Attachment Intermediate-Paper-1 Compressed Lyst4031

INTERMEDIATE
ACCOUNTING
(GROUP I)
PART-1
Contents
1. ACCOUNTING STANDARDS
AS-1 DISCLOSURE OF ACCOUNTING POLICIES.............................................................. 1
AS-2 VALUATION OF INVENTORIES................................................................................ 5
AS-10 PROPERTY, PLANT AND EQUIPMENT.................................................................... 8
AS-11 THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES................................. 23
AS-12 ACCOUNTING FOR GOVERNMENT GRANTS......................................................... 30
AS-16 BORROWING COSTS ............................................................................................ 34
2. FINANCIAL STATEMENTS OF COMPANIES
UNIT-1 : PREPARATION OF FINANCIAL STATEMENTS
(FINAL ACCOUNTS OF COMPANY)......................................................................................... 41
CLASS WORK ........................................................................................................................ 64
HOME WORK........................................................................................................................ 85
UNIT-2 : CASH FLOW STATEMENT [AS-3] ............................................................................ 96
CLASS WORK ....................................................................................................................... 104
HOME WORK ...................................................................................................................... 125
3. PROFIT OR LOSS PRE AND POST INCORPORATION ........................................................... 136
CLASS WORK ....................................................................................................................... 138
HOME WORK ...................................................................................................................... 144
4. BONUS SHARE ...................................................................................................................... 149
CLASS WORK ...................................................................................................................... 152
HOME WORK ...................................................................................................................... 156
5. REDEMPTION OF PREFERENCE SHARES ........................................................................... 159
CLASS WORK ........................................................................................................................ 163
HOME WORK ....................................................................................................................... 168
6. DEBENTURE ......................................................................................................................... 170
CLASS WORK ....................................................................................................................... 172
HOME WORK........................................................................................................................ 178
7. INVESTMENT ACCOUNTS ..................................................................................................... 181
CLASS WORK ........................................................................................................................ 183
HOME WORK........................................................................................................................ 188
8. INSURANCE CLAIMS FOR LOSS OF STOCK AND LOSS OF PROFIT ....................................... 191
CLASS WORK ...................................................................................................................... 197
HOME WORK ....................................................................................................................... 203
9. HIRE PURCHASE AND INSTALMENT SALE TRANSACTIONS ................................................. 211
CLASS WORK ....................................................................................................................... 212
HOME WORK ...................................................................................................................... 216
10. DEPARTMENTAL ACCOUNTS ................................................................................................ 231
CLASS WORK ....................................................................................................................... 233
HOME WORK ...................................................................................................................... 244
11. ACCOUNTING FOR BRANCHES INCLUDING FOREIGN BRANCHES ...................................... 249
CLASS WORK ....................................................................................................................... 261
HOME WORK ....................................................................................................................... 274
12. ACCOUNTS FROM INCOMPLETE RECORDS ......................................................................... 291
CLASS WORK ...................................................................................................................... 294
HOME WORK ....................................................................................................................302-309
CHAPTER-1
ACCOUNTING STANDARDS
AS-1 : DISCLOSURE OF ACCOUNTING POLICIES
INTRODUCTION
 Enterprises operate in diverse situations, so it is not possible to develop a single set of policies applicable
to all.
 So the accounting standards permit more than one policy.
 Therefore Accounting Standard-1 requires disclosure of significant accounting policies adopted.
 Object is to promote better understanding of financial statements.
CLASS WORK
Q-1 Can same type of inventory at two different factories be valued by applying two different accounting
policies ?
Solution
The same type of inventory at two different factors cannot be valued by applying two different
accounting “policies. It has been clarified by expert Advisory Committee of ICAl.
Q-2 A Partnership firm was formed to secure the tenders floated by BSNL for publication of telephone
directories in 1999-2000. It bagged the tender for publishing directory for Pune circle for 5 years. It has
made a profit in 1999-2000, 2000-2001, 2001 -2002 and 2002-2003. It bid in tenders for publication of
directories for other circles Nagpur, Nashik, Mumbai, Hyderabad but failed to bag any of these. Its only
activity till date is publication of Pune directory. The contract is said to expire on 31-12-2004. You are
auditing the accounts of 2002-2003. Is the going concern assumption appropriate for preparation of
accounts for 2002-03 ?
Solution
The going concern assumption is not in doubt as far as accounts for 2002-2003 are concerned. This is
because the assumption’s validity is to be considered for the “foreseeable future” which is generally a
Period not exceeding 1 year from the balance sheet date.
Q-3 In above question if the situation continues during the year 2003-04 would your answer be different?
Solution
The going concern assumption would be in doubt, since the entity’s continuance in foreseeable future
of one year would be doubtful in the absence of any alternative business plans.
Accounting Standards -1-

Q-4 Sanjay Ltd. follows the practice of disclosing accounting policies adopted in preparation of financial
statements in the Directors report. Comment on this practice.
Solution
The practice followed by the company is not correct. It should be disclosed as part of the financial
statements.
Q-5 A Limited has sold its building for 50 lakhs. The purchaser has paid the full price. Company has given
possession to the purchaser. The book value of the building is 35 lakhs. As at 31st March 2013,
documentation and legal formalities are pending. Thecompany has not recorded the disposal. It has
shown the amount received as advance. Do you agree with this treatment?
Solution
Although legal title has not been transferred, the economic reality and substance is that the rights and
beneficial interest in the immovable property have been transferred.
Therefore, recording of acquisition I disposal (by the transferee and transferor respectively) would in
substance represent the transaction entered inte. In view of this ALtd. should record the sales and
recognize the profit of Rs.15 lakhs in its profit & loss account
It should eliminate building from its balance sheet, in notes to account it should disclose that building
has been sold full consideration has been received, possession has been handed over to the buyer and
documentation and legal formalities are pending.
Q-6 B Ltd. has taken a loan of 10 crores from IClCl Limited. Its bankers Canara Bank have given guarantee to
lClCl on its behalf. B Ltd. has mortgaged its assets to Canara Bank.B Ltd. has disclosed this loan in its
balance sheet as unsecured loan on the grounds that no security has been given to the lender lClCl Ltd
Solution
This disclosure of B Ltd. is in accordance with the legal form of transaction which is that no security has
been given to the lender. As per AS-1 accounting treatment and presentation in financial statements of
transactions and events should be governed by their substance and not merely by the legal form. In
view of this, the loan should be disclosed as secured loan since, property had to be given as a security,
If not to the lender, the security had to be given to the guarantor. Economic reality is that the entity had
to give its property as security, the loan should be disclosed as secured loan.
However, in notes on accounts, it should by clarified that security has been given to the guarantor and
not to the lender.
Q-7 In the books of M/s Prashant Ltd., closing inventory as on 31.03.2015 amounts to Rs. 1,63,000 (on the
basis of FIFO method). The company decides to change from FIFO method to weighted average method
for ascertaining the cost of inventory from the year 2014-15. On the basis of weighted average method,
closing inventory as on 31.03.2015 amounts to Rs. 1,47,000. Realisable value of the inventory as on
31.03.2015 amounts to Rs. 1,95,000. Discuss disclosure requirement of change in accounting p o l i c y
as per AS-1.
Solution
As per AS 1 “Disclosure of Accounting Policies”, any change in an accounting policy which has a material
effect should be disclosed in the financial statements. The amount by which any item in the financial
statements is affected by such change should also be disclosed to the extent ascertainable. Where
such amount is not ascertainable, wholly or in part, the fact should be indicated. Thus Prashant Ltd.
should disclose the change in valuation method of inventory and its effect on financial statements.
The company may disclose the change in accounting policy in the following manner:
-2- ACCOUNTING - GROUP I (INTERMEDIATE)

‘The company values its inventory at lower of cost and net realisable value. Since net realisable value
of all items of inventory in the current year was greater than respective costs, the company valued its
inventory at cost. In the present year i.e. 2014-15 the company has changed to weighted average
method for ascertaining inventory costs from the earlier practice of using FIFO for the purpose. The
change in policy has reduced current profit and value of inventory by Rs. 16,000.
Q-8 XYZ Company is engaged in the business of financial services and is undergoing tight liquidity position,
since most of the assets of the company are blocked in various claims/petitions in a Special Court. XYZ
has accepted Inter-Corporate Deposits (ICDs) and, it is making its best efforts to settle the dues. There
were claims at varied rates of interest, from lenders, from the due date of ICDs to the date of repayment.
The company has provided interest, as per the terms of the contract till the due date and a note for
nonprovision of interest on the due date to date of repayment was affected in the financial statements.
On account of uncertainties existing regarding thedetermination of the amount and in the absence of
any specific legal obligation at present as per the terms of contracts, the company considers that these
claims are in the nature of “claims against the company not acknowledged as debt”, and the same has
been disclosed by way of a note in the accounts instead of making a provision in the profit and loss
accounts. State whether the treatment done by the Company is correct or not.
Solution
As per AS 1, ‘accrual’ is one of the fundamental accounting assumptions.Irrespective of the terms of
the contract, so long as the principal amount of a loan is not repaid, the lender cannot be replaced in a
disadvantageous position for nonpayment of interest in respect of overdue amount. From the
aforesaid, it is apparent that the company has an obligation on account of the overdue interest. In this
situation, the company should provide for the liability (since it is not waived by the lenders) at an
amount estimated or on reasonable basis based on facts and circumstances of each case. However, in
respect of the overdue interest amounts, which are settled, the liability should be accrued to the
extent of amounts settled. Non-provision of the overdue interest liability amounts to violation of
accrual basis of accounting. Therefore,the treatment, done by the company, of not providing the interest
amount from due date to the date of repayment is not correct.
HOME WORK
Q-9 Mention few areas in which different accounting policies are followed by companies.
Solution
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.
Q-10 A Ltd. as consistently followed in the past the LIFO cost formula in inventory
valuation, hence it continues to follow the same :
Solution
Consistency does not remedy an inappropriate accounting policy. Appropriate policies
should be consistently followed. A Ltd’s policy violates AS-2. hence, the company should change it as
it is not appropriate.

Q-11 A & Co., a partnership firm has prepared its accounts on cash basis.
Solution
Accrual is fundamental accounting assumption. If it is not being followed, the facts
should be disclosed in accordance with AS-1. Hence, the firm should disclose the fact that cash basis of
accounting has been followed in the notes to account.
LAST MINUTE REVISION
Accounting Change in Accounting Accounting Assumptions

policies policies
All Significant If Material If not

Accounting If followed followed
Policies must Amount
be disclosed Amount Can Not
at one place be Ascertained Ascertained No disclosure
in Financial
Statements Amount to be Fact to be Disclosure is
disclosed disclosed required

AS-2 : VALUATION OF INVENTORIES
INTRODUCTION
 AS-2 provides guidance for determining the value at which inventories are carried in the financial
statements.
 It also provides guidance on the cost formulas.
 Inventories should be valued at lower of cost and net realisable value.
CLASS WORK
Q-1 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:
Items Historical Cost(Rs. in lakhs) Net Realizable Value(Rs. in lakhs)
A 40 28
B 32 32
C 16 24
What will be the value of closing stock?
Q-2 X Co. Limited purchased goods at the cost of Rs. 40 lakhs in October, 2010. Till March,2011, 75% of the
stocks were sold. The company wants to disclose closing stock at Rs. 10 lakhs. The expected sale value
is Rs. 11 lakhs and a commission at 10% on sale ispayable to the agent. Advise, what is the correct
closing stock to be disclosed as at 31.3.2011.
Q-3 An enterprise has in its stock, 10,000 bags of cement purchased at a cost of 180 per bag. The terms of
trade are that the cement is delivered at the buyer’s door, and the cost of delivery of 10 per bag is paid
by the seller. The selling price of cement is 187 per bag. Find out the value of closing stock.
Q-4 Cap Products Ltd. has an annual capacity of 40,000 units. The production overheads for the year are
estimated at Rs. 3,20,000 whereas the total variable cost incurred is Rs.6,90,000. The administrative
costs and selling costs were Rs. 2,00,000 and Rs. 1,80,000 respectively. At the end of year, there were
6,000 units in stock. Find out the value of inventory given that the factory remained closed for one
month for non receipt of orders which is a normal practice. Would your answer be different if the
factory remained closed for any abnormal reason.
Q-5 On 31st March 2017, a business firm finds that cost of a partly finished unit on that date is Rs. 530. The
unit can be finished in 2017-18 by an additional expenditure of Rs. 310. The finished unit can be sold for
Rs. 750 subject to payment of 4% brokerage on selling price. The firm seeks your advice regarding the
amount at which the unfinished unit should be valued as at 31st March, 2017 for preparation of final
accounts. Assume that the partly finished unit cannot be sold in semi finished form and its NRV is zero
without processing it further
Q-6 The cost of production per unit of a product is given below:
Raw material Rs. 300
Direct labour Rs. 90
Overheads Rs. 30
Total Rs. 420
At the end of the year, the firm has 1,500 units of raw material which are to be valued for financial
statements. The current replacement cost of raw material is Rs. 280 per unit. Find out the value of raw
material inventory if the selling price of the finished goods is (i) Rs. 450 or (ii) Rs. 390.
Q-7 You are required to value the inventory per kg of finished goods consisting of
Rs. per kg.
Material cost Rs. 200
Direct labour Rs. 40
Direct variable overhead Rs. 20
Fixed production charges for the year on normal working capacity of 2 lakh kgs is Rs. 20 lakhs. 4,000 kgs
of finished goods are in stock at the year end.
Q-8 XYZ Ltd produced 10 Lakh units of Product A during the year 2009-10, per unit cost is as follows
Raw Material Rs. 100
Direct Wages Rs. 50
Direct Expense Rs.2
Total Rs. 152
Production overhead is Rs. 20 lakh of which 40% is fixed. The company sold 8 lakh units and 2 lakh units
were in Stock as on 31/03/2010. Normal capacity is 5 lakh units.
Calculate the value of Closing Stock.
Q-9 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 Rs. 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?
Q-10 Asia Biscuit Ltd. has a normal capacity of 6,000 tonnes and the fixed annual overheads are Rs. 24,000.
During the year, it manufactured only 5,500 tonnes at a variable cost consisting of material and labour
@ Rs. 6 and Rs. 4 per tonne. At the end of the year, it had 1,800 tonnes of inventory. Find out the value
of inventory as per AS-2.
What would be your answer if actual production is 8,000 tonnes.
HOME WORK
Q-11 Paper Ltd. values its finished goods at lower of cost or net realizable value, and its byproducts at net
realizable value. Comment in the light of AS-2.
Solution
The policy followed by the Paper Ltd, regarding valuation of inventory is correct and in compliance
with AS- 2 “Valuation of Inventory”.
According to AS-2 the finished goods should be valued at lower of cost or NRV while byproduct are
valued at their realizable value.
Q-12 Viptanu Ltd. produces 4 different types of capacitors. A, B, C and D. For the year 2003-04 their closing
stock of finished goods have been valued as follows:
Particulars A B C D
Cost of Production Rs. 5,00,000 Rs. 6,00,000 Rs. 4,00,000 Rs. 2,50,000
Net Realizable Value Rs. 4,80,000 Rs. 6,25,000 Rs. 4,10,000 Rs. 2,10,000
Find out the value of inventory.
Solution
Product Cost or NRV whichever is lower
A Rs. 4,80,000
B Rs. 6,00,000
C Rs. 4,00,000
D Rs. 2,10,000
Total Rs. 16,90,000
Q-13 How the following can be valued as per AS-2 for presentation in the financial statements.
i. Inventories of livestocks
ii. Agricultural and Forest products
iii. Mineral oils, and
iv. Financial assets such as shares held as stock in trade.
Solution
AS -2 is not applicable for valuation of these items.
Q-14 Blue Lagoon Ltd. produces a consumer durable whose, cost of production consists of variable element
of 240 per unit. The total annual production overheads are 25,00,000 out of which 40% are fixed. The
company has an normal capacity of 10,00,000 per annum, but during the year 2003-04, it produced
20,00,000 units, out of which 1,00,000 units are still unsold at the end of the year. Find out the value of
the closing stock.
(Assume cost of Rs. 240 per unit does not include variable production overhead)
Solution
Value of Inventory 2,41,25,000.
Q-15 Can interest on customs duty paid be included in the value of inventory?
Solution
No. interest on custom duty should not be included in inventory valuation. Interest cost relating to
qualifying can only capitalised over the cost of inventory as per
AS-16 “Borrowing cost”.
Finished Raw Material Joint Product By Product

Goods
&
Work-In-Progress
Cost At Cost Cost NRV

or (If finished or (This NRV
NRV goods are sold NRV is deducted
w.e. is lower at or above cost) w.e. is lower from cost of
main Products)

AS-10 : PROPERTY, PLANT AND EQUIPMENT
 Applicability:
This standard is mandatorily applicable for accounting periods commencing on or after 01.04.2016 for
ALL Entities.
 Non-Applicability:
1. Biological assets related to agriculture activity other than bearer plant.
This standard applies to bearer plants but it does not apply to the produce on the bearer plant
Where,
Biological asset is a living animal or plant. E.g. bullock, horse, tea bushes
Agriculture activity is the management by an enterprise of the biological transformation and harvest of
biological assets for sale or for conversion into agriculture produce or into additional biological assets.
Bearer plant is a plant that:
 is used in the production or supply of agriculture produce
 is expected to bear produce for more than a period of 12 months; and
 has a remote likelihood of being sold as agriculture produce, except for incidental scrap
e.g. Coconut tree, orange tree, mango tree is a bearer plant and covered by AS-10.
The following are not bearer plant:
 plants cultivated to be harvested as agriculture produce e.g. Trees grown use as lumber (Example:
Timber used for construction of building)
 plants cultivated to produce agricultural produce when there is more than a remote likelihood
that the entity will also harvest and sell the plant as agricultural produce, other than as incidental
scrap sales. E.g. trees that are cultivated both for their fruit and their lumber. (Example: plantain
trees)
 annual crops (e.g. wheat, rice)
Agricultural produce is the harvested product of biological assets of the enterprise.
e.g. Coconut, orange, mango is a produce of bearer plant so not covered by AS-10.
2. Wasting assets including mineral rights, expenditure on the exploration for and extraction of minerals,
oil, natural gas and similar non regenerative resources
However AS-10 applies to items of Property, Plant and equipment used to develop or maintain the
assets described in 1 and 2 above.
3. Other accounting standards may require recognition of an item of Property, plant and equipment on a
different approach. E.g. Lease (AS-19), Any asset acquired under amalgamation (AS-14)
4. Investment property (AS-13) is accounted as per cost model of AS-10 only. v Objective:
AS-10 deals with recognition of property, plant and equipment, depreciation, carrying]
amount and recognition of an impairment loss. v Definitions:
a. Fixed Asset:
It is an asset held with the intention of being used for the purpose of providing goods or services
and is not held for sale in the normal course of business and expected to be used for more than
one account ting period.

EXAMPLE
A company is engaged in the manufacture of electronic products and systems. As per chief accountant
a prototype system was installed at one of the customer’s locations in June,2016 for getting acceptance
on the performance of the system. The chief accountant has stated that as the ownership of the system
installed for field trials was vested with the company, for accounting and control purposes, the
prototype system installed at customer’s location in 2016 was capitalized in the accounts for the year
2016-17 at its bought out cost. State whether the accounting treatment adopted by the company is
correct or not?
Solution
· As per AS-2, inventories means assets held for sale in the ordinary course of business, or in the process
of production for such sale, or for consumption in the production of goods or services for sale, including
maintenance supplies and consumables other than machinery spares.
· And as per AS-10, fixed asset is an asset held with the intention of being used for the purpose of
producing or providing goods or services and is not held for sale in the normal course of business.
· Accordingly, the system installed by the company at customer’s site for his acceptance, based on the
field trials of the system, is an item of inventory, and is not a fixed asset. Installation of such prototype
system at customer’s sites for their acceptance is akin to sale of goods on approval basis. Therefore,
the capitalization of such prototype system at its bought-out-cost is not correct.
· At the time of installation of such systems at the customer’s site value of the same should be transferred
to a separate account such as “Goods sent for approval account”.
b. Fair Value:
It is the price that would be agreed to in an open and unrestricted market between knowledgeable
and willing parties dealing at arm’s length who are fully informed and are not under any
compulsion to transact.
c. Gross book value:
Gross book value of a fixed asset is its historical cost or other amount substituted for historical cost in
the books of account or financial statements. When this amount is shown net of accumulated
depreciation, it is termed as net book value.
 Recognition:
The cost of an item of PPE should be recognized as asset if and only if
· It is probable that future economic benefits will flow to the enterprise and
· The cost can be measured reliably.
Items such as spare parts, stand-by equipment and servicing equipments are recognized as per AS-10
when they meet recognition criteria otherwise it will be classified as an inventory.
The definition of “Property, Plant & Equipment” covers tangible items which are held for use or
for administrative purpose.
So we can say that asset used for
 Selling and distribution
 Finance and accounting
 Personnel and other function of the enterprise also covered byAS-10.
e.g. A chemical manufacturer may install new chemical handling process to comply with
environmental requirements for the production, related plants are recognized as an asset.

 Initial Cost:
Once an asset qualifies for recognition as an asset, it will be initially measured at cost. Cost includes:
Purchase price.
· Import duties.
· Other non-refundable taxes or levies.
· Any directly attributable cost of bringing the asset to its working condition for its intended use.
Eg: Cost of site preparation, initial delivery and handling costs, installation cost, etc.
· Administration & other general overhead expenses if they are related to the specific fixed asset
and not otherwise.
· Expenditure on start-up and commissioning of the project including the expenditure incurred on
test runs and experimental production.
· Initial estimate of cost of dismantling/decommissioning, removing and site restoration cost at
PRESENT VALUE. (Make a provision under AS-29 by using pre tax discounting rate)
Items Excluded/deducted:
· Trade discounts and rebate.
· Administration and other general overhead expenses if they don’t relate to the specific fixed
asset.
· Expenditure incurred after the plant has begun commercial production.
· Expenses incurred between the dates of a project are ready to commence commercial production
and the date at which commercial production actually begins.
· Inauguration cost for opening new business
· Advertisement and Promotion expenses
Recognition of cost in the carrying amount of PPE ceases when the item is in the location and
condition necessary for it to be capable of operating in manner intended by management.
Following costs are not included in carrying amount:
· Costs incurred while an item capable of operating in manner intended by management has yet to
be brought into use or is operated less than full capacity
· Initial operating losses
· Cost of relocating or reorganizing part or all of the operations of the enterprise
EXAMPLE
A company is in the process of setting up a production line for manufacturing a new product. Based on
trial runs conducted by the company, it was noticed that the production lines output was not of the
desired quality. However, company has taken a decision to manufacture and sell the sub-standard product
over the next one year due to the huge investment involved. In the background of the relevant accounting
standard, advice the company on the cut-off date for capitalization of the project cost.
Solution
As per provisions of AS-10, expenditure incurred on start-up and commissioning of the project, including
the expenditure incurred on test runs and experimental production, is usually capitalized as an indirect
element of the construction cost. However, the expenditure incurred after the plant has begun commercial
production i.e production intended for sale or captive consumption, is not capitalized and is treated as
revenue expenditure even though the contract may stipulate that the plant will not be finally taken over
until after the satisfactory completion of the guarantee period.

did not stop
In the present case, the company did stop production even if the output was not of the desired quality,
and continued the sub-standard production due to huge investment involved in the project. Capitalization
should cease at the end of the trial run, since the cutoff date would be the date when the trial run was
completed.
EXAMPLE
Southern Tower Ltd. Purchased a plant from M/s Tatamaco Ltd. On 30.09.2016 with a quoted price of `
180 lakhs. Tatamaco offer 3 months credit with a condition that discount of 1.25% will be allowed if the
payment were made within one month. VAT is 12.5% of the quoted price. Company incurred 2% on
transportation costs and 3% on erection costs of the quoted price. Pre-operative cost amount to ` 1.5
lakhs. To finance the purchase of the machinery, company took a term loan of ` 125 lakhs at an interest
rate of 14.5% p.a. The machine was ready for use on 31.12.2016. However, it was put to use only on
01.04.2017.
Find out the original cost. & suggest the accounting treatment for the cost incurred during the period
between the date the machine was ready for use and the actual date the machine was put to use.
Solution
i. Original Cost of the machine:
Particulars ` in lakhs ` in lakhs
Quoted Price 180.00
Less: Discount @ 1.25% - 180
Add: VAT @12.5% 22.50
Transportation @ 2% 3.6
Erection Cost @3% 5.4
Pre-operative cost 1.5
Finance Cost (14.5% of Rs 125 lacs for
the period 01.10.16 to 31.12.16)* 4.53
Total 217.53
*Note-:
(i) It is assumed that asset is a qualifying asset under AS-16. Although normally a qualifying asset is an
asset that takes substantial period of time to get ready for its intended use, however, in the suggested
answers given by ICAI in the past, even less than 12 months interest has been capitalized in similar
examination questions.
(ii) Cost incurred during the period between the date the machine was ready for use and the actual date
the machine was put to use.
Finance Cost amounting ` 4.53 lakhs (14.5% on ` 125 lakhs for the period 01.01.2017 to 31.03.2017) will
be charged to profit and loss account as per AS-16.
EXAMPLE
J Ltd. Purchased Machinery from K Ltd on 31.08.2016. Quoted price was ` 275 lakhs. The vendor offers 2%
Trade discount. Sales tax on quoted price is 6%. J Ltd spent `60,000 for transportation and ` 45,000 for
architect’s fees. They borrowed money from HDFC Bank of ` 250 lakhs for acquisition of asset @15% p.a.
They also spent ` 15,000 for material, ` 10,000 for labour and ` 4,000 as overheads during trial run of
the machine. The machine was ready for use on 15.01.2017 but it was put to use on 15.03.2017. Find out
the original cost of the machine. Also suggest the accounting treatment for costs incurred between
the date the machine was ready for use and the date at which it was actually put to use.

Solution
Computation of cost of Machine Amount (` lakhs)
Quote Price (less trade
discount) 269.50
Add: Sales Tax @ 6% (Note 1) 16.17
Add: Transportation Cost 0.60
Add: Architect Fees 0.45
Add: Trial Run Expenses 0.29
Add: Borrowing Cost for the period 31.08.2016 to
15.01.2017 (Note-2) (250*15%*4.5/12) 14.06
301.07
As per AS-10, expenses incurred between the date a project is ready to commence commercial production
and the date at which commercial production actually begins are charged to revenue and are not
capitalized. Accordingly, the cost incurred during the period 15.01.2017 to 15.03.2017 will be expensed
off.
Note-1: It is assumed that Sales Tax will be levied on Quoted Price after deducting Trade Discount.
Note-2: It is assumed that asset is a qualifying asset under AS-16. Although normally a qualifying asset is
an asset that takes substantial period of time to get ready for its intended use, however, in the suggested
answers given by ICAI in the past, even less than 12 months interest has been capitalized in similar
examination questions.
EXAMPLE:
Purchase Price of Plant & Machinery (including excise duty of Rs. 5,00,000 on which 50% credit in the
year of purchase & 50% in next year) = Rs. 25,00,000 Transportation Cost = Rs. 3,00,000 Professional fees
for acquiring the asset = Rs. 2,00,000 Estimated dismantling cost to be incurred at the end of 10th year
= Rs. 7,50,000 Pre tax discounting rate = 12% Tax Rate = 30% Find out the cost of the asset and pass
necessary Journal entry for first 2 years.
Solution
 Subsequent Cost:
The enterprise does not recognize in the carrying amount of an item of PPE the cost of day to day
servicing of the item.
If any subsequent cost which increased either the capacity of the asset or capability (efficiency) of the
asset or it results in saving in cost then it should be capitalized otherwise it will be charged to profit and
loss account.
Sometimes performing regular major inspections for faults or overhaul cost may be a condition of
continuing to operate the asset; then such costs are capitalized regardless whether parts of the
item is replaced or not. (e.g. Ship, Aircraft)
Any remaining carrying amount of the previous inspection or overhaul is derecognized. NOTE: De
recognition of the carrying amount occurs regardless of whether the cost of the previous part / inspection
was identified in the transaction in which the item was acquired or constructed.
 Self Constructed Fixed Assets: (Due to In house Efforts)
While computing the gross value of self-constructed fixed assets, same principles are applied as
in case of other specified fixed assets like the cost of construction that relate directly to the specific
asset are added to the gross value along with other general cost which can be allocated to the specific
asset are also added. Any internal profits are eliminated in arriving at such computed costs.

Bearer plants are treated in a manner similar to constructed asset. The cultivation activities are equated
to construction activities.
Cost of self-constructed fixed assets includes the following:
· All costs which are directly related to specific asset.
· All costs that are attributable to the construction activity should be allocated to the specific
assets.
· Any internal profit included in the cost should be eliminated.
Bearer plants are accounted for in the same way as self constructed item of PPE.
EXAMPLE
PQR Ltd constructed a fixed asset and incurred the following expenses on its construction:
`
Material 16,00,000
Direct Expenses 3,00,000
Direct Labour(1/15th of the total labour time
was chargeable to the construction) 6,00,000
Total Office & Administrative Expenses
(4% is specifically attributable to the
construction of a fixed asset) 9,00,000
Depreciation on assets used for the
construction of fixed asset 15,000
Calculate the cost of Fixed Asset.
Solution
`
Material 16,00,000
Direct Labour (1/15th of 6,00,000) 40,000
Total Office & Administrative Expenses (4% of 9,00,000) 36,000
Depreciation on assets used for the construction of fixed asset 15,000
Cost of fixed assets constructed 19,91,000
 Exchange of Assets:
BASIC RULE:
Cost of an asset acquired in exchange for another asset, should be measured at the fair value of the
asset given up unless the fair value of the asset received is more clearly evident. EXCEPTION:
In following cases, the cost of the asset is not measured at fair value if
1. the exchange transaction lacks commercial substance or
2. neither fair value of the asset given up nor asset received cannot be measure reliably.
For above (1) & (2) cost of the measured at the carrying amount of the asset given up less amount
received in cash, if any.
Where, Commercial Substance of a transaction should be determined by considering whether
reporting entity’s future cash flows are expected to change as a result of the transaction or not.If future
cash flows are expected to change as a result of exchange of the asset, then we can say that the
transaction has commercial substance and cost of the asset is measured by applying basic rule.
If future cash flows are not expected to change as a result of exchange of the asset, then we can say that
the transaction lacks commercial substance and cost of the asset is measured by applying exceptional
rule.
EXAMPLE
V Ltd. exchanged an asset with a carrying amount of Rs. 50,000 with a new asset having fair value of Rs.
43,000. V Ltd.’s cash flows are expected to change after exchange of the asset. Pass necessary journal
entry.
Solution
As per AS-10 Cost of an asset acquired in exchange for another asset, should be measured at the fair
value of the asset given up unless the fair value of the asset received is more clearly evident.
If future cash flows are expected to change as a result of exchange of the asset, then we can say that the
transaction has commercial substance and cost of the asset is measured by applying basic rule.
So, V Ltd. should record the asset at Rs. 43,000.
Journal Entry:
New Asset A/c Dr. 43000
Profit&Loss A/c Dr. 7000
To Old Asset A/c 50000
EXAMPLE
V Ltd. exchanged an asset X with a book value Rs. 10,000 having fair value of Rs.10,800 for cash of Rs.
500 and asset Y of U Ltd. which has a fair value of Rs. 10,200. V Ltd.’s cash flows are not expected to change
as a result of the exchange transaction. Pass necessary journal entry.
Solution
As per AS-10 Cost of an asset acquired in exchange for another asset, should be measured at the fair value
of the asset given up unless the fair value of the asset received is more clearly evident.
In following cases, the cost of the asset is not measured at fair value if
1. the exchange transaction lacks commercial substance or
2. fair value of the asset given up or asset received cannot be measure reliably.
For above (1) & (2) cost of the measured at the carrying amount of the asset given up less amount
received in cash, if any.
If future cash flows are not expected to change as a result of exchange of the asset, then we can say that
the transaction lacks commercial substance and cost of the asset is measured by applying exceptional
rule.
So V Ltd. should use exceptional rule.
Journal Entry:
New Asset A/c Dr. 9500
Cash A/c Dr. 500
To Old Asset A/c 10000
 Measurement after recognition:

 Revaluation of Fixed Assets:
a. When a fixed asset is revalued, an entire class of assets should be revalued or the selection of
assets which are to be revalued should be done on a systematic basis.
Note: Where class of PPE is a grouping of assets of a similar nature and use in operations of an
enterprise.
b. To use this model fair values must be reliably measurable. The revaluation of a class of assets
should not result in the net book value of that class being greater than the recoverable amount of
assets of that class. Recoverable amount means Value in Use or Net Selling Price whichever is
Higher.
c. When a fixed asset is revalued upwards, any accumulated depreciation existing at the date of the
revaluation should not be credited to the profit and loss account.
d. Selective revaluation of assets can lead to unrepresentative amounts being reported in financial
statements. Accordingly, when revaluations do not cover all the assets of a given class, selection
of assets to be revalued should be done on a systematic basis.
e. The revalued assets can be presented in the financial statements in any of the following two
manners:
i. The gross carrying amount is adjusted in a manner consistent with the revaluation of the
carrying amount of the asset.
ii. The accumulated depreciation is eliminated against the gross carrying amount of the asset
f. The frequency of revaluation depends upon the changes in the fair value of the item of PPE. It may
be necessary to revalue the item only every 3 or 5 years. k Accounting treatment of revaluation:
First time revaluation (upward):
Increase in net book value is credited to owner’s interest under the head “Revaluation Reserve”.
First time revaluation (downward):
Decrease in net book value is charged to the Profit & Loss account.
First revaluation (downward) subsequent revaluation (upward):
· Decrease in net book value is charged to Profit & Loss Account in the year in which downward
revaluation was done.
· Amount of revaluation that can be credited to Profit & Loss Account is restricted to the amount of
devaluation earlier written off. Balance amount of revaluation should be credited to revaluation
reserve.
First revaluation (upward) subsequent revaluation (downward):
· Increase in the net book value is credited to owner’s interest under the head
“Revaluation Reserve”.
· Amount of devaluation can be charged to revaluation reserve to the extent the revaluation
reserve earlier credited is unutilized, the balance amount of devaluation is charged to the profit
and loss account.
NOTE:
An enterprise may transfer the amount of difference between
 The depreciation based on revalued carrying amount and
 The depreciation based on original cost
from revaluation reserve to REVENUE RESERVES.

· If any revalued fixed asset is derecognized, revaluation surplus, if any should be transferred to REVENUE
RESERVES.
· All transfers from revaluation surplus to the revenue reserves are made directly and not routed
through profit and loss account.
EXAMPLE:
V Ltd. is a large manufacturing company. It owns a number of buildings , such as factory building and
office buildings. The industrial buildings are located in industrial zones, whereas office buildings are
in the centre of the city. V Ltd.’s management want to apply the revaluation model as per AS-10
to the subsequent measurement of the office building but continues to apply the cost model to the
industrial building. State whether this is acceptable?
Solution
V Ltd. can apply the revaluation model only to the office building. The office buildings can be clearly
distinguished from the industrial building in terms of their function, their nature and their general
location. AS-10 permits assets to be revalued on a class by class basis.
The different characteristics of the building enable them to be classified as different PPE classes. The
different measurement models can, therefore, be applied to these classes for subsequent
measurement.
All properties within the class of office buildings must be carried at revalued amount.
Adjustment of Accumulated Depreciation due to Revaluation:
1. Gross carrying amount is adjusted in a manner that is consistent with the revaluation of the
carrying amount of the asset
2. Accumulated depreciation is eliminated against the Gross carrying amount of the asset
 Changes in existing decommissioning, restoration and other liabilities:
The cost of the asset includes present value of estimated dismantling cost and for that we made a
provision. Sometimes such estimate may change and such changes are accounted as follow:
COST MODEL:
 The changes in liability should be added or deducted from the book value of the asset in the year
in which changes are made.
 But decrease in liability should not exceed the carrying amount. If exceeds then such excess
amount should be credited to Profit and Loss account.
 If there is an increase in liability, then it should be added in the book value of the asset. But we
should ensure that the revised book value should not exceed the recoverable amount. If exceeds,
then such exceed amount should be charged to Profit & Loss account. (Because as per AS-28,
impairment losses are recognized when carrying amount of the asset is higher than recoverable
amount.)
 Depreciation should be provided with prospective effect.
EXAMPLE
Balance sheet of U Ltd. shows following balances: Plant & Machinery Account = Rs. 2,00,000 (Debit) Provision
for dismantling cost = Rs. 3,00,000 (Credit).
U Ltd. follows Cost model for recognizing Property, Plant & Equipment. Pass necessary journal entry in
following case:
I. U Ltd. estimates that additional Rs. 50,000 will be incurred for dismantling cost.
Recoverable amount of the asset on that date is Rs. 3,50,000.
II. U Ltd. estimates that total estimated dismantling cost is only Rs. 2,20,000.

III. U Ltd. estimates that additional Rs. 50,000 will be incurred for dismantling cost.
Recoverable amount of the asset on that date is Rs. 2,30,000.
IV. U Ltd. estimates that total dismantling cost is only Rs. 75,000.
REVALUATION MODEL:
 The changes in liability are treated in the same way as revaluation increase or decrease.
 A decrease in a liability directly credited to revaluation reserve, if any. If there is no balance of
revaluation reserve on the date of change then decreased amount directly credited to Profit &
Loss account.
 In the event that a decrease in the liability exceeds the carrying amount that would have been
recognized had the asset been carried under the cost model the excess should be immediately
charged to profit & loss account.
 An increase in the liability adjusted against the balance of the revaluation reserve and any excess
amount is debited to statement of profit and loss account.
EXAMPLE
Balance sheet of V Ltd. shows following balances:
Plant & Machinery Account = Rs.10,00,000 (Debit)
Provision for dismantling cost = Rs. 3,00,000 (Credit)
Revaluation Reserve Account = Rs. 2,00,000
V Ltd. follows Revaluation model for recognizing Property, Plant & Equipment. Pass necessary journal
entry if
I. V Ltd. estimates that total dismantling cost is Rs. 2,50,000
II. V Ltd. estimates that Rs. 5,75,000
EXAMPLE
V Ltd. has a book value of the asset as on 01/04/2016 is Rs. 10,00,000. On that date V Ltd. is decided for
upward revaluation by 20%. V Ltd. follows policy that difference between the depreciation based on
revalued carrying amount and the depreciation based on original cost transferred to revenue reserves
from revaluation reserve. V Ltd. follows Straight Line method for depreciation and remaining useful life
of the asset is 10 years as on 01/04/2016. On 01/04/2019 books of accounts of V Ltd. shows the balance of
Provision for dismantling cost is Rs. 8,50,000. On 01/04/2019 V Ltd. estimates that total dismantling cost
will be Rs. 1,00,000. Pass necessary journal entry for change in estimate.
 Retirement & Disposals:
a. An item of fixed asset is eliminated from the financial statements on disposal.
b. Items of fixed assets that have been retired from active use and are held for disposal are stated at
the lower of their net book value and net realizable value and are shown separately in the financial
statements. An expected loss is recognized immediately in the profit and loss statement.
c. As per historical cost accounting, gains or losses arising on disposal are generally recognized in the
profit and loss statement.
 Valuation of Fixed Assets in Special Cases:
a. Hire Purchase basis : Fixed assets acquired on hire purchase basis should be recorded at their cash
purchase price. If the cash purchase price is not readily available then it should be calculated by
assuming an appropriate interest rate.
b. Jointly held: Where an enterprise owns fixed assets jointly with others (otherwise than as a
partner in a firm), the extent of its share in such assets, and the proportion in the original cost,
accumulated depreciation, and written down value is stated in the balance sheet. Alternatively,
the pro rata cost of such jointly owned assets is grouped together with similar fully owned assets.
Details of such jointly owned assets are indicated separately in the fixed assets register.
c. Consolidated Price: Where several assets are purchased for a consolidated price, the
consideration is apportioned to the various assets on a fair basis as determined by competent
valuers.
 Definitions:
1. Depreciation : Depreciation is the systematic allocation of depreciation amount of an asset over
its useful life. It is a measure of the wearing out, consumption or other loss of value of a depreciable
arising from use, effluxion of time or obsolescence through technology and market changes.
Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each
accounting period during the expected useful life of the asset. Depreciation includes
amortization of asset whose useful life is predetermined.
2. Depreciable Assets: Depreciable assets are assets which have the following characteristics: Are
expected to be used during more than one accounting period. Have a limited useful life.
Are held by an enterprise for use in the production or supply of goods and services for rental to
others, or for administrative purposes and not for the purpose of sale in the ordinary course of
business.
3. Useful life: It is either: The period over which a depreciable asset is expected to be used by the
enterprise
OR
The number of production or similar units expected to be obtained from the use of the asset by
the enterprise.
4. Depreciable Amount: Depreciable amount of a depreciable asset is its historical cost or other
amount substituted for historical cost in the financial statements less its residual value.
 Factors which are significant while making assessment of Depreciation & the amount charged in
respect thereof :
1. Historical cost or other amount substituted for the historical cost of the depreciable asset when
the asset has been revalued.
2. Expected useful life of the depreciable asset.
3. Estimated residual value of the depreciable asset.
EXAMPLE
Value Ltd. acquired a plant on 01.04.2004 for 100 lakhs. The company charges straight line depreciation
on the basis of estimated useful life of the asset as 10 years and scrap value at the end as 2.5% of the cost.
At the beginning of the 5th year, the asset was revalued upward by 40% of the written down value and
the revaluation profit was transferred to Revaluation Reserve. While charging depreciation after
revaluation, estimated remaining useful life was assumed to be 6 years and scrap realization was
expected to be 2.5% of the revalued figure. No additional depreciation was adjusted through
Revaluation Reserve Account. At the beginning of the 8th year the company found the asset unless
and accordingly, decided to retire it. On the date of retirement the estimated realizable value of the
asset is ` 3,80,000. Ascertain the loss on retirement of the asset to be charged to the statement of profit
and loss.

Solution
Particulars `
Original Cost 1,00,00,000
Less: SLM Depreciation up to 4th year(1,00,00,000-2,50,000/10)*4 (39,00,000)
Net book value at the end of the 4th year or at the beginning of 5th year 61,00,000
Add: Revaluation profit (credited to Revaluation Reserve) 24,40,000
Revised Carrying Amount 85,40,000
Revised Residual Value (2.5% of 85,40,000)=2,13,500 (41,63,250)
Less: Depreciation for 5th , 6th & 7th years(85,40,000-2,13,500/6years)*3years 43,76,750
Net book value at the end of 7th year or at the beginning of 8th year (3,80,000)
Net realizable value on the date of retirement
Loss on retirement of plant 39,96,750
Less: Revaluation Reserve (24,40,000)
Net loss charged to statement of profit and loss 15,56,750
 Factors which determine the Useful Life of a Depreciable Asset:
i. Pre-determined by legal or contractual limits such as the expiry dates of related leases.
ii. Directly governed by extraction or consumption.
iii. Dependent on the extent of use and physical deterioration on account of wear and tear
which again depends on operational factors such as the number of shifts for which the asset is to
be used, repair and maintenance policy of the enterprise.
iv. Reduced by obsolescence arising from such factors as:
· Technological changes.
· Improvement in production methods.
· Change in market demand for the product or service output of the asset.
· Legal or other restrictions.
 Addition or Extension to an Existing Asset:
Each part of an item of PPE with a cost that is significant in relation to the total cost of the item should
be depreciated separately. E.g. it may be appropriate to depreciate separately the airframe and engines
of an aircraft.
 Factors which determine the Residual Value of the Asset:
Often determination of residual value of an asset is an intricate task. However, if such value is
insignificant it is considered as “Nil”. But on the contrary if the value is significant, it is estimated at the
time of acquisition/installation or at the time of subsequent revaluation of the asset. The factor which
play a pivotal role for determining the residual value are as under:
The realizable value of similar assets which have reached the end of their useful lives and have operated
under conditions similar to those in which the asset will be used.
 Estimated residual/scrap value of depreciable assets:
It is estimated value of depreciable assets at the end of its useful life. It is generally difficult to
determine the residual value. It is estimated at the time of acquisition, installation and at the time of
revaluation of assets.
The change in expected useful life and residual value is accounted as a change in accounting
estimate as per AS-5.

 Method of Depreciation:
Depreciation charge should be stopped on the occurrence of any of the events
 Asset is retired from active use and held for disposal
 Asset is derecognized
A variety of depreciation methods can be used. Methods includes
 Straight Line Method
 Written Down Value Method
 Production Unit Method
 Sum of years digit method
 Any method which clearly reflects the pattern of consumption.
 Depreciation as per Schedule II of the Companies Act’2013:
As per the schedule the depreciation to be charged on the basis of the useful life of the assets.
This schedule prescribes the useful life of the tangible assets and if company estimates the useful life
of the tangible asset different than the prescribed useful life in Schedule II, it has to make disclosure
with justification in the financial statements.
Schedule II also prescribes the transitional provisions as under:
From the date this schedule comes into effect, the carrying amount of the asset as on that Rate:
a. Shall be depreciated over the remaining useful life of the asset as per this schedule.
b. After retaining the residual value, shall be recognized in the opening balance of retained
earnings where the remaining useful life of an asset is nil.
 Change in Depreciation Method:
 Depreciation method has to be reviewed at least at each balance sheet date.
 ANY CHANGE IN METHOD OF DEPRECIATION SHOULD BE ACCOUNTED AS CHANGE IN
ACCOUNTING ESTIMATE PROSPECTIVELY AS PER AS-5.
EXAMPLE
A company installed a plant at a cost of `20 lacs with estimated useful life of 10years and decided to
depreciate on straight line method. In the fifth year, the company decided to switch over from straight
line method to written down value method. The depreciation rate is 10%.Compute the resultant surplus/
deficiency if any, and state how will you treat the same in the accounts.
Solution
There will no amount of resultant surplus / deficiency as the change in depreciation method which
considered as a change in accounting estimate and therefore such change should be accounted for
prospectively.
Impairment:
To determine whether an item of PPE is impaired, an enterprise applies AS-28.
· Transition Provisions:
 Where an entity recorded an expenses in Profit & Loss account, which is eligible to be included in
cost of the asset as per AS-10 PPE, then it should be recorded RETROSPECTIVELY NET OF TAX in
revenue reserves. (e.g. Now provision for dismantling cost is added in cost of the asset)
Journal Entry: Asset A/c Dr.
To Revenue Reserves

 The requirement of recognition of an item of PPE in an exchange of the asset should be applied
PROSPECTIVELY after this standard becomes mandatory.
 The requirement regarding the revaluation model should be applied
PROSPECTIVELY.
DISCLOSURE:
 The measurement basis (cost model or revaluation model)
 The depreciation method
 The useful life or depreciation rate
 The gross carrying amount and accumulated depreciation at the beginning and at the end of the
period
 A reconciliation of the carrying amount at the beginning and end of the period
HOME WORK
Q-1 In the books of Optic Fiber Ltd., plant and machinery stood at ` 6,32,000 1.4.2014. However,
on scrutiny it was found that machinery worth ` 1,20,000 was included in the purchases on 1.6.2014.
On 30.6.2014 the company disposed a machine having book value of ` 1,89,000 on 1.4.2014
at ` 1,75,000 in part exchange of a new machine costing ` 2,56,000. The company charges depreciation
@ 20% WDV on plant and machinery. You are required to calculate:
(i) Depreciation to be charged to the Profit and Loss Account.
(ii) Book value of Plant and Machinery A/c as on 31.3.2015. (iii) Loss on exchange of machinery.
(May’2015)
Solution
(i) Depreciation to be charged in the Profit and Loss Account
Depreciation on old Machinery `
[20% on ` 6,32,000 for 3 months (01.4.14 to 30.6.14)] 31,600
Add: Depreciation machinery acquired on 01.06.2014
(` 1,20,000 x 20% x 10/12) 20,000
Depreciation on Machinery after adjustment of Exchange
[20% of ` (6,32,000 - 1,89,000 + 2,56,000) for 9 months] 1,04,850
Total Depreciation to be charged in Profit and Loss A/c 1,56,450
ii) Book Value of Plant and Machinery as on 31.03.2015
` `
Balance as per books on 01.04.2014 6,32,000
Add: Included in purchases on 01.06.2014 1,20,000
Add: Purchase on 30.06.2014 2,56,000 3,76,000
10,08,000
Less: Book value of Machine sold on 30.06.2014 (1,89,000)
8,19,000
Less: Depreciation on machinery in use(1,56,450-9,450) (1,47,000)
Book value as on 31.03.2015 6,72,000

(iii) Loss on exchange of Machinery
`
Book value of machinery as on 01.04.2014 1,89,000
Less: Depreciation for 3 months (9,450)
WDV as on 30.06.2014 1,79,550
Less: Exchange value (1,75,000)
Loss on exchange of machinery 4,550
Q-2 An entity acquires the right to use an underground cave for gas storage purposes for a period of 50
years. The cave is filled with gas, but a substantial part of that gas will only be used to keep the cave
under pressure in order to be able to get gas out of the cave. It is not possible to distinguish the gas
that will be used to keep the cave under pressure and the rest of the gas. Evaluate whether AS-10
would apply or AS-2?
Solution
The total volume of gas must be virtually split in to
(i) Gas held for sale
(ii) Gas held to keep the cave under pressure
The former must be accounted as per AS-2, while letter must be accounted as per AS-10.
Q-3 An entity operates an oil refining plant. For the refining process to take place, the plant must contain
a certain minimum quantity of oil. This can only be taken out once the plant is abandoned and would
then be polluted to such an extent that the plant’s value is significantly reduced. Evaluate whether
AS-10 would apply or AS-2?
Solution
The part of the crude that is necessary to operate the plant and cannot be recouped, even when the
plant is abandoned , should be considered as an item of PPE.
Self-Evaluation Question:
1. The original cost of the machine shown in the books of a company as on 1stApril,2012 is ` 180 lakhs which
they revalued upward by 20% during 2012-13. In the year 2014-15, it appears that a 5% downward
revaluation should be made to arrive at the true value of the assets in the changed economic and
industry conditions. They charged 15% depreciation on W.D.V of the assets. Show the value of the asset
at which it should appear in the balance sheet dated 31stMarch, 2015
Answer: (Hint) The WDV as on 31.03.2015 is 126.02 lakhs
2. S Ltd. has constructed a fixed asset and incurred the following expenses on its construction:
`
Materials 7,00,000
Total Direct Labour (excluding the amount allocated to fixed asset 18,00,000
constructed)
(1/10th of the total labour was chargeable to the fixed asset constructed)
Total Office & Administration Expenses 1,70,000
(5% is chargeable to the fixed asset constructed)
Total Depreciation 1,90,000
(10% is chargeable to the fixed asset constructed)
Calculate the cost of the fixed asset constructed as per AS 10. (RTP,November’2015)
Answer: (Hint) Cost of fixed asset 11,07,500.
AS – 11 : THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES
 Scope:
 Non-Applicability:
 This statement does not deal with the restatement of an enterprise’s financial statements from
its reporting currency into another currency for the convenience of users accustomed to that
currency or for similar purposes.
 This statement does not deal with the presentation in a cash flow statement of cash flows arising
from transactions in a foreign currency and the translation of cash flows of a foreign operation.
 This statement does not deal with exchange differences arising from foreign currency borrowings
to the extent that they are regarded as an adjustment to interest costs.
Note:
This statement does not specify the currency in which an enterprise presents its financial statements.
However, an enterprise normally uses the currency of the country in which it is domiciled. If it uses a
different currency, this statement requires disclosure of the reason for using that currency. This
statement also requires disclosure of the reason for any change in the reporting currency.
 Definitions:
a. Average Rate:
It is the mean of the exchange rates in force during a period.
b. Closing Rate:
It is the exchange rate at the balance sheet date.
c. Exchange Difference:
It is the difference resulting from reporting the same number of units of a foreign currency in the
reporting currency at different exchange rates.
d. Exchange Rate:
It is the ratio for exchange of two currencies.
e. Fair Value:
It is the amount for which an asset could be exchanged, or a liability settled between
knowledgeable, willing parties in an arm’s length transaction.
f. Foreign Currency:
It is a currency other than the reporting currency of an enterprise.
g. Foreign Operation:
It is a subsidiary, associate, joint venture or branch of the reporting enterprise, the activities of
which are based or conducted in a country other than the country of the reporting enterprise.
h. Forward Exchange Contract:
It means an agreement to exchange different currencies at a forward rate.
i. Forward Rate:
It is the specified exchange rate for exchange of two currencies at a specified future date.

j. Integral Foreign Operations:
It is a foreign operation, the activities of which are an integral part of those of the reporting
enterprise.
k. Monetary Items:
They are money held and assets and liabilities to be received or paid in fixed or determinable
amounts of money.
Examples: Cash, Receivables & Payables.
l. Net investment in a non-integral foreign operation:
It is the reporting enterprise’s share in the net assets of that operation.
m. Non-integral foreign operation:
It is a foreign operation that is not an integral foreign operation.
n. Non-monetary Items:
They are assets and liabilities other than monetary items.
Examples: Fixed Assets, Inventories & Investment in Equity Shares.
o. Reporting Currency:
It is the currency used in presenting the financial statements.
 Foreign Currency Transactions:
 Initial Recognition:
 Meaning:
A foreign currency transaction is a transaction which is denominated in or requires settlement in a
foreign currency including transactions arising when an enterprise either:
a. Buy or sell goods or services whose price is denominated in a foreign currency.
b. Borrows or lends funds when the amounts payable or receivable are denominated in a
foreign currency.
c. Becomes a party to an unperformed forward exchange contract.
d. Otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated in a
foreign currency.
 A foreign currency transaction should be recorded, on initial recognition in the reporting currency,
by applying to the foreign currency amount the exchange rate between the reporting currency
and the foreign currency at the date of the transaction.
 For practical reasons, a rate that approximates the actual rate at the date of the transaction is
often used. However, if exchange rates fluctuate significantly, the use of the average rate for a
period is unreliable.
 Reporting at subsequent balance sheet dates:
Item Exchange Rate
Monetary Items Closing Rate
Non Monetary Items which are carried in terms Exchange rate at the date of the transaction
of Historical Cost denominated in a foreign currency
Non Monetary Items which are carried in terms Exchange rates that existed when
of fair value or similar valuation denominated in a the values were determined
foreign currency

 Recognition of Exchange Differences:
 Meaning: An exchange difference results when there is a change in the exchange rate between
the transaction date and the date of settlement of any monetary items arising from a foreign
currency transaction.
 Exchange differences arising on the settlement of monetary items or on reporting an enterprise’s
monetary items at rates different from those at which they are initially recorded during the
period, or reported in previous financial statements, should be recognized as income or expenses
in the period in which they arise, with the exception of exchange differences.
 When the transaction is settled in a subsequent accounting period, the exchange difference is
recognized in each intervening period up to the period of settlement is determined by the change
in exchange rates during that period.
 Exchange difference relating to Non-integral Foreign Operation:
Exchange differences arising on a monetary item that in substance, forms part of an enterprise’s
net investment in a non integral foreign operation should be accumulated in a foreign currency
translation reserve (FCTR) in the enterprise’s financial statements until the disposal of the net
investment at which time they should be recognized as income or expenses.
 An enterprise may have a monetary item that is receivable from or payable to a non integral
foreign operation. An item for which settlement is neither planned nor likely to occur in the
foreseeable future in substance an extension to or deduction from the enterprise net investment
in that non integral foreign operation. Such monetary items may include long term receivables or
loans but do not include trade receivable or trade payables
 Classification of Foreign Operations:
Integral Foreign Non-Integral Foreign

Operation Operation
Classification mainly depends on 2 Factors:

a. Way in which it is financed.
b. Operates in relation to the reporting enterprise.
k Integral Foreign Operations: (Affects individual monetary items)
 A foreign operation that is integral to the operations of the reporting enterprise carries on its
business as if were an extension of the reporting enterprise’s operation. Therefore, the change in
the exchange rate affects the individual monetary items held by the foreign operation rather
than the reporting enterprise’s net investment in that operation.
 Example: Such a foreign operation might only sell goods imported from the reporting enterprise
and remits the proceeds to the reporting enterprise. In such cases, a change in the exchange rate
between the reporting currency and the currency in the country of foreign operation has an
almost immediate effect on the enterprise’s cash flow from operations.
 Non- Integral Foreign Operations : (Affects “net investment”)
 A non integral foreign operation accumulates cash and other monetary items, incurs expenses,
generates income and perhaps arranges borrowings, all substantially in its local currency.
 When there is a change in the exchange rate between the reporting currency and the local currency
there is little or no direct effect on the present and future cash flows from operations of either
the non integral foreign operation or the reporting enterprise. The change in the exchange rate
affects the reporting enterprise’s net investment in the non integral foreign operation rather
than the individual monetary and non monetary items held by the non integral foreign operation.
 Indicators that indicate a foreign operation is a NIFO rather than IFO:
a. While the reporting enterprise may control the foreign operation, the activities of the foreign
operation are carried out with a significant degree of autonomy from those of the reporting
enterprise.
b. Transactions with the reporting enterprise are not a high proportion of the foreign operation’s
activities.
c. The activities of the foreign operation are financed mainly from its own operations or local
borrowings rather than from the reporting enterprise.
d. Cost of lab our, material and other components of the foreign operation’s products or services are
primarily paid or settled in the local currency rather than in the reporting currency.
e. The foreign operation’s sales are mainly in currencies other than the reporting currency.
f. Cash flows of the reporting enterprise are insulated from the day-to-day activities of the foreign
operation rather than being directly affected by the activities of the foreign operation.
g. Sales prices for the foreign operation’s products are not primarily responsive on a short term basis
to changes in exchange rates but are determined more by local competition or local government
regulation.
h. There is an active local sales market for the foreign operation’s products, although there also
might be significant amounts of exports.
 IFO:
 Individual items are translated as if all its transactions had been entered into by the reporting
enterprise itself.
 Cost and depreciation of tangible fixed assets is translated using the exchange rate at the date of
purchase of the asset or if the asset is carried at fair value or other similar valuation, using the rate
that existed on the date of the valuation.
 Cost of inventories is translated at the exchange rates that existed when those costs were incurred.
 The recoverable amount or realizable value of an asset is translated using the exchange rate that
existed when the recoverable amount or net realizable value was determined. An adjustment
may be required to reduce the carrying amount of an asset in the financial statements of the
reporting enterprise to its recoverable amount or net realizable value even when no such
adjustment is necessary in the financial statements of the foreign operation. Alternatively, an
adjustment in the financial statements of the foreign operation may need to be reversed in the
financial statements of the reporting enterprise.
 For practical reasons, a rate that approximates the actual rate at the date of the transaction is
often used. Eg: an average rate for a week or a month might be used for all the transactions in each
foreign currency occurring during that period. However, if exchange rates fluctuate significantly,
the use of the average rate for a period is unreliable.
 NIFO:
Item Translation Rate
a. Assets & Liabilities (Monetary & Non Monetary) Closing Rate
b. Income & Expense Rate at the date of transactions
c. Contingent Liability Closing Rate
d. Goodwill/Capital Reserve arising on acquisition Closing Rate
Further all resulting exchange differences should be accumulated in a foreign currency translation
reserve until the disposal of net investment.

k Disposal of a NIFO:
 On the disposal of a non integral foreign operation, the cumulative amount of the exchange
differences which have been deferred and which relate to that operation should be recognized as
income or as expenses in the same period in which the gain or loss on disposal is recognized.
 An enterprise may dispose of its interest in a NIFO through sale, liquidation, repayment of share
capital, or abandonment of all or part of that operation. The payment of a dividend forms part of
a disposal only when it constitutes a return of the investment. In the case of a partial disposal,
only the proportionate share of the related accumulated exchange differences is included in the
gain or loss. A write down of the carrying amount of a NIFO does not constitute a partial disposal.
Accordingly, no part of the deferred foreign exchange gain or loss is recognized at the time of a
write-down.
Insertion of new paragraph 46 in AS-11, by ICAI for their applicability to entities other than companies:
In line with para 46 inserted by the MCA for corporate entities, the Council of the ICAI has also inserted
Paragraph 46 in AS 11 for Entities other than Companies in the month of February, 2014, which is as
follows:
46(1) In respect of accounting periods commencing on or after 7th December, 2006 (such option to be
irrevocable and to be applied to all such foreign currency monetary items), the exchange differences
arising on reporting of long-term foreign currency monetary items at rates different from those at
which they were initially recorded during the period, or reported in previous financial statements, in
so far as they relate to the acquisition of a depreciable capital asset, can be added to or deducted from
the cost of the asset and should be depreciated over the balance life of the asset, and in other cases,
can be accumulated in a “Foreign Currency Monetary Item Translation Difference Account” in the
enterprise’s financial statements and amortized over the balance period of such long-term asset or
liability, by recognition as income or expense in each of such periods, with the exception of exchange
differences dealt with in accordance with the provisions of paragraph 15.
(2) To exercise the option referred to in sub-paragraph (1), an asset or liability shall be designated as a
long-term foreign currency monetary item, if the asset or liability is expressed in a foreign currency
and has a term of twelve months or more at the date of origination of the asset or the liability:
Provided that the option exercised by the enterprise should disclose the fact of such option and of the
amount remaining to be amortized in the financial statements of the period in which such option is
exercised and in every subsequent period so long as any exchange difference remains unamortized.”
(If a company follows para-4(e) OF AS-16 then company is not required to follow para-46 A of AS-11)
HOME WORK
Q-1 Goods purchased on 24.02.2015 of US$ 10000 46.60
Exchange rate on 3 1.03.2015 47.00
Date of actual payment 05.06.2015 47.50
Calculate the loss/gain for the financial years.
Q-2 NDA Ltd. Purchased fixed assets for US$ 50 lakhs costing Rs. 1,825 lakhs on
01.04.2009 and the same was fully financed by the foreign currency loan [i.e. US Dollars] repayment in
five equal installments annually. [Exchange rate at the time of purchase was 1 US Dollar = Rs. 36.50] AS
on 31.03 .2010 the first installment was paid when 1 US Dollar fetched Rs. 41.50. The entire loss on
exchange was included in cost of goods sold etc. NDA Ltd. normally provides depreciation on fixed
assets at 20% on WDV basis. Give appropriate Treatment.

Q-3 Induga Ltd. Delhi has a branch in Sydney, Australia. At the end of 31st March, 2010 the following ledger
balances have been extracted from the books of the Sydney office:
Sydney
(Australia dollars thousand) Debit Credit
Plant & Machinery (Cost) 200 -
Plant & Machinery - 130
Debtors/Creditors 60 30
Stock (01.04.2009) 20
Cash/Bank balances 10
Purchases/Sales 20 123
Goods sent to branch 5
Wages & Salaries 45
Rent 12
Office Expenses 18
Commission Receipts 100
Branch/H.O. current A/c 7
390 390
The following information is also available:
Stock at 31.03.2010, Sydney Branch Australian $ 3,125,
Goods sent by H.O = Rs. 100 Thousands, Branch A/c in HO = Rs. 120 Thousands
You are required to convert the Branch Trail Balance into rupees if it is classified as
(i) Integral Foreign Operation
(ii) Non Integral Foreign Operation
(Use the following rate of exchange
Opening rate A$ = Rs. 20
Closing rate A$ = Rs. 24
Average rate A$ = Rs. 22
For fixed assets A$ = Rs. 18)
Q-4 A company had imported raw material worth US $250,000 on 15th January, 2010 when the exchange rate
was Rs. 46 per US$. The company had recorded the transaction at that rate. The payment for imports
was made only on 15th April, 2010 when the exchange rate was Rs. 49 per US$. However on 31st March,
2010 the rate of exchange was Rs. 50 per US$, The company passed an entry on 31st March, 2010
adjusting the cost of raw materials consumed for the difference between Rs. 49 and Rs. 46 per US$.
State your views as an auditor.
Q-5 Explain “monetary item” as per Accounting Standard 11. How are foreign currency monetary items to be
recognized at each Balance Sheet date? Classify the following as monetary or non-monetary item:
(i) Share Capital (ii) Trade Receivables
(iii) Investments (iv) Fixed Assets.
Q-6 Beekay Ltd. purchased fixed assets costing Rs.5,000 lakh on 01.04.2012 payable in foreign currency
(US$) on 05.04.2013. Exchange rate of 1 US$ = Rs.50.00 and Rs.54.98 as on 01.04.2012 and 31.03.2013
respectively.
The company also obtained a soft loan of US$ 1 lakh on 01.04.2012 payable in three annual equal
installments. First installment was due on 01.05.2013.
You are required to state, how these transactions would be accounted for in the books of accounts
ending 31st March, 2013.
Q-7
(a) Sterling Ltd. purchased a plant for US $ 20,000 on 31st December, 2011 payable after 4 months. The
company entered into a forward contract for 4 months @ Rs. 48.85 per dollar.
On 31st December, 2011, the exchange rate was Rs. 47.50 per dollar.
How will you recognize the profit or loss on forward contract in the books of Sterling Limited for the
year ended 31st March, 2012.
(b) Exchange Rate per $ Goods sold on 1.1.2011 of US $ 10,000 Rs. 45
Exchange rate on 31.3.2011 Rs. 44
Date of reciept 7.7.2011 Rs. 43
Ascertain the loss/gain for financial years 2010-11 and 2011-12, also give their treatment as per AS 11.
Q-8 Mr. Y bought a forward contract for three months of US $ 2,00,000 on 1stDecember 2010 at 1 US $ = Rs.
44.10 when the exchange rate was 1 US $ = Rs. 43.90. On 31-12-2010, when he closed his books, exchange
rate was 1 US $ = Rs. 44.20. On 31st January, 2011 he decided to sell the contract at Rs. 44.30 per Dollar.
Show how the profits from the contract will be recognized in the books of Mr. Y.
Q-9 Option Ltd is engaged in the manufacturing of steel. For its steel plant, it required machineries of latest
technology. It usually resorts to Long Term Foreign Currency Borrowing for its fund requirements. On
1st April’2011, it borrowed US $ 1 million from International Funding Agency, USA when exchange rate
was 1$= Rs. 52. The funds were used for acquiring machineries on the same date to be used in three
different steel plants. The useful life of the machineries are 10 years and their residual value is Rs. 20,
00,000. Earlier also the company used to purchase machineries out of foreign borrowings. The
exchange differences arising on such borrowings were charged to profit and loss account and were not
capitalized even though the company had an option to capitalize it as per notified AS-11 (Notification
issued by the MCA in 2009).
Now for this new purchase of machinery, Option Ltd, is interested to avail the option of capitalizing
the same to the cost of asset. Exchange rate on 31st March’2012 is 1US $=Rs. 51. Assume that on 31st
March’2012, Option Ltd. is not having any old long term foreign currency borrowings except for the
amount borrowed for machinery purchased on 1st April’2011. Can Option Ltd. capitalize the exchange
difference tot eh cost of asset on 31st March’2012? If yes, then calculate the depreciation amount on
machineries as on 31st March’2012. Would your answer differ, if Option Ltd. was not a company and was
a LLP?
Q-10 Explain briefly the accounting treatment needed in the following cases as per AS 11 `The Effects of
Changes in Foreign Exchanges Rates’.
(i) Sundry Debtors include amount receivable from Ted Rs. 5,00,000 recorded at the prevailing
exchange rate on the date of sales, transactions recorded a t$1 = Rs.38.70
(ii) Long term loan taken from a U.S. Company, amounting to Rs. 60,00,000. It was recorded at $1 = Rs.
35.60, taking exchange rate prevailing at the date of transactions.
(iii) Another long term loan was there in Pound Sterling for purchase of machinery amounting to
Rs.10,00,000. It was recorded at Pounds Rs. 62.80.
Exchange rates at the end of the year were as under:
$1 Receivable = Rs. 45.80
Pounds = Rs. 72.30
$ 1 Payable = Rs. 45.90

AS-12 : ACCOUNTING FOR GOVERNMENT GRANTS
INTRODUCTION
 Government grant should not be recognised until there is reasonbale assurance that the enterprise
will comply with the conditions attached to it.
 Significance in Financial Statements.
1. An Appropriate method of accounting.
2. To what extent enterprise has been benefited from such grant during the reporting period.
CLASS WORK
Q-1 Z ltd purchased a fixed asset for Rs. 50lakhs which has the estimated useful life of 5 years with the
salvage value of Rs. 5lakh. On purchase of the assets government granted it a grant of Rs. 10 lakhs. Pass
the necessary journal entries in the books of the Company for first two years if the grant is deducted
from the value of fixed asset.
Q-2 Z ltd purchased a fixed asset for Rs. 50 lakhs which has the estimated useful life of 5 years with the
salvage value of Rs. 5lakh. On purchase of the assets government granted it a grant of Rs. 10 lakhs. Pass
the necessary journal entries in the books of the Company for first two years if the grant is treated as
deferred income.
Q-3 Top & Top Limited has set up its business in a designated backward area which entitlesthe company to
receive from the Government of India a subsidy of 20% of the cost of investment. Having fulfilled all
the conditions under the scheme, the company on its investment of Rs. 50 crore in capital assets
received Rs. 10 crore from the Government in January, 2017 (accounting period being 2016-2017). The
company wants to treat this receipt as an item of revenue and thereby reduce the losses on profit and
loss account for the year ended 31st March, 2017.
Keeping in view the relevant Accounting Standard, discuss whether this action is justified or not.
Q-4 A fixed asset is purchased for Rs. 20 lakhs. Government grant received towards it is Rs. 8 lakhs. Residual
Value is Rs. 4 lakhs and useful life is 4 years. Assume depreciation on the basis of Straight Line method.
Asset is shown in the balance sheet net of grant. After 1 year, grant becomes refundable to the extent
of Rs. 5 lakhs due to non-compliance with certain conditions. Pass journal entries for first two years.
Q-5 On 1.4.2014, ABC Ltd. received Government grant of Rs. 300 lakhs for acquisition of machinery costing
Rs. 1,500 lakhs. The grant was credited to the cost of the asset. The life of the machinery is 5 years. The
machinery is depreciated at 20% on WDV basis.
The Company had to refund the grant in May 2017 due to non-fulfillment of certain conditions. How
you would deal with the refund of grant in the books of ABC Ltd.? (In the year of Refund adjust the
refund amount first and then calculate depreciation on the revised book value prospectively)
Q-6 Induga Ltd. received a specific grant of Rs. 300 lakhs for acquiring the plant of Rs. 1,500 lakhs during
2006-2007 having usef ul life of 10 years. The grant received was credited to deferred income in the
balance sheet. During 2009-2010 due to non compliance of conditions laid down for the grant of Rs. 300
lakhs the company had to refund the grant to the Government. Balance in the deferred income on that
date was Rs. 210 lakhs and written down value of plant was Rs. 1,050 lakhs.
(a) What should be the treatment of the refund of the grant and the effect on cost of the fixed asset
and the amount of depreciation to be charged during the year 2009-10 in profit and loss account?

(b) What should be the treatment of the refund if grant was deducted from the cost of the plant
during 2006-2007 ?
Q-7 Explain the treatment of the following:
(i) A firm acquired a fixed asset for Rs. 250 lakhs on which the government grant received was 40%.
(ii) Capital subsidy received from the central government for setting up a plant in the notified backward
region. Cost of the plant Rs. 300 lakhs, subsidy received Rs. 100 lakhs.
(iii) Rs. 50 lakhs received from the state government for the setting up of water-reatment plant.
(iv) Rs. 25 lakhs received from the local authority for providing medical facilities to the employees.
Q-8 How would you treat the Government grant received relating to a depreciable asset under the following
cases as per AS-12?
Case I : Gross value of asset Rs. 2 crores and Grant received Rs. 20 lakhs only.
Case II :Gross value of asset Rs. 2 crores and Grant received Rs. 2 crores.
Q-9 X Ltd. acquired a fixed asset for Rs. 50,00,000. The estimated useful life of the asset is 5 years. The
salvage value after useful life was estimated at Rs. 5,00,000. The State Government gave a grant of Rs.
10,00,000 to encourage the asset acquisition. At the end of the second year, the subsidy of the State
Government became refundable. What is the fixed asset value after refund of grant/ subsidy to the
State Government but before amortising the asset value at the end of the second year?

Accounting Treatment Govt Grant Recd. for
(1) Revenue (2) Capital (3) Specific (4) Non-monetary

purpose purpose Fixed Asset
OR
Credited Credited Credited Credited Asset
to to to to To capital reserve
P&L Capital Asset Deferred (Recorded
Reserve Govt. at
Grant A/c Nominal
or value
Capital ` 100)
Reserve
(Non-Depreciable asset)
HOME WORK
Q-10 Santosh Ltd. has received a grant of Rs. 8 crores from the Government for setting up a factory in a
backward area. Out of this grant, the company distributed Rs. 2 crores as dividend. Also, Santosh Ltd.
received land free of cost from the State Government but it has not recorded it at all in the books as no
money has been spent. In the light of AS 12 examine, whether the treatment of both the grants is
correct.

Solution
As per AS 12 ‘Accounting for Government Grants’, when government grant is received for a specific
purpose, it should be utilised for the same. So the grant received for setting up a factory is not available
for distribution of dividend.
In the second case, even if the company has not spent money for the acquisition of land, land should be
recorded in the books of accounts at a nominal value. The treatment of both the elements of the grant
is incorrect as per AS 12.
Q-11 Z Ltd. purchased a fixed asset for Rs. 50 lakhs, which has the estimated useful life of 5 years with the
salvage value of Rs. 5,00,000. On purchase of the assets government granted it a grant for Rs. 10 lakhs
(This amount was reduced from the cost of fixed asset). Grant was considered as refundable in the end
of 2nd year to the extent of Rs. 7,00,000. Pass the journal entry for refund of the grant as per the first
method.
Solution
Fixed Assets Account Dr. Rs. 7,00,000
To Bank Account Rs. 7,00,000
(Being government grant on asset refunded)
Q-12 A Ltd. purchased a machinery for Rs. 40 lakhs. (Useful life 4 years and residual value Rs. 8 lakhs)
Government grant received is Rs. 16 lakhs.
Show the Journal Entry to be passed at the time of refund of grant in the third year and the value of the
fixed assets, if :
(1) the grant is credited to Fixed Assets A/c.
(2) the grant is credited to Deferred Grant A/c.
Solution
(1) If the grant is credited to Fixed Assets Account :
Fixed Assets Account Dr. Rs. 16,00,000
To Bank Account Rs. 16,00,000
(Being government grant on asset refunded)
The balance of fixed assets after two years depreciation will be Rs. 16 lakhs
(W.N.1) and after refund of grant it will become (Rs.16 lakhs + Rs.16 lakhs) =
Rs. 32 lakhs on which depreciation will be charged for remaining two years.
(2) If the grant is credited to Deferred Grant Account :
As per AS 12 ‘Accounting for Government Grants,’ income from Deferred Grant Account is allocated to
Profit and Loss account usually over the periods and in the proportions in which depreciation on
related assets is charged.Accordingly, in the first two years (Rs.16 lakhs /4 years) = Rs. 4 lakhs p.a. x 2
years = Rs. 8 lakhs were credited to Profit and Loss Account and Rs.8 lakhs was the balance of Deferred
Grant Account after two years.
Therefore, on refund in the 3rd year, following entry will be passed : Depreciation = (32-8)/2 = Rs. 12
lakhs p.a. will be charged for next two years.
Deferred Government Grant A/c. Dr. Rs. 8,00,000
P&L A/c. Dr. Rs. 8,00,000
To Bank A/c. Rs. 16,00,000
(Being grant refunded) The amount of refund should be Rs. 16 Lakhs)

Deferred grant account will become Nil. The fixed assets will continue to be shown in the books at Rs.
24 lakhs (W.N.2) and depreciation will continue to be charged at Rs. 8 lakhs per annum for the remaining
two years.
Q-13 Induga Ltd. acquired the fixed assets of Rs. 500 lakhs on which it received the grant of 10%. What will
be the cost of the fixed assets as per the AS-12 and its presentation in the Balance Sheet?
Solution
As per AS-12, Government grant related to specific fixed assets should be presented in the Balance
Sheet by showing the grant as a deduction from the gross value of the assets concerned in arriving at
their book value. Therefore, 90% of 500 lakhs should be shown as addition to the fixed assets due to
this transaction. Para 14 of AS-12 alternatively prescribed that the Government grant related to
depreciable asset may be treated as deferred income which should be recognized in the profit and loss
statement on a systematic and rational basis, over the useful life of the assets ie., such grant should be
allocated to income over the period and in the proportion in which depreciation on those assets be
charged.
Q-14 NDA Ltd. received a revenue grant of Rs. 800 lakhs during the year 2007-2008 from Government for
welfare activities to be carried on by the company for its employees. The grant prescribed the condition
for utilization, however during 2009- 2010 it was found that the condition of grants was not complied
with and the grant had to be refunded to the Government. How this refund should be shown in the
financial statement for the year 2009-2010?
Solution
As per AS-12 , Govt. grants that become refundable should be accounted for as an extraordinary item as
per AS-5. Therefore, refund of grant should be shown in the Profit and Loss Statement of the company
as an extraordinary item during the year 2009-2010.
Q-15 A Limited company has set-up its business in designated backward area which entitles it to receive, as
per a public scheme announced by the Govt. of India, a subsidy of 15% of the cost of investment.
Having fulfilled all the conditions laid down under the scheme, the company on its investment of Rs.
100 lakhs in capital assets, received in January 2010 during the accounting year ending on 31-3-2010, Rs.
15 lakhs from the Govt. of India. The accountant of the company would like to record the receipt as an
item of revenue and to reduce the losses on the Profit and Loss Account for the year ended 31-3-2010.
Is his action justified? Discuss.
Solution
As per AS-12, where the government grants are of the nature of promoters’ contribution, ie., they are
given with reference to the total investment in an undertaking or by way of contribution towards its
total capital outlay (for example, central investment subsidy scheme) and no repayment is ordinarily
expected in respect thereof, the grants are treated as capital reserve which can be neither distributed
as dividend not considered as deferred income. Accordingly in the given case, it is not proper to credit
the subsidy in the profit and loss account for the year ended 3 1-3-2010. It is also to be noted that the
subsidy is not related to specific fixed asset and therefore Para 8.4 of AS-12 will not be applicable.
The receipt of subsidy should be credited to capital reserve as per AS-12.

AS-16 : BORROWING COSTS
INTRODUCTION
1. According to AS-16 Borrowing cost on Qualifying asset is capitalised
2. Borrowing costs are interest and other costs incurred by an enterprise in connection with the borrowing
of funds. It would include:-
(i) Interest and commitment charges on bank borrowings and other short term and long term
borrowings
(ii) Amortisation of discount or premiums relating to borrowings
(iii) Amortisation of ancilliary costs incurred in connection with the arrangement of borrowings
(iv) Finance charge in respect of assets acquired under finance leases or under other similar
arrangements, and
(v) Exchange difference arising from foreign currency borrowings to the extent that they are regarded
as adjustment to the interest cost.
It does not include cost incurred for raising funds through equity shares or preference shares.
3. Qualifying Asset : A qualifying asset is an asset that necessarily takes a substantial period of time to get
ready for its intended use or sale.
The examples of qualifying assets are manufacturing plants, power generation facilities, inventory of
alcohol, Investment properties, Construction of bridge/factory shed, ship building, aircraft etc.
But purchase of machineries ready for use, inventory, trucks & vehicles, Computers, investments,
advances given to the suppliers for purchase of any asset or amount invested in working capital are not
qualifying assets.
4. Substantial period : Ordinarily, a period of 12 months is considered as substantial period of time unless
a shorter or longer period can be justified on the basis of fact and circumstances of the case.
5. Borrowing costs that are directly attributable to the acquisition, construction or production of a
qualifying asset should be capitalised. Directly attributable cost are those cost that would have been
avoided if the expenditure on the qualifying asset had not been made. Borrowing cost would result in
future economic benefit to the enterprise.
6. How to calculate and capitalise interest?
(i) Specific loan: When enterprise borrows funds specifically for the purpose of obtaining a particular
qualifying asset, the borrowing cost that directly relate to that qualifying asset can be readily
identifiable and capitalise over that specific asset.
(ii) Non specific loan: When an enterprise borrow funds by multiple debt instruments/loans at varying
rates of interest for obtaining different qualifying assets it is difficult to identify the borrowing
cost to any specific asset. In this case amount of borrowing cost eligible for capitalisation should
be determined by applying capitalisation rate to the expenditure on that asset. Capitalisation
rate is the weighted average rate of interest on such various non specific borrowings.

7. Any income earned on the temporary investment of specific borrowing should be deducted from the
borrowing cost incurred.
8. Commencement of capitalisation : Capitalisation of borrowing cost should commence when all the
following conditions are satisfied.
(i) Expenditure for acquisition, construction or production of a particular asset is being incurred.
(ii) Borrowing costs are being incurred, and
(iii) Activities that are necessary to prepare the asset for its intended use or sale are in progress.
Expenditure on qualifying asset includes:-
(a) Transfer of cash
(b) Transfer of other assets, or
(c) Assumption of interest bearing securities
Expenditure should be reduced by progress payments received and Grants received in connection with
the asset.
9. Suspension of capitalisation : Borrowing cost incurred during an extended period in which activities
necessary to prepare an asset for its intended use or sale are interrupted are not capitalised.
However when such interruption is due to normal forces, the capitalisation is not suspended.
Capitalisation of borrowing cost is not suspended when a temporary delay is necessary part of the
process of getting an asset ready for its intended use or sale.
10. Cessation of Capitalisation : Capitalisation of borrowing cost should cease when:-
(i) Substantially all the activities necessary to prepare the qualifying asset for its intended use or
sale are complete.
(ii) Borrowing cost has ceased.
11. Disclosure:
The financial statements should disclose:
(i) The accounting policy adopted for borrowing cost; and
(ii) The amount of borrowing cost capitalised during the period.
CLASS WORK
Q-1 Paras Ltd. had the following borrowings during a year in respect of capital expansion.
Plant Cost of Asset (`) Remarks
Plant P 100 lakhs No specific borrowings
Plant G 125 lakhs Bank loan of ` 65 lakhs at 10%
Plant R 175 lakhs 9% Debentures of ` 125 lakhs were issued.
In addition to the specific borrowings stated above, the Company had obtained term loans from two
banks:
(1) ` 100 lakhs at 10% from Corporation Bank and
(2) ` 110 lakhs at 11.50% from State Bank of India, to meet its capital expansion requirements.
Determine the amount of borrowing costs to be capitalized in each of the above Plants, as per AS-16.

Q-2 An industry borrowed ` 40,00,000 for purchase of machinery on 1.6.2007. Interest on loan is 9% per
annum. The machinery was put to use from 1.1.2008. Pass journal entry for the year ended 31.3.2008 to
record the borrowing cost of loan as per AS 16.
Q-3 Enumerate two points which the financial statements should disclose in respect of Borrowing Costs as
per AS 16.
Q-4 Rohini Limited has obtained loan from an Institution for ` 500 lakhs for modernization and renovating
the Plant and Machinery. The installation of plant and machinery was completed on 31-3-2009 amounting
to ` 320 lakhs and ` 50 lakhs advanced to suppliers of additional assets and ` 320 lakhs and ` 50 lakhs
advanced to suppliers of additional assets and the balance of ` 130 lakhs has been utilized for working
capital requirements. Total interest paid for the above loan amounted to ` 65 lakhs during 2008-09.
You are required to state how the interest on institutional loan is to be accounted for in the year 2008-
09.
Q-5 When capitalisation of borrowing cost should cease as per Accounting Standard 16?
Q-6 GHI Limited obtained a loan for `70 lakhs on 15th April, 2010 from JKL Bank, to be utilized as under:
` in lakhs
Construction of Factory shed 25
Purchase of Machinery 20
Working capital 15
Advance for purchase of Truck 10
In March 2011, construction of the factory shed was completed and machinery, which was ready for its
intended use, was installed. Delivery of Truck was received in the next financial year. Total interest of
`9,10,000 was charged by the bank for the financial year ending 31-03-2011.
Show the treatment of interest under AS 16and also explain the nature of Assets.
Q-7 Axe Limited began construction of a new plant on 1st April, 2011 and obtained a special loan of `
4,00,000 to finance the construction of the plant. The rate of interest on loan was 10%.
The expenditure that were made on the project of plant were as follows:
`
1st April, 2011 5,00,000
1st August, 2011 12,00,000
1st January, 2012 2,00,000
The company’s other outstanding non-specific loan was ` 23,00,000 at an interest rate of 12%.
The construction of the plant completed on 31st March, 2012. You are required to:
(a) Calculate the amount of interest to be capitalized as per the provisions of AS 16 “Borrowing Cost”.
(b) Pass a journal entry for capitalizing the cost and the borrowing cost in respect of the plant.
Q-8 On 1st April, 2011, Amazing Construction Ltd. obtained a loan of `32 crores to be utilized as under:
(i) Construction of sealink across two cities:
(work was held up totally for a month during the year
due to high water levels) : `25 crores

(ii) Purchase of equipments and machineries : `3 crores
(iii) Working capital : `2 crores
(iv) Purchase of vehicles : `50,00,000
(v) Advance for tools/cranes etc. : `50,00,000
(vi) Purchase of technical know-how : `1 crores
(vii) Total interest charged by the bank for the year ending
31 st March, 2012 : `80,00,000
Show the treatment of interest by Amazing Construction Ltd.
Q-9 A company capitalizes interest cost of holding investments and adds to cost of investment every year,
thereby understating interest cost in profit and loss account. Comment on the accounting treatment
done by the company in context of the relevant AS.
Q-10 Take Ltd. has borrowed `30 lakhs from State Bank of India during the financial year 2016-2017. The
borrowings are used to invest in shares of Give Ltd., a subsidiary company of Take Ltd., which is
implementing a new project, estimated to cost `50 lakhs. As on 31st March, 2017, since the said project
was not complete, the directors of Take Ltd. resolved to capitalise the interest accruing on borrowings
amounting to `4 lakhs and add it to the cost of investments. Comment.
Q-11 ABC Ltd borrowed 1,00,000 US $ on 1st April, 2017 @ 5% p.a. interest to acquire qualifying asset. If the
same loan is borrowed in India then it would cost 11% p.a. interest. The qualifying asset was ready for
its intended use on 31-3-2018. The details of foreign exchange rates were as follows:
On 1-4-2017 1 US $ = 60 INR
On 31-3-2018 1 US $ = 65 INR
Give appropriate treatment of Borrowing cost for the year ended 31st March, 2018 as per para 4(E) of As-
16.
HOME WORK
Q-12 Assume NDA Limited begins Construction on a new building on 1st January, 2004. In addition NDA
Limited obtained a Rs. 1 lakh loan to finance the construction of the building on 1st January, 2004 at an
annual interest rate of 10%. The company’s outstanding debt during 2004 Consists of two loans of Rs. 6
lakhs Rs.8 lakhs with interest rates of 11% and 13%, respectively. Expenditure that were made on the
building project were as follows:
January 2004 200000
April 2004 300000
July 2004 400000
December 2004 120000
Compute the cost to be capitalised including borrowing cost.
Ans. Average expenditure Rs. 6,35,000. Capitalisation rate for Non specific loans 12.14%. Interest
capitalised Rs. 74,950 ( 10,000 on specific loan and Rs. 64,950 on non specific loan of Rs. 5,35,000.
Q-13 The Company deals in purchase and sale of timber. Maturity period of timber for sale is five years. The
Company taken loan to meet the cost of holding of timber upto maturity. The company has included
the interest charge in value of stock of time as at the balance sheet. Give comment.
Ans. Company stand is correct as per As – 16.

Q-14
Amount (Rs.)
Expenditure incurred till 31-03-2008 5,00,000
Interest cost capitalized for the financial year 2007-08 @ 13% 26,000
Amount borrowed till 31-03-08 is 2,00,000
Assets transferred to construction during 2008-09 1,00,000
Cash payment during 2008-09 75,000
Progress payment received 3,50,000
New borrowing during 2008-09 @ 13% 2,00,000
Calculate the amount of borrowing cost to be capitalised.
Ans. Borrowing cost= 4,00,000 * 13%= 52,000. Money borrowed including previously capitalised interest=
4,00,000 + 26,000= 4,26,000. Expenditure incurred = 5,00,000 + 26,000 capitalised interest + 75,000 cash
+ 1,00,000 asset transferred – 3,50,000 progress payment= 3,51,000. Borrowing cost to be capitalised =
52,000 *(3,51,000/4,26,000)= 42,845.
Q-15 An industry borrowed `40,00,000 {or purchase of machinery on 1.6.2007. Interest on loan is 9% per
annum The machinery was put to use from 1.1.2008. Pass journal entry for the year ended 31.3.2008 to
record the borrowing cost of loan as per AS-16.
Ans. BC capitalised Rs. 2,10,000 and Rs. 90,000 charged to P & L.
Q-16 On 25th April, 2010 Neel Limited obtained a loan from the bank for ` 70 lakhs to be utilised as under:
` in lakhs
Construction of factory shed 28
Working Capital 14
Advance for purchase of truck 7
In March 2011, Construction of shed was completed and machinery installed.
Delivery of truck was not received. Total interest charged by the bank for the year ending 31st March,
2011 was ` 12 lakhs. Show the treatment of interest under Accounting Standard -16.
Ans. BC capitalised Rs. 4.80 lakhs and Rs.7.20 Lakhs charged to P&L
Q-17 Raj & Co. has taken a loan of US$ 20,000 at the beginning of the financial year for a specific project at an
interest rate of 6% per annum, payable annually. On the day of taking loan, the exchange rate between
currencies was ? 48 per 1 US$. The exchange rate at the closing of the financial year was ? 50 per 1 US$.
The corresponding amount could have been borrowed by the company in Indian Rupee at an interest
rate of 11% per annum. Determine the treatment of borrowing cost in the books of accounts.
Ans. Interest expenses Rs. 60,000. Increase in liability Rs. 40,000. Interest if loan is in INR-Rs. 1,05,600.
Difference in interest Rs. 45,600. Exchange difference Rs. 40,000 considered borrowing cost.

Q-18 Suhana Ltd. issued 12% secured debentures of ` 100 Lakhs on 01.05.2013, to be utilised as under:
Particulars Amount (` in Lakhs)
Construction of factory building 40
Working Capital 25
In March 2014, construction of the factory building was completed and machinery was installed and
ready for it’s intended use- Total interest on debentures for the financial year ended 31.03.2014 was `
11,00,000. During the year 2013-14, the company had invested idle fund out of money raised from
debentures in banks’ fixed deposit and had earned an interest of ` 2,00,000.
Show the treatment of interest-under Accounting Standard 16 and also explain nature of assets.
Ans. BC capitalised Rs. 3.60 lakhs and Rs.5.40 Lakhs charged to P & L
Q-19 M/s. Ayush Ltd. began construction of a new building on 1st January, 2014.; It obtained ` 3 lakh special
loan to finance the construction of the building on 1st January, 2014 at an Interest rate of 12% p.a. The
company’s other outstanding two non-specific loans were:
Amount Rate of Interest
` 6,00,000 11% p.a.
` 11,00,000 13% p.a.
The expenditure that were made on the building project were as follows :
Amount (`)
January, 2014 3,00,000
April, 2014 3,50,000
July, 2014 5,50,000
December, 2014 1,50,000
Building was completed on 31st December, 2014. Following the principles prescribed in AS 16 ‘Borrowing
Cost’, calculate the amount of interest to be capitalized and pass one Journal Entry for capitalizing the
cost-and borrowing in respect of the building.
Ans. Average expenditure Rs. 8,50,000. Capitalisation rate for Non specific loans 12.29%. Interest capitalised
Rs. 1,03,595 ( 36,000 on specific loan and Rs. 67,595 on non specific loan of Rs. 5,50,000.
Q-20 M/s. Zen Bridge Construction Limited obtained a loan of ` 64 crores to be utilized as under:
(i) Construction of Hill link road in Kedarnath: ` 50 crores
(work was held up totally for a month during the
year due to heavy rain which are common in the
geographic region involved)
(ii) Purchase of Equipment and Machineries ` 6 crores
(iii) Working Capital ` 4 crores
(iv) Purchase of Vehicles. ` 1 crore
(v) Advances for tools/cranes etc. ` 1 crore
(vi) Purchase of Technical Know how ` 2 crores
(vii) Total Interest charged by the Bank for the year
ending 31st March, 2016 ` 1.6 crores
Show the treatment of Interest according to Accounting Standard by M /s Zen Bridge Construction
Limited.
Ans. BC capitalised Rs. 1.25 crores and Rs.0.35 crores charged to P & L.

MULTIPLE CHOICE QUESTIONS
1. Accounting Standards for non-corporate entities in India are issued by

(a) Central Govt. (b) State Govt.
(c) Institute of Chartered Accountants of India.
2. Accounting Standards
(a) Harmonise accounting policies and eliminate the non-comparability of financial statements.
(b) Improve the reliability of financial statements.
(c) Both (a) and (b).
3. It is essential to standardize the accounting principles and policies in order to ensure
(a) Transparency. (b) Consistency. (c) Both (a) and (b).
4. Which committee is responsible for approval of accounting standards and their modification for the
purpose of applicability to companies?
(a) National Advisory Committee on Accounting Standards.
(b) Central Government Advisory Committee.
(c) Advisory Committee for approval of Accounting Standards.
5. Global Standards facilitate
(a) Cross border flow of money.
(b) Comparability of financial statements.
THEORETICAL QUESTIONS
1. Explain the objective of “Accounting Standards” in brief. State the advantages of setting Accounting
Standards.
2. Explain the need of convergence of IFRS as Global Standards.
3. What is the significance of issue of Indian Accounting Standards?

CHAPTER-2
FINANCIAL STATEMENTS OF COMPANIES
(FINAL ACCOUNTS OF COMPANY)

INTRODUCTION
In the modern age, the major part of trade and industry is carried on by joint stock companies. In every
country, in large companies billions of rupees are invested. But this money is raised by the company from
public by issuing shares. Thus, the public has major interest in the joint stock companies. Hence, in every
country, the government keeps control over the management of companies by passing companies Act. The
companies are compelled by laws to publish their annual accounts before the shareholders to show how
they have managed people’s money. Accordingly Companies Act, it is made compulsory for all companies to
publish their annual accounts. In India also, the forms of Balance Sheet & Profit and Loss Statement are given
in the Schedule III to the Companies Act, 2013. All companies are required to prepare their Balance Sheet &
Profit & Loss Statement in these forms.
THEORY AND CONCEPTWISE PRACTICAL QUESTIONS (CLASS WORK)

PREPARTATION OF FINAL ACCOUNTS :
Sections 128 to 138 of the Companies Act, 013 deals with the Final Accounts. As per Section 128, every
company shall keep books of account and other relevant books and papers at its registered office.
Under Section 129 of the Companies Act, 2013, at the annual general meeting of a company, the Board
of Directors of the company should lay financial statements before the company:
Financial Statements as per Section 2(40) of the Companies Act, 2013, inter-alia include
(i) a balance sheet as at the end of the financial year;
(ii) a profit and loss account, or in the case of a company carrying on any activity not for profit, an income
and expenditure account for the financial year;
(iii) cash flow statement for the financial year;
(iv) a statement of changes in equity, if applicable; and
(v) any explanatory note annexed to, or forming part of, any document referred to in (i) to (iv) above:
Provided that the financial statement, with respect to One Person Company, small company and dormant
company, may not include the cash flow statement.
Financial Statements of Companies -41-

Requisites of Financial Statements
It should give a true and fair view of the state of affairs of the company as at the end of the financial year.
Provisions Applicable
(1) Specific Act is Applicable For instance, any
(a) insurance company
(b) banking company or
(c) any company engaged in generation or supply of electricity (The Electricity Act, 2003 does not
specify any format for presentation of Financial Statements. Therefore, Schedule III of the
Companies Act, 2013 is followed by Electricity Companies in preparation of their financial
statements.)
(d) any other class of company for which a Form of balance sheet or Profit and loss account has been
prescribed under the Act governing such class of company
(2) In case of all other companies
Balance Sheet as per Form set out in Part I of Schedule III and Statement of Profit and Loss as per Part
II of Schedule III
Points to be kept in mind while preparing final accounts:
- Requirements of Schedule III to the Companies Act;
- Other statutory requirements;
- Accounting Standards notified by Ministry of Corporate Affairs (MCA) (AS 1 to AS 29);
- Statements and Guidance Notes issued by the Institute of Chartered Accountants of India (ICAI); which
are necessary for understanding the accounting treatment/ valuation/ disclosure suggested by the
ICAI.
Compliance with Accounting Standards
As per section 133 of the Companies Act, it is mandatory to comply with accounting standards notified by the
Central Government from time to time.
Schedule III of the Companies Act, 2013
As per section 129 of the Companies Act, 2013, Financial statements should give a true and fair view of the
state of affairs of the company or companies and comply with the accounting standards notified under
section 133 and should be in the form or forms as may be provided for different class or classes of companies
in Schedule III under the Act.
MAINTENANCE OF BOOKS OF ACCOUNT :
As per Section 128 of the Companies Act, 2013, Every company should prepare and keep at its registered
office books of account and other relevant books and papers and financial statement for every financial year
which give a true and fair view of the state of the affairs of the company, including that of its branch office or
offices, if any, and explain the transactions effected both at the registered office and its branches and such
books should be kept on accrual basis and according to the double entry system of accounting:
Provided further that the company may keep such books of account or other relevant papers in electronic
mode in such manner as may be prescribed.
Maintenance at Place other than Registered Office
It is a duty of the company to inform the Registrar of Companies within seven days of the decision in case the
Board of Directors decides to maintain books at the place other than the registered office.

In Case of Branch Office
Where a company has a branch office in India or outside India, it should be deemed to have complied with
the provisions of the Act, if proper books of account relating to the transactions effected at the branch office
are kept at that office and proper summarised returns periodically are sent by the branch office to the
company at its registered office or such other place as the Board of Directors has decided.
Section 128 (3) further lays down that the books of account and other books and papers maintained by the
company within India should be open for inspection at the registered office of the company or at such other
place in India by any director during business hours, and in the case of financial information, if any, maintained
outside the country, copies of such financial information should be maintained and produced for inspection
by any director subject to such conditions as may be prescribed. Section 128(5) further states that the books
of account of every company relating to a period of not less than 8 financial years immediately preceding a
financial year, or where the company had been in existence for a period less than 8 years, in respect of all the
preceding years together with the vouchers relevant to any entry in such books of account should be kept in
good order.
STATUTORY BOOKS :
The following statutory books are required to be maintained by a company under different sections of the
Companies Act, 2013 :
- Register of Investments of the company held in its own name (Section 187)
- Register of Charges (Section 85)
- Register of Members (Sections 88)
- Register of Debenture-holders and other Security holders (Section 88)
- Minute Books (Section 118)
- Register of Contracts, or arrangements in which directors are interested (Section 189)
- Register of directors and key managerial personnels and their shareholding (Section 170)
- Register of Loans and Investments by Company (Section 186)
In addition, a company usually maintains a number of statistical books to keep a record of its transactions
which have resulted either in the payment of money to it or constitute the basis on which certain
payments have been made by it.
- Registers and documents relating to the issue of shares are:
(i) Share Application and Allotment Book
(ii) Share Call Book
(iii) Certificate Book
(iv) Register of Members
(v) Share Transfer Book
(vi) Dividend Register.
ANNUAL RETURN :
In accordance with Section 92 of the Companies Act, 2013, every company should prepare an annual return in
the form prescribed by the Companies Act, 2013 signed by a director and the company secretary, or where
there is no company secretary, by a company secretary in practice :
Provided that in relation to One Person Company and small company, the annual return should be signed by
the company secretary, or where there is no company secretary, by the director of the company.
The annual return should be filed with the Registrar within 60 days from the day on which each of the annual
general meeting (AGM) is held or where no AGM is held in any year, within 60 days from the date on which
AGM should have been held along with a statement showing the reasons why AGM was not held.

ANNEXURE
..................... Limited
Balance Sheet
(Rupees in ___)
Note As at As at
Particulars No. 31st March, 2015 31st March, 2014
I. EQUITY AND LIABILITIES

(1) Shareholder’s Funds
(a) Share Capital 1 - -
(b) Reserves and Surplus 2 - -
(c) Money received against Share Warrants
(2) Share Application Money pending allotment - -
(3) Non-Current Liabilities
(a) Long- term Borrowings 3 - -
(b) Deferred Tax Liabilities (Net) as per AS-22
(c) Other Long Term Liabilities 4 - -
(d) Long- term Provisions 5 - -
(4) Current Liabilities
(a) Short-Term Borrowings 6 - -
(b) Trade Payables - -
(c) Other Current Liabilities 7 - -
(d) Short-Term Provisions 8 - -
TOTAL ___________ ___________
___________ ___________

II. ASSETS
(1) Non-Current Assets
(a) Fixed Assets
(i) Tangible Assets 9 - -
(ii) Intangible Assets 10 - -
(iii) Capital work-in-progress - -
(iv) Intangible assets under development - -
(b) Non-Current Investments 11 - -

(c) Deferred Tax Assets (Net) as per AS 22
(d) Long-Term Loans and Advances 12 - -
(e) Other Non-Current Assets 13 - -
(2) Current Assets
(a) Current Investments 14 - -
(b) Inventories 15 - -
(c) Trade Receivables 16 - -
(d) Cash and Cash Equivalents 17 - -
(e) Short-Term Loans and Advances 18 - -
(f) Other Current Assets 19 - -
TOTAL __________ ___________
__________ ___________
..................... Limited
P & L Statement
(Rupees in ___)
Note For the year ended For the year ended
Particulars No. 31st March, 2015 31st March, 2014
I. Revenue from Operations 20 - -
II Other Incomes 21 - -
_________ ___________
III Total Revenue (I + II) _________ ___________
IV Expenses :
Manufacturing Expenses :
Cost of Materials Consumed -
Purchases of Stock-in-Trade -

Changes in Inventories of Finished Goods
Work-in-Progress and Stock-in-Trade - -
Other Manufacturing Expenses 22 - -
Administrative & Selling Expenses :
Employee Benefit Expenses 23 - -
Other Administrative and Selling Expenses 24 - -
Other Expenses 25 - -
Finance Costs 26 - -
Depreciation and Amortization Expense 9/10
__________ ___________
__________ ___________
Total Expenses
V Profit before Exceptional and Extraordinary - -
items and (III-IV)
VI. Exceptional Items (related to business activity but -
non recurring nature)
VII Profit before Extraordinary Items and Tax (V - VI)
VIII Extra Ordinary items (mainly due natural
calamities legal suits etc.)
IX Profit before Tax (VII - VIII) - -
X Tax Expense
(1) Current tax - -
(2) Deferred Tax - -
XI Profit / (Loss) for the period from continuing - -
Operations (IX - X)

XII Profit / Loss from Discontinuing Operations - -
XIII Tax Expense of Discontinuing Operations
XIV Profit / (Loss) from Discontinuing Operations (after tax) - -
(XII - XIII)
XV Profit / (Loss) for the Period (XI + XIV) -
XVI Earnings Per Equity Share as per AS 20
(1) Basic - -
(2) Diluted - -
..................... Limited
Annexures to the Balance Sheet
Particulars As at
31st March, 2015
NOTE # 1
Share Capital
Authorised Capital
...... Equity Shares of Rs .../- each ___________
Issued, Subscribed and Paid up

Equity Shares of Rs ....... /- each ___________
___________
* Reconciliation of the number of shares at the beginning & end of the Reporting Period.
* Shares held by the Holding Co.
* Shares held by each shareholder holding more than 5% shares, specifying the number of
shares held.
* Terms of securities convertible into Equity / Preference Shares.

NOTE # 2
Reserves, and Surplus
(a) Capital Reserve
As per last Balance Sheet -
Addition during the year -
___________
___________
(b) Securities Premium

___________
___________
(c) Surplus i.e. Balance in the Statement of Profit & Loss
Allocations & Appropriations
Transfer to Reserves ___________
___________
Note # 3
Long-Term Borrowings
Bonds / Debentures
Term Loans
- From Banks
- From Others
Deferred Payment Liabilities due after 12 months of reporting date
Deposits
Loans and advances from Related Parties
Long-Term maturities of Finance Lease Obligations
Other Loans and Advances (specify nature) ___________
___________
* Borrowings shall be further classified as Secured / Unsecured. Nature of security to be disclosed.

* In case loans have been guaranteed by Directors/Others, the aggregate amount of loans under each
head In case of Debentures / Bonds, Rate of Interest along with particulars of
redemption / conversion.
* Terms of Repayment of Term Loans & Other Loans.
Note # 4
Other Long-Term Liabilities
Trade Payables false due after 12 months of reporting date
Others
___________
___________
* Trade Payables shall be further classified as Micro/Small/Medium Enterprises & Others.
Note # 5
Long-Term Provisions
Provision for Employee Benefits
Others (specify nature) ___________
___________
Note # 6
Short-Term Borrowings
Loans Repayable On Demand
- From Banks
- From Others
Loans and advances from Related Parties
Deposits
Other Loans and Advances (specify nature)
- Cash Credit Facilities
- Working Capital Loans ___________
___________
* Borrowings shall be further classified as Secured / Unsecured. Nature of security to be

disclosed
* In case loans have been guaranteed by Directors / Others, the aggregate amount of loans
under each head.

NOTE # 7
Other Current Liabilities
Current Maturities of Long-Term Debt
Current maturities of Finance Lease Obligations
Interest Accrued but not Due on Borrowings
Interest Received in Advance
Unpaid Dividends
Application Money received for allotment of
securities and due for refund and interest
accrued thereon
Paid Matured Deposits and interest accrued thereon

Unpaid Matured Debentures and interest accrued thereon
Other Payables (specify nature) ___________
___________
NOTE # 8
Short-Term Provisions
Provision for Employee Benefits
___________
NOTE # 11
Non-Current Investments
Investment Property
Investments in Equity Instruments
Investments in Preference Shares
Investments in Government or Trust Securities
Investments in Debentures! Bonds
Investments in Mutual Funds
Investments in Partnership Firms
Other Non-Current Investments (specify nature) ___________
___________
* Non-Current Investments shall be classified as Trade Investments & Other Investments.

* Under each classification, following details shall be given.
- Name of Body Corporate (also indicating whether it is a subsidiary / associate/ JV/ SPE
- Nature & Extent of Investment so made (showing separately investments that are partly paid)
* For Investments in capital of Partnership firms, following details shall be given:

- Name of the Partnership Firm.
- Names of all Partners, Total Capital & share of each Partner.
* Further disclosures required:
- Aggregate amount of Quoted Investments & Market Value thereof.
- Aggregate amount of Unquoted Investments.
- Aggregate provision for diminution in the value of Investments.
NOTE # 12
Long-Term Loans and Advances
Capital Advances
Security Deposits
Loans and advances to Related Parties
Other Loans & Advances (specify nature) ___________
___________
* These shall be further classified as:

- Secured, considered Good
- Unsecured, considered Good.
- Doubtful.
* Allowance for Bad & Doubtful Loans & Advances shall be disclosed under the relevant heads.
* Loans & Advances due by Directors! Employees/Firms in which Directors are partners / Private
Companies in which Directors are Members to be separately disclosed.
NOTE #13
Other Non-Current Assets
Long-Term Trade Receivables (including Receivables on deferred credit terms)
___________
* Long-Term Trade Receivables shall be further classified as:

- Secured, considered Good.
- Doubtful.
* Allowance for Bad & Doubtful Debts shall be disclosed under the relevant heads.

* Debts due by Directors / Employees! Firms in which Directors are partners / Private Companies in
which Directors are Members to be separately disclosed.
NOTE # 14
Current Investments
Investments in Equity Instruments
Investments in Preference Shares
Investments in Government or Trust Securities
Investments in Debentures! Bonds
Investments in Mutual Funds
Investments in Partnership Firms
Other Investments (specify nature) ___________
___________
* Under each classification, following details shall be given

- Name of Body Corporate (also indicating whether it is a subsidiary / associate/ JV / SPE)
- Nature & Extent of investment so made (showing separately investments that are partly paid)
* For Investments in capital of Partnership firms, following details shall be given.
- Name of the Partnership Firm.
- Names of all Partners, Total Capital & share of each Partner.
* Further disclosures required:
- Basis of valuation of Individual Investments
- Aggregate amount of Quoted Investments & Market Value thereof.
- Aggregate amount of Unquoted Investments
- Aggregate provision for diminution in the value of Investments
NOTE # 15
Inventories
Raw Materials
Work-in-Progress
Finished Goods
Stock-in-Trade (in respect of goods acquired for trading)
Stores and Spares
Loose Tools
___________

* Goods in Transit shall be disclosed under the relevant sub-heads.
* Mode of Valuation
NOTE # 16
Trade Receivables
Secured Considered Good
- Outstanding for a period exceeding six months
- Others
Less: Allowance for Bad& Doubtful Debts
Unsecured, Considered Good
- Outstanding for a period exceeding six months
- Others
Less: Allowance for Bad & Doubtful Debts
Doubtful ___________
___________
* Debts due by Directors / Employees / Firms in which Directors are partners! Private Companies in which
Directors are Members to be separately disclosed.
NOTE # 17
Cash and Cash Equivalents
Balance with Banks
Cheques / Drafts on Hand
Cash on Hand
___________
* Earmarked Balances with Banks (e.g. Unpaid Dividend) shall be separately disclosed.
* Balances held as margin money, security against borrowings, guarantees, etc. to be
separately disclosed.
* Repatriation restrictions, if any, shall be separately disclosed
* Bank Deposits with more than 12 months maturity to be separately disclosed

NOTE # 18
Short-Term Loans and Advances
Loans and advances to Related Parties
___________
* Short-Term Loans & Advances shall be further classified as

- Secured, considered Good.
- Doubtful.
* Allowance for Bad & Doubtful Debts shall be disclosed under the relevant heads.
* Debts due by Directors / Employees/ Firms in which Directors are partners / Private
Companies in which Directors are Members to be separately disclosed.
NOTE # 19
Other Current Assets (Residual Head)
Interest Receivable ___________
Dividend receivable ___________
........................ Limited
Annexures to the Profit & Loss Statement
Particulars Year Ended
31st March, 2015
NOTE # 20
Revenue From Operations
Sale of Products
Sale of Services
Other Operating Revenues
Less: Excise Duty ___________
___________
NOTE # 21
Other incomes
Interest income
Dividend Income
Net Gain / (Loss) on sale of Investments
Other Non-Operating Income ___________
___________
NOTE # 22
Other Manufacturing Expenses
Store and Hardware Consumed
Job Charges
Increase / (Decrease) in Excise Duty Provision on Closing Stock
Freight & Cartage
Packing Material Consumed
Power & Fuel ___________
___________
NOTE # 23
Employee Benefit Expenses
Salaries and Wages
Contribution to PF and Other Funds
Expense on Employee Stock Option Scheme / Employee Stock Purchase Plan
Staff Welfare Expenses ___________
___________
NOTE # 24
Other Administrative and Selling Expenses
Travelling & Conveyance
Postage & Telephone
Insurance
Rent, Rates & Taxes
Professional & Legal Expenses
Repair & Maintenance
- Buildings
- Others
Marketing & Service Charges
Discount & Rebate
Freight & Cartage (Outward)
Late Delivery Charges
Auditors’ Remuneration
Bank Charges
Other Expenses ___________
___________

NOTE # 25
Other Expenses
Miscellaneous Expenses Written Off
Loss on sale of Fixed Assets
Forex (Gain) / Loss on Restatement of Items other
than Foreign Currency Borrowings ___________
___________
NOTE # 26
Finance Costs
Interest Expense
Other Borrowing Costs
Applicable Net (Gain) / Loss on Foreign
Currency Borrowings ___________
___________

NOTE # 9
Intangible Assets as on 31st March 2015.
GROSS BLOCK DEPRECIATION BLOCK NET BLOCK
SALE / NET NET
COST AS AD DITIONS D ISPOSA L TOTA L CARRY CARRY
S.NO. PARTICULARS ON AS ON AS ON FOR THE A D JU ST AS ON ING ING
01.04.2 014 DURING DURING 31.03.2 015 01.04.2 014 YEAR MENT 31.03.2 015 AMOUNT A MOUNT
THE THE AS ON AS ON
Financial Statements of Companies

YEAR YEAR 31.03.2 015 31.03.2014
1 Land - - -
2 Buildings
3 Plant & Equipment
4 Furniture & Fixtures - - -
5 Vehicle - - -
6 Office Equipment - - -
7 Others (specify nature) - - -

_____________________________________________________________________________________
TOTAL - - - - - - - - -
-
_____________________________________________________________________________________
Previous Year
* Assets under Lease shall be separately classified under each class of asset.
-57-
NOTE # 10
-58-
Intangible Assets as on 31st March 2015.
GROSS BLOCK DEPRECIATION BLOCK NET BLOCK
SALE / NET NET
COST AS AD DITIONS D ISPOSA L TOTA L CARRY CARRY
S.NO. PARTICULARS ON AS ON AS ON FOR THE A D JU ST AS ON ING ING
01.04.2 014 DURING DURING 31.03.2 015 01.04.2 014 YEAR MENT 31.03.2 015 AMOUNT A MOUNT
THE THE AS ON AS ON
YEAR YEAR 31.03.2 015 31.03.2014
1 Goodwill - - -
2 Brands/Trademarks
3 Computer Software
4 Mastheads and Publishing Titles - - -
5 Mining Rights - - -
6 Copyrights and Patents, Intellectual Property Rights, Services & Operating Rights
7 Receipes, Formulate, Models, Designs and Prototypes
8 Licenses and Franchise
9 Others (Specify nature)
_____________________________________________________________________________________
TOTAL - - - - - - - - - -
_____________________________________________________________________________________
ACCOUNTING - GROUP I (INTERMEDIATE)

Previous Year
 Fast track revision regarding elements of Balance sheet (various illustrations) :
1. Share capital
a. i. Share capital (authorised) = only disclosure requirement
ii. Other disclosure requirments :
* Equity shares allotted as consideration for other than cash.
* Reconciliation of the number of shares at the beginning & end of the Reporting
Period.
* Shares held by the Holding Co.
* Shares held by each shareholder holding more than 5% shares, specifying the number
of shares held.
* Terms of securities convertible into Equity / Preference Shares.
b. Paid up equity share capital and Preference share capital
c. Calls-in-arrears (deduct)
d. Share forfeiture (add)
2. Reserves and surplus

a. P & L account
b. General reserve
c. Capital redemption reserve
d. Securities premium
e. Revaluation reserve
f. Debenture redemption reserve
g. Capital reserve
2. Long term borrowings :
a. Debentures
b. Term loan from banks
c. Public deposits
d. IDBI loan (if nothing is given)
e. Loan from state financial corporation (if nothing is given)
3. Other long term liabilities :
Long term payables false due after 12 months of reporting date.
4. Long term provisions :
Provision for employee benefits like provision for gratuity (it means for more than 12 months
from reporting date).

5. Short term borrowings :
a. Bank overdraft
b. Cash credit
c. Working capital loans
6. Trade payables (it means regarding goods) :
a. Creditors
b. Bills payable
7. Other current liabilities :
a. Calls-in-advance
b. Outstanding managerial remuneration
c. Outstanding expenses (other than goods i.e. like outstanding salary expense)
d. Unclaimed dividend and unpaid dividend
e. Short term maturity of long term debt (like loan from state financial corporation i.e repaid
within 1 year)
f. TDS from salary expenses
g. TDS from interest expense on debentures
h. Outstanding income tax liability
8. Short term provisions :
a. Provision for taxation (it means closing balance)
b. Provident fund
9. Tangible Assets :
a. Land
b. Buildings
c. Plant & Equipment
d. Furniture & Fixtures
e. Vehicle
f. Office Equipment
10. Intangible Assets :
a. Goodwill
b. Brands/Trademarks
c. Computer Software
d. Mastheads and Publishing Titles
e. Mining Rights
f. Copyrights and Patents, Intellectual Property Rights, Services & Operating Rights
g. Receipes, Formulate, Models, Designs and Prototypes
h. Licenses and Franchise

11. Long term loans and advances :
a. Capital advance
b. Security deposits
12. Other non-current assets :
Long term receivable false due after 12months of reporting date.
13. Current investments :
Investments false due within 12months of reporting date.
14. Inventories
a. Goods in Transit
b. Closing stock of Finished goods
c. Closing stock of Raw material
d. Closing stock of work-in-progress
e. Closing stock in trade (in respect of goods acquired for trading)
f. Loose tools
g. Stores and spares
15. Trade receivables (it means regarding goods)
a. Debtors (net i.e. after deducting closing balance of bad debt reserve) (separate disclosure
shall be required regarding debtors are due for more than 6 months)
b. Bills receivable
16. Cash and cash Equivalents
a. Cash on hand
b. Balance with banks
17. Short term loans and advances
a. Advance tax (closing balance)
b. Prepaid insurance (better disclosure)
c. Loans to directors
d. TDS on interest income
18. Other current assets :
a. Interest receivable
b. Dividend receivable
19. Contingent liabilities and commitments (only seperate disclosure and as a part of footnote) : Few
examples :
a. Bills receivables maturing after closing balance sheet date had been discounted
b. The company had contract for the erection of machinery which is still incomplete on the
closing balance sheet date.
c. Preference share dividend in arrears.

 Fast track revision regarding elements of Profit and loss statement (various illustrations) :
1. Revenue from operation :
a. Net sales of products (it means after deducting sales return from gross sales)
b. Sale of services
2. Other incomes :
a. Interest income
b. Dividend income
c. Profit on sale of investments and other assets.
3. Cost of material consumed :
Opening stock of raw material + purchase of raw material - closing stock of raw material
4. Purchase of stock in trade :
Purchase i.e. other than raw material.
5. Changes in inventories of finished goods, work in progress and stock in trade :
Opening stock (other than raw material) - closing stock (other than raw material)
6. Other manufacturing expenses :
a. Freight and cartage (inward)
b. Power and fuel
c. Carriage inward
7. Employee benefit expenses :
a. Salaries (gross i.e. before TDS)
b. wages (if unproductive)
c. contribution to provident fund
d. Staff welfare expense
e. Directors fees
f. Managerial remuneration
g. Gratuity paid
8. Other administrative and selling expenses :
a. Carriage outward
b. Freight and cartage (outward)
c. Travelling expense
d. Postage and telephone expense
e. Insurance
f. Rent, rates and taxes
g. Professional and legal expenses
h. Repairs and maintenance expanes
i. Marketing and service charges
j. Discount and rebate
k. Late delivery charges
l. Auditors remuneration
m. Bank charges
9. Other expenses :
a. Miscellaneous expenses written off
b. Loss on sale of fixed assets
10. Finance costs :
Interest expense on long term borrowings and short term borrowings
11. Depreciation and Amortization expense :
a. Depreciation on depreciable assets
b. Intangible assets written off (amortized)
12. Tax expenses (deduct from profit before tax) :
a. Current tax (tax provided in the current year)
b. Deficit of previous year’s tax provision/surplus of previous year’s tax provision.
c. Deferred tax (deferred tax liability = deduct and deferred tax assets = add)

CLASS WORK
LONG QUESTION REGARDING BALANCE SHEET

Q-1 Prepare the Balance Sheet as at 31st March, 2015 from the particulars furnished by Vision Ltd., as per
Schedule 3 of Companies Act, 2013.
`
Equity Share Capital ( ` 10 each fully paid) 8,00,000
Calls in arrear 800
Land 1,60,000
Building 2,80,000
Plant & Machinery 4,20,000
Furniture 40,000
General Reserve 1,68,000
Loan from IDBI 1,20,000
Loans (Unsecured) 96,800
Provision for Taxation 54,400
Sundry Debtors 1,60,000
Advances (Dr.) 34,160
Dividend Payable 48,000
Profit & Loss A/c 80,000
Cash balance 24,000
Cash at Bank 1,97,600
Preliminary Expenses 10,640
Sundry Creditors (For goods & expenses) 1,60,000
Stock:Finished goods 1,60,000
Raw material 40,000 2,00,000
Adjustment:
· 1500 equity shares were issued for consideration other than cash.
· Loan of ` 1,20,000 for IDBI is inclusive of ` 6,000 for interest accrued but not due.
The loan is hypothecated by plant & machinery.
· Debtors of ` 50,000 are due for more than six months.
· The cost of assets :

`
Building 3,20,000
Furniture 50,000
· Bank balance includes ` 2,000 with Trust Bank Ltd., which is not a scheduled Bank.
· Bills receivable for ` 2,20,000 maturing on 30th June, 2015 have been discounted.
· The company had contract for the erection of machinery at ` 1, 50,000 which is still incomplete.
SHORT QUESTION REGARDING BALANCE SHEET (EXTRACT)

Q-2 Following items appears in the Trial Balance of X Ltd. as at 31.3.2015 :
Particulars Dr.( `) Cr. ( `)
P & L A/c on 1 .4.2014 4,00,000
Equity Share Capital 12,00,000
Provision for Taxation 5,12,050
Interim Dividend 1,20,000
Dividend distribution Tax 24,429
Net Profit after tax for 2014 -2015 9,50,950
The entire authorised share capital which consists of equity shares of ` 100 each has been
issued and subscribed. The share capital is paid up to the extent of 30% and there are no calls-in-
arrears. Transfer to G.R. = 10%
Required:How will you disclose the relevant items in Final Accounts?
SHORT QUESTION REGARDING BALANCE SHEET (EXTRACT) AND STATEMENT OF

PROFIT & LOSS HAVING IMPORTANT POINTS OF TAXATION :
Q-3 The Trial Balance of Simplex Ltd. as at 31st March, 2014 shows the following items:
Dr. Cr.
` `
Provision for Income-tax Account (1.4.2013) 70,000
Advance Payment of Tax Account 1,55,000
You are also given the following information:

1. Advance Payment of Tax Account includes ` 65,000 for 2012-13.
2. Actual tax liability for 2012-13 amounts to ` 68,000 and no effect for the same has so far been given
in accounts.
3. Provision for Income-tax has to be made for 2013-14 for ` 80,000.
4. Profit before tax during the year (2013-14) amounted to ` 4,00,000.
Prepare the various ledger accounts involved and also show how the relevant items will appear in the
balance sheet of the company.

LONG QUESTION REGARDING BALANCE SHEET AND STATEMENT OF PROFIT & LOSS :
Q-4 The following balances have been extracted from the books of Premier Ltd. as on 31st March, 2015 :
Debit ` Credit `
Freehold land 2,50,000 Income from investment 12,000
Building 1,00,000 Provision for bad debts (1.4.2014) 2,000
Furniture 30,000 Creditors 30,000
Debtors 50,000 Provision for depreciation (1.4.2014) :
Stock (31.3.2015) 40,000 Building 5,000
Cash at bank 15,000 Furniture 5,000 10,000
Cash in hand 1,000 Suspense account 2,500
Cost of goods sold 3,00,000 Equity share capital 3,67,500
Salaries and wages 15,000 Preference share capital 80,000
Miscellaneous expenses 8,000 Securities premium 20,000
Investment in shares 2,00,000 Bank overdraft 1,00,000
Interest 3,000 Sales 4,00,000
Bad debts 1,000 Profit & loss A/c. (1.4.2014) 6,500
Repairs and maintenance 1,500
Advance payment of
Income-Tax 16,000 ________
10,30,500 10,30,500
The following further particulars are available:
(i) The land was revalued on 1st January, 2015 at ` 3,50,000 by an expert valuer but no effect given in
the books although the directors have decided to adjust the revalued amount.
(ii) Provision for bad debts is to be adjusted to 5% on the amount of debtors.
(iii) Equity share capital consists of 36,900 equity shares of ` 10 each, out of which 36,400 shares are
fully paid-up, and on 500 shares final call of ` 3 remains unpaid.
(iv) Suspense account represents money received from the new allottee for re-issue of 500 shares
forfeited during the year for non-payment of the final call, but no entry thereof has been passed.
(v) Provision for taxation is to be made at 30% on net profit before tax.
(vi) Market value of investments was ` 1,85,000 on 31st March, 2015.
(vii) The company is managed by the directors who are entitled to a remuneration calculated at 3% of
the annual net profits.
(viii) Depreciation is to be charged on WDV method :
(a) Building @ 2%; and
(b) Furniture @ 10%.
(ix) The land and building of the company are mortgaged in favour of the bank as security for overdraft
sanctioned upto a limit of ` 3,00,000.

(x) Bills receivable for ` 6,500 maturing after 31st March, 2015 had been discounted. You are required
to prepare the profit and loss statement for the year ended on 31st March, 2015 and the balance
sheet as on that date. Ignore previous year’s figures.
 Dividend Declaration Rules, 2014 [out of Free reserves i.e. normally general reserve for academic
purpose] :
In case of insufficient profits company can declare dividend (it means to equity shareholders) from
general reserve (First priority from Profit & Loss a/c & next priority from general reserve) only after
compliance with dividend declaration rules, 2014 which can be discussed as under.
(i) Maximum amount that can be utilized from general reserve.
= 10% of paidup Capital & Balance of general reserve subject to minimum 15% of paid up capital shall
not be utilized for the purpose of dividend distribution (it means such amount shall be kept set
aside). It means that such amount shall not be available for dividend distribution.
Here paid up capital
= paid up equity share capital & paid up preference share capital.
(ii) Maximum rate of dividend (equity) by using general reserve = 10% or Average rate of Dividend
(equity) for last 3 years OR calculated rate of equity dividend, which ever is less.
Here, caclulated rate of dividend [Equity]
= Profit available to Equity share holders x 100

Paid up equity share capital
PRACTICAL QUESTIONS REGARDING DIVIDEND DECLARATION RULES, 2014

Q-5 Due to inadequacy of profit during the year, the company proposes to declare dividend out of the
general reserves. From the following particulars, you are to ascertain the amount that can be drawn
applying the Companies (Declaration of Dividend out of Reserves) Rules, 2014 :
`
(a) 17,500 9% preference shares of ` 100 each fully paid 17,50,000
(b) 7,00,000 equity shares of ` 10 each fully paid 70,00,000
(c) General reserves 21,00,000
(d) Capital reserves on revaluation of assets 3,50,000
(e) Secturities premium 3,50,000
(f) Profit and loss account-credit balance 63,000
(g) Net profit for the year 3,57,000
Average rate of dividend during the last 3 years: 15%.
Q-6 Due to inadequacy of profits during the year ended 31st March, 2015, XYZ Ltd. proposes to declare 10%
dividend out of general reserves. From the following particulars, ascertain the amount that can be
utilized from general reserves, according to the Companies (Declaration of dividend out of Reserves)
Rules, 2014 :

`
17,500 9% Preference shares of `100 each, fully paid up 17,50,000
8,00,000 Equity shares of `10 each, fully paid up 80,00,000
General Reserves as on 1.4.2014 25,00,000
Capital Reserves as on 1.4.2014 3,00,000
Revaluation Reserves as on 1.4.2014 3,50,000
Net profit for the year ended 31st March, 2015 3,00,000
Average rate of dividend during the last three years has been 12%.
MANAGERIAL REMUNERATION :
 PROVISIONS REGARDING MANAGERIAL REMUNERATION IN CASE OF SUFFICIENT PROFIT :
1. As per section 197 of Companies Act, 2013, maximum overall (Total) managerial remuneration (for
concerned financial year) that can be payable by public companies (having sufficient profits) = 11% of
profit calculated as per sec.198 of Companies Act, 2013.
2. Here remuneration term includes remuneration available to managerial persons (Whole Time Director,
Managing Director & Manager) & Part Time Directors (other directors) in the nature of salary, bonus,
commission, perquisites, allowances etc.
3. If public companies having sufficient profits may want to give excess managerial remuneration (i.e.
more than 11%) then prior approval of C.G. shall be required to obtain.
4. Profit u/s 198 can be calculated as under.
Net Profit as per P & L (after all appropriations) 
Add : Disallowable Expenses (for the purpose managerial remuneration) 
Less : Disallowable Incomes (for the purpose managerial remuneration) (xx)
Net Profit u/s 198 of Companies Act, 2013 
OR
Gross Profit during the year 

Add : Allowable incomes (for the purpose managerial remuneration) 
Less : Allowable expenses (for the purpose managerial remuneration) (xx)
Net Profit u/s 198 of Companies Act, 2013 

  Maximum Remuneration payable to Managerial
persons & part time directors (other directors)
 
Managerial P.T.D.S (other Directors)
Persons
 
Only one More than one M.P.s Basis : “Managerial Person”
M.P. in co. in co.  
No “M.P.” “Any” M.P.
in Co. (one or more)
 in co.
  Remuneration 
Rremuneration available Rremuneration available available to Remuneration
to M.P. = to M.P.s = P.T.D.S = available to
Max. 5% of Max. 10% of Max. 3% P.T.D.S. =
profit profit of profit u/s 198 Max. 1%
u/s 198 u/s 198 (overall) of profit
(overall) u/s 198 (overall)
If Public co. wants to give excess remuneration (more than above mentioned percentages) then previous
approval of C.G. shall be required to obtain.
List of Disallowable incomes and expenses for the purpose of calculating profit u/s 198 (it means for the
purpose of caculating managerial remuneration as per Companies Act) (we assume that all elements
are already recorded in P & L) :
1. Profit on sale of Non-depreciable assets
(Like profit on sale of land
= Total profit shall be considered as capital profit
= Disallowable income)
2. Capital profit on sale of depreciable assets (disallowable income)
For ex. - Information regarding sale of machinery
Cost price 1,00,000
Less : Dep. upto sale (60,000)
WDV (Net value / Book value) 40,000
Add : Profit on sale of Machinery 70,000
selling price 1,10,000

Analysis 1 :
(i) S.P. > C.P. (ii) Total profit on
1,10,000 > 1,00,000 sale of machinery i.e. 70,000
Diff.i.e.  
Capital profit = 10,000 10,000 (?) 60,000
(Disallowable income) Capital profit Revenue profit
(Disallowable income) (Allowable income)
Analysis 2 :
(i) Total profit on sale of machinery i.e. 70,000
 
60,000 (?) 10,000
Revenue profit (Depreciation upto sale Capital profit
= due to non cash revenue expense) (disallowable income)
(allowable income)
3. Profit on sale of investment [credited to P & L] & Loss on sale of investment
[charged to P & L]
[Disallowable incomes & disallowable expenses respectively by considering non-trade investment.]
4. Tax provided [charged to P & L]
[Disallowable exp.]
5. Managerial remuneration charged to P & L [Disallowable exp.]
6. Any appropriations [Like interim dividend. As well as any amount tranferred to reserve [other than
if any legal claim] [Disallowable Exp.]
7. Securities premium credited to P & L [Capital income = Disallowable income]
8. Profit on sale of forfeited shares [credited to P & L] [due to capital profit shall be considered as
disallowable income]
9. Intangible assets & fictitious assets write off [charged to P & L] [Disallowable exp.]
10. Special depreication charged to P & L [Disallowable exp.]
11. Ex-gratia payment to an employee [charged to P & L] [Disallowable exp.]
12. Capital Expenditure charged to P & L [Disallowable exp.]
 List of allowable incomes & allowable Exps. for the purpose of calculating profit u/s 198 (it means for
the purpose of calculating managerial remuneration as per Companies Act) (we assume that all elements
are already recorded in P & L].
1. Revenue profit on sale of Fixed Asset [Allowable Income]
2. Loss on sale of Fixed Asset [Allowable Exp].
3. Grant or subsidies received from Government [credited to P & L] [Allowable income]
4. Certain miscellaneous incomes credited to P & L like interest received on investments [by considering
trade investments ) & transfer fees received [Allowable incomes].
5. Depreciation as per Companies Act, 2013 (it means as per schedule II /Sec.123)
[Allowable exp.]

6. Donation charged to P & L (in good faith) [Allowable exp.]
7. Directors fees charged to P & L [by considering that directors’ fees were available to directors as per
professional capacity]. [Allowable exp.]
8. Legal incomes & expenses recorded in P & L [Allowable income & Expenses resp.]
9. Certain expenses charged to P & L like salary & wages expenses [it means available to other employees],
staff welfare expenses, repairs & maintenance expenses, rent & rates expenses, miscellaneous
expenses (general expenses), interest expenses on borrowing (on Long Term & Short Term borrowings
i.e. on secured loans & on unsecured loans) [Allowable expenses]
10. Multiple shift allowance debited to P & L [Allowable expenses]
PRACTICAL QUESTIONS REGARDING MANAGERIAL REMUNERATION :

Q-7 From the following Profit and Loss Account of Swatantra Ltd. for the year ended 31st March, 2015,
calculate the commission payable to the Managing Director and other Directors of the company whose
commission was fixed ® 5% and 2% respectively on the profit of the company before charging their
commission.
` `
Salaries and Wages 20,00,000 Gross Profit 51,00,000
Rent, Rates and Taxes 4,50,000 Bounties and Subsidies
Repairs and Renewals 60,000 received from Govt. 1,00,000
Miscellaneous Expenses 1,40,000 Profit on Sale of Fixed Assets 80,000
Workmen Compensation including Premium on Issue of Shares 20,000
` 10,000 legal compensation 25,000 Profit on Sale of Forfeited Shares 10,000
Interest on Bank Overdraft 40,000
Interest on Debentures 50,000
Directors’ Fees 18,000
Donation 35,000
Depreciation on Fixed Assets 1,00,000
Loss on Sale of Investment 25,000
Reserve for Redemption of
Redeemable Preference Shares 1,50,000
Investment Revaluation Res. 1,00,000
Balancec/d 11,17,000 ________
53,10,000 53,10,000

`
(1) Original cost of the fixed assets sold 1,90,000
Written down value of the fixed assets sold 1,40,000
Sales proceeds of the fixed assets 2,20,000
(2) Donation allowable under the Income Tax Act 25,000
(3) Depreciation allowable under sec.-123 of Companies Act, 2013 80,000
Q-8 Determine the maximum remuneration payable to the part-time directors and manager of B Ltd. (a
manufacturing company) under sections 197 of the Companies Act, 2013 from the following particulars:
Before charging any such remuneration, the Profit and Loss Account showed a credit balance of `
23,10,000 for the year ended 31st March, 2015 after taking into account the following matters:
`
(i) Capital Expenditure 5,25,000
(ii) Subsidy received from Government 4,20,000
(iii) Special Depreciation 70,000
(iv) Multiple shift allowance 1,05,000
(v) Bonus to foreign technicians 3,15,000
(vi) Provision for taxation 28,00,000
(vii) Compensation paid to injured workman 70,000
(viii) Ex-gratia to an employee 35,000
(ix) Loss on sale of fixed assets 70,000
(x) Profit on sale of investment 2,10,000
Q-9 From the following particulars of CANIH Limited, you are required to calculate the managerial
remuneration in the following situation.
(i) There is only one Whole Time Director.
(ii) There are two Whole Time Directors.
(iii) There are two Whole Time Directors, a Part Time Director and a Manager
Net Profit before provision for income-tax and
managerial remuneration `
but after depreciation and provision for repairs 8,70,410
Depreciation provided in the books 3,10,000
Provision for repairs of machinery during the year 25,000
Depreciation allowable under Schedule II of Companies Act, 2013 2,60,000
Actual expenditure incurred on repairs during the year 15,000

 PROVISIONS REGARDING MANAGERIAL REMUNERATION (MAX. YEARLY
REMUNERATION PAYABLE TO MANAGERIAL PERSON) IN CASE OF INADEQUATE
PROFITS OR LOSS : (PART II OF SCHEDULE V) :
(i) In above mentioned situation maximum yearly remuneration payable to managerial person shall be
calculated on the basis of “Effective capital” of company. (As calculated from latest Balance Sheet).
Effective capital = Paid-up share capital (paid up Equity share capital & Preference share capital)
+ All Reserves (other than revaluation Reserve) + Long term borrowings (Like debentures, term loans,
public deposits etc. but short term borrowings likes Bank O.D., cash credit, working capital loans etc. shall
not be added.) - All fictitious assets (like preliminary expense, P & L Dr. balance etc.) - Non-trade
investments (if nature of investments may not be given then investments = Non Trade Investments)
(ii) As per schedule V maximum remuneration payable to managerial person shall be as follows :
Where Effictive capital is : Maximum yearly remuneration
(p.a.) payable to managerial person (`)
Negative or less than 5 crores 60 lakhs
5 crores or more but less than 100 crores 84 lakhs
100 crores or more but less than 250 crores 120 lakhs
250 crores or more 120 lakhs + 0.01% of effective capital in excess
of ` 250 crores.
Provided that the above limit shall be doubled if the resolution passed by the shareholders is a special
resolution.
Practical Question regarding Managerial Remuneration (Max. yearly Remuneration
payable to managerial person) in case of inadequate profits or loss : (Part II of schedule
V) :
Q-10 Kumar Ltd., a non investment company has been incurring losses for the past few years. The company
provides the following information for the current year:
(` in lakhs)
Paid up equity share capital 120
Paid up Preference share capital 20
Reserves (including Revaluation reserve ` 10 lakhs) 150
Securities premium 40
Long term loans 40
Deposits repayable after one year 20
Application money pending allotment 720
Accumulated losses not written off 20
Investments 180
Kumar Ltd. has only one whole-time director, Mr. X. You are required to calculate the amount of maximum
remuneration that can be paid to him as per provisions of Part II of Schedule V, if no special resolution
is passed at the general meeting of the company in respect of payment of remuneration for a period
not exceeding three years.

IMPORTANT POINTS :
1. Regarding Reserves & Surplus note :-
Particulars : `
(i) P & L A/C :-
Opening Balance ( Dr Bal./ Cr. Bal) ( xxx)/xxx
Add: N.P. during the year xxx
( P.A.T Provided but before
appropriations) [ from P/L statement ]
Less: Appropriations
Transfer to G.R. (xxx)
Interim dividend (xxx)
Dividend distribution Tax
(Regarding interim Dividend) (xxx)
xxx
(ii) Genral Reserve
Opening Balance xxx
Add: Transfer from P & L (appropriation) xxx
Less: Transfer to CRR (xxx)
xxx
(iii) Capital Redemption Reserve xxx
(iv) Securities premium :
Opening Balance xxx
Add: Increase due to issue of securities xxx
Less: Redemption premium (xxx)
xxx
Total xxx
Revaluation Reserve, Debenture Redemption Reserve, Capital Reserve etc. shall also be the part of
Reserves & Surplus.
2. Regarding P & L Statement
Particulars `
Profit Before Tax ( Total Revenue- Total expenses) xxx
Less: Tax provided (xxx)
Less: Deficit of previous year’s tax provision/surplus of
previous year’s tax provision (xxx)/xxx
Profit After Tax providend but before appropriations xxx
[Disclose Reserves & Surplus note  P& L a/c  Add ]
3. Deferred Tax Liability (DTL) and deferred text assets (DTA)
DTL and DTA shall be generated due to different treatment of certain element in relation to companies
act and income tax act.
(i) Regarding DTL :
P & L a/c Dr.
To DTL a/c
(ii) Regarding Deferred Tax assets (DTA) :
DTA a/c Dr.
To P & L a/c
 Following items are given in the trial balance of XYZ Ltd. as at 31-3-16. Identify the proper head in view
point of schedule III to the Companies act, 2013.
1. Goods in Transit (Dr.) 2. Closing stock of Finished goods (Dr.)
3. Closing stock of Raw material (Dr.) 4. Audit fees (Dr.)
5. Bank Balance (Dr.) 6. Custom deposit [ for more than 12 months ]

(Dr.)
7. P & L (credit Balance) 8. Salary [before TDS i.e. gross] (Dr.)
9. TDS from salary (Cr.) 10. Interest on debenture ( gross) (Dr.)
11. TDS from Interest on debentures (Cr.) 12. Interest Income (gross) (Cr.)
13. TDS on interest income (Dr.) 14. Torrent power deposit

(for more than 12 months) (Dr.)
15. Bill Receivable (Dr.) 16. Licenses (Dr.)
17. Directors fees (Dr.) 18. Staff welfare expenses (Dr.)
19. Marketing expenses (Dr.) 20. Furniture (Dr.)
21. Premise (Building) (Dr.) 22. RBI Bonds (Dr.)
23. Bad debt reserve (Cr.) 24. Administration expenses (Dr.)
25. Debtors (Dr.) 26. Adverisment Expenses (Dr.)
27. Prepaid income tax for current year (Dr.) 28. Debenture Redemption Reserve (Cr.)
29. Long term investment (Dr.) 30. Bills payable (Cr.)

31. Calls in arrears (Dr.) 32. Share forfeiture (Cr.)
33. Calls in advance (Cr.) 34. Preference share capital (Cr.)
35. Unclaimed dividend (Cr.) 36. Unpaid dividend (Cr.)
37. General Reserves (Cr.) 38. Sales (Cr.)
39. Debentures (Cr.) 40. Term loan from banks

(it means for more than 1 year) (Cr.)
41. Creditors (Cr.) 42. Preliminary expenses (Dr.)
43. Capital Reserve (Cr.) 44. Securities premium (Cr.)
45. Legal expenses (Dr.) 46. Provision for taxation (Cr.)
47. Share in Tata global (Dr.) 48. Rent, Rates and Taxes (Dr.)
(for more than 1 year)
49. IDBI loan ( for more than 12 months) (Cr.) 50. Provident fund (Cr.)
51. Loan from state finanacial corporation (Cr.)
52. Loan from state finanacial corporation (repay within 1 year) (Cr.)
53. Gratuity paid (Dr.) 54. Prepaid insurance (Dr.)
55. Loans to directors (Dr.) 56. Contribution to provident fund (Dr.)
57. Public deposit (Cr.) 58. Capital advance (Dr.)
59. Security deposit (Dr.)

Ans.
1. Goods in Transit (Dr.) Inventories
2. Closing stock of Finished goods (Dr.) Inventories
3. Closing stock of Raw material (Dr.) Inventories
4. Audit fees (Dr.) Other admin. and selling expneses

5. Bank Balance (Dr.) Cash and C.E.
6. Custom deposit [ for more than

12 months ] (Dr.) Long term loans and advances
7. P & L (credit Balance) Reserve and surplus

(op. balance of p&L  +)
8. Salary [before TDS i.e. gross] (Dr.) Employees benefit expense
9. TDS from salary (Cr.) Other current liabilities
10. Interest on debenture ( gross) (Dr.) Finance Cost
11. TDS from Interest on debentures (Cr.) Other current liabilities
12. Interest Income (gross) (Cr.) Other incomes
13. TDS on interest income (Dr.) Short term loans and advances
14. Torrent power deposit

(for more than 12 months) (Dr.) Long term loans and advances
15. Bill Receivable (Dr.) Trade receivables
16. Licenses (Dr.) Intangible assets
17. Directors fees (Dr.) Employees benefit expense
18. Staff welfare expenses (Dr.) Employees benefit expense
19. Marketing expenses (Dr.) Other admin. and selling expneses
20. Furniture (Dr.) Tangible assets

21. Premise (Building) (Dr.) Tangible assets
22. RBI Bonds (Dr.) Non current investments
23. Bad debt reserve (Cr.) Deduct from gross debtors (trade receivables)
24. Administration expenses (Dr.) Other admin. and selling expneses

25. Debtors (Dr.) Trade receivables
26. Adverisment Expenses (Dr.) Other admin. and selling expenses
27. Prepaid income tax for current year (Dr.) Short term loans and advances
28. Debenture Redemption Reserve (Cr.) Reserve and surplus
29. Long term investment (Dr.) Non current investments
30. Bills payable (Cr.) Trade payables
31. Calls in arrears (Dr.) Share capital (deduct)
32. Share forfeiture (Cr.) Share capital (add)
33. Calls in advance (Cr.) Other current liabilities
34. Preference share capital (Cr.) Share capital
35. Unclaimed dividend (Cr.) Other current liabilities
36. Unpaid dividend (Cr.) Other current liabilities
37. General Reserves (Cr.) Reserve and surplus
38. Sales (Cr.) Revenue from operations
39. Debentures (Cr.) Long term borrowings
40. Term loan from banks

(it means for more than 1 year) (Cr.) Long term borrowings
41. Creditors (Cr.) Trade payables
42. Preliminary expenses (Dr.) Preliminary expenses shall be the part of

Other expenses if P & L statement is pending
(Accounting standards - 26, para 56) where
as only balance sheet is pending then
preliminary expenses shall be deducted from
balance of P & L account.
43. Capital Reserve (Cr.) Reserve and surplus

44. Securities premium (Cr.) Reserve and surplus
45. Legal expenses (Dr.) Other admin. and selling expneses
46. Provision for taxation (Cr.) Short term provision
47. Share in Tata global (Dr.) Non current investments

(for more than 1 year)
48. Rent, Rates and Taxes (Dr.) Other admin. and selling expneses
49. IDBI loan ( for more than 12 months) (Cr.) Long term borrowings
50. Provident fund (Cr.) Short term provision
51. Loan from state finanacial corporation (Cr.) Long term borrowings
52. Loan from state finanacial corporation Other current liabilities

(repay within 1 year) (Cr.)
53. Gratuity paid (Dr.) Employees benefit expense
54. Prepaid insurance (Dr.) Short term loans and advances
55. Loans to directors (Dr.) Short term loans and advances
56. Contribution to provident fund (Dr.) Employees benefit expense
57. Public deposit (Cr.) Long term borrowings
58. Capital advance (Dr.) Long term loans and advances
59. Security deposit (Dr.) Long term loans and advances
 How will you give proper effect of following adjustments ?
1. Unrecorded sales return = ` 50,000

Deduct from sales (revenue from operations) and deduct from gross debtors (trade receivables)
2. Provide ` 30,000 for taxation
Deduct from profit before tax (P & L statement) and part of short term provisions (cl. provisions for
taxation a/c)
Journal entry :

P&L Dr. 30,000
To provision for taxation a/c 30,000
3. Dividend declared = ` 10,000 and related DDT = ` 2036
Deduct from balance of P & L a/c and part of other current liability.
a. Journal entry :
P & L appro. a/c Dr. 12036
To dividend payable a/c 10,000
To dividend distribution tax payble a/c 2036
(Being dividend declared)
b. Part of other current liability
DIVIDEND DISTRIBUTION TAX

1. Meaning
(a) The Finance Act, 1997, has introduced Chapter XIID (Sections 115O and 115Q) on “Special Provisions
Relating to Tax on Distributed profits of Domestic Companies” [Hereinafter referred to as ‘DDT’
(Dividend Distribution tax)]. The ICAI has also issued Guidance Note on Accounting for Corporate
Dividend Tax.
(b) The salient features of DDT are as below:
(i) DDT is in addition to the income-tax chargeable in respect of the total income of a domestic
company.
(ii) Dividend and income distribution tax is leviable on gross dividend / income and not on the
net dividend / income distributed to shareholders and unit holders as per Income- tax Act,
1961.
(iii) The dividends chargeable to DDT may be out of the current profits or accumulated profits.
(iv) The rate of DDT is 15% (excluding surcharge of 12% plus secondary and higher education cess
is (2+1) 3%).
(v) DDT should be payable even if no income-tax is payable by the domestic company on its
total income.
(vi) DDT is payable to the credit of the Central Government within 14 days of
(a) declaration of any dividend,
(b) distribution of any dividend, or
(c) payment of any dividend.
whichever is the earliest.
(vii) DDT paid should be treated as the final payment of tax on the dividends and no further credit
therefore should be claimed by the company or by any person in respect of the tax so paid.
(viii) The expression ‘dividend’ should have the same meaning as is given to ‘dividend’ in the
Companies Act.
To make clear the understanding of the concept of grossing for calculation of CDT, an example has been
given as follows:

Example
X Ltd., a domestic company, has distributed on 31st March, 2016, dividend of ` 230 lakh to its shareholders.
Compute the Dividend Distribution tax payable by X Ltd.
Solution
Calculation of corporate dividend tax
Particulars `in lakh
Dividend distributed by X Ltd. 230
Add: Increase for the purpose of grossing up of dividend 40.59
Gross dividend 270.59

Dividend distribution tax @ 15% [15% of ` 270.59 lakh] 40.59
Add: Surcharge@12% 4.88
45.47
Add: Education cess@2% and SHEC@1% 1.36
Dividend Distribution tax 46.83
2. Accounting for DDT
As per AS 4 (Revised), Final dividend declared after the balance sheet date is recognised in the financial
year in which it has been approved by the shareholder, i.e., there is no provision for dividend on the balance
sheet date (to be disclosed by way of note only).
In view of this, DDT on dividend, being directly linked to the amount of the dividend concerned, should also
be reflected in the accounts of the same financial year even though the actual tax liability in respect thereof
may arise in a different year.
3. Disclosure and Presentation of DDT in Financial Statements
- Dividend on shares is an appropriation of profit which is not shown in the Statement of Profit and Loss
as per the Schedule III to the Companies Act, 2013. It is shown as an appropriation or allocation of profit
in the ‘Notes to Accounts’ of the ‘Reserves and Surplus’ item of the Balance sheet.
- Since dividends are appropriation to profits which is not the part of disclosure in the Statement of
Profit and Loss, therefore, a question arises with regard to disclosure and presentation of DDT, as to
whether the said tax should also be disclosed as appropriation or should be disclosed along with the
normal income-tax provision for the year.
- The liability in respect of DDT arises only if the profits are distributed as dividends whereas the normal
income-tax liability arises on the earning of the taxable profits
- Since the DDT liability relates to distribution of profits as dividends which are disclosed as appropriation
/allocation of profit in the ‘Notes to Accounts’ of ‘Reserves and Surplus’, it is appropriate that the
liability in respect of DDT should also be disclosed therein.
- It is felt that such a disclosure would give a proper picture regarding payments involved with reference
to dividends.
- DDT liability should be recognised in the accounts of the same financial year in which the dividend
concerned is recognised.

- DDT liability should be disclosed separately in the ‘Notes to Accounts’ of ‘Reserves and Surplus’, as
follows:
Dividend xxxxx
Dividend Distribution tax thereon xxxxx xxxxx
The accounting treatment for Dividend Distribution tax in the financial statements of a company can be
explained with the help of following example:
On 31st March, 2016 X Ltd. declared dividend amounting to ` 425 lacs for the year 2015-2016. The Dividend
Distribution tax liability (15% of Corporate dividend tax including surcharge @ 12%, Education Cess @ 2%
and SHEC @ 1% i.e. 17.304%) arises as per Income-tax Act,1961. In this case, calculate the grossing-up of
dividend and separately disclose the charge for DDT in the ‘Notes to Accounts’ of ‘Reserves and Surplus’.
Solution
Calculation of grossing-up of dividend:
Particulars `in lacs
Dividend distributed by X CO. 425
75
 15 
Add: Increase for the purpose of grossing up of dividend  × 425
 100 -15 
Gross dividend 500
Dividend distribution tax @ 17.304% 86.52
(An Extract)
- ‘Notes to Accounts’ of ‘Reserves and Surplus’
- for the year ended 31st March, 2016
` (lacs) ` (lacs)
Dividend 425.00
Dividend Distribution tax 86.52 511.52
The Dividend Distribution tax should be disclosed separately under, the head ‘Other Current Liabilities’.
The relevant extracts of the Balance Sheet of X Ltd. can be shown as follows:
Balance Sheet as on 31st March, 2016
‘Other Current Liabilities’ ` (lacs)
Dividend declared 425.000
Declared Distribution tax 86.52

1. Trade payables as per Schedule III will include:

(a) Dues payable in respect to statutory obligation
(b) Interest accrued on trade payables
(c) Bills payables.
2. Securities Premium Account is shown on the liabilities side in the Balance Sheet under the heading:
(a) Reserves and Surplus.
(b) Current Liabilities.
(c) Share Capital.
3. “Fixed assets held for sale” will be classified in the company’s balance sheet as
(a) Current asset
(b) Non-current asset
(c) Capital work- in- progress
4. Receivables arising from the activities being carried out by the company, during the lean period, which
is not in its normal course of business, is considered as:
(a) Other current/non-current assets
(b) Trade receivables
(c) Bills receivables
5. If there is increase in managerial remuneration, exceeding the overall ceiling as given in section 198 of
the Companies Act, then sanction of which authority is required?
(a) Registrar of the company.
(b) Central Government.
(c) Board of Directors of the company.
6. Declaration of dividends for current year is made after providing for
(a) Depreciation of past years only.
(b) Depreciation on assets for the current year and arrears of depreciation of past years (if any).
(c) Depreciation on current year only and by forgoing arrears of depreciation of past years.
7. For companies having profits, the overall maximum limit for managerial remuneration as per Section
198 of the Companies Act, 2013 is
(a) 11% of net profit.
(b) 10% of net profit.
(c) 5% of net profit.

8. For the purpose of managerial remuneration, paid up share capital used for calculation of effective
capital means
(a) Paid up share capital excluding share application money and advances against shares.
(b) Paid up share capital excluding share application money but including advances against shares.
(c) Paid up share capital including both share application money and advances against shares.
9. Which of the following is not a current liability as per Schedule III?
(a) Bank overdraft
(b) Net deferred tax liability
(c) Dividend declared.
10. As per the Schedule III, separate disclosure is required for an item of income or expenditure which
exceeds:
(a) % of Revenue from operations or `1,00,000 whichever is lower
(b) 1% of Revenue or `5,000
(c) 1% of Revenue from operations or `1,00,000 whichever is higher.

HOME WORK
LONG QUESTIONS
Q-11 On 31st March, 2015 Bose and Sen Ltd. provides to you the following ledger balances after preparing its
Profit and Loss Account for the year ended 31st March, 2015 :
Credit Balances : `
Equity shares capital, fully paid shares of ` 10 each 70,00,000
Loan from State Finance Corporation 10,50,000
Secured by hypothecation of Plant & Machinery
(Repayable within one year ` 2,00,000)
Loans: Unsecured (Long term) 8,47,000
Sundry Creditors for goods & expenses
(Payable within 6 months) 14,00,000
Profit & Loss Account 7,00,000
1,33,63,000
Debit Balances : `
Calls in arrear 7,000
Land 14,00,000
Buildings 20,50,000
Plant and Machinery 36,75,000
Furniture & Fixture 3,50,000
Stocks : Finished goods 14,00,000
Raw Materials 3,50,000
Sundry Debtors 14,00,000
Advances: Short-term 2,98,900
Cash in hand 2,10,000
Balances with banks 17,29,000
Patents & Trade marks 4,00,000
1,33,63,000
The following additional information is also provided :

(i) 4,20,000 fully paid equity shares were allotted as consideration for land & buildings.
(ii) Cost of Building ` 28,00,000
Cost of Plant & Machinery ` 49,00,000
Cost of Furniture & Fixture ` 4,37,500
(iii) Sundry Debtors for ` 3,80,000 are due for more than 6 months.
(iv) The amount of Balances with Bank includes ` 18,000 with a bank which is not a scheduled Bank and
the deposits of ` 5 lakhs are for a period of 9 months.
(v) Unsecured loan includes ` 2,00,000 from a Bank and ` 1,00,000 from related parties.
You are not required to give previous year figures. You are required to prepare the Balance Sheet of the
Company as on 31st March, 2015 as required under Schedule III of the Companies Act, 2013.
(Ans. : Balance sheet Total 13262900)
Q-12 From the following particulars furnished by Pioneer Ltd., prepare the Balance Sheet as at 31st March,
2015 as required by Schedule III of the Companies Act. Give notes at the foot of the Balance Sheet as
may be found necessary -
Debit Credit
` `
Equity Capital (Face value of `100) 10,00,000
Calls in Arrears 1,000
Land 2,00,000
Building 3,50,000
Furniture 50,000
Loan from State Financial Corporation 1,50,000
Inventory :
Finished Goods 2,00,000
Raw Materials 50,000 2,50,000
Provision for Taxation 68,000
Trade receivables 2,00,000
Advances 42,700
Dividend Payable 60,000
Profit and Loss Account 86,700
Cash Balance 30,000
Loans (Unsecured) 1,21,000
Trade payables (For Goods and Expenses) 2,00,000
18,95,700 18,95,700

The following additional information is also provided :
(1) 2,000 equity shares were issued for consideration other than cash.
(2) Trade receivables of `52,000 are due for more than six months.
(3) The cost of assets:
Building `4,00,000
Plant and Machinery `7,00,000
Furniture `62,500
(4) The balance of `1,50,000 in the loan account with State Finance Corporation is inclusive of `7,500 for
interest accrued but not due. The loan is secured by hypothecation of the Plant and Machinery.
(5) Balance at Bank includes `2,000 with Perfect Bank Ltd., which is not a Scheduled Bank.
(6) The company had contract for the erection of machinery at `1,50,000 which is still incomplete.
(Ans. : Balance Sheet Total 18,94,700)
Q-13 From the following particulars furnished by Alpha Ltd., prepare the Balance Sheet as on 31st March 2017
as required by Part I, Schedule III of the Companies Act, 2013.
Particulars Debit ` Credit `
Equity Share Capital (Face value of ` 100 each) 50,00,000
Call in Arrears 5,000
Land & Building 27,50,000
Furniture 2,50,000
Loan from State Financial Corporation 7,50,000
Inventory:
Raw Materials 2,50,000
Finished Goods 10,00,000 12,50,000
Short term Advances 2,13,500
Profit & Loss Account 4,33,500
Cash in Hand 1,50,000
Unsecured Loan 6,05,000
Trade payables (for Goods and Expenses) 8,00,000
Loans & advances from related parties 2,00,000
The following additional information is also provided:
(i) 10,000 Equity shares were issued for consideration other than cash.
(ii) Trade receivables of ` 2,60,000 are due for more than 6 months.
(iii) The cost of the Assets were:
Building ` 30,00,000, Plant & Machinery ` 35,00,000 and Furniture ` 3,12,500

(iv) The balance of ` 7,50,000 in the Loan Account with State Finance Corporation is inclusive of `
37,500 for Interest Accrued but not Due. The loan is secured by hypothecation of Plant & Machinery.
(v) Balance at Bank includes ` 10,000 with Omega Bank Ltd., which is not a Scheduled Bank.
(vi) Transfer ` 20,000 to general reserve is proposed by Board of directors.
(vii) Board of directors has declared dividend of 5% on the paid up capital.
(Ans. : (a) Balance Sheet Total 94,73,500
(b)
Calculation of grossing-up of dividend
Particulars `
Dividend distributed by Alpha Ltd. (5% of 49,95,000) 2,49,750
Add: Increase for the purpose of grossing up of dividend
 15 
 100 -15 × 2,49,750 
 
Gross dividend 2,93,824
Dividend distribution tax @ 17.304% 50,843 )
Q-14 The following is the Trial Balance of Omega Limited as on 31.3.2017:
(Figures in `000)
Debit Credit
Land at cost 220 Equity Capital (Shares of ` 10 each) 300
Plant & Machinery at cost 770 10% Debentures 200
Trade Receivables 96 General Reserve 130
Inventories (31.3.17) 86 Profit & Loss A/c 72
Bank 20 Securities Premium 40
Adjusted Purchases 320 Sales 700
Factory Expenses 60 Trade Payables 52
Administration Expenses 30 Provision for Depreciation 172
Selling Expenses 30 Suspense Account 4
Debenture Interest 20
Interim Dividend Paid 18
1670 1670
Additional Information:
(i) The authorised share capital of the company is 40,000 shares of ` 10 each.
(ii) The company on the advice of independent valuer wish to revalue the land at ` 3,60,000.
(iii) Declared final dividend @ 10%.
(iv) Suspense account of ` 4,000 represents cash received for the sale of some of the machinery on
1.4.2016. The cost of the machinery was ` 10,000 and the accumulated depreciation thereon being
` 8,000.
(v) Depreciation is to be provided on plant and machinery at 10% on cost.
You are required to prepare Omega Limited’s Balance Sheet as on 31.3.2017 and Statement of Profit and
Loss with notes to accounts for the year ended 31.3.2017 as per Schedule III. Ignore previous years’ figures
& taxation.
(Ans. : Balance Sheet Total = 1082 ` in thousand; Profit from Profit & Loss Statement = 166 ` in thousand)

Q-15 You are required to prepare Balance sheet and statement of Profit and Loss from the following trial
balance of Haria Chemicals Ltd. for the year ended 31st March, 2017.
Haria Chemicals Ltd.
Trial Balance as at 31st March, 2017
Particulars ` Particulars `
Inventory 6,80,000 Equity Shares
Furniture 2,00,000 Capital (Shares of `10 each) 25,00,000
Discount 40,000 11% Debentures 5,00,000
Loan to Directors 80,000 Bank loans 6,45,000
Advertisement 20,000 Trade payables 2,81,000
Bad debts 35,000 Sales 42,68,000
Commission 1,20,000 Rent received 46,000
Purchases 23,19,000 Transfer fees 10,000
Plant and Machinery 8,60,000 Profit & Loss account 1,39,000
Rentals 25,000 Depreciation provision:
Current account 45,000 Machinery 1,46,000
Cash 8,000
Interest on bank loans 1,16,000
Preliminary expenses 10,000
Fixtures 3,00,000
Wages 9,00,000
Consumables 84,000
Freehold land 15,46,000
Tools & Equipments 2,45,000
Goodwill 2,65,000
Dealer aids 21,000
Transit insurance 30,000
Trade expenses 37,000
Distribution freight 54,000
Debenture interest 55,000 _______
85,35,000 85,35,000
Additional information: Closing Inventory on 31-3-2017 : `8,23,000.
(Ans. : Balance Sheet Total = 46,66,000; Profit from Profit & Loss Statement = 6,01,000)
Q-16 You are required to prepare a Statement of Profit and Loss and Balance Sheet from the following Trial
Balance extracted from the books of the International Hotels Ltd., on 31st March, 2017:

Dr. Cr.
` `
Authorised Capital-divided into 5,000 6%
Preference Shares of `100 each and 10,000
equity Shares of `100 each 15,00,000
Subscribed Capital -
5,000 6% Preference Shares of `100 each 5,00,000
Equity Capital 8,05,000
Purchases - Wines, Cigarettes, Cigars, etc. 45,800
- Foodstuffs 36,200
Wages and Salaries 28,300
Rent, Rates and Taxes 8,900
Laundry 750
Sales - Wines, Cigarettes, Cigars, etc. 68,400
- Food 57,600
Coal and Firewood 3,290
Carriage and Cooliage 810
Sundry Expenses 5,840
Advertising 8,360
Repairs 4,250
Rent of Rooms 48,000
Billiard 5,700
Miscellaneous Receipts 2,800
Discount received 3,300
Transfer fees 700
Freehold Land and Building 8,50,000
Furniture and Fittings 86,300
Inventory on hand, 1st April, 2016
Wines, Cigarettes. Cigars, etc. 12,800
Foodstuffs 5,260
Cash in hand 2,200
Cash with Bankers 76,380
Preliminary and formation expenses 8,000
2,000 Debentures of `100 each (6%) 2,00,000
Profit and Loss Account 41,500
Trade payables 42,000
Trade receivables 19,260
Investments 2,72,300
Goodwill at cost 5,00,000
19,75,000 19,75,000
Wages and Salaries Outstanding 1,280
Inventory on 31st March, 2017
Wines, Cigarettes and Cigars, etc. 22,500
Foodstuffs 16,400

Depreciation : Furniture and Fittings @ 5% p.a. : Land and Building @ 2% p.a.
The Equity capital on 1st April, 2016 stood at `7,20,000, that is 6,000 shares fully paid and 2,000 shares `
60 paid. The directors made a call of `40 per share on 1st October 2016. A shareholder could not pay the
call on 100 shares and his shares were then forfeited and reissued @ `90 per share as fully paid. The
Directors declare a dividend of 8% on equity shares, transferring any amount that may be required
from General Reserve. Ignore Taxation.
(Ans. : Balance Sheet Total = 18,24,025; Profit from Profit & Loss Statement =22,245)
Q-17 Ring Ltd. was registered with a nominal capital of ` 10,00,000 divided into shares of ` 100 each. The
following Trial Balance is extracted from the books on 31st March, 2017 :
Buildings 5,80,000 Sales 10,40,000
Machinery 2,00,000 Outstanding Expenses 4,000
Closing Stock 1,80,000 Provision for Doubtful Debts 6,000
Loose Tools 46,000 (1-4-2016)
Purchases (Adjusted) 4,20,000 Equity Share Capital 4,00,000
Salaries 1,20,000 General Reserve 80,000
Directors’ Fees 20,000 Profit and Loss A/c 50,000
Rent 52,000 (1-4-2016)
Depreciation 40,000 Creditors 1,84,000
Bad Debts 12,000 Provision for depreciation:
Investment 2,40,000 On Building 1,00,000
Interest accrued on investment 4,000 On Machinery 1,10,000 2,10,000
Debenture Interest 56,000 14% Debentures 4,00,000
Advance Tax 1,20,000 Interest on Debentures 28,000
Sundry expenses 36,000 accrued but not due
Debtors 2,50,000 Interest on Investments 24,000
Bank 60,000 Unclaimed dividend 10,000
24,36,000 24,36,000
st
You are required to prepare statement of Profit and Loss for the year ending 31 March, 2017 and
Balance sheet as at that date after taking into consideration the following information:
(a) Closing stock is more than opening stock by ` 1,60,000;
(b) Provide to doubtful debts @ 4% on Debtors
(c) Make a provision for income tax @30%.
(d) Depreciation expense included depreciation of ` 16,000 on Building and that of ` 24,000 on
Machinery.
(e) The directors declared a dividend @ 25% and transfer to General Reserve @ 10%
(f) Bills Discounted but not yet matured ` 20,000.

(Ans. : (a) Balance Sheet Total = 14,60,000; Profit from Profit & Loss Statement =2,12,800
(b) Calculation of Dividend distribution tax
Particulars `
(i) Grossing-up of dividend
Dividend distributed by Ring Ltd. 25% of 4,00,000 1,00,000
Add: Increase for the purpose of grossing up of dividend 17,647
[1,00,000 x (15/(100-15)]
Gross dividend 1,17,647
(ii) Dividend distribution tax @ 17.304% of `1,17,647 20,358 )
FEW OTHER QUESTIONS FOR CONCEPTUAL CLARITY
Q-18 State under which head these accounts should be classified in Balance Sheet, as per Schedule III of the
Companies Act, 2013:
(i) Share application money received in excess of issued share capital.
(ii) Share option outstanding account.
(iii) Unpaid matured debenture and interest accrued thereon.
(iv) Uncalled liability on shares and other partly paid investments.
(v) Calls unpaid.
(vi) Intangible Assets under development.
(vii) Money received against share warrant.
(Ans. :
(i) Current Liabilities/ Other Current Liabilities
(ii) Shareholders’ Fund / Reserve & Surplus
(iii) Current liabilities/Other Current Liabilities
(iv) Contingent Liabilities and Commitments
(v) Shareholders’ Fund / Share Capital
(vi) Fixed Assets
(vii) Shareholders’ Fund / Money received against share warrants )
Q-19 In the financial statements of the financial year 2014-2015, Alpha Ltd. has mentioned in the notes to
accounts that during financial year, 24,000 equity shares of ` 10 each were issued as fully paid bonus
shares. However, the source from which these bonus shares were issued has not been disclosed. Is
such non-disclosure a violation of the Schedule III to the Companies Act? Comment.
(Ans. : As per Part I of the Schedule III, a company should, disclose in notes to accounts for the period of
5 years the aggregate number and class of shares allotted as fully paid-up bonus shares. Schedule
III does not require a company to disclose the source from which bonus shares have been issued.
Therefore, non-disclosure of source from which bonus shares have been issued does not violate
the Schedule III to the Companies Act.)

Q-20 The management of Loyal Ltd. contends that the work in process is not valued since it is difficult to
ascertain the same in view of the multiple processes involved. They opine that the value of opening
and closing work in process would be more or less the same. Accordingly, the management had not
separately disclosed work in process in its financial statements. Comment in line with Schedule III.
(Ans. : Schedule III to the companies Act does not require that the amounts of WIP at the beginning and at
the end of the accounting period to be disclosed in the statement of profit and loss. Only changes
in inventories of WIP need to be disclosed in the statement of profit and loss. Non-disclosure of
such change in the statement of profit and loss by the company may not amount to violation of
Schedule III if the differences between opening and closing WIP are not material. )
Q-21 Futura Ltd. had the following items under the head “Reserves and Surplus” in the Balance Sheet as on
31st March, 2015:
Amount ` in lakhs
Securities Premium Account 80
Capital Reserve 60
General Reserve 90
The company had an accumulated loss of ` 250 lakhs on the same date, which it has disclosed
under the head “Statement of Profit and Loss” as asset in its Balance Sheet. Comment on
accuracy of this treatment in line with Schedule III to the Companies Act, 2013.
(Ans. : Part I of Schedule III to the Companies Act, 2013 provides that debit balance of Statement of Profit
and Loss (after all allocations and appropriations) should be shown as a negative figure under the
head ‘Surplus’. Similarly, the balance of ‘Reserves and Surplus’, after adjusting negative balance of
surplus, should be shown under the head ‘Reserves and Surplus’ even if the resulting figure is in
the negative. In this case, the debit balance of profit and loss i.e. ` 250 lakhs exceeds the total of
all the reserves i.e. ` 230 lakhs. Therefore, balance of ‘Reserves and Surplus’ after adjusting debit
balance of profit and loss is negative by ` 20 lakhs, which should be disclosed on the face of the
balance sheet. Thus the treatment done by the company is incorrect.)
Q-22 Sumedha Ltd. took a loan from bank for ` 10,00,000 to be settled within 5 years in 10 equal half yearly
instalments with interest. First instalment is due on 30.09.2015 of ` 1,00,000. Determine how the loan
will be classified in preparation of Financial Statements of Sumedha Ltd. for the year ended 31st March,
2015 according to Schedule III.
(Ans. : As per Schedule III, a liability should be classified as current when it satisfies any of the following
criteria:
(i) it is expected to be settled in the company’s normal operating cycle;
(ii) it is held primarily for the purpose of being traded;
(iii) it is due to be settled within twelve months after the reporting date; or
(iv) the company does not have an unconditional right to defer settlement of the liability for at least
twelve months after the reporting date.
In the given case, instalments due on 30.09.2015 and 31.03.2016 will be shown under the head
‘other current liabilities’ as per criteria (c).
Therefore, in the balance sheet as on 31.3.2015, ` 8,00,000 (`1,00,000 x 8 instalments) will be
shown under the heading ‘Long term Borrowings’ and ` 2,00,000 (` 1,00,000 x 2 instalments) will
be shown under the heading ‘Other Current Liabilities’ as current maturities of loan from bank.)

SHORT QUESTIONS REGARDING MANAGERIAL REMUNERATION
Q-23 The following is the Draft Profit & Loss A/c of Mudra Ltd., the year ended 31st March, 2015 :
` `
To Administrative, Selling and By Balance b/d 5,72,350
distribution expenses 8,22,542 “ Balance from Trading A/c 40,25,365
“ Subsidies received from Govt. 2,73,925
” Directors fees 1,34,780
” Interest on debentures 31,240
” Managerial remuneration 2,85,350
” Depreciation on fixed assets 5,22,543
” Provision for Taxation 12,42,500
” General Reserve 4,00,000
” Investment Revaluation Reserve 12,500
” Balance c/d 14,20,185
48,71,640 48,71,640
Depreciation on fixed assets as per Schedule II of the Companies Act, 2013 was `5,75,345. You are
required to calculate the maximum limits of the managerial remuneration as per Companies Act, 2013.
(Ans. : Maximum Managerial remuneration under Companies Act, 2013 = 11% of `27,35,383 = ` 3,00,892. )S
Q-24 The following extract of Balance Sheet of X Ltd. was obtained:
Balance Sheet (Extract) as on 31st March, 2015
Liabilities `
Authorised capital:
20,000, 14% preference shares of ` 100 20,00,000
2,00,000 Equity shares of ` 100 each 2,00,00,000
2,20,00,000
Issued and subscribed capital:
15,000, 14% preference shares of ` 100 each fully paid 15,00,000
1,20,000 Equity shares of ` 100 each, ` 80 paid-up 96,00,000
Share suspense account 20,00,000
Reserves and surplus
Capital reserves (` 1,50,000 is revaluation reserve) 1,95,000
Securities premium 50,000
Secured loans:
15% Debentures 65,00,000
Unsecured loans:
Public deposits 3,70,000
Cash credit loan from SBI 4,65,000
Current Liabilities:
Sundry creditors 3,45,000
Assets:
Investment in shares, debentures, etc. 75,00,000
Profit and Loss account 15,25,000

Share suspense account represents application money received on shares, the allotment of which is
not yet made.
X Ltd. has been sustaining loss for the last few years. X Ltd. has only one whole-time director.
Find out how much remuneration X Ltd. can pay to its managerial person as per the provisions
of Schedule V. Would your answer differ if X Ltd. is an investment company?
(Ans. :
Where X Ltd. is Where X Ltd.
a non-investment is an investment
company company
` `
Effective capital 90,40,000 1,65,40,000
Yearly remuneration shall not exceed 60,00,000 60,00,000)
Q-25 The following extract of Balance Sheet of Star Ltd. (Non-investment) company was obtained:
Balance Sheet (Extract) as on 31st March, 2017
Liabilities `
Authorised capital:
60,000, 14% preference shares of `100 60,00,000
6,00,000 Equity shares of `100 each 6,00,00,000
6,60,00,000
Issued and subscribed capital:
45,000, 14% preference shares of `100 each fully paid 45,00,000
3,60,000 Equity shares of `100 each, `80 paid-up 2,88,00,000
Share suspense account 60,00,000
Reserves and surplus:
Capital reserves (` 4,50,000 is revaluation reserve) 5,85,000
Securities premium 1,50,000
Secured loans:
15% Debentures 1,95,00,000
Unsecured loans:
Public deposits 11,10,000
Cash credit loan from SBI (short term) 3,95,000
Trade Payables 10,35,000
Assets:
Investment in shares, debentures, etc. 2,25,00,000
Profit and Loss account (Dr. balance) 45,75,000
Share suspense account represents application money received on shares, the allotment of which is
not yet made.
You are required to compute effective capital as per the provisions of Schedule V. Would your answer
differ if Star Ltd. is an investment company ?
(Ans. :
Where Star Ltd. Where Star Ltd.
is a non-investment is an investment
company company
` `
Effective capital 2,71,20,000 4,96,20,000 )

UNIT-2
CASH FLOW STATEMENT [AS-3]
INTRODUCTION
CASH FLOW STATEMENT (AS 3)
This Standard is mandatory for the enterprises, which fall in the category of level I, at the end of the relevant
accounting period. For all other enterprises though it is not compulsory but it is encouraged to prepare such
statements. Where an enterprise was not covered by this statement during the previous year but qualifies
in the current accounting year, they are not supposed to disclose the figures for the corresponding previous
years. Whereas, if an enterprises qualifies under this statement to prepare the cash flow statements during
the previous year but now disqualified, will continue to prepare cash flow statements for another two
consecutive years.
THEORY AND CONCEPTWISE PRACTICALS
THEORY
(A) Objective
Cash flow Statement (CFS) is an additional information provided to the users of accounts in the form of an
statement, which reflects the various sources from where cash was generated (inflow of cash) by an
enterprise during the relevant accounting year and how these inflows were utilised (outflow of cash) by
the enterprise. This helps the users of accounts :
• To identify the historical changes in the flow of cash & cash equivalents.
• To determine the future requirement of cash & cash equivalents.
• To assess the ability to generate cash & cash equivalents.
• To estimate the further requirement of generating cash & cash equivalents.
• To compare the operational efficiency of different enterprises.
• To study the insolvency and liquidity position of an enterprise.
• As an indicator of amount, timing and certainty of future cash flows.
• To check the accuracy of past assessments of future cash flows
• In examining the relationship between profitability and net cash flow and the impact of changing
prices.

(B) Meaning of the term cash and cash equivalents for cash flow statements
Cash and cash equivalents for the purpose of cash flow statement consists of the following:
(a) Cash in hand and deposits repayable on demand with any bank or other financial institutions and
(b) Cash equivalents, which are short term, highly liquid investments that are readily convertible
into known amounts of cash and are subject to insignificant risk or change in value. A short-term
investment is one, which is due for maturity within three months from the date of acquisition.
Investments in shares are not normally taken as cash equivalent, because of uncertainties
associated with them as to realisable value.
Note :For the purpose of cash flow statement, ‘cash and cash equivalent’ consists of at least three
balance sheet items, viz. cash in hand; demand deposits with banks etc. and investments regarded as
cash equivalents. For this reason, the AS 3 requires enterprises to give a break-up of opening and
closing cash shown in their cash flow statements. This is presented as a note to cash flow statement.
Example : Ruby Exports had a bank balance of USD 25,000, stated in books at ` 16,76,250 using the rate of
exchange ` 67.05 per USD prevailing on the date of receipt of dollars.
However, on the balance sheet date, the closing rate of exchange was ` 67.80 and the bank balance had to
be restated at `16,95,000.
Comment on the effect of change in bank balance due to exchange rate fluctuation and also discuss how it
will be disclosed in Cash Flow Statement of Ruby Exports with reference to AS -3.
ANS. : Cash flow statement consists of:(a) Cash in hand and deposits repayable on demand with any bank or
other financial institutions and (b) Cash equivalegnts, which are short term, highly liquid investments that
are read ily convertible into known amounts of cash and are subject to insignificant risk or change in value.
Cash flows are inflows (i.e. receipts) and outflows (i.e. payments) of cash and cash equivalents. Any
transaction, which does not result in cash flow, sho uld not be reported in the cash flow statement.
Movements within cash or cash equivalents are not cash flows because they do not change cash as defined
by AS 3 “Cash Flow Statements” which is sum of cash, bank and cash equivalents.
In the given case, due t o increase in rate of foreign exchange by 75 paise, there is increase (change) in bank
balance. This increase of ` 18,750 (25,000 x 0.75) is not a cash flow because neither there is any cash inflow
nor there is any cash outflow. Therefore, this change in bank balance amounting ` 18,750 need not be
disclosed in Cash Flow Statement of Ruby exports.
The net increase/decrease in Cash/Cash equivalents in the Cash Flow Statements are stated exclusive of
exchange gains and losses. The resultant difference betwee n Cash and Cash Equivalents as per the Cash
flow statement and that recognized in the balance sheet is reconciled in the note on cash flow statements.
(C) Meaning of the term cash flow
Cash flows are inflows (i.e. receipts) and outflows (i.e. payments) of cash and cash equivalents. Any
transaction, which does not result in cash flow, should not be reported in the cash flow statement.
Movements within cash or cash equivalents are not cash flows because they do not change cash as
defined by AS 3, which is sum of cash, bank and cash equivalents. For example, acquisitions of cash
equivalent investments or cash deposited into bank are not cash flows.
It is important to note that a change in cash does not necessarily imply cash flow. For example suppose
an enterprise has a bank balance of USD 10,000, stated in books at `4,90,000 using the rate of exchange
`49/USD prevailing on date of receipt of dollars. If the closing rate of exchange is `50/USD, the bank
balance will be restated at `5,00,000 on the balance sheet date. The increase is however not a cash flow
because neither there is any cash inflow nor there is any cash outflow.

(D) Types of cash flow
Cash flows for an enterprise occur in various ways, e.g. through operating income or expenses, by
borrowing or repayment of borrowing or by acquisition or disposal of fixed assets. The implication of
each type of cash flow is clearly different. Cash received on disposal of a useful fixed asset is likely to
have adverse effect on future performance of the enterprise and it is completely different from cash
received through operating income or cash received through borrowing. It may also be noted that
implications of each cash flow types are interrelated. For example, borrowed cash used for meeting
operating expenses is not same as borrowed cash used for acquisition of useful fixed assets.
For the aforesaid reasons, the standard identifies three types of cash flows, i.e. operating cash flows,
investing cash flows and financing cash flows. Separate presentation of each type of cash flow in the
cash flow statement improves usefulness of cash flow information.
The operating cash flows are cash flows generated by operating activities or by other activities that are
not investing or financing activities. Operating activities are the principal revenue-producing activities
of the enterprise. Examples include, cash purchase and sale of goods, collections from customers for
goods, payment to suppliers of goods, payment of salaries, wages etc.
The investing cash flows are cash flows generated by investing activities. The investing activities are
the acquisition and disposal of long-term assets and other investments not included in cash equivalents.
The examples of investing cash flows include cash flow arising from investing activities include: (a)
receipts from disposals of fixed assets; (b) loan given to / recovered from other entities (other than
loans by financial enterprises) (c) payments to acquire fixed assets (d) Interests and dividends earned
(other than interests and dividends earned by financial institutions).
The financing cash flows are cash flows generated by financing activities. Financing activities are
activities that result in changes in the size and composition of the owners’ capital (including preferences
share capital in the case of company) and borrowings of the enterprise. Examples include issue of
shares / debentures, redemption of debentures / preference shares, payment of dividends and payment
of interests (other than interests paid by financial institutions).
Cash flow type depends on the business of the enterprise and other factors. For example, since principal
business of financial enterprises consists of borrowing, lending and investing, loans given and interests
earned are operating cash flows for financial enterprises and investing cash flows for other enterprises.
A few typical cases are discussed below.
Loans/Advances given and Interests earned
(a) Loans and advances given and interests earned on them in the ordinary course of business are
operating cash flows for financial enterprises.
(b) Loans and advances given and interests earned on them are investing cash flows for non-financial
enterprises.

(c) Loans and advances given to subsidiaries and interests earned on them are investing cash flows
for all enterprises.
(d) Loans and advances given to employees and interests earned on them are operating cash flows
for all enterprises.
(e) Advance payments to suppliers and interests earned on them are operating cash flows for all
enterprises.
(f) Interests earned from customers for late payments are operating cash flows for non-financial
enterprises.
Loans/Advances taken and interests paid
(a) Loans and advances taken and interests paid on them in the ordinary course of business are operating
cash flows for financial enterprises.
(b) Loans and advances taken and interests paid on them are financing cash flows for non-financial
enterprises.
(c) Loans and advances taken from subsidiaries and interests paid on them are financing cash flows for all
enterprises.
(d) Advance taken from customers and interests paid on them are operating cash flows for non-financial
enterprises.
(e) Interests paid to suppliers for late payments are operating cash flows for all enterprises.
(f) Interests taken as part of inventory costs in accordance with AS 16 are operating cash flows.
Investments made and dividends earned
(a) Investments made and dividends earned on them in the ordinary course of business are operating cash
flows for financial enterprises.
(b) Investments made and dividends earned on them are investing cash flows for non-financial enterprises.
(c) Investments in subsidiaries and dividends earned on them are investing cash flows for all enterprises.
Dividends Paid
Dividends paid are financing cash outflows for all enterprises.
Interest and Dividends
Cash flows from interest and dividends received and paid should each be disclosed separately. Cash
flows arising from interest paid and interest and dividends received in the case of a financial enterprise
should be classified as cash flows arising from operating activities. In the case of other enterprises, cash
flows arising from interest paid should be classified as cash flows from financing activities while interest
and dividends received should be classified as cash flows from investing activities. Dividends paid should
be classified as cash flows from financing activities.
Income Tax
(a) Tax paid on operating income is operating cash outflows for all enterprises
(b) Tax deducted at source against income are operating cash outflows if concerned incomes are
operating incomes and investing cash outflows if the concerned incomes are investment incomes,
e.g. interest earned.
(c) Tax deducted at source against expenses are operating cash inflows if concerned expenses are
operating expenses and financing cash inflows if the concerned expenses are financing expenses,
e.g. interests paid.

Insurance claims received
(a) Insurance claims received against loss of stock or loss of profits are extraordinary operating cash
inflows for all enterprises.
(b) Insurance claims received against loss of fixed assets are extraordinary investing cash inflows for
all enterprises.
AS 3 requires separate disclosure of extraordinary cash flows, classifying them as cash flows from operating,
investing or financing activities, as may be appropriate.
(E) Reporting Cash Flows from Operating Activities
Net cash flow from operating activities can be reported either as direct method or as indirect method.
In ‘Direct method’ we take the gross receipts from sales, trade receivables and other operating inflows
subtracted by gross payments for purchases, creditors and other expenses ignoring all non-cash items
like depreciation, provisions. In ‘Indirect method’ we start from the net profit or loss figure, eliminate
the effect of any non-cash items, investing items and financing items from such profit figure i.e. all such
expenses like depreciation, provisions, interest paid, loss on sale of assets etc. are added and interest
received etc. are deducted. Adjustment for changes in working capital items are also made ignoring cash
and cash equivalent to reach to the figure of net cash flow.
(F) Profit or loss on disposal of fixed assets
Profit or loss on sale of fixed asset is not operating cash flow. The entire proceeds of such transactions
should be taken as cash inflow from investing activity.
(G) Fundamental techniques of cash flow preparation
A cash flow statement is a summary of cash receipts and payments of an enterprise during an accounting
period. Any attempt to compile such a summary from cashbooks is impractical due to the large volume
of transactions. Fortunately, it is possible to compile such a summary by comparing financial statements
at the beginning and at the end of accounting period.
(H) Reporting Cash Flows on Net Basis
AS 3 forbids netting of receipts and payments from investing and financing activities.
Thus, cash paid on purchase of fixed assets should not be shown net of cash realised from sale of fixed
assets. For example, if an enterprise pays ` 50,000 in acquisition of machinery and realises ` 10,000 on
disposal of furniture, it is not right to show net cash outflow of ` 40,000. The exceptions to this rule are
stated below.
Cash flows from the following operating, investing or financing activities may be reported on a net basis.
(a) Cash receipts and payments on behalf of customers, e.g. cash received and paid by a bank against
acceptances and repayment of demand deposits.
(b) Cash receipts and payments for items in which the turnover is quick, the amounts are large and
the maturities are short, e.g. purchase and sale of investments by an investment company.
AS 3 permits financial enterprises to report cash flows on a net basis in the following three circumstances.
(a) Cash flows on acceptance and repayment of fixed deposits with a fixed maturity date
(b) Cash flows on placement and withdrawal deposits from other financial enterprises
(c) Cash flows on advances/loans given to customers and repayments received therefrom.
(I) Non-Cash transactions
Investing and financing transactions that do not require the use of cash or cash equivalents, e.g. issue
of bonus shares, should be excluded from a cash flow statement.

Such transactions should be disclosed elsewhere in the financial statements in a way that provides all
the relevant information about these investing and financing activities.
Business Purchase
The aggregate cash flows arising from acquisitions and disposals of subsidiaries or other business units
should be presented separately and classified as cash flow from investing activities.
(a) The cash flows from disposal and acquisition should not be netted off.
(b) An enterprise should disclose, in aggregate, in respect of both acquisition and disposal of
subsidiaries or other business units during the period each of the following:
(i) The total purchase or disposal consideration; and
(ii) The portion of the purchase or disposal consideration discharged by means of cash and cash
equivalents.
(J) Treatment of current assets and liabilities taken over on business purchase
Business purchase is not operating activity. Thus, while taking the differences between closing and
opening current assets and liabilities for computation of operating cash flows, the closing balances
should be reduced by the values of current assets and liabilities taken over. This ensures that the
differences reflect the increases/decreases in current assets and liabilities due to operating activities
only.
(K) Exchange gains and losses
The foreign currency monetary assets (e.g. balance with bank, debtors etc.) and liabilities (e.g. creditors)
are initially recognised by translating them into reporting currency by the rate of exchange transaction
date. On the balance sheet date, these are restated using the rate of exchange on the balance sheet
date. The difference in values is exchange gain/loss. The exchange gains and losses are recognised in
the statement of profit and loss.
The exchange gains/losses in respect of cash and cash equivalents in foreign currency (e.g. balance in
foreign currency bank account) are recognised by the principle aforesaid, and these balances are restated
in the balance sheet in reporting currency at rate of exchange on balance sheet date. The change in
cash or cash equivalents due to exchange gains and losses are however not cash flows. This being so,
the net increases/decreases in cash or cash equivalents in the cash flow statements are stated exclusive
of exchange gains and losses. The resultant difference between cash and cash equivalents as per the
cash flow statement and that recognised in the balance sheet is reconciled in the note on cash flow
statement.
(L) “Management of Marketable Securities is an Integral Part of Investment of Cash” :
Management of marketable securities is an integral part of investment of cash as it serves both the
purposes of liquidity and cash, provided choice of investment is made correctly. As the working capital
needs are fluctuating, it is possible to invest excess funds in some short term securities, which can be
liquidated when need for cash is felt.
The selection of securities should be guided by three principles namely safety, maturity and
marketability.
(M) Disclosures
AS 3 requires an enterprise to disclose the amount of significant cash and cash equivalent balances
held by it but not available for its use, together with a commentary by management. This may happen
for example, in case of bank balances held in other countries subject to such exchange control or other
regulations that the fund is practically of no use.
AS 3 encourages disclosure of additional information, relevant for understanding the financial position
and liquidity of the enterprise together with a commentary by management. Such information may
include:

(a) The amount of undrawn borrowing facilities that may be available for future operating activities and
to settle capital commitments, indicating any restrictions on the use of these facilities; and
(b) The aggregate amount of cash flows required for maintaining operating capacity, e.g. purchase of
machinery to replace the old, separately from cash flows that represent increase in operating capacity,
e.g. additional machinery purchased to increase production.
CONCEPTWISE PRACTICALS
(A) Direct Method :
Direct method is preferred over indirect because, direct method gives us the clear picture of various
sources of cash inflows and outflows which helps in estimating the future cash inflows and outflows.
In ‘Direct method’ we take the gross receipts from sales, trade receivables and other operating inflows
subtracted by gross payments for purchases, creditors and other expenses ignoring all non-cash items
like depreciation, provisions.
 (Illustrative only for operating activities) Below is the format for Cash Flow Statement :
Cash Flow Statement of X Ltd. for the year ended March 31, 2017 (Direct Method)
Particulars ` `
Operating Activities:
Cash received from sale of goods xxx
Cash received from Trade receivables xxx
Cash received from sale of services xxx xxx
Less: Payment for Cash Purchases xxx
Payment to Trade payables xxx
Payment for Operating Expenses xxx
e.g. power, rent, electricity
Payment for wages & salaries xxx
Payment for Income Tax xxx xxx
xxx
Adjustment for Extraordinary Items xxx
Net Cash Flow from Operating Activities xxx
 (Illustrative for all activities) Below is the format for Cash Flow Statement :
Cash Flow Statement of X Ltd. for the year ended March 31, 2017 (Direct Method)
Cash flows from operating activities
cash sale (of Goods) xx
cash purchase (of goods) (xx)
collection from Debtors xx
Payment to Creditors (xx)
Payment for wages and salaries (xx)

Operating Expenses paid (xx)
(Examples of oprating expenses :
Manufacturing Exp.
Admin. & selling Exp.
Power exp.
Electricity Exp.
Rent Exp.
Establishment charges)
Operating Incomes received
{examples of operating incomes : xx
Commision income (goods)
Royalty Income (goods)
Net Tax paid (xx)
[Gross Tax Paid - Income Tax refund received]
Extraordinary items[ received/ paid] xx/(xx)
Net cash flow from Operating Activities xx
Cash flow from investing activities

Cash sale of Fixed Assets [ Tangible as well as intangible] xxx
cash purchase of Fixed Assets (xxx)
cash sale of Long Term investments xxx
cash purchase of Long Term Investments (xxx)
Brokerage paid in relation to Long Term Investments (xxx)
Rent received on property held as investment xxx
Dividend received on investments xxx
Interest received on investment xxx
Expense paid on capital WIP (xxx)
Cash flow from financing activities

Proceeds from issue of shares capital / amount received
asagaints borrowing funds xxx
Repayment (Redemption) of share capital & Borrowing funds (xxx)
Securities premium received on issue of shares xxx
Brokerage paid in relation to securities issued (xxx)
Underwriting commission paid (xxx)
Dividend paid on shares issued (xxx)
Interest paid in relation to borrowing funds (xxx)
Net increase / decrease in cash flow during the year xxx/(xxx)

Add : Cash and Cash equivalents at beginning of period xxx
Cash and Cash equivalents at end of period xxx

CLASS WORK
PRACTICAL QUESTIONS OF DIRECT METHOD : SHORT QUESTION

Q-1 From the following Summary Cash Account of Pakhi Ltd. prepare Cash Flow Statement for the year
ended 31st March, 2017 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 31.3.2017
` ’000 ` ’000
Balance on 1.4.2016 20 Payment to Suppliers 5
Issue of Equity Shares 10 Purchase of Fixed Assets 10
Receipts from Customers 20 Overhead expense 2
Sale of Fixed Assets 30 Wages and Salaries 3
Taxation 2
Dividend 8
Repayment of Bank Loan 20
__ Balance on 31.3.2017 30
80 80
 Steps for solving the sum by Direct Method (For Long Questions) :
Step 1 To consider opening & closing cash & cash equivalents.
Step 2 To calculate amount regarding collection from debtors, payment to creditors & operating
exp.paid
Step 3 To prepare all other accounts (untick a/cs upto Step 2) and record respective opening and
closing balances but balance of P & L a/c given in the balance sheets shall not be utilised for the
purpose of Direct method.
Step 4 To consider additional informations & give necessary effects.
Step 5 Necessary Elements of Income statement shall be considered & give the necessary effects.
Non-operating OR Non cash transactions shall not be evaluated for the purpose of cash flow
from operating activities by way of Direct method but respective a/c shall be affected accordingly.
Step 6 To close all the a/cs & give the necessary effects.
Step 7 Net increase / Decrease in cash flow during the year (A+B+C)+op.cash & cash
equivalents= cl.cash & cash equivalents

PRACTICAL QUESTION OF DIRECT METHOD : LONG QUESTION
Q-2 From the folloiwng information as contained in the income statement and the balance sheet of Strong
Ltd., you are required to prepare a cash flow statement using direct method :
INCOME STATEMENT AND RECONCILIATION OF EARNINGS
for the year ended 31st March, 2014
`
Net Sales 40,32,000
Less : Cost of sales 31,68,000
Depreciation 96,000
Salaries and Wages 3,84,000
Operating expenses 1,28,000
Provision for taxation 1,40,800 39,16,800
Net operating profit 1,15,200
Non-recurring income :
Profit on sale of equipment 19,200
Profit for the year 1,34,400
Retained earnings (balance in profit
and loss account brought forward) 2,42,880
3,77,280
Dividend declared and paid during the year 1,15,200
Profit and Loss account balance as on 31st March, 2014 2,62,080
Comparative Balance Sheets
Particulars As on 31-3-2013 As on 31-3-2014
` `
Fixed Assets :
Land 76,800 1,53,600
Building and equipments 5,76,000 9,21,600
Current Assets :
Cash 96,000 1,15,200
Debtors 2,68,800 2,97,600
Stock 4,22,400 1,53,600
Advances 12,480 14,400
Total 14,52,480 16,56,000
Capital 5,76,000 7,10,400
Surplus in P & L A/c. 2,42,880 2,62,080
Sundry creditors 3,84,000 3,74,400
Outstanding expneses 38,400 76,800
Income-tax payable 19,200 21,120
Accumulated depreciation on building & equipments 1,92,000 2,11,200
Total 14,52,480 16,56,000
Cost of equipment sold was ` 1,15,200

(B) Indirect Method :
In ‘Indirect method’ we start from the net profit or loss figure, eliminate the effect of any non-cash
items, investing items and financing items from such profit figure i.e. all such expenses like
depreciation, provisions, interest paid, loss on sale of assets etc. are added and interest received etc.
are deducted. Adjustment for changes in working capital items are also made ignoring cash and cash
equivalent to reach to the figure of net cash flow.
 (Illustrative only for operating activities) Below is the format for Cash Flow Statement :
Cash Flow Statement of X Ltd. for the year ended March 31, 2017 (Indirect Method)
N.P. During the year XXX
[after all appropriations]
[ closing. P& L.- Opening. P& L i.e. normally]
Add: Non-operating Exp./Non cash exp./ XXX
Non cash Transactions( Dr. to P&L)
Less: Non-operating Incomes/ Non cash Incomes/ (XXX)
Non cash Transaction(Cr. to P&L) ______
in working capital. XXX
N.P. beforeconsidering changes
Changes in working capital +/(xxx)
Cash flow before considering XXX
Net Tax paid & Extraordinary
item (received/ paid)
Net Tax paid (XXX)
[ Gross Tax paid - income tax Refund received]
Extraordinary items( received or paid) +/(XXX)
_______
Net cash flow from operating activities XXX
 (Illustrative for all activities) Below is the format for Cash Flow Statement :
Cash Flow Statement of X Ltd. for the year ended March 31, 2017 (Indirect Method)
Cash flows from operating activities
N.P. During the year XXX
[after all appropriations]
[ closing. P& L.- Opening. P& L i.e. normally]
Add: Non-operating Exp./Non cash exp./ XXX
Non cash Transactions( Dr. to P&L)
Less: Non-operating Incomes/ Non cash Incomes/ (XXX)
Non cash Transaction(Cr. to P&L) ______
in working capital. XXX
N.P. beforeconsidering changes

Changes in working capital +/(xxx)
Cash flow before considering XXX
Net Tax paid & Extraordinary
item (received/ paid)
Net Tax paid (XXX)
[ Gross Tax paid - income tax Refund received]
Extraordinary items( received or paid) +/(XXX)
_______
Net cash flow from operating activities XXX
Cash flow frrom investing activities
Cash sale of Fixed Assets [ Tangible as well as intangible] xxx
cash purchase of Fixed Assets (xxx)
cash sale of Long Term investments xxx
cash purchase of Long Term Investments (xxx)
Brokerage paid in relation to Long Term Investments (xxx)
Rent received on property held as investment xxx
Dividend received on investments xxx
Interest received on investment xxx
Expense paid on capital WIP (xxx)
Cash flow frrom financing activities
Proceeds from issue of shares capital / amount received
asagaints borrowing funds xxx
Repayment (Redemption) of share capital & Borrowing funds (xxx)
Securities premium received on issue of shares xxx
Brokerage paid in relation to securities issued (xxx)
Underwriting commission paid (xxx)
Dividend paid on shares issued (xxx)
Interest paid in relation to borrowing funds (xxx)
Net increase / decrease in cash flow during the year xxx/(xxx)

Add : Cash and Cash equivalents at beginning of period xxx
Cash and Cash equivalents at end of period xxx

 For the the purpose of indirect method following shall be considered as current Assets :
(i) Debtors (Gross )
Account receivables or Trade receivables
(ii) Bills receivable
(iii) Stock (Inventory)
(iv) prepaid Expenses ( If advances given under the head of current asset= prepaid
Expenses)
(v) outstanding incomes (accrued incomes)
The rule regarding changes in current Asset= opening current Asset - closing current Asset
 For the purpose of indirect method following shall be considered as current Liabilities :
(i) Creditors
Accounts payables Or Trade payables)
(ii) Bills payable
(iii) Provision for doubtful debts
(iv) outststanding expenses ( Accrued liabilities or liabilities for expenses)
(v) Pre-received Incomes
The rule regarding changes in current Liability = closing current liabilities - opening current liability
 For the purpose of logical evaluation regarding changes in current Asset following illustration of Debtors
shall be helpful.
Debtors account
To Bal.b/d 1000 By cash /bank 1000
To Credit sale 2000 (collection from Debtors)
[ Already recorded to calculate Net profit ____ By Bal. c/d 2000
during the year] 3000 3000
....................................................................................................................................................................................................
Logic regarding changes in working capital
Credit sale 2000
(Already recorded)
Changes in current Asset ? (1000)
(op. Drs- cl.Drs)
(1000-2000) ____
Collection from Drs (we want to 1000
obtain indirectly in indirect methods)
 For the purpose of Indirect method following examples can be given regarding Non operating .exp/
Non cash Exp/ Non cash Transactions (Dr to P & L)
(i) Depreciation provided (charged) on Depreciable Asset (N.c Exp.)

(ii) Intangible Assets & fictitious Assets write off ( N.C..Exp.)
(iii) Tax provided (N.C.Exp.)
(iv) Any appropriations (like Transfer.to G.R., Interim Div. Declared) (N.c. Transactions)
(v) Loss on sale of Long term Investments [ N.O.Exp.]
(vi) Loss on sale of F.A. [ N.O. EXP]
(vii) Interest exp. charged to P & L [ N.O. EXP.]
(viii) Extra ordinary cost charged to p& l (due to separate disclosure of Extra ordinary items)
 For the purpose of Indirect method following examples can be given regarding Non operating incomes/
Non cash incomes / Non cash Transactions ( cr. to P & L )
1. Profit on sale of Fixed Assets ( N.O. Income)
2 Profit on sale of Long term Investments (N.O. Income)
3. G.R. Written back [ N.C. Transaction)
4 Interest Income credited to P& L [N.O. Income]
5. Dividend. Income credited . to P & L [ N.O. Income]
6. Extra ordinary Income credited to P& L (due to separate disclosure requirement)
 Identification of Net Profit during the year for the purpose of Indirect method :
Situation-1
When opening & closing balances of P& L a/c are available in the question (when separate balances of
General Reserve/Reserves surplus / Retained Earnings are not given) then N.P. during the year (after
all appropriations)
= Closing Balance - opening Balance
of P & L of P & L
Situation-2
When along with balance of P & L a/c balances of General Reserve are also available in the question
then N.P. during the year ( after all appropriations)
= Closing Balance - opening Balance
of P & L of P & L
Separate a/c of General Reserve shall be prepared to calculate the amount of transfer to General
Reserve/ General Reserve written back.
Situation-3
When the balance of P&L a/c are not given separately but balances of Reserve & Surplus / Retained
Earnings are available in the question then N.P. during the year (after all appropriations )
= Closing Balance - Opening Balance of Reserve & Surplus
of Reserve & Surplus
Separate a/c of Reserve can not be prepared here.

 Steps for solving the sum by way of Indirect method :
Step-1 To record cash & cash Equivalents[ opening as well as closing ]
Step-2 To consider N.P. during the year (after all appropriation)
Step-3 To identify elements of working capital (current Assets & current Liabilities for the
purpose of indirect method) & calculate changes in working capital.
If additional information regarding any element of W.C. may be available in the question,
then such element shall be considered at the time of performing step.3
Step-4 To prepare all other accounts (untick accounts i.e. upto step 3 ) & record respective
opening & closing balances.
Step-5 To consider additional informations & give the necessary effects.
Step-6 If Income statement (P& L statement) may be given in the question then consider
necessary elements & give the necessary effects.
Step-7 To close all the a/cs and give necessary effects.
Normally Dr. side difference in account= Negative i.e. due to cash/ Bank (cash outflow)
OR P & L (Non operating incomes/ Non cash incomes / Non cash transactions) and
credit side difference in account = positive i.e. due to cash or bank (cash inflow) OR P &L
(non operating expense/non cash expense / non cash transactions)
Step-8 Net increase / Decrease in cash flow during the year (A+B+C)+op.cash & cash
equivalents= cl.cash & cash equivalents.
PRACTICAL QUESTIONS OF INDIRECT METHOD :

Q-3 The comparative Balanc e Sheets of Mr. Wheldon for the two years were as follows :
Liabilities 2013 2014 Assets 2013 2014
` ` ` `
Capital 1,50,000 1,75,000 Land & Bldg. 1,10,000 1,50,000
Loan from Bank 1,60,000 1,00,000 Machinery 2,00,000 1,40,000
Creditors 90,000 1,00,000 Stock 50,000 45,000
Bills payable 50,000 40,000 Debtors 70,000 80,000
Loan from I.F.C. ---- 25,000 Cash 20,000 25,000
4,50,000 4,40,000 4,50,000 4,40,000
Additional Information :
(i) Net profit for the year 2014 amounted to ` 60,000.
(ii) During the year a machine costing ` 25,000 (accumulated depreciation ` 10,000) was sold for `
13,000. The provision for depreciation against machinery as on 31-12-2013 was ` 50,000 and 31-12-
2014 ` 85,000.
You are required to prepare a cash flow statement.

Q-4 Following are the summarised balance sheets of Growell Ltd. as on 31st March, 2013 and 2014 :
2013 2014
` `
Liabilities :
Share Capital 2,00,000 2,50,000
General reserve 50,000 60,000
Profit and loss 30,500 30,600
Bank loan (Long term) 70,000 —
Sundry Creditors 1,50,000 1,35,200
Provision for taxation 30,000 35,000
5,30,500 5,10,800
Assets :
Land and Building 2,00,000 1,90,000
Machinery 1,50,000 1,69,000
Stock 1,00,000 74,000
Sundry debtors 80,000 64,200
Cash 500 800
Bank — 7,800
Goodwill — 5,000
5,30,500 5,10,800
Additional information
During the year ended 31st March, 2014 —
(i) dividend of ` 23,000 was paid
(ii) assets of another company were purchased for a consideration of ` 50,000 payable in shares. The
following assets were purchased:
Stock:` 20,000; machinery : ` 25,000;
(iii) machinery was further purchased for ` 8,000
(iv) depreciation written off on machinery ` 12,000; and
(v) income-tax provided during the year ` 33,000 ; loss on sale of machinery ` 200 was written off to
general reserve.
You are required to make the statement of cash flow.
Q-5 The following data were provided by the accounting records of Ryan Ltd. at year-end, March 31-3-2014 :
Income Statement
Sales 6,98,000
Cost of Goods Sold 5,20,000
Gross Margin 1,78,000
Operating Expenses
(Including Depreciation Expenses of ` 37,000) (1,47,000)
31,000

Other Income (Expenses)
Interest Expense paid (23,000)
Interest Income received 6,000
Gain on Sale of Investments 12,000
Loss on Sale of Plant (3,000) (8,000)
23,000
Income Tax (7,000)
16,000
Comparative Balance Sheets
31st March 31st March
2014 ` 2013 `
Assets
Plant Assets 7,15,000 5,05,000
Less : Accumulated Depriciation (1,03,000) (68,000)
6,12,000 4,37,000
Investments (Long-term) 1,15,000 1,27,000
Current Assets :
Inventory 1,44,000 1,10,000
Accounts Receivable 47,000 55,000
Cash 46,000 15,000
Prepaid Expenses 1,000 5,000
9,65,000 7,49,000
Liabilities
Share Capital 4,65,000 3,15,000
Reserves & Surplus 1,40,000 1,32,000
Bonds 2,95,000 2,45,000
Current Liabilities :
Accounts Payable 50,000 43,000
Accured Liabilities 12,000 9,000
Income Taxes Payable 3,000 5,000
9,65,000 7,49,000
Analysis of selected accounts and transactions during 2013-2014 :
1. Purchased investments for ` 78,000.
2. Sold investments for ` 1,02,000. These investments cost ` 90,000. Profit on sale of investments
included in P & L statement (Income statement).
3. Purchased plant assets for ` 1,20,000.
4. Sold plant assets that cost ` 10,000 with accumulated depreciation of ` 2,000 for ` 5,000.
5. Issued ` 1,00,000 of bonds at face value in a exchange for plant
6. Repaid ` 50,000 of bonds af face value at maturity.
7. Issued 15,000 shares of ` 10 each
8. Paid cash dividends ` 8,000
Prepare Cash Flow statement as per AS-3 (Revised), using indirect method.

Q-6 From the following Balance Sheet and information, prepare Cash Flow Statement of Ryan Ltd. for the
year ended 31st March, 2015 :
Balance Sheet
31st March, 2015 31st March, 2014
` `
Liabilities
Equity Share Capital 6,00,000 5,00,000
Redeemable Preference 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 —
Trade payables 1,15,000 1,10,000
Liabilities for Expenses 30,000 20,000
Provision for Taxation 95,000 60,000
Dividend payable 90,000 60,000
_______ ________
15,00,000 12,50,000
31st March, 2015 31st March, 2014
` `
Assets
Plant and Machinery 7,65,000 5,00,000
Investments 50,000 80,000
Inventory 95,000 90,000
Trade receivables 2,50,000 2,25,000
Cash and Bank 65,000 90,000
Voluntary Separation Payments 1,25,000 65,000
15,00,000 12,50,000
(1) 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.
(2) On 1st April, 2014 a plant was sold for ` 70,000 (Original Cost — ` 90,000 and W.D.V. — ` 50,000)
and Debentures worth ` 1 lakh issued at par as part consideration for Plant of ` 4.5 lakhs acquired.
(3) Part of the investments (Cost — ` 50,000) was sold for ` 70,000.
(4) Pre-acquisition dividend received ` 5,000 was adjusted against cost of Investment.
(5) Directors have declared 15% dividend for the current year.
(6) Prefernce shares were redeemed at the begining of the year and all the debentures were issued
at the begining of the year.

(7) Voluntary separation cost of ` 50,000 was adjusted against General Reserve.
(8) Income-tax liability for the current year was estimated at ` 1,35,000.
(9) Depreciation @ 15% has been written off from Plant account but no depreciation has been
charged on Land and Building.
Q-7 The Balance Sheet of New Light Ltd. for the years ended 31st March, 2014 and 2015 are as follows:
Liabilities 31st March 31st March Assets 31st March 31st March
2014 2015 2014 2015
(` ) (` ) (` ) (` )
Equity share Fixed assets 32,00,000 38,00,000
capital 12,00,000 16,00,000 Less: Depre
Preference ciation 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 & Loss A/c 2,40,000 3,00,000 Other current
9% Debentures 4,00,000 2,80,000 assets 11,10,000 13,10,000
Current liabilities 4,80,000 5,20,000
Provision for Tax 3,60,000 3,40,000
Dividend payable 1,20,000 1,60,000
________ ________ ________ _________
38,00,000 42,80,000 38,00,000 42,80,000
Additional information :
(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 at begining of the year.
(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 31-3-2014 was ` 2,16,000. The stock on 31-3-2015 was
correctly valued at ` 3,00,000.
Prepare Cash Flow Statement as per revised Accounting Standard-3 by indirect method.

Q-8 From the following information prepare Cash Flow statement:
Balance Sheets as at 31-12-2013 and 31-12-2014
(` in thousands)
Liabilities 2014 2013 Assets 2014 2013
Sundry creditors 150 1,890 Cash on hand and balance with bank 200 25
Interest payable 230 100 Short-term investments 670 135
Income-tax payable 400 1,000 Sundry debtors 1,700 1,200
Long-term debt 1,110 1,040 Interest receivable 100
Total liabilities 1,890 4,030 Inventories 900 1,950
Shareholders’ funds-Share capital 1,500 1,250 Long-term investments 2,500 2,500
Reserves 3,410 1,380 Fixed assets at cost 2,180 1,910
Total Shareholders’ funds 4,910 2,630 Accumulated depreciation (1,450) (1,060)
Total liabilities and
Shareholders’ funds 6,800 6,660 Total assets 6,800 6,660
Statement of Profit and Loss for the year ended 31-12-2014
(` in thousand)
Sales 30,650
Cost of sales (26,000)
Gross profit 4,650
Depreciation (450)
Administration and selling expenses (910)
Interest expense (400)
Interest income 300
Foreign exchange loss (40)
Dividend income 200
Net profit before taxation and extraordinary item 3,350
Extraordinary item - Insurance proceeds from
earthquake disaster settlement 180
Net profit after extraordinary item 3,530
Income-tax (300)
Net profit 3,230
Additional information
(` in thousands):
(a) An amount of ` 250 was raised from the issue of share capital and a further ` 250 was raised from
long. term borrowings.
(b) Interest expense was ` 400 of which `170 was paid during the period. ` 100 relating to interest
expense of the prior period was also paid during the period.
(c) Dividends paid were ` 1,200.

(d) Tax deducted at source on dividends received (included in the tax expense of ` 300 for the year)
amounted to ` 40,
(e) During the period, the enterprise acquired fixed assets for ` 350. The payment was made in cash.
(f) Plant with original cost of ` 80 and accumulated depreciation of ` 60 was sold for ` 20.
(g) Foreign exchange loss of ` 40 represnets loss in value of short term investments.
(h) Sundry debtors and sundry creditors include amounts relating to credit sales and credit purchases
only.
Q-9 Balance Sheets of RST Limited as on March 31, 2014 and March 31, 2015 are as under :
Liabilities 31.3.2014 31.3.2015 Assets 31.3.2014 31.3.2015
` ` ` `
Equity Share Land &
Capital (` Building 6,00,000 7,00,000
10 face value
per share) 10,00,000 12,00,000
General Plant &
Reserve 4,60,000 4,25,000 Machinery 9,00,000 11,00,000
Preference Investments
Share Capital 3,00,000 5,00,000 (Long-term) 2,50,000 2,50,000
Stock 3,60,000 3,50,000
Profit & Loss A/c 2,00,000 3,00,000 Debtors 3,00,000 3,90,000
8% Debentures 3,00,000 1,00,000 Cash & Bank 1,00,000 95,000
Creditors 2,05,000 3,00,000 Prepaid 15,000 20,000
Expenses
Bills Payable 70,000 85,000 Advance Tax
Payment 80,000 1,05,000
Provision for Tax 70,000 1,00,000
_________ _________ ________ ________
26,05,000 30,10,000 26,05,000 30,10,000
Additional information:
(i) Depreciation charged on building and plant and machinery during the year 2014-15 were ` 50,000
and ` 1,20,000 respectively.
(ii) During the year an old machine costing ` 1,50,000 was sold for ` 32,000. Its written down value
was ` 40,000 on date of sale.
(iii) During the year, income tax for the year 2013-14 was assessed at ` 76,000. A cheque of ` 4,000 was
received along with the assessment order towards refund of income tax paid in excess, by way of
advance tax in earlier years.
(iv) Preference shares of ` 3,00,000, which were due for redemption, were redeemed during the year
2014-15 at a premium of 5%, out of the proceeds of fresh issue of Preference shares.
(v) Bonus shares were issued to the existing equity shareholders at the rate of one share for every
five shares held on 31.3.2014 out of general reserves.
(vi) Debentures were redeemed at the beginning of the year at a premium of 3%.
(vii) Interim dividend paid during the year 2014-15 was ` 50,000.
You are required to prepare a cash flow statement.
---0---0---
 Identify the nature of cash flow as well as pass the necessary entries of following transactions:
1. Cash Sale of machinery = ` 80,000
Cash a/c Dr. ` 80,000
To machinery a/c 80,000
( Cash inflow )
2. Cash Purchase of long term investment= 50,000
Long term invest. a/c Dr. 50,000
To cash a/c 50,000
( cash out flow )
3. Proceeds from issue of Equity share capital= 60,000

Cash or Bank a/c Dr. 60,000
To Eq sh cap a/c 60,000
( Cash inflow)

4. Purchase of machinery in exchange of shares = ` 90,000
Machinery a/c Dr. 90,000
To share capital 90,000
[ Non- cash transaction ]
5. Proceeds from issue of Debentures = ` 40,000
Cash or Bank A/c Dr. 40,000
To Debentures 40,000
[ cash in flow ]
6. Proceeds from issue of equity share capital = ` 50,000 [ excl. prem ]
(Premium = 10 % )
Cash or Bank a/c Dr. 55,000
To Eq.sh.capital 50,000
To sec. prem.( 50,000 x 10 %) 5,000
[ cash in flow ]
7. Arrangement of capital for section - 55 of Companies Act, 2013 :
Redemption of Preference Share Capital
` 2,00,000 (Nominal Value)
Proceeds from Transfer from free reserve

issue of fresh shares to capital redemption reserve
[Cash/Bank a/c Dr. [Free Reserve a/c Dr.
To share capital] To capital redemption reserve]
Option - I ` 2,00,000 NIL

OR
Option - II NIL ` 2,00,000
OR
Option - III ` 80,000 ` 1,20,000
8. Redemption of Preference Share capital = ` 50,000

(i) Redeemable Preference Share Capital a/c Dr. 50,000
To Preference Share Holders a/c 50,000
(Being Amount due to Preference Share Holders. i.e. Non cash Transaction)
(ii) Preference Share Holders a/c 50,000
To Cash or Bank a/c
(being actual payment to Preference Share Holders i.e. cash out flow )

9. Redemption of pref.sh.capital amounted to ` 50,000 Redemption premium = 10%
(i) Redeemable pref. sh.capital a/c Dr. 50,000
Redemtion prem. a/c Dr. 5000
To pref.sh.holders 55,000
(Being Amount due to pref.sh.holder)
[ Non- cash transaction ]
(ii) Pre.sh.Holder a/c Dr 55000
To Cash or Bank 55000
(Being Actual payment to pref.sh.holder due to pref.sh.holder)
(cash out flow)
(iii) P & L a/c Dr. 5000
Redemption prem. a/c 5000
[ Non- cash Transaction ]
10. Tax provided during the year = ` 1,00,000
P & L a/c Dr. 1,00,000
To prov. for Taxation a/c 1,00,000
[ Non cash Transaction ]
11. Tax paid = ` 80,000
Provision for Tax a/c Dr. 80,000
To Bank a/c 80,000
[ Cash out flow]
 When only opening & closing balance may be given for provision for tax a/c, then evalution shall be
done as under:
P.F.T a/c
To Bank (?) 1,00,000 BY bal.b/d 1,00,000
(Gross taxpaid) BY P & L. ( Tax provided in
current year)(?) 2,00,000
To bal. c/d 2,00,000 _______
3,00,000 3,00,000
11. Amount transfer to Gen.Res(from current profit) = ` 80,000
P& L Appropriation a/c Dr. 80,000
To Gen. Res. a/c 80,000
[ Non cash Transaction ]
12. Interim Dividend declared & paid during the year = ` 23,000
(i) P & L Appropriation a/c Dr. 23,000
To Interim Div. payable a/c 23,000

( Being Interim Div declared )
(Non cash Transaction )
(ii) Interim Div. payable a/c Dr. 23,000
To Bank a/c 23,000
( Being Interim Div paid )
( cash out flow )
OR
Net Entry : P&L Appropriation a/c Dr. 23,000
To Bank a/c 23,000
(Being Interim Div. declaired & paid during the year)
 Important points regarding Depreciable Assets :

Circumstance-I :
When Depreciable Assets account & Depreciation fund account are given in balance sheets
Above mentioned two acconts shall be separately prepared only when opening & closing balances of
Dep. fund a/c are available in balance sheets.
In the give case,following important entries shall be passed.
(i) Depreciation provided during the year :
P & L a/c Dr.
To Depn Fund a/c
(Net Entry)
(ii) Depreciation upto sale of Depreciable Assets :
Dep. fund a/c Dr.
To Depreciable Asset a/c
[ Non cash Transacction]
(iii) Depreciation upto write off ( regarding Dep. Assets ) :
Depn Fund a/c Dr.
To Depreciable Asset a/c
(iv) Loss on sale of Depreciable Asset
( or loss due to write off ):
P & L a/c Dr.
To Depreciable Asstes a/c
( Non- cash Transaction)
(v) Profit of on sale of Dep. Asset
Depreciable Asset a/c Dr.
To P & L a/c
( Non- cash Transaction)
(Net entry)

 Format / specimen of Depreciation fund a/c :
To Dep. Asset xxx By bal. b/d
xxx
(Depn upto sale) By P & L a/c xxx
To Dep.Asset xxx (Depn provided during the year)
(Depn upto w/o) ___ ___
To Bal. c/l. xxx xxx
Circumstance II :
When opening & closing balance of Dep. fund are not given in the question :
In the given case Dep.Asset a/c shall be prepared at wdv (Net values) & hence separate a/c of Depn fund
can’t be evaluated
Important Entries in the given case can be as under :
(i) Depnprovided during the year
P & L a/c Dr
To Dep.Asset a/c
[ Non cash Transaction]
(Net entry)
(ii) Dep. up to sale of Depreciable Asset & dep. up to write off
 Not Applicable
(iii) Loss on sale of Depreciable Asset, loss due to w/o & profit on sale of Depreicable Asset  same
entry as per Circumstance - I
 CASH FLOW STATEMENT
(i) It is a statement which shows movements of cash & cash equivalents in the business to know
about liquidity position of the enterprise.
(ii) As 3 [ Revised] is applicable to Cash flow statement as issued by ICAI]
As per As 3 cash & cash Equivalents
= cash & bank balance [ Demand deposits with Bank]
+ Short Term Invetments ( Investments having maturity within 3 months)
3. For the purpose of cash flow statement extraordinary items shall be disclosed separately [
Transactions which are non- recurring for the purpose of AS 3] like
: Insurance proceeds received as against goods destroyed due to earthquake ( Ex-
ordinary income)
: Damages received due to loss of reputation ( Ex- ordinary income)
: Bad Debts recovered. ( Ex- ordinary income)
: Voluntary separation payment ( Ex- ordinary cost )

 BIFURCATION OF VARIOUS ACTIVITIES
Regarding cash flow statement as per revised As- 3
A Cash flow main/core Goods related
from operating  business  [Normally for academic
activities activities propose]
( Main revenue producing
activities)
B Cash flow from  Line business  Fixed Assets & long term
investing activities (Parallel to main business investments related
activity)
C Cash flow from financing  Line Business  Capital & borrowings related
Activities (Parallel to main business (short term as well as long
activity) term)

1. While preparing cash flow statement, conversion of debt to equity

(a) Should be shown as a financing activity.
(b) Should be shown as an investing activity.
(c) Should not be shown as it is a non-cash transaction.
2. Which of the following would be considered a ‘cash-flow item from an “investing” activity’?
(a) Cash outflow to the government for taxes.
(b) Cash outflow to purchase bonds issued by another company.
(c) Cash outflow to shareholders as dividends.
3. All of the following would be included in a company’s operating activities except:
(a) Income tax payments
(b) Collections from customers or Cash payments to suppliers
(c) Dividend payments.
4. Hari Uttam, a stock broking firm, received `1,50,000 as premium for forward contracts entered for
purchase of equity shares. How will you classify this amount in the cash flow statement of the firm?
(a) Operating Activities.
(b) Investing Activities.
(c) Financing Activities.
5. As per AS 3 on Cash Flow Statements, cash received by a manufacturing company from sale of shares of
ABC Company Ltd. should be classified as
(a) Operating activity.
(b) Financing activity.
(c) Investing activity.
6. Which of the following activities would generally be regarded as a financing activity in preparing a cash
flow statement?
(a) Dividend distribution.
(b) Proceeds from the sale of shares of other companies.
(c) Loans made by the financial enterprise to other businesses entities.
7. All of the following are examples of cash flows arising from investing activities except
(a) Cash payments to acquire fixed assets.
(b) Cash receipts from disposal of fixed assets.
(c) Cash payments to suppliers for goods and services.

8. Cash repayments of amounts borrowed will be disclosed in the cash flow statement as
(a) An operating activity.
(b) A financing activity
(c) An investing activity.
9. In the cash flow statement, ‘cash and cash equivalents’ include
(a) Bank balances and Cash balances.
(b) Short-term investments readily convertible into Cash are subject to an insignificant risk of changes
in value.
Q-1 What is the significance of cash flow statement? Explain in brief.
Q-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.

HOME WORK
Q-10 From the following Summary Cash Account of X Ltd. prepare Cash Flow Statement for the year ended
31st March, 2001 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 31.3.2001
` ’000 ` ’000
Balance on 1.4.2000 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 31.3.2001 150
3,250 3,250
(ANS. : [Net Cash Flow from operating activities = 250 ` in thousand; Net Cash Flow from investing activities=(100)
` in thousand; Net Cash Flow from financing activities =(50)` in thousand]
Q-11 The following summary cash account has been extracted from the company’s accounting records :
Summary Cash Account
(` ‘000)
Balance at l.1.2006 35
Receipts from customers 2,783
Issue of shares 300
Sale of fixed assets 128
3,246
Payments to suppliers 2,047
Payments for fixed assets 230
Payments for overheads 115
Wages and salaries 69
Taxation 243
Dividends 80
Repayments of bank loan 250 (3,034)
Balance at 31.12.2006 212

Prepare Cash Flow Statement of this company Hills Ltd. for the year ended 31st December 2006 in
accordance with AS-3 (Revised).
The company does not have any cash equivalents.
(ANS. : [Net Cash Flow from operating activities = 309 ` in thousand; Net Cash Flow from investing activities=(102)
` in thousand; Net Cash Flow from financing activities =(30) ` in thousand]
Q-12 Classify the following activities as (a) Operating Activities, (b) Investing Activities, (c) Financing Activities,
(d) Cash Equivalents.
a. Purchase of Machinery.
b. Proceeds from issuance of equity share capital
c. Cash Sales.
d. Proceeds from long-term borrowings. e. Proceeds from Trade receivables.
f. Cash receipts from Trade receivables. g. Trading Commission received.
h. Purchase of investment. i. Redemption of Preference Shares.
j. Cash Purchases. k. Proceeds from sale of investment
l. Purchase of goodwill. m. Cash paid to suppliers.
n. Interim Dividend paid on equity shares.
o. Wages and salaries paid.
p. Proceed from sale of patents.
q. Interest received on debentures held as investment.
r. Interest paid on Long-term borrowings.
s. Office and Administration Expenses paid
t. Manufacturing Overheads paid.
u. Dividend received on shares held as investments.
v. Rent Received on property held as investment.
w. Selling and distribution expense paid.
x. Income tax paid
y. Dividend paid on Preference shares.
z. Underwritings Commission paid.
aa. Rent paid.
bb. Brokerage paid on purchase of investments.
cc. Bank Overdraft
dd. Cash Credit
ee. Short-term Deposits having maturity of 6 months.
ff. Marketable Securities having maturity of 3 months.
gg. Refund of Income Tax received.
(ANS.
(a) Operating Activities: c, e, f, g, j, m, o, s, t, w, x, aa & gg.
(b) Investing Activities: a, h, k, l, p, q, u, v, bb & ee.
(c) Financing Activities: b, d, i, n, r, y, z, cc & dd.
(d) Cash Equivalent: ff.)
Q-13 X Ltd. purchased debentures of ` 10 lacs of Y Ltd., which are redeemable within three months. How will
you show this item as per AS 3 while preparing cash flow statement for the year ended on 31st March,
2017?
(ANS. : Cash equivalent)
Q-14 Classify the following activities as per AS–3 Cash Flow Statement:
(i) Interest Paid by Financial Enterprise
(ii) Dividend Paid
(iii) Tax Deducted at Source on Interest Received from Subsidiary Company
(iv) Deposit with Bank for a term of two years
(v) Insurance Claim Received towards loss of Machinery by Fire
(vi) Bad Debts Written Off
Which activity does the purchase of Business falls under and whether netting off of aggregate Cash
Flows from Disposal and Acquisition of Business Units is possible?
(ANS.
1. Treatment of Activities under AS – 3
Particulars Activities
(i) Interest Paid by Financial Enterprise Operating Activities
(ii) Dividend Paid Financing Activities
(iii) TDS on Interest Received from Subsidiary Company Investing Activities
(iv) Deposit with Bank for a term of two years Investing Activities
(v) Insurance Claim Received towards Under Investing Activities (Extraordinary Items)
Loss of Machinery by Fire
(vi) Bad Debts Written Off Adjustments under Operating Activities
2. Treatment of Consideration received on Purchase of Business
(a) The aggregate cash flows arising from acquisitions and from disposals of Subsidiaries or other business
units should be presented separatelyand classified as Investing Activities.
(b) The Cash Flow effects of disposals should not be deductedfrom those of acquisitions.
(c) Hence the Purchase of Business falls under Investing Activities and netting off of aggregate Cash
Flows from Disposal and Acquisition of Business units is not possible.)
Q-15 Following is the cash flow abstract of Alpha Ltd. for the year ended 31st March, 2017 :
Cash Flow (Abstract)
Inflows ` Outflows `
Opening balance: Payment for Account
Cash 10,000 Payables 90,000
Bank 70,000 Salaries and wages 25,000
Share capital – shares issued 5,00,000 Payment of overheads 15,000
Collection on account of Trade

Receivables 3,50,000 Fixed assets acquired 4,00,000
Debentures redeemed 50,000
Sale of fixed assets 70,000 Bank loan repaid 2,50,000
Taxation 55,000
Dividends (including
dividend distribution tax) 1,00,000
Closing balance:
Cash 5,000
_______ bank 10,000
10,00,000 10,00,000
Prepare Cash Flow Statement for the year ended 31st March, 2017 in accordance with Accounting standard
3.
(ANS. : [Net Cash Flow from operating activities = 1,65,000; Net Cash Flow from investing activities=(3,30,000);
Net Cash Flow from financing activities =1,00,000]
Q-16 Prepare Cash Flow from Investing Activities of Creative Furnishings Limited for the year ended
31.03.2015.
Particulars `
Plant acquired by the issue of 8% Debentures 1,56,000
Claim received for Loss of Plant in Fire 49,600
Unsecured Loans given to Subsidiaries 4,85,000
Interest on Loan received fromSubsidiary Companies 82,500
Pre–Acquisition Dividend received on Investment made 62,400
Debenture Interest Paid 1,16,000
Term Loan repaid 4,25,000
Interest received on Investment (TDS of `8,200) 68,000
Book Value of Plant sold (Loss incurred `9,600) 84,000
[ANS. : Net cash used in investing activities (after extra ordinary item) = (1,48,100)]
Q-17 Intelligent Ltd., a non financial company has the following entries in its Bank Account. It has sought your
advice on the treatment of the same for preparing Cash Flow Statement.
(i) Loans and Advances given to the following and interest earned on them:
(1) to suppliers
(2) to employees
(3) to its subsidiaries companies
(ii) Investment made in subsidiary Smart Ltd. and dividend received
(iii) Dividend paid for the year
(iv) TDS on interest income earned on investments made
(v) TDS on interest earned on advance given to suppliers
(vi) Insurance claim received against loss of fixed asset by fire
Discuss in the context of AS 3 Cash Flow Statement .

(ANS. :
(i) Loans and advances given and interest earned
(1) to suppliers Operating Cash flow
(2) to employees Operating Cash flow
(3) to its subsidiary companies Investing Cash flow
(ii) Investment made in subsidiary company and dividend received
Investing Cash flow
(iii) Dividend paid for the year
Financing Cash Outflow
(iv) TDS on interest income earned on investments made
Investing Outflow
(v) TDS on interest earned on advance given to suppliers
Operating Outflow
(vi) Insurance claim received against loss of fixed asset by fire.
Extraordinary item to be shown under a separate heading as ‘Cash inflow from investing
activities’.)
Q-18 Following are the extracts of Balance Sheet of Ajay Ltd.:
Liabilities 31.3.2005 31.3.2006 Assets 31.3.2005 31.3.2006
` ` `
Share Capital 5,00,000 5,00,000 Goodwill 1,15,000 90,000
15% Debentures 5,00,000 7,50,000
Unpaid Interest -- 5,000 Discount on issue
Profit & Loss A/c 50,000 90,000 of Debentures 90,000 1,15,000
You are required to show the related items in Cash Flow Statement, if Discount on issue of Debentures
amounting to `10,000 has been written off during the year. New Debentures were issued at the end of the
year.
ANS. : [Net Cash Flow from operating activities = 1,50,000; Net Cash Flow from investing activities = Nil; Net
Cash Flow from financing activities = 1,45,000]
Q-19 From the following information, calculate cash flow from operating activities:
Summary of Cash Account
for the year ended March 31, 2015
To Balance b/d 1,00,000 By Cash Purchases 1,20,000
To Cash sales 1,40,000 By Trade payables 1,57,000
To Trade receivables 1,75,000 By Office & Selling Expenses 75,000
To Trade Commission 50,000 By Income Tax 30,000
To Sale of Investment 30,000 By Investment 25,000
To Loan from Bank 1,00,000 By Repay of Loan 75,000
To Interest & Dividend 1,000 By Interest on loan 10,000
______ By Balance c/d 1,04,000
5,96,000 5,96,000
[ANS. : [Net Cash Flow from operating activities = (17,000)]
Q-20 Prepare Cash Flow Statement of MNT Ltd for the year ended 31st March 2015 with the help of the
following information:
1. Company sold goods for cash only.
2. Gross Profit Ratio was 30% for the year, Gross Profit amounts to` 3,82,500.
3. Opening Inventory was lesser than Closing Inventory by ` 35,000.
4. Wages paid during the year ` 4,92,500.
5. Office and Selling Expenses paid during the year` 75,000.
6. Dividend paid during the year ` 30,000 (including Dividend Distribution Tax.)
7. Bank Loan repaid during the year ` 2,15,000 (including Interest` 15,000)
8. Trade Payables on 31st March 2014 exceed the balance on 31st March 2015 by ` 25,000.
9. Amount paid to Trade Payables during the year ` 4,60,000.
10. Tax paid during the year amounts to` 65,000 (Provision for Taxation as on 31.03.2015 ` 45,000).
11. Investments of ` 7,00,000 sold during the year at a profit of ` 20,000.
12. Depreciation on Fixed Assets amounts to` 85,000.
13. Plant and Machinery purchased on 15th November 2014 for ` 2,50,000.
14. Cash and Cash Equivalents on 31st March 2014 ` 2,00,000.
15. Cash and Cash Equivalents on 31st March 2015 ` 6,07,500.
ANS. : [Net Cash Flow from operating activities = 1,82,500; Net Cash Flow from investing activities=4,70,000 ;
Net Cash Flow from financing activities =(2,45,000)]
Q-21 The balance sheets of Sun Ltd. for the years ended 31st March 2006 and 2005 were summarised thus:
2006 2005
` `
Equity Share Capital 60,000 50,000
Reserves:
Profit and Loss Account 5,000 4,000
Creditors 4,000 2,500
Taxation 1,500 1,000
Dividend payable 2,000 1,000
72,500 58,500
Fixed Assets
Premises 10,000 10,000
Fixtures 17,000 11,000
Vehicles 12,500 8,000
Short-term investments 2,000 1,000
Current Assets
Stock 17,000 14,000
Debtors 8,000 6,000
Bank and Cash 6,000 8,500
72,500 58,500
The profit and loss account for the year ended 31st March, 2006 disclosed.

`
Profit before tax 4,500
Taxation (1,500)
Profit after tax 3,000
Declared dividend (2000)
Retained profit 1,000
Further information is available:
Fixtures Vehicles
` `
Depreciation for year 1,000 2,500
Disposals:
Proceeds on disposal - 1,700
Written down value - (1,000)
Profit on disposal 700
Prepare a Cash Flow Statement for the year ended 31st March, 2006.
ANS. : [Net Cash Flow from operating activities = 2,800; Net Cash Flow from investing activities=(13,300) ; Net
Cash Flow from financing activities =9,000]
Q-22 Ms. Jyoti of Star Oils Limited has collected the following information for the preparation of cash flow
statement for the year ended 31st March, 2015 :
(` in lakhs)
NetProfit 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
Profit on sale of Investments 100
Carrying amount of Investment sold 27,765
Interest income on investments 2,506
Interest expenses of the year 10,000
Interest paid during the year 10,520
Increase in Working Capital (excluding Cash & Bank Balance) 56,081
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

Prepare the Cash Flow Statement for the year 2015 in accordance with AS 3. (Make necessary
assumptions).
ANS. : [Net Cash Flow from operating activities = (2,895); Net Cash Flow from investing activities=(22,634) ;
Net Cash Flow from financing activities =27,514]
Q-23 Given below is Profit and Loss Account of ABC Ltd. and relevant Balance Sheet information:
Profit and Loss Account of ABC Ltd.
for the year ended 31st December, 2006
` in lakhs
Revenue:
Sales 4,150
Interest and dividend 100
Stock adjustment 20
Total (A) 4,270
Expenditure:
Purchases 2,400
Wages and salaries 800
Other expenses 200
Interest 60
Depreciation 100
Total (B) 3,560
Profit before tax (A - B) 710
Tax provision 200
Profit after tax 510
Balance of Profit and Loss account brought forward 50
Profit available for distribution (C) 560
Appropriations:
Transfer to general reserve 200
Declared dividend(including CDT) 330
Total (D) 530
Balance (C - D) 30
Relevant Balance Sheet information 31.12.2006 31.12.2005

` in lakhs ` in lakhs
Debtors 400 250
Inventories 200 180
Creditors 250 230
Outstanding wages 50 40
Outstanding expenses 20 10
Advance tax 195 180
Tax provision 200 180

Assessed tax liability 180
Compute cash flow from operating activities using both direct and indirect method.
(ANS. : Net Cash flow from operating activities by Direct method = 445 ` in lakhs ; Net Cash flow from
operating activities by Indirect method = 445 ` in lakhs)
Q-24 Prepare Cash Flow for Gamma Ltd. for the year ending 31.3.2014 from the following information:
(1) Sales for the year amounted to Rs.135 crores out of which 60% was cash sales.
(2) Purchase for the year amounted to Rs.55 crores out of which credit purchase was 80%.
(3) Administrative and selling expenses amounted to Rs.18 crores and salary paid amounted to Rs.22
crores.
(4) The Company redeemed debentures of Rs.20 crores at a premium of 10%. Debenture holders
were issued equity shares of Rs.15 crores towards redemption and the balance was paid in cash.
Debenture interest paid during the year was Rs.1.5 crores.
(5) Dividend paid during the year amounted to `11.7 crores (including Dividend distribution tax) was
also paid.
(6) Investment costing Rs.12 crores were sold at a profit of Rs.2.4 crores.
(7) Rs.8 crores was paid towards income tax during the year.
(8) A new plant costing Rs.21 crores was purchased in part exchange of an old plant. The book value
of the old plant was Rs.12 crores but the vendor took over the old plant at a value of Rs.10 crores
only. The balance was paid in cash to the vendor.
(9) The following balances are also provided
Rs. in crores Rs.in crores
1.4.2013 31.3.2014
Debtors 45 50
Creditors 21 23
Bank 6
ANS. : [Net Cash Flow from operating activities = 29 ` in crores; Net Cash Flow from investing activities= 3.4
` in crores; Net Cash Flow from financing activities =(20.2) ` in crores; Cash at the end of period=18.2 `
in crores]
Q-25 From the following Balance Sheets of Mr. Zen, prepare a Cash flow statement as per AS-3 for the year
ended 31.3.2017:
Balance Sheets of Mr. Zen
Liabilities As on 1.4.2016 As on 1.4.2017
` `
Zen’s Capital A/c 10,00,000 12,24,000
Trade payables 3,20,000 3,52,000
Mrs. Zen’s loan 2,00,000 —
Loan from Bank 3,20,000 4,00,000
18,40,000 19,76,000
Assets As on 1.4.2016 As on 1.4.2017
` `

Land 6,00,000 8,80,000
Inventories 2,80,000 2,00,000
Trade receivables 2,40,000 4,00,000
Cash 80,000 56,000
18,40,000 19,76,000
A machine costing ` 80,000 (accumulated depreciation there on ` 24,000) was sold for ` 40,000. The
provision for depreciation on 1.4.2016 was ` 2,00,000 and 31.3.2017 was ` 3,20,000. The net proft for the
year ended on 31.3.2017 was ` 3,60,000.
ANS. : [Net Cash Flow from operating activities = 4,72,000; Net Cash Flow from investing activities=(2,40,000)
; Net Cash Flow from financing activities =(2,56,000)]
Q-26 From the following details relating to the Accounts of Grow More Ltd. prepare Cash Flow Statement:
Liabilities 31.03.2002 (`) 31.03.2001 (`)
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
Sundry Creditors 7,00,000 8,20,000
25,00,000 20,00,000
Assets
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.
(ANS. : [Net Cash Flow from operating activities = 3,10,000; Net Cash Flow from investing activities= (6,10,000);
Net Cash Flow from financing activities =3,00,000]
Q-27 ABC Ltd. gives you the following informations. You are required to prepare Cash Flow Statement by
using indirect methods as per AS 3 for the year ended 31.03.2004:

Balance Sheet as on
Liabilities 31st 31st Assets 31st 31st
March March March March
2003 2004 2003 2004
` ` ` `
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
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, 2004, 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 2003-04.
ANS. : [Net Cash Flow from operating activities = 19,60,000; Net Cash Flow from investing activities=(13,40,000)
; Net Cash Flow from financing activities =Nil]

CHAPTER 3
PROFIT OR LOSS PRE AND POST INCORPORATION
INTRODUCTION
1. Concept and Introduction :
In case of conversion of business into limited company, a running business of non corporate entity is
taken over by the promoters of a company w.e.f. a date prior to the date of incorporation of Company,
the amount of profit or loss of such period is referred to as Profit Prior to Incorporation.
Such profit or loss, though belongs to the Company, is of capital nature and hence should be separately
shown from other trading profits.
2. How to calculate Profit prior to incorporation :
In case of conversion of business, profit prior to incorporation can be decided by any of the following
two methods:
(a) The existing books of accounts are closed on the date of incorporation and new set of books are
prepared for the period after incorporation.
(b) When same books of vendor are continued without break till the year end, company prepares
separate profit and loss accounts for the period prior and post incorporation. In this profit and loss
account, the incomes and expenses of the period are allocated between two periods either on
actual basis or on the basis of suitable basis of apportionment.
3. Accounting treatment of profit or loss.
(a) Post incorporation profit or loss:
Such profit or loss is from normal trading activities and is considered as revenue profit or loss.
Such profit is available for distribution of dividend. Such profit or loss is carried to balance sheet
as balance of Profit or Loss Account
(b) Profit or loss for the pre incorporation period:
(1) It is of capital nature. Such profit is not available for distribution of dividend.
(2) Pre incorporation profit is normally transferred to Capital Reserve or shown in the balance
sheet as” Prior period profit”
(3) Loss during pre incorporation is normally transferred to Goodwill Account.
(4) Pre incorporation profits can be used for:-
(i) Writing off Goodwill on acquisition
(ii) Writing off preliminary expenses
(iii) Writing off capital losses e.g. to write down over valued assets
(iv) Writing off other fictitious assets

4.
Sr. NO. Basis of Apportionment Name of income or expenses

01 Time Ratio Salary, salary of sales staff, Depreciation, Insurance,
Interest, Rent, Rent and rates, Printing, Postage and
stationery, Telephone expenses, Administration/ office
expenses, Establishment expenses, Electricity charges
Miscellaneous expenses, other fixed expenses.
02 Sales or Turnover Ratio Gross profit, Sales commission, Carriage outward, Discount
allowed, Bad debts, Advertisement expenses, Sales and
Distribution expenses, Delivery van expenses, brokerage,
sales promotion expenses, expenses of free samples, other
variable expenses.
03 Purchase Ratio Carriage inward, Purchase expenses, Discount earned
04 Post period only Directors’ remuneration, Directors’ fees, Debenture interest,
Share transfer fees, Preliminary expenses written off,
Goodwill written off, Underwriting commission written off,
Debenture discount written off, Share issue expense written
off, Bad debt reserve, Income tax provision, Donation to
political parties, other expenses exclusively relating to
company.
05 Pre period only Salary of partners, Interest on capital, Interest on drawing
06 Specific Basis 1. Bad debt recovered is credited to that period in which
it was originally written off as bad.
2. Profit or loss on sale of Fixed assets/Investment is
recorded in the period in which such asset is disposed
off.
3. Interest paid to venture for late payment of purchase
consideration is divided in time ratio of the period
commencing from the date of conversion to the date of
actual payment4. Audit fees to be dealt with as
follows:
(a) Tax Audit fees- In Sales ratio
(b) Audit fees – In time ratio
(c) Company audit fees- Post period only
Profit or Loss Pre and Post Incorporation -137-

CLASS WORK
Q-1 Flat private Limited was incorporated on 1st July, 2017 to take over the running business of Mr. Round
with effect from 1st April, 2017. The following Profit and Loss Account for the year ended 31st March,
2018 was drawn up:
Dr. Cr.
Particulars Amount Particulars Amount
` `
To Commission 2,625 By Gross profit 98,000
Advertisement 5,250 Bad debt realised 500
Managing Director’s
remuneration 9,000
Depreciation 2,800
Salaries 18,000
Insurance 600
Preliminary cexpenses 700
Rent and taxes 3,000
Discount 350
Bad debts 1,250
Net profit 54,925 _____
98,500 98,500
The following details are available: (1) The average monthly turnover from July, 2017 onwards was
double than that of the previous months. (2) Rent for the first three months was paid @ ` 200 p.m. and
thereafter at a rate increased by ` 50 p.m. (3) Bad debts ` 350 related to sales effected after 1st
September, 2017. Realisation of bad debts was in respect of debts written off during 2015 (4)
Advertisement expenses were directly proportionate to the sales. You are required to find out the
profit prior to incorporation and to state the treatment thereof in the books of the company.
Q-2 Mr. X formed a private limited company under the name and style of Exe. Pvt. Ltd. to take over his
existing business as from 1st April. 2017 but the company was not incorporated till 1.7.2017. No entries
relating to transfer of the business was entered in the books, which were carried on without a break till
31st March 2018.
The following Balances were extracted from the books as on 31st March, 2018 :

Heads of Accounts Debit Credit
` `
Opening Stock 43,000
Purchases 1,89,000
Carriage Outwards 3,300
Sales 2,78,000
Travellers’ Commission 7,500
Office Salaries 21,000
Administration Expenses 19,900
Rent and Rates 12,000
Director’s Fees 18,000
X’s Capital on 1.4.2017 2,30,000
Fixed Assets 1,00,000
Current Assets (other than stock) 34,000
Current Liabilities 37,000
You are also given that—
(a) Stock on 31st March, 2018 amounted to ` 44,000
(b) The Gross Profit ratio is constant and monthly sales in April, ‘17, Feb. ‘18 and March ‘18 are double
the average monthly sales of the remaining period.
(c) The purchase consideration was agreed to be satisfied by the issue of 3,000 equity shares of ` 100
each.
(d) The Prelintinary Expenses are to be written off.
(e) You are to assume that carriage àutwards and travellers commission vary in direct proportion to
sales.
You are required to prepare the Profit and Loss Account for the year ended on 31st March, 2018
apportioning the profit or loss of the periods before and after incorporation. Depreciation shall be
provided at 25% p.a. on fixed assets.
Q-3 Navin Enterprise Ltd. was registered on April 1, 2017 to take over the business of Navin Bros from
January 1, 2017. The company was granted certificate to commence business on May 31, 2017 From the
following information given to you, you are required to calculate the profit earned by the company in
pre- and post-incorporation periods:
(a) Sales during the period Jan- Dec 2017 ` 2,40,000. The trend of sales was as under:
January and February : half the average sales in each month
May, June and July : average sale in each month
October : average sale
November and December : half the average sale in each month
(b) Cost of goods sold ` 60,000
(c) Salary and other administration charges ` 6,000
(d) Bad debts ` 2,400
(e) Interest on the purchase price paid by the company to Navin Bros on August 1, 2017 ` 2,100.
(f) Expenses exclusively related to company ` 8,900.

Q-4 X Ltd. was incorporated on 1st May 2017 to acquire a business as on 1st January, 2017. The first accounts
were closed on 30th September, 2017.
The gross profit for the period was ` 42,000
Details of other expenses:
General expenses ` 7,200
Directors Remuneration ` 12,000
Preliminary Expenses ` 2,000
Rent upto 30th June was ` 6,000 per annum after which it was increased by 40%.
Salary of the manager, who on formation of the company had become a whole time director and whose
remuneration has been given above, was ` 5,100 per annum.
The company earned a uniform gross profit. The sales upto 30th September 2017 were ` 98,000. The
monthly average of sales for the first four months of the year was one-half of the remaining period.
Show the Profit and Loss Account and indicate how you would deal with the pre-incorporation results.
Q-5 SALE Limited was incorporated on 01.08.20X1 to take-over the business of a partnership firm w.e.f.
01.04.20X1. The following is the extract of Profit and Loss Account for the year ended 31.03.20X2:
Particulars Amount (`) Particulars Amount (`)
To Salaries 1,20,000 By Gross Profit 6,00,000
To Rent, Rates & Taxes 80,000
To Commission on Sales 21,000
To Depreciation 25,000
To Interest on Debentures 32,000
To Director Fees 12,000
To Advertisement 36,000
To Net Profit for the Year 2,74,000
6,00,000 6,00,000
(i) SALE Limited initiated an advertising campaign which resulted increase in monthly average sales
by 25% post incorporation.
(ii) The Gross profit ratio post incorporation increased to 30% from 25%.
You are required to apportion the profit for the year between pre-incorporation and post-
incorporation, also explain how pre-incorporation profit is treated in the accounts.
Q-6 Rama Udyog Limited was incorporated on August 1, 20X1. It had acquired a running business of Rama &
Co. with effect from April 1, 20X1. During the year 20X1-X2, 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, 20 X1 ` 5,000.
You are required to ascertain pre-incorporation and post-incorporation profit for the year ended 31st
March, 20X2.

Q-7 ABC Ltd. was incorporated on 1.8.2017 to acquire the running business of Mr. XY w.e.f. 1.4.2017. Following
particulars are available for the year ended 31st March, 2018.
Sales during the period from 1 .4.2017 to 31.7.2017 ` 2,00,000
Sales for the period from 1.8.2017 to 31.3.2018 ` 3,30,000
Cost of sales for the year ` 4,20,000
Sales price increased by 10% in post-incorporation period as compared to pre-incorporation period.
Allocate the Gross Profit between pre and post-incorporation period. Also calculate ratio of sales value
and sales volume.

LAST MINUTE REVISION (LMR)
1. For dividing income and expenses between pre and post incorporation, basis of apportionment should
be applied only when actual information of division is not available
2. Dividend on share capital is an appropriation and therefore will not be shown in profit and loss account.
Similarly details of asset or liability will also not appear in profit and loss account.
3. Format of answer should be either in statement form or account form, as per the instruction. In absence
of specific information, it is convenient to follow statement form.
4. Sales value ratio and sales volume ratio would be same only when selling price per unit remains
constant.
5. Preliminary expenses would be written off in the post incorporation period. But alternatively company
can utilise pre incorporation profit to write off preliminary expenses.
6. Normally rate of GP on sales remain constant and therefore Gross profit is divided in sales ratio. But GP
rate remains constant only when either both cost price and sale price remain constant or both change
proportionately.
7. When details regarding sales are not available, the sales ratio would be same as time ratio.
8. Accounting period may be more than or less than 12 months.
9. Date of commencement of business is not relevant for calculating profit or loss prior to incorporation.

1. Profit prior to incorporation is transferred to
(a) General reserve. (b) Capital reserve.
(c) Profit and loss account.
2. The profit earned by the company from the date of purchase to the date of incorporation is
(a) Pre- incorporation profit. (b) Post- incorporation profit.
(c) Notional profit.
3. Loss prior to incorporation is debited to which account?
(a) Goodwill account
(b) Loss prior to incorporation account
(c) Either (a) or (b)
4. Profit prior to incorporation is
(a) Available for distribution as dividend among the members of the company.
(b) Not available for distribution as dividend among the members of the company.
(c) Depends upon the Memorandum of Association.

5. Profit or loss prior to incorporation is of
(a) Revenue nature. (b) Capital nature.
(c) Nominal nature.
6. Which of the following expenditure is allocated on the basis of time?
(a) Insurance. (b) Bad debts.
(c) Discount allowed.
7. Which of the following is allocated on the basis of turnover?
(a) Salaries. (b) Depreciation. (c) Gross profit.
8. Preliminary expenses on the formation of the company are charged against
(a) Pre-incorporation profit.
(b) Post- incorporation profit.
(c) Not calculated because of bifurcation of profit into pre and post.
9. Which of the following expense is not allocated on time basis?
(a) Rent (b) Salaries (c) Discounts
THEORETICAL QUESTION
1. Define Pre–incorporation profit/loss in brief.

HOME WORK
Q-8 The promoters of Glorious Ltd. took over on behalf of the company a running business with effect from
1st April, 20X1. The company got incorporated on 1st August, 20X1. The annual accounts were made up
to 31st March, 20X2 which revealed that the sales for the whole year totalled ` 1,600 lakhs out of which
sales till 31st July, 20X1 were for ` 400 lakhs. Gross profit ratio was 25%.
The expenses from 1st April 20X1, till 31st March, 20X2 were as follows:
(` in lakhs)
Salaries 69
Rent, Rates and Insurance 24
Sundry Office Expenses 66
Travellers’ Commission 16
Discount Allowed 12
Bad Debts 4
Directors’ Fee 25
Tax Audit Fee 9
Depreciation on Tangible Assets 12
Debenture Interest 11
Prepare a statement showing the calculation of Profits for the pre-incorporation and post-incorporation
periods.
Ans.
PPI-32.75, Post profit- 119.25, TR- 1:2, SR- 1:3.
Q-9 Inder and Vishnu, working in partnership registered a joint stock company under the name of Fellow
Travellers Ltd. on May 31, 20X1 to take over their existing business. It was agreed that they would take
over the assets of the partnership from January 1st, 20X1 for a sum of ` 3,00,000 and that until the
amount was discharged they would pay interest on the amount at the rate of 6% per annum. The
amount was paid on June 30, 20X1. To discharge the purchase consideration, the company issued 20,000
equity shares of ` 10 each at a premium of ` 1 each and allotted 7% Debentures of the face value of `
1,50,000 to the vendors at par.
The summarised Profit and Loss Account of the “Fellow Travellers Ltd.” for the year ended 31st December,
20X1 was as follows:

` `
To Purchase, including Inventory 1,40,000 By Sales:
To Freight and carriage 5,000 1st January to 31st May 20X1 60,000
To Gross Profit c/d 60,000 1st June to 31st Dec., 20X1 1,20,000
_______ By Inventory in hand 25,000
2,05,000 2,05,000
To Salaries and Wages 10,000 By Gross profit b/d 60,000
To Debenture Interest 5,250
To Interest on purchase
Consideration (up to 30-6-20X1) 9,000
To Selling commission 9,000
To Directors’ Fee 600
To Preliminary expenses 900
To Provision for taxes
(entirely related with company) 6,000
To Dividend paid on equity shares 5,000
@ 5%
To Balance c/d 13,250 ______
60,000 60,000
Prepare statement apportioning the expenses and calculate profits/losses for the ‘post’ and ‘pre-
incorporation’ periods and also show how these figures would appear in the Balance Sheet of the
company.
Ans.
PPI- 4,917, Post profit- 13,333,TR-5:7, SR- 1:2, Gross profit- 60,000, Dividend not to be shown, Interest on
purchase consideration- 5:1.
Q-10 The partners of Maitri Agencies decided to convert the partnership into a private limited company
called MA (P) Ltd. with effect from 1st January, 20X2. The consideration was agreed at ` 1,17,00,000
based on the firm’s Balance Sheet as at 31st December, 20X1. However, due to some procedural
difficulties, the company could be incorporated only on 1st April, 20X2. Meanwhile the business was
continued on behalf of the company and the consideration was settled on that day with interest at 12%
per annum. The same books of account were continued by the company which closed its account for
the first time on 31st March, 20X3 and prepared the following summarised profit and loss account.
`
Sales 2,34,00,000
Less: Cost of goods sold 1,63,80,000
Salaries 11,70,000
Depreciation 1,80,000
Advertisement 7,02,000
Discounts 11,70,000
Managing Director’s remuneration 90,000
Miscellaneous office expenses 1,20,000
Office-cum-show room rent 7,20,000
Interest 9,51,000 2,14,83,000
Profit 19,17,000

The company’s only borrowing was a loan of ` 50,00,000 at 12% p.a. to pay the purchase consideration
due to the firm and for working capital requirements.
The company was able to double the average monthly sales of the firm, from 1st April, 20X2 but the
salaries tripled from that date. It had to occupy additional space from 1st July, 20X2 for which rent was
` 30,000 per month.
Prepare statement of apportioning cost and revenue between pre-incorporation and post-incorporation
periods and calculation of profits/losses for such periods.
Ans.
PPI- 19,000 loss, Post period- 19,36,000, TR- 1:4, SR- 1:8, Ratio of salary- 1:12, Rent 90,000 and 6,30,000,
Interest 3,51,000 and 6,00,000)
Q-11 ABC Ltd. took over a running business with effect from 1st April, 20X1. The company was incorporated
on 1st August, 20X1. The following summarised Profit and Loss Account has been prepared for the year
ended 31.3.20X2:
` `
To Salaries 48,000 By Gross profit 3,20,000
To Stationery 4,800
To Travelling expenses 16,800
To Advertisement 16,000
To Miscellaneous trade expenses 37,800
To Rent (office buildings) 26,400
To Electricity charges 4,200
To Director’s fee 11,200
To Bad debts 3,200
To Commission to selling agents 16,000
To Tax Audit fee 6,000
To Debenture interest 3,000
To Interest paid to vendor 4,200
To Selling expenses 25,200
To Depreciation on fixed assets 9,600
To Net profit 87,600 _______
3,20,000 3,20,000
(a) Total sales for the year, which amounted to ` 19,20,000 arose evenly up to the date of 30.9.20X1.
Thereafter they recorded an increase of two-third during the rest of the year.
(b) Rent of office building was paid @ ` 2,000 per month up to September, 20X1 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, 20X1 by issuing equity
shares of ` 10 each.

Prepare Statement showing calculation of profits and allocation of expenses between pre and post
incorporation periods.
Ans.
PPI- 12,800, Post period- 74,800, TR-1:2, SR- 1:3, Rent- 8,000 and 18,400, Interest to vendor- 2:1, Depreciation-
3,000 & 6,600.
Q-12 ABC Ltd. was incorporated on 1.05.2014 to take over the business of DEF and Co. from 1.1.2014. The
Profit and Loss Account as given by ABC Ltd. for the year ending 31.12.2014 is as under :
Profit and Loss Account
` `
To Rent and Taxes 90,000 By Gross Profit 10,64,000
To Salaries including manager’s
salary of ` 85,000 3,31,000 By Interest on Investments 36,000
To Carriage Outwards 14,000
To Printing and Stationery 18,000
To Interest on Debentures 25,000
To Sales Commission 30,800
To Bad Debts (related to sales) 91,000
To Underwriting Commission 26,000
To Preliminary Expenses 28,000
To Audit Fees 45,000
To Loss on Sale of Investments 11,200
To Net Profit 3,90,000 ________
11,00,000 11,00,000
Prepare a Statement showing allocation of pre-incorporation and post-incorporation profits after
considering the following information:
(i) G.P. ratio was constant throughout the year.
(ii) Sales for January and October were 1½ times while sales for December were twice the average
monthly sales of remaining period.
(iii) Bad Debts are shown after adjusting a recovery of ` 7,000 of Bad Debt for a sale made in July,
2012.
(iv) Manager’s salary was increased by ` 2,000 p.m. from 1.5.2014.
(v) All investments were sold in April, 2014.
Ans.
PPI- 1,86,900, Post period- 2,03,100, TR-1:2, SR- 9:19, Bad debt 98,000 in sales ratio, Bad debt recovered 7,000
in pre period, Manager salary- 23,000 and 62,000, Other salary 82,000 and 1,64,000, Loss on investment and
interest on investment in pre period, U/W commission in post period)
Q-13 Sneha Ltd. was incorporated on 1st July, 20X1 to acquire a running business of Atul Sons with effect
from 1stApril, 20X1. During the year 20X1-X2, the total sales were ` 24,00,000 of which ` 4,80,000 were
for the first six months. The Gross profit of the company ` 3,90,800. The expenses debited to the Profit
& Loss Account included:
(i) Director’s fees ` 30,000
(ii) Bad debts ` 7,200
(iii) Advertising ` 24,000 (under a contract amounting to ` 2,000 per month)
(iv) Salaries and General Expenses ` 1,28,000

(v) Preliminary Expenses written off ` 10,000
(vi) Donation to a political party given by the company ` 10,000.
Prepare a statement showing pre-incorporation and post-incorporation profit for the year ended 31st
March, 20X2.
Ans.
PPI- 360 , Post period- 1,81,240, TR- 1:3, SR-1:9, Advertising exp. in time ratio
Q-14 The partners Kamal and Vimal decided to convert their existing partnership business into a Private
Limited Company called M/s. KV Trading Private Ltd. with effect from 1-4-20X2. Company was
incorporated on 1-7-20X2.
The same books of accounts were continued by the company which closed its account for first term on
31-3-20X3.
The summarised Profit and Loss Account for the year ended 31-3-20X3 is below:
(`) in lakhs (`) in lakhs
Turnover 240.00
Interest on investments 6.00
246.00
Less: Cost of goods sold 102.00
Advertisement 3.00
Sales Commission 6.00
Salary 18.00
Managing director’s remuneration 6.00
Interest on Debentures 2.00
Rent 5.50
Bad Debts 1.00
Underwriting Commission 2.00
Audit fees 2.00
Loss on sale of investment 1.00
Depreciation 4.00 152.50
93.50
The following additional information was provided:
(i) The average monthly sales doubled from 1-7-20X2. GP ratio was constant.
(ii) All investments were sold on 31-5-20X2.
(iii) Average monthly salary doubled from 1-10-20X2.
(iv) The company occupied additional space from 1-7-20X2 for which rent of ` 20,000 per month was
incurred.
(v) Bad debts recovered amounting to ` 50,000 for a sale made in 20X0, has been deducted from bad
debts mentioned above.
(vi) Audit fees pertains to the company.
Prepare a statement apportioning the expenses between pre and post incorporation periods and
calculate the Profit/Loss for such periods.
Ans.
PPI- 18.79 , Post period- 74.71, TR- 1:3, SR-1:6, Salary-1:5, Rent 0.925 and 4.575.
---0---0---
CHAPTER-4
BONUS SHARE
INTRODUCTION
A bonus share may be defined as issue of shares at no cost to current shareholders in a company, based upon
the number of shares that the shareholder already owns.
In other words, no new funds are raised with a bonus issue While the issue of bonus shares increases the
total number of shares issued and owned, it does not increase the net worth of the company. Although the
total number of issued shares increases, the ratio of number of shares held by each shareholder remains
constant.
Bonus issue is also known as ‘capitalisation of profits’. Capitalisation of profits refers to the process of
converting profits or reserves into paid up capital. A company may capitalise its profits or reserves which
otherwise are available for distribution as dividends among the members by issuing fully paid bonus shares
to the members.
If the subscribed and paid-up capital exceeds the authorised share capital as a result of bonus issue, a
resolution shall be passed by the company at its general body meeting for increasing the authorised capital.
A return of bonus issue along with a copy of resolution authorising the issue of bonus shares is also required
to be filed with the Registrar of Companies.
PROVISIONS OF THE COMPANIES ACT, 2013

Section 63 of the Companies Act, 2013 deals with the issue of bonus shares. According to Sub-section (1) of
Section 63, a company may issue fully paid-up bonus shares to its members, in any manner whatsoever, out
of—
(i) its free reserves*;
(ii) the securities premium account; or
(iii) the capital redemption reserve account:
Provided that no issue of bonus shares shall be made by capitalising reserves created by the revaluation of
assets.
Sub-section (2) of Section 63 provides that no company shall capitalise its profits or reserves for the purpose
of issuing fully paid-up bonus shares under sub-section (1), unless—
(a) it is authorised by its articles;
(b) it has, on the recommendation of the Board, been authorised in the general meeting of the company;
(c) it has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities
issued by it;
Bonus Share -149-

(d) it has not defaulted in respect of the payment of statutory dues of the employees, such as, contribution
to provident fund, gratuity and bonus; (e) the partly paid-up shares, if any outstanding on the date of
allotment, are made fully paid-up.
The company which has once announced the decision of its Board recommending a bonus issue, shall
not subsequently withdraw the same.
Sub-section (3) of the Section also provides that the bonus shares shall not be issued in lieu of dividend.
As per Para 39 (i) of Table F under Schedule I to the Companies Act, 2013, a company in general meeting
may, upon the recommendation of the Board, resolve—
*As per Section 2(43) of the Companies Act, 2013, “free reserves” means such reserves which, as per the
latest audited balance sheet of a company, are available for distribution as dividend. Provided that—
(i) any amount representing unrealised gains, notional gains or revaluation of assets, whether shown
as a reserve or otherwise, or
(ii) any change in carrying amount of an asset or of a liability recognised in equity, including surplus in
profit and loss account on measurement of the asset or the liability at fair value, shall not be
treated as free reserves.
(i) (a) that it is desirable to capitalise any part of the amount for the time being standing to the credit of any
of the company’s reserve accounts, or to the credit of the profit and loss account, or otherwise available
for distribution; and (b) that such sum be accordingly set free for distribution in the specified manner
amongst the members who would have been entitled thereto, if distributed by way of dividend and in
the same proportions.
(ii) The sum aforesaid shall not be paid in cash but shall be applied, subject to the provision contained in
clause (iii), either in or towards— (a) paying up any amounts for the time being unpaid on any shares held by
such members respectively; (b) paying up in full, unissued shares of the company to be allotted and distributed,
credited as fully paid-up, to and amongst such members in the proportions aforesaid; partly in the way
specified in (a) and partly in that specified in (b) above;
A securities premium account and a capital redemption reserve account may be applied in the paying up of
unissued shares to be issued to members of the company as fully paid bonus shares. In other words, securities
premium account and capital redemption reserve cannot be applied towards payment of unpaid amount on
any shares held by existing shareholders.
As per Section 63(2) of the Companies Act, 2013, bonus shares cannot be issued unless party paid-up shares are
made fully paid-up. Para 39(ii) of Table F under Schedule I to the Companies Act, 2013 allows use of free
reserves for paying up amounts unpaid on shares held by existing shareholders.
On a combined reading of both the provisions, it can be said that free reserves may be used for paying up
amounts unpaid on shares held by existing shareholders (though securities premium account and capital
redemption reserve cannot be used).
SEBI REGULATIONS
A listed company, while issuing bonus shares to its members, has to comply with the following requirements
under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009:
Regulation 92- Conditions for Bonus Issue
Subject to the provisions of the Companies Act, 2013 or any other applicable law for the time being in force,
a listed company may issue bonus shares to its members if:

(a) it is authorised by its articles of association for issue of bonus shares, capitalisation of reserves, etc.:
Provided that if there is no such provision in the articles of association, the issuer shall pass are
solution at its general body meeting making provisions in the articles of associations for capitalisation
of reserve;
(b) it has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities
issued by it;
(c) it has sufficient reason to believe that it has not defaulted in respect of the payment of statutory dues
of the employees such as contribution to provident fund, gratuity and bonus;
(d) the partly paid shares, if any outstanding on the date of allotment, are made fully paid up
Regulation 93- Restriction on bonus issue
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. 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.
Regulation 94- Bonus shares only against reserves, etc. if capitalised in cash
The bonus issue shall be made out of free reserves built out of the genuine profits or securities premium
collected in cash only and reserves created by revaluation of fixed assets shall not be capitalised for the
purpose of issuing bonus shares. The bonus share shall not be issued in lieu of dividend.
Regulation 95- Completion of bonus issue
An issuer, announcing a bonus issue after the approval of its board of directors and not requiring shareholders’
approval for capitalisation of profits or reserves for making the bonus issue, shall implement the bonus issue
within fifteen days from the date of approval of the issue by its board of directors: Provided that where the
issuer is required to seek shareholders’ approval for capitalisation of profits or reserves for making the
bonus issue, the bonus issue shall be implemented within two months from the date of the meeting of its
board of directors wherein the decision to announce the bonus issue was taken subject to shareholders’
approval.
Once the decision to make a bonus issue is announced, the issue cannot be withdrawn.
Bonus Share -151-

CLASS WORK
Q-1 The Balance Sheet of COSMOS Ltd. on 31st Dec., 2010, was as follows:
Liabilities ` Assets `
4,000 Equity Shares of ` 100 Sundry Assets 10,00,000
each, ` 80 paid 3,20,000
Share Premium Account 60,000
Capital Redemption Reserve Account 70,000
Profit and Loss Account 3,00,000
Sundry Creditors 1,50,000
10,00,000 10,00,000
The directors recommended the following with a view to capitalising, whole of Share Premium Account,
Capital Redemption Reserve Account, General Reserve and ` 50,000 out of Profit and Loss Account:
(a) The existing shares be made fully paid without the shareholders having to pay anything.
(b) Each shareholder to be given fully paid bonus shares at a premium of 25% for the remaining
amount in proportion to his holdings. Assuming that the scheme is accepted and that all formalities
are gone through, give journal entries and also show in what proportion bonus shares will be
distributed among shareholders.
Q-2 Following is the Balance Sheet of XYZ Ltd. as on 3 1.3.2010.
Share Capital: Sundry Assets 14,30,000
4,000 Equity Share of ` 100
each fully paid 4,00,000
Security Premium 50,000
Capital Redemption Reserves 1,00,000
Profit and Loss A/c 2,00,000
12% Fully Convertible Debentures 1,50,000
14% Partly Convertible Debentures 2,00,000
Sundry Creditors 1,80,000
14,30,000 14,30,000
Company has decided to issue bonus shares at the rate of one share of ` 100 each for every two shares.
Fully convertible debentures are convertible into equity shares at a premium of 25%. 80% of the partly
convertible debentures are convertible into equity shares at par. Make journal entries for issue of
bonus shares at present and on conversion of debentures.
Q-3 Following items appear in the trial balance of Bharat Ltd. (a listed company) as on 31st March, 20X1:
`
40,000 Equity shares of ` 10 each 4,00,000
Capital Redemption Reserve 55,000
Securities Premium (collected in cash) 30,000
Surplus i.e. credit balance of Profit and Loss Account 50,000
The company decided to issue to equity shareholders bonus shares at the rate of 1 share for every 4
shares held and for this purpose, it decided that there should be the minimum reduction in free
reserves. Pass necessary journal entries.
Q-4 Following is the extract of the Balance Sheet of Solid Ltd. as at 31st March, 20X1:
`
Authorised capital :
10,000 12% Preference shares of ` 10 each 1,00,000
1,00,000 Equity shares of ` 10 each 10,00,000
11,00,000
Issued and Subscribed capital:
8,000 12% Preference shares of ` 10 each fully paid 80,000
90,000 Equity shares of ` 10 each, ` 8 paid up 7,20,000
Reserves and Surplus:
General reserve 1,60,000
Revaluation reserve 35,000
Securities premium (collected in cash) 20,000
Secured Loan:
12% Debentures @ ` 100 each 5,00,000
On 1st April, 20X1 the Company has made final call @ ` 2 each on 90,000 equity shares. The call money
was received by 20th April, 20X1. Thereafter the company decided to capitalise its reserves by way of
bonus at the rate of one share for every four shares held. Show necessary entries in the books of the
company and prepare the extract of the Balance Sheet immediately after bonus issue assuming that
the company has passed necessary resolution at its general body meeting for increasing the authorised
capital.
Q-5 A company offers new shares of ` 100 each at 25% premium to existing shareholders on one for four
bases. The cum-right market price of a share is ` 150. Calculate the value of a right. What should be the
ex-right market price of a share?
Bonus Share -153-

JOURNAL ENTRIES
(A) (1) Upon the sanction of an issue of bonus shares
(a) Debit Capital Redemption Reserve Account
Debit Securities Premium Account1
Debit General Reserve Account
Debit Profit & Loss Account
(b) Credit Bonus to Shareholders Account.
(2) Upon issue of bonus shares
(a) Debit Bonus to Shareholders Account
(b) Credit Share Capital Account.
(B) (1) Upon the sanction of bonus by converting partly paid shares into fully paid shares
(a) Debit General Reserve Account
Debit Profit & Loss Account
(b) Credit Bonus to Shareholders Account
(2) On making the final call due
(a) Debit Share Final Call Account
(b) Credit Share Capital Account.
(3) On adjustment of final call
(a) Debit Bonus to Shareholders Account
(b) Credit Share Final Call Account
Bonus
 
• Conversation of partly paid up Issue of New Bonus Shares
shares in to fully paid up
Issues out of
` 1. CRR
• Issues out of Free Reserves 2. Securities Premium
[ G.R. P & L e+c ] 3. Free Reserves
• All above reserves must be cash reserves only.

1. Which of the following cannot be used for issue of bonus shares as per the Companies Act?
(a) Securities premium account (b) Revaluation reserve
(c) Capital redemption reserve
2. Which of the following statements is true with regard to declaring and issuing of Bonus Shares?
(a) Assets are transferred from the company to the share holders.
(b) A Bonus issue results in decrease in reserves and surplus.
(c) A Bonus issue is same as declaration of dividends.
3. Which of the following statement is true in case of bonus issue?
(a) Convertible debenture holders will get bonus shares in same proportion as to the existing
shareholders.
(b) Bonus shares may be issued to convertible debenture holders at the time of conversion of such
debentures into shares.
4. Bonus issue is also known as
(a) Scrip issue. (b) Capitalisation issue.
5. The bonus issue is not made unless
(a) Partly paid shares are made fully paid up.
(b) It is provided in its articles of association
6. In case of further issue of shares, the right to renounce the shares in favour of a third party
(a) Must include a right exercisable by the person concerned to renounce the shares;
(b) Should include a right exercisable by the person concerned to renounce the shares;
(c) Is deemed to include a right exercisable by the person concerned to renounce the shares (subject
to the provisions under the articles of the company).
7. A company’s share’s face value is ` 10, book value is ` 20, Right issue price is ` 30 and Market price is `
40, while recording the issue of right share, the securities premium will be credited with
(a) ` 10 (b) ` 20 (c) ` 30
8. A. Right shares enables existing shareholders to maintain their proportional holding in the company.
B. Right share issue does not cause dilution in the market value of the share.
Which of the option is correct:
(a) A-Correct; B Correct (b) A – Incorrect; B Correct
(c) A Correct; B – Incorrect
1. What is meant by Bonus issue? Explain its related provisions as per the Companies Act, 2013.
2. Explain the financial effects of a further issue of equity shares on the market value of the share.
3. What are the advantages and disadvantages of a rights issue?
Bonus Share -155-

HOME WORK
Q-6 Following is the extract of the Balance Sheet of Preet Ltd. as at 31st March, 20X1
Authorised capital : `
16,50,000
12,000 12% Preference shares of ` 10 each fully paid 1,20,000
1,35,000 Equity shares of ` 10 each, ` 8 paid up 10,80,000
Reserves and surplus: General Reserve 1,80,000
Capital Redemption Reserve 60,000
On 1st April, 20X1, the Company has made final call @ ` 2 each on 1,35,000 equity shares. The call
money was received by 20th April, 20X1. Thereafter, the company decided to capitalise its reserves by
way of bonus at the rate of one share for every four shares held.
Show necessary journal entries in the books of the company and prepare the extract of the balance
sheet as on 30th April, 20X1 after bonus issue.
Solution
Journal Entries in the books of Preet Ltd.
` `
1-4-20X1 Equity share final call A/c Dr. 2,70,000
To Equity share capital A/c 2,70,000
(For final calls of ` 2 per share on 1,35,000 equity
shares due as per Board’s Resolution dated….)
20-4-20X1 Bank A/c Dr. 2,70,000
To Equity share final call A/c 2,70,000
(For final call money on 1,35,000 equity shares
received)
Securities Premium A/c Dr. 37,500
Capital Redemption Reserve A/c Dr. 60,000
General Reserve A/c Dr. 1,80,000

Profit and Loss A/c Dr. 60,000
To Bonus to share holders A/c 3,37,500
(For making provision for bonus issue of
one share for every four shares held)
Bonus to share holders A/c Dr. 3,37,500
(For issue of bonus shares)
Extract of Balance Sheet as at 30th April, 20X1 (after bonus issue)
`
Authorised Capital
1,83,750 Equity shares of ` 10 each (refer working note below) 18,37,500
Issued and subscribed capital
12,000 12% Preference shares of ` 10 each, fully paid 1,20,000
1,68,750 Equity shares of ` 10 each, fully paid 16,87,500
(Out of above, 33,750 equity shares @ ` 10 each were issued by way of bonus)
Working Note :
The authorised capital should be increased as per details given below: `
Existing authorised Equity share capital 15,00,000
Add : Issue of bonus shares to equity shareholders 3,37,500
18,37,500
Q-7 Following is the extract of the Balance Sheet of Manoj Ltd. as at 31st March, 20X1
Authorised capital: `
33,00,000
24,000 12% Preference shares of `10 each fully paid 2,40,000
2,70,000 Equity shares of `10 each, `8 paid up 21,60,000
Reserves and surplus :
Capital Redemption Reserve 1,20,000
On 1st April, 20X1, the Company has made final call @ `2 each on 2,70,000 equity shares. The call
money was received by 20th April, 20X1. Thereafter, the company decided to capitalise its reserves by
way of bonus at the rate of one share for every four shares held.
Show necessary journal entries in the books of the company and prepare the extract of the balance
sheet as on 30th April, 20X1 after bonus issue.
Bonus Share -157-

Solution
Journal Entries in the books of Manoj Ltd.
` `
1-4-20X1 Equity share final call A/c Dr. 5,40,000
(For final calls of ` 2 per share on 2,70,000 equity
shares due as per Board’s Resolution dated….)
20-4- Bank A/c Dr. 5,40,000
20X1 To Equity share final call A/c 5,40,000
(For final call money on 2,70,000 equity shares received)
Securities Premium A/c Dr. 75,000
Capital redemption Reserve A/c Dr. 1,20,000
General Reserve A/c Dr. 3,60,000
Profit and Loss A/c (b.f.) Dr. 1,20,000
To Bonus to shareholders A/c 6,75,000
(For making provision for bonus issue of one share
for every four shares held)
Bonus to shareholders A/c Dr. 6,75,000
(For issue of bonus shares)
Extract of Balance Sheet as at 30th April, 20X1 (after bonus issue)
`
Authorised Capital
3,67,500 Equity shares of ` 10 each (refer W.N.) 36,75,000
Issued and subscribed capital
24,000 12% Preference shares of ` 10 each, fully paid 2,40,000
3,37,500 Equity shares of ` 10 each, fully paid 33,75,000
(Out of the above, 67,500 equity shares @ ` 10 each were issued by way of bonus
shares)
Working Note :
The authorised capital should be increased as per details given below: `
Existing authorised Equity share capital 30,00,000
Add: Issue of bonus shares to equity shareholders 6,75,000
36,75,000


CHAPTER-5
REDEMPTION OF PREFERENCE SHARES
1. INTRODUCTION
Redemption is the process of repaying an obligation, at prearranged amounts and timings. It is a contract
giving the right to redeem preference shares within or at the end of a given time period at an agreed price.
These shares are issued on the terms that shareholders will at a future date be repaid the amount which
they invested in the company (along with frequent payment of a specified amount as return on investment
during the tenure of the preference shares). The redemption date is the maturity date, which specifies
when repayment takes place and is usually printed on the preference share certificate. Through the process
of redemption, a company can also adjust its financial structure, for example, by eliminating preference
shares and replacing those with other securities if future growth of the company makes such change
advantageous.
2. PURPOSE OF ISSUING REDEEMABLE
PREFERENCE SHARES
A company may issue redeemable preference shares because of the following:
1 It is a proper way of raising finance in a dull primary market.
2. A company may face difficulty in raising share capital, as its shares are not traded on the stock exchange.
Potential investors, hesitant in putting money into shares that cannot easily be sold, may be encouraged
to invest if the shares are redeemable by the company.
3. The preference shares may be redeemed when there is a surplus of capital and the surplus funds
cannot be utilised in the business for profitable use.
In India, the issue and redemption of preference shares is governed by Section 55 of the Companies Act,
2013.
3. PROVISIONS OF THE COMPANIES ACT (SECTION 55)
A company limited by shares if so authorised by its Articles, may issue preference shares which at the option
of the company, are liable to be redeemed within a period, normally not exceeding 20 years from the date
of their issue. It should be noted that:
(a) no shares can be redeemed except out of profit of the company which would otherwise be available
for dividend or out of proceeds of fresh issue of shares made for the purpose of redemption;
(b) no such shares can be redeemed unless they are fully paid;
(c) (i) in case of such class of companies, as may be prescribed and whose financial statement comply with
the accounting standards prescribed for such class of companies under Section 133, the premium, if
Redemption of Preference Shares -159-

any, payable on redemption shall be provided for out of the profits of the company, before the shares
are redeemed:
Provided also that premium, if any, payable on redemption of any preference shares issued on or
before the commencement of this Act by any such company shall be provided for out of the profits of
the company or out of the company’s securities premium account, before such shares are redeemed.
(ii) in case of other companies (not falling under (i) above), the premium, if any payable on redemption
shall be provided for out of the profits of the company or out of the company’s securities premium
account, before such shares are redeemed.
(d) where any such shares are proposed to be redeemed out of the profits of the company, there shall, out
of profits which would otherwise have been available for dividends, be transferred to a reserve account
to be called Capital Redemption Reserve Account, a sum equal to the nominal amount of the shares
redeemed; and the provisions of the Act relating to the reduction of the share capital of a company
shall, except as provided in the Section, apply as if the Capital Redemption Reserve (CRR) Account
were the paid-up share capital of the company. The utilisation of CRR Account is further restricted to
issuance of fully paid-up bonus shares only.
From the legal provision outlined above, it is apparent that on the redemption of redeemable preference
shares out of accumulated profits it will be necessary to transfer to the Capital Redemption Reserve
Account an amount equal to the amount repaid on the redemption of preference shares on account of
face value less proceeds of a fresh issue of capital made for the purpose of redemption. The object is
that with the repayment of redeemable preference shares, the security for creditors/ bankers, etc.
should not be reduced. At times, a part of the preference share capital may be redeemed out of
accumulated profits and the balance out of a fresh issue.
4. Redemption of Preference Shares by Fresh Issue of Shares
One of the methods for redemption of preference shares is to use the proceeds of a fresh issue of shares. A
company can issue new shares (equity share or preference share) and the proceeds from such new shares
can be used for redemption of preference shares.
The proceeds from issue of debentures cannot be utilised for the purpose.
A problem arises when a fresh issue is made for the purpose of redemption of preference shares, at a
premium. The point to ponder is that whether the proceeds of a fresh issue of shares will include the
amount of securities premium for the purpose of redemption of preference shares.
For securities premium account, Section 52 of the Companies Act, 2013 provides that the securities premium
account may be applied by the company;
(a) Towards issue of un-issued shares of the company to be issued to members of the company as fully
paid bonus securities
(b) To write off preliminary expenses of the company
(c) To write off the expenses of, or commission paid, or discount allowed on any of the securities or
debentures of the company
(d) To provide for premium on the redemption of redeemable preference shares or debentures of the
company.
(e) For the purchase of its own shares or other securities.
Note : If may be noted that certain class of Companies whose financial statements comply with the Accounting
Standards as prescribed under Section 133 of the Companies Act, 2013, can’t apply the securities premium
account for the purposes (b) and (d) mentioned above.

Note : All the questions in this chapter have been solved on the basis that the companies referred in the
questions are governed by Section 133 of the Companies Act, 2013 and comply with the Accounting Standards
prescribed for them.
Accordingly the balance in securities premium account has not been utilized for the purpose of premium
payable to redemption of preference share.
Any other way, except the above prescribed ways, in which securities premium account is utilised will be in
contravention of law.
Thus, the proceeds of a fresh issue of shares will not include the amount of securities premium for the
purpose of redemption of preference shares.
Reasons for issue of New Equity Shares
A company may prefer issue of new equity shares for the following reasons:
(a) When the company has come to realise that the capital is needed permanently and it makes more
sense to issue Equity Shares in place of Redeemable Preference Shares which carry a fixed rate of
dividend.
(b) When the balance of profit, which would otherwise be available for dividend, is insufficient.
(c) When the liquidity position of the company is not good enough.
Advantages of redemption of preference shares by issue of fresh equity shares
Following are the advantages of redemption of preference shares by the issue of fresh equity shares:
(1) No cash outflow of money – now or later.
(2) New equity shares may be valued at a premium.
(3) Shareholders retain their equity interest.
Disadvantages of redemption of preference shares by issue of fresh equity shares
The disadvantages are:
(1) There will be dilution of future earnings;
(2) Share-holding in the company is changed.
Accounting Entries
1. When new shares are issued at par
Bank Account
To Share Capital Account
(Being the issue of …….shares of ‘……each for the purpose of
redemption of preference shares, as per Board’s Resolution No……
dated……. ) Dr.

2. When new shares are issued at a premium
Bank Account Dr.
To Share Capital Account
To Securities Premium Account
(Being the issue of ……..shares of ‘……each at a premium of ‘……each
for the purpose of redemption of preference shares as per Board’s
Resolution No….. dated……)
3. When preference shares are redeemed at par
Redeemable Preference Share Capital Account Dr.
To Preference Shareholders Account
4. When preference shares are redeemed at a premium
Redeemable Preference Share Capital Account Dr.
Premium on Redemption of Preference Shares Account Dr.
To Preference Shareholders Account
5. When payment is made to preference shareholders
Preference Shareholders Account Dr.
To Bank Account
6. For adjustment of premium on redemption
Profit and Loss Account Dr.
To Premium on Redemption of Preference Shares Account
---0---0---

CLASS WORK
Q-1 The Balance Sheet of X Ltd. as on 31st March, 2013 is as follows:

Particulars `
EQUITY AND LIABILITIES
1. Shareholders’ funds
a Share capital 2,90,000
b Reserves and Surplus 48,000
2. Current liabilities Trade Payables 56,500
Total 3,94,500
ASSETS
1. Fixed Assets
Tangible asset 3,45,000
Non-current investments 18,500
2. Current Assets
Cash and cash equivalents (bank) 31,000
Total 3,94,500
The share capital of the company consists of `50 each equity shares of ` 2,25,000 and ` 100 each
Preference shares of ` 65,000 (issued on 1.4.2011). Reserves and Surplus comprises Profit and Loss
Account only.
In order to facilitate the redemption of preference shares at a premium of 10%, the Company decided:
(a) to sell all the investments for ` 15,000.
(b) to finance part of redemption from company funds, subject to, leaving a bank balance of ` 12,000.
(c) to issue minimum equity share of ` 50 each at a premium of ` 10 per share to raise the balance of
funds required.
You are required to pass:
The necessary Journal Entries to record the above transactions and prepare the balance sheet as on
completion of the above transactions.
Q-2 The capital structure of a company consists of 20,000 Equity Shares of `10 each fully paid up and 1,000
8% Redeemable Preference Shares of ` 100 each fully paid up (issued on 1.4.2011).
Undistributed reserve and surplus stood as: General Reserve ` 80,000; Profit and Loss Account ` 20,000;
Investment Allowance Reserve (out of which ` 5,000, not free for distribution as dividend) ` 10,000;
Securities Premium ` 2,000, Cash at bank amounted to ` 98,000. Preference shares are to be redeemed
at a Premium of 10% and for the purpose of redemption, the directors are empowered to make fresh
issue of Equity Shares at par after utilising the undistributed reserve and surplus, subject to the
conditions that a sum of ` 20,000 shall be retained in general reserve and which should not be utilised.

Pass Journal Entries to give effect to the above arrangements and also show how the relevant items
will appear in the Balance Sheet of the company after the redemption carried out.
Q-3 The Balance Sheet of XYZ as at 31st December, 2015 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
Under the terms of their issue, the preference shares are redeemable on 31st March, 2016 at 5%
premium. In order to finance the redemption, the company makes a rights issue of 50,000 equity
shares of ` 100 each at ` 110 per share, ` 20 being payable on application, ` 35 (including premium) on
allotment and the balance on 1st January, 2017. The issue was fully subscribed and allotment made on
1st March, 2016. The money due on allotment were received by 31st March, 2016. The preference
shares were redeemed after fulfilling the necessary conditions of Section 55 of the Companies Act,
2013.
You are asked to pass the necessary Journal Entries and show the relevant extracts from the balance
sheet as on 31st March, 2016 with the corresponding figures as on 31st December, 2015.
Q-4 The following is the summarized Balance Sheet of Trinity Ltd. as at 31.3.2015:
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 and Advances
Capital
10,000 10% Redeemable Preference Inventory 45,000
Shares of ` 10 each 1,00,000 Trade receivables 25,000
10,000 Equity Shares of ` 10 each 1,00,000 Cash and Bank Balances 50,000
(A) 2,00,000
Reserves and Surplus
Securities Premium 70,000
Profit and Loss A/c 18,500
(B) 2,08,500
Current Liabilities and Provisions
(C) 11,500
Total (A + B + C) 4,20,000 Total 4,20,000

For the year ended 31.3.2016, the company made a net profit of ` 35,000 after providing ` 20,000
depreciation.
The following additional information is available with regard to company’s operation:
1. The preference dividend for the year ended 31.3.2016 was paid.
2. Except cash and bank balances other current assets and current liabilities as on 31.3.2016, was the
same as on 31.3.2015.
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
31.3.2016.
5. To meet the cash requirements of redemption, the company sold investments.
6. Investments were sold at 90% of cost on 31.3.2016.
You are required to prepare necessary journal entries to record redemption and issue of bonus
shares.

1. Securities premium cannot be used to _______.

(a) Issue bonus shares
(b) Redeem preference shares
(c) Write-off preliminary expenses
2. S Ltd. issued 2,000, 10% Preference shares of `100 each at par on 1.4.20X1, which are redeemable
at a premium of 10%. For the purpose of redemption, the company issued 1,500 Equity Shares of
`100 each at a premium of 20% per share. At the time of redemption of Preference Shares, the
amount to be transferred by the company to the Capital Redemption Reserve Account = ?
(a) `50,000 (b) `40,000 (c) `2,00,000
3. Which of the following cannot be used for the purpose of creation of capital redemption reserve
account?
(a) Profit and loss account (credit balance)
(b) General reserve account
(c) Unclaimed dividend account
4 According to Section 52 of the Companies Act, 2013, the amount in the Securities Premium A/c
cannot be used for the purpose of
(a) Issue of fully paid bonus shares
(b) Writing off losses of the company
(c) For purchase of own securities
5. Which of the following can be utilized for redemption of preference shares?
(a) The proceeds of fresh issue of equity shares
(b) The proceeds of issue of debentures
(c) The proceeds of issue of fixed deposit
6. Which of the following statements is True?
(a) Capital redemption reserve cannot be used for writing off miscellaneous expenses and losses
(b) Capital profit realized in cash cannot be used for payment of dividend
(c) Reserves created by revaluation of fixed assets are not permitted to be capitalized.

7. Which of the following accounts can be used for transfer to capital redemption reserve account?
(a) General reserve account
(b) Forfeited shares account
(c) Profit prior to incorporation
8. Preference shares amounting to `2,00,000 (already issued on 1.4.20X1) are redeemed at a premium
of 5%, by issue of shares amounting to `1,00,000 at a premium of 10%. The amount to be transferred
to capital redemption reserve = ?
(a) `1,05,000 (b) `1,00,000 (c) `2,00,000
1. What is the purpose of issuing redeemable preference shares?

2. What are the provisions of the Companies Act, 2013 related with redemption of preference shares?
Explain in brief.

HOME WORK
Q-5 C Limited had 3,000, 12% Redeemable Preference Shares of ` 100 each, fully paid up. The company had
to redeem these shares at a premium of 10%.
It was decided by the company to issue the following:
(i) 25,000 Equity Shares of `10 each at par,
(ii) 1,000 14% Debentures of `100 each.
The issue was fully subscribed and all amounts were received in full .The payment was duly made. The
company had sufficient profits. Show Journal Entries in the books of the company.
Hints : Amount transfer to CRR 50,000.
Q-6 The books of B Ltd. showed the following balance on 31st December, 2015 :
30,000 Equity Shares of `10 each fully paid; 18,000 12% Redeemable Preference Shares of ` 10 each
fully paid; 4,000 10% Redeemable Preference Shares of ` 10 each, `8 paid up (all shares issued on 1st
April, 2014).
Undistributed Reserve and Surplus stood as: Profit and Loss Account ` 80,000; General Reserve ` 1,20,000;
Securities Premium Account 15,000 and Capital Reserve ` 21,000.
Preference shares are redeemed on 1st January, 2016 at a premium of ` 2 per share. The whereabouts
of the holders of 100 shares of `10 each fully paid are not known.
For redemption, 3,000 equity shares of ` 10 each are issued at 10% premium. At the same time, a bonus
issue of equity share was made at par, two shares being issued for every five held on that date out of
the Capital Redemption Reserve Account.
Show the necessary Journal Entries to record the transactions.
Hints : Working Note:
(1) Partly paid-up preference shares cannot be redeemed.
(2) Amount to be Transferred to Capital Redemption Reserve Account
Face value of share to be redeemed `1,80,000
Less: Proceeds from fresh issue (excluding premium) (` 30,000)
`1,50,000
(3) No bonus shares on 3,000 equity shares issued for redemption.

Q-7 The following is the summarised Balance Sheet of Bumbum Limited as at 31st March, 2015:
`
Sources of funds
Authorized capital
10,000 Preference shares of ` 100 each (8% redeemable) 10,00,000
15,00,000
Issued, subscribed and paid up
5,000, 8% Redeemable Preference shares of ` 100 each 5,00,000
Reserves & Surplus
Securities Premium 6,00,000
Profit & Loss A/c 40,000
2,500, 9% Debentures of ` 100 each 2,50,000
Trade payables 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
Cash & Bank balance 2,80,000
25,10,000
In Annual General Meeting held on 20th June, 2015 the company passed the following resolutions:
(i) To split equity share of ` 10 each into 5 equity shares of ` 2 each from 1st July.
(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.
On 10th July, 20X5 investments were sold for ` 5,55,000 and preference shares were redeemed.
40% of Debenture holders exercised their option to accept cash and their claims were settled on 1st
August, 2015.
The company fixed 5th September, 2015 as record date and bonus issue was concluded by 12th
September, 2015.
You are requested to journalize the above transactions including cash transactions and prepare Balance
Sheet as at 30th September, 2015. All working notes should form part of your answer.
Hints : CRR 3,90,000 Balance Sheet Total - 19,42,500
❑

CHAPTER-6
DEBENTURE
INTRODUCTION
Under Section 71 (1) of the Companies Act, 2013, a company may issue debentures with an option to convert
such debentures into shares, either wholly or partly at the time of redemption. Provided that the issue of
debentures with an option to convert such debentures into shares, wholly or partly, should be approved by
a special resolution passed at a duly convened general meeting. Section 71 (2) further provides that no
company can issue any debentures which carry any voting rights. Section 71 (4) provides that where debentures
are issued by a company, the company should create a debenture redemption reserve account out of the
profits of the company available for payment of dividend and the amount credited to such account should
not be utilised by the company for any purpose other than the redemption of debentures.
THEORY
Redeemable debentures may be redeemed
 after a fixed number of years or
 any time after a certain number of years has elapsed since their issue,
 on giving a specified notice, or by annual drawing.
DEBENTURE REDEMPTION RESERVE
A company issuing debentures is required to create a debenture redemption reserve account out of the
profits available for distribution of dividend and amounts credited to such account cannot be utilised by the
company except for redemption of debentures. Such an arrangement would ensure that the company will
have sufficient liquid funds for the redemption of debentures at the time they should fall due for payment.
An appropriate amount is transferred from profits every year to Debenture Redemption Reserve and its
investment is termed as Debenture Redemption Reserve Investment. These investment earn certain amount
of income i.e. interest which is reinvested together with the fixed appropriated amount for the purpose in
subsequent years. In last year, the interest earned and the appropriated fixed amount are not invested. In
fact, at this stage the Debenture Redemption Reserve Investments are encashed and the amount so obtained
is used for the redemption of debentures. Any profit or loss made on the encashment of Debenture
Redemption investments is also transferred to Debenture Redemption Reserve Account.
Section 71 of the Companies Act 2013 covers the requirement of creating a debenture redemption reserve
account. Section 71 states as follows:

(1) Where a company issues debentures under this section, it should create a debenture redemption
reserve account out of its profits which are available for distribution of dividend every year until such
debentures are redeemed.
(2) The amounts credited to the debenture redemption reserve should not be utitlised by the company
except for the purpose aforesaid.
(3) The company should pay interest and redeem the debentures in accordance with the terms and
conditions of their issue.
(4) Where a company fails to redeem the debentures on the date of maturity or fails to pay the interest on
debentures when they fall due, the Tribunal may, on the application of any or all the holders of
debentures or debenture trustee and, after hearing the parties concerned, direct, by order, the company
to redeem the debentures forthwith by the payment of principal and interest due thereon.
ADEQUACY OF DEBENTURE REDEMPTION RESERVE (DRR)
Ministry of Corporate Affairs has made the following clarification on adequacy of Debenture Redemption
Reserve (DRR) vide Circular no. 04/2013 dated 11 February, 2013.
Adequacy of Debenture Redemption Reserve (DRR)
(i) For debentures issued by All No DRR is required
India Financial Institutions (AIFIs)
regulated by Reserve Bank of India
and Banking Companies for both
public as well as privately placed
debentures
(ii) For other Financial Institutions (FIs) DRR will be as applicable to NBFCs
registered with RBI (as per (iii) below)
(iii) For debentures issued by NBFCs 25% of the value of outstanding
registered with RBI and for housing debentures issued through public
finance companies registered with issue. No DRR is required in the case of
National Housing Bank privately placed debentures.
(iv) For debentures issued by other 25% of the value of outstanding
companies including manufacturing debentures issued through public issue.
and infrastructure companies Also 25% DRR is required in the case of
privately placed debentures by listed companies.
For unlisted companies issuing debentures on private
placement basis, the DRR will be 25% of the value of
outstanding debentures.
Debenture -171-
CLASS WORK
(WHEN SINKING FUND IS CREATED TO REDEEM DEBENTURES AT THE END OF THE

SPECIFIED PERIOD)
Q-1 Steady Ltd. issued 2,000, 9% Debentures of Rs. 100 each at par on 1st April 2003 repayable at the end
of 5 years at a premium of 6%. It was decided to institute a Sinking Fund for the purpose, the
investments being expected to yield 8% p.a.Sinking Fund tables show that Re. 1 per annum at 8%
compound interest amounts to Rs. 5.867 in 5 years. Investments were made in multiples of rupees ten
only.
On 31st March, 2008 the investments realised Rs. 1,75,000 and the debentures were redeemed. The
bank balance as on that date was Rs. 54,800.
You are required to show the journal entries relating to the creation of Sinking Fund and to prepare the
relevant ledger accounts in the books of the company.
Ignore debenture interest.
(WHEN DEBENTURES ARE PURCHASED FOR IMMEDIATE CANCELLATION AND THERE
IS NO SINKING FUND)
Q-2 Favourite Ltd. had 2,000, 12% Debentures of Rs. 100 each as on 1st April, 2007.
As per the terms of issue, the company purchased the following debentures in the open market for
immediate cancellation:
1st May - 400 Debentures at Rs. 98 cum-interest
1st January - 800 Debentures at Rs. 100.25 cum-interest
1st March - 200 Debentures at Rs. 98.50 ex-interest
Assuming that debenture interest was payable half-yearly on 30th September and 31st March and the
Income-tax was deductible at the rate of 10% at source.
Show the journal entries in the books of the company and prepare the necessary ledger accounts. The
company closes its books on 31st March.
(WHERE DEBENTURES ARE PURCHASED AS INVESTMENTS AND NO SINKING FUND
EXISTS. THIS ALSO INCLUDES TREATMENT OF INTEREST ON OWN DEBENTURES).
Q-3 In the books of Joy Ltd., the 12% Debentures Account showed a credit balance of Rs. 2,00,000 consisting
of 2,000 debentures of Rs. 100 each as on 1st April, 2007.
During the year debentures were purchased in the open market as follows:
1st August, 300 Debentures at Rs. 95 ex-interest.
1st November, 200 Debentures at Rs. 98 cum-interest.

The Debentures, thus, purchased were retained as investments of the company.
Interest on debentures was payable half-yearly on 30th September and 31st March every year.
You are required to show the journal entries and the ledger accounts in the books of the company.
Ignore Income-tax. Also show how the items would appear in the Balance Sheet.
(CANCELLATION OF OWN DEBENTURES ON A SUBSEQUENT DATE WHERE SINKING
FUND DOES NOT EXIST)
Q-4 Continuing Illustration above, if the Debentures held by the company are cancelled on 31st March,
2008, show the necessary journal entries on cancellation and the effect of the same in the Balance
Sheet of the company.
Q-5 Senco Limited issued ` 1,50,000 5% Debentures on which interest is payable half yearly on 31st March
and 30th September. The company has power to pruchase debentures in the open market for cancellation
thereof. The following purchase were made during the year ended 31st December, 2014 and the
cancellation were made on the following 31st March 2015 :
1st March ` 25,000 nominal purchased for ` 24,725 ex-interest.
1st September ` 20,000 nominal purchased for ` 20,125 cum-interest.
You are required to draw up the following accounts up to the date of cancellation;
(i) Debentures Account;
(ii) Own Debentures Investment Account, and
(iii) Debentures Interest Account.
Ignore taxation and make calculations to the nearest rupee.
Q-6
(i) Swati Associates Ltd. has issued 10,000 12% Debentures of ` 100 each on 1.1.2011. These debentures
are redeemable after 3 years at a premium of 5 per Debenture. Interest is payable annually.
(ii) On October 1, 2012, it buys 1500 debentures from the market at ` 98 per denenture. These are sold
away on June 30, 2013 at ` 105 per Debentures.
(iii) On January 1, 20X3 it buys 1,000 debentures at ` 104 per debenture from the open market. These
are cancelled on April 1, 20X3.
(iv) On October 1, 20X3 it buys 2,000 debentures at ` 106 per debenture from the open market. These
debentures along with other debentures are redeemed on 31st December, 20X3.
Prepare the relevant Ledger Accounts showing the above transactions. Workings should form part of your
answer. Also show the extracts of statement of profit & loss own Debenture Account for the year 20X1,
20X2, 20X3.
(WHEN DEBENTURES ARE PURCHASED FOR IMMEDIATE CANCELLATION AND SINKING
FUND EXISTS)
Q-7 The following balances appeared in the books of Cheerful Ltd. as on 1st April, 2007:
9% Debentures (face value Rs. 100) - Rs. 1,50,000
Debenture Redemption Fund - Rs. 75,000
Debenture Redemption Fund Investment - Rs. 75,000
(in 8% Government Bonds of the face value of Rs. 90,000) ( Per Unit Face Value 100 Rs.)
Debenture -173-
Interest on the debentures was payable on 30th September and 31st March and interest on Government
Bonds was receivable on the same dates.
On 31st May, 2007 the company purchased for immediate cancellation 250 debentures in the market at
Rs. 95 each cum-interest. The amount required for this was raised by selling 8% Government Bonds of
the face value of Rs. 27,000.
On 31st March, 2008 Rs. 20,800 was appropriated for the Sinking Fund and on the same date 8%
Government Bonds were acquired for the amount plus the interest on investments. The face value of
the Government Bonds acquired was Rs. 28,000.
You are required to show the journal entries and ledger accounts in the books of the company. Ignore
Income-tax.
(WHEN DEBENTURES ARE PURCHASED AS INVESTMENTS OF SINKING FUND)
Q-8 Confident Ltd. had 2,000 12% Debentures of Rs. 100 each outstanding as on 1st April 2007. The following
other balances also appeared in the books of the company on this date:
Debentures Redemption Fund Account 1,00,000
Debentures Redemption Fund Investments:
12% Port Trust Bonds (face value Rs. 60,000) 55,000 (Per Unit Face Value 100Rs.)
Own Debentures (face value Rs. 50,000) 45,000
Interest on the debentures was payable on 30th September and 31st March and interest on Port Trust
onds was received on the same dates.
On 1st August, 2007, Rs. 20,000, 12% Port Trust Bonds were sold at Rs. 95 ex-interest and the amount
realised was invested in 200 Own Debentures at Rs. 97 cum-interest. During the year a sum of Rs. 5,800
was appropriated for the Sinking Fund which together with the interest received on Sinking Fund
during the year was invested in Own Debentures at Rs. 95 each.
You are required to show the journal entries and ledger accounts in the books of the company.
(CANCELLATION OF OWN DEBENTURES ON A SUBSEQUENT DATE WHERE SINKING FUND EXISTS)

Q-9 Continuing Illustration above if Own Debentures held by the company are cancelled on 31st March,
2008, show the necessary journal entries on cancellation and the effect of the same in the Balance
Sheet of the Company.
Q-10 MM Ltd. had the following among their ledger opening balances on January 1,20X1:
`
11% Debentures A/c (2000 issue) 50,00,000
Debenture Redemption Reserve A/c 45,00,000
13.5% Debentures in XX Ltd. A/c (Face Value ` 20,00,000) 19,50,000
Own Debentures A/c (Face value ` 20,00,000) 18,50,000
As 31st December, 20X1 was the date for redemption of the 2000 debentures, the company started
buying own debentures and made the following purchases in the open market :
1-2-20X1 2,000 debentures at ` 98 cum-interest.
1-6-20X1 2,000 debentures at ` 99 ex-interest.
Half yearly interest is due on the debentures on the 30th June and 31st December in the case of both
the companies.
On 31st December, 20X1, the debentures in XX Ltd. were sold for ` 95 each ex-interest.

On that date, the outstanding debentures of MM Ltd. were redeemed by payment and by cancellation.
Show the entries in the following ledger accounts of MM Ltd. during 20X1:
(a) Debenture Redemption Reserve A/c
(b) Own Debentures A/c
The face value of a debenture was ` 100 (Round off calculations to the nearest rupee.)
CONVERSION OF DEBENTURES
Q-11 On 1st January, 2014 X Limited issued 10,000 fifteen years debentures of ` 100 each bearing interest at
10% p.a. One of the conditions of issue was that the company could redeem the debentures by giving
six month’s notice at any time after 5 years, at a premium of 4% either by payment in cash or by
allotment of preference shares and/or other debentures at the option of the debentures holders.
On 1st April, 2014 the Company gave notice to the debenture holders of its intention to redeem the
debentures on 1st October, 2014 either by payment in cash or by allotment of 11% preference shares of
` 100 each at ` 130 per share or 11% Second Debentures of ` 100 at ` 96 per debenture.
Holders of 4,000 debentures accept the offer of the preference shares; holders of 4,800 debentures
accepted the offer of the 11% second debentures and the rest demanded cash on 1st October, 2014.
Give the journal entries to give effect to the above as of 1st October, 2014. suggest how discount on
issue of debentures can be dealt in the accounts.
Q-12 Libra Limited recently made a public issue in respect of which the following information is available :
(a) No. of partly convertible debentures issued 2,00,000; face value and issue price ` 10 per debenture.
(b) Covertible portion per debenture 60%; date of conversion on expiry of 6 months from the date of
closing of issue.
(c) Date of closure of subscription lists 1.5.2014, date of allotment 1.6.2014, rate of interest on
debenture 15% payable from the date of allotment, value of equity share for the purpose of
conversion ` 60 (Face Value ` 10).
(d) Underwriting Commission : 2%.
(e) No.of debentures applied for : 1,50,000.
(f) Interest payable on debentures half-yearly on 30th September and 31st March.
Write relevant journal entries for all transactions arising out of the above during the year ended
31st March, 2015 (including cash and bank entries).
Q-13 The summarised Balance Sheet of Convertible Limited, as on 30th June, 20X1, stood as follows:
Liabilities `
Share Capital : 5,00,000 equity shares of ` 10 each fully paid 50,00,000
Debenture Redemption Reserve 50,00,000
13.5% Convertible Debentures, 1,00,000 Debentures of ` 100 each 1,00,00,000
Other loans 50,00,000
Current Liabilities and Provisions 1,25,00,000
4,50,00,000
Assets :
Fixed Assets (at cost less depreciation) 1,60,00,000
Debenture -175-
Debenture Redemption Reserve Investments 40,00,000
Cash and bank Balances 50,00,000
Other Current Assets 2,00,00,000
4,50,00,000
The debentures are due for redemption on 1st July, 20X1. The terms of issue of debentures provided
that they were redeemable at a premium 5% and also conferred option to the debenture holders to
convert 20% of their holding into equity shares at a predetermined price of ` 15.75 per share and the
payment in cash.
Assuming that :
(i) except for 100 debenture holders holding totally 25,000 debentures, the rest of them exercised
the option for maximum conversion.
(ii) the investments realise ` 44 lakhs on sale; and
(iii) all the transactions are put through, without any lag, on 1st July, 20X1.
Redraft the balance sheet of the company as on 1st July, 20X1 after giving effect to the redemption.
Show your calculations in respect of the number of equity shares to be allotted and the cash payment
necessary.

1. Securities premium cannot be used to _______.

(a) Issue bonus shares (b) Redeem preference shares
(c) Write-off preliminary expenses
2. S Ltd. issued 2,000, 10% Preference shares of `100 each at par on 1.4.20X1, which are redeemable at a
premium of 10%. For the purpose of redemption, the company issued 1,500 Equity Shares of `100 each
at a premium of 20% per share. At the time of redemption of Preference Shares, the amount to be
transferred by the company to the Capital Redemption Reserve Account = ?
(a) `50,000 (b) `40,000 (c) `2,00,000
3. Which of the following cannot be used for the purpose of creation of capital redemption reserve
account?
(a) Profit and loss account (credit balance) (b) General reserve account
(c) Unclaimed dividend account
4. According to Section 52 of the Companies Act, 2013, the amount in the Securities Premium A/c cannot
be used for the purpose of
(a) Issue of fully paid bonus shares
(b) Writing off losses of the company
(c) For purchase of own securities
5. Which of the following can be utilized for redemption of preference shares?
(a) The proceeds of fresh issue of equity shares
(b) The proceeds of issue of debentures
(c) The proceeds of issue of fixed deposit
6. Which of the following statements is True?
(a) Capital redemption reserve cannot be used for writing off miscellaneous expenses and losses
(b) Capital profit realized in cash cannot be used for payment of dividend
(c) Reserves created by revaluation of fixed assets are not permitted to be capitalized.
7. Which of the following accounts can be used for transfer to capital redemption reserve account?
(a) General reserve account
(b) Forfeited shares account
(c) Profit prior to incorporation
8. Preference shares amounting to ` 2,00,000 (already issued on 1.4.20X1) are redeemed at a premium of
5%, by issue of shares amounting to ` 1,00,000 at a premium of 10%. The amount to be transferred to
capital redemption reserve = ?
(a) ` 1,05,000 (b) ` 1,00,000 (c) ` 2,00,000
1. What is the purpose of issuing redeemable preference shares?
2. What are the provisions of the Companies Act, 2013 related with redemption of preference shares?
Explain in brief.
Debenture -177-
HOME WORK
(WHEN DEBENTURES ARE PURCHASED FOR IMMEDIATE CANCELLATION AND THERE

IS NO SINKING FUND)
Q-14 On January 1, Rama Ltd., had 500 Debentures of ` 100 each outstanding in its books carrying interest at
6% per annum. In accordance with the powers in the deed, the directors acquired debentures from the
open market for immediate cancellation as follows:
March 1 ` 5,000 at ` 98.00 (cum interest)
Aug. 1 ` 10,000 at ` 100.25 (cum interest)
Dec. 15 ` 2,500 at ` 98.50 (ex-interest)
Debenture interest is payable half-yearly, on 30th June and 31st Dec. Show ledger accounts of
Debentures, Debenture interest and profit or loss on cancellation, ignoring income-tax.
Hints
Balance of debenture a/c. 32500, Debenture interest a/c. 2493.75
WHEN DEBENTURES ARE PURCHASED AS INVESTMENTS OF SINKING FUND

Q-15 The following balances appeared in the books of a company as on December 31,20X1: 6% Mortgage
10,000 debentures of ` 100 each; Debenture Redemption Reserve (for redemption of debentures) `
10, 42,000; Investment ` 5,28,000, 4% Government Loan purchased at par and ` 5,60,000, 3-1/2%
Government paper purchased for ` 5,42,000.
The Interest on debentures had been paid up to December 31,20X1.
On February 28, 20X2, the investments were sold at ` 90 and ` 87 respectively and the debentures were
paid off at 101, together with accrued interest.
Write up the ledger accounts concerned. The Debenture Redemption Reserve is non cumulative.
Hints
DRFI Loss 107600, DRFI sale value 475200 and 487200.
Q-16 The following balances appeared in the books of Paradise Ltd. on 1-4-20X1:
(i) 12 % Debentures ` 7,50,000
(ii) Balance of DRR ` 6,00,000
(iii) DRR Investment 6,00,000 represented by 10% ` 6,50,000 secured bonds of government of India.
Annual contribution to the DRR was ` 1,20,000 made on 31st March each year. On 31-3-20X2, balance at
bank was ` 3,00,000 before receipt of interest. The company sold the investment at 90% of cost, for
redemption of debentures at a premium of 10% on the above date.
You are required to prepare the following accounts for the year ended 31st march, 20X2:

(1) Debentures Account
(2) DRR Account
(3) DRR Investment Account
(4) Bank Account
(5) Debenture Holders Account.
Hint
Loss on DRFI A/c. 15000, Transfer to G.R. 770000.
(WHERE DEBENTURES ARE PURCHASED AS INVESTMENTS AND NO SINKING FUND
EXISTS. THIS ALSO INCLUDES TREATMENT OF INTEREST ON OWN DEBENTURES
Q-17 Sencom Limited issued ` 1,50,000 5% Debentures on which interest is payable half yearly on 31st March
and 30th September. The company has power to purchase debentures in the open market for
cancellation thereof. The following purchases were made during the year ended 31st December, 20X1
and the cancellation were made on the following 31st March :
1st March ` 25,000 nominal value purchased for ` 24,725 ex-interest.
1st September ` 20,000 nominal value purchased for ` 20,125 cum-interest.
You are required to draw up the following accounts up to the date of cancellation :
(i) Debentures Account;
(ii) Own Debenture Investment Account; and
(iii) Debenture Interest Account.
Ignore taxation and make calculations to the nearest rupee.
Hints
Debenture a/c. 105000, Own debenture a/c. cost 44333, profit on own debenture 567.
ISSUE OF BONUS SHARES AND REDEMPTION OF DEBENTURE WITH BALANCE SHEET
Q-18 The Summary Balance Sheet of BEE Co. Ltd. on 31st March, 20X1 read as under :
Share Capital : Freehold property 1,15,000
Authorised: Stock 1,35,000
30,000 Equity Shares of ` 10 each 3,00,000 Trade receivables 75,000
Issued and Subscribed: Cash 30,000
20,000 Equity Shares of ` 10 each Balance at Bank 2,00,000
fully paid 2,00,000
12% Debentures 1,20,000
Trade payables 1,15,000 _______
5,55,500 5,55,000
At the Annual General Meeting it was resolved :
(a) To give existing shareholders the option to purchase one ` 10 share at ` 15 for every four shares
(held prior to the bonus distribution), this option being taken up by all shareholders.
(b) To issue one bonus share for every four shares held.
(c) To repay the debentures at a premium of 3%.
Give the necessary journal entries and the company’s Balance Sheet after these transactions are
completed.
Debenture -179-
CONVERSION OF DEBENTURE AND BALANCE SHEET
Q-19 The summarised Balance Sheet of Convertible Limited, as on 30th June, 20X1, stood as follows:
Liabilities `
Share Capital : 5,00,000 equity shares of ` 10 each fully paid 50,00,000
Debenture Redemption Reserve 50,00,000
13.5% Convertible Debentures, 1,00,000 Debentures of ` 100 each 1,00,00,000
Other loans 50,00,000
Current Liabilities and Provisions 1,25,00,000
4,50,00,000
Assets :
Fixed Assets (at cost less depreciation) 1,60,00,000
Debenture Redemption Reserve Investments 40,00,000
Cash and bank Balances 50,00,000
Other Current Assets 2,00,00,000
4,50,00,000
The debentures are due for redemption on 1st July, 20X1. The terms of issue of debentures provided
that they were redeemable at a premium 5% and also conferred option to the debenture holders to
convert 20% of their holding into equity shares at a predetermined price of ` 15.75 per share and the
payment in cash.
Assuming that :
(i) except for 100 debenture holders holding totally 25,000 debentures, the rest of them exercised
the option for maximum conversion.
(ii) the investments realise ` 44 lakhs on sale; and
(iii) all the transactions are put through, without any lag, on 1st July, 20X1.
Redraft the balance sheet of the company as on 1st July, 20X1 after giving effect to the redemption.
Show your calculations in respect of the number of equity shares to be allotted and the cash payment
necessary.
Hint
Balance sheet total Rs. 3,64,75,000


CHAPTER-7
INVESTMENT ACCOUNTS
INTRODUCTION
Investments are assets held by an enterprise for earning income by way of dividends, interest and rentals,
for capital appreciation, or for other benefits to the investing enterprise. Investment Accounting is done as
per AS 13.
The investments are classified into two categories as per AS 13, viz., Current Investments and Long-term
Investments. A current Investment is an investment that is by its nature readily realisable and is intended to
be held for not more than one year from the date on which such investment is made. The carrying amount for
current investments is the lower of cost and fair value. Any reduction to fair value and any reversals of such
reductions are included in the statement of profit and loss. A long-term investment is an investment other
than a current investment. Long term investments are usually carried at cost. However, when there is a
decline, other than temporary, in the value of a long term investment, the carrying amount is reduced to
recognise the decline. The reduction in carrying amount is charged to the statement of profit and loss.
THEORY:
1. AS 13, Accounting for Investments which deals with accounting for investments in the financial
statements and related disclosure requirements except:
(i) Bases for recognition of interest, dividends and rentals earned on investments
(ii) operating or financial leases
(iii) investment of retirement benefit plans and life insurance enterprises
(iv) mutual funds and banking company investments etc.
(v) Assets held as Stock-in-trade are not 'Investments'
2. The investments are classified into two categories as per AS 13, viz., Current Investments and Long-
term Investments. Current Investments: A current Investment is an investment that is by its nature
readily realisable and is intended to be held for not more than one year from the date on which such
investment is made.
The carrying amount for current investments is the lower of cost and fair value.
Long-term Investments: A long-term investment is an investment other than a current investment. o
Long term investments are usually carried at cost. o If there is a decline, other than temporary, in the
value of a long term investment; the carrying amount is reduced to recognise the decline. The reduction
in carrying amount is charged to the statement of profit and loss.
Investment Accounts -181-

3. The cost of an investment includes acquisition charges such as brokerage, fees and duties. If an
investment is acquired, or partly acquired, by the issue of shares or other securities, the acquisition
cost is the fair value of the securities issued. The fair value may not necessarily be equal to the nominal
or par value of the securities issued.
4. On disposal of an investment, the difference between the carrying amount and the disposal proceeds,
net of expenses is recognized in the profit and loss statement, When a part of the holding of an
individual investment is disposed, the carrying amount is required to be allocated to that part on the
basis of the average carrying amount of the total holding of the investment, In respect of shares,
debentures and other securities held as stock-in-trade, the cost of stocks disposed of may be determined
by applying an appropriate cost formula (e.g., first-in, first-out (FIFO), average cost, etc.). These cost
formulae are the same as those specified in AS 2, Valuation of Inventories.
5. A separate Investment Account should be made for each scrip purchased. The scrips purchased may be
broadly divided into two categories, viz.
1. Fixed income bearing scrip: These refer to securities having fixed return of income. Investment in
Government securities or debentures comes under this category. Transaction for fixed income
bearing securities may occur on following basis:
(a) Ex-interest basis
(b) Cum- interest basis
2. Variable income bearing scrip. These refer to securities having variable return of income. Investment
in equity shares comes under this category. The following points should be noted with respect to
investment in equity shares:
(a) dividends from investments in shares are not recognised in the statement of profit and loss until
a right to receive payment is established;
(b) the amount of dividend accruing between the date of last dividend payment and the date of
purchase cannot be immediately ascertained.

CLASS WORK
METHOD -1 ACCOUNTING OF FIXED INCOME SECURITIES

Q-1 A purchased on 1st March ` 24,000 5% Bharat Debenture Stock at 90 cum interest, interest being payable
on 31st March and 30th September each year. Stamp and expenses on purchase amounted to ` 20 and
brokerage at 2% was charged on cost; interest for the half-year was received on the due date. On 1st
September ` 10,000 of the stock was sold at 92 ex-interest less brokerage at 2%. On 30th September `
8,000 stock was purchased at 91 ex-interest plus brokerage at 2% and charges` 10. On 1st December,`
6,000 stock was sold at 94 cum interest less brokerage 2%. The market price of stock on 31st December
was 881 2%. Show the Investment for the year ended 31st December, marking all calculation in months.
Q-2 Tee Ltd. purchased on 1st May, 2010 13.5% Convertible Debentures in Dee Ltd. of face value of `
5,00,000 @ 105 cum-interest; Interest on the debentures is payable each year on 31st March and 30
September. The accounting year adopted by Tee Ltd. is the calendar year. The following other transactions
were entered into in 2010 by Tee Ltd. in regard to these debentures:
Aug. 1 Purchased ` 2,50,000 Debentures @ 107 cum interest.
Oct. 1 Sale of ` 2, 00,000 Debentures @ 103.
Dec. 31 Receipt of 10,000 Equity Shares in Dee. Ltd. of `10 each in conversion of 20% of the Debentures
held.
The market value of the Debentures and Equity shares in Dee Ltd. at the end of 2010 was ` 96 and ` 15
respectively. Prepare the Debenture Investment Account in the books of Tee Ltd. on Average cost.
Q-3 On 1st April 2009, XY & Co. held 9% Debentures in B. Ltd of the face value of`10,000 at a cost of 8,000.
Market value on that date was ` 9,000. Interest is payable on 31st Dec. every year. On 1st Dec.2009.
Debentures of nominal value of ` 6,000 were purchased for ` 5,000 ex-interest and on 31st Dec. 2009,
Debenture of Nominal value of ` 2,000 were sold cum-interest for ` 1,900. On 1st Jan. 2010, debentures
of nominal value of ` 6,000 were bought at`5,800. The market value of the Debentures on 31st March
2010 was at 90%. Make out 9% debentures Account in the books of XY Co. Ltd. showing profit and loss on
sale of Investment. Stocks on 31st March each year at valued at lower of cost or market price.
METHOD -2 ACCOUNTING OF VARIABLE INCOME SECURITIES

Q-4 Mr. X purchased 500 equity shares of ` 100 each in Omega Co. Ltd. for ` 62,500 inclusive of brokerage
and stamp duty. Some years later the company resolved to capitalise its profits and to issue to the
holders of equity shares, one equity bonus share for every share held by them. Prior to capitalisation,
the shares of Omega Co. Ltd. were quoted at ` 175 per share. After the capitalisation, the shares were
quoted at ` 92.50 per share. Mr. X. sold the bonus shares and received at ` 90 per share. Prepare the
Investment Account in X’s books on average cost basis.
Q-5 On 1st January 20X1, Singh had 20,000 equity shares in X Ltd. Nominal value of the shares was ` 10 each
but their book value was ` 16 per share. On 1st June 20X1, Singh purchased 5,000 more equity shares in
the company at a premium of ` 4 per share. On 30th June, 20X1, the directors of X Ltd. announced a
bonus and rights issue. Bonus was declared at the rate of one equity share for every five shares held
and these shares were received on 2nd August, 20X1. The terms of the rights issue were :
(a) Rights shares to be issued to the existing holders on 10th August, 20X1.
(b) Rights issue would entitle the holders to subscribe to additional equity shares in the Company at
the rate of one share per every three held at ` 15 per share-the whole sum being payable by 30th
September, 20X1.
(c) Existing shareholders were entitled to transfer their rights to outsiders, either wholly or in part.
(d) Singh exercised his option under the issue for 50% of his entitlements and the balance of rights he
sold to Ananth for a consideration of ` 1.50 per share.
(e) Dividends for the year ended 31st March, 20X1, at the rate of 15% were declared by the Company
and received by Singh on 20th October, 20X1.
(f) On 1st November, 20X1, Singh sold 20,000 equity shares at a premium of ` 3 per share.
The market price of share on 31-12-20X1 was ` 14. Show the Investment Account as it would
appear in Singh's books on 31-12-20X1 and the value of shares held on that date..
Q-6 On 1st April, 20X1, XY Ltd. has 15,000 equity shares of ABC Ltd. at a book value of ` 15 per share (nominal
value ` 10 per share). On 1st June, 20X1, XY Ltd. acquired 5,000 equity shares of ABC Ltd. for ` 1,00,000.
ABC Ltd. announced a bonus and right issue.
(1) Bonus was declared, at the rate of one equity share for every five shares held, on 1st July 20X1.
(2) Right shares are to be issued to the existing shareholders on 1st September 20X1. 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 31.3.20X1 were declared by ABC Ltd. @ 20%, which was received by
XY Ltd. on 31st October 20X1. XY Ltd.
(i) Took up half the right issue.
(ii) Sold the remaining rights for ` 8 per share.
(iii) Sold half of its shareholdings on 1st January 20X2 at ` 16.50 per share. Brokerage being 1%.
You are required to prepare Investment account of XY Ltd. for the year ended 31st March 20X2 assuming the
shares are being valued at average cost.
METHOD-3 COMBINED ACCOUNTING OF FIXED AND VARIABLE INCOME SECURITIES.

Q-7 Mr. Brown has made following transactions during the financial year 20X1-X2:
Date Particulars
01.05.20X1 Purchased 24,000 12% Bonds of ` 100 each at ` 84 cum-interest.
Interest is payable on 30th September and 31st March every year.
15.06.20X1 Purchased 1,50,000 equity shares of ` 10 each in Alpha Limited
for ` 25 each through a broker, who charged brokerage @ 2%.
10.07.20X1 Purchased 60,000 equity shares of `10 each in Beeta Limited for
` 44 each through a broker, who charged brokerage @2%.
14.10.20X1 Alpha Limited made a bonus issue of two shares for every three
shares held.
31.10.20X1 Sold 80,000 shares in Alpha Limited for ` 22 each.
01.01.20X2 Received 15% interim dividend on equity shares of Alpha Limited.

15.01.20X2 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.
01.03.20X2 Sold 15,000 12% Bonds at ` 90 ex-interest.
15.03.20X2 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, 20X2.

 Investment Accounting is done as per Accounting Standard-13.

 Two type of Investments :
 Long Term Investments
 Current Investments
 Valuation of Current investment – Lower of Cost or Fair Value/net Realizable Value
 Valuation of Long Term investment – At cost
 Reclassification :
 From Current to Permanent ? Valuation at Cost or Fair value, whichever is lower
 From Permanent to Current ? Valuation at Cost or Carrying Amount, whichever is lower
 Disposal of Investment:
 Difference between carrying amount and disposal proceeds is transferred to Profit &
Loss A/c.
 In case of partial sale, weighted average method to be used.
 Sale of Rights:
 If rights are not subscribed for but are sold in the market, the sale proceeds of rights are
taken to the profit and loss statement as per para 13 of AS 13 “Accounting for Investment”.
In this case, the sale proceeds will not appear in the dividend column of the Investment
account.
 However, when the investments are acquired on cum-right basis and the market value
of investments immediately after their becoming ex-right is lower than the cost for
which they were acquired, it may be appropriate to apply the sale proceeds of rights to
reduce the carrying amount of such investments to the market value. In this case, the
sale proceeds will credited to Investment account.
 Here, it is pertinent to note that if right shares are issued during the year, then year-end
fall in the market value of the shares shall not be considered as immediate fall in the
market value of the shares after issue of right shares and in such a case, the sale proceeds
of rights shall be taken to the profit and loss statement.

1. The cost of Right shares is

(a) added to the cost of investments.
(b) subtracted from the cost of investments.
(c) no treatment is required.
2. Long term investments are carried at
(a) fair value.
(b) cost less ‘other than temporary’ decline.
(c) Cost and market value whichever is less.
3 Current investments are carried at
(a) Fair value. (b) cost.
(c) Cost and fair value, whichever is less.
4. A Ltd. acquired 2,000 equity shares of Omega Ltd. on cum-right basis at ` 75 per share. Subsequently,
omega Ltd. made a right issue of 1:1 at ` 60 per share, which was subscribed for by A. Total cost of
investments at the year-end will be `
(a) 2,70,000. (b) 1,50,000. (c) 1,20,000.
5. Cost of investment includes
(a) Purchase costs. (b) Brokerage and Stamp duty paid.
(c) Both (a) and (b)
6. A current investment is an investment
(a) That is readily realisable.
(b) That is intended to be held for not more than one year from the date on which such investment
is made.
7. All the following are fixed income bearing securities except
(a) Debentures. (b) Equity shares.
(c) Govt. Bonds.
8. If there is ‘other than temporary’ decline in the value of a long term investment then
(a) Carrying amount is reduced to recognise the decline.
(b) The reduction in carrying amount is charged to profit and loss account.
9. If investment is acquired by issue of shares, the acquisition cost of investment is
(a) Amount paid for acquisition.
(b) Fair value of securities issued.
(c) Market price of securities.
10. When long-term investments are reclassified as current investments, current investments are valued
at
(a) Cost.
(b) Carrying amount.
(c) Lower of Cost and Carrying amount.
1. How will you classify the investments as per AS 13? Explain in Brief.

HOME WORK
METHOD -1 ACCOUNTING OF FIXED INCOME SECURITIES

Q-8 In 20X1, M/s. Wye Ltd. issued 12% fully paid debentures of ` 100 each, interest being payable half
yearly on 30th September and 31st March of every accounting year. On 1st December, 20X2, M/s. Bull &
Bear purchased 10,000 of these debentures at ` 101 cum-interest price, also paying brokerage @ 1% of
cum-interest amount of the purchase. On 1st March, 20X3 the firm sold all of these debentures at ` 106
cum-interest price, again paying brokerage @ 1 % of cum-interest amount. Prepare Investment Account
in the books of M/s. Bull & Bear for the period 1st December, 20X2 to 1st March, 20X3.
Hint- Loss on investment Rs.700, Interest net Rs.30000
Q-9 The following information is presented by Mr. Z (a stock broker), relating to his holding in 9% Central
Government Bonds. Opening balance (nominal value) ` 1,20,000, Cost ` 1,18,000 (Nominal value of
each unit is ` 100).
1.3.20X1 Purchased 200 units, ex-interest at ` 98.
1.7.20X1 Sold 500 units, ex-interest out of original holding at ` 100.
1.10.20X1 Purchased 150 units at ` 98, cum interest.
1.11.20X1 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. Mr. Z follows
FIFO method.
Hint- Closing balance F.V. 1, 55,000, Cost-73633, Interest net Rs. 9,938
Q-10 Mr. Purohit furnishes the following details relating to his holding in 8% Debentures (` 100 each) of P
Ltd., held as Current assets:
1.4.20X1 Opening balance – Nominal value ` 1,20,000, Cost ` 1,18,000
1.7.20X1 100 Debentures purchased ex-interest at ` 98
1.10.20X1 Sold 200 Debentures ex-interest at ` 100
1.1.20X2 Purchased 50 Debentures at ` 98 cum-interest
1.2.20X2 Sold 200 Debentures ex-interest at ` 99
Due dates of interest are 30th September and 31st March.
Mr. Purohit closes his books on 31.3.20X2. 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 31.3.20X2 is ` 99.
Hint- Closing balance F.V. 95000, Cost – 93414, Interest net Rs. 9233

METHOD -2 ACCOUNTING OF VARIABLE INCOME SECURITIES
Q-11 On 1.4.20X1, 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 31.1.20X2, 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 31.3.20X2, Mr.
Krishna Murty sold bonus shares to a Broker, who charged 2% brokerage. 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.
Hint- Closing F.V. 1, 00,000, Cost 82,000
Q-12 On 01-04-20X1, 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 31-01-20X2 bonus was declared in the ratio of 1: 2. Before and after the record date of bonus
shares, the shares were quoted at ` 175 per share and ` 90 per share respectively. On 31-03-20X2, 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.
Hint- Closing F.V. 5,00,000, Cost 4,10,000
Q-13 On 1st April, 20X1, Rajat has 50,000 equity shares of P Ltd. at a book value of ` 15 per share (nominal
value ` 10 each). He provides you the further information :
(1) On 20th June, 20X1 he purchased another 10,000 shares of P Ltd. at ` 16 per share.
(2) On 1st August, 20X1, P Ltd. issued one equity bonus share for every six shares held by the
shareholders.
(3) On 31st October, 20X1, 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, 20X1.
You are required to prepare Investment A/c in the books of Rajat for the year ending 31st March,
20X2.
Hint- Closing F.V. 90,000 , Cost 12,10,000
Q-14 On 1.4.20X1, Sundar had 25,000 equity shares of `X’ Ltd. at a book value of ` 15 per share (Nominal value
` 10). On 20.6.20X1, he purchased another 5,000 shares of the company at ` 16 per share. The directors
of `X’ Ltd. announced a bonus and rights issue. No dividend was payable on these issues. The terms of
the issue are as follows :
Bonus basis 1:6 (Date 16.8.20X1).
Rights basis 3:7 (Date 31.8.20X1) Price ` 15 per share.
Due date for payment 30.9.20X1.
Shareholders were entitled to transfer their rights in full or in part. Accordingly, Sundar sold 33.33% of
his entitlement to Sekhar for a consideration of ` 2 per share. Dividends: Dividends for the year ended
31.3.20X1 at the rate of 20% were declared by X Ltd. and received by Sundar on 31.10.20X1. Dividends
for shares acquired by him on 20.6.20X1 are to be adjusted against the cost of purchase. On 15.11.20X1,
Sundar sold 25,000 equity shares at a premium of ` 5 per share. You are required to prepare in the
books of Sundar.
1. Investment Account
2. Profit & Loss Account.
For your exercise, assume that the books are closed on 31.12.20X1 and shares are valued at average
cost.
Hint- F.V. 20,000, Cost 2,64,444

METHOD-3 COMBINED ACCOUNTING OF FIXED AND VARIABLE INCOME SECURITIES.
Q-15 The following transactions of Nidhi took place during the year ended 31st March 20X2:
1st April Purchased ` 12,00,000, 8% bonds at ` 80.50 cum-interest. Interest is
payable on 1st November and 1st May.
12th April Purchased 1,00,000 equity shares of ` 10 each in X Ltd. for ` 40,00,000
1st May Received half-year’s interest on 8% bonds.
15th May X Ltd. made a bonus issue of three equity shares for every two held. Nidhi
sold 1,25,000 bonus shares for ` 20 each.
1st October Sold ` 3,00,000, 8% bonds at ` 81 ex-interest.
1st November Received half-year’s bond interest.
1st December Received 18% dividend on equity shares in X Ltd.
Prepare the relevant investment account in the books of Nidhi for the year ended 31st March, 20X2.
Hint- Bond A/c..F.V. 900000 Cost 694500, Interest 84000
Equity share A/c. F.V. 125000, Cost 2000000, Dividend- 225000
Q-16 Smart Investments made the following investments in the year 20X1-X2 :
12% State Government Bonds having nominal value ` 100
01.04.20X1 Opening Balance (1200 bonds) book value of ` 126,000
12th April Purchased 2,000 bonds @ ` 100 cum interest
30.09.20X1 Sold 1,500 bonds at ` 105 ex interest
Interest on the bonds is received on 30th June and 31st Dec. each year.
Equity Shares of X Ltd.
15.04.20X1 Purchased 5,000 equity shares @ ` 200 on cum right basis Brokerage of 1% was
paid in addition (Nominal Value of shares ` 10)
03.06.20X1 The company announced a bonus issue of 2 shares for every 5 shares held.
16.08.20X1 The company made a rights issue of 1 share for every 7 shares held at ` 250 per
share. The entire money was payable by 31.08.20X1.
22.8.20X1 Rights to the extent of 20% was sold @ ` 60. The remaining rights were subscribed.
02.09.20X1 Dividend @ 15% for the year ended 31.03.20X1 was received on 16.09.20X1
15.12.20X1 Sold 3,000 shares @ ` 300. Brokerage of 1% was incurred extra.
15.01.20X2 Received interim dividend @ 10% for the year 20X1 –X2
31.03.20X2 The shares were quoted in the stock exchange @ ` 220
Prepare Investment Accounts in the books of Smart Investments. Assume that the average cost method
is followed.
Hint- 12% Bond A/c. Cost- 168938, Interest 27400 , Equity share A/c. Cost-740000, Dividend-4800.
---0---0---

CHAPTER-8
INSURANCE CLAIMS FOR LOSS OF STOCK AND LOSS OF PROFIT
CHAPTER OVERVIEW
Amount of Claim in case of
Total Loss (Goods fully destroyed) Partial Loss (Goods partially

destroyed)
Actual loss (provided the goods are Actual loss (subject to goods are being
fully insured fully insured and whether average
clause is applicable or not)
Amount of claim in case of Under insurance
Total Loss Partial Loss
Restricted to the policy Without Average clause With Average

amount Clause
Actual loss Or Sum Loss of stock x sum

insured whichever is insured/Insurable
lower amount (Total cost)
Insurance Claims for Loss of Stock and Loss of Profit -191-

Claim for The Loss of Profit Policy normally covers the following items:
Loss of Profit (1) Loss of net profit
(2) Any increased cost of working
Gross Profit Net profit +Insured Standing charges
OR
Insured Standing charges – [Net Trading Loss (If any) X Insured
Standing charges/All standing charges of business]
Net Profit The net trading profit (exclusive of all capital receipts and accretion and
all outlay properly chargeable to capital) resulting from the business of the
Insured at the premises after due provision has been made for all standing
and other charges including depreciation.
Insured Interest on Debentures, Mortgage Loans and Bank Overdrafts, Rent,
Standing Rates and Taxes (other than taxes which form part of net profit)
Charges Salaries of Permanent Staff and Wages to Skilled Employees, Boarding
and Lodging of resident Directors and/or Manager, Directors’ Fees,
Unspecified Standing Charges.
Rate of Gross The rate of Gross Profit earned on turnover during the financial year
Profit immediately before the date of damage.
Annual The turnover during the twelve months immediately before the damage.
Turnover
(adjusted)
Standard The turnover during that period (in the twelve months immediately
Turnover before the date of damage) which corresponds with the Indemnity Period.
Indemnity The period beginning with the occurrence of the damage and ending
Period 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
1. INTRODUCTION
Business enterprises get insured against the loss of stock on the happening of certain events such as fire,
flood, theft, earthquake etc. Insurance being a contract of indemnity, the claim for loss is restricted to the
actual loss of assets. Sometimes an enterprise also gets itself insured against consequential loss of profit
due to decreased turnover, increased expenses etc.
If loss consequential to the loss of stock is also insured, the policy is known as loss of profit or consequential
loss policy.
Insurance claim can be studied under two parts as under:-
• Claim for loss of stock
• Claim for loss of profit

2. MEANING OF FIRE
For purposes of insurance, fire means:
1. Fire (whether resulting from explosion or otherwise) not occasioned or happening through:
(a) Its own spontaneous fomentation or heating or its undergoing any process involving the application
of heat;
(b) Earthquake, subterraneans fire, riot, civil commotion, war, invasion act of foreign enemy, hostilities
(whether war be declared or not), civil war, rebellion, revolution, insurrection, military or usurped
power.
2. Lightning.
3. Explosion, not occasioned or happening through any of the perils specified in 1 (a) above.
(i) of boilers used for domestic purposes only;
(ii) of any other boilers or economisers on the premises;
(iii) in a building not being any part of any gas works or gas for domestic purposes or used for lighting
or heating the building.
The policy of insurance can be made to cover any of the excepted perils by agreement and payment of extra
premium, if any. Damage may also be covered if caused by storm or tempest, flood, escape of water, impact
and breakdown of machinery, etc., again by agreement with the insurer.
Usually, fire policies covering stock or other assets do not cover explosion of boilers used for domestic
purposes or other boilers or economizers in the premises but policies in respect of profit cover such
explosions.
3. CLAIM FOR LOSS OF STOCK
Fire insurance being a contract of indemnity, a claim can be lodged only for the actual amount of the loss, not
exceeding the insured value. In dealing with problems requiring determination of the claim the following
point must be noted:
a. Total Loss : If the goods are totally destroyed, the amount of claim is equal to the actual loss, provided
the goods are fully insured. However, in case of under insurance (i.e. insurable value of stock insured
is more than the sum insured), the amount of claim is restricted to the policy amount.
b. Partial Loss: If the goods are partially destroyed, the amount of claim is equal to the actual loss provided
the goods are fully insured. However in case of under insurance, the amount of claim will depend upon
the nature of insurance policy as follows:
I) Without Average clause:- Claim is equal to the lower of actual loss or the sum insured.
II) With Average Clause:- Amount of claim for loss of stock is proportionately reduced, considering
the ratio of policy amount (i.e. insured amount) to the value of stock as on the date of fire (i.e
insurable amount) as shown below:
Amount of claim = Loss of stock x sum insured / Insurable amount (Total Cost)
One should note that the average clause applies only where the insured value is less than the total cost
and not when goods are fully insured.
3.1 Relevant points
(i) Where stock records are maintained and such records are not destroyed by fire, the value of the stock
as at the date of the fire can be easily arrived at.
(ii) Where either stock records are not available or where they are destroyed by the fire the value of stock

at the date of the fire has to be estimated. The usual method of arriving at this value is to build up a
Trading Account as from the date of last accounting year. After allowing for the usual gross profit, the
figure of closing stock on the date of the fire can be ascertained as the balancing item.
(iii) Where books of account are destroyed, the task of building up the Trading Account becomes difficult.
In that case information is obtained from the customers and suppliers have to be circularised to ascertain
the amount of sales and purchases.
(iv) After the insurance company makes payment for total loss, it has the same rights which the insured had
over the damaged stock. These are subrogated to the insurance company. In practice, in determining
the amount of the claim, credit is given for damaged and salvaged stock.
4. CLAIM FOR LOSS OF PROFIT
When a fire occurs, apart from the direct loss on account of stock or other assets destroyed, there is also a
consequential loss because, for some time, the business is disorganized or has to be discontinued, and
during that period, the standing expenses of the business like rent, salaries etc. continue. Moreover, there
is loss of profits which the business would have earned during the period. This loss can be insured against by
a “Loss of Profit” or “Consequential Loss” policy; there must be a separate policy in respect of the
consequential loss but claim will be admitted in respect of the policy only when the claim on account of fire
is also admitted under other policies.
The Loss of Profit Policy normally covers the following items:
(1) Loss of net profit
(2) Any increased cost of working, e.g., renting of temporary premises
In every business, there is some standard by which its activity or progress can be accurately judged: it may be
sales affected or the quantity of goods (or services) produced. To measure the loss suffered by a firm due to
fire, it is necessary to set up some standard expressed in such units to represents the volume of work. There
should be a direct relation between the amount of standard and the amount of profit raised. A comparison
between the amount of the standard before and after the fire will give a reliable indication of the loss of
profit. The most satisfactory unit of measuring the prosperity (and therefore profits) is usually turnover:
A claim for loss of profits can be established only if :
(i) the insured’s premises, or the property therein, are destroyed or damaged by the peril defined in the
policy; and
(ii) the insured’s business carried on the premises is interrupted or interfered with as a result of such
damage.
A claim for loss of profits cannot arise if the claim for loss of property as a result of the fire is not admitted.
It is possible that the business of the insured may suffer because of fire in the neighborhood, not causing
damage to the property of the insured, say by closing the street for some time. Such eventualities may be
covered by agreement with the insurer on payment of extra premium. If fire does not affect the volume of
business, there can be no claim for loss of profits.
Also, it does not mean that if there is a large property claim, there will be necessarily a large claim for loss of
profit or vice versa.
1 Terms Defined
The following terms should be noted:
Gross Profit is the sum produced by adding to the Net Profit the amount of the Insured Standing Charges,
or, if there be no Net profit, the amount of the Insured Standing Charges less such a proportion of any net
trading loss as the amount of the Insured Standing Charges bears to all the standing charges of the
business.

Net Profit is the net trading profit (exclusive of all capital receipts and accretion and all outlay properly
chargeable to capital) resulting from the business of the Insured at the premises after due provision has
been made for all standing and other charges including depreciation.
Insured 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].
2. Conditions included in a Loss of Profit Insurance Policy
Insurance policies covering loss of profit contain the following conditions usually:
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 to which such adjustment shall be made as may be
necessary to provide for the trend of the business and for variations in or special circumstances affecting the
business either before or after the damage or which would have affected the business had the damage not
occurred, so that the figures thus adjusted shall represent, as nearly as may be reasonably practicable the
results which but for the damage would have been obtained during the relative period after damage.
Indemnity Period: The period beginning with the occurrence of the damage and ending not later than
twelve months thereafter during which the results of the business shall be affected in consequence of the
damage.
Memo 1: If during the indemnity period goods shall be sold or services shall be rendered elsewhere than at
the premises for the benefit of the business either by the insured or by others on the Insured’s behalf, the
money paid or payable in respect of such sales or service shall be brought into account in arriving at the
turnover during the indemnity period.
Memo 2: If any standing charges of the business be not insured by this policy then in computing the amount
recoverable hereunder as increase in cost of workings only that proportion of the additional expenditure
shall be brought into account which the sum of the Net Profit and the insured Standing Charges bear to the
sum of the Net Profit and all standing charges.
Amount recoverable as increase in cost of workings = Additional expenditure x
[(Net Profit + Insured Standing Charges)/ (Net Profit + All Standing Charges)]
Memo 3: This insurance does not cover loss occasioned by or happening through or in consequence of
destruction of or damage to a dynamo motor, transformer, rectifier or any part of an electrical installation
resulting from electric currents, however, arising.
The student should note the following:
(i) The word ‘turnover’ used above may be replaced by any other term denoting the basis for arriving at
the loss of profit e.g., output.
(ii) Insured standing charges may include additional items, by agreement with the insurer.
(iii) Net profit means profit before income tax based on profit.
(iv) Depending upon the nature of business, the indemnity period may extend beyond 12 months (it may
be as long as 6 years). Indemnity period shall not be confused with the period of insurance which
cannot be more than one year.

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.
The amount payable as indemnity is the sum of (a) and (b) below :
(a) In respect of reduction in turnover : The sum produced by applying the rate of gross profit to the
amount by which the turnover during the indemnity period shall, in consequence of the damage, falls
short of the standard turnover, i.e., gross profit on short sales.
(b) In respect of increase in cost of working : The additional expenditure [subject to the provisions of
Memo (2) given above] necessarily and reasonably incurred for the sole purpose of avoiding or
diminishing the reduction in turnover which, but for that expenditure, would have taken place during
the indemnity period in consequence of the damage. The amount allowable under this provision
cannot exceed the sum produced by applying the rate of gross profit to the amount of reduction
avoided by the additional expenditure, i.e., gross profit on (additional) sales generated by increased
cost of workings.
The amount payable arrived at as above is reduced by any sum saved during the indemnity period in
respect of such of the insured standard charges as may cease or be reduced in consequence of the
damage.
Insurance policies provide that if the sum insured in respect of loss of profit is less than the sum produced
by applying the rate of gross profit to the annual turnover (as adjusted by the trend of the business or
variation in special circumstances affecting the business either before or after the damage or which
would have affected the business had the damage not occurred), the amount payable by the insurer shall
be proportionately reduced. This is nothing but application of the average clause.
The turnover of a business rarely remains constant and where there has been an upward or downward
trend since the date of the last accounts and upto the date of the fire, the “standard turnover” should be
appropriately adjusted, as per definition given above.
Similarly, where the earning capacity of the business has changed, the rate of gross profit may not represent
a correct indication of the lots and mutually agreed rate may be used for the computation.

CLASS WORK
Q-1 The premises of a trading firm caught fire on 22.10. 2010 and the stock was damaged. The firm had made
up accounts to 31st December.
`
Stock on 1.1. 2010 13,272
Stock on 1.1. 2009 9,614
Purchase during 2009 45,258
Purchase from 1.1. 2010 to the date of fire 34,827
Sales from 1.1. 2010 to the date of fire 49,170
Sales during 2009 52,000
(a) In April 2010 goods which cost ` 1,000 were given away for advertising purposes, no entries being
made in the books.
(b) During 2010, a clerk had misappropriated unrecorded cash sales. It is estimated that the defalcation
amounted to ` 400.
(c) The rate of gross profit is constant.
From the above information, make an estimate of the stock on the date of fire.
Q-2 The following information is available from the books of DHG Ltd. whose premises were destroyed by
a fire on 31st May, 2010.
`
Stock (1.1.2009) 90,000
Purchases (1.1.2009 to 31.12.2009) 4,24,000
Sales (1.1.2009 to 31.12.2009) 5,00,000
Stock (31.12.2009) 1,32,000
The stock on 1st January, 2009 it was valued at 10% below cost. However this practice was changed and
the stock on 31st December, 2009 was valued at 10% above cost. After the accounts of 2009 were
audited, it was found that purchase of office equipments of ` 4,000 was wrongly included in the figure
of purchases given above.
The information for the period 1st January, 2010 to 31st May 2010 are - Purchases - ` 3,00,000; Sales
(exluding goods sent on sale or return basis) ` 4,00,000. On 31st May, 2010, goods of the cost price of `
40,000 were lying with customers on sale or return basis. On the date of fire, customers had approved
half the value of goods sent. The gross profit margin charged on the above is the normal margin the
salvage was ` 10,000.
Required : Calculate the amount of insurance claim.

Q-3 On 13th July 2010 a fire occurred and partly destroyed the goods of DHH Corporation. The cost of the
salvaged goods was ` 20,000. The following particulars could be obtained from books.
(a) Balance as at 31st March, 2010
`
Stock at cost 1,20,000
Creditors for goods 10,000
(b) Transactions between 1st April 2010 and 13th July, 2010 were as follows :
`
Payments to creditors for goods 62,000
Return outwards 2,000
Returns inwards 6,500
Carriage inwards 9,000
Carriage outwards 7,500
Sales 1,10,000
(c) Unpaid creditors for goods as on 13th July, 2010 amounted to ` 8000.
All Sales were made at a profit of 33-1/3% on selling price. There were no other purchases and sales.
The policy was for ` 90,000 and there was average clause in the policy.
You are required to draw up a statement of claim for loss of stock on the basis of the above facts in the
books of DHH corporation.
Q-4 A fire occurred on 15th December, 2010 in the premises of CSDIG Co. Ltd. From the following figures,
calculate the amount of claim to be lodged with insurance company for loss of stock.
`
Stock at cost on 1st April, 2009 20,000
Stock at cost on 31st March, 2010 30,000
Purchases during the year ended 31st March,2010 40,000
Purchases from 1st April, 2010 to 15th Dec., 2010 88,000
Sales during the year ended 31st March, 2010 60,000
Sales from 1st April, 2010 to 15th December, 2010 1,05,000
During the current year cost of purchases have risen by 10% above last year’s levels. Selling prices have
gone up by 5%. Salvage value of stock after fire ` 2,000.
Q-5 Bee & Co. suffered loss of stock due to fire on May 16, 2010. From the following information, prepare
a statement showing the claim to be lodged.
`
Stock on 1.1.2009 38,400
Purchase during 2009 1,60,000
Sales during 2009 2,02,600
Stock on 31.12.2009 31,800
Purchases from 1.1.2010 to the date of fire 54,000
Sales from 1.1.2010 to the date of fire 61,400
An item of stock purchased in 2008 at a cost of ` 10,000 was valued at ` 6,000 on 31.12.2008. Half of this
stock was sold in 2009 for ` 2,600. The remaining was valued at ` 2,400 on 31st December 2009. One
fourth of the original stock was sold in March 2010 for ` 1,400 the remaining stock was considered to be
worth 60% of the original cost. The salvaged stock ` 12,000. The amount of the policy was ` 30,000 and
there was an average clause in the policy.
Q-6 On the 25th June 2010, a fire broke out in the premises of X company Ltd. All the stocks were destroyed
except some which were partly damaged and sold subsequently for ` 7,900. From the following
particulars ascertain the claim to be submitted to the Insurance company assuming that the policy was
for ` 20,000.
`
Stock on 1-1-2010 24,400
Purchases upto the date of fire 73,000
Sales upto the date of fire 97,000
Purchases during the year 2009 1,53,500
Sales during the year 2009 1,96,500
Stock as on 1-1-2009 18,500
The stock as on 1-1-2009 included a special item valued ` 5,600 which was sold at a profit of 20% on
sales. A part of this item was sold in 2009. While the balance was sold on 3rd May 2010 for ` 2,500.
Except for this item, the gross profit on all other items was at an uniform rate throughtout the period.
Q-7 From the following information provided by Tushar Tulsain, compute the amount of claim under the loss
of profit policy :
Sum Insured ` 7,50,000
Indemnity Period 6 Months
Reason for Damage Due to fire Accident on 1.3.2010
Period of interruption 1.3.2010. to 31.7.2010
Accounting Year Calender Year
Net Profit ` 2,40,000
Turnover For the year ended 31st December,2009 ` 40,00,000
Turnover For the period from 1.3.2009 to 28.2.2010 ` 44,00,000
Turnover For the period from 1.3.2009 to 31.7.2009 ` 20,00,000
Turnover For the period from the 1.3.2010 to 31.7.2010 ` 8,00,000
Standing Charges (out of which ` 80,000 have not been insured) ` 5,60,000
It was agreed that an adjustment of 10% should be made in respect of the upward trend in the turnover
2% in respect of upward trend in the rate of gross profit.
Q-8 A fire occurred in the premises of Bala Shoe Co. Ltd. on 1st May, 2010. The company had a loss of profit
policy for ` 1.20 lakhs. Sale from 1st May, 2009 to 30th April 2010 were ` 10 lakhs, from 1st May, 2009 to
31st August, 2009 being ` 3 lakh. During the indemnity period which lasted four months sales amounted
to only ` 40,000. The company made up its accounts on 31st December. The Profit and Loss Account for
2009 is given below :
Profit & Loss Account
for the Year 2009
Particular ` Particulars `
Opening Stock 1,00,000 Sales 9,50,000
Purchases 6,00,000 Closing Stock 50,000
Manufacturing Expenses 67,000
Variable Selling Expenses 90,500
Fixed Expenses 72,500
Net Profit 70,000 _______
10,00,000 10,00,000
Comparing the sales of first four months of 2010 those of 2009, it was found that sales were 20% higher in
2010. Ascertain the loss of profit.
Q-9 The premises of XY Limited were partly destroyed by fire on 1st March, 2010 and as a result, the business
was practically disorganised upto 31st August, 2010. The company is insured under a loss of profits policy
for ` 1,65,000 having an indemnity period of 6 months.
From the following information, prepare a claim under the policy :
`
(i) Actual turnover during the period of dislocation (1.3.2010 to
31.8.2010) 80,000
(ii) Turnover for the corresponding period (1.3.2009 to 31.8.2009) 2,40,000
(iii) Turnover for the 12 months immediately preceding the fire
(1.3.09 to 28.2.10) 6,00,000
(iv) Net profit for the last financial year 90,000
(v) Insured standing charges for the last financial year 60,000
(vi) Uninsured standing charges 5,000
(vii) Turnover for the financial year 5,00,000
Due to substantial increase in trade, before and up to the time of the fire, it was agreed that an
adjustment of 10% should be made in respect of the upward trend in turnover. The company incurred
additional expenses amounting to ` 9,300 immediately after the fire and but for this expenditure, the
turnover during the period of dislocation would have been only ` 55,000. There was also a saving during
the indemnity period, of ` 2,700 in insured standing charge as a result of the fire.
Q-10 Sony Ltd.’s Trading and Profit and Loss Account for the year ended 31st December, 2009 were as follows
:
Trading and Profit and Loss Account for the year ended 31.12.2009
` `
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 By 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 for ` 1,00,000 having an
indemnity period of 6 months. A fire occurred on 1.4.10 at the premises and the entire stock were gutted
with nil salvage value. The net quarter sales i.e. 1.4.10 to 30.6.10 was severely affected.
The following are the other information :
Sales during the period 1.1.10 to 31.3.10 2,50,000
Purchase during the period 1.1.10 to 31.3.10 3,00,000
Manufacturing Expenses 1.1.10 to 31.3.10 70,000
Sales during the period 1.4.10 to 30.6.10 87,500
Standing Charges Insurance 50,000
Additional expenses 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 costs.
Ascertain the claim for stock and Loss of Profits.
❑
1. Claim for Claim for loss of stock can be studied under two heads:
Loss of a. Total Loss:
Stock Amount of claim = Actual loss (If goods are fully insured but the amount
of claim is restricted to the policy amount).
b. Partial Loss:
(i) Without Average clause:-
Claim =Lower of actual Loss or Sum Insured
(ii) With Average Clause:-
Claim = Loss of stock x sum insured / Insurable amount (Total Cost)
2. Claim for The Loss of Profit Policy normally covers the following items:
Loss of (1) Loss of net profit
Profit (2) Standing charges.
(3) Any increased cost of working
Gross Profit Net profit +Insured Standing charges OR
Insured Standing charges – Net Trading Loss (If any) X Insured Standing charges/
All standing charges of business
Net Profit The net trading profit (exclusive of all capital) receipts and accretion and all
outlay properly (chargeable to capital) resulting from the business of the
Insured at the premises after due provision has been made for all standing
and other charges including depreciation.
Insured Interest on Debentures, Mortgage Loans and Bank Overdrafts,Rent, Rates and
Standing Taxes (other than taxes which form part of net profit) Salaries of Permanent
Charges Staff and Wages to Skilled Employees, Boarding and Lodging of resident
Directors and/or Manager, Directors’ Fees, Unspecified Standing Charges.
Rate of Gross The rate of Gross Profit earned on turnover during the financial year
Profit immediately before the date of damage.
Annual The turnover during the twelve months immediately before the damage.
Turnover
(adjusted)
Standard The turnover during that period in the twelve months immediately before the
Turnover date of damage which corresponds with the Indemnity Period.
Indemnity The period beginning with the occurrence of the damage and ending not
Period 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.

1. Goods costing `1,00,000 were insured for `50,000. Out of these goods, ¾ are destroyed by fire. The
amount of claim with average clause will be
(a) `37,500. (b) `50,000. (c) `75,000.
2. Fire insurance claim will be limited to the
(a) actual loss suffered even though the insured value of the goods may be higher.
(b) proportion of the loss as the insured value bears to the total cost.
(c) both (a) and (b).
3. The Loss of Profit Policy normally covers the following items :
(a) Loss of net profit and Standing charges.
(b) Any increased cost of working e.g., renting of temporary premises.
4. A plant worth `40,000 has been insured for `30,000, the loss on account of fire is ` 25,000. the insurance
company will bear the loss to the extent of
(a) `18,750. (b) `25,000. (c) `30,000.
5. If the policy is without average clause, a claim for loss of profit will be
(a) Sum insured.
(b) Higher of actual loss and sum insured.
(c) Lower of actual loss and sum insured
6. Standard turnover is
(a) Turnover during the last 12 months immediately before damage.
(b) Turnover during that period in 12 months immediately before damage which corresponds with
indemnity period.
(c) Turnover during the last accounting period immediately before damage.
7. Gross profit can be calculated as
(a) Net profit +Insured standing charges.
(b) Net profit - Insured standing charges.
(c) Net profit + standing charges.
8. The cost of salvaged stock must be
(a) Credited to trading account.
(b) Debited to salvaged stock account.
1. Explain the significance of ‘Average Clause’ in a fire insurance policy.
2. Define the following terms:
(i) Indemnity Period; (ii) Standard Turnover
HOME WORK
Q-11 On 1st April, 2008 the stock of Shri Ramesh was destroyed by fire but sufficient records were saved
from which following particulars were ascertained:
`
Stock at cost-1st January, 2007 73,500
Stock at cost-31st December, 2007 79,600
Purchases-year ended 31st December, 2007 3,98,000
Sales-year ended 31st December, 2007 4,87,000
Purchases-1-1-2008 to 31-3-2008 1,62,000
Sales-1-1-2008 to 31-3-2008 2,31,200
In valuing the stock for the Balance Sheet at 31st December, 2007 ` 2,300 had been written off on
certain stock which was a poor selling line having the cost ` 6,900. A portion of these goods were sold
in March, 2008 at loss of ` 250 on original cost of ` 3450. The remainder of this stock was now estimated
to be worth its original cost. Subject to the above exception, gross profit had remained at a uniform
rate throughout the year.
The value of stock salvaged was ` 5,800. The policy was for ` 50,000 and was subject to the average
clause. Work out the amount of the claim of loss by fire.
Hint : Amount of Claim = 45,004
Q-12 A fire occurred in the business premises of M/S Poonawalla on 15th October 2005. From the following
particulars ascertain the loss of stock and claim for insurance.
`
Stock as on 1-1-2004 30,600
Purchases from 1-1-2004 to 31-12-2004 1,22,000
Sales from 1-1-2004 to 3 1-12-2004 1,80,000
Stock as on 3 1-12-2004 27,000
Purchases from 1-1-2005 to 14-10-2005 1,47,000
Sales from 1-1-2005 to 14 -10-2005 1,50,000
The stock were always valued at 90 percent of cost. The stock saved from fire was worth ` 18,000. The
amount of policy was ` 63,000. There was average clause in policy.
Hint : Amount of Claim = 47,250.

Q-13 The Premises of M/s New and Company were gutted by fire on 31st Aug. 2004 and some stock was found
badly damaged. The accounts of the firm are closed on 31st Dec. each year. On 31st Dec. 2003 stock was
valued at cost at ` 26,544 against ` 19,228 as on 31st Dec. 2002. Purchases and sales were as follows:
Full year 2003 Period upto 31.8.2004
Purchases 90,516 69,654
Sales 1,04,000 98,340
In addition to above you collect the following information:
(1) Some time in May 2004 goods costing ` 10,000 were distributed as a part of advertisement campaign
in support thereof no entry appears to have been passed in the books.
(2) During 2004 cash sales of ` 1,190 were misappropriated and these were not recorded in the
books. Ascertain the estimated value of stock at the date of fire assuming that the rate of gross
profit was constant.
Hint : Amount of Claim 6574.
Q-14 From the following particulars you are required to prepare a statement of claim for X, Y, whose business
premises were partly destroyed by fire on 30th September, 2006. He prepares account on 30th June
each year.
`
Stock on 30th June, 2006 34,017
Purchases from 1st July, 2006 to 30th September, 2006 80,000
Wages from 1st July, 2006 to 30th September, 2006 30,500
Sales from 1St July, 2006 to 30th September, 2006 1,50,000
Average percentage of gross profit to cost is 16 2/3 %. Stock to the value of ` 10,000 was salvaged policy
was for ` 8,000. Claim was subject to average clause.
Following additional information is available :—
(i) Purchases include purchase of plant of ` 8,000.
(ii) Plant was installed in August and firm’s own men had spent time amounting to ` 500 which was
included in wages.
(iii) Stock in the beginning was calculated at 15% less than cost. you are required to calculate the claim
for the loss of stock.
Hint : Amount of claim - ` 2,052
Q-15 On 1st July 2006 a fire took place in the godown of Ram Kumar which destroyed all Stocks. Calculate the
amount of insurance claim for the stock from the following details:
`
Sales in 2004 2,00,000
Gross profit in 2004 60,000
Sales in 2005 3,00,000
Gross profit 2005 60,000
Stock as on 1-1-2006 2,70,000
Purchases from 1-1-2006 to 30-6- 2006 4,00,000
Sales from 1-1-2006 to 30-6-2006 7,20,000
The following are also to be taken in to consideration:

(1) Stock as on 31st Dec. 2005 had been undervalued by 10%.
(2) Stock taking conducted in March 2006 had revealed that stocks costing ` 80,000 were lying in
damaged condition. 50% of these stocks had been sold in May 2006 at 50% of cost and the balance
were expected to be sold at 40% of cost.
(3) Amount of policy ` 1,50,000.
Hint : Amount of claim is `1,46,000.
Q-16 Ashish and Co. Ltd. suffered loss of stock due to fire on May 15 2003. From the following information
prepare a statement showing the claim to be lodged:
`
Stock on 1st January, 2002 45,400
Purchases during 2002 3,16,800
Sales during 2002 4,03,900
Closing stock on 31St December 2002 36,800
Purchases from 1st January 2003 to May 15,2003 81,000
Sales from 1st January 2003 May 15, 2003 92,100
An item of stock purchased in 2001 at a cost of ` 15,000 was valued at ` 9,000 on 31st December, 2001.
Half of this stock was sold in 2002 for ` 3,900, the remaining was valued at
` 3,600 on 31st December, 2002. One fourth of the ori iginal stock was sold in March 2003 for ` 2,100.
The remaining stock was considered to be worth 50% of the original cost. Salvaged stock was ` 15,000.
The amount of the policy was ` 40,000. There was an average clause in the policy.
Hint : Amount of Claim : ` 26,387
Q-17 The premises of a company were destroyed by fire on 15th June 2004. The records, however were saved
where from the following particulars were available.
`
Stock at Cost on 1.1.2003 30,000
Stock at cost on December 31, 2003 40,000
Purchases less return for the year ended December 31, 2003 2,00,000
Sales less return for the year ended December 31, 2003 2,50,000
Purchases less return from 1.1.2004 to 15.6.2004 85,000
Sales less return from 1.1.2004 to 15.6.2004 1,20,000
` 2,500 had been written off a certain stock which was poor selling line. While valuing the stock for the
balance sheet as at Dec. 31, 2003, the cost of such stock was ` 4,000. A portion of this stock was sold in
March 2004 at a loss of `500 on the original cost of ` 2,000. The balance of this stock is now estimated
to be worth the original cost. Excepting the above the gross profit had remained at a uniform rate
throughout.
Stock saved was ` 5,000. You are required to ascertain the amount of loss of stock which was to be
claimed from the insurance company. Amount of policy was ` 30,000.
30,000
Hint : Amount of Claim 36,625 x 31,625 = ` 25,904.

Q-18 Fire occurred in the premises of A & Co. on 1st September 2005 and stock of the value of ` 1,01,000 was
salvaged and the business books and records were saved. The following information was obtained.
`
Purchases for the year ended 31st March, 2005 6,80,000
Sales for the year ended 31st March, 2005 11,00,000
Purchases from April, 2005 to 1st Sept. 2005 2,50,000
Sales from 1st April 2005 to 1st Sept 2005 3,60,000
Stock on 31st March 2004 3,00,000
Stock on 31st March 2005 3,40,000
Further information is that the stock on 31st March 2005 was over - valued by ` 20,000. Calculate the
claim to be presented to the Insurance Company in respect of the loss. In April 2005 selling price was
lowered by 10%.
Hint : Colsing Stock = 3,30,000
Q-19 A fire occurred in the shop of M/s. Jambheshawar & Co. on August 20, 2004 From the following particulars,
calculate claim to be made by the trader:
`
(a) Stock on December 31, 2002
(Including stock purchased during the year at ` 4,000 valued at
` 2,000 because of poor selling price) 50,000
(b) Wages paid 2003 15,000
(Including, wages paid for the construction of a show room for which workers
of the factory worked ` 1,000. Manufacturing wages ` 750 were outstanding)
(c) Freight inwards 2003 2,050
(d) Purchases 2003 60,000
(Including purchases of furniture of ` 750 wrongly passed through the invoice book)
(e) Sales 2003 1,23,400
(Including sale of 1/4 of the stock at ` 400 which had a poor selling
line and which was valued at ` 2,000 on Dec. 31,2002)
(f) Stock on December 31, 2003 21,000
(Including remaining stock which had a poor selling line at the half value)
(g) Purchases upto August 20, 2004 71,400
(h) Sales up to August 20, 2004 71,450
(Including sale of the 1/3 remaining stock which had a poor selling line at ` 450)
The remaining stock which had a poor selling line, was considered at 60% of the original cost for the
purpose of claim. The salvage was ` 23,700. The firm had taken the policy of ` 20,000. There was an
average clause in the policy.
Hint : Amount of claim= ` 5,071.
Q-20 A fire occurred on 1st February, 2008, in the premises of Pioneer Ltd., a retail store and business was
partially disorganised upto 30th June, 2008. The company was insured under a loss of profits for `
1,25,000 with a six months period indemnity. From the following information, compute the amount of
claim under the loss of profit policy.

`
Actual turnover from 1st February to 30th June, 2008 80,000
Turnover from 1st February to 30th June, 2007 2,00,000
Turnover from 1st February, 2007 to 31st January, 2008 4,50,000
Net Profit for last financial year 70,000
Insured standing charges for last financial year 56,000
Total standing charges for last financial year 64,000
Turnover for the last financial year 4,20,000
The company incurred additional expenses amounting to ` 6,700 which reduced the loss in turnover.
There was also a saving during the indemnity period of ` 2,450 in the insured standing charges as a
result of the fire.
There had been a considerable increase in trade since the date of the last annual accounts and it has
been agreed that an adjustment of 15% be made in respect of the upward trend in turnover.
Hint : Amount of claim under the policy = ` 39,390/39,000
Q-21 S & M Ltd. give the following Trading and Profit and Loss Account for year ended 31st December, 2007:
Trading and Profit and Loss Account for the year ended 31st December, 2007
` `
To Opening Stock 50,000 By Sales 8,00,000
To Purchases 3,00,000 By Closing Stock 70,000
To Wages (` 20,000 for
skilled labour) 1,60,000
To Manufacturing Expenses 1,20,000
To Gross Profit 2,40,000 _______
8,70,000 8,70,000
To Office Administrative By Gross Profit 2,40,000
Expenses 60,000
To Advertising 20,000
To Selling Expenses (Fixed) 40,000
To Commission on Sales 48,000
To Carriage Outward 16,000
To Net Profit 56,000 _______
2,40,000 2,40,000
The company had taken out policies both against loss of stock and against loss of profit, the amounts
being ` 80,000 and `1,72,000. A fire occurred on 1st May, 2008 and as a result of which sales were
seriously affected for a period of 4 months. You are given the following further information:
(a) Purchases, wages and other manufacturing expenses for the first 4 months of 2008 were ` 1,00,000,
` 50,000 and ` 36,000 respectively.
(b) Sales for the same period were ` 2,40,000.
(c) Other sales figures were as follows :
`
From 1st January 2007 to 30th April, 2007 3,00,000
From 1st May 2007 to 31st August, 2007 3,60,000
From 1st May, 2008 to 31st August, 2008 60,000

(d) Due to rise in wages, gross profit during 2008 was expected to decline by 2% on sales.
(e) Additional expenses incurred during the period after fire amounted to ` 1,40,000. The amount of
the policy included ` 1,20,000 for expenses leaving ` 20,000 uncovered.
Ascertain the claim for stock and for loss of profit.
All workings should form part of your answers.
Hint : N.B.: On the amount of final claim, the average clause will not apply since the amount of the policy `
1,72,000 is higher than Gross Profit on annual turnover ` 1,28,000.
Q-22 Financial year ends on 31st December, 2002 with turnover of ` 2,00,000. Fire takes place on June 1,2003,
Period of interruption being 5 months (from 1st June, 2003 to Nov. 2003), Period of indemnity according
to policy-6 months.
Net profit for 2002 ` 12,000 and insured standing charges ` 24,000. Sum insured ` 42,240. Uninsured
standing charges ` 2000; Standard turnover i.e. for corresponding months of interruption (from 1st
June to 1st Nov.) in the year preceeding the fire. ` 75,000.
Turnover in the period of interruption ` 22,500. Annual turnover (for 1st June 2002 to 31st May, 2003 `
2,20,000.)
Additional expenses ` 4,000 with a saving of insured standing charges ` 1,500. But for this additional
expenditure, the turnover after the fire would have been only ` 12,500. The expenses on putting the
fire out were ` 500. During 2003 increase in turnover (both standard and annual) is expected to be 20%
and increase in G.P. rate is expected by 2%. Calculate amount of claim for loss of profit.
Hint : Amount of Claim = 11,700
Q-23 On 1st August, 2000, a fire occurred in the premises of ABC Ltd. The company has a loss of profit policy
for ` 12,00,000. Sales from 1st August, 1999 to 31st July, 2000 were ` 1 crore; the sales from 1st August,
1999 to 30th November 1999 being ` 30,00,000. During the indemnity period, which lasted four months,
sales amounted to ` 4,00,000 only. The company closes its books of account every year on 31st March.
The profit and loss account for the year ended 3 March, 2000 is given below:
Profit and Loss Account
` `
To Opening stock 10,00,000 By Sales 95,00,000
To Purchases 60,00,000 By Closing stock 5,00,000
To Manufacturing expenses 6,70,000
To Variable selling expenses 9,05,000
To Fixed expenses 7,25,000
To Net profit 7,00,000 _________
1,00,00,000 1,00,00,000
As compared with the sales for the first four months of the accounting year 1999-2000, the sales for the
first four months of the accounting year 2000-200 1 were found to be up by 20%.
Calculate the amount of claim for loss of profit assuming that the policy has an ‘average clause’.
` 12,00,000
Hint : Therefore, amount of the claim = ` 4,80,000 x ` 18,000 = ` 3,20,000.

Q-24 Raghwan Ltd. gives you the following. Trading and Profit and Loss Account for the year ending December
31, 2004:
To Opening Stock 25,000 By Sales 4,00,000
To Purchases 1,50,000 By Closing Stock 35,000
To Wages (` 10.000 for
skilled labour) 80,000
To Manufacturing Exp. 60,000
To Gross Profit 1,20,000 _______
4,35,000 4,35,000
To Office Expenses 30,000 By Gross Profit 1,20,000
To Advertising 8,000 By Interest on Securities 2,000
To Selling Exp. (fixed) 20,000
To Commission on sales 26,000
To Carriage outward 8,000
To Net Profit 30,000 _______
1,22,000 1,22,000
The Company had taken out a consequential loss policy for ` 1,00,000. Fire occurred on 1st May 2005 as
a result of which sales were seriously affected for a period of 4 months. You are given following further
information :—
(a) Sales figures were as follows: From 1st January 2004 to 30th April 2004 ` 1,50,000; From 1st May 2004
to 31st Aug, 2004 ` 1,80,000; From 1st May 2005 to 31st Aug. 2005 ` 30,000; From 1st January, 2005 to 30th
April 2005 ` 1,20,000; (b) Due to rise in material prices, net profit during 2005 was expected to decline
by 2% on sales (c) Standing charges to the extent of ` 4,000 were not insured.
Ascertain the claim for loss of profits.
Hint : Since amount of policy is more than the amount of coverage required, average clause shall not be
applicable. Hence amount of claim = ` 23,940.
Q-25 In the dislocation period (4 months) covered by the consequential loss policy (` 1,25,000), sales of `
1,00,000 was obtained out of which ` 40,000 sale was received from another premises hired for this
period at a rent of ` 1,000 per month on the temporary basis. However, there was saving in insured
standing charges during this period @ ` 6,000 p.a.
Sales in the same period of last year amounted to ` 3,00,000 and an upward trend of 10% in the
business was expected in the current year. Sale for the period of 12 months immediately preceding the
date of fire was ` 10,00,000.
The following information is available from the last years profit and loss account:
Sales ` 9,00,000
Net Profit ` 1,00,000
Standing charges (out of which ` 20,000 uninsured) ` 1,00,000
You are require to calculate the amount of claim.
Hints :
Gross Claim x Amount of Policy 47, 600 x 1, 25, 000

= = ` 27, 045
Coverage Required 2, 20, 000

Q-26 A fire occurred in the premises of a business on 31st January. 2002, which destroyed -stock. However,
stock worth ` 5,940 was salvaged. The company’s insurance policy covers the following:
`
Stock 6,00,000
Loss of Profit (including standing charges) 3,75,000
Period of indemnity Six months
The summarised Profit and Loss Account for the year ended 31st December. 2001 is as follows:
` `
Turnover 30,00,000
Closing Stock 7,87,500
37,87,500
Opening Stock 6,18,750
Purchases 27,18,750
Standing Charges 2,51,250
Variable Charges 1,20,000 37,08,750
Net Profit 78,750
The transactions for the month of January 2002 were as under: `
Turnover 1,50,000
Payments to Creditors 1,60,020
Trade Creditors:
1-1-2002 2,26,000
31-1-2002 2,30,980
The company’s business was disrupted until 30-4-2002 during which period the reduction in the turnover
amounted to ` 2,70,000 as compared with the turnover of same period corresponding in the previous
year.
You are required to submit the claim for insurance for loss of stock and loss of profit.
Hints : Note: Amount of the policy. ` 3,75,000 is more than 11% on 29,00,000, i.e. sales for 12 months,
immediately before the date of fire i.e. coverage required. Hence the average clause will not be
applicable.

CHAPTER-9
HIRE PURCHASE AND INSTALMENT SALE TRANSACTIONS
INTRODUCTION
When a person wants to acquire an asset, but is not sure how to make payment within a stipulated period of
time he may pay in instalments if the vendor agrees. This enables the purchaser to use the asset while paying
for it in instalments over an agreed period of time. This type of a business deal is known as hire purchase
transaction. Here, the customer pays the entire amount either in monthly or quarterly or yearly instalments,
while the asset remains the property of the seller until the buyer squares up his entire liability. For the seller,
the agreed instalments include his interest on the assets given on credit to the purchaser. Therefore, when
the total amount (being paid in instalments over a period of time) is certainly higher than the cash down
price of the asset because of interest charges. Obviously, both the parties gain in the bargain. By virtue of
this, the purchaser has the right of immediate use of the asset without making immediate payment for the
asset, by this, he gets both credit and product from the same seller. From seller’s view point, he derives the
benefits by way of increase in sales and also he recovers his own cost of credit.
THEORY:
Under the Hire Purchase System, the Hire Purchaser gets possession of the goods at the outset and can use
it, while paying for it in instalments over a specified period of time as per the agreement. However, the
ownership of the goods remains with the Hire Vendor until the hire purchaser has paid all the instalments.
Each instalment paid by the hire purchaser is treated as hire charges for using the asset. In case he fails to pay
any of the instalments (even the last one) the hire vendor has the right to take back his goods without
compensating the buyer, i.e., the hire vendor is not going to pay back a part or whole of the amount received
through instalments till the date of default from the buyer.
Terms:
Hire Vendor : Hire vendor is a person who delivers the goods along with its possession to the hire purchaser
under a hire purchase agreement.
Hire Purchaser : Hire purchaser is a person who obtains the goods and rights to use the same from hire
vendor under a hire purchase agreement.
Cash Price: Cash price is the amount to be paid by the buyer on outright purchase in cash.
Down Payment : Down payment is the initial payment made to the hire vendor by the hire purchaser at the
time of entering into a hire purchase agreement.
Hire Purchase Instalment : Hire purchase instalment is the amount which the hire purchaser has to pay after
a regular interval upto certain period as specified in the agreement to obtain the ownership of the asset
purchased (on payment of the last installment) under a hire purchase agreement. It comprises of principal
amount and the interest on the unpaid amount.
Hire Purchase and Instalment Sale Transactions -211-

CLASS WORK
CALCULATION OF INTEREST, CASH PRICE, INSTALLMENTS, INTEREST RATE
Q-1 Mr.x purchased a machine on hire purchase on following terms

Cash price – 7,92,500
Down Payment – 20%
Rate of Interest – 10%
Remaining amount was payable in four equal annual installments of Rs.2,00,000 each. Show the
calculation of Interest.
Q-2 Mr.x purchased a machine on hire purchase on following terms
Cash price – 1,40,000
Down Payment – 20,000
Remaining amount towards cash price was payable in three half yearly installments of Rs.50,000,
Rs.40,000, Rs.30,000 respectively and interest to be paid extra. Show the calculation of Interest and
Installment amt.
Q-3 Down Payment – 40,000
Remaining amount was payable in four annual installments of Rs.87,000, Rs.56,000, Rs.59,000 & Rs.30,000
each. Show the calculation of Interest.
Q-4 Down Payment – 20,000
Remaining amount was payable in four quarterly installments inclusive of interest of Rs.57,000,
Rs.45,960, Rs.35,280 & Rs.24,960 respectively. Show the calculation of Interest and find cash Price.
Q-5 Down Payment – 1/4/14 – Rs.32,000
Remaining amount was payable as under.
Instalment Date Amount
1st 31/7/14 77,880
2nd 31/3/15 70,840
3rd 30/6/15 47,465
4th 30/11/15 35,475
Show the calculation of Interest and find cash Price.
Q-6 Down Payment – 1/4/14 – Rs.30,000
Rate of Interest – 20%(to be compounded annually)
Remaining amount was payable as under.
1st 31/3/16 1,61,800
2nd 31/3/19 1,87,840
3rd 31/3/20 96,000
Show the calculation of Interest and find cash Price.
Q-7 Down Payment = 27175
Installment (incl. Interest) = 15000 p.a
Rate = 15 %
No. of Installments = 4
Annuity Factor (15%, 4yrs) = 2.854978
Find Cash Price
Q-8 Down Payment = 1,20,000
Installment (incl. Interest) = 2,20,000 p.a
Rate = 12 %
Find Cash Price
Q-9 Cash Price = 20,00,000
Down Payment = 2,00,000
Installment (incl. Interest) = ? p.a
Rate = 20 %
No. of Installments = 4 (Annual)
Find equalized Installment amount.
Q-10 Cash Price = 7,92,500
Down Payment = 1,58,500
Installment (incl. Interest) = 2,00,000 p.a
Rate = ?
Calculate interest
Q-11 Happy Valley Florists Ltd. acquired a delivery van on hire purchase on 01.04.20X1 from Ganesh
Enterprises. The terms were as follows :
Particulars Amount (`)
Hire Purchase Price 180,000
Down Payment 30,000
1st installment payable after 1 year 50,000
2nd installment after 2 years 50,000
3rd installment after 3 years 30,000
4th installment after 4 years 20,000
Cash price of van ` 1,50,000 You are required to calculate Total Interest and Interest included in each
instalment.
Q-12 Following is the information about Installments, Calculate Cash price and amount of Interest.
D.P. – 1,00,000
I – 2,21,900
II – 2,06,050
III – 1,90,200
IV- 1,74,350
BASIC ACCOUNTING IN THE BOOKS OF VENDOR AND PURCHASER
Q-13 Cash Price = 340,000
Down Payment (1/4/11) = 30,000
1st 31/8/11 88,250
2nd 31/3/12 ?
3rd 31/7/12 90,200
4th 31/8/13 1,07,550
Rate of Interest = 18% p.a.
Mr.A will provide dep. @20% SLM.
Pass entries in the books of both the parties
REPOSSESSION OF GOODS – REPOSSESSION VALUE NOT GIVEN
Q-14 A machinery is sold on hire purchase. The terms of payment is four annual installment of ` 6,000 at the
end of each year commencing from the date of agreement. Interest is charged @ 20% and is included in
the annual payment of ` 6,000.
Show Machinery Account and Hire Vendor Account in the books of the purchaser who defaulted in the
payment of the third yearly payment where upon the vendor re-possessed the machinery. The purchaser
provides depreciation on the machinery @ 10% per annum. on WDV. All workings should form part of
your answers.
REPOSSESSION OF GOODS – REPOSSESSION VALUE GIVEN

Q-15 Bombay Roadways Ltd purchased three trucks costing ` 1,00,000 each from Hindustan Auto Ltd on 1st
January, 2007 on the hire purchase system. ‘The terms were: Payment on delivery ` 25,000 for ‘each
truck and balance of the principal amount by 3 equal instalments plus interest at 15% per annum to be
paid at the end of each year. Bombay Roadways Ltd writes off 25% depreciation each year on the
diminishing balance method.
Bombay Roadways Ltd paid the instalments due on 31st December, 2007 and 31st December, 2008 but
could not pay the final instalment Hindustan Auto Ltd repossessed two trucks adjusting values against
the amount due. The repossession was done on 1st January, 2010 on the basis of 40% depreciation on
the diminishing balance method. You are required to: (a) Write up the ledger accounts in the books of
Bombay Roadways Ltd showing the above transactions’ upto 1.1 .2010, and (b) Show the’ disclosure of
the balance arising from the above in the Balance Sheet of Bombay Roadways Ltd as on 31st December
2009.
1. The amount paid at the time of entering the hire-purchase transaction for the goods purchased is
known as
(a) Cash price (b) Down payment (c) First instalment
2. Total interest on hire purchased goods is the difference between
(a) Hire purchase price and cash price
(b) Hire purchase price and down payment
(c) Cash price and first instalment
3. Depreciation on hire purchased asset is claimed by
(a) Hire vendor
(b) Hire purchaser
(c) Either the hire vendor or the hire purchaser as per the agreement between them
4. Under instalment payment system, ownership of goods
(a) is transferred at the time of payment of last instalment
(b) is not transferred
(c) is transferred at the time of signing the contract.
5. The hire purchaser records the asset at its
(a) Hire purchase price
(b) Amount paid to the vendor till date
(c) Cash price
6. The ownership of goods purchased under hire purchase is transferred only when
(a) Down payment is paid
(b) outstanding balance is paid in full.
(c) Cash price and first installment is paid
7. Hire purchase price is
(a) Cash price
(b) Interest on unpaid installments.
1. What is meant by Hire purchase transactions? What are the specific features of hire purchase
transactions?
2. What are the differences between Hire Purchase and Instalment System?

HOME WORK
CALCULATION OF INTEREST, CASH PRICE, INSTALLMENTS, INTEREST RATE.
Q-16 Asha purchased a truck on hire purchase system. As per terms she is required to pay ` 70,000 down, `
53,000 at the end of first year, ` 49,000 at the end of second year and ` 55,000 at the end of third year.
Interest is charged @ 10% p.a.
You are required to calculate the total cash price of the truck and the interest paid with each instalment.
Solution
Rate of interest 10 1
(1) Ratio of interest and amount due = = =
100 + Rate of interest 110 11
(2) Calculation of Interest and Cash Price
No. of Amount due at the Interest Cash price
instalments time of instalment
[1] [2] [3] [4]
3rd 55,000 1/11 of ` 55,000 = ` 5,000 50,000
2nd *99,000 1/11 of ` 99,000 = ` 9,000 90,000
1st **1,43,000 1/11of ` 1,43,000 = ` 13,000 1,30,000
Total cash price = ` 1,30,000+ 70,000 (down payment) = ` 2,00,000.
*` 50,000 + 2nd instalment of ` 49,000 = ` 99,000.
** ` 90,000 + 1st instalment of ` 53,000 = ` 1,43,000.
Q-17 A acquired on 1st January, 20X1 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, 20X1. 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.

Solution
Statement showing cash value of the machine acquired on hire-purchase basis
Instalment Interest @ 5% half yearly Principal
Amount (10% p.a.) = 5/105 = 1/21 Amount (in each
(in each instalment) 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) (6,000 – 558)
11,156
Add: 3rd instalment 6,000
17,156 817 5,183
Less: Interest (817) (6,000 – 817)
16,339
Add: 2nd instalment 6,000
22,339 1,063 4,937
Less: Interest (1,063) (6,000 – 1,063)
21,276
Add: 1st instalment 6,000
27,276 1,299 4,701
Less: Interest (1,299) _______ (6,000 –1,299)
25,977 4,023 25,977
The cash purchase price of machinery is ` 25,977.
Q-18 On 1st April, 20X1 a manufacturing company buys on Hire-purchase system a machinery for ` 90,000,
payable by three equal annual instalments combining principal and interest, the rate of interest was
5% per annum. Calculate the amount of cash price and interest. Assume that the present value of an
annuity of one rupee for three years at 5% interest is ` 2.723.
Solution
Calculation of Cash Price : The present value of an annuity of Re. 1 paid for 3 year @ 5% = ` 2.723. Hence,
the present value of ` 30,000 for 3 years = 2.723 x 30,000 = ` 81,690.
Thus, Cash Price will be computed as ` 81,690.
Cash price may also be calculated using the annuity formula discussed above:
(1 +r)n -1
Cash price = Annual instalment ×
r(1 +r)n
= 30,000 x [(1 + 0.05)3 – 1]/ 0.05 (1 + 0.05)3
= ` 81,697.

Note : The difference in cash price of ` 7 is on account of approximation.
Q-19 Om Ltd. purchased a machine on hire purchase basis from Kumar Machinery Co. Ltd. on the following
terms:
(a) Cash price ` 80,000
(b) Down payment at the time of signing the agreement on 1.1.20X1 ` 21,622.
(c) 5 annual instalments of ` 15,400, the first to commence at the end of twelve months from the date
of down payment.
(d) Rate of interest is 10% p.a.
You are required to calculate the total interest and interest included in cash instalment.
Solution
Calculation of interest
Total Interest in each Cash price in each
(`) instalment (1) instalment (2)
Cash Price 80,000
Less : Down Payment (21,622) Nil ` 21,622
Balance due after down payment 58,378
Interest/Cash Price of 1st instalment - ` 58,378 x10/100 ` 15,400 – ‘ 5,838
= ` 5,838 = ` 9,562
Less : Cash price of 1st instalment (9,562)
Balance due after 1st instalment 48,816
Interest/cash price of 2nd instalment - ` 48,816 x ` 15,400 - ` 4,882
10/100 = ` 10,518
= ` 4,882
Less: Cash price of 2nd instalment (10,518)
Balance due after 2nd instalment 38,298
Interest/Cash price of 3rd instalment - ` 38,298 x 10/100 ` 15,400 - ` 3,830
= ` 3,830 = ` 11,570
Less: Cash price of 3rd instalment (11,570)
Balance due after 3rd instalment 26,728
Interest/Cash price of 4th instalment - ` 26,728 x 10/100 ` 15,400 - ` 2,672
= ` 2,672 = ` 12,728
Less : Cash price of 4th instalment (12,728)
Balance due after 4th instalment 14,000
Interest/Cash price of 5th instalment - `14,000 x 10/100 ` 15400 – ` 1,400
= ` 1,400 = 14,000
Less : Cash price of 5th instalment (14,000)
Total Nil ` 18,622 ` 80,000
Total interest can also be calculated as follow:
(Down payment + instalments) – Cash Price = ` [21,622 + (15400 x 5)] – ` 80,000 = ` 18,622

REPOSSESSION OF GOOD
Q-20 X Ltd. purchased 3 milk vans from Super Motors costing ` 75,000 each on hire purchase system. Payment
was to be made: ` 45,000 down and the remainder in 3 equal instalments together with interest @ 9%.
X Ltd. writes off depreciation @ 20% on the diminishing balance. It paid the instalment at the end of
the 1st year but could not pay the next. Super Motor agreed to leave one milk van with the purchaser,
adjusting the value of the other two milk vans against the amount due. The milk vans were valued on
the basis of 30% depreciation annually on written down value basis. X Ltd. settled the seller’s dues
after three months.
You are required to give necessary journal entries and the relevant accounts in the books of X Ltd.
Solution
In the Books of X Ltd.
Journal Entries
Dr. (`) Cr. (`)
I Year
Milk Vans purchased:
Milk Vans A/c Dr. 2,25,000
To Vendor A/c 2,25,000
On down payment:
Vendor A/c Dr. 45,000
To Bank 45,000
I Year end
Interest A/c (` 1,80,000 @ 9%) Dr. 16,200
To Vendor A/c 16,200
Vendor A/c Dr. 76,200
To Bank A/c (60,000 + 16,200) 76,200
Depreciation @ 20% Depreciation A/c Dr. 45,000
To Milk Vans A/c 45,000
Proft & Loss A/c Dr. 61,200
To interest A/c 16,200
II Year end
Depreciation @ 20%
Depreciation A/c Dr. 36,000
Interest A/c Dr. 10,800
(1,20,000 @ 9%)
To Vendor A/c 10,800
For Loss in Repossession:
Super Motors A/c (1,50,000 – 45,000 – 31,500) Dr. 73,500
Proft/Loss A/c (b.f.) Dr. 22,500
To Milk Vans A/c [(2,25,000 – 45,000 – 36,000) x 2/3] 96,000

IIIrd Year Depreciation
Depreciation A/c (48,000 x 20%) Dr. 9,600
Settlement of A/c
Vendor A/c Dr. Dr. 57,300
To Bank 57,300
Milk Vans Account
Year ` Year `
1 To Super Motors A/c 2,25,000 1 end By Depreciation A/c 45,000
_______ ” By Balance c/d 1,80,000
2,25,000 2,25,000
2 To Balance b/d 1,80,000 2 end By Depreciation 36,000
By Super Motors (value of 73,500
2 vans after depreciation
for 2 years @ 30%)
By P & L A/c (balancing 22,500
figure)
By Balance c/d (one van 48,000
less depreciation for 2
_______ years) @ 20% _______
1,80,000 1,80,000
Super Motors Account
Year ` Year `
1 To Bank A/c 45,000 1 By Milk Vans A/c 2,25,000
To Bank A/c 76,200 By Interest @ 9% on 16,200
`1,80,000
To Balance c/d 1,20,000 _______
2,41,200 2,41,200
2 To Milk Van A/c 73,500 2 By Balance b/d 1,20,000
To Balance c/d 57,300 By Interest A/c 10,800
1,30,800 1,30,800
3 To Bank A/c 57,300 3 By Balance b/d 57,300
Q-21 A firm acquired two tractors under hire purchase agreements, details of which were as follows:
Date of Purchase Tractor A Tractor B
1st April, 1st Oct.,
20X1(`) 20X1 (`)
Cash price 14,000 19,000

Both agreements provided for payment to be made in twenty-four monthly instalments (of ` 600 each
for Tractor A and Rs. 800 each for Tractor B), commencing on the last day of the month following
purchase, all instalments being paid on due dates.
On 30th June, 20X2, Tractor B was completely destroyed by fire. In full settlement, on 10th July, 20X2 an
insurance company paid ` 15,000 under a comprehensive policy. Any balance on the hire purchase
company’s account in respect of these transactions was to be written off.
The firm prepared accounts annually to 31st December and provided depreciation on tractors on a
straight-line basis at a rate of 20 per cent per annum rounded off to nearest ten rupees, apportioned as
from the date of purchase and up to the date of disposal.
You are required to record these transactions in the following accounts, carrying down the balances on
31st December, 20X1 and 31st December, 20X2:
(a) Tractors on hire purchase.
(b) Provision for depreciation of tractors.
(c) Disposal of tractors.
Solution
Hire Purchase accounts in the buyer’s books
(a) Tractors on Hire Purchase Account
20X1 ` 20X1 `
April 1 To HP Co. - Dec. 31 By Balance c/d
Cash price
Tractor A 14,000 Tractor A 14,000
Tractor B 19,000 33,000
Oct. 1 To HP Co. -
Cash price
Tractor B 19,000 _____
33,000 33,000
20X2 ` 20X2 `
Jan. 1 To Balance b/d June 30 By Disposal of 19,000
Tractor A/c -
Transfer
Tractor A 14,000 By Balance c/d 14,000
Tractor B 19,000 33,000 Dec. 31 33,000
33,000
20X3
Jan. 1 To Balance b/d 14,000
(b) Provision for Depreciation of Tractors Account
20X1 ` 20X1 `
Dec. 31 To Balance c/d 3,050 Dec.31 By P & L A/c:
Tractor A 2,100*
Tractor B 950** 3,050
3,050 3,050
* 14,000 x 20% x 9/12 = 2,100
** 19,000 x 20% x 3/12 = 950

20X2 ` 20X2 `
June30 To Disposal of Tractor 2,850 Jan. 1 By Balance b/d 3,050
account—Transfer
(950 + 1,900)
Jun. 30 By P & L A/c
Dec. 31 To Balance c/d 4,900 (Depn. for Tractor B) 1,900
(19,000 x 20% x 6/12)
Dec. 31 By P & L A/c
(Depn. for Tractor A) 2,800
_____ (14,000 x 20%) _____
7,750 7,750
20X3
Jan. 1 By Balance b/d 4,900
(c) Disposal of Tractor Account
20X2 ` 20X2 `
June 30 To Tractors on hire 19,000 June 30 By Provision for Depn. 2,850
purchase—Tractor B of Tractors A/c
July 10 By Cash : Insurance 15,000
_____ Dec. 31 By P & L A/c : Loss (b.f.) 1,150
19,000 19,000
Q-22 Lucky bought 2 tractors from Happy on 1-10-20X1 on the following terms:
`
Down payment 5,00,000
1st installment at the end of first year 2,65,000
2nd installment at the end of 2nd year 2,45,000
3rd installment at the end of 3rd year 2,75,000
Interest is charged at 10% p.a.
Lucky provides depreciation @ 20% on the diminishing balances.
On 30-9-20X4 Lucky failed to pay the 3rd installment upon which Happy repossessed 1 tractor. Happy
agreed to leave one tractor with Lucky and adjusted the value of the tractor against the amount due.
The tractor taken over was valued on the basis of 30% depreciation annually on written down basis.
The balance amount remaining in the vendor’s account after the above adjustment was paid by Lucky
after 3 months with interest @ 18% p.a.
You are required to :
(1) Calculate the cash price of the tractors and the interest paid with each installment.
(2) Prepare Tractor Account and Happy Account in the books of Lucky assuming that books are
closed on September 30 every year. Figures may be rounded off to the nearest rupee.

Solution
(i) Calculation of Interest and Cash Price
No. of Outstanding Amount due Outstanding Interest Outstanding
installments balance at at the time of balance balance
the end after installment at the end at the
the payment before the beginning
of installment payment of
installment
[1] [2] [3] [4]= 2 +3 [5]= 4 x [6]= 4 - 5
10/110
3rd - 2,75,000 2,75,000 25,000 2,50,000
2nd 2,50,000 2,45,000 4,95,000 45,000 4,50,000
1st 4,50,000 2,65,000 7,15,000 65,000 6,50,000
Total cash price = ` 6,50,000 + 5,00,000 (down payment) = ` 11,50,000.
(ii) In the books of Lucky
Tractors Account
Date Particulars ` Date Particulars `
1.10.20X1 To Happy a/c 11,50,000 30.9.20X2 By Depreciation A/c 2,30,000
________ Balance c/d 9,20,000
11,50,000 11,50,000
1.10.20X2 To Balance b/d 9,20,000 30.9.20X3 By Depreciation A/c 1,84,000
_______ Balance c/d 7,36,000
9,20,000 9,20,000
1.10.20X3 To Balance b/d 7,36,000 30.9.20X4 By Depreciation A/c 1,47,200
By Happy a/c (Value 1,97,225
of 1 Tractor taken over
after depreciation for
3 years @30% p.a.)
{5,75,000 - (1,72,500 +
1,20,750 + 84,525)}
By Loss transferred to 97,175
Proft and Loss a/c on
surrender (Bal. fg.) or
(2,94,400-1,97,225)
By Balance c/d ½ 2,94,400
(7,36,000 - 1,47,200 =
_______ 5,88,800) _______
7,36,000 7,36,000
Happy Account
1.10.X1 To Bank (down 5,00,000 1.10.X1 By Tractors a/c 11,50,000
payment)
30.9.X2 To Bank (1st 2,65,000 30.9.X2 By Interest a/c 65,000
Installment)
To Balance c/d 4,50,000 ________
12,15,000 12,15,000

30.9.X3 To Bank (2nd 2,45,000 1.10.X2 By Balance b/d 4,50,000
Installment)
To Balance c/d 2,50,000 30.9.X3 By Interest a/c 45,000
4,95,000 4,95,000
30.9.X4 To Tractor a/c 1,97,225 1.10.X3 By Balance b/d 2,50,000
To Balance c/d (b.f.) 77,775 30.9.X4 By Interest a/c 25,000
2,75,000 2,75,000
31.12.X4 To Bank (Amount 81,275 1.10.X4 By Balance b/d 77,775
settled after 3 months) 31.12.X4 By Interest a/c 3,500
(@ 18% on bal.)
______ (77,775x3/12x18/100) ______
81,275 81,275
Q-23 Auto Distributors Ltd. sold a motor car to Sita Travel Agency on hire purchase on terms as to payment
requiring four annual instalments of ` 28,200 at the end of each year commencing from the date of
agreement on 1st January 2006.
The rate of interest was taken at 5% p.a. and the interest is included in the annual payment of ` 28,200.
Show Ledger Accounts in the books of Sita Travel Agency who defaulted in the payment of the third
yearly installment whereupon the vendor re-possessed the car. Sita Travel Agency was to provide
depreciation on the motor car @ 10% p.a. on the straight line method.
Solution
In the books of the Sita Travel Agency
Dr. Motor Car Account Cr.
1.1.06 To Auto Distributors
Ltd. A/c (Note 2) 1,00,000 31.12.06 By Depreciation A/c 10,000
______ 31.12.06 By Balance c/d 90,000
1,00,000 1,00,000
1.1.07 To Balance b/d 90,000 31,12.07 By Depreciation A/c 10,000
______ 31.112.07 By Balance c/d 80,000
90,000 90,000
1.1.08 To Balance b/d 80,000 31.12.08 By Depreciation A/c 10,000
31.12.08 By Auto
Distributors Ltd. A/c 55,057
By Profit &
_____ Loss A/c (Loss) 14,943
80,000 80,000

Dr. Auto Distributors Ltd. Account Cr.
31.12.06 To Bank A/c 28,200 1.1.06 By Motor Car A/c 1,00,000
31.12.06 To Balance c/d 76,795 31.12.06 By Interest A/c (Note 2) 4,995
1,04,995 1,04,995
31.12.07 To Bank A/c 28,200 1.1.07 By Balance b/d 76,795
To Balance c/d 52,435 31.12.08 By Interest A/c (Note 2) 3,840
80,635 80,635
31.12.08 To Motor Car A/c 55,057 1.1.08 By Balance b/d 52,435
______ 31.12.08 By Interest A/c 2,622
55,057 55,057
5 1
Note: (1) Interest is payable @ 5% p.a. Therefore, the ratio of interest and amount due = =
105 21
(2) Calculation of Interest and Cash Price
No. of instal- Amount due at the time of instalment Interest Cash price
ments [1 ] [2] [3] ( 2 - 3]
4th 28,200 1/21 of ` 28,200 = ` 1,343 26,857
3rd (26,857 + 28,200) 55,057 1 /21 of ` 55,057 = ` 2,622 52,435
2nd (52,435 + 28,200) 80,635 1/21 of ` 80,635 = ` 3,840 76,795
1st (76,795 + 28,200)1,04.995 1/21 of ` 1,04,995 = *` 4,995 1,00,000
Total cash price = ` 1,00,000. Interest for 1st year actually comes to ` 5,000. For balancing purposes, it has
been taken as ` 4,995.
Q-24 On 1st January, 20X1, Ashok acquired furniture on the hire-purchase system from Real Aids Ltd, agreeing
to pay four semi-annual instalments of ` 800 each, commencing on 30th June, 20X1, The Cash price of
the furniture was ` 3,010 and interest of 5% per annum at half yearly rest was chargeable. On 30th
September, 20X1, Ashok expresses his inability to continue and Real Aids seized the property. It was
agreed that Ashok would pay ‘the due proportion of the instalment upto the date of seizure and also a
further sum of ` 200 towards depreciation. At the time of, re-possession, Real Aids valued the furniture
at ` 1,500. The company’ after incurring ` 200 towards repairs of the furniture, sold the items for `
1,800 on 15th October, 20X1.
Required : Prepare the Ledger accounts in the books of the Vendor and the Purchaser presuming that
the purchaser charges depreciation @ 10% p.a.
Solution
Books of Ashok
Dr. Furniture Account Cr.
Date Particulars `P Date Particulars ` P
01.01 X1 To Real Aids Ltd 3,010.00 30.09.X1 By Depreciation A/c
(10% on ` 3,010
for 9 months) 225.75
By Real Aids Ltd 1,713,82
By Profit & Loss
_______ A/c (Loss) 1,070.43
3,010.00 3,010.00
Dr. Real Aids Ltd’s Account Cr.
Date Particulars `P Date Particulars `P
30.06.X1 To cash A/c 800.00 01.01.X1 By Furniture A/c 3,010.00
30.09.X1 To Cash A/c 30.06.X1 By interest A/c 75.25
(` 400 + ` 200) 600.00 30.09.X1 By interest (on ` 2,285,25
30.09.X1 To Furniture A/c 1713.82 @ 5% p.a) 28.57
3,11382 3,113,82
Dr. Interest Account Cr.
Date Particulars `P Date Particulars `P
30.06.X1 To Real Aids 75.25 By Profit & Loss A/c 103.82
30.09.X1 To Real Aids Ltd 28.57
103.82 103.82
Dr An Extract of Profit and Loss Account of Ashok Cr.

Particulars `P Particulars `P
To Interest 103.82
To Loss on Seizure of goods 1,070.43
To Depreciation on Furniture 225.75
1,400.00
Books of Real Aid Ltd
Dr. Ashok’s Account Cr.
Date Particulars `P Date Particulars ` P
01.01.X1 To Hire Purchase 30.06.X1 By Bank A/c 800.00
Sales a/c 3,010.00 30.06.X1 By Bank A/c 600.00
30.06X1 To interest A/c 30.09.X1 By Profit & Loss A/c
(on ` 3,010) 75.25 (Loss On
valuation of goods
repossessed) 213.82
30.09.X1 To Interest A/c 30.09.X1 By H.P. Goods
(on ` 2,285.25) 28.57 Repossessed A/c 1,500.00
3,113.82 3,113,82
Dr. Hire Purchase Goods Repossessed Account Cr.

30.09.X1 To Ashok 1,500 15.10.X1 By Cash A/c (Sales) 1,800
30.09.X1 To Cash (Expenses) 200
15.10.X1 To Profit and Loss A/c
(Profit on sale of
repossessed goods) 100 _____
1,800 1,800

Dr. An Extract of Profit and Loss Account of Real Aid Ltd. Cr.
Particulars ` P Particulars ` P
To Loss on valuation of goods By interest on H.P. Sales 103.82
repossessed 213.82 By Hire Purchase Goods
Repossessed A/c (Profit) 100.00
Q-25 Neha purchased a Maruti Car and a Tata Sumo from Saya Automobile on 1-1-2000. The cash price of the
car is ` 2,00,000 and of Tata. Sumo is ` 3,00,000 The amount is payable as 10% down and the balance in
3 annual instalments of 30% of the cash price each along with interest @ 20%p.a. Neha depreciates
both the vehicle @ 20% of original cost. She pays the 1st instalment in time but fails to pay the 2nd one.
Saya, Automobile seizes the car from Neha leaving the Tata Sumo with her.’ The company values the car
taken away at cost less 30%. It sells the reconditioned car at ` 1,60,000 after incurring expenses of `
5,000. Prepare the relevant accounts in the books of Neha and Saya Automobile.
Solution
Books of Neha
Dr. Maruti Car Account Cr.
1-1-2000 To Saya Automobile A/c 2,00,000 31-12-2000 By Depreciation A/c 40,000
_______ By Balance c/d : 1,60,000
2,00,000 2,00,000
1-1-2001 To Balance b/d 1,60,000 31-12-2001 By Depreciation A/c 40,000
31-12-2001 To Profit and loss A/c 20,000 By Saya Automobile A/c 1,40,000
(balancing figure) ______ _______
1,80,000 1,80,000
Dr. Tata Sumo account Cr.
1-1-2000 To Saya Automobile A/c 3,00,000 31-12-2000 By Depreciation A/c 60,000
_______ By Balance c/d 2,40,000
3,00,000 3,00,000
______ By Balance c/d 1,80,000
2,40,000 2,40,000
Working Notes:
Calculation of agreed value of Maruti car taken away by Saya Automobile.
Original cost of Maruti Car 2,00,000
Less 30% of ` 2,00,000 60,000
Agreed value of the Maruti Car on 31-12-2001 1,40,000
Calculation of carried down value of the Tata Sumo left with Neha.
Original cost of Tata Sumo 3,00,000
Less Depreciation for 2000 ( 20% of 3,00,000) 60,000
WDV of Tata Sumo on 1-1-2001 2,40,000
Less Depreciation for 2001 (20% of 3,00,000) 60,000
WDV of Tata Sumo on 31-12-2001 1,80,000

Dr. Saya Automobile Account Cr.
1-1-2000 To Bank A/c 50,000 1-1-2000 By Maruti Car A/c 2,00,000
(10% of ` 5,00,000)
31-12-2000 To Bank A/c 2,40,000 By Tata Sumo A/c 3,00,000
(30% of ` 5,00,000 +
interest (` 90,000)
To Balance c/d 3,00,000 31-12-2000 By Interest A/c 90,000
______ (20% of 4,50,000) ______
5,90,000 5,90,000
31.12.2001 To Maruti car A/c 1,40,000 1-1-2001 By Balance b/d 3,00,000
To Balance c/d 2,20,000 31-12-2001 By Interest A/c 60,000
(balancing figure) ______ (20% of 3,00,000) ______
3,60,000 3,60,000
Alternatively, a single Vehicle account instead of two accounts of Maruti car and Tata Sumo can be
preparedin the books of Neha. The account willappear as follows:
Dr. Vehicle Account Cr.
1-1-2000 To Saya Automobile A/c 5,00,000 31-12-2000 By Depreciation A/c 1,00,000
______ By Balance c/d 4,00,000
5,00,000 5,00,000
1-1-2001 To Balance b/d 4,00,000 31-12-2001 By Depreciation A/c 1,00,000
31-12-2001 To Profit and loss 20,000 By Saya Automobile A/c 1,40,000
A/c (balancing figure)
_______ By Balance c/d 1,80,000
4,20,000 4,20,000
Agreed value of Maruti Car.
Written down value of Tata Sumo.
Books of Saya Automobile
Dr. Neha Account Cr.
1-1-2000 To H.P. Sales A/c 5,00,000 1-1-2000 By Bank A/c 50,000
31-12-2000 To Interest A/c 90,000 31-12-2000 By Bank A/c 2,40,000
(20% of 4,50,000)
______ By Balance c/d 3,00,000
5,90,000 5,90,000
1-1-2001 To Balance b/d 3,00,000 31-12-2001 By Goods
Repossessed A/c 1,40,000
To Interest A/c 60,000 By Balance c/d 2,20,000
(20% of 3,00,000) _______ _______
3,60,000 3,60,000
Dr. Goods Repossessed Account Cr.
31-12-2001 To Neha A/c 1,40,000 31-12-2001 By Bank A/c 1,60,000
To Bank A/c 5,000
To Profit & loss A/c 15,000 ______
1,60,000 1,60,000
Q-26 Chetan purchases 4 personal computers from Nikki Infotech Ltd. on 1-1-2000 on hire-purchase basis.
The cash price of each computer is ` 30,000 each. The amount is payable as 10% down and the balance
in 3 annual instalments of 20% each and the final instalment of 30% of the cash price together with
interest @ 10% p.a. Chetan depreciates the PC’s @15% of original cost. Chetan paid the first instalment
in time but failed to pay the second one falling due on 31-12-2001 and consequently Nikki infotech Ltd.
repossessed the 2 personal computers. The repossessed computers were valued at cost less 35% Nikki
Infotech Ltd. sold one PC for ` 22,000 after incurring expenses of ` 1,000 and revalued the other at `
19,000. Prepare the relevant accounts in the books of Chetan and Nikki infotech Ltd., assuming that
both purchaser and vendor close their books on 31 December every year.
Solution
Books of Chetan
Dr. Personal Computer Account Cr.
1-1-2000 To Nikki Infotech Ltd. A/c 1,20,000 31-12-2000 By Depreciation A/c 18,000
______ By Balance c/d 1,02,000
1,20,000 1,20,000

By Nikki Infotech
Ltd. A/c 39,000
By Profit and loss A/c 3,000
(balancing figure)
_______ By Balance c/d 42,000
1,02,000 1,02,000
Calculation of agreed value of 2 personal computers taken away by Nikki Infotech Ltd.
Original cost of 2 PCs = ` 60,000
Less 35% of ` 60,000 = ` 21,000
Agreed value of the 2 PCs on 31-12-2001 = ` 39,000
Calculation of written down value of the 2 PCs left with Chetan.
Original cost of 2 PCs = ` 60,000
Less Depreciation for 2000 (15% of 60,000) = ` 9,000
WDV of 2 PCs on 1-1-2001 = 51,000
Less Depreciation for 2001 (15% of 60,000) = ` 9,000
WDV of 2 PCs on 31-12-2001 ` 42,000

Dr. Nikki Infotech Limited Account Cr.
1-1.2000 To Bank A/c 12,000 1-1-2000 By Personal Computer A/c 1,20,000
(10% of ` 1,20,000)
31-12-2000 To Bank A/c 34,800 31-12-2000 By Interest A/c 10,800
(20% of ` 1,20,000 + (10% of 1,08,000)
interest (` 10,800))
To Balance c/d 84,000 _______
1,30,800 1,30,800
31-12-2001 To Personal Computer A/c 39,000 1-1-2001 By Balance b/d 84,000

To Balance c/d 53,400 31-12-2001 By Interest A/c 8,400
(balancing figure) _____ (10% of 84,000) _____
92,400 92,400
Books of Nikki Infotech Ltd.
Dr. Chetan Account Cr.
1-1-2000 To H.P. Sales A/c 1,20,000 1-1-2000 By Bank A/c 12,000
31-12-2000 To Interest A/c 10,800 31-12-2000 By Bank A/c 34,800
(10% of 1,08,000)
______ By Balance c/d 84,000
1,30,800 1,30,800
1-1-2001 To Balance b/d 84,000 31-12-2001 By Goods Repossessed A/c 39,000

To interest A/c 8,400 By Balance c/d 53,400
(10% of 84,000) _____ _____
92,400 92,400
Dr. Goods Repossessed Account Cr.
31-12-2001 To Neha A/c 39,000 31-12-2001 By Bank A/c 22,000
To Bank A/c 1,000 31-12-2001 By Balance c/d 19,000
To Profit & loss A/c 1,000
(balancing figure) ______ ______
41,000 41,000

CHAPTER-10
DEPARTMENTAL ACCOUNTS
INTRODUCTION
When business consists of several activities/functions, the management is usually interested to know the
profit or loss of each function/activity separately to examine the efficiency and effectiveness of each such
function. Each function or activity is designated as department. With the help of departmental accounting,
the management can achieve the following objectives.
1. It can evaluate the performance of each department. This can help the management to take decision as
to whether to continue such department or that is to be outsourced.
2. Can check the growth potential of the department.
3. It can justify whether the investment generates adequate return or not.
4. It can help to measure the efficiency of each departmental manager which in turn can be the base for
awards or incentives.
5. It can help for better and effective planning and control of the organisation as a whole.

Types of Departments:
Departments can be classified as Independent Departments and Dependent Departments.
1. Independent department are those departments which function independently. They normally
do not have transactions with other departments of the organisation.
2. Dependent departments are those which for their functioning depend on the other departments
of the organisation. Output of one department is transferred to other department for further
processing or sale.
Basis of allocation of common expenses among different departments:

While preparing the income statement of each department the identifiable expenses are debited to the
respective department and the common expenses are allocated over the departments on suitable basis.
The following table shows appropriate basis of allocation of common expenses.
Departmental Accounts -231-

Sr. Name of Expense Basis of Allocation
1 Rent, Rates and Taxes; Repairs and Floor area occupied, if given otherwise time basis
maintenance; Insurance of building
2 Lighting and heating expenses Consumption of energy in each department
3 Selling expenses( discount, bad debts, Sales of each department
selling commission, freight outward, travelling,
sales manager’s salary)
4 Carriage inward; Discount received Purchase of each department
5 Wages; Salaries Time devoted to each department or No. of
workers/employees
6 Depreciation; Insurance; Repairs and maintenance Value of asset in each department or time basis
of capital asset
7 Administrative and other expenses like salary of Time basis or equally among all departments
manager/director, common advertisement expenses
8 Labour welfare expenses No. of employees in each department
9 PF/ESI contribution Wages and Salaries of each department
10 Interest on loan Utilisation of loan amount in each department
or it is debited to General P & L A/c
11 Profit or loss on sale of Investment Equal or shown in General P & L A/c

CLAS WORK
ALLOCATION OF OVERHEADS
Q-1 M/s Omega is a departmental stores having three departments X, Y and Z. The manager of each
department is entitled to a commission of 10% of the net profit of the department besides their annual
salary of ` 3,000 each. The information regarding three departments for the year ended 30th June, 2010
are given below :
X Y Z
` ` `
Opening stock 72,000 48,000 40,000
Purchases 2,64,000 1,76,000 88,000
Debtors at end 15,000 10,000 10,000
Sales 3,60,000 2,70,000 1,80,000
Closing stock 90,000 35,000 42,000
Floor space occupied by each
department (In Sq. ft.) 3,000 2,500 2,000
Number of employees in each Dept. 25 20 15
The balance of other revenue items in the books for the year and the basis of thier allocation amongst
three departments are given below :
Items Amount Basis
Carriage Inwards 6,000 Purchase
Carriage Outwards 4,500 Turnover
Salaries including Manager’s salaries 81,000 No. of Employees
Advertisement 5,400 Turnover
Discount allowed 2,250 Turnover
Discount received 1,800 Purchases
Rent, Rates & Taxes 7,500 Floor space
occupied
Depreciation on furniture 1,500 Equal
Assets and liabilities on 30th June, were as follows:

Debit Credit
` `
Capital ---- 3,00,000
Goodwill 1,00,000 ----
Bills Payable ---- 12,100
Bills Receivable 42,500 ----
Furniture 13,500 ----
Sundry Creditors ---- 27,000
Cash in hand 1,750 ----
Cash at Bank 1,62,000 ----
You are required to prepare Trading and Profit & Loss A/c. for the year ended 30th June 2010 (after
providing forprovision for Bad Debts at 5%) and a Balance Sheet as on that date.
Q-2 Robinhood is a retail trader whose stores has two departments dealing in clothing and sports equipment
respectively. The following Trial Balance was extracted from books at 31-12-2014, the balance accounting
year end :
Particulars Dr. (`) Cr. (`)
Sales - clothing 1,20,000
- sports Equipment 1,60,000
Stock at cost at 1-1-2014 - clothing 10,000
- sports equipment 16,000
Purchases - Clothing and sports equipment 1,92,000
Establishment Expenses - Clothing 15,000
- Sports Equipment 16,920
Sales and Administrative Expenses- clothing 7,400
- Sports Equipment 5,840
Capital 20,000
Reserve 21,460
Creditors 5,800
Bank overdraft 2,300
Debtors 8,600
Building - At cost 20,000
Provision for depreciation 800
Furniture - At cost 26,000
Provision for depreciation 9,000
Vehicles - At cost 42,000
Provision for depreciation 20,400
Total 3,59,760 3,59,760

(a) Gross profit is earned as follows:
Clothing - 1/3rd of sales; sports equipment - 3/10th of sales.
(b) Stock is valued at cost on 31-12-2014 :
Clothing ` 8,000; sports equipment ` 14,000
(c) Amounts prepaid at 31-12-2014 :
Establishment Expenses - Clothing ` 300
(d) Amount outstanding on 31-12-2014 :
Sales and administrative expenes - clothing ` 200; sports equipment ` 700
(e) The sales staff receive commission in june of each year based on the gross profit earned in thier
department in the previous financial year :
Clothing - 2% of gross profit; sports equipment - 3% of gross profit.
(f) In June 2014, additional furniture was acquired at a cost of ` 4,000 wasd debited to purchases.
(g) Depreciation is provided annually on fixed assets at the following percentage of the cost of assets
held at the relevant accounting year end : Building - 2%, Furniture - 10%; Vehicles - 20%.
(h) In August 2014, a motor vehicle which had been bought in January 2010 at a cost of ` 6,000 was
scrapped the firm did not receive anything for the scrap.
(i) The fixed assets depreciation is apportioned to departments as follows:
Clothing Sport Equ.
Building 1/2 1/2
Furniture 3/5 2/5
Vehicles 5/12 7/12
You are required to prepare the Trading & Profit and Loss Account for the year ended 31-12-2014 and
the Balance Sheet as on that date.
Q-3 M/s. Suman Hosiery Mills produce three varieties of products : Sona, Mona and Dona. The cost of
production during the year 2014 of these varities amounted to ` 8,00,000. Output during the year were
: Sona-4,000 units; Mona-8,000 units and Dona-9,600 units.
Stock on 1st Janurary, 2014 were : Sona-450 units; Mona-300 units and Dona-600 units.
Sales during the year were; Sona-4,100 units @ ` 48 each; Mona-7,700 units @ ` 54 each and Doan -
10,000 units @ ` 60 each. The rate of gross profit is the same in each case. Total departmental expenses
of ` 96,000 were to be apportioned to various products in the ratio of 1:2:2.
Prepare Departmental Trading Account.
Inter departmental transfers:
In case of dependent departments goods and services are transferred from one department to other
department usually on the following basis:
1. Cost price
2. Current market price
3. Cost plus agreed percentage of profit

Unrealised profits:
When goods are transferred to other department after loading profits, then the unsold goods in the other
department includes profit which is known as unrealised profits. Such profit is to be excluded at the time of
preparing final accounts of business. For eliminating the unrealised profit in unsold goods, the following
entry is passed at the end of every year.
Profit and Loss Account ……….. Dr
To Stock Reserve Account—Cr
At the beginning of the next year, the above entry is to be reversed.
Stock Reserve Account ………………. Dr
To Profit and Loss Account—— Cr
In the Balance sheet the amount of stock reserve is deducted from the stock so that stock is reduced
to its original cost price.
INTER DEPARTMENTAL TRANSFERS :

Q-4 A firm had two departments X and Y. Department Y (which was a Manufacturing Department) received
goods from Department X as its raw material. Department X supplied the said goods to Y at cost price.
From the following particulars you are required to prepare a Departmental Trading and Profit and Loss
Account for the year ended on 31st December, 2014 (all figures in rupees).
Particulars Dept X Dept Y
Opening Stock (as on 1-1-2014) 2,50,000 75,000
Purchases (from outside suppliers) 10,00,000 20,000
Sales (to outside customers) 12,00,000 3,00,000
Closing stock (as on 31-12-2014) 1,50,000 50,000
The following information is to be taken into account :
a. Depreciation of Buildings to be provided at 20% p.a. The value of the Building occupied by both
the Departments was ` 1,05,000 (Department X occupying two-third portion and Department Y
occupying the rest)
b. Goods transferred from Department X to Deaprtment Y ` 2,50,000 at cost.
c. Manufacturing Expenses amounted to ` 10,000
d. Selling expenses amounted to ` 15,000 (to be apportioned on the basis of sales of respective
department)
e. general expenses of the business as a whole amounted to ` 58,000.
Q-5 The firm “Tantuja” has two departments - first one is “cloth” and teh second is “tailoring”. Tailoring
department gets all its requirements of cloth from the clothdepartment at the usual selling price.
From the following particulars prepare Departmental Trading Account and Profit and Loss Account for
the year ended 31st March, 2014 : (all figures in Rupees)
Particulars Cloth Dept. Tailoring Dept.
Manufacturing Expenses ---- 1,08,000
Selling Expenese 45,000 18,000
Stock on 1-4-2013 5,40,000 72,000
Sales 36,00,000 7,20,000
Transfer of cloth to Tailoring Dept. 4,50,000 ----
Purchases 30,60,000 45,000
Stock on 31-3-2014 9,00,000 1,35,000
The stock in Tailoring Depatment may be assumed to consist 80% cloth and 20% other expenses.
Genral expenses of the business for the year came to ` 2,07,000. In 2012-2013 the Cloth Department
earned a gross profit of 30% on sales.
Q-6 A & Co. has two departments P and Q. Department P sells goods to Department Q at normal selling
prices. From the following particulars, prepare Departmental Trading and Profit and Loss Account for
the year ended 31-3-2014 and also ascertain the Net Profit to be transferred to Balance Sheet :
Department Department
P (`) Q (`)
Opening Stock 5,00,000 ----
Purchases 28,00,000 3,00,000
Goods from P ---- 8,00,000
Wages 3,50,000 2,00,000
Travelling Expenses 20,000 1,60,000
Closing stock at cost to the Department 8,00,000 2,09,000
Sales 30,00,000 20,00,000
Printing & Stationery 30,000 25,000
The following expenses incurred for both departments were not apportioned between the
departments:
(a) Salaries ` 3,30,000; (b) Advertisement expenses ` 1,20,000; (c) General expenses ` 5,00,000; (d)
Depreciation isto be charged @ 30% on the machinery value of ` 96,000.
The advertisement expenses of the departments areto be apportioned in the turnover ratio. Salaries
and depreciation are to be apportioned in the ratio 2 : 1 and 1 : 3 respectively. General expenses are to
be apportioned in the ratio 3 : 1.
Q-7 X Ltd. has two departments A and B. From the following particualrs prepare Departmental Trading
Account and consolidated trading account for the year ended 31st December 2014. (all figures in
rupees)
Dept. A Dept. B
Opening stock at cost 40,000 24,000
Purchases 1,84,000 1,36,000
Carriage Inward 4,000 4,000
Wages 24,000 16,000
Sales 2,80,000 2,24,000
Purchased goods transferred by Dept. B to Dept. A 20,000 ----
Purchased goods transferred by Dept. A to Dept. B ---- 16,000
Finished goods transferred by Dept. B to Dept. A 70,000 ----
Finished goods transferred by Dept. A to Dept. B ---- 80,000
Return of finished goods by Dept. B to Dept. A 20,000 ----
Return of finished goods by Dept. A to Dept. B ---- 14,000
Closing stock of Purchased goods 9,000 12,000
Closing stock of Finished goods 48,000 28,000

Purchased goods have been transferred mutually at their respective departmental purchase cost and
finished goods at departmental market price an dthat 20% of the finished stock (closing) at each
department represented finished goods received from the other department.
Q-8 The Complex Ltd. Has three departments namely X, Y and Z. The following are the details:
X Y Z
` ` `
Opening stock of Finished goods 3,000 4,000 6,000
Raw materials consumed 8,000 12,000 ---
Wages 5,000 10,000 ---
Closing stock of finished goods 4,000 14,000 8,000
Sales ---- --- 34,000
Unrealised profits in opening stocks ----- 1,000 2,000
Stocks of each department is valued at cost to the department concerned, stocks of X department are
transferred to Y at a margin of 50% above cost, stocks of Y department are transferred to Z department
at a margin of 10% above cost. The other expenses were ` 16,000 which are to be allocated to all the
departments in the ratio of Gross Profits.
Prepare Departmental Trading and Departmental profit and loss account for the year ending 31st March,
2014.
Q-9 Department P sells goods to Department S at a profit of 25% on cost and to Department Q at a profit of
15% on cost. Department S sells goods to P and Q at a profit of 20% and 30% on sales respectively.
Department Q sells goods to P and S at 20% and 10% profit on cost respectively.
Departmental Managers are entitled to 10% commission on net profit subject to unrealized profit on
departmental sales being eliminated. Departmental profits after charging Manager's commission, but
before adjustment of unrealized profits are as below:
`
Department P 90,000
Department S 60,000
Department Q 45,000
Stock lying at different Departments at the end of the year are as below:
Figures in `
DEPARTMENTS
P S Q
Transfer from P - 18,000 14,000
Transfer from S 48,000 - 38,000
Transfer from Q 12,000 8,000 -
Find out correct Departmental Profits after charging Managers' Commission.

MEMORANDUM STOCK AND MEMORANDUM MARK UP ACCOUNT METHOD:
When goods are sold through department at fixed price which is after loading standard margins, profits of
the department can be decided by (i) Preparing departmental trading account or (ii) Preparing Memorandum
Stock and memorandum Mark up accounts.
(i) In departmental trading account all the transactions are recorded at cost price.
(ii) When memorandum stock and memorandum mark up accounts are prepared:
1. When goods are supplied to the department at Mark up price( Cost plus standard margin),
Memorandum stock account is debited
2. Mark up on goods supplied is credited to memorandum mark up account.
3. Sales are credited to memorandum stock account.
4. When the selling price of goods is reduced below mark up price, the reduction (Mark down) is
recorded in memorandum stock account as well as memorandum mark up account.
5. When at the end of the year department has unsold goods at mark down price then proportionate
markdown is revered and entered in both the accounts.
6. Mark up and mark down on all the transactions are recorded in memorandum mark up account on
opposite side of stock account.
7. Memorandum stock account is closed without disclosing any profit/loss. The balancing amount of
that account is considered closing stock.
8. The balance of memorandum mark up account is considered profit or loss of the department.
MEMORANDUM STOCK AND MARK UP METHOD :

Q-10 Southern Store Ltd. is a retail store operating two departments. The company maintains a Memorandum
Stock Account and Memorandum Mark-up Account for each of the departments.
Supplies issued to the departments are debited to the Memorandum Stock Account for the
department at cost plus the mark-up, and departmental sales are credited to this account. The mark-up
on supplie issued to the departments is credited to the mark-up account forthe department. When it is
necessary to reduce the selling price below the normal selling price, i.e. cost plus mark-up, the reduction
(mark-down) is entered in the Memorandum Stock Account and in the mark-up account. Department Y
has a mark-up of 33-1/3% on cost and Department Z 50% on cost.
The followng information has been extracted from therecords of Southern Store Pvt. Ltd. for the
year ended 31st December, 2014 : (all figures in rupees)
Dept. Y Dept. Z
Stock (1-1-2014) at cost 24,000 36,000
Purchases 1,62,000 1,90,000
Sales 2,10,000 2,85,000
1. The stock of Department Y at 1st January 2014 includes goods on which the selling price has been
marked down by ` 510. These goods were sold in January 2014 at the reduced price.
2. Certain goods purchased in 2014 for ` 2,700 for department Y, were transferred during the year to
department Z, and sold for ` 4,050. Purchase and sale are recorded in the purchases of department
Y and the sales of department Z respectively, but no entries in respect of the transfer have been
made.

3. Goods purchased in 2014 were marked down as follows :
Dept. Y Dept. Z
Cost 8,000 21,000
Mark down 800 4,100
At the end of the year threre were some items in the stock of department Z, which had been marked
down to ` 2,300. With this exception, all goods marked down in 2014 were sold during the year at the
reduced prices.
4. During stock taking in Department Y, shortage of goods costing ` 240 was noticed. It was determined
that the loss should be regarded as irrecoverable.
5. The closing stock in both departments areto be value at cost for the purose of the annual accounts.
You are required to prepare for each department for the year ended 31st December 2014 :
(a) Trading Account (b) Memorandum Stock Account; and (c) Memorandum Mark-up account.

LAST MINUTE REVISION (LMR)
DISTINCTION BETWEEN BRANCH ACCOUNTS AND DEPARTMENTAL ACCOUNTS

Branch Accounts differ from Departmental Accounts in the following respects :
Basis of Distinction Branch Accounts Departmental Accounts

1. Place at which accounts Branch accounts may be Departmental Accounts are
may be maintained maintained at Head office or maintained at one place.
Branch.
2. Allocation of Common There is usually no problem in There is problem of allocation of
Expenditure allocation of common allocation common expenditure among
of common expenditure (except different Departments.
for H.O. expenditure) since the
amount of expense in respect of
each branch can be identified.
3. Problem of Reconciliating In case of an independent
branch, reconciliation of Head No such problem arises
Office and Branch accounts is
necessary.
4. Problem of conversion of In case of Foreign Branch, the
Foreign Branch Figures problem of conversion of foreign No such problem arises.
branch figures arises.

Inter Departmental
1. Departmental accounting helps in

(a) Evaluation of trading results of each department separately.
(b) Effective planning and control on each department.
2. Selling commission expense is apportioned among departments in the proportion of
(a) Average stock carried by each department.
(b) Number of units sold by each department.
(c) Sales of each department.
3. If Department A transfers goods to Department B at a price of 50% above cost, what will be the
amount of stock reserve on unsold stock worth `9,000 of Department B?
(a) 3,000. (b) 4,500. (c) 1,500.
4. Goods and services may be charged by one department to another on
(a) Market price.
(b) Cost plus agreed percentage of profit.

5. Administrative expenses are apportioned among various departments on basis of
(a) Time spent by employees in each department.
(b) Value of assets of each department.
6. Depreciation on assets is apportioned among various departments on basis of
(a) Value of assets of each department.
(b) Purchases of each department.
7. Expense of rent is apportioned among various departments on basis of
(a) Sales of each department.
(b) Floor area occupied by each department.
(c) Either (a) or (b).
8. When profit is added in inter-departmental transfers, unrealised profit included in the closing
stock at the year end (before preparing final accounts) is eliminated by
(a) Creating an appropriate stock reserve.
(b) Debiting the combined profit and loss account.
9. If an organisation is interested in determining the separate departmental net profit, then
(a) Accounts of all departments are kept in one book only.
(b) Separate set of books are kept for each department.
(c) Departments transfer goods to each other for further processing.
1. Explain the significance of having departmental accounts for a business entity.
2. How will you allocate the following expenses among different departments?
(i) Rent, rates and taxes, repairs and maintenance, insurance of building.
(ii) Lighting and Heating expenses (e.g. energy expenses)
(iii) Selling expenses.

HOME WORK
ALLOCATION OF OVERHEADS
Q-11 Z Ltd. has three departments and submits the following information for the year ending on 31st March,
2009:
A B C Total (`)
Purchases (units) 6,000 12,000 14,400
Purchases (Amount) 6,00,000
Sales (Units) 6,120 11,520 14,976
Selling Price (per unit) ` 40 45 50
Closing Stock (Units) 600 960 36
You are required to prepare departmental trading account of Z Ltd., assuming that the rate of profit on
sales is uniform in each case.
Ans. Rate of profit on sales is 60%. Cost per unit of A - Rs.16, B-Rs.18, C-Rs.20. Gross Profit : A-Rs.1,46,880, B-
Rs. 3,11,040, C - 4,49,280.
Q-12 Brahma Limited has three departments and submits the following information for the year ending on
31st March, 20X1:
Particulars A B C Total
Purchases (units) 5,000 10,000 15,000
Purchases (Amount) 8,40,000
Sales (units) 5,200 9,800 15,300
Selling price ( ` per unit) 40 45 50
Closing Stock (Units) 400 600 700
You are required to prepare departmental trading account of Brahma Limited assuming that the rate of
profit on sales is uniform in each case.
Ans. Rate of profit on sales is 40%. Cost per unit of A- Rs. 24, B-Rs.27, C-Rs.30. Gross profit: A- Rs. 83,200, B-
Rs. 1,76,400, C-3,06,000.
INTER DEPARTMENTAL TRANSFERS :

Q-13 Goods are transferred from Department P to Department Q at a price 50% above cost. If closing stock of
Department Q is ` 27,000, compute the amount of stock reserve.
Ans. Rs. 9,000

Q-14 X Ltd. has two departments, A and B. From the following particulars prepare the consolidated Trading
Account and Departmental Trading Account for the year ending 31st December, 2008:
A B
` `
Opening Stock (at cost) 20,000 12,000
Purchases 92,000 68,000
Sales 1,40,000 1,12,000
Wages 12,000 8,000
Carriage 2,000 2,000
Closing Stock:
(i) Purchased goods 4,500 6,000
(ii) Finished goods 24,000 14,000
Purchased goods transferred:
by B to A 10,000
by A to B 8,000
Finished goods transferred:
by A to B 35,000
by B to A 40,000
Return of finished goods:
by A to B 10,000
by B to A 7,000
You are informed that purchased goods have been transferred mutually at their respective departmental
purchase cost and finished goods at departmental market price and that 20% of the finished stock
(closing) at each department represented finished goods received from the other department.
Ans. Gross Profit A-Rs. 38,500; B- Rs. 46,000. Gross profit of consolidated trading A/c Rs. 82,304. Departmental
GP rates: A- 22.916%; B- 32.394%. Unrealised profit in the stock of A Rs. 1,555 and in the stock of B Rs.
641.
Q-15 Department A sells goods to Department B at a profit of 50% on cost and to Department C at 20% on
cost. Department B sells goods to A and C at a profit of 25% and 15% respectively on sales. Department
C charges 30% and 40% profit on cost to Department A and B respectively.
Stock lying at different departments at the end of the year are as under :
Department A Department B Department C
` ` `
Transfer from Department A - 45,000 42,000
Transfer from Department B 40,000 - 72,000
Transfer from Department C 39,000 42,000 -
Calculate the unrealised profit of each department and also total unrealised profit.
Ans. Unrealised profit : A-Rs. 22,000; B-Rs.20,800; C-Rs. 21,000. Total Rs. 63,800

Q-16 Department X sells goods to Department Y at a profit of 25% on cost and to Department Z at 10% profit
on cost. Department Y sells goods to X and Z at a profit of 15% and 20% on sales, respectively. Department
Z charges 20% and 25% profit on cost to Department X and Y, respectively.
Department Managers are entitled to 10% commission on net profit subject to unrealised profit on
departmental sales being eliminated. Departmental profits after charging Managers’ commission, but
before adjustment of unrealised profit are as under:
`
Department X 36,000
Department Y 27,000
Department Z 18,000
Stock lying at different departments at the end of the year are as under:
Department X Department Y Department Z
` ` `
Transfer from Department X — 15,000 11,000
Transfer from Department Y 14,000 — 12,000
Transfer from Department Z 6,000 5,000 —
Find out the correct departmental Profits after charging Managers’ commission.
Ans. Correct profit after manager commission: X-Rs. 32,400; Y-Rs. 22,950; Z-Rs. 16,200.
Q-17 M/s Suman Enterprises has two Departments, Finished Leather and Shoes. Shoes are made by the Firm
itself out of leather supplied by Leather Department at its usual selling price. From the following
figures, prepare Departmental Trading and Profit & Loss Account for the year ended 31st March, 2014 :
Finished Shoes
Leather Department
Department
(` ) (` )
Opening Stock (As on 01.04.2013) 30,20,000 4,30,000
Purchases 1,50,00,000 2,60,000
Sales 1,80,00,000 45,20,000
Transfer to Shoes Department 30,00,000 -
Manufacturing Expenses - 5,00,000
Selling Expenses 1,50,000 60,000
Rent and Warehousing 5,00,000 3,00,000
Stock on 31.03.2014 12,20,000 5,00,000
The following further information are available for necessary consideration :
(i) The stock in Shoes Department may be considered as consisting of 75% of Leather and 25% of
other expenses.
(ii) The Finished Leather Department earned a Gross Profit @ 15% in 2012-13.
(iii) General expenses of the business a a whole amount to `8,50,000.
Ans. Departmental GP : Finished leather Rs. 42,00,000; Shoes-Rs. 8,30,000. Departmental NP: Finished leather
Rs. 35,50,000; Shoes –Rs. 4,70,000. Unrealised profit Rs. 26,625. NP of business Rs. 31,43,375.

MEMORANDUM STOCK AND MARK UP METHOD :
Q-18 Gram Udyog, a retail store, has two departments, ‘Khadi and Silks’ for each of which stock account and
memorandum ‘mark up’ accounts are kept. All the goods supplied to each department are debited to
the stock account at cost plus a ‘mark up’, which together make-up the selling-price of the goods and in
the account of the sale proceeds of the goods are credited. The amount of ‘mark-up’ is credited to the
Departmental Mark up Account. If the selling price of any goods is reduced below its normal selling
price, the reduction ‘marked down’ is adjusted both in the Stock Account and the Departmental ‘Mark
up’ Account. The rate of ‘Mark up’ for Khadi Department is 33-1/3% of the cost and for Silks Department
it is 50% of the cost.
The following figures have been taken from the books for the year ended December 31, 2008:
Khadi D Silks D
` `
Stock as on January 1st at cost 10,500 18,600
Purchases 75,900 93,400
Sales 95,600 1,25,000
(1) The stock of Khadi on January 1, 2008 included goods the selling price of which had been marked
down by ` 1,260. These goods were sold during the year at the reduced prices.
(2) Certain stock of the value of ` 6,900 purchased for the Khadi Department were later in the year
transferred to the Silks department and sold for ` 10,350. As a result though cost of the goods is
included in the Khadi Department the sale proceeds have been credited to the Silks Department.
(3) During the year 2008 to promote sales the goods were marked down as follows :
Cost Marked down
` `
Khadi 5,600 360
Silk 10,000 2,000
All the goods marked down, were sold except Silks of the value of ` 5,000 marked down by `
1,000.
(4) At the time of stock-taking on December 31, 2008 it was discovered that Khadi cloth of the cost of
` 390 was missing and it was decided that the amount be written off.
You are required to prepare for both the departments for the year 2008.
(a) Departmental Trading Account.
(b) The Memorandum Stock Account; and
(c) The Memorandum Mark up Account.
Ans. GP of Silk Rs. 16,450 and GP of Khadi Rs. 2,065
Q-19 Martis Ltd. has several departments. Goods supplied to each department are debited to a Memorandum
Departmental Stock Account at cost, plus a fixed percentage (mark-up) to give the normal selling price.
The mark-up is credited to a memorandum departmental ‘Mark-up account’, any reduction in selling
prices (mark-down) will require adjustment in the stock account and in mark-up account. The mark up
for Department A for the last three years has been 25%. Figures relevant to Department A for the year
ended 31st March, 20X2 were as follows:
Opening stock as on 1st April, 20X1, at cost ` 65,000
Purchase at cost ` 2,00,000
Sales ` 3,00,000

It is further ascertained that :
(1) Shortage of stock found in the year ending 31.03.20X2, costing ` 1,000 were written off.
(2) Opening stock on 01.04.20X1 including goods costing ` 6,000 had been sold during the year and
bad been marked down in the selling price by ` 600. The remaining stock had been sold during the
year.
(3) Goods purchased during the year were marked down by ` 1,200 from a cost of ` 15,000. Marked-
down stock costing ` 5,000 remained unsold on 31.03.20X2.
(4) The departmental closing stock is to be valued at cost subject to adjustment for mark-up and
mark-down.
You are required to prepare:
(i) A Departmental Trading Account for Department A for the year ended 31st March, 20X2 in the books
of Head Office.
(ii) A Memorandum Stock Account for the year.
(iii) A Memorandum Mark-up Account for the year.
Ans. GP Rs. 58,880. Mark up is on cost price.

CHAPTER-11
ACCOUNTING FOR BRANCHES INCLUDING FOREIGN BRANCHES
INTRODUCTION
A branch can be described as any establishment carrying on either the same or substantially the same
activity as that carried on by head office of the company. It must also be noted that the concept of a
branch means existence of a head office for there can be no branch without a head office - the principal
place of business.
MEANING OF A BRANCH
A branch is any establishment carrying on either the same or substantially the same activity as that
carried on by the head office of the company.
CLASSIFICATION OF BRANCHES
From the accounting point of view, Branches may be classified as follows:
ACCOUNTING FOR DEPENDENT BRANCHES

The branch which does not maintain a complete record of its transactions is said to be dependent one. The
head office may maintain the accounts of such branches according to any of the following methods:
Accounting for Branches including Foreign Branches -249-

(a) DEBTORS METHOD
Meaning of Debtors Method
This method is usually adopted when the branch is of small size. Under this method, the head office
maintains separate Branch Account for each branch. Its purpose is to ascertain profit or loss made by each
branch.
Journal Entries under Debtors Method

1. To record opening balances of Branch A/c Dr.
Branch Assets To Branch Assets (Individually)
2. To record opening balances of Branch Liabilities (Individually) Dr.
Branch Liabilities To Branch A/c
3. When goods are supplied by the Head Branch A/c Dr.
office/another branch to Branch To Goods sent to Branch A/c
4. When goods are returned by the Goods Sent to Branch A/c Dr.
branch/branch customers directly To Branch A/c
to the Head Office
5. When goods are supplied by the Goods Sent to Branch A/c Dr.
branch to another branch under To Branch A/c
instructions of Head office
6. When goods are supplied by the Goods-in Transit A/c Dr.
Head office but not received by the To Branch A/c
Branch head
7. When the Head office meets the Branch A/c Dr.
branch expenses or sends cash to To Cash/Bank A/c
the branch for meeting its expenses
8. When remittances are received by Cash/Bank A/c Dr.
the Head Office from the Branch/ To Branch A/c
Branch Customers

9. When remittances are sent by the Cash in-transit A/c Dr.
Branch but not received by the To Branch A/c
Head office
10. When the balance in Goods sent Goods sent to Branch A/c Dr.
to Branch Account is transferred To Purchases A/c (in case of
Trading concerns) or,
To Trading A/c (in case of
manufacturing concerns)
11. To record the closing balances of Branch Assets A/c (Individually) Dr.
Branch Assets To Branch A/c
12. To record the closing balances of Branch A/c Dr.
Branch Liabilities To Branch Liabilities (Individually)
13. To record Profit or Loss
(i) If credit side exceeds the debit Branch A/c Dr.
side To General Profit & Loss A/c
(ii) If debit side exceeds the credit General Profit & Loss A/c Dr.
side To Branch A/c
In the books of H.O.
Format of Branch Account
A format of Branch Account is given below:
Dr. Branch Account Cr.
Particulars Rs Particulars Rs
To Balance b/d : By Balance b/d :
Stock xxx
Debtors xxx Outstanding Expenses xxx
Petty Cash xxx By Bank (remittances to H.O.):
Fixed Assets xxx by Branch xxx
Prepaid Expenses xxx by Branch Debtors directly
to H.O. xxx
To Goods sent to Branch A/c: By Goods Sent to Branch A/c:
Goods sent by H.O. xxx Returned by Branch xxx
Goods sent by other Branches xxx Returned by Branch debtors
To Bank (Remittances by H.O.) xxx directly to H.O. xxx
To Balance c/d: Sent to other Branches xxx
By Balance c/d:

Outstanding Expenses xxx Stock-in-hand xxx
Stock-in-transit xxx
Cash in-transit xxx
*To Net Profit t/f to General Debtors xxx
P & L A/c xxx Petty Cash xxx

Fixed Assets xxx
Prepaid Expenses xxx
*By Net Loss t/f to General

P&L A/c xxx
xxx xxx
*only one figure shall appear.
Notes :
(i) The following transactions do not appear in the Branch Account:
(a) Expenses met by Branch out of cash, since either reduced cash balance at the end is decreased
or the liability at the end is increased.
(b) Purchase of Goods/Fixed Assets by Branch, since book value of Goods/Fixed assets at the end
is increased and either the amount of remittances is reduced or the Creditors at the end are
increased.
(c) Sale of Goods/Fixed Assets by Branch since book value of Goods/Fixed assets at the end is
decreased and eitherthe amount of remittances is increased or the Debtors at the end are
increased.
(d) Bad debts, discount allowed, sales returns by customers to branch, cash received by Branch
from Branch Debtors, etc., since the debtors at the end appear at the adjusted figure.
(e) Depreciation and Profit/Loss on sale of fixed assets since fixed assets at the end appear at the
adjusted figure.
(f) Abnormal Losses since stock at the end appears at the adjusted figure.
(ii) When the branch is not authorised to keep any sum out of collections, expenses met by Branch out
of petty cash maintained may be dealt with as under:
(a) In case the petty cash is maintained on Imprest System, the expenses met by the branch are to
be shown in the same manner as the branch expenses met by the Head Office. In such a case,
petty cash balance at the end appears at the same amount at which it appears in the beginning.
(b) In case the petty cash is not maintained on Imprest System, the expenses met by branch are
automatically charged to the Branch Account since the petty cash at the end appears at the
adjusted figure.
(iii) When goods are returned either by Branch Debtors to the H.O. directly or are sent by one branch to
another branch, the entry is made in the same manner as in the case of goods returned by the Branch
to the H.O.
(iv) In case any insurance claim is admitted and paid to the Branch, either the Bank balance at the end will
increase or the remittances to H.O., will increase. In case, the insurance claim is admitted but not
paid, the insurance company will appear as a debtor at the end.
(v) To ascertain any missing figure, relating to Stock and /or Debtors, Memorandum Branch Stock Account
& Memorandum Branch Debtors Account may be prepared.
Accounting Treatment of Goods Returned and Cash Remitted by Branch Customers directly to Head Office
Item Treatment in Branch A/c Treatment in Memorandum
Branch Debtors A/c
1. Goods returned by Treat like goods returned by Show the selling price of
Branch customers Branch to H.O. and thus, show the these goods on credit side of
directly to H.O Cost/Invoice price (as the case Branch Debtors Account.
may be) of these goods on credit
side of Branch Account.
2. Cash remitted by Treat like cash remitted by branch Show on the credit side of
Branch customers to H.O. and thus, show on the Branch Debtors Account.
directly to H.O. credit side of Branch Account.
Accounting Treatment of Goods Sent to Another Branch and Goods received from Another Branch
Item Treatment in Branch A/c Treatment in Memorandum
Branch Stock A/c
1. Goods sent to another Treat like goods returned to Treat like goods returned to
branch H.O. and thus, show on the H.O. and thus, show on the
credit side of Branch Ac- credit side of Branch Stock
count. Account.
2. Goods received from Treat like goods received Treat like goods received
another branch. from H.O. and thus, show from H.O. and thus, show
on the debit side of on the debit side of
Branch Account. Branch Stock Account.
When goods are sent to Branch at Cost Plus Profit
(a) Meaning of Invoice Price and Loading : Sometimes, the Consignor does not want to reveal the cost
of goods to the Consignee and therefore, invoices goods at a price which is higher than the Cost
Price (CP). Such price is known as ‘Invoice Price’ (IP) and the difference between the Invoice Price
(IP) and the Cost price (CP) is called ‘loading’.

(b) How to Eliminate/Remove Loading ? : When goods are sent at invoice price, to ascertain correct
profit/loss on consignment, the items recorded at invoice price should be brought down to Cost
Price level. For this purpose, the loading included in various items (like Opening Stock, Goods Sent
to Branch, Goods Returned by Branch, Closing Stock) should be eliminated by passing the following
adjusting entries.
1. To remove loading from the amount of Net Goods sent to Branch (i.e.,
Goods Sent to Branch less Returns by Branch (or Branch Customers) to H.O.]
Goods sent to Branch A/c Dr.
To Branch A/c
2. To remove loading from the amount of Closing Stock at Branch
Branch A/c Dr.
To Branch Stock Reserve A/c
The closing stock at the end of current accounting period becomes the opening stock of the next accounting
period. The aforesaid entry will be reversed in the beginning of the next accounting period as follows:
Branch Stock Reserve A/c Dr.
To Branch A/c
(c) How to Disclose relevant items after adjusting entries? : After passing the aforesaid adjusting entries,
the relevant items will appear in the Branch Account as follows:
Dr. An Extract of Branch Account Cr.
To Opening Stock xxx By Stock Reserve Account xxx
(at invoice price) (Loading on Opening Stock)
To Goods sent to Branch xxx By Goods sent to Branch A/c xxx
(at invoice price) (Returns at Invoice Price)
Goods sent to branch (loading
on returns) xxx
To Stock Reserve A/c xxx By Goods Sent to Branch A/c xxx
(loading on Closing Stock) (Loading on Goods sent
to Branch)
By Closing Stock
xxx (at Invoice Price) xxx
Tutorial Notes
(i) Unless otherwise stated, goods sent to branch and branch stocks are deemed to be at invoice price.
(ii) Stock at Branch (at cost to branch) or Stock at Branch at its cost means Stock at invoice price. -

(b) STOCK AND DEBTORS METHOD
Meaning of Stock and Debtors Method
Under Stock and Debtors Method, in order to exercise more control over the working of a branch, the
head office usually maintains the following accounts:
Accounts Purpose
1. Branch Stock Account at Invoice To ascertain any shortage or surplus Price
2. Branch Debtors Account To ascertain the closing debtors
3. Branch Expenses Account To ascertain the total expenses incurred at
the Branch
4. Branch Adjustment Account To ascertain Gross Profit/Gross Loss
5. Branch Profit and Loss Account To ascertain Net Profit/Net Loss
6. Goods Sent to Branch Account To ascertain the net cost of goods sent to
branch
7. Branch Cash Account To record all cash transactions of the branch

8. Branch Fixed Assets Account To record all transactions relating to branch
fixed assets
Journal Entries under Stock and Debtors Method
1. When goods are supplied by the Branch Stock A/c Dr.
H.O/another branch To Goods sent to Branch A/c
2. When goods are returned by the Goods Sent to Branch A/c Dr.
Branch/or when goods are To Branch Stock A/c
supplied to another branch
3. When goods are returned by Goods sent to Branch A/c Dr.
branch Customers directly to H.O. To Debtors A/c
4. When goods are sold on credit Branch Debtors A/c Dr.
To Branch Stock A/c
5. When goods are sold for cash Branch Cash A/c Dr.
To Branch Stock A/c
6. When goods are returned by Branch Stock A/c Dr.
Branch Debtors to branch To Branch Debtors A/c
7. When cash is received by branch Branch Cash A/c Dr.
from its debtors To Branch Debtors A/c

8. To record bad debts, discount Branch Expenses A/c Dr.
allowed etc. To Branch Debtors A/c
9. To record branch Expenses paid Branch Expenses A/c Dr.
by branch To Branch Cash A/c
10. To record abnormal loss of Stock Branch Adjustment A/c Dr. [Loading]
(Due to abnormal factors like fire, Branch Profit & Loss a/c Dr. [Cost]
flood, theft etc.] To Branch Stock A/c Dr. [Invoice
Price]
11. To record normal loss of stock Branch Adjustment A/c Dr. [Invoice
(Due to the Inherent nature of Price]
the product] To Branch Stock A/c
12. To record surplus representing Branch Stock A/c Dr. Invoice Price
of selling price over invoice price To Branch Adjustment A/c
excess
13.(i)To remove loading from goods sent Goods sent to Branch A/c Dr. [Loading]
to branch To Branch Adjustment A/c
(ii) To remove loading from goods returns Branch adjustment A/c Dr.
by branch to H.O. To goods sent to Branch A/c (loading)
14. To remove loading from the Branch Adjustment A/c Dr. [Loading]
amount of closing stock To Stock Reserve A/c
15. To remove loading from the Stock Reserve A/c Dr. [Loading]
amount of opening stock To Branch Adjustment A/c
16. To record gross profit made by Branch Adjustment A/c Dr.
branch To Branch Profit & Loss A/c
Note: The entry will be reversed in case
of gross loss.
17. To record the transfer of branch Branch Profit & Loss A/c Dr.
expenses To Branch Expenses A/c
18. To record net profit made by Branch Profit & Loss A/c Dr.
branch To General Profit & Loss A/c
Note: The entry will be reversed in case
of net loss.
19. To transfer the balance in Goods Goods Sent to Branch A/c Dr.
sent to Branch A/c To Trading A/c or Purchases A/c
Formats of Accounts opened Under Stock & Debtors method
Dr. 1. Branch Stock Account Cr.
Particulars Rs Particulars Rs.
To Balance b/d xxx By Branch Cash A/c
To Goods Sent to Branch A/c xxx (cash Sales) xxx
To Branch Debtors A/c xxx By Branch Debtors A/c
(Return by Customers to (Credit Sales) xxx
Branch) By Goods Sent to Branch A/c
To Goods sent to Branch A/c xxx (Returns to H.O.) xxx
(T/f of goods from other By Goods Sent to Branch A/c
Branch) (T/f of Goods to other
To Branch Adjustment A/c xxx Branch) xxx
(Excess of Selling Price By Branch Adjustment A/c xxx
over Invoice Price) (Load on Abnormal Loss
(i.e. surplus) due to fire etc.)
By Branch Profit & Loss A/c xxx
(Cost of Abnormal Loss
due to fire etc.)
By Branch Adjustment A/c
(Normal Loss) xxx
By Balance c/d:
In hand xxx
In transit xxx
xxx xxx
Dr. 2. Branch Adjustment Account Cr.
To Direct Expenses like wages etc. xxx By Stock Reserve A/c
To Goods sent to Branch A/c
(load to goods return) xxx
To Branch Stock A/c xxx (Load on Opening Stock) xxx
(Load on Abnormal Loss By Goods Sent to Branch A/c
due to Fire, etc.) (Load on Goods Sent) xxx
To Branch Stock A/c By Branch Stock A/c xxx
(Normal Loss) xxx (Excess of Selling Price
To Stock Reserve A/c (Load on over Invoice Price)
Closing Stock) xxx (Surplus)
To Gross Profit I/f to Branch
P and L A/c xxx
xxx xxx

Dr. 3. Branch Expenses Account Cr.
Particulars Rs Particulars Rs.
To Branch cash accounts
Salaries xxx By Branch Profit and Loss A/c xxx
Rent xxx
To Petty account
Petty Expenses xxx
To Branch Debtors account
Bad Debts xxx
Discount xxx
To Branch asset account
Depreciation xxx
xxx xxx
Dr. 4. Branch Profit and Loss Account Cr.
To Branch Stock A/c (Cost of By Branch Adjustment A/c
Abnormal Loss) xxx (Gross Profit b/d) xxx
To Branch Expenses xxx By Branch Cash A/c (Insurance
*To Net Profit t/f to General claim received)/lnsurance
P & L A/c xxx Co. (claim admitted but not
received) xxx
*By Net Loss t/f to General
P & L A/c xxx
xxx xxx
*only one figure shall appear.
Dr. 5. Branch Debtors Account Cr.
To Balance b/d xxx By Branch Cash A/c
To Branch Stock A/c (Cash paid to branch) xxx
(Credit Sales) xxx By Bills Receivable A/c xxx
To Bills Receivable A/c By Cash A/c (Cash paid
(B/A dishonoured) xxx directly to H.O) xxx
By Branch Stock A/c
(Returns to Branch) xxx
By Goods Sent to Branch A/c
(Goods returned directly
to H.O.) xxx
By Discount A/c xxx
By Bad Debts A/c xxx
___ By Balance c/d xxx
xxx xxx

Dr. 6. Goods Sent to Branch Account Cr.
To Branch Stock A/c (Returns) xxx By Branch Stock A/c
To Branch Adjustment A/c xxx (goods sent) xxx
[Load on goods sent] By branch adjustment a/c
To Purchases/ Trading A/c xxx (load on goods return) xxx
___ ___
xxx xxx
(c) FINAL ACCOUNTS METHOD
Meaning Final Accounts Method
Under this method the profit or loss of the branch is ascertained by preparing the Memorandum Branch
Trading and Profit and Loss.Account in place of Branch Account. Under this method, if Branch Account is
prepared,that is of personal nature and not of nominal nature (as in case of debtors method).
How to Prepare Final Accounts ?
The Branch Trading and Profit and Loss Account is prepared exactly on the same basis as in case of other
normal concerns. It is to be noted that Opening Stock. Goods Sent to Branch, Goods Returned by branch
and Closing Stock are to be shown at Cost (i.e., excluding loading, if any, charged)
Format
The format of Branch Trading and Profit and Loss Account is given below:
Dr. Branch Trading and Profit and Loss Account for the year ending on... Cr.
To Opening Stock (at Cost) xxx By Sales
To Goods sent xxx Cash xxx
Less: Returns to H.O. xxx Credit xxx
To Direct Purchases xxx Less: Returns form
To Direct Expenses xxx Branch Debtors xxx xxx
To Gross Profit c/d xxx By Abnormal Loss due to
fire etc. xxx
By Closing Stock:
Direct Purchases xxx
Supplied by H.O. xxx
___ in transit xxx xxx
xxx xxx
To Branch Expenses xxx By Gross Profit b/d xxx
To Abnormal Loss due to By Bank A/c/Insurance Co.
Fire etc. xxx (Insurance Claim) xxx
To Net Profit f/f to general
P&L A/c xxx
xxx xxx

(d) WHOLE SALE BRANCH METHOD
Meaning of Whole Sale Branch Method
Under this method, the head office supplies goods to owned retail branches as well as to other retailers
at wholesale price which is cost plus wholesale profit. The owned retail branches sell these goods to
customers at list or catalogue price which is wholesale price plus retail profit.
In such type of problems, first the relationship between Cost, Wholesale Profit and Retail Profit should
be ascertained as follows:
A Cost xxx
B. Wholesale Profit xxx
C. Wholesale Price (A + B) xxx
D. Retail Profit xxx
E. Retail Price (C + D) xxx
Under this method, the Head Office (particularly, the manufacturing concern) supplies goods to its retail
branches at wholesale price which is cost plus wholesale profit. The profit attributable to such branches
is the difference between the sale proceeds of goods at the shops and the wholesale price of the goods
sold. For the purpose, it is assumed that the manufacturer would always be able to sell the goods on
wholesale terms and thereby realizes profit equal to the difference between the wholesale price and the
cost. Many concerns, therefore, invoice goods to such shops at wholesale price and determine profit or
loss on sale of goods on this basis. Accordingly, Branch Stock Account or the Trading Account is debited
with:
(a) the value of opening stock at the Branch; and
(b) price of goods sent during the year at wholesale price.
It is credited by:
(a) sales effected at the shop; and
(b) closing stock of goods valued at wholesale price.
The value of goods lost due to accident, theft etc.also is credited to the Branch Stock Account or Trading
Account calculated at the wholesale price. At this stage, the Branch Stock or Trading Account will reveal
the amount of gross profit (or loss). It is transferred to the Branch Profit and Loss Account. On further
being debited with the expenses incurred at the shop and the wholesale price of goods lost, the Branch
Profit and Loss Account will disclose the net profit (or loss) at the shop.
Since the closing stock at the branch has to be valued at wholesale price, it would be necessary to create
a stock reserve equal to the difference between its wholesale price and its cost (to the head office) by
debiting the amount in the Head Office Profit and Loss Account.
This Stock Reserve is carried down to the next year and then transferred to the credit of the (Head Office)
Profit and Loss Account.

CLASS WORK
PRACTICAL QUESTIONS OF DEPENDENT BRANCH
Q-1 The ABC Ltd. invoiced goods to its branch at cost. Head office paid all the branch expenses (i.e. done
out of cash/cheque remitted by H.O. to Branch) except petty cash expenses which were met by the
branch. All the cash collected by the branch was banked on the same day to the credit of the Head
office. The following is a summary of the transactions entered into at the branch during the year ended
March 31, 2014.
` `
Stock, April 1 10,500 Bad debts 900
Debtors, April 1 18,900 Goods returned by
Customers 750
Petty cash, April 1 300 Salaries & Wages 9,300
Goods sent from H. O. 39,000 Rent & Rates 1,800
Goods returned from Branch 1,500 Sundry Expenses 1,200
Cash Sales 26,250 Cash received from
Credit Sales 42,600 Sundry Debtors 42,750
Allowances to customer 300 Stock, March 31 9,750
Discount to customers 2,100 Debtors, March 31 14,700
Petty cash, March 31 150
Find out the actual profit of branch for the financial year 2013-14 (a) Debtors Method, (b) Trading and
Profit and Loss Account Method, (c) Stock & Debtors System.
Q-2 A Ltd., Bombay has a branch in Surat to which office goods are invoiced at cost plus 331/3%. The branch
sells both for cash and on credit, Branch Expenses are paid from head office (i.e. done out of cash/
cheque remitted by H.O. to Branch) and the Branch has to remit all cash received into the Head Office
Bank Account.
Branch does not maintain any books of account, but sends weekly returns to the Head Office. Find out
actual profit for the financial year 2013-14
(a) Debtors metod
(b) Trading and profit & Loss account method
(c) Stock and Debtors system
`
Goods received from Head Office at invoice price 13,50,000
Returns to Head Office at invoice price 27,000
Stock at Surat as on 1st April, 2013 (invoice price) 1,35,000
Sale in the year - Cash 4,50,000
Credit 8,10,000
Sundry Debtors at Surat as on 1st April, 2013 1,62,000
Cash received from Debtors 7,20,000
Bad Debts in the year 13,500
Sales returns at Surat Branch 9,000
Rent, Rates, Taxes at Branch 40,500
Salaries, Wages, Bonus at Branch 1,35,000
Office Expenses 13,500
Stock at Branch on 31st March, 2014 at invoice price 2,70,000
Q-3 X Ltd., Bombay has a branch at Ahmedabad to which goods are sent @ 25% above costs. The branch
makes both cash credit sales. Bracnh expense are met partly from H. O. and partly by the branch. The
statement of expenses incurred by the branch every month is sent to head office for recording.
Following further details are given for the year ended 31st March, 2014 :
`
Cost of goods sent to Branch at cost 5,00,000
Goods received by Branch till 31.3.2014 at invoice price 5,50,000
Credit Sales for the year @ invoice price 4,12,500
Cash Sales for the year @ invoice price 1,47,500
Cash Remitted to head office 5,56,250
Expenses paid by H. O. (i.e. done out of cash/cheque remitted by H.O. to Branch)30,000
Bad Debts Written off 1,875
Balance as on 1.4.13 31.3.14
` `
Stock 62,500 (cost) 71,250 (invoice price)
Debtors 81,875 65,000
Cash in hand 12,500 6,250
Find out the actual profit branch for the financial year 2013-14 by (i) debtors method and (ii) stock and
debtors method.
Q-4 M/s Bright & Co. with its head office in Madra, invoiced goods to its branch at Bombay, at 20% less than
the catalogue price which is cost plus 50%, with instructions that cash sales were to be made at invoice
price and credit sales at catalogue price. Discount on credit sales at 15% on prompt payment will be
allowed.
Stock 1.4.2013 (invoice price) 12,000
Goods received from head office (invoice price) 1,32,000
Debtors on 1.4.2013 10,000
Sales (cash) 46,000

Sales (credit) 1,00,000
Cash realised from debtors 85,635
Discount allowed to debtors 13,365
Expenses at the branch 6,000
Remittance to head office 1,20,000
Debtors on 31.3.2014 11,000
Cash in hand on 31.3.2014 5,635
Stock on 31.3.2014 (invoice price) 15,000
It was reported that a part of stock at the branch was lost by fire during the year whose value is to be
ascertained; and provision should be made for discount to be allowed to debtors as on 31st March,
2014, on the basis of the year’s trend of prompt payment.
Calculate actual profit or loss of the branch for the year 2013-14 by way of final accounts method
(Trading and profit & Loss account method).
Q-5 M/s Rahul operates a number of retail outlets to which goods are invoiced at wholesale price which is
cost plus 25%. These outlets sell the goods at the retail price which is wholesale price plus 20%.
Following is the information regarding one of the outlets for the year ended 31.3.2012:
`
Stock at the outlet 1.4.11 30,000
Goods invoiced to the outlet during the year 3,24,000
Gross profit made by the outlet 60,000
Goods lost by fire ?
Expenses of the outlet for the year 20,000
Stock at the outlet 31.3.12 36,000
You are required to prepare the following accounts in the books of Rahul Limited for the year ended
31.3.12 :
(a) Outlet Stock Account.
(b) Outlet Profit & Loss Account.
(c) Stock Reserve Account.
Accounting for Independent Branches
When the size of the business is big, it is desirable that the branch maintains complete records of its
transactions. These branches are called independent branches and each independent branch maintains
comprehensive account books for recording their transactions; therefore a separate trial balance of each
branch can be prepared. The head office maintains one ledger account for each such branch, wherein all
transactions between the head office and the branches are recorded.
Salient features of accounting system of an independent branch are as follows:
1. Branch maintains its entire books of account under double entry system.
2. Branch opens in its books a Head Office account to record all transactions that take place between
Head Office and branch. The Head Office maintains a Branch account to record these transactions.
3. Branch prepares its Trial Balance, Trading and profit and loss Account at the end of the accounting
period and sends copies of these statements to Head Office for incorporation.
4. After receiving the final statements from branch, Head Office reconciles between the two – Branch
account in Head Office books and Head Office account in Branch books.
5. Head office passes necessary journal entries to incorporate branch trial balance in its books.
The Head Office Account in branch books and Branch Account in head office books is maintained
respectively.
Transactions Head office books Branch books
(i) Dispatch of goods to Branch A/c Dr. Goods received from H.O. A/c Dr.
branch by H.O. To Good sent to To Head Office A/c
Branch A/c
(ii) When goods are Goods sent to Branch A/c Dr. Head Office A/c Dr.
returned bythe Branch To Branch A/c To Goods received from H.O. A/c
to H.O.
(iii) Branch Expenses No Entry Expenses A/c Dr.
are paid by the Branch To Cash A/c
(iv) Branch Expenses Branch A/c Dr. Expenses A/c Dr.
paid by H.O. To Bank To Head Office A/c
(v) Outside purchases No Entry Purchases A/c Dr.
made by the Branch To Bank (or) Crs. A/c
(vi) Sales effected by No Entry Cash or Debtors A/c Dr.

the Branch To Sales
(vii) Collection from Cash or Bank A/c Dr. Head office A/c Dr.
Debtors of the Branch To Branch A/c To Sundry Drs. A/c
recd. by H.O.
(viii) Payment byH.O. for Branch A/c Dr. Purchase (or) Sundry Creditors A/c Dr.
purchase made by To Bank To Head Office
Branch
(ix) Purchase of Asset No Entry Sundry Assets Dr.
by Branch To Bank (or) Liability
(x) Asset purchased by Branch Asset A/c Dr. Head office Dr.
the Branch but Asset A/c To Branch A/c To Bank (or) Liability
retained at H.O. books
(xi) Depreciation on (x) Branch A/c Dr. Depreciation A/c Dr.
above To Branch Asset To Head Office A/c
(xii) Remittance of funds Branch A/c Dr. Bank A/c Dr.
by H.O. to Branch To Bank To Head Office
(xiii) Remittance of funds by Reverse entry of(xii) Reverse entry of (xii) above
Branch to H.O. above
(xiv) Transfer of goods (Recipient) Branch A/c Dr. Supplying Branch H.O. A/c Dr.
from one Branch to To SupplyingBranch To Goods Received
another branch A/c from H.O. A/c
Recipient Branch
Goods Received from H.O. A/c Dr.
To Head Office A/c

Students may find a few further practical situations and it is hoped that they can pass entries on the basis
of accounting principles explained above.
The final result of these adjustments will be that so far as the Head Office is concerned, the branch will be
looked upon either as a debtor or creditor, as a debtor if the amount of its assets is in excess of its
liabilities and as a creditor if the position is reverse.
A debit balance in the Branch Account should always be equal to the net assets at the branch. The important
thing to remember, when independent sets of accounts are maintained, is that the branch and head
office books are connected with each other only through the medium of the Branch and the Head Office
Account which are converse of each other.; also when accounts of the branch and head office are
consolidated both the Branch and Head Office Accounts will be eliminated.
Accounting for Fixed Assets

The accounts of Branch Fixed Assets may be maintained either at the Head Office or at the branch.
Transaction If the accounts are If the accounts are

maintained at H.O. maintained at Branch
Branch Accounts H.O. Books Branch Books H.O.Books
(a ) On Purchase No entry Branch assets A/c Dr. Assets A/c Dr. Branch A/c Dr.
by Head Office To Cash A/c To H.O. A/c To Cash A/c
(b) On Purchase Head Office A/c Dr. Branch Assets A/c Dr. Assets A/c Dr. No Entry
by Branch To Cash A/c To Branch A/c To Cash A/c
(c) On Providing Depreciation A/c Dr. Branch A/c Dr. Depreciation A/c Dr. No entry
Depreciation To H.O. A/c To Branch Assets A/c To Assets A/c
Tutorial Notes :
(i) Branch Asset Account is always opened in the books of that party which is maintaining Branch Assets
Accounts.
(ii) Depreciation on Branch Assets Account is always opened in the books of Branch only.
PRACTICAL QUESTIONS OF INDEPENDENT BRANCH
Q-6 The following is the Trial Balance of Meerut Branch as on 31st December, 2014 :
Dr. (`) Cr. (`) Dr. (`) Cr. (`)
Delhi head office 5,000 Debtors 3,700
Stock 1st January 2014 6,000 Creditors 1,850
Purchases 1,06,040 Rent 1,960
Goods received from H.O 19,000 Sundry office Expenses 1,470
Sales 1,38,000 Cash at bank 1,780
Goods supplied to H. O. 6,000 Furniture 6,000
Salaries 4,500 Depreciation on Furniture 400
Total 1,50,850 1,50,850
Stock at branch on 31st December, 2014 was valued at ` 7,700.

Meerut Branch Account in the head office books on 31st December, 2014 stood at ` 8,700 (debit balance).
On 28th December, 2014 the head office forwarded goods of the value of ` 3,700 to the branch where
they received on 3rd January, 2015.
(i) Prepare Trading and Profit and Loss Account of Meerut branch for the year ended 31st December,
2014 and its Balance Sheet as on that date.
(ii) Pass Journal Entries in the books of the head office to incorporate the above-mentioned trial
balance, and
(iii) Show Meerut branch Account as it would be closed in the head office’s ledger.
Q-7 Give Journal entries in the books of head office & Branch to adjust or rectify the following transactions.
(i) Provide depreciation @ 10% p.a. on furniture when Delhi Branch furniture account is also
maintained in the head office books.
Head office furniture is ` 60,000
Delhi branch furniture is ` 30,000
(ii) Delhi branch collected ` 1,000 from a customers of head office.
(iii) Delhi branch paid ` 4,000 for a machine purchased by the head office for the head office.
(iv) Goods sent by Head Office to the Branch ` 10,000, not yet received by the branch.
Q-8 M/s Patel & Co. commenced business on 1st April, 2013 Purchases were made exclusively by the head
office where the goods processed before sale. There was no loss or wastage.
Only processed goods received from head office were handled by the branch, and these goods are
charged to the branch at processed cost plus 10%.
All sales, whether by head office or the branch, were at uniform gross profit of 25% on their respective
cost.
The following Trial Balance as on 31st March, 2014 were extracted from the books:
HEAD OFFICE BRANCH
Dr. Cr. Dr. Cr.
` ` ` `
Capital 4,00,000
Purchases 19,93,350
Cost of processing 34,650
Sales 14,20,000 6,40,000
Goods sent to Branch 6,51,200
Goods received by Branch 6,40,200
Selling & General Expenses 2,24,000 27,000
Debtors/Creditors 2,55,000 4,03,350 92,000 2,400
Branch/ H. O.
Current A/c 2,05,550 1,50,800
Balance at Bank 1,62,000 34,000
Total 28,74,550 28,74,550 7,93,200 7,93,200

Further details are :
(i) Goods charged by head office to branch in March, 2014 at ` 11,000, were not received until April,
2014. A remittance of ` 43,750 from the branch to head office in March, 2014, is still in transits.
(ii) Stock-taking at Branch disclosed shortage of ` 5,000 (at selling price).
(iii) Cost of unprocessed goods at head office as on 31st March, 2014 was ` 1,80,000.
You are required to prepared in columnar form trading and Profit & Loss Account and Balance Sheet of
the Head Office, branch and the business as a whole.
FOREIGN BRANCHES
Foreign branches generally maintain independent and complete record of business transacted by them
in currency of the country in which they operate. Thus problems of incorporating balances of foreign
branches relate mainly to translation of foreign currency into Indian rupees. This is because exchange
rate of Indianrupee is not stable in relation to foreign currencies due to international demand and supply
effects on various currencies. The accounting principles which apply to inland branches also apply to a
foreign branch after converting the trial balance of the foreign branch in the Indian currency.
Accounting for Foreign Branches
For the purpose of accounting, AS 11 (revised 2003) classifies the foreign branches may be classified into
two types:
 Integral Foreign Operation;
 Non- Integral Foreign Operation.
Let us discuss these two types of foreign branches in detail.
Integral Foreign Operation (IFO)
It is a foreign operation, the activities of which are an integral part of those of the reporting enterprise.
The business of IFO is carried on as if it were an extension of the reporting enterprise’s operations.
Generally, IFO carries on business in a single foreign currency, ie. of the country where it is located. For
example,sale of goods imported from the reporting enterprise and remittance of proceeds to the reporting
enterprise.
Non-Integral Foreign Operation (NFO)
It is a foreign operation that is not an Integral Foreign Operation. The business of a NFO is carried on in a
substantially independent way by accumulating cash and other monetary items, incurring expenses,
generating income and arranging borrowing in its local currency. An NFO may also enter into transactions
in foreign currencies, including transactions in the reporting currency. An example of NFO may be
production in a foreign currency out of the resources available in such country independent of the reporting
enterprise.
The following are the indicators of Non- Integral Foreign Operation-
 Control by reporting enterprises- While the reporting enterprise may control the foreign operation,
the activities of foreign operation are carried independently without much dependence on reporting
enterprise.
 Transactions with the reporting enterprises are not a high proportion of the foreign operation’s
activities.
 Activities of foreign operation are mainly financed by its operations or from local borrowings. In
other words it raises finance independently and is in no way dependent on reporting enterprises.
 Foreign operation sales are mainly in currencies other than reporting currency.
 All the expenses by foreign operations are primarily paid in local currency, not in the reporting
currency.

 Day-to-day cash flow of the reporting enterprises is independent of the foreign enterprises cash
flows.
 Sales prices of the foreign enterprises are not affected by the day-to-day changes in exchange rate
of the reporting currency of the foreign operation.
 There is an active sales market for the foreign operation product.
The above are only indicators and not decisive/conclusive factors to classify the foreign operations as
non-integral, much will depend on factual information, situations of the particular case and, therefore,
judgment is necessary to determine the appropriate classification.
Controversies may arise in deciding the foreign branches of the enterprises into integral or non-integral.
However, there may not be any controversy that subsidiary associates and joint ventures are non-integral
foreign operation.
In case of branches classified as independent for the purpose of accounting are generally classified as
non-integral foreign operations.
Change in Classification
When there is a change in classification, accounting treatment is as under-
1 Integral to Non-Integral
(i) Translation procedure applicable to non-integral shall be followed from the date of change.
(ii) Exchange difference arising on the translation of non-monetary assets at the date of
reclassification is accumulated in foreign currency translation reserve.
2 Non-Integral to Integral
(i) Translation procedure as applicable to integral should be applied from the date of change.
(ii) Translated amount of non-monetary items at the date of change is treated as historical cost.
(iii) Exchange difference lying in foreign currency translation reserve is not to be recognized as
income or expense till the disposal of the operation even if the foreign operation becomes
integral.
Techniques for Foreign Currency Translation
Integral Foreign Operation (IFO)
Following are the standard recommendations for foreign currency translation:
(1) All transactions of IFO be translated at the rate prevailing on the date of transaction.
This will require date wise details of the transaction entered by that operation together with the
rates. Weekly or monthly average rate is permitted if there are no significant variations in the rate.
(2) Translation at the balance sheet date-
(i) Monetary items at closing rate;
(ii) Non-monetary items : The cost and depreciation of the tangible fixed assets is translated using
the exchange rate at the date of purchase of the asset if asset is carried at cost. If tangible fixed
asset is carried at fair value, translation should be done using the rate existed on the date of
the valuation.
(iii) The cost of inventories is translated at the exchange rates that existed when the cost of inventory
was incurred and realizable value is translated applying exchange rate when realizable value is
determined which is generally closing rate.
(iv) Exchange difference arising on the translation of the financial statement of integral foreign
operation should be charged to profit and loss account.

Non-Integral Foreign Operation
Accounts of non-integral foreign operation are translated using the following principles:
 Balance sheet items i.e. Assets and Liabilities both monetary and non-monetary – apply closing
exchange rate.
 Items of income and expenses – At actual exchange rates on the date of transactions. However,
accounting standard allows average rate subject to materiality.
 Resulting exchange rate difference should be accumulated in a “foreign currency translation reserve”
until the disposal of “net investment in non-integral foreign operation”.
PRACTICALS QUESTIONS OF FOREIGN BRANCH
Q-9 S & M Ltd., Bombay, have a branch in Sydney, Australia, At the end of 31st March, 2015 the following
ledger balances have been extracted from the books of the Bombay office and the Sydney office:
Head of Account Bombay Sydney
(` thousands) (A$ thousands)
Debit Credit Debit Credit
Share Capital -- 2,000 -- --
Reserve & Surplus -- 1,000 -- --
Land 500 -- -- --
Buildings (Cost) 1,000 -- -- --
Buildings Dep./ Rserve -- 200 -- --
Plant & Machinery (Cost) 2,500 -- 200 --
Plant & Machinery Dep. Reserve -- 600 -- 130
Debtors/Creditors 280 200 60 30
Stock (1.4.14) 100 -- 20 --
Branch Stock Reserve -- 4 -- --
Cash & Bank Balances 10 -- 10 --
Purchase/Sales 240 520 20 123
Goods sent to Branch -- 100 5 --
Manging Director’s Salary 30 -- -- --
Salaries & Wages 75 -- 45 --
Rent -- -- 12 --
Office Expenses 25 -- 18 --
Commission Receipts -- 256 -- 100
Branch/ H. O. Current A/c 120 -- -- 7
4,880 4,880 390 390
The following further information is also available:
(1) Stock as at 31.3.15
Bombay ` 1,50,000
Sydney A$ 3,125
(2) Head Office always sent goods to the Branch at cost plus 25%.
(3) Provision is to be made for doubtful debts at 5%.

(4) Depreciation is to be provided on buildings at 10% and on plant and machinery at 20% on written
down values.
(5) The Managing Director is entitled to 2% commission on net profits.
(6) Income-tax is to be provided at 47.5%.
You are required:
(a) To convert the Branch Trial Balance into rupees:
(use the following rates of exchange):
Opening Rate A$ = 20
Closing Rate A$ = 24
Average Rate A$ = 22 F. Assets acquired Rate A$ = 18.
(b) To prepare the Trading and Profit and Loss Account for the year ended 31st March, 2015 showing to
the extent possible H. O. results and Branch results separately. (Balance Sheet not required).
Q-10 Omega has a branch at Washington. Its Trial Balance as at 30th September, 2014 is as follows:
Heads of Account Dr.(US $) Cr.(US $)
Furniture and Fixtures 8,000
Stock, October 1, 2013 56,000
Purchases 2,40,000
Sales 4,16,000
Goods from Omega 80,000
Wages 2,000
Carriage Inward 1,000
Salaries 6,000
Rent, Rates and Taxes 2,000
Insurance 1,000
Trade Expenses 1,000
Head Office A/c 1,14,000
Trade Debtors 24,000
Trade Creditors 17,000
Cash at Bank 5,000
Cash in hand 1,000
TOTAL 5,47,000 5,47,000

The following further inforjmation is given:
(1) Wages outsanding $ 1,000.
(2) Depreciate Plant and Machinery and Furniture and Fixtures @ 10% p.a.
(3) The head office sends goods to branch for ` 39,40,000.
(4) The head office shows an amount of ` 43,00,000 due from branch.
(5) Stock on 30th September, 2014 : $ 52,000.
(6) There were no-transit items either at the start or at the end of the year.
(7) On September 1, 2012, when the fixed assets were purchased, the rate of exchange was ` 38 to
one $.
On October 1, 2013, the rate was ` 39 to one $.
On September 30, 2014, the rate was ` 41 to one $.
Average rate during the year was ` 40 to one $.
You are asked to prepare:
(a) Trial Balance incorporating adjustments given under 1 to 4 above, converting dollars into rupees.
(b) Trading and Profit and Loss Account for the year ended 30th September, 2014 and Balance Sheet as
on that date depicting the profitability and net position of the branch as would appear in India for
the purpose of incorporating in the main Balance Sheet.

Types of branches
- Dependent branches
- Independent branches
Based on accounting point of view, branches may be classified as follows:
- Branches in respect of which the whole of the accounting records are kept at the head office
- Branches which maintain independent accounting records, and
- Foreign Branches.
System of accounting
- Debtors System: under this system head office makes a branch account. Anything given to branch is
debited and anything received from branch would be credited.
- Branch trading and profit and loss account method/Final accounts method: Under this system head
office prepares (a) profit and loss account (b) branch account taking each branch as a separate entity.
Stock and debtors system: Under this system head office opens:
- Branch stock account
- Branch debtors account
- Branch asset account
- Branch expenses account
- Branch adjustment account
- Branch profit and loss account
Types of Foreign branches :
- Integral Foreign Operation (IFO): It is a foreign operation, the activities of which are an integral part of
those of the reporting enterprise.
- Non-Integral Foreign Operation (NFO): It is a foreign operation that is not an Integral Foreign Operation.
The business of a NFO is carried on in a substantially independent way by accumulating cash and other
monetary items, incurring expenses, generating income and arranging borrowing in its local currency.
Non-Integral Foreign Operation -translation
- Balance sheet items i.e. Assets and Liabilities both monetary and non-monetary – apply closing exchange
rate.
- Items of income and expenses – At actual exchange rates on the date of transactions
- Resulting exchange rate difference should be accumulated in a “foreign currency translation reserve”
until the disposal of “net investment in non-integral foreign operation”.
Integral Foreign Operation (IFO) – translation at the rate prevailing on the date of transaction.

1. If goods are invoiced to branches at cost, trading results of branch can be ascertained by
(a) Debtors method. (b) Stock and debtors method.
2. Under branch trading and profit loss account method
(a) H.O prepares profit and loss account. (b) Each branch is treated separate entity.
3. Goods may be invoiced to branch at
(a) Cost or Selling price. (c) Wholesale price.
(d) Both (a) and (b).
4. Under debtors method, opening balance of debtors is
(a) Debited to branch account. (b) Credited to branch account.
(c) Debited to H.O account.
5. Cost of goods returned by branch will have the following effect
(a) Goods sent to branch account will be debited.
(b) Branch stock account will be credited.
(c) (a) and (b).
6. Assets and liabilities of a non- integral foreign operation should be converted at
(a) Closing exchange rate. (b) Average exchange rate.
(c) Opening exchange rate.
7. All of the following are examples of monetary assets except:
(a) Trade Payables. (b) Inventory.
(c) Trade Receivables.
8. If asset of an integral foreign operation is carried at cost, cost and depreciation of tangible fixed assets
is translated at
(a) Average exchange rate. (b) Closing exchange rate.
(c) Exchange rate at the date of purchase of asset.
9. Incomes and expenses of a NFO is translated at
(a) Average rate that approximates the actual exchange rates.
(b) Exchange rate at the date of transaction.
10. AS 11 classifies foreign branches are classified as
(a) Autonomous branches and non-autonomous branches.
(b) Uncontrolled and fully controlled branches.
(c) Integral and non-integral foreign operations.
1. Why goods are marked on invoice price by the head office while sending goods to the branch?
2. Differentiate Branch Accounts with Departmental accounts.

HOME WORK
DEPENDENT BRANCH
Q-11 Buckingham Bros, Bombay have a branch at Nagpur. They send goods at cost to their branch at Nagpur.
However, direct purchases are also made by the branch for which payments are made at head office.
All the daily collections are transferred from the branch to the head office.
From the following :
(A) Prepare Nagpur branch account in the books of head office.
(B) Prepare following ledgers :
(i) Branch Petty cash account
(ii) Branch Debtors account
(iii) Branch cash account
(iv) Nagpur Branch stock account
(v) Nagpur Branch expense account
(vi) Nagpur Branch P & L account
(C) Prepare Nagpur branch trading and P & L account.
Opening balance 1-1-2008 ` `
Imprest Cash 2,000 Bad Debts 1,000
Sundry Debtors 25,000 Discount to Customers 2,000
Stock: Transferred from H.O. 24,000 Remittances to H.O.
Direct Purchases 16,000 (recd. by H.O.) 1,65,000
Cash Sales 45,000 remittances to H.O.
Credit Sales 1,30,000 (not recd. by H.O. so far) 5,000
Direct Purchases 45,000 Branch Exp. directly paid by 30,000
H.O.
Returns from Customers 3,000 Closing Balance (31-12-2008)
Goods sent to branch from H.O. 60,000 Stock: Direct Purchase 10,000
Transfer from H.O. for Petty Transfer from H.O. 15,000
Cash Exp. 4,000 Debtors ?
Imprest Cash ?
[Ans. Net Profit transferred to General Profit & Loss A/c = 15,000]

Q-12 The Bombay Traders invoiced goods to its Delhi branch at cost. Head Office paid all the branch expenses
from its bank account, except petty cash expenses which were met by the Branch. All the cash collected
by the branch was banked on the same day to the credit of the Head Office. The following is a summary
of the transactions entered into at the branch during the year ended December 31, 20X1.
` `
Balances as on 1.1.20X1:
Stock 7,000 Bad Debts 600
Stock 12,600 Goods returned by customers 500
Petty Cash, 200 Salaries & Wages 6,200
Goods sent from H.O. 26,000 Rent & Rates 1,200
Goods returned to H.O. 1,000 Sundry Expenses 800
Cash Sales 17,500 Cash received from Sundry
Credit Sales 28,400 Debtors 28,500
Allowances to customers 200 Balances as on 31.12.20X1:
Discount to customers 1,400 Stock 6,500
Debtors 9,800
Petty Cash 100
Prepare: (a) Branch Account (Debtors Method), (b) Branch Stock Account, Branch Profit & Loss Account,
Branch Debtors and Branch Expenses Account by adopting the Stock and Debtors Method and (c) Branch
Trading and Profit & Loss Account to prove the results as disclosed by the Branch Account.
[Ans. Net Profit transferred to General Profit & Loss A/c = 9,400]
Q-13 Harrison Ltd., Chennai has a branch at New Delhi to which goods are sent @ 20% above cost.
The branch makes both cash and credit sales. Branch expenses are met partly from H.O. and partly by
the branch. The statement of expenses incurred by the branch every month is sent to head office for
recording.
Following further details are given for the year ended 31st December, 2008.
`
Cost of goods sent to Branch at cost 2,00,000
Goods received by Branch till 31-12-2008 at invoice price 2,20,000
Credit Sales for the year 1,65,000
Cash Sales for the year 59,000
Cash Remitted to head office 2,22,500
Expenses paid by H.O. (i.e. done out of cash/cheque remitted by H.O. to Branch) 12,000
Bad Debts written off 750
Balances as on 1-1-2008 31-12-2008
` `
Stock 25,000 (Cost) 28,000 (invoice price)
Debtors 32,750 26,000
Cash in Hand 5,000 2,500

(A) Show necessary ledger accounts in the books of the head office and determine the Profit and Loss of
the Branch for the year ended 31st December, 2008.
(B) Prepare Branch account.
(C) Prepare Branch trading and P & L account.
[Ans. Net Profit transferred to general P & L a/c = 16,250]
Q-14 Following is the information of the Jammu branch of Best New Delhi for the year ending 31st March,
2014 from the following:
(1) Goods are invoiced to the branch at cost plus 20%.
(2) The sale price is cost plus 50%.
(3) Other information:
`
Stock as on 01.04.2013 (invoice price) 2,20,000
Goods sent during the year(invoice price) 11,00,000
Sales during the year 12,00,000
Expenses incurred at the branch 45,000
Ascertain
(i) the profit earned by the branch during the year.
(ii) branch stock reserve in respect of unrealized profit.
[Ans. (i) The Net profit earned by the branch during the year - 1,95,000
(ii) Stock reserve in respect of unrealised profit
= ` 3,60,000 x (20/120) = `60,000
Working Note :
`
Cost Price 100
Invoice Price 120
Sale Price 150
Calculation of closing stock at invoice price
Opening stock at invoice price 2,20,000
Goods received during the year at invoice price 11,00,000
Less : Cost of goods sold at invoice price 13,20,000
Closing stock (9,60,000) [12,00,000 x (120/150)]
3,60,000 ]
Q-15 Sell Well Ltd. who carried on a retail business opened a branch X on January 1st, 2008 where all sales
were on credit basis. All goods required by the branch were supplied from the Head Office and were
invoiced to the branch at 10% above cost.
The following were the transactions:

Jan. ’08 Feb. 08 March ’08
` ` `
Goods sent to Branch (Purchase Price) 40,000 50,000 60,000
Sales as shown by the branch monthly report 38,000 42,000 55,000
Cash received from Debtors and remitted to H.O. 20,000 51,000 35,000
Returns to H.O. (Invoice price to Branch) 1,200 600 2,400
The stock of goods held by the branch on March 31, 2008 amounted to ` 53,400 at invoice to branch.
Record these transactions in the Head Office books, showing balances as on 31st March, 2008 and the
branch profit for the three months ended on that date as per following methods :
(A) Debtors method
(B) Final Accounts method
(C) Stock and Debtors method
[Ans. General P & L a/c [ N.P.] = 37,363]
Q-16 Hindustan Industries Mumbai has a branch in Cochin to which office goods are invoiced at cost plus
25%. The branch sells both for cash and on credit. Branch Expenses are paid direct from head office, and
the Branch has to remit all cash received into the Head Office Bank Account.
From the following details, relating to calendar year 2014, prepare the accounts in the Head Office
Ledger and ascertain the Branch Profit. Branch does not maintain any books of account, but sends
weekly returns to the Head Office:
`
Goods received from Head Office at invoice price 6,00,000
Returns to Head Office at invoice price 12,000
Stock at Cochin as on 1st Jan., 2014 60,000
Sales in the year - Cash 2,00,000
Credit 3,60,000
Sundry Debtors at Cochin as on 1st Jan. 2014 72,000
Cash received from Debtors 3,20,000
Discount allowed to Debtors 6,000
Bad debts in the year 4,000
Sales returns at Cochin Branch 8,000
Rent, Rates, Taxes at Branch 18,000
Salaries, Wages, Bonus at Branch 60,000
Office Expenses 6,000
Stock at Branch on 31st Dec. 2014 at invoice price 1,20,000
Prepare Branch accounts in books of head office by Stock and debtors method.
[Ans. P & L A/c – Profit transfer = 35,600]
Q-17 Arnold of Delhi, trades in Ghee and Oil. It has a branch at Lucknow. He dispatches 25 tins of Oil @ ` 1,000
per tin and 15 tins of Ghee @ ` 1,500 per tin on 1st of every month. The branch incurs some expenditure
which is met out of its collections; this is in addition to expenditure directly paid by Head Office.
Following are the other details:

Delhi Lucknow
` `
Purchases Ghee 14,75,000 -
Oil 29,32,000 -
Direct expenses 3,83,275 -
Expenses paid by H.O. - 14,250
Sales Ghee 18,46,350 3,42,750
Oil 27,41,250 3,15,730
Collection during the year (including Cash Sales) - 6,47,330
Remittance by Branch to Head Office - 6,13,250
(Delhi)
Balance as on: 1-1-2016 31-12-2016
Stock : Ghee 1,50,000 3,12,500
Oil 3,50,000 4,17,250
Debtors 7,32,750 -
Cash on Hand 70,520 55,250
Furniture & Fittings 21,500 19,350
Plant/Machinery 3,07,250 7,73,500
(Lucknow)
Balance as on: 1-1-2016 31-12-2016
Stock : Ghee 17,000 13,250
Oil 27,000 44,750
Debtors 75,750 ?
Cash on Hand 7,540 12,350
Furniture & Fittings 6,250 5,625
Plant/Machinery -
Addition to Plant/Machinery on 1-1-2016 ` 6,02,750.
Rate of Depreciation: Furniture / Fittings @ 10% and Plant / Machinery @ 15% (already adjusted in the
above figures).
The Branch Manager is entitled to 10% commission after charging such commission whereas, the General
Manager is entitled to 10% commission on overall company profits after charging such commission.
General Manager is also entitled to a salary of ` 2,000 p.m. General expenses incurred by H.O. ` 24,000.
Prepare Branch Account in the head office books and also prepare the Arnold’s Trading and Profit and
Loss A/c (excluding branch transactions).
[Ans. In the books of Arnold
Net Profit of Lucknow Branch Account transferred to General P & L A/c = 53,032
In the books of Arnold
(i) Gross profit = 5,97,075
(ii) Arnold Trading and profit and loss account for the year ended 31st December, 2016
To Net profit = 4,21,325 ]
INDEPENDENT BRANCH
Q-18 Messrs Ramchand & Co., Hyderabad have a branch in Delhi. The Delhi Branch deals not only in the
goods from Head Office but also buys some auxiliary goods and deals in them. They, however, do not
prepare any Proft & Loss Account but close all accounts to the Head Office at the end of the year and

open them afresh on the basis of advice from their Head Office. The fixed assets accounts are also
maintained at the Head Office.
The goods from the Head Office are invoiced at selling prices to give a proft of 20 percent on the sale
price. The goods sent from the branch to Head Office are at cost. From the following, prepare Branch
Trading and Proft & Loss Account and Branch Assets Account in the Head Office Books.
Trial Balance of the Delhi Branch as on 31-12-2017
Debit ` Credit `
Head office opening balance on 1-1-17 15,000 Sales 1,00,000
Goods from H.O. 50,000 Goods to H.O. 3,000
Purchases 20,000 Head Office Current A/c 15,000
Opening Stock Sundry Creditors 3,000
(H.O. goods at invoice prices) 4,000
Opening Stock of other goods 500
Salaries 7,000
Rent 3,000
Office expenditure 2,000
Cash on Hand 500
Cash at Bank 4,000
Sundry Debtors 15,000 _______
1,21,000 1,21,000
The Branch balances as on 1st January, 2017, were as under: Furniture ` 5,000; Sundry Debtors ` 9,500;
Cash ` 1,000, Creditors ` 30,000. The closing stock at branch of the head office goods at invoice price is
` 3,000 and that of purchased goods at cost is ` 1,000. Depreciation is to be provided at 10 per cent on
branch assets.
[Ans. Gross Profit = 42,700; Net Profit = 30,200]
Q-19 Ring Bell Ltd. Delhi has a Branch at Bombay where a separate set of books is used. The following is the
trial balance extracted on 31st December, 2017.
Head Office Trial Balance ` `

Share Capital (Authorised: 10,000 Equity
Shares of ` 100 each):
Issued: 8,000 Equity Shares 8,00,000
Proft & Loss Account - 1-1-2017 25,310
Fixed Assets 5,30,000
Stock 2,22,470
Debtors and Creditors 50,500 21,900
Profit for 2017 52,200
Cash Balance 62,730
Branch Current Account 1,33,710 _______
9,99,410 9,99,410

Branch Trial Balance
` `
Fixed Assets 95,000
Profit for 2017 31,700
Stock 50,460
Debtors and Creditors 19,100 10,400
Cash Balance 6,550
Head Office Current Account _______ 1,29,010
1,71,110 1,71,110
The difference between the balances of the Current Account in the two sets of books is accounted for
as follows:
(a) Cash remitted by the Branch on 31st December, 2017, but received by the Head Office on 1st
January 2018 - ` 3,000.
(b) Stock stolen in transit from Head Office and charged to Branch by the Head Office, but not credited
to Head Office in the Branch books as the Branch Manager declined to admit any liability (not
covered by insurance) - ` 1,700.
Give the Branch Current Account in Head Office books after incorporating Branch Trial Balance through
journal.
[Ans. The Branch Current Account in the Head Office Books and Head Office Current Account in the Branch
Books do not show the same balances. Therefore, in order to reconcile them, the following journal
entries will be passed in the Head Office books :
Journal Entries
2017 Dr. Cr.
` `
Dec., 31 Cash in Transit A/c Dr. 3,000
To Branch Current A/c 3,000
(Cash sent by the Branch on 31st Dec., 2017
but received at H.O. on 1st Jan., 2018)
Loss by theft A/c Dr. 1,700
To Branch Current A/c 1,700
(Stock lost in transit from H.O. to Branch)
In order to incorporate, in the H.O. books, the given Branch trial balance which has been drawn up
after preparing the Branch Profit & Loss Account, the following journal entries will be necessary:
Journal Entries
2017 ` `
Dec. 31 Branch Current Account Dr. 31,700
To Profit & Loss Account 31,700
(Branch Profit for the year)
Branch Fixed Assets Dr. 95,000
Branch Stock Dr. 50,460
Branch Debtors Dr. 19,100

Branch Cash Dr. 6,550
To Branch Current Account 1,71,110
(Branch assets brought into H.O. Books)
Branch Current A/c Dr. 10,400
To Branch Creditors 10,400
(Branch creditors brought into H.O. Books)
Branch Current Account
` `
To Balance b/d 1,33,710 By Cash in transit 3,000
To Profit & Loss A/c 31,700 By Loss of theft 1,700
To Branch Creditors 10,400 By Sundry Branch Assets 1,71,110
1,75,810 1,75,810
Proft and Loss Account for 2017
` `
To Loss by Theft 1,700 By Balance b/d 25,310
To Balance c/d 1,07,510 By Year’s Profit : H.O. 52,200
_______ Branch 31,700
1,09,210 1,09,210
Q-20 KP manufactures a range of goods which it sells to wholesale customers only from its head office. In
addition, the H.O. transfers goods to a newly opened branch at factory cost plus 15%. The branch then
sells these goods to the general public on only cash basis.
The selling price to wholesale customers is designed to give a factory profit which amounts to 30% of
the sales value. The selling price to the general public is designed to give a gross margin (i.e., selling
price less cost of goods from H.O.) of 30% of the sales value.
The company operates from rented premises and leases all other types of fixed assets. The rent and
hire charges for these are included in the overhead costs shown in the trial balances.
From the information given below, you are required to prepare for the year ended 31st Dec., 2014 in
columnar form.
(a) A Profit & Loss account for (i) H.O. (ii) the branch (iii) the entire business.
(b) Balance Sheet as on 31st Dec., 2014 for the entire business.
H.O. Branch Branch
Dr.` Cr.` Dr. ` Cr.`
Raw materials purchased 35,000
Direct wages 1,08,500
Factory overheads 39,000
Stock on 1-1-2014
Raw materials 1,800
Finished goods 13,000 9,200
Debtors 37,000
Cash 22,000 1,000

Administrative Salaries 13,900 4,000
Salesmen’s Salaries 22,500 6,200
Other administrative &
selling overheads 12,500 2,300
Inter-unit accounts 5,000 2,000
Capital 50,000
Sundry Creditors 13,000
Provision for Unrealised profit in stock 1,200
Sales 2,00,000 65,200
Goods sent to Branch 46,000
Goods Received from H.O. _______ _______ 44,500 _____
3,10,200 3,10,200 67,200 67,200
Notes:
(1) On 28th Dec., 2014 the branch remitted ` 1,500 to the H.O. and this has not yet been recorded in the
H.O. books. Also on the same date, the H.O. dispatched goods to the branch invoiced at ` 1,500 and
these too have not yet been entered into the branch books. It is the company’s policy to adjust items
in transit in the books of the recipient.
(2) The stock of raw materials held at the H.O. on 31st Dec., 2014 was valued at ` 2,300.
(3) You are advised that:
* there were no stock losses incurred at the H.O. or at the branch.
* it is the company’s practice to value finished goods stock at the H.O. at factory cost.
* there were no opening or closing stock of work-in-progress.
(4) Branch employees are entitled to a bonus of ` 156 under a bilateral agreement.
[Ans.
1. Gross Profit of H.O. = 66,000; Gross profit of Branch = 19,560; Business as a whole = 85,560 (Before giving
effect of unrealised profit) or Business as a whole = 85,513 (after eliminating effect of unrealised
profit.)
2. Net Profit of H.O. = 17,053; Net profit of Branch = 6,904; Business as a whole = 23,957 ( after eliminating
effect of unrealised profit.)
3. Balance Sheet Total H.O. = 88,204; Branch = 10,560; Business as a whole = 87,113]
Q-21 AFFIX of Kolkata has a branch at Delhi to which the goods are supplied from Kolkata but the cost thereof
is not recorded in the Head Office books. On 31st March, 2017 the Branch Balance Sheet was as follows
:
Creditors Balance 40,000 Debtors Balance 2,00,000
Head Office 1,68,000 Building Extension A/c closed —
by transfer to H.O. A/c
_______ Cash at Bank 8,000
2,08,000 2,08,000

During the six months ending on 30-9-2017, the following transactions took place at Delhi.
` `
Sales 2,40,000 Manager’s Salary 4,800
Purchases 48,000 Collections from Debtors 1,60,000
Wages paid 20,000 Discounts allowed 8,000
Salaries (inclusive of advance Discount earned 1,200
of ` 2,000) 6,400 Cash paid to Creditors 60,000
General Expenses 1,600 Building Account 4,000
(further payment)
Fire Insurance (paid for one year) 3,200 Cash in Hand 1,600
Remittance to H.O. 38,400 Cash at Bank 28,000
Set out the Head Office Account in Delhi books and the Branch Balance Sheet as on 30-9-2017. Also give
journal entries in the Delhi books.
[Ans.
1. Journal Entries
2017 Dr. Cr.
30 Sept. (` ) (` )
Salary Advance A/c Dr. 2,000
To Salaries A/c 2,000
(The amount paid as advance adjusted by debit to Salary
Advance Account)
Prepared Insurance A/c (3,200 x 6/12) Dr. 1,600
To Fire Insurance A/c 1,600
(Six months premium transferred to the Prepaid Insurance A/c)
Head Office Account Dr. 88,400
To Purchases A/c 48,000
To Wages A/c 20,000
To Salaries A/c (6,400 – 2,000) 4,400
To General Expenses A/c 1,600
To Fire Insurance A/c (3,200 x 6/12) 1,600
To Manager’s Salary A/c 4,800
To Discount Allowed A/c 8,000
(Transfer of various revenue accounts (Dr.) to the H.O. Account for
closing the accounts)
Sales Accounts Dr. 2,40,000
Discount Earned A/c Dr. 1,200
To Head Office A/c 2,41,200
[Revenue accounts (Cr.) transferred to H.O.]
Head Office Account Dr. 4.000
To Building Account 4,000
(Transfer of amounts spent on building extension to H.O. A/c)

Head Office Account
2017 ` 2017 `
Sep. 30 To Cash-remittance 38,400 April 1 By Balance b/d 1,68,000
To Sundries 88,400 Sep. 30 By Sundries 2,41,200
(Revenue A/cs) (Revenue A/cs)
To Building A/c 4,000
To Balanced c/d 2,78,400 _______
4,09,200 4,09,200
Balance Sheet of Delhi Branch as on Sept. 30, 2017
Creditors Balances 26,800 Debtors Balances 2,72,000
Head Office Account 2,78,400 Salary Advance 2,000
Prepaid Insurance 1,600
Building Extension A/c
transferred to H.O. —
Cash in Hand 1,600
_______ Cash at Bank 28,000
3,05,200 3,05,200
Q-22 The following Trial balances as at 31st December, 2017 have been extracted from the books of Major
Ltd. and its branch at a stage where the only adjustments requiring to be made prior to the preparation
of a Balance Sheet for the undertaking as a whole.
Head Office Branch
Dr. Cr. Dr. Cr.
` ` ` `
Share Capital 1,50,000
Fixed Assets 75,125 18,901
Current Assets 1,21,809 23,715 (Note 3)
Current Liabilities 34,567 9,721
Stock Reserve, 1st Jan., 2017
(Note 2) 693
Revenue Account 43,210 10,250
Branch Account 31,536
Head Office Account _______ _______ ______ 22,645
2,28,470 2,28,470 42,616 42,616
You are required to record the following in the appropriate ledger accounts in both sets of books.
Notes :
1. Goods transferred from Head Office to the Branch are invoiced at cost plus 10% and both Revenue
Accounts have been prepared on the basis of the prices charged.

2. Relating to the Head Office goods held by the Branch on 1st January, 2017.
3. Includes goods received from Head Office at invoice price ` 4,565.
4. Goods invoiced by Head Office to Branch at ` 3,641 were in transit at 31st December, 2017, as was
also a remittance of ` 3,500 from the Branch.
5. At 31st December, 2017, the following transactions were reflected in the Head Office books but
unrecorded in the Branch books.
The purchase price of lorry, ` 2,500, which reached the Branch on December 25th; a sum received on
December 30, 2017 from one of the Branch debtors, ` 750.
[Ans.
H.O. Books
Branch Account
2017 ` 2017 `
Dec. 31 To Balance b/d 31,536 Dec. 31 By Cash in transit 3,500
______ By Balance b/d 28,036
31,536 31,536
Cash in Transit Account
2017 ` 2017 `
Dec. 31 To Branch A/c 3,500 Dec. 31 By Balance c/d 3,500
Stock Reserve Account
2017 ` 2017 `
Dec. 31 To Balance c/d 746 Jan. 1 By Balance c/d 693
(4,565+3,641) x 10/110 ___ By Revenue A/c (b.f.) 53
746 746
Revenue Account
2017 ` 2017 `
Dec. 31 To Stock Reserve 53 Dec. 31 By Balance b/d 43,210
To Balance c/d 43,157 ______
43,210 43,210
Branch Books Head Office Account
2017 ` 2017 `
Dec.31 To Current Assets 750 Dec. 31 By Balance b/d 22,645
To (Debtors) By Goods in transit 3,641
Balance c/d 28,036 By Motor Vehicle 2,500
28,786 28,786
Goods in Transit Account
2071 ` 2017 `
Dec. 31 To Head Office 3,641 Dec. 31 By Balance c/d 3,641
Motor Vehicle Account
2017 ` 2017 `
Dec. 31 To Head Office 2,500 Dec. 31 By Balance c/d 2,500

Sundry Current Assets A/c
2017 ` 2017 `
Dec. 31 To Balance b/d 23,715 Dec. 31 By H.O. (Remittance by 750
Debtor)
_____ By Balance c/d 22,965
23,715 23,715
Q-23 Widespread invoices goods to its branch at cost plus 20%. The branch sells goods for cash as well as on
credit. The branch meets its expenses out of cash collected from its debtors and cash sales and remits
the balance of cash to head office after with holding ` 10,000 necessary for meeting immediate
requirements of cash. On 31st March, 2016 the assets at the branch were as follows:
` (‘000)
Cash in Hand 10
Trade Debtors 384
Stock, at Invoice Price 1,080
Furniture and Fittings 500
During the accounting year ended 31st March, 2017 the invoice price of goods dispatched by the head
office to the branch amounted to ` 1 crore 32 lakhs. Out of the goods received by it, the branch sent
back to head office goods invoiced at ` 72,000.
Other transactions at the branch during the year were as follows:
` (‘000)
Cash Sales 9,700
Credit Sales 3,140
Cash collected by Branch from Credit Customers 2,842
Cash Discount allowed to Debtors 58
Returns by Customers 102
Bad Debts written off 37
Expenses paid by Branch 842
On 1st January, 2017 the branch purchased new furniture for ` 1 lakh for which payment was made by
head office through a cheque.
On 31st March, 2017 branch expenses amounting to ` 6,000 were outstanding and cash in hand was
again ` 10,000. Furniture is subject to depreciation @ 16% per annum on diminishing balance method.
Prepare Branch Account in the books of head office for the year ended 31st March, 2017.
[Ans. Net profit transfer to General P & L A/c = 1096 (` in thousand)]
Q-24 The Washington branch of XYZ Mumbai sent the following trial balance as on 31st December, 2017:
$ $
Head office A/c _ 22,800
Sales _ 84,000
Debtors and creditors 4,800 3,400
Machinery 24,000 _
Cash at bank 1,200 _
Stock, 1 January, 2017 11,200 _
Goods from H.O. 64,000 _
Expenses 5,000 _
1,10,200 1,10,200
In the books of head office, the Branch A/c stood as follows:

Washington Branch A/c
Particular ` Particulars `
To Balance b/d 8,10,000 By Cash 28,76,000
To Goods sent to branch 29,26,000 By Balance c/d 8,60,000
37,36,000 37,36,000
Goods are sent to the branch at cost plus 10% and the branch sells goods at invoice price plus 25%.
Machinery was acquired on 31st January, 2017, when $ 1.00 = ` 40.
Rates of exchange were :
1st January, 2017 $ 1.00 = ` 46
31st December, 2017 $ 1.00 = ` 48
Average $ 1.00 = ` 47
Machinery is depreciated @ 10% and the branch manager is entitled to a commission of 5% on the
profits of the branch.
You are required to:
(i) Prepare the Branch Trading & Profit & Loss A/c in dollars.
(ii) Convert the Trial Balance of branch into Indian currency and prepare Branch Trading & Profit
and Loss A/c and the Branch A/c in the books of head office.
Assume that Washington branch is integral foreign operation of head office (XYZ Mumbai).
[Ans.
1. Exchange loss = 47,000 $; Gross profit = 16,800 $ ; Net profit = 8,930 $ ;
2. Gross profitof Branch = 8,90,800 `; Net profit of Branch = 4,90,240 `
3.
Branch Account
` `
To Balance b/d 8,60,000 By Machinery 9,60,000
To Net profit Creditors 4,90,240 Less: Depreciation (96,000) 8,64,000
To Creditors 1,63,200 By Closing stock 3,84,000
To Outstanding commission 22,560 By Debtors 2,30,400
________ By Cash at bank 57,600
15,36,000 15,36,000
Working Notes :
1. Calculation of manager’s commission @ 5% on profit
i.e. 5% of $[16,800 – (5,000 + 2,400)]
Or 5% × $9,400 = $ 470
Manager’s commission in Rupees = $ 470 × ` 48 = ` 22,560
2. Calculation of closing stock $
Opening stock 11,200
Add: Goods from head office 64,000
75,200

100
Less: Cost of goods sold (at invoice price) i.e. × 84,000 (67,200)
125
Closing stock 8,000
Closing stock in Rupees = $8,000 x ` 48 = ` 3,84,000.
Note : Manager is entitled to commission on profits earned at the end of the year.
INTER BRANCH TRANSACTIONS

Q-25 Show adjustment Journal entry in the books of Head Office at the end of April, 2003 for incorporation
of inter-branch transactions assuming that only Head Office maintains different branch accounts in its
books.
A. Delhi Branch:
(1) Received goods from Mumbai – ` 35,000 and ` 15,000 from Kolkata.
(2) Sent goods to Chennai – ` 25,000, Kolkata – ` 20,000.
(3) Bill Receivable received – ` 20,000 from Chennai.
(4) Acceptances sent to Mumbai – ` 25,000, Kolkata – ` 10,000.
B. Mumbai Branch (apart from the above) :
(5) Received goods from Kolkata – ` 15,000, Delhi – ` 20,000.
(6) Cash sent to Delhi – ` 15,000, Kolkata – ` 7,000.
C. Chennai Branch (apart from the above) :
(7) Received goods from Kolkata – ` 30,000.
(8) Acceptances and Cash sent to Kolkata – ` 20,000 and ` 10,000 respectively.
D. Kolkata Branch (apart from the above) :
(9) Sent goods to Chennai – ` 35,000.
(10) Paid cash to Chennai – ` 15,000.
(11) Acceptances sent to Chennai – ` 15,000.
[Ans.
Journal entry in the books of Head Office
Date Particulars Dr. Cr.
` `
30th April, 2003 Mumbai Branch Account Dr. 3,000
Chennai Branch Account Dr. 70,000
To Delhi Branch Account 15,000
To Kolkata Branch Account 58,000
(Being adjustment entry passed by head
office in respect of inter-branch transactions
for the month of April, 2003.]

FOREIGN BRANCH
Q-26 On 31st December, 2017 the following balances appeared in the books of Chennai Branch of an English
firm having its HO office in New York:
Amount in Amount in
(`) (`)
Stock on 1st Jan., 2017 2,34,000
Purchases and Sales 15,62,500 23,43,750
Debtors and Creditors 7,65,000 5,10,000
Bills Receivable and Payable 2,04,000 1,78,500
Salaries and Wages 1,00,000 -
Rent, Rates and Taxes 1,06,250 -
Furniture 91,000 -
Bank A/c 5,68,650
New York Account - 5,99,150
36,31,400 36,31,400
Stock on 31st December, 2017 was ` 6,37,500.
Branch account in New York books showed a debit balance of $ 13,400 on 31st December, 2017 and
Furniture appeared in the Head Office books at $ 1,750.
The rate of exchange for 1 $ on 31st December, 2016 was ` 52 and on 31st December, 2017 was ` 51. The
average rate for the year was ` 50.
Prepare in the Head Office books the Proft and Loss A/c and the Balance Sheet of the Branch assuming
integral foreign operation.
[Ans.
1. Exchange translation loss = 2,000 $;
2. Gross profit = 23,625 $ ;
3. Net profit = 17,500 $ ;
4. Balance Sheet Total of Chennai Branch = 44,400 $]
Q-27 M/s Carlin has head office at New York (U.S.A.) and branch at Mumbai (India). Mumbai branch furnishes
you with its trial balance as on 31st March, 1999 and the additional information given thereafter :
(Rupees in thousands)
Dr. Cr.
Stock on 1st April, 1998 300 –
Purchases and sales 800 1,200
Sundry Debtors and creditors 400 300
Bills of exchange 120 240
Wages and salaries 560 –
Rent, rates and taxes 360 –
Sundry charges 160 –
Computers 240 –
Bank balance 420 –
New York office a/c – 1,620
3,360 3,360
(a) Computers were acquired from a remittance of US $ 6,000 received from New York head office and
paid to the suppliers. Depreciate computers at 60% for the year.
(b) Unsold stock of Mumbai branch was worth ` 4,20,000 on 31st March, 1999.
(c) The rates of exchange may be taken as follows :
(i) on 1.4.1998 @ ` 40 per US $
(ii) on 31.3.1999 @ ` 42 per US $
(iii) average exchange rate for the year @ ` 41 per US $
(iv) conversion in $ shall be made upto two decimal accuracy.
You are asked to prepare in US dollars the revenue statement for the year ended 31st March, 1999 and
the balance sheet as on that date of Mumbai branch as would appear in the books of New York head
office of M/s Carlin . You are informed that Mumbai branch account showed a debit balance of US $
39609.18 on 31.3.1999 in New York books and there were no items pending reconciliation.
[Ans. Gross Loss = 1,402.45 US $; Net Loss = 17,685.38 US $; Balance Sheet Total of Mumbai Branch = 34,780.95
US $]
Note : The above answer has been given on the basis that the Mumbai Branch is an integral foreign operation
of M/s Carlin.
FEW OTHER QUESTIONS FOR CONCEPTUAL CLARITY

Q-28 Goods worth ` 50,000 sent by head office but the branch has received till the closing date goods for
worth ` 40,000 only. Give journal entry in the books of H.O. and branch for goods in transit.
Solution
Journal entry in the books of Head Office No entry Journal entry in the books of Branch
` `
Goods-in-transit account Dr. 10,000
To Head Office account 10,000
(Being goods sent by head office is still in transit)
Q-29 Alphs having head office in Mumbai has a branch in Nagpur. The branch at Nagpur is an independent
branch maintaining separate books of account. On 31.3.2017, it was found that the goods dispatched
by head office for ` 2,00,000 was received by the branch only to the extent of ` 1,50,000. The balance
goods are in transit. What is the accounting entry to be passed by the branch for recording the goods in
transit, in its books?
Solution
Nagpur branch must include the inventory in its books as goods in transit.
The following journal entry must be made by the branch:
Goods in transit A/c Dr. 50,000
To Head office A/c 50,000
[Being Goods sent by Head office is still in transit on the closing date]
---0---0---

CHAPTER-12
ACCOUNTS FROM INCOMPLETE RECORDS
(Single Entry System)
INTRODUCTION
Very often the small sole proprietorship and partnership businesses do not maintain double entry book
keeping system. Sometimes they keep record only of the cash transactions and credit transactions. Sometimes
they maintain no record of many transactions. But at the end of the accounting period they want to know the
performance and financial position of their businesses. This creates some special problems to the accountants.
This study discusses how to complete the accounts from available incomplete records.
The term “Single Entry System”is popularly used to describe the problems of accounts from incomplete
records. In fact there is no such system as single entry system. In practice the quack (untrained) accountants
follow some hybrid methods. For some transactions they complete double entries. For some others they
just maintain one entry. Still for some others, they even do not pass any entry. This is no system of accounting.
Briefly, this may be stated as incomplete records. The task of the accountant is to establish linkage among
the available information and to finalise the accounts.
THEORY AND CONCEPTWISE PRACTICALS
THEORY
(A) Difference between Statement of Affairs and Balance Sheet
Basis Statement of affairs Balance sheet
Reliability It is prepared on the basis of It is based on transactions
transactions partly recorded on the recorded strictly on the basis of
basis of double entry book keeping double entry book keeping; each
and partly on the basis of single item in the balance sheet can be
basis. Most of the assets are verified from the relevant
recorded on the basis of estimates, subsidiary books and ledger.
assumptions, information gathered Hence the balance sheet is not
from memory rather than records. only reliable, but also
dependable.
Capital In this statement, capital is merely Capital is derived from the
a balancing figure. In short capital account in the ledger
total assets- liabilities and therefore the total of
(other than capital) = capital. assets side will always be
equal to the total of liabilities
side.
Accounts from Incomplete Records -291-
Omission Since this statement is prepared There is no possibility of
on the basis of incomplete omission of any item of asset
records, it is very difficult, to and liability since all items are
locate the assets and liabilities, if properly recorded. Moreover, it
they are omitted from the books. is easy to locate the missing
items since the balance sheet
will not agree.
Basis of The valuation of assets is The valuation of assets is done
Valuation generally done unsceintific on scientific basis, that is original
manner; therefore no method of cost in the case of new assets
valuation is disclosed. and depreciated amount on the
basis of cost minus depreciation
to date for used assets. Any
change in the method of
valuation is properly disclosed.
Objects The object of preparing this The object of preparing the
statement in the calculation of balance sheet is to ascertain
capital figures in the beginning the financial position on a
and at the end of the accounting particular date.
period respectively.
(B) TYPES :
A scrutiny of many procedures adopted in maintaining records under single entry system brings forth the
existence of following three types:
(i) Pure single entry: In this, only personal accounts are maintained with the result that no information
is available in respect of cash and bank balances, sales and purchases, etc. In view of its failure to
provide even the basic information regarding cash etc., this method exists only on paper and has no
practical application.
(ii) Simple single entry: In this, only: (a) personal accounts, and (b) cash book are maintained. Although
these accounts are kept on the basis of double entry system, postings from cash book are made only
to personal accounts and no other account is to be found in the ledger. Cash received from debtors
or cash paid to creditors is simply noted on the bills issued or received as the case may be.
(iii) Quasi single entry: In this: (a) personal accounts, (b) cash book, and (c) some subsidiary books are
maintained. The main subsidiary books kept under this system are Sales book, Purchases book and
Bills book. No separate record is maintained for discounts, which are entered into the personal
accounts. In addition, some scattered information is also available in respect of few important items
of expenses like wages, rent, rates, etc. In fact, this is the method which is generally adopted as a
substitute for double entry system.

CONCEPTWISE PRACTICALS
(A) Various Methods of Single Entry
Method No.1: Capital comparison method (Statement of affiars method) :
(i) Identification of method No.1 = Incomplete records/ no duble entry book keeing system/ partial
recording system / calculation of profit by way of statement of affairs method + calculation of
profit / loss
(ii) Important points for method No.1 can be discussed as under:
Step No. 1 : To Calculate opening & closing capital by way of preparing statement of Affairs
Format of above mentioned statement can be illustrated as under :
Statement of affairs of Mr. X as on 31/3/2016 and 31/3/2017
Liabilities 31/3/16 31/3/17 Assets 31/3/16 31/3/17
` ` ` `
Capital ? ? Fixed assets xxx xxx
(Bal.fig.) Investments xxx xxx
Bank loan xxx xxx Current Assets xxx xxx
Current liabilities xxx xxx xxx xxx
xxx xxx xxx xxx
Step No. 2 : To calculate profit (of related time period) by way of preparing statement of calculating
profit
Above mentioned statement can be illutrated as under :
Statement of calculating profit during the year (2016-17)(as per conceptual clarity)
Particular `
Opening Capital (31/3/2016) xxx
Add: Additional capital xxx
Add: Interest on Capital xxx
Add: Profit (2016-2017) ?
xxx
Less: Drawings (xxx)
Less: Interest on drawings (xxx)
Closing capital (31/3/2017) xxx
OR
Statement of calculating the profit during the year (2016-17)(as demanded by ICAI)
Particular `
Closing Capital (31/3/2017) xxxx
Less: Additional capital (xxxx)
Less : Interest on capital (xxxx)
Add: Drawings xxxx
Add : Interest on Drawings xxxx
Less: Opening capital (31/3/2016) (xxxx)
Profit (2016-17) xxxx
Step No. 3 : Make the necessary calculations (working notes)

CLASS WORK
PRACTICAL QUESTIONS OF CAPITAL COMPARISION METHOD (Statement of Affairs) :
Q-1 Mr. X could not keep complete records. He furnishes you the following information for the year 2013-
2014 :
(a) Particulars of Assets and Liabilities
1-4-2013 1-4-2014
` `
Stock in hand 37,400 46,800
Sundry Debtors 24,000 28,000
Sundry Creditors 18,000 3,000
Bills Receivable 8,000 10,000
Bills Payable 2,000 400
Furniture & Fixtures 1,200 1,200
Buildings 24,000 24,000
Bank Balance 8,700 1,660
(Overdraft)
Information : Additional capital introduced ` 5,000, drawings ` 15,000; A provision @ 10% is required
for doubtful debts and depreciation @ 5% p.a. is to be written-off for furniture and fixtures and buildings,
` 6,000 is outstanding for wages and ` 2,400 for salaries, prepaid insurance amounted to ` 400,
outstanding legal expenses are ` 1,400.
Required : Find out by statement of affairs method, the Profit or Loss made by Mr. X during 2013-2014.
Q-2 Suresh does not maintain his books of account under the double entry system. But keeps slips of
papers from which he makes up his annual accounts. He has borrowed moneys from a bank to whom he
has to render figures to profits every year. He has given the bank the following profit figures :
Year ending Profit

31st December `
2010 20,000
2011 32,000
2012 35,000
2013 48,000
2014 55,000
The bank appoints you to audit the statement and verify whether the figures of profits reported are
correct or not for this purpose, the following figures are made available to you :

(a) Position as on 31st December, 2009 : Sundry debtors ` 20,000; Stock on trade (at 95% of the cost)
` 47,500; Cash on hand and at bank ` 12,000; Trade creditors ` 6,000; Expenses due ` 1,600.
(b) He had borrowed ` 5,000 from his wife on 30th September 2009 on which he had agreed to pay
simple interest at 12% p.a. The loan was repaid along with interest on 31st December, 2011.
(c) In December 2010, he had advanced ` 8,000 to A for purchase of a vacant land. The property was
registered in March, 2012 after payment of balance consideration of ` 32,000. Costs of registration
incurred for this were ` 7,500. He had purchased vacant land for his personal purpose.
(d) Suresh purchased jewellery for ` 15,000 for his daughter in October, 2012. Marriage expenses
incurred in January, 2013 were ` 24,000.
(e) A New V.C.R. was purchased by him in March 2014 for ` 18,000 and presented by him to his friend
in November 2014.
(f) His annual household expenses amounted to a minimum of ` 24,000.
(g) The position of assets and liabilities as on 31st December 2014 was found to be Overdraft with
Bank (Secured against property) ` 12,000; Trade creditors ` 10,000; Expenses payable ` 600; Sundry
debtors (including ` 600 due from a person declared insolvent by court) ` 28,800; Stock in trade
(at 125% of cost to reflect market value) ` 60,000 and cash on hand ` 250.
It is found that the rate of profit has been uniform throughout the period and the proportion of sales
during the years to total sales for the period was in the ratio of 3:4:4:6:8.
Ascertain the annual profits and indicate differences, if any, with those reported by Suresh to the bank
earlier.
All workings are to from part of your answer.
Q-3 Mr. Aman is running a business of readymade garments. He does not maintain his books of accounts
under double entry system. While assessing the income of Mr. Aman for the financial year 2016-17,
Income Tax Officer feels that he has not disclosed the full income earned by hi, from his business. He
provides you the following informations :
On 31st March, 2016
Sundry Assets ` 16,65,000
Liabilities ` 4,13,000
On 31st March, 2017
Sundry Assets ` 28,40,000
Liabilities ` 5,80,000
Mr.Aman’s drawings for the year 2016-17 ` 32,000 per month
Income declared to the Income Tax Officer ` 9,12,000
During the year 2016-17, one life insurance policy of Mr.Aman was matured and amount received `
50,000 was retained in the business.
State whether the Income Tax Officer’s contention is correct. Explain by giving your working.

Method No. 2 : Conversion of single entry into double entry system :
(a) Identification of method No.2 : To prepare trading & profit and loss account as well as Balance sheet /
finalise the accounts.
(b) Important points for the purpose of method No.2 can be discussed as under :
Setp No. 1 : When opening capital is not available in the question then opening capital is to be calculate by
way of preparing opening statement of affairs.
Step No.2 : To calculate profit of the business (of related time period) by way of preparing trading and profit
and loss account.
Step No.3 : To prepare balance sheet (closing) of the business.
Step No.4 : To prepare summary cash statement (separate columns of cash & bank).
Step No.5 : If it is required then prepare various accounts like debtors, creditors, B/R,B/P, expenses, income
accounts etc.
PRACTICAL QUESTIONS OF CONVERSION METHOD :
Q-4 The following is the audtied Balance Sheet of Shri Ram Chand as on 31st March 2013 :
Capital Account 1,62,000 Machinery 40,000
Sundry Creditors for goods 30,000 Furniture 10,000
Stock 35,000
Debtors 90,000
Cash in hand 6,000
_______ Cash at Bank 11,000
1,92,000 1,92,000
A fire occured in the evening of 31st March, 2014, destroying the books of account and furniture. The
cashiner absconded with the available cash in the Cash Box.
The trader gives the following information :
(1) Sales are effected as 20% for cash and the balance on credit. His total sales for the year ended March
31, 2014 were 20% higher than the previous year. All sales and purchases of goods were evenly
spread throughout the year (as also in the last year).
(2) Terms of Credit
Debtors 2 months
Creditors 1 month
(3) Stock level was maintained at ` 35,000 all throughout the year.
(4) A steady Gross Profit rate of 33-1/3% on turnover was maintained throughout. Creditors are paid by
cheque only. There is no cash purchase.
(5) His private records and the Bank Pass Book kept with him disclosed the following transactions for
the year.
(i) Miscellaneous Business Expenses ` 1,80,000 (including ` 35000 paid by cheque)
(of which ` 5000 was outstanding on 31-3-2014)

(ii) Repairs ` 2,500 (paid by cash)
(iii) Addition to Machinery ` 50,000 (paid by cheque)
(iv) Private drawings ` 36,000 (paid by cash)
(v) Travelling expenses ` 12,000 (paid by cash)
(6) Collections from debtors (including ` 30,000 for cash) and payments to creditors were prompt all
along.
(7) Depreciation is to be provided on machinery @10% of the closing book value.
(8) The cash stolen is to be provided in the Profit & Loss Account.
Prepare Trading, Profit & Loss Account for the year ended 31st March, 2014 and a balance sheet as at
that date.
Q-5 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 received from customers 1,56,000
Cash paid to suppliers 1,72,000
Bad Debts recovered 16,000
Bills Receivables endorsed to creditors 27,000
Bills Receivables dishonoured by customers 5,000
Discount allowed by suppliers 7,000
Discount allowed to customers 9,000
Endorsed Bills Receivables dishonoured 3,000
Sales Return 11,000
Bills Receivable discounted 8,000
Discounted Bills Receivable dishonoured 2,000
Cash Sales 1,68,500
Cash Purchases 1,97,800
Debtors as on 31.03.2012 82,000
Creditors as on 31.03.2012 95,000
Q-6 AVL is unemployed science graduate with typewriting qualification. Being unable to get employment
for more than ` 500 p.m. he decided to start his own typewriting institute. He approached U.B.C. Bank
which sanctioned him a loan of ` 20,000 on 1-1-2014. His father gifted him ` 5,000 on 1-1-2014. He
purchased 6 typewriters worth ` 24,000.
Unable to understand the accounts properly, he seeks your help in preparing a Profit & Loss account
and Balance Sheet relating to the year ending 31-12-2014. His passbook reveals the following

`
(a) Expenses of the Institute 8,400
(b) Salary to self 4,000
(c) Monthly Fees Collected 32,700
(d) Examination Fees Collected 4,200
The following are the additional details available :
(1) During the year AVL purchased a second-hand cycle costing ` 400 from a student who owed a montly
fees of ` 100. The balance was paid. The cycle is used for the institute only.
(2) AVL helped a friend by encashing a cheque for ` 1,000 which was dishonoured. The friend has so far
repaid only ` 400.
(3) AVL had taken ` 600 per month for personal expenses in addition to his salary.
(4) AVL runs the institute from his house for which a rent of ` 600 p.m. is paid. 50% may reasonably be
allocated for his own living.
(5) The following are outstanding as at end of 31-12-2014.
`
(a) Fees Receivable 2,200
(b) Expenses Payable 1,000
(c) Salary to Self for Nov. & Dec.,
(d) Stock of stationery on hand 200
(6) Provide Depreciation 20% on typewriters and cycle.
(7) The loan from Bank is repayable at ` 500 p.m. from the beginning of July onwards interest is
payble at 12% per annum in addition to installments for principal.
(8) Assume that all transactions are routed through Bank and no cash is handled.
Q-7 Mr. Anup runs a wholesale business where in all purchases and sales are made on credit. He furnishes
the following closing balances:
31-12-2015 31-12-2016
Sundry debtors 70,000 92,000
Bills receivable 15,000 6,000
Bills payable 12,000 14,000
Sundry creditors 40,000 56,000
Inventory 1,10,000 1,90,000
Bank 90,000 87,000
Cash 5,200 5,300
Summary of cash transactions during the year 2016:
(i) Deposited to bank after payment of shop expenses @ `600 p.m., salaries and wages @ ` 9,200
p.m. and personal expenses @ `1,400 p.m. `7,62,750.
(ii) Withdrawals `1,21,000.
(iii) Cash payment to suppliers `77,200 for supplies and `25,000 for furniture.
(iv) Cheques collected from customers but dishonoured `5,700.
(v) Bills accepted by customers `40,000.
(vi) Bills endorsed `10,000.
(vii) Bills discounted `20,000, discount `750.
(viii) Bills matured and duly collected `16,000.
(ix) Bills accepted `24,000.
(x) Paid suppliers by cheque `3,20,000.
(xi) Received `20,000 on maturity of one LIC policy of the proprietor by cheque.
(xii) Rent received `14,000 by cheque for the premises owned by proprieter.
(xiii) A building was purchased on 30-11-2016 for opening a branch for `3,50,000 and some expenses
were incurred on this building, details of which are not maintained.
(xiv) Electricity and telephone bills paid by cash `18,700, due `2,200.
Other transactions :
(i) Claim against the firm for damage `1,55,000 is under legal dispute. Legal expenses `17,000. The
firm anticipates defeat in the suit.
(ii) Goods returned to suppliers `4,200.
(iii) Goods returned by customers `1,200.
(iv) Discount offered by suppliers `2,700.
(v) Discount offered to the customers `2,400.
(vi) The business is carried on at the rented premises for an annual rent of `20,000 which is outstanding
at the year end.
Prepare Trading and Profit & Loss Account of Mr. Anup for the year ended 31-12-2016 and Balance Sheet as on
that date.

-300-
Accounts From Incomplete Records
Types Methods
Pure Simple Quasi Capital Conversion

single single single Comparison method method
entry entry entry (Statement Setp No. 1 : When opening capital
of affiars is not available in the question then
only only Personal method) opening capital is required to calculate by

personal personal accounts, Step-1 : To calculate way of preparing opening statement of affairs.
accounts accounts cash book and opening and Step No.2 : To calculate profit of the
are and Cash subisidary closing capital business (of related time period) by
maintained book books by way of way of preparing trading and
are are preparing profit and loss account.
maintained maintained statement Step No.3 : To prepare balance
of affiars sheet (closing) of the business.
Step-2 : To calculate profit Step No.4 : To prepare summary cash
(of related time period) by statement (separate columns
way of preparing statement of cash & bank).
of calculating profit Step No.5 : If it is required
Step No. 3 : Make the necessary then prepare various accounts
calculations (working notes) like debtors, creditors,
B/R,B/P, expenses,
income accounts etc.
ACCOUNTING - GROUP I (INTERMEDIATE)

1. In case of net worth method, profit is determined by

(a) Preparing a trading and profit and loss account.
(b) Comparing the capital in the beginning with the capital at the end of the accounting period.
(c) Comparing the net assets in the beginning with the net assets at the end of the accounting period.
2. Single entry system can be followed by
(a) Small firms.
(b) Joint stock companies.
(c) Co-operative societies.
3. Closing capital is calculated as
(a) Opening capital +Additional capital -Drawings.
(b) Opening capital +Additional capital –Drawings + Profit.
(c) Opening capital +Additional capital +Drawings - Profit.
4. Under single entry system, only personal accounts are kept and in some cases
(a) Cash book is maintained;
(b) Fixed assets’ accounts are maintained;
(c) Liabilities’ accounts are maintained.
5. The closing capital of Mr. B as on 31.3.2016 was ` 4,00,000. On 1.4.2015 his capital was ` 3,50,000. His net
profit for the year ended 31.3.2016 was ` 1,00,000.
He introduced ` 30,000 as additional capital in February, 2016. Find out the amount drawn by Mr. B for
his domestic expenses.
(a) ` 1,00,000; (b) ` 80,000; (c) ` 1,20,000;
1. What is meant by Single entry System? What are the types of procedures adopted for this system?

HOME WORK
PRACTICAL QUESTIONS (LONG QUESTIONS) :
CAPITAL COMPARISON METHOD
Q-8 Assets and Liabilities of Mr. X as on 31-12-2013 and 31-12-2014 are as follows:
31-12-2013 31-12-2014
` `
Assets
Building 1,00,000 ?
Furniture 50,000 ?
Stock 1,20,000 2,70,000
Cash at Bank 70,000 85,000
Cash in Hand 1,200 3,200
Liabilities
Loans 1,00,000 80,000
Decided to depreciate building by 2.5% and furniture by 10%. One Life Insurance Policy of the Proprietor
was matured during the period and the amount ` 40,000 is retained in the business.
Proprietor took @ ` 2,000 p.m. for meeting family expenses.
Prepare Statement of Affairs and also calculate profit of Mr.X.
(ANS. : Capital as on 31-12-13 = 2,41,200; Capital as on 31-12-14 = 4,40,700; Profit (2014) = 183,500)
Q-9 A and B are in Partnership having Profit sharing ratio 2:1 The following information is available about
their assets and liabilities :
31-3-2013 31-3-2014
` `
Furniture 1,20,000
Advances 70,000 50,000
Creditors 32,000 30,000
Debtors 40,000 45,000
Stock 60,000 74,750
Loan 80,000 -
Cash at Bank 50,000 1,40,000
The partners are entitled to salary @ ` 2,000 p.m. They contributed proportionate capital.
Interest is paid @ 6% p.a. on capital and charged @ 10% p.a. on drawings.
Drawings of A and B
A B
` `
April 30 2,000 -
May 31 - 2000
June 30 4,000 -
Sept. 30 - 6,000
Dec. 31 2,000 -
Feb. 28 - 8,000
On 30th June, they took C as 1/3rd partner who contributed ` 75,000. C is entitled to share of 9 months’
profit. The new profit ratio becomes 1:1:1. A withdrew his proportionate share. Depreciate furniture @
10% p.a., new purchases ` 10,000 may be depreciated for 1/4th of a year.
Current account as on 31-3-2013 : A ` 5,000 (Cr.), B ` 2,000 (Dr.)
Prepare Statement of Profit, Current Accounts of partners and Statement of Affairs as on 31-3-2014.
(ANS. : Capital as on 31/3/13 = 2,25,000 {Fixed capital}; Capital as on 31-3-14 = 2,25,000 {Fixed Capital}; Current
accounts as on 31-3-14=172500 (of A & B & C); Profit (2013-2014) = 1,15,067; Balance of current account
as on 31-3-14 : of A  74036, of B  48,322, of C  50,142)
Q-10 The Income Tax Officer, on assessing the income of Shri Moti for the financial years 2011-2012 and 2012-
2013 feels that Shri Moti has not disclosed the full income. He gives you the following particulars of
assets and liabilities of Shri Moti ason 1st April, 2011and 1st April, 2013.
`
1-4-2011 Assets : Cash in hand 25,500
Inventory 56,000
Sundry debtors 41,500
Land and Building 1,90,000
Wife’s Jewellery 75,000
Liabilities : Owing to Moti’s Brother 40,000
Sundry creditors 35,000
1-4-2013 Assets : Cash in hand 16,000
Inventory 91,500
Sundry debtors 52,500
Land and Building 1,90,000
Motor Car 1,25,000
Wife’s Jewellery 1,25,000
Loan to Moti’s Brother 20,000
Liabilities : Sundry creditors 55,000
During the two years the domestic expenditure was ` 4,000 p.m. The declared income of the financial
years were ` 1,05,000 for 2011-2012 and ` 1,23,000 for 2012-2013 respectively.
State whether the Income-tax Officer’s contention is correct. Explain by giving your workings.
(ANS. : Capital as on 1-4-11 = 3,13,000; Capital as on 1-4-13 = 5,65,000; Income earned in 2011-12 and 2012-13 =
3,48,000; Suppressed income = 1,20,000]

CONVERSION OF SINGLE ENTRY INTO DOUBLE ENTRY SYSTEM
Q-11 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, 2014 and a Balance Sheet as on that
date:
(a) Balance as on 31st Balance as on 31st
March, 2013 March, 2014
` `
Building 3,20,000 3,60,000
Furniture 60,000 68,000
Motorcar 80,000 80,000
Stocks - 40,000
Bills payable 28,000 16,000
Cash and Bank balances 1,80,000 1,04,000
Sundry Debtors 1,60,000 -
Bills receivable 32,000 28,000
Sundry Creditors 1,20,000 -
(b) Cash transactions during the year included the following besides certain other items:
` `
Sale of old papers and Cash purchases 48,000
miscellaneous income 20,000 Payment to creditors 1,84,000
Miscellaneous Trade expenses Cash sales 80,000
(including salaries etc.) 80,000
Collection from debtors 2,00,000
(c) Other information:
* Bills receivable drawn during the year amount to ` 20,000 and Bills payable accepted ` 16,000.
* Some items of old furniture, whose written down value on 31st March, 2013 was ` 20,000 was sold
on 30th September, 2013 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 to be provided for 6 months and for additions to Building for
whole year.
* 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%.
* Mr. Shivkumar has been maintaining a steady gross profit rate of 30% on turnover.
* Outstanding salary on 31st March, 2013 was ` 8,000 and on 31st March, 2014 was ` 10,000 on 31st
March, 2013. Profit and Loss Account had a credit balance of ` 40,000.
* 20% of total sales and total purchases are to be treated as for cash.
* Additions in Furniture Account took place in the beginning of the year and there was no opening
provision for doubtful debts.
(ANS. : Gross Profit = 1,20,000; Net Loss = 25,840 ; Total of Closing Balance Sheet = 8,68,160)

Q-12 A. Adamjee keeps his books on single entry basis. The analysis of the cash book for the year ended on
31st December, 2014 is given below :
Receipts ` Payments `
Bank Balance as on 1st January, 2014 2,800 Payments to Sundry creditors 35,000
Received from Sundry Debtors 48,000 Salaries 6,500
General expenses 2,500
Cash Sales 11,000 Rent and Taxes 1,500
Capital brought during the year 6,000 Drawings 3,600
Interest on Investments 200 Cash purchases 12,000
Balance at Bank on 31st Dec., 2014 6,400
______ Cash in hand on 31st Dec., 2014 500
68,000 68,000
Particulars of other assets and liabilities are as follows:
1st January, 2014 31st December, 2014
Machinery 7,500 7,500
Furniture 1,200 1,200
Stock 3,900 5,700
Investments 5,000 5,000
Prepare final accounts for the year ending 31st December, 2014 after providing depreciation at 10 percent
on machinery and furniture and ` 800 against doubtful debts.
(ANS. : Gross Profit = 14,800; Net Profit = 2,830; Total of Closing Balance Sheet = 42,230)
Q-13 From the following data, you are required to prepare a Trading and Profit and Loss Account for the year
ended 31st March, 2014 and a Balance Sheet as at that date. All workings should form part of your
answer.
Assets and Liabilities As on As on
1st April 2013 31st March 2014
` `
Creditors 15,770 12,400
Sundry expenses outstanding 600 330
Sundry Assets 11,610 12,040
Stock in trade 8,040 11,120
Cash in hand and at bank 6,960 8,080
Trade debtors - 17,870
Details relating to transactions in the year :
Cash and discount credited to debtors 64,000
Sales return 1,450
Bad debts 420
Sales (cash and credit) 71,810
Discount allowed by trade creditors 700
Purchase returns 400
Additional capital-paid into Bank 8,500
Realisations from debtors-paid into Bank 62,500
Cash purchases 1,030
Cash expenses 9,570
Paid by cheque for machinery purchased 430
Household expenses drawn from Bank 3,180
Cash paid into Bank 5,000
Cash drawn from Bank 9,240
Cash in hand on 31-3-2014 1,200
Cheques issued to trade creditors 60,270
Q-14 Ms. Rashmi furnishes you with the following information relating to her business:
(a) Assets and liabilities as on 1.1.2016 31.12.2016
` `
Furniture (w.d.v) 12,000 12,700
Inventory at cost 16,000 14,000
Sundry Debtors 32,000 ?
Prepaid expenses 1,200 1,400
Unpaid expenses 4,000 3,600
Cash in hand and at bank 2,400 1,250
(b) Receipts and payments during 2016:
Collections from debtors, after allowing discount of ` 3,000 amounted to ` 1,17,000.
Collections on discounting of bills of exchange, after deduction of discount of ` 250 by the bank,
totalled to ` 12,250.
Creditors of ` 80,000 were paid ` 78,400 in full settlement of their dues.
Payment for freight inwards ` 6,000.
Amount withdrawn for personal use ` 14,000.
Payment for office furniture ` 2,000.
Investment carrying annual interest of 4% were purchased at ` 192 (face value ` 200) on 1st July, 2016
and payment made there for.
Expenses including salaries paid ` 29,000.
Miscellaneous receipts ` 1,000.
(c) Bills of exchange drawn on and accepted by customers during the year amounted to ` 20,000. Of these,
bills of exchange of ` 4,000 were endorsed in favour of creditors. An endorsed bill of exchange of ` 800
was dishonoured.
(d) Goods costing ` 1,800 were used as advertising materials.
(e) Goods are invariably sold to show a gross profit of 33-1/3% on sales.
(f) Difference in cash book, if any, is to be treated as further drawing or introduction of capital by Ms.
Rashmi.
(g) Provide at 2.5% for doubtful debts on closing debtors.
Rashmi asks you to prepare trading and profit and loss account for the year ended 31st December, 2016
and the balance sheet as on that date.

Q-15 The following is the Balance Sheet of the retail business of Sri Srinivas as at 31st December, 2013 :
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 :
(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, 2014 disclosed the following:
`
Payments to creditors 75,000
Payments of rent upto 31.3.14 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, 2014 :
`
Stock 40,000
Debtors 30,000
Creditors for goods 36,500
On the evening of 31st March, 2014 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, 2014 and a Balance Sheet as on that
date.
(ANS. : Gross Profit = 30,250; Net Profit = 5,300; Total of Closing Balance Sheet = 1,40,500)
Q-16 Mr. A runs a business of readymade garments. He closes the books of accounts on 31st March. The
Balance Sheet as on 31st March, 2016 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, 2017 were 20% higher than the sales of previous year, out
of which 20% sales was cash sales.
Total sales during the year 2015-16 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 2017disclosed the following:
`
Payment to creditors 3,00,000
Payment of rent up to 31st March, 2017 16,000
Cash deposited into the bank during the year 80,000
The following are the balances on 31st March, 2017:
`
Stock 1,60,000
Debtors 1,20,000
Creditors for goods 1,46,000
On the evening of 31st March 2017, 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, 2017 and
Balance Sheet as on that date. All the workings should form part of the answer.
(ANS. : Gross Profit = 1,16,000; Net Profit = 34,000; Total of Closing Balance Sheet = 5,78,000)
Q-17 A trader keeps his books of account under single entry system. On 31st March, 2013 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, 20014 :
Receipts ` Payments `
Cash in Hand and at Bank on Payments to Trade Creditors 75,07,000
1st April, 20014 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, 20014 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, 2014 :
`
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, 2014 and Balance Sheet as
at that date.
(ANS. : Gross Profit = 9,30,000; Net Profit = 3,26,300; Total of Closing Balance Sheet = 10,91,300)
Q-18 The following is the Balance Sheet of a concern on 31st March, 2013 :
` `
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, 2014 as under :
upto 28.2.2014 March 2014
` `
Purchases 14,10,000 1,10,000
Sales 19,20,000 2,00,000
It was decided to invest` 1,00,000 in purchases of fixed assets, which are depreciated @ 10% on cost.
The time lag for payment to Trade Creditors for purchase and receipt from Sales is one month. The
business earns a gross profit of 30% on turnover. The expenses against gross profit amount to 10% of
the turnover. The amount of depreciation is not included in these expenses.
Draft a Balance Sheet as at 31st March, 2014 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.
(ANS. : Gross Profit = 6,36,000; Net Profit = 3,74,000 ; Total of Closing Balance Sheet = 15,44,000)
SHORT QUESTION
Q-19 A company sold 20% of the goods on cash basis and the balance on credit basis.
Debtors are allowed 1½ month’s credit and their balance as on 31.03.2016 is ` 1,25,000.
Assume that the sale is uniform through out the year. Calculate the credit sales and total sales of the
company for the year ended 31.03.2016.
(ANS. : Credit Sales = 10,00,000; Total Sales = 12,50,000)
----0----0----

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INTERMEDIATE

AS-1 : DISCLOSURE OF ACCOUNTING POLICIES

Accounting Standards -1-

-2- ACCOUNTING - GROUP I (INTERMEDIATE)

Accounting Standards -3-

LAST MINUTE REVISION

Accounting Change in Accounting Accounting Assumptions

All Significant If Material If not

-4- ACCOUNTING - GROUP I (INTERMEDIATE)

LAST MINUTE REVISION

Finished Raw Material Joint Product By Product

Cost At Cost Cost NRV

Accounting Standards -7-

-8- ACCOUNTING - GROUP I (INTERMEDIATE)

Accounting Standards -9-

-10- ACCOUNTING - GROUP I (INTERMEDIATE)

Accounting Standards -11-

-12- ACCOUNTING - GROUP I (INTERMEDIATE)

-14- ACCOUNTING - GROUP I (INTERMEDIATE)

Accounting Standards -15-

-16- ACCOUNTING - GROUP I (INTERMEDIATE)

-18- ACCOUNTING - GROUP I (INTERMEDIATE)

Accounting Standards -19-

-20- ACCOUNTING - GROUP I (INTERMEDIATE)

Accounting Standards -21-

Accounting Standards -23-

-24- ACCOUNTING - GROUP I (INTERMEDIATE)

Integral Foreign Non-Integral Foreign

Classification mainly depends on 2 Factors:

-26- ACCOUNTING - GROUP I (INTERMEDIATE)

Accounting Standards -27-

Accounting Standards -29-

-30- ACCOUNTING - GROUP I (INTERMEDIATE)

LAST MINUTE REVISION

(1) Revenue (2) Capital (3) Specific (4) Non-monetary

Accounting Standards -31-

-32- ACCOUNTING - GROUP I (INTERMEDIATE)

Accounting Standards -33-

-34- ACCOUNTING - GROUP I (INTERMEDIATE)

Accounting Standards -35-

-36- ACCOUNTING - GROUP I (INTERMEDIATE)

Accounting Standards -37-

-38- ACCOUNTING - GROUP I (INTERMEDIATE)

1. Accounting Standards for non-corporate entities in India are issued by

-40- ACCOUNTING - GROUP I (INTERMEDIATE)

UNIT-1 : PREPARATION OF FINANCIAL STATEMENTS

THEORY AND CONCEPTWISE PRACTICAL QUESTIONS (CLASS WORK)

Financial Statements of Companies -41-

-42- ACCOUNTING - GROUP I (INTERMEDIATE)

Financial Statements of Companies -43-

I. EQUITY AND LIABILITIES

-44- ACCOUNTING - GROUP I (INTERMEDIATE)

(b) Non-Current Investments 11 - -

Cost of Materials Consumed - ­

Financial Statements of Companies -45-

Work-in-Progress and Stock-in-Trade - -

Other Manufacturing Expenses 22 - -

Administrative & Selling Expenses :

Employee Benefit Expenses 23 - -

Other Administrative and Selling Expenses 24 - -

Cost of Materials Consumed -

VI. Exceptional Items (related to business activity but -

XV Profit / (Loss) for the Period (XI + XIV) -