Accounts

INTERMEDIATE (IPC) COURSE
PRACTICE MANUAL
PAPER : 1
ACCOUNTING
BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
© The Institute of Chartered Accountants of India

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A WORD ABOUT PRACTICE MANUAL
The Board of Studies has been instrumental in imparting theoretical education to the students
of Chartered Accountancy Course. The distinctive characteristics of the course i.e. distance
education has emphasized the need for bridging the gap between the students and th e
Institute and for this purpose, the Board of Studies has been providing a variety of educational
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relating to a subject at one place and that too grouped chapter-wise.
The Practice Manual in the subject of ‘Accounting’ is divided into fifteen chapters in line with
the study material. This will help the students to correlate the Practice Manual with the Study
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cover the entire syllabus and also do practice on their own while going through the practice
manual. Exercises have been given at the end of each topic for independent practice.
Practice Manual includes questions from past examinations at PE-II, PCC and IPCC levels
which would facilitate in thorough understanding of the chapters explained in the study
material. Few questions have been added in some of the chapters to increase the practice
base of the students.
New theoretical/case study based questions added in this edition of the practice manual
have been highlighted in bold and italics while practical questions are indicated in grey
background for easy identification. It may be noted that the questions given in the
practice manual have been revised as per relevant sections of the Companies Act, 2013
which have come into force. This Practice Manual contains a matrix showing the analysis of
the past examinations. This matrix will help the students in getting an idea about the trend of
questions being asked and relative weightage of each topic in the past examinations. It will
serve as a useful and handy reference guide while preparing for the examination. It will guide
the students to improve their performance in the examination and also help them to work upon
their grey areas and plan a strategy to tackle practical problems.
Feedback form is given at the end of this Practice Manual wherein students are encouraged to
give their feedback/suggestions. The concerned faculty members of Board of Studies have put
in their best efforts in making this practice manual lucid and student-friendly. In case you need
any clarification/guidance, you may send your queries at [email protected]; [email protected] and
[email protected].
Happy Reading and Best Wishes!
iii

Paper 1 Accounting
Statement showing topic-wise distribution of Examination Questions along with Marks
Term of Examination
Topics May 2011 Nov.2011 May 2012 Nov.2012 May 2013 Nov.2013 May 2014 Nov. 2014 May 2015 Nov.2015
Q M Q M Q M Q M Q M Q M Q M Q M Q M Q M
1 Accounting 1 (a) 5 1(c) 5 1 20 7(c) 4 7 (b) 4 1 20 1(a) 5 1(a) 5 1 20 1 20

Standards 7 (b) 4 7 (a) 4 7(c) 4 7(d) 4 7(c) 4 (b) 5 (b) 5 7(c) 4 7(b) 4
9 7 (b) 4 24 8 7 (d) 4 (c) 5 (c) 5 7(e) 4 24
7(c) 4 7(e) 4 (d) 5 (d) 5 28
7 (d) 4 16 7(d) 4 7(a) 4
7(e) 4 24 24
25
2 Financial Statements
of Companies
Unit 1 Preparation of 1(a) 5 7(d) 4 5 16 2(a) 8 3(b) 10

Financial statements
Unit 2 Cash Flow 4 16 4(a) 10 6(b) 8 3(b) 8 3 16 3(a) 6 3(a) 8

Statements 7(b) 4
20
3 Profits or Losses 4(b) 6 6(a) 8 2(b) 8 3(a) 10 4(b) 8

Prior to Incorporation

4 Accounting for Bonus 6 (a) 8 3(b) 8 7(e) 4
Issue
5 Internal 2 16 2 16 3 16 7(b) 4 4(a) 12 2 16

Reconstruction
6 Amalgamation 3 16 2 16 4 16 2 16
7 Unit 1 Average Due Date 7(a) 4 6 (b) 8 7(a) 4 7(a) 4 7(d) 4 7(c) 4 7(e) 4 7(b) 4 3(b) 8
7(c) 4
12
Unit 2 Account Current 7(c) 4 7(d) 4
8 Self Balancing 7(e) 4 1(a) 5 1(b) 5 4(b) 4 7(a) 4

Ledgers
9 Financial Statements 5 16 3 16 4 16 1(d) 5 5(a) 10 4 16 7(a) 4 2 16 7(a) 4 6(a) 6

of Not for Profit
Organisations
10 Accounts from 6 16 3(a) 8 4 16 4 16 3(a) 8 4 16 7(d) 4

Incomplete Records
11 Hire Purchase and 5(a)* 8 1(c) 5 1(a) 5* 5(a) 8 7(c) 4 5(a) 8

Instalment Sale 3(a) 8* 5(b) 6*
Transactions
13 11
12 Investment Accounts 1 (d) 5 5(b) 8 5(a) 8 1(d) 5 7(a) 4 5(b) 8 5(b) 8 5(b) 8 6(b) 10
13 Insurance Claims for 1(b) 5 5(a) 10 6 16 5(b) 8 1(c) 5 6 16 5(a) 8 3(b) 6 4(a) 8

Loss of Stock and 7(b) 4
Loss of Profit 12
14 Issues in Partnership 1(c) 5 1 (d) 5 3(b) 8 1(b) 5 2 16 2 16 6 16 6 16 6 16 5 16

Accounts 2 16 7(b) 4 6 16
7 (c) 4 12 21
25
15 Accounting in 7(d) 4 5(b) 6 7(e) 4 7(e) 4 7(a) 4 7(e) 4 7(b) 4 7(d) 4 7(e) 4
Computerized
Environment
Note: ‘Q’ represents question numbers as they appeared in the question paper of respective examination. ‘M’ represents
the marks which each question carries in that respective examination.
The question papers of all the past attempts of IPCC can be accessed from the BOS Knowledge Portal at the Students’
Page on the Institute’s website www.icai.org.
*The questions are based on Stock & Debtors method and H.P. Trading A/c method which have been removed from the
existing syllabus.

CONTENTS
CHAPTER – 1 Accounting Standards 1.1 – 1.45
CHAPTER – 2 Financial Statements of Companies 2.1 – 2.56
Unit 1 Preparation of Financial Statements 2.1 – 2.18
Unit 2 Cash Flow Statement 2.19 – 2.56
CHAPTER – 3 Profit or Loss Pre and Post Incorporation 3.1 – 3.16
CHAPTER – 4 Accounting for Bonus Issue 4.1 – 4.14
CHAPTER – 5 Internal Reconstruction 5.1 – 5.32
CHAPTER – 6 Amalgamation 6.1 – 6.49
CHAPTER – 7 Average Due Date and Account Current 7.1 – 7.22
Unit 1 Average Due Date 7.1 – 7.15
Unit 2 Account Current 7.13 – 7.22
CHAPTER – 8 Self- Balancing Ledgers 8.1 – 8.21
CHAPTER – 9 Financial Statements of Not-For-Profit Organisations 9.1 – 9.50
CHAPTER – 10 Accounts from Incomplete Records 10.1 – 10.58
CHAPTER – 11 Hire Purchase and Installment Sale Transactions 11.1 – 11.6
CHAPTER – 12 Investment Accounts 12.1 – 12.18
CHAPTER – 13 Insurance Claims for Loss of Stock and Loss of Profit 13.1 – 13.24
CHAPTER – 14 Issues in Partnership Accounts 14.1 – 14.55
CHAPTER – 15 Accounting in Computerised Environment 15.1 -15.5
vii

1 Accounting Standards
BASIC CONCEPTS
Accounting Accounting Standards (ASs) are written policy documents
Standards (ASs) issued by expert accounting body or by government or other
regulatory body covering the aspects of recognition, measurement,
presentation and disclosure of accounting transactions in the
financial statements. Accounting Standards 1, 2, 3, 6, 7, 9, 10, 13
and 14 are covered in this paper.
Applicability of Accounting Standards

Question 1
What are the issues, with which Accounting Standards deal?
Answer
Accounting Standards deal with the issues of
(i) Recognition of events and transactions in the financial statements,
(ii) Measurement of these transactions and events,
(iii) Presentation of these transactions and events in the financial statements in a manner that is
meaningful and understandable to the reader, and
(iv) Disclosure requirements which should be there to enable the public at large and the
stakeholders and the potential investors in particular, to get an insight into what these
financial statements are trying to reflect and thereby facilitating them to take prudent and
informed business decisions.
Question 2
List the criteria to be applied for rating a non-corporate entity as Level-I entity for the purpose of
compliance of Accounting Standards in India.
Answer
Non-corporate entities which fall in any one or more of the following categories, at the end of the
relevant accounting period, are classified as Level I entities:

1.2 Accounting
(i) Entities whose equity or debt securities are listed or are in the process of listing on any stock
exchange, whether in India or outside India.
(ii) Banks (including co-operative banks), financial institutions or entities carrying on insurance
business.
(iii) All commercial, industrial and business reporting entities, whose turnover (excluding other
income) exceeds rupees fifty crore in the immediately preceding accounting year.
(iv) All commercial, industrial and business reporting entities having borrowings (including public
deposits) in excess of rupees ten crore at any time during the immediately preceding
accounting year.
(v) Holding and subsidiary entities of any one of the above.
Question 3
List the criteria to be applied for rating a non-corporate entity as Level-II entity for the purpose of
compliance of Accounting Standards in India.
Answer
Non-corporate entities which are not level I entities but fall in any one or more of the following
categories are classified as level II entities:
(i) All commercial, industrial and business reporting entities, whose turnover (excluding other
income) exceeds rupees one crore but does not exceed rupees fifty crore in the immediately
preceding accounting year.
(ii) All commercial, industrial and business reporting entities having borrowings (including public
deposits) in excess of rupees one crore but not in excess of rupees ten crore at any time
during the immediately preceding accounting year.
(iii) Holding and subsidiary entities of any one of the above.
AS 1 “Disclosure of Accounting Policies”
Question 4
What are the three fundamental accounting assumptions recognised by Accounting Standard
(AS) 1? Briefly describe each one of them.
Answer
Accounting Standard (AS) 1 recognizes three fundamental accounting assumptions. These are as
follows:
(i) Going Concern: The financial statements are normally prepared on the assumption that an
enterprise will continue its operations in the foreseeable future and neither there is intention,
nor there is need to materially curtail the scale of operations.
(ii) Consistency: The principle of consistency refers to the practice of using same accounting
policies for similar transactions in all accounting periods unless the change is required (i) by a

Accounting Standards 1.3
statute, (ii) by an accounting standard or (iii) for more appropriate presentation of financial
statements.
(iii) Accrual basis of accounting: Under this basis of accounting, transactions are recognised as
soon as they occur, whether or not cash or cash equivalent is actually received or paid.
Question 5
Mention few areas in which different accounting policies are followed by companies.
Answer
Following are the examples of the areas in which different accounting policies may be adopted by
different enterprises:
(i) Methods of depreciation, depletion and amortisation.
(ii) Valuation of inventories.
(iii) Methods of valuing goodwill.
(iv) Valuation of investments.
Question 6
In the books of M/s Prashant Ltd., closing inventory as on 31.03.2015 amounts to
` 1,63,000 (on the basis of FIFO method).
The company decides to change from FIFO method to weighted average method for
ascertaining the cost of inventory from the year 2014-15. On the basis of weighted
average method, closing inventory as on 31.03.2015 amounts to ` 1,47,000. Realisable
value of the inventory as on 31.03.2015 amounts to ` 1,95,000.
Discuss disclosure requirement of change in accounting policy as per AS-1.
Answer
As per para 22 of AS 1 “Disclosure of Accounting Policies”, any change in an
accounting policy which has a material effect should be disclosed in the financial
statements. The amount by which any item in the financial statements is affected by
such change should also be disclosed to the extent ascertainable. Where such amount
is not ascertainable, wholly or in part, the fact should be indicated. Thus Prashant Ltd.
should disclose the change in valuation method of inventory and its effect on financial
statements. The company may disclose the change in accounting policy in the following
manner:
„The company values its inventory at lower of cost and net realisable value. Since net
realisable value of all items of inventory in the current year was greater than respective
costs, the company valued its inventory at cost. In the present year i.e. 2014 -15, the
company has changed to weighted average method, which better reflects the
consumption pattern of inventory, for ascertaining inventory costs from the earlier

1.4 Accounting
practice of using FIFO for the purpose. The change in policy has reduced current profit
and value of inventory by ` 16,000.
AS 2 “Valuation of Inventories”
Question 7
“In determining the cost of inventories, it is appropriate to exclude certain costs and recognize them
as expenses in the period in which they are incurred”. Provide examples of such costs as per AS 2
„Valuation of Inventories‟.
Answer
As per AS 2 „Valuation of Inventories‟, certain costs are excluded from the cost of the inventories
and are recognised as expenses in the period in which incurred. Examples of such costs are:
(a) abnormal amount of wasted materials, labour, or other production costs;
(b) storage costs, unless those costs are necessary in the production process prior to a further
production stage;
(c) administrative overheads that do not contribute to bringing the inventories to their present
location and condition; and
(d) selling and distribution costs.
Question 8
The company deals in three products, A, B and C, which are neither similar nor interchangeable.
At the time of closing of its account for the year 2014-15, the Historical Cost and Net Realizable
Value of the items of closing stock are determined as follows:
Historical Cost Net Realisable Value
Items
(` in lakhs) (` in lakhs)
A 40 28
B 32 32
C 16 24
What will be the value of closing stock?
Answer
As per para 5 of AS 2 on „Valuation of Inventories‟, inventories should be valued at the lower of
cost and net realizable value. Inventories should be written down to net realizable value on an
item-by-item basis in the given case.
Items Historical Cost Net Realisable Value Valuation of closing
(` in lakhs) (` in lakhs) stock (` in lakhs)
A 40 28 28
B 32 32 32

C 16 24 16
88 84 76
Hence, closing stock will be valued at ` 76 lakhs.
Question 9
X Co. Limited purchased goods at the cost of ` 40 lakhs in October, 2014. Till March, 2015, 75%
of the stocks were sold. The company wants to disclose closing stock at ` 10 lakhs. The expected
sale value is ` 11 lakhs and a commission at 10% on sale is payable to the agent. Advise, what is
the correct closing stock to be disclosed as at 31.3.2015.
Answer
As per para 5 of AS 2 “Valuation of Inventories”, the inventories are to be valued at lower of cost or
net realizable value.
In this case, the cost of inventory is ` 10 lakhs. The net realizable value is 11,00,000  90% =
` 9,90,000. So, the stock should be valued at ` 9,90,000.
Question 10
The company X Ltd., has to pay for delay in cotton clearing charges. The company up to
31.3.2014 has included such charges in the valuation of closing stock. This being in the nature of
interest, X Ltd. decided to exclude such charges from closing stock for the year 2014-15. This
would result in decrease in profit by ` 5 lakhs. Comment.
Answer
As per para 12 of AS 2 (revised), interest and other borrowing costs are usually considered as
not relating to bringing the inventories to their present location and condition and are
therefore, usually not included in the cost of inventories. However, X Ltd. was in practice to
charge the cost for delay in cotton clearing in the closing stock. As X Ltd. decided to change
this valuation procedure of closing stock, this treatment will be considered as a change in
accounting policy and such fact to be disclosed as per AS 1. Therefore, any change in amount
mentioned in financial statement, which will affect the financial position of the company should
be disclosed properly as per AS 1, AS 2 and AS 5.
Also a note should be given in the annual accounts that, had the company followed earlier system
of valuation of closing stock, the profit before tax would have been higher by
` 5 lakhs.
Question 11
In a production process, normal waste is 5% of input. 5,000 MT of input were put in process
resulting in wastage of 300 MT. Cost per MT of input is ` 1,000. The entire quantity of waste is on
stock at the year end. State with reference to Accounting Standard, how will you value the
inventories in this case?

1.6 Accounting
Answer
As per para 13 of AS 2 (Revised), abnormal amounts of wasted materials, labour and other
production costs are excluded from cost of inventories and such costs are recognized as expenses
in the period in which they are incurred.
In this case, normal waste is 250 MT and abnormal waste is 50 MT. The cost of 250 MT will be
included in determining the cost of inventories (finished goods) at the year end. The cost of
abnormal waste (50 MT x 1,052.6315 = ` 52,632) will be charged to the profit and loss statement.
Cost per MT (Normal Quantity of 4,750 MT) = 50,00,000 / 4,750 = ` 1,052.6315
Total value of inventry = 4,700 MT x ` 1,052.6315 = ` 49,47,368.
Question 12
You are required to value the inventory per kg of finished goods consisting of:
` per kg.
Material cost 200
Direct labour 40
Direct variable overhead 20
Fixed production charges for the year on normal working capacity of 2 lakh kgs is
` 20 lakhs. 4,000 kgs of finished goods are in stock at the year end.
Answer
In accordance with paras 8 & 9 of AS 2, the cost of conversion include a systematic allocation of
fixed and variable overheads that are incurred in converting materials into finished goods. The
allocation of fixed overheads for the purpose of their inclusion in the cost of conversion is based on
normal capacity of the production facilities.
Cost per kg. of finished goods:
`
Material Cost 200
Direct Labour 40
Direct Variable Production Overhead 20
 20,00,000 
Fixed Production Overhead   10 70
 2,00,000 
270
Hence the value of 4,000 kgs. of finished goods = 4,000 kgs x ` 270 = ` 10,80,000

Question 13
On 31st March 2013 a business firm finds that cost of a partly finished unit on that date is
` 530. The unit can be finished in 2013-14 by an additional expenditure of ` 310. The finished unit
can be sold for ` 750 subject to payment of 4% brokerage on selling price. The firm seeks your
advice regarding the amount at which the unfinished unit should be valued as at 31st March, 2013
for preparation of final accounts.
Answer
Valuation of unfinished unit
`
Net selling price 750
Less: Estimated cost of completion (310)
440
Less: Brokerage (4% of 750) (30)
Net Realisable Value 410
Cost of inventory 530
Value of inventory (Lower of cost and net realisable value) 410
Note: The above answer is given on the assumption that partly finished unit cannot be sold in semi
finished form and its NRV is zero without processing it further.
Question 14
Calculate the value of raw materials and closing stock based on the following information:
Raw material X
Closing balance 500 units
` per unit
Cost price including excise duty 200
Excise duty (Cenvat credit is receivable on the excise duty paid) 10
Freight inward 20
Unloading charges 10
Replacement cost 150
Finished goods Y
Closing Balance 1200 units
` per unit
Material consumed 220
Direct labour 60
Direct overhead 40

1.8 Accounting
Total Fixed overhead for the year was ` 2,00,000 on normal capacity of 20,000 units.
Calculate the value of the closing stock, when
(i) Net Realizable Value of the Finished Goods Y is ` 400.
(ii) Net Realizable Value of the Finished Goods Y is ` 300.
Answer
Situation (i)
When Net Realisable Value of the Finished Goods Y is ` 400
NRV is greater than the cost of Finished Goods Y i.e. ` 330
Hence, Raw Material and Finished Goods are to be valued at cost
Value of Closing Stock:
Qty Rate Amount (`)
Raw Material X 500 220 1,10,000
Finished Goods Y 1,200 330 3,96,000
Total Cost of Closing Stock 5,06,000
Situation (ii)
When Net Realisable Value of the Finished Goods Y is ` 300
NRV is less than the cost of Finished Goods Y i.e. ` 330
Hence, Raw Material is to be valued at replacement cost and
Finished Goods are to be valued at NRV since NRV is less than the cost
Value of Closing Stock:
Qty Rate Amount (`)
Raw Material X 500 150 75,000
Finished Goods Y 1,200 300 3,60,000
Total Cost of Closing Stock 4,35,000
Working Notes:
Raw Material X `
Cost Price 200
Less: Cenvat Credit (10)
190
Add: Freight Inward 20
Unloading charges 10
Cost 220

Finished goods Y `
Materials consumed 220
Direct Labour 60
Direct overhead 40
Fixed overheads (` 2,00,000/20,000 units) 10
Cost 330
Note: It has been considered that Raw Material X is used for the production of Finished Goods Y.
Question 15
Capital Cables Ltd., has a normal wastage of 4% in the production process. During the year
2013-14 the Company used 12,000 MT of raw material costing ` 150 per MT. At the end of the
year 630 MT of wastage was in stock. The accountant wants to know how this wastage is to
be treated in the books. Explain in the context of AS 2 the treatment of normal loss and
abnormal loss and also find out the amount of abnormal loss if any.
Answer
As per para 13 of AS 2 (Revised) „Valuation of Inventories‟, abnormal amounts of wasted materials,
labour and other production costs are excluded from cost of inventories and such costs are
recognized as expenses in the period in which they are incurred. The normal loss will be included
in determining the cost of inventories (finished goods) at the year end.
Amount of Abnormal Loss:
Material used 12,000 MT @ `150 = `18,00,000
Normal Loss (4% of 12,000 MT) 480 MT
Net quantity of material 11,520 MT
Abnormal Loss in quantity 150 MT
Abnormal Loss ` 23,437.50
[150 units @ ` 156.25 (` 18,00,000/11,520)]
Amount ` 23,437.50 will be charged to the Profit and Loss statement.
Question 16
Mr. Mehul gives the following information relating to items forming part of inventory as on
31-3-2015. His factory produces Product X using Raw material A.
(i) 600 units of Raw material A (purchased @ ` 120). Replacement cost of raw material A as on
31-3-2015 is ` 90 per unit.
(ii) 500 units of partly finished goods in the process of producing X and cost incurred till date
` 260 per unit. These units can be finished next year by incurring additional cost of ` 60 per
unit.

1.10 Accounting
(iii) 1500 units of finished Product X and total cost incurred ` 320 per unit.
Expected selling price of Product X is ` 300 per unit.
Determine how each item of inventory will be valued as on 31-3-2015. Also calculate the value of
total inventory as on 31-3-2015.
Answer
As per AS 2 “Valuation of Inventories”, materials and other supplies held for use in the production
of inventories are not written down below cost if the finished products in which they will be
incorporated are expected to be sold at cost or above cost. However, when there has been a
decline in the price of materials and it is estimated that the cost of the finished products will exceed
net realizable value, the materials are written down to net realizable value. In such circumstances,
the replacement cost of the materials may be the best available measure of their net realizable
value. In the given case, selling price of product X is ` 300 and total cost per unit for production is
` 320.
Hence the valuation will be done as under:
(i) 600 units of raw material will be written down to replacement cost as market value of finished
product is less than its cost, hence valued at ` 90 per unit.
(ii) 500 units of partly finished goods will be valued at 240 per unit i.e. lower of cost
` 320 (` 260 + additional cost ` 60) or Net estimated selling price ` 240 (Estimated selling
price ` 300 per unit less additional cost of ` 60).
(iii) 1,500 units of finished product X will be valued at NRV of ` 300 per unit since it is lower than
cost ` 320 of product X.
Valuation of Total Inventory as on 31.03.2015:
Units Cost (`) NRV/Replacement Value = units x cost
cost or NRV whichever is
less (`)
Raw material A 600 120 90 54,000
Partly finished goods 500 260 240 1,20,000
Finished goods X 1,500 320 300 4,50,000
Value of Inventory 6,24,000
AS 3 “Cash Flow Statements”
Question 17
What are the main features of the Cash Flow Statement? Explain with special reference to AS 3.
Answer
According to AS 3 (Revised) on “Cash Flow Statement”, cash flow statement deals with the
provision of information about the historical changes in cash and cash equivalents of an enterprise

during the given period from operating, investing and financing activities. Cash flows from
operating activities can be reported using either
(a) the direct method, whereby major classes of gross cash receipts and gross cash payments
are disclosed; or
(b) the indirect method, whereby net profit or loss is adjusted for the effects of transactions of
non–cash nature, any deferrals or accruals of past or future operating cash receipts or
payments, and items of income or expense associated with investing or financing cash flows.
As per para 42 of AS 3 (Revised), an enterprise should disclose the components of cash and cash
equivalents and should present a reconciliation of the amounts in its cash flow statement with the
equivalent items reported in the balance sheet.
A cash flow statement when used in conjunction with the other financial statements, provides
information that enables users to evaluate the changes in net assets of an enterprise, its financial
structure (including its liquidity and solvency), and its ability to affect the amount and timing of
cash flows in order to adapt to changing circumstances and opportunities. This statement also
enhances the comparability of the reporting of operating performance by different enterprises
because it eliminates the effects of using different accounting treatments for the same transactions
and events.
Question 18
X Ltd. purchased debentures of ` 10 lacs of Y Ltd., which are redeemable within three months.
How will you show this item as per AS 3 while preparing cash flow statement for the year ended on
31st March, 2015?
Answer
As per AS 3 on „Cash flow Statement‟, cash and cash equivalents consists of cash in hand,
balance with banks and short-term, highly liquid investments. If investment, of ` 10 lacs, made in
debentures is for short-term period then it is an item of „cash equivalents‟.
However, if investment of ` 10 lacs made in debentures is for long-term period then as per AS 3, it
should be shown as cash flow from investing activities.
Question 19
Following is the cash flow abstract of Alpha Ltd. for the year ended 31st March, 2015:
Cash Flow (Abstract)
Inflows ` Outflows `
Opening balance: Payment for Account
Cash 10,000 Payables 90,000

As per para 6 of AS 3, an investment normally qualifies as a cash equivalent only when it has a short maturity of, say
three months or less from the date of acquisition.

1.12 Accounting
Bank 70,000 Salaries and wages 25,000

Share capital – shares issued 5,00,000 Payment of overheads 15,000
Collection on account Trade Fixed assets acquired 4,00,000
Receivables 3,50,000 Debentures redeemed 50,000
Sale of fixed assets 70,000 Bank loan repaid 2,50,000
Taxation 55,000
Dividends 1,00,000
Closing balance:
Cash 5,000
bank 10,000
10,00,000 10,00,000
Prepare Cash Flow Statement for the year ended 31st March, 2015 in accordance with Accounting
standard 3.
Answer
Cash Flow Statement
for the year ended 31.3.2015
` `
Cash flow from operating activities
Cash received on account of trade receivables 3,50,000
Cash paid on account of trade payables (90,000)
Cash paid to employees (salaries and wages) (25,000)
Other cash payments (overheads) (15,000)
Cash generated from operations 2,20,000
Income tax paid (55,000)
Net cash generated from operating activities 1,65,000
Cash flow from investing activities
Payment for purchase of fixed assets (4,00,000)
Proceeds from sale of fixed assets 70,000
Net cash used in investment activities (3,30,000)
Cash flow from financing activities
Proceeds from issue of share capital 5,00,000
Bank loan repaid (2,50,000)
Debentures redeemed (50,000)

Dividends paid (1,00,000)

Net cash used in financing activities 1,00,000
Net decrease in cash and cash equivalents (65,000)
Cash and cash equivalents at the beginning of the year 80,000
Cash and cash equivalents at the end of the year 15,000
Question 20
Prepare Cash Flow from Investing Activities of M/s. Creative Furnishings Limited for the year
ended 31-3-2015.
Particulars `
Plant acquired by the issue of 8% Debentures 1,56,000
Claim received for loss of plant in fire 49,600
Unsecured loans given to subsidiaries 4,85,000
Interest on loan received from subsidiary companies 82,500
Pre-acquisition dividend received on investment made 62,400
Debenture interest paid 1,16,000
Term loan repaid 4,25,000
Interest received on investment 68,000
(TDS of ` 8,200 was deducted on the above interest)
Book value of plant sold (loss incurred ` 9,600) 84,000
Answer
Cash Flow Statement from Investing Activities of
M/s Creative Furnishings Limited for the year ended 31-03-2015
Cash generated from investing activities ` `
Interest on loan received 82,500
Pre-acquisition dividend received on investment made 62,400
Unsecured loans given to subsidiaries (4,85,000)
Interest received on investments (gross value) 76,200
TDS deducted on interest (8,200)
Sale of plant 74,400
Cash used in investing activities (before extra ordinary item) (1,97,700)
Extraordinary claim received for loss of plant 49,600
Net cash used in investing activities (after extra ordinary item) (1,48,100)

1.14 Accounting
Note:
1. Debenture interest paid and Term Loan repaid are financing activities and therefore not
considered for preparing cash flow from investing activities.
2. Plant acquired by issue of 8% debentures does not amount to cash outflow, hence also
not considered in the above cash flow statement.
AS 6 “Depreciation Accounting”
Question 21
What are depreciable assets as per Accounting Standard-6? Explain why AS 6 does not apply
to Land.
Answer
As per AS 6 „Depreciation Accounting‟, depreciable assets are the assets which
(i) are expected to be used during more than one accounting period; and
(ii) have a limited useful life; and
(iii) are held by an enterprise for use in the production or supply of goods and services, for rental
to others, or for administrative purposes and not for the purpose of sale in the ordinary course
of business.
AS 6 does not apply to „land‟ as land is considered to have unlimited useful life. Therefore, it is not
appropriate to charge depreciation on land.
Question 22
X Co. Ltd. charged depreciation on its asset on SLM basis. For the year ended 31.3.2015 it
changed to WDV basis. The impact of the change when computed from the date of the asset
coming to use amounts to ` 20 lakhs being additional charge.
Decide how it must be disclosed in Profit and loss account. Also discuss, when such changes in
method of depreciation can be adopted by an enterprise as per AS 6.
Answer
The company should disclose the change in method of depreciation adopted for the accounting
year. The impact on depreciation charge due to change in method must be quantified and reported
by the enterprise.
Following aspects may be noted in this regard as per AS 6 on Depreciation Accounting.
(a) The depreciation method selected should be applied consistently from period to period.
(b) A change from one method of providing depreciation to another should be made only if the
adoption of the new method is required by statute or for compliance with an accounting
standard if it is considered that the change would result in a more appropriate preparation or
presentation of the financial statements of the enterprise.

(c) When such a change in the method of depreciation is made, depreciation should be
recalculated in accordance with the new method from the date of the asset coming into use.
The deficiency or surplus arising from retrospective recomputation of depreciation in
accordance with the new method should be adjusted in the accounts in the year in which the
method of depreciation is changed.
(d) In case the change in the method results in deficiency in depreciation in respect of past years,
the deficiency should be charged in the statement of profit and loss.
(e) In case the change in the method results in surplus, the surplus should be credited to the
statement of profit and loss. Such a change should be treated as a change in accounting
policy and its effect should be quantified and disclosed.
Question 23
A Limited company charged depreciation on its assets on the basis of W.D.V. method from the
date of assets coming to use till date amounts to ` 32.23 lakhs. Now the company decides to
switch over to Straight Line method of providing for depreciation. The amount of depreciation
computed on the basis of S.L.M. from the date of assets coming to use till the date of change of
method amounts to ` 20 lakhs.
Discuss as per AS-6, when such changes in method of can be adopted by the company and what
would be the accounting treatment and disclosure requirement.
Answer
Paragraph 21 of Accounting Standard 6 on Depreciation Accounting says, "The depreciation
method selected should be applied consistently from period to period. A change from one method
of providing depreciation to another should be made only if the adoption of the new method is
required by statute or for compliance with an accounting standard or if it is considered that the
change would result in a more appropriate preparation or presentation of the financial statements
of the enterprise."
The paragraph also mentions the procedure to be followed when such a change in the method of
depreciation is made by an enterprise. As per the said paragraph, depreciation should be
recalculated in accordance with the new method from the date of the asset coming to use. The
difference in the amount, being deficiency or surplus from retrospective re-computation should be
adjusted in the profit and loss account in the year such change is affected. Since such a change
amounts to a change in the accounting policy, it should be properly quantified and disclosed. In
the question given, the surplus arising out of retrospective re-computation of depreciation as per
the straight line method is ` 12.23 lakhs (` 32.23 lakhs – ` 20 lakhs). This should be written back
to Profit and Loss Account and should be disclosed accordingly.

1.16 Accounting
Question 24
A plant was depreciated under two different methods as under:
Year SLM W.D.V.
1 7.80 21.38
2 7.80 15.80
3 7.80 11.68
4 7.80 8.64
31.20 57.50
5 7.80 6.38
What should be the amount of resultant surplus/deficiency, if the company decides to switch over
from W.D.V. method to SLM method for first four years? Also state, how you will treat the same in
Accounts.
Answer
As per para 21 of AS 6 on Depreciation Accounting, when a change in the method of depreciation
is made, depreciation should be recalculated in accordance with the new method from the date of
the asset coming into use. The deficiency or surplus arising from retrospective re-computation of
depreciation in accordance with the new method should be adjusted in the accounts in the year in
which the method of depreciation is changed. In the given case, there is a surplus of ` 26.30 lakhs
on account of change in method of depreciation, which will be credited to Profit and Loss Account.
Such a change should be treated as a change in accounting policy and its effect should be
quantified and disclosed.
Question 25
A machinery costing ` 20 lakhs has useful life for 5 years. At the end of 5 years its scrap value
would be ` 2 lakhs. How much depreciation is to be charged in the books of the company as per
Accounting Standard 6?
Answer
Calculation of depreciation as per Straight Line Method
`
Cost of machinery 20,00,000
Less: Scrap value at the end of its useful life (i.e. after 5 years) (2,00,000)
Amount to be written off during the useful life of the machinery 18,00,000
Useful life of the machinery 5 years
Depreciation to be provided each year (` 18,00,000 / 5 years) ` 3,60,000

Question 26
MIs Progressive Company Limited has not charged depreciation for the year ended on 31st
March, 2015, in respect of a spare bus purchased during the financial year 201 4-15 and kept
ready by the company for use as a stand-by, on the ground that, it was not actually used
during the year. State your views with reference to Accounting Standard 6 "Depreciation
Accounting".
Answer
According to AS 6, „Depreciation Accounting‟, depreciation is a measure of the wearing out,
consumption or other loss of value of a depreciable assets arising from use, effluxion of time or
obsolescence through technology and market changes. Accordingly, depreciation may arise even
the asset is not used in the current year but was ready for use in that year.
The need for using the stand by bus may not have arisen during the year but that does not imply
that the useful life of the bus has not been affected. Therefore, non-provision of depreciation on
the ground that the bus was not used during the year is not tenable. So, depreciation should be
changed on Spare Parts.
Question 27
A computer costing ` 60,000 is depreciated on straight line basis, assuming 10 years working
life and Nil residual value, for three years. The estimate of remaining useful life after third year
was reassessed at 5 years. Calculate depreciation as per the provisions of Accounting
Standard 6 "Depreciation Accounting".
Answer
Depreciation per year = ` 60,000 / 10 = ` 6,000
Depreciation on SLM charged for three years = ` 6,000 x 3 years = ` 18,000
Book value of the computer at the end of third year = ` 60,000 – ` 18,000 = ` 42,000.
Remaining useful life as per previous estimate = 7 years
Remaining useful life as per revised estimate = 5 years
Depreciation from the fourth year onwards = ` 42,000 / 5 = ` 8,400 per annum
Question 28
In the Trial Balance of M/s. Sun Ltd. as on 31-3-2014, balance of machinery appears
` 5,60,000. The company follows rate of depreciation on machinery @ 10% p.a. on Written Down
Value Method. On scrutiny it was found that a machine appearing in the books on
1-4-2014 at ` 1,60,000 was disposed of on 30-9-2014 at ` 1,35,000 in part exchange of a new
machine costing ` 1,50,000.
You are required to calculate:
(i) Total depreciation to be charged in the Profit and Loss Account.

1.18 Accounting
(ii) Loss on exchange of machine.

(iii) Book value of machinery in the Balance Sheet as on 31.3.2015.
Answer
(i) Total Depreciation to be charged in the Profit and Loss Account
`
Depreciation on old machinery in use [10% of (5,60,000-1,60,000)] 40,000
Add: Depreciation on new machine @ 10% for six months
 6
 1,50,000  10%  12  7,500
 
Total depreciation on machinery in use 47,500
Add: Depreciation on machine disposed of (10% for 6 months)
 6
 1,60,000  10%  12  8,000
 
So, total depreciation to be charged in Profit and Loss A/c 55,500
(ii) Loss on Exchange of Machine
`
Book value of machine as on 1.4.2014 1,60,000
Less: Depreciation for 6 months @ 10% (8,000)
Written Down Value as on 30.9.2014 1,52,000
Less: Exchange value (1,35,000)
Loss on exchange of machine 17,000
(iii) Book Value of Machinery in the Balance Sheet as on 31.03.2015
`
Balance as per trial balance 5,60,000
Less: Book value of machine sold (1,60,000)
4,00,000
Add: Purchase of new machine 1,50,000
5,50,000
Less: Depreciation on machinery in use (47,500)
5,02,500

Question 29
Narmada Ltd. purchased an existing bottling unit from Kaveri Ltd. Kaveri Ltd. followed straight line
method of charging depreciation on machinery of the sold unit whereas Narmada Ltd. followed
written down value method in its other units. The directors of Narmada Ltd. want to continue to
charge depreciation for the acquired unit in Straight Line Method which is not consistent with the
WDV method followed in other units. Discuss the contention of the directors with reference to the
Accounting Standard 6. Further during the year, Narmada Ltd. set up a new plant on coastal land.
In view of the corrosive climate, the Company felt that its machine life is reducing faster. Can the
Company charge a higher rate of depreciation?
Answer
According to para 12 of AS 6 „Deprecation Accounting‟, there are several methods of allocating
depreciation over the useful life of the assets. The management of a business selects the most
appropriate method(s) based on various important factors e.g., (i) type of asset, (ii) the nature of
the use of such asset and (iii) circumstances prevailing in the business. A combination of more
than one method is sometimes used. A company may adopt different methods of depreciation for
different types of assets, provided the same methods are followed consistently. Thus Narmada Ltd.
can continue to charge depreciation for the acquired unit as per straight line method. The statute
governing an enterprise may provide the basis for computation of the depreciation. For example,
the Companies Act lays down the rates of depreciation in respect of various assets. Where the
management‟s estimate of the useful life of an asset of the enterprise is shorter than that
envisaged under the provisions of the relevant statute, the depreciation provision is appropriately
computed by applying a higher rate. Therefore, in the given case, the Company can charge higher
rates of depreciation based on its estimate of the useful life of machinery, provided that such
estimate is not less than the rate prescribed by the Companies Act, for that class of assets.
However, such higher depreciation rates and/or the reduced useful lives of the assets should be
disclosed by way of notes to the accounts in the Financial Statements.
Question 30
On 01.04.2010 a machine was acquired at ` 4,00,000. The machine was expected to have a
useful life of 10 years. The residual value was estimated at 10% of the original cost. At the
beginning of the 4th year, an attachment was made to the machine at a cost of
` 1,80,000 to enhance its capacity. The attachment was expected to have a useful life of 10 years
and zero terminal value. During the same time the original machine was revalued upwards by
` 90,000 and remaining useful life was reassessed at 9 years and residual value was reassessed
at NIL.
Find depreciation for the fourth year, if
(i) attachment retains its separate identity.
(ii) attachment becomes integral part of the machine

1.20 Accounting
Answer
Depreciation of Original Machine
`
Original cost of Machine as on 01.04.2010 4,00,000
Less: Residual Value 10% (40,000)
Depreciable Value 3,60,000
Useful life 10 Years
Depreciation per year 36,000
Depreciation for 3 Years 1,08,000
Written down value at the beginning of 4th year (as on 1.04.2013) 2,92,000
(4,00,000 – 1,08,000)
Add: Revaluation 90,000
Total Book Value after revaluation 3,82,000
Reassessed remaining useful life 9 Years
Depreciation per year from 2013-14 42,444
Depreciation of Attachment
`
Original cost of Attachment as on 01.04.2013 1,80,000
Useful life 10 Years
Depreciation per year from 2013-14 18,000
Depreciation for the year 2013-14
(i) If Attachment retains its separate identity:
Depreciation of Original Machine ` 42,444
Depreciation of Attachment ` 18,000
Total Depreciation for 2013-14 ` 60,444
(ii) If Attachment becomes integral part of the Machine:
Total value of Machine as on 01.04.2013
Original Machine at revalued cost (W.N.1) ` 3,82,000
Cost of attachment ` 1,80,000
` 5,62,000
Useful life 9 Years
Depreciation for 2013-14 ` 62,444

Question 31
In the books of Optic Fiber Ltd., plant and machinery stood at ` 6,32,000 on 1.4.2013. However on
scrutiny it was found that machinery worth ` 1,20,000 was included in the purchases on 1.6.2013.
On 30.6.2013 the company disposed a machine having book value of ` 1,89,000 on 1.4.2013 at
` 1,75,000 in part exchange of a new machine costing ` 2,56,000. The company charges
depreciation @ 20% per annum WDV on plant and machinery.
You are required to calculate:
(i) Depreciation to be charged to P/L
(ii) Book value of Plant and Machinery A/c as on 31.3.2014
(iii) Loss on exchange of machinery.
Answer
(i) Depreciation to be charged to the Profit and Loss Account
(`)
Depreciation on old Machinery 31,600
[20% on `6,32,000 for 3 months(01.4.13 to 30.6.13)]
Add: Depreciation machinery acquired on 01.06.2013
(` 1,20,000 x 20% x 10/12) 20,000
Depreciation on Machinery after adjustment of exchange
[20% of `(6,32,000 -1,89,000+2,56,000) for 9 months] 1,04,850
Total Depreciation to be charged to Profit and Loss A/c 1,56,450
(ii) Book Value of Plant and Machinery as on 31.03.2014
` `
Balance as per books on 01.04.2013 6,32,000
Add: Included in purchases on 01.06.2013 1,20,000
Add: Purchase on 30.06.2013 2,56,000 3,76,000
10,08,000
Less: Book value of Machine sold on 30.06.2013 (1,89,000)
8,19,000
Less: Depreciation on machinery in use (1,56,450 - 9,450) (1,47,000)
Book Value as on 31.03.2014 6,72,000

1.22 Accounting
(iii) Loss on exchange of Machinery

Book value of machinery as on 01.04.2013 1,89,000
Less: Depreciation for 3 months 9,450
WDV as on 30.06.2013 1,79,550
Less: Exchange value 1,75,000
Loss on exchange of machinery 4,550
Question 32
M/s. Laghu Udyog Limited has been charging depreciation on an item of Plant and Machinery on
straight line basis. The machine was purchased on 1-4-2012 at ` 3,25,000. It is expected to have
a total useful life of 5 years from the date of purchase and residual value of ` 25,000. Calculate
the book value of the machine as on 1-4-2014 and the total depreciation charged till 31-3-2014
under SLM. The company wants to change the method of depreciation and charge depreciation
@ 20% on WDV from 2014-15.
Is it valid to change the method of depreciation? Explain the treatment required to be done in the
books of accounts in the context of AS-6.
Ascertain the amount of depreciation to be charged for 2014-15 and the net book value of the
machine as on 31-3-2015 after giving effect of the above change.
Answer
As per AS 6 “Depreciation Accounting”, a change from one method of providing depreciation to
another should be made only if the adoption of the new method is required by statute or for
compliance with an accounting standard or if it is considered that the change would result in a
more appropriate preparation or presentation of the financial statements of the enterprise
When a change in the method of depreciation is made, depreciation should be recalculated in
accordance with the new method from the date of the asset coming into use.
The deficiency or surplus arising from retrospective re-computation of depreciation in accordance
with the new method should be adjusted in the accounts in the year in which the method of
depreciation is changed. In case the change in the method results in deficiency in depreciation in
respect of past years, the deficiency should be charged in the statement of profit and loss. In case
the change in the method results in surplus, the surplus should be credited to the statement of
profit and loss.
Such a change should be treated as change in accounting policy and its effect should be quantified
and disclosed.
In the given case, the company cannot change the method of depreciation from year 2014-15
without making re-computations for the previous year also according to the new method.

Depreciation for year 2014-15 and net book value of Machine as on 31.3.15 after `
effect of the change
Purchase value of Machinery as on 01.04.2012 3,25,000
Depreciation for 2 years under WDV @ 20% ( ` 65,000 + ` 52,000) 1,17,000
Book value as on 01.04.2014 under WDV (i) 2,08,000
Book value as on 01.04.2014 under SLM (Working Note) (ii) 2,05,000
Excess depreciation credited to Statement of Profit and Loss (i-ii) 3,000
Current year depreciation as per new method (WDV) (2,08,000 X 20%) 41,600
Net Book value as on 31.03.2015 (2,08,000 – 41,600) 1,66,400
Working Note:
Book Value of Machinery and Depreciation under SLM as on 01-04-2014
`
Cost of Machine purchased on 01.04.2012 3,25,000
Less: Residual Value 25,000
Depreciable amount 3,00,000
Useful life of Machine 5 Years
Depreciation for 2 Years (`3,00,000 x 2/5) 1,20,000
Book value as on 01.04.2014 2,05,000
Question 33
A machinery with a useful life of 6 years was purchased on 1st April, 2012 for
` 1,50,000. Depreciation was provided on straight line method for first three years
considering a residual value of 10% of cost.
In the beginning of fourth year the company reassessed the remaining useful life of the
machinery at 4 years and residual value was estimated at 5% of original cost.
The accountant recalculated the revised depreciation historically and charged the
difference to profit and loss account. You are required to comment on the treatment by
accountant and calculate the depreciation to be charged for the fourth year.
Answer
As per AS 6 “Depreciation Accounting”, when there is a revision of the estimated useful life
of an asset, the unamortized depreciable amount should be charged over the revised
remaining useful life. Accordingly revised depreciation shall be calculated prospectively.
Thus, the treatment done by the accountant regarding recalculating the revised depreciation
historically i.e. retrospectively is incorrect. As per para 18 of AS 6, if the depreciable assets
are revalued, the provision for depreciation should be based on the revalued amount and on

1.24 Accounting
the estimate of the remaining useful lives of such assets. In case the revaluation has a
material effect on the amount of depreciation, the same should be disclosed separately in
the year in which revaluation is carried out.
Calculation of Depreciation
Depreciation per year charged for first three years = ` (1,50,000 - 15,000) / 6
= ` 22,500
WDV of the machine at the beginning of the fourth year = ` 1,50,000 – (` 22,500× 3)
= ` 82,500
Depreciable amount after reassessment of residual vale = ` 82,500 – (1,50,000 x 5%)
= ` 75,000
Remaining useful life as per revised estimate = 4 years
Depreciation from the fourth year onwards = ` 75,000 / 4 = ` 18,750
AS7 “Construction Contracts”
Question 34
What are the disclosure requirements of AS-7 (Revised)?
Answer
According to paragraphs 38, 39 and 41 of AS 7, an enterprise should disclose:
(a) the amount of contract revenue recognized as revenue in the period;
(b) the methods used to determine the contract revenue recognized in the period; and
(c) the methods used to determine the stage of completion of contracts in progress.
In case of contract still in progress the following disclosures are required at the reporting date:
(a) the aggregate amount of costs incurred and recognised profits (less recognised losses) upto
the reporting date;
(b) the amount of advances received; and
(c) the amount of retentions.
An enterprise should also present:
(a) the gross amount due from customers for contract work as an asset; and
(b) the gross amount due to customers for contract work as a liability.
Question 35
B Ltd. undertook a construction contract for ` 50 crores in April, 2014. The cost of construction
was initially estimated at ` 35 crores. The contract is to be completed in 3 years. While executing
the contract, the company estimated the cost of completion of the contract at ` 53 crores.

Can the company provide for the expected loss in the book of account for the year ended
31st March, 2015?
Answer
As per para 35 of AS 7 “Construction Contracts”, when it is probable that total contract costs will
exceed total contract revenue, the expected loss should be recognised as an expense
immediately. Therefore, The foreseeable loss of ` 3 crores (` 53 crores less ` 50 crores) should
be recognised as an expense immediately in the year ended 31st March, 2015. The amount of loss
is determined irrespective of
(i) Whether or not work has commenced on the contract;
(ii) Stage of completion of contract activity; or
(iii) The amount of profits expected to arise on other contracts which are not treated as a single
construction contract in accordance with para 8 of AS 7.
Question 36
M/s Excellent Construction Company Limited undertook a contract to construct a building for
` 3 crore on 1st September, 2014. On 31st March, 2015 the company found that it had already
spent ` 1 crore 80 lakhs on the construction. Prudent estimate of additional cost for completion
was ` 1 crore 40 lakhs. What amount should be charged, to revenue in the final accounts for the
year ended on 31st March, 2015, as per the provisions of Accounting Standard 7 "Construction
Contracts (Revised)"?
Answer
` in crores
Cost of construction incurred till date 1.80
Add: Estimated future cost 1.40
Total estimated cost of construction 3.20
Percentage of completion till date to total estimated cost of construction
= (1.80/3.20)100 = 56.25%
Proportion of total contract value recognised as revenue as per AS 7 (Revised)
= Contract price x percentage of completion
= ` 3 crores x 56.25% = ` 1.6875 crores
Amount of foreseeable loss (` in crores)
Total cost of construction 3.20
Less: Total contract price (3.00)
Total foreseeable loss to be recognized as expense 0.20

1.26 Accounting
According to of AS 7 (Revised 2002), when it is probable that total contract costs will exceed total
contract revenue, the expected loss should be recognized as an expense immediately.
Question 37
M/s Highway .Constructions undertook the construction of a highway on 01.04.2013. The contract
was to be completed in 2 years. The contract price was estimated at ` 150 crores. Up to
31.03.2014 the company incurred ` 120 crores on the construction. The engineers involved in the
project estimated that a further ` 45 crores would be incurred for completing the work.
What amount should be charged to revenue for the year 2013-14 as per the provisions of
Accounting Standard 7 "Construction Contracts"? Show the extract of the Profit & Loss A/c in
the books of M/s. Highway Constructions.
Answer
Statement showing the amount to be charged to Revenue as per AS 7
` in crores
Cost of construction incurred upto 31.03.2014 120
Add: Estimated future cost 45
Total estimated cost of construction 165
Degree of completion (120/165 x 100) 72.73%
Revenue recognized (72.73% of 150) 109 (approx)
Total foreseeable loss (165 – 150) 15
Less: Loss for the current year (120 – 109) 11
Loss to be provided for 4
Profit and Loss Account (Extract)
` in crores ` in crores
To Construction Costs 120 By Contract Price 109
To Provision for loss 4 By Net loss 15
124 124
Question 38
A construction contractor has a fixed price contract for ` 9,000 lacs to build a bridge in 3 years time
frame. A summary of some of the financial data is as under:
(Amount ` in lacs)
Year 1 Year 2 Year 3
Initial Amount for revenue agreed in contract 9,000 9,000 9,000
Variation in Revenue (+) - 200 200

Contracts costs incurred up to the reporting date 2,093 6,168* 8,100**

Estimated profit for whole contract 950 1,000 1,000
*Includes ` 100 lacs for standard materials stored at the site to be used in year 3 to complete
the work.
**Excludes ` 100 lacs for standard material brought forward from year 2.
The variation in cost and revenue in year 2 has been approved by customer.
Compute year wise amount of revenue, expenses, contract cost to complete and profit or loss
to be recognized in the Statement of Profit and Loss as per AS-7 (revised).
Answer
The amounts of revenue, expenses and profit recognized in the statement of profit and loss in
three years are computed below:
(Amount in ` lakhs)
Up to the Recognized in Recognized in
reporting date previous years current year
Year 1
Revenue (9,000 x 26%) 2,340 - 2,340
Expenses (8,050 x 26%) 2,093 - 2,093
Profit 247 - 247
Year 2
Revenue (9,200 x 74%) 6,808 2,340 4,468
Expenses (8,200 x 74%) 6,068 2,093 3,975
Profit 740 247 493
Year 3
Revenue (9,200 x 100%) 9,200 6,808 2,392
Expenses (8,200 x 100%) 8,200 6,068 2,132
Profit 1,000 740 260
Working Note:
Year 1 Year 2 Year 3
Revenue after consider variations 9,000 9,200 9,200
Less: Estimated profit for whole contract 950 1,000 1,000
Estimated total cost of the contract (A) 8,050 8,200 8,200
Actual cost incurred upto the reporting date (B) 2,093 6,068 8,200
(6,168-100) (8,100+100)
Degree of completion (B/A) 26% 74% 100%

1.28 Accounting
AS 9 “Revenue Recognition”
Question 39
Arjun Ltd. sold farm equipments through its dealers. One of the conditions at the time of sale is
payment of consideration in 14 days and in the event of delay interest is chargeable
@ 15% per annum. The Company has not realized interest from the dealers in the past. However,
for the year ended 31.3.2015, it wants to recognise interest due on the balances due from dealers.
The amount is ascertained at ` 9 lakhs. Decide, whether the income by way of interest from
dealers is eligible for recognition as per AS 9?
Answer
As per AS 9 “Revenue Recognition”, where the ability to assess the ultimate collection with
reasonable certainty is lacking at the time of raising any claim, the revenue recognition is
postponed to the extent of uncertainty inverted. In such cases, the revenue is recognized only
when it is reasonably certain that the ultimate collection will be made.
In this case, the company never realized interest for the delayed payments make by the
dealers. Hence, it has to recognize the interest only if the ultimate collection is certain. The
interest income hence is not to be recognized.
Question 40
The Board of Directors of X Ltd. decided on 31.3.2015 to increase sale price of certain items of goods
sold retrospectively from 1st January, 2015. As a result of this decision the company has to receive
` 5 lakhs from its customers in respect of sales made from 1.1.2015 to 31.3.2015. But the
Company‟s Accountant was reluctant to make-up his mind. You are asked to offer your suggestion.
Answer
As per para 10 of AS 9 „Revenue Recognition‟, the additional revenue on account of increase in
sales price with retrospective effect, as decided by Board of Directors of X Ltd., of ` 5 lakhs to be
recognised as income for financial year 2014-15, only if the company is able to assess the ultimate
collection with reasonable certainty. If at the time of raising of any claim it is unreasonable to
expect ultimate collection, revenue recognition should be postponed.
Question 41
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.

Answer
As per para 11 of AS 9 “Revenue Recognition”, in a transaction involving the sale of goods,
performance should be regarded as being achieved when the following conditions are fulfilled:
(i) the seller of goods has transferred to the buyer the property in the goods for a price or all
significant risks and rewards of ownership have been transferred to the buyer and the seller
retains no effective control of the goods transferred to a degree usually associated with
ownership; and
(ii) no significant uncertainty exists regarding the amount of the consideration that will be derived
from the sale of the goods.
In the given case, transfer of property in goods results in or coincides with the transfer of significant
risks and rewards of ownership to the buyer. Also, the sale price has been recovered by the seller.
Hence, the sale is complete but delivery has been postponed at buyer‟s request. A Ltd. should
recognize the entire sale of ` 1,00,000 (` 25,000 x 4) and no part of the same is to be treated as
Advance Receipt against Sales.
Question 42
M/s. Moon Ltd. sold goods worth ` 6,50,000 to Mr. Star. Mr. Star asked for a trade discount
amounting to ` 53,000 and same was agreed to by M/s. Moon Ltd. The sale was effected and
goods were dispatched. On receipt of goods, Mr. Star has found that goods worth ` 67,000 are
defective. Mr. Star returned defective goods to M/s. Moon Ltd. and made payment due amounting
to ` 5,30,000. The accountant of M/s. Moon Ltd. booked the sale for ` 5,30,000. Discuss the
contention of the accountant with reference to Accounting Standard (AS) 9.
Answer
As per AS 9 „Revenue Recognition‟, revenue is the gross inflow of cash, receivable or other
consideration arising in the course of the ordinary activities of an enterprise from the sale of goods.
However, trade discounts and volume rebates given in the ordinary course of business should be
deducted in determining revenue. Revenue from sales should be recognized at the time of transfer
of significant risks and rewards. If the delivery of the sales is not subject to approval from
customers, then the transfer of significant risks and rewards would take place when the sale is
affected and goods are dispatched.
In the given case, if trade discounts allowed by M/s. Moon Ltd. are given in the ordinary course
of business, M/s. Moon Ltd. should record the sales at ` 5,97,000 (i.e. ` 6,50,000 – ` 53,000)
and goods returned worth ` 67,000 are to be recorded in the form of sales return. However,
when trade discount allowed by M/s. Moon Ltd. is not in the ordinary course of business, M/s.
Moon Ltd. should record the sales at gross value of ` 6,50,000. Discount of ` 53,000 in price
and return of goods worth ` 67,000 are to be adjusted by suitable provisions. M/s Moon Ltd.
might have sent the credit note of ` 1,20,000 to Mr. Star to account for these adjustments. In
both the cases, the contention of the accountant to book the sales for ` 5,30,000 is not correct.

1.30 Accounting
Question 43
Sarita Publications publishes a monthly magazine on the 15th of every month. It sells advertising
space in the magazine to advertisers on the terms of 80% sale value payable in advance and the
balance within 30 days of the release of the publication. The sale of space for the March 2014
issue was made in February 2014. The magazine was published on its scheduled date. It received
` 2,40,000 on 10.3.2014 and ` 60,000 on 10.4.2014 for the March 2014 issue. Discuss in the
context of AS 9 the amount of revenue to be recognized and the treatment of the amount received
from advertisers for the year ending 31.3.2014. What will be the treatment if the publication is
delayed till 2.4.2014 ?
Answer
As per para 12 of AS 9 „Revenue Recognition‟, „In a transaction involving the rendering of services,
performance should be measured either under the completed service contract method or under the
proportionate completion method, whichever relates the revenue to the work accomplished‟.
In the given case, income accrues when the related advertisement appears before public. The
advertisement service would be considered as performed on the day the advertisement is seen by
public and hence revenue is recognized on that date. In this case, it is 15.03.2014, the date of
publication of the magazine.
Hence, ` 3,00,000 (` 2,40,000 + ` 60,000) is recognized as income in March, 2014. The terms of
payment are not relevant for considering the date on which revenue is to be recognized. ` 60,000
is treated as amount due from advertisers as on 31.03.2014 and ` 2,40,000 will be treated as
payment received against the sale.
However, if the publication is delayed till 02.04.2014 revenue recognition will also be delayed till
the advertisements get published in the magazine. In that case revenue of ` 3,00,000 will be
recognized for the year ended 31.03.2015 after the magazine is published on 02.04.2014. The
amount received from sale of advertising space on 10.03.2014 of ` 2,40,000 will be considered as
an advance from advertisers for the year ended 31st March, 2014.
Question 44
Given the following information of M/s. Paper Products Ltd.
(i) Goods of ` 60,000 were sold on 20-3-2015 but at the request of the buyer these were
delivered on 10-4-2015.
(ii) On 15-1-2015 goods of ` 1,50,000 were sent on consignment basis of which 20% of the
goods unsold are lying with the consignee as on 31-3-2015.
(iii) ` 1,20,000 worth of goods were sold on approval basis on 1-12-2014. The period of
approval was 3 months after which they were considered sold. Buyer sent approval for
75% goods up to 31-1-2015 and no approval or disapproval received for the remaining
goods till 31-3-2015.

(iv) Apart from the above, the company has made cash sales of ` 7,80,000 (gross). Trade
discount of 5% was allowed on the cash sales.
You are required to advise the accountant of M/s. Paper Products Ltd., with valid reasons,
the amount to be recognized as revenue in above cases in the context of AS-9 and also
determine the total revenue to be recognized for the year ending 31-3-2015.
Answer
As per AS 9 “Revenue Recognition”, in a transaction involving the sale of goods,
performance should be regarded as being achieved when the following conditions are
fulfilled:
(i) the seller of goods has transferred to the buyer the property in the goods for a price or
all significant risks and rewards of ownership have been transferred to the buyer and
the seller retains no effective control of the goods transferred to a degree usually
associated with ownership; and
(ii) no significant uncertainty exists regarding the amount of the consideration that will be
derived from the sale of the goods.
Case (i)
The sale is complete but delivery has been postponed at buyer‟s request. M/s Paper
Products Ltd. should recognize the entire sale of ` 60,000 for the year ended 31 st March,
2015.
Case (ii)
20% goods lying unsold with consignee should be treated as closing inventory and
sales should be recognized for ` 1,20,000 (80% of ` 1,50,000). In case of consignment
sale revenue should not be recognized until the goods are sold to a third part y.
Case (iii)
In case of goods sold on approval basis, revenue should not be recognized until the
goods have been formally accepted by the buyer or the buyer has done an act adopting
the transaction or the time period for rejection has elapsed or where no time has been
fixed, a reasonable time has elapsed. Therefore, revenue should be recognized for the
total sales amounting ` 1,20,000 as the time period for rejecting the goods had expired.
Case (iv)
Trade discounts given should be deducted in determining revenue. Thus ` 39,000
should be deducted from the amount of turnover of ` 7,80,000 for the purpose of
recognition of revenue. Thus, revenue should be ` 7,41,000.
Thus total revenue amounting ` 10,41,000 (60,000 + 1,20,000+ 1,20,000+7,41,000) will be
recognized for the year ended 31st March, 2015 in the books of M/s Paper Products Ltd.

1.32 Accounting
Question 45
M/s Umang Ltd. sold goods through its agent. As per terms of sales, consideration is
payable within one month. In the event of delay in payment, interest is chargeable @
12% p.a. from the agent. The company has not realized interest from the agent in the
past. For the year ended 31 st March, 2015 interest due from agent (because of delay in
payment) amounts to ` 1,72,000. The accountant of M/s Umang Ltd. booked ` 1,72,000
as interest income in the year ended 31 st March, 2015. Discuss the contention of the
accountant with reference to Accounting Standard-9.
Answer
As per para 9.2 of AS 9 “Revenue Recognition”, “where the ability to assess the ultimate
collection with reasonable certainty is lacking at the time of raising any claim, the revenue
recognition is postponed to the extent of uncertainty involved. In such cases, the revenue
is recognized only when it is reasonably certain that the ultimate collection will be made”. In
this case, the company never realized interest for the delayed payments made by the agent.
Hence, based on the past experience, the realization of interest for the delayed payments by
the agent is very much uncertain. The interest should be recognized only if the ultimate
collection is certain. Therefore, the interest income of ` 1,72,000 should not be recognized
in the books for the year ended 31st March, 2015. Thus the contention of accountant is
incorrect. However, if the agents have agreed to pay the amount of interest and there is an
element of certainty associated with these receipts, the accountant is correct regarding
booking of ` 1,72,000 as interest amount.
AS 10 “Accounting for Fixed Assets”
Question 46
(a) Explain the „Accounting of Revaluation of Assets‟ with reference to AS 10.
(b) Explain the disclosure requirement for fixed assets as per AS 10.
Answer
(a) As per Para 30 of AS 10 “Accounting for Fixed Assets”, an increase in net book value
arising on revaluation of fixed assets should be credited to owner‟s interests under the
head of „revaluation reserve, except that, to the extent that such increase is related to
and not greater than a decrease arising on revaluation previously recorded as a charge
to the profit and loss statement, it may be credited to the profit and loss statement. A
decrease in net book value arising on revaluation of fixed assets is charged directly to
profit and loss statement except that to the extent such a decrease is related to an
increase which was previously recorded as a credit to revaluation reserve and which has
not been subsequently reversed or utilized , it may be charged directly to that account.
(b) As per para 39 of AS 10 “Accounting for Fixed Assets”, following information should be
disclosed in the financial statements:

1. Gross and net book values of fixed assets at the beginning and at the end of an
accounting period showing additions, disposals, acquisitions and other movements.
2. Expenditure incurred on account of fixed assets in the course of construction or
acquisition; and
3. Revalued amounts substituted for historical costs of fixed assets, the method
adopted to compute the revalued amounts, the nature of indices used, the year of
any appraisal made, and whether an external valuer was involved, in case where
fixed assets are stated at revalued amounts.
Question 47
During the current year 2014-15, X Limited made the following expenditure relating to its plant
building:
` in lakhs
Routine Repairs 4
Repairing 1
Partial replacement of roof tiles 0.5
Substantial improvements to the electrical wiring system which will increase
efficiency 10
What amount should be capitalized?
Answer
As per para 12.1 of AS 10 „Accounting for Fixed Assets‟, expenditure that increases the future
benefits from the existing asset beyond its previously assessed standard of performance is
included in the gross book value, e.g., an increase in capacity. Hence, in the given case, Repairs
amounting ` 5 lakhs and Partial replacement of roof tiles should be charged to profit and loss
statement. ` 10 lakhs incurred for substantial improvement to the electrical writing system which
will increase efficiency should be capitalized.
Question 48
During the year 2014-15, P Limited incurred the following expenses on machinery:
` 2.50 lacs as routine repairs and ` 75,000 on partial replacement of a part. ` 7 lacs on
replacement of part of a machinery which will improve the efficiency of the machine. Which
amount should be capitalized as per AS 10?
Answer
As per para 12.1 of AS 10 “Accounting for Fixed Assets”, only those expenditures that increase the
future benefits from the existing assets, is to be included in the gross book value. Example:
Increase in capacity.

1.34 Accounting
Hence, in the given case, amount of ` 3.25 lacs spent on repairs and partial replacement of a part
of the machinery should be charged to Profit and Loss Account as they will help in maintaining the
capacity but will not improve the efficiency of the machine. However, ` 7 lacs incurred on
replacement of a part of the machinery, which will increase the efficiency, should be capitalized by
inclusion in the gross book value of assets.
Question 49
During the year MIs Progressive Company Limited made additions to its factory by using its
own workforce, at a cost of ` 4,50,000 as wages and materials. The lowest estimate from an
outside contractor to carry out the same work was ` 6,00,000. The directors contend that,
since they are fully entitled to employ an outside contractor, it is reasonable to debit the
Factory Building Account with ` 6,00,000. Comment whether the directors' contention is right
in view of the provisions of Accounting Standard 10 "Accounting for Fixed Assets"?
Answer
AS 10, „Accounting for Fixed Assets‟, clearly states that the gross book value of the self
constructed fixed asset includes the cost of construction that relate directly to the specific asset
and the costs that are attributable to the construction activity in general can be allocated to the
specific asset. If any internal profit is there it should be eliminated. Thus, only ` 4,50,000 should
be debited to the factory building account and not ` 6,00,000. Hence, the contention of the
directors of the company to capitalize ` 6,00,000 as cost of factory building, on the ground that the
company is fully entitled to employ an outside contractor is not justifiable.
Question 50
M/s. Tiger Ltd. allotted 7,500 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, show how the value of the machinery would be recorded in the
books of Tiger Ltd.?
Answer
As per para 11 of AS 10 “Accounting for Fixed Assets”, fixed asset acquired in exchange for shares
or other securities in the enterprise should be recorded at its fair market value, or the fair market
value of the securities issued, whichever is more clearly evident. Since, in the given situation, the
market value of the shares exchanged for the asset is more clearly evident, the company should
record the value of machinery at ` 7,12,500 (i.e., 7,500 shares x ` 95 per share) being the market
price of the shares issued in exchange.
Question 51
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% of office and administrative expenses are specifically attributable to
construction of a fixed asset )
Depreciation on assets used for the construction of this asset 15,000
Calculate the cost of the fixed asset.

Answer
Calculation of cost of fixed asset
`
Materials 16,00,000
Direct expenses 3,00,000
Direct labour (1/15th of ` 6,00,000) 40,000
Office and administrative expenses (4% ` 9,00,000) 36,000
Depreciation on assets 15,000
Cost of fixed asset 19,91,000
Question 52
Amna Ltd. contracted with a supplier to purchase a specific machinery to be installed in
Department A in two months time. Special foundations were required for the plant, which
were to be prepared within this supply lead time. The cost of site preparation and laying
foundations were ` 47,290. These activities were supervised by a technician during the
entire period, who is employed for this purpose of ` 15,000 per month. The Technician's
services were given to Department A by Department B, which billed the services at
` 16,500 per month after adding 10% profit margin.
The machine was purchased at ` 52,78,000. Sales Tax was charged at 4% on the invoice
` 18,590 transportation charges were incurred to bring the machine to the factory. An Architect
was engaged at a fee of ` 10,000 to supervise machinery installation at the factory premises. Also,
payment under the invoice was due in 3 months. However, the Company made the payment in 2nd
month. The company operates on Bank Overdraft@ 11%.
Ascertain the amount at which the asset should be capitalized under AS 10.

1.36 Accounting
Answer
Calculation of Cost of Fixed Asset (i.e. Machine)
Particulars `
Purchase Price Given 52,78,000
Add: Sales Tax at 4% ` 52,78,000 x 4% 2,11,120
Site Preparation Cost Given 47,290
Technician‟s Salary Specific/Attributable overheads for 30,000
2 months (See Note)
Initial Delivery Cost Transportation 18,590
Professional Fees for Installation Architect‟s Fees 10,000
Total Cost of Asset 55,95,000
Note:
(i) Interest on Bank Overdraft for earlier payment of invoice is not relevant under AS 10.
(ii) Internally booked profits should be eliminated in arriving at the cost of Fixed Assets.
(iii) It has been assumed that the purchase price of ` 52,78,000 excludes amount of sales
tax.
Question 53
Ascertain the value at which various items of Fixed Assets are to be shown in the Financial
Statements of Velvet Ltd. and amount to be debited to the Profit and Loss Account in the context of
the relevant Accounting Standard. Narrations for the adjustments made should form part of the
answer:
(i) Goodwill was valued at ` 1,20,000 by independent valuers and no consideration was paid.
The Company has not yet recorded the same.
(ii) Balance of Office Equipment as on 01.04.2013 is ` 1,20,000. On.1.04.2013, out of the above
office equipment having book value ` 20,000 has been retired from use and held for disposal.
The net realizable value of the same is ` 2,000. Rate of depreciation is 15% p.a. on WDV
basis.
(iii) Book Value of Plant and Machinery as on 01.04.2013 was ` 7,20,000. On 01.08.2013 an item
of machinery was purchased in exchange for 500 equity shares of face value ` 10. The Fair
Market value of the equity shares on 01.08.2013 was ` 120. Rate of depreciation is 10% p.a.
on WDV basis.

Answer
Statement showing treatment and value of various items of Fixed Assets
Item of Fixed Assets Amount Amount Narration Book Value
(`) Debited to as on
P& L in 31.3.2014
2013-14 to be
shown in
the
Financial
Statements
(i) Goodwill
Book value as on 1.4.2013 0
Balance as on 31.3.2014 0
(See Note 1)
(ii) Office Equipment
Balance as on 1.4.2013 1,20,000
Less: Retired from use (Book value 20,000
on 1.4.2013)
1,00,000
Less: Depreciation for 2013-14
@ 15% WDV 15,000 15,000 Depreciation
Balance as on 31.3.2014 85,000 85,000
Office Equipment (Retired from use)
Book Value as on 1.4.2013 20,000
Less: Book Value as on 31.3.2014 2,000 2,000
(at NRV)(See Note 2)
Loss on retirement charged to P&L 18,000 18,000 Loss on
(iii) Plant and Machinery retirement of
Book Value as on 1.4.2013 7,20,000 asset
Add: Machine purchased on 60,000
01.08.2013 (See Note 3)
7,80,000
Less: Depreciation
Original machine for
whole year 72,000
New machine for 8 months 4,000 76,000 76,000 Depreciation

1.38 Accounting
Balance as on 31.3.2014 7,04,000 7,04,000

1,09,000 7,91,000
Note:
1. As per para 16 of AS 10 „Accounting for Fixed Assets‟ goodwill is to be recorded only
when some consideration in money or money‟s worth has been paid for it. Since the
goodwill is self generated and no money or money‟s worth has been paid for the same,
therefore, it is not to be recorded in the books.
2. Office equipment having book value of ` 20,000 as on 1.4.2013 has been retired from
use. It has been recorded at Net Realisable Value (NRV) as the NRV is lower than the
book value and shown separately in the financial statements. This is in consonance with
the provisions stated in para 14 of AS 10.
3. As per para 11 of the standard, the new machine has been recorded at the Fair Market
Value of the securities issued as it is more clearly evident.
Question 54
M/s. Versatile Limited purchased machinery for ` 4,80,000 (inclusive of excise duty of
` 40,000). CENVAT credit is available for 50% of the duty paid. The company incurred the
following other expenses for installation.
`
Cost of preparation of site for installation 21,000
Total labour charges . 66,000
(200 out of the total of 600 men hours worked, were spent
for installation of the machinery)
Spare parts and tools consumed in installation 6,000
Total salary of supervisor 24,000
(time spent for installation was 25% of the total time worked.)
Total administrative expenses 32,000
(1/10 relates to the plant installation)
Test run and experimental production expenses 23,000
Consultancy changes to architect for plant set up 9,000
Depreciation on assets used for the installation 12,000
The machine was ready for use on 15-1-2015 but was used from 1-2-2015. Due to this delay
further expenses of ` 19,000 were incurred. Calculate the value at which the plant should be
capitalized in the books of M/s. Versatile Limited.

Answer
Calculation of Cost of Fixed Asset (i.e. Machine)
Particulars `
Purchase Price Given 4,80,000
Add:
Site Preparation Cost Given 21,000
Labour charges (66,000/600x200) 22,000
Spare parts Given 6,000
Supervisor‟s Salary 25% of ` 24,000 6,000
Administrative costs 1/10 of ` 32,000 3,200
Test run and experimental production charges Given 23,000
Architect Fees for set up Given 9,000
Depreciation on assets used for installation Given 12,000
Total Cost of Asset 5,82,200
Less: Cenvat credit receivable 50% of ` 40,000 20,000
5,62,200
Note: Expenses of ` 19,000 from 15.1.2015 to 1.2.2015 to be charged to profit and loss A/c as
plant were ready for production on 15.1.2015.
Question 55
Briefly explain the treatment of following items as per relevant accounting standards:
- The accountant of Star Limited valued the Goodwill of the company at` 50 lakhs and
showed the same as Fixed Asset in Balance Sheet. The corresponding credit was
given to Reserves.
- An expense of ` 5 crores was incurred on a Machine towards its Repairs and
Maintenance. The accountant wants to capitalize the same considering the
significance of amount spent.
- A plant was ready for commercial production on 01.04.2014 but could commence
actual production only on 01.06.2014. The company incurred ` 50 Iakhs as
administrative expenditure during the period of which 20% was allocable to the plant.
The accountant added ` 10 lakhs to cost of plant.
Answer
Treatment of given items
 As per AS 10 “Accounting for Fixed Assets”, goodwill, in general, is recorded in the
books only when some consideration in money or money‟s worth has been paid for it.

1.40 Accounting
In the given situation, the company has valued its goodwill which will be considered as
earned over the years i.e. it is self-generated goodwill. Therefore, the same shall not be
recorded in the books, as consideration in money or money‟s worth has not been paid
for it. Thus raising goodwill by giving corresponding credit to Reserve is incorrect.
 Only expenditure that increases the future benefits from the existing asset beyond
its previously assessed standard of performance is included in the gross book value,
e.g., an increase in capacity. The cost of an addition or extension to an existing asset
which is of a capital nature and which becomes an integral part of the existing asset
is usually added to its gross book value. Any other expenses incurred, though
substantial, on machine towards its repairs and maintenance should not be
capitalized but charged to profit and loss account since it does not increase
capacity.
 If the interval between the date a project is ready to commence commercial production
and the date at which commercial production actually begins is prolonged, all
expenses incurred during this period are charged to the profit and loss statement.
However, the expenditure incurred during this period is also sometimes treated as
deferred revenue expenditure, to be amortized over a period not exceeding 3 to 5
years, after the commencement of commercial production. Thus the amount of
` 10 lakh should either be charged to profit and loss statement in the year ended
31st March, 2015 or may be amortized for a future period not exceeding 3 to 5 years
after the commencement of commercial production i.e. 1.6.2014.
AS 13 “Accounting for Investments”
Question 56
Briefly explain disclosure requirements for Investments as per AS-13.
Answer
The disclosure requirements as per para 35 of AS 13 are as follows:
(i) Accounting policies followed for valuation of investments.
(ii) Classification of investment into current and long term in addition to classification as per
Schedule VI of Companies Act in case of company.
(iii) The amount included in profit and loss statements for
(a) Interest, dividends and rentals for long term and current investments, disclosing therein
gross income and tax deducted at source thereon;
(b) Profits and losses on disposal of current investment and changes in carrying amount of
such investments;
(c) Profits and losses and disposal of long term investments and changes in carrying
amount of investments.

(iv) Aggregate amount of quoted and unquoted investments, giving the aggregate market value of
quoted investments;
(v) Any significant restrictions on investments like minimum holding period for sale/disposal,
utilisation of sale proceeds or non-remittance of sale proceeds of investment held outside
India.
(vi) Other disclosures required by the relevant statute governing the enterprises.
Question 57
M/s Innovative Garments Manufacturing Company Limited invested in the shares of another
company on 1st October, 2014 at a cost of ` 2,50,000. It also earlier purchased Gold of
` 4,00,000 and Silver of ` 2,00,000 on 1st March, 2012. Market value as on 31 st March, 2015
of above investments are as follows:
`
Shares 2,25,000
Gold 6,00,000
Silver 3,50,000
How above investments will be shown in the books of accounts of M/s Innovative Garments
Manufacturing Company Limited for the year ending 31st March, 2015 as per the provisions of
Accounting Standard 13 "Accounting for Investments"?
Answer
As per AS 13 „Accounting for Investments‟, for investment in shares - if the investment is
purchased with an intention to hold for short-term period then it will be shown at the realizable
value of ` 2,25,000 as on 31st March, 2015.
If equity shares are acquired with an intention to hold for long term period then it will continue
to be shown at cost in the Balance Sheet of the company. However, provision for diminution
shall be made to recognize a decline, if other than temporary, in the value of the investments.
As per the standard, investment acquired for long term period shall be shown at cost. Gold
and silver are generally purchased with an intention to hold it for long term period until and
unless given otherwise. Hence, the investment in Gold and Silver (purchased on 1 st March,
2009) shall continue to be shown at cost as on 31 st March, 2015 i.e., ` 4,00,000 and
` 2,00,000 respectively, though their realizable values have been increased.
Question 58
ABC Ltd. wants to re-classify its investments in accordance with AS 13. Decide and state on
the amount of transfer, based on the following information:
(1) A portion of current investments purchased for ` 20 lakhs, to be reclassified as long term
investment, as the company has decided to retain them. The market value as on the
date of Balance Sheet was ` 25 lakhs.

1.42 Accounting
(2) Another portion of current investments purchased for ` 15 lakhs, to be reclassified as

long term investments. The market value of these investments as on the date of balance
sheet was ` 6.5 lakhs.
(3) Certain long term investments no longer considered for holding purposes, to be
reclassified as current investments. The original cost of these was ` 18 lakhs but had
been written down to ` 12 lakhs to recognize permanent decline as per AS 13.
Answer
As per AS 13, where investments are reclassified from current to long-term, transfers are
made at the lower of cost and fair value at the date of transfer.
(1) In the first case, the market value of the investment is ` 25 lakhs, which is higher than its
cost i.e. ` 20 lakhs. Therefore, the transfer to long term investments should be carried at
cost i.e. ` 20 lakhs.
(2) In the second case, the market value of the investment is ` 6.5 lakhs, which is lower than
its cost i.e. ` 15 lakhs. Therefore, the transfer to long term investments should be
carried in the books at the market value i.e. ` 6.5 lakhs. The loss of ` 8.5 lakhs should
be charged to profit and loss account.
As per AS 13, where long-term investments are re-classified as current investments, transfers
are made at the lower of cost and carrying amount at the date of transfer.
(3) In the third case, the book value of the investment is ` 12 lakhs, which is lower than its
cost i.e. ` 18 lakhs. Here, the transfer should be at carrying amount and hence this re -
classified current investment should be carried at ` 12 lakhs.
Question 59
Blue-chip Equity Investments Ltd., wants to re-classify its investments in accordance with AS 13.
State the values, at which the investments have to be reclassified in the following cases:
(i) Long term investments in Company A, costing ` 8.5 lakhs are to be re-classified as current.
The company had reduced the value of these investments to ` 6.5 lakhs to recognize a
permanent decline in value. The fair value on date of transfer is ` 6.8 lakhs.
(ii) Long term investments in Company B, costing ` 7 lakhs are to be re-classified as current.
The fair value on date of transfer is ` 8 lakhs and book value is ` 7 lakhs.
(iii) Current investment in Company C, costing ` 10 lakhs are to be re-classified as long term as
the company wants to retain them. The market value on date of transfer is ` 12 lakhs.
(iv) Current investment in Company D, costing ` 15 lakhs are to be re-classified as long term.
The market value on date of transfer is ` 14 Lakhs.
Answer
As per AS 13 „Accounting for Investments‟, where long-term investments are reclassified as current
investments, transfers are made at the lower of cost and carrying amount at the date of transfer.

And where investments are reclassified from current to long term, transfers are made at lower of
cost and fair value on the date of transfer.
Accordingly, the re-classification will be done on the following basis:
(i) In this case, carrying amount of investment on the date of transfer is less than the cost; hence
this re-classified current investment should be carried at ` 6.5 lakhs in the books.
(ii) The carrying / book value of the long term investment is same as cost i.e. ` 7 lakhs. Hence
this long term investment will be reclassified as current investment at book value of ` 7 lakhs
only.
(iii) In this case, reclassification of current investment into long-term investments will be made at
` 10 lakhs as cost is less than its market value of ` 12 lakhs.
(iv) In this case, market value is ` 14 lakhs which is lower than the cost of ` 15 lakhs. The
reclassification of current investment as long-term investments will be made at ` 14 lakhs.
AS 14 “Accounting for Amalgamations”
Question 60
Briefly describe the disclosure requirements for amalgamation including additional disclosure, if
any, for different methods of amalgamation as per AS 14.
Or
What disclosures should be made in the first financial statements following the amalgamation?
Answer
The disclosure requirements for amalgamations have been prescribed in paragraphs 43 to 46 of
AS 14 on Accounting for Amalgamation.
For all amalgamations, the following disclosures should be made in the first financial statements
following the amalgamation:
(a) names and general nature of business of the amalgamating companies;
(b) the effective date of amalgamation for accounting purpose;
(c) the method of accounting used to reflect the amalgamation; and
(d) particulars of the scheme sanctioned under a statute.
For amalgamations accounted under the pooling of interests method, the following additional
disclosures should be made in the first financial statements following the amalgamation:
(a) description and number of shares issued, together with the percentage of each company‟s
equity shares exchanged to effect the amalgamation; and
(b) the amount of any difference between the consideration and the value of net identifiable
assets acquired, and the treatment thereof.

1.44 Accounting
For amalgamations, accounted under the purchase method, the following additional disclosures
should be made in the first financial statements following the amalgamation;
(a) consideration for the amalgamation and a description of the consideration paid or contingently
payable; and
(b) the amount of any difference between the consideration and the value of net identifiable
assets acquired, and the treatment thereof including the period of amortisation of any goodwill
arising on amalgamation.
Question 61
Briefly explain the methods of accounting for amalgamation as per Accounting Standard-14.
Answer
As per AS 14 on „Accounting for Amalgamations‟, there are two main methods of accounting for
amalgamations:
(i) The Pooling of Interest Method: Under this method, the assets, liabilities and reserves of the
transferor company are recorded by the transferee company at their existing carrying
amounts (after making the necessary adjustments).
If at the time of amalgamation, the transferor and the transferee companies have conflicting
accounting policies, a uniform set of accounting policies is adopted following the
amalgamation. The effects on the financial statements of any changes in accounting policies
are reported in accordance with AS 5 on „Net Profit or Loss for the Period, Prior Period Items
and Changes in Accounting Policies‟.
(ii) The Purchase Method: Under the purchase method, the transferee company accounts for the
amalgamation either by incorporating the assets and liabilities at their existing carrying
amounts or by allocating the consideration to individual identifiable assets and liabilities of the
transferor company on the basis of their fair values at the date of amalgamation. The
identifiable assets and liabilities may include assets and liabilities not recorded in the financial
statements of the transferor company.
Where assets and liabilities are restated on the basis of their fair values, the determination of fair
values may be influenced by the intentions of the transferee company.
Question 62
List the conditions to be fulfilled as per Accounting Standard 14 for an amalgamation to be in the
nature of merger, in the case of companies.
Answer
An amalgamation should be considered to be an amalgamation in the nature of merger if the
following conditions are satisfied:
(i) All the assets and liabilities of the transferor company become, after amalgamation, the
assets and liabilities of the transferee company.

(ii) Shareholders holding not less than 90% of the face value of the equity shares of the
transferor company (other than the equity shares already held therein, immediately before the
amalgamation, by the transferee company or its subsidiaries or their nominees) become
equity shareholders of the transferee company by virtue of the amalgamation.
(iii) The consideration for the amalgamation receivable by those equity shareholders of the
transferor company who agree to become equity shareholders of the transferee company is
discharged by the transferee company wholly by the issue of equity shares in the transferee
company, except that cash may be paid in respect of any fractional shares.
(iv) The business of the transferor company is intended to be carried on, after the amalgamation,
by the transferee company.
(v) No adjustment is intended to be made to the book values of the assets and liabilities of the
transferor company when they are incorporated in the financial statements of the transferee
company except to ensure uniformity of accounting policies.
Exercise
1. Explain provisions contained in the Accounting Standard in respect of Revaluation of fixed assets.
2. When can revenue be recognized in the case of transaction of sale of goods?
3. Write short note on valuation of fixed assets in special cases.
4. A Ltd. is amalgamating with B Ltd. They are undecided on the method of accounting to be
followed. You are required to advice the management of B Ltd. on the method of accounting that
can be adopted under AS-14.

2 Financial Statements of
Companies
UNIT 1: PREPARATION OF FINANCIAL STATEMENTS

BASIC CONCEPTS
While preparing the final accounts of a company the following

should be kept in mind:
 Requirements of Schedule III to the Companies Act, 2013
 Other statutory requirements;
 Accounting Standards issued by the Institute of Chartered
Accountants of India on different accounting matters as
notified by the Central Government
Question 1
The balance sheet of XYZ Ltd. as at 31st December, 2013 inter alia includes the following:
`
50,000 8% Preference shares of ` 100 each ` 70 paid up 35,00,000
1,00,000 Equity shares of ` 100 each fully paid up 1,00,00,000
Securities premium 5,00,000
Capital redemption reserve 20,00,000
General reserve 50,00,000
Under the terms of their issue, the preference shares are redeemable on March 31, 2014 at a
premium of 5%. In order to finance the redemption, the company makes a right issue of 50,000
equity shares of ` 100 each at ` 20 being payable on application, ` 35 (including ` 10 premium)
on allotment and the balance on May 1, 2014. The issue was fully subscribed and allotment made
on May 1, 2014. The monies due on allotment were received by March 30, 2014.
The preference shares were redeemed after fulfilling the necessary conditions of Section 55 of the
Companies Act, 2013. The company decided to make the minimum utilisation of general reserve.

Financial Statements of Companies 2.2
You are asked to pass the necessary journal entries and show the relevant extracts from the
Balance Sheet as on March 31, 2014 with the corresponding figures as on 31st December, 2013.
Answer
XYZ Ltd.
Journal Entries
Dr. Cr.
` ‘000 ` ‘000
8% Preference Share Final Call Account Dr. 15,00
To 8% Preference Share Capital Account 15,00
(Being the final call made on 50,000 preference shares
@ ` 30 each to make them fully paid up)
Bank Account Dr. 15,00
To 8% Preference Share Final Call Account 15,00
(Being the final call amount received on 50,000
preference shares @ ` 30 each)
To Equity Share Application Account 10,00
(Being the application money received on 50,000
equity shares @ ` 20 per share)
Equity Share Application Account Dr. 10,00
To Equity Share Capital Account 10,00
(Being the application money on 50,000 equity shares
transferred to equity share capital account vide Board’s
resolution dated...)
Equity Share Allotment Account Dr. 17,50
To Equity Share Capital Account 12,50
To Securities Premium Account 5,00
(Being the amount due on 50,000 equity shares @ ` 35
per share including premium ` 10 vide Board’s
resolution dated...)
To Equity Share Allotment Account 17,50
(Being the allotment money received on 50,000 equity
shares @ ` 35 per share)
8% Preference Share Capital Account Dr. 50,00

2.3 Accounting
Premium on Redemption of Preference Shares Account Dr. 2,50

To Preference Shareholders Account 52,50
(Being the amount payable to preference share holders
on redemption)
Preference Shareholders Account Dr. 52,50
To Bank Account 52,50
(Being the payment made to preference shareholders)
Securities Premium Account Dr. 2,50
To Premium on Redemption of Preference Shares
Account 2,50
(Being the premium payable on redemption of preference
shares charged to share premium account)
General Reserve (50,00 – 22,50) Dr. 27,50
To Capital Redemption Reserve 27,50
(Being the amount transferred to capital redemption
reserve on redemption of preference shares for the
balance not covered by proceeds of fresh issue of shares)
Balance Sheet of XYZ Limited
As at 31st March, 2014 (after redemption of preference shares)
(Relevant extracts)
Particulars Notes ` ('000) ` ('000)
Equity and Liabilities as on 31.03.14 as on 31.12.13
1 Shareholders' funds
a Share capital 1 12,250 13,500
b Reserves and Surplus 2 7,750 7,500
The cash and bank balance will be decreased by ` 10,00,000 on 31.3.2014 as compared to the
balance on 31.12.2013.
Notes to accounts
` ('000)
as on 31.03.14 as on 31.12.13
1. Share Capital
Equity share capital
Issued, subscribed and paid-up

1,00,000 equity shares of ` 100 each, fully 100,00 100,00

paid up
50,000 equity shares of ` 100 each, ` 45 22,50 -
called up and paid up
Preference share capital
50,000, 8% Redeemable preference - 35,00
shares of ` 100 each, ` 70 called-up and
paid-up (redeemed on 31st March, 2014)
Total 1,22,50 1,35,00
2. Reserves and Surplus
Capital redemption reserve
Balance as on 31.12.2013 20,00 20,00
Add : Transfer from general reserve 27,50
Balance as on 31.3.2014 47,50
Securities premium account
Balance as on 31.12.2013 5,00 5,00
Add : Amount received @ ` 10
per share on fresh issue of
50,000 equity shares 5,00
10,00
Less : Premium on redemption of
preference shares (2,50)
Balance as on 31.3.2014 7,50
General reserve
Balance as on 31.12.2013 50,00
Less : Transfer to capital
redemption reserve (27,50) 50,00
Balance as on 31.3.2014 22,50
Total 77,50 75,00
Working Notes:
` ‘000
(i) Transfer to capital redemption reserve
Nominal value of preference shares redeemed (` 100 × 50,000) 50,00
Less : Proceeds of fresh equity issue [(` 20 + 25) × 50,000)] (22,50)
Transfer to capital redemption reserve 27,50

2.5 Accounting
(ii) Change in cash and bank balance

Receipts : (31.12.2013 - 31.3.2014)
Application money on 50,000 equity shares @ ` 20 per share 10,00
Allotment money on 50,000 equity shares @ ` 35 per share 17,50
Final call on 50,000, 8% Preference shares @ ` 30 per share 15,00
42,50
Payments:
Amount paid to preference shareholders on redemption 52,50
Reduction in cash and bank balance 10,00
Question 2
Provisional Balance Sheet of P Ltd. as at 31st March, 2014 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 & Bank 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 :
General Reserve 3,00,000
Profit & Loss Account 2,70,000
Trade payables 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.
Interest @ 10% p.a. on calls in advance and 12% p.a. on calls in arrear are allowed/charged.

The Board of Directors have recommended that:

(i) Dividend for the year 2013-14 be declared @ 20% on equity shares.
(ii) Money on calls in advance be refunded. Calls in Arrear with interest received.
(iii) The preference shares, which are redeemable at a premium of 10% any time after
31st March, 2014 may be redeemed by issue of 10% Debentures of ` 100 in cash.
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.
Answer
Journal Entries
P Ltd.
Dr. Cr.
` `
Interest on Calls in Arrear A/c Dr. 1,200
To Profit & Loss A/c 1,200
(Being interest @ 12 % p.a. on ` 20,000 for 6 months
credited to Profit and Loss Account)
Bank A/c Dr. 21,200
To Calls in Arrear A/c 20,000
To Interest on Calls in Arrear A/c 1,200
(Being interest on calls in arrear received)
Profit & Loss A/c Dr. 6,000
To Interest on Calls in Advance A/c 6,000
(Being interest @ 10% on ` 1,20,000 for 6 months
allowed on calls in advance)
To Preference Dividend 20,000
To Equity Dividend 70,000
(Being dividend @ 10% on Preference share capital &
20% on Equity share capital payable)
Calls in Advance A/c Dr. 1,20,000
Interest on Calls in Advance A/c Dr. 6,000
To Bank A/c 1,26,000
(Being amount of calls in advance along with interest refunded)

2.7 Accounting
Bank A/c Dr. 2,20,000

To 10% Debentures A/c 2,20,000
(Being 2,200 Debentures of ` 100 each issued in cash)
To Premium on Redemption of Preference shares A/c 20,000
(Being premium payable on redemption)
Profit & Loss A/c Dr. 1,55,200
General Reserve A/c Dr. 44,800
To Capital Redemption Reserve A/c 2,00,000
(Transfer to capital redemption reserve)
Preference Share Capital A/c Dr. 2,00,000
Premium on Redemption of Preference Shares A/c Dr. 20,000
To Preference Shareholders A/c 2,20,000
(Amount due on redemption of preference shares)
Preference Shareholders A/c Dr. 2,20,000
(Amount paid to preference shareholders)
Note: The preference shares are redeemed by fund generated by issue of debentures, as
specifically required by the question. However, the required amount has been transfer to CRR as
per section 55 of the Companies Act, 2013 to remain capital intact.
Statement of Profit & Loss of P Ltd.
for the year ended 31st March, 2014
Particulars Notes no. `
a Profit 2,70,000
Other Income 5 1,200
b Expenses
Other Expenses 6 (6,000)
c Profit before tax 2,65,200
Less: Provision for tax -
Profit after tax 2,65,200

Balance Sheet of P Ltd.

as on 31st March 2014
Particulars Notes `
Equity and Liabilities
a Share capital 1 3,50,000
b Reserves and Surplus 2 4,55,200
2 Non-current liabilities
a Long-term borrowings 3 2,20,000
3 Current liabilities
a Trade Payables 2,80,000
b Other current liabilities 4 90,000
Total 13,95,200
Assets
1 Non-current assets
a Fixed assets 7,00,000
2 Current assets
a Cash and cash equivalents 95,200
b Other current assets 6,00,000
Total 13,95,200
Notes to accounts
`
1. Share Capital
Issued, subscribed and paid-up
50,000 equity shares of ` 10 each, ` 7 paid up 3,50,000
Total 3,50,000
Capital redemption reserve 2,00,000
General reserve 3,00,000
Less: Utilised for redemption of preference share (44,800) 2,55,200
Less: Adjustments/Appropriations
Premium on redemption (20,000)
Preference Dividend (20,000)
Equity Dividend (70,000)

2.9 Accounting
Capital Redemption Reserve (1,55,200)

Total (2,65,200) -
Total 4,55,200
3. Long-term borrowings
Secured
10% Debentures 2,20,000
Total 2,20,000
4. Other current liabilities
Dividend payable 90,000
Total 90,000
5. Other Income
Interest on calls in arrear 1,200
6. Other Expenses
Interest on calls in advance 6,000
Working Note:
Cash and Bank balance as on 31st March, 2014
`
Cash and bank balance (given) 2,00,000
Add: Recovery of calls in arrear and interest thereon 21,200
Proceeds from issue of 10% Debentures 2,20,000
4,41,200
Less: Payment of calls in advance and interest thereon (1,26,000)
Redemption of preference shares (2,20,000)
95,200
Question 3
The following items were extracted from the Balance Sheet of Xansa Ltd. as on 1 st April, 2014:
`
13½% Preference Share capital 4,00,000
Equity Share Capital fully paid up 10,00,000
Securities Premium 7,00,000
Profit before interest on debentures and before payment of tax @ 30% is ` 11,50,000 for the
year ended 31 st March, 2014.

The Board of Directors of the Company declare a dividend of 15% on equity capital on
31.3.2015. The company also decided to transfer creation of general reserve @ 5% of net profit
(i.e. ` 7,00,000),Corporate dividend tax is payable @ 17.304%.
Pass the necessary Journal entries to incorporate the Board’s recommendations and show
how the items concerned would be shown on the liabilities side of the Balance Sheet of Xansa
Ltd. as on 31 st March, 2015.
Solution
Journal Entries
` `
Profit and Loss A/c Dr. 1,50,000
To Debenture Interest A/c 1,50,000
(Being transfer of debenture interest to profit and loss
account)
To Provision for Taxation A/c 3,00,000
(Being provision for tax made @ 30% on
` 10,00,000 i.e. ` 11,50,000 – ` 1,50,000)
Profit and Loss A/c Dr. 35,000
To General Reserve A/c 35,000
(Being creation of general reserve @ 5% of net profit
(i.e. ` 7,00,000))
To preference share dividend A/c 54,000
(Being preference share dividend payable @ 13½% on
` 4,00,000)
To equity share dividend A/c 1,50,000
(Being equity share dividend payable @ 15% on
` 10,00,000)
To Provision for corporate dividend tax A/c 41,530
(Being provision made for corporate dividend tax @
17.304% on total dividend of ` 2,40,000 (W.N.))
Balance Sheet (Extracts) as on 31st March, 2014
`
Equity and Liability
Share holders’ funds

2.11 Accounting

Non- current liabilities
a Long term borrowings 3 10,00,000
Current liabilities
Short term provisions 4 5,45,530
Notes to accounts
`
1 Share Capital
Issued, subscribed and called up 10,00,000
13½% Preference share capital 4,00,000 14,00,000
2 Reserves and Surplus
General Reserve 35,000
Surplus (Profit & Loss A/c) 4,26,330 11,61,330
3 Long-term borrowings
Secured
4 Short term Provisions
Corporate Income-tax 3,00,000
Dividend payable
Preference 54,000
Equity 1,50,000 2,04,000
Corporate Dividend Tax 41,530 5,45,530
Working Note:
Calculation of grossing-up of dividend
Particular `
Dividend distribute by Xansa Ltd. 2,04,000
 15  36,000
Add: Increase for the purpose of grossing-up of dividend  × 2,04,000
 100 - 15 
Gross dividend 2,40,000

Note: It is assumed that debenture interest has been paid.

Question 4
On 31st March, 2015 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) 8,47,000
Sundry Creditors for goods & expenses 14,00,000
(Payable within 6 months)
Provision for Taxation 8,16,900
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
Inventories : Finished goods 14,00,000
Raw Materials 3,50,000
Trade Receivables 14,00,000
Advances: Short-term 2,98,900
Cash in hand 2,10,000
Balances 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 in respect of the above balances:
(i) 4,20,000 fully paid equity shares were allotted as consideration for land & buildings.

2.13 Accounting
(ii) Cost of Building ` 28,00,000

(iii) Cost of Plant & Machinery ` 49,00,000
Cost of Furniture & Fixture ` 4,37,500
(iv) Trade receivables for ` 3,80,000 are due for more than 6 months.
(v) The amount of Balances with Bank includes ` 18,000 with a bank which is not a
scheduled Bank and the deposits of ` 5 lakhs are for a period of 9 months.
(vi) 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 Schedule III of the
Companies Act, 2013.
Answer
Bose and Sen Ltd.
Balance Sheet as on 31st March, 2015
Particulars Notes Figures at the end of
current reporting
period (` )
b Other current liabilities 4 2,00,000
c Short-term provisions 5 8,16,900
Total 1,32,62,900
Assets
a Fixed assets
Tangible assets 6 74,75,000
Intangible assets ( Patents & Trade Marks) 4,00,000
2 Current assets

a Inventories 7 17,50,000
b Trade receivables 8 14,00,000
c Cash and cash equivalents 9 19,39,000
d Short-term loans and advances 2,98,900
Total 1,32,62,900
Notes to accounts
`
1 Share Capital
Issued, subscribed and called up
7,00,000 Equity Shares of ` 10 each 70,00,000
(Out of the above 4,20,000 shares have been issued for
consideration other than cash)
Less: Calls in arrears (7,000) 69,93,000
Total 69,93,000
Surplus (Profit & Loss A/c) 7,00,000
Less: Preliminary expenses (93,100) 6,06,900
Total 21,56,000
Secured
Term Loans
Loan from State Finance Corporation 8,50,000
(` 10,50,000 - ` 2,00,000)
(Secured by hypothecation of Plant and Machinery)
Unsecured
Bank Loan 2,00,000
Loan from related parties 1,00,000
Others 5,47,000 8,47,000
Total 16,97,000

Preliminary expenses have been written off in line with Accounting Standards.

2.15 Accounting
4 Other current liabilities

Loan Instalment repayable within one year 2,00,000
5 Short-term provisions
Provision for taxation 8,16,900
6 Tangible assets
Land 14,00,000
Buildings 28,00,000
Less: Depreciation (7,50,000) 20,50,000
Plant & Machinery 49,00,000
Furniture & Fittings 4,37,500
Less: Depreciation (87,500) 3,50,000
Total 74,75,000
7 Inventories
Raw Material 3,50,000
Finished goods 14,00,000
17,50,000
8 Trade receivables
Debts outstanding for a period exceeding six months 3,80,000
Other Debts 10,20,000
Total 14,00,000
9 Cash and cash equivalents
Cash at bank with Scheduled Banks including Bank 17,11,000
deposits for period of 9 months amounting ` 5,00,000
with others 18,000 17,29,000
Total 19,39,000
Question 5
From the following particulars furnished by Elegant Ltd., prepare the Balance Sheet as on
31st March 2014 as required by Part I, revised Schedule III of the Companies Act.
Particulars Debit ` Credit `
Equity Share Capital (Face value of ` 100 each) 50,00,000

Call in Arrears 5,000

Land & Building 27,50,000
Furniture 2,50,000
Loan from State Financial Corporation 7,50,000
Stock:
Finished Goods 10,00,000 12,50,000
Provision for Taxation 6,40,000
Sundry Debtors 10,00,000
Advances 2,13,500
Cash in Hand 1,50,000
Cash at Bank 12,35,000
Unsecured Loan 6,05,000
Sundry Creditors (for Goods and Expenses) 10,00,000
The following additional information is also provided:
(i) 10000 Equity shares were issued for consideration other than cash.
(ii) Debtors of ` 2,60,000 are due for more than 6 months.
(iii) The cost of the Assets were:
Building ` 30,00,000, Plant & Machinery ` 35,00,000 and Furniture ` 3,12,500
(iv) The balance of ` 7,50,000 in the Loan Account with State Finance Corporation is
inclusive of ` 37,500 for Interest Accrued but not Due. The loan is secured by
hypothecation of Plant & Machinery.
(v) Balance at Bank includes ` 10,000 with Global Bank Ltd., which is not a Scheduled
Bank.
Answer
Elegant Ltd.
Particulars Notes `

2.17 Accounting

Long-term borrowings 3 13,17,500
b Other current liabilities 4 37,500
c Short-term provisions 5 6,40,000
Total 94,73,500
Assets
Fixed assets
2 Current assets
d Short-term loans and advances 2,13,500
Total 94,73,500
Notes to accounts
`
1 Share Capital
Issued & subscribed & called up
50,000 Equity Shares of ` 100 each
(of the above 10,000 shares have been issued for
consideration other than cash) 50,00,000
Less: Calls in arrears (5,000) 49,95,000
Total 49,95,000
Surplus (Profit & Loss A/c) 4,33,500
Total 14,83,500
Secured Term Loan
State Financial Corporation Loan (7,50,000- 37,500)
(Secured by hypothecation of Plant and Machinery) 7,12,500

Unsecured Loan 6,05,000

Total 13,17,500
Interest accrued but not due on loans (SFC) 37,500
5 Short-term provisions
6 Tangible assets
Land and Building 30,00,000
Furniture & Fittings 3,12,500
Total 56,25,000
7 Inventories
Finished goods 10,00,000
Total 12,50,000
8 Trade receivables
Outstanding for a period exceeding six months 2,60,000
Other Amounts 7,40,000
Total 10,00,000
Cash at bank
with Scheduled Banks 12,25,000
with others (Global Bank Ltd.) 10,000 12,35,000
Total 13,85,000

2.19 Accounting
UNIT 2: CASH FLOW STATEMENT

BASIC CONCEPTS AND STEPS TO SOLVE THE PROBLEMS
AS 3  Dealt with under AS 3

 Based on cash concept of profit
 Benefits include providing information relating to changes in cash and
cash equivalents of an enterprise.
 Useful tool of planning
 Cash include :
(a) Cash in hand
(b) Demand deposits with banks
(c) Cash equivalents
 Cash flow activities may be classified as inflow and outflow but as per
AS-3 they are classified as Operating Activities, Investing activities,
Financing activities
 Operating activities are principal revenue generating activities
 Investing Activities relate to acquisition and disposal of long-term
assets and other investments
 Financing Activities include the ones which result in changes in the
size and composition of the owner’s capital (including preference
share capital) and borrowings of the enterprise.
 Methods to calculate cash flow from operating activities include:
(a) Direct Method
(b) Indirect Method
 In order to calculate cash flow from investing activities inflows and
outflows related to acquisition and disposal of assets, other than
those related to operating activities, are shown under this category
 In order to calculate cash flow from financing activities inflows
and outflows related to the amount of capital and borrowings of
the enterprise are shown under this head

Question 1
Explain Classification of activities (with two examples) as suggested in AS 3, to be used for
preparing a cash flow statements.
Answer
AS 3 (Revised) on Cash Flow Statements requires that the cash flow statement should report cash
flows by operating, investing and financing activities.
(i) Operating activities are the principal revenue-producing activities of the enterprise and
other activities that are not investing or financing activities. Cash receipts from sale of
goods and cash payments to suppliers of goods are two examples of operating activities.
(ii) Investing activities are acquisition and disposal of long-term assets and other
investments not included in cash equivalents. Payment made to acquire machinery and
cash received for sale of furniture are examples of investing activities.
(ii) Financial activities are those activities that result in changes in the size and
composition of the owner’s capital (including preference share capital in the case of a
company) and borrowings of the enterprise. Cash proceeds from issue of shares and
cash paid to redeem debentures are two examples of financing activities.
Question 2
Explain the difference between direct and indirect methods of reporting cash flows from
operating activities with reference to Accounting Standard 3, (AS 3) revised.
Answer
As per Para 18 of AS 3 (Revised) on Cash Flow Statements, an enterprise should report cash
flows from operating activities using either:
(a) The direct method, whereby major classes of gross cash receipts and gross cash
payments are disclosed; or
(b) the indirect method, whereby net profit or loss is adjusted for the effects of transactions of a
non-cash nature, any deferrals or accruals of past or future operating cash receipts or
payments, and items of income or expense associated with investing or financing cash flows.
The direct method provides information which may be useful in estimating future cash flows and
which is not available under the indirect method and is, therefore, considered more appropriate
than the indirect method. Under the direct method, information about major classes of gross cash
receipts and gross cash payments may be obtained either:
(a) from the accounting records of the enterprise; or
(b) by adjusting sales, cost of sales (interest and similar income and interest expense and
similar charges for a financial enterprise) and other items in the statement of profit and
loss for:

2.21 Accounting
(i) changes during the period in inventories and operating receivables and payables;
(ii) other non-cash items; and
(iii) other items for which the cash effects are investing or financing cash flows.
Under the indirect method, the net cash flow from operating activities is determined by adjusting
net profit or loss for the effects of:
(a) changes during the period in inventories and operating receivables and payables;
(b) non-cash items such as depreciation, provisions, deferred taxes and unrealised foreign
exchange gains and losses; and
(c) all other items for which the cash effects are investing or financing cash flows.
Alternatively, the net cash flow from operating activities may be presented under the indirect
method by showing the operating revenues and expenses, excluding non-cash items disclosed in
the statement of profit and loss and the changes during the period in inventories and operating
receivables and payables.
Question 3
From the following Balance Sheets of Mr. Zen, prepare a Cash flow statement as per AS -3 for
the year ended 31.3.2015:
Balance Sheets of Mr. Zen
Liabilities As on 1.4.2014 As on 1.4.2015
` `
Zen’s Capital A/c 10,00,000 12,24,000
Trade payables 3,20,000 3,52,000
Mrs. Zen’s loan 2,00,000 --
Loan from Bank 3,20,000 4,00,000
18,40,000 19,76,000
Assets As on 1.4.2014 As on 1.4.2015
` `
Land 6,00,000 8,80,000
Plant and Machinery 6,40,000 4,40,000
Inventories 2,80,000 2,00,000
Trade receivables 2,40,000 4,00,000
Cash 80,000 56,000
18,40,000 19,76,000

Additional information:
A machine costing ` 80,000 (accumulated depreciation there on ` 24,000) was sold for
` 40,000. The provision for depreciation on 1.4.2014 was ` 2,00,000 and 31.3.2015 was
` 3,20,000. The net profit for the year ended on 31.3.2015 was ` 3,60,000.
Answer
Cash Flow Statement of Mr. Zen as per AS 3
`
(i) Cash flow from operating activities
Net Profit (given) 3,60,000
Adjustments for
Depreciation on Plant & Machinery 1,44,000
Loss on Sale of Machinery 16,000 1,60,000
Operating Profit before working capital changes 5,20,000
Decrease in inventories 80,000
Increase in trade receivables (1,60,000)
Increase in trade payables 32,000 (48,000)
(ii) Cash flow from investing activities
Sale of Machinery 40,000
Purchase of Land (2,80,000)
Net cash used in investing activities (2,40,000)
(iii) Cash flow from financing activities
Repayment of Mrs. Zen’s Loan (2,00,000)
Drawings (1,36,000)
Loan from Bank 80,000
Net cash used in financing activities (2,56,000)
Net decrease in cash (24,000)
Opening balance as on 1.4.2014 80,000
Cash balance as on 31.3.2015 56,000

2.23 Accounting
Working Notes:
1. Plant & Machinery A/c
` `
To Balance b/d 8,40,000 By Cash – Sales 40,000
(6,40,000 + 2,00,000) By Provision for Depreciation A/c 24,000
By Profit & Loss A/c – Loss on 16,000
Sale (80,000 – 64,000)
By Balance c/d
(4,40,000+3,20,000) 7,60,000
8,40,000 8,40,000
2. Provision for depreciation on Plant and Machinery A/c
` `
To Plant and Machinery A/c 24,000 By Balance b/d 2,00,000
To Balance c/d 3,20,000 By Profit & Loss A/c (Bal. fig.) 1,44,000
3,44,000 3,44,000
3. To find out Mr. Zen’s drawings:
`
Opening Capital 10,00,000
Add: Net Profit 3,60,000
13,60,000
Less: Closing Capital (12,24,000)
Drawings 1,36,000
Question 4
From the following details relating to the Accounts of Grow More Ltd. prepare Cash Flow
Statement:
Liabilities 31.03.2015 (`) 31.03.2014 (`)
Share Capital 10,00,000 8,00,000
Reserve 2,00,000 1,50,000
Profit and Loss Account 1,00,000 60,000
Debentures 2,00,000 –
Provision for taxation 1,00,000 70,000
Dividend payable 2,00,000 1,00,000
25,00,000 20,00,000

Assets
Land and Building 6,00,000 4,00,000
Investments 1,00,000 –
Inventories 4,00,000 2,00,000
Cash on hand/Bank 2,00,000 2,00,000
25,00,000 20,00,000
(i) Depreciation @ 25% was charged on the opening value of Plant and Machinery.
(ii) At the year end, one old machine costing 50,000 (WDV 20,000) was sold for ` 35,000.
Purchase was also made at the year end.
(iii) ` 50,000 was paid towards Income tax during the year.
(iv) Building under construction was not subject to any depreciation.
Prepare Cash flow Statement.
Answer
Grow More Ltd
Cash Flow Statement
Cash Flow from Operating Activities
Increase in balance of Profit and Loss Account 40,000
Dividend payable 2,00,000
Provision for taxation 80,000
Transfer to General Reserve 50,000
Depreciation 1,25,000
Profit on sale of Plant and Machinery (15,000)
Operating Profit before Working Capital changes 4,80,000
Increase in Inventories (2,00,000)
Decrease in Trade receivables 2,00,000
Decrease in Trade payables (1,20,000)
Net Cash from operating activities 3,10,000

2.25 Accounting
Cash Flow from Investing Activities

Purchase of fixed assets (3,45,000)
Expenses on building (2,00,000)
Increase in investments (1,00,000)
Sale of old machine 35,000
Net Cash used in investing activities (6,10,000)
Cash Flow from Financing activities
Proceeds from issue of shares 2,00,000
Proceeds from issue of debentures 2,00,000
Dividend paid (1,00,000)
Net cash used in financing activities 3,00,000
Net increase in cash or cash equivalents NIL
Cash and Cash equivalents at the beginning of the year 2,00,000
Cash and Cash equivalents at the end of the year 2,00,000
Working Notes:
Provision for taxation account
` `
To Cash (Paid) 50,000 By Balance b/d 70,000
To Balance c/d 1,00,000 By Profit and Loss A/c 80,000
(Balancing figure)
1,50,000 1,50,000
Plant and Machinery account
` `
To Balance b/d 5,00,000 By Depreciation 1,25,000
To Profit and Loss A/c(profit on sale 15000
of machine)
To Cash (Balancing figure) 3,45,000 By Cash (sale of machine) 35,000
_______ By Balance c/d 7,00,000
8,60,000 8,60,000
Question 5
From the following Balance Sheet and information, prepare Cash Flow Statement of Ryan Ltd. for
the year ended 31st March, 2015:

Balance Sheet
31st March, 2015 31st March, 2014
` `
Liabilities
Equity Share Capital 6,00,000 5,00,000
10% Redeemable Preference Share Capital – 2,00,000
Capital Redemption Reserve 1,00,000 –
Capital Reserve 1,00,000 –
General Reserve 1,00,000 2,50,000
Profit and Loss Account 70,000 50,000
9% Debentures 2,00,000 –
Liabilities for Expenses 30,000 20,000

Provision for Taxation 95,000 60,000
Dividend payable 90,000 60,000
15,00,000 12,50,000
` `
Assets
Investments 50,000 80,000
Inventory 95,000 90,000

Cash and Bank 65,000 90,000
Voluntary Separation Payments 1,25,000 65,000
15,00,000 12,50,000
Additional Information:
(i) A piece of land has been sold out for ` 1,50,000 (Cost – ` 1,20,000) and the balance land
was revalued. Capital Reserve consisted of profit on sale and profit on revaluation.
(ii) On 1st April, 2014 a plant was sold for ` 90,000 (Original Cost – ` 70,000 and W.D.V. –
` 50,000) and Debentures worth ` 1 lakh was issued at par as part consideration for plant of
` 4.5 lakhs acquired.
(iii) Part of the investments (Cost – ` 50,000) was sold for ` 70,000.

2.27 Accounting
(iv) Pre-acquisition dividend received ` 5,000 was adjusted against cost of investment.
(v) Directors have declared 15% dividend for the current year.
(vi) Voluntary separation cost of ` 50,000 was adjusted against General Reserve.
(vii) Income-tax liability for the current year was estimated at ` 1,35,000.
(viii) Depreciation @ 15% has been written off from Plant account but no depreciation has been
charged on Land and Building.
Answer
Cash Flow Statement of Ryan Limited
For the year ended 31st March, 2015
Cash flow from operating activities ` `
Net Profit before taxation 2,45,000
Adjustment for
Profit on sale of plant (40,000)
Profit on sale of investments (20,000)
Interest on debentures 18,000
Operating profit before working capital changes 3,38,000
Increase in inventory (5,000)
Increase in trade receivables (25,000)
Increase in Trade payables 5,000
Increase in accrued liabilities 10,000

Income taxes paid (1,00,000)
2,23,000
Voluntary separation payments (1,10,000)
Proceeds from sale of land 1,50,000
Proceeds from sale of plant 90,000
Proceeds from sale of investments 70,000
Purchase of plant (3,50,000)

Purchase of investments (25,000)

Pre-acquisition dividend received 5,000
Net cash used in investing activities (60,000)
Proceeds from issue of equity shares 1,00,000
Proceeds from issue of debentures 1,00,000
Redemption of preference shares (2,00,000)
Dividends paid (60,000)
Interest paid on debentures (18,000)
Net cash used in financing activities (78,000)
Net decrease in cash and cash equivalents (25,000)
Cash and cash equivalents at the beginning of the year 90,000
Cash and Cash equivalents at the end of the year 65,000
Working Notes:
1.
`
Net profit before taxation
Retained profit 70,000
Less: Balance as on 31.3.2014 (50,000)
20,000
Dividend payable 90,000
2,45,000
2. Land and Building Account
` `
To Balance b/d 2,00,000 By Cash (Sale) 1,50,000
To Capital reserve (Profit on sale) 30,000 By Balance c/d 1,50,000
To Capital reserve
(Revaluation profit) 70,000 _______
3,00,000 3,00,000
3. Plant and Machinery Account
` `
To Balance b/d 5,00,000 By Cash (Sale) 90,000

2.29 Accounting
To Profit and loss account 40,000 By Depreciation 1,35,000

To Debentures 1,00,000 By Balance c/d 7,65,000
To Bank 3,50,000
9,90,000 9,90,000
4. Investments Account
` `
To Balance b/d 80,000 By Cash (Sale) 70,000
To Profit and loss account 20,000 By Dividend
To Bank (Balancing figure) 25,000 (Pre-acquisition) 5,000
_______ By Balance c/d 50,000
1,25,000 1,25,000
5. Capital Reserve Account

` `
To Balance c/d 1,00,000 By Profit on sale of land 30,000
By Profit on revaluation
_______ of land 70,000
1,00,000 1,00,000
6. General Reserve Account
` `
To Voluntary separation cost 50,000 By Balance b/d 2,50,000
To Capital redemption reserve 1,00,000
To Balance c/d _______
1,00,000
2,50,000
2,50,000
7. Dividend payable Account
` `
To Bank (Balancing figure) 60,000 By Balance b/d 60,000
To Balance c/d 90,000 By Profit and loss account 90,000
1,50,000 1,50,000
8. Provision for Taxation Account
` `
To Bank (Balancing figure) 1,00,000 By Balance b/d 60,000

To Balance c/d 95,000 By Profit and loss account 1,35,000

1,95,000 1,95,000
9. Voluntary Separation Payments Account
` `
To Balance b/d 65,000 By General reserve 50,000
To Bank (Balancing figure) 1,10,000 By Balance c/d 1,25,000
1,75,000 1,75,000
Note: Cash Flow Statement has been prepared using ‘indirect method’.
Question 6
The Balance Sheet of New Light Ltd. for the years ended 31st March, 2014 and 2015 are as follows:
Liabilities 31st 31st Assets 31st 31st
March March March March
2014 2015 2014 2015
(`) (`) (`) (`)
Equity share capital 12,00,000 16,00,000 Fixed Assets 32,00,000 38,00,000
10% Preference Less: Depreciation 9,20,000 11,60,000
share capital 4,00,000 2,80,000 22,80,000 26,40,000
Capital Reserve – 40,000 Investment 4,00,000 3,20,000
General Reserve 6,00,000 7,60,000 Cash 10,000 10,000
Profit and Loss A/c 2,40,000 3,00,000 Other current assets 11,10,000 13,10,000
9% Debentures 4,00,000 2,80,000
Current liabilities 4,80,000 5,20,000
Provision for Tax 3,60,000 3,40,000
Unpaid dividend – 16,000 ________ ________
38,00,000 42,80,000 38,00,000 42,80,000
(i) The company sold one fixed asset for ` 1,00,000, the cost of which was ` 2,00,000 and the
depreciation provided on it was ` 80,000.
(ii) The company also decided to write off another fixed asset costing ` 56,000 on which
depreciation amounting to ` 40,000 has been provided.
(iii) Depreciation on fixed assets provided ` 3,60,000.
(iv) Company sold some investment at a profit of ` 40,000, which was credited to capital reserve.

2.31 Accounting
(v) Debentures and preference share capital redeemed at 5% premium.

(vi) Company decided to value inventory at cost, whereas previously the practice was to value
inventory at cost less 10%. The inventory according to books on 31.3.2014 was ` 2,16,000.
The inventory on 31.3.2015 was correctly valued at ` 3,00,000.
Prepare Cash Flow Statement as per revised Accounting Standard 3 by indirect method.
Answer
New Light Ltd.
Cash Flow Statement for the year ended 31st March, 2015
A. Cash Flow from operating activities ` `
Profit after appropriation
Increase in profit and loss A/c after inventory
adjustment [` 3,00,000 – (` 2,40,000 + ` 24,000)] 36,000
Transfer to general reserve 1,60,000
Dividend payable 1,44,000
Provision for tax 3,40,000
Net profit before taxation and extraordinary item 6,80,000
Adjustments for:
Loss on sale of fixed assets 20,000
Decrease in value of fixed assets 16,000
Premium on redemption of preference share capital 6,000
Premium on redemption of debentures 6,000
Increase in current liabilities (` 5,20,000 –` 4,80,000) 40,000
Increase in other current assets
[` 13,10,000 – (` 11,10,000 + ` 24,000)] (1,76,000)
Income taxes paid (3,60,000)
Net Cash generated from operating activities 5,92,000
B. Cash Flow from investing activities
Proceeds from sale of fixed assets 1,00,000
Proceeds from sale of investments 1,20,000

Net Cash from investing activities (6,36,000)

C. Cash Flow from financing activities
Proceeds from issuance of share capital 4,00,000
Redemption of preference share capital (1,26,000)
(` 1,20,000 + ` 6,000)
Redemption of debentures (` 1,20,000 + ` 6,000) (1,26,000)
Net Cash from financing activities 44,000
Net increase/decrease in cash and cash equivalent during
the year Nil
Cash and cash equivalent at the beginning of the year 10,000
Cash and cash equivalent at the end of the year 10,000
Working Notes:
1. Revaluation of inventory will increase opening inventory by ` 24,000.
2,16,000
 10  ` 24,000
90
Therefore, opening balance of other current assets would be as follows:
` 11,10,000 + ` 24,000 = ` 11,34,000
Due to under valuation of inventory, the opening balance of profit and loss account be
increased by ` 24,000.
The opening balance of profit and loss account after revaluation of inventory will be
` 2,40,000 + ` 24,000 = ` 2,64,000
2. Investment Account
` `
To Balance b/d 4,00,000 By Bank A/c 1,20,000
To Capital reserve A/c (balancing figure being
(Profit on sale of investment sold)
investment) 40,000 By Balance c/d 3,20,000
4,40,000 4,40,000
3. Fixed Assets Account
` ` `
To Balance b/d 32,00,000 By Bank A/c (sale of 1,00,000
assets)

2.33 Accounting
To Bank A/c 8,56,000 By Accumulated

(balancing depreciation A/c 80,000
figure being By Profit and loss A/c(loss
assets on sale of assets) 20,000 2,00,000
purchased)
By Accumulated
depreciation A/c 40,000
By Profit and loss A/c
(assets written off) 16,000 56,000
By Balance c/d 38,00,000
40,56,000 40,56,000
4. Accumulated Depreciation Account

` `
To Fixed assets A/c 80,000 By Balance b/d 9,20,000
To Fixed assets A/c 40,000 By Profit and loss A/c
To Balance c/d 11,60,000 (depreciation for the period) 3,60,000
12,80,000 12,80,000
5. Unpaid dividend is taken as non-current item and dividend paid is shown at ` 1,04,000
(` 1,20,000 – ` 16,000).
Note: Alternatively, unpaid dividend can be assumed as current liability and hence, dividend paid
can be shown at ` 1,20,000. Due to this assumption cash flow from operating activities would be
affected. The cash flow from operating activities will increase by ` 16,000 to ` 6,08,000 and cash
flow from financing activities will get reduced by ` 16,000 to ` 28,000.
Question 7
ABC Ltd. gives you the following information. You are required to prepare Cash Flow
Statement by using indirect methods as per AS 3 for the year ended 31.03.2015:
Balance Sheet as on
Liabilities 31st March 31st March Assets 31st March 31st March
2014 2015 2014 2015
` ` ` `
Capital 50,00,000 50,00,000 Plant & Machinery 27,30,000 40,70,000
Retained Earnings 26,50,000 36,90,000 Less: Depreciation (6,10,000) (7,90,000)
Debentures ― 9,00,000 21,20,000 32,80,000

Current Liabilities Current Assets

Trade payables 8,80,000 8,20,000 Trade receivables 23,90,000 28,30,000
Bank Loan 1,50,000 3,00,000 Less: Provision (1,50,000) (1,90,000)
Liability for expenses 3,30,000 2,70,000 22,40,000 26,40,000
Dividend payable 1,50,000 3,00,000 Cash 15,20,000 18,20,000
Marketable
securities 11,80,000 15,00,000
Inventories 20,10,000 19,20,000
Prepaid Expenses 90,000 1,20,000
91,60,000 1,12,80,000 91,60,000 1,12,80,000
(i) Net profit for the year ended 31st March, 2015, after charging depreciation ` 1,80,000 is
` 22,40,000.
(ii) Trade receivables of ` 2,30,000 were determined to be worthless and were written off against
the provisions for doubtful debts account during the year.
(iii) ABC Ltd. declared dividend of ` 12,00,000 for the year 2014-2015.
Answer
Cash Flow Statement of ABC Ltd. for the year ended 31.3.2015
Cash flows from Operating Activities ` `
Net Profit 22,40,000
Add: Adjustment for Depreciation (` 7,90,000 – ` 6,10,000) 1,80,000
Add: Decrease in Inventories (` 20,10,000 – ` 19,20,000) 90,000
Increase in provision for doubtful debts
(` 4,20,000 – ` 1,50,000) 2,70,000
27,80,000
Less: Increase in Current Assets:
Trade receivables (` 30,60,000 – ` 23,90,000) 6,70,000
Prepaid expenses (` 1,20,000 – ` 90,000) 30,000
Decrease in current liabilities:
Trade payables (` 8,80,000 – ` 8,20,000) 60,000
Expenses outstanding (` 3,30,000 – ` 2,70,000) 60,000 (8,20,000)

2.35 Accounting
Net cash from operating activities 19,60,000

Cash flows from Investing Activities
Purchase of Plant & Equipment
(` 40,70,000 – ` 27,30,000) 13,40,000
Cash flows from Financing Activities
Bank loan raised (` 3,00,000 – ` 1,50,000) 1,50,000
Issue of debentures 9,00,000
Payment of Dividend (` 12,00,000 – ` 1,50,000) (10,50,000)
Net cash used in financing activities NIL
Net increase in cash during the year 6,20,000
Add: Cash and cash equivalents as on 1.4.2014
(` 15,20,000 + ` 11,80,000) 27,00,000
Cash and cash equivalents as on 31.3.2015
(` 18,20,000 + ` 15,00,000) 33,20,000
Note: Bad debts amounting ` 2,30,000 were written off against provision for doubtful debts
account during the year. In the above solution, Bad debts have been added back in the balances
of provision for doubtful debts and trade receivables as on 31.3.2015. Alternatively, the adjustment
of writing off bad debts may be ignored and the solution can be given on the basis of figures of
trade receivables and provision for doubtful debts as appearing in the balance sheet on 31.3.2015.
Question 8
The following figures have been extracted from the books of X Limited for the year ended on
31.3.2015. You are required to prepare a cash flow statement.
(i) Net profit before taking into account income tax and income from law suits but after
taking into account the following items was ` 20 lakhs:
(a) Depreciation on Fixed Assets ` 5 lakhs.
(b) Discount on issue of Debentures written off ` 30,000.
(c) Interest on Debentures paid ` 3,50,000.
(d) Book value of investments ` 3 lakhs (Sale of Investments for ` 3,20,000).
(e) Interest received on investments ` 60,000.
(f) Compensation received ` 90,000 by the company in a suit filed.
(ii) Income tax paid during the year ` 10,50,000.
(iii) 15,000, 10% preference shares of ` 100 each were redeemed on 31.3.2015 at a premium of
5%. Further the company issued 50,000 equity shares of ` 10 each at a premium of 20% on

2.4.2014. Dividend on preference shares were paid at the time of redemption.

(iv) Dividend paid for the year 2013-2014 ` 5 lakhs and interim dividend paid ` 3 lakhs for
the year 2014-2015.
(v) Land was purchased on 2.4.2014 for ` 2,40,000 for which the company issued 20,000
equity shares of ` 10 each at a premium of 20% to the land owner as consideration.
(vi) Current assets and current liabilities in the beginning and at the end of the years were as
detailed below:
As on 31.3.2014 As on 31.3.2015
` `
Inventory 12,00,000 13,18,000
Trade receivables 258000 253100
Cash in hand 1,96,300 35,300
Trade payables 211000 211300
Outstanding expenses 75,000 81,800
Answer
X Ltd.
Cash Flow Statement
` `
Cash flow from Operating Activities
Net profit before income tax and extraordinary items: 20,00,000
Adjustments for:
Depreciation on fixed assets 5,00,000
Discount on issue of debentures 30,000
Interest on debentures paid 3,50,000
Interest on investments received (60,000)
Profit on sale of investments (20,000) 8,00,000
Adjustments for:
Increase in inventory (1,18,000)
Decrease in trade receivable 4,900
Increase in trade payables 300
Increase in outstanding expenses 6,800 (1,06,000)

2.37 Accounting

Income tax paid (10,50,000)
16,44,000
Cash flow from extraordinary items:
Compensation received in a suit filed 90,000
Net cash flow from operating activities 17,34,000
Cash flow from Investing Activities
Sale proceeds of investments 3,20,000
Interest received on investments 60,000
Net cash flow from investing activities 3,80,000
Cash flow from Financing Activities
Proceeds by issue of equity shares at 20% premium 6,00,000
Redemption of preference shares at 5% premium (15,75,000)
Preference dividend paid (1,50,000)
Interest on debentures paid (3,50,000)
Dividend paid (5,00,000 + 3,00,000) (8,00,000)
Net cash used in financing activities (22,75,000)
Net decrease in cash and cash equivalents during the year (1,61,000)
Add: Cash and cash equivalents as on 31.3.2014 1,96,300
Cash and cash equivalents as on 31.3.2015 35,300
Note: Purchase of land in exchange of equity shares (issued at 20% premium) has not been
considered in the cash flow statement as it does not involve any cash transaction.
Question 9
Raj Ltd. gives you the following information for the year ended 31st March, 2015:
(i) Sales for the year ` 48,00,000. The Company sold goods for cash only.
(ii) Cost of goods sold was 75% of sales.
(iii) Closing inventory was higher than opening inventory by ` 50,000.
Additional information:-
(i) Trade payables on 31.3.2015 exceed the outstanding on 31.3.2014 by ` 1,00,000.
(ii) Tax paid during the year amounts to ` 1,50,000.
(iii) Amounts paid to Trade payables during the year ` 35,50,000.

(iv) Administrative and Selling expenses paid ` 3,60,000.

(v) One new machinery was acquired in December, 2014 for ` 6,00,000.
(vi) Dividend paid during the year ` 1,20,000.
(vii) Cash in hand and at Bank on 31.3.2015 ` 70,000.
(viii) Cash in hand and at Bank on 1.4.2014 ` 50,000.
Prepare Cash Flow Statement for the year ended 31.3.2015 as per the prescribed Accounting
standard.
Answer
Cash flow statement of Raj Limited
Direct Method
Cash flow from operating activities: ` `
Sales (Cash only) 48,00,000
Less: Cost of goods sold (75%) 36,00,000
G.P. 12,00,000
Less:Adm. & Selling Expenses 3,60,000
Operating Profit before W.C. Charges 8,40,000
Add: Increase in Creditors 1,00,000
Increase in Investors (50,000) 50,000
Cash generated from operation 8,90,000
Less: Tax paid 1,50,000
Cash flow from investing activities:
Cash flow from financing activities:
Dividend Paid (1,20,000)
Net cash from financing activities (1,20,000)
20,000
Add: Opening balance of Cash in Hand and at Bank 50,000
Cash in Hand and at Bank on 31.3.2015 70,000

2.39 Accounting
Question 10
The following are the summarized Balance Sheets of ‘X’ Ltd. as on March 31, 2014 and 2015:
Liabilities As on As on 31.3.2015 (`)
31.3.2014 (` )
Equity share capital 15,00,000 16,50,000
Capital Reserve --- 10,000
Profit and Loss A/c 1,50,000 1,80,000
Provision for Taxation 50,000 60,000
25,50,000 27,25,000
Assets Year 2014 Year 2015
(` ) (` )
Machinery 7,50,000 9,20,000
Investment 1,00,000 50,000
inventory 3,00,000 2,80,000
Cash in Hand 2,00,000 1,65,000
Cash at Bank 3,00,000 4,10,000
25,50,000 27,25,000
(i) Dividend of ` 1,00,000 was paid during the year ended March 31, 2015.
(ii) Machinery during the year purchased for ` 1,25,000.
(iii) Machinery of another company was purchased for a consideration of ` 1,00,000 payable in
equity shares.
(iv) Income-tax provided during the year ` 55,000.
(v) Company sold some investment at a profit of ` 10,000, which was credited to Capital reserve.
(vi) There was no sale of machinery during the year.
(vii) Depreciation written off on Land and Building ` 20,000.
From the above particulars, prepare a cash flow statement for the year ended March, 2015 as per
AS 3 (Indirect method).

Answer
Cash Flow Statement for the year ending on March 31, 2015
` `
I. Cash flows from Operating Activities
Net profit made during the year (W.N.1) 2,60,000
Adjustment for depreciation on Machinery (W.N.2) 55,000
Adjustment for depreciation on Land & Building 20,000
Operating profit before change in Working Capital 3,35,000
Decrease in inventory 20,000
Decrease in trade payables (1,00,000)
Income-tax paid (45,000)
II. Cash flows from Investing Activities
Purchase on Machinery (1,25,000)
Sale of Investments 60,000 (65,000)
III. Cash flows from Financing Activities
Issue of equity shares (1,50,000-1,00,000) 50,000
Dividend paid (1,00,000) (50,000)
Net increase in cash and cash equivalent 75,000
Cash and cash equivalents at the beginning of the period 5,00,000
Cash and cash equivalents at the end of the period 5,75,000
Working Notes:
(i) Net Profit made during the year ended 31.3.2015
`
Increase in P & L (Cr.) Balance 30,000
Add: Transfer to general reserve 50,000
Add: Provision for taxation made during the year 55,000
Add: Dividend payable during the year 1,25,000
2,60,000

2.41 Accounting
(ii) Machinery Account

` `
To Balance b/d 7,50,000 By Depreciation (Bal. Fig.) 55,000
To Bank 1,25,000 By Balance c/d 9,20,000
To Equity share capital 1,00,000
9,75,000 9,75,000
(iii) Provision for Taxation Account
` `
To Cash (Bal. Fig.) 45,000 By Balance b/d 50,000
To Balance c/d 60,000 By P & L A/c 55,000
1,05,000 1,05,000
(iv) Dividend payable Account
` `
To Bank 1,00,000 By Balance b/d 1,00,000
To Balance c/d 1,25,000 By P & L A/c (Bal. Fig.) 1,25,000
2,25,000 2,25,000
(v) Investment Account
` `
To Balance b/d 1,00,000 By Bank A/c 60,000
To Capital Reserve A/c (Profit (Balancing figure for
on sale of investment) 10,000 investment sold)
By Balance c/d 50,000
1,10,000 1,10,000
Question 11
From the following information, prepare cash flow statement of A (P) Ltd. as at 31 st March, 2015 by
using indirect method:
Balance Sheet
2014 2015
` `
Liabilities:
Share capital 12,00,000 12,00,000
Profit and loss account 8,50,000 10,00,000

Long term loans 10,00,000 10,60,000

34,00,000 36,60,000
Assets:
Fixed assets 17,00,000 20,00,000
Investment in shares 2,00,000 2,00,000
Inventory 6,80,000 7,00,000
Cash 60,000 70,000
34,00,000 36,60,000
Income Statement for the year ended 31 st March, 2015
`
Sales 40,80,000
Less: Cost of sales (27,20,000)
Gross profit 13,60,000
Less: Operating expenses:
Administrative expenses 4,60,000
Depreciation 2,20,000 (6,80,000)
Operating profit 6,80,000
Add: Non-operating incomes (dividend received) 50,000
7,30,000
Less: Interest paid (1,40,000)
Profit before tax 5,90,000
Less: Income-tax (2,60,000)
Statement of Retained Earnings
`
Opening balance 8,50,000
Add: Profit 3,30,000
11,80,000
Less: Dividend paid (1,80,000)
Closing balance 10,00,000

2.43 Accounting
Answer
Cash Flow Statement of A (P) Ltd.
for the year ended 31 st March 2015
` `
(i) Cash flows from operating activities
Profit before tax 5,90,000
Adjustments for
Interest paid 1,40,000
Dividend received (50,000)
Add:
Decrease in trade receivables 70,000
Increase in trade payables 50,000
10,20,000
Less: Increase in inventory (20,000)
Less: Tax paid (2,60,000)
Cash flow from operating activities 7,40,000
(ii) Cash flows from investing activities
[20,00,000+2,20,000-17,00,000]
Dividend on investments 50,000
Cash used in investing activities (4,70,000)
(iii) Cash flows from financing activities
Long term loan taken 60,000
Interest paid (1,40,000)
Cash used in financing activities (2,60,000)
Net increase in cash during the year 10,000
Add: Opening cash balance 60,000
Closing cash balance 70,000

Question 12
The Balance Sheets of X Ltd. as on 31st March, 2014 and 31st March, 2015 are as follows:
Liabilities 2014 2015 Assets 2014 2015
Amount (` ) Amount Amount Amount
(`) (` ) (` )
Share Capital 5,00,000 7,00,000 Land and Buildings 80,000 1,20,000
General Reserve 50,000 70,000 Plant and Machinery 5,00,000 8,00,000
Profit and Loss A/c 1,00,000 1,60,000 Inventory 1,00,000 75,000
Trade payables 1,93,000 240,000 Trade receivables 1,50,000 1,60,000
Cash 20,000 20,000
Outstanding Expenses 7,000 5,000
8,50,000 11,75,000 8,50,000 11,75,000
Additional Information :
(a) ` 50,000 depreciation has been charged to Plant and Machinery during the year 2015.
(b) A piece of Machinery costing ` 12,000 (Depreciation provided there on ` 7,000) was sold at
60% profit on book value.
You are required to prepare Cash flow statement for the year ended 31st March 2015 as per AS 3
(revised), using indirect method.
Answer
Cash Flow Statement for the year ended 31 st March, 2015
Amount Amount
` `
I Cash Flows from Operating Activities
Closing Balance as per Profit & Loss A/c 1,60,000
Less: Opening Balance as per Profit & Loss A/c (1,00,000)
60,000
Add: Transfer to General Reserve 20,000
Net Profit before taxation and extra-ordinary items 80,000
Add: Depreciation on Plant and Machinery 50,000
Less: Profit on sale of machinery (Refer W.N.) (3,000)
Operating Profit 1,27,000
Add: Decrease in Inventory 25,000

2.45 Accounting
Increase in trade payables 47,000 72,000

1,99,000
Less: Increase in trade receivables (10,000)
Decrease in Outstanding expenses (2,000) (12,000)
Net Cash from Operating Activities 1,87,000
II. Cash Flows from Investing Activities
Purchase of Land & Building (40,000)
Proceeds from Sale of Machinery (Refer W.N.) 8,000
Purchases of Plant & Machinery (Refer W.N.) (3,55,000)
Net Cash Used in Investing Activities (3,87,000)
III. Cash Flows from Financing Activities
Proceeds from Issuance of Share Capital 2,00,000
Net Cash from Financing Activities 2,00,000
Net Increase/Decrease in Cash & Cash Equivalents 0
Add: Cash in hand at the beginning of the year 20,000
Cash in hand at the end of the year 20,000
Working Note:
Plant and Machinery Account
` `
To Balance b/d 5,00,000 By Bank 8,000
To Profit and Loss A/c (Profit on sale) 3,000 By Depreciation 50,000
To Purchases (Bal. fig.) 3,55,000 By Balance c/d 8,00,000
8,58,000 8,58,000
Question 13
The following are the summarized Balance Sheet of Star Ltd. as on 31st March, 2014 and 2015:
(` ’000)
2014 2015
Equity share capital of ` 10 each 3,400 3,800
Profit and Loss A/c 400 540
Securities Premium 40 80
14% Debentures 800 900

160% of (12,000-7,000) = ` 8,000.

Long term borrowings 180 240

Trade payables 360 440
Provision for Taxation 20 40
Dividend payable 300 480
5,500 6,520
Sundry Fixed Assets:
Gross Block 3,200 4,000
Less: Depreciation (640) (1,440)
Net Block 2,560 2,560
Investment 1,200 1,400
Inventories 1,000 1,400
Trade receivables 640 900
Cash and Bank Balance 100 260
5,500 6,520
The Profit and Loss account for the year ended 31st March, 2015 disclosed:
(` ’000)
Profit before tax 780
Less: Taxation (160)
Profit after tax 620
Less: Dividend payable (480)
Retained Profit 140
The following information are also available:
(1) 40,000 equity shares issued at a premium of ` 1 per share.
(2) The Company paid taxes of ` 1,40,000 for the year 2014-15.
(3) During the period, it discarded fixed assets costing ` 4 lacs, (accumulated depreciation
` 80,000) at ` 40,000 only.
You are required to prepare a cash flow statement as per AS 3 (Revised), using indirect method.
Answer
` (‘000)
(A) Cash flow from operating activities
Net profit before tax 780
Add: Adjustment for depreciation 880
Loss on sale of fixed assets 280

2.47 Accounting
Interest on debentures 126

Operating profit before changes in working capital 2,066
Less: Increase in trade receivables (260)
Less: Increase in Inventories (400)
Add: Increase in trade payables 80
Cash generated from operations 1,486
Less: Income tax paid (W.N.1) (140)
Net cash from operating activities 1,346
(B) Cash flow from investing activities
Purchase of fixed assets (1,200)
Sale of fixed assets 40
Purchase of investments (200)
Net cash used in investing activities (1,360)
(C) Cash flow from financing activities
Proceeds from issue of shares including premium (400 + 40) 440
Proceeds from issue of 14% debentures (900 – 800) 100
Proceeds from long term borrowings 60
Interest on debentures (126)
, Payment of dividend (300)
Net cash from financing activities 174
Net increase in cash and cash equivalents (A+B+C) 160
Cash and cash equivalents at the beginning of the year 100
Cash and cash equivalents at the end of the year 260
Working Notes:
1. Calculation of Income tax paid during the year ` (‘000)
Income tax expense for the year 160
Add: Income tax liability at the beginning of the year 20
180
Less: Income tax liability at the end of the year (40)
Income tax paid during the year 140

It is assumed that debentures of ` 1,00,000 were issued at the beginning of the year.

2. Calculation of Fixed assets purchased during the year

Closing balance of gross block of fixed assets 4,000
Add: Cost of assets discarded during the year 400
4,400
Less: Opening balance of gross block of fixed assets (3,200)
Fixed assets purchased during the year 1,200
3. Calculation of Depreciation charged during the year
Closing balance of accumulated depreciation 1,440
Add: Depreciation charged on assets discarded during the year 80
1,520
Less: Opening balance of accumulated depreciation (640)
Depreciation charged during the year 880
Question 14
On the basis of the following information prepare a Cash Flow Statement for the year ended
31st March, 2015:
(i) Total sales for the year were ` 199 crore out of which cash sales amounted to
` 131 crore.
(ii) Cash collections from credit customers during the year, totalled ` 67 crore.
(iii) Cash paid to suppliers of goods and services and to the employees of the enterpr ise
amounted to ` 159 crore.
(iv) Fully paid preference shares of the face value of ` 16 crore were redeemed and equity
shares of the face value of ` 16 crore were allotted as fully paid up at a premium of 25%.
(v) ` 13 crore were paid by way of income tax.
(vi) Machine of the book value of ` 21 crore was sold at a loss of ` 30 lakhs and a new
machine was installed at a total cost of ` 40 crore.
(vii) Debenture interest amounting ` 1 crore was paid.
(viii) Dividends totalling ` 11.7 crore (including CDT) was paid on equity and preference
shares.
(ix) On 31st March, 2012 balance with bank and cash on hand totalled ` 9 crore.

2.49 Accounting
Answer
Cash flow statement
(` in (` in
crores) crores)
Cash flow from operating activities
Cash sales 131
Cash collected from credit customers 67
Less: Cash paid to suppliers for goods & services and to employees (159)
Cash from operations 39
Less: Income tax paid (13)
Net cash generated from operating activities 26.00
Payment for purchase of Machine (40.00)
Proceeds from sale of Machine 20.70
Net cash used in investing activities (19.30)
Redemption of Preference shares (16.00)
Proceeds from issue of Equity shares 20.00
Debenture interest paid (1.00)
Dividend Paid (11.70)
Net cash used in financing activities (8.70)
Net decrease in cash and cash equivalent (2.00)
Add: Cash and cash equivalents as on 1.04.2014 9.00
Cash and cash equivalents as on 31.3.2015 7.00
Question 15
Surya Ltd. has provided you the following particulars. Prepare Cash Flow from Operating
Activities by Indirect Method in accordance with AS 3 :
Profit & Loss Account of Surya Ltd.
Particulars ` Particulars `
To Depreciation 86,700 By Operating Profit before depreciation 11,01,600

To Patents written off 35,000 By Profit on Sale on Investments 10,000

To Provision for Tax 1,25,000 By Refund of Tax 3,000
To Dividend payable 72,000 By Insurance Claim-Major Fire Settlement 1,00,000
To Transfer to Reserve 87,000
To Net Profit 8,08,900
12,14,600 12,14,600
Additional information :
in `
31.3.2014 31.3.2015
Inventory 1,20,000 1,60,000
Trade Receivables 7,500 75,000
Trade Payables 23,735 87,525
Provision for Tax 1,18,775 1,25,000
Prepaid Expenses 15,325 12,475
Marketable Securities 11,775 29,325
Cash Balance 25,325 35,340
Answer
Indirect Method
Cash flow from Operating activities for the year ended 31 st March, 2015
`
Net Profit as per Profit & Loss A/c 8,08,900
Add: Dividend payable 72,000
Add: Transfer to reserve 87,000
Add: Provision for Tax made during the Current Year 1,25,000
Less: Refund of tax (3,000)
Less: Extraordinary items (i.e. Insurance Claim – Major Fire
Settlement) (1,00,000)
Net Profit before taxation, and extraordinary items 9,89,900
Add: Depreciation 86,700
Add: Patents written off 35,000
Less: Profit on sale of investments (10,000)
Increase in Inventory (40,000)

2.51 Accounting

Increase in trade payables 63,790
Decrease in prepaid expenses 2,850 (40,860)
Income taxes paid (net of refund) 1,15,775
Cash flow before extraordinary item 9,44,965
Insurance claim recovery (major fire setlement) 1,00,000
Question 16
Intelligent Ltd., a non financial company has the following entries in its Bank Account. It has
sought your advice on the treatment of the same for preparing Cash Flow Statement.
(i) Loans and Advances given to the following and interest earned on them:
(1) to suppliers
(2) to employees
(3) to its subsidiaries companies
(ii) Investment made in subsidiary Smart Ltd. and dividend received
(iii) Dividend paid for the year
(iv) TDS on interest income earned on investments made
(v) TDS on interest earned on advance given to suppliers
(vi) Insurance claim received against loss of fixed asset by fire
Discuss in the context of AS 3 Cash Flow Statement.
Answer
(i) Loans and advances given and interest earned
(1) to suppliers Operating Cash flow
(2) to employees Operating Cash flow
(3) to its subsidiary companies Investing Cash flow
(ii) Investment made in subsidiary company and dividend received
Investing Cash flow
(iii) Dividend paid for the year
Financing Cash Outflow
(iv) TDS on interest income earned on investments made
Investing Cash Outflow

(v) TDS on interest earned on advance given to suppliers

Operating Cash Outflow
(vi) Insurance claim received of amount loss of fixed asset by fire
Extraordinary item to be shown under a separate heading as ‘Cash inflow from Operating
activities’.
Question 17
Prepare cash flow statement of M/s MNT Ltd. for the year ended 31 st March, 2015 with the
help of the following information:
(1) Company sold goods for cash only.
(2) Gross Profit Ratio was 30% for the year, gross profit amounts to ` 3,82,500.
(3) Opening inventory was lesser than closing inventory by ` 35,000.
(4) Wages paid during the year ` 4,92,500.
(5) Office and selling expenses paid during the year ` 75,000.
(6) Dividend paid during the year ` 30,000 (including dividend distribution tax.)
(7) Bank loan repaid during the year ` 2,15,000 (included interest ` 15,000)
(8) Trade payables on 31 st March, 2014 exceed the balance on 31 st March, 2015 by
` 25,000.
(9) Amount paid to trade payables during the year ` 4,60,000.
(10) Tax paid during the year amounts to ` 65,000 (Provision for taxation as on 31.03.2015
` 45,000).
(11) Investments of ` 7,00,000 sold during the year at a profit of ` 20,000.
(12) Depreciation on fixed assets amounts to ` 85,000.
(13) Plant and machinery purchased on 15 th November, 2014 for ` 2,50,000.
(14) Cash and Cash Equivalents on 31 st March, 2014 ` 2,00,000.
(15) Cash and Cash Equivalents on 31 st March, 2015 ` 6,07,500.
Answer
M/s MNT Ltd.
(Using direct method)
Particulars ` `
Cash flows from Operating Activities
Cash sales (` 3,82,500/.30) 12,75,000

2.53 Accounting
Less: Cash payments for trade payables (4,60,000)

Wages Paid (4,92,500)
Office and selling expenses (75,000) (10,27,500)
Cash generated from operations before taxes 2,47,500
Net cash generated from operating activities (A) 1,82,500
Cash flows from investing activities
Sale of investments 7,20,000
Payments for purchase of Plant & machinery (2,50,000)
Net cash used in investing activities (B) 4,70,000
Cash flows from financing activities
Bank loan repayment(including interest) (2,15,000)
Dividend paid(including dividend distribution tax) (30,000)
Net cash used in financing activities (C) (2,45,000)
Net increase in cash (A+B+C) 4,07,500
Cash and cash equivalents at beginning of the period 2,00,000
Cash and cash equivalents at end of the period 6,07,500
Exercise
1. Given below are the condensed Balance Sheets of Lambakadi Ltd. for two years and the statement of
Profit and Loss for one year:
(Figures ` in lakhs)
As at 31st March 2015 2014
Share Capital
In equity shares of ` 100 each 150 110
10% redeemable preference shares of ` 100 each 10 40
Capital redemption reserve 10 —
General reserve 15 10
Profit and loss account balance 30 20
8% debentures with convertible option 20 40
Other term loans 15 30
250 250
Fixed assets less depreciation 130 100

Long term investments 40 50

Working capital 80 100
250 250
Statement of Profit and Loss for the year ended 31st March, 2015
Sales 600
Less : Cost of sales 400
200
Establishment charges 30
Selling and distribution expenses 60
Interest expenses 5
Loss on sale of equipment (Book value ` 40 lakhs) 15 110
90
Interest income 4
Dividend income 2
Foreign exchange gain 10
Damages received for loss of reputation 14 30
120
Depreciation 50
70
Taxes 30
40
Dividends 15
Net profit carried to Balance Sheet 25
Your are informed by the accountant that ledgers relating to trade receivables, trade payables and
inventory for both the years were seized by the income-tax authorities and it would take atleast two
months to obtain copies of the same. However, he is able to furnish the following data :
2015 2014
Dividend receivable 2 4
Interest receivable 3 2
Cash on hand and with bank 7 10
Investments maturing within two months 3 2
15 18
Interest payable 4 5

2.55 Accounting
Taxes payable 6 3
10 8
Current ratio 1.5 1.4
Acid test ratio 1.1 0.8
It is also gathered that debenture holders owning 50% of the debentures outstanding as on 31.3.2014
exercised the option for conversion into equity shares during the financial year and the same was put
through.
You are required to prepare a direct method cash flow statement for the financial year, 2015 in
accordance with para 18(a) of Accounting Standard (AS) 3 revised.
(Hints: Net cash from operating activities 112; Net cash used in investing activities (78); and Net
cash used in financing activities (46))
2. The following are the changes in the account balances taken from the Balance Sheets of PQ Ltd. as at
the beginning and end of the year. :
Changes in Rupees in debt or [credit]
Equity share capital 30,000 shares of ` 10 each issued and fully paid 0
Capital reserve [49,200]
8% debentures [50,000]
Debenture discount 1,000
Freehold property at cost/revaluation 43,000
Plant and machinery at cost 60,000
Depreciation on plant and machinery [14,400]
Trade receivables 50,000
inventory and work-in-progress 38,500
Trade payables [11,800]
Net profit for the year [76,500]
Dividend paid in respect of earlier year 30,000
Provision for doubtful debts [3,300]
Trade investments at cost 47,000
Bank [64,300]
0
You are informed that.
(a) Capital reserve as at the end of the year represented realised profits on sale of one freehold
property together with surplus arising on the revaluation of balance of freehold properties.
(b) During the year plant costing ` 18,000 against which depreciation provision of ` 13,500 was lying,
was sold for ` 7,000.
(c) During the middle of the year ` 50,000 debentures were issued for cash at a discount of ` 1,000.
(d) The net profit for the year was after crediting the profit on sale of plant and charging debenture
interest.

You are required to prepare a statement which will explain why bank borrowing has increased by
` 64,300 during the year end. Ignore taxation.
(Hints: Net cash flow from operating activities ` 30,500; Net cash used in investing activities
` (1,11,800); and Net cash from financing activities ` 17,000)
3. The following are the summarized Balance Sheets of Lotus Ltd. as on 31 st March 2014 and 2015:
Liabilities 31-3-2014 31-3-2015
` `
Equity share capital (` 10 each) 10,00,000 12,50,000
Capital reserve 10,000
Profit and loss A/c 4,00,000 4,80,000
Long term loan from the bank 5,00,000 4,00,000
Provision for taxation 50,000 60,000
24,50,000 26,00,000
Assets ` `
Land and building 4,00,000 3,80,000
Machinery 7,50,000 9,20,000
Investment 1,00,000 50,000
Inventory 3,00,000 2,80,000
Cash in hand 2,00,000 1,40,000
Cash at bank 3,00,000 4,10,000
24,50,000 26,00,000
(1) Depreciation written off on land and building ` 20,000.
(2) The company sold some investment at a profit of ` 10,000, which was credited to Capital
Reserve.
(3) Income-tax provided during the year ` 55,000.
(4) During the year, the company purchased a machinery for ` 2,25,000. They paid
` 1,25,000 in cash and issued 10,000 equity shares of ` 10 each at par.
You are required to prepare a cash flow statement for the year ended 31st March 2015 as per AS
3 by using indirect method.
[Hint: Net cash flow from operating activities ` 65,000; Net cash used in investing
activities (` 65,000); and Net cash from financing activities ` 50,000]

Profit or Loss Prior to
3 Incorporation
BASIC CONCEPTS
Pre and Post  Profit or loss of a business for the period prior to the date the
Incorporation company came into existence is referred to as Pre-Incorporation
Profits/Losses Profits or Losses.
 Generally there are two methods of computing Profit & Loss
prior to Incorporation
 One is to close of old books and open new books with the
assets and liabilities as they existed at the date of
incorporation. In this way, automatically the result to that
date will be adjusted.
 Other is to split up the profit of the year of the transfer of the
business to the company between ‘pre’ and ‘post’ incorporation
periods. This is done either on the time basis or on the turnover
basis or by a method which combines the two.
Item Basis of Apportionment
between pre and Post
incorporation period
Gross Profit or Gross Loss On the basis of turnover in
the respective periods.
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 the
absence of any information
regarding turnover and cost of
goods sold.

Profit or Loss Prior to Incorporation 3.2
Variable expenses linked with On the basis of Turnover in

Turnover [e.g. the pre and post
Carriage/Cartage outward, incorporation.
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.]
Fixed Common charges [e.g. On the basis of Time in the
Salaries, Office and pre and post incorporation
Administration Expenses, periods.
Rent, Rates and Taxes,
Printing and Stationery,
Telephone, Telegram and
Postage, Depreciation,
Miscellaneous Expenses]
Expenses exclusively relating Charge to pre-incorporation
to pre-Incorporation period period but if the purchase
[e.g. Interest on Vendor’s consideration is not paid on
Capital] taking over of business,
interest for the subsequent
period is charged to post
incorporation period.
Expenses exclusively relating to Charge to Post-incorporation
post-incorporation period [e.g. period
Formation expenses, interest on
debentures, director’s fees,
Directors’ remuneration,
Preliminary Expenses, Share
issue Expenses, Underwriting
commission, Discount on issue
of securities.
Audit Fees
(i) For Company’s Audit Charge to Post-incorporation
under the Companies period
Act, 2013.
(ii) For Tax Audit under On the basis of turnover in
section 44AB of the the respective periods.
Income tax Act, 1961

3.3 Accounting
Interest on purchase
consideration to vendor:
(i) For the period from the Charge to Pre-incorporation
date of acquisition of period
business to date of
incorporation.
(ii) For the period from the Charge to Post-incorporation
date period
Question 1
Define Pre–incorporation expenses in brief.
Answer
Pre–incorporation expenses denote expenses incurred by the promoters for the purposes of the
company before its incorporation.
Broadly, these include expenses in connection with:
(a) preliminary analysis of the conceived idea,
(b) detailed investigation in terms of technical feasibility and commercial viability to establish the
soundness of the proposition,
(c) preparation of ‘project report’ or ‘feasibility report’ and its verification through independent
appraisal authority (before giving final approval to the proposition) and
(d) organisation of funds, property and managerial ability and assembling of other business
elements.
Question 2
ABC Ltd. took over a running business with effect from 1 st April, 2013. The company was
incorporated on 1 st August, 2013. The following summarized Profit and Loss Account has
been prepared for the year ended 31.3.2014:
` `
To Salaries 48,000 By Gross profit 3,20,000
To Stationery 4,800
To Travelling expenses 16,800
To Advertisement 16,000
To Miscellaneous trade expenses 37,800
To Rent (office buildings) 26,400
To Electricity charges 4,200

To Director’s fee 11,200

To Bad debts 3,200
To Commission to selling agents 16,000
To Tax Audit fee 6,000
To Debenture interest 3,000
To Interest paid to vendor 4,200
To Selling expenses 25,200
To Depreciation on fixed assets 9,600
To Net profit 87,600
3,20,000 3,20,000
(a) Total sales for the year, which amounted to ` 19,20,000 arose evenly upto the date of 30.9.2013.
Thereafter they spurted to record an increase of two-third during the rest of the year.
(b) Rent of office building was paid @ ` 2,000 per month upto September, 2013 and
thereafter it was increased by ` 400 per month.
(c) Travelling expenses include ` 4,800 towards sales promotion.
(d) Depreciation include ` 600 for assets acquired in the post incorporation period.
(e) Purchase consideration was discharged by the company on 30 th September, 2013 by
issuing equity shares of ` 10 each.
Prepare Statement showing calculation of profits and allocation of expenses between pre and
post incorporation periods.
Answer
Statement showing calculation of profits for pre and post incorporation periods
Particulars Pre-incorpo- Post- incorpo-
ration period ration period
` `
Gross profit (1:3) 80,000 2,40,000
Less: Salaries (1:2) 16,000 32,000
Stationery (1:2) 1,600 3,200
Advertisement (1:3) 4,000 12,000
Travelling expenses (W.N.3) 4,000 8,000

3.5 Accounting
Sales promotion expenses (W.N.3) 1,200 3,600

Misc. trade expenses (1:2) 12,600 25,200
Rent (office building) (W.N.2) 8,000 18,400
Electricity charges (1:2) 1,400 2,800
Director’s fee - 11,200
Bad debts (1:3) 800 2,400
Selling agents commission (1:3) 4,000 12,000
Audit fee (1:3) 1,500 4,500
Debenture interest - 3,000
Interest paid to vendor (2:1) (W.N.4) 2,800 1,400
Selling expenses (1:3) 6,300 18,900
Depreciation on fixed assets (W.N.5) 3,000 6,600
Capital reserve (Bal.Fig.) 12,800 -
Net profit (Bal.Fig.) - 74,800
Working Notes:
1. Time Ratio
Pre incorporation period = 1 st April, 2013 to 31st July, 2013
i.e. 4 months
Post incorporation period is 8 months
Time ratio is 1: 2.
2. Sales ratio
Let the monthly sales for first 6 months (i.e. from 1.4.2013 to 30.09.13) be = x
Then, sales for 6 months = 6x
2 5
Monthly sales for next 6 months (i.e. from 1.10.13 to 31.3.2014) = x + x= x
3 3
5
Then, sales for next 6 months = x X 6 = 10x
3
Total sales for the year = 6x + 10x = 16x
Monthly sales in the pre incorporation period = ` 19,20,000/16 = ` 1,20,000
Total sales for pre-incorporation period = ` 1,20,000 x 4 = ` 4,80,000
Total sales for post incorporation period = ` 19,20,000 – ` 4,80,000 = ` 14,40,000
Sales Ratio = 4,80,000 : 14,40,000 = 1 : 3

3. Rent
`
Rent for pre-incorporation period (` 2,000 x 4) 8,000 (pre)
Rent for post incorporation period
August,2013 & September, 2013 (` 2,000 x 2) 4,000
October,2013 to March,2014 (` 2,400 x 6) 14,400 18,400 (post)
4. Travelling expenses and sales promotion expenses
Pre Post
` `
Traveling expenses ` 12,000 (i.e. ` 16,800- ` 4,800)
distributed in 1:2 ratio 4,000 8,000
Sales promotion expenses ` 4,800 distributed in 1:3 ratio 1,200 3,600
5. Interest paid to vendor till 30 th September, 2013
Pre Post
` `
 ` 4,200  2,800
Interest for pre-incorporation period  4
 6 
Interest for post incorporation period i.e. for
 ` 4,200  1,400
August, 2013 & September, 2013 =  2
 6 
6. Depreciation
Pre Post
` `
Total depreciation 9,600
Less: Depreciation exclusively for post incorporation period 600 600
9,000
 4
Depreciation for pre-incorporation period 9,000   3,000
 12 
 8
Depreciation for post incorporation period 9,000   6,000
 12 
3,000 6,600

3.7 Accounting
Question 3
Rama Udyog Limited was incorporated on August 1, 2013. It had acquired a running business of
Rama & Co. with effect from April 1, 2013. During the year 2013-14, the total sales were
` 36,00,000. The sales per month in the first half year were half of what they were in the later half
year. The net profit of the company, ` 2,00,000 was worked out after charging the following
expenses:
(i) Depreciation ` 1,23,000, (ii) Directors’ fees ` 50,000, (iii) Preliminary expenses ` 12,000, (iv)
Office expenses ` 78,000, (v) Selling expenses ` 72,000 and (vi) Interest to vendors upto August 31,
2013 ` 5,000.
Please ascertain pre-incorporation and post-incorporation profit for the year ended 31st March, 2014.
Answer
Statement showing pre and post incorporation profit for the year ended 31 st March, 2014
Particulars Total Basis of Pre- Post-
Amount Allocation incorporation Incorporation
` Rs, `
Gross Profit 5,40,000 2:7 1,20,000 4,20,000
Less: Depreciation 1,23,000 1:2 41,000 82,000
Director’s Fees 50,000 Post - 50,000
Preliminary Expenses 12,000 Post - 12,000
Office Expenses 78,000 1:2 26,000 52,000
Selling Expenses 72,000 2:7 16,000 56,000
Interest to vendors 5,000 Actual 4,000 1,000
Net Profit (` 33,000 being pre-
incorporation profit is transferred
to capital reserve Account) 2,00,000 33,000 1,67,000
Working Notes:
1. Sales ratio
The sales per month in the first half year were half of what they were in the later half
year. If in the later half year, sales per month is Re.1 then it should be 50 paise per
month in the first half year. So sales for the first four months (i.e. from 1 st April, 2013 to
31st July, 2013) will be 4  .50 = ` 2 and for the last eight months (i.e. from 1 st August,
2013 to 31st March, 2014) will be (2 × .50 + 6 × 1) = ` 7. Thus sales ratio is 2:7.
2. Time ratio
1st April, 2013 to 31st July, 2013 : 1st August, 2013 to 31st March, 2014
= 4 months : 8 months = 1:2

Thus, time ratio is 1:2.

3. Gross profit
Gross profit = Net profit + All expenses
= ` 2,00,000 + ` ( 1,08,000+15,000+50,000+12,000+78,000+72,000+5,000)
= ` 2,00,000 +` 3,40,000 = ` 5,40,000.
Question 4
A firm M/s. Alag, which was carrying on business from 1 st July, 2013 gets itself incorporated
as a company on 1 st November, 2013. The first accounts are drawn upto 31 st March 2014.
The gross profit for the period is ` 56,000. The general expenses are ` 14,220; Director's fee
` 12,000 p.a.; Incorporation expenses ` 1,500. Rent upto 31 st December was ` 1,200 p.a.
after which it is increased to ` 3,000 p.a. Salary of the manager, who upon incorporation of
the company was made a director, is ` 6,000 p.a. His remuneration thereafter is included in
the above figure of fee to the directors.
Give Statement showing pre and post incorporation profit. The net sales are ` 8,20,000, the
monthly average of which for the first four months is one-half of that of the remaining period.
The company earned a uniform profit. Interest and tax may be ignored.
Answer
Statement showing pre and post-incorporation profits
Particulars Basis Pre – Post- Total
incorporation incorporation
period period
` ` `
Gross Profit Sales ratio 16,000 40,000 56,000
Less: General expenses Time ratio 6,320 7,900 14,220
Directors’ fee Actual - 5,000 5,000
Formation expenses Actual - 1,500 1,500
Rent (600 + 750) W.N. 2 400 950 1,350
Manager’s salary Actual 2,000 - 2,000
Net Profit transferred to:
Capital Reserve 7,280 - -
P & L A/c - - 24,650 31,930
Working Notes:
1. Calculation of sales ratio
Let the average monthly sales of first four months = 100
and next five months = 200

3.9 Accounting
Total sales of first four months = 100 x 4 = 400 and

Total sales of next five months = 200 x 5 = 1,000
The ratio of sales = 400 : 1,000 =2 : 5
2. Rent
Till 31st December, 2013, rent was ` 1,200 p.a. i.e. ` 100 p.m.
So, Pre-incorporation rent = ` 100 x 4 months = ` 400
Post-incorporation rent = (` 100 x 2 months) + (` 250 x 3 months) = ` 950
3. Time ratio
Pre-incorporation period =1st July, 2013 to 31st Oct. 2013 = 4 months
Post –incorporation = 1 st November 2013 to 31st March 2014 = 5 months
= 4 months : 5 months
Thus, time ratio is 4:5
Question 5
The promoters of Glorious Ltd. took over on behalf of the company a running business with
effect from 1st April, 2012. The company got incorporated on 1 st August, 2012. The annual
accounts were made up to 31st March, 2013 which revealed that the sales for the whole year
totalled ` 1,600 lakhs out of which sales till 31 st July, 20I2 were for ` 400 lakhs. Gross profit
ratio was 25%.
The expenses from 1st April 2012, till 31st March, 2013 were as follows:
(` in lakhs)
Salaries 69
Rent, Rates and Insurance 24
Sundry Office Expenses 66
Travellers' Commission 16
Discount Allowed 12
Bad Debts 4
Directors' Fee 25
Audit Fee 9
Depreciation on Tangible Assets 12
Debenture Interest 11
Prepare a statement showing the calculation of Profits for the pre-incorporation and post-
incorporation periods.

Answer
Statement showing the calculation of Profits for the pre-incorporation and post-
incorporation periods
Amount Allocation incorporation incorporation
(` in lakhs) (` in lakhs) (` in lakhs)
Gross Profit (25% of ` 1,600) 400 Sales 100 300
Less: Salaries 69 Time 23 46
Rent, rates and Insurance 24 Time 8 16
Sundry office expenses 66 Time 22 44
Travellers’ commission 16 Sales 4 12
Discount allowed 12 Sales 3 9
Bad debts 4 Sales 1 3
Directors’ fee 25 Post - 25
Audit Fees 9 Sales 2.25 6.75
Depreciation on tangible assets 12 Time 4 8
Debenture interest 11 Post - 11
Net profit 152 32.75 119.25
Working Notes:
1. Sales ratio
(` in lakh)
Sales for the whole year 1,600
Sales upto 31st July, 2012 400
Therefore, sales for the period from 1st August, 2012 to 31st March, 2013 1,200
Thus, sale ratio = 400:1200 = 1:3
2. Time ratio
1st April, 2012 to 31st July, 2012 : 1st August, 2012 to 31st March, 2013
= 4 months: 8 months = 1:2

Audit fee has been assumed to be related with tax audit and therefore apportioned into pre and post-
incorporation periods on the basis of turnover.

3.11 Accounting
Question 6
Sneha Ltd. was incorporated on 1 st July, 2013 to acquire a running business of Atul Sons with
effect from 1st April, 2013. During the year 2013-14, the total sales were ` 24,00,000 of which
` 4,80,000 were for the first six months. The Gross profit of the company
` 3,90,800. The expenses debited to the Profit & Loss Account included:
(i) Director's fees ` 30,000
(ii) Bad debts ` 7,200
(iii) Advertising ` 24,000 (under a contract amounting to ` 2,000 per month)
(iv) Salaries and General Expenses ` 1,28,000
(v) Preliminary Expenses written off ` 10,000
(vi) Donation to a political party given by the company ` 10,000.
Prepare a statement showing pre-incorporation and post-incorporation profit for the year
ended 31st March, 2014.
Answer
For the year ended 31 st March, 2014
Gross Profit 3,90,800 Sales 39,080 3,51,720
Less: Directors’ fee 30,000 Post 30,000
Bad debts 7,200 Sales 720 6,480
Advertising 24,000 Time 6,000 18,000
Salaries & general expenses 1,28,000 Time 32,000 96,000
Preliminary expenses 10,000 Post 10,000
Donation to Political Party 10,000 Post 10,000
Net Profit 1,81,600 1,81,240
Pre-incorporation profit transfer to 360
Capital Reserve
Working Notes:
1. Sales ratio
Particulars `
Sales for period up to 30.06.2013 (4,80,000 * 3/6) 2,40,000
Sales for period from 01.07.2013 to 31.03.2014 (24,00,000 – 2,40,000) 21,60,000

Thus, Sales Ratio = 1 : 9

2. Time ratio
1st April, 2013 to 30 June, 2013: 1st July, 2013 to 31 st March, 2014
= 3 months: 9 months = 1: 3
Thus, Time Ratio is 1: 3
Question 7
The partners Kamal and Vimal decided to convert their existing partnership business into a
Private Limited Company called M/s. KV Trading Private Ltd. with effect from 1-7-2014.
The same books of accounts were continued by the company which closed its account for first
term on 31-3-2015.
The summarized Profit and Loss Account for the year ended 31-3-2015 is below:
(`) in lakhs (`) in lakhs
Turnover 240.00
Interest on investments 6.00
246.00
Less: Cost of goods sold 102.00
Advertisement 3.00
Sales Commission 6.00
Salary 18.00
Managing directors remuneration 6.00
Interest on Debentures 2.00
Rent 5.50
Bad Debts 1.00
Underwriting Commission 2.00
Audit fees 2.00
Loss on sale of investment 1.00
Depreciation 4.00 152.50
93.50
The following additional information was provided
(i) The average monthly sales doubled from 1-7-2014. GP ratio was constant.
(ii) All investments were sold on 31-5-2014.
(iii) Average monthly salary doubled from 1-10-2014.

3.13 Accounting
(iv) The company occupied additional space from 1-7-2014 for which rent of ` 20,000 per
month was incurred.
(v) Bad debts recovered amounting to ` 50,000 for a sale made in 2012, has been deducted
from bad debts mentioned above.
(vi) Audit fees pertains to the company.
Prepare a statement apportioning the expenses between pre and post incorporation periods
and calculate the Profit/Loss for such periods. Also suggest how the pre-incorporation profits
are to be dealt with.
Answer
K V Trading Private Limited
Statement showing calculation of profit/loss for pre and post incorporation periods
` in lakhs
Ratio Total Pre Post
Incorporation Incorporation
Sales 1:6 240.00 34.29 205.71
Interest on Investments Pre 6.00 6.00 -
Bad debts recovered Pre 0.50 0.50 -
(i) 246.50 40.79 205.71
Cost of goods sold 1:6 102.00 14.57 87.43
Advertisement 1:6 3.00 0.43 2.57
Sales commission 1:6 6.00 0.86 5.14
Salary (W.N.3) 1:5 18.00 3.00 15.00
Managing directors remuneration Post 6.00 - 6.00
Interest on Debentures Post 2.00 - 2.00
Rent (W.N.4) 5.50 0.93 4.57
Bad debts 1:6 1.50 0.21 1.29
Underwriting commission Post 2.00 - 2.00
Audit fees Post 2.00 - 2.00
Loss on sale of Investment Pre 1.00 1.00 -
Depreciation 1:3 4.00 1.00 3.00
(ii) 153.00 22.00 131.00
Net Profit [(i) – (ii)] 93.50 18.79* 74.71
*Note: ` 18.79 lakhs pre-incorporation profit is a capital profit and will be transferred to
Capital Reserve.

Working Notes:
1. Calculation of Sales Ratio
Let the average sales per month be x
Total sales from 01.04.2014 to 30.06.2014 will be 3x
Average sales per month from 01.07.2014 to 31.03.2015 will be 2x
Total sales from 01.07.2014 to 31.03.2015 will be 2x X 9 =18x
Ratio of Sales will be 3x: 18x i.e. 3:18 or 1:6
2. Calculation of time Ratio
3 Months: 9 Months i.e. 1:3
3. Apportionment of Salary
Let the salary per month from 01.04.2014 to 30.09.2014 is x
Salary per month from 01.10.2014 to 31.03.2015 will be 2x
Hence, pre incorporation salary (01.04.2014 to 30.06.2014) = 3x
Post incorporation salary from 01.07.2014 to 31.03.2015 = (3x + 12x) i.e.15x
Ratio for division 3x: 15x or 1: 5
4. Apportionment of Rent ` Lakhs
Total Rent 5.5
Less: additional rent from 1.7.2014 to 31.3.2015 1.8
Rent of old premises for 12 months 3.7
Pre Post
Apportionment in time ratio 0.925 2.775
Add: Rent for new space - 1.80
Total 0.925 4.575
Question 8
SALE Limited was incorporated on 01.08.2014 to take-over the business of a partnership firm
w.e.f. 01.04.2014. The following is the extract of Profit and Loss Account for the year ended
31.03.2015:
Particulars Amount (`) Particulars Amount (`)
To Salaries 1,20,000 By Gross Profit 6,00,000
To Rent, Rates & Taxes 80,000
To Commission on Sales 21,000

3.15 Accounting
To Depreciation 25,000
To Interest on Debentures 32,000
To Director Fees 12,000
To Advertisement 36,000
To Net Profit for the Year 2,74,000
6,00,000 6,00,000
(i) SALE Limited initiated an advertising campaign which resulted increase in monthly
average sales by 25% post incorporation.
(ii) The Gross profit ratio post incorporation increased to 30% from 25%.
You are required to apportion the profit for the year between pre-incorporation and post-
incorporation, also explain how pre-incorporation profit is treated in the accounts.
Answer
` ` `
Gross Profit 6,00,000 1:3 1,50,000 4,50,000
Less: Salaries 1,20,000 Time 40,000 80,000
Rent, rates and taxes 80,000 Time 26,667 53,333
Sales’ commission 21,000 Sales(2:5) 6,000 15,000
Depreciation 25,000 Time 8,333 16,667
Interest on debentures 32,000 Post 32,000
Directors’ fee 12,000 Post 12,000
Advertisement 36,000 post 36,000
Net profit 2,74,000 69,000* 2,05,000
* Pre-incorporation profit is a capital profit and will be transferred to capital reserve.
Working Notes:
1. Sales ratio
Let the monthly sales for first 4 months (i.e. from 1.4.2014 to 31.7.2014) be = x
Then, sales for 4 months = 4x
Monthly sales for next 8 months (i.e. from 1.8.14 to 31.3.2015) = x + 25% of x= 1.25x

Then, sales for next 6 months = 1.25x X 8 = 10x

Total sales for the year = 4x + 10x = 14x
Sales Ratio = 4 x :10x i.e. 2:5
2. Gross profit ratio
From 1.4.2014 to 31.7.2014 gross profit is 25% of sales
Then, 25% of 4x= 1x
gross profit for next 8 months (i.e. from 1.8.14 to 31.3.2015) is 30%
Then, 30% of 10x = 3x
Therefore gross profit ratio will be 1:3
3. Time ratio
1st April, 2014 to 31 st July, 2014 : 1 st August, 2014 to 31 st March, 2015
= 4 months: 8 months = 1:2

4 Accounting for Bonus Issue
BASIC CONCEPTS
 Bonus Issue means an offer of free additional shares to existing

shareholders. A company may decide to distribute further
shares as an alternative to increase the dividend payout.
 Bonus Issue is also known as a "scrip issue" or "capitalization
issue".
 Bonus issue has following major effects :
 Share capital gets increased according to the bonus issue
ratio
 Liquidity in the stock increases.
 Effective Earnings per share, Book Value and other per
share values stand reduced.
 Market price gets adjusted on issue of bonus shares.
 Accumulated profits get reduced.
a company may issue fully paid-up bonus shares to its members, in any
manner whatsoever, out of—
(i) its free reserves;
(ii) the securities premium account; or
(iii) the capital redemption reserve account:
Provided that no issue of bonus shares shall be made by capitalising
reserves created by the revaluation of assets. Once bonus issue gets
approved by the board, subsequently it can not be withdrawn.

Accounting For Bonus Issue 4.2
Question 1
The following is the summarised Balance Sheet of Bumbum Limited as at 31 st March, 2015:
`
Sources of funds
Authorized capital
50,000 Equity shares of ` 10 each 5,00,000
10,000 Preference shares of ` 100 each (8% redeemable) 10,00,000
15,00,000
Issued, subscribed and paid up
5,000, 8%Redeemable Preference shares of ` 100 each 5,00,000
Reserves & Surplus
Profit & Loss A/c 40,000
2,500, 9% Debentures of ` 100 each 2,50,000
25,10,000
Application of funds
Fixed Assets (net) 7,80,000
Investments (market value ` 5,80,000) 4,90,000
Deferred Tax Assets 3,40,000
Trade receivables 6,20,000
Cash & Bank balance 2,80,000
25,10,000
In Annual General Meeting held on 20 th June, 2015 the company passed the following
resolutions:
(i) To split equity share of ` 10 each into 5 equity shares of ` 2 each from 1 st July, 5.
(ii) To redeem 8% preference shares at a premium of 5%.
(iii) To redeem 9% Debentures by making offer to debenture holders to convert their holdings
into equity shares at ` 10 per share or accept cash on redemption.
(iv) To issue fully paid bonus shares in the ratio of one equity share for every 3 shares held
on record date.

4.3 Accounting
On 10th July, 2015 investments were sold for ` 5,55,000 and preference shares were
redeemed.
40% of Debentureholders exercised their option to accept cash and their claims were settled
on 1st August, 2015.
The company fixed 5 th September, 2015 as record date and bonus issue was concluded by
12th September, 2015
You are requested to journalize the above transactions including cash transactions and
prepare Balance Sheet as at 30 th September, 2015. All working notes should form part of your
answer.
Answer
Bumbum Limited
Journal Entries
2015 Dr. (`) Cr. (`)
July 1 Equity Share Capital A/c (` 10 each) Dr. 3,00,000
To Equity share capital A/c (` 2 each) 3,00,000
(Being equity share of ` 10 each splitted into 5 equity
shares of ` 2 each) {1,50,000 X 2}
July 10 Cash & Bank balance A/c Dr. 5,55,000
To Investment A/c 4,90,000
To Profit & Loss A/c 65,000
(Being investment sold out and profit on sale credited to
Profit & Loss A/c)
July 10 8% Redeemable preference share capital A/c Dr. 5,00,000
Premium on redemption of preference share A/c Dr. 25,000
To Preference shareholders A/c 5,25,000
(Being amount payable to preference share holders on
redemption)
July 10 Preference shareholders A/c Dr. 5,25,000
To Cash & bank A/c 5,25,000
(Being amount paid to preference shareholders)
July 10 General reserve A/c Dr. 5,00,000
To Capital redemption reserve A/c 5,00,000
(Being amount equal to nominal value of preference shares
transferred to Capital Redemption Reserve A/c on its
redemption as per the law)

Aug 1 9% Debentures A/c Dr. 2,50,000

Interest on debentures A/c Dr. 7,500
To Debentureholders A/c 2,57,500
(Being amount payable to debenture holders along with
interest payable)
Aug. 1 Debentureholders A/c Dr. 2,57,500
To Cash & bank A/c (1,00,000 + 7,500) 1,07,500
To Equity share capital A/c{15,000 X 2} 30,000
To Securities premium A/c 1,20,000
(Being claims of debenture holders satisfied)
Sept. 5 Capital Redemption Reserve A/c Dr. 1,10,000
To Bonus to shareholders A/c 1,10,000
(Being balance in capital redemption reserve capitalized to
issue bonus shares)
Sept. 12 Bonus to shareholders A/c Dr. 1,10,000
To Equity share capital A/c 1,10,000
(Being 55,000 fully paid equity shares of ` 2 each issued
as bonus in ratio of 1 share for every 3 shares held)
Sept. 30 Securities Premium A/c Dr. 25,000
To Premium on redemption of preference shares A/c 25,000
(Being premium on preference shares adjusted from
securities premium account)
Sept. 30 Profit & Loss A/c Dr. 7,500
To Interest on debentures A/c 7,500
(Being interest on debentures transferred to Profit and
Loss Account)
Balance Sheet as at 30th September, 2015
Particulars Notes `
Total 19,42,500

4.5 Accounting
Assets
a Fixed assets
Tangible assets 7,80,000
b Deferred tax asset 3,40,000
2 Current assets
Cash and cash equivalents 2,02,500
Total 19,42,500
Notes to accounts
1 Share Capital ` `
Authorized share capital
2,50,000 Equity shares of ` 2 each 5,00,000
10,000 Preference shares of `100 each 10,00,000 15,00,000
Securities Premium A/c
Balance as per balance sheet 6,00,000
Add: Premium on equity shares issued on
conversion of debentures (15,000 x 8) 1,20,000
7,20,000
Less: Adjustment for premium on preference
Shares (25,000)
Balance 6,95,000
Capital Redemption Reserve(5,00,000-1,10,000) 3,90,000
General Reserve (6,50,000 – 5,00,000) 1,50,000
Profit & Loss A/c 40,000
Add: Profit on sale of investment 65,000
Less: Interest on debentures (7,500) 97,500
Total 13,32,500

Working Notes:
`
1. Redemption of preference share:
5,000 Preference shares of ` 100 each 5,00,000
Premium on redemption @ 5% 25,000
Amount Payable 5,25,000
2. Redemption of Debentures
2,500 Debentures of ` 100 each 2,50,000
Less: Cash option exercised by 40% holders (1,00,000)
Conversion option exercised by remaining 60% 1,50,000
1,50,000
Equity shares issued on conversion = = 15,000 shares
10
3. Issue of Bonus Shares
Existing equity shares after split (30,000 x 5) 1,50,000 shares
Equity shares issued on conversion 15,000 shares
Equity shares entitled for bonus 1,65,000 shares
Bonus shares (1 share for every 3 shares held) to be issued 55,000 shares
4. Cash and Bank Balance
Balance as per balance sheet 2,80,000
Add: Realization on sale of investment 5,55,000
8,35,000
Less: Paid to preference share holders (5,25,000)
Paid to Debentureholders (7,500 + 1,00,000) (1,07,500)
Balance 2,02,500
5. Interest of ` 7,500 paid to debenture holders have been debited to
Profit & Loss Account.
Question 2
Following is the extract of the Balance Sheet of Preet Ltd. as at 31 st March, 2015
Authorised capital: `
15,000 12% Preference shares of ` 10 each 1,50,000
16,50,000

4.7 Accounting
Issued and Subscribed capital:

12,000 12% Preference shares of ` 10 each fully paid 1,20,000
1,35,000 Equity shares of ` 10 each, ` 8 paid up 10,80,000
Reserves and surplus:
Capital Reserve (profit realized on sale of plant) 60,000
Securities premium 37,500
Profit and Loss Account 3,00,000
On 1st April, 2015, the Company has made final call @ ` 2 each on 1,35,000 equity shares.
The call money was received by 20 th April, 2015. Thereafter, the company decided to
capitalize its reserves by way of bonus at the rate of one share for every four shares held.
Company decides to use Capital Reserve for bonus issue as it has been realized in cash.
Show necessary journal entries in the books of the company and prepare the extract of the
balance sheet as on 30 th April, 2015 after bonus issue.
Answer
Journal Entries in the books of Preet Ltd.
` `
1-4-2015 Equity share final call A/c Dr. 2,70,000
(For final calls of ` 2 per share on 1,35,000
equity shares due as per Board’s Resolution
dated….)
20-4-2015 Bank A/c Dr. 2,70,000
To Equity share final call A/c 2,70,000
(For final call money on 1,35,000 equity shares
received)
Securities Premium A/c Dr. 37,500
Capital Reserve A/c Dr. 60,000
General Reserve A/c Dr. 1,80,000
To Bonus to shareholders A/c 3,37,500
(For making provision for bonus issue of one
share for every four shares held)
Bonus to shareholders A/c Dr. 3,37,500
(For issue of bonus shares)

Extract of Balance Sheet as at 30th April, 2015 (after bonus issue)

`
Authorised Capital
15,000 12% Preference shares of `10 each 1,50,000
1,83,750 Equity shares of `10 each (W.N.2) 18,37,500
Issued and subscribed capital
12,000 12% Preference shares of `10 each, fully paid 1,20,000
1,68,750 Equity shares of `10 each, fully paid 16,87,500
(Out of above, 33,750 equity shares @ `10 each were issued by way of
bonus)
Reserves and surplus
Profit and Loss Account 2,40,000
Working Notes:
The authorized capital should be increased as per details given below: `
Existing authorized Equity share capital 15,00,000
Add: Issue of bonus shares to equity shareholders
(25% of ` 13,50,000) 3,37,500
18,37,500
Question 3
The following is the summarized Balance Sheet of Trinity Ltd. as at 31.3. 2014:
Liabilities ` Assets `
Share Capital Fixed Assets
Authorised Gross Block 3,00,000
10,000 10% Redeemable Preference Less : Depreciation 1,00,000
Shares of ` 10 each 1,00,000 2,00,000
90,000 Equity Shares of `10 each 9,00,000 Investments 1,00,000
10,00,000 Current Assets and Loans
Issued, Subscribed and Paid-up Capital and Advances
10,000 10% Redeemable Preference Inventory 45,000
Shares of ` 10 each 1,00,000 Trade receivables 25,000
10,000 Equity Shares of ` 10 each 1,00,000 Cash and Bank Balances 50,000
(A) 2,00,000

4.9 Accounting
Reserves and Surplus

Securities Premium 70,000
Profit and Loss A/c 18,500
(B) 2,08,500
Current Liabilities and Provisions (C) 11,500
Total (A + B + C) 4,20,000 Total 4,20,000
For the year ended 31.3. 2015, the company made a net profit of ` 35,000 after providing
` 20,000 depreciation.
The following additional information is available with regard to company’s operation :
1. The preference dividend for the year ended 31.3. 2015 was paid.
2. Except cash and bank balances other current assets and current liabilities as on 31.3. 2015,
was the same as on 31.3.2014.
3. The company redeemed the preference shares at a premium of 10%.
4. The company issued bonus shares in the ratio of one share for every equity share held as on
31.3.2015.
5. To meet the cash requirements of redemption, the company sold investments.
6. Investments were sold at 90% of cost on 31.3.2015.
You are required to prepare necessary journal entries to record redemption and issue of
bonus shares.
Answer
Journal Entries in the Books of Trinity Ltd.
Dr. Cr.
` `
To Premium on Redemption of Preference shares 10,000
(Being amount of premium payable on redemption of
preference shares)
10% Redeemable Preference Capital Dr. 1,00,000
Premium on redemption of Preference Shares Dr. 10,000
To Preference Shareholders 1,10,000
(Being the amount payable to preference shareholders on
redemption)

General Reserve A/c Dr. 1,00,000

To Capital Redemption Reserve 1,00,000
(Being transfer to the latter account on redemption of shares)
Bank A/c Dr. 90,000
To Investments 1,00,000
(Being amount realised on sale of Investments and loss
thereon adjusted)
Preference shareholders A/c Dr. 1,10,000
To Bank 1,10,000
(Being payment made to preference shareholders)
Capital Redemption Reserve A/c Dr. 1,00,000
To Bonus to Shareholders 1,00,000
(Amount adjusted for issuing bonus share in the ratio of 1 : 1)
Bonus to Shareholders A/c Dr. 1,00,000
To Equity Share Capital 1,00,000
(Balance on former account transferred to latter)
Question 4
The following notes pertain to Brite Ltd.'s Balance Sheet as on 31st March, 2015:
Notes ` in Lakhs
(1) Share Capital
Authorised :
20 crore shares of ` 10 each 20,000
Issued and Subscribed :
10 crore Equity Shares of ` 10 each 10,000
2 crore 11% Cumulative Preference Shares of ` 10 each 2,000
Total 12,000
Called and paid up:
10 crore Equity Shares of ` 10 each, ` 8 per share called and paid up 8,000
2 crore 11% Cumulative Preference Shares of ` 10 each,
fully called and paid up 2,000
Total 10,000
(2) Reserves and Surplus :
Capital Reserve (profit on fixed assets realized in cash) 485
Capital Redemption Reserve 1,000

4.11 Accounting

Surplus i.e. credit balance of Profit & Loss Account 273
Total 4,798
On 2nd April 2015, the company made the final call on equity shares @ ` 2 per share. The entire
money was received in the month of April, 2015.
On 1st June 2015, the company decided to issue to equity shareholders bonus shares at the rate
of 2 shares for every 5 shares held and for this purpose, it decided to utilize the capital reserves to
the maximum possible extent.
Pass journal entries for all the above mentioned transactions. Also prepare the notes on Share
Capital and Reserves and Surplus relevant to the Balance Sheet of the company immediately after
the issue of bonus shares.
Answer
Journal Entries in the books of Brite Ltd.
Dr. Cr.
2015
` in lakhs ` in lakhs
April 2Equity Share Final Call A/c Dr. 2,000
To Equity Share Capital A/c 2,000
(Final call of ` 2 per share on 10 crore equity shares
made due)
Bank A/c Dr. 2,000
To Equity Share Final Call A/c 2,000
(Final call money on 10 crore equity shares received)
June 1 Capital Reserve A/c Dr. 485
Capital Redemption Reserve A/c Dr. 1,000
General Reserve A/c Dr. 515
To Bonus to Shareholders A/c 4,000
(Bonus issue of two shares for every five shares held,
by utilising various reserves as per Board’s resolution
dated…….)
Bonus to Shareholders A/c Dr. 4,000
(Capitalisation of profit)

Notes to Accounts
` in lakhs
1. Share Capital
Authorised share capital
20 crore shares of ` 10 each 20,000
Issued, subscribed and fully paid up share capital
14 crore Equity shares of ` 10 each, fully paid up 14,000
(Out of the above, 4 crore equity shares @ ` 10 each were
issued by way of bonus)
2 crore, 11% Cumulative Preference share capital of ` 10
each, fully paid up 2,000
16,000
Capital Reserves 485
Less: Utilized for bonus issue (485) -
Capital Redemption reserve 1,000
Less: Utilized for bonus issue (1,000) -
Less: Utilized for bonus issue (2,000) -
Less: Utilized for bonus issue (515) 525
Surplus (Profit and Loss Account) 273
Total 798
Question 5
Following items appear in the Trial Balance of Saral Ltd. as on 31st March, 2014:
Particulars Amount
4,500 Equity Shares of ` 100 each 4,50,000
Capital Reserve (including `40,000 being profit on sale of Plant) 90,000
Capital Redemption Reserve 30,000
Profit and Loss Account (Cr. Balance) 65,000

4.13 Accounting
The company decided to issue to equity shareholders bonus shares at the rate of 1 share for
every 3 shares held. Company decided that there should be the minimum reduction in free
reserves. Pass necessary Journal Entries in the books Saral Ltd.
Answer
Capital Redemption Reserve A/c Dr. 30,000
Capital Reserve (Realized in cash) Dr 40,000
General Reserve A/c Dr. 40,000
To Bonus to Shareholders 1,50,000
(Being issue of bonus shares by utilization of various
Reserves, as per resolution dated …….)
Bonus to Shareholders A/c Dr. 1,50,000
(Being capitalization of Profit)
Exercises
1. The summarised Balance Sheet of A Ltd. as at 31.3.2015 is as follows:
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
` 7.50 each called-up and paid-up 6,00,000
Reserves and surplus
Capital Redemption Reserve 1,50,000
Plant Revaluation Reserve 20,000
Securities Premium Account 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 share holders at the rate of one share for every two
shares held. Necessary resolutions were passed; requisite legal requirements were complied with:
(a) You are required to give effect to the proposal by passing journal entries in the books of A Ltd.
(b) Show the amended Balance Sheet.

(Hints: Total of Balance Sheet ` 19,00,000)

2. The following is the Trial Balance of Subhash Limited as on 31.3.2015 :
(Figures in ` ‘000)
Debit ` Credit `
Land at cost 110 Equity Capital (Shares of ` 10 each) 150
Plant & Machinery at cost 385 10% Debentures 100
Trade receivables 48 General Reserve 65
Inventory (31.3.2012) 43 Profit & Loss A/c 36
Bank 10 Securities Premium 20
Adjusted Purchases 160 Sales 350
Factory Expenses 30 Trade payables 26
Administration Expenses 15 Provision for Depreciation 86
Selling Expenses 15 Suspense Account 2
Debenture Interest 10
Interim Dividend Paid 9
835 835
Additional Information :
(a) On 31.3.2015, the company issued bonus shares to the shareholders on 1 : 3 basis. No entry
relating to this has yet been made.
(b) The authorised share capital of the company is 25,000 shares of ` 10 each.
(c) The company on the advice of independent valuer wish to revalue the land at ` 1,80,000.
(d) Declared final dividend 10%.
(e) Suspense account of ` 2,000 represent cash received for the sale of some of the machinery on
1.4.2014. The cost of the machinery was ` 5,000 and the accumulated depreciation thereon
being ` 4,000.
(f) Depreciation is to be provided on plant and machinery at 10% on cost.
You are required to prepare Subhash Limited’s Statement of Profit & Loss for the year ended
31.3.2015 and a balance sheet on that date.
Your answer to include detailed notes only for the following:
(1) Share Capital
(2) Reserves & Surplus
(3) Fixed Assets
Ignore previous years’ figures & taxation.
(Hints: Total of Balance Sheet ` 541; Net profit before dividend ` 83)

5 Internal Reconstruction
BASIC CONCEPTS
Reconstruction  Reconstruction is a process by which affairs of a company
are reorganized by revaluation of assets, reassessment of
liabilities and by writing off the losses already suffered by
reducing the paid up value of shares and/or varying the
rights attached to different classes of shares.
 Reconstruction account is a new account opened to
transfer the sacrifice made by the shareholders for that
part of capital which is not represented by lost assets.
 Reconstruction account is utilized for writing-off
fictitious and intangible assets, writing down over-valued
fixed assets, recording new liability etc.
 If some credit balance remains in the reconstruction
account, the same should be transferred to the capital
reserve account.
 Methods of Internal reconstruction :
 Alteration of share capital :
 Sub-divide or consolidate shares into smaller or
higher denomination
 Conversion of share into stock or vice-versa
 Variation of shareholders’ rights:
 Only the specific rights are changed. There is no
change in the amount of capital.
 Reduction of share capital
 Compromise, arrangements etc.
 Surrender of Shares.

Internal Reconstruction 5.2
Question 1
Green Limited had decided to reconstruct the Balance Sheet since it has accumulated huge
losses. The following is the summarized Balance Sheet of the Company on 31.3.2015 before
reconstruction:
Share Capital: Fixed Assets:
Authorised: Goodwill 20,00,000
1,50,000 Equity Shares of ` 50 each 75,00,000 Building 10,00,000
Subscribed and Paid up Capital: Plant 10,00,000
50,000 Equity Shares of ` 50 each 25,00,000 Computers 25,00,000
1,00,000 Equity Shares of ` 50 Investments Nil
each, ` 40 per share paid up 40,00,000 Current Assets Nil
Secured Loans: Profit and Loss A/c-Loss 20,00,000
12% First Debentures 5,00,000
12% Second Debentures 10,00,000
Current Liabilities:
85,00,000 85,00,000
The following is the interest of Mr. X and Mr. Y in Green Limited:
Mr. X Mr. Y
` `
12% First Debentures 3,00,000 2,00,000
12% Second Debentures 7,00,000 3,00,000
12,00,000 6,00,000
Fully paid up ` 50 shares 3,00,000 2,00,000
Parly paid up shares (` 40 paid up) 5,00,000 5,00,000
The following Scheme of Reconstruction is approved by all parties interested and also by the
Court:
(a) Uncalled capital is to be called up in full and such shares and the other fully paid up
shares be converted into equity shares of ` 20 each.

5.3 Accounting
(b) Mr. X is to cancel ` 7,00,000 of his total debt (other than share amount) and to pay
` 2 lakhs to the company and to receive new 14% First Debentures for the balance
amount.
(c) Mr. Y is to cancel ` 3,00,000 of his total debt (other than equity shares) and to accept
new 14% First Debentures for the balance.
(d) The amount thus rendered available by the scheme shall be utilised in writing off of
Goodwill, Profit and Loss A/c Loss and the balance to write off the value of computers.
You are required to draw the Journal Entries to record the same and also show the Balance Sheet
of the reconstructed company.
Answer
Green Limited
Journal Entries
Dr. Cr.
` `
Bank Account Dr. 10,00,000
To Equity Share Capital Account 10,00,000
(Balance of ` 10 per share on 1,00,000 equity shares
called up as per reconstruction scheme)
Equity Share Capital Account (` 50) Dr. 75,00,000
To Equity Share Capital Account (` 20) 30,00,000
To Capital Reduction Account 45,00,000
(Reduction of equity shares of ` 50 each to shares of ` 20
each as per reconstruction scheme)
12% First Debentures Account Dr. 3,00,000
12% Second Debentures Account Dr. 7,00,000
Trade payables Account Dr. 2,00,000
To X 12,00,000
(The total amount due to X, transferred to his account)
Bank Account Dr. 2,00,000
To X 2,00,000
(The amount paid by X under the reconstruction scheme)
12% First Debentures Account Dr. 2,00,000
12% Second Debentures Account Dr. 3,00,000

Trade payables Account Dr. 1,00,000

To Y 6,00,000
(The total amount due to Y, transferred to his account)
Y Dr. 6,00,000
To 14% First Debentures Account 3,00,000
(The amount due to Y discharged by issue of 14% first debentures)
X Dr. 14,00,000
To 14% First Debentures Account 7,00,000
(The cancellation of ` 7,00,000 out of total debt of
Mr. X and issue of 14% first debentures for the balance
amount as per reconstruction scheme)
Capital Reduction Account Dr. 55,00,000
To Goodwill Account 20,00,000
To Profit and Loss Account 20,00,000
To Computers Account 15,00,000
(The balance amount of capital reduction account utilised in
writing off goodwill, profit and loss account, and computers—
Working Note)
Balance Sheet of Green Limited (and reduced)
as on 31st March, 2015
Particulars Notes `
Total 42,00,000

5.5 Accounting
Assets
a Fixed assets
2 Current assets
Cash and cash equivalents 12,00,000
Total 42,00,000
Notes to accounts
`
1. Share Capital
1,50,000 equity shares of ` 20 each 30,00,000
Total 30,00,000
Secured
14% First Debentures 10,00,000
Total 10,00,000
3. Tangible assets
Building 10,00,000
Plant 10,00,000
Computers 10,00,000
Total 30,00,000
Working Note:
Capital Reduction Account
` `
To Goodwill A/c 20,00,000 By Equity Share Capital A/c 45,00,000
To P & L A/c 20,00,000 By X 7,00,000
To Computers (Bal. Fig.) 15,00,000 By Y 3,00,000
55,00,000 55,00,000

Question 2
The following is the summarised Balance Sheet of Weak Ltd. as on 31.3.2015:
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 1,00,00,000
Trade payables 50,00,000 P & L A/c 6,00,000
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 debenture holders 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.
(ix) It is decided to write off the debit balance of Profit and Loss account.
Pass Journal entries and show the Balance sheet of the company after giving effect to the
above.
Answer
Journal Entries in the books of Weak Ltd.
` `
(i) Equity share capital (` 100) A/c Dr. 1,00,00,000
To Equity Share Capital (` 40) A/c 40,00,000
To Capital Reduction A/c 60,00,000

5.7 Accounting
(Being conversion of equity share capital of ` 100 each into

` 40 each as per reconstruction scheme)
(ii) 12% Cumulative Preference Share capital (` 100) A/c Dr. 50,00,000
To 12% Cumulative Preference Share Capital (` 60) A/c 30,00,000
(Being conversion of 12% cumulative preference share
capital of ` 100 each into ` 60 each as per reconstruction
scheme)
(iii) 10% Debentures A/c Dr. 40,00,000
(Being 12% debentures issued to 10% debenture-holders
for 70% of their claims. The balance transferred to capital
reduction account as per reconstruction scheme)
(iv) Trade payables A/c Dr. 20,00,000
To Equity Share Capital A/c 12,00,000
(Being a creditor of ` 20,00,000 agreed to surrender his
claim by 40% and was allotted 30,000 equity shares of ` 40
each in full settlement of his dues as per reconstruction
scheme)
(v) Provision for Taxation A/c Dr. 1,00,000
Capital Reduction A/c Dr. 50,000
To current assets(bank A/c) A/c 1,50,000
(Being liability for taxation settled)
(vi) Capital Reduction A/c Dr. 99,00,000
To P & L A/c 6,00,000
To Fixed Assets A/c 37,50,000
To Current Assets A/c 55,00,000
To Investments A/c 50,000
(Being amount of Capital Reduction utilized in writing off
P & L A/c (Dr.) Balance, Fixed Assets, Current Assets,
Investments through capital reduction account)

(vii) Capital Reduction A/c Dr 50,000

To capital Reserve A/c 50,000
(Being balance in capital reduction account transferred to
capital reserve account)
Balance Sheet of Weak Ltd. (and reduced) as on 31.3.2015
Particulars Notes `
b Reserves and Surplus 2 50,000
Total 1,40,50,000
Assets
a Fixed assets
b Investments 5 9,50,000
2 Current assets 6 43,50,000
Total 1,40,50,000
Notes to accounts
`
1. Share Capital
50,000 12% Cumulative Preference shares of ` 60 each 30,00,000
Total 82,00,000

5.9 Accounting

Capital Reserve 50,000
Secured
4. Tangible assets
Fixed Assets 1,25,00,000
Adjustment under scheme of reconstruction (37,50,000) 87,50,000
5. Investments 10,00,000
Adjustment under scheme of reconstruction (50,000) 9,50,000
6. Current assets 45,00,000
Working Note:
Capital Reduction Account
` `
To Current Asset 50,000 By Equity share capital 60,00,000
To P & L A/c 6,00,000 By 12% Cumulative 20,00,000
preference share capital
To Fixed assets 37,50,000 By 10% Debentures 12,00,000
To Current assets 55,00,000 By Trade payables 8,00,000
To Investment 50,000
To Capital Reserve (bal. fig.) 50,000 _________
1,00,00,000 1,00,00,000
Question 3
The following is the summarized Balance Sheet of X Ltd. as on 31 st March, 2015:
12,000, 10% Preference shares of Goodwill 90,000
` 100 each 12,00,000
24,000, Equity shares of ` 100 each 24,00,000 Land & building 12,00,000
10% Debentures 6,00,000 Plant & machinery 18,00,000
Bank overdraft 6,00,000 Inventories 2,60,000

Trade payables 3,00,000 Trade receivables 2,80,000

Cash 30,000
51,00,000 51,00,000
On the above date, the company adopted the following scheme of reconstruction:
(i) The equity shares are to be reduced to shares of ` 40 each fully paid and the preference
shares to be reduced to fully paid shares of ` 75 each.
(ii) The debenture holders took over Inventories and Trade receivables in full satisfaction of
their claims.
(iii) The Land and Building to be appreciated by 30% and Plant and machinery to be
depreciated by 30%.
(iv) The debit balance of profit and loss account and intangible assets are to be eliminated.
(v) Expenses of reconstruction amounted to ` 5,000.
Give journal entries incorporating the above scheme of reconstruction and prepare the
reconstructed Balance Sheet.
Answer
In the books of X Ltd.
Journal Entries
31st March, 2015 ` `
(i) Equity Share Capital A/c (` 100) Dr. 24,00,000
To Equity Share Capital A/c (` 40) 9,60,000
(Being 24,000 equity shares of ` 100 each reduced to ` 40
each fully paid up)
(ii) 10% Preference Share Capital A/c (` 100) Dr. 12,00,000
To 10% Preference Share Capital A/c (` 75) 9,00,000
(Being 12,000 Preference shares of ` 100 each reduced to ` 75
each fully paid up)
(iii) 10% Debentures A/c Dr. 6,00,000
To Inventories A/c 2,60,000
To Trade receivables A/c 2,80,000

5.11 Accounting
To Capital Reduction A/c 60,000

(Being debenture holders given Inventories and Trade
receivables in full settlement of their claims)
(iv) Land & Building A/c Dr. 3,60,000
(Being Land & Building appreciated by 30%)
(v) Capital reductionA/c Dr. 5,000
To Cash A/c 5,000
(Being expenses of reconstruction paid)
(vi) Capital Reduction A/c Dr. 20,70,00
0
To Goodwill A/c 90,000
To Profit and Loss A/c 14,40,000
To Plant & Machinery A/c 5,40,000
(Being various losses written off, assets written down
through Capital Reserve A/c )
(vii) Capital Reduction Dr. 85,000
To Capital Reserve A/c (Bal. Fig.) 85,000
(Being balance in Capital Reduction A/c transferred to
Capital Reserve A/c)
Balance Sheet (And Reduced) of X Ltd.
as at 31st March, 2015
Particulars Notes No. `
b Short term borrowings 6,00,000
Total 28,45,000
Assets

a Fixed assets
2 Current assets
Cash and cash equivalents (30,000 -5,000) 25,000
Total 28,45,000
Notes to accounts
`
1. Share Capital
24,000 equity shares of ` 40 each fully paid up 9,60,000
12,000, 10% Preference shares of ` 75 each fully paid up 9,00,000
Total 18,60,000
Capital Reserve 85,000
3. Tangible assets
Land and Building 15,60,000
Plant and Machinery 12,60,000
Total 28,20,000
Question 4
The following scheme of reconstruction has been approved for Win Limited:
(i) The shareholders to receive in lieu of their present holding at 1,00,000 shares of ` 10
each, the following:
(a) New fully paid ` 10 Equity shares equal to 3/5 th of their holding.
(b) 10% Preference shares fully paid to the extent of 1/5 th of the above new equity
shares.
(c) ` 40,000, 8% Debentures.
(ii) An issue of ` 1 lakh 10% first debentures was made and allotted, payment for the same
being received in cash forthwith.
(iii) Goodwill which stood at ` 1,40,000 was completely written off.
(iv) Plant and machinery which stood at ` 2,00,000 was written down to ` 1,50,000.
(v) Freehold property which stood at ` 1,50,000 was written down by ` 50,000.

5.13 Accounting
You are required to draw up the necessary Journal entries in the Books of Win Limited for the
above reconstruction. Suitable narrations to Journal entries should form part of your answer.
Answer
Journal Entries
` `
Equity Share Capital (old) A/c Dr. 10,00,000
To 10% Preference Share Capital A/c 1,20,000
To 8% Debentures A/c 40,000
(Being new equity shares, 10% Preference Shares,
8% Debentures issued and the balance transferred to
Reconstruction account as per the Scheme)
Bank A/c Dr. 1,00,000
To 10% First Debentures A/c 1,00,000
(Being allotment of 10% first Debentures)
Capital Reduction A/c Dr. 2,40,000
To Goodwill Account 1,40,000
To Plant and Machinery Account 50,000
To Freehold Property Account 50,000
(Being Capital Reduction Account utilized for writing
off of Goodwill, Plant and Machinery and Freehold
property as per the scheme)
Question 5
M/s Platinum Limited has decided to reconstruct the Balance Sheet since it has accumulated
huge losses. The following is the Balance Sheet of the company as on
31st March, 2014 before reconstruction:
Liabilities Amount (`) Assets Amount (`)
Share Capital (`)
50,000 shares of ` 50 Goodwill 22,00,000
each fully paid up 25,00,000 Land & Building 42,70,000
1,00,000 shares of ` 50 Machinery 8,50,000
each ` 40 paid up 40,00,000 Computers 5,20,000

Capital Reserve 5,00,000 Inventories 3,20,000

8% Debentures of ` 100 each 4,00,000 Trade receivables 10,90,000
12% Debentures of ` 100 each 6,00,000 Cash at Bank 2,68,000
Trade Creditors 12,40,000 Profit & Loss Account 7,82,000
Outstanding Expenses 10,60,000
Total 1,03,00,000 Total 1,03,00,000
Following is the interest of Mr. Shiv and Mr. Ganesh in M/s Platinum Limited:
Mr. Shiv Mr. Ganesh
8% Debentures 3,00,000 1,00,000
12% Debentures 4,00,000 2,00,000
Total 7,00,000 3,00,000
The following scheme of internal reconstruction was framed and implemented, as approved by
the court and concerned parties:
(1) Uncalled capital is to be called up in full and then all the shares to be converted into
Equity Shares of ` 40 each.
(2) The existing shareholders agree to subscribe in cash, fully paid up equity shares of 40
each for ` 12,50,000.
(3) Trade Creditors are given option of either to accept fully paid equity shares of ` 40 each
for the amount due to them or to accept 70% of the amount due to them in cash in full
settlement of their claim. Trade Creditors for ` 7,50,000 accept equity shares and rest of
them opted for cash towards full and final settlement of their claim.
(4) Mr. Shiv agrees to cancel debentures amounting to ` 2,00,000 out of total debentures
due to him and agree to accept 15% Debentures for the balance amount due. He also
agree to subscribe further 15% Debentures in cash amounting to
` 1,00,000.
(5) Mr. Ganesh agrees to cancel debentures amounting to ` 50,000 out of total debentures
due to him and agree to accept 15% Debentures for the balance amount due.
(6) Land & Building to be revalued at ` 51,84,000, Machinery at ` 7,20,000, Computers at
` 4,00,000, Inventories at ` 3,50,000 and Trade receivables at 10% less to as they are
appearing in Balance Sheet as above.
(7) Outstanding Expenses are fully paid in cash.
(8) Goodwill and Profit & Loss A/c will be written off and balance, if any, of Capital Reduction
A/c will be adjusted against Capital Reserve.
You are required to pass necessary Journal Entries for all the above transactions and draft the
company's Balance Sheet immediately after the reconstruction.

5.15 Accounting
Answer
Journal Entries
` `
Bank A/c Dr. 10,00,000
(Being money on final call received)
Equity share capital (` 50) A/c Dr. 75,00,000
To Equity share capital (` 40) A/c 60,00,000
(Being conversion of equity share capital of ` 50 each
into ` 40 each as per reconstruction scheme)
Bank A/c Dr. 12,50,000
(Being new shares allotted at ` 40 each)
Trade Creditors A/c Dr. 12,40,000
To Bank A/c (4,90,000 x 70%) 3,43,000
(Being payment made to creditors in shares or cash to
the extent of 70% as per reconstruction scheme)
8% Debentures A/c Dr. 3,00,000
To Shiv A/c 7,00,000
(Being cancellation of 8% and 12% debentures of Shiv)
Shiv A/c Dr. 8,00,000
(Being issuance of new 15% debentures and balance
transferred to capital reduction account as per
reconstruction scheme)
Bank A/c Dr. 1,00,000

(Being new debentures subscribed by Shiv)

To Ganesh A/c 3,00,000
(Being cancellation of 8% and 12% debentures of
Ganesh)
Ganesh A/c Dr. 3,00,000
(Being issuance of new 15% debentures and balance
transferred to capital reduction account as per
Land and Building Dr.
(51,84,000 – 42,70,000) 9,14,000
Inventories Dr. 30,000
(Being value of assets appreciated)
Outstanding expenses A/c Dr. 10,60,000
To Bank A/c 10,60,000
(Being outstanding expenses paid in cash)
Capital Reduction A/c Dr. 33,41,000
To Machinery A/c 1,30,000
To Computers A/c 1,20,000
To Goodwill A/c 22,00,000
P & L A/c (Dr.) balance, goodwill and downfall in value
of other assets)
Capital Reserve A/c Dr. 5,00,000
(Being debit balance of capital reduction account
adjusted against capital reserve)

5.17 Accounting
Balance Sheet (as reduced) as on 31.3.2014

Particulars Notes `
Total 88,50,000
Assets
a Fixed assets
2 Current assets
a Inventories 3,50,000
b Trade receivables 9,81,000
c Cash and cash equivalents 12,15,000
Total 88,50,000
Notes to accounts
`.
1. Share Capital
2,00,000 Equity shares of ` 40 80,00,000
Secured
15% Debentures (assumed to be secured) 8,50,000
3. Tangible assets
Land & Building 51,84,000
Machinery 7,20,000
Computers 4,00,000 63,04,000
Working Notes:
1. Cash at Bank Account
To Balance b/d 2,68,000 By Trade Creditors A/c 3,43,000

To Equity Share capital A/c 10,00,000 By Outstanding expenses A/c 10,60,000

To Equity Share Capital A/c 12,50,000 By Balance c/d (bal. fig.) 12,15,000
26,18,000 26,18,000
2. Capital Reduction Account
To Machinery A/c 1,30,000 By Equity Share Capital A/c 15,00,000
To Computers A/c 1,20,000 By Trade Creditors A/c 1,47,000
To Trade receivables A/c 1,09,000 By Shiv A/c 2,00,000
To Goodwill A/c 22,00,000 By Ganesh A/c 50,000
To Profit and Loss A/c 7,82,000 By Land & Building 9,14,000
By Inventories 30,000
By Capital Reserve A/c 5,00,000
33,41,000 33,41,000
Question 6
The summarised Balance Sheet of M/s. Ice Ltd. as on 31-03-2015 is given below:
1,00,000 Equity shares of 10,00,000 Freehold property 5,50,000
` 10 each fully paid up Plant and machinery 2,00,000
4,000, 8% Preference shares of 4,00,000 Trade investment (at cost) 2,00,000
` 100 each fully paid Trade receivables 4,50,000
6% Debentures 4,00,000 Inventories-in trade 3,00,000
(secured by freehold Profit and loss account 5,25,000
property)
Arrear interest 24,000 4,24,000
Director’s loan 3,00,000
22,25,000 22,25,000
The Board of Directors of the company decided upon the following scheme of reconstruction
with the consent of respective stakeholders:
(i) Preference shares are to be written down to ` 80 each and equity shares to ` 2 each.
(ii) Preference dividend in arrear for 3 years to be waived by 2/3 rd and for balance 1/3 rd,
equity shares of ` 2 each to be allotted.

5.19 Accounting
(iii) Debentureholders agreed to take one freehold property at its book value of
` 3,00,000 in part payment of their holding. Balance debentures to remain as liability of
the company.
(iv) Arrear debenture interest to be paid in cash.
(v) Remaining freehold property to be valued at ` 4,00,000.
(vi) Investment sold out for ` 2,50,000.
(vii) 75% of Director’s loan to be waived and for the balance, equity shares of ` 2 each to be
allotted.
(viii) 40% of Trade receivables, 80% of Inventories and 100% of debit balance of profit and
loss account to be written off.
(ix) Company’s contractual commitments amounting to ` 6,00,000 have been settled by
paying 5% penalty of contract value.
Show the Journal Entries for giving effect to the internal re-construction and draw the Balance
Sheet of the company after effecting the scheme.
Answer
In the books of Ice Ltd.
Journal Entries
Particulars Debit Credit
` `
i 8% Preference share capital A/c (` 100 each) Dr. 4,00,000
To 8% Preference share capital A/c (` 80 each) 3,20,000
To Capital reduction A/c 80,000
(Being the preference shares of ` 100 each reduced
to ` 80 each as per the approved scheme)
ii Equity share capital A/c (` 10 each) Dr. 10,00,000
To Equity share capital A/c (` 2 each) 2,00,000
To Capital reduction A/c 8,00,000
(Being the equity shares of ` 10 each reduced to ` 2 each)
iii Capital reduction A/c Dr. 32,000
To Equity share capital A/c (` 2 each) 32,000
(Being arrears of preference share dividend of one year to
be satisfied by issue of 16,000 equity shares of ` 2 each)
iv 6% Debentures A/c Dr. 3,00,000
To Freehold property A/c 3,00,000
(Being claim settled in part by transfer of freehold
property)

v Accrued debenture interest A/c Dr. 24,000

To Bank A/c 24,000
(Being accrued debenture interest paid)
vi Freehold property A/c Dr. 1,50,000
(Being appreciation in the value of freehold property)
vii Bank A/c Dr. 2,50,000
To Trade investment A/c 2,00,000
To Capital reduction A/c 50,000
(Being trade investment sold on profit)
viii Director’s loan A/c Dr. 3,00,000
To Equity share capital A/c (` 2 each) 75,000
(Being director’s loan waived by 75% and balance
being discharged by issue of 37,500 equity shares of
` 2 each)
ix Capital Reduction A/c Dr. 9,75,000
To Profit and loss A/c 5,25,000
To Inventories-in-trade A/c 2,40,000
To Bank A/c To
30,000
Bank A/c
(Being various assets, penalty on cancellation of
contract, profit and loss account debit balance written
off through capital reduction account)
x Capital Reduction A/c Dr. 2,98,000
To Capital reserve A/c 2,98,000
(Being balance transferred to capital reserve account
as per the scheme)
Balance Sheet of Ice Ltd. (As reduced)
Particulars Notes No. `
Long-term borrowings 3 1,00,000

5.21 Accounting
Total 11,26,000
Assets
a Fixed assets
2 Current assets
a Inventories 60,000
Total 11,26,000
Note to Accounts `
1. Share Capital
(out of which 53,500 shares have been issued for consideration other than cash)
4,000, 8% Preference shares of ` 80 each fully paid up 3,20,000
Total 6,27,000
Capital Reserve 2,98,000
Secured
4. Tangible assets
Freehold property 4,00,000
Plant and machinery 2,00,000
Total 6,00,000
5. Cash and cash equivalents
Cash at bank (2,50,000 – 24,000 –30,000) 1,96,000
Question 7
The Balance Sheet of M/s. Cube Limited as on 31-03-2015 is given below:

Particulars Note No. Amount

(` in lakh)
Equity & Liabilities
Shareholders' Funds
Shares’ Capital 1 700
Reserves & Surplus 2 (261)
Non-Current Liabilities
Long term Borrowings 3 350
Current Liabilities
Trade Payables 4 51
Other Liabilities 5 12
Total 852
Assets
Non-Current Assets
Fixed Assets
Tangible Assets 6 375
Current Assets
Current Investments 7 100
Inventories 8 150
Trade Receivables 9 225
Cash & Cash Equivalents 10 2
Total 852
Notes to Accounts:
` in Lakhs
(1) Share Capital
Authorised :
100 lakh shares of ` 10 each 1,000
4 lakh, 8% Preference Shares of ` 100 each 400
1,400
Issued, Subscribed and paid up:
50 lakh Equity Shares of ` 10 each, full paid up 500
2 lakh 8% Preference Shares of ` 100 each, fully paid up 200

5.23 Accounting
Total 700
(2) Reserves and Surplus
Debit balance of Profit & Loss A/c (261)
(3) Long Term Borrowings
6% Debentures (Secured by Freehold Property) 200
Directors’ Loan 150
350
(4) Trade Payables
Trade payables for Goods 51
(5) Other Current Liabilities
Interest Accrued and Due on 6% Debentures 12
(6) Tangible Assets
Freehold Property 275
Plant & Machinery 100
375
(7) Current Investment
Investment in Equity Instruments 100
(8) Inventories
Finished Goods 150
(9) Trade Receivables
Trade receivables for Goods 225
(10) Cash and Cash Equivalents
Balance with Bank 2
with the consent of respective shareholders:
(1) Preference Shares are to be written down to ` 80 each and Equity Shares to
` 2 each.
(2) Preference Shares Dividend in arrears for 3 years to be waived by 2/3 rd and for balance
1/3 rd, Equity Shares of ` 2 each to be allotted.
(3) Debenture holders agreed to take one Freehold Property at its book value of ` 150 lakh
in part payment of their holding. Balance Debentures to remain as liability of the
company.
(4) Interest accrued and due on Debentures to be paid in cash.

(5) Remaining Freehold Property to be valued at ` 200 lakh.

(6) All investments sold out for ` 125 lakh.
(7) 70% of Directors' loan to be waived and for the balance, Equity Shares of ` 2 each to be
allowed.
(8) 40% of Trade receivables and 80% of Inventories to be written off.
(9) Company's contractual commitments amounting to ` 300 lakh have been settled by
You are required to :
(a) Pass Journal Entries for all the transactions related to internal reconstruction;
(b) Prepare Reconstruction Account; and
(c) Prepare notes on Share Capital and Tangible Assets to Balance Sheet, immediately after
the implementation of scheme of internal reconstruction.
Answer
(a) Journal Entries in the books of M/s. Cube Ltd.
(i) 8% Preference share capital A/c (` 100 Dr. 200
each)
To 8% Preference share capital A/c (` 80 160
each)
To Capital Reduction A/c 40
(Being the preference shares of ` 100 each
reduced to ` 80 each as per the approved
scheme)
(ii) Equity share capital A/c (` 10 each) Dr. 500
To Equity share capital A/c (` 2 each) 100
(Being the equity shares of ` 10 each
reduced to ` 2 each)
(iii) Capital Reduction A/c Dr. 16
(Being 1/3rd arrears of preference share
dividend of 3 years to be satisfied by issue of 8
lakhs equity shares of ` 2 each)
(iv) 6% Debentures A/c Dr. 150

5.25 Accounting
To Freehold property A/c 150

(Being claim of Debenture holders settled
in part by transfer of freehold property)
(v) Accrued debenture interest A/c Dr. 12
To Bank A/c 12
(Being accrued debenture interest paid)
(vi) Freehold property A/c Dr. 75
(Being appreciation in the value of freehold
property)
(vii) Bank A/c Dr. 125
To Investments A/c 100
(Being investment sold at profit)
(viii) Director’s loan A/c Dr. 150
(Being director’s loan waived by 70% and
balance being discharged by issue of 22.5
lakhs equity shares of ` 2 each)
(ix) Capital Reduction A/c Dr. 483
To Profit and loss A/c 261
To Trade receivables A/c (225 x 40%) 90
To Inventories-in-trade A/c (150 x 80%) 120
To Bank A/c (300 x 5%) To
15Bank A/c
(Being certain value of various assets,
penalty on cancellation of contract, profit
and loss account debit balance written off
through Capital Reduction Account)
(x) Capital Reduction A/c 143
To Capital reserve A/c 143
(Being balance transferred to capital
reserve account as per the scheme)
(b) Capital Reduction Account
Dr. Cr.
To Equity Share Capital 16 By Preference Share Capital 40
To Trade receivables 90 By Equity Share Capital 400

To Finished Goods 120 By Freehold Property 75

To Profit & Loss A/c 261 By Bank 25
To Bank A/c 15 By Director’s Loan 105
To Capital Reserve 143
645 645
(c) Notes to Balance Sheet
1. Share Capital
Authorised:
100 lakhs Equity shares of ` 2 each 200
4 lakhs 8% Preference shares of ` 80 each 320
520
Issued:
80.5 lakhs equity shares of ` 2 each 161
2 lakhs Preference Shares of ` 80 each 160
321
2. Tangible Assets
Freehold Property 275
Less: Utilized to pay Debenture holders (150)
125
Add: Appreciation 75 200
Plant and Machinery 100
300
Question 8
The Balance Sheet of M/s Clean Ltd. as on 31 st March, 2015 was summarized as follows:
Liabilities Amount Assets Amount
` `
Share Capital: Land & Building 75,00,000
Equity Shares of ` 50 each, fully paid up 60,00,000 Plant & Machinery 22,00,000
9% Preference Shares of ` 10 each, fully paid 40,00,000 Trade Investment 16,50,000
up Inventories 9,50,000
7% Debentures (secured by plant & machinery) 23,00,000 Trade Receivable 18,00,000

5.27 Accounting
Cash and Bank

8% Debentures 17,00,000 Balances 3,60,000
Trade Payables 6,00,000 Profit & Loss
Provision for Tax 75,000 Account 2,15,000
1,46,75,000 1,46,75,000
duly approved by all concerned parties:
(1) The equity shareholders agreed to receive in lieu of their present holding of ` 1,20,000
shares of ` 50 each as under:
(a) New fully paid equity shares of ` 10 each equal to 2/3 rd of their holding.
(b) 9% preference shares of ` 8 each to the extent of 25% of the above new equity
share capital.
(c) ` 2,80,000, 10% debentures of ` 80 each.
(2) The preference shareholders agreed that their ` 10 shares should be reduced to ` 8 by
cancellation of ` 2 per share. They also agreed to subscribe for two new equity shares of
` 10 each for every five preference shares held.
(3) The taxation liability of the company is settled at ` 66,000 and the same is paid
immediately.
(4) One of the trade creditors of the company to whom the company owes ` 1,00,000
decides to forgo 30% of his claim. He is allotted equity shares of ` 10 each in full
satisfaction of his balance claim.
(5) Other trade creditors of ` 5,00,000 are given option of either to accept fully paid 9%
preference shares of ` 8 each for the amount due to them or to accept 80% of the
amount due to them in cash in full settlement of their claim. Trade creditors for
` 3,50,000 accepted preference shares option and rest of them opted for cash towards
full settlement of their claim.
(6) Company's contractual commitments amounting to ` 6,50,000 have been settled by
(7) Debenture holders having charge on plant and machinery accepted plant and machinery
in full settlement of their dues.
(8) The rate of interest on 8% debentures is increased to 10%. The debenture holders surrender
their existing debenture of ` 50 each and agreed to accept 10% debentures of
` 80 each for every two debentures held by them.
(9) The land and building to be depreciated by 5%.
(10) The debit balance of profit and loss account is to be eliminated.

(11) 1/4th of trade receivables and 1/5 th of inventory to be written off.

Pass Journal Entries and prepare Balance Sheet after completion of the reconstruction
scheme in the books of M/s Clean Ltd. as per Schedule III to the Companies Act, 2013.
Answer
(i) Journal Entries
` `
(i) Equity share capital (` 50) A/c Dr. 60,00,000

To Equity share capital (` 10) A/c 8,00,000
To 9% Preference share capital A/c (25,000 x ` 8) 2,00,000
To 10% Debentures A/c (3,500 x ` 80) 2,80,000
(Being payment made in lieu of equity share capital of
` 50 each by issue of equity shares of ` 10 each, 9%
Preference share capital and 10% Debentures as per
(ii) 9% Preference Share capital (` 10) A/c Dr. 40,00,000
To 9% Preference Share Capital (` 8) A/c 32,00,000
(Being 9% preference share capital of ` 10 each reduced
to ` 8 each as per reconstruction scheme)
(iii) Bank A/c Dr. 16,00,000
(Being preference share holders subscribed for 2 new
equity shares of 10 each against every 5 shares)
(iv) (a) Provision for Taxation A/c Dr. 75,000
To Taxation Liability A/c 66,000
(Being liability for taxation settled)
(b) Taxation Liability A/c Dr. 66,000
To Bank A/c 66,000
(Being liability for taxation paid)

Holding interpreted as number of shares i.e. number of newly issued shares computed as 2/3 rd of 1,20,000
= 80,000

5.29 Accounting
(v) Trade payables A/c Dr. 1,00,000

To Equity share capital A/c (7,000 x ` 10) 70,000
(Being payment made to creditors in shares to the extent
of 70% as per reconstruction scheme)
(vi) Trade Payables A/c Dr. 5,00,000
To 9% Preference share capital A/c (43,750 x ` 8) 3,50,000
(Being payment made to creditors in shares and cash as
per reconstruction scheme)
(vii) Capital Reduction A/c Dr. 26,000
To Bank A/c 26,000
(Being contractual commitment settled by payment of 4%
penalty)
(viii) 7% Debentures A/c Dr. 23,00,000
To Plant & Machinery A/c 22,00,000
(Being 7% debentures holders settled through charge of
plant & machinery as per reconstruction scheme)
(ix) 8% Debentures A/c (34,000 x ` 50) Dr. 17,00,000
To 10% Debentures A/c (17,000 x ` 80) 13,60,000
(Being conversion of 8% debentures to 10% debentures
at one for every two debentures held by them as per
(x) Capital Reduction A/c Dr. 12,30,000
To Land & building A/c 3,75,000
To Inventories A/c 1,90,000
Profit & loss Dr. bal., Land & building, Current Assets,
Inventories through capital reduction account)

(xi) Capital Reduction A/c Dr. 47,73,000

To Capital Reserve A/c 47,73,000
(Being balance in capital reduction account transferred to
capital reserve account)
(ii) Balance Sheet of M/s Clean Ltd. (as reduced) as on 31.3.2015

Particulars Notes `
a Share Capital 1 62,20,000
a Long-term Borrowings 3 16,40,000
Total 1,26,33,000
Assets
a Fixed Assets
Tangible Assets 4 71,25,000
b Investments 16,50,000
2 Current assets
b Trade Receivables 6 13,50,000
c Cash and Cash equivalents 17,48,000
Total 1,26,33,000
Notes to accounts
`
1. Share Capital
(out of which 7,000 equity shares have been issued for
consideration for other that cash)
4,68,750 Preference shares of ` 8 each 37,50,000

5.31 Accounting
(out of which 43,750 equity shares have been issued for

62,20,000
consideration for other that cash)
Capital Reserve 47,73,000
Secured
20,500 10% Debentures of ` 80 each 16,40,000
4. Tangible assets
Land & building 75,00,000
5. Inventories 9,50,000
6. Trade receivables 18,00,000
Working Notes:
1. Cash at Bank Account
To Balance b/d 3,60,000 By Taxation liability 66,000
To Equity Share capital A/c 16,00,000 By Trade Payables A/c 1,20,000
By Penalty A/c 26,000
By Balance c/d (bal. fig.) 17,48,000
19,60,000 19,60,000
2. Capital Reduction Account
To Land & building A/c 3,75,000 By Equity Share Capital A/c 47,20,000
To Machinery A/c 2,15,000 By 9% Preference share capital 8,00,000
To Trade receivables A/c 4,50,000 By 7% Debentures 1,00,000
To Inventories A/c 1,90,000 By Provision for tax 9,000
To Bank 26,000 By Trade Payables 60,000
To Capital Reserve (30,000 + 30,000)
(bal. fig.) 47,73,000 By 8% Debentures 3,40,000
60,29,000 60,29,000

Exercise
1. The paid-up capital of Toy Ltd. amounted to ` 2,50,000 consisting of 25,000 equity shares of ` 10
each.
Due to losses incurred by the company continuously, the directors of the company prepared a scheme
for reconstruction which was duly approved by the court. The terms of reconstruction were as under:
(i) In lieu of their present holdings, the shareholders are to receive:
(a) Fully paid equity shares equal to 2/5th of their holding.
(b) 5% preference shares fully paid-up to the extent of 20% of the above new equity
shares.
(c) 3,000 6% second debentures of ` 10 each.
(ii) An issue of 2,500 5% first debentures of ` 10 each was made and fully subscribed in cash.
(iii) The assets were reduced as follows:
(a) Goodwill from ` 1,50,000 to ` 75,000.
(b) Machinery from ` 50,000 to ` 37,500.
(c) Leasehold premises from ` 75,000 to ` 62,500.
Show the journal entries to give effect to the above scheme of reconstruction.

6 Amalgamation
AS 14  Amalgamation means joining of two or more existing
companies into one company, the joined companies lose
their identity and form themselves into a new company.
 In absorption, an existing company takes over the business
of another existing company. Thus, there is only one
liquidation and that is of the merged company.
 A company which is merged into another company is
called a transferor company or a vendor company.
 A company into which the vendor company is merged is
called transferee company or vendee company or
purchasing company.
 In amalgamation in the nature of merger there is genuine
pooling of:
 Assets and liabilities of the amalgamating companies,
 Shareholders’ interest, Also the business of the
transferor company is intended to be carried on by the
transferee company.
 In amalgamation in the nature of purchase, one company
acquires the business of another company.
 Purchase Consideration can be defined as the aggregate of
the shares and securities issued and the payment made in
form of cash or other assets by the transferee company to
the share holders of the transferor company.
 There are two main methods of accounting for
amalgamation:
 The pooling of interests method, and
 The purchase method.
 Under pooling of interests method, the assets, liabilities
and reserves of the transferor company will be taken over

Amalgamation 6.2
by transferee company at existing carrying amounts.

Under purchase method, the assets and liabilities of the
transferor company should be incorporated at their existing
carrying amounts or the purchase consideration should be
allocated to individual identifiable assets and liabilities on the
basis of their fair values at the date of amalgamation.
Question 1
What are the conditions, which, according to AS 14 on Accounting for Amalgamations, must
be satisfied for an amalgamation in the nature of merger?
Answer
According to AS 14 on Accounting for Amalgamations; the following conditions must be
satisfied for an amalgamation in the nature of merger:
(i) All the assets and liabilities of the transferor company become, after amalgamation, the
assets and liabilities of the transferee company.
(ii) Shareholders holding not less than 90% of the face value of the equity shares of the
transferor company (other than the equity shares already held therein, immediately before the
amalgamation, by the transferee company or its subsidiaries or their nominees) become
equity shareholders of the transferee by virtue of the amalgamation.
(iii) The consideration for the amalgamation receivable by those equity shareholders of the
transferor company who agree to become equity shareholders of the transferee company is
discharged by the transferee company wholly by the issue of equity shares in the transferee
company, except that cash may be paid in respect of any fractional shares.
(iv) The business of the transferor company is intended to be carried on, after the
amalgamation, by the transferee company.
(v) No adjustment is intended to be made to the book values of the assets and liabilities of
the transferor company when they are incorporated in the financial statements of the
transferee company except to ensure uniformity of accounting policies.
If any one of the condition is not satisfied in a process of amalgamation, it cannot be treated
as amalgamation in the nature of merger.
Question 2
Distinguish between (i) the pooling of interests method and (ii) the purchase method of
recording transactions relating to amalgamation.

6.3 Accounting
Answer
The following are the points of distinction between (i) the pooling of interests method and (ii)
the purchase method of recording transactions relating to amalgamation:
(i) The pooling of interests method is applied in case of an amalgamation in the nature of
merger whereas purchase method is applied in the case of an amalgamation in the
nature of purchase.
(ii) In the pooling of interests method all the reserves of the transferor company are also
recorded by the transferee company in its books of account while in the purc hase method
the transferee company records in its books of account only the assets and liabilities
taken over, the reserves, except the statutory reserves, of the transferor company are not
aggregated with those of the transferee company.
(iii) Under the pooling of interests method, the difference between the consideration paid and
the share capital of the transferor company is adjusted in the general reserve or other
reserves of the transferee company. Under the purchase method, the difference between
the consideration and net assets taken over is treated by the transferee company as
goodwill or capital reserve.
(iv) Under the pooling of interests method, the statutory reserves are recorded by the
transferee company like all other reserves without opening amalgamation adjustment
account. In the purchase method, while incorporating statutory reserves the transferee
company has to open amalgamation adjustment account debiting it with the amount of
the statutory reserves being incorporated.
Question 3
The following are the summarised Balance Sheets of Yes Ltd. and No Ltd. as on 31st October,
2014:
Yes Ltd. No Ltd.
` (in crores) ` (in crores)
Sources of funds:
Share capital:
Authorised 25 5
Issued and Subscribed :
Equity Shares of ` 10 each fully paid 12 5
Reserves and surplus 88 10
Shareholders funds 100 15
Unsecured loan from Yes Ltd. — 10
100 25
Funds employed in :
Fixed assets: Cost 70 30

Amalgamation 6.4
Less: Depreciation (50) (24)

Written down value 20 6
Investments at cost:
30 lakhs equity shares of ` 10 each 3
Long-term loan to No. Ltd. 10
Current assets 100 34
Less : Current liabilities (33) 67 (15) 19
100 25
On that day Yes Ltd. absorbed No Ltd. The members of No Ltd. are to get one equity sh are of
Yes Ltd. issued at a premium of ` 2 per share for every five equity shares held by them in No
Ltd. The necessary approvals are obtained.
You are asked to pass journal entries in the books of the two companies to give effect to the
above.
Answer
Journal Entries in the books of No Ltd.
(Rupees in crores)
Dr. Cr.
Realisation Account Dr. 64.00
To Fixed Assets Account 30.00
To Current Assets Account 34.00
(Being the assets taken over by Yes Ltd. transferred to
Realisation Account)
Provision for depreciation Account Dr. 24.00
Current Liabilities Account Dr. 15.00
Unsecured Loan from Yes Ltd. Account Dr. 10.00
To Realisation Account 49.00
(Being the transfer of liabilities and provision to
Realisation Account)
Yes Ltd. Dr. 1.2
(Being the amount of consideration due from Yes Ltd. credited
to Realisation Account)
Equity Shareholders Account Dr. 13.80
(Being the loss on realisation transferred to equity share-
holders account)

6.5 Accounting
Equity Share Capital Account Dr. 5.00

Reserves and Surplus Account Dr. 10.00
To Equity Shareholders Account 15.00
(Being the amount of share capital, reserves and surplus
credited to equity shareholders account)
Equity shares of Yes Ltd. Dr. 1.20
To Yes Ltd. 1.20
(Being the receipt of 10 lakhs equity shares of
` 10 each at ` 12 per share for allotment to shareholders)
Equity shareholders Account Dr. 1.20
To Equity shares of Yes Ltd. 1.20
(Being the distribution of equity shares received from Yes
Ltd. to shareholders)
Journal Entries in the books of Yes Ltd.
(Rupees in crores)
Dr. Cr.
Business Purchase Account Dr. 1.2
To Liquidator of No Ltd. Account 1.2
(Being the amount of purchase consideration agreed under
approved scheme of amalgamation- W.N. 1)
Fixed Assets Dr. 6.00
Current Assets Dr. 34.00
To Current Liabilities 15.00
To Unsecured Loan (from Yes Ltd.) 10.00
To Business Purchase Account 1.20
To Reserve & Surplus A/c 10.00

To Profit & loss A/c 3.80
(Being the assets and liabilities taken over and the surplus
transferred to capital reserve)
Liquidator of No Ltd. Dr. 1.20

As amalgamation in the nature of merger so balancing figure will be transferred to Profit & Loss account.

Amalgamation 6.6
To Equity Share Capital Account 1.00

To Securities Premium Account 0.20
(Being the allotment to shareholders of No Ltd.
10 lakhs equity shares of ` 10 each at a premium of
` 2 per share)
Unsecured Loan (from Yes Ltd.) Dr. 10.00
To Loan to No. Ltd. 10.00
(Being the cancellation of unsecured loan given to No Ltd.)
Working Note:
Purchase Consideration ` in crores
50lakhs
× ` 12 i.e., 10 lakhs equity shares at ` 12 per share 1.20
5
Number of equity shares of ` 10 each to be issued  1.20crores  = 10 lakhs.

 12 
Question 4
Super Express Ltd. and Fast Express Ltd. were in competing business. They decided to form
a new company named Super Fast Express Ltd. The summarized balance sheets of both the
companies were as under:
Super Express Ltd.
Balance Sheet as at 31st December, 2014
` `
20,000 Equity shares of Buildings 10,00,000
` 100 each 20,00,000 Machinery 4,00,000
Provident fund 1,00,000 Inventory 3,00,000
Trade Payables 60,000 Trade receivables 2,40,000
Insurance reserve 1,00,000 Cash at bank 2,20,000
22,60,000 22,60,000

6.7 Accounting
Fast Express Ltd.

Balance Sheet as at 31st December, 2014
` `
10,000 Equity shares of Goodwill 1,00,000
` 100 each 10,00,000 Buildings 6,00,000
Employees profit sharing Machinery 5,00,000
account 60,000 Inventory 40,000
Trade Payables 40,000 trade receivables 40,000
Reserve account 1,00,000 Cash at bank 10,000
Surplus 1,00,000 Cash in hand 10,000
13,00,000 13,00,000
The assets and liabilities of both the companies were taken over by the new company at their book
values. The companies were allotted equity shares of ` 100 each in lieu of purchase consideration
amounting to ` 30,000 (20,000 for Super Fast Express Ltd and 10,000 for Fast Express Ltd.).
Prepare opening balance sheet of Super Fast Express Ltd.
Answer
Balance Sheet of Super Fast Express Ltd
as at 1st Jan., 2015
Particulars Notes `
a Long-term provisions 3 1,00,000
Total 35,60,000
Assets
a Fixed assets
Intangible assets 5 1,00,000

Amalgamation 6.8
2 Current assets
Inventories 3,40,000
Cash and cash equivalents 6 3,40,000
Total 35,60,000
Notes to accounts
`
1 Share Capital
Total 30,00,000
Reserve account 1,00,000
Surplus 1,00,000
Insurance reserve 1,00,000
Employees profit sharing account 60,000
Total 3,60,000
3 Long-term provisions
Provident fund 1,00,000
Total 1,00,000
4 Tangible assets
Buildings 16,00,000
Machinery 9,00,000
Total 25,00,000
5 Intangible assets
Goodwill 1,00,000
Total 1,00,000
Balances with banks 2,30,000
Cash on hand 1,10,000
Total 3,40,000
The above solution is based on pooling of interests method.

6.9 Accounting
Question 5
The following were the summarized Balance Sheets of P Ltd. and V Ltd. as at 31st March,
2015:
Liabilities P Ltd. V Ltd.
Equity Share Capital (Fully paid shares of ` 10 each) 15,000 6,000
Securities Premium 3,000 –
Foreign Project Reserve – 310
General Reserve 9,500 3,200
Profit and Loss Account 2,870 825
12% Debentures – 1,000
Trade payables 1,200 463
Provisions 1,830 702
33,400 12,500
Assets P Ltd. V Ltd.

Land and Buildings 6,000 –
Plant and Machinery 14,000 5,000
Furniture, Fixtures and Fittings 2,304 1,700
Inventory 7,862 4,041
Trade receivables 2,120 1,100
Cash at Bank 1,114 609
Cost of Issue of Debentures — 50
33,400 12,500
All the bills receivable held by V Ltd. were P Ltd.’s acceptances.
On 1st April 2015, P Ltd. took over V Ltd in an amalgamation in the nature of merger. It was
agreed that in discharge of consideration for the business P Ltd. would allot three fully paid
equity 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.

Amalgamation 6.10
Details of trade receivables and trade payables as under:

Assets P Ltd. V Ltd.
Trade payables
Bills Payable 120 -
Creditors 1,080 463
1,200 463
Trade receivables
Trade receivables 2,120 1,020
Bills Receivable — 80
2,120 1,100
Expenses of amalgamation amounting to ` 1 lakh were borne by P Ltd.
(i) Pass journal entries in the books of P Ltd. and
(ii) Prepare P Ltd.’s Balance Sheet immediately after the merger.
Answer
Books of P Ltd.
Journal Entries
Dr. Cr.
(` in Lacs) (` in Lacs)
Business Purchase A/c Dr. 9,000
To Liquidator of V Ltd. 9,000
(Being business of V Ltd. taken over for consideration
settled as per agreement)
Plant and Machinery Dr. 5,000
Furniture & Fittings Dr. 1,700
Inventory Dr. 4,041
Debtors Dr. 1,020
Cash at Bank Dr. 609
Bills Receivable Dr. 80
To Foreign Project Reserve 310
To General Reserve (3,200 - 3,000) 200
To Profit and Loss A/c (825 - 50) 775

6.11 Accounting
To Liability for 12% Debentures 1,000

To Creditors 463
To Provisions 702
To Business Purchase 9,000
(Being assets & liabilities taken over from V Ltd.)
Liquidator of V Ltd. A/c Dr. 9,000
(Purchase consideration discharged in the form of equity
shares)
Profit & loss A/c Dr. 1
To Bank A/c 1
(Liquidation expenses paid by P Ltd.)
Liability for 12% Debentures A/c Dr. 1,000
To 13% Debentures A/c 1,000
(12% debentures discharged by issue of 13% debentures)
Bills Payable A/c Dr. 80
To Bills Receivable A/c 80
(Cancellation of mutual owing on account of bills)
Balance Sheet of P Ltd. as at 1st April, 2015 (after merger)

Particulars Notes ` (in lakhs)
a Share capital 1 24,000
a Long-term borrowings 3 1,000
a Trade Payables (1,543 + 40) 1,583
b Short-term provisions 2,532
Total 45,769
Assets
a Fixed assets
Tangible assets 4 29,004

Amalgamation 6.12
2 Current assets
a Inventories 11,903
b Trade receivables 3,140
c Cash and cash equivalents 1,722
Total 45,769
Notes to accounts
`
1. Share Capital
Authorised, issued, subscribed and paid up
24 crores equity shares of ` 10 each 24,000
(Of the above shares, 9 crores shares have been issued for
Total 24,000
Foreign Project Reserve 310
Profit and Loss Account 3,644
Total 16,654
Secured
13% Debentures 1,000
4. Tangible assets
Land & Buildings 6,000
Plant & Machinery 19,000
Furniture & Fittings 4,004
Total 29,004
Working Note:
Computation of purchase consideration
The purchase consideration was discharged in the form of three equity shares of P Ltd. for
every two equity shares held in V Ltd.
3
Purchase consideration = ` 6,000 lacs × = ` 9,000 lacs.
2

6.13 Accounting
Note: The question is silent regarding the treatment of fictitious assets and therefore they are
not transferred to the amalgamated company. Thus the cost of issue of debentures shown in
the balance sheet of the V Ltd. company is not transferred to the P Ltd. company.
Question 6
The following are the summarised Balance Sheets of X Ltd. and Y Ltd :
X Ltd. Y Ltd.
` `
Liabilities :
Equity Share Capital 1,00,000 50,000
Profit & Loss A/c 10,000 –
Trade payables 25,000 5,000
Loan X Ltd. — 15,000
1,35,000 70,000
Assets :
Sundry Assets 1,20,000 60,000
Loan Y Ltd. 15,000 –
Profit & Loss A/c — 10,000
1,35,000 70,000
A new company XY Ltd. is formed to acquire the sundry assets and trade payables of X Ltd.
and Y Ltd. and for this purpose, the sundry assets of X Ltd. are revalued at ` 1,00,000. The
debt due to X Ltd. is also to be discharged in shares of XY Ltd.
Show the Ledger Accounts to close the books of X Ltd.
Answer
Books of X Ltd.
Realisation Account
` `
To Sundry Assets 1,20,000 By Trade payables 25,000
By XY Ltd. (Purchase consideration) 75,000
By Shareholders (Loss on realisation) 20,000
1,20,000 1,20,000
Shareholders Account
` `
To Realisation Account (Loss) 20,000 By Equity Share Capital 1,00,000
To Shares in XY Ltd. 90,000 By Profit and Loss Account 10,000
1,10,000 1,10,000

Amalgamation 6.14
Loan Y Ltd.
` `
To Balance b/d 15,000 By Shares in XY Ltd. 15,000
Shares in XY Ltd.
` `
To XY Ltd. 75,000 By Shareholders 90,000
To Loan Y Ltd. 15,000
90,000 90,000
XY Ltd.
` `
To Realisation Account 75,000 By Shares in XY Ltd. 75,000
Question 7
The financial position of two companies Hari Ltd. and Vayu Ltd. as on 31st March, 20 15 was
as under:
Assets Hari Ltd. (`) Vayu Ltd. (`)
Goodwill 50,000 25,000
Building 3,00,000 1,00,000
Machinery 5,00,000 1,50,000
Inventory 2,50,000 1,75,000
Cash at Bank 50,000 20,000
13,50,000 5,70,000
Liabilities
Share Capital: Hari Ltd. (`) Vayu Ltd. (`)

Equity Shares of ` 10 each 10,00,000 3,00,000
9% Preference Shares of ` 100 each 1,00,000 –
10% Preference Shares of ` 100 each – 1,00,000
General Reserve 70,000 70,000
Retirement Gratuity fund 50,000 20,000
Trade payables 1,30,000 80,000
13,50,000 5,70,000

6.15 Accounting
Hari Ltd. absorbs Vayu Ltd. on the following terms:

(a) 10% Preference Shareholders are to be paid at 10% premium by issue of 9% Preference
Shares of Hari Ltd.
(b) Goodwill of Vayu Ltd. is valued at ` 50,000, Buildings are valued at ` 1,50,000 and the
Machinery at ` 1,60,000.
(c) Inventory to be taken over at 10% less value and Provision for Doubtful Debts to be
created @ 7.5%.
(d) Equity Shareholders of Vayu Ltd. will be issued Equity Shares @ 5% premium.
Prepare necessary Ledger Accounts to close the books of Vayu Ltd. and show the acquisition
entries in the books of Hari Ltd. Also draft the Balance Sheet after absorption as at
31st March, 2015.
Answer
In the Books of Vayu Ltd.
Realisation Account
` `
To Sundry Assets 5,70,000 By Retirement Gratuity Fund 20,000
To Preference Shareholders By Trade payables 80,000
(Premium on Redemption) 10,000 By Hari Ltd. (Purchase
To Equity Shareholders Consideration) 5,30,000
(Profit on Realisation) 50,000 _______
6,30,000 6,30,000
Equity Shareholders Account
` `
To Equity Shares of Hari Ltd. 4,20,000 By Share Capital 3,00,000
By General Reserve 70,000
By Realisation Account
_______ (Profit on Realisation) 50,000
4,20,000 4,20,000
Preference Shareholders Account
` `
To 9% Preference Shares of Hari 1,10,000 By Preference Share 1,00,000
Ltd. Capital
By Realisation Account

Amalgamation 6.16
(Premium on
Redemption of
Preference Shares) 10,000
1,10,000 1,10,000
Hari Ltd. Account
` `
To Realisation Account 5,30,000 By 9% Preference Shares 1,10,000
_______ By Equity Shares 4,20,000
5,30,000 5,30,000
In the Books of Hari Ltd.
Journal Entries
Dr. Cr.
` `
Business Purchase A/c Dr. 5,30,000
To Liquidators of Vayu Ltd. Account 5,30,000
( Being business of Vayu Ltd. taken over)
Goodwill Account Dr. 50,000
Building Account Dr. 1,50,000
Machinery Account Dr. 1,60,000
Inventory Account Dr. 1,57,500
Trade receivables Account Dr. 1,00,000
To Retirement Gratuity Fund Account 20,000
To Trade payables Account 80,000
To Provision for Doubtful Debts Account 7,500
To Business Purchase A/c 5,30,000
(Being Assets and Liabilities taken over as per agreed
valuation).
Liquidators of Vayu Ltd. A/c Dr. 5,30,000
To 9% Preference Share Capital A/c 1,10,000
To Securities Premium A/c 20,000
(Being Purchase Consideration satisfied as above).

6.17 Accounting
Balance Sheet of Hari Ltd. (after absorption)

Particulars Notes `
a Long-term provisions 3 70,000
b Short term provision 7,500
Total 19,87,500
Assets
a Fixed assets
2 Current assets
a Inventories 4,07,500
Total 19,87,500
Notes to accounts
`
1 Share Capital
1,40,000 Equity Shares of ` 10 each fully paid 14,00,000
(Out of above 40,000 Equity Shares were issued in
consideration other than for cash)

Amalgamation 6.18
2,100 9% Preference Shares of ` 100 each 2,10,000

(Out of above 1,100 Preference Shares were issued in
consideration other than for cash)
Total 16,10,000
Total 90,000
3 Long-term provisions
Gratuity fund 70,000
Total 70,000
4 Short term Provisions
Provision for Doubtful Debts 7,500
5 Tangible assets
Buildings 4,50,000
Machinery 6,60,000
Total 11,10,000
6 Intangible assets
Goodwill 1,00,000
Total 1,00,000
7 Trade receivables 3,00,000
Working Notes:
Purchase Consideration: `
Goodwill 50,000
Building 1,50,000
Machinery 1,60,000
Inventory 1,57,500
Trade receivables 92,500
Cash at Bank 20,000
6,30,000
Less: Liabilities:
Retirement Gratuity (20,000)

6.19 Accounting
Trade payables (80,000)

Net Assets/ Purchase Consideration 5,30,000
To be satisfied as under:
10% Preference Shareholders of Vayu Ltd. 1,00,000
Add: 10% Premium 10,000
1,100 9% Preference Shares of Hari Ltd. 1,10,000
Equity Shareholders of Vayu Ltd. to be satisfied by issue of 40,000
Equity Shares of Hari Ltd. at 5% Premium 4,20,000
Total 5,30,000
Question 8
The following is the summarized Balance Sheet of A Ltd. as at 31 st March, 2015:
8,000 equity shares of ` 100 each 8,00,000 Building 3,40,000
10% debentures 4,00,000 Machinery 6,40,000
Loan from A 1,60,000 Inventory 2,20,000
General Reserve 80,000 Bank 1,36,000
Goodwill 1,30,000
Share issue Expenses 34,000
17,60,000 17,60,000
B Ltd. agreed to absorb A Ltd. on the following terms and conditions:
(1) B Ltd. would take over all assets, except bank balance at their book values less 10%.
Goodwill is to be valued at 4 year’s purchase of super profits, assuming that the normal
rate of return be 8% on the combined amount of share capital and general reserve.
(2) B Ltd. is to take over trade payables at book value.
(3) The purchase consideration is to be paid in cash to the extent of ` 6,00,000 and the
balance in fully paid equity shares of ` 100 each at ` 125 per share.
The average profit is ` 1,24,400. The liquidation expenses amounted to ` 16,000. B Ltd.
sold prior to 31 st March, 2015 goods costing ` 1,20,000 to A Ltd. for ` 1,60,000.
` 1,00,000 worth of goods are still in Inventory of A Ltd. on 31 st March, 2015. Trade
payables of A Ltd. include ` 40,000 still due to B Ltd.
Show the necessary Ledger Accounts to close the books of A Ltd. and prepare the
Balance Sheet of B Ltd. as at 1 st April, 2015 after the takeover.

Amalgamation 6.20
Answer
Books of A Limited
Realisation Account
` `
To Building 3,40,000 By Trade payables 3,20,000
To Machinery 6,40,000 By B Ltd. 12,10,000
To Inventory 2,20,000 By Equity Shareholders (Loss) 76,000
To Trade receivables 2,60,000
To Goodwill 1,30,000
To Bank (Exp.) 16,000
16,06,000 16,06,000
Bank Account
To Balance b/d 1,36,000 By Realisation (Exp.) 16,000
To B Ltd. 6,00,000 By 10% debentures 4,00,000
By Loan from A 1,60,000
By Equity shareholders 1,60,000
7,36,000 7,36,000
10% Debentures Account
4,00,000 4,00,000
Loan from A Account
1,60,000 1,60,000
Share issue Expenses Account
To Balance b/d 34,000 By Equity shareholders 34,000
34,000 34,000
General Reserve Account
To Equity shareholders 80,000 By Balance b/d 80,000
80,000 80,000
B Ltd. Account
To Realisation A/c 12,10,000 By Bank 6,00,000
By Equity share in B Ltd.(4,880
shares at ` 125 each) 6,10,000
12,10,000 12,10,000

6.21 Accounting
Equity Shares in B Ltd. Account

To B Ltd. 6,10,000 By Equity shareholders 6,10,000
6,10,000 6,10,000
Equity Share Holders Account
To Realisation 76,000 By Equity share capital 8,00,000
To Share issue Expenses 34,000 By General reserve 80,000
To Equity shares in B Ltd. 6,10,000
To Bank 1,60,000
8,80,000 8,80,000
B Ltd
Balance Sheet as on 1 st April, 2015 (An extract)
Particulars Notes `
a Trade Payables 3 2,80,000
b Bank overdraft 6,00,000
Total 14,75,000
Assets
a Fixed assets
2 Current assets
14,75,000

In the absence of the particulars of assets and liabilities (other than those of A Ltd.), the complete Balance Sheet of B
Ltd. after takeover cannot be prepared.

Amalgamation 6.22
Notes to accounts
`
1 Share Capital
4,880 Equity shares of ` 100 each
(Shares have been issued for consideration
other than cash) 4,88,000
Total 4,88,000
2 Reserves and Surplus (an extract)
Profit and loss account …..
Less: Unrealised profit (15,000) (15,000)
Total 1,07,000
3 Trade payables
Less: Inter-company transaction cancelled upon
amalgamation (40,000) 2,80,000
4 Tangible assets
Buildings 3,06,000
Machinery 5,76,000
Total 8,82,000
5 Intangible assets
Goodwill 2,16,000
6 Inventories
Less: Cancellation of profit upon amalgamation (15,000) 1,83,000
7 Trade receivables
Less: Intercompany transaction cancelled upon (40,000)
amalgamation
Less: Provision for doubtful debts (26,000) 1,94,000

6.23 Accounting
Working Notes:
1. Valuation of Goodwill `
Average profit 1,24,400
Less: 8% of ` 8,80,000 (70,400)
Super profit 54,000
Value of Goodwill = 54,000 x 4 2,16,000
2. Net Assets for purchase consideration
Goodwill as valued in W.N.1 2,16,000
Building 3,06,000
Machinery 5,76,000
Inventory 1,98,000
Trade receivables (2,60,000-26,000) 2,34,000
Total Assets 15,30,000
Less: Trade payables (3,20,000)
Net Assets 12,10,000
Out of this ` 6,00,000 is to be paid in cash and remaining i.e., (12,10,000 – 6,00,000)
` 6,10,000 in shares of ` 125. Thus, the number of shares to be allotted 6,10,000/125 =
4,880 shares.
3. Unrealised Profit on Inventory `
The Inventory of A Ltd. includes goods worth ` 1,00,000 which was sold
by B Ltd. on profit. Unrealized profit on this Inventory will be
40,000 25,000
1,00,000
1,60,000
As B Ltd purchased assets of A Ltd. at a price 10% less than the book
value, 10% need to be adjusted from the Inventory i.e., 10% of ` (10,000)
1,00,000.
Amount of unrealized profit 15,000
Question 9
The following is the summarized Balance Sheet of ‘A’ Ltd. as on 31.3.2015:
14,000 Equity shares of Sundry assets 18,00,000

Amalgamation 6.24
` 100 each fully paid 14,00,000 Discount on issue of

General reserve 10,000 debentures 10,000
10% Debentures 2,00,000 P & L A/c 90,000
Bank overdraft 50,000
19,00,000 19,00,000
‘R’ Ltd. agreed to take over the business of ‘A’ Ltd. Calculate purchase consideration under
Net Assets method on the basis of the following:
The market value of 75% of the sundry assets is estimated to be 12% more than the book
value and that of the remaining 25% at 8% less than the book value. The liabilities are taken
over at book values. There is an unrecorded liability of ` 25,000.
Answer
Calculation of Purchase Consideration under Net Assets Method
`
Sundry assets
75 112
18,00,000   
100 100 15,12,000
25 92
18,00,000   
100 100 4,14,000 19,26,000
Less: Liabilities:
Bank overdraft 50,000
Unrecorded liability 25,000 (5,15,000)
Purchase consideration 14,11,000
Question 10
Following is the summarized Balance Sheet of X Co. Ltd. as at 31 st March, 2015:
Balance Sheet as at 31 st March, 2015
Equity share capital 15,00,000 Land and building 10,00,000

6.25 Accounting
(` 100 each)
11% Pref. share capital 5,00,000 Plant and machinery 7,00,000
General reserve 3,00,000 Furniture and fittings 2,00,000
trade payables 2,00,000 Inventory in trade 3,00,000
trade receivables 2,00,000
Cash in hand and at bank 1,00,000
25,00,000 25,00,000
Y Co. Ltd. agreed to take over X Co. Ltd. on the following terms:
(i) Each equity share in X Co. Ltd. for the purpose of absorption is to be valued at ` 80.
(ii) Equity shares will be issued by Y Co. Ltd. by valuing its each equity shares of ` 100 each
at ` 120 per share.
(iii) 11% Preference shareholders of X Co. Ltd. will be given 11% redeemable debentures of
Y Co. Ltd. at equivalent value.
(iv) All the Assets and Liabilities of X Co. Ltd. will be recorded at the same value in the books
of Y Co. Ltd.
(a) Calculate Purchase consideration.
(b) Pass Journal entries in the books of Y Co. Ltd. for absorbing X Co. Ltd.
Answer
Computation of Purchase Consideration
`
Value of 15,000 equity shares @ ` 80 per share = ` 12,00,000
Shares to be issued by Y Co. Ltd. (` 12,00,000/120 per share) = 10,000
shares @ ` 120 each) 12,00,000
11% Preference shareholders to be issued equivalent 11% Redeemable
Debentures by Y Co. Ltd. 5,00,000
Total Purchase consideration 17,00,000
Journal Entries in the books of Y Co. Ltd.
` `
Business Purchase A/c Dr. 17,00,000
To Liquidator of X Co. Ltd. 17,00,000
(Being the amount payable to X Co. Ltd’s liquidator)

Amalgamation 6.26
Land & Building A/c Dr. 10,00,000

Plant & Machinery A/c Dr. 7,00,000
Furniture & Fittings A/c Dr. 2,00,000
Inventory in Trade A/c Dr. 3,00,000
Trade receivables A/c Dr. 2,00,000
Cash & Bank A/c Dr. 1,00,000
To Trade payables 2,00,000
To Capital Reserve (Balancing figure) 6,00,000
To Business Purchase 17,00,000
(Being the value of assets and liabilities taken over
from X Co. Ltd.)
Liquidators of X Co. Ltd. Account Dr. 17,00,000
To Securities Premium Account 2,00,000
To 11% Debentures 5,00,000
(Being purchase consideration discharged)
Question 11
Summarised Balance Sheets as on 31st March, 2015
Liabilities Gee Ltd. Pee Ltd Assets Gee Ltd. Pee Ltd.
` ` ` `
Equity share capital 25,00,000 15,00,000 Buildings 12,50,000 7,75,000
(` 10 per share) Plant and machinery 16,25,000 8,50,000
14% Preference 11,00,000 8,50,000 Furniture and fixtures 2,87,500 1,75,000
share capital
(` 100 each) - - Investments 3,50,000 2,50,000
General reserve 2,50,000 2,50,000 Inventory 6,25,000 4,75,000
Export profit reserve 1,50,000 1,00,000 Trade receivables 4,50,000 5,15,000
Investment allowance - 50,000 Cash at bank 3,62,500 2,60,000
reserve
Profit and loss 3,75,000 1,25,000
account
15% Debentures 2,50,000 1,75,000
(` 100 each)

6.27 Accounting

Other current
liabilities 1,00,000 75,000
49,50,000 33,00,000 49,50,000 33,00,000
All the bills receivables of Pee Ltd. were having Gee Ltd.’s acceptances.
Gee Ltd. takes over Pee Ltd. on 1 st April, 2015. The purchase consideration is discharged as
follows:
(i) Issued 1,65,000 equity shares of ` 10 each at par to the equity shareholders of Pee Ltd.
(ii) Issued 15% preference shares of ` 100 each to discharge the preference shareholders
of Pee Ltd. at 10% premium.
(iii) The debentures of Pee Ltd. will be converted into equivalent number of debentures of
Gee Ltd.
(iv) The statutory reserves of Pee Ltd. are to be maintained for two more years.
(v) Expenses of amalgamation amounting to ` 10,000 will be borne by Gee Ltd.
(vi) Details of trade receivables and trade payables as under:
Gee L td. Pee Ltd.
Trade payables
Trade payables 1,50,000 75,000
Bills payables 75,000 1,00,000
2,25,000 1,75,000
Trade receivables
Debtors 4,00,000 4,60,000
Bills receivables 50,000 55,000
4,50,000 5,15,000
Show the opening Journal entries and the opening balance sheet of Gee Ltd. as at 1 st April,
2015 after amalgamation, on the assumption that the amalgamation is in the nature of the
merger.
Answer
In the books of Gee Ltd.
Journal Entries
` `
Business purchase A/c (W.N.1) Dr. 25,85,000

Amalgamation 6.28
To Liquidator of Pee Ltd. 25,85,000

(Being business of Pee Ltd. taken over)
Building A/c Dr. 7,75,000
Plant and machinery A/c Dr. 8,50,000
Furniture and fixtures A/c Dr. 1,75,000
Investments A/c Dr. 2,50,000
Inventory A/c Dr. 4,75,000
Debtors A/c Dr. 4,60,000
Bills receivables A/c Dr. 55,000
Bank A/c Dr. 2,60,000
To General reserve A/c (W.N.2) 15,000
(2,50,000-2,35,000)
To Export profit reserve A/c 1,00,000
To Investment allowance reserve A/c 50,000
To Profit and loss A/c 1,25,000
To Liability for 15% Debentures A/c (` 100 each) 1,75,000
To Trade creditors A/c 75,000
To Bills payables A/c 1,00,000
To Other current liabilities A/c 75,000
To Business purchase A/c 25,85,000
(Being assets and liabilities taken over)
Liquidator of Pee Ltd. Dr. 25,85,000
To 15% Preference share capital A/c 9,35,000
General Reserve  A/c Dr. 10,000
To Cash at bank 10,000
(Being expenses of amalgamation paid)
Liability for 15% Debentures in Pee Ltd. A/c Dr. 1,75,000
(Being debentures in Pee Ltd. discharged by
issuing own 15% debentures)
Bills payables A/c Dr. 55,000
To Bill receivables A/c 55,000
(Cancellation of mutual owing on account of bills of

It can also be adjusted against Profit & Loss A/c.

6.29 Accounting
exchange)
Opening Balance Sheet of Gee Ltd. (after absorption)
as on 1st April, 2015
Particulars Notes `
a Trade Payables 4 3,45,000
b Other current liabilities 5 1,75,000
Total 81,85,000
Assets
a Fixed assets
b Investments 7 6,00,000
2 Current assets
Total 81,85,000
Notes to accounts
`
1 Share Capital
4,15,000 Equity shares of ` 10 each
(Out of above, 1,65,000 shares were issued for 41,50,000
9,350 15% Preference shares of ` 100 each
(Out of above, 9,350 shares were issued for 9,35,000

Amalgamation 6.30
11,000 14% Preference Shares of ` 100 each 11,00,000

Total 61,85,000
General Reserve
Add: Adjustment under scheme of amalgamation 15,000
Less: Amalgamation expense paid (10,000) 2,55,000
Export profit reserve
Add: Adjustment under scheme of amalgamation 1,00,000 2,50,000
Investment allowance reserve 50,000
Profit and loss account
Total 10,55,000
Secured
Total 4,25,000
4 Trade payables
Creditors: Opening balance 1,50,000
Add: Adjustment under scheme of amalgamation 75,000 2,25,000
Bills Payables: Opening balance 75,000
Add: Adjustment under scheme of amalgamation 1,00,000
Less: Cancellation of mutual owning upon
(55,000) 1,20,000
amalgamation
3,45,000
Add: Adjustment under scheme of amalgamation 75,000 1,75,000
6 Tangible assets
Buildings- Opening balance 12,50,000

6.31 Accounting

Plant and machinery- Opening balance 16,25,000
Furniture and fixtures- Opening balance 2,87,500
Total 49,62,500
7 Investments
8 Inventories
9 Trade receivables
Debtors: Opening balance 4,00,000
Bills Payables: Opening balance 50,000
Add: Adjustment under scheme of amalgamation 55,000
Less: Cancellation of mutual owning upon
(55,000) 50,000
amalgamation
Total 9,10,000
Add: Adjustment under scheme of amalgamation 2,60,000
Less: Amalgamation expense paid (10,000) 6,12,500
Working Notes:
1. Calculation of purchase consideration
`
Equity shareholders of Pee Ltd. (1,65,000 x ` 10) 16,50,000
Preference shareholders of Pee Ltd. (8,50,000 x 110%) 9,35,000
Purchase consideration would be 25,85,000
2. Amount to be adjusted from general reserve

Amalgamation 6.32
The difference between the amount recorded as share capital issued and the amount of
share capital of transferor company should be adjusted in General Reserve.
Thus, General reserve will be adjusted as follows:
`
Purchase consideration 25,85,000
Less: Share capital issued (` 15,00,000 + ` 8,50,000) (23,50,000)
Amount to be adjusted from general reserve 2,35,000
Question 12
Ram Limited and Shyam Limited carry on business of a similar nature and it is agreed that
they should amalgamate. A new company, Ram and Shyam Limited, is to be formed to which
the assets and liabilities of the existing companies, with certain exception, are to be
transferred. On 31st March 2015, the Summarized Balance Sheets of the two companies
were as under:
Ram Limited
Balance Sheet as at 31st March, 2015
Issued and Subscribed Freehold Property, at cost 2,10,000
Share Capital: Plant and Machinery, at cost
30,000 Equity Shares of ` 10 less Depreciation 50,000
each, fully paid 3,00,000 Motor Vehicles, at cost Less
General Reserve 1,60,000 Depreciation 20,000
Profit and Loss Account 40,000 Inventory 1,20,000
Cash at Bank 86,000
6,50,000 6,50,000
Shyam Limited
Issued and Subscribed Freehold Property, at cost 1,20,000
Share Capital: Plant and Machinery, at cost
16,000 Equity Shares of ` 10 less Depreciation 30,000
each, fully paid 1,60,000 Inventory 1,56,000
Profit and Loss Account 40,000 Trade receivables 42,000
6% Debentures 1,20,000 Cash at Bank 36,000

6.33 Accounting
Trade payables 64,000

3,84,000 3,84,000
Assets and Liabilities are to be taken at book-value, with the following exceptions:
(a) Goodwill of Ram Limited and of Shyam Limited is to be valued at ` 1,60,000 and
` 60,000 respectively.
(b) Motor Vehicles of Ram Limited are to be valued at ` 60,000.
(c) The debentures of Shyam Limited are to be discharged by the issue of 6% Debentures of
Ram and Shyam Limited at a premium of 5%.
(d) The Trade receivables of Shyam Ltd. realized fully and Bank Balance of Shyam Limited are to
be retained by the liquidator and the Trade payables of Shyam Ltd. are to be paid out of the
proceeds thereof.
You are required to:
(i) Compute the basis on which shares in Ram and Shyam Limited will be issued to the
Shareholders of the existing companies assuming that the nominal value of each share in
Ram and Shyam Limited is ` 10.
(ii) Draw up a Balance Sheet of Ram and Shyam Limited as of 1st April, 2015, the date of
completion of amalgamation.
(iii) Write up Journal entries, including Bank entries, for closing the books of Shyam
Limited.
Answer
Calculation of Purchase consideration
Ram Ltd. Shyam Ltd.
Purchase Consideration: ` `
Goodwill 1,60,000 60,000
Freehold property 2,10,000 1,20,000
Plant and Machinery 50,000 30,000
Motor vehicles 60,000 -
Inventory 1,20,000 1,56,000
Trade receivables 1,64,000 -
Cash at Bank 86,000 -
8,50,000 3,66,000
Less: Liabilities:
6% Debentures (1,20,000 x 105%) - (1,26,000)
Trade payables (1,50,000) -
Net Assets taken over 7,00,000 2,40,000
To be satisfied by issue of shares of Ram and Shyam Ltd. @ ` 10 each 70,000 24,000

Amalgamation 6.34
Balance Sheet of Ram and Shyam Ltd. as at 1 st April, 2015

Equity and Liabilities `
Total 12,16,000
Assets
a Fixed assets
i Tangible assets 4 4,70,000
ii Intangible assets 5 2,20,000
2 Current assets
a Inventories (1,20,000 + 1,56,000) 2,76,000
Total 12,16,000
Notes to accounts
1. Share Capital
94,000 shares of ` 10 each 9,40,000
Securities Premium (W.N.1) 6,000
Secured
6% Debentures (assumed to be secured) 1,20,000

6.35 Accounting
4. Tangible assets
Free hold property (2,10,000 + 1,20,000) 3,30,000
Plant & Machinery (50,000+30,000) 80,000
Motor vehicles 60,000
Total 4,70,000
5. Intangible assets
Goodwill (1,60,000 + 60,000) 2,20,000
In the books of Shyam Ltd.
Journal Entries
` `
1. Realisation A/c Dr. 3,48,000
To Freehold Property 1,20,000
To Plant and Machinery 30,000
To Inventory 1,56,000
To Trade receivables 42,000
(Being all assets except cash transferred to Realisation Account)
2. 6% Debentures A/c Dr. 1,20,000
Trade payables A/c Dr. 64,000
To Realisation A/c 1,84,000
(Being all liabilities transferred to Realisation Account)
3. Equity Share Capital A/c Dr. 1,60,000
To Equity share holder A/c 2,00,000
(Being equity transferred to equity shareholders account)
4. Ram and Shyam Ltd. Dr. 2,40,000
To Realisation A/c 2,40,000
(Being purchase consideration due)
5. Bank A/c Dr. 42,000
To Realisation A/c 42,000
(Being cash realized from trade receivables in full)
6. Realisation A/c Dr. 64,000
To Bank A/c 64,000
(Being payment made to trade payables)
7. Shares in Ram and Shyam Ltd. Dr. 2,40,000
To Ram and Shyam Ltd. 2,40,000
(Being purchase consideration received in the form of shares of
Ram and Shyam Ltd.)

Amalgamation 6.36
8. Realisation A/c Dr. 54,000

To Equity shareholders A/c 54,000
(Being profit on Realisation account transferred to shareholders
account)
9. Equity shareholders A/c Dr. 2,54,000
To Shares in Ram and Shyam Ltd. 2,40,000
To Bank A/c 14,000
(Being final payment made to shareholders)
Working Note:
Calculation of Securities Premium balance
Debentures issued by Ram and Shyam Ltd. to Shyam Ltd. at 5% premium
Therefore, securities premium account will be credited with (` 1,20,000 x 5%) ` 6,000.
Question 13
The summarised Balance Sheet of Mars Limited as on 31 st March, 2015 was as follow:
Share Capital: Fixed Assets:
1,00,000 Equity shares of Land and building 7,64,000
` 10 each fully paid up 10,00,000 Current Assets:
Reserve and surplus: Inventory 7,75,000
Capital reserve 42,000 Trade receivables 1,82,000
Contingency reserve 2,70,000 Cash at bank 3,29,000
Profit and loss A/c 2,52,000
Current Liabilities & Provisions:
Provision for income tax 2,20,000
20,50,000 20,50,000
On 1st April, 2015, Jupiter Limited agreed to absorb Mars Limited on the following terms and
conditions:
(1) Jupiter Limited will take over the assets at the following values:
`
Land and building 10,80,000
Inventory 7,70,000
Bills receivable 30,000

6.37 Accounting
(2) Purchase consideration will be settled by Jupiter Ltd. as under:

4,100 fully paid 10% preference shares of ` 100 will be issued and the balance will be
settled by issuing equity shares of ` 10 each at ` 8 paid up.
(3) Liquidation expenses are to be reimbursed by Jupiter Ltd. to the extent of ` 5,000.
(4) trade receivables realized ` 1,50,000. Bills payable were settled for ` 38,000. Income
tax authorities fixed the taxation liability at ` 2,22,000 and the same was paid.
(5) Trade payables were finally settled with cash remaining after meeting liquidation
expenses amounting to ` 8,000.
(6) Details of trade receivables and trade payables as under:
Trade Receivables
trade receivables 1,60,000
Less : Provision for doubtful debts (8,000) 1,52,000
Bill receivable 30,000
1,82,000
Trade Payables
Bills payable 40,000
creditors 2,26,000
2,66,000
(i) Calculate the number of equity shares and preference shares to be allotted by Jupiter
Limited in discharge of purchase consideration
(ii) Prepare the Realisation account, Bank account, Equity shareholders account and Jupiter
Limited’s account in the books of Mars Ltd.
Answer
(i) Calculation of number of shares to be allotted
Particulars Amount (`)
Land and building 10,80,000
Inventory 7,70,000
Total 18,80,000
Amount discharged by issue of preference shares 4,10,000
Number of preference shares to be issued (4,10,000/100) 4,100 shares

Amalgamation 6.38
Amount discharged by issue of equity shares (` 18,80,000 – ` 4,10,000) 14,70,000

Number of equity shares to be issued (` 14,70,000 / 8) 1,83,750 Shares
(ii) Ledger Accounts in the books of Mars Limited

Realization Account
To Land and building 7,64,000 By Provision for doubtful debts 8,000
To Inventory 7,75,000 By Bills payable 40,000
To debtors 1,60,000 By creditors 2,26,000
To Bills receivable 30,000 By Provision for taxation 2,20,000
To Bank A/c –liquidation 3,000 By Jupiter Ltd. (purchase
expenses consideration) 18,80,000
To Bank A/c- bills payable 38,000 By Bank A/c- debtors 1,50,000
To Bank A/c –income tax 2,22,000
To Bank A/c – creditors 2,16,000
To Profit transferred to equity
shareholders A/c 3,16,000
25,24,000 25,24,000
Bank Account
To Balance b/d 3,29,000 By Realisation A/c 3,000
To Realisation A/c (payment received (liquidation expenses)
from debtors) 1,50,000 By Jupiter Ltd. 5,000
To Jupiter Ltd. (liquidation expenses) 5,000 By Bills payable 38,000
By Income tax 2,22,000
By creditors
(Bal.fig.) 2,16,000
4,84,000 4,84,000
Equity Shareholders Account
To 10% Preference shares in By Equity share capital A/c 10,00,000
Jupiter Limited 4,10,000 By Capital reserve 42,000
To Equity shares in Jupiter By Contingency reserve 2,70,000
Limited 14,70,000 By Profit and loss A/c 2,52,000

6.39 Accounting
By Realisation A/c (profit) 3,16,000

18,80,000 18,80,000
Jupiter Limited Account
To Realisation A/c 18,80,000 By 10% Preference shares in 4,10,000
Jupiter Limited
To Bank A/c (Reimbursement exp.) 5,000 By Bank A/c (Liquidation exp.) 5,000
By Equity shares in Jupiter
Limited 14,70,000
18,85,000 18,85,000
Question 14
The following was the Balance Sheet of V Ltd. as on 31st March, 2015:
Particulars Note No. Amount
(` in lakhs)
(1) Shareholders' Funds
(a) Share Capital 1 1,150
(b) Reserves and Surplus 2 (87)
(2) Non-current Liabilities
(a) Long-term Borrowings 3 630
(3) Current Liabilities
Trade Payables 170
Total 1,863
Assets
(1) Non-current Assets
Tangible Assets 4 1,152
(2) Current Assets
Inventories 380
Trade Receivables 256
Cash and Cash equivalents 5 75
Total 1,863
Notes:
(1) Share Capital
Authorised : ?
Issued, Subscribed and Paid up :
80 lakhs Equity Shares of ` 10 each, fully paid up 800

Amalgamation 6.40
35 lakhs 12% Cumulative Preference Shares of ` 10 each, fully paid up 350

Total 1,150
(2) Reserves and Surplus
Profit & Loss Account (87)
Total (87)
(3) Long-term Borrowings
10% Secured Cumulative Debentures of ` 100 each, fully paid up 600
Outstanding Debenture Interest 30
Total 630
(4) Tangible Assets
Land and Buildings 445
Plant and Machinery 593
Furniture, Fixtures and Fittings 114
Total 1,152
(5) Cash and Cash Equivalents
Balance at Bank 69
Cash in hand 6
Total 75
On 1st April, 2015, P Ltd. took over the entire business of V Ltd. on the following terms:
V Ltd.'s equity shareholders would receive 4 fully paid equity shares of P Ltd. of ` 10 each
issued at a premium of ` 2.50 each for every five shares held by them in V Ltd.
Preference shareholders of V Ltd. would get 35 lakhs 13% Cumulative Preference Shares of
` 10 each fully paid up in P Ltd., in lieu of their present holding.
All the debentures of V Ltd. would be converted into equal number of 10.5% Secured
Cumulative Debentures of ` 100 each, fully paid up after the take over by P Ltd., which would
also pay outstanding debenture interest in cash.
Expenses of amalgamation would be borne by P Ltd. Expenses came to be ` 2 lakhs. P Ltd.
discovered that its trade payables included ` 7 lakhs due to V Ltd. for goods purchased.
Also P Ltd.'s Inventory included goods of the invoice price of ` 5 lakhs earlier purchased from
V Ltd., which had charged profit @ 20% of the invoice price.
(i) Prepare Realisation A/c in the books of V Ltd.

6.41 Accounting
(ii) Pass journal entries in the books of P Ltd. assuming it to be an amalgamation in the
nature of merger.
Answer
(i) In the books of V Ltd.
Realisation Account
` in ` in
lakhs lakhs
To Land and Buildings A/c 445 By 10% Secured Cumulative 600
Debentures A/c
To Plant and Machinery A/c 593 By Outstanding Debenture interest A/c 30
To Furniture, Fixtures & Fittings A/c 114 By Trade payables A/c 170
To Inventories A/c 380 By P Ltd. A/c 1,150
To Trade Receivables A/c 256 (purchase consideration - Refer
working note)
To Bank A/c 69
To Cash in Hand A/c 6
To Equity Shareholders’ A/c 87
(Profit on Realisation)
1,950 1,950
(ii) In the books of P Ltd.
Journal Entries
Dr. Cr.
` in ` in
lakhs lakhs
1. Business Purchase A/c Dr. 1,150
To Liquidator of V Ltd. A/c 1,150
(Being purchase consideration due)
2. Land and Buildings A/c Dr. 445
Plant and Machinery A/c Dr. 593
Furniture, Fixtures & Fittings A/c Dr. 114
Inventories A/c Dr. 380
Trade Receivables A/c Dr. 256
Bank A/c Dr. 69

Amalgamation 6.42
Cash in Hand A/c Dr. 6

Profit and Loss A/c Dr. 87
To 10% Debentures A/c 600
To Outstanding Debenture interest A/c 30
To Trade payables A/c 170
To Business Purchase A/c 1,150
(Being assets and liabilities taken over from V Ltd. under the
scheme of amalgamation in the nature of merger)
3. Liquidators of V Ltd. A/c Dr. 1,150
To Equity Share Capital A/c 640
To 13% Cumulative Preference Shares A/c 350
To Securities Premium A/c 160
(Being discharge of consideration, by allotment of 64 lakhs
equity shares of ` 10 each at a premium of ` 2.50 per share
and 35 lakhs 13% cumulative preference shares of ` 10 each at
par)
4. 10% Secured Cumulative Debentures A/c Dr. 600
To 10.5% Secured Cumulative Debentures A/c 600
(Being 10% Secured Cumulative Debentures of V Ltd.
converted into 10.5% Secured Cumulative Debentures of P Ltd.)
5. Outstanding Debenture interest A/c Dr. 30
To Bank A/c 30
(Being outstanding debenture interest paid in cash by P Ltd.)
6. Profit and Loss A/c Dr. 2
To Bank A/c 2
(Being amalgamation expenses met by P Ltd.)
7. Trade Payables A/c Dr. 7
To Trade Receivables A/c 7
(Being settlement of mutual liability)
8. Profit and Loss A/c Dr. 1
To Inventories A/c (5 x 20%) 1
(Being unrealized profit on Inventory eliminated from the
inventories of P Ltd.)

6.43 Accounting
Working Note:
Calculation of Purchase Consideration payable by P Ltd.
` in lakhs
Payment to preference shareholders:
13% Cumulative Preference Shares of ` 10 each (35 lakhs shares × ` 10) 350
Payment to equity shareholders:
(80 lakhs shares x 4/5)= 64 lakhs equity shares @ ` 10 640
Securities Premium (64 lakhs equity shares @ ` 2.5) 160
Total purchase consideration 1,150
Question 15
The summarized Balance Sheet of Srishti Ltd. as on 31 st March, 2014 was as follows:
Amount ( `) Amount
Liabilities Assets
(`)
Equity Shares of ` 10 fully paid 30,00,000 Goodwill 5,00,000
Export Profit Reserves 8,50,000 Tangible Fixed Assets 30,00,000
General Reserves 50,000 Stock 10,40,000
Profit and loss Account 5,50,000 Debtors 1,80,000
9% Debentures 5,00,000 Cash & Bank 2,80,000
Trade Creditors 1,00,000 Preliminary Expenses 50,000
50,50,000 50,50,000
Anu Ltd. agreed to absorb the business of Srishti Ltd. with effect from 1 st April, 2014.
(a) The purchase consideration settled by Anu Ltd. as agreed:
(i) 4,50,000 equity Shares of ` 10 each issued by Anu Ltd. by valuing its share @
` 15 per share.
(ii) Cash payment equivalent to ` 2.50 for every share in Srishti Ltd.
(b) The issue of such an amount of fully paid 8% Debentures in Anu Ltd. at 96% as is
sufficient to discharge 9% Debentures in Srishti Ltd. at a premium of 20%.
(c) Anu Ltd. will take over the Tangible Fixed Assets at 100% more than the book value,
Stock at ` 7,10,000 and Debtors at their face value subject to a provision of 5% for
doubtful Debts.
(d) The actual cost of liquidation of Srishti Ltd. was ` 75,000. Liquidation cost of Srishti Ltd.
is to be reimbursed by Anu Ltd. to the extent of ` 50,000.
(e) Statutory Reserves are to be maintained for 1 more year.

Amalgamation 6.44

(i) Close the books of Srishti Ltd. by preparing Realisation Account, Anu Ltd. Account,
Shareholders Account and Debenture Account, and
(ii) Pass Journal Entries in the books of Anu Ltd. regarding acquisition of business.
Answer
(i) Purchase consideration computation `
Cash payment for (3,00,000 x ` 2.5) 7,50,000
Equity Shares (4,50,000 x ` 15) 67,50,000
75,00,000
In the books of Srishti Ltd.
Realisation Account
` `
To Goodwill 5,00,000 By 9% Debentures 5,00,000
To Tangible Fixed Assets 30,00,000 By Creditors 1,00,000
To Stock 10,40,000 By By Anu Ltd. 75,00,000
To Debtors 1,80,000 (Purchase consideration)
To Cash & Bank A/c 2,55,000
(2,80,000- 25,000)
To Cash & Bank A/c 25,000
(Realization expenses)
To Profit on realization
transfer to shareholders 31,00,000
81,00,000 81,00,000
Equity Shareholders A/c
` `
To Preliminary expenses 50,000 By Equity Share Capital 30,00,000
To Equity Shares in Anu Ltd. 67,50,000 By Export Profit Reserves 8,50,000
To Cash & Bank A/c 7,50,000 By General Reserves 50,000
By P & L A/c 5,50,000
By Realization A/c 31,00,000
75,50,000 75,50,000

6.45 Accounting
9% Debentures Account
` `
To Realization A/c 5,00,000 By Balance b/d 5,00,000
Anu Ltd.
` `
To Realization A/c 75,00,000 By Share Capital 67,50,000
By Bank A/c 7,50,000
75,00,000 75,00,000
(ii) Journal Entries in the books of Anu Ltd.
` `
1 Business Purchase A/c Dr. 75,00,000
To Liquidator of Srishti Ltd 75,00,000
(Being business of Srishti Ltd. taken over)
2 Tangible Fixed Assets Dr. 60,00,000
Stock Dr. 7,10,000
Debtors Dr. 1,80,000
Cash & Bank A/c Dr. 2,55,000
Goodwill A/c (Bal. fig.) Dr. 10,64,000
To Provision for doubtful debts 9,000
To Liability for 9 % Debentures 6,00,000
To Creditors 1,00,000
To Business Purchase account 75,00,000
(Being assets and liabilities taken over)
3 Amalgamation Adjustment A/c Dr. 8,50,000
To Export Profit Reserves 8,50,000
(Being statutory Reserves taken over)
4 Goodwill Dr. 50,000
To Bank A/c 50,000
(Liquidation expenses reimbursed))
5 Liquidator of Shristi Ltd. Dr. 75,00,000
To Securities Premium 22,50,000

Amalgamation 6.46
6 Liability for 9% Debentures ( 5,00,000 x 120/100) Dr. 6,00,000

Discount on issue of debentures 25,000
To 8% Debentures (6,00,000 x 100/96) 6,25,000
(Being liability of debenture holders’
discharged)
Question 16
The financial position of two companies M/s. Abhay Ltd. and M/s. Asha Ltd. as on 31 -3-2015
is as follows:
Balance Sheet as on 31-3-2015
Abhay Ltd. ` Asha Ltd.`
Sources of Funds
Share Capital – Issued and Subscribed
15,000 equity shares @ ` 100, fully paid 15,00,000
10,000 equity shares @ ` 100, fully paid 10,00,000
Profit & Loss 75,000 25,000
Securities Premium 1,50,000 50,000
Contingency Reserve 45,000 30,000
12% Debentures, @ ` 100 fully paid 2,50,000
Sundry Creditors 55,000 35,000
21,00,000 15,15,000
Application of Funds
Land and Buildings 8,50,000 5,75,000
Goodwill 1,45,000
Inventory 4,20,000 2,40,000
Sundry Debtors 3,05,000 2,85,000
Bank 1,80,000 45,000
21,00,000 15,15,000
They decided to merge and form a new company M/s. Abhilasba Ltd. as on 1 -4-2015 on the
following terms:

6.47 Accounting
(1) Goodwill to be valued at 2 years purchase of the super profits. The normal rate of return
is 10% of the combined share capital and general reserve. All other reserves are to be
ignored for the purpose of goodwill.
Average profits of M/s. Abhay Ltd. is ` 2,75,000 and M/s. Asha Ltd. is ` 1,75,000.
(2) Land and Buildings, Plant and machinery and Inventory of both companies to be valued
at 10% above book value and a provision of 10% to be provided on Sundry Debtors.
(3) 12% debentures to be redeemed, by the issue of 12% preference shares of M/s.
Abhilasha Ltd. (face value of ` 100), at a premium of 10%.
(4) Sundry creditors to be taken over at book value. There is an unrecorded liability of
` 15,500 of M/s. Asha Ltd. as on 1-4-2015.
(5) The bank balance of both companies to be taken over by M/s. Abhilasha Ltd. after
deducting liquidation expenses of ` 60,000 to be borne by M/s. Abhay Ltd. and M/s.
Asha Ltd. in the ratio of 2 : 1.
(i) Compute the basis on which shares of M/s. Abhilasha Ltd. are to be issued to the
shareholders of the existing company assuming that the nominal value of per share of
M/s. Abhilasha Ltd. is ` 100.
(ii) Draw Balance Sheet of M/s. Abhilasha Ltd. as on 1-4-2015 after the amalgamation.
Answer
(i) Computation of Purchase consideration and Basis for issue of Shares
Abhay Ltd. Asha Ltd.
Average profits 2,75,000 1,75,000
Less: Normal profits 1,77,500 1,12,500
Super Profit 97,500 62,500
Goodwill (at 2 years purchase) 1,95,000 1,25,000
Inventory 4,62,000 2,64,000
Debtors less provision 2,74,500 2,56,500
Bank (less liquidation expenses ` 40,000: 20,000) 1,40,000 25,000
23,86,000 15,50,500
Less: Creditors (55,000) (50,500)
Debentures - (2,75,000)
Purchase consideration (Basis for issue of shares) 23,31,000 12,25,000

Amalgamation 6.48
To be satisfied by issue of equity share of Abhilasha 23,310 12,250

Ltd. @ 100 face value
(ii) Balance Sheet of Abhilasha Ltd. (After Amalgamation) as on 01.04.2015
Particulars Notes `
b Reserves and surplus -
Total 39,36,500
Assets
a Fixed assets
(i) Tangible assets 2 21,94,500
(ii) Intangible assets 3 3,20,000
2 Current assets
Inventories 7,26,000
Trade receivables 4 5,31,000
Cash and cash equivalents 5 1,65,000
Total 39,36,500
Notes to accounts
`
1. Share Capital
35,560 equity shares of ` 100 each
35,56,000
2,750 12% Preference shares @ ` 100 each
2,75,000 38,31,000
(The above shares have been issued for
2. Tangible assets
Fixed Assets
Land and Building (` 9,35,000 + ` 6,32,500) 15,67,500
Plant and Machinery (` 3,79,500 + ` 2,47,500) 6,27,000 21,94,500

6.49 Accounting
3. Intangible assets
Goodwill (` 1,95,000 + ` 1,25,000) 3,20,000
Current Assets
4. Trade Receivables ` (3,05,000 + 2,85,000) 5,90,000
Less: Provision for doubtful debts (59,000) 5,31,000
5. Cash and cash equivalents (Bank) 1,65,000

Average Due Date and
7 Account Current
UNIT 1: AVERAGE DUE DATE
Interest  Average Due Date is one on which the net amount payable can
calculation on be settled without causing loss of interest either to the borrower
basis of or the lender.
Average Due
Date  When the amount is lent in various instalments then average due
date can be calculated as:
Total of [Amount  No. of days from
Average due date = Base date  base date to due date]
Total amounts
 When interest is chargeable on drawings, and drawings are on

different dates, interest may be calculated on the basis of Average
Due Date of drawings.
 Average due date in a case where the amount is lent in one
instalment and repayment is done in various instalments will be:
Sum of days/months/Years from the date
of lending to the date of repayment of
Average due date = Date of Loan + each instalment
Number of instalments
Question 1
Define Average Due Date. List out the various instances when Average Due Date can be used.
Answer
In business enterprises, a large number of receipts and payments by and from a single party
may occur at different points of time. To simplify the calculation of interest involved for such
transactions, the idea of average due date has been developed. Average Due Date is a break -

7.2 Accounting
even date on which the net amount payable can be settled without causing loss of interest
either to the borrower or the lender.
Few instances where average due date can be used:
(i) Calculation of interest on drawings made by the proprietors or partners of a business firm
at several points of time.
(ii) Settlement of accounts between a principal and an agent.
(iii) Settlement of contra accounts, that is, A and B sell goods to each other on different
dates.
Question 2
E owes to F the following amounts:
` 5,000 due on 10th March, 2011
` 18,000 due on 2nd April, 2011
` 60,000 due on 30th April, 2011
` 2,000 due on 10th June, 2011
He desires to make the full payment on 30th June, 2011 with interest at 10% per annum after the
average due date. Find out the average due date and the amount of interest.
Answer
Calculation of Average Due Date
Taking 10th March, 2011 as the base date.
No. of days from the base

Due date Amount Product
date i.e. 10th March, 2011
2011 ` `
10th March 5,000 0 0
2nd April 18,000 23 4,14,000
30th April 60,000 51 30,60,000
10th June 2,000 92 1,84,000
85,000 36,58,000
Total of products
Average due date=Base date+ Days equal to
Total amount
R`36,58,000
= 10th March +
` 85,000

Average Due Date and Account Current 7.3
= 10th March + 43 days =22nd April, 2011

Interest amount: Interest can be calculated on ` 85,000 after 22nd April, 2011 to 30th June,
2011 at 10% p.a. i.e. interest on ` 85,000 for 69 days at 10%.
=` 85,000 x 10/100 x 69/365 = ` 1,607 (approx.)
Question 3
Calculate average due date from the following informations:
Date of bill Term Amount (`)

1st March, 2011 2 months 4,000
10th March, 2011 3 months 3,000
5th April, 2011 2 months 2,000
20th April, 2011 1 months 3,750
10th May, 2011 2 months 5,000
Answer
(Taking 4th May, 2011 as the base date)
Date of bill Term Due date Amount No. of days from Product
` the base date i.e. `
May 4, 2011
2011 2011
1st March 2 months 4th May 4,000 0 0
10th March 3 months 13th June 3,000 40 1,20,000
5th April 2 months 8th June 2,000 35 70,000
20th April 1 month 23rd May 3,750 19 71,250
10th May 2 months 13th July 5,000 70 3,50,000
17,750 6,11,250
Total of products
Total amount
R` 6,11,250
= 4th May, 2011 + = 4th May, 2011 + 35 days = 8th June, 2011
17,750

7.4 Accounting
Question 4
‘A’ lent ` 25,000 to ‘B’ on 1 st January, 2011. The amount is repayable in 5 half-yearly
installments commencing from 1 st January, 2012. Calculate the average due date and interest
@ 10% per annum.
Answer
Calculation of sum of periods from the date of each transaction:
1st payment is made after 12 months from the date of loan.
2nd payment is made after 18 months from the date of loan.
3rd payment is made after 24 months from the date of loan.
4th payment is made after 30 months from the date of loan.
5th payment is made after 36 months from the date of loan.
Sum of the months =120
Average due date =
Sum of months from 1st January, 2011 to the date of each installment
Date of loan +
Number of installments
120 months
=1st January, 2011 +
5
=1st January, 2011+ 24 months
=1st January, 2013
Interest = ` 25,000 x 10/100 x 2 years
=` 5,000
Question 5
Calculate average due date from the following information:
Date of bill Term Amount (`)
16th August, 2010 3 months 3,000
20th October, 2010 60 days 2,500
14thDecember, 2010 2 months 2,000
24th January, 2011 60 days 1,000
06th March, 2011 2 months 1,500

Answer
(Taking November 19, 2010 as the base date)
Date of bill Term Due date Amount No. of days Product (no.
(including 3 ` from the base of days x
grace days) date amount)
16th August, 2010 3 months Nov. 19, 2010 3,000 0 0
20th October, 2010 60 days Dec. 22, 2010 2,500 33 82,500
14th December, 2010 2 months Feb. 17, 2011 2,000 90 1,80,000
24th January, 2011 60 days March 28 , 2011 1,000 129 1,29,000
06th March, 2011 2 months May 09, 2011 1,500 171 2,56,500
10,000 6,48,000
Total of products
Total amount
= November 19, 2010 +6,48,000/10,000
= November 19, 2010 + 65 days = January 23, 2011
Question 6
A trader allows his customers, credit for one week only beyond which he charges interest
@ 12% per annum. Anil, a customer buys goods as follows:
Date of Sale/Purchase Amount (`)
January 2, 2012 6,000
January 28, 2012 5,500
February 17, 2012 7,000
March 3, 2012 4,700
Anil settles his account on 31 st March, 2012. Calculate the amount of interest payable by Anil
using average due date method.
Answer
Let us assume 9 th January, 2012 to be the base date:
Date of Due date of Amount (`) No. of days from Product
Sale payment 9th January, 2012
Jan. 2 Jan. 9 6,000 0 0
Jan. 28 Feb. 4 5,500 26 1,43,000

7.6 Accounting
Feb. 17 Feb. 24 7,000 46 3,22,000

March 3 March 10 4,700 61 2,86,700
23,200 7,51,700
Sum of Pr oduct
Average Due date = Base date +
Sum of amount
7,51,700
= 9th January, 2012 +  33days
23,200
33 days from 9 th January, 2012 = 11th February, 2012
Thus, average due date = 11th February, 2012
No. of days after 11th February, 2012 to 31st March, 2012 = 49 days.
Interest payable by Anil on ` 23,200 for 49 days @ 12% per annum
49 12
= ` 23,200 x x = ` 372.72
366 100
Question 7
From the following details find out the average due date:
Date of Bill Amount ( `) Usance of Bill
29th January, 2012 5,000 1 month
20 March, 2012
th 4,000 2 months
12th July, 2012 7,000 1 month
10th August, 2012 6,000 2 months
Answer
(Taking 3rd March, 2012 as base date)
Date of bill Term Due date Amount No. of days from Product
2012 2012 the base date i.e.
3rd March,2012
(`) (`) (`)
29th January 1 month 3rd March1 5,000 0 0
20th March 2 months 23rd May 4,000 81 3,24,000
1 Bill dated 29 th January, 2012 has the maturity period of one month and since 2012 is a leap year 29 th
February, 2012 shall be the maturity date and due date would be 3 rd March, 2012 (after adding 3 days
of grace).

12th July 1month 14th Aug.2 7,000 164 11,48,000

10th August 2 months 13th Oct. 6,000 224 13,44,000
22,000 28,16,000
Sum of Products
Average due date = Base date + Days equal to
Sum of Amounts
28,16,000
= 3rd March, 2012 +
22,000
= 3rd March, 2012 + 128 days = 9th July, 2012
Question 8
A and B are partners in a firm and share profits and losses equally. A has withdrawn the
following sum during the half year ending 30 th June 2012:
Date Amount (`)
January 15 5,000
February 10 4,000
April 5 8,000
May 20 10,000
June 18 9,000
Interest on drawings is charged @ 10% per annum. Find out the average due date and
calculate the interest on drawings to be charged on 30 th June 2012
Answer
Calculation of Average due date
(Base Date 15th Jan, 2012)
Date Amount No. of days Product
` from base date `
January 15 5,000 0 0
February 10 4,000 26 1,04,000
April 5 8,000 81 6,48,000
May 20 10,000 126 12,60,000
June 18 9,000 155 13,95,000
36,000 34,07,000
2 Bill dated 12 th July, 2012 has the maturity period of one month, due date (after adding 3 days of
grace) falls on 15 th August, 2012. 15 th August being public holiday, due date would be preceding date
i.e. 14 th August, 2012.

7.8 Accounting
Total product
Average due date = Base date +  days
Total amount
34,07,000
= 15th Jan + days
36,000
= 15th Jan + 95 days = 19th April, 2012
Number of days after 19th April, 2012 to 30 th June, 2012 = 72 days
Interest on drawings after 19th April to 30 th June @10%:
72 10
= ` 36,000   = ` 708
366 100
Hence, interest on drawings ` 708 will be charged from A on 30 th June, 2012.
Question 9
Mr. Black accepted the following bills drawn by Mr. White:
Date of Bill Period Amount (`)
09-03-2011 4 months 4,000
16-03-2011 3 months 5,000
07-04-2011 5 months 6,000
18-05-2011 3 months 5,000
He wants to pay all the bills on a single date. Interest chargeable is @ 18% p.a. and
Mr. Black wants to earn ` 150 on account of interest payment. Find out the date on which he
has to effect the payment to earn interest of ` 150. Base date to be taken shall be the earliest
due date.
Answer
Calculation of Average Due Date taking base date as 19.06.2011
Date of Bill Period Maturity date No. of days from the Amount Products
base date (`)
09.03.2011 4 months 12.07.2011 23 4,000 92,000
16.03.2011 3 months 19.06.2011 0 5,000 0
07.04.2011 5 months 10.09.2011 83 6,000 4,98,000
18.05.2011 3 months 21.08.2011 63 5,000 3,15,000
20,000 9,05,000
Total of pr oduct
Average due date = Base date +
Total of amount

9,05,000
= 19.06.2011 + = 19.06.2011 + 46 days = 4th August, 2011.
20,000
Computation of date of payment to earn interest of ` 150
Interest per day = [` 20,000 x (18/100)] / 365 days
= ` 3,600/365 = ` 10 per day (approx.)
To earn interest of ` 150, the payment should be made 15 days (` 150 / ` 10 per day) earlier
to the due date. Accordingly, the date of payment would be:
Date of payment to earn interest of ` 150 = 4th August, 2011 –15 days = 20th July, 2011.
Question 10
T owes to K the following amounts:
` 7,000 due on 15th March, 2012
` 12,000 due on 5th April, 2012
` 30,000 due on 25th April, 2012
` 20,000 due on 11th June, 2012
He desires to make the full payment on 30th June, 2012 along with interest @ 10% per annum
after the average due date. Find out the average due date and the amount of interest. Amount of
interest may be rounded off to the nearest rupee.
Answer
Calculation of Average Due Date taking 15 th March, 2012 as the base date
Due date Amount No. of days from the base Product
date i.e. 15th March, 2012
`
15th March, 2012 7,000 0 0
5th April, 2012 12,000 21 2,52,000
25th April, 2012 30,000 41 12,30,000
11th June 2012 20,000 88 17,60,000
69,000 32,42,000
Total of products
Average due date = Base date + Days equal to
Total amount
32,42,000
= 15th March, 2012 +
69,000
= 15th March, 2012 + 47 days =1st May, 2012

7.10 Accounting
Interest amount: Interest can be calculated on ` 69,000 after 1st May, 2012 to 30 th June,
2012 at 10% p.a. i.e. interest on ` 69,000 for 60 days at 10% p.a. =` 69,000 x 10/100 x
60/366 = ` 1,131 (approx.)
Note: Alternatively, interest can be calculated on the basis of 365 days instead of 366 days.
In such a case, interest amount will be ` 1,134 (approx.) instead of ` 1,131.
Question 11
The following transactions took place between Thick and Thin. They desire to settle their
account on average due date.
Purchases by Thick from Thin (` )
9th July, 2013 7,200
14th August, 2013 12,200
Sales by Thick to Thin (` )
15th July, 2013 18,000
31st August, 2013 16,500
Calculate Average Due Date and the amount to be paid or received by Thick.
Answer
Computation of products for Thick’s payments
(Taking 9.7.13 as base date)
Due Date Amount No. of days from base date to due date Product
` `
9.7.13 7,200 0 0
14.8.13 12,200 36 4,39,200
19,400 4,39,200
Computation of products for Thin’s payments (Base date = 9.7.13)
Due Date Amount No. of days from base date to due date Product
` `
15.7.13 18,000 6 1,08,000
31.8.13 16,500 53 8,74,500
34,500 9,82,500
Excess of Thin’s products over Thick [9,82,500-4,39,200] 5,43,300
Excess of Thin’s amounts over Thick [34,500-19,400] 15,100

5,43,300
Number of days from base date to date of settlement is = = 36 days (approx.)
15,100
Hence, the date of settlement of the balance amount is 36 days after 9th July, i.e. 14th August.
Thus, on 14 th August, 2013, Thin has to pay ` 15,100 to Thick.
Question 12
Kishanlal has made the following sales to Babulal. He allows a credit period of 10 days
beyond which he charges interest @ 12% per annum.
Date of Sales Amount ( `)
26.05.14 12,000
18.07.14 18,000
02.08.14 16,500
28.08.14 9,500
09.09.14 15,500
17.09.14 13,500
Babulal wants to settle his accounts on 30-9-2014. Calculate the interest payable by him using
Average Due Date (ADD). If Babulal wants to save interest of `588, how many days before
30.9.2014 does he have to make payment? Also find the payment date in this case.
Answer
Calculation of Average Due date (Taking 05 th June as the base date)
Date Due Date Amount No. of days from Product
` Base date `
26.05.2014 05.06.2014 12,000 0 0
18.07.2014 28.07.2014 18,000 53 9,54,000
02.08.2014 12.08.2014 16,500 68 11,22,000
280.8.2014 07.09.2014 9,500 94 8,93,000
09.09.2014 19.09.2014 15,500 106 16,43,000
17.09.2014 27.09.2014 13,500 114 15,39,000
85,000 61,51,000
61,51,000
Average due date = 5.6.14 +
85,000
= 5.6.14 + 72 days (app.) = 16.08.2014
Interest if settlement is done on 30.9.14

7.12 Accounting
45
85,000 x 12% x = ` 1,258 (approx.)
365
If Babulal wants to save interest of ` 588, then he has to make the payment following days
before 30.09.2014:
= 588/1258 X 45 days (16.08.2014 to 30.09.2014) = 21 days earlier
Payment date in the above case will be 09.09.2014.
Question 13
From the following details, find out the average due date:
Date of Bill Amount (`) Usance of bill
29th January 2014 10,000 1 month
20th March 2014 8,000 2 months
12th July 2014 14,000 1 month
10th August 2014 12,000 2 months
Answer
(Taking 3rd March, 2014 as base date)
Date of bill Term Due date Amount No. of days Product
2014 2014 from the base
date i.e. 3rd
March, 2014
` ` `
29 th January 1 month 3rd March* 10,000 0 0
20 th March 2 months 23 rd May 8,000 81 6,48,000
12 th July 1month 14 th Aug.** 14,000 164 22,96,000
10 th August 2 months 13 th Oct. 12,000 224 26,88,000
44,000 56,32,000
= 3rd March, 2014 + (56,32,000/ 44,000)
= 3rd March, 2014 + 128 days
Note:
1. * Bill dated 29th January, 2014 has the maturity period of one month, but there is no
corresponding date in February, 2014, therefore, due date (after adding 3 days of grace)
falls on 3rd March ,2014 as the last date of the month shall be deemed maturity date.

2. ** Bill dated 12th July, 2014 has the maturity period of one month, due date (after
adding 3 days of grace) falls on 15th .August, 2014. 15th August being public ho liday,
due date would be preceding date i.e. 14th August, 2014.
Question 14
Mr. Yash and Mr. Harsh are partners in a firm. They had drawn the following amounts from the
firm during the year ended 31.03.2015:
Date Amount (`) Drawn by
01.05.2014 75,000 Mr. Yash
30.06.2014 20,000 Mr. Yash
14.08.2014 60,000 Mr. Harsh
31.12.2014 50,000 Mr. Harsh
04.03.2015 75,000 Mr. Harsh
31.03.2015 15,000 Mr. Yash
Interest is charged @ 10% p.a. on all drawings. Calculate interest chargeable from each
partner by using Average due date system. (Consider 1 st May as base date)
Answer
Calculation of Interest chargeable from Partners
Taking 1st May as the base date
Dates Amount (`) Days from 1st May Products ( `)
Yash 1.5.2014 75,000 0 0
30.6.2014 20,000 60 12,00,000
31.3.2015 15,000 334 50,10,000
1,10,000 62,10,000
62,10,000
Average Due Date = days from 1st May. i.e 57 days
1,10,000
= 27thJune
Interest is chargeable for Yash from 27 th June to March 31 i.e. 277 days
` 1,10,000 x 10% x 277/365 = ` 8,348
Dates ` Days from 1 May Products ( `)
Harsh 14.8.2014 60,000 105 63,00,000
31.12.2014 50,000 244 1,22,00,000
4.3.2015 75,000 307 2,30,25,000
1,85,000 4,15,25,000

7.14 Accounting
4,15,25,000
Average Due Date = days from 1 May = 225 days.
1,85,000
= 12th Dec.
Interest is chargeable for Harsh from 12 December to 31 st March i.e. for 109 days.
10 109
` 1,85,000 x x = ` 5,525
100 365
Thus, interest amounting ` 8,348 will be charged from Yash and amount of ` 5,525 will be
charged from Harsh.
Question 15
Anand purchased goods from Amirtha, the average due date for payment in cash is
10.08.2015 and the total amount due is ` 67,500. How much amount should be paid by Anand
to Amirtha, if total payment is made on following dates and interest is to be considered at the
rate of 12% p.a.
(i) On average due date.
(ii) On 25th August, 2015.
(iii) On 30th July, 2015.
Answer
A B C D=B C
Principal Interest from Average Due Date to Actual date of Total amount
Amount Payment to be paid
(i) Payment on average due date
` 67,500 12 0
` 67,500 x   0
100 365 ` 67,500
(ii) Payment on 25th Aug. 2015
` 67,500 12 15
` 67,500 x   333
100 365 ` 67,833
Interest to be charged for period of 15 days from
10.8.2015 to 25th Aug. 2015
(iii) Payment on 30th July, 2015
` 67,500 12 (11)
` 67,500 x   (244)
100 365 ` 67,256
Rebate has been allowed for unexpired credit
period of 11 days from 30.7.2015 to 10.8.2015

Exercise
1. Calculate Average Due date from the following information:
Date of the bill Term Amount
`
August 10, 2010 3 months 6,000
October 23, 2010 60 days 5,000
December 4, 2010 2 months 4,000
January 14, 2011 60 days 2,000
March 08, 2011 2 months 3,000
(Hints: Average due date = January 19, 2011.)
2. Hari owes Ram ` 2,000 on 1st April, 2011. From 1st April, 2011 to 30th June, 2011 the following further
transactions took place between Hari and Ram:
April 10 Hari buys goods from Ram for ` 5,000
May 16 Hari receives cash loan of ` 10,000 from Ram
June 9 Hari buys goods from Ram for ` 3,000
Hari pays the whole amount, together with interest @ 15% per annum, to Ram on 30 th June, 2011.
Calculate the interest payable on 30th June, 2011 by the average due-date method.
(Hints: Average due date =6th May, 2011; Interest= ` 452 (approx.))
3. Mr. Green and Mr. Red had the following mutual dealings and desire to settle their account on the
average due date:
Purchases by Green from Red: Rs.
6th January, 2011 6,000
2nd February, 2011 2,800
31st March, 2011 2,000
Sales by Green to Red:
6th January, 2011 6,600
9th March, 2011 2,400
20th March, 2011 500
You are asked to ascertain the average due date.
(Hints: On 20th February, 2011, Green has to pay Red ` 1,300 to settle the account)

7.16 Accounting
UNIT-2 : ACCOUNT CURRENT

BASIC CONCEPTS
Account
Current  When interest calculation becomes an integral part of the account.
The account maintained is called “Account Current”.
Some examples where it is maintained are:
 Frequent transactions between two parties.
 Goods sent on consignment
 Frequent transactions between a banker and his customers
 There are three ways of preparing an Account Current :
 With the help of interest tables
 By means of products
 By means of products of balances
Question 1
On 1st January, 2011 Suri’s account in Puri’s ledger showed a debit balance of ` 2,500. The
following transactions took place between Puri and Suri during the quarter ended 31st March, 2011:
2011 `
Jan 11 Puri sold goods to Suri 3,000
Jan 24 Puri received a promissory note from Suri at 3 months date 2,500
Feb 01 Suri sold goods to Puri 5,000
Feb 04 Puri sold goods to Suri 4,100
Feb 07 Suri returned goods to Puri 500
March 01 Suri sold goods to Puri 2,800
Mar 18 Puri sold goods to Suri 4,600
Mar 23 Suri sold goods to Puri 2,000
Accounts were settled on 31stMarch, 2011 by means of a cheque. Prepare an Account
Current to be submitted by Puri to Suri as on 31st March, 2011, taking interest into account
@ 10% per annum. Calculate interest to the nearest rupee.

In the books of Puri
Suri in Account Current with Puri
(interest to 31 st march,2011@10%p.a.)
Date Particulars Due Date Amount Days Products Date Particulars Due Date Amount Days Products
2011 ` 2011 `
Jan.1 To Balance b/d Jan. 1 2,500 90 2,25,000 Jan.24 By B/R April 27 2,500 (27) (67,500)
Jan. 11 To Sales Jan 11 3,000 79 2,37,000 Feb. 1 By Purchases Feb. 1 5,000 58 2,90,000

Feb. 4 To Sales Feb. 4 4,100 55 2,25,500 Feb. 7 By Sales Returns Feb. 7 500 52 26,000
Mar. 18 To Sales Mar. 18 4,600 13 59,800 Mar. 1 By Purchases Mar.1 2,800 30 84,000
Mar. 31 To Interest 109 Mar. 23 By Purchases Mar. 23 2,000 8 16,000
Mar. 31 By Balance of 3,98,800
Products
Mar. 31 By Bank 1,509
Total 14,309 7,47,300 14,309 7,47,300
Calculation of interest:
3,98,800 10
Interest =  = ` 109
365 100

7.18 Accounting
Question 2
The following are the transactions that took place between G and H during the period from
1st October, 2010 to 31st March, 2011:
2010 `
Oct.1 Balance due to G by H 3,000
Oct 18 Goods sold by G to H 2,500
Nov. 16 Goods sold by H to G (invoice dated November, 26) 4,000
Dec.7 Goods sold by H to G (invoice dated December, 17) 3,500
2011 `
Jan. 3 Promissory note given by G to H, at three months 5,000
Feb. 4 Cash paid by G to H 1,000
Mar. 21 Goods sold by G to H 4,300
Mar.28 Goods sold by H to G (invoice dated April, 8) 2,700
Draw up an Account Current up to March 31st, 2011 to be rendered by G to H, charging interest at

10% per annum. Interest is to be calculated to the nearest rupee.

Answer
In the books of G
H in Account Current with G
(interest to 31st march,2011@10%p.a.)
Date Due Particulars No. of days Amt. Product Date Due date Particulars No. of days Amt. Product
date till 31.3.11 till 31.3.11
2010 2010 ` ` 2010 2010 ` `
Oct 1, Oct 1, To Balance b/d 182 3,000 5,46,000 Nov 16 Nov 26 By Purchases 125 4,000 5,00,000
Oct 18, Oct 18 To Sales 164 2,500 4,10,000 Dec 7 Dec. 17 By Purchases 104 3,500 3,64,000
2011 2011 2011 2011

Jan 3 Apr 6 To Bills payable (6) 5,000 (30,000) Mar 28 Apr 8 By Purchases (8) 2,700 (21,600)
Feb 4 Feb 4 To Cash 55 1,000 55,000 Mar 31 Mar 31 By Balance of 1,81,600
product
Mar 21 Mar. 21 To Sales 10 4,300 43,000 By Balance c/d 5,650
Mar 31 Mar 31 To Interest 50 -
15,850 10,24,000 15,850 10,24,000
1,81,600 x 10 x 1
Interest for the period = = ` 50 (approx.)
100 x 365
7.20 Accounting
Question 3
Roshan has a current account with partnership firm. It has debit balance of ` 75,000 as on
01-07-2012. He has further deposited the following amounts:
Date Amount (`)
14-07-2012 1,38,000
18-08-2012 22,000
He withdrew the following amounts :
Date Amount (`)
29-07-2012 97,000
09-09-2012 11,000
Show Roshan's A/c in the ledger of the firm. Interest is to be calculated at 10% on debit
balance and 8% on credit balance. You are required to prepare current account as on 30th
September, 2012 by means of product of balances method.
Answer
Roshan’s Current Account with Partnership firm (as on 30.9.2012)
Date Particulars Dr Cr Balance Dr. Days Dr Cr
or Product Product
(` ) (` ) (` ) Cr. (` ) (` )
01.07.12 To Bal b/d 75,000 75,000 Dr. 13 9,75,000
14.07.12 By Cash A/c 1,38,000 63,000 Cr. 15 9,45,000
29.07.12 To Self 97,000 34,000 Dr. 20 6,80,000
18.08.12 By Cash A/c 22,000 12,000 Dr. 22 2,64,000
09.09.12 To Self 11,000 23,000 Dr. 22 5,06,000
30.09.12 To Interest A/c 457 23,457 Dr.
30.09.12 By Bal. c/d 23,457
1,83,457 1,83,457 24,25,000 9,45,000
Interest Calculation:
On ` 24,25,000x 10% x 1/365 = ` 664
On ` 9,45,000 x 8% x 1/365 = (` 207)
Net interest to be debited = (` 457)

Question 4
From the following particulars prepare a account current, as sent by Mr. Ram to Mr. Siva as on
31st October 2014 by means of product method charging interest @ 5% p.a.
2014 Particulars `
1st July Balance due from Siva 750
15th August Sold goods to Siva 1250
20th August Goods returned by Siva 200
22nd Sep Siva paid by cheque 800
15th Oct Received cash from Siva 500
Answer
Siva in Account Current with Ram as on 31 st Oct, 2014

Dr. Cr.
` Days Product ` Days Product
(` ) (` )
01.07.14 To Bal. b/d 750 123 92,250 20.08.14 By Sales 200 72 14,400
Returns
15.8.14 To Sales 1,250 77 96,250 22.09.14 By Bank 800 39 31,200
31.10.14 To Interest 18.48 15.10.14 By Cash 500 16 8,000
By Balance 1,34,900
of Products
_____ ______ 31.10.14 By Bal. c/d 518.48 ______
2018.48 1,88,500 2018.48 1,88,500
5 1
Interest = ` 1,34,900 x  = ` 18.48
100 365
Exercise
1. From the following particulars prepare an Account Current to be rendered by A to B at 31st
December, reckoning interest @ 10% p.a.
2011 ` 2011 `
July 1 Balance owing from B 600 Sept. 01 B accepted A’s Bill at 3 months date 250
July 17 Goods sold to B 50 Oct.22 Goods bought from B 30
Aug. 1 Cash received from B 650 Nov. 12 Goods sold to B 20
Aug. 19 Goods sold to B 700 Dec. 14 Cash received from B 80
Aug. 30 Goods sold to B 40
Sept. 1 Cash received from B 350

7.22 Accounting
(Hints: Interest (67,090  0.1 /365) = ` 18.38 and Balance c/d ` 68.38)
2. Following transactions took place between X and Y during the month of April, 2011:
Date Particulars `
1.4.2011 Amount payable by X to Y 10,000
7.4.2011 Received acceptance of X to Y for 2 months 5,000
10.4.2011 Bills receivable (accepted by Y) on 7.2.2011 is honoured on this due date 10,000
10.4.2011 X sold goods to Y (due date 10.5.2011) 15,000
12.4.2011 X received cheque from Y (due date 15.5.2011) 7,500
15.4.2011 Y sold goods to X (due date 15.5.2011) 6,000
20.4.2011 X returned goods sold by Y on 15.4.2011 1,000
20.4.2011 Bill accepted by Y is dishonoured on this due date 5,000
Prepare Y’s account in the books of X for the month of April, 2011.
(Hints: Interest ` 4,17,500  18/100  1/365 = ` 205.90 and Balance c/d ` 2,294.10)

8 Self-Balancing Ledgers
BASIC CONCEPTS
System of  Self Balancing Ledger System implies a system of ledger

Ledger keeping which classifies ledgers as per nature of transactions.
keeping
 In this system, generally three ledgers, namely debtors ledger,
creditors ledger and main ledger (containing remaining
accounts) are prepared.
 In such a case "General Ledger Adjustment Account" is
prepared in each of the subsidiary ledgers. The General ledger
would have Bought Ledger Adjustment Account (in reality,
Total Creditors Account) and Sales Ledger Adjustment
Account (in reality, Total Debtors Account). These accounts
are known as Control Accounts.
Question 1
Write short note on Self balancing ledgers.
Answer
A self balancing ledger system implies a system of ledger keeping which classifies ledgers as per
nature of transactions namely Sales Ledger, Bought Ledger, General Ledger etc. and also make
them to balance independently. In order to make each ledger self-balancing, an extra account
called General Ledger Adjustment Account is opened in each of the sales ledger and bought
ledger. Normally, the accounts of individual debtors are maintained recording credit sales, cash
collections, discount, bad debts etc, in Debtors Ledger or Sales Ledger. The General Ledger
Adjustment account in the Sales Ledger gives a summary of all these transactions in a reverse
manner. Similarly in Bought ledger, General Ledger Adjustment account gives a summary of all
transactions of the Bought Ledger in a reverse manner. Against these ledger adjustment accounts,
two other adjustment accounts are maintained in the General Ledger to complete the double entry.
These adjustment accounts are known as Control Accounts. The correctness of individual
balances in each ledger would be verified by extracting its balances and agreeing them with the

8.2 Accounting
balance of the Control Account. The object of the system is to identify errors and to facilitate their
quick detection with the minimum effort.
Question 2
Distinguish between Self and Sectional Balancing System.
Answer
A self balancing ledger system implies a system of ledger keeping which classifies ledgers as per
nature of transactions namely, Sales Ledger, Bought Ledger, General Ledger etc. and also make
them to balance independently.
In order to make each ledger self-balancing, an extra account called General Ledger Adjustment
Account is opened in each of the sales ledger and bought ledger. Normally, the accounts of
individual debtors are maintained recording credit sales, cash collections, discount, bad debts etc.
in Debtors Ledger or Sales Ledger. The General Ledger Adjustment account in the Sales Ledger
gives a summary of all these transactions in reverse manner. Similarly in Bought ledger, general
ledger adjustment account gives a summary of all transactions of the Bought Ledger in a reverse
manner. Against these ledger adjustment accounts, two other adjustment accounts are maintained
in the General Ledger to complete the double entry.
(a) Bought Ledger Adjustment Account.
(b) Sales Ledger Adjustment Account.
These adjustment accounts are known as Control Accounts. The correctness of individual
balances in each ledger would be verified by extracting its balances and agreeing them with the
balance of the Control Account. The object of the system is to identify errors and to facilitate their
quick detection with the minimum effort.
Under sectional balancing system, only two additional accounts (i) Total Debtors Account; and (ii)
Total Creditors Account are kept in the General Ledger. Thus, only the totals account for each of
the subsidiary ledgers is opened in the General Ledger and no Control Account/Adjustment
Account is opened in the subsidiary ledger. It would mean that whereas accounts of individual
debtors would be maintained in the Sales Ledger; in the General Ledger, the Total Debtors
Account would be posted by the (monthly) totals of various transactions with debtors. The balance
in the Total Debtors Account should be equal to the total of balances shown by the accounts of
individual debtors. A difference would show that there are some errors somewhere. In the same
way, the accuracy of individual supplier’s account may be checked by comparing the total of their
balances with the balance of the Total Creditors Account. A trial balance can be prepared on the
basis of General Ledger only, without using Debtors’ Ledger and Creditors’ Ledger since the
double entry is completed in the General Ledger itself.

Self Balancing Ledgers 8.3
Question 3
State with reasons, whether the following statements are true or false:
(a) Under the self balancing system the general ledger adjustment account is always opened in
the general ledger.
(b) Purchase Ledger Adjustment Account under sectional balancing system is also known as
Creditors Ledger Control Account.
(c) In self balancing system, whenever a balance is transferred from an account in one ledger to
that in another, only one entry is recorded through the respective ledger.
Answer
(a) False- Under the self balancing system, general ledger adjustment account is opened in
each of the sales ledger and purchases ledger. In general ledger, two adjustment
accounts namely sales ledger adjustment account and purchases ledger adjustment
accounts are maintained.
(b) True- Purchase ledger adjustment account is in reality, total creditors account, hence
also known as creditors ledger control account under sectional balancing system.
(c) False- Whenever a balance is transferred from one account in one ledger to that in
another, the entry is recorded through the journal. Also an additional entry is made in the
control accounts for recording the corresponding effect.
Question 4
Prepare the General Ledger Adjustment Account as will appear in the Debtors’ and Creditors’
Ledger from the information given below:
Dr. Cr.
` `
Balances on 1.4.2010
Debtors’ Ledger 47,200 240
Creditors’ Ledger 280 26,300
Transactions for the year ended 31.3.2011:
Total sales 1,20,000
Cash sales 8,000
Total purchases 89,500
Credit purchases 67,000
Creditors paid off (in full settlement of ` 40,000) 39,500
Received from debtors (in full settlement of ` 59,000) 58,200
Returns from debtors 2,600

8.4 Accounting
Returns to creditors 1,800

Bills accepted for creditors 5,500
Bills payable matured 8,000
Bills accepted by debtors 20,100
Bills receivables dishonoured 1,500
Bills receivable discounted 5,000
Bills receivable endorsed to creditors 4,000
Endorsed bills dishonoured 1,000
Bad debts written off (after deducting bad debts recovered ` 300) 2,200
Provision for doubtful debts 550
Transfer from debtors’ ledger to creditors’ ledger 1,100
Transfer from creditors’ ledger to debtors’ ledger 1,900
Balances on 31.3.2011
Debtors’ ledger (Cr.) 380
Creditors’ ledger (Dr.) 420
Answer
In Debtors’ Ledger
General Ledger Adjustment Account
` `
1.4.2010 To Balance b/d 240 1.4.2010 By Balance b/d 47,200
To Debtor’s By Debtors
ledger ledger
adjustment adjustment
account: account:
Bank 58,200 Sales (on 1,12,000
Discount 800 credit)
Returns 2,600 Bills
Bills receivable
receivable dishonoured
Bad debts Endorsed
written off 20,100 bills 1,500
Bad debts receivable
written off 2,500 84,200 dishonoured 1,000 1,14,500
To Debtors 31.3.2011 By Balance c/d 380
ledger
adjustment

account:
Transfer
from
debtors
ledger
to creditor’s
ledger 1,100
Transfer
from
creditor’s
ledger to
debtor’s
ledger 1,900 3,000
31.3.2011 To Balance c/d
(bal. fig.) 74,640
1,62,080 1,62,080
Creditor’s Ledger
General Ledger Adjustment Account
` `
1.4.2010 To Balance b/d 26,300 1.4.2010 By Balance b/d 280
To Creditors’ By Creditors’
ledger ledger
adjustment adjustment
A/c: A/c:
Purchases 67,000 Bank 39,500
Endorsed bills Discount
receivable received 500
dishonoured 1,000 68,000 Returns 1,800
31.3.2011 To Balance b/d 420 Bills payable 5,500
Bills receivable
endorsed 4,000 51,300
By Creditors’
ledger
adjustment
A/c:
Transfer from
debtors’ ledger to
creditors’ ledger 1,100

8.6 Accounting
Transfer from
creditors’ ledger
to debtors’ ledger 1,900 3,000
31.3.2011 By Balance c/d
(bal. fig.) 40,140
94,720 94,720
Notes: No entries will be made for the following transactions as they do not affect general ledger
adjustment accounts:
(i) Cash sales
(ii) Bills payable matured
(iii) Bills receivable discounted
(iv) Bad debts recovered and
(v) Provision for doubtful debts.
Question 5
From the following information available from the books of a trader from 1.1.2011 to 31.3.2011, you
are required to draw up the Debtors Ledger Adjustment Account in the General Ledger:
(a) Total sales amounted to ` 1,80,000 including the sale of old zerox machine for ` 4,800 (book
value ` 8,000). The total cash sales were 80% less than the total credit sales.
(b) Cash collections from debtors amounted to 70% of the aggregate of the opening debtors and
credit sales for the period. Debtors were allowed a cash discount of ` 20,000.
(c) Bills receivable drawn during the three months totalled ` 30,000 of which bills amounting to
` 10,000 were endorsed in favour of suppliers. Out of the endorsed bills, one bill for
` 6,000 was dishonoured for non-payment as the party became insolvent, his estate realized
nothing.
(d) Cheque received from debtors ` 8,000 were dishonoured, a sum of ` 2,000 was
irrecoverable; Bad debts written off in the earlier years realised ` 11,000.
(e) Sundry debtors as on 1.1.2011 stood at ` 50,000.
Answer
In General Ledger
Debtors Ledger Adjustment Account
Dr. Cr.
2011 ` 2011 `
Jan. 1 To Balance b/d 50,000 Mar.31 By General ledger

Mar. 31 To General ledger adjustment account:

adjustment account:
Sales 1,46,000 Collection-cash and
[(100/120) x (1,80,000- bank(70 % of the
4,800)] ` 1,96,000) 1,37,200
Creditors-bill
receivable dishonoured 6,000 Discount 20,000
Bank-cheques 8,000 Bills receivable 30,000
dishonoured
Bad debts 8,000
(6,000+2,000)
_______ By Balance c/d 14,800
2,10,000 2,10,000
Question 6
The following information is extracted from the books of Shri Hari for the year ended 31 st March,
2011.
`
Sales 3,80,800
Purchases 3,26,000
Return outwards 14,000
Cash received from debtors 1,78,200
Bills payable accepted 1,22,000
Returns inward 17,600
Cash paid to creditors 1,86,000
Bills receivable received 1,36,000
Discount received 4,000
Bad debit written off 24,000
Reserve for discount to debtors. 2,000
Discount allowed 1,800
Transfers from purchases ledger 26,600
The total of the sales ledger balance on 1st April, 2010 was ` 90,600 and that of the purchases
ledger balance on the same date was ` 78,600.
Prepare sales ledger and purchases ledger adjustment accounts from the above information.

8.8 Accounting
Answer
Sales Ledger Adjustment Account
` `
1.4.2010 To Balance b/d 90,600 1.4.2010 By General ledger
1.4.2010 To General ledger to adjustment account:
to adjustment A/c: 31.3.2011 Cash 1,78,200
31.3.2011 Sales 3,80,800 Return inwards 17,600
Bills receivable 1,36,000
Bad debts written off 24,000
Transfer from
purchases ledger 26,600
_______ 31.3.2011 By Balance c/d 87,200
4,71,400 4,71,400
Purchases Ledger Adjustment Account

` `
1.4.2010 To General ledger 1.4.2010 By Balance b/d 78,600
To adjustment account: 1.4.2010 By General
32.3.2011 Cash 1,86,000 To ledger adjustment
31.3.2011 account:
Return outwards 14,000 Purchases 3,26,000
Bills payable 1,22,000
Transfer to sales 26,600
ledger
31.3.2011 To Balance c/d 52,000 _______
4,04,600 4,04,600
Question 7
Prepare the Sales Ledger Control Account in General Ledger from the following particulars:
`
Debit balance as on 1.10.2010 3,75,000
Credit balance as on 1.10.2010 500
Credit sales 10,00,000

Cheques received 11,25,000

Discounts allowed 12,500
Sales returns 25,000
Transfer from purchases to sales ledger 25,000
Bad debts 5,000
Bad debts previously written off now recovered 10,000
Reserve for discounts 25,200
Bills receivable dishonoured 12,500
Debit balance as on 31.3.2011 75,000
Credit balance as on 31.3.2011 ?
Answer
General Ledger
Sales Ledger Control Account
` `
1-10-2010 To Balance b/d 3,75,000 1-10-2010 By Balance b/d 500
1-10-2010 To General ledger 1-10-2010 By General ledger
to control A/c: to control A/c:
31-3-2011 Sales 10,00,000 31-3-2011 Bank 11,25,000
Bills receivable Bills receivable 1,25,000
(dishonoured) 12,500 Discount 12,500
31-3-2011 To Balance c/d (balancing 5,500 Sales return 25,000
figure)
Bad debts 5,000
Transfer 25,000
31.3.2011 By Balance c/d
(given)
75,000
13,93,000 13,93,000
Note: Reserve for discounts and bad debts previously written off now recovered do not appear in
debtors account and hence this will not figure in the sales ledger control account.

8.10 Accounting
Question 8
From the following information, prepare Sales Ledger Adjustment A/c in the General Ledger:
`
On 1.4.2010: Balance in sales ledger (Dr.) 1,41,880
(Cr.) 2,240
On 31.3.2011:
Cash sales 40,000
Sales return 10,000
Cash paid to supplier 4,80,000
Transfer from sales to bought ledger 20,800
B/R received 40,000
Reserve for doubtful debts 9,160
Cash paid to customer 1,840
Bills received dishonoured 6,000
Sales ledger balance (Dr.) 1,83,200
Sales ledger balance (Cr.) 13,720
Answer
In General Ledger
Sales Ledger Adjustment Account
` `
01.04.2010 To Balance b/d 1,41,880 1.4.2010 By Balance b/d 2,240
31.3.2011 To General ledger 31.3.2011 By General ledger
adjustment A/c in sales adjustment A/c in sales
ledger: ledger:
Credit sales 7,28,000 Cash 6,24,000
Cash paid 1,840
Bills receivable Discount
dishonoured 6,000 7,35,840 allowed 11,200
Transfers to

bought ledger 20,800

To Balance c/d 13,720 Bills receivable
received 40,000
Sales return 10,000 7,06,000
_______ By Balance c/d 1,83,200
8,91,440 8,91,440
Question 9
From the following information prepare the necessary adjustment accounts as they would appear
in the general ledger of Vatika Ltd.
`
Closing debtors balance (as per general ledger adjustment account) 60,000 (Cr.)
Credit sales 40,000
Credit purchases 15,000
Paid to creditors 7,500
Bills payable accepted 5,000
Discount received 500
Received from debtors 20,000
Bad debts 5,000
Closing creditors balance (as per general ledger adjustment account) 30,000 (Dr.)
Bills accepted by debtors 3,000
Discount allowed to debtors ` 500 was recorded as discount received from creditors.
Answer
In General Ledger
Debtors’ Ledger Adjustment Account
` `
To Balance b/d (bal.fig.) 49,500 By General ledger adjustment
To General ledger adjustment account:
account: Cash from debtors 20,000
Credit sale 40,000 Bills receivable 3,000
Bad debts 5,000

8.12 Accounting
Discount allowed (1,500+500) 2,000

______ By Balance c/d (60,000-500) 59,500
89,500 89,500
Creditors’ Ledger Adjustment Account
` `
To General ledger By Balance b/d (bal. fig.) 28,000
adjustment A/c: By General ledger adjustment A/c:
Cash paid to creditors 7,500 Credit purchases 15,000
Bills payable 5,000
To Balance c/d (30,000+500) 30,500 ______
43,000 43,000
Question 10
Gupta Traders keep their ledgers on the self balancing system. They provide you the following
information for the year ended 31 st March, 2010:
`
Debtors Ledger balance on April, 2009
1st 1,37,250
Credit sales 68,100
Returns outward 1,800
Cash received from debtors 76,800
Acceptances received 25,500
You are required to prepare General Ledger Adjustment A/c in Sales Ledger of Gupta Traders.
Answer
In the books of Gupta Traders
General Ledger Adjustment A/c in the Sales Ledger
Date Particulars Amount Date Particulars Amount
` `
1 April, To Sales Ledger 1 April, 09 By Balance b/d 1,37,250

2009 to Adjustment A/c 1 April, By Sales Ledger

31st March, (in General 2009 to Adjustment
2010 Ledger): 31 March,
st Account (in
Returns inward 1,200 2010 General Ledger):
Cash Sales 68,100
(received from B/R dishonoured 3,600
debtors) 76,800
Bills receivables 25,500
Bad debts 7,500
31st
March To Balance c/d 97,950
2010
2,08,950 2,08,950
Note : Returns outward and discount received would be shown in the General Ledger Adjustment
Account of Purchases Ledger.
Question 11
On 1st October, 2011, the debit balances of debtors account is ` 77,500 in the books of M/s
Zee Ltd. Transactions during the 6 months ended on 31 st March 2012 were as follows:
`
Total sales (including cash sales ` 14,000) 84,000
Payment received from debtors in cash 38,000
Bills receivable received 26,000
Discount allowed to debtors for prompt payment 1,000
Goods rejected and returned back by the customer 2,550
Bills receivable endorsed to suppliers 5,000
Bills receivables dishonoured 8500
Noting charges on bills dishonoured 250
Bad debts recovered (written off in 2010) 900
Interest debited for delay in payment 1,250
You are required to prepare a Debtors Ledger Adjustment Account for the period ending 31 st
March in the General Ledger of M/s Zee Ltd.

8.14 Accounting
Answer
Debtors Ledger Adjustment Account in the General Ledger of M/s Zee Ltd.
Date Particulars Amount Date Particulars Amount
` `
1.10.11 To Balance c/d 77,500 1.10.11 to By General Ledger
31.3.12 Adjustment A/c:
1.10.11 to To General Ledger Cash collected 38,000
31.3.12 Adjustment A/c: Bills Receivable A/c 26,000
Sales (84,000- Discount allowed 1,000
14,000) 70,000
Bills receivable Sales return 2,550
(Bill dishonored) 8,500 By Balance c/d 89,950
Bank (Noting 31.3.12
charges) 250
Interest 1,250
1,57,500 1,57,500
Working Note:
1. Bad debts of the year 2009-10 recovered in 2011-12 will not appear in the ‘Debtors
Ledger Adjustment account’. It will be credited to profit & loss account.
2. Bills receivables of ` 5,000 endorsed to the supplier will not be shown in the ‘Debtors
Ledger Adjustment account because at the time of endorsement Supplier’s account will
be debited and Bills receivable account will be credited.
Question 12
A business concern maintains self-balancing ledgers. On the basis of following information,
prepare General Ledger Adjustment Account in Debtors Ledger for the month of April, 2012:
(` )
Debit balances in Debtors Ledger on 01-04-2012 3,58,200
Credit balances in Debtors Ledger on 01-04-2012 9,400
Transactions during the month of April, 2012 are:
Total Sales (including Cash Sales, ` 1,00,000) 20,95,400
Sales Returns 33,100
Cash received from credit debtors 17,25,700

Bills Receivable received from debtors 95,000

Bills Receivable dishonoured 7,500
Cash paid to debtors for returns 6,000
Transfers to Creditors Ledger 16,000
Credit balances in Debtors Ledger on 30-04-2012 9,800
Answer
General Ledger Adjustment Account in Debtors Ledger
Date Particulars ` Date Particulars `
01.04.2012 To Balance b/d 9,400 1.4.2012 By Balance b/d 3,58,200
01.04.2012 To Debtors ledger 01.04.2012 By Debtors ledger
to adjustment A/c : to adjustment A/c :
30.4.2012 Cash received 17,25,700 30.4.2012 Credit sales 19,95,400
Sales Returns 33,100 Cash paid for returns 6,000
Bills receivable Bills receivable
received 95,000 dishonoured 7,500
Transfer to 16,000 30.04.2012 By Balance c/d 9,800
creditors ledger
30.04.2012 To Balance c/d
(bal.fig) 4,97,700
23,76,900 23,76,900
Question 13
M/s. Big Systematic Ltd. maintains self-balancing ledgers preparing control accounts at the
end of each calendar month.
On 3rd January, 2013 the accountant of the company located the following errors in the books
of account:
(i) An amount of ` 8,700 received from customer Mehra was credited to Mehta, another
customer.
(ii) The sales book for December, 2012 was undercast by ` 1,000.
(iii) Goods invoiced at ` 15,600 were returned to supplier, M/s Mega Ltd., but no entry was
made in the books for this return made on 28 th December, 2012.
Pass the necessary Journal Entries to rectify the above mentioned errors.

8.16 Accounting
Answer
Journal Entries
In the books of M/s Big. Systematic Ltd.
` `
(i) Mehta (In Sales/ Debtors Ledger) Dr. 8,700
To Mehra (In Sales/ Debtors Ledger) 8,700
(Being amount received from Mehra was wrongly credited
to Mehta, now rectified)
(ii) (a) Suspense Account (In Sales / Debtors Ledger) Dr. 1,000
To Sales Account (In General Ledger) 1,000
(b) Sales/Debtors Ledger Adjustment Account Dr. 1,000
(In General Ledger)
To General Ledger Adjustment Account 1,000
(In Sales/ Debtors Ledger)
(Being rectification of the error resulting from under
casting of the Sales Book)
(iii) (a) M/s. Mega Ltd. A/c (In Creditors/Bought Ledger) Dr. 15,600
To Purchase Returns A/c 15,600
(In General Ledger)
(b) Creditors/Bought Ledger Adjustment A/c Dr. 15,600
(In General Ledger)
To General Ledger Adjustment A/c 15,600
(In Creditors/Bought Ledger)
(Being goods returned to supplier not recorded earlier,
now recorded)
Question 14
From the following particulars, prepare the Creditors' Ledger Adjustment Account as would,
appear in the General Ledger of Mr. Sathish for the month of March 2014.
Date Particulars
1 Purchase from Mr. Akash ` 7,500
3 Paid ` 3000 after adjusting the initial advance in full to Mr. Akash
10 Paid ` 2,500 to Mr. Dev towards the purchases made in February in full.
12 Paid advance to Mr. Giridhar ` 6,000
14 Purchase goods from Mr. Akash ` 6,200
20 Returned goods worth ` 1,000 to Mr. Akash

24 Settled the balance due to Mr. Akash at a discount of 5%.

26 Goods purchased from Mr. Giridhar against the advance paid already
29 Purchased from Mr. Nathan ` 3,500
30 Goods returned to Mr. Prem 1,200. The goods were originally purchased form
cash in the month of February 2014.
Answer
Creditors Ledger Adjustment Account in the General Ledger for month of March, 2014
2014 ` 2014 `
March 1 To Balance b/d 4,500 March 1 By Balance b/d 2,500
(Advance to Akash) (Due to Mr. Dev)
March 31 To General Ledger March 31 By General Ledger
Adjustment A/c (In Adjustment A/c (in
Bought Ledger) Bought Ledger)
Bank (WN 2) 16,440 Purchases (WN 1) 23,200
Returns (Akash) 1,000
Discount 260
(5% of 5,200)
March 31 To Balance c/d
(Due to Nathan) 3,500 ____
25,700 25,700
Note: The above answer is given on the basis that Mr. Prem will pay in cash as the sale was
on cash basis and was not recorded in Creditors Ledger Adjustment account earlier.
Working Notes:
(1) Purchases:
1.3.2013 Akash 7,500
14.3.2013 Akash 6,200
26.3.2013 Giridhar 6,000
29.3.2013 Nathan 3,500
23,200
(2) Payments:
3.3.2013 Akash 3,000
10.3.2013 Dev 2,500
12.3.2013 Giridhar 6,000
24.3.2013 Akash (95% of 5,200) 4,940
16,440

8.18 Accounting
Question 15
Prepare the General ledger adjustment account in creditors ledger for the year ending 31 st
March, 2015 from the following information:
Sundry creditors as on 01.04.2014 ` 2,30,000.
Total purchases amounted to ` 8,25,000 including purchase of trade investment for
` 45,000 (face value ` 50,000). The total cash purchases were 60% more than the credit
purchases.
Cash paid to creditors during the year was 50% of the aggregate of the opening creditors and
credit purchases for the period. Creditors allowed a cash discount of ` 8,000.
A Cheque paid to creditors ` 7,000 was dishonored.
Goods returned to suppliers ` 11,000.
Bills receivables amounting to ` 30,000 endorsed in favour of a creditor in the month of
February, 2015.
Answer
Creditors’ Ledger
General Ledger Adjustment Account for the year ended 31.3.2015
` `
1.4.14 To Balance b/d 2,30,000 31.3.15 By Creditors ledger
31.3.15 To Creditors ledger adjustment A/c:
adjustment A/c: Bank 2,65,000
Purchases 3,00,000 Discount
Cheque paid received 8,000
dishonoured 7,000 3,07,000 Returns 11,000
Bills receivable
endorsed 30,000 3,14,000
By balance c/d 2,23,000
5,37,000 5,37,000
Working Note:
Calculation of credit purchases and Cash paid to creditors
If credit purchases are 100% then cash purchase will be 60% higher i.e.100% +60% = 160%
Thus, credit purchases and cash purchases are in ratio of 100:160= 5:8. Hence credit
purchase is 5/13 of `(8,25,000-45,000)= ` 3,00,000
Cash paid to creditors is 50% of (2,30,000+3,00,000)= ` 2,65,000

Exercise
1. Prepare the Sales ledger control account and Purchases ledger control account from the following
particulars:-
Sales Ledger Purchases Ledger
Debit balance as on 1.1.2011 1,50,000 18,000
Credit balance as on 1.1.2011 200 1,25,000
Credit sales and purchases 4,00,000 3,80,000
Cheque received and paid 4,50,000 3,50,000
Advance paid to suppliers - 2,000
B/R received and B/P accepted 50,000 50,000
Discounts allowed and received 5,000 3,000
Returns 10,000 5,000
Transfer from purchases to sales ledger 10,000 10,000
Bad debts 2,000 -
Reserve for discounts 10,000 5,000
B/R and B/P dishonoured 5,000 5,000
Debit Balances as on 30.6.2011 30,000 -
Credit Balances as on 30.6.2011 ? 72,000
(Hints: Total of Sales Ledger Control Account = `5,57,200 closing credit balance of sales ledger
control account = ` 2200; and Total of Purchases Ledger Control Account = ` 5,10,000)
2. From the following information prepare Sales Ledger Adjustment Account and Bought Ledger
Adjustment Account in the General Ledger:
On 1.4.2010 balance in bought ledger (Dr.) ` 10,000, (Cr.) ` 96,000, balance in sales ledger (Dr.)
` 1,41,880 (Cr.) ` 2,240:
31.3.2011 ` 31.3.2011 `
Purchases 5,40,000 Discount received 7,200
Purchases return 20,000 Bills receivable received 40,000
Total sales 7,68,000 Bills payable issued 22,400
Cash sales 40,000 Reserve for doubtful debts 9,160
Sales return 10,000 Cash paid to debtors 1,840
Cash received from debtors 6,24,000 Bills receivable dishonoured 6,000
Discount allowed 11,200 Bought ledger balance(Dr) 10,400
Cash paid to suppliers 4,80,000 Sales ledger balance(Dr) 1,83,200
Transfer from sales to bought ledger 20,800

8.20 Accounting
(Hints: Total of Sales Ledger Adjustment Account = ` 8,91,440; and Bought Ledger Adjustment
Account = ` 6,46,400)
3. The following information is extracted from a set of books for the half-year ended 30th June, 2011
`
Sales 5,63,000
Purchases 3,22,000
Returns outward 7,600
Bills payable accepted 1,20,000
Cash paid to suppliers 1,80,200
Discounts received 4,200
Transfers from purchases ledger 6,800
The debit balance of the sales ledger on 1st Jan, 2011 was ` 3,20,800 and credit balance of the
purchases ledger on the same date was ` 1,86,400.
Prepare Sales Ledger and Purchases Ledger Adjustment Accounts from the foregoing information.
(Hints: Total of Sales Ledger Adjustment Account = ` 8,83,800; and Purchases Ledger
Adjustment Account = ` 5,08,400)
4. From the following particulars prepare Debtors control account in general ledger:
`
Opening balance in Debtors ledger (Dr.) 2,35,000
Opening balance in Debtors ledger (Cr.) 3,500
Goods sold during the year 7,65,000
Returns inwards 15,000
Cash/cheques received 5,90,000
Bills received 1,10,000
Cheque received dishonoured 5,000
Bills received dishonoured 7,000
Bad debts 9,000

A debit of ` 1,500 is to be transferred from Debtors ledger to Creditors ledger. Similarly a credit entry ` 1,600
is to be transferred from Creditors ledger to Debtors ledger. Closing credit balance in Debtors ledger is
` 3,000.
(Hints: Total of Debtors Control Account = ` 10,15,000)
5. The following transactions have been extracted from the books of Mr. X. You are required to prepare
the Sales Ledger Adjustment Account as on 31.3.2011:
`
debtors balance on 1.3.2011 50,000
Transactions during the period were:
Sales (including cash sales of ` 20,000) 1,28,000
Cash received from debtors 90,000
Discount allowed to debtors 500
Acceptances received from debtors 8,000
Bad debts written off (after deducting bad debts recovered ` 1,000) 4,000
Sundry charges debited to debtors 600
Transfers to bought ledger 300
(Hints: Total of Sales Ledger Adjustment Account = ` 1,60,100)

Financial Statements of Not-
9 for-Profit Organisations

Financial  A not-for-profit organization is a legal and accounting entity
Statements of that is operated for the benefit of the society as a whole, rather
NPOs than for the benefit of a sole proprietor or a group of partners
or shareholders. Financial Statements of such organizations
consists of:
 Receipts and Payments Account
 Income and Expenditure Account
 Balance Sheet
 The income and expenditure account is equivalent to the
Profit and Loss Account of a business enterprise. It is an
account which is widely adopted by not-for-profit concerns
and is prepared by following accrual principle. Only items of
revenue nature pertaining to the period of account are
included therein.
Educational  Educational institutions are different from other not-for-profit
Institutions organizations both in terms of their sources of income as well as
the freedom to choose their accounting years.
Note: Non-profit organizations registered under Section 8 of the Companies
Act, 2013 are required to prepare their financial statements as per Schedule
III to the Companies Act, 2013. All the questions in this chapter have been
solved on the basis that Non-profit organizations referred to in the questions
are not registered under Section 8 of the Companies Act, 2013.

Financial Statements of Not-for-Profit Organisations 9.2
Question 1
Differentiate Receipt and Payment with Income and Expenditure account.
Answer
Non-profit making organizations such as public hospitals, public educational institutions, clubs etc.,
conventionally prepare Receipt and Payment Account and Income and Expenditure Account to
show periodic performance for a particular accounting period. The distinguishing features of both
the accounts can be summarized as:
Receipt and Payment Account is an elementary form of account consisting of a classified summary
of cash receipts and payments over a certain period together with cash balances at the beginning
and close of the period. The receipts are entered on the left hand side and payments on the right
hand side i.e. same sides as those on which they appear in cash book. All the receipts and
payments, whether of revenue or capital nature, are included in this account. The balance of the
account at the end of a period represents the difference between the amount of cash received and
paid up. It is always in debit since it is made up of cash in hand and at bank.
Income and Expenditure Account resembles a Profit and Loss Account and serves the same
function in respect of a non-profit making concern as the last mentioned account does for a firm,
carrying on business or trade. Income and Expenditure Account is drawn up in the same form as
the Profit and Loss Account. Expenditure of revenue nature only is shown on the debit side, and
income and gains of revenue nature are shown on the credit side. Income and Expenditure
Account contains all the items of income and expenditure relevant to the period of account,
whether received or paid out as well as that which have fallen due for recovery or payment. Capital
receipts, prepayments of income and capital expenditures, prepaid expenses are excluded. It does
not start with any opening balance. The closing balance represents the amount by which the
income exceeds the expenditure only or vice-versa.
Question 2
(a) During the year ended 31st March, 2012, Sachin Cricket Club received subscriptions as
follows:
`
For year ending 31st March, 2011 12,000
For year ending 31st March, 2012 6,15,000
For year ending 31st March, 2013 18,000
Total 6,45,000
There are 500 members and annual subscription is ` 1,500 per member.
On 31st March, 2012, a sum of ` 15,000 was still in arrears for subscriptions for the year

9.3 Accounting
Ascertain the amount of subscriptions that will appear on the credit side of Income and
Expenditure Account for the year ended 31st March, 2012. Also show how the items
would appear in the Balance Sheet as on 31st March, 2011 and the Balance Sheet as on
31st March, 2012.
(b) From the following information of M/s. Officers Sports Club (A non-profit organization)
calculate (i) the total cost of sports material consumed in the club and (ii) Sale value of
sports material during the year 2014-15.
`
Opening balance of sports material as on 1-4-2014 56,800
Closing balance of sports material as on 31-3-2015 32,900
Sports material purchased in cash 23,500
Payment made to creditors of sports material 64,300
Creditors for sports materials
Opening 23,200
Closing 29,400
Out of the total sports material used during the year 40% was consumed by the club and
the remaining was sold at a profit of 20% on cost.
(c) The following information of M/s. TT Club are related for the year ended 31 st March,
2015:
(1)
Balances As on 01-04-2014 As on 31-3-2015
(` ) (` )
Stock of Sports Material 75,000 1,12,500
Amount due for Sports Material 67,500 97,500
Subscription due 11,250 16,500
Subscription received in advance 9,000 5,250
(2) Subscription received during the year ` 3,75,000
(3) Payments for Sports Material during the year ` 2,25,000
(A) Ascertain the amount of Subscription and Sports Material that will appear in Income
& Expenditure Account for the year ended 31.03.2015 and
(B) Also show how these items would appear in the Balance Sheet as on 31.03.2015.

Answer
(a) Amount of subscription for the year 2011-12
Income & Expenditure Account (An extract) of Sachin Cricket Club
` `
By Subscription 7,50,000
(500 members × ` 1,500 per member)
Balance Sheet of Sachin Cricket Club as on 31 st March 2011 (An extract)
Liabilities Rs` Assets Rs`
Subscription Receivable (15,000 + 12,000) 27,000
Balance Sheet of Sachin Cricket Club as on 31 st March 2012 (An extract)
Liabilities Rs` Assets ` Rs`
Unearned Subscription 18,000 Outstanding Subscription
of 2010-11 15,000
of 2011-12
` (7,50,000 – 6,15,000) 1,35,000 1,50,000
(b)
`
Opening balance of sports material 56,800
Add: Purchases during the year (cash 23,500 + credit 70,500) 94,000
1,50,800
Less: Closing Stock 32,900
Sports material used 1,17,900
(i) Total cost of sports material consumed in the Club
40% of used material was consumed. 47,160
(i.e. 40% of 1,17,900)
(ii) Sale value of sports material
Cost of sports material sold (1,17,900-47,160) 70,740
Add: Profit @20% on cost 14,148
84,888

9.5 Accounting
Working Note:
Calculation of Credit purchase of Sports Material
` `
To Bank 64,300 By Balance b/d 23,200
To Balance c/d 29,400 By Purchases (Balancing Figure) 70,500
93,700 93,700
(c) Subscription for the year ended 31.3.2015

`
Subscription received during the year 3,75,000
Less: Subscription receivable on 1.4.2014 11,250
Less: Subscription received in advance on 31.3.2015 5,250 (16,500)
3,58,500
Add: Subscription receivable on 31.3.2015 16,500
Add: Subscription received in advance on 1.4.2014 9,000 25,500
Amount of Subscription appearing in Income & Expenditure 3,84,000
Account
Sports material consumed during the year end 31.3.2015
`
Payment for Sports material 2,25,000
Less: Amounts due for sports material on 1.4.2014 (67,500)
1,57,500
Add: Amounts due for sports material on 31.3.2015 97,500
Purchase of sports material 2,55,000
Sports material consumed:
Stock of sports material on 1.4.2014 75,000
Add: Purchase of sports material during the year 2,55,000
3,30,000
Less: Stock of sports material on 31.3.2015 (1,12,500)
Amount of Sports Material appearing in Income & Expenditure Account 2,17,500
Balance Sheet of M/s TT Club For the year ended 31 st March, 2015 (An extract)
Unearned Subscription 5,250 Subscription receivable 16,500
Amount due for sports material 97,500 Stock of sports material 1,12,500

Question 3
Mahaveer Sports club gives the following receipts and payments account for the year ended
March 31, 2011:
Receipts and Payment Account
Receipts ` Payments `
To Opening cash and bank balances 5,200 By Salaries 15,000
To Subscription 34,800 By Rent and taxes 5,400
To Donations 10,000 By Electricity charges 600
To Interest on investments 1,200 By Sports goods 2,000
To Sundry receipts 300 By Library books 10,000
By Newspapers and periodicals 1,080
By Miscellaneous expenses 5,400
_____ By Closing cash and bank balances 12,020
51,500 51,500
Liabilities As on 31.3.2010 As on 31.3.2011

` `
Outstanding expenses:
Salaries 1,000 2,000
Newspapers and periodicals 400 500
Rent and taxes 600 600
Electricity charges 800 1,000
Library books 10,000 -
Sports goods 8,000 -
Furniture and fixtures 10,000 -
Subscription receivable 5,000 12,000
Investment-government securities 50,000 -
Accrued interest 600 600
Provide depreciation on:
Furniture and fixtures @ 10% p.a.
Sports goods @ 20% p.a.
Library books @ 10% p.a

9.7 Accounting
You are required to prepare Club’s opening balance sheet as on 1.4.2010, income and expenditure
account for the year ended on 31.3.2011 and balance sheet as on that date.
Answer
Balance Sheet of Mahaveer Sports Club
Capital fund (bal.fig.) 86,000 Library books 10,000
Outstanding expenses: Sports goods 8,000
Salaries 1,000 Furniture and fixtures 10,000
Newspapers and periodicals 400 Subscriptions receivable 5,000
Electricity charges 800 Investment-Govt. securities 50,000
Rent and taxes 600 Accrued interest 600
2,800 Cash and bank balances 5,200
88,800 88,800
Income and Expenditure Account
for the year ended on 31st March, 2011
Expenditure ` Income `
To Salaries 16,000 By Subscription (W.N.1) 41,800
To Electricity charges 800 By Interest on investments (W.N.2) 1,200
To Rent and taxes 5,400 By Sundry receipts 300
To Newspapers and periodicals 1,180
To Misc expenses 5,400
To Depreciation on fixed assets 5,000
(W N 4)
To Excess of income over 9,520
expenditure (transferred to
capital fund) ______ ______
43,300 43,300
Balance Sheet of Mahaveer Sports Club
Liabilities ` ` Assets ` `
Capital fund Fixed assets (W.N. 4)
Opening balance 86,000 Furniture and fixtures 9,000
Add: Surplus 9,520 Sports goods 8,000

Add: Donations 10,000 1,05,520 Library books 18,000 35,000

Outstanding expenses: Investment-Govt. 50,000
(W.N.3) securities
Salaries 2,000 Accrued interest 600
Newspapers and 500 Subscriptions receivable 12,000
periodicals Cash and bank balances
Electricity charges 1,000 12,020
Rent and taxes 600 4,100 _______
1,09,620 1,09,620
Working Notes:
(1) Subscriptions for the year ended 31st March, 2011:
`
Subscription received during the year 34,800
Add: Subscriptions receivable on 31.3.2011 12,000
46,800
Less: Subscriptions receivable on 31.3.2010 (5,000)
41,800
(2) Interest on investments for the year ended 31st March, 2011:
`
Interest received during the year 1,200
Add: Accrued interest on 31.3.2011 600
1,800
Less: Accrued interest on 31.3.2010 (600)
1,200
(3) Expenses for the year ended 31 st March, 2011:
Expenses Salaries Electricity Rent and Newspapers
charges taxes and
periodicals
` ` ` `
Paid during the year 15,000 600 5,400 1,080
Add: Outstanding (as on 31.3.2011)
2,000 1,000 600 500
17,000 1,600 6,000 1,580
Less: Outstanding (as on 31.3.2010)
(1,000) (800) (600) (400)
16,000 800 5400 1,180

9.9 Accounting
(4) Depreciation on Fixed assets
Assets Book value Additions Total Rate of Depreciation W.D.V as on

(31.3.2010) during the depreciation 31.3.2011
year
Furniture 10,000 - 10,000 10% 1,000 9,000

and fixtures
Sports 8,000 2,000 10,000 20% 2,000 8,000

goods
Library 10,000 10,000 20,000 10% 2,000 18,000

books _____ ______
Total 5,000 35,000
Note: In the given solution, donations have been capitalized. Alternatively, donations
may be credited to the income and expenditure account assuming that the donations
have been raised for meeting some revenue expenditure.
Question 4
Summary of receipts and payments of Bombay Medical Aid society for the year ended 31.12.2011
are as follows:
Opening cash balance in hand ` 8,000, subscription ` 50,000, donation ` 15,000, interest on
investments @ 9% p.a. ` 9000, payments for medicine supply ` 30,000 Honorarium to doctor
` 10,000, salaries ` 28,000, sundry expenses ` 1,000, equipment purchase ` 15,000, charity
show expenses ` 1,500, charity show collections ` 12,500.
1.1.2011 31.12.2011
Subscription due 1,500 2,200
Subscription received in advance 1,200 700
Stock of medicine 10,000 15,000
Amount due for medicine supply 9,000 13,000
Value of equipment 21,000 30,000
Value of building 50,000 48,000
You are required to prepare receipts and payments account and income and expenditure account
for the year ended 31.12.2011 and balance sheet as on 31.12.2011.

Answer
Receipts and Payments Account of Bombay Medical Aid Society
for the year ended 31st December, 2011
To Cash in hand (opening) 8,000 By Medicine supply 30,000
To Subscription 50,000 By Honorarium to doctors 10,000
To Donation 15,000 By Salaries 28,000
To Interest on investment 9,000 By Sundry expenses 1,000
To Charity show collections 12,500 By Purchase of equipment 15,000
By Charity show expenses 1,500
______ By Cash in hand (closing) 9,000
94,500 94,500
Income and Expenditure Account of Bombay Medical Aid Society

To Medicine consumed 29,000 By Subscription 51,200
To Honorarium to doctors 10,000 By Donation 15,000
To Salaries 28,000 By Interest on investments 9,000
To Sundry expenses 1,000 By Profit on charity show:
To Depreciation on Show collections 12,500
Equipment 6,000 Less: Show expenses (1,500) 11,000
Building 2,000 8,000
To Surplus-excess of income over
expenditure 10,200 ______
86,200 86,200
Balance Sheet of Bombay Medical Aid Society
as on 31st December, 2011
Capital fund: Building 50,000
Opening balance 1,80,300 Less: Depreciation (2,000) 48,000
Add: Surplus 10,200 1,90,500 Equipment 21,000
Subscription received in advance 700 Add: Purchase 15,000
Amount due for medicine supply 13,000 36,000

9.11 Accounting
Less: Depreciation (6,000) 30,000

Stock of medicine 15,000
Investments 1,00,000
Subscription 2,200
receivable
______ Cash in hand 9,000
2,04,200 2,04,200
Working Notes:
Subscription for the year ended 31st December, 2011: `
Less: Subscription received in advance on 31.12.2011 700 (2,200)
47,800
51,200
Purchase of medicine:
Payment for medicine supply 30,000
Less: Amounts due for medicine supply on 1.1.2011 (9,000)
21,000
Add: Amounts due for medicine supply on 31.12.2011 13,000
34,000
Medicine consumed:
Stock of medicine on 1.1.2011 10,000
Add: Purchase of medicine during the year 34,000
44,000
Less: Stock of medicine on 31.12.2011 (15,000)
29,000
Depreciation on equipment:
Value of equipment on 1.1.2011 21,000
Add: Purchase of equipment during the year 15,000
36,000
Less: Value of equipment on 31.12.2011 (30,000)
Depreciation on equipment for the year 6,000

Balance Sheet of Medical Aid Society

as on 1st January, 2011
Capital fund (balancing figure) 1,80,300 Building 50,000
Subscription received in advance 1,200 Equipment 21,000
Amount due for medicine supply 9,000 Stock of medicine 10,000
Investments (` 9,000 x 100/9) 1,00,000
Subscription receivable 1,500
_______ Cash in hand 8,000
1,90,500 1,90,500
Note: Donation has been credited directly to the income and expenditure account assuming that
this has been raised for meeting revenue expenditure. Alternatively, donation may be taken to have
been raised for meeting some capital expenditure and thus, be credited to capital fund.
Question 5
Smith Library Society showed the following position on 31st March, 2010:
Capital fund 7,93,000 Electrical fittings 1,50,000
Expenses payable 7,000 Furniture 50,000
Books 4,00,000
Investment in securities 1,50,000
Cash at bank 25,000
______ Cash in hand 25,000
8,00,000 8,00,000
The receipts and payment account for the year ended on 31st March, 2011 is given below:
` `
To Balance b/d By Electric charges 7,200
Cash at bank 25,000 By Postage and stationary 5,000
Cash in hand 25,000 50,000 By Telephone charges 5,000
To Entrance fee 30,000 By Books purchased 60,000
To Membership subscription 2,00,000 By Outstanding expenses paid 7,000
To Sale proceeds of old papers 1,500 By Rent 88,000

9.13 Accounting
To Hire of lecture hall 20,000 By Investment in securities 40,000

To Interest on securities. 8,000 By Salaries 66,000
By Balance c/d
Cash at bank 20,000
_______ Cash in hand 11,300
3,09,500 3,09,500
You are required to prepare income and expenditure account for the year ended 31st March, 2011
and a balance sheet as at 31s, March, 2011 after making the following adjustments:
Membership subscription included ` 10,000 received in advance.
Provide for outstanding rent ` 4,000 and salaries ` 3,000.
Books to be depreciated @ 10% including additions. Electrical fittings and furniture are also to be
depreciated at the same rate.
75% of the entrance fees is to be capitalized.
Interest on securities is to be calculated @ 5% p.a. including purchases made on 1.10.2010 for
` 40,000.
Answer
Smith Library Society
Dr. Cr.
Expenditure ` ` Income `
To Electric charges 7,200
By By Entrance fee (25% of 7,500
To Postage and stationary 5,000 ` 30,000)
To Telephone charges 5,000
By By Membership 2,00,000
To Rent 88,000 subscription 10,000 1,90,000
Add: Outstanding 4,000 92,000 Less: Received in advance
To Salaries 66,000 By Sale proceeds of old 1,500
Add: Outstanding 3,000 69,000 papers
To Depreciation (W.N.1) By Hire of lecture hall 20,000
Electrical fittings 15,000 By By Interest on securities 8,000
Furniture 5,000 (W.N.2)
Books 46,000 66,000 Add: Receivable 500 8,500
By By Deficit- excess of 16,700
expenditure over
income
2,44,200 2,44,200

Balance Sheet of Smith Library Society

Liabilities ` ` Asset ` `
Capital fund 7,93,000 Electrical fittings 1,50,000
Add: Entrance fees _22,500 Less: Depreciation (15,000) 1,35,000
8,15,500 Furniture 50,000
Less: Excess of Less: Depreciation (5,000) 45,000
expenditure over income (16,700) 7,98,800 Books 4,60,000
Outstanding expenses: Less Depreciation (46,000) 4,14,000
Rent 4,000 Investment:
Salaries 3,000 7,000 Securities 1,90,000
Membership subscription Accrued interest 500 1,90,500
in advance 10,000 Cash at bank 20,000
_______ Cash in hand 11,300
8,15,800 8,15,800
Working Notes:
1. Depreciation `
Electrical fittings 10% of ` 1,50,000 15,000
Furniture 10% of ` 50,000 5,000
Books 10% of ` 4,60,000 46,000
2. Interest on Securities
Interest @ 5% p.a. on ` 1,50,000 for full year 7,500
Interest @ 5% p.a. on ` 40,000 for half year 1,000 8,500
Less: Received (8,000)
Receivable 500
Question 6
A doctor, after retiring from govt. service, started private practice on 1st April, 2010 with ` 20,000
of his own and ` 30,000 borrowed at an interest of 15% per annum on the security of his life
policies. His accounts for the year were kept on a cash basis and the following is his summarized
cash account:
` `
Own capital 20,000 Medicines purchased 24,500
Loan 30,000 Surgical equipments 25,000
Prescription fees 52,500 Motor car 32,000

9.15 Accounting
Gifts from patients 13,500 Motor car expenses 12,000

Visiting fees 25,000 Wages and salaries 10,500
Fees from lectures 2,400 Rent of clinic 6,000
Pension received 30,000 General charges 4,900
Household expenses 18,000
Household Furniture 2,500
Expenses on daughter’s marriage 21,500
Interest on loan 4,500
Balance at bank 11,000
_______ Cash in hand 1,000
1,73,400 1,73,400
You are required to prepare his capital account and income and expenditure account for the year
ended 31st March, 2011 and balance sheet as on that date. One-third of the motorcar expense may
be treated as applicable to the private use of car and ` 3,000 of the wages and salaries are in
respect of domestic servants.
The stock of mediciness in hand on 31st March, 2011 was valued at ` 9,500.
Answer
Capital Account
` `
To Drawings: By Cash/bank 20,000
Motor car expenses 4,000 By Cash bank (pension) 30,000
(one-third of ` 12,000) By By Net income from practice 47,500
Household expenses 18,000 (derived from income and
Daughter’s marriage exp. 21,500 expenditure a/c)
Wages of domestic servants 3,000
Household furniture 2,500
To Balance c/d 48,500 _____
97,500 97,500


` `
To Medicines consumed By Prescription fees 52,500
Purchases 24,500 By Gift from patients 13,500
Less: Stock on 31.3.11 (9,500) 15,000 By Visiting fees 25,000
To Motor car expense 8,000 By Fees from lectures 2,400
To Wages and salaries(` 10,500 – ` 3,000) 7,500
To Rent for clinic 6,000
To General charges 4,900
To Interest on loan 4,500
To Net Income 47,500 ______
93,400 93,400
Balance Sheet
Capital 48,500 Motor car 32,000
Loan 30,000 Surgical equipment 25,000
Stock of medicines 9,500
Cash at bank 11,000
78,500 78,500
Question 7
The Receipts and Payments account of Trustwell Club prepared on 31st March, 2011 is as follows.
Receipts and Payments Account
Dr. Cr.
Receipts Amount Payments Amount
` `
To Balance b/d 450
By By Expenses (including
To Annual income from subscription 4,590 payment for sports
Add: Outstanding of last year received 180 material ` 2,700)
this year 4,770

9.17 Accounting
Less: Prepaid of last year (90) 4,680 6,300

To Other fees 1,800
By By Loss on sale of
furniture (cost price
` 450) 180
To Donation for building 90,000 By Balance c/d 90,450
96,930 96,930
Trustwell club had balances as on 1.4.2010:
Furniture ` 1,800; investment at 5% ` 27,000;
Sports material ` 6,660;
Balance as on 31.3.2011; subscription receivable ` 270;
Subscription received in advance ` 90;
Stock of sports material ` 1,800.
Do you agree with above receipts and payments account? If not, prepare correct receipts and
payments account and income and expenditure account for the year ended 31st March, 2011 and
balance sheet as on that date.
Answer
Corrected Receipts and Payments Account of Trustwell Club
` ` `
To Balance b/d 450 By Expenses (` 6,300- 3,600
To Subscription Annual income 4,590 ` 2,700)
Less: receivable as on 31.3.2011 (270) By Sports material 2,700
Add: Advance received for the 90 By Balance c/d (cash in 90,720
year 2011-2012 hand and at bank)
Add: Receivable as on 31.3.2010 180
Less: Advance received as on
31.3.2010 (90) 4,500
To Other fees 1,800
To Donation for building 90,000
To Sale of furniture 270 _____
97,020 97,020

Income and Expenditure Account of Trustwell club

Expenditure Amount Income Amount
To Sundry expenses 3,600 By Subscription 4,590
To Sports material By Other fees 1,800
Balance as on 1.4.2010 6,660 By Interest on investment 1,350
Add: Purchases 2,700 (5% on ` 27,000)
Less: Balance as on 31.3.2011 (1,800) 7,560 By Deficit: Excess of
To Loss on sale of furniture 180 expenditure over income 3,600
11,340 11,340
Balance sheet of Trustwell club

(` ) (` )
Capital fund 36,000 Furniture 1,800
Less: Excess of (3,600) 32,400 Less: Sold (450) 1,350
expenditure 5% Investment 27,000
over income Interest accrued on investment 1,350
Building fund 90,000 Sports material 1,800
Subscription Subscription receivable 270
received in advance 90 Cash in hand and at bank 90,720
1,22,490 1,22,490
Balance Sheet of Trustwell Club

` `
Subscription received in advance 90 Furniture 1,800
Capital Fund (balancing figure) 36,000 Investment 27,000
Sports material 6,660
Subscription receivable 180
_____ Cash in hand and at bank 450
36,090 36,090

9.19 Accounting
Question 8
The Accountant of Diana Club furnishes you the following receipts and payments account for the
year ending 30th September, 2011:

` `
Opening balance: Honoraria to secretary 9,600
Cash and bank 16,760 Misc. expenses 3,060
Subscription 21,420 Rates and taxes 2,520
Sale of old newspapers 4,800 Ground man’s wages 1,680
Entertainment fees 8,540 Printing and stationary 940
Bank interest 460 Telephone expenses 4,780
Bar receipts 14,900 Payment for bar purchases 11,540
Repairs 640
New car (Less sale proceeds of old 25,200
car ` 6,000)
Closing balance:
_____ Cash and bank 6,920
66,880 66,880
1.10.2010 30.9.2011
` `
Subscription due (not received) 2,400 1,960
Cheques issued, but not presented for payment of printing 180 60
Club premises at cost 58,000 -
Depreciation on club premises provided so far 37,600 -
Car at cost 24,380 -
Depreciation on car 20,580 -
Value of Bar stock 1,420 1,740
Amount unpaid for bar purchases 1,180 860
Depreciation is to be provided @ 5% p.a. on the written down value of the club premises and
@ 15% p.a. on car for the whole year.
You are required to prepare an income and expenditure account of Diana Club for the year ending
30th September, 2011 and balance sheet as on that date.

Answer
Income and Expenditure Account of Diana Club
for the year ended 30th September, 2011
` `
To Honoraria to secretary 9,600 By Subscriptions (W.N.3) 20,980
To Misc. expenses 3,060 By Sale of old newspapers 4,800
To Rates and taxes 2,520 By Entertainment fees 8,540
To Groundman's wages 1,680 By Bank interest 460
To Printing and stationary 940 By Bar receipts 14,900
To Telephone expenses 4,780 By Profit on sale of car (W.N.5) 2,200
To Bar expenses
Opening bar stock 1,420
Add. Purchases (W.N.2) 11,220
12,640
Less: Closing bar stock (1,740) 10,900
To Repairs 640
To Depreciation
Club premises (W.N. 4) 1,020
Car (W.N. 6) 4,680 5,700
To To Excess of income over
expenditure transferred to
capital fund 12,060 _____
51,880 51,880
Balance Sheet of Diana Club

as on 30th September, 2011
` `
Capital fund (W.N. 1) 43,600 Club Premises 19,380
Add: Excess of income over Car 26,520
expenditure 12,060 55,660 Bar stock 1,740
Outstanding liabilities for Outstanding subscription 1,960
bar purchases 860 Cash and bank 6,920
56,520 56,520

9.21 Accounting
Working Notes:
1. Balance Sheet of Diana Club
as on 1st October, 2010
` `
Amount due for bar Club premises 58,000
purchases 1,180 Less: Depreciation (37,600) 20,400
Capital fund on 1.10.2010 43,600 Car 24,380
(balancing figure) Less: Depreciation (20,580) 3,800
Bar stock 1,420
Outstanding subscription 2,400
______ Cash at bank 16,760
44,780 44,780
2. Calculation of bar purchases for the year:
`
Bar payments as per receipts and payments account 11,540
Add: Amount due on 30.9.2011 860
12,400
Less: Amount due on 1.10.2010 (1,180)
11,220
3. Calculation of subscriptions accrued during the year:
`
Subscriptions received as per receipts and payments account 21,420
Add: Outstanding on 30.9.2011 1,960
23,380
Less: Outstanding on 1.10.2010 (2,400)
20,980
4. Depreciation on club premises and written down value on 30 th September, 2011:
`
Written down value on 1.10.2010 (58,000-37,600) 20,400
Less: Depreciation for the year 2010-2011 @ 5% p.a. (1,020)
19,380

5. Calculation of profit on sale of car:

`
Sale proceeds of old car 6,000
Less: Written down value of old car:
Cost of car on 1.10.2010 24,380
Less: Depreciation upto 1.10.2010 (20,580) (3,800)
2,200
6. Depreciation on car and written down values on 30 th September, 2011:
`
Cost of new car purchased (25,200 + 6,000) 31,200
Less: Depreciation for the year @ 15% p.a. (4,680)
Written down value on 30.9.2011 26,520
Note: The opening and closing balance of cash and bank shown in the Receipts and
Payments Account (given in the question), include the bank balance as per cash book.
Therefore, no adjustment has been made in the above solution on account of cheques issued,
but not presented for payment of printing.
Question 9
Income and Expenditure Account for the year ended 31 st March, 2012 of South Asia Club is
given below:
To Salaries & wages 47,500 By Subscription 75,000
To Miscellaneous expenses 5,000 By Entrance fee 2,500
To Audit fee 2,500 By Contribution for annual 7,500
To Executive’s honorarium 10,000 day (After deducting
To Sports day expenses 5,000 expenses ` 7,500)
To Printing & stationary 4,500
To Interest on bank loan 1,500
To Depreciation on sports 3,000
equipment
To Excess of income over
expenditure 6,000
85,000 85,000
Following additional information are also available:

9.23 Accounting
31.3.2011 31.3.2012
` `
(1) Subscription received in advance 4,500 2,700
(2) Subscription outstanding 6,000 7,500
(3) Salaries outstanding 4,000 4,500
(4) Sports equipment (After deducting depreciation) 26,000 27,000
(5) Cash in hand on 31-3-12 was ` 16,000.
(6) The club took a 5% loan of ` 30,000 from a bank during 2010-11 for which interest was
not paid in the financial year 2011-12.
Prepare Receipts and Payments account of South Asia Club for the year ending
31st March 2012.
Answer
In the books of South Asia Club
Receipt and Payment Account
for the year ended 31 st March, 2012
Receipt Amount Payment Amount
` `
To Balance b/d (Bal.fig.) 12,300 By Salaries & Wages (W.N.2) 47,000
To Subscription (W.N.1) 71,700 By Miscellaneous Expenses 5,000
To Entrance fee 2,500 By Audit fee 2,500
To Contribution for annual day 15,000 By Executive’s honorarium 10,000
(` 7,500 + ` 7,500) By Sports Day Expenses 5,000
By Printing & Stationary 4,500
By Expenses of Annual Day 7,500
By Sports Equipment 4,000
(W.N.3)
1,01,500 1,01,500
Working Notes:
(1) Subscription received during the year
`
Subscription credited to Income and Expenditure A/c 75,000

Add: Outstanding subscription at the beginning of the year 6,000

Advance subscription received at the end of the year 2,700
83,700
Less: Outstanding subscription at the end of the year (7,500)
Advance subscription received at the beginning of the
year (4,500) (12,000)
(2) Salaries & wages paid during the year
`
Salaries debited to Income and Expenditure Account 47,500
Add: Outstanding salaries at the beginning of the year 4,000
Less: Outstanding salaries at the end of the year (4,500)
Salaries paid during the year 47,000
(3) Sports equipment purchased during the year
Sports Equipment A/c
Particulars Amount Particulars Amount `
`
To Balance b/d 26,000 By Depreciation A/c 3,000
To Cash (Bal.fig.) 4,000 By Balance c/d 27,000
30,000 30,000
Question 10
From the following Income & Expenditure A/c of Premium Sports Club for the year ended 31 st
March, 2012, you are required to prepare Receipts & Payment A/c for the year ended 31 st
March, 2012 and Balance Sheet as on that date:
Expenditure (` ) Income (` )
To Salaries 1,18,800 By Subscriptions 4,20,000
To Rent 2,16,000 By Entrance Fee 1,20,000
To Printing & Stationery 28,000 By Profit on sale of Sports
41,600 Material 5,500
To Postage & Telephone
To Membership Fee 3,200 By Interest on 8%

To Electricity Charges 38,500 Government Bonds 12,000

9.25 Accounting
To Garden Upkeep 19,300 By Sale of Old Newspaper 11,600

To Sports Material Utilized 62,800
To Repairs & Maintenance 18,700
To Miscellaneous Expenses 5,700
To Surplus carried to Capital Fund 3,500
Total 5,69,100 Total 5,69,100
The following additional information is provided to you:

(a) Balances as Balances as
on 01.04.2011 on 31.03.2012
Fixed Assets 2,40,000 ?
Bank Balance 8,300 ?
Stock of Sports Material 43,450 35,670
Outstanding Subscription 10,200 5,700
8% Government Bonds 1,50,000 1,50,000
Outstanding Salaries 16,000 14,300
Outstanding Rent 21,000 15,000
Advance for Stationery 1,350 1,550
Outstanding Repairs & Maintenance 1,200 Nil
Creditors for purchase of Sports Material 3,400 4,200
(b) Some of Fixed Assets were purchased on 01.10.2011 and depreciation is to be charged
@ 5% p.a.
(c) Sports Material worth ` 72,000 was purchased on credit during the year.
(d) The Club became member of State Table Tennis Association on 01.01.2012 when it paid
fee up to 31.12.2012.
(e) 50% of Entrance Fee is to be capitalized.
(f) Interest on 8% Government Bonds was received for two quarters only.
(g) A Fixed Deposit of ` 80,000 was made on 31st March, 2012.

Answer
Receipts and Payments Account of Premium Sports Club
To Cash at bank (opening) 8,300 By Salaries (W.N.6) 1,20,500
To Subscription (W.N.1) 4,27,000 By Rent (W.N.7) 2,22,000
To Entrance fee (W.N.2) 2,40,000 By Printing and stationary (W.N.8) 28,200
To Interest on 8% Government 6,000 By Postage and telephone 41,600
Bond (W.N.3) By Membership fee (W.N.9) 12,800
To Sale of old Newspaper 11,600 By Electricity charges 38,500
To Sale of Sports Material (W.N.4) 22,480 By Garden upkeep 19,300
By Payment to creditors for sports 71,200
material (W.N.5)
By Purchase of Fixed assets 40,000
(W.N.10)
By Repairs and Maintenance 19,900
(W.N.11)
By Misc. expenses 5,700
By Fixed Deposit made 80,000
By Cash at bank (closing) (bal.fig.)
15,680
7,15,380 7,15,380
Balance Sheet of Premium Sports Club
Capital fund: Fixed Assets 2,40,000
Opening balance (W.N.12) 4,09,300 Add: Additions (W.N.10) 40,000
Add: Surplus 3,500 4,12,800 2,80,000
Entrance fee 1,20,000 Less: Depreciation (13,000) 2,67,000
Subscription received in 4,900 Fixed Deposit 80,000
advance Investments in 8%
Outstanding expenses: Government Bonds 1,50,000
Salary 14,300 Stock of sports material 35,670
Rent 15,000 29,300 Subscription receivable 5,700

9.27 Accounting
Creditors for purchase of 4,200 Membership fee paid in 9,600

sports material advance
Prepaid printing and
stationary charges 1,550
Outstanding interest on
8% Govt. Bond 6,000
Cash at bank 15,680
5,71,200 5,71,200
Working Notes:
1. Subscription received during the year
`
Subscription for the year ended 31st March, 2012 4,20,000
Less: Subscription received in advance on 1.4.2011 2,400 (8,100)
4,11,900
4,27,000
2. Entrance Fee received during the year
Entrance fee as per Income and Expenditure Account ` 1,20,000
Add: Capitalised entrance fee (50%) ` 1,20,000
` 2,40,000
3. Interest on 8% Government Bond
`
Interest as per Income and Expenditure Account 12,000
Less: Outstanding interest for 2 quarters [12,000x (6/12)] (6,000)
6,000
4. Sales price of Sports Material sold
`
Stock of Sports Material on 1.4.2011 43,450
Add: Purchase of Sports Material during the year 72,000

1,15,450
Less: Stock of Sports Material on 31.3.2012 (35,670)
Cost of Sports Material consumed in the club and for sale 79,780
Less: Sports material consumed in the club (62,800)
Cost of Sports material sold 16,980
Sales Price of sports material sold = ` 16,980 + ` 5,500 = ` 22,480
5. Payment to creditors for Sports Material
`
Purchase of Sports Material 72,000
Less: Closing creditors for purchase of Sports Material on 31.3.2012 (4,200)
67,800
Add: Opening creditors for purchase of Sports Material on 1.4.2011 3,400
71,200
6. Salaries paid during the year
`
Salary as per Income and Expenditure Account 1,18,800
Less: Outstanding balance as on 31.3.2012 (14,300)
1,04,500
Add: Outstanding balance as on 1.4.2011 16,000
1,20,500
7. Rent paid during the year
`
Rent as per Income and Expenditure Account 2,16,000
Less: Outstanding balance as on 31.3.2012 (15,000)
2,01,000
2,22,000
8. Printing and Stationary paid during the year
`
Printing and stationary as per Income and Expenditure Account 28,000
Less: Prepaid balance as on 1.4.2011 (1,350)

9.29 Accounting
26,650
Add: Prepaid balance as on 31.3.2012 1,550
28,200
9. Membership fee paid during the year
`
Membership fee as per Income and Expenditure Account 3,200
Add: Prepaid balance as on 31.3.2012 [(3,200/3) x 9] 9,600
12,800
10. Fixed Asset purchased during the year
`
Depreciation during the year 13,000
Less: Depreciation on Opening balance of fixed asset (12,000)
(5% of 2,40,000)
Depreciation on new purchase of fixed asset during the year 1,000
 12 100 
Cost of asset purchased during the year  1,000   40,000
 6 5 
11. Repairs and Maintenance paid during the year

`
Repairs and Maintenance as per Income and Expenditure Account 18,700
19,900
12. Balance Sheet of Premium Sports Club
Capital fund (Bal.fig.) 4,09,300 Fixed Assets 2,40,000
Subscription received in 2,400 Investments in 8% 1,50,000
advance Government Bonds
Outstanding expenses: Stock of sports material 43,450
Salary 16,000 Subscription receivable 10,200
Rent 21,000 Prepaid printing and 1,350
stationary charges

Repairs and maintenance 1,200 Bank 8,300

Creditors for purchase of
sports material 3,400
4,53,300 4,53,300
Note: It is assumed that Premium Sports Club has purchased all the sports equipment on
credit basis only.
Question 11
The following is the Receipt and Payment Account of Park View Club in respect of the year
Receipt Amount ( `) Payments Amount (`)
To Balance b/d 1,02,500 By Salaries 2,08,000
To Subscriptions By Stationery 40,000
2010-11 4,500 By Rent 60,000
2011-12 2,11,000 By Telephone expenses 10,000
2012-13 7,500 2,23,000 By Investment 1,25,000
To Profit on sports meet 1,55,000 By Sundry expenses 92,500
To Income from investments 1,00,000 By Balance c/d 45,000
5,80,500 5,80,500
(1) There are 450 members each paying an annual subscription of ` 500. On 1 st April, 2011
outstanding subscription was ` 5,000.
(2) There was an outstanding telephone bill for ` 3,500 on 31st March, 2012.
(3) Outstanding sundry expenses as on 31 st March, 2011 totalled ` 7,000.
(4) Stock of stationery:
On 31st March, 2011 ` 5,000
On 31st March, 2012 ` 9,000
(5) On 31st March, 2011 building stood in the books at ` 10,00,000 and it was subject to
depreciation @ 5% per annum.
(6) Investment on 31 st March, 2011 stood at ` 20,00,000.
(7) On 31st March, 2012, income accrued on the investments purchased during the year
amounted to ` 3,750.
Prepare an Income and Expenditure Account for the year ended 31 st March, 2012 and the
Balance Sheet as at that date.

9.31 Accounting
Answer
Park View Club
for the year ending on 31st March 2012
Expenditure Amount Income Amount (`)
(` )
To Salaries 2,08,000 By Subscriptions (W.N. 2) 2,25,000
To Stationery consumed (W.N.3) 36,000 By Profit on sports meet 1,55,000
To Rent 60,000 By Income on investments 1,00,000
To Telephone expenses 10,000 Add: Income accrued 3,750 1,03,750
Add: Outstanding on 31.3.12 3,500 13,500
To Sundry expenses 92,500
Less: Outstanding on 31.3.11 (7,000) 85,500
To Depreciation of building 50,000
To Surplus (excess of income over
expenditure) 30,750
4,83,750 4,83,750
Balance Sheet as at 31 st March 2012
Liabilities Amount Assets Amount (`)
(` )
Capital fund (W.N.1) 31,05,500 Outstanding subscriptions 14,500
Add: Surplus 30,750 31,36,250 Investment
Subscriptions received in (20,00,000+1,25,000) 21,25,000
advance 7,500 Add: Interest accrued on
Outstanding telephone bills 3,500 investments 3,750 21,28,750
Building 10,00,000
Stock of stationery 9,000
Cash balance 45,000
31,47,250 31,47,250
Working Notes:
(1) Balance Sheet as at 31 st March 2011
Liabilities Amount Assets Amount (`)
(`)
Outstanding sundry expenses 7,000 Building 10,00,000
Capital fund (Bal.fig.) 31,05,500 Investments 20,00,000

Stock of stationery 5,000

Cash balance 1,02,500
Outstanding subscriptions 5,000
31,12,500 31,12,500
(2) Calculation of subscriptions accrued during the year
Subscription A/c
Particulars Amount Particulars Amount
(`) (`)
To Outstanding Subscriptions 5,000 By Cash A/c 2,23,000
(as on 1.4.11) By Outstanding
subscriptions 14,500
(as on 31.3.12) (Bal.fig.)
To Income & Expenditure A/c 2,25,000
To Subscriptions received in
advance for 2012-13 7,500
2,37,500 2,37,500
(3) Calculation of stationery consumed during the year
`
Stock of stationery as on 31 March, 2011 5,000
Add: Purchased during the year 2011-12 40,000
45,000
Less: Stock of stationery as on 31st March, 2012 (9,000)
Stationery consumed 36,000
Question 12
City Bar club was registered in a city and the accountant prepared the following Receipts and
Payments Account for the year ended 31 st March, 2012 and showed a deficit of ` 14,520.
` `
Subscriptions 62,130 Premises 30,000
Fair receipts 7,200 Honorarium to Secretary 12,000
Variety show receipt (net) 12,810 Rent 2,400
Interest 690 Rates & taxes 3,780
Bar collection 22,350 Printing & stationary 1,410

9.33 Accounting
Excess cash spent 1,000 Sundry expenses 5,350

Deficit 14,520 Wages 2,520
Fair expenses 7,170
Bar purchases payments 17,310
Repair 960
New car (less proceeds of old car
` 9,000) 37,800
1,20,700 1,20,700
The following additional information are:
01-04-2011 31-03-2012
Cash in hand 450 -
Bank balances as per pass book 24,690 10,440
Cheque issued but not presented - for sundry expenses 270 90
Subscriptions due 3,600 2,940
Premises at cost 87,000 1,17,000
Accumulated depreciation on premises 56,400 -
Car at cost 36,570 46,800
Accumulated depreciation on car 30,870 -
Bar stock 2,130 2,610
Creditors for the bar purchases 1,770 1,290
Cash excess spent represent honorarium to secretary not withdrawn due to cash deficit. His
annual honorarium is ` 12,000.
Depreciation on premises and car is to be provided at 5% and 20% on written down value
method.
You are required to prepare the correct Receipts and Payments Account, Income and
Expenditure Account and Balance Sheet as on 31 st March, 2012.
Answer
In the books of Bear Bar Club
Receipts & Payments Account for the year ended 31.03.2012
` `
To Balance b/d By Honorarium to Secretary 11,000

Cash in hand 450 (12,000 – 1,000) Cash in hand

Bank (W.N.6) 24,420 24,870 By Rent 2,400
To Subscriptions 62,130 By Rates & taxes 3,780
To Fair receipts 7,200 By Printing & stationery 1,410
To Variety show receipts 12,810 By Sundry expenses 5,350
To Interest 690 By Wages 2,520
To Bar collection 22,350 By Fair expenses 7,170
To Car sold (old) 9,000 By Bar purchases 17,310
By Repairs 960
By Premises 30,000
By Car (37,800 + 9,000) 46,800
By Balance c/d
Bank (W.N.6) 10,350
1,39,050 1,39,050
Income & Expenditure Account
` `
To Honorarium to secretary 12,000 By Subscription 62,130
To Rent 2,400 Less: Outstanding as on 1.4.11 (3,600)
To Rates & taxes 3,780 Add: Outstanding as on 1.3.12 2,940 61,470
To Printing & stationery 1,410 By Fair receipts 7,200
To Sundry expenses 5,350 Less: Fair expenses (7,170) 30
To Wages 2,520 By Variety show 12,810
To Repairs 960 By Interest 690
To Depreciation on: By Profit from bar (W.N.3) 6,000
Premises (1,530+1,500) 3,030 By Profit on sale of car (W.N.5) 3,300
Car 9,360
To Surplus (excess of
income over expenditure) 43,490
84,300 84,300

9.35 Accounting
Balance Sheet as on 31.03.2012

` `
Capital fund Premises 87,000
Opening balance (W.N.1) 65,130 Add: Addition in the year 30,000
Add: Surplus 43,490 1,08,620 1,17,000
Sundry creditors 1,290 Less: Accumulated
Outstanding Honorarium 1,000 depreciation (W.N.4) (59,430) 57,570
Car 36,570
Add: Addition in the year 46,800
83,370
Less: Book value of the
car sold (36,570)
Less: Depreciation of
new car (9,360) 37,440
Bar stock 2,610
Subscription due 2,940
Cash at bank (W.N.6) 10,350
1,10,910 1,10,910
Working Notes:
1. Balance Sheet as on 31.03.2011
` `
Capital fund (bal. fig.) 65,130 Premises 87,000
Sundry creditors for bar 1,770 Car 36,570
Accumulated depreciation on Bar stock 2,130
Premises 56,400 Subscription due 3,600
Premises
Car 30,870 87,270 Cash at bank (W.N.6) 24,420
Cash in hand 450
1,54,170 1,54,170
2. Creditors for Bar Purchases
` `
To Bank 17,310 By Balance b/d 1,770
To Balance c/d 1,290 By Purchases (Bal. fig.) 16,830
18,600 18,600

3. Trading Account (of Bar)

` `
To Opening stock 2,130 By Bar collections 22,350
To Purchases (W.N.2) 16,830 (Cash)
To Profit (Bal. fig.) 6,000 By Closing stock 2,610
24,960 24,960
4. Accumulated Depreciation on Premises
`
Opening Balance 56,400
Add: Depreciation on old premises [(87,000 – 56,400) × 5%] 1,530
Depreciation on new premises (30,000 × 5%) 1,500
59,430
5. Profit on sale of car
` `
Sales price of a car 9,000
Less: Book value of old car sold 36,570
Less: Accumulated depreciation (30,870) (5,700)
Profit on sale 3,300
6 Bank balance as per cash book
1.4.2011 31.3.2012
` `
Bank balance as per Pass book 24,690 10,440
Less: Cheque issued but not presented for payment (270) (90)
Bank balance as per cash book 24,420 10,350
Question 13
The Receipts and Payments Account, the Income and Expenditure Account and additional
information of a sports club for the year ended 31st March, 2013 were as foll ows:
Receipts & Payments Account
For the year ending on 31st March, 2013
To Balance b/d 42,000 By Secretary’s Salary 10,000
To Entrance Fees 2011-12 10,000 By Printing & Stationary 26,000

9.37 Accounting
To Entrance Fees 2012-13 1,00,000 By Advertising 16,000

To Subscription 2011-12 6,000 By Fire Insurance 12,000
To Subscription 2012-13 1,50,000 By 12% Investments
To Subscription 2013-14 4,000 (Purchased on 01-10-2012) 2,00,000
To Rent Received 24,000 By Furniture 20,000
To Interest Received 6,000 By Balance c/d 58,000
3,42,000 3,42,000
Income & Expenditure Account

For the year ending on 31st March, 2013
To Secretary Salary 15,000 By Entrance Fees 1,05,000
To Printing & Stationery 22,000 By Subscription 1,56,000
To Advertising 16,000 By Rent 28,000
To Audit Fees 5,000 By Interest on Investments 12,000
To Fire Insurance 10,000
To Depreciation:
Sports Equipments 90,000
Furniture 5,000
To Surplus 1,38,000
3,01,000 3,01,000
The assets and liabilities as on 31st March, 2012 include Club Grounds & Pavilion
` 4,40,000, Sports Equipments ` 2,50,000, Furniture & Fixtures ` 40,000, Subscription in
Arrear ` 8,000, Subscription received in advance ` 2,000 and Creditors for Printing &
Stationery ` 5,000.
You are required to prepare the Balance Sheet of the Club as on 31st March, 2013.
Answer Balance Sheet of Sports Club
As at 31st March 2013
Fixed Assets:
Capital Fund: Club, Grounds & Pavilion 4,40,000
Opening Balance (W.N.) 7,83,000 Furniture & Fixtures 40,000

Add: Surplus 1,38,000 9,21,000 Add: Additions 20,000

Current Liabilities: 60,000
Outstanding Salary 5,000 Less : Depreciation (5,000) 55,000
(15,000-10,000)
Outstanding Audit Fees 5,000 Sports Equipments 2,50,000
Creditors for Printing & Less: Depreciation (90,000) 1,60,000
Stationery
{22,000-(26,000– 5,000)} 1,000
Subscription received in 4,000 Investments :
advance Investment (at cost) 2,00,000
Accrued Interest 6,000
[` 12,000 - ` 6,000]
Current Assets:
Accrued rent 4,000
(28,000 - 24,000)
Subscription receivable
For 2011-12
(8,000-6,000) 2,000
For 2012-13 {(1,56,000-
(1,50,000 + 2,000)} 4,000
Entrance Fees receivables
(1,05,000-1,00,000) 5,000
Prepaid Insurance
(12,000-10,000) 2,000
Cash and bank 58,000
9,36,000 9,36,000
Working Note:
Calculation of Capital Fund as on 1st April, 2012
Balance Sheet of Sports Club
As at 31st March 2012
Capital Fund (bal.fig.) 7,83,000 Fixed Assets :
Current Liabilities: Club, Grounds & Pavilion 4,40,000
Subscription received in advance 2,000 Furniture & Fixtures 40,000
Creditors for Printing and Stationary Sports Equipments 2,50,000
5,000 Current Assets:

9.39 Accounting
Entrance Fees receivables 10,000

Subscription receivables 8,000
Cash and Bank 42,000
7,90,000 7,90,000
Question 14
Highend Club appointed a new accountant for maintaining books of account. He prepared
following Receipts and Payments A/c for the year ended as on 31st March, 2013.
Receipts and Payments Account
(`) (`)
To Balance b/d 9,000 By Printing & Stationery 21,000
To Annual subscription for 9,18,000 By Telephone Expenses 45,000
current year By Repair & Maintenance
Add : Outstanding of last year Expenses (including 1,26,000
received this year 36,000 payment for sports material
9,54,000 ` 54,000)
Less: Subscription recd. in By Garden Upkeep 55,000
Advance as on 31-03-2012 (18,000) 9,36,000 By Electricity Charged 36,000
To Sale of Old Newspaper 36,000 By Loss on sale of furniture 36,000
To 5% Interest on 27,000 (Cost as per books
Investments ` 90,000) By Balance c/d 25,57,000
To Entrance Fees 68,000
To Donation for building 18,00,000
28,76,000 28,76,000
Highend Club had following balances :
01-04-2012 01-04-2013
` `
Furniture 3,60,000
Stock of Sports material 1,33,200 36,000
Subscription receivable 54,000
Subscription received in advance 18,000
Outstanding Printing & Stationery Expenses 1,500 2,500
Outstanding Electricity Charges 3,200
50% Entrance Fees is to be capitalized.

Do you agree with above Receipts and Payments Account? If not, prepare correct Receipts
and Payments Account and Income and Expenditure Account for the year ended 31st March,
2013 and Balance Sheet as on that date.
Answer
Corrected Receipts and Payments Account of Highend Club
` `
To bal. b/d 9,000 By Printing & Stationery 21,000
To annual subscription 9,18,000 By Telephone expenses 45,000
Less: Receivable on 31.3.2013 (54,000) By Garden upkeep 55,000
Add: Advance received for year 2013-14 18,000 By Electricity charges 36,000
Add: Receivable as on 31.3.2012 36,000 By Repairs and maintenance 72,000
Less: Advance received on 31.3.2012 (18,000) 9,00,000 (1,26,000 - 54,000)
To sale of furniture (90,000 - 36,000) 54,000 By Sports material 54,000
To Sale of old newspaper 36,000 By bal. c/d 26,11,000
To Entrance fee 68,000
To Donation for building 18,00,000
To Interest on investments 27,000
28,94,000 28,94,000
Income & Expenditure Account of Highend Club for the year ended 31 st March, 2013
` `
To Printing and Stationery expenses 22,000 By Subscription 9,18,000
(W.N.1)
To Repairs and Maintenance By Entrance fee
(1,26,000 -54,000) 72,000 (50% of 68,000) 34,000
To Telephone expenses 45,000 By Sale of old newspapers 36,000
To Sports material (W.N. 2) 1,51,200 By Interest on investments 27,000
To Garden upkeep 55,000
To Electricity charges (W.N. 3) 39,200
To Loss on sale of furniture 36,000
To Excess of surplus over expenditure 5,94,600 expenditure
10,15,000 10,15,000

9.41 Accounting
Balance sheet of Highed Club as on 31 st March, 2013

` `
Capital Fund (W.N. 4) 10,58,700 Furniture 3,60,000

Add: Entrance fee capitalized 34,000 Less: sale (90,000) 2,70,000
Add: Surplus 5,94,600 16,87,300 Sports material 36,000
Building fund 18,00,000 5% investments 5,40,000
Outstanding Electricity charges 3,200 Cash in hand 26,11,000
Outstanding printing and stationary exp. 2,500 Subscription receivable 54,000
Subscription received in advance 18,000
35,11,000 35,11,000
Working Notes:
1. Printing and Stationary expenses for the year
`
Amount paid 21,000
Add: Outstanding as on 31.3.2013 2,500
23,500
Less: Outstanding as on 31.3.2012 (1,500)
22,000
2. Sports material consumed
Stock as on 1.4.2012 1,33,200
Add: Purchases 54,000
1,87,200
Less: Stock as on 31.3.2013 (36,000)
1,51,200
3. Electricity charges for the year
Amount paid 36,000
39,200
4. Calculation of value of investments
Interest on 5% investments = ` 27,000
Value of Investment = ` 27,000 x 100 /5 = ` 5,40,000

Alternatively, Entrance fees may be shown separately as liability without being added to Capital Fund.

5. Balance Sheet as on 1 st April, 2012

Furniture 3,60,000
Capital fund (balancing fig.) 10,58,700 Sports material 1,33,200
Subscription received in advance 18,000 Subscription receivables 36,000
Outstanding printing and stationary 1,500 Investments 5,40,000
charges Cash in hand 9,000
10,78,200 10,78,200
Question 15
The following information relates to Country Sports Club for the year ended 31.3.2014. You
are required to prepare the Receipts and Payments Account for the year ended 31.3.2014 and
Balance Sheet as on that date.
To Salaries 3,36,000 By Subscriptions 8,40,000
To Repairs and By Receipts for annual
Maintenance 88,000 Sports 3,25,000
To Ground upkeep 1,66,500 Less: Expenses for Sports 2,75,000 50,000
To Electricity charges 82,600 By Entrance fees 1,80,000
To Sports material used 1,48,000 By Interest on 10%
To Printing and Stationary 42,200 government bond 12,000
To Groundsman wages 80,000 By Rent on hire of club
To Depreciation 1,36,000 ground 84,000
To Prizes distributed By Profit on sale of
(Net of fund income) 4,000 sports material 10,500
To Surplus carried to By Sale of old
capital fund 96,700 newspaper 3,500
11,80,000 11,80,000
(a)
Balance as on Balance as on
1.4.2013 ( `) 31.3.2014 (`)
Fixed assets (net block) 6,36,000 7,20,000
Stock of sports material 1,24,000 1,38,000

9.43 Accounting
Investment in 10% government bond 1,20,000 1,20,000

Outstanding subscriptions 1,24,000 88,000
Outstanding repair expenses 13,500 24,500
Creditors for sports material 78,600 62,500
Salary paid in advance 32,000 28,000
Prize fund 2,40,000 2,40,000
Prize fund investments 2,36,000 2,36,000
Bank balance 54,500 ?
(b) During the year the club purchased sports material of ` 1,80,000, out of which 75% was
credit purchase.
(c) 25% of the entrance fees is to be capitalized.
(d) As per the Club's policy any excess of expense for prizes distributed over prize fund
income is to be charged to Income and Expenditure A/c and vice versa:-
prize fund income earned during the year ` 36,000
prizes distributed during the year ` 40,000
(e) Interest on Government bond is received half yearly on 30th June and 31st December
each year.
Answer
Country Sports Club
Receipts and Payments Account for the year ended 31 st March, 2014
To Balance b/d 54,500 By Salaries (W.N.4) 3,32,000
To Subscription (W.N.3) 8,84,000 By Repairs & maintenance (W.N.5) 77,000
To Receipts for Annual 3,25,000 By Expenses for Annual Sports 2,75,000
Sports By Ground upkeep 1,66,500
To Entrance fee 2,40,000 By Electricity charges 82,600
(` 1,80,000 x 4/3) By Sports materials (Cash) 45,000
To Interest 12,000 By Sports material (creditors paid) 1,51,100
To Rent received 84,000 (W.N.2)
To Sale of old newspapers 3,500 By Printing and Stationery 42,200
To Prize fund income 36,000 By Ground man wages 80,000
To Sale of Sports Material 28,500 By Fixed Assets (W.N.6) 2,20,000
(W.N.2) By Prizes distributed 40,000

____ By Balance c/d (Bal. fig) 1,56,100

16,67,500 16,67,500
Balance Sheet of Club as on 31.3.2014
(`) (` )
Capital fund (opening 9,33,400 Fixed Assets (net) 7,20,000
balance) (W.N.1) Sports Material 1,38,000
Add: Surplus 96,700 Investment
Entrance fee 60,000 10,90,100 (10% Govt. Bonds) 1,20,000
Prize fund 2,40,000 Accrued Interest 3,000
Subscription received in Outstanding
advance 72,000 Subscriptions 88,000
Outstanding repair Salary paid in advance 28,000
expenses 24,500 Prize fund investments 2,36,000
Creditors Bank Balance 1,56,100
(Sports Material) 62,500
14,89,100 14,89,100
Working Notes:
1. Balance Sheet of Club as on 1.4.2013
(`) (`)
Capital fund opening (bal. fig.) 9,33,400 Fixed Assets (net) 6,36,000
Prize fund 2,40,000 Sports Material 1,24,000
Subscription received in 64,000 Investment 1,20,000
advance (10% Govt. Bonds)
Outstanding repair expenses 13,500 Accrued interest 3,000
(` 1,20,000x 10% x 3/12)
Creditors (Sports Material) 78,600 Outstanding Subscriptions 1,24,000
Salary paid in advance 32,000
Prize fund investments 2,36,000
Bank Balance 54,500
13,29,500 13,29,500

9.45 Accounting
2. Stock of Sports Materials

Amount Amount
(`) (`)
To Balance b/d 1,24,000 By Sale of Materials (Bal. fig.) 28,500
To Cash (1,80,000x 0.25) 45,000 By Sports Materials used 1,48,000
To Creditors (given)
(Purchases on credit) 1,35,000 By Balance c/d 1,38,000
To Profit on Sale 10,500 __
3,14,500 3,14,500
Creditors for Sports Materials
Amount Amount
(`) (`)
To Cash (bal. fig.) 1,51,100 By Balance b/d 78,600
To Balance c/d 62,500 By Sports Materials 1,35,000
2,13,600 2,13,600
[Payments for Sports materials is ` 1,96,100 (`1,51,100 + ` 45,000)]
3. Subscriptions received during the year
`
Subscription credited to Income and Expenditure A/c 8,40,000
Add: Outstanding subscription at the beginning of the year 1,24,000
Advance subscription received at the end of the year 72,000
10,36,000
Less: Outstanding subscription at the end of the year 88,000
Advance subscription received at the beginning of the year 64,000 (1,52,000)
Subscription received during the year 8,84,000
4. Salaries paid during the year `
Amount debited to Income and Expenditure A/c 3,36,000
Add: Salary paid in advance as on 31.3.2014 28,000
3,64,000
Less: Salary paid in advance as on 31.3.2013 (32,000)
3,32,000

5. Repairs and maintenance paid during the year

Amount debited to Income and Expenditure A/c 88,000
1,01,500
Less: Outstanding as on 31.3.2014 (24,500)
77,000
6. Purchase of Fixed Assets
Amount Amount
(`) (`)
To Balance b/d 6,36,000 By Depreciation 1,36,000
To Purchase of fixed 2,20,000 By Balance c/d 7,20,000
assets (Bal. fig.)
_____ ____
8,56,000 8,56,000
Note: The above solution is prepared on the basis that club is not registered under the
Companies Act, 2013.
Exercise
1. The accountant of City Club gave the following information about the receipts and payments of the club
for the year ended 31st March, 2011:
Receipts: `
Subscriptions 62,130
Fair receipts 7,200
Variety show receipts (net) 12,810
Interest 690
Bar collections 22,350
Payments:
Premises 30,000
Rent 2,400
Rates and taxes 3,780
Printing and stationary 1,410
Sundry expenses 5,350
Wages 2,520
Fair expenses 7,170
Honorarium to secretary 11,000

9.47 Accounting
Bar purchases (payments) 17,310

Repairs 960
New car (less proceeds of old car ` 9,000) 37,800
The following additional information could be obtained:-

1.4.2010 31.3.2011
Cash in hand 450 Nil
Bank balance as per cash-book 24,420 10,350
Cheque issued for sundry expenses not presented to the bank 270 90
(entry has been duly made in the cash book)
Subscriptions due 3,600 2,940
Premises (at cost) 87,000 1,17,000
Provision for depreciation on premises 56,400 -
Car (at cost) 36,570 46,800
Accumulated depreciation on car 30,870 -
Bar stock 2,130 2,610
Creditors for bar purchases 1,770 1,290
Annual honorarium to secretary is ` 12,000. Depreciation on premises is to be provided at 5% on

written down value. Depreciation on new car is to be provided at 20%.
You are required to prepare the Receipts and Payments Account and Income and Expenditure Account
for the year ended 31.3.2011.
(Hints: Total of Receipts and Payments Account =` 1,39,050; and Surplus = ` 43,490)
2. From the following Receipts and Payments Account of Excellent Recreation Club for the year ended
31.3.2011 and additional information given, prepare an Income and Expenditure Account for the year
ended 31.3.2011 and Balance sheet as on 31.3.2011:
Opening Balance: Secretary’s salary 12,000
Cash in Hand and at Bank 3,180 Salaries to staff 25,000
Subscription 18,000 Charities 1,000
Sale of old newspapers 2,500 Printing and stationary 600
Legacies 4,000 Postage expenses 120
Interest on investments 2,000 Rates and taxes 1,500
Endowment fund receipts 20,000 Upkeep of the land 2,000
Proceeds of sport and concerts 4,020 Purchase of sports materials 10,000

Advertisement in the year book 5,000 Telephone expenses 3,480

Closing balance:
______ Cash in hand and at bank 3,000
58,700 58,700
Assets and liabilities as on 31.3.2010 and 31.3.2011 were as follows:-

31.3.2010 31.3.2011
` `
Subscription in arrears 2,000 1,000
Subscription received in advance 500 400
Furniture 2,000 1,800
Land 10,000 10,000
Depreciation shall be charged at 10% p.a. under the diminishing value method. Legacies received shall
be capitalized. Investments were made in securities, the rate of interest being 12% p.a., the date of
investment was 1.6.2009 and the amount of investments was ` 20,000. Due date of interest is 31st
March of every year. Stock of sports materials on 31.3.2011 were useless and value d at NIL price.
(Hints: Deficit = ` 24,880; and Total of Balance Sheet = ` 36,200)
3. A and B are in partnership practicing as Chartered Accountants under the name and style AB & Co.
sharing profits and losses in the matter stated below. They close their accounts on 31 st March every
year. The following was their Balance Sheet as at 31st March, 2011:
` `
Partners’ capitals: Furniture 20,000
A 65,000 Office machinery 15,000
B 40,000 1,05,000 Library books 8,000
Audit fees collected in 10,000 Car 60,000
advance (A’s client) Outstanding audit fees:
Liability for salary 5,000 A’s client 30,000
Provision against 50,000 B’s client 20,000 50,000
outstanding audit fees Cash at bank 15,000
_______ Cash in hand 2,000
1,70,000 1,70,000
The following is the summary of their cash/bank transactions for the year ended 31 st March. 2012.
Opening: Salary charges 2,60,000

9.49 Accounting
Bank balance 15,000 Car expenses 35,000

Cash balance 2,000 Travelling expenses 21,000
Audit fees: Printing and stationary 18,000
A’s client 2,80,000 Postage expenses 3,000
B’s client 1,80,000 4,60,000 Telephones 15,000
Fees for other Subscription for 7,000
services: journals
A’s client 50,000 Library books 12,000
B’s client 40,000 90,000 Fax machine 16,000
Miscellaneous income 4,000 Membership fees 2,000
Drawings:
A 72,000
B 60,000 1,32,000
Cash at bank 48,000
5,71,000 5,71,000
The following further information is available:

1. Audit fees receivable
A’s client ` 30,000
B’s client ` 50,000
2. Audit fees collected in advance
B’s client ` 20,000
3. Outstanding liability for salary on 31st March, 2012 ` 20,000
4. Depreciation to be provided on:
Furniture 10%
Office machinery 20%
Library books 10%
Car 20%
5. It has been agreed that 80% of the audit fees and 40% of fees for other services should be
transferred to income and expenditure account in respect of each partner’s account, the balance
being credited directly to the capital accounts. Profits/losses to be divided between A and B in
the ratio of 2:1 respectively.
You are required to prepare Income and Expenditure account for the year ended 31 st March,
2012 and a Balance Sheet as at 31st March, 2012.

(Hints: Surplus of A ` 1,200 and of B ` 600; Total of Balance Sheet = ` 2,38,800)

4. From the following receipts and payments account of Mumbai Club, prepare income and expenditure
account for the year ended 31.12.2010 and its balance sheet as on that date:
Cash in hand 4,000 Salary 2,000
Cash at bank 10,000 Repair expenses 500
Donations 5,000 Purchase of furniture 6,000
Subscriptions 12,000 Misc. expenses 500
Entrance fees 1,000 Purchase of investments 6,000
Interest on investments 100 Insurance premium 200
Interest received from bank 400 Billiard table 8,000
Sale of old newspaper 150 Paper, ink etc. 150
Sale of drama tickets 1,050 Drama expenses 500
Cash in hand (closing) 2,650
_____ Cash at bank (closing) 7,200
33,700 33,700
Information:
1. Subscriptions in arrear for 2010 ` 900 and subscriptions in advance for 2011 ` 350.
2. Insurance premium outstanding ` 40.
3. Misc. expenses prepaid ` 90.
4. 50% of donation is to be capitalized.
5. Entrance fees are to be treated as revenue income.
6. 8% interest has accrued on investment for five months.
7. Billiard table costing ` 30,000 was purchased during the last year and ` 22,000 were paid for it.
(Hints: Surplus ` 14,150; and Total of Balance Sheet = ` 53,040)

Accounts from
10 Incomplete Records

Single Entry  Single entry system is generally found in sole trading concerns
System or even in partnership firms to some extent but never in case
of limited liability companies on account of legal requirements.
 There are three types of single entry systems:
 Pure Single Entry
 Simple Single Entry
 Quasi Single Entry
 Single entry system ignores the concept of duality and
therefore, transactions are not recorded in their two-fold
aspects.
 Closing Capital = Opening Capital + Additional Capital –
Drawings + Profits
Question 1
(a) Question A company sold 20% of the goods on cash basis and the balance on
credit basis. Debtors are allowed 1½ month's credit and their balance as on
31.03.2015 is ` 1,25,000. Assume that the sale is uniform through out the year.
Calculate the credit sales and total sales of the company for the year ended
31.03.2015.
(b) The following is the Balance Sheet of the retail business of Sri Srinivas as at 31st
December, 2010:
Sri Srinivas’s capital 1,00,000 Furniture 10,000
Liabilities for goods 20,500 Stock 70,000
Rent 1,000 Debtors 25,000

Accounts from Incomplete Records 10.2
Cash at bank 14,500

Cash in hand 2,000
1,21,500 1,21,500
You are furnished with the following information:
(1) Sri Srinivas sells his goods at a profit of 20% on sales.
(2) Goods are sold for cash and credit. Credit customers pay by cheques only.
(3) Payments for purchases are always made by cheques.
(4) It is the practice of Sri Srinivas to send to the bank every weekend the collections of the week
after paying every week, salary of ` 300 to the clerk, Sundry expenses of ` 50 and personal
expenses ` 100.
Analysis of the Bank Pass–Book for the 13 weeks period ending 31st March, 2011 disclosed the
following:
`
Payments to creditors 75,000
Payments of rent upto 31.3.2011 4,000
Amounts deposited into the bank 1,25,000
(include ` 30,000 received from debtors by cheques)
The following are the balances on 31st March, 2011: `
Stock 40,000
Debtors 30,000
Creditors for goods 36,500
On the evening of 31st March, 2011 the Cashier absconded with the available cash in the cash
box. There was no cash deposit in the week ended on that date.
You are required to prepare a statement showing the amount of cash defalcated by the Cashier
and also a Profit and Loss Account for the period ended 31st March, 2011 and a Balance Sheet as
on that date.
Answer
(a) Calculation of Credit Sales and Total sales
12 months
Credit Sales for the year ended 2014-15 = Debtors x
1.5 months
12 months
= ` 1,25,000 x
1.5 months
= ` 10,00,000

10.3 Accounting
100%
Total sales for the year ended 2014-15 = Credit sales x
80%
100%
= ` 10,00,000 x
80%
= ` 12,50,000
(b) Statement showing the amount of cash defalcated by the Cashier
` `
Cash balance as on 1.1.2011 2,000
Add : Cash sales 1,16,250 1,18,250
Less : Salary to clerk (` 300 × 13) 3,900
Sundry expenses (` 50 × 13) 650
Drawings of Sri Srinivas (` 100 × 13) 1,300
Deposit into bank (` 1,25,000 – ` 30,000) 95,000 (1,00,850)
Cash balance as on 31.3.2011 (defalcated by cashier) 17,400
Trading and Profit and Loss Account of Sri Srinivas

for the 13 week period ended 31st March, 2011
` ` `
To Opening stock 70,000 By Sales :
To Purchases 91,000 Cash 1,16,250
To Gross Profit c/d 30,250 Credit 35,000 1,51,250
By Closing stock 40,000
191,250 1,91,250
To Salaries 3,900 By Gross profit b/d 30,250
To Rent (` 4,000 – ` 1,000) 3,000
To Sundry Expenses 650
To Loss of cash by theft 17,400
To Net Profit 5,300
30,250 30,250

Balance Sheet of Sri Srinivas

Capital as on 1.1.2011 1,00,000 Furniture 10,000
Add : Profit 5,300 Stock 40,000
1,05,300 Debtors 30,000
Less : Drawings (1,300) 1,04,000 Cash at bank 60,500
Liabilities for goods 36,500
1,40,500 1,40,500
Working Notes :
(1) Purchases
Creditors Account
` `
To Bank A/c 75,000 By Balance b/d 20,500
To Balance c/d 36,500 By Purchases A/c (Bal. fig.) 91,000
1,11,500 1,11,500
(2) Total sales
`
Opening stock 70,000
Add : Purchases 91,000
1,61,000
Less : Closing stock (40,000)
Cost of goods sold 1,21,000
Add : Gross profit @ 25% on cost 30,250
Total Sales 1,51,250
(3) Credit Sales
Debtors Account
` `
To Balance b/d 25,000 By Bank A/c 30,000
To Sales A/c (Bal. fig.) 35,000 By Balance c/d 30,000
60,000 60,000

10.5 Accounting
(4) Cash Sales

`
Less : Credit Sales (35,000)
Cash sales 1,16,250
(5) Bank balance as on 31.3.2011

` `
To Balance b/d 14,500 By Creditors A/c 75,000
To Debtors A/c 30,000 By Rent A/c 4,000
To Cash A/c 95,000 By Balance c/d 60,500
1,39,500 1,39,500
Notes :
1. All purchases are taken on credit basis.
2. In the absence of information about the rate of depreciation, no depreciation has been
charged on furniture. Alternatively, students may assume any appropriate rate of
depreciation and account for the charge.
3. The amount defalcated by the cashier may be treated as recoverable from him. In that
case, ` 17,400 may be shown as sundry advances on assets side in the Balance Sheet
and net profit for the 13 week period ending 31st March, 2011 would amount ` 22,700.
Question 2
Mr. A runs a business of readymade garments. He closes the books of accounts on
31st March. The Balance Sheet as on 31 st March, 2011 was as follows:
A’s capital a/c 4,04,000 Furniture 40,000
Creditors 82,000 Stock 2,80,000
Debtors 1,00,000
Cash in hand 28,000
Cash at bank 38,000
4,86,000 4,86,000
You are furnished with the following information:

(1) His sales, for the year ended 31 st March, 2012 were 20% higher than the sales of
previous year, out of which 20% sales was cash sales.

Total sales during the year 2010-11 were ` 5,00,000.

(2) Payments for all the purchases were made by cheques only.
(3) Goods were sold for cash and credit both. Credit customers pay be cheques only.
(4) Deprecition on furniture is to be charged 10% p.a.
(5) Mr. A sent to the bank the collection of the month at the last date of the each month after
paying salary of ` 2,000 to the clerk, office expenses ` 1,200 and personal expenses
` 500.
Analysis of bank pass book for the year ending 31 st March 2012 disclosed the following:
`
Payment to creditors 3,00,000
Payment of rent up to 31 st March, 2012 16,000
Cash deposited into the bank during the year 80,000
The following are the balances on 31 st March, 2012:
`
Stock 1,60,000
Debtors 1,20,000
Creditors for goods 1,46,000
On the evening of 31st March 2012, the cashier absconded with the available cash in the cash book.
You are required to prepare Trading and Profit and Loss A/c for the year ended 31 st March,
2012 and Balance Sheet as on that date. All the workings should form part of the answer.
Answer
Trading and Profit and Loss Account for the year ending 31st March 2011
To Opening stock 2,80,000 By Sales (W.N. 3)
To Purchases (W.N. 1) 3,64,000 Credit 4,80,000
To Gross profit 1,16,000 Cash 1,20,000 6,00,000
By Closing stock 1,60,000
7,60,000 7,60,000
To Salary 24,000 By Gross profit 1,16,000
To Rent 16,000
To Office expenses 14,400

10.7 Accounting
To Loss of cash (W.N. 6) 23,600

To Depreciation on furniture 4,000
To Net Profit 34,000
1,16,000 1,16,000
Balance Sheet as on 31 st March, 2011
A’s Capital 4,04,000 Furniture 40,000
Add: Net Profit 34,000 Less: Depreciation (4,000) 36,000
Less: Drawings (6,000) 4,32,000 Stock 1,60,000
Creditors 1,46,000 Debtors 1,20,000
Cash at bank 2,62,000
5,78,000 5,78,000
Working Notes:
(1) Calculation of purchases
Creditors Account
To Bank A/c 3,00,000 By Balance b/d 82,000
To Balance c/d 1,46,000 By Purchases (Bal.fig.) 3,64,000
4,46,000 4,46,000
(2) Calculation of total sales
`
Sales for the year 2010-11 5,00,000
Add: 20% increase 1,00,000
Total sales for the year 2011-12 6,00,000
(3) Calculation of credit sales
`
Less: Cash sales (20% of total sales) (1,20,000)
4,80,000

(4) Calculation of cash collected from debtors

Debtors Account
To Balance b/d 1,00,000 By Bank A/c (Bal. fig.) 4,60,000
To Sales A/c 4,80,000 By Balance c/d 1,20,000
5,80,000 5,80,000
(5) Calculation of closing balance of cash at bank
Bank Account
To Balance b/d 38,000 By Creditors A/c 3,00,000
To Debtors A/c 4,60,000 By Rent A/c 16,000
To Cash A/c 80,000 By Balance c/d 2,62,000
5,78,000 5,78,000
(6) Calculation of the amount of cash defalcated by the cashier
`
Cash balance as on April 2011
1st 28,000
Add: Cash sales during the year 1,20,000
1,48,000
Less: Salary (` 2,000x12) 24,000
Office expenses (` 1,200 x 12) 14,400
Drawings of A (` 500x12) 6,000
Cash deposited into bank during the year 80,000 (1,24,400)
Cash balance as on 31st March 2012 (defalcated by the cashier) 23,600
Question 3
A trader keeps his books of account under single entry system. On 31st March, 2010 his statement
of affairs stood as follows :
Trade Creditors 5,80,000 Furniture, Fixtures and Fittings 1,00,000
Bills Payable 1,25,000 Stock 6,10,000
Outstanding Expenses 45,000 Trade Debtors 1,48,000
Capital Account 2,50,000 Bills Receivable 60,000

10.9 Accounting
Unexpired Insurance 2,000

Cash in Hand and at Bank 80,000
10,00,000 10,00,000
The following was the summary of Cash–book for the year ended 31st March, 2011:
Cash in Hand and at Bank on Payments to Trade Creditors 75,07,000
1st April, 2011 80,000 Payments for Bills payable 8,15,000
Cash Sales 73,80,000 Sundry Expenses paid 6,20,700
Receipts from Trade Debtors 15,10,000 Drawings 2,40,000
Receipts for Bills Receivable 3,40,000 Cash in Hand and at Bank
on 31st March, 2011 1,27,300
93,10,000 93,10,000
Discount allowed to trade debtors and received from trade creditors amounted to ` 36,000 and
` 28,000 respectively. Bills endorsed amounted to ` 15,000. Annual Fire Insurance premium of
` 6,000 was paid every year on 1st August for the renewal of the policy. Furniture, fixtures and
fittings were subject to depreciation @ 15% per annum on diminishing balances method.
You are also informed about the following balances as on 31st March, 2011 :
`
Stock 6,50,000
Trade Debtors 1,52,000
Bills Receivable 75,000
Bills Payable 1,40,000
Outstanding Expenses 5,000
The trader maintains a steady gross profit ratio of 10% on sales.
Prepare Trading and Profit and Loss Account for the year ended 31st March, 2011 and Balance
Sheet as at that date.
Answer
Trading and Profit and Loss Account
` `
To Opening Stock 6,10,000 By Sales

To Purchases (W.N. 3) 84,10,000 Cash 73,80,000

To Gross profit c/d 9,30,000 Credit (W.N. 2) 19,20,000 93,00,000
(10% of 93,00,000) By Closing stock 6,50,000
99,50,000 99,50,000
To Sundry expenses (W.N. 6) 5,80,700 By Gross profit b/d 9,30,000
To Discount allowed 36,000 By Discount received 28,000
(15% ` 1,00,000)
9,58,000 9,58,000

` `
Capital Furniture & Fittings 1,00,000
Opening balance 2,50,000 Less : Depreciation (15,000) 85,000
Less : Drawing (2,40,000) Stock 6,50,000
10,000 Trade Debtors 1,52,000
Add : Net profit for the years 3,26,300 3,36,300 Bills receivable 75,000
Bills payable 1,40,000 Unexpired insurance 2,000
Trade creditors 6,10,000 Cash in hand & at bank 1,27,300
Outstanding expenses 5,000
10,91,300 10,91,300
Working Notes :
1. Bills Receivable Account
` `
To Balance b/d 60,000 By Cash 3,40,000
To Trade debtors 3,70,000 By Trade creditors 15,000
(Bills endorsed)
4,30,000 4,30,000
2. Trade Debtors Account
` `
To Balance b/d 1,48,000 By Cash/Bank 15,10,000
To Credit sales 19,20,000 By Discount allowed 36,000

10.11 Accounting
(Bal. fig.) By Bills receivable 3,70,000

20,68,000 20,68,000
3. Memorandum Trading Account

` `
To Opening stock 6,10,000 By Sales 93,00,000
To Purchases (Balancing figure) 84,10,000 By Closing stock 6,50,000
To Gross Profit (10% on sales) 9,30,000
99,50,000 99,50,000
4. Bills Payable Account

` `
To Cash/Bank 8,15,000 By Balance b/d 1,25,000
To Balance c/d 1,40,000 By Creditors (balancing figure) 8,30,000
9,55,000 9,55,000
5. Trade Creditors Account

` `
To Cash/Bank 75,07,000 By Balance b/d 5,80,000
To Discount received 28,000 By Purchases (as calculated 84,10,000
To Bills receivable 15,000 in W.N. 3)
To Bills payable 8,30,000
To Balance c/d (balancing figure) 6,10,000
89,90,000 89,90,000
6. Computation of sundry expenses to be charged to Profit & Loss A/c
`
Sundry expenses paid (as per cash book) 6,20,700
Add : Prepaid expenses as on 31–3–2010 2,000
6,22,700
Less : Outstanding expenses as on 31–3–2010 (45,000)
5,77,700
Add : Outstanding expenses as on 31–3–2011 5,000
5,82,700
Less : Prepaid expenses as on 31–3–2011 (Insurance paid till July, 2011) (2,000)
5,80,700

Question 4
The following is the Balance Sheet of a concern on 31st March, 2010 :
` `
Capital 10,00,000 Fixed Assets 4,00,000
Creditors (Trade) 1,40,000 Stock 3,00,000
Profit & Loss A/c 60,000 Debtors 1,50,000
Cash & Bank 3,50,000
12,00,000 12,00,000
The management estimates the purchases and sales for the year ended 31st March, 2011 as
under :
upto 28.2.2011 March 2011
` `
Purchases 14,10,000 1,10,000
Sales 19,20,000 2,00,000
It was decided to invest ` 1,00,000 in purchases of fixed assets, which are depreciated @
10% on cost.
The time lag for payment to Trade Creditors for purchase and receipt from Sales is one month.
The business earns a gross profit of 30% on turnover. The expenses against gross profit
amount to 10% of the turnover. The amount of depreciation is not included in these expenses.
Draft a Balance Sheet as at 31st March, 2011 assuming that creditors are all Trade Creditors for
purchases and debtors for sales and there is no other item of current assets and liabilities apart
from stock and cash and bank balances.
Answer
Projected Balance Sheet of ......
Capital 10,00,000 Fixed Assets 4,00,000
Profit & Loss Account as on Additions 1,00,000
1st April, 2010 60,000 5,00,000
Add : Profit for the year 3,74,000 4,34,000 Less : Depreciation (50,000) 4,50,000
Creditors (Trade) 1,10,000 Stock in trade 3,36,000
Sundry Debtors 2,00,000
Cash & Bank Balances 5,58,000
15,44,000 15,44,000

10.13 Accounting
Working Notes:
1. Projected Trading and Profit and Loss Account
` `
To Opening Stock 3,00,000 By Sales 21,20,000
To Purchases 15,20,000 By Closing Stock (balancing 3,36,000
figure)
To Gross Profit c/d (30% on 6,36,000
sales)
24,56,000 24,56,000
To Sundry Expenses (10% on 2,12,000 By Gross Profit b/d 6,36,000
sales)
6,36,000 6,36,000
Cash and Bank Account
1st April, 2010 to 31st March, 2011
` `
To Balance b/d 3,50,000 By Sundry Creditors 15,50,000
To Sundry Debtors 20,70,000 (` 1,40,000 + ` 14,10,000)
(` 1,50,000 + ` 19,20,000) By Expenses 2,12,000
By Fixed Assets 1,00,000
24,20,000 24,20,000
Note : The entire sales and purchases are taken on credit basis.
Question 5
The following is the Balance Sheet of Sri Agni Dev as on 31st March, 2010:
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, 2011, 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, 2011 were 20% higher than 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 transactions 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, 2011)
(ii) Repairs ` 3,500 (paid by cash)
(iii) Addition to Machinery ` 60,000 (paid by cheque)
(iv) Private drawings ` 30,000 (paid by cash)
(v) Travelling expenses ` 18,000 (paid by cash)
(vi) Introduction of additional capital by ` 5,000
depositing in to the Bank
(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, 2011 and a Balance
Sheet as on that date. Make appropriate assumptions whenever necessary. All workings
should form part of your answer.

10.15 Accounting
Answer
Trading and Profit and Loss Account of Sri. Agni Dev
` `
To Opening Stock 33,000 By Sales 9,60,000
To Purchases 7,20,000 By Closing Stock 33,000
To Gross Profit c/d 2,40,000 _______
9,93,000 9,93,000
To Business Expenses 1,57,500 By Gross Profit b/d 2,40,000
To Repairs 3,500
To Travelling Expenses 18,000
To Loss by theft 1,500
To Net Profit 32,500 _______
2,40,000 2,40,000
Balance Sheet of Sri Agni Dev as at 31st March, 2011
Capital 2,52,500 Machinery 1,20,000
Add: additions 60,000
1,80,000
Add: Additional Capital 5,000 Less: Depreciation (27,000) 1,53,000
Net Profit 32,500
2,90,000 Stock in Trade 33,000
Less: Loss of Furniture (20,000) Sundry Debtors 1,20,000
Drawings (30,000) 2,40,000
Bank Overdraft 2,667
Sundry Creditors 55,833
Outstanding Expenses 7,500 _______
3,06,000 3,06,000
Working Notes:
1. Sales during 2010-2011 `
Debtors as on 31st March, 2010 1,00,000
(Being equal to 2 months' sales)

Total credit sales in 2009- 2010, ` 1,00,000 × 6 6,00,000

Cash Sales, being equal to 1/3rd of credit sales or 1/4th of the total 2,00,000
Sales in 2009- 2010 8,00,000
Increase, 20% as stated in the problem 1,60,000
Total sales during 2010-2011 9,60,000
Cash sales : 1/4th 2,40,000
Credit sales : 3/4th 7,20,000
2. Debtors equal to two months credit sales 1,20,000
3. Purchases
Sales in 2010-2011 9,60,000
Gross Profit @ 25% 2,40,000
Cost of goods sold being purchases 7,20,000
(Since there is no change in stock level)
4. Sundry Creditors for goods
(` 7,20,000 – ` 50,000) /12 = ` 6,70,000/12 55,833
5. Collections from Debtors
Opening Balance 1,00,000
Add: Credit Sales 7,20,000
8,20,000
Less: Closing Balance (1,20,000)
7,00,000
6. Payment to Creditors
Opening Balance 45,000
Add: Credit Purchases (` 7,20,000 – ` 50,000) 6,70,000
7,15,000
Less: Closing Balance (55,833)
Payment by cheque 6,59,167
7. Cash and Bank Account

Particulars Cash Bank Particulars Cash Bank
To Balance b/d 8,000 16,500 By Payment to 50,000 6,59,167
Creditors
To Collection from – 7,00,000 By Misc. Expenses 1,45,000 5,000
Debtors

10.17 Accounting
To Sales 2,40,000 – By Repairs 3,500 –

To Additional – 5,000 By Addition to – 60,000
Capital Machinery
To Balance c/d – 2,667 By Travelling 18,000 –
Expenses
(Bank overdraft) By Private Drawings 30,000 –
By Balance c/d (lost by
theft) 1,500
2,48,000 7,24,167 2,48,000 7,24,167
Question 6
Lucky does not maintain proper books of accounts. However, he maintains a record of his bank
transactions and also is able to give the following information from which you are requested to
prepare his final accounts for the year 2011:
1.1.2011 31.12.2011
` `
Debtors 1,02,500 
Creditors  46,000
Stock 50,000 62,500
Bank Balance  50,000
Fixed Assets 7,500 9,000
Details of his bank transactions were as follows:

`
Received from debtors 3,40,000
Additional capital brought in 5,000
Sale of fixed assets (book value ` 2,500) 1,750
Paid to creditors 2,80,000
Expenses paid 49,250
Personal drawings 25,000
Purchase of fixed assets 5,000
No cash transactions took place during the year. Goods are sold at cost plus 25%. Cost of goods
sold was ` 2,60,000.

Answer
Amount Amount
` `
To Opening stock 50,000 By Sales (` 2,60,000  125/100) 3,25,000
To Purchases (balancing By Closing stock 62,500
figure) 2,72,500
To Gross profit c/d

(` 2,60,000  25/100) 65,000 _______
3,87,500 3,87,500
To Expenses 49,250 By Gross profit b/d 65,000
To Loss on sale of fixed
assets 750
To Depreciation on fixed
assets (W.N.1) 1,000
To Net profit 14,000 ______
65,000 65,000
Balance Sheet as on 31st December, 2011

Amount Amount
Capital (W.N. 5) 1,69,000 Fixed assets 9,000
Add: Additional capital 5,000 Debtors (W.N. 3) 87,500
Net profit 14,000 Stock 62,500
1,88,000 Bank balance 50,000
Less: Drawings (25,000) 1,63,000
Creditors 46,000 _______
2,09,000 2,09,000

10.19 Accounting
Working Notes:
1. Fixed assets account
` `
To Balance b/d 7,500 By Bank (sale) 1,750
To Bank 5,000 By Loss on sale of fixed 750
asset(2,500-1,750)
By Depreciation (balancing figure) 1,000
_____ By Balance c/d 9,000
12,500 12,500
2. Bank account
` `
To Balance b/d (balancing figure) 62,500 By Creditors 2,80,000
To Debtors 3,40,000 By Expenses 49,250
To Capital 5,000 By Drawings 25,000
To Sale of fixed assets 1,750 By Fixed assets 5,000
_______ By Balance c/d 50,000
4,09,250 4,09,250
3. Debtors account
` `
To Balance b/d 1,02,500 By Bank 3,40,000
To Sales 3,25,000 By Balance c/d 87,500
125 (balancing figure)
(` 2,60,000  )
100 _______ _______
4,27,500 4,27,500
4. Creditors account
` `
To Bank 2,80,000 By Balance b/d (balancing figure) 53,500
To Balance c/d 46,000 By Purchases (from trading account) 2,72,500
3,26,000 3,26,000
5. Balance Sheet as on 1st January, 2011
Creditors (W.N. 4) 53,500 Fixed assets 7,500

Capital (balancing figure) 1,69,000 Debtors 1,02,500

Stock 50,000
_______ Bank balance (W.N. 2) 62,500
2,22,500 2,22,500
Question 7
The following information relates to the business of Mr. Shiv Kumar, who requests you to prepare a
Trading and Profit & Loss Account for the year ended 31st March, 2011 and a Balance Sheet as on
that date
(a) Balance as on Balance as on
` `
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 balances 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 besides certain other items:
` `
Sale of old papers and Cash purchases 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, 2010 was
` 20,000 was sold on 30th September, 2010 for ` 8,000. Depreciation is to be
provided on Building and Furniture @ 10% p.a. and on Motorcar @ 20% p.a.
Depreciation on sale of furniture is to be provided for 6 months and for additions to
Building for whole year.

10.21 Accounting
(iii) Of the Debtors, a sum of ` 8,000 should be written off 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, 2010 was ` 8,000 and on 31st March, 2011 was
` 10,000 on 31st March, 2010. 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 and there was
no opening provision for doubtful debts.
Answer
Trading and Profit and Loss Account of Mr. Shiv Kumar
` `
To Opening stock By Sales(80000*100/20)Closing 4,00,000
(balancing figure) 80,000 By stock 40,000
To Purchases(48,000*100/20) 2,40,000
To Gross profit c/d
@ 30% on sales 1,20,000 _______
4,40,000 4,40,000
To Miscellaneous expenses By Gross profit b/d 1,20,000
(` 80,000 - ` 8,000 + ` 10,000) 82,000 By Miscellaneous receipts 20,000
By Net loss transferred to
Capital A/c 25,840
To Depreciation:
Building ` 36,000
Furniture ` 7,800
(` 6,800 + ` 1,000)
Motor Car ` 16,000 59,800
To Loss on sale of furniture
11,000
To Bad debts 8,000
To Provision for doubtful debts
5,040
1,65,840 1,65,840

Balance Sheet of Mr. Shivkumar

Capital as on 1st April, Building 3,20,000
2010 7,16,000 Add: Addition during the
Profit and Loss A/c year 40,000
Opening balance 40,000 3,60,000
Less: Loss for the Less: Provision for
year (25,840) 14,160 depreciation (36,000) 3,24,000
Furniture 60,000
Sundry creditors 1,12,000 Less: Sold during the year (20,000)
Bills payable 16,000 40,000
Outstanding salary 10,000 Add: Addition during the
year 28,000
68,000
Motor car (at cost) 80,000
Stock in trade 40,000
Sundry debtors 2,52,000
Less: Provision for
doubtful debts @ 2% (5,040) 2,46,960
_______ Cash in hand and at bank 1,04,000
8,68,160 8,68,160
Working Notes:
Sundry Debtors Account
` `
To Balance b/d 1,60,000 By Cash/Bank A/c 2,00,000
To Sales A/c 3,20,000 By Bills receivable A/c 20,000
By Bad debts A/c 8,000
By Balance c/d (balancing fig.) 2,52,000
4,80,000 4,80,000

10.23 Accounting
Sundry Creditors Account

` `
To Cash/Bank A/c 1,84,000 By Balance b/d 1,20,000
To Bills payable A/c 16,000 By Purchases A/c 1,92,000
To Balance c/d
(balancing figure) 1,12,000
3,12,000 3,12,000
Bills Receivable Account

` `
To Balance b/d 32,000 By Cash/ Bank A/c 24,000
To Sundry debtors A/c 20,000 (balancing figure)
52,000 52,000
Bills Payable Account
` `
To Cash/Bank A/c 28,000 By Balance b/d 28,000
(balancing figure) By Sundry creditors A/c 16,000
To Balance c/d 16,000
44,000 44,000
Furniture Account
` `
To Balance b/d 60,000 By Bank/Cash A/c 8,000
To Bank A/c 28,000 By Depreciation A/c 1,000
By Profit and loss A/c (loss on sale) 11,000
By Depreciation A/c 6,800
88,000 88,000
Cash/Bank Account
` `
To Balance b/d 1,80,000 By Misc. trade expenses A/c 80,000
To Miscellaneous By Purchases A/c 48,000
receipts A/c 20,000 By Furniture A/c (balancing
To Sundry debtors A/c 2,00,000 figure) 28,000

To Sales A/c 80,000 By Sundry creditors A/c 1,84,000

To Furniture A/c (sale) 8,000 By Bills payable A/c 28,000
To Bills receivable A/c 24,000 By Building A/c 40,000
5,12,000 5,12,000
Opening Balance Sheet of Mr. Shivkumar
Capital (balancing figure) 7,16,000 Building 3,20,000
Profit and loss A/c 40,000 Furniture 60,000
Sundry creditors 1,20,000 Motor car 80,000
Bills payable 28,000 Stock in trade 80,000
Outstanding salary 8,000 Sundry debtors 1,60,000
Cash in hand and at bank 1,80,000
9,12,000 9,12,000
Question 8
From the following furnished by Shri Ramji, prepare Trading and Profit and Loss account for the
year ended 31.3.2011. Also draft his Balance Sheet as at 31.3.2011:
1.4.2010 31.3.2011
` `
Creditors 3,15,400 2,48,000
Expenses outstanding 12,000 6,600
Fixed assets (includes machinery) 2,32,200 2,40,800
Stock in hand 1,60,800 2,22,400
Cash in hand 59,200 24,000
Cash at bank 80,000 1,37,600
Sundry debtors 3,30,600 ?
Details of the year’s transactions are as follows:
Cash and discount credited to debtors 12,80,000
Bad debts 8,400
Sales (Both cash and credit) 14,36,200

10.25 Accounting
Discount allowed by creditors 14,000

Returns to creditors 8,000
Capital introduced by cheque 1,70,000
Collection from debtors (Deposited into bank after receiving 12,50,000
cash)
Cash purchases 20,600
Expenses paid by cash 1,91,400
Drawings by cheque 8,600
Machinery acquired by cheque 63,600
Cash deposited into bank 1,00,000
Cash withdrawn from bank 1,84,800
Cash sales 92,000
Payment to creditors by cheque 12,05,400
Note: Ramji has not sold any Fixed Asset during the year.
Answer
In the books of Shri Ramji
` ` ` `
To Opening stock 1,60,800 By Sales:
To Purchases: Cash 92,000
Cash 20,600 Credit 13,44,200
Credit (W.N. 3) 11,60,000 14,36,200
11,80,600 Less: Returns (29,000) 14,07,200
Less: Returns (8,000) 11,72,600
To Gross Profit c/d 2,96,200 By Closing stock 2,22,400
16,29,600 16,29,600
To Discount 30,000 By Gross profit 2,96,200
allowed b/d
To Bad debts 8,400 By Discount 14,000
To General expenses (W.N. 5) 1,86,000
To Depreciation (W.N. 4) 55,000

To Net profit 30,800 _______

3,10,200 3,10,200

Capital (W.N. 1) 5,35,400 Sundry Assets 2,32,200
Add: Additional capital 1,70,000 Add: New machinery 63,600
Net profit 30,800 2,95,800
7,36,200 Less: Depreciation (55,000) 2,40,800
Less: Drawings (8,600) 7,27,600 Stock in trade 2,22,400
Sundry creditors 2,48,000 Sundry debtors (W.N. 2) 3,57,400
Expenses outstanding 6,600 Cash in hand 24,000
_______ Cash in Bank 1,37,600
9,82,200 9,82,200
Working Notes:
(1) Statement of Affairs as at 31st March, 2010
Sundry creditors 3,15,400 Sundry Assets 2,32,200
Outstanding expenses 12,000 Stock 1,60,800
Ramji’s Capital Debtors 3,30,600
(Balancing figure) 5,35,400 Cash in hand 59,200
_______ Cash at Bank 80,000
8,62,800 8,62,800
(2) Sundry Debtors Account
` `
To Balance b/d 3,30,600 By Cash 12,50,000
To Sales (14,36,200 – 13,44,200 By Discount 30,000
92,000)
By Returns (sales) 29,000
By Bad debts 8,400
________ By Balance c/d (Bal. fig.) 3,57,400
16,74,800 16,74,800

10.27 Accounting
(3) Sundry Creditors Account

` `
To Bank – Payments 12,05,400 By Balance b/d 3,15,400
To Discount 14,000 By Purchases credit 11,60,000
To Returns 8,000 (Balancing figure)
To Balance c/d (closing balance) 2,48,000 ________
14,75,400 14,75,400
(4)
Depreciation on Fixed Assets: `
Add: Additions 63,600
2,95,800
Less: Closing balance (2,40,800)
Depreciation 55,000
(5) Expenses to be shown in profit and loss account
Expenses (in cash) 1,91,400
Add: Outstanding of 2011 6,600
1,98,000
Less: Outstanding of 2010 12,000
1,86,000
(6) Cash and Bank Account
Cash Bank Cash Bank
` ` ` `
To Balance b/d 59,200 80,000 By Purchases 20,600 
To Capital 1,70,000 By Expenses 1,91,400
To Debtors 12,50,000 By Plant and 63,600
Machinery
To Bank 1,84,800 By Drawings 8,600
To Cash 1,00,000 By Creditors 12,05,400
To Sales 92,000 By Cash 1,84,800
By Bank 1,00,000
_______ ________ By Balance c/d 24,000 1,37,600
3,36,000 16,00,000 3,36,000 16,00,000

Question 9
Mr. X runs a retail business. Suddenly he finds on 31.3.2011 that his Cash and Bank balances
have reduced considerably. He provides you the following information:
(i) Balances 31.3.2010 31.3.2011
` `
Sundry Debtors 35,400 58,800
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 1.10.10) 54,000
Proprietor’s drawings 1,61,900
(iii) Rent has been increased from January, 2011.
(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 31.3.2011. Prepare his
statement of affairs and reconcile the profit and capital balance.

10.29 Accounting
Answer
Trading and profit and Loss Account of Mr. X
` ` `
To Opening Stock 11,400 By Sales:
To Purchases 8,28,000 Cash 2,97,500
To Gross Profit 3,78,100 Credit 9,00,000 11,97,500
By Closing Stock 20,000
12,17,500 12,17,500
To Wages 78,000 By Gross Profit 3,78,100
To Rent* 30,600
To Electricity & Telephone** 30,400
To Professional charges 34,000
To Shop Expenses 18,000
10 1
(` 54,000  )
100 2
3,78,100 3,78,100
`
*Rent Paid 30,000
Less: Outstanding on 1.4.2010 (2,400)
27,600
30,600
`
**Electricity & Telephone charges paid 24,000
30,400

Statement of Affairs of Mr. X as on 31-03-2010 & 31-03-2011
Liabilities 31-3-2010 31-3-2011 Assets 31-3-2010 31-3-2011

` ` ` `
Capital Account Furniture - 51,300
(Balancing Figure) 78,800 1,01,300
Sundry Creditors 84,400 22,400 Stock 11,400 20,000
Outstanding Expenses: Sundry Debtors 35,400 58,800
Rent 2,400 3,000 Bank 1,08,400 2,500
Electricity & Telephone 6,400 Cash 10,400 500
1,65,600 1,33,100 1,65,600 1,33,100
Reconciliation of Profit
`
Capital on 31.03.2011 1,01,300
Add: Drawings 1,61,900
2,63,200
Less: Opening Capital on 1.4.2010 (78,800)
Profit for the year 1,84,400
Working Notes
1. Total Debtors Account
` `
To Balance b/d 35,400 By Cash (Balancing Figure) 8,76,600
To Credit Sales 9,00,000 By Balance c/d 58,800
9,35,400 9,35,400
2. Total Creditors Account
` `
To Bank 8,90,000 By Balance b/d 84,400
To Balance c/d 22,400 By Credit Purchases 8,28,000
9,12,400 9,12,400

10.31 Accounting
3. Cash Account
Cash (` ) Bank (` ) Cash (` ) Bank (` )
To Balance b/d 10,400 1,08,400 By Bank 10,34,000 -
To Sundry Debtors 8,76,600 - By Wages 78,000 -
To Cash Sales 2,97,500 - By Rent 30,000 -
(Balancing figure)
To Cash A/c - 10,34,000 By Electricity & 24,000 -
(Contra) Telephone
By Shop Expenses 18,000 -
By Professional charges - 34,000
By Sundry Creditors A/c - 8,90,000
By Furniture - 54,000
By Drawings A/c - 1,61,900
By Balance c/d 500 2,500
11,84,500 11,42,400 11,84,500 11,42,400
Question 10
Mr. Ashok keeps his books in Single Entry system. From the following information, prepare
Trading and Profit & Loss Account for the year ended 31st March, 2011 and the Balance Sheet as
on that date:
Assets and Liabilities 31.3.2010 31.3.2011
(` ) (` )
Outstanding expenses 1,000 500
Fixed Assets 23,000 22,000
Stock 16,000 22,500
Cash in Hand and at Bank 14,000 16,000
Sundry Debtors ? 36,000
Following further details are available for the Current year:
` `
Total receipts from debtors 1,30,000 Cash purchases 2,000
Returns inward 3,000 Fixed Assets purchased and
paid by cheque 1,000
Bad Debts 1,000 Drawings by cheques 6,500

Total Sales 1,50,000 Deposited into the bank 10,000

Discount received 1,500 Withdrawn from bank 18,500
Return outwards 1,000 Cash in hand at the end 2,500
Capital introduced Paid to creditors by cheques 1,20,000
(paid into Bank) 15,000 Expenses paid 20,000
Cheques received from Debtors 1,25,000
Answer
for the year ended on 31st March, 2011
` `
To Purchases: Cash
(W.N.1) 6,500
Cash 2,000 Credit 1,43,500
Credit (W.N.3) 1,17,500 1,50,000
1,19,500 Less: Returns (3,000) 1,47,000
Less: Returns (1,000) 1,18,500 By Stock 22,500
To Gross Profit c/d 35,000
1,69,500 1,69,500
To Expenses 20,000
Add: O/s at the end 500 By Gross profit b/d 35,000
20,500 By Discount received 1,500
Less: O/s at the
beginning (1,000) 19,500
To Bad debts 1,000
36,500 36,500
Balance Sheet
` `
Capital (W.N.5) 48,500 Fixed Assets 23,000
Add: Additional Add: Purchased during the 1,000

10.33 Accounting
Capital 15,000 year

Add: Net Profit 14,000 Less: Depreciation (2,000) 22,000
Less: Drawings (6,500) 71,000 Stock 22,500
Creditors 25,000 Cash 2,500
Outstanding Exp. 500 Bank 13,500
_____ Debtors 36,000
96,500 96,500
Working Notes:
1. Cash Account
` `
To Balance b/d 4,500 By Purchases 2,000
To Sales (Bal. Fig.) 6,500 By Bank (contra) 10,000
To Debtors 5,000 By Expenses 20,000
To Bank (contra) 18,500 By Balance c/d 2,500
34,500 34,500
2. Bank Account
` `
To Balance b/d (Bal. Fig.) 9,500 By Fixed Assets 1,000
To Capital 15,000 By Drawings 6,500
To Cash (contra) 10,000 By Cash (contra) 18,500
To Debtors 1,25,000 By Creditors 1,20,000
1,59,500 1,59,500
3. Creditors Account
` `
To Bank 1,20,000 By Balance b/d 30,000
To Returns 1,000 By Purchase (Bal. Fig.) 1,17,500
To Discount received 1,500
1,47,500 1,47,500

4. Debtors Account
` `
To Balance b/d (Bal. Fig.) 26,500 By Cash 5,000
To Sales 1,43,500 By Bank 1,25,000
By Bad Debts 1,000
By Returns 3,000
1,70,000 1,70,000
5. Opening Balance Sheet as on 31.3.2010
` `
Creditors 30,000 Fixed Assets 23,000
O/s Expenses 1,000 Stock 16,000
Capital (Bal. Fig.) 48,500 Cash 4,500
Bank (W.N.2) 9,500
Debtors (W.N.4) 26,500
79,500 79,500
Question 11
‘A’ and ‘B’ are in partnership sharing profits and losses equally. They keep their books by single
entry system. The following balances are available from their books as on 31.3.2010 and
31.3.2011
31.3.2010 31.3.2011
` `
Building 1,50,000 1,50,000
Equipments 2,40,000 2,72,000
Furniture 25,000 25,000
Debtors ? 1,00,000
Creditors 65,000 ?
Stock ? 70,000
Bank loan 45,000 35,000
Cash 60,000 ?

10.35 Accounting
The transactions during the year ended 31.3.2011 were the following:
`
Collection from debtors 3,80,000
Payment to creditors 2,50,000
Cash purchases 65,000
Expenses paid 40,000
Drawings by ‘A’ 30,000
On 1.4.2010 an equipment of book value ` 20,000 was sold for ` 15,000. On 1.10.2010, some
equipments were purchased.
Cash sales amounted to 10% of sales.
Credit sales amounted to ` 4,50,000.
Credit purchases were 80% of total purchases.
The firm sells goods at cost plus 25%.
Discount allowed ` 5,500 during the year.
Discount earned ` 4,800 during the year.
Outstanding expenses ` 3,000 as on 31.3.2011.
Capital of ‘A’ as on 31.3.2010 was ` 15,000 more than the capital of ‘B’, equipments and furniture
to be depreciated at 10% p.a. and building @ 2% p.a.
You are required to prepare:
(I) Trading and Profit and Loss account for the year ended 31.3.2011 and
(ii) The Balance Sheet as on that date.
Answer
Trading and Profit and Loss A/c for the year ended 31.3.2011
` `
To Opening stock 1,45,000 By Sales- Cash 50,000
(W.N.3) (W.N.1)
To Purchases-Cash 65,000 Credit 4,50,000 5,00,000
Credit (W.N.2) 2,60,000 3,25,000 By Closing stock 70,000
To Gross profit c/d 1,00,000
5,70,000 5,70,000
To Loss on sale of By Gross profit b/d 1,00,000
equipment 5,000
(20,000-15,000)

To Depreciation By Discount received 4,800

Building 3,000
Furniture 2,500
Equipment 24,600 30,100
(W.N.4)
To Expenses paid 40,000
Add : Outstanding
expenses 3,000 43,000
To Discount allowed 5,500
To Net profit
transferred to: 10,600
A’s capital A/c
B’s capital A/c 10,600 21,200
1,04,800 1,04,800
Balance Sheet as on 31-3-2011

A’s capital (W.N.7) 2,80,250 Building 1,50,000
Less: Drawings (30,000 ) Less: Depreciation (3,000) 1,47,000
2,50,250 Equipments 2,72,000
Add: Net profit 10,600 2,60,850 Less: Depreciation (24,600) 2,47,400
B’s capital (W.N.7) 2,65,250 Furniture 25,000
Add: Net profit 10,600 2,75,850 Less: Depreciation (2,500) 22,500
Sundry creditors 70,200 Debtors 1,00,000
(W.N.5)
Bank loan 35,000 Stock 70,000
Outstanding expenses 3,000 Cash balance (W.N.8) 58,000
6,44,900 6,44,900
Working Notes:
1. Calculation of total sales and cost of goods sold
Cash sales = 10% of total sales
Credit sales = 90% of total sales = ` 4,50,000
4,50,000
Total sales = 100  5,00,000
90
Cash sales = 10% of 5,00,000 = ` 50,000

10.37 Accounting
2. Calculation of total purchases and credit purchases

Cash purchases = ` 65,000
Credit purchases = 80% of total purchases
Cash purchases = 20% of total purchases
65,000
Total purchases = 100  ` 3,25,000
20
Credit purchases = 3,25,000 – 65,000 = ` 2,60,000
3. Calculation of opening stock
Stock Account
` `
To Balance b/d (Bal. Fig.) 1,45,000 By Cost of goods sold
5,00,000
 100 4,00,000
125
To Total purchases (W.N.2) 3,25,000 By Balance c/d 70,000
4,70,000 4,70,000
4. Purchase of equipment & depreciation on equipments

Equipment Account
` `
To Balance b/d 2,40,000 By Cash -equipment sold 15,000
To Cash-purchase (Bal. Fig.) 52,000 By Profit and Loss
Accounts ( Loss on 5,000
sale)
2,92,000 2,92,000
Depreciation on equipment:
@ 10% p.a. on ` 2,20,000 (i.e. ` 2,40,000 – ` 20,000) = 22,000
@ 10% p.a. on ` 52,000 for 6 months (i.e. during the year) = 2,600
24,600

5. Calculation of closing balance of creditors

Creditors Account
` `
To Cash 2,50,000 By Balance b/d 65,000
To Discount received 4,800 By Credit purchases (W.N.2) 2,60,000
To Balance c/d (Bal. Fig.) 70,200
3,25,000 3,25,000
6. Calculation of opening balance of debtors

Debtors Account
` `
To Balance b/d (Bal. Fig.) 35,500 By Cash 3,80,000
To Sales (Credit) 4,50,000 By Discount allowed 5,500
4,85,500 4,85,500
7. Calculation of capital accounts of A & B as on 31.3.2010

Balance Sheet as on 31.3.2010
Combined Capital Accounts of Building 1,50,000
A & B (Bal. Fig.) 5,45,500
Creditors 65,000 Equipments 2,40,000
Bank Loan 45,000 Furniture 25,000
Debtors (W.N.6) 35,500
Stock (W.N.3) 1,45,000
Cash balance 60,000
6,55,500 6,55,500
`
Combined Capitals of A & B 5,45,500
Less: Difference in capitals of A and B (15,000)
5,30,500
5,30,500
A’s Capital as on 31.3.2010 =  2,65,250  15,000  ` 2,80,250
2

10.39 Accounting
5,30,500
B’s Capital as on 31.3.2010 =  ` 2,65,250
2
8. Cash Account
` `
To Balance b/d 60,000 By Creditors 2,50,000
To Debtors 3,80,000 By Purchases 65,000
To Equipment (sales) 15,000 By Expenses 40,000
To Cash sales (W.N.1) 50,000 By A’s drawings 30,000
By Bank loan paid 10,000
(45,000-35,000)
By Equipment purchased 52,000
(W.N.4)
By Balance c/d (Bal. Fig.) 58,000
5,05,000 5,05,000
Question 12
Ram carried on business as retail merchant. He has not maintained regular account books.
However, he always maintained ` 10,000 in cash and deposited the balance into the bank account.
He informs you that he has sold goods at profit of 25% on sales.
Following information is given to you:
Assets and Liabilities As on 1.4.2010 As on 31.3.2011
Cash in Hand 10,000 10,000
Cash at Bank 50,000 (Cr.) 80,000 (Dr.)
Sundry Debtors 1,00,000 3,50,000
Stock in Trade 2,80,000 ?
Analysis of his bank pass book reveals the following information:

(a) Payment to creditors ` 7,00,000
(b) Payment for business expenses ` 1,20,000
(c) Receipts from debtors ` 7,50,000
(d) Loan from Laxman ` 1,00,000 taken on 1.10.2010 at 10% per annum
(e) Cash deposited in the bank ` 1,00,000

He informs you that he paid creditors for goods ` 20,000 in cash and salaries ` 40,000 in cash.
He has drawn ` 80,000 in cash for personal expenses. During the year Ram had not introduced
any additional capital. Surplus cash if any, to be taken as cash sales.
Prepare:
(i) Trading and Profit and Loss Account for the year ended 31.3.2011.
(ii) Balance Sheet as at 31 st March, 2011.
Answer
` `
To Opening stock 2,80,000 By Sales
To Purchases 7,70,000 Cash 2,40,000
To Gross Profit @ 25% 3,10,000 Credit 10,00,000 12,40,000
By Closing Stock(bal.fig.) 1,20,000
13,60,000 13,60,000
To Salaries 40,000 By Gross Profit 3,10,000

To Business expenses 1,20,000
To Interest on loan 5,000
(10% of 1,00,000*6/12)
3,10,000 3,10,000
Ram’s capital: Cash in hand 10,000
Opening 3,00,000 Cash at Bank 80,000
Add: Net Profit 1,45,000 Sundry Debtors 3,50,000
4,45,000 Stock in trade 1,20,000
Less: Drawings (80,000) 3,65,000
Loan from Laxman (including interest due) 1,05,000
Sundry Creditors 90,000 _______
5,60,000 5,60,000

10.41 Accounting
Working Notes:
1. Sundry Debtors Account
` `
To Balance b/d 1,00,000 By Bank A/c 7,50,000
To Credit sales (Bal. fig) 10,00,000 By Balance c/d 3,50,000
11,00,000 11,00,000
2. Sundry Creditors Account
` `
To Bank A/c 7,00,000 By Balance b/d 40,000
To Cash A/c 20,000 By Purchases (Bal. fig.) 7,70,000
8,10,000 8,10,000
3. Cash and Bank Account
Cash Bank Cash Bank
` ` ` `
To Balance b/d 10,000 By Balance b/d 50,000
To Sales (bal. 2,40,000 By Bank A/c (C) 1,00,000
fig)
To Cash (C) 1,00,000 By Salaries 40,000
To Debtors 7,50,000 By Creditors 20,000 7,00,000
To Laxman’s By Drawings 80,000
loan 1,00,000 By Business
expenses 1,20,000
By Balance c/d 10,000 80,000
2,50,000 9,50,000 2,50,000 9,50,000
4. Calculation of Ram’s Capital on 1st April, 2010
Balance Sheet as at 01.04.2010
Ram’s Capital (bal. fig) 3,00,000 Cash in hand 10,000
Bank Overdraft 50,000 Sundry Debtors 1,00,000
Sundry Creditors 40,000 Stock in trade 2,80,000
3,90,000 3,90,000

Question 13
The closing capital of Mr. B as on 31.3.2010 was ` 4,00,000. On 1.4.2009 his capital was
` 3,50,000. His net profit for the year ended 31.3.2010 was ` 1,00,000. He introduced
` 30,000 as additional capital in February, 2010. Find out the amount drawn by Mr. B for his
domestic expenses.
Answer
Computation of drawings during the year
`
Opening capital as on 01.04.2009 3,50,000
Add: Net profit 1,00,000
4,50,000
Add: Additional capital introduced in February, 2010 30,000
4,80,000
Less: Closing capital as on 31.3.2010 (4,00,000)
Drawings by Mr. ‘B’ during the year 2009 – 2010 80,000
Question 14
Lokesh, who keeps books by single entry, had submitted his Income-tax returns to Income-tax
authorities showing his incomes to be as follows:
`
Year ending March 31, 2005 = 33,075
The Income-tax officer is not satisfied as to the accuracy of the incomes returned. You are
appointed as a consultant to assist in establishing correctness of the incomes returned and for
that purpose you are given the following information:
(a) Business liabilities and assets at March 31, 2004 were:
Creditors: ` 32,940, Furniture & Fittings: ` 22,500, Stock : ` 24,390 (at selling price
which is 25% above cost), Debtors: ` 11,025, Cash at Bank and in hand ` 15,615.

10.43 Accounting
(b) Lokesh owned his brother ` 18,000 on March 31, 2004. On February 15, 2007 he repaid
this amount and on April 1, 2009, he lent his brother ` 13,500.
(c) Lokesh owns a house which he purchased in 1999 for ` 90,000 and a car which he
purchased in October, 2005 for ` 33,750. In January, 2009, he bought debentures in X
Ltd. having face value of ` 40,000 for ` 33,750.
(d) In May, 2009 a sum of ` 13,500 was stolen from his house.
(e) Lokesh estimates that his living expenses have been 2004-05 – ` 13,500; 2005-06 –
` 18,000; 2006-07 – ` 27,000; 2007-08, 2008-09 and 2009-10 – ` 31,500 p.a. exclusive
of the amount stolen.
(f) On March 31, 2010 business liabilities and assets were: Creditors ` 37,800, Furniture,
Fixtures and Fittings ` 40,500, Stock ` 54,330 (at selling price with a gross profit of
25%), Debtors ` 26,640, Cash-in-Hand and at Bank ` 29,025.
From the information submitted, prepare statements showing whether or not the incomes
declared by Lokesh are correct.
Answer
Statement of Affairs of ‘Lokesh’
as on March 31, 2004
Creditors 32,940 Furniture, Fixtures & Fittings 22,500
Loan from brother 18,000 Stock (24,390 x 100/125) 19,512
Capital (Bal. fig.) 1,07,712 Debtors 11,025
Cash-in-Hand and at Bank 15,615
Building (House) 90,000
1,58,652 1,58,652
Statement of Affairs of ‘Lokesh’ as on March 31, 2010
Creditors 37,800 Furniture, Fixtures & Fittings 40,500
Capital (Bal. fig.) 2,70,112 Stock (54,330 x 75%) 40,747
Debtors 26,640
Cash-in-Hand and at Bank 29,025
Loan to Brother 13,500
Building (House) 90,000

Car 33,750
Debentures in ‘X Ltd.’ 33,750
3,07,912 3,07,912
Statement of Profit:
Particulars `
Capital as on March 31, 2010 2,70,112
Add: Drawings
2004-05 13,500
2005-06 18,000
2006-07 27,000
2007-08 31,500
2008-09 31,500
2009-10 31,500 1,53,000
4,23,112
Add: Amount stolen in May, 2009 13,500
4,36,612
Less: Opening Capital as on March 31, 2004 (1,07,712)
3,28,900
Less: Profit as shown by I.T.O.
For the year ending March 31, 2005 33,075
For the year ending march 31, 2008 61,875
For the year ending March 31, 2010 41,670 (2,59,965)
Understatement of Income 68,935
Note: In the absence of the information regarding depreciation in the question, no
depreciation has been provided on Building (house) and Car. The candidates may assume
any appropriate rate of depreciation and can provide depreciation.
Question 15
M/s Ice Limited gives you the following information to find out Total Sales and Total
Purchases:

10.45 Accounting
Particulars Amount (`)

Debtors as on 01.04.2011 70,000
Creditors as on 01.04.2011 81,000
Bills Receivables received during the year 47,000
Bills Payable issued during the year 53,000
Cash received from customers 1,56,000
Cash paid to suppliers 1,72,000
Bad Debts recovered 16,000
Bills Receivables endorsed to creditors 27,000
Bills Receivables dishonoured by customers 5,000
Discount allowed by suppliers 7,000
Discount allowed to customers 9,000
Endorsed Bills Receivables dishonoured 3,000
Sales Return 11,000
Bills Receivable discounted 8,000
Discounted Bills Receivable dishonoured 2,000
Cash Sales 1,68,500
Cash Purchases 1,97,800
Debtors as on 31.03.2012 82,000
Creditors as on 31.03.2012 95,000
Answer
1. Total Sales = Cash sales + Credit sales
= ` 1,68,500 + ` 2,25,000 (W.N.1)
= ` 3,93,500
2. Total Purchases = Cash Purchases + Credit Purchases
= ` 1,97,800 + ` 2,70,000 (W.N.2)
= ` 4,67,800
Working Notes:
1. Debtors Account
To Balance b/d 70,000 By Bills receivable 47,000
To Bills receivable dishonoured 5,000 By Cash 1,56,000
To Bills receivable dishonoured (endorsed) 3,000 By Discount allowed 9,000
To Bills receivable dishonoured(discounted) 2,000 By Sales return 11,000
To Credit sales (bal.fig.) 2,25,000 By Balance c/d 82,000
3,05,000 3,05,000

2. Creditors Account
To Bills payable 53,000 By Balance b/d 81,000
To Cash 1,72,000 By Bills receivable dishonoured 3,000
(endorsed)
To Discount received 7,000 By Credit purchases (bal.fig.) 2,70,000
To Bills receivable endorsed 27,000
3,54,000 3,54,000
Note: It is assumed that sales return is out of credit sales only.
Question 16
A sole trader requests you to prepare his Trading and Profit & Loss Account for the year
ended 31st March, 2013 and Balance Sheet as at that date. He provides you the following
information:
Statement of Affairs as at 31st March, 2012
Bank Overdraft 4,270 Furniture 96,000
Outstanding Expenses Computer 24,300
Salaries 8,000 Mobile Phone 8,000
Rent 6,000 14,000 Stock 89,500
Bills Payable 22,500 Trade Debtors 55,000
Trade Creditors 52,500 Bills Receivable 15,000
Capital Unexpired Insurance 2,400
(balancing figure) 1,97,430 Stock of Stationery 200
Cash in Hand 300
Total 2,90,700 Total 2,90,700
He informs you that there has been no addition to or sale of Furniture, Computer and Mobile
Phone during the accounting year 2012-13. The other assets and liabilities on 31st March,
2013 are as follows:
`
Stock 95,400
Trade Debtors 65,000
Bills Receivable 20,000

10.47 Accounting
Stock of Stationery 250

Cash at Bank 18,000
Cash at Hand 7,230
Salaries Outstanding 8,300
Rent Outstanding 6,000
Bills Payable 26,500
Trade Creditors 76,000
He also provides you the following summary of his cash transactions:
Cash Sales 5,09,800 Trade Creditors 3,06,000
Trade Debtors 1,51,900 Bills Payable 80,000
Bills Receivable 65,000 Salaries 99,000
Rent 72,000
Insurance Premium 10,000
Stationery 1,500
Mobile Phone Expenses 9,000
Drawings 1,20,000
It is found prudent to depreciate Furniture @ 5%, Computer @ 10% and Mobile Phone @ 25%. A
provision for bad debts @ 5% on Trade Debtors is also considered desirable.
Answer
Particulars ` Particulars ` `
To Purchases (W. N. 3) 4,13,500 Credit (W.N. 1) 2,31,900
To Gross profit c/d (Bal. Fig.) 3,34,100 Cash 5,09,800 7,41,700
By Closing stock 95,400
8,37,100 8,37,100
To Insurance (W.N. 5) 9,900 By Gross profit b/d 3,34,100
To Salaries (W. N. 6) 99,300
To Rent (W.N. 7) 72,000
To Stationery (W.N. 8) 1,450
To Mobile Phone expenses 9,000
To Provision for doubtful 3,250

debts (5% of 65,000)

To Depreciation:
Furniture 4,800
Computer 2,430
Mobile Phone 2,000 9,230
3,34,100 3,34,100
Liabilities ` ` Asset ` `
Capital A/c: Furniture 96,000
Opening Balance 1,97,430 Less: Depreciation (4,800) 91,200
Less :Drawings (1,20,000) Computer 24,300
77,430 Less: Depreciation (2,430) 21,870
Add: Net Profit 1,29,970 2,07,400 Mobile Phone 8,000
Bills Payable 26,500 Less: Depreciation (2,000) 6,000
Trade Creditors 76,000 Trade Debtors 65,000
Outstanding Less: Provision for (3,250) 61,750
expenses: doubtful debts
Salaries 8,300 Bills Receivable 20,000
Rent 6,000 Closing Stock 95,400
Stock of Stationery 250
Cash at bank 18,000
Cash in hand 7,230
3,24,200 3,24,200
Working Notes:
1. Trade Debtors Account
` `
To Balance b/d 55,000 By Cash /Bank 1,51,900
To Credit Sales (bal. fig.) 2,31,900 By Bills Receivable A/c (W.N.2) 70,000
By Balance c/d (given) 65,000
2,86,900 2,86,900

10.49 Accounting
2. Bills Receivable Account

` `
To Balance b/d 15,000 By Cash/Bank 65,000
To Sundry Debtors (bal. fig.) 70,000 By Bal. c/d (given) 20,000
85,000 85,000
3. Trade Creditors Account
` `
To Bank/Cash 3,06,000 By Bal. b/d 52,500
To Bills payable A/c (W.N.4) 84,000 By Credit Purchases (bal. fig) 4,13,500
To Bal. c/d(given) 76,000
4,66,000 4,66,000
4. Bills Payable Account
` `
To Cash/Bank A/c 80,000 By Bal. b/d 22,500
To Bal. c/d (given) 26,500 By Sundry Creditors (bal. fig.) 84,000
1,06,500 1,06,500
5. Insurance expenses for the year 2012-2013
`
Insurance paid during the year 10,000
Add: Unexpired Insurance as on 1.4.2012 2,400
Less: Unexpired insurance as on 31.3.2013 (2,500)
9,900
6. Salaries for the year 2012-2013
`
Salaries paid during the year 99,000
Add: Salaries outstanding as on 31.03.2013 8,300
1,07,300
Less: Salaries outstanding as on 1.4.2012 (8,000)
99,300
7. Rent expenses for the year 2012-2013
`
Rent paid during the year 72,000

Add: Rent outstanding as on 31.03.2013 6,000

78,000
Less: Rent outstanding as on 1.04.2012 (6,000)
72,000
8. Stationery expenses for the year 2012-2013
`
Stock of stationery as on 1.4.2012 200
Add: Stationery purchased during the year 1,500
1,700
Less: Stock of stationery as on 31.3.2013 (250)
1,450
Question 17
The details of Assets and Liabilities of Mr. 'A' as on 31-3-2012 and 31-3-2013 are as follows:
31.3.2012 31.3.2013
` `
Assets:
Furniture 50,000
Building 1,00,000
Stock 1,00,000 2,50,000
Sundry Debtors 60,000 1,10,000
Cash in hand 11,200 13,200
Cash at Bank 60,000 75,000
Liabilities :
Loans 90,000 70,000
Mr. 'A' decided to provide depreciation on building by 2.5% and furniture by 10% for the
period ended on 31-3-2013. Mr. ‘A’ purchased jewellery for ` 24,000 for his daughter in
December 2012. He sold his car on 30-3-2013 and the amount of
` 40,000 is retained in the business.
(i) Prepare statement of affairs as on 31-3-2012 and 31-3-2013.
(ii) Calculate the profit received by 'A' during the year ended 31-3-2013.

10.51 Accounting
Answer
(i) Statement of Affairs
Liablilities 31.3.12 31.3.13 Assets 31.3.12 31.3.13
` ` ` `
Loans 90,000 70,000 Furniture 50,000 45,000
Creditors 50,000 80,000 Building 1,00,000 97,500
Capital A/c 2,41,200 4,40,700 Stock 1,00,000 2,50,000
Debtors 60,000 1,10,000
Cash in hand 11,200 13,200
Cash at Bank 60,000 75,000
3,81,200 5,90,700 3,81,200 5,90,700
Working Note:
Dep. on Building ` 2,500 (2.5% of ` 1,00,000)
Dep. on Furniture ` 5,000 (10% of ` 50,000)
(ii) Calculation of Profit earned by A during the year ended 31 st March, 2013
Capital Account
` `
By bal. b/d 2,41,200
To Drawings 24,000 By Additional Capital (Car sale proceeds) 40,000
To bal. c/d 4,40,700 By P&L A/c. (Bal. figure) 1,83,500
4,64,700 4,64,700
Note: Interest on drawings and capital has been ignored in the absence of information.
Question 18
The following is the Balance Sheet of M/s. Care Traders as on 1-4-2014:
`
Source of Funds
Share Capital 10,00,000
Profit and Loss 1,47,800
Unsecured loan @ 10% 1,75,000
Trade Payables 45,800
13,68,600

Application of Funds
Machinery 8,25,500
Furniture 1,28,700
Inventory 1,72,000
Trade Receivables 2,29,600
Bank Balance 12,800
13,68,600
A fire broke out in the premises on 31-3-2015 and destroyed the books of account. The
accountant could however provide the following information:
(1) Sales for the year ended 31-3-2014 was ` 18,60,000. Sales for the current year was
20% higher than the last year.
(2) 25% sales were made in cash and the balance was on credit.
(3) Gross profit on sales is 30%.
(4) Terms of Credit
Debtor : 2 months
Creditors : 1 month
All creditors are paid by cheque and all credit sales are collected in cheque.
(5) The Bank Pass Book has the following details (other than payment to creditors and
collection from debtors)
`
Machinery purchased 1,14,000
Rent paid 1,32,000
Advertisement expenses 80,000
Travelling expenses 78,400
Repairs 36,500
Sales of furniture 9,500
Cash withdrawn for petty expenses 28,300
Interest paid on unsecured loan 8,750
(6) Machinery was purchased on 1-10-2014.
(7) Rent was paid for 11 months only and 25% of the advertisement expenses relates to the
next year.
(8) Travelling expenses of ` 7,800 for which cheques were issued but not presented in bank.

10.53 Accounting
(9) Furniture was sold on 1-4-2014 at a loss of ` 2,900 on book value.

(10) Physical verification as on 31-3-2015 ascertained the stock position at ` 1,81,000 and
petty cash balance at nil.
(11) There was no change in unsecured loan during the year.
(12) Depreciation is to be provided at 10% on machinery and 20% on furniture.
Prepare Bank Account, Trading and Profit and Loss Account for the year ended 31-3-2015 in
the books of M/s. Care Traders and a Balance Sheet as on that date. Make necessary
assumptions wherever necessary.
Answer
In the books of M/s. Care Traders
Bank Account as on 31.3.2015
To Opening Balance 12,800 By Creditors (Payment 14,86,250
made) (WN 6)
To Cash sales (WN 1) 5,58,000 By Machinery (Purchased) 1,14,000
To Debtors (collection made) 16,24,600 By Advertisement expenses 80,000
(WN 4) By Rent 1,32,000
To Furniture (sold) 9,500 By Travelling expenses 86,200
(78,400 + 7,800)
By Repairs 36,500
By Petty Cash 28,300
By Interest on unsecured 8,750
loan
By Balance c/d (bal. fig,) 2,32,900
22,04,900 22,04,900
For the year ended 31 st March, 2015
( `) (` )
To Opening Stock 1,72,000 By Sales (WN 1) 22,32,000
To Purchases (WN 2) 15,71,400 By Closing Stock 1,81,000
To Gross Profit b/d (WN 1) 6,69,600
24,13,000 24,13,000

To Rent (1,32,000x12/11) 1,44,000 By Gross Profit c/d 6,69,600

To Advertisement expenses 60,000
To Travelling expenses 86,200
To Repairs 36,500
To Petty Cash expenses 28,300
To Interest on unsecured loan 17,500
To Loss on sale of Furniture 2,900
To Depreciation
Machinery(W.N.8) 88,250
Furniture 23,260
6,69,600 6,69,600
Balance Sheet of M/s. Care Traders as on 01.04.2015
Liabilities `
Share Capital
Profit and Loss 10,00,000
Opening Balance
Add: Profit for the year 1,47,800
Unsecured loan @10% 1,82,690 3,30,490
Interest on unsecured loan 1,75,000
Trade Payables (W.N.5) 8,750
Outstanding expenses Rent 1,30,950
12,000
16,57,190
Assets
Machinery
Gross block value (WN 7) 9,39,500
Less: depreciation (88,250) 8,51,250
Furniture
Gross block value (WN 9) 1,16,300
Less: depreciation (23,260) 93,040
Inventory 1,81,000
Trade Receivables (WN 3) 2,79,000
Prepaid expenses (Advertisement) 20,000
Bank balance 2,32,900
16,57,190

10.55 Accounting
Working Notes:
1. Sale for the year ended 31.03.2015 `
Last year Sales 18,60,000
Add: growth @20% 3,72,000
Sale for 2014-15 (A) 22,32,000
Cash Sales (25% of ` 22,32,000) 5,58,000
Credit sales (22,32,000 – 5,58,000) 16,74,000
Gross profit 30% on sales (B) 6,69,600
2. Purchases for the year ended 31.03.2015 `
Cost of Sales (A-B) (22,32,000 -6,69,600) 15,62,400
Add Closing stock 1,81,000
17,43,400
Less: Opening stock (1,72,000)
Purchases during the year 15,71,400
3. Trade receivables (Debtors) as on 31.03.2015 `
Total credit sales 16,74,000
Debtors 2 months credit
(16,74,000 x 2/12) 2,79,000
4. Collections from Debtors account
Amount Amount
(`) (`)
To opening Balance 2,29,600 By Bank (collection) Bal .fig. 16,24,600
To Credit sales 16,74,000 By Closing balance 2,79,000
19,03,600 19,03,600
5. Trade Payables (Creditors) as on 31.03.2015 `
Total Credit purchases 15,71,400
(all creditors paid by cheque, hence there are no cash purchases)
Creditors 1 month credit 1,30,950
(15,71,400 x 1/12)

6. Payment to Creditors account

Amount Amount
(` ) (` )
To Bank (Payment) Bal. fig. 14,86,250 By Opening Balance 45,800
To Closing Balance 1,30,950 By Credit Purchases 15,71,400
16,17,200 16,17,200
7. Machinery Account
Amount Amount
(` ) (` )
To Opening Balance 8,25,500 By Closing Balance (Bal. fig.) 9,39,500
To Machinery Purchased 1,14,000
9,39,500 9,39,500
8. Depreciation on Machinery `
Existing Machinery for 1 Year (` 8,25,500 x 10%) 82,550
New Machinery (Purchased on 1.10.2014)
For 6 months (` 1,14,000 x ½ x 10%) 5,700
88,250
9. Furniture Account
Amount Amount
(` ) (` )
To Opening Balance 1,28,700 By Bank (Sale ) 9,500
By Loss on Sale 2,900
By Closing balance 1,16,300
1,28,700 1,28,700

10.57 Accounting
Exercise
1. K. Azad, who is in business as a wholesaler in sunflower oil, is a client of your accounting 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
(Hints: Gross Profit ` 22.50.000; net Profit ` 21,26,300; Total of Balance Sheet ` 30,98,300)

Hire Purchase and Installment
11 Sale Transactions
BASIC CONCEPTS
Hire Purchase Under Hire Purchase System, hire purchaser will pay cost of
Accounting purchased asset in installments. The ownership of the goods will
be transferred by the Hire Vendor only after payment of
outstanding balance.
 Under installment system, ownership of the goods is transferred
by owner on the date of delivery of goods.
 Accounting Methods under Hire Purchase System
 Cash price Method
 Interest suspense Method
Question 1
What are the differences between Hire Purchase and Installment System?
Answer
Statement showing differences between Hire Purchase and Installment System
Basis of Distinction Hire Purchase Installment System
1. Governing Act It is governed by Hire It is governed by the Sale of
Purchase Act, 1972. Goods Act, 1930.
2. Nature of Contract It is an agreement of hiring. It is an agreement of sale.
3. Passing of Title The title to goods passes on The title to goods passes
(ownership) last payment. immediately as in the case
of usual sale.
4. Right to Return goods The hirer may return goods Unless seller defaults,
without further payment goods are not returnable.
except for accrued
installments.

Hire Purchase and Installment Sale Transactions 11.2
5. Seller’s right to The seller may take The seller can sue for price
repossess possession of the goods if if the buyer is in default. He
hirer is in default. cannot take possession of
the goods.
6. Right of Disposal Hirer cannot hire out sell, The buyer may dispose off
pledge or assign entitling the goods and give good
transferee to retain title to the bona fide
possession as against the purchaser.
hire vendor.
7. Responsibility for Risk The hirer is not responsible The buyer is responsible for
of Loss. for risk of loss of goods if he risk of loss of goods
has taken reasonable because of the ownership
precaution because the has transferred.
ownership has not yet
transferred.
8. Name of Parties The parties involved are The parties involved are
involved called Hirer and Hire vendor. called buyer and seller.
9. Component other than Component other than Cash Component other than Cash
cash price. Price included in installment Price included in Installment
is called Hire charges. is called Interest.
Question 2
A acquired on 1st January, 2011 a machine under a Hire-Purchase agreement which provides for 5
half-yearly instalments of ` 6,000 each, the first instalment being due on 1st July, 2011. Assuming
that the applicable rate of interest is 10 per cent per annum, calculate the cash value of the
machine. All working should form part of the answer.
Answer
Statement showing cash value of the machine acquired on hire-purchase basis
Instalment Interest @ 5% half yearly Principal Amount

Amount (10% p.a.) = 5/105 = 1/21) (in each instalment)
(in each instalment)
` ` `
5th Instalment 6,000 286 5,714
Less: Interest (286)
5,714
Add: 4th Instalment 6,000
11,714 558 5,442

11.3 Accounting
Less: Interest (558) (11,156–5,714)

11,156
Add: 3rd instalment 6,000
17,156 817 5,183
Less: Interest (817) (16,339–11,156)
16,339
Add: 2nd instalment 6,000
22,339 1,063 4,937
Less: Interest (1,063) (21,276–16,339)
21,276
Add: 1st instalment 6,000
27,276 1,299 4,701
Less: Interest (1,299) (25,977–21,276)
25,977 4,023 25,977
The cash purchase price of machinery is ` 25,977.

Question 3
On 1st April, 2012, Fastrack Motors Co. sells a truck on hire purchase basis to Teja Transport
Co. for a total hire purchase price of ` 9,00,000 payable as to ` 2,40,000 as down payment
and the balance in three equal annual instalments of ` 2,20,000 each payable on 31st March
2013, 2014 and 2015.
The hire vendor charges interest @ 10% per annum.
You are required to ascertain the cash price of the truck for Teja Transport Co. Calculations
may be made to the nearest rupee.
Answer
Rate of int erest 10 1
Ratio of interest and amount due =  
100  Rate of int erest 110 11
There is no interest element in the down payment as it is paid on the date of the transaction.
Instalments paid after certain period includes interest portion also. Therefore, to ascertain
cash price, interest will be calculated from last instalment to first instalment as follows:

Calculation of Interest and Cash Price

No. of Amount due at the time Interest Cumulative
instalments of instalment Cash price
[1] [2] [3] (2-3) = [4]
3rd 2,20,000 1/11 of ` 2,20,000 =` 20,000 2,00,000
2nd 4,20,000 [W.N.1] 1/11 of ` 4,20,000= ` 38,182 3,81,818
1st 6,01,818 [W.N.2] 1/11of ` 6,01,818= ` 54,711 5,47,107
Total cash price = ` 5,47,107+ 2,40,000 (down payment) =` 7,87,107.
Working Notes:
1. ` 2,00,000+ 2nd instalment of ` 2,20,000= ` 4,20,000.
2. ` 3,81,818+ 1st instalment of ` 2,20,000= ` 6,01,818.
Question 4
Lucky bought 2 tractors from Happy on 1-10-2011 on the following terms:
`
Down payment 5,00,000
1st installment at the end of first year 2,65,000
2nd installment at the end of 2 nd year 2,45,000
3rd installment at the end of 3 rd year 2,75,000
Interest is charged at 10% p.a.
Lucky provides depreciation @ 20% on the diminishing balances.
On 30-9-2014 Lucky failed to pay the 3 rd installment upon which Happy repossessed
1 tractor. Happy agreed to leave one tractor with Lucky and adjusted the value of the tractor
against the amount due. The tractor taken over was valued on the basis of 30% depreciation
annually on written down basis. The balance amount remaining in the vendor's account after
the above adjustment was paid by Lucky after 3 months with interest @ 18% p.a.
(1) Calculate the cash price of the tractors and the interest paid with each installment.
(2) Prepare Tractor Account and Happy Account in the books of Lucky assuming that books
are closed on September 30 every year. Figures may be rounded off to the nearest
rupee.

11.5 Accounting
Answer
(i) Calculation of Interest and Cash Price
No. of Outstanding Amount due Outstanding Interest Outstanding
installments balance at at the time of balance at balance at
the end after installment the end the
the payment before the beginning
of installment payment of
installment
[1] [2] [3] [4]= 2 +3 [5]= 4 x 10/110 [6]= 4-5
3rd - 2,75,000 2,75,000 25,000 2,50,000
2nd 2,50,000 2,45,000 4,95,000 45,000 4,50,000
1st 4,50,000 2,65,000 7,15,000 65,000 6,50,000
Total cash price = ` 6,50,000+ 5,00,000 (down payment) =` 11,50,000.
(ii) In the books of Lucky
Tractors Account
1.10.2011 To Happy a/c 11,50,000 30.9.2012 By Depreciation A/c 2,30,000
Balance c/d 9,20,000
11,50,000 11,50,000
1.10.2012 To Balance b/d 9,20,000 30.9.2013 By Depreciation A/c 1,84,000
Balance c/d 7,36,000
9,20,000 9,20,000
1.10.2013 To Balance b/d 7,36,000 30.9.2014 By Depreciation A/c 1,47,200
By Happy a/c (Value of 1 Tractor
taken over after depreciation for
3 years @30% p.a.) {5,75,000- 1,97,225
(1,72,500+1,20,750+84,525)}
By Loss transferred to Profit and

97,175
Loss a/c on surrender (Bal. fig.)
or (2,94,400-1,97,225)

½ (7,36,000-1,47,200=5,88,800)
7,36,000 7,36,000

Happy Account
1.10.11 To Bank (down 5,00,000 1.10.11 By Tractors a/c 11,50,000
payment) 30.9.12 By Interest a/c 65,000
30.9.12 To Bank (1st 2,65,000
Installment)
To Balance c/d 4,50,000
12,15,000 12,15,000
30.9.13 To Bank (2 nd 2,45,000 1.10.12 By Balance b/d 4,50,000
Installment) 30.9.13 By Interest a/c 45,000
4,95,000 4,95,000
30.9.14 To Tractor a/c 1,97,225 1.10.13 By Balance b/d 2,50,000
To Balance c/d 77,775 30.9.14 By Interest a/c 25,000
2,75,000 2,75,000
31.12.14 To Bank 81,275 1.10.14 By Balance b/d 77,775
(Amount settled 31.12.14 By Interest a/c (@
after 3 months) 18% on bal.) 3,500
(77,775x3/12x18/100)
81,275 81,275

12 Investment Accounts
BASIC CONCEPTS
 Investment Accounting is done as per Accounting Standard-13.
 Two type of Investments :
 Long Term Investments
 Current Investments
 Valuation of Current investment – Lower of Cost or Fair Value/net
Realizable Value
 Valuation of Long Term investment – At cost
 Reclassification :
 From Current to Permanent  Valuation at Cost or Fair value,
whichever is lower
 From Permanent to Current  Valuation at Cost or Carrying Amount,
whichever is lower
 Disposal of Investment:
 Difference between carrying amount and disposal proceeds is
transferred to Profit & Loss A/c.
 In case of partial sale, weighted average method to be used.
 Sale of Rights:
 If rights are not subscribed for but are sold in the market, the sale
proceeds of rights are taken to the profit and loss statement as per para
13 of AS 13 “Accounting for Investment”. In this case, the sale
proceeds will not appear in the dividend column of the Investment
account.
 However, when the investments are acquired on cum-right basis and the
market 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 rights to reduce the carrying amount of
such investments to the market value. In this case, the sale proceeds
will credited to Investment account.

Investment Accounts 12.2
 Here, it is pertinent to note that if right shares are issued during the
year, then year-end fall in the market value of the shares shall not be
considered as immediate fall in the market value of the shares after issue
of right shares and in such a case, the sale proceeds of rights shall be
taken to the profit and loss statement.
Question 1
In 2011, M/s. Wye Ltd. issued 12% fully paid debentures of ` 100 each, interest being payable
half yearly on 30th September and 31 st March of every accounting year.
On 1st December, 2012, M/s. Bull & Bear purchased 10,000 of these debentures at
` 101 cum-interest price, also paying brokerage @ 1% of cum-interest amount of the
purchase. On 1st March, 2013 the firm sold all of these debentures at ` 106 cum-interest
price, again paying brokerage @ 1 % of cum-interest amount. Prepare Investment Account in
the books of M/s. Bull & Bear for the period 1 st December, 2012 to 1 st March, 2013.
Answer
In the books of M/s Bull & Bear
Investment Account
for the period from 1st December 2012 to 1st March, 2013
(Scrip: 12% Debentures of M/s. Wye Ltd.)
Date Particulars Nominal Interest Cost Date Particulars Nominal Interest Cost
Value (` ) Value (` )
(` ) (` )
1.12.2012 To Bank A/c 10,00,000 20,000 10,00,100 1.03.2013 By Bank A/c 10,00,000 50,000 9,99,400
(W.N.1) (W.N.2)
1.3.2013 To Profit & - 1.3.2013 By Profit & loss
loss A/c 30,000 A/c 700
10,00,000 50,000 10,00,100 10,00,000 50,000 10,00,100
Working Notes:
(i) Cost of 12% debentures purchased on 1.12.2012 `
Cost Value (10,000  ` 101) = 10,10,000
Add: Brokerage (1% of ` 10,10,000) = 10,100
Less: Cum Interest (10,000 x 100 x12% x 2/12) = ( 20,000)
Total = 10,00,100
(ii) Sale proceeds of 12% debentures sold on 31st March, 2013 `

12.3 Accounting
Sales Price (10,000  ` 106) = 10,60,000

Less: Brokerage (1% of ` 10,60,000) = (10,600)
Less: Cum Interest (10,000 x 100 x12% x 5/12) = (50,000)
Total = 9,99,400
Question 2
On 1st April, 2009, XY Ltd. has 15,000 equity shares of ABC Ltd. at a book value of ` 15 per
share (face value ` 10 per share). On 1 st June, 2009, XY Ltd. acquired 5,000 equity shares of
ABC Ltd. for ` 1,00,000. ABC Ltd. announced a bonus and right issue.
(1) Bonus was declared, at the rate of one equity share for every five shares held, on 1 st July
2009.
(2) Right shares are to be issued to the existing shareholders on 1 st September 2009. The
company will issue one right share for every 6 shares at 20% premium. No dividend was
payable on these shares.
(3) Dividend for the year ended 31.3.2009 were declared by ABC Ltd. @ 20%, which was
received by XY Ltd. on 31 st October 2009.
XY Ltd.
(i) Took up half the right issue.
(ii) Sold the remaining rights for ` 8 per share.
(iii) Sold half of its share holdings on 1 st January 2010 at ` 16.50 per share. Brokerage being
1%.
You are required to prepare Investment account of XY Ltd. for the year ended 31 st March 2010
assuming the shares are being valued at average cost.
Answer
In the books of XY Ltd.
Investment in equity shares of ABC Ltd.
Date Particulars No. Dividend Amount Date Particulars No. Dividend Amount
` ` ` `
2009 To Balance b/d 15,000 - 2,25,000 2009 By Bank - 30,000 10,000
April 1 Oct. 31 A/c
(W.N. 5)
June 1 To Bank A/c 5,000 -- 1,00,000 2010 By Bank A/c 13,000 - 2,12,355
Jan. 1 (W.N.4)
July 1 To Bonus Issue 4,000 - - March 31 By Balance c/d 13,000 - 1,69,500
(W.N. 1) (W.N. 6)
Sept.1 To Bank A/c 2,000 - 24,000
(W.N. 2)

2010 To P & L A/c - - 42,855

March (W.N. 4)
31
“ To P & L A/c - 30,000 -
26,000 30,000 3,91,855 26,000 30,000 3,91,855
Working Notes:
1. Calculation of no. of bonus shares issued
15,000 shares  5,000 shares
Bonus Shares = x 1= 4,000 shares
5
2. Calculation of right shares subscribed
15,000 shares  5,000 shares  4,000 shares
Right Shares = = 4,000 shares
6
4,000
Shares subscribed by XY Ltd. = = 2,000 shares
2
Value of right shares subscribed = 2,000 shares @ ` 12 per share = ` 24,000
3. Calculation of sale of right entitlement
2,000 shares x ` 8 per share = ` 16,000
Amount received from sale of rights will be credited to P & L A/c as per para 13 of
AS 13 ‘Accounting for Investments’.
4. Calculation of profit on sale of shares
Total holding = 15,000 shares original
5,000 shares purchased
4,000 shares bonus
2,000 shares right shares
26,000 shares
50% of the holdings were sold
i.e. 13,000 shares (26,000 x1/2) were sold.
Cost of total holdings of 26,000 shares (on average basis)
= ` 2,25,000 + ` 1,00,000 + ` 24,000– ` 10,000
= ` 3,39,000
Average cost of 13,000 shares would be
3,39,000
=  13,000 = ` 1,69,500
26,000

12.5 Accounting
`
Sale proceeds of 13,000 shares (13,000 x `16.50) 2,14,500
Less: 1% Brokerage (2,145)
2,12,355
Less: Cost of 13,000 shares (1,69,500)
5. Dividend received on investment held as on 1st April, 2009
= 15,000 shares x ` 10 x 20%
= ` 30,000 will be transferred to Profit and Loss A/c
Dividend received on shares purchased on 1 st June, 2009
= 5,000 shares x ` 10 x 20% = `10,000 will be adjusted to Investment A/c
Note: It is presumed that no dividend is received on bonus shares as bonus shares
are declared on 1 st July, 2009 and dividend pertains to the year ended
31.3.2009.
6. Calculation of closing value of shares (on average basis) as on
31st March, 2010
3,39,000
13,000  = ` 1,69,500.
26,000
Closing value of shares would be ` 1,69,500.

Question 3
The following information is presented by Mr. Z, relating to his holding in 9% Central
Government Bonds.
Opening balance (face value) ` 1,20,000, Cost ` 1,18,000 (Face value of each unit is ` 100).
1.3.2008 Purchased 200 units, ex-interest at ` 98.
1.7.2008 Sold 500 units, ex-interest out of original holding at ` 100.
1.10.2008 Purchased 150 units at ` 98, cum interest.
1.11.2008 Sold 300 units, ex-interest at ` 99 out of original holdings.
Interest dates are 30 th September and 31 st March. Mr. Z closes his books every
31st December. Show the investment account as it would appear in his books. Mr. Z follows
FIFO method.

Answer
In the Books of Mr. Z
9% Central Government Bonds (Investment) Account
Particulars Face Interest Principal Particulars Face Interest Principal
Value Value
2008 ` ` ` 2008 ` ` `
Jan.1 To Balance March By Bank
b/d 1,20,000 2,700 1,18,000 31 A/c - 6,300 -
March To Bank July 1 By Bank
1 A/c 20,000 750 19,600 A/c 50,000 1,125 50,000
July 1 To P&L A/c - - 833 Sept. By Bank
30 A/c - 4,050 -
Oct. 1 To Bank Nov. By Bank
A/c 15,000 - 14,700 1 A/c 30,000 225 29,700
Nov. To P&L A/c - - 200 Dec. By Balance
1 31 c/d 75,000 1,688 73,633
Dec. To P&L A/c
31 (Transfer) 9,938
1,55,000 13,388 1,53,333 1,55,000 13,388 1,53,333
Working Note:
Calculation of closing balance: Units `
Bonds in hand remained in hand at 31 December 2008
st
From original holding (1,20,000 – 50,000 – 30,000)= 40,000 1,18,000 39,333

 40,000 =
1,20,000
Purchased on 1st March 20,000 19,600
Purchased on 1st October 15,000 14,700
75,000 73,633
Question 4
Mr. Purohit furnishes the following details relating to his holding in 8% Debentures ( ` 100
each) of P Ltd., held as Current assets:
1.4.2009 Opening balance – Face value ` 1,20,000, Cost ` 1,18,000
1.7.2009 100 Debentures purchased ex-interest at ` 98
1.10.2009 Sold 200 Debentures ex-interest at ` 100

12.7 Accounting
1.1.2010 Purchased 50 Debentures at ` 98 cum-interest

1.2.2010 Sold 200 Debentures ex-interest at ` 99
Due dates of interest are 30 th September and 31 st March.
Mr. Purohit closes his books on 31.3.2010. Brokerage at 1% is to be paid for each
transaction. Show Investment account as it would appear in his books. Assume FIFO
method. Market value of 8% Debentures of P Limited on 31.3.2010 is ` 99.
Investment A/c of Mr. Purohit

for the year ending on 31-3-2010
(Scrip: 8% Debentures of P Limited)
(Interest Payable on 30 th September and 31 st March)
Value Value
` ` ` `
1.4.09 To Balance b/d 1,20,000 - 1,18,000 30.9.09 By Bank - 5,200 -
1.7.09 To Bank (ex- 10,000 200 9,898 1.10.09 By Bank 20,000 - 19,800
Interest)
1.10.09 To Profit & 133 1.2.10 By Bank 20,000 533 19,602
Loss A/c (ex-
Interest)
1.1.10 To Bank (cum- 5,000 100 4,849 1.2.10 By Profit & 64
Interest) Loss A/c
31.3.10 To Profit & - 9,233 31.3.10 By Bank - 3,800 -
Loss
A/c(Bal.fig.)
31.3.10 By 95,000 - 93,414
Balance
c/d
1,35,000 9,533 1,32,880 1,35,000 9,533 1,32,880
Working Notes:
1. Valuation of closing balance as on 31.3.2010:
Market value of 950 Debentures at ` 99 = ` 94,050
Cost price of

 1,18,000 
800 Debentures cost =  x80,000  = 78,667
 1,20,000 
100 Debentures cost = 9,898
50 Debentures Cost = 4,849
93,414
Value at the end = ` 93,414 i.e whichever is less
2. Profit on sale of debentures as on 1.10.2009
`
Sales price of debentures (200 x ` 100) 20,000
Less: Brokerage @ 1% (200)
19,800
 1,18,000 
Less: Cost price of Debentures  x20,000   (19,667)
 1,20,000 
Profit on sale 133
3. Loss on sale of debentures as on 1.2.2010
`
Sales price of debentures (200 x ` 99) 19,800
Less: Brokerage @ 1% (198)
19,602
 1,18,000 
Less: Cost price of Debentures  x20,000   (19,666)
 1,20,000 
Loss on sale 64
Question 5
Mr. Brown has made following transactions during the financial year 2011-12:
Date Particulars
01.05.2011 Purchased 24,000 12% Bonds of ` 100 each at ` 84 cum-interest. Interest is
payable on 30th September and 31st March every year.
15.06.2011 Purchased 1,50,000 equity shares of ` 10 each in Alpha Limited for ` 25 each
through a broker, who charged brokerage @ 2%.
10.07.2011 Purchased 60,000 equity shares of ` 10 each in Beeta Limited for ` 44 each
through a broker, who charged brokerage @2%.
14.10.2011 Alpha Limited made a bonus issue of two shares for every three shares held.
31.10.2011 Sold 80,000 shares in Alpha Limited for ` 22 each.
01.01.2012 Received 15% interim dividend on equity shares of Alpha Limited.

12.9 Accounting
15.01.2012 Beeta Limited made a right issue of one equity share for every four shares held
at ` 5 per share. Mr. Brown exercised his option for 40% of his entitlements and
sold the balance rights in the market at ` 2.25 per share.
01.03.2012 Sold 15,000 12% Bonds at ` 90 ex-interest.
15.03.2012 Received 18% interim dividend on equity shares of Beeta Limited.
Interest on 12% Bonds was duly received on due dates.
Prepare separate investment account for 12% Bonds, Equity Shares of Alpha Limited and
Equity Shares of Beeta Limited in the books of Mr. Brown for the year ended on
31st March, 2012.
Answer
In the books of Mr. Brown
12% Bonds for the year ended 31 st March, 2012
Date Particulars No. Interest Amount Date Particulars No. Interest Amount
` ` ` `
2011 May, To Bank A/c 24,000 24,000 19,92,000 2011 Sept. By Bank- - 1,44,000
1 30 Interest
2012 To P & L A/c - - 1,05,000 2012 Mar. By Bank 15,000 75,000 13,50,000
March 31 (W.N.1) 1 A/c
To P & L A/c 2,49,000 2012 Mar. By Bank- 54,000
31 Interest
By Balance
c/d
(W.N.2) 9,000 - 7,47,000
24,000 2,73,000 20,97,000 24,000 2,73,000 20,97,000
Investment in Equity shares of Alpha Ltd. for the year ended 31 st March, 2012
` ` ` `
2011 To Bank A/c 1,50,000 -- 38,25,000 2011 By Bank A/c 80,000 - 17,60,000
June 15 Oct. 31
Oct. 14 To Bonus 1,00,000 - - 2012 By Bank A/c - 2,55,000
Issue Jan. 1 dividend
(1,50,000/3 x2)
2012 To P & L A/c 5,36,000 March 31 By Balance 1,70,000 - 26,01,000
Mar. 31 (W.N.3) c/d
(W.N.4)
To P & L A/c
2,55,000
2,50,000 2,55,000 43,61,000 2,50,000 2,55,000 43,61,000
Investment in Equity shares of Beeta Ltd. for the year ended 31 st March, 2012
` ` ` `
2011 July 10 To Bank 60,000 -- 26,92,800 2012 By Bank – - 1,18,800
A/c Mar. 15 dividend
2012 Jan. 15 To Bank 6,000 - 30,000 March By Balance
A/c 31 c/d

(W.N. (bal.fig.) 66,000 - 27,22,800

5)
March 31 To P & L
A/c - 1,18,800 -
66,000 1,18,800 27,22,800 66,000 1,18,800 27,22,800
Working Notes:
1. Profit on sale of 12% Bond
Sales price ` 13,50,000
19,92,000
Less: Cost of bond sold = x 15,000 (` 12,45,000)
24,000
Profit on sale ` 1,05,000
2. Closing balance as on 31.3.2012 of 12 % Bond
19,92,000
x 9,000 = ` 7,47,000
24,000
3. Profit on sale of equity shares of Alpha Ltd.
Sales price ` 17,60,000
38,25,000
Less: Cost of bond sold = x 80,000 (` 12,24,000)
2,50,000
Profit on sale ` 5,36,000
4. Closing balance as on 31.3.2012 of equity shares of Alpha Ltd.
38,25,000
x 1,70,000 = ` 26,01,000
2,50,000
5. Calculation of right shares subscribed by Beeta Ltd.
60,000 shares
Right Shares = x 1= 15,000 shares
4
Shares subscribed by Mr. Brown = 15,000 x 40%= 6,000 shares
Value of right shares subscribed = 6,000 shares @ ` 5 per share = ` 30,000
6. Calculation of sale of right entitlement by Beeta Ltd.
No. of right shares sold = 15,000 - 6,000 = 9,000 shares
Sale value of right = 9,000 shares x ` 2.25 per share = ` 20,250
Note: As per para 13 of AS 13, sale proceeds of rights is to be credited to P & L A/c.

12.11 Accounting
Question 6
On 1st April, 2011, Rajat has 50,000 equity shares of P Ltd. at a book value of ` 15 per share
(face value ` 10 each). He provides you the further information:
(1) On 20th June, 2011 he purchased another 10,000 shares of P Ltd. at ` 16 per share.
(2) On 1st August, 2011, P Ltd. issued one equity bonus share for every six shares held by
the shareholders.
(3) On 31st October, 2011, the directors of P Ltd. announced a right issue which entitles the
holders to subscribe three shares for every seven shares at ` 15 per share.
Shareholders can transfer their rights in full or in part.
Rajat sold 1/3 rd of entitlement to Umang for a consideration of ` 2 per share and subscribed
the rest on 5 th November, 2011.
You are required to prepare Investment A/c in the books of Rajat for the year ending
31st March, 2012.
Answer
In the books of Rajat
Investment Account
(Equity shares in P Ltd. )
Date Particulars No. of Amount Date Particulars No. of Amount
shares (`) shares (`)
1.4.11 To Balance b/d 50,000 7,50,000 31.3.12 By Balance c/d 90,000 12,10,000
20.6.11 To Bank A/c 10,000 1,60,000 (Bal. fig.)
1.8.11 To Bonus 10,000 -
issue (W.N.1)
5.11.11 To Bank A/c
(right shares)
(W.N.4) 20,000 3,00,000
90,000 12,10,000 90,000 12,10,000
Working Notes:
50,000 + 10,000
(1) Bonus shares = = 10,000 shares
6
50,000 + 10,000 + 10,000
(2) Right shares =  3 = 30,000 shares
7
1
(3) Sale of rights = 30,000 shares× × ` 2= ` 20,000 to be credited to P & L A/c as per
3
AS 13.
2
(4) Rights subscribed = 30,000 shares × × ` 15 = ` 3,00,000
3

Question 7
On 01-04-2011, Mr. T. Shekharan purchased 5,000 equity shares of ` 100 each in V Ltd. @
` 120 each from a broker, who charged 2% brokerage. He incurred 50 paisa per
` 100 as cost of shares transfer stamps. On 31-01-2012 bonus was declared in the ratio of 1 : 2.
Before and after the record date of bonus shares, the shares were quoted at
` 175 per share and ` 90 per share respectively. On 31-03-2012, Mr. T. Shekharan sold bonus
shares to a broker, who charged 2% brokerage.
Show the Investment Account in the books of T. Shekharan, who held the shares as Current
Assets and closing value of investments shall be made at cost or market value whichever is lower.
Answer
In the books of T. Shekharan
Investment Account
(Script: Equity Shares of V Ltd.)
Date Particulars Nominal Cost Date Particulars Nominal Cost
Value Value
(` ) (` ) (` ) (` )
1.4.2011 To Bank A/c 5,00,000 6,15,000 31.3.2012 By Bank A/c 2,50,000 2,20,500
(W.N.1) (W.N.2)
31.1.2012 To Bonus shares 2,50,000  31.3.2012 By Balance 5,00,000 4,10,000
31.3.2012 To Profit and c/d
Loss A/c (W.N.4)
(W.N.3) 15,500
7,50,000 6,30,500 7,50,000 6,30,500
Working Notes:
1. Cost of equity shares purchased on 1st April, 2011
= Cost + Brokerage + Cost of transfer stamps
= 5,000  ` 120 + 2% of ` 6,00,000 + ½% of ` 6,00,000
= ` 6,15,000
2. Sale proceeds of equity shares sold on 31 st March, 2012
= Sale price – Brokerage
= 2,500  ` 90 – 2% of ` 2,25,000
= ` 2,20,500.
3. Profit on sale of bonus shares on 31 st March, 2012
= Sales proceeds – Average cost
Sales proceeds = ` 2,20,500

12.13 Accounting
Average cost = ` [6,15,000  2,50,000/7,50,000]

= ` 2,05,000
Profit = ` 2,20,500 – ` 2,05,000= ` 15,500.
4. Valuation of equity shares on 31 st March, 2012
Cost = ` [6,15,000  5,00,000/7,50,000]= ` 4,10,000 i.e ` 82 per share
Market Value = 5,000 shares × ` 90 = ` 4,50,000
Closing stock of equity shares has been valued at ` 4,10,000 i.e. cost being lower than
the market value.
Question 8
Mr. Chatur had 12% Debentures of Face Value ` 100 of M/s. Unnati Ltd. as current
investments.
He provides the following details relating to the investments.
1-4-2014 Opening balance 4,000 debentures costing ` 98 each
1-6-2014 Purchased 2,000 debentures @ ` 120 cum interest
1-9-2014 Sold 3,000 debentures @ ` 110 cum interest
1-12-2014 Sold 2,000 debentures @ ` 105 ex interest
31-1-2015 Purchased 3,000 debentures @ ` 100 ex interest
31-3-2015 Market value of the investments ` 105 each
Interest due dates are 30 th June and 31 st December.
Mr. Chatur closes his books on 31-3-2015. He incurred 2% brokerage for all his transactions.
Show investment account in the books of Mr. Chatur assuming FIFO method is followed.

Answer
12.14
Investment A/c of Mr. Chatur
for the year ending on 31-3-2015
Investment Accounts
(Scrip: 12% Debentures of Unnati Limited)
(Interest Payable on 30 th June and 31 st December) Amt. in `
Value Value
1.4.2014 To Balance b/d 4,00,000 12,000 3,92,000 30.6.2014 By Bank - 36,000 -
(6,00,000 x 6%)
1.6.2014 To Bank 2,00,000 10,000 2,34,800 1.9.2014 By Bank 3,00,000 6,000 3,17,400
1.9.2014 To Profit & Loss A/c 23,400 1.12.2014 By Bank 2,00,000 10,000 2,05,800
31.1.2015 To Bank 3,00,000 3,000 3,06,000 1.12.2014 By Profit & Loss a/c - - 9,600
31.3.2015 To Profit & Loss A/c 45,000 31.12.14 By Bank - 6,000 -
(Bal .fig.) ( 1,00,000 x 6% )
31.3.2015 By Profit & Loss A/c - - 3,400
31.3.2015 By Balance c/d 4,00,000 12,000 4,20,000
9,00,000 70,000 9,56,200 9,00,000 70,000 9,56,200
12.14
12.15 Accounting
Working Notes:
1. Valuation of closing balance as on 31.3.2015:
Market value of 4,000 Debentures at ` 105 = ` 4,20,000
Cost price of 1,000 debentures at 1,17,400
3,000 debentures at 3,06,000
4,23,400
Value at the end = ` 4,20,000 i.e. whichever is less
2. Profit on sale of debentures as on 1.9.2014
`
Sales price of debentures (3,000 x ` 110) 3,30,000
Less: Brokerage @ 2% (6,600)
3,23,400
Less: Interest for 2 months (6,000)
 3,000 
Less: Cost price of Debentures  3,92,000x  (2,94,000)
 4,000 
3. Loss on sale of debentures as on 1.12.2014
`
Sales price of debentures (2,000 x ` 105) 2,10,000
2,05,800
Less: Cost price of Debentures (98,000 + 1,17,400) (2,15,400)
Loss on sale 9,600
4. Purchase Cost of 2,000 debentures on 1.6.2014
`
2,000 Debentures @` 120 cum interest 2,40,000
Add: Brokerage @ 2% 4,800
2,44,800
Purchase cost of 2,000 debentures 2,34,800

5. Sale value for 3,000 debentures on 1.9.2014

`
Sales price of debentures cum interest (3,000 x ` 110) 3,30,000
3,23,400
Sale value for 3,000 debentures 3,17,400
Question 9
A Limited purchased 5,000 equity shares (face value ` 100 each) of Allianz Limited for
` 105 each on 1 st April, 2014. The shares were quoted cum dividend. On 15 th May, 2014,
Allianz Limited declared & paid dividend of 2% for year ended 31 st March, 2014. On 30 th June,
2014 Allianz Limited issued bonus shares in ratio of 1:5. On 1 st October, 2014 Allianz Limited
issued rights share in the ratio of 1:12 @ 45 per share. A limited subscribed to half of the
rights issue and the balance was sold at ` 5 per right entitlement. The company declared
interim dividend of 1% on 30 th November, 2014. Right shares were not entitled to dividend.
The company sold 3,000 shares on 31 st December, 2014 at ` 95 per share. The company A
Ltd. incurred 2% as brokerage while buying and selling shares.
You are required to prepare Investment Account in books of A Ltd.
Answer
In the books of A Ltd.
Investment in equity shares of Allianz Ltd.
` ` ` `
2014 2014
April 1 To Bank A/c 5,000 - 5,35,500 May 15 By Bank A/c - - 10,000
(dividend)
June 30 To Bonus 1,000 - - Oct. 1 By Bank - 1,250 -
Issue (rights
(W.N 2) sales)
Oct. 1 To Bank A/c 250 - 11,250 Nov. 30 By Bank A/c - 6,000 -
(W.N. 3) (Interim
dividend)
Dec.31 To P & L A/c - - 21,660 Dec. 31 By Bank A/c 3,000 - 2,79,300
(W.N. 5) (W.N.5)

12.17 Accounting
2015 2015
March To P & L A/c - 7,250 - March By Balance
31 31 c/d
(W.N. 7) 3,250 2,79,110
-
6,250 7,250 5,68,410 6,250 7,250 5,68,410
Working Notes:
1. Calculation of cost of purchase on 1 st April, 2014
` 105 X 5,000 shares = ` 5,25,000
Add: Brokerage (2%) = ` 10,500
` 5,35,500
2. Calculation of number of bonus shares issued
5,000
Bonus Shares =  1  1,000
5
3. Calculation of right shares subscribed
6,000
Right Shares =  500 shares
12
500
Shares subscribed =  250 shares
2
Value of right shares subscribed = 250 shares @ ` 45 per share = ` 11,250
4. Calculation of sale of right entitlement
250 shares x ` 5 per share = ` 1,250
(Amount received from sale of rights will be credited to P&L a/c)
5. Calculation of profit on sale of shares
Total holding = 5,000 shares original
1,000 shares bonus
250 shares right shares
6,250 shares
3,000 shares were sold on 31.12.2014
Cost of total holdings of 6,250 shares (on average basis)
= ` 5,35,500 + ` 11,250 – ` 10,000 = ` 5,36,750

Average cost of 3,000 shares would be
= 5,36,750  3,000 = ` 2,57,640

6,250
`
Sale proceeds of 3,000 shares (3,000 x ` 95) 2,85,000
Less: 2% Brokerage (5,700)
2,79,300
Less: Cost of 3,000 shares (2,57,640)
6. Dividend received on investment held as on 15 th May, 2014
= ` 10,000 (5,000 x ` 100 x 2%) adjusted to Investment A/c
Dividend amounting ` 6,000 received on 30.11.2014 will be credited to P&L A/c
7. Calculation of closing value of shares (on average basis) as on
31st March, 2015
5,36,750
 3,250  ` 2,79,110
6,250

Insurance Claims for Loss of
13 Stock and Loss of Profit
BASIC CONCEPTS
1. Claim for Claim for loss of stock can be studied under two heads:
Loss of a. Total Loss:
Stock
Amount of claim = Actual loss (If goods are fully insured but
the amount of claim is restricted to the policy amount).
b. Partial Loss:
(i) Without Average clause:-
Claim =Lower of actual Loss or Sum Insured
(ii) With Average Clause:-
Claim = Loss of stock x sum insured / Insurable
amount (Total Cost)
2. Claim for The Loss of Profit Policy normally covers the following items:
Loss of (1) Loss of net profit
Profit
(2) Standing charges.
(3) Any increased cost of working
Gross Profit Net profit +Insured Standing charges OR
Insured Standing charges – Net Trading Loss (If any) X Insured
Standing charges/All standing charges of business
Net Profit The net trading profit (exclusive of all capital) receipts and accretion
and all outlay properly (chargeable to capital) resulting from the
business of the Insured at the premises after due provision has been
made for all standing and other charges including depreciation.
Insured Interest on Debentures, Mortgage Loans and Bank Overdrafts,
Standing Rent, Rates and Taxes (other than taxes which form part of net
Charges profit) Salaries of Permanent Staff and Wages to Skilled
Employees, Boarding and Lodging of resident Directors and/or
Manager, Directors’ Fees, Unspecified Standing Charges.

Insurance Claims for Loss of Stock and Loss of Profit 13.2
Rate of Gross The rate of Gross Profit earned on turnover during the financial
Profit year immediately before the date of damage.
Annual The turnover during the twelve months immediately before the
Turnover damage.
(adjusted)
Standard The turnover during that period in the twelve months immediately
Turnover before the date of damage which corresponds with the Indemnity
Period.
Indemnity The period beginning with the occurrence of the damage and
Period ending not later than twelve months.
The insurance for Loss of Profit is limited to loss of gross profit
due to
(i) Reduction in turnover, and
(ii) Increase in the cost of working.
Claim for Loss of Stock

Question 1
Significance of ‘Average Clause’ in a fire insurance policy.
Answer
In order to discourage under-insurance, fire insurance policies often include an average
clause. The effect of these clause is that if the insured value of the subject matter concerned
is less than the total cost then the average clause will apply, that is, the loss will be limited to
that proportion of the loss as the insured value bears to the total cost.
The actual claim amount would therefore be determined by the following formula:
Insured value
Claim= × Loss suffered
Total cost
For example, if stock worth ` 4 lakhs is insured for ` 3 lakhs only and the loss incurred due to
fire amounts to ` 1,80,000, the claim admitted by the insurer will be ` 1,80,000 x
3,00,000/4,00,000 = ` 1,35,000.
The average clause applies only when the insured value is less than the total value of the insured
subject matter.
Question 2
Mr. A prepares accounts on 30 th September each year, but on 31 st December, 2011 fire
destroyed the greater part of his stock. Following information was collected from his book:

13.3 Accounting
`
Stock as on 1.10.2011 29,700
Purchases from 1.10.2011 to 31.12.2011 75,000
Wages from 1.10.2011 to 31.12.2011 33,000
Sales from 1.10.2011 to 31.12.2011 1,40,000
The rate of gross profit is 33.33% on cost. Stock to the value of ` 3,000 was salvaged.
Insurance policy was for ` 25,000 and claim was subject to average clause.
Additional informations:
(i) Stock at the beginning was calculated at 10% less than cost.
(ii) A plant was installed by firm’s own worker. He was paid ` 500, which was included in wages.
(iii) Purchases include the purchase of the plant for ` 5,000
You are required to calculate the claim for the loss of stock.
Answer
Computation of claim for loss of stock:
`
Stock on the date of fire i.e. 31.12.2011 (Refer working note) 30,500
Less: Salvaged stock (3,000)
Loss of stock 27,500
Amount of claim
Insured value
=  loss of stock
Total cost of stock on the date of fire
` 25,000
=  ` 27,500 = ` 22,541
R` 30,500
Working Note:
Memorandum trading account can be prepared for the period from 1.10.2011 to 31.12.2011 to
compute the value of stock on 31.12.2011.
Memorandum Trading Account
for period from 1.10.2011 to 31.12.2011
` ` `
To Opening stock 33,000 By Sales 1,40,000
(` 29,700 x 100/90) By Closing stock (bal. fig.) 30,500

To Purchases 75,000
Less: Cost of plant (5,000) 70,000
To Wages 33,000
Less: Wages paid for plant _(500) 32,500
To Gross profit 35,000
(33.33% on cost or 25% on sales)
_______ _______
1,70,500 1,70,500
Question 3
On 20th October, 2009, the godown and business premises of Aman Ltd. were affected by fire.
From the salvaged accounting records, the following information is available :
`
Stock of goods @ 10% lower than cost as on 31 st March, 09 2,16,000
Purchases less returns (1.4.09 to 20.10.09) 2,80,000
Sales less returns (1.4.09 to 20.10.09) 6,20,000
(1) Sales upto 20 th October, 09 includes ` 80,000 for which goods had not been dispatched.
(2) Purchases upto 20 th October, 09 did not include ` 40,000 for which purchase invoices
had not been received from suppliers, though goods have been received in Godown.
(3) Past records show the gross profit rate of 25%.
(4) The value of goods salvaged from fire ` 31,000.
(5) Aman Ltd. has insured their stock for ` 1,00,000.
Compute the amount of claim to be lodged to the insurance company.
Answer
Memorandum Trading A/c
(1.4.09 to 20.10.09)
Particulars (`) Particulars (`)
To Opening stock (Refer W.N.) 2,40,000 By Sales 5,40,000
(` 6,20,000 – ` 80,000)
To Purchases 3,20,000 By Closing stock 1,55,000
(` 2,80,000 + ` 40,000) (bal. fig.)
To Gross profit

13.5 Accounting
(` 5,40,000 x 25%) 1,35,000

6,95,000 6,95,000
`
Stock on the date of fire (i.e. on 20.10.2009) 1,55,000
Less: Stock salvaged (31,000)
Stock destroyed by fire 1,24,000
Loss of stock
Insurance claim =  Amount of policy
Value of stock on the date of fire
1,24,000
=  1,00,000 = ` 80,000
1,55,000
Working Note:
Stock as on 1 st April, 2009 was valued at 10% lower than cost.
Hence, original cost of the stock as on 1 st April, 2009 would be
2,16,000
=  100 = ` 2,40,000
90
Question 4
On 19th May, 2011, the premises of Shri Garib Das were destroyed by fire, but sufficient records
were saved, wherefrom the following particulars were ascertained:
`
Stock at cost on 1.1.2010 36,750
Stock at cost on 31.12.2010 39,800
Purchases less returns during 2010 1,99,000
Sales less return during 2010 2,43,500
Purchases less returns during 1.1.2011 to 19.5.2011 81,000
Sales less returns during 1.1.2011 to 19.5.2011 1,15,600
In valuing the stock for the balance Sheet as at 31st December, 2010, ` 1,150 had been written off
on certain stock which was a poor selling line having the cost ` 3,450. A portion of these goods
were sold in March, 2011 at a loss of ` 125 on original cost of ` 1,725. The remainder of this stock
was now estimated to be worth the original cost. Subject to the above exceptions, gross profit has
remained at a uniform rate throughout. The stock salvaged was ` 2,900.
Show the amount of the claim of stock destroyed by fire. Memorandum Trading Account to be
prepared for the period from 1-1-2011 to 19-5-2011 for normal and abnormal items.

Answer
Shri Garib Das
Trading Account for the year ended on 31st December, 2010
` ` `
To Opening Stock 36,750 By Sales A/c 2,43,500
Pur
To Purchases 1,99,000 By Closing Stock :
To Gross Profit 48,700 As valued 39,800
Add: Amount written off to
restore stock to full cost 1,150 40,950
2,84,450 2,84,450
48,700
The normal rate of gross profit to sales is =  100 = 20%
2,43,500
Memorandum Trading Account upto 19, May, 2011
Normal Abnormal Total Normal Abnormal Total
items items items items
` ` ` ` ` `
To Opening 37,500 3,450* 40,950 By Sales 1,14,000 1,600 1,15,600
Stock
To Purchases 81,000 — 81,000 By Loss — 125 125
To Gross Profit By Closing
(20% on Stock (bal.
` 1,14,000) 22,800 — 22,800 fig.) 27,300 1,725 29,025
1,41,300 3,450 1,44,750 1,41,300 3,450 1,44,750
* at cost.
Calculation of Insurance Claim
`
Value of Stock on 19th May, 2011 29,025
Less : Salvage (2,900)
Therefore, insurance claim will be for ` 26,125 only.
Question 5
On 30th March, 2012 fire occurred in the premises of M/s Suraj Brothers. The concern had
taken an insurance policy of ` 60,000 which was subject to the average clause. From the
books of accounts, the following particulars are available relating to the period 1 st January to
30th March 2012.
(1) Stock as per Balance Sheet at 31 st December, 2011, ` 95,600.

13.7 Accounting
(2) Purchases (including purchase of machinery costing ` 30,000) ` 1,70,000

(3) Wages (including wages ` 3,000 for installation of machinery) ` 50,000.
(4) Sales (including goods sold on approval basis amounting to ` 49,500) ` 2,75,000. No
approval has been received in respect of 2/3 rd of the goods sold on approval.
(5) The average rate of gross profit is 20% of sales.
(6) The value of the salvaged goods was ` 12,300.
You are required to compute the amount of the claim to be lodged to the insurance company.
Answer
Computation of claim for loss of stock
`
Stock on the date of fire i.e. on 30th March, 2012 (W.N.1) 62,600
Less: Value of salvaged stock (12,300)
Insured value 48,211
Amount of claim = x Loss of stock (approx.)
Total cost of stock on the date of fire
 60,000 
=   50,300 
 62,600 
A claim of ` 48,211 (approx.) should be lodged by M/s Suraj Brothers to the insurance company.
Working Notes:
1. Calculation of closing stock as on 30 th March, 2012
Memorandum Trading Account for
(from 1st January, 2012 to 30th March, 2012)
(`) (`)
To Opening stock 95,600 By Sales (W.N.3) 2,42,000
To Purchases By Goods with customers
(1,70,000-30,000) 1,40,000 (for approval) (W.N.2) 26,400
To Wages (50,000 – 3,000) 47,000 By Closing stock (Bal. fig.) 62,600
To Gross profit
(20% on sales) 48,400
3,31,000 3,31,000

2. Calculation of goods with customers

Since no approval for sale has been received for the goods of ` 33,000 (i.e. 2/3 of
` 49,500) hence, these should be valued at cost i.e. ` 33,000 – 20% of ` 33,000 =
` 26,400.
3. Calculation of actual sales
Total sales – Sale of goods on approval (2/3rd)= ` 2,75,000 – ` 33,000 = ` 2,42,000.
Question 6
A fire occurred in the premises of M/s. Fireproof Co. on 31 st August, 2011. From the following
particulars relating to the period from 1 st April, 2011 to 31st August, 2011, 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 31-03-2011 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, 2011, lying unsold with
them 16,500
(vii) Cost of goods distributed as free samples 1,500
While valuing the stock at 31 st March, 2011, ` 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.
Answer
Memorandum Trading Account for the period 1st April, 2011 to 31st August, 2011
Normal Abnormal Total Normal Abnormal Total
Items Items Items Items
` ` ` ` ` `
To Opening stock 95,000 5,000 1,00,000 By Sales 2,40,000 2,000 2,42,000
To Purchases 1,56,500 - 1,56,500 By Goods
(Refer W.N.) sent to 16,500 - 16,500
consignee
To Wages 47,000 - 47,000 By Loss - 500 500

13.9 Accounting
To Gross profit 48,000 - 48,000 By Closing 90,000 2,500 92,500

@ 20% stock
(Bal.fig.)
3,46,500 5,000 3,51,500 3,46,500 5,000 3,51,500
Statement of Claim for Loss of Stock

`
Book value of stock as on 31.08.2011 92,500
Less: Stock salvaged (20,000)
Amount of claim to be lodged with insurance company

Policy value
= Loss of stock x
Value of stock on the date of fire
60,000
= ` 72,500 x = ` 47,027
92,500
Working Note:
Calculation of Adjusted Purchases
`
Purchases 1,70,000
Less: Drawings (12,000)
Free samples (1,500)
Adjusted purchases 1,56,500
Question 7
On 29th August, 2012, the godown of a trader caught fire and a large part of the stock of goods
was destroyed. However, goods costing ` 1,08,000 could be salvaged incurring fire fighting
expenses amounting to ` 4,700.
The trader provides you the following additional information:
`
Cost of stock on 1st April, 2011 7,10,500
Cost of stock on 31st March, 2012 7,90,100
Purchases during the year ended 31st March, 2012 56,79,600

Purchases from 1st April, 2012 to the date of fire 33,10,700

Cost of goods distributed as samples for advertising from 1st April, 2012
to the date of fire 41,000
Cost of goods withdrawn by trader for personal use from 1st April, 2012
to the date of fire 2,000
Sales for the year ended 31st March, 2012 80,00,000
Sales from 1st April, 2012 to the date of fire 45,36,000
The insurance company also admitted firefighting expenses. The trader had taken the fire
insurance policy for ` 9,00,000 with an average clause.
Calculate the amount of the claim that will be admitted by the insurance company.
Answer
(b) Memorandum Trading Account for the period 1st April, 2012 to 29th August 2012
` `
To Purchases 33,10,700 By Closing stock (Bal. fig.) 8,82,600
Less: Advertisement (41,000)
Drawings (2,000) 32,67,700
To Gross Profit [30% of Sales -
Refer Working Note] 13,60,800
54,18,600 54,18,600
Statement of Insurance Claim

`
Value of stock destroyed by fire 8,82,600
Less: Salvaged Stock (1,08,000)
Add: Fire Fighting Expenses 4,700
Insurance Claim 7,79,300
Note: Since policy amount is more than claim amount, average clause will not apply.
Therefore, claim amount of ` 7,79,300 will be admitted by the Insurance Company.
Working Note:
Trading Account for the year ended 31st March, 2012
` `

13.11 Accounting
To Purchases 56,79,600 By Closing stock 7,90,100

To Gross Profit 24,00,000
87,90,100 87,90,100
Rate of Gross Profit in 2011-12
Gross Pr ofit 24,00,000
 100 =  100 = 30%
Sales 80,00,000
Question 8
From the following information, ascertain the value of stock as on 31st March, 2012:
`
Stock as on 01-04-2011 28,500
Purchases 1,52,500
Manufacturing Expenses 30,000
Selling Expenses 12,100
Administration Expenses 6,000
Financial Expenses 4,300
Sales 2,49,000
At the time of valuing stock as on 31st March, 2011, a sum of ` 3,500 was written off on a
particular item, which was originally purchased for ` 10,000 and was sold during the year for
` 9,000. Barring the transaction relating to this item, the gross profit earned during the year was
20% on sales.
Answer
Statement showing valuation of stock as on 31.3.2012
` `
Stock as on 01.04.2011 28,500
Less: Book value of abnormal stock (` 10,000 – ` 3,500) 6,500 22,000
Add: Purchases 1,52,500
Manufacturing Expenses 30,000
2,04,500
Less: Cost of Sales:
Sales as per Books 2,49,000
Less: Sales of Abnormal item (9,000)
2,40,000
Less: Gross Profit @ 20% (48,000) (1,92,000)
Value of Stock as on 31 st March, 2012 12,500

Question 9
On 15th December, 2012, a fire occurred in the premises of M/s. OM Exports. Most of the
stocks were destroyed. Cost of stock salvaged being ` 1,40,000. From the books of account,
the following particulars were available:
(i) Stock at the close of account on 31 st March, 2012 was valued at ` 9,40,000.
(ii) Purchases from 01-04-2012 to 15-12-2012 amounted to ` 13,20,000 and the sales
during that period amounted to ` 20,25,000.
On the basis of his accounts for the past three years, it appears that average gross profit ratio
is 20% on sales.
Compute the amount of the claim, if the stock were insured for ` 4,00,000.
Answer
Memorandum Trading Account
For the period 01.04.2012 to 15.12.2012
To Opening stock 9,40,000 By Sales 20,25,000
To Purchases 13,20,000 By Closing Stock 6,40,000
To Gross Profit @20% 4,05,000 (Bal. figure)
26,65,000 26,65,000
Statement of Claim
`
Estimated value of Stock as at date of fire 6,40,000
Less: Value of Salvaged Stock 1,40,000
Estimated Value of Stock lost by fire 5,00,000
As the value of stock is more than insured value, amount of claim would be subject to average
clause.
Amount of Policy
Amount of Claim=  Actual Loss of Stock
Value of Stock
4,00,000
Amount of Claim = × 5,00,000 = ` 3,12,500
6,40,000
Question 10
A fire occurred in the premises of M/s. Kailash & Co. on 30 th September 2013. From the
following particulars relating to the period from 1 st April 2013 to 30 th September 2013, you are
required to ascertain the amount of claim to be filed with the Insurance Company for the loss
of Stock. The company has taken an Insurance policy for ` 75,000 which is subject to average

13.13 Accounting
clause. The value of goods salvaged was estimated at ` 27,000. The average rate of Gross
Profit was 20% throughout the period.
Particulars Amount in `
(i) Opening Stock 1,20,000
(ii) Purchase made 2,40,000
(iii) Wages paid (including wages for the installation of a machine 75,000
` 5,000)
(iv) Sales 3,10,000
(v) Goods taken by the Proprietor (Sale Value) 25,000
(vi) Cost of goods sent to Consignee on 20 th September 2013, lying 18,000
unsold with them
(vii) Free Samples distributed -Cost 2,500
Answer
Memorandum Trading Account for the period 1 st April, 2013 to 30 th Sept. 2013
` `
To Purchases 2,40,000 By Consignment stock 18,000
Less: Advertisement (2,500) By Closing Stock (Bal. fig.) 1,41,500
Cost of goods
taken by proprietor (20,000) 2,17,500
To Wages 70,000
To Gross Profit 62,000
[20% of Sales) _____ _____
4,69,500 4,69,500
Statement of Insurance Claim
`
Value of stock destroyed by fire 1,41,500
Less: Salvaged Stock (27,000)
Insurance Claim 1,14,500
Note: Since policy amount is less than claim amount, average clause will apply.
Therefore, claim amount will be computed by applying the formula
Insured value
Claim= × Loss suffered
Total cost

Claim amount = ` 60,689 (1,14,500 x 75,000/ 1,41,500)

Claim for Loss of Profit
Question 11
X Ltd. has insured itself under a loss of profit policy for ` 3,63,000. The indemnity period
under the policy is six months. On 1 st September, 2010 a fire occurred in the factory of X Ltd.
and the normal business was affected upto 1 st March, 2011.
The following information is compiled for the year ended on 31 st March, 2010:
`
Sales 20,00,000
Insured standing charges 2,40,000
Uninsured standing charges 20,000
Net profit 1,20,000
Following further details of turnover are furnished.
(a) Turnover during the period of 12 months ending on the date of fire was ` 22,00,000.
(b) Turnover during the period of interruption was ` 2,25,000.
(c) Actual turnover during the period from 1.9.2009 to 1.3.2010 during the preceding year
corresponding to the indemnity period was ` 7,50,000.
X Ltd. spent an amount of ` 40,000 as additional cost of working during the indemnity period.
On account of this additional expenditure:
(a) There was a saving of ` 15,000 in insured standing charges during the period of indemnity.
(b) Reduced turnover avoided was ` 1,00,000. i.e. but for this expenditure, the turnover after the
date of fire would have been only ` 1,25,000.
A special clause in the policy stipulates that owing to the reasons acceptable to the insurer under
the special circumstances the following increases are to be made:
(a) Increase of turnover standard and actual by 10%.
(b) Increase in rate of gross profit by 2% from previous year’s level.
X Ltd. asks you to compute the claim for loss of profit. All calculations should be to the
nearest rupee.

13.15 Accounting
Answer
Computation of loss of profit for insurance claim
(1) Rate of gross profit
Net profit for the last financial year + Insured standing charges
× 100
Turnoverfor the last financial year
`1,20,000  ` 2,40,000
=  100 18%
` 20,00,000
Add: Adjustment for increase in gross profit rate= 2%
20%
(2) Calculation of short sales:
`
Turnover from 1.9.2009 to 1.3.2010 7,50,000
Add: Adjustment for increase in turnover @ 10% _75,000
Adjusted turnover 8,25,000
Less: Actual turnover from 1.9.2010 to 1.3.2011 2,25,000
Short sales 6,00,000
(3) Additional expenses:
`
(i) Actual expenses 40,000
(ii) Gross profit on sale generated by additional expenses
[(20/100)x ` 1,00,000] 20,000
Gross profit on annual adjusted turnov er
(iii) Additional ex penses 
Gross profit on annual adjusted turnov er  Uninsured standing charges
20% on ` 24,20,000 *
= `40,000
(20% on ` 24,20,000) ` 20,000
` 4,84,000
= ` 40,000 x = ` 38,413
` 5,04,000
Least of the above three figures i.e. ` 20,000 is allowable.
* ` 22,00,000 x (110/100)

(4) Amount of claim before application of average clause

`
Gross profit on short sales (20% on ` 6,00,000) 1,20,000
Add: Allowable additional expenses 20,000
1,40,000
Less: Saving in insured standing charges (15,000)
1,25,000
(5) Application of average clause
`
Annual turnover i.e. turnover from 1.9.2009 to 31.8 2010 22,00,000
Add: Adjustment for increase in turnover (10% of ` 22,00,000) 2,20,000
24,20,000
Gross profit on annual adjusted turnover (20% on ` 24,20,000) 4,84,000
Loss of profit policy value 3,63,000
Since the policy-value is less than gross profit on adjusted annual turnover, the average
clause is applicable.
Hence the amount of claim = ` 1,25,000 x (` 3,63,000/` 4,84,000)
= ` 93,750
Question 12
On account of a fire on 15 th June, 2011 in the business house of a company, the working
remained disturbed upto 15 th December 2011 as a result of which it was not possible to affect
any sales. The company had taken out an insurance policy with an average clause against
consequential losses for ` 1,40,000 and a period of 7 months has been agreed upon as
indemnity period. An increased of 25% was marked in the current year’s sales as compared
to the last year. The company incurred an additional expenditure of ` 12,000 to make sales
possible and made a saving of ` 2,000 in the insured standing charges.
`
Actual sales from 15th June, 2011 to 15th Dec, 2011 70,000
Sales from 15th June 2010 to 15th Dec 2010 2,40,000
Net profit for last financial year 80,000
Insured standing charges for the last financial year 70,000
Total standing charges for the last financial year 1,20,000
Turnover for the last financial year 6,00,000
Turnover for one year : 16th June 2010 to 15th June 2011 5,60,000

13.17 Accounting
Answer
(1) Calculation of short sales:
`
Sales for the period 15.6.2010 to 15.12.2010 2,40,000
Add: 25% increase in sales _ 60,000
Estimated sales in current year 3,00,000
Less: Actual sales from 15.6.2011 to 15.12.2011 (70,000)
Short sales 2,30,000
(2) Calculation of gross profit:
Net profit + Insured standing charges
Gross profit = × 100
Turnover
` 80,000  ` 70,000
=  100
` 6,00,000
` 1,50,000
=  100
` 6,00,000
= 25%
(3) Calculation of loss of profit:
` 2,30,000 x 25% =` 57,500
(4) Calculation of claim for increased cost of working:
Least of the following:
(i) Actual expense= ` 12,000
Gross profit on adjusted turnover
(ii) Expenditure x
Gross profit as above  Uninsured standing charges
(25/100) x ` 7,00,000
` 12,000 x = ` 9,333 approx.
[(25/100) x ` 7,00,000]  ` 50,000
Where,
Adjusted turnover `
Turnover from 16.06.2010 to 15.06.2011 5,60,000
Add: 25% increase 1,40,000
7,00,000

(iii) Gross profit on sales generated due to additional expenditure = 25% x ` 70,000
= ` 17,500.
` 9,333 being the least, shall be the increased cost of working.
(5) Calculation of total loss of profit
`
Loss of profit 57,500
Add: Increased cost of working 9,333
66,833
Less: Saving in insured standing charges (2,000)
64,833
(6) Calculation of insurable amount:
Adjusted turnover x G.P. rate
= ` 7,00,000 x 25% = ` 1,75,000
(7) Total claim for consequential loss of profit:
Insured amount
=  Total loss of profit
Insurable amount
` 1,40,000
= x ` 64,833 = ` 51,866.40
` 1,75,000
Question 13
Ramda & Sons had taken out policies (without Average Clause) both against loss of stock and loss
of profit, for ` 2,10,000 and ` 3,20,000 respectively. A fire occurred on 1st July, 2011 and as a
result of which sales were seriously affected for a period of 3 months.
Trading and Profit & Loss A/c of Ramda & Sons for the year ended on 31st March, 2011 is given
below:
To Opening Stock 96,000 By Sales 12,00,000
To Wages 1,58,000
To Manufacturing Expenses 75,000
To Gross Profit c/d 3,00,000
13,85,000 13,85,000
To Administrative Expenses 83,600 By Gross Profit b/d 3,00,000
To Selling Expenses (Fixed) 72,400
To Commission on Sales 34,200

13.19 Accounting
To Carriage Outward 49,800

3,00,000 3,00,000
Further detail provided is as below:
(a) Sales, Purchases, Wages and Manufacturing Expenses for the period 1.04.2011 to
30.06.2011 were ` 3,36,000, ` 2,14,000, ` 51,000 and ` 12,000 respectively.
(b) Other Sales figure were as follows `
From 01.04.2010 to 30.06.2010 3,00,000
From 01.07.2010 to 30.09.2010 3,20,000
From 01.07.2011 to 30.09.2011 48,000
(c) Due to decrease in the material cost, Gross Profit during 2011-12 was expected to increase
by 5% on sales.
(d) ` 1,98,000 were additionally incurred during the period after fire. The amount of policy
included ` 1,56,000 for expenses leaving ` 42,000 uncovered.
Compute the claim for stock, loss of profit and additional expenses
Answer
Claim for loss of stock
Memorandum Trading Account for the period 1st April to 1st July, 2011
` `
To Purchases 2,14,000 By Closing stock
To Wages 51,000 (Bal.fig.) 2,26,800
To Manufacturing expenses 12,000
To Gross Profit @ 30% on sales
(W.N) 1,00,800
5,62,800 5,62,800
Claim for loss of stock will be limited to ` 2,10,000 only which is the amount of Insurance policy
and no average clause will be applied.
Loss of Profit
(a) Short Sales :
Sales from 1st July, 2010 to 30th Sept. 2010 3,20,000
Add: 12% rise observed in 2011-12 over 2010-11
(April- June ` 3,36,000 instead of ` 3,00,000) 38,400
3,58,400

Less: Sales from 1st July, 2011 to 30th Sept. 2011 (48,000)
Short-Sales 3,10,400
(b) Gross profit ratio
Net Profit  Insured standing charges (2010-11)
100
Sales (2010-11)
60,000  1,56,000
 100 = 18%
12,00,000
Add: Expected rise due to decline in material cost 5%
23%
(c) Loss of Gross Profit
23% on short sales ` 3,10,400= ` 71,392
(d) Annual turnover (12 months to 1st July, 2011):
Amount (`)
Sales for April 2010 - March, 2011 12,00,000
Less: From 1-4-2010 to 30-6-2010 (3,00,000)
9,00,000
Add: From 1-4-2011 to 30-6-2011 3,36,000
12,36,000
Add: 12% increasing trend 1,48,320
13,84,320
Gross Profit on annual turnover @ 23% 3,18,394
(e) Amount allowable in respect of additional expenses
Least of the following: Amount (`)
(i) Actual expenses 1,98,000
(ii) Gross Profit on sales during indemnity period
23% of ` 48,000 11,040
Gross profit on annual (adjusted) turnover
(iii)  Additional Expenses
Gross profit as above  Uninsured charges
(3,18,394/ 3,60,394) x 1,98,000 1,74,925
Least i.e. `11,040 is admissible.
Claim
Loss of Gross Profit ` 71,392
Add: Additional expenses ` 11,040
` 82,432
Insurance claim for loss of profit will be of ` 82,432 only.

13.21 Accounting
Working Note:
Rate of Gross Profit in 2010-11
Gross Pr ofit
 100
Sales
3,00,000
 100 = 25%
12,00,000
In 2011-12, Gross Profit is expected to increase by 5% as a result of decline in material cost,
hence the rate of Gross Profit for loss of stock is taken at 30%.
Question 14
Monalisa & Co. runs plastic goods shop. Following details are available from quarterly
sales tax return filed.
Sales 2009 2010 2011 2012
` ` ` `
From 1st January to 31 st March 1,80,000 1,70,000 2,05,950 1,62,000
From 1st April to 30th June 1,28,000 1,86,000 1,93,000 2,21,000
From 1st July to 30th September 1,53,000 2,10,000 2,31,000 1,75,000
From 1st October to 31 st December 1,59,000 1,47,000 1,90,000 1,48,000
Total 6,20,000 7,13,000 8,19,950 7,06,000
Period `
Sales from 16-09-2011 to 30-09-2011 34,000
Sales from 16-09-2012 to 30-09-2012 Nil
Sales from 16-12-2011 to 31-12-2011 60,000
Sales from 16-12-2012 to 31-12-2012 20,000
A loss of profit policy was taken for ` 1,00,000. Fire occurred on 15th September, 2012.
Indemnity period was for 3 months. Net Profit was ` 1,20,000 and standing charges
(all insured) amounted to ` 43,990 for year ending 31st December, 2011.
Determine the Insurance Claim.
Answer
(1) Gross profit ratio `
Net profit in year 2011 1,20,000
Add: Insured standing charges 43,990
Gross profit 1,63,990

1,63,990
Ratio of gross profit = = 20%
8,19,950
(2) Calculation of Short sales
Indemnity period: 16.9.2012 to 15.12.12
Standard sales to be calculated on basis of corresponding period of year 2011
`
Sales for period 16.9.2011 to 30.9.11 34,000
Sales for period 1.10.2011 to 15.12.2011 (Note 1) 1,30,000
Sales for period 16.9.2011 to 15.12.2011 1,64,000
Add: upward trend in sales (15%) (Note 2) 24,600
Standard Sales (adjusted) 1,88,600
Actual sales of disorganized period
Calculation of sales from 16.9.12 to 15.12.12
Sales for period 16.9.12 to 30.9.12 Nil
Sales for 1.10.12 to 15.12.12 (` 1,48,000 – ` 20,000) 1,28,000
Actual Sales 1,28,000
Short Sales (` 1,88,600 - ` 1,28,000) 60,600
(3) Loss of gross profit
Short sales x gross profit ratio = 60,600 x 20% 12,120
(4) Application of average clause
policy value
Net claim = Gross claim x
gross profit on annual turnover
1,00,000
= 12,120 x
1,63,120 (W.N.3)
Amount of claim = `7,430
Working Notes:
1. Sales for period 1.10.11 to 15.12.11 `
Sales for 1.10.11 to 31.12.11 (given) 1,90,000
Sales for 16.12.11 to 31.12.11 (given) 60,000
Sales for period 1.10.11 to 15.12.11 1,30,000

13.23 Accounting
2. Calculation of upward trend in sales

Total sales in year 2009 = ` 6,20,000
Increase in sales in year 2010 as compared to 2009 = ` 93,000
93,000 (7,13,000 - 6,20,000)
% increase = = 15%
6,20,000
Increase in sales in year 2011 as compared to year 2010
1,06,950 (8,19,950 - 7,13,000)
% increase = = 15%
7,13,000
Thus annual percentage increase trend is of 15%.
3. Gross profit on annual turnover `
Sales from 16.9.11 to 30.9.11(adjusted)(34,000 x1.15) 39,100
1.10.11 to 31.12.11(adjusted)(1,90,000 x1.15) 2,18,500
1.1.12 to 31.3.12 1,62,000
1.4.12 to 30.6.12 2,21,000
1.7.2012 to 15.9.2012 (1,75,000 – Nil) 1,75,000
Sales for 12 months just before date of fire 8,15,600
Gross profit on adjusted annual sales @ 20% 1,63,120
Exercise
1. Sony Ltd.’s. trading and profit and loss account for the year ended 31st December, 2010 were as follows:
Trading and Profit and Loss Account for the year ended 31.12.2010
` `
Opening stock 20,000 Sales 10,00,000
Purchases 6,50,000 Closing stock 90,000
Manufacturing expenses 1,70,000
Gross profit 2,50,000 _______
10,90,000 10,90,000
Administrative expenses 80,000 Gross profit 2,50,000
Selling expenses 20,000
Finance charges 1,00,000
Net profit 50,000 _______
2,50,000 2,50,000
The company had taken out a fire policy for ` 3,00,000 and a loss of profits policy for ` 1,00,000
having an indemnity period of 6 months. A fire occurred on 1.4.2011 at the premises and the entire

stock was gutted with nil salvage value. The net quarter sales i.e. 1.4.2011 to 30.6.2011 was severely
affected. The following are the other information:
Sales during the period 1.1.2011 to 31.3.2011 2,50,000
Purchases during the period 1.1.2011 to 31.3.2011 3,00,000
Manufacturing expenses 1.1.2011 to 31.3.2011 70,000
Sales during the period 1.4.2011 to 30.6.2011 87,500
Standing charges insured 50,000
Actual expense incurred after fire 60,000
The general trend of the industry shows an increase of sales by 15% and decrease in GP by 5% due to
increased cost.
Ascertain the claim for stock and loss of profit.
(Hints: Stock destroyed by fire ` 2,60,000; and loss of profit ` 15,000)
2. On 30th June, 2011, accidental fire destroyed a major part of the stocks in the godown of Jay
associates. Stock costing ` 30,000 could be salvaged but not their stores ledgers. A fire insurance
policy was in force under which the sum insured was ` 3,50,000. From available records, the following
information was retrieved:
(1) Total of sales invoices during the period April-June amounted to ` 30,20,000. An analysis
showed that goods of the value of ` 3,00,000 had been returned by the customers before the
date of fire.
(2) Opening stock on 1.4.2011 was ` 2,20,000 including stocks of value of ` 20,000 being lower of
cost and net value subsequently realised.
(3) Purchases between 1.4.2011 and 30.6.2011 were ` 21,00,000
(4) Normal gross profit rate was 33-1/3% on sales.
(5) A sum of ` 30,000 was incurred by way of fire fighting expenses on the day of the fire.
Prepare a statement showing the insurance claim recoverable.
(Hints: Claim ` = ` 3,50,000)
3. A fire occurred in the premises of Agni on 25th August, 2011 when a large part of the stock was
destroyed. Salvage was ` 15,000. Agni gives you the following information for the period of January 1,
2011 to August 25th, 2011:
(a) Purchases ` 85,000.
(b) Sales ` 90,000
(c) Goods costing ` 5,000 were taken by Agni for personal use.
(d) Cost price of stock on January 1, 2011 was ` 40,000
Over the past few years, Agni has been selling goods at a consistent gross profit margin of 33-1/3%.
The insurance policy was for ` 50,000. It included an average clause.
Agni asks you to prepare a statement of claim to be made on the insurance company.
(Hints: Admissible claim ` 37,500)

Issues in Partnership
14 Accounts
BASIC CONCEPTS
Partnership  Partnership is defined as the relationship between persons who
Accounting have agreed to share the profit or loss of a business carried on by
all or any of them acting for all.
 Two methods of accounting
 Fixed capital method
 Fluctuating capital method.
Goodwill
 Goodwill is the value of reputation of a firm in respect of profits
expected in future over and above the normal rate of profits.
 Necessity for valuation of goodwill in a firm arises in the
following cases:
 When the profit sharing ratio amongst the partners is
changed;
 When a new partner is admitted;
 When a partner retires or dies, and
 When the business is dissolved or sold.
 Methods for valuation of goodwill:
(1) Average profit basis :
Total Profit
Average Profit =
Number of y ears
Goodwill = Average Profit x No. of Years’ purchased
The profits taken into consideration are adjusted with abnormal
losses, abnormal gains, errors, return on non-trade investments
and errors.

Issues in Partnership Accounts 14.2
(2) Super profit basis :

Calculate Capital Employed
Assets …….
Less: Liability …….
Capital Employed …....
 Find the normal Rate of Return (NRR)
 Find Normal Profit = Capital Employed x Normal rate
of Return
 Find Average Actual Profit
 Find Super Profit = Average Actual Profit - Normal
Profit
 Find Goodwill = Super Profit x Number of Years
Purchased
(3) Annuity basis :
Goodwill=Super Profit X Annuity Number
(4) Capitalization basis :
Super Pr ofit
Goodwill =
Normal Rate of Re turn
Question 1
A, B and C were partners of a firm sharing profits and losses in the ratio of 3 : 4 : 3. The
Balance Sheet of the firm, as at 31 st March, 2010 was as under:
Capital Accounts: Fixed Assets 1,00,000
A 48,000 Current Assets:
B 64,000 Stock 30,000
C 48,000 1,60,000 Debtors 60,000
Reserve 20,000 Cash and Bank 30,000 1,20,000
Creditors 40,000
2,20,000 2,20,000
Partner C died on 30th September, 2010. It was agreed between the surviving partners and
the legal representatives of C that:

14.3 Accounting
(i) Goodwill of the firm will be valued at ` 60,000.

(ii) Fixed Assets will be written down by ` 20,000.
(iii) In lieu of profits, C should be paid at the rate of 25% per annum on his capital as on
31st March, 2010.
The profits for the year ended 31 st March, 2011, after charging depreciation of ` 10,000
(depreciation upto 30th September was agreed to be ` 6,000) were ` 48,000.
Partners‟ Drawings Accounts showed balances as under :
A ` 18,000 (drawn evenly over the year)
B ` 24,000 (drawn evenly over the year)
C (up-to-date of death) ` 20,000
On the basis of the above figures, please indicate the entitlement of the legal heirs of C as on
31st March, 2011.
Answer
Computation of entitlement of legal heirs of C
(1) Profits for the half year ended 31 st March, 2011
`
Profits for the year ended 31 st
March, 2011 (after depreciation) 48,000
Add : Depreciation 10,000
Profits before depreciation 58,000
Profits for the first half (assumed: evenly spread) 29,000
Less : Depreciation for the first half (6,000)
Profits for the first half year (after depreciation) 23,000
Profits for the second half (i.e., 1 st October, 2010 to 31st March, 2011) 29,000
Less : Depreciation for the second half (4,000)
Profits for the second half year (after depreciation) 25,000
(2) Capital Accounts of Partners as on 30 th September, 2010
A B C A B C
` ` ` ` ` `
To Fixed Assets By Balance b/d 48,000 64,000 48,000
(loss on By Reserve 6,000 8,000 6,000
revaluation) 6,000 8,000 6,000 By A and B 18,000
To C (goodwill adj.) 7,714 10,286
To Drawings 9,000 12,000 20,000 By P & L Appro-
To C Executor’s A/c 52,000 priation A/c

To Balance c/d 31,286 41,714 – (Interest on

` 48,000 @ 25%
for 6 months) — — 6,000
54,000 72,000 78,000 54,000 72,000 78,000
(3) Application of Section 37 of the Partnership Act
The amount due to the deceased partner carries interest at the mutually agreed upon
rate. In the absence of any agreement, the representatives of the deceased partner can
receive at their option interest at the rate of 6% per annum or the sh are of profit earned
for the amount due to the deceased partner.
Thus, the representatives of C can opt for
Either,
(i) Interest on ` 52,000 for 6 months @ 6% p.a. = ` 1,560
Or
(ii) Profit earned out of unsettled capital (in the second half year ended 31 st March,
2011)
52,000
` 25,000   ` 10,400 (approx.)
31,286  41,714  52,000
In the above case, it would be rational to assume that the legal heirs would opt for
` 10,400.
(4) Amount due to legal heirs of C `
Balance in C’s Executor’s account 52,000
Amount of profit earned out of unsettled capital [calculated in (3)] 10,400
Amount due 62,400
Question 2
M/s Neptune & Co.‟s Balance Sheet as at 31 st March, 2011:
Bank overdraft (State Bank) 54,000 Cash at Bank of India 800
Sundry Creditors 1,56,000 Sundry Debtors 2,80,000
Capital Accounts : Stock 1,00,000
Mr. A Motor Cars cost as per last B/S 1,60,000
Balance as per last B/S 4,02,000 Less : Depreciation till date (54,000) 1,06,000
Add : Profits for the year 95,400 Machinery :
4,97,400 Cost as per last B/S 3,00,000

14.5 Accounting
Less : Drawings (40,000) 4,57,400 Less : Depreciation till date (1,40,000) 1,60,000
Mr. B Land and Building 2,40,000
Balance as per last B/s 2,00,000
Add : Profit for the year 95,400
2,95,400
Less : Drawings (76,000) 2,19,400
8,86,800 8,86,800
You have examined the foregoing Draft of the Balance Sheet and have ascertained that the
following adjustments are required to be carried out :
(i) Land and Buildings are shown at cost less ` 60,000 being the proceeds of the sale
during the year of premises costing ` 70,000.
(ii) Machinery having a net book value of ` 4,300 had been scrapped during the year. The
original cost was ` 12,300.
(iii) ` 2,000 paid for the License fee for the year ending 30 th September, 2011 had been
written off.
(iv) Debts amounting to ` 10,420 were considered to be bad and further debts amounting to
` 5,400 were considered doubtful and required 100% provision. Provision for doubtful
debts had previously been made for ` 10,000.
(v) An item in the Inventory was valued at ` 37,400, but had a realisable value of
` 26,000 only. Scrap Material having a value of ` 6,600 had been omitted from the stock
valuation.
(vi) The cashier had misappropriated ` 700.
(vii) The cash-book for the year ending 31st March, 2011 included payments amounting to
` 6,924, the cheques having been made out, but not dispatched to suppliers until April 2011.
(viii) Interest is to be allowed on the Partners‟ opening Capital Account balances less
drawings during the year at 9%.
(a) Profit & Loss Adjustment Account for the year.
(b) Capital Accounts of the Partners.

Answer
(a) M/s Neptune & Co.
Profit and Loss Adjustment Account
` `
To Land & Building (Loss on sale 10,000 By Partner’s Capital Accounts :
To Machinery (Loss on scrapping) 4,300 Mr. A 95,400
To Provision for Doubtful Debts 5,820 Mr. B 95,400 1,90,800
(Working note)
To Stock Adjustment (Fall in the 11,400 By Prepaid expenses (License 1,000
Market value) fee - 2000 x 6/12)
To Cash (Misappropriated) 700 By Stock Adjustment (items 6,600
To Interest on Capital omitted)
Mr. A 32,580
Mr. B 11,160 43,740
To Profit transferred to Capital
Accounts:
Mr. A 61,220
Mr. B 61,220 1,22,440
1,98,400 1,98,400
(b) Partners’ Capital Accounts
As on 31 st March, 2011
Mr. A Mr. B Mr. A Mr. B
` ` ` `
31.3.2011 31.3.2010
To Drawings 40,000 76,000 By Balance b/d 4,02,000 2,00,000
To Profit & Loss 31.3.2011
Adjustment Account 95,400 95,400 By Profit & Loss A/c 95,400 95,400
To Balance c/d 4,55,800 1,96,380 By Profit & Loss
Adjustment A/c:
Interest on capital 32,580 11,160
Profit for the year 61,220 61,220
5,91,200 3,67,780 5,91,200 3,67,780

14.7 Accounting
Working Notes:
(1) Provision for doubtful debts charged to profit and loss adjustment account
Provision for Doubtful Debts Accounts
` `
To Bad Debts 10,420 By Balance b/d 10,000
To Balance c/d (required) 5,400 By Profit & Loss Adjustment A/c
(bal.fig.) 5,820
15,820 15,820
(2) Interest on Capitals
Mr. A ` 3,62,000 × 9% p.a. = ` 32,580
Mr. B ` 1,24,000 × 9% p.a. = ` 11,160
Note : Misappropriation by cashier may be debited to cashier also. In that case, ` 700 will not
be debited to Profit and Loss Adjustment Account and profit transferred to partners will be
` 1,23,140. No adjustment should be made for cheques made out but not dispatched to
suppliers.
Question 3
Manish, Jatin and Paresh were partners sharing Profits/ Losses in the ratio of Manish 40
percent, Jatin 35 percent, and Paresh 25 percent. The draft Balance Sheet of the partnership
as on 31st December, 2011 was as follows :
Sundry Creditors 30,000 Cash in hand and at Bank 67,000
Bills payable 8,000 Stock 42,000
Loan from Jatin 30,000 Sundry Debtors 34,000
Current Accounts : Less : Provision for
Manish 12,000 Doubtful Debts (6,000) 28,000
Jatin 8,000 Plant and Machinery
Paresh 6,000 26,000 (at cost) 80,000
Capital Accounts : Less : Depreciation (28,000) 52,000
Manish 90,000 Premises (at cost) 75,000
Jatin 50,000
Paresh 30,000 1,70,000
2,64,000 2,64,000

Jatin retired on 31 st December, 2011. Manish and Paresh continued in partnership sharing
Profits/ Losses in the ratio of Manish 60 percent and Paresh 40 percent. 50 percent of Jatin‟s
Loan was repaid on 1.1.2012 and it was agreed that of the amount then remaining due to him
a sum of ` 80,000 should remain as loan to partnership and the balance to be carried forward
as ordinary trading liability. The following adjustments were agreed to be made to the above
mentioned Balance Sheet:
(i) ` 10,000 should be written off from the premises.
(ii) Plant and Machinery was revalued at ` 58,000.
(iii) Provision for doubtful debts to be increased by ` 1,200
(iv) ` 5,000 due to creditors for expenses had been omitted from the books of account.
(v) ` 4,000 to be written off on stocks.
(vi) Provide ` 1,200 for professional charges in connection with revaluation.
As per the deed of partnership, in the event of the retirement of a partner, goodwill was to be
valued at an amount equal to one year‟s purchase of the average profits of the preceding
three years on the date of retirement. Before determining the said average profits a notional
amount of ` 80,000 should be charged for remuneration to partners. The necessary profits
before charging such remuneration were:
Year ending 30.12.2009 ` 1,44,000
Year ending 31.12.2010 ` 1,68,000
Year ending 31.12.2011 ` 1,88,200 (As per draft accounts)
It was agreed that, for the purpose of valuing goodwill, the amount of profit for the year 2011
be recomputed after charging the loss on revaluation in respect of premises and stock, the
unprovided expenses (except professional expenses) and increase in the provision for
doubtful debts. The continuing partners decided to eliminate goodwill account from their
books.
(i) Revaluation Account:
(ii) Capital Accounts (merging current accounts therein):
(iii) Jatin‟s Accounts showing balance due to him; and
(iv) Balance Sheet of Manish and Paresh as at 1 st January, 2012.

14.9 Accounting
Answer
(i) Revaluation Account

` `
To Premises 10,000 By Plant and Machinery 6,000
To Provision for Doubtful Debts 1,200 By Loss on revaluation transferred
To Outstanding Expenses 5,000 to Capital Accounts:
To Stocks 4,000 Manish (40%) 6,160
To Provision for Professional Charges 1,200 Jatin (35%) 5,390
Paresh (25%) 3,850 15,400
21,400 21,400
(ii) Capital Accounts of Partners

Manish Jatin Paresh Manish Jatin Paresh
` ` ` ` ` `
To Revaluation A/c (loss) 6,160 5,390 3,850 By Balance b/d 90,000 50,000 30,000
To Goodwill (written off in 48,000 – 32,000 By Current A/c 12,000 8,000 6,000
new Profit sharing ratio)
To Personal A/c (Balance 80,610 By Goodwill 32,000 28,000 20,000
transferred) – (old profit sharing)
To Balance c/d 79,840 20,150
1,34,000 86,000 56,000 1,34,000 86,000 56,000
(iii) Jatin’s Personal Account
` `
To Bank Account 15,000 By Capital Accounts 80,610
(50% of old loan) (Balance transferred)
ToLoan Account 80,000 By Loan Account 30,000
(transferred) (old loan)
1,10,610 1,10,610
(iv) Balance Sheet of Manish and Paresh

as on 1 st January, 2012
Capital Accounts Fixed Assets
Manish 79,840 Plant and Machinery 86,000

Paresh 20,150 99,990 Less: Depreciation (28,000) 58,000

Jatin’s Loan A/c 80,000 Premises 75,000
Current Liabilities Less: Written off (10,000) 65,000
and Provisions Current Assets
Bills Payable 8,000 Cash in hand & at Bank
Sundry Creditors 35,000 (67,000–15,000) 52,000
(30,000+5,000) Sundry Debtors 34,000
Jatin’s dues 15,610 Less: Provision for
Provision for doubtful debts (7,200) 26,800
Professional charges 1,200 59,810 Stock in trade 38,000
2,39,800 2,39,800
Working Notes :
(1) Profit for the Year ending 31 st December, 2011 `
As per draft accounts 1,88,200
Less: Premises written off 10,000
Provision for Doubtful debts 1,200
Outstanding Expenses 5,000
Stock 4,000 (20,200)
1,68,000
(2) Valuation of Goodwill
Profit for the year ending 31 st Dec.2011 (adjusted) 1,68,000
Profit for the year ending 31 st Dec. 2010 1,68,000
Profit for the year ending 31 st Dec. 2009 1,44,000
4,80,000
Average Profits before partners’ salaries 1,60,000
Less: Partners’ Salaries (notional) (80,000)
Super Profit and Goodwill (one year’s purchase) 80,000
Question 4
Ram, Rahim and Robert are partners, sharing Profits and Losses in the ratio of 5 : 3 : 2. It was
decided that Robert would retire on 31.3.2011 and in his place Richard would be admitted as a
partner with new profit sharing ratio between Ram, Rahim and Richard at 3 : 2 : 1.

14.11 Accounting
Balance Sheet of Ram, Rahim and Robert as at 31.3.2011:

Capital Accounts: Cash in hand 20,000
Ram 1,00,000 Cash in Bank 1,00,000
Rahim 1,50,000 Sundry Debtors 5,00,000
Robert 2,00,000 Stock in Trade 2,00,000
General Reserve 2,00,000 Plant & Machinery 3,00,000
Sundry Creditors 8,00,000 Land & Building 5,30,000
Loan from Richard 2,00,000 ________
16,50,000 16,50,000
Retirement of Robert and admission of Richard is on the following terms:

(a) Plant & Machinery to be depreciated by ` 30,000.
(b) Land and Building to be valued at ` 6,00,000.
(c) Stock to be valued at 95% of book value.
(d) Provision for doubtful debts @ 10% to be provided on debtors.
(e) General Reserve to be apportioned amongst Ram, Rahim and Robert.
(f) The firm‟s goodwill to be valued at 2 years purchase of the average profits of the last 3
years. The relevant figures are:
Year ended 31.3.2008  Profit ` 50,000
(g) Out of the amount due to Robert ` 2,00,000 would be retained as loan by the firm and
the balance will be settled immediately.
(h) Richard‟s capital should be equal to 50% of the combined capital of Ram and Rahim.
Prepare:
(i) Capital accounts of the partners; and
(ii) Balance Sheet of the reconstituted firm.

Answer
Partners’ Capital Accounts
Dr. Cr.
Ram Rahim Robert Richard Ram Rahim Robert Richard
` ` ` ` ` ` ` `
To Revaluation 10,000 6,000 4,000  By Balance 1,00,000 1,50,000 2,00,000 
A/c (W.N.1) b/d
To Loan from 2,00,000 By General 1,00,000 60,000 40,000 
Robert A/c reserve
To Bank 58,000 By Goodwill 55,000 33,000 22,000 
(W.N. 2)
To Balance c/d 2,45,000 2,37,000   _______ _______ _______ _______
2,55,000 2,43,000 2,62,000  2,55,000 2,43,000 2,62,000 
To Goodwill 55,000 36,667  18,333 By Balance 2,45,000 2,37,000  

b/d
By Loan A/c    2,00,000

transfer
To Balance c/d 1,90,000 2,00,333  1,95,167 By Bank    13,500
2,45,000 2,37,000  2,13,500 2,45,000 2,37,000  2,13,500

after the admission of Richard
Capital Accounts: Land and Building 6,00,000
Ram 1,90,000 Plant and Machinery 2,70,000
Rahim 2,00,333 Stock 1,90,000
Richard 1,95,167 Debtors 4,50,000
Sundry Creditors 8,00,000 Cash at Bank (W.N. 3) 55,500
Loan from Robert 2,00,000 Cash in hand 20,000
15,85,500 15,85,500
Working Notes:
(1) Revaluation Account
` `
To Plant and Machinery 30,000 By Land and Building 70,000

As per para 36 of AS 10, ‘Accounting for Fixed Assets’, goodwill should be recorded in the books only when some
consideration in money or money’s worth has been paid for it. Therefore, the goodwill raised at the time of retirement of
Robert is to be written off in new ratio among remaining partners including new partner – Richard.

14.13 Accounting
To Stock 10,000 By Partners Capital A/cs:

To Provision for doubtful 50,000 Ram 10,000
debts.
Rahim 6,000
______ Robert 4,000 20,000
90,000 90,000
(2) Calculation of Goodwill:
Profit for the year ended 31.3.2008 50,000
1,65,000
1,65,000
Average profit   ` 55,000
3
Goodwill = ` 55,000  2 years = ` 1,10,000.
(3) Bank Account
` `
To Balance b/d 1,00,000 By Robert’s Capital A/c 58,000
To Richard’s Capital A/c 13,500 By Balance c/d 55,500
1,13,500 1,13,500
Question 5
The following was the Balance Sheet of „A‟ and „B‟, who were sharing profits and losses in the
ratio of 2:1 on 31.12.2011:
Capital Accounts Plant and machinery 12,00,000
A 10,00,000 Building 9,00,000
B 5,00,000 Sundry debtors 3,00,000
Reserves 9,00,000 Stock 4,00,000
Sundry creditors 4,00,000 Cash 1,00,000
Bills payable 1,00,000
29,00,000 29,00,000
They agreed to admit ‘C’ into the partnership on the following terms:
(i) The goodwill of the firm was fixed at ` 1,05,000.
(ii) That the value of stock and plant and machinery were to be reduced by 10%.

(iii) That a provision of 5% was to be created for doubtful debts.

(iv) That the building account was to be appreciated by 20%.
(v) There was an unrecorded liability of ` 10,000.
(vi) Investments worth ` 20,000 (Not mentioned in the Balance Sheet) were taken into
account.
(vii) That the value of reserve, the values of liabilities and the values of assets other than
cash are not to be altered.
(viii) „C‟ was to be given one-fourth share in the profit and was to bring capital equal to his
share of profit after all adjustments.
Prepare Memorandum Revaluation Account, Capital account of the partners and the Balance
Sheet of the newly reconstituted firm.
Answer
Memorandum Revaluation Account
` `
To Stock 40,000 By Building 1,80,000
To Plant & machinery 1,20,000 By Investments 20,000
To Unrecorded liability 10,000
To Profit transferred to
Partners’ Capital A/cs (in old
ratio)
A = 10,000
B = 5,000 15,000
2,00,000 2,00,000
To Building 1,80,000 By Stock 40,000
To Investments 20,000 By Plant & machinery 1,20,000
By Provision for doubtful debts 15,000
By Unrecorded liability 10,000
By Loss transferred to
Partners’ Capital A/cs (in
new ratio)
A = 7,500
B = 3,750
C = 3,750 15,000
2,00,000 2,00,000

14.15 Accounting

A B C A B C
To Memorandum 7,500 3,750 3,750 By Balance b/d 10,00,000 5,00,000 -
Revaluation
To Reserve Fund 4,50,000 2,25,000 2,25,000 By Reserve 6,00,000 3,00,000 -
To A (W.N.3) - - 17,500 By C (W.N.3) 17,500 8,750 -
To B (W.N.3) - - 8,750 By Memorandum 10,000 5,000
Revaluation A/c
To Balance c/d By Cash (Bal. Fig.) 8,40,000
(Refer W.N.2) 11,70,000 5,85,000 5,85,000
16,27,500 8,13,750 8,40,000 8,13,750 8,40,000
16,27,500
Balance Sheet of newly reconstituted firm as on 31.12.2011

Capital Accounts Plant & Machinery 12,00,000
A 11,70,000 Building 9,00,000
B 5,85,000 Sundry Debtors 3,00,000
C 5,85,000 Stock 4,00,000
Reserve Fund 9,00,000 Cash (1,00,000 + 8,40,000) 9,40,000
Sundry Creditors 4,00,000
Bills Payable 1,00,000
37,40,000 37,40,000
Working Notes:
1. Calculation of new profit and loss sharing ratio
C will get 1/4th share in the new profit sharing ratio.
Therefore, remaining share will be 1-1/4 =3/4
Share of A will be 3/4 x 2/3 = 2/4 i.e. 1/2
Share of B will be 3/4 x 1/3 = 1/4
New ratio will be
A:B:C
1/2 : 1/4 : 1/4
2 : 1: 1

2. Calculation of closing capital of C

Closing capitals of A & B after all adjustments are:
A = ` 11,70,000
B = ` 5,85,000
Since B’s capital is less than A’s capital, therefore B’s capital is taken as base.
Hence, C’s closing capital should be ` 5,85,000 (23,40,000 x ¼) i.e. at par with B (as per
new profit and loss sharing ratio)
3. Adjustment entry for goodwill 
Partners Goodwill as per old ratio Goodwill as per new ratio Effect
A 70,000 52,500 + 17,500 -
B 35,000 26,250 + 8,750 -
C - 26,250 - -26,250
1,05,000 1,05,000 26,250 26,250
Adjustment entry will be:
C’s Capital A/c Dr. 26,250
To A’s Capital A/c 17,500
To B’s Capital A/c 8,750
Question 6
P, Q, R are three doctors who are running a Polyclinic. Their capital on 31 st March, 2009 was
` 1,00,000 each. They agreed to admit X, Y and Z as partners w.e.f. 1 st April 2009. The
terms for sharing profits & losses were as follows:
(a) 70% of the visiting fee is to go to the specialist concerned.
(b) 50% of the chamber fee will be payable to the individual specialist.
(c) 40% of operation fee and fee for pathological reports, X-rays and ECG will accrue in
favour of the doctor concerned.
(d) Balance of profit or loss is shared equally.
(e) All the partners are entitled for 6% interest on capital employed.
They further agreed that:
(i) X, Y and Z brought in ` 20,000 each as goodwill. Goodwill is shared by the existing
partners equally.

As per para 36 of AS 10, ‘Accounting for fixed Assets,’ goodwill should be recorded in the books only when some
consideration in money or money’s worth has been paid for it. Therefore, the goodwill raised at the time of admission of C
is to be written off in new ratio among all partners including new partner, C.

14.17 Accounting
(ii) X, Y and Z brought in ` 50,000 each as capital. Each of the original partners also
contributed ` 50,000 by way of capital.
The receipts for the year after admission of new partners were:
Name of Particulars Visiting Fees Chambers Fees Fees for reports,
doctors (`) (`) operation etc.
(`)
P General Physician 1,50,000 2,00,000 -
Q Gynecologist 25,000 1,75,000 1,00,000
R Cardiologist - 1,00,000 75,000
X Child Specialist 1,00,000 1,50,000 -
Y Pathologist - - 1,00,000
Z Radiologist - 40,000 2,00,000
Total 2,75,000 6,65,000 4,75,000
Expenses for the year were as follows:
Particulars `
Medicines, injections and other consumables 1,00,000
Printing and stationery 5,000
Telephone expenses 5,000
Rent 42,000
Power and light 10,000
Nurses salary 20,000
Attendants wages 20,000
Total 2,02,000
Depreciation:
X-Ray machines 15,000
ECG equipments 5,000
Furniture 5,000
Surgical equipments 5,000
Total Depreciation 30,000
You are requested to:
(i) Pass necessary journal entries on admission of partners.
(ii) Prepare the Profit and Loss Account of the polyclinic for the year ended
31st March, 2010.
(iii) Prepare capital accounts of all the partners at the end of the financial year 2009 -10. Also
show the distribution of profit among partners.

Answer
(i) Journal Entries (on admission of partners)
Date Particulars Debit (`) Credit
(`)
1st April, 2009 X’s capital A/c Dr. 20,000
Y’s capital A/c Dr. 20,000
Z’s capital A/c Dr. 20,000
To P’s capital A/c 20,000
To Q’s capital A/c 20,000
To R’s capital A/c 20,000
(Being goodwill adjusted through capital accounts)
Bank A/c Dr. 2,10,000
To X’s capital A/c ( 20,000 + 50,000) 70,000
To Y’s capital A/c ( 20,000 + 50,000) 70,000
To Z’s capital A/c ( 20,000 + 50,000) 70,000
(Being goodwill and capital brought in by new
partners)
Bank A/c Dr. 1,50,000
To P’s capital A/c 50,000
To Q’s capital A/c 50,000
To R’s capital A/c 50,000
(Being capital brought in by existing partners)
(ii) Profit & Loss Account
Particulars (`) Particulars (`)
To Medicines, injections and 1,00,000 By Visiting fee 2,75,000
other consumables
To Printing and stationery 5,000 By Chamber fee 6,65,000
To Telephone expenses 5,000 By Fee for report, 4,75,000
operation etc.
To Rent 42,000
To Power and light 10,000
To Nurses salary 20,000

14.19 Accounting
To Attendants wages 20,000

To Depreciation
X-ray machine 15,000
ECG equipment 5,000
Furniture 5,000
Surgical equipment 5,000 30,000
14,15,000 14,15,000
To Interest on capital (W.N.3) 39,600 By Balance b/d 11,83,000
To Fee payable to partners 7,15,000
To Net profit transferred to
partners’ capital accounts 4,28,400
11,83,000 11,83,000
(iii) Partners’ Capital Accounts
Debit side
Particulars P Q R X Y Z
` ` ` ` ` `
To P, Q & R A/cs - - - 20,000 20,000 20,000
(Goodwill)
To Balance c/d 4,56,600 3,96,600 3,31,600 2,69,400 1,64,400 2,24,400
4,56,600 3,96,600 3,31,600 2,89,400 1,84,400 2,44,400
Credit side
Particulars P Q R X Y Z
` ` ` ` ` `
By Balance b/d 1,00,000 1,00,000 1,00,000 - - -
By X, Y & Z A/cs 20,000 20,000 20,000 - - -
(Goodwill)
By Bank 50,000 50,000 50,000 70,000 70,000 70,000
By Interest on 10,200 10,200 10,200 3,000 3,000 3,000
capital (W.N.3)
By Fee (share) 2,05,000 1,45,000 80,000 1,45,000 40,000 1,00,000
(W.N.1)

By Profit (share)
(W.N.2) 71,400 71,400 71,400 71,400 71,400 71,400
4,56,600 3,96,600 3,31,600 2,89,400 1,84,400 2,44,400
Working Notes:
1. Statement showing distribution of fee among partners
Partner Name Visiting fees Chamber fees Operations fees Total
(70%) (`.) (50%) (`) (40%) (`) ( `)
P 1,05,000 1,00,000 - 2,05,000
Q 17,500 87,500 40,000 1,45,000
R - 50,000 30,000 80,000
X 70,000 75,000 - 1,45,000
Y - - 40,000 40,000
Z - 20,000 80,000 1,00,000
1,92,500 3,32,500 1,90,000 7,15,000
2. Statement showing distribution of profit among partners
`
Profits as per profit and loss account 11,43,400
Less: Fee payable to partners (7,15,000)
Profit to be divided equally among partners 4,28,400
Share of each partner in remaining profit = ` 4,28,400/6 = ` 71,400.
3. Interest on capital employed
P Q R X Y Z
` ` ` ` ` `
Opening balance 1,00,000 1,00,000 1,00,000 - - -
Add: Premium for goodwill
shared equally by old
partners 20,000 20,000 20,000 - - -
Add: Capital brought in
cash 50,000 50,000 50,000 50,000 50,000 50,000
1,70,000 1,70,000 1,70,000 50,000 50,000 50,000
Interest @ 6% 10,200 10,200 10,200 3,000 3,000 3,000
Total interest = ` 39,600.

14.21 Accounting
Note: It is assumed that amount of premium for goodwill brought in by new partners
X, Y and Z has not been withdrawn by old partners P, Q and R and it is still kept in
the business.
Question 7
The Balance Sheet of Amitabh, Abhishek and Amrish as at 31.12.2008 stood as follows:
` `
Capital: Land & Buildings 74,000
Amitabh 60,000 Investments 10,000
Abhishek 40,000 Advertisement 37,800
suspense
Amrish 40,000 1,40,000 Life Policy (at
surrender value):
Creditors 25,800 Amitabh 2,500
General Reserve 8,000 Abhishek 2,500
Investment Amrish 1,000
Fluctuation Reserve 2,400 Stock 20,000
Debtors 20,000
Less: Provision for
doubtful debts (1,600) 18,400
Cash & bank balance 10,000
1,76,200 1,76,200
Amrish died on 31 March, 2009, due to this reason the following adjustments were agreed
upon:
(i) Land and Buildings be appreciated by 50%.
(ii) Investment be valued at 6% less than the cost.
(iii) All debtors (except 20% which are considered as doubtful) were good.
(vi) Stock to be reduced to 94%.
(v) Goodwill to be valued at 1 year‟s purchase of the average profits of the past five years.
(vi) Amrish‟s share of profit to the date of death be calculated on the basis of average profits
of the three completed years immediately preceeding the year of death.

The profits of the last five years are as follows:

Year `
2004 23,000
2005 28,000
2006 18,000
2007 16,000
2008 20,000
1,05,000
The life policies have been shown at their surrender values representing 10% of the sum
assured in each case. The annual premium of `1,000 is payable every year on 1st August.
Give the necessary Journal Entries in the books of account and prepare the Balance Sheet of
the reconstituted firm.
Answer
Journal Entries
Particulars Amount Amount
1. Insurance Company’s A/c Dr. 10,000
To Life Policy A/c 10,000
(Being the policy on the life of Amrish matured on his death)
2. Life Policy A/c Dr. 9,000
To Amitabh’s Capital A/c 3,000
To Abhishek’s Capital A/c 3,000
To Amrish’s Capital A/c 3,000
(Being the transfer of balance in life policy account to all
partners’ capital accounts)
3. Amitabh’s Capital A/c Dr. 12,600
Abhishek’s Capital A/c Dr. 12,600
Amrish’s Capital A/c Dr. 12,600
To Advertisement suspense A/c 37,800
(Being Advertisement suspense standing in the books
written off fully)
4. Land & Buildings A/c Dr. 37,000
To Revaluation A/c 37,000
(Being an increase in the value of assets recorded)
5. Investment Fluctuation Reserve A/c Dr. 600
To Investment A/c 600

14.23 Accounting
(Being reduction in the cost of investment adjusted through

Investment Fluctuation Reserve)
6. Revaluation A/c Dr. 3,600
To Stock A/c 1,200
To Provision for Doubtful Debts A/c 2,400
(Being the fall in value of assets recorded)
7. Amitabh’s Capital A/c Dr. 3,500
Abhishek’s Capital A/c Dr. 3,500
(Being the share of Amrish’s revalued goodwill adjusted
through capital accounts of the remaining partners)
8. Profit & Loss Suspense Account Dr. 1,500
(Being Amrish’s Share of profit to date of death credited to
his account)
To Amrish’s Capital A/c 11,134
(Being the transfer of profit on revaluation)
10. General Reserve A/c Dr. 8,000
Investment Fluctuation Reserve A/c (` 2,400 - ` 600) Dr. 1,800
(Being the transfer of accumulated profits to capital
accounts)
11. Amrish’s Capital A/c Dr. 53,300
To Amrish’s Executor’s A/c 53,300
(Being the transfer of Amrish’s Capital A/c to his Executor’s
A/c)
Balance Sheet
Amithabh’s Capital Account 61,300 Land & Building 1,11,000
Abhishek’s Capital Account 41,300 Life Policy: Amitabh 2,500

Rounded off.

Amrish’s Executor’s Account 53,300 Abhishek 2,500 5,000

Sundry Creditors 25,800 Investments 9,400
Stock 18,800
Debtors 20,000
Less: Provisions (4,000) 16,000
Insurance Company 10,000
Cash & Bank Balance 10,000
Profit and loss Suspense A/c 1,500
1,81,700 1,81,700
Working Notes:
(i) Calculation of Amrish’s Share of Profit
Total profit for last three years ` 18,000 + ` 16,000 + ` 20,000= ` 54,000
Average profit 54,000/3 = ` 18,000
Profit for 3 months = 18,000 x 3/12 = ` 4,500
Amrish’s share of Profit = 4,500 x 1/3 = ` 1,500
(ii) Calculation of Goodwill
Total profits for last five years ` 1,05,000
Average profit 1,05,000/5 = ` 21,000
Goodwill at one year’s purchase ` 21,000 x 1 =` 21,000
Question 8
A, B and C run a business sharing profits and losses in proportion of 2:2:1. On 1st January,
2008 their respective capitals were ` 96,000, ` 90,000 and ` 84,000. On 30th June, 2008 the
following was the position:
`
Creditors 30,000
Furniture 9,000
Book debts 1,80,000
Stock 90,000
Cash in hand and at bank 36,000
The drawings of the partners respectively were ` 12,000, ` 9,000 and ` 6,000 during the half-
year. Each partner is entitled to an interest at the rate of 5% p.a. on capital. Interest on
drawings was calculated as ` 600 for A, ` 450 in case of B and ` 300 in case of C.

14.25 Accounting

(i) A statement of affair as on 30 th June, 2008.
(ii) Calculate the profits for the half-year ending on 30 th June, 2008 and allocate the same
amongst the partners. Also calculate capital of each partner as on 30 th June, 2008.
Answer
(i) Statement of Affairs of A, B & C
As on 30th June, 2008
Capital (Bal. Fig.) 2,85,000 Furniture 9,000
Creditors 30,000 Stock 90,000
Book debts 1,80,000
Cash in hand and at bank 36,000
3,15,000 3,15,000
(ii) Statement showing Profit and Loss of partners A, B and C for six months ending
on 30th June, 2008
Particulars `
Capital as on 30th June, 2008 2,85,000
Add: Drawings of A, B and C (` 12,000 + ` 9,000 + ` 6,000) 27,000
Add: Interest on drawings of A, B and C (` 600 + ` 450 + ` 300) 1,350
3,13,350
Less: Interest on capital of A, B and C (` 2,400+` 2,250+` 2,100) (6,750)
3,06,600
Less: Capital as on 1st January, 2008 of A, B and C
(` 96,000 + ` 90,000 + ` 84,000) (2,70,000)
Net Profit 36,600
Statement showing allocation of profits and other adjustments in the capital
accounts of A, B and C
Particulars A ( `) B ( `) C (`.)
Capital as on January, 2008
1st 96,000 90,000 84,000
Add: Net profit in the ratio of 2:2:1 14,640 14,640 7,320
Add: Interest on capital @ 5% p.a. for 6 months 2,400 2,250 2,100
1,13,040 1,06,890 93,420
Less: Drawings (12,000) (9,000) (6,000)

Less: Interest on drawings (600) (450) (300)

Capital as on 30 th June, 2008 1,00,440 97,440 87,120
Question 9
„A‟ and „B‟ are partners sharing Profits and Losses in the ratio of 3:1. Their capitals were
` 3,00,000 and ` 2,00,000 respectively. As from 1 st April, 2009, it was agreed to change the
profit sharing ratio to 3:2. According to the partnership deed, goodwill should be valued at two
years‟ purchase of the average of three years‟ profits. The profits of the previous three years
ending 31 st March were:
2007- ` 1,50,000; 2008 - ` 2,50,000 and 2009 - ` 2,00,000. Pass the necessary journal entry
to give effect to the above arrangement in the capital accounts of the partners.
Answer
Journal Entry
` `
B’s Capital A/c Dr. 60,000
(Being the adjusting entry for goodwill, passed due to
change in profit and loss sharing ratio, through capital
accounts of partners)
Working Notes:
1. Calculation of Goodwill
`.
Profit for the year 2007 1,50,000
Total profit of 3 years 6,00,000
6,00,000
Average Profit =  ` 2,00,000
3
Goodwill = ` 2,00,000 × 2 = ` 4,00,000
2. Effect of change in Profit Sharing Ratio
Old ratio of A and B = 3 : 1
New ratio of A and B = 3 : 2
Gaining Ratio = New Ratio – Old Ratio

14.27 Accounting
3 3 12  15 3 3
For A = - = = i.e. A loses by
5 4 20 20 20
2 1 85 3 3
For B = - = = i.e. B gains by
5 4 20 20 20
3. Amount of compensation payable by B to A
3
 ` 4,00,000  ` 60,000
20
Question 10
Good, Better and Best are in partnership sharing profits and losses in the ratio 3:2:4. Their
capital account balances as on 31st March, 2012 are as follows:
`
Good 1,70,000 (Cr)
Better 1,10,000 (Cr)
Best 1,22,000 (Cr)
Following further information provided:
(1) ` 22,240 is to be transferred to General Reserve.
(2) Good, Better and Best are paid monthly salary in cash amounting ` 2,400, ` 1,600
and ` 1,800 respectively.
(3) Partners are allowed interest on their closing capital balance @ 6% p.a. and are
charged interest on drawings @ 8% p.a.
(4) Good and Best are entitled to commission @ 8% and 10% respectively of the net
profit before making any appropriation.
(5) Better is entitled to commission @ 15% of the net profit before charging Interest on
Drawings but after making all other appropriations.
(6) During the year Good withdraw ` 2,000 at the beginning of every month, Better
` 1,750 at the end of every month and Best ` 1,250 at the middle of every month.
(7) Firm's Accountant is entitled to a salary of ` 2,000 per month and a commission of
12% of net profit after charging such commission.
The Net Profit of the firm for the year ended on 31st March, 2012 before providing for any of
the above adjustments was ` 2,76,000.
You are required to prepare Profit and Loss Appropriation Account for the year ended on
31st March, 2012

Answer
Profit and Loss Appropriation Account
To General reserve 22,240 By Net Profit (See W.N.1) 2,25,000
To Salaries to partners By Interest on drawings (W.N.3) 2,410
Good 28,800 Good 1,040
Better 19,200 Better 770
Best 21,600 69,600 Best 600
To Interest on Capital
Good 10,200
Better 6,600
Best 7,320 24,120
To Commission to partners
Good 18,000
Better 10,281
(W.N.4)
Best 22,500 50,781
To Partners’ Capital A/cs
(profit)
Good 20,223
Better 13,482
Best 26,964 60,669
2,27,410 2,27,410
Working Notes:
1. Profit and Loss Account
To Salary (Firm’s Accountant) 24,000 By Profit 2,76,000
To Commission (Firm’s Accountant) (W.N.2) 27,000
To Net Profit transferred to P&L 2,25,000
Appropriation A/c
2,76,000 2,76,000

14.29 Accounting
2. Commission of Firm’s Accountant

Profit after salary of firm's accountant  2,76,000 - 24,000  12%
=  12% = = ` 27,000
100+12  % 100+12  %
3. Interest on Drawings
`
Good (at the beginning of every month) (` 2,000 x 6.5 x 8%) 1,040
Better (at the end of every month) (` 1,750 x 5.5 x 8%) 770
Best (at the middle of every month) (` 1,250 x 6 x 8%) 600
2,410
4. Commission of Better
Commission of Better = [Net profit for appropriation (excluding interest on drawings) - General
reserve – Interest on capital - Salaries to partners – Commission to Good and Best] x 15%
Commission to Better = ` [2,25,000 – 22,240 – 24,120 – 69,600– 18,000 – 22,500] x 15%
= ` 68,540 x 15% = ` 10,281
Question 11
X, Y and Z are partners sharing profits an losses in the ratio of 4:3:2 respectively. On
31st March, 2012 Y retires and X and Z decide to share profits and losses in the ratio of 5:3.
Then immediately, W is admitted for 3/10 th shares in profits, 2/3 rd of which was given by X and
rest was taken by W from Z. Goodwill of the firm is valued at ` 2,16,000. W brings required
amount of goodwill.
Give necessary Journal Entries to adjust goodwill on retirement of Y and admission of W if
they do not want to raise goodwill in the books of accounts.
Answer
Journal Entries
Date Particulars L.F. Dr. (`) Cr.(`)
31.3.12 X’s capital A/c Dr. 39,000
Z’s capital A/c Dr. 33,000
To Y’s capital A/c (3/9 х ` 2,16,000) 72,000
(Being Y’s share of goodwill adjusted in the capital
accounts of gaining partners in their gaining ratio 13:11
– Refer Working Note.)
Cash A/c Dr. 64,800
To W’s capital A/c (3/10 х ` 2,16,000) 64,800
(Being the amount of goodwill brought in by W)

W’s capital A/c Dr. 64,800

To X’s capital A/c 43,200
To Z’s capital A/c 21,600
(Being the goodwill credited to sacrificing partners in
their sacrificing ratio 2:1)
Working Note:
Calculation of gaining ratio of X and Z

Gaining ratio = New ratio – Old ratio
For X = 5/8-4/9 = 13/72
Z = 3/8-2/9 = 11/72
Gaining ratio = 13:11
Question 12
A and B are in partnership sharing profits and losses in the ratio of 3:2. The capitals of A and B
are ` 80,000 and ` 60,000 respectively. They admit C as a partner who contributes ` 35,000 as
capital for 1/5th share of profits to be acquired equally from both A & B. The capital accounts of
old partners are to be adjusted on the basis of the proportion of C‟s capital to his share in the
business. Calculate the amount of actual cash to be paid off or brought in by the old partners for
the purpose and pass the necessary journal entries.
Answer
Share of profit taken from A and B each= 1/5 x 1/2 = 1/10 each
Calculation of New Profit Sharing Ratio
A B
Existing ratio 3/5 2/5
Less: Share of profit transferred to C (1/10) (1/10)
New share 5/10 3/10
New profit sharing ratio of A:B:C = 5/10 : 3/10 : 2/10
Calculation of Total Capital of the Reconstituted Firm
Capital brought in by C for 1/5 th share = ` 35,000
Total Capital = ` 35,000 x (5/1) = ` 1,75,000

14.31 Accounting
Calculation of Actual Cash to be paid or brought in by old partners

A B C
(`) (`) (`)
New capital of ` 1,75,000 distributed in the ratio 5:3:2 87,500 52,500 35,000
Less: Adjusted old capital of A & B (80,000) (60,000) -
Cash brought in 7,500 35,000
Cash to be paid (7,500)
Journal Entries
Dr. Cr.
Particulars L.F. Amount Amount
` `
Cash A/c Dr. 7,500
(Being the shortage of capital brought in cash by A)
B’s Capital A/c Dr. 7,500
To Cash A/c 7,500
(Being the excess capital withdrawn by B)
Note: Entries for cash brought in and paid off only, have been passed.
Question 13
Arun and Varun were partners sharing profits in the ratio of 13 : 11 respectively. On
1st April, 2012 they admitted Tarun as a new partner on the following conditions:
(i) All partners would share profits equally in the new firm.
(ii) Tarun would bring in ` 52,000 as his capital and ` 36,000 as his share of goodwill. No
goodwill account appeared in the books of the firm at the time of Tarun's admission and it
was decided not to open any goodwill account. Adjustment for Tarun's goodwill being
made through capital accounts.
Pass journal entries to record all the transactions on Tarun's admission.
Clearly show the calculation of ratio of sacrifice.
Answer
Journal Entries on Tarun’s admission
Year 2012 Dr. Cr.
` `
1st April Bank A/c Dr. 88,000
To Tarun’s Capital A/c (52,000 + 36,000) 88,000

(Being amount brought by Tarun towards his capital

and share of goodwill)
Tarun’s Capital A/c Dr. 36,000
To Arun’s Capital A/c 22,500
To Varun’s Capital A/c 13,500
(Being Tarun’s share of goodwill in the firm ` 36,000, has
been credited to the old partners in the sacrificing ratio 5:3)
Working Note:
Calculation of Sacrificing Ratio
Old Ratio New Ratio Sacrificing Ratio (Old – new)
Arun 13/24 1/3 (13/24 – 1/3) = 5/24
Varun 11/24 1/3 (11/24 – 1/3) = 3/24
Tarun -- 1/3 --
Therefore, sacrificing ratio is 5:3.
Question 14
Atul, Balbir and Chatur were carrying on a business in partnership sharing profits in the ratio
of 5 : 3 : 2 respectively. On 31st March, 2012 their Balance Sheet stood as follows:
Liabilities ` Assets ` `
Atul's Capital 6,25,000 Goodwill 80,000
Balbir's Capital 3,75,000 Land and Buildings 7,00,000
Chatur's Capital 2,50,000 Furniture 1,65,000
General Reserve 1,00,000 Stock 2,86,000
Trade Creditors 2,10,000 Trade Debtors 1,80,000
Less: Provision for
(3,600) 1,76,400
Doubtful Debts
Total 15,60,000 Total 15,60,000
Atul retired on the above mentioned date and partners agreed that :
(i) The current value of goodwill be taken to be equal to the book value of the asset.
(ii) Land and Buildings be considered worth ` 9,00,000.
(iii) The provision for bad debts on trade debtors be raised to 5%.
(iv) Provision be made for compensation of ` 5,000 to an ex-employee.

14.33 Accounting
(v) Half of the amount due to Atul be paid immediately in cash and the balance be treated as
10% loan, repayable within 3 years.
In order to facilitate cash payment to Atul, Balbir and Chatur brought in ` 3,00,000 in the ratio
of 3 : 2 respectively.
Prepare Revaluation Account, the Capital Accounts of all the partners and Bank Account.
Also draw the Initial Balance Sheet of Balbir and Chatur, immediately after Atul's retirement
after writing off goodwill.
Answer
Revaluation Account
` `
To Provision for doubtful debts 5,400 By Land and Buildings 2,00,000
[(5% of 1,80,000) – 3,600]
To Provision for compensation 5,000
To Partners’ Capital Accounts
(Profit)
Atul 94,800
Balbir 56,880
Chatur 37,920 1,89,600
2,00,000 2,00,000
Particulars Atul Balbir Chatur Particulars Atul Balbir Chatur
` ` ` ` ` `
To Goodwill By Balance b/d 6,25,000 3,75,000 2,50,000
(5:3:2) 40,000 24,000 16,000
To Cash A/c 3,84,900 By General
Reserve 50,000 30,000 20,000
To 10% Loan 3,84,900 By Revaluation 94,800 56,880 37,920
A/c
To Atul’s By Balbir’s &
Capital A/c - 24,000 16,000 Chatur’s
Capital
Accounts 40,000
To Balance c/d By Cash A/c 1,80,000 1,20,000
5,93,880 3,95,920
8,09,800 6,41,880 4,27,920 8,09,800 6,41,880 4,27,920
Bank Account
` `
To Balance b/d 1,52,600 By Atul’s Capital A/c 3,84,900

To Balbir’s capital A/c 1,80,000 By Balance c/d 67,700

To Chatur’s capital A/c 1,20,000
4,52,600 4,52,600
Balance Sheet of Balbir and Chatur
as at 31.03.2012 (after Atul’s retirement)
Capital Accounts: Land and Buildings 9,00,000
Balbir 5,93,880 Furniture 1,65,000
Chatur 3,95,920 Stock 2,86,000
10% Loan from Atul 3,84,900 Trade Debtors 1,80,000
Trade Creditors 2,10,000 Less: Provision for doubtful
Provision for debts (9,000) 1,71,000
Compensation 5,000 Cash at Bank 67,700
15,89,700 15,89,700
Question 15
P, Q and R were carrying on a business in partnership, sharing profits and losses in the ratio
of 5 : 3 : 2 respectively. The firm earned a profit of ` 3,60,000 for the accounting year ended
31st March, 2012 on which date the firm's Balance Sheet stood as follows:
Balance Sheet as at 31 st March, 2012
P's Capital 7,00,000 Freehold Land and Building 8,00,000
Q's Capital 5,70,000 Machinery 3,50,000
R's Capital 4,30,000 Furniture & Fixtures 1,02,000
Creditors 79,400 Stock 2,98,800
Outstanding Expenses 4,900 Debtors 1,60,000
Cash at Bank 73,500
Total 17,84,300 Total 17,84,300
P died on 31st August, 2012. According to firm's partnership deed, in case of death of a
partner:-
(i) Assets and Liabilities have to be revalued by an independent valuer.
(ii) Goodwill is to be calculated at two years' purchase of average profits for the last three
completed accounting years and the deceased partner's capital account is to be credited
with his share of goodwill.

14.35 Accounting
(iii) The share of the deceased partner in the profits for the period between end of the
previous accounting year and the date of death is to be calculated on the basis of the
previous accounting year's profits. Post death of P, Q & R will share profit in the ratio of
3 : 2.
Profits for the accounting years 2009-2010 and 2010-2011 were as follows :-
`
For the year ended 31st March, 2010 2,90,000 .
For the year ended 31st March, 2011 3,40,000
Drawings by P from 1st April, 2012 to the date of his death totalled ` 46,000.
On revaluation, Freehold Land and Building was appreciated by ` 1,00,000; Machinery was
depreciated by ` 10,000 and a Provision for Bad Debts was created @ 5% on Debtors as on
31st March, 2012. P's sole heir was given ` 5,00,000 immediately and the balance along with
interest @ 12% per annum was paid to him on 31st March, 2013.
Prepare Revaluation Account, P's Capital Account and P's Heir Account, giving important
working notes.
Answer
Revaluation Account
Particulars ` ` Particulars `
To Machinery 10,000 By Freehold Land &
To Provision for doubtful Building 1,00,000
debts( 5% of 1,60,000) 8,000
To Capital accounts:
P 41,000
Q 24,600
R (Profit transferred) 16,400 82,000
1,00,000 1,00,000
P’s Capital Account
To Drawings 46,000 By Balance b/d 7,00,000
To P’s heir 11,00,000 By Q’s capital A/c 1,98,000
(Balance transferred) By R’s capital A/c 1,32,000
By Profit and Loss Suspense A/c 75,000
By Revaluation A/c 41,000
11,46,000 11,46,000

P’s Heir Account

31.08.2012 To Bank A/c 5,00,000 31.08.2012 By P’s Capital A/c 11,00,000
31.03.2013 To Bank A/c 6,42,000 31.03.2013 By Interest A/c
 7
 6,00,000  12%   42,000
 12 
11,42,000 11,42,000
Working Notes:
1. Calculation of gaining ratio of Partners Q and R
New share Old share Gaining share Sacrificing share
P 5/10 5/10
Q 3/5 3/10 3 3 63 3
 = =
5 10 10 10
R 2/5 2/10 2 2 42 2
 = =
5 10 10 10
2. Calculation of Goodwill
`
2009-10 2,90,000
2010-11 3,40,000
2011-12 3,60,000
9,90,000
Average Profit = 9,90,000/3 = ` 3,30,000
Goodwill = 3,30,000 x 2 = ` 6,60,000
5
Share of P in goodwill = 6,60,000  = ` 3,30,000
10
Adjustment for P’s share of goodwill through Q’s and R’s capital accounts (in their
gaining ratio 3:2) :
Q’s capital A/c (3,30,000 x 3/5) ` 1,98,000
R’ s capital A/c (3,30,000 x 2/5) ` 1,32,000
3. Share of P in Profits for the period between 1.4.2012 to 31.8.2012 i.e. till the date of
death
1st April, 2012 to 31 st August, 2012 = 5 months
Profit for year 2011-12 = ` 3,60,000

14.37 Accounting
5
Estimated profit for 5 months = 3,60,000 x ` 1,50,000
12
5
Share of P = 1,50,000 x ` 75,000
10
Question 16
Pathak, Quereshi and Ranjeet were partners sharing profits in the ratio of 7 : 5 : 3
respectively. On 31st March, 2013 Quereshi retired when the firm's Balance Sheet was as
follows :
Capital Accounts : Land and Building 10,00,000
Pathak 8,50,000 Plant and Machinery 4,65,000
Quereshi 6,20,000 Furniture, Fixture and Fittings 2,30,100
Ranjeet 3,70,000 Stock 1,82,200
General Reserve 2,25,000 Trade Debtors 2,00,000
Trade Creditors 1,13,000 Less : Provision for Bad Debts (6,000) 1,94,000
Total 21,78,000 Total 21,78,000
It was agreed that :
(i) Land & Building be appreciated by 20%.
(ii) Plant & Machinery be depreciated by 10%.
(iii) Provision for Bad Debts be made equal to 4% of Trade Debtors.
(iv) Outstanding repairs bill amounting to ` 1,500 be recorded in the books of account.
(v) Goodwill of the firm be valued at ` 3,00,000 and Quereshi's capital account be
credited with his share of goodwill without raising goodwill account.
(vi) Half of the amount due to Quereshi be immediately paid to him by means of a cheque
and the balance be treated as a loan bearing interest @ 12% per annum.
After Quereshi's retirement, Pathak and Ranjeet admitted Swamy as a new partner with effect
from 1st April, 2013. Pathak, Ranjeet and Swamy agreed to share profits in the ratio of 2 : 1 : 1
respectively. Swamy brought patents valued at ` 20,000 and ` 3,80,000 in cash including
payment for his share of goodwill as valued by the old firm. The entire amount of ` 4,00,000
was credited to Swamy's Capital Account. Adjustments were made in the capital accounts for
Swamy's share of goodwill.
(a) Pass journal entries for all the above transactions without any narration, and
(b) Prepare the capital account of all the partners.

Answer
(a) Journal Entries
31st March, 2013
` `
1 Land and Building Dr. 2,00,000
To Revaluation A/c 2,00,000
To Plants and Machinery 46,500
3 Revaluation A/c Dr 3,500
To Provision for bad debts 2,000
[(` 2,00,000 x 4%) - ` 6000]
To Provision for Outstanding repair bills 1,500
4 Pathak’s Capital A/c Dr. 70,000
Ranjeet’s Capital A/c Dr. 30,000
To Quereshi’s Capital A/c 1,00,000
5 Revaluation A/c Dr. 1,50,000
To Pathak’s Capital A/c 70,000
To Quereshi’s Capital A/c 50,000
To Ranjeet’s Capital A/c 30,000
6 General reserve A/c Dr. 2,25,000
To Pathak’s Capital A/c 1,05,000
To Quereshi’s Capital A/c 75,000
7 Quereshi’s Capital A/c Dr. 8,45,000
To Quereshi’s Loan A/c 4,22,500
8 Patents Dr. 20,000
Cash A/c Dr. 3,80,000
To Swamy’s Capital A/c 4,00,000
9 Swamy’s Capital A/c (` 3,00,000/4) Dr. 75,000
To Pathak’s Capital A/c 60,000

(b) Capital Accounts of partners
14.39
Amount Amount
Pathak Quereshi Ranjeet Swamy Pathak Quereshi Ranjeet Swamy
Accounting
31.3.13 31.3.13
To Quereshi 70,000 30,000 By Bal. b/d 8,50,000 6,20,000 3,70,000
By general reserve 1,05,000 75,000 45,000
To Bank A/c 4,22,500 By Pathak & 1,00,000
Ranjeet
To Loan A/c 4,22,500 By Revaluation A/c 70,000 50,000 30,000
To Bal. c/d 9,55,000 4,15,000
10,25,000 8,45,000 4,45,000 10,25,000 8,45,000 4,45,000
1.4.13 1.4.13
To Pathak 60,000 By Bal. b/d 9,55,000 4,15,000
To Ranjeet 15,000 By Patents 20,000
To Bal. c/d 10,15,000 4,30,000 3,25,000 By Cash 3,80,000
By Swamy 60,000 15,000
10,15,000 4,30,000 4,00,000 10,15,000 4,30,000 4,00,000

Working Notes:
1. Calculation of Gaining ratio after retirement of Quereshi on 31st March, 2013
Pathak : Quereshi : Ranjeet Pathak : Ranjeet
Old Ratio 7/15 : 5/15 : 3/15 New Ratio 7/10 : 3/10
Gain of Pathak New Ratio - Old Ratio
7/10 - 7 / 15
(105 – 70) / 150
35 / 150
Gain of Ranjeet 3/10 – 3/15 = (45 – 30)/150 = 15/150
Gaining Ratio = 35 : 15 =7:3
2. Calculation of Sacrificing ratio of Pathak and Ranjeet at time of admission of Swamy
1st April, 2013 7:3 (ratio between old partners)
2 7 1 3
New ratio 2:1:1  
4 10 4 10
10 - 14 5-6
20 20
4 1
=
20 20
Sacrificing ratio 4:1
Question 17
The Balance Sheet of Amit, Bhushan and Charan, who share profits and losses as 3 : 2 : 1
respectively, as on 01.04.2013 is as follows:
(`) (`)
Capital Accounts: Amit 1,80,000 Machinery 1,50,000
Bhushan 1,60,000 Furniture 1,50,000
Charan 1,40,000 Debtors 80,000
Current Accounts: Bhushan 16,000 Less: Provision for 4,000 76,000
doubtful Debts
Creditors 1,20,000 Stock 2,10,000
Cash 20,000

14.41 Accounting
Current Account: 10,000

-
Charan
6,16,000 6,16,000
1
Dev is admitted as a partner on the above date for th share in the profit and loss. Following
5
are agreed upon:
(1) The profit and loss sharing ratio among the old partners will be equal.
(2) Dev brings in ` 1,50,000 as capital but is unable to bring the required amount of premium
for goodwill.
(3) The goodwill of the firm is valued at ` 60,000.
(4) Assets and liabilities are to be valued as follows:
Machinery ` 2,06,000 : Furniture ` 1,28,000 : Provision for doubtful debts @ 10% on
debtors.
(5) Necessary adjustments regarding goodwill and Profit / loss on revaluation are to made
through the Partner's Current Accounts.
(6) It is decided that the revalued figures of assets and liabilities will not appear in the
Balance Sheet of the new firm.
(7) Capital Accounts of the old partners in the new firm should be proportionate t o the new
profit and loss sharing ratio, taking Dev's Capital as base. The existing partners will not
bring cash for further capital. The necessary adjustments are to be made through the
partner‟s Current Account.
Prepare Partner's Capital & Current Account, and the Balance Sheet of the new firm after
admission.

Answer
In the books of Firm
Amit Bhushan Charan Dev Amit Bhushan Charan Dev
To Balance 2,00,000 2,00,000 2,00,000 1,50,000 By Balance b/d 1,80,000 1,60,000 1,40,000
c/d
(Working By Bank A/c - - - 1,50,000
Note 1)
By Partners’ Current A/cs 20,000 40,000 60,000
(bal. fig)
2,00,000 2,00,000 2,00,000 1,50,000 2,00,000 2,00,000 2,00,000 1,50,000
Issues In Partnership Accounts 14.42

Partners’ Current Accounts
Amit Bhushan Charan Dev Amit Bhushan Charan Dev
To Balance b/d - - 10,000 - By Balance b/d - 16,000 - -
To Memorandum 8,000 8,000 8,000 6,000 By Memorandum 15,000 10,000 5,000 -
Revaluation A/c Revaluation
To Amit and - - 6,000 12,000 By Dev and Charan 14,000 4,000 - -
Bhushan (Goodwill
(Goodwill adjustment) adjustment)
To Partners Capital 20,000 40,000 60,000 - By Balance c/d - 18,000 79,000 18,000
A/cs
To Balance c/d 1,000 - -
29,000 48,000 84,000 18,000 29,000 48,000 84,000 18,000

14.43 Accounting
Balance Sheet of new firm

After Dev’s Admission
Capital Accounts: A/cs Machinery 1,50,000
Amit 2,00,000 Furniture 1,50,000
Bhushan 2,00,000 Stock 2,10,000
Charan 2,00,000 Debtors 80,000
Dev 1,50,000 7,50,000 Less: Provision for doubtful debts 4,000 76,000
Current Account: Amit 1,000 Cash 1,70,000
Creditors 1,20,000 Current Accounts:
Bhushan 18,000
Charan 79,000
Dev 18,000
1,15,000
8,71,000 8,71,000
Working Notes:
1. Dev. joins the business for 1/5 th share and brings ` 1,50,000 as capital. Thus, total
capital of new firm will be ` 7,50,000 (1,50,000 × 5). Total capital of Amit, Bhushan &
Charan will be ` 6,00,000 (7,50,000 – 1,50,000) which will be shared by them equally i.e.
2,00,000 each.
2. Calculation of New profit sharing ratio
Amit Bhushan Charan Dev
4 1 4 1 4 1 1
  
5 3 5 3 5 3 5
4 4 4 3
15 15 15 15
4:4:4:3
3. Adjustment of Goodwill
Sacrificing/gaining ratios of old partners
Amit Bhushan Charan Dev
4 3 4 2 4 1 1
- - -
15 6 15 6 15 6 5
24  45 24  30 24  15
90 90 90

21 6 9 18
Sacrifice Sacrifice Gain Gain
90 90 90 90
Entry for adjustment for goodwill of ` 60,000
Charan Dr. 6,000
Dev Dr. 12,000
To Amit 14,000
To Bhushan 4,000
(Being goodwill adjusted in partners sacrificing/gaining ratios)
4. Memorandum Revaluation A/c

Amount Amount
` `
To Furniture 22,000 By Machinery 56,000
To Partners’ Current A/cs:
Amit 15,000
Bhushan10,000
Charan 5,000 30,000
56,000 56,000
To Machinery 56,000 By Furniture 22,000
By Provision for doubtful debts 4,000
By Partners’ Current A/cs:
Amit 8,000
Bhushan 8,000
Charan 8,000
Dev 6,000 30,000
56,000 56,000
Question 18
A and B who carry on partnership business in the name of M/s. AB Ltd., closes their firm's
account as on 31 st March each year.
Their partnership agreement provides:
(i) Profit Loss sharing, A : 2/3 and B : 1/3.
(ii) On retirement or admission of Partner:

14.45 Accounting
(a) lf the change takes place during any accounting year, such partner's share of profits
or losses for the period up to retirement or from admission, is to be arrived at by
apportionment on a time basis except otherwise stated for specific item(s).
(b) No account for Goodwill is to be maintained in the firm's books.
(c) Any balance due to an outgoing partner is to carry interest @ 9% p.a. from the date
of his retirement to the date of payment.
The Trial Balance of the firm as on March 31 st, 2015 was as follows:
Particulars Amount in Amount in
(`) (`)
Capital Account
A - 24,000
B - 12,000
C – Cash brought in on 30-09-2014 - 9,000
Plant and machinery at cost 22,000 -
Depreciation provision up to 31-03-2014 - 4,400
Motor car at cost 30,000 -
Depreciation provision up to 31-03-2014 - 6,000
Purchases 84,000 -
Stock as on 31st March 2014 15,500 -
Salaries 18,000 -
Debtors 5,400 -
Sales - 1,20,000
Travelling expenses 800
Office Maintenance 1,200
Conveyance 500
Trade Expenses 1,000
Creditors - 10,100
Rent and Rates 3,000 -
Bad Debts 900 -
Cash in hand and at Bank 3,200 -
1,85,500 1,85,500
'A‟ retired from the firm on 30 th September, 2014 and on the same day 'C' an employee of the
firm was admitted as partner. Further Profits or Losses shall be shared - B : 3/5 and C : 2/5.

Necessary Accounting Entries adjustments were pending up to 31-03-2015. You are given the
following further information:
(i) The value of firm's goodwill as on 30 th September, 2014 was agreed to ` 15,000.
(ii) The stock as on 31 st March, 2015 was valued at ` 18,550.
(iii) Partners' drawings which are included in Salaries : A - ` 2,000, B -` 3,000 and C - ` 1,000.
(iv) Salaries also includes ` 1,500 paid to C prior to his being admitted as a partner.
(v) Bad-debts of ` 500 related to the period upto 30 th September, 2014.
(vi) As on 31st March, 2015 rent paid in advance amounted to ` 600 and trade expenses
accrued amounted to ` 250.
(vii) Provision is to be made for depreciation on Plant and Machinery and on Motor car at the
rate of 10% p.a. on cost.
(viii) A bad-debts provision, specifically attributable to the second half of the year, is to be
made @ 5% on debtors as on March 31 st 2015.
(ix) Amount payable to A on retirement remained unpaid till March 31 st 2015.
(a) The Trading and Profit & Loss Account for the year ended March 31 st 2015.
(b) Partners' Capital Account for the year ended March 31 st 2015.
(c) The Balance Sheet as on that date.
Answer
Trading and Profit and Loss A/c
` `
Sales 1,20,000
Less: Cost of goods sold:
Opening Stock 15,500
Purchases 84,000
99,500
Less: Closing stock (18,550) (80,950)
Gross Profit 39,050

14.47 Accounting
Half year to 30th September Half year to 31st March

2014 2015
` ` ` `
Gross profit allocated on time basis 19,525 19,525
Less: Expenses
Salaries (W.N. 1) 6,750 5,250
Travelling expenses 400 400
Office maintenance 600 600
Conveyance 250 250
Trade expenses (W.N.2) 625 625
Rent and rates (W.N. 3) 1,200 1,200
Bad debts 500 400
Provision for doubtful debts - 270
Depreciation:
Plant and machinery 1,100 1,100
Motor vehicles 1,500 1,500
Interest on loan (W.N. 4) - (12,925) 1,638 (13,233)
6,600 6,292
Appropriation of profits:
Remaining profits
A and B (2:1) 4,400
2,200 6,600 3,775
B and C (3:2) 2,517 6,292

A B C A B C
` ` ` ` ` `
To A (goodwill) 4,000 6,000 By Balance b/d 24,000 12,000 -
To Drawings 2,000 3,000 1,000 By Cash - - 9,000
To Transfer to 36,400 - - By B (Goodwill) 4,000 - -
loan a/c By C (Goodwill) 6,000 - -
To Balance c/d - 10,975 4,517 By Profit 4,400 5,975 2,517
38,400 17,975 11,517 38,400 17,975 11,517


(`) (`)
Capital A/c Plant & Machinery
B 10,975 Less: Depreciation
C 4,517 15,492 (22,000 – 6,600) 15,400
A’s Loan 36,400 Motor Car
Interest 1,638 38,038 Less: Depreciation
(30,000 – 9,000) 21,000
Current Liabilities Current Assets:
Creditors 10,100 Stock 18,550
Out-standing Trade expenses 250 Debtors (Less: Provision (5,400-270) 5,130
Prepaid Rent 600
Balance at bank 3,200
Total 63,880 63,880
Working Notes:
` `
1. Salaries
Total as per trial balance 18,000
Less: Partners’ Drawings - A 2,000
B 3,000
C 1,000 (6,000)
12,000
Less: C’s Salary upto 30.09.2014 1,500
10,500
Upto Upto
Allocation on time basis 30.09.2014 31.03.2015
5,250 5,250
Add: C’s salary upto 30.09.2014 1,500 0
6,750 5,250
2. Trade Expenses
Add: Accrual 250
1,250

14.49 Accounting
Allocation: on time basis ( 50 : 50) 625 625

3. Rent and rates
Less: Rent paid in advance (600)
2,400
Allocation: on time basis ( 50 : 50) 1,200 1,200
4. Interest on loan account of ‘A’
Balance in Capital a/c as per trial balance 24,000
Less: Drawings (2,000)
Add: Share of Goodwill 10,000
Share in Profit 4,400 14,400
36,400
Interest payable @9% p.a. from 01.10.2014 to
31.03.2015 (6 months)
36,400 x 6/12 x 9/100 = 1,638
Adjustment of A’s share of Goodwill
Value of goodwill ` 15,000
Net entry for Goodwill
B’s Capital account Dr. ` 4,000
C’s Capital account Dr. ` 6,000
To A’s Capital account ` 10,000
(A’s share in goodwill adjusted to existing partners in their gaining ratio)
Question 19
Ms. Naina, Ms. Radha and Ms. Khushi were partners in a firm sharing profits and losses in the
ratio of 4:3:2. Balance Sheet of the firm as on 31-03-2014 was as follows:
Liabilities Amount (`) Assets Amount (`)
Capital Accounts Plant & Machinery 4,26,000
Naina 3,00,000 Stock 1,85,800
Radha 2,25,000 Debtors 1,30,500
Khushi 1,50,000 Bank Balance 92,700
Current Accounts:
Naina 25,000
Radha 12,500

Khushi 18,750
Creditors 1,03,750
8,35,000 8,35,000
On 1st April 2014, Ms. Naina retired. On her retirement goodwill is valued at ` 1,80,000. Ms.
Radha and Ms. Khushi do not wish to raise Goodwill account in the books.
Ms. Naina drew her balance of current account on 2 nd April, 2014 and it is agreed to pay
balance of her capital account over a period of two years by half yearly installments with
interest at 10% per annum.
On 1st Oct. 2014 Ms. Asmita (Daughter of Radha) admitted as a partner. Ms. Radha
surrendered one third of her share of profit and loss in favour of Asmita and also transferred
one third of her capital to Ms. Asmita. Ms. Asmita was manager in the firm with annual salary
of ` 16,000, prior to admission as a partner.
The other bank transactions during the financial year 2014-15 were as follows:
(`)
(1) Payment to creditors 7,75,000
(2) Received from debtors 11,25,000
(3) Expenses paid 11,250
(4) Asmita‟s salary paid 8,000
(5) Partners‟ Drawing :
Ms. Radha 50,000
Ms. Khushi 41,250
Ms. Asmita 11,250
(6) First installment with interest paid to Ms. Naina on 1st Oct, 2014.
(7) Plant & Machinery sold at ` 9,000 on 3rd April, 2014 (Cost ` 10,000 & Book value
` 7,000).
(8) Balances as on 31st March, 2015: Debtors ` 1,50,000, Creditors for purchases
` 1,25,000, Creditors for expenses ` 10,000 and Stock ` 1,71,250.
(9) Depreciation is to be written off on Plant & Machinery ` 30,350.
(10) Second installment with interest paid to Ms. Naina on 1st April, 2015.
(a) Ms. Naina's loan account,
(b) Partners‟ capital accounts,
(c) Partners' current accounts,

14.51 Accounting
(d) Bank Account, and

(e) Balance Sheet as on 31st March, 2015 in the books of the firm.
Answer
(a) Naina’s Loan A/c
` ` `
1.10.2014 To Bank 1,14,000 1.4.2014 By Capital A/c 3,80,000
[95,000(3,80,000/4) 30.9.2014 By Interest – For 6 19,000
+ 19,000)] months on
3,80,000
31.3.2015 To Balance c/d 2,99,250 31.3.2015 By Interest –For 6
months on
` 2,85,000 @ 10%
p.a 14,250
4,13,250 4,13,250
By Balance b/d 2,99,250
(b) Partners’ Capital Accounts
Particulars Naina Radha Khushi Asmita Particulars Naina Radha Khushi Asmita
` ` ` ` ` ` ` `
To Naina 48,000 32,000 By Balance 3,00,000 2,25,000 1,50,000 -
b/d
To Asmita 59,000 By Radha 80,000 - - -
Capital A/c and Khushi
To Naina’s 3,80,000 - - - By Radha - - - 59,000
Loan a/c capital a/c
To Balance
c/d 1,18,000 1,18,000 59,000 _______ - - -
3,80,000 2,25,000 1,50,000 59,000 3,80,000 2,25,000 1,50,000 59,000
(c) Partners’ Current Accounts

Particulars Naina Radha Khushi Asmita Particulars Naina Radha Khushi Asmita
` ` ` ` ` ` ` `
To Drawings 50,000 41,250 11,250 By Balance b/d 25,000 12,500 18,750
To Bank A/c 25,000
To Bal. c/d 82,850 74,640 14,110 By P&L Account
upto:
Sept. 30, 2014 69,630 46,420
March 31, 2015 50,720 50,720 25,360
25,000 1,32,850 1,15,890 25,360 25,000 1,32,850 1,15,890 25,360

(d) Bank Account

` `
To Balance b/d 92,700 By Naina’s Current Account 25,000
To Sundry Debtors 11,25,000 By Sundry Creditors 7,75,000
To Sale of Machine 9,000 By Sundry Expenses 11,250
By Asmita’s Salary 8,000
By Naina’s Loan Account 1,14,000
By Drawings:
Naina 50,000
Radha 41,250
Khushi 11,250
By balance c/d 1,90,950
12,26,700 12,26,700
(e) Balance Sheet of firm as on March 31, 2015
Creditors : Trade 1,25,000 Machinery 4,26,000
Expenses 10,000 1,35,000 Less: Sold (7,000)
Naina’s Loan Account 2,99,250 Depreciation (30,350) 3,88,650
Partners’ Capital Current Assets:
Accounts:
Radha 1,18,000 Stock in 1,71,250
trade
Khushi 1,18,000 Debtors 1,50,000
Asmita 59,000 2,95,000 Bank 1,90,950 5,12,200
Balance
Partners’ Current
Accounts:
Radha 82,850
Khushi 74,640
Asmita 14,110 1,71,600
9,00,850 9,00,850

14.53 Accounting
Working Notes:
(1) Calculation of Sales
Debtors Account
` `
To Bal. b/d 1,30,500 By Cash 11,25,000
To Sales (bal. fig.) 11,44,500 By Bal. c/d 1,50,000
12,75,000 12,75,000
Calculation of Purchases
Creditors Account
` `
To Cash A/c 7,75,000 By Bal. b/d 1,03,750
To Bal. c/d 1,25,000 By Purchase (bal. fig.) 7,96,250
9,00,000 9,00,000
*All Sales and purchases are considered to be on credit basis.
(2) Computation of Profits for the year ended March 31, 2015
Trading and Profit and Loss Account for the year ended March 31, 2015
` `
To Gross Profit c/d 3,33,700
13,15,750 13,15,750
Apr 1 to Oct 1 to Apr 1 to Oct 1 to

Sept. 30 Mar. 31 Sept. 30 Mar. 31
(`) (`) (`) (`)
To Sundry Expenses 10,625 10,625 By Gross 1,66,850 1,66,850
(11,250 +10,000) Profit b/d
To Depreciation on 15,175 15,175 By Profit on 2,000 -
Machinery Sale of
Machine
To Interest on Naina’s 19,000 14,250
Loan
To Salary- Asmita 8,000

To Profit transferred to
Radha 69,630 50,720
Khushi 46,420 50,720
Asmita - 25,360
1,68,850 1,66,850 1,68,850 1,66,850
3. Adjustment of goodwill at the time of retirement of Naina
` `
Radha Dr. 48,000
Khushi Dr. 32,000
To Naina (` 1,80,000 x 4/9) 80,000
(Naina’s share of goodwill adjusted among
Radha and Khushi in their gaining ratio of 3:2)
4. New profit sharing ratio after admission of Asmita will be 2:2:1.
Profits for the half year ended on 30.9.2014 will be distributed among Radha and
Khushi in the ratio of 3:2 and profits for the half year ended on 31.3.2015 will be
distributed among Radha, Khushi and Asmita in the ratio of 2:2:1.
Exercises
1. X, Y Ltd. and Z Ltd. are partners of X & Co. The partnership deed provided that :
(a) The working partner Mr. X is to be remunerated at 15% of the net profits after charging his
remuneration, but before charging interest on capital and provision for taxation;
(b) Interest is to be provided on capital at 15% per annum;
(c) Balance profits after making provision for taxation, is to be shared in the ratio of 1 : 2 : 2 by the
three partners.
During the year ended 31st March, 2011 :
(i) the net profit before tax and before making any payment to partners amounted to ` 6,90,000;
(ii) interest on capitals at 15% per annum amounted to :
(iii) ` 60,000 for X; ` 1,50,000 for Y Ltd. and ` 1,80,000 for Z Ltd. The capitals have remained
unchanged during the year;
Provision for tax is to be at 40% of “total income” of the firm. The total income has been computed at
` 1,95,000.
You are asked by :
(a) the firm to pass closing entries in relation to the above;

14.55 Accounting
(b) Y Ltd. to pass journal entries in its books pertaining to its income from the firm and show the
investment in partnership account as it would appear in its ledger;
(c) Z Ltd. to show, how the above information will appear in its financial statements for the year;
(d) Shri X to show the working, if any, in relation to the above.
(Hints: Investment in partnership with Shri X and Z Ltd. ` 12,02,800)
2. Avinash, Basuda Ltd. and Chinmoy Ltd. were in partnership sharing profits and losses in the ratio of
9 : 4 : 2. Basuda Ltd. retired from the partnership on 31 st March, 2011, when the firm‟s balance sheet
was as under
` in thousand
Sundry creditors 600 Cash and bank 284
Capital accounts : Sundry debtors 400
Avinash 2,700 Stock 800
Basuda Ltd. 1,200 Furniture 266
Chinmoy Ltd. 600 4,500 Plant 850
Land and building 2,500
5,100 5,100
Basuda Ltd.‟s share in goodwill and capital was acquired by Avinash and Chinmoy Ltd. in the
ratio of 1 : 3, the continuing partners bringing in the necessary finance to pay off Basuda Ltd. The
partnership deed provides that on retirement or admission of a partner, the goodwill of the firm is
to be valued at three times the average annual profits of the firm for the four years ended on the
date of retirement or admission. The profits of the firm during the four years ended 31 st March,
2011 in thousands of rupees were:
` in thousand
2007-2008 450
2008-2009 250
2009-2010 600
2010-2011 700
The deed further provided that goodwill account is not to appear in the books of accounts at all.
The continuing partners agreed that with effect from 1 st April, 2011, Ghanashyam, son of Avinash
is to be admitted as a partner with 25% share of profit.
Avinash gifts to Ghanashyam, by transfer from his capital account, an amount sufficient to cover
up 12.5% of capital and goodwill requirement. The balance 12.5% of capital and goodwill
requirement is purchased by Ghanashyam from Avinash and Chinmoy Ltd. in the ratio of 2 : 1.
The firm asks you to:
(i) Prepare a statement showing the continuing partners‟ shares;
(ii) Pass journal entries including for bank transactions; and
(iii) Prepare the balance sheet of the firm after Ghanashyam‟s admission
(Hints: New ratio 11:7:6; Total of Balance Sheet `66,00,000)

Accounting in
15 Computerised Environment
BASIC CONCEPTS
Role of  Role of Computer in accountancy
Computer in  Controlling operations
accountancy
 Deciding sequence of operations
 Accounting operations
Consideration for  Consideration for Selection of Pre-Packaged
Selection of Pre- Accounting Software
Packaged  Fulfilment of business requirements
Accounting
Software  Completeness of reports
 Ease of use
 Cost
 Reputation of the vendor
 Regular updates
Choice of an  Choice of an ERP
ERP  Functional requirement of the organisation
 Reports available in the ERP
 Background of the vendors
Question 1
"ERP package is gaining popularity in big organizations." Briefly explain the advantages and
disadvantages of using an ERP package, in the light of above statement.
Answer
An ERP is an integrated software package that manages the business process across the entire
enterprise.

15.2 Accounting
Advantages of using an ERP

The advantages of using an ERP for maintaining accounts are as follows:
1. Standardised processes and procedures: An ERP is a generalised package which covers
most of the common functionalities of any specific module.
2. Standardised reporting: Majority of the desired reports are available in an ERP package.
These reports are standardised across industry and are generally acceptable to the users.
3. Duplication of data entry is avoided as it is an integrated package.
4. Greater information is available through the package.
Disadvantages of an ERP
The disadvantages of an ERP are the following:
1. Lesser flexibility: The user may have to modify their business procedure at times to be able
to effectively use the ERP.
2. Implementation hurdles: Many of the consultants doing the implementation of the ERP may
not be able to fully appreciate the business procedure to be able to do a good implementation
of an ERP.
3. Very expensive : ERP are normally priced at an amount which is often beyond the reach of
small and medium sized organisation. However, there are some ERP coming into the market
which are moderately priced and may be useful to the small businesses.
4. Complexity of the software : Generally an ERP package has large number of options to
choose from. Further the parameter settings and configuration makes it a little complex for the
common users.
Question 2
Explain the factors to be considered before selecting the pre-packaged accounting software.
Answer
There are many accounting softwares available in the market. To choose the accounting software
appropriate to the need of the organization is a difficult task, some of the criteria for selection could
be the following:
1. Fulfillment of business requirements: Some packages have few functionalities more than
the others. The purchaser may try to match his requirement with the available solutions.
2. Completeness of reports: Some packages might provide extra reports or the reports match
the requirements more than the others.
3. Ease of Use: Some packages could be very detailed and cumbersome compare to the
others.

Accounting In Computerised Environment1 15.3
4. Cost: The budgetary constraints could be an important deciding factor. A package having
more features cannot be opted because of the prohibitive costs.
5. Reputation of vendor: Vendor support is essential for any software. A stable vendor with
good reputation and track records will always be preferred.
6. Regular updates: Law is changing frequently. A vendor who is prepared to give updates will
be preferred to a vendor unwilling to give updates.
Question 3
What are the advantages of customised accounting packages?
Answer
Following are the advantages of the customised accounting packages:
1. The functional areas that would otherwise have not been covered get computerised.
2. The input screens can be tailor made to match the input documents for ease of data entry.
3. The reports can be as per the specification of the organisation. Many additional MIS reports
can be included in the list of reports.
4. Bar-code scanners can be used as input devices suitable for the specific needs of an
individual organisation.
5. The system can suitably match with the organisational structure of the company.
Question 4
“Recently a growing trend has developed for outsourcing the accounting function”. Explain the
advantages and disadvantages of outsourcing the accounting functions.
Answer
Recently a growing trend has developed for outsourcing the accounting function to a third
party. The consideration for doing this is to save cost and to utilise the expertise of the
outsourced party.
Advantages
1. Saving of Time: The organisation that outsources its accounting function is able to save time
to concentrate on the core area of business activity.
2. Expertise of the third party: The organisation is able to utilise the expertise of the third party
in undertaking the accounting work.
3. Maintenance of data: Storage and maintenance of the data is in the hand of professional people.
4. Economical: The organisation is not bothered about people leaving the organisation in key
accounting positions. The proposition is proving to be economically and more sensible as
they do not have train the people again. Hence, the training cost is saved.1.

15.4 Accounting
Disadvantages
1. Lack of security & confidentiality: The data of the organisation is handed over to a
third party. This raises two issues, one of security and second of confidentiality. There
have been instances of information leaking out of the third party data centres.
2. Inadequate services provided : The third party is unable to meet the standards desirable.
3. High cost: The cost may ultimately be higher than initially envisaged.
4. Delay in obtaining services: The third party service providers are catering to number of
clients thereby processing as per priority basis.
Question 5
Write any four disadvantages of Pre-packaged Accounting Software.
Answer
Disadvantage of Pre-packaged Accounting Software:
1. Lesser Flexibility: Business today is becoming more and more complex. A standard
package may not be able to take care of these complexities i.e. it does not cover
peculiarities of specific business. Therefore, customization may not be possible in such
softwares.
2. Covers only few functional areas and only main reports are covered: Many pre-packaged
accounting softwares do not cover all functional areas. For example, production process
may not be covered by most pre-packaged accounting softwares. The demands for
modern day business may make the management desire for several other reports for
exercising management control. These reports may not be available in a standard
package.
3. Lack of security: Any person can view data of all companies with common access
password. Levels of access control as we find in many customised accounting software
packages are generally missing in a pre-packaged accounting package.
4. Bugs in the software: Certain bugs may remain in the software which takes long time to be
rectified by the vendor and is common in the initial years of the software.
Question 6
“In business today, the accounts which were earlier maintained in a manual form, are replaced with
computerized accounts”. Explain the significance of computerized accounting system in modern time.
Answer
In modern time, computerized accounting systems are used in various areas. The significance
of the computerized accounting system is as follows:
(1) Increase speed, accuracy and security - In computerized accounting system, the speed
with which accounts can be maintained is several fold higher. Besides speed, level of
accuracy is also high in computerized accounting system.

Accounting In Computerised Environment1 15.5
(2) Reduce errors - In computerized accounting, the possibilities of errors are also very less
unless some mistake is made while recording the data.
(3) Immediate information - In this system, with an entry of a transaction, corresponding
ledger posting is done automatically. Hence, trial balance will also be automatically
tallied and the user will get the information immediately.
(4) Avoid duplication of work - Computerized accounting systems also remove the
duplication of the work.
Question 7
What is an Enterprise Resource Planning (ERP) software? What are the factors which
you will take into consideration while choosing an ERP software?
Answer
An Enterprise Resource Planning (ERP) is an integrated software package that manages the
business process across the entire enterprise by integrating informations created by different
functional groups of the organisation.
Choice of ERP software depends upon the following factors:
1. Functional requirement of the organisation: The ERP that matches most of the
requirements of an organisation is preferred over the others.
2. Reports available in the ERP: The organisation visualises the reporting requirements and
chooses a vendor which fulfils its reporting requirements.
3. Background of the vendors: The service and deliverable record of a vendor is extremely
important in choosing the vendor.
4. Cost comparisons: The budget constraints and fund position of an enterprise often
becomes the deciding factor for choosing a particular package.

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INTERMEDIATE (IPC) COURSE

© The Institute of Chartered Accountants of India

 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

Revised Edition : April, 2016

Committee / : Board of Studies

Published by : The Publication Department on behalf of The Institute of Chartered

© The Institute of Chartered Accountants of India

Happy Reading and Best Wishes!

© The Institute of Chartered Accountants of India

1 Accounting 1 (a) 5 1(c) 5 1 20 7(c) 4 7 (b) 4 1 20 1(a) 5 1(a) 5 1 20 1 20

Unit 1 Preparation of 1(a) 5 7(d) 4 5 16 2(a) 8 3(b) 10

Unit 2 Cash Flow 4 16 4(a) 10 6(b) 8 3(b) 8 3 16 3(a) 6 3(a) 8

3 Profits or Losses 4(b) 6 6(a) 8 2(b) 8 3(a) 10 4(b) 8

© The Institute of Chartered Accountants of India

5 Internal 2 16 2 16 3 16 7(b) 4 4(a) 12 2 16

Unit 2 Account Current 7(c) 4 7(d) 4

8 Self Balancing 7(e) 4 1(a) 5 1(b) 5 4(b) 4 7(a) 4

9 Financial Statements 5 16 3 16 4 16 1(d) 5 5(a) 10 4 16 7(a) 4 2 16 7(a) 4 6(a) 6

10 Accounts from 6 16 3(a) 8 4 16 4 16 3(a) 8 4 16 7(d) 4

11 Hire Purchase and 5(a)* 8 1(c) 5 1(a) 5* 5(a) 8 7(c) 4 5(a) 8

© The Institute of Chartered Accountants of India

14 Issues in Partnership 1(c) 5 1 (d) 5 3(b) 8 1(b) 5 2 16 2 16 6 16 6 16 6 16 5 16

© The Institute of Chartered Accountants of India

CHAPTER – 1 Accounting Standards 1.1 – 1.45

CHAPTER – 2 Financial Statements of Companies 2.1 – 2.56

Unit 1 Preparation of Financial Statements 2.1 – 2.18

Unit 2 Cash Flow Statement 2.19 – 2.56

CHAPTER – 3 Profit or Loss Pre and Post Incorporation 3.1 – 3.16

CHAPTER – 4 Accounting for Bonus Issue 4.1 – 4.14

CHAPTER – 5 Internal Reconstruction 5.1 – 5.32

CHAPTER – 6 Amalgamation 6.1 – 6.49

CHAPTER – 7 Average Due Date and Account Current 7.1 – 7.22

Unit 1 Average Due Date 7.1 – 7.15

Unit 2 Account Current 7.13 – 7.22

CHAPTER – 8 Self- Balancing Ledgers 8.1 – 8.21

CHAPTER – 9 Financial Statements of Not-For-Profit Organisations 9.1 – 9.50

CHAPTER – 10 Accounts from Incomplete Records 10.1 – 10.58

CHAPTER – 11 Hire Purchase and Installment Sale Transactions 11.1 – 11.6

CHAPTER – 12 Investment Accounts 12.1 – 12.18

CHAPTER – 14 Issues in Partnership Accounts 14.1 – 14.55

CHAPTER – 15 Accounting in Computerised Environment 15.1 -15.5

© The Institute of Chartered Accountants of India

Applicability of Accounting Standards

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Bank 70,000 Salaries and wages 25,000

© The Institute of Chartered Accountants of India

Dividends paid (1,00,000)

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India