costs incurred during such periods should not be capitalized. Where there is a
temporary delay which is necessary for getting the asset ready e.g. : maintaining of inventory
for maturing the wine etc., the borrowing costs for such periods should be capitalized.
9. Capitalization of borrowing costs should cease when all activities necessary for making assets
ready for intended use / sale are substantially complete.
10. When an asset is completed in parts & the completed part is capable of use when work on
others is in progress, capitalization of borrowing costs pertaining to the completed part should
be stopped.
11. Financial statements should disclose the accounting policy followed for treatment of borrowing
costs & the amount or borrowing costs capitalized during the period.
AS - 17 : SEGMENTAL REPORTING
1) Many business now a days operate in many industries or many states / countries.
Therefore there is a need to give more details regarding different segments.
2) The segment report is made as per Accounting Standard - 17 which is mandatory
and is effective for the accounting periods starting on or after 1.04.2003. The
Accounting Standard is mandatory for listed companies or companies intending to
be listed or whose turnover exceeds 50 crores.
3) Segmentation can be done on the basis of products on services or a group of related
products & services. Segmentation can also be geographical. Whether segmentation
should be primarily product wise or geographical depends on whether primary risk is
due to products or services or due to geographical area. To identify the primary risk the
internal organisation & management structure & its system of reporting to the Board of
Directors or CEO of the company should be considered.
4) A business segment is a distinguishable component of an enterprise which is engaged
in providing an individual product or service or a group of related products or services
and that is subject to risks & returns which are different from those of other segments.
Factors which would be considered in determining whether products or service are
related includes :
a) Nature of products or services
b) Nature of production process
c) Type of or class of customers for products or services
d) The methods used to distribute the products or provide the services
e) Nature of regulatory environment.
5) A geographical segment is a distinguishable component of an enterprise which is
engaged in providing products or services within a particular economic environ-
ment and it is subject to risks and returns that are different from those of other
segments operating in other economic environment. It includes :
(a) Similarity of economic & political conditions.
(b) Relationship between operations
(c) Proximity of operations
(d) Special Risks
(e) Exchange Control Regulations
(f) Underlying Currency Risks
The risks & returns of an enterprise are categorised by geographical location of its
assets and location of its customers.
6) Determining the composition of a business or geographical segment involves a certain
amount of judgement.
7) Reportable Segment
It is a business or geographical is identified on the basis of the foregoing definition for
which segment information is required to be disclosed by the financial statements.
i) Par a 2 7 a of Acc oun t in g Standa rd - 1 7 s t at es t h at i f t ota l r even u e
(External + Intersegment) of a segment is 10% or more of total revenue of
all segment then those segments are reportable.
ii) Para 27 b states that if the result i.e. profit or loss of any segment is 10% or more
of combined profit / combined loss of all segments in absolute terms then
that segment is reportable.
iii) Para 27 c states that if assets of any segment is 10% or more than the total
assets of all segments then that segment is reportable.
iv) Para 28 states that management may designate any segment as reportable even
if it doesn't satisfy above mentioned criteria.
v) Para 29 requires that if the total external revenue of reportable segments
identified as per para 27 & 28 is less than 75% of total enterprise revenue,
additional segments should be identified as reportable till limit of 75% is reached.
8) Disclosure
Accounting Standard - 17 is a reporting standard. Hence " disclosures" is its core
element. The intensity of disclosures is high in case of primary segments and low
for secondary segments.
For each Primary segment the following disclose have to be made.
a) Segment Revenue (External + Internal segment)
b) Segment Result
c) Segment Assets.
d) Segment Liabilities
e) Capital expense incurred during the period
f) Depreciation charge for the period
g) Other non-cash expenses during the period.
Disclosure required for secondary segments.
If Business segments are primary then geographical segments are secondary.
Disclose :
* Revenue from external customers by geographical location (10% Test)
* Assets by geographical location of assets (10% Test)
* Fixed Asset acquired during the period.
If Geographical segs are primary then Business segs are secondary. If a business seg's
external sales are > 10% of total external revenue or Business segment assets are > 10%
of total assets of all business segs, then disclose for those business segments :
* Segments revenue from external customers.
* Segments assets
* Fixed assets acquired during the period.
Also if the primary geographic segments are based on location of customers, also make the
following disclosures:
* Assets located in each geographic segment (10 % Test)
* Additions to fixed assets during the period.
If the Primary geographic segments are based on location of assets, also make the
following disclosure :
* Sales to external customers for each customer based geographical segment (10% Test).
AS - 22 : ACCOUNTING FOR TAXES ON INCOME
1) Until recently the amount of tax provision was determined on the Profit or Loss
calculated on per Income Tax laws. As per Accounting Standard - 22 tax should be
accounted by following the principle of Matching Concept. i.e. tax should be ac-
counted in the period in which the corresponding revenue and expenses are ac-
counted.
2) Accounting Standard - 22 covers domestic and foreign taxes based on taxable
income. The standard does not deal with corporate dividend tax or wealth tax.
3) There is a difference between accounting profit (i.e. Profit calculated on the basis of
accounting policies) and taxable profit (i.e. profit calculated as per Income Tax laws).
There are two main reasons for this difference.
a) Timing difference: These difference originate in one period and is capable of
reversal in one or more subsequent periods. e.g.
* Difference in rate of depreciation
* Difference in method of depreciation
* Section 43B items of the Income Tax Act (Outstanding Interest, Bonus, etc).
* Provision for doubtful debts
* Provision for warranties
* Provision for decrease in value of assets
* Provision for impairment of assets, etc.
b) Permanent Difference: These differences originate in one period and do not re-
verse subsequently e.g., expenses charged to profit & Loss but not allowed for tax
purpose at all in any year or incomes credited to Profit & Loss but are exempt from
tax.
4) Timing differences will lead to either Deferred Tax Asset or Deferred Tax Liability. When
accounting profit is more than taxable profit, a deferred tax liability is created. However
when accounting profit is less than taxable profit, a Deferred Tax Asset is created e.g.
* Accelerated depreciation allowed by Income Tax Act leads to creation of
Deferred Tax Liability.
* Provision for doubtful debts will lead to creation of Deferred Tax Asset.
5) Permanent differences are differences that always remain and are of permanent na-
ture.
? Permanent differences do not create Deferred Tax Asset / Deferred Tax Liability.
? These are excluded for determining of tax expense.
6) The difference between tax expenses and current tax (i.e. Tax payable as per Income
Tax Laws) arises only on account of timing difference which creates Deferred Tax Asset
or Deferred Tax Liabiliy
?Tax expense = Current Tax + Deferred Tax
Current tax is calculated using tax rates and tax laws applicable for the relevant
accounting year. Deferred Tax Assets or Deferred Tax Liabiliy is determined using tax
rate and tax laws that have been enacted or substantially enacted at the Balance Sheet
date. Further deferred tax is not discounted to its P.V.
7) Deferred Tax Liabiliy must be provided for, but prudence would require that Deferred Tax
Assets should be recognised and carried forward only to the extent that there is resonable
certainty that sufficient future taxable income will be available against which such
Deferred Tax Asset can be realised. However in case of unabsorbed depreciation and
carry forward losses under Income Tax laws, Deferred Tax Asset should be recognised
only to the extent there is virtual certainty that sufficient future taxable income will be
available against which such Deferred Tax Asset can be realised.
8) Review of deferred tax asset: The carrying amount of deferred tax asset should be
reviewed at each balance sheet date, if it is evident that any portion of the deferred tax
asset is not recoverable because of uncertainty of future income, the deferred tax asset
should be written down. Any such written down amount may be reversed in subsequent
period to the extent that it becomes reasonably certain that sufficient future taxable
income will be available.
9) Re - assessment of unrecognized deferred tax Asset: Previously unrecognized

deferred tax asset is re-assessed at every balance sheet date. If it becomes reasonably
certain that such unrecognized deferred tax asset will be realised, then unrecognized
deferred tax asset is recognised now.
10) Any adjustment arising out of such review / reassessment is charged / credited to Profit
& loss account of the year. ( i.e. year of review / reassessment) It is not prior period item
but a change in accounting estimate. However if the amount is material proper disclo-
sure should be made because this item would be an item of exceptional nature.
11) For determining taxes during an interim period, the integral approach is followed.
(see Accounting Standard - 25).
12) Transitional Provision : When this accounting standard of taxes on income is first time
applied, the amount of deferred tax asset / liability should be treated in the same way had this
accounting standard been in effect from the beginning. The corresponding debit / credit to
the revenue reserves is subject to the consideration of prudence in case of deferred tax
assets.
13) Disclosure:
* The break - up of deferred tax asset / liability should be disclosed.
* In case of deferred tax asset arising out of unabsorbed depreciation or

loss, evidence-supporting recognition should be disclosed.
* Deferred tax asset / liability should be disclosed separately from current

asset / liabilities. They should also be distinguished from advance tax / tax
provision / tax refund due.
* Deferred tax asset and liability should be set off if permissible under the tax laws
but to be shown separately if not permissible.
Q. 1. Mention six areas in which different accounting policies are followed by Companies.
Q. 2. What are the three fundamental accounting assumptions recognised by Accounting

Standard (AS) 1? Briefly describe each one of them.
Q. 3. Induga Ltd. manufactures computers. During the year ended 31/03/08 the company
manufactured 550 computers. It has a policy of valuing finished stock of goods at a
standard cost of ` 1.80 lacs per computer. The details of cost are as follows :
Particulars Amt.( ` Lacs)
Raw material cost 400
Direct Labour 250
Variable production overheads 150
Fixed production overheads (incl. Interest of ` 100 lacs) 290
Compute the value per computer for the purpose of closing stock valuation.
Q. 4. A Ltd. incurs fixed production overheads of ` 10 lacs every year. Its normal capacity
of production is 1 lac units / year. In year 2007, 80000 units were produced & in 2008,
120000 units were produced. Calculate the fixed production overheads allocated to
each unit in each of these years.
Q. 5. How will you value the inventory per kg. of finished goods consisted of :
Material cost ` 100 per kg.

Direct labour cost ` 20 per kg.
Direct variable production overhead ` 10 per kg.
Fixed production charges for the year on normal capacity of one lakh kgs. Is Rs. 10
lakhs. 2000 kgs .of finished goods are on stock at the year-end
Q. 6. From the info. given below you are required to estimate the cost of inventory of a
retailer as on 31/03/08.
Inventory on 01/04/07 : 400 items @ ` 19.50 cost ; Retail price = ` 30
Purchases for the year. : 1,200 items @ ` 25 cost ; Retail price = ` 35
Net sales for the year : ` 45,000
Q. 7. A Company deals in 3 products - A, B & C. At the year-end, the following info. is available:
Category Historical Cost(` Lacs) NRV(` Lacs)
A 40 28
B 32 32
C 16 24
Calculate the value of inventory to be shown in the B/S as per AS-2.
Q. 8. 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 out the value of inventory in each case.
Q. 9. (i) List the items of "inflows" of cash receipts from operating activities.
(ii) List the items of "outflows" of investing activities.
Q. 10 What are the main features of the cash flow statement? Explain with special reference
to AS 3?
Q. 11 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.
AS 4 : CONTINGENCIES & EVENTS OCCURING AFTER BALANCE SHEET DATE

Q. 12. Explain the treatment of the following events occurring after the B/S date in the financial statements:
a. A major fire has damaged the assets in the factory on April 2, two days after the
closure of the accounts. The loss is estimated at ` 20 crores out of which `12 crores
would be recoverable from the insurers. (I.P.C.C. - May' 16)
b. The directors have agreed to increase the retirement benefits & this may involve
a future annual increase of provision by ` 2 lacs.
c. The dispute for bonus to employees was before the arbitrator & he gave the
award in favour of workmen for ` 3 lacs.
d. A contract for civil construction was performed during the accounting year. The
client has gone on appeal for damages for low quality works & was awarded an
amount of ` 1.5 lacs.
e. Dividend proposed @ 20% on share capital of ` 100 lacs. (I.P.C.C. - May' 17)
Q. 13. X Ltd. entered into an agreement to sell its immovable property included in the Balance
Sheet at ` 10 lacs to another company for ` 15 lacs. The agreement to sell was
concluded on 28 th February, 2006 and the deed was registered on 1 st May, 2006.
Comment with reference to AS-4. (I.P.C.C. - May' 16)
AS 5 : NET PROFIT OR LOSS FOR THE PERIOD, PRIOR PERIOD ITEMS & CHANGE
IN ACCOUNTING POLICIES
Q. 14. The difference between actual expense or income & estimated expense or income
as accounted for in the earlier accounts does not necessarily constitute the item to be
a prior period item. Comment. (CA Inter. – Nov’94, May’96 & May’98)
Q. 15. XYZ Ltd. prepares its accounts for the year ending March 31 every year. On 31/08/08
there was an agreement with the union, which created an additional liability of ` 6
lacs p.a. The revision was w.e.f. 01/01/08. How would you deal with this in the accounts
for the year ending 31/03/09?
Q. 16. During the financial year 2007-08 goods costing ` 1 lac were sent by LMN Ltd. to its
consignee at a sale value of ` 1.50 lacs. Consignee sold all the good during the
financial year 2007-08, but sent the sales invoice & statement of sales of ` 75000.
LMN Ltd. showed sales of ` 75000 for the year 2007-08 & the balance ` 75000 was
shown at cost as stock with consignee. In 2008-09, LMN Ltd. booked the balance
sale of ` 75000 as PPI. Is the accounting treatment of 2008-09 correct?
(I.P.C.C. - May' 17)
Q. 17. A company has to pay delayed cotton clearing charges over & above the purchase price
for taking delayed delivery of cotton from the supplier’s godown. Till 2007-08 the company
has regularly included such charges in the valuation of closing stock. This being in the
nature of interest, the company has decided to exclude it from closing stock valuation from
the year 2008-09. This would result into decrease in profit of ` 5 lacs. Comment.
Q. 18. Give two examples on each of the following items:

(i) Change in Accounting Policy - Method of Amortization / Change in cost
formula.
(ii) Change in Accounting Estimate - change in useful life of FA / Provision for
BD.
(iii) Extra Ordinary items - loss due to earthquake / Refund of GG
(iv) Prior Period Items - error in calculation in providing inclusive non-provision
for salary already due in earlier years.
Q. 19. Original cost of a plant = ` 1.50 crores, estimated useful life = 10 yrs., estimated
scrap value = ` 10 lacs. The company followed the WDV method of depreciation
(rate 23.72%) for the first 3 yrs & decided to switch over to SLM in the 4 th yrs. What
will be the revised depreciation amount?
Q. 20. Taking the info. from the above sum, assume that the company was following SLM from
the time of purchase of the asset. After 3 yrs., the company realized that the useful life of
the asset would be 8 yrs instead of the previously assessed 10 yrs. Comment.
Q.21. Manufacturers & Traders Ltd. purchased a conveyor system & the total amount capitalized
on 01/01/04 was for a value of ` 41.37 crores. The details of the cost are as follows :
Particulars Amt. ( ` Crores)
Civil & mechanical structure 11.72
Driving unit & planning 5.40
Rope 2.83
Belt 11.17
Safety & Electrical equipments 6.15
Other accessories 4.10
Total 41.37
During the year 2007-08, due to wear & tear, the rope used in the conveyor system
was replaced by a new one at a cost of ` 8 crores. Comment on the accounting
treatment that needs to be given in such a scenario.
Q. 22. XYZ Ltd. purchased a machine as on 30/09/07 for ` 200 lacs. Sales tax on the quoted
price is 8%. The following additional expenses were incurred :
Expenses Amt. (in ` )
Transit insurance 2,00,000
Transportation charges 5,00,000
Special foundation 1,50,000
Installation charges 2,50,000
The company borrowed a sum of ` 180 lacs from State Finance Corp. @ 16% interest
p.a. The machinery was ready for use on 31/03/08. Ascertain the acquisition cost of
the machine assuming the 6 months period is substantially long period of time.
Q. 23. ABC Ltd. sold a machine on 01/04/047 for 100 lacs. The BV on the date of sale was 250
lacs. The machine sold, was revalued in the past & a reserve of 200 lacs was carried in
the books as on the date of sale. What would be the correct accounting treatment for the
transaction.
Q. 24. A company is engaged in the manufacture of electronic products & systems. A prototype
system was installed at one of the customer’s location in June 2007 for getting
acceptance of the customer on the performance of the system. The Chief accountant of
the company stated that as the ownership of the system installed for field trials was
vested with the company for accounting & control purposes, the prototype system
installed at the customer’s location in 2007 was capitalized in the accounts for the year
2007-08 at its bought-out cost.Is the accounting treatment correct?
Q. 25. 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 machinery acquired, how the value of the
machinery would be recorded in the books of Tiger Ltd?
Q. 26. 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
(1/15th 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.
Q. 27. ABC Ltd. purchased an aircraft of 50 cr.It has 2 significant components body and
engine in the ratio of 30 : 70. Life of body is 10 years and that of engine is 20 years.
Pass the Journal entries in the books ABC Ltd. and show balance sheet at the end of
1st year.
AS 11 : THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES
Q. 29. XYZ Ltd. imported goods from ABC Ltd. worth USD 1 lac as on 15/03/08 when the
exchange rate was USD 1 = INR 44. The payment for the imports was to be made on
15/04/08. The exchange rates as on 31/03/08 & 15/04/08 are INR 46 & INR 41
respectively. How will XYZ Ltd. account for this transaction.
Q. 30. Explain "monetary item" as per Accounting Standard 11. How are foreign currency
monetary items to be recognized at each Balance Sheet date? Classify the following
as monetary or non-monetary item:
(i) Share Capital (ii) Trade Receivables
(iii) Investments (iv) Fixed Assets
Q. 31. ABC Ltd. purchased a FA worth ` 64 lacs, expected useful life – 10 yrs., scrap value
– ` 10 lacs, WDV rate of depreciation – 16.94%. The purchased asset was supported
by Government Grant to the extent of ` 25 lacs. The company follows income approach
in accounting for Government Grants. Required :
a. The amount of GG brought over to P & L A/c for each of the 5 yrs. Assume that asset
was purchased & GG was recd. on the 1st day of the accounting year.
b. The company changes method of depreciation from the 6th year from WDV to SLM.
Explain the accounting implications thereof.
Q. 32. XYZ Ltd. received a specific grant of ` 300 lacs for acquiring a plant of ` 1500 lacs during
on 01/04/01 having useful life of 10 years. The grant received was credited to deferred
income in the B/S. On 01/04/04, due to non-compliance of conditions laid down for the
grant, XYZ Ltd. had to refund the grant to the government. Balance in the Deferred
Government Grant A/c on that date was ` 210 lacs & WDV of plant was ` 1050 lacs.
Required :
a. What should be the treatment of the refund of the grant & impact on cost of the FA &
depreciation for 2004-05.
b. What should be the treatment of the refund & other accounting implications if grant
was deducted from the cost of the plant in 2001-02. (PE II – May’04)
Q. 33.MY Ltd. had acquired 200 equity shares of XY Ltd. at ` 105 per share on 01.01.2009
any paid ` 200 towards brokerage, stamp duty and STT. On 31st March 2009, shares
of XY 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.
Q. 34.AB Ltd. acquired 2,000 shares in CD Ltd. at a cum-right price of ` 300 per share.
CD Ltd. offered right shares of one for every two held by the equity shareholder at
` 150 per share. The rights were sold by AB Ltd. at ` 80 per share. After the right
issue the share price fell from ` 300 to ` 240 per share. What would be the carrying
cost of investment in CD Ltd. after the sale of "rights"?
Q. 35.An unquoted long - term investment is carried in the books at cost of ` 2 lacs. The
published accounts of unlisted company received in May, 2009 showed that the
company has incurred cash losses with decline market share and the long - term
investment may not fetch more than ` 20,000. How you will deal with it in the financial
statement of investing company for the year ended 31.3.2009?
Q. 36.A Company has invested a substantial amount in the shares of another company
under the same management. The market price of the shares of the aforesaid
company is about half of that at which these shares were acquired by the company.
The management is not prepared to provide for the fall in the value of shares on the
ground that the loss is only notional till the time the share are actually sold?
Q. 37. MP Ltd. Wants to re-classify its investments according to AS 13:

a. Long term investments in company A , costing Rs. 8.5Lakhs are to be reclassi-
fied as Current. The company has reduced the value of these investments to
Rs. 6.5Lakhs to recognize a permanent decline in value. The Fair value on the
date of transfer is Rs. 6.8 Lakhs.
b. Long Term investments in Company B, costing Rs. 7 Lakhs are to be reclassi-
fied as current. The Fzair value on the date of transfer is Rs. 8 Lakhs and Book
value is Rs. 7 Lakhs.
c. Current Investments in Company C, costing Rs. 10 Lakhs are to be reclassi-
fied as long term, as the company wants to retain them. The market value on
the date of transfer is Rs. 12 Lakhs.
d. Current Investments in company D, costing Rs. 15Lakhs are to be reclassified
as long term. The market value on the date of transfer is Rs. 14 Lakhs.
Q. 38. On 20/04/03 JLC Ltd. obtained a loan from the bank for ` 50 lacs to be used as under :
Particulars ` Lacs)
Amt. (`
Construction of a shed 20
Purchase of machinery 15
Working Capital 10
Advance for purchase of truck 5
In March 2004, the construction of the shed was completed & machinery installed. Delivery
of truck was not received. Total interest charged by the bank for the y.e. 31/03/04 was ` 9
lacs. Show the treatment of interest under AS 16. (PE II – Nov’04)
Q. 39. Advice XYZ Ltd. on the weighted average borrowing cost to be capitalized based on the following;
a. Total borrowing & interest costs of XYZ Ltd. for he year ending 31/03/04 are as follows:
Borrowings Date of Borrowing Amt. of loan in ` ‘000
18% Bank loan 01/04/03 3,000
14% Debentures 01/10/03 2,000
16% Term Loan 01/07/03 1,000
Total 6,000
b. QAs in which these borrowed funds are used are :
Assets ` in ‘000 Period in months
Factory Shed 2,500 12
Plant 1 1,500 9
Plant 2 1,000 7
Q. 40. Can interest on loan taken to pay license fees for a telecom circle to the central
government be capitalized as per AS 16?
Q. 41. On 1sl 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 31st March 2010 : ` 80,00,000
Show the treatment of interest by Amazing Construction Ltd.
AS - 17 : SEGMENTAL REPORTING
Q. 42. The Company is engaged in the manufacture of shock absorbers for the OEM segment,
and there are no sales in the replacement market. 87% of the sales are made to the two
wheeler (2W) industry and the balance to the 4 wheeler (4W) industry. The shock absorbers
per se, use the same technology, and the risks and rewards by far remain the same. The
shock absorbers are manufactured on different earmarked machines. Management does
not obtain information by 4 wheeler or 2 wheeler and looks at the business as a whole.
Would it be necessary to identify and disclose two segments 2W and 4W, or just one
segment i.e. shock absorbers ?
Q. 43. We are a publishing house, primarily engaged in English and Hindi newspapers across
India. Are we required to segment Hindi and English newspapers as two different
segments?
Q.44ABC Ltd. has provided depreciation as per accounting records ` 8,00,000 and as per
tax records ` 14,00,000. Unamortised preliminary expenses, as per tax record is
` 10,000. There is adequate evidence of future profit sufficiency. How much deferred
tax asset / liability should be recognized as transition adjustment. Tax rate is 30%.
Q.45.1. Cost of asset purchased in year 1 = 200 lakhs

2. Depreciation
a) Book at 20%
b) Income tax 100%
3. PBDT = 200 lakhs each for years 1 to 5
4. Rate of tax = 50%
Calculate deferred tax and show journal entries.
Q.46.1. Profit before tax for year 1 and year 2 = ` 200 lacs each
2. Provision for interest on loan
from Financial Institutions in year 1 = ` 20 lacs paid in year 2
Rates of tax = 50%
Calculate deferred tax and show journal entries.
Q.47.Krishna Ltd. started business on 1st April 2005. The following details are available
from the books of account and other records of Krishna Ltd.
Profit before depreciation and taxes
`
2005 - 2006 15,00,000
2006 - 2007 18,00,000
2007 - 2008 25,00,000
2008 - 2009 30,00,000
The company purchased the following machines :
Date of purchase Amount (` `)
1. 4. 2005 4,00,000
1. 4. 2006 3,00,000
1. 4. 2007 4,00,000
The company charges depreciation on machines @ 15% p. a., whereas the rate of depre-
ciation for tax purpose is 25% p. a. The company has no other fixed assets. Tax rates for
the five relevant years were 50%, 45%, 40%, 35% and 35% respectively.
You are required to prepare the profit and loss statement showing the provision for taxes under
the following methods (a) Tax Payable method, and (b) As per Accounting Standard - 22.
Q.48. A company ABC Ltd. prepares its accounts annually on 31st March. The company has
incurred a loss of ` 1,00,000 in the year 20x1 and made profits of ` 50,000 and 60,000 in
year 20x4 and year 20x5 respectively. It is assumed that under the tax laws, loss can be
carried forward for 8 years and tax rate is 40% and at the end of year 20x3, it was virtually
certain, supported by convincing evidence, that the company would have sufficient taxable
income in the future years against which unabsorbed depreciation and carry forward of
losses can be set-off. It is also assumed that there is not difference between taxable in-
come and accounting income except that set-off of loss is allowed in years 20x4 and 20x5
for tax purposes.
Q.49. 1. OTD in year - 1 = 100 lakhs

2. RTD
(a) Year - 2 = 40 lakhs
(b) Year - 3 = 30 lakhs
(c) Year - 4 = 30 lakhs
3. Rates of tax
(a) Year - 1 = 50%
(b) Year - 2 = 50%
(c) Year - 3 = 40% [known in Year - 2]
(d) Year - 4 = 30% [known in Year - 3]
Q.50. The following details are available in the books of ABC Ltd.
Particulars ` in Lakhs
Provision for tax :
For 2005 - 2006 200
For 2006 - 2007 300
For 2007 - 2008 250
Advance tax paid :
For 2005 - 2006 175
For 2006 - 2007 350
For 2007 - 2008 270
ABC Ltd. estimates its Deferred Tax Liabilities to be ` 100 lakhs and its Deferred Tax
Assets to be ` 20 lakhs. How will the above be disclosed?
Q.51. Dilemma Ltd. has operating profit before taxes and depreciation of ` 500 Lacs in each of
the 3 years. The company purchased a microcomputer for ` 240 Lacs in the beginning
of Year 1. The expenditure was fully allowed as a deduction U/s 35 of the Income - tax Act.
However the company has decided to amortise the expense over its useful life of 3 years in its
books.
The tax rates in the 3 years are :
Year 1 40%
Year 1 38%
Year 3 35%
(a) If it is assumed that future tax rates are known only one year ahead, pass jour-
nal entries for all the three years.
(b) If it is assumed that future tax rates are known two years ahead, pass journal
entries for all the three years.
Q.52. Omega Limited is working on different projects those are likely to be completed within 3
years period. It recognises revenue from these contracts on percentage of completion
method for financial statement during 2006, 2007 and 2008 for ` 11,00,000, ` 16,00,000
and ` 21,00,000 respectively. However, for Income - tax purpose, it has adopted the com-
pleted contract method under which it has recognised revenue of ` 7,00,000, ` 18,00,000
and ` 23,00,000 for the years 2006, 2007 and 2008 respectively. Income - tax rate is 35%.
Compute the amount of deferred tax asset / liability for the years 2006, 2007 and 2008.
J.K.SHAH CLASSES INTER C.A. - ACCOUNTING
REDEMPTION OF REDEEMABLE
CHAPTER - 2
PREFERENCE SHARE
PART –A
Section – 100 :- According to S/100 Redemption of equity share or preference share
is not allowed because Redemption Leads to reduction of Capital
which does not protect the right of outsides liability .
Section – 80:- According to S/80. Redemption of Preference shares only is allowed
in such a way that Redemption does not lead to reduction of capital.
CONDITIONS OF S/80:-
1) Only fully paid preference shares can be redeemed.
2) Pref. Shares can be redeemed at pay or at premium.
3) Premium on redemption is a & should be written off against profits.
(Share Premium, Gen. Res., P & L)
Premium on Redem = Share Premium + other profits
4) Pref. Shares can be redeemed either out of proceeds of fresh issue OR out of
profits otherwise available for dividend.
(a) Redemption out of proceeds of fresh issue :-
Fresh issue :- Fresh issue means issue of new equity share or new preference
share but not debentures.
Proceeds :-
Nominal Value Issue Price Proceeds
AT PAR 100 100 100
AT PREMIUM 100 110 100
Proceeds means Nominal Value or Issue Price which every is Less.
(B) Redemption out of divisible profit :-

Profits (Reserves)
Divisible Profits Non Divisible Profits

1) General Reserve 1) Capital Reserve
2) Reserve Funds 2) Capital Redemption Reserve
3) Profit & Loss A/c. (CRR)
4) Dividend Equalisation Reserve 3) Share Premium
5) Sinking fund 4) Profits Prior to Incorporation
6) Insurance Fund 5) Shares forfeited A/c.
7) Working Compensation Funds 6) Development Rebate
Reserve (only for certain number
of years)
Notes:
Amount equal to Nominal value of Preference Share to be Redeemed should be
transferred from divisible profits to CRR.
This Leads to reduction of capital and Increase in CRR.
CRR Can be used now or in the future only for issue of new fully paid Bonus shares
which will compensate for the above reduction.
Nominal value of Preference share = Proceeds of fresh issue + Divisible Profit transfer to CRR
: 32 :
JOURNAL ENTRIES
1) Demanding of final call :-

Share Final Call A/c. Dr. xx
To Pref. share capital xx
2) Receiving of final call :-
Bank A/c. Dr. xx
To Share final call : Xx
3) Receiving of calls in Arrears :
Bank A/c. Dr. xx
To calls in Arrears xx
4) Forfeiture
Pref. Sh. Cap. A/c. xx
To Calls in Arrears xx
To Shares forfeited (*1) xx
Share capital was in call in Arrears
∴ Share forfeiture
5) Re-issue
Bank A/c. Dr.
Share forefeited (*2) Dr.
To Pref. Sh. Cap
6) Transfer to capital Reserve :
Share forfeited A/c. Dr.
To capital Reserve (*1 - *2)
7) Sale of Investments :
Bank A/c. (Amt. Received) Dr.
P & L A/c. (Loss) Dr.
To Investment (Book value)
To P & L (Profit)
8) Fresh Issue :
Bank A/c. (Amt. Received) Dr.
To Equity/pref. sh.cap (Nominal value)
To Share Premium (If any)
9) Transfer to C.R.R :
Divisible Profits Dr.
To C.R.R
10) Redemption :
Pref. Share Capital A/c. Dr.
Prem. On Redemption Dr.
To Pref. Share Holder A/c.
11) Writing off prem. On Redemption :
Securities Premium.
General Reserve or P & L Dr.
To Prem on Redemption Dr.
12) Payment :-
Preference share Holder A/c. Dr.
To Bank Dr.
: 33 :
PART – B
Q.1. The Balance sheet of BHAVANA LTD., as on 31st December, 1988 is as follows:
Rs. Rs.
Share Capital : Fixed Assets :
Issued & fully paid shares: Land & Bldg. 1,00,000
500 11% Red. Pref. Plant 30,000
Shares of Rs. 100 each 50,000 Furniture 2,000 1,32,000
9,000 equity shares Current Assets:
of Rs.10 each 90,000 Stocks 30,000
Reserves and Surplus : Debtors 15,000
Share Premium 10,000 Investment 28,000
General Reserve 20,000 Bank 20,000 93,000
P & L. A/c. 25,000 55,000
Current Liabilities 30,000
2,25,000 2,25,000
The company decided to redeem its preference shares at a premium of 5% on 1st January,
1989.
A fresh issue of 1,000 equity shares of Rs. 10/- each was made at Rs. 12/- per share
payable in full on 10th February, 1988. These were fully subscribed and all moneys were
duly collected. All the investments were sold realising Rs. 27,000. The directors wish that
only a minimum reduction should be made in the revenue reserve.
You are required to give the journal entries, including those relating to cash, to record the
above transactions and draw up the balance sheet as would appear after redemption of
preference shares.
Q.2 The balance sheet of Besto Ltd., as on 31st March, 1992, disclosed the following
information:
Authorised share capita l : Rs.

5% Redeemable preference shares of Rs. 10 each 1,50,000
Ordinary shares of Rs. 10 each 5,00,000
Paid up capital :
5% Redeemable preference shares of Rs. 10 each fully paid 1,10,000
Ordinary shares of Rs. 10 each fully paid 3,00,000
Profit and Loss Account 2,00,000
On 6th April, 1992 the preference shares were redeemed at a premium of Rs. 4 per share.
The company could not yet trace holders of 1,200 preference shares. On 8th April, 1992 a
bonus issue of one fully paid ordinary share for three shares was made.
Show the journal entries to record these transactions (including cash) and show these
accounts as they would appear in the balance sheet as on 8th April, 1992.
Q.3. The following balances were extracted from the books of EMEL DEEKAY Limited :
Rs.
8 per cent redeemable cumulative preference shares :
1,000 shares of Rs. 100 each fully called up 1,00,000
Less Calls unpaid at Rs. 25 per share 500
Amount paid up 99,500
Share premium account 14,000
General reserve 34,000
Cash at bank 15,000
Proposed dividend on cumulative preference shares (since
sanctioned) 7,840
: 34 :
The directors redeemed the preferences shares at a premium of 10% and for that purpose
made a fresh issue of equity shares for such amount as was necessary for the purpose
after utilising the available sources to the maximum extent and satisfied the amount of
preference dividend.
You are required to show the journal entries including those relating to cash for recording
the above transactions Ignore taxation.
Q.4. The Bharat Aluminium Co. Ltd., whose issued share capital on 31st December, 1992,
consisted of 12,000 8% redeemable preference shares of Rs.100 each fully paid and
40,000 equity shares of Rs. 100 each, Rs. 80 paid up, decided to redeem preference
shares at a premium of Rs. 10 per share. The company’s balance sheet as at 31st
December, 1992, showed a general reserve of Rs. 18,00,000 and a capital reserve of Rs.
1,70,000. To redemption was effected partly out of profits and partly out of the proceeds of
a new issue of 6,000 7 ½% cumulative preference shares of Rs. 100 each at a premium of
Rs. 25 per share. The premium payable on redemption was met out of the premium
received on the new issue.
On 1st April,1993, the company at its general meeting resolved that all the capital reserves
be applied in the following manner : (i) the declaration of bonus at the rate of Rs. 20 per
share on equity shares for the purpose of making the said equity shares fully paid, and (ii)
the issue of bonus shares to the equity shareholders in the ratio of one share for every four
shares held by them.
You are required to pass necessary journal entries.
Q.5. Sanjeev Kumar Limited had Rs.1,00,000 Equity share capital (Rs.10), 1,000 8% Rs. 100
redeemable preferences shares and Rs. 60,000 and Rs. 40,000 respectively in general
reserve and profit and loss account. It had also Rs. 3,000 in share premium account. The
company exercised its option to redeem the preference shares at 10% premium.
For this purpose 5,000 Rs. 10 rights shares were issued at 10% premium which were fully
paid at a time. The company had also Rs. 30,000 investments which were sold for Rs.
38,000.
All payments were made except to holders of 50 shares who could not be traced.
The directors then issued bonus shares to the then shareholders at the rate of 2 for 3 held
at 5% premium.
Pass entries (without narration) assuming that directors want there should be minimum
reduction in fee reserves.
Q.6. The following is the summarised Balance Sheet of Redeemable Limited :

Liabilities Rs. Assets Rs.
Paid up Share Capital Bank 90,000
Equity Shares : 50,000 shares of Other Assets 8,10,000
Rs. 10 each 5,00,000
1,000 10% Red. Pref. Shares of
Rs. 100 each 1,00,000
Less : Call is arrear 1,000 99,000
(On 50 shares @ Rs. 20 each)
Reserve & Surplus 1,00,000
Dev. Rebate Reserve 50,000
Other Liabilities 1,51,000
9,00,000 9,00,000
The Redeemable Preference Shares were redeemed on the following basis:
(1) Further 4,500 equity shares were issued at a premium of 10%
(2) Of the 50 Preference Shares, holder for 40 shares paid the call money before the
date of redemption. The balance 10 shares were forefeited for non-payment of calls
before redemption. The forfeited shares were reissued as fully paid on receipt of
Rs.500 before redemption.
(3) Preference shares were redeemed at a premium of 10 per cent and share premium
amount was utilised in full for the purpose.
Show journal entries including those relating to cash showing rough workings.
: 35 :
Q.7. The Balance Sheet of M Ltd. as on 31.12.1994 is given below :

9% Red. Pref. Shares of Rs. 6,50,000 Fixed Assets 9,50,000
100 each, fully paid up
Equity Shares of Rs. 5 each 2,25,000 Investments 2,75,000
fully paid up
General Reserve 1,00,000 Cash at Bank 67,500
P & L A/c. 2,60,000
Sundry Creditors 57,500
12,92,500 12,92,500
The preference shares are to be redeemed on 1.1.1995, at a premium of 7. ½% in
order to facilitate redemption the company had decided :
(i) To sell the investments for Rs.2,60,000.
(ii) To finance part of the redemption from company’s fund; and
(iii) To issue sufficient equity shares at a premium of Re. 1 per share to raise the balance
of funds required.
(iv) Minimum Bank Balance to be retained at Rs. 10,500. The investments were sold, the
equity shares were fully subscribed and the shares were duly redeemed.
Show the entries and prepare the Balance Sheet.
Note : Minimum reduction is to be made against General Reserve.
Q. 8.Pass appropriate journal entries in respect of the following:

(a) In 1993 ‘A’ Ltd. redeemed Rs. 1,00,000 preference shares by converting them into
equity shares issued at 25% premium.
(b) In 1994 ‘B’ Ltd. redeemed Rs. 95,000 preference shares by converting them into
shares issued at 5% discount.
(c) In 1995 ‘C’ Ltd. redeemed 10,000 preference shares of Rs. 10 each at premium of
Rs. 1.25 per share by converting into Debentures of Rs. 10 each issued at 10 %
discount.
Q. 9.In addition to Equity Shares, Kamini Ltd. has issued at par 6,000 6% redeemable preference
shares of Rs. 100 each fully paid, and 2,000. 7% redeemable preference shares of Rs. 100
each Rs. 75 paid. All these preference shares were redeemable, on or after 1st April, 1994
at premium of 5%.
The summarised Balance Sheet of the Company on 31st March, 1994 was as follows :
Issued Share Capital : Fixed Assets 17,00,000
6,000 6% Red. Pref. Shares of Cash & Bank Bal. 9,00,000
Rs.100 each fully paid. 6,00,000
2,000 7% Red. Pref. Shares of
Rs. 100 each, Rs. 75 paid 1,50,000
1,00,000 Equity Shares of Rs. 10
each fully paid 10,00,000
Share Premium A/c. 1,00,000
Profit & Loss A/c. 2,40,000
Creditors 5,10,000
26,00,000 26,00,000
: 36 :
1. It was decided to redeem both classes of preference shares on 1st May, 1994 after
taking the steps necessary to comply with the requirements of the Companies Act,
1956.
2. In April, 1994 Company issued for cash so many (but no more) equity shares of Rs.
10 each at par as were necessary to provide for the redemption of all preference
shares which could not otherwise be redeemed. These equity shares were fully paid
up on allotment.
3. All necessary steps were duly taken and the redemption of both classes of
preference shares was effected on 1st May, 1994.
You are required to show : i) Journal entries (including cash) necessary to record the
foregoing transactions; and ii) To set out the summarised Balance Sheet of the
Company as it would appear immediately after the redemption.
: 37 :
CHAPTER - 3
PART A : THEORY SECTION
Creation of debenture redemption fund / sinking fund :

The company have to provide for future redemption of debenture by creation of a debenture
redemption fund or sinking fund. Under this approach a fixed amount is appropriated from
the profits of every year towards redemption which is invested in some fixed interest
securities. The interest received year after year is also kept aside for redemption purpose
which is reinvested. In the last year, the accumulated investments are sold and the proceeds
are utilised for redemption of debentures.
Proforma Journal Entries :
(I) In the first year :
1. For annual appropriation
Profit and Loss Appropriation a/c Dr. xx
To Sinking Fund a/c xx
2. For making investment
Sinking Fund Investments a/c Dr. xx
To Bank a/c xx
(II) From the second year onwards :
1. For receipt of Interest
Bank a/c Dr. xx
To Sinking fund a/c. xx
Profit and Loss appropriation a/c Dr. xx
To Sinking fund a/c xx
3. For making investments
Sinking Fund Investments a/c Dr. xx
To Bank a/c xx
(Annual appropriation + Interest)
(III) In the last year :
1. For receipt of interest
Bank a/c Dr. xx
Profit and Loss Appropriation A/c Dr. xx
: 38 : REDEMPTION OF DEBENTURES
3. For sale / disposal of investment
Bank a/c Dr. xx
To Sinking Fund Investment a/c xx
Note : Profit or Loss on sale of investments will be transferred to sinking fund a/c.
4. For redemption (money payable to debenture holders)
Debentures a/c Dr. xx
Premium on Redemption a/c Dr. xx
To Debenture holders a/c xx
5. For writing off Premium on Redemption
Sinking Fund a/c Dr. xx
To Premium on Redemption a/c xx
6. For Pay off
Debenture holders a/c Dr. xx
To Bank a/c xx
7. For Writing off Sinking Fund
Sinking Fund a/c Dr. xx
To General Reserve a/c xx
Note : If all the debentures are redeemed, the entire balance in sinking fund a/c will be
transferred to General Reserve. But if a part of the debenture is redeemed then an amount
equivalent to face value of debentures redeemed will be transferred to General Reserve
and balance will be retained in sinking fund a/c to facilitate future redemption.
Purchase or Buy-Back of own Debentures :
When a company has purchased its own debentures for immediate cancellation, a temporary
account called "Debenture Redemption A/c" is opened. The accounting entries in this account
are passed as under :
1. Entry of purchase of own debentures
Debenture Redemption a/c Dr. xx
To Bank a/c xx
2. Entry for cancellation
Debenture a/c (FV) Dr. xx
To Debenture Redemption a/c (cost) xx
To Capital Reserve a/c (Profit) xx
Note : The loss on cancellation should be debited to "Profit & Loss a/c".
Purchase of own debentures as investments:
When the company has purchased its own debentures and have not cancelled them on the same
day then instead of opening debenture redemption account, a special account called "Investment
in own debentures a/c" is opened and the accounting entries are passed as under :
1. Entry for purchase of own debentures
Investment in own debentures a/c Dr. xx
To Bank a/c xx
2. Entry for interest on each interest date
Interest on debenture a/c (Gross) Dr. xx
To Bank a/c (Net) xx
To Interest on own debentures a/c xx
3. Entry for cancellation
Debentures a/c (FV) Dr. xx
To Investment in own Debentures a/c (cost) xx
To Capital Reserve a/c (Profit) xx
Note : The loss on cancellation should be debited to Profit & Loss Account.
PART B : CLASSWORK SECTION
Q. 1. The summarised balance sheet of Juhi Ltd. on March 31, 2011 was as follows :
Liabilities ` Assets `
Share Capital : Fixed Assets at cost
6% redeemable preference Less : Depreciation 6,12,000
shares of ` 10 each 2,00,000 Investment 3,10,000
Equity Shares of ` 10 each 4,00,000 Stock 3,50,000
Profit & Loss A/c 2,50,000 Sundry Debtors 3,15,000
6% Debentures 3,00,000 Discount on debentures 5,000
Bank Loan 50,000
Creditors 3,92,000
15,92,000 15,92,000
Wanting to redeem the preference shares and debentures the company offered to the
redeemable preference shareholders and the debenture holders the option to convert
their holding into equity shares to be issued at a premium of ` 2.50 per share. Half of
the preference shareholders and one third of the debenture holders agreed to do this.
The company issued 30,000 equity shares at ` 12.50 to the public for cash and with
funds available paid off the bank loan and redeemed the remaining redeemable pref-
erence shares and debentures.
Journalise the transactions and show how the balance sheet will appear after the
transactions have been completed.
Q. 2. The summarised Balance Sheet of Convertible Limited, as on 31st March, 2011, stood as follows :
Liabilities `
Share Capital : 5,00,000 equity shares of ` 10 each fully paid 50,00,000
General Reserve 75,00,000
Debenture Redemption Fund 50,00,000
13.5% Convertible Debentures 1,00,000 Debentures
of ` 100 each 1,00,00,000
Other Loans 50,00,000
Current Liabilities and Provisions 1,25,00,000
4,50,00,000
Assets :
Fixed Assets (at cost less depreciation 1,60,00,000
Debenture Redemption Fund Investments 40,00,000
Cash and Bank Balances 50,00,000
Other Current Assets 2,00,00,000
4,50,00,000
The debentures are due for redemption on 1st April, 2011. The terms of issue of
debentures provided 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 at a
predetermined price of ` 15.75 per share and the payment in cash.
Assuming that :
(i) except for 100 debenture holders holding totally 25,000 debentures, the rest of
them exercised the option for maximum conversion;
(ii) the investments realise ` 44 lakhs on sale; and
(iii) all the transactions are put through, without any lag, on 1st April, 2011.
Give Necessary Journal entries. Show your calculations in respect of the number of
equity shares to be allotted and the cash payment necessary.
Q. 3. M/s. SOLVENT LTD. intends to redeem its Secured Debts on 1st April, 2011 when its
financial position indicated.
SOURCES ` in Lakhs
I. Own Fund :
(1) Equity Share Capital 7.00
(2) Preference Share Capital 1.00
8.00
(3) Reserves & Surplus :
Sinking Fund 3.85
Profit & Loss Account 0.90
4.75
12.75
II. Owed Fund :
(1) 10% Debenture Stock Redeemable
@ Premium of 10% 4.00
(Secured against Fixed Assets)
(2) Public Deposits 0.25 4.25
Total Fund : 17.00
APPLICATIONS :
I. Fixed Assets : 10.00
II. Sinking Fund Investments
` 80,000, 5% Infrastructure Bonds 0.76
` 90,000, 6% National Defence Bonds 1.00
` 70,000, 7 1/ 2% State Finance Corp. Bonds 0.70
` 1,90,000, 7% IDBI Securities 1.85 4.31
III. Net Current Assets 2.69
Total Application : 17.00
The Debenture holders were given option to get :
(1) Cash on Redemption
Or
(2) Equity Shares of ` 10/- each @ Premium of ` 5/- per share.
Or
(3) 15% Debenture of ` 100/- each @ Discount of ` 12 per Debenture. Accordingly:
(a) 50% Debentures holders opted for 1st option.
(b) 30% Debentures holders opted for 2nd option.
(c) 20% Debentures holders opted for 3rd option.
(4) All investments were sold as under :
(a) 5% Infrastructure Bonds @ 98.
(b) 6% National Defence Bonds @ 101.
(c) 7 1 / 2 % State Bonds at par.
(d) 7% IDBI Securities @ 99.
Pass necessary journal entries.
Q. 4 Indebted Ltd. issued 10% debentures at par for 8 lakhs on 1st April, 2005. Interest
was payable half yearly on 30th September and 31st March every year. Under the
terms of the trust deed, the debentures are redeemable at par (after three years of
issue) by the company purchasing them in the open market and cancelling them with
a minimum redemption of ` 80,000 every year. Incase, there was a short fall 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 draw lots and redeem the debentures.
The company purchased its own debentures for cancellation as under :
(a) 31st December, 2008 ` 1,00,000 at ` 98 cum-interest.
(b) 31st August, 2009 ` 60,000 at ` 95 ex-interest.
(c) 31st October 2010 ` 90,000 at ` 96 cum-interest.
The company carried out its obligations under the deed. Prepare the following ledger
accounts for the years 2008-09, 2009-10 and 2010-11 :
(i) Debentures Account,
(ii) Debenture Redemption Account and
(iii) Debenture Interest A/c. Ignore taxation.
Q. 5. Bhave Ltd. issued 500 debentures of ` 1,000 each on 1st April, 1999. Interest at 10%
is payable on these Debentures on 30th September and 31st March, every year.
It purchased its own debentures as under:
1st October, 2009 5 at ` 975
1st April, 2010 5 at ` 950
1st October, 2010 100 at ` 985
It cancelled above Own Debentures on 31st March, 2011.
You are required to prepare the following Ledger Accounts in the books of Bhave Ltd.
for two years 2009-10 and 2010-11 :
(a) Debentures Account;
(b) Own Debentures Account;
(c) Interest on Debentures Account;
(d) Interest on Own Debentures Account.
Q. 6. On 1st April 2008, a company issued 2,000, 6% Debentures of ` 100 each. The
interest is payable on 30th September and 31st March every year. The company is
allowed to purchase its own debentures which may be cancelled or kept or reissued
at the company's option.
The company made the following purchases by cheque in the open market :
On 1st February 2009 - 300 Debentures @ ` 99 cum-interest.
On 31st August 2009 - 200 Debentures @ ` 98 ex-interest.
On 31st December 2010 - 100 Debentures @ ` 97 cum-interest.
The debentures, which were purchased on 31st August, 2009 were cancelled on
31st March, 2011. All payments were made on due dates.
Show Ledger Accounts to record the above transactions (including receipts and payments)
and show journal entries for the year 2010-11.
Q. 7. (i) Swati Associates Ltd. had issued 10,000 12% Debentures of ` 100 each on
1.4.2008. These Debentures are redeemable after 3 years at a premium of ` 5
per Debenture. Interest is payable annually.
(ii) On January 1, 2009 it buys 1500 debentures from the market at ` 98 per Debenture.
These are sold away on September 30, 2010 at `105 per Debenture.
(iii) On April 1, 2010 it buys 1000 debentures at ` 104 per debenture from the open
market. These are cancelled on July 1, 2010.
(iv) On January 1, 2011 it buys 2,000 debentures at ` 106 cum - interest from the
open market. These are cancelled on March 31, 2011. The other debentures
are redeemed on the same date.
Show ledger accounts recording all transactions.
Q. 8. M M Ltd. had the following among their ledger opening balances as on April 1, 2010 :
`
11% Debentures A/c 50,00,000
Debenture Redemption Fund A/c. 45,00,000
13.5% Debentures in XX Ltd. A/c (Face value ` 20,00,000) 19,50,000
Own Debentures A/c. (Face value ` 20,00,000) 18,50,000
As 31st March, 2011 was the date for redemption, the company started buying own
debentures and made the following purchases in the open market :
1.5.2010 : 4,000 debentures at ` 98 cum interest.
1.12.2010 : 3,000 debentures at ` 99 ex-interest.
15.3.2011 : Debentures in XX Ltd. were sold for ` 95 each cum-interest.
31.3.2011 : Debentures of MM Ltd were redeemed by payment and by cancellation.
Note : The company appropriated ` 2,00,000 towards sinking fund every year.
Half yearly interest is due on the debentures on the 30th September and 31st March
in the case of both the companies.
Show the entries in the necessary ledger accounts of MM Ltd. during 2010 - 2011.
Q. 9. X Ltd. has issued 12% Debentures worth 4,00,000 during 2012 (Interest Dates : Sep.
30 & March 31) During 2016-2017 it Purchased following own debentures for Imme-
diate cancellation.
30.4.16 300 Debentures @ 98
1.8.16 200 Debentures @ 99 cum-Interest
1.1.17 400 Debentures @ 101 ex-Interest
Show Journal of X Ltd for 2016-2017
Q. 10. A company had 16,000, 12% debentures of ` 100 each outstanding as on 1st April,
2012, redeemable on 31st March, 2013. On that day, sinking fund was ` 14,98,000
represented by 2,000 own debentures purchased at the average price of ` 99 and 9%
stocks face value of ` 13,20,000. The annual instalment was ` 56,800.
On 31st March, 2013 the investments were realized at ` 98 and the debentures were
redeemed. You are required to write up the following accounts for the year ending
31st March 2013:
(1) 12% Debentures account
(2) Debenture redemption sinking fund account.
CHAPTER-4
(I) Types of Reserves

All Reserves of a Joint stock company can be classified into 3 parts.
1. Capital type of reserves
They are created out of capital events and they are not available for dividend
purpose. They are normally used for Bonus purpose.
Examples :
a. Capital Redemption Reserve
b. Capital Reserve
c. Securities Premium
d. Revaluation Reserve
2. Statutory Types of Reserves
They are created as per some statute or law and they are neither available for
dividend nor for bonus.
Examples :
(a) Investment Allowance Reserve
(b) Development Rebate Reserve
(c) Development Reserve
(d) Export profit reserves
3. Revenue type of reserves : (also called as free reserves or divisible profits)
They are created out of revenue events and they are available for dividend purpose
Examples :
(a) General Reserve/Reserve Fund
(b) Profit and Loss A/c
(c) Dividend equalisation reserve
(d) Subsidy Reserve
(II) Issue of Bonus Shares (Sec. 63) :
(a) Conversion of partly paid shares into fully paid by way of bonus
(i) Share final call A/c Dr. xx
To equity shares capital A/c xx
(ii) Divisible profits A/c Dr. xx
To Bonus to share holders A/c xx
(iii) Bonus to share holder A/c Dr. xx
To Share final call A/c xx
(b) Issue of fully paid bonus shares
(i) Capital Redemption Reserve A/c Dr. xx
Capital Reserve (excluding Revl. Res) A/c Dr. xx
Securities Premium (earned in cash) A/c Dr. xx
Divisible Profit (if required) A/c Dr. xx
To Bonus to share holders A/c xx
(ii) Bonus to share holders A/c Dr. xx
To Equity share capital A/c xx
Notes :
As per bonus guidelines given in the companies Act, no company can issue fully paid
bonus shares until all partly paid shares are converted into fully paid shares by way a bonus.
: 46 : COMPANY FINAL ACCOUNTS

........................ Ltd.
Balance Sheet as on.............
Particulars Note CY PY
I. EQUITY AND LIABILITIES
(1) Shareholders’ funds
(a) Share capital
(b) Reserve and surplus
(c) Money received against share warrants
(2) Share application money pending allotment
(3) Non-current liabilities
(a) Long - term borrowings
(b) Deferred tax liabilities (Net)
(c) Other Long - term liabilities
(d) Long - term provisions
(4) Current liabilities
(a) Short - term borrowings
(b) Trade payables
(c) Other Current liabilities
(d) Short - term provisions
TOTAL
II. ASSETS
(1) Non-current assets
(a) Fixed assets
(i) Tangible assets
(ii) Intangible assets
(iii) Capital Work – in - progress
(iv) Intangible assets under development
(b) Non - current investments
(c) Deferred tax assets (net)
(d) Long - term loans and advances
(e) Other non-current assets
(2) Current assets
(a) Current investments
(b) Inventories
(c) Trade receivables
(d) Cash and cash equivalents
(e) Short - term loans and advances
(f) Other current assets
TOTAL
Contingent liabilities and commitments
............. Ltd.
Profit and Loss Statement for the year ended...................
Particulars Note CY PY
I. Revenue from operations
II. Other incomes
III. Total Revenue
IV. Expenses :
Cost of materials consumed
Purchases of Stock - in - Trade
Changes in inventories of finished goods, Work - in - progress
and Stock-in-Trade
Employee benefits expenses
Finance Cost
Depreciation and amortization expenses
Other expenses
Total expenses
V. Profit before exceptional and extraordinary items and tax
VI. Exceptional items
VII. Profit before extraordinary items and tax
VIII. Extraordinary Items
IX. Profit before tax
X. Tax expense :
(1) Current tax
(2) Deferred tax
(3) (Excess) / Short Income Tax Provision of earlier year
XI. Profit / (Loss) for the period from Continuing operations
XII. Profit / (loss) from discontinuing Operations
XIII. Tax expense of discontinuing Operations
XIV. Profit / (loss) from Discontinuing Operations
XV. Profit / (Loss) for the period

Note 1 : Share Capital

Authorised
..............% Preference Shares of ` .. each XX
....... Equity Shares of Rs... each XX XX
Issued, Subscribed and paid up
..........% Preference Shares of ` .. each, fully paid / called XX
.......... Equity Shares of ` .. each fully paid / called up XX
XX
Less : Call in Arrears (due from directors / officers (XX) XX
Share Forfeiture A/c XX
XX
Notes :(i) Shares issued for consideration other than cash
(ii) Shares issued as Bonus
(iii) No. of shares bought back
Note 2 : Reserves and Surplus

(a) Capital Reserves XX
(b) Capital Redemption Reserve XX
(c) Securities Premium Reserve XX
(d) Debenture Redemption Reserve XX
(e) Revaluation Reserve XX
(f) Other Reserve XX
(g) Surplus (Profit & Loss A/c)
Surplus as at the beginning of the year XX
Add : Profit / (Loss) for the period XX
Less : Proposed Dividend (XX)
Less : Transfer to Reserves (XX)
Add : Transfer from Reserves XX XX
XX
Note 3 : Long term borrowings

Debentures
Bank Loan
Loan form Financial institute
Bonds
Loan from Directors
Public Deposit etc.

Note 4 : Long Term Provisions

Provision for Gratuity
Provision for Provident fund
Provision for Pension
Note 5 : Short term borrowings
Bank O/D
Cash Credit
Loans payable on demand.
(Security information also needs to be disclosed)
Note 6 : Other Current Liabilities
Creditors
Bills Payable
O/s expenses
Note 6(a): Other Current Liabilities
Call in advance
Advance from customers
Unclaimed dividend
TDS on expenses
Income Tax Payable etc.
Note 7 : Short term provisions
Provision for Tax
Proposed dividend
Note 8 : Tangible Assets
Land & Building
Furniture & fixtures
Motor Car
Plant & machinery
Office equipments etc.
(Tangible assets shall be disclosed at cost)
Note 9 : Intangible Assets
Goodwill
Patent
Copy Rights
Trade mark
Computer Software etc
(Intangible assets shall be disclosed at cost)
Note 10 : Non - Current Investments
Investment in shares
Bonds
Government securities
Property
Gold etc
(Market values of investment should disclose separately.)

Note 11 : Long term Loan and Advances
Loan to subsidiaries
Related parties
Housing loan to employees
Security deposit
Deposit with government Authorities
Telephone deposit
Note 12 : Inventories
Closing stock of RM
WIP
Finished goods
Stock in trade
Loose tools
Stores and squares parts
Tools and dies
Goods in transit etc.
Note 13 : Trade Recievables
Bills Receivable
Sundrydebtors xx
O/s for more than 6 months xx
Other debts xx xx
Less: Provision for BD / RDD (xx)
Note 14 : Cash & Cash equivalents
Cash in hand
Cash at Bank
Note 15 : Short term loans & Advances
Advances to staff
Prepaid expenses
Advance Tax
TDS on Income
Income Tax Refund etc.
Note 16 : Other Current Assets
Income receivable
Miscellaneous Expenditure item
Note 17 : Contingent Liabilities and Commitments
Contingent liabilities-
Claims against company not acknowledge as Debt
Bill discounted but not mature
Guarantee given by the company
Commitments-
Un called amount on partly paid shares held as Investments
Capital Expenditure Commitments

Note 18 : Other Incomes
Rent
Dividend
Commission
Note 19 : Change in Inventory of FG, WIP & Stock in trade
Opening stock
Closing stock
Note 20 : Employee Benefit cost
Salary
Wages
Bonus
Commission
Allowances
Staff welfare expenses
Note 21 : Finance Cost
Interest on all Borrowing
Miscellaneous expense w/off during the year
Note 22 : Other Expenses
Administration expenses
Selling & distribution expenses
Bad debts
Auditors for remuneration-Audit fees + Taxation work +
Company law matter + Consultancy + other matters +
Reimbursement of employee
Miscellaneous expense w/off during the year
Note 23 : Exceptional Items
Profit/ Loss on sales of FA
Investment
Note 24 : Extra Ordinary Items
Loss due to earthquake other natural calamity items.

Adjustment in Final Accounts :
(1) Provision for Tax :
(a) Profit and loss a/c (Current Tax)
(b) Balance Sheet (Short term Provisions)
(The Provision for tax should be calculated as a specific percentage of PBT)
(2) Transfer to Reserves :
(a) Profit and Loss a/c in Reserves & Surplus (Less from Profit)
(b) Balance sheet (Add to concerned Reserves).
(3) Transfer from Reserves :
(a) Profit and Loss a/c in Reserves & Surplus (Add to Profit)
(b) Balance Sheet (Less from Concerned Reserve)
(4) Preliminary Expenditure Written Off :
(a) Balance Sheet (Less from Other Current Assets)
(b) Profit and Loss a/c (Exceptional items)
(5) Proposed Dividend :
(a) Profit and Loss in Reserve & Surplus (Less From Profit)
(b) Balance Sheet (Short term Provisions)
Note :
(i) The amount of dividend should be calculated as a specific percentage of
paid-up share capital i.e. Called up capital less Calls in Arrears.
(ii) At the time of providing equity dividend, the preference dividend also should
be provided for. (Hidden Adjustment)
(iii) Dividend Distribution Tax (DDT) should be provided @ 19.994 %(Applicable from
1.10.2014) on proposed Dividend
(6) Outstanding Debenture Interest :
(a) Profit and Loss A/c - (Finance Cost)
(b) Balance Sheet - (Other Current Liabilities)
(7) TDS on Income :
(a) Profit and Loss A/c (add to income)
(b) Balance Sheet (Short term loan and Advances)
(It is similar to Advance Tax)
(8) TDS on Expenses :
(a) Profit and Loss A/c (add to expenses)
(b) Balance Sheet (Other Current Liabilities)
(Money is payable to I.T. Department)
(9) Completion of Income Tax Assessment of Last Year :
When last years assessment is completed during the current year then the Gross
Demand is to be compared with Advance tax and provision fot tax.
Note :
(i) If the assessment is completed without any dispute or modification or change, then
the gross demand will be taken same as 'provision for tax'.
(ii) If the assessment is completed without any further liability or demand, then the gross
demand taken same as 'Advance Tax'.
(iii) If any Income tax appeal is filed, the disputed amount is shown as contingent liability.
Calculation of Managerial Remunerations (Sec. 197)
This aspect covers any remunerations (salary, commission, perks or any other
remuneration excluding directors fees) paid to managerial staff (managing directors,
directors and managers appointed under the companies Act, 2013).
Ceiling for Maximum Remuneration
(I) In event of Profits
(1) Remuneration of a Managing Director (M.D.)
Max. 5% of net profit
or a whole time director (W.T.D.) or manager
(2) Remuneration of more than one Max. 10% of net profit altogether
(3) Remuneration of part time director
(a) When there is no M.D./ W.T.D. Max. 3% of net profit
(b) When there is M.D./ W.T.D. Max. 1% of net profit
(4) Overall managerial remuneration Max. 11% of net profit
Calculation of net profit for managerial Remuneration (Sec. 198)
Gross Profit xxx
Add :
(1) Any other Revenue type income xxx
(2) Subsidies received from government xxx
(3) Revenue Profit on Sale of Fixed Assets xxx xxx
xxx
Do not Add
(1) Premium on issue of shares & debentures
(2) Profit on reissue of forfeited shares
(3) Capital Profit on sale of fixed assets
Less :
(1) All working charges xxx
(2) Donations to charitable funds (Sec. 293) xxx
(3) Compensation for breach of contract xxx
(4) Bad Debts xxx
(5) Directors Fees xxx
(6) Business Related taxes xxx
(7) Depreciation as per Schedule II (Sec. 123) xxx
(8) Brought forward losses xxx (xxx)
Net Profit for Director's Remuneration xxx

Do not Less
1. All non - working charges
2. RDD, RFDD or any other adhoc provision
3. Director's Remuneration
4. Provision for Income - tax
5. Depreciation as per Books. (If it is not as per sec. 123)
6. Transfer to Reserves
(II) In event of losses or inadequate profits (Schedule V Part II) :
If the company has incurred losses or if the profits are insufficient, then the
remuneration can be paid to managerial staff on the basis of effective capital
of the company as under.
Effective Capital
(1) Negative or less than ` 5 crore ` 60,00,000

(2) ` 5 Crore and above but less than `100 Crores ` 84,00,000
(3) `100 Crores and above but less than 250 crores ` 1,20,00,000
(4) ` 250 Crores and above. ` 1,20,00,000 +
0.01%of effective
capital in excess
of 250 Crore
Note : If the shareholders approve by a special resolution, 200% of above
remuneration can be paid to managerial staff.
Note : Effective Capital is determined as under :
Paid-up share capital xx
(Excluding Share application money when allotment is not yet done)
Add : All reserve & Surplus xx
(Excluding Revaluation Reserve)
Add : All long term Borrowings
(Outstanding Period > 1 year) xx
Less : miscellaneous expenditure not w/off / accumulated losses (xx)
Less : Investment held by a non-investment company (xx)
xx
Rules for payment of dividend
Normally, Dividend is paid out of current year profits.But if the Current year's Profits are insuffi-
cient then it can be paid out of Divisible Profits lying with the company provoded following 3
conditions are sufficient:
(1) Dividend Rate cannot exceed average rate of Dividend of last 3 years.
(2) Divisible profits utilised should not exceed 10% of paid up share capital and Divisilbe
Profits.
(3) Divisible profits left over after such utilisation should not fall below 15% of paid up capital.

Q. 1. Sampada Ltd.. is a company registered with an authorised capital of `25,00,000

divided in to equity shares of ` 100 each. 50% of the shares are issued on which Rs.
80 per share is called up. The following balances are extracted from its ledger as on
31-12-2012:
Particulars ` Particulars `
Land 3,00,000 Share capital 10,00,000
Building 10,00,000 Security premium 1,25,000
(cost Rs. 15,00,000) Debenture redemption fund 1,00,000
Machinery 14,60,000 Capital reserve 3,00,000
(cost Rs.20,00,000) General reserves 8,50,000
Furniture (cost Rs.1,75,000) 1,30,000 P&L statement:
Stock 8,30,000 Opening balance 1,93,400
Debtors 10,18,750
Cash in hand 2,500 Add: Net profit for 5,50,000 7,43,400
Current account with bank 2,25,000 the year
Interim dividend paid 50,000 12% secured debentures 5,00,000
Advance income tax 1,90,550 Bank loan (unsecured ) 5,00,000
Prepayments 15,000 Sundry creditors 8,58,400
Provision for tax 2,45,000
Total 52,21,800 Total 52,21,800
Additional information:
a. During the year company decided to:
a) Make the shares fully paid up out of general reserve.
b) Issue 2500 equity shares of Rs. 100 each for the public for cash.
c) Issue of bonus share in the ratio of one fully paid share for five shares held
out of general reserve.
The accounting entries for the above are yet to be made.
b. As per the instructions given to bank ` 1,00,000 is to be transferred from current
account to account of Sumedha Ltd. as a consideration for 10,000 equity shares of
` 10 each (market value of investments is ` 1,05,000)
c. One of the customers directly paid ` 30,000 to one of the suppliers. Since the
intimation was not received in time, effect is yet to be given.
d. The directors propose to:
a) Transfer of ` 1,00,000 to debenture redemption fund.
b) Declare final dividend at 10% on revised share capital (ignore taxation)
e. One of the employee who was injured while working in the company has filed a suit
for damages of ` 3,00,000. The company has not made any provision as it has
been advised that suit is likely to be decided in favour of the company.
Prepare statement of profit and loss for the year ended 31-12-2012 and balance sheet as
on that date keeping in minds the prescribed formats and applicable accounting standards.

Q. 2. Following is the trial balance of KKK Ltd. on 31st march 2012:
Debit balance ` Credit balance `

Fixed assets (net block) 7,50,000 Equity share capital 4,40,000
Investments 2,50,000 (Rs.10each fully paid)
Closing stock 3,75,000 9% preference share capital 1,00,000
Sundry debtors 1,22,500 (Rs.100 each fully paid)
Share issue expenses 20,000 P/L statement 2,80,000
Staff advance 1,00,000 Securities premium 30,000
Advance tax 60,000 Debenture redemption reserves 2,00,000
Pre-paid expenses 45,000 General reserves 75,000
Advance to suppliers 27,500 8 % debentures 5,25,000
Cash in hand 12,500 Loan from director Mr. D 10,000
Bank balance 1,10,000 Loan from subsidiary co. 70,000
Sundry creditors 58,500
Bills payable 21,500
Provision from taxation 62,500
Total 18,72,500 Total 18,72,500
Additional information:
(a) Transfer to debenture redemption reserves ` 50000 and general reserve ` 25,000.
(b) The company declared dividend on equity shares capital at 15% after declaring
preference dividend.
(c) Entire authorised share capital has been issued & subscribed.
(d) 8% debentures are secured against all fixed assets. The figure in trial balance includes
interest accrued and due ` 25,000.
(e) Loan from director and subsidiary co. are unsecured and for short term.
(f) Creditors include creditors for goods ` 40,000 while for expense ` 18,500.
(g) Stock comprises of raw-materials ` 2,50,000 WIP ` 50,000 and finished goods
` 75,000.
(h) Of the debtors, a debt due for more than 6months is ` 22,500. All debts are unsecured
and considered to be good.
(i) Profit and loss statement figure in trial balance is arrived at as under:
Previous year’s Balance b/d 1,48,500
Net profit of the year 1,31,500
2,80,000
After considering the above adjustments, prepare balance sheet of the company on 31st march
2012 as per schedule VI requirements.
Q. 3. On 31st March, 2013 Bose and Sen Ltd. provides to you the following ledger balances
after preparing its Profit and Loss Account for the year ended 31st March, 2015 :
Credit Balances : `
Equity shares capital, fully paid shares of ` 10 each 70,00,000
Loan from State Finance Corporation 10,50,000
Secured by hypothecation of Plant & Machinery
(Repayable within one year ` 2,00,000)
Loans : Unsecured (Long term) 8,40,000
Sundry Creditors for goods & expenses 14,00,000
Calls in Advance 7,000
Profit & Loss Account 7,00,000
Provision of Taxation 3,25,500
Proposed Dividend 4,20,000
Provision for Dividend Distribution Tax 71,400
1,33,63,000
Debit Balances : `
Calls in arrear 7,000
Land 14,00,000
Buildings 20,50,000
Plant and Machinery 36,75,000
Furniture & Fixture 3,50,000
Stocks : Finished goods 14,00,000
Raw Materials 3,50,000
Sundry Debtors 14,00,000
Advances : Short-term 2,98,900
Cash in hand 2,10,000
Balance with banks 17,29,000
Preliminary Expenses 93,100
Patents & Trade marks 4,00,000
1,33,63,000
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 deposit 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 31st March, 2015 as required under Revised
Schedule III of the Companies Act, 2013.
Q. 4. The trial balance of Complex Ltd. as at 31st March, 2015 shows the following items :
Dr. Cr.
` `
Advance payment of income-tax 2,20,000 ---
Provision for income-tax for the year ended 31.03.2014 --- 1,20,000
The following futher informations are given :
(i) Advance payment of income-tax includes ` 1,40,000 for 2013-14.
(ii) Actual tax liability for 2013-14 amounts to ` 1,52,000 and no effect for the same
has so far been given in accounts.
(iii) Provision for income-tax has to be made for 2014-15 for ` 1,60,000.
You are required to prepare (a) provision for income - tax account, (b) advance
payment of income - tax account, (c) liabilities for taxation account.
Q. 5. The Articles of Association of S Ltd. provide the following:

(i) That 20% of the net profit of each year shall be transferred to reserve fund.
(ii) That an amount equal to10% 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 two third as additional equity dividend.
A further condition was imposed by the article viz. that the balance carried forward shall be
equal to 12% on preference shares after making provisions (i), (i) and (iii) mentioned
above. The company has issued 13,000, 14% cumulative participating preference shares
of ` 100 each fully paid 70,000 equity shares of ` 10 each fully paid.
The profit for the year 2012 was ` 10,00,000 and balance brought from previous year
` 80,000 provide ` 31,000 for depreciation and ` 80,000 for taxation before making
other appropriations.
Calculate Additional Dividend on preference shares and Equity Shares.
Q. 6. Due to inadequacy of profits duroing the year ended 31st march 2015, XYZ Ltd
proposes to declare 10% dividend out of general reserves. From the following
particulars ascertain the amount that can be utilized from general reserves according
to the companies (declaration of dividend out of reserves) Rules 2014 -
`
17,500 9% preference shares of ` 100each fully paid up 17,50,000
8,00,000 equity shares of ` 10 each fully paid up 80,00,000
General Reserves as on 1.4.2014 25,00,000
Capital Reserves as on 1.4.2014 3,00,000
Revaluation reserves as on 1.4.2014 3,50,000
Net profit for year ended 31.3.2015 3,00,000
Average rate of dividend during last 5 years 12%
Note - ignore dividend distribution tax.

Q. 7. The Balance Sheet of A Ltd. as at 31.3.2015 is as follow :
Balance Sheet as at 31.3.2015
Authorised Share Capital Sundry Assets 17,00,000
1,50,000 Equity Shares of `10 each 15,00,000
Issued, Subscribed and Paid-up
80,000 Equity Shares of ` 10 each,
` 7.50 each paid-up 6,00,000
Reserves :
Capital Redemption Reserve 1,50,000
Plant Revaluation Account 20,000
Securities Premium A/c 1,50,000
Development Rebate Reserve 2,30,000
Investment Allowance Reserve 2,50,000
17,00,000 17,00,000
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 compiled with :
You are required to give effect to the proposal by passing journal entries in the books of A Ltd.
Q. 8. Provisional Balance Sheet of P Ltd. as on 31st March, 2015 was as under :

Liabilities ` ` Assets `
Share capital Fixed Assets (at cost less
50,000 equity shares of `10 depreciation) 7,00,000
each, ` 7 per share called up 3,50,000 Cash & Other balances 2,00,000
Less : Calls in arrear (on 10,000 Other Current assets 6,00,000
shares @ ` 2 per share) (20,000)
3,30,000
Add: Calls in advance (on
40,000 shares @
` 3 per share) 1,20,000 4,50,000
20,000, 10% Redeemable
preference shares of ` 10 each,
fully paid up 2,00,000
Reserves & Surplus :
Current Liabilities 2,80,000
15,
00,
000 15,00,000

Calls in arrear are outstanding for 6 months. Calls in advance were also received 6 months
back.
The Board of Directors have recommended that :
(i) Dividend for the year 2014-15 be allowed @ 20% on equity shares.
(ii) Money on calls in advance be refunded with interest and calls in arrears with
interest received
(iii) partly paid equity shares be converted as fully paid up by declaring bonus divi-
dend to shareholders.
Show Journal Entries to give effect to the above proposals including payment and receipt
of cash and redraft the Statement of Profit and Loss and Balance Sheet of P Ltd.
Q. 9. The following is the Profit & Loss A/c of Mudra Ltd., the year ended 31st March, 2015.
` `
Additional Information :
(1) Original Cost of the Machinery sold was ` 40,000.
(2) Depreciation on fixed assets as per Schedule II of the Companies Act, 2013
was ` 575,345.
You are required to comment on the managerial remuneration in the following situations :
(a) there is only one whole time director ;
(b) there are two whole time directors ;
(c) there are two whole time directors, a part time director and a manager.
Q. 10. From the following particulars of Ganga Limited, you are required to calculate the
managerial remuneration in the following situation.
(i) There is only one whole time director.
(ii) There are two whole time directors.
(iii) There are two whole time directors, a part time director and Manager :
`
Net profit before provision for income-tax and manager
remuneration, but after depreciation and provision for repairs 8,70,410
Depreciation provided in the books 3,10,000
Provision for repairs of machinery during the year 25,000
Depreciation allowable under Schedule II 2,60,000
Actual expenditure incurred on repairs during the year 15,000
Q. 11. The following extract of Balance sheet of X Ltd. was obtained :

Balance sheet (Extract) as on 31st March,2015
Liabilities `
Authorised capital :
4,20,000 14% Pref.Share of Rs.100 each. 4,20,00,000
2,00,000 Equity Share of Rs.100 each. 2,00,00,000
6,20,00,000
Issued and subscribed capital :
4,15,000, 14% preference shares of ` 100 each fully paid 4,15,00,000
1,20,000 Equity shares of ` 100 each, ` 80 paid - up 96,00,000
Share suspense account 20,00,000
Capital reserves (60% is revaluation reserve) 2,50,000
Securities premium 50,000
15% Debentures 65,00,000
Public deposits 3,70,000
Cash credit loan from SBI 4,65,000
Sundry creditors 3,45,000
Assets : `
Investment in shares, debentures, etc. 75,00,000
Profit and Loss account 15,25,000
Preliminary expenses not written off 55,000
Share suspense account represents application money received on shares the allotment
of which is not yet made.
X Ltd. has been sustaining loss for the past few years. X Ltd. has only one whole-time director.
Find out how much remuneration X Ltd. can pay to its managerial person as per the provisions
of Part II of Schedule V. Would your answer differ if X Ltd. is an investment company?

Q. 12. company offers new shares of ` 100 each at 25% premium to existing shareholders on one
for four bases. The cum-right market price of a share is ` 150. Calculate the value of a right.
What should be the ex-right market price of a share?
Q. 13. A company has decided to increase its existing share capital by making rights issue to its
existing shareholders. The company is offering one new share for every two shares held by the
shareholder. The market value of the share is ` 240 and the company is offering one share of
` 120 each. Calculate the value of a right. What should be the ex-right market price of a share?

CHAPTER-6
When business of a non-corporate entity is taken over by a newly formed limited company
and if the certificate of incorporation is received at some later date, the first accounting
year of the company is bifurcated in following two parts :
(1) Pre - incorporation period (A period before getting certificate of Incorporation)
(2) Post-incorporation period (A period after getting certificate of Incorporation)
As per the companies Act, the profit earned by the company in pre - incorporation period should
be transferred to capital reserve (If there is a loss it should be debited to goodwill a/c) and profits
of post incorporation period are treated as revenue profits.
The profit and loss account of the first accounting year should be prepared in a columnar from
and all incomes and expenses should be allocated between pre and post on some appropriate
basis as under :
Item Basis of Apportionment between pre and

incorporation period
(1) Gross Profit or On the basis oft urnover in the respective periods.
Gross Loss Or
On the basis of cost of goods sold in the respective
periods in the absence of any information regarding
turnover.
Or
On the basis of time in the respective periods in
absence of any information regarding turnover and cost
of goods sold.
(2) Variable expenses linked On the basis of Turnover in the pre and post incorporation.
with Turnover [e.g. Carriage/
Cartage outward, Selling and
distribution expenses,
Commission to selling agents/
travelling agents, advertisement
expenses, Bad debts
(if actual bad debts for the
two periods are not given),
Brokerage, Sales Promotion.]
: 64 :
(3) Fixed Common charges On the basis of Time in the pre and post
[e.g. Salaries,Office and incorporation periods.
Administration Expenses,Rent,
Rates and Taxes,Printing and
Stationery,Telephone,Telegram
and Postage,Depreciation,
Miscellaneous Expenses]
(4) Expenses exclusively relating Charge to pre-incorporation period but if the purchase
to pre-Incorporation period consideration is not paid on taking over of
[e.g.Interest on Vendor’s business,interest for the subsequent
Capital] period is charged to post incorporation period.
(5) Expenses exclusively relating to Charge to Post-incorporation period
post-incorporation
[e.g. period Formation expenses,
interest on debentures,director’s
fees, Directors’ remuneration,
PreliminaryExpenses,Share issue
Expenses,Underwriting commission,
Discount on issue of securities.
(6) Audit Fees
(i) For Company’s Audit Charge to Post-incorporation period
under the Companies
Act, 2013.
(ii) For Tax Audit under On the basis of turnover in the respective periods.
section 44AB of the
Income tax Act, 1961
(ii) Audit fees Time Ratio assume it is for full year
(7) Interest on purchase
consideration to vendor:
(i) For the period fromthe Charge to Pre-incorporation period
date of acquisition of
business to date of
incorporation.
(ii) For the period from the date Charge to Post-incorporation period
(8) Discount Received Purchase Ratio
(9) Bad Debts Recovered (i) If date of Recovery is given then Actual basis
(ii) If Date of Recovery not given then assume prepaid
(10) Profi/Loss on sale of On Actual Basis according to Date of sale
Asset / Investment
(11) Interest Received on (i) On Actual basis if purchase/ sale date of
Investment Investment given
or
(ii) If no dates are given then Time Ratio.
: 65 :
Q. 1. ABC Ltd. was incorporated on 1.5.2016 to take over the business of DEF and Co.
from 1.1.2016. The summarised Profit and Loss Account as given by ABC Ltd. for the
year ending 31.12.2016 is as under:
Summarised Profit and Loss Account
` `
To Rent and Taxes 90,000 By Gross Profit 10,64,000
To Salaries including manager’s By Interest on Investments 36,000
salary of ` 85,000 3,31,000
To Carriage Outwards 14,000
To Printing and Stationery 18,000
To Interest on Debentures 25,000
To Sales Commission 30,800
To Bad Debts (related to sales) 91,000
To Underwriting Commission 26,000
To Preliminary Expenses 28,000
To Audit Fees 45,000
To Loss on Sale of Investments 11,200
To Net Profit 3,90,000

11,00,000 11,00,000
Prepare a Statement showing allocation of expenses and calculations of pre-incorporation
and post-incorporation profits after considering the following information:
(i) G.P. ratio was constant throughout the year.
(ii) Sales for January and October were 1½ times the average monthly sales while
sales for December were twice the average monthly sales.
(iii) Bad Debts are shown after adjusting a recovery of ` 7,000 of Bad Debt for a
sale made in July, 2013.
(iv) Manager’s salary was increased by ` 2,000 p.m. from 1.5.2016.
(v) All investments were sold in April, 2016.

(vi) The entire audit fees relates to company.
: 66 : PROFIT PRIOR TO INCORPORATION

Q. 2. Enar Pvt. Ltd. was registered on 1st June, 2016 took over the business of Arti Agencies
effective from 1st January, 2016.
The consideration agreed is ` 4,80,000. Interest @ 6% p.a. is payable.
The company issued for cash consideration 30,000 Equity Shares of ` 10 @ ` 11 and 7%
Debentures for ` 2,00,000 on 30th June, 2016. The consideration was settled on same date.
In addition to the items arising from above data the following items of income and
expenses appeared in the account for the year ended 31st December, 2016.
Sales ` 2,70,000
Cost of Sales ` 1,62,000
Salaries ` 30,000 (Including Salary to Naru)
Depreciation ` 1,500
Sales Commission @ 5% on Sales
Directors Meeting Fee ` 1,200
Provision for Income Tax ` 8,000
Rent ` 6,000
Preliminary expenses ` 1,800 (to be written off)
Dividend (Proposed) ` 4,500
Notes :
(1) Sales for each month of July to Dec. 2016, was twice the monthly sales of
January to June, 2016.
(2) Mr. Naru was a working Partner in Firm entitled to remuneration @ ` 1,500 per
month. From 1st June 2016, he was made Managing Director of Company
entitled to Salary @ ` 2,500 per month. The remaining salary is to clerks
employed during period 1st April to 31st August.
(3) Mr. Ravi owns premises. He charged rent @ ` 300 per month upto 1st July,
2016 and @ ` 700 per month thereafter.
Prepare an account showing amount to be treated as Capital Reserve and Revenue Profit.
Q. 3. The partners of Maitri Agencies decided to convert the partnership into a private limited
company called MA(P) Ltd. with effect from 1st January, 2016. The consideration was
agreed at ` 1,17,00,000 based on the firm's Balance Sheet as at 31st December, 2015.
However, due to some procedural difficulties, the company could be incorporated only on
1st April, 2016. Meanwhile, the business was continued on behalf of the company and the
consideration was settled on that day with interest at 12% per annum. The same books of
accounts were continued by the company which closed its account for the first time on
31st March, 2017 and prepared following summarised profit and loss account :

Sales 2,34,00,000
Cost of goods sold 1,63,80,000
Salaries 11,70,000
Depreciation 1,80,000
Advertisements 7,02,000
Discounts 11,70,000
Managing Directors remuneration 90,000
Miscellaneous office expenses 1,20,000
Office cum show room rent 7,20,000
Interest 9,51,000
2,14,83,000
Profit 19,17,000
The company's only borrowal was a loan of ` 50,00,000 at 12% p.a. to pay the purchase
consideration due to the firm.
The company was able to double the average monthly sales of the firm, from 1st April,
2016 but the salaries trebled from that date. It has to occupy additional space from
1st July, 2016 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.
Q. 4. New Ventures Ltd. was incorporated on 1st July, 2016 with an authorised capital
consisting of 5,000 equity shares of ` 10 each to take over the running business of
Rundown Brothers as from 1st April, 2016.
The following is the summarised Profit and Loss Account for the year ended 31st March, 2017.
` `
Sales
1st April, 2016 to 30th June, 2016 6,000
1st July, 2016 to 31st March, 2017 19,000 25,000
Expenses
Cost of Sales for the year 16,000
Administrative expenses 1,768
Selling commission 875
Goodwill written off 200
Interest on P.C. paid on 1.12.2016 373
Distribution expenses
(60 per cent variable) 1,250
Preliminary expenses written off 330
Debenture interest 320
Depreciation 444
Directors' fees 100 21,660
Net Profit 3,340
The company deals in one type of product. The unit cost of sales was reduced by
10 per cent in the post incorporation period as compared to the pre-incorporation
period in the year.
You are required to apportion the net profit amount between pre-incorporation and
post-incorporation periods showing the basis of apportionment.

Q. 5. The Kalpana Ltd. was registered on 1st July, 2016 to take over the business of Natu
Brothers from 1st April, 2016. The company was granted certificate to commence
business on 31st October, 2016. From the following information, calculate the profit
earned by the company in 'pre' and 'post' incorporation periods.
(1) Sales during the period April - March, 2017 amounted to ` 72,000. The trend of
the sales was as under :
April and May half the average sale in each month.
August, September and October average sales in each month.
January twice the average sales
February and March half the average sale in each month.
(2) Cost of goods sold ` 18,000
(3) Rent and rates ` 4,000
(4) Salaries ` 1,800
(There were three employees in the pre-incorporation period and four employees in
the post - incorporation period)
(5) Bad debts ` 720
(6) Interest on purchase price (upto 31st October, 2016) ` 630
(7) Expenses exclusively related to the company ` 2,000.
(8) Partner's salaries ` 1,500
(9) Commission on sales ` 480
(10) Manager's salary ` 10,500 (The manager whose salary was ` 6,000 p.a. was
replaced on 1st July, 2016 and his successor is being paid `12,000 per year)
(11) Provision for income-tax ` 1,000.
(12) Donation to a political party given by the company ` 5,000.
Q. 6. Kalyan Kumar formed a private limited company under the name of Kalyan Pvt Ltd., to
take over his existing business as form April, 1, 2016, but the company was not
incorporated until July 1, 2016. No entries relating to transfer of the business were
entered in the books, which were carried on without a break until March 31, 2017.

The following Trial Balance was extracted from the books as on March 31, 2017 :
Debit Credit
` `
Stock April 1, 2016 4,300
Sales 27,800
Purchases 18,900
Carriage outward 330
Traveller's Commission 750
Office Salaries and Expenses 2,100
Rent and Rates 1,200
Kalyan Kumar's Capital A/c. April 1, 2016 23,000
Directors' Fees 1,800
Fixed Assets 13,400
Current Liabilities 3,700
Current Assets (other than stock) 11,200
Preliminary Expenses 520
54,500 54,500
You are also given the following information :
(a) Stock, March 31, 2017, ` 4,400
(b) The purchase consideration was agreed at ` 30,000 to be satisfied by the
issue of 3,000 equity shares of ` 10 each.
(c) The gross profit margin is constant and the monthly sales in April, 2016, February,
2017 and March, 2017 are double the monthly sales for the remaining months of the
year.
(d) The Preliminary expenses are to be written off.
(e) The provision for tax is to be made @ 30%.
Prepare Final Accounts.

CHAPTER-7
(I) Investment in fixed interest securities

Accounting Procedure
1. When the given transaction is at ex - interest price, the price itself is
cost and additionally, the interest should be recorded in interest column.
2. When the transaction is given at cum-interest price, the given price should
be bifercated into cost and interest for accounting purpose.
3. Record the entry for receiving half yearly interest on all the securities in
hand on each interest date (hidden adjustment).
4. When the investments are sold, the profit or loss on sale should be
calculated immediately (taking weighted average) and should be
transferred to profit and loss a/c.
5. If no specification is given, the price should be concluded as Ex-Interest Price.
6. At the time of recording closing balance accrued interest on closing balance
should be credited to interest column and at the time of recording opening
balance, accrued should be debited to interest column (hidden adjustment).
Treatment of Convertible Debentures :
When a company converts its debenture into shares, for a debenture holder, it
is a sort of barter exchange where he surrenders debentures and receives
equity shares in return.
Entry :
Investment in equity shares of ______ Ltd. A/c Dr. xx
To Investment in Debentures of ______ Ltd. A/c xx
Note :1. The cost of debentures surrendered will be considered as cost of
equity shares acquired and there will be no profit or loss on
conversion. The profit or loss will arise in future when these equity
shares will be sold.
2. At the time of surrender of debentures, the debentureholder will
receive interest on debentures surrendered upto the date of
surrender because now a fixed interest security is getting
converted into variable interest security (hidden adjustment).
: 71 : INVESTMENT ACCOUNTS
(II) Investment Account of Equity Shares : W hen the equity shares are
purchased the payment itself is considered as cost because this is a variable
interest security and accrued dividend therein cannot be estimated.
Important Adjustments :
1. Treatment of Bonus Shares : W hen bonus shares are received it is

technically not a financial transaction because the cost involved is NIL
but still in investment a/c, the entry should be passed in quantity column
as bonus shares received will reduce average cost of investment.
2. Treatment of Right Issue : When the right shares are offered the
shareholders has following two options :
(a) Subscribe for shares : this is like a normal purchase of investment
(b) Renounce the right : the consideration received on transfer of

right in favour of some other person is considered as a sundry
income to be credited to profit / loss account.
3. Treatment of Final Dividend : When the dividend is received, it is to

be bifercated into two parts :
(a) pre-acquisition period dividend - it is to be considered as a

capital receipt which should be credited to cost column so as to
reduce the cost of investment
(b) post-acquisition period dividend - it is a routine revenue income

to be credited in dividend column.
4. Treatment of Interim Dividend : To be treated as revenue income and

should be credited to Dividend column
5. Sale of Investment : Calculate profit / loss on sale on weighted

average cost basis.
Q. 1. Mr. A has made investment in 12% Debentures of X Ltd. (Interest dates March 31 and
September 30). From the following details prepare Investment account in the books
of Mr. A for the year 2012.
1.1.2012 Purchased 300 Debentures @ 96 Ex - interest
1.3.2012 Purchased 200 Debentures @ 99 Cum - interest
1.8.2012 Sold 100 Debentures @ 98 Ex - interest
1.12.2012 Purchased 200 Debentures @ 97.
Q. 2. Calcutta Investments hold 400, 12% Debentures of ` 100 each in Acme Ltd. as on
1st April, 2010 at a cost of ` 50,000. Interest is payable on 30th June and 31st December
each year. On 1st June, 2010, 200 debentures are purchased cum interest at ` 21,400.
On 1st November, 2010, 200 debentures are purchased ex-interest at ` 19,200. On
31st December, 2010, 300 debentures are sold cum-interest for ` 32,250.
Prepare Investment account valuing closing stock as on 31st March, 2011 at cost or market
price whichever is lower. The debentures were quoted at ` 98 on 31st March, 2011.
Q. 3. A purchased on 1st March, 2011 ` 24,000 5% Bharat Debenture Stock at 90

cum-interest, being payable on 31st March and 30th September each year. Stamp and
expenses on purchase amounted to ` 20 and brokerage at 2% was charged. Interest for
the half year was received on the due date. On 1st September, ` 10,000 of the stock was
sold at 92 ex-interest less brokerage at 2%. On 30th September, ` 8,000 stock was
purchased at 91 ex-interest plus brokerage at 2% and charges ` 10. On 1st December,
` 6,000 stock was sold at 94 cum interest less brokerage 2%. The market price of stock
on 31st December was ` 92. Show the Investment Account for the year ended
31st December, making all calculation in months.
Q. 4. Bharat Finance Ltd. purchased on 1st May, 2010 13.5% convertible debentures in Glance
Ltd. of the face value of ` 1,00,000 @ 105. Interest on debentures is payable each year on
31st March and 30th September. The following were the other transactions with regard to
these debentures carried by Bharat Finance Ltd. in 2010.
Aug.1 Purchased ` 50,000 Debentures @ 107 cum-interest.
Oct. 31 Sold ` 40,000 Debentures @ 103.
Nov. 30 Receipt of 2,200 Equity Shares in Glance Ltd. of ` 10 each in conversion of
20% of the Debentures held.
Dec.15 Purchased 1000 Equity Shares in Glance Ltd. @ ` 16.
The market value of the Debentures and Equity Shares in Glance Ltd. at the end of
2010 was respectively 96 and ` 15.
The accounting year of the Bharat Ltd. is the Calendar year. Prepare the Debenture
Investment Account in the books of Bharat Ltd. on Weighted Average Cost Basis.
Q. 5. On 1.1.2010, sunder had 25,000 equity shares of "X" Ltd. a book value of ` 15 per
share (Purchased on 1.10.2009). On 20.6.2010, he purchased another 5,000 shares
of the company at ` 16 per share. The directors of "X" Ltd. announced a bonus and
right issue. The terms of the issue are as follows :
Bonus basis 1 : 6 (Date 16.8.2010)
Rights basis 3 : 7 (Date 31.8.2010) Price ` 15 per share.
Due date for payment 30.9.2010.
Shareholders can transfer their rights in full or in part. Accordingly Sundar Sold
33-1/3% of his entitlement to Shekhar for a consideration of ` 2 per share.
Dividends : Dividends for the year ended 31.3.2010 at the rate of 20% were declared
by X Ltd. and received by Sundar on 31.10.2010.
On 15.11.2010, Sunder sold 25,000 equity shares at a premium of ` 5 per share.
You are required to prepare Investment Account.
For your exercise, assume that the books are closed on 31.12.2010 and shares are
valued at average cost.
Q. 6. Mr. Brown has made following transactions during the financial year 2016-2017.
15.6.2016 :- Purchased 150000 equity shares of ` 10 each in Alpha Ltd.
for ` 25 each through a broker, who charged brokerage @ 2%.
14.10.2016 :- Alpha Ltd. made a bonus issue of two shares for every three
shares held .
31.10.2016 :- Sold 80,000 shares in Alpha Ltd. for `22 each.
1-1-17 :- Received 15% Interim dividend on equity shares of Alpha Ltd.
Prepare Investment Account.
Q.7. Mr. White has given following details of his investment in equity shares of TCS Ltd.
1.4.16 :- Held 20,000 equity shares as detailed below.
(a) 5,000 shares purchased on 1.4.15 -@ 20 each
(b) 5000 shares purchased on 1.1.16 -@ 22 each
(c) 5000 shares purchased on 1.2.16 -@ 21 each
(d) 5000 shares purchased on 1.3.16 -@ 23 each
1.5.16 :- Purchased 5000 equity share 22 each
1.6.16 :- Received Bonus shs. from TCS Ltd. @ of 1 share for 2 held.
1.7.16 :- Received Rights offer from TCS Ltd. @ 1:1 at Rs. 15 per share. All
shares were subscribed.
1.8.16 :- Received Dividend @ 20% from TCS Ltd. for the year ended on 31.3.16.
You are required to calculate dividend and discuss its accounting Treatment.
CHAPTER-8
Insurance contract is a contract of indemnity. Under this contract an insurance company

indemnifies the insured for loss of property due to specified reasons (fire, flood,
earthquake etc.) A business organisation usually gets it's property insured against the risk
of fire and other natural calamities. After the happening of fire or accident, the business
organisation has to estimate the loss and lodge a claim with insurance company.
In this chapter calculation of the claim for the following are discussed :
1. Loss of Stock - in - Trade
2. Loss of Profit or Consequential Loss
Fire Claims - Loss of Stock :
Steps for Calculating the claim
1. Prepare the Trading A/c for the earlier accounting years & calculating the gross profit.
2. Calculate the gross profit ratios for the earlier accounting years & select a gross
profit ratio for the memorandum trading account.
3. In order to ascertain the closing stock (i.e.) stock on hand as on the date of fire
prepare a memorandum Trading A/c. This A/c is from the beginning of the
Accounting year to the date of fire.
4. Record everything that is relevant in the memorandum Trading A/c.
5. Calculate the gross profit as a percentage of sales on the basis of gross profit
ratio in step 2.
6. The memorandum Trading A/c should be balanced. The balancing figure would
represent closing stock.
7. Statement of claim
Closing Stock xx
(-) Salvage (xx)
Amount of loss or claim xx
8. Average clause :
If closing stock is greater than the amount of policy
Amount of Loss x Policy
Amount of claim =
Total closing stock
: 75 : FIRE INSURANCE CLAIMS

Adjustment :
1. The Stock should always be valued at cost. If there is any undervaluation or
overvaluation then the stock should be brought back to cost.
2. Purchases & Sales should include only purchases & sales of goods. Assets
purchased or sold should be excluded from the purchases & Sales.
3. Unrecorded purchases and sales if any should be recorded
4. Purchases should include those goods which have been actually received
before the date of fire. Whether the invoice is received or not is not material.
Similarly Sales should include only those goods which have been despatched
before the date of fire.
5. Salvage should be valued either at cost or market value whichever is less.
6. The Insurance company would compensate the insured to the full extent of fire
fighting expenses.
7. Claim for loss of stock
Without average Clause With average clause

Claim = actual Claim = Loss of x Policy amount
loss or policy amount stock Closing Stock
whichever is less on date
of fire
8. After insurance company makes payment of total loss it has rights over
salvage / damage goods. But in practice insurance company does not take
over salvage & deducts the salvage from the claim. If insurance company takes
over the salvaged goods then it will pay full claim without deducting salvage.
The Loss of Profit Policy would cover the following aspects :

(1) Loss of Profit during the period of dislocation
(2) Insured Standing Charges incurred during the period of the dislocation i.e.
wages to skilled workers, salaries to permanent staff members, Interest on
loan, office expenses etc.
(3) Additional Expenses incurred as a consequence of fire i.e. rent paid for an
alternate premises during the period of dislocation

Calculation the claim under loss of profit policy :
(1) Compare the period of dislocation with the period of indemnity. Calculation for
loss of profit would for the period whichever is shorter.
(2) Calculate the adjusted standard turnover. The Adjusted Standard is also termed
as expected sales.
(3) Calculate the indemnity period turnover. This turnover is also termed as actual sale.
(4) Calculate the Short Sales
Short Sales = Expected Sales Actual Sales
(5) Calculate the Gross Profit Ratio
(Net Profit of last financial + Insured Standing
G.P.Ratio = year before fire Charges)
x 100
Sales of last financial year before fire
If there is a net loss then

[Net Loss x Insured standing
charges]
GP ratio = Insured standing charges -
All standing
charges
x 100
Sales of last financial year before fire
The G.P.Ratio as calculated above is revised for any changes that occur during the
current year for e.g. expected increase in wages, expected saving in costs due to
installation of machine etc.
Adjusted G.P.Ratio = G.P.Ratio + Trend
(6) Calculate the Loss of Profit
Loss of Profit = Short Sales x G.P. Ratio
(7) Calculate the claim for Additional Expenses
It is restricted to the least of the following :
(a) Actual Additional Expenses
(b) Additional Gross Profit
Additional Sales x Gross Profit Ratio
(If Given)
OR
indemnity turnover x Gross Profit Ratio

(c) Gross Profit on Adjusted Annual Turnover
Gross profit on adjusted annual turnover

x Actual additional expenses
Gross profit on adjusted annual turnover
+ uninsured standing charges
(8) Prepare a Statement of Claim :
Loss of Profit (Step 6) x
(+) Additional Expenses (Step 7) x
(-) Savings in standing charges x
TOTAL LOSS OF PROFIT xx
(9) Average Clause
If Gross Profit on > Amount of policy
Adjusted Annual Turnover
Policy Amount
Amount of claim Total Loss of Profit x
Gross Profit on Adjusted annual turnover
If there are any fire fighting expenses then in respect of such expenses the Average
clause is not applicable i.e. insurance company would indemnify to the full extent of
the expenses.

Q. 1. Fire occurred in the godown of M/s. SUN BEAM LTD., on 4th May, 2017. All the stock
was destroyed with the exception of goods ` 13,000. Following particulars are
available from the Books of Accounts of the Firm :
`
Stock on 1st January, 2016 36,000
Stock on 31st December, 2016 66,000
Purchase during 2016 4,80,000
Sales during 2016 6,00,000
Purchases during 2017 upto the date of fire 2,30,000
Sales during 2017 upto the date of fire 3,00,000
On 20th December, 2016 also fire broke out and destroyed stock at genuine cost
` 10,000. There was a practice in the firm to value stock at cost less 10%. But all of a
sudden they changed this practice and valued stock on 31st Dec. 2016 at cost plus 10%.
The amount of the policy was ` 40,000 and claim was subject to an average clause.
Q. 2. The following information is available from the books of a company whose premises
were destroyed by a fire on 31st May, 2017 :
`
Stock 1.1.2016 90,000
Purchases 1.1.2016 to 31.12.2016 4,24,000
Sales 1.1.2016 to 31.12.2016 5,00,000
Stock 31.12.2016 1,32,000
The stock on 1st January, 2016 was valued at 90% of cost. However this practice was
changed and the stock on 31st December, 2016 was valued at 110% of cost. After
the accounts of 2016 were audited it was found that purchase of office equipment of
` 4,000 was wrongly included in the figure of purchases given above.
The information for the period of 1st January, 2017 to 31st May, 2017 is as follows :
Purchases 3,00,000
Sales (excluding goods sent on sale or return basis) 4,00,000
During January to May 2017 goods of the cost price of ` 40,000 were sent to customers on
sale or return basis. On the date of fire customers had approved half the value of goods sent.
The Gross Profit margin charged on the above is the normal margin. The salvage was
` 10,000. Calculate the amount of the claim to be submitted to the Insurance Company.
Q. 3. A fire had broken in the factory of M TRADERS on 17th October, 2016 and destroyed
the stock of goods in their godown. The following figures are available :
`
Opening stock on 1. 1. 2015 31,570
Sales during the year of 2015 3,50,000
Purchases during the year of 2015 1,83,200
Purchase from 1. 1. 2016 to 17.10.2016 1,63,300
Sales from 1. 1. 2016 to 17.10.2016 2,69,350
Closing stock on 31.12.2015 40,590
Other details are as follows:
(a) A theft took place in September, 2016 and goods of sales value of ` 19,040
were stolen and lost but were not recorded in the books.
(b) Goods costing ` 5,205 were given away as free samples in 2016 but no
entries were passed.
(c) The goods saved from fire were subsequently sold by the firm for ` 17,600 at a
loss of ` 1,200.
(d) The stock of goods was insured by the firm for ` 38,100 and there was an
average clause in the policy.
(e) The firm as a practice valued the stock of goods at 10% above cost.
Calculate the amount of claim.
Q. 4. A fire occurred in the premises of M/s. Fire proof Co. on 31st August, 2016. From the
following particulars relating to the period from 1st April, 2016 to 31st August, 2016,
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 an average clause.
`
(i) Stock as per Balance Sheet at 31-03-2016 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 consignee on 16th August, 2016, lying unsold with them 16,500
(vii) Cost of goods distributed as free samples 1,500
While valuing the stock at 31st March, 2016, ` 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.

Q. 5. The premises of Emarbee Ltd. were engulfed by fire on 16th November, 2016 whereby
substantial stock was severely destroyed. The records available with the company
yield the following information.
a. For year ended 31st March, 2016 :
` `
To Stocks 1,50,000 By Sales 30,00,000
To Purchases 12,30,000 By Stock 1,80,000
To Freight & Direct Expenses 3,00,000
To Wages 6,00,000
To Gross Profit 9,00,000
31,80,000 31,80,000
b. For half year ended 30th September, 2016
Sales ` 14,00,000
Purchases ` 8,24,000
c. For period from 1st October to date of fire sales and purchases were at same
monthly rate as for period 1st April, 2016 to 30th September, 2016.
d. The Freight, Wages and Direct Expenses during period 1st April, 2016 to date
of fire were at the same rate per month as in the last year.
e. Salvage value is 10% of Cost of Stocks.
f. The sum insured is ` 2,00,000 and policy contains Average Clause.
Q. 6. The store house of TOP MANUFACTURER caught fire on 31st March, 2017 and due
to fire a great part of stock was burnt to ashes. The stock was covered by insurance
policy of ` 1,00,000 and claim was subject to an average clause From the following
information prepare statement showing claim which Top Manufacturer will get from
the insurance company.
(i) They used to :
(a) Sell goods to wholesalers on one month credit at wholesale price which
is a catalogue price less 15%.
Further cash discount of 5% on wholesale price is allowed to those
wholesalers who made immediate payment.
(b) Sell goods to retailers at retailer’s price which is a catalogue price less
10%. Terms cash payment only.
(c) Sales to Direct consumers at catalogue price which is cost plus 100%.
(ii) Figure for the goods sold or despatched were:
(a) Credit sale upto 31st March, 2017 to wholesalers at wholesale price
` 3,40,000 worth.
(b) Net Cash sales (after deducting cash discount) upto 31st March, 2017
wholesalers ` 3,23,000 worth.
(c) Cash sales to retailers upto 31st March, 2017 ` 90,000 worth.
(d) Sales to direct consumers upto 31st March, 2017 ` 3,00,000
(iii) Stock on 1st January, 2017 was ` 2,50,000 at catalogue price. Purchases at
catalogue price from 1st Jan., 2017 to 31st March, 2017 were ` 12,50,000.
(iv) Stock salvaged ` 45,000 at cost price.

Q. 7. A fire occurred in the godown of Maruti Ltd. on 31.3.2017 destroying the major
portion of the stock. The following particulars were, however, available.
`
Stock on 1. 1. 2016 31,400
Stock on 31.12.2016 35,600
Sales for the year 2016 1,00,500
Sales from 1.1.2017 to 31.3.2017 40,250
Purchases for the year 2016 80,000
Purchases from 1.1.2017 to 31.3.2017 12,600
Included in the stock of 31.12.2015 were some shop-soiled goods which originally
cost ` 2,000 but were valued at ` 1,400. Half of this stock was sold for ` 500 in
the year 2016 and the remaining stock was valued at ` 600 on 31.12.2016. Half of
this was sold for ` 250 in March, 2017.
The unsold portion was considered to be worth 80% of the original cost. Subject to
this rate of gross profit was uniform.
The sum insured was ` 15,000 and there was an average clause in the policy. The
stock salvaged worth ` 1,200.
Find out the amount of claim to be lodged with the insurance company for loss of stock.
Q. 8. M/s. Inflammable Ltd. suffered loss of stock due to fire on October 31st, 2016. From
the following records calculate claim to be made by the shop.
`
(1) Stock on December 31st 2014 (including stock purchased during the year at
` 8,000 valued at ` 4,000 because of poor selling line) 1,00,000
(2) Wages paid for 2015 (including paid for capital expenditure ` 2,000,
wages outstanding 1,500) 30,000
(3) Freight for 2015 5,000
(4) Purchase for 2015 (including purchase of furniture ` 1,500) 1,20,000
(5) Sales for 2015 (including sale of 1/4th of the stock for ` 1,000 which had
a poor selling line and which was valued at ` 4,000 on 31st December, 2014) 2,46,000
(6) Stock on December 31st 2015 (including remaining stock which had a poor
selling line at the same Basis) 42,000
(7) Purchase upto 31st October, 2016 1,42,800
(8) Sales upto 31st October, 2016 (including sale of 1/3rd remaining stock which
had a poor selling line at ` 800) 1,42,900
The abnormal goods were to be valued at 80% of the original cost.

Q. 9. A fire occurred on 1st July, 2016, in the premises of Arolite Ltd., and business was
practically disorganised upto 30th November, 2016. From the books of account, the
following information was extracted :-
`
1. Actual turnover from 1st July, 2016, to 30th Nov. 2016 60,000
2. Turnover from 1st July, 2015 to 30th Nov. 2015 2,00,000
3. Net profit for the last financial year 90,000
4. Insured standing charges for the last financial year 60,000
5. Turnover for the last financial year 5,00,000
6. Turnover for the year ending 30th June, 2016 5,50,000
7. Total standing charges for the year 72,000
The company incurred additional expenses amounting to ` 9,000 which reduced the
loss in turnover. There was also a saving during the indemnity period of ` 2,486.
The company holds a "Loss of profit" policy for ` 1,65,000 having an indemnity
period for 6 months. There had been a considerable increase in trade and it had
been agreed that an adjustment of 20% be made in respect of upward trend in turnover.
Compute claim under "Loss of Profit insurance.
Q. 10. The premises of a company were partly destroyed by fire which took place on 1st
March, 2017 and as a result of which the business was disorganised from 1st March
to 31st July, 2017. Accounts are closed on 31st December every year. The company
is insured under a Loss of Profits policy for ` 7,50,000. The period of indemnity
specified in the policy is 6 months. From the following information, you are required
to compute the amount of claim under the Loss of profits policy :
`
Turnover for the year 2016 40,00,000
Net Profits for the year 2016 2,40,000
Insured standing charges 4,80,000
Uninsured standing charges 80,000
Turnover during the period of dislocation i.e. from 1.3.2017 to 31.7.2017 8,00,000
Standard turnover for the corresponding period in the preceding year
i.e. 1.3.2016 to 31.7.2016 20,00,000
Annual turnover for the year immediately preceding the fire
i.e. from 1.3.2016 to 29.2.2017 44,00,000
Increased cost of working 1,50,000
Saving in insured standing charges 30,000
Reduction in turnover avoided through increase in working cost 4,00,000
Owing to reasons acceptable to the insurer, the "special circumstances clause" stipulates for:
(a) Increase of turnover (standard and annual) by 10% and
(b) Increase of rate of gross profit by 2%.

Q. 11. A Loss of profit policy was taken for ` 80,000. Fire occurred on 15th March, 2017.
Indemnity period was for three months. Net profit for 2016 year ending on 31st December
was ` 56,000 and standing charges (all insured) amounted ` 49,600. Determine claim
from the following details available from quarterly sales tax returns :
2014 2015 2016 2017
Sales
` ` ` `
From 1st January to 31st March 1,20,000 1,30,000 1,42,000 1,30,000
From 1st April to 30th June 80,000 90,000 1,00,000 40,000
From 1st July to 30th Sept. 1,00,000 1,10,000 1,20,000 1,00,000
From 1st Oct. to 31st Dec. 1,36,000 1,50,000 1,66,000 1,60,000
Sales from 16.3.2016 to 31.3.2016 were 28,000
Sales from 16.3.2017 to 31.3.2017 were Nil
Q. 12. Wye Ltd. had taken out a loss of profit policy for ` 3,00,000 being ` 1,30,000 for
net profit and ` 1,70,000 for fixed expenses. Expenses to the extent of ` 30,000
were not insured. During 2015 the company earned a profit of ` 90,000 after charging
` 2,00,000, standing charges on a sale of ` 32,50,000. On 1st June, 2016 there was
a fire as a result of which sales suffered a great deal for a period of six months.
The details of sales are as under :
2015 2016 2015 2016
January 2,00,000 2,20,000 June 3,60,000 50,000
February 2,00,000 2,20,000 July 4,00,000 50,000
March 2,50,000 2,75,000 August 3,40,000 60,000
April 2,50,000 2,75,000 September 3,00,000 80,000
May 3,00,000 3,30,000 October 2,50,000 1,10,000
November 2,50,000 1,50,000
December 1,50,000 1,80,000
The indemnity period according to the policy was 4 months. ` 2,000 was spent on
putting the fire out and additional expenses as a consequence of fire were ` 16,028
but a saving of ` 3,000 was affected. Towards the end of 2015 a machine was
installed which would have resulted in a net saving equal to 2% of sales.

Q. 13. S & M Ltd. give the following Trading and Profit and Loss Account for year ended
31st December, 2016:
Trading and Profit and Loss Account for the year ended 31st December, 2016
` `
To Opening Stock 50,000 By Sales 8,00,000
To Purchases 3,00,000 By Closing stock 70,000
To Wages (` 20,000 for skilled
labour) 1,60,000
To Manufacturing expenses 1,20,000
To Gross Profit 2,40,000
8,70,000 8,70,000
To Office Administrative Expenses 60,000 By Gross profit 2,40,000
To Advertising 20,000
To Selling expenses (Fixed) 40,000
To Commission on sales 48,000
To Carriage outward 16,000
To Net profit 56,000
2,40,000 2,40,000
The company had taken out policies both against loss of stock and against loss of
profit, the amounts being ` 80,000 and ` 1,72,000. A fire occurred on 1st May, 2017
and as a result of which sales were seriously affected for a period of 4 months. You
are given the following further information:
(a) Purchases, wages and other manufacturing expenses for the first 4 months of
2017 were ` 1,00,000, ` 50,000 and ` 36,000 respectively.
(b) Sales for the same period were ` 2,40,000.
(c) Other sales figures were as follows :
`
From 1st January 2016 to 30th April, 2016 3,00,000
From 1st May 2016 to 31st August, 2016 3,60,000
From 1st May, 2017 to 31st August, 2017 60,000
(d) Due to rise in wages, gross profit during 2017 was expected to decline by 2%
on sales.
(e) Additional expenses incurred during the period after fire amounted to
` 1,40,000. The amount of the policy included ` 1,20,000 for expenses leaving
` 20,000 uncovered. Ascertain the claim for stock and for loss of profit.
All workings should form part of your answers.

Q. 14. CCL wants to take up a loss of profit policy. Turnover during the current year is
expected to increase by 20%. The company will avail overdraft facilities from its bank
@ 15% interest to boost up the sales. The average daily overdraft balance will be
around ` 3 lakhs. All other fixed expenses will remain same. The following further
details are also available from the previous year’s account.
Total variable expenses 24,00,000
Fixed expenses:
Salaries 3,30,000
Rent, Rates, and Taxes 30,000
Travelling expenses 50,000
Postage, Telegram, Telephone 60,000
Director’s fees 10,000
Audit fees 20,000
Miscellaneous income 70,000
Net Profit 4,20,000
Determine the amount of policy to be taken for the current year.

CHAPTER - 9 HIRE PURCHASE& INSTALLMENT SELLING
Definition :
Under hire purchase H.P. vendor provides delivery of the goods to H.P. buyer without
receiving entire sale price. H.P. buyer takes the delivery on making an immediate payment
/ spot payment / Down payment. The balance price is paid in installments including
interest.
Clear title / ownership is transferred by H.P. vendor to H.P. buyer on receipt of entire
selling Price. If H.P. buyer makes a default then H.P. vendor will repossess the goods
without returning the price already received.
Important Terms :
1. Cash Price : It is prevailing market price of the goods on the date of purchase
agreement. In other words, it is a price at which asset can be bought on out right basis.
It will never include interest.
2. Hire Purchase Price (H.P.P.) : It is the price payable by H.P. buyer to H.P. vendor
under H.P. agreement. It will consist of cash price + total Interest.
3. Down payment / Spot payment / Deposit : It is the portion of cash price paid by
H.P. buyer to H.P. vendor at the time of taking delivery of the goods. It will never
include interest.
4. Installments : These are periodic payments made by H.P. buyer to H.P. vendor
under H.P. agreement. It will consist of portion of cash price and interest on
outstanding cash price.
5. Default : When H.P. buyer does not pay the installment on due date then it is called
as default.
6. Repossession : When H.P. vendor takes back the goods due to default made by
H.P. buyer then it is called as repossession.
Accounting Treatment
Full Cash price method (Credit Purchase And Credit Sales method)
Sr. Particulars Hire Purchase Buyer Hire Purchase Vendor
No.
1) For Delivery of Asset Asset A/c Dr. H.P. Buyer A/c Dr.
To H.P. Vendor A/c To Sales price
(At cash price) (At cash price)
2) For down payment H.P. Vendor A/c Dr. Cash/Bank A/c Dr.
To Cash/Bank A/c To H.P. Buyer A/c
3) For Interest Interest A/c Dr. H.P. Buyer A/c
To H.P. Vendor A/c To Interest A/c
4) For Installments Paid H.P. Vendor A/c Dr. Cash/Bank A/c Dr.
To Cash / Bank A/c To H.P. Buyer A/c
5) For Depreciation Depreciation A/c Dr. ---
To Asset A/c
6) For Transfer P & L A/c Dr. Interest A/c Dr.
To Depreciation A/c To P & L A/c
To Interest A/c
: 87 :
Accounting treatment for Repossession :
In the books of H.P. Buyer
Complete repossession Partial Repossession
a) For HP Vendor A/c Dr. HP Vendor A/c Dr.
Repossession To Asset A/c To Asset A/c
[For balance in HP Vendor A/c] [At Agreed Repossession Value
(A.R.V)]
b) For loss on Profit / Loss A/c Dr. Profit/Loss A/c Dr.
Repossession To Asset A/c To Asset A/c
[For Balance in Asset A/c] [ WDV of Asset repossessed –
A.R.V }
In the books of H.P. Vendor

1) For Goods Repossessed A/c Dr. {At A.R.V}
Repossession : To HP Buyer A/c

Note :
If COMPLETE REPOSSESSION, then
after passing the above entry if
there is balance in HP Buyer A/c, then the same should be
transferred to PROFIT/LOSS A/C.
2) For expenses
incurred on Goods Repossessed A/c. Dr.
Repossessed To Cash Bank A/c
goods :
3) For Sale of Cash / Bank A/c Dr.
repossessed To Goods Repossessed A/c
goods:
4) For profit Goods Repossessed A/c Dr.
pm sale: To Profit / Loss A/c
5) For loss Profit / Loss A/c Dr.
on sale: To Goods Repossessed A/c
INTEREST SUSPENSE METHOD

Under normal accounting method, interest is credited to H. P. Vendor A/c as and when it
becomes due. However, under interest suspense method, the total interest is credited to
H. P. Vendor A/c. At the time delivery of the asset. This is done with the help of a special
account called as Interest suspense A/c.
Particulars H. P. Buyer H. P. Vendor
1) Delivery of the Asset Assets A/c Dr. Hire Purchase Buyer
(at cash price) A/c Dr.
Interest ( H.P.P.)
Suspense A/c Dr. To Sales A/c
(total interest) (at cash)
To Hire Purchase To Interest Suspense
Vendor A/c A/c
(at H.P.P.) (total interest)
2) Interest Interest A/c Dr. Interest Suspense
To Interest Suspense A/c Dr.
A/c To Interest A/c
(current year) (current year)
: 88 :
Q. 1. From the following particulars prepare necessary accounts in the books of the H.P. Vendor.
`
(1) Cash Price 1,49,000
(2) Down Payment 40,000
(3) Instalments 40,000/- each.
3 annual instalments
(4) Rate of Interest 5% p.a.
Q. 2. From the following particulars calculate interest payable in each year by H.P. Customer.
`
(1) Cash Price 1,49,000
(3) Instalments 40,000 each.
3 annual instalments.
`
(2) Instalments 40,000 each
3 annual instalments.
(3) Rate of Interest 5% p.a.
(1) Payment to made as ` 60,000 each for 5 years
(2) Annuity Value Present value Re. 1/ for 5 years = ` 4.33
Prepare necessary Accounts in the books of vendor under interest suspense method.
Q. 5. G.D. Miling Industries Auraiya purchased an asset on hire-purchase system. They pay
` 1,524 down and ` 5,400 in 3 instalments of ` 1,800 each at the interval of two
years. Hire- vendor charges interest at 10 percent per annum on yearly rests.
Calculate interest payable each year.
Q. 6. M/s India Motors Ltd., sells scooters on the hire-purchase system. The terms of payment
for the sale of scooter are ` 1,000 on delivery, ` 1,040 at the end of the first year, ` 960 at
the end of the second year, and ` 880 at the end of the third year. Inclusive of finance
charges (or interest), Calculate amount of interest included in each instalment.
Q. 7. Dobsons Ltd. had purchased a machinery on hire purchases system from Hind Machinery
Ltd. The terms are that they would pay ` 20,000 down on 1.4.2006 and 5 annual
instalments of ` 11,000 each commencing from 31.3.2007. They charged depreciation on
machinery at the rate of 15% per annum under diminishing balance system.
Hind Machinery Ltd. had charged interest at the rate of 10% p.a.
Show the "Machinery Account" and "Hind Machinery Ltd.". Accounts to record the
above transaction in the books of Dobsons Ltd. till the instalments are paid off.
Dobsons accounting year ended on 31st March in each year.
: 89 : HIRE PURCHASE AND INSTALMENT SELLING
Q. 8. On April 1, B company Ltd. sold machinery worth ` 45,000 to A Company Ltd. on a

hire purchase system. An amount of ` 6,000 is to be paid on delivery and the balance
in five instalments of ` 9,000 each payable annually on April 1. Prepare the Ledger
Accounts in the books of A Company Ltd. for five years. Provide depreciation at the
rate of 20% on the diminishing balances.
Ans. Hire Purchase Price = Downpayment + Installments
= 6,000 + (9,000 x 5)
= 6,000 + 45,000
= ` 51,000
Cash Price = ` 45,000
? Total Interest = HPP - Cash Price
= 51,000 - 45,000
= ` 6,000
Calculation of Interest Payable each year.
Year O/S Hire Purh. Price Ratio
1. 45,000 5
2. 36,000 4
3. 27,000 3
4. 18,000 2
5. 9,000 1
= 15
In the books of A. Co. Ltd.
Dr. Interest A/c. Cr.
31.03 To B.Co. Ltd. A/c. 2,000 31.03 By P& L A/c. 2,000
31.03 To B. Co. Ltd. A/c. 1,600 31.03 By P& L A/c. 1,600
31.03 To B. Co. Ltd. A/c. 1,200 31.03 By P& L A/c. 1,200
31.03 To B. Co. Ltd. A/c. 800 31.03 By P& L A/c. 800
31.03 To B. Co. Ltd. A/c. 400 31.03 By P& L A/c. 400

Dr. Machinery A/c. Cr.
Apr.1. To B. C. Ltd. A/c. 45,000 31.03 By Depreciation A/c. 9,000
31.03 By Balance c/d. 36,000
45,000 45,000
01.04. To Balance b/d 36,000 31.03 By Depreciation A/c. 7,200
31.03 By Balance c/d. 28,800
36,000 36,000
01.04. To Balance b/d 28,800 31.03. By Depreciation A/c. 5,760
31.03. By Balance c/d. 23,040
28,800 28,800
01.04. To Balance b/d 23,040 31.03. By Depreciation A/c. 4,608
31.03. By Balance c/d 18,432
23,040 23,040
01.04. To Balance b/d 18,432 31.03 By Depreciation A/c. 3,686
31.03 By Balance c/d 14,746
18,432 18,432
01.04. To Balance b/d 14,746
Dr. B.Co. Ltd. A/c. Cr.

01.04. To Cash/Bank A/c. 6,000 01.04. By Machinery A/c. 45,000
31.03 To Balance c/d 41,000 31.03. By Interest A/c. 2,000
47,000 47,000
01.04. To Cash/Bank Ac. 9,000 01.04. By Balance b/d. 41,000
31.03. To Balance c/d. 33,600 31.03. By Interest A/c. 1,600
42,600 42,600
01.04 To Cash/Bank A/c. 9,000 01.04 By Balance b/d 33,600
31.03 To Balance c/d 25,800 31.03 By Interest A/c. 1,200
34,800 34,800
01.04. To Cash/Bank A/c. 9,000 01.04 By Balance b/d 25,800
31.03 To Balance c/d. 17,600 31.03 By Interest A/c. 800
26,600 26,600
01.04. To Cash/Bank A/c. 9,000 01.04 By Balance b/d. 17,600
31.03. To Balance c/d 9,000 31.03 By Interest A/c. 400
18,000 18,000
01.04. To Cash/Bank A/c. 9,000 01.04 By Balance b/d 9,000
9,000 9,000
Q. 9. On October 1, 2009, Eastern Printers purchased a printing machine on a hire

purchase basis, payments to be made ` 10,000 on the said date and the balance in
three half yearly instalment of ` 8,200, ` 7,440 and ` 6,300 commencing from March
31st, 2010. The vendor charged interest at 10% p.a. calculated on half-yearly rests.
The H. P. vendor closes their books annually on March 31.
Determine the cash price of the machine and show the necessary ledger accounts in
the books of the H. P. Vendor.
Q. 10. A firm acquired two tractors under hire purchase agreements, details of which were as follows:
Tractor A Tractor B
Date of purchase 1st July, 2009 1st Jan. 2010
` `
Cash price 14,000 19,000
Deposit 2,000 2,680
Interest (deemed to accrue evenly over the
period of the agreement) 2,400 2,880
Both agreements provided for payment to be made in 24 monthly instalments, commencing
on the last day of the month of purchase, all instalments being paid on due date.
On 30th September 2010 Tractor B was completely destroyed by fire. In full
settlement on 10th October, 2010 the insurance company paid ` 15,000 under a
comprehensive policy out of which ` 12,000 was paid to the hire purchase company
in termination of the agreement. Any balance on the hire purchase company's
account in respect of these transactions was to be written off.
The firm prepared accounts annually to 31st March and provided depreciation on tractors
on a straight line basis at a rate of 20% p.a. rounded off to nearest ten rupees,
apportioned as from the date of purchase and up to the date of disposal.
You required to record these transactions in the following accounts, carrying down the
balances on 31st March, 2010 and 31st March, 2011.
(a) Tractors on hire purchase.
(b) Provision for depreciation of tractors.
(c) Disposal of tractors.
(d) Hire purchase company.
Q. 11. A Ltd. purchases a plant on hire purchase basis for ` 1,00,000 and makes the
payment in the following order:
Down payment ` 20,000,
the 1st instalment after one year ` 40,000;
the 2nd instalment after two years ` 20,000
and the last instalment after three years.
The cash price of the plant is ` 86,000.
You are required to calculate:
(i) the total interest and
(ii) the interest included in each instalment.
Q. 12. Bombay Roadways Ltd. purchased three trucks costing `1,00,000 each from Hindustan
Auto Ltd. on 1st April, 2008 on the hire purchase system. The terms are :
Payment on delivery ` 25,000 for each truck and balance of the principal amount by
3 equal instalments plus interest at 15% per annum to be paid at the end of each year.
Bombay Roadways Ltd. writes off 25% depreciation each year on the diminishing
balance method.

Bombay Roadways Ltd. paid the instalments due on 31st March, 2009 and 31st March,
2010 but could not pay the final instalment.
Hindustan Auto Ltd. re-possess one Truck adjusting its value against the amount due.
The repossession was done on 1st April, 2011 on the basis of 40% depreciation on
the diminishing balance method.
You are required to :
Write up the ledger accounts in the books of Bombay Roadways Ltd. showing the
above transactions upto 1.4.2011 and
Q. 13. M/s Mahmud Mumtaz purchased from Ashok Ltd. 3 machines costing ` 50,000 each
on the hire-purchase system. Payment was to be made ` 30,000 down and the
remainder in 3 equal instalments together with interest @ 9% M/s Mahmud Mumtaz
had written off depreciation @ 20% on diminishing balance. It paid the instalment due
at the end of the first year but could not pay the next. Ashok Ltd. agreed to leave one
machine with the purchaser, adjusting the value of the other two machines against the
amount due. The machine taken back were valued on the basis 30% depreciation
annually. Show the necessary accounts in the books of M/s Mahmud Mumtaz for three
years assuming that final dues were paid in the third year.
Q. 14. On 1st April, 2010, Ashok acquired furniture on the hire purchase system from Real
Aids Ltd. agreeing to pay four semiannual instalments of ` 800 each, commencing
on 30th September, 2010. The cash price of the items was ` 3,010 and an interest of
5% per annum was chargeable.
On 31st December, 2010, Ashok expresses his inability to continue and Real Aids seized
the property. It was agreed that Ashok would pay the due proportion of the instalment upto
the date of seizure and also a further sum of ` 500 towards penalty. At the time of
re-possession, Real Aids valued the furniture at ` 1,500.
The company after incurring ` 200 towards repairs of the furniture sold the items for
` 1,800 on 15th January, 2011.
Show the ledger accounts as they would appear in the books of Real Aids, working
out the profit or loss on the transaction, assuming that the Company passes
hire - purchase transactions through its books as sales.

CHAPTER - 10
If a business is divided into different divisions known as departments - it becomes

desirable to know the profit or loss for each department separately. This merely
involves making out a separate Trading and Profit or Loss Account for each
department. To facilitate this, subsidiary books will be provided with suitable columns
to disclose purchases and sale of each department. Similarly even the stock registers are
prepared in columnar form so that stocks of each department can be known.
Allocation of Expenses :
Some expenses are incurred directly for each department. Such as salary paid to the
employees of the department concerned. But common expenses are to be allocated
to various departments on suitable basis. Various common expenses should be
allocated as under :
1. Rent, Rates, Taxes, Insurance, etc of Building : These should be allocated

in the ratio of space occupied by each department.
2. Lighting : This should be allocated in the ratio of number of Electric points.
3. Staff related Expenses : This should be allocated in the ratio of number of

employees of each department.
5. Sale Related Expenses (Carriage Outward, Bad Debts, Discount Allowed,

Sales Commission etc) should be allocated on the basis of sale of various
department. For this purpose inter departmental transfers should be excluded.
6. Purchase Related Items : (Discount received, carriage inwards, commission

to purchase manager etc) should be allotted in purchase ratio.
Expenses for which neither specific ratio nor suitable basis is available should be
debited in general Profit and Loss Account.
Inter - Departmental Transfers : At times one department uses goods traded by the
other department. The transfer may be at cost at fixed margin of profit or at selling
price. The accounting entry for inter departmental transfer is as follows :
Receiving Department A/c Dr. xx
To Giving department A/c xx
(If the transfer has been made at cost then no further adjustments are required).
: 94 : DEPARTMENTAL ACCOUNTS
INTER DEPARTMENTAL TRANSFER : When one department transfers goods /

services to another department of the same organisation then it is called as inter
departmental transfers. The following effect should be given in departmental trading
account i.e.
Receiving Dept. Dr.
To Sending A/c
Note : Whenever interdepartmental transfers are at cost no further adjustment is required.
Inter departmental transfers at other than cost :
In order to find out the real profitability / efficiency, one department may transfer goods
to another department at transfer price. At year end if such transferred goods remain
unsold then, they shall be valued at cost to receiving department.
Such unsold goods include profit of sending department from owners’ point of view.
Thus, it is necessary to find out realised profit and therefore following accounting
entry should be passed at year end.
General Profit & Loss A/c Dr.
To stock reserve A/c
(Note : In the next year the above entry shall be reversed).
Steps for calculating stock reserve :
(i) Find out closing stock of receiving department.
(ii) Find out transferred goods included in the above closing stock.
(iii) Find out gross profit ratio of sending department.
GP
Gross Profit = x 100
Net Sales + Net Interdepartmental Transfers at S.P.
Note : There is no need to calculate Gross Profit ratio if goods are transferred
at cost + profit.
(iv) Stock reserve = Gross Profit Margin x Transferred goods.

Q. 1. From the following Trial Balance, prepare the Departmental Trading and Profit and
Loss accounts for the year ending March 31, 2011 and Balance Sheet on that date in
the books of Mr. P.
Dr. Cr.
` `
Stock A Dept. 5,400
B Dept. 4,900
Purchases A Dept. 9,800
B Dept. 7,350
Sales A Dept. 16,900
B Dept. 13,520
Wages A Dept. 1,340
B Dept. 240
Rent 1,870
Salaries 1,320
Lighting and Heating 420
Discount Allowed 441
Discount Received 133
Advertising 738
Carriage Inwards 469
Furniture and Fittings 600
Plant and Machinery 4,200
Sundry Debtors 1,820
Capital 9,530
Drawings 900
Cash in hand 32
Cash at Bank 1,980
43,820 43,820
The following information is also provided :
(a) Rent and Lighting and Heating are to be allocated between Factory and Office
in the ratio of 3 : 2.
(b) Rent, Lighting and heating, Salaries and Depreciation are to be apportioned
to A and B Depts. as 2 : 1.
(c) Other Expenses and income are to be apportioned to A and B Depts. on a
suitable basis.
(d) The following adjustments are to be made :
Rent Prepaid ` 370; Lighting and heating outstanding ` 180; and Depreciation
on Furniture and Fittings at 10% p.a.
(e) The stock on March 31, 2011: A Dept. ` 2,478: B Dept. ` 2,401.
(f) Transfer from Dept. A to Dept. B ` 1,200.
Q. 2. A firm had two departments, cloth and ready-made clothes. The clothes were made by the firm
itself out of cloth supplied by the cloth department at its selling price. From the following figures
prepare Departmental Trading and Profit Loss Accounts for the year 2010-2011.
Particulars Cloth Department Ready - made Clothes
` `
Opening Stock on 1.4.2010 3,00,000 50,000
Purchases 20,00,000 ----
Sales 22,00,000 4,50,000
Transfer to Ready-made cloth Department 3,00,000 3,00,000
Expenses - Manufacturing ---- 75,000
Selling Expenses 20,000 6,000
Stock on 31.3.2011 2,00,000 60,000
The stocks in the ready-made clothes department may be considered as consisting of
75% cloth and 25% other expenses. The cloth department earned gross profit at the rate
of 15% in 2009-2010. General expenses of the business as a whole came to `1,10,000.
Q. 3. X Ltd. has two departments A and B. From the following particulars prepare Departmental
Trading Account and Consolidated Trading Account for the year ending 31st March, 2011.
Dept. A Dept. B
Opening Stock at Cost 40,000 24,000
Purchases 1,84,000 1,36,000
Carriage Inward 4,000 4,000
Wages 24,000 16,000
Sales 2,80,000 2,24,000
Purchased goods transferred :
by Deptt. B to Dept. A 20,000
by Deptt. A to Dept. B 16,000
Finished goods transferred :
by Dept. B to Dept. A 70,000
by Dept. A to Dept. B 80,000
Return of Finished Goods :
by Dept. B to Dept. A 20,000
by Dept. A to Dept. B 14,000
Closing Stock :
Purchased goods 9,000 12,000
Finished goods 48,000 28,000
Purchased goods have been transferred mutually at their respective departmental purchases
cost and finished goods at departmental market price and the 20% of the finished stock
(closing) at each department represented finished goods received from the other department.
Q. 4. The following balances were extracted from the books of Vijay Shankar. You are required
to prepare Department Trading and Profit & Loss A/c for the year ended 31st December,
2007 after adjusting the unrealised department profits, if any.
Particulars `)
Dept. A (` `)
Dept. 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 :
(i) Closing Stock Department A ` 1,00,000 including goods from Department B for
` 20,000 at cost to Department A.
(ii) Closing Stock of Department B ` 2,00,000 including goods from Department A for
` 30,000 at cost to Department B.
(iii) Opening Stock of Department A and Department B include goods of the value of
` 10,000 and ` 15,000 taken from Department B and A respectively at cost to
transferee departments.
(iv) The Gross Profit is uniform from year to year.
Q. 5. Department X sells goods to Department Y at a profit of 25% on cost & to

Department Z at a profit of 10% on cost. Department Y sells goods to X & Z at a profit
of 15% & 20% sales, respectively. Department Z charges 20% & 25% profit on cost
to Department X & Y, respectively.
Department Managers are entitled to 10% Commission on Net Profit subject to
Unrealised Profits on Departmental sales being eliminated.
Departmental profits after charging manager's commission, but before adjustment of
unrealised profits are : X = ` 36,000 ; Y = ` 27,000 ; Z = ` 18,000.
Stocks lying at different departments at the year end are as under :
Particulars X Y Z
Transfer from Department X ---- 15,000 11,000
Transfer from Department Y 14,000 ---- 12,000
Transfer from Department Z 6,000 5,000 ----
Find out the correct Departmental Profits after charging Manager's Commission.
Ans. (1) Caln of G.P. RATIO

Receiving X Y Z
Sending
X - 1 1
5 11
Y 15% - 20%
Z 1 1 -
6 5
(2) Caln of Correct Departmental Profits After Commission.

Particulars DEPT. X DEPT. Y DEPT. Z
Given Profit after commission (90) 36,000 27,000 18,000
(+) Commission (10) 4,000 3,000 2,000
Profit Before Commission (100) 40,000 30,000 20,000
(-) Unrealised Profits in Stock of:
Dept. X - (2,100) (1,000)
Dept. Y (3,000) - (1,000)
Dept. Z (1,000) (2,400) -
Realized Profit 36,000 25,000 18,000
(-) Commission (10%) (3,600) (2,550) (1,800)
32,400 22,950 16,200
Q. 6. Complex Ltd. has three departments A B & C. The following information is provided :
Particulars A B C
` ` `
Opening Stock 3,000 4,000 6,000
Consumption of Direct Materials 8,000 12,000 ----
Wages 5,000 10,000 ----
Closing Stock 4,000 14,000 8,000
Sales ---- ---- 34,000
Stock of each department are valued at cost to the department concerned. Stocks of A
department are transferred to B at a margin of 50% above the departmental cost. Stocks of
B department are transferred to C department at a margin of 10% above departmental cost.
Other Expenses :
Salaries ` 2,000
Printing and Stationary ` 1,000
Rent ` 6,000
Interest Paid ` 4,000
Depreciation ` 3,000
Allocate expenses in the ratio of departmental gross profits. 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.
Q. 7. The following purchases were made during the year 2010-2011 by a business house hav-
ing three departments.
Department A 1,000 Units
Department B 2,000 Units at total cost of ` 1,00,000
Department C 2,400 Units
Stock on 1st April, 2010 were :
Department A 120 units
Department B 80 units
Department C 152 units
The sale during 2010-2011 were :
Department A 1,020 units at ` 20 each
Department B 1,920 units at ` 22.50 each
Department C 2,496 units at ` 25 each
The rate of gross profit is the same in each case. Prepare Departmental Trading Account
for the year 2010-2011.
Q. 8. A Ltd. has a factory which has two manufacturing Departments X and Y. Part of the output of X
department is transferred to Y department for further processing and the balance is directly
transferred to the selling department. The entire production of Y department is transferred to
the selling department. Inter departmental stock transfers are made as follows :
X department to department Y at 331/3% over departmental cost.
X department to selling at 50% over departmental cost.
Y department to selling department at 25% over departmental cost.
The following information is given for the year ending 31st March, 2011.
Department X Department Y Selling Department
M.T. ` M.T. ` M.T. `
Opening Stock 60 60,000 20 40,000 50 1,45,000
Raw Material consumption 90 1,00,000 20 20,000 - -
Labour Charges - 50,000 - 80,000 - -
Closing Stock 30 ---- 50 - 60 -
Sales - - - - - 5,00,000
Out of the total production in X department 30 M.T. were for transfer to the selling
department. Apart from these stocks which were transferred during the year the balance
output and the entire opening and closing stocks of X department were for transfer to Y
department. The per tonne material and labour consumption in X department on
production to be transferred directly to the selling department is 300 percent of the labour
and material consumption on production for Y department.
Administration expenses were ` 1,65,000.
Prepare Departmental Trading A/c ignoring material wastage, on weighted average cost basis.

CHAPTER - 11 Branch Accounts
It deals with accounting of Branch related transactions and finding out Profit/ Loss made
by the branch for the given period.
From accounting point of view, Branch can be classified as:
1) Dependent Branch.
2) Independent Branch.
1) Dependent Branch : When the size of the Branch is small & business volume carried
is less, then total control is exercised by Head Office (Principal place of business).
All branch related transaction are accounted in Head Offices books. The following
methods can be used to find out Profit/ Loss made by the Branch during the given
period:
(i) Debtors Method
(ii) Stock & Debtors Method
DEBTORS METHOD
Under this method, Head Office will maintain only one Account that is Branch Account.
Only those transactions shall be recorded which takes place between:
a) Head Office & Branch
b) Branch & Head Office
c) Head Office & 3rd parties in relation to Branch.
In other words, transactions between Branch & 3rd party shall not be recorded. They will
get automatically adjusted.
Accounting Entries:
1 For goods sent to Branch Branch A/c Dr.
To Goods sent to Branch A/c
2 For goods returned by branch Goods sent to Branch A/c Dr.
To Branch A/c
3 For cash remitted to Branch for exps. or Branch A/c Dr.
for the purpose of purchasing fixed To Cash / Bank A/c
asset.
4 For remittance made by Branch to Head Cash / Bank A/c Dr.
To Branch A/c
5 For Branch assets at the end of the year Branch Assets A/c Dr.
To Branch A/c
6 For Branch liabilities at the end of the Branch A/c Dr.
year To Branch Liabilities A/c
Note: The above two entries shall Be reversed at the beginning of the next year.
7 For transfer of balance in goods sent to Goods sent to Branch A/c Dr.
Branch A/c To Trading A/c.
8 For branch profit Branch A/c Dr.
To general Profit & Loss A/c
9 For branch loss General Profit & Los A/c Dr.
To Branch A/c
: 101 :
Whenever goods are sent at Invoice Price, the following additional points should be
considered:-
1) Record goods sent to Branch at Invoice Price on the debit side of Branch A/c
2) Reverse the loading element by passing the following entry:
Goods sent to Branch A/c Dr.
To Branch A/c.
3) Record Closing Stock on Credit side of Branch A/c at Invoice Price.
4) Create appropriate Stock Reserve on Closing Stock by passing the following entry.
Branch A/c Dr.
To Stock Receive A/c
STOCK AND DEBTORS METHOD
The following accounts shall be prepared normally in the books of Head Office :-
1) Branch Stock Accounts (At Invoice Price)
2) Branch Stock Adjustment Accounts (For Loading Element)
3) Branch Debtors Accounts
4) Branch Profit & Loss Accounts
5) Branch Cash / Bank Accounts
6) Goods sent to Branch Accounts
Accounting Entries :-
1) For Goods sent to Branch
a) Branch Stock A/c Dr.
To Goods sent to branch A/c. (At Invoice Price)
b) Goods sent to Branch A/c Dr.
To Branch Stock Adjustment A/c. (For Loading)
2) For Goods returned by the Branch

Reversal of 1(a) & 1 (b)
3) For Sales made by the branch

a) For cash sales
Branch cash /bank A/c Dr.
To Branch Stock A/c.
b) For Credit Sales
Branch Debtors A/c Dr.
To Branch Stock A/c.
4) For Sales Returns
Branch Stock A/c Dr.
To Branch Cash / Bank A/c. (For Cash Sales returns)
To branch Debtors A/c. (For Credit Sales returns)
Note : No reversal of loading in case of Sales or Sales Returns.
: 102 :
5) For discount allowed and Bad Debts
a) Discount Allowed A/c Dr.
Bad Debts A/c Dr.
To Branch Debtors A/c.
b) Branch Profit & Loss A/c Dr.
To Discount Allowed A/c.
To Bad Debts A/c.
6) For expenses incurred and paid by the Branch

a) Branch Exps. A/c. Dr.
To Branch Cash / Bank A/c.
b) Branch Profit & Loss A/c. Dr.
To Branch Exps. A/c.
7) For remittance made by Branch to head Office

Cash / bank A/c Dr.
To Branch Cash / Bank A/c.
8) For remittance made by head Office to branch

Branch Cash / Bank A/c. Dr.
To cash / Bank Ac/.
9) For Stock Reserve on Closing Stock.

Branch Stock Adjustment A/c Dr.
To stock Reserve A/c.
Note : In the beginning of next year, the above entry shall be reversed.
10) For balance in goods sent to Branch A/c.

Goods sent to Branch A/c. Dr.
To trading A/c
11) For balance in branch Stock Adjustment A/c.

Branch Stock Adjustment A/c. Dr.
To branch Profit & Loss A/c.
( This is gross profit realized )
12) For net profit

Branch Profit & Loss A/c. Dr.
To General profit & Loss A/c.
13) For net Loss

General Profit & Loss A/c. Dr.
To Branch profit & Loss A/c.
: 103 :
SPECIAL TRANSACTIONS
1) Shortage of Stock / Abnormal Loss

Branch Profit & Loss A/c Dr. (Cost)
Branch Stock Adjustment A/c Dr. (Loading)
To Branch Stock A/c (Invoice Price)
2) Normal Loss
Branch Stock Adjustment A/c. Dr. (Invoice Price)
To Branch Stock A/c. (Invoice Price)
Note : Unless otherwise specified all losses be treated as abnormal loss.
3) For Increase in Selling Price above Invoice Price

Branch Stock A/c Dr.
To Branch Stock Adjustment A/c
4) For decrease in Selling Price below Invoice Price
Branch Stock Adjustment A/c Dr.
To Branch Stock A/c
Note:
After recording all the and above entries the balancing figure in Branch Stock
Account should be treated as Closing Stock with Branch.
However, if we have information about closing stock at branch then the difference (if any)
should be accounted in the following manner (following priority):-
Branch Stock Accounts (Invoice Price)
Dr. Cr.
1 Increase in selling price above 1 Shortage of Stock
Invoice Price
2 Decrease in Selling Price below
Invoice Price
INDEPENDENT BRANCH
When Branch maintains its own books of Accounts & prepares its own Trial Balance at the
end of the year then such type of Branch is called as Independent Branch. Head Office will
also prepare its own Trial Balance at the end of the year. From the point of view of an
outsider, Head Office & Branch are one & the same. Therefore we are required to prepare
consolidated Final Accounts for the entire organization (i.e. Head Office & Branch). Before
we start with consolidation, the following adjustments have to be considered.
1) Reconciliation of Head Office Account & Branch Accounts
Usual transactions like goods sent to Branch and Cash remitted to Head Office shall
take place between Head Office & Branch throughout the year. Such transactions
shall be recorded in the books of Head Office through Branch Accounts & in the
books if Branch through Head Office Accounts. Normally Incase there is difference in
: 104 :
Head Office Accounts & Branch Account then that difference could be because of
following two reasons:-
i) Goods in Transit
ii) Cash in Transit
The above difference should be reconciled by passing a reconciliation entry either in
books of Head Office or in the books of Branch but never in both the books.
In the books of Head Office In the books of Branch
i) When reconciliation entry is passed
on the books of Head Office
Goods in Transit A/c Dr. No Entry
Cash in Trade A/c Dr.
To Branch A/c
i) When reconciliation entry is passed
in the books of Branch.
Goods in Transit A/c Dr.
No Entry Cash in Transit A/c Dr.
To Head Office Account
ii) For depreciation on Branch Fixed
Assets when such fixed assets are
maintained in the books of
Head Office
a) Branch Depreciation A/c Dr. Depreciation A/c Dr.
To Branch Fixed Assets A/c To Head Office A/c.
b) Branch A/c Dr.
To Branch Depreciation A/c
iii) When some portion of Head Office
expense is charged to Branch
Branch A/c Dr. Expenses A/c Dr.
To Expense A/c To Head Office A/c
Incorporation of Branch Trial Balance in the Books of Head Office.
Method 1
Under this method Head Office will take over Branch Profit / Branch Loss, Branch Assets
& Branch Liabilities.
In the Books of Head Office In the books of Branch
i) For incorporation of Branch Profit
Branch A/c Dr. Profit & Loss A/c Dr.
To General Profit & Loss A/c. To Head Office A/c
ii) For incorporation of Branch Loss.
Reverse the above the entry
iii) For Incorporation of Branch Assets
Branch Assets A/c Dr. Head Office A/c Dr.
To Branch A/c To Assets A/c
iv) For incorporation of Branch
Liabilities
Branch A/c Dr. Liabilities A/c Dr.
To Branch Liabilities To Head Office A/c
: 105 :
Note: After passing the above entries, Branch A/c in books of Head Office & Head Office
A/c in books of Branch will get closed.
Method 2 Detailed Incorporation

Under this method Head Office takes over each & every A/c maintained by the Branch i.e.
incomes, expenses, assets, liabilities & prepares Branch Trading & Profit & Loss A/c to
ascertain Profit / Loss made by the Branch..
In the books of Head Office In the books of Branch
i) For incorporation of Branch assets & Branch Exps.
Branch Asset A/c Dr. Head Office A/c Dr.
Branch Exps. A/c. Dr. To Asset A/c.
To Branch A/c To Exps. A/c
ii) For incorporation of Branch Liabilities & branch Income
Branch A/c. Dr. Liabilities A/c Dr.
To branch Liabilities A/c. Income A/c. Dr.
To Branch Income A/c. To Head Office A/c.
Note : After passing the above entries, Branch Account in the books of Head Office &
Head Office Account in the books of Branch will get closed.
iii) Branch Trading A/c ---- Dr.
To Branch Exps.
(Opening Stock + Purchase + Goods received from Head Office + Direct Exps.)
iv) Branch Income A/c ----- Dr.
To Branch Trading A/c
(Sales + Closing Stock)
v) For Transfer of Branch Gross Profit
Branch Trading A/c ---- Dr
To Branch profit & Loss Ac/
vi) Branch Profit & Loss A/c ----- Dr.
To Branch Exps. A/c
(Indirect Exps.)
vii) Branch Income A/c ----- Dr.
To Branch Profit & Loss A/c
(Discount Received, Rent Received, other Incomes etc)
viii) For Branch Net profit
Branch Profit & Loss A/c ----- Dr.
To General Profit & Loss A/c.
: 106 :
FOREIGN BRANCH
The Accounting at the Foreign Branch would be terms of foreign currency. The Accounting
at the head office would be terms of reporting currency i.e. currency in which the financial
statements of the enterprise are being reported. The foreign branch trial balance has to be
converted into reporting currency on the basis as specified under Accounting Standard 11
(revised) The conversion should be done in the following manner
(1) Integral Foreign Operations :
Particulars Basis
(i) Opening Stock Opening Rate i.e. rate prevailing at the
Commencement of the accounting year
(ii) Closing Stock Closing Rate i.e. rate prevailing at the end of the
accounting year.
(iii) Purchases & Sales Average Rate
(iv) Expenses & Income Average Rate
(v) Fixed Assets / Investments Original Rate (i.e. rate prevailing on date of
purchase)
(vi) Depreciation Original Rate
(vii) Provision for depreciation Original Rate
(viii) Secured / Unsecured Loans Closing Rate
(ix) Goods received from head office Equivalent amount at which goods sent to branch
appears head office books.
(x) Head Office Equivalent amount at which branch account
appears in head office books.
(xi) All current Assets & Closing rate
Current Liabilities
The difference in the converted trial balance represents either an exchange gain or loss
which is reflected in the profit & loss account.
(2) Non Integral Foreign Operations (NFOs):

Here even Fixed Asset , Investments & Depreciation will be converted as closing
rate and the exchange difference is transferred to "Foreign Currency Translation
Reserve".
: 107 :
Q. 1. Modi Sales Ltd. Modi nagar has branch at Delhi. Goods are supplied to branch at a
profit of 20% on sale price. Account are kept at head office from where all expenses
are paid. Petty cash expenses are paid by the branch which is allowed to maintain
petty cash. From the following balance as shown by books. Prepare Branch Account.
`
Balance as on 1st April 2010
Petty cash in hand at Branch 500
Stock in hand at Branch at
Invoice price 20,000
Sundry Debtors at Branch 4,000
Sundry Creditors at Branch 1,200
Furniture at Branch 10,000
Rent prepaid (up to 30th June 2010) 400
Transactions for the year ended 31st March, 2011 were follows :
Goods sent to Branch 1,05,000
Cash Sales at Branch 80,000
Credit sales at Branch 45,000
Allowances to Debtors 500
Cash received from Debtors 40,000
Bad debts written off 200
Cash paid by branch to creditors 8,000
Creditors as on 31.3.2011 3,000
Payments made by H.O
Rent for one year (Paid on 1st July 2010) 2,000
Salaries 3,000
Insurance paid for the year ending 30th June 2011 800
Payment made by Branch Petty Expenses 300
Balance on 31st March, 2011
Stock at cost 30,000
Petty Cash in Hand 700
Write off Depreciation @ 10% p.a on furniture.
: 108 : BRANCH ACCOUNTS
Q. 2. Indian Soap Mills Ltd. has two branches, at Agra and at Kanpur. Goods are invoiced
to branches at cost plus 50%. Branches remit all cash received to the head office and
all expenses are met by the H.O. From the following particulars prepare Branch
Accounts to show the profit earned at the branches :
Particulars Agra Kanpur
` `
Stock on 1st April, 2010 (Invoice Price) 9,300 15,600
Debtors on 1st April, 2010 6,800 8,700
Goods invoiced to Branches (cost) 34,000 36,000
Sales at branches :
Cash Sales 25,010 35,000
Credit Sales 31,000 30,100
Cash collected from Debtors 30,400 29,800
Goods Returned by Debtors 1,200 1,500
Goods Returned by Branch to H.O. 1,500 -
Goods transferred from Kanpur to Agra 2,100 2,100
Surplus in Stock - 300
Shortage in Stock 450 -
Discount allowed to customers 200 350
Expenses at Branches 5,400 6,700
Q. 3. Pawan, of Delhi has a branch at Jaipur. Goods are invoiced to the branch at cost plus
25%.The branch is instructed to deposit the receipts everyday in the head office
account with the bank. All the expenses are paid through cheque by the head office
except petty cash expenses which are paid by the Branch.
From the following information, you are required to prepare Branch Account in the
books of Head office:
Depreciation to be provided on branch furniture & fixtures @ 10% p.a. on WDV basis.
Q. 4. Widespread Ltd. invoices goods to its branch at cost plus 20%. The branch sells
goods for cash as well as on credit. The branch meets its expenses out of cash
collected from its debtors and cash sales and remits the balance of cash to head
office after withholding ` 10,000 necessary for meeting immediate requirements for
cash. On 31st March, 2010 the assets at the branch were as follows :
('000')
Cash in Hand 10
Trade Debtors 384
Stock, at Invoice Price 1,080
Furniture and Fittings 500
During the accounting year ended 31st March, 2011 the invoice price of goods
dispatched by the head office to the branch amounted to ` 1 crore 32 lakh. Out of the
goods received by it, the branch sent back to head office goods invoiced at ` 72,000.
Other transactions at the branch during the year were as follows :
('000')
Cash Sales 9,700
Credit Sales 3,140
Cash collected by Branch from Credit Customers 2,842
Cash Discount allowed to Debtors 58
Returns by Customers 102
Bad Debts written off 37
Expenses paid by Branch 842
On 1st January, 2011 the branch purchased new furniture for ` 11 lakh for which
payment was made by head office through a cheque.
On 31st March, 2011 branch expenses amounting to ` 6,000 were outstanding and
cash in hand was again ` 10,000. Furniture is subject to depreciation @ 16% per
annum on diminishing balances method.
Prepare Branch Account in the books of head office for the year ended 31st March, 2011.

Q. 5. HLL Ltd. has two Branches, one at Calcutta and the Madras. Goods are invoiced to
Branches at invoice price . Branches remit all cash received to the Head Office and all
expenses are met by Head Office. From the following particular prepare the necessary
accounts under the Stock and Debtors System.
Calcutta Madras
` `
Stock (on 1.4.2010 at invoice price) 93,000 1,56,000
Debtors (on 1.4.2010) 68,000 87,000
Goods invoiced to Branches (at cost price) 3,40,000 3,60,000
Sales at Branches
Cash Sales 2,00,100 3,50,000
Credit Sales 3,10,000 3,01,000
Cash collection from Debtors 3,04,000 2,98,000
Goods returned by Branch (at invoice price) 15,000 ----
Goods returned by Debtors 12,000 15,000
Goods transferred from Madras to Calcutta(cost) 20,000 20,000
Surplus of Stock (at invoice price) ---- 3,000
Shortage of Stock (at invoice price) 4,500 ----
Discount allowed to Debtors 2,000 3,500
Expenses at Branches 54,000 67,000
The goods are invoiced to Calcutta branch at cost plus 25% and Madras branch at
cost plus 50%.
Q. 6. MADRAS Ltd. invoices goods to its branch at cost plus 33 1/ 3%. From the following
particulars prepare the Branch Stock Account and the Branch Stock Adjustment
Account as they would appear in the books of the Head Office.
`
Stock at commencement of Branch at invoice price 1,50,000
Stock at close of Branch at invoice price 1,20,000
Goods sent to branch during the year at invoice price 10,00,000
(including goods invoiced at ` 20,000 to branch on 31.3.2011 but not
received by branch before close of the year)
Return of goods to Head Office (invoice price) 50,000
Cash Sales at Branch 9,00,000
Credit Sales at Branch 50,000
Invoice value of Goods pilfered 10,000
Normal loss at branch due to wastage & deterioration of Stock (at invoice price) 15,000
MADRAS LTD. closes its books on 31st March 2011.
Q. 7. Webb and Co. is retail organisation with a number of branch shops. All accounts are
kept at the head office and goods sent to branches are recorded at cost plus the
expected mark up of 33 1 / 3%. The accounting system is designed to give the head
office as much control as possible over the branch stocks.
At the Hull branch at 1st April 2010, goods costing ` 1,200 in stock, but some of
these, costing ` 150, had been reduced in selling price to ` 160. The balances of the
Hull debtors accounts totalled ` 920 at the same date.
The following information relates to the Hull branch for the year to 31st March 2011 or
at the end of that year :
`
Goods sent to branch (cost) 18,600
Cash sales (including all the goods marked down at the beginning of the
year and others costing `1,800 sold for half of the normal selling price) 16,060
Cash received from debtors 6,280
Goods returned by branch debtors direct to head Office (Selling Price) 80
Bad debts written off 30
Closing Stock of goods at selling price 2,400
Closing total of debtors balances 830
Prepare the relevant accounts for the Hull branch, and calculate the branch profit for
the year.
Q. 8. Atlantic Paper Products send goods to Bhopal Branch at cost plus 25%. You are
given the following particulars :
`
Opening stock at branch at its cost 5,000
Goods sent to branch at invoice price 20,000
Loss-in-transit at invoice price 2,500
Theft at invoice price 1,000
Loss-in-weight (normal) at invoice price 500
Sales 25,500
Expenses 8,000
Closing stock at branch at cost to branch 6,000
Claim received from the insurance company for loss in transit 2,000
You are required to prepare in the Head Office books :
(a) Branch Stock Account
(b) Branch Adjustment Account
(c) Branch Profit & Loss Account
Show your working.
Q. 9. Dara Store Ltd., with its head office at Delhi, invoiced goods to its branch at Ghaziabad
at 20% less than the list price which is cost plus 100% with instruction that cash sales
were to be made at invoice price and credit sales at catalogue price (i.e. list price).
From the following particulars available from the branch, prepare branch stock
account, branch adjustment account, branch profit and loss account and branch
debtors account for the year ending March 31, 2011. You are also required to verify
the gross profit so calculated by preparing branch trading account.
`
Stock on 1st April, 2010 (invoice price) 6,000
Debtors on 1st April, 2010 5,000
Goods received from head office (invoice price) 66,000
Sales : Cash 23,000
Credit 50,000 73,000
Cash received from debtors 42,817
Expenses at branch 8,683
Remittances to head office 60,000
Debtors on March 31, 2011 12,183
Stock on March 31, 2011 8,800
Q. 10. Southern Store Ltd. is a retail store operating two departments. The company maintains a
memorandum stock account and memorandum mark up account for each of the
departments. Supplies issued to the departments are debited the memorandum stock
account of the department at cost plus the mark up and departmental sales are credited to
this account. The mark up on supplies issued to a department 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 in the mark up account. Department Y has a mark up to
331/3% on cost and Department Z 50% on the cost.
The following information has been extracted from the records of Southern Store Ltd.
for the year ended 31st March, 2011 :
Dept. Y Dept. Z
Stock, 1st April, 2010 at cost 24,000 36,000
Purchases 1,62,000 1,90,000
Sales 2,10,000 2,85,000
(1) The stock of department Y at 1st April, 2010 includes goods on which the
selling price has been marked down by ` 510. These goods were sold in April,
2010 at the reduced price.
(2) Certain goods purchased in 2010-2011 for ` 2,700 for department Y, were
transferred during the year to department Z, and sold for ` 4,050. Purchase and
sale are recorded in the purchases of department Y and the sales of department Z
respectively, but no entries in respect of the transfer have been made.
(3) Goods purchased in 2007-2008 were marked down as follows :
Dept. Y Dept. Z
` `
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 Z,
which had been marked down to ` 2,300. With this exception all goods marked
down in 2010-2011 were sold during the year at the reduced prices.
(4) During stock taking at 31st March, 2011 goods which had cost ` 240 were
found to be missing in department Y. It was determined that the loss should be
regarded as irrecoverable.
(5) The closing stock in both departments are to be valued at cost for the purpose of the
annual accounts.
You are requested to prepare for each department for the year ended 31st March, 2011.
(a) A trading Account.
(b) A memorandum Stock Account.
(c) A Memorandum Mark up Account.
Q. 11.You are required to prepare the trading and profit and loss accounts and consolidated
balance sheet of Eve Ltd in Calcutta and its branch at Delhi. Give journal entries for
incorporation of Delhi branch accounts in the head office and branch.
Trial Balance on 31-3-2011
H.O. Branch H.O. Branch.
Dr. Dr. Cr. Cr.
Manufacturing Expenses 30,000 10,000 - -
Salaries 30,000 10.000 - -
Wages 1,00,000 40,000 - -
Cash in hand 10,000 2,000 - -
Purchases 1,50,000 80,000 - -
Capital - - 2,00,000 -
Goods received from H.O. - 15,000 - -
Rent 8,000 4,000 - -
General Expenses 20,000 5,000 - -
Sales - - 4,50,000 1,50,000
Goods sent to branch - - 15,000 -
Purchases returns - - 5,000 1,000
Opening Stock 50,000 30,000 - -
Discount earned - - 2,000 1,000
Machinery (H.O.) 1,50,000 - - -
Machinery (Branch) 50,000 - - -
Furniture (H.O.) 7,000 - - -
Furniture (Branch) 3,000 - - -
Debtors 40,000 15,000 - -
Creditors - - 30,000 5,000
H.O. Account - - - 54,000
Branch Account 54,000 - - -
7,02,000 2,11,000 7,02,000 2,11,000
Closing stock at head office was ` 40,000 and at branch ` 30,000. Depreciation is to be
provided on machinery @ 20% and furniture @ 15%. Rent outstanding is ` 500 (for branch).
General Expense of Branch includes ` 1,000 paid for H.O.
Q. 12. The head office of a business and its branch keep their own books and prepare own
profit and loss account. The following are the balance appearing in the two sets of the
books as on 31st March, 2011 after ascertainment of profits.
Head Office Branch
Dr. Cr. Dr. Cr.
` ` ` `
Capital - 1,00,000 - -
Fixed Assets 36,000 - 16,000 -
Stock 34,200 - 10,740 -
Debtors & Creditors 7,820 3,960 4,840 1,920
Cash 10,740 - 1,420 -
Profit & Loss - 14,660 - 3,060
Branch Account 29,860 - - -
Head Office A/c. - - - 28,020
1,18,620 1,18,620 33,000 33,000
Set out the Balance Sheet of the business as on 31st March, 2011 after considering
following adjustments.
(a) On 31st March, the branch had sent a cheque for ` 1,000 to the head office, not
received by them nor credited to the branch till next month.
(b) Goods valued at ` 440 had been forwarded by the head office to the branch
and invoiced on 30th March, but were not received by the branch nor dealt with
in their books till next month.
(c) Branch paid salary to H.O. inspector 5,000 debited to salary a/c.
(d) It was agreed that the branch should be charged with ` 300 for administration
service, rendered by the head office during the year.
(f) Stock stolen from the head office meant for the branch and charged to the branch
by the head office but not credited to the head office in the branch books as the
branch manager declined to admit any liability ` 400 (not covered by insurance).
(e) Depreciation of branch assets of which accounts are maintained by the head
office not provided for ` 250.

Q. 13. M/s Shah commenced business on 1.4.2012 with Head Office at Mumbai and a Branch
at Chennai. Purchases were made exclusively by the Head Office, where the goods
were processed before sale. There was no loss or wastage in processing.
Only the processed goods received from Head Office were handled by the Branch.
The goods were sent to branch at processed cost plus 10%.
All sales, whether by Head Office or by the Branch, were at uniform gross profit of
25% on their respective cost.
Following is the Trial Balance as on 31.3.2013.
Head Office Branch
Dr. Cr. Dr. Cr.
` ` ` `
Capital 3,10,000
Drawings 55,000
Purchases 19,69,500
Cost of processing 50,500
Sales 12,80,000 8,20,000
Goods sent to Branch 9,24,000
Administrative expenses 1,39,000 15,000
Selling expenses 50,000 6,200
Debtors 3,09,600 1,13,600
Branch Current account 3,89,800
Creditors 6,01,400 10,800
Bank Balance 1,52,000 77,500
Head Office Current account 2,61,500
Goods received from H.O. 8,80,000
31,15,400 31,15,400 10,92,300 10,92,300
Following further information is provided:
(i) Goods sent by Head Office to the Branch in March, 2013 of ` 44,000 were not
receivedby the Branch till 2.4.2013.
(ii) A remittance of ` 84,300 sent by the Branch to HeadOffice was also similarly
not received upto 31.3.2013.
(iii) Stock taking at the Branch disclosed a shortage of ` 20,000 (at selling price to
the branch).
(iv) Cost of unprocessed goods at Head Office on 31.3.2013 was ` 1,00,000.
Prepare Trading and Profit and Loss account in columnar form and Balance Sheet of
the business as a whole as at 31.3.2013.
Q. 14. XY & Co. with Head Office at Calicut and a Branch at Trichur presents you following :
All goods were purchased by Head Office and normally packed immediately but on
31.3.2011, goods costing ` 5,000 remained unpacked.
Only packed goods were sent to the Branch which was charged at selling price less 10%.
Following information is furnished to you as on 31st March, 2011 from the Head
Office and Branch Office books.
Head Office Branch
` `
Opening Stock 20,000 5,400
Capital amount 40,000
Drawing by Proprietor 10,000
Purchases 4,00,000
Packing material bought 6,000
Stock Reserve (1.4.2010) 600
Sales 3,20,000 1,00,000
Despatch of goods to Branch 1,13,400
Profit & Loss Account (Cr.) 24,800
Selling expenses 16,000 800
Clerk's salary, wages etc. 20,000 3,000
Sundry Debtors 28,000 4,200
Sundry Creditors 26,600 5,000
Current Accounts :
Head Office (Credit balance) 12,000
Branch Office (Debit balance) 19,000
Bank Balance 1,000 1,000
Goods received from Head Office 1,08,000
You are further informed that :
(a) Sales by Head Office were at a uniform gross profit. After charging packing
materials of 20% on the fixed selling price.
(b) Sales at branches were at fixed selling price :
(c) Goods invoiced and despatched by Head Office to Branch in March, 2011 for
` 5,400 were received in the Branch only on 10th April, 2011.
(d) Stock of packing materials on Hand as on 31 March, 2011 was valued at ` 1,000.
(e) Remittance of ` 1,600 from the Branch to the Head Office was in transit on
31-3-2011;
(f) ` 2,000 worth of stock at selling price was damaged at the Branches. For valuing
stock, this was reduced by ` 1,090 below the invoice cost to the branch. It was
decided that the Head Office and the Branch Would share equally the loss
occasioned by this and also the deficit in stock, ascertained on actual stock taking
at the Branch of Goods at selling price of ` 500.
Prepare the Profit and Loss Accounts of the Tiruchur and Calicut Offices and also a
Balance Sheet as at 31-3-2011 of the business.
Q. 15. Give Journal Entries in the books of Head Office to rectify or adjust the following:
(i) Goods sent to Branch ` 12,000 stolen during transit. Branch manager refused
to accept any liability.
(ii) Branch paid ` 15,000 as salary to the officer of Head Office on his visit to the branch.
(iii) On 28th March, 2012, the H.O. dispatched goods to the Branch invoiced at ` 25,000
which was not received by Branch till 31st March, 2012.
(iv) A remittance of ` 10,000 sent by the branch on 30th March, 2012, received by
the Head Office on 1st April, 2012.
(v) Head Office made payment of ` 25,000 for purchase of goods by Branch and
wrongly debited its own purchase account.
Q. 16. Give Journal Entries in the books of Branch A to rectify or adjust the following:
(i) Head Office expenses ` 3,500 allocated to the Branch, but not recorded in the
Branch Books.
(ii) Depreciation of branch assets, whose accounts are kept by the Head Office
not provided earlier for ` 1,500.
(iii) Branch paid ` 2,000 as salary to a H.O. Inspector, but the amount paid has
been debited by the Branch to Salaries account.
(iv) H.O. collected ` 10,000 directly from a customer on behalf of the Branch, but
no intimation to this effect has been received by the Branch.
(v) A remittance of ` 15,000 sent by the Branch has not yet been received by the
Head Office.
(vi) Branch A incurred advertisement expenses of ` 3,000 on behalf of Branch B.
Q. 17. Head office passes adjustment entry at the end of each month to adjust the position
arising out of inter-branch transactions during the month. From the following
inter-branch transactions in March 2011, make the entry in the books of Head Office :
(a) Bombay Branch
(1) Received Goods ` 6,000 from Calcutta Branch, ` 4,000 from Patna Branch.
(2) Send Goods to :`
` 10,000 to Patna, ` 8,000 Calcutta.
(3) Received B/R. : ` 6,000 from Patna
(4) Sent Acceptance : ` 4,000 to Calcutta, ` 2,000 to Patna
(b) Madras Branch (Apart from the above)
(5) Received Goods : ` 10,000 from Calcutta, ` 4,000 from Bombay.
(6) Cash Sent : ` 2,000 to Calcutta, ` 6,000 to Bombay.
(c) Calcutta Branch (Apart from the above)
(7) Sent Goods to Patna : ` 6,000.
(8) Paid B/P : ` 4,000 of Patna, ` 4,000 cash to Patna.
Q. 18. DM Ltd. Delhi has a branch in London. London branch is an integral foreign
operation of DM Ltd. At the end of the year 31st March, 2009, the branch furnishes the
following trial balance in U. K. Pound :
£ £
Particulars
Dr. Cr.
Fixed assets (Acquired on 1st April, 2005) 24,000 ----
Stock as on 1st April, 2008 11,200 ----
Goods from head office 64,000 ----
Expenses 4,800 ----
Debtors 4,800 ----
Creditors ---- 3,200
Cash at Bank 1,200 ----
Head office account ---- 22,800
Purchases 12,000 ----
Sales ----- 96,000
1,22,000 1,22,000
In head office books, the branch account stood as shown below :
London Branch A/c
Particulars Amount Particulars Amount
` `
To Balance b/d 20,10,000 By Bank A/c 52,16,000
To Goods sent to branch 49,26,000 By Balance c/d 17,20,000
69,36,000 69,36,000
The following further information are given :
(a) Fixed assets are to be depreciated @ 10% p.a. on straight line basis.
(b) On 31st March, 2009 :
Expenses outstanding - £ 400
Prepaid expenses - £ 200
Closing stock - £ 8,000
(c) Rate of Exchange :
1st April, 2005 - ` 70 to £ 1
1st April, 2008 - ` 76 to £ 1
31st March, 2009 - ` 77 to £ 1
Average - ` 75 to £ 1
You are required to prepare :
(i) Trial balance, incorporating adjustments of outstanding and prepaid expenses,
converting U.K. pound into Indian rupees.
(ii) Trading and Profit and Loss Account for the year ended 31st March, 2009 and
the Balance Sheet as on that date of London Branch as would appear in the
books of Delhi head office of DM Ltd.
Q. 19. Omega has a branch at Washington. Its Trial Balance as at 30th September, 2012 is
as follows:(The Branch is non integral foreign operations)
Dr. Cr.
US $ US $
Plant and Machinery 1,20,000 ----
Furniture and Fixtures 8,000 ----
Stock, Oct. 1, 2011 56,000 ----
Purchases 2,40,000 ----
Sales ---- 4,16,000
Goods from Omega (H.O.) 80,000 ----
Wages 2,000 ----
Carriage inward 1,000 ----
Salaries 6,000 ----
Rent, rates and taxes 2,000 ----
Insurance 1,000 ----
Trade expenses 1,000 ----
Head Office A/c ---- 1,14,000
Trade debtors 24,000 ----
Trade creditors ---- 17,000
Cash at bank 5,000 ----
Cash in hand 1,000 ----
5,47,000 5,47,000
The following further information is given :
(1) Wages outstanding – $ 1,000.
(2) Depreciate Plant and Machinery and Furniture and Fixtures @ 10 % p.a.
(3) The Head Office sent goods to Branch for ` 39,40,000.
(4) The Head Office shows an amount of ` 43,00,000 due from Branch.
(5) Stock on 30th September, 2012 – $ 52,000.
(6) There were no in transit items either at the start or at the end of the year.
(7) On September 1, 2010, when the fixed assets were purchased, the rate of
exchange was ` 38 to one $.
On October 1, 2011, the rate was ` 39 to one $.
On September 30, 2012, the rate was ` 41 to one $.
Average rate during the year was ` 40 to one $.
You are asked to prepare:
(a) Trial balance incorporating adjustments given under 1 to 4 above, converting
dollars into rupees.
(b) Trading and Profit and Loss Account for the year ended 30th September, 2012 and
Balance Sheet as on that date depicting the profitability and net position of the Branch
as would appear in India for the purpose of incorporating in the main Balance Sheet.

Q. 20. The Washington branch of XYZ Mumbai sent the following trial balance as on
31st December, 2012 :
$ $
Head Office A/c ---- 22,800
Sales ---- 84,000
Debtors and Creditors 4,800 3,400
Machinery 24,000 ----
Cash at Bank 1,200 ----
Stock, 1 January, 2012 11,200 ----
Goods from H.O. 64,000 ----
Expenses 5,000 ----
1,10,200 1,10,200
In the books of head office, the Branch A/c stood as follows :
Washington Branch A/c
To Balance b/d 8,10,000 By Cash 28,76,000
To Goods sent to branch 29,26,000 By Balance c/d 8,60,000
37,36,000 37,36,000
Goods are sent to the branch at cost plus 10% and the branch sells goods at invoice
price plus 25%. Machinery was acquired on 31st January, 2007, when $ 1.00 = ` 40.
Rates are exchange were :
1st January, 2012 $ 1.00 = ` 46
31st December, 2012 $ 1.00 = ` 48
Average $ 1.00 = ` 47
Machinery is depreciated @ 10% and the branch manager is entitled to a
commission of 5% on the profits of the branch.
(i) Prepare the Branch Trading and Profit & Loss A/c in dollars.
(ii) Convert the Trial Balance of branch into Indian currency and prepare Branch
Trading and Profit and Loss A/c and the Branch A/c in the books of head office.

J. K. SHAH CLASSES INTER C.A. ACCOUNTING
CHAPTER-12
There are two methods of ascertaining profit or loss under single entry system :
(a) statement of affairs method (calculation of profit or loss without preparing

trading and profit and loss account)
(b) conversion method (Accounts from incomplete records)
(A) Statement of Affairs Method :
Here, total capital at the end of the year is compared with total capital at the
beginning and profit is calculated as under :
Total Capital at the End xx
(-) Total capital at the Beginning xx
xx
Add : Drawings during the year xx

(Including Interest on Drawings) xx
Less : Capital introduced during the year xx

(Including Interest on capital)
PROFIT xx
(B) Conversion Method
Here, all scattered and incomplete data is converted into double entry system.
Here in addition to Trading, Profit & Loss A/c and Balance Sheet following
additional notes are to be prepared.
(a) Opening Balance - Sheet (If opening capital is not given)
(b) Cash / Bank A/c (In columnar form if cash on hand and Cash at Bank is
separately given)
(c) Total Debtors A/c
(d) Total Creditors A/c
(e) Bills Receivable A/c
(f) Bills Payable A/c

: 122 : SINGLE ENTRY SYSTEM
Q. 1. A and B started a business on 1-4-2015 with ` 50,000 as capital, contributed equally

but the profit sharing ratio was 3 : 2. Their drawings were ` 300 and 200 per month
respectively. They had kept no accounts but given you the following information :
31-3-2016 31-3-2017
` `
Machinery at cost 20,000 25,000
Stock in trade 30,000 30,000
Debtors 50,000 60,000
Cash 2,000 500
Creditors 30,000 20,000
Outstanding Expenses 4,000 3,000
Bank Balance (as per Pass Book) 6,000 8,000
Provision is to be made for depreciation at 10 percent on the cost of machinery as at the
end of each year. Debtors on 31-3-2016 included ` 5,000 for goods sent out on
consignment at 25 per cent above cost, and the goods were sold only in 2016-2017. A
cheque for ` 1,000 had been deposited on 31-3-2016 but was credited on 2-4-2016.
A cheque for ` 2,000 issued on 26-3-2017 was presented on 3-4-2017. A cheque for
` 1,000 was directly deposited by a customer on 31-3-2017 but no entry is made in
Cash Book. A cheque for ` 500 deposited in March, 2017, was dishonoured but no
adjustment for this was made.
Determine the profit for 2016-2017 and draw up a Balance Sheet as at 31 March, 2017.
Q. 2. Shri. Kanubhai is operating a small manufacturing business. He did not keep

adequate records to determine his income or prepare a proper Balance Sheet. The
following particulars are furnished to you :
Statement of Affairs
31.3.2016 31.3.2017
` `
Cash in hand 700 900
Cash at Bank 6,000 4,100
Stock of Raw Materials 7,500 12,000
Stock of Finished goods 33,000 36,000
Fixed Assets 95,000 1,10,000
Investments 36,700 24,900
2,06,700 2,08,500
Loan from Banubhai --- 9,000
Kanubhai Capital 1,81,700 1,67,000
2,06,700 2,08,500

Your examination of the available records reveals the following additional information :-
(i) Sundry debtors as at the end of the year 31st March 2017, do not include the
sum of ` 4,600/- due from a customer as full collection from him was
considered doubtful. However, prior to the time you start your work, you find
that the above account was settled for ` 3,500/-.
(ii) The stocks of finished goods have been valued at sale price. The average margin
of profit on sales was 30% at 31st March, 2016 and 40% at 31st March, 2017.
Raw materials were valued at cost.
(iii) Sundry debtors include the sum of ` 1,000/- in respect of goods sent on
consignment on 30th March, 2017. The same has been billed at sale price.
(iv) The details of investments are as under :
31.3.2016 31.3.2017
Name of the Company Shares Face Value
` `
A Ltd. 200 100 20,000 20,000
B Ltd. 167 100 16,700 ---
C Ltd. 98 50 --- 4,900
36,700 24,900
(a) The shares of A Ltd. were acquired in 2006 for ` 27,000/-.
(b) The shares of B Ltd. were purchased in June 2006 for ` 17,000/- and sold in
April, 2016 for ` 22,000/-.
(c) The shares of C Ltd. were purchased in June, 2016 for ` 7,000/-.
(v) The loan from Banubhai was utilised for making a gift to the proprietor's newly
born daughter.
(vi) The figures of cash at Bank are amounts appearing as the balances in his
bank statements as on 31st March, 2016 and 31st March, 2017, respectively.
By reviewing subsequent bank statements, you find the following :
(a) A deposit of ` 2,000/- made on 31st March, 2016 was not recorded by
the bank until 4th April, 2016. A cheque for ` 900/- issued prior to 31st
March, 2016 was not presented to Bank until April, 2016.
(b) A deposit of ` 4,000/- from a customer was entered by the bank on 30th March,
2017. Shri Kanubhai did not receive notice of this collection until 6th April, 2017.
(vii) The following expenditures were made during the year 2016 - 2017.
All these were paid out of account with bank :
(a) Advance payment of tax ` 6,000
(b) Household and personal expenses ` 25,600
(i) A statement of Shri Kanubhai's income for the year ending 31st March, 2017.
(ii) His balance sheet as on that date, and
(iii) Supporting schedules

Q. 3. From the following data, you are required to prepare a Trading and Profit and Loss
Account for the year ended 31st March 2017, and a Balance Sheet as at that date. All
working should from part of your answer.
As on As on
1st April, 2016 31st March, 2017

Assets and Liabilities
` `
Creditors 15,770 12,400
Sundry Expenses Outstanding 600 330

Sundry Assets 11,610 11,120
Stock-in-trade 8,040 11,120

Cash in hand at bank 6,960 8,080
Trade Debtors ? 17,870
Details relating to transactions in the year : `

Cash and Discount credited to Debtors 64,000
Sales Return 1,450

Bad Debts 420
Sales (Cash and Credit) 71,810
Discount allowed by Trade Creditors 700
Purchase Return 400
Additional Capital-paid into Bank 8,500

Realisation from Debtors-paid into Bank 62,500
Cash Purchases 1,030
Cash Expenses 9,570
Paid by cheque for Machinery purchased 430
Household expenses drawn from Bank 3,180

Cash paid into Bank 5,000
Cash drawn from Bank 9,240
Cash in hand on 31.3.2017 1,200
Cheque issued to Trade Creditors 60,270

Q. 4. The following is the Balance Sheet of Sri Ram as on 31st March, 2016.
Capital Account 96,000 Building 65,000
Loan 30,000 Furniture 10,000
Creditors 62,000 Motor Car 18,000
Stock 40,000
Debtors 34,000
Cash in hand 4,000
Cash at Bank 17,000
1,88,000 1,88,000
A riot occurred on the night of 31st March, 2017 in which all books and records were lost. The
Cashier had absconded with the available cash. Sri Ram gives you following information :
(a) His sales for the year ended 31st March, 2017 were 20% higher than the previous
year's and 20% of the total sales for the year ended 31.3.2017 were for cash. There
were no cash purchases. He always sells his goods for cost plus 25%.
(b) On 1st April, 2016 the stock level was raised to ` 60,000 and stock was
maintained at this new level all throughout the year.
(c) Collection from debtors amounted to ` 2,60,000 of which ` 70,000 was

received in cash. Business Expenses amounted to ` 40,000 of which ` 10,000
was outstanding on 31st March, 2017 and ` 12,000 was paid by cheque.
(d) Analysis of the Pass Book revealed the following :
`
Payment to creditors 2,75,000
Personal Drawings 15,000
Cash deposited in Bank 1,43,000
Cash withdrawn from bank 24,000
(e) Gross profit as per last year's audited accounts was ` 60,000.
(f) Provide depreciation on Building and Furniture at 5% and Motor Car at 20%.
(g) The amount defalcated by the cashier may be treated as recoverable from him.
Prepare the Trading and Profit and Loss Account for the year ended 31st March, 2017
and Balance Sheet as on that date.
Q. 5. The following is the Balance Sheet of Sri Agni Dev as on 31st March, 2016 :
Capital Account 2,52,500 Machinery 1,20,000
Sundry Creditors for purchases 45,000 Furniture 20,000
Stock 33,000
Debtors 1,00,000
Cash in hand 8,000
Cash at Bank 16,500
2,97,500 2,97,500
Riots occurred and fire broke out on the evening of 31st March, 2017 destroying the
books of account and Furniture. The cashier was grievously hurt and the cash
available in the cash box was stolen.
The trader gives you the following information :
(i) Sales are effected as 25% for cash and the balance on credit. His total sales
for the year ended 31st March, 2017 were 20% higher then the previous year.
All the sales and purchases of goods were evenly spread throughout the year
(as also in the last year)
(ii) Terms of credit
Debtors 2 Months
Creditors 1 Month
(iii) Stock level was maintained at ` 33,000 all throughout the year.
(iv) A steady Gross Profit rate of 25% on the turnover was maintained throughout.
Creditors are paid by cheque only, except for cash purchase of ` 50,000.
(v) His private records and the Bank Pass-book disclosed the following
transaction for the year.
(i) Miscellaneous Business expenses ` 1,57,500 (including ` 5,000 paid by cheque and
` 7,500 was outstanding as on 31st March, 2017)
(ii) Repairs ` 3,500 (paid by cash)
(iii) Addition to Machinery ` 60,000 (paid by cheque)
(iv) Private drawing ` 30,000 (paid by cash)
(v) Travelling expenses ` 18,000 (paid by cash)
(vi) Introduction of additional capital
by depositing in to the Bank ` 5,000
(vi) Collection from debtors were all through cheques.
(vii) Depreciation on Machinery is to be provided @ 15% on the Closing Book Value.
(viii) The Cash stolen is to be charged to the Profit and Loss Account.
(ix) Loss of furniture is to be adjusted from the Capital Account.
Prepare Trading Profit and Loss Account for the year ended 31st March, 2017 and a
Balance Sheet as on that date. Make appropriate assumptions whenever necessary.
All working should form part of your answer.
Q. 6. Ms. Rashmi furnishes you with the following information relating to her business:
(a) Assets and liabilities as on 1.1.2016 31.12.2016
` `
Furniture (w.d.v) 12,000 12,700
Inventory at cost 16,000 14,000
Sundry Debtors 32,000 ?
Prepaid expenses 1,200 1,400
Unpaid expenses 4,000 3,600
Cash in hand and at bank 2,400 1,250
(b) Receipts and payments during 2016 :
Collections from debtors, after allowing discount of ` 3,000 amounted to ` 1,17,000.
Collections on discounting of bills of exchange, after deduction of discount of
` 250 by the bank, totalled to ` 12,250.
Creditors of ` 80,000 were paid ` 78,400 in full settlement of their dues.
Payment for freight inwards ` 6,000.
Amount withdrawn for personal use ` 14,000.
Payment for office furniture ` 2,000.
Investment carrying annual interest of 4% were purchased at ` 192 (face value
` 200) on 1st July, 2016 and payment made there for.
Expenses including salaries paid ` 29,000.
Miscellaneous receipts ` 1,000.
(c) Bills of exchange drawn on and accepted by customers during the year
amounted to ` 20,000. Of these, bills of exchange of ` 4,000 were endorsed in
favour of creditors. An endorsed bill of exchange of ` 800 was dishonoured.
(d) Goods costing ` 1,800 were used as advertising materials.
(e) Goods are invariably sold to show a gross profit of 33 1 / 3 % on sales.
(f) Difference in cash book, if any, is to be treated as further drawing or
introduction of capital by Ms. Rashmi.
(g) Provide at 2.5% for doubtful debts on closing debtors.
Rashmi asks you to prepare trading and profit and loss account for the year ended
31st December, 2016 and the balance sheet as on that date.
Q. 7. AVL is an unemployed science graduate with typewriting qualification. Being unable to get
employment for more than ` 500 p.m. he decided to start his own typewriting institute. He
approached U.B.C. Bank which sanctioned him a loan of ` 20,000 on 1-1-2016. His father
gifted him ` 5,000 on 1-1-2016. He purchased 6 typewriters worth ` 24,000.
Unable to understand the accounts properly, he seeks your help in preparing a Profit
and Loss Account and Balance Sheet relating to the year ending 31-12-2016. His
Pass Book reveals the following:
`
(a) Expenses of the Institute 8,400
(b) Salary to self 4,000
(c) Monthly Fee Collected 32,700
(d) Examination Fee Collected 4,200
The following are the additional details available:
(1) During the year AVL purchased a second-hand cycle costing ` 400 from a
student who owed monthly fees of ` 100. The balance was paid. The cycle is
used for the institute only.
(2) AVL helped a friend by encashing his cheque for ` 1,000 which was dishonoured.
The friend has so far repaid only ` 400.
(3) AVL has taken ` 600 per month for his personal expenses in addition to his salary.
(4) AVL runs the institute from his house for which a rent of ` 600 p.m. is paid.
50% may reasonably be allocated for his own living.
(5) The following are outstanding as at end of 31-12-2016
`
(a) Fees Receivable 2,200
(b) Expenses Payable 1,000
(c) Salary to Self for Nov. and Dec.,
(d) Inventory of stationery on hand 200
(6) Provide Depreciation 20% on typewriters and cycle.
(7) The loan from Bank is repayable at ` 500 p.m. from the beginning of July onwards.
Interest is payable at 12% per annum in addition to instalments for principal.
(8) Assume that all transactions are routed through Bank and no cash is handled..

Q. 8. Following incomplete information of X are given below:
Trading and Profit & Loss Account for the year ended 31st March, 2017
` '000 ` '000
To Opening stock 700 By Sales ?
To Purchases ? By Closing stock ?
To Direct expenses 175
To Gross profit c/d ?
? ?
To Establishment expenses 740 By Gross profit b/d ?
To Interest on loan 60 By Commission 100
To Provision for taxation ?
To Net profit c/d ? ?
? ?
To Proposed dividends ? By Balance b/f 140
To Transfer to general reserve ? By Net profit b/d ?
To Balance transferred to Balance sheet ?
? ?
Balance Sheet as at 31st March, 2017
Liabilities Amount Assets Amount
` '000 ` '000
Paid-up Capital 1,200 Fixed assets :
General Reserve : Plant & Machinery 1,400
Balance at the beginning ? Other fixed assets ?
Proposed addition ? Current assets:
Profit and loss account ? Stock ?
10% Loan account ? Sundry debtors ?
Current liabilities ? Cash at bank 125 ?
? ?
Other information:
(i) Current ratio is 2 : 1.
(ii) Closing stock is 25% of sales.
(iii) Proposed dividends to paid-up capital ratio is 2 : 3.
(iv) Gross profit ratio is 60% of turnover.
(v) Loan is half of current liabilities.
(vi) Transfer to general reserves to proposed dividends ratio is 1 : 1.
(vii) Profit carried forward is 10% of proposed dividends.
(viii) Provision for taxation is equal to the amount of net profit of the year.
(ix) Balance to credit of general reserve at the beginning of the year is twice the
amount transferred to that account from the current year's profits.
All working notes should be part of your answer. You are required to complete:
(i) Trading and Profit and Loss account for the year ended 31st March, 2017 and
(ii) The Balance Sheet as on that date.
Q. 9. The following information relates to the business of Mr. Shiv Kumar, who request you
to prepare a Trading and Profit & Loss Account for the year ended 31st March, 2017
and a Balance Sheet as on that date :
(a) Balance as on Balance as on
31st March, 2016 31st March, 2011
` `
Building 3,20,000 3,60,000
Furniture 60,000 68,000
Motorcar 80,000 80,000
Stocks ? 40,000
Bills payable 28,000 16,000
Cash and Bank balance 1,80,000 1,04,000
Sundry Debtors 1,60,000 ?
Bills receivable 32,000 28,000
Sundry Creditors 1,20,000 ?
(b) Cash transactions during the year included the following beside certain other items :
` `
Sale of Old Papers and Cash Purchase 48,000
Miscellaneous Income 20,000 Payment to Creditors 1,84,000
Miscellaneous Trade Expenses Cash Sales 80,000
(including salaries etc.) 80,000
Collection from Debtors 2,00,000
(c) Other information :
(i) Bills receivable drawn during the year amount to ` 20,000 and Bills
Payable accepted ` 16,000.
(ii) Some items of old furniture, whose written down value on 31st March,
2016 was ` 20,000 was sold on 30th September, 2016 for ` 8,000.
Depreciation is to be provided on Building and Furniture @10% p.a. and
on Motor car @ 20% p.a. The Closing Balance of Fixed Assets is before
charging depreciation.
(iii) Of the Debtors, a sum of ` 8,000 should be written of as Bad Debt and
a reserve for doubtful debts is to be provided @ 2%.
(iv) Mr. Shivkumar has been maintaining a steady gross profit rate of 30% on turnover.
(v) Outstanding salary on 31st March, 2016 was ` 8,000 and on 31st March, 2017
was ` 10,000. Profit and Loss Account had a credit balance of ` 40,000.
(vi) 20% of total sales and total purchases are to be treated as for cash.
(vii) Additions in Furniture Account took place in the beginning of the year.
Q. 10. Yayati is an importer of fancy goods, operating from rented premises, which is on
lease of ` 500 per month. He prepares his accounts as on 31st March, each year.
On the night of March, 31st 2017 all these books and records were destroyed in a
fire. The following was his summarised financial position as on 31st March, 2010.
` ` `
Fixed Assets :
Motor Car 6,500
Furniture 10,000 16,500
Working Capital :
Current Assets :
Stock-in-trade 2,00,500
Debtors 24,000
Prepaid rate's 500
Balance at Bank 27,060
Cash in hand 590 2,52,650
Less : Current Liabilities :
Creditors (after adj. for rebate due) 1,10,200
Accrued Rent 1,000
Due for Hire Purchase Instalments 2,790 (1,13,990)
Net Current Assets 1,38,660
Capital Amount 1,55,160
The following further information is also available.
(a) Yayati buys goods for resale only from one manufacturer in Japan, who allows a
rebate of 3% of the goods purchased by him excess of ` 5,00,000 in a financial
year. The rebate due for the year ended 31st March, 2017 was ` 12,480.
(b) All goods are sold at a standard gross profit margin of 40% on selling price.
Any rebate due is to be ignored for the purpose.
(c) Stock at cost on 31st March, 2017 amounted to ` 90,200.
(d) Weekly cash expenses out of cash sales have been :
Drawings ` 250
Carriage outwards ` 450
Petrol ` 40
Sundries ` 20
Cash in hand on 31st March, 2017 amounted to ` 670.
(e) His bank statements for the year reveal the following information :
`
Paid for purchases of goods 10,10,500
Car Expenses 3,680
Rent 6,500
Rates for the year ended 30th June, 2017 2,800
Rebate from Japan for year ended 31st March, 2016 9,800
Hire Purchase Instalments (Final Payments) 3,040
Salaries 1,02,460
General Expenses 1,56,020
Drawings 37,060
Balance as on 31st March, 2017 2,41,800
(f) Depreciation on motor car and furniture is to be provided at 20% and 10% respectively.
You are required to prepare Yayati's Trading and Profit and Loss Account for the year
ended 31st March, 2017 and the Balance Sheet as on date.
Q. 11. Mr. X runs a retail business. Suddenly he finds on 31.3.2017 that his Cash and Bank
balances have reduced considerably. He provides you the following information:
(i) Balances 31.3.2016 31.3.2017
` `
Cash at Bank 1,08,400 2,500
Cash in Hand 10,400 500
Rent (Outstanding for one month) 2,400 3,000
Stock 11,400 20,000
Electricity and Telephone bills - outstanding ---- 6,400
(ii) Bank Pass-book reveals the following `
Total Deposits 10,34,000
Withdrawals:
Creditors 8,90,000
Professional charges 34,000
Furniture and Fixtures (acquired on 1.10.16) 54,000
Proprietor’s drawings 1,61,900

(iii) Rent has been increased from January, 2017.
(iv) Mr. X deposited all cash sales and collections from debtors after meeting wages,
shop expenses, rent, electricity and telephone charges.
(v) Mr. X made all purchases on credit.
(vi) His credit sales during the year amounts to ` 9,00,000.
(vii) He incurred ` 6,500 per month towards wages.
(viii) He incurred following expenses:
(a) Electricity and telephone charges ` 24,000 (paid)
(b) Shop expenses ` 18,000 (paid).
(ix) Charge depreciation on furniture and fixtures @10% p.a.
Finalise the accounts of Mr. X and compute his profit for the year ended 31.3.2017.
Q. 12. K. Azad, who is in business as a wholesaler in sunflower oil, is a client of your ac-
counting firm. You are required to draw up his final accounts for the year ended
31.3.2011.
From the files, you pick up his Balance Sheet as at 31.3.2010 reading as below:
Liabilities ` `
K. Azad’s Capital 1,50,000
Creditors for Oil Purchases 2,00,000
12% Security Deposit from Customers 50,000
Creditors for Expenses:
Rent 6,000
Salaries 4,000
Commission 20,000
4,30,000
Assets
Cash and Bank Balances 75,000
Debtors 1,60,000
Stock of Oil (125 tins) 1,25,000
Furniture 30,000
Less: Depreciation (3,000) 27,000
Rent Advance 12,000
Electricity Deposit 1,000
3-Wheeler Tempo Van 40,000
Less: Depreciation (10,000) 30,000
4,30,000

A Summary of the rough Cash Book of K. Azad for the year ended 31.3.2011 is as
below:
Cash and Bank Summary
Receipts `
Cash Sales 5,26,500
Collections from Debtors 26,73,500
Payments
To Landlord 79,000
Salaries 48,000
Miscellaneous Office Expenses 12,000
Commission 20,000
Personal Income-tax 50,000
Transfer on 1.10.2010 to 12% Fixed Deposit 6,00,000
To Creditors for Oil Supplies 24,00,000
A scrutiny of the other records gives you the following information:
(i) During the year oil was purchased at 250 tins per month basis at a unit cost of
` 1,000. 5 tins were damaged in transit in respect of which insurance claim has
been preferred. The surveyors have since approved the claim at 80%. The
damaged ones were sold for ` 1,500 which is included in the cash sales. One
tin has been used up for personal consumption. Total number of tins sold during
the year was 3,000 at a unit price of ` 1,750.
(ii) Rent until 30.9.2010 was ` 6,000 per month and was increased thereafter by
` 1,000 per month. Additional advance rent of ` 2,000 was paid and this is
included in the figure of payments to landlord.
(iii) Provide depreciation at 10% and 25% of WDV on furniture and tempo van
respectively.
(iv) It is further noticed that a customer has paid ` 10,000 on 31.3.2011 as security
deposit by cash. One of the staff has defalcated. The claim against the Insurance
Company is pending.
You are requested to prepare final accounts for the year ended 31.3.2011

J. K. SHAH CLASSES INTER C.A.- ACCOUNTING
CHAPTER - 13
DISSOLUTION OF PARTNERSHIP FIRM
The following ledger A/c’s would be opened in the books of the partnership firm.
(1) Realisation A/c (2) Capital A/c (3) Current A/c
(4) Loan A/c (5) Cash / Bank A/c
Steps :
(1) Transfer all Balance Sheet item to their respective accounts.
Assets :
(a) The P/L (Dr.) Balance Should be distributed amongst the old partners in the old
P.S.R.
(b) All Assets (excluding Cash & Bank) should be transferred to the Realisation
Account Debit side at Book Values.
Realisation A/c Dr. xx
To Sundry Assets A/c xx
(c) The Cash / Bank Balance Should be transferred to the Cash / Bank Account
Debit side as the opening balance.
Liabilities :
(a) The Capital, Current and Loan Balances should be transferred to the respec-
tive accounts on the credit side.
(b) The Reserves should be distributed amongst the old partners in the old ratio.
(c) The liabilities should be transferred to the Realisation Account Credit Side at
Book Values.
Sundry Liabilities A/c Dr. xx
To Realisation A/c xx
(2) Dispose of Assets & Pay off the liabilities :
(a) Disposal of Assets
Cash / Bank A/c Dr. xx
Partners Capital A/c Dr. xx (Agreed values)
(b) Payment of Liabilities
To Cash / Bank A/c xx
To Partners Capital A/c xx (Agreed values)
: 136 : PARTNERSHIP ACCOUNTS

Note : If no information is given then it is assumed that the asset is disposed off or liability
is settled at book values. However if no information is given then it is to be assumed that
intangible assets have no realisable value.
(3) Expenses of Realisation
(4) Payment of Partners Loan
Partners Loan A/c Dr. xx
To Realisation A/c (If assets is taken over) xx
If there is any difference in the partners loan a/c then it is to be transferred to the realisation a/c.
(5) Close the realisation Account and the profit / loss on realisation should be distributed
amongst the partners in the P.S.R.
(6) Balance the partners capital account and the final balance in the partners capital account
should be settled in cash.
(7) The Cash / Bank Account must tally.
Insolvency loss : At the stage of final settlement if there is a debit balance in the
partner Capital A/c's then the partner is required to bring in cash. If the partner is
unable to bring in cash then there would be a loss arising out of insolvency. The
distribution of this insolvency loss would depend upon the no. of partners who are
insolvent / solvent. The following are the various possibilities :
(i) When one partner is solvent and the remaining are insolvent.
In this case the loss arising out of insolvency should be transferred to the solvent
partners capital accounts by passing the following Journal Entry.
Solvent Partner’s capital A/c Dr. xx
To Insolvent partner’s capital A/c xx
(ii) When one or more partner is solvent.
In this case the question would arise regarding the basis (ratio) in which the
insolvency loss has to be distributed. The insolvency loss can be distributed -
(1) If partnership deed provides for specific method for distribution of
insolvency loss, then provision of deed should be applied.
(2) If deed does not make any provisions then.
(a) As per the provisions of the Indian Partnership Act, 1932.
According to the Indian Partnership Act, such loss should be
distributed in the PSR. OR
(b) According to the principle of Garner vs Murray such loss
should be distributed in the capital ratio.

The capital ratio is ascertained in the following manner :

(a) If the Capital’s are fixed : In this case the insolvency loss should be
distributed in the fixed capital ratio.
(b) If the Capital’s are not fixed : Than ascertain the adjusted capital i.e.
opening capital + Reserves - Losses appearing in the Balance sheet.
A solvent partner having a debit balance will not bear the insolvency loss.
(iii) When all partners are insolvent : Unless otherwise specified the following
steps would be applicable :
(a) Transfer the assets to the realisation A/c.
(b) Open separate Accounts' for the liabilities.
(c) Realise the assets & pay realisation expenses.
(d) Close the realisation A/c & distribute the profit / loss amongst the
partners in their PSR.
(e) Collect the final amounts (if any) from the partners. At this stage the
amount available would be opening balance + Net Realisation from
assets + Final amounts received from the partners. This amount would
be insufficient to pay off the liabilities.
(f) Pay off the liabilities to the extent possible & transfer the unpaid
liabilities to a separate A/c called as “Capital Deficiency.”
(g) Transfer the final balances in the partners capital A/c’s to the capital
deficiency A/c. (The A/c must tally).
PIECE MEAL DISTRIBUTION
When the firm goes into dissolution the assets of the firm would be realised gradually. As
and when the amounts are realised it should be utilised towards the payment of liabilities
and expenses. Hence in this topic there would be a stage wise distribution of cash. The
amount received should be applied in the following manner :
(a) Realisation Expenses
(b) Secured Loans
(c) Preferential Creditors for e.g.. government dues and employees' dues
(d) Unsecured Liabilities + Deficiency in respect of Secured Loans
(e) Partners Loans
(f) Partners Capital
The amounts are to be distributed to the partners by following one of the alternative
methods stated below :
(a) Maximum Loss / Notional Loss Method
(b) Excess / Surplus / Highest Relative Capital Method

(a) Maximum loss / notional loss method : Basic presumption of this method at
every stage of realisation is that there will be no further realisation of assets.
Practical steps for distribution among partners :
(1) Calculate balance of capital a/c of all partner after adjusting accumulated
profit / losses / current a/c balances
(2) Calculate maximum loss assuming that remaining asset will realise nothing
Maximum loss = Total capital balance (-) Cash available
(3) Distribute maximum loss among partners in profit sharing ratio
(4) Calculate balance of capital after distribution of maximum loss
(5) If no capital balance in step (4) shows negative balance then capital balance
in step (4) = Cash distributed among partners
(6) If any of capital balance shows negative balance after step (4) transfer such
negative capital to capital a/c of other partner (having positive capital) in
ratio of capital (capital balance + reserves (-) Losses) assuming partner
having negative capital balance as insolvent & application of Garner Murray.
Repeat the process till negative balance is obolished. Thus capital balances
= cash distributed among partners (as in steps 5)
(7) Calculate fresh capital after distribution of cash as in step (5) or (6) & repeat
same process from step no (2) on every realisation to assets.
(b) Excess / surplus / Highest Relative / proportionate capital method /
quotient method
The basic presumption of this method is that a partner who has contributed
more than his proportionate share of capital, should be paid first to the extent
of his excess capital over & obove the proportionate capital.
Practical steps for distributions among partners :
(1) Calculate actual capital of all partners after making adjustment for
reserves / losses / current a/c
(2) Divide actual capital (as above) of partners by their profit sharing ratio &
treat smallest quotient as base capital
(3) Base capital x profit sharing ratio proportionate capital (i.e. this should
have been the capital)
(4) Surplus capital = Actual capital (Step 1) (–) proportionate capital [step (3)]
(5) If there is only one partner having surplus capital, make payment of such
surplus capital to the partner first
(6) If there is more than one partner having surplus capital then divide
surplus capital by profit sharing ratio & treat the smallest quotient as
revised base capital
(7) Repeat above process (step 2-4) until number of partner having excess
capital reduces to one.
AMALGAMATION OF FIRM
This is a combination of following two events

(1) Dissolution of two partnership firms
(2) Formation of a new firm
Here the business of two partnership firms get closed down and a new firm is formed which
takes over all assets and liabilities of old firms and the partners in the old firms now become
partners in the new firm.
Accounting Treatment in old firms
Since the business of the old firms is getting closed by any of the following two methods :
(a) Revaluation method
(b) Realisation method
(a) Revaluation Method
The following four accounts are normally prepared
(1) Revaluation A/c (3) Cash / Bank A/c
(2) Partner's Capital A/c (4) New firm A/c
Steps to close books of old firm.
Step 1 Transfer partners capital and current a/c balance to partners capital a/c &
current a/c.
Step 2 Transfer undistributed profits or losses to partners capital a/c in PSR.
Step 3 Transfer cash/bank balance to cash / Bank A/c.
Step 4 Transfer all assets and liabilities taken over to new firm a/c at their agreed
values and the difference between the old value and agreed values should
be transferred to Revaluation A/c.
Step 5 Dispose off the assets and liabilities not taken over by the new firm.
Step 6 Raise or write off goodwill by using partners capital a/c's in PSR.
Step 7 Close Revaluation a/c and distribute Profit / Loss in PSR.
Step 8 Close Partners Capital A/c & Cash / Bank A/c and transfer balance to
New firm A/c. The New firm A/c will tally.
Accounting Treatment in books of new firm
Here, just one entry is required to take over business of both old firms
All assets taken over a/c Dr. xx
To all liabilities taken over a/c xx
To all partners capital a/c xx

Additional Adjustment in new firm

(1) Entry for writing off goodwill
New Partners Capital A/c Dr. xx
To Goodwill A/c xx
(Total goodwill in new PSR)
Note : If in the question it is specifically mentioned that the goodwill a/c should
not appear in the books then instead of raising the goodwill in the old firms, the
net effect of goodwill in partners capital a/c in new firm should be determined
and it should be recorded directly in partner's capital accounts.
(2) Inter firm debt
Sundry Creditors A/c Dr. xx
To Sundry Debtors A/c xx
(3) Capital Adjustment :
The partners capital accounts may have to be adjusted after amalgamation trans-
ferring the excess or deficit to partners current account as or partners loan a/c
or cash / bank a/c as a per instructions in question.
(b) Realisation Method : The following ledger accounts would be opened
1. Partners Capital Account
2. Realisation Account
3. New Firms Account
The books of the old firms have to be closed by following the procedure as mentioned
below :
1. Purchase Consideration :
The P.C. should be calculated by following either the net assets method or net
payments method. (Similar to conversion)
2. Distribute reserve or losses amongst the old partners and the old ratio
3. Record the P.C.
New firm A/c Dr. xx
4. Dispose of the assets & liabilities which are not taken over by the new firm.
5. Distribute the realisation profit or loss amongst the partners in the P.S.R.
6. Transfer the final balance in the partners capital accounts to the new firm.
Partners Capital A/c Dr. xx
To New Firm A/c xx
The new firm account must tally.
The accounting treatment in the books of the new firm would continue to remain the same.

Conversion of Partnership Firm into Limited Company contains following legal events :
1. Dissolution of the Partnership Firm
2. Incorporation of a Limited Company.
This is an event where the existing business of the firm is closed down and a new
company is formed which takes over all assets and liabilities of the firm and the
partners of the firm will now become shareholders in the limited company. This event
is to be considered as “Sale of Business”.
Accounting treatment in the books of the Firm :
Since the business of the firm is getting closed down, closing entries will have to be passed
under the dissolution technique where in following accounts should be prepared :
1. Realisation Account
2. Partner’s Capital Account
3. Partner’s Loan Account
4. New Company ‘s Account
5. Cash / Bank Account
6. Equity Shares in New Co. Account
7. Preference Shares in New Co. Account
8. Debentures in New Co. Account
STEPS TO CLOSE THE BOOKS OF THE FIRM :
Step 1 : Purchase Consideration : This is the price at which the business of the firm
is sold to the company and this can be calculated in following two ways :
a. PC as per Net Assets Method :
PC = Revised values of assets - Revised value of liabilities
b. PC as per Net Payment Method :
PC = Cash + Equity Shares + Preference Shares + Debentures [Issued

by the company to the firm]
Note : Always calculate PC as net payments method first and if the details of
net payments are not given then PC as per net assets method should be
calculated. All Accounting entries should be passed as per net payment method.

Step 2: Record all Balance Sheet items in the respective accounts

Balance Sheet Items Respective Accounts
Partners Capital & Current A/c. Partners Capital A/c
Undistributed profit / losses Partners Capital A/c
Partners loan Partners loan A/c
Sundry Assets & Liabilities Realisation A/c
Cash / Bank Balance
(a) Taken over by new company Realisation A/c
(b) Not taken over by new company Cash / Bank A/c
Step 3: Record and receive the PC
(a) New Co. A/c Dr. xx
(b) Cash / Bank A/c Dr. xx
Equity shares in New Co. A/c Dr. xx
Preference Shares In New Co. A/c Dr. xx
Debentures in New Co. A/c Dr. xx
To New Co. A/c xx
Step 4: Dispose off the assets and liabilities not taken over
Note : If no information is given it should be assumed that all assets and
liabilities are disposed off at book valued (except goodwill)
Step 5: Expenses of realisation
Step 6 : Payment of Partner’s Loans
Partner’s Loan A/c Dr. xx
To Equity shares in New Co. A/c xx
To Preference Shares In New Co. A/c xx
To Debentures in New Co. A/c xx
Step 7 : Close Realisation A/c
The profit \ loss on realisation will be distributed to the partners in PSR.
Step 8 : Distribute shares and debentures etc. among the partners in the given
proportions.
Note : If in the question, the basis of distribution of equity shares among the
partners is not given then it should be distributed among the partners in their
PSR. This is because the internal ownership of the business should remain the
same as before.
Step 9 : Close partners capital a/c and settle their accounts through cash.
Note : If any partner having debit balance is declared insolvent then his
deficiency should be distributed among other solvent partners as per the
principle of Garner vs Murray (i.e. Capital ratio).
ACCOUNTING ENTRIES IN BOOKS OF NEW COMPANY
(1) For business purchase :
Business Purchase A/c Dr. xx
To Vendors of Partnership firm A/c. xx
[For PC amount]
(2) For Payment of PC
Vendors of Partnership firm A/c (PC) Dr. xx
Discount on Shares / debentures A/c Dr. xx
To ESC / PSC / Debentures A/c (FV) xx
To Securities Premium A/c xx
(3) For take over of assets and liabilities
Revised values of assets taken over A/c. Dr. xx
Goodwill a/c (Loss on take over) (Balancing Figure) Dr. xx
To Revised value of liabilities taken over A/c. xx
To Capital Reserve (Profit on take over) (Bal fig) xx
To Business Purchase A/c (PC) xx

PART B : PROBLEMS SECTION
DISSOLUTION
Q. 1. The firm of Kapils and Devs dissloved on 31st March, 2017.Its Balance Sheet stood
as follows :
Balance Sheet as on 31st March, 2017
Capital A/c's Land 50,000
F. Kapil 2,00,000 Building 2,50,000
S. Kapil 2,00,000 Office equipment 1,25,000
R. Dev 1,00,000 Computer 70,000
Current A/cs Debtors 4,00,000
F. Kapil 50,000 Stocks 3,00,000
S. Kapil 1,50,000 Cash at Bank 75,000
R. Dev 1,10,000 Other Current Assets 22,600
Loan from NBFC 5,00,000 Current A/c
Current Liabilities 70,000 B. Dev 87,400
13,80,000 13,80,000
The partners have been sharing profits and losses in the ratio of 4 : 4 : 1 : 1. It has
been agreed to dissolve the firm on 1.4.2017 on the basis of the following
understanding :
(a) The following assets to be adjusted to the extent indicate with respect to the book value :
Land 200%
Building 120%
Computer 70%
Debtors 95%
Stock 90%
(b) In the case of the loan, the lender's are to be paid at their insistence a
prepayments premium of 1%.
(c) B. Dev is insolvent and no amount is recoverable from him. His father, R. Dev,
however, agrees to bear 50% of his deficiency. The balance of the deficiency is
agreed to be apportioned according to law.
Assuming that the realisation of the assets and discharge of liabilities is carried out
immediately show the Cash A/c, Realisation Account and the Partners' Accounts.

Q. 2. Read, Write and Add give you the following Balance Sheet as on 31st March, 2017.
Read’s Loan 15,000 Plant and Machinery at cost 30,000
Capital Accounts : Fixtures and Fittings 2,000
Read 30,000 Stock 10,400
Write 10,000 Debtors 18,400
Add 2,000 42,000 Less: Provision (400) 18,000
Sundry Creditors 17,800 Joint Life Policy 15,000
Loan on Hypothecation of Patents and Trademarks 10,000
Stock 6,200 Cash at Bank 8,000
Joint Life Policy Reserve 12,400
93,400 93,400
The partners shared profits and losses in the ratio of Read 4/9, Write 2/9 and Add 1/3.
Firm was dissolved on 31st March, 2017 and you are given the following information:
(a) Add had taken a loan from insurers for ` 5,000 on the security of Joint Life Policy.
The policy was surrendered and Insurers paid a sum of ` 10,200 after deducting
` 5,000 for. Add’s loan and ` 300 as interest thereon.
(b) One of the creditors took some of the patents whose book value was ` 6,000
at a valuation of ` 4,500. The balance to that creditor was paid in cash.
(c) The firm had previously purchased some shares in a joint stock company and
had written them off on finding them useless. The shares were now found to be
worth ` 3,000 and the loan creditor agreed to accept the shares at this value.
(d) The remaining assets realized the following amount:
`
Plant and Machinery 17,000
Fixtures and Fittings 1,000
Stock 9,000
Debtors 16,500
Patents 50% of their book value
(e) The liabilities were paid and a total discount of ` 500 was allowed by the creditors.
(f) The expenses of realization amounted to ` 2,300.
Prepare the Realisation Account, Bank Account and Partners Capital Accounts in
columnar form.

Q. 3. A, B, C and D are sharing profits and losses in the ratio 5 : 5 : 4 : 2. Frauds committed
by C during the year were found out and it was decided to dissolve the partnership on
31st March, 2017 when their Balance Sheet was as under :
Liabilities Amount ( ` ) Assets Amount ( ` )
Capital Building 1,20,000
A 90,000 Stock 85,500
B 90,000 Investments 29,000
C ---- Debtors 42,000
D 35,000 Cash 14,500
General Reserve 24,000 Capital - C 15,000
Trade Creditors 47,000
Bills Payable 20,000
3,06,000 3,06,000
Following information is given to you:
(i) A cheque for ` 4,300 received from debtor was not recorded in the books and
was misappropriated by C.
(ii) Investments costing ` 5,400 were sold by C at ` 7,900 and the funds transferred to
his personal account. This sale was omitted from the firm’s books.
(iii) A creditor agreed to take over investments of the book value of ` 5,400 at
` 8,400. The rest of the creditors were paid off at a discount of 2%.
(iv) The other assets realized as follows:
Building 105% of book value
Stock ` 78,000
Investments The rest of investments were sold at a profit of ` 4,800
Debtors The rest of the debtors were realized at a discount of 12%
(v) The bills payable were settled at a discount of ` 400.
(vi) The expenses of dissolution amounted to ` 4,900.
(vii) It was found out that realization from C’s private assets would only be ` 4,000.
Prepare the necessary Ledger Accounts.

Q. 4. Amal and Bimal are in equal partnership. Their Balance Sheet stood as under on
31st March, 2017 when the firm was dissolved:
` `
Creditors A/c 4,800 Plant & Machinery 2,500
Amal's Capital A/c 750 Furniture 500
Debtors 1,000
Stock 800
Cash 200
Bimal's drawings 550
5,550 5,550
The assets realised as under:
`
Plant & Machinery 1,250
Furniture 150
Debtors 400
Stock 500
The expenses of realisation amounted to ` 175. Amal's private estate is not sufficient
even to pay his private debts, whereas Bimal's private estate has a surplus of ` 200 only.
Show necessary ledger accounts to close the books of the firm.
Q. 5. The following was the balance sheet of Exe, Wye, Zed and Ess as on April 1, 2017 :
` `
Sundry Creditors 25,000 Furniture & Fittings 20,400
Capitals : Stock in trade 21,000
Exe 15,000 Sundry Debtors 15,600
Wye 10,000 Cash at Bank 1,000
Zed 3,000
Ess 5,000 33,000
58,000 58,000
Ess was a minor partner with 1/5th share, the other partner sharing profits and losses
equally. The capital account of Ess represented underdrawn profit; the profits drawn by
Ess and lying intact in his bank account totalled ` 7,500. The firm had taken out a policy on
the life of Exe whose paid-up value was ` 15,000 and surrender value ` 10,000. The firm
had to be dissolved owing to some serious legal action against it.

The assets realised as follows :

`
Furniture & Fitting 15,000
Stock in trade 16,000
Sundry creditors allowed a discount averaging 8% and Exe took over his policy at the
surrender value. Compensation to worker of various types totalled ` 24,000; expenses
totalled ` 4,600. Exe brought in the necessary cash to affect the payments. Zed is
insolvent ; his estate pays 40% of what is due by him to the firm.
Prepare the capital accounts, Realisation Account and the Cash Book.
Q. 6. M/s. X, Y and Z who were in partnership sharing profits and losses in the ratio of 2:2:1
respectively, had the following Balance Sheet as at December 31, 2012:
Capital : X 29,200 Fixed Assets 40,000
Y 10,800 Stock 25,000
Z 10,000 50,000 Book Debts 25,000
Z's Loan 5,000 Less: Provision (5,000) 20,000
Loan from Mrs. X 10,000 Cash 1,000
Sundry Trade Creditors 25,000 Advance to Y 4,000
90,000 90,000
The firm was dissolved on the date mentioned above due to continued losses. After
drawing up the balance sheet given above, it was discovered that goods amount-
ing to ` 4,000 have been purchased in November, 2012 and had been received but
the purchase was not recorded in books.
Fixed assets realised ` 20,000; Stock ` 21,000 and Book Debt ` 20,500. Similary,
the creditors allowed a discount of 2% on the average. The expenses of realisation
come to ` 1,080. X agreed to take over the loan of Mrs. X. Y is insolvent, and his
estate is unable to contribute anything.
Give accounts to close the books; work according to the decision in Garner vs.
Murray.

PIECEMEAL DISTRIBUTION
Q. 7. The partners A, B and C have called you to assist them in winding up the affairs of
their partnership on 30th June, 2017. Their Balance Sheet as on that date is given
below:
Sundry Creditors 17,000 Cash at Bank 6,000
Capital Accounts: Sundry Debtors 22,000
A 67,000 Stock in trade 14,000
B 45,000 Plant and Equipment 99,000
C 31,500 Loan-A 12,000
Loan-B 7,500
1,60,500 1,60,500
(1) The partners share profit and losses in the ratio of 5:3:2
(2) Cash is distributed to the partners at the end of each month
(3) A summary of liquidation transactions are as follows:
July 2017
` 16,500 - collected from Debtors; balance is uncollectable.
` 10,000 - received from sale of entire stock.
` 1,000 - liquidation expenses paid.
` 8,000 - cash retained in the business at the end of the month.
August 2017
` 1,500 - liquidation expenses paid. As part payment of his Capital,
C accepted a piece of equipment for 10,000 (book value 4,000).
` 2,500 - cash retained in the business at the end of the month.
September 2017
` 75,000 - received on sale of remaining plant and equipment.
` 1,000 - Liquidation expenses paid. No cash retained in the business.
Required : Prepare a schedule of cash payments as of September 30, showing how
the cash was distributed.
Q. 8. Lock, Stock and Barrel were in partnership sharing the ratio 1/2, 1/4, 1/4. Their
Balance Sheet on 31st March, 2011 was as under, the date on which they decided to
dissolve the firm.
Balance Sheet as on 31st March, 2011
Creditors 15,000 Cash 9,000
Income Tax payable 4,000 Stock 40,000
Loan from Bank 30,000 Debtors 60,000
(Secured by pledge of stock) Furniture 36,000
Loan from Mr. Stock 11,000 Motor Car 25,000
Capitals :
Lock 40,000
Stock 40,000
Barrel 30,000
1,70,000 1,70,000
(1) Bank could realise only ` 25,000 on disposal of stock.
(2) A sum of ` 3,000 was spent on furniture for getting better price.
(3) Other assets were realised as follows :
In April 12,000, In May 15,000, In June 10,000, In July 30,000, In August 35,000.
The Partners distributed the cash as and when available. Using highest relative
capital method, show the distribution of cash.

Q. 9. Ananth Associates is a reputed firm. On account of certain misunderstandings
between the partners, it was decided to dissolve the firm as on 31st March, 2017 on
which date their Balance Sheet was as follows :
Capital : Land & Building 7,00,000
Ananth 3,00,000 Other Fixed Assets 3,00,000
Kishore 2,00,000 Stock in trade 2,00,000
Kumar (Minor) 1,00,000 6,00,000 Debtors 4,00,000
Mortgage Loans 3,00,000 Bills 1,50,000
(Secured by a charge Goodwill 30,000
of fixed assets) Cash 20,000
Bank O.D. 3,00,000
Other Loans 2,00,000
Creditors 2,00,000
Kumar's Loan 2,00,000
18,00,000 18,00,000
It was decided that Mr. Ananth shall be in charge of Realisation. He shall set apart
` 10,000 towards expenses. He shall be paid a remuneration of 5% on the amounts
distributed to the partners towards their contributions, other than loans. Assets
realised as under :
Date Assets `
April 1 Debtors 3,50,000
April 15 Fixed Assets 4,00,000
May 15 Bills 1,90,000
June 1 Fixed Assets 50,000
June 15 Land & Building and remaing assets 8,00,000
Prepare a statement showing how the monies received on various dates will be
distributed assuming :
(a) The actual expenses of realisation amounted to ` 20,005.
(b) The capital were all originally contributed.
(c) The profit - sharing ratio was 2 : 2 : 1.
(d) The final dissolution was made on 15th June, 2017.
Q. 10. Given below is the Balance Sheet of A, B, C as on 31st March, 2017 on which date
they dissolve their partnership. The shares profits and losses in the rate of 4 : 3 : 3.
Since the realisation of assets were to take time they decided to distribute amounts
as and when feasible and appointed A for the purpose, who was to get his
remuneration; 1% of the assets realised immediately after realisation of assets other
than cash at bank and 10% of the amount distributed to the partners.

Balance Sheet as at 31st March, 2017
Capital A/c. : Cash at Bank 550
A 30,000 Other Assets 1,02,450
B 10,000
C 30,000 70,000
1,03,000 1,03,000
The assets realised as under :
`
1st realisation 32,500
2nd realisation 25,500
3rd realisation 20,000
Last realisation 15,000
Prepare a statement showing distribution of cash on the basis of "Maximum Loss
Method".
Q. 11. Ramesh, Rajesh and Rakesh are three partners in a firm and share profits and losses
in the proportion of 3/10, 5/10 and 2/10 respectively. Their Balance Sheet on
31st March, 2017 is as follows :
Sundry Creditors 17,000 Cash in hand 4,000
Capitals : Other Assets 70,000
Ramesh 38,000 Profit and Loss A/c. 10,000
Rajesh 26,000
Rakesh 3,000 67,000
84,000 84,000
The partnership is dissolved and the assets are realised as follows :

Book Value of assets realised Amount realised
2017 ` `
April 30,000 25,000
May 25,000 15,000
June 15,000 10,000
Rakesh is insolvent and a sum of ` 1,400 is recovered from his estate in full
settlement. Prepare a statement how the distribution should be made by the following
maximum loss method.

AMALGAMATION OF FIRMS
Q. 12. In similar type of business Navin and Vasant are in the partnership as Western
Trading Co. and Das and Chatterjee in Eastern Trading Co.
It was mutually agreed that as on 1st April, 2017 the partnerships be amalgamated into one firm,
"East & West Co." The profit sharing ratio in the various firms were and are to be as follows :
Navin Vasant Das Chatterjee
Old Firms 4 : 3 3 : 2
New Firms 6 : 5 : 4 : 3
As on 31st March, 2017 the Balance Sheet of the Firms were as follows:
Western Eastern Western Eastern
Trading Co. Trading Co. Trading Co. Trading Co.
Capital A/c : Property 74,000 1,00,000
Navin 1,53,000 - Fixture 18,000 14,000
Vasant 1,10,000 - Vehicles 30,000 18,000
Das - 1,13,000 Stock 83,000 66,000
Chatterjee - 74,000 Investment 8,000 -
Creditors 52,000 60,000 Debtors 68,000 58,000
Bank overdraft - 9,000 Bank Bal. 34,000 -
3,15,000 2,56,000 3,15,000 2,56,000
The agreement to amalgamate contains the following provisions
(a) Provisions for doubtful debts at 5% to be made in respect of debtors and provision
for discount receivable at the rate of 21/2% to be made in respect of creditors.
(b) East & West Co. to take over the old partnerships assets at the following values :
Western Eastern
Trading Co.` ` Trading Co.` `
Stock 84,500 63,900
Vehicles 28,000 13,000
Fixtures 16,000 -
Property 1,00,000 -
Goodwill 63,000 45,000
(c) The property and fixtures of Eastern Trading Co. are not be taken over by the East
& West Co. and these were sold for ` 1,35,000 cash, and the same was taken over
by the new firm.
(d) Vasant to take over his firm's investment at a value of `7,600.
(e) Goodwill account is to be written off in the new firm.
(f) The capital of East & West Co. to be `5,40,000 and to be contributed by partners in
profit sharing ratio, any adjustment to be made in cash. Prepare Ledger Accounts
in the Books of both old firms, Journal Entries in the Books of East & West Co. and
Balance Sheet of East & West Co.

Q. 13. Two Partnership firms carrying on business under the name and styles of Black & co.,
and White & Co., decided to amalgamate into Grey & Co. w.e.f. 1st April, 2017. The
Balance Sheets as on 31st March, 2017 are :
Balance Sheet of Black & Co. as on 31st March, 2017
B' Capital 19,000 Plant and Machinery 10,000
Creditors 10,000 Stock 20,000
Bank Overdraft 15,000 Debtors 10,000
A's Capital 4,000
44,000 44,000
A & B share profits and losses in the ratio 1 : 2.
Balance Sheet of White & Co. as on 31st March, 2017
X's Capital 10,000 Goodwill 10,000
Y's Capital 2,000 Stock 5,000
Creditors 28,000 Debtors 10,000
Cash 6,000
Bank 9,000
40,000 40,000
X and Y share profits and losses equally.
The following further information is given :
(1) All fixed assets are to be depreciated by 50%.
(2) All stocks is to be appreciated by 50%.
(3) Black & Co owes ` 5,000 to White & Co as on 31st March, 2017. This debt is
settled at ` 2,000.
(4) Goodwill is to be ignored for the purpose of amalgamation.
(5) The fixed capital accounts in the new firm are to be A ` 2,000; B ` 3,000;
X ` 1,000; Y ` 4,000.
(6) B take over the bank overdraft of Black and Co and gifts to A the amount of
money to be brought in by A to make up his capital contribution.
(7) X is paid off in cash from White & Co and Y brings in sufficient cash to make up
his required capital contribution.
Prepare Journal of Black & Co, ledger of white & Co and Balance Sheet of Grey & Co.

Q. 14. B and S are partners of S & co. sharing profits and losses in the ratio of 3 : 1. S and
T are partners of T & Co. sharing profits and losses in the ratio of 2 : 1. On 31.3.2017,
they decided to amalgamate and form a new firm M/s. BST & Co., where in B, S & T
would be partners sharing profits & losses in the ratio of 3 : 2 : 1.
Their Balance Sheets on that date were as under :
Liabilities S & Co. T & Co. Assets S & Co. T & Co.
Due to X & Co. 40,000 ---- Cash in hand 10,000 5,000
Due to S & Co. ---- 50,000 Cash at Bank 15,000 20,000
Other Creditors 60,000 58,000 Due from T & Co. 50,000 ----
Reserve 25,000 50,000 Due from X & Co. ---- 30,000
Capitals : Other Debtors 80,000 1,00,000
B 1,20,000 ---- Stock 60,000 70,000
S 80,000 1,00,000 Furniture 10,000 3,000
T ---- 50,000 Vehicles ---- 80,000
Machinery 75,000 ----

Building 25,000 ----
3,25,000 3,08,000 3,25,000 3,08,000
The amalgamated firm took over the businesses on the following terms :
(a) Goodwill of S & Co. was worth ` 60,000 and that of T & Co. ` 50,000. Goodwill
account was not to be opened in the books of the new firm, the adjustments
being recorded through capital accounts of the partners.
(b) Building, Machinery and Vehicles were taken over at ` 50,000, ` 90,000 and
` 1,00,000 respectively.
(c) Provision for doubtful debts had to be carried forward at ` 4,000 in respect of
debtors of S & Co. and ` 5,000 in respect of Debtors of T & Co.
(i) Partner's Capital Accounts in all the firms.
(ii) Pass the journal entries in the books of BST & Co. assuming that excess /
deficit capitals (taking T's Capital as base) with reference to share in profits
are to be transferred to current accounts.
(iii) Prepare Balance Sheet of M/s. BST & Co.

CONVERSION
Q. 15. M, P and N in partnership sharing profit and losses equally. The balance sheet as on
31st March, 2017 was as under :
Creditors 36,000 Debtors 68,000
Capital Accounts : Stock 6,000
M 80,000 Bank 82,000
N 10,000
P 30,000
1,56,000 1,56,000
The partners have decided to a form a limited company, called " Gumnam Ltd." with
an authorised capital of ` 2,00,000/- divided into 20,000 Equity shares of ` 10/- each
to take over the business of the partnership firm.
The terms are as follows :
(1) All assets are taken over at book values. (including furniture worth ` 1,000. The
furniture is fully written off).
(2) All liabilities are taken over.
(3) The purchase consideration is as under :
(a) 10,000 equity shares of ` 10 each. ` 8 per share paid up at ` 12/- per share.
(b) Cash ` 30,000.
(4) Realisation expenses amounted to ` 3,000/-.
(5) The company has issued 5,000 equity shares to the Public at ` 14/- per share
and also called up balance money on partly paid shares.
(6) Preliminary expenses amounted to ` 4,000/-.
(7) Equity shares are to be distributed in profit sharing ratio.
Prepare necessary Ledger Accounts in the books of the firm, Journal of the new
company and Opening Balance Sheet.

Q. 16. A, B and C were partners sharing profits and losses in the ratio of 5, 3 and 2
respectively. The trial balance of the firm on 31st March, 2017 was the following :
` `
Machinery at Cost 1,00,000
Stock 68,700
Bills payable 20,000
Capital's A/cs.
A 68,000
B 45,000
C 23,000
Drawing A/c.'s :
A 25,000
B 23,000
C 17,000
Depreciation on Machinery 40,000
Profit for the year ended 31.3.2011 1,24,300
Cash at Bank 89,300
3,85,000 3,85,000
Interest on Capital A/cs at 10% p.a. on the amount standing to the credit of partners'
Capital Account at the beginning of the year was not provided before preparing the
above trial balance. On 1st April, 2017 they formed a Private Limited Company with
an authorised Share Capital of ` 2,00,000 in shares of ` 10 each to be divided in
different classes to take over the business of partnership.
You are informed as under :
(1) Machinery is to be transferred at ` 70,000.
(2) Shares in the company are to be issued to the partners, at par, in such numbers and
in such classes as will give the partners, by reason of their share holdings along,
the same rights as regards interest on capital and the sharing of profit and losses
as they had in the partnership.
(3) Before transferring the business, the partners wish to draw from the partnership
profits to such an extent that the bank balance is reduced to ` 50,000.
(4) All assets and liabilities except machinery and the bank are to be transferred
at their book value as on 31st March, 2017.
(a) Capital Accounts showing all adjustments required to dissolve the partnership.
(b) Statement showing the workings of the number of shares of each class to be
issued by the company to each of the partners.
(c) The Balance Sheet of the Company immediately after acquiring the business
of the partnership and issuing of shares.

Q. 17. A, B and C were partners in business, sharing profits and losses in the ratio 2 : 1 : 1.
Their Balance Sheet as at 31.3.2017 is as follows.
(Figures in ` '000)
Fixed Capital : Fixed Assets 300
A 200 Investments 50
B 100 Current Assets :
C 100 400 Stock 100
Current Accounts : Debtors 60
A 40 Cash & Bank 150 310
B 20 60
Unsecured Loans 200
660 660
On 1.4.2017, it is agreed among the partners that BC (P) Ltd., a newly formed company
with B and C having each taken up 100 shares of ` 10 each will take over the firm as a
going concern including goodwill but excluding cash & bank balances. The following points
are also agreed upon:
(a) Goodwill will be valued at 3 years purchase of super profits.
(b) The actual profits for the purpose of goodwill valuation will be ` 1,00,000.
(c) Normal rate of return will be 15% on fixed capital.
(d) All other assets and liabilities will be taken over at book values.
(e) The purchase consideration will be payable partly in shares of ` 10 each and
partly in cash. Payment in cash being to meet the requirement to discharge A,
who has agreed to retire.
(f) B and C are to acquire equal interest in the new company.
(g) Expenses of liquidation ` 40,000.
You are required to prepare the necessary Ledger Accounts.
Q. 18. M, B and G were in partnership sharing profits and losses equally. Their Balance
Sheet on 31st March, 2017was as follows :
Bills payable 12,075 Goodwill 5,000
Creditors 20,625 Machinery 22,500
Capital Accounts Furniture 2,625
M 28,125 Investments 1,500
B 9,375 Stock 17,550
G 3,750 41,250 Debtors 22,625
Cash 2,150
73,950 73,950

They decided to sell their business to MBG Ltd. as G who was the working partner, was
found to be mismanaging the affairs of the firm. A sum of ` 5,000 received from the
firm’s debtors was not credited to their accounts but was misappropriated by him. Stocks
were overstated by ` 3,750.
Repairs to machinery amounting to ` 3,000 had been wrongly capitalised during the
year ended 31.3.2014. Depreciation was written off on machinery during the three
years ending 31st March 2017 at the rate of 10% diminishing balance.
MBG Ltd. acquired all the partnership assets except the investments which B agreed to
take at ` 1,250. For the purpose of sale the assets were valued as follows :
Goodwil l ` 1,250, Furniture ` 1,625, Stock `12,500, Machinery at book value Debtors at
book value less 5%. M agreed to discharge the creditors. For the purpose of paying the
bills payable, M and B introduced cash in their profit sharing proportion.
G being insolvent, is unable to meet any deficiency that may arise.
The purchase consideration was settled by the allotment at a premium of ` 10 per share of
sufficient fully paid equity shares of Face value of `100 each in MBG Ltd. & cash for
fractions if any. B agreed to take 200 shares and the balance was to be given to M.
Prepare necessary ledger accounts in the books of Partnership Firm.
Q. 19. Kapoor and Jain were carrying on business sharing profits and losses equally. The
firm's balance sheet as at 31st March, 2016 was as follows :
Sundry Creditors 60,000 Stock 60,000
Bank Overdraft 35,000 Machinery 1,50,000
Capital Accounts : Debtors 70,000
Kapoor 1,40,000 Joint Life Policy 9,000
Jain 1,30,000 Leasehold premises 34,000
Profit & Loss Account 26,000
Drawings Accounts :
Kapoor 10,000
Jain 6,000
3,65,000 3,65,000
The business was carried on till 30th September, 2016. The partners withdrew in 3 : 2 half
the amount of profits made during the period of six months after charging depreciation at
10% p.a. on machinery and after writing off 5% on Leasehold premises. In half year,
Sundry Creditors were reduced by ` 10,000/- and bank overdraft by ` 15,000/-.

On 30th September, 2016, stock was valued at ` 75,000/- and Debtors at ` 60,000/-
the Joint Life Policy had been surrendered for ` 9,000/- before 30th September, 2016
and other items remained the same as at 31st March, 2016.
On 30th September 2016, the firm sold the business to a limited company. The value
of goodwill was fixed at ` 1,00,000/- and the rest of the assets and liabilities were
valued on the basis of the balance sheet as at 30th September, 2016.
The company paid the purchase consideration in Equity Shares of ` 10/- each.
(a) Balance Sheet of the firm as at 30.9.2016.
(b) The realisation Account.
(c) Partner's Capital Accounts showing the final settlement between them.
Q. 20. 'X' and 'Y' carrying on business in partnership sharing Profits and Losses equally,
wished to dissolve the firm and sell the business to 'X' Limited Company on 31.3.2017,
when the firm's position was as follows :
X's Capital 1,50,000 Land and Building 1,00,000
Y's Capital 1,40,000 Furniture 40,000
Sundry Creditors 20,000 Stock 1,00,000
Debtors 66,000
Cash 4,000
3,10,000 3,10,000
The arrangement with X Limited Company was as follows :
(i) Land and Building was purchased at 20% more than the book value.
(ii) Furniture and Stock were purchased at book values less 15%.
(iii) The goodwill of the firm was valued at ` 40,000.
(iv) The firm's debtors, cash and creditors were not to be taken over, but the company
agreed to collect the book debts of the firm and discharge the creditors of the firm
as agent, for which services, the company was to be paid 5% on all collections from
the firm's debtors and 3% on cash paid to firm's creditors.
(v) The purchase price was to be discharged by the company in fully paid equity
shares of ` 10 each at a premium of ` 2 per share.
The company collects all the amounts from debtors (Bad debts 6,000). The creditors
were paid off less by ` 1,000 allowed by them as discount. The company paid the
balance due to the vendors in cash.
Prepare :
Realisation account, the Capital accounts of the partners and the Cash account in the
books of partnership firm and Journal of X Ltd.

J. K. SHAH CLASSES INTER C.A. - ADVANCED ACCOUNTING
CHAPTER - 1
1. AS 7 addresses the issue of allocation of revenue & costs attributable to contract

activity to the accounting period in which construction work is performed.
2. A construction contract is defined as a contract specifically negotiated for the
construction of an asset or combination of assets that are closely inter-related or
inter-dependent in terms of their design, technology & function or their ultimate purpose
or use e.g. :- contract for construction of a bridge, building, dam, pipeline, road etc.
Construction contracts also include contract for rendering services relating to
construction of assets (e.g. :- service of architect) & contracts for destruction or
restoration of asset & restoration of environment following demolition of asset.
3. Construction contracts are of the following 2 types :
a. Fixed price construction contracts : are those in which parties agree to a fixed
price or fixed rate per unit & in some cases subject to escalation clause
b. Cost plus construction contracts : are those which involves reimbursement of
defined costs plus a percentage of such cost or a fixed fee.
Cost plus contracts involving a maximum ceiling would bear the characteristics of
both the above types.
4. Profit / Loss is to be calculated for each contract separately but when a group of
contracts have been negotiated as a single package with an overall profit margin
then all such contracts put together would be treated as a single contract.
5. Construction contracts may provide for construction of additional asset at the option
of the customer. The construction of additional asset should be treated as a separate
contract if the asset differs significantly from the asset covered by the original contract
& the price of the additional asset is independent of the original contract price.
6. To calculate the contract profit/loss, contract revenue & costs must be calculated.
Contract revenue consists of :
a. Agreed price
b. Claims arising due to escalation clause
c. Claims for re-imbursement of costs not included in the contract price
d. Increase or decrease in revenue due to change or variation in scope of work to
be performed
e. Incentives (additional amounts paid if performance exceeds agreed targets)
Contract costs consists of the following :
a. Direct or specific costs : Direct materials, direct labour & direct expenses
b. Allocable costs : Insurance, design & technical assistance expenditure etc.
specifically chargeable under the contract

Following costs are excluded from contract costs :
a. General administration cost
b. Selling costs
c. R & D costs
d. Depreciation on idle plant & equipment
7. Costs incurred in securing contracts & pre-contract costs are included in the contract
costs if it is probable that contract will be obtained. Otherwise they should be charged
to the General P & L A/c.
8. Interest cost can be included in contract costs if the asset is a qualifying asset as per AS – 16.
9. Recognition of contract cost & revenue : When the outcome of the contract can
be estimated reliably then contract revenue & related costs are recognized as revenue
& costs by reference to the stage of completion of the contract activity at the Balance
Sheet date. This is also called Percentage Completion Method (PCM). The stage of
completion can be determined in a variety of ways :
a. Cost to cost method : Compare the total cost incurred to date with the total
estimated cost of the contract. Therefore, % of completion = [cost incurred till
date / (cost incurred till date + cost likely to be incurred for completion)] * 100.
b. Survey of work performed
c. Completion of a physical proportion of the contract work.
10. Contract revenue recognition = Contract price * % of completion – Revenue recognized earlier
11. When it is probable that total contract costs will exceed total contract revenue,
expected loss should be recognized as an expense immediately irrespective of
a. Whether or not work has commenced
b. The stage of completion
c. The amount of profit on other contracts which are not treated as a single contract
12. When the outcome of a contract cannot be reliably estimated then revenue should be
recognized only to the extent of costs incurred & of which recovery is possible.
Recognition of revenue & expenditure in construction contracts is based on estimates.
Changes in estimates in year-to-year are accounted as a change in accounting
estimate as per AS 5. This change will neither be a PPI nor an extra-ordinary item.
13. Disclosure : An enterprise should disclose the method used to determine the stage
of completion & method used to determine contract revenue. In addition to the policy
disclosure, the following disclosures are also required :
a. Amount of contract revenue recognized during the period
b. Contract cost incurred & recognition of profit
c. Advance received
d. Gross amount due to / from customers (Costs Incurred + Recognised
Profit - Recognised Losses - Progressive Billing)
e. Gross a mo unt d ue to cu st ome rs (P ro gress ive B illin g + Recogn is ed
Losses - Recognised Profit - Costs Incurred)
f. Retentions

1. Why AS 9?
It is basically concerned with the "timing of recognition" in the statement of Profit and
Loss. It lays down criteria for recognition of revenue most suited to preparers of FS of
enterprises engaged in varied activities.
2. What is Revenue?
Revenue means the gross inflow of cash, receivable or other consideration arising in the
course of ordinary activities of an enterprise from sale of goods, from the rendering of
services and from the use by others of the resources of the enterprise yielding interest,
royalties and dividend.
3. Common elements for recognition of revenue:
To all these three groups aforesaid, there are two common elements. It is imperative to
seek answers to two questions.
• No significant uncertainty exists regarding the amount of the consideration that will
be derived (MEASURABILITY)
• Are we certain that the amount will be received? (COLLECTABILITY)
NOTE:
a. If Consideration is not measurable
Consideration receivable for sale of goods or for rendering of services should be
determinable. When such consideration is not determinable within reasonable lim-
its, revenue recognition will be postponed.
b. If collectability is uncertain
When there is uncertainty about the collection of revenue even at the time when
claim is raised recognition must be postponed to the extent of uncertainty involved.
In such cases, it may be appropriate to recognize revenue only when it is reason-
ably certain that the ultimate collection will be made.
Where there is no uncertainty as to ultimate collection, revenue is recognized at the
time of sale or rendering of service even though payments are made by installments.
c. Effect of postponement
When recognition of revenue is postponed due to the effect of uncertainties', the
amount is considered as revenue of the period in which it is properly recognized.
d. Uncertainty arises later - make a provision(Do not adjust revenue)
When a transaction was concluded initially, the collectability was certain. Revenue,
therefore, stood recognized. Subsequent to sale or rendering of the service, and at
a much later date, the collectability of consideration is rendered uncertain. In such a
situation, it is more appropriate to make a separate provision to reflect the
uncertainty rather than to adjust the amount of revenue originally recorded.

4. Sale of goods:
Revenue is to be recognized when the following conditions are satisfied:
a .The seller has transferred to the buyer the property in goods for a consideration,
OR
b. Significant risks and rewards of ownership have been transferred to the buyer
AND
c. No significant uncertainty exists regarding the amount of consideration that will be
derived from the sale of goods
5. Rendering of services
The Standard prescribes two methods:
a. COMPLETED SERVICE CONTRACT METHOD:
Performance in a service contract may consist of
(i) one single act
(ii) or more than one act, where services not performed are significant enough
in relation to all transaction taken as whole. Under such conditions, perform-
ance is not deemed complete and service is not chargeable unless all the
transactions are completed.
Revenue is recognized only when the SOLE or FINAL act takes place and the serv-
ice becomes
chargeable.
b. PROPORTIONATE COMPLETION METHOD:
This method - evolved out of accrual concept - is to be applied when performance
consists of execution of more than one act. Revenue is to be recognized propor-
tionately by reference to the performance of each act.
Revenue is recognized when EACH independent act takes place and the propor-
tionate service
becomes chargeable.
6. Other income:
a. INTEREST:
Revenue must be recognized on time proportion basis.
b. ROYALTIES:
Revenue is recognized on accrual basis in accordance with the terms of relevant
agreement.
c. DIVIDENDS:
Revenue is to be recognized only when the owner's right to receive payment is
established (When dividends are DECLARED)
EXECEPTION: When interest, royalties and dividends are receivable from other coun-
tries which requires forex permission, revenue recognition has to be on CASH BASIS.

AS - 18 : RELATED PARTY DISCLOSURES
1) This standard deals only with related party relationships described in (a) to (e) below :
(a) enterprises that directly, or indirectly through one or more intermediates, control,
or are controlled by, or are under common control with, the reporting enterprise
(this includes holding companies, subsidiaries and fellow subsidiaries) ;
(b) associates and joint ventures of the reporting enterprise and the investing
party or venturer in respect of which the reporting enterprise is an associate
or a joint venture ;
(c) individuals owning, directly or indirectly, an interest in the voting power of the
reporting enterprise that gives them control or significant influence over the
enterprise, and relatives of any such individual ;
(d) key management personnel and relatives of such personnel ; and
(e) enterprises over which any person described in (c) or (d) is able to exercise
significant influence. This includes enterprises owned by directors or major
shareholders of the reporting enterprise and enterprises that have a mem-
ber key management in common with the reporting enterprise.
2) In the context of this statement, the following are deemed not to be related parties:
(a) two companies simply because they have a director in common, notwithstand-
ing paragraph 3(d) or (e) above (unless the director is able to affect the policies
of both companies in their manual dealings);
(b) a single customer, supplier, franchiser, distributor, or general agent with whom
an enterprise transacts a significant volume of business merely by virtue of
the resulting economic dependence ; and
(c) the parties listed below, in the course of their normal dealings with an enterprise
by virtue of those dealings (although they may circumscribe the freedom of ac-
tion of the enterprise or participate in its decision - making process) :
(i) providers of finance ;
(ii) trade unions ;
(iii) public utilities ;
(iv) government departments and government agencies including government
sponsored bodies.
3) Exemptions
(a) Related party disclosure requirements as laid down in this Statement do no
apply in circumstances where providing such disclosures would conflict with
the reporting enterprises duties of confidentiality as specifically required in
terms of statute or by any regulator or similar competent authority.
For example, banks are obliged by law to maintain confidentiality in respect of
their customer's transactions and this Statement would not override the obliga-
tion to preserve the confidentiality of customer's dealings.

(b) Disclosure of transactions between members of group is unnecessary is
consolidated financial statement because consolidated financial statements present
information about the holding and its subsidiaries as a single reporting enterprise.
(c) No disclosure is required in the financial statements of state - controlled
enterprises as regards related party relationships with other state - controlled
enterprises and transactions with such enterprises.
4) Definitions
For the purpose of this standard, the following terms are used with the meanings specified:
Related Party - parties are considered to be related if at any time during the reporting
period one party has the ability to control the other party or exercise significant influence
over the other party in making financial and / or operating decisions.
Related Party Transactions - a transfer of resources or obligations between related
parties regardless of whether or not a price is charged.
Control - (a) ownership, directly or indirectly, of more than one half of the voting power
of an enterprise, or (b) control of the composition of the board of directors in the case of
a company or of the composition of the corresponding governing body in case of any
other enterprise, or (c) a substantial interest in voting power and the power to direct, by
statute or agreement, the financial and / or operating policies of the enterprise.
Significant Influence - participation in the financial and / or operating policy decisions
of an enterprise, but not control of those policies.
An Associate - an enterprise in which an investing reporting party has significant
influence and which is neither a subsidiary nor a joint venture of that party.
A Joint Venture - a contractual arrangement whereby two ore more parties undertake
an economic activity which is subject to joint control.
Joint Control - the contractually agreed sharing of power to govern the financial
and operating policies of an economic activity so as to obtain benefits from it.
Key Management Personnel - those persons who have the authority and responsibil-
ity for planning, directing and controlling the activities of the reporting enterprise.
Relative - in relation to an individual, means the spouse, son, daughter, brother,
sister, father and mother who may be expected to influence, or be influenced by,
that individual in his / her dealings with the reporting enterprise.
Holding Company - a company having one ore more subsidiaries.
Subsidiary - a company :
(a) in which another company (the holding company) holds, either by itself and /
or through one ore more subsidiaries, more than one - half in nominal value
of its equity share capital ; or
(b) of which another company (the holding company) controls, either by itself and /
or through one or more subsidiaries, the composition of its board of directors.

Fellow subsidiary - a company is considered to be a fellow subsidiary of another
company if both are subsidiaries of the same holding company.
State - Controlled Enterprise - an enterprise which is under the control of the Central
Government and / or any State Government(s).
5) For the purpose of this standard, an enterprise is considered to control the composition of-
(i) the board of directors of a company, if it has the power, without the consent
or concurrence of any other person, to appoint or remove all or a majority of
directors of that company. An enterprise is deemed to have the power to
appoint a director if any of the following conditions is satisfied:
(a) a person cannot be appointed as director without the exercise in his

favour by that enterprise of such a power as aforesaid ; or
(b) a person's appointment as director follows necessarily from his

appointment to a position held by him in that enterprise ; or
(c) the director is nominated by that enterprise; in case that enterprise is a

company, the director is nominated by the company / subsidiary thereof.
(ii) the governing body of an enterprise that is not a company, if it has the power,
without the consent or the concurrence of any other person, to appoint or
remove all or a majority of members of the governing body of that other
enterprise. An enterprise is deemed to have the power to appoint a member
if any of the following conditions is satisfied : Similar to (a), (b) & (c) above.
6) An enterprise is considered to have a substantial interest in another enterprise if that

enterprise owns, directly or indirectly, 20 per cent or more interest in the voting power of
the other enterprise. Similarly, an individual is considered to have a substantial interest
in an enterprise, if that individual owns, directly or indirectly, 20 per cent or more interest
in the voting power of the enterprise.
7) S ig n if i ca nt i nf lu enc e m ay be exer cis ed in sever al ways, f or exam ple, by
representation on the board of directors, participation in the policy making process,
material inter company transactions, interchange of managerial personnel, or
dependence on technical information.
8) Key management personnel are those persons who have the authority and
responsibility for planning, directing and controlling the activities of the reporting
enterprise. For example, in the case of a company, the managing director(s), whole
time director(s), manager and any person in accordance with whose directions or
instructions the board of directors of the company is accustomed to act, are usu-
ally considered key management personnel.
9) Without related party disclosures, there is a general presumption that transactions

reflected in financial statements are consummated on an arm's - length basis
between independent parties. However, that presumption may not be valid when
related party relationships exist because related parties may enter into transac-
tions which unrelated parties would not enter into.

10) Disclosure : Name of the related party and nature of the related party relationship
where control exists should be disclosed irrespective of whether or not there have
been transactions between the related parties.
If there have been transactions between related parties, during the existence of a
related party relationship, the reporting enterprise should disclose the following :
(i) the name of the transacting related party ;
(ii) a description of the relationship between the parties ;
(iii) a description of the nature of transactions ;
(iv) volume of the transactions either as an amount or as an appropriate proportion ;
(v) any other elements of the related party transactions necessary for an under
standing of the financial statements ;
(vi) the amounts or appropriate proportions of outstanding items pertaining to

related parties at the balance sheet date and provisions for doubtful debts
due from such parties at that date ; and
(vii) amount written off or written back in the period in respect of debts due from
or to related parties.
The following are examples of the related party transactions in respect of which
disclosures may be made by a reporting enterprise :
(i) purchases or sales of goods (finished or unfinished) ;
(ii) purchases or sales of fixed assets ;
(iii) rendering or receiving of services ;
(iv) agency arrangements ;
(v) leasing or hire purchase arrangements ;
(vi) transfer of research and development ;
(vii) licences agreements ;
(viii) finance (including loans and equity contributions in cash or in kind) ;
(ix) guarantees and collaterals ; and
(x) management contracts including for deputation of employees.
Items of a similar nature may be disclosed in aggregate by type of related party.

1. Lease is an arrangement by which the lessor gives a right to use an asset for a given period of
time to the lessee on rent
2. Leases are classified into Finance Lease & Operating Lease
3. Finance Lease : It is a lease that transfers substantially all the risks & rewards incidental to
ownership of an asset to the lessee by the lessor, but not legal ownership. In the following
situations, the lease transactions are called Finance Lease :
(a) The lessee will get the ownership of the leased asset at the end of the lease term (i.e.
hire purchase transactions).
(b) The lessee has an option to buy the leased asset at the end of the lease term at a price
which is lower than its expected fair value at the date on which option will be exercisable
& the lessee is likely to exercise the option.
(c) The lease term covers the major part of the useful life of the asset.
(d) At the beginning of the lease term, the PV of Minimum Lease Payments (MLPs) covers
substantially the fair value (FV).
(e) The asset given is of specialised nature & can be used only by the lessee without major
modifications.
4. Operating Lease : It is a lease other than Finance Lease
5. Definitions :
(a) Minimum Lease Payments (MLP)
(i) MLP(lessee) = Lease Rents (LR) + Guaranteed Residual Value (GRV) by or on
behalf of the lessee
(ii) MLP (lessor) = LR + GRV by or on behalf of the lessee or by an independent 3rd
party (i.e. anybody)
MLPs do not include contingent rent, cost of services & taxes to be paid by &
reimbursed to the lessor by the lessee. E.g. : property tax etc.
(b) If lessee has purchase option & is likely to exercise it then,
(i) MLP (lessor & lessee) = LR + Purchase Price (Option Price)
(c) Definitions from Lessor point of view only :
(i) Residual Value (RV) = It is the estimated FV of the leased asset at the end of the lease term
(ii) Unguaranteed Residual Value (UGRV) = RV – GRV (anybody)
(iii) Gross Investment (GI) = MLP(lessor) + UGRV
It is just like Hire Purchase Price. In other words, GI is the maximum amount a
lessor can get i.e. LR + RV
(iv) Unearned Finance Income = GI – PV of GI
In other words, it is the interest earned by the lessor
(v) Net Investment in Lease (NI) = GI – unearned finance income
In other words, it is just like cash price i.e. PV of GI
(vi) FV is basically the market price (generally the cost price)
(vii) Lease Term : The lease term is the non-cancellable period for which the lessee
has agreed to take on lease the asset together with any future periods for which
the lessee has the option to continue the lease of the asset, with or without further
payment, which option at the inception of the lease it is reasonably certain that
the lessee will exercise
(viii) Implicit Interest Rate : It is the discounting rate that equates PV of GI to the FV.
Implicit Interest Rate can be calculated by the IRR technique.

1. Basic EPS = Net profit attributable to ESHs / Weighted average no. of equity shares (WANES)
2. Numerator includes PPIs, extra-ordinary items & is after deduction of tax (current & deferred)
& deduction of preference dividend including dividend tax on preference dividend.
3. Time is the weight factor for calculation of WANES. WANES is calculated on the basis of
equity shares outstanding during the period. Shares are included in the calculation of WANES
from the date the consideration is receivable. For e.g. :
Shares issued Included from
For cash Date of cash receivable
Against conversion of debentures Date of conversion
Against interest or principle Date on which interest ceases to accrue
Against settlement of liability Date on which settlement becomes effective
For acquisition of assets Date on which the acquisition is recognized
Amalgamation in the nature of purchase Date of acquisition
Amalgamation in the nature of merger Beginning of the reporting period
Bonus shares Beginning of the reporting period
4. Partly paid equity shares should be treated as a fraction of an equity share i.e. converted to
equivalent fully paid shares.
5. Bonus Issue : WANES should be so adjusted as if the bonus issue was made at the start of
the earliest reporting period.
6. Rights Issue : If the rights issue is made at fair value, then it is treated as a normal issue i.e.
included in WANES from the date of issue. However, generally a rights issue is below the fair
price i.e. there is a bonus element to it. In this case, the no. of shares before the rights issue
are to be multiplied by a Rights Factor, which is calculated as follows :
Rights Factor = FV per share immediately prior to the exercise of rights / Theoretical ex-rights
FV per share
7. In case of a share split or consolidation only the number of shares changes without any change
in resources. EPS must be calculated on the basis of revised no. of shares from the beginning
of the reporting period (similar to bonus issue).
8. Potential equity share is a financial instrument or a contract that entitles its holders to equity
shares i.e. convertible debentures, convertible preference shares, Esops etc.
9. Potential equity shares are considered dilutive when their conversion into equity shares result
in a decrease in EPS.
10. Diluted EPS = Net profit / loss attributable to ESHs after adjustment for diluted earnings /
WANES (assuming the conversion of potential equity shares).
11. Only dilutive potential equity shares are considered for calculating Diluted EPS. Anti-dilutive
potential equity shares are ignored.
12. Re-statement : If the no. of equity shares or potential shares outstanding is increased as a
result of bonus issue/share split / consolidation of shares then the Basic EPS & Diluted EPS
should be adjusted for all the periods presented.
13. Disclosures : The amount used as numerator for calculating Basic & Diluted EPS & its
reconciliation with the net profit / loss for the period. Also, the calculation of WANES used as
denominator in the calculation of Basic EPS & Diluted EPS.
AS - 24 : DISCOUNTINUING OPERATIONS
1) Definition :
A discontinuing operation is a component of an enterprise
(a) that the enterprise, pursuant to a single plan, is
i) disposing of substantially in its entirety, such as by selling the component
in a single transaction, or by demerger or spin-off of ownership of the
component to the enterprise's shareholders,
ii) disposing of piecemeal, such as by selling off the component's as-
sets and settling its liabilities individually, or
iii) terminating through abandonment, and
(b) that represents a separate major line of business or geographical area of operations,
and
(c) that can be distinguished operationally and for financial reporting purposes.
2) Discontinuing Operations are expected to occur infrequently. However Discontinu-
ing Operation is not an extraordinary item as defined in Accounting Standard - 5. Also
a Discontinuing Operation does not automatically bring into question the fundamen-
tal assumption of going concern.
3) A restructuring event is not necessarily a Discontinuing Operation. Examples of activi-
ties that do not necessarily on their own satisfy the discontinuing definition, but that
might do so in combination with other circumstances, include :
(a) Gradual or evolutionary phasing out of a product line or class of service ;
(b) Discontinuing, even if relatively abruptly, several products within an ongoing
line of business ;
(c) Shifting of some production or marketing activities for a particular line of busi-
ness from one location to another; and
(d) Closing of a facility to achieve productivity improvements or other cost savings.
4) A Discontinuing Operation is a component of an enterprise that can be distinguished
operationally and for financial reporting. A component can be distinguished operationally and
for financial reporting purposes if all the following conditions are met :
a) the operating assets and liabilities of the component can be directly attributed to it ;
b) its revenue can be directly attributed to it ;
c) at least a majority of its operating expenses can be directly attributed to it.
Assets, liabilities, revenue, and expenses are directly attributable to a component if
they would be eliminated when the component is sold, abandoned or otherwise
disposed of. If debt is attributable to a component, the related interest and other
financing costs are similarly attributed to it.
5) Discontinuance begins when initial disclosure event takes place. A disclosure is re-
quired when either of the following two events takes place (whichever is earlier) :
(a) the enterprise has entered into a binding sale agreement for substantially all
of the assets attributable to the discontinuing operation ; or
(b) the enterprise's board of directors or similar governing body has both
(i) approved a detailed, formal plan for the discontinuance and (ii) made an
announcement of the plan.

A detailed, formal plan for the discontinuance normally includes :
(a) identification of the major assets to be disposed of ;
(b) the expected method of disposal ;
(c) the period expected to be required for completion of the disposal;
(d) the principal locations affected ;
(e) the location, function, and approximate number of employees who will be
compensated for terminating their services ; and
(f) the estimated proceeds or salvage to be realised by disposal.
An enterprise's board of directors or similar governing body is considered to have made
the announcement of a detailed, formal plan for discontinuance, if it has announced the
main features of the plan to those affected by it, such as, lenders, stock exchanges,
creditors, trade unions, etc., in a sufficiently specific manner so as to make the
enterprise demonstrably committed to the discontinuance.
6) The initial disclosure required relating to a discontinuing Operations are
(a) a description of the discontinuing operation ;
(b) the business or geographical segment in which it is reported as per Accounting
Standard - 17, Segment Reporting ;
(c) the date and nature of the initial disclosure event ;
(d) the date or period in which the discontinuance is expected to be completed if
known or determinable ;
(e) the carrying amounts, as of the balance sheet date, of the total assets to be
disposed of and the total liabilities to be settled ;
(f) the amount of revenue and expenses in respect of the ordinary activities attributable
to the discontinuing operation during the current financial reporting period ;
(g) the amount of pre-tax profit or loss from ordinary activities attributable to the
discontinuing operation during the current financial reporting period, and the
income tax expense (as defined under Accounting Standard - 22) related
thereto; and
(h) the amounts of net cash flows attributable to the operating, investing, and financing
activities of the discontinuing operation during the current financial reporting period.
For the purpose of presentation and disclosures required by Accounting Standard - 24,
the items of assets, liabilities, revenues, expenses, gains, losses, and cash flows can
be attributed to a discontinuing operation only if they will be disposed of, settled, re-
duced, or eliminated when the discontinuance is completed.
When an enterprise disposes of assets or settles liabilities attributable to a
discontinuing operation or enters into binding agreements for the sale of such
assets or the settlement of such liabilities, it should include, in its financial
statements, the following information when the events occur :
(a) For any gain or loss that is recognised on the disposal of assets or settlement
of liabilities attributable to the discontinuing operation,
(i) the amount of the pre tax gain or loss and
(ii) income tax expense relating to the gain or loss; and
(b) The net selling price or range of prices (which is after deducting expected disposal
costs) of the those net assets for which the enterprise has entered into one or
more binding sale agreements, the expected timing of receipt of those cash flows
and the carrying amount of those net assets on the balance sheet date.

7) If an initial disclosure event occurs between the balance sheet date and the date on
which the financial statements for that period are approved by the board of directors in
the case of a company or by the corresponding approving authority in the case of any
other enterprise, disclosures as required by Accounting Standard - 4, Contingencies
and Events Occurring After Balance Sheet Date, are made. However, disclosures under
Accounting Standard - 24 are not required.
8) The disclosure should continue in Financial Statement for the periods upto and includ-
ing the period in which the discontinuance is completed.
9) Narrative disclosures are g iven as notes to Financial Statement g iving the
following information :
* Description of Discontinuing Operations.
* Business geographical segment in which it is covered under Accounting
Standard - 17.
* Date & nature of initial disclosure event
* Date and period in which discontinuance is likely to be completed if known or determinable.
Quantitative disclosures are as follows :
* Carrying amount of Assets and Liabilities to be disposed.
* Revenue, expenses, Pre-tax profits, tax related to Discontinuing Operations.
* Cash flow classified as operating, Investing & Financing activities for cur-
rent period to be separately shown for Discontinuing Operations.

1. An assets is defined as a resource controlled by an enterprise as a result of past events &

from which future economic benefits are expected to flow to the enterprise.
2. Objective : AS 26 prescribes recognition criteria, measurement, amortization &
disclosure of IAs
3. AS 26 is applicable to :
a. Goodwill
b. Advertising exps
c. Preliminary exps
d. R & D costs
e. Patents, trademarks & copyrights
f. Computer software etc
4. Definition of IA : An IA is an identifiable, non-monetary asset without physical substance held
for use in the production or supplying of goods or services, or for rentals to others or for
administrative purposes.
5. Recognition Criteria : An IA will be recognized i.e. recorded in the books provided both the
following conditions are fulfilled :
a. Probable future economic benefits will flow from the IA to the enterprise &
b. The cost of the IAs can be reliably measured
6. The cost of IA depends on the way it is acquired :
a. Separate Acquisition
b. Exchange for another asset
c. Issue of shares or securities
d. IAs arising from amalgamation (in the nature of purchase)
e. Acquisition through government grants
7. Subsequent Expenditure on IAs : Expenditure incurred on IAs after they have been
recognized / recorded is called subsequent expenditure. It should be added to the cost of IA
only if such subsequent expenditure will enable the asset to generate future economic benefits
in excess of its originally assessed standard of performance & the expenditure can be
measured & attributed to the asset reliably.
8. Carrying amount of IAs : It is the amount at which assets are recognized in the Balance
Sheet, net of accumulated amortization & impairment losses thereon
9. Amortization method : The depreciable amount of IAs is amortised over its useful life.
Depreciable amount is cost less residual value. AS 26 provides that amortisation
method should reflect the pattern in which the asset’s economic benefits are consumed.
If that is not determinable then SLM should be used. The residual value of IAs is
assumed to be zero unless :
a. There is commitment by a third party to purchase the asset at the end of its useful life or
b. There is an active market for the asset that can be used to determine the residual
value & that such a market would probably exist at the end of the asset’s useful
life. The residual value cannot be subsequently increase for changes in value
(decrease is permitted).
The useful life of the IAs should be taken as 10 years unless there is clear evidence that the
useful life is longer than 10 years. If economic benefits from IAs are achieved through legal
right granted for finite period then the useful life cannot exceed the legal right period unless the
legal right is renewable & the renewal is certain.
10. Amortisation method should be review annually. It should be changed if :
a. The expected useful life has significantly changed or
b. The pattern of future economic benefits has significantly changed.
Prospective / retrospective effect would depend upon whether it is a change in accounting
estimate / policy.
11. An IA should be de-recognised / eliminated from Balance Sheet if :
a. It is disposed or
b. No future economic benefits are expected from its use.
Gain / loss on disposal should be recognized as income / expense in the P & L A/c.
12. Internally generated goodwill is not recognized in the financial statements because the cost
cannot be reliably measured.
13. R & D expense : Research is original & planned investigation undertaken with the prospect
of gaining new scientific or technical knowledge & understanding. Development is the
application of research findings or other knowledge to a plan or design for the production of
new or substantially improved materials, devices, products, process systems or services prior
to the commencement of commercial production or use. If an enterprise cannot distinguish the
research phase from the development phase of a project to create an intangible asset, it
should treat the expenditure on that project as if it were incurred in the research phase only. As
per AS 26, research cost must be expensed when it is incurred i.e. research cost cannot be
capitalized. Development costs are also to be expensed unless they meet the asset recognition
criteria & the enterprise can demonstrate the following :
a. Technical feasibility of completing the IA so that it will be available for use or sale.
b. Its intention to complete the IA & its intention & ability to use or sell it etc..
14. Cost of internally generated intangible would comprise of the costs which are incurred during
the development phase of the IA & which are directly attributable to or reasonably allocable to
the IA.
15. AS 26 is not applicable to :
a. Ownership interest in other enterprise, investments
b. Goodwill arising on amalgamation
c. Goodwill arising on consolidation
d. DTA
e. Issue exps, discounts & premiums on borrowings & issue of shares etc.
16. Disclosures : The financial statements should disclose the following in respect of IA :
a. Useful life or amortisation rate
b. Amortisation method
c. Gross carrying amount & accumulated amortisation at the beginning & end of the period
d. Reconciliation of carrying amount at the beginning & end of the period
e. If amortisation period is more than 10 years, the reason thereof
f. R & D exps recognized as expenses during the period etc..
AS 29 : PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS

1. As per AS 4, contingency refers to conditions or situations on the Balance Sheet date, the
outcome of which is not known & the result would be determined by future events which
may or may not occur.
2. Definitions :
a. A provision is a liability which can be measured only by using a substantial degree

of estimation.
b. A liability is a present obligation of the enterprise arising from past events, the
settlement of which is expected to result in an outflow from the enterprise of resources
embodying economic benefits.
c. An obligating event is an event that creates an obligation that results in an enterprise

having no realistic alternative to settling that obligation. Thus, a past event that leads
to a present obligation is called an obligating event.
d. A contingent liability is :
i. A possible obligation that arises from past events & the existence of which
be confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the enterprise or
ii. A present obligation that arises from past events but is not recognized
because :
1. it is not probable that an outflow of resources embodying economic

benefits will be required to settle the obligation or
2. a reliable estimate of the amount of obligation cannot be made
e. A contingent asset is a possible asset that arises from past events, the existence of
which will be confirmed only by the occurrence or non-occurrence of 1 or more
uncertain future events not wholly within the control of the enterprise
f. An obligation is a present obligation if based on the evidence available, its existence

at the balance sheet date is considered probable i.e. more likely than not
g. An obligation is a possible obligation if based on the evidence available, its existence

at the balance sheet date is considered not probable.
3. Provisions : A provision should be recognized when :-
a. An enterprise has a present obligation as a result of a past event
b. Its is probable that an outflow of resources embodying economic benefits will be

required to settle the obligation &
c. A reliable estimate can be made of the amount of the obligation.

If these conditions are not met, no provision should be recognized. The amount of
provision should be recognized before tax & is not discounted to its PV.
4. Financial statements deal with the financial position of an enterprise at the end of its
reporting period & not its possible position in the future. Therefore, no provision is
recognized for costs that need to be incurred to operate in the future. The only liabilities
recognized in an enterprise’s B/S are those that exist at the B/S date. It is only those
obligation arising from past events existing independently of an enterprise’s future
actions (i.e. the future conduct of its business) that are recognized as provisions.
5. Where there are a number of similar obligations (e.g. : product warranties), the
probability that an outflow will be required in settlement is determined by considering
the class of obligations as a whole.
6. An enterprise should not recognize a contingent liability. A contingent liability is to be
disclosed unless the possibility of an outflow of resources embodying economic
benefits is remote. When an enterprise is jointly & severally liable for an obligation,
that part of the obligation which is expected to be met by other parties is treated as a
contingent liability. Contingent liabilities may develop in a way not initially expected.
Therefore, they are assessed continually to determine whether an outflow of resources
economic benefits has become probable.
7. Where some or all of the expenditure required to settle a provision is expected to be
reimbursed by another party, the reimbursement should be recognized, when & only
when, it is virtually certain that reimbursement will be received if the enterprise settles
the obligation. The reimbursement should be treated as a separate asset. The amount
recognized for the reimbursement should not exceed the amount of the provision. In
the statement of the P & L, the expense relating to a provision may be presented net
of the amount recognized for a reimbursement
8. Provisions should be reviewed at each Balance Sheet date & adjusted to reflect the
current best estimate. If it is no longer probable that an outflow of resources embodying
economic benefits will be required to settle the obligation, the provision should be
reversed.
9. An enterprise should not recognize a contingent asset. Contingent assets usually arise
from unplanned or other unexpected events that give rise to the possibility of an inflow
of economic benefits to the enterprise. E.g. : a claim that an enterprise is pursuing
through legal processes, where the outcome is uncertain. Where an inflow of economic
benefits is probable, the contingent asset is usually disclosed in the Directors’ Report
& not in the financial statements. Contingent assets are assessed continually & if it
has become virtually certain that an inflow of economic benefits will arise, the asset &
the related income are recognized in the financial statements of the period in which
the change occurs.
Q. 1. L & T construction company Ltd. was awarded a contract for construction of a bridge
for ` 100 crores on 01/06/02.Total contract cost estimated was ` 85 crores. The
position of the contract as on 31/03/03 & 31/03/04 was as under :
In ` crores
As on 31/03/03 As on 31/03/04
Contract price 100 100
Contract cost incurred till date 25 95 (100% complete)
Estimated contract cost of completion 60 NIL
While closing the books of accounts as on 31/03/04 the chief accountant treated excess
cost of ` 10 crores incurred as against an estimated cost of ` 85 crores (25 + 60) as
on 31/03/03 as mistake in estimation of cost, hence categorized ` 10 crores as a
prior period expense. Comment
Q. 2. Hiranandani Ltd. follows the percentage completion method for recognizing the revenue
on construction contracts. From the following particulars, you are required to determine
the results of contracts X, Y & Z to be included in the P & L A/c of the company for the
year ended 31/03/04.
In ` crores
Particulars X Y Z
Date of commencement 15/04/03 01/10/03 05/08/02
Expected date of completion 15/05/04 01/07/06 30/04/04
Contract Value 313 1247 80
Costs incurred till 31/03/04 239 75 72
Estimated costs to complete 17 9
Profits recognized till 31/03/03 1.50
Q. 3. Raheja Ltd. procured a ` 5,00,000 contract that required 3 years to complete &
incurred a total cost of ` 4,50,000. The following data pertains to the construction
period. The firm seeks your advice & assistance in the presentation of accounts in
accordance with AS 7. Also show relevant disclosures.
Particulars Year 1 Year 2 Year 3
Cumulative costs incurred till date 1,50,000 3,60,000 4,05,000
Estimated cost yet to be incurred at year end 3,00,000 40,000 ----
Progressive billing made during the year 1,00,000 3,70,000 30,000
Collections of billings 75,000 3,00,000 1,25,000

Q. 4. A company took a construction contract for ` 100 lakhs in January, 2006. It was found
that 80% of the contract was completed at a cost of ` 92 lakhs on the closing date i.e.
on 31.3.2007. The company estimates further expenditure of ` 23 lakhs for completing
the contract. The expected loss would be ` 15 lakhs.
Can the company recognise the loss in the financial statements prepared for the year
ended 31.3.2007?
Q. 5. An amount of ` 9,90,000 was incurred on a contract work upto 31-3-2010. Certificates

have been received to date to the value of ` 12,00,0000 against which ` 10,80,000
has been received in cash. The cost of work done but not certified amounted to
` 22,500. It is estimated that by spending an additional amount of ` 60,000 (including
provision for contingencies) the work can be completed in all respects in another two
months. The agreed contract price of work is ` 12,50,000.
Compute a conservative estimate of the profit to be taken to the e Profit and Loss
Account as per AS-7.
Q. 6. From the following data, show. Profit and Loss A/c (Extract) as would appear in the
books of a contractor following Accounting Standard - 7:
( ` in lakhs)
Contract Price (fixed) 480.00
Cost incurred to date 300.00
Estimated cost to complete 200.00

Q. 7. Suggest a suitable method for recognition of revenue in the following situations :

Sale of Goods :
a. Goods sold subject to installation & inspection
b. Sale on approval
c. Guaranteed sales
d. Consignment sale
e. Cash on delivery
f. Sale & re-purchase agreements
Rendering of services :
a. Insurance agency commission
b. Admission ticket fees for some performance
Q. 8. A company offers product warranty. Past experience shows that the company had to
expend 5% of the sales value of the last accounting year during the current accounting
period to fulfill the warranty obligation. Should the company recognize any provision
for warranty against sales of the current accounting year?
Q. 9. Total sales of XYZ Ltd. include a sum of ` 50 lacs representing royalty receivable for
supply of know-how to a company in Iraq. As per the agreement, the amount is to be
received in USDs.. However, exchange permission was denied to the Iraqi company
for remitting the same. How should this be treated in the books as per AS 9?
Q. 10. Media Advertisers Ltd. obtained advertising rights for the World Cup cricket tournament
to be held in May / June 1999 for ` 2 50 lacs.
a. By 31/03/99 they paid ` 150 lacs to secure these advertising rights & the
balance ` 100 lacs were paid in April 1999.
b. By 31/03/99 they processed advertisement for 70% of the available time for
` 350 lacs. The advertiser paid 60% of the amount by that date & balance 40%
was received by April 1999.
c. The advertisement for balance 30% time was processed in April 1999 for ` 150 lacs.
d. The advertiser paid full amount while booking the advertisement. 25% of the advertising
time is expected to be available in May 1999 & balance 75% in June 1999.
Calculate the Profit/Loss for the month of April, May & June 1999.
Q. 11. M/s. SEA Ltd. recognized ` 5.00 lakhs on accrual basis income from dividend during
the year 2010-11, on shares of the face value of ` 25.00 lakhs held by it in Rock Ltd.
as at 31st March, 2011. Rock Ltd. proposed dividend @ 20% on 10th April, 2011.
However, dividend was declared on 30th June, 2011. Please state with reference to
relevant Accounting Standard, whether the treatment accorded by SEA Ltd. is in order.
Q. 12. A Ltd. entered into a contract with B Ltd. to despatch goods valuing ` 25,000 every
month for 4 months upon receipt of entire payment. B Ltd. accordingly made the
payment of ` 1,00,000 and A Ltd. started despatching the goods. In third month, due
to a natural calamity, B Ltd. requested A Ltd. not to despatch goods until further notice
though A Ltd. is holding the remaining goods worth ` 50,000 ready for despatch. A
Ltd. accounted ` 50,000 as sales and transferred the balance to Advance Received
against Sales. Comment upon the treatment of balance amount with reference to the
provisions of Accounting Standard 9.

AS - 18 : RELATED PARTY DISCLOSURES
Q. 13. A Ltd. sold to B Ltd. goods having a sales value of ` 50 lakhs during the financial year
ended 31.3.2009. Mr. X, the Managing Director and Chief Executive of A Ltd. owns nearly
100% of the capital of B Ltd. The sales were made to B Ltd. at the normal selling price of
A Ltd. The chief accountant of A Ltd. does not consider that these sales should be treated
any differently from any other sale made by the company despite being made to a
controlled company, because the sales were made at normal and that too, at arm's length
prices. Discuss the above issue from the view point AS - 18.
Q. 14. Amro Ltd. is considering the replacement of its outdated mainframe computer on 1st October
2008. The replacement computer has a cost of ` 21 lakhs and its useful economic life is
estimated to be seven years. After negotiations the directors of Amro Ltd. decide to enter into
a four-year lease with Scottish Ltd. for total lease payments of ` 20 lakhs payable in four equal
instalments - the first instalment being due on day one of the leasing period.
Under this arrangement, Scottish Ltd. would have responsibility for up keep and maintenance,
and has negotiated a guaranteed repurchase by the manufacturer at the end of the lease term.
The interest rate implicit in the lease is 10%. Analyse whether this transaction should be treated
as a Finance Lease I Operating Lease with reference to AS 19 in the books of Amro Ltd.
Ans. To determine whether a lease is a finance or operating lease we have to consider the
provisions contained in para 3, 8 and 9 of AS 19. According to para 3:
A finance lease is a lease that transfers substantially all the risks and rewards incident to
ownership of an asset.
An operating lease is a lease other than a finance lease.
The following provisions of para 8 will be considered in determining whether the lease is a
finance or operating lease .
Whether a lease is a finance lease or an operating lease depends on the substance of the
transaction rather than its form. Examples of situations which would normally lead to a lease
being classified as a finance lease are:
(a) at the inception of the lease the present value of the minimum lease payments amounts
to at least substantially all of the fair value of the leased asset; and
(b) the lease transfers ownership of the asset to the lessee by the end of the lease term;
(c) the lease term is for the major part of the economic life of the asset even if title is
not transferred;
Various aspects of the agreement are to be examined in order to determine whether
any of the provisions and indications above are being satisfied.
(i) We shall first calculate the present value of the minimum lease payments as under:
Year 0 (day 1) Year 1 Year 2 Year 3 Total
5,00,000 5,00,000 5,00,000 5,00,000 20,00,000
*1 * 0.909 *0.826 * 0.751
5,00,000 4,54,500 4,13,000 3,75,500 = 17,43,000
(r / off to 000)

Going by the fair value of computer at ` 21.00 lacs, the present value of minimum
lease payments is about 83%. This is indicative of the arrangement being an
operating lease. However, other factors ought to be considered.
(ii) Scottish Ltd. the lessor is vested with the responsibility of upkeep and
maintenance and thus the risks of ownership continues to remain with the lessor.
This is also indicative of the arrangement being an operating lease.
(iii) As regards residual value, manufacturer has himself agreed to a guaranteed
repurchase, and the asset will no longer be with Amro Ltd. at the end of lease term.
(iv) The computer has a life of seven years. But the lease term is restricted to only four
years. Thus the lease term does not cover the entire economic life of the asset.
Viewed in totality, this is an operating lease.
Q. 15. Classify the following, into either operating or finance leases.

(a) Ownership of an asset gets vested in the lessee at the end of lease term
(b) Lessee has option to purchase the asset at lower than fair value, at the end of
lease term.
(c) Economic life of the asset 5 Years, lease term 4 1/ 2 years, but asset is not
acquired at the end of lease term.
(d) PV of MLP = ”X”, Fair value of the asset is Y.
(e) Economic life = 5 Years, lease term 2 years, but the asset is of a special nature,
and has been procured only for use of lessee.
Ans. (a) Finance Lease
(b) If it becomes certain, at the inception of lease itself, that the option will be
exercised by the lessee, it is a Finance Lease.
(c) It will still be classified as a finance lease, since a substantial portion of the life
of the asset is covered by lease - term.
(d) Where X = Y, or where X substantially equals Y, it is a finance lease.
(e) Since the asset is procured only for the use of lessee, it is a finance lease.
Q. 16.Amro Ltd. leased out a machinery for a period of 10 years. The lease term covers a
substantial part of the economic life of the machinery. The lessee ABN Ltd. has agreed
to pay lease rentals @ ` 12 lacs p.a. for seven years. ABN Ltd. has the option to
continue the lease paying @ ` 3 lacs p.a. for another three years.
ABN Ltd. does not provide any guarantee for residual value. But a Group company
gives guarantee for a residual value at the end of 7 years and 10 years at ` 6 lacs
and ` 1 lac respectively.
Required :
(i) What should be taken as minimum lease payment from the standpoint of the lessor
and the lessee?
(ii) Also advice the Gross investment in lease.

Q. 17. Hi Ltd. (the Lessee) acquired a machinery on lease from Fi Ltd. (Lessor) for a period of 3
years beginning from April 1, 2005. The lease term covers the entire economic life of the
machinery. The fair value of the machinery on April 1, 2005 is `3,50,000. The lease
agreement requires the lessee to pay an amount of `1,50,000 per year beginning March
31, 2006.
The lessee has guaranteed a residual value of ` 11,400 on March 31, 2008 to the
lessor. The lessor however estimates that the machinery will have a salvage value of
only ` 10,000 on March 31, 2009. The implicit rate of interest is 15% p.a. The lessee
has classified the lease as a finance lease in accordance with the provisions of
AS-19 and accordingly requires you to.
(i) Compute the value of machinery to be recognised by the lessee.
(ii) Compute the finance charges for each year of the lease term.
Q. 18. Samsung Ltd. has taken the asset on lease from Trintron Ltd. on 01/04/2009. The
following information is given below :
Lease term 4 years
Fair value at inception of lease ` 16,00,000
Annual Lease Rent payable at the end of the year ` 5,00,000
Guaranteed Residual Value ` 1,00,000
Expected Residual Value ` 3,00,000
Implicit Interest Rate 14.97%
The lease has been classified as finance lease.
Account for the above transactions in the books of Samsung Ltd. for the lease term.
Q. 19. Samsung Ltd. has taken the asset on lease from Trintron Ltd. on 01/04/2009. The
following information is given below :
Lease term 4 years
Fair value at inception of lease ` 16,00,000
Annual Lease Rent payable at the end of the year ` 5,00,000
Guaranteed Residual Value ` 1,00,000
Expected Residual Value ` 3,00,000
Implicit Interest Rate 14.97%
Initial direct cost incurred by the lessor ` 40,000
The lease has been classified as finance lease.
Account for the above transactions in the books of Trinitron Ltd.

Q. 20. Operating Lease
An asset is leased out for a period of 5 years out of its useful life of 10 years on
01/04/2009, the date on which the asset was purchase by the lessor. The lease
arrangement has been classified as operating lease. The agreed annual lease rental
is ` 20 lacs. Following information has been provided :
Annual Lease Rent ` 20,00,000
Fair Value of the asset at the inception of lease ` 1,00,00,000
Initial direct cost incurred by the lessor ` 1,00,000
Method of depreciation followed by the lessor SLM
Annual Depreciation charge ` 10,00,000
You are required to account for the operating lease in accordance with the provisions
of AS 19:
(i) In the books of the Lessor (ii) In the books of the Lessee
Q. 21. On 01/01/08 XYZ Ltd. had 1800 equity shares outstanding. On 31/05/08, it issued
600 equity shares for cash. On 01/11/08, it bought back 300 equity shares. Calculate
WANES as on 31/12/08.
Q. 22. LMN Ltd. had 1800 fully paid up equity shares of ` 10 each outstanding as on
01/01/08. On 31/10/08, it issued 600 shares of ` 10 each, ` 5 paid up. Calculate
WANES as on 31/12/08.
Q. 23. ABC Ltd. had 2 lac equity shares outstanding as on 01/01/08. On 01/10/08, it issued
bonus shares in the ratio of 2 : 1. Net profit for 2007 was ` 18 lacs & 2008 was ` 60
lacs. Calculate Basic EPS for 2007 & 2008.
Q. 24. On 01/01/08 D Ltd. had 5 lac shares outstanding. On 01/03/08, it issued 1 new share
for every 5 shares held @ ` 15. FV of 1 equity share immediately before the rights
issue was ` 21. Net profit for the year 2007 was ` 11 lacs & 2008 was ` 15 lacs.
Calculate Basic EPS for 2007 & 2008.
Q. 25. E Ltd. has 50 lac outstanding shares as on 01/01/08. Net profit for the year is ` 1
crore. E Ltd. has 1 lac 12% convertible debentures outstanding of ` 100 each to be
converted into 10 equity shares per debenture. Tax rate = 30%. Calculate Basic &
Diluted EPS.
Q. 26. F Ltd. has 5 lac equity shares outstanding as on 01/01/08. Net profit for 2008 was `12
lacs, average FV per share during 2008 was ` 20. F Ltd. has given share option to its
employees of 1 lac shares at option price of ` 15. Calculate Basic & Diluted EPS.

Q. 27. (i) Explain the concept of ‘Weighted average number of equity shares outstanding
during the period’.
State how would you compute, based on AS-20, the weighted average number
of equity shares in the following case:
1 st April 2011 Balance of Equity Shares 4,80,000
st
31 August 2011 Equity Shares issued for cash 3,60,000
1 st February 2012 Equity shares bought back 1,80,000
st
31 March 2012 Balance of equity shares 6,60,000
(ii) Compute adjusted earning per share and basic earning per share based on
the following information :
Net Profit 2010-11 ` 11,40,000
Net Profit 2011-12 ` 22,50,000
No. of equity shares outstanding ` 5,00,000
Q. 28. The following information is available for Raja Ltd. for the accounting year 2009-10
and 2010-11:
Net profit for `

Year 2009-10 25,00,00
Year 2010-11 0 40,00,000
No. of shares outstanding prior to right issue 12,00,000 shares.
Right issue : One new share for each three outstanding i.e. 4,00,000 shares
: Right issue price ` 22
: Last date to exercise rights 30-6-2010
Fair value of one equity share immediately prior to exercise of rights on 30-6-2010 = ` 28.
You are required to compute the basic earnings per share for the years 2009-10 and
2010-11.
AS - 24 : DISCOUNTINUING OPERATIONS
Q.29.A healthcare goods producer has changed the product line as follows :
Monthly Sales Washing Soap Bathing Soap
January, 2009 - September, 2009 4,00,000 4,00,000
October, 2009 - December, 2009 2,00,000 6,00,000
January, 2010 - March, 2010 -- 8,00,000
The company has enforced a gradual enforcement of change in product line on the basis
of an overall plan. The Board of Directors of the Company has passed a resolution in
March, 2009 to this effect. The company follows calendar year as its accounting year.
Should it be treated as discontinuing operation?

Q. 30. A heaithcare goods producer has changed its geographic segment for one area, as follows:
Monthly Sales Maharastra Gujarat
January, 2008 - September, 2008 4,00,000 4,00,000
October, 2008 - December, 2008 2,00,000 6,00,000
January, 2009 - March, 2009 -- 8,00,000
Earlier the company was marketing the production in two geographic segments. Because
of stiff competition and falling margin in the Maharastra, it had gradually closed down its
operation in Maharastra and shifted all activities to Gujarat. Should this event form part of
discontinuing operations?
Q.31.A Company belonging to the process industry carries out three consecutive processes.
The output of the first process is taken as input of the second process, and the output of
the second process is taken as input of the third process. The final product emerges out
of the third process. It is also possible to outsource the intermediate products. It has been
found that over a period of time cost of production of the first process is 10% higher than
the market price of the intermediate product available freely in the market. The company
has decided to close down the first process as a measure of cost saving (vertical spin off)
and outsource. Should this event be treated as discontinuing operations?
Q. 32.A company has two divisions - cement and steel. It has started negotiating for disposal of
the steel division informally since May 2008, discussion has been held with the possible
buyers, the labour union has demonstrated against this secret deal, the company has
given a statement that there is no move to sell the steel division. The significant reduction
in the production has taken place because of decline in the market demand for the
company's product not as planned strategy to close down operation. During November
2008 the Board of Directors has announced that they are considering disposal of the steel
division because of continuing loss suffered by that division. But no formal resolution was
passed. Necessary formalities for disposal of a division were fulfilled only during January
2005 and the steel division was disposed of in the last week of January 2009. The
company follows calendar year as accounting year. Does this event require disclosure?
Q. 33. XYZ Ltd. acquired a patent right for ` 200 lacs. The product life cycle has been initially estimated
` in lacs) Yr. 1 –
to be 5 years. The estimated cash flows over the useful life of the patent are (`
300, Yr. 2 – 300, Yr. 3 – 300, Yr. 4 – 200 & Yr. 5 – 200. Initially a 5 year amortisation period has
been decided in the ratio of estimated future cash flows. After 3rd year it was ascertained that
the patent will continue to maintain the market share for another 6 years but the estimated cash
flow p.a. after the 5th year is expected to be `150 lacs. What would be the change in amortisation.

Q. 35. A company had deferred research and development cost of ` 450 Lakhs. Sales
expected in the subsequent years are as under:
Years Sales ( ` in Lakhs)
1 1200
2 900
3 600
4 300
You are asked to suggest how should research and development cost be charged to
Profit and Loss Account assuming entire cost of ` 450 Lakhs is development cost. If
at the end of 3rd year, it is felt that no further benefit will accrue in the year, how the
unamortized expenditure would be dealt with in the accounts of the Company?
Q. 36. Hera Ltd. has got the license to manufacture particular medicines for 10 years at a license fee
of ` 200 lakhs. Given below is the pattern of expected production and expected operating
cash inflow:
Year Production in bottles (in lakhs) Net operating cash flow (` in lakhs)
1 300 900
2 600 1,800
3 650 2,300
4 800 3,200
5 800 3,200
6 800 3,200
7 800 3,200
8 800 3,200
9 800 3,200
10 800 3,200
Net operating cash flow has increased for third year because of better inventory management
and handling method. Suggest the amortization method.
Q. 37. NDA Corporation is engaged in research on a new process design for its product. It had
incurred an expenditure of ` a 530 lakhs on research upto 31st March, 2011
The development of the process began on 1st April, 2011 and Development phase expenditure
was ` 360 lakhs upto 31st March, 2012 which meets assets recognition criteria.
From 1st April, 2012, the company will implement the new process design which will result in
after tax saving of ` 80 lakhs per annum for the next five years.
The cost of capital of company is 10%.
Explain:
(1) Accounting treatment for research expenses.
(2) The cost of internally generated intangible asset as per AS 26.
(3) The amount of amortization of the assets. (The present value of annuity factor of ` 1 for
5 years @ 10% = 3.7908)
AS 29 : PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
Q. 38. Warranties
A manufacturer gives warranties at the time of sale to purchasers of its product. Under
the terms of the contract for sale the manufacturer undertakes to make good, by repair
or replacement, manufacturing defects that become apparent within three years from
the date of sale. On past experience, it is probable (i.e. more likely than not) that there
will be some claims under the warranties.
Q. 39. Contaminated Land Legislation Virtually Certain to be Enacted

An enterprise in the oil industry causes contamination but does not clean up because
there is no legislation requiring cleaning up, and the enterprise has been contaminating
land for several years. At 31 March 2005 it is virtually certain that a law requiring a
clean - up of land already contaminated will be enacted shortly after the year end.
Q. 40. Refund Policy

A retail store has a policy of refunding purchases by dissatisfied customers, even though
it is under no legal obligation to do so. Its policy of making refunds is generally known.
Q. 41. Staff Retraining as a Result of Changes in the Income - Tax System.

The government introduces a number of changes to the income tax system. As a result of
these changes, an enterprise in the financial services sector will need to retrain a large
proportion of its administrative and sales work force in order to ensure continued
compliance with financial services regulation. At the balance sheet date, not retraining of
staff has taken place.
Q. 42. A Single Guarantee

During 2007-08, Enterprise A gives a guarantee of certain borrowings of Enterprise B,
whose financial condition at that time is sound. During 2008-09, the financial condition of
Enterprise B deteriorates and at 30 September, 2008 Enterprise B goes into liquidation.
Q. 43. A Court Case

After a wedding in 2007-08, ten people died, possibly as a result of food poisoning from
products sold by the enterprise. Legal proceedings are started seeking damages from
the enterprise but it disputes liability. Up to the date of approval of the financial statements
for the year 31 March 2008, the enterprise’s lawyers advise that it is probable that the
enterprise will not be found liable. However, when the enterprise prepares the financial
statements for the year 31 March 2009, its lawyers advise that, owing to developments in
the case, it is probable that the enterprise will be found liable.

Q. 44. An engineering goods company provides after sales warranty for 2 years to its customers.
Based on past experience, the company has been following policy for making provision
for warranties on the invoice amount, on the remaining balance warranty period:
Less than 1 year : 2% provision
More than 1 year : 3% provision
The company has raised invoices as under:
Invoice Date Amount (`)
19th January, 2011 40,000
29th January, 2012 25,000
15th October, 2012 90,000
Calculate the provision to be made for warranty under Accounting Standard 29 as at
31st March, 2012 and 31st March, 2013. Also compute amount to be debited to Profit and
Loss Account for the year ended 31st March, 2013.
Q .45.There is a sales tax demand of ` 2.50 crores against a company relating to prior years
against which the company has gone on appeal to the appellate authority in the department.
The grounds of appeal deal with points covering ` 2 crores of the demand. State how the
matter will have to be dealt with in the final accounts for the year.

ANSWERS
Ans.35. Pr es en t o b li g ati o n as a r es u l t o f a p as t o b li g ati n g ev en t - The obligations event

is the sale of the product with a warranty, which gives rise to an obligation.
An outflow of resources embodying economic benefits in settlement -
Probable for the warranties as a whole (see paragraph 23).
Conclusion - A provision is recognised for the best estimate of the costs of making
good under the warranty products sold before the balance sheet date (see paragraph
14 and 23).
Ans.36. Present obligation as a result of a past obligating event - The obligating event is
the contamination of the land because of the virtual certainty of legislation requiring
cleaning up.
Probable.
Conclusion - a provision is recognised for the best estimate of the costs of the
clean - up (see paragraphs 14 and 21).
Ans. 37. Present obligation as a result of past obligating event - The obligating event is
the sale of the product, which gives rise to an obligation because obligations also
arise from normal business practice, custom and a desire to maintain good business
relations or act in an equitable manner.
Probable, a proportion of goods are returned for refund (see paragraph 23).
Conclusion - A provision is recognised for the best estimate of the costs of refunds
(see paragraphs 11, 14 and 23).
Ans. 38. Present obligation as a result of a past obligating event - There is no obligation
because no obligating event (retraining) has taken place.
Conclusion - No provision is recognised (see paragraphs 14 and 16 - 18).
Ans. 39. (a) At 31 March, 2008

Present obligation as a result of a past obligating event - The
obligating event is the giving of the guarantee, which gives rise to an
obligation.
No outflow of benefits is probable at 31 March 2008.
Conclusion - No provision is recognised (see paragraph 14 and 22).
The guarantee is disclosed as a contingent liability unless the probability
of any outflow is regarded as remote (see paragraph 68).

(b) At 31 March 2009
Present obligation as a result of a past obligating event - The obligating
event is the giving of the guarantee, which gives rise to a legal obligation.
An outflow of resources embodying economic benefits in settlement - At 31
March, 2009 it is possible that an outflow of resources embodying economic
benefits will be required to settle the obligation.
Conclusion - A provision is recognised for the best estimate of the obligation
(see paragraph 14 and 22).
Note : This example deals with a single guarantee. If an enterprise has a portfolio of
similar guarantees, it will assess that portfolio as a whole in determining whether an
outflow of resources embodying economic benefit is probable (see paragraph 23).
Where an enterprise gives guarantees in exchange for a fee, revenue is recognised
under AS 9, Revenue Recognition.
Ans. 40. (a) At 31 March 2008

Present obligation as a result of past obligating event - On the basis
of the evidence available when the financial statements were approved,
there is no present obligation as a result of past events.
Conclusion - No provision is recognised (see definition of ‘present
obligation’ and paragraph 15). The matter is disclosed as a contingent
liability unless the probability of any outflow is regarded as remote
(paragraph 68).
(b) At 31 March 2009
Present obligation as a result of a past obligating event - On the
basis of the evidence available, there is a present obligation.
An outfl ow of r e s ourc e s e m bodyi ng e c onom i c be nefi ts i n
settlement - Probable.
Conclusion - A provision is recognised for the best estimate of the
amount to settle the obligation (paragraphs 14-15).

CHAPTER - 2 COMPANY ACCOUNTS (ESOP & BUY BACK)

EMPLOYEE STOCK OPTION PLAN
As per Company Act 2013, the ESOP means the option given to the old time directors, officers or
employees of a company which gives such directors, officers or employees the benefit or right to
purchase or subscribe at a future at the securities offered by the company at a predetermined price.
No ESOP can be offered to employees of a company unless the shareholders of company approve
by passing a special resolution in General Meeting.
Option Granted to Employees shall not be transferable to any person.
ESOS would be open to all permanent employees & directors of the company.
Journal Entries :
1. Stock Option Granted :
Employee Compensation Expense A/c Dr. xx
To Employee Stock Option Outstanding A/c xx
2. Allotment of Shares :
Bank A/c (Shares x amount received) Dr. xx
Employees Stock Option Outstanding A/c Dr. xx
To Equity Share Capital A/c xx
To Securities Premium A/c xx
3. Stock Option Lapsed :
Employee Stock Option Outstanding A/c Dr. xx
To Employee Compensation Expenses A/c xx
4. Transfer :
Profit & Loss A/c Dr. xx
To Employee Compensation Expense A/c xx
BUY - BACK OF SHARES
Legal Provisions : (As per Sec. 68, 69 & 70 Companies Act, 2013) :
1. The Nominal Value of Buy Back in a particular financial year cannot exceed 25% of paid equity
share capital of the company.
2. Maximum expenditure on buy - back in a particular financial year cannot exceed 25% of total
equity base of the company.
(Equity Base = Preference Share Capital + Equity Share Capital + Divisible Profits Including
Securities Premium - Miscellaneous Expenditure)
3. The Debt Equity Ratio after buy - back should not exceed 2 : 1.
Debt Secured loans + unsecured loans
Debt Equity Ratio = Equity = Equity Base
Journal Entries
1. For Fresh Issue
Bank A/c Dr. xx
To Preference Share Capital A/c xx
2. For Buy Back
Equity Share Capital A/c Dr. xx
Premium on Buy Back A/c Dr. xx
To Bank A/c xx
3. For writing off the premium
Divisible profits incl. securities premium A/c Dr. xx
To Premium on Buy Back A/c xx
4. For Creation of C.R.R.
Divisible Profit Incl. Securities Premium A/c Dr. xx
To C.R.R. A/c xx
Note : If the fresh issue is less than the buy back amount, C.R.R. will have to the created for the
difference amount.
: 192 : ESOP & BUY - BACK
(I) ESOP
Q. 1. A company has its share capital divided into share of ` 10 each. On 1st April, 2016 it
granted 10,000 employees' stock options at ` 40, when the market price was ` 130.
The options were to be exercised between 16th December, 2016 and 15th March,
2011. The employees exercised their options for 9,500 shares only; the remaining
options lapsed. The company closes its books on 31st March every year.
Q. 2. ABC Ltd. grants 1,000 employees stock options on 1.4.2016 at ` 40, when the market
` 160. The vesting period is 2 1/ 2 years and the maximum exercise period is
price is`
one year. 300 unvested options lapse on 1.5.2016. 600 options are exercised on
30.6.2017. 100 vested options lapse at the end of the exercise period.
Pass Journal Entries giving suitable narrations.
Q. 3. S Ltd. grants 1,000 options to its employees on 1.4.2014 at ` 60. The vesting period
is two and a half years. The maximum exercise period is one year. Market price on
that date is ` 90. All the options were exercised on 31.7.2017. Journalize, if the face
value of equity share is ` 10 per share.
Q. 4. On 1st April, 2016, a company offered 100 shares to each of its 500 employees at
` 50 per share. The employees are given a year to accept the offer. The shares
issued under the plan shall be subject to lock-in on transfer for three years from the
grant date. The market price of shares of the company on the grant date is ` 60 per
share. Due to post-vesting restrictions on transfer, the fair value of shares issued
under the plan is estimated at ` 56 per share.
On 31st March, 2017, 400 employees accepted the offer and paid ` 50 per share
purchased. Nominal value of each share is ` 10.
Record the issue of share in the books of the company under the aforesaid plan.
Q. 5. X Co. Ltd. has its share capital divided into equity shares of ` 10 each. On 1.4.2016 it
granted 20,000 employees' stock option at ` 50 per share, when the market price
was ` 120 per share. The options were to be exercised between 15th March, 2017
and 31st March, 2017. The employees exercised their options for 16,000 shares only and
the remaining options lapsed. The company closes its books on 31st March every year.
Show Journal entries (with narration) as would appear in the books of the company
upto 31st March, 2017.

Q. 6. Choice Ltd. grants 100 stock options to each of its 1,000 employees on 1.4.2014 for
` 20, depending upon the employees at the time of vesting of options. Options would
be exercisable within a year it is vested. The market price of the share is ` 50 each.
These options will vest at the end of year 1 if the earning of Choice Ltd. is 16%, or it
will vest at the end of the year 2 if the average earning of two years is 13%, or lastly it
will vest at the end of the third year if the average earning of 3 years will be 10%.
5,000 unvested options lapsed on 31.3.2015. 4,000 unvested options lapsed on
31.3.2016 and finally 3,500 unvested options lapsed on 31.3.2017.
Following is the earning of Choice Ltd. :
Year ended on Earning (in %)
31.3.2015 14%
31.3.2016 10%
31.3.2017 7%
850 employees exercised their vested options within a year and remaining options
were unexercised at the end of the contractual life. Pass Journal entries for the above.

(II) BUY BACK OF SHARES
Q. 7. Shruti Ltd., resolved to buy - back 3,00,000 of its fully paid equity shares of ` 10 each at
` 12 per share. For the purpose, it issued 10,000 13% preference shares of ` 100 each at
par, the total sum being payable with applications. The company uses ` 9,00,000 of its
balance in securities premium Account apart from its adequate balance in General
Reserve Account to fulfil the legal requirements regarding buy - back.
Pass journal entries for all the transactions involved in the buy - back.
Q. 8. Kuber Ltd. furnishes you with the following Balance Sheet as at 31st March, 2017.
` in crores)
(`
The company redeemed preference shares on 1st April, 2017 at 5% premium. It also
bought back 50 lakh equity shares of ` 10 each at ` 50 per share. The payments for
the above were made out of the huge bank balance, which appeared as part of
current assets. You are asked to pass journal entries to record the above.

Q. 9. The balance sheet of V Ltd. as on 31.3.2017 is as follows :
I. Share Capital I. Fixed Assets
Authorised : ? Net Block 60,00,000
Paid up : II. Investments 50,00,000
Equity shares of ` 10 each 50,00,000 III. Current Assets, Loans &
II. Reserves & Surplus Advances
Securities premium A/c 5,00,000 a. Current Assets : 80,00,000
General reserve 20,00,000 b. Loans & Advances : ----
Profit & Loss A/c 25,00,000 IV. Miscellaneous Expenditure ----
III. Secured Loans
Debentures 50,00,000
IV. Unsecured Loans ----
V. Current Liabilities &
Provisions
a. Current Liabilities : 40,00,000
b. Provisions : ----
1,90,00,000 1,90,00,000
Keeping in view all the legal requirements, ascertain the maximum no. of equity shares
that V Ltd. can buy back, at market value ` 40.
Q. 10. From the following details calculate maximum buy - back permissible when market value is ` 25
` 10)
Equity Share Capital (` 15,00,000
` 100)
Preference Share Capital (` 5,00,000
Development Rebate Reserve 2,00,000
Investment Allowance Reserve 1,50,000
Securities Premium 50,000
Capital Reserve 1,00,000
Discount on Issue of Debentures 40,000
Loan from Directors 2,00,000

Q. 11. Following is the Balance Sheet of M/s Competent Limited as on 31st March, 2013:
Equity Shares of `10 Each fully paid 12,50,000 Fixed Assets 46,50,000
Revenue reserve 15,00,000 Current Assets 30,00,000
Securities Premium 2,50,000
Secured Loans:
Unsecured Loans 10,00,000
Current maturities of long-term
borrowings 16,50,000
Total 76,50,000 Total 76,50,000
The company wants to buy back 25,000 equity shares of ` 10 each, on 1st April, 2013 at
` 20 per share. Buy back of shares is duly authorized by its articles and necessary resolution
passed by the company towards this. The payment for buy back of shares will be made by
the company out of sufficient bank balance available as part of Current Assets.
Comment with your calculations, whether buy back of shares by company is within the
provisions of the companies Act, 2013. If yes, pass necessary journal entries towards buy
back of shares and prepare the Balance Sheet after buy back of shares.

J. K. SHAH CLASSES INTER C.A.- ADVANCED ACCOUNTING
CHAPTER - 3
Underwriting is a contract of guarantee. In case of issue of shares or debentures, if

applications received fall short of total issue or amount underwritten, the balance of shares
or debentures are taken up by underwriters. Underwriting ensures that company will receive
full amount of its public issue of securities and thus helps companies to plan their financial
requirements. The company has the option to have a public issue underwritten by more than
one underwriter. When the public issue of a company is underwritten by more than one
underwriters and if there is a short subscription then the liability of each underwriter is
determined by adopting following course.
(A) For Public Issue fully underwritten
Steps to calculate underwriters liability
Step 1 : Record Gross liability and determine its ratio.
Step 2 : Deduct Marked application from gross liability.
Step 3 : Distribute unmarked applications amongst all underwriters in the ratio of
their gross liabilities.
Step 4 : If any underwriter has a surplus after step 3 then his surplus should be dis
tributed amongst remaining underwriters in their gross liability ratio.
Step 5 : The resultant figure after the completion of the above steps represents
the net liability of the underwriters. The net liability represents the shares
unsubscribed by the public.
Journal Entries :
1. For amount due from underwriters :
Underwriters a/c Dr. xx
To Equity Shares Capital a/c xx
(Based on net liability)
2. For commission due to underwriters :
Underwriters Commission a/c Dr. xx
To Underwriters a/c xx
(Based on gross liability)
3. Settlement :
Compare entry no.1 and 2 and determine net amount to be received or paid
and pass the journal entry for money received or paid.
: 198 : UNDERWRITERS LIABILITY

Q. 1. Export Ltd. incorporated on 1st January, 2017 issued a prospectus inviting applications
for 5,00,000 Equity shares of ` 10 each at 20% premium.
The whole issue was fully underwritten by Kapoor, Bhora, Dalal and Mehta as follows:
Kapoor 2,00,000 Shares
Bhora 1,50,000 Shares
Dalal 1,00,000 Shares
Mehta 50,000 Shares
Applications were received for 4,50,000 shares of which marked applications were
as follows :
Kapoor 2,20,000 Shares
Dalal 90,000 Shares
Bhora 1,10,000 Shares
Mehta 10,000 Shares
You are required to find out the liabilities of individual underwriters and show Journal
entries when underwriters' commission is payable at 2.5%.
Q. 2. X Ltd. made a public issue of 5,00,000 equity shares of ` 10 each, ` 3 payable on

application. The entire issue was underwritten by five underwriters as follows :
A 25%
B 25%
C 20%
D 20%
E 10%
Under the underwriting terms, a commission of 2 1 / 2 %, was payable on the amount
under written. Further the underwriter was at a liberty to apply, during the tenure of
public issue, for any number of shares, in which case he is entitled to a brokerage
equal to 1/ 2% of the par value of shares so applied for.
Applications received were to be analysed on the basis of marking of underwriter,
who was to be given credit for the number of applications received bearing the marking.
Application received directly by the company were earmarked as "unmarked
application" and these are to be credited to all the underwriters in the ratio of their
respective underwriting commitment. If, as a result of this, a surplus arises to any
underwriter as compared to his commitment, such surplus was to be distributed
amongst the remaining underwriters in the ratio of their respective underwriting
commitment.

As result of the issue the following applications were received :
Marked Applications
A 1,30,000 Shares
B 1,20,000 Shares
C 80,000 Shares
D 80,000 Shares
E 45,000 Shares
Unmarked Applications 15,000 Shares
4,70,000 Shares
Included in the number of application mentioned against C in the above table was an
application made by C himself for 10,000 shares. The underwriters were informed of the
amounts due to or receivable from them, the amounts were duly received or paid.
Show in a single journal entry the amounts so received or paid. All working should
form part of your answer.
Q. 3. Libra Ltd. came up with an issue of 20,00,000 equity shares of ` 10 each at par 5,00,000
shares were issued to the promoters and the balance offered to the public was underwritten by
three underwriters - Anand, Vijay and Ashok - equally, with firm underwriting of 50,000 shares
each. Subscriptions totalled 12,97,000 shares including the marked forms which were :
Anand 4,25,000 Shares
Vijay 4,50,000 Shares
Ashok 3,50,000 Shares
The amounts payable on application and allotment were ` 2.50 and ` 2 respectively.
The agreed commission was 2.5%.
Pass summary journal entries for :
(a) the allotment of shares to the underwriters;
(b) the commission due to each of them, and
(c) the net cash paid and / or received.
Q. 4. Sardar Limited issued to public 1,50,000 equity shares of ` 100 each at par ` 60 per
share was payable along with application and the balance on allotment. The issue was
underwritten equally by Ali, Bali and Charlie for a commission of 2.5%. Applications for
1,40,000 shares were received as per details below :
Underwriter Firm Marked Total
Application Application
Ali 5,000 40,000 45,000
Bali 5,000 46,000 51,000
Charlie 3,000 34,000 37,000
Unmarked Applications 7,000
1,40,000
It was agreed to credit the unmarked applications equally to Ali and Charlie. Sardar
Limited accordingly made the allotment and received the amounts due from the public.
The underwriters settled their accounts.
Prepare a statement showing the liability of the underwriters

Q. 5. The following shares were issued and underwritten as below :
Alpha 5,000 Shares
Beta 3,000 Shares
Gama 2,000 Shares
There is firm underwriting :
Alpha 1,200 Shares
Beta 200 Shares
Gama 600 Shares
The total subscriptions including firm underwriting was 8,200 shares and the forms
included the following "marked" forms.
Alpha 1,400 Shares
Beta 500 Shares
Gama 1,200 Shares
Show the allocation of liability of the underwriters.
Q. 7. A joint stock company resolved to issue 10 lakh equity shares of ` 10 each at a

premium of ` 1 per share. One lakh of these shares were taken up by the directors of
the company, their relatives, associates and friends, the entire amount being received
forthwith. The remaining shares were offered to the public, the entire amount being
asked for with applications.
The issue was underwritten by X, Y and Z for a commission @ 2% of the issue price,
65% of the issue was underwritten by X, while Y’s and Z’s shares were 25% and 10%
respectively. Their firm underwriting was as follows :
X 30,000 shares, Y 20,000 shares and Z 10,000 shares. The underwriters were to
submit unmarked applications for shares underwritten firm with full application money
along with members of the general public.
Marked applications were as follows:
X 1,19,500 shares, Y 57,500 shares and Z 10,500 shares.
Unmarked applications totaled 7,00,000 shares.
Accounts with the underwriters were promptly settled.
You are required to:
(i) Prepare a statements calculating underwriters’ liability for shares other than
shares underwritten firm.
(ii) Pass journal entries for all the transactions including cash transactions.
Q. 8. Abrol Ltd. offered to the public 5,000, 9% mortgage debentures of ` 100 each at
Rs.105 and 80% of the issue was underwritten by Smart Bulls for maximum
commission allowed by law. Applications were received from public for 4,000
debentures which were allotted. Show the balance sheet of the company.

Q. 10. Plentiful Ltd. comes out with a public issue of on 1.1.2016 of 10,00,000 equity shares
of ` 10 each at a premium of 5%.` ` 2.50 is payable on application (on or before
31.3.2016) and ` 3.00 on allotment (30.6.2016) including premium. The allotment
resolution was passed on 1st April 2016.
The issue is underwritten by two underwriters – Seth and Shetty – equally the com-
mission being 2.5% of the issue price. Each of the underwriters underwrites 20,000
shares firm. Subscriptions total 9,60,000 shares, the distribution of forms being:
Seth: 5,20,000; Shetty 3,60,000 and unmarked forms : 80,000.
One of the allottees (using forms marked with the name of Seth) for 2,00,000 shares,
fails to pay the amount due to allotment, all other money due being received in full
including any due from the shares devolving upon the underwriters. The commission
due is paid separately.
The shares of the indifferent allottee are finally forfeited by 30.9.2016 and re-allotted
for payment in cash for ` 4 per share including premium.
You are required to pass summary journal entries to record the above events and
transaction (including cash).

CHAPTER-4
Internal Reconstruction means reconstructing the balance sheet position of the

company without liquidating the company. The main purpose of the reconstruction
scheme is to write off all fictitious assets and goodwill. For this purpose the company,
creates an "artificial surplus" by the adoption of the following course :
(a) By utilising existing reserves
(b) By revaluation of existing assets
(c) By claims fully / partially waived by creditors or Debentureholders
(d) By reduction of share capital
The scheme is required to be approved by a special resolution of shareholders and
by the High Court. In order to implement the scheme a special account called "Capital
Reduction Account" is used and when the balance sheet is presented after implementing
the scheme the words "And Reduced" should be added with the name of the company if
ordered by the court.
Journal Entries
1. For utilisation of the existing reserves (if specified)
Reserves A/c Dr. xx
To Capital Reduction A/c xx
2. For revaluation of assets
Assets A/c Dr. xx
3. For claims waived by creditors / debentureholders
Creditors / Debentures A/c Dr. xx
4. For contingent liability cancelled
No Entry
(Because the balance sheet value of such liability is already nil)
Note :Examples of Contingent Liability (Uncertain liabilities)
1. Liability on Bills discounted
2. Capital Expenditure Commitment
3. Arrears of Dividend on Preference Shares
5. For contingent liability settled
Capital reduction A/c Dr. xx
(Since the book value of contingent liability is already nil, the entire settlement
amount is treated as loss)
6. For reconstruction expenses
Capital Reduction A/c Dr. xx
: 203 : INTERNAL RECONSTRUCTION

7. For reduction of share capital
(a) When face value of the shares is reduced
Share Capital (Old) A/c Dr. xx
To Share Capital (New) A/c xx
(Replacement Entry)
(b) When only paid up value is reduced
Share Capital A/c Dr. xx
To Capital reduction A/c xx
(Reduction Entry)
Note : If in the question, no specification is given, it should be assumed
that the face value is reduced and replacement entry should be passed.
8. For writing off fictitious assets, goodwill & Accumulated losses
Capital reduction A/c Dr. xx
To Fictitious Assets A/c xx
To Goodwill A/c xx
To Profit & Loss A/c xx
(These should be written off even if it is not specified in the question)
9. For credit Balance in Capital Reduction A/c, if any
Capital Reduction A/c Dr. xx
To Capital Reserve A/c xx
(Always to be done)
Surrender of shares
Under this scheme, the shareholders are expected to return a part of their holdings
back to the company, which the company can reissue to the creditors and / or
debentureholders to settle their dues. (It is technically a transfer of ownership by
shareholders in favour of creditors / Debentureholders).
Journal Entries
(1) Entry for Surrender of shares :
Equity Share Capital A/c Dr. xx
To Share Surrender A/c xx
(2) Entry for Reissue of surrendered shares to creditors or debentures
(a) As Equity Shares
Share Surrender A/c Dr. xx
To Equity Share Capital A/c xx
(b) As Preference Shares
To Preference Share Capital A/c xx
(No special Entry is required to convert surrendered Equity shares into preference
shares as the shares are already with the company)
(3) Entry for cancellation of liability so settled
Creditors / Debentures A/c Dr. xx
(4) Balance in the share surrender a/c not utilised is transferred to Capital ReductionA/c (i.e. cancelled)
Q. 1. The following is the summarised Balance Sheet of Weak Ltd. as on 31.3.2012 :

Equity shares of ` 100 each 1,00,00,000 Fixed assets 1,25,00,000
12% cumulative preference 50,00,000 Investments (Market value 10,00,000
shares of ` 100 each ` 9,50,000)
10% debentures of ` 100 each 40,00,000 Current assets (Excl. Bank Bal.) 1,00,00,000
Sundry creditors 50,00,000 P & L A/c 6,00,000
Provision for taxation 1,00,000
2,41,00,000 2,41,00,000
The following scheme of reorganization is sanctioned:
(i) All the existing equity shares are reduced to ` 40 each.
(ii) All preference shares are reduced to ` 60 each.
(iii) The rate of interest on debentures is increased to 12%. The debentureholders
surrender their existing debentures of ` 100 each and exchange the same for
fresh debentures of ` 70 each for every debenture held by them.
(iv) One of the creditors of the company to whom the company owes ` 20,00,000
decides to forgo 40% of his claim. He is allotted 30,000 equity shares of ` 40
each in full satisfaction of his claim.
(v) Fixed assets are to be written down by 30%.
(vi) Current assets are to be revalued at ` 45,00,000.
(vii) The taxation liability of the company is settled at ` 1,50,000.
(viii) Investments to be brought to their market value.
Pass Journal entries and show the Balance sheet of the company after giving effect
to the above.
Q. 2. The Balance Sheet of Neptune Ltd., as on 31.3.2011 is given below :

80,000 Equity shares of ` 10 Freehold Property 5,00,000
each fully paid 8,00,000 Plant & Machinery 1,80,000
5,000, 6% Cumulative preference Trade investment (at cost) 1,70,000
shares of `100 each fully paid 5,00,000 Sundry debtors 4,50,000
6% Debentures (secured by 3,75,000 Stock in trade 2,00,000
freehold property) Deferred advertisement
Arrear interest 22,500 3,97,500 expenditure 1,50,000
Sundry creditors 17,500 Profit and Loss A/c 3,65,000
Directors Loan 3,00,000
20,15,000 20,15,000

The Court approved a scheme of re-organisation to take effect on 1.4.2011 and the
terms are given below :
(i) Preference shares are to be written down to ` 75 each and equity shares to ` 2 each.
(ii) Preference dividend in arrear for 4 years to be waived by 75% and for the
balance equity shares of ` 2 each to be allotted.
(iii) Arrear of debenture interest to be paid in cash.
(iv) Debentureholders agreed to take one freehold property (Book value ` 3,50,000)
at a valuation of ` 3,00,000 in part payment of their holding. Balance debentures
to remain as liability of the company.
(v) Deferred advertisement expenditure to be written off.
(vi) Stock value to be written off fully in the books.
(vii) 50% of the Sundry Debtors to be written off as bad debt.
(viii) Remaining freehold property (after takeover by debentureholders) to be valued
at ` 3,50,000.
(ix) Investment sold out for ` 2,00,000.
(x) 80% of the Director's loan to be waived and for the balance, equity shares of ` 2
each to be issued.
(xi) Company's contractual commitments amounting to ` 5,00,000 to be cancelled
by paying penalty at 3% of contract value.
(xii) Cost of reconstruction scheme is ` 20,000.
Show the Journal entries to be passed for giving effect to the above transactions and
draw Balance Sheet of the company after effecting the scheme.
Q. 3. The following was the Balance Sheet of Ever Hopeful Ltd. as on 31st March, 2011.
Equity share capital in 5,00,000 Land & Building 2,00,000
` 100 each shares Plant & Machinery 2,00,000
10% Preference Capital in Invention & Promotion
` 100 each shares 3,00,000 Expenses 1,00,000
12% convertible debentures 90,000 Discount & Issue Expenses
Loan from Bankers (secured) 1,10,000 on shares & Debentures 30,000
Capital Reserve 40,000 Profit & Loss A/c 2,80,000
Creditors 1,60,000 Stock in hand 3,00,000
Securities premium 10,000 Debtors 1,00,000
12,10,000 12,10,000

It was believed that worst was now over and Company's New Invention was certain to
bring sizeable profit in future. But at present the Additional working capital was badly
required. The dividend on Preference Shares was in arrears for the last three years. The
company had a very valuable property which stood highly understated in the Balance Sheet
and which it could not afford to sell, the said being required for the business.
In view of these shareholders and the creditors agreed upon the following scheme of
reconstruction.
1. All fictitious assets including invention and promotion expenses were to be
written off.
2. ` 30,000 from Debtors, ` 2,00,000 from stock and ` 1,50,000 from plant and
machinery were to be written off.
3. The convertible debentureholders were given the option of subscribing Equity
shares of ` 30 each upto 50% of their face value and subscribing preference
shares of ` 50/- each upto 25% of their face value and the remaining 25% was
to be paid to them in cash. All debenture holders exercised the option.
4. All reserves were to be utilised.
5. The creditors being unsecured agreed to reduce their claim by 25% on the
condition that they will be paid off before 31st March, 2013. They also agreed
not to charge any interest till the date of payment.
6. Preference shares were reduced to ` 50 per share and equity shares were
reduced to 30 per share.
7. Land & Building were revalued at such a figure so as to put through the entire scheme.
8. Bankers were to be paid off fully. For this purpose the company was to issue
6,000 equity shares of ` 30 each for cash.
9. The arrears of dividend on preference shares is cancelled.
Assuming that the scheme had been duly sanctioned by the Court, prepare the Capital
Reduction Account.
Q. 4. The Balance Sheet of Fortune Ltd. as on 31st March, 2011 was as follows :
Share Capital Fixed Assets 5,14,000
6,000 Equity share of Cash at Bank 2,80,000
` 60 each ` 30/- paid up 1,80,000 Profit & Loss A/c 8,60,000
5% First Debentures 3,00,000
6% Second Debentures 6,00,000
Unsecured Creditors 4,50,000
Creditors for Expenses 1,24,000
16,54,000 16,54,000

Ms. Simple holds the First Debentures for ` 3,00,000 and Second Debentures of
` 3,00,000. She is also unsecured creditors for ` 90,000.
Ms. Dimple holds second debentures for ` 3,00,000/- and is an unsecured creditors
for ` 60,000.
The following scheme of reconstruction was proposed :
(1) Ms. Simple is to cancel ` 2,10,000 of total debt owing to her, to advance ` 30,000
in cash and to take new 7% Debentures (In cancellation of those already held) for
` 5,10,000 in full satisfaction of all her claims.
(2) Ms. Dimple to accept ` 90,000 in cash in satisfaction of all her claims.
(3) Unsecured Creditors (other than Simple and Dimple) are to accept the allotment of
20,000 fully paid equity shares of ` 7.50 each in satisfaction of 75% of their claims and
the balance of 25% is to be postponed and to be payable at the end of two years.
(4) Uncalled capital is to be called up in full and ` 52.50 per share cancelled thus
making the shares of ` 7.50 each fully paid up.
(5) The nominal share capital is to be increased to 50,000 equity shares.
Assuming that the scheme is duly approved, give the necessary journal entries and
the Balance Sheet of the Company after the scheme has been put into effect.
Ans.4.
1. 5% Debentures A/c. Dr. 3,00,000
6% Debentures A/c. Dr. 3,00,000
Creditors A/c. Dr. 90,000
Bank A/c. Dr. 30,000
To Capital Reduction A/c. 2,10,000
To 7% Debentures A/c. 5,10,000
2. 6% Debentures A/c. Dr. 3,00,000
Creditors A/c. Dr. 60,000
To Bank A/c. 90,000
3. Creditors A/c. Dr. 2,25,000
To Capital Reduction A/c. 75,000
To ESC (FV ` 7.5) A/c. 1,50,000
4. Equity share Final Call A/c. Dr. 1,80,000
To Equity Share Capital A/c. 1,80,000
5. Bank A/c. Dr. 1,80,000
To ESFC A/c. 1,80,000
6. Equity Share Capital (FV ` 60) A/c. Dr. 3,60,000
To ESC (FV ` 7.5) A/c. 45,000
7. Capital Reduction A/c. Dr. 8,60,000
To P & L A/c. 8,60,000
8. Capital Reduction A/c. Dr. 10,000
To Capital Reserve A/c. 10,00,000

Subdivision and Consolidation of Share
Subdivision :
Old o10,000 x ` 100 = ` 10,00,000 Same
New on10,00,000 x p`
` 1 = 10,00,000 ? NPNL
ESC (FV ` 100) A/c. Dr. 10,00,000

To ESC (FV ` 1) A/c. 10,00,000
Consolidation :
Old o10,00,000 x ` 1 = ` 10,00,000 Same
New op 10,000 x n`
` 100 = ` 10,00,000 ? NPNL
ESC (FV ` 1 ) A/c. Dr. 10,00,000

To ESC (FV ` 100) A/c. 10,00,000S
Q. 5. Fair-weather Limited ran into a patch of bad financial management and its affairs
were handed over to a Receiver appointed by the debenture-holders. Its statement of
affairs was as given below :
Book Value Realisable
Assets Value
` `
Land & Building 8,00,000 10,00,000
Plant & Machinery 12,00,000 7,00,000
Stock in Trade 8,00,000 5,50,000
Trade Debtors 9,50,000 4,75,000
Cash 1,50,000 1,50,000
39,00,000 28,75,000
Deduct : 7% First Mortgage Debenture 12,50,000
16,25,000
Deduct: 8% Second Mortgage Debenture 20,00,000
Deficiency Regarding Second Debenture 3,75,000
Unsecured Creditors 4,50,000
Deficiency regarding unsecured creditors 8,25,000
Contributories :
40,000 Equity Shares of ` 10 each fully paid up 4,00,000
60,000 Equity Shares of ` 10, ` 5 per share paid up 3,00,000 7,00,000
Deficiency regarding contributories 15,25,000
All the mortgage debentures are held between two groups of individuals X and Y as
indicated below :
X and his Friends Y and his Friends
` `
First Mortgage Debentures 7,50,000 5,00,000
Second Mortgage Debentures 12,50,000 7,50,000

In addition, X and Y rank as unsecured creditors to the extent of ` 1,50,000 and
` 1,00,000 respectively. X also hold 10,000 fully paid equity shares and 4,000 partly
paid equity shares in the company.
The following scheme of reconstruction was agreed upon :
(i) the partly paid up equity shares would be fully paid up by making a call; after
the shares are fully paid, all equity shares other than shares of Mr. X would be
reduced to shares of Re.1 each fully paid up.
(ii) X will give up all his claims regarding debentures and other credits, cancel all
his equity shares and would receive in return 10% mortgage debentures of
` 18 lakhs and cash of ` 89,000.
(iii) Y will give up all his claims on debentures and credits he will bring in cash of
` 7 5,0 00 and in con siderat ion wou ld be issued with 10 % mort gage
debentures of ` 10 lakhs.
(iv) the rest of the sundry creditors agree to give up 12 1/ 2% of their claims get
equity share of Re.1. each fully paid up allowed to them for 50% of their net
claims and await discharge of the balance in due course.
Pass journal entries (narrations need not be given) to give effect to the above
proposal and prepare the Balance Sheet after reconstruction.
Working should form part of your answer.
Q. 6. X Ltd., whose Balance sheet as at 31st March, 2011 appears below formulated a scheme
of reconstruction, details of which follow and secured approval of all concerned.
Equity share capital : Fixed Assets 5,60,000
50,000 shares of ` 20 each Patents and copyrights 40,000
` 10 paid 5,00,000 Investments at cost 32,500
8% Preference Share - capital (Market value ` 27,500)
40,000 Shares of ` 100 each Current Assets 4,24,500
` 75 paid up 3,00,000 Profit and Loss A/c 2,14,000
Secured Loans :
Int. accrued & due 54,000 3,54,000
Bank Overdraft 75,000
Sundry Creditors
(including interest of
` 7,500 due to Bank) 42,000
12,71,000 12,71,000
Preference dividend is in arrears for one year.
(1) Preference shareholders to give up their claims; inclusive of dividends, to the
extent of 30% and desire to be paid off.
(2) Debenture holders agree to give up their claims to interest in consideration of
their rate of interest being enhanced to 10%.

(3) Sundry Creditors would like to grant a discount of 5% if they were to be paid off
immediately.
(4) Balance on Profit and Loss Account, Patents and copyrights and 25% of the
total Sundry Debtors of ` 60,000 to be written off. Fixed assets to be written
down by ` 7,000. Investments to reflect their market value.
(5) To the extent not specifically stated, equity shareholders suffer no reduction of
their rights.
(6) Costs of reconstruction ` 1,675.
(7) Bank agrees to give up 50% of their interest outstanding in consideration of
their claims being paid off at once.
Pass Journal entries in the books of the company assuming that the scheme has
been put through fully with the equity shareholders bringing in necessary cash to pay
off the parties and to leave a closing cash balance of ` 10,000.
Q. 7. The Balance Sheet of H Ltd. as on June 31st March, 2011 was as follows :
Share Capital Authorised Freehold land & Building 34,000
Issued and Fully paid : Plant Tools and Dies 27,300 96,000
10,000 6% cumulative pref. shares
of ` 10 each 1,00,000 Investments 15,000

15,000 ordinary sh. of ` 10 each 1,50,000 Stocks 42,500
2,50,000 Debtors 53,400
7% Debentures 60,000 Research & Development
Interest due thereon 4,200 64,200 Expenditure 18,000
Bank overdraft secured on freehold Profit & Loss A/c 98,000
Land & Building & Plant 20,000
Creditors 50,000
3,84,200 3,84,200
The scheme of reorganisation detailed below has been agreed by all the interested
parties and approved by the court. You are required to prepare :
(i) The Journal entries recording the transactions in the books, including cash; and
(ii) The balance sheet of the company as on April 1, 2011 after completion of the
scheme.

(1) The following assets are to be revalued as shown below : Plant ` 59,000; Tools
and dies ` 15,000; stock ` 30,000; and debtors ` 48,700.
(2) The research and development expenditure and the debit balance of Profit and
Loss Account are to be written off.
(3) Piece of land recorded in the books at ` 6,000 is valued at ` 14,000 and is to
be taken over by the debentureholders in part repayment of principal. The re-
maining freehold land and buildings are to be revalued at ` 40,000.
(4) A creditor for ` 18,000 has agreed to accept a second mortgage debenture of
10% p.a. secured on the plant for ` 15,500 in settlement of his debt. Other creditors
totalling ` 10,000 agree to accept a payment of ` 0.85 in the rupee for immediate
settlement.
(5) The investments at a valuation of ` 22,000 are to be taken over by the bank in
settlement of Bank Over Draft.
(6) The ascertained loss is to be met by writing down the ordinary shares to Re.1
each and the preference to ` 8.00 each. The authorised share capital is to be
increased immediately to the original amount.
(7) The ordinary shareholders agreed to subscribe for two new ordinary shares at
par for every share held. This cash is fully received.
(8) The cost of the scheme are ` 1,500. These have been paid and are to be writ-
ten off. The debenture interest has also been paid.
Ans. 7.
1. Capital Reduction A/c. Dr. 1,82,500
To Plant A/c. 37,000
To Tools & Dies A/c. 12,300
To Stock A/c. 12,500
To Debtors A/c. 4,700
To R & D Exp. A/c. 18,000
To P & L A/c. 98,000
2. 7% Debentures A/c. Dr. 14,000
To Freehold Land & Bldg. A/c. 6,000
3. Freehold Land & Bldg A/c. Dr. 12,000
4. Creditors A/c. Dr. 28,000
To Bank A/c. 8,500
To 10% Second Mor. Deb. A/c. 15,500
5. Investment A/c.
To Capital Reduction A/c. Dr. 7,000
7,000

6. Bank O/D A/c. Dr. 20,000
Bank A/c. Dr. 2,000
To Investment A/c.
7. ESC (FV `10) A/c. Dr. 1,50,000
To ESC (FV ` 1) A/c. 15,000
8. 6% PSC (FV `10) A/c. Dr. 1,00,000
To 6% PSC (FV ` 8) A/c. 80,000
9. Bank A/c. Dr. 30,000
To ESC A/c. 30,000
To Bank A/c. 1,500
11. Debenture Interest A/c. Dr. 4,200
To Bank A/c. 4,200
To Capital Reserve A/c. 2,000
Q. 8. The Balance Sheet of M/s. Raman Ltd. as at 31st March, 2011 is as follows :
Paid up Capital Fixed Assets :
8,000 Equity shares of ` 100 Land, Building, Machinery 14,00,000
each fully paid 8,00,000 Current Assets
Secured Loan : Stock 1,00,000
8% Debentures 14,00,000 Sundry Debtors 1,43,000
Accrued Interest on Debentures 70,000 Investments 15,000
Sundry Creditors 4,50,000 Cash at Bank 2,000
Income Tax Liability 10,000 Profit & Loss A/c 10,70,000
27,30,000 27,30,000
The fixed assets are heavily overvalued. A scheme of reorganisation was prepared
and passed. The salient points of the scheme are the following :
(1) Each share shall be sub divided into ten fully paid equity shares of ` 10 each.
(2) After such sub division, each share holder shall surrender to the Company 90%
of his holding for the purpose of re-issue to Debenture-holders and Creditors
so far as required and otherwise for cancellation.
(3) Of these shares surrendered 50,000 Equity Shares of ` 10 each shall be converted
into 8% preference shares of ` 10 each fully paid for debenture holders.
(4) The debenture-holder's total claim shall be reduced to ` 5,00,000. This will be
satisfied by the issue of 50,000 preference shares of ` 10 each fully paid.
(5) The claim of sundry creditors shall be reduced by 80% and balance shall be
satisfied by allotting them equity shares of ` 10 each, fully paid from the shares
surrendered.
(6) Shares surrendered and not-reissued shall be cancelled.
Assuming that the scheme is duly approved by all parties interested and by the
court, draft necessary journal entries and Balance Sheet of the Company after
the scheme has been carried into effect.

Q. 9. Following is the Balance Sheet as at March 31, 2011 : (` in '000)
`
`
On 1.4.2011, Max Ltd. adopted the following scheme of resconstruction :

(i) Each equity share shall be sub - divided into 10 equity shares of ` 10 each fully
paid up. 50% of the equity share capital would be surrendered to the Company.
(ii) Preference dividends are in arrear for 3 years. Preference shareholders agreed
to waive 90% of the dividend claim and accept payment for the balance.
(iii) Own debentures of ` 80,000 were sold at ` 98 and remaining own debentures
were cancelled.
(iv) Debentureholders of ` 2,80,000 agreed to accept one machinery of book value
of ` 3,00,000 in full settlement.
(v) Creditors, debtors and stocks were valued at ` 3,50,000, ` 5,90,000 and
` 3,60,000 respectively.
(vi) The Company paid ` 15,000 as penalty to avoid capital commitments of ` 3,00,000.
On 2.4.2011 a scheme of absorption was adopted. Max Ltd. would take over Mini Ltd.
The purchase consideration was fixed as below :
(a) Equity shareholders of Mini Ltd. will be given 50 equity shares of ` 10 each
fully paid up, in exchange for every 5 shares held in Mini Ltd.
(b) Issue of 9% preference shares of ` 100 each in the ratio of 4 preference shares
of Max Ltd. for every 5 preference shares held in Mini Ltd.
(c) Issue of one 12% debenture of ` 100 each of Max Ltd. for every 12% debentures in
Mini Ltd.
You are required to give Journal entries in the books of Max Ltd.

Ans. Journal
Sr.No. Particulars Debt ` Credit `
(1) Equity Share Capital (FV `100) A/c. Dr. 15,00,000
To Equity Share Capital (FV `100) A/c. 15,00,000
(Being equity shares reduced/sub-divided)
(2) ` 10) A/c
Equity Share Capital (FV` Dr. 7,50,000
(Being Shares surrendered)
(3) Capital Reduction A/c. Dr. 13,500
To Cash / Bank A/c. 13,50,000
(Being pref. dividend to arrears paid)
(4) Cash/ Bank A/c. Dr. 78,400
To Own Debentures A/c. 76,800
(Being debentures sold at profit)
WN:Selling Price (800 x 98) 78,400
Less : Weg. Avg. cost 2,00,000 1,92,000 76,800
80,000 ? Profit 1,600
(5) 12% Debentures A/c. Dr. 1,20,000
To Own Debentures A/c. 1,15,200
(Being debentures cancelled)
(6) 12% Debentures A/c. Dr. 2,80,000
Capital Reduction A/c. Dr. 20,000
To Machinery A/c. 3,00,000
(Being debentureholder settled)
(7) Creditors A/c. Dr. 65,000
(Being creditors revalued)
(8) Capital Reduction A/c. Dr. 5,27,000
To Debtors A/c. 61,000
To Stock A/c. 33,000
To Goodwill A/c. 20,000
To P & L A/c. 4,11,000
To Discount on Issue of Debentures A/c. 2,000
(Being assets revalued and misc.exp. w/off)

(9) Capital Reduction A/c. Dr. 15,000

To Bank A/c. 15,000
(Being penalty paid)
(10) Capital Reduction A/c. Dr. 2,45,900
To Capital Reserve A/c. 2,45,900
(Being capital profit transferred)
(11) Business Purchased A/c. Dr. 13,20,000
To Liquidator of Mini Ltd. A/c. 13,20,000
(Being business purchased)
(12) Other Fixed Assets A/c. Dr. 7,60,000
Debtors A/c. Dr. 4,40,000
Stock A/c. Dr. 6,80,000
Bank A/c. Dr. 1,30,000
To Sundry Creditors A/c. 2,25,000
To Debentures (12%) A/c. 2,00,000
To Profit & Loss A/c. 15,000
To Business Purchased A/c. 13,20,000
To General Reserves A/c. 2,50,000
(Being assets taken over)
(13) Liquidator of Mini Ltd. A/c. Dr. 13,20,000

To Equity Share Capital A/c. 10,00,000
To 9% Preference Share Capital A/c. 3,20,000
(Being P.C. discharged)
(14) 12% Debentures A/c. (Mini Ltd.) Dr. 2,00,000
To 12% Debentures A/c. (Max Ltd.) 2,00,000
(Being fresh debentures issued)

J.K.SHAH CLASSES INTER C.A. – ADVANCE ACCOUNTING
CHAPTER - 5 AMALGAMATION, ABSORPTION AND

EXTERNAL RECONSTRUCTION
As per Accounting Standard 14 issued by ICAI dealing with Accounting for Amalgamation.
Purchase consideration consists of shares, debentures and cash given by purchasing
company to shareholders of selling company. It means any payment made by purchasing
company to selling company’s debenture holders or creditors cannot be included in the
purchase consideration, even liquidation expenses of selling company paid by purchasing
company cannot be included in the purchasing consideration. If purchasing company
decides to make any payment for debenture holders or creditors then first a fall purchasing
company should take over debentures and creditors at amount payable (not book value)
and then discharge them after takeover.
There are two methods to derived purchase consideration amount.
1) Net Assets Methods : Under this method purchase consideration will be
Revised value of Real Assets Takeover x
Less : Revised value of outside liabilities Takeover -x
Net Asset Takeover or Purchase Consideration x
Purchase consideration will be discharge in the form of shares, debentures and
cash by purchasing company.
2) Net Payment Methods : Under this method purchase consideration will be sum total
of all payment made by purchasing company to shareholders of Selling company.
I) Accounting in the books of Selling Company

Close the books of Selling Company :
Following Accounts are to be opened in books of selling company.
1) Realisation A/c
2) Equity shareholders A/c
3) Preference shareholders A/c
4) Cash/ Bank A/c
5) Purchasing Company A/c
6) Share/ Debentures in purchasing company A/c
Step I
Record all balance sheet items in respective accounts at book value.
Liabilities Where to Record
1) Equity share capital & reserves Credit equity shareholder A/c
2) Preference share capital Credit preference shareholders A/c
3) All remaining liabilities including Credit realisation A/c
debentures (whether takenover or
not takenover)
: 217 :
Assets Where to Record

1) Profit and loss A/c (Dr), Misc Debit Equity shareholder A/c
expenditure
2) Cash/Bank balance
a) If taken over a) Debit realisation A/c
b) If not taken over b) Opening debit balance in cash A/c
3) All remaining assets (whether Debit realisation A/c
takenover or not takenover)
Step II
Record and Receive Purchase Consideration :
1) To Record Purchase Consideration
Purchasing Company A/c Dr.
To Realisation A/c
2) To Receive Purchase Consideration

Shares in Purchasing Company A/c Dr.
Debentures in Purchasing Company A/c Dr.
Cash A/c Dr.
To Purchasing Company A/c
Step III
Expenses of liquidation/ winding up/ realization to be recorded.
Realisation A/c Dr.
To Cash/ Bank A/c
Note : If the expenses are paid by purchasing company then they are not to be recorded in
books of selling company. Entry will be directly passed in books of Purchasing
Company.
Step IV
Disposal of asset liabilities not taken over
a) Disposal of assets
Cash/Bank A/c Dr.
To Realisation A/c
b) Disposal of liabilities
Realisation A/c Dr.
To Cash/ Bank A/c
Step V
Payment to preference share holders
Preference shareholders A/c Dr.
To Preference share/ Equity share in purchasing company A/c
To Cash A/c
Note : Any excess or short payment to preference shareholders represents Profit/ Loss to
be transfer to realization A/c.
: 218 :
Step VI
Close Realisation A/c and transfer Profit or Loss of Equity shareholders A/c
a) If profit
Realisation A/c Dr.
To Equity shareholder A/c
b) If loss
Equity shareholders A/c Dr.
To Realisation A/c
Step VII
Payment to equity shareholders
Equity shareholders A/c Dr.
To Shares/Debentures in purchasing company A/c
To Cash/ Bank A/c
Note : Finally Equity shareholder A/c & other accounts should tally.
II) Accounting in the books of Purchasing Company

Journal Entries (Purchase method)
1) For business purchased
Business purchased A/c Dr
To Liquidators of selling company A/c
(At purchase consideration Amount)
2) For Discharge of P.C.
Discount on issue of debentures A/c Dr.
Liquidatiors of Selling company A/c Dr.
To Equity shares capital A/c
To Cash/ Bank A/c
To Share premium A/c
To Preference share capital A/c
To Debentures A/c
3) For Net Assets takenover
Sundry Assets (Revised value) Dr.
Goodwill A/c Dr.
To Sundry liabilities (Revised Value) A/c
To Capital Reserve A/c
To Business purchased A/c
4) Payments to creditors or debentures holders of selling company.

Debenture/Creditors A/c Dr.
Discount on issue of debentures A/c Dr
To equity share capital A/c
To new debentures A/c
To Cash/Bank A/c
5) For liquidation expenses of selling company paid by purchasing company.

Goodwill/Capital Reserve A/c Dr
To Cash/ Bank A/c
: 219 :
6) Fresh issues of shares
At par At premium
Cash Bank A/c Dr. Cash/ Bank A/c Dr.
To Share capital A/c To Share capital A/c
To Share premium A/c
7) Preliminary expenses, formation expenses etc paid.

Concerned expenses A/c /Profit & Loss A/c Dr.
To Cash/ Bank A/c
NOTES :
Special entries in books of purchasing company

These entries are to be passed exclusively in books of purchase company after passing
entries for business purchased. These entries will not have any effect in books of Selling
Company. Purchase Consideration calculation will also be as usual.
1) Cancellation of Inter Company debt :
Creditors A/c Dr
To Debtors A/c
Note : RBD should be always calculated on outside debtor excluding inter company debt.
2) Cancellation of Inter Company bills :
Bills payable A/c Dr.

To Bills receivable A/c
3) Cancellation of profit included on inter company stock:
Goodwill/ Capital Reserve A/c Dr.

To Stock A/c
4) For creation of Statutory Reserve.

Amalgamation Adjustment A/c Dr.
To Statutory Reserve A/c
: 220 :
INTRINSIC VALUE METHOD :

It is also called ‘NET ASSET VALUE METHOD’. This method helps us to find out intrinsic
value per share (real worth). It can be calculated as follows :
Particulars P Company S Company

Revised value of Assets xx xx
Less : Revised value of outside liabilities (xx) (xx)
Net Assets for shareholders xx xx
Less : Amount payable to pref. shareholders (xx) (xx)
Net Assets for equity shareholders xxx xxx
No. of equity shares xx xx
\ Intrinsic value per share xx xx
(Net assets for equity shareholders ¸ No. of equity shares)
Merger Method (Pooling of interest method) :

According to accounting standard 14 the following conditions should be satisfied if
amalgamation is in the nature of merger :
1. All assets (including fictitious assets) & all liabilities (except equity share capital)
should be taken over.
2. All above assets and liabilities are taken over at book value except to maintain
uniform A/c policies.
3. Payment to equity shareholders of selling co. should be in form of equity share of
purchasing Co. except for fractional shares.
4. Atleast 90% of equity shareholders of selling Co. in terms of face value should
become share holders of purchasing co.
5. Business of selling co. should be continued by purchasing Co.
Other important Points :

1. Accounting in the books of selling co. would be usual (i.e. no change)
2. N.A.T.O. will be always equal to share capital of selling Co.
3. If P.C. is more than N.A.T.O. than the difference should be reduced from Reserves in
following manner :
(a) Revenue Reserve of Selling Co.
(b) Revenue Reserve of Purchasing Co.
(c) Capital Reserve of Selling Co.
(d) Capital Reserve of Purchasing Co.
4. If P.C. is less than N.A.T.O. then the difference should be LOGICALLY credited to
capital Reserve.
v N.A.T.O. – Means Net Assets Taken over by Purchasing Co.
: 221 :
J. K. SHAH CLASSES INTER C.A. - ADVANCE ACCOUNTING
Q. 1. Ajanta Limited agreed to acquire the business of Elora Limited as on 31st March,
2017. The Balance Sheet of Elora Limited as on that date was as under :
Paid - up Capital : Fixed Assets :
10,000, 12% Preference Shares Land & Building 2,00,000
of ` 10 each 1,00,000 Machineries 1,00,000
20,000 Equity Shares of Current Assets :
` 10 each 2,00,000 Stock 2,00,000
Reserve 20,000 Debtors 50,000
Profit & Loss A/c 30,000 Cash & Bank Balance 35,000
7% Debentures 1,00,000 Miscellaneous Expenditure :
Sundry Creditors 1,50,000 Preliminary Expenses 10,000
Debenture Discount 5,000
6,00,000 6,00,000
The consideration payable by Ajanta Limited was agreed as under :
(i) The Preference Shareholders of Elora Limited were to be allotted 14% Preference
Shares of ` 1,10,000.
(ii) Equity Shareholders to be allotted six Equity Shares of ` 10 each issued at a
premium of 10% and ` 3 cash against every five shares held.
7% Debentureholders of Elora Limited to be paid at 8% premium by issue of
9% Debenture at 10% discount.
While arriving at the agreed consideration, the Directors of Ajanta Limited valued
Land & Building at ` 2,50,000, Stock ` 2,20,000 and Debtors at their book value
subject to an allowance of 5% Doubtful Debts. Liquidation expenses are ` 5,000.
Close the books of Elora Limited and show Journal of Ajanta Ltd.
Q. 2. Following is the Balance Sheet of Govind Limited as on 31st March, 2017 :

Share Capital : Goodwill 4,00,000
20,000 Equity Shares of Land and Building 15,60,000
` 100 each fully paid 20,00,000 Plant & Machinery 14,00,000
Reserve Fund 5,00,000 Patent Rights 3,50,000
Sinking Fund 1,00,000 Stock 2,00,000
Workmen's Accident Sundry Debtors 4,00,000
Compensation Fund Investment 1,00,000
(Estimated Liability ` 9,000) 50,000 Cash at Bank 1,30,000
Development Reserve 1,00,000
Staff Provident Fund 1,50,000
Sundry Creditors 1,40,000
'A' Debentures 4,00,000
'B' Debentures 10,00,000
Loan from Ramkrishna Ltd. 1,00,000
45,40,000 45,40,000
: 222 :
Ramakrishna Limited absorbed Govind Ltd. on the date of its above Balance Sheet.
The terms being :
1. The payment of cost of absorption not exceeding ` 8000/-.
2. The repayment of the 'B' Debentures at a premium of 5% in cash.
3. The discharge of 'A' Debentures at a premium of 10% by the issue of 6%
debentures in Ramakrishna Limited at 20% Discount.
4. A payment of ` 15 per share in cash.
5. Allotment of one 7% preference share of ` 100 each fully paid and five equity
shares of ` 10 each fully paid for every four equity shares in Govind Ltd.
6. The actual expenses of absorption came to ` 10,000/-.
7. Stock of Govind Limited includes goods valued at ` 56,000/- purchased from
Ramakrishna Limited which company invoices goods at cost plus 16 2/ 3%.
8. The directors of Ramakrishna Limited decided to create a provision of 5% on
sundry debtors against doubtful debts.
9. Contingent liabillity ` 1,00,000 of Govind Ltd. settled by Ramakrishna Ltd. at ` 20,000.
10. Debtors of Govind Limited includes `50,000 due from Ramakrishna Ltd.
Pass Journal Entries in the books of Ramakrishna Limited.
Q. 3. The All India Company Limited agrees to acquire, as a going concern, the business
of the Presidency Company Limited on the basis of the Vendor's balance sheet at
31st March, 2017, which is follows :
Authorised Capital Freehold property 2,50,000
25,000 shares of ` 50 each 12,50,000 Plant and Machinery 50,000
Issued Capital Stock 3,00,000
20,000 Shares of ` 50 each 10,00,000 6% Government paper 10,000
Called -up Capital Debtors 2,30,000
20,000 Shares ` 30 each called up 6,00,000 Less : Reserve 10,000 2,20,000
Reserve fund 1,25,000 Bank 30,000
Creditors 75,000
Profit and Loss Account 60,000
8,60,000 8,60,000
The All India Company Limited took over all the assets and liabilities of the vendor
company, subject to the retention out of such assets of ` 13,500 to provide for cost of
liquidation, Income tax, etc., and to satisfy dissenting shareholders.
The consideration for the sale is the allotment to the shareholders in the vendor
company of one share of ` 100 ( ` 50 paid-up) in the All India Company for every
three shares in the Presidency Company Limited.
The market value of the All India Company's shares, which are ` 50 paid-up, at the
date of sale is ` 60 each. The liquidator of the vendor company has paid out of
` 13,500 retained, costs of liquidation amounting to ` 2,500 ; income-tax ` 7,500
and dissenting shareholders of 100 shares @ ` 35 per share.
The sale and purchase were carried through in terms of the agreement.
Prepare ledger accounts to close the books of selling company.
: 223 :
Q. 4. Given below are the summarized balance sheets of Vasudha Ltd. and Vaishali Ltd as at
31st March, 2017.
Goodwill of the Companies Vasudha Ltd. and Vaishali Ltd. is to be valued at ` 75,000 and
` 50,000 respectively. Factory Building of Vasudha Ltd is worth ` 1,95,000 and of Vaishali
Ltd ` 1,75,000.Inventory of Vaishali has been shown at 10% above of its cost.
It is decided that Vasudha Ltd will absorb Vaishali Ltd. by taking over its entire business
by issue of shares at the Intrinsic Value.
You are required to draft the balance sheet of the Vasudha Ltd after putting through
the scheme assuming that the assets & liabilities of Vaishali Ltd. were incorporated
in Vasudha Ltd at fair value and assets and liabilities of Vasudha Ltd. have been
carried at carrying values only.
Q. 5. The following are the summarized Balance Sheets of A Ltd. and B Ltd. as on
31st December, 2017:
Liabilities A Ltd. B Ltd. Assets A Ltd. B Ltd.
` ` ` `
Share Capital Fixed Assets 7,00,000 2,50,000
Equity Shares of Current Assets:
` 10 each 6,00,000 3,00,000 Inventory 2,40,000 3,20,000
10% Pref. Shares of Trade Receivable 5,00,000 2,90,000
` 100 each 2,00,000 1,00,000 Cash at Bank 1,10,000 40,000
Reserves and Surplus 3,00,000 2,00,000
Secured Loans:
12% Debentures 2,00,000 1,50,000
Current Liabilities:
Trade Payable 2,50,000 1,50,000
15,50,000 9,00,000 15,50,000 9,00,000
: 224 :
Details of Trade receivables and trade payables are as under:
Trade Payables A Ltd. B Ltd
Sundry Creditors 2,20,000 1,25,000
Bills Payable 30,000 25,000
2,50,000 1,50,000
Trade Receivables
Debtors 3,60,000 1,90,000
Bills Receivable 1,40,000 1,00,000
5,00,000 2,90,000
Fixed Assets of both the companies are to be revalued at 15% above book value.
Inventory in Trade and Debtors are taken over at 5% lesser than their book value. Both
the companies are to pay 10% Equity dividend, Preference dividend having been already paid.
After the above transactions are given effect to, A Ltd. will absorb B Ltd. on the following terms:
(i) 8 Equity Shares of `10 each will be issued by A Ltd. at par against 6 shares of B Ltd.
(ii) 10% Preference Shareholders of B Ltd. will be paid at 10% discount by issue
of 10% Preference Shares of `100 each at par in A Ltd.
(iii) 12% Debentureholders of B Ltd. are to be paid at 8% premium by 12% Debentures
in A Ltd. issued at a discount of 10%.
(iv) ` 30,000 is to be paid by A Ltd. to B Ltd. for Liquidation expenses. Sundry
Creditors of B Ltd. include ` 10,000 due to A Ltd.
Prepare:
(a) Absorption entries in the books of A Ltd.
(b) Statement of consideration payable by A Ltd.
Q. 6. The Balance Sheet of X Co. Ltd. and Y Ltd. on 31st March, 2017 are as follows :
Balance Sheet of X Co. Ltd.
Share Capital : Fixed Asset :
Authorised Capital of Goodwill 80,000
10,000 shares of ` 100 each 10,00,000 Others 8,00,000 8,80,000
Issued Capital: Current Assets,
10,000 shares of ` 100 each fully paid 10,00,000 Loans and Advances 9,00,000
Reserves & Surplus
Capital Reserve 2,00,000
General Reserve 70,000 2,70,000
Unsecured Loans 2,00,000
Current Liabilities & Provisions
Total 17,80,000 Total 17,80,000
: 225 :
Balance Sheet of Y Ltd.
Share Capital Fixed Assets 16,00,000
Authorised Capital 2,00,000 shares Current Assets,
of ` 10 each 20,00,000 Loans and Advances:
Issued Capital: Bank 2,00,000
80,000 shares of ` 10 each fully paid 8,00,000 Others 6,60,000 8,60,000
Reserves and Surplus :
Secured Loans 5,00,000
Current Liabilities & Provisions
Total 24,60,000 Total 24,60,000
It was proposed that X Co. Ltd. should be taken over by Y Co. Ltd. The following
arrangements were accepted by both the companies.
(a) Goodwill of X Co. Ltd. is considered valueless.
(b) Arrears of depreciation in X Co. Ltd. amounted to ` 40,000
(c) The holder of every 2 shares in X Co. Ltd. was to receive.
(i) as fully paid 10 shares in Y Co. Ltd. and
(ii) so much cash as is necessary to adjust the right of shareholders of both
the companies in accordance with the intrinsic value of the shares as
per their Balance Sheet, subject to necessary adjustment with regard to
Goodwill and depreciation in X Co. Ltd.'s Balance Sheet.
1. Determine the composition of purchase consideration
2. Show the Balance Sheet after absorption.
Q. 7. The Balance Sheet of Anand Ltd. and Dany Ltd. as at 31st December, 2016 were as follows:
Particualrs Anand Danny Particulars Anand Danny
Equity Shares of `10 3,00,000 2,00,000 Fixed Assets 2,50,000 1,75,000
Reserves 75,000 50,000 Stock in trade 47,500 37,500
Profit & Loss A/c 37,500 30,000 Debtors 70,000 50,000
Sundry Creditors 18,750 15,000 Cash and Bank 58,750 30,000
Preliminary Exp. 5,000 2,500
4,31,250 2,95,000 4,31,250 2,95,000
: 226 :
Anand Ltd. took over and absorbed Danny Ltd., as on 1st July, 2017. No Balance
Sheets were prepared on the date of take over. But the following information is made
available :
(a) In the six months ended 30 June, 2017 Danny Ltd. made net profits of ` 30,000
after providing for depreciation at 10% per annum on fixed assets.
(b) Anand Ltd., during that period had made net profits of ` 72,500 after providing for
depreciation at 10% per annum on the fixed assets
(c) Both the companies had distributed dividends of 10% on 1st April, 2017.
(d) Goodwill of Danny Ltd. on the date of take over, was estimated at ` 12,500 and
it was agreed that the stocks of Danny Ltd. would be appreciated by ` 7,500
on the same date.
(e) Anand Ltd. to issue shares at par to shareholders of Danny Ltd. on the basis of
the intrinsic value of its shares on the date of take over.
Draft the Balance Sheet of Anand Ltd. after absorption.
Q. 8 .Reckless Ltd. is reconstructed into Careful Ltd. which takes over all assets and liabilities of
Reckless Ltd. The Balance Sheet of the company is as under on 31st March 2017 :
Share Capital (fully paid Shares Patent Rights 1,20,000
of ` 100 each) 10,00,000 Plant & Machinery 5,00,000
5% Debentures 2,00,000 Stock 1,20,000
Creditors 3,00,000 Debtors 60,000
Cash at Bank 5,000
Profit & Loss A/c 6,85,000
Discount on Issue of 10,000
Debentures
15,00,000 15,00,000
Careful Ltd. is to issue one share of ` 20 each as fully paid for each share held in
Reckless Ltd. Debentureholders in Reckless Ltd. are to receive 6% Debentures of
face value of ` 1,15,000. Careful Ltd. will issue to the shareholders additional 20,000
shares of ` 20 each. These Shares are fully subscribed and out of the sum received
` 1,00,000 is paid to the creditors. Patent Rights are valueless. Careful Ltd. is to
adjust the value of Plant and Machinery as required.
Give the Balance Sheet Careful Ltd. after all the above arrangement have been put through.
: 227 :
Q. 9. Following is the Balance Sheet of Backward Ltd. as on 31st March, 2017 :
40,000 7% preference shares Land and Buildings 3,18,000
of ` 10 each fully paid 4,00,000 Plant & Machinery 1,65,000
60,000 Equity shares of ` 10 each 6,00,000 Motor Lorries 6,200
Profit prior to incorporation 12,100 Trade Debtors 1,34,000
Loans 5,000 Less : Provision 3,000 1,31,000
Trade Creditors 86,100 Stock in trade 83,500
Bills payable 4,200 Cash in hand and at bank 13,100
Bank overdraft 9,400 Profit & Loss A/c. 4,00,000
11,16,800 11,16,800
Note : There is a contingent liability in respect of a claim for royalties amounting to 15,000.
It was arranged that a new company. Progressive Ltd. should be formed to acquire the
undermentioned assets at the values stated :
Land & Building ` 2,00,000
Plant & Machinery ` 1,20,000
Motor Lorries `10,000
Stock ` 70,000
The total of ` 4,00,000 payable was satisfied by the allotment of 20,000 6%
preference shares of ` 10 each, fully paid and 20,000 equity shares of ` 10 each,
fully paid. The new company also satisfied the contingent liability in respect of the
claim for royalties by allotting to the claimant 400 Equity shares fully paid.
The book debts realised ` 1,30,000 and the amount of trade creditors proved to be `
81,000. Loans and other liabilities were discharged and the costs of winding up amounted to
` 1,400.
The preference shareholders in the old company accepted the preference shares in the
new company in full satisfaction whereas the equity shareholders took the equity shares in
the new company and the balance in cash as final settlement.
Show the journal entries in the books of both the companies.
Q. 10. K Ltd. and L Ltd. amalgamate to form a new company LK Ltd. The financial position
of these two companies on the date of amalgamation was as under :
Liabilities K Ltd. L. Ltd. Assets K Ltd. L. Ltd.
Share Capital Goodwill 80,000
Equity shares of Land & Building 4,50,000 3,00,000
` 100 each: 8,00,000 3,00,000 Plant & Machinery 6,20,000 5,00,000
7% Preference shares Furniture & Fittings 60,000 20,000
of ` 100 each 4,00,000 3,00,000 Sundry Debtors 2,75,000 1,75,000
5% Debentures 2,00,000 Stores & Stock 2,25,000 1,40,000
General Reserve — 1,00,000 Cash at Bank 1,20,000 55,000
Profit & Loss A/c 4,31,375 97,175 Cash in hand 41,375 17,175
Sundry Creditors 1,00,000 2,10,000 Preliminary Expenses 60,000
Secured Loan 2,00,000
19,31,375 12,07,175 19,31,375 12,07,175
: 228 :
(A) The terms of amalgamation were as under :
1. The assumption of liabilities of both the Companies.
2. Issue of 5 equity shares of ` 20 each in LK Ltd. @ ` 18 paid up at a premium of
` 4 per share for each preference share held in both the Companies.
3. (a) Issue of 6 Equity shares of ` 20 each in LK Ltd. @ ` 18 paid up at a
premium of ` 4 per share for each equity share held in both the Companies.
(b) In addition, necessary cash should be paid to the Equity shareholders of
both the Companies as is required to adjust the rights of shareholders of
both the Companies in accordance with the intrinsic value of the shares
of both the Companies.
4. Issue of such an amount of fully paid 6% debenture in LK Ltd. as is
sufficient to discharge the 5% debentures in K. Ltd.
(B) You are further informed that :
1. The assets and liabilities are to be taken at Book values except stock and
debtors for which a provision at 2% and 21/2% respectively to be raised.
2. The sundry debtors of K Ltd. include ` 20,000 due from 'L' Ltd.
(C) The LK Ltd. is to issue 15,000 new equity shares of ` 20 each. ` 18 paid at
premium of ` 4 per share so as to have sufficient working capital.
(1) Calculate Intrinsic value of both the companies shares.
(2) Calculate purchase consideration.
(3) Give opening entries in the Books of New Company.
Q. 11. Given below are the summarised balance sheets of the two companies as on
31st March, 2017.
A Ltd. B Ltd. A Ltd. B Ltd.
Liabilities Assets
` ` ` `
Equity shares of Goodwill 1,50,000 80,000
` 100 each 6,00,000 2,00,000 Plant &
10% Preference shares Machinery 10,87,000 2,50,000
of ` 100 each 2,00,000 — Stocks 3,20,000 95,000
General reserve 75,000 — Sundry Debtors 1,90,000 47,000
Profit & Loss a/c 22,500 6,800 Cash & Bank
6% Mortgage Balances 70,800 6,400
Debentures 4,00,000 — Discount on
Sundry creditors 5,38,300 2,71,600 debentures 18,000 —
18,35,800 4,78,400 18,35,800 4,78,400
: 229 :
Due to unfavourable financial position, both the companies decided to amalgamate
and form a new company. In substance the provision of the scheme were as under :
(a) A new company C Ltd. was to be formed to take over the net assets of A Ltd.
and B Ltd. The new company was to have an authorised capital of ` 25,00,000
divided into 20,000 equity shares of ` 100 each and 5,000 10% cumulative
preference shares of ` 100 each. The preference shares were convertible into
equity shares at the expiration of five years from the date of their issue.
(b) The preference shares of A Ltd. were to be exchanged for preference shares in
the new company on equal basis. Every two equity shares of A Ltd. were to be
exchanged for three equity shares in the new company.
(c) The remaining preference shares of the new company were to be issued for
cash. All the available equity shares of the new company after withholding a
sufficient number to meet the conversion privilege of the shareholders were to
be offered for cash subscription at par.
(d) The sundry debtors of A Ltd. includes a sum of ` 24,000 due from B Ltd. for
sale of goods, whose cost to A Ltd. was ` 18,000. These goods remaining on
hand with B Ltd. are included in the company’s stock inventory.
(e) The cash proceeds realised from the sale of the shares were to be applied as follows :
(i) The debentures were to be paid of in full.
(ii) The creditors were to be paid 30 percent of amount due to them.
You are required to pass journal entries in the books of C Ltd.
Q. 12. A and B Ltd. agreed to amalgamate their business. The scheme envisaged the
formation of C Ltd.. with a share capital equal to the combined capitals of A Ltd. and
B Ltd. for the purpose of acquiring the assets, liabilities and undertakings and the
two companies in exchange for shares in C Ltd. The Balance sheets of A Ltd. and B
Ltd. as on 31-3-2011 (the date of amalgamation) are summarised below :
` ` ` `
Authorised & Issued Fixed Assets 1,20,000 1,80,000
Capitals 1,00,000 1,40,000 Stock 60,000 1,10,000
Reserves 1,70,000 1,00,000 Debtors 80,000 1,30,000
Creditors 40,000 90,000 Balance with
Bank Overdraft ---- 90,000 Bank 50,000 ----
3,10,000 4,20,000 3,10,000 4,20,000
: 230 :
The consideration was to be based on the net assets of companies as shown in their
books on March 31, 2011 but subject to an addition to compensate A Ltd. for its
super profits records. This addition was to be the weighted average of the net profits
of A Ltd. for three years ended March 31, 2011. The weights for this purpose for the
year 2008-09, 2009-10 and 2010-11 were agreed as 1, 2 and 3 respectively.
The profits had been :
Year ended 31st March, 2009 20,000
Year ended 31st March, 2010 80,000
Year ended 31st March, 2011 1,20,000
The shares in C Ltd. were to be issued to A Ltd. and B Ltd. at the premium and in
proportion of the agreed net assets value of those companies.
In order to raise working capital, C Ltd. increased its authorised share capital by
` 2,00,000 and proceeds to issue 12,000 shares of ` 10 each at a price of ` 15 per
share.
(a) You are required to calculate the number of shares issued to A Ltd. and B Ltd.
(b) To show Journal entries in the books of A Ltd.
(c) To prepare the summarised balance sheet of C Ltd. after the issue of shares.
Q. 13. White Ltd. and Blue Ltd. propose to sell their business to a new company being formed
for that purpose.
The summarised balance sheet as on 31st March, 2017 and profits of the companies
for the past three years are as follows :
White Ltd. Blue Ltd. White Ltd. Blue Ltd.
Liabilities
` ` Assets ` `
Equity shares of Freehold properly
` 10 each 6,00,000 2,50,000 (at cost) 3,60,000 1,20,000
Capital reserve — 1,50,000 Plant & machinery
General reserve 3,90,000 1,20,000 (at cost) 3,20,000 1,80,000
Profit and loss a/c 1,10,000 1,60,000 Investment (at cost) — 1,00,000
Creditors 2,15,800 1,26,800 Stock - in - trade 1,10,000 89,500
Debtors 89,000 64,000
Balance at bank 4,36,800 2,53,300
13,15,800 8,06,800 13,15,800 8,06,800
: 231 :
White Ltd. Blue Ltd.
` `
Net profits for the year ended :
31st March, 2015 1,74,500 1,07,600
31st March, 2016 1,93,400 1,22,900
31st March, 2017 2,14,700 1,44,500
You are given the following relevant information.
It is agreed :
(1) that the properties and plant and machinery be re-valued as follows :
White Ltd. Blue Ltd.
` `
Freehold property 4,48,000 1,44,000
Plant and machinery 3,05,700 1,72,950
(2) that the value of stocks be reduced by 10% and a provision of 12 1 / 2% be made
on debtors for bad and doubtful debts.
(3) that goodwill be valued at two years purchase of the average annual trading
profits of the past three years after deducting a standard profit of 10% on the
net trading assets before revaluation or adjustment on 31st March, 2017. Blue
Ltd. had earned ` 17,000 on an average on its investments.
You are required to prepare the opening balance sheet of the new company.
Q. 14. Star and Moon had been carrying on business independently. They agreed to
amalgamate and form a new company Neptune Ltd. with an authorised share capital
of ` 2,00,000 divided into 40,000 equity shares of ` 5 each.
On 31st March, 2008 the respective Balance Sheet of Star and Moon were as follows:
Star Moon
` `
Fixed Assets 3,17,500 1,82,500
Current Assets 1,63,500 83,875
4,81,000 2,66,375
Less : Current Liabilities 2,98,500 90,125
Representing Capital 1,82,500 1,76,250
: 232 :
Additional Information :
(a) Revalued figures of Fixed and Current Assets were As follows :
` `
Fixed Assets 3,55,000 1,95,000
Current Assets 1,49,750 78,875
(b) The debtors and creditors include ` 21,675 owed by Star to Moon. The
purchase consideration is satisfied by issue of the following shares and
debentures.
(i) 30,000 equity shares of Neptune Ltd. to Star & Moon in the proportion to
the profitability of their respective business based on the average net
profit during the last three years which were as follows :
` `
2006 profit 2,24,788 1,36,950
2007 (Loss) / Profit (1,250) 1,71,050
2008 Profit 1,88,962 1,79,500
(ii) 15% debentures in Neptune Ltd. at par to provide an income equivalent
to 8% return on capital employed in their respective business as on
31st March, 2008 after revaluation of assets.
Compute the amount of debentures and shares to be issued to Star & Moon.
Q. 15. The following were the Balance Sheets of P Ltd and V Ltd as at 31st March, 2017 :
` in lakhs)
(`
Liabilities P Ltd. V Ltd. Assets P Ltd. V Ltd.
Equity Share Capital 15,000 6,000 Land & Building 6,000 ----
(fully paid shares of Plant & Machinery 14,000 5,000
` 10 each) Furniture & Fixtures
Securities Premium 3,000 ---- and Fittings 2,304 1,700
Foreign Projects Stock 7,862 4,041
Reserve (Statutory) ---- 310 Debtors 2,120 1,020
General Reserve 9,500 3,200 Cash at Bank 1,114 609
Profit & Loss A/c 2,870 825 Bills Receivable ---- 80
12% Debentures ---- 1,000 Cost of Issue of
Bills Payable 120 ---- Debentures ---- 50
Sundry Creditors 1,080 463
Sundry Provisions 1,830 702
33,400 12,500 33,400 12,500
All the Bills Receivable held by V Ltd were P Ltd's acceptances. On 1st April, 2007,
P Ltd took over V Ltd in an amalgmation in the nature of merger. It was agreed that in
discharge of consideration for the business, P Ltd would allot three fully paid ordinary
shares of ` 10 each at par for every two shares held in V Ltd. It was also agreed that
12% Debentures in V Ltd would be converted into 13% Debentures in P Ltd of the
same amount and denomination. Expenses of amalgamation amounting to ` 1 lakh
were borne by P Ltd and profit in internal stock is ` 2 lakhs.
You are required to pass journal entries in the books of P Ltd
: 233 :
Q. 16.The following are the Balance Sheets of M Ltd. and N Ltd. as at 31st March, 2017 :
( ` in lakhs)
Liabilities M Ltd. N Ltd.
Fully paid equity shares of ` 10 each 3,600 900
10% Preference Shares of ` 10 each fully paid up 1,200 ----
Capital Reserve 600 ----
General Reserve 2,100 ----
Profit and Loss Account 780 ----
8% Redeemable debentures of ` 1,000 each ---- 300
Trade Creditors 2,421 369
Provisions 870 93
11,571 1,662
Assets
Plant and Machinery 4,215 468
Furniture and Fixtures 2,400 183
Motor Vehicles ---- 51
Stock 2,370 444
Sundry Debtors 1,044 237
Cash at Bank 1,542 240
Preliminary Expenses ---- 33
Discount on Issue of Debentures ---- 6
11,571 1,662
A new Company MN Ltd was got incorporated with an authorised capital of ` 15,000
lakhs divided into shares of ` 10 each for the purpose of amalgamation in the nature
of merger. M Ltd and N Ltd were merged into MN Ltd on the following terms :
(i) Purchase consideration for M Ltd's business is to be discharged by issue of
120 lakhs fully paid 11% preference shares and 720 lakhs fully paid equity
shares of MN Ltd to the preference and equity shareholders of M Ltd in full
satisfaction of their claims.
(ii) To discharge purchase consideration for N Ltd's business, MN Ltd to allot 90
lakhs fully paid up equity shares to shareholders of N Ltd in full satisfaction of
their claims.
(iii) Expenses on the liquidation of M Ltd and N Ltd amounting to ` 6 lakhs are to
be borne by MN Ltd
(iv) 8% redeemable debentures of N Ltd to be converted into 8.5% redeemable
debentures of MN Ltd
(v) Expenses on incorporation of MN Ltd were ` 15 lakhs.
You are requested to :

(a) Pass necessary Journal entries in the books of MN Ltd to record above
transactions, and
(b) Prepare Balance Sheet of MN Ltd after merger.
: 234 :
CHAPTER - 6
Types of liquidation :
1. Compulsory liquidation (By the order of the court) : In this case the liquidator would
be appointed by the court and would be called as an official liquidator.
2. Voluntary liquidation (By Shareholders): In this case the shareholders would
decide at their meeting (extraordinary) that the company has to be wound up by
passing a special resolution. The shareholders would appoint the liquidator who would
prepare a statement which would consist of the estimated realisable value of assets
and estimated payments towards liabilities. This statement is termed as ‘Liquidators
statement of Affairs’. On the basis of this statement the directors of the company
would make a declaration of solvency. A copy of this statement has to be submitted
to the court for obtaining its permission. Once the permission is granted the
liquidation would commence.
On the completion of the liquidation proceedings, the liquidator would call a final
meeting of the shareholders. At this meeting a statement of accounts would be
submitted to the shareholders. This statement would summarize the actual amounts
realised from the sale of the assets and the amounts paid towards expenses &
liabilities. This statement is called as “Liquidators Final Statement of Account.” A copy
of this statement has to be submitted to the ROC. On this submission, the company's
name would be deleted and the company is said to be liquidated.
Conclusion
(1) Liquidators Statement of affairs
(a) Prepared before the commencement of liquidation.
(b) On an Estimated Basis.
(2) Liquidators Final Statement of Account
(a) Prepared after the completion of the liquidation
(b) On an Actual Basis.
NOTES :
(1) Legal order of payments : When the amounts are realised from the disposal of
assets it should be applied towards the payment of expenses & liabilities in a
specified order which is as follows :
Step 1 Legal Expenses
Step 2 Liquidator’s Remuneration
Step 3 Liquidation Expenses
Step 4 Secured Creditors : It would only include liabilities which are secured
by a specific charge, hypothecation or mortgage. The specific asset
should be given as a security against the liability. For the purpose of
liquidation secured loans would not include the liabilities which are
secured by a floating charge.
: 235 : LIQUIDATION OF COMPANIES

Note : If the amount realised from the sale of the asset exceeds the secured liability
than the surplus can be utilised towards the payment of other liabilities. Alternatively
if there is a deficiency then the balance would be treated as unsecured and it would
be paid alongwith all other unsecured liabilities in step 7.
Step 5 Preferential Creditors : (Unsecured Creditors)
(i) The payment of Government dues for taxes provided they have arisen
within the period of 12 months before the date of liquidation.
(ii) The payment of wages & salaries to employees and workers (not
directors) for a maximum period of 4 months. The salaries and
wages should have arisen within a period of 12 months before the
date of liquidation. How ever the amount payable to an individual
should not exceed ` 20,000/-.
(iii) The payment of provident fund, gratuity, pension as per the

provision of the relevant acts.
(iv) Any leave salary which is payable to the employees and workers.
(v) Compensation paid as per the provisions of the workmen

compensation Act and Industrial Disputes Act.
(vi) Cost of investigation as per the provisions of Sec. 235 or 237 of

the Co’s Act. 1956.
NOTE : All preferential creditors rank equal.
Step 6 The amount of those liabilities which are secured by a floating charge,
for e.g.. Debentures and Interest accrued upto the date of liquidation.
Step 7 The payment of unsecured creditors together with the deficiency of

secured creditors which arose in step 4.
Step 8 Interest an liabilities with floating charge from the date of liquidation to
the date of repayment.
Step 9 Preference share holders. (Preference share capital + Arrears of

dividend upto the date of liquidation).
Step 10 Equity share holders.
(2) Cash deficit : If there is a cash deficit and the shares are partly paid than the
liquidator can make a call on such shares and utilise the amount received towards the
payment of the liabilities. If there are partly paid equity shares and partly paid
preference shares then firstly the liquidator would make a call on the partly paid
equity shares.

Liquidators statement of Account
Cash / Bank Balance xx Legal Expenses xx

Liquidators Remuneration xx
Assets Realised xx Liquidation Expenses xx
(It would incl. only those Liabilities secured
assets which have not been by floating charge
given as a specific security). Principal x
Surplus from securities xx Interest x xx
On _____ shares @ ` __ Unsecured Creditors
On _____ shares @ ` __ Preferential x
xx Others x xx
xx Preference share holders
On _____ share @ ` ___ xx
Equity share holders
On _____ share @ ` ___ xx
On _____ share @ ` ___ xx
xx xx

FORMAT OF LIQUIDATOR'S STATEMENT OF AFFAIRS
__________ Ltd. (In liquidation)
Liquidators statement of affairs as on______
Estimated
Realisable Values
List - A Assets not specifically pledged. xx
----- xx
----- xx
----- xx
List B Assets specifically Pledged.
Assets Estimated Due to Deficiency Surplus trfd.
Realisable Secured ranking as to the last
value. Creditors unsecured column.
(a) (b) (c) (d)
----- xx xx ----- xx
----- xx xx xx -----
xx xx xx xx xx
Estimated amount available for meeting liabilities. xx
Summary of Gross Assets.
(a) Estimated Realisable value of assets specifically pledged xx
(b) Other Assets xx
Gross Assets xx
Gross
Liabilities
xx Secured Creditors (As per list B) ----
Estimated total amount available for preferential creditors, Liabilities xx
with floating charge and other unsecured creditors.
xx List ‘C’ Preferential Creditors xx
----- xx (x)
-----
Estimated total amount available for liability with floating x
charge & other unsecured Creditors.
xx List ‘D’ Liabilities with floating charge xx
----- xx (x)
-----
Estimated total amount available for other unsecured creditors. x
xx List ‘E’ Other unsecured creditors + Deficiency as per ‘List B’ (x)
Estimated Total Amount available for shareholders. x
xx List ‘F’ P reference share holders (x)
Estimated Total Amount available for Equity Share holders. x
xx List ‘G’ Equity share holders (x)
Estimated Surplus / Deficiency as regards contributories/members. (List H) x

List - H - Deficiency Statement
In event of liquidation, if the liquidator's statement of affairs is showing any deficiency, the
liquidator is required to explain this deficiency by preparing an explanatory statement called
"List H - deficiency statement". In this statement he is required to cover all major financial
factors contributing to / reducing the deficiency in last minimum 3 years. (If the company is
getting liquidated within 3 years of incorporation then all the factors from the date of
incorporation till date). This statement is prepared in following format.
Items contributing to deficiency or reducing the surplus :
(1) Excess of Capital & Liabilities over Assets.....Years ago
as shown by Balance sheet x
(2) Dividends / Bonuses declared during the period. x
(3) Net Trading losses during the period. x
(4) Losses other than trading losses which have been written off
during the period. x
(5) Estimated losses now w/off for which provision has been made
while preparing the statement of affairs. x
(6) Other items contributing to deficiency or reducing surplus. x
(A) x
Items increasing surplus or reducing deficiency.
(7) Excess of Assets over Capital & Liabilities.... years ago
as shown by the Balance sheet. x
(8) Net trading profit during the period. x
(9) Profits and incomes other than trading profits during the period. x
(10) Other items reducing the deficiency or contributing to surplus. x
(B) x
Estimated deficiency as per the statement of affairs. (A - B) xx

Contributory & past Contributory
A contributory is a share holder of the company which is in liquidation. The shareholders is

termed as a contributory since a contribution may have to be made by the shareholder in
order to enable the liquidator to pay off the liabilities. The liability of the contributory would
be limited to the extent of the uncalled amount on the shares.
In the case of a company which is not in liquidation the share holders liability to pay
the amounts in respect of the call is contractual in nature. In the event of the share
holder making a default in respect of the call than the company can forfeit the shares
and subsequently it can be reissued.
In the case of a company which is in liquidation the liquidator has a legal right against
the contributories to recover the amount uncalled in respect of the shares. However if
the present contributory is insolvent then amount would be Recovered from the past
contributory of shares. All the present contributories would be included in List A and
all the past contributories would be included in List - B.
Rules and Regulations for ascertaining the liability of the transferor of shares.
(1) The transferor of shares would be liable if the transfer has taken place within a
period of 12 months before the date of liquidation.
(2) The transfer should not have taken place on the death of the transferor
(Transmission).
(3) The past contributory (i.e. Transferor) would be liable to contribute the
minimum of the following :
(a) Outstanding Liability as on the date of transfer of shares or
(b) Amount unpaid on the shares.
The past contributory cannot be made liable for any liabilities that arises after
the date of transfer of shares.
(4) If there are more than one transferor of shares then the liability will have to be
allocated on the basis of the ratio of the No. of shares transferred. The
allocation of the liability should be compared with maximum liability and the
amount that would be contributed would be the least.

Q. 1. Few Assets Ltd. went into voluntary liquidation on March 31st 2017. At that date the
Balance Sheet read as follows :
`
Plant 2,00,000
Stock 1,00,000
Debtors 1,50,000
Cash at Bank 3,000
4,53,000
Less : 5% Debentures 60,000
Creditors 1,03,000 1,63,000
2,90,000
Represented by:
12,000 10% Preference shares of ` 10 each 1,20,000
20,000 ordinary shares of ` 10 each 2,00,000
3,20,000
Less : Deficiency on Profit & Loss Account 30,000
2,90,000
The dividends on the Preference shares had been paid upto 31st, March 2016. The
liquidator sold the plant and stock for ` 2,75,000 and realised all the debts except one
of ` 25,000 which proved to be irrecoverable. He admitted the claim of all creditors
` 5,000 of which were preferential.
Expenses of liquidation amounted to `1,600 and the Debentures were repaid on 30th,
September 2011. The liquidator's remuneration was at the rate of 2% on the amounts
realised (except cash) and 2% on the amount distributed to the ordinary shareholders.
Prepare the Liquidators Final account ignoring income tax.
Q. 2. The following is the Balance Sheet of M/s. Unfortunate Limited as on 31st March, 2017.

On that date, the Company went into liquidation. The dividends on preference shares were
in arrears for two years. The arrears are payable on liquidation as per the Articles of the
Company. Creditors include a loan of` ` 1,00,000 on Mortgage of Land and Buildings. The
assets realised are as under :
`
Land and Buildings 2,40,000
Plant & Machinery 4,00,000
Patents 60,000
Stock 1,20,000
The expenses of liquidation amounted to ` 21,800. The liquidator is entitled to
commission of 3% on all assets realised and a commission of 2% on amounts
distributed among unsecured creditors. Preferential creditors amount of ` 30,000.
All payments were made on 30th September, 2017.
Prepare the Liquidator's statement of Account.
Q. 3. Break Limited went into voluntary liquidation on 31.3.2017. The balances in its books
on that date were :

The liquidator is entitled to a remuneration of 5% on all assets realised except cash and
1% on the amount distributed to Unsecured Creditors other than Preferential Creditors.
Bank Overdraft is secured by deposit of title deed of land and building which realised
` 3,00,000. Other assets realised the following sums :
`
Plant & Machinery 5,00,000
Stock 1,50,000
Expenses of liquidation amounted to ` 27,250.
Prepare liquidator's final statement of account. Liquidator realised all assets on
1.7.2017 and discharged his obligation on the same date. Dividend on preference
shares were in arrears for two years.
Q. 4. Given below is the position as on April 1, 2017 of Ganges Silk Mills Ltd., on which
date it goes into liquidation :
Realisations were :
a. Stock of raw materials - ` 30,000;
b. Other stocks - 80,000;
c. Remaining Assets - ` 20,000
The liquidator is entitled to a fixed remuneration of `1,000 plus 3% of the gross amounts
realised by him. Other costs and charges amounted to ` 11,000. Equity shares carry the
same rights, regardless of the amount paid, as far as capital repayment is concerned.
Show the Liquidator's final statement of Account.

Q. 5. The summarized Balance Sheet of Vasant Ltd. as on 31st March, 2017, being the
date of voluntary winding up is as under:
` `
Share Capital: Land & Building 1,30,000
Issued: 10% Pref. Shares of ` 10 each 1,50,000 Sundry Current Assets 4,36,000
10,000 Equity Shares of ` 10 each, fully Profit and Loss Account 35,000
paid up 1,00,000 Debenture issue expenses
5,000 Equity Shares of ` 10 each, not written off 2,000
` 8 per share paid up 40,000
Mortgage Loan 70,000
Bank overdraft 30,000
Trade Creditors 38,000
Income Tax Arrears (assessment
concluded in February, 2013) 25,000
6,03,000 6,03,000
Mortgage loan was secured against Land & Building. Debentures were secured by a
floating charge on all assets. The company was unable to meet the payments and
therefore the debentureholders appointed a Receiver for the debentureholders. He
brought the Land & Buildings to auction and realized ` 1,60,000. He also took charge
of Sundry Assets of value of ` 2,36,000 and realized ` 2,00,000. The Bank overdraft
was secured by personal guarantee of the directors of the company and on the Bank
raising a demand, the Directors paid off the due from their personal resources. Costs
incurred by the Receiver were ` 1,950 and by the Liquidator ` 3,000. The receiver
was not entitled to any remuneration but the Liquidator was to receive 2% fee on the
value of assets realized by him. Preference Shareholders have not been paid
dividend for period after 31st March, 2015 and interest for the last half year was due
to the Debentureholders. Rest of the assets were realized at ` 1,50,000.
Prepare the accounts to be submitted by the receiver and Liquidator.
Q. 6. M Co. Ltd. went into voluntary liquidation on 31st March, 2017. The following balances are
extracted from its books on that date :

Plant & Machinery and Buildings are valued at `1,50,000 and `1,20,000 respectively. On
realisation, losses of `15,000 are expected on Stock. Book Debts will realise ` 70,000. Calls
in arrears are expected to realise 90%. Bank overdraft is secured against Buildings and Bank
loan is against Plant and Machinery.
Prepare a Statement of Affairs to be submitted to the meeting of creditors.
Q. 7. The following information was extracted from the books of a limited company on 31st March,
2017 on which date a winding up order was made :
`
`
` `
`
`
`
`
`
On 31st March, 2012 the company's share capital stood at the same figure as on
31st March, 2017 but, in addition, there was a General Reserve of ` 65,000. In
2013-2014 the company earned a profit ` 85,000 but thereafter it suffered trading
losses totalling in all ` 4,67,000. In 2014-2015 a speculation loss of ` 91,000 was
incurred. Preference dividend was paid for 2013-2014 and 2014-2015 and on equity
shares a dividend of 10% was paid in 2013-2014 only.
Excise authorities imposed a penalty of ` 60,000 in 2008 for evasion of excise and
income-tax authorities imposed a penalty of ` 1,60,200 for evasion of tax.
Prepare the Statement of Affairs and the Deficiency Statement.

Q. 8. Bad Luck Limited went into voluntary liquidation and the proceedings commenced on
2nd July, 2016. Certain creditors could not receive payment out of the realisation of
assets and out of the contributions from the contributories of the A list. The following
details of share transfers are made available to you.
Name of the No of Shares Date of transferror Creditors remaining unpaid
transferror transferred ceasing to be and outstanding at the time
member of the transferror ceasing
`)
to be a member (`
A 1,000 1st May, 2004 6,000
B 1,250 15th Aug., 2015 8,000
C 500 1st Oct., 2015 10,750
D 2,000 1st Dec., 2015 13,000
E 250 1st April, 2016 15,000
All the shares were of ` 10 each, on which ` 5 per share had been paid up. Ignoring
other details like liquidator's expenses etc., you are required to work out the liability
of the individual contributories listed above.
Q. 9.The position of Valueless Ltd. on its liquidation is as under:

Issued and paid up Capital:
3,000 11 % preference shares of ` 100 each fully paid.
3,000 Equity shares of' 100 each fully paid.
1,000 Equity shares of ` 50 each ` 30 per share paid.
Calls in Arrears are ` 10,000 and Calls received in Advance ` 5,000. Preference
Dividends are in arrears for one year. Amount left with the liquidator after discharging
all liabilities is ` 4,13,000. Articles of Association of the company provide for
payment of preference dividend arrears in priority to return of equity capital. You are
required to prepare the Liquidators final statement of account.
Q. 10.From the following details calculate amount of preferential creditor for the company
which went into liquadation on 1-4-2017.
(i) Government taxes payable for the 2015-2016 ` 22,000 & for the year
2016 - 17 ` 21,000.
(ii) Electricity & water charges payable to govt. on 31st March 2016 20,000.
(iii) Wages of staff Mr. A for 5 months @ ` 4,000 per month.
(iv) Wages of staff Mr. B for 4 months @ ` 6,000 per month.
(v) Accrued holiday remunaration of staff Mr. C ` 21,000.
(vi) Compensation payable of ` 25,000 to staff Mr. D under employers compensation Act.
(vii) Providend fund & gratuity payable to staff Mr. E ` 30,000.

Q. 11. In a winding up of a company, certain creditors remained unpaid. The following
persons had transferred their holding sometime before winding up :
Name Date of Transfer No. of Shares Amount due to creditors on
transferred the date of transfer
2016 `
P January 1 1,000 7,500
Q February 15 400 12,500
S March 15 700 18,000
T March 31 900 21,000
U April 5 1,000 30,000
The shares were of ` 100 each, ` 80 being called up and paid up on the date of transfers.
A member, R, who held 200 shares died on 28th February, 2016 when the amount due
to creditors was ` 15,000. His shares were transmitted to his son X.
Z was the transferee of shares held by T. Z paid ` 20 per share as calls in advance
immediately on becoming a member.
The liquidation of the company commenced on 1st February, 2017 when the liquidator
made a call on the present and the past contributories to pay the amount.
You are asked to quantify the maximum liability of the transferors of shares mentioned
in the above table, when the transferees:
(i) pay the amount due as “present” member contributories;
(ii) do not pay the amount due as “present” member contributories.
Also quantity the liability of X to whom shares were transmitted on the demise of his father R.

CHAPTER - 7
Insurance companies require a separate format for presenting final accounts because of its
distinct nature of business. This is a business where the insurance companies (insurer)
indemnifies the policy holder (insured) against the risk. The insured pays premium for this
service and if any loss arises he receives claims, which means that the main item of income
f or insurance companies is "premium" & main item of expenditure is "claims" &
"commission". Since there is no trading activity, the trading a/c is replaced by Revenue A/c.
Hence the final accounts of insurance companies contains following three statements-
(1) Revenue a/c
(2) Profit & loss a/c
(3) Balance sheet.
Important concepts –
(1) Main Incomes & Expenses
Insurance Business
Direct Business Re – Insurance Business
Premium – Income
Claims – Expense Re- Insurance accepted Re- Insurance ceded
Commission – Expense
Premium - Income Premium - Expense
Claims - Expense Claims - Income
Commission - Expense Commission- Income
(2) Reserve for Unexpired Risk

Normally insurance policy is for one year. So premium received by insurance
companies is for one year. So it happens that for policies which are taken in current
year claims may materialize in next financial year for which a provision should be
made in current financial year which is known as Reserve for Unexpired risk. As per
IRDA guidelines the reserve for unexpired risk is to be provided at –
50% of net premium for fire & Miscellaneous business & 100% of net premium for
marine insurance business.
(3) Additional Reserve for unexperienced Risk :

No Rule (continue as last year if nothing is specified in the question).
: 248 :
Format of Final Accounts of General Insurance Co.
.......................... Insurance Co.
Revenue Account For The Year Ended.................
In Respect of .................. Insurance Business
1. Premium Earned (Net) 1

2. Profit / Loss on Sale / Redemption of Investments
3. Other Incomes
4. Interest, Dividend, Rent etc. (Gross)
Total (A)
1. Claim Incurred (Net) 2
2. Commission 3
3. Operating Expenses related to insurance business 4
Total (B)
Operating profit transferred to Profit & Loss Account (A- B)
Profit and Loss Account For The Year Ended ........................
Current Year Previous Year
1. Profit / Loss from Revenue Account
2. Income from Investments
a. Interest, Dividend, Rent etc. (Gross)
b. Profit on Sale of Interests
Less: Loss on Sale of Investments
3. Other Incomes
Total (A)
4. Provisions (Other than taxation)
5. Other Expenses
Total (B)
Profit before taxation (A - B)
Less : Provision for taxation
Profit after taxation
Less: Appropriations
Profit after appropriations
Add: Balance from Last Year
Balance carried to Balance Sheet
: 249 :
................. Insurance Co.
Balance Sheet As On.....................
Sch. Current Year Previous Year
SOURCES OF FUNDS
Share Capital 5
Reserve and Surplus 6
Borrowings 7
Total
APPLICATIONS OF FUNDS
Investments 8
Loans 9
Fixed Assets 10
Current Assets
Cash and Bank Balance 11
Advance and Other Assets 12
Sub-total (A)
Current Liabilities 13
Provisions 14
Sub-total (B)
Net Current Assets Sub-total (A - B)
Miscellaneous Expenditure 15
Debit Balance in P & L Account
Total
Contingent Liabilities
SCHEDULES FORMING PART OF REVENUE ACCOUNT
Schedule 1 Premium Earned
Premium on Direct Business
Add : Premium on RI Accepted
Less: Premium on RI ceded
Net Premium
Adjustment for change in Reserve for Unexpired Risk
Total
: 250 :
Schedule 2 Claims incurred (Net)

Claims on Direct Business
Add : Claims on RI Accepted
Less : Claims on RI ceded
Net Claims Incurred
Add : Outstanding at the End
Less : Outstanding at the Beginning
Total
Schedule 3 Commission
Commission on Direct Business
Add : Commission on RI Accepted
Less : Commission on RI ceded
Total
Schedule 4 Operating Expenses
1. Employee's Remuneration and Welfare benefits
2. Travel, Conveyance and Vehicle Expenses
3. Training Expenses
4. Rent, Rates and Taxes
5. Repairs
6. Printing and Stationery
7. Communication
8. Legal and Professional Charges
9. Auditor's fees and Expenses
10. Advertisement and Publicity
11. Interest and Bank Charges
12. Others
13. Depreciation
Total
SCHEDULES FORMING PART OF BALANCE SHEET
Schedule 5 Share Capital
Authorised
..................
Issued, Subscribed and paid up
..................
Less : Calls in Arrears
Add : Balance in share forfeiture a/c
Less : Expenses on Issue of Shares
Total
: 251 :
Schedule 6 Reserves and Surplus

1. Capital Reserve
2. Capital Redemption Reserve
3. Share Premium
4. General Reserve
5. Other Reserves
6. Balance in Profit & Loss Account
Total
Schedule 7 Borrowings
Total
Schedule 8 Investments
1. Long Term Investments
Total
2. Short term Investments
Total
Total (1 + 2)
Schedule 9 Loans
1. Security - wise Classification
Total
2. Borrower - wise Classification
Total
3. Performance - wise Classification
Total
4. Maturity - wise Classification
Total
: 252 :
Schedule 10 Fixed Assets
Gross Accumulated Net
Block Depreciation Block
Total
Previous Year
Schedule 11 Cash and Bank Balance
1. Cash
2. Bank Balance
3. Money at Call and Short notice
4. Others
Total
Schedule 12 Advances and Other Assets
1. Advances
Total (A)
2. Other Assets
Total (B)
Total (A + B)
Schedule 13 Current Liabilities
Total
Schedule 14 Provisions
Total
Schedule 15 Miscellaneous Expenditure (To the Extent not written off or adjusted)
Total
: 253 :
Revenue Account of Life Insurance Business
REVENUE ACCOUNT FOR THE YEAR ENDED 31ST MARCH, 20.......
Policyholders' Account (Technical Account)
Particulars Sch. Current Previous
Year Year
`)
(` `)
(`
Premiums earned - net
(a) Premium 1
(b) Reinsurance ceded
(c) Reinsurance accepted
Income from Investments
(a) Interest, Dividends & Rent - (Gross)
(b) Profit on sale / redemption of investments
(c) (Loss on sale / redemption of investments)
(d) Transfer / Gain on revaluation / change in fair value*
Other Income (to be specified)
TOTAL (A)
Commission 2
Operating Expenses related to Insurance Business 3
Other Expenses (to be specified)
Provisions (other than taxation)
(a) For diminution in the value of investments (Net)
(b) Other (to be specified)
TOTAL (B)
Benefits Paid (Net) 4
Interim Bonuses Paid
Change in valuation of liability against life policies in force
(a) Gross
(b) (Amount ceded in Reinsurance)
(c) Amount accepted in Reinsurance
TOTAL (C)
SURPLUS / (DEFICIT) (D) = (A) - (B) - (C)
Appropriations :
Transfer to Shareholders' Account
Transfer to Other Reserves (to be specified)
Balance carried to Balance Sheet
: 254 :
SCHEDULES FORMING PART OF REVENUE ACCOUNT

SCHEDULE - 1 : PREMIUM
Current Previous
Particulars Year Year
`)
(` `)
(`
1. First year premiums
2. Renewal Premiums
3. Single Premiums
Total
Premium Income from business written :
1 In India
2 Outside India
Total
SCHEDULE - 2 : COMMISSION EXPENSES

Current Previous
`)
(` `)
(`
Direct - First year premiums
- Renewal premiums
- Single premiums
Add : Commission on Re-insurance Accepted
Less : Commission on Re-insurance Ceded
Net Commission
SCHEDULE - 3 : OPERATING EXPENSES RELATED TO INSURANCE BUSINESS

Current Previous
(`
`) (`
`)
1. Employees' remuneration & welfare benefits
2. Travel, conveyance and vehicle running expenses
3. Training expenses
4. Rents, rates & taxes
5. Repairs
6. Printing & stationery
7. Communication expenses
8. Legal & professional charges
9. Medical fees
: 255 :
10. Auditors' fees, expenses etc.

(a) as auditor
(b) as adviser or in any other capacity, in respect of
(i) Taxation matters
(ii) Insurance matters
(iii) Management services; and
(c) in any other capacity
11. Advertisement and publicity
12. Interest & Bank Charges
13. Others (to be specified)
14. Depreciation
TOTAL
SCHEDULE - 4 : BENEFITS PAID [NET]

Particulars Current Previous
Year Year
`)
(` `)
(`
1. Insurance Claims
(a) Claims by Death,
(b) Claims by Maturity,
(c) Annuities / Pensions in payment,
(d) Other benefits, specify
2. (Amount ceded in reinsurance) :
3. Amount accepted in reinsurance :
Total
Benefits paid to claimants :
1 In India
2 Outside India
Total
: 256 :
Q. 1. From the following balances as at March 31, 2011 in the books of General Insurance
Co. Ltd. prepare a Revenue Account in respect of Fire Insurance business carried on
by them.
`
Claims paid 4,80,000
Claims outstanding on April 1, 2010 40,000
Claims intimated and accepted, but not paid on March 31, 2011 70,000
Premium received 12,00,000
Re-insurance Premium paid 1,20,000
Commission on Direct Business 2,00,000
Commission on re-insurance ceded 8,000
Commission on re-insurance accepted 4,000
Administrative Expenses 1,60,000
Provision for unexpired risk on April 1 4,00,000
Additional provision for unexpired risk on April 1 20,600
Salaries 1,30,000
Re-insurance recoveries of claims 8,000
Survey expenses regarding claims 5,000
Printing and Stationery 3,500
Postage & Telegram 2,500
Profit on sale of furniture 54,500
Training Expenses 50,000
Interest and Dividends (Net) 8,000
Income tax deducted thereon 1,500
Rent, Rates and Taxes 2,500
Legal Expenses 4,000
Profit on sale of investments 3,500
Contribution to Providend Fund 6,000
Bad Debts 2,400
Depreciation of Furniture 4,600
You are required to provide for additional reserve for unexpired risk at 1% of the net
premium in addition to the opening balance of Additional Reserve.
: 257 :
Q. 2. From the following information as on 31st March 2011, prepare the Revenue Account
of the Indian Marine Insurance Co. Ltd.
Direct Business Reinsurance
` `
I. Premium :
Received 46,00,000 7,20,000
Receivable - 1st April 2,48,000 27,000
- 31st March 3,36,000 34,000
Paid - 4,60,000
Payable - 1st April - 37,000
- 31st March - 62,000
II. Claims :
Paid 23,50,000 3,00,000
Payable - 1st April 1,66,000 39,000
- 31st March 2,08,000 44,000
Received - 1,70,000
Receivable - 1st April - 16,000
- 31st March - 23,000
III. Commission :
On Insurance accepted 2,20,000 19,000
On Re-insurance ceded - 26,000
IV. Other Expenses and Income
Salaries - ` 3,20,000, Rent Rates and Taxes ` 29,000; Postage & Telegrams
` 43,000; Indian Marine Tax paid -` ` 4,40,000; Interest, Dividends and Rent
(Gross) ` 1,37,500; Income Tax deducted at Source ` 40,250; Legal expenses
(inclusive of ` 40,000 in connection with settlement of claims) ` 72,000.
V. Balance of Fund on 1st April,` ` 38,45,000 including Additional Reserve of
` 4,45,000. Additional Reserve has to be maintained at 5% of the net premium
of the year.
Q. 3. The following balances relate to the Sea Blessed Insurance Co. Ltd.
Year ending Year ending
31st March, 2010 31st March, 2011
Premiums 5,00,000 6,00,000
Commission on Direct Business 22,500 30,000
Commission on Re-insurance Accepted 17,500 25,000
Commission on Re-insurance ceded 4,000 24,000
Claims under Policies (paid during the year) 86,250 1,62,250
Depreciation on Furniture, car etc. 12,750 15,750
Profit on Sale of Motor Car 6,000 Nil
: 258 :
Loss on Sale of old furniture Nil 2,000

Interest on Investments 14,000 7,000
Audit Fees 10,000 10,000
Salaries to staff 1,25,000 1,35,000
Printing, Postage and Stationery 46,500 57,500
Legal Expenses 5,000 4,000
Miscellaneous Expenses 15,500 22,500
Bad Debts 750 22,200
Recoveries in respect of claim under re-insurance 10,000 20,000
Re-insurance Premium 50,000 1,00,000
Total amounts of estimated liability in respect of outstanding claims as at 31-3-2009;
31-3-2010; 31-3-2011 were ` 34,250, ` 44,750 and ` 55,550 respectively.
Reserve for unexpired risks as at 31-3-2009 was ` 3,20,000 and the Additional Reserve was
` 32,000. Reserve for unexpired was to be provided for at 100% and Additional Reserve at
10% of the net Premium income for the year ending 31-3-2010 and 31-3-2011.
Prepare Marine Revenue Accounts of Sea Blessed Insurance Co. Ltd., for the year
ending 31-3-2010 and 31-3-2011 in the prescribed form.
Q. 4. From the following balances extracted from the books of Perfect General Insurance
Company Limited as on 31.3.2013 you are required to prepare Revenue Accounts in
respect of Fire and marine Insurance business for the year ended 31.3.2013 to and a
Profit and Loss Account for the same period:
` `
Directors’ Fees 80,000 Interest received 19,000
Dividend received 1,00,000 Fixed Assets (1.4.2012) 90,000
Provision for Taxation Income-tax paid during
(as on 1.4. 2012) 85,000 the year 60,000
Fire Marine
` `
Outstanding Claims on 1.4. 2012 28,000 7,000
Claims paid 1,00,000 80,000
Claims Received 20,000 5,000
Reserve for Unexpired Risk on 1.4.2012 2,00,000 1,40,000
Premiums Received 4,50,000 3,30,000
Agent’s Commission 40,000 20,000
Expenses of Management 60,000 45,000
Re-insurance Premium (Dr.) 25,000 15,000
: 259 :
The following additional points are also to be taken into account :
(a) Depreciation on Fixed Assets to be provided at 10% p.a.
(b) Interest accrued on investments ` 10,000.
(c) Closing provision for taxation on 31.3. 2013 to be maintained at ` 1,24,138
(d) Claims outstanding on 31.3.2013 were Fire Insurance ` 10,000; Marine
Insurance ` 15,000.
(e) Premium outstanding on 31.3.2013 were Fire Insurance ` 30,000; Marine
Insurance ` 20,000.
(f) Reserve for unexpired risk to be maintained at 50% and 100% of net premiums
in respect of Fire and Marine Insurance respectively.
(g) Expenses of management due on 31.3.2013 were ` 10,000 for Fire Insurance
and ` 5,000 in respect of marine Insurance.
Q. 5. The following figures are from the books of Varuna Fire Insurance Co. Ltd. as at the
end of their financial year ended 31st March, 2011.
: 260 :
From the above, you are required to prepare Fire Revenue Account, Profit and Loss
Account, and Balance Sheet of the Company, after taking into account the following :
(i) Income tax to be provided ` 2,50,000
(ii) Transfer to General Reserve ` 1,00,000
(iii) Proposed Dividend 12%.
(iv) Claims intimated but not paid as on 31st March, 2011, ` 60,800.
Q. 6. From the following information furnished to you by Ayushman Insurance Co. Ltd., you
are required to pass Journal entries relating to unexpired risk reserve and show in
columnar form “Unexpired Risks Reserve Account” for 2013.
(a) On 31.12.2012, it had reserve for unexpired risks amounting to ` 40 crores. It
comprised of ` 15 crores in respect of marine insurance business, ` 20 crores
i n re sp e ct o f f ire ins u ra n ce b u sin e ss a n d ` 5 cro re s in re s p e c t o f
miscellaneous insurance business.
(b) Ayushman Insurance Co. Ltd. creates reserves at 100% of net premium income
in respect of marine insurance policies and at 50% of net premium income in
respect of fire and miscellaneous income policies.
(c) During 2013, the following business was conducted:
` in crores)
(`
Marine Fire Miscellaneous
Premium collected from:
(a) Insured in respect of policies issued 18.00 43.00 12.00
(b) Other insurance companies in respect of
risks undertaken 7.00 5.00 4.00
Premium paid / payable to other insurance
companies on business ceded 6.70 4.30 7.00
Q. 7. From the following balance as at 31st March, 2011. In the books on the National Life
Assurance Co. Ltd., prepare Profit and Loss Account and Balance Sheet.
: 261 :
Transfer the surplus amount if any to Life Fund for the year ended 31st March, 2011 &
5% Dividend is also proposed.
: 262 :
CHAPTER - 8
* IMPORTANT CONCEPTS *
I. Revenue Recognition
Advances
Performing Assets Non - performing Assets
Interest & Discount Interest & Discount

Income is recognised Income is recognised
on ACCRUAL basis on CASH basis.
II. Rebate on Bills Discounted (Unexpired Discount)
When a client has discounted bill with the bank, the bank will have following entry-
Bills purchased and Discounted A/c Dr. xx
To Cash / Clients A/c xx
To Discount on bills Discounted A/c xx
If the maturity date falls in the next Accounting year, a part of the discount is considered as
unexpired discount for which following adjustments entry is required -
Discount on Bills Discounted A/c Dr. xx
To Rebate on Bills Discounted A/c xx
Note : The unexpired discount of this year is carried forward to next year and similarly
unexpired discount of last year is brought forward in the current year.
? Interest Income for the year = Opening Rebate + Discount Received - Closing Rebate
III. Rule for Valuation of Investments

INVESTMENTS
Held to maturity Held for Trading Available for sale

Investments Investments Investments
Valued at cost Valued at cost / Market price Valued at cost / Market

price whichever is less whichever is less
: 263 :
: 264 :
V. Advance with ECGC / DIGC cover

Advances
Secured Portion Unsecured Portion
Create RDD as Per Rule Advance xx

(-) ECGC or
DICGC cover xx
xx
Create RDD as Per Rule
o ECGC / DICGC covers risk of bad debts from advances given by bank to the extent
of unsecured portion i.e. RDD provisions will proportionately reduce for unsecured
portion as part of bad debts will be compensated back to the bank by the credit
guarantee corporations.
VI. Treatment of Bills for collection
When the bank has received bills for collection purpose, it is technically a non - accounting
item because no payment is involved at this stage but still the bank brings them “on
records” for which it prepares following two accounts -
1. Bills for collection (Assets) A/c
2. Bills for collection (Liabilities) A/c
The Accounting entries will be as under :
1. For Receipt of bills -
BFC (Assets) A/c Dr. xx
To BFC (Liabilities) A/c xx
2. For Bill Dishonored on due date
BFC (Liabilities) A/c Dr. xx
To BFC (Assets) A/c xx
3. For Bill money collected on due dates
(a) Cash A/c Dr. xx
To Cash A/c xx
To Commission A/c
(b) BFC (Liabilities) A/c Dr. xx
To BFC (Assets) A/c xx
Note : The final balance in this two Accounts will represent bills still in hand for collection
purpose which will appear as "off balance sheet item" in Final Accounts.
VII. Acceptances and Endorsements
When the bank has accepted / guaranteed bills on behalf of its clients, for bank it is a sort
of contingent liability (A Non - Accounting item) but still the bank brings this “on records”
by preparing following two accounts in its General Ledger -
1. Acceptances, Endorsements & Other Obligations (Asset) A/c
2. Acceptances, Endorsements & Others Obligations (Liabilities) A/c
The accounting entries in these two accounts are passed as under -
: 265 :
1. For acceptance of bill
A, E & O (asset) A/c Dr. xx
To A, E & O (Liabilities) A/c xx
2. For bill honoured by client himself
A, E & O (Liabilities) A/c Dr. xx
To A, E & O (Asset) A/c xx
3. For Bill honoured by bank on clients failure
(a) Client A/c Dr. xx
To Cash A/c xx
(b) A, E & O (Liabilities) A/c Dr. xx
To A, E & O (Asset) A/c xx
Note : The closing balance in these two accounts represents the bills accepted /
Guaranteed which will mature in next year & it will appear as "Contingent Liability"
in Final Accounts.
VIII. Capital Adequacy Norm
As per Basel Committee Report (Basle II Norms) every commercial bank should maintain
capital Adequacy ratio at minimum 9%.
Capital fund
Capital Adequacy ratio = x 100
Risk weighted asset.
Capital fund :
Tier I (Core capital) Tier II Capital (Less permanent)
Paid up Equity share Capital xx Undisclosed Reserves xx
(+)All reserves & surplus xx Revaluation Reserve xx
(excluding Revaluation reserve) (-) Discounting (55%) xx xx
(-) Intangible / fictitious assets (xx) General Provisions and
(-) Current & b/f losses (xx) loss Reserves xx
(-) Equity investments in Hybrid debt capitl Instruments xx
Subsidiaries (xx) Subordinated Debts xx
xx Investment Reserves xx
xx
Risk adjusted /weighted assets

Weights to be assigned to assets (in brief) for calculating capital adequacy ratio -
Assets Weighted in %
1. Cash balance, Balance with RBI & 0%
advances guaranteed by Govt.
2. Balance with other banks, advances 20%
guaranteed by banks
3. Advance against DIGCC / ECGC 50%
4. Other off Balance Sheet items 100%
5. Non funded exposure to real estate 150%
: 266 :
Balance Sheet As on
Schedule Current Previous
No. Year Year
Capital And Liabilities
Capital 1
Reserves & Surplus 2
Deposits 3
Borrowings 4
Other Liabilities and Provisions 5
Total
Assets
Cash and Balance with RBI 6
Balance with Banks & Money at call and short notice 7
Investments 8
Advances 9
Fixed Assets 10
Other Assets 11
Total
Contingent Liabilities 12
Bills for collection
Profit / Loss Account for the year ended...
I Income
Interest Earned 13
Other Incomes 14
Total
II Expenditure
Interest Expended 15
Operating Expenses 16
Provision and Contingencies
Total
III Profit / (-) Loss
Profit / (-) Loss for the year
Profit / (-) Loss brought forward
Total
IV Appropriations
Transfer to Statutory Reserve
Transfer to other Reserves
Transfer to Government / Proposed dividends
Balance carried over to Balance Sheet
Total
: 267 :
Schedules forming part of Balance Sheet C.Y. P.Y.
Schedule -1 Capital
I For Nationalised Banks
Capital (Wholly owned by the central government)
II For bank incorporated outside India :
(i) The amount of capital brought in by the banks
(a) Start up capital should be shown under this head
(As prescribed by RBI)
(ii) The amount of deposits maintained with the RBI as per
the provision of sec. 11 (2) of the Banking Regulation Act. 1949
should be shown under this head.
Total
III For other Banks :
Authorised Capital [—Shares of ` each]
Issued Capital [—Shares of ` each]
Subscribed Capital [—Shares of ` each]
Called up Capital [—Shares of ` each
` ___called up]
Less : Calls unpaid
Add : Forfeited shares
Schedule—2 : Reserves & Surplus
I Statutory Reserve
II Capital Reserve
III Share Premium
IV Revenue & Other Reserves
V Balance in the P/L A/c
Total
: 268 :
Schedule - 3 - Deposits
A)
I Demand Deposits :
II Savings Bank Deposits
III Term Deposits
Total
B)
I Deposits of Branches in India
II Deposits of Branches outside India
Total
Schedule - 4 Borrowing
I Borrowings in India
II Borrowings from outside India
[ Secured Borrowings _____________ ]
Total
Schedule - 5 : Other Liabilities
I Bills Payable
II Inter-Office adjustments (Net)
III Interest accrued
IV Others including provisions (for e.g. provision for tax,
Proposed dividends, Rebate on bills discounted,
Provision for doubtful debts etc.)
Total
Schedule - 6 : Cash & Balances with RBI
I Cash in hand (Including foreign currency notes)
II Balances with RBI
Total
Schedule -7 : Balances with Banks & Money a call & short Notice
I In India
Total
: 269 :
II Outside India :
Total
Grand Total (I & II)
Schedule - 8 Investments
I In India :
Total
II Outside India
Total
Grand Total ( I + II )
Schedule - 9 Advances
(A)
(i) Bills purchased & discounted
(ii) Cash Credits, overdrafts and loans payable on demand
(iii) Term Loans
Total
(B)
(i) Secured by tangible assets
(ii) Covered by bank / govt. guarantees
(iii) Unsecured
Total
(C)
I In India
II Outside India
Total
: 270 :
Schedule -10 Fixed Assets
I Premises :
Cost
Less : Depreciation upto date (Accumulated)
II Other (Including Furniture & Fixtures)
Cost
Less : Depreciation upto date (Accumulated)
Total
Schedule -11 Other Assets
I Inter office adjustments (Net)
II Interest Accrued
III Tax Paid in Advance / TDS
IV Stationery & Stamps
V Non banking assets (acquired in satisfaction of claims)
vi Other
Total
Schedule -12 Contingent Liabilities
I Claims against bank not acknowledged as debts
II Liability on Account of partly paid investment
III Liability on Account of outstanding forward exchange contracts
IV Guarantees given on behalf of clients
V Acceptances, endorsement and other obligations
VI Others
Total
: 271 :
Schedules forming part of Profit & Loss A/c C. Y. P. Y.

Schedule -13 Interest Earned
I Interest/discount on Advance / Bills
II Income from Investments
III Interest on balance with RBI & other inter bank funds
IV Others
Total
Schedule -14 Other Incomes
I Commission, exchanges & brokerage
II Profit on sale of investments
(-) Loss on sale of investments
III Profit on revaluation of investments
(-) loss on revaluation of investments
IV Profit on sale of land, bldg. & other assets
(-) Loss on sale of land, bldg & other assets
V Profit on exchange transactions
(-) Loss on exchange transactions
VI Income earned by way of dividends etc. from
subsidiaries & joint venture abroad or in India
VII Miscellaneous income
Total
Schedule - 15 Interest Expended
I Interest on deposits
II Interest on RBI / Inter bank borrowings
III Others
Total
Schedule -16 Operating Expenses
I Payment to and provision for employees
II Rent, taxes & lighting
III Printing & Stationery
IV Advertisement & Publicity
V Depreciation on banks properties
VI Director’s fees, allowances and expenses
VII Auditors fees & allowances [including branch auditors]
VIII Law Charges
IX Postage, telegrams, & telephones, etc.
X Repairs & Maintenance
XI Insurance
XII Others
Total
: 272 :
Q. 1. Following are the statements of interest on advance in respect of performing and

non-performing assets of Madura Bank Ltd. find out the income to be recognised for
the year ended 31st March 2011.
` in Lakhs)
(`
Performing Assets Interest Interest
Earned Received
Cash Credits and Overdrafts 1,800 1060
Term Loan 480 320
Bills purchased and Discounted 700 550
Non- Performing Assets
Cash Credits and Overdrafts 450 70
Term Loan 300 40
Bills purchased and Discounted 350 36
Q. 2. As on 31st March, 2017, the books of the Herucles Bank, include among others, the
following balances :
`
Rebate on bills discounted (1.4.2016) 3,20,000
Discount received 46,00,000
Bills discounted and purchased 3,15,47,000
Bills for collection 12,00,000
Throughout 2016-2017, the Bank's rate for discounting has been 18% and the rate of
commission on bills for collection, 4%.
On investigation, and analysis, the average due date for the bills discounted and
purchased is calculated as 15th May, 2017 and that for collection as 15th April, 2017.
Show the calculation of the amount to be credited to the Bank's Profit and Loss
Account under discount earned for the year 2016-2017. Show also the journal entries
required to adjust the above mentioned accounts.
Q. 3. The following is an extract from Trial Balance of Overseas Bank Ltd. as at 31st March, 2017.
` `
Bills discounted 12,64,000
Rebate on bills discounted not due
On March 31st, 2016 22,160
Discount received 1,05,708
: 273 :
An analysis of the bills discounted is as follows :

Amount Due Date 2017 Rate of discount
` (%)
(i) 1,40,000 June 5 14
(ii) 4,36,000 June 12 14
(iii) 2,82,000 June 25 14
(iv) 4,06,000 July 6 16
Calculate Rebate on Bills Discounted as on 31.3.2017 and show necessary journal
entries.
Q. 4. On 31st March, 2016, Uncertain Bank Ltd. had a balance of ` 9 crores in "rebate on bills
discounted" account. During the year ended 31st March, 2017, Uncertain Bank Ltd.
discounted bills of exchange of ` 4,000 crores charging interest at 18% per annum, the
average period of discount being for 73 days. Of these, bills of exchange of ` 600 crores
were due for realisation from the accepts / customers after 31st March, 2017, the average
period outstanding after 31st March, 2017 being 36.5 days.
Uncertain Bank Ltd. asks you to show the ledger accounts pertaining to :
(i) discounting of bills of exchange and
(ii) rebate on bills discounted.
Q. 5. From the following information find out the amount of provisions to be shown in the Profit
and Loss Account of a commercial bank.
` in lakhs
Assets
Standard 5,000
Sub-standard 4,000
Doubtful : for one year 800
: for two years 600
: for more than three years 200
Loss Assets 1,000
Q. 6. From the following information find out the amount of provisions required to be made in
the Profit & Loss Account of a commercial bank for the year ended 31st March, 2011 :
(i) Packing credit outstanding from Food Processors ` 60 lakhs which the bank holds
securities worth ` 15 lakhs. 40% of the above advance is covered by ECGC. The
above advance has remained doubtful for 3 years.
: 274 :
(ii) Other advances :
Assets classification ` in lakhs
Standard 7,000
Sub-standard 3,500
(includes secured exposures
` 1000 lacs & balance
unsecured exposure of ` 2500
lacs includes ` 1500 lacs
in respect of infrastructure
loan a/c where escrow a/c
is available)
Doubtful : (Secured)
Upto one year 500
More than 1 year upto three years 600
For more than 3 years 300
Loss assets 200
Doubtful : (Unsecured) 1,500
Q. 7. Mohan Bank Ltd., gives you the following information for the year 2016 - 2017
(i) Export credit given ` 50 lakhs
ECGC cover 40%
Securities held `10 lakhs(realisable value of ` 12 lakhs)
Period for which the advance has remained doubtful 2 years
(ii) Term Loan ` 75 lakhs
DICGC cover 50% (maximum limit ` 20 lakhs)
Securities held ` 20 lakhs (realisable value ` 18 lakhs)
Period for which the loan has remained doubtful 1 year
You are asked to compute the provision required on the above advances.
Q. 8. From the following details prepare "Acceptances, Endorsements and other

Obligation A/cs" as would appear in the general ledger.
On 1.4.2016 Acceptances not yet satisfied stood ` 22,30,000. Out of which ` 20 lacs
were subsequently paid off by clients and bank had to honour the rest. A scrutiny of
the Acceptance Register revealed the following :
Dates Client Acceptances / Guarantees Remarks
`
3.4.2016 A 10,00,000 Bank honoured on 10.6.2016
16.7.2016 B 12,00,000 Party paid off on 30.9.2016
1.9.2016 C 5,00,000 Party failed to pay and bank had
to honour on 30.11.2016
16.10.2016 D 8,00,000 Not satisfied upto 31.3.2017
19.11.2016 E 5,00,000 -do-
2.12.2016 F 2,70,000 -do-
Total 42,70,000
: 275 :
Q. 9. From the following information, prepare Profit and Loss A/c of Modern Bank Ltd. as on 31.3.2011:
Previous year Current Year
'000 ` Items '000 `
14,27 Interest and Discount 20,45
1,14 Income from Investments 1,12
1,55 Interest on Balances with RBI 1,77
7,22 Commission, Exchange and brokerage 7,12
12 Profit on Sale of Investments 1,22
6,12 Interest on Deposit 8,22
1,27 Interest on RBI Borrowings 1,47
7,27 Payment to and provision for Employees 8,55
1,58 Rent, Taxes and Lighting 1,79
1,47 Printing and Stationery 2,12
1,12 Advertisement and Publicity 98
98 Depreciation 98
1,48 Director's Fees 2,12
1,10 Auditor's Fees 1,10
50 Law Charges 1,52
48 Postage, Telegrams and Telephones 62
42 Insurance 52
57 Repair & Maintenance 66
Also give necessary Schedules.
Other Information :
(i) The following items are already adjusted with Interest and Discount (Cr.) :
Tax Provision ('000 `) 1,48
Provision for Doubtful Debts ('000 `) 92
Loss on sale of investments ('000 `) 12
Rebate on Bills Discounted ('000 ` ) 55
(ii) Appropriations :
25% of profit is transferred to Statutory Reserves.
5% of profit is transferred to Revenue Reserves.
: 276 :
Q. 10.From the following information, prepare Profit and Loss A/c of Hyderabad Bank Ltd.
for the year ended 31st March 2011.
Items '000 `
Interest on Cash Credit 18,20
Interest on Overdraft 7,50
Interest on term loans 15,40
Income on investments 8,40
Interest on balance with RBI 1,50
Commission on remittances and transfer 75
Rebate or Bills Discounted (1.4.2010) 1,20
Discount on bills Discounted 1,18
Rent Received 82
Profit on sale of land and building 27
Rebate on Bills Discounted 52
Interest paid on deposit 17,20
Auditor's fees and allowances 1,20
Directors fees and allowances 2,50
Advertisements 1,80
Salaries, allowances and bonus to employees 12,40
Depreciation 1,40
Payment to Provident Fund 2,80
Printing and Stationery 1,40
Repairs and Maintenance 50
Postage, telegrams, telephones 80
Other Information :
(i) Interest on NPA is as follows :
` '000)
Earned (` ` '000)
Collected (`
Cash Credit 820 4,00
Overdraft 450 1,00
Term Loans 750 2,50
(ii) Classification of advances ('000 ` )
(a) Sub-standard : 1,120
(b) Doubtful assets covered by security for 3 years 2,00
(c) Doubtful assets covered by security for one year : 60
(d) Loss Assets : 2,00
(iii) Investments : 27,50
Bank should not keep more than 25% of its investments as held to maturity investment. The
market value of its held for trading 75% investment is ` 2052.50 thousands as on 31.3.2017.
(iv) Provide for tax @ 40%.
: 277 :
Q. 11.From the following Ledger balances, prepare final balance sheet of South Indian Bank as
on 31st March, 2017 giving the relevant schedules :
('000 ` )
Dr. Cr.
Share Capital
19,80,000 shares of ` 10 each 198,00
Statutory Reserve 231,00
Net Profit (before appropriations) 150,00
Profit and Loss A/c 412,00
Fixed Deposit 517,00
Saving Deposit 450,00
Current Accounts 28,00 520,12
Borrowings from other Banks 110,00
Bills payable 10
Cash credits 812,10
Cash in hand 160,15
Cash with RBI 37,88
Cash with other banks 155,87
Money at Call 210,12
Gold 55,23
Government Securities 110,17
Premises 155,70
Furniture 70,12
Term Loans 792,88
25,88,22 25,88,22
(i) Necessary transfer is to be made from cash with other banks to maintain 3% cash
reserve on fixed, savings and current accounts with RBI.
(ii) Bills for collection ` 18,10,000.
(iii) Acceptances and endorsement ` 14,12,000.
(iv) Claims against bank not acknowledged as debt ` 5,50,000.
(v) Depreciation (Accumulated)
Premises ` 1,10,000 Furniture ` 78,000.
(vi) 50% of term loans are secured by Government guarantees. 10% of cash credits
are unsecured. Other portion is secured by tangible assets.
: 278 :
Q. 12.The following Trial balance of Citizen Bank Ltd. as on 31st March, 2017 :
` (Dr.) ` (Cr.)
Issued Capital (Equity shares of ` 100 each) ---- 1,50,000
Interest paid on Deposits and borrowings 48,500
Loss on sale of Investment 12,600
Provident fund Contribution 9,200
Director's Fees 5,500
Stationery, Printing and Advertisement 5,600
Auditor's fees 1,200
General Expenses 2,700
Commission, Exchange and brokerage 49,400
Profit on sale of Gold 35,900
Loan from other Banks 2,20,000
Term Loan 20,000
Statutory Reserve 80,000
Rebate on BIlls Discounted (1.4.2016) 20,000
Demand, loans and cash credits 3,80,000
Bank Premises 60,000
Kerala Govt. Bonds 80,000
Government of India Securities 4,20,000
Current Accounts 5,85,000
Income from Investments 15,000
Profit an Loss Account on 1.4.2016 25,000
Money at call and short notice 70,000
Bills discounted 73,000
Shares of other companies 1,17,000
Cash in hand and with Reserve Bank of India 1,10,000
Cash at Banks 3,00,000
Advance Income tax 9,000
Salaries and allowances 73,500
Interest and Discount 1,70,000
Interim Dividend paid 7,500
Deposits and Savings Bank Accounts 4,55,000
Bills for collection 2,00,000 2,00,000
Acceptances and Endorsements 1,50,000 1,50,000
21,55,300 21,55,300
: 279 :
Additional information :
(i) The bills discounted mature at an average date May 20th, (including days of grace).
All bills are discounted at 10% p.a.
(ii) Claims against the Bank not acknowledged as Debts ` 2,00,000.
(iii) Provide 5% depreciation on o.c. of premises.Balance on Provision for
Depreciation is ` 30,000 is to be made @ 30%.
(iv) Provision for taxation for current year is ` 13,000.
(v) Interest accrued on Investments ` 750.
(vi) Details of Advances are as under :
` ) Security
Amount (`
(Value as on 31.3.2017)
73,000 Secured by Gold.
1,70,000 Government Securities ` 1,80,500
70,000 Guaranteed by Directors.
10,000 Shares in Textiles ` 6,000
1,75,000 Bank Guarantee.
50,000 Gold value of ` 85,000
40,000 Debenture of a Company value of security ` 46,000.
5,88,000
(vii) Assume that all Advances are Standard Assets.
(viii) The Balance in Current Account is after adjusting overdrafts ` 1,15,000.
You are required to prepare Profit and Loss account for the year ended 31st March, 2011
and Balance Sheet of the Bank as at that date.
Q. 13. Perfect Bank Ltd. has the following capital funds and assets. Find out the Tier I and Tier II
capitals, risk- adjusted assets and risk - weighted asset ratio.
Capital funds : (Crores of Rupees)
Equity Share Capital 200
Statutory Reserves 30
Capital Reserve (of which ` 5 crores was due to revaluation of assets) 15
Share Premium 10
Undisclosed REserves 10
General Reserve 20
: 280 :
Assets :
Cash Balance 10
Balance with RBI 5
Balance with other Banks 12
Certificate of Deposits with other Commercial Banks 20
Equity investment in subsidiaries 12
Other investments 78
Loans and advances :
(i) Guaranteed by Government 100
(ii) Guaranteed by Public Sector 200
(iii) Others 1,500
Premises, furniture & fixtures 100
Other assets 120
Fictitious assets 10
Off - Balance Sheet items
Acceptances, endorsements and letters of credit 800
: 281 :
FINANCIAL REPORTING FOR FINANCIAL

INSTITUTIONS
Q. 1. Mutual Fund raised funds on 1.4.2011 by issuing 10 lakhs units @ ` 17.50 per unit. Out of
this Fund, ` 160 lakhs invested in several capital market instruments. The initial expenses
amounts to ` 9 lakhs. During June 2011, the Fund sold certain Securities worth ` 100 lakhs
for ` 125 lakhs and it bought certain securities for ` 90 lakhs. The Fund Management
expenses amounting to ` 5 lakhs per month. The dividend earned was ` 3 lakhs. 80% of
realized earnings were distributed among the unit holders. The market value of the portfolio
was ` 175 lakhs. Determine Net Asset Value (NAV) per unit as on 30.6.2011.
Q. 2. On 1.4.2011, a mutual fund scheme had 18 lakhs of unit of face value of ` 10 each was
outstanding. The scheme earned ` 162 lakhs in 2011-12, out of which ` 90 lakhs was earned
in the first half of the year. On 30.9.2011, 2 lakhs of unit were sold at a "NAV" of ` 70. Pass
journal entries for sale of units and distribution of dividend at the end of 2011-12.
Q. 3. A Mutual Fund raised 100 lakh on April 1, 2012 by issue of 10 lakh units of ` 10 per unit.
The fund invested in several capital market instruments to build a portfolio of ` 90 lakhs.
The initial expenses amounted to ` 7 lakh. During April, 2012, the fund sold certain
securities of cost ` 38 lakhs for ` 40 lakhs and purchased certain other securities for
` 28.20 lakhs. The fund management expenses for the month amounted to ` 4.50 lakhs
of which ` 0.25 lakh was in arrears. The dividend earned was ` 1.20 lakhs. 75% of the
realised earnings were distributed. The market value of the portfolio on 30.4.2012 was
` 101.90 lakh. Determine NAV per unit.
Q. 4. Shrewd Mutual Funds have introduced a scheme "Primo - Fund". Its major details are :
(a) Scheme Size = 100 Crores
(b) Face Value per unit : ` 20
(c) Investments in Quoted Shares having Market Value ` 150 Crore
Compute the NAV per unit of the Fund. Is there an appreciation of the value invested in
Units of the Fund?
: 282 :
Q. 5. Calculate the NAV of a Mutual Fund scheme from the information given below :
Beginning of the year :
Number of Units outstanding 1.8 Crores of ` 10 each
Investments at Cost ` 20 Crores (Market Value ` 37 Crores)

Outstanding Liabilities ` 1 Crore
Other Information :
1. Another 15 Lakh units were sold during the year at ` 24.
2. 35 Lakh units were repurchased during the year and 10% of the opening investments
were sold for ` 3.50 Crores to finance the repurchase.
3. No additional investments were made during the year as at the year - end, 50%
of the Investments at year beginning were quoted at 80% above the book value.
4. 10% of the Investments had witnessed a permanent fall of 20% below cost.
5. The balance investments were quoted at ` 20 Crores.
6. Outstanding liabilities towards Custodian Charges, Salaries, Commission etc.

applicable to the Scheme were ` 1.6 Crores.
7. There are no other assets and liabilities of the fund.
Q. 6. Anischit Finance Ltd., is a non - banking finance company. It makes available to you the costs
and market price of various investments held by it. (Figures in Lakhs) as on 31.3.2012.
1. Can the company adjust depreciation of a particular item of investment within a category?
2. What should be the value of investments as on 31.3.2012?
3. It is possible to set - off depreciation in investment in mutual funds against

appreciation of the value investment in Equity Shares and Government Securities?
: 283 :
Q. 7. While closing its books of account on 31st March, a NBFC has its advances classified as follows:
` `
Calculate the amount of provision which must be made against the advances.
Q. 8. While closing its books of account on 31st March, 2012 a Non - banking Finance Company
has its advances classified as follows :
Particulars ` in Lakhs
Standard Assets 16,800
Sub - standard assets 1,340
Secured positions of doubtful debts : upto one year 320
one year to three years 90
more than three years 30
Unsecured portions of doubtful debts 97
Loss assets 48
Calculate the amount of provision, which must be made against the Advances.
Q. 9. Samvedan Limited is a non-banking finance company. It accepts public deposit and also
deals in hire purchase business. It provides you with the following information regarding
major hire purchase deals as on 31-03-2011. Few machines were sold on hire purchase
basis. The hire purchase price was set as ` 100 as against the cash price of ` 80 lakhs.
The amount was payable as ` 20 lakhs down payment and balance in 5 equal installments.
The hire vendor collected first installment as on 31-03-2012, but could not collect the second
installment which was due on 31-03-2013. The company was finalizing accounts for the
year ending 31-03-2013. Till 15-05-2013, the date ‘on which the’ Board of Directors signed
the accounts, the second installment was not collected. Presume IRR to be 10.42%.
Required:
i. What should be the principal outstanding on 1-4-2012? Should the company recognize
finance charge for the year 2012-13 as income?
ii. What should be the net book value of assets as on 31-03-2013 so far Samvedan Ltd.
is concerned as per NBFC prudential norms requirement for provisioning?
(iii) What should be the amount of provision to be made as per prudential norms for
NBFC laid down by RBI?
: 284 :
J.K.SHAH CLASSES INTER C.A. – ADVANCED ACCOUNTING
CHAPTER - 10 VALUATION OF GOODWILL
The goodwill is the reputation of the business which is measured in monetary terms
and based on the profits generated by the business. The need for valuation of goodwill
would arise at various stages. For eg :- admission, retirement or death of a partner,
sale of business, scheme of absorption etc.
The methods of valuation of goodwill are as follows :
1) Super profits method
2) Capitalisation method
3) Annuity method
Super Profits Method :

This method would involve the following steps :-
1) Average Profits
2) Future Maintainable Profit (F.M.P.)
3) Closing Capital Employed
4) Average Capital Employed
5) Normal Rate of Return (NRR) (If not provided)
6) Normal Profits
7) Super Profit
8) Goodwill
1) Average Profit :
The average profit is based on the past profits. The average can be calculated
either on the basis of simple average or weighted average. If the profits of the
past are showing a continuously increasing or decreasing trend then the
weighted average method is more preferable. While computing the average, it
should be based on the operating profits. Hence, if there are non-operating
incomes and expenses, then they are to be eliminated from the given profits.
2) Future Maintainable Profit (FMP) :

Average profit as above xx
(+) Decrease in expenses xx
(-) Increase in expenses (xx)
(+) Increase in Income xx
(-) Decrease in Income (xx)
FMP before tax xx
(-) Tax (xx)
FMP after tax xx
: 285 :
3) Closing Capital Employed:

It is the investment in the business at the end of the accounting year. While
computing the capital employed the following assets should not be considered :-
a) Fictitious assets
b) Non – trade Investments
c) Accumulated losses
All outside liabilities whether short term or long term are to be deducted while
calculating capital employed. This would mean that the closing capital employed
represents the share holders funds. If no information is given in the question the
shareholders funds approach is to be adopted.
Notes
4) Average Capital Employed:

Since FMP is based on average profits then the expected return should also be
based on average capital employed for the sake of comparability. However this is
an alternative approach to closing capital employed. The average capital
employed can be calculated in the following manner under different alternatives
Remarks :
: 286 :
5) Normal Rate of Return (NRR) :

It is the expectation of the investors from this particular class of business. It is
combination of the following :-
a) Risk free rate
b) Allowance for business risks and
c) Allowance for financial risks because of a high debt equity ratio
6) Normal profits :
Normal Prtofits = Closing / Average Capital Employed × NRR
7) Super Profits :
Super Profits = FMP - Normal Profits
8) Goodwill :
Goodwill = Super profits × No. of years of purchase
In the event the number of years of purchase is not given, then generally take 3
years purchase. However if the profit of the past are showing an increasing trend
then 5 years purchase is also acceptable.
OTHER METHODS :
1. Capitalisation method of Super Profit :
Goodwill =
2. Capitalisation method of F.M.P. :
Goodwill =
3. Annuity method :
Goodwill = Super Profits x Annuity factor
: 287 :
J. K. SHAH CLASSES INTER C.A - ADVANCED ACCOUNTING
Q. 1. Negotiation is going on for transfer of X Ltd. on the basis of the Balance Sheet and the
additional information as given below :
BALANCE SHEET OF X LTD. AS ON 31ST MARCH, 2012.
` `
Share Capital
( ` 10 fully paid up share) 10,00,000 Goodwill 1,00,000
Reserve and Surplus 4,00,000 Land & Building 3,00,000
Sundry Creditors 3,00,000 Plant and Machinery 8,00,000
Investment 1,00,000
Stock 2,00,000
Debtors 1,50,000
Cash and Bank 50,000
17,00,000 17,00,000
Profit before tax for 2011-2012 amounted to ` 6,00,000 including ` 10,000 as interest on
investment. However, an additional amount of ` 50,000 p.a. shall be required to be spent
for smooth running of the business.
Market values of Land and Buildings and Plant and Machinery are estimated at ` 9,00,000,
and ` 10,00,000 respectively. In order to match the above figures further depreciation to
the extent of ` 40,000 should be taken into consideration. Income tax rate may be taken
at 50%. Return on capital at the rate of 20% before tax may be considered normal for this
business at the present stage.
For the purpose of determining the rate of return, profit for this year after the aforesaid
adjustments may be taken as the expected average profit. Similarly, average trading
capital employed is also to be considered on the basis of the position in this year.
It has been agreed that 4 years purchase of super profit shall be taken as the value of
goodwill for the purpose of the deal.
You are requested to calculate the value of goodwill of the company.
Q. 2. From the following information supplied to you, ascertain the value of goodwill of A Ltd., which is carrying
on business as retail trader, under Super Profit Method at 5 years of purchase after Super Profit Method: :
BALANCE SHEET AS ON 31ST MARCH, 2012
` `
Paid up capital : Goodwill at cost 50,000
5,000 shares of ` 100 each Land & Building 2,20,000
fully paid 5,00,000 Plant & Machinery 2,00,000
Bank Overdraft 1,16,700 Stock in trade 3,00,000
Sundry Creditors 1,81,000 Book debts less provision
Provision for taxation 39,000 for bad debts 1,80,000
Profit & Loss Appropriation a/c. 1,13,300
9,50,000 9,50,000
: 288 : VALUATION OF GOODWILL & SHARES

The company commenced operations in 1986 with a paid up capital of ` 5,00,000. Profits
for recent year (after taxation) have been as follows :
Year ended 31st March `
2008 40,000 (loss)
2009 88,000
2010 1,03,000
2011 1,16,000
2012 1,30,000
The loss in 2007-08 occurred due to prolonged strike.
The income-tax paid so far has been at the average rate of 40%, but it is likely to be 50% from
2012-13 onwards. Dividends were distributed at the rate of 10% on the paid up capital in
2008-09 and 2009-10 and the rate of 15% in 2010-11 and 2011-12. The market price of shares
is ruling at ` 125 at the end of the year ended 31st March, 2012. Profits till 31.3.12 have been
ascertained after debiting ` 40,000 as remuneration to the managing director. The government
has approved a remuneration of ` 60,000 with effect from 1st April, 2012. The company has
been able to secure a contract for supply of materials at advantageous prices. The advantage
has been valued at ` 40,000 per annum for the next five years.
Q. 3. On 31st March, 2012, the Balance Sheet of Menon Ltd. was as follow :
` `
Share Capital : Land & Buildings 2,20,000
Authorised & Issued : Plant and Machinery 95,000
5,000 equity shares of Stock 3,50,000
` 100 each fully paid 5,00,000 Sundry Debtors 1,55,000
Profit and Loss A/c 1,03,000
Bank Overdraft 20,000
Creditors 77,000
Provision for Taxation 45,000
Proposed Dividend 75,000
8,20,000 8,20,000
The net profits of the company, after deducting all working charges and providing for
depreciation and taxation, were as under :
Year ended 31st March `
2008 85,000
2009 96,000
2010 90,000
2011 1,00,000
2012 95,000
On 31st March, 2012 Land and Buildings were valued at ` 2,50,000 and Plant and
Machinery at ` 1,50,000.
In view of the nature of the business, it is considered that 10% is a reasonable return on
tangible capital.
Value goodwill based on five years purchase of the super profits based on the average
profit of the last five years.

Q. 4. The following is the Balance Sheet of Alpha Limited as on 31st March, 2012 :
Share Capital : Land & Building 4,00,000
Equity Shares of Machinery 4,50,000
` 100 each 10,00,000 Motorcar 25,000
Less Calls in Furniture 25,000
Arrears ( ` 20 1,00,000 9,00,000 Investments (face value) 50,000
for final call) Current Assets :
Reserve and Surplus : Stock 7,25,000
General Reserve 3,50,000 Sundry Debtors 2,00,000
Profit & Loss Account 2,50,000 6,00,000 Cash at Bank 1,05,000
Current Liabilities : Miscellaneous
Sundry Creditors 5,00,000 Expenditure
20,00,000 20,00,000
Additional information is as under :
(1) Fixed Assets are worth-
Building ` 6,00,000
Machinery ` 5,20,000
(2) All investments are non-trading investments and are to be valued at 20% above
cost. Dividend at uniform rate of 20% is earned on all investments.
(3) For the purpose of valuation of shares, goodwill is to be valued on the basis of 3 years
purchase of super profits based on average profit (after tax) of the last three years.
(4) Depreciation on appreciated value of Land and Building and Machinery is not to be
considered for valuation of goodwill.
(5) Profits (after tax) are as follows :
31st March `
2010 3,80,000
2011 4,20,000
2012 5,00,000
Rate of income tax 50%
In similar business, return on capital employed is 20% (after tax).
(6) In 2009-2010 machinery (Book value ` 20,000) was sold for ` 20,000 but the proceeds
were wrongly credited to profit and loss account. The mistake has not yet been rectified.
Depreciation has been charged on machinery @ 10% per annum on reducing
balance method.
Find out the value of Goodwill.
Note : Trend in profit is to be ignored for the purpose of calculation of average profit.

Q. 5. From the information given on are requested to calculate the average capital employed.
(` in ‘000)
Equity share of `10/- each 9,000 Land & Building 5,120
8½% Preference Shares of Plant & Machinery 10,870
` 10/- each 2,000 Furniture 2,700
General Reserve 1,050 Vehicles 200
Profit & Loss 4,970 Stock 700
18% Term Loan 4,500 Debtors 450
Cash credit 580 Cash & Bank 2,340
Creditors 200 Preliminary Exp. 20
Provision for tax (net of Adv. Tax) 100
22,400 22,400
The reserve and surplus position on 31.03.03
Profit and Loss 480
General Reserve 450
Q. 6. On the basis of the following information, calculate the value of goodwill of Gee Ltd. at three
years’ purchase of super profits, if any, earned by the company in the previous four completed
accounting years.
Balance Sheet of Gee Ltd. as at 31st March, 2003
` in ` in
Liabilities Lakhs Assets Lakhs
Share Capital : Goodwill 310
Authorised 7,500 Land & Buildings 1,850
Issued and Subscribed 5 crore Machinery 3,760
equity shares of `10 each fully paid 5,000 Furniture and Fixtures 1,015
Capital Reserve 260 Patents and Trade Marks 32
General Reserve 2,543 9% Non-trading 600
Surplus i.e. credit balance of Investments Stock 873
Profit and Loss A/c (appropriation) 1,227 Debtors 614
Trade Creditors 568 Cash in hand and at Bank 546
Provision for Taxation (net) 22 Preliminary Expenses 20
9,620 9,620

The profits before tax of the four years have been as follows :
Year ended 31st March Profit before tax in lakhs of Rupees
2000 3,190
2001 2,500
2002 3,108
2003 2,900
The rate of income tax for the accounting year 1999-2000 was 40%. Thereafter it has been
38% for all the years so far. But for the accounting year 2003-2004 it will be 35%.
In the accounting year 1999-2000, the company earned an extraordinary income of ` 1
crore due to a special foreign contract. In August, 2000 there was an earthquake due to
which the company lost property worth ` 50 lakhs and the insurance policy did not cover
the loss due to earthquake or riots.
9% Non-trading investments appearing in the above mentioned Balance Sheet were
purchased at par by the company on 1st April, 2001.
The normal rate of return for the industry in which the company is engaged is 20%. Also
note that the company’s shareholders, in their general meeting have passed a resolution
sanctioning the directors an additional remuneration of ` 50 lakh every year beginning from
the accounting year 2003-2004.
Q. 7. Given below the balance sheet of PPX Ltd. as on 31.3.2003.

Liabilities '000 ` Assets ‘000 `
Share Capital 50,00 Sundry Fixed Assets 72,00
Reserve 32,00 Non-trade Investments 12,00
Profit and Loss A/c 13,00 Stock 7,80
Sundry Creditors 8,20 Debtors 6,20
Cash & Bank 5,20
1,03,20 1,03,20
Other information :
(1) Profit before tax and other relevant information :
Year Ended PBT Provision for Gratuity Gratuity paid Loss of Uninsured
31st March ` Required Stock
‘000 ` ‘000 ` ‘000 ` ‘000 `
1999 42,00 220 ---- ----
2000 39,00 230 167 62
2001 44,00 250 32 ----
2002 42,00 260 142 ----
2003 37,00 270 12 ----
(2) Tax-rate 51%
(3) Non-trade investments fetched 11%.
(4) Expected Tax-rate 45%.
(5) The company wants to switch over towards maintaining gratuity provision on actuarial
calculation rather than accounting on payment basis.
(6) Normal rate of return may be taken as 16%
Find out value of goodwill it may be assumed that the super profit, if any, is maintainable for
5 years 20% should be the appropriate discount factor.

Q. 8. A company desirous of selling its business to another company has earned an average
profit in past ` 1,50,000 per annum. It is considered that such average profit fairly represents
the profit likely to be earned in the future expect that:
a) Directors fees ` 10,000 charged against such profit will not be payable by the
purchasing company whose existing board can cope with additional work without
additional fees.
b) Rent at ` 20,000 p.a. which has been paid by the existing company will not be charged
in the future.
c) Expansion plan implemented in the last year will result in extra expenses ` 10,000
p.a. and extra income ` 15,000 p.a.
The value of the net tangible assets of the existing company at the proposed date of sale
was `19,00,000 and it was considered that reasonable return on capital invested, for the
type of company was 8%. Calculate the value of goodwill at 3 years purchase of super
profits.
Q. 9. The average net profit was (before tax) ` 2,07,000. It included investment income ` 2,000.
The cost (also present value) of investments was ` 50,000. Expenses amounting to ` 3,000
p.a. are likely to be discontinued in future. 50 paise in rupee may be taken as average
annual taxation. 6% represented a fair commercial return. The average capital employed
was ` 13,50,000 but upon valuation obtained, the actual capital was valued at ` 14,50,000.
a) Assuming seven years purchase of super profits what is the value of goodwill?
b) W hat will be the value of goodwill under capitalization method?
Q. 10. The balance sheet of Moon Ltd. discloses the following financial position as on 31st
December, 1983.
500, 8% pref. Shares of 50,000 Land and Building 3,50,000
` 100 each Plant and Machinery 4,00,000
1,500 Equity shares of ` 100 each 1,50,000 Stock 1,50,000
Debtors 2,00,000
General Reserve 10,000 Cash at Bank 50,000
Profit and Loss A/c 40,000
7% Mortgage Debenture 5,00,000
Trade Creditors 4,00,000
11,50,000 11,50,000
You are required to value goodwill of Moon Ltd., for which the following information is
supplied:
1) The present market value of Plant and Machinery is ` 4,70,000 and Land and Building
is ` 4,00,000 respectively.

2) The debtors are subject to a reserve for doubtful debts at 10%.
3) Given below are figures of profit and sales, for five years from 1979 to 1983 and the
figures of profits are arrived at before adjustments of tax @ 40% but after charging
debenture interest and depreciation.
Year Profits Sales
1979 1,10,000 11,00,000
1980 1,25,000 12,00,000
1981 1,35,000 13,50,000
1982 1,50,000 16,00,000
1983 1,80,000 17,50,000
4) The reasonable return on capital invested in the same class of business done by
Moon Ltd. is 8%.
5) It may be assumed that the company will be able to maintain its profit in the next five
years on the same level as in the past. Use super profit method. Take weighted average
method.
Q. 11. Following is the Balance sheet of A limited as on 31st March, 1980.

Balance Sheet
Share capital Goodwill 1,25,000
5,000 shares of ' 100 each 5,00,000 Land and Building 1,80,000
Reserve fund 1,50,000 Less: Dep. 36,000 1,44,000
Workmen compensation fund 25,000 Plant and Machinery
Workmen profit sharing fund 45,000 (at cost) 2,40,000
Profit and loss account 1,50,000 Less: Dep. 40,000 2,00,000
Creditors 2,30,000 Investment (To provide
Other liabilities 1,00,000 replacement of P & M) 1,00,000
Book debts 3,60,000
Less: R.B.D. 30,000 3,30,000
Stock 2,00,000
Cash at bank 75,000
Preliminary expenses 26,000
12,00,000 12,00,000
Further Information:
1) A Ltd. had been carrying on business for, the past several years . The company is to
be taken over by another company and for this purpose you are required to value
goodwill by "capitalization of maintainable profits method". For this purpose following
additional information is available.
a) The profit earned by the company for the past three years were as under:
Year ended 31st March, 1978 ` 3,10,000
The profits given are profits before tax, which was 50% throughout.
b) The new company expect to carry on business with its own board of directors,
without any addition. The director's fees paid by A Ltd., to its directors
amounted to ` 9,000 per year, no more payable.
c) The new company expects a large increase in volume of business and
therefore, will have to take an additional office for which it will have to pay
extra rent of ` 12,000 per year.
d) As on 31st March, 1980. Land and Building were worth ` 3,00,000 whereas
Plant and Machinery were worth only ` 1,80,000. There is sufficient provision
for doubtful debts. There is no fluctuation in the value of investments and stock.
e) Liability under workmen compensation fund was only ` 5,000.
f) The expected rate of return on similar business may be taken at 12%. You are
required to value goodwill according to above instructions. All your workings
should from part of your answer. Take average capital employed, the same as
closing employed for your calculations.
Q. 12.From the following information supplied to you, ascertain the value of goodwill of ANAMIKA
LTD. which is carrying business as retail trade under the capitalization of profits method.
Balance Sheet as on March 31, 1991
Paid up capital: Goodwill at cost 50,000
5,000 equity shares of ` 5,00,000 Land and Building at cost 2,20,000
100 each fully paid Plant and Machinery at cost 2,00,000
P&L appropriation A/c 1,13,300 Stock in trade 3,00,000
Book debt
Bank overdraft 1,16,700 Less provisions for bad debts 1,80,000
Prov. For taxation 39,000
Sundry creditors 1,81,000
9,50,000 9,50,000
The company commenced operations in 1985 with a paid up capital of `5,00,000. Profits
for recent years (after taxation) have been as follows:
Year ending March, 31 `
1987 40,000 (loss)
1988 88,000
1989 1,03,000
1990 1,16,000
1991 1,30,000
1) The loss in 1987 occurred due to prolonged strike.
2) The income tax paid so far has been at the average rate of 40%, but it is likely to be
50% now onwards.
3) Dividends were distributed at the rate of 10% at the end of the year ending March 31, 1991.
4) The market price of shares is ruling at ` 125 at the end of the year ending March, 31, 1991.
5) Profit till 1991 have been ascertained after debating ` 40,000 as remuneration to the
managing director. The government has approved a remuneration of ' 60,000 with
effect from April 1, 1991.
6) The company has been abl e to secure a contract for supply of materials at
advantageous prices. The advantage has been valued at ` 40,000 p.a. for the next
five years .
Q. 13. Balance Sheet of X Ltd.
Liabilities in lakhs Assets in lakhs
Share Capital 80 Fixed Assets 1,80
P & L A/c 20 Inventory 40
13% Debentures 1,20 Trade receivables 20
Trade payables 40 Cash & Bank 20
2,60 2,60
Suppose normal return on Shareholders' fund is 20% and normal return on long term fund
is 18%.
Future Maintainable Profit (before interest) of X Ltd. is 38.4 lakhs.
Calculate Goodwill by Shareholders fund approach and Long term funds approach.
Also determine the Leverage Effect on Goodwill.
Q. 14.Find out Leverage effect on Goodwill in the following case :

(i) Current cost of capital employed 10,40,000
(ii) Profit earned after current cost adjustments 1,72,000
(iii) 10 % long term loan 4,50,000
(iv) Normal rate of return :
On equity capital employed 15.6 %
On long term capitla employed 13.5%

CHAPTER - 11 CONSOLIDATED FINANCIAL STATEMENT
Objective : The objective of this chapter is to provide guideline for the preparation and
presentation of Consolidated Financial Statement (CFS). CFS means financial statement
of a parent (i.e. holding co.) and its subsidiaries as a single economic entity. CFS includes
the following :
a) Balance Sheet
b) Profit and Loss Account
c) Notes to accounts
d) Cash Flow Statement
Important Terms :
1. Control : It means –
a) Ownership, directly or indirectly through subsidiaries, of more than one half of
the voting power of an enterprise. Or
b) Control of the composition of the board of directors or other governing body.
Subsidiary : It is an enterprise that is controlled by another enterprise
(known as parent)
Parent : It is an enterprise that has one or more subsidiaries.
Group : A group is set of parent and all its subsidiaries.
Consolidated Financial Statement : Consolidated Financial Statements are
the financial statements of a group presented as those of a single
enterprise.
Equity : It is the residual interest in the assets of the enterprise after
deducting all its liabilities.
Minority Interest : It is that part of the net results of operations and of the
net assets of a subsidiary attributable to interests which are not owned, by
the parent.
2. Consolidation Procedure :
a) In preparing CFS, the financial statement of the parent and its subsidiaries
should be combined / added on line by line basis by adding the like items of
assets, liabilities, income and expenses.
b) The cost of investment of parent in each subsidiary should be cancelled /
eliminated with parent’s portion of equity on each subsidiary on the date on
which the investment was acquired in each subsidiary.
c) If cost of investment in a subsidiary exceeds the parent’s portion of above
equity on the date of consolidation, the excess is debited in Goodwill and should
be shown as an asset in the CFS.
d) If cost of investment in a subsidiary is less than the parent’s portion of above
equity on the date of consolidation, the difference is credited to Capital Reserve
account and should be shown in the CFS under the head Reserve and Surplus.
e) Minority Interest should be calculated and shown in the CFS
f) Intra group balances and intra group transactions and resulted unrealized
profits should be eliminated in full.
: 297 :
Accounting for Investment in Parent’s Separate Financial Statement : In a parent’s

separate financial statement, investment in subsidiaries should be accounted for in
accordance with Accounting Standard – 13.
3. Sale of goods :
Downstream Transaction :
When goods are transferred to subsidiary at cost + profit, profit is included in stock of
subsidiary company.
Upstream Transaction :
Where goods are transferred to holding company at cost + profit, profit margin is
included in stock of holding company.
Therefore, profit included in stock has to be eliminated.
4. Treatment of revaluation & depreciation when the same is not accounted in the
books of subsidiary
Remarks: Final Post P/L should be distributed between Holding co. & Minority Interest.
5. Preliminary Expenses :
Whenever, Preliminary expenses are existing on date of acquisition of shares by
holding company then such preliminary expenses would be treated as pre loss. It is
quite possible that such preliminary expenses are written off in future. However, since
such expenses are treated as pre loss, we should always consider future profit
without adjusting preliminary expenses written off.
6. Bonus Shares :
Issue of bonus shares by subsidiary company does not change the controlling stake
of holding company & therefore date of bonus issue is irrelevant.
: 298 :
J. K. SHAH CLASSES INTER C.A. -ADVANCED ACCOUNTING
Q. 1. The balance sheet of Big Limited and Small Limited as at 31st March, 2012 were as under:
Big Ltd. Small Ltd. Big Ltd. Small Ltd.
` ` ` `
Equity Capital 9,00,000 3,00,000 Fixed Assets 9,00,000 4,00,000
(Shares of ` 10 each) Investments 6,00,000 --
General Reserve 5,00,000 30,000 Sundry Debtors 1,60,000 90,000
Profit & Loss A/c. 6,00,000 2,00,000 Inventory 2,10,000 1,20,000
Sundry Creditors 1,00,000 1,70,000 Cash & Bank 2,30,000 90,000
21,00,000 7,00,000 21,00,000 7,00,000
Big Ltd. has acquired 75 per cent of Small Ltd.'s shares at ` 6,00,000 on 1st July, 2011.
Small Ltd. had an opening balance of ` 1,00,000 in Profit and Loss Account from which it
paid dividend for 2010-2011 at 20 per cent on 30th September, 2011. The dividend received
by Big Ltd. is included in its Profit & Loss Account.
Inventory of Big Ltd. included ` 20,000 out of purchases of ` 50,000 made from Small Ltd. in January
2012. Credit period is 100 days. Small Ltd. had sold these items at a margin of 25 per cent on cost.
There had been no change in the General Reserve Account of Small Ltd. during 2011-2012.
Prepare a consolidated balance sheet as at 31st March, 2012.
Q. 2. A Ltd. acquired 1,600 ordinary shares of ` 100 each of B Ltd. on 30th September, 2011. On
31st March, 2012 the Balance Sheets of the two companies were as given below :
` ` ` `
Share Capital Land & Buildings 1,50,000 1,80,000
(of ` 100 each fully paid) 5,00,000 2,00,000 Plant & Machinery 2,40,000 1,35,000
Reserves 2,40,000 1,00,000 Investment in B Ltd.
Profit & Loss A/c 57,200 82,000 at cost 3,40,000 —
Bank Overdraft 80,000 — Stock 1,20,000 36,400
Bills Payable — 8,400 Sundry Debtors 44,000 40,000
Creditors 47,100 9,000 Bills Receivable 15,800 —
Cash 14,500 8,000
9,24,300 3,99,400 9,24,300 3,99,400
The Profit & Loss Account of B Ltd. showed a credit balance of ` 30,000 on 1st April, 2011 out of
which a dividend of 10% was paid on 31st October, 2011 ; A Ltd. has credited the dividend
received to its Profit & Loss Account. The Plant & Machinery which stood at ` 1,50,000 on 1st
April, 2011 was considered as worth ` 1,80,000 on 30th September, 2011 ; this figure is to be
considered while consolidating the Balance Sheets.
Prepare consolidated Balance Sheet as on 31st March, 2012.
: 299 : CONSOLIDATED FINANCIAL STATEMENT
Q. 3. The following are the Balance Sheets of H Ltd. and S Ltd. as on 31st March, 2012 :
Liabilities H Ltd. S Ltd. Assets H Ltd. S Ltd.
` ` ` `
Share Capital Fixed Assets 4,80,000 2,50,000
Shares of ` 100/- each 10,00,000 5,00,000 Investments
Reserve & Surplus in S Ltd. 5,00,000 --
General Reserve 1,00,000 1,50,000 Current Assets 7,20,000 7,50,000
Profit & Loss A/c 1,60,000 1,50,000
Current Liabilities 4,40,000 2,00,000
17,00,000 10,00,000 17,00,000 10,00,000
The following further information is furnished :
(1) H Limited acquired 3000 shares in S Limited on 1.7.2011. The Reserves and Surplus
position of S Limited as on 1.4.2011 was as under :
(a) General Reserve ` 2,50,000
(b) P & L A/c. Bal. ` 1,20,000
(2) On 1.10.2011 S Limited issued 1 share for every 4 shares held as Bonus Share at a
face value of ` 100 per share. No entry has been made in the books of H Limited for
the receipt of these bonus shares.
(3) On 30.9.2011, S Limited declared a dividend out of its pre-acquisition profits of 25%
on its then share capital. H Limited credited the dividend to its Profit and Loss Account.
(4) H Limited owed S Limited ` 50,000 for purchase of stock from S Limited. The entire
stock is held by H Limited on 31.3.2012. S Limited made a profit of 25% on cost.
(5) H Limited transferred a machinery to S Limited for ` 1,00,000. The book value of the
machinery to H Ltd. was ` 80,000.
Prepare a consolidated Balance Sheet as on 31.3.2012.
Q. 4. On 31st March, 1996, P Ltd. acquired 1,05,000 shares of Q Ltd. for ` 12,00,000. The Balance
Sheet of Q Ltd. on that date was as under :
1,50,000 equity shares of ` 10 Fixed Assets 10,50,000
each fully paid 15,00,000 Current Assets 6,45,000
Pre-incorporation profits 30,000
Profit and Loss Account 60,000
Creditors 1,05,000
16,95,000 16,95,000

On 31st March, 2002 the Balance Sheets of two companies were as follows :
Liabilities P Ltd. Q Ltd. Assets P Ltd. Q Ltd.
` ` ` `
Equity Shares of `10 each 1,05,000 Fixed Assets 79,20,000 23,10,000
fully paid. equity Shares in Q Ltd.
(before bonus issue) 45,00,000 15,00,000 at cost 12,00,000 ----
Securities Premium 9,00,000 ---- Current Assets 44,10,000 17,55,000
Pre-incorporation Profits ---- 30,000
General Reserve 60,00,000 19,05,000
Profit & Loss A/c 15,75,000 4,20,000
Creditors 5,55,000 2,10,000
1,35,30,000 40,65,000 1,35,30,000 40,65,000
Directors of Q Ltd. made bonus issue on 31.3.2002 in the ratio of one equity share of ` 10
each fully paid for every two equity shares held on that date.
Calculate as on 31 st March, 2002
(i) Cost of Control / Capital Reserve;
(ii) Minority Interest;
(iii) Consolidated Profit and Loss Account in each of the following cases :
(a) Before issue of bonus shares.
(b) Immediately after issue of bonus shares.
It may be assumed that bonus shares were issued out of post-acquisition profits by using
General Reserve.
Prepare a Consolidated Balance Sheet after the bonus issue.
Q. 5. Balance sheets as on 31st March, 2010

Share capital Fixed Assets 3,00,000 1,00,000
Equity Shares of 60% shares in
Rs. 10 each fully paid 5,00,000 2,00,000 S Ltd. at cost 1,62,400 --
General Reserve 1,00,000 50,000 Current Assets 2,77,600 2,39,000
Profit and loss Account 60,000 35,000 Preliminary
Expenses -- 6,000
creditors 80,000 60,000
7,40,000 3,45,000 7,40,000 3,45,000
H Ltd. acquired the share on 1st April 2009 on which date General Reserve and profit and loss
Account of S Ltd. showed balances of Rs. 40,000 and Rs. 8,000 respectively. No part of preliminary
expenses was written off during the year ending 31st March, 2010. prepare the consolidated
balance sheet of H Ltd. and its subsidiary S Ltd. as on 31st March 2010.

Q. 6. From the following balance sheet of H. Ltd. and its subsidiary S Ltd. drawn up at 31.12.2010.
Prepare a consolidated Balance sheet as on that date having regard to the following.
(i) Reserve and profit and loss account (cr.) of S. Ltd. stood at ` 50,000 and 30,000
respectively, on the date of acquisition of its 80% shares. Held by H Ltd. as on 1/01/2010
and
(ii) Machinery (Book value ` 2,00,000) and furniture (Book value ` 40,000) of S Ltd. were
revalued at ` 3,00,000 and ` 30,000 respectively for the purpose of fixing the price of its
shares there was no purchase or sale of these assets since the date of acquisition.
Balance sheets of H Ltd. S Ltd. as at 31st December, 2010.
Liabilities H Ltd. Rs. S Ltd. Rs. Assets H Ltd. Rs. S Ltd. Rs.
Share capital
Shares of 10,00,000 2,00,000 Machinery 6,00,000 1,80,000
Rs. 100 each
Reserves 4,00,000 1,50,000 Furniture 1,00,000 34,000
Profit & loss A/c 2,00,000 50,000 Other Assets (current) 8,80,000 2,86,000
Creditors 3,00,000 1,00,000 Shares in S Ltd. 1600
at Rs. 200 each 3,20,000
19,00,000 5,00,000 19,00,000 5,00,000
Q. 7. The following are summarized Balance Sheets of ‘X’ Ltd. and ‘Y’ Ltd. as on 31st December 2010
X Ltd. Y Ltd X Ltd. Y Ltd.

Paid up capital in Freehold premises 4,50,000 1,20,000
Shares of Rs. 100 10,00,000 3,00,000 Plant & 3,50,000 1,60,000
each Machinery
General reserve 4,00,000 1,25,000 Furniture 80,000 30,000
Profit and Loss A/c 3,00,000 1,75,000 Debtors 3,00,000 1,70,000
Sundry Creditors 1,00,000 70,000 Stock investment in 3,20,000 1,60,000
Shares in Y Ltd. 2,60,000 _
at cost
Cash balance 40,000 30,000
18,00,000 6,70,000 18,00,000 6,70,000
You are required to prepare a consolidated Balance Sheet as on 31st December 2010. Showing
in detail necessary adjustments and taking into consideration the following information
a) 'X' Ltd. acquired the shares of Y Ltd. on 1.1.2010 when the balance on their profit and
Loss account and general reserve were ` 75000 and ` 80000 respectively.
b) Stock of ` 1,60,000 held by ‘Y’ Ltd. consists of ` 60,000 goods purchased from ‘X’ Ltd.
Who has charges profit at 25% on cost.
c) Included in Debtors of X Ltd. ` 30,000 due from Y Ltd.

Q. 8. H Ltd. acquired 8,000 shares of Rs. 10 each in K Ltd. on 31st March 2011. The summarized
Balance Sheets of the two companies as on that date were as follows :
Particulars H Ltd. Rs. K Ltd. Rs.
Liabilities :
Share Capital :
30,000 Shares of Rs. 10 eAach --------- 3,00,000
10,000 Shares of Rs. 10 each --------- - 1,00,000
Capital Reserve --------- - 52,000
General Reserve --------- 25,000 5,000
Profit & Loss Account ---------- 38,200 18,000
Loan from H Ltd. ---------- 2,100 -
Bills payable (including Rs. - 1,700
1,000 to H Ltd.) ---------
Creditors --------- 17,900 5,000
3,83,200 1,81,700
Assets :
Fixed Assets 1,50,000 1,44,700
Investments in K Ltd. at cost --------- 1,70,000 -
Stock-in-hand --------- 40,000 20,000
Loan to H Ltd. --------- - 2,000
Bills Receivable (including Rs. 1,200 -
700 from K Ltd.) ---------
Debtors --------- 20,000 10,000
Bank --------- 2,000 5,000
3,83,200 1,81,700
You are given the following information :
1) K Ltd. made a bonus issue on 31st March 2011 of one share for every two shares held,
reducing the capital reserve equivalently, but the transaction is not shown in the above
Balance Sheets.
2) Interest receivable (Rs. 100) in respect of the loan due by H Ltd. to K Ltd. has not been
credited in the account of K Ltd.
3) The directors decided that the fixed assets of K Ltd. were overvalued and should be
written down by Rs. 5,000.
Prepare the Consolidated Balance Sheet as at 31st March 2011, showing your workings.

Q. 9. From the following Balance sheet of H Ltd. and its subsidiary S Ltd. as on 31st March 2011, and
the additional information provided there after prepare consolidated Balance sheet on 31.3.11
Rs. Rs. Rs. Rs.
Share capital (Rs.10) 25,00,000 5,00,000 Land 5,00,000 1,00,000
Reserve 2,00,000 - Building 10,00,000 3,00,000
Profit & Loss A/c 3,00,000 4,00,000 Machinery 6,00,000 4,50,000
Current Liabilities 1,60,000 90,000 Investment 7,50,000 12,000
Current Assets 3,10,000 1,28,000
31,60,000 9,90,000 31,60,000 9,90,000
Additional Information:
1. H. Ltd. acquired 40,000 Equity shares of S Ltd. for Rs. 7,00,000 on 1 July 2010.
2. Land of S Ltd. was revolved as on 30.6.2010 Rs. 5,00,000
3. S Ltd. declared & paid interim dividend @ 20% p.a. for 6 month ended on 30th September
2010. Dividend received by H Ltd., credited to profit a loss A/c
4. Profit & Loss A/c of S Ltd. as on 1st April 2010 showed Dr. Balance amounting Rs. 4,00,000
Q. 10. Following are the Balance Sheets of H. Ltd. and S. Ltd. as at 31st March 2011
Rs. Rs. Rs. Rs.
Share capital share of 5,00,000 2,00,000 Goodwill 40,000 30,000
Rs.10 each
General Reserve as 1,00,000 60,000 Land & Building 2,00,000 1,30,000
on 1.4.03
Profit & Loss A/c 1,40,000 90,000 Plant &Machinery 1,60,000 90,000
Bills Payable - 40,000 Stock in Trade 1,00,000 90,000
Creditor s 80,000 50,000 Shares in S. Ltd. 2,40,000 1500
shares (atcost)
Cash at Bank 60,000 25,000
8,20,000 4,40,000 8,20,000 4,40,000
The Profit and Loss Account of S Ltd. showed a credit balance of ` 50,000 on 1st April 2010. A
dividend of 15% was paid in December 2010 for the year 2009-10. This dividend was credited to
profit and loss account by H Ltd.
H Ltd. acquired the shares in S. Ltd. on 1st October, 2010.
The Bills Payable of S Ltd. were all issued in favour of H Ltd. which company got the bills
discounted.
Included in the Creditors of S Ltd. is ` 20,000 for goods supplied by H Ltd. included in the stock
of S Ltd. are goods to the value of ` 8,000 which were supplied by H. Ltd. at a profit of 33%% on cost.
In arriving at the value of S. Ltd. shares, the plant and machinery which then stood in the books
at ` 1,00,000 on 1.4.2010 was revalued at ` 1,50,000. The new value was not incorporated in
the books. No changes in these have been made since then in books of S. Ltd.
Prepare the consolidated balance sheet as on that date.
Q. 11. Following are the balance sheets of the two companies H. Ltd. and S. Ltd. as at 31.3.2012.
H Ltd. S. Ltd.
` `
Share of ` 100/- each 10,00,000 5,00,000
Profit & Loss A/c. 3,00,000 2,00,000
Creditors 1,00,000 1,00,000
14,00,000 8,00,000
Sundry Assets 9,00,000 6,90,000
Investments :
4000 shares in S Ltd. 5,00,000 ----
1000 shares in H Ltd. -- 1,10,000
14,00,000 8,00,000
H Ltd. acquired the shares in S Ltd. on 1st April, 2011, when profit and loss account balance
in S Ltd. stood at ` 1,20,000 and in H Ltd. at 1,80,000. S Ltd. had acquired shares in H Ltd.
on 1st April, 2010, when H Ltd. had balance of ` 1,00,000 and S Ltd. had balance of ` 50,000
in the profit and loss account.
Prepare a consolidated balance sheet of two companies as on 31.3.2012.
Q. 12.H. Ltd. Acquired 60% of share capital of S Ltd. On 1st April 2005. Following are the cash flow
statements of H Ltd. And S Ltd. For the year ended 31st March 2011 :-
Particulars H Ltd. S Ltd.
` ` ` `
Cash flows from operating activities
Net profit before tax 90,000 60,000
Adjustments for :
Interest expense 5,000 2,000
Dividend income [6,000]
Depreciation and amortization 26,000 17,000
Operating profit before working capital 1,15,000 79,000
changes
Increase in Sundry debtors 7,000 8,000
Decrease in inventories [3,000] [3,000]
Decrease in sundry creditors 6,000 7,000
Cash generated from operations 1,25,000 91,000
Income taxes paid [15,000] [10,000]
1,10,000 81,000
Net cash from operating activities
Cash flows from investing activities
Purchase of fixes assets [56,000] [40,000]
Investment in debt securities [30,000] [20,000]
Dividend received 6,000
Net cash used in investing activities
80,000 60,000
Cash flows from financing activities

Interest paid [4,000] [3,000]
Interim Dividend paid [12,000] [10,000]
Net cash used in financing activities [16,000] [13,000]
Net increase in cash and cash equivalents 14,000 8,000
Cash and cash equivalents at the beginning 5,000 4,000
of the year
Cash and cash equivalents at the end of the year 19,000 12,000
During the year , S Ltd. Sold to H Ltd. Goods costing Rs. 6,000 at a profit cost plus 30%. As at
the year end , Rs.3,000 was still outstanding for payment on this account. H Ltd. Managed to
sell 50% of such goods to outsiders before the year end. During the year ,S Ltd. Paid an interim
dividend of Rs. 10,000 to its shareholders. A final dividend of Rs.20,000 has been recommended
by are debtors of H Ltd.
Prepare consolidated cash flow statement.
Q. 13.The following are the Profit & Loss A/c of H. Ltd. & S. Ltd. for the year ended March 31st, 2011
Particulars H. Ltd. ` S. Ltd. ` H. Ltd. ` S. Ltd. `
To Opening Stock 2,00,000 1,00,000 By Sales 19,80,000 14,00,000
To Purchases 12,00,000 7,50,000 By Closing Stock 2,10,000 60,000
To Carriage 20,000 10,000
To Wages 2,10,000 80,000
To Gross Profit c/d 5,60,000 5,20,000
21,90,000 21,90,000 14,60,000
To Salaries 95,000 45,000 By Gross Profit b/d 5,60,00 5,20,000
To Rent 40,000 25,000 By Commission 1,00,000
To Commission - 50,000 By Debenture Interest S Ltd. 10,000
To Sundry Expenses 65,000 25,000 By Rent 40,000
To Debentures Interest - 25,000
To Provision for Taxation 1,90,000 1,10,000
To Net Profit c/d 3,20,000 2,40,000
7,10,000 5,20,000 7,10,000 5,20,000
To Preference Dividend 40,000
By Balance B/d 1,00,000 40,000
To Proposed Dividend 90,000 60,000 By Net Profit B/fd 3,20,000 2,40,000
To Corporate Dividend Tax 15,021 16,690
To Balance carried to
Balance sheet 3,14,979 1,63,310
4,20,000 2,80,000 4,20,000 2,80,000
You are given following additional information :
1. H. Ltd. acquired 3000 Equity shares in S. Ltd. on 1st October 2010, of 4000 Equity shares
of S. Ltd. However Debentures were acquired on 1st April 2009.
2. During the year H. Ltd. sold goods to S Ltd.costing ` 60,000 for ` 80,000. One fourth of
the goods remained unsold on March 31st 2011. It is included in closing stock at cost to
S. Ltd.
3. Commission, Rent credited to profit & Loss A/c of H. Ltd. include ` 40,000, ` 10,000
received from S. Ltd.
4. Prepare a consolidated profit and Loss A/c for the year ended March 31st 2011.

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CONTENTS

Sr. No. Chapter Page No.

2. Redemption of Redeemable Preference shares 32 - 37

4. Company Final Account 46 - 63

5. Cash Flow Statement

6. Profit Prior to Incorporation 64 - 70

8. Fire Insurance Claims 75- 86

9. Hire Purchase and Installment Selling 87 - 93

10. Departmental Accounts 94 - 100

11. Branch Accounts 101 - 121

12. Single Entry System 122 - 135

13. Partnership Accounts 136 - 160

Sr. No. Chapter Page No.

1. Accounting Standards 161 - 191

2. Company Accounts (ESOP & BUY BACK) 192 - 197

3. Underwriters Liability 198 - 202

4. Internal Reconstruction 203- 216

5. Amalgamation, Absoroption and External Reconstruction 217 - 234

6. Liquadation of Companies 235 - 247

7. Financial Statements of Insurance Companies 248 - 262

8. Financial Statements of Banking Companies 263 - 281

9. Financial Reporting for Financial Institutions 282 - 284

10. Valuation of Goodwill 285 - 296

11. Consolidated Financial Statement 297 - 306

1. What are Accounting Policies?

5. Factors to be considered while choosing an accounting policies:

AS 4 : CONTINGENCIES & EVENTS OCCURING AFTER BALANCE SHEET DATE

EVENTS OCCURRING AFTER THE BALANCE SHEET DATE :

b. Adjusting events may provide evidence that the Fundamental Accounting

5. Examples of Adjusting & Non-adjusting events :

AS 5 : NET PROFIT OR LOSS FOR THE PERIOD,

Note:- AS is applicable on bearer plants

At what value should any asset be shown?

Cost Under different circumstances

Does the subsequent expenditure increases future economic benefits

Value @ Net Book Value

AS 11 (REVISED) : THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES

1. AS 11 applies to the following :

m. Non-Integral Foreign Operation (NFO) : It is a foreign operation that is not an

b. Tax exemptions in backward / notified areas.

1. What are Investments?

AS - 22 : ACCOUNTING FOR TAXES ON INCOME

9) Re - assessment of unrecognized deferred tax Asset: Previously unrecognized

* The break - up of deferred tax asset / liability should be disclosed.

* In case of deferred tax asset arising out of unabsorbed depreciation or

* Deferred tax asset / liability should be disclosed separately from current

Q. 2. What are the three fundamental accounting assumptions recognised by Accounting

Particulars Amt.( ` Lacs)

Raw material cost 400

Direct Labour 250

Variable production overheads 150

Fixed production overheads (incl. Interest of ` 100 lacs) 290

Material cost ` 100 per kg.

Q. 8. Raw materials inventory of a company includes certain material purchased at ` 100

Q. 11 Define briefly the classification of activities, as suggested in Accounting Standard 3,

AS 4 : CONTINGENCIES & EVENTS OCCURING AFTER BALANCE SHEET DATE

Q. 18. Give two examples on each of the following items:

AS 11 : THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES

Q. 37. MP Ltd. Wants to re-classify its investments according to AS 13:

Q.45.1. Cost of asset purchased in year 1 = 200 lakhs

Q.49. 1. OTD in year - 1 = 100 lakhs

Premium on Redem = Share Premium + other profits

Proceeds means Nominal Value or Issue Price which every is Less.

(B) Redemption out of divisible profit :-

Accounts & Adv Account Book

Accounts & Adv Account Book