Accounting Vol. II

PRACTICE MANUAL
Intermediate (IPC) Course
PAPER : 1
ACCOUNTING
VOLUME – II
BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
i
This practice manual has been prepared by the faculty of the Board of Studies. The objective
of the practice manual is to provide teaching material to the students to enable them to obtain
knowledge and skills in the subject. Students should also supplement their study by reference
to the recommended text books. In case students need any clarifications or have any
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All care has been taken to provide interpretations and discussions in a manner useful for the
students. However, the practice manual has not been specifically discussed by the Council of
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necessarily represent the views of the Council or any of its Committees.
Permission of the Institute is essential for reproduction of any portion of this material.
© THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
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otherwise, without prior permission in writing from the publisher.
Revised Edition : July, 2013
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Department
ISBN No. : 978-81-8441-304-5

Price : `
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ii
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 the
Institute and for this purpose, the Board of Studies has been providing a variety of educational
inputs for the students. Bringing out a series of subject wise Practice Manuals is one of the
quality services provided by the Institute. These Practice Manuals are highly useful to the
students preparing for the examination, since they get answers for all important questions
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
Volume I of the study material. This will help the students to correlate the Practice Manual
with the Study Material and facilitate in complete revision of each chapter. The students are
expected to 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 volume I. 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. 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
IPCC
Paper 1 Accounting
Statement showing topic-wise distribution of Examination Questions along with Marks
Term of Examination Total Avg.
Topics Marks Marks
Nov. 2009 May 2010 Nov. 2010 May 2011 Nov. 2011 May 2012 Nov.2012
Q M Q M Q M Q M Q M Q M Q M
1 Accounting Standards 1(vii ) 2 1(v) 2 1(b) 5 1 (a) 5 1(c) 5 1 20 7(c) 4 110 15.7
1(viii) 2 1(vi) 2 1(d) 5 7 (b) 4 7 (a) 4 7(c) 4 7(d) 4
6(ii) 4 1(viii) 2 7(a) 4 9 7 (b) 4 24 8
6(iv) 4 6(b) 4 7(c ) 4 7(c) 4
12 6(d) 4 18 7 (d) 4
14 7(e) 4
25
2 Financial Statements of
Companies
Unit 1 Preparation of Financial 1(ii) 2 1(a) 5 7(d) 4 21 3
statements 1(v) 2
1(vi) 2
1(x) 2
6 (v) 4
12
iv
Unit 2 Cash Flow Statements 5 (b) 8 3 16 4 16 4(a) 10 50 7.1
3 Profits or Losses Prior 5(b) 6 6(a) 10 4(b) 6 22 3.1
to Incorporation
4 Accounting for Bonus 5(a) 12 6 (a) 8 3(b) 8 28 4
Issue
5 Internal Reconstruction 2 16 2 16 32 4.6
6 Amalgamation 2 16 3 16 1 (c) 5 3 16 2 16 69 9.9
7 Unit 1 Average Due Date 4 (b) 8 1(iv) 2 7(e) 4 7(a) 4 6 (b) 8 7(a) 4 7(a) 4 34 4.9
Unit 2 Account Current
8 Self Balancing Ledgers 5 (b) 4 7(e) 4 1(a) 5 13 1.9
9 Financial Statements of 1(i) 2 5 (a) 8 2 16 5 16 3 16 4 16 1(d) 5 91 13

Not for Profit 1(ix) 2
Organisations 5 (a) 10
14
10 Accounts from 2 16 6 16 3(a) 8 4 16 56 8
Incomplete Records
11 Hire Purchase and 1(ii) 2 6 (b) 6 5(a) 8 1(c) 5 41 5.9
Instalment Sale 1(x) 2 3(a) 8
Transactions 4(a) 10 13
14
12 Investment Accounts 1 (iii) 2 1(iii) 2 1 (d) 5 5(b) 8 5(a) 8 31 4.4
4(b) 6
8
v
13 Insurance Claims for 4 (a) 8 1 (ix) 2 7 (d) 4 1(b) 5 5(a) 10 6 16 5(b) 8 57 8.1
Loss of Stock and Loss 7(b) 4
of Profit 12
14 Issues in Partnership 1(iv) 2 1 (i) 2 1 (a) 5 1(c) 5 1 (d) 5 3(b) 8 1(b) 5 110 15.7
Accounts 3 16 1 (vii) 2 4 16 2 16 7(b) 4 6 16
6 (vi) 4 4 21 7 (c) 4 12 21
22 25
15 Accounting in 6(i) 4 6(c) 4 7(b) 4 7(d) 4 5(b) 6 7(e) 4 7(e) 4 34 4.9
Computerized 6 (iii) 4
Environment 8
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.
vi
CONTENTS
CHAPTER – 1 Accounting Standards 1.1 – 1.26
CHAPTER – 2 Financial Statements of Companies 2.1 – 2.52
Unit 1 Preparation of Financial Statements 2.1 – 2.15
Unit 2 Cash Flow Statement 2.16 – 2.52
CHAPTER – 3 Profit or Loss Pre and Post Incorporation 3.1 – 3.8
CHAPTER – 4 Accounting for Bonus Issue 4.1 – 4.16
CHAPTER – 5 Internal Reconstruction 5.1 – 5.22
CHAPTER – 6 Amalgamation 6.1 – 6.44
CHAPTER – 7 Average Due Date and Account Current 7.1 – 7.15
Unit 1 Average Due Date 7.1 – 7.10
Unit 2 Account Current 7.11 – 7.15
CHAPTER – 8 Self- Balancing Ledgers 8.1 – 8.17
CHAPTER – 9 Financial Statements of Not-For-Profit Organisations 9.1 – 9.38
CHAPTER – 10 Accounts from Incomplete Records 10.1 – 10.52
CHAPTER – 11 Hire Purchase and Installment Sale Transactions 11.1 – 11.20
CHAPTER – 12 Investment Accounts 12.1 – 12.12
CHAPTER – 13 Insurance Claims for Loss of Stock and Loss of Profit 13.1 – 13.22
A: Claim for Loss of Stock 13.2 – 13.12
B: Claim for Loss of Profit 13.12 – 13.22
CHAPTER – 14 Issues in Partnership Accounts 14.1 – 14.42
CHAPTER – 15 Accounting in Computerised Environment 15.1 -15.4
vii
1
Accounting Standards
BASIC CONCEPTS
Accounting Standards (ASs) are written policy documents 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
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:
(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 2
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.
1.2 Accounting
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 3
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.
AS 2 “Valuation of Inventories”
Question 4
“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;
∗
This change is made as per the announcement ‘Revision in the criteria for classifying Level II
non-corporate entities’ issued by the ASB on 7.3.2013. This revision is applicable with effect
from the accounting year commencing on or after April 01, 2012.
Accounting Standards 1.3
(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 5
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 2010-11, 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 6
X Co. Limited purchased goods at the cost of ` 40 lakhs in October, 2010. Till March, 2011, 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 31.3.2011.
Answer
As per para 5 of AS 2 “Valuation of Inventories”, the inventories are to be valued at lower of cost
and net realizable value.
1.4 Accounting
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 7
The company X Ltd., has to pay for delay in cotton clearing charges. The company up to
31.3.2010 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 2010-11. 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 8
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?
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 amounting to ` 50,000 (50 MT × ` 1,000) will be charged to
the profit and loss statement.
Question 9
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
AS 3 “Cash Flow Statements”
Question 10
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
1.6 Accounting
(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.
AS 3 (revised) is recommendatory at present but for companies listed on stock exchanges, its
compliance is mandatory due to the listing agreement which provides for the listed companies to
furnish cash flow statement in their Annual Reports.
Question 11
X Ltd. purchased debentures of ` 10 lacs of Y Ltd., which are traded in stock exchange. How will
you show this item as per AS 3 while preparing cash flow statement for the year ended on
31st March, 2011?
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 12
Following is the cash flow abstract of Alpha Ltd. for the year ended 31st March, 2011:
Cash Flow (Abstract)
Inflows ` Outflows `
Opening balance: Payment to creditors 90,000
Cash 10,000 Salaries and wages 25,000
∗
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.
Bank 70,000 Payment of overheads 15,000

Share capital – shares issued 5,00,000 Fixed assets acquired 4,00,000
Collection from Debtors 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 31 March, 2011 in accordance with Accounting
st
standard 3.
Answer
Cash Flow Statement
for the year ended 31.3.2011
` `
Cash flow from operating activities
Cash received from customers 3,50,000
Cash paid to suppliers (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)
1.8 Accounting
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
AS 6 “Depreciation Accounting”
Question 13
X Co. Ltd. charged depreciation on its asset on SLM basis. For the year ended 31.3.2011 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 14
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.
Question 15
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
1.10 Accounting
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 16
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 17
MIs Progressive Company Limited has not charged depreciation for the year ended on 31st
March, 2012, in respect of a spare bus purchased during the financial year 2011-12 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.
Question 18
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 19
In the Trial Balance of M/s. Sun Ltd. as on 31-3-2012, 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
1-4-2011 at ` 1,60,000 was disposed of on 30-9-2011 at ` 1,35,000 in part exchange of a new
machine costing ` 1,50,000.
You are required to calculate:
(i) Total depreciation to be charged in the Profit and Loss Account.
(ii) Loss on exchange of machine.
(iii) Book value of machinery in the Balance Sheet as on 31.3.2012.
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
1.12 Accounting
(ii) Loss on Exchange of Machine

`
Book value of machine as on 1.4.2011 1,60,000
Less: Depreciation for 6 months @ 10% (8,000)
Written Down Value as on 30.9.2011 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 31.03.2012
`
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
AS7 “Construction Contracts”

Question 20
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 21
B Ltd. undertook a construction contract for ` 50 crores in April, 2010. 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, 2011?
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, 2011.
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 22
M/s Excellent Construction Company Limited undertook a contract to construct a building for ` 3
crore on 1st September, 2011. On 31st March, 2012 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, 2012, 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
1.14 Accounting
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
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.
AS9 “Revenue Recognition”
Question 23
Media Advertisers obtained advertisement rights for One Day World Cup Cricket Tournament
to be held in May/June, 2011 for ` 250 lakhs.
By 31st March, 2011, they have paid ` 150 lakhs to secure these advertisement rights. The balance
` 100 lakhs was paid in April, 2011.
By 31st March, 2011, they procured advertisement for 70% of the available time for ` 350 lakhs. The
advertisers paid 60% of the amount by that date. The balance 40% was received in April, 2011.
Advertisements for the balance 30% time were procured in April, 2011 for ` 150 lakhs. The
advertisers paid the full amount while booking the advertisement.
25% of the advertisement time is expected to be available in May, 2011 and the balance 75% in
June, 2011.
You are asked to:
(i) Pass journal entries in relation to the above.
(ii) Show in columnar form as to how the items will appear in the monthly financial statements for
March, April, May and June 2011.
Give reasons for your treatment.
Answer
(i) In the books of Media Advertisers
Journal Entries
Dr. Cr.
` in lakhs ` in lakhs
2011
March Advance for advertisement rights (purchase) A/c Dr. 150.00
To Bank A/c 150.00
(Being advance paid for obtaining advertisement rights)
Bank A/c Dr. 210.00

To Advance for advertisement time (sale) A/c 210.00
(Being advance received from advertisers amounting
to 60% of ` 350 lakhs for booking 70% advertisement
time)
April Advance for advertisement rights (purchase) A/c Dr. 100.00
To Bank A/c 100.00
(Being balance advance i.e., ` 250 lakhs less ` 150
lakhs paid)
Bank A/c Dr. 140.00
(Being balance advance i.e., ` 350 lakhs less
` 210 lakhs received from advertisers)
Bank A/c Dr. 150.00
(Being advance received from advertisers in respect
of booking of balance 30% time)
May Advertisement rights (purchase) A/c Dr. 62.50
To Advance for advertisement rights (purchase) A/c 62.50
(Being cost of advertisement rights used in May i.e.,
25% of ` 250 lakhs, adjusted against advance paid)
Advance for advertisement time (sale) A/c Dr. 125.00
To Advertisement time (sale) A/c 125.00
(Being sale price of advertisement time in May i.e.,
25% of ` 500 lakhs adjusted, against advance
received from advertisers)
Profit and Loss A/c Dr. 62.50
To Advertisement rights (purchase) A/c 62.50
(Being cost of advertisement rights debited to Profit
and Loss Account in May)
Advertisement time (sale) A/c Dr. 125.00
To Profit and Loss A/c 125.00
(Being revenue recognised in Profit and Loss Account
in May)
June Advertisement rights (purchase) A/c Dr. 187.50
1.16 Accounting
To Advance for advertisement rights (purchase) A/c 187.50

(Being cost of advertisement rights used in June, i.e.,
75% of ` 250 lakhs, adjusted against advance paid)
Advance for advertisement time (sale) A/c Dr. 375.00
To Advertisement time (sale) A/c 375.00
(Being sale price of advertisement time availed in
June i.e., 75% of ` 500 lakhs, adjusted against
advance received from advertisers)
June Profit and Loss A/c Dr. 187.50
To Advertisement rights (purchase) A/c 187.50
(Being cost of advertisement rights used in June,
debited to Profit and Loss Account in June)
Advertisement time (sale) A/c Dr. 375.00
To Profit and Loss Account 375.00
(Being revenue recognised in June)
(ii) Monthly financial statements
(1) Revenue statement (` in lakhs)
March April May June
` ` ` `
Sale of advertisement time – – 125.00 375.00
Less: Purchase of advertisement rights – – (62.50) (187.50)
Net profit – – 62.50 187.50
(2) Balance sheet as at 31.3.2011 30.4.2011 31.5.2011 30.6.2011
Sources of funds:
Net profit – – 62.50 250.00
Application of funds:
Current assets, loans and advances:
Advance for advertisement rights 150.00 250.00 187.50 –
Bank Balance 60.00 250.00 250.00 250.00
210.00 500.00 437.50 250.00
Less: Current liabilities
Advance for advertisement time
(received from advertisers) (210.00) (500.00) (375.00) –
Net current assets – – 62.50 250.00
As per para 7.1 of AS 9 on Revenue Recognition, under proportionate completion
method, revenue from service transactions is recognised proportionately by reference to
the performance of each act where performance consists of the execution of more than
one act. Therefore, income from advertisement is recognised in May, 2011 (25%) and
June, 2011 (75%) in the proportion of availability of the advertisement time.
Question 24
X Limited has recognized ` 10 lakhs on accrual basis income from dividend on units of mutual
funds of the face value of ` 50 lakhs held by it as at the end of the financial year
31st March, 2011. The dividends on mutual funds were declared at the rate of 20% on
15th June, 2011. The dividend was proposed on 10th April, 2011 by the declaring company.
Whether the treatment is as per the relevant Accounting Standard? You are asked to answer with
reference to provisions of Accounting Standard.
Answer
Paragraph 8.4 and 13 of Accounting Standard 9 ‘Revenue Recognition’ states that dividends from
investments in shares are not recognised in the statement of profit and loss until a right to receive
payment is established.
In the given case, the dividend is proposed on 10th April, 2011, while it is declared on
15th June, 2011. Hence, the right to receive payment is established on 15th June, 2011. As per the
above mentioned paragraphs, income from dividend on units of mutual funds should be recognised
by X Ltd. in the financial year ended 31st March, 2012.
The recognition of ` 10 lakhs on accrual basis in the financial year 2010-2011 is not as per AS 9
'Revenue Recognition'.
(i) Acting as a banker in respect of funds of local bodies, Zilla Parishads, Panchayat Institutions
etc. who keep their funds with the treasuries.
(ii) Custody of opium and other valuables because of the strong room facility provided at the
treasury.
(iii) Custody of cash balances of the State Government and conducting cash business of
Government at non-banking treasuries.
Question 25
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 31.3.2011, 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
1.18 Accounting
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 26
The Board of Directors of X Ltd. decided on 31.3.2011 to increase sale price of certain items of
goods sold retrospectively from 1st January, 2011. As a result of this decision the company has to
receive ` 5 lakhs from its customers in respect of sales made from 1.1.2011 to 31.3.2011. 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 2010-11, 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.
AS 10 “Accounting for Fixed Assets”
Question 27
(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 28
During the current year 2010-11, 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 29
During the year 2010-11, 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.
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
1.20 Accounting
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 30
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 31
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 32
PQR Ltd. constructed a fixed asset and incurred the following expenses on its construction:
`
Materials 16,00,000
Direct Expenses 3,00,000
Total Direct Labour 6,00,000
(1/15th of the total labour time was chargeable to the construction)

Total Office & Administrative Expenses 9,00,000
(4% is chargeable to the construction)
Depreciation on assets used for the construction of this asset 15,000
Calculate the cost of the fixed asset.
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
Note: It is assumed that 4% of office and administrative expenses are specifically attributable
to construction of a fixed asset. Alternatively, it may be assumed that 4% of office and
administrative expenses are only allocated to construction project and is not specifically attributable
to it. In such a case, the cost of fixed assets will be ` 19,55,000.
AS 13 “Accounting for Investments”
Question 33
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;
1.22 Accounting
(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 34
M/s Innovative Garments Manufacturing Company Limited invested in the shares of another company
on 1st October, 2011 at a cost of ` 2,50,000. It also earlier purchased Gold of
` 4,00,000 and Silver of ` 2,00,000 on 1 March, 2009. Market value as on 31st March, 2012 of
st
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, 2012 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, 2012.
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 1st March, 2009) shall continue
to be shown at cost as on 31st March, 2012 i.e., ` 4,00,000 and ` 2,00,000 respectively, though
their realizable values have been increased.
Question 35
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.
(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.
AS 14 “Accounting for Amalgamations”
Question 36
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:
1.24 Accounting
(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.
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 37
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 38
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.
Question 39
Briefly explain the types of Amalgamations?
Answer
As per AS 14, ‘Accounting for Amalgamations’ there are two types of amalgamation. In
first type of amalgamation there is a genuine pooling not merely of assets and liabilities
of the amalgamating companies but also of the shareholders’ interests and of the
businesses of the companies. Such amalgamations are amalgamations which are in the
nature of ‘merger’ and the accounting treatment of such amalgamations should ensure
that the resultant figures of assets, liabilities, capital and reserves more or less
represent the sum of the relevant figures of the amalgamating companies.
In the second category are those amalgamations which are in effect a mode by which
one company acquires another company and, as a consequence, the shareholders of
the company which is acquired normally do not continue to have a proportionate share
1.26 Accounting
in the equity of the combined company, or the business of the company which is
acquired is not intended to be continued. Such amalgamations are amalgamations in
the nature of ‘purchase’.
EXERCISES
1. Explain provisions contained in the Accounting Standard in respect of Revaluation of fixed assets.
2. When can revenue be recognised in the case of transaction of sale of goods?
3. Write short note on valuation of fixed assets in special cases.
4. Jagannath Ltd. had made a rights issue of shares in 2009. In the offer document to its members, it had projected a
surplus of ` 40 crores during the accounting year to end on 31st March, 2011. The draft results for the year,
prepared on the hitherto followed accounting policies and presented for perusal of the board of directors showed a
deficit of ` 10 crores. The board in consultation with the managing director, decided on the following:
(i) Value year-end inventory at works cost (` 50 crores) instead of the hitherto method of valuation of inventory
at prime cost (` 30 crores).
(ii) Provide depreciation for the year on straight line basis on account of substantial additions in gross block
during the year, instead of on the reducing balance method, which was hitherto adopted. Consequently, the
charge for depreciation at ` 27 crores is lower than the amount of ` 45 crores which would have been
provided had the old method been followed, by ` 18 cores.
(iii) Not to provide for “after sales expenses” during the warranty period. Till the last year, provision at 2% of
sales used to be made under the concept of “matching of costs against revenue” and actual expenses used
to be charged against the provision. The board now decided to account for expenses as and when actually
incurred. Sales during the year total to ` 600 crores.
(iv) Provide for permanent fall in the value of investments - which fall had taken place over the past five years -
the provision being ` 10 crores.
As chief accountant of the company, you are asked by the managing director to draft the notes on accounts for
inclusion in the annual report for 2010-2011.
5. On 25th September, 2011, Planet Advertising Limited obtained advertisement rights for World Cup Hockey
Tournament to be held in Nov./Dec., 2011 for ` 520 lakhs.
They furnish the following information:
(1) The company obtained the advertisements for 70% of available time for ` 700 lakhs by
30th September, 11.
(2) For the balance time they got bookings in October, 11 for ` 240 lakhs.
(3) All the advertisers paid the full amount at the time of booking the advertisements.
(4) 40% of the advertisements appeared before the public in Nov. 11 and balance 60% appeared in the month
of December, 11.
You are required to calculate the amount of profit/loss to be recognized for the month November and December,
2011 as per Accounting Standard 9.
(Hints: Company should recognise ` 168 lakhs (i.e. ` 420 lakhs x 40%) in November, 2011 and rest ` 252
lakhs (i.e. ` 420 lakhs x 60%) in December, 2011.)
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:
¾ Requirements of Schedule VI;
¾ 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
Dividend on partly paid shares.
Answer
In the case of partly paid-up shares, the dividend is payable either on the nominal, called-up
or the paid-up amount of shares, depending on the provisions in this regard that there may be
in the articles of the company. In the absence of any such provisions, Table A should be
applicable. In such a case the amount of dividend payable will be calculated on the amount
paid-up on the shares, and while doing so, the dates on which the amounts were paid must be
taken into account. Calls paid in advance do not rank for payment of dividend. A company
may if so authorised by its articles, pay a dividend in proportion to the amount paid on each
share, where a larger amount is paid on some shares than on others (Section 93 of the
Companies Act, 1956). But where the articles are silent and Table A has been excluded, the
amount of dividend payable will have to be calculated on the nominal amount of shares. It
should, however, be noted that according to Clause 88 of Table A dividends are to be
declared and paid according to the amounts paid or credited as paid on the shares in respect
whereof the dividend is paid, but if and so long as nothing is paid upon any of the shares of
the company, dividends may be declared and paid according to the nominal amount of the
shares.
2.2 Accounting
Question 2
The Articles of Association of S Ltd. provide the following:
(i) That 20% of the net profit of each year shall be transferred to reserve fund.
(ii) That an amount equal to 10% of equity dividend shall be set aside for staff bonus.
(iii) That the balance available for distribution shall be applied:
(a) in paying 14% on cumulative preference shares.
(b) in paying 20% dividend on equity shares.
(c) one-third of the balance available as additional dividend on preference shares and
two-third as additional equity dividend.
A further condition was imposed by the articles viz. that the balance carried forward shall be equal
to 12% on preference shares after making provisions (i), (ii) and (iii) mentioned above. The
company has issued 13,000, 14% cumulative participating preference shares of ` 100 each fully
paid and 70,000 equity shares of ` 10 each fully paid up.
The profit for the year 2012 was ` 10,00,000 and balance brought from previous year
` 80,000. Provide ` 31,200 for depreciation and ` 80,000 for taxation before making other
appropriations.
Show net balance of profit and loss account after making above adjustments.
Answer
Statement of Profit and Loss∗ for the year ended 2012
Particulars `
a Profit 10,00,000
b Expenses:
Depreciation and amortization expense (31,200)
Total expenses (31,200)
c Profit before tax (a-b) 9,68,800
d Provision for tax (80,000)
e Profit (Loss) for the period 8,88,800
Balance of Profit and Loss account brought forward 80,000
f Total 9,68,800
g Appropriations (made in Notes to Accounts)
Transfers to Reserves (1,77,760)
Proposed preference dividend (1,82,000 + 93,450) (2,75,450)
Proposed equity dividend (1,40,000 + 1,86,900) (3,26,900)
∗
As per revised Schedule VI, Statement of Profit and Loss is to be prepared upto profit for the current year
only. Any appropriation to current year’s profit alongwith the brought forward profit is to be shown in the
‘Notes to Financial Statements for Reserves and Surplus’.
Financial Statements of Companies 2.3
Bonus to employees (14,000 + 18,690) (32,690)

Total (8,12,800)
h Balance carried to Balance sheet (f-g) 1,56,000
Working Note:
Balance of amount available for Preference and Equity shareholders and Bonus for `
Employees
Credit Side 9,68,800
Less: Dr. side [1,77,760 + 1,82,000+1,40,000+14,000 + 1,56,000] (6,69,760)
2,99,040
Suppose remaining balance will be = x
1 1
Suppose preference shareholders will get share from remaining balance = x × = x
3 3
2 2
Equity shareholders will get share from remaining balance = x × = x
3 3
2 10 2
Bonus to Employees = x × = x
3 100 30
2 1 2
Now, x+ x+ x = 2,99,040
3 3 30
32 x = 89,71,200
x = 89,71,200/32 = ` 2,80,350
1
Share of preference shareholders - ` 2,80,350 × = ` 93,450
3
2
Share of equity shareholders - ` 2,80,350 × = ` 1,86,900
3
2
Bonus to employees - ` 2,80,350 × = ` 18,690
30
Question 3
The balance sheet of XYZ Ltd. as at 31st December, 2011 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
2.4 Accounting
Under the terms of their issue, the preference shares are redeemable on March 31, 2012 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 premium) on
allotment and the balance on January 1, 2012. The issue was fully subscribed and allotment made
on March 1, 2012. The monies due on allotment were received by March 30, 2012.
The preference shares were redeemed after fulfilling the necessary conditions of Section 80 of the
Companies Act, 1956. The company decided to make the minimum utilisation of general reserve.
You are asked to pass the necessary journal entries and show the relevant extracts from the
Balance Sheet as on March 31, 2012 with the corresponding figures as on 31st December, 2011.
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
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 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, 2012 (after redemption of preference shares)
(Relevant extracts)
Particulars Notes ` ('000) ` ('000)
Equity and Liabilities as on 31.03.12 as on 31.12.11
1 Shareholders' funds
a Share capital 1 12,250 13,500
b Reserves and Surplus 2 7,750 7,500
2.6 Accounting
The cash and bank balance will be decreased by ` 10,00,000 on 31.3.2012 as compared to the
balance on 31.12.2011.
Notes to accounts
` ('000)
as on 31.03.12 as on 31.12.11
1. Share Capital
Equity share capital
Issued, subscribed and paid-up
1,00,000 equity shares of ` 100 each, fully 10,000 10,000
paid up
50,000 equity shares of ` 100 each, ` 45 2,250 -
called up and paid up
Preference share capital
50,000, 8% Redeemable preference - 3,500
shares of ` 100 each, ` 70 called-up and
paid-up (redeemed on 31st March, 2012)
Total 12,250 13,500
2. Reserves and Surplus
Capital redemption reserve
Balance as on 31.12.2011 20,00 2,000
Add : Transfer from general reserve 27,50
Balance as on 31.3.2012 4,750
Securities premium account

Balance as on 31.12.2011 5,00 500
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 31.3.2012 750
General reserve
Balance as on 31.12.2011 50,00
Less : Transfer to capital

redemption reserve ( 27,50) 5,000
Balance as on 31.3.2012 2,250
Total 7,750 7,500
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
(ii) Change in cash and bank balance
Receipts : (31.12.2011 - 31.3.2012)
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 4
Provisional Balance Sheet of P Ltd. as at 31st March, 2012 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
2.8 Accounting
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
Current Liabilities 2,80,000
15,00,000 15,00,000
Calls in arrear are outstanding for 6 months. Calls in advance were also received 6 months back.
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 2011-12 be allowed @ 20% on equity shares.
(ii) Money on calls in advance be refunded and partly paid equity shares be converted as fully
paid up by declaring bonus dividend to shareholders.
(iii) The preference shares, which are redeemable at a premium of 10% any time after
31st March, 2012 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 proposed)
Profit & Loss A/c Dr. 1,50,000
To Bonus to Equity Shareholders A/c 1,50,000
(Being bonus dividend declared)
Share Final Call A/c Dr. 1,50,000
To Equity Share Capital A/c 1,50,000
(Being final call made @ ` 3 on 50,000 shares)
Bonus to Equity shareholders A/c Dr. 1,50,000
To Share Final Call A/c 1,50,000
(Being adjustment of bonus dividend against final call)
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)
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)
General Reserve A/c Dr. 1,94,800
2.10 Accounting
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)
Statement of Profit & Loss of P Ltd.

for the year ended 31st March, 2012
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 2012
Particulars Notes `
Equity and Liabilities
a Share capital 1 5,00,000
b Reserves and Surplus 2 3,05,200
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 fully paid up (of the above 5,00,000
equity shares ` 3 per share has not been received in cash but
has been capitalised by issuing bonus dividend)
Total 5,00,000
Less: Utilised for redemption of preference share (1,94,800) 105,200
Less: Adjustments/Appropriations
Premium on redemption (20,000)
Preference Dividend (20,000)
Equity Dividend (70,000)
Bonus Dividend (1,50,000)
Capital Redemption Reserve (5,200)
Total (2,65,200) -
Total 3,05,200
3. Long-term borrowings
Secured
10% Debentures 2,20,000
Total 2,20,000
2.12 Accounting
4. Other current liabilities

Proposed dividend 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, 2012
`
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
Note : In the absence of information, it has been assumed that the amount of calls in arrear has
been received in the given solution. It has been assumed that 20% dividend on equity shares has
been proposed before the equity shares are made fully paid by way of bonus dividend.
Question 5
What are the maximum limits of managerial remuneration for companies having adequate profits?
Answer
For companies having adequate profits, maximum limits of managerial remuneration in different
circumstances are as under:
(i) Overall (excluding fee for attending meetings) 11% of net profit
(ii) If there is one managerial person 5% of net profit
(iii) If there are more than one managerial person 10% of net profit
(iv) Remuneration of part-time directors:
(a) If there is no managing or whole-time director 3% of net profit
(b) If there is a managing or whole-time director 1% of net profit
Question 6
Calculate the maximum remuneration payable to the Managing Director based on effective
capital of a non-investment company for the year, from the information given below:
(` in ‘000)
(i) Profit for the year (calculated as per Section 349, 350 & 351 of the 3,000
Companies Act, 1956)
(ii) Paid up capital 18,000
(iii) Reserves & surplus 7,200
(iv) Securities premium 1,200
(v) Long term loans 6,000
(vi) Investment 3,600
(vii) Preliminary expenses not written off 3,000
(viii) Remuneration paid to the Managing Director during the year 600
Answer
Calculation of Effective Capital∗∗ of the Company
` in '000
Paid-up capital 18,000
Add: Reserves and surplus 7,200
Securities premium 1,200
Long term loans 6,000
32,400
Less: Investments 3,600
Preliminary expenses 3,000 (6,600)
Effective capital for the purpose of managerial remuneration 25,800
As effective capital is less than ` 5 crores but more than ` 1 crore, therefore maximum
remuneration payable to the Managing Director should be @ ` 1,00,000 per month.
So, maximum remuneration payable to the Managing Director for the year
(` 1,00,000 x 12) = ` 12,00,000
∗∗
It is assumed that the company is having inadequate net profit and remuneration to a managerial
person by way of salary, dearness allowance, perquisites and any other allowances is not exceeding
the ceiling limit of ` 24,00,000 p.a.
2.14 Accounting
Question 7
The following items were extracted from the Balance Sheet of Xansa Ltd. as on 1st April, 2011:
`
13½% Preference Share capital 4,00,000
Equity Share Capital fully paid up 5,00,000
Equity Share Capital 60% partly paid up 3,00,000
Securities Premium 7,00,000
Profit before interest on debentures and before payment of tax @ 30% is ` 1,50,000 for the
year ended 31st March, 2012.
The Board of Directors of the Company proposed a dividend of 15% on equity capital and
capitalisation of profits for making partly paid-up shares into fully paid up. Corporate dividend
tax is payable @ 16.2225%.
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 31st March, 2012.
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), as rate of dividend is 15% as per the Sec.
205 (2A) of the Companies Act read with the Companies
(Transfer of Profits to Reserves) Rules, 1975)

To Proposed preference share dividend A/c 54,000
(Being preference share dividend payable @ 13½% on
` 4,00,000)
To Proposed equity share dividend A/c 1,20,000
(Being equity share dividend payable @ 15% on
` 8,00,000)
To Provision for corporate dividend tax A/c 28,227
(Being provision made for corporate dividend tax @
16.2225% on total dividend of ` 1,74,000)
(Being partly paid equity shares converted to fully paid up,
by capitalization of profit)
Balance Sheet (Extracts) as on 31st March, 2012
`
Share capital:
13½% Preference share capital 4,00,000
Equity share capital fully paid up 10,00,000
Reserves and Surplus:
General Reserve 35,000
Profit and Loss Account 2,62,773
Secured Loan:
Provisions:
Corporate Income-tax 3,00,000
Proposed Dividend:
Preference 54,000
Equity 1,20,000 1,74,000
Corporate Dividend Tax 28,227
Note: It is assumed that debenture interest has been paid.
2.16 Accounting
UNIT 2 : CASH FLOW STATEMENT

BASIC CONCEPTS AND STEPS TO SOLVE THE PROBLEMS
¾ Dealt with under AS 3
¾ Based on cash concept of profit
¾ Benefits include providing information relating to changes in cash and cash equivalents
of an enterprise.
¾ Useful tool of planning
¾ Cash include :
(a) Cash in hand
(b) Demand deposits with banks
(c) Cash equivalents
¾ 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
¾ Operating activities are principal revenue generating activities
¾ Investing Activities relate to acquisition and disposal of long-term assets and other
investments
¾ 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.
¾ Methods to calculate cash flow from operating activities include:
(a) Direct Method
(b) Indirect Method also known as reconciliation method
¾ 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
¾ 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
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 in 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:
(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.
2.18 Accounting
Under the indirect method, the net cash flow from operating activies 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 31.3,2010:
Balance Sheets of Mr. Zen
Liabilities As on 1.4.2009 As on 1.4.2010
` `
Zen’s Capital A/c 10,00,000 12,24,000
Sundry creditors 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 1.4.2009 As on 1.4.2010
` `
Land 6,00,000 8,80,000
Plant and Machinery 6,40,000 4,40,000
Stock 2,80,000 2,00,000
Debtors 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 old for
` 40,000. The provision for depreciation on 1.4.2009 was ` 2,00,000 and 31.3.2010 was
` 3,20,000. The net profit for the year ended on 31.3.2010 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 Stock 80,000
Increase in Debtors (1,60,000)
Increase in Creditors 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 1.4.2009 80,000
Cash balance as on 31.3.2010 56,000
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
2.20 Accounting
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
Ms. Joyti of Star Oils Limited has collected the following information for the preparation of cash flow
statement for the year 2011 :
(` in lakhs)
Net Profit 25,000
Dividend (including dividend tax) paid 8,535
Provision for Income tax 5,000
Income tax paid during the year 4,248
Loss on sale of assets (net) 40
Book value of the assets sold 185
Depreciation charged to Profit & Loss Account 20,000
Amortisation of Capital grant 6
Profit on sale of Investments 100
Carrying amount of Investment sold 27,765
Interest income on investments 2,506
Increase expenses 10,000
Interest paid during the year 10,520
Increase in Working Capital (excluding Cash & Bank Balance) 56,075
Purchase of fixed assets 14,560
Investment in joint venture 3,850
Expenditure on construction work in progress 34,740
Proceeds from calls in arrear 2
Receipt of grant for capital projects 12
Proceeds from long-term borrowings 25,980

Proceeds from short-term borrowings 20,575
Opening cash and Bank balance 5,003
Closing cash and Bank balance 6,988
Required :
Prepare the Cash Flow Statement for the year 2011 in accordance with AS 3, Cash Flow
Statements issued by the Institute of Chartered Accountants of India. (make necessary
assumptions).
Answer
Star Oils Limited
Cash Flow Statement
for the year ended 31st December, 2011
(` in lakhs)
Cash flows from operating activities
Net profit before taxation ` (25,000 + 5,000) 30,000
Adjustments for :
Depreciation 20,000
Loss on sale of assets (Net) 40
Amortisation of capital grant (6)
Profit on sale of investments (100)
Interest income on investments (2,506)
Interest expenses 10,000
Operating profit before working capital changes 57,428
Changes in working capital (Excluding cash and bank balance) (56,075)
Cash generated from operations 1,353
Income taxes paid (4,248)
Net cash used in operating activities (2,895)
Cash flows from investing activities
Sale of assets 145
Sale of investments (27,765 + 100) 27,865
Interest income on investments 2,506
Purchase of fixed assets (14,560)
Investment in joint venture (3,850)
Expenditure on construction work-in progress (34,740)
Net cash used in investing activities (22,634)
2.22 Accounting
Cash flows from financing activities

Proceeds from calls in arrear 2
Receipts of grant for capital projects 12
Proceeds from long-term borrowings 25,980
Proceed from short-term borrowings 20,575
Interest paid (10,520)
Dividend (including dividend tax) paid (8,535)
27,514
Net increase in cash and cash equivalents 1,985
Cash and cash equivalents at the beginning of the period 5,003
Cash and cash equivalents at the end of the period 6,988
Working note :
Book value of the assets sold 185
Less : Loss on sale of assets (40)
Proceeds on sale 145
Assumption :
Interest income on investments ` 2,506 has been received during the year.
Question 5
From the following Summary Cash Account of X Ltd. prepare Cash Flow Statement for the year
ended 31st March, 2011 in accordance with AS 3 (Revised) using the direct method. The company
does not have any cash equivalents.
Summary Cash Account for the year ended 31.3.2011
` ’000 ` ’000
Balance on 1.4.2010 50 Payment to Suppliers 2,000
Issue of Equity Shares 300 Purchase of Fixed Assets 200
Receipts from Customers 2,800 Overhead expense 200
Sale of Fixed Assets 100 Wages and Salaries 100
Taxation 250
Dividend 50
Repayment of Bank Loan 300
Balance on 31.3.2011 150
3,250 3,250
Answer
X Ltd.
Cash Flow Statement for the year ended 31st March, 2011
(Using the direct method)
` ’000 ` ’000
Cash flows from operating activities
Cash receipts from customers 2,800
Cash payments to suppliers (2,000)
Cash paid to employees (100)
Cash payments for overheads (200)
Cash generated from operations 500
Income tax paid (250)
Net cash generated from operating activities 250
Cash flows from investing activities
Payments for purchase of fixed assets (200)
Proceeds from sale of fixed assets 100
Net cash used in investing activities (100)
Cash flows from financing activities
Proceeds from issuance of equity shares 300
Bank loan repaid (300)
Dividend paid (50)
Net cash used in financing activities (50)
Net increase in cash 100
Cash at beginning of the period 50
Cash at end of the period 150
Question 6
From the following details relating to the Accounts of Grow More Ltd. prepare Cash Flow
Statement:
Liabilities 31.03.2011 (`) 31.03.2010 (`)
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
2.24 Accounting
Proposed dividend 2,00,000 1,00,000

Sundry Creditors 7,00,000 8,20,000
25,00,000 20,00,000
Assets
Land and Building 6,00,000 4,00,000
Investments 1,00,000 –
Sundry Debtors 5,00,000 7,00,000
Stock 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) During the year one old machine costing 50,000 (WDV 20,000) was sold for ` 35,000.
(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
Net Profit 40,000
Proposed Dividend 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 Stock (2,00,000)
Decrease in debtors 2,00,000
Decrease in creditors (1,20,000)
Income tax paid (50,000)

Net Cash from operating activities 3,10,000
Cash Flow from Investing Activities
Purchase of fixed assets (3,45,000)
Expenses on building (2,00,000)
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 Cash (Balancing figure) 3,45,000 By Cash (sale of machine) 20,000
_______ By Balance c/d 7,00,000
8,45,000 8,45,000
2.26 Accounting
Question 7
From the following Balance Sheet and information, prepare Cash Flow Statement of Ryan Ltd. for
the year ended 31st March, 2011:
Balance Sheet
31st March, 2011 31st March, 2010
` `
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 –
Sundry Creditors 95,000 80,000
Bills Payable 20,000 30,000
Liabilities for Expenses 30,000 20,000
Provision for Taxation 95,000 60,000
Proposed Dividend 90,000 60,000
15,00,000 12,50,000
` `
Assets
Investments 50,000 80,000
Inventory 95,000 90,000
Bills Receivable 75,000 95,000
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, 2010 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.
(iv) Pre-acquisition dividend received ` 5,000 was adjusted against cost of investment.
(v) Directors have proposed 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, 2011
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)
Decrease in bills receivable 20,000
Increase in debtors (45,000)
Increase in creditors 15,000
Decrease in bills payable (10,000)
Increase in accrued liabilities 10,000
Income taxes paid (1,00,000)
2.28 Accounting
2,23,000
Voluntary separation payments (1,10,000)
Cash flow from investing activities
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
Cash flow from financing activities
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 31.3.2010 (50,000)
20,000
Provision for taxation 1,35,000
Proposed dividend 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
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
2.30 Accounting
7. Proposed Dividend 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 8
The Balance Sheet of New Light Ltd. for the years ended 31st March, 2010 and 2011 are as follows:
Liabilities 31st 31st Assets 31st 31st
March March March March
2010 2011 2010 2011
(` ) (` ) (` ) (` )
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
Proposed dividend 1,20,000 1,44,000
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.
(v) Debentures and preference share capital redeemed at 5% premium.
(vi) Company decided to value stock at cost, whereas previously the practice was to value stock
at cost less 10%. The stock according to books on 31.3.2010 was ` 2,16,000. The stock on
31.3.2011 was correctly valued at ` 3,00,000.
Prepare Cash Flow Statement as per revised Accounting Standard 3 by indirect method.
Answer
New Light Ltd.
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
Proposed dividend 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
2.32 Accounting

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 stock will increase opening stock 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 stock, the opening balance of profit and loss account be
increased by ` 24,000.
The opening balance of profit and loss account after revaluation of stock 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 assets) 1,00,000
To Bank A/c 8,56,000 By Accumulated
(balancing figure depreciation A/c 80,000
being assets By Profit and loss A/c(loss
purchased) on sale of assets) 20,000 2,00,000
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.
2.34 Accounting
Question 9
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 31.03.2011:
Balance Sheet as on
Liabilities 31st March 31st March Assets 31st March 31st March
2010 2011 2010 2011
` ` ` `
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
Creditors 8,80,000 8,20,000 Debtors 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, 2011, after charging depreciation ` 1,80,000 is
` 22,40,000.
(ii) Debtors 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 2010-2011.
Answer
Cash Flow Statement of ABC Ltd. for the year ended 31.3.2011
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:
Debtors (` 30,60,000 – ` 23,90,000) 6,70,000
Prepaid expenses (` 1,20,000 – ` 90,000) 30,000
Decrease in current liabilities:
Creditors (` 8,80,000 – ` 8,20,000) 60,000
Expenses outstanding (` 3,30,000 – ` 2,70,000) 60,000 (8,20,000)
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 1.4.2010
(` 15,20,000 + ` 11,80,000) 27,00,000
Cash and cash equivalents as on 31.3.2011
(` 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 debtors as on 31.3.2011. Alternatively, the adjustment of writing
off bad debts may be ignored and the solution can be given on the basis of figures of debtors and
provision for doubtful debts as appearing in the balance sheet on 31.3.2011.
Question 10
The following figures have been extracted from the books of X Limited for the year ended on
31.3.2011. 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.
2.36 Accounting
(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 31.3.2011 at a premium of
5%. Further the company issued 50,000 equity shares of ` 10 each at a premium of 20% on
2.4.2010. Dividend on preference shares were paid at the time of redemption.
(iv) Dividend paid for the year 2009-2010 ` 5 lakhs and interim dividend paid ` 3 lakhs for
the year 2010-2011.
(v) Land was purchased on 2.4.2010 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 31.3.2010 As on 31.3.2011
` `
Stock 12,00,000 13,18,000
Cash in hand 1,96,300 35,300
Bills receivable 50,000 40,000
Bills payable 45,000 40,000
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 stock (1,18,000)
Increase in sundry debtors (5,100)
Decrease in bills receivable 10,000
Decrease in bills payable (5,000)
Increase in sundry creditors 5,300
Increase in outstanding expenses 6,800 (1,06,000)
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 31.3.2010 1,96,300
Cash and cash equivalents as on 31.3.2011 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.
2.38 Accounting
Question 11
Raj Ltd. gives you the following information for the year ended 31st March, 2011:
(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.
(i) Trade creditors on 31.3.2011 exceed the outstanding on 31.3.2010 by ` 1,00,000.
(ii) Tax paid during the year amounts to ` 1,50,000.
(iii) Amounts paid to Trade creditors during the year ` 35,50,000.
(iv) Administrative and Selling expenses paid ` 3,60,000.
(v) One new machinery was acquired in December, 2010 for ` 6,00,000.
(vi) Dividend paid during the year ` 1,20,000.
(vii) Cash in hand and at Bank on 31.3.2011 ` 70,000.
(viii) Cash in hand and at Bank on 1.4.2010 ` 50,000.
Prepare Cash Flow Statement for the year ended 31.3.2011 as per the prescribed Accounting
standard.
Answer
Cash flow statement of Raj Limited
Direct Method
Cash flow from operating activities: ` `
Cash receipt from customers (sales) 48,00,000
Cash paid to suppliers and expenses (` 35,50,000 + ` 3,60,000) (39,10,000)
Cash flow 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 31.3.2011 70,000
Question 12
The following are the summarized Balance Sheets of ‘X’ Ltd. as on March 31, 2010 and 2011:
(` ) (`)
Equity share capital 10,00,000 12,50,000
Capital Reserve --- 10,000
General Reserve 2,50,000 3,00,000
Profit and Loss A/c 1,50,000 1,80,000
Long-term loan from the Bank 5,00,000 4,00,000
Provision for Taxation 50,000 60,000
Proposed Dividends 1,00,000 1,25,000
25,50,000 27,25,000
Assets Year 2010 Year 2011

(` ) (` )
Machinery 7,50,000 9,20,000
Investment 1,00,000 50,000
Stock 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, 2011.
(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.
2.40 Accounting
(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, 2011 as per
AS 3 (Indirect method).
Answer
Cash Flow Statement for the year ending on March 31, 2011
` `
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 Stock 20,000
Increase in Sundry Debtors (20,000)
Decrease in Sundry Creditors (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 (2,50,000-1,00,000) 1,50,000
Repayment of Long term loan (1,00,000)
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 31.3.2011
`
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: Provided for proposed dividend during the year 1,25,000
2,60,000
(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) Proposed Dividend 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
2.42 Accounting
Question 13
From the following information, prepare cash flow statement of A (P) Ltd. as at 31st March, 2010 by
using indirect method:
Balance Sheet
2009 2010
` `
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
Creditors 3,50,000 4,00,000
34,00,000 36,60,000
Assets:
Fixed assets 17,00,000 20,00,000
Investment in shares 2,00,000 2,00,000
Stock 6,80,000 7,00,000
Debtors 7,20,000 6,60,000
Cash 60,000 70,000
34,00,000 36,60,000
Income Statement for the year ended 31st March, 2010
`
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
Answer
Cash Flow Statement of A (P) Ltd.
for the year ended 31st March 2010
` `
(i) Cash flows from operating activities
Profit before tax 5,90,000
Adjustments for
Interest 1,40,000
Dividend (50,000)
Add: Decrease in bills receivable 10,000
Decrease in debtors 60,000
Increase in creditors 50,000
10,20,000
Less: Increase in stock (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]
2.44 Accounting
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 14
The Balance Sheets of X Ltd. as on 31st March, 2010 and 31st March, 2011 are as follows:
Liabilities 2010 2011 Assets 2010 2011
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 5,00,000 8,00,000
Machinery
Profit and Loss A/c 1,00,000 1,60,000 Stock 1,00,000 75,000
Sundry Creditors 1,53,000 1,90,000 Sundry Debtors 1,50,000 1,60,000
Bills Payable 40,000 50,000 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 2011.
(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 2011 as per AS 3
(revised), using indirect method.
Answer
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 Stock 25,000
Increase in Creditors 37,000
Increase in Bills Payable 10,000 72,000
1,99,000
Less: Increase in Debtors (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
2.46 Accounting
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 15
The following are the summarized Balance Sheet of Star Ltd. as on 31st March, 2010 and 2011:
(` ’000)
2010 2011
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
Long term borrowings 180 240
Sundry Creditors 360 440
Provision for Taxation 20 40
Proposed Dividend 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
Sundry Debtors 640 900
Cash and Bank Balance 100 260
5,500 6,520
∗
160% of (12,000-7,000) = ` 8,000.
The Profit and Loss account for the year ended 31st March, 2011 disclosed:
(` ’000)
Profit before tax 780
Less: Taxation (160)
Profit after tax 620
Less: Proposed dividend (480)
Retained Profit 140
The following information are also available:
(1) 40,000 equity shares issued at a premium of Re.1 per share.
(2) The Company paid taxes of ` 1,40,000 for the year 2010-11.
(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
Interest on debentures∗ 126
Operating profit before changes in working capital 2,066
Less: Increase in Sundry Debtors (260)
Less: Increase in Inventories (400)
Add: Increase in Sundry Creditors 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)
∗
It is assumed that debentures of ` 1,00,000 were issued at the beginning of the year.
2.48 Accounting
(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
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
EXERCISES
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 2011 2010
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, 2011
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
2.50 Accounting
40
Dividends 15
Net profit carried to Balance Sheet 25
Your are informed by the accountant that ledgers relating to debtors, creditors and stock 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 :
2011 2010
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
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 31.3.2010 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, 2011 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]
Debtors 50,000
Stock and work-in-progress 38,500
Creditors [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 2011 and 2012:
Liabilities 31-3-2011 31-3-2012
` `
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
Sundry creditors 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
Stock 3,00,000 2,80,000
Sundry debtors 4,00,000 4,20,000
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.
2.52 Accounting
(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 2012 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 and Net cash from financing activities ` 50,000]
3
Profit or Loss Prior to Incorporation
BASIC CONCEPTS
¾ Profit or loss of a business for the period prior to the date the company came into existence
is referred to as Pre-Incorporation Profits or Losses.
¾ 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.
Variable expenses linked with Turnover On the basis of Turnover in the pre and
[e.g. Carriage/Cartage outward, Selling and post incorporation.
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. Salaries, On the basis of Time in the pre and post
Office and Administration Expenses, Rent, incorporation periods.
Rates and Taxes, Printing and Stationery,
3.2 Accounting
Telephone, Telegram and Postage,

Depreciation, Miscellaneous Expenses]
Expenses exclusively relating to pre- Charge to pre-incorporation period but if
Incorporation period [e.g. Interest on the purchase consideration is not paid on
Vendor’s Capital] taking over of business, interest for the
subsequent period is charged to post
incorporation period.
Expenses exclusively relating to post- Charge to Post-incorporation period
incorporation period [e.g. 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 under the Charge to Post-incorporation period
Companies Act, 1956.
(ii) For Tax Audit under section 44AB of On the basis of turnover in the respective
the Income tax Act, 1961 periods.
Interest on purchase consideration to
vendor:
(i) For the period from the date of Charge to Pre-incorporation period
acquisition of business to date of
incorporation.
(ii) For the period from the date Charge to Post-incorporation period
¾ A company taking over a running business may also agree to collect its debts as an agent
for the vendor and may further undertake to pay the creditor on behalf of the vendors. In
such a case, the debtors and creditors of the vendors will be included in the accounts for
the company by debit or credit to separate total accounts in the General Ledger to
distinguish them from the debtors and creditors of the business and contra entries will be
made in corresponding Suspense Accounts. Also details of debtors and creditors balance
will be kept in separate ledger.
¾ The vendor is treated as a creditor for the cash received by the purchasing company in
respect of the debts due to the vendor, just as if he has himself collected cash from his
debtors and remitted the proceeds to the purchasing company.
¾ The vendor is considered a debtor in respect of cash paid to his creditors by the
purchasing company. The balance of the cash collected, less paid, will represent the
amount due to or by the vendor, arising from debtors and creditors balances which have
been taken over, subject to any collection expenses.
¾ The balance in the suspense accounts will be always equal to the amount of debtors and
creditors taken over remaining unadjusted at any time.
Profit or Loss Prior to Incorporation 3.3
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 1st April, 2009. The company was
incorporated on 1st August, 2009. The following summarized Profit and Loss Account has
been prepared for the year ended 31.3.2010:
` `
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
3.4 Accounting
(a) Total sales for the year, which amounted to ` 19,20,000 arose evenly upto the date of
30.9.2009. 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, 2009 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 30th September, 2009 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
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:
Pre incorporation period = 1st April, 2009 to 31st July, 2009
i.e. 4 months
1. Sales ratio
Let the monthly sales for first 6 months (i.e. from 1.4.2009 to 30.09.09) be = x
Then, sales for 6 months = 6x
2 5
Monthly sales for next 6 months (i.e. from 1.10.09 to 31.3.2010) = 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
2. Rent
`
Rent for pre-incorporation period (` 2,000 x 4) 8,000 (pre)
Rent for post incorporation period
August,2009 & September, 2009 (` 2,000 x 2) 4,000
October,2009 to March,2010 (` 2,400 x 6) 14,400 18,400 (post)
3. 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
4. Interest paid to vendor till 30th September, 2009
Pre Post
` `
⎛ ` 4,200 ⎞ 2,800
Interest for pre-incorporation period ⎜ ×4⎟
⎝ 6 ⎠
3.6 Accounting
Interest for post incorporation period i.e. for

⎛ ` 4,200 ⎞ 1,400
August, 2009 & September, 2009 = ⎜ ×2⎟
⎝ 6 ⎠
5. 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
Question 4
Rama Udyog Limited was incorporated on August 1, 2011. It had acquired a running business
of Rama & Co. with effect from April 1, 2011. During the year 2011-12, 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, 2011 ` 5,000.
Please ascertain pre-incorporation and post-incorporation profit for the year ended 31st March,
2012.
Answer
Statement showing pre and post incorporation profit for the year ended 31st March, 2012
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 1st April, 2011 to
31st July, 2011) will be 4 × .50 = ` 2 and for the last eight months (i.e. from 1st August,
2011 to 31st March, 2012) will be (2 × .50 + 6 × 1) = ` 7. Thus sales ratio is 2:7.
2. Time ratio
1st April, 2011 to 31st July, 2011 : 1st August, 2011 to 31st March, 2012
= 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 5
A firm M/s. Alag, which was carrying on business from 1st July, 2011 gets itself incorporated
as a company on 1st November, 2011. The first accounts are drawn upto 31st March 2012.
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
31st 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.
3.8 Accounting
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
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, 2011, 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
4
Accounting for Bonus Issue
BASIC CONCEPTS
¾ 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.
¾ Bonus Issue is also known as a "scrip issue" or "capitalization issue".
¾ 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.
¾ Bonus shares can be issued from following :
• General Reserves
• Balance in Profit and Loss Account
• Capital Reserve realized in cash
• Securities Premium realized in cash
• Capital Redemption Resserve
¾ The SEBI (Disclosure and Investor Protection) Guidelines, 2000 which came into force
w.e.f. 27th day of January, 2000 require that the company while issuing bonus shares
shall ensure the following :
(i) No issuer shall make a bonus issue of equity shares unless it has made reservation of
equity shares of the same class in favour of the holders of outstanding [compulsorily]
convertible debt instruments [,if any,] in proportion to the convertible part thereof.
(ii)The equity shares [so] reserved for the holders of fully or partly [compulsorily] convertible
debt instruments shall be issued at the time of conversion of such convertible debt
instruments on the same terms or same proportion [at] which the bonus shares were
issued.
4.2 Accounting
Question 1
The following is the summarised Balance Sheet of Bumbum Limited as at 31st March, 2012:
`
Sources of funds
Authorized capital
50,000 Equity shares of ` 10 each 5,00,000
10,000 Preference shares of ` 100 each 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
Sundry Creditors 1,70,000
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
Sundry Debtors 6,20,000
Cash & Bank balance 2,80,000
25,10,000
In Annual General Meeting held on 20th June, 2012 the company passed the following
resolutions:
(i) To split equity share of ` 10 each into 5 equity shares of ` 2 each from 1st July, 12.
(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.
Accounting For Bonus Issue 4.3
On 10th July, 2012 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, 2012.
The company fixed 5th September, 2012 as record date and bonus issue was concluded by
12th September, 2012.
You are requested to journalize the above transactions including cash transactions and
prepare Balance Sheet as at 30th September, 2012. All working notes should form part of your
answer.
Answer
Bumbum Limited
Journal Entries
2012 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)
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)
4.4 Accounting
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 debentureholders 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 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, 2012
Particulars Notes `
Total 19,42,500
Assets
a Fixed assets
Tangible assets 7,80,000
b Deferred tax asset 3,40,000
2 Current assets
Trade receivables 6,20,000
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
2 Reserves and Surplus
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
3. Other current asset
Preliminary expenses 1,40,000
Deferred tax assets (assumed to be current asset) 3,40,000
Total 4,80,000
4.6 Accounting
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 from the Balance Sheet of M/s. Yahoo Ltd. as at 31st March, 2012:
(`)
Authorised capital:
50,000, 10% Preference shares of ` 10 each 5,00,000
Issued and subscribed capital:
40,000, 10% Preference shares of ` 10 each fully paid 4,00,000
1,80,000, Equity shares of ` 10 each, of which ` 7.50 paid up 13,50,000
Reserves and Surplus:

Capital reserve 1,50,000
Profit and loss account 3,00,000
On 1 April, 2012, the company has made a final call @ ` 2.50 each on 1,80,000 equity
st
shares. The call money was received by 30th April, 2012. There after the company decided to
capitalize its reserves by issuing bonus shares at the rate of one share for every three shares
held. Securities premium of ` 50,000 includes a premium of ` 20,000 for shares issued to
vendor for purchase of a special machinery. Capital reserve includes ` 60,000 being profit on
exchange of plant and machinery.
Show necessary Journal Entries in the books of the company and prepare the extract of the
Balance Sheet after bonus issue. Necessary assumption, if any, should form part of your
answer.
Answer
In the books of M/s. Yahoo Ltd.
Journal Entries
Date Particulars ` `
1.4.2012 Equity share final call A/c Dr. 4,50,000
(Being the final call of ` 2.50 per share on 1,80,000
equity shares made)
30.4.2012 Bank A/c Dr. 4,50,000
To Equity share final call A/c 4,50,000
(Being final call money on 1,80,000 shares received)
30.4.2012 Securities premium A/c (50,000 – 20,000) Dr. 30,000
Capital reserve A/c (1,50,000 – 60,000) Dr. 90,000
General reserve A/c Dr. 2,40,000
Profit and loss A/c Dr. 2,40,000
To Bonus to shareholders A/c 6,00,000
(Being utilisation of reserves for bonus issue of one
share for every three shares held)
30.4.2012 Bonus to equity shareholders A/c Dr. 6,00,000
(Being bonus shares issued)
4.8 Accounting
Extract of Balance Sheet (After bonus issue)

Particulars `
Notes No.
Equity & Liabilities
1. Shareholders’ Funds
(a) Share Capital 1 28,00,000
(b) Reserves & Surplus 2 1,40,000
Notes to Accounts
`
1. Share Capital
Authorised share capital:
50,000, 10% Preference shares of ` 10 each 5,00,000
2,40,000, Equity shares of ` 10 each (refer W.N.) 24,00,000
Issued and subscribed capital:
40,000, 10% Preference shares of ` 10 each fully 4,00,000
paid
2,40,000, Equity shares of ` 10 each fully paid 24,00,000
(Out of the above, 60,000 equity shares of ` 10
each have been issued by way of bonus)
28,00,000
2. Reserves and Surplus:
Less: Utilisation for issue of bonus shares (2,40,000) -
Capital reserve 1,50,000
Less: Utilisation for issue of bonus shares (90,000) 60,000
Less: Utilisation for issue of bonus shares (30,000) 20,000
Profit and loss A/c 3,00,000
Less: Utilisation for issue of bonus shares (2,40,000) 60,000
1,40,000
Assumption:
1. As per SEBI Guidelines, Capital Reserve and Securities Premium collected in cash only
can be utilized for the purpose of issue of bonus shares. It is assumed that balance of
capital reserve and securities premium is collected in cash only.
2. It is also assumed that necessary resolutions have been passed and requisite legal
requirements related to the issue of bonus shares have been complied with before issue
of bonus shares.
Working Note:
On the basis of the above assumptions, the Authorised Capital should be increased as under:
Required for bonus issue ` 6,00,000
Less: Balance of authorised equity share capital (available) (` 2,00,000)
Authorised capital to be increased ` 4,00,000
Total authorised capital after bonus issue (` 20,00,000 + ` 4,00,000) = ` 24,00,000.
Question 3
The following is the summarized Balance Sheet of Trinity Ltd. as at 31.3.2011:
Trinity Ltd.
Balance Sheet as at 31st March, 2011
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 25,000
Shares of ` 10 each 1,00,000 Debtors 25,000
10,000 Equity Shares of ` 10 each 1,00,000 Cash and Bank Balances 50,000
(A) 2,00,000 Misc. Expenditure to the extent 20,000
Reserves and Surplus not written of
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 31.3.2012, the company made a net profit of ` 15,000 after providing
` 20,000 depreciation and writing off the miscellaneous expenditure of ` 20,000.
The following additional information is available with regard to company’s operation :
4.10 Accounting
1. The preference dividend for the year ended 31.3.2012 was paid before 31.3.2012.
2. Except cash and bank balances other current assets and current liabilities as on 31.3.2012,
was the same as on 31.3.2011.
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
31.3.2012.
5. To meet the cash requirements of redemption, the company sold a portion of the investments,
so as to leave a minimum balance of `30,000 after such redemption.
6. Investments were sold at 90% of cost on 31.3.2012.
You are required to
(a) Prepare necessary journal entries to record redemption and issue of bonus shares.
(b) Prepare the cash and bank account.
(c) Prepare the Balance Sheet as at 31st March, 2012 incorporating the above transactions.
Answer
(a) Journal Entries in the Books of Trinity Ltd.
Dr. Cr.
` `
Securities Premium A/c Dr. 10,000
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. 45,000
To Investments 50,000
(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)
(b) Cash and Bank Account

` `
To Balance b/d 50,000 By Preference Dividend 10,000
To Cash from operations: By Preference shareholders 1,10,000
Profit 15,000 By Balance c/d 30,000
Add : Depreciation 20,000
Add : Miscellaneous
Expenditure
written off 20,000 55,000
To Investments 45,000
1,50,000 1,50,000
(c) Balance Sheet of Trinity Limited
as at 31st March, 2012 (after redemption)
Particulars Note No Amount
`
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 2,00,000
(b) Reserves and Surplus 2 98,500
(2) Current Liabilities
(a) Trade payables 11,500
Total 3,10,000
4.12 Accounting
II. Assets
(1) Non-current assets
(a) Fixed assets 3
(i) Tangible assets 1,80,000
(b) Non-current investments (Market Value ` 45,000) 50,000
(2) Current assets
(a) Current investments -
(b) Inventories 25,000
(c) Trade receivables 25,000
(d) Cash and cash equivalents 30,000
Total 3,10,000
Notes to Accounts
`
1 Share Capital
(i) Authorised Capital 10,00,000
(ii) Issued, Subscribed and Paid-up Capital
20,000 Equity Shares of ` 10 each fully paid
(10,000 shares have been allotted as Bonus Shares by
capitalising capital Redemption Reserve) 2,00,000 2,00,000
Less: Transfer to CRR (1,00,000) 20,000
Less: Premium on redemption of preference shares (10,000) 60,000
Less: Utilised for Bonus shares (1,00,000) -
Profit and Loss A/c
Operating profit of the year(W.N.(i)) 10,000
Add: profit brought forward from last year 18,500
28,500
Less: Preference dividend (10,000) 18,500 98,500
3 Tangible assets
Gross Block 3,00,000
Less : Depreciation up to 31.3.2011 (1,00,000)

For the year (20,000) 1,80,000
Working Notes:
`
(i) Profit and Loss for the year ending 31st March, 2012
Profit for the year 15,000
Less : Loss on sale of investments (5,000)
Balance as on 31.3.2012 10,000
(ii) Sale of Investments
Cost of Investments 50,000
Less : Cash Received (45,000)
Loss on Sale of Investments 5,000
Total Investments: 1,00,000
Less : Cost of Investments sold (50,000)
Cost of Investments on hand 50,000
Market value (90% of ` 50,000) 45,000
Question 4
The following notes pertain to Brite Ltd.'s Balance Sheet as on 31st March, 2012:
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 8,000
2 crore 11% Cumulative Preference Shares of ` 10 each,
fully called and paid up 2,000
10,000
(2) Reserves and Surplus :
Capital Reserve 485
4.14 Accounting
Capital Redemption Reserve 1,000

Surplus i.e. credit balance of Profit & Loss (Appropriation) Account 273
Total 4,798
On 2nd April 2012, the company made the final call on equity shares @ ` 2 per share.
The entire money was received in the month of April, 2012.
On 1st June 2012, the company decided to issue to equity shareholders bonus shares at
the rate of 2 shares for every 5 shares held and for this purpose, it decided to utilize the
capital reserves to the maximum possible extent.
Pass journal entries for all the above mentioned transactions. Also prepare the notes on
Share Capital and Reserves and Surplus relevant to the Balance Sheet of the company
immediately after the issue of bonus shares.
Answer
Journal Entries in the books of Brite Ltd.
Dr. Cr.
2012 ` in ` in
lakhs lakhs
April 2 Equity 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
Securities Premium A/c Dr. 2,000
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
Notes: As per SEBI Guidelines, Capital reserve and Securities premium have been assumed
as realized in cash and hence can be used for issue of fully paid bonus shares.
EXERCISES
1. The summarised Balance Sheet of A Ltd. as at 31.3.2012 is as follows:
Liabilities Rs. Assets Rs.
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
4.16 Accounting

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 Rs.19,00,000)
2. The following is the Trial Balance of Subhash Limited as on 31.3.2012 :
(Figures in ` ‘000)
Debit Rs. Credit Rs.
Land at cost 110 Equity Capital (Shares of ` 10 each) 150
Plant & Machinery at cost 385 10% Debentures 100
Debtors 48 General Reserve 65
Stock (31.3.2012) 43 Profit & Loss A/c 36
Bank 10 Securities Premium 20
Adjusted Purchases 160 Sales 350
Factory Expenses 30 Creditors 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 31.3.2012, 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) Proposed final dividend 10%.
(e) Suspense account of ` 2,000 represents cash received for the sale of some of the machinery on 1.4.2011.
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 31.3.2012 and a
balance sheet on that date as per the provisions of Revised Schedule VI of the Companies Act, 1956.
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
¾ 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.
¾ 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.
¾ Reconstruction account is utilized for writing-off fictitious and intangible assets,
writing down over-valued fixed assets, recording new liability etc.
¾ If some credit balance remains in the reconstruction account, the same should be
transferred to the capital reserve account.
¾ 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.
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 31.3.2012 before
reconstruction :
5.2 Accounting
Summarised Balance Sheet of Green Limited as at 31.3.2012

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.
(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.
Internal Reconstruction 5.3
(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
Sundry Creditors 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
Sundry Creditors Account Dr. 1,00,000
5.4 Accounting
To Y 6,00,000
(The total amount due to Y, transferred to his account)
X Dr. 14,00,000
To 14% First Debentures Account 7,00,000
To Capital Reduction 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, 2012
Particulars Notes `
Total 42,00,000
Assets
a Fixed assets
Tangible assets 3 30,00,000
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 31.3.2012:
Equity shares of ` 100 each 1,00,00,000 Fixed assets 1,25,00,000
12% cumulative preference 50,00,000 Investments (Market value 10,00,000
5.6 Accounting
shares of ` 100 each ` 9,50,000)

10% debentures of ` 100 each 40,00,000 Current assets 1,00,00,000
Sundry creditors 50,00,000 P & L A/c 6,00,000
Provision for taxation 1,00,000
2,41,00,000 2,41,00,000
The following scheme of reorganization is sanctioned:
(i) All the existing equity shares are reduced to ` 40 each.
(ii) All preference shares are reduced to ` 60 each.
(iii) The rate of interest on debentures is increased to 12%. The 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
(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) Sundry Creditors A/c Dr. 20,00,000
(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 Liability for Taxation A/c 1,50,000
(Being conversion of the provision for taxation into liability
for taxation for settlement of the amount due)
(vi) Capital Reduction A/c Dr. 99,50,000
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
To Capital Reserve A/c 50,000
(Being amount of Capital Reduction utilized in writing off
P & L A/c (Dr.) Balance, Fixed Assets, Current Assets,
Investments and the Balance transferred to Capital
Reserve)
(vii) Liability for Taxation A/c Dr. 1,50,000
To Current Assets (Bank A/c) 1,50,000
(Being the payment of tax liability)
5.8 Accounting
Balance Sheet of Weak Ltd. (and reduced) as on 31.3.2012

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
1,50,000 equity shares of ` 20 each 52,00,000
12% Cumulative Preference shares of ` 60 each 30,00,000
Total 82,00,000
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
Adjustment under scheme of reconstruction (1,50,000) 43,50,000
Working Note:
Capital Reduction Account

` `
To Liability for taxation A/c 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 Sundry creditors 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 31st March, 2012:
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 Stock 2,60,000
Sundry Creditors 3,00,000 Debtors 2,80,000
Cash 30,000
Profit & Loss Account 14,40,000
51,00,000 51,00,000
5.10 Accounting
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 stock and debtors 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, 2012 ` `
(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 Stock A/c 2,60,000
To Debtors A/c 2,80,000
To Capital Reduction A/c 60,000
(Being debenture holders given stock and debtors in full
settlement of their claims)
(iv) Land & Building A/c Dr. 3,60,000
(Being Land & Building appreciated by 30%)
(v) Reconstruction expenses A/c Dr. 5,000

To Cash A/c 5,000
(Being expenses of reconstruction paid)
(vi) Capital Reduction A/c Dr. 21,60,000
To Goodwill A/c 90,000
To Profit and Loss A/c 14,40,000
To Plant & Machinery A/c 5,40,000
To Reconstruction expenses A/c 5,000
To Capital Reserve A/c (Bal. Fig.) 85,000
(Being various losses written off, assets written down and
balance in Capital Reduction A/c transferred to Capital
Reserve A/c)
Balance Sheet (And Reduced) of X Ltd.
as at 31st March, 2012
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
5.12 Accounting
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 3/5th of their holding.
(b) 10% Preference shares fully paid to the extent of 1/5th 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.
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 Equity Share Capital (` 10) A/c 6,00,000
To 10% Preference Share Capital A/c 1,20,000
To 8% Debentures A/c 40,000
To Reconstruction A/c 2,40,000
(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 Application & 1,00,000
Allotment A/c
(Being amount received on issue of 10% First
Debentures for application and allotment Account)
10% First Debentures Application and allotment A/c Dr. 1,00,000
To 10% First Debentures Account 1,00,000
(Being allotment of 10% first Debentures)
Reconstruction 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 Reconstruction 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, 2012 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
5.14 Accounting
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 Stock 3,20,000
8% Debentures of ` 100 each 4,00,000 Trade Debtors 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, Stock at ` 3,50,000 and Trade Debtors 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.
Answer
Journal Entries
` `
1. Equity share final call A/c Dr. 10,00,000
(Being final call made for ` 10 each on 1,00,000 shares)
2. Bank A/c Dr. 10,00,000
To Equity share final call A/c 10,00,000
(Being money on final call received)
3. 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)
4. Bank A/c Dr. 12,50,000
(Being new shares allotted at ` 40 each)
5. Trade Creditors A/c Dr. 12,40,000
(Being payment made to creditors in shares or cash to the
extent of 70% as per reconstruction scheme)
6. 8% Debentures A/c Dr. 3,00,000
12% Debentures A/c Dr. 4,00,000
(Being cancellation of 8% and 12% debentures of Shiv, &
issuance of new 15% debentures and balance transferred
to capital reduction account as per reconstruction
scheme)
5.16 Accounting
7. Bank A/c Dr. 1,00,000

(Being new debentures subscribed by Shiv)
12% Debentures A/c Dr. 2,00,000
To Capital Reduction A/c 50,000
(Being cancellation of 8% and 12% debentures of Ganesh
& issuance of new 15% debentures and balance
transferred to capital reduction account as per
reconstruction scheme)
9. Land and Buildings (51,84,000-42,70,000) Dr. 9,14,000
Stock Dr. 30,000
(Being value of assets appreciated)
10. Outstanding expenses A/c Dr. 10,60,000
To Bank A/c 10,60,000
(Being outstanding expenses paid in cash)
11. Capital Reduction A/c Dr. 33,41,000
To Machinery A/c 1,30,000
To Computers A/c 1,20,000
To Trade Debtors A/c 1,09,000
To Goodwill A/c 22,00,000
To Profit and Loss A/c 7,82,000
(Being amount of Capital Reduction utilized in writing off P
& L A/c (Dr.) balance, goodwill and downfall in value of
other assets)
12. Capital Reserve A/c Dr. 5,00,000
(Being debit balance of capital reduction account adjusted
against capital reserve)
Balance Sheet (as reduced) as on 31.3.2012

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
Particulars ` Particulars `
To Balance b/d 2,68,000 By Trade Creditors A/c 3,43,000
To Equity Share final call 10,00,000 By Outstanding expenses 10,60,000
A/c A/c
5.18 Accounting
To Equity Share Capital 12,50,000 By Balance c/d (bal. fig.) 12,15,000

A/c
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 Debtors A/c 1,09,000 By 8% and 12% Debentures A/c 2,00,000
To Goodwill A/c 22,00,000 By 8% and 12% Debentures A/c 50,000
To Profit and Loss A/c 7,82,000 By Land & Building 9,14,000
By Stock 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 31-03-2012 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 Sundry debtors
4,50,000
6% Debentures 4,00,000 Stock-in trade 3,00,000
(secured by freehold Profit and loss account 5,25,000
property)
Arrear interest 24,000 4,24,000
Sundry creditors 1,01,000
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 2/3rd and for balance 1/3rd,
equity shares of ` 2 each to be allotted.
(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 sundry debtors, 80% of stock and 100% of debit balance of profit and loss
accoount 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)
5.20 Accounting
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. 12,73,000
To Profit and loss A/c 5,25,000
To Sundry debtors A/c 1,80,000
To Stock-in-trade A/c 2,40,000
To Bank A/c 30,000
To Capital reserve A/c 2,98,000
(Being various assets, penalty on cancellation of
contract, profit and loss account debit balance written
off, and 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
Total 11,26,000
Assets
a Fixed assets
2 Current assets
a Inventories 60,000
c Cash and cash equivalents 5 1,96,000
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
5.22 Accounting
EXERCISES
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

¾ 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.
¾ 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.
¾ A company which is merged into another company is called a transferor company or
a vendor company.
¾ A company into which the vendor company is merged is called transferee company
or vendee company or purchasing company.
¾ 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.
¾ In amalgamation in the nature of purchase, one company acquires the business of
another company.
¾ 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.
¾ There are two main methods of accounting for amalgamation:
• The pooling of interests method, and
• The purchase method.
¾ Under pooling of interests method, the assets, liabilities and reserves of the
transferor company will be taken over 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.
6.2 Accounting
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.
(vi) All reserves & surplus of the transferor company shall be preserved by the transferee
company.
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.
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.
Amalgamation 6.3
(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 purchase
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,
2011:
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
Less: Depreciation (50) (24)
Written down value 20 6
6.4 Accounting
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 share 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
Amalgamation 6.5

(Being the loss on realisation transferred to equity share-
holders account)
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 Capital Reserve 13.80
(Being the assets and liabilities taken over and the surplus
transferred to capital reserve)
6.6 Accounting
Liquidator of No Ltd. Dr. 1.20

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, 2012
` `
20,000 Equity shares of Buildings 10,00,000
` 100 each 20,00,000 Machinery 4,00,000
Provident fund 1,00,000 Stock 3,00,000
Sundry creditors 60,000 Sundry debtors 2,40,000
Insurance reserve 1,00,000 Cash at bank 2,20,000
Cash in hand 1,00,000
22,60,000 22,60,000
Amalgamation 6.7
Fast Express Ltd.

Balance Sheet as at 31st December, 2012
` `
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 Stock 40,000
Sundry creditors 40,000 Sundry debtors 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.
Prepare opening balance sheet of Super Fast Express Ltd.
Answer
Balance Sheet of Super Fast Express Ltd

as at 1st Jan., 2013
Particulars Notes `
a Long-term provisions 3 1,00,000
Total 35,60,000
Assets
a Fixed assets
Intangible assets 5 1,00,000
6.8 Accounting
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
Amalgamation 6.9
6 Cash and cash equivalents

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.

Alternative solution under the purchase method is given below :
Balance Sheet of Super Fast Express Ltd.
as at 1st Jan., 2013
Particulars Notes `
a Long-term provisions 3 1,00,000
Total 34,60,000
Assets
a Fixed assets
Intangible assets 5 0
2 Current assets
Inventories 3,40,000
Cash and cash equivalents 6 3,40,000
Total 34,60,000
6.10 Accounting
Notes to accounts
`
1 Share Capital
Total 32,00,000
Employees profit sharing account 60,000
Total 60,000
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
Less: Adjustment under scheme of amalgamation (1,00,000) 0
Total 0
Balances with banks 2,30,000
Cash on hand 1,10,000
Total 3,40,000
Working Notes :
Calculation of Purchase Consideration
Super Express Fast Express Ltd.
Ltd.
Total assets on 31.12.2012 (excluding goodwill) 22,60,000 12,00,000
Less: Provident fund (1,00,000) –
Employees profit sharing account – (60,000)
Amalgamation 6.11
Sundry creditors (60,000) (40,000)

Net assets taken over 21,00,000 11,00,000
Question 5
The following were the summarized Balance Sheets of P Ltd. and V Ltd. as at 31st March,
2012:
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
Bills Payable 120 -
Sundry Creditors 1,080 463
Sundry 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
Stock 7,862 4,041
Debtors 2,120 1,020
Cash at Bank 1,114 609
Bills Receivable — 80
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 2012, 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
6.12 Accounting
12% debentures in V Ltd. would be converted into 13% debentures in P Ltd. of the same
amount and denomination.
Expenses of amalgamation amounting to ` 1 lakh were borne by P Ltd.
You are required to :
(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
Stock 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
To 12% Debentures 1,000
To Sundry Creditors 463
To Sundry Provisions 702
To Business Purchase 9,000
(Being assets & liabilities taken over from V Ltd.)
Amalgamation 6.13
Liquidator of V Ltd. A/c Dr. 9,000

(Purchase consideration discharged in the form of equity
shares)
General Reserve A/c Dr. 1
To Bank A/c 1
(Liquidation expenses paid by P Ltd.)
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, 2012 (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
6.14 Accounting
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
consideration other than cash)
Total 24,000
Foreign Project Reserve 310
Surplus (Profit and Loss Account) 3,645
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
Amalgamation 6.15
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
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 :
Share Capital 1,00,000 50,000
Profit & Loss A/c 10,000 –
Creditors 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 creditors 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 Creditors 25,000
6.16 Accounting
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 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
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, 2012 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
Stock 2,50,000 1,75,000
Amalgamation 6.17
Debtors 2,00,000 1,00,000

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
Sundry Creditors 1,30,000 80,000
13,50,000 5,70,000
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) Stock 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, 2012.
Answer
In the Books of Vayu Ltd.
Realisation Account
` `
To Sundry Assets (5,80,000 – 5,70,000 By Gratuity Fund 20,000
10,000)
To Preference Shareholders By Sundry Creditors 80,000
(Premium on Redemption) 10,000 By Hari Ltd. (Purchase
6.18 Accounting
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 70,000
Reserve
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
(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.
` `
Goodwill Account Dr. 50,000
Building Account Dr. 1,50,000
Amalgamation 6.19
Machinery Account Dr. 1,60,000

Stock Account Dr. 1,57,500
Debtors Account Dr. 1,00,000
To Gratuity Fund Account 20,000
To Sundry Creditors Account 80,000
To Provision for Doubtful Debts Account 7,500
To Liquidators of Vayu Ltd. Account 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).
Balance Sheet of Hari Ltd. (after absorption)

Particulars Notes `
a Long-term provisions 3 70,000
Total 19,80,000
Assets
a Fixed assets
6.20 Accounting
2 Current assets
a Inventories 4,07,500
b Trade receivables 6 2,92,500
Total 19,80,000
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)
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
Gratuity fund 70,000
Total 70,000
4 Tangible assets
Buildings 4,50,000
Machinery 6,60,000
Total 11,10,000
5 Intangible assets
Goodwill 1,00,000
Total 1,00,000
6 Trade receivables
Less: Provision for Doubtful Debts (7,500) 2,92,500
Amalgamation 6.21
Working Notes:
Purchase Consideration: `
Goodwill 50,000
Building 1,50,000
Machinery 1,60,000
Stock 1,57,500
Debtors 92,500
Cash at Bank 20,000
6,30,000
Less: Liabilities:
Gratuity (20,000)
Sundry Creditors (80,000)
Net Assets 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 31st March, 2012:
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 Stock 2,20,000
Creditors 3,20,000 Debtors 2,60,000
General Reserve 80,000 Bank 1,36,000
Goodwill 1,30,000
Share issue Expenses 34,000
17,60,000 17,60,000
6.22 Accounting
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 creditors 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 31st March, 2012 goods costing ` 1,20,000 to A Ltd. for ` 1,60,000.
` 1,00,000 worth of goods are still in stock of A Ltd. on 31st March, 2012. Creditors 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 1st April, 2012 after the takeover.
Answer
Books of A Limited
Realisation Account
` `
To Building 3,40,000 By Creditors 3,20,000
To Machinery 6,40,000 By B Ltd. 12,10,000
To Stock 2,20,000 By Equity Shareholders (Loss) 76,000
To Debtors 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
Amalgamation 6.23
Loan from A Account

1,60,000 1,60,000
Misc. 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
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 Misc. 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 1st April, 2012 (An extract)∗
Particulars Notes `
∗
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.
6.24 Accounting
a Trade Payables 3 2,80,000
b Bank overdraft 6,00,000
Total 14,75,000
Assets
a Fixed assets
2 Current assets
a Inventories 6 1,83,000
14,75,000
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
Amalgamation 6.25
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
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
Stock 1,98,000
Debtors 2,60,000
Total Assets 15,56,000
Less: Creditors 3,20,000
Provision for bad debts 26,000 (3,46,000)
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 Stock `

6.26 Accounting
The stock of A Ltd. includes goods worth ` 1,00,000 which was sold by B
40,000
Ltd. on profit. Unrealized profit on this stock will be ×1,00,000 25,000
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 stock i.e., 10% of ` 1,00,000. (10,000)
Amount of unrealized profit 15,000
Question 9
The following is the summarized Balance Sheet of ‘A’ Ltd. as on 31.3.2012:
14,000 Equity shares of ` Sundry assets 18,00,000
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
Bills payable 40,000
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:
Amalgamation 6.27

Bank overdraft 50,000
Bills payable 40,000
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 31st March, 2012:
Equity share capital 15,00,000 Land and building 10,00,000
(` 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
Sundry creditors 2,00,000 Stock in trade 3,00,000
Sundry debtors 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.
6.28 Accounting
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)
Land & Building A/c Dr. 10,00,000
Plant & Machinery A/c Dr. 7,00,000
Furniture & Fittings A/c Dr. 2,00,000
Stock in Trade A/c Dr. 3,00,000
Sundry Debtors A/c Dr. 2,00,000
Cash & Bank A/c Dr. 1,00,000
To Sundry Creditors 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 Equity Share Capital 10,00,000
To Securities Premium Account 2,00,000
To 11% Debentures 5,00,000
(Being purchase consideration discharged)
Amalgamation 6.29
Question 11
Summarised Balance Sheets as on 31st March, 2012
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 Stock 6,25,000 4,75,000
Export profit reserve 1,50,000 1,00,000 Debtors 4,00,000 4,60,000
Investment - 50,000 Bills receivables 50,000 55,000
allowance reserve
Profit and loss 3,75,000 1,25,000 Cash at bank 3,62,500 2,60,000
account
15% Debentures 2,50,000 1,75,000
(` 100 each)
Trade creditors 1,50,000 75,000
Bills payables 75,000 1,00,000
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 1st April, 2012. 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.
6.30 Accounting
Show the opening Journal entries and the opening balance sheet of Gee Ltd. as at 1st April,
2012 after amalgamation, on the assumption that the amalgamation is in the nature of the
merger.
Answer
In the books of Gee Ltd.
Journal Entries
Particulars Debit Credit
` `
Business purchase A/c (W.N.1) Dr. 25,85,000
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
Stock A/c Dr. 4,75,000
Debtors A/c Dr. 4,60,000
Bills receivables A/c Dr. 55,000
Cash at 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 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
(Being purchase consideration discharged)
General Reserve A/c Dr. 10,000
To Cash at bank 10,000
(Being expenses of amalgamation paid)
Amalgamation 6.31
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
exchange)
Opening Balance Sheet of Gee Ltd. (after absorption)
as on 1st April, 2012
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
a Inventories 8 11,00,000
c Cash and cash equivalents 10 6,12,500
Total 81,85,000
Notes to accounts
`
1 Share Capital
6.32 Accounting
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
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
3 Long-term borrowings
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
Amalgamation 6.33
5 Other current liabilities

Add: Adjustment under scheme of amalgamation 75,000 1,75,000
6 Tangible assets
Buildings- Opening balance 12,50,000
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
6.34 Accounting
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

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 2011, the Balance Sheets of the two companies were as under:
Ram Limited
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 Stock 1,20,000
Sundry Creditors 1,50,000 Debtors 1,64,000
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
Amalgamation 6.35
each, fully paid 1,60,000 Stock 1,56,000

Profit and Loss Account 40,000 Debtors 42,000
6% Debentures 1,20,000 Cash at Bank 36,000
Sundry Creditors 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 Debtors of Shyam Ltd. realized fully and Bank Balance of Shyam Limited are to be
retained by the liquidator and the Sundry Creditors 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, 2011, 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 -
Stock 1,20,000 1,56,000
Debtors 1,64,000 -
Cash at Bank 86,000 -
6.36 Accounting
8,50,000 3,66,000
Less: Liabilities:
6% Debentures (1,20,000 x 105%) - (1,26,000)
Sundry Creditors (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 70,000 24,000
each
Balance Sheet of Ram and Shyam Ltd. as at 1st April, 2011
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
Amalgamation 6.37

Securities Premium (W.N.1) 6,000
Secured
6% Debentures (assumed to be secured) 1,20,000
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 Stock 1,56,000
To Debtors 42,000
(Being all assets except cash transferred to Realisation
Account)
Sundry Creditors 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
(Being equity transferred to equity shareholders account)
4. Ram and Shyam Ltd. Dr. 2,40,000
6.38 Accounting

(Being purchase consideration due)
5. Bank A/c Dr. 42,000
To Realisation A/c 42,000
(Being cash realized from debtors in full)
6. Realisation A/c Dr. 64,000
To Bank A/c 64,000
(Being payment made to creditors)
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.)
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 31st March, 2012 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: Stock 7,75,000
Capital reserve 42,000 Sundry debtors 1,60,000
Contingency reserve 2,70,000 Less : Provision for
Profit and loss A/c 2,52,000 doubtful debts (8,000) 1,52,000
Amalgamation 6.39
Current Liabilities & Provisions: Bill receivable 30,000

Bills payable 40,000 Cash at bank 3,29,000
Provision for income tax 2,20,000
20,50,000 20,50,000
On 1 April, 2012, Jupiter Limited agreed to absorb Mars Limited on the following terms and
st
conditions:
(1) Jupiter Limited will take over the assets at the following values:
`
Land and building 10,80,000
Stock 7,70,000
Bills receivable 30,000
(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) Sundry debtors 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) Creditors were finally settled with cash remaining after meeting liquidation expenses
amounting to ` 8,000.
(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
Stock 7,70,000
Total 18,80,000
Amount discharged by issue of preference shares 4,10,000
6.40 Accounting
Number of preference shares to be issued (4,10,000/100) 4,100 shares

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 Stock 7,75,000 By Bills payable 40,000
To Sundry debtors 1,60,000 By Sundry 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- sundry debtors 1,50,000
To Bank A/c –income tax 2,22,000
To Bank A/c –sundry 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 Sundry 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
By Realisation A/c (profit)
3,16,000
18,80,000 18,80,000
Amalgamation 6.41
Jupiter Limited Account

To Realisation A/c 18,80,000 To 10% Preference shares in 4,10,000
Jupiter Limited
To Equity shares in Jupiter
Limited 14,70,000
18,80,000 18,80,000
Question 14
The following was the Balance Sheet of V Ltd. as on 31st March, 2012:
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 Parables 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
35 lakhs 12% Cumulative Preference Shares of ` 10 each, fully paid up 350
Total 1,150
6.42 Accounting
(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, 2012, 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 creditors included ` 7 lakhs due to V Ltd. for goods purchased.
Also P Ltd.'s stock included goods of the invoice price of ` 5 lakhs earlier purchased from
V Ltd., which had charged profit @ 20% of the invoice price.
You are required to :
(i) Prepare Realisation A/c in the books of V Ltd.
(ii) Pass journal entries in the books of P Ltd. assuming it to be an amalgamation in the
nature of merger.
Amalgamation 6.43
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
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)
6.44 Accounting
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. Goodwill 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 stock eliminated from the inventories
of P Ltd.)
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
∗
However, amalgamation expenses should be recognized as expenses when they are incurred
because no asset is acquired from the expenditure incurred.
counting
7
Average Due Date and Account Current
UNIT-1 : AVERAGE DUE DATE

¾ Average Due Date is one on which the net amount payable can be settled without causing
loss of interest either to the borrower or the lender.
¾ 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
¾ 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.
¾ 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
State with reasons, whether the following statements are true or false:
(a) If payment is made on the average due date, it results in loss of interest to creditors.
(b) Average due date is the median average of several due dates for payments.
(c) In the calculation of average due date, only the due date of first transaction must be taken as
the base date.
7.2 Accounting
Answer
(a) False- Average due date is ‘no loss no gain’ date to either party. i.e. neither the debtor nor
the creditor stands to lose or gain anything by way of interest.
(b) False- Average due date is equated date for several due dates of payments.
(c) False- While calculating the average due date, any transaction date may be taken as the
base date.
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 from 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
= 10th March + 43 days (approx.) =22nd April, 2011
Average Due Date and Account Current 7.3
Interest amount: Interest can be calculated on ` 85,000 from 22nd April, 2011 to 30th June,
2011 at 10% p.a. i.e. interest on ` 85,000 for 70 days at 10%.
=` 85,000 x 10/100 x 70/365 = ` 1,630 (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 +
17,750
= 4th May, 2011 + 34 days (approx.) = 7th June, 2011

7.4 Accounting
Question 4
‘A’ lent ` 25,000 to ‘B’ on 1st January, 2011. The amount is repayable in 5 half-yearly
installments commencing from 1st 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.
36
5th payment is made after months from the date of loan.
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 27, 2011 1,000 128 1,28,000
06th March, 2011 2 months May 09, 2011 1,500 171 2,56,500
10,000 6,47,000
Total of products
Total amount
6,47,000
= November 19, 2010 +
10,000
= November 19, 2010 + 65 days (approx.) = 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 31st March, 2012. Calculate the amount of interest payable by Anil
using average due date method.
Answer
Let us assume 9th 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
7.6 Accounting
Jan. 28 Feb. 4 5,500 26 1,43,000

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
7,47,000
= 9th January, 2012 + = 32 days
23,200
32 days from 9th January, 2012 = 10th February, 2012
Thus, average due date = 10th February, 2012
No. of days from 10th February, 2012 to 31st March, 2012 = 50 days.
Interest payable by Anil on ` 23,200 for 50 days @ 12% per annum
50 12
= ` 23,200 × × = ` 380.32
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 Product
2012 2012 from the base
date i.e. 3 rd
March,2012
(`) (`) (`)
29 th January 1 month 3 rd March1 5,000 0 0
1 Bill dated 29th January, 2012 has the maturity period of one month, but there is no corresponding date
in February, 2012. Therefore, the last day of the month i.e. 29th February, 2012 shall be deemed
maturity date and due date would be 3rd March, 2012 (after adding 3 days of grace).
20 th March 2 months 23 rd May 4,000 813,24,000

12 th July 1month 14 th Aug. 2 7,000 164
11,48,000
10 th August 2 months 13 th 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 30th 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 30th 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 12th July, 2012 has the maturity period of one month, due date (after adding 3 days of
grace) falls on 15th August, 2012. 15th August being public holiday, due date would be preceding date
i.e. 14th 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 (approx.)
= 19th April, 2012
Number of days from 19th April, 2012 to 30th June, 2012 = 72 days
Interest on drawings from 19th April to 30th June @10%:
72 10
= ` 36,000 × × = ` 708
366 100
Hence, interest on drawings ` 708 will be charged from A on 30th 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 No. of days from the Amount Products
date 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 + 45 days (approx.)
20,000
= 3rd August, 2011.
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 = 3rd August, 2011 –15 days = 19th 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
from 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 15th 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
5thApril, 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
7.10 Accounting
32,42,000
= 15th March, 2012 +
69,000
= 15th March, 2012 + 47 days (approx.) =1st May, 2012
Interest amount: Interest can be calculated on ` 69,000 from 1st May, 2012 to 30th 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.
EXERCISES
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 30th June, 2011. Calculate the
interest payable on 30th June, 2011 by the average due-date method.
(Hints: Average due date =6th May, 2011; Interest= ` 459 (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)
Unit-2 : ACCOUNT CURRENT
BASIC CONCEPTS
¾ 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
¾ 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 31st March, 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.
7.12 Accounting
In the books of Puri
Suri in Account Current with Puri
Date Particulars Due Amount Days Products Date Particulars Due Amount Days Products
Date Date
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 Feb. 7 500 52 26,000
Returns
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. By Purchases Mar. 23 2,000 8 16,000
23
Mar. By Balance of 3,98,800
31 Products
Mar. By Bank 1,509
31
Total 14,309 7,47,300 14,309 7,47,300
Calculation of interest:
3,98,800 10
Interest = × = ` 109
365 100
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.
7.14 Accounting
Answer
In the books of G
H in Account Current with G
Date Due Particulars No., of days Amt. Product Date Due Particulars No. of days Amt. Product
date till 31.3.11 date till 31.3.11
2010 2010 ` ` 2010 2010 ` `
Oct 1, Oct 1, To Balance 182 3,000 5,46,000 Nov 16 Nov 26 By Purchases 125 4,000 5,00,000
b/d
Oct Oct 18 To Sales 164 2,500 4,10,000 Dec 7 Dec. By Purchases 104 3,500 3,64,000
18, 17
2011 2011 2011 2011
Jan 2 Apr 6 To Bills (6) 5,000 (30,000) Mar 28 Apr 8 By Purchases (8) 2,700 (21,600)
payable
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
EXERCISES
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
(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
¾ Self Balancing Ledger System implies a system of ledger keeping which classifies
ledgers as per nature of transactions.
¾ In this system, generally three ledgers, namely debtor ledger, creditor ledger and
main ledger (containing remaining accounts) are prepared.
¾ 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
balance of the Control Account. The object of the system is to identify errors and to facilitate their
quick detection with the minimum effort.
Self Balancing Ledgers 8.2
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
customers 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 credit customers. The
balance in the Total Debtors Account should be equal to the total of balances shown by the
accounts of individual customers. 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.
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.
8.3 Accounting
(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
Returns to creditors 1,800
Bills accepted for creditors 5,500
Bills payable matured 8,000
Bills accepted by customers 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 ledger By Debtors ledger
adjustment adjustment
account: account:
Bank 58,200 Sales (on credit) 1,12,000
Discount 800
Returns 2,600 Bills receivable
Bills receivable 20,100 dishonoured 1,500
Endorsed bills
Bad debts receivable
written off 2,500 84,200 dishonoured 1,000 1,14,500
To Debtors ledger 31.3.2011 By Balance c/d 380
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
8.5 Accounting
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
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 customers ` 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 dishonoured 8,000 Bills receivable 30,000
Bad debts 8,000
(6,000+2,000)
_______ By Balance c/d 14,800
2,10,000 2,10,000
8.7 Accounting
Question 6
The following information is extracted from the books of Shri Hari for the year ended 31st 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.
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 ledger
to adjustment account:
32.3.2011 Cash 1,86,000 31.3.2011 Purchases 3,26,000
Return outwards 14,000
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 ?
8.9 Accounting
Answer
General Ledger
Sales Ledger
` `
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 figure) 5,500 Sales return 25,000
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.
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 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
8.11 Accounting
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 customers 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
account:
To General ledger adjustment Cash from debtors 20,000
account:
Credit sale 40,000 Bills receivable 3,000
Bad debts 5,000
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 31st March, 2010:
`
Debtors balance on 1st April, 2009 1,37,250
Credit sales 68,100
Returns outward 1,800
Cash received from customers 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): 31st March, Account (in
Returns inward 1,200 2010 General Ledger):
Cash Sales 68,100
(received from B/R dishonoured 3,600
customers) 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 31st March 2012 were as follows:
8.13 Accounting
`
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 customers for prompt payment 1,000
Goods rejected and returned back by the customer 2,550
Bad debts recovered (written off in 2010) 900
Interest debited for delay in payment 1,250
You are required to prepare a Debtors Account for the period ending 31st March in the General
of M/s Zee Ltd.
Answer
Total Debtors 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- 70,000 Discount allowed 1,000
14,000)
Bills receivable Sales return 2,550
(Bill dishonored) 8,500 By Balance c/d 89,950
Bank (Noting 250 31.3.12
charges)
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 ‘Total Debtors
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 ‘Total
Debtors 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 customers 17,25,700
Bills Receivable received from customers 95,000
Bills Receivable dishonoured 7,500
Cash paid to customers 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
8.15 Accounting
EXERCISES
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 1,000
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 creditors - 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 31.6.2011 ? 72,000
(Hints: Total of Sales Ledger Control Account = ` 5,57,200; and Purchases Ledger Control Account
= ` 5,11,000)
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 customers 1,840
Cash received from customers 6,24,000 Bills receivable dishonoured 6,000
Discount allowed 11,200 Bought ledger balance 10,400
Cash paid to suppliers 4,80,000 Sales ledger balanced 1,83,200
Transfer from sales to bought ledger 20,800

(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
Cash received from debtors 1,84,200
Bills payable accepted 1,20,000
Cash paid to creditors 1,80,200
Discounts received 4,200
Transfers from purchases ledger 6,800
The total of the sales ledger balances on 1st Jan, 2011 was ` 3,20,800 and that of the purchases ledger balances
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 customers control account in general ledger:
`
Opening balance in customers ledger (Dr.) 2,35,000
Opening balance in customers 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 customers ledger to suppliers ledger. Similarly a credit entry ` 1,600 is to be
transferred from suppliers ledger to customers ledger. Closing credit balance in customers ledger is ` 3,000.
(Hints: Total of Customers 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:
8.17 Accounting
`
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 customers 600
Transfers to bought ledger 300
(Hints: Total of Sales Ledger Adjustment Account = ` 1,60,100)
9
Financial Statements of Not-for-Profit
Organisations

¾ A not-for-profit organization is a legal and accounting entity that is operated for the
benefit of the society as a whole, rather 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
¾ 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.
¾ Educational institutions are different from other not-for-profit 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 25 of the Companies Act,
1956 are required to prepare their Income and Expenditure account and Balance
Sheet as per the revised Schedule VI to the Companies Act, 1956. All the questions
in this chapter have been solved on the basis that Non-profit organization referred
to in the questions are not registered under section 25 of the Companies Act, 1956
Question 1 Write short notes on:

(a) Receipts and Expenditure Account.
(b) Receipts and Payments Account.
9.2 Accounting
Answer
(a) In the case of professionals, Receipts and Payments Account, Income and Expenditure
Account and Balance Sheet are generally prepared to show the results of their activities
and their financial position. However, some professionals also prepare Receipts and
Expenditure Account to show final result of their professional activities.
Such an account includes all expenses on the basis of mercantile system, i.e. accrual basis
but for recording income, cash system is followed. In other words, to find out the profit, all
outstanding expenses are taken into account but the fees and charges that are outstanding or
the work-in progress are not considered. The reason for this treatment is that professionals
consider it imprudent and risky to recognize the outstanding fees. Therefore, the difference
between the profit as shown by Income and Expenditure Account and Receipts and
Expenditure Account arises on account of non-recognition of outstanding fees and charges
and work-in-progress in Receipts and Expenditure Account.
(b) Receipts and Payments Account is an elementary form of account commonly adopted by
non-profit making concerns such as hospitals, clubs, societies etc. for recording cash and
bank transactions. It starts with the opening cash or bank balance (or an overdraft) and is
debited with all sums received and credited with amounts paid out whether or not such
receipts and payments relate to that period. All the receipts and payments, whether of
revenue or capital nature, are included in this account. The balance of this account at the
end of year represents the difference between the amount received and paid out i.e. the
balance of cash in hand and at the bank or bank overdraft.
Question 2
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
Financial Statements of Not-for-Profit Organisations 9.3
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 3
State with reasons, whether the following statement is true or false:
Receipts and Payments Account highlights total income and expenditure.
Answer
False- Receipts and payments account is a classified summary of cash receipts and payments over a
certain period together with cash and bank balances at the beginning and close of the period.
Question 4
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
ended 31st March, 2011.
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.
Answer
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)
9.4 Accounting
Balance Sheet of Sachin Cricket Club as on 31st March 2011 (An extract)
Liabilities Rs` Assets Rs`
Subscription Receivable (15,000 + 12,000) 27,000
Balance Sheet of Sachin Cricket Club as on 31st 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
Question 5
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

` `
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
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
9.6 Accounting
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 31st 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
(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 6
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.
9.8 Accounting
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
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
Less: Depreciation (6,000) 30,000
Stock of medicine 15,000
Investments 1,00,000
Subscription receivable 2,200
______ Cash in hand 9,000
2,04,200 2,04,200
Working Notes:
Subscription for the year ended 31st December, 2011: `

Less: Subscription receivable on 1.1.2011 1,500
Less: Subscription received in advance on 31.12.2011 700 (2,200)
47,800
Add: Subscription receivable on 31.12.2011 2,200
Add: Subscription received in advance on 1.1.2011 1,200 3,400
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
9.10 Accounting
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 7
Smith Library Society showed the following position on 31st March, 2010:
Balance Sheet as 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 Bu Outstanding expenses paid 7,000
To Sale proceeds of old papers 1,500 By Rent 88,000
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.
9.12 Accounting
Answer
Smith Library Society
Dr. Cr.
Expenditure ` ` Income `
To Electric charges 7,200 Entrance fee (25% of 7,500
To Postage and stationary 5,000 ` 30,000)
To Telephone charges 5,000 Membership subscription 2,00,000
To Rent 88,000 Less: Received in advance 10,000 1,90,000
Add: Outstanding 4,000 92,000 By Sale proceeds of old 1,500
To Salaries 66,000 papers 20,000
By Hire of lecture hall
Add: Outstanding 3,000 69,000 Interest on securities 8,000
To Depreciation (W.N.1) (W.N.2)
Electrical fittings 15,000 Add: Receivable 500 8,500
Furniture 5,000 Deficit- excess of 16,700
Books 46,000 _66,000 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 8
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
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
9.14 Accounting
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 machines 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) 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 9
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 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
Less: Prepaid of last year (90) 4,680 6,300
To Other fees 1,800 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.
9.16 Accounting
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

Liabilities Amount Assets Amount
(` ) (` )
Capital fund 36,000 Furniture 1,800
Less: Excess of (3,600) 32,400 Less: Sold (450) 1,350
expenditure over 5% Investment 27,000
income Interest accrued on 1,350
investment
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
Question 10
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
9.18 Accounting
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 -
Depredation 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 2,200
To Bar expenses (W.N.5)
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 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
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
9.20 Accounting
(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 30th 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 30th 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 11
Income and Expenditure Account for the year ended 31st 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:
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
9.22 Accounting
(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
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 12
From the following Income & Expenditure A/c of Premium Sports Club for the year ended 31st
March, 2012, you are required to prepare Receipts & Payment A/c for the year ended 31st
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
To Postage & Telephone 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
To Garden Upkeep 19,300 By Sale of Old Newspaper 11,600
To Sports Material Utilized 62,800
To Repairs & Maintenance 18,700
To Depreciation 13,000
To Miscellaneous Expenses 5,700
To Surplus carried to Capital Fund 3,500
Total 5,69,100 Total 5,69,100
9.24 Accounting
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
Subscription received in advance 2,400 4,900
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 28,200
(W.N.8)
To Interest on 8% Government 6,000 By Postage and telephone 41,600
Bond (W.N.3)
To Sale of old Newspaper 11,600 By Membership fee (W.N.9) 12,800

To Sale of Sports Material 22,480 By Electricity charges 38,500
(W.N.4)
By Garden upkeep 19,300
By Payment to creditors for 71,200
sports 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 4,09,300 Add: Additions 40,000
(W.N.12) (W.N.10)
Add: Surplus 3,500 4,12,800 2,80,000
Entrance fee 1,20,000 Less: Depreciation (13,000) 2,67,000
Subscription received 4,900 Fixed Deposit 80,000
in advance
Outstanding Investments in 8% 1,50,000
expenses: Government Bonds
Salary 14,300 Stock of sports 35,670
material
Rent 15,000 29,300 Subscription 5,700
receivable
Creditors for 4,200 Membership fee paid 9,600
purchase of sports in advance
material
Prepaid printing and 1,550
9.26 Accounting
stationary charges
Outstanding interest 6,000
on 8% Govt. Bond
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 receivable on 31.3.2012 5,700
Less: Subscription received in advance on 1.4.2011 2,400 (8,100)
4,11,900
Add: Subscription receivable on 1.4.2011 10,200
Add: Subscription received in advance on 31.3.2012 4,900 15,100
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)
26,650
Add: Prepaid balance as on 31.3.2012 1,550
28,200
9.28 Accounting
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)
Depreciation on new purchase of fixed asset during the year 1,000
12 100
Cost of asset purchased during the year (1,000 xx )
6 5 40,000
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 advance 2,400 Investments in 8% Government 1,50,000
Bonds
Outstanding expenses: Stock of sports material 43,450
Salary 16,000 Subscription receivable 10,200
Rent 21,000 Prepaid printing and stationary 1,350
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 13
The following is the Receipt and Payment Account of Park View Club in respect of the year
ended 31st March, 2012.
Receipt Amount (`) Payments Amount (`)
To Balance b/d 1,02,500 By Salaries 2,08,000
To Subscriptions By Stationery 40,000
2009-10 4,500 By Rent 60,000
2010-11 2,11,000 By Telephone expenses 10,000
2011-12 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 1st 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 31st 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 31st 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 31st March, 2012 and the
Balance Sheet as at that date.
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
9.30 Accounting
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 31st 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
Less: Depreciation (50,000) 9,50,000
Stock of stationery 9,000
Cash balance 45,000
31,47,250 31,47,250
Working Notes:
(1) Balance Sheet as at 31st 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
(as on 31.3.12) (Bal.fig.) 14,500

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 14
Bear Bar club was registered in a city and the accountant prepared the following Receipts and
Payments Account for the year ended 31st 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
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
9.32 Accounting
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 31st 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)
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 1.4.10 (3,600)
To Rates & taxes 3,780 Add: Outstanding as on 1.3.11 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
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
9.34 Accounting
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
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
EXERCISES
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
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 (entry 270 90
has been duly made in the cash book)
9.36 Accounting
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 valued 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 31st 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 31st March. 2012.
Opening: Salary charges 2,60,000
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 services: Subscription for journals 7,000
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
9.38 Accounting
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 31st 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)
10
Accounts from Incomplete Records

¾ Single entry system is generally found in sole trading concerns or even in partnership
firms to some extent but never in case of limited liability companies on account of
legal requirements.
¾ There are three types of single entry systems:
• Pure Single Entry
• Simple Single Entry
• Quasi Single Entry
¾ Single entry system ignores the concept of duality and therefore, transactions are not
recorded in their two-fold aspects.
¾ Closing Capital = Opening Capital + Additional Capital – Drawings + Profits
Question 1
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
Cash at bank 14,500
Cash in hand 2,000
1,21,500 1,21,500
You are furnished with the following information:

10.2 Accounting
(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
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
Accounts from Incomplete Records 10.3
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
10.4 Accounting
(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
(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 31st 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 31st 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 31st March 2012 disclosed the following:
`
Payment to creditors 3,00,000
Payment of rent up to 31st March, 2012 16,000
Cash deposited into the bank during the year 80,000
The following are the balances on 31st March, 2012:
10.6 Accounting
`
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 31st 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
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 31st 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
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
10.8 Accounting
(6) Calculation of the amount of cash defalcated by the cashier

`
Cash balance as on 1st April 2011 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
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)
To Net Profit 3,26,300
9,58,000 9,58,000
` `
Capital Furniture & Fittings 1,00,000
Opening balance 2,50,000 Less : Depreciation (15,000) 85,000
10.10 Accounting
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
(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
10.12 Accounting
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
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 figure) 3,36,000
To Gross Profit c/d (30% on 6,36,000
sales)
24,56,000 24,56,000
To Sundry Expenses (10% 2,12,000 By Gross Profit b/d 6,36,000
on sales)
6,36,000 6,36,000
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.
10.14 Accounting
(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.
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 1,80,000
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
10.16 Accounting
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
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
10.18 Accounting
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
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 asset 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
10.20 Accounting
Cash and Bank balances 1,80,000 1,04,000

Sundry Debtors 1,60,000 –
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.
(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 4,00,000
(balancing figure) 80,000 By Closing stock 40,000

To Purchases 2,40,000
To Gross profit c/d
@ 30% on sales 1,20,000 _______
4,40,000 4,40,000
To Miscellaneous By Gross profit b/d 1,20,000
expenses (` 80,000 By Miscellaneous receipts 20,000
– ` 8,000 + By Net loss transferred to
` 10,000) 82,000 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)
Outstanding salary 10,000 Add: Addition during the
year 28,000
68,000
10.22 Accounting

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
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
10.24 Accounting
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
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
10.26 Accounting
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
(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
10.28 Accounting
(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.
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
Rs
*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
10.30 Accounting
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
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
` `
To Opening Stock 16,000 By Sales:
10.32 Accounting
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
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
10.34 Accounting
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 ?
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
10.36 Accounting
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 (W.N.5) 70,200 Debtors 1,00,000
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
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
125 4,00,000
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 2,60,000
(W.N.2)
To Balance c/d (Bal. Fig.) 70,200
3,25,000 3,25,000
10.38 Accounting
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
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
Following incomplete information of X are given below:
Trading and Profit & Loss Account for the year ended 31st March, 2011
` ’000 ` ’000
To Opening stock 700 By Sales ?
To Purchases ? By Closing stock ?
To Direct expenses 175
To Gross profit c/d ?
? ?
To Establishment expenses 740 By Gross profit b/d ?
To Interest on loan 60 By Commission 100
To Provision for taxation ?
To Net profit c/d ?
? ?
To Proposed dividends ? By Balance b/f 140
To Transfer to general reserve ? By Net profit b/d ?
To Balance transferred to Balance sheet ?
? ?
10.40 Accounting

(` ’000) (` ’000)
Paid-up capital 1,000 Fixed assets:
General reserve: Plant & machinery 1,400
Balance at the beginning of ? Other fixed assets ?
the year
Proposed addition ? Current assets:
Profit and loss account ? Stock ?
10% Loan account ? Sundry debtors ?
Current liabilities ? Cash at bank 125
? ?
Other information:
(i) Current ratio is 2:1.
(ii) Closing stock is 25% of sales.
(iii) Proposed dividends to paid-up capital ratio is 2:3.
(iv) Gross profit ratio is 60% of turnover.
(v) Loan is half of current liabilities.
(vi) Transfer to general reserves to proposed dividends ratio is 1:1.
(vii) Profit carried forward is 10% of proposed dividends.
(viii) Provision for taxation is equal to the amount of net profit of the year.
(ix) Balance to credit of general reserve at the beginning of the year is twice the amount
transferred to that account from the current year’s profits.
All working notes should be part of your answer. You are required to complete:
(i) Trading and Profit and Loss account for the year ended 31st March, 2011 and
(ii) The Balance Sheet as on that date.
Answer
Trading and Profit & Loss A/c
(` in (` in
‘000s) ‘000s)
To Opening stock 700.00 By Sales (W.N.10) 5366.66
To Purchases (Bal. Fig.) 2613.33 By Closing stock (W.N.11) 1341.67
To Direct expenses 175.00
To Gross profit c/d (W.N.9) 3,220.00
6,708.33 6,708.33
To Establishment expenses 740.00 By Gross profit b/d (Bal. Fig.) 3,220.00
To Interest on loan 60.00 By Commission 100.00
To Provision for tax (W.N.8) 1,260.00
To Net profit c/d 1,260.00
3,320.00 3,320.00
To Proposed dividends (W.N.1) 666.67 By Balance b/f 140.00
To Transfer to general reserve 666.67 By Net profit b/d (Bal. Fig.) 1,260.00
(W.N.2)
To Balance transferred to
Balance sheet (W.N.3) 66.66
1,400.00 1,400.00
Liabilities (` in Assets (` in ‘000s)
‘000s)
Paid-up capital 1,000.00 Fixed assets:
General reserve: Plant & machinery 1,400.00
Balance at the beginning (W.N.14) 1333.34 Other fixed assets (Bal. Fig.) 1066.67
Proposed addition (W.N.2) 666.67 Current Assets:
Profit and loss A/c 66.66 Stock (W.N.11) 1341.67
10% Loan A/c (W.N.4) 600.00 Sundry debtors (W.N.13) 933.33
Current liabilities (W.N.5) 1,200.00 Cash at bank 125.00
4,866.67 4,866.67
10.42 Accounting
Working Notes:
1. Proposed dividend to paid up capital is 2:3.
2
i.e. Proposed dividend = of paid up capital
3
2
= ` 1,000.00 thousand × = ` 666.67 thousand
3
2. Transfer to General Reserve is equal to proposed dividend i.e., 1:1.
Proposed dividend is ` 666.67 thousand,
therefore general reserve is also ` 666.67 thousand.
3. Profit carried forward to Balance Sheet = 10% of Proposed Dividend
i.e., ` 666.67 thousand × 10% = ` 66.66 thousand
4. 10% Loan implies interest on loan being 10%
i.e. ` 60.00 thousand × 100 = ` 600.00 thousand
10
5. Loan is half of current liabilities which means current liabilities are twice of loan
i.e., ` 600.00 thousand × 2 = ` 1,200.00 thousand
6. Current Assets 2
Current Ratio i.e., = 2:1 or
Current Liabilities 1
i.e. Current Assets = 2 x Current Liabilities
or 2 x ` 1,200.00 thousand = ` 2,400.00 thousand
7. Current Net Profit (` in ‘000s)
Proposed dividend 666.67
Transfer to general reserve 666.67
Profit and loss balance transferred to balance sheet 66.66
1,400.00
Less: Balance b/f (140.00)
Net profit for the year 1,260.00
8. Provision for taxation is equal to current net profit i.e., = ` 1,260.00 thousand
9. Gross profit being balancing figure of Profit and Loss A/c = ` 3,220.00 thousand
10. Gross profit = 60% of sales i.e.
` 3,220.00 thousand = 60% of sales
100
Or, sales = ` 3,220 thousand × = ` 5,366.67 thousand
60
11. Closing stock is 25% of sales i.e., 25% of ` 5,366.67 thousand = ` 1,341.67 thousand
12. Purchases being balancing figure of Trading A/c = ` 2,613.33 thousand
13. Debtors = Current Assets – Closing Stock – Cash at Bank
= ` 2,400.00 thousand – ` 1,341.67 thousand – ` 125.00 thousand
= ` 933.33 thousand
14. Balance of general reserve at the beginning of the year is twice of the amount transferred to
general reserve during the year i.e. 2 x ` 666.67 thousand = ` 1,333.34 thousand
15. Other fixed assets = Total of balance sheet (liabilities side)- Current assets – Plant and
machinery
i.e., ` 4,866.67 thousand - ` 2,400.00 thousand – ` 1,400.00 thousand
= ` 1,066.67 thousand
Question 13
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.)
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.
10.44 Accounting
Prepare:
(i) Trading and Profit and Loss Account for the year ended 31.3.2011.
(ii) Balance Sheet as at 31st 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 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
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
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. fig) 2,40,000 By Bank A/c (C) 1,00,000
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 14
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.
10.46 Accounting
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 15
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.
(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
10.48 Accounting
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 16
M/s Ice Limited gives you the following information to find out Total Sales and Total
Purchases:
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 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 5,000 By Cash 1,56,000
dishonoured
To Bills receivable 3,000 By Discount allowed 9,000
dishonoured (endorsed)
To Bills receivable 2,000 By Sales return 11,000
dishonoured (discounted)
To Credit sales (bal.fig.) 2,25,000 By Balance c/d 82,000
3,05,000 3,05,000
10.50 Accounting
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.
EXERCISES
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)
2. The following is the Balance Sheet of Sanjay, a small trader as on 31.3.2010 :
(Figures in ` ‘000)
Capital 200 Fixed Assets 145
Creditors 50 Stock 40
Debtors 50
Cash in Hand 5
Cash at Bank 10
250 250
A fire destroyed the accounting records as well as the closing cash of the trader on 31.3.2011. However, the
following information was available :
10.52 Accounting
(a) Debtors and creditors on 31.3.2011 showed an increase of 20% as compared to 31.3.2011.
(b) Credit Period :
Debtors – 1 month Creditors – 2 months
(c) Stock was maintained at the same level throughout the year.
(d) Cash sales constituted 20% of total sales.
(e) All purchases were for credit only.
(f) Current ratio as on 31.3.2011 was exactly 2.

(g) Total expenses excluding depreciation for the year amounted to ` 2,50,000.
(h) Depreciation was provided at 10% on the closing value of fixed assets.
(i) Bank and cash transactions:
(1) Payments to creditors included ` 50,000 by cash.
(2) Receipts from debtors included ` 5,90,000 by way of cheques.
(3) Cash deposited into the bank ` 1,20,000.
(4) Personal drawings from bank ` 50,000.
(5) Fixed assets purchased and paid by cheques ` 2,25,000.
You are required to prepare :
(a) The Trading and Profit & Loss Account of Sanjay for the year ended 31.3.2011 and
(b) A Balance Sheet on that date.
For your exercise, assume cash destroyed by fire is written off in the Profit and Loss Account
(Hints: Gross 540; Net Profit 243; and Total Balance Sheet 453 – ` in ‘000s))
11
Hire Purchase and Installment Sale
Transactions
BASIC CONCEPTS
Under Hire Purchase System, hire purchaser will pay cost of purchased asset in
installments. The ownership of the goods will be transferred by the Hire Vendor only after
payment of outstanding balance.
¾ Under installment system, ownership of the goods is transferred by owner on the date of
delivery of goods.
¾ Accounting Method when goods have substantial sales under Hire Purchase System
• Cash price Method
• Interest suspense Method
¾ Accounting Method when goods have small sales under Hire Purchase System
• Debtor Method
• Stock and Debtors Method
Question 1
Omega Corporation sells computers on hire purchase basis at cost plus 25%. Terms of sales are
` 10,000 as down payment and 8 monthly instalments of ` 5,000 for each computer. From the
following particulars prepare Hire Purchase Trading Account for the year 2011.
As on 1st January, 2011 last instalment on 30 computers was outstanding as these were not due
up to the end of the previous year.
During 2011 the firm sold 240 computers. As on 31st December, 2011 the position of instalments
outstanding were as under :
Instalments due but not collected :
11.2 Accounting
2 instalments on 2 computers and last instalment on 6 computers.

Instalments not yet due :
8 instalments on 50 computers, 6 instalments on 30 and last instalment on 20 computers.
Two computers on which 6 instalments were due and one instalment not yet due on 31.12.2011
had to be repossessed. Repossessed stock is valued at 50% of cost. All other instalments have
been received.
Answer
In the books of Omega Corporation
Hire Purchase Trading Account
for the year ended on 31st Dec., 2011
Dr. Cr
` ` `
To Hire Purchase Stock By Hire Purchase
(30×` 5,000) 1,50,000 Sales (W.N. 2) 91,40,000
To Goods Sold on By Stock Reserve
Hire Purchase (` 1,50,000×20%) 30,000
(240×` 50,000) 1,20,00,000
To Bad Debts 12,000 By Goods sold on Hire Purchase
To Loss on Re- (` 1,20,00,000× 20%) 24,00,000
possession 16,000 By Hire Purchase Stock
Less : Instalments [(8×50)+(6×30)+(1×20)] × ` 5,000 30,00,000
not yet due (8,000) 8,000
To Stock Reserve 6,00,000
(30,00,000 ×20%)
To Profit & Loss A/c
(Transfer of Profit) 18,00,000
1,45,70,000 1,45,70,000
Alternatively, hire purchase trading account can be prepared in the following manner:
for the year ended on 31st Dec., 2011
` `
To Hire Purchase Stock By Cash (W.N.1) 90,30,000
(30×` 5,000) 1,50,000 By Stock Reserve
To Goods Sold on Hire (` 1,50,000×20%) 30,000
Purchase By Goods Sold on Hire
(240×` 50,000) 1,20,00,000 Purchase
To Stock Reserve (` 1,20,00,000×20%) 24,00,000
(` 30,00,000 × 20%) 6,00,000 By Goods Repossessed
To Profit & Loss A/c (2×` 40,000×50%) 40,000
(Transfer of Profit) 18,00,000 By Instalments Due
Hire Purchase and Installment Sale Transactions 11.3
[(2×2)+(1×6)]×` 5,000 50,000

By Hire Purchase Stock
[(8×50)+(6×30+(1×20)]×` 5,000 30,00,000
1,45,50,000 1,45,50,000
Working Notes :
`
(1) Cash collected:
Cash down payment (240 × ` 10,000) 24,00,000
Add : Instalments collected :
Last instalments on 30 computers outstanding on 1.4.2011 1,50,000
Instalments due and collected on 240 computers sold
during the year :
Total instalments on 240 computers
(8 × 240 × ` 5,000) 96,00,000
Less : Instalments due but not collected
[(2 × 2) + (1 × 6) + (6 × 2)] × ` 5,000 1,10,000
Instalments not due on 31.12.2011
[(8 × 50) + (6 × 30) + (1 × 20) +
(1 × 2)] × ` 5,000 30,10,000 (31,20,000) 64,80,000
90,30,000
(2) Hire purchase sales:
Cash collected 90,30,000
Add : Instalments due but not collected
[(2 × 2)+ (1 × 6) + (6 × 2)] × ` 5,000 1,10,000
91,40,000
(3) Loss on repossessed computers:
Cost of instalments due but not collected
(6 × 2 × ` 4,000) 48,000
Cost of Instalments not yet due
(1 × 2 × ` 4,000) 8,000
56,000
Less : Estimated value of repossessed computers
(2 × ` 40,000 × 50%) (40,000)
Loss 16,000
(4) Bad debts (in respect of repossessed computers):
Instalments due but not collected
(6 × 2 × ` 5,000) 60,000
Cost of installments not due on 31.12.2011
(1 × 2 × ` 5,000 × 80%) 8,000
68,000
11.4 Accounting
Less : Cost of instalments due but not collected

(6 × 2 × ` 4,000) 48,000
Cost of instalments not yet due
(1 × 2 × ` 4,000) 8,000 (56,000)
Bad debts 12,000
Question 2
Welwash (Pvt.) Ltd. sells washing machines for outright cash as well as on hire-purchase basis.
The cost of a washing machine to the company is ` 10,500. The company has fixed cash price of
the machine at ` 12,300 and hire-purchase price, at ` 13,500 payable as to ` 1,500 down and the
balance in 24 equal monthly instalments of ` 500 each.
On 1st April, 2010 the company had 26 washing machines lying in its showroom. On that date 3
instalments had fallen due, but not yet received and 675 instalments were yet to fall due in respect
of machines lying with the hire purchase customers.
During the year ended 31st March, 2011 the company sold 130 machines on cash basis and 80
machines on hire-purchase basis. After paying five monthly instalments, one customer failed to pay
subsequent instalments and the company had to repossess the washing machine. After spending
` 1,000 on it, the company resold it for ` 11,500.
On 31st March, 2011 there were 21 washing machines in stock, 810 instalments were yet to fall due
and 5 instalments had fallen due, but not yet received in respect of washing machines lying with
the hire-purchase customers. Total selling expenses and office expenses including depreciation on
fixed assets totalled ` 1,60,000 for the year.
You are required to prepare for the Accounting Year ended 31st March, 2011:
(i) Hire purchase Trading Account, and
(ii) Trading and Profit and Loss Account showing net profit earned by the company after
making provision for income-tax @ 35%.
Answer
In the books of Welwash (Pvt.) Ltd.
Dr. Cr
` `
To Hire Purchase Stock By Cash (W.N. 1) 10,02,000
(` 500 × 675) 3,37,500
To Instalments due By Stock Reserve
` (500 × 3) 1,500 ⎛ 3,000 ⎞ 75,000
⎜ ` 3,37,500 × 13,500 ⎟
⎝ ⎠
To Goods sold on Hire Purchase By Goods Repossessed

(` 13,500×80) 10,80,000 (` 13,500–` 1,500–` 2,500) 9,500
To Stock Reserve By Goods sold on Hire Purchase 2,40,000
⎛ 3,000 ⎞ 90,000 ⎛ 3,000 ⎞
⎜ ` 4,05,000 × 13,500 ⎟ ⎜ ` 10,80,000 × 13,500 ⎟
⎝ ⎠ ⎝ ⎠
To Profit and Loss A/c By Hire Purchase Stock
(Transfer of profit) 2,25,000 (` 500 × 810) 4,05,000
By Instalments due
(` 500 × 5) 2,500
17,34,000 17,34,000

` `
To Opening Stock 2,73,000 By Sales (` 12,300×130) 15,99,000
(` 10,500×26)
To Purchases By Goods sold on Hire Purchase
` 10,500×(130+80+21–26) 21,52,500 (` 10,80,000–` 2,40,000) 8,40,000
To Gross Profit 2,34,000 By Closing Stock (` 10,500×21) 2,20,500
26,59,500 26,59,500
To Sundry Expenses 1,60,000 By Gross Profit 2,34,000
To Provision for Income Tax By Hire Purchase Trading A/c 2,25,000
(35% of ` 3,00,000) 1,05,000 By Goods Repossessed
To Net Profit for the year 1,95,000 (` 11,500–` 1,000–` 9,500) 1,000
4,60,000 4,60,000
Working Notes :
`
(1) Cash collected during the year
Hire purchase stock on 1.4.2010 3,37,500
Instalments due on 1.4.2010 1,500
Hire purchase price of goods sold during the year 10,80,000
14,19,000
Less : Repossessed goods 9,500
Hire purchase stock on 31.3.2011 4,05,000
Instalments due on 31.3.2011 2,500 (4,17,000)
Cash collected during the year 10,02,000
11.6 Accounting
(2) Washing machines purchased during the year

No. No.
Closing balance 21
Add : Cash Sales 130
Sales on hire purchase basis 80 231
Less : Opening stock (26)
Purchase during the year 205
Purchases 205 × ` 10,500 = ` 21,52,500
Question 3
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 Principal Amount

Amount yearly (10% p.a.) = (in each
5/105 = 1/21) 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
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 4
Sameera Corporation sells Computers on Hire-purchase basis at cost plus 25%. Terms of sales
are ` 5,000 as Down payment and 10 monthly instalments of ` 2,500 for each Computer. From
the following particulars, prepare Hire-purchase Trading A/c for the year 2010-2011:
On 1st April, 2010, last instalment on 20 Computers were outstanding as these were not due upto
the end of the previous year. During 2010-2011, the firm sold 120 Computers. On
31st March, 2011 the position of instalments outstanding were as under:
Instalments due but not collected 4 instalments on 4 computers and last instalment on 9
computers
Instalments not yet due 6 instalments on 50 computers, 4 instalments on 20 and
last instalment on 40 Computers
Two Computers on which 8 instalments were due and one instalment not yet due on 31.03.2011,
had to be repossessed. Repossessed stock is valued at 50% of cost. All other instalments have
been received.
Answer
In the books of Sameera Corporation
Amount Amount
` `
To Hire Purchase Stock 50,000 By Hire Purchase Sales 25,95,000
(20 × ` 2,500) (W.N. 2)
To Goods sold on Hire Purchase (120×` 36,00,000 By Stock Reserve 10,000
30,000) (` 50,000 × 20%)
11.8 Accounting
To Bad Debts 8,000 By Goods sold on Hire Purchase

(W.N. 4) 7,20,000
To Loss on Repossession 12,000 (` 36,00,000 × 20%)
Less: Instalments not By Hire Purchase Stock 10,50,000
yet due (4,000) 8,000 [(6×50)+(4×20)+ (1×40)] ×
` 2,500
To Stock Reserve 2,10,000
(` 10,50,000 × 20%)
To Profit and Loss Account (Transfer of 4,99,000
Profit) ________
43,75,000 43,75,000
Alternatively the Hire Purchase Trading A/c can be prepared in the following manner:
Amount Amount
` `
To Hire Purchase Stock 50,000 By Cash Account 24,92,500
(20 × ` 2,500) (W.N. 1)
To Goods sold on Hire Purchase 36,00,000 By Stock Reserve 10,000
(120×` 30,000) (` 50,000 × 20%)
To Stock Reserve 2,10,000 By Goods sold on Hire Purchase 7,20,000
(` 10,50,000 × 20%) (` 36,00,000 × 20%)
To Profit and Loss Account 4,99,000 By Goods Repossessed 24,000
(Transfer of Profit) (2 × ` 24,000 × 50%)
By Instalments due 62,500
[(4 × 4) + (1 × 9)] × ` 2,500
By Hire Purchase Stock 10,50,000
[(6 × 50 + 4 × 20 + 1 × 40) ×
________ ` 2,500]
43,59,000 43,59,000
Question 5
ABC Ltd. sells goods on Hire-purchase by adding 50% above cost. From the following particulars,
prepare Hire-purchase Trading account to reveal the profit for the year ended 31.3.2011:
`
1.4.2010 Instalments due but not collected 10,000
1.4.2010 Stock at shop (at cost) 36,000
1.4.2010 Instalment not yet due 18,000

31.3.2011 Stock at shop 40,000
31.3.2011 Instalments due but not collected 18,000
Other details:
Total instalments became due 1,32,000
Goods purchased 1,20,000
Goods on which due instalments could not be collected were repossessed and valued at 30%
below original cost. The vendor spent ` 500 on getting goods overhauled and then sold for
` 2,800.
Answer
In the Books of ABC Ltd.
` `
1.1.2010 To Hire purchase stock 18,000 1.1.2010 By Stock reserve
1.1.2010 To Goods sold on hire (1/3 of ` 18,000) 6,000
to Purchase 1,74,000 1.1.2010 By Hire purchase sales 1,32,000
31.3.2011 To Loss on to By Goods sold on hire
repossession of 31.3.2011 purchase (1/3 of
goods (W.N. 5) 1,600 ` 1,74,000) 58,000
31.3.2011 To Stock reserve 20,000 By Profit on sale of
To Profit and loss repossessed goods
account (Transfer of (W.N. 4) 900
profit) 43,300 31.3.2005 By Hire purchase stock
(W.N. 3) 60,000
2,56,900 2,56,900
Alternatively, Hire Purchase Trading Account can be prepared in the following manner:

` `
1.1.2010 To Hire purchase stock 18,000 1.1.2010 By Stock reserve (1/3 of 6,000
1.1.2010 To Hire purchase debtors 10,000 ` 18,000)
to To Goods sold on hire 1,74,000 1.1.2010 By Cash (` 1,21,000 +
31.3.2011 purchase to ` 2,800) 1,23,800
To Cash (Overhauling 500 31.3.2011 By Goods sold on hire
charges) purchase 58,000
11.10 Accounting
31.3.2011 To Stock reserve 20,000 (1/3 of ` 1,74,000)

To Profit and loss account 31.3.2011 By Hire purchase stock 60,000
By Hire purchase debtors 18,000
(Transfer of profit) 43,300 _______
2,65,800 2,65,800
Working Notes:
1. Memorandum Instalment due but not collected (hire purchase debtors) account
` `
To Balance b/d 10,000 By Cash 1,21,000
To Hire purchase sales 1,32,000 By Repossessed stock (Bal.fig.) 3,000
_______ By Balance c/d 18,000
1,42,000 1,42,000
2. Memorandum shop stock account
` `
To Balance b/d 36,000 By Goods sold on hire purchase 1,16,000
To Purchases 1,20,000 (Balancing figure)
_______ By Balance c/d 40,000
1,56,000 1,56,000
3. Memorandum hire purchase stock (Instalment not yet due) account
` `
To Balance b/d 18,000 By Hire purchase Sales 1,32,000
To Goods sold on hire By Balance c/d (Balancing
purchase [1,16,000 + figure) 60,000
(1,16,000 × 50%)] 1,74,000 _______
1,92,000 1,92,000
4. Goods Repossessed account
` `
To Hire purchase debtors 3,000 By Hire purchase trading
account (W.N. 5) 1,600
_____ By Balance c/d (W.N. 5) 1,400
3,000 3,000
To Balance b/d 1,400 By Cash account 2,800
To Cash account 500
(expenses)
To Profit on sale 900 _____
2,800 2,800
5. `
⎛ 100 ⎞
Original cost of goods repossessed ⎜ ` 3,000 × 2,000
⎝ 150 ⎟⎠
Instalments due but not received 3,000
Valuation of repossessed goods (70% of ` 2,000) (1,400)
Loss on repossession 1,600
Question 6
Computer point sells computers on Hire-purchase basis at cost plus 25%. Terms of sale are
` 5,000 down payment and eight monthly instalments of ` 2,500 for each computer.
The following transactions took place during the financial year 2010-11:
Number of instalments not yet due as on 1.4.2010 = 25
Number of instalments due but not collected as on 1.4.2010 = 5
During the financial year 240 computers were sold. Out of the above sold computers during the
year the outstanding position were as follows as on 31.3.2011:
Instalments not yet due:
(i) Eight instalments on 50 computers.

(ii) Six instalments on 30 computers.
(iii) Two instalments on 10 computers.
Instalments due but not collected:
Two instalments on 5 computers during the year. Two computers on which five instalments were
due and two instalments not yet due were repossessed out of sales effected during current year.
Repossessed stock is valued at 50% of cost. All instalments have been received. You are asked
to prepare Hire-Purchase Trading Account for the year ending on 31.3.2011.
Answer
Hire Purchase Trading Account for the year ended 31.3.2011
` `
To Hire purchase stock 62,500 By 25 12,500
(25 x ` 2,500) Stock reserve ( 62,500 × )
125
To Hire purchase debtors 12,500 By Goods sold on hire purchase A/c –
(5 x ` 2,500) 12,00,000
11.12 Accounting
25
Loading ( 60,00,000 × )
125
To Goods sold on hire purchase 60,00,000 By Cash A/c (W.N.1) 45,15,000
(240 computers x ` 25,000∗)
To Stock reserve 3,00,000 By Repossessed goods (W.N.2) 20,000
25
( ` 15,00,000 × )
125
To Profit transferred to P & L A/c 8,97,500 By Hire purchase debtors 25,000
(2 x 5 x ` 2,500)
By Hire purchase stock
[(8x50)+(6x30)+(2x10)] x ` 2,500 15,00,000
72,72,500 72,72,500
Working Notes:
1. Calculation of cash collected during the year
`
Down payment received on 240 computers sold during the 12,00,000
year (240 x ` 5,000)
Number of Instalments due and collected: No. of
instalments
Total Instalments (8 instalments x 240 computers) 1,920
Add: Opening hire purchase debtors 25
Add: Opening hire purchase stock 5
1950
Less: Closing hire purchase debtors (2 x 5 ) (10)
1,940
Less: Closing hire purchase stock
8 x 50 = 400
6 x 30 = 180
2 x 10 = 20 (600)
1,340
Less: Repossessed computer [(5 x 2 )+(2 x 2)] (14)
Total number of instalments received during the year 1,326
Total amount of instalments received (1,326 instalments x
` 2,500) 33,15,000
Instalments collected during the year 45,15,000
∗
Hire purchase price of a computer = ` 5,000 + (` 2,500 x 8) = ` 25,000.
2. Value of repossessed computers
Hire purchase price of two repossessed computers = [` 5,000 + (8 x ` 2,500)] x 2

computers
= ` 50,000
` 50,000
Cost price of the repossessed computers = × 100 = ` 40,000
125
Value of repossessed computers = ` 40,000 x 50% = ` 20,000
Alternatively Hire Purchase Trading Account can also be prepared in the following manner:
Hire Purchase Trading Account for the year ended 31.3.2011
` `
To Hire purchase stock 62,500 By 25 12,500
Stock reserve ( 62,500 × )
(25 x ` 2,500) 125
To Hire purchase debtors 12,500 By Hire purchase sales A/c (W.N.1) 45,65,000
(5 x ` 2,500)
To Goods sold on hire purchase 60,00,000 By Goods sold on hire purchase A/c –
(240 computers x ` 25,000) 25 12,00,000
Loading ( 60,00,000 × )
125
To Bad debts (W.N.3) 5,000 By Hire purchase stock 15,00,000

[(8x50)+(6x30)+(2x10)] x ` 2,500
To Loss on goods repossessed
(W.N.2) 8,000
Less : Cost of instalments
not due (8,000) Nil
To Stock reserve 3,00,000
25
15,00,000 ×
125
To Profit transferred to P & L A/c 8,97,500
72,77,500 72,77,500
Working Notes:
1. Calculation of hire purchase sales `
Cash collected (As per the working note 1 of the Alternate solution given 45,15,000
above)
11.14 Accounting
Add: Instalments due but not collected (including repossessed computers)

(2 x ` 2,500 x 5) + (5 x ` 2,500 x 2) 50,000
45,65,000
2. Calculation of loss on repossessed computers
(2 x 2,500 x 5) 20,000
Cost of instalments due but not collected × 100
125
(2 x 2,500 x 2)
Add: Cost of instalments not yet due × 100 8,000
125
28,000
Less : Value of repossessed computers
⎡ (2 x 25,000) ⎤
⎢ × 100⎥ × 50%
⎣ 125 ⎦ (20,000)
Loss on repossessed computers 8,000
3. Bad debts (in respect of repossessed computers)
Instalments due but not collected (5 x ` 2,500 x 2) 25,000
(2 × ` 2,500 x 2)
Add: Cost of installments not due × 100 8,000
125
33,000
Less : Cost of instalments due but not collected
(5 x ` 2,500 x 2) 20,000
× 100
125
Cost of instalments not yet due
(2 × ` 2,500 x 2)
× 100 8,000 (28,000)
125
Bad debts on repossessed computers 5,000
Question 7
Easy buy Corporation sells goods on hire-purchase basis. The hire-purchase price is cost plus
60%.
It furnishes you the following information:
`
Hire Purchase stock on 1.4.2010 2,40,000
Installments due on 1.4.2010 45,000
Goods sold on hire purchase from 1.4.2010 to 31.3.2011 9,60,000

Cash collected from HP debtors during 1.4.2010 to 31.3.2011 3,00,000
Stock with customers at hire-purchase price on 31.3.2011 6,40,000
You are required to prepare Hire Purchase Trading Account for the year ended 31st March, 2011.
Answer
For the year ended 31.3.2011
` `
To Hire purchase stock 2,40,000 By Hire purchase stock 90,000
(Opening) reserve (Opening)
To Instalments due (Opening) 45,000 By Bank (Collections) 3,00,000
To Goods sold on hire 9,60,000 By Goods sold on hire 3,60,000
purchase purchase (Loading)
To Hire purchase stock 2,40,000 By Hire purchase stock 6,40,000
reserve (Closing) (Closing)
To Profit and loss A/c 2,10,000 By Instalments due (Closing) 3,05,000
16,95,000 16,95,000
Working Notes:
Memorandum Hire Purchase Stock A/c
` `
To Balance b/d 2,40,000 By Hire Purchase debtors A/c 5,60,000
(Balancing Figure)
To Goods sold on hire purchase 9,60,000 By balance c/d 6,40,000
12,00,000 12,00,000
Memorandum Hire Purchase Debtors A/c
` `
To Balance b/d 45,000 By Cash/Bank A/c 3,00,000
To Hire purchase stock A/c 5,60,000 By balance c/d (Bal.Fig.) 3,05,000
6,05,000 6,05,000
11.16 Accounting
Question 8
From the following information of M/s Chennai Traders, you are required to prepare Hire
Purchase Trading Account to ascertain the profit made during the financial year
2009-10.
Chennai Traders sell goods on hire purchase basis at cost plus 25%. The following details are
available:
`
(1) Instalment not due on 31st March, 2009 4,50,000
(2) Instalment due and collected during the financial year 2009-10 12,00,000
(3) Instalment due but not collected during the financial
year 2009-10 which includes ` 15,000 for which goods were 75,000
repossessed
(4) Instalment not due on 31st March, 2010 including ` 30,000 for
which goods were repossessed 5,55,000
(5) Instalment collected on repossessed stock 22,500
(6) M/s Chennai Traders valued repossessed stock at 60% of original cost.
Answer
In the books of M/s Chennai Traders
Hire Purchase Trading A/c (at invoice value)
To Goods with customer 4,50,000 By Stock reserve 90,000
(31st March, 2009) (Opening)
To Goods sold on Hire 13,50,000 By Hire purchase sales 12,75,000
Purchase (W.N.3) (W.N.1)
To Bad debts (W.N.4) 3,000 By Goods sold on hire 2,70,000
purchase (loading)
(W.N.3)
To Loss on repossession 3,600 By Goods with customer 5,25,000
(W.N.2) (31st March, 2010)
To Stock reserve (Closing) 1,05,000
To Profit & Loss A/c
(Transfer of H.P. profit) 2,48,400
21,60,000 21,60,000
Working Notes:
1. Hire purchase sales
`
Installments due and collected 12,00,000
Add: Installments due but not collected 75,000
12,75,000
2. Loss on repossessed goods
`
Hire purchase price of repossessed goods
Installments collected 22,500
Installments due 15,000
Installments not due 30,000
67,500
Cost of repossessed goods (`67,500 x 100/125) 54,000
Valuation of repossessed goods (`54,000 x 60/100) 32,400
Less: Cost of installments due + Installments not yet due
(` 15,000 + ` 30,000) x 100/125 (36,000)
Loss on repossession 3,600
3. Goods taken from shop stock :
`
Hire purchase sales (12,00,000+75,000) 12,75,000
Add: Stock with customer as on 31st March 2010
(5,55,000 – 30,000) 5,25,000
Less: Stock with Customer as on 31st March, 2009 (4,50,000)
13,50,000
Loading on goods taken from shop stock= ` 13,50,000 x (25/125)= ` 2,70,000
4. Bad Debt
`
Installment due but not collected 15,000
Add: Installment not yet due at cost 24,000
39,000
Less: Cost of installments due and not yet due (36,000)
3,000
In other words `15,000 x (25/125) = ` 3,000
Note: It is presumed that all the figures given in the question is at invoice price.
11.18 Accounting
Question 9
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 10
A Trader sold out goods on hire purchase at a profit of 25% on cost price.
Prepare (i) Hire Purchase Stock A/c (ii) Shop Stock A/c (iii) Hire Purchase Debtors' A/c and
(iv) Hire Purchase Adjustment A/c in the books of the trader from the following details :
(` )
Stock in Godown on 01-04-2011 6,00,000
on 31-03-2012 5,00,000
Overdue Instalments :
on 01-04-2011 40,000
on 31-03-2012 60,000
Goods with Customer on Hire Purchase on 01-04-2011 7,20,000
Purchases 12,92,000
Instalments received 12,00,000
Answer
(i) Hire Purchase Stock Account
` `
1.4. 11 To Balance b/d 7,20,000 1.4.11 to By H.P. Debtors 12,20,000
31.3.12 A/c
1.4.11 to To Shop stock A/c 13,92,000 31.3.12 By Balance c/d 12,40,000
31.3.12 To H.P Adjustment A/c 3,48,000 (bal.fig.)
⎛ 25 ⎞
⎜ 17, 40,000 × ⎟
⎝ 125 ⎠
24,60,000 24,60,000
(ii) Shop Stock Account

` `
1.4.11 To Balance b/d 6,00,000 1.4.11 By Hire Purchase Stock 13,92,000
to Account (Cost of
31.3.12 Goods sold) (bal.fig.)
1.4.11 to To Purchases 12,92,000 31.3.12 By Balance c/d 5,00,000
31.3.12
18,92,000 18,92,000
(iii) Hire Purchase Debtors Account

` `
1.4.11 To Balance b/d 40,000 1.4.11 to By Bank A/c 12,00,000
31.3.12
1.4.11 to To Hire Purchase Stock 31.3.12 By Balance c/d 60,000
31.3.12 Account (bal.fig.)
12,20,000
12,60,000 12,60,000
11.20 Accounting
(iv) Hire Purchase Adjustment Account

` `
31.3.12 To Stock reserve on 1.4.11 By Stock reserve on
closing H.P.Stock A/c opening H.P. Stock A/c
⎛ 25 ⎞ ⎛ 25 ⎞
⎜ 12,40,000 × ⎟ 2,48,000 ⎜ 7,20,000 × ⎟ 1,44,000
⎝ 125 ⎠ ⎝ 125 ⎠
31.3.12 To Profit and Loss Account 1.4.11 By H.P. Stock 3,48,000

(bal.fig.) 2,44,000 to
31.3.12
4,92,000 4,92,000
EXERCISES
1. Krishna Agencies started business on 1st April, 2010. During the year ended 31st March, 2011, they sold under-
mentioned durables under two schemes — Cash Price Scheme (CPS) and Hire-Purchase Scheme (HPS).
Under the CPS they priced the goods at cost plus 25% and collected it on delivery.
Under the HPS the buyers were required to sign a Hire-purchase Agreement undertaking to pay for the value of
the goods including finance charges in 30 instalments, the value being calculated at Cash Price plus 50%.
The following are the details available at the end of 31st March, 2011 with regard to the products :
Product Nos. Nos. sold Nos. sold Cost per No. of instalments No. of instalments
purchased under under unit due during the year received during the
CPS HPS ` year
TV sets 90 20 60 16,000 1,080 1,000
Washing 70 20 40 12,000 840 800
Machines
The following were the expenses during the year :
`
Rent 1,20,000
Salaries 1,44,000
Commission to Salesmen 12,000
Office Expenses 1,20,000
From the above information, you are required to prepare :
(a) Hire-purchase Trading Account, and
(b) Trading and Profit & Loss Account.
(Hints: Total of Hire Purchase Trading Account = ` 39,60,000; Gross Profit ` 1,40,000; and Net Profit
` 5,42,000)
12
Investment Accounts
BASIC CONCEPTS
¾ Investment Accounting is done as per Accounting Standard-13.
¾ Two type of Investments :
• Long Term Investments
• Current Investments
¾ Valuation of Current investment – Lower of Cost or Fair Value/net Realizable Value
¾ Valuation of Long Term investment – At cost
¾ 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
¾ Disposal of Investment:
• Difference between carrying amount and disposal proceeds is transferred to Profit &
Loss A/c.
• In case of partial sale, FIFO or weighted average method to be used.
Question 1
On 1.4.2010, Mr. Krishna Murty purchased 1,000 equity shares of ` 100 each in TELCO Ltd. @
` 120 each from a Broker, who charged 2% brokerage. He incurred 50 paise per ` 100 as cost of
shares transfer stamps. On 31.1.2011 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 31.3.2011 Mr. Krishna Murty sold bonus shares to a Broker, who charged 2%
brokerage.
12.2 Accounting
Show the Investment Account in the books of Mr. Krishna Murty, 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 Mr. Krishna Investment Account
(Scrip: Equity Shares of TELCO Ltd.)
Date Particulars Nominal Cost Date Particulars Nominal Cost
Value Value
(` ) (` ) (` ) (` )
1.4.2010 To Bank A/c 1,00,000 1,23,000 31.3.2011 By Bank A/c 50,000 44,100
31.1.2011 To Bonus shares 50,000 − 31.3.2011 By Balance c/d 1,00,000 82,000
31.3.2011 To Profit & loss A/c − 3,100
1,50,000 1,26,100 1,50,000 1,26,100
Working Notes:
(i) Cost of equity shares purchased on 1.4.2010 = 1,000 × ` 120 + 2% of ` 1,20,000 + ½%
of ` 1,20,000 = ` 1,23,000
(ii) Sale proceeds of equity shares sold on 31st March, 2011 = 500 × ` 90 – 2% of ` 45,000
= ` 44,100.
(iii) Profit on sale of bonus shares on 31st March, 2011
= Sales proceeds – Average cost
Sales proceeds = ` 44,100
Average cost = ` (1,23,000 × 50,000)/1,50,000
= ` 41,000
Profit = ` 44,100 – ` 41,000 = ` 3,100.
(iv) Valuation of equity shares on 31st March, 2011
Cost = (` 1,23,000 × 1,00,000)/1,50,000 = ` 82,000)
Market Value = 1,000 shares × ` 90 = ` 90,000
Closing balance has been valued at ` 82,000 being lower than the market value.
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 1st June, 2009, XY Ltd. acquired 5,000 equity shares of
ABC Ltd. for ` 1,00,000 on cum right basis. 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 1st July
2009.
Investment Accounts 12.3
(2) Right shares are to be issued to the existing shareholders on 1st 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 31st 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 1st January 2010 at ` 16.50 per share. Brokerage being
1%.
You are required to prepare Investment account of XY Ltd. for the year ended 31st 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. Income Amount Date Particulars No. Income Amount
` ` ` `
2009 To Balance b/d 15,000 - 2,25,000 2009 By Bank A/c - - 16,000
April 1 Sept. 1 (W.N 3)
June 1 To Bank A/c 5,000 -- 1,00,000 2009 By Bank - 30,000 10,000
Oct. 31 A/c
(W.N. 5)
July 1 To Bonus 4,000 - - 2010 By Bank A/c 13,000 - 2,12,355
Issue Jan. 1 (W.N.4)
(W.N. 1)
Sept.1 To Bank A/c 2,000 - 24,000 March By Balance 13,000 - 1,61,500
(W.N. 2) 31 c/d
(W.N. 6)
2010 To P & L A/c - - 50,855
March (W.N. 4)
31
“ To P & L A/c - 30,000 -
26,000 30,000 3,99,855 26,000 30,000 3,99,855
Working Notes:
1. Calculation of no. of bonus shares issued
15,000 shares + 5,000 shares
Bonus Shares = x 1= 4,000 shares
5
12.4 Accounting
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
(Since shares are purchased cum right basis, therefore, amount received from sale
of rights will be credited to investment a/c)
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 –` 16,000 – ` 10,000
= ` 3,23,000
Average cost of 13,000 shares would be
3,23,000
= × 13,000 = ` 1,61,500
26,000
`
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 (1,61,500)
Profit on sale 50,855
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 1st 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 1st 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
3,23,000
13,000 × = ` 1,61,500.
26,000
Closing value of shares would be ` 1,61,500.

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 30th September and 31st March. Mr. Z closes his books every
31st December. Show the investment account as it would appear in his books.
Answer
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
12.6 Accounting
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 31st December 2008
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
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 30th September and 31st 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 30th September and 31st March)
Date Particulars Nominal Interest Cost Date Particulars Nominal Interest Cost
Value Value
` ` ` `
1.4.2009 To Balance b/d 1,20,000 - 1,18,000 30.9.2009 By Bank - 5,200 -
1.7.2009 To Bank (ex-Interest) 10,000 200 9,898 1.10.2009 By Bank 20,000 - 19,800
1.10.2009 To Profit & Loss A/c 133 1.2.2010 By Bank (ex- 20,000 533 19,602
Interest)
1.1.2010 To Bank (cum-Interest) 5,000 100 4,849 1.2.2010 By Profit & Loss 64
A/c
31.3.2010 To Profit & Loss A/c - 9,233 31.3.2010 By Bank - 3,800 -
31.3.2010 By Balance c/d 95,000 - 93,414
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 ⎜ x 20,000 ⎟ = (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 ⎜ x 20,000 ⎟ = (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.
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 31st March, 2012
` ` ` `
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 31st 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 31st March, 2012
` ` ` `
2011 To Bank A/c 60,000 -- 26,92,800 2012 By Bank A/c - - 20,250
July 10 Jan. 15 (W.N 6)
2012 To Bank A/c 6,000 - 30,000 Mar. 15 By Bank – - 1,18,800
12.10 Accounting
Jan. 15 (W.N. 5) dividend

March To P & L A/c March By Balance
31 - 1,18,800 - 31 c/d
(bal.fig.) 66,000 - 27,02,550
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: Shares are assumed to be purchased on cum right basis; therefore, amount
received from sale of rights is credited to Investment A/c.
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 1/3rd of entitlement to Umang for a consideration of ` 2 per share and subscribed
the rest on 5th 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 5.11.11 By Bank A/c (sale
20.6.11 To Bank A/c 10,000 1,60,000 of rights) (W.N.3) - 20,000
1.8.11 To Bonus 10,000 - 31.3.12 By Balance c/d 90,000 11,90,000
issue (W.N.1) (Bal. fig.)
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
3
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
12.12 Accounting
` 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 31st March, 2012
= Sale price – Brokerage
= 2,500 × ` 90 – 2% of ` 2,25,000
= ` 2,20,500.
3. Profit on sale of bonus shares on 31st March, 2012
= Sales proceeds – Average cost
Sales proceeds = ` 2,20,500
Average cost = ` [6,15,000 × 2,50,000/7,50,000]
= ` 2,05,000
Profit = ` 2,20,500 – ` 2,05,000= ` 15,500.
4. Valuation of equity shares on 31st March, 2012
Cost = ` [6,15,000 × 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.
13
Insurance Claims for Loss of Stock and
Loss of Profit
BASIC CONCEPTS
1. Claim for Loss of Stock
Claim for loss of stock can be studied under two heads:
a. Total Loss:
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 Loss of Profit
The Loss of Profit Policy normally covers the following items:
(1) Loss of net 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
13.2 Accounting
the premises after due provision has been made for all standing and other charges
including depreciation.
Insured Standing Charges: Interest on Debentures, Mortgage Loans and Bank
Overdrafts, Rent, Rates and Taxes (other than taxes which form part of net profit)
Salaries of Permanent Staff and Wages to Skilled Employees, Boarding and Lodging
of resident Directors and/or Manager, Directors’ Fees, Unspecified Standing Charges
[not exceeding 5% (five per cent) of the amount recoverable in respect of Specified
Standing Charges].
Rate of Gross Profit: The rate of Gross Profit earned on turnover during the financial
year immediately before the date of damage.
Annual Turnover: The turnover during the twelve months immediately before the
damage.
Standard Turnover: The turnover during that period in the twelve months
immediately before the date of damage which corresponds with the Indemnity Period.
Indemnity Period: The period beginning with the occurrence of the damage and
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.
Insurance Claims for Loss of Stock and Loss of Profit 13.3
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 30th September each year, but on 31st December, 2011 fire
destroyed the greater part of his stock. Following information was collected from his book:
`
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
13.4 Accounting
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 30,500
To Purchases 75,000 (bal. fig.)
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 31st 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 20th October, 09 includes ` 80,000 for which goods had not been dispatched.
(2) Purchases upto 20th 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
(` 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 1st April, 2009 was valued at 10% lower than cost.
Hence, original cost of the stock as on 1st 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 returned during 2010 2,43,500
13.6 Accounting
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
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 1st January to
30th March 2012.
(1) Stock as per Balance Sheet at 31st December, 2011, ` 95,600.
(2) Purchases (including purchase of machinery costing ` 30,000) ` 1,70,000
(3) Wages (including wages ` 3,000 for installation of machinery) ` 50,000.
(4) Sales (including goods sold on approval basis amounting to ` 49,500) ` 2,75,000. No
approval has been received in respect of 2/3rd of the goods sold on approval.
(5) The average rate of gross profit is 20% of sales.
(6) The value of the salvaged goods was ` 12,300.
You are required to compute the amount of the 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 30th 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
13.8 Accounting
2. Calculation of goods with customers

Since no approval for sale has been received for the goods of ` 33,000 (i.e. 2/3 of
` 49,500) hence, these should be valued at cost i.e. ` 33,000 – 20% of ` 33,000 =
` 26,400.
3. Calculation of actual sales
Total sales – Sale of goods on approval = ` 2,75,000 – ` 33,000 = ` 2,42,000.
Question 6
A fire occurred in the premises of M/s. Fireproof Co. on 31st August, 2011. From the following
particulars relating to the period from 1st 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 50,000
` 3,000)
(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 March, 2011, ` 1,000 were written off in respect of a slow
st
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
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
92,500
= ` 47,027
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
13.10 Accounting
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
` `
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
13.12 Accounting
Less: Sales of Abnormal item (9,000)

2,40,000
Less: Gross Profit @ 20% (48,000) (1,92,000)
Value of Stock as on 31st March, 2012 12,500
CLAIM FOR LOSS OF PROFIT

Question 9
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 1st September, 2010 a fire occurred in the factory of X Ltd.
and the normal business was affected upto 1st March, 2011.
The following information is compiled for the year ended on 31st 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.
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
Turnover for 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 _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 turnover
(iii) Additional expenses ×
Gross profit on annual adjusted turnover + 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)
13.14 Accounting
(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 10
CCL wants to take up a loss of profit policy. Turnover during the current year is expected to
increase by 20%. The company will avail overdraft facilities from its bank @ 15% interest to
boost up the sales. The average daily overdraft balance will be around ` 3 lakhs. All other
fixed expenses will remain same. The following further details are also available from the
previous year’s account.
`
Total variable expenses 24,00,000
Fixed expenses:
Salaries 3,30,000
Rent, Rates, and Taxes 30,000
Travelling expenses 50,000
Postage, Telegram, Telephone 60,000
Director’s fees 10,000
Audit fees 20,000

Miscellaneous income 70,000
Net Profit 4,20,000
Determine the amount of policy to be taken for the current year.
Answer
Insurance Policy
`
Gross profit on the basis of last year’s sales 8,50,000
Add: 20% for increase of turnover 1,70,000
10,20,000
Add: Increased standing charges (interest on overdraft) 45,000
Policy to be taken for current year 10,65,000
Working Notes:
1. Profit and Loss Account for the previous year
` `
To Variable expenses 24,00,000 By Sales 32,50,000
To Fixed expenses 5,00,000 By Misc. income 70,000
To Net profit 4,20,000 ________
33,20,000 33,20,000
2. Gross profit of the previous year
`
Sales 32,50,000
Less: Variable expenses (24,00,000)
8,50,000
Question 11
On account of a fire on 15th June, 2011 in the business house of a company, the working
remained disturbed upto 15th 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.
13.16 Accounting
`
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
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
(ii) Expenditure x (Net profit + Insured standing charges) / (Net profit + Total standing
charges)
` 80,000 + ` 70,000
= ` 12,000 x = ` 9,000
` 80,000 + ` 1,20,000
(iii) Gross profit on sales generated due to additional expenses
= ` 70,000 x 25% = ` 17,500
` 9,000 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 9,000
66,500
Less: Saving in standing charges (2,000)
64,500
(6) Calculation of insurable amount = Adjusted sales x G. P. rate:
`
Turnover from 16.6.2010 to 15.6.2011 5,60,000
Adjusted sales 7,00,000
Insurable amount= ` 7,00,000 x 25% = ` 1,75,000
(7) Total claim for consequential loss of profit:

Insured amount
Total claim= × Total loss of profit
Insurable amount
` 1,40,000
Total claim= x ` 64,500 = ` 51,600
` 1,75,000
Alternatively claim for increased cost of working can also be calculated applying the
following method (first three calculations will be the same as in the earlier alternative).
(8) 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
13.18 Accounting
(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
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.
(9) 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
(10) Calculation of insurable amount:
Adjusted turnover x G.P. rate
= ` 7,00,000 x 25% = ` 1,75,000
(11) 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 12
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:
Particulars Amount (`) Particulars Amount (`)
To Opening Stock 96,000 By Sales 12,00,000
To Purchases 7,56,000 By Closing Stock 1,85,000

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
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
13.20 Accounting
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
12,00,000 = 18%
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: 12% increasing trend 1,08,000
10,08,000
Add: From 1-4-2011 to 30-6-2011 3,36,000
13,44,000
Gross Profit on annual turnover @ 23% 3,09,120
(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
3,09,120
× 1,98,000 = 1,74,316
3,51,120
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.
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%.
EXERCISES
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)
13.22 Accounting
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)
14
Issues in Partnership Accounts
BASIC CONCEPTS
¾ Partnership is defined as the relationship between persons who have agreed to share the
profit or loss of a business carried on by all or any of them acting for all.
¾ Two methods of accounting
• Fixed capital method
• Fluctuating capital method.
¾ Goodwill is the value of reputation of a firm in respect of profits expected in future over
and above the normal rate of profits.
¾ 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.
¾ Methods for valuation of goodwill:
(1) Average profit basis :
Total Pr ofit
Average Profit =
Number of years
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.
(2) Super profit basis :
Calculate Capital Employed
Assets …….
14.2 Accounting
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 31st 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
The firm had taken a Joint Life Policy for ` 1,00,000; the premium periodically paid was
charged to Profit and Loss Account. Partner C died on 30th September, 2010. It was agreed
between the surviving partners and the legal representatives of C that:
(i) Goodwill of the firm will be taken 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.
Issues In Partnership Accounts 14.3
Policy money was received and the legal heirs were paid off. The profits for the year ended
31st 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,
assuming that they had not been paid anything other then the share in the Joint Life Policy.
Answer
Computation of entitlement of legal heirs of C
(1) Profits for the half year ended 31st March, 2011
`
Profits for the year ended 31st 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., 1st 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 30th 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 Goodwill 18,000 24,000 18,000
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 57,000 76,000 – (Interest on
` 48,000 @ 25%
for 6 months) — — 6,000
72,000 96,000 78,000 72,000 96,000 78,000
14.4 Accounting
(3) Application of Section 37 of the Partnership Act

Legal heirs of C have not been paid anything other than the share in joint life policy. 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 share 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 31st March,
2011)
52,000
` 25,000 × = ` 7,027 (approx.)
57,000 + 76,000 + 52,000
In the above case, it would be rational to assume that the legal heirs would opt for
` 7,027.
(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)] 7,027
Amount due 59,027
Question 2
A, B and C were partners, sharing Profits and Losses in the ratio of 5 : 3 : 2 respectively. On
31st March, 2011 their Balance Sheet stood as follows :
Liabilities Rs. Assets Rs.
A’s capital 7,79,000 Plant and Machinery 13,62,000
B’s capital 7,07,800 Furniture and Fittings 2,36,000
C’s capital 6,86,200 Stock 7,02,000
Cash at Bank 1,73,000
26,64,000 26,64,000
On 31 July, 2011 A died. According to partnership deed, on the death of a partner, the capital
st
account of the deceased partner was to be credited with:

(i) his share of profit for the relevant part of the year of death calculated on the basis of
profit earned during the immediately preceding accounting year, and
(ii) his share of goodwill
Goodwill was to be valued at two years’ purchase of the average profits of immediately
preceding three accounting years. The profits, as per books of account were as follows:
`
For accounting year ended 31st March, 2009 3,29,000
However, while going through the books of account on A’s death, it came to light that
` 30,000 worth of wages were spent on installation of a new machinery, but the same was not
capitalized; the machinery was put into operation on 1st October, 2010. Depreciation was
provided on the machinery @ 20% per annum.
On 1st October, 2011, A’s son D was admitted into partnership with immediate effect on the
following terms:
(a) D would get one-fourth share in the profit of the firm, while the relative profit sharing
ratio between B and C would remain unchanged.
(b) The final balance of A’s capital account would be credited to D’s capital account
(c) An adjustment would be made in the Capital Accounts for D’s share of goodwill. The
basis of valuation of firm’s goodwill would be the same as was adopted at the time of the
death of his father.
On 31st March, 2012, the Profit and Loss Account of the firm showed that the firm had earned
a profit of ` 4,16,000 for the year. The respective drawings accounts showed that while B and
C had withdrawn ` 60,000 each during the year, D’s drawings totalled ` 30,000. The Drawings
Accounts are closed at the end of the year by transfer to respective capital accounts.
(i) Prepare a statement showing distribution of profits for the accounting year ended
31st March, 2012; and
(ii) Pass journal entries for all the transactions relating to death of the partner. D’s
admission into partnership, and at the end of the year relating to transfer of Drawings
Accounts and distribution of profit for the year.
14.6 Accounting
Answer
(i) Statement showing distribution of profits for the accounting year ended 31st March,
2012
` `
Net profit for the year ended 31.03.2012 4,16,000
A’s share
(Profit distributed to deceased partner A & his executor)
(a) Profit for 4 months (1.4.2011 – 31.7.2011) (W.N.1) 67,500
(b) Application of Sec. 37 (1.8.2011 – 30.9.2011) (W.N.5) 28,021 95,521
B’s share
(b) Profit for 2 months (1.8.2011 – 30.9.2011) (W.N.6) 24,787
(c) Profit for 6 months (1.10.2011 – 31.3.2012) (W.N.10) 93,600 1,61,087
C’s share
(b) Profit for 2 months (1.8.2011 – 30.9.2011) (W.N.6) 16,525
(c) Profit for 6 months (1.10.2011 – 31.3.2012) (W.N.10) 62,400 1,07,392
D’s share
(a) Profit for 6 months (1.10.2011 – 31.3.2012) (W.N.10) 52,000 52,000
4,16,000
(ii) Journal Entries
Year Dr. Cr.

2011 ` `
July 31 Machinery A/c Dr. 27,000
To A’s Capital A/c 13,500
To B’s Capital A/c 8,100
To C’s Capital A/c 5,400
(Wages spent on installation of new machinery
capitalised and credited to partners’ capital accounts
after providing depreciation for six months ended 31st
March, 2011)
Profit and Loss Suspense A/c Dr. 67,500

(A’s share of profit for four months as calculated in
W. N. 1 credited to his capital account)
Goodwill A/c Dr. 7,20,000
To A’s Capital A/c 3,60,000
To B’s Capital A/c 2,16,000
To C’s Capital A/c 1,44,000
(Goodwill raised in the books and credited to partners
in the old profit sharing ratio 5 : 3 : 2)
A’s Capital A/c Dr. 12,20,000
To A’s Executor’s A/c 12,20,000
(Balance due to A transferred to his executor’s
account)
Profit & Loss Suspense A/c Dr. 28,021
To A’s Executor’s A/c 28,021
(Profit earned out of the unsettled capital credited to
A’s executor’s account as per W. N. 5)
Oct. 1 A’s Executor’s A/c Dr. 12,48,021
To D’s Capital A/c 12,48,021
(Final balance of A’s executor’s account transferred
to D’s capital account)
B’s Capital A/c Dr. 3,24,000
C’s Capital A/c Dr. 2,16,000
D’s Capital A/c Dr. 1,80,000
To Goodwill 7,20,000
(Goodwill written off and debited to partners in the
new profit sharing ratio 9 : 6 : 5)
March B’s Capital A/c Dr. 60,000
31 C’s Capital A/c Dr. 60,000
D’s Capital A/c Dr. 30,000
To B’s Drawings A/c 60,000
To C’s Drawings A/c 60,000
To D’s Drawings A/c 30,000
(Drawings debited to partners’ capital accounts)
14.8 Accounting
March Profit and Loss Appropriation A/c Dr. 4,16,000

31
To Profit and loss suspense A/c
(` 67,500 + ` 28,021) 95,521
To B’s Capital A/c 1,61,087
To C’s Capital A/c 1,07,392
To D’s Capital A/c 52,000
(Division of profits as shown in statement of
distribution of profits and balance of profit & loss
suspense account transferred to profit and loss
appropriation account)
Working Notes:
(1) Computation of A’s share in profit for the period 1.4.2011 – 31.7.2011
A’s share in profit for the period of 1st April, 2011 to 31st July, 2011 is to be calculated on
the basis of profit earned during the immediately previous accounting year i.e. year
ended on 31st March, 2011
`
Profit for the year ended 31st March, 2011 3,78,000
Add : Capital expenditure of wages spent on installation
of new machinery, treated as revenue expenditure 30,000
4,08,000
Less : Depreciation on ` 30,000 (being the value of machinery @ 20%
p.a. for 6 months) (3,000)
Correct profit for the year ended 31 March, 2011
st 4,05,000
4
Profit for 4 months on the basis of last year’s profit = ` 4,05,000 × = 1,35,000
12
5
A’s share in profit = 1,35,000 × = 67,500
10
(2) Valuation of Goodwill `
Total Profit 10,80,000
10,80,000
Average Profit =` = ` 3,60,000
3
Goodwill (two years’ purchase) = ` 3,60,000 × 2 = ` 7,20,000
(3) Distribution of profit for 4 months ended 31st July, 2011
`
4
Net Profit (` 4,16,000 × ) 1,38,667
12
A’s share (W. N. 1) 67,500
3
B’s share (` 71,167 × ) 42,700
5
2
C’s share (` 71,167 × ) 28,467
5
(4) Partners’ Capital Accounts as on 31st July, 2011
A B C A B C
` ` ` ` ` `
To Drawings 20,000 20,000 By Balance b/d 7,79,000 7,07,800 6,86,200
To A’s Executor’s A/c 12,20,000 9,54,600 8,44,067 By Plant & Machinery 13,500 8,100 5,400
To Balance c/d – – By Goodwill 3,60,000 2,16,000 1,44,000
By Share in
Profit (W. N. 3) 67,500 42,700 28,467
12,20,000 9,74,600 8,64,067 12,20,000 9,74,600 8,64,067
(5) Application of section 37 of the Partnership Act

Either
6 2
(i) Interest of ` 12,20,000 × × = ` 12,200
100 12
Or
(ii) Profit earned out of unsettled capital
` 4,16,000 × 2 × ` 12,20,000
= ` 28,021 (approx.)
12 ` (12,20,000 + 9,54,600 + 8,44,067)
In the absence of specific agreement amongst partners on the above subject matter, the
representatives of the deceased partner can receive at their option, interest at the rate of
6% p.a. or share of profit earned for the amount due to the deceased partner.
In the above case, it would be rational to assume that A’s representatives would opt for
` 28,021.
14.10 Accounting
(6) Distribution of profit for 2 months ended 31st Oct, 2011

`
2
Net profit (` 4,16,000 × ) 69,333
12
A’s executor’s share (W. N. 5) 28,021
3
B’s share (` 41,312 × ) 24,787
5
2
C’s share (` 41,312 × ) 16,525
5
(7) A’s Executor’s Account

` `
To D’s Capital A/c 12,48,021 By A’s capital A/c 12,20,000
By Share in profit (W. N. 6) 28,021
12,48,021 12,48,021
(8) Partner’s Capital Accounts (1st August, 2011 to 30th Sept., 2011)
Dr. B C B C
` ` ` `
To Drawings 10,000 10,000 By Balance b/d 9,54,600 8,44,067
To Balance c/d 9,69,387 8,50,592 By P & L A/c 24,787 16,525
9,79,387 8,60,592 9,79,387 8,60,592
(9) Computation of new profit sharing ratio between B, C & D

D is admitted for ¼ share
B’s new ratio = 3/4 × 3/5 = 9/20
C’s new ratio = 3/4 × 2/5 = 6/20
D’s new ratio = 5/20
New profit sharing ratio =9:6:5
(10) Distribution of profit for 6 months ended 31st March, 2012

`
6
Net profit (` 4,16,000 × ) 2,08,000
12
9
B’s share (` 2,08,000 × ) 93,600
20
6
C’s share (` 2,08,000 × ) 62,400
20
5
D’s share (` 2,08,000 × ) 52,000
20
(11) Partner’s Capital Accounts as on 31st March, 2012
B C D B C D
` ` ` ` ` `
To Goodwill 3,24,000 2,16,000 1,80,000 By Balance b/d 9,69,387 8,50,592
To Drawings 30,000 30,000 30,000 By A’s Executor’s A/c 12,48,021
To Balance c/d 7,08,987 6,66,992 10,90,021 By Share of profit
(W. N. 10) 93,600 62,400 52,000
10,62,987 9,12,992 13,00,021 10,62,987 9,12,992 13,00,021
Notes:
1. It is assumed that profit was earned uniformly throughout the year. Although notional
profit was calculated for the first four months, it is to be transferred from the current
year’s profit (as calculated in working note 3). The question requires that A’s share of
profit for this period is to be calculated on the basis of profit earned during year ended
31st March. 2011. The balance amount after calculating his share has been credited to B
and C in ratio 3 : 2.
2. It is assumed that drawings were made evenly throughout the year. However, single
entry has been given at year end in the main solution relating to transfer of drawings and
distribution of profit but the Partners’ capital accounts shown in the working notes include
the entries of drawings and distribution of profit of respective dates within the year.
14.12 Accounting
Question 3
M/s Neptune & Co.’s Balance Sheet as at 31st 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
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 30th 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)
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 31st 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
14.14 Accounting
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
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.
Question 4
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 on 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 31st 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 1st January, 2012.
14.16 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 1st 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 31st 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 31st Dec.2011 (adjusted) 1,68,000
Profit for the year ending 31st Dec. 2010 1,68,000
Profit for the year ending 31st 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 5
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.
14.18 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
∗
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.
14.20 Accounting
Working Notes:
(1) Revaluation Account
` `
To Plant and Machinery 30,000 By Land and Building 70,000
To Stock 10,000 By Partners Capital A/cs:
To Debtors 50,000 Ram 10,000
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 6
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
Reserve fund 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 fund, 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 Provision for doubtful debts 15,000
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
14.22 Accounting

A B C A B C
To Loss on 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 Fund 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 Profit on 10,000 5,000
Revaluation
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 16,27,500 8,13,750 8,40,000
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
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 1/4 th 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 Rs.5,85,000 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 B’s Capital A/c 8,750
Question 7
P, Q, R are three doctors who are running a Polyclinic. Their capital on 31st March, 2009 was
` 1,00,000 each. They agreed to admit X, Y and Z as partners w.e.f. 1st 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:
∗
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.
14.24 Accounting
(i) X, Y and Z brought in ` 20,000 each as goodwill. Goodwill is shared by the existing
partners equally.
(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)
14.26 Accounting
(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
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
To Interest on capital (W.N.3) 39,600
To Net profit transferred to
partners’ capital accounts 11,43,400
14,15,000 14,15,000
(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.
14.28 Accounting
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.

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 8
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 Goodwill 37,800
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 Rs.
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 Rs.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
14.30 Accounting
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 Goodwill A/c 37,800
(Being goodwill 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
(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)
9. Revaluation A/c Dr. 33,400
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
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
•
Rounded off.
14.32 Accounting
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 9
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 Rs.96,000, Rs.90,000 and Rs.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 Rs.12,000, Rs.9,000 and Rs.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 Rs.600 for A, Rs.450 in case of B and Rs.300 in case of C.
(i) A statement of affair as on 30th June, 2008.
(ii) Calculate the profits for the half-year ending on 30th June, 2008 and allocate the same
amongst the partners. Also calculate capital of each partner as on 30th 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 1st January, 2008 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 30th June, 2008 1,00,440 97,440 87,120
Question 10
‘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 1st 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 31st March were:
2007-`.1,50,000; 2008-`2,00,000 and 2009-`2,50,000. Pass the necessary journal entry to
give effect to the above arrangement in the capital accounts of the partners.
14.34 Accounting
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
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 11
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
14.36 Accounting
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 24,000 By Profit 2,76,000
Accountant)
To Commission (Firm’s
Accountant) (W.N.2) 27,000
To Net Profit transferred to
P & L Appropriation A/c 2,25,000
2,76,000 2,76,000
2. Commission of Firm’s Accountant
Profit after salary of firm's accountant
= × 12%
(100+12 ) %
=
( 2,76,000 - 24,000 ) × 12% = ` 27,000
(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 12
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 3/10th shares in profits, 2/3rd 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
14.38 Accounting
For X = 5/8-4/9 = 13/72

Z = 3/8-2/9 = 11/72
Gaining ratio = 13:11
Question 13
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 1/5th share = ` 35,000
Total Capital = ` 35,000 x (5/1) = ` 1,75,000
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 14
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 Dr. Cr.
2012 ` `
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)
Note: In place of above entries, ‘Premium on goodwill’ or ‘Goodwill A/c’ may also be opened
instead of ‘Tarun’s capital A/c’, for share of goodwill brought by him in cash.
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.
14.40 Accounting
Question 15
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
Cash at Bank 1,52,600
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.
(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
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.
14.42 Accounting
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;
(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 31st 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 31st 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 1st 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)
15
Accounting in Computerised Environment
BASIC CONCEPTS
¾ Role of Computer in accountancy
• Controlling operations
• Deciding sequence of operations
• Accounting operations
¾ Consideration for Selection of Pre-Packaged Accounting Software
• Fulfilment of business requirements
• Completeness of reports
• Ease of use
• Cost
• Reputation of the vendor
• Regular updates
¾ Choice of an 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.
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.
15.2 Accounting
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.
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.
Accounting In Computerised Environment 15.3
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.
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.
15.4 Accounting
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.
(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.
FEEDBACK FORM
(1) Name of the Student
(2) Registration No.
Contact detail with e-mail id, mobile
number, etc.
(3) Subject & Paper No. Paper: 1: Accounting

(4) Name of Publication Practice Manual Volume-II
(5) Edition July, 2013
(6) Do you find the publication student-
friendly?
(7) Do the illustrations in the Study Material
assist in understanding of the provisions
contained in the Study Material?
(8) Does the Practice Manual contain
adequate and sufficient questions to
help in better understanding of the
concepts explained in the Study
Material?
(12) Are there any errors which you have noticed in the publication? If yes, give the specific
details :
Type of Error Chapter No. Page Para No. & Text or Suggested
(Specify nature (Unit No., if No. line of the problem Correction
of error) applicable) para (containing
the error) as
per the
publication
Typographical/
Printing/
Computational/
Conceptual/
Updation
(13) Do you feel that the publication can be made more value additive? If so, please give your
specific suggestions.
Note: Use separate sheet, if necessary. You are also encouraged to send your response by e-mail at
[email protected]
Please send feedback form to :
Director, Board of Studies

The Institute of Chartered Accountants of India
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PRACTICE MANUAL

Intermediate (IPC) Course

© THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

Revised Edition : July, 2013

Committee / : Board of Studies

ISBN No. : 978-81-8441-304-5

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

Printed by : Sahitya Bhawan Publications, Hospital Road, Agra 282 003

Happy Reading and Best Wishes!

Unit 2 Account Current

8 Self Balancing Ledgers 5 (b) 4 7(e) 4 1(a) 5 13 1.9

9 Financial Statements of 1(i) 2 5 (a) 8 2 16 5 16 3 16 4 16 1(d) 5 91 13

CHAPTER – 1 Accounting Standards 1.1 – 1.26

CHAPTER – 2 Financial Statements of Companies 2.1 – 2.52

Unit 1 Preparation of Financial Statements 2.1 – 2.15

Unit 2 Cash Flow Statement 2.16 – 2.52

CHAPTER – 3 Profit or Loss Pre and Post Incorporation 3.1 – 3.8

CHAPTER – 4 Accounting for Bonus Issue 4.1 – 4.16

CHAPTER – 5 Internal Reconstruction 5.1 – 5.22

CHAPTER – 6 Amalgamation 6.1 – 6.44

CHAPTER – 7 Average Due Date and Account Current 7.1 – 7.15

Unit 1 Average Due Date 7.1 – 7.10

Unit 2 Account Current 7.11 – 7.15

CHAPTER – 8 Self- Balancing Ledgers 8.1 – 8.17

CHAPTER – 9 Financial Statements of Not-For-Profit Organisations 9.1 – 9.38

CHAPTER – 10 Accounts from Incomplete Records 10.1 – 10.52

CHAPTER – 11 Hire Purchase and Installment Sale Transactions 11.1 – 11.20

CHAPTER – 12 Investment Accounts 12.1 – 12.12

A: Claim for Loss of Stock 13.2 – 13.12

B: Claim for Loss of Profit 13.12 – 13.22

CHAPTER – 14 Issues in Partnership Accounts 14.1 – 14.42

CHAPTER – 15 Accounting in Computerised Environment 15.1 -15.4

Applicability of Accounting Standards

Bank 70,000 Payment of overheads 15,000

Net cash used in financing activities 1,00,000

was reassessed at 5 years. Calculate depreciation as per the provisions of Accounting

(ii) Loss on Exchange of Machine

AS7 “Construction Contracts”

Amount of foreseeable loss (` in crores)

Bank A/c Dr. 210.00

To Advance for advertisement rights (purchase) A/c 187.50

2. Expenditure incurred on account of fixed assets in the course of construction or

(1/15th of the total labour time was chargeable to the construction)

above investments are as follows:

(a) names and general nature of business of the amalgamating companies;

UNIT 1: PREPARATION OF FINANCIAL STATEMENTS

Bonus to employees (14,000 + 18,690) (32,690)

per share including premium ` 10 vide Board’s

Securities premium account

Less : Transfer to capital

Add : Calls in advance on

To Interest on Calls in Arrear A/c 1,200

To Capital Redemption Reserve A/c 2,00,000

Statement of Profit & Loss of P Ltd.

4. Other current liabilities

Profit and Loss A/c Dr. 54,000

UNIT 2 : CASH FLOW STATEMENT

2. Provision for depreciation on Plant and Machinery A/c

Proceeds from long-term borrowings 25,980

Cash flows from financing activities